3. Examples: - Chapter 2 Recording Business Transactions Quest...

54 Copyright © 2014 Pearson Canada Inc.Chapter 2 Recording Business Transactions Questions

• The basic shortcut device of accounting is the T-account. It resembles the letter

T, and its left side is called the debit side and its right side the credit side.

• The statement is false because debit means left and credit means right. Debits

and credits are used to record increases and decreases in accounts, so debits can be increases or decreases depending on the type of account involved and likewise for credits.

3. Examples:

• A debit to an asset account indicates an increase in the asset.
• To record a decrease in a liability, the accountant should record a debit.
• Debit all asset accounts to record increases in them.
• The accountant should debit Cash to record a receipt of cash.
• The debit side of an account is the left side.
• It is customary to record the debit side of a journal entry before recording

the credit side of the entry.

• The three basic types of accounts are ASSETS, LIABILITIES, and OWNER’S

EQUITY. Two additional types of accounts are REVENUES and EXPENSES.They are part of owner’s equity; revenues increase owner’s equity and expenses decrease owner’s equity.

• The dual effects of an owner’s investment in her business are (1) an increase in

the entity’s cash and (2) an increase in the owner’s equity.

• Business Transaction Entry in Posting to Trial

Creates Source Document → Journal → Ledger → Balance

• The normal balance of an account is the side of the account—debit or credit—

that records increases. Also, an account’s normal balance is the side of the account that usually has the account’s balance.

• Account Type Normal Balance

Assets Debit Liabilities Credit Owner’s equity Credit Revenues Credit Expenses Debit

• Posting transfers amounts from the journal to the ledger. This is important

because the transaction entries in the journal do not accumulate all the information related to each account. The accounts in the ledger hold that Accounting Volume 1 Canadian 9th Edition Horngren Solutions Manual Visit TestBankDeal.com to get complete for all chapters

Copyright © 2014 Pearson Canada Inc. 55 information. The ledger groups together transactions that are similar. For example, all cash transaction from the journal are grouped together in the ledger. Therefore, the transfer of data to the accounts in the ledger—that is, posting from the journal to the ledger—makes it possible to determine the balance in each account. Posting comes after journalizing.

• + a. Investment by owner 0 e. Cash payment on account
• Invoice customer for services – f. Withdrawal of cash by owner
• Purchase of supplies on credit 0 g. Borrowing money on a note payable

– d. Pay expenses with cash + h. Sale of services on account

• Posting’s four steps are (1) copy the date of a transaction from the journal to the

ledger, (2) copy the journal page number from the journal to the ledger, (3) copy (post) the dollar amounts of the debit and the credit from the journal to the ledger, and (4) copy the account numbers from the ledger back to the journal to indicate that the transaction amount has been posted to the ledger. Step 3, transferring the transaction amount to the account, is the fundamental purpose of posting.

• Cash Sam Westman, Capital

Accounts Receivable Sales Revenue Note Payable Salary Expense

• “Accounts Payable has a credit balance of $2,800” means that the entity owes

$2,800 to its creditors on a debt that is not evidenced by a formal note payable.

• The two business transactions are (1) Spiffy Cleaners providing laundry service

and earning revenue and (2) Bobby Ng paying cash to Spiffy Cleaners. The business’s earning of the revenue increases the owner’s equity in the company, and Ng’s payment of cash increases the business’s cash.

• The ledger is the group of actual accounts in use that contain a record of activity

in those accounts. The chart of accounts is a list of all the accounts set up in the ledger with their account numbers.

• Accountants prepare a trial balance to check the accuracy of postings to

accounts and determine whether the total debits equal the total credits. It is a useful summary of all the accounts and their balances and serves as an early error-detection tool.

• A compound journal entry is one that affects more than two accounts.
• This error does not cause the trial balance to be out of balance because both the

total debits and the total credits are overstated by the same amount, $5,400

($6,000 – $600).

• Collecting cash on account has no effect on total assets because the increase in

cash, which increases total assets, is offset by the decrease in accounts receivable, which decreases total assets.

• Both systems depend on the accuracy of the initial analysis of the transaction

and require that the journal entry be recorded correctly. Thereafter, a number of errors could occur in a manual system (such as slides, transpositions, errors in calculating account balances); these errors will affect a manual trial balance.Most computerized systems will not allow you to post a journal entry if it does not balance. Once the journal entry has been correctly recorded, the computerized accounting system performs much the same actions as accountants do in a manual system. These routine tasks are accomplished faster

56 Copyright © 2014 Pearson Canada Inc.and with less risk of error with a computer. The computer does not recognize debits and credits, only increases and decreases by account type.

Copyright © 2014 Pearson Canada Inc. 57 Starters (5 min.) S 2-1

“The basic summary device in accounting is the account. The left side is called the debit side, and the right side is called the credit side. We record transactions first in a journal. Then we post (copy the data) to the ledger. It is helpful to list all the accounts with their balances on a trial balance.”

(10 min.) S 2-2 C 1. Credit A. Record of transactions D 2. Normal balance B. Always an asset G 3. Payable C. Right side of an account A 4. Journal D. Side of an account where increases are recorded B 5. Receivable E. Copying data from the journal to the ledger J 6. Capital F. Increases in equity from providing goods and services E 7. Posting G. Always a liability F 8. Revenue H. Revenues – Expenses (where expenses exceed revenues) H 9. Net loss I. Grouping of accounts I 10. Ledger J. Owner’s equity in the business