Accounting Principles, Volume 1, 7th Canadian Edition Test Bank

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CHAPTER 2THE RECORDING PROCESSCHAPTERLEARNINGOBJECTIVES1.Describe how accounts, debits, and credits are used to record businesstransactions.Debit means left and credit means right. The normal balance of an asset is adebitbecause assets are on the left side of the accounting equation. Assets are increasedby debits and decreased by credits. The normal balance of liabilities and owner’s capital isa credit because they are on the right side of the accounting equation. Liabilities andowner’s capital are increased by credits and decreased by debits. Revenues increaseowner’s equity and therefore are recorded as credits because credits increase owner’sequity. Credits increase revenues and debits decrease revenues. Expenses and drawingsdecrease owner’s equity and therefore are recorded as debits because debits decreaseowner’s equity. Expenses and drawings are increased by debits and decreased by credits.2.State how a journal is used in the recording process and journalize transactions.Thesteps in the recording process are the first three steps in the accounting cycle. These stepsare: (a) analyze each transaction for its effect on the accounts, (b) record the transaction ina journal, and (c) transfer the journalinformation to the correct accounts in the ledger.A journal:(a) discloses the complete effect of a transaction in one place, (b) provides achronological record of transactions, (c) helps to prevent and locate errors because thedebit and credit amounts for each entry can be easily compared, and (d) explains thetransaction and, if there is one, identifies the source document.3.Explain how a ledger helps in the recording process and post transactions.The entiregroup of accounts maintained by a company is called the ledger. The ledger keeps in oneplace all the information about changes in each of the specific account balances. Posting isthe procedure of transferring journal entries to the ledger accounts. After the journal entrieshave been posted, the ledger will show all of the increases and decreases that have beenmade to each account.4.Prepare a trial balance.A trial balance is a list of the accounts in the ledger and theaccount balances at a specific time. Its main purpose is toprove that debits and credits areequal after posting. A trial balance uncovers certain types of errors in journalizing andposting, and is useful in preparing financial statements. Preparing a trial balance is thefourth step in the accounting cycle.

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EXERCISESExercise1Identify each of the following accounts as an asset, liability, equity, revenue or expense.1.L. Ralph, Capital_____________2.Consulting Revenue_____________3.Accounts Payable_____________4.Office Supplies_____________5.Prepaid Advertising_____________6.Machinery_____________7.Cash_____________8.L. Ralph, Withdrawals_____________9.Salaries Expense_____________10.Repairs & Maintenance_____________11.Accounts Receivable_____________12.Unearned Revenue_____________13.Rent Revenue_____________Solution1(5 min.)1.Equity2.Revenue3.Liability4.Asset5.Asset6.Asset7.Asset8.Equity9.Expense10.Expense11.Asset12.Liability13.RevenueBloomcode: Comprehension

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Difficulty: EasyLearningObjective: Describe how accounts, debits, and credits are used to record businesstransactions.SectionReference: The AccountCPA: Financial ReportingExercise2For the accounts listed below,indicate if the normal balance of the account is a debit or credit.Normal BalanceAccountsDebit or Credit1.Repairs & Maintenance_________________2.Interest Receivable_________________3.Prepaid Insurance_________________4.Unearned Revenue_________________5.Insurance Expense_________________6.FeesEarned_________________7.Machinery_________________8.Notes Payable_________________9.Land_________________10.Owner Withdrawals_________________Solution2(5 min.)Normal BalanceAccountsDebit or Credit1.Repairs & MaintenanceDebit2.Interest ReceivableDebit3.PrepaidInsuranceDebit4.Unearned RevenueCredit5.Insurance ExpenseDebit6.Fees EarnedCredit7.MachineryDebit8.Notes PayableCredit9.LandDebit10.Owner WithdrawalsDebitBloomcode: ComprehensionDifficulty: EasyLearningObjective: Describe how accounts, debits, and credits are used to record business

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transactions.SectionReference: The AccountCPA: Financial ReportingExercise3The following accounts relate to Harold’s Pool & Spas Co.:1.Land2.Installation Revenue3.Land4.Notes Receivable5.Harold, Capital6.Sales7.Prepaid Insurance8.Interest Payable9.Commission Expense10.Salaries Payable11.Unearned Revenue12.Harold, WithdrawalsInstructionsUse the form below to identify the type of account and its normal balance.The first one hasbeen completed for you as an example.Type of AccountNormal BalanceAssetLiabilityEquityDebitCredit1.__X_____________X_______2.________________________3.________________________4.________________________5.________________________6.________________________7.________________________8.________________________9.________________________10.________________________11.________________________12.________________________Solution3(10 min.)Type of AccountNormal BalanceAssetLiabilityEquityDebitCredit1.__X_____________X_______2.___________X_________X__3.__X_____________X_______

