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 what it is like for a major corporation like Bank of Taiwan (BOT) (TWN). If you had your life savings invested at BOT, you might be just slightly displeased if, when you checked your balance online, a message appeared on the screen indicating that your account information was lost.
To ensure the accuracy of your balance and the security of your funds, BOT, like all other companies large and small, relies on a sophisticated accounting information system. That's not to say that BOT or any other company is error-free. In fact, if you'veever overdrawn your bank account because you failed to track your debit card purchases properly, you may take some comfort from one accountant's mistake at Fidelity Investments (USA), one of the largest mutual fund investment firms in the world. The accountant failed to include a minus sign while doing a calculation, making what was actually a $1.3 billion loss look like a $1.3 billion—yes, billion—gain! Fortunately, like most accounting errors, it was detected before any real harm was done.
No one expects that kind of mistake at a company like Fidelity, which has sophisticated computer systems and top investment managers. In explaining the mistake to shareholders, a spokesperson wrote, “Some people have asked how, in this age of technology, such a mistake could be made. While many of our processes are computerized, accounting systems are complex and dictate that some steps must be handled manually by our managers and accountants, and people can make mistakes.”
In Chapter 1, we analyzed business transactions in terms of the accounting equation. We then presented the cumulative effects of these transactions in tabular form. Imagine a company like Bank of Taiwan (BOT) (as in the Feature Story) using the same tabular format as Softbyte SA to keep track of its transactions. In a single day, BOT engages 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.
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 equity item. For example, Softbyte SA (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.
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.
Define debits and credits and explain their use in recording business transactions.
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 SA. The data are taken from the Cash column of the tabular summary in Illustration 1-10 (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 payment of cash (in blue) is credited to Cash.
Having increases on one side and decreases on the other reduces recording errors and helps in determining the totals of each side of the account as well as the account balance. The balance is determined by netting the two sides (subtracting one amount from the other). The account balance, a debit of €8,050, indicates that Softbyte had €8,050 more increases than decreases in cash. That is, since it started with a balance of zero, it has €8,050 in its Cash account.
In Chapter 1, you learned the effect of a transaction on the basic accounting equation. Remember that each transaction must affect two or more accounts to keep the basic accounting equation in balance. In other words, for each transaction, debits must equal credits. The equality of debits and credits provides the basis for the double-entry system of recording transactions.
Under the double-entry system, the dual (two-sided) effect of each transaction is recorded in appropriate accounts. This system provides a logical method for recording transactions. As discussed in the Feature Story about Bank of Taiwan (TWN), the double-entry system also helps to 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. On the following pages, we will illustrate debit and credit procedures in the double-entry system.
In Illustration 2-2 for Softbyte SA 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 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 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 equity: share capital—ordinary, retained earnings, dividends, revenues, and expenses. In a double-entry system, companies keep accounts for each of these subdivisions, as explained below.
SHARE CAPITAL—ORDINARY Companies issue share capital—ordinary in exchange for the owners' investment paid in to the company. Credits increase the Share Capital—Ordinary account, and debits decrease it. For example, when an owner invests cash in the business in exchange for ordinary shares, the company debits (increases) Cash and credits (increases) Share Capital—Ordinary.
Illustration 2-5 shows the rules of debit and credit for the Share Capital–Ordinary account.
We can diagram the normal balance in Share Capital—Ordinary as follows.
• HELPFUL HINT The rules for debit and credit and the normal balances of share capital—ordinary 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 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 shareholders. The most common form of a distribution is a cash dividend. Dividends reduce the shareholders' 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.
• HELPFUL HINT Because revenues increase equity, a revenue account has the same debit/credit rules as the Retained Earnings account. Expenses have the opposite effect.
The purpose of earning revenues is to benefit the shareholders of the business. When a company recognizes revenues, equity increases. Revenues are a subdivision of equity that provides information as to why 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 equity.
Expenses have the opposite effect: expenses decrease 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 reverse of revenue accounts. Thus, debits increase expense accounts, and credits decrease them.
Illustration 2-9 shows the effect of debits and credits on 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 balance as follows.
As Chapter 1 indicated, companies report share capital—ordinary and retained earnings in the equity section of the statement of financial position. They report dividends on the retained earnings statement. And they report revenues and expenses on the income statement. Dividends, revenues, and expenses are eventually transferred to retained earnings at the end of the period. As a result, a change in any one of these three items affects equity. Illustration 2-11 shows the relationships related to equity.
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.
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 receipt, a check, or a bill, provide evidence of the transaction. The company analyzes this evidence to determine the transaction's effects on specific accounts. The company then enters the transaction in the journal. Finally, it transfers the journal entry to the designated accounts in the ledger. Illustration 2-13 shows the recording process.
The steps in the recording process occur repeatedly. In Chapter 1, we illustrated the first step, the analysis of transactions, and will give further examples in this and later chapters. The other two steps in the recording process are explained in the next sections.
Explain what a journal is and how it helps in the recording process.
Companies initially record transactions in chronological order (the order in which they occur). Thus, the journal is referred to as the book of original entry. For each transaction, the journal shows the debit and credit effects on specific accounts.
Companies may use various kinds of journals, but every company has the most basic form of journal, a general journal. Typically, a general journal has spaces for dates, account titles and explanations, references, and two amount columns. (See the format of the journal in Illustration 2-14 , below.) Whenever we use the term “journal” in this textbook, we mean the general journal, unless we specify otherwise.
The journal makes several significant contributions to the recording process:
Entering transaction data in the journal is known as journalizing. Companies make separate journal entries for each transaction. A complete entry consists of: (1) the date of the transaction, (2) the accounts and amounts to be debited and credited, and (3) a brief explanation of the transaction.
Illustration 2-14 shows the technique of journalizing, using the first two transactions of Softbyte SA. On September 1, shareholders invested €15,000 cash in the corporation in exchange for ordinary shares, and Softbyte purchased computer equipment for €7,000 cash. The number J1 indicates that the company records these two entries on the first page of the general journal. (The boxed numbers correspond to explanations in the list below the illustration.)
