Accidents Happen
How organized are you financially? Take a short quiz. Answer yes or no to each question:
- Does your wallet contain so many cash
machine receipts that you've been declared a walking fire hazard? - Do you wait until you debit card is denied before checking the status of your funds?
- Was Aaron Rodgers (the quarterback for the Green Bay Packers) playing high school football the last time you verified the accuracy of your bank account?
If you think it is hard to keep track of the many transactions that make up your life, imagine how difficult it is for a big corporation to do so. Not only that, but now consider how important it is for a large company to have good accounting records, especially if it has control of your life savings. MF Global Holdings Ltd is such a company. As a big investment broker, it held billions of dollars of investments for clients. If you had your life savings invested at MF Global, you might be slightly displeased if you heard this from one of its representatives: “You know, I kind of remember an account for someone with a name like yours—now what did we do with that?”
Unfortunately, that is almost exactly what happened to MF Global's clients shortly before it recently filed for bankruptcy. During the days immediately following the bankruptcy filing, regulators and auditors struggled to piece things together. In the words of one regulator, “Their books are a disaster … we're trying to figure out what numbers are real numbers.” One company that considered buying an interest in MF Global walked away from the deal because it “couldn't get a sense of what was on the balance sheet.” That company said the information that should have been instantly available instead took days to produce.
It now appears that MF Global did not properly segregate customer accounts from company accounts. And, because of its sloppy recordkeeping, customers were not protected when the company had financial troubles. Total customer losses were approximately $1 billion. As you can see, accounting matters!
Source: S. Patterson and A. Lucchetti, “Inside the Hunt for MF Global Cash,” Wall Street Journal Online (November 11, 2011).
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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 their use in recording 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.
Preview of Chapter 2
In Chapter 1, we analyzed business transactions in terms of the accounting equation, and we presented the cumulative effects of these transactions in tabular form. Imagine a company like MF Global (as in the Feature Story) using the same tabular format as Softbyte to keep track of its transactions. In a single day, MF Global engaged in thousands of business transactions. To record each transaction this way would be impractical, expensive, and unnecessary. Instead, companies use a set of procedures and records to keep track of transaction data more easily. This chapter introduces and illustrates these basic procedures and records.
The content and organization of Chapter 2 are as follows.
The Account
An account is an individual accounting record of increases and decreases in a specific asset, liability, or owner's equity item. For example, Softbyte (the company discussed in Chapter 1) would have separate accounts for Cash, Accounts Receivable, Accounts Payable, Service Revenue, Salaries and Wages Expense, and so on. (Note that whenever we are referring to a specific account, we capitalize the name.)
In its simplest form, an account consists of three parts: (1) a title, (2) a left or debit side, and (3) a right or credit side. Because the format of an account resembles the letter T, we refer to it as a T-account. Illustration 2-1 shows the basic form of an account.
Illustration 2-1 Basic form of account
We use this form often throughout this book to explain basic accounting relationships.
Debits and Credits
Define debits and credits and explain their use in recording business transactions.
The term debit indicates the left side of an account, and credit indicates the right side. They are commonly abbreviated as Dr. for debit and Cr. for credit. They do not mean increase or decrease, as is commonly thought. We use the terms debit and credit repeatedly in the recording process to describe where entries are made in accounts. For example, the act of entering an amount on the left side of an account is called debiting the account. Making an entry on the right side is crediting the account.
When comparing the totals of the two sides, an account shows a debit balance if the total of the debit amounts exceeds the credits. An account shows a credit balance if the credit amounts exceed the debits. Note the position of the debit side and credit side in Illustration 2-1.
The procedure of recording debits and credits in an account is shown in Illustration 2-2 for the transactions affecting the Cash account of Softbyte. The data are taken from the Cash column of the tabular summary in Illustration 1-8 (page 20).
Illustration 2-2 Tabular summary and account form for Softbyte's Cash account
Every positive item in the tabular summary represents a receipt of cash. Every negative amount represents a payment of cash. Notice that in the account form, we record the increases in cash as debits and the decreases in cash as credits. For example, the $15,000 receipt of cash (in red) is debited to Cash, and the −$7,000 payment of cash (in blue) is credited to Cash.
Having increases on one side and decreases on the other reduces recording errors and helps in determining the totals of each side of the account as well as the account balance. The balance is determined by netting the two sides (subtracting one amount from the other). The account balance, a debit of $8,050, indicates that Softbyte had $8,050 more increases than decreases in cash. That is, since it started with a balance of zero, it has $8,050 in its Cash account.
DEBIT AND CREDIT PROCEDURE
In Chapter 1, you learned the effect of a transaction on the basic accounting equation. Remember that each transaction must affect two or more accounts to keep the basic accounting equation in balance. In other words, for each transaction, debits must equal credits. The equality of debits and credits provides the basis for the double-entry system of recording transactions.
Under the double-entry system, the dual (two-sided) effect of each transaction is recorded in appropriate accounts. This system provides a logical method for recording transactions. As discussed in the Feature Story about MF Global, the double-entry system also helps ensure the accuracy of the recorded amounts as well as the detection of errors. If every transaction is recorded with equal debits and credits, 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 equation is much more efficient than the plus/minus procedure used in Chapter 1. The following discussion illustrates debit and credit procedures in the double-entry system.
International Note 
Rules for accounting for specific events sometimes differ across countries. For example, European companies rely less on historical cost and more on fair value than U.S. companies. Despite the differences, the double-entry accounting system is the basis of accounting systems worldwide.
DR./CR. PROCEDURES FOR ASSETS AND LIABILITIES
In Illustration 2-2 for Softbyte, increases in Cash—an asset—were entered on the left side, and decreases in Cash were entered on the right side. We know that both sides of the basic equation (Assets = Liabilities + Owner's Equity) must be equal. It therefore follows that increases and decreases in liabilities will have to be recorded opposite from increases and decreases in assets. Thus, increases in liabilities must be entered on the right or credit 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 in Illustration 2-3.
Illustration 2-3 Debit and credit effects—assets and liabilities
Asset accounts normally show debit balances. That is, debits to a specific asset account should exceed credits to that account. Likewise, liability accounts normally show credit balances. That is, credits to a liability account should exceed debits to that account. The normal balance of an account is on the side where an increase in the account is recorded. Illustration 2-4 (page 56) shows the normal balances for assets and liabilities.
Illustration 2-4 Normal balances—assets and liabilities
Knowing the normal balance in an account may help you trace errors. For example, a credit balance in an asset account such as Land or a debit balance in a liability account such as Salaries and Wages Payable usually indicates an error. Occasionally, though, an abnormal balance may be correct. The Cash account, for example, will have a credit balance when a company has overdrawn its bank balance (i.e., written a check that “bounced”).
DR./CR. PROCEDURES FOR OWNER's EQUITY
As Chapter 1 indicated, owner's investments and revenues increase owner's equity. Owner's drawings and expenses decrease owner's equity. Companies keep accounts for each of these types of transactions.
OWNER's CAPITAL Investments by owners are credited to the Owner's Capital account. Credits increase this account, and debits decrease it. When an owner invests cash in the business, the company debits (increases) Cash and credits (increases) Owner's Capital. When the owner's investment in the business is reduced, Owner's Capital is debited (decreased).
Illustration 2-5 shows the rules of debit and credit for the Owner's Capital account.
Illustration 2-5 Debit and credit effects—Owner's Capital
We can diagram the normal balance in Owner's Capital as follows.
Illustration 2-6 Normal balance—Owener's Capital
OWNER's DRAWINGS An owner may withdraw cash or other assets for personal use. Withdrawals could be debited directly to Owner's Capital to indicate a decrease in owner's equity. However, it is preferable to use a separate account, called Owner's Drawings. This separate account makes it easier to determine total withdrawals for each accounting period. Owner's Drawings is increased by debits and decreased by credits. Normally, the drawings account will have a debit balance.
Illustration 2-7 shows the rules of debit and credit for the drawings account.
Illustration 2-7 Debit and credit effects—Owner's Drawings
We can diagram the normal balance as shown in Illustration 2-8.
Illustration 2-8 Normal balance—Owner's Drawings
The Owner's Drawings account decreases owner's equity. It is not an income statement account like revenues and expenses.
INVESTOR INSIGHT 
Keeping Score
The Chicago Cubs baseball team probably has these major revenue and expense accounts:
Do you think that the Chicago Bears football team would be likely to have the same major revenue and expense accounts as the Cubs? (See page 95.)
REVENUES AND EXPENSES The purpose of earning revenues is to benefit the owner(s) of the business. When a company earns revenues, owner's equity increases. Therefore, the effect of debits and credits on revenue accounts is the same as their effect on Owner's Capital. That is, revenue accounts are increased by credits and decreased by debits.
Expenses have the opposite effect. Expenses decrease owner's equity. Since expenses decrease net income and revenues increase it, it is logical that the increase and decrease sides of expense accounts should be the opposite of revenue accounts. Thus, expense accounts are increased by debits and decreased by credits. Illustration 2-9 shows the rules of debits and credits for revenues and expenses.
Helpful Hint Because revenues increase owner's equity, a revenue account has the same debit/credit rules as the Owner's Capital account. Expenses have the opposite effect.
Illustration 2-9 Debit and credit effects—revenues and expenses
Credits to revenue accounts should exceed debits. Debits to expense accounts should exceed credits. Thus, revenue accounts normally show credit balances, and expense accounts normally show debit balances. We can diagram the normal balances as follows.
Illustration 2-10 Normal balances—revenues and expenses
Helpful Hint You may want to bookmark Illustration 2-11. You probably will refer to it often.
Summary of Debit/Credit Rules
Illustration 2-11 shows a summary of the debit/credit rules and effects on each type of account. Study this diagram carefully. It will help you understand the fundamentals of the double-entry system.
