Fill This Form To Receive Instant Help
Fill This Form To Receive Instant Help
Homework answers / question archive / This assignment is a continuation of the Cookie Creations case study, which began in Chapter 1
This assignment is a continuation of the Cookie Creations case study, which began in Chapter 1. From the information gathered in the previous chapter, read the continuation of the Cookie Creations case study in Chapter 2 of the textbook on p. 2-42. SEE BELOW
The case study allows you to apply what you have learned about accounting and the recording process. This assignment will enable you to practice what you have learned so far.
After researching the different forms of business organization, Natalie decides to operate Cookie Creations as a proprietorship. She then starts the process of getting the business running. In November 2019, the following activities listed below take place.
Nov. 8: Natalie cashes her U.S. Savings Bonds and receives $520, which she deposits in her personal bank account.
Nov. 8: She opens a bank account under the name “Cookie Creations” and transfers $500 from her personal account to the new account.
Nov. 11: Natalie pays $65 for advertising.
Nov. 13: She buys baking supplies, such as flour, sugar, butter, and chocolate chips, for $125 cash. (Hint: Use the Supplies account.)
Nov. 14: Natalie starts to gather some baking equipment to take with her when teaching the cookie classes. She has an excellent top-of-the-line food processor and mixer that originally cost her $750. Natalie decides to start using it only in her new business. She estimates that the equipment is currently worth $300. She invests the equipment in the business.
Nov. 16: Natalie realizes that her initial cash investment is not enough. Her grandmother lends her $2,000 cash, for which Natalie signs a note payable in the name of the business. Natalie deposits the money in the business bank account. (Hint: The note does not have to be repaid for 24 months. As a result, the note payable should be reported in the accounts as the last liability and on the balance sheet as the last liability.)
Nov. 17: She buys more baking equipment for $900 cash.
Nov. 20: She teaches her first class and collects $125 cash.
Nov. 25: Natalie books a second class for December 4 for $150. She receives $30 cash in advance as a down payment.
Nov. 30: Natalie pays $1,320 for a 1-year insurance policy that will expire on December 1, 2020.
Answer the questions below using an Excel spreadsheet. You should create a new tab on your spreadsheet for each calculation used for a total of three tabs on your spreadsheet.
Please show your work, and do not take any shortcuts. Make sure to complete item “a” completely before moving to item “b,” and then move to item “c.” You cannot jump ahead unless you have completed each step sequentially in full.
Submit the Excel document in Blackboard upon completion.
CHAPTER 2 The Recording Process Chapter Preview In Chapter 1, we analyzed business transactions in terms of the accounting equation, and we presented the cumulative effects of these transactions in tabular form. Imagine a company like MF Global (as in the following Feature Story) using the same tabular format as Softbyte to keep track of its transactions. In a single day, MF Global engaged in thousands of business transactions. To record each transaction this way would be impractical, expensive, and unnecessary. Instead, companies use a set of procedures and records to keep track of transaction data more easily. This chapter introduces and illustrates these basic procedures and records. Feature Story Accidents Happen How organized are you financially? Take a short quiz. Answer yes or no to each question: • Does your wallet contain so many cash machine receipts that you've been declared a walking fire hazard? • Do you wait until your debit card is denied before checking the status of your funds? • Was Aaron Rodgers (the quarterback for the Green Bay Packers) playing high school football the last time you verified the accuracy of your bank account? If you think it is hard to keep track of the many transactions that make up your life, imagine how difficult it is for a big corporation to do so. Not only that, but now consider how important it is for a large company to have good accounting records, especially if it has control of your life savings. MF Global Holdings Ltd was such a company. As a large investment broker, it held billions of dollars of investments for clients. If you had your life savings invested at MF Global, you might be slightly displeased if you heard this from one of its representatives: “You know, I kind of remember an account for someone with a name like yours—now what did we do with that?” Unfortunately, that is almost exactly what happened to MF Global's clients shortly before it filed for bankruptcy. During the days immediately following the bankruptcy filing, regulators and auditors struggled to piece things together. In the words of one regulator, “Their books are a disaster … we're trying to figure out what numbers are real numbers.” One company that considered buying an interest in MF Global walked away from the deal because it “couldn't get a sense of what was on the balance sheet.” That company said the information that should have been instantly available instead took days to produce. It now appears that MF Global did not properly segregate customer accounts from company accounts. And, because of its sloppy recordkeeping, customers were not protected when the company had financial troubles. Total customer losses were approximately $1 billion. As you can see, accounting matters! Source: S. Patterson and A. Lucchetti, “Inside the Hunt for MF Global Cash,” Wall Street Journal Online (November 11, 2011). Chapter Outline LEARNING OBJECTIVES LO 1 Describe how accounts, debits, and credits are used to record business transactions. LO 2 Indicate how a journal is used in the recording process. LO 3 Explain how a ledger and posting help in the recording process. • The account • Debits and credits • Summary of debit/credit rules • The recording process • The journal • The ledger • Posting • Chart of accounts D B D B D LO 4 Prepare a trial balance. • The recording process illustrated • Summary illustration of journalizing and posting • Limitations of a trial balance • Locating errors • Dollar signs and underlining • Go to the Review and Practice section at the end of the chapter for a review of key concepts and practice applications with solutions. • Visit WileyPLUS with ORION for additional tutorials and practice opportunities. Accounts, Debits, and Credits LEARNING OBJECTIVE 1 Describe how accounts, debits, and credits are used to record business transactions. The Account An account is an individual accounting record of increases and decreases in a specific asset, liability, or owner's equity item. For example, Softbyte (the company discussed in Chapter 1) would have separate accounts for Cash, Accounts Receivable, Accounts Payable, Service Revenue, Salaries and Wages Expense, and so on. (Note that whenever we are referring to a specific account, we capitalize the name.) In its simplest form, an account consists of three parts: (1) a title, (2) a left or debit side, and (3) a right or credit side. Because the format of an account resembles the letter T, we refer to it as a T-account. Illustration 2.1 shows the basic form of an account. ILLUSTRATION 2.1 Basic form of account We use this form often throughout this book to explain basic accounting relationships. Debits and Credits The term debit indicates the left side of an account, and credit indicates the right side. They are commonly abbreviated as Dr. for debit and Cr. for credit. They do not mean D increase or decrease, as is commonly thought. We use the terms debit and credit repeatedly in the recording process to describe where entries are made in accounts. For example, the act of entering an amount on the left side of an account is called debiting the account. Making an entry on the right side is crediting the account. When comparing the totals of the two sides, an account shows a debit balance if the total of the debit amounts exceeds the credits. An account shows a credit balance if the credit amounts exceed the debits. Note the position of the debit side and credit side in Illustration 2.1. The procedure of recording debits and credits in an account is shown in Illustration 2.2 for the transactions affecting the Cash account of Softbyte. The data are taken from the Cash column of the tabular summary in Illustration 1.8. ILLUSTRATION 2.2 Tabular summary and account form for Softbyte's Cash account Every positive item in the tabular summary represents a receipt of cash. Every negative amount represents a payment of cash. Notice that in the account form, we record the increases in cash as debits and the decreases in cash as credits. For example, the $15,000 receipt of cash (in blue) is debited to Cash, and the −$7,000 payment of cash (in red) is credited to Cash. Having increases on one side and decreases on the other reduces recording errors and helps in determining the totals of each side of the account as well as the account balance. The balance is determined by netting the two sides (subtracting one amount from the other). The account balance, a debit of $8,050, indicates that Softbyte had $8,050 more increases than decreases in cash. In other words, Softbyte started with a balance of zero and now has $8,050 in its Cash account. Debit and Credit Procedure In Chapter 1, you learned the effect of a transaction on the basic accounting equation. Remember that each transaction must affect two or more accounts to keep the basic accounting equation in balance. In other words, for each transaction, debits must equal credits. The equality of debits and credits provides the basis for the double-entry system of recording transactions (see International Note). INTERNATIONAL NOTE Rules for accounting for specific events sometimes differ across countries. Despite the differences, the double-entry accounting system is the basis of accounting systems worldwide. Under the double-entry system, the dual (two-sided) effect of each transaction is recorded in appropriate accounts. This system provides a logical method for recording transactions and also helps ensure the accuracy of the recorded amounts as well as the detection of errors. If every transaction is recorded with equal debits and credits, the sum of all the debits to the accounts must equal the sum of all the credits. The double-entry system for determining the equality of the accounting equation is much more efficient than the plus/minus procedure used in Chapter 1. The following discussion illustrates debit and credit procedures in the double-entry system. Dr./Cr. Procedures for Assets and Liabilities In Illustration 2.2 for Softbyte, increases in Cash—an asset—are entered on the left side, and decreases in Cash are entered on the right side. We know that both sides of the basic equation (Assets = Liabilities + Owner's Equity) must be equal. It therefore follows that increases and decreases in liabilities have to be recorded opposite from increases and decreases in assets. Thus, increases in liabilities are entered on the right or credit side, and decreases in liabilities are entered on the left or debit side. The effects that debits and credits have on assets and liabilities are summarized in Illustration 2.3. Debits Credits Increase assets Decrease assets Decrease liabilities Increase liabilities ILLUSTRATION 2.3 Debit and credit effects—assets and liabilities Asset accounts normally show debit balances. That is, debits to a specific asset account should exceed credits to that account. Likewise, liability accounts normally show credit balances. That is, credits to a liability account should exceed debits to that account. The normal balance of an account is on the side where an increase in the account is recorded. Illustration 2.4 shows the normal balances for assets and liabilities. ILLUSTRATION 2.4 Normal balances—assets and liabilities Knowing the normal balance in an account may help you trace errors. For example, a credit balance in an asset account such as Land or a debit balance in a liability account such as Salaries and Wages Payable usually indicates an error. Occasionally, though, an abnormal balance may be correct. The Cash account, for example, will have