Chapter 3 - The Accounting Information System

Question 1

Basic Accounting Equation

Answer 1

Assets = Liabilities + Stockholder’s Equity

Question 2

What falls under stockholder’s equity?

Answer 2

Common stock and retained earnings

Question 3

What falls under retained earnings?

Answer 3

Revenues, Expenses, and Dividends

Question 4

Accounting transactions

Answer 4

Economic events that require recording in the financial statements

Question 5

How to keep the accounting equation in balance?

Answer 5

For each transaction, debits and Credits must equal each other

Question 6

Debits

Answer 6

Increase Debits and decrease credits

Question 7

Credits

Answer 7

Increase credits and decrease debits

Question 8

On October 1, Sierra issued common stock in exchange for $10,000 cash:

Answer 8

Debit cash and credit common stock

Question 9

On October 1, Sierra borrowed $5,000 by signing a note:

Answer 9

Debit cash and credit notes payable

Question 10

On October 2, Sierra purchased equipment for $5,000:

Answer 10

debit equipment and credit cash

Question 11

General Ledger

Answer 11

contains all the asset, liability, stockholders’ equity, revenue, and expense accounts

Question 12

What are examples of assets

Answer 12

Cash, accounts receivable, supplies, prepaid insurance, equipment

Question 13

What are examples of liabilities?

Answer 13

Notes payable, accounts payable, interest payable, unearned service revenue, salaries and wages payable

Question 14

What are examples of stockholder’s equity

Answer 14

Common stock, retained earnings, dividents

Question 15

What are examples of revenues

Answer 15

Service revenue, rent revenue, interest revenue

Question 16

Purpose of transaction analysis

Answer 16

first to identify the type of account involved and then to determine whether a debit or a credit to the account is required.

Question 17

Purpose of a trail balance sheet

Answer 17

to prove the mathematical equality of debits and credits after posting.

Question 18

Order of a trial balance sheet

Answer 18

Assets, Liabilities, Stockholder’s equity, revenues and expenses

Question 19

Analyze the effect of business transactions on the basic accounting equation.

Answer 19

Each business transaction must have a dual effect on the accounting equation. For example, if an individual asset is increased, there must be a corresponding (a) decrease in another asset, or (b) increase in a specific liability, or (c) increase in stockholders’ equity.

Question 20

Explain how accounts, debits, and credits are used to record business transactions.

Answer 20

An account is an individual accounting record of increases and decreases in specific asset, liability, and stockholders’ equity items.

The terms debit and credit are synonymous with left and right. Assets, dividends, and expenses are increased by debits and decreased by credits. Liabilities, common stock, retained earnings, and revenues are increased by credits and decreased by debits.

Question 21

Indicate how a journal is used in the recording process.

Answer 21

The basic steps in the recording process are (a) analyze each transaction in terms of its effect on the accounts, (b) enter the transaction information in a journal, and (c) transfer the journal information to the appropriate accounts in the ledger.

The initial accounting record of a transaction is entered in a journal before the data are entered in the accounts. A journal (a) discloses in one place the complete effect of a transaction, (b) provides a chronological record of transactions, and (c) prevents or locates errors because the debit and credit amounts for each entry can be readily compared.

Question 22

Explain how a ledger and posting help in the recording process.

Answer 22

The entire group of accounts maintained by a company is referred to collectively as a ledger. The ledger provides the balance in each of the accounts as well as keeps track of changes in these balances.

Posting is the procedure of transferring journal entries to the ledger accounts. This phase of the recording process accumulates the effects of journalized transactions in the individual accounts.

Question 23

Prepare a trial balance.

Answer 23

A trial balance is a list of accounts and their balances at a given time. The primary purpose of the trial balance is to prove the mathematical equality of debits and credits after posting. A trial balance also uncovers errors in journalizing and posting and is useful in preparing financial statements.

Question 24

Double entry system

Answer 24

a system that records the two sided effect of each transaction in appropriate accounts

Question 25

Journalizing must occur…

Answer 25

in chronological order

Question 26

T- account

Answer 26

the basic form of an account

Question 27

The effects on the basic accounting equation of performing services for cash are to:

Answer 27

( Increase assets and increase SE) When services are performed for cash, assets are increased and stockholders’ equity is increased. The other choices are therefore incorrect.

Question 28

Genesis Company buys a $900 machine on credit. This transaction will affect the:

Answer 28

(Balance sheet only) When equipment is purchased on credit, assets are increased and liabilities are increased. These are both balance sheet accounts. The other choices are incorrect because neither the income statement nor the retained earnings statement is affected.

Question 29

Which of the following events is not recorded in the accounting records?

Answer 29

Termination of an employee is not a recordable event in the accounting records.

Question 30

Paying an account payable with cash affects the components of the accounting equation in the following way:

Answer 30

When paying an account payable with cash, the asset cash decreases. Accounts payable, a liability, decreases as well.

Question 31

Which is not part of the recording process?

Answer 31

Preparing an income statement is not part of the recording process. Choices (a) analyzing transactions, (c) entering transactions in a journal, and (d) posting transactions are all steps in the recording process.

Question 32

Posting:

Answer 32

Posting transfers journal entries to ledger accounts.

Question 33

A Trial Balance

Answer 33

A trial balance is a list of accounts with their balances at a given time.

Question 34

T account Acroymn?

Answer 34

(Increase w Debits) DEA / LOR (increase with credit) (DEALOR)

Question 35

“sold items”

Answer 35

Revenue

Question 36

“Paid”

Answer 36

credit cash

Question 37

received cash

Answer 37

Debit cash