ACCT Chapter 3
Journalize the following transactions: Cash received for photocopy services amounted to $ 8,600.
Cash/Debit (8600) Service Revenue/Credit (8600)
Journalize the following transactions: Paid $ 2,000 cash for rent for the current month.
Rent Expense/ Debit (2000) Cash/ Credit (2000)
What is debit?
The left side of an account.
Which statement about an account is true? a. An account consists of a title, a debit side, and a ledger side. b. An account is an individual accounting record of increases and decreases in specific asset, liability, and stockholders' equity items. c. There are separate accounts for specific assets and liabilities but only one account for stockholders' equity items. d. The left side of an account is the credit, or decrease, side.
b. An account is an individual accounting record of increases and decreases in specific asset, liability, and stockholders' equity items. An account is an individual accounting record of increases and decreases in specific asset, liability, and stockholders' equity items. The other choices are incorrect because (a) in its simplest form, an account consists of three parts: a title and debit and credit side; (c) there are specific accounts for different types of stockholders' equity, such as Common Stock, Retained Earnings, and Dividends; and (d) the left side of an account is the debit side.
Genesis Company buys a $900 machine on credit. This transaction will affect the: a. income statement only. b. balance sheet only. c. income statement and retained earnings statement only. d. income statement, retained earnings statement, and balance sheet.
b. balance sheet only. When equipment is purchased on credit, assets are increased and liabilities are increased. These are both balance sheet accounts. The other choices are incorrect because neither the income statement nor the retained earnings statement is affected.
The expanded accounting equation under IFRS is as follows: a. Assets = Liabilities + Common Stock + Retained Earnings + Revenues − Expenses + Dividends. b. Assets + Liabilities = Common Stock + Retained Earnings + Revenues − Expenses − Dividends. c. Assets = Liabilities + Common Stock + Retained Earnings + Revenues − Expenses − Dividends. d. Assets = Liabilities + Common Stock + Retained Earnings − Revenues − Expenses − Dividends.
c. Assets = Liabilities + Common Stock + Retained Earnings + Revenues − Expenses − Dividends.
Debits: a. increase both assets and liabilities. b. decrease both assets and liabilities. c. increase assets and decrease liabilities. d. decrease assets and increase liabilities.
c. increase assets and decrease liabilities. Debits increase assets and decrease liabilities. The other choices are therefore incorrect
Paying an account payable with cash affects the components of the accounting equation in the following way: a. Decreases stockholders' equity and decreases liabilities. b. Increases assets and decreases liabilities. c. Decreases assets and increases stockholders' equity. d. Decreases assets and decreases liabilities.
d. Decreases assets and decreases liabilities. When paying an account payable with cash, the asset cash decreases. Accounts payable, a liability, decreases as well. The other choices are therefore incorrect.
A revenue account: a. is increased by debits. b. is decreased by credits. c. has a normal balance of a debit. d. is increased by credits.
d. is increased by credits. Revenues are increased by credits. Revenues have a normal credit balance. The other choices are therefore incorrect.
Posting: a. normally occurs before journalizing. b. transfers ledger transaction data to the journal. c. is an optional step in the recording process. d. transfers journal entries to ledger accounts.
d. transfers journal entries to ledger accounts. Posting transfers journal entries to ledger accounts. The other choices are incorrect because posting (a) occurs after journalizing, (b) transfers the information contained in journal entries to the ledger, and (c) is a required step in the recording process. If posting is not done, the ledger accounts will not reflect changes in the accounts resulting from transactions.
Decrease in Common Stock...
Debit
Decrease in Revenues...
Debit
Decrease in Unearned Rent Revenue...
Debit
Increase in Dividends...
Debit
Increase in Prepaid Insurance....
Debit
Increase in Salaries and Wages Expense...
Debit
Increase in Supplies...
Debit
Paid for office equipment purchased in transaction 2...
ASSETS: Decrease LIABILITIES: Decrease STOCKHOLDERS' EQUITY: No effect
Dividends were paid...
ASSETS: Decrease LIABILITIES: No effect STOCKHOLDERS' EQUITY: Decrease
Paid employees' salaries...
ASSETS: Decrease LIABILITIES: No effect STOCKHOLDERS' EQUITY: Decrease
Paid telephone bill for the month...
ASSETS: Decrease LIABILITIES: No effect STOCKHOLDERS' EQUITY: Decrease
Obtained a loan from the bank...
ASSETS: Increase LIABILITIES: Increase STOCKHOLDERS' EQUITY: No effect
Purchased office supplies on credit...
ASSETS: Increase LIABILITIES: Increase STOCKHOLDERS' EQUITY: No effect
Purchased office equipment on credit...
ASSETS: Increase LIABILITIES: Increase STOCKHOLDERS' EQUITY: No effect
Journalize the following transactions: Paid $ 700 on account for paper supplies purchased in transaction 3.
