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 large company to have good accounting records, especially if it has control of your life savings. MF Global Holdings Ltd is such a company. As a big investment broker, it held billions of dollars of investments for clients. If you had your life savings invested at MF Global, you might be slightly displeased if you heard this from one of its representatives: “You know, I kind of remember an account for someone with a name like yours—now what did we do with that?”
Unfortunately, that is almost exactly what happened to MF Global's clients shortly before it 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.
p. 64 p. 74 p. 78
Learning Objectives
After studying this chapter, you should be able to:
[1] Explain what an account is and how it helps in the recording process.
[2] Define debits and credits and explain their use in recording business transactions.
[3] Identify the basic steps in the recording process.
[4] Explain what a journal is and how it helps in the recording process.
[5] Explain what a ledger is and how it helps in the recording process.
[6] Explain what posting is and how it helps in the recording process.
[7] Prepare a trial balance and explain its purposes.
It now appears that MF Global did not properly segregate customer accounts from company accounts. And, because of its sloppy record-keeping, 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).
Preview of Chapter 2
In Chapter 1, we analyzed business transactions in terms of the accounting equation, and we presented the cumulative effects of these transactions in tabular form. Imagine a company like MF Global (as in the Feature Story) using the same tabular format as Softbyte Inc. to keep track of its transactions. In a single day, MF Global engaged in thousands of business transactions. To record each transaction this way would be impractical, expensive, and unnecessary. Instead, companies use a set of procedures and records to keep track of transaction data more easily. This chapter introduces and illustrates these basic procedures and records.
The content and organization of Chapter 2 are as follows.
1
Explain what an account is and how it helps in the recording process.
An account is an individual accounting record of increases and decreases in a specific asset, liability, or stockholders' equity item. For example, Softbyte Inc. (the company discussed in Chapter 1) would have separate accounts for Cash, Accounts Receivable, Accounts Payable, Service Revenue, Salaries and Wages Expense, and so on. (Note that whenever we are referring to a specific account, we capitalize the name.)
In its simplest form, an account consists of three parts: (1) a title, (2) a left or debit side, and (3) a right or credit side. Because the format of an account resembles the letter T, we refer to it as a T-account. Illustration 2-1 shows the basic form of an account.
We use this form often throughout this textbook to explain basic accounting relationships.
2
Define debits and credits and explain their use in recording business transactions.
The term debit indicates the left side of an account, and credit indicates the right side. They are commonly abbreviated as Dr. for debit and Cr. for credit. They do not mean increase or decrease, as is commonly thought. We use the terms debit and credit repeatedly in the recording process to describe where entries are made in accounts. For example, the act of entering an amount on the left side of an account is called debiting the account. Making an entry on the right side is crediting the account.
When comparing the totals of the two sides, an account shows a debit balance if the total of the debit amounts exceeds the credits. An account shows a credit balance if the credit amounts exceed the debits. Note the position of the debit side and credit side in Illustration 2-1.
The procedure of recording debits and credits in an account is shown in Illustration 2-2 for the transactions affecting the Cash account of Softbyte Inc. The data are taken from the Cash column of the tabular summary in Illustration 1-9 (page 21).
Every positive item in the tabular summary represents a receipt of cash. Every negative amount represents a payment of cash. Notice that in the account form, we record the increases in cash as debits and the decreases in cash as credits. For example, the $15,000 receipt of cash (in red) is debited to Cash, and the −$7,000 payment of cash (in blue) is credited to Cash.
Having increases on one side and decreases on the other reduces recording errors and helps in determining the totals of each side of the account as well as the account balance. The balance is determined by netting the two sides (subtracting one amount from the other). The account balance, a debit of $8,050, indicates that Softbyte had $8,050 more increases than decreases in cash. In other words, Softbyte started with a balance of zero and now has $8,050 in its Cash account.
In Chapter 1, you learned the effect of a transaction on the basic accounting equation. Remember that each transaction must affect two or more accounts to keep the basic accounting equation in balance. In other words, for each transaction, debits must equal credits. The equality of debits and credits provides the basis for the double-entry system of recording transactions.
International Note
Rules for accounting for specific events sometimes differ across countries. For example, European companies rely less on historical cost and more on fair value than U.S. companies. Despite the differences, the double-entry accounting system is the basis of accounting systems worldwide.
Under the double-entry system, the dual (two-sided) effect of each transaction is recorded in appropriate accounts. This system provides a logical method for recording transactions. As discussed in the Feature Story about MF Global, the double-entry system also helps ensure the accuracy of the recorded amounts as well as the detection of errors. If every transaction is recorded with equal debits and credits, the sum of all the debits to the accounts must equal the sum of all the credits.
The double-entry system for determining the equality of the accounting equation is much more efficient than the plus/minus procedure used in Chapter 1. The following discussion illustrates debit and credit procedures in the double-entry system.
In Illustration 2-2 for Softbyte Inc., increases in Cash—an asset—were entered on the left side, and decreases in Cash were entered on the right side. We know that both sides of the basic equation (Assets = Liabilities + Stockholders' Equity) must be equal. It therefore follows that increases and decreases in liabilities will have to be recorded opposite from increases and decreases in assets. Thus, increases in liabilities must be entered on the right or credit side, and decreases in liabilities must be entered on the left or debit side. The effects that debits and credits have on assets and liabilities are summarized in Illustration 2-3.
Asset accounts normally show debit balances. That is, debits to a specific asset account should exceed credits to that account. Likewise, liability accounts normally show credit balances. That is, credits to a liability account should exceed debits to that account. The normal balance of an account is on the side where an increase in the account is recorded. Illustration 2-4 (page 58) shows the normal balances for assets and liabilities.
Knowing the normal balance in an account may help you trace errors. For example, a credit balance in an asset account such as Land or a debit balance in a liability account such as Salaries and Wages Payable usually indicates an error. Occasionally, though, an abnormal balance may be correct. The Cash account, for example, will have a credit balance when a company has overdrawn its bank balance (i.e., written a check that “bounced”).
As Chapter 1 indicated, there are five subdivisions of stockholders' equity: common stock, retained earnings, dividends, revenues, and expenses. In a double-entry system, companies keep accounts for each of these subdivisions, as explained below.
COMMON STOCK Companies issue common stock in exchange for the owners' investment paid in to the corporation. Credits increase the Common Stock account, and debits decrease it. For example, when an owner invests cash in the business in exchange for shares of the corporation's stock, the company debits (increases) Cash and credits (increases) Common Stock.
Illustration 2-5 shows the rules of debit and credit for the Common Stock account.
We can diagram the normal balance in Common Stock as follows.
Helpful Hint
The rules for debit and credit and the normal balances of common stock and retained earnings are the same as for liabilities.
RETAINED EARNINGS Retained earnings is net income that is kept (retained) in the business. It represents the portion of stockholders' equity that the company has accumulated through the profitable operation of the business. Credits (net income) increase the Retained Earnings account, and debits (dividends or net losses) decrease it, as Illustration 2-7 shows.
DIVIDENDS A dividend is a company's distribution to its stockholders on a pro rata (equal) basis. The most common form of a distribution is a cash dividend. Dividends reduce the stockholders' claims on retained earnings. Debits increase the Dividends account, and credits decrease it. Illustration 2-8 shows that this account normally has a debit balance.
INVESTOR INSIGHT
Keeping Score
The Chicago Cubs baseball team probably has these major revenue and expense accounts:
Revenues | Expenses |
Admissions (ticket sales) | Players' salaries |
Concessions | Administrative salaries |
Television and radio | Travel |
Advertising | Ballpark maintenance |
Do you think that the Chicago Bears football team would be likely to have the same major revenue and expense accounts as the Cubs? (See page 99.)
