Description
I have attached the details of the assignment in the following attachments. I am placing a 2 day timer on this assigment but i do not need it until Monday at 2pm PST.
Purpose of Assignment
The purpose of this assignment is to help you become familiar with examining transactions and how
it affects the balance sheet.
Assignment Steps
Resources: Financial Accounting: Tools for Business Decision Making
Use and complete the Excel template in Student Materials to each of the following scenarios from
Exercise E3-1 in Financial Accounting (p. 132) describing the effect of each transaction on assets,
liabilities, and stockholder’s equity (For example, the first answer is (1) Increase in assets and
increase in stockholders’ equity):
•
Selected transactions for Thyme Advertising Company, Inc.
1. Issued common stock to investors in exchange for cash received from investors.
2. Paid monthly rent.
3. Received cash from customers when service was performed.
4. Billed customers for services performed.
5. Paid dividend to stockholders.
6. Incurred advertising expense on account.
7. Received cash from customers billed in (4).
8. Purchased additional equipment for cash.
9. Purchased equipment on account.
Click the Assignment Files tab to submit your completed Excel spreadsheet
3
The Accounting Information System
CHAPTER PREVIEW
As indicated in the Feature Story, a reliable information system is a necessity for any
company. The purpose of this chapter is to explain and illustrate the features of an
accounting information system.
Accidents Happen
How organized are you financially? Take a short quiz. Answer yes or no to each question:
•
Does your wallet contain so many cash machine receipts that you’ve been declared a
walking fire hazard?
Do you wait until your debit card is denied before checking the status of your funds?
Was Aaron Rodgers (the quarterback for the Green Bay Packers) playing high
school football the last time you verified the accuracy of your bank account?
If you think it is hard to keep track of the many transactions that make up your life, imagine
how difficult it is for a big corporation to do so. Not only that, but now consider how
important it is for a big company to have good accounting records, especially if it has
control of your life savings. MF Global Holdings Ltd was such a company. As a large
investment broker, it held billions of dollars of investments for clients. If you had your life
savings invested at MF Global, you might be slightly displeased if you heard this from one of
its representatives: “You know, I kind of remember an account for someone with a name
like yours—now what did we do with that?”
Unfortunately, that is almost exactly what happened to MF Global’s clients shortly before it
filed for bankruptcy. During the days immediately following the bankruptcy filing,
regulators and auditors struggled to piece things together. In the words of one regulator,
“Their books are a disaster … we’re trying to figure out what numbers are real numbers.”
One company that considered buying an interest in MF Global walked away from the deal
because it “couldn’t get a sense of what was on the balance sheet.” That company said the
information that should have been instantly available instead took days to produce.
It now appears that MF Global did not properly segregate customer accounts from
company accounts. And, because of its sloppy recordkeeping, customers were not
protected when the company had financial troubles. Total customer losses were
approximately $1 billion. As you can see, accounting matters!
•
•
Source: S. Patterson and A. Lucchetti, “Inside the Hunt for MF Global Cash,” Wall Street Journal
Online (November 11, 2011).
LEARNING OBJECTIVE 1
Analyze the effect of business transactions on the basic
accounting equation.
The accounting cycle graphic above illustrates the steps companies follow each period to
record transactions and eventually prepare financial statements.
The system of collecting and processing transaction data and communicating financial
information to decision‐makers is known as the accounting information system. Factors
that shape an accounting information system include the nature of the company’s business,
the types of transactions, the size of the company, the volume of data, and the information
demands of management and others.
Most businesses use computerized accounting systems—sometimes referred to as
electronic data processing (EDP) systems. These systems handle all the steps involved in
the recording process, from initial data entry to preparation of the financial statements. In
order to remain competitive, companies continually improve their accounting systems to
provide accurate and timely data for decision‐making. For example, in a recent annual
report, Tootsie Roll stated, “We also invested in additional processing and data storage
hardware during the year. We view information technology as a key strategic tool, and are
committed to deploying leading edge technology in this area.” In addition, many companies
have upgraded their accounting information systems in response to the requirements of
Sarbanes‐Oxley.
Accounting information systems rely on a process referred to as the accounting cycle. As
you can see from the graphic above, the accounting cycle begins with the analysis of
business transactions and ends with the preparation of a post‐closing trial balance. We
explain each of the steps in this chapter as well as in Chapter 4.
In this chapter, in order to emphasize the underlying concepts and principles, we focus on a
manual accounting system. The accounting concepts and principles do not change whether
a system is computerized or manual.
ACCOUNTING TRANSACTIONS
To use an accounting information system, you need to know which economic events to
recognize (record). Not all events are recorded and reported in the financial statements.
For example, suppose General Motors hired a new employee and purchased a new
computer. Are these events entered in its accounting records? The first event would not be
recorded, but the second event would. We call economic events that require recording in
the financial statements accounting transactions.
An accounting transaction occurs when assets, liabilities, or stockholders’ equity items
change as a result of some economic event. The purchase of a computer by General
Motors, the payment of rent by Microsoft, and the sale of a multi‐day guided trip by Sierra
Corporation are examples of events that change a company’s assets, liabilities, or
stockholders’ equity. Illustration 3-1 summarizes the decision process companies use to
decide whether or not to record economic events.
ILLUSTRATION 3-1
Transaction identification process
ANALYZING TRANSACTIONS
In Chapter 1, you learned the basic accounting equation:
Assets=Liabilities+Stockholders’ EquityAssets=Liabilities+Stockholders’ Equity
In this chapter, you will learn how to analyze transactions in terms of their effect on assets,
liabilities, and stockholders’ equity. Transaction analysis is the process of identifying the
specific effects of economic events on the accounting equation.
The accounting equation must always balance. Each transaction has a dual (double‐
sided) effect on the equation. For example, if an individual asset is increased, there must be
a corresponding:
• Decrease in another asset, or
• Increase in a specific liability, or
Increase in stockholders’ equity.
Two or more items could be affected when an asset is increased. For example, if a company
purchases a computer for $10,000 by paying $6,000 in cash and signing a note for $4,000,
one asset (equipment) increases $10,000, another asset (cash) decreases $6,000, and a
liability (notes payable) increases $4,000. The result is that the accounting equation
remains in balance—assets increased by a net $4,000 and liabilities increased by $4,000, as
shown below.
•
Chapter 1 presented the financial statements for Sierra Corporation for its first month. You
should review those financial statements (on page 16) at this time. To illustrate how
economic events affect the accounting equation, we will examine events affecting Sierra
during its first month.
In order to analyze the transactions for Sierra, we will expand the basic accounting
equation. This will allow us to better illustrate the impact of transactions on stockholders’
equity. Recall from the balance sheets in Chapters 1 and 2 that stockholders’ equity is
comprised of two parts: common stock and retained earnings. Common stock is affected
when the company issues new shares of stock in exchange for cash. Retained earnings is
affected when the company recognizes revenue, incurs expenses, or pays
dividends. Illustration 3-2 shows the expanded equation.
ILLUSTRATION 3-2
Expanded accounting equation
If you are tempted to skip ahead after you’ve read a few of the following transaction
analyses, don’t do it. Each has something unique to teach, something you’ll need later. (We
assure you that we’ve kept them to the minimum needed!)
DECISION TOOLS
The accounting equation is used to determine if an accounting transaction has occurred.
EVENT (1). INVESTMENT OF CASH BY STOCKHOLDERS.
On October 1, cash of $10,000 is invested in the business by investors in exchange for
$10,000 of common stock. This event is an accounting transaction that results in an
increase in both assets and stockholders’ equity.
The equation is in balance after the issuance of common stock. Keeping track of the source
of each change in stockholders’ equity is essential for later accounting activities. In
particular, items recorded in the revenue and expense columns are used for the calculation
of net income.
EVENT (2). NOTE ISSUED IN EXCHANGE FOR CASH.
On October 1, Sierra borrowed $5,000 from Castle Bank by signing a 3‐month, 12%, $5,000
note payable. This transaction results in an equal increase in assets and liabilities. The
specific effect of this transaction and the cumulative effect of the first two transactions are
as follows.
Total assets are now $15,000, and liabilities plus stockholders’ equity also total $15,000.
EVENT (3). PURCHASE OF EQUIPMENT FOR CASH.
On October 2, Sierra purchased equipment by paying $5,000 cash to Superior Equipment
Sales Co. This transaction results in an equal increase and decrease in Sierra’s assets.
The total assets are now $15,000, and liabilities plus stockholders’ equity also total
$15,000.
EVENT (4). RECEIPT OF CASH IN ADVANCE FROM CUSTOMER.
On October 2, Sierra received a $1,200 cash advance from R. Knox, a client. Sierra received
cash, it does not record revenue until it has performed the work. In some industries,
such as the magazine and airline industries, customers are expected to prepay. These
companies have a liability to the customer until they deliver the magazines or provide the
flight. When the company eventually provides the product or service, it records the
revenue.
Since Sierra received cash prior to performance of the service, Sierra has a liability for the
work due.
EVENT (5). SERVICES PERFORMED FOR CASH.
On October 3, Sierra received $10,000 in cash (an asset) from Copa Company for guide
services performed for a corporate event. Guide service is the principal revenue‐producing
activity of Sierra. Revenue increases stockholders’ equity. This transaction, then,
increases both assets and stockholders’ equity.
Often companies perform services “on account.” That is, they perform services for which
they are paid at a later date. Revenue, however, is recorded when services are performed.
Therefore, revenues would increase when services are performed, even though cash has
not been received. Instead of receiving cash, the company receives a different type of asset,
an account receivable. Accounts receivable represent the right to receive payment at a
later date. Suppose that Sierra had performed these services on account rather than for
cash. This event would be reported using the accounting equation as:
Later, when Sierra collects the $10,000 from the customer, Accounts Receivable decreases
by $10,000, and Cash increases by $10,000.
Note that in this case, revenues are not affected by the collection of cash. Instead Sierra
records an exchange of one asset (Accounts Receivable) for a different asset (Cash).
EVENT (6). PAYMENT OF RENT.
On October 3, Sierra paid its office rent for the month of October in cash, $900. This rent
payment is a transaction that results in a decrease in an asset, cash.
Rent is a cost incurred by Sierra in its effort to generate revenues. It is treated as an
expense because it pertains only to the current month. Expenses decrease stockholders’
equity. Sierra records the rent payment by decreasing cash and increasing expenses to
maintain the balance of the accounting equation.
EVENT (7). PURCHASE OF INSURANCE POLICY FOR CASH.
On October 4, Sierra paid $600 for a one‐year insurance policy that will expire next year on
September 30. Payments of expenses that will benefit more than one accounting period are
identified as assets called prepaid expenses or prepayments.
The balance in total assets did not change; one asset account decreased by the same
amount that another increased.
EVENT (8). PURCHASE OF SUPPLIES ON ACCOUNT.
On October 5, Sierra purchased an estimated three months of supplies on account from
Aero Supply for $2,500. In this case, “on account” means that the company receives goods
or services that it will pay for at a later date. This transaction increases both an asset
(supplies) and a liability (accounts payable).
