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CHAPTER

2

                   



Analyzing Transactions

Apple, Inc.™

E

veryday it seems like we get an incredible amount of incoming e-mail messages; you get them from your friends, relatives, subscribed e-mail lists, and even spammers! But how do you organize all of these messages? You might create folders to sort messages by sender, topic, or project. Perhaps you use keyword search utilities. You might even use filters/rules to automatically delete spam or send messages from your best friend to a special folder. In any case, you are organizing information so that it is simple to retrieve and allows you to understand, respond, or refer to the messages. In the same way that you organize your e-mail, companies develop an organized method for processing, recording, and summarizing financial transactions. For example, Apple, Inc., has a huge volume of financial transactions, resulting from sales of its innovative computers, digital media

CHE-WARREN-09-0902-002.indd 51

(iTunes), iPods, iPhones, and iPads. When Apple sells an iPad, a customer has the option of paying with credit card, a debit or check card, an Apple gift card, a financing arrangement, or cash. In order to analyze only the information related to Apple’s cash transactions, the company must record or summarize all these similar sales using a single category or “cash” account. Similarly, Apple will record credit card payments for iPads and sales from financing arrangements in different accounts (records). While Chapter 1 uses the accounting equation (Assets = Liabilities + Owner’s Equity) to analyze and record financial transactions, this chapter presents more practical and efficient recording methods that most companies use. In addition, this chapter discusses possible accounting errors that may occur, along with methods to detect and correct them.

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Learning Objectives Example Exercises

Page

EE 2-1 EE 2-2

56 61

EE 2-3 EE 2-4 EE 2-5

65 68 68

Prepare an unadjusted trial balance and explain how it can be used to discover errors. Trial Balance Errors Affecting the Trial Balance Errors Not Affecting the Trial Balance

EE 2-6 EE 2-7

72 73

Describe and illustrate the use of horizontal analysis in evaluating a company’s performance and financial condition. Financial Analysis and Interpretation: Horizontal Analysis

EE 2-8

75

After studying this chapter, you should be able to: Describe the characteristics of an account and a chart of accounts. Using Accounts to Record Transactions Chart of Accounts

                   

Describe and illustrate journalizing transactions using the double-entry accounting system. Double-Entry Accounting System Balance Sheet Accounts Income Statement Accounts Owner Withdrawals Normal Balances Journalizing Describe and illustrate the journalizing and posting of transactions to accounts. Posting Journal Entries to Accounts

At a Glance

Describe the characteristics of an account and a chart of accounts.

2

Page 75

Using Accounts to Record Transactions In Chapter 1, the November transactions for NetSolutions were recorded using the accounting equation format shown in Exhibit 1. However, this format is not efficient or practical for companies that have to record thousands or millions of transactions daily. As a result, accounting systems are designed to show the increases and decreases in each accounting equation element as a separate record. This record is called an account. To illustrate, the Cash column of Exhibit 1 records the increases and decreases in cash. Likewise, the other columns in Exhibit 1 record the increases and decreases in the other accounting equation elements. Each of these columns can be organized into a separate account. An account, in its simplest form, has three parts. 1. A title, which is the name of the accounting equation element recorded in the account. 2. A space for recording increases in the amount of the element. 3. A space for recording decreases in the amount of the element.

The account form presented below is called a T account because it resembles the letter T. The left side of the account is called the debit side, and the right side is called the credit side.1 Title Left side debit

Right side credit

 1 The terms debit and credit are derived from the Latin debere and credere.

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Chapter 2 Analyzing Transactions

EXHIBIT 1

53

NetSolutions November Transactions = Liabilities +

Cash + Supp. + Land = a. +25,000 b. –20,000 +20,000 Bal. 5,000 20,000 c. +1,350 Bal. 5,000 1,350 20,000 d. +7,500 Bal. 12,500 1,350 20,000 e. –3,650 Bal. 8,850 1,350 20,000 f. –950 Bal. 7,900 1,350 20,000 g. –800 Bal. 7,900 550 20,000 h. –2,000 Bal. 5,900 550 20,000

Owner’s Equity Owner’s Equity

Accounts Chris Clark, Chris Clark, Fees Wages Rent Supplies Utilities Misc. Payable + Capital – Drawing + Earned – Exp. – Exp. – Exp. – Exp. – Exp. +25,000 25,000 +1,350 1,350

25,000

1,350

25,000

+7,500 7,500

1,350 –950 400

25,000

7,500

–2,125 –2,125

–800 –800

25,000

7,500

–2,125

–800

400

25,000

400

25,000

–2,000 –2,000

7,500

–2,125

–800

–800 –800

7,500

–2,125

–800

–800

The amounts shown in the Cash column of Exhibit 1 would be recorded in a cash account as follows: Cash Debit Side of Account

(a) (d)

Balance

25,000 7,500

(b) (e) (f) (h)

20,000 3,650 950 2,000

Credit Side of Account

–450 –450

–275 –275

–450

–275

–450

–275

–450

–275

                   

Assets

Note: Amounts entered on the left side of an account are debits, and amounts entered on the right side of an account are credits.

5,900

Balance of account

Recording transactions in accounts must follow certain rules. For example, increases in assets are recorded on the debit (left side) of an account. Likewise, decreases in assets are recorded on the credit (right side) of an account. The excess of the debits of an asset account over its credits is the balance of the account. To illustrate, the receipt (increase in Cash) of $25,000 in transaction (a) is entered on the debit (left) side of the cash account shown above. The letter or date of the transaction is also entered into the account. This is done so if any questions later arise related to the entry, the entry can be traced back to the underlying transaction data. In contrast, the payment (decrease in Cash) of $20,000 to purchase land in transaction (b) is entered on the credit (right) side of the account. The balance of the cash account of $5,900 is the excess of the debits over the credits as shown below. Debits ($25,000 + $7,500) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less credits ($20,000 + $3,650 + $950 + $2,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$32,500 26,600

Balance of Cash as of November 30, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 5,900

The balance of the cash account is inserted in the account, in the Debit column. In this way, the balance is identified as a debit balance.2 This balance represents NetSolutions’ cash on hand as of November 30, 2011. This balance of $5,900 is reported on the November 30, 2011, balance sheet for NetSolutions as shown in Exhibit 6 of Chapter 1. 2 The totals of the debit and credit columns may be shown separately in an account. When this is done, these amounts should be identified in some way so that they are not mistaken for entries or the ending balance of the account.

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Chapter 2 Analyzing Transactions

In an actual accounting system, a more formal account form replaces the T account. Later in this chapter, a four-column account is illustrated. The T account, however, is a simple way to illustrate the effects of transactions on accounts and financial statements. For this reason, T accounts are often used in business to explain transactions. Each of the columns in Exhibit 1 can be converted into an account form in a similar manner as was done for the Cash column of Exhibit 1. However, as mentioned earlier, recording increases and decreases in accounts must follow certain rules. These rules are discussed after the chart of accounts is described.

                   

Chart of Accounts A group of accounts for a business entity is called a ledger. A list of the accounts in the ledger is called a chart of accounts. The accounts are normally listed in the order in which they appear in the financial statements. The balance sheet accounts are listed first, in the order of assets, liabilities, and owner’s equity. The income statement accounts are then listed in the order of revenues and expenses. Assets are resources owned by the business entity. These resources can be physical items, such as cash and supplies, or intangibles that have value. Examples of intangible assets include patent rights, copyrights, and trademarks. Assets also include accounts receivable, prepaid expenses (such as insurance), buildings, equipment, and land. Liabilities are debts owed to outsiders (creditors). Liabilities are often identified on the balance sheet by titles that include payable. Examples of liabilities include accounts payable, notes payable, and wages payable. Cash received before services are delivered creates a liability to perform the services. These future service commitments are called unearned revenues. Examples of unearned revenues include magazine subscriptions received by a publisher and tuition received at the beginning of a term by a college. Owner’s equity is the owner’s right to the assets of the business after all liabilities have been paid. For a proprietorship, the owner’s equity is represented by the balance of the owner’s capital account. A drawing account represents the amount of withdrawals made by the owner. Revenues are increases in owner’s equity as a result of selling services or products to customers. Examples of revenues include fees earned, fares earned, commissions revenue, and rent revenue.

BusinessConnection THE HIJACKING RECEIVABLE

A company’s chart of accounts should reflect the basic nature of its operations. Occasionally, however, transactions take place that give rise to unusual accounts. The following is a story of one such account. Before strict airport security was implemented across the United States, several airlines experienced hijacking incidents. One such incident occurred when a Southern Airways DC-9 en route from Memphis to Miami was hijacked during a stopover in Birmingham, Alabama. The three hijackers boarded the plane in Birmingham armed with handguns and hand grenades. At gunpoint, the hijackers took the plane, the plane’s crew, and the passengers to nine American cities, Toronto, and eventually to Havana, Cuba. During the long flight, the hijackers demanded a ransom of $10 million. Southern Airways, however, was only

able to come up with $2 million. Eventually, the pilot talked the hijackers into settling for the $2 million when the plane landed in Chattanooga for refueling. Upon landing in Havana, the Cuban authorities arrested the hijackers and, after a brief delay, sent the plane, passengers, and crew back to the United States. The hijackers and $2 million stayed in Cuba. How did Southern Airways account for and report the hijacking payment in its subsequent financial statements? As you might have analyzed, the initial entry credited Cash for $2 million. The debit was to an account entitled “Hijacking Payment.” This account was reported as a type of receivable under “other assets” on Southern’s balance sheet. The company maintained that it would be able to collect the cash from the Cuban government and that, therefore, a receivable existed. In fact, Southern Airways was repaid $2 million by the Cuban government, which was, at that time, attempting to improve relations with the United States.



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Chapter 2 Analyzing Transactions

Procter & Gamble’s account numbers have over 30 digits to reflect P&G’s many different operations and regions.

                   

Expenses result from using up assets or consuming services in the process of generating revenues. Examples of expenses include wages expense, rent expense, utilities expense, supplies expense, and miscellaneous expense. A chart of accounts should meet the needs of a company’s managers and other users of its financial statements. The accounts within the chart of accounts are numbered for use as references. A numbering system is normally used, so that new accounts can be added without affecting other account numbers. Exhibit 2 is NetSolutions’ chart of accounts that is used in this chapter. Additional accounts will be introduced in later chapters. In Exhibit 2, each account number has two digits. The first digit indicates the major account group of the ledger in which the account is located. Accounts beginning with 1 represent assets; 2, liabilities; 3, owner’s equity; 4, revenue; and 5, expenses. The second digit indicates the location of the account within its group.

55

EXHIBIT 2 Balance Sheet Accounts

Chart of Accounts for NetSolutions

Income Statement Accounts

1. Assets 11 Cash 12 Accounts Receivable 14 Supplies 15 Prepaid Insurance 17 Land 18 Office Equipment 2. Liabilities 21 Accounts Payable 23 Unearned Rent 3. Owner’s Equity 31 Chris Clark, Capital 32 Chris Clark, Drawing

4. Revenue 41 Fees Earned 5. Expenses 51 Wages Expense 52 Rent Expense 54 Utilities Expense 55 Supplies Expense 59 Miscellaneous Expense

Each of the columns in Exhibit 1 has been assigned an account number in the chart of accounts shown in Exhibit 2. In addition, Accounts Receivable, Prepaid Insurance, Office Equipment, and Unearned Rent have been added. These accounts will be used in recording NetSolutions’ December transactions.

Double-Entry Accounting System All businesses use what is called the double-entry accounting system. This system is based on the accounting equation and requires:

Describe and illustrate journalizing transactions using the double-entry accounting system.

1. Every business transaction to be recorded in at least two accounts. 2. The total debits recorded for each transaction to be equal to the total credits recorded.

The double-entry accounting system also has specific rules of debit and credit for recording transactions in the accounts.

Balance Sheet Accounts The debit and credit rules for balance sheet accounts are as follows: Balance Sheet Accounts ASSETS Asset Accounts Debit for increases (+)

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Credit for decreases (–)

=

LIABILITIES Liability Accounts Debit for decreases (–)

Credit for increases (+)

+

OWNER’S EQUITY Owner’s Equity Accounts Debit for decreases (–)

Credit for increases (+)

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Chapter 2 Analyzing Transactions

Income Statement Accounts The debit and credit rules for income statement accounts are based on their relationship with owner’s equity. As shown on page 55, owner’s equity accounts are increased by credits. Since revenues increase owner’s equity, revenue accounts are increased by credits and decreased by debits. Since owner’s equity accounts are decreased by debits, expense accounts are increased by debits and decreased by credits. Thus, the rules of debit and credit for revenue and expense accounts are as follows: Income Statement Accounts Revenue Accounts

                   

Debit for decreases (–)

Expense Accounts

Credit for increases (+)

Debit for increases (+)

Credit for decreases (–)

Owner Withdrawals The debit and credit rules for recording owner withdrawals are based on the effect of owner withdrawals on owner’s equity. Since owner’s withdrawals decrease owner’s equity, the owner’s drawing account is increased by debits. Likewise, the owner’s drawing account is decreased by credits. Thus, the rules of debit and credit for the owner’s drawing account are as follows: Drawing Account Debit for increases (+)

Credit for decreases (–)

Normal Balances The sum of the increases in an account is usually equal to or greater than the sum of the decreases in the account. Thus, the normal balance of an account is either a debit or credit depending on whether increases in the account are recorded as debits or credits. For example, since asset accounts are increased with debits, asset accounts normally have debit balances. Likewise, liability accounts normally have credit balances. The rules of debit and credit and the normal balances of the various types of accounts are summarized in Exhibit 3. Debits and credits are sometimes abbreviated as Dr. for debit and Cr. for credit. When an account normally having a debit balance has a credit balance, or vice versa, an error may have occurred or an unusual situation may exist. For example, a credit balance in the office equipment account could result only from an error. This

Example Exercise Example Exercise 22-1 -1 1

R Ru Rules les of Debit le Deb ebit it and and d Credit Cred re edi dit and and Normal an N rmal No rm mal a B Balances alan al a ce es

State for each account whether it is likely to have (a) debit entries only, (b) credit entries only, or (c) both debit and credit entries. Also, indicate its normal balance. 1. Amber Saunders, Drawing

4. Fees Earned

2. Accounts Payable

5. Supplies

3. Cash

6. Utilities Expense

Follow My Example 2-1 1. Debit entries only; normal debit balance

4. Credit entries only; normal credit balance

2. Debit and credit entries; normal credit balance

5. Debit and credit entries; normal debit balance

3. Debit and credit entries; normal debit balance

6. Debit entries only; normal debit balance

Practice Exercises: PE 2-1A, PE 2-1B

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Chapter 2 Analyzing Transactions

EXHIBIT 3

Rules of Debit and Credit, Normal Balances of Accounts

=

Credit for decreases (–)

LIABILITIES Liability Accounts Debit for decreases (–)

Balance

+

Credit for increases (+)

OWNER’S EQUITY Owner’s Capital Account Debit for decreases (–)

Balance

Balance

– Owner’s Drawing Account Debit for increases (+)

Credit for increases (+)

Credit for decreases (–)

Balance

                   

ASSETS Asset Accounts Debit for increases (+)

57

Income Statement Accounts + Revenue Accounts Debit for decreases(–)

Credit for increases (+) Balance

– Expense Accounts Debit for increases (+) The side of the account for recording increases and the normal balance is shown in green.

