Chapter 3

Question 1

Accounts

Answer 1

written records of the assets, liabilities, and equity of a business

Question 2

Classification

Answer 2

a means of identifying each account as an asset, liability, or owners equity

Question 3

Asset Accounts

Answer 3

show the property a business owns

Question 4

Liability Accounts

Answer 4

show the debts of a business

Question 5

Equity accounts

Answer 5

shows the owner’s financial interest in the business

Question 6

T-Account

Answer 6

A type of account, resembling a T, used to analyze the effects of a business transaction
- used to analyze transactions
- name of account written is written on horizontal (top) line
- Increases are written on either side of vertical line

Question 7

Asset T Account

Answer 7

+ Left: Record Increases (NB)
- Right: Record Decreases

Question 8

Liability T Account

Answer 8

• Left: Record Decreases
  + Right: Record Increases (NB)

Question 9

Equity T Account

Answer 9

• Left: Record Decreases
  + Right: Record Increases (NB)

Question 10

Analyze effects of business transaction

Answer 10

1. Analyze the financial event
   - Identify, classify, accounts affected
   - determine amount of increase or decrease for each account
2. Apply the left-right rules for each account affected
3. Make the T entry in T-Account form

Question 11

Left Rules

Answer 11

• Increase to asset accounts recorded on left
• decrease to liability and equity accounts

Question 12

Right Rules

Answer 12

• Increases to equity and liability accounts recorded on right side
• Decrease to asset accounts

Question 13

Account Balance

Answer 13

the difference between the amounts recorded on the two sides of an account

Question 14

footing

Answer 14

a small pencil figure written at the base of an amount column showing the sum of the entries in the column

Question 15

Account Balance

Answer 15

• If the total on right is larger than total on left, balance is recorded on right
• If total on left is larger than total on right, balance is recorded on left
• If account shows one amount, that amount is the balance
• If account contains entries on only one side, the total of those entries is the account balance

Question 16

Normal Balance

Answer 16

the increase side of an account

Question 17

Expense T-Account

Answer 17

+ Left: Record Increases (NB)
- Right: Record Decreases

Question 18

Drawing Account

Answer 18

a special type of equity account set up to record owners withdrawals from the business
- in sole proprietorships and partnerships, owners do not generally pay themselves a salary. They make withdrawals to cover personal living expenses
- to keep Withdrawals separate from capital until the end of the accounting period

Question 19

Debit

Answer 19

an entry on the left side of an account
- assets
- expenses
- drawing

Question 20

Credit

Answer 20

an entry on the right side
- liability
- revenue
- capital

Question 21

Double-Entry system

Answer 21

an accounting system that involves recording the effects of each transaction as debits and credits

Question 22

Trial Balance

Answer 22

A statement to test the accuracy of total debits and credits after transactions have been recorded
1. Enter trial balance heading showing the company name, report title, and closing date for the accounting period
2. List the account names in the same order as they appear on the financial statements
- Assets, liabilities, equity, revenue, expenses
3. Enter ending balance of each account in appropriate debit or credit column
4. Total the debit
5. Total the credit
6. Compare totals

Question 23

Chart of Accounts set up

Answer 23

Balance sheet accounts first, income statement accounts second

Question 24

Common Trial Balance Errors

Answer 24

• adding trial balance columns incorrectly
• recording half a transaction
• recording both halves of transaction as either debits or credits
• recording amount incorrectly
• recording debit for one amount, and credit for different amount
• error when calculating balances

Question 25

Finding Trial Balance Errors

Answer 25

1. Check the arithmetic. If calculated from top to bottom, try bottom to top 2. Check that the correct account balances were transferred to the correct trial balance columns 3. Check the arithmetic used to compute the account balances 4. Check that each transaction was recorded correctly in the accounts by tracing the amount to the analysis of the transaction - If difference is evenly divisible by 2, a debit might be recorded as a credit or vice versa - If difference is evenly divisible by 9, there might be a transposition

Question 26

Transposition

Answer 26

an accounting error involving misplaced digits in a number Divisible by 9 evenly

Question 27

Slide

Answer 27

an accounting error involving a misplaced decimal point If the difference is divided by 9 and then equals the number with the decimal

Question 28

Chart of Accounts

Answer 28

A list of the accounts used by a business to record its financial transactions

Question 29

Account Numbers

Answer 29

100-199 Assets 200-299 Liabilities 300-399 Equity - Capital - Drawing 400-499 Revenue 500-599 Expenses

Question 30

How assets are arranged

Answer 30

based on the liquidity of the asset (the ability to convert to cash) Cash always comes first, followed by marketable securities, AR, supplies, inventory, prepaid items then fixed assets (which appear in order of longevity). Liability accounts appear by earliest due dates

Question 31

Permanent account

Answer 31

an account that is kept open from one accounting period to the next. balances are carried forwards AKA real accounts Assets, liabilities, equity

Question 32

Temporary Accounts

Answer 32

an account whose balance is transferred to another account at the end of an accounting period AKA nominal accounts revenue, expenses, drawing account these balances are transferred to the capital account at the end of the accounting period - The accounts start with zero balances in the next period