Accounting Transactions Chapter 3-8

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Questions and Answers

What is the total increase in assets after the first transaction?

$15,000

$20,000

$5,000

$10,000 (correct)

What effect does borrowing $5,000 from a bank have on Sierra's liabilities?

Decreases by $5,000

Lies unchanged

Increases by $10,000

Increases by $5,000 (correct)

After purchasing office equipment for $5,000 in cash, what is the change in total assets?

Increases by $10,000

Remains the same (correct)

Increases by $5,000

Decreases by $5,000

How much cash did Sierra receive for advertising services on October 3?

$10,000 Signup and view all the answers

What was the total cash inflow for Sierra up to October 3 from all transactions listed?

$16,200 Signup and view all the answers

What amount did Sierra pay for office rent in October?

$900 Signup and view all the answers

What is the total liability for Sierra after the second transaction?

$5,000 Signup and view all the answers

If Sierra makes the payment for office equipment, what will happen to liabilities?

Stay the same Signup and view all the answers

What is the total effect on the accounting equation after Sierra pays $600 for the insurance policy?

Equity decreases by $600 Signup and view all the answers

How does the purchase of advertising materials on account affect Sierra's assets and liabilities?

Assets increase by $2,500 and liabilities increase by $2,500 Signup and view all the answers

What happens to the accounting equation when employees are paid $4,000 in salaries?

Equity decreases by $4,000 Signup and view all the answers

What must occur in a double-entry accounting system for every transaction?

Each transaction affects two or more accounts Signup and view all the answers

What is the impact on Sierra's equity when paying out a $500 dividend?

Equity decreases by $500 Signup and view all the answers

What is the net effect on Sierra's assets after the total series of transactions listed?

Assets increase by $5,600 Signup and view all the answers

In an account where debits exceed credits, what is the resulting balance called?

Debit balance Signup and view all the answers

How much does Sierra's equity ultimately change after paying $600 for insurance and $500 dividend?

Equity decreases by $1,100 Signup and view all the answers

What is the primary purpose of an account in accounting?

To record increases and decreases in specific items Signup and view all the answers

What does it indicate if an account shows a credit balance?

Credits exceed debits Signup and view all the answers

What transaction causes an increase in both assets and liabilities?

Purchase of advertising materials on account Signup and view all the answers

Which of the following statements about Sierra's transactions is true?

Some transactions decrease equity Signup and view all the answers

How are debits and credits recorded in bookkeeping?

Debits are on the left, credits are on the right Signup and view all the answers

Which transaction describes a decrease in assets?

Paying accrued salaries Signup and view all the answers

If Sierra had not issued the dividend, what would the accounting equation reflect?

Higher equity Signup and view all the answers

Which of the following must always be true in accounting?

Debits must equal credits for every transaction Signup and view all the answers

What is the effect of a debit on assets?

Debits increase assets. Signup and view all the answers

Which accounts typically have a normal debit balance?

Assets, dividends, and expenses. Signup and view all the answers

How is the accounting equation expressed?

Assets = Liabilities + Stockholders’ Equity. Signup and view all the answers

What happens to liabilities when there is a debit entry?

Debits decrease liabilities. Signup and view all the answers

What is required for the accounting equation to remain balanced after each transaction?

Each debit must have a corresponding credit. Signup and view all the answers

Which statement describes the effect of credits on expenses?

Credits decrease expenses. Signup and view all the answers

What is true about the relationship between debits and credits?

Credits and debits must always balance. Signup and view all the answers

When a business records revenue, which type of account is typically credited?

A revenue account. Signup and view all the answers

What is the main purpose of a trial balance?

To prove that debits equal credits. Signup and view all the answers

What could cause a trial balance to appear balanced even when errors exist?

A journal entry is recorded more than once. Signup and view all the answers

Which of the following situations would definitively cause a trial balance to not balance?

A $100 cash dividend is debited as $1,000. Signup and view all the answers

Which statement about posting is correct?

Posting allows transactions to be transferred from journals to ledgers. Signup and view all the answers

Which of the following limitations is NOT associated with a trial balance?

Correct entries are double counted. Signup and view all the answers

What can lead to the trial balance balancing despite having an unrecorded transaction?

An oversight where one entry is not journalized. Signup and view all the answers

When a trial balance is prepared incorrectly, which of the following can be a contributing factor?

Use of incorrect accounts. Signup and view all the answers

What is NOT a reason why a trial balance might balance when it shouldn't?

Debits and credits were not analyzed. Signup and view all the answers

Study Notes

Accounting Transactions Overview

The basic accounting equation is essential for tracking the financial health of a business: Assets = Liabilities + Equity.
Each business transaction impacts at least two accounts to maintain balance.

Key Transactions of Sierra Corporation

October 1: Investors invested $10,000 for common stock; increases cash and equity equally.
October 1: Sierra borrowed $5,000 from Castle Bank with a 12% note payable for three months; increases cash and liabilities.
October 2: Sierra purchased office equipment for $5,000 cash; cash decreases while assets increase.
October 2: Received $1,200 cash advance from a client; increases cash and unearned revenue (liability).
October 3: Received $10,000 cash for advertising services rendered; increases cash and revenue (equity).
October 3: Paid $900 in cash for office rent; decreases cash and increases expenses (reducing equity).
October 4: Paid $600 for a one-year insurance policy; decreases cash and increases prepaid expenses (asset).
October 5: Purchased $2,500 in advertising materials on account; increases inventory (asset) and accounts payable (liability).
October 20: Paid a $500 dividend; decreases cash and retained earnings (equity).
October 26: Paid $4,000 in salaries; decreases cash and increases salary expenses (reducing equity).

Understanding Accounts

An Account records increases and decreases in specific asset, liability, equity, revenue, or expense items.
Debits (Dr) are recorded on the left; Credits (Cr) are on the right.
Each transaction impacts multiple accounts ensuring the equation remains balanced.

Double-Entry Accounting

Every transaction includes at least one debit and one credit.
Debits must equal credits for accurate bookkeeping.
Any excess debits result in a debit balance; credit balances occur when credits exceed debits.

Normal Balance

Accounts typically have normal balances:
- Debits: Assets, expenses, dividends.
- Credits: Liabilities, equity, revenues.

Trial Balance Purpose

A trial balance lists all accounts and their balances to verify that total debits equal total credits.
Important limitations include the potential to balance despite errors like unjournalized transactions or incorrect postings.

Review Questions Insights

Understanding increases and decreases related to debits and credits is crucial for accounting accuracy.
Mistakes in journal entries can lead to imbalances in the trial balance.

Summary of Debit/Credit Rules

Maintaining balance is critical; for every debit entry, there must be a corresponding credit entry.
Appropriate record-keeping ensures clarity in a company's financial position and aids in analyzing business transactions effectively.

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Description

This quiz focuses on analyzing the effects of business transactions on the basic accounting equation. It includes transaction analysis and illustrations to deepen your understanding of accounting principles. Test your knowledge about how these transactions affect the financial statements.