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Questions and Answers
What is the first step in transaction analysis?
Which type of transaction would NOT be classified as an accounting transaction?
In the accounting cycle, which step occurs after preparing financial statements?
What effect do revenues have on retained earnings?
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What should happen to the accounting equation after analyzing a transaction?
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What is the primary purpose of providing financial information?
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Which characteristic ensures information is complete, neutral, and free from error?
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What does the continuity (going-concern) assumption imply?
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In the accounting cycle, what is the initial step before journalizing transactions?
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What output is most likely generated from an accounting information system dealing with periodic business activities?
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Which assumption supports the notion that the dollar's purchasing power remains stable over time?
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What is the purpose of transaction analysis in the accounting cycle?
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Which of the following is an example of an output from journalizing transactions?
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Which accounts are affected when a customer pays $2,000 and has a remaining balance of $1,000 for services provided?
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What is the correct journal entry for recording a service revenue of $3,000 where a customer pays $2,000 in cash and owes $1,000?
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How does a debit transaction impact assets according to the accounting rules?
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In the accounting equation, which of the following components does Shareholders’ Equity include?
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When recording a transaction for the purchase of equipment for $50,000 cash, which account should be credited?
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What type of account is 'Service Revenue' classified as in terms of the financial statements?
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What does an increase in Accounts Receivable indicate?
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During the posting to the ledger, what does each account in the ledger represent?
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Study Notes
The Accounting Cycle
- The accounting cycle outlines a series of steps businesses take to record, summarize, and report financial information.
- The cycle starts with business activities and ends with the preparation of financial statements.
Transaction Analysis
- Transaction Analysis is the process of identifying and analyzing business transactions to determine their impact on the accounting equation: Assets = Liabilities + Shareholders' Equity.
- It involves three steps:
- Identify and classify affected accounts
- Determine the amount of change on each account
- Determine the direction of change (increase or decrease) for each account
- The accounting equation must be balanced after each analysis.
Journalizing
- Journalizing is the process of recording business transactions in a chronological order in a journal.
- Each entry consists of a debit and a credit, representing the dual effects of transactions on the accounting equation.
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Debit represents:
- Increase in assets
- Recording expenses, losses and declared dividends
- Decreases in liabilities and shareholders equity
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Credit represents:
- Decreases in assets
- Recording revenues and gains
- Increases in liabilities and shareholders equity
Posting to the Ledger
- Posting is the process of transferring journal entries to the ledger, which is a book containing separate accounts for each element of the accounting equation.
Financial Reporting Standards
- These standards provide a framework for preparing and presenting financial statements.
- They aim to provide financial information that is useful to investors, lenders, and other creditors.
- The standards are based on fundamentally qualitative characteristics such as:
- Relevance (predictive and confirmatory value, materiality)
- Faithful representation (complete, neutral, and free from error)
- Comparability
- Verifiability
- Timeliness
- Understandability
Recognition and Measurement Criteria
- These criteria are used to determine when and how to record transactions in the accounts.
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Assumptions used in accounting:
- Separate entity assumption: Business is a separate unit from owners
- Continuity (going-concern) assumption: Entity will continue to exist indefinitely
- Historical cost assumption: Assets recorded at purchase price
- Stable monetary unit assumption: Dollar’s purchasing power is stable over time
Accounting Information System
- An information system that collects, processes, and reports financial data.
- The system includes inputs, processing, and output stages.
Outputs of the Accounting Information System
- Financial reports:
- Income Statement
- Statement of Retained Earnings
- Balance Sheet
- Statement of Cash Flows
Objective of Financial Reporting
- To provide useful financial information to investors, lenders, and other creditors in making decisions about providing resources to an entity.
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Description
Test your knowledge on the accounting cycle, including steps in transaction analysis and journalizing. Understand how business transactions impact the accounting equation and learn the importance of recording each entry accurately.
