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The effects of business transactions are recorded in accounting records called journals and ledgers. Transactions are recorded first in a journal, and the data is later transferred to the ledger. A ledger account lists all of the increases and decreases in a particular financial statement account.
The effects of business transactions are recorded in accounting records called journals and ledgers. Transactions are recorded first in a journal, and the data is later transferred to the ledger. A ledger account lists all of the increases and decreases in a particular financial statement account.
The effects of business transactions are recorded in accounting records called journals and ledgers. Transactions are recorded first in a journal, and the data is later transferred to the ledger. A ledger account lists all of the increases and decreases in a particular financial statement account.
HIGHLIGHTS OF THE CHAPTER 1. The effects of business transactions are recorded in accounting records called journals and ledgers. The recorded data then are used to prepare financial statements and other accounting reports at periodic intervals. 2. Transactions are recorded first in a journal, and the data is later transferred to the ledger. We can best illustrate the nature of these accounting records if we discuss the ledger first. 3. A ledger account may be viewed as the smallest unit of storage in an accounting system. n a manual system, each ledger account is represented by a separate page in a binder. n a computeri!ed system, of course, each unit of storage is maintained electronically using general ledger software. "ut each general ledger account can still be viewed separately. #. $ach ledger account lists all of the increases and decreases in a particular financial statement account, and also indicates the account%s current &balance.' (. n its simplest form a ledger account may be viewed as having two sides. The left side of the account is called the debit side) the right side is called the credit side. *. nformation entered on the left side of a ledger account are called debit entries. nformation entered on the right side of a ledger account are called credit entries. +. ,or all asset accounts, increases are recorded by debit entries, and decreases are recorded by credit entries. -. ,or all liability accounts and owners' equity accounts, increases are recorded by credits, and decreases are recorded by debits. .. The debit and credit rules for recording revenue and e/penses are based upon the changes they cause in owners0 e1uity. 2evenue increases owners0 e1uity) therefore, revenue is recorded by credit entries. $/penses decrease owners0 e1uity and are recorded debits. 13. The double4entry system of accounting re1uires that equal dollar amounts of debits and credits be recorded for every transaction. 11. 5irtually every business maintains a journal as a record of &original' entry. A journal is a chronological listing of all transactions in the order they occur. 12. The journal shows all information about each transaction6 7a8 the date of the transaction, 7b8 the accounts debited and credited, and 7c8 a brief e/planation of the transaction. 13. After a transaction has first been recorded in the journal, each debit and credit is later transferred to the appropriate ledger accounts. This transfer is called posting. 1#. Two things can cause changes in owners0 e1uity6 7a8 owner investments and dividends, and 7b8 profits or losses resulting from the operation of the business. 1(. 9rofits increase owners0 e1uity, and may either be distributed to the owners or reinvested in the business to help finance e/pansion and growth. :osses, however, reduce owners0 e1uity, ma;ing the owners worse off, economically. 1*. Net income is the term most often used to describe increases in owners0 e1uity resulting from profitable operations. Net loss is the term used to describe decreases in owners0 e1uity resulting from unprofitable operations. 2* 1+. <et income is computed by deducting expenses incurred during the accounting period from revenue earned during the period. <et income for each accounting period is reported in a financial statement called an income statement. 1-. An income statement covers a span of time, whereas a balance sheet shows a company%s financial position at one particular date. The need to relate net income to a period of time is called the time period principle. 1.. Revenue is the price charged to customers for goods sold and services rendered during the accounting period. 2evenue is not necessarily &cash' flowing into a business. 2ather, it is the amount &earned' during the period. 