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Chapter 1 Introduction to Accounting and Business

chapter

2 Analyzing Transactions

© BODYWEDGE 21/PRNEWSFOTO (AP TOPIC GALLERY)

objectives
After studying this chapter, you should be able to:
1 Describe the characteristics of an account and 3 Prepare an unadjusted trial balance and ex-
record transactions using a chart of accounts plain how it can be used to discover errors.
and journal.
4 Discover and correct errors in recording trans-
2 Describe and illustrate the posting of journal actions.
entries to accounts.
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Gold’s Gym International, Inc.

Y
ou can organize your digital music within its transactions. For example, Gold’s
your MP3 player or IPod® according to var- would want to record all its cash trans-
ious playlists, according to your favorite actions so that they can be summa-
songs, genre, artist, or album. Your playlists rized as a single category, called
allow you to quickly retrieve music for listening. “cash.” This is much the same way you
Computer files are organized within folders for the would summarize the cash transactions in the check
same reason. Information, like music or digital files, register of your checkbook.
is organized into categories to simplify retrieval and In Chapter 1, we analyzed and recorded this kind
reporting. In the same way that you organize your of information by using the accounting equation,
digital information, a business also needs to organize Assets
Liabilities  Owner’s Equity. However,
its transactions. For example, when you shop at such a format is not practical for most businesses,
Wal-Mart or Target, or buy groceries at Kroger or and in this chapter we will study more efficient
SUPERVALU, you enter into a transaction that is methods of recording transactions. We will conclude
processed and recorded by the business. A company this chapter by discussing how accounting errors
such as Gold’s Gym, the largest co-ed gym chain in may occur and how they may be detected and cor-
the world, must also process, record, and summarize rected by the accounting process.

Using Accounts to Record Transactions

1 In Chapter 1, we recorded the November transactions for NetSolutions using the ac-
objective counting equation format shown in Exhibit 1. However, this format is not efficient or
Describe the practical for companies that have to record and summarize thousands or millions of
characteristics of transactions daily. As a result, accounting systems are designed to show the increases
an account and
record transactions and decreases in each financial statement item as a separate record. This record is
using a chart of called an account.
accounts and To illustrate, the Cash column of Exhibit 1 records the increases and decreases in
journal. cash. Likewise, the other columns in Exhibit 1 record the increases and decreases in
Supplies; Land; Accounts Payable; Chris Clark, Capital; Chris Clark, Drawing; Fees
Earned; Wages Expense; Rent Expense; Supplies Expense; Utilities Expense; and
Miscellaneous Expense. As we illustrate next, each of these columns can be organized
into a separate account that more efficiently records and summarizes transactions.
An account, in its simplest form, has three parts. First, each account has a title,
which is the name of the item recorded in the account. Second, each account has a
space for recording increases in the amount of the item. Third, each account has a space
for recording decreases in the amount of the item. The account form presented below
is called a T account because it resembles the letter T. The left side of the account is
called the debit side, and the right side is called the credit side.1

Title
Left side Right side
debit credit

1 The terms debit and credit are derived from the Latin debere and credere.

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50 Chapter 2 Analyzing Transactions

EXHIBIT 1 NetSolutions November Transactions

Assets
Liabilities  Owner’s Equity

Accounts Chris Clark, Chris Clark, Fees Wages Rent Supplies Utilities Misc.
Cash  Supp.  Land  Payable  Capital
Drawing  Earned
Exp.
Exp.
Exp.
Exp.
Exp.
a. 25,000 25,000

b.
20,000 20,000
Bal. 5,000 20,000 25,000
c. 1,350 1,350
Bal. 5,000 1,350 20,000 1,350 25,000
d.  7,500 7,500
Bal. 12,500 1,350 20,000 1,350 25,000 7,500
e.
3,650
2,125
800
450
275
Bal. 8,850 1,350 20,000 1,350 25,000 7,500
2,125
800
450
275
f.
950
950
Bal. 7,900 1,350 20,000 400 25,000 7,500
2,125
800
450
275
g.
800
800
Bal. 7,900 550 20,000 400 25,000 7,500
2,125
800
800
450
275
h.
2,000
2,000
Bal. 5,900 550 20,000 400 25,000
2,000 7,500
2,125
800
800
450
275

Amounts entered on the left side of an account, regardless of the ac-

count title, are called debits to the account. When debits are entered in
Amounts entered on the
an account, the account is said to be debited. Amounts entered on the
left side of an account are
right side of an account are called credits, and the account is said to be
debits, and amounts en- credited. Debits and credits are sometimes abbreviated as Dr. and Cr.
tered on the right side of The cash account shown below illustrates how NetSolutions’
an account are credits. November cash transactions shown in the first column of Exhibit 1 would
be recorded in an account. Transactions involving receipts of cash are
listed on the debit side of the account. For example, the receipt of $25,000
from Chris Clark in transaction (a) is entered on the debit side of the ac-
count. The letter or date of the transaction is also entered into the account. This is done
so that if any questions later arise related to the entry, the entry can be traced back to
the underlying transaction data. The transactions involving cash payments are listed on
the credit side. For example, the payment of $20,000 to purchase land in transaction (b)
is entered on the credit side of the account.
If at any time the total of the cash receipts is needed, the entries on the debit side
of the account may be added. For NetSolutions, the total receipts is $32,500 ($25,000 +
$7,500). Likewise, the total cash payments of $26,600 ($20,000 + $3,650 + $950 + $2,000)
may be determined by adding the entries on the credit side of the account. Subtracting
the smaller sum from the larger, $32,500
$26,600, identifies the amount of cash on
hand, $5,900. This amount is called the balance of the account and is inserted in the

Cash
⎧ (a) 25,000 (b) 20,000 ⎫
Debit ⎪ (d) 7,500 (e) 3,650 ⎪ Credit
side of ⎪ (f) 950 ⎪ side of
Many times when accoun- account ⎪ (h) 2,000 ⎪ account
⎨ ⎬
⎪
tants analyze complex transac-
Balance 5,900 ⎪
⎪ ⎪
tions, they use T accounts to
simplify the thought process.
⎪ ⎪
In the same way, you will find
T accounts a useful device in ⎩ ⎭
this and later accounting
courses. Balance of account
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Chapter 2 Analyzing Transactions 51

account, in the debit column. In this way, the balance is identified as a debit balance.2
This balance is reported on the balance sheet for NetSolutions as of November 30, 2007,
shown in Exhibit 6 of Chapter 1. Each of the columns in Exhibit 1 can be converted
into an account form in a similar manner as was done for the cash column of Exhibit
1. We illustrate each of these accounts later in this chapter.

CHART OF ACCOUNTS
A group of accounts for a business entity is called a ledger. A list of the accounts in
the ledger is called a chart of accounts. The accounts are normally listed in the order
in which they appear in the financial statements. The balance sheet accounts are usu-
ally listed first, in the order of assets, liabilities, and owner’s equity. The income state-
ment accounts are then listed in the order of revenues and expenses. Each of these
major account classifications is briefly described below.
Assets are resources owned by the business entity. These resources can be physi-
cal items, such as cash and supplies, or intangibles that have value, such as patent
rights. Some other examples of assets include accounts receivable, prepaid expenses
(such as insurance), buildings, equipment, and land.
Liabilities are debts owed to outsiders (creditors). Liabilities are often identified on
the balance sheet by titles that include the word payable. Examples of liabilities include ac-
counts payable, notes payable, and wages payable. Cash received before services are de-
livered creates a liability to perform the services. These future service commitments are
often called unearned revenues. Examples of unearned revenues are magazine subscrip-
tions received by a publisher and tuition received by a college at the beginning of a term.
Owner’s equity is the owner’s right to the assets of the business. For a propri-
etorship, the owner’s equity on the balance sheet is represented by the balance of the
owner’s capital account. A drawing account represents the amount of withdrawals
made by the owner.
Revenues are increases in owner’s equity as a result of selling services or products
to customers. Examples of revenues include fees earned, fares earned, commissions
revenue, and rent revenue.
Expenses result from using up assets or consuming services in the process of gen-
erating revenues. Examples of typical expenses include wages expense, rent expense,
utilities expense, supplies expense, and miscellaneous expense.
A chart of accounts is designed to meet the information needs of a company’s man-
agers and other users of its financial statements. The accounts within the chart of ac-
counts are numbered for use as references. A flexible numbering system is normally
used, so that new accounts can be added without affecting other account numbers.
Exhibit 2 is NetSolutions’ chart of accounts that we will be using in this chapter.
Additional accounts will be introduced in later chapters. In Exhibit 2, each account
number has two digits. The first digit indicates the major classification of the ledger in
which the account is located. Accounts beginning with 1 represent assets; 2, liabilities;
3, owner’s equity; 4, revenue; and 5, expenses. The second digit indicates the location
of the account within its class. You should note that each of the columns in Exhibit 1
Procter & Gamble’s account has been assigned an account number in the chart of accounts shown in Exhibit 2. In
numbers have over 30 digits addition, we have added accounts for Accounts Receivable, Prepaid Insurance, Office
to reflect P&G’s many different
Equipment, and Unearned Rent. These accounts will be used in recording NetSolutions’
operations and regions.
December transactions later in this chapter.

ANALYZING AND SUMMARIZING TRANSACTIONS IN ACCOUNTS

Every business transaction affects at least two accounts. To illustrate how transactions
are analyzed and summarized in accounts, we will use the NetSolutions transactions
from Chapter 1, with dates added. First, we illustrate how transactions (a), (b), (c), and

2 The totals of the debit and credit columns may be shown separately in an account. When this is done,
these amounts should be identified in some way so that they are not mistaken for entries or the ending
balance of the account.
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52 Chapter 2 Analyzing Transactions

EXHIBIT 2 Analysis and Recording of Transactions Using Accounts

Balance Sheet Accounts Income Statement Accounts

1. Assets 4. Revenue
11 Cash 41 Fees Earned
12 Accounts Receivable 5. Expenses
14 Supplies 51 Wages Expense
15 Prepaid Insurance 52 Rent Expense
17 Land 54 Utilities Expense
18 Office Equipment 55 Supplies Expense
2. Liabilities 59 Miscellaneous Expense
21 Accounts Payable
23 Unearned Rent
3. Owner’s Equity
31 Chris Clark, Capital
32 Chris Clark, Drawing

(f) are analyzed and summarized in balance sheet accounts (assets, liabili-
ties, and owner’s equity). Next, we illustrate how transactions (d), (e), and
Every transaction affects at (g) are analyzed and summarized in income statement accounts (revenues
least two accounts. and expenses). Finally, we illustrate how the withdrawal of cash by Chris
Clark, transaction (h), is analyzed and summarized in the accounts.

Balance Sheet Accounts Chris Clark’s first transaction, (a), was to deposit $25,000 in
a bank account in the name of NetSolutions. The effect of this November 1 transaction
on the balance sheet is to increase assets and owner’s equity, as shown below.

November 1
Transaction NetSolutions
Balance Sheet
November 1, 2007

Assets Owner’s Equity

Cash $25 0 0 0 00 Chris Clark, capital $25 0 0 0 00

This transaction is initially entered in a record called a journal. The title of the
account to be debited is listed first, followed by the amount to be debited. The title of
the account to be credited is listed below and to the right of the debit, followed by
the amount to be credited. This process of recording a transaction in the journal is
called journalizing. This form of recording a transaction is called a journal entry.
The journal entry for transaction (a) is shown below.

JOURNAL Page 1
Post.
Date Description Ref. Debit Credit
2007
1 Nov. 1 Cash 25 0 0 0 00 1
2 Chris Clark, Capital 25 0 0 0 00 2
3 Invested cash in NetSolutions. 3

A journal can be thought of as

being similar to an individual’s The increase in the asset (Cash), which is reported on the left side of the balance sheet,
diary of significant day-to-day is debited to the cash account. The increase in owner’s equity, which is reported on the
life events. right side of the balance sheet, is credited to the Chris Clark, capital account. As other
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Chapter 2 Analyzing Transactions 53

assets are acquired, the increases are also recorded as debits to asset accounts. Likewise,
other increases in owner’s equity will be recorded as credits to owner’s equity accounts.
The effects of this transaction are shown in the accounts by transferring the amount
and date of the journal entry to the left (debit) side of Cash and to the right (credit)
side of Chris Clark, Capital, as follows:

Cash Chris Clark, Capital

Nov. 1 25,000 Nov. 1 25,000

November 5 On November 5 [transaction (b)], NetSolutions bought land for $20,000, paying cash.
Transaction This transaction increases one asset account and decreases another. It is entered in the
journal as a $20,000 increase (debit) to Land and a $20,000 decrease (credit) to Cash, as
shown below.

4 4
5 5 Land 20 0 0 0 00 5
6 Cash 20 0 0 0 00 6
7 Purchased land for building site. 7

The effect of this entry is shown in the accounts of NetSolutions as follows:

Cash Land Chris Clark, Capital

Nov. 1 25,000 Nov. 5 20,000 Nov. 5 20,000 Nov. 1 25,000

November 10 On November 10 [transaction (c)], NetSolutions purchased supplies on account for

Transaction $1,350. This transaction increases an asset account and increases a liability account. It
is entered in the journal as a $1,350 increase (debit) to Supplies and a $1,350 increase
(credit) to Accounts Payable, as shown below. To simplify the illustration, the effect
of entry (c) and the remaining journal entries for NetSolutions will be shown in the
accounts later.

8 8
9 10 Supplies 1 3 5 0 00 9
10 Accounts Payable 1 3 5 0 00 10
11 Purchased supplies on account. 11

November 30 On November 30 [transaction (f)], NetSolutions paid creditors on account, $950. This
Transaction transaction decreases a liability account and decreases an asset account. It is entered
in the journal as a $950 decrease (debit) to Accounts Payable and a $950 decrease
(credit) to Cash, as shown below.

23 23
24 30 Accounts Payable 9 5 0 00 24
25 Cash 9 5 0 00 25
26 Paid creditors on account. 26

In the preceding examples, you should observe that the left side of asset
accounts is used for recording increases, and the right side is used for
The left side of all ac- recording decreases. Also, the right side of liability and owner’s equity
counts is the debit side, accounts is used to record increases, and the left side of such accounts is
and the right side is the used to record decreases. The left side of all accounts, whether asset, lia-
credit side. bility, or owner’s equity, is the debit side, and the right side is the credit
side. Thus, a debit may be either an increase or a decrease, depending
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54 Chapter 2 Analyzing Transactions

on the account affected. Likewise, a credit may be either an increase or a decrease, de-
pending on the account.
The general rules of debit and credit for balance sheet accounts may be stated as
follows:

Debit Credit
Asset accounts Increase () Decrease ()
Liability accounts Decrease () Increase ()
Owner’s equity (capital) accounts Decrease () Increase ()

The rules of debit and credit may also be stated in relationship to the accounting
equation, as shown below. The side of the account for recording increases is shown in
green.

Balance Sheet Accounts

ASSETS LIABILITIES OWNER’S EQUITY

Asset Accounts Liability Accounts Owner’s Equity Accounts


Debit for Credit for Debit for Credit for Debit for Credit for
increases() decreases() decreases() increases() decreases() increases()

Example Exercise 2-1 objective 1

Prepare a journal entry for the purchase of a truck on June 3 for $42,500, paying $8,500 cash and the
remainder on account.

