Learning Questions and Answers for Financial Accounting, Lesson 4.3A – Mastery Level

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Read the following questions and then the answers.

Repeat until you can provide the answers without having to read them.

There is a lot of information here but nothing that you cannot do with some reading, thinking, and effort.

Mark any questions or answers that you want to review again later.

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(1) – What are T-accounts?

(2) – How many T-accounts would a company have in its accounting system?

(3) – Where are T-accounts located within a company’s accounting system?

(4) – What is a debit?

(5) – What is a credit?

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(6) – A number is listed on the debit side of a T-account and the accountant indicates that it is an increase. What kind of account might this be if a debit signifies an increase?

(7) – A number is listed on the credit side of a T-account and the accountant indicates that it is an increase. What kind of account might this be if a credit signifies an increase?

(8) – Expenses, assets, and dividend distributions are costs and increase using the debit side of their T-account. Revenues, contributed capital, and liabilities provide financial resources and increase using the credit side of their T-account. A T-account has just two sides and there are only six types of accounts here. How hard can this be to learn?

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(9) – What about gains and losses? What do debits and credits signify for those two accounts?

(10) – What about the recording of retained earnings?

(11) – A transaction takes place. For example, a company borrows $10,000 by signing a note payable with the bank. Cash increases (a debit) and notes payable increases (a credit). In double-entry bookkeeping, how is the effect of that transaction captured?

(12) – Where are journal entries recorded?

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(13) – After journal entries have been recorded for one or more transactions, what happens next?

(14) – Journal entries serve as the recording of transactions. The individual entries are replicated (“posted’) into the corresponding T-account. For example, look at the journal entries in Table 4.34 of the textbook and then see how those same entries are moved into the T-accounts in Table 4.35. Being able to create the entries in Table 4.34 and post them into the T-accounts in Table 4.35 is a huge step in learning double-entry bookkeeping. What happens next?

(15) – U.S. GAAP is said to follow accrual accounting. What is accrual accounting?

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These questions provide a great overview for the exploration of double-entry bookkeeping. How many of them did you know before reading the answers? Read the questions. Read the answers. Soon the knowledge will be deep in your brain. When you know them all, it will be time to move on to the next step in the learning process.

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(1) – What are T-accounts?

T-accounts are forms within a company’s accounting system where each separate account balance is maintained. For example, an organization will set up a T-account for accounts receivable and a different T-account for salary expense and rent payable. It will use a T-account to monitor transactions involving sales revenue and another T-account to keep up with the current balance of equipment. As the name implies, each T-account is shaped like a T. In this original form, the top line held the account title while the left side and the right side remained open for any increases and decreases in the account balance. Today’s computerized systems do not always follow this physical form but the terminology remains the same.

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(2) – How many T-accounts would a company have in its accounting system?

A company will have a T-account for every separate asset, liability, revenue, expense, and the like. Thus, a company could have hundreds of T-accounts.

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(3) – Where are T-accounts located within a company’s accounting system?

All T-accounts are gathered together to create the company’s ledger (also known as its general ledger). T-accounts make up the ledger.

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(4) – What is a debit?

A debit is the left side of a T-account. Depending on the type of account, a dollar figure placed on the debit side of a T-account might represent an increase or it might represent a decrease.

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(5) – What is a credit?

A credit is the right side of a T-account. Once again, depending on the type of account, a dollar figure placed on the credit side of a T-account might represent an increase or it might represent a decrease.

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(6) – A number is listed on the debit side of a T-account and the accountant indicates that it is an increase. What kind of account might this be if a debit signifies an increase?

A debit serves as an increase when the account reflects a cost (or the use of financial resources). For example, an expense is a cost to the company. It is a use of financial resources. Acquiring an asset is also a cost to the company. In the same way, a dividend distribution is a cost to the company. For those three types of accounts—expenses, assets, and dividend distributions—they are all costs to the company so their increases are shown on the debit side. (Decreases for these accounts are, therefore, shown as credits.)

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(7) – A number is listed on the credit side of a T-account and the accountant indicates that it is an increase. What kind of account might this be if a credit signifies an increase?

A credit serves as an increase when the account reflects a source of financial resources. In simple terms, a credit is used when an account helps the organization get money or other assets. For example, a revenue brings in financial resources, it increases with a credit. Contributed capital (or capital stock) brings in resources. It increases with a credit. Borrowing on a liability brings in money. The liability increases with a credit.

