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CHAPTER 2
ANALYZING TRANSACTIONS
EYE OPENERS
- An account is a form designed to record changes in a particular asset, liability, own- er’s equity, revenue, or expense. A ledger is a group of related accounts.
- The terms debit and credit may signify either an increase or decrease, depending upon the nature of the account. For example, de- bits signify an increase in asset and expense accounts but a decrease in liability, owner’s capital, and revenue accounts.
- Liabilities and owner’s equity both have rights or claims to assets as indicated by the accounting equation, Assets = Liabilities + Owner’s Equity. Therefore, the same rules of debit and credit apply to both liabilities and owner’s equity.
- a. Decrease in owner’s equity b. Increase in expense
- a. Increase in owner’s equity b. Increase in revenue
- a. Assuming no errors have occurred, the credit balance in the cash account re- sulted from drawing checks for $1,250 in excess of the amount of cash on depo- sit. b. The $1,250 credit balance in the cash account as of March 31 is a liability owed to the bank. It is usually referred to as an “overdraft” and should be classi- fied on the balance sheet as a liability.
- a. The revenue was earned in July. b. (1) Debit Accounts Receivable and credit Fees Earned or another ap- propriately titled revenue account in July. (2) Debit Cash and credit Accounts Receivable in August.
- The trial balance is a proof of the equality of the debits and the credits in the ledger.
- No. Errors may have been made that had the same erroneous effect on both debits and credits, such as failure to record and/or post a transaction, recording the same transaction more than once, and posting a transaction correctly but to the wrong ac- count. 10. The listing of $1,850 is a slide; the listing of $3,860 is a transposition. 11. a. No. Because the same error occurred on both the debit side and the credit side of the trial balance, the trial balance would not be out of balance. b. Yes. The trial balance would not bal- ance. The error would cause the debit total of the trial balance to exceed the credit total by $90. 12. a. The equality of the trial balance would not be affected. b. On the income statement, total operating expenses (salary expense) would be overstated by $10,000, and net income would be understated by $10,000. On the statement of owner’s equity, the be- ginning and ending capital would be cor- rect. However, net income and with- drawals would be understated by $10,000. These understatements offset one another, and, thus, ending owner’s equity is correct. The balance sheet is not affected by the error. 13. a. The equality of the trial balance would not be affected. b. On the income statement, revenues (fees earned) would be overstated by $120,000, and net income would be overstated by $120,000. On the state- ment of owner’s equity, the beginning capital would be correct. However, net income and ending capital would be overstated by $120,000. The balance sheet total assets is correct. However, liabilities (notes payable) is understated by $120,000, and owner’s equity is over- stated by $120,000. The understatement of liabilities is offset by the overstate- ment of owner’s equity, and, thus, total liabilities and owner’s equity is correct.
- The preferred procedure is to journalize and post a correcting entry debiting Accounts Payable and crediting Cash.
- a. From the viewpoint of Yellowstone Sto- rage, the balance of the checking ac- count represents an asset.
b. From the viewpoint of Livingston Sav- ings Bank, the balance of the checking account represents a liability.
PE 2 – 3A
Apr. 2 Cash ..................................................................... 3, Fees Earned ................................................... 3,
PE 2 – 3B
Nov. 29 Accounts Receivable .......................................... 11, Fees Earned ................................................... 11,
PE 2 – 4A
Jan. 19 Carla Hammond, Drawing .................................. 8, Cash................................................................ 8,
PE 2 – 4B
Dec. 23 Matt Nehls, Drawing ........................................... 6, Cash................................................................ 6,
PE 2 – 5A
Using the following T account, solve for the amount of supplies expense (indi- cated by? below).
Supplies July 1 Bal. 1,950 (^)? Supplies expense Cash receipts 6,750 _____ July 31 Bal. 1,
$1,851 = $1,950 + $6,750 – Supplies expense
Supplies expense = $1,950 + $6,750 – $1,851 = $6,
PE 2 – 5B
Using the following T account, solve for the amount of cash receipts (indicated by ? below).
Cash Oct. 1 Bal. 23,600 (^) 315,700 Cash payments Cash receipts? _______ Oct. 31 Bal. 36,
$36,900 = $23,600 + Cash receipts – $315,
Cash receipts = $36,900 + $315,700 – $23,600 = $329,
PE 2 – 6A
a. The totals are equal since both the debit and credit entries were journalized and posted for $8,000.
b. The totals are unequal. The credit total is higher by $6,075 ($6,750 – $675).
c. The totals are unequal. The debit total is higher by $360 ($4,510 – $4,150).
PE 2 – 6B
a. The totals are unequal. The debit total is higher by $2,700 ($6,300 – $3,600).
b. The totals are equal since both the debit and credit entries were journalized and posted for $752.
c. The totals are unequal. The debit total is higher by $1,800 ($900 + $900).