Follow My Example 2-1

June 3 Truck . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,500

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,500
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,000

For Practice: PE 2-1A, PE 2-1B

Income Statement Accounts The analysis of revenue and expense transactions fo-
cuses on how each transaction affects owner’s equity. Transactions that increase rev-
enue will increase owner’s equity. Just as increases in owner’s equity are recorded as
credits, so, too, are increases in revenue accounts. Transactions that increase expense
will decrease owner’s equity. Just as decreases in owner’s equity are recorded as debits,
increases in expense accounts are recorded as debits.
We will use NetSolutions’ transactions (d), (e), and (g) to illustrate the analysis of
transactions and the rules of debit and credit for revenue and expense accounts. On
November 18 November 18 [transaction (d)], NetSolutions received fees of $7,500 from customers for
Transaction services provided. This transaction increases an asset account and increases a revenue
account. It is entered in the journal as a $7,500 increase (debit) to Cash and a $7,500 in-
crease (credit) to Fees Earned, as shown below [transaction (d)].

12 12
13 18 Cash 7 5 0 0 00 13
14 Fees Earned 7 5 0 0 00 14
15 Received fees from customers. 15
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Chapter 2 Analyzing Transactions 55

Business Connections

THE HIJACKING RECEIVABLE

A company’s chart of accounts should reflect the basic tually, the pilot talked the hijackers into settling for the
nature of its operations. Occasionally, however, transac- $2 million when the plane landed in Chattanooga for re-
tions take place that give rise to unusual accounts. The fueling.
following is a story of one such account. Upon landing in Havana, the Cuban authorities ar-
During the early 1970s, before strict airport security was rested the hijackers and, after a brief delay, sent the plane,
implemented across the United States, several airlines ex- passengers, and crew back to the United States. The hi-
perienced hijacking incidents. One such incident occurred jackers and $2 million stayed in Cuba.
on November 10, 1972, when a Southern Airways DC- How did Southern Airways account for and report the
9 en route from Memphis to Miami was hijacked during a hijacking payment in its subsequent financial statements?
stopover in Birmingham, Alabama. The three hijackers As you might have analyzed, the initial entry credited Cash
boarded the plane in Birmingham armed with handguns for $2 million. The debit was to an account entitled “Hi-
and hand grenades. At gunpoint, the hijackers took the jacking Payment.” This account was reported as a type of
plane, the plane’s crew of four, and 27 passengers to nine receivable under “other assets” on Southern’s balance
American cities, Toronto, and eventually to Havana, Cuba. sheet. The company maintained that it would be able to
During the long flight, the hijackers threatened to crash collect the cash from the Cuban government and that,
the plane into the Oak Ridge, Tennessee, nuclear facili- therefore, a receivable existed. In fact, in August 1975,
ties, insisted on talking with President Nixon, and de- Southern Airways was repaid $2 million by the Cuban gov-
manded a ransom of $10 million. Southern Airways, ernment, which was, at that time, attempting to improve
however, was only able to come up with $2 million. Even- relations with the United States.

November 30 Throughout the month, NetSolutions incurred the following expenses: wages, $2,125;
Transaction rent, $800; utilities, $450; and miscellaneous, $275. To simplify the illustration, the en-
try to journalize the payment of these expenses is recorded on November 30 [transac-
tion (e)], as shown below. This transaction increases various expense accounts and
decreases an asset account.

16 16
17 30 Wages Expense 2 1 2 5 00 17
18 Rent Expense 8 0 0 00 18
19 Utilities Expense 4 5 0 00 19
20 Miscellaneous Expense 2 7 5 00 20
21 Cash 3 6 5 0 00 21
22 Paid expenses. 22

You should note that regardless of the number of accounts, the sum of the debits is
always equal to the sum of the credits in a journal entry.
November 30 On November 30, NetSolutions recorded the amount of supplies used in the op-
Transaction erations during the month [transaction (g)]. This transaction increases an expense
account and decreases an asset account. The journal entry for transaction (g) is shown
below.

27 27
28 30 Supplies Expense 8 0 0 00 28
29 Supplies 8 0 0 00 29
30 Supplies used during November. 30

The general rules of debit and credit for analyzing transactions affecting income state-
ment accounts are stated as shown at the top of the following page.
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56 Chapter 2 Analyzing Transactions

Debit Credit
Revenue accounts Decrease () Increase ()
Expense accounts Increase () Decrease ()

The rules of debit and credit for income statement accounts may also be summarized
in relationship to the accounting equation, owner’s equity accounts, and net income or
net loss as shown below.
OWNER’S EQUITY
ASSETS
LIABILITIES  Owner’s Equity Accounts
Debit for Credit for
decreases() increases()

Income Statement
Accounts

Revenue Accounts

The sum of the debits Debit for Credit for

must always equal the decreases() increases()
sum of the credits.
Less

Expense Accounts
Debit for Credit for
increases() decreases()

Equals

Net Income
Revenues exceed expenses
Increases owner’s equity (capital)
or
Net Loss
Expenses exceed revenues
Decreases owner’s equity (capital)

Example Exercise 2-2 objective 1

Prepare a journal entry on August 7 for the fees earned on account, $115,000.

Follow My Example 2-2

Aug. 7 Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,000

Fees Earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,000

For Practice: PE 2-2A, PE 2-2B

Drawing Account The owner of a proprietorship may withdraw cash from the busi-
ness for personal use. This is common practice for owners devoting full time to the
business, since the business may be the owner’s main source of income. Such with-
drawals have the effect of decreasing owner’s equity. Just as decreases in owner’s equity
are recorded as debits, increases in withdrawals are recorded as debits. Withdrawals
are debited to an account with the owner’s name followed by Drawing or Personal.
November 30 In transaction (h), Chris Clark withdrew $2,000 in cash from NetSolutions for per-
Transaction sonal use. The effect of this transaction is to increase the drawing account and decrease
the cash account. The journal entry for transaction (h) is shown on the next page.
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Chapter 2 Analyzing Transactions 57

2007
1 Nov. 30 Chris Clark, Drawing 2 0 0 0 00 1
2 Cash 2 0 0 0 00 2
3 Chris Clark withdrew cash for 3
4 personal use. 4

Example Exercise 2-3 objective 1

Prepare a journal entry on December 29 for the payment of $12,000 to the owner of Smartstaff
Consulting Services, Dominique Walsh, for personal use.

Follow My Example 2-3

Dec. 29 Dominique Walsh, Drawing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000

For Practice: PE 2-3A, PE 2-3B

NORMAL BALANCES OF ACCOUNTS

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 reason, the normal balances of
all accounts are positive rather than negative. For example, the total debits (increases)
in an asset account will ordinarily be greater than the total credits (decreases). Thus,
asset accounts normally have debit balances.
The rules of debit and credit and the normal balances of the various types of ac-
counts are summarized in Exhibit 3. In Exhibit 3, the side of the account for recording
increases and the normal balance is shown in green.
When an account normally having a debit balance actually has a credit balance, or vice
versa, an error may have occurred or an unusual situation may exist. For example, a credit
balance in the office equipment account could result only from an error. On the other hand,
a debit balance in an accounts payable account could result from an overpayment.

Example Exercise 2-4 objective 1

State for each account whether it is likely to have (a) debit entries only, (b) credit entries only, or (c) both
debit and credit entries. Also, indicate its normal balance.
1. Amber Saunders, Drawing 4. Fees Earned
2. Accounts Payable 5. Supplies
3. Cash 6. Utilities Expense

Follow My Example 2-4

1. Debit entries only; normal debit balance 4. Credit entries only; normal credit balance
2. Debit and credit entries; normal credit balance 5. Debit and credit entries; normal debit balance
3. Debit and credit entries; normal debit balance 6. Debit entries only; normal debit balance

For Practice: PE 2-4A, PE 2-4B

Integrity, Objectivity, and Ethics in Business

WILL JOURNALIZING PREVENT FRAUD?

While journalizing transactions reduces the possibility of fraud, be hidden within the double-entry bookkeeping system by
it by no means eliminates it. For example, embezzlement can creating fictitious suppliers to whom checks are issued.
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58 Chapter 2 Analyzing Transactions

EXHIBIT 3 Rules of Debit and Credit, Normal Balances of Accounts

Total Debits
Total Credits

Balance Sheet Accounts

ASSETS LIABILITIES OWNER’S EQUITY

Asset Accounts
Liability Accounts  Owner’s Equity Accounts
Debit for Credit for Debit for Credit for Debit for Credit for
increases() decreases() decreases() increases() decreases() increases()

Income Statement
The side of the account for recording increases and the Accounts
normal balance is shown in green.
Revenue Accounts
Debit for Credit for
decreases() increases()

Less

The sum of the debits is Expense Accounts

always equal to the sum
Debit for Credit for
of the credits for each increases() decreases()
journal entry.
Equals

Net Income
Revenues exceed expenses
Increases owner’s equity (capital)
or
Net Loss
Expenses exceed revenues
Decreases owner’s equity (capital)

Drawing Account

Debit for Credit for

increases() decreases()

Double-Entry Accounting System

In the preceding paragraphs, we illustrated the rules of debit and credit for recording
transactions in accounts using journal entries. In doing so, the sum of the debits is al-
ways equal to the sum of the credits for each journal entry. As shown in Exhibit 3, this
equality of debits and credits for each transaction is built into the accounting equation:
Assets
Liabilities  Owner’s Equity. Because of this double equality, this system of
recording transactions is called the double-entry accounting system.
In 1494, Luca Pacioli, a Fran-
ciscan monk, invented the As we illustrate in the remainder of this text, the double-entry accounting system
double-entry accounting sys- is a very powerful tool in analyzing the effects of transactions. Using this system to
tem that is still used today. analyze transactions is summarized below and in Exhibit 4.
1. Carefully read the description of the transaction to determine whether an asset, li-
ability, owner’s equity, revenue, expense, or drawing account is affected by the
transaction.
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Chapter 2 Analyzing Transactions 59

2. For each account affected by the transaction,

Recording Transactions Using
EXHIBIT 4 determine whether the account increases or
Double-Entry Accounting
decreases.
3. Determine whether each increase or decrease
should be recorded as a debit or a credit, fol-
lowing the rules of debit and credit shown in
Exhibit 3.
4. Record the transaction using a journal entry.
5. Periodically post journal entries to the accounts
in the ledger.
6. Prepare an unadjusted trial balance at the end
of the period.
We have described and illustrated steps 1–4
in the preceding paragraphs. In the remainder of
this chapter, we describe and illustrate steps 5
and 6.

2
objective
Describe and illustrate the posting of journal
entries to accounts.

Posting Journal Entries

to Accounts
As we discussed in the preceding section, a trans-
action is first recorded in a journal. Periodically,
the journal entries are transferred to the accounts
in the ledger (step 5 in Exhibit 4). The ledger is a
history of transactions by account. The process of
transferring the debits and credits from the journal
entries to the accounts is called posting.
In practice, businesses use a variety of formats
for recording journal entries. A business may use
one all-purpose journal, sometimes called a two-
column journal, or it may use several journals. In
the latter case, each journal is used to record dif-
ferent types of transactions, such as cash receipts
or cash payments. The journals may be part of ei-
ther a manual accounting system or a computer-
ized accounting system.3
As a review of the analysis and recording of
transactions and to illustrate posting in a manual
accounting system, we will use the December trans-
actions of NetSolutions. The first transaction in
December occurred on December 1.

3 The use of special journals and computerized accounting systems is discussed in Chapter 5, after the
basics of accounting systems have been covered.
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60 Chapter 2 Analyzing Transactions

December 1 NetSolutions paid a premium of $2,400 for a comprehensive insurance policy covering
Transaction liability, theft, and fire. The policy covers a one-year period.

Analysis When you purchase insurance for your automobile, you may be required
to pay the insurance premium in advance. In this case, your transaction is similar to
NetSolutions. Advance payments of expenses such as insurance are prepaid expenses,
which are assets. For NetSolutions, the asset acquired for the cash payment is insur-
ance protection for 12 months. The asset Prepaid Insurance increases and is debited for
$2,400. The asset Cash decreases and is credited for $2,400. The recording and posting
of this transaction is shown in Exhibit 5.
Note where the date of the transaction is recorded in the journal. Also note that
the entry is explained as the payment of an insurance premium. Such explanations
should be brief. For unusual and complex transactions, such as a long-term rental
arrangement, the journal entry explanation may include a reference to the rental agree-
ment or other business document.
You will note that the T account form is not used in this illustration. Although the
T account clearly separates debit and credit entries, in practice, the T account is usu-
ally replaced with the standard form shown in Exhibit 5.
The debits and credits for each journal entry are posted to the accounts in the order
in which they occur in the journal. To illustrate, the debit portion of the December 1 jour-
nal entry is posted to the prepaid account in Exhibit 5 using the following four steps:
Step 1: The date (Dec. 1) is entered in the Date Column of Prepaid Insurance;

EXHIBIT 5 JOURNAL Page 2 ③

Diagram of the Post.
Date Description Ref. Debit Credit
Recording and
Posting of a Debit
and a Credit 5 5
① 6 Dec. 1 Prepaid Insurance ④ 15 2 4 0 0 00 6
7 Cash ④ 11 2 4 0 0 00 7
8 Paid premium on one-year policy. 8

②
②

ACCOUNT Prepaid Insurance ACCOUNT NO. 15 ④

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
①
2007
Dec. 1 2 2 4 0 0 00 2 4 0 0 00

ACCOUNT Cash ACCOUNT NO. 11 ④

Balance
Post.
Date Item Ref. Debit Credit Debit Credit

30 2 2 0 0 0 00 5 9 0 0 00
① Dec. 1 2 2 4 0 0 00 3 5 0 0 00

③
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Chapter 2 Analyzing Transactions 61

Step 2: The amount (2,400) is entered into the Debit Column of Prepaid Insurance;
Step 3: The journal page number (2) is entered in the Posting Reference (Post. Ref.) Col-
umn of Prepaid Insurance;
Step 4: The account number (15) is entered in the Posting Reference (Post. Ref.) Col-
umn in the journal.
As shown in Exhibit 5, the credit portion of the December 1 journal entry is posted
to the cash account in a similar manner.
The remaining December transactions for NetSolutions are analyzed in the follow-
ing paragraphs. These transactions are posted to the ledger in Exhibit 6, shown later.
To simplify and reduce repetition, some of the December transactions are stated in sum-
mary form. For example, cash received for services is normally recorded on a daily ba-
sis. In this example, however, only summary totals are recorded at the middle and end
of the month. Likewise, all fees earned on account during December are recorded at the
middle and end of the month. In practice, each fee earned is recorded separately.

December 1 NetSolutions paid rent for December, $800. The company from which NetSolutions is
Transaction renting its store space now requires the payment of rent on the first of each month,
rather than at the end of the month.

Analysis You may pay monthly rent on an apartment on the first of each month.
Your rent transaction is similar to NetSolutions. The advance payment of rent is an as-
set, much like the advance payment of the insurance premium in the preceding trans-
action. Unlike the insurance premium, this prepaid rent will expire in one month.
When an asset that is purchased will be used up in a short period of time, such as a
month, it is normal to debit an expense account initially. This avoids having to trans-
fer the balance from an asset account (Prepaid Rent) to an expense account (Rent
Expense) at the end of the month. Thus, when the rent for December is prepaid at the
beginning of the month, Rent Expense is debited for $800, and Cash is credited for $800.