Accounts Payable/ Debit (700) Cash/ Credit (700)
Journalize the following transactions: Billed a customer for $ 300 for photocopy services completed.
Accounts Receivable/ Debit (300) Service Revenue/ Credit (300)
Journalize the following transactions: Paid $ 550 cash for radio advertising.
Advertising Expense/ Debit (550) Cash/ Credit (550)
Decrease in Interest Payable...
Debit
Decrease in Notes Payable...
Debit
Journalize the following transactions: Dividends of $ 1,800 were paid to stockholders.
Dividends/ Debit (1800) Cash/ Credit (1800)
Debit/Credit Rules: Assets
Dr. + Cr. -
Debit/Credit Rules: Dividends
Dr. + Cr. -
Debit/Credit Rules: Expenses
Dr. + Cr. -
Which is not part of the recording process? a. Analyzing transactions. b. Preparing an income statement. c. Entering transactions in a journal. d. Posting journal entries.
b. Preparing an income statement. Preparing an income statement is not part of the recording process. Choices (a) analyzing transactions, (c) entering transactions in a journal, and (d) posting transactions are all steps in the recording process.
Which statement is correct regarding IFRS? a. IFRS reverses the rules of debits and credits, that is, debits are on the right and credits are on the left. b. IFRS uses the same process for recording transactions as GAAP. c. The chart of accounts under IFRS is different because revenues follow assets. d. None of the above statements are correct.
b. IFRS uses the same process for recording transactions as GAAP.
What is a general journal?
The most basic form of journal.
What is a Journal?
An accounting record in which transactions are initially recorded in chronological order.
What is the order listed in the Trial Balance?
1. Assets (Debit Side) a. Cash b. Supplies c. Accounts Receivable d. Prepaid Insurance e. Equipment f. Accumulated Depreciation- Equipment 2. Liabilities (Credit Side) a. Notes Payable b. Accounts Payable c. Interest Payable d. Unearned Service Revenue e. Salaries and Wages Payable 3. Stockholders' Equity (Credit) a. Common Stock b. Retained Earnings c. Dividends (Debit Side) d. Income Summary 4. Revenues (Credit) a. Service Revenue 5. Expenses (Debit) a. Salaries and Wages Expense b. Supplies Expense c. Rent Expense d. Insurance Expense e. Interest Expense f. Depreciation Expense
Asset Accounts include what?
1. Equipment 2. Land 3. Supplies 4. Cash 5. Prepaid insurance
Billed customers for service rendered...
ASSETS: Increase LIABILITIES: No effect STOCKHOLDERS' EQUITY: Increase
Received cash for services rendered...
ASSETS: Increase LIABILITIES: No effect STOCKHOLDERS' EQUITY: Increase
Received cash from costumer in payment on account...
ASSETS: No effect LIABILITIES: No effect STOCKHOLDERS' EQUITY: No effect
At the beginning of the day the balance in the Cash account was $4,750. The ledger entries that day were a debit of $1,250 and a credit of $700. What would be the balance at the end of the day? a. $6,700 b. $5,300 c. $4,200 d. $6,000
Answer: B Solution: The normal balance is a debit. Debits increase Cash and credits decrease Cash. Therefore, the new balance is $4,750 + $1,250 - $700 = $5,300.
Which of the following accounting entries would you MOST expect to accompany a $2,500 increase in cash, and why? a. A $2,500 increase in unearned service revenue, because unearned service revenue is considered a liability until the service is actually performed. b. A $2,500 increase in notes payable, because this increase in stockholders' equity would need to be offset by a corresponding increase in assets. c. A $2,500 decrease in unearned service revenue, because unearned service revenue is considered an asset no matter when it is received. d. A $2,500 decrease in notes payable, because this reduction in liabilities would need to be offset by a corresponding increase in assets.
Answer: A Solution: Both notes payable and unearned service revenue are considered liabilities (and not a component of stockholders' equity), while cash is considered an asset. Because any change in a firm's assets must be offset by an equal change in the firm's liabilities plus stockholders' equity, the $2,500 increase in cash must be offset by either a $2,500 increase in unearned service revenue or a $2,500 increase in notes payable.
Paulson Oil account balances at January 31st include: Cash $70,000, Accounts Receivable $100,000, Common Stock $120,000 and Accounts Payable $50,000. During the month of February, the company collected $25,000 of its account receivable and paid $10,000 of its accounts payable. What is Paulson's cash balance on their February 28th trial balance? a. $85,000.00 b. $65,000 c. $60,000.00 d. $95,000.00
Answer: A Solution: Collecting accounts receivable will increase the January 31st cash balance by $25,000 and paying accounts payable will decrease the January 31st cash balance by $10,000. Therefore the cash balance as of February 28th for Paulson Oil is $85,000 ($70,000 beginning balance + $25,000 collection - $10,000 payment).
