Debits and Credits: Analyzing and Recording Business Transactions

ANSWERS TO DISCUSSION QUESTIONS 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

A ledger is a group of accounts that records in monetary value data from business transactions. Because that is always the debit side. It is an arbitrary rule. False. Accounts with one entry will not need footings. The end product of the accounting process is preparing financial statements. The transaction analysis chart is a teaching device that is not used in the regular accounting process. Accounts affected, category, rules, update of T accounts. The analysis of transactions results in the total of debits being equaled to the total of credits. A double-entry system provides a system of checks and balances. False. Informal report; does not have the same status as financial statements. The financial statements are prepared from the ending balances of the accounts (debit or credit) in the ledger. These ending balances are then used on financial statements. The inside columns on financial statements are for subtotaling. It is easier to prepare the reports from the trial balance, because a list of all accounts and their balances is provided. The columns for revenue, expenses, etc., on the expanded accounting equation do not list specific titles and their balances.

22

CHAPTER 2 SOLUTIONS TO MINI EXERCISES 1. Cash C. Clark, Capital 2. A. B. C. D. E. F. G. 3.

Cash 3,000 Cash Asset

$11,500 $16,000 Dr. Dr. Cr. Cr. Dr. Cr. Dr. Cr. Cr. Dr. Dr. Cr. Dr Cr. Dr. Dr. Cr. Cr. Dr. Cr. Dr.

Debit Balance Credit Balance

Asset Asset Liability Capital Withdrawals Revenue Expense

Dr. Acc. Rec. 1,000

Acc. Rec.

Asset

Dr. Legal Fees 4,000

Legal Fees

Revenue

Cr.

4. Cash Accounts Receivable Computer Equipment Accounts Payable D. Cope, Capital D. Cope, Withdrawals Legal Fees Advertising Expense Rent Expense Selling Expense 5. A. B. C. D. E. F. G. H. I. J. K. BS BS BS BS OE OE IS IS IS IS IS

23

SOLUTIONS TO EXERCISES 2-1. Balance Sheet Accounts Assets 111 Cash 112 Accounts Receivable 121 Digital Cameras Liabilities 211 Accounts Payable Owners Equity 311 A. Sting, Capital 312 A. Sting, Withdrawals Income Statement Accounts Revenue 411 Professional Fees Expenses 511 Salaries Expense 512 Rent Expense 513 Repair Expense

2-2.
1 Accounts Affected 2. Category 3

4 Rules

5 T-Account Update Equipment 16,000 Accounts Payable 12,000

Office Equipment

Asset

Dr.

Accounts Payable

Liability

Cr. Cash 4,000

Cash

Asset

Cr.

2-3.
ACCOUNT ex. Computer Legal Fees Earned P. Rey, Withdrawals Accounts Payable Salaries Expense Auto CATEGORY Supplies Revenue Withdrawals Liability Expense Asset

Asset Cr. Dr. Cr. Dr. Dr.

Dr. Dr. Cr. Dr. Cr. Cr.

FINANCIAL STATEMENT Cr. Balance Sheet Income Statement Statement of Owners Equity Balance Sheet Income Statement Balance Sheet

24

EXERCISES (CONTINUED) 2-4.

Dr. A. B. C. D. E. F. G. H. I. 8 6 9 1 10 3 2 1 3 Cr. 1 1 4 7 1 5 7 2 4

2-5. (1)
HALLS CLEANERS INCOME STATEMENT FOR MONTH ENDED JULY 31, 200X

Revenue: Cleaning Fees Operating Expenses: Salaries Expense Utilities Expense Total Operating Expenses Net Income

4 5 8 00

1 6 0 00 1 1 3 00 $ 2 7 3 00 1 8 5 00

(2)
HALLS CLEANERS STATEMENT OF OWNERS EQUITY FOR MONTH ENDED JULY 31, 200X

J. Hall, Capital, July 1, 200x Net Income for July Less: Withdrawals for July Decrease in Capital J. Hall, Capital, July 31, 200x

$ $ 1 8 5 00 (1 9 8 00) $

8 0 0 00

1 3 00 7 8 7 00

25

EXERCISES (CONTINUED) (3)