2ecogni!ing revenue as it is &earned' illustrates the realization principle. =ash received from customers may be received by a business before revenue is earned, after revenue is earned, or at the same time that revenue is earned. 23. Expenses are the cost of goods and services incurred in the effort to generate revenue. $/penses are typically recorded as &resources' are used up, regardless of when payment for the resources is made. Thus, cash may be paid before resources are used up, after resources are used up, or at the same time that resources are used up. 21. An income statement shows the revenue earned during the period and the e/penses incurred during the period in generating that revenue. This policy of offsetting revenue with related e/penses is called the matching principle. 22. "usinesses often purchase assets that will be &used up' over two or more accounting periods. The matching principle re1uires that an effort be made to allocate an appropriate portion of the asset%s cost as an e/pense in each period that the asset helps the business to earn revenue. 23. At the end of the accounting period, when all entries in the journal have been posted to the ledger, the debit or credit balance of each account is computed. These balances are listed in a trial balance. 2#. The trial balance is a two4column schedule listing all of the accounts in the order they appear in the ledger. >ebit account balances are shown in the left column and credit account balances are shown in the right column. ?ince the total of the debit balances should e1ual the total of the credit balances, the two columns will be equal if the ledger is in balance. @owever, the amounts shown are not necessarily the correct amounts. 2(. The trial balance is not a formal financial statement, but merely a preliminary step to preparing financial statements. 2*. The accounting procedures covered in this chapter were part of what is referred to collectively as the accounting cycle. The accounting cycle involves eight steps6 7a8 journali!ing transactions 7b8 posting journal entries to ledger accounts, 7c8 preparing a trial balance, 7d8 ma;ing adjusting entries, 7e8 preparing an adjusted trial balance 7f8 preparing financial statements from the adjusted trial balance figures, 7g8 closing appropriate accounts, and 7h8 preparing an after4closing trial balance. n this chapter we have illustration d steps a4c of the accounting cycle. n =hapters # and (, the remaining steps will be addressed. TEST YOURSELF ON THE ACCOUNTING CYCLE True or False ,or each of the following statements, circle the T or the , to indicate whether the statement is true or false. 2+ T , 1. n a prosperous and solvent business the accounts with credit balances will normally e/ceed in total dollar amount the accounts with debit balances. T , 2. The term debit may signify either an increase or a decrease) the same is true of the term credit. T , 3. A business transaction is always recorded in the ledger by entries to two or more different ledger accounts. T , #. An entry on the left side of a ledger account is called a debit entry and an entry on the right side is called a credit entry, regardless of whether the account represents an asset, a liability, or owners0 e1uity. T , (. Accounts representing items which appear on the left4hand side of the balance sheet usually have credit balances. T , *. A trial balance with e1ual debit and credit totals proves that all transactions have been correctly journali!ed and posted to the proper ledger accounts. T , +. The se1uence of the account titles in a trial balance depends upon the si!e of the account balances. T , -. A journal entry may include debits to more than one account and credits to more than one account but the total of the debits must always e1ual the total of the credits. T , .. f a business transaction is recorded correctly, it cannot possibly upset the e1uality of debits and credits in the ledger. T , 13. n a journal entry recording the purchase of a des; for A2+(.-3, both the debit and credit were recorded and posted as A2(+.-3. This transposition error would not be disclosed by the preparation of a trial balance. T , 11. The double4entry accounting system means that transactions are recorded both in the journal and in the ledger. T , 12. An income statement relates to a specified period time whereas a balance sheet shows the financial position of a business at a particular date. T , 13. The reali!ation principle states that a business should never record revenue until cash is collected from the customer. T , 1#. $/penses cause a decrease in owners0 e1uity and are recorded by debits. T , 1(. f cash receipts are A13,333 greater than total e/penses for a given period, the business will earn a net income of A13,333 or more. T , 1*. The journal entry to recogni!e a revenue or an e/pense usually affects an asset or liability account as well. 2- T , 1+. Bnder accrual basis accounting, revenue is recogni!ed when cash is received, and e/penses are recogni!ed when cash is paid. T , 1-. An e/pense may be recogni!ed and recorded even though no cash outlay has been made. T , 1.. "uying a building for cash is just e/changing one asset for another and will not result in an e/pense even in future. T , 23. 