Which of the following events would lead to a decrease in a firm's retained earnings, and why? a. Payment of $10,000 in employee salaries, because salaries are considered an expense, and an increase in expenses will reduce a firm's retained earnings b. Payment of $10,000 in employee salaries, because salaries are considered a liability, and an increase in liabilities will reduce a firm's retained earnings c. Issuance of a $10,000 note payable in exchange for cash, because notes payable are considered an expense, and an increase in expenses will reduce a firm's retained earnings d. Issuance of a $10,000 note payable in exchange for cash, because notes payable are considered a liability, and an increase in liabilities will reduce a firm's retained earnings
Answer: A Solution: Retained earnings is affected when a company recognizes revenue, incurs expenses, or pays dividends; it is not affected by changes in a firm's liabilities. Here, payment of employee salaries increases the firm's expenses, while issuance of the note payable increases the firm's liabilities. The salary-related increase in expenses is what causes the decrease in the firm's retained earnings.
Stockholders' equity and liabilities both have normal credit balances. Why are the stockholders' equity debit/credit rules more complex than liabilities? a. The elements of Stockholders' Equity are broken into different types of accounts; some are increased with debits and some with credits. b. Net income can be a loss, thus changing the debit/credit relationship. c. Dividends are paid to common stockholders, thus reducing Common Stock. d. Stockholders' equity is composed of both Common Stock and Retained Earnings, one of which is increased with debits and the other with credits.
Answer: A Solution: Stockholders' equity is comprised of the balances of Common Stock & Retained Earnings, both of which are increased with credits. Retained Earnings is further broken down into revenues, expenses, and dividends. While common stock and revenues are increased with credits, expenses, and dividends are increased with debits.
Of the following sets of accounting entries, which one correctly records the purchase of a piece of equipment? a. a $14,000 decrease in cash, a $4,000 increase in notes payable, and a $10,000 increase in equipment, all entered on the same date b. a $5,000 decrease in cash, a $15,000 increase in notes payable, and a $20,000 increase in equipment, all entered on the same date c. a $15,000 increase in cash and a $15,000 decrease in equipment, both entered on the same date d. a $16,000 decrease in notes payable and a $16,000 increase in equipment, both entered on the same date
Answer: B Solution: The purchase of a piece of equipment will increase a company's equipment asset account. Payment for that equipment can be in the form of a decrease (credit) to Cash, an increase (credit) to Accounts Payable, or a combination of both. An entry of a debit (increase) to Equipment of $20,000 along with a credit (decrease) to Cash of $5,000 and a credit (increase) to Accounts Payable of $15,000 creates a balanced accounting equation and fits the parameters for recording the purchase of equipment.
Pickett, Inc. recorded its monthly transactions in the journal, but failed to record a transaction involving cash received from customers on January 14. Assuming Pickett performed all subsequent steps in the recording process correctly for the month, what will likely occur? a. The transaction will be transferred to the financial statements, but not be incorporated to appropriate accounts in the ledger. b. The transaction will not be transferred to the ledger, nor incorporated in the financial statements c. The transaction will be correctly analyzed, but will not be supported by the appropriate business documents. d. The transaction will be transferred to the ledger, but not to the financial statements.
Answer: B Solution: Transactions in the journal get transferred to the ledger accounts, which then become part of the amounts reported on financial statements. If a transaction is not in the journal, it will not be a part of the subsequent recording process steps and will be omitted from the accounting cycle.
During October, Blue Sky Inc. correctly enters a $10,000 credit to its Revenues account. What conclusions can be made based on this accounting entry? a. This entry indicates that Blue Sky recognized $10,000 in revenue in October, which likely means that the firm's net income and ending retained earnings increased while its stockholders' equity decreased. b. This entry indicates that Blue Sky lost $10,000 in revenue in October, which likely means that the firm's net income, ending retained earnings, and stockholders' equity all decreased. c. This entry indicates that Blue Sky recognized $10,000 in revenue in October, which likely means that the firm's net income, ending retained earnings, and stockholders' equity all increased. d. This entry indicates that Blue Sky lost $10,000 in revenue in October, which likely means that the firm's net income and ending retained earnings decreased while its stockholders' equity increased.
Answer: C Solution: A credit to the revenue account represents an increase in revenues. Net income is calculated as revenues minus expenses and Blue Sky's recognition of $10,000 in revenue therefore positively affected net income by $10,000. Retained earnings is calculated as beginning balance plus net income minus dividends and is therefore positively affected by an increase in revenues and net income. Stockholders' equity is calculated as common stock plus retained earnings and is therefore also positively affected by an increase in revenues, net income, and retained earnings.