Illustration 2-11 Summary of debit/credit rules
DO IT!
Normal Balances
Kate Browne has just rented space in a shopping mall. In this space, she will open a hair salon to be called “Hair It Is.” A friend has advised Kate to set up a double-entry set of accounting records in which to record all of her business transactions.
Identify the balance sheet accounts that Kate will likely need to record the transactions needed to open her business. Indicate whether the normal balance of each account is a debit or a credit.
Action Plan
Determine the types of accounts needed. Kate will need asset accounts for each different type of asset she invests in the business and liability accounts for any debts she incurs.
Understand the types of owner's equity accounts. Only Owner's Capital will be needed when Kate begins the business. Other owner's equity accounts will be needed later.
Solution
Kate would likely need the following accounts in which to record the transactions necessary to ready her hair salon for opening day:
| Cash (debit balance) Equipment (debit balance) Supplies (debit balance) Accounts Payable (credit balance) |
If she borrows money: Notes Payable (credit balance) Owner's Capital (credit balance) |
Related exercise material: BE2-1, BE2-2, BE2-5, E2-1, E2-2, E2-4, and DO IT! 2-1.
Steps in the Recording Process
Although it is possible to enter transaction information directly into the accounts without using a journal, few businesses do so. Practically every business uses three basic steps in the recording process:
1. Analyze each transaction for its effects on the accounts.
2. Enter the transaction information in a journal.
3. Transfer the journal information to the appropriate accounts in the ledger.
The recording process begins with the transaction. Business documents, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction. The company analyzes this evidence to determine the transaction's effects on specific accounts. The company then enters the transaction in the journal. Finally, it transfers the journal entry to the designated accounts in the ledger. Illustration 2-12 shows the recording process.
The steps in the recording process occur repeatedly. In Chapter 1, we illustrated the first step, the analysis of transactions, and will give further examples in this and later chapters. The other two steps in the recording process are explained in the next sections.
ETHICS Note 
Business documents provide evidence that transactions actually occurred. International Outsourcing Services, LLC was accused of submitting fraudulent documents (store coupons) to companies such as Kraft Foods and PepsiCo for reimbursement of as much as $250 million. Ensuring that all recorded transactions are backed up by proper business documents reduces the likelihood of fraudulent activity.
Illustration 2-12 The recording process
The Journal
Companies initially record transactions in chronological order (the order in which they occur). Thus, the journal is referred to as the book of original entry. For each transaction, the journal shows the debit and credit effects on specific accounts.
Companies may use various kinds of journals, but every company has the most basic form of journal, a general journal. Typically, a general journal has spaces for dates, account titles and explanations, references, and two amount columns. See the format of the journal in Illustration 2-13 (page 60). Whenever we use the term “journal” in this textbook, we mean the general journal unless we specify otherwise.
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 easily compared.
JOURNALIZING
Entering transaction data in the journal is known as journalizing. Companies make separate journal entries for each transaction. A complete entry consists of (1) the date of the transaction, (2) the accounts and amounts to be debited and credited, and (3) a brief explanation of the transaction.
Illustration 2-13 shows the technique of journalizing, using the first two transactions of Softbyte. Recall that on September 1, Ray Neal invested $15,000 cash in the business, and Softbyte purchased computer equipment for $7,000 cash. The number J1 indicates that these two entries are recorded on the first page of the journal. Illustration 2-13 shows the standard form of journal entries for these two transactions. (The boxed numbers correspond to explanations in the list below the illustration.)
Illustration 2-13 Technique of journalizing
The date of the transaction is entered in the Date column.
The debit account title (that is, the account to be debited) is entered first at the extreme left margin of the column headed “Account Titles and Explanation,” and the amount of the debit is recorded in the Debit column.
The credit account title (that is, the account to be credited) is indented and entered on the next line in the column headed “Account Titles and Explanation,” and the amount of the credit is recorded in the Credit column.
A brief explanation of the transaction appears on the line below the credit account title. A space is left between journal entries. The blank space separates individual journal entries and makes the entire journal easier to read.
The column titled Ref. (which stands for Reference) is left blank when the journal entry is made. This column is used later when the journal entries are transferred to the ledger accounts.
It is important to use correct and specific account titles in journalizing. Erroneous account titles lead to incorrect financial statements. However, some flexibility exists initially in selecting account titles. The main criterion is that each title must appropriately describe the content of the account. Once a company chooses the specific title to use, it should record under that account title all later transactions involving the account.1
SIMPLE AND COMPOUND ENTRIES
Some entries involve only two accounts, one debit and one credit. (See, for example, the entries in Illustration 2-13.) An entry like these is considered a simple entry. Some transactions, however, require more than two accounts in journalizing. An entry that requires three or more accounts is a compound entry. To illustrate, assume that on July 1, Butler Company purchases a delivery truck costing $14,000. It pays $8,000 cash now and agrees to pay the remaining $6,000 on account (to be paid later). The compound entry is as follows.
Illustration 2-14 Compound journal entry
In a compound entry, the standard format requires that all debits be listed before the credits.
ACCOUNTING ACROSS THE ORGANIZATION 
Boosting Microsoft's Profits
At one time, Microsoft's Home and Entertainment Division lost over $4 billion, mostly due to losses on the original Xbox videogame console. With the Xbox 360 videogame console, the division's head of finance, Bryan Lee, hoped the division would become profitable. He set strict goals for sales, revenue, and profit. “A manager seeking to spend more on a feature such as a disk drive has to find allies in the group to cut spending elsewhere, or identify new revenue to offset the increase,” he explained.
For example, Microsoft originally designed the Xbox 360 to have 256 megabytes of memory. But the design department said that amount of memory wouldn't support the best special effects. The purchasing department said that adding more memory would cost $30—which was 10% of the estimated selling price of $300. The marketing department, however, “determined that adding the memory would let Microsoft reduce marketing costs and attract more game developers, boosting royalty revenue. It would also extend the life of the console, generating more sales.” As a result, Microsoft doubled the memory to 512 megabytes. Today, the division enjoys great success.
Source: Robert A. Guth, “New Xbox Aim for Microsoft: Profitability,” Wall Street Journal (May 24, 2005), p. C1.
In what ways is this Microsoft division using accounting to assist in its effort to become more profitable? (See page 95.)
DO IT!
Recording Business Activities
Kate Browne engaged in the following activities in establishing her salon, Hair It Is:
1. Opened a bank account in the name of Hair It Is and deposited $20,000 of her own money in this account as her initial investment.
2. Purchased equipment on account (to be paid in 30 days) for a total cost of $4,800.
3. Interviewed three persons for the position of hair stylist.
In what form (type of record) should Kate record these three activities? Prepare the entries to record the transactions.
Action Plan
Understand which activities need to be recorded and which do not. Any that affect assets, liabilities, or owner's capital should be recorded in a journal.
Analyze the effects of transactions on asset, liability, and owner's equity accounts.
Each transaction that is recorded is entered in the general journal. The three activities would be recorded as follows.
Related exercise material: BE2-3, BE2-6, E2-3, E2-5, E2-6, E2-7, and DO IT! 2-2.
The Ledger
The entire group of accounts maintained by a company is the ledger. The ledger provides the balance in each of the accounts as well as keeps track of changes in these balances.
Companies may use various kinds of ledgers, but every company has a general ledger. A general ledger contains all the asset, liability, and owner's equity accounts, as shown in Illustration 2-15 for J. Lind Company. Whenever we use the term “ledger” in this textbook, we are referring to the general ledger unless we specify otherwise.
Illustration 2-15 The general ledger, which contains all of a company's accounts
Companies arrange the ledger in the sequence in which they present the accounts in the financial statements, beginning with the balance sheet accounts. First in order are the asset accounts, followed by liability accounts, owner's capital, owner's drawings, revenues, and expenses. Each account is numbered for easier identification.
The ledger provides the balance in each of the accounts. For example, the Cash account shows the amount of cash available to meet current obligations. The Accounts Receivable account shows amounts due from customers. Accounts Payable shows amounts owed to creditors.
ETHICS INSIGHT
A Convenient Overstatement
Sometimes a company's investment securities suffer a permanent decline in value below their original cost. When this occurs, the company is supposed to reduce the recorded value of the securities on its balance sheet (“write-them down” in common financial lingo) and record a loss. It appears, however, that during the financial crisis, employees at some financial institutions chose to look the other way as the value of their investments skidded. A number of Wall Street traders that worked for the investment bank Credit Suisse Group were charged with intentionally overstating the value of securities that had suffered declines of approximately $2.85 billion. One reason that they may have been reluctant to record the losses is out of fear that the company's shareholders and clients would panic if they saw the magnitude of the losses. However, personal self-interest might have been equally to blame—the bonuses of the traders were tied to the value of the investment securities.
Source: S. Pulliam, J. Eaglesham, and M. Siconolfi, “U.S. Plans Changes on Bond Fraud,” Wall Street Journal Online (February 1, 2012).
What incentives might employees have had to overstate the value of these investment securities on the company's financial statements? (See page 95.)
STANDARD FORM OF ACCOUNT
The simple T-account form used in accounting textbooks is often very useful for illustration purposes. However, in practice, the account forms used in ledgers are much more structured. Illustration 2-16 shows a typical form, using assumed data from a cash account.
Illustration 2-16 Three-column form of account
This format is called the three-column form of account. It has three money columns—debit, credit, and balance. The balance in the account is determined after each transaction. Companies use the explanation space and reference columns to provide special information about the transaction.
POSTING
Transferring journal entries to the ledger accounts is called posting. This phase of the recording process accumulates the effects of journalized transactions into the individual accounts. Posting involves the following steps.
