第2章73-100页

K K Chapter 2 • Analyzing Transactions 73 Key Points 1 Explain why accounts areused to record and summarize the effects of transactions on financial statements. The record used for recording indi- vidual transactions is an account. A group of accounts is called a ledger. The system of accounts that make up a ledger is called a chart of ac- counts. The accounts are numbered and listed in the order in which they appear in the balance sheet and the income statement. 2 Describe the characteristics ofan account. The simplest form of an account, a T account, has three parts: (1) a ti- tle, which is the name of the item recorded in the account; (2) a left side, called the debit side; (3) a right side, called the credit side. Amounts entered on the left side of an ac- count, regardless of the account ti- tle, are called debits to the account. Amounts entered on the right side of an account are called credits. Pe- riodically, the debits in an account are added, the credits in the account are added, and the balance of the account is determined. 3 List the rules of debit andcredit and the normal balances of accounts. General rules of debit and credit have been established for recording increases or decreases in asset, lia- bility, owner’s equity, revenue, ex- expense account is affected, (2) each account affected increases or decreases, and (3) each increase or decrease is recorded as a debit or a credit. A journal is used for record- ing the transaction initially. The jour- nal entries are periodically posted to the accounts. 5 Prepare a trial balance andexplain how it can be used to discover errors. A trial balance is prepared by listing the accounts from the ledger and their balances. If the two totals of the trial balance are not equal, an error has occurred. 6 Discover errors in recordingtransactions and correct them. Errors may be discovered (1) by au- dit procedures, (2) by looking at the trial balance or (3) by chance. The procedures for correcting errors are summarized in Exhibit 7. 7 Use horizontal analysis tocompare financial statements from different periods. In horizontal analysis, the amount of each item on the current financial statements is compared with the same item on one or more earlier statements. The increase or decrease in the amount of the item is com- puted, together with the percent of increase or decrease. pense, and drawing accounts. Each transaction is recorded so that the sum of the debits is always equal to the sum of the credits. Transactions are initially entered in a record called a journal. The sum of the increases recorded in an account is usually equal to or greater than the sum of the decreases recorded in the account. For this rea- son, the normal balance of an ac- count is indicated by the side of the account (debit or credit) that receives the increases. The rules of debit and credit and normal account balances are sum- marized in the following table: Increase Decrease (Normal Balance) Balance sheet accounts: Asset Debit Credit Liability Credit Debit Owner’s Equity: Capital Credit Debit Drawing Debit Credit Income statement accounts: Revenue Credit Debit Expense Debit Credit 4 Analyze and summarize thefinancial statement effects of transactions. Transactions are analyzed by deter- mining whether: (1) an asset, liabil- ity, owner’s equity, revenue, or Key Terms account (48) assets (48) balance of the account (50) chart of accounts (48) credits (50) debits (49) double-entry accounting (53) drawing (49) expenses (49) horizontal analysis (71) journal (51) journal entry (51) journalizing (51) ledger (48) liabilities (48) materiality concept (69) owner’s equity (48) posting (55) revenues (49) slide (70) T account (49) transposition (70) trial balance (68) two-column journal (55) unearned revenue (58) 66124_c02_47-100.qxd 11/10/03 6:41 PM Page 73 I Chapter 2 • Analyzing Transactions74 Illustrative Problem J. F. Outz, M.D., has been practicing as a cardiologist for three years. During April, 2005, Outz completed the following transactions in her practice of cardiology. April 1. Paid office rent for April, $800. 