ACCT 201

Use the expanded accounting equation to answer each of the following questions. (a) The liabilities of Sheridan Company are $90,000. Owner's capital is $149,000; drawings are $85,000; revenues, $431,000; and expenses, $333,000. What is the amount of Sheridan Company's total assets? (b) The total assets of Sierra Company are $61,000. Owner's capital is $25,000; drawings are $5,800; revenues, $47,000; and expenses, $42,000. What is the amount of the company's total liabilities? (c) The total assets of Birch Co. are $741,000 and its liabilities are equal to two-thirds of its total assets. What is the amount of Birch Co.'s owner's equity?

(a) $252,000 (b) $36,800 (c) $247,000

Given the accounting equation, answer each of the following questions. (a) The liabilities of Oriole Company are $116,000 and the owner's equity is $231,000. What is the amount of Oriole Company's total assets? (b) The total assets of Oriole Company are $183,000 and its owner's equity is $96,000. What is the amount of its total liabilities? (c) The total assets of Oriole Company are $889,000 and its liabilities are equal to one-half of its total assets. What is the amount of Oriole Company's owner's equity?

(a) $347,000 (b) $87,000 (c) $444,500

Indicate whether each of the following items is an asset, liability, or part of owner's equity. (a)Accounts receivable (b)Salaries and wages payable (c)Equipment (d)Supplies (e)Owner's capital (f)Notes payable

(a) asset (b) liability (c) asset (d) asset (e) owner's equity (f) liability

Indicate whether the following items would appear on the income statement, balance sheet, or owner's equity statement. (a)Notes payable (b)Advertising expense (c)Owner's capital (d)Cash (e)Service revenue

(a) balance sheet (b) income statement (c) balance sheet and owner's equity statement (d) balance sheet (e) income statement

ILLUSTRATION 2.13 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 individual accounts.

How do assets make you money?

1) directly Ex: merchandiser buys things and resell it. These "things" are called inventory. 2) indirectly Ex: You need certain assets like, equipment, technology, and anything else that helps you run the business.

A trial balance does not guarantee freedom from recording errors, however. Numerous errors may exist even though the totals of the trial balance columns agree. For example, the trial balance may balance even when:

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. The trial balance does not prove that the company has recorded all transactions or that the ledger is correct.

Tabular summary of Softbyte transactions

1. Each transaction is analyzed in terms of its effect on:a. The three components of the basic accounting equation (assets, liabilities, and owner's equity).b. Specific types (kinds) of items within each component (such as the asset Cash). 2. The two sides of the equation must always be equal. 3. The Owner's Capital, Owner's Drawings, Revenues, and Expenses columns indicate the causes of each change in the owner's claim on assets.

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.

Financial statements and their interrelationships

1. Net income of $2,750 on the income statement is added to the beginning balance of owner's capital in the owner's equity statement. 2. Owner's capital of $16,450 at the end of the reporting period shown in the owner's equity statement is reported on the balance sheet. 3. Cash of $8,050 on the balance sheet is reported on the statement of cash flows.

The statement of cash flows provides answers to the following simple but important questions.

1. Where did cash come from during the period? 2. What was cash used for during the period? 3. What was the change in the cash balance during the period?

Genesis Company performs the following accounting tasks during the year.Accounting is "an information system that identifies, records, and communicates the economic events of an organization to interested users."Categorize the accounting tasks performed by Genesis as relating to either the identification, recording, or communication aspects of accounting. 1. Analyzing and interpreting information. 2. Classifying economic events. 3. Explaining uses, meaning, and limitations of data. 4. Keeping a systematic chronological diary of events. 5. Measuring events in dollars and cents. 6. Preparing accounting reports. 7. Reporting information in a standard format. 8. Selecting economic activities relevant to the company. 9. Summarizing economic events.

1. communication 2. recording 3. communication 4. recording 5. recording 6. communiction 7. communication 8. indentification 9. recording

The following situations involve accounting principles and assumptions. For each of the three situations, say if the accounting method used is correct or incorrect. If correct, identify which principle or assumption supports the method used. If incorrect, identify which principle or assumption has been violated. 1. Sosa Company owns buildings that are worth substantially more than they originally cost. In an effort to provide more relevant information, Sosa reports the buildings at fair value in its accounting reports. 2. Mays Company includes in its accounting records only transaction data that can be expressed in terms of money. 3. Curt Russell, owner of Curt's Photography, records his personal living costs as expenses of the business.

