As indicated in the Feature Story, a reliable information system is a necessity for any company. The purpose of this chapter is to explain and illustrate the features of an accounting information system.
How organized are you financially? Take a short quiz. Answer yes or no to each question:
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 big company to have good accounting records, especially if it has control of your life savings. MF Global Holdings Ltd was such a company. As a large 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 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).
LEARNING OBJECTIVES | REVIEW | PRACTICE |
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LO 1 Analyze the effect of business transactions on the basic accounting equation. |
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DO IT! 1 Transaction Analysis |
LO 2 Explain how accounts, debits, and credits are used to record business transactions. |
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DO IT! 2 Accounts, Debits, and Credits |
LO 3 Indicate how a journal is used in the recording process. |
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DO IT! 3 Journal Entries |
LO 4 Explain how a ledger and posting help in the recording process. |
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DO IT! 4 Posting |
LO 5 Prepare a trial balance. |
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DO IT! 5 Trial Balance |
Go to the Review and Practice section at the end of the chapter for a targeted summary and practice applications with solutions. Visit Wiley Course Resources for additional tutorials and practice opportunities. |
The system of collecting and processing transaction data and communicating financial information to decision-makers is known as the accounting information system. Factors that shape an accounting information system include the nature of the company’s business, the types of transactions, the size of the company, the volume of data, and the information demands of management and others.
Most businesses use computerized accounting systems—sometimes referred to as electronic data processing (EDP) systems. These systems handle all the steps involved in the recording process, from initial data entry to preparation of the financial statements.
This accounting cycle graphic illustrates the steps companies follow each period to record transactions and eventually prepare financial statements.
In order to emphasize the underlying concepts and principles, we focus on a manual accounting system. The accounting concepts and principles do not change whether a system is computerized or manual.
To use an accounting information system, you need to know which economic events to recognize (record). Not all events are recorded and reported in the financial statements. For example, suppose Zoom Video Communications hired a new employee and purchased a new computer. Are these two events entered in its accounting records? The first event would not be recorded, but the second event would.
Illustration 3.1 summarizes the decision process companies use to decide whether or not to record economic events.
ILLUSTRATION 3.1 Transaction identification process
Recall the basic accounting equation:
Assets = Liabilities + Stockholders’ Equity |
In this chapter, you will learn how to analyze transactions in terms of their effect on assets, liabilities, and stockholders’ equity. Transaction analysis is the process of identifying the specific effects of economic events on the accounting equation (see Decision Tools).
The accounting equation must always balance. Each transaction has a dual (double-sided) effect on the equation. For example, if an individual asset is increased, there must be a corresponding:
Two or more items could be affected when an asset is increased. For example, if a company purchases a computer for $10,000 by paying $6,000 in cash and signing a note for $4,000, one asset (equipment) increases $10,000, another asset (cash) decreases $6,000, and a liability (notes payable) increases $4,000. The result is that the accounting equation remains in balance—assets increased by a net $4,000 and liabilities increased by $4,000, as shown below.
Illustration 1.10 presented the financial statements for Sierra Corporation for its first month. You should review those financial statements at this time. To illustrate how economic events affect the accounting equation, we will examine the events affecting Sierra during its first month.
In order to analyze the transactions for Sierra, we will expand the basic accounting equation. This allows us to better illustrate the impact of transactions on stockholders’ equity.
Illustration 3.2 shows the expanded equation.
ILLUSTRATION 3.2 Expanded accounting equation
To demonstrate the effect that each transaction has on particular financial statements, we analyze each of Sierra’s transactions using the tabular analysis shown in Illustration 3.3.
ILLUSTRATION 3.3 Tabular analysis of transactions
Event (1). Investment of Cash by Stockholders On October 1, cash of $10,000 is invested in the business by investors in exchange for $10,000 of common stock. This event is an accounting transaction that results in an increase in both assets and stockholders’ equity.
Basic Analysis: The asset Cash is increased $10,000; stockholders’ equity (specifically Common Stock) is increased $10,000.
The equation is in balance after the issuance of common stock. Keeping track of the source of each change in stockholders’ equity is essential for later accounting activities. In particular, items recorded in the revenue and expense columns are used for the calculation of net income.
Event (2). Note Issued in Exchange for Cash On October 1, Sierra borrowed $5,000 from Castle Bank by signing a 3-month, 12%, $5,000 note payable. This transaction results in an equal increase in assets and liabilities. The specific effect of this transaction and the cumulative effect of the first two transactions are as follows.
Basic Analysis: The asset Cash is increased $5,000; the liability Notes Payable is increased $5,000.
Total assets are now $15,000, and liabilities plus stockholders’ equity also total $15,000.
Event (3). Purchase of Equipment for Cash On October 2, Sierra purchased equipment by paying $5,000 cash to Superior Equipment Sales Co. This transaction results in an equal increase and decrease in Sierra’s assets.
Basic Analysis: The asset Equipment is increased $5,000; the asset Cash is decreased $5,000.
The balance in total assets did not change; one asset account decreased by the same amount that another increased. The total assets are still $15,000, and liabilities plus stockholders’ equity also still total $15,000.
Event (4). Receipt of Cash in Advance from Customer On October 2, Sierra received a $1,200 cash advance from R. Knox, a client. Sierra received cash (an asset) for guide services for multi-day trips that it expects to complete in the future.
Since Sierra received cash prior to performance of the service, Sierra has a liability for the work due.
Basic Analysis: The asset Cash is increased $1,200; the liability Unearned Service Revenue is increased $1,200 because the service has not been performed yet. That is, when an advance payment is received, unearned revenue (a liability) should be recorded in order to recognize the obligation that exists.
Event (5). Services Performed for Cash On October 3, Sierra received $10,000 in cash (an asset) from Copa Company for guide services performed for a corporate event. Guide service is the principal revenue-producing activity of Sierra. Revenue increases stockholders’ equity. This transaction, then, increases both assets and stockholders’ equity.
Basic Analysis: The asset Cash is increased $10,000; the revenue account Service Revenue is increased $10,000.
Often companies perform services “on account.” That is, they perform services for which they are paid at a later date.
Suppose that Sierra had performed these services on account rather than for cash. This event would be reported using the accounting equation as follows.
Assets | = | Liabilities | + | Stockholders’ Equity | ||
Accounts | ||||||
Receivable | = | Revenues | ||||
+$10,000 | +$10,000 | Service Revenue |
Later, when Sierra collects the $10,000 from the customer, Accounts Receivable decreases by $10,000, and Cash increases by $10,000.
Assets | = | Liabilities | + | Stockholders’ Equity | ||
Accounts | ||||||
Cash | + | Receivable | ||||
+$10,000 | −$10,000 |
Note that in this case, revenues are not affected by the collection of cash. Instead Sierra records an exchange of one asset (Accounts Receivable) for a different asset (Cash).
Event (6). Payment of Rent On October 3, Sierra paid its office rent for the month of October in cash, $900 (see Helpful Hint). This rent payment is a transaction that results in a decrease in an asset, cash, as well as a decrease in stockholders’ equity.
Note that although Rent Expense increases, it is shown as a negative number in the accounting equation because expenses decrease retained earnings, which in turn decreases stockholders’ equity. Overall, assets (cash) decrease by $900 and stockholders’ equity decreases by $900, thereby keeping the accounting equation in balance.
Basic Analysis: The expense Rent Expense is increased $900 because the payment pertains only to the current month and results in a decrease to Retained Earnings; the asset Cash is decreased $900.
Event (7). Purchase of Insurance Policy for Cash On October 4, Sierra paid $600 for a one-year insurance policy that will expire next year on September 30. Payments of expenses that will benefit more than one accounting period are identified as assets called prepaid expenses or prepayments.
Basic Analysis: The asset Cash is decreased $600; the asset Prepaid Insurance is increased $600.
The balance in total assets did not change; one asset account decreased by the same amount that another increased.
Event (8). Purchase of Supplies on Account On October 5, Sierra purchased an estimated three months of supplies on account from Aero Supply for $2,500. In this case, “on account” means that the company receives goods or services that it will pay for at a later date. This transaction increases both an asset (supplies) and a liability (accounts payable).
Basic Analysis: The asset Supplies is increased $2,500; the liability Accounts Payable is increased $2,500.
Event (9). Hiring of New Employees On October 9, Sierra hired four new employees to begin work on October 15. Each employee will receive a weekly salary of $500 for a five-day work week, payable every two weeks. Employees will receive their first paychecks on October 26. On the date Sierra hires the employees, there is no effect on the accounting equation because the assets, liabilities, and stockholders’ equity of the company have not changed.
Basic Analysis: An accounting transaction has not occurred. There is only an agreement that the employees will begin work on October 15. (See Event (11) for the first payment.)
Event (10). Payment of Dividend On October 20, Sierra paid a $500 cash dividend (see Helpful Hint). Dividends are a reduction of stockholders’ equity but not an expense. Dividends are not included in the calculation of net income. Instead, a dividend is a distribution of the company’s assets to its stockholders, which is presented in the retained earnings statement.
Basic Analysis: Dividends is increased $500, which results in a decrease to Retained Earnings; the asset Cash is decreased $500.
Event (11). Payment of Cash for Employee Salaries Employees have worked two weeks, earning $4,000 in salaries, which were paid on October 26. Salaries and Wages Expense is an expense that reduces stockholders’ equity. In this transaction, both assets and stockholders’ equity are reduced.
Basic Analysis: The asset Cash is decreased $4,000; the expense Salaries and Wages Expense is increased $4,000, which results in a decrease to Retained Earnings.
Illustration 3.4 summarizes the transactions of Sierra Corporation to show their cumulative effect on the basic accounting equation. It includes the transaction number in the first column on the left. The right-most column shows the specific effect of any transaction that affects revenues or expenses. Remember that Event (9) did not result in a transaction, so nothing is recorded for that event. The illustration demonstrates three important points:
ILLUSTRATION 3.4 Summary of transactions
Rather than using a tabular summary like the one in Illustration 3.4 for Sierra Corporation, an accounting information system uses accounts. An account is an individual accounting record of increases and decreases in a specific asset, liability, stockholders’ equity, revenue, or expense item. For example, Sierra Corporation has 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:
Because the alignment of these parts of an account resembles the letter T, it is referred to as a T-account. The basic form of an account is shown in Illustration 3.5.
