CHAPTER 2: The Recording Process

Which of the following statements about an account is true?

• The right side of an account is the debit, or increase, side.

• An account is an individual accounting record of increases and decreases in specific asset, liability, and equity items.

• There are separate accounts for specific assets and liabilities but only one account for equity items.

• The left side of an account is the credit, or decrease, side.

Answer explanation

An account is an individual accounting record of increases and decreases in specific asset, liability, and equity items. The other choices are incorrect because (a) the right side of the account and can be either the decrease or the increase side, depending on the

specific classification account.

Debits:

• increase both assets and liabilities

• decrease both assets and liabilities.

• increase assets and decrease liabilities.

• decrease assets and increase liabilities.

Answer explanation

Debits increase assets but they decrease liabilities. The other choices are incorrect because debits (a) decrease, not increase, liabilities; (b) increase, not decrease, assets; and (d) increase, not decrease, assets and decrease, not increase liabilities.

A revenue account:

• is increased by debits.

• is decreased by credits.

• has a normal balance of a debit.

• is increased by credits.

Answer explanation

A revenue account is increased by credits. The other choices are incorrect because a revenue account (a) is increased by credits, not debits; (b) is decreased by debits, not credits; and (c) has a normal balance of a credit, not a debit.

Accounts that normally have debit balances are:

• assets, expenses, and revenues.

• assets, expenses, and share capital—ordinary.

• assets, liabilities, and dividends.

• assets, dividends, and expenses.

Answer explanation

Assets, dividends, and expenses all have normal debit bal- ances. The other choices are incorrect because (a) revenues have nor- mal credit balances, (b) share capital—ordinary has a normal credit balance, and (c) liabilities have normal credit balances.

The expanded accounting equation is:

• Assets + Liabilities = Share Capital + Retained Earnings + Dividends + Revenues + Expenses.

• Assets = Liabilities + Share Capital + Retained Earnings + Dividends + Revenues – Expenses.

• Assets = Liabilities – Share Capital – Retained Earnings – Dividends – Revenues – Expenses.

• Assets = Liabilities + Share Capital + Retained Earnings + Revenues – Expenses – Dividends.

Answer explanation

The expanded accounting equation is Assets = Liabilities + Share Capital + Retained Earnings + Revenues – Expenses – Divi- dends. The other choices are therefore incorrect.

Which of the following is not part of the recording process?

• Analyzing transactions.

• Preparing an income statement.

• Entering transactions in a journal.

• Posting journal entries.

Answer explanation

Preparing an income statement is not part of the recording process. Choices (a) analyzing transactions, (c) entering transactions in a journal, and (d) posting journal entries are all part of the record- ing process.

Which of the following statements about a journal is false?

• It is not a book of original entry.

• It provides a chronological record of transactions.

• It helps to locate errors because the debit and credit amounts for each entry can be readily compared.

• It discloses in one place the complete effect of a transaction.

Answer explanation

The journal is a book of original entry. The other choices are all true statements.

The purchase of supplies on account should result in:

• a debit to Supplies Expense and a credit to Cash.

• a debit to Supplies Expense and a credit to Accounts Payable.

• a debit to Supplies and a credit to Accounts Payable.

• a debit to Supplies and a credit to Accounts Receivable.

Answer explanation

The purchase of supplies on account results in a debit to Supplies and a credit to Accounts Payable. The other choices are incorrect because the purchase of supplies on account results in (a) a debit to Supplies, not Supplies Expense, and a credit to Ac- counts Payable, not Cash; (b) a debit to Supplies, not Supplies Expense; and (d) a credit to Accounts Payable, not Accounts Receivable.

The order of the accounts in the ledger is:

• assets, revenues, expenses, liabilities, share capital—ordinary,

  dividends

• assets, liabilities, share capital—ordinary, dividends, revenues, expenses.

• share capital—ordinary, assets, revenues, expenses, liabilities, dividends.

• revenues, assets, expenses, liabilities, share capital—ordinary, dividends.

Answer explanation

The correct order of the accounts in the ledger is assets, lia- bilities, share capital—ordinary, dividends, revenues, expenses. The other choices are incorrect because they do not reflect this order. The order of the accounts in the ledger is (1) statement of financial posi- tion accounts: asset, liability, and equity accounts (Share Capital— Ordinary, Retained Earnings, and Dividends); and then (2) income statement accounts: revenues and expenses.

A ledger:

• contains only asset and liability accounts.

• should show accounts in alphabetical order.

• is a collection of the entire group of accounts maintained by a company.

• is a book of original entry.

Answer explanation

A ledger is a collection of all the accounts maintained by a company. The other choices are incorrect because a ledger (a) contains all account types—asset, liability, and equity accounts—not just asset and liability accounts; (b) usually shows accounts in account number order, not alphabetical order; and (d) is not a book of original entry because entries made in the ledger come from the journals (the books of original entry).