ACG 4101 Ch. 2 Questions and Answers
Explain the differences between external events and internal events. Give an example
of each type of event. - answer External events involve an exchange transaction
between the company and a separate economic entity. For every external transaction,
the company is receiving something in exchange for something else. Internal events do
not involve an exchange transaction but do affect the financial position of the company.
Examples of external events are the purchase of inventory, a sale to a customer, and
the borrowing of cash from a bank. Examples of internal events include the recording of
depreciation expense, the expiration of prepaid rent, and the accrual of salary expense.
Each economic event or transaction will have a dual effect on financial position. Explain
what is meant by this dual effect. - answer According to the accounting equation, there
is equality between the total economic resources of an entity, its assets, and the claims
to those resources, liabilities, and equity. This implies that, since resources must always
equal claims, the net effect of any transaction cannot affect one side of the accounting
equation differently than the other side.
What is the purpose of a journal? What is the purpose of a general ledger? - answer
The purpose of a journal is to capture, in chronological order, the dual effect of a
transaction. A general ledger is a collection of storage areas called accounts. These
accounts keep track of the increases and decreases in each element of financial
position.
Explain the difference between permanent accounts and temporary accounts. Why
does an accounting system include both types of accounts? - answerPermanent
accounts represent the financial position of a company—assets, liabilities and owners'
equity—at a particular point in time. Temporary accounts represent the changes in
shareholders' equity, the retained earnings component of equity for a corporation,
caused by revenue, expense, gain, and loss transactions. It would be cumbersome to
record revenue/expense, gain/loss transactions directly into the permanent retained
earnings account. Recording these transactions in temporary accounts facilitates the
preparation of the financial statements.
Describe how debits and credits affect assets, liabilities, and permanent owners' equity
accounts. - answerAssets are increased by debits and decreased by credits. Liabilities
and equity accounts are increased by credits and decreased by debits.
Describe how debits and credits affect temporary owners' equity accounts. -
answerRevenues and gains are increased by credits and decreased by debits.
Expenses and losses are increased by debits (thus causing owners' equity to decrease)
and decreased by credits (thus causing owners' equity to increase).
Explain the differences between external events and internal events. Give an example
of each type of event. - answer External events involve an exchange transaction
between the company and a separate economic entity. For every external transaction,
the company is receiving something in exchange for something else. Internal events do
not involve an exchange transaction but do affect the financial position of the company.
Examples of external events are the purchase of inventory, a sale to a customer, and
the borrowing of cash from a bank. Examples of internal events include the recording of
depreciation expense, the expiration of prepaid rent, and the accrual of salary expense.
Each economic event or transaction will have a dual effect on financial position. Explain
what is meant by this dual effect. - answer According to the accounting equation, there
is equality between the total economic resources of an entity, its assets, and the claims
to those resources, liabilities, and equity. This implies that, since resources must always
equal claims, the net effect of any transaction cannot affect one side of the accounting
equation differently than the other side.
What is the purpose of a journal? What is the purpose of a general ledger? - answer
The purpose of a journal is to capture, in chronological order, the dual effect of a
transaction. A general ledger is a collection of storage areas called accounts. These
accounts keep track of the increases and decreases in each element of financial
position.
Explain the difference between permanent accounts and temporary accounts. Why
does an accounting system include both types of accounts? - answerPermanent
accounts represent the financial position of a company—assets, liabilities and owners'
equity—at a particular point in time. Temporary accounts represent the changes in
shareholders' equity, the retained earnings component of equity for a corporation,
caused by revenue, expense, gain, and loss transactions. It would be cumbersome to
record revenue/expense, gain/loss transactions directly into the permanent retained
earnings account. Recording these transactions in temporary accounts facilitates the
preparation of the financial statements.
Describe how debits and credits affect assets, liabilities, and permanent owners' equity
accounts. - answerAssets are increased by debits and decreased by credits. Liabilities
and equity accounts are increased by credits and decreased by debits.
Describe how debits and credits affect temporary owners' equity accounts. -
answerRevenues and gains are increased by credits and decreased by debits.
Expenses and losses are increased by debits (thus causing owners' equity to decrease)
and decreased by credits (thus causing owners' equity to increase).