It is important to use correct and specific account titles in journalizing. Erroneous account titles lead to incorrect financial statements. However, some flexibility exists initially in selecting account titles. The main criterion is that each title must appropriately describe the content of the account. Once a company chooses the specific title to use, it should record under that account title all later transactions involving the account.2
Some entries involve only two accounts, one debit and one credit. (See, for example, the entries in Illustration 2-14 .) An entry like these is considered a simple entry. Some transactions, however, require more than two accounts in journalizing. An entry that requires three or more accounts is a compound entry. To illustrate, assume that on July 1, Tsai Company purchases a delivery truck costing NT$420,000. It pays NT$240,000 cash now and agrees to pay the remaining NT$180,000 on account (to be paid later). The compound entry is as follows.
In a compound entry, the standard format requires that all debits be listed before the credits.
As president and sole shareholder, Kate Browne engaged in the following activities in establishing her beauty salon, Hair It Is Company SA.
In what form (type of record) should Hair It Is Company record these three activities? Prepare the entries to record the transactions.
Each transaction that is recorded is entered in the general journal. The three activities would be recorded as follows.
Related exercise material: BE2-3, BE2-6, E2-3, E2-5, E2-6, E2-7, and DO IT! 2-2.
The entire group of accounts maintained by a company is the ledger. The ledger keeps in one place all the information about changes in specific account balances.
Explain what a ledger is and how it helps in the recording process.
Companies may use various kinds of ledgers, but every company has a general ledger. A general ledger contains all the asset, liability, and equity accounts, as shown in Illustration 2-16 . Whenever we use the term “ledger” in this textbook, we mean the general ledger, unless we specify otherwise.
The ledger provides the balance in each of the accounts and keeps track of changes in these balances. For example, the Cash account shows the amount of cash available to meet current obligations. The Accounts Receivable account shows amounts due from customers. The Accounts Payable account shows amounts owed to creditors. Each account is numbered for easier identification.
In his autobiography, Sam Walton described the double-entry accounting system he used when Wal-Mart Stores, Inc. (USA) was just getting started: “We kept a little pigeonhole on the wall for the cash receipts and paperwork of each [Wal-Mart] store. I had a blue binder ledger book for each store. When we added a store, we added a pigeonhole. We did this at least up to twenty stores. Then once a month, the bookkeeper and I would enter the merchandise, enter the sales, enter the cash, and balance it.” Today, the company operates more than 7,000 stores worldwide under various names. That's a lot of “pigeonholes.”
Source: Sam Walton , Made in America (New York: Doubleday, 1992), p. 53.
Q Why did Sam Walton keep separate pigeonholes and blue binders? Why bother to keep separate records for each store? (See page 97.)
The simple T-account form used in accounting textbooks is often very useful for illustration purposes. However, in practice, the account forms used in ledgers are much more structured. Illustration 2-17 shows a typical form, using assumed data from a cash account.
This is called the three-column form of account. It has three money columns—debit, credit, and balance. The balance in the account is determined after each transaction. Companies use the explanation space and reference columns to provide special information about the transaction.
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 SA's first journal entry, the issuance of ordinary shares for €15,000 cash. The boxed numbers indicate the sequence of the steps.
Posting should be performed in chronological order. That is, the company should post all the debits and credits of one journal entry before proceeding to the next journal entry. Postings should be made on a timely basis to ensure that the ledger is up to date.3
The reference column of a ledger account indicates the journal page from which the transaction was posted.4 The explanation space of the ledger account is used infrequently because an explanation already appears in the journal.
The number and type of accounts differ for each company. The number of accounts depends on the amount of detail management desires. For example, the management of one company may want a single account for all types of utility expense. Another may keep separate expense accounts for each type of utility, such as gas, electricity, and water. Similarly, a small company like Softbyte SA will have fewer accounts than a corporate giant like Anheuser-Busch InBev (BEL). Softbyte may be able to manage and report its activities in 20 to 30 accounts, while Anheuser-Busch InBev may require thousands of accounts to keep track of its worldwide activities.
• HELPFUL HINT On the textbook's endpapers, you will also find an expanded chart of accounts.
Most companies have a chart of accounts. This chart lists the accounts and the account numbers that identify their location in the ledger. The numbering system that identifies the accounts usually starts with the statement of financial position accounts and follows with the income statement accounts.
In this and the next two chapters, we will be explaining the accounting for Yazici Advertising A.Ş. (a service company). The ranges of the account numbers are as follows.
Illustration 2-19 shows the chart of accounts for Yazici Advertising A.Ş. Accounts shown in red are used in this chapter. Accounts shown in black are explained in later chapters.
You will notice that there are gaps in the numbering system of the chart of accounts for Yazici Advertising A.Ş. Gaps are left to permit the insertion of new accounts as needed during the life of the business.
Illustrations 2-20 through 2-29 show the basic steps in the recording process, using the October transactions of Yazici Advertising A.Ş. Yazici's accounting period is a month. A basic analysis and a debit-credit analysis precede the journalizing and posting of each transaction. For simplicity, we use the T-account form in the illustrations instead of the standard account form.
Study these transaction analyses carefully. The purpose of transaction analysis is first to identify the type of account involved, and then to determine whether to make a debit or a credit to the account. You should always perform this type of analysis before preparing a journal entry. Doing so will help you understand the journal entries discussed in this chapter as well as more complex journal entries in later chapters.
• HELPFUL HINT Follow these steps:
Como Company SpA 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 the ending balance in cash. The beginning balance in Cash on March 1 was €600.
Cash | |||
3/1 | 600 | 3/15 | 400 |
3/4 | 2,280 | 3/19 | 92 |
3/31 Bal. | 2,388 |
Related exercise material: BE2-7, BE2-8, E2-8, E2-9, E2-12, and DO IT! 2-3.
Illustration 2-30 shows the journal for Yazici Advertising A.Ş. for October. Illustration 2-31 (page 72) shows the ledger, with all balances in red.
