Review Questions - Chapter 2 Recording Business Transactions Revie...

© 2016 Pearson Education, Inc. 2-1 Chapter 2 Recording Business Transactions

Review Questions

• The three categories of the accounting equation are assets, liabilities, and equity. Assets include

Cash, Accounts Receivable, Notes Receivable, Prepaid Expenses, Land, Building, Equipment, Furniture, and Fixtures. Liabilities include Accounts Payable, Notes Payable, Accrued Liability, and Unearned Revenue. Equity includes Common Stock, Dividends, Revenue, and Expenses.

• Companies need a way to organize their accounts so they use a chart of accounts. Accounts starting

with 1 are usually Assets, 2 – Liabilities, 3 – Equity, 4 – Revenues, and 5 – Expenses. The second and third digits in account numbers indicate where the account fits within the category.

• A chart of accounts and a ledger are similar in that they both list the account names and account

numbers of the business. A ledger, though, provides more detail. It includes the increases and decreases of each account for a specific period and the balance of each account at a specific point in time.

• With a double-entry you need to record the dual effects of each transaction. Every transaction affects

at least two accounts.

• A T-account is a shortened form of each account in the ledger. The debit is on the left side, credit on

the right side, and the account name is shown on top.

• Debits are increases for assets, dividends, and expenses. Debits are decreases for liabilities, common

stock, and revenue.

• Credits are increases for liabilities, common stock, and revenue. Credits are decreases for assets,

dividends, and expenses.

• Assets, dividends, and expenses have a normal debit balance. Liabilities, common stock, and

revenue have a normal credit balance.

• Source documents provide the evidence and data for accounting transactions. Examples of source

documents a business would have are: bank deposit slips, purchase invoices, bank checks, and sales invoices

• Transactions are first recorded in a journal, which is the record of transactions in date order.

Horngrens Financial and Managerial Accounting 5th Edition Miller-Nobles Solutions Manual Visit TestBankDeal.com to get complete for all chapters

© 2016 Pearson Education, Inc. 2-2

• Step 1: Identify the accounts and the account type. You need this information before you can

complete the next step. Step 2: Decide if each account increases or decreases, then apply the rules of debits and credits. Reviewing the rules of debits and credits, we use the accounting equation to help determine debits and credits for each account. Step 3: Record transactions in the journal using journal entries. Step 4: Post the journal entry to the ledger. When journal entries are posted from the journal to the ledger, the dollar amount is transferred from the debit and credit columns to the specific accounts in the ledger. The date on the journal entry should also be transferred to the accounts in the ledger. Step 5: Determine whether the accounting equation is in balance. After each entry the accounting equation should always be in balance.

• Part 1: Date of the transaction. Part 2: Debit account name and dollar amount. Part 3: Credit account

name and dollar amount. The credit account name is indented. Part 4: Brief explanation.

• When transactions are posted from the journal to the ledger, the dollar amount is transferred from the

debit and credit columns to the specific accounts in the ledger. The date of the journal entry is also transferred to the accounts in the ledger. The posting reference columns in the journal and ledger are also completed. In a computerized system, this step is completed automatically when the transaction is recorded in the journal.

• The trial balance is used to prove the equality of total debits and total credits of all accounts in the

ledger; it is also used to prepare the financial statements.

• A trial balance verifies the equality of total debits and total credits of all accounts on the trial balance

and is an internal document used only by employees of the company. The balance sheet, on the other hand, presents the business’s accounting equation and is a financial statement that can be used by both internal and external users.

• If total debits equal total credits on the trial balance, it does not mean that the trial balance is error-

free. An incorrect amount could have been used, an entry could have been completely missed, or the wrong account title could have been debited or credited.

• The debt ratio is calculated by dividing total liabilities by total assets and shows the proportion of

assets financed with debt. It can be used to evaluate a business’s ability to pay its debts.

© 2016 Pearson Education, Inc. 2-3 Short Exercises S2-1

• Notes Receivable (A) f. Taxes Payable (L)
• Common Stock (E) g. Rent Expense (E)
• Prepaid Insurance (A) h. Furniture (A)
• Notes Payable (L) i. Dividends (E)
• Rent Revenue (E) j. Unearned Revenue (L)

S2-2

• Increase to Accounts Receivable (DR) f. Decrease to Prepaid Rent (CR)
• Decrease to Unearned Revenue (DR) g. Increase to Common Stock (CR)
• Decrease to Cash (CR) h. Increase to Notes Receivable (DR)
• Increase to Interest Expense (DR) i. Decrease to Accounts Payable (DR)
• Increase to Salaries Payable (CR) j. Increase to Interest Revenue (CR)

S2-3

• Notes Payable (CR) f. Common Stock (CR)
• Dividends (DR) g. Utilities Expense (DR)
• Service Revenue (CR) h. Office Supplies (DR)
• Land (DR) i. Advertising Expense (DR)
• Unearned Revenue (CR) j. Interest Payable (CR)

S2-4

Date Accounts and Explanation Debit Credit Jan. 1 Cash 35,000 Common Stock 35,000 Received cash in exchange for common stock.

• Medical Supplies 13,000

Accounts Payable 13,000 Purchased medical supplies on account.

• Cash 1,900

Service Revenue 1,900 Performed services for patients.

12 Rent Expense 2,600 Cash 2,600 Paid rent with cash.

15 Accounts Receivable 10,000 Service Revenue 10,000 Performed services for patients on account.

© 2016 Pearson Education, Inc. 2-4 S2-5

Date Accounts and Explanation Debit Credit Jan. 22 Accounts Receivable 9,000 Service Revenue 9,000 Performed services for customers on account.

30 Cash 7,000 Accounts Receivable 7,000 Received cash on account from customers.

31 Utilities Expense 210 Utilities Payable 210 Received a utility bill due in February.

31 Salaries Expense 2,400 Cash 2,400 Paid monthly salary to salesman.

31 Cash 2,475 Unearned Revenue 2,475 Received cash for 3 months consulting services in advance.

31 Dividends 900 Cash 900 Payment of cash dividends.

S2-6

Accounts Payable May 2 6,000 14,000 May 1 May 22 12,000 1,000 May 5 7,000 May 15 500 May 23 4,500 Bal.