REVENUES AND EXPENSES The purpose of earning revenues is to benefit the stockholders of the business. When a company recognizes revenues, stockholders' equity increases. Revenues are a subdivision of stockholders' equity that provides information as to why stockholders' equity increased. Credits increase revenue accounts and debits decrease them. Therefore, the effect of debits and credits on revenue accounts is the same as their effect on stockholders' equity.
Helpful Hint
Because revenues increase stockholders' equity, a revenue account has the same debit/credit rules as the Common Stock account. Expenses have the opposite effect.
Expenses have the opposite effect. Expenses decrease stockholders' equity. Since expenses decrease net income and revenues increase it, it is logical that the increase and decrease sides of expense accounts should be the opposite of revenue accounts. Thus, expense accounts are increased by debits and decreased by credits. Illustration 2-9 shows the rules of debits and credits for revenues and expenses.
Credits to revenue accounts should exceed debits. Debits to expense accounts should exceed credits. Thus, revenue accounts normally show credit balances, and expense accounts normally show debit balances. We can diagram the normal balances as follows.
As Chapter 1 indicated, companies report common stock and retained earnings in the stockholders' equity section of the balance sheet. They report dividends on the retained earnings statement. And they report revenues and expenses on the income statement. Dividends, revenues, and expenses are eventually transferred to retained earnings at the end of the period. As a result, a change in any one of these three items affects stockholders' equity. Illustration 2-11 shows the relationships related to stockholders' equity.
Helpful Hint
You may want to bookmark Illustration 2-12. You probably will refer to it often.
Illustration 2-12 shows a summary of the debit/credit rules and effects on each type of account. Study this diagram carefully. It will help you understand the fundamentals of the double-entry system.
> DO IT!
Normal Balances
Kate Browne, president of Hair It Is, Inc. has just rented space in a shopping mall in which she will open and operate a beauty salon. A friend has advised Kate to set up a double-entry set of accounting records in which to record all of her business transactions.
Identify the balance sheet accounts that Hair It Is, Inc. will likely use to record the transactions needed to establish and open the business. Also, indicate whether the normal balance of each account is a debit or a credit.
Action Plan
Determine the types of accounts needed. Kate will need asset accounts for each different type of asset she invests in the business, and liability accounts for any debts she incurs.
Understand the types of stockholders' equity accounts. When Kate begins the business, she will need only Common Stock. Later, she will need other stockholders' equity accounts.
Solution
Hair It Is, Inc. would likely use the following accounts to record the transactions needed to ready the beauty salon for opening day:
Cash (debit balance) | Equipment (debit balance) |
Supplies (debit balance) | Accounts Payable (credit balance) |
Notes Payable (credit balance), if the business borrows money | Common Stock (credit balance) |
Related exercise material: BE2-1, BE2-2, BE2-5, E2-1, E2-2, E2-4, and DO IT! 2-1.
3
Identify the basic steps in the recording process.
Although it is possible to enter transaction information directly into the accounts without using a journal, few businesses do so. Practically every business uses three basic steps in the recording process:
The recording process begins with the transaction. Business documents, such as a sales slip, a check, or a bill provide evidence of the transaction. The company analyzes this evidence to determine the transaction's effects on specific accounts. The company then enters the transaction in the journal. Finally, it transfers the journal entry to the designated accounts in the ledger. Illustration 2-13 (page 62) shows the recording process.
Ethics Note
International Outsourcing Services, LLC was accused of submitting fraudulent documents (store coupons) to companies for reimbursement of as much as $250 million. Use of proper business documents reduces the likelihood of fraudulent activity.
The steps in the recording process occur repeatedly. In Chapter 1, we illustrated the first step, the analysis of transactions, and will give further examples in this and later chapters. The other two steps in the recording process are explained in the next sections.
4
Explain what a journal is and how it helps in the recording process.
Companies initially record transactions in chronological order (the order in which they occur). Thus, the journal is referred to as the book of original entry. For each transaction, the journal shows the debit and credit effects on specific accounts.
Companies may use various kinds of journals, but every company has the most basic form of journal, a general journal. Typically, a general journal has spaces for dates, account titles and explanations, references, and two amount columns. See the format of the journal in Illustration 2-14 (page 63). Whenever we use the term “journal” in this textbook, we mean the general journal unless we specify otherwise.
The journal makes several significant contributions to the recording process:
Entering transaction data in the journal is known as journalizing. Companies make separate journal entries for each transaction. A complete entry consists of (1) the date of the transaction, (2) the accounts and amounts to be debited and credited, and (3) a brief explanation of the transaction.
Illustration 2-14 shows the technique of journalizing, using the first two transactions of Softbyte Inc. On September 1, stockholders invested $15,000 cash in the corporation in exchange for shares of stock, and Softbyte purchased computer equipment for $7,000 cash. The number J1 indicates that these two entries are recorded on the first page of the journal. Illustration 2-14 shows the standard form of journal entries for these two transactions. (The boxed numbers correspond to explanations in the list below the illustration.)
The date of the transaction is entered in the Date column.
The debit account title (that is, the account to be debited) is entered first at the extreme left margin of the column headed “Account Titles and Explanation,” and the amount of the debit is recorded in the Debit column.
The credit account title (that is, the account to be credited) is indented and entered on the next line in the column headed “Account Titles and Explanation,” and the amount of the credit is recorded in the Credit column.
A brief explanation of the transaction appears on the line below the credit account title. A space is left between journal entries. The blank space separates individual journal entries and makes the entire journal easier to read.
The column titled Ref. (which stands for Reference) is left blank when the journal entry is made. This column is used later when the journal entries are transferred to the ledger accounts.
It is important to use correct and specific account titles in journalizing. Erroneous account titles lead to incorrect financial statements. However, some flexibility exists initially in selecting account titles. The main criterion is that each title must appropriately describe the content of the account. Once a company chooses the specific title to use, it should record under that account title all later transactions involving the account.1
Some entries involve only two accounts, one debit and one credit. (See, for example, the entries in Illustration 2-14.) An entry like these is considered a simple entry. Some transactions, however, require more than two accounts in journalizing. An entry that requires three or more accounts is a compound entry. To illustrate, assume that on July 1, Butler Company purchases a delivery truck costing $14,000. It pays $8,000 cash now and agrees to pay the remaining $6,000 on account (to be paid later). The compound entry is as follows.
In a compound entry, the standard format requires that all debits be listed before the credits.
ACCOUNTING ACROSS THE ORGANIZATION
Boosting Microsoft's Profits
At one time, Microsoft's Home and Entertainment Division lost over $4 billion, mostly due to losses on the original Xbox videogame console. With the Xbox 360 videogame console, the division's head of finance, Bryan Lee, hoped the division would become profitable. He set strict goals for sales, revenue, and profit. “A manager seeking to spend more on a feature such as a disk drive has to find allies in the group to cut spending elsewhere, or identify new revenue to offset the increase,” he explained.
For example, Microsoft originally designed the Xbox 360 to have 256 megabytes of memory. But the design department said that amount of memory wouldn't support the best special effects. The purchasing department said that adding more memory would cost $30—which was 10% of the estimated selling price of $300. The marketing department, however, “determined that adding the memory would let Microsoft reduce marketing costs and attract more game developers, boosting royalty revenue. It would also extend the life of the console, generating more sales.” As a result, Microsoft doubled the memory to 512 megabytes. Today, the division enjoys great success.
Source: Robert A. Guth, “New Xbox Aim for Microsoft: Profitability,” Wall Street Journal (May 24, 2005), p. C1.
In what ways is this Microsoft division using accounting to assist in its effort to become ? more profitable? (See page 99.)
> DO IT!
Recording Business Activities
As president and sole stockholder, Kate Browne engaged in the following activities in establishing her salon, Hair It Is, Inc.