9 9
10 1 Rent Expense 52 8 0 0 00 10
11 Cash 11 8 0 0 00 11
12 Paid rent for December. 12

December 1 NetSolutions received an offer from a local retailer to rent the land purchased on
Transaction November 5. The retailer plans to use the land as a parking lot for its employees and
customers. NetSolutions agreed to rent the land to the retailer for three months, with
the rent payable in advance. NetSolutions received $360 for three months’ rent begin-
ning December 1.

Analysis By agreeing to rent the land and accepting the $360, NetSolutions has in-
curred an obligation (liability) to the retailer. This obligation is to make the land avail-
able for use for three months and not to interfere with its use. The liability created by
receiving the cash in advance of providing the service is called unearned revenue.
Thus, the $360 received is an increase in an asset and is debited to Cash. The liability
account Unearned Rent increases and is credited for $360. As time passes, the un-
earned rent liability will decrease and will become revenue.
Magazines that receive sub-
scriptions in advance must
record the receipts as un- 13 13
earned revenues. Likewise, air-
14 1 Cash 11 3 6 0 00 14
lines that receive ticket
payments in advance must 15 Unearned Rent 23 3 6 0 00 15
record the receipts as un- 16 Received advance payment for 16
earned revenues until the pas- 17 three months’ rent on land. 17
sengers use the tickets.

December 4 NetSolutions purchased office equipment on account from Executive Supply Co. for
Transaction $1,800.
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62 Chapter 2 Analyzing Transactions

Analysis The asset account Office Equipment increases and is therefore debited for
$1,800. The liability account Accounts Payable increases and is credited for $1,800.

18 18
19 4 Office Equipment 18 1 8 0 0 00 19
20 Accounts Payable 21 1 8 0 0 00 20
21 Purchased office equipment 21
22 on account. 22

December 6 NetSolutions paid $180 for a newspaper advertisement.

Transaction
Analysis An expense increases and is debited for $180. The asset Cash decreases and
is credited for $180. Expense items that are expected to be minor in amount are nor-
mally included as part of the miscellaneous expense. Thus, Miscellaneous Expense is
debited for $180.

23 23
24 6 Miscellaneous Expense 59 1 8 0 00 24
25 Cash 11 1 8 0 00 25
26 Paid for newspaper ad. 26

December 11 NetSolutions paid creditors $400.

Transaction
Analysis This payment decreases the liability account Accounts Payable, which is
debited for $400. Cash also decreases and is credited for $400.

27 27
28 11 Accounts Payable 21 4 0 0 00 28
29 Cash 11 4 0 0 00 29
30 Paid creditors on account. 30

December 13 NetSolutions paid a receptionist and a part-time assistant $950 for two weeks’ wages.
Transaction
Analysis This transaction is similar to the December 6 transaction, where an expense
account is increased and Cash is decreased. Thus, Wages Expense is debited for $950,
and Cash is credited for $950.

In computerized accounting
JOURNAL Page 3
systems, some transactions may Post.
be automatically authorized Date Description Ref. Debit Credit
and recorded when certain 2007
events occur. For example, the 1 Dec. 13 Wages Expense 51 9 5 0 00 1
wages of employees may be 2 Cash 11 9 5 0 00 2
paid automatically at the end 3 Paid two weeks’ wages. 3
of each pay period.

December 16 NetSolutions received $3,100 from fees earned for the first half of December.
Transaction
Analysis Cash increases and is debited for $3,100. The revenue account Fees Earned
increases and is credited for $3,100.

4 4
5 16 Cash 11 3 1 0 0 00 5
6 Fees Earned 41 3 1 0 0 00 6
7 Received fees from customers. 7
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Chapter 2 Analyzing Transactions 63

December 16 Fees earned on account totaled $1,750 for the first half of December.
Transaction
Analysis Assume that you have agreed to take care of a neighbor’s dog for a week
for $100. At the end of the week, you agree to wait until the first of the next month to
receive the $100. Like NetSolutions, you have provided services on account and thus
have a right to receive the payment from your neighbor. When a business agrees that
payment for services provided or goods sold can be accepted at a later date, the firm
has an account receivable, which is a claim against the customer. The account receiv-
able is an asset, and the revenue is earned even though no cash has been received.
Thus, Accounts Receivable increases and is debited for $1,750. The revenue account
Fees Earned increases and is credited for $1,750.

8 8
9 16 Accounts Receivable 12 1 7 5 0 00 9
10 Fees Earned 41 1 7 5 0 00 10
11 Recorded fees earned on account. 11

December 20 NetSolutions paid $900 to Executive Supply Co. on the $1,800 debt owed from the
Transaction December 4 transaction.

Analysis This is similar to the transaction of December 11.

12 12
13 20 Accounts Payable 21 9 0 0 00 13
14 Cash 11 9 0 0 00 14
15 Paid part of amount owed to 15
16 Executive Supply Co. 16

December 21 NetSolutions received $650 from customers in payment of their accounts.

Transaction
Analysis When customers pay amounts owed for services they have previously re-
ceived, one asset increases and another asset decreases. Thus, Cash is debited for $650,
and Accounts Receivable is credited for $650.

17 17
18 21 Cash 11 6 5 0 00 18
19 Accounts Receivable 12 6 5 0 00 19
20 Received cash from customers 20
21 on account. 21

December 23 NetSolutions paid $1,450 for supplies.

Transaction
Analysis The asset account Supplies increases and is debited for $1,450. The asset ac-
count Cash decreases and is credited for $1,450.

22 22
23 23 Supplies 14 1 4 5 0 00 23
24 Cash 11 1 4 5 0 00 24
25 Purchased supplies. 25

December 27 NetSolutions paid the receptionist and the part-time assistant $1,200 for two weeks’
Transaction wages.

Analysis This is similar to the transaction of December 13.

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64 Chapter 2 Analyzing Transactions

26 26
27 27 Wages Expense 51 1 2 0 0 00 27
28 Cash 11 1 2 0 0 00 28
29 Paid two weeks’ wages. 29

December 31 NetSolutions paid its $310 telephone bill for the month.
Transaction
Analysis You pay a telephone bill each month. Businesses, such as NetSolutions, also
must pay monthly utility bills. Such transactions are similar to the transaction of
December 6. The expense account Utilities Expense is debited for $310, and Cash is
credited for $310.

30 30
31 31 Utilities Expense 54 3 1 0 00 31
32 Cash 11 3 1 0 00 32
33 Paid telephone bill. 33

December 31 NetSolutions paid its $225 electric bill for the month.
Transaction
Analysis This is similar to the preceding transaction.

JOURNAL Page 4
Post.
Date Description Ref. Debit Credit
2007
1 Dec. 31 Utilities Expense 54 2 2 5 00 1
2 Cash 11 2 2 5 00 2
3 Paid electric bill. 3

December 31 NetSolutions received $2,870 from fees earned for the second half of December.
Transaction
Analysis This is similar to the transaction of December 16.

4 4
5 31 Cash 11 2 8 7 0 00 5
6 Fees Earned 41 2 8 7 0 00 6
7 Received fees from customers. 7

December 31 Fees earned on account totaled $1,120 for the second half of December.
Transaction
Analysis This is similar to the transaction of December 16.

8 8
9 31 Accounts Receivable 12 1 1 2 0 00 9
10 Fees Earned 41 1 1 2 0 00 10
11 Recorded fees earned on account. 11

December 31 Chris Clark withdrew $2,000 for personal use.

Transaction
Analysis This transaction resulted in an increase in the amount of withdrawals and
is recorded by a $2,000 debit to Chris Clark, Drawing. The decrease in business cash is
recorded by a $2,000 credit to Cash.

12 12
13 31 Chris Clark, Drawing 32 2 0 0 0 00 13
14 Cash 11 2 0 0 0 00 14
15 Chris Clark withdrew cash for 15
16 personal use. 16
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Chapter 2 Analyzing Transactions 65

Example Exercise 2-5 objective 2

On March 1, the cash account balance was $22,350. During March, cash receipts totaled $241,880 and the
March 31 balance was $19,125. Determine the cash payments made during March.

Follow My Example 2-5

Using the following T account, solve for the amount of cash payments (indicated by ? below).

Cash
Mar. 1 Bal. 22,350 ? Cash payments
Cash receipts 241,880
Mar. 31 Bal. 19,125

$19,125
$22,350  $241,880  Cash payments

Cash payments
$22,350  $241,880  $19,125
$245,105

For Practice: PE 2-5A, PE 2-5B

The journal for NetSolutions since it was organized on November 1 is shown in

Exhibit 6. Exhibit 6 also shows the ledger after the transactions for both November and
December have been posted.

EXHIBIT 6 JOURNAL Page 1

Journal and Ledger— Post.
NetSolutions Date Description Ref. Debit Credit
2007
1 Nov. 1 Cash 11 25 0 0 0 00 1
2 Chris Clark, Capital 31 25 0 0 0 00 2
3 Invested cash in NetSolutions. 3
4 4
5 5 Land 17 20 0 0 0 00 5
6 Cash 11 20 0 0 0 00 6
7 Purchased land for building site. 7
8 8
9 10 Supplies 14 1 3 5 0 00 9
10 Accounts Payable 21 1 3 5 0 00 10
11 Purchased supplies on account. 11
12 12
13 18 Cash 11 7 5 0 0 00 13
14 Fees Earned 41 7 5 0 0 00 14
15 Received fees from customers. 15
16 16
17 30 Wages Expense 51 2 1 2 5 00 17
18 Rent Expense 52 8 0 0 00 18
19 Utilities Expense 54 4 5 0 00 19
20 Miscellaneous Expense 59 2 7 5 00 20
21 Cash 11 3 6 5 0 00 21
22 Paid expenses. 22
23 23
24 30 Accounts Payable 21 9 5 0 00 24
25 Cash 11 9 5 0 00 25
26 Paid creditors on account. 26
27 27
28 30 Supplies Expense 55 8 0 0 00 28
29 Supplies 14 8 0 0 00 29
30 Supplies used during November. 30

(continued)
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66 Chapter 2 Analyzing Transactions

EXHIBIT 6 JOURNAL Page 2

Post.
Date Description Ref. Debit Credit
2007
1 Nov. 30 Chris Clark, Drawing 32 2 0 0 0 00 1
2 Cash 11 2 0 0 0 00 2
3 Chris Clark withdrew cash for 3
4 personal use. 4
5 5
6 Dec. 1 Prepaid Insurance 15 2 4 0 0 00 6
7 Cash 11 2 4 0 0 00 7
8 Paid premium on one-year policy. 8
9 9
10 1 Rent Expense 52 8 0 0 00 10
11 Cash 11 8 0 0 00 11
12 Paid rent for December. 12
13 13
14 1 Cash 11 3 6 0 00 14
15 Unearned Rent 23 3 6 0 00 15
16 Received advance payment for 16
17 three months’ rent on land. 17
18 18
19 4 Office Equipment 18 1 8 0 0 00 19
20 Accounts Payable 21 1 8 0 0 00 20
21 Purchased office equipment 21
22 on account. 22
23 23
24 6 Miscellaneous Expense 59 1 8 0 00 24
25 Cash 11 1 8 0 00 25
26 Paid for newspaper ad. 26
27 27
28 11 Accounts Payable 21 4 0 0 00 28
29 Cash 11 4 0 0 00 29
30 Paid creditors on account. 30

(continued)
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Chapter 2 Analyzing Transactions 67

EXHIBIT 6 JOURNAL Page 3

Post.
Date Description Ref. Debit Credit
2007
1 Dec. 13 Wages Expense 51 9 5 0 00 1
2 Cash 11 9 5 0 00 2
3 Paid two weeks’ wages. 3
4 4
5 16 Cash 11 3 1 0 0 00 5
6 Fees Earned 41 3 1 0 0 00 6
7 Received fees from customers. 7
8 8
9 16 Accounts Receivable 12 1 7 5 0 00 9
10 Fees Earned 41 1 7 5 0 00 10
11 Recorded fees earned on account. 11
12 12
13 20 Accounts Payable 21 9 0 0 00 13
14 Cash 11 9 0 0 00 14
15 Paid part of amount owed to 15
16 Executive Supply Co. 16
17 17
18 21 Cash 11 6 5 0 00 18
19 Accounts Receivable 12 6 5 0 00 19
20 Received cash from customers 20
21 on account. 21
22 22
23 23 Supplies 14 1 4 5 0 00 23
24 Cash 11 1 4 5 0 00 24
25 Purchased supplies. 25
26 26
27 27 Wages Expense 51 1 2 0 0 00 27
28 Cash 11 1 2 0 0 00 28
29 Paid two weeks’ wages. 29
30 30
31 31 Utilities Expense 54 3 1 0 00 31
32 Cash 11 3 1 0 00 32
33 Paid telephone bill. 33

(continued)
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68 Chapter 2 Analyzing Transactions

EXHIBIT 6 JOURNAL Page 4

Post.
Date Description Ref. Debit Credit
2007
1 Dec. 31 Utilities Expense 54 2 2 5 00 1
2 Cash 11 2 2 5 00 2
3 Paid electric bill. 3
4 4
5 31 Cash 11 2 8 7 0 00 5
6 Fees Earned 41 2 8 7 0 00 6
7 Received fees from customers. 7
8 8
9 31 Accounts Receivable 12 1 1 2 0 00 9
10 Fees Earned 41 1 1 2 0 00 10
11 Recorded fees earned on account. 11
12 12
13 31 Chris Clark, Drawing 32 2 0 0 0 00 13
14 Cash 11 2 0 0 0 00 14
15 Chris Clark withdrew cash for 15
16 personal use. 16

LEDGER
ACCOUNT Cash ACCOUNT NO. 11
Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Nov. 1 1 25 0 0 0 00 25 0 0 0 00
5 1 20 0 0 0 00 5 0 0 0 00
18 1 7 5 0 0 00 12 5 0 0 00
30 1 3 6 5 0 00 8 8 5 0 00
30 1 9 5 0 00 7 9 0 0 00
30 2 2 0 0 0 00 5 9 0 0 00
Dec. 1 2 2 4 0 0 00 3 5 0 0 00
1 2 8 0 0 00 2 7 0 0 00
1 2 3 6 0 00 3 0 6 0 00
6 2 1 8 0 00 2 8 8 0 00
11 2 4 0 0 00 2 4 8 0 00
13 3 9 5 0 00 1 5 3 0 00
16 3 3 1 0 0 00 4 6 3 0 00
20 3 9 0 0 00 3 7 3 0 00
21 3 6 5 0 00 4 3 8 0 00
23 3 1 4 5 0 00 2 9 3 0 00
27 3 1 2 0 0 00 1 7 3 0 00
31 3 3 1 0 00 1 4 2 0 00
31 4 2 2 5 00 1 1 9 5 00
31 4 2 8 7 0 00 4 0 6 5 00
31 4 2 0 0 0 00 2 0 6 5 00

(continued)
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Chapter 2 Analyzing Transactions 69

