Chapter 6

Question 1

Explain what is meant by the statement, “the accounting entries become scattered through the ledger.”

Answer 1

The individual debit and credit amounts contained in one accounting entry are recorded in a variety of accounts throughout the ledger.

Question 2

Why is a second book, the journal, necessary in accounting?

Answer 2

Recording each transaction separately and in chronological order provides an important, continuous record of all transactions. The journal makes future investigations into the accounting records easy.

Question 3

Define journal.

Answer 3

A journal is a book in which the accounting entries for all transactions are first recorded, in order of date, before they are recorded in a ledger.

Question 4

What is a journal entry?

Answer 4

A journal entry is the complete accounting entry for a transaction in the form in which it is written in the general journal.

Question 5

What is meant by journalizing?

Answer 5

Journalizing is the process of recording accounting entries in the journal.

Question 6

Why is a journal known as a book of original entry?

Answer 6

It is the place where the accounting entries are first recorded.

Question 7

Describe the appearance of a two-column journal.

Answer 7

The two-column journal has a column for the date, the account names, the posting references, with two money columns as debit and credit.

Question 8

In the two-column general journal, how do you tell where on journal entry ends and another begins?

Answer 8

There is a blank line between each entry.

Question 9

Answer the following questions about the two-column general journal: Where is the year always entered? When do you re-enter the year? Where is the month always entered? When do you re-enter the month? What is the rule for recording the day of a transaction?

Answer 9

The year is always entered at the very top of the date column. The year is re-entered in the date columns at the point where a new year begins. The month is always entered on the first line of the date column. The month is re-entered in the date column at the point where a new month begins. The day is recorded for every transaction.

Question 10

Which accounts are recorded first when recording a journal entry?

Answer 10

The accounts that are debited are recorded first.

Question 11

Which accounts are indented when recording a journal entry?

Answer 11

The accounts that are credited are indented.

Question 12

Describe where explanations are recorded in the journal.

Answer 12

Explanations are recorded immediately beneath the debits and credits, beginning at the left side of the particulars column and staying within it.

Question 13

What is the purpose of an explanation in a journal entry and what does this explanation usually contain?

Answer 13

The purpose of an explanation in a journal entry is to make each entry unique. The explanation usually contains the reference number for the source document related to the entry.

Question 14

What does the journal provide besides a daily list of accounting entries?

Answer 14

Besides a daily list of accounting entries, the journal provides a place to work out the accounting entries for the various transactions and is a good reference for all the transactions completed by the business since they are in order of date.

Question 15

Describe what is meant by the opening entry.

Answer 15

The opening entry is the very first journal entry recorded in a journal. It is taken from the account balance in the balance sheet.

Question 16

Not all transactions requiring journal entries are initiated by the accounting staff. Explain.

Answer 16

Some transactions that require journal entries are initiated by the owner, sales people, department supervisors, managers, and other authorized people.

Question 17

How does the accounting department find out about all transactions?

Answer 17

The accounting department learns about all the transactions in a business through the source documents that are sent to the accounting office.

Question 18

What is a source document?

Answer 18

A source document is a business paper that provides all the details about a business transaction.

Question 19

What is the principal use of source documents in the accounting department?

Answer 19

Source documents are used by the accounting department as the primary source of information for accounting entries.

Question 20

Give an example of a transaction for which there is no conventional source document.

Answer 20

A transaction that would not have a conventional source document would be a withdrawal of money, by the owner, from the business for personal use.

Question 21

Who else, besides the accounting department, may have a reason to use the source documents on file?

Answer 21

The employees outside of the accounting department who made the transactions may need to see the source documents on file to check the details. An auditor may also need to see the source documents.

Question 22

What is the purpose of a cash sales slip?

Answer 22

A cash sales slip is a business form used to record the details of a cash sale.

Question 23

Explain the essential difference between a sales invoice and a cash sales slip.

Answer 23

A sales invoice represents a sale on account, which has yet to be paid for, while a cash sales slip represents a sale for cash, which has been paid in full.

Question 24

Explain who the vendor is.

Answer 24

The vendor is the business selling the goods or services.

Question 25

What is a point of sale terminal?

Answer 25

A point of sale terminal is a computerized sales register that allows a business and its customers to exchange funds electronically.

Question 26

When a customer uses a credit card to purchase an item, the business debits Accounts Receivable. T or F? Explain your answer.

Answer 26

False. When a customer uses a credit card to purchase an item, the business debits Bank because credit card purchases are treated like cash receipts.

Question 27

What is a purchase invoice?

Answer 27

A purchase invoice is a document received from a supplier when you purchase goods or services on account. The supplier calls it a sales invoice but you, the buyer, refer to it from your own point of view as a purchase document.

Question 28

Explain why all journal entries for purchase invoices are not the same.