In what form (type of record) should Kate record these three activities? Prepare the entries to record the transactions.
Action Plan
Understand which activities need to be recorded and which do not. Any that affect assets, liabilities, or stockholders equity should be recorded in a journal.
Analyze the effects of transactions on asset, liability, and stockholders' equity accounts.
Solution
Each transaction that is recorded is entered in the general journal. The three activities would be recorded as follows.
Related exercise material: BE2-3, BE2-6, E2-3, E2-5, E2-6, E2-7, and DO IT! 2-2.
5
Explain what a ledger is and how it helps in the recording process.
The entire group of accounts maintained by a company is the ledger. The ledger provides the balance in each of the accounts as well as keeps track of changes in these balances.
Companies may use various kinds of ledgers, but every company has a general ledger. A general ledger contains all the asset, liability, and stockholders' equity accounts, as shown in Illustration 2-16 for J. Lind Company. Whenever we use the term “ledger” in this textbook, we are referring to the general ledger unless we specify otherwise.
Companies arrange the ledger in the sequence in which they present the accounts in the financial statements, beginning with the balance sheet accounts. First in order are the asset accounts, followed by liability accounts, stockholders' equity accounts, revenues, and expenses. Each account is numbered for easier identification.
The ledger provides the balance in each of the accounts. For example, the Cash account shows the amount of cash available to meet current obligations. The Accounts Receivable account shows amounts due from customers. The Accounts Payable account shows amounts owed to creditors.
ETHICS INSIGHT
A Convenient Overstatement
Sometimes a company's investment securities suffer a permanent decline in value below their original cost. When this occurs, the company is supposed to reduce the recorded value of the securities on its balance sheet (“write-them down” in common financial lingo) and record a loss. It appears, however, that during the financial crisis, employees at some financial institutions chose to look the other way as the value of their investments skidded. A number of Wall Street traders that worked for the investment bank Credit Suisse Group were charged with intentionally overstating the value of securities that had suffered declines of approximately $2.85 billion. One reason that they may have been reluctant to record the losses is out of fear that the company's shareholders and clients would panic if they saw the magnitude of the losses. However, personal self-interest might have been equally to blame—the bonuses of the traders were tied to the value of the investment securities.
Source: S. Pulliam, J. Eaglesham, and M. Siconolfi, “U.S. Plans Changes on Bond Fraud,” Wall Street Journal Online (February 1, 2012).
What incentives might employees have had to overstate the value of these investment securities on the company's financial statements? (See page 99.)
The simple T-account form used in accounting textbooks is often very useful for illustration purposes. However, in practice, the account forms used in ledgers are much more structured. Illustration 2-17 shows a typical form, using assumed data from a cash account.
This format is called the three-column form of account. It has three money columns—debit, credit, and balance. The balance in the account is determined after each transaction. Companies use the explanation space and reference columns to provide special information about the transaction.
6
Explain what posting is and how it helps in the recording process.
Transferring journal entries to the ledger accounts is called posting. This phase of the recording process accumulates the effects of journalized transactions into the individual accounts. Posting involves the following steps.
Illustration 2-18 shows these four steps using Softbyte Inc.'s first journal entry. The boxed numbers indicate the sequence of the steps.
Posting should be performed in chronological order. That is, the company should post all the debits and credits of one journal entry before proceeding to the next journal entry. Postings should be made on a timely basis to ensure that the ledger is up to date.2
The reference column of a ledger account indicates the journal page from which the transaction was posted.3 The explanation space of the ledger account is used infrequently because an explanation already appears in the journal.
The number and type of accounts differ for each company. The number of accounts depends on the amount of detail management desires. For example, the management of one company may want a single account for all types of utility expense. Another may keep separate expense accounts for each type of utility, such as gas, electricity, and water. Similarly, a small company like Softbyte Inc. will have fewer accounts than a corporate giant like Dell. Softbyte may be able to manage and report its activities in 20 to 30 accounts, while Dell may require thousands of accounts to keep track of its worldwide activities.
Most companies have a chart of accounts. This chart lists the accounts and the account numbers that identify their location in the ledger. The numbering system that identifies the accounts usually starts with the balance sheet accounts and follows with the income statement accounts.
Helpful Hint
On the textbook's front endpapers, you also will find an expanded chart of accounts.
In this and the next two chapters, we will be explaining the accounting for Pioneer Advertising Agency Inc. (a service company). Accounts 101–199 indicate asset accounts; 200–299 indicate liabilities; 301–350 indicate stockholders' equity accounts; 400–499, revenues; 601–799, expenses; 800–899, other revenues; and 900–999, other expenses. Illustration 2-19 shows Pioneer's chart of accounts. Accounts listed in red are used in this chapter; accounts shown in black are explained in later chapters.
You will notice that there are gaps in the numbering system of the chart of accounts for Pioneer Advertising. Companies leave gaps to permit the insertion of new accounts as needed during the life of the business.
Illustrations 2-20 through 2-29 (pages 69–73) show the basic steps in the recording process, using the October transactions of Pioneer Advertising Agency Inc. Pioneer's accounting period is a month. In these illustrations, a basic analysis, an equation analysis, and a debit-credit analysis precede the journal entry and posting of each transaction. For simplicity, we use the T-account form to show the posting instead of the standard account form.
Study these transaction analyses carefully. The purpose of transaction analysis is first to identify the type of account involved, and then to determine whether to make a debit or a credit to the account. You should always perform this type of analysis before preparing a journal entry. Doing so will help you understand the journal entries discussed in this chapter as well as more complex journal entries in later chapters.
In addition, an Accounting Cycle Tutorial is available in WileyPLUS. It provides an interactive presentation of the steps in the accounting cycle, using the examples in the illustrations on the following pages.
Helpful Hint
Follow these steps:
Posting
Kate Browne recorded the following transactions in a general journal during the month of March.
Post these entries to the Cash account of the general ledger to determine its ending balance. The beginning balance of Cash on March 1 was $600.
Action Plan
Recall that posting involves transferring the journalized debits and credits to specific accounts in the ledger.
Determine the ending balance by netting the total debits and credits.
Solution
Related exercise material: BE2-7, BE2-8, E2-8, E2-12, and DO IT! 2-3.
Illustration 2-30 shows the journal for Pioneer Advertising Agency Inc. for October.
Illustration 2-31 shows the ledger, with all balances in red.
7
Prepare a trial balance and explain its purposes.
A trial balance is a list of accounts and their balances at a given time. Customarily, companies prepare a trial balance at the end of an accounting period. They list accounts in the order in which they appear in the ledger. Debit balances appear in the left column and credit balances in the right column.
The trial balance proves the mathematical equality of debits and credits after posting. Under the double-entry system, this equality occurs when the sum of the debit account balances equals the sum of the credit account balances. A trial balance may also uncover errors in journalizing and posting. For example, a trial balance may well have detected the error at MF Global discussed in the Feature Story. In addition, a trial balance is useful in the preparation of financial statements, as we will explain in the next two chapters.
The steps for preparing a trial balance are:
Illustration 2-32 shows the trial balance prepared from Pioneer Advertising's ledger. Note that the total debits equal the total credits.
Helpful Hint
Note that the order of presentation in the trial balance is:
Assets
Liabilities
Stockholders' equity
Revenues
Expenses
A trial balance is a necessary checkpoint for uncovering certain types of errors. For example, if only the debit portion of a journal entry has been posted, the trial balance would bring this error to light.
Ethics Note
An error is the result of an unintentional mistake; it is neither ethical nor unethical. An irregularity is an intentional misstatement, which is viewed as unethical.
A trial balance does not guarantee freedom from recording errors, however. Numerous errors may exist even though the totals of the trial balance columns agree. For example, the trial balance may balance even when:
As long as equal debits and credits are posted, even to the wrong account or in the wrong amount, the total debits will equal the total credits. The trial balance does not prove that the company has recorded all transactions or that the ledger is correct.