EXHIBIT 6 ACCOUNT Accounts Receivable ACCOUNT NO. 12

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Dec. 16 3 1 7 5 0 00 1 7 5 0 00
21 3 6 5 0 00 1 1 0 0 00
31 4 1 1 2 0 00 2 2 2 0 00

ACCOUNT Supplies ACCOUNT NO. 14

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Nov. 10 1 1 3 5 0 00 1 3 5 0 00
30 1 8 0 0 00 5 5 0 00
Dec. 23 3 1 4 5 0 00 2 0 0 0 00

ACCOUNT Prepaid Insurance ACCOUNT NO. 15

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Dec. 1 2 2 4 0 0 00 2 4 0 0 00

ACCOUNT Land ACCOUNT NO. 17

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Nov. 5 1 20 0 0 0 00 20 0 0 0 00

ACCOUNT Office Equipment ACCOUNT NO. 18

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Dec. 4 2 1 8 0 0 00 1 8 0 0 00

(continued)
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70 Chapter 2 Analyzing Transactions

EXHIBIT 6 ACCOUNT Accounts Payable ACCOUNT NO. 21

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Nov. 10 1 1 3 5 0 00 1 3 5 0 00
30 1 9 5 0 00 4 0 0 00
Dec. 4 2 1 8 0 0 00 2 2 0 0 00
11 2 4 0 0 00 1 8 0 0 00
20 3 9 0 0 00 9 0 0 00

ACCOUNT Unearned Rent ACCOUNT NO. 23

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Dec. 1 2 3 6 0 00 3 6 0 00

ACCOUNT Chris Clark, Capital ACCOUNT NO. 31

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Nov. 1 1 25 0 0 0 00 25 0 0 0 00

ACCOUNT Chris Clark, Drawing ACCOUNT NO. 32

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Nov. 30 2 2 0 0 0 00 2 0 0 0 00
Dec. 31 4 2 0 0 0 00 4 0 0 0 00

ACCOUNT Fees Earned ACCOUNT NO. 41

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Nov. 18 1 7 5 0 0 00 7 5 0 0 00
Dec. 16 3 3 1 0 0 00 10 6 0 0 00
16 3 1 7 5 0 00 12 3 5 0 00
31 4 2 8 7 0 00 15 2 2 0 00
31 4 1 1 2 0 00 16 3 4 0 00

(continued)
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Chapter 2 Analyzing Transactions 71

EXHIBIT 6 ACCOUNT Wages Expense ACCOUNT NO. 51

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Nov. 30 1 2 1 2 5 00 2 1 2 5 00
Dec. 13 3 9 5 0 00 3 0 7 5 00
27 3 1 2 0 0 00 4 2 7 5 00

ACCOUNT Rent Expense ACCOUNT NO. 52

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Nov. 30 1 8 0 0 00 8 0 0 00
Dec. 1 2 8 0 0 00 1 6 0 0 00

ACCOUNT Utilities Expense ACCOUNT NO. 54

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Nov. 30 1 4 5 0 00 4 5 0 00
Dec. 31 3 3 1 0 00 7 6 0 00
31 4 2 2 5 00 9 8 5 00

ACCOUNT Supplies Expense ACCOUNT NO. 55

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Nov. 30 1 8 0 0 00 8 0 0 00

ACCOUNT Miscellaneous Expense ACCOUNT NO. 59

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Nov. 30 1 2 7 5 00 2 7 5 00
Dec. 6 2 1 8 0 00 4 5 5 00

(concluded)
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72 Chapter 2 Analyzing Transactions

Trial Balance
3 How can you be sure that you have not made an error in posting the debits and cred-
objective its to the ledger? One way is to determine the equality of the debits and credits in the
Prepare an ledger. This equality should be proved at the end of each accounting period, if not
unadjusted trial
more often. Such a proof, called a trial balance, may be in the form of a computer
balance and
explain how it can printout or in the form shown in Exhibit 7.
be used to The trial balance shown in Exhibit 7 is prepared by first listing the name of the com-
discover errors. pany (NetSolutions), its title (Unadjusted Trial Balance), and the date it is prepared
(December 31, 2007). The trial balance shown in Exhibit 7 is titled an unadjusted trial
balance. This is to distinguish it from other trial balances that we will be preparing
in later chapters. These other trial balances include an adjusted trial balance and a post-
closing trial balance.4
The account balances in Exhibit 7 are taken from the ledger shown in Exhibit 6.
Thus, before the trial balance can be prepared, each account balance in the ledger must
be determined. When the standard account form is used, the balance of each account ap-
pears in the balance column on the same line as the last posting to the account.

EXHIBIT 7 NetSolutions
Unadjusted Trial Balance
Trial Balance
December 31, 2007

Debit Credit
Balances Balances
Cash 2 0 6 5 00
Accounts Receivable 2 2 2 0 00
Supplies 2 0 0 0 00
Prepaid Insurance 2 4 0 0 00
Land 20 0 0 0 00
Office Equipment 1 8 0 0 00
Accounts Payable 9 0 0 00
Unearned Rent 3 6 0 00
Chris Clark, Capital 25 0 0 0 00
Chris Clark, Drawing 4 0 0 0 00
Fees Earned 16 3 4 0 00
Wages Expense 4 2 7 5 00
Rent Expense 1 6 0 0 00
Utilities Expense 9 8 5 00
Supplies Expense 8 0 0 00
Miscellaneous Expense 4 5 5 00
42 6 0 0 00 42 6 0 0 00

The trial balance does not provide complete proof of the accuracy of the ledger. It
indicates only that the debits and the credits are equal. This proof is of value, however,
because errors often affect the equality of debits and credits. If the two totals of a trial
balance are not equal, an error has occurred. In the next section of this chapter, we will
discuss procedures for discovering and correcting errors.

4 The adjusted trial balance is discussed in Chapter 3, and the post-closing trial balance is discussed in
Chapter 4.
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Chapter 2 Analyzing Transactions 73

Example Exercise 2-6 objective 3

For each of the following errors, considered b. A fee of $2,850 earned from a client was
individually, indicate whether the error would debited to Accounts Receivable for $2,580 and
cause the trial balance totals to be unequal. If the credited to Fees Earned for $2,850.
error would cause the trial balance total to be c. A payment of $3,500 to a creditor was posted
unequal, indicate whether the debit or credit total as a debit of $3,500 to Accounts Payable and a
is higher and by how much. debit of $3,500 to Cash.
a. Payment of a cash withdrawal of $5,600 was
journalized and posted as a debit of $6,500 to
Salary Expense and a credit of $6,500 to Cash.

Follow My Example 2-6

a. The totals are equal since both the debit and c. The totals are unequal. The debit total is
credit entries were journalized and posted for higher by $7,000 ($3,500  $3,500).
$6,500.
b. The totals are unequal. The credit total is
higher by $270 ($2,850  $2,580).

For Practice: PE 2-6A, PE 2-6B

Discovery and Correction of Errors

4 Errors will sometimes occur in journalizing and posting transactions. In some cases,
objective however, an error might not be significant enough to affect the decisions of manage-
Discover and ment or others. In such cases, the materiality concept implies that the error may be
correct errors in treated in the easiest possible way. For example, an error of a few dollars in recording
recording
transactions. an asset as an expense for a business with millions of dollars in assets would be con-
sidered immaterial, and a correction would not be necessary. In the remaining para-
graphs, we assume that errors discovered are material and should be corrected.

DISCOVERY OF ERRORS
Many large corporations such As mentioned previously, preparing the trial balance is one of the primary ways to dis-
as Microsoft and Quaker cover errors in the ledger. However, it indicates only that the debits and credits are
Oats round the figures in their equal. If the two totals of the trial balance are not equal, it is probably due to one or
financial statements to millions
more of the errors described in Exhibit 8.
of dollars.
Among the types of errors that will not cause the trial balance totals to be unequal
are the following:
1. Failure to record a transaction or to post a transaction.
2. Recording the same erroneous amount for both the debit and the credit parts of a
transaction.
3. Recording the same transaction more than once.
4. Posting a part of a transaction correctly as a debit or credit but to the wrong account.
It is obvious that care should be used in recording transactions in the journal and
in posting to the accounts. The need for accuracy in determining account balances and
reporting them on the trial balance is also evident.
Errors in the accounts may be discovered in various ways: (1) through audit pro-
cedures, (2) by looking at the trial balance, or (3) by chance. If the two trial balance to-
tals are not equal, the amount of the difference between the totals should be determined
before searching for the error.
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74 Chapter 2 Analyzing Transactions

EXHIBIT 8 Errors Causing Unequal Trial Balance

Column incorrectly added.

Trial balance preparation errors Amount incorrectly entered on trial balance.

Balance entered in wrong column or omitted.

Balance incorrectly computed.

Errors Account balance errors
Balance entered in wrong column of account.

Wrong amount posted to an account.

Posting errors Debit posted as credit, or vice versa.

Debit or credit posting omitted.

The amount of the difference between the two totals of a trial balance sometimes
gives a clue as to the nature of the error or where it occurred. For example, a differ-
ence of 10, 100, or 1,000 between two totals is often the result of an error in addition.
A difference between totals can also be due to omitting a debit or a credit posting. If
the difference can be evenly divided by 2, the error may be due to the posting of a
debit as a credit, or vice versa. For example, if the debit total is $20,640 and the credit
total is $20,236, the difference of $404 may indicate that a credit posting of $404 was
omitted or that a credit of $202 was incorrectly posted as a debit.
Two other common types of errors are known as transpositions and slides. A
transposition occurs when the order of the digits is changed mistakenly, such as writ-
ing $542 as $452 or $524. In a slide, the entire number is mistakenly moved one or more
spaces to the right or the left, such as writing $542.00 as $54.20 or $5,420.00. If an er-
ror of either type has occurred and there are no other errors, the difference between
the two trial balance totals can be evenly divided by 9.
If an error is not revealed by the trial balance, the steps in the accounting process
must be retraced, beginning with the last step and working back to the entries in the
journal. Usually, errors causing the trial balance totals to be unequal will be discov-
ered before all of the steps are retraced.

CORRECTION OF ERRORS
The procedures used to correct an error vary according to the nature of the error, when
the error is discovered, and whether a manual or computerized accounting system is
used. Oftentimes, an error is discovered as it is being journalized or posted. In such
cases, the error is simply corrected. For example, computerized accounting systems au-
tomatically verify for each journal entry whether the total debits equal the total cred-
its. If the totals are not equal, an error report is created and the computer program will
not proceed until the journal entry is corrected.
Occasionally, however, an error is not discovered until after a journal entry has
been recorded and posted to the accounts. Correcting this type of error is more com-
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Chapter 2 Analyzing Transactions 75

plex. To illustrate, assume that on May 5 a $12,500 purchase of office equipment on ac-
count was incorrectly journalized and posted as a debit to Supplies and a credit to
Accounts Payable for $12,500. This posting of the incorrect entry is shown in the fol-
lowing T accounts:

Supplies Accounts Payable

Incorrect: 12,500 12,500

Before making a correcting entry, it is best to determine the debit(s) and credit(s) that
should have been recorded. These are shown in the following T accounts:

Office Equipment Accounts Payable

Correct: 12,500 12,500

Comparing the two sets of T accounts shows that the incorrect debit to Supplies may
be corrected by debiting Office Equipment for $12,500 and crediting Supplies for
$12,500. The following correcting entry is then journalized and posted:

Entry to Correct Error: 17 17

18 May 31 Office Equipment 18 12 5 0 0 00 18
19 Supplies 14 12 5 0 0 00 19
20 To correct erroneous debit 20
21 to Supplies on May 5. See invoice 21
22 from Bell Office Equipment Co. 22

Example Exercise 2-7 objective 4

The following errors took place in journalizing and posting transactions:

a. A withdrawal of $6,000 by Cheri Ramey, owner of the business, was recorded as a debit to Office
Salaries Expense and a credit to Cash.
b. Utilities Expense of $4,500 paid for the current month was recorded as a debit to Miscellaneous
Expense and a credit to Accounts Payable.
Journalize the entries to correct the errors. Omit explanations.

Follow My Example 2-7

a. Cheri Ramey, Drawing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000

Office Salaries Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
b. Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500
Miscellaneous Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500
Utilities Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500
Note: The first entry in (b) reverses the incorrect entry, and the second entry records the correct entry.
These two entries could also be combined into one entry; however, preparing two entries will make it
easier for someone later to understand what had happened and why the entries were necessary.

For Practice: PE 2-7A, PE 2-7B

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76 Chapter 2 Analyzing Transactions

At a Glance

1. Describe the characteristics of an account and record transactions using a chart of accounts and journal.
Example Practice
Key Points Key Learning Outcomes Exercises Exercises

The record used for recording individual • Prepare a chart of accounts

transactions is an account. A group of ac- for a proprietorship.
counts is called a ledger. The system of ac-
counts that make up a ledger is called a chart • Prepare journal entries. 2-1 2-1A, 2-1B
of accounts. Transactions are initially entered 2-2 2-2A, 2-2B
in a record called a journal. 2-3 2-3A, 2-3B
The simplest form of an account, a T ac- • Record entries in
count, has three parts: (1) a title; (2) a left T accounts.
side, called the debit side; and (3) a right
side, called the credit side. Amounts entered
on the left side of an account are called deb-
its to the account. Amounts entered on the
right side of an account are called credits.
Periodically, the balance of the account is
determined.
The rules of debit and credit for recording • List the rules of debit and 2-4 2-4A, 2-4B
increases or decreases in asset, liability, credit.
owner’s equity, revenue, expense, and draw-
ing accounts are shown in Exhibit 3. Each
transaction is recorded so that the sum of the
debits is always equal to the sum of the cred-
its. The normal balance of an account is the • Determine the normal bal- 2-4 2-4A, 2-4B
side of the account (debit or credit) in which ance for accounts.
increases are recorded.

2. Describe and illustrate the posting of journal entries to accounts.

Example Practice
Key Points Key Learning Outcomes Exercises Exercises

The debits and credits for each journal entry • Post journal entries to a stan-
are periodically posted to the accounts in the dard account.
order in which they occur in the journal using
the steps illustrated in Exhibit 5. • Post journal entries to a 2-5 2-5A, 2-5B
T account.

3. Prepare an unadjusted trial balance and explain how it can be used to discover errors.

Example Practice
Key Points Key Learning Outcomes Exercises Exercises

A trial balance is prepared by listing the ac- • Prepare an unadjusted trial 2-6 2-6A, 2-6B
counts from the ledger and their balances. If balance.
the two totals of the trial balance are not
equal, an error has occurred.
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Chapter 2 Analyzing Transactions 77

4. Discover and correct errors in recording transactions.

Example Practice
Key Points Key Learning Outcomes Exercises Exercises
Errors may be discovered (1) by audit proce- • Discover errors in journaliz-
dures, (2) by looking at the trial balance, or ing, posting, or preparing the
(3) by chance. trial balance.
• Prepare correcting entries for 2-7 2-7A, 2-7B
errors that have been journal-
ized and posted.

