Intermediate Accounting
7th Edition
by
David Spiceland, Mark Nelson, Wayne Thomas, Jennifer
, Chapter 2 Review of the Accounting Process
QUESTIONS FOR REVIEW OF KEY TOPICS
Question 2–1
External events involve an exchange transaction between the company and a
separate economic entity. For every external transaction, the company is receiving
something in exchange for something else. Internal events do not involve an
exchange transaction but do affect the financial position of the company. Examples
of external events are the purchase of inventory, a sale to a customer, and the
borrowing of cash from a bank. Examples of internal events include the recording of
depreciation expense, the expiration of prepaid rent, and the accrual of salary
expense.
Question 2–2
According to the accounting equation, there is equality between the total
economic resources of an entity, its assets, and the claims to those resources,
liabilities, and equity. This implies that, since resources must always equal claims,
the net effect of any transaction cannot affect one side of the accounting equation
differently than the other side.
Question 2–3
The purpose of a journal is to capture, in chronological order, the dual effect of a
transaction. A general ledger is a collection of storage areas called accounts. These
accounts keep track of the increases and decreases in each element of financial
position.
Question 2–4
Permanent accounts represent the financial position of a company—assets,
liabilities and owners' equity—at a particular point in time. Temporary accounts
represent the changes in shareholders’ equity, the retained earnings component of
equity for a corporation, caused by revenue, expense, gain, and loss transactions. It
would be cumbersome to record revenue/expense, gain/loss transactions directly into
the permanent retained earnings account. Recording these transactions in temporary
accounts facilitates the preparation of the financial statements.
,Answers to Questions (continued)
Question 2–5
Assets are increased by debits and decreased by credits. Liabilities and equity
accounts are increased by credits and decreased by debits.
Question 2–6
Revenues and gains are increased by credits and decreased by debits. Expenses
and losses are increased by debits (thus causing owners’ equity to decrease) and
decreased by credits (thus causing owners’ equity to increase).
Question 2–7
The first step in the accounting processing cycle is to identify external
transactions affecting the accounting equation. Source documents, such as sales
invoices, bills from suppliers, and cash register tapes, help to identify the transactions
and then provide the information necessary to process the transaction.
Question 2–8
Transaction analysis is the process of reviewing the source documents to
determine the dual effect on the accounting equation and the specific elements
involved.
Question 2–9
After transactions are recorded in a journal, the debits and credits must be
transferred to the appropriate general ledger accounts. This transfer is called posting.
Question 2–10
In Transaction 1 we record the purchase of $20,000 of inventory on account. In
Transaction 2 we record a credit sale of $30,000 and the corresponding cost of goods
sold of $18,000.
Question 2–11
An unadjusted trial balance is a list of the general ledger accounts and their
balances at a time before any end-of-period adjusting entries have been recorded. An
adjusted trial balance is prepared after adjusting entries have been recorded and
posted to the accounts.
, Answers to Questions (continued)
Question 2–12
We use adjusting entries to record the effect on financial position of internal
events, those that do not involve an exchange transaction with another entity. We
record them at the end of any period when financial statements are prepared to
properly reflect financial position and results of operations according to the accrual
accounting model, that is, to update accounts to their proper balances before we
report those balances in the financial statements.
Question 2–13
Closing entries transfer the balances in the temporary owners’ equity accounts
(revenues, expenses, gains, losses, dividends) to a permanent owners’ equity account,
retained earnings for a corporation. This is done only at the end of a fiscal year in
order to reduce the temporary accounts to zero before beginning the next reporting
year.
Question 2–14
Prepaid expenses represent assets recorded when a cash disbursement creates
benefits that extend beyond the current reporting period. Examples are supplies on
hand at the end of a period, prepaid rent, and prepaid insurance.
Question 2–15
The adjusting entry required when deferred revenues are recognized is a debit to
the deferred revenue liability and a credit to revenue.
Question 2–16
Accrued liabilities are recorded when an expense has been incurred that will not
be paid until a subsequent reporting period. The adjusting entry needed to record an
accrued liability is a debit to an expense and a credit to a liability.
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