ILLUSTRATION 3.5 Basic form of account
We use this form of account often throughout this text to explain basic accounting relationships.
The term debit indicates the left side of an account, and credit indicates the right side.
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 3.5.
The procedure of recording debits and credits in an account is shown in Illustration 3.6 for the transactions affecting the Cash account of Sierra Corporation. The data are taken from the Cash column of the tabular summary in Illustration 3.4.
ILLUSTRATION 3.6 Tabular summary and account form for Sierra Corporation’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 $10,000 receipt of cash (in blue) is debited to Cash, and the −$5,000 payment of cash (in red) is credited to Cash.
There are two main benefits from using the T-account form:
The account balance, a debit of $15,200, indicates that Sierra had $15,200 more increases than decreases in cash. That is, since it started with a balance of zero, it has $15,200 in its Cash account.
Each transaction must affect two or more accounts to keep the basic accounting equation in balance.
The double-entry system also helps to ensure the accuracy of the recorded amounts and helps to detect errors such as those at MF Global as discussed in the Feature Story. If every transaction is recorded with equal debits and credits, then the sum of all the debits to the accounts must equal the sum of all the credits.
The double-entry system for determining the equality of the accounting equation is much more efficient than the plus/minus procedure used earlier. The following discussion illustrates debit and credit procedures in the double-entry system.
In Illustration 3.6 for Sierra Corporation, increases in Cash—an asset—are entered on the left side, and decreases in Cash are entered on the right side.
The effects that debits and credits have on assets and liabilities are summarized in Illustration 3.7.
ILLUSTRATION 3.7 Debit and credit effects–assets and liabilities
Debits | Credits |
Increase assets | Decrease assets |
Decrease liabilities | Increase 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 balances may be diagrammed as in Illustration 3.8.
ILLUSTRATION 3.8 Normal balances–assets and liabilities
Knowing which is the normal balance in an account may help when you are trying to identify errors (see Helpful Hint). 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 errors in recording. Occasionally, however, an abnormal balance may be correct. The Cash account, for example, will have a credit balance when a company has overdrawn its bank balance by spending more than it has in its account. In automated accounting systems, the computer is programmed to flag violations of the normal balance and to print out error or exception reports. In manual systems, careful visual inspection of the accounts is required to detect normal balance problems.
Recall that stockholders’ equity is comprised of two parts: common stock and retained earnings. In the transaction events earlier in this chapter, you saw that revenues, expenses, and the payment of dividends affect retained earnings. Therefore, the subdivisions of stockholders’ equity are common stock, retained earnings, dividends, revenues, and expenses.
Common Stock Common stock is issued to investors in exchange for the stockholders’ investment.
The effects of debits and credits on the Common Stock account are shown in Illustration 3.9.
ILLUSTRATION 3.9 Debit and credit effects–common stock
Debits | Credits | |
Decrease Common Stock | Increase Common Stock |
The normal balance in the Common Stock account may be diagrammed as in Illustration 3.10.
ILLUSTRATION 3.10 Normal balance–common stock
Retained Earnings Retained earnings is net income that is retained in the business.
ILLUSTRATION 3.11 Debit and credit effects–retained earnings
Debits | Credits |
Decrease Retained Earnings | Increase Retained Earnings |
The normal balance for the Retained Earnings account may be diagrammed as in Illustration 3.12.
ILLUSTRATION 3.12 Normal balance–retained earnings
Dividends A dividend is a distribution by a corporation to its stockholders. The most common form of distribution is a cash dividend.
As shown in Illustration 3.13, the Dividends account normally has a debit balance.
ILLUSTRATION 3.13 Normal balance–dividends
Revenues and Expenses When a company recognizes revenues, stockholders’ equity is increased. Revenue accounts are increased by credits and decreased by debits.
The effects of debits and credits on revenues and expenses are shown in Illustration 3.14.
ILLUSTRATION 3.14 Debit and credit effects–revenues and expenses
Debits | Credits |
Decrease revenues | Increase revenues |
Increase expenses | Decrease 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. The normal balances may be diagrammed as in Illustration 3.15.
ILLUSTRATION 3.15 Normal balances–revenues and expenses
Companies report the subdivisions of stockholders’ equity in various places in the financial statements:
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 stockholders’ equity. Illustration 3.16 shows the relationships of the accounts affecting stockholders’ equity.
ILLUSTRATION 3.16 Stockholders’ equity relationships
Illustration 3.17 summarizes the debit/credit rules and effects on each type of account.
ILLUSTRATION 3.17 Summary of debit/credit rules
Although it is possible to enter transaction information directly into the accounts, few businesses do so. Practically every business uses these basic steps in the recording process (an integral part of the accounting cycle):
The actual sequence of events begins with the transaction. Evidence of the transaction comes in the form of a source document, such as a sales slip, a check, a bill, or a cash register document (see Ethics Note). This evidence is analyzed to determine the effect of the transaction on specific accounts. The transaction is then entered in the journal. Finally, the journal entry is transferred to the designated accounts in the ledger. The sequence of events in the recording process is shown in Illustration 3.18.
ILLUSTRATION 3.18 The recording process
Transactions are initially recorded in chronological order in a journal before they are transferred to the accounts. For each transaction, the journal shows the debit and credit effects on specific accounts (see Helpful Hint).
Companies may use various kinds of journals, but every company has at least the most basic form of journal, a general journal. The journal makes three significant contributions to the recording process:
Entering transaction data in the journal is known as journalizing. To illustrate the technique of journalizing, let’s look at the first three transactions of Sierra Corporation in equation form.
Assets | = | Liabilities | + | Stockholders’ Equity | |||||
Common | |||||||||
Cash | = | Stock | |||||||
+$10,000 | +$10,000 | Issued stock |
Assets | = | Liabilities | + | Stockholders’ Equity |
Notes | ||||
Cash | = | Payable | ||
+$5,000 | +$5,000 |
Assets | = | Liabilities | + | Stockholders’ Equity | ||
Cash | + | Equipment | ||||
−$5,000 | +$5,000 |
Sierra makes 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. These transactions are journalized in Illustration 3.19.
ILLUSTRATION 3.19 Recording transactions in journal form
General Journal |
|||
Date | Account Titles and Explanation | Debit | Credit |
2025 Oct. 1 | Cash | 10,000 | |
Common Stock | 10,000 | ||
(Issued stock for cash) | |||
1 | Cash | 5,000 | |
Notes Payable | 5,000 | ||
(Issued 3-month, 12% note payable for cash) | |||
2 | Equipment | 5,000 | |
Cash | 5,000 | ||
(Purchased equipment for cash) |
Note the following features of the journal entries.
It is important to use correct and specific account titles in journalizing. Erroneous account titles lead to incorrect financial statements. Some flexibility exists initially in selecting account titles. The main criterion is that each title must appropriately describe the content of the account. For example, a company could use any of these account titles for recording the cost of delivery trucks: Equipment, Delivery Equipment, Delivery Trucks, or Trucks. Once the company chooses the specific title to use, however, it should record under that account title all subsequent transactions involving the account.
The record of all accounts maintained by a company and their amounts is referred to collectively as the ledger.
Whenever we use the term ledger in this text without additional specification, it will mean the general ledger.
ILLUSTRATION 3.20 The general ledger
The number and type of accounts used differ for each company, depending on the size, complexity, and type of business. For example, the number of accounts depends on the amount of detail desired by management. The management of one company may want one single account for all types of utility expense. Another may keep separate expense accounts for each type of utility expenditure, such as gas, electricity, and water.
Most companies list the names of the accounts in a chart of accounts. They may create new accounts as needed during the life of the business. Illustration 3.21 shows the chart of accounts for Sierra in the order that they are typically listed (assets, liabilities, stockholders’ equity, revenues, and expenses). Accounts shown in red are used in this chapter; accounts shown in black are explained in later chapters.
ILLUSTRATION 3.21 Chart of accounts for Sierra Corporation
Sierra Corporation Chart of Accounts |
||||||||||
Assets | Liabilities | Stockholders’ Equity | Revenues | Expenses | ||||||
Cash Accounts Receivable Supplies Prepaid Insurance Equipment Accumulated Depreciation—Equipment |
Notes Payable Accounts Payable Interest Payable Unearned Service Revenue Salaries and Wages Payable |
Common Stock Retained Earnings Dividends Income Summary |
Service Revenue | Salaries and Wages Expense Supplies Expense Rent Expense Insurance Expense Interest Expense Depreciation Expense |
The procedure of transferring journal entry amounts to ledger accounts is called posting. This phase of the recording process accumulates the effects of journalized transactions in the individual accounts. Posting involves these steps:
Illustrations 3.22 through 3.32 show the basic steps in the recording process using the October transactions of Sierra Corporation. Sierra’s accounting period is a month. A basic analysis and a debit–credit analysis precede the journalizing and posting of each transaction. Study these transaction analyses carefully.
ILLUSTRATION 3.22 Investment of cash by stockholders
ILLUSTRATION 3.23 Issue of note payable
ILLUSTRATION 3.24 Purchase of equipment
ILLUSTRATION 3.25 Receipt of cash in advance from customer
ILLUSTRATION 3.26 Services performed for cash
ILLUSTRATION 3.27 Payment of rent with cash
ILLUSTRATION 3.28 Purchase of insurance policy with cash
ILLUSTRATION 3.29 Purchase of supplies on account
ILLUSTRATION 3.30 Hiring of new employees
ILLUSTRATION 3.31 Payment of dividend
ILLUSTRATION 3.32 Payment of cash for employee salaries
The journal for Sierra Corporation for the month of October is summarized in Illustration 3.33. The ledger is shown in Illustration 3.34 with all balances highlighted in red.
ILLUSTRATION 3.33 General journal for Sierra Corporation
General Journal | |||
Date | Account Titles and Explanation | Debit | Credit |
2025 Oct. 1 | Cash | 10,000 | |
Common Stock | 10,000 | ||
(Issued stock for cash) | |||
1 | Cash | 5,000 | |
Notes Payable | 5,000 | ||
(Issued 3-month, 12% note payable for cash) | |||
2 | Equipment | 5,000 | |
Cash | 5,000 | ||
(Purchased equipment for cash) | |||
2 | Cash | 1,200 | |
Unearned Service Revenue | 1,200 | ||
(Received advance from R. Knox for future service) | |||
3 | Cash | 10,000 | |
Service Revenue | 10,000 | ||
(Received cash for services performed) | |||
3 | Rent Expense | 900 | |
Cash | 900 | ||
(Paid cash for October office rent) | |||
4 | Prepaid Insurance | 600 | |
Cash | 600 | ||
(Paid 1-year policy; effective date October 1) | |||
5 | Supplies | 2,500 | |
Accounts Payable | 2,500 | ||
(Purchased supplies on account from Aero Supply) | |||
20 | Dividends | 500 | |
Cash | 500 | ||
(Declared and paid a cash dividend) | |||
26 | Salaries and Wages Expense | 4,000 | |
Cash | 4,000 | ||
(Paid salaries to date) |
ILLUSTRATION 3.34 General journal for Sierra Corporation
A trial balance lists accounts and their balances at a given time.