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4.__X_____________X_______5.___________X_________X__6.___________X_________X__7.__X_____________X_______8._______X_____________X__9.___________X____X_______10._______X_____________X__11._______X_____________X__12.___________X____X_______Bloomcode: ComprehensionDifficulty: EasyLearningObjective: Describe how accounts, debits, and credits are used to recordbusinesstransactions.SectionReference: The AccountCPA: Financial ReportingExercise4The chart of accounts used byFortierCopy Company is listed below:10Cash30D.Fortier, Capital12Accounts Receivable35D.Fortier, Drawings15PaperSupplies40Photocopy Revenue18Copy Machines51Advertising Expense22Accounts Payable53Rent Expense25Notes Payable54Wages Expense28Unearned RevenueInstructionsIndicate the proper accounts to be debited and credited for the following transactions by writingthe account number(s) in the appropriatecolumns.——————————————————————————————————————————Number(s)Number(s)of account(s)of account(s)debitedcredited——————————————————————————————————————————1.DanFortierinvests $90,000 cash to start thebusiness.——————————————————————————————————————————2.Purchased three photocopy machines for

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$200,000, paying $50,000 cash and signing a 5-year, 6% note for the remainder.——————————————————————————————————————————3.Purchased $5,000 paper supplies on credit.——————————————————————————————————————————4.Cash photocopy revenue amounted to $7,000.——————————————————————————————————————————5.Paid $500 cash for radio advertising.——————————————————————————————————————————6.Paid $800 on account for paper suppliespurchased in transaction 3.——————————————————————————————————————————7.DanFortierwithdrew $1,500 from the business forpersonal expenses.——————————————————————————————————————————8.Paid $1,200 cash for rent for the current month.——————————————————————————————————————————9.Received $2,000 cash advance from a customerfor future copying.——————————————————————————————————————————10.Billed a customer for $450 for photocopy workdone.——————————————————————————————————————————11.Paid $400 for wages for the month.——————————————————————————————————————————Solution4(15 min.)——————————————————————————————————————————Number(s)Number(s)of account(s)of account(s)debitedcredited——————————————————————————————————————————1.DanFortierinvests $90,000 cash to start thebusiness.1030——————————————————————————————————————————2.Purchased three photocopy machines for$200,000, paying $50,000 cash and signing a5-year, 6% note for the remainder.1810, 25——————————————————————————————————————————3.Purchased $5,000 paper supplies on credit.1522——————————————————————————————————————————4.Cash photocopy revenue amounted to $7,000.1040——————————————————————————————————————————5.Paid $500 cash for radio advertising.5110——————————————————————————————————————————6.Paid $800 on account for paper suppliespurchased in transaction 3.2210——————————————————————————————————————————7.DanFortierwithdrew $1,500 from the business forpersonal expenses.3510

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——————————————————————————————————————————8.Paid $1,200 cash for rent for the current month.5310——————————————————————————————————————————9.Received $2,000 cash advance from acustomer for future copying.1028——————————————————————————————————————————10.Billed a customer for $450 for photocopy workdone.1240——————————————————————————————————————————11.Paid $400 for wages for the month.5410——————————————————————————————————————————Bloomcode: ComprehensionDifficulty: EasyLearningObjective: Describe how accounts, debits, and credits are used to record businesstransactions.SectionReference: The AccountCPA: Financial ReportingExercise5Indicate whether you would use a debit or a credit to record the following changes:Debit or Credit1.Anincrease in Salary Expense__________________2.Adecrease in Accounts Payable__________________3.An increase in Prepaid Insurance__________________4.An increase in Owner's Capital__________________5.A decrease in Office Supplies__________________6.An increase in Owner's Drawings__________________7.An increase in Service Revenue__________________8.Adecrease in AccountsReceivable__________________9.An increase in Rent Expense__________________10.A decrease in Store Equipment__________________Solution5(5 min.)1.An increase in Salary ExpenseDebit_______2.A decrease in Accounts PayableDebit_______3.An increase in Prepaid InsuranceDebit_______4.An increase in Owner's CapitalCredit______5.A decrease in Office SuppliesCredit______6.An increase in Owner's DrawingsDebit_______7.An increase in Service RevenueCredit______