1. In the ledger, in the appropriate columns of the account(s) debited, enter the date, journal page, and debit amount shown in the journal.
2. In the reference column of the journal, write the account number to which the debit amount was posted.
3. In the ledger, in the appropriate columns of the account(s) credited, enter the date, journal page, and credit amount shown in the journal.
4. In the reference column of the journal, write the account number to which the credit amount was posted.
Illustration 2-17 shows these four steps using Softbyte's first journal entry. The boxed numbers indicate the sequence of the steps.
Illustration 2-17 Posting a journal entry
Posting should be performed in chronological order. That is, the company should post all the debits and credits of one journal entry before proceeding to the next journal entry. Postings should be made on a timely basis to ensure that the ledger is up to date.2
The reference column of a ledger account indicates the journal page from which the transaction was posted.3 The explanation space of the ledger account is used infrequently because an explanation already appears in the journal.
CHART OF ACCOUNTS
The number and type of accounts differ for each company. The number of accounts depends on the amount of detail management desires. For example, the management of one company may want a single account for all types of utility expense. Another may keep separate expense accounts for each type of utility, such as gas, electricity, and water. Similarly, a small company like Softbyte will have fewer accounts than a corporate giant like Dell. Softbyte may be able to manage and report its activities in 20 to 30 accounts, while Dell may require thousands of accounts to keep track of its worldwide activities.
Most companies have a chart of accounts. This chart lists the accounts and the account numbers that identify their location in the ledger. The numbering system that identifies the accounts usually starts with the balance sheet accounts and follows with the income statement accounts.
In this and the next two chapters, we will be explaining the accounting for Pioneer Advertising Agency (a service company). Accounts 101–199 indicate asset accounts; 200–299 indicate liabilities; 301–350 indicate owner's equity accounts; 400–499, revenues; 601–799, expenses; 800–899, other revenues; and 900–999, other expenses. Illustration 2-18 shows Pioneer's chart of accounts. Accounts listed in red are used in this chapter; accounts shown in black are explained in later chapters.
Helpful Hint On the textbook's front endpapers, you also will find an expanded chart of accounts.
Illustration 2-18 Chart of accounts
You will notice that there are gaps in the numbering system of the chart of accounts for Pioneer Advertising. Companies leave gaps to permit the insertion of new accounts as needed during the life of the business.
The Recording Process Illustrated
Illustrations 2-19 through 2-28 (pages 66–70) show the basic steps in the recording process, using the October transactions of Pioneer Advertising Agency. Pioneer's accounting period is a month. In these illustrations, a basic analysis, an equation analysis, and a debit-credit analysis precede the journal entry and posting of each transaction. For simplicity, we use the T-account form to show the posting instead of the standard account form.
Study these transaction analyses carefully. The purpose of transaction analysis is first to identify the type of account involved, and then to determine whether to make a debit or a credit to the account. You should always perform this type of analysis before preparing a journal entry. Doing so will help you understand the journal entries discussed in this chapter as well as more complex journal entries in later chapters.
Illustration 2-19 Investment of cash by owner
Cash Flows +10,000 
Helpful Hint Follow these steps:
1. Determine what type of account is involved.
2. Determine what items increased or decreased and by how much.
3. Translate the increases and decreases into debits and credits.
Illustration 2-20 Purchase of office equipment
Cash Flows no effect
Illustration 2-21 Receipt of cash for future service
Cash Flows + 1,200
Illustration 2-22 Payment of monthly rent
Cash Flows − 9, 000 
Illustration 2-23 Payment for insurance
Cash Flows − 600
Illustration 2-24 Purchase of supplies on credit
Cash Flows no effect
Illustration 2-25 Hiring of employees
Cash Flows no effect
Illustration 2-26 Withdrawal of cash by owner
Cash Flows − 500
Illustration 2-27 Payment of salaries
Cash Flows − 4,000
Illustration 2-28 Receipt of cash for services performed
Cash Flows + 10,000
Posting
Kate Browne recorded the following transactions in a general journal during the month of March.
Post these entries to the Cash account of the general ledger to determine its ending balance. The beginning balance of 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.
Solution
Related exercise material: BE2-7, BE2-8, E2-8, E2-12, and DO IT! 2-3.
Summary Illustration of Journalizing and Posting
Illustration 2-29 shows the journal for Pioneer Advertising Agency for October.
Illustration 2-29 General journal entries
Illustration 2-30 shows the ledger, with all balances in red.
Illustration 2-30 General ledger
The Trial Balance
A trial balance is a list of accounts and their balances at a given time. Customarily, companies prepare a trial balance at the end of an accounting period. They list accounts in the order in which they appear in the ledger. Debit balances appear in the left column and credit balances in the right column.
The trial balance proves the mathematical equality of debits and credits after posting. Under the double-entry system, this equality occurs when the sum of the debit account balances equals the sum of the credit account balances. A trial balance may also uncover errors in journalizing and posting. For example, a trial balance may well have detected the error at MF Global discussed in the Feature Story. In addition, a trial balance is useful in the preparation of financial statements, as we will explain in the next two chapters.
The steps for preparing a trial balance are:
1. List the account titles and their balances in the appropriate debit or credit column.
2. Total the debit and credit columns.
3. Prove the equality of the two columns.
Illustration 2-31 shows the trial balance prepared from Pioneer Advertising's ledger. Note that the total debits equal the total credits.
Illustration 2-31 A trial balance
Helpful Hint Note that the order of presentation in the trial balance is:
Assets
Liabilities
Owner's equity
Revenues
Expenses
A trial balance is a necessary checkpoint for uncovering certain types of errors. For example, if only the debit portion of a journal entry has been posted, the trial balance would bring this error to light.
Limitations of a Trial Balance
A trial balance does not guarantee freedom from recording errors, however. Numerous errors may exist even though the totals of the trial balance columns agree. For example, the trial balance may balance even when:
1. A transaction is not journalized.
2. A correct journal entry is not posted.
3. A journal entry is posted twice.
4. Incorrect accounts are used in journalizing or posting.
5. Offsetting errors are made in recording the amount of a transaction.
As long as equal debits and credits are posted, even to the wrong account or in the wrong amount, the total debits will equal the total credits. The trial balance does not prove that the company has recorded all transactions or that the ledger is correct.
ETHICS Note
An error is the result of an unintentional mistake; it is neither ethical nor unethical. An irregularity is an intentional misstatement, which is viewed as unethical.
Locating Errors
Errors in a trial balance generally result from mathematical mistakes, incorrect postings, or simply transcribing data incorrectly. What do you do if you are faced with a trial balance that does not balance? First, determine the amount of the difference between the two columns of the trial balance. After this amount is known, the following steps are often helpful:
1. If the error is $1, $10, $100, or $1,000, re-add the trial balance columns and recompute the account balances.
2. If the error is divisible by 2, scan the trial balance to see whether a balance equal 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 to see whether they are incorrectly copied from the ledger. For example, if a balance was $12 and it was listed as $21, a $9 error has been made. Reversing the order of numbers is called a transposition error.
4. If the error is not divisible by 2 or 9, scan the ledger to see whether an account balance in the amount of the error has been omitted from the trial balance, and scan the journal to see whether a posting of that amount has been omitted.
Use of Dollar Signs
Note that dollar signs do not appear in journals or ledgers. Dollar signs are typically used only in the trial balance and the financial statements. Generally, a dollar sign is shown only for the first item in the column and for the total of that column. A single line (a totaling rule) is placed under the column of figures to be added or subtracted. Total amounts are double-underlined to indicate they are final sums.
INVESTOR INSIGHT
Why Accuracy Matters
While most companies record transactions very carefully, the reality is that mistakes still happen. For example, bank regulators fined Bank One Corporation (now Chase) $1.8 million because they felt that the unreliability of the bank's accounting system caused it to violate regulatory requirements.
Also, in recent years Fannie Mae, the government-chartered mortgage association, announced a series of large accounting errors. These announcements caused alarm among investors, regulators, and politicians because they fear that the errors may suggest larger, undetected problems. This is important because the home-mortgage market depends on Fannie Mae to buy hundreds of billions of dollars of mortgages each year from banks, thus enabling the banks to issue new mortgages.
Finally, before a major overhaul of its accounting system, the financial records of Waste Management Inc. were in such disarray that of the company's 57,000 employees, 10,000 were receiving pay slips that were in error.
The Sarbanes-Oxley Act was created to minimize the occurrence of errors like these by increasing every employee's responsibility for accurate financial reporting.
In order for these companies to prepare and issue financial statements, their accounting equations (debits and credits) must have been in balance at year-end. How could these errors or misstatements have occurred? (See page 95.)
Trial Balance
The following accounts come from the ledger of SnowGo Company at December 31, 2014.
Action Plan
Determine normal balances and list accounts in the order they appear in the ledger.
Accounts with debit balances appear in the left column, and those with credit balances in the right column.
Total the debit and credit columns to prove equality.
Prepare a trial balance in good form.
Solution
Related exercise material: BE2-9, BE2-10, E2-9, E2-10, E2-11, E2-13, E2-14, and DO IT! 2-4.
Bob Sample opened the Campus Laundromat on September 1, 2014. During the first month of operations, the following transactions occurred.
| Sept. | 1 | Bob invested $20,000 cash in the business. |
| 2 | The company paid $1,000 cash for store rent for 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 a one-year accident insurance policy. | |
| 10 | Received a bill from the Daily News for advertising the opening of the laundromat $200. | |
| 20 | Bob withdrew $700 cash for personal use. | |
| 30 | The company determined that cash receipts for laundry services for the month were $6,200. |
The chart of accounts for the company is the same as that for Pioneer Advertising Agency plus No. 610 Advertising Expense.
Make separate journal entries for each transaction.
In journalizing, make sure debits equal credits.