HALLS CLEANERS BALANCE SHEET JULY 31, 200X ASSETS LIABILITIES AND OWNERS EQUITY

Cash Equipment

5 5 0 00 6 9 2 00

Total Assets

$1 2 4 2 00

Liabilities Accounts Payable Owners Equity J. Hall, Capital Total Liabilities and Owners Equity

4 5 5 00 7 8 7 00

$1 2 4 2 00

26

SOLUTIONS TO GROUP A PROBLEMS PROBLEM 2A-1

Inc. Dec. A. Accounts Affected Cash Category Asset

Rules
Dr.

T-Account update Cash M. Montgomery, Capital 8,000 8,000

Melissa Montgomery, Capital B. Store Equipment

Capital* Asset

Cr. Dr.

Store Equipment 3,000

Accounts Payable 3,000

C.

Accounts Payable Rent Expense

Liability Expense

Cr. Dr.

Rent Expense 600

Accounts Payable 3,000 600 Bookkeeping Fees Earned 800

Accounts Payable D. Cash

Liability Asset

Cr. Dr. Cash 8,000 800

Bookkeeping Fees Earned E. Accounts Rec. Bookkeeping Fees Earned

Revenue Asset Revenue

Cr. Dr. Cr. Accounts Receivable 500 Bookkeeping Fees Earned 800 500

F. Melissa Montgomery, Withdraw. Withdrawal * Cash

* A subdivision of Owners Equity

Dr.

M. Montgomery, withdrawals 200

Cash 8,000 800 200

Asset

Cr.

27

PROBLEM 2A-2
Cash (A)40,000 (C) 3,000 111 50 (D) 700 (E) 800 (G) M. Slater, Withdrawals 312 (D) 50

Office Equipment (B) 4,000

121

Travel Fees Earned 3,000 (C)

411

Accounts Payable (G) 800

211

Advertising Expense (E) 700

511

4,000 (B) 900 (F)

M. Slater, Capital

311

Rent Expense (F) 900

512

40,000 (A)

PROBLEM 2A-3
Cash 5,000 (A) 3,500 (G) 100 (D) 200 (E) 400 (F) 200 (H) 900 (I) 1,800 112 111 Accounts Payable 100 (D) 211 Fees Earned 411

1,300 (C) 1,200 End Bal

6,500 (B)

8,500 End Bal 6,700

Accounts Receivable 6,500 (B) End Bal 3,000 3,500 (G)

Mike Frank, Capital 311 5,000 (A)

Rent Expense 400 (F)

511

Office Equipment 1,300 (C) 200 (H) End Bal 1,500

121

Mike Frank, Withdrawals 312 900 (I)

Utilities Expense 512 200 (E)

28

PROBLEM 2A-3 (CONTINUED) (2)

MIKES WINDOW WASHING SERVICE TRIAL BALANCE MAY 31, 200X Dr. Cr.

Cash Accounts Receivable Office Equipment Accounts Payable Mike Frank, Capital Mike Frank, Withdrawals Fees Earned Rent Expense Utilities Expense Totals

6 3 1

7 0 0 00 0 0 0 00 5 0 0 00 1 2 0 0 00 5 0 0 0 00 9 0 0 00 6 5 0 0 00 4 0 0 00 2 0 0 00 7 0 0 00

12

12 7 0 0 00

PROBLEM 2A-4 (A)

GRACIE LANTZ, ATTORNEY AT LAW INCOME STATEMENT FOR MONTH ENDED MAY 31, 200X

Revenue: Revenue from Legal Fees Operating Expenses: Utilities Expense Rent Expense Salaries Expense Total Operating Expenses Net Income

$1 3 5 0 00

3 0 0 00 4 5 0 00 1 5 0 00 $ 9 0 0 00 4 5 0 00

29

PROBLEM 2A-4 (CONTINUED) (B)

GRACIE LANTZ, ATTORNEY AT LAW STATEMENT OF OWNERS EQUITY FOR MONTH ENDED MAY 31, 200X

Gracie Lantz, Capital, May 1, 200x Net Income for May Less: Withdrawals for May Increase in Capital Gracie Lantz, Capital, May 31, 200x