Answer 28

All journal entries for purchase invoices are not the same because businesses purchase a variety of goods and services from many different suppliers. Some purchases, for example, will be for assets, others will be for services (expenses). While the debits change for purchase invoices, the credit to accounts payable remains constant.

Question 29

Why is a cheque not used as a source document?

Answer 29

A cheque itself is not used as a source document because it must be sent out to the payee. A copy of the cheque is let and used as a source document.

Question 30

What is the most common type of transaction for which a cheque is issued?

Answer 30

In business, a payment on account is the most common transaction for which a cheque is issued.

Question 31

What supporting documents are needed for payment by cheque?

Answer 31

The supporting documents that are needed for payment by cheque are an invoice or bill that shows the details of the transaction and a copy of the cheque.

Question 32

Explain what cash receipts are.

Answer 32

Cash receipts are the cash and cheques that are received by a company in the course of doing business.

Question 33

Why is it necessary to prepare cash receipts daily summary?

Answer 33

It is necessary to prepare a cash receipts daily summary because the cheques a company receives as payment cannot be kept as source documents. They must be sent out to the bank to be cashed. The cash receipts daily summary and copies of the cheques are source documents for the funds received.

Question 34

From what two sources does the clerk obtain data to prepare the cash receipts daily summary?

Answer 34

The clerk prepares the cash receipts listing using the tear off portion of the cheques and the remittance advices that accompany the cheques.

Question 35

Why do banks issue bank advices?

Answer 35

Banks issue advices to inform clients about transactions in their bank accounts that originate from the bank. The bank will also use bank statements to inform clients of such transactions.

Question 36

A bank debit memo requires a credit entry in the bank account of the business. Explain.

Answer 36

From the bank’s point of view, a client’s bank account is a liability. To decrease a client’s account requires a debit entry because it is a liability account, so a debit memo is sent to inform the client. From the business’s point of view, their bank account is an asset. The debit memo is a decrease in their bank account, so it requires a credit entry at the business’s end.

Question 37

Why do governments tax business transactions?

Answer 37

Governments tax business transactions to collect revenue to fund services like education, healthcare, and social assistance programs.

Question 38

What are the four basic principles that help with the accounting for sales taxes?

Answer 38

1. Tax dollars are charged to the buyer of the goods 2. These tax dollars are collected by the seller and recorded in a separate account 3. These tax dollars rightfully belong to the government 4. The seller sends these tax dollars to the government at appointed times.

Question 39

To whom are retail sales taxes charged?

Answer 39

Retail sales taxes are charged to the final buyer of goods (and some services.

Question 40

What special accounting is done by the purchaser of goods that have retail sales tax added?

Answer 40

The purchaser does no special accounting for retail sales tax. It is the seller’s responsibility to account for the retail sales tax.

Question 41

What type of account records the PST collected from customers (asset, liability, equity)?

Answer 41

PST collected from customers is recorded in the PST Payable account, which is a liability account.

Question 42

Explain how PST is remitted to the government.

Answer 42

PST must be remitted to the government every month by the 15th day of the following month.

Question 43

Explain how a business may be required to pay sales tax to the government before it has been collected from the customer.

Answer 43

A business may be required to pay sales tax to the government before it has been collected from a customer if the company sells on credit. The customer might take a month or two to pay their bill but sales tax must be remitted on the 15th of the following month for all transactions, whether or not the customer has paid.

Question 44

What is a value-added tax?

Answer 44

A value-added tax is a tax charged to both goods and services as they pass through the different stages of production and delivery.

Question 45

What name does the Canada Revenue Agency give to HST refunds?

Answer 45

The Canada Revenue Agency refers to HST refunds as input tax credits.

Question 46

When is a business required to register for the GST/HST?

Answer 46

A business is required to register for the GST/HST if it has sales of taxable goods and services worth $30 000 or more.

Question 47

A registrant obtains two things when registering for the GST/HST. What are they?

Answer 47

When a company registers for the GST/HST, it is assigned a special business number and is advised whether to report and remit the tax monthly, quarterly, or annually.

Question 48

How often is the GST/HST remitted?

Answer 48

GST/HST is remitted monthly, quarterly, or annually depending on the type of business.

Question 49

In terms of percentage rates, identify one difference and one similarity between the GST and HST.

Answer 49

One difference between the GST and HST is that the GST rate is 5% and the HST rate is higher because it contains the federal and provincial portion of the tax. One similarity between the GST and HST is that both taxes result in a 5% value-added tax being sent to the federal government.

Question 50

Why would a business want to keep track of the HST or GST it pays in a separate account, but not want a separate account for the PST it pays?

Answer 50

A business would want a separate account for the HST or GST it pays but not for the PST it pays because it can deduct HST or GST from the amount that it owes the federal government. PST cannot be deducted from the amount owed to the provincial government, so there is no point in recording it in a separate account

Question 51

What is a contra account?

Answer 51

A contra account is an account that has a balance that reduces or offsets the balance of a closely related account.