In journalizing, use specific account titles taken from the chart of accounts.
Provide appropriate description of each journal entry.
Arrange ledger in statement order, beginning with the balance sheet accounts.
Post in chronological order.
Use numbers in the reference column to indicate the amount has been posted.
In the trial balance, list accounts in the order in which they appear in the ledger.
List debit balances in the left column, and credit balances in the right column.
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, 2014.
Solution to Comprehensive DO IT!
SUMMARY OF LEARNING OBJECTIVES
1 Explain what an account is and how it helps in the recording process. An account is a record of increases and decreases in specific asset, liability, and owner's equity items.
2 Define debits and credits and explain their use in recording business transactions. The terms debit and credit are synonymous with left and right. Assets, drawings, and expenses are increased by debits and decreased by credits. Liabilities, owner's capital, and revenues are increased by credits and decreased by debits.
3 Identify the basic steps in the recording process. The basic steps in the recording process are (a) analyze each transaction for its effects on the accounts, (b) enter the transaction information in a journal, (c) transfer the journal information to the appropriate accounts in the ledger.
4 Explain what a journal is and how it helps in the recording process. The initial accounting record of a transaction is entered in a journal before the data are entered in the accounts. A journal (a) discloses in one place the complete effects of a transaction, (b) provides a chronological record of transactions, and (c) prevents or locates errors because the debit and credit amounts for each entry can be easily compared.
5 Explain what a ledger is and how it helps in the recording process. The ledger is the entire group of accounts maintained by a company. The ledger provides the balance in each of the accounts as well as keeps track of changes in these balances.
6 Explain what posting is and how it helps in the recording process. Posting is the transfer of journal entries to the ledger accounts. This phase of the recording process accumulates the effects of journalized transactions in the individual accounts.
7 Prepare a trial balance and explain its purposes. A trial balance is a list of accounts and their balances at a given time. Its primary purpose is to prove the equality of debits and credits after posting. A trial balance also uncovers errors in journalizing and posting and is useful in preparing financial statements.
GLOSSARY
Account A record of increases and decreases in specific asset, liability, or owner's equity items. (p. 54).
Chart of accounts A list of accounts and the account numbers that identify their location in the ledger. (p. 65).
Compound entry A journal entry that involves three or more accounts. (p. 60).
Credit The right side of an account. (p. 54).
Debit The left side of an account. (p. 54).
Double-entry system A system that records in appropriate accounts the dual effect of each transaction. (p. 55).
General journal The most basic form of journal. (p. 59).
General ledger A ledger that contains all asset, liability, and owner's equity accounts. (p. 62).
Journal An accounting record in which transactions are initially recorded in chronological order. (p. 59).
Journalizing The entering of transaction data in the journal. (p. 59).
Ledger The entire group of accounts maintained by a company. (p. 62).
Normal balance An account balance on the side where an increase in the account is recorded. (p. 55).
Posting The procedure of transferring journal entries to the ledger accounts. (p. 63).
Simple entry A journal entry that involves only two accounts. (p. 60).
T-account The basic form of an account. (p. 54).
Three-column form of account A form with columns for debit, credit, and balance amounts in an account. (p. 63).
Trial balance A list of accounts and their balances at a given time. (p. 72).
Self-Test, Brief Exercises, Exercises, Problem Set A, and many more components are available for practice in WileyPLUS.
SELF-TEST QUESTIONS
Answers are on page 96.
1. Which of the following statements about an account is true?
(LO 1)
(a) In its simplest form, an account consists of two parts.
(b) An account is an individual accounting record of increases and decreases in specific asset, liability, and owner's equity items.
(c) There are separate accounts for specific assets and liabilities but only one account for owner's equity items.
(d) The left side of an account is the credit or decrease side.
2. Debits:
(LO 2)
(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:
(LO 2)
(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:
(LO 2)
(a) assets, expenses, and revenues.
(b) assets, expenses, and owner's capital.
(c) assets, liabilities, and owner's drawings.
(d) assets, owner's drawings, and expenses.
5. The expanded accounting equation is:
(LO 2)
(a) Assets + Liabilities = Owner's Capital + Owner's Drawings + Revenues + Expenses
(b) Assets = Liabilities + Owner's Capital + Owner's Drawings + Revenues − Expenses
(c) Assets = Liabilities − Owner's Capital − Owner's Drawings − Revenues − Expenses
(d) Assets = Liabilities + Owner's Capital − Owner's Drawings + Revenues − Expenses
6. Which of the following is not part of the recording process?
(LO 3)
(a) Analyzing transactions.
(b) Preparing a trial balance.
(c) Entering transactions in a journal.
(d) Posting transactions.
7. Which of the following statements about a journal is false?
(LO 4)
(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.
8. The purchase of supplies on account should result in:
(LO 4)
(a) a debit to Supplies Expense and a credit to Cash.
(b) a debit to Supplies Expense and a credit to Accounts Payable.
(c) a debit to Supplies and a credit to Accounts Payable.
(d) a debit to Supplies and a credit to Accounts Receivable.
9. The order of the accounts in the ledger is:
(LO 5)
(a) assets, revenues, expenses, liabilities, owner's capital, owner's drawings.
(b) assets, liabilities, owner's capital, owner's drawings, revenues, expenses.
(c) owner's capital, assets, revenues, expenses, liabilities, owner's drawings.
(d) revenues, assets, expenses, liabilities, owner's capital, owner's drawings.
(LO 5)
(a) contains only asset and liability accounts.
(b) should show accounts in alphabetical order.
(c) is a collection of the entire group of accounts maintained by a company.
(d) is a book of original entry.
11. Posting:
(LO 6)
(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.
12. Before posting a payment of $5,000, the Accounts Payable of Senator Company had a normal balance of $16,000. The balance after posting this transaction was:
(LO 6)
(a) $21,000.
(b) $5,000.
(c) $11,000.
(d) Cannot be determined.
13. A trial balance:
(LO 7)
(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.
14. A trial balance will not balance if:
(LO 7)
(a) a correct journal entry is posted twice.
(b) the purchase of supplies on account is debited to Supplies and credited to Cash.
(c) a $100 cash drawing by the owner is debited to Owner's Drawings for $1,000 and credited to Cash for $100.
(d) a $450 payment on account is debited to Accounts Payable for $45 and credited to Cash for $45.
15. The trial balance of Jeong Company had accounts with the following normal balances: Cash $5,000, Service Revenue $85,000, Salaries and Wages Payable $4,000, Salaries and Wages Expense $40,000, Rent Expense $10,000, Owner's Capital $42,000; Owner's Drawings $15,000; Equipment $61,000. In preparing a trial balance, the total in the debit column is:
(LO 7)
(a) $131,000.
(b) $216,000.
(c) $91,000.
(d) $116,000.
Go to the book's companion website, www.wiley.com/college/weygandt, for additional Self-Test Questions.
QUESTIONS
1. Describe the parts of a T-account.
2. “The terms debit and credit mean increase and decrease, respectively.” Do you agree? Explain.
3. Heath Precourt, a fellow student, contends that the double-entry system means each transaction must be recorded twice. Is Heath correct? Explain.
4. Erica Mendez, a beginning accounting student, believes debit balances are favorable and credit balances are unfavorable. Is Erica correct? Discuss.
5. State the rules of debit and credit as applied to (a) asset accounts, (b) liability accounts, and (c) the owner's equity accounts (revenue, expenses, owner's drawings, and owner's capital).
6. What is the normal balance for each of the following accounts? (a) Accounts Receivable. (b) Cash. (c) Owner's Drawings. (d) Accounts Payable. (e) Service Revenue. (f) Salaries and Wages Expense. (g) Owner's Capital.
7. Indicate whether each of the following accounts is an asset, a liability, or an owner's equity account and whether it has a normal debit or credit balance: (a) Accounts Receivable, (b) Accounts Payable, (c) Equipment, (d) Owner's Drawings, (e) Supplies.
8. For the following transactions, indicate the account debited 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. Indicate whether the following accounts generally will have (a) debit entries only, (b) credit entries only, or (c) both debit and credit entries.
(1) Cash.
(2) Accounts Receivable.
(3) Owner's Drawings.
(4) Accounts Payable.
(5) Salaries and Wages Expense.
(6) Service Revenue.
10. What are the basic steps in the recording process?
11. What are the advantages of using a journal in the recording process?
12. (a) When entering a transaction in the journal, should the 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 be recorded directly in the ledger accounts?
(b) What are the advantages of first recording transactions in the journal and then posting to the ledger?
15. The account number is entered as the last step in posting the amounts from the journal to the ledger. What is the advantage of this step?
16. Journalize the following business transactions.
(a) Qing Wei invests $9,000 cash in the business.
(b) Insurance of $800 is paid for the year.
(c) Supplies of $2,000 are purchased on account.
(d) Cash of $7,500 is received for services performed.
17. (a) What is a ledger?
(b) What is a chart of accounts and why is it important?
18. What is a trial balance and what are its purposes?
19. Victor Grimm is confused about how accounting information flows through the accounting system. He believes the 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.
Is Victor correct? If not, indicate to Victor the proper flow of the information.
20. Two students are discussing the use of a trial balance. They wonder whether the following errors, each considered separately, would prevent the trial balance from balancing.
(a) The bookkeeper debited Cash for $600 and credited Salaries and Wages Expense for $600 for payment of wages.
(b) Cash collected on account was debited to Cash for $900 and Service Revenue was credited for $90.
What would you tell them?
21. What are the normal balances for Apple's Cash, Accounts Payable, and Interest Expense accounts?
BRIEF EXERCISES
BE2-1 For each of the following accounts, indicate the effects of (a) a debit and (b) a credit on the accounts and (c) the normal balance of the account.
