ACCOUNTING PRACTICE - Chapter 2: Analyzing and Recording Business Tra...

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Chapter 2: Analyzing and Recording Business Transactions

ACCOUNTING PRACTICE

Discussion Questions: Key Points

• Assets are listed in order of liquidity, or closeness to cash.
• When the company pays for something in advance that won’t be used up in this accounting

period, it would record a prepaid asset. In a sense, plant assets are a type of prepaid asset, although it would not be classified as such. All prepaid assets would be used up, eventually.That is, they all become expenses over time or with use. An example would be Prepaid Rent, Prepaid Insurance, etc.

• Revenue increases retained earnings. By definition, when revenue is increased as assets are

acquired (or liabilities reduced) as a result of activities relating to the company’s line of business, the owners have a claim on those assets that are acquired. This ownership interest is reflected in the Retained Earnings account.

• Not all events are transactions. A transaction is an event that has a financial impact on a

company. In other words a transaction affects at least two accounts in the accounting equation. If no accounts are affected then it is an event, not a transaction. Journal entries are recorded for all transactions.

• The normal balance of an account is the side that increases the account.
• Debit
• Debit
• Credit
• Credit
• Debit
• The bank is keeping its own books, not yours. When you give the bank cash or deposit your

paycheque, the bank needs to keep track of its liability to you. It is increasing its liability account with a credit (the debit that it makes is to its own cash account).

• A credit balance in the Cash account would indicate a negative cash balance. Negative cash

does not make sense. If a company overdraws its Cash account, it now has a liability to the bank. Rather than showing a credit balance in its Cash account, it should show a credit balance in a liability account. Sometimes, a negative “credit” cash balance is acceptable in case the company had signed an overdraft agreement with its bank. Interest is usually charged in such case on the amount overdrawn.

• Journalizing is the process of recording a transaction in the journal. Posting is the process of

transferring the information from the journal to the appropriate amounts in the ledger or to t- accounts.

• False. A balanced trial balance is a necessary but not sufficient condition for accurate

financial statements. If a debit to Supplies is improperly recorded as a debit to Supplies Expense, for example, the trial balance will balance but the financial statements will be inaccurate.

• The financial statement numbers generally come from the trial balance. However, the

numbers on the trial balance come from the general ledger. So, the numbers on the trial balance really come from the general ledger.Financial Accounting Canadian 2nd Edition Waybright Solutions Manual Visit TestBankDeal.com to get complete for all chapters

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Short Exercises (5–10 min.) S2-1

• b
• c
• e
• g
• d
• f
• a

(5–10 min.) S2-2

• Accounts Payable L
• Cash A
• Service Revenue R
• Prepaid Rent A
• Rent Expense E
• Common Shares SE

(5–10 min.) S2-3

• Transaction occurs.
• Prepare the financial statements.
• Prepare the trial balance.
• Post the transactions from the journal to the ledger.
• Record the transactions in the journal.

(5–10 min.) S2-4

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Example A, 1

1. R, 4

2. SE, 3

3. A, 1

4. E, 5

5. L, 2

6. SE, 3

7. E, 5

(5–10 min.) S2-5 The basic summary device in accounting is the account. The left side of an account is called the debit side, and the right side is called the credit side. We record transactions first in a journal. Then we post or copy the data to the ledger (or T-accounts). It is helpful to list all the accounts with their balances on a trial balance .(5–10 min.) S2-6 DR 1. Rent Expense CR 2. Accounts Payable CR 3. Service Revenue DR 4. Office Furniture CR 5. Common Shares DR 6. Land DR 7. Dividends

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(5–10 min.) S2-7 Supplies Note Payable

3/8 400 3/27 600 3/20 2,000 3/5 10,000

3/17 500 3/31 4,000

Bal 300 Bal 4,000

(5–10 min.) S2-8 Account Type Normal Balance

Office Equipment Asset Dr. Dr. Cr.Dividends Contra Equity Dr. Dr. Cr.Service Revenue Revenue Cr. Cr. Dr.Accounts Payable Liability Cr. Cr. Dr.Rent Expense Expense Dr. Dr. Cr.Cash Asset Dr. Dr. Cr.

(15–20 min.) S2-9 Transaction Account Affected Type Normal Balance

Dr. or Cr.(1) Cash Asset Dr. Increase Dr.Common Shares Shareholders’ Equity Cr. Increase Cr.(2) Equipment Asset Dr. Increase Dr.Cash Asset Dr. Decrease Cr.(3) Supplies Asset Dr. Increase Dr.Accounts Payable Liability Cr. Increase Cr.(4) Accounts Receivable Asset Dr. Increase Dr.