Questions and Answers of Small Business Accounting

Defi ne the separate entity assumption.
List three examples of accounting periods.
Describe the key difference between cash-basis accounting and accrual accounting.
Defi ne internal controls and list three examples
Identify and defi ne the three types of business operations.
List the legal forms of business structure.
Which legal form of business structure is the most simple to set up? Which is the most complicated?
Which business structures protect the owners’ personal assets in lawsuits?
Describe the advantages of using a computerized accounting system.
Identify three accounting software programs.
List the information you should have ready when you set up a computerized accounting system.
If you are starting a gardening business, what are three things you can do to make sure you comply with the separate entity assumption?
Your friend has a full-time job, but he plans to have a side-business teaching music lessons during the school year. He wants to take summers off from his music business. What would be the most
Identify advantages and disadvantages of cash-basis accounting and accrual accounting.
You own a packaging business and employ three workers. What can you do to strengthen internal controls?
Think of a business you would like to open. Briefly describe the type of business operation. Which legal structure do you think would be best? Why?
Suppose you are starting a corporation. What qualities would you want in the people who serve on your board of directors? How would you go about choosing and recruiting board members?
Your business partner does not want to spend money on software and prefers to do the books manually. Prepare a list of talking points to convince your partner to invest in accounting software.
Which software features are most important to you as a potential small-business owner?
Which accounts are affected? (Furniture and Cash in Checking )
What type of account is Furniture? (Assets)
What type of account is Cash in Checking? (Assets)
What is the increase or decrease of each account? (Furniture will increase$900. Cash in Checking will decrease $900.)
Which account is debited? (Furniture. An increase to assets is a debit.)
Which account is credited? (Cash in Checking. A decrease to assets is a credit.)
Describe the difference between debit and credit.
What is meant by normal balance?
List fi ve account types and give a brief description of each type.Include the normal balance in your description.
What is the accounting equation? Restate the accounting equation in your own words.
What is a balance sheet? Why is it called a “balance sheet”?
Which debit accounts appear on the balance sheet? Which credit accounts?
What is an income statement? Which debit accounts are on the income statement? Which credit accounts?
What is the bottom line of an income statement?
How do the titles of a balance sheet and an income statement differ?
How are the accounts organized in a chart of accounts?
What is the difference between current assets and long-term assets?Current liabilities and long-term liabilities?
Defi ne expenses account and give three examples.
You are delegating the day-to-day bookkeeping tasks to a worker who will use an accounting software program. Because you feel a basic understanding of accounting is necessary, you decide to provide
Identify on which fi nancial statement the following items would appear:a. Cash in Checkingb. Equipmentc. Rita Singh, Capitald. Styling Services Incomee. Accounts Payablef. Sales—Hair Products g.
TRANSACTION: Your company borrowed $3,000 from the bank.
TRANSACTION: You received a check for $4,000 for an interior decorating job.
TRANSACTION: You wrote a check for $45 for a six-month subscription to a professional journal.
For each account listed, identify the fi nancial statement on which the account will appear:a. Computersb. Consulting Incomec. Dues and Subscriptionsd. Loan Payablee. Rafael Salas, Capitalf.
Prepare the income statement for Critters Pet Care.
Prepare the balance sheet for Critters Pet Care.
You just opened the bank account for your landscaping business and are setting up your accounting system. What expenses accounts will you include in your chart of accounts?
Your business has a high volume of vendor invoices and you hired an accounts payable clerk to help with the coding and inputting. This person is new to your line of business. What advice would you
Give four examples of source documents.
At what point does a transaction enter the accounting system?
Which accounts are closed at the end of an accounting period? Why?
Describe the difference between a journal and a ledger.
What types of transactions can be recorded in the general journal?
What is the general ledger and why is it considered the book of fi nal entry?
If you wanted to fi nd more information about a transaction in the general ledger, what would you do?
List four reasons for maintaining an accurate paper trail.
What do you need to create a filing system?