a credit balance when a company has overdrawn its bank balance by spending more than it has in its account. Dr./Cr. Procedures for Owner's Equity As Chapter 1 indicated, owner's investments and revenues increase owner's equity. Owner's drawings and expenses decrease owner's equity. Companies keep accounts for each of these types of transactions. Owner's Capital. Investments by owners are credited to the Owner's Capital account. Credits increase this account, and debits decrease it. When an owner invests cash in the business, the company debits (increases) Cash and credits (increases) Owner's Capital. When the owner's investment in the business is reduced, Owner's Capital is debited (decreased). Illustration 2.5 shows the rules of debit and credit for the Owner's Capital account. Debits Credits Decrease Owner's Capital Increase Owner's Capital ILLUSTRATION 2.5 Debit and credit effects—Owner's Capital We can diagram the normal balance in Owner's Capital as shown in Illustration 2.6. ILLUSTRATION 2.6 Normal balance—Owner's Capital Owner's Drawings. An owner may withdraw cash or other assets for personal use. Withdrawals could be debited directly to Owner's Capital to indicate a decrease in owner's equity. However, it is preferable to use a separate account, called Owner's Drawings. This separate account makes it easier to determine total withdrawals for each accounting period. Owner's Drawings is increased by debits and decreased by credits. Normally, the drawings account will have a debit balance. Illustration 2.7 shows the rules of debit and credit for the Owner's Drawings account. Debits Credits Increase Owner's Drawings Decrease Owner's Drawings ILLUSTRATION 2.7 Debit and credit effects—Owner's Drawings We can diagram the normal balance as shown in Illustration 2.8. ILLUSTRATION 2.8 Normal balance—Owner's Drawings The Owner's Drawings account decreases owner's equity. It is not an income statement account like revenues and expenses. Investor Insight Chicago Cubs Keeping Score The Chicago Cubs baseball team probably has these major revenue and expense accounts: Revenues Expenses Admissions (ticket sales) Players' salaries Concessions Administrative salaries Television and radio Travel Advertising Ballpark maintenance Do you think that the Chicago Bears football team would be likely to have the same major revenue and expense accounts as the Cubs? (Go to WileyPLUS for this answer and additional questions.) Revenues and Expenses. The purpose of earning revenues is to benefit the owner(s) of the business. When a company recognizes revenues, owner's equity increases. Therefore, the effect of debits and credits on revenue accounts is the same as their effect on Owner's Capital. That is, revenue accounts are increased by credits and decreased by debits (see Helpful Hint). HELPFUL HINT Because revenues increase owner's equity, a revenue account has the same debit/credit rules as the Owner's Capital account. Expenses have the opposite effect. Expenses have the opposite effect. Expenses decrease owner's equity. Since expenses decrease net income and revenues increase it, it is logical that the increase and decrease sides of expense accounts should be the opposite of revenue accounts. Thus, expense accounts are increased by debits and decreased by credits. Illustration 2.9 shows the rules of debits and credits for revenues and expenses. Debits Credits Decrease revenues Increase revenues Increase expenses Decrease expenses ILLUSTRATION 2.9 Debit and credit effects—revenues and expenses Credits to revenue accounts should exceed debits. Debits to expense accounts should exceed credits. Thus, revenue accounts normally show credit balances, and expense accounts normally show debit balances. Illustration 2.10 shows the normal balances for revenues and expenses. ILLUSTRATION 2.10 Normal balances—revenues and expenses Summary of Debit/Credit Rules Illustration 2.11 shows a summary of the debit/credit rules and effects on each type of account. Study this diagram carefully. It will help you understand the fundamentals of the double-entry system (see Helpful Hint). Debit and Credit Procedure In Chapter 1, you learned the effect of a transaction on the basic accounting equation. Remember that each transaction must affect two or more accounts to keep the basic accounting equation in balance. In other words, for each transaction, debits must equal credits. The equality of debits and credits provides the basis for the double-entry system of recording transactions (see International Note). INTERNATIONAL NOTE Rules for accounting for specific events sometimes differ across countries. Despite the differences, the double-entry accounting system is the basis of accounting systems worldwide. Under the double-entry system, the dual (two-sided) effect of each transaction is recorded in appropriate accounts. This system provides a logical method for recording transactions and also helps ensure the accuracy of the recorded amounts as well as the detection of errors. If every transaction is recorded with equal debits and credits, the sum of all the debits to the accounts must equal the sum of all the credits. The double-entry system for determining the equality of the accounting equation is much more efficient than the plus/minus procedure used in Chapter 1. The following discussion illustrates debit and credit procedures in the double-entry system. Dr./Cr. Procedures for Assets and Liabilities In Illustration 2.2 for Softbyte, increases in Cash—an asset—are entered on the left side, and decreases in Cash are entered on the right side. We know that both sides of the basic equation (Assets = Liabilities + Owner's Equity) must be equal. It therefore follows that increases and decreases in liabilities have to be recorded opposite from increases and decreases in assets. Thus, increases in liabilities are entered on the right or credit side, and decreases in liabilities are entered on the left or debit side. The effects that debits and credits have on assets and liabilities are summarized in Illustration 2.3. Debits Credits Increase assets Decrease assets Decrease liabilities Increase liabilities ILLUSTRATION 2.3 Debit and credit effects—assets and liabilities Asset accounts normally show debit balances. That is, debits to a specific asset account should exceed credits to that account. Likewise, liability accounts normally show credit balances. That is, credits to a liability account should exceed debits to that account. The normal balance of an account is on the side where an increase in the account is recorded. Illustration 2.4 shows the normal balances for assets and liabilities. ILLUSTRATION 2.4 Normal balances—assets and liabilities Knowing the normal balance in an account may help you trace errors. For example, a credit balance in an asset account such as Land or a debit balance in a liability account such as Salaries and Wages Payable usually indicates an error. Occasionally, though, an abnormal balance may be correct. The Cash account, for example, will have a credit balance when a company has overdrawn its bank balance by spending more than it has in its account. Dr./Cr. Procedures for Owner's Equity As Chapter 1 indicated, owner's investments and revenues increase owner's equity. Owner's drawings and expenses decrease owner's equity. Companies keep accounts for each of these types of transactions. Owner's Capital. Investments by owners are credited to the Owner's Capital account. Credits increase this account, and debits decrease it. When an owner invests cash in the business, the company debits (increases) Cash and credits (increases) Owner's Capital. When the owner's investment in the business is reduced, Owner's Capital is debited (decreased). Illustration 2.5 shows the rules of debit and credit for the Owner's Capital account. Debits Credits Decrease Owner's Capital Increase Owner's Capital ILLUSTRATION 2.5 Debit and credit effects—Owner's Capital We can diagram the normal balance in Owner's Capital as shown in Illustration 2.6. ILLUSTRATION 2.6 Normal balance—Owner's Capital Owner's Drawings. An owner may withdraw cash or other assets for personal use. Withdrawals could be debited directly to Owner's Capital to indicate a decrease in owner's equity. However, it is preferable to use a separate account, called Owner's Drawings. This separate account makes it easier to determine total withdrawals for each accounting period. Owner's Drawings is increased by debits and decreased by credits. Normally, the drawings account will have a debit balance. Illustration 2.7 shows the rules of debit and credit for the Owner's Drawings account. Debits Credits Increase Owner's Drawings Decrease Owner's Drawings ILLUSTRATION 2.7 Debit and credit effects—Owner's Drawings We can diagram the normal balance as shown in Illustration 2.8. ILLUSTRATION 2.8 Normal balance—Owner's Drawings The Owner's Drawings account decreases owner's equity. It is not an income statement account like revenues and expenses. Investor Insight Chicago Cubs Keeping Score The Chicago Cubs baseball team probably has these major revenue and expense accounts: Revenues Expenses Admissions (ticket sales) Players' salaries Concessions Administrative salaries Television and radio Travel Advertising Ballpark maintenance Do you think that the Chicago Bears football team would be likely to have the same major revenue and expense accounts as the Cubs? (Go to WileyPLUS for this answer and additional questions.) Revenues and Expenses. The purpose of earning revenues is to benefit the owner(s) of the business. When a company recognizes revenues, owner's equity increases. Therefore, the effect of debits and credits on revenue accounts is the same as their effect on Owner's Capital. That is, revenue accounts are increased by credits and decreased by debits (see Helpful Hint). HELPFUL HINT Because revenues increase owner's equity, a revenue account has the same debit/credit rules as the Owner's Capital account. Expenses have the opposite effect. Expenses have the opposite effect. Expenses decrease owner's equity. Since expenses decrease net income and revenues increase it, it is logical that the increase and decrease sides of expense accounts should be the opposite of revenue accounts. Thus, expense accounts are increased by debits and decreased by credits. Illustration 2.9 shows the rules of debits and credits for revenues and expenses. Debits Credits Decrease revenues Increase revenues Increase expenses Decrease expenses ILLUSTRATION 2.9 Debit and credit effects—revenues and expenses Credits to revenue accounts should exceed debits. Debits to expense accounts should exceed credits. Thus, revenue accounts normally show credit balances, and expense accounts normally show debit balances. Illustration 2.10 shows the normal balances for revenues and expenses. ILLUSTRATION 2.10 Normal balances—revenues and expenses Summary of Debit/Credit Rules Illustration 2.11 shows a summary of the debit/credit rules and effects on each type of account. Study this diagram carefully. It will help you understand the fundamentals of the double-entry system (see Helpful Hint). HELPFUL HINT HELPFUL HINT You may want to bookmark Illustration 2.11. You probably will refer to it often. ILLUSTRATION 2.11 Summary of debit/credit rules DO IT! 1 | Normal Account Balances Kate Browne has just rented space in a shopping mall. In this space, she will open a hair salon to be called “Hair It Is.” A friend has advised Kate to set up a double-entry set of accounting records in which to record all of her business transactions. Identify the balance sheet accounts that Kate will likely need to record the transactions needed to open her business. Indicate whether the normal balance of each account is a debit or a credit. ACTION PLAN • Determine the types of accounts needed. Kate will need asset accounts for each different type of asset she invests in the business and liability accounts for any debts she incurs. • Understand the types of owner's equity accounts. Only Owner's Capital will be needed when Kate begins the business. Other owner's equity accounts will be needed later. Solution Kate would likely need the following accounts in which to record the transactions necessary to ready her hair salon for opening day: • Cash (debit balance) • Equipment (debit balance) • Supplies (debit balance) • Accounts Payable (credit balance) • If she borrows money: Notes Payable (credit