Errors in a trial balance generally result from mathematical mistakes, incorrect postings, or simply transcribing data incorrectly. What do you do if you are faced with a trial balance that does not balance? First, determine the amount of the difference between the two columns of the trial balance. After this amount is known, the following steps are often helpful:
Note that dollar signs do not appear in journals or ledgers. Dollar signs are typically used only in the trial balance and the financial statements. Generally, a dollar sign is shown only for the first item in the column and for the total of that column. A single line (a totaling rule) is placed under the column of figures to be added or subtracted. Total amounts are double-underlined to indicate they are final sums.
INVESTOR INSIGHT
Why Accuracy Matters
While most companies record transactions very carefully, the reality is that mistakes still happen For example, bank regulators fined Bank One Corporation (now Chase) $1.8 million because they felt that the unreliability of the bank's accounting system caused it to violate regulator requirements.
Also, in recent years Fannie Mae, the government-chartered mortgage association, announced a series of large accounting errors. These announcements caused alarm among investors, regulators, and politicians because they fear that the errors may suggest larger, undetected problems This is important because the home-mortgage market depends on Fannie Mae to buy hundred of billions of dollars of mortgages each year from banks, thus enabling the banks to issue new mortgages.
Finally, before a major overhaul of its accounting system, the financial records of Waste Management Inc. were in such disarray that of the company's 57,000 employees, 10,000 were receiving pay slips that were in error.
The Sarbanes-Oxley Act was created to minimize the occurrence of errors like these b increasing every employee's responsibility for accurate financial reporting.
In order for these companies to prepare and issue financial statements, their accounting equations (debits and credits) must have been in balance at year-end. How could these errors or misstatements have occurred? (See page 100.)
Trial Balance
The following accounts come from the ledger of SnowGo Corporation at December 31, 2015.
Prepare a trial balance in good form.
Action Plan
Determine normal balances and list accounts in the order they appear in the ledger.
Accounts with debit balances appear in the left column, and those with credit balances in the right column.
Total the debit and credit columns to prove equality.
Solution
Related exercise material: BE2-9, BE2-10, E2-9, E2-10, E2-11, E2-13, E2-14, and DO IT! 2-4.
> Comprehensive DO IT!
Bob Sample and other student investors opened Campus Laundromat Inc. on September 1, 2015. During the first month of operations, the following transactions occurred.
Sept. 1 | Stockholders invested $20,000 cash in the business. |
2 | The company paid $1,000 cash for store rent for September. |
3 | Purchased washers and dryers for $25,000, paying $10,000 in cash and signing a $15,000, 6-month, 12% note payable. |
4 | Paid $1,200 for a one-year accident insurance policy. |
10 | Received a bill from the Daily News for advertising the opening of the laundromat $200. |
20 | Declared and paid a cash dividend to stockholders $700. |
30 | The company determined that cash receipts for laundry services for the month were $6,200. |
The chart of accounts for the company is the same as that for Pioneer Advertising Agency Inc. (page 68), plus No. 610 Advertising Expense.
(a) Journalize the September transactions. (Use J1 for the journal page number.)
(b) Open ledger accounts and post the September transactions.
(c) Prepare a trial balance at September 30, 2015.
Solution to Comprehensive DO IT!
Action Plan
Make separate journal entries for each transaction.
In journalizing, make sure debits equal credits.
In journalizing, use specific account titles taken from the chart of accounts.
Provide appropriate description of each journal entry.
Arrange ledger in statement order, beginning with the balance sheet accounts.
Post in chronological order.
Use numbers in the reference column to indicate the amount has been posted.
In the trial balance, list accounts in the order in which they appear in the ledger.
List debit balances in the left column, and credit balances in the right column.
1 Explain what an account is and how it helps in the recording process. An account is a record of increases and decreases in specific asset, liability, and stockholders' equity items.
2 Define debits and credits and explain their use in recording business transactions. The terms debit and credit are synonymous with left and right. Assets, 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.
3 Identify the basic steps in the recording process. The basic steps in the recording process are (a) analyze each transaction for its effects on the accounts, (b) enter the transaction information in a journal, and (c) transfer the journal information to the appropriate accounts in the ledger.
4 Explain what a journal is and how it helps in the recording process. The initial accounting record of a transaction is entered in a journal before the data are entered in the accounts. A journal (a) discloses in one place the complete effects of a transaction, (b) provides a chronological record of transactions, and (c) prevents or locates errors because the debit and credit amounts for each entry can be easily compared.
5 Explain what a ledger is and how it helps in the recording process. The ledger is the entire group of accounts maintained by a company. The ledger provides the balance in each of the accounts as well as keeps track of changes in these balances.
6 Explain what posting is and how it helps in the recording process. Posting is the transfer of journal entries to the ledger accounts. This phase of the recording process accumulates the effects of journalized transactions in the individual accounts.
7 Prepare a trial balance and explain its purposes. A trial balance is a list of accounts and their balances at a given time. Its primary purpose is to prove the equality of debits and credits after posting. A trial balance also uncovers errors in journalizing and posting and is useful in preparing financial statements.
Account A record of increases and decreases in specific asset, liability, or stockholders' equity items. (p. 56).
Chart of accounts A list of accounts and the account numbers that identify their location in the ledger. (p. 67).
Common stock Issued in exchange for the owners' investment paid in to corporation. (p. 58)
Compound entry A journal entry that involves three or more accounts. (p. 63).
Credit The right side of an account. (p. 56).
Debit The left side of an account. (p. 56).
Dividend A distribution by a corporation to its stockholders on a pro rata (equal) basis. (p. 59).
Double-entry system A system that records in appropriate accounts the dual effect of each transaction. (p. 57).
General journal The most basic form of journal. (p. 62).
General ledger A ledger that contains all asset, liability, and stockholders' equity accounts. (p. 65).
Journal An accounting record in which transactions are initially recorded in chronological order. (p. 62).
Journalizing The entering of transaction data in the journal. (p. 62).
Ledger The entire group of accounts maintained by a company. (p. 65).
Normal balance An account balance on the side where an increase in the account is recorded. (p. 57).
Posting The procedure of transferring journal entries to the ledger accounts. (p. 66).
Retained earnings Net income that is kept (retained) in the business. (p. 58).
Simple entry A journal entry that involves only two accounts. (p. 63).
T-account The basic form of an account. (p. 56).
Three-column form of account A form with columns for debit, credit, and balance amounts in an account. (p. 66).
Trial balance A list of accounts and their balances at a given time. (p. 75).
Self-Test, Brief Exercises, Exercises, Problem Set A, and many more components are available for practice in WileyPLUS.
Answers are on page 100.
Go to the book's companion website, www.wiley.com/college/weygandt, for additional Self-Test Questions.
1. Describe the parts of a T-account.
2. “The terms debit and credit mean increase and decrease, respectively.” Do you agree? Explain.
3. Tom Dingel, a fellow student, contends that the double-entry system means each transaction must be recorded twice. Is Tom correct? Explain.
4. Olga Conrad, a beginning accounting student, believes debit balances are favorable and credit balances are unfavorable. Is Olga correct? Discuss.
5. State the rules of debit and credit as applied to (a) asset accounts, (b) liability accounts, and (c) the stock-holders' equity accounts (revenue, expenses, dividends, common stock, and retained earnings).
6. What is the normal balance for each of the following accounts? (a) Accounts Receivable. (b) Cash. (c) Dividends. (d) Accounts Payable. (e) Service Revenue. (f) Salaries and Wages Expense. (g) Common Stock.
7. Indicate whether each of the following accounts is an asset, a liability, or a stockholders' equity account and whether it has a normal debit or credit balance: (a) Accounts Receivable. (b) Accounts Payable. (c) Equipment. (d) Dividends. (e) Supplies.