1. incorrect, historical cost principle 2. correct, monetary unit assumption 3. incorrect, economic entity assumption

Corporation

A business organized as a separate legal entity under state corporation law, having ownership divided into transferable shares of stock. Note: Corps. enjoy limited liability, Stockholders may transfer all or part of their ownership shares to other investors at any time, and enjoys an unlimited life as long as there are still stockholders.

Proprietorship

A business owned by one person Note: Usually, only a relatively small amount of money (capital) is necessary to start in business as a proprietorship. The owner (proprietor) receives any profits, suffers any losses, and is personally liable for all debts of the business

Partnership

A business owned by two or more persons associated as partners. Note: Like a proprietorship, for accounting purposes the partnership transactions must be kept separate from the personal activities of the partners

Income statement

A financial statement that presents the revenues and expenses and resulting income or loss of a company for a specific period of time. Note: The income statement is sometimes referred to as the statement of operations, earnings statement, or profit and loss statement. Revenue - expensus = income or loss IS: represents what a copany DOES and covers a period of time.

Balance sheet

A financial statement that reports the assets, liabilities, and owner's equity at a specific date Note: The income statement, owner's equity statement, and statement of cash flows are all for a period of time, whereas the balance sheet is for a point in time. Represents what the company has.

Statement of cash flows

A financial statement that summarizes information about the cash inflows (receipts) and cash outflows (payments) for a specific period of time. Note: The statement of cash flows helps users determine if the company generates enough cash from operations to fund its investing and financing activities. Note: one of the most important statements.

Three-column form of account

A form with columns for debit, credit, and balance amounts in an account.

ILLUSTRATION 2.15 The general ledger, which contains all of a company's accounts

A general ledger contains all the asset, liability, and owner's equity 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.

Securities and Exchange Commission (SEC)

A governmental agency that oversees U.S. financial markets and accounting standard-setting bodies.

Simple entry

A journal entry that involves only two accounts.

Compound entry

A journal entry that involves three or more accounts.

General ledger

A ledger that contains all asset, liability, and owner's equity accounts.

Chart of accounts

A list of accounts and the account numbers that identify their location in the ledger

Trial balance

A list of accounts and their balances at a given time.

Financial Accounting Standards Board (FASB)

A private organization that establishes generally accepted accounting principles (GAAP) in the United States.

Account

A record of increases and decreases in specific asset, liability, or owner's equity items

Double-entry system

A system that records in appropriate accounts the dual effect of each transaction.

Diehl Cleaners has the following balance sheet items.Classify each item as an asset, liability, or owner's equity. A) Accounts payble B) Cash C) Equipment D) Supplies E) Accounts receivable F) Notes payable G) Salaries & wages payable H) Owner's capital

A) Liability B) Asset C) Asset D) Asset E) Asset F) Liability G) Liability H) Owner's Equity

Identify the activities and users associated with accounting.

Accounting is an information system that identifies, records, and communicates the economic events of an organization to interested users. The major users and uses of accounting are as follows. (a) Management uses accounting information to plan, organize, and run the business. (b) Investors (owners) decide whether to buy, hold, or sell their financial interests on the basis of accounting data. (c) Creditors (suppliers and bankers) evaluate the risks of granting credit or lending money on the basis of accounting information. Other groups that use accounting information are taxing authorities, regulatory agencies, customers, and labor unions.

Explain the career opportunities in accounting.

Accounting offers many different jobs in fields such as public and private accounting, governmental, and forensic accounting. Accounting is a popular major because there are many different types of jobs, with unlimited potential for career advancement.

Normal balance

An account balance on the side where an increase in the account is recorded.

Fair value principle

An accounting principle stating that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability).

Historical cost principle

An accounting principle that states that companies should record assets at their cost. Note: Until the item is scrapped, traded or sold. Also value or "depreciation" is recorded in a different section.

Journal

An accounting record in which transactions are initially recorded in chronological order.