balance) • Owner's Capital (credit balance) Related exercise material: BE2.1, BE2.2, DO IT! 2.1, E2.1, E2.2, and, E2.4. The Journal LEARNING OBJECTIVE 2 Indicate how a journal is used in the recording process. The Recording Process Although it is possible to enter transaction information directly into the accounts, few businesses do so. Practically every business uses the basic steps shown in Illustration 2.12 in the recording process (an integral part of the accounting cycle): • 1. Analyze each transaction in terms of its effect on the accounts. • 2. Enter the transaction information in a journal. • 3. Transfer the journal information to the appropriate accounts in the ledger. ILLUSTRATION 2.12 The recording process ILLUSTRATION 2.12 The recording process The steps in the recording process occur repeatedly. In Chapter 1, we illustrated the first step, the analysis of transactions, and will give further examples in this and later chapters. The other two steps in the recording process are explained in the next sections. The Journal Companies initially record transactions in chronological order (the order in which they occur). Thus, the journal is referred to as the book of original entry. For each transaction, the journal shows the debit and credit effects on specific accounts. Companies may use various kinds of journals, but every company has the most basic form of journal, a general journal. Typically, a general journal has spaces for dates, account titles and explanations, references, and two amount columns. See the format of the journal in Illustration 2.13. Whenever we use the term “journal” in this textbook, we mean the general journal unless we specify otherwise. The journal makes several significant contributions to the recording process: • 1. It discloses in one place the complete effects of a transaction. • 2. It provides a chronological record of transactions. • 3. It helps to prevent or locate errors because the debit and credit amounts for each entry can be easily compared. Journalizing Entering transaction data in the journal is known as journalizing. Companies make separate journal entries for each transaction. A complete entry consists of (1) the date of the transaction, (2) the accounts and amounts to be debited and credited, and (3) a brief explanation of the transaction. Illustration 2.13 shows the technique of journalizing, using the first two transactions of Softbyte. Recall that on September 1, Ray Neal invested $15,000 cash in the business, and Softbyte purchased computer equipment for $7,000 cash. The number J1 indicates that these two entries are recorded on the first page of the journal. Illustration 2.13 shows the standard form of journal entries for these two transactions. (The boxed numbers correspond to explanations in the list below the illustration.) GENERAL JOURNAL Date Account Titles and Explanation 2020 Ref. Debit Credit 55 Sept. 1 22 Cash 11 33 15,000 15,000 Owner's Capital 44 1 J1 (Owner's investment of cash in business) Equipment Cash 7,000 7,000 (Purchase of equipment for cash) ILLUSTRATION 2.13 Technique of journalizing • • • • • 11 The date of the transaction is entered in the Date column. 22 The debit account title (that is, the account to be debited) is entered first at the extreme left margin of the column headed “Account Titles and Explanation,” and the amount of the debit is recorded in the Debit column. 33 The credit account title (that is, the account to be credited) is indented and entered on the next line in the column headed “Account Titles and Explanation,” and the amount of the credit is recorded in the Credit column. 44 A brief explanation of the transaction appears on the line below the credit account title. A space is left between journal entries. The blank space separates individual journal entries and makes the entire journal easier to read. 55 The column titled Ref. (which stands for Reference) is left blank when the journal entry is made. This column is used later when the journal entries are transferred to the individual accounts. It is important to use correct and specific account titles in journalizing. Erroneous account titles lead to incorrect financial statements. However, some flexibility exists initially in selecting account titles. The main criterion is that each title must appropriately describe the content of the account. Once a company chooses the specific title to use, it should record under that account title all later transactions involving the account. In homework problems, you should use specific account titles when they are given. When account titles are not given, you may select account titles that identify the nature and content of each account. The account titles used in journalizing should not contain explanations such as Cash Paid or Cash Received. Simple and Compound Entries Some entries involve only two accounts, one debit and one credit. (See, for example, the entries in Illustration 2.13.) This type of entry is called a simple entry. Some transactions, however, require more than two accounts in journalizing. An entry that requires three or more accounts is a compound entry. To illustrate, assume that on July 1, Butler Company purchases a delivery truck costing $14,000. It pays $8,000 cash now and agrees to pay the remaining $6,000 on account (to be paid later). Illustration 2.14 shows the compound entry. GENERAL JOURNAL Date J1 Account Titles and Explanation Ref. Debit Credit 2020 July 1 Equipment 14,000 Cash 8,000 Accounts Payable 6,000 (Purchased truck for cash with balance on account) ILLUSTRATION 2.14 Compound journal entry In a compound entry, the standard format requires that all debits be listed before the credits. Accounting Across the Organization It Starts with the Transaction Hain Celestial Group Recording financial transactions in a company's records should be straightforward. If a company determines that a transaction involves revenue, it records revenue. If it has an expense, then it records an expense. However, sometimes this is difficult to do. For example, for more than a year, Hain Celestial Group (an organic food company) did not provide income information to investors and regulators. The reason was that the company discovered revenue irregularities and said it could not release financial results until it determined when and how to record revenue for certain transactions. When Hain missed four deadlines for reporting earnings information, the food company suffered a 34% drop in its stock price. As one analyst noted, it was hard to fathom why a seemingly simple revenue recognition issue took one year to resolve. In other situations, outright fraud may occur. For example, regulators charged Obsidian Energy for fraudulently moving millions of dollars in expenses from operating expenses to capital expenditure accounts. By understating reported operating expenses, Obsidian made it appear that it was efficiently managing its costs as well as increasing its income. These examples demonstrate that “getting the basic transaction right” is the foundation for relevant and reliable financial statements. Starting with an incorrect or inappropriate transaction leads to distortions in the financial statements. Sources: Shawn Tully, “The Mystery of Hain Celestial's Accounting,” Fortune.com (August 20, 2016); and Kelly Cryderman, “U.S. Charges Obsidian, Formerly Penn West, with Accounting Fraud,” The Globe and Mail (June 28, 2017). Why is it important for companies to record financial transactions completely and accurately? (Go to WileyPLUS for this answer and additional questions.) DO IT! 2 | Recording Business Activities Kate Browne engaged in the following activities in establishing her salon, Hair It Is: • 1. Opened a bank account in the name of Hair It Is and deposited $20,000 of her own money in this account as her initial investment. • 2. Purchased equipment on account (to be paid in 30 days) for a total cost of $4,800. • 3. Interviewed three people for the position of hair stylist. Prepare the journal entries to record the transactions. ACTION PLAN • Understand which activities need to be recorded and which do not. Any that affect assets, liabilities, or owner's equity should be recorded in a journal. • Analyze the effects of transactions on asset, liability, and owner's equity accounts. Solution The three activities would be recorded as follows. 1. Cash 20,000 Owner's Capital 20,000 (Owner's investment of cash in business) 2. Equipment Accounts Payable 4,800 4,800 (Purchase of equipment on account) 3. No entry because no transaction has occurred. Related exercise material: BE2.3, BE2.4, BE2.5, BE2.6, DO IT! 2.2, E2.3, E2.5, E2.6, E2.7, E2.8, and E2.9. The Ledger and Posting LEARNING OBJECTIVE 3 Explain how a ledger and posting help in the recording process. The Ledger The entire group of accounts maintained by a company is the ledger. The ledger provides the balance in each of the accounts as well as keeps track of changes in these balances. Companies may use various kinds of ledgers, but every company has a general ledger. A general ledger contains all the asset, liability, and owner's equity accounts, as shown in Illustration 2.15. Whenever we use the term “ledger” in this textbook, we are referring to the general ledger unless we specify otherwise. ILLUSTRATION 2.15 The general ledger, which contains all of a company's accounts Companies arrange the ledger in the sequence in which they present the accounts in the financial statements, beginning with the balance sheet accounts. First in order are the asset accounts, followed by liability accounts, owner's capital, owner's drawings, revenues, and expenses. Each account is numbered for easier identification. The ledger provides the balance in each of the accounts. For example, the Cash account shows the amount of cash available to meet current obligations. The Accounts Receivable account shows amounts due from customers. Accounts Payable shows amounts owed to creditors. Ethics Insight Credit Suisse Group A Convenient Overstatement Sometimes a company's investment securities suffer a permanent decline in value below their original cost. When this occurs, the company is supposed to reduce the recorded value of the securities on its balance sheet (“write them down” in common financial lingo) and record a loss. It appears, however, that during the financial crisis of 2008, employees at some financial institutions chose to look the other way as the value of their investments skidded. A number of Wall Street traders that worked for the investment bank Credit Suisse Group were charged with intentionally overstating the value of securities that had suffered declines of approximately $2.85 billion. One reason that they may have been reluctant to record the losses is out of fear that the company's shareholders and clients would panic if they saw the magnitude of the losses. However, personal self-interest might have been equally to blame—the bonuses of the traders were tied to the value of the investment securities. Source: S. Pulliam, J.Eaglesham, and M. Siconolfi, “U.S. Plans Changes on Bond Fraud,” Wall Street Journal Online (February 1, 2012). What incentives might employees have had to overstate the value of these investment securities on the company's financial statements? (Go to WileyPLUS for this answer and additional questions.) Standard Form of Account The simple T-account form used in accounting textbooks is often very useful for illustration purposes. However, in practice, the account forms used in ledgers are much more structured. Illustration 2.16 shows a typical form, using assumed data from a cash account. CASH Date Explanation NO. 101 Ref. Debit Credit Balance 2020 June 1 25,000 2 25,000 8,000 17,000 3 4,200 21,200 9 7,500 28,700 17 20 30 11,700 17,000 250 16,750 7,300 9,450 ILLUSTRATION 2.16 Three-column form of account This format is called the three-column form of account. It has three money columns— debit, credit, and balance. The balance in the account is determined after each transaction. Companies use the explanation space and reference columns to provide special information about the transaction. Posting The procedure of transferring journal entries to the ledger accounts is called posting. This phase of the recording process accumulates the effects of journalized transactions into the individual accounts. Posting involves the following steps. • 1. In the ledger, in the appropriate