Equity Relationships

As Chapter 1 indicated, companies report share capital—ordinary and retained earnings in the equity section of the statement of financial position. They report dividends on the retained earnings statement. And they report revenues and expenses on the income statement. Dividends, revenues, and expenses are eventually transferred to retained earnings at the end of the period. As a result, a change in any one of these three items affects equity. Illustration 2-11 shows the relationships related to equity.

Summary of Debit/Credit Rules

Illustration 2-12 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.

Steps in the Recording Process

Learning Objective 3

Identify the basic 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.¹

The recording process begins with the transaction. Business documents, such as a sales receipt, a check, or a bill, 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 2-13 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.

The Journal

Learning Objective 4

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

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 2-14 , below.) 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 2-14 shows the technique of journalizing, using the first two transactions of Softbyte SA. On September 1, shareholders invested €15,000 cash in the corporation in exchange for ordinary shares, and Softbyte purchased computer equipment for €7,000 cash. The number J1 indicates that the company records these two entries on the first page of the general journal. (The boxed numbers correspond to explanations in the list below the illustration.)

1. The date of the transaction is entered in the Date column.
2. 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.
3. 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.
4. 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.
5. 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.²

SIMPLE AND COMPOUND ENTRIES

Some entries involve only two accounts, one debit and one credit. (See, for example, the entries in Illustration 2-14 .) 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, Tsai Company purchases a delivery truck costing NT$420,000. It pays NT$240,000 cash now and agrees to pay the remaining NT$180,000 on account (to be paid later). The compound entry is as follows.

In a compound entry, the standard format requires that all debits be listed before the credits.

The Ledger

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

Learning Objective 5

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

Companies may use various kinds of ledgers, but every company has a general ledger. A general ledger contains all the asset, liability, and equity accounts, as shown in Illustration 2-16 . Whenever we use the term “ledger” in this textbook, we mean the general ledger, unless we specify otherwise.

The ledger provides the balance in each of the accounts and keeps track of changes in these balances. For example, the Cash account shows the amount of cash available to meet current obligations. The Accounts Receivable account shows amounts due from customers. The Accounts Payable account shows amounts owed to creditors. Each account is numbered for easier identification.

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 2-17 shows a typical form, using assumed data from a cash account.

This 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

Learning Objective 6

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

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, enter, in the appropriate columns of the account(s) debited, 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, enter, in the appropriate columns of the account(s) credited, 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 2-18 shows these four steps using Softbyte SA's first journal entry, the issuance of ordinary shares for €15,000 cash. The boxed numbers indicate the sequence of the steps.

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.³

The reference column of a ledger account indicates the journal page from which the transaction was posted.⁴ 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 SA will have fewer accounts than a corporate giant like Anheuser-Busch InBev (BEL). Softbyte may be able to manage and report its activities in 20 to 30 accounts, while Anheuser-Busch InBev may require thousands of accounts to keep track of its worldwide activities.

• HELPFUL HINT On the textbook's endpapers, you will also find an expanded chart of accounts.

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 statement of financial position accounts and follows with the income statement accounts.

In this and the next two chapters, we will be explaining the accounting for Yazici Advertising A.Ş. (a service company). The ranges of the account numbers are as follows.

• Accounts 101–199 indicate asset accounts
• 200–299 indicate liabilities
• 300–399 indicate equity accounts
• 400–499, revenues
• 500–799, expenses
• 800–899, other revenues
• 900–999, other expenses

Illustration 2-19 shows the chart of accounts for Yazici Advertising A.Ş. Accounts shown in red are used in this chapter. Accounts shown in black are explained in later chapters.

You will notice that there are gaps in the numbering system of the chart of accounts for Yazici Advertising A.Ş. Gaps are left to permit the insertion of new accounts as needed during the life of the business.

