accounting principles 10th edition weygandt kimmel chapter 1 2 3

8/18/2019 Accounting Principles 10th Edition Weygandt Kimmel Chapter 1 2 3

http://slidepdf.com/reader/full/accounting-principles-10th-edition-weygandt-kimmel-chapter-1-2-3 1/26

Chapter 1 – Accounting in Action Questions – 1-22, Pages 32-33

1. “Accounting is ingrained in our society and it is vital to oureconomic system.” Do you agree? Explain.

I agree with the statement that “Accounting is ingrained in our society and it is vital to our economic system” because as we all know that accounting is vital to maintain thecompetitiveness of our economic system and to uplift the business society.

Accounting gives us the financial position of an organization in respect of its production,sales, profit etc. It indicates areas that need improvement and areas that are doing well.

Accounting gives an idea of the allocation of funds of an organization. The utilization of

funds is a key element in any economy. It will give an indication of any mal practices andfrauds if any have occurred during the allocation of funds.

Accounting is very important to calculate some important metrics such as the growth rateof the economy. ased on these metrics the crdibility of every company is measured andthese metrics are also crucial from a historical perspective as data over a period of timecan be compared.

2. denti!y and descri"e the steps in the accounting process.

Accounting is the process of identifying, recording, and communicating the economic

events of an organization to interested users of the information.The first step of the accounting process is therefore to identify economic events that arerelevant to a particular business. !nce a company identifies economic events, it recordsthose events in order to provide a history of its financial activities. "ecording consists ofkeeping a systematic, chronological diary of these measured events events, measuredin dollars and cents. In the final step the information is communicated through thepreparation and distribution of accounting reports, the most common of which are calledfinancial statements.

#. $a% &ho are internal users o! accounting data? $"% 'o( does

accounting provide relevant data to these users?$a%Internal users of accounting data are managers who plan, organize, and run

the business. These include marketing managers, production supervisors,finance directors, and company officers.

$"% #anagerial accounting provides internal reports to these users to helpthem make decisions about their companies. $%amples of internal reports are& financial comparisons of operating alternatives, pro'ections of income fromnew sales campaigns, and forecasts of cash needs for the next year.

1



). &hat uses o! *nancial accounting in!ormation are made "y $a%investors and $"% creditors?

Investors (owners) and creditors (such as suppliers and bankers) are e%ternal users.

Investors use financial accounting information to make decisions to buy, hold, or sellownership shares of a company. *reditors use accounting information to evaluate the risksof granting credit or lending money.

a)Investors, also known as owners use accounting information to make decisions tobuy, hold, or sell ownership shares of a company.

b)*reditors also known as suppliers and bankers use the accounting information toanalyze the risks of granting credit or lending money.

+. “,oo--eeping and accounting are the same.” Do you agree?Explain.

ookkeeping and accounting are not the same. ookkeeping usually involves only therecording of economic events in other words it is the process of recording financialtransactions and keeping financial records. It is a small and it is 'ust one part of accountingprocess. Accounting, on the other hand involves the entire process of identifying, recording,and communicating economic events.

6. Eve Myles Travel Agency purchase lan !or "#$,$$$ cash on %ece&'er 1$, 2$12. At %ece&'er 31, 2$12, the lan(s value has increase to "#3,$$$. )hat a&ount shoul 'e reporte !or lan on Eve Myles(s 'alance sheet at %ece&'er 31, 2$12*

E+plain.

As per the cost principle,assets should be recorded at their cost.Cost has an important

advantage over other valuations, it is reliable and cost can be objectively measured and can

be verified.+nder the *ost principle although the fair value of land has increased from -, to -/, from 0ec 1, 212 to 0ecember /1, 212 but $ve #yles3s balance

sheet shouldreport the land at $90,000 on its December 31, 2012 balance sheet.

. )hat is the &onetary unit assu&ption*

The monetary unit assumption re4uires that only transactions data that can be e%pressed ormeasured in terms of money should be includedin the accounting records. This assumptionenables accounting to 4uantify (measure) economic events. The monetary unit assumptionis vital to applying the cost principle.#onetary unit assumption prevents the inclusion of some relevant information in theaccounting records. eg, the health of the owner, the 4uality of service, and the morale ofemployees are not included because companies cannot 4uantify this information in terms ofmoney.

2



. )hat is the econo&ic entity assu&ption*

$conomic entity assumption is an assumption under the 5enerally Accepted Accounting6rinciples. This principle re4uires that the activities of the entity be kept separate and distinctfrom the activities of its owner and all other economic entities.

#. )hat are the three 'asic !or&s o! 'usiness organiations !or pro!it-oriente enterprises*

The three basic forms of business organization are the proprietorship, thepartnership,and the corporation.

Proprietorship & A business owned by one person is generally a proprietorship.The owner is often the manager7operator of the business. +sually only a relatively small amountof money (capital) is necessary to start in business as a proprietorship. The owner (proprietor)takes all the profits or losses of the business and is personally liable for all debts of the business.