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.
These are the procedures for preparing a trial balance:
Illustration 3.35 presents the trial balance prepared from the ledger of Sierra Corporation (see Helpful Hint). Note that the total debits, $28,700, equal the total credits, $28,700.
ILLUSTRATION 3.35 Sierra Corporation trial balance
Sierra Corporation Trial Balance October 31, 2025 |
|||||
Debit | Credit | ||||
Cash | $15,200 | ||||
Supplies | 2,500 | ||||
Prepaid Insurance | 600 | ||||
Equipment | 5,000 | ||||
Notes Payable | $ 5,000 | ||||
Accounts Payable | 2,500 | ||||
Unearned Service Revenue | 1,200 | ||||
Common Stock | 10,000 | ||||
Dividends | 500 | ||||
Service Revenue | 10,000 | ||||
Salaries and Wages Expense | 4,000 | ||||
Rent Expense | 900 | ||||
$28,700 | $28,700 |
A trial balance does not prove that all transactions have been recorded or that the ledger is correct. Numerous errors may exist even though the trial balance column totals agree (see Ethics Note). For example, the trial balance may balance even when any of the following occurs:
In other words, 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. Nevertheless, despite these limitations, the trial balance is a useful screen for finding errors and is frequently used in practice.
Each business transaction must have a dual effect on the accounting equation. For example, if an individual asset is increased, there must be a corresponding (a) decrease in another asset, or (b) increase in a specific liability, or (c) increase in stockholders’ equity.
An account is an individual accounting record of increases and decreases in specific asset, liability, and stockholders’ equity, revenue, or expense items.
The terms debit and credit are synonymous with left and right. Assets, dividends, and expenses are increased by debits and decreased by credits. Liabilities, common stock, retained earnings, and revenues are increased by credits and decreased by debits.
The basic steps in the recording process are (a) analyze each transaction in terms of its effect on the accounts, (b) enter the transaction information in a journal, and (c) transfer the journal information to the appropriate accounts in the ledger.
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 effect 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 readily compared.
The entire group of accounts maintained by a company is referred to collectively as a ledger. The ledger provides the balance in each of the accounts as well as keeps track of changes in these balances.
Posting is the procedure of transferring journal entries to the ledger accounts. This phase of the recording process accumulates the effects of journalized transactions in the individual accounts.
A trial balance is a list of accounts and their balances at a given time. The primary purpose of the trial balance is to prove the mathematical equality of debits and credits after posting. A trial balance also uncovers errors in journalizing and posting and is useful in preparing financial statements.
Decision Checkpoints | Info Needed for Decision | Tool to Use for Decision | How to Evaluate Results |
Has an accounting transaction occurred? | Details of the event | Accounting equation | If the event affected assets, liabilities, or stockholders’ equity, then record as a transaction. |
How do you determine that debits equal credits? | All account balances | Trial balance | List the account titles and their balances; total the debit and credit columns; verify equality. |
1. (LO 1) The effects on the basic accounting equation of performing services for cash are to:
b. When services are performed for cash, assets are increased and stockholders’ equity is increased. The other choices are therefore incorrect.
2. (LO 1) Genesis Company buys a $900 machine on credit. This transaction will affect the:
b. When equipment is purchased on credit, assets are increased and liabilities are increased. These are both balance sheet accounts. The other choices are incorrect because neither the income statement nor the retained earnings statement is affected.
3. (LO 1) Which of the following events is not recorded in the accounting records?
b. Termination of an employee is not a recordable event in the accounting records. The other choices all represent events that are recorded.
4. (LO 1) During 2025, Gibson Company assets decreased $50,000 and its liabilities decreased $90,000. Its stockholders’ equity therefore:
a. Since assets decreased by $50,000 and liabilities decreased by $90,000, stockholders’ equity has to increase by $40,000 to keep the accounting equation balanced. The other choices are therefore incorrect.
5. (LO 2) Which statement about an account is true?
b. An account is an individual accounting record of increases and decreases in specific asset, liability, and stockholders’ equity items. The other choices are incorrect because (a) in its simplest form, an account consists of three parts: a title and debit and credit side; (c) there are specific accounts for different types of stockholders’ equity, such as Common Stock, Retained Earnings, and Dividends; and (d) the left side of an account is the debit side.
6. (LO 2) Debits:
c. Debits increase assets and decrease liabilities. The other choices are therefore incorrect.
7. (LO 2) A revenue account:
d. Revenues are increased by credits. Revenues have a normal credit balance. The other choices are therefore incorrect.
8. (LO 2) Which accounts normally have debit balances?
d. Assets, dividends, and expenses have normal debit balances. The other choices are incorrect because (a) revenues have a normal credit balance, (b) retained earnings has a normal credit balance, and (c) liabilities have a normal credit balance.
9. (LO 2) Paying an account payable with cash affects the components of the accounting equation in the following way:
d. When paying an account payable with cash, the asset cash decreases. Accounts payable, a liability, decreases as well. The other choices are therefore incorrect.
10. (LO 3) Which is not part of the recording process?
b. Preparing an income statement is not part of the recording process. Choices (a) analyzing transactions, (c) entering transactions in a journal, and (d) posting transactions are all steps in the recording process.
11. (LO 3) Which of these statements about a journal is false?
a. A journal contains entries affecting all accounts, not just revenue and expense accounts. The other choices are true statements.
12. (LO 4) A ledger:
c. A ledger is a record of all accounts maintained by a company and their amounts. The other choices are incorrect because (a) it contains all types of accounts, not just assets and liabilities; (b) they are not listed in alphabetical order but instead in the order of asset, liability, and stockholders’ equity accounts and then revenues and expenses; and (d) the journal provides a chronological record.
13. (LO 4) Posting:
d. Posting transfers journal entries to ledger accounts. The other choices are incorrect because posting (a) occurs after journalizing, (b) transfers the information contained in journal entries to the ledger, and (c) is a required step in the recording process. If posting is not done, the ledger accounts will not reflect changes in the accounts resulting from transactions.
14. (LO 5) A trial balance:
a. A trial balance is a list of accounts with their balances at a given time. The other choices are incorrect because (b) it does not confirm that proper account titles were used; (c) if a journal entry is posted twice, the trial balance will still balance; and (d) a trial balance does not prove that all transactions have been recorded.
15. (LO 5) A trial balance will not balance if:
c. The entry will cause the trial balance to be out of balance. The other choices are incorrect because although these entries are incorrect, they will still allow the trial balance to balance.
1. (LO 1) During 2025, Rain Corp. entered into the following transactions.
Using the following tabular analysis, show the effect of each transaction on the accounting equation. Put explanations for changes to revenues or expenses in the right-hand margin. For retained earnings, use separate columns for revenues, expenses, and dividends if necessary. Use Illustration 3.4 as a model.
Assets | = | Liabilities | + | Stockholders’ Equity | ||||||||||||||
Accts. | Accts. | Notes | Common | Retained Earnings | ||||||||||||||
Cash | + | Receivable | + | Supplies | + | Equip. | = | Pay. | + | Pay. | + | Stock | + | Rev. | − | Exp. | − | Div. |
Assets | = | Liabilities | + | Stockholders’ Equity | ||||||||||||||||
Accts. | Accts. | Notes | Common | Retained Earnings | ||||||||||||||||
Cash | + | Receivable | + | Supplies | + | Equip. | = | Pay. | + | Pay. | + | Stock | + | Rev. | − | Exp. | − | Div. | ||
1. | +$31,000 | +$31,000 | ||||||||||||||||||
2. | +$960 | +$960 | Rent Revenue | |||||||||||||||||
3. | −520 | −$520 | ||||||||||||||||||
4. | +$12,500 | +12,500 | Service Revenue |
Identify accounts to be debited and credited.
2. (LO 2) Transactions for Warren Potter Inc. for the month of May are presented below. Identify the accounts to be debited and credited for each transaction.
May 1 | Stockholders invested $22,000 in the business. | |
6 | Paid office rent of $900. | |
12 | Performed consulting services and billed client $4,400. | |
18 | Purchased equipment on account for $1,200. |
Account Debited | Account Credited | |
May 1 | Cash | Common Stock |
6 | Rent Expense | Cash |
12 | Accounts Receivable | Service Revenue |
18 | Equipment | Accounts Payable |
Journalize transactions.
3. (LO 3) Using the data from Practice Brief Exercise 2, journalize the transactions (omit explanations).
May 1 | Cash | 22,000 | |
Common Stock | 22,000 | ||
6 | Rent Expense | 900 | |
Cash | 900 | ||
12 | Accounts Receivable | 4,400 | |
Service Revenue | 4,400 | ||
18 | Equipment | 1,200 | |
Accounts Payable | 1,200 |
Post journal entries to T-accounts.
4. (LO 4) Selected transactions for Carlos Santana Company are presented in journal form below. Post the transactions to T-accounts. Make one T-account for each account and determine each account’s ending balance.
J1 | ||||
Date | Account Titles and Explanation | Ref. | Debit | Credit |
June6 | Cash | 22,000 | ||
Common Stock | 22,000 | |||
(Stockholders’ investment of cash in business) | ||||
13 | Accounts Receivable | 8,200 | ||
Service Revenue | 8,200 | |||
(Billed for services performed) | ||||
14 | Cash | 3,700 | ||
Accounts Receivable | 3,700 | |||
(Received cash in payment of account) |
Cash | Accounts Receivable | |||||||
6/6 | 22,000 | 6/13 | 8,200 | 6/14 | 3,700 | |||
6/14 | 3,700 | Bal. | 4,500 | |||||
Bal. | 25,700 | |||||||
Service Revenue | Common Stock | |||||||
6/13 | 8,200 | 6/6 | 22,000 | |||||
Bal. | 8,200 | Bal. | 22,000 |
Prepare a trial balance.
