Module 8

Question 1

Double-entry accounting is:

Answer 1

The process in a journal entry that records equal debits and credits for every financial transaction.

Question 2

What areinternal controls?

Answer 2

Internal controls are designed to safeguard a company’s assets and ensure the financial statements
are not materially misstated. Internal controls include edits, balancing, and reconciling.

Question 3

What areliabilities?

Answer 3

Liabilities are an organization’s debts that have not been paid. Liabilities represent claims against the
organization’s assets. Liabilities are current (must be paid in a year) or long-term.

Question 4

What does an accrual record?

Answer 4

An accrual records expenses in the accounting period the expenses are incurred, not paid. Accruals also
record revenue in the accounting period the revenue is earned, not when cash is received.

Question 5

What does documentation provide?

Answer 5

Documentation ensures work is performed uniformly, training is simplified, and a reference tool is provided.

Question 6

What is a balance sheet?

Answer 6

A balance sheet is the record of the organization’s assets, liabilities, and equity at a point in time. The
balance sheet formula is: Assets = Liabilities + Equity

Assets and liabilities are listed in order of how quickly they can be converted to cash; first the current assets/liabilities are listed, then longer term assets/liabilities.

Question 7

What is a journal entry?

Answer 7

A journal entry is the record of the daily transactions of a business. Every journal entry records equal debits
and credits.

Question 8

What is an accounting period?

Answer 8

An accounting period is the period of time used to develop an income statement. The accounting period
may be a month, a quarter, a half-year, or a fiscal year or calendar year.

Question 9

What is an asset?

Answer 9

An asset is anything of value that provides an economic benefit or value to an organization over a
period of time. Assets may be current, property, or intangible.

Question 10

What is an expense?

Answer 10

An expense is the cost of goods and services consumed by an organization during an accounting
period to produce the organization’s products or services.

Question 11

What is an income statement?

Answer 11

An income statement is the record of the organization’s revenue and expenses during an accounting period. The income statement shows an organization’s net income or net loss.

Revenue – Expenses = Net Income

Net Income – Income Distributed + Contributed Capital = Equity

Question 12

What is the statement of retained earnings?

Answer 12

statement of retained earnings is a financial report detailing how a company’s accumulated net income—minus dividends paid—changes over a specific period. It acts as a bridge between the income statement and the balance sheet, illustrating how much profit is reinvested in the business rather than distributed to shareholders.

Revenue – Expenses = Net Income
Net Income – Income Distributed + Contributed Capital = Equity

Question 13

What is equity?

Answer 13

Equity represents an owner’s investment in the company consisting of contributed capital and retained
earnings.

Question 14

What is revenue?

Answer 14

Revenue is the amount received for the sale of an organization’s products or services. Revenue can be
recognized by the receipt of cash or a promise to pay in the future.

Question 15

What is the accounting flow?

Answer 15

Transaction → Journal → Ledger → Financial Statements

The accounting flow starts with the transaction which is posted in the journal. The data from the journal is
posted in the ledger. The data in the ledger is used to create the financial statements.

Question 16

What is the chart of accounts?

Answer 16

The chart of accounts is a list of accounts by name and/or identification (account) number.

Question 17

What is the general ledger?

Answer 17

The general ledger is a record of business transactions by account. Journal entries are posted to the general ledger. The financial statements are prepared from the general ledger.

Question 18

Business entity concept

Answer 18

Every organization that operates independently (an entity) is treated as a business under the business entity concept. The purpose of accounting is to report each entity’s financial position on a balance sheet and its profitability on an income statement. The employees, owners, and managers of a business entity must keep their personal transactions separate from those of the business entity.

Question 19

Continuing concern concept

Answer 19

This concept assumes a business entity will continue to operate indefinitely as a business. In most cases, continuing concerns value their assets at the cost of the assets. If a business is for sale, a business would not be a continuing concern, and its assets would be valued at its fair market value, not at its cost.

