The Account. An account consists of three parts: 1. A title. A left or debit side. A right or credit side. Debits and Credits. The terms debit and credit are directional signals: Debit indicates left, and credit indicates right. Assets, drawings, and expenses are increased by debits and decreased by credits. Steps in the Recording Process. There are three basic steps in the recording process: 1. Analyze each transaction for its effects on the accounts.
Entering transaction data in the general journal is called journalizing. The general journal: 1. Discloses in one place the complete effects of a transaction. Provides a chronological record of transactions. Helps to prevent or locate errors because the debit and credit amounts for each entry can be easily compared.
A simple journal entry involves only two accounts one debit and one credit whereas a compound journal entry involves three or more accounts. The Ledger. 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. Companies arrange the ledger in the sequence in which they present the accounts in the financial statements, beginning with the balance sheet accounts.
Posting is transferring journal entries to the ledger accounts. In the ledger, in the appropriate columns of the account s debited, enter the date, journal page, and debit amount shown in the journal. In the ledger, in the appropriate columns of the account s credited, enter the date, journal page, and credit amount shown in the journal.
In the reference column of the journal, write the account number to which the credit amount was posted. A chart of accounts lists the accounts and the account numbers that identify their location in the ledger. Accounts are usually numbered starting with the balance sheet accounts followed by income statement accounts.
Trial Balance. A trial balance is a list of accounts and their balances at a given time. It proves the mathematical equity of debits and credits after posting. It may also uncover errors in journalizing and posting. It is useful the preparation of financial statements.
The financial records of Waste Management Inc. In order for these companies to prepare and issue financial statements, their accounting equations must have been in balance at year-end. How could these errors or misstatements have occurred?
Audits of financial statements uncover some, but not all, errors or misstatements. 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.
The same practice is followed under IFRS, using the currency of the country where the reporting company is headquartered. While most public U. 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.
Assets are increased by debits and liabilities are decreased by credits. True False 2. True False 3. An account will have a credit balance if the total debit amounts exceed the total credit amounts. True False 4.
True False 5. The basic steps in the recording process are 1 to analyze each transaction, 2 to enter the transaction in a journal, and 3 to transfer the journal entry to the appropriate ledger accounts. True False 6. Transferring journal entries to the ledger accounts is called posting and should be per- formed in chronological order. True False 7. True False 8. Column on page two of the journal.
True False 9. When the columns of the trial balance equal each other, it proves no errors occurred in recording and posting. True False The double-entry system helps ensure the accuracy of the recorded amounts and helps to detect errors. Transactions are initially recorded in the a. The right side of an account is referred to as the a. A purchase of equipment for cash requires a credit to a.
Accounts Payable. The equality of the accounting equation can be proven by preparing a a. Which of the following accounts would be increased with a debit? Rent Payable b. Service Revenue d. False 6. True 2. True 7. True 3. False 8. False 4. True 9. False 5. True True Multiple Choice 1. Debit Credit Apr. Debit Credit May 1 Cash Account Titles and Explanation Debit Credit 1. Advertising Expense Miscellaneous Expense Accounts Payable Salaries and Wages Expense Debit Credit Balance Apr.
Debit Credit Sept. Debit Credit Balance Sept. Exercises Problems 1. Indicate how accounts, 1, 2, 3, 4, 5, 1, 2, 5 1 1, 2, 4, 6, 7, 1A, 2A, 3A, debits, and credits are used 6, 7, 8, 9, 19, 14 5A to record business 21 transactions.
Indicate how a journal is 10, 11, 12, 3, 4, 6 2 3, 5, 6, 7, 10, 1A, 2A, 3A, used in the recording 13, 14, 16 11, 12 5A process. Explain how a ledger and 15, 17 7, 8 3 8, 9, 12 2A, 3A, 5A posting help in the recording process. Prepare a trial balance. Simple 20—30 2A Journalize transactions, post, and prepare a trial balance. Simple 30—40 3A Journalize transactions, post, and prepare a trial balance. Moderate 40—50 4A Prepare a correct trial balance.
Moderate 30—40 5A Journalize transactions, post, and prepare a trial balance. DI PA 4. A T account has the following parts: a the title, b the left or debit side, and c the right or credit side.
The terms debit and credit mean left and right respectively. Heath is incorrect. The double-entry system merely records the dual effect of a transaction on the accounting equation. A transaction is not recorded twice; it is recorded once, with a dual effect. Erica is incorrect. A debit balance only means that debit amounts exceed credit amounts in an account. Conversely, a credit balance only means that credit amounts are greater than debit amounts in an account. Thus, a debit or credit balance is neither favorable nor unfavorable.
The basic steps in the recording process are: 1 Analyze each transaction for its effect on the accounts. The advantages of using the journal in the recording process are: 1 It discloses in one place the complete effects of a transaction. When three or more accounts are required in one journal entry, the entry is referred to as a compound entry.
An example of a compound entry is the purchase of equipment, part of which is paid for with cash and the remainder is on account. It discloses in one place the complete effects of a transaction.
It provides a chronological record of all transactions. The advantage of the last step in the posting process is to indicate that the item has been posted. The chart of accounts is important, particularly for a company that has a large number of accounts, because it helps organize the accounts and define the level of detail that a company desires in its accounting system.
