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Accounting Principles, Volume 1, 7th Canadian Edition Test Bank

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    CHAPTER 2 THE RECORDING PROCESS CHAPTER LEARNING OBJECTIVES 1. Describe how accounts, debits, and credits are used to record business transactions . Debit means left and credit means right. The normal balance of an asset is a debit because assets are on the left side of the accounting equation. Assets are increased by debits and decreased by credits. The normal balance of liabilities and owner’s capital is a credit because they are on the right side of the accounting equation. Liabilities and owner’s capital are increased by credits and decreased by debits. Revenues increase owner’s equity and therefore are recorded as credits because credits increase owner’s equity. Credits increase revenues and debits decrease revenues. Expenses and drawings decrease owner’s equity and therefore are recorded as debits because debits decrease owner’s equity. Expenses and drawings are increased by debits and decreased by credits. 2. State how a journal is used in the recording process and journalize transactions . The steps in the recording process are the first three steps in the accounting cycle. These steps are: (a) analyze each transaction for its effect on the accounts, (b) record the transaction in a journal, and (c) transfer the journal information to the correct accounts in the ledger. A journal : (a) discloses the complete effect of a transaction in one place, (b) provides a chronological record of transactions, (c) helps to prevent and locate errors because the debit and credit amounts for each entry can be easily compared, and (d) explains the transaction and, if there is one, identifies the source document. 3. Explain how a ledger helps in the recording process and post transactions. The entire group of accounts maintained by a company is called the ledger. The ledger keeps in one place all the information about changes in each of the specific account balances. Posting is the procedure of transferring journal entries to the ledger accounts. After the journal entries have been posted, the ledger will show all of the increases and decreases that have been made to each account. 4. Prepare a trial balance. A trial balance is a list of the accounts in the ledger and the account balances at a specific time. Its main purpose is to prove that debits and credits are equal after posting. A trial balance uncovers certain types of errors in journalizing and posting, and is useful in preparing financial statements. Preparing a trial balance is the fourth step in the accounting cycle.

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    EXERCISES Exercise 1 Identify each of the following accounts as an asset, liability, equity, revenue or expense. 1. L. Ralph, Capital _____________ 2. Consulting Revenue _____________ 3. Accounts Payable _____________ 4. Office Supplies _____________ 5. Prepaid Advertising _____________ 6. Machinery _____________ 7. Cash _____________ 8. L. Ralph, Withdrawals _____________ 9. Salaries Expense _____________ 10. Repairs & Maintenance _____________ 11. Accounts Receivable _____________ 12. Unearned Revenue _____________ 13. Rent Revenue _____________ Solution 1 (5 min.) 1. Equity 2. Revenue 3. Liability 4. Asset 5. Asset 6. Asset 7. Asset 8. Equity 9. Expense 10. Expense 11. Asset 12. Liability 13. Revenue Bloomcode: Comprehension

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    Difficulty: Easy Learning Objective : Describe how accounts, debits, and credits are used to record business transactions. Section Reference : The Account CPA: Financial Reporting Exercise 2 For the accounts listed below, indicate if the normal balance of the account is a debit or credit. Normal Balance Accounts Debit or Credit 1. Repairs & Maintenance _________________ 2. Interest Receivable _________________ 3. Prepaid Insurance _________________ 4. Unearned Revenue _________________ 5. Insurance Expense _________________ 6. Fees Earned _________________ 7. Machinery _________________ 8. Notes Payable _________________ 9. Land _________________ 10. Owner Withdrawals _________________ Solution 2 (5 min.) Normal Balance Accounts Debit or Credit 1. Repairs & Maintenance Debit 2. Interest Receivable Debit 3. Prepaid Insurance Debit 4. Unearned Revenue Credit 5. Insurance Expense Debit 6. Fees Earned Credit 7. Machinery Debit 8. Notes Payable Credit 9. Land Debit 10. Owner Withdrawals Debit Bloomcode: Comprehension Difficulty: Easy Learning Objective : Describe how accounts, debits, and credits are used to record business