columns of the account(s) debited, enter the date, journal page, and debit amount shown in the journal. • 2. In the reference column of the journal, write the account number to which the debit amount was posted. • 3. In the ledger, in the appropriate columns of the account(s) credited, enter the date, journal page, and credit amount shown in the journal. • 4. In the reference column of the journal, write the account number to which the credit amount was posted. Illustration 2.17 shows these four steps using Softbyte's first journal entry. The boxed numbers indicate the sequence of the steps. ILLUSTRATION 2.17 Posting a journal entry Posting should be performed in chronological order. That is, the company should post all the debits and credits of one journal entry before proceeding to the next journal entry. Postings should be made on a timely basis to ensure that the ledger is up-to-date. In homework problems, you can journalize all transactions before posting any of the journal entries. The reference column of a ledger account indicates the journal page from which the transaction was posted. After the last entry has been posted, the accountant should scan the reference column in the journal, to confirm that all postings have been made. The explanation space of the ledger account is used infrequently because an explanation already appears in the journal. Chart of Accounts The number and type of accounts differ for each company. The number of accounts depends on the amount of detail management desires. For example, the management of one company may want a single account for all types of utility expense. Another may keep separate expense accounts for each type of utility, such as gas, electricity, and water. Similarly, a small company like Softbyte will have fewer accounts than a corporate giant like Dell. Softbyte may be able to manage and report its activities in 20 to 30 accounts, while Dell may require thousands of accounts to keep track of its worldwide activities. Most companies have a chart of accounts. This chart lists the accounts and the account numbers that identify their location in the ledger. The numbering system that identifies the accounts usually starts with the balance sheet accounts and follows with the income statement accounts. In this and the next two chapters, we explain the accounting for Pioneer Advertising (a service company). Accounts 101–199 indicate asset accounts; 200–299 indicate liabilities; 301–350 indicate owner's equity accounts; 400–499, revenues; 601–799, expenses; 800–899, other revenues; and 900–999, other expenses. Illustration 2.18 shows Pioneer's chart of accounts. Accounts listed in red are used in this chapter; accounts shown in black are explained in later chapters. Pioneer Advertising Chart of Accounts Assets 101 Cash 112 Accounts Receivable 126 Supplies 130 Prepaid Insurance 157 Equipment 158 Accumulated Depreciation—Equipment Liabilities 200 Notes Payable 201 Accounts Payable 209 Unearned Service Revenue 212 Salaries and Wages Payable 230 Interest Payable Owner's Equity 301 Owner's Capital 306 Owner's Drawings Pioneer Advertising Chart of Accounts 350 Income Summary Revenues 400 Service Revenue Expenses 631 Supplies Expense 711 Depreciation Expense 722 Insurance Expense 726 Salaries and Wages Expense 729 Rent Expense 732 Utilities Expense 905 Interest Expense ILLUSTRATION 2.18 Chart of accounts You will notice that there are gaps in the numbering system of the chart of accounts for Pioneer. Companies leave gaps to permit the insertion of new accounts as needed during the life of the business. The Recording Process Illustrated Illustrations 2.19 through 2.28 show the basic steps in the recording process, using the October transactions of Pioneer Advertising (see Helpful Hint). Pioneer's accounting period is a month. In these illustrations, a basic analysis, an equation analysis, and a debit-credit analysis precede the journal entry and posting of each transaction. For simplicity, we use the T-account form to show the posting instead of the standard account form. HELPFUL HINT The Accounting Cycle Tutorial in WileyPLUS provides an interactive presentation of the accounting cycle using these transaction analyses. ILLUSTRATION 2.19 Investment of cash by owner Cash flow analyses show the impact of each transaction on cash. ILLUSTRATION 2.20 Purchase of office equipment ILLUSTRATION 2.21 Receipt of cash for future service Many liabilities have the word “payable” in their title. But, note that Unearned Service Revenue is considered a liability even though the word payable is not used. ILLUSTRATION 2.22 Payment of monthly rent ILLUSTRATION 2.23 Payment for insurance ILLUSTRATION 2.24 Purchase of supplies on credit ILLUSTRATION 2.25 Hiring of employees ILLUSTRATION 2.26 Withdrawal of cash by owner ILLUSTRATION 2.26 Withdrawal of cash by owner ILLUSTRATION 2.27 Payment of salaries ILLUSTRATION 2.28 Receipt of cash for services performed Study these transaction analyses carefully. The purpose of transaction analysis is first to identify the type of account involved, and then to determine whether to make a debit or a credit to the account. You should always perform this type of analysis before preparing a journal entry. Doing so will help you understand the journal entries discussed in this chapter as well as more complex journal entries in later chapters (see Helpful Hint). HELPFUL HINT Follow these steps: • 1. Determine what type of account is involved. • 2. Determine what items increased or decreased and by how much. • 3. Translate the increases and decreases into debits and credits. Summary Illustration of Journalizing and Posting Illustration 2.29 shows the journal for Pioneer Advertising for October. GENERAL JOURNAL Date PAGE J1 Account Titles and Explanation Ref. Debit Cash 101 10,000 Credit 2020 Oct. 1 Owner's Capital 301 10,000 (Owner's investment of cash in business) 1 Equipment Notes Payable 157 5,000 200 5,000 (Issued 3-month, 12% note for office equipment) 2 Cash Unearned Service Revenue 101 1,200 209 1,200 (Received cash from R. Knox for future services) 3 Rent Expense 729 900 Cash 101 900 (Paid cash for October office rent) 4 Prepaid Insurance 130 600 Cash 101 600 (Paid one-year policy; effective date October 1) 5 Supplies Accounts Payable 126 201 2,500 2,500 GENERAL JOURNAL Date PAGE J1 Account Titles and Explanation Ref. Debit Credit (Purchased supplies on account from Aero Supply) 20 Owner's Drawings 306 500 Cash 101 500 (Withdrew cash for personal use) 26 Salaries and Wages Expense 726 Cash 4,000 101 4,000 (Paid salaries to date) 31 Cash 101 Service Revenue 400 (Received cash for services performed) ILLUSTRATION 2.29 General journal entries Illustration 2.30 shows the ledger, with all balances in red. GENERAL LEDGER Cash Date No. 101 Explanation Ref. Debit Credit Balance Oct. 1 J1 10,000 10,000 2 J1 1,200 11,200 3 J1 900 10,300 4 J1 600 9,700 20 J1 500 9,200 26 J1 4,000 5,200 2020 10,000 10,000 GENERAL LEDGER 31 J1 10,000 15,200 Supplies Date No. 126 Explanation Ref. Debit J1 2,500 Credit Balance 2020 Oct. 5 2,500 Prepaid Insurance Date Explanation No. 130 Ref. Debit J1 600 Credit Balance 2020 Oct. 4 600 Equipment Date No. 157 Explanation Ref. Debit J1 5,000 Credit Balance 2020 Oct. 1 5,000 Notes Payable Date Explanation No. 200 Ref. Debit Credit Balance 5,000 5,000 2020 Oct. 1 J1 Accounts Payable Date Explanation No. 201 Ref. Debit Credit Balance 2,500 2,500 2020 Oct. 5 J1 Unearned Service Revenue Date Explanation Ref. No. 209 Debit Credit Balance GENERAL LEDGER 2020 Oct. 2 J1 1,200 Owner's Capital Date Explanation 1,200 No. 301 Ref. Debit Credit Balance 2020 Oct. 1 J1 10,000 10,000 Owner's Drawings Date Explanation No. 306 Ref. Debit J1 500 Credit Balance 2020 Oct. 20 500 Service Revenue Date Explanation No. 400 Ref. Debit Credit Balance 2020 Oct. 31 J1 10,000 10,000 Salaries and Wages Expense Date Explanation No. 726 Ref. Debit J1 4,000 Credit Balance 2020 Oct. 26 4,000 Rent Expense Date Explanation No. 729 Ref. Debit J1 900 Credit Balance 2020 Oct. 3 ILLUSTRATION 2.30 General ledger DO IT! 3 | Posting 900 Kate Browne recorded the following transactions in a general journal during the month of March. Mar. 4 Cash 2,280 Service Revenue 15 Salaries and Wages Expense 2,280 400 Cash 19 Utilities Expense Cash 400 92 92 Post these entries to the Cash account of the general ledger to determine its ending balance. The beginning balance of Cash on March 1 was $600. ACTION PLAN • Recall that posting involves transferring the journalized debits and credits to specific accounts in the ledger. • Determine the ending balance by netting the total debits and credits. Solution Cash 3/1 Bal. 600 3/15 400 3/4 2,280 3/19 92 3/31 Bal. 2,388 Related exercise material: BE2.7, BE2.8, DO IT! 2.3, E2.11, and E2.14. The Trial Balance LEARNING OBJECTIVE 4 Prepare a trial balance. A trial balance is a list of accounts and their balances at a given time. Companies usually prepare a trial balance at the end of an accounting period. They list accounts in the order in which they appear in the ledger. Debit balances appear in the left column and credit balances in the right column. The totals of the two columns must equal. The trial balance proves the mathematical equality of debits and credits after posting. Under the double-entry system, this equality occurs when the sum of the debit account balances equals the sum of the credit account balances. A trial balance may also uncover errors in journalizing and posting. For example, a trial balance may well have detected the error at MF Global discussed in the Feature Story. In addition, a trial balance is useful in the preparation of financial statements, as we will explain in the next two chapters. The steps for preparing a trial balance are: • 1. List the account titles and their balances in the appropriate debit or credit column. • 2. Total the debit and credit columns. • 3. Verify the equality of the two columns. Illustration 2.31 shows the trial balance prepared from Pioneer Advertising's ledger. Note that the total debits equal the total credits. Pioneer Advertising Trial Balance October 31, 2020 Debit Cash $15,200 Supplies 2,500 Prepaid Insurance 600 Equipment 5,000 Credit Notes Payable $ Accounts Payable 2,500 Unearned Service Revenue 1,200 Owner's Capital 10,000 Owner's Drawings 500 Service Revenue 10,000 Salaries and Wages Expense 4,000 Rent Expense 5,000 900 Pioneer Advertising Trial Balance October 31, 2020 Debit Credit $28,700 $28,700 ILLUSTRATION 2.31 A Trial balance Note that the order of presentation in the trial balance is: • Assets • Liabilities • Owner's equity • Revenues • Expenses A trial balance is a necessary checkpoint for uncovering certain types of errors. For example, if only the debit portion of a journal entry has been posted, the trial balance would bring this error to light. Limitations of a Trial Balance A trial balance does not guarantee freedom from recording errors, however (see Ethics Note). Numerous errors may exist even though the totals of the trial balance columns agree. For example, the trial balance may balance even when: ETHICS NOTE An error is the result of an unintentional mistake; it is neither ethical nor unethical. An irregularity is an intentional misstatement, which is viewed as unethical. • 1. A transaction is not journalized. • 2. A correct journal entry is not posted. • 3. A journal entry is posted twice. • 4. Incorrect accounts are used in journalizing or posting. • 5. Offsetting errors are made in recording the amount of a transaction. As long as equal debits and credits are posted, even to the wrong account or in the wrong amount, the total debits will equal the total credits. The trial balance does not prove that the company has recorded all transactions or that the ledger is correct. Locating Errors Errors in a trial balance generally result from mathematical mistakes, incorrect postings, or simply transcribing data incorrectly. What do you do if you are faced with a trial balance that does not balance? First, determine the amount of the difference between the two columns of the trial balance. After this amount is known, the following steps are often helpful: • 1. If the error is $1, $10, $100, or $1,000, re-add the trial balance columns and recompute the account balances. • 2. If the error is divisible by 2, scan the trial balance to see whether a balance equal to half the error has been entered in the wrong column. • 