of the account. For example, debits signify an increase in asset and expense accounts but a decrease

1.An account is a form designed to record changes in a particular asset, liability, owner’s equity, revenue, or expense. A ledger is a group of related accounts.

2.The terms debit and credit may signify either an increase or a decrease, depending upon the nature of the account. For example, debits signify an increase in asset and expense accounts but a decrease in liability, owner’s capital, and revenue accounts.

• a.Assuming no errors have occurred, the credit balance in the cash account resulted from drawing

checks for $1,850 in excess of the amount of cash on deposit.b.The $1,850 credit balance in the cash account as of December 31 is a liability owed to the bank.It is usually referred to as an “overdraft” and should be classified on the balance sheet as a liability.

• a.The revenue was earned in October.

b.(1) Debit Accounts Receivable and credit Fees Earned or another appropriately titled revenue account in October.(2) Debit Cash and credit Accounts Receivable in November.

5.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 account.

6.The listing of $9,800 is a transposition; the listing of $100 is a slide.

• 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 balance. The error would cause the debit total of the trial balance to exceed the credit total by $90.

• 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 $7,500, and net income would be understated by $7,500. On the statement of owner’s equity, the beginning and ending capital would be correct. However, net income and withdrawals would be understated by $7,500. These understatements offset one another, and thus, ending owner’s equity is correct. The balance sheet is not affected by the error.

• a.The equality of the trial balance would not be affected.

b.On the income statement, revenues (fees earned) would be overstated by $300,000, and net income would be overstated by $300,000. On the statement of owner’s equity, the beginning capital would be correct. However, net income and ending capital would be overstated by $300,000. The balance sheet total assets is correct. However, liabilities (notes payable) is understated by $300,000, and owner’s equity is overstated by $300,000. The understatement of liabilities is offset by the overstatement of owner’s equity, and thus, total liabilities and owner’s equity is correct.

• a.From the viewpoint of Surety Storage, the balance of the checking account represents an asset.

b.From the viewpoint of Ada Savings Bank, the balance of the checking account represents a liability.

CHAPTER 2

ANALYZING TRANSACTIONS

DISCUSSION QUESTIONS

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CHAPTER 2 Analyzing Transactions

PE 2–1A

• Debit and credit entries, normal debit balance
• Credit entries only, normal credit balance
• Debit and credit entries, normal credit balance
• Credit entries only, normal credit balance
• Credit entries only, normal credit balance
• Debit entries only, normal debit balance

PE 2–1B

• Debit and credit entries, normal credit balance
• Debit and credit entries, normal debit balance
• Debit entries only, normal debit balance
• Debit entries only, normal debit balance
• Debit entries only, normal debit balance
• Credit entries only, normal credit balance

PE 2–2A

Oct. 27 Office Equipment 32,750 Cash 6,550 Accounts Payable 26,200

PE 2–2B

Sept. 30 Office Supplies 2,500 Cash 800 Accounts Payable 1,700

PRACTICE EXERCISES

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CHAPTER 2 Analyzing Transactions

PE 2–3A

Mar. 16 Accounts Receivable 9,450 Fees Earned 9,450

PE 2–3B

Aug. 13 Cash 9,000 Fees Earned 9,000

PE 2–4A

Dec. 23 Steve Buckley, Drawing 20,000 Cash 20,000

PE 2–4B

June 30 Dawn Pierce, Drawing 11,500 Cash 11,500

PE 2–5A

Using the following T account, solve for the amount of cash receipts (indicated by ? below).July 1 Bal. 37,450 115,860 Cash payments Cash receipts ?July 31 Bal. 29,600 $29,600 = $37,450 + Cash receipts – $115,860 Cash receipts = $29,600 + $115,860 – $37,450 = $108,010

PE 2–5B

Using the following T account, solve for the amount of supplies expense (indicated by ? below).Aug. 1 Bal. 1,025 ? Supplies expense Supplies purchased 3,110 Aug. 31 Bal. 1,324 $1,324 = $1,025 + $3,110 – Supplies expense Supplies expense = $1,025 + $3,110 – $1,324 = $2,811 Cash Supplies 2-3 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 2 Analyzing Transactions

PE 2–6A

• The totals are unequal. The debit total is higher by $900 ($5,400 – $4,500).
• The totals are equal because both the debit and credit entries were journalized

and posted for $720.

• The totals are unequal. The debit total is higher by $3,200 ($1,600 + $1,600).

PE 2–6B

• The totals are equal because both the debit and credit entries were journalized

and posted for $12,900.

• The totals are unequal. The credit total is higher by $1,656 ($1,840 – $184).
• The totals are unequal. The debit total is higher by $4,500 ($8,300 – $3,800).

PE 2–7A

• Rent Expense 4,650

Miscellaneous Expense 4,650 Rent Expense 4,650 Cash4,650

Note: The first entry in (a) reverses the incorrect entry, and the second entry

records the correct entry. These two entries could also be combined into one entry as shown below; however, preparing two entries would make it easier for someone to understand later what happened and why the entries were necessary.Rent Expense 9,300 Miscellaneous Expense 4,650 Cash4,650

• Accounts Payable 3,700

Accounts Receivable 3,700 2-4 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.