Partnership & is like a sole proprietorship in most ways, but it has two or more owners. The partners share the profits and losses of the business accordingto a prearranged agreement. oth the sole proprietorship and the partnership are convenientways of separating the owners3 commercial activities from their personal activities.

/orporation & is a business unit chartered by the state and legally separate from its owners (thestockholders). The stockholders, whose ownership is represented by shares of stock, do not

directly control the corporation3s operations. Instead, they elect a board of directors to run thecorporation for their benefit. In e%change for their limited involvement in the corporation3soperations, stockholders en'oy limited liability8 that is, they are not personally liable for the debtsof the corporate entity. 9tockholders may transfer all or part of their ownership shares to otherinvestors at any time.

1$. Maria /ontreras is the o0ner o! a success!ul printing shop. ecently, her 'usiness has 'een increasing, an Maria has 'een thining a'out changing the organiation o! her 'usiness !ro& a proprietorship to a corporation. %iscuss so&e o! the avantages Maria 0oul enoy i! she 0ere to incorporate her 'usiness.

If #aria decides to incorporate her business then she will have below advantages8In corporation, the stockholders en'oy limited liability means they are not personally liable for the debts of the corporate entity.In corporation, stockholders may transfer all or part of their ownership shares to otherinvestors at any time (i.e., sell their shares). The ease with which ownership can changeattracts the investors to invest in a corporation. 9ince the ownership can be transferredwithout dissolving the corporation, the life of a corporation is unlimited and not sub'ect to thewhims or health of a proprietor or a partner.

3



11. )hat is the 'asic accounting e4uation*

The basic accounting equation is Assets = Liabilities + Owner’s Equity.

Assets must e4ual the sum of liabilities and owner3s e4uity.12. 5a %e!ine the ter&s assets, lia'ilities, an o0ner(s e4uity.

Assets are resources owned by a business. The business uses its assets in carrying outactivities such as production and sales. *ommon characteristics of all assets is the capacityto provide future services or benefits. It can be classified as monetary and non monetaryassets8 for e%ample, cash and money that customers owe to the company (called accountsreceivable) are monetary items. !ther assets such as inventories (goods held for sale),land, buildings, and e4uipment are non&monetary, physical items.

7ia'ilitiesare claims against assets, in other words liabilitiesare a business3s presentobligations to pay cash, transfer assets, or provide services to other entities in the future.

Among these obligations are amounts owed to suppliers for goods or services bought oncredit (called accounts payable), borrowed money (e.g., money owed on bank loans),salaries and wages owed to employees, ta%es owed to the government, and services to beperformed.

80ner(s e4uity represents the claims by the owner of a business to the assets of thebusiness. Theoretically, owner3s e4uity is what would be left if all liabilities were paid, and itis sometimes said to e4ual net assets. In Accounting e4uation, we can define owner3s e4uityas listed below8

!wner3s $4uity : Assets & ;iabilities

5' )hat ite&s a!!ect o0ner(s e4uity*

Owner’s equity is affected by owner’s investments, drawings, revenues, and expenses.Investments by owner and revenues from business operations increases owner3s e4uity.

<ithdraw cash or other assets for personal use and e%penses decreases the owner3s e4uity.

13. )hich o! the !ollo0ing ite&s are lia'ilities o! 9arl :e0elry ;tores*5a *ash & Asset

5' Accounts payable 5c !wner3s drawings & Owner’s equity

5 Accounts receivable & Asset5e 9upplies & Asset5! $4uipment & Asset(g) 9alaries and wages payable 5h 9ervice revenue & "evenue, *ash assets5i "ent e%pense & $%pense

4



=or >arl ?ewelry 9tores, liabilities are (b) Accounts payable and (g) 9alaries and wagespayable.

5



1<. /an a 'usiness enter into a transaction in 0hich only the le!t sie o! the 'asic accounting e4uation is a!!ecte* =! so, give an e+a&ple.

Yes, I believe that a business can enter into a transaction in which only the left 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. Eg - An increase in the Equipmentaccount which is offset by a decrease in the Cash account

1>. Are the !ollo0ing events recore in the accounting recors* E+plain your ans0er in each case.

Business transactions are the economic events of the company and they are recorded

because they affect the basic equation.

5a The o0ner o! the co&pany ies @ o, death of the ownerof the company is not

a business transaction as it does not affect the basic accounting equation.

5' ;upplies are purchase on account - Bes,purchase of supplies on account is

a business transactionis a business transaction,as it affects the basic

accounting equation,it debits the assets&supplies and credits the accountspayable.

5c An e&ployee is !ire - o, an employee being fired is not a business

transaction as it does not affect the basicaccounting equation.

5 The o0ner o! the 'usiness 0ithra0s cash !ro& the 'usiness !or personal

use @ Bes,withdrawal of cash from the business is a business transaction as it

affects the basic accounting equation, it decreases !wner3s $4uity.

16. =nicate ho0 the !ollo0ing 'usiness transactions a!!ect the 'asic accounting e4uation.