$1 2 7 5 00 $ 4 5 0 00 (3 0 0 00) 1 5 0 00 $1 4 2 5 00

GRACIE LANTZ, ATTORNEY AT LAW BALANCE SHEET MAY 31, 200X

(C)
ASSETS LIABILITIES AND OWNERS EQUITY

Cash $5 0 0 0 00 Liabilities Accounts Receivable 6 5 0 00 Accounts Payable Office Equipment 7 5 0 00 Salaries Payable Total Liabilities Owners Equity Gracie Lantz, Capital Total Liabilities and $6 4 0 0 00 Owners Equity

$4 3 0 0 00 6 7 5 00 $4 9 7 5 00

1 4 2 5 00

Total Assets

$6 4 0 0 00

30

PROBLEM 2A-5 (1, 2, 3)

Cash (A) 16,000 (E) 2,600 (J) 300 111 Accounts Payable 211 18,000(B) 700 (I) 18,700 Advertising Expense 511 (D) 250

600 (C) 250 (D) 900 (F) 1,200 (G) 300 (K) 3,250

18,900 15,650

Accounts Receivable 112 (H) 800 500 300 (J)

A. Angel, Capital 311 16,000 (A)

Gas Expense (G) 1,200

512

Office Equipment 121 (C) 600

A. Angel, Withdrawals 312 (K) 300

Salaries Expense (F) 900

513

Delivery Trucks (B) 18,000

122

Delivery Fees Earned 411 2,600 (E) 800 (H) 3,400

Telephone Expense 514 (I) 700

31

PROBLEM 2A-5 (CONTINUED)

(4) ANGELS DELIVERY SERVICE TRIAL BALANCE MARCH 31, 200X Dr. Cr.

Cash Accounts Receivable Office Equipment Delivery Trucks Accounts Payable A. Angel, Capital A. Angel, Withdrawals Delivery Fees Earned Advertising Expense Gas Expense Salaries Expense Telephone Expense Totals

15

18

6 5 6 0

5 0 0 0

0 0 0 0

00 00 00 00 18 7 0 0 00 16 0 0 0 00

3 0 0 00 3 4 0 0 00 1 2 2 9 7 1 5 0 0 0 0 0 0 0 0 0 00 00 00 00 00

38

38 1 0 0 00

(5A) ANGELS DELIVERY SERVICE INCOME STATEMENT FOR MONTH ENDED MARCH 31, 200X

Revenue: Delivery Fees Earned Operating Expenses: Advertising Expense Gas Expense Salaries Expense Telephone Expense Total Operating Expenses Net Income

$3 4 0 0 00

$ 1

2 2 9 7

5 0 0 0

0 0 0 0

00 00 00 00 3 0 5 0 00 $ 3 5 0 00

32

PROBLEM 2A-5 (CONCLUDED) (5B)

ANGELS DELIVERY SERVICE STATEMENT OF OWNERS EQUITY FOR MONTH ENDED MARCH 31, 200X

A. Angel, Capital, March 1, 200x Net Income for March Less: Withdrawals for March Increase in Capital A. Angel, Capital, March 31, 200x

$16 0 0 0 00 $ 3 5 0 00 (3 0 0 00) 5 0 00 $16 0 5 0 00

(5C)
ANGELS DELIVERY SERVICE BALANCE SHEET MARCH 31, 200X ASSETS LIABILITIES AND OWNERS EQUITY

Cash Accounts Receivable Office Equipment Delivery Trucks

$15 6 5 6 18 0

5 0 0 0

0 0 0 0

00 00 00 00

Liabilities Accounts Payable Owners Equity A. Angel, Capital Total Liabilities and Owners Equity

$18 7 0 0 00

16 0 5 0 00

Total Assets

$34 7 5 0 00

$34 7 5 0 00

33

SOLUTIONS TO GROUP B PROBLEMS PROBLEM 2B-1

Inc. Dec. A. Accounts Affected Cash Category Asset

Rules
Dr.