8. For the following transactions, indicate the account debited and the account credited.
(a) Supplies are purchased on account.
(b) Cash is received on signing a note payable.
(c) Employees are paid salaries in cash.
9. Indicate whether the following accounts generally will have (a) debit entries only, (b) credit entries only, or (c) both debit and credit entries.
(1) Cash.
(2) Accounts Receivable.
(3) Dividends.
(4) Accounts Payable.
(5) Salaries and Wages Expense.
(6) Service Revenue.
10. What are the basic steps in the recording process?
11. What are the advantages of using a journal in the recording process?
12. (a) When entering a transaction in the journal, should the debit or credit be written first?
(b) Which should be indented, the debit or credit?
13. Describe a compound entry, and provide an example.
14. (a) Should business transaction debits and credits be recorded directly in the ledger accounts?
(b) What are the advantages of first recording transactions in the journal and then posting to the ledger?
15. The account number is entered as the last step in posting the amounts from the journal to the ledger. What is the advantage of this step?
16. Journalize the following business transactions.
(a) Mark Stein invests $9,000 cash in the business in exchange for shares of common stock.
(b) Insurance of $800 is paid for the year.
(c) Supplies of $2,000 are purchased on account.
(d) Cash of $7,800 is received for services performed.
17. (a) What is a ledger?
(b) What is a chart of accounts and why is it important?
18.What is a trial balance and what are its purposes?
19. Juan Kirby is confused about how accounting information flows through the accounting system. He believes the flow of information is as follows.
(a) Debits and credits posted to the ledger.
(b) Business transaction occurs.
(c) Information entered in the journal.
(d) Financial statements are prepared.
(e) Trial balance is prepared.
Is Juan correct? If not, indicate to Juan the proper flow of the information.
20. Two students are discussing the use of a trial balance. They wonder whether the following errors, each considered separately, would prevent the trial balance from balancing. What would you tell them?
(a) The bookkeeper debited Cash for $600 and credited Salaries and Wages Expense for $600 for payment of wages.
(b) Cash collected on account was debited to Cash for $900 and Service Revenue was credited for $90.
21. What are the normal balances for Apple's Cash, Accounts Payable, and Interest Expense accounts?
> DO IT! Review
Identify normal balances.
(LO 2)
DO IT! 2-1 James Mayaguez has just rented space in a strip mall. In this space, he will open a photography studio, to be called “Picture This!” A friend has advised James to set up a double-entry set of accounting records in which to record all of his business transactions.
Identify the balance sheet accounts that James will likely need to record the transactions needed to open his business (a corporation). Indicate whether the normal balance of each account is a debit or credit.
(LO 4)
DO IT! 2-2 James Mayaguez engaged in the following activities in establishing his photography studio, Picture This!:
In what form (type of record) should James record these three activities? Prepare the entries to record the transactions.
Post transactions.
(LO 6)
DO IT! 2-3 James Mayaguez recorded the following transactions during the month of April.
Post these entries to the Cash T-account of the general ledger to determine the ending balance in cash. The beginning balance in cash on April 1 was $1,600.
Prepare a trial balance.
(LO 7)
DO IT! 2-4 The following accounts are taken from the ledger of Chillin' Company at December 31, 2015.
Prepare a trial balance in good form.
Analyze statements about accounting and the recording process.
(LO 1) |
E2-1 Faith Dillon has prepared the following list of statements about accounts.
Instructions Identify each statement as true or false. If false, indicate how to correct the statement. |
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Identify debits, credits, and normal balances.
(LO 2) |
E2-2 Selected transactions for L. Takemoto, an interior decorating firm, in its first month of business, are shown below and on page 86.
Instructions For each transaction indicate the following. (a) The basic type of account debited and credited (asset, liability, stockholders' equity). (b) The specific account debited and credited (Cash, Rent Expense, Service Revenue, etc.). (c) Whether the specific account is increased or decreased. (d) The normal balance of the specific account. Use the following format, in which the January 2 transaction is given as an example. |
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Journalize transactions.
(LO 4) |
E2-3 Data for L. Takemoto, interior decorating, are presented in E2-2.
Instructions Journalize the transactions using journal page J1. (You may omit explanations.) |
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Analyze transactions and determine their effect on accounts.
(LO 2) |
E2-4 Presented below is information related to Lexington Real Estate Agency.
Instructions Prepare the debit-credit analysis for each transaction as illustrated on pages 69–73. |
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Journalize transactions.
(LO 4) |
E2-5 Transaction data for Lexington Real Estate Agency are presented in E2-4.
Instructions Journalize the transactions. (You may omit explanations.) |
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Analyze transactions and journalize.
(LO 2, 3, 4) |
E2-6 Fredo Industries had the following transactions.
Instructions (a) Indicate what accounts are increased and decreased by each transaction. (b) Journalize each transaction. (Omit explanations.) |
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Analyze transactions and journalize.
(LO 2, 3, 4) |
E2-7 Leppard Enterprises had the following selected transactions.
Instructions (a) Indicate the effect each transaction has on the accounting equation (Assets = Liabilities + Stockholders' Equity), using plus and minus signs. (b) Journalize each transaction. (Omit explanations.) |
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Analyze statements about the ledger.
(LO 5) |
E2-8 Meghan Selzer has prepared the following list of statements about the general ledger.
Instructions Identify each statement as true or false. If false, indicate how to correct the statement. |
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Post journal entries and prepare a trial balance.
(LO 6, 7) |
E2-9 Selected transactions from the journal of Kati Tillman, investment broker, are presented below.
Instructions (a) Post the transactions to T-accounts. (b) Prepare a trial balance at August 31, 2015. |
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Journalize transactions from account data and prepare a trial balance.
(LO 4, 7) |
E2-10 The T-accounts below summarize the ledger of Santana Landscaping Company at the end of its first month of operations.
(a) Prepare the complete general journal (including explanations) from which the postings to Cash were made. (b) Prepare a trial balance at April 30, 2015. |
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Journalize transactions from account data and prepare a trial balance.
(LO 4, 7) |
E2-11 Presented below is the ledger for Higgs Co.
Instructions (a) Reproduce the journal entries for the transactions that occurred on October 1, 10, and 20, and provide explanations for each. (b) Determine the October 31 balance for each of the accounts above, and prepare a trial balance at October 31, 2015. |
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Prepare journal entries and post using standard account form.
(LO 4, 6) |
E2-12 Selected transactions for Alvarado Company during its first month in business are presented below.
Alvarado's chart of accounts shows No. 101 Cash, No. 157 Equipment, No. 201 Accounts Payable, No. 311 Common Stock, and No. 332 Dividends. Instructions (a) Journalize the transactions on page J1 of the journal. (Omit explanations.) (b) Post the transactions using the standard account form. |
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Analyze errors and their effects on trial balance.
(LO 7) |
E2-13 The bookkeeper for Brooks Equipment Repair made a number of errors in journalizing and posting, as described below.
For each error: (a) Indicate whether the trial balance will balance. (b) If the trial balance will not balance, indicate the amount of the difference. (c) Indicate the trial balance column that will have the larger total. Consider each error separately. Use the following form, in which error (1) is given as an example. |
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Prepare a trial balance.
(LO 2, 7) |
E2-14 The accounts in the ledger of Time Is Money Delivery Service contain the following Prepare a trial balance. balances on July 31, 2015.
Instructions Prepare a trial balance with the accounts arranged as illustrated in the chapter and fill in the missing amount for Cash. |
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Identify cash flow activities.