Mallard Company's total debit column is $27,000 on its trial balance. The remainder of the trial balance shows Accounts Payable of $3,000 and Service Revenue of $20,000 and Notes Payable is blank. What is balance for the Notes Payable account if no errors have occurred in the trial balance? a. $23,000 b. $27,000 c. $4,000 d. $17,000
Answer: C Solution: Assuming that there are no errors, the total debit column should equal the total credit column. Total debits = 27,000. Accounts Payable and Service Revenue are normally credit balances and, therefore, total credits before Notes Payable equals 23,000. 27,000 - 23,000 = 4,000 (Notes Payable)
When calculating the balance of the Sales Revenue account, you find that the balance is lower than expected. However, according to your Balance Sheet and your analysis of the accounting equation, all of your debits and credits are equal across accounts. What is the most likely explanation for this? a. You made a digit transpose error while recording an entry in the Sales Revenue account. b. You recorded an entry in the Sales Revenue account as a debit rather than a credit. c. You failed to record a sales transaction in the journal, so it never got transferred to the ledger or financial documents. d. You failed to record an entry in the Sales Revenue account even though it was posted to the Cash account.
Answer: C Solution: If a transaction is not posted in the journal, both debits and credits will be equally affected. Therefore, even though the Balance Sheet is in balance and the accounting equation is equal, the affected accounts and subsequent financial information will be incorrect.
During the month of May, Apex Industries recorded a $3,000 debit to an expense account. Which of the following explanations of this transaction is the MOST accurate? a. This entry indicates that Apex incurred $3,000 in expenses. It also suggests that the firm may have recorded a $3,000 debit to an asset account in order to offset the corresponding increase in stockholders' equity. b. This entry indicates that Apex incurred $3,000 in expenses. It also suggests that the firm may have recorded a $3,000 debit to an asset account in order to offset the corresponding decrease in stockholders' equity. c. This entry indicates that Apex incurred $3,000 in expenses. It also suggests that the firm may have recorded a $3,000 credit to an asset account in order to offset the corresponding decrease in stockholders' equity. d. This entry indicates that Apex incurred $3,000 in expenses. It also suggests that the firm may have recorded a $3,000 credit to an asset account in order to offset the corresponding increase in stockholders' equity.
Answer: C Solution: Stockholders' Equity = Common Stock + Revenues - Expenses - Dividends. Therefore, a $3,000 increase in expenses causes a $3,000 decrease in stockholders' equity. To keep the accounting equation (Assets = Liabilities + Stockholders' Equity) in balance, Apex must make an entry to decrease assets, increase liabilities, or increase stockholders' equity by $3,000. Since assets are decreased through credit entries, one of Apex's options is to credit an asset account to offset the corresponding decrease in stockholders' equity.
In the ledger, Accounts Receivable shows a debit balance of $12,500, indicating a. that $12,500 in services are owed to customers. b. sales for the period totaled $12,500. c. receipt of $12,500 from customers. d. that customers owe $12,500 to the company.
Answer: D Solution: Accounts receivable is an asset account and typically has a debit balance. In this case, the company ledger has a debit balance of $12,500 in accounts receivable which portrays that customers owe $12,500 to the company.
Cash and Accounts Receivable are two asset accounts. In a service company, under what circumstances will Cash be debited and Accounts Receivable be credited? a. When the company pays for previously purchased supplies. b. When cash is received from customers at the time of service. c. When a customer uses credit to purchase services in order to pay for them later. d. When cash is received from customers for services provided last month.
Answer: D Solution: For asset accounts, a debit equals an increase to the account, and a credit equals a decrease. When a service provided in the past is paid for presently, accounts receivable decrease, and the account is credited. Upon receipt of cash, the Cash account is debited
You are the accountant responsible for creating financial documents and recording transactions. In which order will you perform the following actions related to these tasks? I. create financial statements II. record transactions in the ledger III. examine business documents IV. record transactions in the journal a. III, II, I, IV b. III, II, IV, I. c. IV, II, I, III d. III, IV, II, I
Answer: D Solution: The first step is to analyze the source documents to determine which accounts the transaction affect. The second step is to record the transactions in the journal. The third step is to record the journal entries to the ledger accounts. Finally, once all information is in the ledger, the financial statements can be prepared.
Geyer Company has the following account balances: Accounts Receivable: $40, Accounts Payable: $45, Cash: $70 and Notes Payable: $65. If the Notes Payable balance is listed as $56 in the trial balance, what impact will this have on the accounts? a. There will be no impact on the accounts. b. The total credit balance will be $9 more than the total debit balance. c. The total debit balance will be $9 less than the total credit balance. d. The total credit balance will be $9 less than the total debit balance.