The Recording Process Illustrated

Illustrations 2-20 through 2-29 show the basic steps in the recording process, using the October transactions of Yazici Advertising A.Ş. Yazici's accounting period is a month. A basic analysis and a debit-credit analysis precede the journalizing and posting of each transaction. For simplicity, we use the T-account form in the illustrations 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.

• 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.

Summary Illustration of Journalizing and Posting

Illustration 2-30 shows the journal for Yazici Advertising A.Ş. for October. Illustration 2-31 (page 72) shows the ledger, with all balances in red.

The Trial Balance

Learning Objective 7

Prepare a trial balance and explain its purposes.

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 Fidelity Investments 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.
2. Total the debit and credit columns.
3. Prove the equality of the two columns.

Illustration 2-32 shows the trial balance prepared from Yazici Advertising's ledger. Note that the total debits (28,700) equal the total credits (28,700).

• HELPFUL HINT To sum a column of figures is sometimes referred to as to foot the column. The column is then said to be footed.

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.

• HELPFUL HINT A trial balance is so named because it is a test to see if the sum of the debit balances equals the sum of the credit balances.

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, or (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.

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.

Currency Signs and Underlining

Note that currency signs do not appear in journals or ledgers. Currency signs are typically used only in the trial balance and the financial statements. Generally, a currency 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. Negative signs or parentheses do not appear in journals or ledgers.

(L0 1)

1. Which of the following statements about an account is true?

   1. The right side of an account is the debit or increase side.
   2. An account is an individual accounting record of increases and decreases in specific asset, liability, and equity items.
   3. There are separate accounts for specific assets and liabilities but only one account for equity items.
   4. The left side of an account is the credit or decrease side.

(LO 2)

2. Debits:

   1. increase both assets and liabilities.
   2. decrease both assets and liabilities.
   3. increase assets and decrease liabilities.
   4. decrease assets and increase liabilities.

(LO 2)

3. A revenue account:

   1. is increased by debits.
   2. is decreased by credits.
   3. has a normal balance of a debit.
   4. is increased by credits.

(LO 2)

4. Accounts that normally have debit balances are:

   1. assets, expenses, and revenues.
   2. assets, expenses, and share capital—ordinary.
   3. assets, liabilities, and dividends.
   4. assets, dividends, and expenses.

(LO 2)

5. The expanded accounting equation is:

   1. $\text{Assets}+\text{Liabilities}=\text{Share Capital}+\text{Retained Earnings}+\text{Dividends}+\text{Expenses}+\text{Revenues}.$
   2. $\text{Assets}=\text{Liabilities}+\text{Share Capital}+\text{Retained Earnings}+\text{Dividends}+\text{Revenues}-\text{Expenses}.$
   3. $\text{Assets}=\text{Liabilities}-\text{Share Capital}-\text{Retained Earnings}-\text{Dividends}-\text{Revenues}-\text{Expenses}.$
   4. $\text{Assets}=\text{Liabilities}+\text{Share Capital}+\text{Retained Earnings}+\text{Revenues}-\text{Expenses}-\text{Dividends}.$

(LO 3)

6. Which of the following is not part of the recording process?

   1. Analyzing transactions.
   2. Preparing a trial balance.
   3. Entering transactions in a journal.
   4. Posting transactions.

(LO 4)

7. Which of the following statements about a journal is false?

   1. It is not a book of original entry.
   2. It provides a chronological record of transactions.
   3. It helps to locate errors because the debit and credit amounts for each entry can be readily compared.
   4. It discloses in one place the complete effect of a transaction.

(LO 4)

8. The purchase of supplies on account should result in:

   1. a debit to Supplies Expense and a credit to Cash.
   2. a debit to Supplies Expense and a credit to Supplies.
   3. a debit to Supplies and a credit to Accounts Payable.
   4. a debit to Supplies and a credit to Accounts Receivable.

(LO 5)

9. A ledger:

   1. contains only asset and liability accounts.
   2. should show accounts in alphabetical order.
   3. is a collection of the entire group of accounts maintained by a company.
   4. is a book of original entry.

