Principles of Accounting Chapter 2
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;Equipment $61,000. In preparing a trial balance, the total in the debit column is
$131,000 ($5,000+$40,000+10,000+$15,000+$61,000)
Crawford Company started the year with $30,000 in its Common Stock account and a credit balance in Retained Earnings of $12,000. During the year, the company earned net income of $24,000 and declared and paid $10,000 of dividends. In addition, the company sold additional common stock amounting to $14,000. As a result, the amount of its retained earnings at the end of the year would be:
$26,000
If total liabilities decreased by $30,000 during a period of time and owners equity increased by $35,000 during the same period, the amount and direction (increase or decrease) of the period's change in total assets is a:
$5,000 increase.
Jamal Company began the year with $64,000 in its Common Stock account and a debit balance in Retained Earnings of $36,000. During the year, the company earned net income of $18,000 and declared and paid $6,000 of dividends. In addition, the company sold additional common stock amounting to $22,000. Based on this information, what should the transaction analysis show for the ending total of all stockholders' equity accounts?
$62,000
Owner's Capital
-Debits Decrease owner's capital, decreases revenue, Increases expenses and Increase Owner's Drawing. -Credit Increases Owner's Capital, Increases Revenue, Decreases Expenses and Decreases Owner's Drawing. -The normal balance of Owner's Capital is a credit balance. -The normal balance of Owner's Drawing is a Debit balance. -Revenues normally show Credit balances while Expenses show Debit balances.
Normal Balance
-is on the side where an increase in the account is recorded. Every account classification has a normal balance whether it is a debit or credit. For that particular account the opposite side entries should never exceed the normal balance.
Three basic steps in the recording process
1. Analyze each transaction for its effects on the accounts. 2. Enter the transaction information in a journal (book of original entry). 3. Transfer the journal information to the appropriate accounts in the ledger (book of accounts). The recording process begins with the transaction. Business documents, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction. The company analyzes this evidence to determine the transaction's effects on specific accounts. The company then enters the transaction in the journal. Finally, it transfers the journal entry to the designated accounts in the ledger.
Steps to posting a journal entry
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.
Compound Entry
A journal entry that involves three or more accounts.
Trial Balance
A trial balance is a list of accounts and their balances at a given time. The primary purpose of a trial balance is to prove (or check) that the debits equal the credits after posting. If the debits and credits do not agree, the trial balance can be used to uncover errors in journalizing and posting. The procedures for preparing a trial balance consist of: 1. List the account titles and their balances. 2. Total the debit and credit columns. 3. Prove the equality of the two columns.
AN ACCOUNT IS PART OF THE FINANCIAL INFORMATION SYSTEM & IS DESCRIBED AS WHAT TYPE OF ACCOUNT?
AN ACCOUNT IS A SOURCE DOCUMENT
CUSTOMARILY, A TRIAL BALANCE IS PREPARED
AT THE END OF AN ACCOUNTING PERIOD
Ledger
An entire group of accounts maintain by a company that provides the balance in each of the accounts as well as keeps track of changes in these balances
If a company issues common stock for $40,000 and uses $30,000 of the cash to purchase a truck,
Assets will be increased by $40,000
Which accounts normally have debit balances?
Assets, expenses, and dividends.
The expanded accounting equation is
Assets=Liabilities+Owner's Capital-Owner's Drawings+Revenues-Expenses
THE FIRST STEP IN DESIGNING A COMPUTERIZED ACCOUNTING SYSTEM IS THE CREATION OF THE
Chart of accounts
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.
An accountant has debited an asset account for $900 and credited a liability account for $500. What can be done to complete the recording of the transaction?
Credit a different asset account for $400
An accountant has debited an asset account for $1,000 and credited a liability account for $500. What can be done to complete the recording of the transaction?
Credit a different asset account for $500
An accountant has debited an asset account for $800 and credited a liability account for $600. Which of the following would be an incorrect way to complete the recording of the transaction?
Debit a stockholders' equity account for $200
Which of the following accounts is increased with a debit?
Dividends
Which of the following accounts follows the rules of debit and credit in relation to increases and decreases in the opposite manner?
Dividends and Interest Revenue
Double-Entry System
Equal Debits and Credits are made in the accounts for each transaction. Thus the total Debits will always Equal the total Credits and the accounting equation will always stay in balance
If a company pays dividends of $10,000
Equity will be reduced by $10,000 and Retained earnings will be reduced by $10,000
General Journal
Every company has this journal which contains: 1. Spaces for dates 2. Accounting titles and explanations 3. references, and 4. two amount columns 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.
The owner's drawings account decreases owner's equity and is an income statement account like expenses
False
T Account
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. The format of an account resembles the letter T
Debits
Increase assets and decrease liabilities
The Prepaid Insurance account has an account balance of $3,000. At the end of an accounting period, the controller has decided that $2,000 of the balance has expired. Which of the following adjusting entries should be made?
Insurance Expense 2,000 Prepaid Insurance 2,000
Debit (Dr.)
Left
Which of the following describes the classification and normal balance of the Unearned Revenue account?
Liability, credit
At the end of an accounting period when accounts are ready to be closed, which of the following activities must be performed?