3. Purchased equipment on account, $2,100. 5. Received cash on account from patients, $3,150. 8. Purchased X-ray film and other supplies on account, $245. 9. One of the items of equipment purchased on April 3 was defective. It was returned with the permission of the supplier, who agreed to reduce the account for the amount charged for the item, $325. 12. Paid cash to creditors on account, $1,250. 17. Paid cash for renewal of a six-month property insurance policy, $370. 20. Discovered that the balances of the cash account and the accounts payable account as of April 1 were overstated by $200. A payment of that amount to a creditor in March had not been recorded. Journalize the $200 payment as of April 20. 24. Paid cash for laboratory analysis, $545. 27. Paid cash from business bank account for personal and family expenses, $1,250. 30. Recorded the cash received in payment of services (on a cash basis) to patients during April, $1,720. 30. Paid salaries of receptionist and nurses, $1,725. 30. Paid various utility expenses, $360. 30. Recorded fees charged to patients on account for services performed in April, $5,145. 30. Paid miscellaneous expenses, $132. Outz’s account titles, numbers, and balances as of April 1 (all normal balances) are listed as follows: Cash, 11, $4,123; Accounts Receivable, 12, $6,725; Supplies, 13, $290; Prepaid Insurance, 14, $465; Equipment, 18, $19,745; Accounts Payable, 22, $765; J. F. Outz, Capital, 31, $30,583; J. F. Outz, Drawing, 32; Professional Fees, 41; Salary Expense, 51; Rent Expense, 53; Laboratory Expense, 55; Utilities Expense, 56; Miscellaneous Expense, 59. Instructions 1. Open a ledger of standard four-column accounts for Dr. Outz as of April 1. En- ter the balances in the appropriate balance columns and place a check mark (�) in the posting reference column. (Hint: Verify the equality of the debit and credit balances in the ledger before proceeding with the next instruction.) 2. Journalize each transaction in a two-column journal. 3. Post the journal to the ledger, extending the month-end balances to the appro- priate balance columns after each posting. 4. Prepare a trial balance as of April 30. 66124_c02_47-100.qxd 11/10/03 6:41 PM Page 74 Chapter 2 • Analyzing Transactions 75 Solution 2. and 3. 8 0 0 00 2 1 0 0 00 3 1 5 0 00 2 4 5 00 3 2 5 00 1 2 5 0 00 3 7 0 00 2 0 0 00 8 0 0 00 2 1 0 0 00 3 1 5 0 00 2 4 5 00 3 2 5 00 1 2 5 0 00 3 7 0 00 2 0 0 00 Rent Expense Cash Paid office rent for April. Equipment Accounts Payable Purchased equipment on account. Cash Accounts Receivable Received cash on account. Supplies Accounts Payable Purchased supplies. Accounts Payable Equipment Returned defective equipment. Accounts Payable Cash Paid creditors on account. Prepaid Insurance Cash Renewed 6-month property policy. Accounts Payable Cash Recorded March payment to creditor. JOURNAL Page 27 Date Description Post. Ref. Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 April 2005 1 3 5 8 9 12 17 20 53 11 18 22 11 12 13 22 22 18 22 11 14 11 22 11 5 4 5 00 5 4 5 00Laboratory Expense Cash Paid for laboratory analysis. JOURNAL Page 28 Date Description Post. Ref. Debit Credit 1 2 3 4 1 2 3 4 April 2005 24 55 11 66124_c02_47-100.qxd 11/10/03 6:42 PM Page 75 Chapter 2 • Analyzing Transactions76 ✓ 27 27 27 27 27 28 28 28 28 28 28 ACCOUNT NO. 11 Date Item Post. Ref. Debit Credit April 1 1 5 12 17 20 24 27 30 30 30 30 Balance 2005 4 1 2 3 00 3 3 2 3 00 6 4 7 3 00 5 2 2 3 00 4 8 5 3 00 4 6 5 3 00 4 1 0 8 00 2 8 5 8 00 4 5 7 8 00 2 8 5 3 00 2 4 9 3 00 2 3 6 1 00 3 1 5 0 00 1 7 2 0 00 8 0 0 00 1 2 5 0 00 3 7 0 00 2 0 0 00 5 4 5 00 1 2 5 0 00 1 7 2 5 00 3 6 0 00 1 3 2 00 ACCOUNT Cash Debit Credit Balance 1. and 3. JOURNAL Page 28 1 2 5 0 00 1 7 2 0 00 1 7 2 5 00 3 6 0 00 5 1 4 5 00 1 3 2 00 1 2 5 0 00 1 7 2 0 00 1 7 2 5 00 3 6 0 00 5 1 4 5 00 1 3 2 00 J. F. Outz, Drawing Cash J. F. Outz withdrew cash for personal use. Cash Professional Fees Received fees from patients. Salary Expense Cash Paid salaries. Utilities Expense Cash Paid utilities. Accounts Receivable Professional Fees Recorded fees earned on account. Miscellaneous Expense Cash Paid expenses. Date Description Post. Ref. Debit Credit 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 April 2005 27 30 30 30 30 30 32 11 11 41 51 11 56 11 12 41 59 11 66124_c02_47-100.qxd 11/10/03 6:42 PM Page 76 Chapter 2 • Analyzing Transactions 77 ✓ 27 28 ACCOUNT NO. 12 Date Item Post. Ref. Debit Credit April 1 5 30 Balance 2005 6 7 2 5 00 3 5 7 5 00 8 7 2 0 005 1 4 5 00 3 1 5 0 00 ACCOUNT Accounts Receivable Debit Credit Balance ✓ 27 ACCOUNT NO. 13 Date Item Post. Ref. Debit Credit April 1 8 Balance 2005 2 9 0 00 5 3 5 00 ACCOUNT Supplies Debit Credit 2 4 5 00 Balance ✓ 27 ACCOUNT NO. 14 Date Item Post. Ref. Debit Credit April 1 17 Balance 2005 4 6 5 00 8 3 5 003 7 0 00 ACCOUNT Prepaid Insurance Debit Credit Balance ✓ 27 27 ACCOUNT NO. 18 Date Item Post. Ref. Debit Credit April 1 3 9 Balance 2005 19 7 4 5 00 21 8 4 5 00 21 5 2 0 00 2 1 0 0 00 3 2 5 00 ACCOUNT Equipment Debit Credit Balance ✓ 27 27 27 27 27 ACCOUNT NO. 22 Date Item Post. Ref. Debit Credit April 1 3 8 9 12 20 Balance 2005 7 6 5 00 2 8 6 5 00 3 1 1 0 00 2 7 8 5 00 1 5 3 5 00 1 3 3 5 00 3 2 5 00 1 2 5 0 00 2 0 0 00 2 1 0 0 00 2 4 5 00 ACCOUNT Accounts Payable Debit Credit Balance 66124_c02_47-100.qxd 11/10/03 6:42 PM Page 77 Chapter 2 • Analyzing Transactions78 ✓ ACCOUNT NO. 31 Date Item Post. Ref. Debit Credit April 1 Balance 2005 3 0 5 8 3 00 ACCOUNT J. F. Outz, Capital Debit Credit Balance 28 ACCOUNT NO. 32 Date Item Post. Ref. Debit Credit April 27 2005 1 2 5 0 001 2 5 0 00 ACCOUNT J. F. Outz, Drawing Debit Credit Balance 28 28 ACCOUNT NO. 41 Date Item Post. Ref. Debit Credit April 30 30 2005 1 7 2 0 00 6 8 6 5 00 ACCOUNT Professional Fees Debit Credit 1 7 2 0 00 5 1 4 5 00 Balance 28 ACCOUNT NO. 51 Date Item Post. Ref. Debit Credit April 30 2005 1 7 2 5 00 ACCOUNT Salary Expense Debit Credit 1 7 2 5 00 Balance 27 ACCOUNT NO. 53 Date Item Post. Ref. Debit Credit April 1 2005 8 0 0 00 ACCOUNT Rent Expense Debit Credit 8 0 0 00 Balance 28 ACCOUNT NO. 55 Date Item Post. Ref. Debit Credit April 24 2005 5 4 5 00 ACCOUNT Laboratory Expense Debit Credit 5 4 5 00 Balance 66124_c02_47-100.qxd 11/10/03 6:42 PM Page 78 S Chapter 2 • Analyzing Transactions 79 28 ACCOUNT NO. 56 Date Item Post. Ref. Debit Credit April 30 2005 3 6 0 00 ACCOUNT Utilities Expense Debit Credit 3 6 0 00 Balance 28 ACCOUNT NO. 59 Date Item Post. Ref. Debit Credit April 30 2005 1 3 2 00 ACCOUNT Miscellaneous Expense Debit Credit 1 3 2 00 Balance J. F. Outz, M.D. Trial Balance April 30, 2005 1 3 3 5 00 30 5 8 3 00 6 8 6 5 00 38 7 8 3 00 2 3 6 1 00 8 7 2 0 00 5 3 5 00 8 3 5 00 21 5 2 0 00 1 2 5 0 00 1 7 2 5 00 8 0 0 00 5 4 5 00 3 6 0 00 1 3 2 00 38 7 8 3 00 Cash Accounts Receivable Supplies Prepaid Insurance Equipment Accounts Payable J. F. Outz, Capital J. F. Outz, Drawing Professional Fees Salary Expense Rent Expense Laboratory Expense Utilities Expense Miscellaneous Expense 4. Self-Examination Questions (Answers at End of Chapter) 2. The type of account with a normal credit balance is: A. an asset. C. a revenue. B. drawing. D. an expense. 