5a Pai cash !or anitorial services &

Decrease assets and decrease owner’s equity

5' Purchase e4uip&ent !or cash &

$4ual increase and decrease in total assets but composition of assets changes8 cash decreases and asset e4uipment increases.

5c =nveste cash in the 'usiness -$4ual increase in cash assets and ownerCs e4uity

5 Pai accounts paya'le in !ull &

Decrease assets and decrease liabilities

6



1. 7iste 'elo0 are so&e ite&s !oun in the !inancial state&ents o! %ave a&sey /o. =nicate in 0hich !inancial state&ent5s the !ollo0ing ite&s 0oul appear.

$a%9ervice revenue @ Income 9tatement$"%$4uipment && alance 9heet

$c% Accounts receivable @ alance 9heet$d%!wner3s capital @Balance sheet and owner’s equity statement5e Advertising e%pense. @ Income 9tatement

$e%9alaries and wages payable @Balance sheet

1. In ?e'ruary 2$12, @etty 9ing investe an aitional "1$,$$$ in her 'usiness, 9ing(s Phar&acy, 0hich is organie as a proprietorship. 9ing(s accountant, 7eroy :a&es, recore this receipt as an increase in cash an revenues. =s this

treat&ent appropriate* )hy or 0hy not*

I believe, this treatment is not proper.1, investment by etty >ing in her business>ing3s 6harmacy is an increase in *ash (Assets) and also increase in !wner3s $4uity but it

does not represent revenue. This transaction is simply an additional investment made by

the owner in the businessand Investment by owner do not represent the "evenue and theyare e%cluded in determining net income.

1#. A co&pany(s net inco&e appears irectly on the inco&e state&ent an the o0ner(s e4uity state&ent, an it is inclue inirectly in the co&pany(s 'alance sheet.B %o you agree* E+plain.

I agree with statement that “A company3s net income appears directly on the income

statement,it is the result of subtracting expenses from revenues. In addition, net income

appears in the statement of owner’s equity.

et Income is indirectly included in a balance sheet because balance sheet reports theassets, liabilities, and owner3s e4uity at a specific date and since !wner3s $4uity includesthe et Income so in this way et Income is indirectly reported in alance sheet.

2$. Torch0oo Enterprises ha a capital 'alance o! "16,$$$ at the 'eginning o! the perio. At the en o! the accounting perio, the capital 'alance 0as "1#,$$$.

5a Assu&ing no aitional invest&ent or 0ithra0als uring the perio, 0hat is thenet inco&e !or the perio*

$nding capital balance 1-D,

eginning capital balance 1ED,

et income /,

7



(b) Assu&ing an aitional invest&ent o! "13,$$$ 'ut no 0ithra0als uring the perio, 0hat is the net inco&e !or the perio*

$nding capital balance 1-D,

eginning capital balance 1ED,

/,

;ess Investment 1/,et income /,

21. ;u&&arie operations !or :. . E0ing /o. !or the &onth o! :uly are as !ollo0s. evenues earneC !or cash "2$,$$$D on account "$,$$$. E+penses incurreC !or cash "26,$$$D on account "<$,$$$. Indicate for ?. ". $wing *o.

(a) the total revenues,(b) the total e%penses, and(c) net income for the month of ?uly.

evenue9ervice "evenue -,

$%penses$%penses on cash (2E,)$%penses on credit (F,) GGGGGGGGG

Total E+penses (EE,)

et =nco&e 2F,

a) The total revenues : -,

( 2, H ,) (9um of cash revenue and on account revenue)

b) The total e%penses : EE,(2E,) H (F,) : EE, (sum of $%pense on cash and e%pesne on credit)

c) et income for the month of ?uly : 2F,

22. The 'asic accounting e4uation isC Assets F 7ia'ilities G 80ner(s E4uity. eplacing the 0ors in that e4uation 0ith ollar a&ounts, 0hat is /oca-/ola(s accounting e4uation at %ece&'er 31, 2$$#* 5Hint: 80ner(s e4uity is e4uivalent to shareo0ners( e4uity.

*oca&*ola3s accounting e4uation at 0ecember /1, 2- is as listed below8 Assets : ;iabilities H !wner3s $4uityFD,E1 : 2/,/2J H 2J,/FE

Total "evenue -,

Total $%penses EE,

et Income 2F,

8



Chapter 2 – he /ecording 0rocessQuestions – 1-21, Pages -#

1. %escri'e the parts o! a T account.

T account consists of three parts: (1 a tit!e, (" a !eft or debit side, and (# a rightor credit side. $ecause the format of an account resemb!es the !etter T, we refer toit as a T account.

2. “The ter&s debit an credit &ean increase an ecrease, respectively.B %o you agree* E+plain.

I do not agree with the statement that “The terms debit and credit mean increase anddecrease, respectively.” <e use the terms debit and credit repeatedly in the recording.0ebit simply means that the amount is entered on the left side of the account, while theword *redit means that the amount is entered on the right hand.