Credit for decreases (–)

Balance Net income or net loss

is because a business cannot have more decreases than increases of office equipment. On the other hand, a debit balance in an accounts payable account could result from an overpayment.

Journalizing Using the rules of debit and credit, transactions are initially entered in a record called a journal. In this way, the journal serves as a record of when transactions occurred and were recorded. To illustrate, the November transactions of NetSolutions from Chapter 1 are used. Nov. 1 Chris Clark deposited $25,000 in a bank account in the name of NetSolutions. This transaction increases an asset account and increases an owner’s equity account. It is recorded in the journal as an increase (debit) to Cash and an increase (credit) to Chris Clark, Capital. Journal Step 2

Date

Analysis

Page 1 Post. Ref.

Description

Transaction A

Debit

Credit

Journal Entry

2011

Nov.

1

Cash Chris Clark, Capital Invested cash in NetSolutions.

Step 1 Step 3

Step 2 Step 3

25,000 25,000

Step 5 Step 4

Assets Cash Nov. 1

CHE-WARREN-09-0902-002.indd 57

25,000

=

Liabilities

+

Owner’s Equity (Investment) Chris Clark, Capital Nov. 1

25,000

Accounting Equation Impact

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Chapter 2 Analyzing Transactions

The transaction is recorded in the journal using the following steps:

A journal can be thought of as being similar to an individual’s diary of significant day-to-day life events.

Step 1. Step 2.

Step 3.

                   

Step 4. Step 5.

The date of the transaction is entered in the Date column. The title of the account to be debited is recorded at the left-hand margin under the Description column, and the amount to be debited is entered in the Debit column. The title of the account to be credited is listed below and to the right of the debited account title, and the amount to be credited is entered in the Credit column. A brief description may be entered below the credited account. The Post. Ref. (Posting Reference) column is left blank when the journal entry is initially recorded. This column is used later in this chapter when the journal entry amounts are transferred to the accounts in the ledger.

The process of recording a transaction in the journal is called journalizing. The entry in the journal is called a journal entry. The following is a useful method for analyzing and journalizing transactions: 1. Carefully read the description of the transaction to determine whether an asset, a liability, an owner’s equity, a revenue, an expense, or a drawing account is affected. 2. For each account affected by the transaction, determine whether the account increases or decreases. 3. Determine whether each increase or decrease should be recorded as a debit or a credit, following the rules of debit and credit shown in Exhibit 3. 4. Record the transaction using a journal entry.

The following table summarizes terminology that is often used in describing a transaction along with the related accounts that would be debited and credited. Journal Entry Account Common transaction terminology

Debit

Credit

Received cash for services provided Services provided on account Received cash on account Purchased on account Paid on account Paid cash Owner investments Owner withdrawals

Cash Accounts Receivable Cash Asset Account Accounts Payable Asset or Expense Account Cash and/or other assets (Owner’s Name), Drawing

Fees Earned Fees Earned Accounts Receivable Accounts Payable Cash Cash (Owner’s Name), Capital Cash

The remaining transactions of NetSolutions for November are analyzed and journalized next.

Transaction B

Nov. 5 NetSolutions paid $20,000 for the purchase of land as a future building site.

Analysis

This transaction increases one asset account and decreases another. It is recorded in the journal as a $20,000 increase (debit) to Land and a $20,000 decrease (credit) to Cash. Nov.

5

Land Cash Purchased land for building site.

Journal Entry

Accounting Equation Impact

Assets

=

Liabilities

20,000 20,000

+

Owner’s Equity

Land Nov. 5

20,000 Cash

 Nov. 5

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20,000

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Chapter 2 Analyzing Transactions

NetSolutions purchased supplies on account for $1,350.

Transaction C

This transaction increases an asset account and increases a liability account. It is recorded in the journal as a $1,350 increase (debit) to Supplies and a $1,350 increase (credit) to Accounts Payable. Nov. 10

Supplies Accounts Payable Purchased supplies on account.

Assets

=

Supplies Nov. 10

1,350

Journal Entry

1,350

Liabilities

+

Accounting Equation Impact

Owner’s Equity

Accounts Payable

1,350

Nov. 10

1,350

Nov. 18 NetSolutions received cash of $7,500 from customers for services provided. This transaction increases an asset account and increases a revenue account. It is recorded in the journal as a $7,500 increase (debit) to Cash and a $7,500 increase (credit) to Fees Earned. Nov. 18

Cash Fees Earned Received fees from customers.

Assets

=

Liabilities

+

Owner’s Equity (Revenue) Fees Earned Nov. 18

7,500

Nov. 30 NetSolutions incurred the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275. This transaction increases various expense accounts and decreases an asset (Cash) account. You should note that regardless of the number of accounts, the sum of the debits is always equal to the sum of the credits in a journal entry. It is recorded in the journal with increases (debits) to the expense accounts (Wages Expense, $2,125; Rent Expense, $800; Utilities Expense, $450; and Miscellaneous Expense, $275) and a decrease (credit) to Cash, $3,650. Wages Expense Rent Expense Utilities Expense Miscellaneous Expense Cash Paid expenses.

Assets

=

2,125 800 450 275

Transaction E

Analysis

Journal Entry

Liabilities

+

Owner’s Equity (Expense) Wages Expense

3,650

Accounting Equation Impact

3,650

Cash Nov. 30

Analysis

Journal Entry

7,500

7,500

Nov. 30

Transaction D

7,500

Cash Nov. 18

Analysis

                   

Nov. 10

59

Nov. 30

2,125

Accounting Equation Impact

Rent Expense Nov. 30

Nov. 30

800 Utilities Expense 450

Miscellaneous Expense Nov. 30 275

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Chapter 2 Analyzing Transactions

Transaction F Analysis

Nov. 30

NetSolutions paid creditors on account, $950.

This transaction decreases a liability account and decreases an asset account. It is recorded in the journal as a $950 decrease (debit) to Accounts Payable and a $950 decrease (credit) to Cash. Nov. 30

Accounts Payable Cash Paid creditors on account.

                   

Journal Entry

Accounting Equation Impact

Transaction G

Analysis

Assets

950

+

Owner’s Equity

Accounts Payable

Nov. 30

950

Nov. 30

950

Nov. 30 Chris Clark determined that the cost of supplies on hand at November 30 was $550. NetSolutions purchased $1,350 of supplies on November 10. Thus, $800 ($1,350 – $550) of supplies must have been used during November. This transaction is recorded in the journal as an $800 increase (debit) to Supplies Expense and an $800 decrease (credit) to Supplies. Nov. 30

Supplies Expense Supplies Supplies used during November.

Assets

Accounting Equation Impact

Analysis

Liabilities

Cash

Journal Entry

Transaction H

=

950

=

Liabilities

800 800

+

Owner’s Equity (Expense)

Supplies Nov. 30

Supplies Expense 800

Nov. 30

800

Nov. 30 Chris Clark withdrew $2,000 from NetSolutions for personal use. This transaction decreases assets and owner’s equity. This transaction is recorded in the journal as a $2,000 increase (debit) to Chris Clark, Drawing and a $2,000 decrease (credit) to Cash. Journal Date

Journal Entry

Post. Ref.

Description

Debit

Credit

2011

Nov. 30

Accounting Equation Impact

Page 2

Chris Clark, Drawing Cash Chris Clark withdrew cash for personal use.

Assets

=

Liabilities

Cash

2,000 2,000

+

Owner’s Equity (Drawing) Chris Clark, Drawing

Nov. 30 2,000

Nov. 30 2,000

Integrity, Objectivity, and Ethics in Business WILL JOURNALIZING PREVENT FRAUD? While journalizing transactions reduces the possibility of fraud, it by no means eliminates it. For example, embezzlement can be hidden within the double-entry bookkeeping

system by creating fictitious suppliers to whom checks are issued.



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Chapter 2 Analyzing Transactions

Example Example Exercise Exercise 22-2 -2 -2

61

Jo Journal ourna urna ur al En Entr Entry try tr y fo forr As A Asset sset se et Pu Purc Purchase rcha rc hase ha e

Prepare a journal jo ou entry for the purchase of a truck on June 3 for $42,500, paying $8,500 cash and the remainder on account. accountt.

Follow M My Example 2-2 June 3

Truck .................................................................................................................... Cash ................................................................................................................ Accounts Payable ......................................................................................

42,500 8,500 34,000

Posting Journal Entries to Accounts As illustrated, a transaction is first recorded in a journal. Periodically, the journal entries are transferred to the accounts in the ledger. The process of transferring the debits and credits from the journal entries to the accounts is called posting. The December transactions of NetSolutions are used to illustrate posting from the journal to the ledger. By using the December transactions, an additional review of analyzing and journalizing transactions is provided. Dec. 1 NetSolutions paid a premium of $2,400 for an insurance policy for liability, theft, and fire. The policy covers a one-year period. Advance payments of expenses, such as for insurance premiums, are called prepaid expenses. Prepaid expenses are assets. For NetSolutions, the asset purchased is insurance protection for 12 months. This transaction is recorded as a $2,400 increase (debit) to Prepaid Insurance and a $2,400 decrease (credit) to Cash. Dec.

1

Prepaid Insurance Cash Paid premium on one-year policy.

Assets Cash Dec. 1 Prepaid Insurance Dec. 1

=

Liabilities

15 11

+

                   

Practice Exercises: PE 2-2A, PE 2-2B

Describe and illustrate the journalizing and posting of transactions to accounts.

Transaction

Analysis

2,400 2,400

Owner’s Equity

11 2,400

Journal Entry

Accounting Equation Impact

15

2,400

The posting of the preceding December 1 transaction is shown in Exhibit 4. Notice that the T account form is not used in Exhibit 4. In practice, the T account is usually replaced with a standard account form similar to that shown in Exhibit 4. The debits and credits for each journal entry are posted to the accounts in the order in which they occur in the journal. To illustrate, the debit portion of the December 1 journal entry is posted to the prepaid account in Exhibit 4 using the following four steps: Step 1.

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The date (Dec. 1) of the journal entry is entered in the Date column of Prepaid Insurance.

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Chapter 2 Analyzing Transactions

EXHIBIT 4

Diagram of the Recording and Posting of a Debit and a Credit Journal Date

                   

Dec.

Page 2 Post. Ref.

Description

1

Step 4 Prepaid Insurance Step 4 Cash Paid premium on one-year policy.

15 11

Debit

Credit

2,400 2,400

Step 2

Step 2

Account Prepaid Insurance Date

Account No. 15

Item

Post. Ref.

Balance Debit

Credit

Debit

Credit

2011

Step 1

Dec.

1

2

2,400

2,400

Step 3

Account Cash Date

Account No. 11

Item

Post. Ref.

Balance Debit

Credit

Debit

Credit

2011

Step 1

Nov.

1

1

Dec.

30 1

2 2

25,000

25,000

2,000 2,400

5,900 3,500

Step 3

Step 2. Step 3.

The amount (2,400) is entered into the Debit column of Prepaid Insurance. The journal page number (2) is entered in the Posting Reference (Post. Ref.) column of Prepaid Insurance. Step 4. The account number (15) is entered in the Posting Reference (Post. Ref.) column in the journal. As shown in Exhibit 4, the credit portion of the December 1 journal entry is posted to the cash account in a similar manner. The remaining December transactions for NetSolutions are analyzed and journalized in the following paragraphs. These transactions are posted to the ledger in Exhibit 5 on pages 69–70. To simplify, some of the December transactions are stated in summary form. For example, cash received for services is normally recorded on a daily basis. However, only summary totals are recorded at the middle and end of the month for NetSolutions.

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Chapter 2 Analyzing Transactions

Dec. 1 NetSolutions paid rent for December, $800. The company from which NetSolutions is renting its store space now requires the payment of rent on the first of each month, rather than at the end of the month.

Transaction

Rent Expense Cash Paid rent for December.

Assets

=

Cash

52 11

Liabilities

+

800

Journal Entry

800

Owner’s Equity (Expense)

11

Dec. 1

Rent Expense

800

Dec. 1

52

800

Dec. 1 NetSolutions received an offer from a local retailer to rent the land purchased on November 5. The retailer plans to use the land as a parking lot for its employees and customers. NetSolutions agreed to rent the land to the retailer for three months, with the rent payable in advance. NetSolutions received $360 for three months’ rent beginning December 1. By agreeing to rent the land and accepting the $360, NetSolutions has incurred an obligation (liability) to the retailer. This obligation is to make the land available for use for three months and not to interfere with its use. The liability created by receiving the cash in advance of providing the service is called unearned revenue. As time passes, the unearned rent liability will decrease and will become revenue. Thus, this transaction is recorded as a $360 increase (debit) to Cash and a $360 increase (credit) to Unearned Rent. 1

Cash Unearned Rent Received advance payment for three months’ rent on land.

Assets

=

Cash Dec. 1

11

360

11 23

Liabilities

+

Unearned Rent

23

Dec. 1

360

360

Owner’s Equity

The asset (Office Equipment) and liability accounts (Accounts Payable) increase. This transaction is recorded as a $1,800 increase (debit) to Office Equipment and a $1,800 increase (credit) to Accounts Payable. Office Equipment Accounts Payable Purchased office equipment on account.

Assets Office Equipment Dec. 4

CHE-WARREN-09-0902-002.indd 63

1,800

= 18

18 21

Liabilities Accounts Payable Dec. 4

+ 21 1,800

Accounting Equation Impact

Transaction

Analysis

360

Dec. 4 NetSolutions purchased office equipment on account from Executive Supply Co. for $1,800.

4

Analysis

                   

The advance payment of rent is an asset, much like the advance payment of the insurance premium in the preceding transaction. However, unlike the insurance premium, this prepaid rent will expire in one month. When an asset is purchased with the expectation that it will be used up in a short period of time, such as a month, it is normal to debit an expense account initially. This avoids having to transfer the balance from an asset account (Prepaid Rent) to an expense account (Rent Expense) at the end of the month. Thus, this transaction is recorded as an $800 increase (debit) to Rent Expense and an $800 decrease (credit) to Cash. 1

63

Journal Entry

Accounting Equation Impact

Transaction

Analysis

1,800 1,800

Owner’s Equity

Journal Entry

Accounting Equation Impact

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64

Chapter 2 Analyzing Transactions

Transaction

Analysis

Dec. 6 NetSolutions paid $180 for a newspaper advertisement. An expense increases and an asset (Cash) decreases. Expense items that are expected to be minor in amount are normally included as part of the miscellaneous expense. This transaction is recorded as a $180 increase (debit) to Miscellaneous Expense and a $180 decrease (credit) to Cash. 6

Miscellaneous Expense Cash Paid for newspaper advertisement.

                   

Journal Entry

Accounting Equation Impact

Transaction Analysis

Assets

+

180 180

Owner’s Equity (Expense) Miscellaneous Exp.

