211solutions-03[1] - CHAPTER 3 The Accounting Information...

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Unformatted text preview: CHAPTER 3 The Accounting Information System 3-1 ANSWERS TO QUESTIONS 1. The system of identifying, recording, and communicating the economic events of an organization to interested users of the information is known as the accounting information system. The first step of the accounting process is therefore to identify events that are (a) considered evidence of eco- nomic activity that comes in the form of source documents and (b) relevant to a particular business enterprise. Once identified and measured, the events are recorded to provide a permanent history of the financial activities of the organization. Recording consists of keeping a chronological diary of these measured events in an orderly and systematic manner in a journal. The information is communicated through the preparation and distribution of accounting reports, the most common of which are called financial statements. A vital element in the communication process is the ac- countants ability and responsibility to analyze and interpret the reported information. 2. Yes, a business can enter into a transaction in which only the left side of the accounting equation is affected. An example would be a transaction where an increase in one asset is offset by a de- crease in another asset. An increase in the equipment account which is offset by a decrease in the cash account is a specific example. 3. Accounting transactions are the economic events of the enterprise recorded by accountants be- cause they affect the basic equation. (a) The death of a major stockholder of the company is not an accounting transaction as it does not affect the basic equation. (b) Supplies purchased on account is an accounting transaction because it affects the basic equation. (c) An employee being fired is not an accounting transaction as it does not affect the basic equation. (d) Paying a cash dividend to stockholders is an accounting transaction as it does affect the basic equation. 4. (a) Decrease assets and decrease stockholders equity. (b) Increase assets and decrease assets. (c) Increase assets and increase stockholders equity. (d) Decrease assets and decrease liabilities. 5. An account consists of three parts: (a) the title, (b) the left or debit side, and (c) the right or credit side. Because the alignment of these parts resembles the letter T, it is referred to as a T account. 6. Disagree. The terms debit and credit are synonymous with left and right respectively. 7. Charles is incorrect. The double-entry system merely records the dual (two-sided) effect of a trans- action on the accounting equation. A transaction is not recorded twice; it is recorded once, with a dual effect. In other words, for each transaction, debits must equal credits....
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211solutions-03[1] - CHAPTER 3 The Accounting Information...

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