0epending on the nature of transaction, debit or credit will be increased or in some cases itwill be decreased. <e can not conclude that 0ebit implies the increasing value and *reditimplies the decreasing value.

3. :e!! Hiller, a !ello0 stuent, contens that the ou'le-entry syste& &eans each transaction &ust 'e recore t0ice. =s :e!! correct* E+plain.

o ?eff is not correct. +nder the double&entry system, the dual (two&sided) effect of eachtransaction is recorded in appropriate accounts. As per basic accounting e4uation eachtransaction must affect two or more accounts to keep the basic accounting e4uation in

balance, means for each transaction, debits must e4ual credits. The e4uality of debits andcredits provides the basis for the double&entry system of recording transactions.This system provides a logical method for recording transactions. The double&entry systemalso helps ensure the accuracy of the recorded amounts and helps to detect errors. If everytransaction is recorded with e4ual debits and credits, the sum of all the debits to theaccounts must e4ual the sum of all the credits.

<. Maria Alvare, a 'eginning accounting stuent, 'elieves e'it 'alances are !avora'le an creit 'alances are un!avora'le. =s Maria correct* %iscuss.

o, #aria is not correct in believing that debit balances are favorable and credit balances

are unfavorable. 0ebit and credit are two actions that are opposite in nature. A debit balanceonly means that debit amounts e%ceed credit amounts in an account and a credit balanceonly means that credit amounts are greater than debit amounts in an account.

An account that is affected by an accounting transaction is either debited or credited with anamount that is reflected in transaction depending on the nature of account and the ruleapplicable to it. elow are the two e%amples to further e%plain this analogy81 @ 6urchase of furniture worth J, in cash In this case furniture account is debited with J, but *ash account is credited by

9



similar amount2 @6ayment of J, received from #r. ?ohn by check

In this case #r. ?ohn3s account is credited by J, and the bank account is debited<ith similar amount.

>. ;tate the rules o! e'it an creit as applie to (a) asset accounts,(b) liability accounts, and(c) the owner3s e4uity accounts (revenue, e%penses, owner3s drawings, and owner3s

capital).

%e'it /reit

Asset accounts Increase 0ecrease

liability accounts 0ecrease Increase

!wner3s e4uity accounts @ "evenue 0ecrease Increase

!wner3s e4uity accounts @ $%penses Increase 0ecrease

!wner3s e4uity accounts @ 0rawings Increase 0ecrease

!wner3s e4uity accounts @ *apital 0ecrease Increase

6. )hat is the nor&al 'alance !or each o! the !ollo0ing accounts* 5a Accounts eceiva'le. 5' /ash. 5c 80ner(s %ra0ings. 5 Accounts Paya'le. 5e ;ervice

evenue. 5! ;alaries an )ages E+pense. 5g 80ner(s /apital.

or&al @alance 5%e'itI/reita Account "eceivable 0ebit alanceb *ash 0ebit alancec !wner3s 0rawings 0ebit alanced Accounts 6ayable *redit alancee 9ervice "evenue *redit alance

g 9alaries and <ages $%pense 0ebit alanceg !wner3s *apital *redit alance

. =nicate 0hether each o! the !ollo0ing accounts is an asset, a lia'ility, or an o0ner(s e4uity account an 0hether it has a nor&al e'it or creit 'alanceC5a Accounts eceiva'le, 5' Accounts Paya'le, 5c E4uip&ent, 5 80ner(s

%ra0ings, 5e ;upplies.

10



ype o!Account

or&al %e'itI/reit @alance

a Account "eceivable Asset Account 0ebit alanceb Accounts 6ayable ;iability Account *redit alancec $4uipment Asset Account 0ebit alanced !wner3s 0rawings !wner3 $4uity 0ebit alancee 9upplies Asset Account 0ebit alance

. ?or the !ollo0ing transactions, inicate the account e'ite an the account creite.

5a 9upplies are purchased on account.

Account Type 0ebit (H) *redit (&)9upplies

Accounts 6ayable

%%%

%%%

Debit Supplies and credit Accounts Payable

5' *ash is received on signing a note payable.

Account Type 0ebit (H) *redit (&)*ash

ote 6ayable%%%

%%%

Debit Cash and credit Notes Payable

5c $mployees are paid salaries in cash.

Account Type 0ebit (H) *redit (&)9alaries and <age $%pense

*ash%%%

%%%

Debit Salaries Expense and credit Cash

#. =nicate 0hether the !ollo0ing accounts generally 0ill have(a) debit entries only,(b) *redit entries only, or(c) both debit and credit entries

51 *ash52 Accounts "eceivable53 !wner3s 0rawings.5< Accounts 6ayable.

11



5> 9alaries and <ages $%pense.56 9ervice "evenue

1 *ash Both debit and credit entries

2 Accounts "eceivableBoth debit and credit entries/ !wner3s 0rawings Debit entries only

F Accounts 6ayable Both debit and credit entries

J 9alaries and <ages $%pense Debit entries only

E 9ervice "evenue Creditentries only

12



1$. )hat are the 'asic steps in the recoring process*

The basic steps in the recording process are:%&tep 1:% To ana!yze each transaction % 'n this step, business documents areexamined to determine the eects of the transaction on the accounts.