180

Dec. 6

180

A liability (Accounts Payable) and an asset (Cash) decrease. This transaction is recorded as a $400 decrease (debit) to Accounts Payable and a $400 decrease (credit) to Cash.

Accounting Equation Impact

Accounts Payable Cash Paid creditors on account.

Assets Cash Dec. 11

= 11

Liabilities Accounts Payable

400

21 11

Dec. 11

400 400

+

Owner’s Equity

21

400

Dec. 13 NetSolutions paid a receptionist and a part-time assistant $950 for two weeks’ wages. This transaction is similar to the December 6 transaction, where an expense account is increased and Cash is decreased. This transaction is recorded as a g Expense p $950 increase (debit) to Wages and a $950 decrease (credit) to Cash. Journal Date

Journal Entry

Page 3 Post. Ref.

Description

Debit

Credit

2011

Dec.

Accounting Equation Impact

59

Dec. 11 NetSolutions paid creditors $400.

11

Analysis

Liabilities

11

Dec. 6

Journal Entry

Transaction

=

Cash

59 11

13

Wages Expense Cash Paid two weeks’ wages.

Assets Cash Dec. 13

= 11 950

51 11

Liabilities

+

950 950

Owner’s Equity (Expense) Wages Expense Dec. 13

51

950

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Chapter 2 Analyzing Transactions

COMPUTERIZED ACCOUNTING SYSTEMS Computerized accounting systems are widely used by even the smallest of companies. These systems simplify the record keeping process in that transactions are recorded in electronic forms. Forms used to bill customers for services provided are often completed using drop down menus that list services that are normally provided to customers. An auto-complete entry feature may also be used to fill in

customer names. For example, type “ca” to display customers with names beginning with “Ca” (Caban, Cahill, Carey, and Caswell). And, to simplify data entry, entries are automatically posted to the ledger accounts when the electronic form is completed. One popular accounting software package used by small- to medium-sized businesses is QuickBooks®. Some examples of using QuickBooks to record accounting transactions are illustrated and discussed in Chapter 5.

Dec. 16 NetSolutions received $3,100 from fees earned for the first half of December.

Transaction

An asset account (Cash) and a revenue account (Fees Earned) increase. This transaction is recorded as a $3,100 increase (debit) to Cash and a $3,100 increase (credit) to Fees Earned. 16

Cash Fees Earned Received fees from customers.

Assets

=

Cash

Liabilities

11 41

+

Journal Entry

3,100

Owner’s Equity (Revenue) Fees Earned

Dec. 16 3,100

41

Dec. 16 3,100

Dec. 16 Fees earned on account totaled $1,750 for the first half of December.

Assets Accounts Receivable

=

Liabilities

12 41

+

Analysis

1,750

Journal Entry

1,750

Owner’s Equity (Revenue)

12

Fees Earned

Dec. 16 1,750

41

Dec. 16 1,750

Example Exercise Example Exercise 22-3 -3 -3

Accounting Equation Impact

Transaction

When a business agrees that a customer may pay for services provided at a later date, an account receivable is created. An account receivable is a claim against the customer. An account receivable is an asset, and the revenue is earned even though no cash has been received. Thus, this transaction is recorded as a $1,750 increase (debit) to Accounts Receivable and a $1,750 increase (credit) to Fees Earned. Accounts Receivable Fees Earned Fees earned on account.

Analysis

3,100

11

16

                   

BusinessConnection

65

Accounting Equation Impact

Jo Journal our u na al En E Entr Entry ntr try y fo forr Fe Fees ees e Earned Ear a ne ed

Prepare a jo journal ou entry on August 7 for the fees earned on account, $115,000.

Follow M My Example 2-3 Aug. 7

Accounts Receivable ............................................................................ Fees Earned ........................................................................................

115,000 115,000

Practice Exercises: PE 2-3A, PE 2-3B

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Chapter 2 Analyzing Transactions

Transaction

Analysis

Dec. 20 NetSolutions paid $900 to Executive Supply Co. on the $1,800 debt owed from the December 4 transaction. This is similar to the transaction of December 11. This transaction is recorded as a $900 decrease (debit) to Accounts Payable and a $900 decrease (credit) to Cash. 20

Journal Entry

                   

Accounting Equation Impact

Transaction

Analysis

Assets

=

Cash

11

Dec. 20

Assets

=

Cash Dec. 21

Owner’s Equity

21

Liabilities

11 12

+

650 650

Owner’s Equity

11

650

Dec. 21

12 650

Dec. 23 NetSolutions paid $1,450 for supplies. One asset account (Supplies) increases and another asset account (Cash) decreases. This transaction is recorded as a $1,450 increase (debit) to Supplies and a $1,450 , decrease (credit) to Cash. 23

Journal Entry

Accounting Equation Impact

900

900

Cash Accounts Receivable Received cash from customers on account.

Accounts Receivable

Analysis

Dec. 20

+

900

When customers pay amounts owed for services they have previously received, one asset increases and another asset decreases. This transaction is recorded as a $650 increase (debit) to Cash and a $650 decrease (credit) to Accounts Receivable. 21

Transaction

Liabilities Accounts Payable

900

21 11

Dec. 21 NetSolutions received $650 from customers in payment of their accounts.

Journal Entry

Accounting Equation Impact

Accounts Payable Cash Paid creditors on account.

Supplies Cash Purchased supplies.

Assets Cash

=

14 11

Liabilities

+

1,450 1,450

Owner’s Equity

11

Dec. 23 1,450 Supplies

14

Dec. 23 1,450

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Chapter 2 Analyzing Transactions

Dec. 27 NetSolutions paid the receptionist and the part-time assistant $1,200 for two weeks’ wages.

Transaction

This transaction is similar to the transaction of December 13. This transaction is recorded as a $950 increase (debit) to Wages Expense and a $950 decrease (credit) to Cash. Wages Expense Cash Paid two weeks’ wages.

Assets

=

Cash

Liabilities

51 11

+

1,200

Journal Entry

1,200

Owner’s Equity (Expense)

11

Wages Expense

Dec. 27 1,200

51

Dec. 27 1,200

Dec. 31 NetSolutions paid its $310 telephone bill for the month.

Utilities Expense Cash Paid telephone bill.

Assets

=

Cash

54 11

Liabilities

+

310

Owner’s Equity (Expense)

Dec. 31

Utilities Expense

310

Dec. 31

54

310

Dec. 31 NetSolutions paid its $225 electric bill for the month.

Journal Debit

Credit

2011

Dec.

Journal Entry 31

Utilities Expense Cash Paid electric bill.

Assets

=

Cash

54 11

Liabilities

+

225 225

Owner’s Equity (Expense)

11

Dec. 31

Utilities Expense

225

Dec. 31

54

225

Dec. 31 NetSolutions received $2,870 from fees earned for the second half of December.

31

Cash Fees Earned Received fees from customers.

Assets Cash Dec. 31 2,870

= 11

Liabilities

11 41

+

Accounting Equation Impact

Transaction

This is similar to the transaction of December 16. This transaction is recorded as a $2,870 increase (debit) to Cash and a $2,870 increase (credit) to Fees Earned.

CHE-WARREN-09-0902-002.indd 67

Analysis

Page 4 Post. Ref.

Description

Accounting Equation Impact

Transaction

This is similar to the preceding transaction. This transaction is recorded as a $225 increase (debit) to Utilities Expense and a $225 decrease (credit) to Cash.

Date

Analysis

Journal Entry

310

11

Accounting Equation Impact

Transaction

This is similar to the transaction of December 6. This transaction is recorded as a $310 increase (debit) to Utilities Expense and a $310 decrease (credit) to Cash. 31

Analysis

                   

27

67

Analysis

2,870

Journal Entry

2,870

Owner’s Equity (Revenue) Fees Earned

41

Dec. 31 2,870

Accounting Equation Impact

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68

Chapter 2 Analyzing Transactions

Transaction

Dec. 31 Fees earned on account totaled $1,120 for the second half of December.

Analysis

This is similar to the transaction of December 16. This transaction is recorded as a $1,120 increase (debit) to Accounts Receivable and a $1,120 increase (credit) to Fees Earned. 31

Journal Entry

                   

Accounting Equation Impact

Transaction Analysis

Accounts Receivable Fees Earned Fees earned on account.

Assets

=

Accounts Receivable

12 41

Liabilities

+

1,120 1,120

Owner’s Equity (Revenue)

12

Fees Earned

Dec. 31 1,120

41

Dec. 31 1,120

Dec. 31 Chris Clark withdrew $2,000 for personal use. This transaction decreases owner’s equity and assets. This transaction is recorded as a $2,000 increase (debit) to Chris Clark, Drawing and a $2,000 decrease (credit) to Cash. 31

Journal Entry

Accounting Equation Impact

Chris Clark, Drawing Cash Chris Clark withdrew cash for personal use.

Assets Cash

=

Liabilities

32 11

+

2,000

Owner’s Equity (Drawing)

11

Chris Clark, Drawing

Dec. 31 2,000

Example Exercise Example Exercise 22-4 -4 4

2,000

32

Dec. 31 2,000

Journal Jour Jo urna ur na al En Ent Entry try fo try tr fforr Ow Owner’s wne er’ r s Wi W Withdrawal th hdr draw a al a

Prepare a jo journal ou entry on December 29 for the payment of $12,000 to the owner of Smartstaff Consulting Services, Walsh, for personal use. Dominique eW

Follow M My Example 2-4 Dec. 29

Dominique Walsh, Drawing ................................................................. Cash ......................................................................................................

12,000 12,000

Practice Exercises: PE 2-4A, PE 2-4B

Example Exercise Example Exercise 22-5 -5 -5

Missing M ss Mi ssiin ing Amount Amou Am o nt n from from ro om an a Account Acc ccou o nt ou n

On March 1, 1 the cash account balance was $22,350. During March, cash receipts totaled $241,880 and the March 31 balance was waas $19,125. Determine the cash payments made during March.

Follow M My Example 2-5 Using the following T account, solve for the amount of cash payments (indicated by ? below). Mar. 1 Bal. Cash receipts Mar. 31 Bal.

Cash 22,350 241,880 19,125

?

Cash payments

$19,125 = $22,350 + $241,880 − Cash payments Cash payments = $22,350 + $241,880 − $19,125 = $245,105



Practice Exercises: PE 2-5A, PE 2-5B

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69

Chapter 2 Analyzing Transactions

Exhibit 5 shows the ledger for NetSolutions after the transactions for both November and December have been posted.

EXHIBIT 5

Ledger NetSolutions Ledger

Account Cash

Account No. 11

Account Land

Account No. 17 Balance

Balance Item

Post. Ref.

Debit

Credit

Debit

Credit

Date

Item

Debit

1

20,000

Credit

2011

Nov. 1 5 18 30 30 30 Dec. 1 1 1 6 11 13 16 20 21 23 27 31 31 31 31

1 1 1 1 1 2 2 2 2 2 2 3 3 3 3 3 3 3 4 4 4

25,000 20,000 7,500 3,650 950 2,000 2,400 800 360 180 400 950 3,100 900 650 1,450 1,200 310 225 2,870 2,000

Account Accounts Receivable

Nov. 5

25,000 5,000 12,500 8,850 7,900 5,900 3,500 2,700 3,060 2,880 2,480 1,530 4,630 3,730 4,380 2,930 1,730 1,420 1,195 4,065 2,065

Credit

20,000

Account Office Equipment

Account No. 18 Balance

Date

Item

Post. Ref.

Debit

2

1,800

Credit

Item

Post. Ref.

Dec. 4

Credit

Debit

Credit

1,800

Account Accounts Payable

Account No. 21 Balance

Date

Item

Post. Ref.

Debit

Credit

Debit

Credit

2011

Nov. 10 30 Dec. 4 11 20

Account No. 12

Debit

Debit

2011

1 1 2 2 3

1,350

Credit

1,350 400 2,200 1,800 900

950 1,800 400 900

Account Unearned Rent

Account No. 23

Balance Date

Debit

2011

                   

Date

Post. Ref.

Balance Date

Item

Post. Ref.

Debit

Credit

Debit

Credit

2011

Dec. 16 21 31

3 3 4

1,750 650 1,120

2011

1,750 1,100 2,220

Dec. 1

2

360

Account Chris Clark, Capital Account Supplies

Balance Date

Item

Account No. 31

Account No. 14

Post. Ref.

Debit

Credit

Debit

800

1,350 550 2,000

Credit

360

Balance Date

Item

Post. Ref.

Debit

Credit

Debit

Credit

2011

Nov. 1

1

25,000

25,000

2011

Nov. 10 30 Dec. 23

1 1 3

1,350 1,450

Account Chris Clark, Drawing

Account No. 32 Balance

Account Prepaid Insurance

Account No. 15 Balance

Date

Item

Post. Ref.

Debit

2

2,400

Credit

Debit

Credit

Date

Item

Post. Ref.

Debit

2 4

2,000 2,000

Credit

Debit

Credit

2011

Nov. 30 Dec. 31

2,000 4,000

2011

Dec. 1

2,400

(continued)

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Chapter 2 Analyzing Transactions

EXHIBIT 5

Ledger NetSolutions (concluded)

Account Fees Earned

Account No. 41

Account Utilities Expense

Account No. 54

Balance Date

Item

Post. Ref.

Debit

Credit

Debit

Credit

2011

Date

Item

Debit

1 3 4

450 310 225

Credit

1 3 3 4 4

7,500 3,100 1,750 2,870 1,120

7,500 10,600 12,350 15,220 16,340

Nov. 30 Dec. 31 31

Credit

450 760 985

Account Supplies Expense Account Wages Expense

Item

Account No. 55 Balance

Account No. 51 Balance

Date

Debit

2011

Nov. 18 Dec. 16 16 31 31

                   

Balance Post. Ref.

Date

Item

Post. Ref.

Debit

1

800

Credit

Debit

Credit

2011

Post. Ref.

Debit

1 3 3

2,125 950 1,200

Credit

Debit

Credit

Nov. 30

800

2011

Nov. 30 Dec. 13 27

2,125 3,075 4,275

Account Rent Expense

Account Miscellaneous Expense

Balance

Account No. 52 Balance

Date

Item

Post. Ref.

Debit

1 2

800 800

Credit

Debit

Account No. 59

Date

Item

Post. Ref.

Debit

1 2

275 180

Credit

Debit

Credit

2011

Nov. 30 Dec. 6

275 455

Credit

2011

Nov. 30 Dec. 1

Prepare an unadjusted trial balance and explain how it can be used to discover errors.

800 1,600

Trial Balance Errors may occur in posting debits and credits from the journal to the ledger. One way to detect such errors is by preparing a trial balance. Double-entry accounting requires that debits must always equal credits. The trial balance verifies this equality. The steps in preparing a trial balance are as follows: Step 1.