EVENT (9). HIRING OF NEW EMPLOYEES.
On October 9, Sierra hired four new employees to begin work on October 15. Each
employee will receive a weekly salary of $500 for a five‐day work week, payable every two
weeks. Employees will receive their first paychecks on October 26. On the date Sierra hires
the employees, there is no effect on the accounting equation because the assets, liabilities,
and stockholders’ equity of the company have not changed.
EVENT (10). PAYMENT OF DIVIDEND.
On October 20, Sierra paid a $500 cash dividend. Dividends are a reduction of
stockholders’ equity but not an expense. Dividends are not included in the calculation of
net income. Instead, a dividend is a distribution of the company’s assets to its stockholders.
EVENT (11). PAYMENT OF CASH FOR EMPLOYEE SALARIES.
Employees have worked two weeks, earning $4,000 in salaries, which were paid on
October 26. Salaries and Wages Expense is an expense that reduces stockholders’ equity. In
this transaction, both assets and stockholders’ equity are reduced.
INVESTOR INSIGHT
Why Accuracy Matters
While most companies record transactions very carefully, the reality is that mistakes still
happen. For example, bank regulators fined Bank One Corporation (now JPMorgan
Chase) $1.8 million because they felt that the unreliability of the bank’s accounting system
caused it to violate regulatory requirements.
Also, in recent years Fannie Mae, the government‐chartered mortgage association,
announced a series of large accounting errors. These announcements caused alarm among
investors, regulators, and politicians because they feared that the errors might suggest
larger, undetected problems. This was important because the home‐mortgage market
depends on Fannie Mae to buy hundreds of billions of dollars of mortgages each year from
banks, thus enabling the banks to issue new mortgages.
Finally, before a major overhaul of its accounting system, the financial records of Waste
Management Company were in such disarray that of the company’s 57,000 employees,
10,000 were receiving pay slips that were in error.
The Sarbanes‐Oxley Act was created to minimize the occurrence of errors like these by
increasing every employee’s responsibility for accurate financial reporting.
In order for these companies to prepare and issue financial statements, their accounting
equations (debits and credits) must have been in balance at year‐end. How could these
errors or misstatements have occurred? (Go to WileyPLUS for this answer and additional
questions.)
SUMMARY OF TRANSACTIONS
Illustration 3-3 summarizes the transactions of Sierra Corporation to show their
cumulative effect on the basic accounting equation. It includes the transaction number in
the first column on the left. The right‐most column shows the specific effect of any
transaction that affects stockholders’ equity. Remember that Event (9) did not result in a
transaction, so no entry is included for that event. The illustration demonstrates three
important points:
1. Each transaction is analyzed in terms of its effect on assets, liabilities, and
stockholders’ equity.
2. The two sides of the equation must always be equal.
3. The cause of each change in stockholders’ equity must be indicated.
ILLUSTRATION 3-3
Summary of transactions
DO IT! 1
Transaction Analysis
A tabular analysis of the transactions made by Roberta Mendez & Co., a certified public
accounting firm, for the month of August is shown below. Each increase and decrease in
stockholders’ equity is explained.
Describe each transaction that occurred for the month.
Action Plan
✓ Analyze the tabular analysis to determine the nature and effect of each transaction.
✓ Keep the accounting equation in balance.
✓ Remember that a change in an asset will require a change in another asset, a liability, or
in stockholders’ equity.
SOLUTION
1. The company issued shares of stock to stockholders for $25,000 cash.
2. The company purchased $7,000 of equipment on account.
3. The company received $8,000 of cash in exchange for services performed.
4. The company paid $850 for this month’s rent.
Related exercise material: BE3-1, BE3-2, BE3-3, DO IT! 3-1, E3-1, E3-2, E3-3, and E3-4.
LEARNING OBJECTIVE 2
Explain how accounts, debits, and credits are used to record
business transactions.
Rather than using a tabular summary like the one in Illustration 3-3 for Sierra Corporation,
an accounting information system uses accounts. An account is an individual accounting
record of increases and decreases in a specific asset, liability, stockholders’ equity, revenue,
or expense item. For example, Sierra Corporation has separate accounts for Cash, Accounts
Receivable, Accounts Payable, Service Revenue, Salaries and Wages Expense, and so on.
(Note that whenever we are referring to a specific account, we capitalize the name.)
In its simplest form, an account consists of three parts: (1) the title of the account, (2) a left
or debit side, and (3) a right or credit side. Because the alignment of these parts of an
account resembles the letter T, it is referred to as a T‐account. The basic form of an
account is shown in Illustration 3-4.
ILLUSTRATION 3-4
Basic form of account
We use this form of account often throughout this textbook to explain basic accounting
relationships.
DEBITS AND CREDITS
The term debit indicates the left side of an account, and credit indicates the right side.
They are commonly abbreviated as Dr. for debit and Cr. for credit. They do not mean
increase or decrease, as is commonly thought. We use the terms debit and credit repeatedly
in the recording process to describe where entries are made in accounts. For example, the
act of entering an amount on the left side of an account is called debiting the account.
Making an entry on the right side is crediting the account.
When comparing the totals of the two sides, an account shows a debit balance if the total
of the debit amounts exceeds the credits. An account shows a credit balance if the credit
amounts exceed the debits. Note the position of the debit side and credit side in Illustration
3-4.
The procedure of recording debits and credits in an account is shown in Illustration 3-5 for
the transactions affecting the Cash account of Sierra Corporation. The data are taken from
the Cash column of the tabular summary in Illustration 3-3.
ILLUSTRATION 3-5
Tabular summary and account form for Sierra Corporation’s Cash account
Every positive item in the tabular summary represents a receipt of cash; every negative
amount represents a payment of cash. Notice that in the account form, we record the
increases in cash as debits and the decreases in cash as credits. For example, the
$10,000 receipt of cash (in blue) is debited to Cash, and the −$5,000−$5,000 payment of
cash (in red) is credited to Cash.
Having increases on one side and decreases on the other reduces recording errors and
helps in determining the totals of each side of the account as well as the account balance.
The balance is determined by netting the two sides (subtracting one amount from the
other). The account balance, a debit of $15,200, indicates that Sierra had $15,200 more
increases than decreases in cash. That is, since it started with a balance of zero, it has
$15,200 in its Cash account.
DEBIT AND CREDIT PROCEDURES
Each transaction must affect two or more accounts to keep the basic accounting equation in
balance. In other words, for each transaction, debits must equal credits. The equality of
debits and credits provides the basis for the double‐entry accounting system.
Under the double‐entry system, the two‐sided effect of each transaction is recorded in
appropriate accounts. This system provides a logical method for recording transactions.
The double‐entry system also helps to ensure the accuracy of the recorded amounts and
helps to detect errors such as those at MF Global as discussed in the Feature Story. If every
transaction is recorded with equal debits and credits, then the sum of all the debits to the
accounts must equal the sum of all the credits. The double‐entry system for determining
the equality of the accounting equation is much more efficient than the plus/minus
procedure used earlier.
INTERNATIONAL NOTE
Rules for accounting for specific events sometimes differ across countries. For example,
European companies rely less on historical cost and more on fair value than U.S.
companies. Despite the differences, the double‐entry accounting system is the basis of
accounting systems worldwide.
Dr./Cr. Procedures for Assets and Liabilities
In Illustration 3-5 for Sierra Corporation, increases in Cash—an asset—are entered on the
left side, and decreases in Cash are entered on the right side. We know that both sides of
the basic equation (Assets=Liabilities+Stockholders’
Equity)(Assets=Liabilities+Stockholders’ Equity) must be equal. It therefore follows
that increases and decreases in liabilities have to be recorded opposite from increases and
decreases in assets. Thus, increases in liabilities are entered on the right or credit side, and
decreases in liabilities are entered on the left or debit side. The effects that debits and
credits have on assets and liabilities are summarized in Illustration 3-6.
ILLUSTRATION 3-6
Debit and credit effects–assets and liabilities
Asset accounts normally show debit balances. That is, debits to a specific asset account
should exceed credits to that account. Likewise, liability accounts normally show credit
balances. That is, credits to a liability account should exceed debits to that account.
The normal balances may be diagrammed as in Illustration 3-7.
ILLUSTRATION 3-7
Normal balances–assets and liabilities
Knowing which is the normal balance in an account may help when you are trying to
identify errors. For example, a credit balance in an asset account, such as Land, or a debit
balance in a liability account, such as Salaries and Wages Payable, usually indicates errors
in recording. Occasionally, however, an abnormal balance may be correct. The Cash
account, for example, will have a credit balance when a company has overdrawn its bank
balance by spending more than it has in its account. In automated accounting systems, the
computer is programmed to flag violations of the normal balance and to print out error or
exception reports. In manual systems, careful visual inspection of the accounts is required
to detect normal balance problems.
▼ HELPFUL HINT
The normal balance is the side where increases in the account are recorded.
Dr./Cr. Procedures for Stockholders’ Equity
In Chapter 1, we indicated that stockholders’ equity is comprised of two parts: common
stock and retained earnings. In the transaction events earlier in this chapter, you saw that
revenues, expenses, and the payment of dividends affect retained earnings. Therefore, the
subdivisions of stockholders’ equity are common stock, retained earnings, dividends,
revenues, and expenses.
COMMON STOCK
Common stock is issued to investors in exchange for the stockholders’ investment. The
Common Stock account is increased by credits and decreased by debits. For example, when
cash is invested in the business, Cash is debited and Common Stock is credited. The effects
of debits and credits on the Common Stock account are shown in Illustration 3-8.
ILLUSTRATION 3-8
Debit and credit effects–common stock
The normal balance in the Common Stock account may be diagrammed as in Illustration 39.
ILLUSTRATION 3-9
Normal balance–common stock
RETAINED EARNINGS
Retained earnings is net income that is retained in the business. It represents the portion of
stockholders’ equity that has been accumulated through the profitable operation of the
company. Retained Earnings is increased by credits (for example, by net income) and
decreased by debits (for example, by a net loss), as shown in Illustration 3-10.
ILLUSTRATION 3-10
Debit and credit effects–retained earnings
The normal balance for the Retained Earnings account may be diagrammed as
in Illustration 3-11.
ILLUSTRATION 3-11
Normal balance–retained earnings
DIVIDENDS
A dividend is a distribution by a corporation to its stockholders. The most common form of
distribution is a cash dividend. Dividends result in a reduction of the stockholders’ claims
on retained earnings. Because dividends reduce stockholders’ equity, increases in the
Dividends account are recorded with debits. As shown in Illustration 3-12, the Dividends
account normally has a debit balance.
ILLUSTRATION 3-12
Normal balance–dividends
REVENUES AND EXPENSES
When a company recognizes revenues, stockholders’ equity is increased. Revenue accounts
are increased by credits and decreased by debits.
Expenses decrease stockholders’ equity. Thus, expense accounts are increased by debits
and decreased by credits. The effects of debits and credits on revenues and expenses are
shown in Illustration 3-13.
ILLUSTRATION 3-13
Debit and credit effects–revenues and expenses
Credits to revenue accounts should exceed debits; debits to expense accounts should
exceed credits. Thus, revenue accounts normally show credit balances, and expense
accounts normally show debit balances. The normal balances may be diagrammed as
in Illustration 3-14.
