financial accounting tools for business decision making solutions 7e chapter 03

Unauthorized copying, distribution, or transmission of this page is strictly prohibited.Analysis Equity Cash Common Shares c Debit−Credit Analysis Debits increase assets: debit Cash $2

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CHAPTER 3 THE ACCOUNTING INFORMATION SYSTEM

LEARNING OBJECTIVES

1 Analyze the effect of transactions on the accounting equation

2 Explain how accounts, debits, and credits are used to record transactions

3 Journalize transactions in the general journal

4 Post transactions to the general ledger

5 Prepare a trial balance

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES

AND BLOOM’S TAXONOMY

Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT

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ANSWERS TO QUESTIONS

shareholders’ equity account are recorded as accounting transactions Other events, such as the agreement to provide a service, do not immediately impact an asset, liability, or shareholder’s equity account and, therefore, are not considered an accounting transaction

(b) Examples of events that would not be recorded include hiring employees, signing a lease, and placing an order to purchase services

LO 1 BT: C Difficulty: M Time: 5 min AACSB: None CPA: cpa-t001 CM: Reporting

2 Accounting transactions that affect the accounting equation (assets =

liabilities + shareholders’ equity) should be recorded

(a) Winning an award is not an accounting transaction, as it does not affect the accounting equation The award did not involve the receipt

of an asset, such as cash

(b) Supplies purchased on account is an accounting transaction because it affects the accounting equation (assets are increased because supplies were received and liabilities are increased because accounts payable were incurred)

(c) A shareholder dying is not an accounting transaction, as it does not affect the accounting equation

(d) Declaring and paying a cash dividend to shareholders is an accounting transaction as it does affect the accounting equation (shareholders’ equity is decreased and assets (cash) are decreased)

(e) The agreement to provide legal services to the company is not an accounting transaction as it does not affect the accounting equation

No expense has been incurred yet and no liabilities have been affected as yet Once the lawyer begins providing services and an amount is paid or owed, then a transaction would be recorded

LO 1 BT: C Difficulty: C Time: 5 min AACSB: None CPA: cpa-t001 CM: Reporting

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3 Yes, a company can enter into a transaction in which only the left (assets)

side of the accounting equation is affected An example would be a transaction where an increase in one asset is offset by a decrease in another asset A decrease in the Accounts Receivable account which is offset by an increase in the Cash account is a specific example (that is, a customer paying for goods previously purchased on account)

LO 1 BT: C Difficulty: S Time: 5 min AACSB: None CPA: cpa-t001 CM: Reporting

accounting Assets are shown on the left-hand side of the accounting equation and debits are shown on the left-hand side of the accounting equation and T accounts Because of this, asset accounts have normal debit balances Liabilities and shareholders’ equity are shown on the right-hand side of the accounting equation and credits are shown on the right-hand side of the accounting equation and T accounts Liabilities and shareholders’ equity accounts (such as share capital and retained earnings) have normal credit balances Following the debit-credit rules will ensure that the accounting equation will be consistently applied

move in the same direction Shareholders’ equity is usually comprised of share capital (which is increased by credits) and retained earnings Retained earnings can be further subdivided into revenues and expenses and dividends declared which are then added to opening retained earnings in the case of revenues, and deducted from opening retained earnings in the case of expenses and dividends Revenues are increased

by credits while expenses and dividends declared are increased by debits

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6 Emily is likely relating the term debit and credit to the normal balances of

accounts Since assets have normal debit balances and, from a personal standpoint, acquiring and possessing assets is viewed in a positive light,

it might follow in Emily’s mind that debits are favourable On the other hand, liabilities have a normal credit balance and might be viewed by Emily in a negative light because debt is unfavourable from a personal standpoint However, Emily is incorrect Debits mean nothing more than the left side of accounts and credits the right side of the accounts Neither

is favourable or unfavourable

7 (a) A general journal is a book of original entry, in which transactions

are recorded in chronological order

(b) The general journal facilitates the recording process by documenting the debit and credit effects on specific accounts The general journal discloses the complete effect of a transaction in one place, including

an explanation and, where applicable, identification of the source document The general journal provides a chronological record of transactions and it helps to prevent and locate errors, because the debit and credit amounts for each entry can be quickly compared

