The Recording 2 Process - BrainMass€¦ · Define debits and credits and explain how they are used to record business transactions. 3. Identify the basic steps in the recording process

45

The RecordingProcess

■■ THENAVIGATOR

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Before studying this chapter, you should know or, if necessary, review:

■ What are assets, liabilities, common stock, retained earnings, dividends, revenues, and expenses. (Ch. 1, pp. 12–13)

■ Why assets equal liabilities plus stockholders’ equity. (Ch. 1, p. 12)

■ What transactions are and how they affect the basic accounting equation. (Ch. 1, pp. 15–21)

C O N C E P T S F O R R E V I E W

T H E N A V I G A T O R ✓Understand Concepts for Review ❏

Read Feature Story ❏

Scan Study Objectives ❏

Read Preview ❏

Read text and answer Before You Go Onp. 53 ❏ p. 56 ❏ p. 67 ❏ p. 71 ❏

Work Demonstration Problem ❏

Review Summary of Study Objectives ❏

Answer Self-Study Questions ❏

Complete Assignments ❏

C h a p t e r

2

No Such Thing as a Perfect World When she got a job doing the accounting

for Forster’s Restaurants, Tanis Anderson had almost finished her business administration

degree at Simon Fraser University. But even after Tanis completed her degree requirements,

her education still continued—this time, in the real world.

Tanis’s responsibilities include paying the bills, tracking food and labor costs, and

managing the payroll for The Mug and Musket, a popular destination restaurant in Surrey,

British Columbia. “My title is Director of Finance,” she laughs, “but really that means I take

care of whatever needs doing!”

The use of judgment is a big part of the job. As Tanis says,

“I learned all the fundamentals in my business classes, but

school prepares you for a perfect world, and there is no such

thing.”

She feels fortunate that her boss understands her job is a

learning experience as well as a responsibility. “Sometimes

he’s let me do something he knew perfectly well was a mis-

take so I can learn something through experience,” she

admits.

To help others gain the benefits of her real-world learn-

ing, Tanis is always happy to help students in the area who

want to use Forster’s as the subject of a project or report. “It’s

the least I can do,” she says.

■■ THENAVIGATOR

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After studying this chapter, you should be able to:

1. Explain what an account is and how it helps in the recording process.

2. Define debits and credits and explain how they are used to record business transactions.

3. Identify the basic steps in the recording process.

4. Explain what a journal is and how it helps in the recording process.

5. Explain what a ledger is and how it helps in the recording process.

6. Explain what posting is and how it helps in the recording process.

7. Prepare a trial balance and explain its purposes.■■ THE

NAVIGATOR✓✓

S T U D Y O B J E C T I V E S

F E A T U R E S T O R YACCOUNTING MATTERS!

P R E V I E W O F C H A P T E R 1 5

In Chapter 1, we analyzed business transactions in terms of the accounting equation. The cu-mulative effects of these transactions were presented in tabular form. Imagine a restaurantand gift shop such as The Mug and Musket using the same tabular format as Softbyte, Inc. tokeep track of every one of its transactions. In a single day, this restaurant and gift shop engagesin hundreds of business transactions. To record each transaction this way would be impracti-cal, expensive, and unnecessary. Instead, a set of procedures and records are used to keep trackof transaction data more easily.

This chapter introduces and illustrates these basic procedures and records. The contentand organization of Chapter 2 are as follows.

P R E V I E W O F C H A P T E R 2

THE RECORDING PROCESS

• Debits and credits

• Debit and credit procedure

• Stockholders’ equityrelationships

• Expansion of basic equation

The Account

• Journal

• Ledger

Steps in theRecording Process

• Summary illustration of journalizing and posting

The Recording Process Illustrated

• Limitations of a trial balance

• Locating errors

• Use of dollar signs

The Trial Balance

■■ THE NAVIGATOR

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47

The Account

An account is an individual accounting record of increases and decreases in a spe-cific asset, liability, or stockholders’ equity item. For example, Softbyte, Inc. (thecompany discussed in Chapter 1) would have separate accounts for Cash, AccountsReceivable, Accounts Payable, Service Revenue, Salaries Expense, and so on. In itssimplest form, an account consists of three parts: (1) the title of the account, (2) aleft or debit side, and (3) a right or credit side. Because the alignment of these partsof an account resembles the letter T, it is referred to as a T account. The basic formof an account is shown in Illustration 2-1.

STUDY OBJECTIVE 1

Explain what an accountis and how it helps in the

recording process.

Left or debit side

Debit balance

Right or credit side

Credit balance

Title of Account

Debit Credit

Illustration 2-1Basic form of account

The T account is a standard shorthand in accounting that helps make clear theeffects of transactions on individual accounts. We will use it often throughout thisbook to explain basic accounting relationships. (Note that when we are referring toa specific account, we capitalize its name.)

Debits and CreditsToday, the term debit indicates left, and credit indicates right. They are commonlyabbreviated as Dr. for debit and Cr. for credit.1 These terms come from Latin wordsthat originally meant “debtor” and “creditor.” Today they are directional signals.They indicate which side of a T account a number will be recorded on. Entering anamount on the left side of an account is called debiting the account; making an entryon the right side is crediting the account.

The procedure of having debits on the left and credits on the right is an ac-counting custom, or rule (like the custom of driving on the right-hand side of theroad in the United States). This rule applies to all accounts. When the totals of thetwo sides are compared, an account will have a debit balance if the total of the debitamounts exceeds the credits. An account will have a credit balance if the creditamounts exceed the debits.

The recording of debits and credits in an account is shown in Illustration 2-2 forthe cash transactions of Softbyte. The data are taken from the cash column of thetabular summary in Illustration 1-8.

48 CHAPTER 2 The Recording Process

STUDY OBJECTIVE 2

Define debits and creditsand explain how they areused to record business

transactions.

HELPFUL HINT

Debits must equal creditsfor each transaction.

Account FormTabular Summary

$15,000–7,0001,2001,500

–1,700–250600

–1,300$ 8,050

Cash Cash15,0001,2001,500

600

7,0001,700

2501,300

Balance

(Debits) (Credits)

(Debit)8,050

Illustration 2-2Tabular summary comparedto account form

In the tabular summary every positive item represents a receipt of cash; every neg-ative amount represents a payment of cash. Notice that in the account form the in-creases in cash are recorded as debits, and the decreases in cash are recorded ascredits. Having increases on one side and decreases on the other helps in deter-mining the total of each side of the account as well as the overall balance in the ac-count. The account balance, a debit of $8,050, indicates that Softbyte, Inc. has had$8,050 more increases than decreases in cash.

Debit and Credit ProcedureIn Chapter 1 you learned the effect of a transaction on the basic accounting equa-tion. Remember that each transaction must affect two or more accounts to keep thebasic accounting equation in balance. In other words, for each transaction debitsmust equal credits in the accounts. The equality of debits and credits provides thebasis for the double-entry system of recording transactions.

Under the double-entry system the dual (two-sided) effect of each transaction isrecorded in appropriate accounts. This universally used system provides a logical

1These terms and their abbreviations come from the Latin words debere (Dr.) and credere (Cr.).

Accounting Cycle Tutorial—Recording Business Transactions

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method for recording transactions. It also offers a means of proving the accuracy ofthe recorded amounts. If every transaction is recorded with equal debits and credits,then the sum of all the debits to the accounts must equal the sum of all the credits.

The double-entry system for determining the equality of the accounting equa-tion is much more efficient than the plus/minus procedure used in Chapter 1. There,it was necessary after each transaction to compare total assets with total liabilitiesand stockholders’ equity to determine the equality of the two sides of the ac-counting equation.

Assets and LiabilitiesWe know that both sides of the basic equation (Assets � Liabilities � Stockhold-ers’ Equity) must be equal. It follows that increases and decreases in assets andliabilities must be recorded opposite from each other. In Illustration 2-2, increasesin cash—an asset—were entered on the left side, and decreases in cash were enteredon the right side. Therefore, increases in liabilities must be entered on the right orcredit side, and decreases in liabilities must be entered on the left or debit side.The effects that debits and credits have on assets and liabilities are summarized asfollows.

The Account 49

HELPFUL HINT

The normal balance for anaccount is always the

same as the increase side.

Debits CreditsIncrease assets Decrease assetsDecrease liabilities Increase liabilities

Debits to a specific asset account should exceed the credits to that account.Credits to a liability account should exceed debits to that account. The normalbalance of an account is on the side where an increase in the account is recorded.Thus, asset accounts normally show debit balances, and liability accounts normallyshow credit balances. The normal balances can be diagrammed as follows.

Assets LiabilitiesDebit for Credit for Debit for Credit forincrease decrease decrease increase

Normal Normalbalance balance

Knowing the normal balance in an account may help you trace errors. For ex-ample, a credit balance in an asset account such as Land or a debit balance in aliability account such as Accounts Payable would indicate recording errors. Occa-sionally, an abnormal balance may be correct. The Cash account, for example, willhave a credit balance when a company has overdrawn its bank balance (i.e., writtena “bad” check).

Stockholders’ EquityAs indicated in Chapter 1, there are five subdivisions of stockholders’ equity:common stock, retained earnings, dividends, revenues, and expenses. In a double-entry system, accounts are kept for each of these subdivisions, as explained below.

Illustration 2-4Normal balances—assetsand liabilities

Illustration 2-3Debit and credit effects—assets and liabilities

C O M M O N S T O C K . Common stock is issued in exchange for the owners’ in-vestment paid into the corporation. The Common Stock account is increased bycredits and decreased by debits. When cash is invested in the business in exchangefor shares of the corporation’s stock, Cash is debited and Common Stock iscredited.

The rules of debit and credit for the Common Stock account are stated asfollows.

R E TA I N E D E A R N I N G S . Retained earnings is net income that is retained in thebusiness. It represents the portion of stockholders’ equity that has been accumu-lated through the profitable operation of the business. Retained earnings is in-creased by credits (net income) and decreased by debits (dividends or net losses) asshown below.


Debits CreditsDecrease common stock Increase common stock

The normal balance in this account may be diagrammed as follows.

Common StockDebit for Credit fordecrease increase

Normalbalance

D I V I D E N D S . A dividend is a distribution by a corporation to its stockholders ona pro rata (equal) basis. The most common form of a distribution is a cash dividend.Dividends can be declared (authorized) only by the board of directors. They are areduction of the stockholders’ claims on retained earnings. The Dividends accountis increased by debits and decreased by credits, with a normal debit balance asshown in Illustration 2-8.

DividendsDebit for Credit forincrease decrease

Normalbalance

Illustration 2-5Debit and credit effect—common stock

Illustration 2-6Normal balance—commonstock

Illustration 2-7Debit and credit effect andnormal balance—retainedearnings

Illustration 2-8Debit and credit effect andnormal balance—dividends

Retained EarningsDebit for Credit fordecrease increase

Normalbalance

HELPFUL HINT

The rules for debit andcredit and the normal bal-ance of common stock arethe same as for liabilities.

Revenues and ExpensesRemember that the ultimate purpose of earning revenues is to benefit the stock-holders of the business.When revenues are earned, stockholders’ equity is increased.Revenues are a subdivision of stockholders’ equity that provides information as towhy stockholders’ equity increased. Revenue accounts are increased by credits anddecreased by debits.Accordingly, the effect of debits and credits on revenue accountsis identical to their effect on stockholders’ equity.

Expenses have the opposite effect: expenses decrease stockholders’ equity.Since expenses are the negative factor in computing net income, and revenues arethe positive factor, it is logical that the increase and decrease sides of expenseaccounts should be the reverse of revenue accounts. Thus, expense accounts areincreased by debits and decreased by credits.

The effect of debits and credits on revenues and expenses may be stated asfollows.

The Account 51

HELPFUL HINT

Because revenues increasestockholders’ equity, a

revenue account has thesame debit and credit

rules as does the commonstock account. Conversely,

expenses have theopposite effect.

Debits CreditsDecrease revenues Increase revenuesIncrease expenses Decrease expenses

Revenues ExpensesDebit for Credit for Debit for Credit fordecrease increase increase decrease

Normal Normalbalance balance

Credits to revenue accounts should exceed the debits, and debits to expense ac-counts should exceed credits. Thus, revenue accounts normally show credit balances,and expense accounts normally show debit balances. The normal balances may bediagrammed as follows.

Illustration 2-9Debit and credit effects—revenues and expenses

Illustration 2-10Normal balances—revenuesand expenses

The Chicago Cubs baseball team has the following major revenue and expenseaccounts.