ILLUSTRATION 3-14
Normal balances–revenues and expenses
INVESTOR INSIGHT
Chicago Cubs
Keeping Score
The Chicago Cubs baseball team has these major revenue and expense accounts:
Revenues
Expenses
Admissions (ticket sales) Players’ salaries
Concessions
Administrative salaries
Television and radio
Travel
Advertising
Ballpark maintenance
Do you think that the Chicago Bears football team would be likely to have the same major
revenue and expense accounts as the Cubs? (Go to WileyPLUS for this answer and
additional questions.)
STOCKHOLDERS’ EQUITY RELATIONSHIPS
Companies report the subdivisions of stockholders’ equity in various places in the financial
statements:
•
Common stock and retained earnings: in the stockholders’ equity section of the
balance sheet.
•
Dividends: on the retained earnings statement.
Revenues and expenses: on the income statement.
Dividends, revenues, and expenses are eventually transferred to retained earnings at the
end of the period. As a result, a change in any one of these three items affects stockholders’
equity. Illustration 3-15 shows the relationships of the accounts affecting stockholders’
equity.
•
ILLUSTRATION 3-15
Stockholders’ equity relationships
SUMMARY OF DEBIT/CREDIT RULES
Illustration 3-16 summarizes the debit/credit rules and effects on each type of
account. Study this diagram carefully. It will help you understand the fundamentals of
the double‐entry system. No matter what the transaction, total debits must equal total
credits in order to keep the accounting equation in balance.
ILLUSTRATION 3-16
Summary of debit/credit rules
DO IT! 2
Debits and Credits for Balance Sheet Accounts
Kate Browne, president of Hair It Is Inc., has just rented space in a shopping mall for the
purpose of opening and operating a beauty salon. Long before opening day and before
purchasing equipment, hiring assistants, and remodeling the space, Kate was strongly
advised to set up a double‐entry set of accounting records in which to record all of her
business transactions.
Identify the balance sheet accounts that Hair It Is Inc. will likely need to record the
transactions necessary to establish and open for business. Also, indicate whether the
normal balance of each account is a debit or a credit.
Action Plan
✓ First identify asset accounts for each different type of asset invested in the business.
✓ Then identify liability accounts for debts incurred by the business.
✓ Hair It Is Inc. needs only one stockholders’ equity account, Common Stock, when it
begins the business. The other stockholders’ equity account, Retained Earnings, will be
needed after the business is operating.
SOLUTION
Hair It Is Inc. would likely need the following accounts in which to record the transactions
necessary to establish and ready the beauty salon for opening day: Cash (debit balance);
Equipment (debit balance); Supplies (debit balance); Accounts Payable (credit balance);
Notes Payable (credit balance), if the business borrows money; and Common Stock (credit
balance).
Related exercise material: BE3-4, BE3-5, DO IT! 3-2, E3-6, E3-7, and E3-8.
LEARNING OBJECTIVE 3
Indicate how a journal is used in the recording process.
THE RECORDING PROCESS
Although it is possible to enter transaction information directly into the accounts, few
businesses do so. Practically every business uses these basic steps in the recording process
(an integral part of the accounting cycle):
1. Analyze each transaction in terms of its effect on the accounts.
2. Enter the transaction information in a journal.
3. Transfer the journal information to the appropriate accounts in the ledger.
The actual sequence of events begins with the transaction. Evidence of the transaction
comes in the form of a source document, such as a sales slip, a check, a bill, or a cash
register document. This evidence is analyzed to determine the effect of the transaction on
specific accounts. The transaction is then entered in the journal. Finally, the journal entry
is transferred to the designated accounts in the ledger. The sequence of events in the
recording process is shown in Illustration 3-17.
ILLUSTRATION 3-17
The recording process
THE JOURNAL
Transactions are initially recorded in chronological order in a journal before they are
transferred to the accounts. For each transaction, the journal shows the debit and credit
effects on specific accounts. (In a computerized system, journals are kept as files, and
accounts are recorded in computer databases.)
ETHICS NOTE
Business documents provide evidence that transactions actually occurred. International
Outsourcing Services, LLC was accused of submitting fraudulent documents (store
coupons) to companies such as Kraft Foods and PepsiCo for reimbursement of as much as
$250 million. Use of proper business documents reduces the likelihood of fraudulent
activity.
Companies may use various kinds of journals, but every company has at least the most
basic form of journal, a general journal. The journal makes three significant
contributions to the recording process:
1. It discloses in one place the complete effect of a transaction.
2. It provides a chronological record of transactions.
3. It helps to prevent or locate errors because the debit and credit amounts for each
entry can be readily compared.
Entering transaction data in the journal is known as journalizing. To illustrate the
technique of journalizing, let’s look at the first three transactions of Sierra Corporation in
equation form.
On October 1, Sierra issued common stock in exchange for $10,000 cash:
On October 1, Sierra borrowed $5,000 by signing a note:
On October 2, Sierra purchased equipment for $5,000:
Sierra makes separate journal entries for each transaction. A complete entry consists of (1)
the date of the transaction, (2) the accounts and amounts to be debited and credited, and
(3) a brief explanation of the transaction. These transactions are journalized in Illustration
3-18.
ILLUSTRATION 3-18
Recording transactions in journal form
Note the following features of the journal entries.
1. The date of the transaction is entered in the Date column.
2. The account to be debited is entered first at the left. The account to be credited is
then entered on the next line, indented under the line above. The indentation
differentiates debits from credits and decreases the possibility of switching the
debit and credit amounts.
3. The amounts for the debits are recorded in the Debit (left) column, and the amounts
for the credits are recorded in the Credit (right) column.
4. A brief explanation of the transaction is given.
It is important to use correct and specific account titles in journalizing. Erroneous
account titles lead to incorrect financial statements. Some flexibility exists initially in
selecting account titles. The main criterion is that each title must appropriately describe
the content of the account. For example, a company could use any of these account titles for
recording the cost of delivery trucks: Equipment, Delivery Equipment, Delivery Trucks, or
Trucks. Once the company chooses the specific title to use, however, it should record under
that account title all subsequent transactions involving the account.
ACCOUNTING ACROSS THE ORGANIZATION
Microsoft
Boosting Profits
Microsoft originally designed the Xbox 360 to have 256 megabytes of memory. But the
design department said that amount of memory wouldn’t support the best special effects.
The purchasing department said that adding more memory would cost $30—which was
10% of the estimated selling price of $300. The marketing department, however,
“determined that adding the memory would let Microsoft reduce marketing costs and
attract more game developers, boosting royalty revenue. It would also extend the life of the
console, generating more sales.”
As a result of these changes, Xbox enjoyed great success. But, it does have competitors. Its
newest video game console, Xbox One, is now in a battle with Sony’s Playstation4 for
market share. How to compete? First, Microsoft bundled the critically acclaimed Titanfall
with its Xbox One. By including the game most Xbox One buyers were going to purchase
anyway, Microsoft was making its console more attractive. In addition, retailers are also
discounting the Xbox, which should get the momentum going for increased sales. What
Microsoft is doing is making sure that Xbox One is the center of the home entertainment
system in the long run.
Sources: Robert A. Guth, “New Xbox Aim for Microsoft: Profitability,” Wall Street Journal (May
24, 2005), p. C1; and David Thier, “Will Microsoft Give the Xbox One a $50 Price Cut?
www.Forbes.com (March 26, 2014).
In what ways is this Microsoft division using accounting to assist in its effort to become
more profitable? (Go to WileyPLUS for this answer and additional questions.)
DO IT! 3
Journal Entries
The following events occurred during the first month of business of Hair It Is Inc., Kate
Browne’s beauty salon:
1. Issued common stock to shareholders in exchange for $20,000 cash.
2. Purchased $4,800 of equipment on account (to be paid in 30 days).
3. Interviewed three people for the position of stylist.
Prepare the entries to record the transactions.
Action Plan
✓ Make sure to provide a complete and accurate representation of the transactions’ effects
on the assets, liabilities, and stockholders’ equity of the business.
SOLUTION
The three activities are recorded as follows.
Related exercise material: BE3-6, BE3-9, DO IT! 3-3, E3-7, E3-9, E3-10, E3-11, and E312.
LEARNING OBJECTIVE 4
Explain how a ledger anda posting help in the recording process.
THE LEDGER
The entire group of accounts maintained by a company is referred to collectively as
the ledger. The ledger provides the balance in each of the accounts as well as keeps track of
changes in these balances.
Companies may use various kinds of ledgers, but every company has a general ledger.
A general ledger contains all the asset, liability, stockholders’ equity, revenue, and
expense accounts, as shown in Illustration 3-19 (page 120). Whenever we use the
term ledger in this textbook without additional specification, it will mean the general
ledger.
ILLUSTRATION 3-19
The general ledger
CHART OF ACCOUNTS
The number and type of accounts used differ for each company, depending on the size,
complexity, and type of business. For example, the number of accounts depends on the
amount of detail desired by management. The management of one company may want one
single account for all types of utility expense. Another may keep separate expense accounts
for each type of utility expenditure, such as gas, electricity, and water. A small corporation
like Sierra Corporation will not have many accounts compared with a corporate giant
like Ford Motor Company. Sierra may be able to manage and report its activities in 20 to
30 accounts, whereas Ford requires thousands of accounts to keep track of its worldwide
activities.
Most companies list the accounts in a chart of accounts. They may create new accounts as
needed during the life of the business. Illustration 3-20 shows the chart of accounts for
Sierra in the order that they are typically listed (assets, liabilities, stockholders’ equity,
revenues, and expenses). Accounts shown in red are used in this chapter; accounts
shown in black are explained in later chapters.
ILLUSTRATION 3-20
Chart of accounts for Sierra Corporation
POSTING
The procedure of transferring journal entry amounts to ledger accounts is
called posting. This phase of the recording process accumulates the effects of
journalized transactions in the individual accounts. Posting involves these steps:
1. In the ledger, enter in the appropriate columns of the debited account(s) the date
and debit amount shown in the journal.
2. In the ledger, enter in the appropriate columns of the credited account(s) the date
and credit amount shown in the journal.
ETHICS INSIGHT
Credit Suisse Group
A Convenient Overstatement
Sometimes a company’s investment securities suffer a permanent decline in value below
their original cost. When this occurs, the company is supposed to reduce the recorded
value of the securities on its balance sheet (“write them down” in common financial lingo)
and record a loss. It appears, however, that during the financial crisis of 2008, employees at
some financial institutions chose to look the other way as the value of their investments
skidded.
A number of Wall Street traders that worked for the investment bank Credit Suisse
Group were charged with intentionally overstating the value of securities that had suffered
declines of approximately $2.85 billion. One reason that they may have been reluctant to
record the losses is out of fear that the company’s shareholders and clients would panic if
they saw the magnitude of the losses. However, personal self‐interest might have been
equally to blame—the bonuses of the traders were tied to the value of the investment
securities.