Answer: D Solution: The normal balance for notes payable is a credit balance. If Notes Payable should be $65 but is listed as $56, the total credit balance will be $9 less than it should be. Since total debits should equal total credits, the total credit balance will be $9 less than the total debit balance.
What would it mean if there was a new ledger credit entry of $5,000 to the Notes Payable account? a. The company has paid $5,000 towards an existing note. b. The company has $5,000 in unearned income (a liability account). c. The company has loaned $5,000 in the form of a note. d. The company has borrowed $5,000 in the form of a note.
Answer: D Solution: The normal balance of Notes Payable, a liability account, is a credit. Therefore, a new ledger credit entry increases the balance of Notes Payable, implying the company has borrowed $5,000 in the form of a note. A new ledger debit entry would imply the company has paid $5,000 towards an existing note. If the company loaned $5,000 in the form of a note, it would be a Note Receivable. An entry to Notes Payable does not affect Unearned Income
Journalize the following transactions: Received $ 3,300 cash advance from a customer for future copying.
Cash/ Debit (3300) Unearned Service Revenue/ Credit (3300)
Journalize the following transactions: Stockholders invest $ 85,000 cash to start the business.
Cash/Debit (85000) Common Stock/Credit (85000)
Increase in Accounts Receivable...
Debit
Journalize the following transactions: Purchased $ 5,100 paper supplies on credit.
Supplies/Debit (5100) Accounts Payable/Credit (5100)
What is a T-account?
The basic form of an account.
What is Journalizing?
The procedure of entering transaction data in the journal.
What is a Posting?
The procedure of transferring journal entry amounts to the ledger accounts.
What is Credit?
The right side of an account.
What is an accounting information system?
The system of collecting and processing transaction data and communicating financial information to decision-makers.
Increase in Interest Payable...
Credit
Increase in Notes Payable...
Credit
Increase in Revenues...
Credit
Increase in Unearned Rent Revenue...
Credit
Liability Accounts include what?
1. Interest payable 2. Salaries and wages payable 3. Accounts payable 4. Notes payable 5. Unearned service revenue
Stockholders' Equity Accounts include what?
1. Salaries and wages expense (Expenses) 2. Service revenue (Revenues) 3. Dividends 4. Retained earnings 5. Common stock 6. Supplies expense (Expenses) 7. Insurance expense (Expenses) 8. Interest expense (Expenses) 9. Depreciation expenses (Expenses)
What is a general ledger?
A ledger that contains all asset, liability, stockholders' equity, revenue, and expense accounts
What is a Trial balance?
A list of accounts and their balances at a given time.
What is the chart of accounts?
A list of the names of a company's accounts.
What is a Ledger?
A record of all accounts maintained by a company and their amounts.
What is a double-entry system?
A system that records the two-sided effect of each transaction in appropriate accounts.
what is an Account?
An individual accounting record of increases and decreases in specific asset, liability, stockholders' equity, revenue, or expense items.
Paulson Oil account balances at January 31st include: Cash $70,000, Accounts Receivable $100,000, Common Stock $120,000 and Accounts Payable $50,000. During the month of February, the company collected $25,000 of its account receivable and paid $10,000 of its accounts payable. What is Paulson's cash balance on their February 28th trial balance? a. $85,000.00 b. $95,000.00 c. $60,000.00 d. $65,000
Answer: A Solution: Collecting accounts receivable will increase the January 31st cash balance by $25,000 and paying accounts payable will decrease the January 31st cash balance by $10,000. Therefore the cash balance as of February 28th for Paulson Oil is $85,000 ($70,000 beginning balance + $25,000 collection - $10,000 payment).
Which of the following is an accurate comparison between the United States and European accounting systems? a. Both the U.S. and Europe use the double-entry bookkeeping system. b. the U.S. uses a single-entry bookkeeping system and Europe uses a double-entry bookkeeping system. c. Both the U.S. and Europe use the single-entry bookkeeping system. d. The U.S. uses a double-entry bookkeeping system and Europe uses a single-entry bookkeeping system.
Answer: A Solution: Double-entry accounting system is the basis of accounting systems worldwide. However, differences do exist between countries' accounting practices. In Europe, fair market value is relied on more than the standard historical cost used in the U.S.
March 12th Blakely Accountants performed accounting services for your small business and billed you $12,000. In Blakely's records, which account would be debited? a. Accounts Receivable b. Cash c. Accounts Payable d. Service Revenue
Answer: A Solution: On March 12th, Blakely Accountants would enter the following transaction related to accounting services performed and billed: a debit to Accounts Receivable for $12,000; a credit to Revenues for $12,000.