Prepare a trial balance and explain its purposes.
A trial balance is a list of accounts and their balances at a given time. Customarily, companies prepare a trial balance at the end of an accounting period. They list accounts in the order in which they appear in the ledger. Debit balances appear in the left column and credit balances in the right column.
The trial balance proves the mathematical equality of debits and credits after posting. Under the double-entry system, this equality occurs when the sum of the debit account balances equals the sum of the credit account balances. A trial balance may also uncover errors in journalizing and posting. For example, a trial balance may well have detected the error at Fidelity Investments discussed in the Feature Story. In addition, a trial balance is useful in the preparation of financial statements, as we will explain in the next two chapters.
The steps for preparing a trial balance are:
Illustration 2-32 shows the trial balance prepared from Yazici Advertising's ledger. Note that the total debits (28,700) equal the total credits (28,700).
• HELPFUL HINT To sum a column of figures is sometimes referred to as to foot the column. The column is then said to be footed.
A trial balance is a necessary checkpoint for uncovering certain types of errors. For example, if only the debit portion of a journal entry has been posted, the trial balance would bring this error to light.
• HELPFUL HINT A trial balance is so named because it is a test to see if the sum of the debit balances equals the sum of the credit balances.
A trial balance does not guarantee freedom from recording errors, however. Numerous errors may exist even though the totals of the trial balance columns agree. For example, the trial balance may balance even when (1) a transaction is not journalized, (2) a correct journal entry is not posted, (3) a journal entry is posted twice, (4) incorrect accounts are used in journalizing or posting, or (5) offsetting errors are made in recording the amount of a transaction. As long as equal debits and credits are posted, even to the wrong account or in the wrong amount, the total debits will equal the total credits. The trial balance does not prove that the company has recorded all transactions or that the ledger is correct.
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.
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 currency signs do not appear in journals or ledgers. Currency signs are typically used only in the trial balance and the financial statements. Generally, a currency sign is shown only for the first item in the column and for the total of that column. A single line (a totaling rule) is placed under the column of figures to be added or subtracted. Total amounts are double-underlined to indicate they are final sums. Negative signs or parentheses do not appear in journals or ledgers.
Recently, the German Finance minister, Wolfgang Schauble, said that “statistical and communication problems” were to blame for a €55.5 billion error in the accounts of nationalized property lender Hypo Real Estate Holding (DEU). Mr. Schauble referred to the error as “an annoying mistake.” This seems to be a considerable understatement considering that the error represented 2.6% of the German gross domestic product. Since the bank had been previously taken over by the German government, the error had resulted in an overstatement of the federal debt of €55.5 billion.
Q In order for this company to prepare and issue financial statements, its accounting equation (debits and credits) must have been in balance at year-end. How could this error have occurred? (See page 97.)
The following accounts come from the ledger of SnowGo Company Ltd. at December 31, 2017 (Japanese yen in thousands).
157 | Equipment | ¥88,000 |
311 | Share Capital—Ordinary | ¥20,000 |
332 | Dividends | 8,000 |
212 | Salaries and | |
201 | Accounts Payable | 22,000 |
Wages Payable | 2,000 |
|
726 | Salaries and | 200 | Notes Payable | 19,000 |
|
Wages Expense | 42,000 |
732 | Utilities Expense | 3,000 |
|
112 | Accounts Receivable | 4,000 |
130 | Prepaid Insurance | 6,000 |
400 | Service Revenue | 95,000 |
101 | Cash | 7,000 |
Prepare a trial balance in good form. |
SNOWGO COMPANY LTD. Trial Balance December 31, 2017 (in thousands) |
||
Debit | Credit | |
Cash | ¥ 7,000 |
|
Accounts Receivable | 4,000 |
|
Prepaid Insurance | 6,000 |
|
Equipment | 88,000 |
|
Notes Payable | ¥ 19,000 |
|
Accounts Payable | 22,000 |
|
Salaries and Wages Payable | 2,000 |
|
Share Capital—Ordinary | 20,000 |
|
Dividends | 8,000 |
|
Service Revenue | 95,000 |
|
Utilities Expense | 3,000 | |
Salaries and Wages Expense | 42,000 | |
¥158,000 |
¥158,000 |
Related exercise material: BE2-9, BE2-10, E2-9, E2-10, E2-11, E2-13, E2-14, and DO IT! 2-4.
Which of the following statements about an account is true?
Debits:
A revenue account:
Accounts that normally have debit balances are:
The expanded accounting equation is:
Which of the following is not part of the recording process?
Which of the following statements about a journal is false?
The purchase of supplies on account should result in:
A ledger:
Posting:
Before posting a payment of €5,000, the Accounts Payable of Senator Company had a normal balance of €16,000. The balance after posting this transaction was:
A trial balance:
A trial balance will not balance if:
The trial balance of Clooney Ltd. had accounts with the following normal balances: Cash £5,000, Service Revenue £85,000, Salaries and Wages Payable £4,000, Salaries and Wages Expense £40,000, Rent Expense £10,000, Share Capital—Ordinary £42,000, Dividends £15,000, and Equipment £61,000. In preparing a trial balance, the total in the debit column is:
Analyze transactions and determine their effect on accounts.
Oct. 1 |
Arnold Conan begins business as a real estate agent with a cash investment of £18,000 in exchange for shares. |
2 |
Hires an administrative assistant. |
3 |
Purchases office equipment for £1,700, on account. |
6 |
Sells a house and lot for B. Clinton; bills B. Clinton £4,200 for realty services performed. |
27 |
Pays £900 on the balance related to the transaction of October 3. |
30 |
Pays the administrative assistant £2,800 in salary for October. |
Journalize the transactions. (You may omit explanations.)
Journalize transactions from account data and prepare a trial balance.
Journalize transactions, post, and prepare a trial balance.
A group of student investors in Hong Kong opened Campus Laundromat Ltd. on September 1, 2017. During the first month of operations, the following transactions occurred.