List the name of the company, the title of the trial balance, and the date the trial balance is prepared. Step 2. List the accounts from the ledger and enter their debit or credit balance in the Debit or Credit column of the trial balance. Step 3. Total the Debit and Credit columns of the trial balance. Step 4. Verify that the total of the Debit column equals the total of the Credit column. The trial balance for NetSolutions as of December 31, 2011, is shown in Exhibit 6. The account balances in Exhibit 6 are taken from the ledger shown in Exhibit 5. Before a trial balance is prepared, each account balance in the ledger must be determined. When the standard account form is used as in Exhibit 5, the balance of each account appears in the balance column on the same line as the last posting to the account.

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Chapter 2 Analyzing Transactions

EXHIBIT 6

NetSolutions

Trial Balance

Unadjusted Trial Balance December 31, 2011 Debit Balances

Step 2

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,065 Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,220 Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,400 Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 Office Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800 Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unearned Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chris Clark, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chris Clark, Drawing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000 Fees Earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,275 Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,600 Utilities Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 985 Supplies Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800 Miscellaneous Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 455 42,600

Credit Balances

900 360 25,000

                   

Step 1

71

16,340

42,600

Steps 3–4 The trial balance shown in Exhibit 6 is titled an unadjusted trial balance. This is to distinguish it from other trial balances that will be prepared in later chapters. These other trial balances include an adjusted trial balance and a post-closing trial balance.3

Errors Affecting the Trial Balance If the trial balance totals are not equal, an error has occurred. In this case, the error must be found and corrected. A method useful in discovering errors is as follows: 1. If the difference between the Debit and Credit column totals is 10, 100, or 1,000, an error in addition may have occurred. In this case, re-add the trial balance column totals. If the error still exists, recompute the account balances. 2. If the difference between the Debit and Credit column totals can be evenly divisible by 2, the error may be due to the entering of a debit balance as a credit balance, or vice versa. In this case, review the trial balance for account balances of one-half the difference that may have been entered in the wrong column. For example, if the Debit column total is $20,640 and the Credit column total is $20,236, the difference of $404 ($20,640 − $20,236) may be due to a credit account balance of $202 that was entered as a debit account balance. 3. If the difference between the Debit and Credit column totals is evenly divisible by 9, trace the account balances back to the ledger to see if an account balance was incorrectly copied from the ledger. Two common types of copying errors are transpositions and slides. A transposition occurs when the order of the digits is copied incorrectly, such as writing $542 as $452 or $524. In a slide, the entire number is copied incorrectly one or more spaces to the right or the left, such as writing $542.00 as $54.20 or $5,420.00. In both cases, the resulting error will be evenly divisible by 9. 4. If the difference between the Debit and Credit column totals is not evenly divisible by 2 or 9, review the ledger to see if an account balance in the amount of the error has been omitted from the trial balance. If the error is not discovered, review the journal postings to see if a posting of a debit or credit may have been omitted. 3 The adjusted trial balance is discussed in Chapter 3, and the post-closing trial balance is discussed in Chapter 4.

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Chapter 2 Analyzing Transactions

5. If an error is not discovered by the preceding steps, the accounting process must be retraced, beginning with the last journal entry.

The trial balance does not provide complete proof of the accuracy of the ledger. It indicates only that the debits and the credits are equal. This proof is of value, however, because errors often affect the equality of debits and credits.

Example Exercise Example Exercise 22-6 -6 6

T Tr Trial ial Balance ia Bala Bal Ba lanc n e Errors E ro Er rors rs

                   

For each of the following errors, considered individually, indicate whether the error would cause the trial balance totals to be unequal. If the error would cause the trial balance totals to be unequal, indicate whether the debit or credit total is higher and by how much. a. Payment of a cash withdrawal of $5,600 was journalized and posted as a debit of $6,500 to Salary Expense and a credit of $6,500 to Cash. b. A fee of $2,850 earned from a client was debited to Accounts Receivable for $2,580 and credited to Fees Earned for $2,850. c. A payment of $3,500 to a creditor was posted as a debit of $3,500 to Accounts Payable and a debit of $3,500 to Cash.

Follow My Example 2-6 a. The totals are equal since both the debit and credit entries were journalized and posted for $6,500.. b. The totals are unequal. The credit total is higher by $270 ($2,850 – $2,580). c. The totals are unequal. The debit total is higher by $7,000 ($3,500 + $3,500).

Practice Exercises: PE 2-6A, PE 2-6B

Errors Not Affecting the Trial Balance An error may occur that does not cause the trial balance totals to be unequal. Such an error may be discovered when preparing the trial balance or may be indicated by an unusual account balance. For example, a credit balance in the supplies account indicates an error has occurred. This is because a business cannot have “negative” supplies. When such errors are discovered, they should be corrected. If the error has already been journalized and posted to the ledger, a correcting journal entry is normally prepared. To illustrate, assume that on May 5 a $12,500 purchase of office equipment on account was incorrectly journalized and posted as a debit to Supplies and a credit to Accounts Payable for $12,500. This posting of the incorrect entry is shown in the following T accounts: Incorrect: Supplies 12,500

Accounts Payable 12,500

Before making a correcting journal entry, it is best to determine the debit(s) and credit(s) that should have been recorded. These are shown in the following T accounts: Correct: Office Equipment 12,500

Accounts Payable 12,500

Comparing the two sets of T accounts shows that the incorrect debit to Supplies may be corrected by debiting Office Equipment for $12,500 and crediting Supplies for $12,500. The following correcting journal entry is then journalized and posted:

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Chapter 2 Analyzing Transactions

73

Entry to Correct Error:

31

Office Equipment Supplies To correct erroneous debit to Supplies on May 5. See invoice from Bell Office Equipment Co.

Example Example Exercise Exercise 22-7 -7 7

18 14

12,500 12,500

Correcting Co orr rrec e ti ec t ng Entries Ent ntri ries e es

                   

May

The following errors took place in journalizing and posting transactions: a. A withdrawal of $6,000 by Cheri Ramey, owner of the business, was recorded as a debit to Office Salaries Expense and a credit to Cash. b. Utilities Expense of $4,500 paid for the current month was recorded as a debit to Miscellaneous Expense and a credit to Accounts Payable. Journalize the entries to correct the errors. Omit explanations.

Follow My Example 2-7 a.

Cheri Ramey, Drawing ........................................................ Office Salaries Expense ..................................................

6,000

b. Accounts Payable.................................................................. Miscellaneous Expense ..................................................

4,500

Utilities Expense .................................................................... Cash.......................................................................................

4,500

6,000 4,500 4,500

Note: The first entry in (b) reverses the incorrect entry, and the second entry records the correct entry. These two entries could also be combined into one entry; however, preparing two entries will make it easier for someone later to understand what had happened and why the entries were necessary.

Practice Exercises: PE 2-7A, PE 2-7B

Financial Analysis and Interpretation: Horizontal Analysis A single item in a financial statement, such as net income, is often useful in interpreting the financial performance of a company. However, a comparison with prior periods often makes the financial information even more useful. For example, comparing net income of the current period with the net income with the prior period will indicate whether the company’s operating performance has improved. In horizontal analysis, the amount of each item on a current financial statement is compared with the same item on an earlier statement. The increase or decrease in the amount of the item is computed together with the percent of increase or decrease. When two statements are being compared, the earlier statement is used as the base for computing the amount and the percent of change.

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F•A•I Describe and illustrate the use of horizontal analysis in evaluating a company’s performance and financial condition.

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To illustrate, the horizontal analysis of two income statements for J. Holmes, Attorneyat-Law, is shown below. J. Holmes, Attorney-at-Law Income Statements For the Years Ended December 31 Increase (Decrease)

                   

Fees earned Operating expenses: Wages expense Rent expense Utilities expense Supplies expense Miscellaneous expense Total operating expenses Net income

2012

2011

Amount

Percent

$187,500

$150,000

$37,500

25.0%*

$ 60,000 15,000 12,500 2,700

$ 45,000 12,000 9,000 3,000

$ 15,000 3,000 3,500 (300)

33.3 25.0 38.9 (10.0)

2,300 $ 92,500 $ 95,000

1,800 $ 70,800 $ 79,200

500 $21,700 $15,800

27.8 30.6 19.9

*$37,500 ÷ $150,000

The horizontal analysis for J. Holmes, Attorney-at-Law, indicates both favorable and unfavorable trends. The increase in fees earned is a favorable trend, as is the decrease in supplies expense. Unfavorable trends include the increase in wages expense, utilities expense, and miscellaneous expense. These expenses increased the same as or faster than the increase in revenues, with total operating expenses increasing by 30.6%. Overall, net income increased by $15,800, or 19.9%, a favorable trend. The significance of the various increases and decreases in the revenue and expense items should be investigated to see if operations could be further improved. For example, the increase in utilities expense of 38.9% was the result of renting additional office space for use by a part-time law student in performing paralegal services. This explains the increase in rent expense of 25% and the increase in wages expense of 33.3%. The increase in revenues of 25% reflects the fees generated by the new paralegal. The preceding example illustrates how horizontal analysis can be useful in interpreting and analyzing the income statement. Horizontal analyses can also be performed for the balance sheet, the statement of owner’s equity, and the statement of cash flows. To illustrate, horizontal analysis for Apple Inc.’s 2009 and 2008 statements of cash flows (in millions) is shown below. Apple Inc. Statements of Cash Flows For the Years Ended

Cash flows from operating activities Cash flows used for investing activities Cash flows from financing activities Net increase (decrease) in cash Beginning of the year balance of cash End of the year balance of cash

Sept. 26, 2009

Sept. 27, 2008

$ 10,159 (17,434) 663 $ (6,612) 11,875 $ 5,263

$ 9,596 (8,189) 1,116 $ 2,523 9,352 $11,875

Increase (Decrease) Amount Percent $

563 (9,245) (453) $(9,135) 2,523 $(6,612)

5.9% (112.9) (40.6) (362.1) 27.0 (55.7)

The horizontal analysis of cash flows for Apple Inc. indicates an increase in cash flows from operating activities of 5.9%, which is a favorable trend. At the same time, Apple increased the cash used in its investing activities by over 112.9% and decreased the cash it received from financing activities by 40.6%. Overall, Apple had a 362.1% decrease in cash for the year, which decreased the end of the year cash balance by 55.7%. In contrast, in the prior year Apple increased its ending cash balance, which is the beginning cash balance of the current year, by 27%.

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Chapter 2 Analyzing Transactions

EExample xample Exercise Exercise 22-8 -8 -8

75

H ri Ho rizo z nt ntal a A al na aly ysi ss Horizontal Analysis

Two income statements for McCorkle Company are shown below. McCorkle Company Income Statements For the Years Ended December 31 2012 2011 Fees earned $210,000 $175,000 Operating expenses 172,500 150,000 Net income $ 37,500 $ 25,000 Prepare a horizontal analysis of McCorkle Company’s income statements.                    

Follow My Example 2-8 McCorkle Company Income Statements For the Years Ended December 31

Fees earned Operating expenses Net income

2012 $210,000 172,500 $ 37,500

2011 $175,000 150,000 $ 25,000

Increase (Decrease) Amount Percent $35,000 20% 22,500 15 $12,500 50

Practice Exercises: PE 2-8A, PE 2-8B

At a Glance 2 Describe the characteristics of an account and a chart of accounts. The simplest form of an account, a T account, has three parts: (1) a title, which is the name of the item recorded in the account; (2) a left side, called the debit side; and (3) a right side, called the credit side. Periodically, the debits in an account are added, the credits in the account are added, and the balance of the account is determined. The system of accounts that make up a ledger is called a chart of accounts.

Key Points

Learning Outcomes

• Record transactions in T accounts.

Example Exercises

Practice Exercises

• Determine the balance of a T account. • Prepare a chart of accounts for a proprietorship.

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Chapter 2 Analyzing Transactions

Describe and illustrate journalizing transactions using the double-entry accounting system. Key Points Transactions are initially entered in a record called a journal. The rules of debit and credit for recording increases or decreases in accounts are shown in Exhibit 3. Each transaction is recorded so that the sum of the debits is always equal to the sum of the credits. The normal balance of an account is indicated by the side of the account (debit or credit) that receives the increases. Learning Outcomes

• Indicate the normal balance of an account.

                   

• Journalize transactions using the rules of debit and credit.

Example Exercises

Practice Exercises

EE2-1

PE2-1A, 2-1B

EE2-2

PE2-2A, 2-2B

Describe and illustrate the journalizing and posting of transactions to accounts. Transactions are journalized and posted to the ledger using the rules of debit and credit. The debits and credits for each journal entry are posted to the accounts in the order in which they occur in the journal.

Key Points

Learning Outcomes

• Journalize transactions using the rules of debit and credit. • Given other account data, determine the missing amount of an account entry.

Example Exercises

Practice Exercises

EE2-3 EE2-4

PE2-3A, 2-3B PE2-4A, 2-4B

EE2-5

PE2-5A, 2-5B

• Post journal entries to a standard account. • Post journal entries to a T account.

Prepare an unadjusted trial balance and explain how it can be used to discover errors. Key Points A trial balance is prepared by listing the accounts from the ledger and their balances. The totals of the Debit column and Credit column of the trial balance must be equal. If the two totals are not equal, an error has occurred. Errors may occur even though the trial balance totals are equal. Such errors may require a correcting journal entry.

Example Exercises

Practice Exercises

• Discover errors that cause unequal totals in the trial balance.

EE2-6

PE2-6A, 2-6B

• Prepare correcting journal entries for various errors.

EE2-7

PE2-7A, 2-7B

Learning Outcomes

• Prepare an unadjusted trial balance.

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Chapter 2 Analyzing Transactions

77

Describe and illustrate the use of horizontal analysis in evaluating a company’s performance and financial condition. In horizontal analysis, the amount of each item on a current financial statement is compared with the same item on an earlier statement. The increase or decrease in the amount of the item is computed together with the percent of increase or decrease. When two statements are being compared, the earlier statement is used as the base for computing the amount and the percent of change.

Learning Outcomes

• Describe horizontal analysis. • Prepare a horizontal analysis report of a financial statement.

Example Exercises

Practice Exercises

EE2-8

PE2-8A, 2-8B                    

Key Points

Key Terms account (52) account receivable (65) assets (54) balance of the account (53) capital account (54) chart of accounts (54) correcting journal entry (72) credit (53) debit (53) double-entry accounting system (55)

drawing (54) expenses (55) horizontal analysis (73) journal (57) journal entry (58) journalizing (58) ledger (54) liabilities (54) normal balance of an account (56) owner’s equity (54)

posting (61) revenues (54) rules of debit and credit (55) slide (71) T account (52) transposition (71) trial balance (70) unadjusted trial balance (71) unearned revenue (63)

Illustrative Problem J. F. Outz, M.D., has been practicing as a cardiologist for three years. During April 2011, Outz completed the following transactions in her practice of cardiology: Apr.

1. Paid office rent for April, $800. 3. Purchased equipment on account, $2,100. 5. Received cash on account from patients, $3,150. 8. Purchased X-ray film and other supplies on account, $245. 9. One of the items of equipment purchased on April 3 was defective. It was returned with the permission of the supplier, who agreed to reduce the account for the amount charged for the item, $325. 12. Paid cash to creditors on account, $1,250.