International Accounting Standards Board (IASB)

An accounting standard-setting body that issues standards adopted by many countries outside of the United States.

Public accounting

An area of accounting in which the accountant offers expert service to the general public.

Forensic accounting

An area of accounting that uses accounting, auditing, and investigative skills to conduct investigations into theft and fraud.

Taxation

An area of public accounting involving tax advice, tax planning, preparing tax returns, and representing clients before governmental agencies.

Management consulting

An area of public accounting ranging from development of accounting and computer systems to support services for marketing projects and merger and acquisition activities.

Monetary unit assumption

An assumption stating that companies include in the accounting records only transaction data that can be expressed in terms of money (Can it be put in dollars and cents).

Economic entity assumption

An assumption that requires that the activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities.

Describe the four financial statements and how they are prepared.

An income statement presents the revenues and expenses, and resulting net income or net loss, for a specific period of time. An owner's equity statement summarizes the changes in owner's equity for a specific period of time. A balance sheet reports the assets, liabilities, and owner's equity at a specific date. A statement of cash flows summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time.

Expanded accounting equation

Assets = Liabilities + Owner's capital − Owner's drawings + Revenues − Expenses

Basic accounting equation

Assets = Liabilities + Owner's equity. Note: Applies to all economic entities, provides the underlying framework for recording and summarizing economic events. This equation must ALWAYS BE TRUE.

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.

ILLUSTRATION 2.23 Payment for insurance

Cash Flows: -600

ILLUSTRATION 2.22 Payment of monthly rent

Cash Flows: -900

ILLUSTRATION 2.19 Investment of cash by owner

Cash flow analyses show the impact of each transaction on cash. Cash Flows: +10,000

ILLUSTRATION 2.28 Receipt of cash for services performed

Cash flows: +10,000

ILLUSTRATION 2.27 Payment of salaries

Cash flows: -4,000

ILLUSTRATION 2.26 Withdrawal of cash by owner

Cash flows: -500

ILLUSTRATION 2.25 Hiring of employees

Cash flows: No affect

ILLUSTRATION 2.24 Purchase of supplies on credit

Cash flows: No effect

Liabilities

Creditor claims against total assets Note: Debt is a legal obligation. You have to pay them.

Analyze the effects of business transactions on the accounting equation.

Each business transaction must have a dual effect on the accounting equation. For example, if an individual asset increases, there must be a corresponding (1) decrease in another asset, (2) increase in a specific liability, or (3) increase in owner's equity.

Explain the building blocks of accounting: ethics, principles, and assumptions.

Ethics are the standards of conduct by which actions are judged as right or wrong. Effective financial reporting depends on sound ethical behavior. Generally accepted accounting principles are a common set of standards used by accountants. The primary accounting standard-setting body in the United States is the Financial Accounting Standards Board. The monetary unit assumption requires that companies include in the accounting records only transaction data that can be expressed in terms of money. The economic entity assumption requires that the activities of each economic entity be kept separate from the activities of its owner(s) and other economic entities.

Relevance

Financial information that is capable of making a difference in a decision.

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.

Illustration 2-11 Summary of debit/credit rules.

Illustration 2-11 Summary of debit/credit rules.

ILLUSTRATION 2.14 Compound journal entry

In a compound entry, the standard format requires that all debits be listed before the credits. Note: 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. Note: In a compound entry, the standard format requires that all debits be listed before the credits.

If you have more money come in than going out, what do you have?

Income

Who uses accounting data?

Internal users external users

International Financial Reporting Standards (IFRS)

International accounting standards set by the International Accounting Standards Board (IASB).

Sarbanes-Oxley Act (SOX)

Law passed by Congress intended to reduce unethical corporate behavior.

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. Cash Flows: +1,200

ILLUSTRATION 2.20 Purchase of office equipment

No Cash Flow Effect

In an accounting sense, are employees assets?

No because you cannot own them.

Faithful representation

Numbers and descriptions match what really existed or happened—they are factual.

What does OPM stand for?

Other people's money.

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. 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.

ILLUSTRATION 2.12 The recording process

Practically every business uses the basic steps shown 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.

What is each stock worth?