1. Accounts Payable.
2. Advertising Expense.
3. Service Revenue.
4. Accounts Receivable.
5. Owner's Capital.
6. Owner's Drawings.
Indicate debit and credit effects and normal balance.
(LO 2)
BE2-2 Transactions for the George Lynch Company for the month of June are presented below. Identify the accounts to be debited and credited for each transaction.
| June | 1 | George Lynch invests $5,000 cash in a small welding business of which he is the sole proprietor. |
| 2 | Purchases equipment on account for $2,100. | |
| 3 | $800 cash is paid to landlord for June rent. | |
| 12 | Sends a bill to M. Rodero for $300 for welding work performed on account. |
Identify accounts to be debited and credited.
(LO 2)
BE2-3 Using the data in BE2-2, journalize the transactions. (You may omit explanations.)
Journalize transactions.
(LO 4)
BE2-4 
Raymond Faust, a fellow student, is unclear about the basic steps in the recording process. Identify and briefly explain the steps in the order in which they occur.
Identify and explain steps in recording process.
(LO 3)
BE2-5 H. Xiao has the following transactions during August of the current year. Indicate (a) the effect on the accounting equation and (b) the debit-credit analysis illustrated on pages 66–70 of the text.
| Aug. | 1 | Opens an office as a financial advisor, investing $8,000 in cash. |
| 4 | Pays insurance in advance for 6 months, $1,800 cash. | |
| 16 | Receives $3,400 from clients for services performed. | |
| 27 | Pays secretary $1,000 salary. |
Indicate basic and debit-credit analysis.
(LO 2)
BE2-6 Using the data in BE2-5, journalize the transactions. (You may omit explanations.)
Journalize transactions.
(LO 4)
BE2-7 Selected transactions for the Joel Berges Company are presented in journal form below. Post the transactions to T-accounts. Make one T-account for each item and determine each account's ending balance.
Post journal entries to T-accounts.
(LO 6)
BE2-8 Selected journal entries for the Joel Berges Company are presented in BE2-7. Post the transactions using the standard form of account.
Post journal entries to standard form of account.
(LO 6)
BE2-9 From the ledger balances given below, prepare a trial balance for the Deroche Company at June 30, 2014. List the accounts in the order shown on page 73 of the text. All account balances are normal.
Accounts Payable $9,000, Cash $5,800, Owner's Capital $15,000, Owner's Drawings $1,200, Equipment $17,000, Service Revenue $10,000, Accounts Receivable $3,000, Salaries and Wages Expense $6,000, and Rent Expense $1,000.
Prepare a trial balance.
(LO 7)
BE2-10 An inexperienced bookkeeper prepared the following trial balance. Prepare a correct trial balance, assuming all account balances are normal.
Prepare a correct trial balance.
(LO 7)
DO IT! Review
DO IT! 2-1 Ivan Klumb has just rented space in a strip mall. In this space, he will open a photography studio, to be called “Picture This!” A friend has advised Ivan to set up a double-entry set of accounting records in which to record all of his business transactions.
Identify the balance sheet accounts that Ivan will likely need to record the transactions needed to open his business. Indicate whether the normal balance of each account is a debit or credit.
Identify normal balances.
(LO 2)
DO IT! 2-2 Ivan Klumb engaged in the following activities in establishing his photography studio, Picture This!:
1. Opened a bank account in the name of Picture This! and deposited $6,300 of his own money into this account as his initial investment.
2. Purchased photography supplies at a total cost of $1,100. The business paid $400 in cash and the balance is on account.
3. Obtained estimates on the cost of photography equipment from three different manufacturers.
In what form (type of record) should Ivan record these three activities? Prepare the entries to record the transactions.
Record business activities.
(LO 4)
DO IT!2-3 Ivan Klumb recorded the following transactions during the month of April.
Post these entries to the Cash T-account of the general ledger to determine the ending balance in cash. The beginning balance in cash on April 1 was $1,600.
Post transactions.
(LO 6)
DO IT! 2-4 The following accounts are taken from the ledger of Recha Company at December 31, 2014.
| 200 | Notes Payable | $20,000 |
| 301 | Owner's Capital | 28,000 |
| 157 | Equipment | 80,000 |
| 306 | Owner's Drawings | 8,000 |
| 726 | Salaries and Wages Expense | 38,000 |
| 400 | Service Revenue | 88,000 |
| 101 | Cash | $ 6,000 |
| 126 | Supplies | 6,000 |
| 729 | Rent Expense | 4,000 |
| 212 | Salaries and Wages Payable | 3,000 |
| 201 | Accounts Payable | 11,000 |
| 112 | Accounts Receivable | 8,000 |
Prepare a trial balance in good form.
Prepare a trial balance.
(LO 7)
EXERCISES
E2-1 Lixun Zhang has prepared the following list of statements about accounts.
1. An account is an accounting record of either a specific asset or a specific liability.
2. An account shows only increases, not decreases, in the item it relates to.
3. Some items, such as Cash and Accounts Receivable, are combined into one account.
4. An account has a left, or credit side, and a right, or debit side.
5. A simple form of an account consisting of just the account title, the left side, and the right side, is called a T-account.
Instructions
Identify each statement as true or false. If false, indicate how to correct the statement.
Analyze statements about accounting and the recording process.
(LO 1)
E2-2 Selected transactions for R. Sparks, an interior decorator, in her first month of business, are as follows.
| Jan. | 2 | Invested $10,000 cash in business. |
| 3 | Purchased used car for $4,000 cash for use in business. | |
| 9 | Purchased supplies on account for $500. | |
| 11 | Billed customers $2,100 for services performed. | |
| 16 | Paid $350 cash for advertising. | |
| 20 | Received $700 cash from customers billed on January 11. | |
| 23 | Paid creditor $300 cash on balance owed. | |
| 28 | Withdrew $1,000 cash for personal use by owner. |
Identify debits, credits, and normal balances.
(LO 2)
Instructions
For each transaction, indicate the following.
(a) The basic type of account debited and credited (asset, liability, owner's 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.
E2-3 Data for R. Sparks, interior decorator, are presented in E2-2.
Instructions
Journalize the transactions using journal page J1. (You may omit explanations.)
Journalize transactions.
(LO 4)
E2-4 Presented below is information related to Lachapelle Real Estate Agency.
Instructions
Prepare the debit-credit analysis for each transaction as illustrated on pages 66–70.
Analyze transactions and determine their effect on accounts.
(LO 2)
E2-5 Transaction data for Lachapelle Real Estate Agency are presented in E2-4.
Instructions
Journalize the transactions. (You may omit explanations.)
Journalize transactions.
(LO 4)
E2-6 Federlin Industries had the following transactions.
1. Borrowed $5,000 from the bank by signing a note.
2. Paid $3,100 cash for a computer.
3. Purchased $850 of supplies on account.
Instructions
(a) Indicate what accounts are increased and decreased by each transaction.
(b) Journalize each transaction. (Omit explanations.)
Analyze transactions and journalize.
(LO 2, 3, 4)
E2-7 Kahl Enterprises had the following selected transactions.
1. Jo Kahl invested $4,000 cash in the business.
2. Paid office rent of $950.
3. Performed consulting services and billed a client $5,200.
4. Jo Kahl withdrew $750 cash for personal use.
Instructions
(a) Indicate the effect each transaction has on the accounting equation (Assets = Liabilities + Owner's Equity), using plus and minus signs.
(b) Journalize each transaction. (Omit explanations.)
Analyze transactions and journalize.
(LO 2, 3, 4)
E2-8 Janet Miyoshi has prepared the following list of statements about the general ledger.
1. The general ledger contains all the asset and liability accounts but no owner's equity accounts.
2. The general ledger is sometimes referred to as simply the ledger.
3. The accounts in the general ledger are arranged in alphabetical order.
4. Each account in the general ledger is numbered for easier identification.
5. The general ledger is a book of original entry.
Instructions
Identify each statement as true or false. If false, indicate how to correct the statement.
Analyze statements about the ledger.
(LO 5)
E2-9 Selected transactions from the journal of Trisha Spoor, investment broker, are presented below.
Post journal entries and prepare a trial balance.
(LO 6, 7)
(a) Post the transactions to T-accounts.
(b) Prepare a trial balance at August 31, 2014.
E2-10 The T-accounts below summarize the ledger of Zimmer Landscaping Company at the end of the first month of operations.
Journalize transactions from account data and prepare a trial balance.
(LO 4, 7)
Instructions
(a) Prepare the complete general journal (including explanations) from which the postings to Cash were made.
(b) Prepare a trial balance at April 30, 2014.
E2-11 Presented below is the ledger for Harbach Co.
Journalize transactions from account data and prepare a trial balance.
(LO 4, 7)
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 balance at October 31, 2014.
E2-12 Selected transactions for Sandra Linke Company during its first month in business are presented below.
| Sept. | 1 | Invested $10,000 cash in the business. |
| 5 | Purchased equipment for $12,000 paying $4,000 in cash and the balance on account. | |
| 25 | Paid $3,000 cash on balance owed for equipment. | |
| 30 | Withdrew $700 cash for personal use. |
Prepare journal entries and post using standard account form.
(LO 4, 6)
Linke's chart of accounts shows: No. 101 Cash, No. 157 Equipment, No. 201 Accounts Payable, No. 301 Owner's Capital, and No. 306 Owner's Drawings.
Instructions
(a) Journalize the transactions on page J1 of the journal. (Omit explanations.)
(b) Post the transactions using the standard account form.
E2-13 The bookkeeper for Jeff Sobol Equipment Repair made a number of errors in journalizing and posting, as described below.
1. A credit posting of $525 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 $415 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 $475 to Advertising Expense was posted as $457.
Analyze errors and their effects on trial balance.