Do you think that the Chicago Bears (football team) would be likely to havethe same major revenue and expense accounts as the Cubs? Do you thinkthat Chicago-based Wrigley Company would be likely to have the same majorrevenue and expense accounts? Why or why not?

ACCOUNTING MATTERS! Business Insight

Revenues ExpensesAdmissions (ticket sales) Players’ salariesConcessions Administrative salariesTelevision and radio TravelAdvertising Ballpark maintenance


Stockholders’ Equity RelationshipsAs indicated in Chapter 1, common stock and retained earnings are reported in thestockholders’ equity section of the balance sheet. Dividends are reported on the re-tained earnings statement. Revenues and expenses are reported on the incomestatement. Dividends, revenues, and expenses are eventually transferred to retainedearnings at the end of the period. As a result, a change in any one of these threeitems affects stockholders’ equity. The relationships related to stockholders’ equityare shown in Illustration 2-11.

Expansion of the Basic EquationYou have already learned the basic accounting equation. Illustration 2-12 expandsthis equation to show the accounts that comprise stockholders’ equity. In addition,the debit/credit rules and effects on each type of account are illustrated. Study thisdiagram carefully. It will help you understand the fundamentals of the double-entrysystem. Like the basic equation, the expanded basic equation must be in balance(total debits equal total credits).

Stockholders' Equity

Common stock(Investments by stockholders)

Retained earnings(Net income retained in business)

Retained Earnings Statement

DividendsNet income or Net loss(Revenues less expenses)

Income Statement

Balance Sheet

Illustration 2-11Stockholders’ equityrelationships

Illustration 2-12Expanded basic equationand debit/credit rules andeffects

Assets Stockholders’ Equity+BasicEquation

ExpandedBasic Equation = + – ++ –

Debit / CreditEffects

Liabilities=

Dr.+

Assets

Cr.–

Dr.–

Liabilities

Cr.+

Dr.–

CommonStock

Cr.+

Dr.–

RetainedEarnings

Cr.+

Dr.+

Dividends

Cr.–

Dr.–

Revenues

Cr.+

Dr.+

Expenses

Cr.–

⎧ ⎪ ⎪ ⎪ ⎪

⎪ ⎪ ⎪

⎪

⎪ ⎪ ⎪ ⎪ ⎪ ⎪ ⎪ ⎪ ⎨ ⎪ ⎪ ⎪ ⎪ ⎪

⎪ ⎪ ⎪

⎪ ⎪ ⎪

⎪ ⎪ ⎪ ⎪ ⎪ ⎩

Steps in the Recording Process 53

Steps in the Recording Process

In practically every business, the basic steps in the recording process are:

1. Analyze each transaction for its effects on the accounts.2. Enter the transaction information in a journal (book of original entry).3. Transfer the journal information to the appropriate accounts in the ledger

(book of accounts).

Review It1. What do the terms debit and credit mean?

2. What are the debit and credit effects on assets, liabilities, and stockhold-ers’ equity?

3. What are the debit and credit effects on revenues, expenses, anddividends?

4. What are the normal balances for PepsiCo’s Cash, Accounts Payable, andInterest Expense accounts? The answers to this question are provided onpage 90.

Do ItKate Browne, president of Hair It Is, Inc., has just rented space in ashopping mall in which she will open and operate a beauty salon. Longbefore opening day and before purchasing equipment, hiring assistants,and remodeling the space, Kate has been advised to set up a double-entry set of accounting records in which to record all of her businesstransactions.

Identify the balance sheet accounts that Hair It Is, Inc., will likely needto record the transactions needed to establish and open the business.Also, indicate whether the normal balance of each account is a debit or acredit.

ACTION PLAN■ Determine the types of accounts needed: Kate will need asset accounts for

each type of asset she invests in the business, and liability accounts for anydebts she incurs.

■ Understand the types of stockholders’ equity accounts: Only CommonStock will be needed when Kate begins the business. Other stockholders’equity accounts will be needed later.

SOLUTION Hair It Is, Inc., would likely need the following accounts torecord the transactions needed to ready the beauty salon for opening day:Cash (debit balance); Equipment (debit balance); Supplies (debit balance);Accounts Payable (credit balance); Notes Payable (credit balance), if thebusiness borrows money; and Common Stock (credit balance).

Related exercise material: BE2-1, BE2-2, E2-1, and E2-3.

B E F O R E Y O U G O O N . . .


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STUDY OBJECTIVE 3

Identify the basic steps inthe recording process.

Although it is possible to enter transaction information directly into the accountswithout using a journal, few businesses do so.

The sequence of events in the recording process begins with the transaction.Evidence of the transaction is provided by a business document, such as a salesslip, a check, a bill, or a cash register tape. This evidence is analyzed to determinethe effects of the transaction on specific accounts. The transaction is then enteredin the journal. Finally, the journal entry is transferred to the designated accountsin the ledger. The sequence of events in the recording process is shown in Illus-tration 2-13.

The basic steps in the recording process occur repeatedly. The analysis of trans-actions was illustrated in Chapter 1. Further examples will be given in this and laterchapters. The other steps in the recording process are explained in the next sections.


Illustration 2-13The recording process

Analyze each transaction Enter transaction in a journal Transfer journal informationto ledger accounts

The Recording Process

JOURNALInvoice

JOURNAL

LEDGERASSETS LIABILITIES

S. Equity

While most companies record transactions very carefully, the reality is that some-times even the most careful companies make mistakes in their accounting records.For example, Hanover Compressor at one time announced that it was restating itsfinancial results for an error that had been made in each of the previous five years.It had accidentally omitted the cost of compressors manufactured at one of itsplants, causing the cost of its inventory to be misstated. Bank One Corporation wasfined $1.8 million by banking regulators because regulators felt that its account-ing system was unreliable and caused the bank to violate certain minimum bank-ing requirements. Finally, before a major overhaul of its accounting system, the fi-nancial records of Waste Management Company were in such disarray that of thecompany’s 57,000 employees, 10,000 were receiving pay slips that were in error.

In order to prepare and issue financial statements, these companies’ ac-counting equations (debit and credits) must have been in balance at year-end. How could these errors or misstatements have occurred?


The JournalTransactions are initially recorded in chronological order in journals before beingtransferred to the accounts. Thus, the journal is referred to as the book of originalentry. For each transaction the journal shows the debit and credit effects on specificaccounts. (In a computerized system, “journals” are now kept as files, and “accounts”are recorded in computer databases.)

Companies may use various kinds of journals, but every company has the mostbasic form of journal, a general journal. Typically, a general journal has spaces fordates, account titles and explanations, references, and two amount columns. When-ever we use the term journal in this textbook without a modifying adjective, wemean the general journal.

The journal makes several significant contributions to the recording process:

1. It discloses in one place the complete effects of a transaction.2. It provides a chronological record of transactions.3. It helps to prevent or locate errors because the debit and credit amounts for

each entry can be readily compared.

JournalizingEntering transaction data in the journal is known as journalizing. Separate journalentries are made for each transaction. A complete entry consists of: (1) the date ofthe transaction, (2) the accounts and amounts to be debited and credited, and (3) abrief explanation of the transaction.

Illustration 2-14 shows the technique of journalizing, using the first two transac-tions of Softbyte, Inc. These transactions were: September 1, stockholders invested$15,000 cash in the corporation in exchange for shares of stock, and computerequipment was purchased for $7,000 cash. The number J1 indicates that these twoentries are recorded on the first page of the general journal.


The standard form and content of journal entries are as follows.

1. The date of the transaction is entered in the Date column. The date recordedshould include the year, month, and day of the transaction.

2. The debit account title (that is, the account to be debited) is entered first at theextreme left margin of the column headed “Account Titles and Explanation,”and the amount of the debit is recorded in the Debit column.

3. The credit account title (that is, the account to be credited) is indented and en-tered on the next line in the column headed “Account Titles and Explanation,”and the amount of the credit is recorded in the Credit column.

4. A brief explanation of the transaction is given on the line below the credit ac-count title.

Illustration 2-14Technique of journalizing

STUDY OBJECTIVE 4

Explain what a journal isand how it helps in the

recording process.

GENERAL JOURNAL J1

Date Account Titles and Explanation Ref. Debit Credit

2006 Sept. 1 Cash 15,000

Common Stock 15,000(Issued shares of stock for cash)

1 Computer Equipment 7,000Cash 7,000

(Purchased equipment for cash)

5. A space is left between journal entries. The blank space separates individualjournal entries and makes the entire journal easier to read.

6. The column titled Ref. (which stands for reference) is left blank when the jour-nal entry is made. This column is used later when the journal entries are trans-ferred to the ledger accounts. At that time, the ledger account number is placedin the Reference column to indicate where the amount in the journal entry wastransferred.

It is important to use correct and specific account titles in journalizing. Sincemost accounts appear later in the financial statements, wrong account titles lead toincorrect financial statements. Some flexibility exists initially in selecting accounttitles. The main criterion is that each title must appropriately describe the contentof the account. For example, the account title used for the cost of delivery trucksmay be Delivery Equipment, Delivery Trucks, or Trucks. Once a company choosesthe specific title to use, all later transactions involving the account should berecorded under that account title.2

If an entry involves only two accounts, one debit and one credit, it is considereda simple entry. Some transactions, however, require more than two accounts in jour-nalizing. When three or more accounts are required in one journal entry, the entryis referred to as a compound entry. To illustrate, assume that on July 1, Butler Com-pany purchases a delivery truck costing $14,000 by paying $8,000 cash and the bal-ance on account (to be paid later). The compound entry is as follows.


Illustration 2-15Compound journal entry

HELPFUL HINT

Assume you find thiscompound entry:

Wages Expense 700

Cash 1,200

Rent Expense 400

(Paid cash for wages andrent) Is the entry correct?No. It is incorrect in form

because both debitsshould be listed before the

credit. It is incorrect incontent because the debitamounts do not equal the

credit amount.

2In homework problems, when specific account titles are given, they should be used. When accounttitles are not given, you may select account titles that identify the nature and content of each ac-count. The account titles used in journalizing should not contain explanations such as Cash Paid orCash Received.

In a compound entry, the total debit and credit amounts must be equal. Also, thestandard format requires that all debits be listed before the credits.


Review It1. What is the sequence of the steps in the recording process?

2. What contribution does the journal make to the recording process?

3. What is the standard form and content of a journal entry made in thegeneral journal?

GENERAL JOURNAL J1


2006July 1 Delivery Equipment 14,000

Cash 8,000Accounts Payable 6,000

(Purchased truck for cash with balance on account)


Illustration 2-16The general ledger

The LedgerThe entire group of accounts maintained by a company is called the ledger. The led-ger keeps in one place all the information about changes in specific account balances.

Companies may use various kinds of ledgers, but every company has a generalledger. A general ledger contains all the assets, liabilities, and stockholders’ equityaccounts, as shown in Illustration 2-16.


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Do ItIn establishing her beauty salon, Hair It Is, Inc., Kate Browne as presidentand sole stockholder engaged in the following activities.

1. Opened a bank account in the name of Hair It Is, Inc., and deposited$20,000 of her own money in this account in exchange for shares of com-mon stock.

2. Purchased equipment on account (to be paid in 30 days) for a total costof $4,800.

3. Interviewed three applicants for the position of beautician.

In what form (type of record) should Hair It Is, Inc., record these threeactivities? Prepare the entries to record the transactions.

ACTION PLAN■ Understand which activities need to be recorded and which do not. Any

that have economic effects should be recorded in a journal.■ Analyze the effects of transactions on asset, liability, and stockholders’ equity

accounts.

SOLUTION Each transaction that is recorded is entered in the general jour-nal. The three activities would be recorded as follows.

Related exercise material: BE2-3, BE2-5, BE2-6, E2-2, E2-4, E2-6, E2-7, and E2-8.

1. Cash 20,000Common Stock 20,000

(Issued shares of stock for cash)2. Equipment 4,800

Accounts Payable 4,800(Purchased equipment on account)

3. No entry because no transaction has occurred.

IndividualAssets

IndividualLiabilities

IndividualStockholders' Equity

EquipmentLand

Supplies

Cash

Interest PayableSalaries Payable

Accounts Payable

Notes Payable

Salaries ExpenseService Revenue

Common Stock

Retained Earnings

STUDY OBJECTIVE 5

Explain what a ledger isand how it helps in the

recording process.


A business can use a looseleaf binder or card file for the ledger. Each accountis kept on a separate sheet or card. Whenever the term ledger is used in this text-book without a modifying adjective, it means the general ledger.

The ledger should be arranged in the order in which accounts are presentedin the financial statements, beginning with the balance sheet accounts. First inorder are the asset accounts, followed by liability accounts, stockholders’ eq-uity accounts, revenues, and expenses. Each account is numbered for easieridentification.

