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Basic Accounting Transactions and Balances
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1
Question
What is the effect of investment of cash by stockholders?
Answer
Increase assets (cash) and increase stockholders equity (common stock)
2
Question
What is the effect of notes issued in exchange for cash?
Answer
Increase assets (cash) and increase liabilities (notes payable)
3
Question
What is the effect of purchase of equipment for cash?
Answer
Increase asset (equipment) and decrease asset (cash)
4
Question
What is the effect of receipt of cash in advance from customer?
Answer
Increase asset (cash) and increase liability (unearned service revenue)
5
Question
What is the effect of services performed for cash?
Answer
Increase assets (cash) and increase stockholders equity (revenue)
6
Question
What is the effect of payment of rent?
Answer
Decrease asset (cash) and increase expense (rent expense)
7
Question
What is the effect of purchase of insurance policy for cash?
Answer
Decrease asset (cash) and increase asset (prepaid insurance)
8
Question
What is the effect of purchase of supplies on account?
Answer
Increase asset (supplies) and increase liabilities (accounts payable)
9
Question
What is the effect of hiring new employees?
Answer
No accounting transaction until employee is paid
10
Question
What is the effect of payment of dividends?
Answer
Decrease asset (cash) and decrease stockholders equity (dividends)
11
Question
What is the effect of payment of employee salary in cash?
Answer
Decrease asset (cash) and increase expense (salaries expense)
12
Question
What is the normal balance for assets?
Answer
Debit
13
Question
What is the normal balance for liabilities?
Answer
Credit
14
Question
What is the normal balance for common stock?
Answer
Credit
15
Question
What is the normal balance for retained earnings?
Answer
Credit
16
Question
What is the normal balance for dividends?
Answer
Debit
17
Question
What is the normal balance for revenue?
Answer
Credit
18
Question
What is the normal balance for expense?
Answer
Debit
19
Question
What is the expanded accounting equation?
Answer
Assets = liabilities + common stock + revenue - expenses - dividends
20
Question
How does revenue affect the expanded accounting equation?
Answer
Increases stockholders equity
21
Question
How do expenses affect the expanded accounting equation?
Answer
Decrease stockholders equity
22
Question
How do dividends affect the expanded accounting equation?
Answer
Decrease stockholders equity
23
Question
What is the double-entry system?
Answer
A system that records the two-sided effect of each transaction in appropriate accounts
24
Question
What is the purpose of the double-entry system?
Answer
To record the two-sided effect of each transaction
25
Question
What are the usual steps in the recording process?
Answer
Analyze transaction, enter in general journal, transfer to ledger, trial balance
26
Question
What is the first step in the recording process?
Answer
Analyze transaction (invoice)
27
Question
What is the second step in the recording process?
Answer
Enter transaction in general journal
28
Question
What is the third step in the recording process?
Answer
Transfer from journal to ledger
29
Question
What is the fourth step in the recording process?
Answer
Prepare trial balance
30
Question
What are examples of assets?
Answer
Cash, accounts receivable, supplies, land, equipment