Source: S. Pulliam, J. Eaglesham, and M. Siconolfi, “U.S. Plans Changes on Bond Fraud,” Wall
Street Journal Online (February 1, 2012).
What incentives might employees have had to overstate the value of these investment
securities on the company’s financial statements? (Go to WileyPLUS for this answer and
additional questions.)
THE RECORDING PROCESS ILLUSTRATED
Illustrations 3-21 through 3-31 on the following pages show the basic steps in the
recording process using the October transactions of Sierra Corporation. Sierra’s accounting
period is a month. A basic analysis and a debit–credit analysis precede the journalizing and
posting of each transaction. Study these transaction analyses carefully. The purpose of
transaction analysis is first to identify the type of account involved and then to
determine whether a debit or a credit to the account is required. You should always
perform this type of analysis before preparing a journal entry. Doing so will help you
understand the journal entries discussed in this chapter as well as more complex journal
entries to be described in later chapters.
ILLUSTRATION 3-21
Investment of cash by stockholders
Issue of note payable
ILLUSTRATION 3-22
ILLUSTRATION 3-23
Purchase of equipment
ILLUSTRATION 3-24
Receipt of cash in advance from customer
▼ HELPFUL HINT
Many liabilities have the word “payable” in their title. But, note that Unearned Service
Revenue is considered a liability even though the word payable is not used.
ILLUSTRATION 3-25
ILLUSTRATION 3-26
Services performed for cash
Payment of rent with cash
ILLUSTRATION 3-27
Purchase of insurance policy with cash
Purchase of supplies on account
Hiring of new employees
ILLUSTRATION 3-28
ILLUSTRATION 3-29
ILLUSTRATION 3-30
Payment of dividend
ILLUSTRATION 3-31
Payment of cash for employee salaries
SUMMARY ILLUSTRATION OF JOURNALIZING AND POSTING
The journal for Sierra Corporation for the month of October is summarized in Illustration
3-32. The ledger is shown in Illustration 3-33 (on page 118) with all balances highlighted in
red.
ILLUSTRATION 3-32
General journal for Sierra Corporation
General ledger for Sierra Corporation
ILLUSTRATION 3-33
DO IT! 4
Posting
Selected transactions from the journal of Faital Inc. during its first month of operations are
presented below. Post these transactions to T‐accounts.
Action Plan
✓ Journalize transactions to keep track of financial activities (receipts, payments,
receivables, payables, etc.).
✓ To make entries useful, classify and summarize them by posting the entries to specific
ledger accounts.
SOLUTION
Related exercise material: BE3-10, DO IT! 3-4, and E3-14.
LEARNING OBJECTIVE 5
Prepare a trial balance.
A trial balance lists accounts and their balances at a given time. A company usually
prepares a trial balance at the end of an accounting period. The accounts are listed in the
order in which they appear in the ledger. Debit balances are listed in the left column and
credit balances in the right column. The totals of the two columns must be equal.
The trial balance proves the mathematical equality of debits and credits after
posting. Under the double‐entry system, this equality occurs when the sum of the debit
account balances equals the sum of the credit account balances. A trial balance may also
uncover errors in journalizing and posting. For example, a trial balance may well have
detected the error at MF Global discussed in the Feature Story. In addition, a trial
balance is useful in the preparation of financial statements.
These are the procedures for preparing a trial balance:
1. List the account titles and their balances.
2. Total the debit column and total the credit column.
3. Verify the equality of the two columns.
Illustration 3-34 presents the trial balance prepared from the ledger of Sierra Corporation.
Note that the total debits, $28,700, equal the total credits, $28,700.
ILLUSTRATION 3-34
Sierra Corporation trial balance
DECISION TOOLS
A trial balance proves that debits equal credits.
▼ HELPFUL HINT
Note that the order of presentation in the trial balance is:
1. Assets
2. Liabilities
3. Stockholders’ equity
4. Revenues
5. Expenses
LIMITATIONS OF A TRIAL BALANCE
A trial balance does not prove that all transactions have been recorded or that the ledger is
correct. Numerous errors may exist even though the trial balance column totals agree. For
example, the trial balance may balance even when any of the following occurs: (1) a
transaction is not journalized, (2) a correct journal entry is not posted, (3) a journal entry is
posted twice, (4) incorrect accounts are used in journalizing or posting, or (5) offsetting
errors are made in recording the amount of a transaction. In other words, as long as equal
debits and credits are posted, even to the wrong account or in the wrong amount, the total
debits will equal the total credits. Nevertheless, despite these limitations, the trial balance
is a useful screen for finding errors and is frequently used in practice.
ETHICS NOTE
An error is the result of an unintentional mistake. It is neither ethical nor unethical.
An irregularity is an intentional misstatement, which is viewed as unethical.
KEEPING AN EYE ON CASH
The Cash account shown below reflects all of the inflows and outflows of cash that occurred
during October for Sierra Corporation (see Illustrations 3-21 to 3-31). We have also
provided a description of each transaction that affected the Cash account.
1. Oct. 1 Issued stock for $10,000 cash.
2. Oct. 1 Issued note payable for $5,000 cash.
3. Oct. 2 Purchased equipment for $5,000 cash.
4. Oct. 2 Received $1,200 cash in advance from customer.
5. Oct. 3 Received $10,000 cash for services performed.
6. Oct. 3 Paid $900 cash for October rent.
7. Oct. 4 Paid $600 cash for one‐year insurance policy.
8. Oct. 20 Paid $500 cash dividend to stockholders.
9. Oct. 26 Paid $4,000 cash salaries.
The Cash account and the related cash transactions indicate why cash changed during
October. However, to make this information useful for analysis, it is summarized in a
statement of cash flows. The statement of cash flows classifies each transaction as an
operating activity, an investing activity, or a financing activity. A user of this statement can
then determine the amount of net cash provided by operating activities, the amount of cash
used for investing purposes, and the amount of cash provided by financing activities.
Operating activities are the types of activities the company performs to generate profits.
Sierra is an outdoor guide business, so its operating activities involve providing guide
services. Activities 4, 5, 6, 7, and 9 relate to cash received or spent to directly support its
guide services.
Investing activities include the purchase or sale of long‐lived assets used in operating the
business, or the purchase or sale of investment securities (stocks and bonds of companies
other than Sierra). Activity 3, the purchase of equipment, is an investing activity.
The primary types of financing activities are borrowing money, issuing shares of stock,
and paying dividends. The financing activities of Sierra are Activities 1, 2, and 8.
DO IT! 5
Trial Balance
The following accounts come from the ledger of SnowGo Corporation at December 31,
2017.
Equipment
$88,000 Common Stock
$20,000
Dividends
8,000
2,000
Accounts Payable
22,000 Notes Payable (due in 3 months) 19,000
Salaries and Wages Payable
Salaries and Wages Expense 42,000 Utilities Expense
3,000
Accounts Receivable
4,000
6,000
Service Revenue
95,000 Cash
Prepaid Insurance
7,000
Prepare a trial balance in good form.
Action Plan
✓ Determine normal balances and list accounts in the order they appear in the ledger.
✓ Accounts with debit balances appear in the left column, and those with credit balances
in the right column.
✓ Total the debit and credit columns to prove equality.
SOLUTION
Related exercise material: BE3-11, BE3-12, DO IT! 3-5, E3-13, E3-15, E3-16, E3-17, E318, E3-19, E3-20, E3-21, and E3-22.
USING DECISION TOOLS—KANSAS FARMERS’ VERTICALLY
INTEGRATED COOPERATIVE, INC.
The Kansas Farmers’ Vertically Integrated Cooperative, Inc. (K‐VIC) was formed by
over 200 northeast Kansas farmers in the late 1980s. Its purpose is to process raw
materials, primarily grain and meat products grown by K‐VIC’s members, into end‐user
food products and then to distribute the products nationally. Profits not needed for
expansion or investment are returned to the members annually, on a pro rata basis,
according to the fair value of the grain and meat products received from each farmer.
Assume that the following trial balance was prepared for K‐VIC.
Because the trial balance is not in balance, you have checked with various people
responsible for entering accounting data and have discovered the following.
1. The purchase of 35 new trucks, costing $7 million and paid for with cash, was not
recorded.
2. A data entry clerk accidentally deleted the account name for an account with a
credit balance of $472 million, so the amount was added to the Mortgage Payable
account in the trial balance.
3. December cash sales revenue of $75 million was credited to the Sales Revenue
account, but the other half of the entry was not made.
4. $50 million of salaries expense were mistakenly charged to Maintenance and
Repairs Expense.
INSTRUCTIONS
Answer these questions.
(a) Which mistake(s) have caused the trial balance to be out of balance?
(b) Should all of the items be corrected? Explain.
(c) What is the name of the account the data entry clerk deleted?
(d) Make the necessary corrections and prepare a correct trial balance with accounts listed
in proper order.
(e) On your trial balance, write BAL beside the accounts that go on the balance sheet and
INC beside those that go on the income statement.
SOLUTION
(a) Only mistake #3 has caused the trial balance to be out of balance.
(b) All of the items should be corrected. The misclassification error (mistake #4) on the
salaries expense would not affect bottom‐line net income, but it does affect the amounts
reported in the two expense accounts.
(c) There is no Common Stock account, so that must be the account that was deleted by the
data entry clerk.
(d) and (e)
REVIEW AND PRACTICE
LEARNING OBJECTIVE REVIEW
1. Analyze the effect of business transactions on the basic accounting
equation. Each business transaction must have a dual effect on the accounting
equation. For example, if an individual asset is increased, there must be a
corresponding (a) decrease in another asset, or (b) increase in a specific liability, or
(c) increase in stockholders’ equity.
2. Explain how accounts, debits, and credits are used to record business
transactions.
An account is an individual accounting record of increases and decreases in specific
asset, liability, and stockholders’ equity items.
The terms debit and credit are synonymous with left and right. Assets, dividends,
and expenses are increased by debits and decreased by credits. Liabilities, common
stock, retained earnings, and revenues are increased by credits and decreased by
debits.
3. Indicate how a journal is used in the recording process.
The basic steps in the recording process are (a) analyze each transaction in terms of
its effect on the accounts, (b) enter the transaction information in a journal, and (c)
transfer the journal information to the appropriate accounts in the ledger.
The initial accounting record of a transaction is entered in a journal before the data
are entered in the accounts. A journal (a) discloses in one place the complete effect
of a transaction, (b) provides a chronological record of transactions, and (c)
prevents or locates errors because the debit and credit amounts for each entry can
be readily compared.
4. Explain how a ledger and posting help in the recording process.
The entire group of accounts maintained by a company is referred to collectively as
a ledger. The ledger provides the balance in each of the accounts as well as keeps
track of changes in these balances.
Posting is the procedure of transferring journal entries to the ledger accounts. This
phase of the recording process accumulates the effects of journalized transactions in
the individual accounts.
5. Prepare a trial balance. A trial balance is a list of accounts and their balances at a
given time. The primary purpose of the trial balance is to prove the mathematical
equality of debits and credits after posting. A trial balance also uncovers errors in
journalizing and posting and is useful in preparing financial statements.