Proportional ownership.

Transaction (1). Investment of Cash by Owner.

Ray Neal starts a smartphone app development company which he names Softbyte. On September 1, 2020, he invests $15,000 cash in the business. This transaction results in an equal increase in assets and owner's equity. Observe that the equality of the accounting equation has been maintained. Note that the investments by the owner do not represent revenues, and they are excluded in determining net income. Therefore, it is necessary to make clear that the increase is an investment (increasing Owner's Capital) rather than revenue.

Transaction (10). Withdrawal of Cash by Owner.

Ray Neal withdraws $1,300 in cash from the business for his personal use. This transaction results in an equal decrease in assets and owner's equity. Observe that the effect of a cash withdrawal by the owner is the opposite of the effect of an investment by the owner. Owner's drawings are not expenses. Expenses are incurred for the purpose of earning revenue. Drawings do not generate revenue. They are a disinvestment. Like owner's investment, the company excludes owner's drawings in determining net income.

What is the matching principle?

Recognize revenues in the period they are earned. Recognize expenses in the period they are incurred.

What is cash basis accounting?

Record revenues when we receive cash and expenses at the time we pay cash Note: You recognize the money you earn, when you actually recieve it. You recognize expenses when you pay them.

What are two primary qualities that make accounting informatino useful for decision making?

Relevance and faithful presentation

Assets

Resources a business owns. Note: The common characteristic possessed by all assets is the capacity to provide future services or benefits

Transaction (8). Payment of Accounts Payable.

Softbyte pays its $250 Daily News bill in cash. The company previously [in Transaction (5)] recorded the bill as an increase in Accounts Payable and a decrease in owner's equity. Observe that the payment of a liability related to an expense that has previously been recorded does not affect owner's equity. The company recorded this expense in Transaction (5) and should not record it again.

Transaction (7). Payment of Expenses.

Softbyte pays the following expenses in cash for September: office rent $600, salaries and wages of employees $900, and utilities $200. These payments result in an equal decrease in assets and owner's equity. The two sides of the equation now balance at $19,600. Three lines in the analysis indicate the different types of expenses that have been incurred.

Transaction (6). Services Performed for Cash and Credit.

Softbyte performs $3,500 of app development services for customers. The company receives cash of $1,500 from customers, and it bills the balance of $2,000 on account. This transaction results in an equal increase in assets and owner's equity. Softbyte recognizes $3,500 in revenue when it performs the service. In exchange for this service, it received $1,500 in Cash and Accounts Receivable of $2,000. This Accounts Receivable represents customers' promises to pay $2,000 to Softbyte in the future. When it later receives collections on account, Softbyte will increase Cash and will decrease Accounts Receivable [see Transaction (9)].

Transaction (2). Purchase of Equipment for Cash.

Softbyte purchases computer equipment for $7,000 cash. This transaction results in an equal increase and decrease in total assets, though the composition of assets changes. Observe that total assets are still $15,000. Owner's equity also remains at $15,000, the amount of Ray Neal's original investment.

Transaction (3). Purchase of Supplies on Credit.

Softbyte purchases headsets (and other computer accessories expected to last several months) for $1,600 from Mobile Solutions. Mobile Solutions agrees to allow Softbyte to pay this bill in October. This transaction is a purchase on account (a credit purchase). Assets increase because of the expected future benefits of using the headsets and computer accessories, and liabilities increase by the amount due to Mobile Solutions. Total assets are now $16,600. This total is matched by a $1,600 creditor's claim and a $15,000 ownership claim.

Transaction (4). Services Performed for Cash.

Softbyte receives $1,200 cash from customers for app development services it has performed. This transaction represents Softbyte's principal revenue-producing activity. Recall that revenue increases owner's equity. The two sides of the equation balance at $17,800. Service Revenue is included in determining Softbyte's net income. Note that we do not have room to give details for each individual revenue and expense account in this illustration. Thus, revenues (and expenses when we get to them) are summarized under one column heading for Revenues and one for Expenses. However, it is important to keep track of the category (account) titles affected (e.g., Service Revenue) as they will be needed when we prepare financial statements later in the chapter.

Transaction (9). Receipt of Cash on Account.