Key Terms
account (49) drawing (51) posting (59)
account receivable (63) expenses (51) revenues (51)
assets (51) journal (52) slide (74)
balance of the account (50) journal entry (52) T account (49)
chart of accounts (51) journalizing (52) transposition (74)
credits (50) ledger (51) trial balance (72)
debits (50) liabilities (51) two-column journal (59)
double-entry accounting materiality concept (73) unearned revenue (61)
system (58) owner’s equity (51)

Illustrative Problem
J. F. Outz, M.D., has been practicing as a cardiologist for three years. During April,
2007, Outz completed the following transactions in her practice of cardiology.

Apr. 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 ac-
count 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 pa-
tients 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.
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78 Chapter 2 Analyzing Transactions

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, Cap-
ital, 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. Enter
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 appropriate
balance columns after each posting.
4. Prepare an unadjusted trial balance as of April 30.
Solution
2. and 3.

JOURNAL Page 27
Post.
Date Description Ref. Debit Credit
2007
1 Apr. 1 Rent Expense 53 8 0 0 00 1
2 Cash 11 8 0 0 00 2
3 Paid office rent for April. 3
4 4
5 3 Equipment 18 2 1 0 0 00 5
6 Accounts Payable 22 2 1 0 0 00 6
7 Purchased equipment on account. 7
8 8
9 5 Cash 11 3 1 5 0 00 9
10 Accounts Receivable 12 3 1 5 0 00 10
11 Received cash on account. 11
12 12
13 8 Supplies 13 2 4 5 00 13
14 Accounts Payable 22 2 4 5 00 14
15 Purchased supplies. 15
16 16
17 9 Accounts Payable 22 3 2 5 00 17
18 Equipment 18 3 2 5 00 18
19 Returned defective equipment. 19
20 20
21 12 Accounts Payable 22 1 2 5 0 00 21
22 Cash 11 1 2 5 0 00 22
23 Paid creditors on account. 23
24 24
25 17 Prepaid Insurance 14 3 7 0 00 25
26 Cash 11 3 7 0 00 26
27 Renewed six-month property policy. 27
28 28
29 20 Accounts Payable 22 2 0 0 00 29
30 Cash 11 2 0 0 00 30
31 Recorded March payment 31
32 to creditor. 32
33 33
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Chapter 2 Analyzing Transactions 79

JOURNAL Page 28
Post.
Date Description Ref. Debit Credit
2007
1 Apr. 24 Laboratory Expense 55 5 4 5 00 1
2 Cash 11 5 4 5 00 2
3 Paid for laboratory analysis. 3
4 4
5 27 J. F. Outz, Drawing 32 1 2 5 0 00 5
6 Cash 11 1 2 5 0 00 6
7 J. F. Outz withdrew cash for 7
8 personal use. 8
9 9
10 30 Cash 11 1 7 2 0 00 10
11 Professional Fees 41 1 7 2 0 00 11
12 Received fees from patients. 12
13 13
14 30 Salary Expense 51 1 7 2 5 00 14
15 Cash 11 1 7 2 5 00 15
16 Paid salaries. 16
17 17
18 30 Utilities Expense 56 3 6 0 00 18
19 Cash 11 3 6 0 00 19
20 Paid utilities. 20
21 21
22 30 Accounts Receivable 12 5 1 4 5 00 22
23 Professional Fees 41 5 1 4 5 00 23
24 Recorded fees earned on account. 24
25 25
26 30 Miscellaneous Expense 59 1 3 2 00 26
27 Cash 11 1 3 2 00 27
28 Paid expenses. 28

1. and 3.
ACCOUNT Cash ACCOUNT NO. 11
Balance
Post.
Date Item Ref. Debit Credit Debit Credit
✓
2007
Apr. 1 Balance 4 1 2 3 00
1 27 8 0 0 00 3 3 2 3 00
5 27 3 1 5 0 00 6 4 7 3 00
12 27 1 2 5 0 00 5 2 2 3 00
17 27 3 7 0 00 4 8 5 3 00
20 27 2 0 0 00 4 6 5 3 00
24 28 5 4 5 00 4 1 0 8 00
27 28 1 2 5 0 00 2 8 5 8 00
30 28 1 7 2 0 00 4 5 7 8 00
30 28 1 7 2 5 00 2 8 5 3 00
30 28 3 6 0 00 2 4 9 3 00
30 28 1 3 2 00 2 3 6 1 00
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80 Chapter 2 Analyzing Transactions

ACCOUNT Accounts Receivable ACCOUNT NO. 12

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
✓
2007
Apr. 1 Balance 6 7 2 5 00
5 27 3 1 5 0 00 3 5 7 5 00
30 28 5 1 4 5 00 8 7 2 0 00

ACCOUNT Supplies ACCOUNT NO. 13

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
✓
2007
Apr. 1 Balance 2 9 0 00
8 27 2 4 5 00 5 3 5 00

ACCOUNT Prepaid Insurance ACCOUNT NO. 14

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
✓
2007
Apr. 1 Balance 4 6 5 00
17 27 3 7 0 00 8 3 5 00

ACCOUNT Equipment ACCOUNT NO. 18

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
✓
2007
Apr. 1 Balance 19 7 4 5 00
3 27 2 1 0 0 00 21 8 4 5 00
9 27 3 2 5 00 21 5 2 0 00

ACCOUNT Accounts Payable ACCOUNT NO. 22

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
✓
2007
Apr. 1 Balance 7 6 5 00
3 27 2 1 0 0 00 2 8 6 5 00
8 27 2 4 5 00 3 1 1 0 00
9 27 3 2 5 00 2 7 8 5 00
12 27 1 2 5 0 00 1 5 3 5 00
20 27 2 0 0 00 1 3 3 5 00

ACCOUNT J. F. Outz, Capital ACCOUNT NO. 31

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
✓
2007
Apr. 1 Balance 3 0 5 8 3 00
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Chapter 2 Analyzing Transactions 81

ACCOUNT J. F. Outz, Drawing ACCOUNT NO. 32

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Apr. 27 28 1 2 5 0 00 1 2 5 0 00

ACCOUNT Professional Fees ACCOUNT NO. 41

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Apr. 30 28 1 7 2 0 00 1 7 2 0 00
30 28 5 1 4 5 00 6 8 6 5 00

ACCOUNT Salary Expense ACCOUNT NO. 51

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Apr. 30 28 1 7 2 5 00 1 7 2 5 00

ACCOUNT Rent Expense ACCOUNT NO. 53

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Apr. 1 27 8 0 0 00 8 0 0 00

ACCOUNT Laboratory Expense ACCOUNT NO. 55

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Apr. 24 28 5 4 5 00 5 4 5 00

ACCOUNT Utilities Expense ACCOUNT NO. 56

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Apr. 30 28 3 6 0 00 3 6 0 00

ACCOUNT Miscellaneous Expense ACCOUNT NO. 59

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Apr. 30 28 1 3 2 00 1 3 2 00
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82 Chapter 2 Analyzing Transactions

4.
J. F. Outz, M.D.
Unadjusted Trial Balance
April 30, 2007

Debit Credit
Balances Balances
Cash 2 3 6 1 00
Accounts Receivable 8 7 2 0 00
Supplies 5 3 5 00
Prepaid Insurance 8 3 5 00
Equipment 21 5 2 0 00
Accounts Payable 1 3 3 5 00
J. F. Outz, Capital 30 5 8 3 00
J. F. Outz, Drawing 1 2 5 0 00
Professional Fees 6 8 6 5 00
Salary Expense 1 7 2 5 00
Rent Expense 8 0 0 00
Laboratory Expense 5 4 5 00
Utilities Expense 3 6 0 00
Miscellaneous Expense 1 3 2 00
38 7 8 3 00 38 7 8 3 00

Self-Examination Questions (Answers at End of Chapter)

1. A debit may signify a(n): 4. The receipt of cash from customers in payment of their
A. increase in an asset account. accounts would be recorded by:
B. decrease in an asset account. A. a debit to Cash and a credit to Accounts Receivable.
C. increase in a liability account. B. a debit to Accounts Receivable and a credit to Cash.
D. increase in the owner’s capital account. C. a debit to Cash and a credit to Accounts Payable.
D. a debit to Accounts Payable and a credit to Cash.
2. The type of account with a normal credit balance is:
A. an asset. C. a revenue. 5. The form listing the titles and balances of the accounts
B. drawing. D. an expense. in the ledger on a given date is the:
A. income statement.
3. A debit balance in which of the following accounts
B. balance sheet.
would indicate a likely error?
C. statement of owner’s equity.
A. Accounts Receivable
D. trial balance.
B. Cash
C. Fees Earned
D. Miscellaneous Expense

Eye Openers
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.
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Chapter 2 Analyzing Transactions 83

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. Rabun 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 January 31 has a credit bal-
ance of $2,500, and there is no undeposited cash on hand. (a) Assuming no errors oc-
curred during journalizing or posting, what caused this unusual balance? (b) Is the
$2,500 credit balance in the cash account an asset, a liability, owner’s equity, a revenue,
or an expense?
7. Cortes Company performed services in February for a specific customer, for a fee of
$6,000. Payment was received the following March. (a) Was the revenue earned in Feb-
ruary or March? (b) What accounts should be debited and credited in (1) February and
(2) March?
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 errors in the
accounting records? Explain.
10. Assume that a trial balance is prepared with an account balance of $21,360 listed as
$21,630 and an account balance of $1,500 listed as $15,000. Identify the transposition
and the slide.
11. Assume that when a purchase of supplies of $1,380 for cash was recorded, both the
debit and the credit were journalized and posted as $1,830. (a) Would this error cause
the trial balance to be out of balance? (b) Would the trial balance be out of balance if
the $1,380 entry had been journalized correctly but the credit to Cash had been posted
as $1,830?
12. Assume that Hahn Consulting erroneously recorded the payment of $5,000 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 income statement, statement of
owner’s equity, and balance sheet?
13. Assume that Hacienda Realty Co. borrowed $80,000 from Clinton Bank and Trust. In
recording the transaction, Hacienda erroneously recorded the receipt as a debit to Cash,
$80,000, and a credit to Fees Earned, $80,000. (a) How would this error affect the equal-
ity of the trial balance? (b) How would this error affect the income statement, statement
of owner’s equity, and balance sheet?
14. In journalizing and posting the entry to record the purchase of supplies for cash, the
accounts payable account was credited in error. What is the preferred procedure to cor-
rect this error?
15. Banks rely heavily upon customers’ deposits as a source of funds. Demand deposits
normally pay interest to the customer, who is entitled to withdraw at any time with-
out prior notice to the bank. Checking and NOW (negotiable order of withdrawal) ac-
counts are the most common form of demand deposits for banks. Assume that Peachtree
Storage has a checking account at Buckhead Savings Bank. What type of account (as-
set, liability, owner’s equity, revenue, expense, drawing) does the account balance of
$18,750 represent from the viewpoint of (a) Peachtree Storage and (b) Buckhead Sav-
ings Bank?

Practice Exercises
PE 2-1A Prepare a journal entry for the purchase of office equipment on November 23 for
Journal entry for $13,750, paying $5,000 cash and the remainder on account.
purchase of office
equipment
obj. 1
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84 Chapter 2 Analyzing Transactions

PE 2-1B Prepare a journal entry for the purchase of office supplies on March 13 for $6,500, paying
Journal entry for pur- $1,300 cash and the remainder on account.
chase of office supplies
obj. 1

PE 2-2A Prepare a journal entry on February 2 for fees earned on account, $6,300.
Journal entry for fees
earned on account
obj. 1

PE 2-2B Prepare a journal entry on January 21 for cash received for services rendered, $1,250.
Journal entry for cash
received for services
rendered
obj. 1

PE 2-3A Prepare a journal entry on October 31 for the withdrawal of $4,500 by Amy Sykes for per-
Journal entry for sonal use.
owner’s withdrawal
obj. 1

PE 2-3B Prepare a journal entry on July 31 for the withdrawal of $7,250 by Paul Wright for per-
Journal entry for sonal use.
owner’s withdrawal
obj. 1

PE 2-4A State for each account whether it is likely to have (a) debit entries only, (b) credit entries
Rules of debit and credit only, or (c) both debit and credit entries. Also, indicate its normal balance.
and normal balances
1. Notes Payable 4. Commissions Earned
obj. 1 2. Accounts Receivable 5. Unearned Rent
3. Wages Expense 6. Shinya Mylod, Capital

PE 2-4B State for each account whether it is likely to have (a) debit entries only, (b) credit entries only,
Rules of debit and credit or (c) both debit and credit entries. Also, indicate its normal balance.
and normal balances
1. Prepaid Insurance 4. Miscellaneous Expense
obj. 1 2. Rent Revenue 5. Accounts Payable
3. Li Xu, Drawing 6. Cash

PE 2-5A On April 1, the cash account balance was $18,750. During April, cash payments totaled
Determining cash $219,140, and the April 30 balance was $22,175. Determine the cash receipts during April.
receipts
obj. 2

PE 2-5B On January 1, the supplies account balance was $1,035. During January, supplies of $2,325
Determining supplies were purchased, and $786 of supplies were on hand as of January 31. Determine supplies
expense expense for January.
obj. 2
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Chapter 2 Analyzing Transactions 85

PE 2-6A For each of the following errors, considered individually, indicate whether the error would
Effect of errors on a trial cause the trial balance totals to be unequal. If the error would cause the trial balance total to
balance be unequal, indicate whether the debit or credit total is higher and by how much.
obj. 3
a. A payment of $468 on account was debited to Accounts Payable for $486 and credited
to Cash for $486.
b. A purchase of supplies of $1,130 was debited to Supplies for $1,130 and debited to Ac-
counts Payable for $1,130.
c. The payment of an insurance premium of $2,450 for a two-year policy was debited to
Prepaid Insurance for $2,450 and credited to Cash for $2,540.

PE 2-6B For each of the following errors, considered individually, indicate whether the error would
Effect of errors on a trial cause the trial balance totals to be unequal. If the error would cause the trial balance total
balance to be unequal, indicate whether the debit or credit total is higher and by how much.
obj. 3
a. The receipt of cash on account of $1,312 was recorded as a debit to Cash for $1,012 and
a credit to Accounts Receivable for $1,312.
b. The payment of cash for the purchase of office equipment of $4,500 was debited to Land
for $4,500 and credited to Cash for $4,500.
c. The payment of $1,420 on account was debited to Accounts Payable for $142 and cred-
ited to Cash for $1,420.

PE 2-7A The following errors took place in journalizing and posting transactions:
Correction of errors
a. The payment of $3,125 from a customer on account was recorded as a debit to Cash and
obj. 4 a credit to Accounts Payable.
b. Advertising expense of $1,500 paid for the current month was recorded as a debit to Mis-
cellaneous Expense and a credit to Advertising Expense.
Journalize the entries to correct the errors. Omit explanations.

PE 2-7B The following errors took place in journalizing and posting transactions:
Correction of errors
a. The purchase of supplies of $2,690 on account was recorded as a debit to Office Equip-
obj. 4 ment and a credit to Supplies.
b. The receipt of $3,750 for services rendered was recorded as a debit to Accounts Receiv-
able and a credit to Fees Earned.
Journalize the entries to correct the errors. Omit explanations.

Exercises
EX 2-1 The following accounts appeared in recent financial statements of Continental Airlines:
Chart of accounts
Accounts Payable Flight Equipment
obj. 1
Air Traffic Liability Landing Fees
Aircraft Fuel Expense 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 account. 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.