T-Account Update Cash M. Montgomery, Capital 2,500 2,500

B.

M. Montgomery, Capital Store Equipment

Capital Asset

Cr. Dr.

Store Equipment 900

Accounts Payable 900

C.

Accounts Payable Rent Expense

Liability Expense

Cr. Dr.

Rent Expense 250

Accounts Payable 900 250 Bookkeeping Fees Earned 1,200

Accounts Payable D. Cash

Liability Asset

Cr. Dr. Cash 2,500 1,200

Bookkeeping Fees Earned E. Accounts Rec.

Revenue Asset

Cr. Dr. Accounts Receivable 700 Bookkeeping Fees Earned 1,200 700

Bookkeeping Fees Earned F. M. Montgomery, Withdr.

Revenue Withdrawal

Cr. Dr. M. Montgomery, withdrawals 275

Cash 2,500 1,200 275

Cash

Asset

Cr.

34

PROBLEM 2B-2
Cash (A)20,000 (C) 1,200 111 200 (D) 600 (E) 400 (G) M. Slater, Withdrawals 312 (D) 200

Office Equipment (B) 6,000

121

Travel Fees Earned 1,200 (C)

411

Accounts Payable (G) 400

211

Advertising Expense (E) 600

511

6,000 (B) 500 (F)

M. Slater, Capital

311

Rent Expense (F) 500

512

20,000 (A)

PROBLEM 2B-3
(A) Cash 10,000 (A) 4,500 (F) 2,000 (G) 16,000 11,040 4,000 (C) 310 (D) 50 (E) 600 (H) 4,960 111 Accounts Payable 211 Fees Earned 411

2,000 (B)

4,000 (F) 4,000 (G) 8,000

Accounts Receivable 2,000 (G)

112

Mike Frank, Capital 311 10,000 (A)

Rent Expense 310 (D)

511

Office Equipment 2,000 (B) 4,000 (C) 6,000

121

Mike Frank, Withdrawals 312 600 (H)

Utilities Expense 512 50 (E)

35

PROBLEM 2B-3 (CONTINUED) (B)

MIKES WINDOW WASHING SERVICE TRIAL BALANCE MAY 31, 200X Dr. Cr.

Cash Accounts Receivable Office Equipment Accounts Payable Mike Frank, Capital Mike Frank, Withdrawals Fees Earned Rent Expense Utilities Expense Totals

11 0 4 0 00 2 0 0 0 00 6 0 0 0 00 2 0 0 0 00 10 0 0 0 00 6 0 0 00 8 0 0 0 00 3 1 0 00 5 0 00 20 0 0 0 00

20 0 0 0 00

PROBLEM 2B-4 (A)

GRACIE LANTZ, ATTORNEY AT LAW INCOME STATEMENT FOR MONTH ENDED MAY 31, 200X

Revenue: Revenue from Legal Fees Operating Expenses: Utilities Expense Rent Expense Salaries Expense Total Operating Expenses Net Income

$8 8 0 0 00

1 0 0 00 3 0 0 00 4 0 0 00 8 0 0 00 $8 0 0 0 00

36

PROBLEM 2B-4 (CONTINUED) (B)

GRACIE LANTZ, ATTORNEY AT LAW STATEMENT OF OWNERS EQUITY FOR MONTH ENDED MAY 31, 200X

Gracie Lantz, Capital, May 1, 200x Net Income for May Less: Withdrawals for May Increase in Capital Gracie Lantz, Capital, May 31, 200x

$4 0 0 0 00 $8 0 0 0 00 (2 0 0 0 00) 6 0 0 0 00 $10 0 0 0 00

(C)
GRACIE LANTZ, ATTORNEY AT LAW BALANCE SHEET MAY 31, 200X ASSETS LIABILITIES AND OWNERS EQUITY

Cash Accounts Receivable Office Equipment

$6 0 0 0 00 2 4 0 0 00 2 4 0 0 00

Liabilities Accounts Payable Salaries Payable Total Liabilities Owners Equity Gracie Lantz, Capital Total Liabilities and Owners Equity