3. If the error is divisible by 9, retrace the account balances on the trial balance to see whether they are incorrectly copied from the ledger. For example, if a balance was $12 and it was listed as $21, a $9 error has been made. Reversing the order of numbers is called a transposition error. • 4. If the error is not divisible by 2 or 9, scan the ledger to see whether an account balance in the amount of the error has been omitted from the trial balance, and scan the journal to see whether a posting of that amount has been omitted. Dollar Signs and Underlining Note that dollar signs do not appear in journals or ledgers. Dollar signs are typically used only in the trial balance and the financial statements. Generally, a dollar sign is shown only for the first item in the column and for the total of that column. A single line (a totaling rule) is placed under the column of figures to be added or subtracted. Total amounts are double-underlined to indicate they are final sums. Investor Insight Fannie Mae Why Accuracy Matters While most companies record transactions very carefully, the reality is that mistakes still happen. For example, bank regulators fined Bank One Corporation (now Chase) $1.8 million because they felt that the unreliability of the bank's accounting system caused it to violate regulatory requirements. Also, in recent years Fannie Mae, the government-chartered mortgage association, announced a series of large accounting errors. These announcements caused alarm among investors, regulators, and politicians because they fear that the errors may suggest larger, undetected problems. This is important because the home-mortgage market depends on Fannie Mae to buy hundreds of billions of dollars of mortgages each year from banks, thus enabling the banks to issue new mortgages. Finally, before a major overhaul of its accounting system, the financial records of Waste Management Inc. were in such disarray that of the company's 57,000 employees, 10,000 were receiving pay slips that were in error. The Sarbanes-Oxley Act was created to minimize the occurrence of errors like these by increasing every employee's responsibility for accurate financial reporting. In order for these companies to prepare and issue financial statements, their accounting equations (debits and credits) must have been in balance at year-end. How could these errors or misstatements have occurred? (Go to WileyPLUS for this answer and additional questions.) DO IT! 4 | Trial Balance The following accounts come from the ledger of SnowGo Company at December 31, 2020. 157Equipment $88,000 306Owner's Drawings 8,000 201Accounts Payable 22,000 726Salaries and Wages Expense42,000 112Accounts Receivable 4,000 400Service Revenue 95,000 301Owner's Capital 20,000 212Salaries and Wages Payable 2,000 200Notes Payable 19,000 732Utilities Expense 3,000 130Prepaid Insurance 6,000 101Cash 7,000 Prepare a trial balance in good form. ACTION PLAN • Determine normal balances and list accounts in the order they appear in the ledger. • Accounts with debit balances appear in the left column, and those with credit balances in the right column. • Total the debit and credit columns to prove equality. Solution Snowgo Company Trial Balance December 31, 2020 Debit Cash $ Accounts Receivable 4,000 Prepaid Insurance 6,000 Equipment 88,000 Credit 7,000 Notes Payable $ 19,000 Accounts Payable 22,000 Salaries and Wages Payable 2,000 Owner's Capital 20,000 Owner's Drawings 8,000 Service Revenue Utilities Expense 95,000 3,000 Salaries and Wages Expense 42,000 $158,000 $158,000 Related exercise material: BE2.9, BE2.10, DO IT! 2.4, E2.11, E2.12, E2.13, E2.15, and E2.16. Review and Practice Learning Objectives Review • 1 Describe how accounts, debits, and credits are used to record business transactions. An account is a record of increases and decreases in specific asset, liability, and owner's equity items. The terms debit and credit are synonymous with left and right. Assets, drawings, and expenses are increased by debits and decreased by credits. Liabilities, owner's capital, and revenues are increased by credits and decreased by debits. • 2 Indicate how a journal is used in the recording process. The basic steps in the recording process are (a) analyze each transaction for its effects on the accounts, (b) enter the transaction information in a journal, and (c) transfer the journal information to the appropriate accounts in the ledger. The initial accounting record of a transaction is entered in a journal before the data are entered in the accounts. A journal (a) discloses in one place the complete effects of a transaction, (b) provides a chronological record of transactions, and (c) prevents or locates errors because the debit and credit amounts for each entry can be easily compared. • 3 Explain how a ledger and posting help in the recording process. The ledger is the entire group of accounts maintained by a company. The ledger provides the balance in each of the accounts as well as keeps track of changes in these balances. Posting is the transfer of journal entries to the ledger accounts. This phase of the recording process accumulates the effects of journalized transactions in the individual accounts. • 4 Prepare a trial balance. A trial balance is a list of accounts and their balances at a given time. Its primary purpose is to prove the equality of debits and credits after posting. A trial balance also uncovers errors in journalizing and posting and is useful in preparing financial statements. Glossary Review Account A record of increases and decreases in specific asset, liability, or owner's equity items. Chart of accounts A list of accounts and the account numbers that identify their location in the ledger. Compound entry A journal entry that involves three or more accounts. Credit The right side of an account. Debit The left side of an account. Double-entry system A system that records in appropriate accounts the dual effect of each transaction. General journal The most basic form of journal. General ledger A ledger that contains all asset, liability, and owner's equity accounts. Journal An accounting record in which transactions are initially recorded in chronological order. Journalizing The entering of transaction data in the journal. Ledger The entire group of accounts maintained by a company. Normal balance An account balance on the side where an increase in the account is recorded. Posting The procedure of transferring journal entries to the ledger accounts. Simple entry A journal entry that involves only two accounts. T-account The basic form of an account, consisting of (1) a title, (2) a left or debit side, and (3) a right or credit side. Three-column form of account A form with columns for debit, credit, and balance amounts in an account. Trial balance A list of accounts and their balances at a given time. T-account The basic form of an account, consisting of (1) a title, (2) a left or debit side, and (3) a right or credit side. Practice Multiple-Choice Questions 1. (LO 1) Which of the following statements about an account is true? 1. a. The right side of an account is the debit, or increase, side. 2. b. An account is an individual accounting record of increases and decreases in specific asset, liability, and owner's equity items. 3. c. There are separate accounts for specific assets and liabilities but only one account for owner's equity items. 4. d. The left side of an account is the credit or decrease side. 2. (LO 1) Debits: 1. a. increase both assets and liabilities. 2. b. decrease both assets and liabilities. 3. c. increase assets and decrease liabilities. 4. d. decrease assets and increase liabilities. 3. (LO 1) A revenue account: 1. a. is increased by debits. 2. b. is decreased by credits. 3. c. has a normal balance of a debit. 4. d. is increased by credits. 4. (LO 1) Accounts that normally have debit balances are: 1. a. assets, expenses, and revenues. 2. b. assets, expenses, and owner's capital. 3. c. assets, liabilities, and owner's drawings. 4. d. assets, owner's drawings, and expenses. 5. (LO 1) The expanded accounting equation is: 1. 2. 3. 4. a. Assets + Liabilities = Owner's Capital + Owner's Drawings + Revenues + Expenses. b. Assets = Liabilities + Owner's Capital + Owner's Drawings + Revenues−Expenses. c. Assets = Liabilities − Owner's Capital − Owner's Drawings − Revenues − Expenses. d. Assets = Liabilities + Owner's Capital − Owner's Drawings + Revenues − Expenses. 6. (LO 2) Which of the following is not part of the recording process? 1. a. Analyzing transactions. 2. b. Preparing an income statement. 3. c. Entering transactions in a journal. 4. d. Posting journal entries. 7. (LO 2) Which of the following statements about a journal is false? 1. a. It is not a book of original entry. 2. b. It provides a chronological record of transactions. 3. c. It helps to locate errors because the debit and credit amounts for each entry can be readily compared. 4. d. It discloses in one place the complete effect of a transaction. 8. (LO 2) The purchase of supplies on account should result in: 1. a. a debit to Supplies Expense and a credit to Cash. 2. b. a debit to Supplies Expense and a credit to Accounts Payable. 3. c. a debit to Supplies and a credit to Accounts Payable. 4. d. a debit to Supplies and a credit to Accounts Receivable. 9. (LO 3) The order of the accounts in the ledger is: 1. a. assets, revenues, expenses, liabilities, owner's capital, owner's drawings. 2. b. assets, liabilities, owner's capital, owner's drawings, revenues, expenses. 3. c. owner's capital, assets, revenues, expenses, liabilities, owner's drawings. 4. d. revenues, assets, expenses, liabilities, owner's capital, owner's drawings. 10. (LO 3) A ledger: 1. a. contains only asset and liability accounts. 2. b. should show accounts in alphabetical order. 3. c. is a collection of the entire group of accounts maintained by a company. 4. d. is a book of original entry. 11. (LO 3) Posting: 1. a. normally occurs before journalizing. 2. b. transfers ledger transaction data to the journal. 3. c. is an optional step in the recording process. 4. d. transfers journal entries to ledger accounts. 12. (LO 3) Before posting a payment of $5,000, the Accounts Payable of Senator Company had a normal balance of $16,000. The balance after posting this transaction was: 1. a. $21,000. 2. b. $5,000. 3. c. $11,000. 4. d. Cannot be determined. 13. (LO 4) A trial balance: 1. a. is a list of accounts with their balances at a given time. 2. b. proves the journalized transactions are correct. 3. c. will not balance if a correct journal entry is posted twice. 4. d. proves that all transactions have been recorded. 14. (LO 4) A trial balance will not balance if: 1. a. a correct journal entry is posted twice. 2. b. the purchase of supplies on account is debited to Supplies and credited to Cash. 3. c. a $100 cash withdrawal by the owner is debited to Owner's Drawings for $1,000 and credited to Cash for $100. 4. d. a $450 payment on account is debited to Accounts Payable for $45 and credited to Cash for $45. 15. (LO 4) The trial balance of Jeong Company had accounts with the following normal balances: Cash $5,000, Service Revenue $85,000, Salaries and Wages Payable $4,000, Salaries and Wages Expense $40,000, Rent Expense $10,000, Owner's Capital $42,000, Owner's Drawings $15,000, and Equipment $61,000. In preparing a trial balance, the total in the debit column is: 1. a. $131,000. 2. b. $216,000. 3. c. $91,000. 4. d. $116,000. Solutions 1. b. An account is an individual accounting record of increases and decreases in specific asset, liability, and owner's equity items. The other choices are incorrect because (a) the right side of the account is the credit side, not the debit side, and can be the increase or the decrease side, depending on the specific classification account; (c) there are also separate accounts for different owner's equity items; and (d) the left side of the account is the debit side, not the credit side, and can be either the decrease or the increase side, depending on the specific classification account. 2. c. 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. 3. d. 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. 4. d. Assets, owner's drawings, and expenses all have normal debit balances. The other choices are incorrect because (a) revenues have normal credit balances, (b) owner's capital has a normal credit balance, and (c) liabilities have normal credit balances. 