&tep ":% To enter each transaction in a )ourna! % This step is ca!!ed )ourna!izingand its resu!ts in ma*ing a chrono!ogica! record of the transactions.&tep #:% To transfer )ourna! information to the appropriate account in the !edger +

This step step is ca!!ed posting. osting ma*es it possib!e toaccumu!ate the eect of

)ourna!ized transactions on indi-idua! accounts.

11. )hat are the avantages o! using a ournal in the recoring process*

elow are the advantages of using a 'ournal in the recording processK

1. It discloses in one place the complete effects of a transaction.2. It provides a chronological record of transactions./. It helps to prevent or locate errors because the debit and credit amounts for each entry can be easily compared

12. 5a )hen entering a transaction in the ournal, shoul the e'it or creit 'e 0ritten !irst*

The debit account title (that is, the account to be debited) is entered first at the e%treme left margin of the column headed “Account Titles and $%planation,”.

5' )hich shoul 'e inente, the e'it or creit*

The credit account tit!e (that is, the account to be credited is indented.

13. %escri'e a co&poun entry, an provie an e+a&ple.

9ome transactions, re4uire more than two accounts in 'ournalizing. An entry that re4uires

three or more accounts is a compound entry.An example of a compound entry is the

purchase of equipment, part of which is paid for with cash and the remainder is on account

To illustrate, assume that on ?uly 1, utler *ompany purchases a delivery truck costing-,. It pays E, cash now and agrees to pay the remaining /, on account (to bepaid later). The compound entry is as follows.

eneral ournal

Account Title an E+planation %e'it /reit

13



177212 $4uipment*ash

Accounts 6ayable(6urchase truck for cash with balance on account)

-,E,/,

1<. 5a ;houl 'usiness transaction e'its an creits 'e recore irectly in the

leger accountsL

Bes, it is possible to enter transaction information (debit and credit) directly into the ;edgeraccount without using a ?ournal but very few businesses do so because in the ;edgerinformation is not arranged in chronological order. #ostly companies arrange the ledger inthe se4uence in which they present the accounts in financial statement.

5' )hat are the avantages o! !irst recoring transactions in the ournal an thenposting to the leger*

Advantage of recording transaction in ?ournal is that the ?ournal provides achronological

record of all transactions, the order in which they occur. In ?ournal at one place we see thecomplete effect of a transaction because a separate entry is entered for each transactionwith date of transaction, the account and amount to be debited and credited and it also

include the brief $%planation of the transaction. ?ournal alsohelps to prevent or locate errors

because the debit and credit amounts for each entry can be easily compared.

1>. The account nu&'er is entere as the last step in posting the a&ounts !ro& the ournal to the leger. )hat is the avantage o! this step*

In the reference column of the ?ournal, we write the account number to which the creditamount was posted and the advantage of writing the account number as the last step is that

this account number is used in the *harts of Accounts and this chart lists the accounts andaccount numbers that identify the location of the account is the ledger.

16. :ournalie the !ollo0ing 'usiness transactions.

5a Mector #olina invests -, cash in the business.5' Insurance of D is paid for the year.5c 9upplies of 2, are purchased on account.(d) *ash of ,J is received for services rendered.

eneral ournalAccount Title an E+planation %e'it /reit

A *ash !wner3s *apital

(Mector #olina invested cash in business)

-,-,

6repaid Insurance*ash

(prepaid insurance for the year)

DD

14



* 9upplies Accounts 6ayable

(purchased supplies on account)

2,2,

0 *ash9ervice "evenue("eceived cash for services provided)

,J,J

1. 5a )hat is a leger*

The entire group of accounts maintained by a company is called the ledger. The ledgerkeeps in one place all the information about changes in specific account balances.*ompanies may use various kinds of ledgers, but every company has a general ledger. Ageneral ledger contains all the asset, liability, and owner3s e4uity accounts.

5' )hat is a chart o! accounts an 0hy is it i&portant*

The *hart of Accounts is the backbone of accounting system.A chart of accounts is a list of

accounts and the account numbers that identify their location in the ledger. 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 ledger.Thenumbering system that identifies the accounts usually starts with the balance sheetaccounts and follows with the income statement accounts.

1. )hat is a trial 'alance an 0hat are its purposes*

A trial balance is a list of accounts and their balances at a given time. Its primary purpose isto prove the e4uality of debits and credits after posting. A trial balance also uncovers errorsin 'ournalizing and posting and is useful in preparing financial statements

1#. :i& @enes is con!use a'out ho0 accounting in!or&ation !lo0s through the accounting syste&. He 'elieves the !lo0 o! in!or&ation is as !ollo0s.5a 0ebits and credits posted to the ledger.5' usiness transaction occursc Information entered in the 'ournal.5 =inancial statements are prepared.5e Trial balance is prepared.

