QXP 03 - CHAPTER 3 DISCUSSION QUESTIONS 1 The basic objective of the accounting cycle is to transform accounting data into financial statements and

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Unformatted text preview: CHAPTER 3 DISCUSSION QUESTIONS 1. The basic objective of the accounting cycle is to transform accounting data into financial statements and other accounting reports. These outputs help individuals make better economic decisions. 2. The first three steps in the accounting cycle include the following: a. Analyze transactions —verify the dates, amounts, and authenticity of the transactions and supporting business documents from which accounting entries are made. b. Record the effects of transactions — record the nature and amounts of business exchanges with journal entries, usually in chronological order. c. Summarize the effects of transactions. (1) Post journal entries —classify and group similar transactions into common accounts. (2) Determine account balances and prepare a trial balance —list the balances of all accounts to verify that total debits equal total credits. 3. Computer-based accounting systems reduce the amount of manual labor required in recording and summarizing business transactions. Computers are much faster and improve the accuracy of transforming data into summary financial reports. Human judgment is still needed with a computer system to analyze and record transactions, especially those of a nonroutine nature. Computers do routine work very well, but they need to be told what to do. 4. Each time accounts are debited, other accounts have to be credited for the same amount. This is a major characteristic of a double-entry accounting system. The total debits must always equal the total credits. 5. Asset accounts are increased by debits and decreased by credits. Liability and owners’ equity accounts are increased by credits and decreased by debits. Thus, A = L + OE and debits equal credits in a double-entry accounting system. 6. Revenues provide resource inflows, and expenses represent resource outflows. The net result of revenues less expenses is income, which is reflected in owners’ equity. Revenue accounts are increased by credits and increase owners’ equity; expense accounts are increased by debits and reduce owners’ equity. Dividends also reduce owners’ equity, since they are distributions of earnings to the owners. Therefore, the dividends account is also increased by debits. However, dividends do not enter into the determination of net income. 7. The dividends account is similar to expense accounts in that dividends and expenses reduce owners’ equity through the retained earnings account. Therefore, they have the same debit (increase) and credit (decrease) relationships. Dividends and expenses are different in that dividends are a distribution of earnings; they do not enter into the determination of net income, and therefore, dividends are not reported on the income statement. Expenses, on the other hand, are subtracted from revenues to determine net income; expenses are reported on the income statement....
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This note was uploaded on 11/16/2009 for the course ACCOUNTING 2101 taught by Professor Malkie during the Spring '09 term at ITT Tech Flint.

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QXP 03 - CHAPTER 3 DISCUSSION QUESTIONS 1 The basic objective of the accounting cycle is to transform accounting data into financial statements and

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