8 While the account title choices suggested by Meghan provide details of

the type of truck the company purchased, the title of the account used to record the purchase should be more generic to include all types of trucks and other vehicles that can be owned and used by the business Ambiguous or multiple account titles with similar names can lead to incorrect financial reporting The name of the account often used by companies for purchases of this nature is Vehicles

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9 This would not be efficient because the journal provides a record that

shows both “sides” of the transaction along with a description of the transaction This information is vital to the understanding of the event A general ledger is not intended to be used to capture the recording of transactions, but to tabulate the effects of transactions in separate accounts The balances arrived at in the ledger are then used to communicate information to the users of the financial statements If one attempted to omit the use of journal entries, one could not retrace the transactions as they originated in the journal One would only see one side of a transaction at a time by looking at an account in the ledger It would become very confusing and unruly to try to keep track of transactions

LO 3,4 BT: C Difficulty: M Time: 5 min AACSB: None CPA: cpa-t001 CM: Reporting

10 Posting should be done on a timely basis, at least monthly, so that

account balances can be monitored and reconciled This ensures that any errors are identified as soon as possible

LO 3,4 BT: C Difficulty: S Time: 5 min AACSB: None CPA: cpa-t001 CM: Reporting

company, including all the asset, liability, and shareholders' equity accounts, including the share capital, retained earnings, dividends declared, revenue, and expense accounts

(b) The general ledger is often arranged in the order in which accounts are presented in the financial statements, beginning with the statement of financial position accounts The asset accounts come first, followed by liability accounts, and then shareholders’ equity accounts, including the share capital, retained earnings, dividends declared, revenue, and expense accounts

LO 4 BT: K Difficulty: S Time: 5 min AACSB: None CPA: cpa-t001 CM: Reporting

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12 (a) The chart of accounts is a list of a company’s accounts The chart of

accounts is important, particularly for a company that has a large number of accounts, because it helps organize the accounts and identify their location in the general ledger

(b) Numbering the accounts helps identify and sort the accounts

Payable, Unearned Revenue, Common Shares, Dividends Declared, Service Revenue, Salaries Expense, and Income Tax Expense

LO 4 BT: K Difficulty: S Time: 5 min AACSB: Analytic CPA: cpa-t001 CM: Reporting

14 (a) A trial balance is a list of accounts and their balances at a point in

time The primary purpose of a trial balance is to prove the mathematical equality of debits and credits after all journalized transactions have been posted A trial balance also facilitates the discovery of errors in journalizing and posting In addition, it is useful

in preparing financial statements

(b) While it does not matter in what order the accounts are listed in the trial balance, it is usual for the accounts in the trial balance to be listed in the same order as they are listed in the general ledger

accounts, including the share capital, retained earnings, dividends declared, revenue, and expense accounts) This makes it easier to compare the trial balance accounts to the general ledger accounts,

as well as to prepare the financial statements from the trial balance

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beginning balance of the period (which is the same as the ending balance

of the prior period) as it has not yet been updated for the effect that the revenues, expenses, and dividends declared have on retained earnings

for the current accounting period (Note to instructors: This chapter only

includes references to an unadjusted and pre-closing trial balance; the post-closing trial balance is not introduced until Chapter 4.)

16 Claire, here are some tips to help you find the $100 difference in the trial

balance columns assuming it is a single error:

1 If the difference between the debit and credit totals is an amount such as $1, $100, or $1,000, re-add the trial balance columns and recalculate the account balances

2 If the amount of the difference can be evenly divided by two, (which

it is in this case) scan the trial balance to see if a balance equal to half the error has been entered in the wrong column

3 If the amount of the difference can be evenly divided by nine, (which

it is not in this case) retrace the account balances on the trial balance to see whether they have been incorrectly copied from the ledger For example, if a balance was $12 but was listed as $21, a

$9 error has been made Reversing the order of numbers is called a transposition error A slide, which is adding or deducting one or several zeros in a figure, has the same effect