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    transactions. Section Reference : The Account CPA: Financial Reporting Exercise 3 The following accounts relate to Harold’s Pool & Spas Co.: 1. Land 2. Installation Revenue 3. Land 4. Notes Receivable 5. Harold, Capital 6. Sales 7. Prepaid Insurance 8. Interest Payable 9. Commission Expense 10. Salaries Payable 11. Unearned Revenue 12. Harold, Withdrawals Instructions Use the form below to identify the type of account and its normal balance. The first one has been completed for you as an example. Type of Account Normal Balance Asset Liability Equity Debit Credit 1. __ X __ ______ ___ __X__ _____ 2. __ _ __ ______ ___ __ _ __ _____ 3. __ _ __ ______ ___ __ _ __ _____ 4. __ _ __ ______ ___ __ _ __ _____ 5. __ _ __ ______ ___ __ _ __ _____ 6. __ _ __ ______ ___ __ _ __ _____ 7. __ _ __ ______ ___ __ _ __ _____ 8. __ _ __ ______ ___ __ _ __ _____ 9. __ _ __ ______ ___ __ _ __ _____ 10. __ _ __ ______ ___ __ _ __ _____ 11. __ _ __ ______ ___ __ _ __ _____ 12. __ _ __ ______ ___ __ _ __ _____ Solution 3 (10 min.) Type of Account Normal Balance Asset Liability Equity Debit Credit 1. __ X__ ______ ___ __X__ _____ 2. __ _ __ ______ X__ __ _ __ __ X __ 3. __ X__ ______ ___ __X__ _____

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    4. __ X__ ______ ___ __X__ _____ 5. __ _ __ ______ X__ __ _ __ __ X__ 6. __ _ __ ______ X__ __ _ __ __ X__ 7. __ X__ ______ ___ __X__ _____ 8. __ _ __ __ X ___ ___ __ _ __ __ X__ 9. __ _ __ ______ X __ __X__ _____ 10. __ _ __ __ X ___ ___ __ _ __ __ X__ 11. __ _ __ __ X ___ ___ __ _ __ __ X__ 12. __ _ __ ______ X __ __X__ _____ Bloomcode: Comprehension Difficulty: Easy Learning Objective : Describe how accounts, debits, and credits are used to record business transactions. Section Reference : The Account CPA: Financial Reporting Ex ercise 4 The chart of accounts used by Fortier Copy Company is listed below : 10 Cash 30 D. Fortier , Capital 12 Accounts Receivable 35 D. Fortier , Drawings 15 Paper Supplies 40 Photocopy Revenue 18 Copy Machines 51 Advertising Expense 22 Accounts Payable 53 Rent Expense 25 Notes Payable 54 Wages Expense 28 Unearned Revenue Instructions I ndicate the proper accounts to be debited and credited for the following transactions by writing the account number(s) in the appropriate columns. —————————————————————————————————————————— Number(s) Number(s) of account(s) of account(s) debited credited —————————————————————————————————————————— 1. D a n Fortier invests $90,000 cash to start the business. —————————————————————————————————————————— 2. Purchased three photocopy machines for

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    $200,000, paying $50,000 cash and signing a 5 - year, 6% note for the remainder. —————————————————————————————————————————— 3. Purchased $5,000 paper supplies on credit. —————————————————————————————————————————— 4. Cash photocopy revenue amounted to $7,000. —————————————————————————————————————————— 5. Paid $500 cash for radio advertising. —————————————————————————————————————————— 6. Paid $800 on account for paper supplies purchased in transaction 3. —————————————————————————————————————————— 7. D a n Fortier withdrew $1,500 from the business for personal expenses. —————————————————————————————————————————— 8. Paid $1,200 cash for rent for the current month. —————————————————————————————————————————— 9. Received $2,000 cash advance from a customer for future copying. —————————————————————————————————————————— 10. Billed a customer for $450 for photocopy work done. —————————————————————————————————————————— 11. Paid $400 for wages for the month. —————————————————————————————————————————— Solution 4 (15 min.) —————————————————————————————————————————— Number(s) Number(s) of account(s) of account(s) debited credited —————————————————————————————————————————— 1. D a n Fortier invests $90,000 cash to start the business. 10 30 —————————————————————————————————————————— 2. Purchased three photocopy machines for $200,000, paying $50,000 cash and signing a 5 - year, 6% note for the remainder. 18 10, 25 —————————————————————————————————————————— 3. Purchased $5,000 paper supplies on credit. 15 22 —————————————————————————————————————————— 4. Cash photocopy revenue amounted to $7,000. 10 40 —————————————————————————————————————————— 5. Paid $500 cash for radio advertising. 51 10 —————————————————————————————————————————— 6. Paid $800 on account for paper supplies purchased in transaction 3. 22 10 —————————————————————————————————————————— 7. D a n Fortier withdrew $1,500 from the business for personal expenses. 35 10

