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SM_CH03 - CHAPTER 3 3-1 No Double-entry refers to the fact...

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CHAPTER 3 3-1 No. Double-entry refers to the fact that each transaction recorded in the journal affects at least two accounts in the ledger. Also the total debits must equal the total credits for each transaction. 3-2 No. Increases in Cash are shown on the left side of the account. 3-3 Verb: To debit an account. Adjective: The account has a debit balance. Noun: A debit is made to cash. 3-4 Source documents include sales slips, time cards, checks, and purchase invoices. 3-5 No. The journal, not the ledger, is usually called a book of original entry. The two are equally important. The journal documents the analysis of the transaction and is an important step in creating the ledger. The ledger provides a continuous record of the balances of the accounts that are used to prepare financial reports. 3-6 Revenue and expense accounts show the details of most increases and decreases in retained earnings, which is a component of stockholders' equity. 3-7 Two synonyms for book value, historical cost minus accumulated depreciation, are carrying amount and net book value . 3-8 No. Accumulated depreciation is the cumulative depreciation charged to expense since acquisition of the asset. 3-9 No. A trial balance is used to test for certain types of errors and to facilitate compiling financial statements. 1
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3-10 No. A trial balance shows whether the total debits equal the total credits, nothing more. Only certain types of errors are detected by the trial balance. 3-11 No. Most errors are not self-correcting. Some, such as recording prepaid rent as rent expense, leave the books only temporarily inaccurate. Others, such as recording the incorrect amount, have a long-lasting impact. Double-entry systems can help identify some types of errors, but accountants must make correcting entries to correct the errors. 3-12 Today a majority of data processing systems, but not all, are computerized. Some small organizations still use manual methods, but even small companies are finding that accounting systems on personal computers meet the cost-benefit test. 3-13 The chart of accounts should meet the needs of the client. The number of accounts is not an important issue by itself. The issue is whether the client is collecting important information for managing and explaining the business. For example, suppose the smaller client in terms of sales had a larger menu and more locations. It might need to track sales for more items and have an account for each one, and it might need to track assets at each location and have an account for each one. 3-14 Expenses are decreases in retained earnings. That is, an increase in an expense, a debit entry, is a decrease in retained earnings, also a debit entry. The debit increases expenses but decreases retained earnings.
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