Chapter 2
ANALYZING AND RECORDING TRANSACTIONS
True /False Questions
1. The first step in the processing of a transaction is to analyze the transaction and source
documents.
2. Preparation of a trial balance is the first step in the analyzing and recording process.
3. Source documents provide evidence of business transactions and are the basis for
accounting entries.
4. Items such as sales tickets, bank statements, checks, and purchase orders are source
documents.
5. An account is a record of increases and decreases in a specific asset, liability, equity,
revenue, or expense item.
6. A customer’s promise to pay is called an account payable to the seller.
7. Withdrawals by the owner are a business expense.
8. Land and buildings are generally recorded in the same ledger account.
9. Unearned revenues are liabilities.
10. Cash withdrawn by the owner of a proprietorship should be treated as an expense of the
business.
11. When a company provides services for which cash will not be received until some future
date, the company should record the amount charged as unearned revenue.
12. The chart of accounts is a list of all the accounts used by a company and includes an
identification number assigned to each account.
13. An account balance is the difference between the debits and credits for an account
including any beginning balance.
14. Debit means the right side of an account.
15. In a double-entry accounting system, the total amount debited must always equal the total
amount credited.
16. Increases in liability accounts are recorded as debits.
17. Debits increase asset and expense accounts.
18. Credits always increase account balances.
19. Crediting an expense account decreases it.
20. A revenue account normally has a debit balance.
21. Accounts are normally decreased by debits.
22. The owner’s withdrawal account normally has a credit balance since it is an equity
account.
23. Asset accounts normally have credit balances and revenue accounts normally have debit
balances.
24. An owner’s capital account normally has a debit balance.
25. A debit entry is always favorable.
26. A transaction that decreases an asset account and increases a liability account must also
affect one or more other accounts.
27. A transaction that increases an asset and decreases a liability must also affect one or more
other accounts.
28. If insurance coverage for the next three years is paid for in advance, the amount of the
payment is debited to an asset account called Prepaid Insurance.
29. The purchase of supplies on credit should be recorded with a debit to Supplies and a credit
to Accounts Payable.
30. If a company purchases land paying cash, the journal entry to record this transaction will
include a debit to Cash.
31. If a company provides services to a customer on credit the selling company should credit
Accounts Receivable.
32. When a company bills a customer for $600 for services rendered, the journal entry to
record this transaction will include a $600 debit to Services Revenue.
33. The debt ratio helps to assess the risk a company has of failing to pay its debts and is
helpful to both its owners and creditors.
34. The higher a company’s debt ratio is, the higher the risk of a company not being able to
meet its obligations.
35. The debt ratio is calculated by dividing total assets by total liabilities.
36. A company that finances a relatively large portion of its assets with liabilities is said to
have a high degree of financial leverage.
37. If a company is highly leveraged, this means that it has relatively low risk of not being
able to repay its debt.
38. Hamilton Industries has liabilities of $105 million and total assets of $350 million. Its debt
ratio is 40.0%.
39. A compound journal entry affects no more than two accounts.
40. Posting is the transfer of journal entry information to the ledger.
41. Transactions are first recorded in the ledger.
42. The journal is known as a book of original entry.
43. A journal gives a complete record of each transaction in one place, and shows the debits
and credits for each transaction.
44. The journal is known as the book of final entry because financial statements are prepared
from it.
45. The trial balance is a list of all general ledger accounts and their balances at a point in
time.
46. Generally, the ordering of accounts in a trial balance typically follows their identification
number from the chart of accounts, that is, assets first, then liabilities, then owner’s capital and
withdrawals, followed by revenues and expenses.
47. The trial balance can serve as a replacement for the balance sheet, since debits must equal
with credits.
48. A trial balance that is in balance is proof that no errors were made in journalizing the
transactions, posting to the ledger, and preparing the trial balance.
49. If cash was incorrectly debited for $100 instead of correctly credited for $100, the cash
account is out of balance by $100.