EX 2-2 Mandalay Interiors is owned and operated by Angie Stowe, an interior decorator. In the
Chart of accounts ledger of Mandalay Interiors, the first digit of the account number indicates its major account
obj. 1 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 pre-
ceding major account classifications.
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86 Chapter 2 Analyzing Transactions

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 Payable Fees Earned

Accounts Receivable Land
Angie Stowe, Capital Miscellaneous Expense
Angie Stowe, Drawing Supplies Expense
Cash Wages Expense

EX 2-3 Dazzle School is a newly organized business that teaches people how to inspire and influ-
Chart of accounts ence others. The list of accounts to be opened in the general ledger is as follows:
obj. 1
Accounts Payable Miscellaneous Expense Supplies
Accounts Receivable Prepaid Insurance Supplies Expense
Cash Rebecca Wimmer, Capital Unearned Rent
Equipment Rebecca Wimmer, Drawing Wages Expense
Fees Earned Rent Expense

List the accounts in the order in which they should appear in the ledger of Dazzle 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.).

EX 2-4 Eos Co. is a travel agency. The nine transactions recorded by Eos during March 2008, its
Identifying transactions first month of operations, are indicated in the following T accounts:
obj. 1
Cash Equipment Tosha Lewis, Drawing
(1) 30,000 (2) 1,800 (3) 24,000 (8) 2,500
(7) 10,000 (3) 9,000
(4) 3,050
(6) 7,500
(8) 2,500

Accounts Receivable Accounts Payable Service Revenue

(5) 15,000 (7) 10,000 (6) 7,500 (3) 15,000 (5) 15,000

Supplies Tosha Lewis, Capital Operating Expenses

(2) 1,800 (9) 1,050 (1) 30,000 (4) 3,050
(9) 1,050

Indicate for each debit and each credit: (a) whether an asset, liability, owner’s equity, draw-
ing, revenue, or expense account was affected and (b) whether the account was increased
() or decreased (). Present your answers in the following form, with transaction (1) given
as an example:

Account Debited Account Credited

Transaction Type Effect Type Effect

(1) asset  owner’s equity 

EX 2-5 Based upon the T accounts in Exercise 2-4, prepare the nine journal entries from which the
Journal entries postings were made. Journal entry explanations may be omitted.
objs. 1, 2
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Chapter 2 Analyzing Transactions 87

EX 2-6 Based upon the data presented in Exercise 2-4, prepare an unadjusted trial balance, listing
Trial balance the accounts in their proper order.
obj. 3

Total Debit Column:

$52,500

EX 2-7 During the month, Witherspoon Labs Co. has a substantial number of transactions affecting
Normal entries for each of the following accounts. State for each account whether it is likely to have (a) debit
accounts entries only, (b) credit entries only, or (c) both debit and credit entries.
obj. 1
1. Accounts Payable 5. Insurance Expense
2. Accounts Receivable 6. Keith Dupree, Drawing
3. Cash 7. Supplies Expense
4. Fees Earned

EX 2-8 Identify each of the following accounts of Sydney Services Co. as asset, liability, owner’s
Normal balances of equity, revenue, or expense, and state in each case whether the normal balance is a debit
accounts or a credit.
obj. 1
a. Accounts Payable f. Fees Earned
b. Accounts Receivable g. Office Equipment
c. Boyd Magnus, Capital h. Rent Expense
d. Boyd Magnus, Drawing i. Supplies
e. Cash j. Wages Expense

EX 2-9 The following table summarizes the rules of debit and credit. For each of the items (a)
Rules of debit and credit through (l), indicate whether the proper answer is a debit or a credit.
obj. 1
Normal
Increase Decrease Balance

Balance sheet accounts:

Asset (a) Credit (b)
Liability (c) (d) Credit
Owner’s equity:
Capital Credit (e) (f)
Drawing (g) (h) Debit
Income statement accounts:
Revenue (i) (j) (k)
Expense Debit (l) Debit

EX 2-10 As of January 1, Sarah Bredy, Capital, had a credit balance of $21,800. During the year, with-
Capital account balance drawals totaled $1,500, and the business incurred a net loss of $24,000.
obj. 1 a. Calculate the balance of Sarah Bredy, Capital, as of the end of the year.
b. Assuming that there have been no recording errors, will the balance sheet prepared at
December 31 balance? Explain.

EX 2-11 During the month, Harpoon Co. received $479,250 in cash and paid out $312,380 in cash.
Cash account balance
a. Do the data indicate that Harpoon Co. earned $166,870 during the month? Explain.
obj. 1 b. If the balance of the cash account is $241,925 at the end of the month, what was the cash
balance at the beginning of the month?
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88 Chapter 2 Analyzing Transactions

EX 2-12 a. On June 1, the cash account balance was $11,150. During June, cash receipts totaled
Account balances $72,300 and the June 30 balance was $15,750. Determine the cash payments made dur-
obj. 1 ing June.
c. $5,100 b. On July 1, the accounts receivable account balance was $25,500. During July, $115,000
was collected from customers on account. Assuming the July 31 balance was $27,500, de-
termine the fees billed to customers on account during July.
c. During December, $60,500 was paid to creditors on account, and purchases on account
were $77,700. Assuming the December 31 balance of Accounts Payable was $22,300, de-
termine the account balance on December 1.

EX 2-13 The Boa Co. has the following accounts in its ledger: Cash; Accounts Receivable; Supplies;
Transactions Office Equipment; Accounts Payable; Alfonso Finley, Capital; Alfonso Finley, Drawing; Fees
objs. 1, 2 Earned; Rent Expense; Advertising Expense; Utilities Expense; Miscellaneous Expense.
Journalize the following selected transactions for October 2007 in a two-column journal.
Journal entry explanations may be omitted.
Oct. 1. Paid rent for the month, $2,500.
3. Paid advertising expense, $1,100.
4. Paid cash for supplies, $725.
6. Purchased office equipment on account, $7,500.
10. Received cash from customers on account, $3,600.
12. Paid creditor on account, $600.
20. Withdrew cash for personal use, $1,000.
27. Paid cash for repairs to office equipment, $500.
30. Paid telephone bill for the month, $195.
31. Fees earned and billed to customers for the month, $20,150.
31. Paid electricity bill for the month, $315.

EX 2-14 On July 27, 2008, Colorcast Co. purchased $1,875 of supplies on account. In Colorcast
Journalizing and posting Co.’s chart of accounts, the supplies account is No. 15, and the accounts payable account
objs. 1, 2 is No. 21.
a. Journalize the July 27, 2008, transaction on page 38 of Colorcast Co.’s two-column jour-
nal. Include an explanation of the entry.
b. Prepare a four-column account for Supplies. Enter a debit balance of $735 as of July 1,
2008. Place a check mark ( ) in the Posting Reference column.
c. Prepare a four-column account for Accounts Payable. Enter a credit balance of $11,380
as of July 1, 2008. Place a check mark ( ) in the Posting Reference column.
d. Post the July 27, 2008, transaction to the accounts.

EX 2-15 The following selected transactions were completed during August of the current year:
Transactions and
T accounts 1. Billed customers for fees earned, $13,750.
objs. 1, 2 2. Purchased supplies on account, $1,325.
3. Received cash from customers on account, $8,150.
4. Paid creditors on account, $800.
a. Journalize the above transactions in a two-column journal, using the appropriate num-
ber to identify the transactions. Journal entry explanations may be omitted.
b. Post the entries prepared in (a) to the following T accounts: Cash, Supplies, Accounts
Receivable, Accounts Payable, Fees Earned. To the left of each amount posted in the ac-
counts, place the appropriate number to identify the transactions.

EX 2-16 The accounts in the ledger of Matice Co. as of July 31, 2008, are listed in alphabetical order
Trial balance as follows. All accounts have normal balances. The balance of the cash account has been in-
obj. 3 tentionally omitted.
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Chapter 2 Analyzing Transactions 89

Accounts Payable $ 56,130 Notes Payable $120,000

Accounts Receivable 112,500 Prepaid Insurance 9,000
Cash ?oo Rent Expense 180,000
Total Credit Column: Fees Earned 930,000 Supplies 6,300
$1,393,050 Insurance Expense 18,000 Supplies Expense 23,700
Land 255,000 Unearned Rent 27,000
Milton Adair, Capital 259,920 Utilities Expense 124,500
Milton Adair, Drawing 60,000 Wages Expense 525,000
Miscellaneous Expense 26,700

Prepare an unadjusted trial balance, listing the accounts in their proper order and insert-
ing the missing figure for cash.

EX 2-17 Indicate which of the following errors, each considered individually, would cause the trial
Effect of errors on trial balance totals to be unequal:
balance
a. A fee of $2,350 earned and due from a client was not debited to Accounts Receivable or
obj. 3
credited to a revenue account, because the cash had not been received.
b. A payment of $1,500 to a creditor was posted as a debit of $1,500 to Accounts Payable
and a debit of $1,500 to Cash.
c. A payment of $6,000 for equipment purchased was posted as a debit of $600 to Equip-
ment and a credit of $600 to Cash.
d. Payment of a cash withdrawal of $12,000 was journalized and posted as a debit of $21,000
to Salary Expense and a credit of $12,000 to Cash.
e. A receipt of $750 from an account receivable was journalized and posted as a debit of
$750 to Cash and a credit of $750 to Fees Earned.

EX 2-18 The following preliminary unadjusted trial balance of Awesome Co., a sports ticket agency,
Errors in trial balance does not balance:
obj. 3
Awesome Co.
Total of Credit Unadjusted Trial Balance
Column: $363,200 December 31, 2008

Debit Credit
Balances Balances

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,700
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,200
Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,960
Unearned Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,800
Sean Milner, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164,840
Sean Milner, Drawing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
Service Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167,500
Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,000
Advertising Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,400
Miscellaneous Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,850
353,140 302,110

When the ledger and other records are reviewed, you discover the following: (1) the debits
and credits in the cash account total $94,700 and $67,950, respectively; (2) a billing of $5,000
to a customer on account was not posted to the accounts receivable account; (3) a payment
of $3,600 made to a creditor on account was not posted to the accounts payable account; (4)
the balance of the unearned rent account is $8,500; (5) the correct balance of the equipment
account is $150,000; and (6) each account has a normal balance.
Prepare a corrected unadjusted trial balance.
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90 Chapter 2 Analyzing Transactions

EX 2-19 The following errors occurred in posting from a two-column journal:

Effect of errors on trial
balance 1. A credit of $5,125 to Accounts Payable was not posted.
2. A debit of $675 to Accounts Payable was posted as a credit.
obj. 3
3. A debit of $1,375 to Supplies was posted twice.
4. A debit of $3,575 to Wages Expense was posted as $3,557.
5. An entry debiting Accounts Receivable and crediting Fees Earned for $6,000 was not
posted.
6. A credit of $350 to Cash was posted as $530.
7. A debit of $1,000 to Cash was posted to Miscellaneous Expense.
Considering each case individually (i.e., assuming that no other errors had occurred), in-
dicate: (a) by “yes” or “no” whether the trial balance would be out of balance; (b) if answer
to (a) is “yes,” the amount by which the trial balance totals would differ; and (c) whether
the debit or credit column of the trial balance would have the larger total. Answers should
be presented in the following form, with error (1) given as an example:

(a) (b) (c)

Error Out of Balance Difference Larger Total

1. yes $5,125 debit

EX 2-20 Identify the errors in the following trial balance. All accounts have normal balances.
Errors in trial balance
obj. 3 Hybrid Co.
Unadjusted Trial Balance
Total of Credit Column: For the Month Ending October 31, 2008
$375,000
Debit Credit
Balances Balances

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,500
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,200
Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,800
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,550
Salaries Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,750
Nolan Towns, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129,600
Nolan Towns, Drawing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000
Service Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236,100
Salary Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,430
Advertising Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,600
Miscellaneous Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,470
458,250 458,250

EX 2-21 The following errors took place in journalizing and posting transactions:
Entries to correct errors
a. A withdrawal of $20,000 by Joel Goodson, owner of the business, was recorded as a debit
obj. 4 to Wages Expense and a credit to Cash.
b. Rent of $3,600 paid for the current month was recorded as a debit to Rent Expense and
a credit to Prepaid Rent.
Journalize the entries to correct the errors. Omit explanations.

EX 2-22 The following errors took place in journalizing and posting transactions:
Entries to correct errors
a. A $940 purchase of supplies for cash was recorded as a debit to Supplies Expense and
obj. 4 a credit to Accounts Payable.
b. Cash of $2,750 received on account was recorded as a debit to Fees Earned and a credit
to Cash.
Journalize the entries to correct the errors. Omit explanations.
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Chapter 2 Analyzing Transactions 91

Problems Series A
PR 2-1A Hannah Knox, an architect, opened an office on July 1, 2008. During the month, she com-
Entries into T accounts pleted the following transactions connected with her professional practice:
and trial balance
a. Transferred cash from a personal bank account to an account to be used for the business,
objs. 1, 2, 3
$25,000.
3. Total of Debit b. Paid July rent for office and workroom, $2,000.
Column: $51,200 c. Purchased used automobile for $16,500, paying $1,500 cash and giving a note payable
for the remainder.
d. Purchased office and computer equipment on account, $6,500.
e. Paid cash for supplies, $975.
f. Paid cash for annual insurance policies, $1,200.
g. Received cash from client for plans delivered, $3,750.
h. Paid cash for miscellaneous expenses, $240.
i. Paid cash to creditors on account, $2,500.
j. Paid installment due on note payable, $450.
k. Received invoice for blueprint service, due in August, $750.
l. Recorded fee earned on plans delivered, payment to be received in August, $3,150.
m. Paid salary of assistant, $1,500.
n. Paid gas, oil, and repairs on automobile for July, $280.
Instructions
1. Record the above transactions directly in the following T accounts, without journalizing:
Cash; Accounts Receivable; Supplies; Prepaid Insurance; Automobiles; Equipment; Notes
Payable; Accounts Payable; Hannah Knox, Capital; Professional Fees; Rent Expense;
Salary Expense; Automobile Expense; Blueprint Expense; Miscellaneous Expense. To the
left of the amount entered in the accounts, place the appropriate letter to identify the
transaction.
2. Determine account balances of the T accounts. Accounts containing a single entry only
(such as Prepaid Insurance) do not need a balance.
3. Prepare an unadjusted trial balance for Hannah Knox, Architect, as of July 31, 2008.

PR 2-2A On March 1, 2008, Kara Frantz established Mudcat Realty, which completed the following
Journal entries and trial transactions during the month:
balance
a. Kara Frantz transferred cash from a personal bank account to an account to be used for
objs. 1, 2, 3
the business, $15,000.
b. Paid rent on office and equipment for the month, $2,500.
c. Purchased supplies on account, $850.
d. Paid creditor on account, $400.
4. c. $6,425 e. Earned sales commissions, receiving cash, $15,750.
f. Paid automobile expenses (including rental charge) for month, $2,400, and miscellaneous
expenses, $600.
g. Paid office salaries, $3,250.
h. Determined that the cost of supplies used was $575.
i. Withdrew cash for personal use, $1,000.
Instructions
1. Journalize entries for transactions (a) through (i), using the following account titles: Cash;
Supplies; Accounts Payable; Kara Frantz, Capital; Kara Frantz, Drawing; Sales Commis-
sions; Office Salaries Expense; Rent Expense; Automobile Expense; Supplies Expense;
Miscellaneous Expense. Explanations may be omitted.
2. Prepare T accounts, using the account titles in (1). Post the journal entries to these ac-
counts, placing the appropriate letter to the left of each amount to identify the transac-
tions. Determine the account balances, after all posting is complete. Accounts containing
only a single entry do not need a balance.
3. Prepare an unadjusted trial balance as of March 31, 2008.
(continued)
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92 Chapter 2 Analyzing Transactions

4. Determine the following:

a. Amount of total revenue recorded in the ledger.
b. Amount of total expenses recorded in the ledger.
c. Amount of net income for March.

