Business Transactions and Accounts
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Questions and Answers

Which of the following accounting equations is represented?

  • Assets + Liabilities = Stockholders' Equity
  • Assets = Liabilities - Stockholders' Equity
  • Assets = Liabilities + Stockholders' Equity (correct)
  • Liabilities = Assets + Stockholders' Equity

An increase in an asset account is typically recorded as a credit.

False (B)

What type of balance do liability accounts typically have?

Credit

A decrease in a liability is recorded as a(n) ______, while an increase in a liability is recorded as a credit.

<p>debit</p> Signup and view all the answers

Match the effect on the accounting equation with the corresponding account type:

<p>Assets = Increase with Debit Liabilities = Increase with Credit Stockholders' Equity = Increase with Credit</p> Signup and view all the answers

Which of the following events would not be recorded as an accounting transaction?

<p>Signing a contract for future services to be provided (A)</p> Signup and view all the answers

An increase in expenses will directly increase stockholders' equity.

<p>False (B)</p> Signup and view all the answers

What is the fundamental accounting equation?

<p>Assets = Liabilities + Stockholders' Equity</p> Signup and view all the answers

A listing of all accounts used by a company is known as the ______.

<p>Chart of Accounts</p> Signup and view all the answers

Match the following transaction with its effect on the accounting equation:

<p>Issuing common stock for cash = Assets increase, Stockholders' Equity increases Paying a cash dividend = Assets decrease, Stockholders' Equity decreases Providing services on account = Assets increase, Stockholders' Equity increases Paying salaries expense = Assets decrease, Stockholders' Equity decreases</p> Signup and view all the answers

Source documents are used in the accounting cycle to:

<p>Identify accounts affected by external transactions (C)</p> Signup and view all the answers

If a company purchases equipment with cash, which of the following describes the effect on the accounting equation?

<p>One asset increases and another asset decreases, with no net effect on total assets. (D)</p> Signup and view all the answers

Explain the 'duality of effects' principle in accounting transactions.

<p>Every transaction affects at least two accounts to keep the accounting equation (Assets = Liabilities + Stockholders' Equity) in balance.</p> Signup and view all the answers

Which of the following actions decrease the balance of common stock?

<p>Repurchasing outstanding shares. (A)</p> Signup and view all the answers

An increase in expenses will decrease retained earnings.

<p>True (A)</p> Signup and view all the answers

What is the effect on the balance sheet of a company issuing new shares of common stock?

<p>Assets and equity increase</p> Signup and view all the answers

Which of the following accounts does not directly flow through retained earnings?

<p>Common Stock (B)</p> Signup and view all the answers

What is the normal balance (increase side) of a revenue account?

<p>Credit (B)</p> Signup and view all the answers

A credit always increases the balance of an account.

<p>False (B)</p> Signup and view all the answers

Match the following account types with their corresponding effect on the accounting equation when increased:

<p>Asset = Debit Liability = Credit Expense = Debit Revenue = Credit</p> Signup and view all the answers

Which of the following best explains why the sum of debits must equal the sum of credits in a trial balance?

<p>To verify that the accounting equation (Assets = Liabilities + Equity) is in balance. (A)</p> Signup and view all the answers

The trial balance shows ending balances for all accounts except for Retained Earnings, which shows the ending balance.

<p>False (B)</p> Signup and view all the answers

On the trial balance, what type of balance (debit or credit) would you expect to see for the Accumulated Depreciation account, and why?

<p>Credit, because it is a contra-asset account that reduces the book value of assets.</p> Signup and view all the answers

In Statement of Stockholders' Equity the ending balance is ______ .

<p>calculated</p> Signup and view all the answers

Match each account listed with its proper classification within the trial balance:

<p>Cash = Asset Accounts Payable = Liability Common Stock = Equity Revenues = Revenue</p> Signup and view all the answers

Using the T-account equation, which of the following correctly calculates the beginning balance?

<p>Beginning balance = Ending balance + Subtractions - Additions (A)</p> Signup and view all the answers

In a journal entry, credited accounts are listed first, followed by debited accounts, with the debited accounts being indented.

<p>False (B)</p> Signup and view all the answers

The Company purchased equipment for $12,000, paying $3,000 in cash and signing a note for the balance. What is the amount of the note signed?

<p>$9,000</p> Signup and view all the answers

In a journal entry, the ______ accounts and amounts are listed first.

<p>debited</p> Signup and view all the answers

The Company received $60,000 cash from investors for 5,000 shares of common stock. Which accounts are affected, and how?

<p>Cash (A+) and Common Stock (SE+) (D)</p> Signup and view all the answers

The entity bought $200 of office supplies on credit, what accounts are affected?