1. A debit may signify: A. an increase in an asset account. B. a decrease in an asset account. C. an increase in a liability account. D. an increase in the owner’s capital account. 66124_c02_47-100.qxd 11/10/03 6:43 PM Page 79 C Chapter 2 • Analyzing Transactions80 C. debit to Cash; credit to Accounts Payable. D. debit to Accounts Payable; credit to Cash. 5. The form listing the titles and balances of the ac- counts in the ledger on a given date is the: A. income statement. B. balance sheet. C. statement of owner’s equity. D. trial balance. 3. A debit balance in which of the following accounts would indicate a likely error? A. Accounts Receivable B. Cash C. Fees Earned D. Miscellaneous Expense 4. The receipt of cash from customers in payment of their accounts would be recorded by a: A. debit to Cash; credit to Accounts Receivable. B. debit to Accounts Receivable; credit to Cash. C lass Discussion Questions 1. What is the difference between an account and a ledger? 2. Do the terms debit and credit signify increase or decrease or can they signify either? Explain. 3. Explain why the rules of debit and credit are the same for liability accounts and owner’s equity accounts. 4. What is the effect (increase or decrease) of a debit to an expense account (a) in terms of owner’s equity and (b) in terms of expense? 5. What is the effect (increase or decrease) of a credit to a revenue account (a) in terms of owner’s equity and (b) in terms of revenue? 6. Kemp Company adheres to a policy of depositing all cash receipts in a bank account and making all payments by check. The cash account as of August 31 has a credit balance of $3,000, and there is no undeposited cash on hand. (a) Assuming no errors occurred during journalizing or posting, what caused this unusual balance? (b) Is the $3,000 credit balance in the cash account an asset, a liability, owner’s equity, a revenue, or an expense? 7. McElwee Company performed services in May for a specific customer, for a fee of $7,500. Payment was received the following June. (a) Was the revenue earned in May or June? (b) What accounts should be debited and credited in (1) May and (2) June? 8. What proof is provided by a trial balance? 9. If the two totals of a trial balance are equal, does it mean that there are no er- rors in the accounting records? Explain. 10. Assume that a trial balance is prepared with an account balance of $18,950 listed as $18,590 and an account balance of $7,200 listed as $720. Identify the trans- position and the slide. 11. Assume that when a purchase of supplies of $1,250 for cash was recorded, both the debit and the credit were journalized and posted as $1,520. (a) Would this error cause the trial balance to be out of balance? (b) Would the trial balance be out of balance if the $1,250 entry had been journalized correctly but the credit to Cash had been posted as $1,520? 12. Assume that Margarita Consulting erroneously recorded the payment of $7,500 of owner withdrawals as a debit to salary expense. (a) How would this error affect the equality of the trial balance? (b) How would this error affect the in- come statement, statement of owner’s equity, and balance sheet? 13. Assume that Blitzkrieg Realty Co. borrowed $25,000 from First Union Bank and Trust. In recording the transaction, Blitzkrieg erroneously recorded the receipt of $25,000 as a debit to cash, $25,000, and a credit to fees earned, $25,000. (a) How would this error affect the equality of the trial balance? (b) How would this error affect the income statement, statement of owner’s equity, and balance sheet? 66124_c02_47-100.qxd 11/10/03 6:43 PM Page 80 E Chapter 2 • Analyzing Transactions 81 14. In journalizing and posting the entry to record the purchase of supplies on ac- count, the accounts receivable account was credited in error. What is the pre- ferred procedure to correct this error? 