DECISION TOOLS REVIEW
GLOSSARY REVIEW
Account An individual accounting record of increases and decreases in specific asset,
liability, stockholders’ equity, revenue, or expense items.
Accounting information system The system of collecting and processing transaction data
and communicating financial information to decision‐makers.
Accounting transactions Events that require recording in the financial statements
because they affect assets, liabilities, or stockholders’ equity.
Chart of accounts A list of a company’s accounts.
Credit The right side of an account.
Debit The left side of an account.
Double‐entry system A system that records the two‐sided effect of each transaction in
appropriate accounts.
General journal The most basic form of journal.
General ledger A ledger that contains all asset, liability, stockholders’ equity, revenue, and
expense accounts.
Journal An accounting record in which transactions are initially recorded in chronological
order.
Journalizing The procedure of entering transaction data in the journal.
Ledger The group of accounts maintained by a company.
Posting The procedure of transferring journal entry amounts to the ledger accounts.
T‐account The basic form of an account.
Trial balance A list of accounts and their balances at a given time.
PRACTICE MULTIPLE‐CHOICE QUESTIONS
(LO 1)
1. The effects on the basic accounting equation of performing services for cash are to:
(a) increase assets and decrease stockholders’ equity.
(b) increase assets and increase stockholders’ equity.
(c) increase assets and increase liabilities.
(d) increase liabilities and increase stockholders’ equity.
(LO 1)
2. Genesis Company buys a $900 machine on credit. This transaction will affect the:
(a) income statement only.
(b) balance sheet only.
(c) income statement and retained earnings statement only.
(d) income statement, retained earnings statement, and balance sheet.
(LO 1)
3. Which of the following events is not recorded in the accounting records?
(a) Equipment is purchased on account.
(b) An employee is terminated.
(c) A cash investment is made into the business.
(d) Company pays dividend to stockholders.
(LO 1)
4. During 2017, Gibson Company assets decreased $50,000 and its liabilities decreased
$90,000. Its stockholders’ equity therefore:
(a) increased $40,000.
(b) decreased $140,000.
(c) decreased $40,000.
(d) increased $140,000.
(LO 2)
5. Which statement about an account is true?
(a) In its simplest form, an account consists of two parts.
(b) An account is an individual accounting record of increases and decreases in specific
asset, liability, and stockholders’ equity items.
(c) There are separate accounts for specific assets and liabilities but only one account for
stockholders’ equity items.
(d) The left side of an account is the credit, or decrease, side.
(LO 2)
6. Debits:
(a) increase both assets and liabilities.
(b) decrease both assets and liabilities.
(c) increase assets and decrease liabilities.
(d) decrease assets and increase liabilities.
(LO 2)
7. A revenue account:
(a) is increased by debits.
(b) is decreased by credits.
(c) has a normal balance of a debit.
(d) is increased by credits.
(LO 2)
8. Which accounts normally have debit balances?
(a) Assets, expenses, and revenues.
(b) Assets, expenses, and retained earnings.
(c) Assets, liabilities, and dividends.
(d) Assets, dividends, and expenses.
(LO 2)
9. Paying an account payable with cash affects the components of the accounting equation
in the following way:
(a) Decreases stockholders’ equity and decreases liabilities.
(b) Increases assets and decreases liabilities.
(c) Decreases assets and increases stockholders’ equity.
(d) Decreases assets and decreases liabilities.
(LO 3)
10. Which is not part of the recording process?
(a) Analyzing transactions.
(b) Preparing an income statement.
(c) Entering transactions in a journal.
(d) Posting journal entries.
(LO 3)
11. Which of these statements about a journal is false?
(a) It contains only revenue and expense accounts.
(b) It provides a chronological record of transactions.
(c) It helps to locate errors because the debit and credit amounts for each entry can be
readily compared.
(d) It discloses in one place the complete effect of a transaction.
(LO 4)
12. A ledger:
(a) contains only asset and liability accounts.
(b) should show accounts in alphabetical order.
(c) is a collection of the entire group of accounts maintained by a company.
(d) provides a chronological record of transactions.
(LO 4)
13. Posting:
(a) normally occurs before journalizing.
(b) transfers ledger transaction data to the journal.
(c) is an optional step in the recording process.
(d) transfers journal entries to ledger accounts.
(LO 5)
14. A trial balance:
(a) is a list of accounts with their balances at a given time.
(b) proves that proper account titles were used.
(c) will not balance if a correct journal entry is posted twice.
(d) proves that all transactions have been recorded.
(LO 5)
15. A trial balance will not balance if:
(a) a correct journal entry is posted twice.
(b) the purchase of supplies on account is debited to Supplies and credited to Cash.
(c) a $100 cash dividend is debited to Dividends for $1,000 and credited to Cash for
$100.
(d) a $450 payment on account is debited to Accounts Payable for $45 and credited to
Cash for $45.
SOLUTIONS
1. (b) When services are performed for cash, assets are increased and stockholders’
equity is increased. The other choices are therefore incorrect.
2. (b) When equipment is purchased on credit, assets are increased and liabilities are
increased. These are both balance sheet accounts. The other choices are incorrect
because neither the income statement nor the retained earnings statement is
affected.
3. (b) Termination of an employee is not a recordable event in the accounting records.
The other choices all represent events that are recorded.
4. (a) Since assets decreased by $50,000 and liabilities decreased by $90,000,
stockholders’ equity has to increase by $40,000 to keep the accounting equation
balanced. The other choices are therefore incorrect.
5. (b) An account is an individual accounting record of increases and decreases in
specific asset, liability, and stockholders’ equity items. The other choices are
incorrect because (a) in its simplest form, an account consists of three parts: a title
and debit and credit side; (c) there are specific accounts for different types of
stockholders’ equity, such as Common Stock, Retained Earnings, and Dividends; and
(d) the left side of an account is the debit side.
6. (c) Debits increase assets and decrease liabilities. The other choices are therefore
incorrect.
7. (d) Revenues are increased by credits. Revenues have a normal credit balance. The
other choices are therefore incorrect.
8. (d) Assets, dividends, and expenses have normal debit balances. The other choices
are incorrect because (a) revenues have a normal credit balance, (b) retained
earnings has a normal credit balance, and (c) liabilities have a normal credit balance.
9. (d) When paying an account payable with cash, the asset cash decreases. Accounts
payable, a liability, decreases as well. The other choices are therefore incorrect.
10. (b) Preparing an income statement is not part of the recording process. Choices (a)
analyzing transactions, (c) entering transactions in a journal, and (d) posting
transactions are all steps in the recording process.
11. (a) A journal contains entries affecting all accounts, not just revenue and expense
accounts. The other choices are true statements.
12. (c) A ledger is a collection of the entire group of accounts maintained by a company.
The other choices are therefore incorrect.
13. (d) Posting transfers journal entries to ledger accounts. The other choices are
incorrect because posting (a) occurs after journalizing, (b) transfers the information
contained in journal entries to the ledger, and (c) is a required step in the recording
process. If posting is not done, the ledger accounts will not reflect changes in the
accounts resulting from transactions.
14. (a) A trial balance is a list of accounts with their balances at a given time. The other
choices are incorrect because (b) it does not confirm that proper account titles were
used; (c) if a journal entry is posted twice, the trial balance will still balance; and (d)
a trial balance does not prove that all transactions have been recorded.
15. (c) The entry will cause the trial balance to be out of balance. The other choices are
incorrect because although these entries are incorrect, they will still allow the trial
balance to balance.
PRACTICE EXERCISES
Prepare a tabular presentation.
(LO 1)
1. Legal Services Inc. was incorporated on July 1, 2017. During the first month of
operations, the following transactions occurred.
1. Stockholders invested $10,000 in cash in exchange for common stock of Legal
Services Inc.
2. Paid $800 for July rent on office space.
3. Purchased office equipment on account $3,000.
4. Performed legal services for clients for cash $1,500.
5. Borrowed $700 cash from a bank on a note payable.
6. Performed legal services for client on account $2,000.
7. Paid monthly expenses: salaries $500, utilities $300, and advertising $100.
INSTRUCTIONS
Prepare a tabular summary of the transactions.
Journalize transactions.
(LO 3)
2. Presented below is information related to Conan Real Estate Agency.
Oct. 1 Arnold Conan begins business as a real estate agent with a cash investment of
$18,000 in exchange for common stock.
2 Hires an administrative assistant.
3 Purchases office equipment for $1,700, on account.
6 Sells a house and lot for B. Clinton; bills B. Clinton $4,200 for realty services
performed.
27 Pays $900 on the balance related to the transaction of October 3.
30 Pays the administrative assistant $2,800 in salary for October.
INSTRUCTIONS
Journalize the transactions. (You may omit explanations.)
PRACTICE PROBLEM
Journalize transactions, post, and prepare a trial balance.
(LO 3, 4, 5)
Bob Sample and other student investors opened Campus Carpet Cleaning, Inc. on
September 1, 2017. During the first month of operations, the following transactions
occurred.
Sept. 1 Stockholders invested $20,000 cash in the business.
2 Paid $1,000 cash for store rent for the month of September.
3 Purchased industrial carpet‐cleaning equipment for $25,000, paying $10,000 in
cash and signing a $15,000 6‐month, 12% note payable.
4 Paid $1,200 for 1‐year accident insurance policy.
10 Received bill from the Daily News for advertising the opening of the cleaning
service, $200.
15 Performed services on account for $6,200.
20 Paid a $700 cash dividend to stockholders.
30 Received $5,000 from customers billed on September 15.
The chart of accounts for the company is the same as for Sierra Corporation except for the
following additional account: Advertising Expense.
INSTRUCTIONS
(a) Journalize the September transactions.
(b) Open ledger accounts and post the September transactions.
(c) Prepare a trial balance at September 30, 2017.
WileyPLUS
Brief Exercises, DO IT! Exercises, Exercises, Problems, and many additional resources are
available for practice in WileyPLUS.
QUESTIONS
1. Describe the accounting information system.
2. Can a business enter into a transaction that affects only the left side of the basic
accounting equation? If so, give an example.
3. Are the following events recorded in the accounting records? Explain your answer
in each case.
(a) A major stockholder of the company dies.
(b) Supplies are purchased on account.
(c) An employee is fired.
(d) The company pays a cash dividend to its stockholders.
4.
Indicate how each business transaction affects the basic accounting equation.
(a) Paid cash for janitorial services.
(b) Purchased equipment for cash.
(c) Issued common stock to investors in exchange for cash.
(d) Paid an account payable in full.
5. Why is an account referred to as a T‐account?
6. The terms debit and credit mean “increase” and “decrease,” respectively. Do you
agree? Explain.
7. Barry Barack, a fellow student, contends that the double‐entry system means each
transaction must be recorded twice. Is Barry correct? Explain.
8. Misty Reno, a beginning accounting student, believes debit balances are favorable
and credit balances are unfavorable. Is Misty correct? Discuss.
9. State the rules of debit and credit as applied to (a) asset accounts, (b) liability
accounts, and (c) the Common Stock account.
10. What is the normal balance for each of these accounts?
(a) Accounts Receivable.
(b) Cash.
(c) Dividends.
