Accounting Principles, Volume 1, 7th Canadian Edition Test Bank

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CHAPTER 2THE RECORDING PROCESSCHAPTERLEARNINGOBJECTIVES1.Describe how accounts, debits, and credits are used to record businesstransactions.Debit means left and credit means right. The normal balance of an asset is adebitbecause assets are on the left side of the accounting equation. Assets are increasedby debits and decreased by credits. The normal balance of liabilities and owner’s capital isa credit because they are on the right side of the accounting equation. Liabilities andowner’s capital are increased by credits and decreased by debits. Revenues increaseowner’s equity and therefore are recorded as credits because credits increase owner’sequity. Credits increase revenues and debits decrease revenues. Expenses and drawingsdecrease owner’s equity and therefore are recorded as debits because debits decreaseowner’s equity. Expenses and drawings are increased by debits and decreased by credits.2.State how a journal is used in the recording process and journalize transactions.Thesteps in the recording process are the first three steps in the accounting cycle. These stepsare: (a) analyze each transaction for its effect on the accounts, (b) record the transaction ina journal, and (c) transfer the journalinformation to the correct accounts in the ledger.A journal:(a) discloses the complete effect of a transaction in one place, (b) provides achronological record of transactions, (c) helps to prevent and locate errors because thedebit and credit amounts for each entry can be easily compared, and (d) explains thetransaction and, if there is one, identifies the source document.3.Explain how a ledger helps in the recording process and post transactions.The entiregroup of accounts maintained by a company is called the ledger. The ledger keeps in oneplace all the information about changes in each of the specific account balances. Posting isthe procedure of transferring journal entries to the ledger accounts. After the journal entrieshave been posted, the ledger will show all of the increases and decreases that have beenmade to each account.4.Prepare a trial balance.A trial balance is a list of the accounts in the ledger and theaccount balances at a specific time. Its main purpose is toprove that debits and credits areequal after posting. A trial balance uncovers certain types of errors in journalizing andposting, and is useful in preparing financial statements. Preparing a trial balance is thefourth step in the accounting cycle.

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