$ 2 0 0 00 6 0 0 00 $ 8 0 0 00

10 0 0 0 00

Total Assets

$10 8 0 0 00

$10 8 0 0 00

37

PROBLEM 2B-5 (1, 2, 3)

Cash (A) 40,000 (E) 13,000 (J) 1,600 111 2,500 (D) 1,850 (F) 750 (G) 400 (I) 88 (K) 5,888 Accounts Payable 211 25,000(B) 800 (I) 25,800 Advertising Expense 511 (D) 800

54,600 49,012

Accounts Receivable 112 (H) 5,500 3,900 1,600 (J)

A. Angel, Capital 311 40,000 (A)

Gas Expense (G) 750

512

Office Equipment 121 (D) 2,500

A. Angel, Withdrawals 312 (K) 88

Salaries Expense (F) 1,850

513

Delivery Trucks (B) 25,000

122

Delivery Fees Earned 411 13,000 (E) 5,500 (H) 18,500

Telephone Expense 514 (I) 400

38

PROBLEM 2B-5 (CONTINUED) (4)

ANGELS DELIVERY SERVICE TRIAL BALANCE MARCH 31, 200X

Dr. Cash Accounts Receivable Office Equipment Delivery Trucks Accounts Payable A. Angel, Capital A. Angel, Withdrawals Delivery Fees Earned Advertising Expense Gas Expense Salaries Expense Telephone Expense Totals 49 3 2 25 0 9 5 0 1 0 0 0 2 0 0 0 00 00 00 00

Cr.

25 8 0 0 00 40 0 0 0 00 8 8 00 18 5 0 0 00 8 7 8 4 3 0 5 5 0 0 0 0 0 0 0 00 00 00 00 00

1 84

84 3 0 0 00

(5A)
ANGELS DELIVERY SERVICE INCOME STATEMENT FOR MONTH ENDED MARCH 31, 200X

Revenue: Delivery Fees Earned Operating Expenses: Advertising Expense Gas Expense Salaries Expense Telephone Expense Total Operating Expenses Net Income

$18 5 0 0 00

$ 1

8 7 8 4

0 5 5 0

0 0 0 0

00 00 00 00 3 8 0 0 00 $14 7 0 0 00

39

PROBLEM 2B-5 (CONCLUDED) (5B)

ANGELS DELIVERY SERVICE STATEMENT OF OWNERS EQUITY FOR MONTH ENDED MARCH 31, 200X

A. Angel, Capital, March 1, 200x Net Income for March Less: Withdrawals for March Increase in Capital A. Angel, Capital, March 31, 200x

$40 0 0 0 00 $14 7 0 0 00 (8 8 00) 14 6 1 2 00 $54 6 1 2 00

(5C)
ANGELS DELIVERY SERVICE BALANCE SHEET MARCH 31, 200X ASSETS LIABILITIES AND OWNERS EQUITY

Cash Accounts Receivable Office Equipment Delivery Trucks

$49 3 2 25

0 9 5 0

1 0 0 0

2 0 0 0

00 00 00 00

Liabilities Accounts Payable Owners Equity A. Angel, Capital Total Liabilities and Owners Equity

$25 8 0 0 00

54 6 1 2 00 $80 4 1 2 00

Total Assets

$80 4 1 2 00

40

SOLUTIONS TO REAL WORLD APPLICATION #1

RANCH COMPANY TRIAL BALANCE JUNE 30, 200X Dr. Cr.

Cash Accounts Receivable Office Equipment Accounts Payable Wage Payable H. Clo, Capital H. Clo, Withdrawals Professional Fees Rent Expense Advertising Expense Totals

4 9 0 00 6 2 0 00 3 6 5 00 1 1 5 00 1 0 00 6 3 5 00 1 4 4 0 00 2 2 4 0 00 2 5 00 1 8 0 00 4 2 0 00

1 8 0 00

SOLUTIONS TO REAL WORLD APPLICATION #2 Situation Total of Trial Balance 1 Will Balance 2 Will not balance 3 Will balance but be overstated by $400 4 Will balance but be overstated 5 Trial balance will balance with correct amount 6 Trial Balance will not balance Effects on Accounts Cash overstated by $765 and equipment understated by $765. Cash overstated by $200. Capital and accounts receivable overstated by $400. Accounts Payable overstated by $360 and cash overstated by $400. Supplies understated by $40. Supplies overstated and equipment understated by $800. Cash overstated by $36.