(LO 6)

10. Posting:

    1. normally occurs before journalizing.
    2. transfers ledger transaction data to the journal.
    3. is an optional step in the recording process.
    4. transfers journal entries to ledger accounts.

(LO 6)

11. 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:

    1. €21,000.
    2. €5,000.
    3. €11,000.
    4. Cannot be determined.

(LO 7)

12. A trial balance:

    1. is a list of accounts with their balances at a given time.
    2. proves the mathematical accuracy of journalized transactions.
    3. will not balance if a correct journal entry is posted twice.
    4. proves that all transactions have been recorded.

(LO 7)

13. A trial balance will not balance if:

    1. a correct journal entry is posted twice.
    2. the purchase of supplies on account is debited to Supplies and credited to Cash.
    3. a £100 cash dividend is debited to Dividends for £1,000 and credited to Cash for £100.
    4. a £450 payment on account is debited to Accounts Payable for £45 and credited to Cash for £45.

(LO 7)

14. The trial balance of Clooney Ltd. 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, Share Capital—Ordinary £42,000, Dividends £15,000, and Equipment £61,000. In preparing a trial balance, the total in the debit column is:

    1. £131,000.
    2. £216,000.
    3. £91,000.
    4. £116,000.

Analyze transactions and determine their effect on accounts.

(LO 4)

1. Presented below is information related to Conan Real Estate Agency plc.

   Oct.  1	Arnold Conan begins business as a real estate agent with a cash investment of £18,000 in exchange for shares.
   2	Hires an administrative assistant.
   3	Purchases office equipment for £1,700, on account.
   6	Sells a house and lot for B. Clinton; bills B. Clinton £4,200 for realty services performed.
   27	Pays £900 on the balance related to the transaction of October 3.
   30	Pays the administrative assistant £2,800 in salary for October.

Instructions

Journalize the transactions. (You may omit explanations.)

Solution

Journalize transactions from account data and prepare a trial balance.

(LO 4,7)

2. The T-accounts below summarize the ledger of Garfunkle Landscaping Company at the end of the first month of operations.

Instructions

1. Prepare the complete general journal (including explanations) from which the postings to Cash were made.
2. Prepare a trial balance at April 30, 2017.

Solution

PRACTICE PROBLEM

Journalize transactions, post, and prepare a trial balance.

(LO 4, 5, 6, 7)

A group of student investors in Hong Kong opened Campus Laundromat Ltd. on September 1, 2017. During the first month of operations, the following transactions occurred.

The chart of accounts for the company is the same as for Yazici Advertising A.Ş. (Illustration 2-19 on page 64) except for the following: No. 610 Advertising Expense.

Instructions

1. Journalize the September transactions. (Use J1 for the journal page number.)
2. Open ledger accounts and post the September transactions.
3. Prepare a trial balance at September 30, 2017.

Solution

WileyPLUS

Brief Exercises, DO IT! Review, Exercises, and Problems, and many additional resources are available for practice in WileyPLUS.

1. Describe the parts of a T-account.
2. “The terms debit and credit mean increase and decrease, respectively.” Do you agree? Explain.
3. Jason Hilbert, a fellow student, contends that the double-entry system means each transaction must be recorded twice. Is Jason correct? Explain.
4. Sandra Browne, a beginning accounting student, believes debit balances are favorable and credit balances are unfavorable. Is Sandra correct? Discuss.
5. State the rules of debit and credit as applied to (a) asset accounts, (b) liability accounts, and (c) equity accounts (revenue, expenses, dividends, share capital—ordinary, and retained earnings).
6. What is the normal balance for each of the following accounts? (a) Accounts Receivable. (b) Cash. (c) Dividends. (d) Accounts Payable. (e) Service Revenue. (f) Salaries and Wages Expense. (g) Share Capital—Ordinary.
7. Indicate whether each of the following accounts is an asset, a liability, or an equity account and whether it has a normal debit or credit balance: (a) Accounts Receivable, (b) Accounts Payable, (c) Equipment, (d) Dividends, (e) Supplies.
8. For the following transactions, indicate the account debited and the account credited.