5. d. The expanded accounting equation is Assets = Liabilities + Owner's Capital − Owner's Drawings + Revenue − Expenses. The other choices are incorrect because (a) both Owner's Drawings and Expenses must be subtracted, not added, and Liabilities should be added to the right side of equation, not to the left side; (b) Owner's Drawings must be subtracted, not added; and (c) Owner's Capital and Revenues must be added, not subtracted. 6. b. 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 recording process. 7. a. The journal is a book of original entry. The other choices are all true statements. 8. c. 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 Accounts Payable, not Cash; (b) a debit to Supplies, not Supplies Expense; and (d) a credit to Accounts Payable, not Accounts Receivable. 9. b. The correct order of the accounts in the ledger is assets, liabilities, owner's capital, owner's drawing, revenues, expenses. The other choices are incorrect because they do not reflect this order. The order of the accounts in the ledger is (1) balance sheet accounts: assets, liabilities, and owner's equity accounts (owner's capital and owner's drawings); and then (2) income statement accounts: revenues and expenses. 10. c. 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—assets, liabilities, and owner's equity—not just assets 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). 11. d. Posting transfers journal entries to ledger accounts. The other choices are incorrect because posting (a) occurs after journalizing, (b) transfers journal transaction data to the ledger; and (c) is not an optional step in the recording process. 12. c. The balance is $11,000 ($16,000 normal balance − $5,000 payment), not (a) $21,000 or (b) $5,000. Choice (d) is incorrect because the balance can be determined. 13. a. A trial balance is a list of accounts with their balances at a given time. The other choices are incorrect because (b) the trial balance does not prove that journalized transactions are mathematically correct; (c) if a journal entry is posted twice, the trial balance will still balance; and (d) the trial balance does not prove that all transactions have been recorded. 14. c. The trial balance will not balance in this case because the debit of $1,000 to Owner's Drawings is not equal to the credit of $100 to Cash. The other choices are incorrect because (a) if a correct journal entry is posted twice, the trial balance will still balance; (b) if the purchase of supplies on account is debited to Supplies and credited to Cash, Cash and Accounts Payable will be understated but the trial balance will still balance; and (d) since the debit and credit amounts are the same, the trial balance will still balance but both Accounts Payable and Cash will be overstated. 15. a. The total debit column = $5,000 (Cash) + $40,000 (Salaries and Wages Expense) + $10,000 (Rent Expense) + $15,000 (Owner's Drawings) + $61,000 (Equipment) = $131,000. The normal balance for Assets, Expenses, and Owner's Drawings is a debit. The other choices are incorrect because (b) revenue of $85,000 should not be included in the total of $216,000 and its normal balance is a credit; (c) the total of $91,000 is missing the Salaries and Wages Expense of $40,000, which has a normal balance of a debit; and (d) the total of $116,000 is missing the Owner's Drawings of $15,000, which has a normal balance of a debit. Practice Brief Exercises 1. (LO 1) Transactions for the Warren Potter Company for the month of May are presented below. Identify the accounts to be debited and credited for each transaction. Identify accounts to be debited and credited. May 1 Warren Potter invested $22,000 in the business. 6 Paid office rent of $900. 12 Performed consulting services and billed client $4,400. 18 Purchased equipment on account for $1,200. Solution 1. Account Debited 2. May 1 Cash Account Credited Owner's Capital 6 Rent Expense Cash 12 Accounts Receivable Service Revenue 18 Equipment Accounts Payable 2. (LO 2) Using the data from Practice Brief Exercise 1, journalize the transactions (omit explanations). Journalize transactions. Solution 2. May 1 Cash 22,000 Owner's Capital 6 Rent Expense 22,000 900 Cash 12 Accounts Receivable 900 4,400 Service Revenue 18 Equipment 4,400 1,200 Accounts Payable 1,200 3. (LO 3) Selected transactions for Carlos Santana Company are presented in journal form below. Post the transactions to T-accounts. Make one T-account for each and determine each account's ending balance. Post journal entries to T-accounts. J1 Date June Account Titles and Explanation 6 Cash Ref. Debit Credit 22,000 Owner's Capital 22,000 (Owner's investment of cash in business) 13 Accounts Receivable 8,200 Service Revenue 8,200 (Billed for services performed) 14 Cash Accounts Receivable (Received cash in payment of account) Solution 3. Cash 6/6 22,000 6/14 3,700 Bal. 25,700 3,700 3,700 Service Revenue 6/13 8,200 Bal. 8,200 Accounts Receivable 6/13 8,200 6/14 3,700 Bal. 4,500 Owner's Capital 6/6 22,000 Bal. 22,000 4. (LO 3) Selected journal entries for Carlos Santana Company are presented in Practice Brief Exercise 3. Post the transactions using the standard form of account. Post journal entries to standard form of account. Solution 4. Cash Date Explanation Ref. Debit June 6 14 Credit Balance J1 22,000 22,000 J1 3,700 25,700 Accounts Receivable Date Explanation Ref. Debit June 13 J1 14 J1 8,200 Credit Balance 8,200 3,700 4,500 Service Revenue Date Explanation Ref. Debit June 13 Owner's Capital J1 Credit Balance 8,200 8,200 Date Explanation Ref. Debit June 6 J1 Credit Balance 22,000 22,000 5. (LO 4) From the ledger accounts below, prepare a trial balance for Bundy Company at December 31, 2020. List the accounts in the order shown in the textbook. All account balances are normal. Prepare a trial balance. Accounts Receivable $10,000 Supplies 4,100 Accounts Payable 3,500 Owner's Drawing 1,100 Service Revenue 11,000 Salaries and Wages Expense 2,300 Rent Expense 1,200 Owner's Capital 10,200 Cash 6,000 Solution 5. Bundy Company Trial Balance December 31, 2020 Debit Cash $ 6,000 Accounts Receivable 10,000 Supplies 4,100 Credit Accounts Payable $ 3,500 Owner's Capital 10,200 Owner's Drawings 1,100 Bundy Company Trial Balance December 31, 2020 Service Revenue 11,000 Salaries and Wages Expense 2,300 Rent Expense 1,200 $24,700 $24,700 Practice Exercises 1. (LO 2) Presented below is information related to Hammond Real Estate Agency. Analyze and journalize transactions. Oct. 1 Lia Berge begins business as a real estate agent with a cash investment of $30,000. 2 Paid rent, $700, on office space. 3 Purchases office equipment for $2,800, on account. 6 Sells a house and lot for Hal Smith; bills Hal Smith $4,400 for realty services performed. 27 Pays $1,100 on the balance related to the transaction of October 3. 30 Receives bill for October utilities, $130 (not paid at this time). Instructions Journalize the transactions. (You may omit explanations) Solution 1. GENERAL JOURNAL Date Account Titles and Explanation Oct. 1 Cash Ref. Debit 30,000 Owner's Capital 2 Rent Expense Credit 30,000 700 GENERAL JOURNAL Date Account Titles and Explanation Ref. Debit Cash 3 700 Equipment 2,800 Accounts Payable 6 2,800 Accounts Receivable 4,400 Service Revenue 27 4,400 Accounts Payable 1,100 Cash 30 Credit 1,100 Utilities Expense 130 Accounts Payable 130 2. (LO 2, 4) The T-accounts below summarize the ledger of Depot Company at the end of the first month of operations. Journalize transactions from account data and prepare a trial balance. Cash No. 101 4/1 16,000 4/15 700 4/12 1,200 4/25 1,600 4/29 900 4/30 1,600 Accounts Receivable No. 112 4/7 2,900 No. 126 No. 209 4/30 Owner's Capital 4/29 900 Supplies 4/4 Unearned Service Revenue No. 301 4/1 Service Revenue 1,900 16,000 No. 400 4/7 2,900 4/12 1,200 Accounts Payable No. 201 Salaries and Wages Expense No. 726 4/25 1,900 4/15 1,600 4/4 700 1,600 Instructions a. Prepare the complete general journal (including explanations) from which the postings to Cash were made. b. Prepare a trial balance at April 30, 2020. Solution 2. a. o GENERAL JOURNAL Date Account Titles and Explanation Apr. 1 Cash Ref. Debit Credit 16,000 Owner's Capital 16,000 (Owner's investment of cash in business) 4 Supplies 1,900 Accounts Payable 1,900 (Purchased supplies on account) 7 Accounts Receivable 2,900 Service Revenue 2,900 (Billed customers for services performed) 12 Cash 1,200 Service Revenue 1,200 (Received cash for services performed) 15 Salaries and Wages Expense 700 GENERAL JOURNAL Date Ref. Account Titles and Explanation Debit Cash Credit 700 (Paid salaries to date) 25 Accounts payable 1,600 Cash 1,600 (Paid creditors on account) 29 Cash 900 Accounts Receivable 900 (Received cash in payment of account) 30 Cash 1,600 1,600 Unearned Service Revenue (Received cash for future services) b. o Depot Company Trial Balance April 30, 2020 Debit Cash $17,400 Accounts Receivable 2,000 Supplies 1,900 Credit Accounts Payable $ 300 Unearned Service Revenue 1,600 Depot Company Trial Balance April 30, 2020 Debit Credit Owner's Capital 16,000 Service Revenue 4,100 Salaries and Wages Expense 700 $22,000 $22,000 Practice Problem (LO 1, 2, 3, 4) Bob Sample opened the Campus Laundromat on September 1, 2020. During the first month of operations, the following transactions occurred. Journalize transactions, post, and prepare a trial balance. Sept. 1 Bob invested $20,000 cash in the business. 2 The company paid $1,000 cash for store rent for September. 3 Purchased washers and dryers for $25,000, paying $10,000 in cash and signing a $15,000, 6-month, 12% note payable. 4 Paid $1,200 for a one-year accident insurance policy. 10 Received a bill from the Daily News for online advertising of the opening of the laundromat $200. 20 Bob withdrew $700 cash for personal use. 30 The company determined that cash receipts for laundry services for the month were $6,200. The chart of accounts for the company is the same as that for Pioneer Advertising plus No. 610 Advertising Expense. Instructions a. Journalize the September transactions. (Use J1 for the journal page number.) b. Open ledger accounts and post the September transactions. c. Prepare a trial balance at September 30, 2020. Solution • a. GENERAL JOURNAL Date J1 Account Titles and Explanation Ref. Debit Cash 101 20,000 Credit 2020 Sept. 1 Owner's Capital 301 20,000 (Owner's investment of cash in business) 2 Rent Expense Cash 729 1,000 101 1,000 (Paid September rent) 3 Equipment 157 25,000 Cash 101 10,000 Notes Payable 200 15,000 (Purchased laundry equipment for cash and 6-month, 12% note payable) 4 Prepaid Insurance Cash 130 1,200 101 1,200 (Paid one-year insurance policy) 10 Advertising Expense 610 Accounts Payable 201 200 200 (Received bill from Daily News for advertising) 20 Owner's Drawings Cash (Withdrew cash for personal use) 306 101 700 700 GENERAL JOURNAL J1 Date Account Titles and Explanation Ref. Debit 30 Cash 101 6,200 Service Revenue 400 (Received cash for services performed) • b. GENERAL LEDGER Cash Date No. 101 Explanation Ref. Debit Credit Balance Sept. 1 J1 20,000 2 J1 1,000 3 J1 10,000 9,000 4 J1 1,200 7,800 20 J1 700 7,100 30 J1 2020 6,200 Prepaid Insurance Date Explanation 20,000 19,000 13,300 No. 130 Ref. Debit J1 1,200 Credit Balance 2020 Sept. 4 Equipment Date 1,200 No. 157 Explanation Ref. Debit J1 25,000 Credit Balance 2020 Sept. 3 25,000 Credit 6,200 Notes Payable Date Explanation No. 200 Ref. Debit Credit Balance 2020 Sept. 3 J1 15,000 15,000 Accounts Payable Date Explanation No. 201 Ref. Debit Credit Balance 2020 Sept. 10 J1 200 Owner's Capital Date Explanation 200 No. 301 Ref. Debit Credit Balance 2020 Sept. 1 J1 20,000 20,000 Owner's Drawings Date Explanation No. 306 Ref. Debit J1 700 Credit Balance 2020 Sept. 20 700 Service Revenue Date Explanation No. 400 Ref. Debit Credit Balance 2020 Sept. 30 J1 6,200 Advertising Expense Date Explanation 6,200 No. 610 Ref. Debit J1 200 Credit Balance 2020 Sept. 10 200 Rent Expense Date No. 729 Explanation Ref. Debit J1 1,000 Credit Balance 2020 Sept. 2 • 1,000 c. Campus Laundromat Trial Balance September 30, 2020 Debit Cash $13,300 Prepaid Insurance 1,200 Equipment 25,000 Credit Notes Payable $15,000 Accounts Payable 200 Owner's Capital 20,000 Owner's Drawings 700 Service Revenue 6,200 Advertising Expense 200 Rent Expense 1,000 $41,400 $41,400 WileyPLUS Brief Exercises, DO IT! Exercises, Exercises, Problems, and many additional resources are available for practice in WileyPLUS. Questions 1. Describe the parts of a T-account. 