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    —————————————————————————————————————————— 8. Paid $1,200 cash for rent for the current month. 53 10 —————————————————————————————————————————— 9. Received $2,000 cash advance from a customer for future copying. 10 28 —————————————————————————————————————————— 10. Billed a customer for $450 for photocopy work done. 12 40 —————————————————————————————————————————— 11. Paid $400 for wages for the month. 54 10 —————————————————————————————————————————— Bloomcode: Comprehension Difficulty: Easy Learning Objective : Describe how accounts, debits, and credits are used to record business transactions. Section Reference : The Account CPA: Financial Reporting Exercise 5 Indicate whether you would use a debit or a credit to record the following changes: Debit or Credit 1. An increase in Salary Expense __________________ 2. A decrease in Accounts Payable __________________ 3. A n increase in Prepaid Insurance __________________ 4. An increase in Owner's Capital __________________ 5 . A decrease in Office Supplies __________________ 6. An increase in Owner's Drawings __________________ 7. An increase in Service Revenue __________________ 8. A decrease in Accounts Receivable __________________ 9. An increase in Rent Expense __________________ 10 . A decrease in Store Equipment __________________ Solution 5 (5 min.) 1 . An increase in Salary Expense Debit _______ 2. A decrease in Accounts Payable Debit _______ 3. A n increase in Prepaid Insurance Debit _______ 4. An increase in Owner's Capital Credit ______ 5 . A decrease in Office Supplies Credit ______ 6. An increase in Owner's Drawings Debit _______ 7. An increase in Service Revenue Credit ______

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    8. A decrease in Accounts Receivable Credit ______ 9. An increase in Rent Expense Debit _______ 10 . A decrease in Store Equipment Credit ______ Bloomcode: Comprehension Difficulty: Easy Learning Objective : Describe how accounts, debits, and credits are used to record business transactions. Section Reference : The Account CPA: Financial Reporting Exercise 6 For the accounts listed below, indicate if the normal balance of the account is a debit or credit. Normal Balance Accounts Debit or Credit 1. Service Revenue _________________ 2. Cash _________________ 3. Accounts Receivable _________________ 4. Accounts Payable _________________ 5. Owner's Capital _________________ 6. Prepaid Insurance _________________ 7. Insurance Expense _________________ 8. Owner's Drawings _________________ 9. Office Building _________________ 10. Notes Receivable _________________ Solution 6 (5 min.) Normal Balance Accounts Debit or Credit 1. Service Revenue Credit 2. Cash Debit 3. Accounts Receivable Debit 4. Accounts Payable Credit 5. Owner's Capital Credit 6. Prepaid Insurance Debit 7. Insurance Expense Debit 8. Owner's Drawings Debit