Sept. 1 |
Shareholders invested HK$200,000 cash in the business in exchange for ordinary shares. |
2 |
Paid HK$10,000 cash for store rent for the month of September. |
3 |
Purchased washers and dryers for HK$250,000, paying HK$100,000 in cash and signing a HK$150,000, 6-month, 12% note payable. |
4 |
Paid HK$12,000 for a one-year accident insurance policy. |
10 |
Received a bill from the Daily News for advertising the opening of the laundromat HK$2,000. |
20 |
Declared and paid a cash dividend to shareholders HK$7,000. |
30 |
Determined that cash receipts for laundry fees for the month were HK$62,000. |
The chart of accounts for the company is the same as for Yazici Advertising A.Ş. (Illustration 2-19 on page 64) except for the following: No. 610 Advertising Expense.
Brief Exercises, DO IT! Review, Exercises, and Problems, and many additional resources are available for practice in WileyPLUS.
Indicate debit and credit effects and normal balance.
BE2-1 For each of the following accounts, indicate the effects of (a) a debit and (b) a credit on the accounts and (c) the normal balance of the account.
Identify accounts to be debited and credited.
BE2-2 Transactions for the Kaustav Sen Company ASA, which performs welding services, for the month of June are presented below. Identify the accounts to be debited and credited for each transaction.
June 1 |
Kaustav Sen invests €4,000 cash in exchange for ordinary shares in a small welding business. |
2 |
Purchases equipment on account for €900. |
3 |
€800 cash is paid to landlord for June rent. |
12 |
Sent an invoice to L. Nigh €300 for welding work performed on account. |
Journalize transactions.
BE2-3 Using the data in BE2-2, journalize the transactions. (You may omit explanations.)
Identify and explain steps in recording process.
BE2-3 Tim Weber, a fellow student, is unclear about the basic steps in the recording process. Identify and briefly explain the steps in the order in which they occur.
Indicate basic and debit-credit analysis.
BE2-3 J.A. Motzek SA has the following transactions during August of the current year. Indicate (a) the effect on the accounting equation and (b) the debit-credit analysis illustrated on pages 65–70.
Aug. 1 |
Opens an office as a financial advisor, investing R$5,000 in cash in exchange for ordinary shares. |
4 |
Pays insurance in advance for 6 months, R$1,800 cash. |
16 |
Receives R$1,100 from clients for services performed. |
27 |
Pays secretary R$1,000 salary. |
Journalize transactions.
BE2-6 Using the data in BE2-5, journalize the transactions. (You may omit explanations.)
Post journal entries to T-accounts.
BE2-6 Selected transactions for the Gilles Ltd. are presented in journal form on the next page. Post the transactions to T-accounts. Make one T-account for each item and determine each account's ending balance.
BE2-8
Post journal entries to standard form of account.
Selected journal entries for the Gilles Ltd. are presented in BE2-7. Post the transactions using the standard form of account.
BE2-9
Prepare a trial balance.
From the ledger balances given below, prepare a trial balance for the Starr SE at June 30, 2017. List the accounts in the order shown on page 73. All account balances are normal.
Accounts Payable €8,600, Cash €6,800, Share Capital—Ordinary €20,000, Dividends €800, Equipment €17,000, Service Revenue €6,000, Accounts Receivable €3,000, Salaries and Wages Expense €6,000, and Rent Expense €1,000.
BE2-10
Prepare a correct trial balance.
An inexperienced bookkeeper prepared the following trial balance. Prepare a correct trial balance, assuming all account balances are normal.
CHENG COMPANY LTD. Trial Balance December 31, 2017 |
||
Debit | Credit | |
Cash | £16,800 | |
Prepaid Insurance | £ 3,500 | |
Accounts Payable | 3,000 | |
Unearned Service Revenue | 4,200 | |
Share Capital—Ordinary | 13,000 | |
Dividends | 4,500 | |
Service Revenue | 25,600 | |
Salaries and Wages Expense | 18,600 | |
Rent Expense | 2,400 | |
£39,600 |
£52,000 |
Identify normal balances.
DO IT! 2-1 Graham Kahl 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 Graham to set up a double-entry set of accounting records in which to record all of his business transactions.
Identify the statement of financial position accounts that Graham 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.
Record business activities.
DO IT! 2-2 Graham Kahl engaged in the following activities in establishing his photography studio, Picture This!:
In what form (type of record) should Graham record these three activities? Prepare the entries to record the transactions.
Post transactions.
DO IT! 2-3 Graham Kahl 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.
DO IT! 2-4 The following accounts are taken from the ledger of Chillin' Company SA at December 31, 2017.
200 | Notes Payable | R$20,000 | 101 | Cash | R$6,000 |
311 | Share Capital—Ordinary | 25,000 | 126 | Supplies | 5,000 |
157 | Equipment | 76,000 | 729 | Rent Expense | 2,000 |
332 | Dividends | 8,000 | 212 | Salaries and | |
726 | Salaries and | Wages Payable | 3,000 | ||
Wages Expense | 38,000 | 201 | Accounts Payable | 9,000 | |
400 | Service Revenue | 86,000 | 112 | Accounts Receivable | 8,000 |
Prepare a trial balance in good form. |
Analyze statements about accounting and the recording process.
E2-1 Larry Burns 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.
Identify debits, credits, and normal balances.
E2-2 Selected transactions for B. Madar SE, an interior decorating firm, in its first month of business, are shown below.
Jan. 2 |
Invested €15,000 cash in the business in exchange for ordinary shares. |
3 |
Purchased used car for €7,000 cash for use in the business. |
9 |
Purchased supplies on account for €500. |
11 |
€1,800 of services were performed and billed. |
16 |
Paid €200 cash for advertising. |
20 |
Received €700 cash from customers billed on January 11. |
23 | Paid creditor €300 cash on balance owed. |
28 | Declared and paid a €1,000 cash dividend. |
Instructions
For each transaction indicate the following.
Use the following format, in which the January 2 transaction is given as an example.