(d) Accounts Payable.
(e) Service Revenue.
(f) Salaries and Wages Expense.
(g) Common Stock.
11. Indicate whether each account is an asset, a liability, or a stockholders’ equity
account, and whether it would have a normal debit or credit balance.
(a) Accounts Receivable.
(b) Accounts Payable.
(c) Equipment.
(d) Dividends.
(e) Supplies.
12. For the following transactions, indicate the account debited and the account
credited.
(a) Supplies are purchased on account.
(b) Cash is received on signing a note payable.
(c) Employees are paid salaries in cash.
13. For each account listed here, indicate whether it generally will have debit entries
only, credit entries only, or both debit and credit entries.
(a) Cash.
(b) Accounts Receivable.
(c) Dividends.
(d) Accounts Payable.
(e) Salaries and Wages Expense.
(f) Service Revenue.
14. What are the normal balances for the following accounts of Apple? (a) Accounts
Receivable, (b) Accounts Payable, (c) Sales, and (d) Selling, General, and
Administrative Expenses.
15. What are the basic steps in the recording process?
16. (a) When entering a transaction in the journal, should the debit or credit be
written first?
(b) Which should be indented, the debit or the credit?
17. (a) Should accounting transaction debits and credits be recorded directly in the
ledger accounts?
(b) What are the advantages of first recording transactions in the journal and
then posting to the ledger?
18. Journalize these accounting transactions.
(a) Stockholders invested $12,000 in the business in exchange for common stock.
(b) Insurance of $800 is paid for the year.
(c) Supplies of $1,800 are purchased on account.
(d) Cash of $7,500 is received for services rendered.
19. (a) What is a ledger?
(b) Why is a chart of accounts important?
20. What is a trial balance and what are its purposes?
21. Brad Tyler is confused about how accounting information flows through the
accounting system. He believes information flows in this order:
(a) Debits and credits are posted to the ledger.
(b) Accounting transaction occurs.
(c) Information is entered in the journal.
(d) Financial statements are prepared.
(e) Trial balance is prepared.
Indicate to Brad the proper flow of the information.
22.
Two students are discussing the use of a trial balance. They wonder whether
the following errors, each considered separately, would prevent the trial balance
from balancing. What would you tell them?
(a) The bookkeeper debited Cash for $600 and credited Salaries and Wages
Expense for $600 for payment of wages.
(b) Cash collected on account was debited to Cash for $800, and Service Revenue
was credited for $80.
BRIEF EXERCISES
Determine effect of transactions on basic accounting equation.
(LO 1), C
BE3-1 Presented below are three economic events. On a sheet of paper, list the letters
(a), (b), and (c) with columns for assets, liabilities, and stockholders’ equity. In each
column, indicate whether the event increased (+)(+), decreased (−)(−), or had no effect
(NE) on assets, liabilities, and stockholders’ equity.
(a) Purchased supplies on account.
(b) Received cash for performing a service.
(c) Expenses paid in cash.
Determine effect of transactions on basic accounting equation.
(LO 1), AP
BE3-2 During 2017, Manion Corp. entered into the following transactions.
1. Borrowed $60,000 by issuing bonds.
2. Paid $9,000 cash dividend to stockholders.
3. Received $13,000 cash from a previously billed customer for services performed.
4. Purchased supplies on account for $3,100.
Using the following tabular analysis, show the effect of each transaction on the
accounting equation. Put explanations for changes to Stockholders’ Equity in the right‐
hand margin. For Retained Earnings, use separate columns for Revenues, Expenses, and
Dividends if necessary. Use Illustration 3-3 (page 99) as a model.
Determine effect of transactions on basic accounting equation.
(LO 1), AP
BE3-3 During 2017, Rostock Company entered into the following transactions.
1. Purchased equipment for $286,176 cash.
2. Issued common stock to investors for $137,590 cash.
3. Purchased inventory of $68,480 on account.
Using the following tabular analysis, show the effect of each transaction on the
accounting equation. Put explanations for changes to Stockholders’ Equity in the right‐
hand margin. For Retained Earnings, use separate columns for Revenues, Expenses, and
Dividends if necessary. Use Illustration 3-3 (page 99) as a model.
Indicate debit and credit effects.
(LO 2), K
BE3-4 For each of the following accounts, indicate the effect of a debit or a credit on the
account and the normal balance.
(a) Accounts Payable.
(b) Advertising Expense.
(c) Service Revenue.
(d) Accounts Receivable.
(e) Retained Earnings.
(f) Dividends.
Identify accounts to be debited and credited.
(LO 2), C
BE3-5 Transactions for Jayne Company for the month of June are presented below.
Identify the accounts to be debited and credited for each transaction.
June 1 Issues common stock to investors in exchange for $5,000 cash.
2 Buys equipment on account for $1,100.
3 Pays $740 to landlord for June rent.
12 Sends Wil Wheaton a bill for $700 after completing welding work.
Journalize transactions.
(LO 3), AP
BE3-6 Use the data in BE3-5 and journalize the transactions. (You may omit
explanations.)
Identify steps in the recording process.
(LO 3), C
BE3-7 Rae Mohlee, a fellow student, is unclear about the basic steps in the recording
process. Identify and briefly explain the steps in the order in which they occur.
Indicate basic debit–credit analysis.
(LO 3), C
BE3-8 Tilton Corporation has the following transactions during August of the current
year. Indicate (a) the basic analysis and (b) the debit–credit analysis illustrated on pages
111–116.
Aug. 1 Issues shares of common stock to investors in exchange for $10,000.
4 Pays insurance in advance for 3 months, $1,500.
16 Receives $900 from clients for services rendered.
27 Pays the secretary $620 salary.
Journalize transactions.
(LO 3), AP
BE3-9 Use the data in BE3-8 and journalize the transactions. (You may omit
explanations.)
Post journal entries to T‐accounts.
(LO 4), AP
BE3-10 Selected transactions for Montes Company are presented below in journal form
(without explanations). Post the transactions to T‐accounts.
Prepare a trial balance.
(LO 5), AP
BE3-11 From the ledger balances below, prepare a trial balance for Peete Company at
June 30, 2017. All account balances are normal.
Accounts Payable
$ 1,000
Cash
5,400
Common Stock
18,000
Dividends
1,200
Equipment
13,000
Service Revenue
$8,600
Accounts Receivable
3,000
Salaries and Wages Expense 4,000
Rent Expense
1,000
Prepare a corrected trial balance.
(LO 5), AN
BE3-12 An inexperienced bookkeeper prepared the following trial balance that does not
balance. Prepare a correct trial balance, assuming all account balances are normal.
DO IT! EXERCISES
Prepare tabular analysis.
(LO 1), AP
DO IT! 3-1 Transactions made by Mickelson Co. for the month of March are shown below.
Prepare a tabular analysis that shows the effects of these transactions on the expanded
accounting equation, similar to that shown in Illustration 3-3 (page 99).
1. The company performed $20,000 of services for customers on account.
2. The company received $20,000 in cash from customers who had been billed for
services [in transaction (1)].
3. The company received a bill for $1,800 of advertising but will not pay it until a later
date.
4. Mickelson Co. paid a cash dividend of $3,000.
Identify normal balances.
(LO 2), C
DO IT! 3-2 Boyd Docker has just rented space in a strip mall. In this space, he will open a
photography studio, to be called SnapShot! A friend has advised Boyd to set up a double‐
entry set of accounting records in which to record all of his business transactions.
Identify the balance sheet accounts that Boyd will likely need to record the transactions
needed to open his business (a corporation). Indicate whether the normal balance of each
account is a debit or credit.
Record business activities.
(LO 3), AP
DO IT! 3-3 Boyd Docker engaged in the following activities in establishing his photography
studio, SnapShot!:
1. Opened a bank account in the name of SnapShot! and deposited $8,000 of his own
money into this account in exchange for common stock.
2. Purchased photography supplies at a total cost of $950. The business paid $400 in
cash, and the balance is on account.
3. Obtained estimates on the cost of photography equipment from three different
manufacturers.
Prepare the journal entries to record the transactions.
Post transactions.
(LO 4), AP
DO IT! 3-4 Boyd Docker recorded the following transactions during the month of April.
Apr. 3 Cash
3,400
Service Revenue
16 Rent Expense
3,400
500
Cash
500
20 Salaries and Wages Expense 300
Cash
300
Post these entries to the Cash account of the general ledger to determine the ending
balance in cash. The beginning balance in cash on April 1 was $1,900.
Prepare a trial balance.
(LO 5), AP
DO IT! 3-5 The following accounts are taken from the ledger of Chillin’ Company at
December 31, 2017.
Notes Payable
$20,000 Cash
$6,000
Common Stock
25,000 Supplies
5,000
Equipment
76,000 Rent Expense
2,000
Dividends
8,000
Salaries and Wages Payable 3,000
Salaries and Wages Expense 38,000 Accounts Payable
9,000
Service Revenue
8,000
86,000 Accounts Receivable
Prepare a trial balance in good form.
EXERCISES
Analyze the effect of transactions.
(LO 1), C
E3-1 Selected transactions for Thyme Advertising Company, Inc. are listed here.
1. Issued common stock to investors in exchange for cash received from investors.
2. Paid monthly rent.
3. Received cash from customers when service was performed.
4. Billed customers for services performed.
5. Paid dividend to stockholders.
6. Incurred advertising expense on account.
7. Received cash from customers billed in (4).
8. Purchased additional equipment for cash.
9. Purchased equipment on account.
Instructions
Describe the effect of each transaction on assets, liabilities, and stockholders’ equity. For
example, the first answer is (1) Increase in assets and increase in stockholders’ equity.
Analyze the effect of transactions on assets, liabilities, and stockholders’ equity.
(LO 1), AP
E3-2 Brady Company entered into these transactions during May 2017, its first month of
operations.
1. Stockholders invested $40,000 in the business in exchange for common stock of the
company.
2. Purchased computers for office use for $30,000 from Ladd on account.
3. Paid $4,000 cash for May rent on storage space.
4. Performed computer services worth $19,000 on account.
5. Performed computer services for Wharton Construction Company for $5,000 cash.
6. Paid Western States Power Co. $8,000 cash for energy usage in May.
7. Paid Ladd for the computers purchased in (2).
8. Incurred advertising expense for May of $1,300 on account.
9. Received $12,000 cash from customers for contracts billed in (4).
Instructions
Using the following tabular analysis, show the effect of each transaction on the
accounting equation. Put explanations for changes to Stockholders’ Equity in the right‐
hand margin. Use Illustration 3-3 (page 99) as a model.
Determine effect of transactions on basic accounting equation.
(LO 1), AP
E3-3 During 2017, its first year of operations as a delivery service, Persimmon Corp.
entered into the following transactions.
1. Issued shares of common stock to investors in exchange for $100,000 in cash.
2. Borrowed $45,000 by issuing bonds.
3. Purchased delivery trucks for $60,000 cash.
4. Received $16,000 from customers for services performed.
5. Purchased supplies for $4,700 on account.
6. Paid rent of $5,200.
7. Performed services on account for $10,000.
8. Paid salaries of $28,000.
9. Paid a dividend of $11,000 to shareholders.
Instructions
Using the following tabular analysis, show the effect of each transaction on the
accounting equation. Put explanations for changes to Stockholders’ Equity in the right‐
hand margin. Use Illustration 3-3 (page 99) as a model.