Is ?im correctL If not, indicate to ?im the proper flow of the information.

o, ?im is not correct. elow are the correct steps listed in which the accounting informationflows through the accounting system.

a usiness transaction occurs' Information entered in the 'ournal.c 0ebits and credits posted to the ledger ) Trial balance is prepared

15



e =inancial statements are prepared.

16



2$. T0o stuents are iscussing the use o! a trial 'alance. They 0oner 0hether the !ollo0ing errors, each consiere separately, 0oul prevent the trial 'alance !ro& 'alancing.

(a) The 'ooeeper e'ite /ash !or "6$$ an creite ;alaries an )ages E+pense!or "6$$ !or pay&ent o! 0ages.

The trial balance would balancebecause bookkeeper debited the cash for E correctlyand salaries and wage e%pense is credited correctly.

5' /ash collecte on account 0as e'ite to /ash !or "#$$ an ;ervice evenue 0as creite !or "#$. )hat 0oul you tell the&*

The trial balance will not balance. *ash and 9ervice "evenue is correctly debited andcredited respectively in each column but the correct dollar amount is not entered eitherfor *ash or 9ervice "evenue and this will prevent trial balance from balancing.

21. )hat are the nor&al 'alances !or Pepsi/o(s /ash, Accounts Paya'le, an =nterest E+pense accounts*

=n &illions

Dec 26’ 2009 Dec 27’ 2008*ash /,-F/ 2,EF

Accounts 6ayable 2,DD1 2,DFEInterest $%pense account /- /2-

17



/hapter 3 - Austing the AccountsQuestions – 1-23, pages 12# – 13$

1. 5a Ho0 oes the ti&e perio assu&ption a!!ect an accountant(s analysis o!

'usiness transactions*

The time period assumption is also called the periodicity assumption. The Time&periodprinciple implies that the economic activities of an enterprise can be divided into artificialtime periods. This assumption allows the accountant to measure the performace of abusiness for distinct time periods. If time is not divided into distinct periods, the accountantcannot record separate transactions in separate time periods. If transactions are notrecorded in separate time periods, the accountant cannot compile and compare transactionsagainst one another to measure various aspects of the business’ activities.

5' E+plain the ter&s !iscal year, calenar year, an interi& perios.

=nteri& Perio & Interim periods are accounting time periods of less than one year induration, such as a 4uarter, a month, or a semi&annual period. #ost large companies mustprepare both 4uarterly and annual financial statements.?iscal Jear & An accounting time period that is one year in length is a fiscal year. A fiscalyear usually begins with the first day of a month and ends twelve months later on the lastday of a month. *ompanies whose fiscal year differs from the calendar year include 0elta

Air ;ines, ?une /, and <alt 0isney 6roductions, 9eptember /.Calendar year + hen businesses use the /anuary 1 to 0ecember #1 as theiraccounting period.

2. ;tate t0o generally accepte accounting principles that relate to austing the

accounts.

Two generally accepted accounting principles that relate to ad'usting the accounts arerevenue recognition principle and e%pense recognition principle.

As per the revenue recognition principle & it is re4uired that companies recognize revenue inthe accounting period in which it is earned.

As per e%pense recognition principle7 matching principle & e%penses should be recordedwhen incurred such that the e%penses are recorded in the same time period as the relatedrevenue.

3. /hris Harris, a la0yer, accepts a legal engage&ent in March, per!or&s the 0or in

April, an is pai in May. =! Harris(s la0 !ir& prepares &onthly !inancial state&ents,0hen shoul it recognie revenue !ro& this engage&ent* )hy*

At the time of preparing monthly financial statements, Marris3s law firm should recognizerevenue in the month of April in which the service is performed under the revenuerecognition principle. As per this principle Marris3s law firm earned the revenue in April whenthe services are performed rather then in #ay when it receives the cash. !n #ay /1stMarris3s law firm should report a receivable on its balance sheet and revenue in its incomestatement for the services performed.

18



<. )hy o accrual-'asis !inancial state&ents provie &ore use!ul in!or&ation than cash-'asis state&ents*

Information presented on an accrual basis is more useful than on a cash basis because it

reveals relationships that are likely to be important in predicting future results.

+nder the accrual basis, companies record the financial aspect of each economic event inthe accounting period in which the event occur. =or e%ample, using the accrual basis todetermine net income means companies recognize revenues when earned (rather than when they receive cash). It also means recognizing e%penses when incurred(rather than when paid).

<hile under the cash&basis accounting, companies record revenue when they receive cash.They record an e%pense when they pay out cash but it often produces misleading financialstatements. It fails to record revenue that a company has earned but for which it has notreceived the cash. Also, it does not match e%penses with earned revenues.

>. =n co&pleting the engage&ent in 4uestion 3, Harris pays no costs in March, "2,$$$ in April, an "2,>$$ in May 5incurre in April. Ho0 &uch e+pense shoul the !ir& euct !ro& revenues in the &onth 0hen it recognies the revenue* )hy*

+nder the matching principle e%pense should be matched with revenues. All of the e%penses

that relate to this revenue must be recorded in the same time period so the expenses of $4,500

should be deducted from the revenues in April.

