Chapter 4

Question 1

Explain what an account is.

Answer 1

A record that documents each change to items in the accounting equation.

Question 2

Define ledger.

Answer 2

A group or file of accounts.

Question 3

Name the different forms a ledger can take.

Answer 3

A ledger can be an electronic computer file, loose-leaf pages in a binder, or cards in a tray.

Question 4

The accounting records are commonly referred to as “the books”. Why would this name be used?

Answer 4

The accounting records are often referred to as the books because accounting was done in ledger books until recently. Accounting software frequently identifies ledger accounts with a book symbol.

Question 5

Why are the beginning amounts for a ledger usually taken from a balance sheet?

Answer 5

They are usually taken from a balance sheet because a balance sheet is prepared at the start of a business to give a balanced record of the company’s assets and liabilities.

Question 6

What is the principal use of T-accounts?

Answer 6

The principal use of T-accounts is to help students understand accounting theory.

Question 7

Explain where the dollar amounts in the accounts are placed when setting up the beginning amounts in a ledger.

Answer 7

For any item, the correct side for its beginning value is the side on which the item itself would appear in the accounting equation. Left side for assets, right side for liability and owner’s equity.

Question 8

Explain the meaning of the words debit and credit.

Answer 8

Debit means the left side of an account and credit means the right side of an account.

Question 9

How is the beginning financial position in a ledger set up?

Answer 9

It is set up by recording he assets on the left side of their account and the liabilities and the capital on the right side.

Question 10

For what accounts does a decrease mean debit?

Answer 10

A decrease means a debit in the liability and capital accounts.

Question 11

For what accounts does an increase mean debit?

Answer 11

An increase means a debit in the asset accounts.

Question 12

For what accounts does an increase mean credit?

Answer 12

An increase means a credit in the liability and capital accounts.

Question 13

For what accounts does a decrease mean credit?

Answer 13

A decrease means a credit in the asset accounts.

Question 14

What is a transaction analysis sheet used for?

Answer 14

It is used to help students learn to work out the accounting entry for a transaction.

Question 15

What is an accounting entry?

Answer 15

An accounting entry represents all of the changes for a transaction in terms of debits and credits in balanced form.

Question 16

What must be true of every correct accounting entry

Answer 16

Every correct accounting entry must balance.

Question 17

What condition is true for an accounting entry that does not balance?

Answer 17

An accounting entry that does not balance cannot be correct.

Question 18

What condition is true for an accounting entry that does balance?

Answer 18

It is probably correct, but not necessarily.

Question 19

Explain the meaning of the double-entry system of accounting.

Answer 19

Every transaction is recorded in the accounts in two steps. It is recorded first as a debit(s) and second as a credit(s), so that the total of the debit entries equal the total of the credit entries.

Question 20

What three pieces of information does an account contain?

Answer 20

The account name, the dollar value or balance of the account, and whether the account balance is debit or credit.

Question 21

Explain the two steps in calculating the balance of a T-account.

Answer 21

First, add up the totals of the two columns of the T-account and write the amounts in pin totals. Next, calculate the difference between the two pin totals, write the amount of the difference on the same side as the larger of the two totals and then circle the amount.

Question 22

How do you know which type of balance (debit or credit) an account has?

Answer 22

By looking at the column totals in the T-account. If debit side is larger, account has a debit balance, if credit side is larger, account has a credit balance.

Question 23

What kind of account has a debit balance?

Answer 23

An asset account.

Question 24

What kind of account has a credit balance?

Answer 24

A liability account and a capital account.

Question 25

What does it mean if an account has an exceptional balance?

Answer 25

An account has a balance opposite to the normal one. For an asset account, credit balance. For liability or capital account, debit balance.

Question 26

Give two examples of situations that result in an exceptional balance.

Answer 26

A customer overpays their account, owner withdraws from bank before cheques have cleared, etc.

Question 27

What is overdraft protection and why would a business find it useful?

Answer 27

Overdraft protection allows a bank account to go below zero. This allows businesses to avoid charges and embarrassment if their account is overdrawn.

Question 28

Why do businesses prefer to make purchases on credit?

Answer 28

It is convenient and it allows to check merchandise is in good condition before paying.

Question 29

What is a purchase on account?

Answer 29

A purchase on account means the goods or services are not paid for at the time of purchase and will be paid for later.

Question 30

What is a sale on account?

Answer 30

A sale on account means the goods or services are sold on credit and will be paid for later.

Question 31

What is a payment on account?

Answer 31

A payment on account is a sum of money paid to a creditor for an amount owing for a purchase on account.

Question 32

What is a receipt on account?

Answer 32

A receipt on account is a sum of money paid by a debtor for an amount owing for a sale on account.

Question 33

Give a mathematical explanation of why a ledger should always balance.

Answer 33

The initial amounts for a ledger are taken from the balance sheet, which is balanced, so the ledger accounts start off in balance as well.

Question 34

Describe the procedure for balancing a ledger.

Answer 34

Write the heading, list all accounts (debit balances in debit column, credit balances in credit column), add the two columns, check they are the same, draw one line above and two lines below the totals.

Question 35

Describe how one takes off a trial balance when using an electronic calculator.

Answer 35

Clear the calculator, enter the balances in order (+ for debits, - for credits), press enter key, if ledger is balanced, total is zero, if not, find errors.

Question 36

What happens to a completed trial balance?

Answer 36

Filed for future reference.

Question 37

What are the steps to be followed to balance a trial balance that is out of balance?

Answer 37

First add the trial balance columns again, check the trial balance figures against the ledger figures. Recalculate the account balances in each ledger account. Check that there is a balanced accounting entry in the accounts.