SOL_Chpt2 - Analyzing and Recording Transactions QUESTIONS...

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Analyzing and Recording Transactions QUESTIONS 1. a. Common asset accounts: Cash, Accounts Receivable, Notes Receivable, Prepaid Expenses (Rent, Insurance, etc.), Office Supplies, Store Supplies, Equipment, Building, and Land. b. Common liability accounts: Accounts Payable, Notes Payable, Unearned Revenue, Wages Payable, and Taxes Payable. c. Common equity accounts: Owner, Capital; and Owner, Withdrawals. 2. A note payable is formal promise, usually denoted by signing a promissory note to pay a future amount. A note payable can be short-term or long-term, depending on when it is due. An account payable also references an amount owed to an entity. An account payable can be oral or implied, and often arises from the purchase of inventory, supplies, or services. An account payable is usually short-term. 3. There are several steps in processing transactions: (1) Identify and analyze the transaction or event, including the source document(s), (2) apply double- entry accounting, (3) record the transaction or event in a journal, and (4) post the journal entry to the ledger. These steps would be followed by preparation of a trial balance and then with the reporting of financial statements. 4. A general journal can be used to record any business transaction or event. 5. Debited accounts are commonly recorded first. The credited accounts are commonly indented. 6. Expense accounts have debit balances because they are decreases to equity (and equity has a credit balance). 7. A transaction is first recorded in a journal to create a complete record of the transaction in one place. (The journal is often referred to as the book of original entry.) This process reduces the likelihood of errors in ledger accounts. 8. The recordkeeper prepares a trial balance to summarize the contents of the ledger and to verify the equality of total debits and total credits. The trial balance also serves as a helpful internal document for preparing financial statements and other reports.
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9. The error should be corrected with a separate (subsequent) correcting entry. The entry’s explanation should describe why the correction is necessary. 10. The four financial statements are: income statement, balance sheet, statement of owner’s equity, and statement of cash flows. 11. The income statement lists the types and amounts of revenues and expenses, and reports whether the business earned a net income (also called profit or earnings) or a net loss. 12. An income statement user must know what time period is covered to judge whether the company’s performance is satisfactory. For example, a statement user would not be able to assess whether the amounts of revenue and net income are satisfactory without knowing whether they were earned over a week, a month, a quarter, or a year. 13. The balance sheet provides information that helps users understand a company’s financial position at a point in time. Accordingly, it is often called the statement of financial position. The balance sheet lists the types and dollar amounts of assets, liabilities, and equity of the business.
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