Recording Transactions

Question 1

What is an account?

Answer 1

An individual accounting record of increases and decreases in a specific asset, liability, and/or shareholders’ equity (common shares, retained earnings, revenue, expense, and dividends declared) item.

Question 2

What is a debit?

Answer 2

The left side of an account.

Question 3

What is a credit?

Answer 3

The right side of an account.

Question 4

What is a T account?

Answer 4

The basic form of an account, with a debit (left) side and a credit (right) side showing the effect of transactions on the account.

Question 5

What are some examples of accounts in a company?

Answer 5

Cash, Accounts Receivable, Accounts Payable, Service Revenue, Salaries Expense.

Question 6

What are the three parts of a T account?

Answer 6

1. Title of the account
2. Debit (left) side
3. Credit (right) side

Question 7

Do debits and credits indicate good or bad?

Answer 7

No, they are directional terms:
Debit (Dr.) means left
Credit (Cr.) means right

Question 8

Why is it called a T account?

Answer 8

Because its layout resembles the letter “T”, making it easy to track transactions visually.

Question 9

What is another term for T account?

Answer 9

General ledger account

Question 10

What are the entire groups of accounts maintained by a company (whether called a T account or a general ledger account) called?

Answer 10

The ledger

Question 11

Why is a date often included in T accounts?

Answer 11

To identify when a transaction occurred.

Question 12

How does the actual account form used in practice differ from a T account?

Answer 12

It typically has six columns, including:
1. Date
2. Explanation
3. Reference (Ref.) (links to supporting documents)
4. Debit
5. Credit
6. Balance

Question 13

What does the reference (Ref.) column indicate?

Answer 13

It refers to the document that serves as evidence of the transaction.

Question 14

Why is the T account still used in learning?

Answer 14

Because of its simplicity, making it easier to visualize transactions.

Question 15

What is normal balance?

Answer 15

The side of an account used to increase the account. Asset accounts have a normal debit balance. Liabilities and shareholders’ equity accounts have a normal credit balance. Individual components that make up shareholders’ equity have normal balances as follows: common shares, retained earnings, and revenue accounts have normal credit balances. Expense and dividends declared accounts have normal debit balances, as they reduce retained earnings.

Question 16

What does “normal balance” mean?

Answer 16

The side of the T account where an account’s ending balance is normally found.

Question 17

How does the normal balance relate to the accounting equation?

Answer 17

Assets (left side) → Normal Debit Balance
Liabilities & Shareholders’ Equity (right side) → Normal Credit Balance

Question 18

How do debits and credits affect different accounts?

Answer 18

Debits (+): Increase assets & expenses, decrease liabilities & equity
Credits (+): Increase liabilities, equity & revenue, decrease assets & expenses

Question 19

Accounts on the left side of the T normally have a ______balance, while accounts on the right side of the T normally have a ______ balance.

Answer 19

debit, credit

Question 20

How do you increase an account balance?

Answer 20

Use the same type of entry as its normal balance (Debit or Credit).

Question 21

How do you decrease an account balance?

Answer 21

Use the opposite type of entry from its normal balance.

Question 22

What is the normal balance for an asset account?

Answer 22

Debit (Left side of the T account and accounting equation).

Question 23

How do you increase or decrease an asset account?

Answer 23

Increase: Debit
Decrease: Credit

Question 24

What happens when total debits exceed total credits in an asset account?

Answer 24

The account has a debit balance (which is normal).

Question 25

What happens if an asset account has a credit balance?

Answer 25

It may indicate an error unless it is a special case (e.g., bank overdraft or contra asset accounts) because this means it's credit entries exceeded its debit

Question 26

What is a contra asset account?

Answer 26

An asset account with a normal credit balance, such as Accumulated Depreciation.

Question 27

What happens if a company has a bank overdraft?

Answer 27

The Cash account will have a credit balance and be classified as bank indebtedness (a current liability).

Question 28

How are increases and decreases recorded in the Cash T account?

Answer 28

Increases: Debit (Left side) Decreases: Credit (Right side)

Question 29

What does a positive item in the Cash column represent?

Answer 29

A receipt of cash (increase).

Question 30

What does a negative item in the Cash column represent?

Answer 30

A payment of cash (decrease).

Question 31

How is the balance of the Cash account determined?

Answer 31

By netting the total debits and credits (subtracting total decreases from total increases).