50. The balance sheet provides a link between beginning and ending income statements.
51. The heading on each financial statement lists the three W’s – Who (the name of the
organization); What (the name of the statement); and Where (the organization’s address)
52. An income statement reports the revenues earned less expenses incurred by a business
over a period of time.
53. The balance sheet reports the financial position of a company at a point in time.
54. Both U.S. GAAP and IFRS prepare the same four basic financial statements.
55. Both U.S. GAAP and IFRS do not require the use of accrual basis accounting.
56. The accounting process begins with:
A. Analysis of business transactions and source documents.
B. Preparing financial statements and other reports.
C. Summarizing the recorded effect of business transactions.
D. Presentation of financial information to decision-makers.
E. Preparation of the trial balance.
57. All of the following statements regarding a sales invoice are true except:
A. A sales invoice is a type of source document.
B. A sales invoice is used by sellers to record the sale.
C. A sales invoice is used by buyers to record purchases.
D. A sales invoice gives rise to an entry in the accounting process.
E. A sales invoice does not provide objective evidence about a transaction.
58. Source documents include all of the following except:
A. Sales tickets.
B. Ledgers.
C. Checks.
D. Purchase orders.
E. Bank statements.
59. Source documents:
A. Include the ledger.
B. Are the sources of accounting information.
C. Must be in electronic form.
D. Are based on accounting entries.
E. Include the chart of accounts.
60. A record of the increases and decreases in a specific asset, liability, equity, revenue, or
expense is a(n):
A. Journal.
B. Posting.
C. Trial balance.
D. Account.
E. Chart of accounts.
61. An account used to record the owner’s investments in the business is called a(n):
A. Withdrawals account.
B. Capital account.
C. Revenue account.
D. Expense account.
E. Liability account.
62. The account used to record the transfers of assets from a business to its owner is:
A. A revenue account.
B. The owner’s withdrawals account.
C. The owner’s capital account.
D. An expense account.
E. A liability account.
63. Which of the following statements is correct?
A. When a future expense is paid in advance, the payment is normally recorded in a liability
account called Prepaid Expense.
B. Promises of future payment by the buyer are called accounts receivable.
C. Increases and decreases in cash are always recorded in the owner’s capital account.
D. An account called Land is commonly used to record increases and decreases in both the
land and buildings owned by a business.
E. Accrued liabilities include accounts receivable.
64. Unearned revenues are:
A. Revenues that have been earned and received in cash.
B. Revenues that have been earned but not yet collected in cash.
C. Liabilities created when a customer pays in advance for products or services before the
revenue is earned.
D. Recorded as an asset in the accounting records.
E. Increases to owners’ capital.
65. Prepaid expenses are:
A. Payments made for products and services that do not ever expire.
B. Classified as liabilities on the balance sheet.
C. Decreases in equity.
D. Assets that represent prepayments of future expenses.
E. Promises of payments by customers.
66. A formal promise to pay (in the form of a promissory note) a future amount is a(n):
A. Unearned revenue.
B. Prepaid expense.
C. Credit account.
D. Note payable.
E. Account receivable.
67. A collection of all accounts and their balances used by a business is called a:
A. Journal.
B. Book of original entry.
C. General Journal.
D. Balance column journal.
E. Ledger.
68. A ledger is:
A. A record containing increases and decreases in a specific asset, liability, equity, revenue, or
expense item.
B. A journal in which transactions are first recorded.
C. A collection of documents that describe transactions and events entering the accounting
process.
D. A list of all accounts with their debit balances at a point in time.
E. A record containing all accounts and their balances used by a company.
69. A list of all accounts and the identification number assigned to each account used by a
company is called a:
A. Source document.
B. Journal.
C. Trial balance.
D. Chart of accounts.
E. General Journal.
70. The numbering system used in a company’s chart of accounts:
A. Is the same for all companies.
B. Is determined by generally accepted accounting principles.
C. Depends on the source documents used in the accounting process.
D. Typically begins with balance sheet accounts.
E. Typically begins with income statement accounts.