2. “The terms debit and credit mean increase and decrease, respectively.” Do you agree? Explain. 3. Pete Harcourt, a fellow student, contends that the double-entry system means each transaction must be recorded twice. Is Pete correct? Explain. 4. Melissa Estes, a beginning accounting student, believes debit balances are favorable and credit balances are unfavorable. Is Melissa correct? Discuss. 5. State the rules of debit and credit as applied to (a) asset accounts, (b) liability accounts, and (c) the owner's equity accounts (revenue, expenses, owner's drawings, and owner's capital). 6. What is the normal balance for each of the following accounts? (a) Accounts Receivable. (b) Cash. (c) Owner's Drawings. (d) Accounts Payable. (e) Service Revenue. (f) Salaries and Wages Expense. (g) Owner's Capital. 7. Indicate whether each of the following accounts is an asset, a liability, or an owner's equity account and whether it has a normal debit or credit balance: (a) Accounts Receivable, (b) Accounts Payable, (c) Equipment, (d) Owner's Drawings, and (e) Supplies. 8. For the following transactions, indicate the account debited and the account credited. a. Supplies are purchased on account. b. Cash is received on signing a note payable. c. Employees are paid salaries in cash. 9. Indicate whether the following accounts generally will have (a) debit entries only, (b) credit entries only, or (c) both debit and credit entries. • 1. Cash. • 2. Accounts Receivable. • 3. Owner's Drawings. • 4. Accounts Payable. • 5. Salaries and Wages Expense. • 6. Service Revenue. 10. What are the basic steps in the recording process? 11. What are the advantages of using a journal in the recording process? 12. a. When entering a transaction in the journal, should the debit or credit be written first? b. Which should be indented, the debit or credit? 13. Describe a compound entry, and provide an example. 14. a. Should business transaction debits and credits be recorded directly in the ledger accounts? b. What are the advantages of first recording transactions in the journal and then posting to the ledger? 15. The account number is entered as the last step in posting the amounts from the journal to the ledger. What is the advantage of this step? 16. Journalize the following business transactions. a. Wes Lee invests $7,000 cash in the business. b. Insurance of $800 is paid for the year. c. Supplies of $2,000 are purchased on account. d. Cash of $8,500 is received for services performed. 17. a. What is a ledger? b. What is a chart of accounts and why is it important? 18. What is a trial balance and what are its purposes? 19. Victor Grimm is confused about how accounting information flows through the accounting system. He believes the flow of information is as follows. a. Debits and credits posted to the ledger. b. Business transaction occurs. c. Information entered in the journal. d. Financial statements are prepared. e. Trial balance is prepared. Is Victor correct? If not, indicate to Victor the proper flow of the information. 20. Two students are discussing the use of a trial balance. They wonder whether the following errors, each considered separately, would prevent the trial balance from balancing. a. The bookkeeper debited Cash for $600 and credited Salaries and Wages Expense for $600 for payment of wages. b. Cash collected on account was debited to Cash for $800 and Service Revenue was credited for $80. What would you tell them? 21. What are the normal balances for Apple's Cash, Accounts Payable, and Interest Expense accounts? Brief Exercises BE2.1 (LO 1) For each of the following accounts, indicate the effects of (a) a debit and (b) a credit on the accounts and (c) the normal balance of the account. Indicate debit and credit effects and normal balance. • 1. Accounts Payable. • 2. Advertising Expense. • 3. Service Revenue. • 4. Accounts Receivable. • 5. Owner's Capital. • 6. Owner's Drawings. BE2.2 (LO 1) Transactions for the Oleg Thorn Company for the month of June are presented below. Identify the accounts to be debited and credited for each transaction. Identify accounts to be debited and credited. June 1 Oleg Thorn invests $5,000 cash in a small welding business of which he is the sole proprietor. 2 Purchases equipment on account for $3,600. 3 $800 cash is paid to landlord for June rent. 12 Sends a bill to K. Johnsen for $400 after completing welding work done on account. BE2.3 (LO 2) Using the data in BE2.2, journalize the transactions. (You may omit explanations.) Journalize transactions. BE2.4 (LO 2) Shea Jonas, a fellow student, is unclear about the basic steps in the recording process. Identify and briefly explain the steps in the order in which they occur. Identify and explain steps in recording process. BE2.5 (LO 2) M. Gonzales has the following transactions during August of the current year. Indicate (a) the effect on the accounting equation and (b) the debit-credit analysis illustrated in the textbook. Indicate basic and debit-credit analysis. Aug. 1 Opens an office as a financial advisor, investing $9,000 in cash. 4 Pays insurance in advance for 6 months, $2,100 cash. 16 Receives $3,600 from clients for services performed. 27 Pays secretary $1,000 salary. BE2.6 (LO 2) Using the data in BE2.5, journalize the transactions. (You may omit explanations.) Journalize transactions. BE2.7 (LO 3) Selected transactions for the Walt Bryce Company are presented in journal form below. Post the transactions to T-accounts. Make one T-account for each item and determine each account's ending balance. Post journal entries to T-accounts. J1 Date Account Titles and Explanation May 5 Accounts Receivable Ref. Debit Credit 5,400 Service Revenue 5,400 (Billed for services performed) 12 Cash 4,200 Accounts Receivable 4,200 (Received cash in payment of account) 15 Cash 3,000 Service Revenue 3,000 (Received cash for services performed) BE2.8 (LO 3) Selected journal entries for the Walt Bryce Company are presented in BE2.7. Post the transactions using the standard form of account. Post journal entries to standard form of account. BE2.9 (LO 4) From the ledger balances given below, prepare a trial balance for the Amaro Company at June 30, 2020. List the accounts in the order shown in the textbook. All account balances are normal. Prepare a trial balance. Accounts Payable $8,100, Cash $5,800, Owner's Capital $15,000, Owner's Drawings $1,200, Equipment $17,000, Service Revenue $10,000, Accounts Receivable $3,000, Salaries and Wages Expense $5,100, and Rent Expense $1,000. BE2.10 (LO 4) An inexperienced bookkeeper prepared the following trial balance. Prepare a correct trial balance, assuming all account balances are normal. Prepare a correct trial balance. Shaushank Company Trial Balance December 31, 2020 Debit Cash Credit $10,600 Prepaid Insurance $ 3,500 Accounts Payable 3,000 Shaushank Company Trial Balance December 31, 2020 Debit Unearned Service Revenue Credit 2,200 Owner's Capital 9,000 Owner's Drawings 4,500 Service Revenue 25,400 Salaries and Wages Expense 18,600 Rent Expense 2,400 $31,400 $47,800 DO IT! Exercises DO IT! 2.1 (LO 1) Tom Rast has just rented space in a strip mall. In this space, he will open a photography studio, to be called “Picture This!” A friend has advised Tom to set up a double-entry set of accounting records in which to record all of his business transactions. Identify normal balances. Identify the balance sheet accounts that Tom will likely need to record the transactions needed to open his business. Indicate whether the normal balance of each account is a debit or credit. DO IT! 2.2 (LO 2) Ron Tost engaged in the following activities in establishing his photography studio, Shutter Bug: Record business activities. • 1. Opened a bank account in the name of Shutter Bug and deposited $6,500 of his own money into this account as his initial investment. • 2. Purchased photography supplies at a total cost of $1,200. The business paid $400 in cash and the balance is on account. • 3. Obtained estimates on the cost of photography equipment from three different manufacturers. Prepare the journal entries to record the transactions. (You may omit explanations.) DO IT! 2.3 (LO 3) Tom Rast recorded the following transactions during the month of April. Post transactions. April 3 Cash 3,400 Service Revenue April 16 3,400 Rent Expense 700 Cash April 20 700 250 Salaries and Wages Expense Cash 250 Post these entries to the Cash T-account of the general ledger to determine the ending balance in cash. The beginning balance in cash on April 1 was $1,600. DO IT! 2.4 (LO 4) The following accounts are taken from the ledger of Macon Company at December 31, 2020. Prepare a trial balance. 200 Notes Payable $20,000 101 Cash $ 6,000 301 Owner's Capital 28,000 126 Supplies 7,000 157 Equipment 80,000 729 Rent Expense 4,000 306 Owner's Drawings 9,000 212 Salaries and Wages Payable 3,000 726 Salaries and Wages Expense 38,000 201 Accounts Payable 11,000 400 Service Revenue 8,000 90,000 112 Accounts Receivable Prepare a trial balance in good form. Exercises E2.1 (LO 1) Kim Yi has prepared the following list of statements about accounts. Analyze statements about accounting and the recording process. • 1. An account is an accounting record of either a specific asset or a specific liability. • 2. An account shows only increases, not decreases, in the item it relates to. • 3. Some items, such as Cash and Accounts Receivable, are combined into one account. • 4. An account has a left, or credit side, and a right, or debit side. • 5. A simple form of an account consisting of just the account title, the left side, and the right side, is called a T-account. Instructions Identify each statement as true or false. If false, indicate how to correct the statement. E2.2 (LO 1) Selected transactions for M. Acosta, an interior decorator, in her first month of business, are as follows. Identify debits, credits, and normal balances. Jan. 2 Invested $10,000 cash in business. 3 Purchased used car for $3,000 cash for use in business. 9 Purchased supplies on account for $600. 11 Billed customers $2,400 for services performed. 16 Paid $350 cash for advertising. 20 Received $900 cash from customers billed on January 11. 23 Paid creditor $300 cash on balance owed. 28 Withdrew $1,000 cash for personal use by owner. Instructions For each transaction, indicate the following. a. The basic type of account debited and credited (asset, liability, owner's equity). b. The specific account debited and credited (Cash, Rent Expense, Service Revenue, etc.). c. Whether the specific account is increased or decreased. d. The normal balance of the specific account. Use the following format, in which the January 2 transaction is given as an example. Account Debited (a) Account Credited (b) (c) (d) (a) (b) (c) (d) Date Basic Type Specific Account Effect Normal Balance Basic Type Specific Account Effect Normal Balance Jan. Asset 2 Cash Increase Debit Owner's Equity Owner's Capital Increase Credit E2.3 (LO 2) Data for M. Acosta, interior decorator, are presented in E2.2. Journalize transactions. Instructions Journalize the transactions using journal page J1. (You may omit explanations.) E2.4 (LO 1) The following information relates to Royale Real Estate Agency. Analyze transactions and determine their effect on accounts. Oct. 1 James Royale begins business as a real estate agent with a cash investment of $17,000. 2 Hires an administrative assistant. 3 Purchases office furniture for $1,900, on account. 6 Sells a house and lot for C. Rouse; bills C. Rouse $3,800 for realty services performed. 27 Pays $1,300 on the balance related to the transaction of October 3. 