15. Banks rely heavily upon customers’ deposits as a source of funds. Demand de- posits normally pay interest to the customer, who is entitled to withdraw at any time without prior notice to the bank. Checking and NOW (negotiable order of withdrawal) accounts are the most common form of demand deposits for banks. Assume that Kennon Storage has a checking account at Livingston Savings Bank. What type of account (asset, liability, owner’s equity, revenue, expense, draw- ing) does the account balance of $15,600 represent from the viewpoint of (a) Kennon Storage and (b) Livingston Savings Bank? Remember! If you need additional help, visit South-Western’s Web site. See page 28 for a description of the online and printed materials that are available. http://warren.swlearning.com Answer: Nestlé Exercises The following accounts appeared in recent financial statements of Continental Airlines: Accounts Payable Flight Equipment Aircraft Fuel Expense Landing Fees Air Traffic Liability Passenger Revenue Cargo and Mail Revenue Purchase Deposits for Flight Equipment Commissions Spare Parts and Supplies Identify each account as either a balance sheet account or an income statement ac- count. For each balance sheet account, identify it as an asset, a liability, or owner’s equity. For each income statement account, identify it as a revenue or an expense. Clarendon Interiors is owned and operated by Corey Krum, an interior decorator. In the ledger of Clarendon Interiors, the first digit of the account number indicates its major account classification (1—assets, 2—liabilities, 3—owner’s equity, 4—revenues, 5—expenses). The second digit of the account number indicates the specific account within each of the preceding major account classifications. Match each account number with its most likely account in the list below. The account numbers are 11, 12, 13, 21, 31, 32, 41, 51, 52, and 53. Accounts: Accounts Payable Fees Earned Accounts Receivable Land Cash Miscellaneous Expense Corey Krum, Capital Supplies Expense Corey Krum, Drawing Wages Expense EXERCISE 2-1 Chart of accounts Objective 1 EXERCISE 2-2 Chart of accounts Objective 1 66124_c02_47-100.qxd 11/10/03 6:43 PM Page 81 The Inflorescence School is a newly organized business that teaches people how to inspire and influence others. The list of accounts to be opened in the general ledger is as follows: Accounts Payable Millard Fillmore, Capital Supplies Accounts Receivable Millard Fillmore, Drawing Supplies Expense Cash Miscellaneous Expense Unearned Rent Equipment Prepaid Insurance Wages Expense Fees Earned Rent Expense List the accounts in the order in which they should appear in the ledger of The In- florescence School and assign account numbers. Each account number is to have two digits: the first digit is to indicate the major classification (1 for assets, etc.), and the second digit is to identify the specific account within each major classification (11 for Cash, etc.). Malta Co. is a travel agency. The nine transactions recorded by Malta during Feb- ruary 2006, its first month of operations, are indicated in the following T accounts: Chapter 2 • Analyzing Transactions82 EXERCISE 2-3 Chart of accounts Objective 1 EXERCISE 2-4 Identifying transactions Objectives 2, 3 Cash (1) 40,000 (2) 1,800 (7) 9,500 (3) 9,000 (4) 3,050 (6) 7,500 (8) 5,000 Equipment (3) 24,000 Ira Janke, Drawing (8) 5,000 Accounts Receivable (5) 12,000 (7) 9,500 Accounts Payable (6) 7,500 (3) 15,000 Service Revenue (5) 12,000 Supplies (2) 1,800 (9) 1,050 Ira Janke, Capital (1) 40,000 Operating Expenses (4) 3,050 (9) 1,050 Indicate for each debit and each credit: (a) whether an asset, liability, owner’s eq- uity, drawing, revenue, or expense account was affected and (b) whether the ac- count was increased (�) or d