Softbyte receives $600 in cash from customers who had been billed for services [in Transaction (6)]. Transaction (9) does not change total assets, but it changes the composition of those assets. Note that the collection of an account receivable for services previously billed and recorded does not affect owner's equity. Softbyte already recorded this revenue in Transaction (6) and should not record it again.

Transaction (5). Purchase of Advertising on Credit.

Softbyte receives a bill for $250 from the Daily News for advertising on its online website but postpones payment until a later date. This transaction results in an increase in liabilities and a decrease in owner's equity. The two sides of the equation still balance at $17,800. Owner's equity decreases when Softbyte incurs the expense. Expenses are not always paid in cash at the time they are incurred. When Softbyte pays at a later date, the liability Accounts Payable will decrease, and the asset Cash will decrease [see Transaction (8)]. The cost of advertising is an expense (rather than an asset) because the company has used the benefits. Advertising Expense is included in determining net income.

Accounting Cycle

Steps companies follow each period to record transactions and eventually prepare financial statements.

What do you do before starting a business?

Talk to an accountant and a lawyer.

generally accepted accounting principles (GAAP)

The accounting profession has developed standards that are generally accepted and universally practiced

generally accepted accounting principles (GAAP)

The accounting profession has developed standards that are generally accepted and universally practiced. These standards indicate how to report economic events.

Net loss

The amount by which expenses exceed revenues.

Net income

The amount by which revenues exceed expenses.

Investments by owner

The assets an owner puts into the business. Note: recorded in a category called owner's capital

State the accounting equation, and define its components.

The basic accounting equation is: Assets=Liabilities+Owner's EquityAssets=Liabilities+Owner's Equity Assets are resources a business owns. Liabilities are creditorship claims on total assets. Owner's equity is the ownership claim on total assets. The expanded accounting equation is: Assets=Liabilities+Owner's Capital−Owner's Drawings+Revenues−ExpensesAssets=Liabilities+Owner's Capital−Owner's Drawings+Revenues−Expenses Investments by owners (assets the owner puts into the business) are recorded in a category called owner's capital. Owner's drawings are the withdrawal of assets by the owner for personal use. Revenues are the gross increase in owner's equity from business activities for the purpose of earning income. Expenses are the costs of assets consumed or services used in the process of earning revenue.

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.

Expenses

The cost of assets consumed or services used in the process of generating revenue Note: They are decreases in owner's equity that result from operating the business

Another explantion for owner's equity.

The difference between what you own vs what you owe. Ex: 250k loan and a 200k house you have -50k in equity.

Transactions

The economic events of a business that are recorded by accountants. Note 1: External transactions involve economic events between the company and some outside enterprise Note 2: Internal transactions are economic events that occur entirely within one company.

Journalizing

The entering of transaction data in the journal.

Ledger

The entire group of accounts maintained by a company.

Auditing

The examination of financial statements by a certified public accountant in order to express an opinion as to the fairness of presentation.

Managerial accounting

The field of accounting that provides internal reports to help users make decisions about their companies.

What is the importance of the economic entity assumption?

The importance of the economic entity assumption is illustrated by scandals involving Adelphia. In this case, senior company employees entered into transactions that blurred the line between the employees' financial interests and those of the company. For example, Adelphia guaranteed over $2 billion of loans to the founding family.

Revenues

The increases in assets or decreases in liabilities resulting from the sale of goods or the performance of services in the normal course of business.

Debit

The left side of an account

General journal

The most basic form of journal

What is unlimited liability?

The owner is personally and fully responsible for all losses and debts of the business

Posting

The procedure of transferring journal entries to the ledger accounts.

convergence

The process of reducing the differences between U.S. GAAP and IFRS.

Credit

The right side of an account.

ethics

The standards of conduct by which actions are judged as right or wrong, honest or dishonest, fair or not fair

Accounting information system

The system of collecting and processing transaction data and communicating financial information to decision-makers.

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.

Why would anyone loan you money?

To make money off of you. They expect to get that money back PLUS a service charge called interest.

Why do you own assets?

To make money. Find a product or service that people are willing to pay more than it costs for you to produce it.