PR 2-3A On June 1, 2008, Brooks Dodd established an interior decorating business, Coordinated
Journal entries and trial Designs. During the month, Brooks completed the following transactions related to the
balance business:
objs. 1, 2, 3
June 1. Brooks transferred cash from a personal bank account to an account to be used
for the business, $18,000.
5. Paid rent for period of June 5 to end of month, $2,150.
6. Purchased office equipment on account, $8,500.
3. Total of Credit 8. Purchased a used truck for $18,000, paying $10,000 cash and giving a note
Column: $49,825 payable for the remainder.
10. Purchased supplies for cash, $1,200.
12. Received cash for job completed, $10,500.
15. Paid annual premiums on property and casualty insurance, $2,400.
23. Recorded jobs completed on account and sent invoices to customers, $5,950.
24. Received an invoice for truck expenses, to be paid in July, $1,000.
29. Paid utilities expense, $1,200.
29. Paid miscellaneous expenses, $400.
30. Received cash from customers on account, $3,200.
30. Paid wages of employees, $2,900.
30. Paid creditor a portion of the amount owed for equipment purchased on June 6,
$2,125.
30. Withdrew cash for personal use, $1,750.

Instructions
1. Journalize each transaction in a two-column journal, referring to the following chart of
accounts in selecting the accounts to be debited and credited. (Do not insert the account
numbers in the journal at this time.) Explanations may be omitted.

11 Cash 31 Brooks Dodd, Capital

12 Accounts Receivable 32 Brooks Dodd, Drawing
13 Supplies 41 Fees Earned
14 Prepaid Insurance 51 Wages Expense
16 Equipment 53 Rent Expense
18 Truck 54 Utilities Expense
21 Notes Payable 55 Truck Expense
22 Accounts Payable 59 Miscellaneous Expense

2. Post the journal to a ledger of four-column accounts, inserting appropriate posting ref-
erences as each item is posted. Extend the balances to the appropriate balance columns
after each transaction is posted.
3. Prepare an unadjusted trial balance for Coordinated Designs as of June 30, 2008.

PR 2-4A Passport Realty acts as an agent in buying, selling, renting, and managing real estate. The
Journal entries and trial unadjusted trial balance on October 31, 2008, is shown at the top of the following page.
balance The following business transactions were completed by Passport Realty during Novem-
objs. 1, 2, 3 ber 2008:
Nov. 1. Paid rent on office for month, $5,000.
2. Purchased office supplies on account, $1,750.
5. Paid annual insurance premiums, $4,800.
4. Total of Debit 10. Received cash from clients on account, $52,000.
Column: $430,650 15. Purchased land for a future building site for $90,000, paying $10,000 in cash
and giving a note payable for the remainder.
17. Paid creditors on account, $7,750.
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Chapter 2 Analyzing Transactions 93

Passport Realty
Unadjusted Trial Balance
October 31, 2008

Debit Credit
Balances Balances

11 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,300
12 Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,500
13 Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
14 Office Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800
16 Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
21 Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,020
22 Unearned Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
23 Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
31 Ashley Carnes, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,980
32 Ashley Carnes, Drawing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
41 Fees Earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260,000
51 Salary and Commission Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148,200
52 Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
53 Advertising Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,800
54 Automobile Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,500
59 Miscellaneous Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,900
306,000 306,000

Nov. 20. Returned a portion of the office supplies purchased on November 2, receiving
full credit for their cost, $250.
23. Paid advertising expense, $2,100.
27. Discovered an error in computing a commission; received cash from the sales-
person for the overpayment, $700.
28. Paid automobile expense (including rental charges for an automobile), $1,500.
29. Paid miscellaneous expenses, $450.
30. Recorded revenue earned and billed to clients during the month, $48,400.
30. Paid salaries and commissions for the month, $25,000.
30. Withdrew cash for personal use, $8,000.
30. Rented land purchased on November 15 to local merchants association for use
as a parking lot in December and January, during a street rebuilding program;
received advance payment of $2,500.
Instructions
1. Record the November 1, 2008, balance of each account in the appropriate balance col-
umn of a four-column account, write Balance in the item section, and place a check mark
( ) in the Posting Reference column.
2. Journalize the transactions for November in a two-column journal. Journal entry expla-
nations may be omitted.
3. Post to the ledger, extending the account balance to the appropriate balance column af-
ter each posting.
4. Prepare an unadjusted trial balance of the ledger as of November 30, 2008.

PR 2-5A If the working papers correlating with this textbook are not used, omit Problem 2-5A.
Errors in trial balance
objs. 3, 4 The following records of Mainstay TV Repair are presented in the working papers:
• Journal containing entries for the period July 1–31.
• Ledger to which the July entries have been posted.
7. Total of Debit • Preliminary trial balance as of July 31, which does not balance.
Column: $43,338.10 Locate the errors, supply the information requested, and prepare a corrected trial balance
according to the following instructions. The balances recorded in the accounts as of July 1
and the entries in the journal are correctly stated. If it is necessary to correct any posted
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94 Chapter 2 Analyzing Transactions

amounts in the ledger, a line should be drawn through the erroneous figure and the cor-
rect amount inserted above. Corrections or notations may be inserted on the preliminary
trial balance in any manner desired. It is not necessary to complete all of the instructions if
equal trial balance totals can be obtained earlier. However, the requirements of instructions
(6) and (7) should be completed in any event.

Instructions
1. Verify the totals of the preliminary trial balance, inserting the correct amounts in the
schedule provided in the working papers.
2. Compute the difference between the trial balance totals.
3. Compare the listings in the trial balance with the balances appearing in the ledger, and
list the errors in the space provided in the working papers.
4. Verify the accuracy of the balance of each account in the ledger, and list the errors in the
space provided in the working papers.
5. Trace the postings in the ledger back to the journal, using small check marks to identify
items traced. Correct any amounts in the ledger that may be necessitated by errors in
posting, and list the errors in the space provided in the working papers.
6. Journalize as of July 31 the payment of $125 for advertising expense. The bill had been
paid on July 31 but was inadvertently omitted from the journal. Post to the ledger.
(Revise any amounts necessitated by posting this entry.)
7. Prepare a new unadjusted trial balance.

PR 2-6A Iberian Carpet has the following unadjusted trial balance as of March 31, 2008.
Corrected trial balance
obj. 3 Iberian Carpet
Unadjusted Trial Balance
March 31, 2008

Debit Credit
1. Total of Debit Balances Balances
Column: $200,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,300
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,870
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,320
Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 880
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,000
Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,100
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,900
Jose Mendrano, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,400
Jose Mendrano, Drawing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,500
Fees Earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,700
Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000
Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,600
Advertising Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 720
Miscellaneous Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,450
178,640 195,100

The debit and credit totals are not equal as a result of the following errors:
a. The balance of cash was understated by $3,000.
b. A cash receipt of $4,500 was posted as a debit to Cash of $5,400.
c. A debit of $1,850 to Accounts Receivable was not posted.
d. A return of $350 of defective supplies was erroneously posted as a $530 credit to Supplies.
e. An insurance policy acquired at a cost of $175 was posted as a credit to Prepaid Insurance.
f. The balance of Notes Payable was understated by $7,500.
g. A credit of $900 in Accounts Payable was overlooked when determining the balance of
the account.
h. A debit of $3,500 for a withdrawal by the owner was posted as a credit to Jose Mendrano,
Capital.
i. The balance of $7,200 in Advertising Expense was entered as $720 in the trial balance.
j. Gas, Electricity, and Water Expense, with a balance of $6,900, was omitted from the trial
balance.
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CONFIRMING

Chapter 2 Analyzing Transactions 95

Instructions
1. Prepare a corrected unadjusted trial balance as of March 31, 2008.
2. Does the fact that the unadjusted trial balance in (1) is balanced mean that there
are no errors in the accounts? Explain.

Problems Series B
PR 2-1B Lynette Moss, an architect, opened an office on April 1, 2008. During the month, she com-
Entries into T accounts pleted the following transactions connected with her professional practice:
and trial balance
a. Transferred cash from a personal bank account to an account to be used for the business,
objs. 1, 2, 3
$22,500.
3. Total of Debit b. Purchased used automobile for $15,300, paying $4,000 cash and giving a note payable
Column: $47,800 for the remainder.
c. Paid April rent for office and workroom, $2,500.
d. Paid cash for supplies, $1,200.
e. Purchased office and computer equipment on account, $5,200.
f. Paid cash for annual insurance policies on automobile and equipment, $1,600.
g. Received cash from a client for plans delivered, $6,500.
h. Paid cash to creditors on account, $1,800.
i. Paid cash for miscellaneous expenses, $300.
j. Received invoice for blueprint service, due in May, $800.
k. Recorded fee earned on plans delivered, payment to be received in May, $3,500.
l. Paid salary of assistant, $1,500.
m. Paid cash for miscellaneous expenses, $210.
n. Paid installment due on note payable, $200.
o. Paid gas, oil, and repairs on automobile for April, $250.
Instructions
1. Record the above transactions directly in the following T accounts, without journalizing:
Cash; Accounts Receivable; Supplies; Prepaid Insurance; Automobiles; Equipment; Notes
Payable; Accounts Payable; Lynette Moss, Capital; Professional Fees; Rent Expense;
Salary Expense; Blueprint Expense; Automobile Expense; Miscellaneous Expense. To the
left of each amount entered in the accounts, place the appropriate letter to identify the
transaction.
2. Determine account balances of the T accounts. Accounts containing a single entry only
(such as Prepaid Insurance) do not need a balance.
3. Prepare an unadjusted trial balance for Lynette Moss, Architect, as of April 30, 2008.

PR 2-2B On July 1, 2008, Bill Bonds established Genesis Realty, which completed the following trans-
Journal entries and trial actions during the month:
balance
a. Bill Bonds transferred cash from a personal bank account to an account to be used for
objs. 1, 2, 3
the business, $18,000.
b. Purchased supplies on account, $1,000.
c. Earned sales commissions, receiving cash, $14,600.
d. Paid rent on office and equipment for the month, $3,000.
4. c. $5,575 e. Paid creditor on account, $600.
f. Withdrew cash for personal use, $1,500.
g. Paid automobile expenses (including rental charge) for month, $2,000, and miscellaneous
expenses, $500.
h. Paid office salaries, $2,800.
i. Determined that the cost of supplies used was $725.
Instructions
1. Journalize entries for transactions (a) through (i), using the following account titles: Cash;
Supplies; Accounts Payable; Bill Bonds, Capital; Bill Bonds, Drawing; Sales Commissions;
Rent Expense; Office Salaries Expense; Automobile Expense; Supplies Expense; Miscel-
laneous Expense. Journal entry explanations may be omitted.
(continued)
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96 Chapter 2 Analyzing Transactions

2. Prepare T accounts, using the account titles in (1). Post the journal entries to these ac-
counts, placing the appropriate letter to the left of each amount to identify the transac-
tions. Determine the account balances, after all posting is complete. Accounts containing
only a single entry do not need a balance.
3. Prepare an unadjusted trial balance as of July 31, 2008.
4. Determine the following:
a. Amount of total revenue recorded in the ledger.
b. Amount of total expenses recorded in the ledger.
c. Amount of net income for July.

PR 2-3B On October 1, 2008, Kristy Gomez established an interior decorating business, Ultimate
Journal entries and trial Designs. During the month, Kristy Gomez completed the following transactions related to
balance the business:
objs. 1, 2, 3
Oct. 1. Kristy transferred cash from a personal bank account to an account to be used for
the business, $20,000.
3. Paid rent for period of October 3 to end of month, $1,600.
10. Purchased a truck for $15,000, paying $5,000 cash and giving a note payable for
3. Total of Credit the remainder.
Column: $47,675 13. Purchased equipment on account, $4,500.
14. Purchased supplies for cash, $1,100.
15. Paid annual premiums on property and casualty insurance, $2,800.
15. Received cash for job completed, $6,100.
21. Paid creditor a portion of the amount owed for equipment purchased on October
13, $2,400.
24. Recorded jobs completed on account and sent invoices to customers, $8,600.
26. Received an invoice for truck expenses, to be paid in November, $875.
27. Paid utilities expense, $900.
27. Paid miscellaneous expenses, $315.
29. Received cash from customers on account, $4,100.
30. Paid wages of employees, $2,500.
31. Withdrew cash for personal use, $3,000.
Instructions
1. Journalize each transaction in a two-column journal, referring to the following chart of ac-
counts in selecting the accounts to be debited and credited. (Do not insert the account num-
bers in the journal at this time.) Journal entry explanations may be omitted.
11 Cash 31 Kristy Gomez, Capital
12 Accounts Receivable 32 Kristy Gomez, Drawing
13 Supplies 41 Fees Earned
14 Prepaid Insurance 51 Wages Expense
16 Equipment 53 Rent Expense
18 Truck 54 Utilities Expense
21 Notes Payable 55 Truck Expense
22 Accounts Payable 59 Miscellaneous Expense

2. Post the journal to a ledger of four-column accounts, inserting appropriate posting ref-
erences as each item is posted. Extend the balances to the appropriate balance columns
after each transaction is posted.
3. Prepare an unadjusted trial balance for Ultimate Designs as of October 31, 2008.

PR 2-4B Equity Realty acts as an agent in buying, selling, renting, and managing real estate. The
Journal entries and trial unadjusted trial balance on July 31, 2008, is shown at the top of the following page.
balance The following business transactions were completed by Equity Realty during August
objs. 1, 2, 3 2008:
Aug. 1. Purchased office supplies on account, $1,500.
2. Paid rent on office for month, $2,500.
3. Received cash from clients on account, $28,720.
4. Total of Debit 5. Paid annual insurance premiums, $3,600.
Column: $375,230
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Chapter 2 Analyzing Transactions 97

Equity Realty
Unadjusted Trial Balance
July 31, 2008

Debit Credit
Balances Balances

11 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,200
12 Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,750
13 Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500
14 Office Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
16 Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
21 Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,200
22 Unearned Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
23 Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
31 Jody Craft, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,550
32 Jody Craft, Drawing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,000
41 Fees Earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220,000
51 Salary and Commission Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,000
52 Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,500
53 Advertising Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,300
54 Automobile Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,400
59 Miscellaneous Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,100
257,750 257,750

Aug. 9. Returned a portion of the office supplies purchased on August 1, receiving full
credit for their cost, $250.
17. Paid advertising expense, $3,450.
23. Paid creditors on account, $2,670.
29. Paid miscellaneous expenses, $500.
30. Paid automobile expense (including rental charges for an automobile), $1,500.
31. Discovered an error in computing a commission; received cash from the sales-
person for the overpayment, $1,000.
31. Paid salaries and commissions for the month, $17,400.
31. Recorded revenue earned and billed to clients during the month, $51,900.
31. Purchased land for a future building site for $75,000, paying $10,000 in cash and
giving a note payable for the remainder.
31. Withdrew cash for personal use, $5,000.
31. Rented land purchased on August 31 to a local university for use as a parking lot
during football season (September, October, and November); received advance
payment of $2,000.