EXERCISES
Ex. 2 – 1
Balance Sheet Accounts Income Statement Accounts
Assets Flight Equipment Purchase Deposits for Flight Equipmenta Spare Parts and Supplies Liabilities Accounts Payable Air Traffic Liabilityb Owner ’ s Equity None
Revenue Cargo and Mail Revenue Passenger Revenue Expenses Aircraft Fuel Expense Commissionsc Landing Feesd
aAdvance payments on aircraft purchases bPassenger ticket sales not yet recognized as revenue cCommissions paid to travel agents dFees paid to airports for landing rights
Ex. 2 – 2
Account Account Number Accounts Payable 21 Accounts Receivable 12 Cash 11 Fees Earned 41 Land 13 Miscellaneous Expense 53 Supplies Expense 52 Tony Newbaurer, Capital 31 Tony Newbaurer, Drawing 32 Wages Expense 51
Ex. 2 – 3 Balance Sheet Accounts Income Statement Accounts
- Assets 11 Cash 12 Accounts Receivable 13 Supplies 14 Prepaid Insurance 15 Equipment
- Liabilities 21 Accounts Payable 22 Unearned Rent
- Owner ’ s Equity 31 Jamie Bjork, Capital 32 Jamie Bjork, Drawing
- Revenue 41 Fees Earned
- Expenses 51 Wages Expense 52 Rent Expense 53 Supplies Expense 59 Miscellaneous Expense
Note: The order of some of the accounts within the major classifications is somewhat arbitrary, as in accounts 13 – 14 and accounts 51 – 53. In a new busi- ness, the order of magnitude of balances in such accounts is not determinable in advance. The magnitude may also vary from period to period.
Ex. 2 – 4
a. and b.
Account Debited Account Credited Transaction Type Effect Type Effect
(1) asset + owner ’ s equity + (2) asset + asset – (3) asset + asset – liability + (4) expense + asset – (5) asset + revenue + (6) liability – asset – (7) asset + asset – (8) expense + asset – (9) drawing + asset –
Ex. 2 – 7
- debit and credit (c)
- debit and credit (c)
- debit and credit (c)
- credit only (b)
- debit only (a)
- debit only (a)
- debit only (a)
Ex. 2 – 8
a. Liability — credit e. Asset — debit b. Asset — debit f. Revenue — credit c. Owner ’ s equity g. Asset — debit (Billy Eldrod, Capital) — credit h. Expense — debit d. Owner ’ s equity i. Asset — debit (Billy Eldrod, Drawing) — debit j. Expense — debit
Ex. 2 – 9
a. credit g. debit b. debit h. credit c. debit i. credit d. credit j. debit e. credit k. credit f. credit l. debit
Ex. 2 – 10
a. Debit (negative) balance of $16,200 ($37,100 – $1,000 – $52,300). Such a neg- ative balance means that the liabilities of Oh ’ s business exceed the assets. b. Yes. The balance sheet prepared at December 31 will balance, with Oh Kwon, Capital, being reported in the owner ’ s equity section as a negative $16,200.
Ex. 2 – 11
a. The increase of $49,850 ($319,750 – $269,900) in the cash account does not indicate earnings of that amount. Earnings will represent the net change in all assets and liabilities from operating transactions. b. $22,500 ($72,350 – $49,850)
Ex. 2 – 12
a. Accounts Payable July 1 X 90,300 115, July 31 39,
X + $115,150 – $90,300 = $39,
X = $39,000 + $90,300 – $115,
X = $14,
b. Accounts Receivable May 1 36,200 (^) 315, X May 31 41,
$36,200 + X – $315,000 = $41,
X = $41,600 + $315,000 – $36,
X = $320,
c. Cash Apr. 1 18,275 (^) X 279, Apr. 30 13,
$18,275 + $279,100 – X = $13,
X = $18,275 + $279,100 – $13,
X = $284,
Ex. 2 – 14
a.
JOURNAL Page 19 Post. Date Description Ref. Debit Credit
2010 Aug. 7 Supplies .................................................. 15 2, Accounts Payable .............................. 21 2, Purchased supplies on account.
b., c., d.
Supplies 15
Post. Balance Date Item Ref. Dr. Cr. Dr. Cr.
2010 Aug. 1 Balance ................................ ............ ........... 1, ........... 7 .............................................. 19 2,190 ........... 3, ...........
Accounts Payable 21
2010 Aug. 1 Balance ................................ ............ ........... ........... 15, 7 .............................................. 19 ............ 2,190 ........... 17,
Ex. 2 – 15
a.
(1) Accounts Receivable .......................................... 41, Fees Earned ................................................... 41, (2) Supplies ............................................................... 1, Accounts Payable .......................................... 1, (3) Cash ..................................................................... 39, Accounts Receivable .................................... 39, (4) Accounts Payable ............................................... 1, Cash................................................................ 1,
b.