2evenue increases owners0 e1uity and is recorded by a credit. Completion Statements ,ill in the necessary word to complete the following statements6 1. ncreases in assets are recorded by CCCCCCCCCCC, and decreases in assets are recorded by credits) increases in accounts appearing on the right side of a balance sheet are recorded by CCCCCCCCCCC, while decreases in those accounts are recorded by CCCCCCCCCCCCC. 2. n accounting, the term debit refers to the CCCCCCCCC side of a CCCCCCCCC CCCCCCCC, while the term credit refers to the CCCCCCCCCCCCCside. 3. Asset accounts appear on the CCCCCCCCCCC side of the balance sheet and normally have CCCCCCCCCCCCbalances. :iability and owners0 e1uity accounts appear on the CCCCCCCCCCCCCC side of the balance sheet and normally have CCCCCCCCCCCbalances. #. When a company borrows from a ban;, two accounts immediately affected are CCCCCCCCCCCCC and CCCCCC CCCCCCCCCCCCCCCC. The journal entry to record the transaction re1uires a CCCCCCCC to the first account and a CCCCCC to the second one. (. A CCCCCCCCCCC CCCCCCCCCCCCCis prepared from the ledger accounts at the end of the month 7or other accounting period8 in order to prove that the total accounts with CCCCCCC CCCCCCCCCCCCC is e1ual to the total accounts with CCCCCCCCCC CCCCCCCCCCCCCCCCCCC. *. The CCCCCCCCCCCCCC principle of accounting states that revenue should be recogni!ed in the period that it is earned. The CCCCCCCCCCCCCCCC principle indicates that e/penses should be recogni!ed in the period in which they help produce CCCCCCCCC. +. The principle distinction between e/penses and dividends is that e/penses are incurred for the purpose of CCCCCCCCCCCCCC CCCCCCCCCCCCCC. 2. Multiple Choice =hoose the best answer for each of the following 1uestions and enter the identifying letter in the space provided. CC 1. A ledger contains a separate &account' for each6 a. "usiness transaction. b. "usiness day. c. Asset, liability, and element of owners0 e1uity. d. Dournal entry. CC 2. Which of the following statements about the rules for debiting and crediting balance sheet accounts is not trueE a. :iability accounts are reduced by debit entries. b. Accounts on the left side of the balance sheet are reduced by credit entries. c. $ach transaction is recorded by e1ual dollar amounts of debits and credits. d. Fwners0 e1uity accounts and asset accounts are increased by the debit entries. CC 3. The ;ey point of doubleentry accounting is that every transaction6 a. s recorded by e1ual dollar amounts of debit and credit entries. b. s recorded in both the journal and the ledger. c. Affects both sides of the balance sheet. d. s both recorded and posted. CC #. A journal consists of6 a. A listing of the balances of the accounts in the ledger. b. A storage center of information within a computer4based system. c. A chronological record of individual business transactions. d. a separate &account' for each asset, liability, and element of owners0 e1uity. 33 CC (. The purpose of a trial balance is6 a. To determine that journal entries are in balance before posting those entries to the ledger. b. To indicate the effects of business transactions. c. To prove the e1uality of debits and credits in the ledger. d. To determine that the number of ledger accounts with debit balances is e1ual to the number of credit balances. CC *. 2ed @ill 5ineyards completes a transaction which causes an asset account to decrease. Which of the following related effects may also occurE a. An increase of e1ual amount in a liability account. b. An increase of an e1ual amount in owners0 e1uity. c. An increase of an e1ual amount in another asset account. d. <one of the above. CC +. The timeperiod principle6 a. 2e1uires that all companies prepare monthly, 1uarterly, and annual financial statements. b. nvolves dividing the life of a business entity into accounting periods of e1ual length. c. 2e1uires all companies to use a fiscal year ending >ecember 31. d. ?tems from the nternal 2evenue ?ervice re1uirement that ta/able income be reported on an annual basis. CC -. The realization principle6 a. ndicates that a business should record revenue when services are rendered or merchandise sold is delivered to customers, even if cash has not yet been received. b. ndicates that revenue should be recogni!ed in the accounting period when cash is received, even if the business has not yet performed all the re1uired services. c. ndicates that revenue should be recorded only after two conditions