   1. Supplies are purchased on account.
   2. Cash is received on signing a note payable.
   3. 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. Dividends.
   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. 1. When entering a transaction in the journal, should the debit or credit be written first?
    2. Which should be indented, the debit or credit?
13. Describe a compound entry, and provide an example.
14. 1. Should business transaction debits and credits be recorded directly in the ledger accounts?
    2. 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.

    1. Alberto Rivera invests R$9,000 cash in the business in exchange for ordinary shares.
    2. Insurance of R$800 is paid for the year.
    3. Supplies of R$2,000 are purchased on account.
    4. Cash of R$7,500 is received for services performed.
17. 1. What is a ledger?
    2. What is a chart of accounts and why is it important?
18. What is a trial balance and what are its purposes?
19. Joe Kirby is confused about how accounting information flows through the accounting system. He believes the flow of information is as follows.
    1. Debits and credits posted to the ledger.
    2. Business transaction occurs.
    3. Information entered in the journal.
    4. Financial statements are prepared.
    5. Trial balance is prepared.
    Is Joe correct? If not, indicate to Joe the proper flow of the information.
20. Two students are discussing the use of a trial balance. They wonder whether the following errors, each considered separately, would prevent the trial balance from balancing. What would you tell them?

    1. The bookkeeper debited Cash for €600 and credited Salaries and Wages Expense for €600 for payment of wages.
    2. Cash collected on account was debited to Cash for €900 and Service Revenue was credited for €90.
21. What are the normal balances for TSMC's Cash, Accounts Payable, and Interest Expense accounts?

BRIEF EXERCISES

Indicate debit and credit effects and normal balance.

(LO 2)

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. Share Capital—Ordinary.
6. Dividends.

Identify accounts to be debited and credited.

(LO 2)

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

Journalize transactions.

(LO 4)

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

Identify and explain steps in recording process.

(LO 3)

BE2-3 Tim Weber, 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.

Indicate basic and debit-credit analysis.

(LO 2)

BE2-3 J.A. Motzek SA 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 65–70.

Journalize transactions.

(LO 4)

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

Post journal entries to T-accounts.

(LO 6)

BE2-6 Selected transactions for the Gilles Ltd. are presented in journal form on the next page. Post the transactions to T-accounts. Make one T-account for each item and determine each account's ending balance.

(LO 6)

BE2-8

Post journal entries to standard form of account.

Selected journal entries for the Gilles Ltd. are presented in BE2-7. Post the transactions using the standard form of account.

(LO 6)

BE2-9

Prepare a trial balance.

From the ledger balances given below, prepare a trial balance for the Starr SE at June 30, 2017. List the accounts in the order shown on page 73. All account balances are normal.

Accounts Payable €8,600, Cash €6,800, Share Capital—Ordinary €20,000, Dividends €800, Equipment €17,000, Service Revenue €6,000, Accounts Receivable €3,000, Salaries and Wages Expense €6,000, and Rent Expense €1,000.

(LO 7)

BE2-10

Prepare a correct trial balance.

An inexperienced bookkeeper prepared the following trial balance. Prepare a correct trial balance, assuming all account balances are normal.

EXERCISES

Analyze statements about accounting and the recording process.

(LO 1)

E2-1 Larry Burns 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.

Identify debits, credits, and normal balances.

(LO 2)

E2-2 Selected transactions for B. Madar SE, an interior decorating firm, in its first month of business, are shown below.

Instructions

For each transaction indicate the following.

1. The basic type of account debited and credited (asset, liability, equity).
2. The specific account debited and credited (cash, rent expense, service revenue, etc.).
3. Whether the specific account is increased or decreased.
4. The normal balance of the specific account.

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

Journalize transactions.