On November 15, Paulson Painting received a $6,000 cash payment from Apex Inc. in exchange for painting services to be provided in December. When posting the journal entries related to this payment, Paulson's accountant debits the Cash account for $6,000 and credits Service Revenue for $6,000. Which of the following statements best describes the results of this posting? a. In Paulson's general ledger, the ending balance for the Cash account will be correct. However, the ending balance for the Service Revenue account will be too high and the ending balance for the Unearned Service Revenue account will be too low. b. In Paulson's general ledger, the ending balance for the Cash account will be too low, the ending balance for the Service Revenue account will be too low, and the ending balance for the Unearned Service Revenue account will be too high. c. In Paulson's general ledger, the ending balances for both the Cash account and the Service Revenue account will be correct. d. In Paulson's general ledger, the ending balances for the Cash and Service Revenue accounts will be too high. However, the ending balance for the Unearned Service Revenue account will be too low.
Answer: A Solution: Paulson's entry for the transaction described should be a debit (increase) to the asset account Cash and a credit (increase) to the liability account Unearned Service Revenue. Paulson correctly recorded the cash side of the transaction. Paulson incorrectly recorded the other side of the transaction. Because the service has not yet been performed, the revenue is not yet earned which should be reflected as a liability on Paulson's books. Therefore, the credit (increase) to the revenue account caused the balance in the service revenue account to be too high. Likewise the lack of the entry to credit (increase) the liability account Unearned Service Revenue caused this account to be too low.
On February 2, Miles Inc. pays $800 to purchase a one-year insurance policy that will expire next year on January 31. Miles indicates this transaction in its books by recording an $800 reduction in cash and an $800 increase in expenses. Did Miles make the proper accounting entries? Why or why not? a. No, Miles did not make the proper accounting entries. Prepaid insurance is an asset, not an expense. Thus, the firm should have offset the $800 decrease in cash (an asset account) with an $800 increase in prepaid insurance (also an asset account). b. No, Miles did not make the proper accounting entries. Prepaid insurance is a liability, not an expense. Thus, the firm should have offset the $800 decrease in cash (an asset account) with an $800 decrease in prepaid insurance (a liability account). c. Yes, Miles made the proper accounting entries. In order to keep the accounting equation in balance, the firm had to increase its expenses and thus decrease its stockholders' equity by the same amount as it decreased its assets. d. No, Miles did not make the proper accounting entries. Prepaid insurance is a liability, not an expense. Thus, the firm should have offset the $800 decrease in cash (an asset account) with an $800 increase in prepaid insurance (a liability account).
Answer: A Solution: Prepaid insurance is an asset, not a liability or expense. Thus, this transaction should not affect either the liabilities or stockholders' equity portion of the balance sheet. Instead, only the assets portion should be affected. Specifically, the $800 reduction in cash should be offset by an $800 increase in prepaid insurance.
The normal balances in stockholders' equity accounts are a. credits for Common Stock, Retained Earnings and revenues, but debits for the others. b. all credits, like liabilities. c. all credits except for expenses that are debits. d. credits for Common Stock and Retained Earnings, but debits for all others.
Answer: A Solution: Stockholders' equity is comprised of common stock and retained earnings. Common stock has a normal credit balance. Retained earnings can be further broken down into revenue less expenses less dividends. Both retained earnings and revenues normal balance is a credit. Expenses and dividends normal balance is a debit.
For September 30th, Cathy's Catering's trial balance has a debit column totaling $110. The credit column totals $128, which of the following would explain this difference? a. Accounts receivable balance of $75 listed in the trial balance as $57. b. Accounts payable balance of $18 listed in the trial balance as $81. c. Cash balance of $51 listed in the trial balance $15. d. Notes payable balance of $25 listed in the trial balance $52.
Answer: A Solution: The difference between the total debit and total credit columns is $18. If the correct accounts receivable balance is $75 and it was listed in the trial balance as $57, this would cause the total debit column to be understated by $18. Therefore it is the Accounts Receivable balance that caused this difference.
What effect may result if specific account titles are not used in journalizing? a. The general ledger will not balance. b. The financial statements may be not be accurate. c. The journal entry will not balance. d. The contents of the account will differ from the name of the account.
Answer: B Solution: Erroneous account titles can lead to incorrect financial statements because the accounts to which the amounts are posted are the basis of the financial statement.
Which of the following problems may cause financial statements to be inaccurate? a. Failing to follow a specific budget. b. Paying more dividends than net income received. c. Failing to use specific account titles. d. Overspending the Cash account.
Answer: C Solution: Erroneous account titles can lead to incorrect financial statements because the accounts to which the amounts are posted are the basis of the financial statements. The other answer choices, while they may imply bad business judgment, do not lead to inaccuracies in the financial statements.