Account Debited |
Account Credited |
||||||||
Date | (a) Basic Type |
(b) Specific Account |
(c) Effect |
(d) Normal Balance |
(a) Basic Type |
(b) Specific Account |
(c) Effect |
(d) Normal Balance |
|
Jan. 2 |
Asset |
Cash |
Increase |
Debit |
Equity |
Share Capital |
Increase |
Credit |
Journalize transactions.
E2-3 Data for B. Madar SE, interior decorating, are presented in E2-2.
Instructions
Journalize the transactions using journal page J1. (You may omit explanations.)
Analyze transactions and determine their effect on accounts.
E2-4 Presented below is information related to Beijing Real Estate Agency Ltd.
Oct. 1 | Lynn Robbins begins business as a real estate agent with a cash investment of ¥200,000 in exchange for ordinary shares. |
2 | Hires an administrative assistant. |
3 | Purchases office furniture for ¥19,000, on account. |
6 | Sells a house and lot for N. Fennig; bills N. Fennig ¥32,000 for realty services performed. |
27 | Pays ¥8,500 on the balance related to the transaction of October 3. |
30 | Pays the administrative assistant ¥25,000 in salary for October. |
Instructions
Prepare the debit-credit analysis for each transaction as illustrated on pages 65–70.
Journalize transactions.
E2-5 Transaction data for Beijing Real Estate Agency Ltd. are presented in E2-4.
Instructions
Journalize the transactions. (You may omit explanations.)
Analyze transactions and journalize.
E2-6 Minsk Industries OAO had the following transactions.
Instructions
Analyze transactions and journalize.
E2-7 Rockford Enterprises Ltd. had the following selected transactions.
Instructions
Analyze statements about the ledger.
E2-8 Rachel Manny 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.
Post journal entries and prepare a trial balance.
E2-9 Selected transactions from the journal of Roberta Mendez SLU, investment broker, are presented below.
Instructions
Journalize transactions from account data and prepare a trial balance.
E2-10 The T-accounts below summarize the ledger of Pierre Landscaping Company SA at the end of the first month of operations.
Instructions
Journalize transactions from account data and prepare a trial balance.
E2-11 Presented below is the ledger for Sparks Co. Ltd.
Instructions
Prepare journal entries and post using standard account form.
E2-12 Selected transactions for Isabella Rossini Company SpA during its first month in business are presented below.
Sept. 1 | Invested €10,000 cash in the business in exchange for ordinary shares. |
5 | Purchased equipment for €12,000 paying €4,000 in cash and the balance on account. |
25 | Paid €2,400 cash on balance owed for equipment. |
30 | Declared and paid a €500 cash dividend. |
Rossini's chart of accounts shows No. 101 Cash, No. 157 Equipment, No. 201 Accounts Payable, No. 311 Share Capital—Ordinary, and No. 332 Dividends.
Instructions
Analyze errors and their effects on trial balance.
The bookkeeper for Arno Equipment Repair NV made a number of errors in journalizing and posting, as described below.
Instructions
For each error:
Consider each error separately. Use the following form, in which error (1) is given as an example.
Error |
(a) In Balance |
(b) Difference |
(c) Larger Column |
(1) |
No |
$400 |
debit |
Prepare a trial balance.
E2-14 The accounts in the ledger of Tempus Fugit Delivery Service Ltd. contain the following balances on July 31, 2017.
Accounts Receivable | £10,642 | Prepaid Insurance | £ 1,968 |
Accounts Payable | 8,396 | Maintenance and Repairs Expense | 961 |
Cash | ? | Service Revenue | 10,610 |
Equipment | 49,360 | Dividends | 700 |
Gasoline Expense | 758 | Share Capital—Ordinary | 40,000 |
Utilities Expense | 523 | Salaries and Wages Expense | 4,428 |
Notes Payable | 26,450 | Salaries and Wages Payable | 815 |
Retained Earnings | 4,636 |
Instructions
Prepare a trial balance with the accounts arranged as illustrated in the chapter and fill in the missing amount for Cash.
Identify cash flow activities.
E2-15 The statement of cash flows classifies each transaction as an operating activity, an investing activity, or a financing activity. Operating activities are the types of activities the company performs to generate profits. Investing activities include the purchase of long-lived assets such as equipment or the purchase of investment securities. Financing activities are borrowing money, issuing shares, and paying dividends.
Presented below are the following transactions.
Instructions
Classify each of these transactions as operating, investing, or financing activities.
Journalize a series of transactions.
P2-1A Prairie Park ASA was started on April 1 by F. L. Wright and associates. The following selected events and transactions occurred during April.
Apr. 1 |
Shareholders invested €50,000 cash in the business in exchange for ordinary shares. |
4 |
Purchased land costing €34,000 for cash. |
8 |
Incurred advertising expense of €1,800 on account. |
11 |
Paid salaries to employees €1,500. |
12 |
Hired park manager at a salary of €4,000 per month, effective May 1. |
13 |
Paid €1,500 cash for a one-year insurance policy. |
17 |
Declared and paid a €1,400 cash dividend. |
20 |
Received €6,400 in cash for admission fees. |
25 |
Sold 100 coupon books for €30 each. Each book contains 10 coupons that entitle the holder to one admission to the park. |
30 |
Received €8,500 in cash admission fees. |
30 |
Paid €900 on balance owed for advertising incurred on April 8. |
Prairie Park uses the following accounts: Cash, Prepaid Insurance, Land, Accounts Payable, Unearned Service Revenue, Share Capital—Ordinary, Dividends, Service Revenue, Advertising Expense, and Salaries and Wages Expense.
Instructions
Journalize the April transactions.
Journalize transactions, post, and prepare a trial balance.
P2-2A Lena Fohn is a licensed accountant. During the first month of operations of her business, Lena Fohn, AG, the following events and transactions occurred.