(LO 4)

E2-3 Data for B. Madar SE, interior decorating, are presented in E2-2.

Instructions

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

Analyze transactions and determine their effect on accounts.

(LO 2)

E2-4 Presented below is information related to Beijing Real Estate Agency Ltd.

Instructions

Prepare the debit-credit analysis for each transaction as illustrated on pages 65–70.

Journalize transactions.

(LO 4)

E2-5 Transaction data for Beijing Real Estate Agency Ltd. are presented in E2-4.

Instructions

Journalize the transactions. (You may omit explanations.)

Analyze transactions and journalize.

(LO 2, 3, 4)

E2-6 Minsk Industries OAO had the following transactions.

1. Borrowed py50,000 from the bank by signing a note.
2. Paid py25,000 cash for a computer.
3. Purchased py4,500 of supplies on account.

Instructions

1. Indicate what accounts are increased and decreased by each transaction.
2. Journalize each transaction. (Omit explanations.)

Analyze transactions and journalize.

(LO 2, 3, 4)

E2-7 Rockford Enterprises Ltd. had the following selected transactions.

1. Kris Rockford invested £5,500 cash in the business in exchange for ordinary shares.
2. Paid office rent of £1,100.
3. Performed consulting services worth £4,700 on account.
4. Declared and paid a £400 cash dividend.

Instructions

1. Indicate the effect each transaction has on the accounting equation $(\text{Assets}=\text{Liabilities}+\text{Equity})$, using plus and minus signs.
2. Journalize each transaction. (Omit explanations.)

Analyze statements about the ledger.

(LO 5)

E2-8 Rachel Manny has prepared the following list of statements about the general ledger.

1. The general ledger contains all the asset and liability accounts, but no 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.

Post journal entries and prepare a trial balance.

(LO 6, 7)

E2-9 Selected transactions from the journal of Roberta Mendez SLU, investment broker, are presented below.

Instructions

1. Post the transactions to T-accounts.
2. Prepare a trial balance at August 31, 2017.

Journalize transactions from account data and prepare a trial balance.

(LO 4, 7)

E2-10 The T-accounts below summarize the ledger of Pierre Landscaping Company SA at the end of the first month of operations.

Instructions

1. Prepare the complete general journal (including explanations) from which the postings to Cash were made.
2. Prepare a trial balance at April 30, 2017.

Journalize transactions from account data and prepare a trial balance.

(LO 4, 7)

E2-11 Presented below is the ledger for Sparks Co. Ltd.

Instructions

1. Reproduce the journal entries for the transactions that occurred on October 1, 10, and 20, and provide explanations for each.
2. Determine the October 31 balance for each of the accounts above, and prepare a trial balance at October 31, 2017.

Prepare journal entries and post using standard account form.

(LO 4, 6)

E2-12 Selected transactions for Isabella Rossini Company SpA during its first month in business are presented below.

Rossini's chart of accounts shows No. 101 Cash, No. 157 Equipment, No. 201 Accounts Payable, No. 311 Share Capital—Ordinary, and No. 332 Dividends.

Instructions

1. Journalize the transactions on page J1 of the journal. (Omit explanations.)
2. Post the transactions using the standard account form.

Analyze errors and their effects on trial balance.

(LO 7)

The bookkeeper for Arno Equipment Repair NV made a number of errors in journalizing and posting, as described below.

1. A credit posting of €400 to Accounts Receivable was omitted.
2. A debit posting of €750 for Prepaid Insurance was debited to Insurance Expense.
3. A collection from a customer of €100 in payment of its account owed was journalized and posted as a debit to Cash €100 and a credit to Service Revenue €100.
4. A credit posting of €300 to Property Taxes Payable was made twice.
5. A cash purchase of supplies for €250 was journalized and posted as a debit to Supplies €230 and a credit to Cash €230.
6. A debit of €495 to Advertising Expense was posted as €459.