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8.Adecrease in Accounts ReceivableCredit______9.An increase in RentExpenseDebit_______10.Adecrease in Store EquipmentCredit______Bloomcode: ComprehensionDifficulty: EasyLearningObjective: Describe how accounts, debits, and credits are used to record businesstransactions.SectionReference: The AccountCPA: Financial ReportingExercise6For the accounts listed below, indicate if the normal balance of the account is a debit or credit.Normal BalanceAccountsDebit or Credit1.Service Revenue_________________2.Cash_________________3.Accounts Receivable_________________4.Accounts Payable_________________5.Owner's Capital_________________6.Prepaid Insurance_________________7.Insurance Expense_________________8.Owner's Drawings_________________9.Office Building_________________10.Notes Receivable_________________Solution6(5 min.)Normal BalanceAccountsDebit or Credit1.Service RevenueCredit2.CashDebit3.Accounts ReceivableDebit4.Accounts PayableCredit5.Owner's CapitalCredit6.Prepaid InsuranceDebit7.Insurance ExpenseDebit8.Owner's DrawingsDebit

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9.Office BuildingDebit10.Notes ReceivableDebitBloomcode:ComprehensionDifficulty: EasyLearningObjective: Describe how accounts, debits, and credits are used to record businesstransactions.SectionReference: The AccountCPA: Financial ReportingExercise7Using the accounts listed below, state theaccount to be debited and the account to be creditedfor each of the following transactions:1.Owner invested cash in the business.2.Purchased equipment for cash.3.Earned revenue on account.4.Purchased supplies on account.5.Paid for supplies purchased in 4.6.Received payment from customer in 3.7.Paid employee salaries.8.Owner withdrew cash for personal use.9.Purchased equipment on credit.10.Owner used personal funds to purchase a new computer for use in the business.ACCOUNTSCashOwner’s CapitalAccounts ReceivableOwner’s DrawingsSuppliesRevenueEquipmentSalaries PayableAccounts PayableSalaries ExpenseSolution7(10 min.)DebitCredit1.CashOwner’s Capital2.EquipmentCash3.Accounts ReceivableRevenue4.SuppliesAccounts Payable5.Accounts PayableCash6.CashAccounts Receivable

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7.Salaries ExpenseCash8.Owner’s DrawingsCash9.EquipmentAccounts Payable10.EquipmentOwner’s CapitalBloomcode: ComprehensionDifficulty: EasyLearningObjective: Describe how accounts, debits, and credits are used to record businesstransactions.SectionReference: The AccountCPA: Financial ReportingExercise8Identify the account to be debited and the account to be credited for each of thefollowingtransactions:1.Purchased equipment for cash and a note payable.2.Accepted a cash deposit from a customer for a service to be provided next month.3.Provided services on account.4.Purchased supplies on account.5.Received payment form the client in 3.6.Provided services to customer in 2 and collected cash for the remaining work done.7.Owner paid himself.8.Paid in full for equipment purchased in 1.Solution8(10 min.)DebitCredit1.EquipmentCash, Note Payable2.CashUnearned Revenue3.Accounts ReceivableRevenue / Sales4.SuppliesAccounts Payable5.CashAccounts Receivable6.Unearned Revenue, CashRevenue / Sales7.Owner’s DrawingsCash8.Note PayableCashBloomcode: Comprehension

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Difficulty: EasyLearningObjective: Describe how accounts, debits, and credits are used to record businesstransactions.SectionReference: The AccountCPA: Financial ReportingExercise9Eight transactions are recorded in the following T accounts:CashAccounts Receivable(1)35,000(2)3,500(5)27,500(7)22,500(7)22,500(3)1,950(4)2,225(6)8,000(8)4,500SuppliesEquipment(3)1,950(2)13,500T. Shaw, CapitalService Revenue(1)35,000(5)27,500Accounts PayableT. Shaw, Drawings(6)8,000(2)10,000(8)4,500Salaries Expense(4)2,225InstructionsIndicate for each debit and each credit:a)whether an asset, liability, capital, drawings, revenue, or expense account was affected, andb)whether the account was increased (+) or decreased (–).

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Answersshould be presented in the following chart form:TransactionAccount DebitedAccount CreditedNo.TypeEffectTypeEffect(1)(Example)Asset+Capital+——————————————————————————————————————————(2)——————————————————————————————————————————(3)——————————————————————————————————————————(4)——————————————————————————————————————————(5)——————————————————————————————————————————(6)——————————————————————————————————————————(7)——————————————————————————————————————————(8)——————————————————————————————————————————Solution9(15 min.)TransactionAccount DebitedAccount CreditedNo.TypeEffectTypeEffect(1)(Example)Asset+Capital+——————————————————————————————————————————(2)Asset+Asset–Liability+——————————————————————————————————————————(3)Asset+Asset–——————————————————————————————————————————(4)Expense+Asset–——————————————————————————————————————————(5)Asset+Revenue+——————————————————————————————————————————(6)Liability–Asset–——————————————————————————————————————————(7)Asset+Asset–——————————————————————————————————————————(8)Drawings+Asset–——————————————————————————————————————————Bloomcode: ComprehensionDifficulty: MediumLearningObjective: Describe how accounts, debits, and credits are used to record businesstransactions.SectionReference: The AccountCPA: Financial Reporting

