CH 2 ACCOUNTING

trial balance

- 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. - The trial balance proves the mathematical equality of debits and credits after posting.

The recording process

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.

The steps for preparing a trial balance

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.

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.

order of presentation in the trial balance

Assets - Cash - A/R - prepaid insurance - equipment Liabilities - N/P - A/P - Salaries/Wages Payable Stockholders' equity - Common Stock - dividends -service revenue - utilities expense - salaries/wage expense

For each of the following accounts indicate the effects of a debit and a credit on the accounts and the normal balance of the account. Accounts Payable

Debit: decrease, Credit: increase, Normal Balance: credit

For each of the following accounts indicate the effects of a debit and a credit on the accounts and the normal balance of the account. Advertising Expense

Debit: increase, Credit: decrease, Normal Balance: debit

Before posting a payment of $5,000, the Accounts Payable of Chola Corporation had a normal balance of $18,000. The balance after posting this transaction was: a. $13,000. b. $5,000. c. $23,000. d. Cannot be determined.

a. The balance is $13,000 ($18,000 normal balance − $5,000 payment), not (b) $5,000 or (c) $23,000. Choice (d) is incorrect because the balance can be determined.

Which of the following 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 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.

The expanded accounting equation is: 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

d. The expanded accounting equation is Assets = Liabilities + Common Stock + Retained Earnings + Revenues − Expenses − Dividends. The other choices are therefore incorrect.

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 stockholders' equity items. The terms debit and credit are synonymous with left and right. Assets, dividends, and expenses are increased by debits and decreased by credits. Liabilities, common stock, retained earnings, and revenues are increased by credits and decreased by debits.

For each of the following accounts indicate the effects of a debit and a credit on the accounts and the normal balance of the account. Common Stock

Debit: decrease, Credit: increase, Normal Balance: credit

For each of the following accounts indicate the effects of a debit and a credit on the accounts and the normal balance of the account. Dividends

Debit: increase, Credit: decrease, Normal Balance: debit

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.

Steps in the Recording Process

1. The accounting cycle: Phase 1: During the accounting period: · Record journal entries (Chp. 2) · Post amounts to general ledger (Chp. 2). Phase 2: End of the accounting period: · Prepare (unadjusted) trial balance (Chp. 2) · Record and post adjusting entries (Chp. 3) · Prepare adjusted trial balance (Chp. 3) · Prepare financial statement (Chp. 3) · Record and post closing entries (Chp. 4)

Technique of journalizing

1. The date of the transaction is entered in the Date column. 2. 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. 3. 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. 4. 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. 5. 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 ledger accounts.

For each of the following accounts indicate the effects of a debit and a credit on the accounts and the normal balance of the account. Service Revenue

Debit: decrease, Credit: increase, Normal Balance: credit

For each of the following accounts indicate the effects of a debit and a credit on the accounts and the normal balance of the account. Accounts Receivable

Debit: increase, Credit: decrease, Normal Balance: debit

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.

A trial balance: a. is a list of accounts with their balances at a given time b. proves the mathematical accuracy of journalized transactions c. will not balance if a correct journal entry is posted twice d. proves that all transactions have been recorded

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.

Which of the following statements about a journal is false? a. It is not a book of original entry 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. The journal is a book of original entry. The other choices are true statements.

Which of the following statements about an account is true? a. The right side of an account is the debit, or increase, 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. 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 classification of the account; (c) there are also separate accounts for different stockholders' 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 of the account.

The order of the accounts in the ledger is: a. assets, revenues, expenses, liabilities, common stock, dividends b. assets, liabilities, common stock, dividends, revenues, expenses c. common stock, assets, revenues, expenses, liabilities, dividends d. revenues, assets, expenses, liabilities, common stock, dividends

b. The correct order of the accounts in the ledger is assets, liabilities, common stock, dividends, 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 stockholders' equity accounts (common stock and dividends), and then (2) income statement accounts: revenues and expenses.

A ledger: a. contains only asset and liability accounts b. should show accounts in alphabetical order c. is a collection of the entire group of accounts maintained by a company d. is a book of original entry

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, stockholders' equity, revenue, and expense accounts—not just asset 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).

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. 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.

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. The trial balance will not balance in this case because the debit of $1,000 to Dividends 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.

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. 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.

Accounts that normally have debit balances are: a. assets, expenses, and revenues b. assets, expenses, and common stock c. assets, liabilities, and dividends d. assets, dividends, and expenses

d. Assets, dividends, and expenses all have normal debit balances. The other choices are incorrect because (a) revenues have normal credit balances, (b) common stock has a normal credit balance, and (c) liabilities have normal credit balances.

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. 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.