Accounting Transactions, Debits, Credits & Adjusting Entries (Chapters 2-4, 6-7, & 9-11

📘 Chapter 2 - Analyzing Transactions

What does a debit entry typically indicate in asset accounts?

Increase in assets. Debits increase asset accounts and decrease liabilities or equity accounts.

Which side of a T-account is the credit side?

Right. Credits are recorded on the right side of a T-account.

What is the accounting equation?

Assets = Liabilities + Owner's Equity. This equation is the foundation of accounting.

Which of the following is considered an asset?

Accounts Receivable. It represents money owed to the business by customers.

What is the effect of a credit entry in a liability account?

Increase. Credits increase liability accounts.

What does the term "double-entry accounting" mean?

Every transaction affects at least two accounts. One account is debited and another is credited.

What type of account is Owner's Capital?

Equity. It represents the owner's investment in the business.

What is the normal balance of an asset account?

Debit. Asset accounts increase with debits.

What is the normal balance of a liability account?

Credit. Liabilities increase with credits.

What is the normal balance of an expense account?

Debit. Expenses increase with debits.

What is the normal balance of a revenue account?

Credit. Revenues increase with credits.

What is the normal balance of Owner's Drawing?

Debit. Drawing accounts reduce equity and increase with debits.

What is the purpose of a journal entry?

To record a business transaction in chronological order.

What is a ledger?

A collection of all accounts used by a business.

What is a chart of accounts?

A list of all account titles and numbers used by a company.

What is a trial balance?

A list of all accounts and their balances to check if debits equal credits.

What happens when you debit an expense account?

It increases. Expenses have a normal debit balance.

What happens when you credit a revenue account?

It increases. Revenues have a normal credit balance.

What happens when you debit a liability account?

It decreases. Liabilities have a normal credit balance.

What happens when you credit an asset account?

It decreases. Assets have a normal debit balance.

What is the effect of paying cash for supplies?

Decrease in cash (asset), increase in supplies (asset).

What is the effect of receiving cash from a customer on account?

Increase in cash, decrease in accounts receivable.

What is the effect of purchasing equipment on account?

Increase in equipment (asset), increase in accounts payable (liability).

What is the effect of paying a utility bill?

Increase in utilities expense, decrease in cash.

What is the effect of the owner investing cash in the business?

Increase in cash (asset), increase in owner's capital (equity).

What is the effect of the owner withdrawing cash?

Decrease in cash, increase in owner's drawing (reduces equity).

What is the effect of earning revenue on account?

Increase in accounts receivable, increase in revenue.

What is the effect of receiving cash for services performed?

Increase in cash, increase in revenue.

What is the effect of paying rent in advance?

Increase in prepaid rent (asset), decrease in cash.

What is the effect of using prepaid rent?

Decrease in prepaid rent, increase in rent expense.

What is the effect of purchasing supplies with cash?

Increase in supplies, decrease in cash.

What is the effect of using supplies?

Decrease in supplies, increase in supplies expense.

What is the effect of borrowing money from a bank?

Increase in cash, increase in notes payable.

What is the effect of repaying a loan?

Decrease in cash, decrease in notes payable.

What is the effect of receiving a bill to be paid later?

Increase in expense, increase in accounts payable.

What is the effect of paying a previously recorded liability?

Decrease in cash, decrease in accounts payable.

What is the effect of earning revenue and receiving cash immediately?

Increase in cash, increase in revenue.

What is the effect of earning revenue but not yet receiving payment?

Increase in accounts receivable, increase in revenue.

What is the effect of paying wages to employees?

Increase in wages expense, decrease in cash.

What is the effect of receiving payment from a customer for a future service?

Increase in cash, increase in unearned revenue (liability).

What is the effect of performing a service that was previously unearned?

Decrease in unearned revenue, increase in revenue.

📘 Chapter 3 - The Adjusting Process

What is the purpose of adjusting entries?

To update account balances before financial statements. They ensure revenues and expenses are recorded in the correct period.

Which of the following is an example of a deferral?

Unearned revenue. Deferrals delay recognition of revenue or expense until a later date.

What is an accrued expense?

An expense incurred but not yet paid. It requires an adjusting entry.

What type of account is depreciation recorded in?

Accumulated Depreciation. It's a contra asset account.

What is the matching principle?

Expenses should be recorded in the same period as the revenues they help generate.

What is the revenue recognition principle?

Revenue is recorded when earned, not necessarily when cash is received.

What is the effect of an adjusting entry for accrued revenue?

Increase in assets (receivable) and increase in revenue.