Instructions

For each error:

1. Indicate whether the trial balance will balance.
2. If the trial balance will not balance, indicate the amount of the difference.
3. 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.

Prepare a trial balance.

(LO 2, 7)

E2-14 The accounts in the ledger of Tempus Fugit Delivery Service Ltd. contain the following balances on July 31, 2017.

Instructions

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

Identify cash flow activities.

(LO 7)

E2-15 The statement of cash flows classifies each transaction as an operating activity, an investing activity, or a financing activity. Operating activities are the types of activities the company performs to generate profits. Investing activities include the purchase of long-lived assets such as equipment or the purchase of investment securities. Financing activities are borrowing money, issuing shares, and paying dividends.

Presented below are the following transactions.

1. Issued shares for €20,000 cash.
2. Issued note payable for €10,000 cash.
3. Purchased equipment for €11,000 cash.
4. Received €15,000 cash for services performed.
5. Paid €1,000 cash for rent.
6. Paid €600 cash dividend to shareholders.
7. Paid €6,500 cash for salaries.

Instructions

Classify each of these transactions as operating, investing, or financing activities.

PROBLEMS: SET A

Journalize a series of transactions.

(LO 2, 4)

P2-1A Prairie Park ASA was started on April 1 by F. L. Wright and associates. The following selected events and transactions occurred during April.

Prairie Park uses the following accounts: Cash, Prepaid Insurance, Land, Accounts Payable, Unearned Service Revenue, Share Capital—Ordinary, Dividends, Service Revenue, Advertising Expense, and Salaries and Wages Expense.

Instructions

Journalize the April transactions.

Journalize transactions, post, and prepare a trial balance.

(LO 2, 4, 6 ,7)

P2-2A Lena Fohn is a licensed accountant. During the first month of operations of her business, Lena Fohn, AG, the following events and transactions occurred.

Lena 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. 311 Share Capital—Ordinary, No. 400 Service Revenue, No. 726 Salaries and Wages Expense, and No. 729 Rent Expense.

Instructions

1. Journalize the transactions.
2. Post to the ledger accounts.
3. Prepare a trial balance on May 31, 2017.

(c) Trial balance totals €28,400

Journalize and post transactions and prepare a trial balance.

(LO 2, 4, 6 ,7)

P2-3A Sean Browne owns and manages a computer repair service, which had the following trial balance on December 31, 2016 (the end of its fiscal year).

Summarized transactions for January 2017 were as follows.

1. Advertising costs, paid in cash, £1,000.
2. Additional supplies acquired on account £4,000.
3. Miscellaneous expenses, paid in cash, £1,100.
4. Cash collected from customers in payment of accounts receivable £13,000.
5. Cash paid to creditors for accounts payable due £15,000.
6. Repair services performed during January: for cash £5,000; on account £9,000.
7. Wages for January, paid in cash, £3,000.
8. Dividends during January were £2,000.

Instructions

1. Open T-accounts for each of the accounts listed in the trial balance, and enter the opening balances for 2017.
2. Prepare journal entries to record each of the January transactions. (Omit explanations.)
3. Post the journal entries to the accounts in the ledger. (Add accounts as needed.)
4. Prepare a trial balance as of January 31, 2017.

Prepare a correct trial balance

(LO 7)

P2-4A The trial balance of the Jason Company Ltd. shown below does not balance.

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 £8,960, respectively.
3. A debit posting to Salaries and Wages Expense of £200 was omitted.
4. A £1,000 cash dividend was debited to Share Capital—Ordinary 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 £450 for advertising was debited to Advertising Expense for £45 and credited to Cash for £45.
7. A collection from a customer for £420 was debited to Cash for £420 and credited to Accounts Payable for £420.

Trial balance totals €26,720

Instructions

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

Journalize transactions, post, and prepare a trial balance.

(LO 2, 4, 6 ,7)

P2-5A The Classic Theater Ltd. opened on April 1. All facilities were completed on March 31. At this time, the ledger showed No. 101 Cash €6,000, 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. 311 Share Capital—Ordinary €20,000. During April, the following events and transactions occurred.