The ledger provides management with the balances in various accounts. Forexample, the Cash account shows the amount of cash that is available to meet cur-rent obligations. Amounts due from customers can be found by examining AccountsReceivable, and amounts owed to creditors can be found by examining AccountsPayable.

Standard Form of AccountThe simple T-account form used in accounting textbooks is often very useful forillustration purposes. However, in practice, the account forms used in ledgers aremuch more structured. A widely used form is shown in Illustration 2-17, usingassumed data from a cash account.

In his autobiography Sam Walton described the double-entry accounting systemhe began the Wal-Mart empire with: “We kept a little pigeonhole on the wallfor the cash receipts and paperwork of each [Wal-Mart] store. I had a blue binderledger book for each store. When we added a store, we added a pigeonhole.We did this at least up to twenty stores. Then once a month, the bookkeeperand I would enter the merchandise, enter the sales, enter the cash, and bal-ance it.”

Source: Sam Walton, Made in America (New York: Doubleday, 1992), p. 53.

Why did Sam Walton keep separate pigeonholes and blue binders for eachstore? Why bother to keep separate records for each store?


Illustration 2-17Three-column form ofaccount

CASH NO. 101

Date Explanation Ref. Debit Credit Balance

2006June 1 25,000 25,000

2 8,000 17,0003 4,200 21,2009 7,500 28,700

17 11,700 17,00020 250 16,75030 7,300 9,450


This form is often called the three-column form of account because it has threemoney columns—debit, credit, and balance. The balance in the account is deter-mined after each transaction. Note that the explanation space and reference columnsare used to provide special information about the transaction.

PostingThe procedure of transferring journal entries to the ledger accounts is called posting.Posting involves the following steps.

1. In the ledger, enter in the appropriate columns of the account(s) debited thedate, journal page, and debit amount shown in the journal.

2. In the reference column of the journal, write the account number to which thedebit amount was posted.

3. In the ledger, enter in the appropriate columns of the account(s) credited thedate, journal page, and credit amount shown in the journal.

4. In the reference column of the journal, write the account number to which thecredit amount was posted.

These four steps are diagrammed in Illustration 2-18 using the first journal entry ofSoftbyte, Inc. The boxed numbers indicate the sequence of the steps.

2006Sept.1 Cash

Common Stock (Issued shares of stock for cash)

Date Account Titles and Explanation

GENERAL JOURNAL

Ref. Debit Credit

J1

2006Sept.1


No.101Cash

GENERAL LEDGER

Key: Post to debit account–date, journal page number, and amount.Enter debit account number in journal reference column.Post to credit account–date, journal page number, and amount.Enter credit account number in journal reference column.

No.311

2006Sept.1


Common Stock

2

2

4

4

1

1

3

3

15,00015,000

J1 15,000 15,000

J1 15,000 15,000

101311

Illustration 2-18Posting a journal entry

STUDY OBJECTIVE 6

Explain what posting isand how it helps in the

recording process.


HELPFUL HINT

How can one tell whetherall postings have been

completed? Answer: Scanthe reference column of

the journal to see whetherthere are any blanks oppo-site account titles. If thereare no blanks, all postings

have been made.

Posting should be performed in chronological order. That is, all the debits andcredits of one journal entry should be posted before proceeding to the next journalentry. Postings should be made on a timely basis to ensure that the ledger is up todate.3

The reference column in the journal serves several purposes. The numbers inthis column indicate the entries that have been posted. After the last entry has beenposted, this column should be scanned to see that all postings have been made.

The reference column of a ledger account indicates the journal page from whichthe transaction was posted. The explanation space of the ledger account is used in-frequently because an explanation already appears in the journal. It generally isused only when detailed analysis of account activity is required.

Chart of AccountsThe number and type of accounts used differ for each enterprise. The number ofaccounts depends on the amount of detail desired by management. For example,the management of one company may want one account for all types of utility ex-pense. Another may keep separate expense accounts for each type of utility, suchas gas, electricity, and water. Similarly, a small corporation like Softbyte, Inc. willhave fewer accounts than a corporate giant like Ford Motor Company. Softbyte,Inc. may be able to manage and report its activities in twenty to thirty accounts,while Ford requires thousands of accounts to keep track of its worldwide activities.

Most companies have a chart of accounts that lists the accounts and the accountnumbers that identify their location in the ledger. The numbering system used toidentify the accounts usually starts with the balance sheet accounts and follows withthe income statement accounts.

3In homework problems, it will be permissible to journalize all transactions before posting any ofthe journal entries.

Determining what to record is the most critical (and for most businesses the mostexpensive) point in the accounting process. In computerized systems, after thisphase is completed, the input and all further processing just boil down to merg-ing files and generating reports. Programmers and management information sys-tem types with good accounting backgrounds (such as they should gain from agood principles of accounting textbook) are better able to develop effective com-puterized systems.

What do accountants call those things that are first recorded at “the mostcritical . . . point in the accounting process”? What is the name of the“book” into which those things are first recorded? What does the accountantcall the group of accounts into which the individual entries are posted(merged and filed)?


The Recording Process Illustrated 61

In this and the next two chapters, we will be explaining the accounting forPioneer Advertising Agency Inc. (a service enterprise). Accounts 101–199 indicateasset accounts; 200–299 indicate liabilities; 300–399 indicate stockholders’ equity ac-counts; 400–499, revenues; 600–799, expenses; 800–899, other revenues; and 900–999,other expenses.

The chart of accounts for Pioneer Advertising Agency Inc. is shown in Ill-ustration 2-19. Accounts shown in red are used in this chapter; accounts shown inblack are explained in later chapters.

You will notice that there are gaps in the numbering system of the chart of ac-counts for Pioneer Advertising Agency Inc. Gaps are left to permit the insertion ofnew accounts as needed during the life of the business.

The Recording Process Illustrated

Illustrations 2-20 through 2-29 show the basic steps in the recording process, usingthe October transactions of the Pioneer Advertising Agency Inc. Its accountingperiod is a month. A basic analysis and a debit-credit analysis precede the journal-izing and posting of each transaction. For simplicity, the T-account form is used inthe illustrations instead of the standard account form.

Study the transaction analyses in Illustrations 2-20 through 2-29 carefully. Thepurpose of transaction analysis is first to identify the type of account involved, andthen to determine whether a debit or a credit to the account is required. You shouldalways perform this type of analysis before preparing a journal entry. Doing so willhelp you understand the journal entries discussed in this chapter as well as morecomplex journal entries to be described in later chapters.

Keep in mind that every journal entry affects one or more of the followingitems: assets, liabilities, stockholders’ equity, revenues, or expenses. By becomingskilled at transaction analysis, you will be able to recognize quickly the impact ofany transaction on these five items.

Assets Stockholders’ Equity101 Cash 311 Common Stock112 Accounts Receivable 320 Retained Earnings126 Advertising Supplies 332 Dividends130 Prepaid Insurance 350 Income Summary157 Office Equipment158 Accumulated Depreciation—Office Equipment Revenues

400 Service Revenue

Liabilities Expenses200 Notes Payable 631 Advertising Supplies Expense201 Accounts Payable 711 Depreciation Expense209 Unearned Revenue 722 Insurance Expense212 Salaries Payable 726 Salaries Expense230 Interest Payable 729 Rent Expense

905 Interest Expense

PIONEER ADVERTISING AGENCY INC.Chart of Accounts

Illustration 2-19Chart of accounts for PioneerAdvertising Agency Inc.


TransactionOctober 1, stockholders invest $10,000 cash in an advertising venture to be known as the Pioneer Advertising Agency Inc.

BasicAnalysis

Debit – CreditAnalysis

Debits increase assets: debit Cash $10,000.Credits increase stockholders' equity: credit Common Stock $10,000

The asset Cash is increased $10,000, and stockholders’ equity (specifically, Common Stock) is increased $10,000.

JournalEntry

Posting Oct. 1, 10,000

Cash 101

Oct. 1, 10,000

Common Stock 311

Oct. 1 Cash Common Stock (Issued shares of stock for cash)

101311

10,00010,000

TransactionOctober 1, office equipment costing $5,000 is purchased bysigning a 3-month, 12%, $5,000 note payable.

BasicAnalysis

The asset Office Equipment is increased $5,000, and theliability Notes Payable is increased $5,000.


Debits increase assets: debit Office Equipment $5,000.Credits increase liabilities: credit Notes Payable $5,000.

JournalEntry

Oct. 1, 5,000

Office Equipment 157

Oct. 1, 5,000

Notes Payable 200Posting

Oct. 1 Office Equipment Notes Payable (Issued 3-month, 12% note for office equipment)

157200

5,0005,000

Illustration 2-20Investment of cash bystockholders

Illustration 2-21Purchase of officeequipment


Illustration 2-22Receipt of cash for futureservice

Illustration 2-23Payment of monthly rent

TransactionOctober 2, a $1,200 cash advance is received from R. Knox, aclient, for advertising services that are expected to becompleted by December 31.

BasicAnalysis


Debits increase assets: debit Cash $1,200.Credits increase liabilities: credit Unearned Revenue $1,200.

The asset Cash is increased $1,200; the liability UnearnedRevenue is increased $1,200 because the service has not beenprovided yet. That is, when an advance payment is received,an unearned revenue (a liability) should be recorded in orderto recognize the obligation that exists. Note also that althoughmany liabilities have the word “payable” in their title, unearnedrevenue is considered a liability even though the word payableis not used.

JournalEntry

Posting Oct. 1 10,000 2 1,200

Cash 101Oct. 2 1,200

Unearned Revenue 209

Oct. 2 Cash Unearned Revenue (Received cash from R. Knox for future service)

101209

1,2001,200

Transaction October 3, office rent for October is paid in cash, $900.

BasicAnalysis


Debits increase expenses: debit Rent Expense $900.Credits decrease assets: credit Cash $900.

The expense account, Rent Expense, is increased $900 because the payment pertains only to the current month; the asset Cash is decreased $900.

JournalEntry

Posting Oct. 1 10,0002 1,200

Cash 101 Rent Expense 729

Oct. 3 Rent Expense Cash (Paid October rent)

729101

900900

Oct. 3 900 Oct. 3 900

HELPFUL HINT

When the revenue isearned, the Unearned Rev-

enue account is debited(decreased), and a rev-

enue account is credited(increased).


Transaction October 4, $600 is paid for a one-year insurance policy thatwill expire next year on September 30.

BasicAnalysis


Debits increase assets: debit Prepaid Insurance $600.Credits decrease assets: credit Cash $600.

The asset Prepaid Insurance is increased $600 because thepayment extends to more than the current month; the assetCash is decreased $600. Note that payments of expenses thatwill benefit more than one accounting period are identified asprepaid expenses or prepayments. When a payment is made,an asset account is debited in order to show the service orbenefit that will be received in the future.

JournalEntry

Posting Oct. 4 600Oct. 1 10,000 2 1,200

Oct. 3 900 4 600

130101

Cash 101 Prepaid Insurance 130

Oct. 4 Prepaid Insurance Cash (Paid one-year policy; effective date October 1)

600600

Transaction October 5, an estimated 3-month supply of advertisingmaterials is purchased on account from Aero Supply for $2,500.

BasicAnalysis


Debits increase assets: debit Advertising Supplies $2,500.Credits increase liabilities: credit Accounts Payable $2,500.

The asset Advertising Supplies is increased $2,500; the liabilityAccounts Payable is increased $2,500.

JournalEntry

Posting Oct. 5 2,500

Advertising Supplies 126

Oct. 5 2,500

Accounts Payable 201

Oct. 5 Advertising Supplies Accounts Payable (Purchased supplies on account from Aero Supply)

126201

2,5002,500

Illustration 2-24Payment for insurance

Illustration 2-25Purchase of supplies oncredit


Transaction

October 9, hire four employees to begin work on October 15.Each employee is to receive a weekly salary of $500 for a 5-daywork week, payable every 2 weeks—first payment made on October 26.

BasicAnalysis

A business transaction has not occurred. There is only anagreement between the employer and the employees to enterinto a business transaction beginning on October 15. Thus, adebit–credit analysis is not needed because there is no accountingentry. (See transaction of October 26 for first entry.)

Transaction October 20, the board of directors declares and pays a$500 cash dividend to stockholders.

BasicAnalysis


Debits increase dividends: debit Dividends $500.Credits decrease assets: credit Cash $500.

The dividends account is increased $500;the asset Cash is decreased $500.