Instructions
1. Record the August 1 balance of each account in the appropriate balance column of a four-
column account, write Balance in the item section, and place a check mark ( ) in the
Posting Reference column.
2. Journalize the transactions for August in a two-column journal. Journal entry explana-
tions may be omitted.
3. Post to the ledger, extending the account balance to the appropriate balance column
after each posting.
4. Prepare an unadjusted trial balance of the ledger as of August 31, 2008.

PR 2-5B If the working papers correlating with this textbook are not used, omit Problem 2-5B.
Errors in trial balance
objs. 3, 4 The following records of Mainstay TV Repair are presented in the working papers:
• Journal containing entries for the period July 1–31.
• Ledger to which the July entries have been posted.
• Preliminary trial balance as of July 31, which does not balance.
Locate the errors, supply the information requested, and prepare a corrected trial balance
according to the following instructions. The balances recorded in the accounts as of July 1
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98 Chapter 2 Analyzing Transactions

7. Total of Credit and the entries in the journal are correctly stated. If it is necessary to correct any posted
Column: $43,338.10 amounts in the ledger, a line should be drawn through the erroneous figure and the cor-
rect amount inserted above. Corrections or notations may be inserted on the preliminary
trial balance in any manner desired. It is not necessary to complete all of the instructions if
equal trial balance totals can be obtained earlier. However, the requirements of instructions
(6) and (7) should be completed in any event.

Instructions
1. Verify the totals of the preliminary trial balance, inserting the correct amounts in the
schedule provided in the working papers.
2. Compute the difference between the trial balance totals.
3. Compare the listings in the trial balance with the balances appearing in the ledger, and
list the errors in the space provided in the working papers.
4. Verify the accuracy of the balance of each account in the ledger, and list the errors in
the space provided in the working papers.
5. Trace the postings in the ledger back to the journal, using small check marks to identify
items traced. Correct any amounts in the ledger that may be necessitated by errors in
posting, and list the errors in the space provided in the working papers.
6. Journalize as of July 31 the payment of $110 for gas and electricity. The bill had been
paid on July 31 but was inadvertently omitted from the journal. Post to the ledger. (Re-
vise any amounts necessitated by posting this entry.)
7. Prepare a new unadjusted trial balance.

PR 2-6B Epic Video has the following unadjusted trial balance as of July 31, 2008:
Corrected trial balance
obj. 3 Epic Video
Unadjusted Trial Balance
July 31, 2008

Debit Credit
1. Total of Debit
Balances Balances
Column: $234,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,250
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,520
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,232
Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 710
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,000
Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,500
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,980
Carlton Dey, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,400
Carlton Dey, Drawing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,500
Fees Earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178,020
Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,000
Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,850
Advertising Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,540
Gas, Electricity, and Water Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,670
225,272 235,900

The debit and credit totals are not equal as a result of the following errors:
a. The balance of cash was overstated by $5,000.
b. A cash receipt of $3,200 was posted as a credit to Cash of $2,300.
c. A debit of $2,780 to Accounts Receivable was not posted.
d. A return of $235 of defective supplies was erroneously posted as a $253 credit to Supplies.
e. An insurance policy acquired at a cost of $500 was posted as a credit to Prepaid In-
surance.
f. The balance of Notes Payable was overstated by $4,500.
g. A credit of $600 in Accounts Payable was overlooked when the balance of the account
was determined.
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Chapter 2 Analyzing Transactions 99

h. A debit of $2,000 for a withdrawal by the owner was posted as a debit to Carlton Dey,
Capital.
i. The balance of $9,450 in Advertising Expense was entered as $9,540 in the trial balance.
j. Miscellaneous Expense, with a balance of $2,520, was omitted from the trial balance.
Instructions
1. Prepare a corrected unadjusted trial balance as of July 31 of the current year.
2. Does the fact that the unadjusted trial balance in (1) is balanced mean that there
are no errors in the accounts? Explain.

Continuing Problem
The transactions completed by Dancin Music during April 2008 were described at the end
of Chapter 1. The following transactions were completed during May, the second month of
the business’s operations:
May 1. Kris Payne made an additional investment in Dancin Music by depositing
$2,500 in Dancin Music’s checking account.
1. Instead of continuing to share office space with a local real estate agency, Kris
decided to rent office space near a local music store. Paid rent for May, $1,600.
4. Total of Debit 1. Paid a premium of $3,360 for a comprehensive insurance policy covering liabil-
Column: $37,800 ity, theft, and fire. The policy covers a one-year period.
2. Received $1,350 on account.
3. On behalf of Dancin Music, Kris signed a contract with a local radio station,
KPRG, to provide guest spots for the next three months. The contract requires
Dancin Music to provide a guest disc jockey for 80 hours per month for a
monthly fee of $2,400. Any additional hours beyond 80 will be billed to KPRG
at $40 per hour. In accordance with the contract, Kris received $4,800 from
KPRG as an advance payment for the first two months.
3. Paid $250 on account.
4. Paid an attorney $300 for reviewing the May 3rd contract with KPRG. (Record
as Miscellaneous Expense.)
5. Purchased office equipment on account from One-Stop Office Mart, $5,000.
8. Paid for a newspaper advertisement, $180.
11. Received $750 for serving as a disc jockey for a college fraternity party.
13. Paid $500 to a local audio electronics store for rental of digital recording equip-
ment.
14. Paid wages of $1,000 to receptionist and part-time assistant.
16. Received $1,500 for serving as a disc jockey for a wedding reception.
18. Purchased supplies on account, $750.
21. Paid $325 to Rocket Music for use of its current music demos in making various
music sets.
22. Paid $800 to a local radio station to advertise the services of Dancin Music
twice daily for the remainder of May.
23. Served as disc jockey for a party for $2,500. Received $750, with the remainder
due June 4, 2008.
27. Paid electric bill, $560.
28. Paid wages of $1,000 to receptionist and part-time assistant.
29. Paid miscellaneous expenses, $150.
30. Served as a disc jockey for a charity ball for $1,500. Received $400, with the
remainder due on June 9, 2008.
31. Received $2,800 for serving as a disc jockey for a party.
31. Paid $900 royalties (music expense) to Federated Clearing for use of various
artists’ music during May.
31. Withdrew $1,000 cash from Dancin Music for personal use.
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100 Chapter 2 Analyzing Transactions

Dancin Music’s chart of accounts and the balance of accounts as of May 1, 2008 (all normal
balances), are as follows:

11 Cash $ 9,160 41 Fees Earned $5,700

12 Accounts Receivable 1,350 50 Wages Expense 400
14 Supplies 170 51 Office Rent Expense 1,000
15 Prepaid Insurance — 52 Equipment Rent Expense 800
17 Office Equipment — 53 Utilities Expense 350
21 Accounts Payable 250 54 Music Expense 1,340
23 Unearned Revenue — 55 Advertising Expense 750
31 Kris Payne, Capital 10,000 56 Supplies Expense 180
32 Kris Payne, Drawing 300 59 Miscellaneous Expense 150

Instructions
1. Enter the May 1, 2008, account balances in the appropriate balance column of a four-
column account. Write Balance in the Item column, 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. Analyze and journalize each transaction in a two-column journal, omitting journal entry
explanations.
3. Post the journal to the ledger, extending the account balance to the appropriate balance
column after each posting.
4. Prepare an unadjusted trial balance as of May 31, 2008.

Special Activities
SA 2-1 At the end of the current month, Tomas Lott prepared a trial balance for AAA Rescue
Ethics and professional Service. The credit side of the trial balance exceeds the debit side by a significant amount.
conduct in business Tomas has decided to add the difference to the balance of the miscellaneous expense ac-
count in order to complete the preparation of the current month’s financial statements
by a 5 o’clock deadline. Tomas will look for the difference next week when he has more
time.
Discuss whether Tomas is behaving in a professional manner.

SA 2-2 Ennis College requires students to pay tuition each term before classes begin. Students who
Account for revenue have not paid their tuition are not allowed to enroll or to attend classes.
What journal entry do you think Ennis College would use to record the receipt of the
students’ tuition payments? Describe the nature of each account in the entry.

SA 2-3 The following discussion took place between Mary Louden, the office manager of Zoom-
Record transactions works Data Company, and a new accountant, Allen Jarvis.

Allen: I’ve been thinking about our method of recording entries. It seems that it’s inefficient.
Mary: In what way?
Allen: Well—correct me if I’m wrong—it seems like we have unnecessary steps in the
process. We could easily develop a trial balance by posting our transactions directly
into the ledger and bypassing the journal altogether. In this way, we could combine
the recording and posting process into one step and save ourselves a lot of time.
What do you think?
Mary: We need to have a talk.

What should Mary say to Allen?

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Chapter 2 Analyzing Transactions 101

SA 2-4 The following excerpt is from a conversation between Shelley Ryan, the president and chief
Debits and credits operating officer of Diamond Construction Company, and her neighbor, Miguel Jimenez.
Group Project
Miguel: Shelley, I’m taking a course in night school, “Intro to Accounting.” I was wonder-
ing—could you answer a couple of questions for me?
Shelley: Well, I will if I can.
Miguel: Okay, our instructor says that it’s critical we understand the basic concepts of ac-
counting, or we’ll never get beyond the first test. My problem is with those rules of
debit and credit . . . you know, assets increase with debits, decrease with credits, etc.
Shelley: Yes, pretty basic stuff. You just have to memorize the rules. It shouldn’t be too
difficult.
Miguel: Sure, I can memorize the rules, but my problem is I want to be sure I understand
the basic concepts behind the rules. For example, why can’t assets be increased with
credits and decreased with debits like revenue? As long as everyone did it that way,
why not? It would seem easier if we had the same rules for all increases and decreases
in accounts. Also, why is the left side of an account called the debit side? Why
couldn’t it be called something simple . . . like the “LE” for Left Entry? The right side
could be called just “RE” for Right Entry. Finally, why are there just two sides to an
entry? Why can’t there be three or four sides to an entry?

In a group of four or five, select one person to play the role of Shelley and one person to
play the role of Miguel.

1. After listening to the conversation between Shelley and Miguel, help Shelley
answer Miguel’s questions.
2. What information (other than just debit and credit journal entries) could the accounting
system gather that might be useful to Shelley in managing Diamond Construction
Company?

SA 2-5 Shane Raburn is planning to manage and operate Birdie Caddy Service at Biloxi Golf and
Transactions and income Country Club during June through August 2008. Shane will rent a small maintenance build-
statement ing from the country club for $500 per month and will offer caddy services, including cart
rentals, to golfers. Shane has had no formal training in record keeping.
Shane keeps notes of all receipts and expenses in a shoe box. An examination of Shane’s
shoe box records for June revealed the following:

June 1. Withdrew $2,000 from personal bank account to be used to operate the caddy
service.
1. Paid rent to Biloxi Golf and Country Club, $500.
2. Paid for golf supplies (practice balls, etc.), $650.
3. Arranged for the rental of 40 regular (pulling) golf carts and 10 gasoline-driven
carts for $1,500 per month. Paid $750 in advance, with the remaining $750 due
June 20.
7. Purchased supplies, including gasoline, for the golf carts on account, $350. Biloxi
Golf and Country Club has agreed to allow Shane to store the gasoline in one of
its fuel tanks at no cost.
15. Received cash for services from June 1–15, $3,150.
17. Paid cash to creditors on account, $350.
20. Paid remaining rental on golf carts, $750.
22. Purchased supplies, including gasoline, on account, $200.
25. Accepted IOUs from customers on account, $850.
28. Paid miscellaneous expenses, $180.
30. Received cash for services from June 16–30, $3,200.
30. Paid telephone and electricity (utilities) expenses, $160.
30. Paid wages of part-time employees, $450.
30. Received cash in payment of IOUs on account, $550.
30. Determined the amount of supplies on hand at the end of June, $390.
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102 Chapter 2 Analyzing Transactions

Shane has asked you several questions concerning his financial affairs to date, and he has
asked you to assist with his record keeping and reporting of financial data.
a. To assist Shane with his record keeping, prepare a chart of accounts that would be
appropriate for Birdie Caddy Service.
b. Prepare an income statement for June in order to help Shane assess the profitability of
Birdie Caddy Service. For this purpose, the use of T accounts may be helpful in analyz-
ing the effects of each June transaction.
c. Based on Shane’s records of receipts and payments, calculate the amount of cash on hand
on June 30. For this purpose, a T account for cash may be useful.
d. A count of the cash on hand on June 30 totaled $4,980. Briefly discuss the pos-
sible causes of the difference between the amount of cash computed in (c) and the ac-
tual amount of cash on hand.

SA 2-6 The increasing complexity of the current business and regulatory environment has created
Opportunities for an increased demand for accountants who can analyze business transactions and interpret
accountants their effects on the financial statements. In addition, a basic ability to analyze the effects of
Internet Project transactions is necessary to be successful in all fields of business as well as in other disci-
plines, such as law. To better understand the importance of accounting in today’s environ-
ment, search the Internet or your local newspaper for job opportunities. One possible
Internet site is http://www.monster.com. Then do one of the following:
1. Print a listing of at least two ads for accounting jobs. Alternatively, bring to class at least
two newspaper ads for accounting jobs.
2. Print a listing of at least two ads for nonaccounting jobs for which some knowledge of
accounting is preferred or necessary. Alternatively, bring to class at least two newspaper
ads for such jobs.

Answers to Self-Examination Questions

1. A A debit may signify an increase in an asset account 4. A The receipt of cash from customers on account in-
(answer A) or a decrease in a liability or owner’s cap- creases the asset Cash and decreases the asset Accounts
ital account. A credit may signify a decrease in an as- Receivable, as indicated by answer A. Answer B has
set account (answer B) or an increase in a liability or the debit and credit reversed, and answers C and D
owner’s capital account (answers C and D). involve transactions with creditors (accounts payable)
2. C Liability, capital, and revenue (answer C) accounts and not customers (accounts receivable).
have normal credit balances. Asset (answer A), draw- 5. D The trial balance (answer D) is a listing of the bal-
ing (answer B), and expense (answer D) accounts have ances and the titles of the accounts in the ledger on a
normal debit balances. given date, so that the equality of the debits and cred-
3. C Accounts Receivable (answer A), Cash (answer B), its in the ledger can be verified. The income statement
and Miscellaneous Expense (answer D) would all nor- (answer A) is a summary of revenue and expenses
mally have debit balances. Fees Earned should nor- for a period of time. The balance sheet (answer B) is
mally have a credit balance. Hence, a debit balance in a presentation of the assets, liabilities, and owner’s
Fees Earned (answer C) would indicate a likely error equity on a given date. The statement of owner’s eq-
in the recording process. uity (answer C) is a summary of the changes in owner’s
equity for a period of time.