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Unformatted text preview: Chapter Three Questions 1. State the accounting equation. Assets = liabilities + stockholders' equity. 2. Identify the three primary sources of resources. Borrowing, owners' investments, and management's operation of the company (net income). 3. What is the major benefit of the double-entry system (debits = credits)? Debits = credits guarantees assets = liabilities + stockholders' equity. 4. What are the two points you must remember in order to be able to convert most business events into debits and credits? Assets increase with debits. Debits = credits. 5. Define the term account . Give three examples of accounts. An account is a data storage device . It is used to store accounting information . Examples are cash, accounts receivable, supplies, accounts payable, and common stock. 6. What is a chart of accounts? A chart of accounts is a list of all the accounts in which accounting information can be stored. 7. What is liquidity? Liquidity is a resource's ability to be converted into cash or used up in operations . The more liquid a resource is, the more quickly it can be converted into cash or used up. 8. How is liquidity important to the asset section of the chart of accounts? Assets are organized in the chart of accounts according to their liquidity . More liquid assets are listed before less liquid assets. 9. What does a general ledger contain? A general ledger contains accounting data stored in all accounts . A cash account stores cash information, while accounts receivable information is stored in the accounts receivable account. 10. What is the purpose of the general journal? The general journal is the place where business events are converted into debits and credits . The information in the general journal is in the form of journal entries . Information is transferred from the general journal to the general ledger through the posting process. 11. What is a journal entry? A journal entry is a business event converted into debits and credits. 12. Why is prepaid rent a resource? Prepaid rent is a resource because it is valuable . It can be used . Prepaid rent allows a company to use something, such as an office, for a certain amount of time in the future. 13. Why are accounts receivable resources? Accounts receivable are resources because they are valuable . They can be held until they are converted into cash when customers pay . They can be used a collateral for loans . They can be sold for cash. 14. Why is prepaid insurance a resource? Prepaid insurance is a resource because it is valuable . It can be used . Prepaid insurance provides a company with protection for a certain amount of time in the future. 15. What is a compound journal entry? A compound journal entry is one with more than one debit or more than one credit . Like all journal entries, in a compound journal entry the total dollar amount of debits equals the total dollar amount of credits....
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