Make closing entries and Prepare post closing trial balance
Are advanced receipts from customers treated as revenue at the time of receipt? Why or why not?
No, revenue cannot be recognized until the work is performed
Is the purchase of equipment treated as an expense at the time of purchase?
No, the cost needs to be allocated to the years of expected use
Which pair of accounts follows the rules of debit and credit in relation to increases and decreases in the same manner?
Prepaid Insurance and Advertising Expense
After the adjusting entries have been posted to the unadjusted trial balance, the adjusted trial balance is then used to:
Prepare the financial statements
Howard Company had a transaction that caused a $5,000 increase in both assets and total liabilities. This transaction could have been a(n):
Purchase of office equipment for $12,000, paying $7,000 cash and issuing a note payable for the balance
Journalizing
Recording transactions in a journal. 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.
Which accounts normally have credit balances?
Revenues, liabilities, and retained earnings.
Credit (Cr.)
Right
Which of the following accounts is increased with a credit?
Sales Revenue
The normal balance of any account is the
Side which increases that account
Budke Corporation paid dividends of $5,000. As a result of this event,
The dividends account was debited for $5,000
Accounting Information System
The system of collecting and processing transaction data and communicating financial information to decision makers
Chart of Accounts
This chart lists the accounts and the account numbers that identify their location in the ledger
A trial balance is the same under IFRS and GAAP
True
Companies prepare a trial balance at the end of an accounting period and it is used in preparing financial statements?
True
Dollar signs do not appear in the journal or ledger.
True
A NUMBERING SYSTEM FOR A CHART OF ACCOUNTS
USUALLY STARTS WITH BALANCE SHEET ACCOUNTS
A trial balance will not balance if
a $100 cash drawing by the owner is debited to Owner's Drawings for $1,000 and credited to Cash for $100
The purchase of supplies on account should result in
a debit to Supplies and a credit to Accounts Payable
Simple Entry
a transaction entered in the journal that only involves two accounts, one debit and one credit
In a Classified Balance Sheet, the current assets are listed
according to how readily each asset can be converted into cash
An investment by the stockholders in a business increases
assets and stockholders' equity
Comstock Company provided consulting services and billed the client $2,500. As a result of this event
assets increased by $2,500 and equity increased by $2,500
Powers Corporation received a cash advance of $500 from a customer. As a result of this event
assets increased by $500
If total liabilities decreased by $4,000, then
assets must have decreased by $4,000, or stockholders' equity must have increased by $4,000
If total liabilities increased by $5,000, then
assets must have increased by $5,000, or stockholders' equity must have decreased by $5,000
Courtney Company purchased equipment for $1,800 cash. As a result of this event
assets remained unchanged
If expenses are paid in cash, then
assets will decrease
If services are rendered for cash, then
assets will increase
The order of the accounts in the ledger is
assets, liabilities, owner's capital, owner's drawings, revenues, expenses
Accounts that normally have debit balances are
assets, owner's drawings, and expenses
If a company buys a $700 machine on credit, this transaction will affect the
balance sheet only
General Ledger
contains all the asset, liability, and owner's equity accounts
Jones Dairy purchased a new milking machine for $40,000 cash. To record the transaction on Jones' books, you would:
debit an asset account and credit an asset account.
When a company performs a service but has not yet received payment, it
debits Accounts Receivable and credits Service Revenue
A company that receives money in advance of performing a service
debits Cash and credits Unearned Service Revenue
The payment of a liability
decreases assets and liabilities
A paid dividend
decreases assets and stockholders' equity
An Expense
decreases stockholders' equity
Garrison Company prepares quarterly reports, which it distributes to all stockholders and other entities that rely on its accounting information. Which of the following is the best term for the key assumption in financial reporting that Garrison is following?
going concern assumption
Collection of a $600 Accounts Receivable
increases an asset $600; decreases an asset $600
The purchase of an asset on credit
increases assets and liabilities
A revenue generally
increases assets and stockholders' equity
Account
is an individual accounting record of increases and decreases in a specific asset, liability, or owner's equity item. EX: A company would have separate accounts for Cash, Accounts Receivable, Accounts Payable, Service Revenue, Salaries and Wages Expense, and so on
A Revenue Account
is increased by credits
If a company has overdrawn its bank balance, then
its Cash account will show a credit balance
The purchase of an asset for cash
leaves total assets unchanged
The sale of an asset on credit for what it cost
leaves total assets unchanged
Liability Accounts
normally show credit balances
Asset Accounts
normally show debit balances
A payment of a portion of Accounts Payable will
not affect stockholders' equity
Debit Balance
occurs when the amount on the debit side of an account is greater than the amount on the credit side
Credit Balance
occurs when the total of the credits in an account is larger than the total of the debits in that account
If services are rendered on account, then
stockholders' equity will increase
The classification and normal balance of the Dividends account is
stockholders' equity with a debit balance
Debiting the Account
the act of entering an amount on the left side of an account
Crediting the Account
the act of entering an amount on the right side of an account
If an individual asset is increased, then
there could be an equal decrease in another asset
When collection is made on Accounts Receivable
total assets will remain the same
Posting
transferring journal entries to the ledger account and it accumulates the effects of journalized transactions into individual accounts
