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Accounting Chapter 3



3.1 Accounting Terminology

Listed as follows re eight technical accounting terms introduced in this chapter:

Realization principle, Time period principle, Matching principle, Net income, Credit, Accounting period, Expenses, Accounting cycle

Each of the following statements may (or may not) describe one of these technical terms. For each statement, indicate the term described, or answer “none” if the statement does not correctly describe any of the terms.

  1. The span of time covered by an income statement.
  2. The sequence of accounting procedures used to record, classify, and summarize accounting information
  3. The traditional accounting practice of resolving uncertainty by choosing the solution that leads to the lower amount of income being recognized
  4. An increase in owners’ equity resulting from profitable operations
  5. The underlying accounting principle that determines when revenue should be recorded in the accounting records
  6. The type of entry used to decrease an asset or increase a liability or owners’ equity account
  7. The underlying accounting principle of offsetting revenue earned during an accounting period with the expenses incurred in generating that revenue
  8. The costs of the goods and services used up in the process of generating revenue


3.2 The matching Principle: You as a Driver

The purpose of this exercise is to demonstrate the matching principle in a familiar setting. Assume that you own a car that you drive about, miles each year.

  1. List the various costs to you associated with owning and operating this car. Make an estimate of the total annual cost of owning and operating the car, as well as the average cost per mile you drive.
  2. Assume also that you have a part-time job. You usually do not use your car in this job, but today your employer asks you to drive miles (round-trip_ to deliver some important documents. Your employer offers to “reimburse you for your driving expenses.”

-You already have a full tank of gas, so you are able to drive the whole miles without stopping and you don’t actually spend any money during the trip. Does this mean that you have incurred no “expenses” for which you should be reimbursed? Explain.


 3.6 Effects of Transactions on the Accounting Equation

Satka Fishing Expedition, Inc., recorded the following transactions in July.

  1. Provided an ocean fishing expedition for a credit customer; payment is due August 10.
  2. Paid Marine Service Center for repairs to boats performed in June. (In June, Satka Fishing Expeditions, Inc., had received and properly recorded the invoice for these repairs.)
  3. Collected the full amount due from a credit customer for a fishing expedition provided in June.
  4. Received a bill from Baldy’s Bait Shop for bait purchased and used in July. Payment is due August.
  5. Purchased a new fishing boat on July 28, paying part cash and issuing a note payable for the balance. The new boat is first scheduled for use on August 5
  6. Declared and paid a cash dividend on July 31

Indicate the effects that each of these transactions will have the following six total amounts in the company’s financial statements for the month of July. Organize your answer in tabular form, using the column headings shown, and use the code letters I for increase, D for decrease, and NE for no effect. The answer to transaction 1 is provided as an example.

Income Statement                                                                   Balance Sheet

Transaction       Revenue – Expenses= Net Income                    Assets= Liabilities + Owners Equity

1                   I                 NE              I                                 I              NE                  I