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Chapter 2 Analyzing Transactions

Apr. 17. Paid cash for renewal of a six-month property insurance policy, $370. 20. Discovered that the balances of the cash account and the accounts payable account as of April 1 were overstated by $200. A payment of that amount to a creditor in March had not been recorded. Journalize the $200 payment as of April 20. 24. Paid cash for laboratory analysis, $545. 27. Paid cash from business bank account for personal and family expenses, $1,250. 30. Recorded the cash received in payment of services (on a cash basis) to patients during April, $1,720. 30. Paid salaries of receptionist and nurses, $1,725. 30. Paid various utility expenses, $360.

                   

30. Recorded fees charged to patients on account for services performed in April, $5,145. 30. Paid miscellaneous expenses, $132. Outz’s account titles, numbers, and balances as of April 1 (all normal balances) are listed as follows: Cash, 11, $4,123; Accounts Receivable, 12, $6,725; Supplies, 13, $290; Prepaid Insurance, 14, $465; Equipment, 18, $19,745; Accounts Payable, 22, $765; J. F. Outz, Capital, 31, $30,583; J. F. Outz, Drawing, 32, $0; Professional Fees, 41, $0; Salary Expense, 51, $0; Rent Expense, 53, $0; Laboratory Expense, 55, $0; Utilities Expense, 56, $0; Miscellaneous Expense, 59, $0.

Instructions 1. Open a ledger of standard four-column accounts for Dr. Outz as of April 1. Enter the balances in the appropriate balance columns and place a check mark (9) in the Posting Reference column. (Hint: Verify the equality of the debit and credit balances in the ledger before proceeding with the next instruction.) 2. Journalize each transaction in a two-column journal. 3. Post the journal to the ledger, extending the month-end balances to the appropriate balance columns after each posting. 4. Prepare an unadjusted trial balance as of April 30.

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Chapter 2 Analyzing Transactions

Solution 1., 2., and 3. Journal Date

Post. Ref.

Description

Journal

Page 27 Debit

Credit

Post. Ref.

Description

Debit

Credit

2011

Apr. 1

3

5

8

9

12

17

20

Rent Expense Cash Paid office rent for April.

53 11

800

Equipment Accounts Payable Purchased equipment on account.

18 22

2,100

Cash Accounts Receivable Received cash on account.

11 12

Supplies Accounts Payable Purchased supplies.

13 22

245

Accounts Payable Equipment Returned defective equipment.

22 18

325

Accounts Payable Cash Paid creditors on account.

22 11

1,250

Prepaid Insurance Cash Renewed six-month property policy.

14 11

370

Accounts Payable Cash Recorded March payment to creditor.

22 11

200

Account Cash

Apr. 24 800

2,100

27

3,150 3,150

245

325

30

30

30

30 1,250

30 370

Laboratory Expense

55 11

J. F. Outz, Drawing Cash J. F. Outz withdrew cash for personal use.

32 11

1,250

Cash Professional Fees Received fees from patients.

11 41

1,720

Salary Expense Cash Paid salaries.

51 11

1,725

Utilities Expense Cash Paid utilities.

56 11

360

Accounts Receivable Professional Fees Recorded fees earned on account.

12 41

5,145

Miscellaneous Expense Cash Paid expenses.

59 11

132

Account Accounts Receivable

Item

Debit

Credit

Debit

CHE-WARREN-09-0902-002.indd 79

1,720

1,725

360

5,145

132

Balance

Credit

Date

Item

Post. Ref.

Debit

Credit

Debit

3,150

6,725 3,575 8,720

Credit

2011

2011

Apr. 1 1 5 12 17 20 24 27 30 30 30 30

1,250

Account No. 12

Balance Date

545

200

Account No. 11

Post. Ref.

545

Cash Paid for laboratory analysis.

                   

2011

Date

Page 28

Balance

9 27 27 27 27 27 28 28 28 28 28 28

800 3,150 1,250 370 200 545 1,250 1,720 1,725 360 132

4,123 3,323 6,473 5,223 4,853 4,653 4,108 2,858 4,578 2,853 2,493 2,361

Apr. 1 5 30

Balance

9 27 28

5,145

Account Supplies

Account No. 13 Balance

Date

Item

Post. Ref.

Debit

Credit

Debit

Credit

2011

Apr. 1 8

Balance

9 27

245

290 535

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Chapter 2 Analyzing Transactions

Account Prepaid Insurance

Account No. 14

Account Professional Fees

Account No. 41

Balance Date

Post. Ref.

Item

Debit

Credit

Debit

Credit

2011

Apr. 1 17

Balance Date

Item

Post. Ref.

Debit

Credit

9 27

Balance

465 835

370

Account Equipment

Apr. 30 30

Account No. 18

28 28

1,720 5,145

Account Salary Expense

                   

Item

Post. Ref.

Debit

Credit

Debit

Credit

2011

Apr. 1 3 9

1,720 6,865

Balance Date

Item

Post. Ref.

Debit

28

1,725

Credit

Debit

Credit

2011

Balance

9 27 27

2,100 325

Account Accounts Payable

19,745 21,845 21,520

Apr. 30

Item

Post. Ref.

1,725

Account Rent Expense

Account No. 53 Balance

Account No. 22 Balance

Date

Credit

Account No. 51

Balance Date

Debit

2011

Date

Item

Post. Ref.

Debit

Credit

Debit

Credit

2011

Debit

Credit

Debit

Credit

Apr. 1

27

765 2,865 3,110 2,785 1,535 1,335

Account Laboratory Expense

800

800

2011

Apr. 1 3 8 9 12 20

Balance

9 27 27 27 27 27

2,100 245 325 1,250 200

Account J. F. Outz, Capital

Account No. 31

Account No. 55 Balance

Date

Item

Post. Ref.

Debit

Credit

Apr. 24

28

545

Date

Item

Debit

Credit

Debit

Credit

Credit

545

Account Utilities Expanse

Account No. 56

Balance Post. Ref.

Debit

2011

Balance Date

Item

Post. Ref.

Debit

Credit

Debit

Credit

2011

Apr. 1

Balance

9

30,583

Account J. F. Qutz, Drawing

Account No. 32

2011

Apr. 30

28

360

360

Account Miscellaneous Expense

Account No. 59

Balance Date

Item

Post. Ref.

Debit

Credit

Debit

2011

Apr. 27

28

1,250

1,250

Credit

Balance Date

Item

Post. Ref.

Debit

Credit

Debit

Credit

2011

Apr. 30

28

132

132

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Chapter 2 Analyzing Transactions

81

4.

J. F. Outz, M.D. Unadjusted Trial Balance April 30, 2011 Debit Balances Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,361

Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8,720

Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

535

Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

835

Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21,520 1,335

J. F. Outz, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J. F. Outz, Drawing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

30,583 1,250

Professional Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6,865

Salary Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,725

Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

800

Laboratory Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

545

Utilities Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

360

Miscellaneous Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

                   

Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Credit Balances

132 38,783

38,783

Discussion Questions 1. What is the difference between an account and a ledger? 2. Do the terms debit and credit signify increase or decrease or can they signify either? Explain. 3. Weir Company adheres to a policy of depositing all cash receipts in a bank account and making all payments by check. The cash account as of December 31 has a credit balance of $3,190, and there is no undeposited cash on hand. (a) Assuming no errors occurred during journalizing or posting, what caused this unusual balance? (b) Is the $3,190 credit balance in the cash account an asset, a liability, owner’s equity, a revenue, or an expense? 4. Resource Services Company performed services in February for a specific customer, for a fee of $11,250. Payment was received the following March. (a) Was the revenue earned in February or March? (b) What accounts should be debited and credited in (1) February and (2) March? 5. If the two totals of a trial balance are equal, does it mean that there are no errors in the accounting records? Explain. 6. Assume that a trial balance is prepared with an account balance of $21,740 listed as $2,174 and an account balance of $4,500 listed as $5,400. Identify the transposition and the slide.

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7. Assume that when a purchase of supplies of $3,100 for cash was recorded, both the debit and the credit were journalized and posted as $1,300. (a) Would this error cause the trial balance to be out of balance? (b) Would the trial balance be out of balance if the $3,100 entry had been journalized correctly but the credit to Cash had been posted as $1,300? 8. Assume that Timberline Consulting erroneously recorded the payment of $9,000 of owner withdrawals as a debit to Salary Expense. (a) How would this error affect the equality of the trial balance? (b) How would this error affect the income statement, statement of owner’s equity, and balance sheet? 9. Assume that Western Realty Co. borrowed $200,000 from Mountain First Bank and Trust. In recording the transaction, Western erroneously recorded the receipt as a debit to Cash, $200,000, and a credit to Fees Earned, $200,000. (a) How would this error affect the equality of the trial balance? (b) How would this error affect the income statement, statement of owner’s equity, and balance sheet? 10. Checking accounts are the most common form of deposits for banks. Assume that Village Storage has a checking account at Camino Savings Bank. What type of account (asset, liability, owner’s equity, revenue, expense, drawing) does the account balance of $8,750 represent from the viewpoint of (a) Village Storage and (b) Camino Savings Bank?

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Practice Exercises Learning Objectives

Example Exercises

OBJ. 2

EE 2-1 p. 56

PE 2-1A Rules of debit and credit and normal balances State for each account whether it is likely to have (a) debit entries only, (b) credit entries only, or (c) both debit and credit entries. Also, indicate its normal balance. 1. Accounts Receivable 2. Commissions Earned 3. Notes Payable

OBJ. 2

EE 2-1 p. 56

4. Paul Howe, Capital 5. Rent Revenue 6. Wages Expense

PE 2-1B Rules of debit and credit and normal balances State for each account whether it is likely to have (a) debit entries only, (b) credit entries only, or (c) both debit and credit entries. Also, indicate its normal balance. 1. Accounts Payable 2. Cash 3. Malissa Wahl, Drawing

4. Miscellaneous Expense 5. Insurance Expense 6. Fees Earned

OBJ. 2

EE 2-2 p. 61

PE 2-2A Journal entry for asset purchase Prepare a journal entry for the purchase of office equipment on March 4 for $27,150, paying $5,000 cash and the remainder on account.

OBJ. 2

EE 2-2 p. 61

PE 2-2B Journal entry for asset purchase Prepare a journal entry for the purchase of office supplies on August 7 for $4,000, paying $1,000 cash and the remainder on account.

OBJ. 3

EE 2-3 p. 65

PE 2-3A Journal entry for fees earned Prepare a journal entry on September 6 for fees earned on account, $8,000.

OBJ. 3

EE 2-3 p. 65

PE 2-3B Journal entry for fees earned Prepare a journal entry on May 29 for cash received for services rendered, $5,000.

OBJ. 3

EE 2-4 p. 68

PE 2-4A Journal entry for owner’s withdrawal Prepare a journal entry on December 22 for the withdrawal of $10,000 by Jason Von Pentz for personal use.

OBJ. 3

EE 2-4 p. 68

PE 2-4B Journal entry for owner’s withdrawal Prepare a journal entry on February 3 for the withdrawal of $7,500 by Allene Collette for personal use.

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Chapter 2 Analyzing Transactions

83

Learning Objectives

Example Exercises

OBJ. 3

EE 2-5 p. 68

PE 2-5A Missing amount from an account On June 1, the cash account balance was $17,200. During June, cash payments totaled $178,300, and the June 30 balance was $23,900. Determine the cash receipts during June.

OBJ. 3

EE 2-5 p. 68

PE 2-5B Missing amount from an account On October 1, the supplies account balance was $900. During October, supplies of $2,750 were purchased, and $1,025 of supplies were on hand as of October 31. Determine supplies expense for October.

OBJ. 4

EE 2-6 p. 72

PE 2-6A Trial balance errors For each of the following errors, considered individually, indicate whether the error would cause the trial balance totals to be unequal. If the error would cause the trial balance totals to be unequal, indicate whether the debit or credit total is higher and by how much. a. The payment of an insurance premium of $4,800 for a two-year policy was debited to Prepaid Insurance for $4,800 and credited to Cash for $8,400. b. A payment of $318 on account was debited to Accounts Payable for $381 and credited to Cash for $381. c. A purchase of supplies on account for $1,200 was debited to Supplies for $1,200 and debited to Accounts Payable for $1,200.

OBJ. 4

EE 2-6 p. 72

PE 2-6B Trial balance errors For each of the following errors, considered individually, indicate whether the error would cause the trial balance totals to be unequal. If the error would cause the trial balance totals to be unequal, indicate whether the debit or credit total is higher and by how much. a. The payment of cash for the purchase of office equipment of $15,000 was debited to Land for $15,000 and credited to Cash for $15,000. b. The payment of $5,200 on account was debited to Accounts Payable for $520 and credited to Cash for $5,200. c. The receipt of cash on account of $1,270 was recorded as a debit to Cash for $1,720 and a credit to Accounts Receivable for $1,270.

OBJ. 4

EE 2-7 p. 73

PE 2-7A Correcting entries The following errors took place in journalizing and posting transactions: a. Advertising expense of $2,700 paid for the current month was recorded as a debit to Miscellaneous Expense and a credit to Advertising Expense. b. The payment of $3,950 from a customer on account was recorded as a debit to Cash and a credit to Accounts Payable.

                   



Journalize the entries to correct the errors. Omit explanations.

OBJ. 4

EE 2-7 p. 73

PE 2-7B Correcting entries The following errors took place in journalizing and posting transactions: a. The receipt of $5,800 for services rendered was recorded as a debit to Accounts Receivable and a credit to Fees Earned. b. The purchase of supplies of $1,800 on account was recorded as a debit to Office Equipment and a credit to Supplies. Journalize the entries to correct the errors. Omit explanations.

OBJ. 5

EE 2-8 p. 75

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PE 2-8A Horizontal analysis Two income statements for Boyer Company are shown on the following page.

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Learning Objectives

Example Exercises Boyer Company Income Statements For Years Ended December 31 2012

F•A•I

Fees earned Operating expenses Net income

$315,000 176,400 $138,600

2011

$300,000 180,000 $120,000

Prepare a horizontal analysis of Boyer Company’s income statements.

OBJ. 5

EE 2-8 p. 75

                   

F•A•I

PE 2-8B Horizontal analysis Two income statements for Hitt Company are shown below. Hitt Company Income Statements For Years Ended December 31 2012

Fees earned Operating expenses Net income

$937,500 612,500 $325.000

2011

$750,000 500,000 $250,000

Prepare a horizontal analysis of Hitt Company’s income statements.

Exercises OBJ. 1

EX 2-1 Chart of accounts The following accounts appeared in recent financial statements of Continental Airlines: Accounts Payable Air Traffic Liability Aircraft Fuel Expense Cargo and Mail Revenue Commissions (Expense)

Flight Equipment Landing Fees (Expense) Passenger Revenue Purchase Deposits for Flight Equipment Spare Parts and Supplies

Identify each account as either a balance sheet account or an income statement account. For each balance sheet account, identify it as an asset, a liability, or owner’s equity. For each income statement account, identify it as a revenue or an expense.