Whom should you consult about record retention?
Name two government agencies that have strict record retention policies for employers
List the fi rst three steps of the accounting cycle. Create an imaginary transaction (be specific) and describe what happens to this transaction in the fi rst three steps.
Describe fi ve transactions that a janitorial service would have.
You are starting a catering business and are preparing to meet with a printer about ordering business forms. Which forms will you have printed?
You prepared an invoice for a customer and you want to enter it in the journal. What specifi c information will you copy from the invoice to the journal? What information is not on the invoice?
In a manual accounting system, would you ever post a transaction directly from a source document to the general ledger? Why or why not?
Which of the following accounts would be closed at the end of the accounting period?Cash in Checking Loan Payable Tom Gegich, Capital Sales—Hardware License Renewal Fees
Which of the following accounts would be carried forward at the end of the accounting period?Accounts Receivable Sales Tax Payable Diane Fratelli, Capital Floor Installation Income Truck Maintenance
How would an expandable file help with your accounts payable? Can you think of a reason why you would use an expandable file if you already have a computerized accounting system? Explain your answer.
How long do you think you should keep income tax returns? What about other income-tax-related documents? Why?
What is the suggested time frame for keeping files accessible? Do you think this is reasonable? Why or why not?
In the real world, when does a business use the general journal?
Why are the pages of a journal numbered?
What is the purpose of the Withdrawals account?
What is the normal balance of the Withdrawals account?How does the Withdrawals account affect a person’s ownership interest?
What type of account is Accounts Payable? What is it used for?
What is a compound entry? Describe how the debits and credits are listed in a compound entry.
What is the normal balance of Accounts Receivable? What type of account is this?
List three transactions of your own creation that refl ect the categories demonstrated in the chapter.
Which transaction decreases the Accounts Payable account? Is the account debited or credited?
Which transaction decreases the Accounts Receivable account? Is the account debited or credited?
How is the combined journal different from the general journal?
You have three business partners. How many equity accounts will your business have? Briefly describe the accounts.
Why do you think the owner’s cash withdrawals are not recorded directly in the Capital account?
When would you credit the Withdrawals account?
The chapter shows an example of a compound journal entry. Give two more examples of compound journal entries.
If your company offered credit to customers, what payment terms would you have (the number of days before you require payment)? Why?
Journalize the following transactions:6/01/200X: Rafael Salas, owner of Creative Software, Invested$3,000 in the business, Memo 21.6/10/200X: Rafael Salas took $1,450 out of the business for personal
Journalize the following transactions:7//01/200X: Beautiful Day Salon replaced the chairs at three styling stations, buying on credit at Specialty Fixtures, Invoice 912 for $1,900.7/02/200X: The
Journalize the following transaction:8/15/200X: Gegich Repair Service bought the following items at Wholesale Mart, Check 189:Copier paper, $35 Motor oil for vans, $200 Hardware supplies including
Journalize the following transaction:9/15/200X: The owner of Solid Foundation Flooring went to Hal’s Tech World and bought a computer system for $1,700. She also bought CD-ROMs and
Journalize the following transactions:10/01/200X: John Ross transferred a van that he owned to his business, Critters Pet Care. According to the Kelley Blue Book, the van was worth $12,000. John
What is a ledger account? Give fi ve examples.
Why is the audit trail necessary?
List the steps needed to post the credit side of a transaction.
How are the posting reference columns used?
If the ledger account has a debit balance and the account is then debited, in which column will the new balance appear?
If the ledger account has a $5,000 credit balance and the account is then debited for $700, which column will show the new balance?What is the new balance?
If your Cash ledger account shows a credit balance, what does this mean?
How do you correct an erroneous journal entry that has already been posted?
How does a computerized accounting program combine the fi rst three steps of the accounting cycle? Provide two specifi c examples.
In a computerized accounting system, how would you research the details of amounts in the Paper Supplies account?
Is it easy or diffi cult to make changes to transactions in a computerized system? Explain your answer.

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