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

1. 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.
2. Journalize the April transactions.
3. Post the April journal entries to the ledger. Assume that all entries are posted from page 1 of the journal.
4. Prepare a trial balance on April 30, 2017.

(d) Trial balance totals €35,516

PROBLEMS: SET B

(LO 2, 4)

Journalize a series of transactions.

P2-1B Surepar Disc Golf Course was opened on March 1 by Bill Arnsdorf. The following selected events and transactions occurred during March:

Surepar uses the following accounts: Cash, Prepaid Insurance, Land, Buildings, Equipment, Accounts Payable, Unearned Service Revenue, Share Capital—Ordinary, Dividends, 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)

P2-2B Judi Dench is a licensed dentist. During the first month of the operation of her business, the following events and transactions occurred.

Judi 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. 311 Share Capital—Ordinary, No. 400 Service Revenue, No. 726 Salaries and Wages Expense, and No. 729 Rent Expense.

Instructions

1. Journalize the transactions.
2. Post to the ledger accounts.
3. Prepare a trial balance on April 30, 2017.

(c) Trial balance totals £53,000

Journalize transactions, post, and prepare a trial balance.

(LO 2, 4, 6 ,7)

P2-3B Richardson Services Ltd. was formed on May 1, 2017. The following transactions took place during the first month.

Transactions on May 1:

1. Shareholders invested £50,000 cash in exchange for ordinary shares.
2. Hired two employees to work in the warehouse. They will each be paid a salary of £2,800 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 £6,000 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:

1.   6. Purchased basic office supplies for £940 cash.
2.   7. Purchased more office supplies for £1,300 on account.
3.   8. Total revenues recognized were £18,000—£5,000 cash and £13,000 on account.
4.   9. Paid £400 to suppliers for accounts payable due.
5. 10. Received £3,000 from customers in payment of accounts receivable.
6. 11. Received utility bills in the amount of £260, to be paid next month.
7. 12. Paid the monthly salaries of the two employees, totalling £5,600.

Instructions

1. Prepare journal entries to record each of the events listed. (Omit explanations.)
2. Post the journal entries to T-accounts.
3. Prepare a trial balance as of May 31, 2017.

Trial balance totals £93,160

Prepare a correct trial balance.

(LO 7)

P2-4B The trial balance of Mueller SE shown below does not balance.

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 €570, and Accounts Receivable was credited for the same amount. The actual collection was for €750.
2. The purchase of a computer on account for €620 was recorded as a debit to Supplies for €620 and a credit to Accounts Payable for €620.
3. Services were performed on account for a client for €890. Accounts Receivable was debited for €890, and Service Revenue was credited for €89.
4. A debit posting to Salaries and Wages Expense of €700 was omitted.
5. A payment of a balance due for €309 was credited to Cash for €309 and credited to Accounts Payable for €390.
6. The payment of a €600 cash dividend 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 €16,348

Journalize transactions, post, and prepare a trial balance.

(LO 2, 4, 6 ,7)

P2-5B The Wilson Theater Ltd., owned by Tegan Wilson, will begin operations in March. The Wilson will be unique in that it will show only triple features of sequential theme movies. As of March 1, the ledger of Wilson showed No. 101 Cash £7,000, No. 140 Land £22,000, No. 145 Buildings (concession stand, projection room, ticket booth, and screen) £10,000, No. 157 Equipment £8,000, No. 201 Accounts Payable £7,000, and No. 311 Share Capital—Ordinary £40,000. During the month of March, the following events and transactions occurred.

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. 729 Rent Expense, and No. 726 Salaries and Wages Expense.

Instructions

1. Enter the beginning balances in the ledger. Insert a check mark (✓) in the reference column of the ledger for the beginning balance.
2. Journalize the March transactions.
3. Post the March journal entries to the ledger. Assume that all entries are posted from page 1 of the journal.
4. Prepare a trial balance on March 31, 2017.