have been met6 718 the earning process is complete, and 728 the cash has been collected. d. 9rovides guidelines as to when e/penses should be recogni!ed. CC .. A produce supplier enters into a contract with a supermar;et chain on ?eptember - to deliver pump;ins in Fctober. The pump;ins are delivered on Fctober 1# at a price of A#,333, A2,333 payable on <ovember 1, and A2,333 >ecember 1. When should the produce supplier record the A#,333 as revenueE a. ?eptember -. b. Fctober 1#. c. A2,333 <ovember 1, and A2,333 >ecember 1. d. When the supermar;et sells the pump;ins. 31 CC 13. The matching principle implies that e/penses6 a. ?hould be deducted from revenue in the period which the suppliers of the goods or services are paid. b. ,or a period should be e1ual in amount to the revenue recogni!ed during the period. c. ?hould be deducted in the period in which use of the related goods or services help to produce revenue. d. ?hould be e1ual to the cash payments made during the period. CC 11. Fn April 1, @udson =ompany received and paid a A+33 bill for advertising done in Garch. n addition to this bill, the company paid A*,133 during April for e/penses incurred in that month. Fn Gay 2, @udson =ompany paid a A#,*33 payroll to employees for wor; done in April. "ased on these facts, total e/penses for the month of April were6 a. A *,133. b. A *,-33. c. A13,+33. d. A11,#33. CC 12. f a journal entry recogni!es an e/pense, the entry might also6 a. ncrease an asset account. b. >ecrease the =apital ?toc; account. c. >ecrease a liability account. d. ncrease a liability account. 32 Eercises 1. :isted below are eight technical accounting terms emphasi!ed in this chapter. !rial "alance #ccounting $ycle %ebit Realization principle Revenue #ccrual accounting Net income $redit $ach of the following statements may 7or may not8 describe one of these technical terms. n the space provided below each statement, indicate the accounting term described, or answer &<one' if the statement does not correctly describe any of the terms. a. An eight4step process by which economic events are initially captured and transformed into financial statements. CCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC b. The price of goods sold and services rendered during the period. CCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC c. 2evenue earned less e/penses incurred during the period. CCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC d. A two4column schedule listing all of the accounts in the general ledger and their respective balances. CCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC e. The generally accepted accounting principle that e/penses are to be recogni!ed in the period that the related e/penditure helps to produce revenue. CCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC f. The right4hand side of a ledger account. CCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC g. The techni1ue of recogni!ing revenue when it is earned and e/penses when the related goods and services are used, without regard to when cash is received or paid. CCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC 33 2. ?how the change in total assets, total liabilities, and total owners0 e1uity that will be caused by posting each amount in the following journal entries. n the effect of transaction row, show the total change in assets, liabilities, and owners0 e1uity that has occurred after all parts of the transaction have been posted. @int6 The effect of each transaction should be that the total change on the left side of the balance sheet 7change in assets8 should e1ual the change on the right side 7change in liabilities H change in owners0 e1uity8. $/planations have been omitted from journal entries to conserve space. !ournal Entr" #r Cr Assets $ Lia%ilities & O'ners( E)uit" Eample6 Fffice $1uipment................................ *33 H*33 =ash ...................................... 1(3 41(3 Accounts 9ayable................... #(3 H#(3 E**ect o* transaction H#(3 I H#(3 H 3 a. =ash ............................................... 1,233 Accounts 2eceivable.............. 1,233 E**ect o* transaction I H b. =ash ............................................... (,333 =apital ?toc;.......................... (,333 E**ect o* transaction c. =ash ............................................... 3,-33 <otes 9ayable........................ 3,-33 E**ect o* transaction I H d. Accounts 9ayable............................ 3(3 =ash....................................... 3(3 E**ect o* transaction I H e. :and ............................................... .,333 =ash....................................... 1,333 <otes 9ayable........................ -,333 E**ect o* transaction I H 3# 3. A list of accounts for Dones =ompany is given below followed by a series of transactions. ndicate the accounts that would be debited and credited in recording each transaction by placing the appropriate account number7s8 in the space provided 1. =ash 2. Accounts 2eceivable 3. Fffice $1uipment #. Accumulated >epreciation6 Fffice $1uipment 21. <otes 9ayable 22. Accounts 9ayable 31. =apital ?toc; 3(. 2etained $arnings #1. All 2evenue Accounts (1. All $/pense Accounts ... >ividends Transactions Accounts+s, #e%ite- Accounts+s, Cre-ite- Eample 9urchased office e1uipment, paying part cash and issuing a note payable for the balance 3 1,21 a. 9aid creditor amount due on open account b. =ollected from customer for services performed by Dones =ompany in previous period c. Btility bill is received) payment will be made in 13 days d. 9erformed services for a customer) A(3 cash received and the balance due in 33 days e. Fffice e1uipment purchased giving note payable f. Gade a =ash distribution to the stoc;holders. 3( #. ndicate the effects that each of these transactions will have upon the following si/ total amounts in the company%s financial statements for the month of Gay. Bse the code letters & for ncrease, % for >ecrease, and NE for <o $ffect. Income Statement .alance Sheet Error Total Re/enue Total Epenses Net Income Total Assets Total Lia%ilities O'ners( E)uit" Eample0 2endered services to a customer and received immediate payment in cash but made no record of the transaction ' NE ' ' NE ' a. 9ayment for repairs erroneously debited to "uilding account b. 2ecorded collection of an account receivable by debiting =ash and crediting a revenue account. c. 2ecorded twice revenue earned on account. d. 2ecorded twice a purchase of offices supplies on credit e. 2ecorded the purchase of office e1uipment for cash as a debit to Fffice e/pense and a credit to cash. f. 2ecorded cash payment for advertising by debiting 2epairs $/pense and crediting Accounts 9ayable.
3* SOLUTIONS TO CHA1TER 2 SELF3TEST True or False 1. F 2egardless of whether a business is solvent or profitable, the sum of accounts with credit balances 7normally :iabilities and Fwners0 $1uity8 will always e1ual the sum of accounts with debit balances 7assets8. 2. T The term debit means an entry on the left4hand side of an account, and credit means an entry on the right4hand side of an account. Whether the entry results in an increase or decrease depends upon the type of account affected. 3. T $1ual dollar amounts of debit and credit entries are needed to record each transaction. Although more than two accounts may be affected, a transaction would never involve just a single account. #. T "y definition, a debit is an amount recorded on the left4hand side of an account and a credit is an amount recorded on the right4hand side of an account. (. F :iability and owners0 e1uity accounts normally have credit balances. These accounts appear on the right4hand side of the balance sheets illustrated in your te/t. *. F A &balancing' trial balance only gives assurance that 7a8 e1ual debits and credits have been recorded, 7b8 the balance of each account has been computed correctly, and 7c8 the addition of account balances in the trial balance has been done accurately. +. F Accounts appear in the trial balance in the order in which they appear in the ledger, which is in financial statement order 7assets, followed by liabilities, owners% e1uity, revenue, and e/penses8. -. T An entry which includes more than one debit or more than one credit is called a compound journal entry. .. T $very transaction is to be recorded by an e1ual dollar amount of debits and credits) recording a transaction properly will maintain e1uality of debits and credits. 13. T ?ince both debit and credit of the original journal entry were e1ual, the trial balance would still show e1uality of debits and credits. 11. F The premise of double4entry accounting means that e1ual dollar amounts of debits and credits are used to record each business transaction. 12. T <et income cannot be evaluated unless it is associated with a specific time period. 13. F The reali!ation principle states that revenue should be recogni!ed when services are rendered or goods are delivered. 1#. T $/penses offset revenue in determining net income and therefore reduce owners% e1uity. 1(. F <et income e1uals revenue minus e/penses) cash receipts and revenue are not the same. 1*. T To record an e/pense, the e/pense account is debited and cash or a liability is credited) to record revenue, the asset received is debited and revenue is credited. 1+. F 2evenue is recogni!ed when earned) e/penses are recogni!ed in the period in which the cost helps to produce revenue. 1-. T The cash payment for an e/pense may occur before, after, or in the same period that an e/pense helps to produce revenue. 