JournalEntry

Posting Oct. 1 10,000 2 1,200

Cash 101

Oct. 3 9004 600

20 500

Oct. 20 Dividends Cash (Declared and paid a cash dividend)

332101

500500

Oct. 20 500

Dividends 332

Illustration 2-26Hiring of employees

Illustration 2-27Declaration and payment ofdividend by corporation


Illustration 2-28Payment of salaries

Illustration 2-29Receipt of cash for servicesprovided

TransactionOctober 26, employee salaries of $4,000 are owed and paid incash. (See October 9 transaction.)

BasicAnalysis


Debits increase expenses: debit Salaries Expense $4,000.Credits decrease assets: credit Cash $4,000.

The expense account Salaries Expense is increased $4,000; theasset Cash is decreased $4,000.

JournalEntry

Posting

Oct. 26 Salaries Expense Cash (Paid salaries to date)

726101

4,0004,000

Oct. 3 9004 600

20 500 26 4,000

Oct. 1 10,000 2 1,200

Cash 101

Oct. 26 4,000

Salaries Expense 726

TransactionOctober 31, received $10,000 in cash from Copa Company foradvertising services provided in October.

BasicAnalysis


Debits increase assets: debit Cash $10,000.Credits increase revenues: credit Service Revenue $10,000.

The asset Cash is increased $10,000; the revenue accountService Revenue is increased $10,000.

JournalEntry

PostingOct. 31 10,000

Service Revenue 400

Oct. 1 10,000 2 1,200

31 10,000

Cash 101

Oct. 3 9004 600

20 500 26 4,000

Oct. 31 Cash Service Revenue (Received cash for services provided)

101400

10,00010,000


Review It1. How does journalizing differ from posting?

2. What is the purpose of the (a) ledger and (b) chart of accounts?

3. Why are gaps left in the chart of accounts numbering system?

Do ItHair It Is, Inc. recorded the following transactions in a general journal dur-ing the month of March.

Cash 2,280Service Revenue 2,280

Wages Expense 400Cash 400

Utilities Expense 92Cash 92

Post these entries to the general ledger accounts. Determine the ending bal-ance in the Cash account. The beginning balance in cash on March 1 was$600.

ACTION PLAN■ Recall that posting involves transferring the journalized debits and credits

to specific accounts in the ledger.■ Determine the ending balance by netting the total debits and credits.

SOLUTIONCash

3/1 600 4002,280 92

3/31 Bal. 2,388

Service Revenue2,280

Wages Expense400

Utilities Expense92


Related exercise material: BE2-7, BE2-8, E2-5, and E2-8. ■■ THE NAVIGATOR

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Summary Illustration of Journalizing and PostingThe journal for Pioneer Advertising Agency Inc. for October is shown in Illustra-tion 2-30. The ledger is shown in Illustration 2-31, on page 69, with all balances incolor.


Illustration 2-30General journal entries GENERAL JOURNAL Page J1


2006Oct. 1 Cash 101 10,000

Common Stock 311 10,000(Issued shares of stock for cash)

1 Office Equipment 157 5,000Notes Payable 200 5,000

(Issued 3-month, 12% note for officeequipment)

2 Cash 101 1,200Unearned Revenue 209 1,200

(Received cash from R. Knox for futureservices)

3 Rent Expense 729 900Cash 101 900

(Paid October rent)

4 Prepaid Insurance 130 600Cash 101 600

(Paid one-year policy; effective date October 1)

5 Advertising Supplies 126 2,500Accounts Payable 201 2,500

(Purchased supplies on account fromAero Supply)

20 Dividends 332 500Cash 101 500

(Declared and paid a cash dividend)

26 Salaries Expense 726 4,000Cash 101 4,000

(Paid salaries to date)

31 Cash 101 10,000Service Revenue 400 10,000

(Received cash for services provided)

GENERAL LEDGER

Cash No. 101Date Explanation Ref. Debit Credit Balance

2006Oct. 1 J1 10,000 10,000

2 J1 1,200 11,2003 J1 900 10,3004 J1 600 9,700

20 J1 500 9,20026 J1 4,000 5,20031 J1 10,000 15,200

Advertising Supplies No. 126Date Explanation Ref. Debit Credit Balance

2006Oct. 5 J1 2,500 2,500

Prepaid Insurance No. 130Date Explanation Ref. Debit Credit Balance

2006Oct. 4 J1 600 600

Office Equipment No. 157Date Explanation Ref. Debit Credit Balance

2006Oct. 1 J1 5,000 5,000

Notes Payable No. 200Date Explanation Ref. Debit Credit Balance

2006Oct. 1 J1 5,000 5,000

Accounts Payable No. 201Date Explanation Ref. Debit Credit Balance

2006Oct. 5 J1 2,500 2,500

Unearned Revenue No. 209Date Explanation Ref. Debit Credit Balance

2006Oct. 2 J1 1,200 1,200

Common Stock No. 311Date Explanation Ref. Debit Credit Balance

2006Oct. 1 J1 10,000 10,000

Dividends No. 332Date Explanation Ref. Debit Credit Balance

2006Oct. 20 J1 500 500

Service Revenue No. 400Date Explanation Ref. Debit Credit Balance

2006Oct. 31 J1 10,000 10,000

Salaries Expense No. 726Date Explanation Ref. Debit Credit Balance

2006Oct. 26 J1 4,000 4,000

Rent Expense No. 729Date Explanation Ref. Debit Credit Balance

2006Oct. 3 J1 900 900

The Trial Balance 69

The Trial Balance

STUDY OBJECTIVE 7

Prepare a trial balanceand explain its purposes.

Illustration 2-31General ledger

A trial balance is a list of accounts and their balances at a given time. Customarily,a trial balance is prepared at the end of an accounting period. The accounts arelisted in the order in which they appear in the ledger; debit balances are listed inthe left column and credit balances in the right column.

The primary purpose of a trial balance is to prove (check) that the debits equalthe credits after posting. In other words, the sum of the debit account balances inthe trial balance should equal the sum of the credit account balances. If the debitsand credits do not agree, the trial balance can be used to uncover errors in jour-nalizing and posting. In addition, it is useful in the preparation of financial state-ments, as will be explained in the next two chapters.

The steps for preparing a trial balance are:

1. List the account titles and their balances.2. Total the debit and credit columns.3. Prove the equality of the two columns.

The trial balance prepared from Pioneer Advertising’s ledger is shown below.


Note that the total debits ($28,700) equal the total credits ($28,700). Account num-bers are sometimes shown to the left of the account titles in the trial balance.

A trial balance is a necessary checkpoint for uncovering certain types of errorsbefore you proceed to other steps in the accounting process. For example, if onlythe debit portion of a journal entry has been posted, the trial balance would bringthis error to light.

Limitations of a Trial BalanceA trial balance does not guarantee freedom from recording errors, however. It doesnot prove that all transactions have been recorded or that the ledger is correct. Nu-merous errors may exist even though the trial balance columns agree. For example,the trial balance may balance even when (1) a transaction is not journalized, (2) acorrect journal entry is not posted, (3) a journal entry is posted twice, (4) incorrectaccounts are used in journalizing or posting, or (5) offsetting errors are made inrecording the amount of a transaction. In other words, as long as equal debits andcredits are posted, even to the wrong account or in the wrong amount, the totaldebits will equal the total credits.

Locating ErrorsThe procedure for preparing a trial balance is relatively simple. However, if the trialbalance does not balance, locating an error in a manual system can be time-consuming, tedious, and frustrating. Errors generally result from mathematical mis-takes, incorrect postings, or simply transcribing data incorrectly.

What do you do if you are faced with a trial balance that does not balance? Firstdetermine the amount of the difference between the two columns of the trial bal-ance. After this amount is known, the following steps are often helpful:

Illustration 2-32A trial balance

ETHICS NOTE

Auditors are required todifferentiate errors from

irregularities when evaluat-ing the accounting system.An error is the result of anunintentional mistake; assuch, it is neither ethicalnor unethical. An irregu-larity, on the other hand,is an intentional misstate-

ment, which is viewedas unethical.

PIONEER ADVERTISING AGENCY INC.Trial Balance

October 31, 2006

Debit CreditCash $15,200Advertising Supplies 2,500Prepaid Insurance 600Office Equipment 5,000Notes Payable $ 5,000Accounts Payable 2,500Unearned Revenue 1,200Common Stock 10,000Dividends 500Service Revenue 10,000Salaries Expense 4,000Rent Expense 900

$28,700 $28,700

HELPFUL HINT

To sum a column of fig-ures is sometimes referredto as to foot the column.The column is then said

to be footed.

HELPFUL HINT

A trial balance is sonamed because it is a test

to see if the sum of thedebit balances equals

the sum of the credit balances.

Demonstration Problem 71

1. If the error is $1, $10, $100, or $1,000, re-add the trial balance columns and re-compute the account balances.

2. If the error is divisible by 2, scan the trial balance to see whether a balanceequal to half the error has been entered in the wrong column.

3. If the error is divisible by 9, retrace the account balances on the trial balance tosee whether they are incorrectly copied from the ledger. For example, if a bal-ance was $12 and it was listed as $21, a $9 error has been made. Reversing theorder of numbers is called a transposition error.

4. If the error is not divisible by 2 or 9 (for example, $365), scan the ledger to seewhether an account balance of $365 has been omitted from the trial balance,and scan the journal to see whether a $365 posting has been omitted.

Use of Dollar SignsNote that dollar signs do not appear in the journals or ledgers. Dollar signs are usu-ally used only in the trial balance and the financial statements. Generally, a dollarsign is shown only for the first item in the column and for the total of that column.A single line is placed under the column of figures to be added or subtracted; thetotal amount is double underlined to indicate the final sum.

Review It1. What is a trial balance and what is its primary purpose?

2. How is a trial balance prepared?

3. What are the limitations of a trial balance?



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D E M O N S T R A T I O N P R O B L E M

Bob Sample and other student investors opened the Campus Laundromat Inc. onSeptember 1, 2006. During the first month of operations the following transactionsoccurred.

Sept. 1 Stockholders invested $20,000 cash in the business.2 Paid $1,000 cash for store rent for the month of September.3 Purchased washers and dryers for $25,000, paying $10,000 in cash

and signing a $15,000, 6-month, 12% note payable.4 Paid $1,200 for one-year accident insurance policy.

10 Received bill from the Daily News for advertising the opening ofthe laundromat $200.

20 Declared and paid a cash dividend to stockholders $700.30 Determined that cash receipts for laundry fees for the month

were $6,200.

The chart of accounts for the company is the same as for Pioneer Advertising AgencyInc. except for the following: No. 154 Laundry Equipment and No. 610 AdvertisingExpense.

Instructions(a) Journalize the September transactions. (Use J1 for the journal page number.)(b) Open ledger accounts and post the September transactions.(c) Prepare a trial balance at September 30, 2006.

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HELPFUL HINT

We have avoided the useof cents in the text to

save you time and effort.

(b) GENERAL LEDGER

Cash No. 101Date Explanation Ref. Debit Credit Balance

2006Sept. 1 J1 20,000 20,000

2 J1 1,000 19,0003 J1 10,000 9,0004 J1 1,200 7,800

20 J1 700 7,10030 J1 6,200 13,300

Prepaid Insurance No. 130Date Explanation Ref. Debit Credit Balance

2006Sept. 4 J1 1,200 1,200

Laundry Equipment No. 154Date Explanation Ref. Debit Credit Balance

2006Sept. 3 J1 25,000 25,000

Notes Payable No. 200Date Explanation Ref. Debit Credit Balance

2006Sept. 3 J1 15,000 15,000

Accounts Payable No. 201Date Explanation Ref. Debit Credit Balance

2006Sept. 10 J1 200 200

Common Stock No. 311Date Explanation Ref. Debit Credit Balance

2006Sept. 1 J1 20,000 20,000

Dividends No. 332Date Explanation Ref. Debit Credit Balance

2006Sept. 20 J1 700 700

(a) GENERAL JOURNAL J1


2006Sept. 1 Cash 101 20,000

Common Stock 311 20,000(Stockholders invested cash in business)

2 Rent Expense 729 1,000Cash 101 1,000

(Paid September rent)

3 Laundry Equipment 154 25,000Cash 101 10,000Notes Payable 200 15,000

(Purchased laundry equipment for cashand 6-month, 12% note payable)

4 Prepaid Insurance 130 1,200Cash 101 1,200

(Paid one-year insurance policy)

10 Advertising Expense 610 200Accounts Payable 201 200

(Received bill from Daily News for advertising)

20 Dividends 332 700Cash 101 700

(Declared and paid a cash dividend)

30 Cash 101 6,200Service Revenue 400 6,200

(Received cash for laundry fees earned)

S O L U T I O N T O D E M O N S T R A T I O N P R O B L E M


ACTION PLAN■ Make separate journal en-

tries for each transaction.