SOLUTION TO REAL WORLD APPLICATION #3 The question in this case is whether Audrey should be allowed to put fictitious figures into the trial balance. Although Audrey has good intentions in this case, I would not support this type of behavior. Her behavior is extremely unprofessional and goes against all accounting standards. Instead of putting in fictitious figures, Audrey should stay late and correct the trial balance (or maybe have an assistant help her so she could catch the plane).

41

Cash 850 (O) 250 (bal) 200 (S) 450 1,200 (bal)

1000

Accounts Receivable 1020

Supplies

1030

Computer Shop Equipment 1080

3,850 (bal) 900 (P)

4,750 2,865 Office Equipment 600 (bal) 200(M) 85 (Q) 285 Service Revenue 1,650 (bal) 850 (O) 900 (P) 3,400 5030 155 (K) 0 Phone Expense 5040 Supplies Expense 5050 Insurance Expense 150 (L) 1,400 (N) 4000 Advertising Expense 5010 335 (bal) 155(K) 200(S) 690 405 Rent Expense 400 (bal) 1090 Accounts Payable 2000 Freedman, Capital

150 (L) 200 (M) 1,400 (N) 85 (Q) 50 (R) 1,885 3000 4,500 (bal)

SOLUTION TO CONTINUING PROBLEM

Freedman, Withdrawals3010

5020

100 (bal)

42 5070

Utilities Expense

5060

85 (bal)

Postage Expense

50 (R)

ELDORADO COMPUTER CENTER TRIAL BALANCE AUGUST 31, 200X Dr. Cr.

Cash Accounts Receivable Supplies Computer Shop Equipment Office Equipment Accounts Payable Freedman, Capital Freedman, Withdrawals Service Revenue Advertising Expense Rent Expense Utilities Expense Phone Expense Insurance Expense Postage Expense Totals

8 8 4 2 6

6 5 5 0 0

5 0 0 0 0

00 00 00 00 00 4 4 0 5 00 5 0 0 00 4 0 0 00

1 0 0 00 3 1 4 0 0 4 0 0 8 5 1 5 5 1 5 0 5 0 3 0 5 00 00 00 00 00 00 00

3 0 5 00

ELDORADO COMPUTER CENTER INCOME STATEMENT FOR THE TWO MONTHS ENDED AUGUST 31, 200X

Revenue: Service Revenue Operating Expenses: Advertising Expense Rent Expense Utilities Expense Phone Expense Insurance Expense Postage Expense Net Income

$3 4 0 0 00 $1 4 0 0 4 0 0 8 5 1 5 5 1 5 0 5 0 00 00 00 00 00 00 2 2 4 0 00 1 1 6 0 00

43

ELDORADO COMPUTER CENTER STATEMENT OF OWNERS EQUITY FOR THE TWO MONTHS ENDED AUGUST 31, 200X

Freedman, Capital, July 1, 200x Net Income Less: Freedman Withdrawals Net Increase Capital Freedman, Capital, August 31, 200x

$4 5 0 0 00 $1 1 6 0 00 (1 0 0 00) 1 0 6 0 00 $5 5 6 0 00

ELDORADO COMPUTER CENTER BALANCE SHEET AUGUST 31, 200X ASSETS LIABILITIES AND OWNERS EQUITY

Cash $2 8 6 5 00 Accounts Receivable 8 5 0 00 Supplies 4 5 0 00 Computer Shop Equipment 1 2 0 0 00 Office Equipment 6 0 0 00

Liabilities: Accounts Payable Owners Equity: Freedman, Capital Total Liabilities and Owners Equity

4 0 5 00

5 5 6 0 00

Total Assets

$5 9 6 5 00

$5 9 6 5 00

44