<p>Office Supplies (A+), Accounts Payable (L+) (D)</p> Signup and view all the answers

All amounts recorded in the journal entry are then posted to the income statement.

<p>False (B)</p> Signup and view all the answers

Match each transaction with its effect on the accounting equation:

<p>Received cash for services to be rendered later = Asset increases, Liability increases Purchased equipment with cash and a note = Asset increases, Asset decreases, Liability increases Received cash from investors for common stock = Asset increases, Stockholder's Equity increases Paid rent and wages = Asset decreases, Stockholder's Equity decreases</p> Signup and view all the answers

Which financial statement shows a company's revenues and expenses over a period of time?

<p>Income Statement (B)</p> Signup and view all the answers

The balance sheet follows the basic accounting equation: Assets = Liabilities + Stockholders' Equity.

<p>True (A)</p> Signup and view all the answers

What is the purpose of a trial balance?

<p>To list all accounts and their balances.</p> Signup and view all the answers

An increase in assets is recorded as a ______ in journal entries.

<p>debit</p> Signup and view all the answers

Match the following accounts with their respective financial statement:

<p>Cash = Balance Sheet Service Revenue = Income Statement Retained Earnings = Statement of Stockholders' Equity Accounts Payable = Balance Sheet</p> Signup and view all the answers

Which of the following is the correct journal entry to record the purchase of equipment on credit?

<p>Debit Equipment, Credit Accounts Payable (A)</p> Signup and view all the answers

Net income increases retained earnings on the statement of stockholders' equity.

<p>True (A)</p> Signup and view all the answers

What is the effect on the accounting equation when a company provides services for cash?

<p>Assets (cash) increase, and stockholders' equity (retained earnings) increases.</p> Signup and view all the answers

The statement of stockholders' equity explains changes in ______ and retained earnings.

<p>common stock</p> Signup and view all the answers

Match each account to its appropriate category:

<p>Cash = Asset Accounts Payable = Liability Common Stock = Stockholders' Equity Rent Expense = Expense</p> Signup and view all the answers

Which of the following transactions would increase both assets and liabilities?

<p>Borrowing money from the bank (A)</p> Signup and view all the answers

Debits increase asset accounts and decrease liability and equity accounts.

<p>True (A)</p> Signup and view all the answers

What is the normal balance of an expense account?

<p>Debit</p> Signup and view all the answers

Dividends ______ retained earnings.

<p>decrease</p> Signup and view all the answers

Match the effects on the accounting equation:

<p>Purchase of supplies on account = Assets increase, Liabilities increase Payment of wages = Assets decrease, Stockholders' Equity decreases Collection of cash from accounts receivable = Assets increase and decrease (no net effect) Issuance of common stock for cash = Assets increase, Stockholders' Equity increases</p> Signup and view all the answers

Flashcards

Assets

Resources a company owns or controls that are expected to provide future benefit.

Liabilities

Obligations to transfer assets or provide services to others in the future.

Stockholders' Equity

The owners' residual claim on the assets of a company after deducting liabilities.

Revenues

Increases in equity from a company's earnings activities.

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Expenses

Decreases in equity from a company's operating activities.

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Business Transactions

Economic occurrences that impact a company's financial statements.

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External Transactions

Transactions involving parties outside the company.

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Account

A standard format used to track the financial impact of transactions on specific financial statement items.

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Chart of Accounts (COA)

A list of all accounts used by a company to record its business transactions.

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Duality of Effects

Every transaction affects at least two accounts, maintaining the accounting equation's balance.

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Accounting Equation

Assets must always equal the sum of Liabilities and Stockholders' Equity. (A = L + SE)

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Effect of Revenues

Increase net income, which in turn increases retained earnings and stockholders' equity.

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Effect of Expenses

Decrease net income, which in turn decreases retained earnings and stockholders' equity.

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Common Stock

A financial account representing ownership in a corporation; its balance increases with stock issuances and decreases with stock repurchases.

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Retained Earnings

Cumulative net income of a company minus dividends distributed; it reflects the profits reinvested back into the business.

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Expanded Accounting Equation

An accounting equation that expands on the basic equation (Assets = Liabilities + Equity) by detailing components of equity like Common Stock and Retained Earnings.

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Dividends

Represent distributions of a company's accumulated earnings to its shareholders.

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Debit

The left side of a T-account; it increases asset, expense, and dividend accounts and decreases liability, owner's equity, and revenue accounts.

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Credit

The right side of a T-account; increases liability, owner's equity, and revenue accounts, and decreases asset, expense, and dividend accounts.

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T-Account Equation

Beginning Balance + Additions - Subtractions = Ending Balance. This formula tracks changes in accounts.

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Journal Entry

The initial record of a transaction, showing debits and credits.

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Journal Entry Format

Debited accounts are listed first, followed by indented credited accounts.