OBJ. 1

EX 2-2 Chart of accounts Innerscape Interiors is owned and operated by Jean Cartier, an interior decorator. In the ledger of Innerscape Interiors, the first digit of the account number indicates its major account classification (1—assets, 2—liabilities, 3—owner’s equity, 4—revenues, 5—expenses). The second digit of the account number indicates the specific account within each of the preceding major account classifications. Match each account number with its most likely account in the list below. The account numbers are 11, 12, 13, 21, 31, 32, 41, 51, 52, and 53. Accounts Payable Accounts Receivable Cash Fees Earned Jean Cartier, Capital

OBJ. 1

Jean Cartier, Drawing Land Miscellaneous Expense Supplies Expense Wages Expense

EX 2-3 Chart of accounts Alpha School is a newly organized business that teaches people how to inspire and influence others. The list of accounts to be opened in the general ledger is as follows:

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Accounts Payable Accounts Receivable Cash Equipment Fees Earned Jan Pulver, Capital Jan Pulver, Drawing

85

Miscellaneous Expense Prepaid Insurance Rent Expense Supplies Supplies Expense Unearned Rent Wages Expense

List the accounts in the order in which they should appear in the ledger of Alpha School and assign account numbers. Each account number is to have two digits: the first digit is to indicate the major classification (1 for assets, etc.), and the second digit is to identify the specific account within each major classification (11 for Cash, etc.). EX 2-4 Rules of debit and credit The following table summarizes the rules of debit and credit. For each of the items (a) through (l), indicate whether the proper answer is a debit or a credit. Increase

Balance sheet accounts: Asset Liability Owner’s equity: Capital Drawing Income statement accounts: Revenue Expense

OBJ. 2

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(a) Credit

Credit (c)

(b) (d)

Credit (g)

(e) (h)

(f ) (i)

Credit (l)

(j) Credit

(k) Debit

Accounts Payable Accounts Receivable Cash Fees Earned

5. Insurance Expense 6. Nicki Swanson, Drawing 7. Utilities Expense

EX 2-6 Normal balances of accounts Identify each of the following accounts of Advanced Services Co. as asset, liability, owner’s equity, revenue, or expense, and state in each case whether the normal balance is a debit or a credit. a. b. c. d. e.

OBJ. 2

Decrease Normal Balance

EX 2-5 Normal entries for accounts During the month, Iris Labs Co. has a substantial number of transactions affecting each of the following accounts. State for each account whether it is likely to have (a) debit entries only, (b) credit entries only, or (c) both debit and credit entries. 1. 2. 3. 4.

OBJ. 1,2

                   

OBJ. 1,2

Accounts Payable Accounts Receivable Barbara Mallary, Capital Barbara Mallary, Drawing Cash

f. g. h. i. j.

Fees Earned Office Equipment Rent Expense Supplies Wages Expense

EX 2-7 Transactions Chalet Co. has the following accounts in its ledger: Cash; Accounts Receivable; Supplies; Office Equipment; Accounts Payable; Andee Freese, Capital; Andee Freese, Drawing; Fees Earned; Rent Expense; Advertising Expense; Utilities Expense; Miscellaneous Expense. Journalize the following selected transactions for October 2012 in a two-column journal. Journal entry explanations may be omitted.

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Oct. 1. 2. 5. 6. 10. 15. 27. 30. 31. 31. 31.

Paid rent for the month, $2,000. Paid advertising expense, $900. Paid cash for supplies, $1,300. Purchased office equipment on account, $16,000. Received cash from customers on account, $6,700. Paid creditor on account, $1,200. Paid cash for repairs to office equipment, $600. Paid telephone bill for the month, $180. Fees earned and billed to customers for the month, $26,800. Paid electricity bill for the month, $400. Withdrew cash for personal use, $3,000.

OBJ. 2,3

EX 2-8 Journalizing and posting On February 3, 2012, Wilco Co. purchased $3,250 of supplies on account. In Wilco Co.’s chart of accounts, the supplies account is No. 15, and the accounts payable account is No. 21. a. Journalize the February 3, 2012, transaction on page 19 of Wilco Co.’s two-column journal. Include an explanation of the entry. b. Prepare a four-column account for Supplies. Enter a debit balance of $975 as of February 1, 2012. Place a check mark (9) in the Posting Reference column. c. Prepare a four-column account for Accounts Payable. Enter a credit balance of $13,150 as of February 1, 2012. Place a check mark (9) in the Posting Reference column. d. Post the February 3, 2012, transaction to the accounts. e. Do the rules of debit and credit apply to all companies?

OBJ. 2,3

EX 2-9 Transactions and T accounts The following selected transactions were completed during August of the current year: 1. Billed customers for fees earned, $35,700. 2. Purchased supplies on account, $2,000. 3. Received cash from customers on account, $26,150. 4. Paid creditors on account, $800. a. Journalize the above transactions in a two-column journal, using the appropriate number to identify the transactions. Journal entry explanations may be omitted. b. Post the entries prepared in (a) to the following T accounts: Cash, Supplies, Accounts Receivable, Accounts Payable, Fees Earned. To the left of each amount posted in the accounts, place the appropriate number to identify the transactions. c. Assume that the unadjusted trial balance on August 31 shows a credit balance for Accounts Receivable. Does this credit balance mean an error has occurred?

OBJ. 1,2,3

EX 2-10 Cash account balance During the month, Lathers Co. received $400,000 in cash and paid out $290,000 in cash. a. Do the data indicate that Lathers Co. had net income of $110,000 during the month? Explain. b. If the balance of the cash account is $185,000 at the end of the month, what was the cash balance at the beginning of the month?

OBJ. 1,2,3

EX 2-11 Account balances a. During October, $90,000 was paid to creditors on account, and purchases on account were $125,000. Assuming the October 31 balance of Accounts Payable was $40,000, determine the account balance on October 1. b. On May 1, the accounts receivable account balance was $25,000. During May, $240,000 was collected from customers on account. Assuming the May 31 balance was $36,000, determine the fees billed to customers on account during May.

c. $284,175

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OBJ. 1,2

EX 2-12 Capital account balance As of January 1, Brenda Cikan, Capital, had a credit balance of $125,000. During the year, withdrawals totaled $7,000, and the business incurred a net loss of $130,000. a. Compute the balance of Brenda Cikan, Capital, as of the end of the year. b. Assuming that there have been no recording errors, will the balance sheet prepared at December 31 balance? Explain.

OBJ. 1,2

EX 2-13 Identifying transactions Southwest Tours Co. is a travel agency. The nine transactions recorded by Southwest Tours during May 2012, its first month of operations, are indicated in the following T accounts: Cash

(1) (7)

40,000 10,000

Equipment

(2) (3) (4) (6) (9)

2,000 (3) 3,600 2,700 9,000 4,000

Accounts Receivable

(5)

18,500

(2)

2,000

(7)

Mickey O’Dell, Drawing

18,000

(9)

Accounts Payable

10,000 (6)

Supplies

9,000

(3)

1,050

(1)

4,000

Service Revenue

14,400

Mickey O’Dell, Capital

(8)

                   

c. On November 1, the cash account balance was $18,275. During November, cash receipts totaled $279,100 and the November 30 balance was $13,200. Determine the cash payments made during November.

(5)

18,500

Operating Expenses

40,000 (4) (8)

2,700 1,050

Indicate for each debit and each credit: (a) whether an asset, liability, owner’s equity, drawing, revenue, or expense account was affected and (b) whether the account was increased (+) or decreased (–). Present your answers in the following form, with transaction (1) given as an example:

Transaction

(1)

Account Debited Type Effect

asset

+

Account Credited Type Effect

owner’s equity

+

OBJ. 1,2

EX 2-14 Journal entries Based upon the T accounts in Exercise 2-13, prepare the nine journal entries from which the postings were made. Journal entry explanations may be omitted.

OBJ. 4

EX 2-15 Trial balance Based upon the data presented in Exercise 2-13, (a) prepare an unadjusted trial balance, listing the accounts in their proper order. (b) Based upon the unadjusted trial balance, determine the net income or net loss.

Total Debit column: $63,900 OBJ. 4

Total of Credit column: $491,400

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EX 2-16 Trial balance The accounts in the ledger of Diva Co. as of July 31, 2012, are listed in alphabetical order as follows. All accounts have normal balances. The balance of the cash account has been intentionally omitted.

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Accounts Payable Accounts Receivable Cash Cheryl Sievert, Capital Cheryl Sievert, Drawing Fees Earned Insurance Expense Land Miscellaneous Expense

$ 28,000 40,000 ? 49,900 25,000 350,000 6,000 125,000 12,000

Notes Payable Prepaid Insurance Rent Expense Supplies Supplies Expense Unearned Rent Utilities Expense Wages Expense

$ 50,000 6,400 36,000 4,000 9,000 13,500 18,000 195,000

                   

Prepare an unadjusted trial balance, listing the accounts in their normal order and inserting the missing figure for cash.

OBJ. 4

EX 2-17 Effect of errors on trial balance Indicate which of the following errors, each considered individually, would cause the trial balance totals to be unequal: a. A fee of $15,000 earned and due from a client was not debited to Accounts Receivable or credited to a revenue account, because the cash had not been received. b. A receipt of $6,000 from an account receivable was journalized and posted as a debit of $6,000 to Cash and a credit of $6,000 to Fees Earned. c. A payment of $1,200 to a creditor was posted as a debit of $1,200 to Accounts Payable and a debit of $1,200 to Cash. d. A payment of $10,000 for equipment purchased was posted as a debit of $1,000 to Equipment and a credit of $1,000 to Cash. e. Payment of a cash withdrawal of $10,000 was journalized and posted as a debit of $1,000 to Salary Expense and a credit of $10,000 to Cash. Indicate which of the preceding errors would require a correcting entry.

OBJ. 4

Total of Credit column: $225,000

EX 2-18 Errors in trial balance The following preliminary unadjusted trial balance of Seats-For-You Co., a sports ticket agency, does not balance: Seats-For-You Co. Unadjusted Trial Balance March 31, 2012 Debit Balances Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unearned Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gina Ness, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gina Ness, Drawing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Service Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advertising Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Credit Balances

98,000 17,800 9,000 7,500 16,500 11,600 81,700 13,000 125,000 60,000 11,300 229,300

15,400 237,500

When the ledger and other records are reviewed, you discover the following: (1) the debits and credits in the cash account total $98,000 and $82,500, respectively; (2) a billing of $8,000 to a customer on account was not posted to the accounts receivable account; (3) a payment of $3,600 made to a creditor on account was not posted to the accounts payable account; (4) the balance of the unearned rent account is $5,400; (5) the correct balance of the equipment account is $75,000; and (6) each account has a normal balance. Prepare a corrected unadjusted trial balance.

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OBJ. 4

EX 2-19 Effect of errors on trial balance The following errors occurred in posting from a two-column journal: 1. A credit of $7,150 to Accounts Payable was not posted. 2. An entry debiting Accounts Receivable and crediting Fees Earned for $11,000 was not posted. 3. A debit of $1,000 to Accounts Payable was posted as a credit. 4. A debit of $800 to Supplies was posted twice. 5. A debit of $900 to Cash was posted to Miscellaneous Expense. 6. A credit of $360 to Cash was posted as $630. 7. A debit of $9,420 to Wages Expense was posted as $9,240.

OBJ. 4

Total of Credit column: $750,000

Error

(a) Out of Balance

(b) Difference

(c) Larger Total

1.

yes

$7,150

debit

                   

Considering each case individually (i.e., assuming that no other errors had occurred), indicate: (a) by “yes” or “no” whether the trial balance would be out of balance; (b) if answer to (a) is “yes,” the amount by which the trial balance totals would differ; and (c) whether the Debit or Credit column of the trial balance would have the larger total. Answers should be presented in the following form, with error (1) given as an example:

EX 2-20 Errors in trial balance Identify the errors in the following trial balance. All accounts have normal balances. Bluefin Co. Unadjusted Trial Balance For the Month Ending August 31, 2012

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Salaries Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ken Frye, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ken Frye, Drawing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Service Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Salary Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advertising Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

OBJ. 4

Debit Balances 45,000

Credit Balances 98,400

21,600 300,000 11,100 7,500 259,200 36,000 472,200 196,860 43,200 8,940 916,500

916,500

EX 2-21 Entries to correct errors The following errors took place in journalizing and posting transactions: a. Rent of $12,500 paid for the current month was recorded as a debit to Rent Expense and a credit to Prepaid Rent. b. A withdrawal of $7,500 by Trent Benedict, owner of the business, was recorded as a debit to Wages Expense and a credit to Cash. Journalize the entries to correct the errors. Omit explanations.

OBJ. 4

EX 2-22 Entries to correct errors The following errors took place in journalizing and posting transactions: a. Cash of $12,975 received on account was recorded as a debit to Fees Earned and a credit to Cash. b. A $3,200 purchase of supplies for cash was recorded as a debit to Supplies Expense and a credit to Accounts Payable. Journalize the entries to correct the errors. Omit explanations.

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OBJ. 5

EX 2-23 Horizontal analysis of income statement The following data (in millions) is taken from the financial statements of Target Corporation. Net sales (revenues) Total operating expenses

2009

2008

$64,948 60,546

$63,367 58,095

                   

a. For Target Corporation, comparing 2009 with 2008, determine the amount of change in millions and the percent of change for: 1. Net sales (revenues) 2. Total operating expenses What conclusions can you draw from your analysis of the net sales and the b. total operating expenses? OBJ. 5

EX 2-24 Horizontal analysis of income statement The following data were adapted from the financial statements of Kmart Corporation, prior to its filing for bankruptcy: In millions For years ending January 31

Sales Cost of sales (expense) Selling, general, and administrative expenses Operating income (loss)

2000

1999

$ 37,028 (29,658) (7,415) $ (45)

$ 35,925 (28,111) (6,514) $ 1,300

a. Prepare a horizontal analysis for the income statement showing the amount and percent of change in each of the following: 1. Sales 2. Cost of sales 3. Selling, general, and administrative expenses 4. Operating income (loss) b. Comment on the results of your horizontal analysis in part (a).

Problems Series A OBJ. 1,2,3,4

3. Total of Debit column: $78,350

PR 2-1A Entries into T accounts and trial balance Leila Durkin, an architect, opened an office on May 1, 2012. During the month, she completed the following transactions connected with her professional practice: a. Transferred cash from a personal bank account to an account to be used for the business, $30,000. b. Paid May rent for office and workroom, $3,500. c. Purchased used automobile for $25,000, paying $5,000 cash and giving a note payable for the remainder. d. Purchased office and computer equipment on account, $9,000. e. Paid cash for supplies, $1,200. f. Paid cash for annual insurance policies, $2,400. g. Received cash from client for plans delivered, $8,150. h. Paid cash for miscellaneous expenses, $300. i. Paid cash to creditors on account, $2,500. j. Paid installment due on note payable, $400. k. Received invoice for blueprint service, due in June, $1,200. l. Recorded fee earned on plans delivered, payment to be received in June, $12,900. m. Paid salary of assistant, $1,800. n. Paid gas, oil, and repairs on automobile for May, $600.