4 If the amount of the difference cannot be evenly divided by two or nine, scan the ledger to see whether an account balance in the amount of the error has been omitted from the trial balance Scan the journal to see whether a posting in the amount of the error has been omitted

When all else fails, all of the transactions should be carefully traced

through the process again

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17 The first four steps in the accounting cycle are:

(a) (1) Analyze the business transactions and determine their effects

on the accounting equation and also determine when and how

to record the transactions

(2) Journalize the transactions in the general journal to record the effects of the transactions on the accounts involved in the transactions

(3) Post to the general ledger accounts to provide an accumulation

of the effect of several journalized transactions in the individual accounts

(4) Prepare a trial balance to prove that the sum of the debit account balances equals the sum of the credit account balances after posting

(b) It does matter in which order the steps of the accounting cycle are completed Each step performed has been designed in the sequence with the understanding that the previous step has been performed Failing to do so would result in incomplete and inaccurate financial information

LO 1,3,4,5 BT: C Difficulty: M Time: 5 min AACSB: None CPA: cpa-t001 CM: Reporting

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accounting records Each of these transactions have an impact on the accounting equation as shown in part (a)

Items 2, 3, and 5 should not be recorded in the accounting equation They do not yet impact the accounting equation

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Prepaid Insurance

= Accounts Payable

Unearned Revenue +

Common Shares

Retained Earnings

+ Revenues

– Expenses

– Dividends Declared

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BRIEF EXERCISE 3-3

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Payable

Increase

LO 2 BT: AP Difficulty: M Time: 10 min AACSB: None CPA: cpa-t001 CM: Reporting

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Analysis

Equity Cash

Common Shares

(c) Debit−Credit

Analysis

Debits increase assets: debit Cash $2,500

Credits increase share capital (shareholders’ equity): credit Common Shares $2,500

(a) Basic

Analysis

The asset account Supplies is increased by $250; the liability account Accounts Payable is increased by $250

(b) Equation

Analysis

Equity Supplies

Accounts Payable

(c) Debit−Credit

Analysis

Debits increase assets: debit Supplies $250

Credits increase liabilities: credit Accounts Payable $250

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BRIEF EXERCISE 3-5 (CONTINUED)

(a), (b), and (c) (continued)

(a) Basic

Analysis

The asset account Accounts Receivable is increased by $300; the revenue account Service Revenue is increased by $300

(b) Equation

Analysis

Equity Accounts

Receivable

Service Revenue

Analysis

The asset account Cash is increased by $200; the asset account Accounts Receivable is decreased by $200

(b) Equation

Analysis

Equity Cash

+$200

Accounts Receivable -$200

(c) Debit−Credit

Analysis

Debits increase assets: debit Cash $200

Credits decrease assets: credit Accounts Receivable $200

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(a) Basic

Analysis

An accounting transaction has not occurred There is only an agreement of employment to start on July 3

Transaction 6 June 27: Received cash of $200 from Liu Controls Ltd as a

deposit for welding work to be done in July

(a) Basic

Analysis

The asset account Cash is increased by $200; the liability account Unearned Revenue is increased by $200

(b) Equation

Analysis

Equity Cash

Unearned Revenue

(c) Debit−Credit

Analysis

Credits increase liabilities: credit Unearned Revenue $200

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(a) Basic

Analysis

The asset account Cash is decreased by $250; the liability account Accounts Payable is decreased by $250

(b) Equation

Analysis

Equity Cash

Accounts Payable

(c) Debit−Credit

Analysis

Debits decrease liabilities: debit Accounts Payable $250

Credits decrease assets: credit Cash $250

(a) Basic

Analysis

The expense account Income Tax Expense is increased by

$100; the asset account Cash is decreased by $100

(b) Equation

Analysis

Equity Cash

Income Tax Expense

(c) Debit−Credit

Analysis

Debits increase expenses: debit Income Tax Expense $100

LO 1,2 BT: AN Difficulty: M Time: 15 min AACSB: Analytic CPA: cpa-t001 CM: Reporting