On December 30, Mega Industries pays employee salaries of $50,000 in cash. When posting the journal entries related to this transaction, Mega's accounting staff credits Cash for $50,000 and credits Accounts Payable for $50,000. Which of the following statements best describes the results of this posting? a. In Mega's general ledger, the ending balance for the Cash account will be too high, while the ending balance for the Accounts Payable account will be too low. b. In Mega's general ledger, the ending balance for the Cash account will be too low, while the ending balance for the Accounts Payable account will be too high. c. In Mega's general ledger, the ending balance for the Cash account will be correct. However, the ending balance for the Accounts Payable account will be too high and the ending balance for the Salaries Expense account will be too low. d. In Mega's general ledger, the ending balance for the Cash account will be correct. However, the ending balance for the Accounts Payable account will be too low and the ending balance for the Salaries Expense account will be too high.
Answer: C Solution: The correct journal entry is a debit (increase) to the expense account, Salaries Expense, and a credit (decrease) to the asset account, Cash. The payment of salaries with cash eliminates a need to record a payable.Mega Industries correctly recorded a credit to cash and the cash account is stated correctly in the general ledger.Mega Industries mistakenly recorded a credit (increase) to the liability account, Accounts Payable, causing this account to be overstated. At the same time, Mega did not record an entry to Salaries expense. The correct entry would have been a debit (increase) to Salaries expense. Therefore Mega's mistake made the balance of Accounts Payable too high and the balance of Salaries Expense too low.
Some of the balances on Carla's Cookies June 30th trial balance include Cash $100,000, Accounts Receivable $50,000, Equipment $25,000 and Accounts Payable $75,000. During the month of July, the company used cash to purchase $8,000 of equipment. How will this transaction affect the equipment account balance on the July 31st trial balance? a. A decrease of $8,000. b. A decrease of $4,000. c. An increase of $8,000. d. An increase of $4,000.
Answer: C Solution: The equipment account balance will increase by the dollar amount of the equipment being purchased. In this case equipment account increases $8,000.
A book designer purchased a new computer monitor for $1,200 cash. As a result of this purchase, a. assets increased by $1,800. b. stockholders' equity decreased by $1,800. c. total assets remained unchanged. d. both assets and stockholders' equity decreased by $1,800.
Answer: C Solution: This transaction's journal entry is a debit (increase) to the asset account equipment and a corresponding credit (decrease) to the asset account cash. The net effect to the total assets is zero.
On September 1, Pike Products purchases $5,000 of supplies from Indigo Industries, with the understanding that Pike will provide payment within 60 days. When posting the journal entries related to this transaction, Pike's accounting staff debits Supplies for $5,000 and debits Cash for $5,000. Which of the following statements best describes the results of this posting? a. In Pike's general ledger, the ending balance for the Cash account will be correct. However, the ending balance for the Supplies account will be too low, while the ending balance for the Accounts Payable account will be too high. b. In Pike's general ledger, the ending balance for the Supplies account will be correct. However, the ending balance for the Cash account will be too low, while the ending balance for the Accounts Payable account will be too high. c. In Pike's general ledger, the ending balance for the Cash account will be correct. However, the ending balance for the Supplies account will be too high, while the ending balance for the Accounts Payable account will be too low. d. In Pike's general ledger, the ending balance for the Supplies account will be correct. However, the ending balance for the Cash account will be too high, while the ending balance for the Accounts Payable account will be too low.
Answer: D Solution: The correct journal entry for this transaction includes a debit (increase) to Supplies reflecting the supplies purchased and received. Pike Products correctly recorded the increase to Supplies. The correct journal entry also includes a credit (increase) to Accounts Payable, reflecting the amount owed to Indigo. Since Pike did not credit Accounts Payable, it's current balance is too low. Likewise, as cash was debited (increased) instead, the cash account will be too high.
Beacon Books issues common stock for $500,000 and uses $100,000 of the cash for building improvements. As a result, a. stockholders' equity will be reduced by $500,000. b. assets will be increased by $400,000. c. assets will be unchanged. d. assets will be increased by $500,000.
Answer: D Solution: The issuance of common stock will increase the asset balance of the cash account by $500,000 and will likewise increase the stockholders' equity balance by $500,000. When building improvements are made, the asset balance of the cash account will decrease by $100,000, and the asset balance of the building improvements account will increase by $100,000. As a whole, the asset account will remain unchanged by the building improvements, and therefore, only the first event will affect the asset account balance, increasing it by $500,000.
Increase in Common Stock...
Credit
Decrease in Accounts Receivable...
Credit
Decrease in Dividends...
Credit
Decrease in Prepaid Insurance....
Credit
Decrease in Salaries and Wages Expense...
Credit
Decrease in Supplies...
Credit
Debit/Credit Rules: Common Stock
Dr. - Cr. +
Debit/Credit Rules: Liabilities
Dr. - Cr. +
Debit/Credit Rules: Retained Earnings
Dr. - Cr. +
Debit/Credit Rules: Revenues
Dr. - Cr. +
Journalize the following transactions: Purchased three digital copy machines for $ 445,000, paying $ 120,000 cash and signing a 5-year, 6% note for the remainder.