6. “Austing entries are re4uire 'y the cost principle o! accounting.B %o you agree* E+plain.

o, ad'usting entries are not re4uired by the cost principle. In accounting ad'ustments areneeded to prepare a correct and up&to&date financial statements and ad'usting entries are

re4uired byrevenue and expense recognition principles.

. )hy &ay a trial 'alance not contain up-to-ate an co&plete !inancial in!or&ation*

Trial balance may not contain up&to&date and complete financial information at the time ofthe pu!!ing together of the transaction data due to se-era! reasons

1. &ome e-ents are not recorded dai!y because it is not e2cient to do so. 3xamp!es

are the use of supp!ies and the earning of wages by emp!oyees.2. &ome costs are not recorded during the accounting period because these costsexpire with the passage of time rather than as a resu!t of recurring dai!y transactions.3xamp!es are charges re!ated to the use of bui!dings and equipment, rent, and insurance.#. &ome items may be unrecorded. 4n examp!e is a uti!ity ser-ice bi!! that wi!! not berecei-ed

19



unti! the next accounting period.

20



. %istinguish 'et0een the t0o categories o! austing entries, an ienti!y the types o! aust&ents applica'le to each category.

There are two categories of ad'usting entries8 1) 0eferrals 2) Accruals. $ach of thesec!asses has two subcategories.

0eferrals @ A deferral is delay of either an e%pense that has been paid or a revenue that hasbeen collected. The two types of deferrals are prepaid e%penses and unearned revenues.1. 6repaid e%pensesK $%penses paid in cash and recorded as assets before they are usedor consumed.2. +nearned revenuesK *ash received and recorded as liabilities before revenue is earned.

Accruals @ An accrual is an e%pense that has not been paid or a revenue that has not yetbeen received. The two types of accruals are accrued revenues and accrued e%penses.1. Accrued revenuesK "evenues earned but not yet received in cash or recorded.2. Accrued e%pensesK $%penses incurred but not yet paid in cash or recorded.

#. )hat is the e'itIcreit e!!ect o! a prepai e+pense austing entry*

An ad'usting entry for prepaid e%penses results in an increase (a debit) to an e%pense accountand a decrease (a credit) to an asset account.

1$. “%epreciation is a valuation process that results in the reporting o! the !air value o! the asset.B %o you agree* E+plain.

o, 0epreciation is an allocation concept, not a valuation concept . 0epreciation is theprocess of allocating the cost of an asset to e%pense over its useful life in a rational and

systematic manner. 0epreciation allocates an asset3s cost to the periods in which it is used.Depreciation results in the presentation of the book value ofthe asset, not its market

value.

11. E+plain the i!!erences 'et0een epreciation e+pense an accu&ulateepreciation.

Depreciation expense is an expense account whose normal balance is a debit. This account

shows the cost that has expired during the current accounting period.

Accumulated depreciation is a contra asset account whose normal balance is a credit. The

balance in this account is the depreciation that has been recognized from the date of

acquisition to the balance sheet date.

21



12. T. Marris *ompany purchased e4uipment for 1D,. y the current balancesheet ate, "6,$$$ ha 'een epreciate. =nicate the 'alance sheet presentationo! the ata.

elow is the balance sheet presentation of the above data8

T. Harris

Balance SheetAssets Amount $ Amount $ !!ice "#uiment $18%000&ess' Accumulated (ereciation ) "#uiment *$6%000+ $12%000

13. )hat is the e'itIcreit e!!ect o! an unearne revenue austing entry*

The ad'usting entry for unearned revenues results in a debit to a liability account and credit to arevenue account.

1<. A co&pany !ails to recognie revenue earne 'ut not yet receive. )hich o! the !ollo0ing accounts are in involve in the austing entryC 5a asset, 5' lia'ility,

5c revenue, or 5 e+pense* ?or the accounts selecte, inicate 0hether they 0oul 'e e'ite or creite in the entry.

Asset and revenueaccounts are involved in the ad'usting entry.

An asset would be debited and a revenue would be credited

1>. A co&pany !ails to recognie an e+pense incurre 'ut not pai. =nicate 0hich o!the !ollo0ing accounts is e'ite an 0hich is creite in the austing entryC5a asset, 5' lia'ility, 5c revenue, or 5 e+pense.

An ad'usting entry for accrued e%penses results in increase in below two accounts8<ithout this ad'usting entry, liabilities and interest e%pense are understated, and net incomeand owner3s e4uity are overstated.

$%pense Account @ 0ebited (increase in e%pense account);iability Account @ *redited (increase in liability account)

22



16. A co&pany &aes an accrue revenue austing entry !or "#$$ an an accruee+pense austing entry !or "$$. Ho0 &uch 0as net inco&e unerstate prior tothese entries* E+plain.

Net income was understated $200 because prior to adjustment revenues are understated by

$900 and expenses are understated by $700. The difference in this case is $200 ($900 –$700).