(LO 7)
Instructions
For 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.
E2-14 The accounts in the ledger of Longoria Delivery Service contain the following balances on July 31, 2014.
Prepare a trial balance.
(LO 2, 7)
Instructions
Prepare a trial balance with the accounts arranged as illustrated in the chapter and fill in the missing amount for Cash.
EXERCISES: SET B AND CHALLENGE EXERCISES
Visit the book's companion website, at www.wiley.com/college/weygandt, and choose the Student Companion site to access Exercise Set B and Challenge Exercises.
PROBLEMS: SET A
Journalize a series of transactions.
(LO 2, 4)
P2-1A McKay Disc Golf Course was opened on March 1 by Evan McKay. The following selected events and transactions occurred during March.
| Mar. | 1 | Invested $20,000 cash in the business. |
| 3 | Purchased Sable's Golf Land for $15,000 cash. The price consists of land $12,000, shed $2,000, and equipment $1,000. (Make one compound entry.) | |
| 5 | Paid advertising expenses of $700. | |
| 6 | Paid cash $600 for a one-year insurance policy. | |
| 10 | Purchased golf discs and other equipment for $1,050 from Taylor Company payable in 30 days. | |
| 18 | Received $1,100 in cash for golf fees (McKay records golf fees as service revenue). | |
| 19 | Sold 150 coupon books for $10 each. Each book contains 4 coupons that enable the holder to play one round of disc golf. | |
| 25 | Withdrew $800 cash for personal use. | |
| 30 | Paid salaries of $250. | |
| 30 | Paid Taylor Company in full. | |
| 31 | Received $2,100 cash for golf fees. |
McKay Disc Golf uses the following accounts: Cash, Prepaid Insurance, Land, Buildings, Equipment, Accounts Payable, Unearned Service Revenue, Owner's Capital, Owner's Drawings, Service Revenue, Advertising Expense, and Salaries and Wages Expense.
Instructions
Journalize the March transactions.
Journalize transactions, post, and prepare a trial balance.
(LO 2, 4, 6, 7)
P2-2A Bridgette Keyes is a licensed dentist. During the first month of the operation of her business, the following events and transactions occurred.
| April. | 1 | Invested $20,000 cash in the business. |
| 1 | Hired a secretary-receptionist at a salary of $700 per week payable monthly. | |
| 2 | Paid office rent for the month $1,100. | |
| 3 | Purchased dental supplies on account from Smile Company $4,000. | |
| 10 | Performed dental services and billed insurance companies $5,100. | |
| 11 | Received $1,000 cash advance from Heather Greene for an implant. | |
| 20 | Received $2,100 cash for services performed from James Chang. | |
| 30 | Paid secretary-receptionist for the month $2,800. | |
| 30 | Paid $2,400 to Smile Company for accounts payable due. |
Bridgette uses the following chart of accounts: No. 101 Cash, No. 112 Accounts Receivable, No. 126 Supplies, No. 201 Accounts Payable, No. 209 Unearned Service Revenue, No. 301 Owner's Capital, No. 400 Service Revenue, No. 726 Salaries and Wages 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, 2014.
(c) Trial balance totals $29,800
Journalize transactions, post, and prepare a trial balance.
(LO 2, 4, 6, 7)
P2-3A Santa Ana Services was formed on May 1, 2014. The following transactions took place during the first month.
Transactions on May 1:
1. Don Humes invested $40,000 cash in the company, as its sole owner.
2. Hired two employees to work in the warehouse. They will each be paid a salary of $3,050 per month.
3. Signed a 2-year rental agreement on a warehouse; paid $24,000 cash in advance for the first year.
4. Purchased furniture and equipment costing $30,000. A cash payment of $10,000 was made immediately; the remainder will be paid in 6 months.
5. Paid $1,800 cash for a one-year insurance policy on the furniture and equipment.
Transactions during the remainder of the month:
6. Purchased basic office supplies for $500 cash.
7. Purchased more office supplies for $1,500 on account.
8. Total revenues earned were $20,000—$8,000 cash and $12,000 on account.
9. Paid $400 to suppliers for accounts payable due.
10. Received $3,000 from customers in payment of accounts receivable.
11. Received utility bills in the amount of $350, to be paid next month.
12. Paid the monthly salaries of the two employees, totalling $6,100.
Instructions
(a) Prepare journal entries to record each of the events listed. (Omit explanations.)
(b) Post the journal entries to T-accounts.
(c) Prepare a trial balance as of May 31, 2014.
P2-4A The trial balance of Marius Santiago Co. shown below does not balance.
(c) Trial balance totals $81,450
Prepare a correct trial balance.
(LO 7)
Each of the listed accounts has a normal balance per the general ledger. An examination of the ledger and journal reveals the following errors.
1. Cash received from a customer in payment of its account was debited for $580, and Accounts Receivable was credited for the same amount. The actual collection was for $850.
2. The purchase of a computer on account for $710 was recorded as a debit to Supplies for $710 and a credit to Accounts Payable for $710.
3. Services were performed on account for a client for $980. Accounts Receivable was debited for $980, and Service Revenue was credited for $98.
4. A debit posting to Salaries and Wages Expense of $700 was omitted.
5. A payment of a balance due for $306 was credited to Cash for $306 and credited to Accounts Payable for $360.
6. The withdrawal of $600 cash for Santiago's personal use was debited to Salaries and Wages Expense for $600 and credited to Cash for $600.
Instructions
Prepare a correct trial balance. (Hint: It helps to prepare the correct journal entry for the transaction described and compare it to the mistake made.)
Trial balance totals $15,462
P2-5A The Lunt Theater, owned by Beth Saxena, will begin operations in March. The Lunt will be unique in that it will show only triple features of sequential theme movies. As of March 1, the ledger of Lunt showed: No. 101 Cash $3,000, No. 140 Land $24,000, No. 145 Buildings (concession stand, projection room, ticket booth, and screen) $10,000, No. 157 Equipment $10,000, No. 201 Accounts Payable $7,000, and No. 301 Owner's Capital $40,000. During the month of March, the following events and transactions occurred.
Journalize transactions, post, and prepare a trial balance.
(LO 2, 4, 6, 7)
In addition to the accounts identified above, the chart of accounts includes: No. 112 Accounts Receivable, No. 400 Service Revenue, No. 429 Rent Revenue, No. 610 Advertising Expense, No. 726 Salaries and Wages Expense, and No. 729 Rent Expense.
Instructions
(a) Enter the beginning balances in the ledger. Insert a check mark (
) in the reference column of the ledger for the beginning balance.
(b) Journalize the March transactions. Lunt records admission revenue as service revenue, rental of the concession stand as rent revenue, and film rental expense as rent expense.
(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, 2014.
(d) Trial balance totals $63,800
PROBLEMS: SET B
P2-1B Frontier Park was started on April 1 by M. Preston. The following selected events and transactions occurred during April.
| Apr. | 1 | Preston invested $35,000 cash in the business. |
| 4 | Purchased land costing $27,000 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 $1,650 cash for a one-year insurance policy. | |
| 17 | Withdrew $1,000 cash for personal use. | |
| 20 | Received $6,800 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. |
Frontier Park uses the following accounts: Cash, Prepaid Insurance, Land, Accounts Payable, Unearned Service Revenue, Owner's Capital, Owner's Drawings, Service Revenue, Advertising Expense, and Salaries and Wages Expense.
Instructions
Journalize the April transactions.
Journalize a series of transactions.
(LO 2, 4)
P2-2B Iris Beck is a licensed CPA. During the first month of operations of her business, the following events and transactions occurred.
Journalize transactions, post, and prepare a trial balance.
(LO 2, 4, 6, 7)
| May. | 1 | Beck invested $20,000 cash in her business. |
| 2 | Hired a secretary-receptionist at a salary of $2,000 per month. | |
| 3 | Purchased $2,500 of supplies on account from Tinio Supply Company. | |
| 7 | Paid office rent of $900 cash for the month. | |
| 11 | Completed a tax assignment and billed client $3,200 for services performed. | |
| 12 | Received $3,500 advance on a management consulting engagement. | |
| 17 | Received cash of $1,200 for services performed for Misra Co. | |
| 31 | Paid secretary-receptionist $2,000 salary for the month. | |
| 31 | Paid 60% of balance due Tinio Supply Company. |
Iris uses the following chart of accounts: No. 101 Cash, No. 112 Accounts Receivable, No. 126 Supplies, No. 201 Accounts Payable, No. 209 Unearned Service Revenue, No. 301 Owner's Capital, No. 400 Service Revenue, No. 726 Salaries and Wages 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, 2014.
(c) Trial balance totals $28,900
P2-3B Tony Vian owns and manages a computer repair service, which had the following trial balance on December 31, 2013 (the end of its fiscal year).
Journalize transactions, post, and prepare a trial balance.
(LO 2, 4, 6, 7)
Summarized transactions for January 2014 were as follows.
1. Advertising costs, paid in cash, $1,000.
2. Additional supplies acquired on account $4,200.
3. Miscellaneous expenses, paid in cash, $2,000.
4. Cash collected from customers in payment of accounts receivable $14,000.
5. Cash paid to creditors for accounts payable due $15,000.
6. Repair services performed during January: for cash $6,000; on account $9,000.
7. Wages for January, paid in cash, $3,500.
8. Tony's drawings during January were $3,000.
Instructions
(a) Open T-accounts for each of the accounts listed in the trial balance, and enter the opening balances for 2014.
(b) Prepare journal entries to record each of the January transactions. (Omit explanations.)
(c) Post the journal entries to the accounts in the ledger. (Add accounts as needed.)
(d) Prepare a trial balance as of January 31, 2014.
(d) Trial balance totals $63,200
P2-4B The trial balance of the Sean Devine Company shown below does not balance.