The primary purpose of a trial balance is to prove check that the debits equal the credits after posting. A trial balance also facilitates the discovery of errors in journalizing and posting. In addition, it is useful in preparing financial statements. No, Victor is not correct. The proper sequence is as follows: b Business transaction occurs. Accounts Payable Decrease Increase Credit 2. Advertising Expense Increase Decrease Debit 3. Service Revenue Decrease Increase Credit 4.
Accounts Receivable Increase Decrease Debit 5. Analyze each transaction. In this step, business documents are examined to determine the effects of the transaction on the accounts. Yes, a business can enter into a transaction in which only the left side of the accounting equation is affected.
An example would be a transaction where an increase in one asset is offset by a decrease in another asset. An increase in the Equipment account which is offset by a decrease in the Cash account is a specific example.
Business transactions are the economic events of the enterprise recorded by accountants because they affect the basic accounting equation. No, this treatment is not proper.
While the transaction does involve a receipt of cash, it does not represent revenues. This transaction is simply an additional investment made by the owner in the business. Net income does appear on the income statement—it is the result of subtracting expenses from revenues. Indirectly, the net income of a company is also included in the balance sheet.
The three steps in the accounting process are identification, recording, and communication. Financial accounting provides reports to help investors and creditors evaluate a company. Congress passed the Sarbanes-Oxley Act to reduce unethical behavior and decrease the likelihood of future corporate scandals. The standards of conduct by which actions are judged as right or wrong, honest or dishonest, fair or not fair, are ethics. DO IT!
R Classifying economic events. C Explaining uses, meaning, and limitations of data. R Keeping a systematic chronological diary of events. R Measuring events in dollars and cents. C Preparing accounting reports.
C Reporting information in a standard format. I Selecting economic activities relevant to the company. R Summarizing economic events. E Did the company earn a satisfactory income?
I Do we need to borrow in the near future? I What does it cost us to manufacture each unit produced? I Which product should we emphasize? E Will the company be able to pay its short-term debts? The historical cost principle requires that assets be recorded and reported at their cost, because cost is faithfully representative and can be objectively measured and verified. Angela Duffy could benefit if the company is able to attract more investors, but would be harmed if the inappropriate reporting is discovered.
Similarly, Jana Barth could benefit by pleasing her boss, but would be harmed if the inappropriate reporting is discovered. She should try to convince Angela Duffy that this is the appropriate course of action, but be prepared to resign her position if Duffy insists.
The historical cost principle requires that assets such as buildings be recorded and reported at their cost. The monetary unit assumption requires that companies include in the accounting records only transaction data that can be expressed in terms of money. The economic entity assumption requires that the activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities.
Increase in assets and increase in liabilities. Increase in assets and decrease in assets. Balance Sheet August 31, Assets Cash Balance Sheet June 30, Assets Cash A partnership is not an option since she is the sole owner of the business.
A proprietorship is the easiest to create and operate because there are no formal procedures involved in creating the proprietorship. However, if she operates the business as a proprietorship she will personally have unlimited liability for the debts of the business.
Operating the business as a corporation would limit her liability to her investment in the business. Natalie will in all likelihood require the services of a lawyer to incorporate. Costs to incorporate as well as additional ongoing costs to administrate and operate the business as a corporation may be costly. My recommendation is that Natalie choose the proprietorship form of business organization. Furthermore, it will be easier to stop operating the business if Natalie decides not to continue with it once she has finished college.
She will need information on her cash balance on a daily or weekly basis to help her determine if she can pay her bills. She will need to know the cost of her services so she can establish her prices.
She will need to know revenue and expenses so she can report her net income for personal income tax purposes, on an annual basis. If she borrows money, she will need financial statements so lenders can assess the liquidity, solvency, and profitability of the business.
Natalie would also find financial statements useful to better understand her business and identify any financial issues as early as possible. Monthly financial statements would be best because they are more timely, but they are also more work to prepare.
This will make it easier to prepare financial statements for her business. The business is a separate entity from Natalie and must be accounted for separately. This work is becoming increasingly computerized and can rely on sophisticated random sampling methods. Audit is the bread-and-butter work of accounting. This work can involve significant travel and allows you to really understand how money is being made in the company that you are analyzing. There are plentiful jobs in this area in government and private industry.
Besides quantitative skills many budget analyst jobs require good people skills because of negotiations involved in the work. This work can be varied over time. One day you may be running spreadsheets. The next day you may be visiting a customer or supplier to set up a new account and discuss business.
This work requires a good understanding of both accounting and finance. Major functions include cost analysis, analysis of new contracts, and participation in efforts to control expenses efficiently.
This work often involves the analysis of the structure of organizations. Is responsibility to spend money in a company at the right level of our organization? Are goals and objectives to control costs being communi- cated effectively?
This work requires a thorough understanding of economics and the tax code. Increasingly, large corpo- rations are looking for persons with both an accounting and a legal background in tax.
This is not a valid basis for determining income because it only shows the change in cash between two points in time. Alternatively, since all revenues are received in cash, revenues earned can be computed from an analysis of the changes in cash as follows: Beginning cash balance A number of items in this balance sheet are not properly reported.
They are: 1. The balance sheet should be dated as of a specific date, not for a period of time.
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