Cash Accounts Payable (3) 39 ,150 (^) (4) 1,1 00 (4) 1,1 (^00) (2) 1,
Supplies Fees Earned (2) 1,800 (^) (1) 41,
Accounts Receivable (1) 41,730 (3) 39,
Ex. 2 – 18
NEVADA-FOR-YOU CO.
Unadjusted Trial Balance December 31, 2010
Debit Credit Balances Balances
Cash .................................................................................... 13, Accounts Receivable ......................................................... 24, Prepaid Insurance .............................................................. 8, Equipment........................................................................... 75, Accounts Payable .............................................................. 11, Unearned Rent .................................................................... 4, Tammy Gazboda, Capital ................................................... 82, Tammy Gazboda, Drawing ................................................ 10, Service Revenue................................................................. 83, Wages Expense .................................................................. 42, Advertising Expense .......................................................... 7, Miscellaneous Expense ..................................................... 1, 181,600 181,
Ex. 2 – 19
(a) (b) (c) Error Out of Balance Difference Larger Total
- yes $6,150 debit
- no — —
- yes 450 credit
- yes 270 credit
- no — —
- yes 1,800 credit
- yes 1,150 debit
Ex. 2 – 20
- The debit column total is added incorrectly. The sum is $1,167,000, rather than $1,833,000.
- The trial balance should be dated ―March 31, 2010,‖ not ―F or the month ending March 31, 2010. ‖
- The Accounts Receivable balance should be in the debit column.
- The Accounts Payable balance should be in the credit column.
- The Estelle Chatman, Drawing, balance should be in the debit column.
- The Advertising Expense balance should be in the debit column.
A corrected trial balance would be as follows:
BURGOO CO.
Unadjusted Trial Balance March 31, 2010
Debit Credit Balances Balances
Cash .................................................................................... 90, Accounts Receivable ......................................................... 196, Prepaid Insurance .............................................................. 43, Equipment........................................................................... 600, Accounts Payable .............................................................. 22, Salaries Payable ................................................................. 15, Estelle Chatman, Capital ................................................... 518, Estelle Chatman, Drawing ................................................. 72, Service Revenue................................................................. 944, Salary Expense ................................................................... 393, Advertising Expense .......................................................... 86, Miscellaneous Expense ..................................................... 17, 1,500,000 1,500,
Ex. 2 – 21
a. Prepaid Rent........................................................ 6, Cash................................................................ 6,
b. Juanita Jacobsen, Drawing ............................... 18, Wages Expense ............................................. 18,
Ex. 2 – 24
a.
KMART CORPORATION Income Statement For the Years Ended January 31, 2000 and 1999 (in millions)
Increase (Decrease) 2000 1999 Amount Percent
- Sales ...................................... $ 37,028 $ 35,925 $ 1,103 3.1%
- Cost of sales ......................... (29,658) (28,111) 1,547 5.5%
- Selling, general, and administrative expenses ... (7,415) (6,514) 901 13.8%
- Operating income (loss) before taxes ........................ $ (45) $ 1,300 $(1,345) (103.5)%
b. The horizontal analysis of Kmart Corporation reveals deteriorating operating results from 1999 to 2000. While sales increased by $1,103 million, a 3.1% in- crease, cost of sales increased by $1,547 million, a 5.5% increase. Selling, general, and administrative expenses also increased by $901 million, a 13.8% increase. The end result was that operating income decreased by $1,345 mil- lion, over a 100% decrease, and created a $45 million loss in 2000. Little over a year later, Kmart filed for bankruptcy protection. It has now emerged from bankruptcy and was merged into Sears to form the company Sears Holding Corporation.
PROBLEMS
Prob. 2 – 1A
- and 2.
Cash Accounts Payable (a) 30,0 00 (b) 4,5 00 (h) 1,75 0 (e) 6,0 00 (g) 7 ,5 (^00) (c) 3,0 00 (j) 1,0 00 (d) 1, 450 Bal. 5 , 250 (f) 2, (h) 1,750 Travis Fortney, Capital (i) 500 (a) 30, (l) 1,6 00 (m) 325 Professional Fees (n) 250 (g) 7, (o) 400 (k) 5, Bal. 21,725 Bal.^1 2,
Accounts Receivable Rent Expense (k) 5,200 (c) 3,
Supplies Salary Expense (d) 1,450 (l) 1,
Prepaid Insurance Blueprint Expense (f) 2,000 (j) 1,
Automobiles Automobile Expense (b) 19,500 (o) 400
Equipment Miscellaneous Expense (e) 6,000 (i) 500 (m) 325 Bal. 825
Notes Payable (n) 250 (b) 15, Bal. 14,