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    9. Office Building Debit 10. Notes Receivable Debit Bloomcode: Comprehension Difficulty: Easy Learning Objective : Describe how accounts, debits, and credits are used to record business transactions. Section Reference : The Account CPA: Financial Reporting Exercise 7 Using the accounts listed below, state the account to be debited and the account to be credited for each of the following transactions : 1. Owner invested cash in the business. 2. Purchased equipment for cash. 3. Earned revenue on account. 4. Purchased supplies on account. 5. Paid for supplies purchased in 4. 6. Received payment from customer in 3. 7. Paid employee salaries. 8. Owner withdrew cash for personal use. 9. Purchased equipment on credit. 10. Owner used personal funds to purchase a new computer for use in the business. ACCOUNTS Cash Owner’s Capital Accounts Receivable Owner’s Drawings Supplies Revenue Equipment Salaries Payable Accounts Payable Salaries Expense Solution 7 (10 min.) Debit Credit 1. Cash Owner’s Capital 2. Equipment Cash 3. Accounts Receivable Revenue 4. Supplies Accounts Payable 5. Accounts Payable Cash 6. Cash Accounts Receivable

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    7. Salaries Expense Cash 8. Owner’s Drawings Cash 9. Equipment Accounts Payable 10. Equipment Owner’s Capital Bloomcode: Comprehension Difficulty: Easy Learning Objective : Describe how accounts, debits, and credits are used to record business transactions. Section Reference : The Account CPA: Financial Reporting Exercise 8 Identify the account to be debited and the account to be credited for each of the following transactions : 1. Purchased equipment for cash and a note payable. 2. Accepted a cash deposit from a customer for a service to be provided next month. 3. Provided services on account. 4. Purchased supplies on account . 5. Received payment form the client in 3. 6. Provided services to customer in 2 and collected cash for the remaining work done. 7. Owner paid himself. 8. Paid in full for equipment purchased in 1. Solution 8 (10 min.) Debit Credit 1. Equipment Cash, Note Payable 2. Cash Unearned Revenue 3. Accounts Receivable Revenue / Sales 4. Supplies Accounts Payable 5. Cash Accounts Receivable 6. Unearned Revenue, Cash Revenue / Sales 7. Owner’s Drawings Cash 8. Note Payable Cash Bloomcode: Comprehension

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    Difficulty: Easy Learning Objective : Describe how accounts, debits, and credits are used to record business transactions. Section Reference : The Account CPA: Financial Reporting Exercise 9 Eight transactions are recorded in the following T accounts: Cash Accounts Receivable (1) 35,000 (2) 3,500 (5) 27,500 (7) 22,500 (7) 22,500 (3) 1,950 (4) 2,225 (6) 8,000 (8) 4,500 Supplies Equipment (3) 1,950 (2) 13,500 T. Shaw, Capital Service Revenue (1) 35,000 (5) 27,500 Accounts Payable T. Shaw, Drawings (6) 8,000 (2) 10,000 (8) 4,500 Salaries Expense (4) 2,225 Instructions Indicate for each debit and each credit: a ) whether an asset, liability, capital, drawings, revenue, or expense account was affected , an d b ) whether the account was increased (+) or decreased ( – ).

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    Answers should be presented in the following chart form: Transaction Account Debited Account Credited No. Type Effect Type Effect (1) (Example) Asset + Capital + —————————————————————————————————————————— (2) —————————————————————————————————————————— (3) —————————————————————————————————————————— (4) —————————————————————————————————————————— (5) —————————————————————————————————————————— (6) —————————————————————————————————————————— (7) —————————————————————————————————————————— (8) —————————————————————————————————————————— Solution 9 (15 min.) Transaction Account Debited Account Credited No. Type Effect Type Effect (1) (Example) Asset + Capital + —————————————————————————————————————————— (2) Asset + Asset – Liability + —————————————————————————————————————————— (3) Asset + Asset – —————————————————————————————————————————— (4) Expense + Asset – —————————————————————————————————————————— (5) Asset + Revenue + —————————————————————————————————————————— (6) Liability – Asset – —————————————————————————————————————————— (7) Asset + Asset – —————————————————————————————————————————— (8) Drawings + Asset – —————————————————————————————————————————— Bloomcode: Comprehension Difficulty: Medium Learning Objective : Describe how accounts, debits, and credits are used to record business transactions. Section Reference : The Account CPA: Financial Reporting