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1 Supplies 250

Accounts Payable 250

2 Accounts Receivable 500

Service Revenue 500

3 Salaries Expense 300

Cash 300

4 Cash 5,000 Common Shares 5,000 5 Dividends Declared 100

Cash 100

6 Cash 500

Accounts Receivable 500

7 Accounts Payable 250

Cash 250

8 Prepaid Insurance 100

Cash 100

9 Cash 300

Unearned Revenue 300

10 Unearned Revenue 300

Service Revenue 300

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1 Cash 5,000

Common Shares 5,000

2 Prepaid Rent 2,100

Cash 2,100

3 Salaries Expense 500

Cash 500

4 Accounts Receivable 1,200 Service Revenue 1,200 5 Cash 900

6 Supplies 500

Cash 500

8 Cash 1,000

Bank Loan Payable 1,000

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June 1 Cash 2,500

4 Supplies 250

7 Accounts Receivable 300

Service Revenue 300

18 Cash 200

25 No transaction – no asset, liability, or equity account affected 27 Cash 200

Unearned Revenue 200

Cash 250

29 Income Tax Expense 100

Cash 100

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Accounts Receivable Accounts Payable Service Revenue

Aug 10 17,500 Aug 5 (c) 6,000 Aug 10 50,000

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(a)

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Accounts payable Credit Accounts receivable Debit Accumulated depreciation—equipment Credit Cash Debit Common shares Credit Dividends declared Debit Equipment Debit Held for trading investments Debit Income tax expense Debit Rent expense Debit Retained earnings Credit Salaries expense Debit Service revenue Credit Unearned revenue Credit

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(b)

CARLAND INC

Trial Balance June 30, 2018

200 4,000 1,000

400

$37,000

$ 3,600 3,000

150 10,000 12,650 7,600

_

$37,000

(Total of debit account balances = Total of credit account balances)

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(c) Larger Column

LO 5 BT: AN Difficulty: C Time: 15 min AACSB: Analytic CPA: cpa-t001 CM: Reporting

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3 Paid $750 for supplies

balance on account of $5,400

7 Paid for operating expenses of $4,800

10 Paid income tax expense of $880

[Revenues – Expenses = Net income or (loss)]

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Solutions Manual 3-28 Chapter 3

Unearned Revenue +

Common Shares

Retained Earnings

Bal

+ Revenues

– Expenses

–

=

Accounts Payable

Dividends Declared July 31 Bal

$6,500 $5,000 $2,000 $5,000 $4,500 (1) +1,000 +$1,000 (2) −1,000 +$5,000 +4,000 (3) −750 +$750 (4) +4,100 +5,400 +$9,500 (5) -2,000 -2,000 (6) -1,000 -$1,000 (7) -4,800 -$4,800 (8) +5,000 -5,000

(10) -880 -880 Aug 31 Bal $5,870 + $5,400 + $750 + $5,000 = $4,000 + $1,000 + $5,000 +$4,500 + $9,500 - $5,980 - $1,000

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Prepaid Insurance Equipment =

Accounts Payable

Bank Loan Payable +

Common Shares

Retained Earnings

Balance

+ Revenues

– Expenses

– Dividends Declared Apr 30 Bal $5,000 $6,000 $2,000 $5,000 $4,000

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EXERCISE 3-3

Position

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Common Shares

(c) Debit−Credit

Analysis

account, for use in the business

(a) Basic

Analysis

The asset account Vehicles is increased by $10,000; the liability account Accounts Payable is increased by $9,000; the asset account Cash is decreased by $1,000

(b) Equation

Analysis

Equity

Cash

Account Payable -$1,000

Vehicles +$10,000

+$9,000

(c) Debit−Credit

Analysis

Debits increase assets: debit Vehicles $10,000

Credits increase liabilities: credit Accounts Payable $9,000

Credit decrease assets: credit Cash $1,000

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EXERCISE 3-4 (CONTINUED)

(a) Basic

Analysis

The asset account Accounts Receivable is increased by $2,300; the revenue account Service Revenue is increased by $2,300