■ In journalizing, make suredebits equal credits.

■ In journalizing, use specificaccount titles taken fromthe chart of accounts.

■ Provide appropriate de-scription of journal entry.

■ Arrange ledger in state-ment order, beginningwith the balance sheetaccounts.

■ Post in chronologicalorder.

■ Use numbers in the refer-ence column to indicatethe amount has beenposted.

■ In the trial balance, listaccounts in the order inwhich they appear in theledger.

■ List debit balances in theleft column, and creditbalances in the rightcolumn.

Service Revenue No. 400Date Explanation Ref. Debit Credit Balance

2006Sept. 30 J1 6,200 6,200

Advertising Expense No. 610Date Explanation Ref. Debit Credit Balance

2006Sept. 10 J1 200 200

Rent Expense No. 729Date Explanation Ref. Debit Credit Balance

2006Sept. 2 J1 1,000 1,000


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Summary of Study Objectives 73

1. Explain what an account is and how it helps in the record-ing process. An account is a record of increases and de-creases in a specific asset, liability, or stockholders’ equityitem.

2. Define debits and credits and explain how they are used torecord business transactions. The terms debit and creditare synonymous with left and right. Assets, dividends, andexpenses are increased by debits and decreased by credits.Liabilities, common stock, retained earnings, and revenuesare increased by credits and decreased by debits.

3. Identify the basic steps in the recording process. The basicsteps in the recording process are: (a) analyze each trans-action in terms of its effects on the accounts, (b) enter thetransaction information in a journal, (c) transfer the jour-nal information to the appropriate accounts in the ledger.

4. Explain what a journal is and how it helps in the record-ing process. The initial accounting record of a transactionis entered in a journal before the data are entered in theaccounts. A journal (a) discloses in one place the completeeffects of a transaction, (b) provides a chronological record

of transactions, and (c) prevents or locates errors becausethe debit and credit amounts for each entry can be readilycompared.

5. Explain what a ledger is and how it helps in the recordingprocess. The entire group of accounts maintained by acompany is referred to as the ledger. The ledger keeps inone place all the information about changes in specific ac-count balances.

6. Explain what posting is and how it helps in the recordingprocess. Posting is the procedure of transferring journalentries to the ledger accounts. This phase of the recordingprocess accumulates the effects of journalized transactionsin the individual accounts.

7. Prepare a trial balance and explain its purposes. A trialbalance is a list of accounts and their balances at a giventime. Its primary purpose is to prove the equality of deb-its and credits after posting. A trial balancealso uncovers errors in journalizing andposting and is useful in preparing financialstatements.

S U M M A R Y O F S T U D Y O B J E C T I V E S


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(c) CAMPUS LAUNDROMAT INC.Trial Balance

September 30, 2006

Debit Credit

Cash $13,300Prepaid Insurance 1,200Laundry Equipment 25,000Notes Payable $15,000Accounts Payable 200Common Stock 20,000Dividends 700Service Revenue 6,200Advertising Expense 200Rent Expense 1,000

$41,400 $41,400


G L O S S A R Y

Account A record of increases and decreases in specific asset,liability, or stockholders’ equity items. (p. 47).

Chart of accounts A list of accounts and the account num-bers that identify their location in the ledger. (p. 60).

Common stock Issued in exchange for the owners’ invest-ment paid in to the corporation. (p. 50).

Compound entry A journal entry that involves three or moreaccounts. (p. 56).

Credit The right side of an account. (p. 48).

Debit The left side of an account. (p. 48).

Dividend A distribution by a corporation to its stockholderson a pro rata (equal) basis. (p. 50).

Double-entry system A system that records in appropriateaccounts the dual effect of each transaction. (p. 48).

General journal The most basic form of journal. (p. 55).

General ledger A ledger that contains all asset, liability, andstockholders’ equity accounts. (p. 57).

Journal An accounting record in which transactions are ini-tially recorded in chronological order. (p. 55).

Journalizing The entering of transaction data in the journal.(p. 55).

Ledger The entire group of accounts maintained by a com-pany. (p. 57).

Posting The procedure of transferring journal entries to theledger accounts. (p. 59).

Retained earnings Net income that is retained in the busi-ness. (p. 50).

Simple entry A journal entry that involves only two accounts.(p. 56).

T account The basic form of an account. (p. 47).

Three-column form of account A form with columns fordebit, credit, and balance amounts in an account. (p. 59).

Trial balance A list of accounts and their balances at a giventime. (p. 69).

S E L F - S T U D Y Q U E S T I O N S

Answers are at the end of the chapter.

1. Which of the following statements about an account is true?a. In its simplest form, an account consists of two parts.b. An account is an individual accounting record of in-

creases and decreases in specific asset, liability, andstockholders’ equity items.

c. There are separate accounts for specific assets and li-abilities but only one account for stockholders’ equityitems.

d. The left side of an account is the credit or decrease side.

2. Debits:a. increase both assets and liabilities.b. decrease both assets and liabilities.c. increase assets and decrease liabilities.d. decrease assets and increase liabilities.

3. A revenue account:a. is increased by debits.b. is decreased by credits.c. has a normal balance of a debit.d. is increased by credits.

4. Accounts that normally have debit balances are:a. assets, expenses, and revenues.b. assets, expenses, and common stock.c. assets, liabilities, and dividends.d. assets, dividends, and expenses.

5. Which of the following is not part of the recording process?a. Analyzing transactions.b. Preparing a trial balance.c. Entering transactions in a journal.d. Posting transactions.

6. Which of the following statements about a journal is false?a. It is not a book of original entry.

b. It provides a chronological record of transactions.c. It helps to locate errors because the debit and credit

amounts for each entry can be readily compared.d. It discloses in one place the complete effect of a

transaction.

7. A ledger:a. contains only asset and liability accounts.b. should show accounts in alphabetical order.c. is a collection of the entire group of accounts main-

tained by a company.d. is a book of original entry.

8. Posting:a. normally occurs before journalizing.b. transfers ledger transaction data to the journal.c. is an optional step in the recording process.d. transfers journal entries to ledger accounts.

9. A trial balance:a. is a list of accounts with their balances at a given time.b. proves the mathematical accuracy of journalized

transactions.c. will not balance if a correct journal entry is posted twice.d. proves that all transactions have been recorded.

10. A trial balance will not balance if:a. a correct journal entry is posted twice.b. the purchase of supplies on account is debited to Sup-

plies and credited to Cash.c. a $100 cash dividend by the corporation is debited

to Dividends for $1,000 and credited to Cash for$100.

d. a $450 payment on account is debitedto Accounts Payable for $45 and cred-ited to Cash for $45.

Self-Study/Self-Test


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Brief Exercises 75

1. Why is an account referred to as a T account?

2. “The terms debit and credit mean increase and decrease,respectively.” Do you agree? Explain.

3. Britney Spears, a fellow student, contends that the double-entry system means each transaction must be recordedtwice. Is Britney correct? Explain.

4. Julia Roberts, a beginning accounting student, believesdebit balances are favorable and credit balances are un-favorable. Is Julia correct? Discuss.

5. State the rules of debit and credit as applied to (a) assetaccounts, (b) liability accounts, and (c) stockholders’ equity.

6. What is the normal balance for each of the following ac-counts? (a) Accounts Receivable. (b) Cash. (c) Dividends.(d) Accounts Payable. (e) Service Revenue. (f) SalariesExpense. (g) Common Stock.

7. Indicate whether each of the following accounts is anasset, a liability, or a stockholders’ equity account andwhether it would have a debit or credit balance: (a) Ac-counts Receivable, (b) Accounts Payable, (c) Equipment,(d) Dividends, (e) Supplies.

8. For the following transactions, indicate the account deb-ited and the account credited.(a) Supplies are purchased on account.(b) Cash is received on signing a note payable.(c) Employees are paid salaries in cash.

9. Presented below is a series of accounts. Indicate whetherthese accounts generally will have (a) debit entries only,(b) credit entries only, (c) both debit and credit entries.(1) Cash.(2) Accounts Receivable.(3) Dividends.(4) Accounts Payable.(5) Salaries Expense.(6) Service Revenue.

10. What are the basic steps in the recording process?

11. What are the advantages of using the journal in therecording process?

12. (a) When entering a transaction in the journal, shouldthe debit or credit be written first?

(b) Which should be indented, the debit or credit?

13. Describe a compound entry, and provide an example.

14. (a) Should business transaction debits and credits berecorded directly in the ledger accounts?

(b) What are the advantages of first recording transac-tions in the journal and then posting to the ledger?

15. The account number is entered as the last step in postingthe amounts from the journal to the ledger. What is theadvantage of this step?

16. Journalize the following business transactions.(a) Tom Cruise invests $12,000 in the business in ex-

change for shares of common stock.(b) Insurance of $720 is paid for the year.(c) Supplies of $900 are purchased on account.(d) Cash of $3,000 is received for services rendered.

17. (a) What is a ledger? (b) Why is a chart of accountsimportant?

18. What is a trial balance and what are its purposes?

19. Joe Alverez is confused about how accounting informa-tion flows through the accounting system. He believesthe flow of information is as follows.(a) Debits and credits posted to the ledger.(b) Business transaction occurs.(c) Information entered in the journal.(d) Financial statements are prepared.(e) Trial balance is prepared.Indicate to Joe the proper flow of the information.

20. Two students are discussing the use of a trial balance.They wonder whether the following errors, each con-sidered separately, would prevent the trial balance frombalancing.(a) The bookkeeper debited Cash for $600 and cred-

ited Wages Expense for $600 for payment of wages.(b) Cash collected on account was debited to Cash for

$800 and Service Revenue was credited for $80.What would you tell them?

Q U E S T I O N S

B R I E F E X E R C I S E S

BE2-1 For each of the following accounts indicate (a) the effect of a debit or a credit on theaccount and (b) the normal balance.

1. Accounts Payable.2. Advertising Expense.3. Service Revenue.4. Accounts Receivable.5. Common Stock.6. Dividends.

Indicate debit and credit effectsand normal balance.

(SO 2)


Journalize transactions.

(SO 4)

Identify and explain steps inrecording process.

(SO 3)

Indicate basic and debit-creditanalysis.

(SO 2)

BE2-2 Transactions for the Kaustav Sen Company for the month of June are presented below.Identify the accounts to be debited and credited for each transaction.

June 1 Kaustav Sen invests $4,000 cash in exchange for shares of common stock in a smallwelding corporation.

2 Purchases equipment on account for $900.3 $800 cash is paid to landlord for June rent.

12 Bills J. Kronsnoble $300 for welding work done on account.

BE2-3 Using the data in BE2-2, journalize the transactions. (You may omit explanations.)

BE2-4 Tim Weber, a fellow student, is unclear about the basic steps in the record-ing process. Identify and briefly explain the steps in the order in which they occur.

BE2-5 J. A. Motzek Inc. has the following transactions during August of the current year. In-dicate (a) the effect on the accounting equation and (b) the debit-credit analysis illustrated onpages 62–66 of the text.

Aug. 1 Opens an office as a financial advisor, investing $5,000 in cash in exchange for com-mon stock.

4 Pays insurance in advance for 6 months, $1,800 cash.16 Receives $800 from clients for services provided.27 Pays secretary $1,000 salary.

BE2-6 Using the data in BE2-5, journalize the transactions. (You may omit explanations.)

BE2-7 Selected transactions for the Gilles Company are presented in journal form below. Postthe transactions to T accounts. Make one T account for each item and determine each account’sending balance.

J1


May 5 Accounts Receivable 6,000Service Revenue 6,000

(Billed for services provided)

12 Cash 2,400Accounts Receivable 2,400

(Received cash in payment of account)

15 Cash 3,000Service Revenue 3,000


BE2-8 Selected journal entries for the Gilles Company are presented in BE2-7. Post the trans-actions using the standard form of account.

BE2-9 From the ledger balances given below, prepare a trial balance for the P. J. Farve Com-pany at June 30, 2006. List the accounts in the order shown on page 61 of the text. All accountbalances are normal.

Accounts Payable $9,000, Cash $6,800, Common Stock $20,000, Dividends $1,200, Equip-ment $17,000, Service Revenue $6,000, Accounts Receivable $3,000, Salaries Expense $6,000,and Rent Expense $1,000.

BE2-10 An inexperienced bookkeeper prepared the following trial balance. Prepare a correcttrial balance, assuming all account balances are normal.


(SO 4)

Post journal entries to standard form of account.

(SO 6)

Post journal entries to T accounts.