Trial balance totals £63,250

MATCHA CREATIONS

(Note: This is a continuation of the Matcha Creations problem from Chapter 1.)

MC2 After researching the different forms of business organization, Mei-ling Lee decides to operate “Matcha Creations” as a corporation. She then starts the process of getting the business running. In November 2017, the following activities take place.

Instructions

1. Prepare journal entries to record the November transactions.
2. Post the journal entries to general ledger accounts.
3. Prepare a trial balance at November 30.

BROADENING YOUR PERSPECTIVE

Critical Thinking

Decision-Making Across the Organization

BYP2-4 Amy Torbert operates Hollins Riding Academy. The academy's primary sources of revenue are riding fees and lesson fees, which are paid on a cash basis. Amy 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: No. 1 Cash, No. 5 Boarding Accounts Receivable, No. 27 Unearned Boarding Revenue, No. 51 Riding Revenue, No. 52 Lesson Revenue, and No. 53 Boarding Revenue.

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

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

Amy makes periodic payments of cash dividends to shareholders. To record equity in the business and dividends, Torbert maintains three accounts: No. 50 Share Capital—Ordinary, No. 51 Retained Earnings, and No. 52 Dividends.

During the first month of operations, an inexperienced bookkeeper was employed. Amy Torbert 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.

1. 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.
2. Which of the incorrect entries would prevent the trial balance from balancing?
3. What was the correct net income for May, assuming the bookkeeper reported net income of £4,600 after posting all 50 entries?
4. 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

BYP2-5 Shandler's Maid Company offers home-cleaning service. Two recurring transactions for the company are billing customers for services rendered 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 textbook under the heading, “The Recording Process Illustrated” (page 65).

Ethics Case

BYP2-6 Sara Rankin is the assistant chief accountant at Hokey Company Ltd., 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. Sara is hurriedly trying to prepare a general ledger 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, Sara decides to force the debits and credits into balance by adding the amount of the difference to the Equipment account. She chose Equipment because it is one of the larger account balances; percentage-wise, it will be the least misstated. Sara “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

1. Who are the stakeholders in this situation?
2. What are the ethical issues involved in this case?
3. What are Sara's alternatives?

Answers to Insight and Accounting Across the Organization Questions

p. 57 Keeping Score Q: Do you think that the Manchester United (GBR) football (soccer) club would be likely to have the same major revenue and expense accounts as Taiwan's Brother Elephants baseball team? A: Because their businesses are similar—professional sports—many of the revenue and expense accounts for these teams might be similar.

p. 62 What Would Sam Do? Q: Why did Sam Walton keep separate pigeonholes and blue binders? Why bother to keep separate records for each store? A: Using separate pigeonholes and blue binders for each store enabled Walton to accumulate and track the performance of each individual store easily. Keeping separate records for each store provided Walton with more information about performance of individual stores and managers, and greater control. Walton would want and need the same advantages if he were starting his business today. The difference is that he might now have started with a computerized system for small businesses.

p. 74 Why Accuracy Matters Q: In order for this company to prepare and issue financial statements, its accounting equation (debits and credits) must have been in balance at year-end. How could this error 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, or transactions were recorded in the wrong accounting period. Audits of financial statements uncover some, but obviously not all, errors or misstatements.

A Look at U.S. GAAP

Learning Objective 8

Compare the procedures for the accounting process under IFRS and U.S. GAAP.

Companies that use GAAP follow the same set of procedures and records to keep track of transaction data as do IFRS companies. 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.

Differences

• In the United States, equity is often referred to as either shareholders' equity or stockholders' equity, and Share Capital—Ordinary is referred to as Common Stock. The statement of financial position is often called the balance sheet in the United States.
• Rules for accounting for specific events sometimes differ across countries. For example, IFRS 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.

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.

GAAP Practice

The Navigator

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