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    Exercise 1 0 Mary Bartlett has operated a lawn care business for 3 months. The following transactions occurred in the fourth month : 1. Ma ry decides that the business needs a new vehicle. A truck is purchased for $20,000 and financed by a note payable for the full amount. 2. Ma ry invested $5,000 of h er own funds in the business. 3. Invoices to customers were issued for services completed. The total invoices amount to $4,500. 4. Paid $350 on account for supplies purchased the prior month. 5. Collected $3,750 from customers for work completed and invoiced the prior month . 6. Paid wages of $250 to an assistant. 7. Received $300 deposit from a new customer for whom work will not be performed until next month. For each transaction, complete the information i n the following table: Transaction: 1 2 3 4 5 6 7 Account debited (name) Type of account (asset, liability, owner’s equity) Normal balance of the account Is the account increased or decreased? Account credited (name) Type of account (asset, liability, owner’s equity) Normal balance of the account Is the account increased or decreased?

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    Solution 1 0 (15 min . ) Transaction: 1 2 3 4 5 6 7 Account debited (name) Vehicle/ equipm e nt Cash Accounts Receivable Accounts Payable Cash Wages Expense Cash Type of account (asset, liability, owner’s equity) Asset Asset Asset Liability Asset Owner’s equity Asset Normal balance of the account DR DR DR CR DR DR DR Is the account increased or decreased? Increase Increase Increase Decrease Increase Increase Increase Account credited (name) Note Payable M. Bartlett , Capital Service Revenue Cash Accounts Receivable Cash Unearned Revenue Type of account (asset, liability, owner’s equity) Liability Owner’s equity Owner’s equity Asset Asset Asset Liability Normal balance of the account CR CR CR DR DR DR CR Is the account increased or decreased? Increase Increase Increase Decrease Decrease Decrease Increase Bloomcode: Comprehension Difficulty: Hard Learning Objective : Describe how accounts, debits, and credits are used to record business transactions. Section Reference : The Account CPA: Financial Reporting Exercise 1 1 For each of the following accounts indicate : a ) the type of account (Asset, Liability, Owner's capital, Owner ’s drawings, Revenue, Expense), b ) th e debit and credit effects, and c ) the normal account balance. Example 0. Cash a ) Asset account b ) Debit increases, credit decreases c ) Normal balance – debit ACCOUNTS

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    1. Accounts Payable 5. Service Revenue 2. Accounts Receivable 6. Insurance Expense 3. D . Chester , Capital 7. Notes Payable 4. D . Chester , Drawings 8. Equipment Solution 1 1 (15 min.) 1. a) Liability account. 5. a) Revenue account. b) Debit decreases, credit increases. b) Debit decreases, credit increases. c) Normal balance – credit. c) Normal balance – credit. 2. a) Asset account. 6. a) Expense account. b) Debit increases, credit decreases. b) Debit increases, credit decreases. c) Normal balance – debit. c) Normal balance – debit. 3. a) Owner's capital account. 7. a) Liability account. b) Debit decreases, credit increases. b) Debit decreases, credit increases. c) Normal balance – credit. c) Normal balance – credit. 4. a) Owner's drawings account. 8. a) Asset account. b) Debit increases, credit decreases. b) Debit increases, credit decreases. c) Normal balance – debit. c) Normal balance – debit. Bloomcode: Comprehension Difficulty: Easy Learning Objective : Describe how accounts, debits, and credits are used to record business transactions. Section Reference : The Account CPA: Financial Reporting Exercise 1 2 Shadow ’s Magic Store has balances in the following accounts at the end of May : 1. Supplies 6. Owner’s Capital 2. Accounts Receivable 7. Prepaid Insurance 3. Unearned Revenue 8. Equipment 4. Salaries Payable 9. Accounts Payable 5. Commission Revenue 10. Notes Payable Instructions For each of the accounts indicate : a) the type of account (Asset, Liability, Owner's capital, Owner’s drawings, Revenue, Expense), b) the debit and credit effects, and c) the normal account balance. Solution 1 2 (15 min.) 1. a) Asset account. 6. a) Owner’s Capital account. b) Debit increases, credit decreases. b) Debit decreases, credit increases.

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