(SO 6)

Prepare a trial balance.

(SO 7)

Prepare a correct trial balance.

(SO 7)

Identify accounts to be debited and credited.

(SO 2)

Exercises 77

CHENG CORPORATIONTrial Balance

December 31, 2006

Debit Credit

Cash $16,800Prepaid Insurance $3,500Accounts Payable 3,000Unearned Revenue 4,200Common Stock 13,000Dividends 4,500Service Revenue 25,600Salaries Expense 18,600Rent Expense 2,400

$39,600 $52,000

E X E R C I S E S

E2-1 Selected transactions for H. Burns, Inc., an interior decorating firm, in its first month ofbusiness, are as follows.

Jan. 2 Invested $15,000 cash in business in exchange for common stock.3 Purchased used car for $4,000 cash for use in business.9 Purchased supplies on account for $500.

11 Billed customers $1,800 for services performed.16 Paid $200 cash for advertising.20 Received $700 cash from customers billed on January 11.23 Paid creditor $300 cash on balance owed.28 Declared and paid a $1,000 cash dividend.

InstructionsFor each transaction indicate the following.

(a) The basic type of account debited and credited (asset, liability, stockholders’ equity).(b) The specific account debited and credited (cash, rent expense, service revenue, etc.).(c) Whether the specific account is increased or decreased.(d) The normal balance of the specific account.

Use the following format, in which the January 2 transaction is given as an example.

Account Debited Account Credited(a) (b) (c) (d) (a) (b) (c) (d)

Basic Specific Normal Basic Specific NormalDate Type Account Effect Balance Type Account Effect BalanceJan. 2 Asset Cash Increase Debit Stockholders’ Common Increase Credit

Equity Stock

E2-2 Data for H. Burns, Inc., interior decorating, are presented in E2-1.

InstructionsJournalize the transactions using journal page J1. (You may omit explanations.)

E2-3 Presented below is information related to Robbins Real Estate Agency, Inc.

Oct. 1 Lynn Robbins begins business as a real estate agent with a cash investment of $20,000in exchange for common stock.

2 Hires an administrative assistant.3 Purchases office furniture for $1,900, on account.6 Sells a house and lot for B. Kidman; bills B. Kidman $3,200 for realty services provided.

27 Pays $700 on the balance related to the transaction of October 3.30 Pays the administrative assistant $2,000 in salary for October.

InstructionsPrepare the debit-credit analysis for each transaction as illustrated on pages 62–66.

Identify debits, credits, andnormal balances.

(SO 2)


(SO 4)

Analyze transactions and determine their effect on accounts.

(SO 2)

E2-4 Transaction data for Robbins Real Estate Agency are presented in E2-3.

InstructionsJournalize the transactions. (You may omit explanations.)

E2-5 Selected transactions from the journal of Roberta Mendez, investment broker, are pre-sented below.


(SO 4)

Post journal entries and prepare a trial balance.

(SO 6, 7)

(b) Trial balance totals $11,000


Cash No. 101

4/1 10,000 4/15 6004/12 900 4/25 1,5004/29 4004/30 1,000

Accounts Receivable No. 112

4/7 3,200 4/29 400

Accounts Payable No. 201

4/25 1,500 4/4 1,800

Salaries Expense No. 726

4/15 600

Supplies No. 126

4/4 1,800

Unearned Revenue No. 205

4/30 1,000

Common Stock No. 311

4/1 10,000

Service Revenue No. 400

4/7 3,2004/12 900

Journalize transactions fromaccount data and prepare atrial balance.

(SO 4, 7)

Instructions(a) Prepare the complete general journal entries (including explanations) from which the post-

ings to Cash were made.(b) Prepare a trial balance at April 30, 2006.


Date Account Titles and Explanation Ref. Debit CreditAug. 1 Cash 3,000

Common Stock 3,000(Investment of cash for stock)

10 Cash 2,400Service Revenue 2,400


12 Office Equipment 5,000Cash 1,000Notes Payable 4,000

(Purchased office equipment for cashand notes payable)

25 Accounts Receivable 1,600Service Revenue 1,600

(Billed for services provided)

31 Cash 900Accounts Receivable 900

(Receipt of cash on account)

Instructions(a) Post the transactions to T accounts.(b) Prepare a trial balance at August 31, 2006.

E2-6 The T accounts below summarize the ledger of Padre Landscaping Company at the endof the first month of operations.

Exercises 79

Cash No. 101

10/1 5,000 10/4 40010/10 650 10/12 1,50010/10 3,000 10/15 25010/20 500 10/30 30010/25 2,000 10/31 500

Accounts Receivable No. 112

10/6 800 10/20 50010/20 940

Supplies No. 126

10/4 400

Furniture No. 149

10/3 2,000

Notes Payable No. 200

10/10 3,000

Accounts Payable No. 201

10/12 1,500 10/3 2,000

Common Stock No. 311

10/1 5,00010/25 2,000

Dividends No. 332

10/30 300

Store Wages Expense No. 628

10/31 500

Rent Expense No. 729

10/15 250

Service Revenue No. 407

10/6 80010/10 65010/20 940

Instructions(a) Reproduce the journal entries for the transactions that occurred on October 1, 10, and 20,

and provide explanations for each.(b) Determine the October 31 balance for each of the accounts above, and prepare a trial bal-

ance at October 31, 2006.

E2-8 Selected transactions for Neve Campbell Company during its first month in business arepresented below.

Sept. 1 Invested $10,000 cash in the business in exchange for common stock.5 Purchased equipment for $12,000 paying $6,000 in cash and the balance on account.

25 Paid $3,000 cash on balance owed for equipment.30 Declared and paid a $500 cash dividend.

Campbell’s chart of accounts shows: No. 101 Cash, No. 157 Equipment, No. 201 AccountsPayable, No. 311 Common Stock, No. 332 Dividends.

Instructions(a) Journalize the transactions on page J1 of the journal.(b) Post the transactions using the standard account form.

E2-9 The bookkeeper for Stan Tucci Equipment Repair made a number of errors in journal-izing and posting, as described below.

1. A credit posting of $400 to Accounts Receivable was omitted.2. A debit posting of $750 for Prepaid Insurance was debited to Insurance Expense.3. A collection from a customer of $100 in payment of its account owed was journalized and

posted as a debit to Cash $100 and a credit to Service Revenue $100.4. A credit posting of $300 to Property Taxes Payable was made twice.5. A cash purchase of supplies for $250 was journalized and posted as a debit to Supplies $25

and a credit to Cash $25.6. A debit of $495 to Advertising Expense was posted as $459.

Journalize transactions fromaccount data and prepare atrial balance.

(SO 4, 7)


E2-7 Presented below is the ledger for Maxim Co.

Analyze errors and their effects on trial balance.

(SO 7)

Prepare journal entries andpost using standard accountform.

(SO 4, 6)


InstructionsFor each error:(a) Indicate whether the trial balance will balance.(b) If the trial balance will not balance, indicate the amount of the difference.(c) Indicate the trial balance column that will have the larger total.

Consider each error separately. Use the following form, in which error (1) is given as an example.(a) (b) (c)

Error In Balance Difference Larger Column(1) No $400 debit

E2-10 The accounts in the ledger of Speedy Delivery Service contain the following balanceson July 31, 2006.

Trial balance totals $90,907

Prepare a trial balance.

(SO 2, 7)

P R O B L E M S : S E T A

P2-1A Surepar Miniature Golf and Driving Range was opened on March 1 by Bill Affleck.The following selected events and transactions occurred during March:

Mar. 1 Invested $60,000 cash in the business in exchange for common stock.3 Purchased Lee’s Golf Land for $38,000 cash. The price consists of land $23,000, build-

ing $9,000, and equipment $6,000. (Make one compound entry.)5 Advertised the opening of the driving range and miniature golf course, paying ad-

vertising expenses of $1,600.6 Paid cash $1,480 for a one-year insurance policy.

10 Purchased golf clubs and other equipment for $2,600 from Parton Company payablein 30 days.

18 Received $800 in cash for golf fees earned.19 Sold 100 coupon books for $15 each. Each book contains 10 coupons that enable the

holder to play one round of miniature golf or to hit one bucket of golf balls.25 Declared and paid $1,000 cash dividend.30 Paid salaries of $600.30 Paid Parton Company in full.31 Received $500 cash for fees earned.

Bill Affleck uses the following accounts: Cash; Prepaid Insurance; Land; Buildings; Equipment;Accounts Payable; Unearned Revenue; Common Stock; Dividends; Golf Revenue; AdvertisingExpense; and Salaries Expense.

InstructionsJournalize the March transactions.

P2-2A Judi Dench is a licensed architect. During the first month of the operation of her com-pany, Judi Dench, Inc., the following events and transactions occurred.

April 1 Stockholders invested $25,000 cash in exchange for common stock.1 Hired a secretary-receptionist at a salary of $300 per week payable monthly.2 Paid office rent for the month $800.3 Purchased architectural supplies on account from Halo Company $1,500.

Journalize a series of transactions.

(SO 2, 4)

Journalize transactions, post,and prepare a trial balance.

(SO 2, 4, 6, 7)

Accounts Receivable $10,642 Prepaid Insurance $ 1,968Accounts Payable 8,396 Repair Expense 961Cash ? Service Revenue 10,610Delivery Equipment 49,360 Dividends 700Gas and Oil Expense 758 Common Stock 40,000Insurance Expense 523 Salaries Expense 4,428Notes Payable 26,450 Salaries Payable 815

Retained Earnings 4,636

InstructionsPrepare a trial balance with the accounts arranged as illustrated in the chapter and fill in themissing amount for Cash.

10 Completed blueprints on a carport and billed client $900 for services.11 Received $500 cash advance from R. Welk for the design of a new home.20 Received $1,500 cash for services completed and delivered to P. Donahue.30 Paid secretary-receptionist for the month $1,500.30 Paid $600 to Halo Company for accounts payable due.

Judi uses the following chart of accounts: No. 101 Cash, No. 112 Accounts Receivable, No. 126Supplies, No. 201 Accounts Payable, No. 205 Unearned Revenue, No. 311 Common Stock,No. 400 Service Revenue, No. 726 Salaries Expense, and No. 729 Rent Expense.

Instructions(a) Journalize the transactions.(b) Post to the ledger accounts.(c) Prepare a trial balance on April 30, 2006.

P2-3A Chambers Brokerage Services Inc. was formed on May 1, 2006. The following transac-tions took place during the first month.

Transactions on May 1:

1. Stockholders invested $120,000 cash in the company in exchange for stock.2. Hired two employees to work in the warehouse. They will each be paid a salary of $2,000

per month.3. Signed a 2-year rental agreement on a warehouse; paid $36,000 cash in advance for the first

year. (Hint: The portion of the cost related to May 2006 is an expense for this month.)4. Purchased furniture and equipment costing $70,000. A cash payment of $20,000 was made

immediately; the remainder will be paid in 6 months.5. Paid $3,000 cash for a one-year insurance policy on the furniture and equipment.

(Hint: The portion of the cost related to May 2006 is an expense for this month.)

Transactions during the remainder of the month:

6. Purchased basic office supplies for $1,000 cash.7. Purchased more office supplies for $3,000 on account.8. Total revenues earned were $30,000—$10,000 cash and $20,000 on account.9. Paid $800 to suppliers for accounts payable due.

10. Received $5,000 from customers in payment of accounts receivable.11. Received utility bills in the amount of $400, to be paid next month.12. Paid the monthly salaries of the two employees, totalling $4,000.

Instructions(a) Prepare journal entries to record each of the events listed.(b) Post the journal entries to T accounts.(c) Prepare a trial balance as of May 31, 2006.(d) Prepare an income statement and a retained earnings statement for Chambers Brokerage

Services for the month ended May 31, 2006, and a balance sheet as of May 31, 2006.

P2-4A The trial balance of Ron Salem Co. shown below does not balance.

RON SALEM CO.Trial Balance

June 30, 2006

Debit CreditCash $ 3,840Accounts Receivable $ 3,231Supplies 800Equipment 3,000Accounts Payable 2,666Unearned Revenue 2,200Common Stock 9,000Dividends 800Service Revenue 2,380Salaries Expense 3,400Office Expense 910

$14,341 $17,886



Journalize transactions, post,and prepare a trial balanceand financial statements.

(SO 2, 4, 6, 7)


(SO 7)

Problems: Set A 81



(SO 2, 4, 6, 7)

Each of the listed accounts has a normal balance per the general ledger. An examination of theledger and journal reveals the following errors.

1. Cash received from a customer in payment of its account was debited for $570, and AccountsReceivable was credited for the same amount. The actual collection was for $750.

