Chapter 3 Questions

What are the two fundamental equality requirements of the double-entry accounting system?

at least one credit and one debit

Define debit and credit. How are assets, liabilities, common stock, retained earnings, revenues, expenses, and dividends affected (increased or decreased) by debits and by credits?

Debit is a entry on the left side of an account.
Assets: Increase
Liabilities: Decrease
Common Stock: Decrease
RE: Decrease
Revenues: Decrease
Expenses: Increase
Dividends: Increase
Credit is a entry on the right side of an account.
Assets: Decrease
Liabi

How is the balance of an account determined?

The balance of an account is determined by the difference between the total debit and credit amounts.

What are the three primary sources of business assets?

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What are the three primary ways a business may use assets?

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Give an example of an asset exchange transaction.

Buying land using cash for payment

Hoe does a debit to an expense account ultimately affect retained earnings? Stockholders' equity?

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What accounts normal have debit balances? What accounts normally have credit balances?

Debit: Assets, Expenses, Dividends
Credit: Liabilities, SE, Revenue

What is the primary source of information for preparing the financial statements?

trial balance

What is the purpose of a journal?

allows you to record each and every business transaction in chronological order of the date

What is the difference between the general journal and special journals?

general journal: a broad journal
special journal: high-volume transactions like credit sales

What is a ledger? What is the function in the accounting system?

the collection of all the accounts used by a particular business
to be able to see all of the account balances

What is the purpose of closing entries?

moving all the data from the temporary accounts (revenue, expenses, and dividends) to the retained earnings. Therefore this gives a zero account balance in the temporary accounts.

Do all companies close their books on December 31? Why or why not?

No, all companies do not close their books on Dec 31. It depends if the company is using the calendar year (Jan-Dec) or the fiscal year (starts beg. of any month and ends the end of 12 months later)

At a minimum, what information is recorded in the general journal?

event date or number
account titles
amount debited
amount credited

What is the purpose of a trial balance?

shows the amount that each account has

When should a trial balance be prepared?

on a regular basis

What does the term posting mean?

when the amounts of each debit and credit are copied into the ledger (t) accounts

What information does the return on assets ratio provide about a company?

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What information does the debt to assets ratio provide a company?

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What is financial leverage?

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Explain how financial leverage impacts the return on equity ratio.

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