(LO 7) |
E2-15 The statement of cash flows classifies each transaction as an operating activity, an investing activity, or a financing activity. Operating activities are the types of activities the company performs to generate profits. Investing activities include the purchase of long-lived assets such as equipment or the purchase of investment securities. Financing activities are borrowing money, issuing shares of stock, and paying dividends.
Presented below are the following transactions.
Instructions Classify each of these transactions as operating, investing, or financing activities. |
Visit the book's companion website, at www.wiley.com/college/weygandt, and choose the Student Companion site to access Exercise Set B and Challenge Exercises.
Journalize a series of transactions.
(LO 2, 4) |
P2-1A Grandview Park was started on April 1 by R. S. Francis and associates. The following selected events and transactions occurred during April.
Grandview uses the following accounts: Cash, Prepaid Insurance, Land, Accounts Payable, Unearned Service Revenue, Common Stock, Dividends, Service Revenue, Advertising Expense, and Salaries and Wages Expense. Instructions Journalize transactions, post and prepare a trial balance. |
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Journalize and post transactions and prepare a trial balance.
(LO 2, 4, 6, 7) |
P2-2A Julia Dumars is a licensed CPA. During the first month of operations of her business, Julia Dumars, Inc., the following events and transactions occurred.
Julia uses the following chart of accounts: No. 101 Cash, No. 112 Accounts Receivable, No. 126 Supplies, No. 201 Accounts Payable, No. 209 Unearned Service Revenue, No. 311 Common Stock, No. 400 Service Revenue, No. 726 Salaries and Wages Expense, and No. 729 Rent Expense. |
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Instructions | |||||||||||||||||||||||
(a) Journalize the transactions. | |||||||||||||||||||||||
(b) Post to the ledger accounts. | |||||||||||||||||||||||
(c) Trial balance totals $28,400 | (c) Prepare a trial balance on May 31, 2015. | ||||||||||||||||||||||
Journalize transactions, post, and prepare a trial balance.
(LO 2, 4, 6, 7) |
P2-3A Tom Zopf owns and manages a computer repair service, which had the following trial balance on December 31, 2014 (the end of its fiscal year).
Summarized transactions for January 2015 were as follows.
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Instructions | |||||||||||||||||||||||
(a) Open T-accounts for each of the accounts listed in the trial balance, and enter the opening balances for 2015. | |||||||||||||||||||||||
(b) Prepare journal entries to record each of the January transactions. (Omit explanations.) | |||||||||||||||||||||||
(c) Post the journal entries to the accounts in the ledger. (Add accounts as needed.) | |||||||||||||||||||||||
(d) Trial balance totals $61,200 | (d) Prepare a trial balance as of January 31, 2015. | ||||||||||||||||||||||
Prepare a correct trial balance.
(LO 7) |
P2-4A The trial balance of Dominic Company shown below does not balance.
Your review of the ledger reveals that each account has a normal balance. You also discover the following errors.
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Instructions | |||||||||||||||||||||||
Trial balance totals $26,720 | Prepare a correct trial balance. Note that the chart of accounts includes the following: Dividends and Supplies. (Hint: It helps to prepare the correct journal entry for the transaction described and compare it to the mistake made.) | ||||||||||||||||||||||
Journalize transactions, post, and prepare a trial balance.
(LO 2, 4, 6, 7) |
P2-5A The Palace Theater opened on April 1. All facilities were completed on March 31. At this time, the ledger showed No. 101 Cash $6,000, No. 140 Land $12,000, No. 145 Buildings (concession stand, projection room, ticket booth, and screen) $8,000, No. 157 Equipment $6,000, No. 201 Accounts Payable $2,000, No. 275 Mortgage Payable $10,000, and No. 311 Common Stock $20,000. During April, the following events and transactions occurred.
In addition to the accounts identified above, the chart of accounts shows No. 112 Accounts Receivable, No. 136 Prepaid Rent, No. 400 Service Revenue, No. 429 Rent Revenue, No. 610 Advertising Expense, No. 726 Salaries and Wages Expense, and No. 729 Rent Expense. |
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Instructions | |||||||||||||||||||||||
(a) Enter the beginning balances in the ledger as of April 1. Insert a check mark in the reference column of the ledger for the beginning balance. | |||||||||||||||||||||||
(b) Journalize the April transactions. | |||||||||||||||||||||||
(c) Post the April journal entries to the ledger. Assume that all entries are posted from page 1 of the journal. | |||||||||||||||||||||||
(d) Trial balance totals $37,130 | (d) Prepare a trial balance on April 30, 2015. |
Journalize a series of transactions.
(LO 2, 4) |
P2-1B Surepar Disc Golf Course was opened on March 1 by Brian Lando. The following selected events and transactions occurred during March:
Surepar uses the following accounts: Cash, Prepaid Insurance, Land, Buildings, Equipment, Accounts Payable, Unearned Service Revenue, Common Stock, Dividends, Service Revenue, Advertising Expense, and Salaries and Wages Expense. Instructions Journalize the March transactions. |
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Journalize transactions, post, and prepare a trial balance.
(LO 2, 4, 6, 7) |
P2-2B Alicia Hiram is a licensed dentist. During the first month of the operation of her business, the following events and transactions occurred.
Alicia uses the following chart of accounts: No. 101 Cash, No. 112 Accounts Receivable, No. 126 Supplies, No. 201 Accounts Payable, No. 209 Unearned Service Revenue, No. 311 Common Stock, No. 400 Service Revenue, No. 726 Salaries and Wages Expense, and No. 729 Rent Expense. |
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Instructions | |||||||||||||||||||||||
(a) Journalize the transactions. | |||||||||||||||||||||||
(b) Post to the ledger accounts. | |||||||||||||||||||||||
(c) Trial balance totals $52,900 | (c) Prepare a trial balance on April 30, 2015. | ||||||||||||||||||||||
Journalize transactions, post, and prepare a trial balance.
(LO 2, 4, 6, 7) |
P2-3B Hillsborough Services was formed on May 1, 2015. The following transactions took place during the first month.
Transactions on May 1:
Transactions during the remainder of the month:
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Instructions | |||||||||||||||||||||||
(a) Prepare journal entries to record each of the events listed. (Omit explanations.) | |||||||||||||||||||||||
(b) Post the journal entries to T-accounts. | |||||||||||||||||||||||
(c) Trial balance totals $92,160 | (c) Prepare a trial balance as of May 31, 2015. | ||||||||||||||||||||||
Prepare a correct trial balance.
(LO 7) |
P2-4B The trial balance of Zoop Co. shown below does not balance.
Each of the listed accounts has a normal balance per the general ledger. An examination of the ledger and journal reveals the following errors.
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Instructions | |||||||||||||||||||||||
Trial balance totals $16,218 | Prepare a correct trial balance. (Hint: It helps to prepare the correct journal entry for the transaction described and compare it to the mistake made.) | ||||||||||||||||||||||
Journalize transactions, post and prepare a trial balance.
(LO 2, 4, 6, 7) |
P2-5B The Hart Theater, owned by Paul Hart, will begin operations in March. The Hart will be unique in that it will show only triple features of sequential theme movies. As of March 1, the ledger of Hart showed No. 101 Cash $8,000, No. 140 Land $22,000, No. 145 Buildings (concession stand, projection room, ticket booth, and screen) $10,000, No. 157 Equipment $8,000, No. 201 Accounts Payable $6,000, and No. 311 Common Stock $42,000. During the month of March, the following events and transactions occurred.
In addition to the accounts identified above, the chart of accounts includes No. 112 Accounts Receivable, No. 400 Service Revenue, No. 429 Rent Revenue, No. 610 Advertising Expense, No. 729 Rent Expense, and No. 726 Salaries and Wages Expense. |
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Instructions | |||||||||||||||||||||||
(a) Enter the beginning balances in the ledger. Insert a check mark () in the reference column of the ledger for the beginning balance. | |||||||||||||||||||||||
(b) Journalize the March transactions. | |||||||||||||||||||||||
(c) Post the March journal entries to the ledger. Assume that all entries are posted from page 1 of the journal. | |||||||||||||||||||||||
(d) Trial balance totals $66,250 | (d) Prepare a trial balance on March 31, 2015. |
Visit the book's companion website, at www.wiley.com/college/weygandt, and choose the Student Companion site to access Problem Set C.