May 1 | Shareholders invested €20,000 cash in exchange for ordinary shares. |
2 | Hired a secretary-receptionist at a salary of €2,000 per month. |
3 | Purchased €1,500 of supplies on account from Hartig Supply Company. |
7 | Paid office rent of €900 cash for the month. |
11 | Completed a tax assignment and billed client €2,800 for services performed. |
12 | Received €3,500 advance on a management consulting engagement. |
17 | Received cash of €1,200 for services performed for Lucille Co. |
31 | Paid secretary-receptionist €2,000 salary for the month. |
31 | Paid 40% of balance due Hartig Supply Company. |
Lena uses the following chart of accounts: No. 101 Cash, No. 112 Accounts Receivable, No. 126 Supplies, No. 201 Accounts Payable, No. 209 Unearned Service Revenue, No. 311 Share Capital—Ordinary, No. 400 Service Revenue, No. 726 Salaries and Wages Expense, and No. 729 Rent Expense.
Instructions
Journalize and post transactions and prepare a trial balance.
P2-3A Sean Browne owns and manages a computer repair service, which had the following trial balance on December 31, 2016 (the end of its fiscal year).
BYTE REPAIR SERVICE, LTD. Trial Balance December 31, 2016 |
||
Cash | £ 8,000 | |
Accounts Receivable | 16,000 | |
Supplies | 13,000 | |
Prepaid Rent | 3,000 | |
Equipment | 24,000 | |
Accounts Payable | £19,000 | |
Share Capital—Ordinary | 33,000 | |
Retained Earnings | 12,000 | |
£64,000 |
£64,000 |
Summarized transactions for January 2017 were as follows.
Instructions
Prepare a correct trial balance
P2-4A The trial balance of the Jason Company Ltd. shown below does not balance.
JASON COMPANY LTD. Trial Balance May 31, 2017 |
||
Debit |
Credit |
|
Cash | £ 3,850 | |
Accounts Receivable | £ 2,750 | |
Prepaid Insurance | 700 | |
Equipment | 12,000 | |
Accounts Payable | 4,500 | |
Unearned Service Revenue | 560 | |
Share Capital—Ordinary | 11,700 | |
Service Revenue | 8,690 | |
Salaries and Wages Expense | 4,200 | |
Advertising Expense | 1,100 | |
Utilities Expense | 800 | |
£30,800 |
£20,050 |
Your review of the ledger reveals that each account has a normal balance. You also discover the following errors.
Instructions
Prepare a correct trial balance. Note that the chart of accounts includes the following: Dividends and Supplies. (Hint: It helps to prepare the correct journal entry for the transaction described and compare it to the mistake made.)
Journalize transactions, post, and prepare a trial balance.
P2-5A The Classic Theater Ltd. opened on April 1. All facilities were completed on March 31. At this time, the ledger showed No. 101 Cash €6,000, No. 140 Land €10,000, No. 145 Buildings (concession stand, projection room, ticket booth, and screen) €8,000, No. 157 Equipment €6,000, No. 201 Accounts Payable €2,000, No. 275 Mortgage Payable €8,000, and No. 311 Share Capital—Ordinary €20,000. During April, the following events and transactions occurred.
Apr. 2 | Paid film rental of €800 on first movie. |
3 |
Ordered two additional films at €1,000 each. |
9 |
Received €1,800 cash from admissions. |
10 |
Made €2,000 payment on mortgage and €1,000 for accounts payable due. |
11 |
Classic Theater contracted with D. Zarle Company to operate the concession stand. Zarle is to pay 18% of gross concession receipts (payable monthly) for the rental of the concession stand. |
12 |
Paid advertising expenses €300. |
20 |
Received one of the films ordered on April 3 and was billed €1,000. The film will be shown in April. |
25 |
Received €5,500 cash from admissions. |
29 |
Paid salaries €1,600. |
30 |
Received statement from D. Zarle showing gross concession receipts of €1,200 and the balance due to The Classic Theater of for April. Zarle paid one-half of the balance due and will remit the remainder on May 5. |
30 |
Prepaid €1,300 rental on special film to be run in May. |
In addition to the accounts identified above, the chart of accounts shows No. 112 Accounts Receivable, No. 136 Prepaid Rent, No. 400 Service Revenue, No. 429 Rent Revenue, No. 610 Advertising Expense, No. 726 Salaries and Wages Expense, and No. 729 Rent Expense.
Instructions
Journalize a series of transactions.
P2-1B Surepar Disc Golf Course was opened on March 1 by Bill Arnsdorf. The following selected events and transactions occurred during March:
Mar. 1 | Invested €60,000 cash in the business in exchange for ordinary shares. |
3 |
Purchased Lee's Golf Land for €38,000 cash. The price consists of land €23,000, shed €9,000, and equipment €6,000. (Make one compound entry.) |
5 |
Advertised the opening of the driving range and miniature golf course, paying advertising expenses of €1,300. |
6 |
Paid cash €3,000 for a one-year insurance policy. |
10 |
Purchased golf discs and other equipment for €1,050 from Parton Company payable in 30 days. |
18 |
Received €440 in cash for golf fees recognized. |
19 |
Sold 100 coupon books for €18 each. Each book contains 4 coupons that enable the holder to play one round of disc golf. |
25 |
Declared and paid an €800 cash dividend. |
30 |
Paid salaries of €250. |
30 |
Paid Parton Company in full. |
31 |
Received €200 cash for fees recognized. |
Surepar uses the following accounts: Cash, Prepaid Insurance, Land, Buildings, Equipment, Accounts Payable, Unearned Service Revenue, Share Capital—Ordinary, Dividends, Service Revenue, Advertising Expense, and Salaries and Wages Expense.
Instructions
Journalize the March transactions.
Journalize transactions, post, and prepare a trial balance.
P2-2B Judi Dench is a licensed dentist. During the first month of the operation of her business, the following events and transactions occurred.
