Page 101 - Accounting Principles (A Business Perspective)

2. Recording business transactions

Journal entry Shows all of the effects of a business transaction as expressed in debit(s) and credit(s) and
may include an explanation of the transaction.
Journalizing A step in the accounting recording process that consists of entering the effects of a transaction
in a journal.
Ledger The complete collection of all of the accounts of a company; often referred to as the general ledger.
Nominal accounts See temporary accounts.
Note An unconditional written promise to pay to another party the amount owed either when demanded or
at a certain specified date.
Permanent accounts (real accounts) Balance sheet accounts; their balances are not transferred (or
closed) to any other account at the end of the accounting period.
Posting Recording in the ledger accounts the information contained in the journal.
Real accounts See permanent accounts.
Simple journal entry An entry with one debit and one credit.
T-account An account resembling the letter T, which is used for illustrative purposes only. Debits are
entered on the left side of the account, and credits are entered on the right side of the account.
Temporary accounts (nominal accounts) They temporarily contain the revenue, expense, and dividend
information that is transferred (or closed) to a stockholders' equity account (Retained Earnings) at the end of
the accounting period.
Trial balance A listing of the ledger accounts and their debit or credit balances to determine that debits
equal credits in the recording process.
Vertical analysis Shows the percentage that each item in a financial statement is of some significant total
such as total assets or sales.
Self-test
True-false
Indicate whether each of the following statements is true or false.

All of the steps in the accounting cycle are performed only at the end of the accounting period.
A transaction must be journalized in the journal before it can be posted to the ledger accounts.
The left side of any account is the credit side.
Revenues, liabilities, and capital stock accounts are increased by debits.
The dividends account is increased by debits.
If the trial balance has equal debit and credit totals, it cannot contain any errors.
Multiple-choice

Select the best answer for each of the following questions.
When the stockholders invest cash in the business:
a. Capital Stock is debited and Cash is credited.
b. Cash is debited and Dividends is credited.
c. Cash is debited and Capital Stock is credited.
d. None of the above.
Assume that cash is paid for insurance to cover a three-year period. The recommended debit and credit are:
a. Debit Insurance Expense, credit Cash.
b. Debit Prepaid Insurance, credit Cash.

c. Debit Cash, credit Insurance Expense.
d. Debit Cash, credit Prepaid Insurance.
A company received cash from a customer in payment for future delivery services. The correct debit and credit
are:

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