Prepare a correct trial balance.
(LO 7)
Your review of the ledger reveals that each account has a normal balance. You also discover the following errors.
1. The totals of the debit sides of Prepaid Insurance, Accounts Payable, and Utilities Expense were each understated $100.
2. Transposition errors were made in Accounts Receivable and Service Revenue. Based on postings made, the correct balances were $2,570 and $6,960, respectively.
3. A debit posting to Salaries and Wages Expense of $200 was omitted.
4. A $1,000 cash drawing by the owner was debited to Owner's Capital 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.
6. A cash payment of $540 for advertising was debited to Advertising Expense for $54 and credited to Cash for $54.
7. A collection from a customer for $210 was debited to Cash for $210 and credited to Accounts Payable for $210.
Instructions
Prepare a correct trial balance. Note that the chart of accounts includes the following: Owner's Drawings and Supplies. (Hint: It helps to prepare the correct journal entry for the transaction described and compare it to the mistake made.)
Trial balance totals $25,020
P2-5B The Classic Theater is owned by Kim Lockerby. All facilities were completed on March 31. At this time, the ledger showed: No. 101 Cash $4,000, No. 140 Land $10,000, No. 145 Buildings (concession 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. 301 Owner's Capital $18,000. During April, the following events and transactions occurred.
Journalize transactions, post, and prepare a trial balance.
(LO 2, 4, 6, 7)
| Apr. | 2 | Paid film rental of $1,100 on first movie. |
| 3 | Ordered two additional films at $1,000 each. | |
| 9 | Received $2,800 cash from admissions. | |
| 10 | Made $2,000 payment on mortgage and $1,000 for accounts payable due. | |
| 11 | Classic Theater contracted with Rhonda Humes to operate the concession stand. Humes is to pay Classic Theater 17% of gross concession receipts, payable monthly, for the rental of the concession stand. | |
| 12 | Paid advertising expenses $500. | |
| 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 $2,000. | |
| 30 | Received statement from Rhonda Humes showing gross concession receipts of $1,000 and the balance due to The Classic Theater of $170 ($1,000 × 17%) for April. Humes paid one-half of the balance due and will remit the remainder on May 5. | |
| 30 | Prepaid $1,200 rental on special film to be run in May. |
In addition to the accounts identified above, the chart of accounts shows: No. 112 Accounts Receivable, No. 136 Prepaid Rent, No. 400 Service Revenue, No. 429 Rent Revenue, No. 610 Advertising Expense, No. 726 Salaries and Wages Expense, and No. 729 Rent Expense.
Instructions
(a) Enter the beginning balances in the ledger as of April 1. Insert a check mark () in the reference column of the ledger for the beginning balance.
(b) Journalize the April transactions. Classic records admission revenue as service revenue, rental of the concession stand as rent revenue, and film rental expense as rent expense.
(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, 2014.
(d) Trial balance totals $34,170
PROBLEMS: SET C
Visit the book's companion website, at www.wiley.com/college/weygandt, and choose the Student Companion site to access Problem Set C.
CONTINUING COOKIE CHRONICLE
(Note: This is a continuation of the Cookie Chronicle from Chapter 1.)
CCC2 After researching the different forms of business organization. Natalie Koebel decides to operate “Cookie Creations” as a proprietorship. She then starts the process of getting the business running. In November 2013, the following activities take place.
| Nov. | 8 | Natalie cashes her U.S. Savings Bonds and receives $520, which she deposits in her personal bank account. |
| 8 | She opens a bank account under the name “Cookie Creations” and transfers $500 from her personal account to the new account. | |
| 11 | Natalie pays $65 for advertising. | |
| 13 | She buys baking supplies, such as flour, sugar, butter, and chocolate chips, for $125 cash. (Hint: Use Supplies account.) | |
| 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 that originally cost her $750. Natalie decides to start using it only in her new business. She estimates that the equipment is currently worth $300. She invests the equipment in the business. | |
| 16 | Natalie realizes that her initial cash investment is not enough. Her grandmother lends her $2,000 cash, for which Natalie signs a note payable in the name of the business. Natalie deposits the money in the business bank account. (Hint: The note does not have to be repaid for 24 months. As a result, the note payable should be reported in the accounts as the last liability and also on the balance sheet as the last liability.) | |
| 17 | She buys more baking equipment for $900 cash. | |
| 20 | She teaches her first class and collects $125 cash. | |
| 25 | Natalie books a second class for December 4 for $150. She receives $30 cash in advance as a down payment. | |
| 30 | Natalie pays $1,320 for a one-year insurance policy that will expire on December 1, 2014. |
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.
Broadening Your Perspective
Financial Reporting and Analysis
Financial Reporting Problem: Apple Inc.
BYP2-1 The financial statements of Apple Inc. are presented in Appendix A. Instructions for accessing and using the company's complete annual report, including the notes to the financial statements, are also provided in Appendix A.
Apple's financial statements contain the following selected accounts, stated in millions of dollars.
| Accounts Payable | Cash and Cash Equivalents |
| Accounts Receivable | Research and Development Expense |
| Property, Plant, and Equipment | Inventories |
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) Inventories are increased.
(c) Identify the other account(s) that ordinarily would be involved when:
(1) Research and Development Expense is increased.
(2) Property, Plant, and Equipment is increased.
Comparative Analysis Problem:
Amazon.com, Inc. vs. Wal-Mart Stores, Inc.
BYP2-2 Amazon.com, Inc.'s financial statements are presented in Appendix D. Financial statements for Wal-Mart Stores, Inc. are presented in Appendix E. Instructions for accessing and using the complete annual reports of Amazon and Wal-Mart, including the notes to the financial statements, are also provided in Appendices D and E, respectively.
Instructions
(a) Based on the information contained in the financial statements, determine the normal balance of the listed accounts for each company.
(b) Identify the other account ordinarily involved when:
(1) Accounts Receivable is increased.
(2) Interest Expense is increased.
(3) Salaries and Wages Payable is decreased.
(4) Service Revenue is increased.
Real-World Focus
BYP2-3 Much information about specific companies is available on the Internet. Such information includes basic descriptions of the company's location, activities, industry, financial health, 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.
Instructions
Answer the following questions.
(a) What is the company's industry?
(b) What is the company's total sales?
(c) What is 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 are its sales? What is its net income?
(g) Which of these two companies is larger by size of sales? Which one reported higher net income?
BYP2-4 The January 27, 2011, edition of the New York Times contains an article by Richard Sandomir entitled “N.F.L. Finances, as Seen Through Packers’ Records.” The article discusses the fact that the Green Bay Packers are the only NFL team that publicly publishes its annual report.
Instructions
Read the article and answer the following questions.
(a) Why are the Green Bay Packers the only professional football team to publish and distribute an annual report?
(b) Why is the football players’ labor union particularly interested in the Packers’ annual report?
(c) In addition to the players’ labor union, what other outside party might be interested in the annual report?
(d) Even though the Packers’ revenue increased in recent years, the company's operating profit fell significantly. How does the article explain this decline?
Critical Thinking
Decision-Making Across the Organization 
BYP2-5 Dyanna Craig operates Craig Riding Academy. The academy's primary sources of revenue are riding fees and lesson fees, which are paid on a cash basis. Dyanna also boards horses for owners, who are billed monthly for boarding fees. In a few cases, boarders pay in advance of expected use. For its revenue transactions, the academy maintains the following accounts: Cash, Accounts Receivable, and Service Revenue.
The academy owns 10 horses, a stable, a riding corral, riding equipment, and office equipment. These assets are accounted for in these accounts: Horses, Buildings, and Equipment.
The academy also maintains the following accounts: Supplies, Prepaid Insurance, Accounts Payable, Salaries and Wages Expense, Advertising Expense, Utilities Expense, and Maintenance and Repairs Expense.
Dyanna makes periodic withdrawals of cash for personal living expenses. To record Dyanna's equity in the business and her drawings, two accounts are maintained: Owner's Capital and Owner's Drawings.
During the first month of operations, an inexperienced bookkeeper was employed. Dyanna Craig 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.
Instructions
With the class divided into groups, answer the following.
(a) Identify each journal entry that is correct. For each journal entry that is incorrect, prepare the 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 income of $4,500 after posting all 50 entries?
(d) What was the correct cash balance at May 31, assuming the bookkeeper reported a balance of $12,475 after posting all 50 entries (and the only errors occurred in the items listed above)?
Communication Activity
BYP2-6 Keller's Maid Company offers home-cleaning service. Two recurring transactions for the company are billing customers for services performed and paying employee salaries. For example, on March 15, bills totaling $6,000 were sent to customers and $2,000 was paid in salaries to employees.
Instructions
Write a memo to your instructor that explains and illustrates the steps in the recording process for each of the March 15 transactions. Use the format illustrated in the text under the heading, “The Recording Process Illustrated” (p. 65).
Ethics Cases
BYP2-7 Meredith Ward is the assistant chief accountant at Frazier Company, a manufacturer of computer chips and cellular phones. The company presently has total sales of $20 million. It is the end of the first quarter. Meredith is hurriedly trying to prepare a trial balance so that quarterly financial statements can be prepared and released to management and the regulatory agencies. The total credits on the trial balance exceed the debits by $1,000. In order to meet the 4 p.m. deadline, Meredith decides to force the debits and credits into balance by adding the amount of the difference to the Equipment account. She chooses Equipment because it is one of the larger account balances; percentage-wise, it will be the least misstated. Meredith “plugs” the difference! She believes that the difference will not affect anyone's decisions. She wishes that she had 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 Meredith's alternatives?
BYP2-8 If you haven't already done so, in the not-too-distant future you will prepare a résumé. In some ways, your résumé is like a company's annual report. Its purpose is to enable others to evaluate your past, in an effort to predict your future.