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91

Instructions 1. Record the above transactions directly in the following T accounts, without journalizing: Cash; Accounts Receivable; Supplies; Prepaid Insurance; Automobiles; Equipment; Notes Payable; Accounts Payable; Leila Durkin, Capital; Professional Fees; Rent Expense; Salary Expense; Blueprint Expense; Automobile Expense; Miscellaneous Expense. To the left of the amount entered in the accounts, place the appropriate letter to identify the transaction. 2. Determine account balances of the T accounts. Accounts containing a single entry only (such as Prepaid Insurance) do not need a balance. 3. Prepare an unadjusted trial balance for Leila Durkin, Architect, as of May 31, 2012. 4. Determine the net income or net loss for May.

4. c. $8,550

PR 2-2A Journal entries and trial balance On October 1, 2012, Faith Schultz established Heavenly Realty, which completed the following transactions during the month: a. Faith Schultz transferred cash from a personal bank account to an account to be used for the business, $20,000. b. Paid rent on office and equipment for the month, $3,750. c. Purchased supplies on account, $1,100. d. Paid creditor on account, $400. e. Earned sales commissions, receiving cash, $16,750. f. Paid automobile expenses (including rental charge) for month, $1,000, and miscellaneous expenses, $700. g. Paid office salaries, $2,150. h. Determined that the cost of supplies used was $600. i. Withdrew cash for personal use, $1,000.

                   

OBJ. 1,2,3,4

Instructions 1. Journalize entries for transactions (a) through (i), using the following account titles: Cash; Supplies; Accounts Payable; Faith Schultz, Capital; Faith Schultz, Drawing; Sales Commissions; Rent Expense; Office Salaries Expense; Automobile Expense; Supplies Expense; Miscellaneous Expense. Explanations may be omitted. 2. Prepare T accounts, using the account titles in (1). Post the journal entries to these accounts, placing the appropriate letter to the left of each amount to identify the transactions. Determine the account balances, after all posting is complete. Accounts containing only a single entry do not need a balance. 3. Prepare an unadjusted trial balance as of October 31, 2012. 4. Determine the following: a. Amount of total revenue recorded in the ledger. b. Amount of total expenses recorded in the ledger. c. Amount of net income for October. 5. Determine the increase or decrease in owner’s equity for October.

OBJ. 1,2,3,4

3. Total of Credit column: $66,500

PR 2-3A Journal entries and trial balance On April 1, 2012, Kathleen Alvarez established an interior decorating business, Intrex Designs. During the month, Kathleen completed the following transactions related to the business: Apr.

1. Kathleen transferred cash from a personal bank account to an account to be used for the business, $17,000. 2. Paid rent for period of April 2 to end of month, $3,400. 6. Purchased office equipment on account, $10,000. 8. Purchased a used truck for $21,000, paying $2,000 cash and giving a note payable for the remainder. 10. Purchased supplies for cash, $1,800. 12. Received cash for job completed, $13,000.

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Apr. 15. Paid annual premiums on property and casualty insurance, $1,800. 23. Recorded jobs completed on account and sent invoices to customers, $9,000. 24. Received an invoice for truck expenses, to be paid in April, $1,000. Enter the following transactions on Page 2 of the two-column journal. 29. Paid utilities expense, $1,500. 29. Paid miscellaneous expenses, $750. 30. Received cash from customers on account, $7,800. 30. Paid wages of employees, $4,000. 30. Paid creditor a portion of the amount owed for equipment purchased on April 6, $2,500.                    

30. Withdrew cash for personal use, $2,000.

Instructions 1. Journalize each transaction in a two-column journal beginning on Page 1, referring to the following chart of accounts in selecting the accounts to be debited and credited. (Do not insert the account numbers in the journal at this time.) Explanations may be omitted. 11 12 13 14 16 18 21 22

Cash Accounts Receivable Supplies Prepaid Insurance Equipment Truck Notes Payable Accounts Payable

31 32 41 51 53 54 55 59

Kathleen Alvarez, Capital Kathleen Alvarez, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Truck Expense Miscellaneous Expense

2. Post the journal to a ledger of four-column accounts, inserting appropriate posting references as each item is posted. Extend the balances to the appropriate balance columns after each transaction is posted. 3. Prepare an unadjusted trial balance for Intrex Designs as of April 30, 2012. 4. Determine the excess of revenues over expenses for April. 5. Can you think of any reason why the amount determined in (4) might not be the net income for April?

OBJ. 1,2,3,4

4. Total of Debit column: $259,600

PR 2-4A Journal entries and trial balance Utopia Realty acts as an agent in buying, selling, renting, and managing real estate. The unadjusted trial balance on October 31, 2012, is shown below. Utopia Realty Unadjusted Trial Balance October 31, 2012

11 12 13 14 16 21 22 23 31 32 41 51 52 53 54 59

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Office Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unearned Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ian Rogstad, Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ian Rogstad, Drawing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fees Earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Salary and Commission Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advertising Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Automobile Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Debit Balances 13,150 30,750 1,500 900 —

7,000 — — 23,000 1,000 120,000 74,100 15,000 8,900 2,750 1,950 150,000

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Credit Balances

150,000

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The following business transactions were completed by Utopia Realty during November 2012: Nov. 1. 2. 5. 10. 15.

Paid rent on office for month, $5,000. Purchased office supplies on account, $1,300. Paid annual insurance premiums, $3,600. Received cash from clients on account, $25,000. Purchased land for a future building site for $90,000, paying $10,000 in cash and giving a note payable for the remainder. 17. Paid creditors on account, $4,500. 20. Returned a portion of the office supplies purchased on November 2, receiving full credit for their cost, $200. 23. Paid advertising expense, $2,000.                    

Enter the following transactions on Page 19 of the two-column journal. 27. Discovered an error in computing a commission; received cash from the salesperson for the overpayment, $1,000. 28. Paid automobile expense (including rental charges for an automobile), $1,500. 29. Paid miscellaneous expenses, $450. 30. Recorded revenue earned and billed to clients during the month, $30,000. 30. Paid salaries and commissions for the month, $7,500. 30. Withdrew cash for personal use, $1,000. 30. Rented land purchased on November 15 to local merchants association for use as a parking lot in December and January, during a street rebuilding program; received advance payment of $3,000.

Instructions 1. Record the November 1, 2010, balance of each account in the appropriate balance column of a four-column account, write Balance in the item section, and place a check mark (9) in the Posting Reference column. 2. Journalize the transactions for November in a two-column journal beginning on Page 18. Journal entry explanations may be omitted. 3. Post to the ledger, extending the account balance to the appropriate balance column after each posting. 4. Prepare an unadjusted trial balance of the ledger as of November 30, 2012. 5. Assume that the November 30 transaction for salaries and commissions should have been $5,700. (a) Why did the unadjusted trial balance in (4) balance? (b) Journalize the correcting entry. (c) Is this error a transposition or slide?

OBJ. 4

7. Total of Debit column: $43,338.10

PR 2-5A Errors in trial balance If the working papers correlating with this textbook are not used, omit Problem 2-5A. The following records of A-Aall Electronic Repair are presented in the working papers: • Journal containing entries for the period May 1–31. • Ledger to which the May entries have been posted. • Preliminary trial balance as of May 31, which does not balance. Locate the errors, supply the information requested, and prepare a corrected trial balance according to the following instructions. The balances recorded in the accounts as of May 1 and the entries in the journal are correctly stated. If it is necessary to correct any posted amounts in the ledger, a line should be drawn through the erroneous figure and the correct amount inserted above. Corrections or notations may be inserted on the preliminary trial balance in any manner desired. It is not necessary to complete all of the instructions if equal trial balance totals can be obtained earlier. However, the requirements of instructions (6) and (7) should be completed in any event.

Instructions 1. Verify the totals of the preliminary trial balance, inserting the correct amounts in the schedule provided in the working papers. (Continued )

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2. Compute the difference between the trial balance totals. 3. Compare the listings in the trial balance with the balances appearing in the ledger, and list the errors in the space provided in the working papers. 4. Verify the accuracy of the balance of each account in the ledger, and list the errors in the space provided in the working papers. 5. Trace the postings in the ledger back to the journal, using small check marks to identify items traced. Correct any amounts in the ledger that may be necessitated by errors in posting, and list the errors in the space provided in the working papers. 6. Journalize as of May 31 the payment of $100 for advertising expense. The bill had been paid on May 31 but was inadvertently omitted from the journal. Post to the ledger. (Revise any amounts necessitated by posting this entry.) 7. Prepare a new unadjusted trial balance.

OBJ. 4

1. Total of Debit column: $1,400,000

PR 2-6A Corrected trial balance Imperial Carpet has the following unadjusted trial balance as of March 31, 2012. Imperial Carpet Unadjusted Trial Balance March 31, 2012

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes Payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leonardo Pepin, Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leonardo Pepin, Drawing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fees Earned. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advertising Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Debit Balances 38,200 81,000 16,690 3,600 392,000

Credit Balances

200,000 54,000 254,300 116,000 858,900 490,000 112,600 50,400 10,200 1,310,690

508,300

The debit and credit totals are not equal as a result of the following errors: a. The balance of cash was understated by $12,000. b. A cash receipt of $13,900 was posted as a debit to Cash of $19,300. c. A debit of $15,000 to Accounts Receivable was not posted. d. A return of $90 of defective supplies was erroneously posted as a $900 credit to Supplies. e. An insurance policy acquired at a cost of $2,500 was posted as a credit to Prepaid Insurance. f. The balance of Notes Payable was understated by $35,200. g. A credit of $7,600 in Accounts Payable was overlooked when determining the balance of the account. h. A debit of $10,000 for a withdrawal by the owner was posted as a credit to Leonardo Pepin, Capital. i. The balance of $116,200 in Rent Expense was entered as $112,600 in the trial balance. j. Gas, Electricity, and Water Expense, with a balance of $48,300 was omitted from the trial balance.

Instructions 1. Prepare a corrected unadjusted trial balance as of March 31, 2012. Does the fact that the unadjusted trial balance in (1) is balanced mean that 2. there are no errors in the accounts? Explain.

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95

Problems Series B 3. Total of Debit column: $74,700

PR 2-1B Entries into T accounts and trial balance April Layton, an architect, opened an office on June 1, 2012. During the month, she completed the following transactions connected with her professional practice: a. Transferred cash from a personal bank account to an account to be used for the business, $25,000. b. Purchased used automobile for $24,000, paying $5,000 cash and giving a note payable for the remainder. c. Paid June rent for office and workroom, $2,000. d. Paid cash for supplies, $1,450. e. Purchased office and computer equipment on account, $8,000. f. Paid cash for annual insurance policies on automobile and equipment, $3,600. g. Received cash from a client for plans delivered, $10,500. h. Paid cash to creditors on account, $1,750. i. Paid cash for miscellaneous expenses, $600. j. Received invoice for blueprint service, due in July, $1,500. k. Recorded fee earned on plans delivered, payment to be received in July, $12,800. l. Paid salary of assistant, $1,600. m. Paid cash for miscellaneous expenses, $200. n. Paid installment due on note payable, $350. o. Paid gas, oil, and repairs on automobile for June, $550.

                   

OBJ. 1,2,3

Instructions 1. Record the above transactions directly in the following T accounts, without journalizing: Cash; Accounts Receivable; Supplies; Prepaid Insurance; Automobiles; Equipment; Notes Payable; Accounts Payable; April Layton, Capital; Professional Fees; Rent Expense; Salary Expense; Blueprint Expense; Automobile Expense; Miscellaneous Expense. To the left of each amount entered in the accounts, place the appropriate letter to identify the transaction. 2. Determine account balances of the T accounts. Accounts containing a single entry only (such as Prepaid Insurance) do not need a balance. 3. Prepare an unadjusted trial balance for April Layton, Architect, as of June 30, 2012. 4. Determine the net income or net loss for June. OBJ. 1,2,3,4

4. c. $5,500

PR 2-2B Journal entries and trial balance On March 1, 2012, Mitch Quade established Marine Realty, which completed the following transactions during the month: a. Mitch Quade transferred cash from a personal bank account to an account to be used for the business, $18,000. b. Purchased supplies on account, $1,200. c. Earned sales commissions, receiving cash, $14,000. d. Paid rent on office and equipment for the month, $3,000. e. Paid creditor on account, $750. f. Withdrew cash for personal use, $2,000. g. Paid automobile expenses (including rental charge) for month, $1,500, and miscellaneous expenses, $400. h. Paid office salaries, $2,800. i. Determined that the cost of supplies used was $800.

Instructions 1. Journalize entries for transactions (a) through (i), using the following account titles: Cash; Supplies; Accounts Payable; Mitch Quade, Capital; Mitch Quade, Drawing; Sales Commissions; Rent Expense; Office Salaries Expense; Automobile Expense; Supplies Expense; Miscellaneous Expense. Journal entry explanations may be omitted. (Continued )

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2. Prepare T accounts, using the account titles in (1). Post the journal entries to these accounts, placing the appropriate letter to the left of each amount to identify the transactions. Determine the account balances, after all posting is complete. Accounts containing only a single entry do not need a balance. 3. Prepare an unadjusted trial balance as of March 31, 2012. 4. Determine the following: a. Amount of total revenue recorded in the ledger. b. Amount of total expenses recorded in the ledger. c. Amount of net income for March. 5. Determine the increase or decrease in owner’s equity for March

                   

OBJ. 1,2,3,4

3. Total of Credit column: $64,500

PR 2-3B Journal entries and trial balance On July 1, 2012, Kim Wheeler established an interior decorating business, Aztec Designs. During the month, Kim completed the following transactions related to the business: July 1. Kim transferred cash from a personal bank account to an account to be used for the business, $21,000. 4. Paid rent for period of July 4 to end of month, $2,750. 10. Purchased a used truck for $18,000, paying $4,000 cash and giving a note payable for the remainder. 13. Purchased equipment on account, $9,000. 14. Purchased supplies for cash, $1,500. 15. Paid annual premiums on property and casualty insurance, $3,600. 15. Received cash for job completed, $12,000. Enter the following transactions on Page 2 of the two-column journal. 21. Paid creditor a portion of the amount owed for equipment purchased on July 13, $2,000. 24. Recorded jobs completed on account and sent invoices to customers, $9,800. 26. Received an invoice for truck expenses, to be paid in August, $700. 27. Paid utilities expense, $1,000. 27. Paid miscellaneous expenses, $300. 29. Received cash from customers on account, $4,600. 30. Paid wages of employees, $2,800. 31. Withdrew cash for personal use, $2,500.

Instructions 1. Journalize each transaction in a two-column journal beginning on Page 1, referring to the following chart of accounts in selecting the accounts to be debited and credited. (Do not insert the account numbers in the journal at this time.) Journal entry explanations may be omitted. 11 12 13 14 16 18 21 22

Cash Accounts Receivable Supplies Prepaid Insurance Equipment Truck Notes Payable Accounts Payable

31 32 41 51 53 54 55 59

Kim Wheeler, Capital Kim Wheeler, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Truck Expense Miscellaneous Expense

2. Post the journal to a ledger of four-column accounts, inserting appropriate posting references as each item is posted. Extend the balances to the appropriate balance columns after each transaction is posted. 3. Prepare an unadjusted trial balance for Aztec Designs as of July 31, 2012. 4. Determine the excess of revenues over expenses for July. 5. Can you think of any reason why the amount determined in (4) might not be the net income for July?