Question 20

Time period concept

Answer 20

Each organization must determine its own accounting period based on the type of business it operates. For its annual accounting period, an organization can choose either the calendar year or another 12‑month period (fiscal year, e.g., June 1, 2025 to May 31, 2026).

Question 21

Cost principle

Answer 21

Because organizations are assumed to continue as going concerns, all goods and services purchased (assets) are recorded at the cost of acquiring them. The cost is measured by the cash spent or the cash equivalent of goods or services provided in return for those purchased. Once valued, an asset remains at that value for its life minus any depreciation in accordance with the continuing concern concept and the objectivity principle.

Question 22

Objectivity principle

Answer 22

Transactions must be recorded objectively to ensure personal opinions and emotions are not part of the recorded transaction. This principle ensures accounting information will be useful for lenders and investors. Generally, valuing an asset at cost meets this principle since it requires a deal between a buyer and a seller with different goals in completing the transaction.

Question 23

Matching principle

Answer 23

Expenses, revenue, and liabilities must be matched to the accounting period in which they were earned or incurred to satisfy the matching principle. Under the matching principle, transactions may be recorded before any money actually changes hands, but after the essence of the transaction has been completed. The matching principle allows a comparison between different organizations’ financial statements.

Question 24

Realization principle

Answer 24

The realization principle governs the recording of revenue. Revenue is the income received for goods and services provided by an organization. Revenue is recognized (or realized) and reported when earned, which is during the accounting period when the goods have been transferred or the services provided. The amount recognized is the cash received or the fair market value of goods and services received.

Question 25

Consistency principle

Answer 25

Transactions must be recorded in a consistent manner based on the particular accounting method, principle, or period. Users of accounting information require transactions be recorded consistently so they can make sound financial decisions regarding the organization, especially when comparing previous accounting periods to the current period.

Question 26

The first digit in the account number identifies the type of account:

Answer 26

1. Asset account 2. Liability account 3. Equity account 4. Revenue account 5. Expense account

Question 27

The second digit in the account number provides a more specific definition of the asset account:

Answer 27

1. Current assets 2. Long-term investments 3. Plant, property, and equipment 4. Intangible assets

Question 28

A third digit in the account identifies an individual account:

Answer 28

1. Cash 2. Accounts receivable 3. Inventory 4. Prepaid expenses

Question 29

In the typical payroll journal entry at payroll recording, which items are credited? A. Wages expense and employer tax expense B. Cash and payroll liabilities C. Only payroll clearing account D. Only wages payable

Answer 29

B. Cash and payroll liabilities Credits go to cash and liabilities expenses are debited

Question 30

What are the six types of journal entries required to post a payroll in the general ledger?

Answer 30

1. Recording wages 2. Recording deductions 3. Recording payment to the employees 4. Recording the employer’s taxes 5. Paying the employees 6. Paying the employer’s taxes and other liabilities

Question 31

The five steps to reconcile payroll checking accounts:

Answer 31

Step 1 - Add deposits, interest, bank charges, or miscellaneous items appearing on the bank statement but not in the ledger. Step 2 - Check off in the ledger each check withdrawal or deposit that is listed on the statement. Step 3 - Total all outstanding checks. Step 4 - Subtract the outstanding checks (step 3) from the closing balance on the bank statement. Step 5 - Compare the general ledger balance for the period with that of the bank. If the amount in step 5 does not agree with the ledger, determine the cause of the imbalance and make corrections.

Question 32

The working capital equation is: A. current assets - current liabilities. B. revenues - expenses. C. gross profit - net earnings.

Answer 32

A. current assets - current liabilities

Question 33

The net income equation is: A. current assets - current liabilities. B. revenues - expenses. C. gross profit - net earnings.

Answer 33

B. revenues - expenses.

Question 34

What journal entries are required to record $250,000.00 in salaries earned during the last week of July but not paid until the first Friday in August? A. Debit liabilities; credit salary expense B. Debit accrued salary expense; credit accrued salary payable C. Debit assets; credit salary expense D. Debit accrued salary payable; credit payroll checking

Answer 34

B. Debit accrued salary expense; credit accrued salary payable