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(8) – Expenses, assets, and dividend distributions are costs and increase using the debit side of their T-account. Revenues, contributed capital, and liabilities provide financial resources and increase using the credit side of their T-account. A T-account has just two sides and there are only six types of accounts here. How hard can this be to learn?

Learning debits and credits is not extremely hard but that is true only if you are willing to do sufficient practice to become good at the process. A cost (expenses, assets, and dividend distributions) shows an increase with a debit and a decrease with a credit. A financial resource (revenues, contributed capital, and liabilities) shows an increase with a credit and an increase with a debit. This pattern is always followed and the number of options is few. If you practice a reasonable amount for a few days, recording debits and credits (rather than increases and decreases) should become easy.

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(9) – What about gains and losses? What do debits and credits signify for those two accounts?

Gains follow the rules for revenues and increase with a credit. Losses follow the rules for expense and increase with a debit.

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(10) – What about the recording of retained earnings?

Increases and decreases are rarely made directly to retained earnings. If the company has earned more net income over the past years than the dividends distributed, retained earnings reflects a source of financial resources and has a credit balance. If the company has had more dividends distributed over the years than the net income earned, the account reflects a cost or use of resources and appears as a debit balance. The retained earnings account balance will be discussed more in the next chapter.

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(11) – A transaction takes place. For example, a company borrows $10,000 by signing a note payable with the bank. Cash increases (a debit) and notes payable increases (a credit). In double-entry bookkeeping, how is the effect of that transaction captured?

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(11) First, the effects of transaction are recorded as a journal entry showing the debit account and balance and the credit account and balance.

Cash is to left of notes payable (on the debit side) and its $10,000 increase is on the left of the numbers (the debit side). Notes payable is to the right of the accounts (the credit side) and the $10,000 increase is on the right of the numbers (the credit side). An accountant would read this journal entry, “Cash has been debited so the balance has increased. Notes payable has been credited which also reflects an increase. Sounds like the company borrowed $10,000 in cash on a note.”

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(12) – Where are journal entries recorded?

Journal entries are found in a company’s journal which is sometimes known as a general journal. The journal is a historical record of all transactions using a debit and credit format. See Table 4.34 in Chapter Four in the textbook.

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(13) – After journal entries have been recorded for one or more transactions, what happens next?

Each debit and each credit are “posted” to the appropriate T-account. If the journal entry shows a debit to cash for $10,000, then that same $10,000 is entered on the debit side of the Cash T-account. If the journal entry shows a credit to notes payable, that same $10,000 is entered on the credit side of the Notes Payable T-account. Look at Table 4.35. Notice how the first new entry in Cash ([3] $9,000) corresponds with the debit entry in entry number (3) in the journal in Table 4.34.

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(14) – Journal entries serve as the recording of transactions. The individual entries are replicated (“posted’) into the corresponding T-account. For example, look at the journal entries in Table 4.34 of the textbook and then see how those same entries are moved into the T-accounts in Table 4.35. Being able to create the entries in Table 4.34 and post them into the T-accounts in Table 4.35 is a huge step in learning double-entry bookkeeping. What happens next?

At some point, maybe monthly, quarterly, or yearly, the company will want to prepare financial statements. The debits and credits for each T-account are totaled and then netted to arrive at the current account balance. For example, in Table 4.35, the debits (increases) in the Cash T-account total $67,000 while the credits (decreases) total $25,600. The cash balance at that time is the net amount or $41,400. To help visualize the balances, they are often listed—one at a time—in a trial balance like the one found in Table 4.36.

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(15) – U.S. GAAP is said to follow accrual accounting. What is accrual accounting?

Accrual accounting is a general term covering all rules for the timing of revenue and expense recognition. In this way, the reporting by all companies is standardized which helps greatly in making comparisons. Revenues are recognized when the seller has satisfied the performance obligation agreed on by the parties. In other words, the seller has done the promised work. Expenses are recognized when a cost no longer provides probable future economic benefits. Expense recognition is guided by the matching principle which states that expenses are recognized in the same period as the revenues which they help to generate.

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Now that you have read over each answer, go back to the questions at the beginning and see if you can answer them all without a prompt. That is the goal, for you to know every answer and know It well.

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