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OBJ. 1,2,3,4

4. Total of Debit column: $575,400

97

PR 2-4B Journal entries and trial balance Prime Time Realty acts as an agent in buying, selling, renting, and managing real estate. The unadjusted trial balance on July 31, 2012, is shown below. Prime Time Realty Unadjusted Trial Balance July 31, 2012

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Office Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unearned Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sandy Ulrich, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sandy Ulrich, Drawing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fees Earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Salary and Commission Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advertising Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Automobile Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Credit Balances

12,000 — — 50,000

                   

11 12 13 14 16 21 22 23 31 32 41 51 52 53 54 59

Debit Balances 30,000 57,200 7,200 1,600 —

25,600 338,000 220,000 28,000 18,400 9,000 3,000 400,000

400,000

The following business transactions were completed by Prime Time Realty during August 2012: Aug.

1. Purchased office supplies on account, $1,800. 2. Paid rent on office for month, $5,000. 3. Received cash from clients on account, $40,000. 5. Paid annual insurance premiums, $6,000. 9. Returned a portion of the office supplies purchased on August 1, receiving full credit for their cost, $400. 17. Paid advertising expense, $5,500. 23. Paid creditors on account, $7,000

Enter the following transactions on Page 19 of the two-column journal. 29. Paid miscellaneous expenses, $500. 30. Paid automobile expense (including rental charges for an automobile), $2,500. 31. Discovered an error in computing a commission; received cash from the salesperson for the overpayment, $8,000. 31. Paid salaries and commissions for the month, $18,000. 31. Recorded revenue earned and billed to clients during the month, $112,000. 31. Purchased land for a future building site for $75,000, paying $10,000 in cash and giving a note payable for the remainder. 31. Withdrew cash for personal use, $12,000. 31. Rented land purchased on August 31 to a local university for use as a parking lot during football season (September, October, and November); received advance payment of $4,000.

Instructions 1. Record the August 1 balance of each account in the appropriate balance column of a four-column account, write Balance in the item section, and place a check mark (9) in the Posting Reference column. 2. Journalize the transactions for August in a two-column journal beginning on Page 18. Journal entry explanations may be omitted. 3. Post to the ledger, extending the account balance to the appropriate balance column after each posting. (Continued )

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4. Prepare an unadjusted trial balance of the ledger as of August 31, 2012. 5. Assume that the August 31 transaction for Sandy Ulrich’s cash withdrawal should have been $1,200. (a) Why did the unadjusted trial balance in (4) balance? (b) Journalize the correcting entry. (c) Is this error a transposition or slide? OBJ. 4

                   

7. Total of Credit column: $43,338.10

PR 2-5B Errors in trial balance If the working papers correlating with this textbook are not used, omit Problem 2-5B. The following records of A-Aall Electronic Repair are presented in the working papers: • Journal containing entries for the period May 1–31. • Ledger to which the May entries have been posted. • Preliminary trial balance as of May 31, which does not balance. Locate the errors, supply the information requested, and prepare a corrected trial balance according to the following instructions. The balances recorded in the accounts as of May 1 and the entries in the journal are correctly stated. If it is necessary to correct any posted amounts in the ledger, a line should be drawn through the erroneous figure and the correct amount inserted above. Corrections or notations may be inserted on the preliminary trial balance in any manner desired. It is not necessary to complete all of the instructions if equal trial balance totals can be obtained earlier. However, the requirements of instructions (6) and (7) should be completed in any event.

Instructions 1. Verify the totals of the preliminary trial balance, inserting the correct amounts in the schedule provided in the working papers. 2. Compute the difference between the trial balance totals. 3. Compare the listings in the trial balance with the balances appearing in the ledger, and list the errors in the space provided in the working papers. 4. Verify the accuracy of the balance of each account in the ledger, and list the errors in the space provided in the working papers. 5. Trace the postings in the ledger back to the journal, using small check marks to identify items traced. Correct any amounts in the ledger that may be necessitated by errors in posting, and list the errors in the space provided in the working papers. 6. Journalize as of May 31 the payment of $275 for gas and electricity. The bill had been paid on May 31 but was inadvertently omitted from the journal. Post to the ledger. (Revise any amounts necessitated by posting this entry.) 7. Prepare a new unadjusted trial balance.

OBJ. 4

1. Total of Debit column: $285,000

PR 2-6B Corrected trial balance Elite Video has the following unadjusted trial balance as of October 31, 2012. Elite Video Unadjusted Trial Balance October 31, 2012

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes Payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Aimee Desanti, Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Aimee Desanti, Drawing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fees Earned. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advertising Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gas, Electricity, and Water Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Debit Balances 11,100 17,560 2,520 1,840 64,800

31,600 6,160 39,140 11,600 213,600 122,400 25,020 13,140 6,800 276,780

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Credit Balances

290,500

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The debit and credit totals are not equal as a result of the following errors: a. The balance of cash was overstated by $7,500. b. A cash receipt of $7,200 was posted as a debit to Cash of $2,700. c. A debit of $5,000 to Accounts Receivable was not posted. d. A return of $350 of defective supplies was erroneously posted as a $530 credit to Supplies. e. An insurance policy acquired at a cost of $1,000 was posted as a credit to Prepaid Insurance. f. The balance of Notes Payable was overstated by $10,000. g. A credit of $500 in Accounts Payable was overlooked when the balance of the account was determined. h. A debit of $4,000 for a withdrawal by the owner was posted as a debit to Aimee Desanti, Capital. i. The balance of $11,340 in Advertising Expense was entered as $13,140 in the trial balance. j. Miscellaneous Expense, with a balance of $1,840, was omitted from the trial balance.

Instructions 1. Prepare a corrected unadjusted trial balance as of October 31 of the current year. Does the fact that the unadjusted trial balance in (1) is balanced mean that 2. there are no errors in the accounts? Explain.

Continuing Problem The transactions completed by PS Music during June 2012 were described at the end of Chapter 1. The following transactions were completed during July, the second month of the business’s operations: July

4. Total of Debit column: $40,030

1. Pat Sharpe made an additional investment in PS Music by depositing $4,000 in PS Music’s checking account. 1. Instead of continuing to share office space with a local real estate agency, Pat decided to rent office space near a local music store. Paid rent for July, $1,800. 1. Paid a premium of $2,700 for a comprehensive insurance policy covering liability, theft, and fire. The policy covers a one-year period. 2. Received $1,250 on account. 3. On behalf of PS Music, Pat signed a contract with a local radio station, WHBD, to provide guest spots for the next three months. The contract requires PS Music to provide a guest disc jockey for 80 hours per month for a monthly fee of $3,600. Any additional hours beyond 80 will be billed to WHBD at $40 per hour. In accordance with the contract, Pat received $7,200 from WHBD as an advance payment for the first two months. 3. Paid $250 on account. 4. Paid an attorney $800 for reviewing the July 3rd contract with WHBD. (Record as Miscellaneous Expense.) 5. Purchased office equipment on account from One-Stop Office Mart, $6,000. 8. Paid for a newspaper advertisement, $200. 11. Received $900 for serving as a disc jockey for a party. 13. Paid $600 to a local audio electronics store for rental of digital recording equipment. 14. Paid wages of $1,200 to receptionist and part-time assistant.

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Enter the following transactions on Page 2 of the two-column journal. 16. Received $2,100 for serving as a disc jockey for a wedding reception. 18. Purchased supplies on account, $1,080. 21. Paid $620 to Upload Music for use of its current music demos in making various music sets. 22. Paid $800 to a local radio station to advertise the services of PS Music twice daily for the remainder of July. 23. Served as disc jockey for a party for $2,500. Received $750, with the remainder due August 4, 2012. 27. Paid electric bill, $760. 28. Paid wages of $1,200 to receptionist and part-time assistant.                    

29. Paid miscellaneous expenses, $370. 30. Served as a disc jockey for a charity ball for $1,800. Received $400, with the remainder due on August 9, 2012. 31. Received $2,800 for serving as a disc jockey for a party. 31. Paid $1,400 royalties (music expense) to National Music Clearing for use of various artists’ music during July. 31. Withdrew $1,500 cash from PS Music for personal use. PS Music’s chart of accounts and the balance of accounts as of July 1, 2012 (all normal balances), are as follows: 11 12 14 15 17 21 23 31 32

Cash Accounts Receivable Supplies Prepaid Insurance Office Equipment Accounts Payable Unearned Revenue Pat Sharpe, Capital Pat Sharpe, Drawing

$5,310 1,250 170 — — 250 — 5,000 500

41 50 51 52 53 54 55 56 59

Fees Earned Wages Expense Office Rent Expense Equipment Rent Expense Utilities Expense Music Expense Advertising Expense Supplies Expense Miscellaneous Expense

$6,650 400 750 700 300 1,590 450 180 300

Instructions 1. Enter the July 1, 2012, account balances in the appropriate balance column of a fourcolumn account. Write Balance in the Item column, and place a check mark (9) in the Posting Reference column. (Hint: Verify the equality of the debit and credit balances in the ledger before proceeding with the next instruction.) 2. Analyze and journalize each transaction in a two-column journal beginning on Page 1, omitting journal entry explanations. 3. Post the journal to the ledger, extending the account balance to the appropriate balance column after each posting. 4. Prepare an unadjusted trial balance as of July 31, 2012.

Cases & Projects CP 2-1 Ethics and professional conduct in business At the end of the current month, Jonni Rembert prepared a trial balance for Star Rescue Service. The credit side of the trial balance exceeds the debit side by a significant amount. Jonni has decided to add the difference to the balance of the miscellaneous expense account in order to complete the preparation of the current month’s financial statements by a 5 o’clock deadline. Jonni will look for the difference next week when she has more time. Discuss whether Jonni is behaving in a professional manner.

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CP 2-2 Account for revenue Tucson College requires students to pay tuition each term before classes begin. Students who have not paid their tuition are not allowed to enroll or to attend classes. What journal entry do you think Tucson College would use to record the receipt of the students’ tuition payments? Describe the nature of each account in the entry.

CP 2-3 Record transactions The following discussion took place between Erin Carr, the office manager of Panda Data Company, and a new accountant, Mark Goodell. Mark: I’ve been thinking about our method of recording entries. It seems that it’s inefficient.

                   

Erin: In what way? Mark: Well—correct me if I’m wrong—it seems like we have unnecessary steps in the process. We could easily develop a trial balance by posting our transactions directly into the ledger and bypassing the journal altogether. In this way, we could combine the recording and posting process into one step and save ourselves a lot of time. What do you think? Erin: We need to have a talk.

What should Erin say to Mark?

CP 2-4 Debits and credits

Group Project The following excerpt is from a conversation between Boris Harris, the president and chief operating officer of Chesapeake Company, and his neighbor, Neil Liven. Neil: Boris, I’m taking a course in night school, “Intro to Accounting.” I was wondering—could you answer a couple of questions for me? Boris: Well, I will if I can. Neil: Okay, our instructor says that it’s critical we understand the basic concepts of accounting, or we’ll never

get beyond the first test. My problem is with those rules of debit and credit . . . you know, assets increase with debits, decrease with credits, etc. Boris: Yes, pretty basic stuff. You just have to memorize the rules. It shouldn’t be too difficult. Neil: Sure, I can memorize the rules, but my problem is I want to be sure I understand the basic concepts

behind the rules. For example, why can’t assets be increased with credits and decreased with debits like revenue? As long as everyone did it that way, why not? It would seem easier if we had the same rules for all increases and decreases in accounts. Also, why is the left side of an account called the debit side? Why couldn’t it be called something simple . . . like the “LE” for Left Entry? The right side could be called just “RE” for Right Entry. Finally, why are there just two sides to an entry? Why can’t there be three or four sides to an entry?

In a group of four or five, select one person to play the role of Boris and one person to play the role of Neil. After listening to the conversation between Boris and Neil, help Boris answer 1. Neil’s questions. 2. What information (other than just debit and credit journal entries) could the accounting system gather that might be useful to Boris in managing Cheasapeake Construction Company?

CP 2-5 Transactions and income statement Anwar Askari is planning to manage and operate AA Caddy Service at Mission Valley Golf and Country Club during June through August 2012. Anwar will rent a small maintenance building from the country club for $700 per month and will offer caddy services, including cart rentals, to golfers. Anwar has had no formal training in record keeping.

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Anwar keeps notes of all receipts and expenses in a shoe box. An examination of Anwar’s shoe box records for June revealed the following: June 1. Transferred $3,500 from personal bank account to be used to operate the caddy service. 1. Paid rent expense to Mission Valley Golf and Country Club, $700. 2. Paid for golf supplies (practice balls, etc.), $800. 3. Arranged for the rental of 25 regular (pulling) golf carts and 10 gasolinedriven carts for $3,000 per month. Paid $500 in advance, with the remaining $2,500 due June 20.

                   

7. Purchased supplies, including gasoline, for the golf carts on account, $600. Mission Valley Golf and Country Club has agreed to allow Anwar to store the gasoline in one of its fuel tanks at no cost. 15. Received cash for services from June 1–15, $4,150. 17. Paid cash to creditors on account, $600. 20. Paid remaining rental on golf carts, $2,500. 22. Purchased supplies, including gasoline, on account, $400. 25. Accepted IOUs from customers on account, $1,800. 28. Paid miscellaneous expenses, $350. 30. Received cash for services from June 16–30, $6,350. 30. Paid telephone and electricity (utilities) expenses, $340. 30. Paid wages of part-time employees, $850. 30. Received cash in payment of IOUs on account, $1,200. 30. Determined the amount of supplies on hand at the end of June, $500. Anwar has asked you several questions concerning his financial affairs to date, and he has asked you to assist with his record keeping and reporting of financial data. a. To assist Anwar with his record keeping, prepare a chart of accounts that would be appropriate for AA Caddy Service. b. Prepare an income statement for June in order to help Anwar assess the profitability of AA Caddy Service. For this purpose, the use of T accounts may be helpful in analyzing the effects of each June transaction. c. Based on Anwar’s records of receipts and payments, compute the amount of cash on hand on June 30. For this purpose, a T account for cash may be useful. d. A count of the cash on hand on June 30 totaled $8,390. Briefly discuss the possible causes of the difference between the amount of cash computed in (c) and the actual amount of cash on hand.

Internet Project

CP 2-6 Opportunities for accountants The increasing complexity of the current business and regulatory environment has created an increased demand for accountants who can analyze business transactions and interpret their effects on the financial statements. In addition, a basic ability to analyze the effects of transactions is necessary to be successful in all fields of business as well as in other disciplines, such as law. To better understand the importance of accounting in today’s environment, search the Internet or your local newspaper for job opportunities. One possible Internet site is http://www.careerbuilder.com. Then do one of the following: 1. Print a listing of one or two ads for accounting jobs. Alternatively, bring to class one or two newspaper ads for accounting jobs. 2. Print a listing of one or two ads for nonaccounting jobs for which some knowledge of accounting is preferred or necessary. Alternatively, bring to class one or two newspaper ads for such jobs.

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