True or False: In a corporation, you can lose 100% of the value of your stock but nothing else.

True

True or false: Corporations can be double taxed.

True

ILLUSTRATION 2.8 Normal balance—Owner's Drawings

We can diagram the normal balance

ILLUSTRATION 2.6 Normal balance—Owner's Capital

We can diagram the normal balance in Owner's Capital

Drawings

Withdrawal of cash or other assets from an unincorporated business for the personal use of the owner(s). Note: drawings decrease owner's equity

Should you talk to a lawyer before starting a partnership?

Yes, partnerships are extremely dangerous without talking to a lawyer first. Because unlimited liability is equally distributed no matter if the partner is the one who made bad decisions.

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.

Owner's equity statement

a financial statement that summarizes the changes in owner's equity during a fiscal period Note:

As of December 31, 2020, Kent Company has assets of $3,500 and owner's equity of $2,000. What are the liabilities for Kent Company as of December 31, 2020? a. $1,500. b. $1,000. c. $2,500. d. $2,000.

a. $1,500.

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: a. $131,000. b. $2term-16216,000. c. $91,000. d. $116,000.

a. $131,000. Note: 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

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. It is not a book of original entry.

Services performed by a public accountant include: a. auditing, taxation, and management consulting. b. auditing, budgeting, and management consulting. c. auditing, budgeting, and cost accounting. d. auditing, budgeting, and management consulting.

a. auditing, taxation, and management consulting.

A trial balance: a. is a list of accounts with their balances at a given time. b. proves the journalized transactions are correct. 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.

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 owner's equity items. c. There are separate accounts for specific assets and liabilities but only one account for owner's 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 owner's equity items.

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. The owner withdraws cash for personal use.

b. An employee is terminated.

Which of the following is not a step in the accounting process? a. Identification. b. Economic entity. c. Recording. d. Communication.

b. Economic entity.

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.

Which of the following statements about basic assumptions is correct? a. Basic assumptions are the same as accounting principles. b. The economic entity assumption states that there should be a particular unit of accountability. c. The monetary unit assumption enables accounting to measure employee morale. d. Partnerships are not economic entities.

b. The economic entity assumption states that there should be a particular unit of accountability.

The order of the accounts in the ledger is: a. assets, revenues, expenses, liabilities, owner's capital, owner's drawings. b. assets, liabilities, owner's capital, owner's drawings, revenues, expenses. c. owner's capital, assets, revenues, expenses, liabilities, owner's drawings. d. revenues, assets, expenses, liabilities, owner's capital, owner's drawings.

b. assets, liabilities, owner's capital, owner's drawings, revenues, expenses.

On the last day of the period, Alan Cesska Company buys a $900 machine on credit. This transaction will affect the: a. income statement only. b. balance sheet only. c. income statement and owner's equity statement only. d. income statement, owner's equity statement, and balance sheet.

b. balance sheet only.

Performing services on account will have the following effects on the components of the basic accounting equation: a. increase assets and decrease owner's equity. b. increase assets and increase owner's equity. c. increase assets and increase liabilities. d. increase liabilities and increase owner's equity.

b. increase assets and increase owner's equity.

The three types of business entities are: a. proprietorships, small businesses, and partnerships. b. proprietorships, partnerships, and corporations. c. proprietorships, partnerships, and large businesses. d. financial, manufacturing, and service companies.

b. proprietorships, partnerships, and corporations.

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: a. $21,000. b. $5,000. c. $11,000. d. Cannot be determined.

c. $11,000. ($16,000 normal balance − $5,000 payment)

Which of the following statements is false? a. A statement of cash flows summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time. b. A balance sheet reports the assets, liabilities, and owner's equity at a specific date. c. An income statement presents the revenues, expenses, changes in owner's equity, and resulting net income or net loss for a specific period of time. d. An owner's equity statement summarizes the changes in owner's equity for a specific period of time.

c. An income statement presents the revenues, expenses, changes in owner's equity, and resulting net income or net loss for a specific period of time.

