Chapter 4

Question 1

Entity

Answer 1

Separation of accounting records of a business from the records of the business’ owner or owners

Question 2

Transaction

Answer 2

Exchange of property or service by a business with another entity

Question 3

Source document

Answer 3

Business record used as evidence that a transaction has occurred

Question 4

Monetary unit concept

Answer 4

Concept that transactions are to be recorded in terms of money or currency

Question 5

Historical cost concept

Answer 5

Concept that a business records its transactions based on the dollars exchanged at the time the transaction occurred

Question 6

Prepaid insurance

Answer 6

Cost paid for the right to insurance protection

Question 7

Creditors

Answer 7

External parties to whom a business owes debts

Question 8

Wages and salaries payable

Answer 8

Amounts owed to employees for work they have done

Question 9

Loans payable

Answer 9

Amounts owing to financial institutions for money lent to the business

Question 10

Partners equity

Answer 10

The partners’ current investment in the assets of the business

Question 11

Residual equity

Answer 11

Term that is used to refer to owner’s equity because creditors have first legal claim to a business’ assets

Question 12

Balance

Answer 12

The amount in an account column at the beginning of the period plus the increases and minus the decreases recorded in the column during the period

Question 13

Dual effect of transactions

Answer 13

A business must make at least two changes in its assets, liabilities or owner’s equity when it records each transaction

Question 14

Revenues

Answer 14

Prices charged to a business’ customers for the goods or services the business provides to them

Question 15

Expenses

Answer 15

Costs a business incurs to provide goods or services to its customers during an accounting period

Question 16

Accounting period

Answer 16

Timespan for which a business reports its revenues and expenses

Question 17

Earning process

Answer 17

Purchasing (or producing) inventory, selling the inventory (or services), delivering the inventory (or services), and collecting and paying cash

Question 18

Records revenues

Answer 18

A business does this during the accounting period in which the revenues are earned and are collectable (or collected)

Question 19

Matching principle

Answer 19

To determine its net income for an accounting period, a business computes and deducts the total expenses from the total revenues earned during the period

Question 20

Going concern

Answer 20

An assumption that an entity is able to continue as a viable entity for the foreseeable future

Question 21

Accrual accounting

Answer 21

Recording revenues and related expense transactions in the same accounting period that goods or services are provided, regardless of when cash is received or paid

Question 22

Withdrawal

Answer 22

A payment from the business to the owner

Question 23

End-of-period adjustments

Answer 23

Increases or decreases to account balances at the end of the period to reflect the costs of providing goods or services that are not supported by source documents

Question 24

Depreciation

Answer 24

The systematic periodic transfer of the cost of a fixed asset to an expense account during its expected useful life