April 1 | Shareholders invested £40,000 cash in exchange for ordinary shares. |
1 |
Hired a secretary-receptionist at a salary of £600 per week payable monthly. |
2 |
Paid office rent for the month £1,400. |
3 |
Purchased dental supplies on account from Halo Company £5,200. |
10 |
Performed dental services and billed insurance companies £6,600. |
11 |
Received £1,000 cash advance from Rich Welk for an implant. |
20 |
Received £2,100 cash for services performed for Phil Stueben. |
30 |
Paid secretary-receptionist for the month £2,400. |
30 |
Paid £1,900 to Halo Company for accounts payable due. |
Judi uses the following chart of accounts: No. 101 Cash, No. 112 Accounts Receivable, No. 126 Supplies, No. 201 Accounts Payable, No. 209 Unearned Service Revenue, No. 311 Share Capital—Ordinary, No. 400 Service Revenue, No. 726 Salaries and Wages Expense, and No. 729 Rent Expense.
Instructions
Journalize transactions, post, and prepare a trial balance.
P2-3B Richardson Services Ltd. was formed on May 1, 2017. The following transactions took place during the first month.
Transactions on May 1:
Transactions during the remainder of the month:
Instructions
Prepare a correct trial balance.
P2-4B The trial balance of Mueller SE shown below does not balance.
MUELLER SE Trial Balance June 30, 2017 |
||
Debit |
Credit |
|
Cash | € 3,840 |
|
Accounts Receivable | € 2,898 |
|
Supplies | 800 |
|
Equipment | 3,000 |
|
Accounts Payable | 2,666 |
|
Unearned Service Revenue | 2,200 |
|
Share Capital—Ordinary | 9,000 |
|
Dividends | 800 |
|
Service Revenue | 2,380 |
|
Salaries and Wages Expense | 3,400 |
|
Utilities Expense | 910 |
|
€14,008 |
€17,886 |
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 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.
P2-5B The Wilson Theater Ltd., owned by Tegan Wilson, will begin operations in March. The Wilson will be unique in that it will show only triple features of sequential theme movies. As of March 1, the ledger of Wilson showed No. 101 Cash £7,000, No. 140 Land £22,000, No. 145 Buildings (concession stand, projection room, ticket booth, and screen) £10,000, No. 157 Equipment £8,000, No. 201 Accounts Payable £7,000, and No. 311 Share Capital—Ordinary £40,000. During the month of March, the following events and transactions occurred.
Mar. 2 | Rented the three Indiana Jones movies to be shown for the first 3 weeks of March. The film rental was £3,500; £1,000 was paid in cash and £2,500 will be paid on March 10. |
3 |
Ordered the Lord of the Rings movies to be shown the last 10 days of March. It will cost £240 per night. |
9 |
Received £4,000 cash from admissions. |
10 |
Paid balance due on Indiana Jones movies rental and £1,600 on March 1 accounts payable. |
11 |
Wilson Theater contracted with M. Brewer to operate the concession stand. Brewer is to pay 15% of gross concession receipts (payable monthly) for the right to operate the concession stand. |
12 |
Paid advertising expenses £450. |
20 |
Received £4,400 cash from customers for admissions. |
20 |
Received the Lord of Rings movies and paid the rental fee of £2,400. |
31 |
Paid salaries of £2,500. |
31 |
Received statement from M. Brewer showing gross receipts from concessions of £3,000 and the balance due to Wilson Theater of for March. Brewer paid one-half the balance due and will remit the remainder on April 5. |
31 |
Received £9,000 cash from customers for admissions. |
In addition to the accounts identified above, the chart of accounts includes No. 112 Accounts Receivable, No. 400 Service Revenue, No. 429 Rent Revenue, No. 610 Advertising Expense, No. 729 Rent Expense, and No. 726 Salaries and Wages Expense.
Instructions
(Note: This is a continuation of the Matcha Creations problem from Chapter 1.)
MC2 After researching the different forms of business organization, Mei-ling Lee decides to operate “Matcha Creations” as a corporation. She then starts the process of getting the business running. In November 2017, the following activities take place.
Nov. 8 |
Mei-ling sells her investments for NT$520, which she deposits in her personal bank account. |
8 |
She opens a bank account under the name “Matcha Creations” and transfers NT$500 from her personal account to the new account in exchange for ordinary shares. |
11 |
Mei-ling pays NT$65 to have advertising brochures and posters printed. She plans to distribute these as opportunities arise. (Hint: Use Advertising Expense.) |
13 |
She buys baking supplies, such as flour, sugar, butter, and matcha, for NT$125 cash. |
14 |
Mei-ling 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 NT$750. Mei-ling decides to start using it only in her new business. She estimates that the equipment is currently worth NT$300. She invests the equipment in the business in exchange for ordinary shares. |
16 |
Mei-ling re alizes that her initial cash investment is not enough. Her grandmother lends her NT$2,000 cash, for which Mei-ling signs a note payable in the name of the business. Mei-ling deposits the money in the business bank account. (Hint: The note does not have to be repaid for 24 months. As a result, the notes payable should be reported in the accounts as the last liability and also on the statement of financial position as the last liability.) |
17 |
She buys more baking equipment for NT$900 cash. |
20 |
She teaches her first class and collects NT$125 cash. |
25 |
Mei-ling books a second class for December 4 for NT$150. She receives NT$30 cash in advance as a down payment. |
30 |
Mei-ling pays NT$1,320 for a one-year insurance policy that will expire on December 1, 2018. |
Instructions
BYP2-1 The financial statements of TSMC are presented in Appendix A. The notes accompanying the statements contain the following selected accounts. The company's complete annual report, including the notes to the financial statements, is available in the Investors section of the company's website, www.tsmc.com.
Accounts (Trade) Payable | Tax Payable |
Accounts (Trade) Receivable | Interest Expense (finance cost) |
Property, Plant, and Equipment | Inventories |
Instructions
BYP2-2 Nestlé's financial statements are presented in Appendix B. Financial statements for Petra Foods are presented in Appendix C.