5. (LO 5) From the ledger accounts below, prepare a trial balance for Bundy Corporation at December 31, 2025. List the accounts in the order shown in the text. All account balances are normal.
Accounts Receivable | $10,000 | Salaries and Wages Expense | $ 2,300 |
Supplies | 4,100 | Rent Expense | 1,200 |
Accounts Payable | 3,500 | Common Stock | 10,200 |
Dividends | 1,100 | Cash | 6,000 |
Service Revenue | 11,000 |
Bundy Corporation Trial Balance December 31, 2025 |
||||||
Debit | Credit | |||||
Cash | $ 6,000 | |||||
Accounts Receivable | 10,000 | |||||
Supplies | 4,100 | |||||
Accounts Payable | $ 3,500 | |||||
Common Stock | 10,200 | |||||
Dividends | 1,100 | |||||
Service Revenue | 11,000 | |||||
Salaries and Wages Expense | 2,300 | |||||
Rent Expense | 1,200 | |||||
$24,700 | $24,700 |
Prepare a tabular presentation.
1. (LO 1) Legal Services Inc. was incorporated on July 1, 2025. During the first month of operations, the following transactions occurred.
Instructions
Prepare a tabular summary of the transactions.
Journalize transactions.
2. (LO 3) Presented below is information related to Conan Real Estate Agency.
Oct.1 | Arnold Conan begins business as a real estate agent with a cash investment of $18,000 in exchange for common stock. | |
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.)
General Journal | |||
Date | Account Titles and Explanation | Debit | Credit |
Oct. 1 | Cash | 18,000 | |
Common Stock | 18,000 | ||
2 | No entry required | ||
3 | Equipment | 1,700 | |
Accounts Payable | 1,700 | ||
6 | Accounts Receivable | 4,200 | |
Service Revenue | 4,200 | ||
27 | Accounts Payable | 900 | |
Cash | 900 | ||
30 | Salaries and Wages Expense | 2,800 | |
Cash | 2,800 |
Journalize transactions, post, and prepare a trial balance.
(LO 3, 4, 5) Bob Sample and other student-investors opened Campus Carpet Cleaning, Inc. on September 1, 2025. During the first month of operations, the following transactions occurred.
Sept.1 | Stockholders invested $20,000 cash in the business. | |
2 | Paid $1,000 cash for store rent for the month of September. | |
3 | Purchased industrial carpet-cleaning equipment for $25,000, paying $10,000 in cash and signing a $15,000 6-month, 12% note payable. | |
4 | Paid $1,200 for 1-year accident insurance policy. | |
10 | Received bill from the Daily News for advertising the opening of the cleaning service, $200. | |
15 | Performed services on account for $6,200. | |
20 | Paid a $700 cash dividend to stockholders. | |
30 | Received $5,000 from customers billed on September 15. |
The chart of accounts for the company is the same as for Sierra Corporation except for the following additional account: Advertising Expense.
Instructions
General Journal | |||
Date | Account Titles and Explanation | Debit | Credit |
2025 Sept.1 | Cash | 20,000 | |
Common Stock | 20,000 | ||
(Issued stock for cash) | |||
2 | Rent Expense | 1,000 | |
Cash | 1,000 | ||
(Paid September rent) | |||
3 | Equipment | 25,000 | |
Cash | 10,000 | ||
Notes Payable | 15,000 | ||
(Purchased cleaning equipment for cash and 6-month, 12% note payable) | |||
4 | Prepaid Insurance | 1,200 | |
Cash | 1,200 | ||
(Paid 1-year insurance policy) | |||
10 | Advertising Expense | 200 | |
Accounts Payable | 200 | ||
(Received bill from Daily News for advertising) | |||
15 | Accounts Receivable | 6,200 | |
Service Revenue | 6,200 | ||
(Services performed on account) | |||
20 | Dividends | 700 | |
Cash | 700 | ||
(Declared and paid a cash dividend) | |||
30 | Cash | 5,000 | |
Accounts Receivable | 5,000 | ||
(Collection of accounts receivable) |
Campus Carpet Cleaning, Inc. Trial Balance September 30, 2025 |
||||||
Debit | Credit | |||||
Cash | $12,100 | |||||
Accounts Receivable | 1,200 | |||||
Prepaid Insurance | 1,200 | |||||
Equipment | 25,000 | |||||
Notes Payable | $15,000 | |||||
Accounts Payable | 200 | |||||
Common Stock | 20,000 | |||||
Dividends | 700 | |||||
Service Revenue | 6,200 | |||||
Advertising Expense | 200 | |||||
Rent Expense | 1,000 | |||||
$41,400 | $41,400 | |||||
1. Describe the accounting information system.
2. Can a business enter into a transaction that affects only the left side of the basic accounting equation? If so, give an example.
3. Are the following events recorded in the accounting records? Explain your answer in each case.
4. Indicate how each business transaction affects the basic accounting equation.
5. Why is an account referred to as a T-account?
6. The terms debit and credit mean “increase” and “decrease,” respectively. Do you agree? Explain.
7. Barry Barack, a fellow student, contends that the double-entry system means each transaction must be recorded twice. Is Barry correct? Explain.
8. Misty Reno, a beginning accounting student, believes debit balances are favorable and credit balances are unfavorable. Is Misty correct? Discuss.
9. State the rules of debit and credit as applied to (a) asset accounts, (b) liability accounts, and (c) the Common Stock account.
10. What is the normal balance for each of these accounts?
11. Indicate whether each account is an asset, a liability, or a stockholders’ equity account, and whether it would have a normal debit or credit balance.
12. For the following transactions, indicate the account debited and the account credited.
13. For each account listed here, indicate whether it generally will have debit entries only, credit entries only, or both debit and credit entries.
14. What are the normal balances for the following accounts of Apple? (a) Accounts Receivable, (b) Accounts Payable, (c) Sales, and (d) Selling, General, and Administrative Expenses.
15. What are the basic steps in the recording process?
16.
17.
18. Journalize these accounting transactions.
19.
20. What is a trial balance and what are its purposes?
21. Brad Tyler is confused about how accounting information flows through the accounting system. He believes information flows in this order:
Indicate to Brad the proper flow of the information.
22. 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?
Determine effect of transactions on basic accounting equation.
BE3.1 (LO 1), C Presented below are three economic events. On a sheet of paper, list the letters (a), (b), and (c) with columns for assets, liabilities, and stockholders’ equity. In each column, indicate whether the event increased (+), decreased (−), or had no effect (NE) on assets, liabilities, and stockholders’ equity.
BE3.2 (LO 1), AP During 2025, Manion Corp. entered into the following transactions.
Determine effect of transactions on basic accounting equation.
Using the following tabular analysis, show the effect of each transaction on the accounting equation. Put explanations for changes to revenues or expenses in the right-hand margin. For Retained Earnings, use separate columns for Revenues, Expenses, and Dividends if necessary. Use Illustration 3.4 as a model.
Assets | = | Liabilities | + | Stockholders’ Equity | ||||||||
Accounts | Accounts | Bonds | Common | Retained | ||||||||
Cash | + | Receivable | + | Supplies | = | Payable | + | Payable | + | Stock | + | Earnings |
BE3.3 (LO 1), AP During 2025, Rostock Company entered into the following transactions.
Determine effect of transactions on basic accounting equation.
Using the following tabular analysis, show the effect of each transaction on the accounting equation. Put explanations for changes to revenues or expenses in the right-hand margin. For Retained Earnings, use separate columns for Revenues, Expenses, and Dividends if necessary. Use Illustration 3.4 as a model.
Assets | = | Liabilities | + | Stockholders’ Equity | |||||||
Accounts | Common | Retained | |||||||||
Cash | + | Inventory | + | Equipment | = | Payable | + | Stock | + | Earnings |
Indicate debit and credit effects.
BE3.4 (LO 2), K For each of the following accounts, indicate the effect of a debit or a credit on the account and the normal balance.
Indicate debit and credit effects.
BE3.5 (LO 2), K For each of the following accounts, indicate the effect of a debit or credit on the account and the normal balance.
Identify accounts to be debited and credited.
BE3.6 (LO 2), C Transactions for Jayne Company for the month of June are presented below. Identify the accounts to be debited and credited for each transaction.
June1 | Issues common stock to investors in exchange for $5,000 cash. | |
2 | Buys equipment on account for $1,100. | |
3 | Pays $740 to landlord for June rent. | |
12 | Sends Wil Wheaton a bill for $700 after completing welding work. |
Journalize transactions.
BE3.7 (LO 3), AP Use the data in BE3.6 and journalize the transactions. (You may omit explanations.)
Journalize transactions.
BE3.8 (LO 3), AP Journalize the following transactions for Matt’s Carpentry, Inc. (You may omit explanations.)
Sept.1 | Purchased supplies for $910 cash. | |
5 | Paid $300 cash dividend to stockholders. | |
7 | Received $4,600 down payment from customer for services to be provided in the future. | |
16 | Received $675 cash from a previously billed customer for payment of services provided in the prior month. | |
22 | Purchased equipment for $1,900 by paying $600 cash and issued a note payable for the balance. |
Identify steps in the recording process.
BE3.9 (LO 3), C Rae Mohlee, 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 debit–credit analysis.
BE3.10 (LO 3), C Tilton Corporation has the following transactions during August of the current year. Indicate (a) the basic analysis and (b) the debit–credit analysis as shown in Illustrations 3.22 to 3.32.
Aug. 1 | Issues shares of common stock to investors in exchange for $10,000. | |
4 | Pays insurance in advance for 3 months, $1,500. | |
16 | Receives $900 from clients for services rendered. | |
27 | Pays the secretary $620 salary. |
Journalize transactions.
BE3.11 (LO 3), AP Use the data in BE3.10 and journalize the transactions. (You may omit explanations.)
Post journal entries to T-accounts.
BE3.12 (LO 4), AP Selected transactions for Montes Company are presented below in journal form (without explanations). Post the transactions to T-accounts.
Date | Account Title | Debit | Credit |
May5 | Accounts Receivable | 3,800 | |
Service Revenue | 3,800 | ||
12 | Cash | 1,600 | |
Accounts Receivable | 1,600 | ||
15 | Cash | 2,000 | |
Service Revenue | 2,000 |
Prepare a trial balance.