(b) Equation

Analysis

Equity Accounts

Receivable

Service Revenue

(c) Debit−Credit

Analysis

Debits increase assets: debit Accounts Receivable $2,300

Credits increase revenues: credit Service Revenue $2,300

(a) Basic

Analysis

The expense account Advertising Expense is increased by $225; the asset account Cash is decreased by $225

(b) Equation

Analysis

Assets = Liabilities + Shareholders’

Equity Cash

Advertising Expense

(c) Debit−Credit

Analysis

Debits increase expenses: debit Advertising Expense $225

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Transaction 5 March 25: Received $1,000 cash from customers billed on March

Analysis

Equity Cash

+$1,000 Accounts Receivable -$1,000

(c) Debit−Credit

Analysis

Credits decrease assets: credit Accounts Receivable $1,000

(a) Basic

Accounts Payable

(c) Debit−Credit

Analysis

Debits decrease liabilities: debit Accounts Payable $9,000

Credits decrease assets: credit Cash $9,000

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performed in April

(a) Basic

Analysis

The asset account Cash is increased by $700; the liability account Unearned Revenue is increased by $700

(b) Equation

Analysis

Equity Cash

Unearned Revenue

(c) Debit−Credit

Analysis

Credits increase liabilities: credit Unearned Revenue $700

(a) Basic

Analysis

The asset account Cash is decreased by $300; the Dividends Declared account is increased by $300

(b) Equation

Analysis

Equity

Cash

Dividends Declared

(c) Debit−Credit

Analysis

Debits increase dividends: debit Dividends Declared $300

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EXERCISE 3-7

(a) Basic

Analysis

The asset account Cash is increased by $20,000; the shareholders’ equity account Common Shares is increased by $20,000

(b) Equation

Analysis

Equity Cash

Common Shares

(c) Debit−Credit

Analysis

(a) Basic

Analysis

The asset account Accounts Receivable is increased by $9,000; the revenue account Service Revenue is increased by $9,000

(b) Equation

Analysis

Equity Accounts

Receivable

Service Revenue

(c) Debit−Credit

Analysis

Debits increase assets; debit Accounts Receivable $9,000

Credits increase revenues; credit Service Revenue $9,000

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Transaction 3 Sept 4: Purchased equipment for $12,000 paying $5,000 in cash

and borrowing the balance from the bank

(a) Basic

Analysis

The asset account Equipment is increased by $12,000; the asset account Cash is decreased by $5,000 and the liability account Bank Loan Payable increased by $7,000

(b) Equation

Analysis

Equity Cash

Bank Loan Payable -$5,000

Equipment +$12,000

+$7,000

(c) Debit−Credit

Analysis

Debits increase assets: debit Equipment $12,000

Credits decrease assets: credit Cash $5,000 Credits increase liabilities: credit Bank Loan Payable $7,000

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(a) Basic

Analysis

The asset account Supplies is increased by $500; the liability account Accounts Payable is increased by $500

(b) Equation

Analysis

Equity Supplies

Accounts Payable

(c) Debit−Credit

Analysis

Debits increase assets: debit Supplies $500

Credits increase liabilities: credit Accounts Payable $500

services to be provided next month

(a) Basic

Analysis

The asset account Cash is increased by $4,500; the liability account Unearned Revenue is increased by $4,500

(b) Equation

Analysis

Equity Cash

Unearned Revenue

(c) Debit−Credit

Analysis

Credits increase liabilities: credit Unearned Revenue $4,500

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for supplies purchased Sept 10

Accounts Payable

(c) Debit−Credit

Analysis

Debits decrease liabilities: debit Accounts Payable $300

Transaction 7 Sept 30: Collected $5,000 on account owing from customer from

+$5,000

Accounts Receivable -$5,000

(c) Debit−Credit

Analysis

Credits decrease assets: credit Accounts Receivable $5,000

Tiêu đề	The Accounting Information System
Tác giả	Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Trường học	John Wiley & Sons Canada, Ltd.
Thể loại	solutions manual
Năm xuất bản	2017
Thành phố	Canada

Định dạng
Số trang	164
Dung lượng	1,84 MB