1.. F A portion of the cost of the building will be recogni!ed as depreciation e/pense each period over the building%s useful life. 23. T 2evenue is the gross increase in owners% e1uity resulting from business activities) all increases in owners% e1uity are recorded by credits. 3+ Completion Statements 1. >ebits, credits, debits. 2. :eft, ledger account, right. 3. :eft, debit, right, credit. #. =ash, <otes 9ayable, debit, credit. (. Trial balance, debit balances, credit balances. *. 2eali!ation, matching, revenue. +. producing revenue. Multiple Choice 1. Answer c J a separate ledger account is maintained to record the changes in each asset, liability, and element of owners0 e1uity. Answers a4 %, and - all relate to the journal, which consists of a chronological record of business transactions. 2. Answer - is false. Fwners0 e1uity accounts appear on the right4hand side of the balance sheet and are increase by credit entries. 3. Answer a J double4entry accounting means that e1ual dollar amounts of debits and credits are needed to record any business transaction. #. Answer c describes a journal. Answer a describes a trial balance) answer %, a database) and answer -, a ledger. (. Answer c J a trial balance is a listing of the balances of the accounts in the ledger. Answers a and % are incorrect because they relate to data not yet posted into the ledger. Answer - is incorrect because it is the total dollar amount of debit and credit balances that must be e1ual, not the number of accounts with each type of balance. *. Answer c J a decrease in one asset account must be accompanied by an increase in another asset account, or by a decrease in either a liability or an owners0 e1uity account. +. Answer % J for accounting information to be useful, it must be available on a fre1uent periodic basis. This re1uires dividing the overall life of the business entity into e1ual &accounting periods.' Answer a is incorrect because the principle does not re1uire monthly statements. Answer c is incorrect because a company%s fiscal year need not end on >ecember 31. Answer - is incorrect because generally accepted accounting principles are not governed by income ta/ laws. -. Answer a J under the reali!ation principles revenue is recogni!ed when it is earned regardless of when the cash is collected. Answers % and c are incorrect because they tie the recognition of revenue to the collection of cash. Answer - describes the matching principle, not the reali!ation principle. .. Answer % J the reali!ation principle indicates that revenue should be recogni!ed when it is earned J that is, when services are rendered or when goods sold are delivered to customers. 13. Answer c J e/penses should be offset against the revenue produced by these e/penditures. Answers a and - are incorrect because the period in which e/penses are recogni!ed may differ from the period in which the related cash payments are made. Answer % is incorrect because e/penses may differ from revenue by the amount of any net income or net loss. 11. Answer c J A*,133 H A#,*33. Answer a e/cludes the A#,*33 in salaries e/pense for April. Answer % e/cludes the salaries and improperly includes A+33 in advertising e/pense for the month of Garch. Answer - improperly includes the A+33 in advertising e/pense applicable to Garch. 12. Answer - J the debit entry to record an e/pense is always accompanied by either a credit 7decrease8 in an asset account, or a credit 7increase8 in a liability account. 3- Solutions to Eercises 1. a. Accounting =ycle b. 2evenue c. <et income d. Trial "alance e. <one 7The statement describes the matching principle.8 f. =redit g. Accrual accounting 2. !ournal Entr" #r Cr Assets $ Lia%ilities & O'ners( E)uit" a. =ash ............................................... 1,233 H1,233 Accounts 2eceivable 1,233 41,233 E**ect o* transaction 3 I 3 H 3 b. =ash ............................................... (,333 H(,333 =apital ?toc;.......................... (,333 H(,333 E**ect o* transaction H(,333 I 3 H H(,333 c. =ash ............................................... 3,-33 H3,-33 <otes 9ayable........................ 3,-33 H3,-33 E**ect o* transaction H3,-33 I H3,-33 H 3 d. Accounts 9ayable............................ 3(3 43(3 =ash....................................... 3(3 43(3 E**ect o* transaction 43(3 I 43(3 H 3 e. :and ............................................... .,333 H.,333 =ash....................................... 1,333 41,333 <otes 9ayable........................ -,333 H-,333 E**ect o* transaction H-,333 I H-,333 H 3 3. Transactions Accounts+s, #e%ite- Accounts+s, Cre-ite- a 22 1 % 1 2 c (1 22 - 1,2 #1 e 3 21 * .. 1 3. #. Income Statement .alance Sheet Error Total Re/enue Total Epenses Net Income Total Assets Total Lia%ilities O'ners( E)uit" a NE ' ( ( NE ( % ( NE ( ( NE ( c ( NE ( ( NE ( - NE NE NE ( ( NE e NE ( ' ' N ' * NE NE NE ( ( NE #3