BE3.13 (LO 5), AP From the ledger balances below, prepare a trial balance for Peete Company at June 30, 2025. All account balances are normal.
Accounts Payable | $ 1,000 | Service Revenue | $8,600 |
Cash | 5,400 | Accounts Receivable | 3,000 |
Common Stock | 18,000 | Salaries and Wages Expense | 4,000 |
Dividends | 1,200 | Rent Expense | 1,000 |
Equipment | 13,000 |
Prepare a corrected trial balance.
BE3.14 (LO 5), AN An inexperienced bookkeeper prepared the following trial balance that does not balance. Prepare a correct trial balance, assuming all account balances are normal.
Birellie Company Trial Balance December 31, 2025 |
||||
Debit | Credit | |||
Cash | $20,800 | |||
Prepaid Insurance | $ 3,500 | |||
Accounts Payable | 2,500 | |||
Unearned Service Revenue | 1,800 | |||
Common Stock | 10,000 | |||
Retained Earnings | 6,600 | |||
Dividends | 5,000 | |||
Service Revenue | 25,600 | |||
Salaries and Wages Expense | 14,600 | |||
Rent Expense | 2,600 | |||
$37,200 | $55,800 |
Prepare tabular analysis.
DO IT! 3.1 (LO 1), AP Transactions made by Mickelson Co. for the month of March are shown below. Prepare a tabular analysis that shows the effects of these transactions on the expanded accounting equation, similar to that shown in Illustration 3.4.
Identify account type, normal balance, and debit effect.
DO IT! 3.2 (LO 2), C Tracy has the following selected accounts.
Indicate whether each of the above accounts is an asset, liability, or stockholders’ equity account, and identify the normal balance. Also, indicate whether a debit would increase or decrease each account.
Record business activities.
DO IT! 3.3 (LO 3), AP Boyd Docker engaged in the following activities in establishing his photography studio, SnapShot!:
Prepare the journal entries to record the transactions.
Post transactions.
DO IT! 3.4 (LO 4), AP Boyd Docker recorded the following transactions during the month of April.
Apr.3 | Cash | 3,400 | |
Service Revenue | 3,400 | ||
16 | Rent Expense | 500 | |
Cash | 500 | ||
20 | Salaries and Wages Expense | 300 | |
Cash | 300 |
Post these entries to the Cash account of the general ledger to determine the ending balance in cash. The beginning balance in cash on April 1 was $1,900.
Prepare a trial balance.
DO IT! 3.5 (LO 5), AP The following accounts are taken from the ledger of Chillin’ Company at December 31, 2025.
Notes Payable | $20,000 | Cash | $6,000 |
Common Stock | 25,000 | Supplies | 5,000 |
Equipment | 76,000 | Rent Expense | 2,000 |
Dividends | 8,000 | Salaries and Wages Payable | 3,000 |
Salaries and Wages Expense | 38,000 | Accounts Payable | 9,000 |
Service Revenue | 86,000 | Accounts Receivable | 8,000 |
Prepare a trial balance in good form.
Analyze the effect of transactions.
E3.1 (LO 1), C Selected transactions for Thyme Advertising Company, Inc. are listed here.
Instructions
Describe the effect of each transaction on assets, liabilities, and stockholders’ equity. For example, the first answer is (1) Increase in assets and increase in stockholders’ equity.
Analyze the effect of transactions on assets, liabilities, and stockholders’ equity.
E3.2 (LO 1), AP Brady Company entered into these transactions during May 2025, its first month of operations.
Instructions
Using the following tabular analysis, show the effect of each transaction on the accounting equation. Put explanations for changes to revenues or expenses in the right-hand margin. Use Illustration 3.4 as a model.
Assets | = | Liabilities | + | Stockholders’ Equity | ||||||||||
Accounts | Accounts | Common | Retained Earnings | |||||||||||
Cash | + | Receivable | + | Equipment | = | Payable | + | Stock | + | Revenues | − | Expenses | − | Dividends |
Determine effect of transactions on basic accounting equation.
E3.3 (LO 1), AP During 2025, its first year of operations as a delivery service, Persimmon Corp. entered into the following transactions.
Instructions
Using the following tabular analysis, show the effect of each transaction on the accounting equation. Put explanations for changes to Stockholders’ Equity in the right-hand margin. Use Illustration 3.4 as a model.
Assets | = | Liabilities | + | Stockholders’ Equity | ||||||||||||||
Accounts | Equip- | Accounts | Bonds | Common | Retained Earnings | |||||||||||||
Cash | + | Receivable | + | Supplies | + | ment | = | Payable | + | Payable | + | Stock | + | Revenues | − | Expenses | − | Dividends |
Analyze transactions and compute net income.
E3.4 (LO 1), AP A tabular analysis of the transactions made during August 2025 by Wolfe Company during its first month of operations is shown as follows. Each increase and decrease in stockholders’ equity is explained.
Assets | = | Liabilities | + | Stockholders’ Equity | ||||||||||||||
Accounts Payable | Common Stock | Retained Earnings | ||||||||||||||||
Cash | + | A/R | + | Supp. | + | Equip. | = | + | + | Rev. | − | Exp. | − | Div. | ||||
1. | +$20,000 | +$20,000 | ||||||||||||||||
2. | −1,000 | +$5,000 | +$4,000 | |||||||||||||||
3. | −750 | +$750 | ||||||||||||||||
4. | +4,100 | +$5,400 | +$9,500 | Serv. Rev. | ||||||||||||||
5. | −1,500 | −1,500 | ||||||||||||||||
6. | −2,000 | −$2,000 | ||||||||||||||||
7. | −800 | −$ 800 | Rent Exp. | |||||||||||||||
8. | +450 | −450 | ||||||||||||||||
9. | −3,000 | −3,000 | Salar. Exp. | |||||||||||||||
10. | +300 | −300 | Util. Exp. |
Instructions
Prepare an income statement, retained earnings statement, and balance sheet.
E3.5 (LO 2), AP The tabular analysis of transactions for Wolfe Company is presented in E3.4.
Instructions
Prepare an income statement and a retained earnings statement for August and a classified balance sheet at August 31, 2025.
Identify normal account balance and corresponding financial statement.
E3.6 (LO 2), K The following accounts, in alphabetical order, were selected from recent financial statements of Krispy Kreme Doughnuts, Inc.
Accounts Payable | Interest Income |
Accounts Receivable | Inventories |
Common Stock | Prepaid Expenses |
Depreciation Expense | Property and Equipment |
Interest Expense | Revenues |
Instructions
For each account, indicate (a) whether the normal balance is a debit or a credit, and (b) the financial statement—balance sheet or income statement—where the account should be presented.
Identify normal balances and statement classifications.
E3.7 (LO 2), C You are presented with the following alphabetical list of items, selected from the financial statements of Saputo Inc.:
Accounts receivable | Income taxes payable |
Bank loans payable | Income tax expense |
Buildings | Interest expense |
Cash | Interest revenue |
Depreciation expense | Inventories |
Dividends | Service revenue |
Equipment |
Instructions
For each of the above accounts, identify the following.
Indicate debit and credit effects and normal balances.
E3.8 (LO 2), C Wood Renew Corp. incurred the following selected transactions during the month of April.
Apr.2 | Paid monthly rent, $800. | |
3 | Completed floor refinishing on account for $1,000. | |
5 | Received $1,250 cash for floor sanding and polishing. | |
6 | Purchased additional refinishing equipment for $3,000. The company paid cash of $500, and the balance was due on account in 20 days. | |
12 | Collected amount owed by customer for April 3 transaction. | |
15 | Declared and paid $150 of dividends to stockholders. | |
16 | Purchased sandpaper for $500 on account. (Hint: Use the Supplies account.) | |
19 | Paid $200 to repair equipment. |
Instructions
For each transaction, indicate (1) the basic type of account debited or credited (asset, liability, or stockholders’ equity), (2) the specific account debited or credited, and (3) whether the specific account is increased or decreased to record this transaction. Use the following format.
Account Debited | Account Credited | |||||||||||
Transaction | (1) Basic Type | (2) Specific Account | (3) Effect | (1) Basic Type | (2) Specific Account | (3) Effect | ||||||
Apr. 2 | Stockholders’ equity | Rent Expense | Increase | Asset | Cash | Decrease |
Analyze transactions and determine their effect on accounts.
E3.9 (LO 2), C This information relates to McCall Real Estate Agency.
Oct.1 | Stockholders invest $30,000 in exchange for common stock of the corporation. | |
2 | Hires an administrative assistant at an annual salary of $36,000. | |
3 | Buys office furniture for $3,800, on account. | |
6 | Sells a house and lot for E. C. Roads; commissions due from Roads, $10,800 (not paid by Roads at this time). | |
10 | Receives cash of $140 as commission for acting as rental agent renting an apartment. | |
27 | Pays $700 on account for the office furniture purchased on October 3. | |
30 | Pays the administrative assistant $3,000 in salary for October. |
Instructions
Prepare the debit–credit analysis for each transaction, as shown in Illustrations 3.22 to 3.32.
Identify debits, credits, and normal balances and journalize transactions.
E3.10 (LO 2, 3), AP Selected transactions for Front Room, an interior decorator corporation, in its first month of business, are as follows.
Instructions
Account Debited | Account Credited | ||||||||
(a) | (b) | (c) | (d) | (a) | (b) | (c) | (d) | ||
Transaction | Basic Type | Specific Account | Effect | Normal Balance | Basic Type | Specific Account | Effect | Normal Balance | |
1 | Asset | Cash | Increase | Debit | Stock-holders’equity | CommonStock | Increase | Credit |
Journalize transactions.
E3.11 (LO 3), AP Transaction data for McCall Real Estate Agency are presented in E3.9.
Instructions
Journalize the transactions. Do not provide explanations.
Journalize selected transactions.
E3.12 (LO 3), AP Selected transactions for Decorators Mill during its first month of operations are as follows.
Mar.2 | Issued common stock for $11,000 cash. | |
4 | Purchased used car for $1,000 cash and $9,000 on account, for use in the business. | |
10 | Billed customers $2,300 for services performed. | |
13 | Paid $225 cash to advertise business opening. | |
25 | Received $1,000 cash from customers billed on March 10. | |
27 | Paid amount owed for used car purchased on March 4. | |
30 | Received $700 cash from a customer for services to be performed in April. | |
31 | Declared and paid $300 of dividends to stockholders. |
Instructions
Journalize each transaction. Do not provide explanation.