2. The purchase of a printer on account for $340 was recorded as a debit to Supplies for $340and a credit to Accounts Payable for $340.

3. Services were performed on account for a client for $890. Accounts Receivable was debitedfor $890, and Service Revenue was credited for $89.

4. A debit posting to Salaries Expense of $367 was omitted.5. A payment of a balance due for $309 was credited to Cash for $309 and credited to Accounts

Payable for $390.6. The payment of a $500 cash dividend was debited to Salaries Expense for $500 and credited

to Cash for $500.

InstructionsPrepare a correct trial balance. (Hint: It helps to prepare the correct journal entry for the trans-action described and compare it to the mistake made).

P2-5A The Russo Theater will begin operations in March. The Russo will be unique in that itwill show only triple features of sequential theme movies. As of March 1, the ledger of Russoshowed: No. 101 Cash $16,000; No. 140 Land $42,000; No. 145 Buildings (concession stand, pro-jection room, ticket booth, and screen) $18,000; No. 157 Equipment $16,000; No. 201 AccountsPayable $12,000; and No. 311 Common Stock $80,000. During the month of March the follow-ing events and transactions occurred.

Mar. 2 Rented the three Star Wars movies (Star Wars, The Empire Strikes Back, and The Re-turn of the Jedi) to be shown for the first 3 weeks of March. The film rental was $9,000;$3,000 was paid in cash and $6,000 will be paid on March 10.

3 Ordered the first three Star Trek movies to be shown the last 10 days of March. It willcost $300 per night.

9 Received $6,500 cash from admissions.10 Paid balance due on Star Wars movies rental and $3,000 on March 1 accounts

payable.11 Russo Theater contracted with M. Brewer Company to operate the concession stand.

Brewer is to pay 10% of gross concession receipts (payable monthly) for the right tooperate the concession stand.

12 Paid advertising expenses $800.20 Received $7,200 cash from customers for admissions.20 Received the Star Trek movies and paid the rental fee of $3,000.31 Paid salaries of $4,800.31 Received statement from M. Brewer showing gross receipts from concessions of

$8,000 and the balance due to Russo Theater of $800 ($8,000 � 10%) for March.Brewer paid one-half the balance due and will remit the remainder on April 5.

31 Received $12,000 cash from customers for admissions.

In addition to the accounts identified above, the chart of accounts includes: No. 112 AccountsReceivable, No. 405 Admission Revenue, No. 406 Concession Revenue, No. 610 AdvertisingExpense, No. 632 Film Rental Expense, and No. 726 Salaries Expense.

Instructions(a) Enter the beginning balances in the ledger. Insert a check mark (✓) in the reference col-

umn of the ledger for the beginning balance.(b) Journalize the March transactions.(c) Post the March journal entries to the ledger. Assume that all entries are posted from page

1 of the journal.(d) Prepare a trial balance on March 31, 2006.Trial balance totals $115,500


Problems: Set B 83

P R O B L E M S : S E T B

P2-1B Frontier Park Inc. was started on April 1 by C. J. Amaro and associates. The followingselected events and transactions occurred during April.

Apr. 1 Stockholders invested $50,000 cash in the business in exchange for common stock.4 Purchased land costing $30,000 for cash.8 Incurred advertising expense of $1,800 on account.

11 Paid salaries to employees $1,500.12 Hired park manager at a salary of $4,000 per month, effective May 1.13 Paid $1,500 cash for a one-year insurance policy.17 Declared and paid a $600 cash dividend.20 Received $5,700 in cash for admission fees.25 Sold 100 coupon books for $25 each. Each book contains 10 coupons that entitle the

holder to one admission to the park.30 Received $8,900 in cash admission fees.30 Paid $900 on balance owed for advertising incurred on April 8.

Amaro uses the following accounts: Cash; Prepaid Insurance; Land; Accounts Payable; Un-earned Admission Revenue; Common Stock; Dividends; Admission Revenue; AdvertisingExpense; and Salaries Expense.

InstructionsJournalize the April transactions.

P2-2B Kara Shin is a licensed CPA. During the first month of operations of her company, ShinCorp., the following events and transactions occurred.

May 1 Stockholders invested $20,000 cash in exchange for common stock.2 Hired a secretary-receptionist at a salary of $1,000 per month.3 Purchased $1,500 of supplies on account from Read Supply Company.7 Paid office rent of $900 cash for the month.

11 Completed a tax assignment and billed client $2,100 for services provided.12 Received $3,500 advance on a management consulting engagement.17 Received cash of $1,200 for services completed for H. Arnold Co.31 Paid secretary-receptionist $1,000 salary for the month.31 Paid 40% of balance due Read Supply Company.

Kara uses the following chart of accounts: No. 101 Cash, No. 112 Accounts Receivable, No. 126Supplies, No. 201 Accounts Payable, No. 205 Unearned Revenue, No. 311 Common Stock,No. 400 Service Revenue, No. 726 Salaries Expense, and No. 729 Rent Expense.

Instructions(a) Journalize the transactions.(b) Post to the ledger accounts.(c) Prepare a trial balance on May 31, 2006.

P2-3B Mark Hockenberry owns and manages Byte Repair Service, Inc., which had the fol-lowing trial balance on December 31, 2005 (the end of its fiscal year).

Journalize a series of transactions.

(SO 2, 4)


(SO 2, 4, 6, 7)

Journalize and post transactions, prepare a trialbalance, and determine elements of financial statements.

(SO 2, 4, 6, 7)


BYTE REPAIR SERVICE, INC.Trial Balance

December 31, 2005

Cash $ 8,000Accounts Receivable 15,000Parts Inventory 13,000Prepaid Rent 3,000Shop Equipment 21,000Accounts Payable $19,000Common Stock 30,000Retained Earnings 11,000

$60,000 $60,000

Summarized transactions for January 2006 were as follows:

1. Advertising costs, paid in cash, $1,000.2. Additional repair parts inventory acquired on account $4,000.3. Miscellaneous expenses, paid in cash, $2,000.4. Cash collected from customers in payment of accounts receivable $13,000.5. Cash paid to creditors for accounts payable due $15,000.6. Repair parts used during January $4,000. (Hint: Debit this to Repair Parts Expense.)7. Repair services performed during January: for cash $5,000; on account $9,000.8. Wages for January, paid in cash, $3,000.9. Rent expense for January recorded. However, no cash was paid out for rent during Janu-

ary. A rent payment had been made for 4 months, in advance, on December 1, 2005, in theamount of $4,000.

10. Dividends paid during January were $2,000.

Instructions(a) Explain why the December 31, 2005, balance in the Prepaid Rent account is $3,000. (Refer

to the Trial Balance and item (9) above.)(b) Open T accounts for each of the accounts listed in the trial balance, and enter the opening

balances for 2006.(c) Prepare journal entries to record each of the January transactions.(d) Post the journal entries to the accounts in the ledger. (Add accounts as needed.)(e) Prepare a trial balance as of January 31, 2006.(f) Determine the total assets as of January 31, 2006. (It is not necessary to prepare a balance

sheet. Simply list the relevant amounts from the trial balance and calculate the total.)(g) Determine the net income or loss for the month of January 2006. (It is not necessary to pre-

pare an income statement. Simply list the relevant amounts from the trial balance, and cal-culate the amount of the net income or loss.)

P2-4B The trial balance of the Garland Company shown below does not balance.

GARLAND COMPANYTrial Balance

May 31, 2006

Debit CreditCash $3,850Accounts Receivable $2,750Prepaid Insurance 700Equipment 12,000Accounts Payable 4,500Property Taxes Payable 560Common Stock 11,700Service Revenue 8,690Salaries Expense 4,200Advertising Expense 1,100Property Tax Expense 800

$30,800 $20,050

Your review of the ledger reveals that each account has a normal balance. You also dis-cover the following errors.

1. The totals of the debit sides of Prepaid Insurance, Accounts Payable, and Property Tax Ex-pense were each understated $100.

2. Transposition errors were made in Accounts Receivable and Service Revenue. Based onpostings made, the correct balances were $2,570 and $8,960, respectively.

3. A debit posting to Salaries Expense of $200 was omitted.4. A $1,000 cash dividend by the corporation was debited to Common Stock for $1,000 and

credited to Cash for $1,000.5. A $520 purchase of supplies on account was debited to Equipment for $520 and credited to

Cash for $520.




(SO 7)

Broadening Your Perspective 85

6. A cash payment of $450 for advertising was debited to Advertising Expense for $45 andcredited to Cash for $45.

7. A collection from a customer for $420 was debited to Cash for $420 and credited to Ac-counts Payable for $420.

InstructionsPrepare a correct trial balance. Note that the chart of accounts includes the following: Dividendsand Supplies. (Hint: It helps to prepare the correct journal entry for the transaction describedand compare it to the mistake made.)

P2-5B The Lake Theater opened on April 1. All facilities were completed on March 31. At thistime, the ledger showed: No. 101 Cash $6,000; No. 140 Land $10,000; No. 145 Buildings (con-cession stand, projection room, ticket booth, and screen) $8,000; No. 157 Equipment $6,000;No. 201 Accounts Payable $2,000; No. 275 Mortgage Payable $8,000; and No. 311 CommonStock $20,000. During April, the following events and transactions occurred.

Apr. 2 Paid film rental of $800 on first movie.3 Ordered two additional films at $1,000 each.9 Received $1,800 cash from admissions.

10 Made $2,000 payment on mortgage and $1,000 for accounts payable due.11 Lake Theater contracted with R. Zarle Company to operate the concession stand.

Zarle is to pay 17% of gross concession receipts (payable monthly) for the right tooperate the concession stand.

12 Paid advertising expenses $300.20 Received one of the films ordered on April 3 and was billed $1,000. The film will be

shown in April.25 Received $5,200 cash from admissions.29 Paid salaries $1,600.30 Received statement from R. Zarle showing gross concession receipts of $1,000 and

the balance due to The Lake Theater of $170 ($1,000 � 17%) for April. Zarle paidone-half of the balance due and will remit the remainder on May 5.

30 Prepaid $900 rental on special film to be run in May.

In addition to the accounts identified above, the chart of accounts shows: No. 112 Accounts Re-ceivable, No. 136 Prepaid Rentals, No. 405 Admission Revenue, No. 406 Concession Revenue,No. 610 Advertising Expense, No. 632 Film Rental Expense, and No. 726 Salaries Expense.

Instructions(a) Enter the beginning balances in the ledger as of April 1. Insert a check mark (✓) in the ref-

erence column of the ledger for the beginning balance.(b) Journalize the April transactions.(c) Post the April journal entries to the ledger. Assume that all entries are posted from page 1

of the journal.(d) Prepare a trial balance on April 30, 2006.



(SO 2, 4, 6, 7)


BROADENING YOUR PERSPECTIVE

Financial Reporting and Analysis

■ FINANCIAL REPORTING PROBLEM: PepsiCo

BYP2-1 The financial statements of PepsiCo are presented in Appendix A.The statements con-tain the following selected accounts, stated in millions of dollars.

Accounts Payable $5,213 Income Taxes Payable $ 611Accounts Receivable 2,830 Interest Expense 163Property, Plant, and Equipment 7,828 Inventory 1,412


Instructions(a) Answer the following questions.

(1) What is the increase and decrease side for each account?(2) What is the normal balance for each account?

(b) Identify the probable other account in the transaction and the effect on that account when:(1) Accounts Receivable is decreased.(2) Accounts Payable is decreased.(3) Inventory is increased.

(c) Identify the other account(s) that ordinarily would be involved when:(1) Interest Expense is increased.(2) Property, Plant, and Equipment is increased.

■ COMPARATIVE ANALYSIS PROBLEM: PepsiCo vs. Coca-Cola

BYP2-2 PepsiCo’s financial statements are presented in Appendix A. Coca-Cola’s financialstatements are presented in Appendix B.

Instructions(a) Based on the information contained in the financial statements, determine the normal bal-

ance of the listed accounts for each company.

PepsiCo Coca-Cola

1. Inventory 1. Accounts Receivable2. Property, Plant, and Equipment 2. Cash and Cash Equivalents3. Accounts Payable 3. Cost of Goods Sold4. Interest Expense 4. Sales (revenue)

(b) Identify the other account ordinarily involved when:(1) Accounts Receivable is increased.(2) Wages Payable is decreased.(3) Property, Plant, and Equipment is increased.(4) Interest Expense is increased.

■ RESEARCH CASE

BYP2-3 Several commonly available indexes enable individuals to locate articles from numer-ous business publications and periodicals. Articles can generally be searched for by companyname or by subject matter. Four common indexes are the Wall Street Journal Index, BusinessAbstracts (formerly Business Periodicals Index), Predicasts F&S Index, and ABI/Inform.