(Note: This is a continuation of the Cookie Chronicle from Chapter 1.)
CCC2 After researching the different forms of business organization. Natalie Koebel decides to operate “Cookie Creations” as a corporation. She then starts the process of getting the business running.
Go to the book's companion website, www.wiley.com/college/weygandt, to see the completion of this problem.
Broadening Your PERSPECTIVE
BYP2-1 The financial statements of Apple Inc. are presented in Appendix A. Instructions for accessing and using the company's complete annual report, including the notes to the financial statements, are also provided in Appendix A.
Apple's financial statements contain the following selected accounts, stated in millions of dollars.
Accounts Payable | Cash and Cash Equivalents |
Accounts Receivable | Research and Development Expense |
Property, Plant, and Equipment | Inventories |
Instructions
(a) Answer the following questions.
(1) What is the increase and decrease side for each account?
(2) What is the normal balance for each account?
(b) Identify the probable other account in the transaction and the effect on that account when:
(1) Accounts Receivable is decreased.
(2) Accounts Payable is decreased.
(3) Inventories are increased.
(c) Identify the other account(s) that ordinarily would be involved when:
(1) Research and Development Expense is increased.
(2) Property, Plant, and Equipment is increased.
BYP2-2 PepsiCo's financial statements are presented in Appendix B. Financial statements of The Coca-Cola Company are presented in Appendix C. Instructions for accessing and using the complete annual reports of PepsiCo and Coca-Cola, including the notes to the financial statements, are also provided in Appendices B and C, respectively.
Instructions
(a) Based on the information contained in the financial statements, determine the normal balance of the listed accounts for each company.
PepsiCo | Coca-Cola |
1. Inventory | 1. Accounts Receivable |
2. Property, Plant, and Equipment | 2. Cash and Cash Equivalents |
3. Accounts Payable | 3. Cost of Goods Sold (expense) |
4. Interest Expense | 4. Sales (revenue) |
(b) Identify the other account ordinarily involved when:
(1) Accounts Receivable is increased.
(2) Salaries and Wages Payable is decreased.
(3) Property, Plant, and Equipment is increased.
(4) Interest Expense is increased.
BYP2-3 Amazon.com, Inc.'s financial statements are presented in Appendix D. Financial statements for Wal-Mart Stores, Inc. are presented in Appendix E. Instructions for accessing and using the complete annual reports of Amazon and Wal-Mart, including the notes to the financial statements, are also provided in Appendices D and E, respectively.
Instructions
(a) Based on the information contained in the financial statements, determine the normal balance of the listed accounts for each company.
Amazon | Wal-Mart |
1. Interest Expense | 1. Net Sales Revenues |
2. Cash and Cash Equivalents | 2. Inventories |
3. Accounts Payable | 3. Cost of Sales |
(b) Identify the other account ordinarily involved when:
(1) Accounts Receivable is increased.
(2) Interest Expense is increased.
(3) Salaries and Wages Payable is decreased.
(4) Service Revenue is increased.
BYP2-4 Much information about specific companies is available on the Internet. Such information includes basic descriptions of the company's location, activities, industry, financial health, and financial performance.
Address: biz.yahoo.com/i, or go to www.wiley.com/college/weygandt
Steps
Instructions
Answer the following questions.
(a) What is the company's industry?
(b) What are the company's total sales?
(c) What is the company's net income?
(d) What are the names of four of the company's competitors?
(e) Choose one of these competitors.
(f) What is this competitor's name? What are its sales? What is its net income?
(g) Which of these two companies is larger by size of sales? Which one reported higher net income?
BYP2-5 The January 27, 2011, edition of the New York Times contains an article by Richard Sandomir entitled “N.F.L. Finances, as Seen Through Packers' Records.” The article discusses the fact that the Green Bay Packers are the only NFL team that publicly publishes its annual report.
Instructions
Read the article and answer the following questions.
(a) Why are the Green Bay Packers the only professional football team to publish and distribute an annual report?
(b) Why is the football players' labor union particularly interested in the Packers' annual report?
(c) In addition to the players' labor union, what other outside party might be interested in the annual report?
(d) Even though the Packers' revenue increased in recent years, the company's operating profit fell significantly. How does the article explain this decline?
BYP2-6 Dyanna Craig operates Craig Riding Academy. The academy's primary sources of revenue are riding fees and lesson fees, which are paid on a cash basis. Dyanna also boards horses for owners, who are billed monthly for boarding fees. In a few cases, boarders pay in advance of expected use. For its revenue transactions, the academy maintains the following accounts: Cash, Accounts Receivable, and Service Revenue.
The academy owns 10 horses, a stable, a riding corral, riding equipment, and office equipment. These assets are accounted for in these accounts: Horses, Buildings, and Equipment.
The academy also maintains the following accounts: Supplies, Prepaid Insurance, Accounts Payable, Salaries and Wages Expense, Advertising Expense, Utilities Expense, and Maintenance and Repairs Expense.
Dyanna makes periodic withdrawals of cash dividends to stockholders. To record stockholders' equity in the business and dividends, three accounts are maintained: Common Stock, Retained Earnings, and Dividends.
During the first month of operations, an inexperienced bookkeeper was employed. Dyanna Craig asks you to review the following eight entries of the 50 entries made during the month. In each case, the explanation for the entry is correct.
Instructions
With the class divided into groups, answer the following.
(a) Identify each journal entry that is correct. For each journal entry that is incorrect, prepare the entry that should have been made by the bookkeeper.
(b) Which of the incorrect entries would prevent the trial balance from balancing?
(c) What was the correct net income for May, assuming the bookkeeper reported net income of $4,500 after posting all 50 entries?
(d) What was the correct cash balance at May 31, assuming the bookkeeper reported a balance of $12,475 after posting all 50 entries (and the only errors occurred in the items listed above)?
BYP2-7 Keller's Maid Company offers home-cleaning service. Two recurring transactions for the company are billing customers for services performed and paying employee salaries. For example, on March 15, bills totaling $6,000 were sent to customers and $2,000 was paid in salaries to employees.
Instructions
Write a memo to your instructor that explains and illustrates the steps in the recording process for each of the March 15 transactions. Use the format illustrated in the textbook under the heading, “The Recording Process Illustrated” (p. 68).
BYP2-8 Meredith Ward is the assistant chief accountant at Frazier Company, a manufacturer of computer chips and cellular phones. The company presently has total sales of $20 million. It is the end of the first quarter. Meredith is hurriedly trying to prepare a trial balance so that quarterly financial statements can be prepared and released to management and the regulatory agencies. The total credits on the trial balance exceed the debits by $1,000. In order to meet the 4 p.m. deadline, Meredith decides to force the debits and credits into balance by adding the amount of the difference to the Equipment account. She chooses Equipment because it is one of the larger account balances; percentage-wise, it will be the least misstated. Meredith “plugs” the difference! She believes that the difference will not affect anyone's decisions. She wishes that she had another few days to find the error but realizes that the financial statements are already late.
Instructions
(a) Who are the stakeholders in this situation?
(b) What are the ethical issues involved in this case?
(c) What are Meredith's alternatives?
BYP2-9 If you haven't already done so, in the not-too-distant future you will prepare a résumé. In some ways, your résumé is like a company's annual report. Its purpose is to enable others to evaluate your past, in an effort to predict your future.