Analyze effects of transactions.
E3.13 (LO 3), AP Wong Computer had the following transactions during the month of May.
Instructions
Journalize the above transactions. Do not provide explanations.
Journalize a series of transactions.
E3.14 (LO 3), AP The May transactions of Chulak Corporation were as follows.
May4 | Paid $700 due for supplies previously purchased on account. |
7 | Performed advisory services on account for $6,800. |
8 | Purchased supplies for $850 on account. |
9 | Purchased equipment for $1,000 in cash. |
17 | Paid employees $530 in cash. |
22 | Received bill for equipment repairs of $900. |
29 | Paid $1,200 for 12 months of insurance policy. Coverage begins June 1. |
Instructions
Journalize the transactions. Do not provide explanations.
Journalize a series of transactions.
E3.15 (LO 3), AP Selected transactions for Sophie’s Dog Care are as follows during the month of March.
March1 | Paid monthly rent of $1,200. | |
3 | Performed services for $140 on account. | |
5 | Performed services for cash of $75. | |
8 | Purchased equipment for $600. The company paid cash of $80 and the balance was on account. | |
12 | Received cash from customers billed on March 3. | |
14 | Paid wages to employees of $525. | |
22 | Paid utilities of $72. | |
24 | Borrowed $1,500 from Grafton State Bank by signing a note. | |
27 | Paid $220 to repair service for plumbing repairs. | |
28 | Paid balance amount owed from equipment purchase on March 8. | |
30 | Paid $1,800 for six months of insurance. |
Instructions
Journalize the transactions. Do not provide explanations.
Record journal entries.
E3.16 (LO 3), AP On April 1, Adventures Travel Agency, Inc. began operations. The following transactions were completed during the month.
Instructions
Journalize the transactions. Do not provide explanations.
Identify key terms.
E3.17 (LO 1, 2, 3, 4, 5), K The following is a list of terms or phrases discussed in the chapter.
Instructions
Match each term or phrase to its description below.
Post journal entries and prepare a trial balance.
E3.18 (LO 4, 5), AP Transaction data and journal entries for McCall Real Estate Agency are presented in E3.9 and E3.11.
Instructions
Analyze transactions, prepare journal entries, and post transactions to T-accounts.
E3.19 (LO 1, 3, 4), AP Selected transactions for Therow Corporation during its first month in business are presented below.
Sept.1 | Issued common stock in exchange for $20,000 cash received from investors. | |
5 | Purchased equipment for $9,000, paying $3,000 in cash and the balance on account. | |
8 | Performed services on account for $18,000. | |
14 | Paid salaries of $1,200. | |
25 | Paid $4,000 cash on balance owed for equipment. | |
30 | Paid $500 cash dividend. |
Therow’s chart of accounts shows Cash, Accounts Receivable, Equipment, Accounts Payable, Common Stock, Dividends, Service Revenue, and Salaries and Wages Expense.
Instructions
Journalize transactions from T-accounts and prepare a trial balance.
E3.20 (LO 3, 5), AN The T-accounts below summarize the ledger of Salvador’s Gardening Company, Inc. at the end of the first month of operations.
Cash | Unearned Service Revenue | |||||||
Apr. 1 | 15,000 | Apr. 15 | 800 | Apr. 30 | 900 | |||
12 | 700 | 25 | 3,500 | |||||
29 | 800 | |||||||
30 | 900 | |||||||
Accounts Receivable | Common Stock | |||||||
Apr. 7 | 3,400 | Apr. 29 | 800 | Apr. 1 | 15,000 | |||
Supplies | Service Revenue | |||||||
Apr. 4 | 5,200 | Apr. 7 | 3,400 | |||||
12 | 700 | |||||||
Accounts Payable | Salaries and Wages Expense | |||||||
Apr. 25 | 3,500 | Apr. 4 | 5,200 | Apr. 15 | 800 |
Instructions
Post journal entries and prepare a trial balance.
E3.21 (LO 4, 5), AP Selected transactions from the journal of Baylee Inc. during its first month of operations are presented here.
Date | Account Titles | Debit | Credit |
Aug.1 | Cash | 8,000 | |
Common Stock | 8,000 | ||
10 | Cash | 1,700 | |
Service Revenue | 1,700 | ||
12 | Equipment | 6,200 | |
Cash | 1,200 | ||
Notes Payable | 5,000 | ||
25 | Accounts Receivable | 3,400 | |
Service Revenue | 3,400 | ||
31 | Cash | 600 | |
Accounts Receivable | 600 |
Instructions
Journalize transactions from T-accounts and prepare a trial balance.
E3.22 (LO 3, 5), AN Here is the ledger for Kriscoe Co.
Cash | Common Stock | |||||||
Oct. 1 | 7,000 | Oct. 4 | 400 | Oct. 1 | 7,000 | |||
10 | 980 | 12 | 1,500 | 25 | 2,000 | |||
10 | 8,000 | 15 | 250 | |||||
20 | 700 | 30 | 300 | |||||
25 | 2,000 | 31 | 500 | |||||
Accounts Receivable | Dividends | |||||||
Oct. 6 | 800 | Oct. 20 | 700 | Oct. 30 | 300 | |||
20 | 920 | |||||||
Supplies | Service Revenue | |||||||
Oct. 4 | 400 | Oct. 31 | 180 | Oct. 6 | 800 | |||
10 | 980 | |||||||
20 | 920 | |||||||
Equipment | Salaries and Wages Expense | |||||||
Oct. 3 | 3,000 | Oct. 31 | 500 | |||||
Notes Payable | Supplies Expense | |||||||
Oct. 10 | 8,000 | Oct. 31 | 180 | |||||
Accounts Payable | Rent Expense | |||||||
Oct. 12 | 1,500 | Oct. 3 | 3,000 | Oct. 15 | 250 |
Instructions
Journalize transactions, post transactions to T-accounts, and prepare trial balance.
E3.23 (LO 3, 4, 5), AP Beyers Corporation provides security services. Selected transactions for Beyers are presented below.
Oct.1 | Issued common stock in exchange for $66,000 cash from investors. | |
2 | Hired part-time security consultant. Salary will be $2,000 per month. First day of work will be October 15. | |
4 | Paid 1 month of rent for building for $2,000. | |
7 | Purchased equipment for $18,000, paying $4,000 cash and the balance on account. | |
8 | Paid $500 for advertising. | |
10 | Received bill for equipment repair cost of $390. | |
12 | Provided security services for event for $3,200 on account. | |
16 | Purchased supplies for $410 on account. | |
21 | Paid balance due from October 7 purchase of equipment. | |
24 | Received and paid utility bill for $148. | |
27 | Received payment from customer for October 12 services performed. | |
31 | Paid employee salaries and wages of $5,100. |
Instructions
Analyze errors and their effects on trial balance.
E3.24 (LO 5), AN The bookkeeper for Birmingham Corporation made these errors in journalizing and posting.
Instructions
For each error, indicate (a) whether the trial balance will balance; if the trial balance will not balance, indicate (b) the amount of the difference and (c) the trial balance column that will have the larger total. Consider each error separately. Use the following form, in which error 1 is given as an example.
(a) | (b) | (c) | |
Error | In Balance | Difference | Larger Column |
1 | No | $400 | Debit |
Prepare a trial balance and financial statements.
E3.25 (LO 5), AP The accounts in the ledger of Rapid Delivery Service contain the following balances on July 31, 2025.
Accounts Receivable | $13,400 | Prepaid Insurance | $ 2,200 |
Accounts Payable | 8,400 | Service Revenue | 15,500 |
Cash | ? | Dividends | 700 |
Equipment | 59,360 | Common Stock | 40,000 |
Maintenance and Repairs Expense | 1,958 | Salaries and Wages Expense | 7,428 |
Salaries and Wages Payable | 820 | ||
Insurance Expense | 900 | Retained Earnings (July 1, 2025) | 5,200 |
Notes Payable (due 2028) | 28,450 |
Instructions
Classify transactions as cash-flow activities.
E3.26 (LO 5), AP Review the transactions listed in E3.1 for Thyme Advertising Company. Classify each transaction as either an operating activity, investing activity, or financing activity, or if no cash is exchanged, as a noncash event.
Classify transactions as cash-flow activities.
E3.27 (LO 5), AP Review the transactions listed in E3.3 for Persimmon Corp. Classify each transaction as either an operating activity, investing activity, or financing activity, or if no cash is exchanged, as a noncash event.
Analyze transactions and compute net income.
P3.1 (LO 1), AP On April 1, Wonder Travel Agency Inc. was established. These transactions were completed during the month.
Instructions
Cash | $34,800 |
Total assets | $38,700 |
Analyze transactions and prepare financial statements.
P3.2 (LO 1, 2), AP Nona Curry started her own consulting firm, Curry Consulting Inc., on May 1, 2025. The following transactions occurred during the month of May.
May 1 | Stockholders invested $15,000 cash in the business in exchange for common stock. | |
2 | Paid $600 for office rent for the month. | |
3 | Purchased $500 of supplies on account. | |
5 | Paid $150 to advertise in the County News. | |
9 | Received $1,400 cash for services performed. | |
12 | Paid $200 cash dividend. | |
15 | Performed $4,200 of services on account. | |
17 | Paid $2,500 for employee salaries. | |
20 | Paid for the supplies purchased on account on May 3. | |
23 | Received a cash payment of $1,200 for services performed on account on May 15. | |
26 | Borrowed $5,000 from the bank on a note payable. | |
29 | Purchased office equipment for $2,000 paying $200 in cash and the balance on account. | |
30 | Paid $180 for utilities. |
Instructions
Assets | = | Liabilities | + | Stockholders’Equity | |||||||||||||||
Accounts | Notes | Accounts | Common | Retained Earnings | |||||||||||||||
Date | Cash | + | Receivable | + | Supplies | + | Equipment | = | Payable | + | Payable | + | Stock | + | Revenues | − | Expenses | − | Dividends |
Include margin explanations for revenues and expenses.
Cash | $18,270 |
Total assets | $23,770 |
Net income | $2,170 |
Analyze transactions and prepare an income statement, retained earnings statement, and balance sheet.
