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