Instructions
Nestlé |
Petra Foods |
1. Inventory | 1. Accounts (Trade) Receivable |
2. Property, Plant, and Equipment | 2. Cash and Cash Equivalents |
3. Accounts (Trade) Payable | 3. Cost of Sales (expense) |
4. Interest Expense (finance cost) | 4. Sales (revenue) |
BYP2-3 Much information about specific companies is available on the Internet. Such information includes basic descriptions of the company's location, activities, industry, financial health, and financial performance.
Address: finance.yahoo.com, or go to www.wiley.com/college/weygandt
Steps
Instructions
Answer the following questions.
BYP2-4 Amy Torbert operates Hollins Riding Academy. The academy's primary sources of revenue are riding fees and lesson fees, which are paid on a cash basis. Amy also boards horses for owners, who are billed monthly for boarding fees. In a few cases, boarders pay in advance of expected use. For its revenue transactions, the academy maintains the following accounts: No. 1 Cash, No. 5 Boarding Accounts Receivable, No. 27 Unearned Boarding Revenue, No. 51 Riding Revenue, No. 52 Lesson Revenue, and No. 53 Boarding Revenue.
The academy owns 10 horses, a stable, a riding corral, riding equipment, and office equipment. These assets are accounted for in accounts No. 11 Horses, No. 12 Building, No. 13 Riding Corral, No. 14 Riding Equipment, and No. 15 Office Equipment.
For its expenses, the academy maintains the following accounts: No. 6 Hay and Feed Supplies, No. 7 Prepaid Insurance, No. 21 Accounts Payable, No. 60 Salaries Expense, No. 61 Advertising Expense, No. 62 Utilities Expense, No. 63 Veterinary Expense, No. 64 Hay and Feed Expense, and No. 65 Insurance Expense.
Amy makes periodic payments of cash dividends to shareholders. To record equity in the business and dividends, Torbert maintains three accounts: No. 50 Share Capital—Ordinary, No. 51 Retained Earnings, and No. 52 Dividends.
During the first month of operations, an inexperienced bookkeeper was employed. Amy Torbert asks you to review the following eight entries of the 50 entries made during the month. In each case, the explanation for the entry is correct.
Instructions
With the class divided into groups, answer the following.
BYP2-5 Shandler's Maid Company offers home-cleaning service. Two recurring transactions for the company are billing customers for services rendered and paying employee salaries. For example, on March 15, bills totaling €6,000 were sent to customers and €2,000 was paid in salaries to employees.
Instructions
Write a memo to your instructor that explains and illustrates the steps in the recording process for each of the March 15 transactions. Use the format illustrated in the textbook under the heading, “The Recording Process Illustrated” (page 65).
BYP2-6 Sara Rankin is the assistant chief accountant at Hokey Company Ltd., a manufacturer of computer chips and cellular phones. The company presently has total sales of €20 million. It is the end of the first quarter. Sara is hurriedly trying to prepare a general ledger trial balance so that quarterly financial statements can be prepared and released to management and the regulatory agencies. The total credits on the trial balance exceed the debits by €1,000. In order to meet the 4 p.m. deadline, Sara decides to force the debits and credits into balance by adding the amount of the difference to the Equipment account. She chose Equipment because it is one of the larger account balances; percentage-wise, it will be the least misstated. Sara “plugs” the difference! She believes that the difference will not affect anyone's decisions. She wishes that she had another few days to find the error but realizes that the financial statements are already late.
Instructions
p. 57 Keeping Score Q: Do you think that the Manchester United (GBR) football (soccer) club would be likely to have the same major revenue and expense accounts as Taiwan's Brother Elephants baseball team? A: Because their businesses are similar—professional sports—many of the revenue and expense accounts for these teams might be similar.
p. 62 What Would Sam Do? Q: Why did Sam Walton keep separate pigeonholes and blue binders? Why bother to keep separate records for each store? A: Using separate pigeonholes and blue binders for each store enabled Walton to accumulate and track the performance of each individual store easily. Keeping separate records for each store provided Walton with more information about performance of individual stores and managers, and greater control. Walton would want and need the same advantages if he were starting his business today. The difference is that he might now have started with a computerized system for small businesses.
p. 74 Why Accuracy Matters Q: In order for this company to prepare and issue financial statements, its accounting equation (debits and credits) must have been in balance at year-end. How could this error have occurred? A: A company's accounting equation (its books) can be in balance yet its financial statements have errors or misstatements because of the following: entire transactions were not recorded, transactions were recorded at wrong amounts, transactions were recorded in the wrong accounts, or transactions were recorded in the wrong accounting period. Audits of financial statements uncover some, but obviously not all, errors or misstatements.
Compare the procedures for the accounting process under IFRS and U.S. GAAP.
Companies that use GAAP follow the same set of procedures and records to keep track of transaction data as do IFRS companies. Thus, the material in Chapter 2 dealing with the account, general rules of debit and credit, and steps in the recording process—the journal, ledger, and chart of accounts—is the same under both GAAP and IFRS.
APPLE INC. Consolidated Statements of Operations (in millions except per share data) For the Year Ended September 28, 2013 |
|||
Net sales | $170,910 |
||
Cost of sales | 106,606 |
||
Gross margin | 64,304 |
||
Operating expenses: | |||
Research and development | 4,475 |
||
Selling, general and administrative | 10,830 |
||
Total operating expenses | 15,305 |
||
Operating income | 48,999 |
||
Other income/(expense), net | 1,156 |
||
Income before provision for income taxes | 50,155 |
||
Provision for income taxes | 13,118 |
||
Net income | $ 37,037 |
The basic recording process shown in this textbook is followed by companies across the globe. It is unlikely to change in the future. The definitional structure of assets, liabilities, equity, revenues, and expenses may change over time as the IASB and FASB evaluate their overall conceptual framework for establishing accounting standards.
GAAP2-1 Describe some of the issues the SEC must consider in deciding whether the United States should adopt IFRS.
GAAP2-2 The financial statements of Apple Inc. are presented in Appendix D. The company's complete annual report, including the notes to its financial statements, is available at http://investor.apple.com.
Instructions
Accounts Payable | Inventories |
Accounts Receivable | Net Sales |
Buildings | Research and Development |