P3.3 (LO 1, 2), AP Bindy Crawford created a corporation providing legal services, Bindy Crawford Inc., on July 1, 2025. On July 31 the balance sheet showed Cash $4,000, Accounts Receivable $2,500, Supplies $500, Equipment $5,000, Accounts Payable $4,200, Common Stock $6,200, and Retained Earnings $1,600. During August, the following transactions occurred.
Aug. 1 | Collected $1,100 of accounts receivable due from customers. | |
4 | Paid $2,700 cash for accounts payable due. | |
9 | Performed services worth $5,400, of which $3,600 is collected in cash and the balance is due in September. | |
15 | Purchased additional office equipment for $4,000, paying $700 in cash and the balance on account. | |
19 | Paid salaries $1,400, rent for August $700, and advertising expenses $350. | |
23 | Paid a cash dividend of $700. | |
26 | Borrowed $5,000 from American Federal Bank; the money was borrowed on a 4-month note payable. | |
31 | Incurred utility expenses for the month on account $380. |
Instructions
Cash | $7,150 |
Net income | $2,570 |
Ret. earnings | $3,470 |
Journalize a series of transactions.
P3.4 (LO 3), AP Bradley’s Miniature Golf and Driving Range Inc. was opened on March 1 by Bob Dean. These selected events and transactions occurred during March.
Mar.1 | Stockholders invested $50,000 cash in the business in exchange for common stock of the corporation. | |
3 | Purchased Snead’s Golf Land for $38,000 cash. The price consists of land $23,000, building $9,000, and equipment $6,000. (Record this in a single entry.) | |
5 | Advertised the opening of the driving range and miniature golf course, paying advertising expenses of $1,200 cash. | |
6 | Paid cash $2,400 for a 1-year insurance policy. | |
10 | Purchased golf clubs and other equipment for $5,500 from Tahoe Company, payable in 30 days. | |
18 | Received golf fees of $1,600 in cash from customers for golf services performed. | |
19 | Sold 100 coupon books for $25 each in cash. Each book contains 10 coupons that enable the holder to play one round of miniature golf or to hit one bucket of golf balls. (Hint: The revenue should not be recognized until the customers use the coupons.) | |
25 | Paid a $500 cash dividend. | |
30 | Paid salaries of $800. | |
30 | Paid Tahoe Company in full for equipment purchased on March 10. | |
31 | Received $900 in cash from customers for golf services performed. |
The company uses these accounts: Cash, Prepaid Insurance, Land, Buildings, Equipment, Accounts Payable, Unearned Service Revenue, Common Stock, Retained Earnings, Dividends, Service Revenue, Advertising Expense, and Salaries and Wages Expense.
Instructions
Journalize the March transactions, including explanations. Bradley’s records golf fees as service revenue.
Journalize transactions, post, and prepare a trial balance.
P3.5 (LO 3, 4, 5), AP Ayala Architects incorporated as licensed architects on April 1, 2025. During the first month of the operation of the business, these events and transactions occurred:
Apr.1 | Stockholders invested $18,000 cash in exchange for common stock of the corporation. | |
1 | Hired a secretary-receptionist at a salary of $375 per week, payable monthly. | |
2 | Paid office rent for the month $900. | |
3 | Purchased architectural supplies on account from Burmingham Company $1,300. | |
10 | Completed blueprints on a carport and billed client $1,900 for services. | |
11 | Received $700 cash advance from M. Jason to design a new home. | |
20 | Received $2,800 cash for services completed and delivered to S. Melvin. | |
30 | Paid secretary-receptionist for the month $1,500. | |
30 | Paid $300 to Burmingham Company for accounts payable due. |
The company uses these accounts: Cash, Accounts Receivable, Supplies, Accounts Payable, Unearned Service Revenue, Common Stock, Service Revenue, Salaries and Wages Expense, and Rent Expense.
Instructions
Cash | $18,800 | Tot. trial balance | $24,400 |
Journalize transactions, post, and prepare a trial balance.
P3.6 (LO 3, 4, 5), AP This is the trial balance of Lacey Company on September 30.
Lacey Company Trial Balance September 30, 2025 |
||||
Debit | Credit | |||
Cash | $19,200 | |||
Accounts Receivable | 2,600 | |||
Supplies | 2,100 | |||
Equipment | 8,000 | |||
Accounts Payable | $ 4,800 | |||
Unearned Service Revenue | 1,100 | |||
Common Stock | 15,000 | |||
Retained Earnings | 11,000 | |||
$31,900 | $31,900 |
The October transactions were as follows.
Oct.5 | Received $1,300 in cash from customers for accounts receivable due. | |
10 | Billed customers for services performed $5,100. | |
15 | Paid employee salaries $1,200. | |
17 | Performed $600 of services in exchange for cash. | |
20 | Paid $1,900 to creditors for accounts payable due. | |
29 | Paid a $300 cash dividend. | |
31 | Paid utilities $400. |
Instructions
Cash | $17,300 |
Tot. trial balance | $35,700 |
Prepare a correct trial balance.
P3.7 (LO 5), AN This trial balance of Washburn Co. does not balance.
Washburn Co. Trial Balance June 30, 2025 |
||||
Debit | Credit | |||
Cash | $ 3,090 | |||
Accounts Receivable | $ 3,190 | |||
Supplies | 800 | |||
Equipment | 3,000 | |||
Accounts Payable | 3,686 | |||
Unearned Service Revenue | 1,200 | |||
Common Stock | 9,000 | |||
Dividends | 800 | |||
Service Revenue | 3,480 | |||
Salaries and Wages Expense | 3,600 | |||
Utilities Expense | 910 | |||
$13,500 | $19,256 |
Each of the listed accounts has a normal balance per the general ledger. An examination of the ledger and journal reveals the following errors:
Instructions
Prepare the correct trial balance. (Hint: All accounts should have normal balances. Your first step, therefore, should be to move all amounts to the column of their normal balance.)
Tot. trial balance | $16,900 |
Journalize transactions, post, and prepare a trial balance.
P3.8 (LO 3, 4, 5), AP The Triquel Theater Inc. was recently formed. It began operations in March 2025. The Triquel is unique in that it will show only triple features of sequential theme movies. On March 1, the ledger of The Triquel showed Cash $16,000, Land $38,000, Buildings (concession stand, projection room, ticket booth, and screen) $22,000, Equipment $16,000, Accounts Payable $12,000, and Common Stock $80,000. During the month of March, the following events and transactions occurred.
Mar.2 | Rented the first three Star Wars movies (Star Wars®, The Empire Strikes Back, and The Return of the Jedi) to be shown for the first three weeks of March. The film rental was $10,000; $2,000 was paid in cash and $8,000 will be paid on March 10. | |
3 | Ordered the first three Star Trek movies to be shown the last 10 days of March. It will cost $500 per night. | |
9 | Received $9,900 cash from admissions. | |
10 | Paid balance due on Star Wars movies’ rental and $2,900 on March 1 accounts payable. | |
11 | The Triquel Theater contracted with R. Lazlo to operate the concession stand. Lazlo agrees to pay The Triquel 15% of gross receipts, payable monthly, for the rental of the concession stand. | |
12 | Paid advertising expenses $500. | |
20 | Received $8,300 cash from customers for admissions. | |
20 | Received the Star Trek movies and paid rental fee of $5,000. | |
31 | Paid salaries of $3,800. | |
31 | Received statement from R. Lazlo showing gross receipts from concessions of $10,000 and the balance due to The Triquel of $1,500 ($10,000 × .15) for March. Lazlo paid half the balance due for rental of the concession stand and will remit the remainder on April 5. | |
31 | Received $20,000 cash from customers for admissions. |
In addition to the accounts identified above, the chart of accounts includes Accounts Receivable, Service Revenue, Rent Revenue, Advertising Expense, Rent Expense, and Salaries and Wages Expense.
Instructions
Cash | $32,750 |
Tot. trial balance | $128,800 |
Journalize transactions, post, and prepare a trial balance.
P3.9 (LO 3, 4, 5), AP On July 31, 2025, the general ledger of Hills Legal Services Inc. showed the following balances: Cash $4,000, Accounts Receivable $1,500, Supplies $500, Equipment $5,000, Accounts Payable $4,100, Common Stock $3,500, and Retained Earnings $3,400. During August, the following transactions occurred.
Aug.3 | Collected $1,200 of accounts receivable due from customers. | |
5 | Received $1,300 cash for issuing common stock to new investors. | |
6 | Paid $2,700 cash on accounts payable. | |
7 | Performed legal services of $6,500, of which $3,000 was collected in cash and the remainder was due on account. | |
12 | Purchased additional equipment for $1,200, paying $400 in cash and the balance on account. | |
14 | Paid salaries $3,500, rent $900, and advertising expenses $275 for the month of August. | |
18 | Collected the balance for the services performed on August 7. | |
20 | Paid cash dividend of $500 to stockholders. | |
24 | Billed a client $1,000 for legal services performed. | |
26 | Received $2,000 from Laurentian Bank; the money was borrowed on a bank note payable that is due in 6 months. | |
27 | Agreed to perform legal services for a client in September for $4,500. The client will pay the amount due after the services have been performed. | |
28 | Received the utility bill for the month of August in the amount of $275; it is not due until September 15. | |
31 | Paid income tax for the month $500. |
Instructions
Cash | $6,225 |
Tot. trial balance | $20,175 |
Journalize transactions, post, and prepare trial balance.
P3.10 (LO 3, 4, 5), AP Pamper Me Salon Inc.’s general ledger at April 30, 2025, included the following: Cash $5,000, Supplies $500, Equipment $24,000, Accounts Payable $2,100, Notes Payable $10,000, Unearned Service Revenue (from gift certificates) $1,000, Common Stock $5,000, and Retained Earnings $11,400. The following events and transactions occurred during May.
May1 | Paid rent for the month of May $1,000. | |
4 | Paid $1,100 of the account payable at April 30. | |
7 | Issued gift certificates for future services for $1,500 cash. | |
8 | Received $1,200 cash from customers for services performed. | |
14 | Paid $1,200 in salaries to employees. | |
15 | Received $800 in cash from customers for services performed. | |
15 | Customers receiving services worth $700 used gift certificates in payment. | |
21 | Paid the remaining accounts payable from April 30. | |
22 | Received $1,000 in cash from customers for services performed. | |
22 | Purchased supplies of $700 on account. All of these were used during the month. | |
25 | Received a bill for advertising for $500. This bill is due on June 13. | |
25 | Received and paid a utilities bill for $400. | |
29 | Received $1,700 in cash from customers for services performed. | |
29 | Customers receiving services worth $600 used gift certificates in payment. | |
31 | Interest of $50 was paid on the note payable. | |
31 | Paid $1,200 in salaries to employees. | |
31 | Paid income tax payment for the month $150. |
Instructions
Cash | $5,100 |
Tot. trial balance | $34,800 |
Analyze errors and their effects on the trial balance.