What is the effect of an adjusting entry for accrued expenses?

Increase in expenses and increase in liabilities (payable).

What is the effect of an adjusting entry for prepaid expenses?

Decrease in asset (prepaid) and increase in expense.

What is the effect of an adjusting entry for unearned revenue?

Decrease in liability (unearned revenue) and increase in revenue.

What is depreciation?

The allocation of the cost of a fixed asset over its useful life.

What is the purpose of adjusting entries for depreciation?

To record the expense of using long-term assets over time.

What is the formula for straight-line depreciation?

(Cost - Salvage Value) ÷ Useful Life

What is the purpose of the adjusted trial balance?

To ensure total debits equal total credits after adjusting entries are posted.

What is the difference between a trial balance and an adjusted trial balance?

The adjusted trial balance includes the effects of adjusting entries.

What is the purpose of accrual accounting?

To match revenues and expenses to the period in which they occur.

What happens if adjusting entries are not made?

Financial statements will be inaccurate and not comply with GAAP.

What is the effect of not adjusting for accrued expenses?

Expenses are understated and net income is overstated.

What is the effect of not adjusting for accrued revenues?

Revenues are understated and net income is understated.

What is the effect of not adjusting for prepaid expenses?

Assets are overstated and expenses are understated.

What is the effect of not adjusting for unearned revenue?

Liabilities are overstated and revenues are understated.

What is the purpose of the worksheet in the adjusting process?

To organize and summarize data for preparing financial statements.

What is the purpose of the income statement column in the worksheet?

To calculate net income or loss.

What is the purpose of the balance sheet column in the worksheet?

To show the financial position of the company.

What is the purpose of the adjustments column in the worksheet?

To reflect changes from adjusting entries.

What is the purpose of the adjusted trial balance column in the worksheet?

To verify that debits equal credits after adjustments.

What is the purpose of the statement of owner's equity?

To show changes in owner's capital during the period.

What is the purpose of the balance sheet?

To show the company's financial position at a point in time.

What is the purpose of the income statement?

To show the company's performance over a period of time.

What is the purpose of reversing entries?

To simplify bookkeeping by canceling certain adjusting entries.

When are reversing entries made?

At the beginning of the next accounting period.

Which adjusting entries are commonly reversed?

Accrued revenues and accrued expenses.

What is the effect of reversing an accrued expense?

It removes the liability and expense recorded in the prior period.

What is the effect of reversing an accrued revenue?

It removes the receivable and revenue recorded in the prior period.

What is the purpose of the fiscal year?

To define the 12-month period used for financial reporting.

What is the difference between a calendar year and a fiscal year?

A calendar year ends December 31; a fiscal year can end on any date.

What is the accrual basis of accounting?

Revenues and expenses are recorded when earned or incurred, not when cash is exchanged.

What is the cash basis of accounting?

Revenues and expenses are recorded only when cash is received or paid.

Why is accrual accounting preferred under GAAP?

It provides a more accurate picture of financial performance.

What is the effect of adjusting entries on financial statements?

They ensure revenues and expenses are properly matched and assets/liabilities are accurate.

📘 Chapter 4 - Completing the Accounting Cycle

What is the final step in the accounting cycle?

Preparing a post-closing trial balance. This ensures all temporary accounts are closed.

Which accounts are closed at the end of the period?

Revenues and expenses. Temporary accounts are closed to reset for the next period.

What is the purpose of closing entries?

To transfer balances from temporary accounts to permanent accounts.

What is a post-closing trial balance?

A list of all permanent accounts and their balances after closing entries are posted.

What is the purpose of the income summary account?

To temporarily hold revenues and expenses before transferring net income to owner's equity.

What is the purpose of the worksheet?

To organize and summarize data for preparing financial statements.

What is the order of financial statements?

Income Statement → Statement of Owner's Equity → Balance Sheet.

What is the purpose of the income statement?

To show the company's performance over a period of time.

What is the purpose of the balance sheet?

To show the company's financial position at a point in time.

What is the purpose of the statement of owner's equity?

To show changes in owner's capital during the period.

What is the purpose of the adjusted trial balance?

To verify that debits equal credits after adjustments.

What is the purpose of reversing entries?

To simplify bookkeeping by canceling certain adjusting entries.

When are reversing entries made?

At the beginning of the next accounting period.

Which adjusting entries are commonly reversed?

Accrued revenues and accrued expenses.

What is the effect of reversing an accrued expense?

It removes the liability and expense recorded in the prior period.

What is the effect of reversing an accrued revenue?

It removes the receivable and revenue recorded in the prior period.