30 Pays the administrative assistant $2,500 in salary for October. Instructions Prepare the debit-credit analysis for each transaction as illustrated in the textbook. E2.5 (LO 2) Transaction data for Royale Real Estate Agency are presented in E2.4. Journalize transactions. Instructions Journalize the transactions. (You may omit explanations.) E2.6 (LO 1, 2) Lennon Industries had the following transactions. Analyze transactions and journalize. • 1. Borrowed $5,000 from the bank by signing a note. • 2. Paid $3,900 cash for a computer. • 3. Purchased $650 of supplies on account. Instructions a. Indicate what accounts are increased and decreased by each transaction. b. Journalize each transaction. (Omit explanations.) E2.7 (LO 1, 2) Halladay Enterprises had the following selected transactions. Analyze transactions and journalize. • 1. Bo Halladay invested $4,000 cash in the business. • 2. Paid office rent of $840. • 3. Performed consulting services and billed a client $5,200. • 4. Bo Halladay withdrew $750 cash for personal use. Instructions a. Indicate the effect each transaction has on the accounting equation (Assets = Liabilities + Owner's Equity), using plus and minus signs. b. Journalize each transaction. (Omit explanations.) E2.8 (LO 2) Selected transactions for Sophie's Dog Care are as follows during the month of March. Journalize a series of transactions. March 1 Paid monthly rent of $1,200. 3 Performed services for $160 on account. 5 Performed services for cash of $75. 8 Purchased equipment for $600. The company paid cash of $90 and the balance was on account. 12 Received cash from customers billed on March 3. 14 Paid salaries and wages to employees of $525. 22 Paid utilities of $72. 24 Borrowed $1,500 from Grafton State Bank by signing a note. 27 Paid $220 to repair service for plumbing repairs. 28 Paid balance amount owed from equipment purchase on March 8. 30 Paid $1,800 for six months of insurance. Instructions Journalize the transactions. (Omit explanations.) E2.9 (LO 2) On April 1, Adventures Travel Agency began operations. The following transactions were completed during the month. Record journal entries. • 1. Owner invested $24,000 in the business. • 2. Obtained a bank loan for $7,000 by issuing a note payable. • 3. Paid $11,000 cash to buy equipment. • 4. Paid $1,200 cash for April office rent. • • 5. Paid $1,450 for supplies. 6. Purchased $600 of advertising in the Daily Herald, on account. • 7. Performed services for $18,000: cash of $2,000 was received from customers, and the balance of $16,000 was billed to customers on account. • 8. Cash withdrawal of $400 by owner for personal use. • • 9. Paid the utility bill for the month, $2,000. 10. Paid Daily Herald the amount due in transaction (6). • 11. Paid $40 of interest on the bank loan obtained in transaction (2). • 12. Paid employees' salaries and wages, $6,400. • 13. Received $12,000 cash from customers billed in transaction (7). Instructions Journalize the transactions. (Omit explanations). E2.10 (LO 3) Alma Ortiz has prepared the following list of statements about the general ledger. Analyze statements about the ledger. • 1. The general ledger contains all the asset and liability accounts but no owner's equity accounts. • 2. The general ledger is sometimes referred to as simply the ledger. • 3. The accounts in the general ledger are arranged in alphabetical order. • 4. Each account in the general ledger is numbered for easier identification. • 5. The general ledger is a book of original entry. Instructions Identify each statement as true or false. If false, indicate how to correct the statement. E2.11 (LO 3, 4) Selected transactions from the journal of June Feldman, investment broker, are presented below. Post journal entries and prepare a trial balance. Date Account Titles and Explanation Aug. 1 Cash Ref. Debit Credit 5,000 Owner's Capital 5,000 (Owner's investment of cash in business) 10 Cash 2,600 Service Revenue 2,600 (Received cash for services performed) 12 Equipment 5,000 Cash 2,300 Notes Payable 2,700 (Purchased equipment for cash and notes payable) 25 Accounts Receivable 1,700 Date Account Titles and Explanation Ref. Debit Credit Service Revenue 1,700 (Billed clients for services performed) 31 Cash 900 Accounts Receivable 900 (Receipt of cash on account) Instructions a. Post the transactions to T-accounts. b. Prepare a trial balance at August 31, 2020. E2.12 (LO 2, 4) The T-accounts below summarize the ledger of Negrete Landscaping Company at the end of the first month of operations. Journalize transactions from account data and prepare a trial balance. Cash No. 101 4/1 14,000 4/15 1,300 4/12 900 4/25 1,500 4/29 400 4/30 1,000 Unearned Service Revenue 4/30 Accounts Receivable No. 112 4/7 3,000 4/29 Supplies 4/4 400 Service Revenue 1,800 1,500 4/4 No. 201 1,800 1,000 No. 301 4/1 No. 126 Accounts Payable 4/25 Owner's Capital No. 209 14,000 No. 400 4/7 3,000 4/12 900 Salaries and Wages Expense No. 726 4/15 1,300 Instructions a. Prepare the complete general journal (including explanations) from which the postings to Cash were made. b. Prepare a trial balance at April 30, 2020. ournalize transactions from account data and prepare a trial balance. Cash No. 101 10/1 3,000 10/4 400 10/10 750 10/12 1,500 10/10 4,000 10/15 350 10/20 500 10/30 300 10/25 2,000 10/31 500 Accounts Receivable 10/6 800 10/20 940 10/20 Supplies 10/4 400 No. 157 2,000 Notes Payable No. 200 10/10 4,000 Accounts Payable 10/12 1,500 2,000 No. 301 10/1 3,000 10/25 2,000 Owner's Drawings 300 No. 201 10/3 Owner's Capital 10/30 500 No. 126 Equipment 10/3 No. 112 No. 306 Service Revenue 10/6 800 10/10 750 10/20 940 Salaries and Wages Expense 10/31 No. 400 No. 726 500 Rent Expense 10/15 No. 729 350 Instructions a. Reproduce the journal entries for the transactions that occurred on October 1, 10, and 20, and provide explanations for each. b. Determine the October 31 balance for each of the accounts above, and prepare a trial balance at October 31, 2020. E2.14 (LO 2, 3) Selected transactions for Bonnie Donne Company during its first month in business are presented below. Prepare journal entries and post using standard account form. Sept. 1 Invested $10,000 cash in the business. 5 Purchased equipment for $14,000 paying $4,000 in cash and the balance on account. 25 Paid $3,000 cash on balance owed for equipment. 30 Withdrew $900 cash for personal use. Donne's chart of accounts shows No. 101 Cash, No. 157 Equipment, No. 201 Accounts Payable, No. 301 Owner's Capital, and No. 306 Owner's Drawings. Instructions a. Journalize the transactions on page J1 of the journal. (Omit explanations.) b. Post the transactions using the standard account form. E2.15 (LO 4) The bookkeeper for J.L. Kang Equipment Repair made a number of errors in journalizing and posting, as described below. Analyze errors and their effects on trial balance. • 1. A credit posting of $525 to Accounts Receivable was omitted. • 2. A debit posting of $750 for Prepaid Insurance was debited to Insurance Expense. • 3. A collection from a customer of $100 in payment of its account owed was journalized and posted as a debit to Cash $100 and a credit to Service Revenue $100. • 4. A credit posting of $415 to Property Taxes Payable was made twice. • 5. A cash purchase of supplies for $250 was journalized and posted as a debit to Supplies $25 and a credit to Cash $25. • 6. A debit of $625 to Advertising Expense was posted as $652. Instructions For each error: a. Indicate whether the trial balance will balance. b. If the trial balance will not balance, indicate the amount of the difference. c. Indicate the trial balance column that will have the larger total. Consider each error separately. Use the following form, in which error (1) is given as an example. (a) (b) (c) Error In Balance Difference Larger Column (1) No $525 Debit E2.16 (LO 4) The accounts in the ledger of Prompt Delivery Service contain the following balances on July 31, 2020. Prepare a trial balance. Accounts Receivable $ 7,640 Prepaid Insurance $ 1,968 Accounts Payable 8,394 Maintenance and Repairs Expense 961 Cash ? Service Revenue Equipment 45,360 Owner's Drawings 700 Gasoline Expense 758 Owner's Capital 38,000 Utilities Expense 523 Salaries and Wages Expense 4,428 Notes Payable 17,000 Salaries and Wages Payable 10,610 815 Instructions Prepare a trial balance with the accounts arranged as illustrated in the chapter and fill in the missing amount for Cash. E2.17 (LO 2, 3, 4) Beyers Security Company provides security services. Selected transactions for Beyers are presented below. Journalize transactions, post transactions to T-accounts, and prepare trial balance. Oct. 1 Invested $66,000 cash in the business. 2 Hired part-time security consultant. Salary will be $2,000 per month. First day of work will be October 15. 4 Paid one month of rent for building for $2,000. 7 Purchased equipment for $18,000, paying $4,000 cash and the balance on account. 8 Paid $500 for advertising. 10 Received bill for equipment repair cost of $390. 12 Provided security services for event for $3,200 on account. 16 Purchased supplies for $410 on account. 21 Paid balance due from October 7 purchase of equipment. 24 Received and paid utility bill for $148. 27 Received payment from customer for October 12 services performed. 31 Paid employee salaries and wages of $5,100. Instructions a. Journalize the transactions. Do not provide explanations. b. Post the transactions to T-accounts. c. Prepare a trial balance at October 31, 2020. (Hint: Compute ending balances of Taccounts first.) Problems: Set A P2.1A (LO 1, 2) Holz Disc Golf Course was opened on March 1 by Ian Holz. The following selected events and transactions occurred during March. Journalize a series of transactions. Mar. 1 Invested $20,000 cash in the business. 3 Purchased Rainbow Golf Land for $15,000 cash. The price consists of land $12,000, shed $2,000, and equipment $1,000. (Make one compound entry.) 5 Paid advertising expenses of $900. 6 Paid cash $600 for a one-year insurance policy. 10 Purchased golf discs and other equipment for $1,050 from Stevenson Company payable in 30 days. 18 Received $1,100 in cash for golf fees (Holz records golf fees as service revenue). 19 Sold 150 coupon books for $10 each. Each book contains 4 coupons that enable the holder to play one round of disc golf. 25 Withdrew $800 cash for personal use. 30 Paid salaries of $250. 30 Paid Stevenson Company in full. 31 Received $2,700 cash for golf fees. Holz Disc Golf uses the following accounts: Cash, Prepaid Insurance, Land, Buildings, Equipment, Accounts Payable, Unearned Service Revenue, Owner's Capital, Owner's Drawings, Service Revenue, Advertising Expense, and Salaries and Wages Expense. Instructions Journalize the March transactions. P2.2A (LO 1, 2, 3, 4) Vera Ernst is a licensed dentist. During the first month of the operation of her business, the following events and transactions occurred. Journalize transactions, post, and prepare a trial balance. April 1 Invested $20,000 cash in her business. 1 Hired a secretary-receptionist at a salary of $700 per week payable monthly. 2 Paid office rent for the month $1,500. 3 Purchased dental supplies on account from Dazzle Company $4,000. 10 Performed dental services and billed insurance companies $5,100. 11 Received $1,000 cash advance from Leah Mataruka for an implant. 20 Received $2,100 cash for services performed from Michael Santos. 30 Paid secretary-receptionist for the month $2,800. 30 Paid $2,600 to Dazzle for accounts payable due. Vera uses the following chart of accounts: No. 101 Cash, No. 112 Accounts Receivable, No. 126 Supplies, No. 201 Accounts Payable, No. 209 Unearned Service Revenue, No. 301 Owner's Capital, No. 400 Service Revenue, No. 726 Salaries and Wages Expense, and No. 729 Rent Expense. Instructions a. Journalize the transactions. b. Post to the ledger accounts. c. Prepare a trial balance on April 30, 2020. Trial balance totals $29,600 P2.3A (LO 1, 2, 3, 4) Maquoketa Services was formed on May 1, 2020. The following transactions took place during the first month. Journalize transactions, post, and prepare a trial balance. Transactions on May 1: • 1. Jay Bradford invested $40,000 cash in the company, as its sole owner. • 2. Hired two employees to work in the warehouse. They will each be paid a salary of $3,050 per month. • 3. Signed a 2-year rental agreement on a warehouse; paid $24,000 cash in advance for the first year. • 4. Purchased furniture and equipment costing $30,000. A cash payment of $10,000 was made immediately; the remainder will be paid in 6 months. • 5. Paid $1,800 cash for a one-year insurance policy on the furniture and equipment. Transactions during the remainder of the month: • 6. Purchased basic office supplies for $420 cash. • 7. Purchased more office supplies for $1,500 on account. • 8. Total revenues earned were $20,000—$8,000 cash and $12,000 on account. • 9. Paid $400 to suppliers for accounts payable due. • 10. Received $3,000 from customers in payment of accounts receivable. • 11. Received utility bills in the amount of $380, to be paid ne...