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Posting

Transferring journal entry amounts to specific accounts in the ledger.

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Cash from Stock Issuance

Cash received from investors in exchange for shares of ownership in the company.

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Accounts Payable

An obligation to pay for goods or services received on credit.

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Unearned Revenue

Cash received in advance for services to be provided later.

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Trial Balance

A list showing debit and credit balances to check equality.

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Debit/Credit Equality

On a trial balance, the sum of all debits must equal the sum of all credits for the accounting equation to balance.

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Statement of Stockholders' Equity

Shows changes in equity accounts during a period, including net income, dividends, and stock transactions.

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Stockholders' Equity (SE)

The owners' stake in the company; the residual interest in the assets of an entity that remains after deducting its liabilities.

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Net Income (NI)

The difference between revenues and expenses.

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Cash

Money held by the company.

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Accounts Receivable (A/R)

The amounts customers owe to the company.

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Supplies

Items used in the operation of the business.

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Equipment

Machinery, computers, and other items used to operate the business.

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Accounts Payable (A/P)

The amounts owed to suppliers.

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Notes Payable (N/P)

A formal written promise to pay a certain sum of money at a future date.

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Deferred Revenue

Cash received before providing the service (liability).

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Service Revenue

Income earned from providing services.

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Phone Expense

Costs incurred for telephone usage.

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Rent Expense

Payment related to the use of buildings and equipment.

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Wages Expense

Payment to employees for their service.

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Income Statement

Reports a company's financial performance over a period of time.

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Balance Sheet

Reports a company's assets, liabilities, and equity at a specific point in time.

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Study Notes

  • Business transactions are economic events, categorized as internal or external.
  • Some events related to the business are not recorded due to involving future promises without established assets or liabilities.
  • Source documents are important.

Accounts

  • An account is a standardized format to accumulate the dollar effects of transactions on a specific financial statement item.
  • Examples of accounts include cash, accounts receivable, salaries payable, and retained earnings.
  • A Chart of Accounts (COA) lists the accounts a company uses.

Effects of External Transactions

  • Duality of Effects means that at least two accounts are affected in every transaction.
  • The accounting equation, A = L + SE (Assets = Liabilities + Stockholders' Equity), must always remain in balance.

Measuring External Transactions

  • Step 1 involves using source documents to identify accounts affected by external transactions.
  • Step 2 involves identifying the accounts and effects: Determine if the accounts (at least 2) affected are assets (A), liabilities (L), stockholders' equity (SE), revenue (R), or expenses (E).
  • Determine the direction of the effect (increase or decrease) for each account.
  • Ensure the accounting equation (A = L + SE) remains balanced.

Revenues and Expenses

  • Revenues increase net income, which in turn increases retained earnings and ultimately stockholders' equity (R+ → SE+).
  • Revenues are income statement accounts NOT Stockholders' Equity accounts.
  • Expenses decrease net income, which cause retained earnings and stockholders' equity to decrease (E+ → SE-).
  • Expenses are income statement accounts, NOT stockholders' equity accounts.

Debits and Credits

  • Assets increase with debits and decrease with credits; the beginning balance is on the debit side.
  • Liabilities increase with credits and decrease with debits; the beginning balance is on the credit side.
  • Stockholders' Equity increases with credits and decreases with debits; the beginning balance is on the credit side.
  • DEALOR (Dividends, Expenses, Assets increase with debits ), LOR (Liabilities, Owners' Equity, Revenue increase with credits).

Expenses, Dividends, and Revenue

  • Expenses increase with debits and decrease with credits.
  • Dividends increase with debits and decrease with credits.
  • Revenue increases with credits and decreases with debits.
  • Credit means the right side of an account.
  • Debit means the left side of an account.

T-Account Equation

  • Beginning balance + additions = ending balance + subtractions
  • Beginning balance + additions – subtractions = ending balance
  • Beginning balance + additions = total – subtractions = ending balance
  • Ending balance + subtractions = total – additions = beginning balance

Recording Transactions

  • Journal Entry debited accounts and amounts are listed first, followed by credited accounts, which are indented.

Trial Balance

  • It lists all accounts, typically categorized by financial statement type (assets, liabilities, stockholders' equity, revenue, and expenses).
  • The sum of all debits must equal the sum of all credits.
  • The retained earnings amount shown on the trial balance is the beginning balance.
  • The ending balance is calculated by preparing the Statement of Stockholders' Equity.
  • Other account balances displayed are the ending balances before adjustments.

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Chapter 2 Accounting Lecture Outline

Description

Explanation of business transactions as events categorized as internal or external. An account is a format to accumulate the dollar effects of transactions on a financial statement item. Every transaction affects at least two accounts and the accounting equation.

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