Analyze transactions and compute net income.
(LO 1), AP
E3-4 A tabular analysis of the transactions made during August 2017 by Wolfe Company
during its first month of operations is shown below. Each increase and decrease in
stockholders’ equity is explained.
Instructions
(a) Describe each transaction.
(b) Determine how much stockholders’ equity increased for the month.
(c) Compute the net income for the month.
Prepare an income statement, retained earnings statement, and balance sheet.
(LO 2), AP
E3-5 The tabular analysis of transactions for Wolfe Company is presented in E3-4.
Instructions
Prepare an income statement and a retained earnings statement for August and a
classified balance sheet at August 31, 2017.
Identify normal account balance and corresponding financial statement.
(LO 2), K
E3-6 The following accounts, in alphabetical order, were selected from recent financial
statements of Krispy Kreme Doughnuts, Inc.
Accounts Payable
Interest Income
Accounts Receivable Inventories
Common Stock
Prepaid Expenses
Depreciation Expense Property and Equipment
Interest Expense
Revenues
Instructions
For each account, indicate (a) whether the normal balance is a debit or a credit, and (b)
the financial statement—balance sheet or income statement—where the account should
be presented.
Identify debits, credits, and normal balances and journalize transactions.
(LO 2, 3), AP
E3-7 Selected transactions for Front Room, an interior decorator corporation, in its first
month of business, are as follows.
1. Issued stock to investors for $15,000 in cash.
2. Purchased used car for $10,000 cash for use in business.
3. Purchased supplies on account for $300.
4. Billed customers $3,700 for services performed.
5. Paid $200 cash for advertising at the start of the business.
6. Received $1,100 cash from customers billed in transaction (4).
7. Paid creditor $300 cash on account.
8. Paid dividends of $400 cash to stockholders.
Instructions
(a) For each transaction indicate (a) the basic type of account debited and credited
(asset, liability, stockholders’ equity); (b) the specific account debited and credited
(Cash, Rent Expense, Service Revenue, etc.); (c) whether the specific account is
increased or decreased; and (d) the normal balance of the specific account. Use the
following format, in which transaction (1) is given as an example.
(b) Journalize the transactions. Do not provide explanations.
Analyze transactions and determine their effect on accounts.
(LO 2), C
E3-8 This information relates to McCall Real Estate Agency.
Oct. 1 Stockholders invest $30,000 in exchange for common stock of the corporation.
2 Hires an administrative assistant at an annual salary of $36,000.
3 Buys office furniture for $3,800, on account.
6 Sells a house and lot for E.C. Roads; commissions due from Roads, $10,800 (not
paid by Roads at this time).
10 Receives cash of $140 as commission for acting as rental agent renting an
apartment.
27 Pays $700 on account for the office furniture purchased on October 3.
30 Pays the administrative assistant $3,000 in salary for October.
Instructions
Prepare the debit–credit analysis for each transaction, as illustrated on pages 111–116.
Journalize transactions.
(LO 3), AP
E3-9 Transaction data for McCall Real Estate Agency are presented in E3-8.
Instructions
Journalize the transactions. Do not provide explanations.
Journalize a series of transactions.
(LO 3), AP
E3-10 The May transactions of Chulak Corporation were as follows.
May 4 Paid $700 due for supplies previously purchased on account.
7 Performed advisory services on account for $6,800.
8 Purchased supplies for $850 on account.
9 Purchased equipment for $1,000 in cash.
17 Paid employees $530 in cash.
22 Received bill for equipment repairs of $900.
29 Paid $1,200 for 12 months of insurance policy. Coverage begins June 1.
Instructions
Journalize the transactions. Do not provide explanations.
Journalize a series of transactions.
(LO 3), AP
E3-11 Selected transactions for Sophie’s Dog Care are as follows during the month of
March.
March 1 Paid monthly rent of $1,200.
3 Performed services for $140 on account.
5 Performed services for cash of $75.
8 Purchased equipment for $600. The company paid cash of $80 and the balance
was on account.
12 Received cash from customers billed on March 3.
14 Paid wages to employees of $525.
22 Paid utilities of $72.
24 Borrowed $1,500 from Grafton State Bank by signing a note.
27 Paid $220 to repair service for plumbing repairs.
28 Paid balance amount owed from equipment purchase on March 8.
30 Paid $1,800 for six months of insurance.
Instructions
Journalize the transactions. Do not provide explanations.
Record journal entries.
(LO 3), AP
E3-12 On April 1, Adventures Travel Agency, Inc. began operations. The following
transactions were completed during the month.
1. Issued common stock for $24,000 cash.
2. Obtained a bank loan for $7,000 by issuing a note payable.
3. Paid $11,000 cash to buy equipment.
4. Paid $1,200 cash for April office rent.
5. Paid $1,450 for supplies.
6. Purchased $600 of advertising in the Daily Herald, on account.
7. Performed services for $18,000: cash of $2,000 was received from customers, and
the balance of $16,000 was billed to customers on account.
8. Paid $400 cash dividend to stockholders.
9. Paid the utility bill for the month, $2,000.
10. Paid Daily Herald the amount due in transaction (6).
11. Paid $40 of interest on the bank loan obtained in transaction (2).
12. Paid employees’ salaries, $6,400.
13. Received $12,000 cash from customers billed in transaction (7).
14. Paid income tax, $1,500.
Instructions
Journalize the transactions. Do not provide explanations.
Post journal entries and prepare a trial balance.
(LO 4, 5), AP
E3-13 Transaction data and journal entries for McCall Real Estate Agency are presented
in E3-8 and E3-9.
Instructions
(a) Post the transactions to T‐accounts.
(b) Prepare a trial balance at October 31, 2017.
Analyze transactions, prepare journal entries, and post transactions to T‐accounts.
(LO 1, 3, 4), AP
E3-14 Selected transactions for Therow Corporation during its first month in business
are presented below.
Sept. 1 Issued common stock in exchange for $20,000 cash received from investors.
5 Purchased equipment for $9,000, paying $3,000 in cash and the balance on
account.
8 Performed services on account for $18,000.
14 Paid salaries of $1,200.
25 Paid $4,000 cash on balance owed for equipment.
30 Paid $500 cash dividend.
Therow’s chart of accounts shows Cash, Accounts Receivable, Equipment, Accounts
Payable, Common Stock, Dividends, Service Revenue, and Salaries and Wages Expense.
Instructions
(a) Prepare a tabular analysis of the September transactions. The column headings
should be Cash+Accounts Receivable+Equipment=Accounts Payable+Common
Stock+Revenues−Expenses−DividendsCash+Accounts
Receivable+Equipment=Accounts Payable+Common
Stock+Revenues−Expenses−Dividends. For transactions affecting stockholders’
equity, provide explanations in the right margin, as shown on Illustration 3-3 on page
99.
(b) Journalize the transactions. Do not provide explanations.
(c) Post the transactions to T‐accounts.
Journalize transactions from T‐accounts and prepare a trial balance.
(LO 3, 5), AN
E3-15 The T‐accounts below summarize the ledger of Salvador’s Gardening Company,
Inc. at the end of the first month of operations.
Instructions
(a) Prepare the journal entries (including explanations) that resulted in the amounts
posted to the accounts. Present them in the order they occurred.
(b) Prepare a trial balance at April 30, 2017. (Hint: Compute ending balances of T‐
accounts first.)
Post journal entries and prepare a trial balance.
(LO 4, 5), AP
E3-16 Selected transactions from the journal of Baylee Inc. during its first month of
operations are presented here.
Instructions
(a) Post the transactions to T‐accounts.
(b) Prepare a trial balance at August 31, 2017.
Journalize transactions from T‐accounts and prepare a trial balance.
(LO 3, 5), AN
E3-17 Here is the ledger for Kriscoe Co.
Instructions
(a) Reproduce the journal entries for only the transactions that occurred on October 1,
10, and 20, and provide explanations for each.
(b) Prepare a trial balance at October 31, 2017. (Hint: Compute ending balances of T‐
accounts first.)
Journalize transactions, post transactions to T‐accounts, and prepare trial balance.
(LO 3, 4, 5), AP
E3-18 Beyers Corporation provides security services. Selected transactions for Beyers
are presented below.
Oct. 1 Issued common stock in exchange for $66,000 cash from investors.
2 Hired part‐time security consultant. Salary will be $2,000 per month. First day of
work will be October 15.
4 Paid 1 month of rent for building for $2,000.
7 Purchased equipment for $18,000, paying $4,000 cash and the balance on account.
8 Paid $500 for advertising.
10 Received bill for equipment repair cost of $390.
12 Provided security services for event for $3,200 on account.
16 Purchased supplies for $410 on account.
21 Paid balance due from October 7 purchase of equipment.
24 Received and paid utility bill for $148.
27 Received payment from customer for October 12 services performed.
31 Paid employee salaries and wages of $5,100.
Instructions
(a) Journalize the transactions. Do not provide explanations.
(b) Post the transactions to T‐accounts.
(c) Prepare a trial balance at October 31, 2017. (Hint: Compute ending balances of T‐
accounts first.)
Analyze errors and their effects on trial balance.
(LO 5), AN
E3-19 The bookkeeper for Birmingham Corporation made these errors in journalizing
and posting.
1. A credit posting of $400 to Accounts Receivable was omitted.
2. A debit posting of $750 for Prepaid Insurance was debited to Insurance Expense.
3. A collection on account of $100 was journalized and posted as a debit to Cash $100
and a credit to Accounts Payable $100.
4. A credit posting of $300 to Income Taxes Payable was made twice.
5. A cash purchase of supplies for $250 was journalized and posted as a debit to
Supplies $25 and a credit to Cash $25.
6. A debit of $395 to Advertising Expense was posted as $359.
Instructions
For each error, indicate (a) whether the trial balance will balance; if the trial balance will
not balance, indicate (b) the amount of the difference and (c) the trial balance column
that will have the larger total. Consider each error separately. Use the following form, in
which error 1 is given as an example.
Prepare a trial balance and financial statements.
(LO 5), AP
E3-20 The accounts in the ledger of Rapid Delivery Service contain the following
balances on July 31, 2017.
Accounts Receivable
$13,400
Accounts Payable
8,400
Cash
?
Equipment
59,360
Maintenance and Repairs Expense 1,958
Insurance Expense
900
Notes Payable (due 2020)
28,450
Prepaid Insurance
$ 2,200
Service Revenue
15,500
Dividends
700
Common Stock
40,000
Salaries and Wages Expense
7,428
Salaries and Wages Payable
820
Retained Earnings (July 1, 2017) 5,200
Instructions
(a) Prepare a trial balance with the accounts arranged as illustrated in the chapter, and
fill in the missing amount for Cash.
(b) Prepare an income statement, a retained earnings statement, and a classified
balance sheet for the month of July 2017.
Classify transactions as cash‐flow activities.