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 withdrawal by the owner is debited to Owner's Drawings 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 withdrawal by the owner is debited to Owner's Drawings for $1,000 and credited to Cash for $100. Note: 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 purchase of supplies on account should result in: a. a debit to Supplies Expense and a credit to Cash. b. a debit to Supplies Expense and a credit to Accounts Payable. c. a debit to Supplies and a credit to Accounts Payable. d. a debit to Supplies and a credit to Accounts Receivable.

c. a debit to Supplies and a credit to Accounts Payable.

The historical cost principle states that: a. assets should be initially recorded at cost and adjusted when the fair value changes. b. activities of an entity are to be kept separate and distinct from its owner. c. assets should be recorded at their cost. d. only transaction data capable of being expressed in terms of money be included in the accounting records.

c. assets should be recorded at their cost.

The financial statement that reports assets, liabilities, and owner's equity is the: a. income statement. b. owner's equity statement. c. balance sheet. d. statement of cash flows.

c. balance sheet.

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.

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. is a collection of the entire group of accounts

Accounting

consists of three basic activities—it identifies, records, and communicates the economic events of an organization to interested users

The expanded accounting equation is: 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.

d. Assets = Liabilities + Owner's Capital − Owner's Drawings + Revenues − Expenses.

Payment of an account payable affects the components of the accounting equation in the following way. a. Decreases owner's equity and decreases liabilities. b. Increases assets and decreases liabilities. c. Decreases assets and increases owner's equity. d. Decreases assets and decreases liabilities.

d. Decreases assets and decreases liabilities.

Which of the following statements about users of accounting information is incorrect? a. Management is an internal user. b. Taxing authorities are external users. c. Present creditors are external users. d. Regulatory authorities are internal users.

d. Regulatory authorities are internal users.

Accounts that normally have debit balances are: a. assets, expenses, and revenues. b. assets, expenses, and owner's capital. c. assets, liabilities, and owner's drawings. d. assets, owner's drawings, and expenses.

d. assets, owner's drawings, and expenses.

During 2020, Bruske Company's assets decreased $50,000 and its liabilities decreased $50,000. Its owner's equity therefore: a. increased $50,000. b. decreased $50,000. c. decreased $100,000. d. did not change.

d. did not change.

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.

Net income will result during a time period when: a. assets exceed liabilities. b. assets exceed revenues. c. expenses exceed revenues. d. revenues exceed expenses.

d. revenues exceed expenses.

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.

Who are the external users of accounting?

investors and creditors

Who are the internal users of accounting?

managers who plan, organize, and run a business

Financial accounting

provides economic and financial information for investors, creditors, and other external users

What is accrual basis accounting?

revenues are recognized when earned and expenses are recognized when incurred. Note: you recognize revenue when its earned. Same with expenses.

ILLUSTRATION 2.11 Summary of debit/credit rules

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

ILLUSTRATION 2.29 General journal entries

shows the journal for Pioneer Advertising for October.

ILLUSTRATION 2.30 General ledger

shows the ledger, with all balances in red.

ILLUSTRATION 2.10 Normal balances—revenues and expenses

shows the normal balances for revenues and expenses.

ILLUSTRATION 2.5 Debit and credit effects—Owner's Capital

shows the rules of debit and credit for the Owner's Capital account.

ILLUSTRATION 2.7 Debit and credit effects—Owner's Drawings

shows the rules of debit and credit for the Owner's Drawings account.

ILLUSTRATION 2.9 Debit and credit effects—revenues and expenses

shows the rules of debits and credits for revenues and expenses.

ILLUSTRATION 2.31 A Trial balance

shows the trial balance prepared from Pioneer Advertising's ledger. Note that the total debits equal the total credits. Note that the order of presentation in the trial balance is: Assets Liabilities Owner's equity Revenues Expenses

Owner's equity

the owner's claims to the assets of the business Note 1: Since the claims of creditors must be paid before ownership claims, owner's equity is often referred to as residual equity. Note 2: In some places, we use the term "owner's equity" and in others we use "owners' equity." Owner's (singular, possessive) refers to one owner (the case with a sole proprietorship). Owners' (plural, possessive) refers to multiple owners (the case with partnerships or corporations).

What was the Sarbanes-Oxley Act (SOX) created?

to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals

Bookkeeping

usually involves only the recording of economic events. It is therefore just one part of the accounting process