Below listed is the detailed explanation;

Accrued /evenue ad3usting entry !or 4566 Asset Account @ 0ebited"evenue Account @ *redited

Accrued expense ad3usting entry !or 4766$%pense Account @ 0ebited;iability Account @ *redited

Assets : 7ia'ilities G 80nerKs E4uityAccounts eceiva'le ;ervice evenue - E+pense

Accrued re,enuead-ustin. entr/ $ 900 -

Accrued eensead-ustin. entr/ ()

otal - ()

et Income : 9um of "evenue and $%penses 2 : - H()

1. 8n :anuary #, a co&pany pays ">,$$$ !or salaries, o! 0hich "2,$$$ 0as reporteas ;alaries an )ages Paya'le on %ece&'er 31. Live the entry to recor thepay&ent.

The $ntry to record the payment is listed below8

0ate Account Titles N $%planation 0ebit *redit?an - 9alaries and <ages 6ayable

9alaries N <ages $%pense*ash

(6ayment of the salaries and salaries payable)

/, 2,

J,

23



1. ?or each o! the !ollo0ing ite&s 'e!ore aust&ent, inicate the type o! austing entry 5prepai e+pense, unearne revenue, accrue revenue, or accrue e+pense

that is neee to correct the &isstate&ent. =! an ite& coul result in &ore than on type o! austing entry, inicate each o! the types.5a Assets are understated.

5' ;iabilities are overstated.5c ;iabilities are understated.5 $%penses are understated5e Assets are overstated.5! "evenue is understated.

elow are the type of ad'usting entry for each account listed above8

a Assets are understated Accrued "evenueb ;iabilities are overstated +nearned revenuec ;iabilities are understated Accrued $%pense

d $%penses are understated 6repaid e%pense, Accrued $%pensee Assets are overstated 6repaid e%pensef "evenue is understated +nearned revenue, Accrued "evenue

1#. 8ne-hal! o! the austing entry is given 'elo0. =nicate the account title !or theother hal! o! the entry.

5a 9alaries and <ages $%pense is debited.5' 0epreciation $%pense is debited.5c Interest 6ayable is credited.

5 9upplies is credited.5e Accounts "eceivable is debited.5! +nearned 9ervice "evenue is debited.

elow are the account titles8

Account Titles %e'it /reit

a 9alaries and <ages $%pense9alaries and <ages 6ayable

%%% %%%

b 0epreciation $%pense Accumulated 0epreciation

%%% %%%

c Interest $%penseInterest 6ayable

%%% %%%

d 9upplies $%pense 9upplies

%%% %%%

e Accounts "eceivable 9ervice "evenue

%%% %%%

f +nearned 9ervice "evenue 9ervice "evenue

%%% %%%

24



2$. “An austing entry &ay a!!ect &ore than one 'alance sheet or inco&e state&ent account.B %o you agree* )hy or 0hy not*

I do not agree with the above statement because each ad'usting entry only affects one

income statement account (a revenue or e%pense account) and one balance sheet account(an asset or liability account).

=or e%ample, suppose a company has a 2, debit balance in its supplies account at theend of a month, but a count of supplies on hand finds only E of them remaining. 9incesupplies worth 1F have been used up, the supplies account re4uires a 1F ad'ustmentso assets are not overstated, and the supplies e%pense account re4uires a 1Fad'ustment so e%penses are not understated.

21. )hy is it possi'le to prepare !inancial state&ents irectly !ro& an auste trial 'alance*

=inancial statements can be prepared from an ad'usted trial balance because the balancesof all accounts have been ad'usted to show the effects of all financial events that have

occurred during the accounting period.

22. M. Harrison /o&pany e'its ;upplies E+pense !or all purchases o! supplies an creits ent evenue !or all avance rentals. ?or each type o! aust&ent, give

the aust&ent entry.

For Supplies Expense (prepaid expense) - expenses are overstated and assets areunderstated.

Ad'usting $ntries are as below8

%ate Account Title an E+planation %e'it /reit

Apr&21/ 9upplies $%pense 9upplies (To record supplies used)

%%%%%%%%

For Rent Revenue (unearned revenues) - revenues are overstated and liabilities are

understated.

Ad'usting $ntries are as below8

%ate Account Title an E+planation %e'it /reit

25



Apr&21/ +nearned "ent "evenue "ent "evenue (To record rent revenue earned)

%%%%%%%%

Assets (Supplies)...................................................................................................... XXExpenses (Supplies Expense)........................................................................ XX

Revenues (Rent Revenue) ..................................................................................... XX

Liabilities (Unearned Rent Revenue)

23. )hat 0as Pepsi/o(s epreciation an a&ortiation e+pense !or 2$$# an 2$$*

As per =inancial 9tatements in Appendi% “A” 6epsi*o3s depreciation and amortizatione%pense for 2- and 2D are as below8

In Millions

2$$# 2$$0epreciation $%pense 1,J 1,F22

Amortization $%pense E/ EF

accounting principles 10th edition weygandt kimmel chapter 1 2 3

Documents