(LO 5), AP
E3-21 Review the transactions listed in E3-1 for Thyme Advertising Company. Classify
each transaction as either an operating activity, investing activity, or financing activity,
or if no cash is exchanged, as a noncash event.
Classify transactions as cash‐flow activities.
(LO 5), AP
E3-22 Review the transactions listed in E3-3 for Persimmon Corp. Classify each
transaction as either an operating activity, investing activity, or financing activity, or if
no cash is exchanged, as a noncash event.
EXERCISES: SET B AND CHALLENGE EXERCISES
Visit the book’s companion website, at www.wiley.com/college/kimmel, and choose the
Student Companion site to access Exercises: Set B and Challenge Exercises.
PROBLEMS: SET A
Analyze transactions and compute net income.
(LO 1), AP
P3-1A On April 1, Wonder Travel Agency Inc. was established. These transactions were
completed during the month.
1. Stockholders invested $30,000 cash in the company in exchange for common stock.
2. Paid $900 cash for April office rent.
3. Purchased office equipment for $3,400 cash.
4. Purchased $200 of advertising in the Chicago Tribune, on account.
5. Paid $500 cash for office supplies.
6. Performed services worth $12,000. Cash of $3,000 is received from customers, and
the balance of $9,000 is billed to customers on account.
7. Paid $400 cash dividend.
8. Paid Chicago Tribune amount due in transaction (4).
9. Paid employees’ salaries $1,800.
10. Received $9,000 in cash from customers billed previously in transaction (6).
Instructions
Cash
$34,800
Total assets $38,700
(a) Prepare a tabular analysis of the transactions using these column headings: Cash,
Accounts Receivable, Supplies, Equipment, Accounts Payable, Common Stock, and
Retained Earnings (with separate columns for Revenues, Expenses, and Dividends).
Include margin explanations for any changes in Retained Earnings.
(b) From an analysis of the Retained Earnings columns, compute the net income or net
loss for April.
Analyze transactions and prepare financial statements.
(LO 1, 2), AP
P3-2A Nona Curry started her own consulting firm, Curry Consulting Inc., on May 1,
2017. The following transactions occurred during the month of May.
May 1 Stockholders invested $15,000 cash in the business in exchange for common
stock.
2 Paid $600 for office rent for the month.
3 Purchased $500 of supplies on account.
5 Paid $150 to advertise in the County News.
9 Received $1,400 cash for services performed.
12 Paid $200 cash dividend.
15 Performed $4,200 of services on account.
17 Paid $2,500 for employee salaries.
20 Paid for the supplies purchased on account on May 3.
23 Received a cash payment of $1,200 for services performed on account on May 15.
26 Borrowed $5,000 from the bank on a note payable.
29 Purchased office equipment for $2,000 paying $200 in cash and the balance on
account.
30 Paid $180 for utilities.
Instructions
(a) Show the effects of the previous transactions on the accounting equation using the
following format. Assume the note payable is to be repaid within the year.
Include margin explanations for any changes in Retained Earnings.
(a) Cash
$18,270
Total assets
$23,770
(b) Net income $2,170
(b) Prepare an income statement for the month of May 2017.
(c) Prepare a classified balance sheet at May 31, 2017.
Analyze transactions and prepare an income statement, retained earnings statement, and
balance sheet.
(LO 1, 2), AP
P3-3A Bindy Crawford created a corporation providing legal services, Bindy Crawford
Inc., on July 1, 2017. On July 31 the balance sheet showed Cash $4,000, Accounts
Receivable $2,500, Supplies $500, Equipment $5,000, Accounts Payable $4,200,
Common Stock $6,200, and Retained Earnings $1,600. During August, the following
transactions occurred.
Aug. 1 Collected $1,100 of accounts receivable due from customers.
4 Paid $2,700 cash for accounts payable due.
9 Performed services worth $5,400, of which $3,600 is collected in cash and the
balance is due in September.
15 Purchased additional office equipment for $4,000, paying $700 in cash and the
balance on account.
19 Paid salaries $1,400, rent for August $700, and advertising expenses $350.
23 Paid a cash dividend of $700.
26 Borrowed $5,000 from American Federal Bank; the money was borrowed on a 4‐
month note payable.
31 Incurred utility expenses for the month on account $380.
Instructions
(a) Cash
$7,150
(b) Net income $2,570
Ret. earnings $3,470
(a) Prepare a tabular analysis of the August transactions beginning with July 31
balances. The column heading should be Cash+Accounts
Receivable+Supplies+Equipment=Notes Payable+Accounts Payable+Common
Stock+Retained Earnings+Revenues−Expenses−DividendsCash+Accounts
Receivable+Supplies+Equipment=Notes Payable+Accounts Payable+Common
Stock+Retained Earnings+Revenues−Expenses−Dividends. Include margin
explanations for any changes in Retained Earnings.
(b) Prepare an income statement for August, a retained earnings statement for August,
and a classified balance sheet at August 31.
Journalize a series of transactions.
(LO 3), AP
P3-4A Bradley’s Miniature Golf and Driving Range Inc. was opened on March 1 by Bob
Dean. These selected events and transactions occurred during March.
Mar. 1 Stockholders invested $50,000 cash in the business in exchange for common
stock of the corporation.
3 Purchased Snead’s Golf Land for $38,000 cash. The price consists of land $23,000,
building $9,000, and equipment $6,000. (Record this in a single entry.)
5 Advertised the opening of the driving range and miniature golf course, paying
advertising expenses of $1,200 cash.
6 Paid cash $2,400 for a 1‐year insurance policy.
10 Purchased golf clubs and other equipment for $5,500 from Tahoe Company,
payable in 30 days.
18 Received golf fees of $1,600 in cash from customers for golf services performed.
19 Sold 100 coupon books for $25 each in cash. Each book contains 10 coupons that
enable the holder to play one round of miniature golf or to hit one bucket of golf
balls. (Hint: The revenue should not be recognized until the customers use the
coupons.)
25 Paid a $500 cash dividend.
30 Paid salaries of $800.
30 Paid Tahoe Company in full for equipment purchased on March 10.
31 Received $900 in cash from customers for golf services performed.
The company uses these accounts: Cash, Prepaid Insurance, Land, Buildings,
Equipment, Accounts Payable, Unearned Service Revenue, Common Stock, Retained
Earnings, Dividends, Service Revenue, Advertising Expense, and Salaries and Wages
Expense.
Instructions
Journalize the March transactions, including explanations. Bradley’s records golf fees as
service revenue.
Journalize transactions, post, and prepare a trial balance.
(LO 3, 4, 5), AP
P3-5A Ayala Architects incorporated as licensed architects on April 1, 2017. During the
first month of the operation of the business, these events and transactions occurred:
Apr. 1 Stockholders invested $18,000 cash in exchange for common stock of the
corporation.
1 Hired a secretary‐receptionist at a salary of $375 per week, payable monthly.
2 Paid office rent for the month $900.
3 Purchased architectural supplies on account from Burmingham Company $1,300.
10 Completed blueprints on a carport and billed client $1,900 for services.
11 Received $700 cash advance from M. Jason to design a new home.
20 Received $2,800 cash for services completed and delivered to S. Melvin.
30 Paid secretary‐receptionist for the month $1,500.
30 Paid $300 to Burmingham Company for accounts payable due.
The company uses these accounts: Cash, Accounts Receivable, Supplies, Accounts
Payable, Unearned Service Revenue, Common Stock, Service Revenue, Salaries and
Wages Expense, and Rent Expense.
Instructions
(a) Journalize the transactions, including explanations.
(b) Post to the ledger T‐accounts.
(c) Prepare a trial balance on April 30, 2017.
(a) Cash
$18,800
Tot. trial balance $24,400
Journalize transactions, post, and prepare a trial balance.
(LO 3, 4, 5), AP
P3-6A This is the trial balance of Lacey Company on September 30.
The October transactions were as follows.
Oct. 5 Received $1,300 in cash from customers for accounts receivable due.
10 Billed customers for services performed $5,100.
15 Paid employee salaries $1,200.
17 Performed $600 of services in exchange for cash.
20 Paid $1,900 to creditors for accounts payable due.
29 Paid a $300 cash dividend.
31 Paid utilities $400.
Instructions
(a) Prepare a general ledger using T‐accounts. Enter the opening balances in the ledger
accounts as of October 1. Provision should be made for these additional accounts:
Dividends, Service Revenue, Salaries and Wages Expense, and Utilities Expense.
(Hint: The October 1 beginning amounts are the September 30 balances in the trial
balance above.)
(b) Journalize the transactions, including explanations.
(c) Post to the ledger accounts.
(d) Prepare a trial balance on October 31, 2017.
(a) Cash
$17,300
Tot. trial balance $35,700
Prepare a correct trial balance.
(LO 5), AN
P3-7A This trial balance of Washburn Co. does not balance.
Each of the listed accounts has a normal balance per the general ledger. An examination
of the ledger and journal reveals the following errors:
1. Cash received from a customer on account was debited for $780, and Accounts
Receivable was credited for the same amount. The actual collection was for $870.
2. The purchase of a printer on account for $340 was recorded as a debit to Supplies
for $340 and a credit to Accounts Payable for $340.
3. Services were performed on account for a client for $900. Accounts Receivable was
debited for $90 and Service Revenue was credited for $900.
4. A debit posting to Salaries and Wages Expense of $700 was omitted.
5. A payment on account for $206 was credited to Cash for $206 and credited to
Accounts Payable for $260.
6. Payment of a $600 cash dividend to Washburn’s stockholders was debited to
Salaries and Wages Expense for $600 and credited to Cash for $600.
Instructions
Prepare the correct trial balance. (Hint: All accounts have normal balances.)
Tot. trial balance $16,900
Journalize transactions, post, and prepare a trial balance.
(LO 3, 4, 5), AP
P3-8A The Triquel Theater Inc. was recently formed. It began operations in March 2017.
The Triquel is unique in that it will show only triple features of sequential theme movies.
On March 1, the ledger of The Triquel showed Cash $16,000, Land $38,000, Buildings
(concession stand, projection room, ticket booth, and screen) $22,000, Equipment
$16,000, Accounts Payable $12,000, and Common Stock $80,000. During the month of
March, the following events and transactions occurred.
Mar. 2 Rented the first three Star Wars movies (Star Wars®, The Empire Strikes Back,
and The Return of the Jedi) to be shown for the first three weeks of March. The
film rental was $10,000; $2,000 was paid in cash and $8,000 will be paid on
March 10.
3 Ordered the first three Star Trek movies to be shown the last 10 days of March. It
will cost $500 per night.
9 Received $9,900 cash from admissions.
10 Paid balance due on Star Wars movies’ rental and $2,900 on March 1 accounts
payable.
11 The Triquel Theater contracted with R. Lazlo to operate the concession stand.
Lazlo agrees to pay The Triquel 15% of gross receipts, payable monthly, for the
rental of the concession stand.
12 Paid advertising expenses $500.
20 Received $8,300 cash from customers for admissions.
20 Received the Star Trek movies and paid rental fee of $5,000.
31 Paid …
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