P3.11 (LO 5), AN The bookkeeper for Roger’s Dance Studio made the following errors in journalizing and posting.
Instructions
For each error, indicate (a) whether the trial balance will balance, (b) the amount of the difference if the trial balance will not balance, and (c) the trial balance column that will have the larger total. Consider each error separately. Use the following form, in which error 1 is given as an example.
(a) | (b) | (c) | ||||||
Error | In Balance | Difference | Larger Column | |||||
1 | No | $600 | Debit |
3. a. Yes; b. None; c. N/A
(Note: This is a continuation of the Cookie Creations from Chapters 1 and 2.)
CCC3 In November 2023, after having incorporated Cookie Creations Inc., Natalie begins operations. She has decided not to pursue the offer to supply cookies to Biscuits. Instead, she will focus on offering cooking classes. The following events occur.
Nov.8 | Natalie cashes in her U.S. Savings Bonds and receives $520, which she deposits in her personal bank account. |
8 | Natalie opens a bank account for Cookie Creations Inc. |
8 | Natalie purchases $500 of Cookie Creations’ common stock. |
11 | Cookie Creations purchases paper and other office supplies for $95. (Use Supplies.) |
14 | Cookie Creations pays $125 to purchase baking supplies, such as flour, sugar, butter, and chocolate chips. (Use Supplies.) |
15 | 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 $550. Natalie decides to start using it only in her new business. She estimates that the equipment is currently worth $300, and she transfers the equipment into the business in exchange for additional common stock. |
16 | The company needs more cash to sustain its operations. Natalie’s grandmother lends the company $2,000 cash, in exchange for a two-year, 9% note payable. Interest and the principal are repayable at maturity. |
17 | Cookie Creations pays $900 for additional baking equipment. |
18 | Natalie schedules her first class for November 29. She will receive $100 on the date of the class. |
25 | Natalie books a second class for December 5 for $150. She receives a $60 cash down payment, in advance. |
29 | Natalie teaches her first class, booked on November 18, and collects the $100 cash. |
30 | Natalie’s brother develops a website for Cookie Creations Inc. that the company will use for advertising. He charges the company $600 for his work, payable at the end of December. (Because the website is expected to have a useful life of two years before upgrades are needed, it should be treated as an asset called Website.) |
30 | Cookie Creations pays $1,200 for a one-year insurance policy. |
30 | Natalie teaches a group of elementary school students how to make Santa Claus cookies. At the end of the class, Natalie leaves an invoice for $300 with the school principal. The principal says that he will pass it along to the business office and it will be paid some time in December. |
30 | Natalie receives a $50 invoice for use of her cell phone. She uses the cell phone exclusively for Cookie Creations Inc. business. The invoice is for services provided in November, and payment is due on December 15. |
Instructions
CT3.1 The financial statements of Apple Inc. in Appendix A contain the following selected accounts, all in thousands of dollars.
Common Stock | $ 50,779 |
Accounts Payable | 42,296 |
Accounts Receivable | 16,120 |
Selling, General, and Administrative Expenses | 19,916 |
Inventories | 4,061 |
Net Property, Plant, and Equipment | 36,766 |
Net Sales | 274,515 |
Instructions
CT3.2 The financial statements of Columbia Sportswear Company are presented in Appendix B. Financial statements of Under Armour, Inc. are presented in Appendix C.
Instructions
Columbia Sportswear | Under Armour | |
(1) Accounts Receivable | (1) Inventories | |
(2) Net Property, Plant, and Equipment | (2) Income Taxes | |
(3) Accounts Payable | (3) Accrued Liabilities | |
(4) Retained Earnings | (4) Common Stock | |
(5) Net Sales | (5) Interest Expense |
CT3.3 Amazon.com, Inc.’s financial statements are presented in Appendix D. Financial statements of Walmart Inc. are presented in Appendix E.
Instructions
Amazon | Walmart | |
|
|
CT3.4 Chieftain International, Inc., is an oil and natural gas exploration and production company. A recent balance sheet reported $208 million in assets with only $4.6 million in liabilities, all of which were short-term accounts payable.
During the year, Chieftain expanded its holdings of oil and gas rights, drilled 37 new wells, and invested in expensive 3-D seismic technology. The company generated $19 million cash from operating activities and paid no dividends. It had a cash balance of $102 million at the end of the year.
Instructions
CT3.5 This activity provides information about career opportunities for CPAs.
Instructions
Search the Internet for “start here go places” to access free accounting resources for future CPAs and then answer the following questions.
CT3.6 The New York Times published an article by Richard Sandomir that discusses the fact that the Green Bay Packers are the only NFL team that publicly publishes its annual report.
Instructions
Search online for “NFL Finances, as Seen Through Packers’ Records,” read the article, and then answer the following questions.
CT3.7 Saira Morrow operates Dressage Riding Academy, Inc. The academy’s primary sources of revenue are riding fees and lesson fees, which are provided on a cash basis. Saira 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 these accounts: Cash, Accounts Receivable, Unearned Service Revenue, and Service Revenue.
The academy owns 10 horses, a stable, a riding ring, riding equipment, and office equipment. These assets are accounted for in the following accounts: Horses, Buildings, and Equipment.
The academy employs stable helpers and an office employee, who receive weekly salaries. At the end of each month, the mail usually brings bills for advertising, utilities, and veterinary service. Other expenses include feed for the horses and insurance. For its expenses, the academy maintains the following accounts: Supplies, Prepaid Insurance, Accounts Payable, Salaries and Wages Expense, Advertising Expense, Utilities Expense, Maintenance and Repairs Expense, Supplies Expense, and Insurance Expense.
Saira’s sole source of personal income is dividends from the academy. Thus, the corporation declares and pays periodic dividends. To account for stockholders’ equity in the business and dividends, two accounts are maintained: Common Stock and Dividends.
During the first month of operations, an inexperienced bookkeeper was employed. Saira 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.
May1 | Cash | 15,000 | |
Unearned Service Revenue | 15,000 | ||
(Issued common stock in exchange for $15,000 cash) | |||
5 | Cash | 250 | |
Service Revenue | 250 | ||
(Received $250 cash for lesson fees) | |||
7 | Cash | 500 | |
Service Revenue | 500 | ||
(Received $500 for boarding of horses beginning June 1) | |||
9 | Supplies Expense | 1,500 | |
Cash | 1,500 | ||
(Purchased estimated 5 months’ supply of feed and hay for $1,500 on account) | |||
14 | Equipment | 80 | |
Cash | 800 | ||
(Purchased desk and other office equipment for $800 cash) | |||
15 | Salaries and Wages Expense | 400 | |
Cash | 400 | ||
(Issued check to Saira Morrow for personal use) | |||
20 | Cash | 145 | |
Service Revenue | 154 | ||
(Received $154 cash for riding fees) | |||
31 | Maintenance and Repairs Expense | 75 | |
Accounts Receivable | 75 | ||
(Received bill of $75 from carpenter for repair services performed) |
Instructions
With the class divided into groups, answer the following.
CT3.8 Klean Sweep 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 memorandum 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.”
CT3.9 Vanessa Jones is the assistant chief accountant at IBT Company, a manufacturer of computer chips and cell phones. The company presently has total sales of $20 million. It is the end of the first quarter and Vanessa 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, Vanessa 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. Vanessa plugs the difference! She believes that the difference is quite small and 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
CT3.10 The August 5, 2020, issue of the Wall Street Journal includes an article by Tomio Geron entitled “Former Trustify CEO’s Indictment Highlights Due Diligence Dilemma.”
Instructions
Read the article and answer the following questions.
CT3.11 In their annual reports to stockholders, companies must report or disclose information about all liabilities, including potential liabilities related to environmental clean-up. There are many situations in which you will be asked to provide personal financial information about your assets, liabilities, revenues, and expenses. Sometimes you will face difficult decisions regarding what to disclose and how to disclose it.
Instructions
Suppose that you are putting together a loan application to purchase a home. Based on your income and assets, you qualify for the mortgage loan, but just barely. How would you address each of the following situations in reporting your financial position for the loan application? Provide responses for each of the following questions.
International companies use the same set of procedures and records to keep track of transaction data. Thus, the material in this chapter 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. The following are the key similarities and differences between GAAP and IFRS as related to the recording process.
1. Which statement is correct regarding IFRS?
IFRS reverses the rules of debits and credits, that is, debits are on the right and credits are on the left.
IFRS uses the same process for recording transactions as GAAP.
The chart of accounts under IFRS is different because revenues follow assets.
None of the answer choices is correct.
2. The expanded accounting equation under IFRS is as follows:
Assets = Liabilities + Common Stock + Retained Earnings + Revenues − Expenses + Dividends.
Assets + Liabilities = Common Stock + Retained Earnings + Revenues − Expenses − Dividends.
Assets = Liabilities + Common Stock + Retained Earnings + Revenues − Expenses − Dividends.
Assets = Liabilities + Common Stock + Retained Earnings − Revenues − Expenses − Dividends.
3. A trial balance:
is the same under IFRS and GAAP.
proves that transactions are recorded correctly.
proves that all transactions have been recorded.
will not balance if a correct journal entry is posted twice.
4. One difference between IFRS and GAAP is that:
GAAP uses accrual-accounting concepts and IFRS uses primarily the cash basis of accounting.
IFRS uses a different posting process than GAAP.
IFRS uses more fair value measurements than GAAP.
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 text. This policy is as follows:
Currency signs only appear in ledgers and journal entries.
Currency signs are only shown in the trial balance.
Currency signs are shown for all compound journal entries.
Currency signs are shown in trial balances and financial statements.
IFRS3.1 The complete annual report of Louis Vuitton, including the notes to its financial statements, is available at the company’s website.
Describe in which statement each of the following items is reported, and the position in the statement (e.g., current asset).
a. Other operating income and expense.
b. Cash and cash equivalents.
c. Trade accounts payable.
d. Cost of net financial debt.
Answers to IFRS Self-Test Questions
1. b2. c3. a4. c5. d