A résumé is your opportunity to create a positive first impression. It is important that it be impressive—but it should also be accurate. In order to increase their job prospects, some people are tempted to “inflate” their résumés by overstating the importance of some past accomplishments or positions. In fact, you might even think that “everybody does it” and that if you don't do it, you will be at a disadvantage.
David Edmondson, the president and CEO of well-known electronics retailer Radio Shack, overstated his accomplishments by claiming that he had earned a bachelor of science degree, when in fact he had not. Apparently, his employer had not done a background check to ensure the accuracy of his résumé. Should Radio Shack have fired him?
YES: Radio Shack is a publicly traded company. Investors, creditors, employees, and others doing business with the company will not trust it if its leader is known to have poor integrity. The “tone at the top” is vital to creating an ethical organization.
NO: Mr. Edmondson had been a Radio Shack employee for 11 years. He had served the company in a wide variety of positions, and had earned the position of CEO through exceptional performance. While the fact that he lied 11 years earlier on his résumé was unfortunate, his service since then made this past transgression irrelevant. In addition, the company was in the midst of a massive re-structuring, which included closing 700 of its 7,000 stores. It could not afford additional upheaval at this time.
Instructions
Write a response indicating your position regarding this situation. Provide support for your view.
BYP2-10 Every company needs to plan in order to move forward. Its top management must consider where it wants the company to be in three to five years. Like a company, you need to think about where you want to be three to five years from now, and you need to start taking steps now in order to get there.
Instructions
Provide responses to each of the following items.
(a) Where would you like to be working in three to five years? Describe your plan for getting there by identifying between five and 10 specific steps that you need to take.
(b) In order to get the job you want, you will need a résumé. Your résumé is the equivalent of a company's annual report. It needs to provide relevant and reliable information about your past accomplishments so that employers can decide whether to “invest” in you. Do a search on the Internet to find a good résumé format. What are the basic elements of a résumé?
(c) A company's annual report provides information about a company's accomplishments. In order for investors to use the annual report, the information must be reliable; that is, users must have faith that the information is accurate and believable. How can you provide assurance that the information on your résumé is reliable?
(d) Prepare a résumé assuming that you have accomplished the five to 10 specific steps you identified in part (a). Also, provide evidence that would give assurance that the information is reliable.
BYP2-11 Auditors provide a type of certification of corporate financial statements. Certification is used in many other aspects of business as well. For example, it plays a critical role in the sustainability movement. The February 7, 2012, issue of the New York Times contained an article by S. Amanda Caudill entitled “Better Lives in Better Coffee,” which discusses the role of certification in the coffee business.
Address: http://scientistatwork.blogs.nytimes.com/2012/02/07/better-lives-in-better-coffee
Instructions
Read the article and answer the following questions.
(a) The article mentions three different certification types that coffee growers can obtain from three different certification bodies. Using financial reporting as an example, what potential problems might the existence of multiple certification types present to coffee purchasers?
(b) According to the author, which certification is most common among coffee growers? What are the possible reasons for this?
(c) What social and environmental benefits are coffee certifications trying to achieve? Are there also potential financial benefits to the parties involved?
Answers to Insight and Accounting Across the Organization Questions
p. 59 Keeping Score Q: Do you think that the Chicago Bears football team would be likely to have the same major revenue and expense accounts as the Cubs? A: Because their businesses are similar—professional sports—many of the revenue and expense accounts for the baseball and football teams might be similar.
p. 64 Boosting Microsoft's Profits Q: In what ways is this Microsoft division using accounting to assist in its effort to become more profitable? A: The division has used accounting to set very strict sales, revenue, and profit goals. In addition, the managers in this division use accounting to keep a tight rein on product costs. Also, accounting serves as the basis of communication so that the marketing managers and product designers can work with production managers, engineers, and accountants to create an exciting product within specified cost constraints.
p. 65 A Convenient Overstatement Q: What incentives might employees have had to overstate the value of these investment securities on the company's financial statements? A: One reason that they may have been reluctant to record the losses is out of fear that the company's shareholders and clients would panic if they saw the magnitude of the losses. However, personal self-interest might have been equally to blame—the bonuses of the traders were tied to the value of the investment securities.
p. 77 Why Accuracy Matters Q: In order for these companies to prepare and issue financial statements, their accounting equations (debits and credits) must have been in balance at year-end. How could these errors or misstatements have occurred? A: A company's accounting equation (its books) can be in balance yet its financial statements have errors or misstatements because of the following: entire transactions were not recorded; transactions were recorded at wrong amounts; transactions were recorded in the wrong accounts; transactions were recorded in the wrong accounting period. Audits of financial statements uncover some but obviously not all errors or misstatements.
Answers to Self-Test Questions
1. b 2. c 3. d 4. d 5. d 6. b 7. a 8. c 9. b 10. c 11. d 12. a ($18,000 − $5,000) 13. a 14. c 15. c ($5,000 + $40,000 + $10,000 + $13,000 + $61,000)
International companies use the same set of procedures and records to keep track of transaction data. Thus, the material in Chapter 2 dealing with the account, general rules of debit and credit, and steps in the recording process—the journal, ledger, and chart of accounts—is the same under both GAAP and IFRS.
8
Compare the procedures for the accounting process under GAAP and IFRS.
The basic recording process shown in this textbook is followed by companies around the globe. It is unlikely to change in the future. The definitional structure of assets, liabilities, equity, revenues, and expenses may change over time as the IASB and FASB evaluate their overall conceptual framework for establishing accounting standards.
(a) IFRS reverses the rules of debits and credits, that is, debits are on the right and credits are on the left.
(b) IFRS uses the same process for recording transactions as GAAP.
(c) The chart of accounts under IFRS is different because revenues follow assets.
(d) None of the above statements are correct.
(a) Assets = Liabilities + Common Stock + Retained Earnings + Revenues − Expenses + Dividends.
(b) Assets + Liabilities = Common Stock + Retained Earnings + Revenues − Expenses − Dividends.
(c) Assets = Liabilities + Common Stock + Retained Earnings + Revenues − Expenses − Dividends.
(d) Assets = Liabilities + Common Stock + Retained Earnings − Revenues − Expenses − Dividends.
(a) is the same under IFRS and GAAP.
(b) proves that transactions are recorded correctly.
(c) proves that all transactions have been recorded.
(d) will not balance if a correct journal entry is posted twice.
(a) GAAP uses accrual-accounting concepts and IFRS uses primarily the cash basis of accounting.
(b) IFRS uses a different posting process than GAAP.
(c) IFRS uses more fair value measurements than GAAP.
(d) the limitations of a trial balance are different between IFRS and GAAP.
(a) Currency signs only appear in ledgers and journal entries.
(b) Currency signs are only shown in the trial balance.
(c) Currency signs are shown for all compound journal entries.
(d) Currency signs are shown in trial balances and financial statements.
IFRS2-1 Describe some of the issues the SEC must consider in deciding whether the United States should adopt IFRS.
IFRS2-2 The financial statements of Zetar plc are presented in Appendix F. Instructions for accessing and using the company's complete annual report, including the notes to its financial statements, are also provided in Appendix F.
Instructions
Describe in which statement each of the following items is reported, and the position in the statement (e.g., current asset).
(a) Other administrative expenses.
(b) Cash at bank.
(c) Borrowings and overdrafts.
(d) Finance costs.
Answers to IFRS Self-Test Questions
1. b 2. c 3. a 4. c 5. d
1In homework problems, you should use specific account titles when they are given. When account titles are not given, you may select account titles that identify the nature and content of each account. The account titles used in journalizing should not contain explanations such as Cash Paid or Cash Received.
2In homework problems, you can journalize all transactions before posting any of the journal entries.
3After the last entry has been posted, the accountant should scan the reference column in the journal, to confirm that all postings have been made.