A résumé is your opportunity to create a positive first impression. It is important that it be impressive—but it should also be accurate. In order to increase their job prospects, some people are tempted to “inflate” their résumés by overstating the importance of some past accomplishments or positions. In fact, you might even think that “everybody does it” and that if you don't do it, you will be at a disadvantage.
David Edmondson, the president and CEO of well-known electronics retailer Radio Shack, overstated his accomplishments by claiming that he had earned a bachelor's of science degree, when in fact he had not. Apparently, his employer had not done a background check to ensure the accuracy of his résumé. Should Radio Shack have fired him?
YES: Radio Shack is a publicly traded company. Investors, creditors, employees, and others doing business with the company will not trust it if its leader is known to have poor integrity. The “tone at the top” is vital to creating an ethical organization.
NO: Mr. Edmondson had been a Radio Shack employee for 11 years. He had served the company in a wide variety of positions, and had earned the position of CEO through exceptional performance. While the fact that he lied 11 years earlier on his résumé was unfortunate, his service since then made this past transgression irrelevant. In addition, the company was in the midst of a massive restructuring, which included closing 700 of its 7,000 stores. It could not afford additional upheaval at this time.
Instructions
Write a response indicating your position regarding this situation. Provide support for your view.
All About You
BYP2-9 Every company needs to plan in order to move forward. Its top management must consider where it wants the company to be in three to five years. Like a company, you need to think about where you want to be three to five years from now, and you need to start taking steps now in order to get there.
Provide responses to each of the following items.
(a) Where would you like to be working in three to five years? Describe your plan for getting there by identifying between five and 10 specific steps that you need to take.
(b) In order to get the job you want, you will need a résumé. Your résumé is the equivalent of a company's annual report. It needs to provide relevant and reliable information about your past accomplishments so that employers can decide whether to “invest” in you. Do a search on the Internet to find a good résumé format. What are the basic elements of a résumé?
(c) A company's annual report provides information about a company's accomplishments. In order for investors to use the annual report, the information must be reliable; that is, users must have faith that the information is accurate and believable. How can you provide assurance that the information on your résumé is reliable?
(d) Prepare a résumé assuming that you have accomplished the five to 10 specific steps you identified in part (a). Also, provide evidence that would give assurance that the information is reliable.
Considering People, Planet, and Profit
BYP2-10 Auditors provide a type of certification of corporate financial statements. Certification is used in many other aspects of business as well. For example, it plays a critical role in the sustainability movement. The February 7, 2012, issue of the New York Times contained an article by S. Amanda Caudill entitled “Better Lives in Better Coffee,” which discusses the role of certification in the coffee business.
Address: http://scientistatwork.blogs.nytimes.com/2012/02/07/better-lives-in-better-coffee
Instructions
Read the article and answer the following questions.
(a) The article mentions three different certification types that coffee growers can obtain from three different certification bodies. Using financial reporting as an example, what potential problems might the existence of multiple certification types present to coffee purchasers?
(b) According to the author, which certification is most common among coffee growers? What are the possible reasons for this?
(c) What social and environmental benefits are coffee certifications trying to achieve? Are there also potential financial benefits to the parties involved?
Answers to Chapter Questions
Answers to Insight and Accounting Across the Organization Questions
p. 57 Keeping Score Q: Do you think that the Chicago Bears football team would be likely to have the same major revenue and expense accounts as the Cubs? A: Because their businesses are similar—professional sports—many of the revenue and expense accounts for the baseball and football teams might be similar.
p. 61 Boosting Microsoft's Profits Q: In what ways is this Microsoft division using accounting to assist in its effort to become more profitable? A: The division has used accounting to set very strict sales, revenue, and profit goals. In addition, the managers in this division use accounting to keep a tight rein on product costs. Also, accounting serves as the basis of communication so that the marketing managers and product designers can work with production managers, engineers, and accountants to create an exciting product within specified cost constraints.
p. 63 A Convenient Overstatement Q: What incentives might employees have had to overstate the value of these investment securities on the company's financial statements? A: One reason that they may have been reluctant to record the losses is out of fear that the company's shareholders and clients would panic if they saw the magnitude of the losses. However, personal self-interest might have been equally to blame—the bonuses of the traders were tied to the value of the investment securities.
p. 74 Why Accuracy Matters Q: In order for these companies to prepare and issue financial statements, their accounting equations (debits and credits) must have been in balance at year-end. How could these errors or misstatements have occurred? A: A company's accounting equation (its books) can be in balance yet its financial statements have errors or misstatements because of the following: entire transactions were not recorded; transactions were recorded at wrong amounts; transactions were recorded in the wrong accounts; transactions were recorded in the wrong accounting period. Audits of financial statements uncover some but obviously not all errors or misstatements.
Answers to Self-Test Questions
1. b 2. c 3. d 4. d 5. d 6. b 7. a 8. c 9. b 10. c 11. d 12. c ($16,000 − $5,000) 13. a 14. c 15. a ($5,000 + $40,000 + $10,000 + $15,000 + $61,000)
A Look at IFRS
International companies use the same set of procedures and records to keep track of transaction data. Thus, the material in Chapter 2 dealing with the account, general rules of debit and credit, and steps in the recording process—the journal, ledger, and chart of accounts—is the same under both GAAP and IFRS.
Key Points
- Transaction analysis is the same under IFRS and GAAP but, as you will see in later chapters, different standards sometimes impact how transactions are recorded.
- Rules for accounting for specific events sometimes differ across countries. For example, European companies rely less on historical cost and more on fair value than U.S. companies. Despite the differences, the double-entry accounting system is the basis of accounting systems worldwide.
- Both the IASB and FASB go beyond the basic definitions provided in this textbook for the key elements of financial statements, that is, assets, liabilities, equity, revenues, and expenses. The more substantive definitions, using the IASB definitional structure, are provided in the Chapter 1 A Look at IFRS discussion.
- A trial balance under IFRS follows the same format as shown in the textbook.
- As shown in the textbook, dollars signs are typically used only in the trial balance and the financial statements. The same practice is followed under IFRS, using the currency of the country that the reporting company is headquartered.
- In February 2010, the SEC expressed a desire to continue working toward a single set of high-quality standards. In deciding whether the United States should adopt IFRS, some of the issues the SEC said should be considered are:
- Whether IFRS is sufficiently developed and consistent in application.
- Whether the IASB is sufficiently independent.
- Whether IFRS is established for the benefit of investors.
- The issues involved in educating investors about IFRS.
- The impact of a switch to IFRS on U.S. laws and regulations.
- The impact on companies including changes to their accounting systems, contractual arrangements, corporate governance, and litigation.
- The issues involved in educating accountants, so they can prepare financial statements under IFRS.
Looking to the Future
The basic recording process shown in this textbook is followed by companies across the globe. It is unlikely to change in the future. The definitional structure of assets, liabilities, equity, revenues, and expenses may change over time as the IASB and FASB evaluate their overall conceptual framework for establishing accounting standards.
IFRS Self-Test Questions
1. Which statement is correct regarding IFRS?
(a) IFRS reverses the rules of debits and credits, that is, debits are on the right and credits are on the left.
(b) IFRS uses the same process for recording transactions as GAAP.
(c) The chart of accounts under IFRS is different because revenues follow assets.
(d) None of the above statements are correct.
2. The expanded accounting equation under IFRS is as follows:
(a) Assets = Liabilities + Owner's Capital + Owner's Drawings + Revenues − Expenses.
(b) Assets + Liabilities = Owner's Capital + Owner's Drawings + Revenues − Expenses.
(c) Assets = Liabilities + Owner's Capital − Owner's Drawings + Revenues − Expenses.
(d) Assets = Liabilities + Owner's Capital + Owner's Drawings − Revenues − Expenses.
3. A trial balance:
(a) is the same under IFRS and GAAP.
(b) proves that transactions are recorded correctly.
(c) proves that all transactions have been recorded.
(d) will not balance if a correct journal entry is posted twice.
4. One difference between IFRS and GAAP is that:
(a) GAAP uses accrual-accounting concepts and IFRS uses primarily the cash basis of accounting.
(b) IFRS uses a different posting process than GAAP.
(c) IFRS uses more fair value measurements than GAAP.
(d) the limitations of a trial balance are different between IFRS and GAAP.
5. The general policy for using proper currency signs (dollar, yen, pound, etc.) is the same for both IFRS and this textbook. This policy is as follows:
(a) Currency signs only appear in ledgers and journal entries.
(b) Currency signs are only shown in the trial balance.
(c) Currency signs are shown for all compound journal entries.
(d) Currency signs are shown in trial balances and financial statements.
IFRS Exercises
IFRS2-1 Describe some of the issues the SEC must consider in deciding whether the United States should adopt IFRS.
International Financial Reporting Problem: Zetar plc
IFRS2-2 The financial statements of Zetar plc are presented in Appendix F. Instructions for accessing and using the company's complete annual report, including the notes to its financial statements, are also provided in Appendix F.
Instructions
Describe in which statement each of the following items is reported, and the position in the statement (e.g., current asset).
(a) Other administrative expenses.
(b) Cash at bank.
(c) Borrowings and overdrafts.
(d) Finance costs.
Answers to IFRS Self-Test Questions
Remember to go back to The Navigator box on the chapter opening page and check off your completed work.
__________
1In homework problems, you should use specific account titles when they are given. When account titles are not given, you may select account titles that identify the nature and content of each account. The account titles used in journalizing should not contain explanations such as Cash Paid or Cash Received.
2In homework problems, you can journalize all transactions before posting any of the journal entries.
3After the last entry has been posted, the accountant should scan the reference column in the journal, to confirm that all postings have been made.