Equipment/Debit (445000) Cash/Credit (120000) Notes Payable/Credit (325000)
What is are accounting transactions?
Events that require recording in the financial statements because they affect assets, liabilities, or stockholders' equity.
Which of these statements about a journal is false? a. It contains only revenue and expense accounts. b. It provides a chronological record of transactions. c. It helps to locate errors because the debit and credit amounts for each entry can be readily compared. d. It discloses in one place the complete effect of a transaction.
a. It contains only revenue and expense accounts. A journal contains entries affecting all accounts, not just revenue and expense accounts. The other choices are true statements.
During 2022, Gibson Company assets decreased $50,000 and its liabilities decreased $90,000. Its stockholders' equity therefore: a. increased $40,000 b. decreased $140,000. c. decreased $40,000. d. increased $140,000.
a. increased $40,000 Since assets decreased by $50,000 and liabilities decreased by $90,000, stockholders' equity has to increase by $40,000 to keep the accounting equation balanced. The other choices are therefore incorrect.
A trial balance: a. is a list of accounts with their balances at a given time. b. proves that proper account titles were used. c. will not balance if a correct journal entry is posted twice. d. proves that all transactions have been recorded.
a. is a list of accounts with their balances at a given time. A trial balance is a list of accounts with their balances at a given time. The other choices are incorrect because (b) it does not confirm that proper account titles were used; (c) if a journal entry is posted twice, the trial balance will still balance; and (d) a trial balance does not prove that all transactions have been recorded.
A trial balance: a. is the same under IFRS and GAAP. b. proves that transactions are recorded correctly. c. proves that all transactions have been recorded. d. will not balance if a correct journal entry is posted twice.
a. is the same under IFRS and GAAP.
Which of the following events is not recorded in the accounting records? a. Equipment is purchased on account. b. An employee is terminated. c. A cash investment is made into the business. d. Company pays dividend to stockholders.
b. An employee is terminated. Termination of an employee is not a recordable event in the accounting records. The other choices all represent events that are recorded.
The effects on the basic accounting equation of performing services for cash are to: a. increase assets and decrease stockholders' equity. b. increase assets and increase stockholders' equity. c. increase assets and increase liabilities. d. increase liabilities and increase stockholders' equity.
b. increase assets and increase stockholders' equity. When services are performed for cash, assets are increased and stockholders' equity is increased. The other choices are therefore incorrect.
One difference between IFRS and GAAP is that: a. GAAP uses accrual-accounting concepts and IFRS uses primarily the cash basis of accounting. b. IFRS uses a different posting process than GAAP. c. IFRS uses more fair value measurements than GAAP. d. the limitations of a trial balance are different between IFRS and GAAP.
c. IFRS uses more fair value measurements than GAAP.
A trial balance will not balance if: a. a correct journal entry is posted twice. b. the purchase of supplies on account is debited to Supplies and credited to Cash. c. a $100 cash dividend is debited to Dividends for $1,000 and credited to Cash for $100. d. a $450 payment on account is debited to Accounts Payable for $45 and credited to Cash for $45.
c. a $100 cash dividend is debited to Dividends for $1,000 and credited to Cash for $100. The entry will cause the trial balance to be out of balance. The other choices are incorrect because although these entries are incorrect, they will still allow the trial balance to balance.
A ledger: a. contains only asset and liability accounts. b. should show accounts in alphabetical order. c. is a record of all accounts maintained by a company and their amounts. d. provides a chronological record of transactions.
c. is a record of all accounts maintained by a company and their amounts. A ledger is a record of all accounts maintained by a company and their amounts. The other choices are incorrect because (a) it contains all types of accounts, not just assets and liabilities; (b) they are not listed in alphabetical order but instead in the order of asset, liability, and stockholders' equity accounts and then revenues and expenses; and (d) the journal provides a chronological record.
Which accounts normally have debit balances? a. Assets, expenses, and revenues. b. Assets, expenses, and retained earnings. c. Assets, liabilities, and dividends. d. Assets, dividends, and expenses.
d. Assets, dividends, and expenses. Assets, dividends, and expenses have normal debit balances. The other choices are incorrect because (a) revenues have a normal credit balance, (b) retained earnings has a normal credit balance, and (c) liabilities have a normal credit balance.
The general policy for using proper currency signs (dollar, yen, pound, etc.) is the same for both IFRS and this text. This policy is as follows: a. Currency signs only appear in ledgers and journal entries. b. Currency signs are only shown in the trial balance. c. Currency signs are shown for all compound journal entries. d. Currency signs are shown in trial balances and financial statements.
d. Currency signs are shown in trial balances and financial statements.