InstructionsUse one of these resources to find a list of articles about Best Buy, Circuit City, or TweeterHome Entertainment. Choose an article from this list that you believe would be of interest toan investor or creditor of this company. Read the article and answer the following questions.(Note: Your library may have either hard-copy or CD-ROM versions of these indexes.)(a) What is the article about?(b) What company-specific information is included in the article?(c) Is the article related to anything you read in this chapter?(d) Identify any accounting-related issues discussed in the article.

■ INTERPRETING FINANCIAL STATEMENTS

BYP2-4 The following selected accounts are excerpted from the 2003 financial statements ofMotorola, Inc. (in millions).

Cash and Cash Equivalents $ 7,877Inventories 2,792Notes Payable 896Selling, General, and Administrative Expenses 4,073Sales Revenue 27,058Dividends 372Common Stock 7,017Income Tax Expense 400


Instructions(a) What is the increase and decrease side for each of Motorola’s accounts?(b) What is the normal balance for each account?(c) List those accounts that appear on Motorola’s balance sheet.(d) List those accounts that appear on Motorola’s income statement.(e) On what financial statement does Dividends appear?

■ A GLOBAL FOCUS

BYP2-5 Doman Industries Ltd., whose products are sold in 30 countries worldwide, is an in-tegrated Canadian forest products company.

Doman sells the majority of its lumber products in the United States and a significantamount of its pulp products in Asia. Doman also has loans from other countries. For example,the company borrowed US $160 million at an annual interest rate of 12%. Doman must repaythis loan, and interest, in U.S. dollars.

One of the challenges global companies face is to make themselves attractive to investorsfrom other countries. This is difficult to do when different accounting rules in different coun-tries blur the real impact of earnings. For example, in 1998 Doman reported a loss of $2.3 mil-lion, using Canadian accounting rules. Had it reported under U.S. accounting rules, its losswould have been $12.1 million.

Many companies that want to be more easily compared with U.S. and other global com-petitors have switched to U.S. accounting principles. Canadian National Railway, Corel, Cott,Inco, and the Thomson Corporation are but a few examples of large Canadian companieswhose financial statements are now presented in U.S. dollars, which adhere to U.S. GAAP, orare reconciled to U.S. GAAP.

Instructions(a) Identify advantages and disadvantages that companies should consider when switching to

U.S. reporting standards.(b) Suppose you wish to compare Doman Industries to a U.S.-based competitor. Do you be-

lieve the use of country-specific accounting policies would hinder your comparison? If so,explain how.

(c) Suppose you wish to compare Doman Industries to a Canadian-based competitor. If thecompanies chose to apply generally acceptable Canadian accounting policies differently,how could this affect your comparison of their financial results?

(d) Do you see any significant distinction between comparing statements prepared using gen-erally accepted accounting principles of different countries and comparing statements pre-pared using generally accepted accounting principles of the same country (e.g., U.S.) butthat apply the principles differently?

■ EXPLORING THE WEB

BYP2-6 Much information about specific companies is available on the World Wide Web. Suchinformation includes basic descriptions of the company’s location, activities, industry, financialhealth, and financial performance.

Address: biz.yahoo.com/i, or go to www.wiley.com/college/weygandt

Steps

1. Type in a company name, or use index to find company name.2. Choose Profile. Perform instructions (a)–(c) below.3. Click on the company’s specific industry to identify competitors. Perform instructions (d)–(g)

below.

InstructionsAnswer the following questions.

(a) What is the company’s industry?(b) What was the company’s total sales?(c) What was the company’s net income?(d) What are the names of four of the company’s competitors?(e) Choose one of these competitors.(f) What is this competitor’s name? What were its sales? What was its net income?(g) Which of these two companies is larger by size of sales? Which one reported higher net

income?

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weygandt


Critical Thinking

■ GROUP DECISION CASE

BYP2-7 Amy Torbert is president of Hollins Riding Academy Inc. The academy’s primarysources of revenue are riding fees and lesson fees, which are paid on a cash basis. Hollins alsoboards horses for owners, who are billed monthly for boarding fees. In a few cases, boarderspay in advance of expected use. For its revenue transactions, the academy maintains the fol-lowing accounts: No. 1 Cash, No. 5 Boarding Accounts Receivable, No. 27 Unearned BoardingRevenue, No. 51 Riding Revenue, No. 52 Lesson Revenue, and No. 53 Boarding Revenue.

The academy owns 10 horses, a stable, a riding corral, riding equipment, and office equip-ment. These assets are accounted for in accounts No. 11 Horses, No. 12 Building, No. 13 RidingCorral, No. 14 Riding Equipment, and No. 15 Office Equipment.

For its expenses, the academy maintains the following accounts: No. 6 Hay and Feed Sup-plies, No. 7 Prepaid Insurance, No. 21 Accounts Payable, No. 60 Salaries Expense, No. 61 Ad-vertising Expense, No. 62 Utilities Expense, No. 63 Veterinary Expense, No. 64 Hay and FeedExpense, and No. 65 Insurance Expense.

Hollins makes periodic payments of cash dividends to stockholders. To record stockhold-ers’ equity in the business and dividends, three accounts are maintained: No. 50 Common Stock,No. 51 Retained Earnings, and No. 52 Dividends.

During the first month of operations an inexperienced bookkeeper was employed. AmyTorbert asks you to review the following eight entries of the 50 entries made during the month.In each case, the explanation for the entry is correct.

May 1 Cash 18,000Common Stock 18,000

(Invested $18,000 cash in exchange for stock)

5 Cash 250Riding Revenue 250

(Received $250 cash for lessons provided)

7 Cash 500Boarding Revenue 500

(Received $500 for boarding of horsesbeginning June 1)

14 Riding Equipment 80Cash 800

(Purchased desk and other officeequipment for $800 cash)

15 Salaries Expense 400Cash 400

(Issued dividend checks to stockholders)

20 Cash 148Riding Revenue 184

(Received $184 cash for riding fees)

30 Veterinary Expense 75Accounts Payable 75

(Received bill of $75 from veterinarian forservices rendered)

31 Hay and Feed Expense 1,500Cash 1,500

(Purchased an estimated 2 months’supply of feed and hay for $1,500 onaccount)

InstructionsWith the class divided into groups, answer the following.

(a) Identify each journal entry that is correct. For each journal entry that is incorrect, preparethe entry that should have been made by the bookkeeper.

(b) Which of the incorrect entries would prevent the trial balance from balancing?


(c) What was the correct net income for May, assuming the bookkeeper reported net incomeof $4,500 after posting all 50 entries?

(d) What was the correct cash balance at May 31, assuming the bookkeeper reported a balanceof $12,475 after posting all 50 entries (and the only errors occurred in the items listedabove)?

■ COMMUNICATION ACTIVITY

BYP2-8 Shandler’s Maid Company offers home cleaning service. Two recurring transactionsfor the company are billing customers for services rendered and paying employee salaries. Forexample, on March 15, bills totaling $5,000 were sent to customers and $2,000 was paid insalaries to employees.

InstructionsWrite a memo to your instructor that explains and illustrates the steps in the recording processfor each of the March 15 transactions. Use the format illustrated in the text under the heading,“The Recording Process Illustrated” (p. 61).

■ ETHICS CASE

BYP2-9 Sara Rankin is the assistant chief accountant at Hokey Company, a manufacturer ofcomputer chips and cellular phones. The company presently has total sales of $20 million. It isthe end of the first quarter. Sara is hurriedly trying to prepare a general ledger trial balance sothat quarterly financial statements can be prepared and released to management and the regu-latory agencies. The total credits on the trial balance exceed the debits by $1,000. In order tomeet the 4 p.m. deadline, Sara decides to force the debits and credits into balance by adding theamount of the difference to the Equipment account. She chose Equipment because it is one ofthe larger account balances; percentage-wise, it will be the least misstated. Sara “plugs” the dif-ference! She believes that the difference will not affect anyone’s decisions. She wishes that shehad another few days to find the error but realizes that the financial statements are already late.

Instructions(a) Who are the stakeholders in this situation?(b) What are the ethical issues involved in this case?(c) What are Sara’s alternatives?

■ CONTINUING COOKIE CHRONICLE

(Note: The Continuing Cookie Chronicle was started in Chapter 1 and will continue in eachchapter.)

BYP2-10 After researching the different forms of business organization, Natalie Koebel de-cides to operate “Cookie Creations” as a corporation. She then starts the process of getting thebusiness running. In November 2005, the following activities occur.

Nov. 8 Natalie invests $500 in exchange for common stock.9 She creates promotional materials: a brochure and a poster for advertising the com-

pany and the services available.11 Natalie pays $95 to have the brochures and posters printed. She plans to distribute

these as opportunities arise.13 She buys baking supplies, for $125 cash.14 Natalie starts to gather some baking equipment to take with her when teaching the

cookie classes. She has an excellent top-of-the-line food processor and mixer thatoriginally cost her $550. Natalie decides to start using it only in her new business. Sheestimates that the equipment is currently worth $300.

16 Natalie realizes that her initial cash investment is not enough. Her grandmother lends$2,000 cash, for which Natalie signs a note payable in the name of the business,Cookie Creations.

17 She buys more baking equipment for $900 cash.20 She books her first class for November 29 for $100. One of her mother’s friends

needed a novel idea for her young daughter’s birthday party.25 Natalie books a second class for December 4 for $125. She receives $25 cash in

advance as a down payment.29 She teaches her first class, booked on November 20, and collects the $100 cash.

AccountingMatters!

AccountingMatters!

REMEMBER to go back to the Navigator box on the chapter-opening page and check off your completed work.• • • • •• ••• • •

✓✓

30 Natalie’s brother designs a Web site for Cookie Creations that will be used foradvertising. She agrees to pay her brother $600 for his work, payable at the end ofDecember. (Because the Web site is expected to have a useful life of 2 years beforeupgrades are needed, it should be treated as an asset.)

30 Natalie pays $1,200 for a one-year insurance policy that will expire on December 1,2006.

Instructions(a) Prepare journal entries to record the November transactions.(b) Post the journal entries to general ledger accounts.(c) Prepare a trial balance at November 30, 2005.

Answers to Accounting Matters! Questionsp. 51Q: Do you think that the Chicago Bears would be likely to have the same major revenue andexpense accounts as the Cubs?A: Because their businesses are similar—professional sports—many of the revenue and ex-pense accounts for the baseball and football teams might be similar.Q: Do you think that Chicago-based Wrigley Company would be likely to have the same major rev-enue and expense accounts? Why or why not?A: No, many of the Wrigley Company’s revenue and expense accounts would be different fromthose of the sports teams. Companies use specific accounts that most accurately track the keyactivities and transactions of the business, in order to maintain control over those transactionsand to inform owners and creditors.p. 54Q: In order to prepare and issue financial statements, these companies’ accounting equations(debit and credits) must have been in balance at year-end. How could these errors or mis-statements have occurred?A: A company’s accounting equation (its books) can be in balance yet its financial statementshave errors or misstatements because of the following: entire transactions were not recorded;transactions were recorded at wrong amounts; transactions were recorded in the wrong ac-counts; transactions were recorded in the wrong accounting period. Audits of financial state-ments uncover some, but obviously not all, errors or misstatements.p. 58Q: Why did Sam Walton keep separate pigeonholes and blue binders for each store?A: Using separate pigeonholes and binders permitted Sam to accumulate and track the per-formance of each individual store easily.Q: Why bother to keep separate records for each store?A: Keeping separate records for each store provided Walton with more information (about per-formance of individual stores and managers) and greater control.p. 60Q: What do accountants call those things that are first recorded at “the most critical . . . pointin the accounting process”?A: The things recorded are transactions.Q: What is the name of the “book” into which those things are first recorded?A: The “book” into which transactions are first recorded is a journal. (In computerized sys-tems, the journal is an electronic file—not a separate book.)Q: What does the accountant call the group of accounts into which the individual entries areposted (merged and filed)?A: The transaction entries are posted (merged and filed) into a group of accounts called a ledger.

Answer to PepsiCo Review It Question 4, p. 53Normal balances for PepsiCo (or any company) are: Cash—debit; Accounts Payable—credit;Interest Expense—debit.

Answers to Self-Study Questions1. b 2. c 3. d 4. d 5. b 6. a 7. c 8. d 9. a 10. c


AccountingMatters!

Documents

The Recording 2 Process - BrainMass€¦ · Define debits and credits and explain how they are used to record business transactions. 3. Identify the basic steps in the recording process