Question 32

What does a debit balance in the Cash account indicate?

Answer 32

The company has more cash inflows than outflows during the period.

Question 33

How does using a T account reduce recording errors?

Answer 33

It separates increases and decreases into different sides, making it easier to track balances.

Question 34

How are increases recorded in a liability T account?

Answer 34

On the credit (right) side.

Question 35

How are decreases recorded in a liability T account?

Answer 35

On the debit (left) side.

Question 36

Why do liability accounts normally have credit balances?

Answer 36

Because credits (increases) usually exceed debits (decreases) in liability accounts.

Question 37

How do liability T accounts compare to asset T accounts?

Answer 37

They are opposite: Assets: Increase with debits, decrease with credits. Liabilities: Increase with credits, decrease with debits.

Question 38

What does a credit balance in a liability account indicate?

Answer 38

The company owes money (has outstanding obligations).

Question 39

What side of the accounting equation are liabilities on?

Answer 39

The right side, opposite assets.

Question 40

What are the main components of shareholders’ equity?

Answer 40

- Common shares and retained earnings. - Retained earnings include revenues, expenses (which make up net income), and dividends declared.

Question 41

How do the components of retained earnings add to or deduct from it?

Answer 41

These components are then added to (in the case of revenues) or deducted from (in the case of expenses and dividends declared) retained earnings

Question 42

How do revenues affect shareholders’ equity?

Answer 42

Revenues increase retained earnings, so they also increase shareholders’ equity.

Question 43

How do expenses and dividends affect shareholders’ equity?

Answer 43

Expenses and dividends decrease retained earnings, reducing shareholders’ equity.

Question 44

What is the normal balance for common shares, retained earnings, and revenue accounts?

Answer 44

A credit balance (because they increase with credits, decrease with debits)

Question 45

How are increases and decreases recorded in common shares, retained earnings, and revenue accounts?

Answer 45

By credits and these accounts have normal credit balances.

Question 46

What reduces shareholders' equity?

Answer 46

Expenses and dividends declared reduce retained earnings, which in turn reduces shareholders’ equity.

Question 47

How do expenses affect retained earnings and shareholders' equity?

Answer 47

Expenses reduce net income, which reduces retained earnings, thus decreasing shareholders’ equity.

Question 48

How are expense accounts recorded?

Answer 48

Increases: Recorded with debits (left side of T account) Decreases: Recorded with credits (right side of T account) Normal balance: Debit balance

Question 49

How are dividends declared recorded?

Answer 49

Increases: Recorded with debits Decreases: Recorded with credits Normal balance: Debit balance

Question 50

How do revenues and expenses relate to net income?

Answer 50

Revenues increase net income, while expenses decrease net income, affecting retained earnings.

Question 51

What is the double-entry accounting system?

Answer 51

A system that records the dual effect of each transaction in appropriate accounts.

Question 52

How does the double-entry accounting system provide a logical method for recording transactions and ensuring amounts are recorded accurately?

Answer 52

If every transaction is recorded with equal debits and credits, then the sum of all the debits to the accounts must equal the sum of all the credits.

Question 53

What is the rule for the accounting equation?

Answer 53

The accounting equation must always balance: Total Debits = Total Credits

Question 54

Where are revenues and expenses reported?

Answer 54

Revenues and expenses are reported in the Statement of Income. They combine to determine net income (or loss).

Question 55

What is the generally chosen convention for listing revenues and expenses on the statement of income?

Answer 55

List these items from largest to smallest. The exception is income tax expense, which is reported separately near the end of the statement

Question 56

What does the Statement of Changes in Equity show?

Answer 56

- It reports changes in shareholders' equity items, including common shares and retained earnings. - The statement starts with opening balances (ending balances from the previous period) and shows changes during the period. - It includes net income (or loss) and dividends declared.

Question 57

What is included in the Statement of Financial Position?

Answer 57

- It reports the balances of assets, liabilities, and shareholders' equity at the end of the period. - Assets = Liabilities + Shareholders' equity - Common shares and retained earnings, from the Statement of Changes in Equity, are reported under shareholders' equity in this statement.

Question 58

How are assets and liabilities classified in the Statement of Financial Position?

Answer 58

- Assets and liabilities are classified as current or non-current. - Current items are listed in order of liquidity; non-current items in order of permanency. - Other ordering options are possible.