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Exercise10Mary Bartletthas operated a lawn care business for 3 months. The following transactionsoccurred in the fourth month:1.Marydecides that the business needs a new vehicle. A truck is purchased for $20,000 andfinanced by a note payable for the full amount.2.Maryinvested $5,000 of herown funds in the business.3.Invoices to customers were issued for services completed. The total invoices amount to$4,500.4.Paid $350 on account for supplies purchased the prior month.5.Collected $3,750 from customers for work completed and invoiced the prior month.6.Paid wages of $250 to an assistant.7.Received $300 deposit from a new customer for whom work will not be performed until nextmonth.For each transaction, complete the informationin the following table:Transaction:1234567Accountdebited(name)Type of account(asset, liability,owner’s equity)Normal balance ofthe accountIs the accountincreased ordecreased?Accountcredited(name)Type of account(asset, liability,owner’s equity)Normal balance ofthe accountIs the accountincreased ordecreased?

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Solution10(15 min.)Transaction:1234567Accountdebited(name)Vehicle/equipmentCashAccountsReceivableAccountsPayableCashWagesExpenseCashType of account(asset, liability,owner’s equity)AssetAssetAssetLiabilityAssetOwner’sequityAssetNormal balanceof the accountDRDRDRCRDRDRDRIs the accountincreased ordecreased?IncreaseIncreaseIncreaseDecreaseIncreaseIncreaseIncreaseAccountcredited(name)NotePayableM.Bartlett,CapitalServiceRevenueCashAccountsReceivableCashUnearnedRevenueType of account(asset, liability,owner’sequity)LiabilityOwner’sequityOwner’sequityAssetAssetAssetLiabilityNormal balanceof the accountCRCRCRDRDRDRCRIs the accountincreased ordecreased?IncreaseIncreaseIncreaseDecreaseDecreaseDecreaseIncreaseBloomcode:ComprehensionDifficulty: HardLearningObjective: Describe how accounts, debits, and credits are used to record businesstransactions.SectionReference: The AccountCPA: Financial ReportingExercise11For each of the following accountsindicate:a)the type of account (Asset, Liability, Owner's capital, Owner’s drawings, Revenue,Expense),b)the debit and credit effects, andc)the normal account balance.Example0.Casha)Asset accountb)Debit increases, credit decreasesc)Normal balance–debitACCOUNTS

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1.Accounts Payable5.Service Revenue2.Accounts Receivable6.Insurance Expense3.D.Chester, Capital7.Notes Payable4.D.Chester, Drawings8.EquipmentSolution11(15 min.)1.a)Liability account.5.a)Revenue account.b)Debit decreases, credit increases.b)Debit decreases, credit increases.c)Normal balance–credit.c)Normal balance–credit.2.a)Asset account.6.a)Expense account.b)Debit increases, credit decreases.b)Debit increases, credit decreases.c)Normal balance–debit.c)Normal balance–debit.3.a)Owner's capital account.7.a)Liability account.b)Debit decreases, credit increases.b)Debit decreases, credit increases.c)Normal balance–credit.c)Normal balance–credit.4.a)Owner's drawings account.8.a)Asset account.b)Debit increases, credit decreases.b)Debit increases, credit decreases.c)Normal balance–debit.c)Normal balance–debit.Bloomcode: ComprehensionDifficulty: EasyLearningObjective: Describe how accounts, debits, and credits are used to record businesstransactions.SectionReference: The AccountCPA: Financial ReportingExercise12Shadow’s Magic Store has balances in the following accounts at the end of May:1.Supplies6.Owner’s Capital2.Accounts Receivable7.Prepaid Insurance3.Unearned Revenue8.Equipment4.Salaries Payable9.Accounts Payable5.Commission Revenue10.Notes PayableInstructionsFor each of the accounts indicate:a)the type ofaccount (Asset, Liability, Owner's capital, Owner’s drawings, Revenue,Expense),b)the debit and credit effects, andc)the normal account balance.Solution 12(15 min.)1.a)Asset account.6.a)Owner’s Capital account.b)Debit increases,credit decreases.b)Debit decreases, credit increases.

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