Accounting Quiz 3 example #32686

increase assets and increase stockholders' equity. Basic accounting equation: Assets = Liabilities + Stockholders' Equity When services are performed for cash, the company records the transaction as an increase in cash (which is an asset) and an increase in revenue, and increases in revenue increase retained earnings which is an equity account. Thus, assets and stockholders' equity both increase.

balance sheet and cash flows statement only. When collecting cash in advance from customers, the company receives cash (which increases its assets) and increases its liabilities (the liability account is called unearned revenues). Thus, assets increase and liabilities increase by the same amount. Collecting cash also affects the cash flows statement. This transaction does not affect income statement accounts (e.g., revenues and expenses). It also does not affect retained earnings or the retained earnings statement.

No, hiring an employee is an important event; however it is not an economic event that should be recorded. Paying the employees a wage decreases cash (i.e., decreases assets) and increases wages expense and an increase in expenses decreases retained earnings which is an equity account. How-ever, merely hiring an employee indicates that the employee has not yet performed any services for the company and has eared no wage. Certain events, such as hiring an employee, are not transactions.

decreases cash and decreases retained earnings Payment of dividends reduces cash and increases dividends. Dividends is a temporary account that will be closed at the end of the period (such as a year) and closing it will cause retained earnings to decrease.

liabilities will increase and assets will increase. Receiving cash in advance means that the business receives cash from a customer before the company provides the merchandise or services being sold to the customer. This creates an obligation or a liability to the company. We call this liability "unearned revenue." Liabilities increase and assets (i.e., cash) increase.

stockholders' equity will increase and assets will increase Receiving cash from stockholders as an investment in the company by stockholders is a contribution to capital. This transaction increases the company's assets (specifically, it increases the cash account) by the amount of cash received and it increases the company's stockholders' equity (specifically, it increases the common stock account).

assets increase and liabilities increase Issuing a note means that the company is borrowing money and signing a note payable as evidence of the loan. When a company borrows money by issuing a note, it receives cash but it also creates an obligation or a liability. This, assets increase because cash increases, and liabilities increase because notes payable increases.

assets increase and assets decrease. Paying for a one-year insurance policy reduces the company's cash so assets decrease. In exchange for the cash, the company receives insurance coverage that will benefit the company for the next 12 months, and that coverage is an asset. So, assets increase and decrease by equal amounts, and liabilities and stockholders' equity are not affected.

assets increase and liabilities increase. Buying supplies indicates that supplies are acquired, and supplies are assets so assets increase. Buying "on account" indicates that cash has not been paid. Rather, a liability is created for the amount owed. This transaction increases an asset (i.e., supplies) and increases a liability (i.e., accounts payable). Stockholders' equity is not affected.

decreases assets and decreases stockholders' equity When employees earn wages, the company incurs wage expense. Since the company records wages (i.e., wage expense) when it pays employees their wages, this transaction reduces assets (e.g., it reduces cash) and it reduces stockholders' equity (i.e., it increases wage expense which reduces retained earnings and stockholders' equity).

An account is a source document. An account has three basic parts: (1) a title (such as "Cash" or Accounts Payable"), (2) a debit side (i.e., left-side column for recording account balance changes), and (3) a credit side (i.e., a right-side column for recording account balance changes). Source documents are the information sources used to record changes to account balances (e.g., invoices are source documents). Accounts are not source document.

$9,000 Note: Retained earnings begins with a debit balance indicating the company has had a history of losses rather than profits. A debit balance rarely occurs except with new companies experiencing a slow start. This year's income eliminates is enough to eliminate the debit balance in retained earnings and change it to a credit balance. Ending retained earnings = Beginning retained earnings + net income - dividends. Ending retained earnings = $18,000 (debit) + 33,000 (i.e., credit Retained Earnings) - 6,000 (i.e., debit Retained Earnings) = $9,000 (i.e., credit balance in Retained Earnings).

increase assets and decrease liabilities All asset accounts, expense accounts, and dividends increase with debits and decrease with credits.

assists, dividends, expenses Certain accounts normally have debit balances, including assets, expenses, and dividends. Liabilities, equities, and revenues normally have credit balances.

$22,000 debit The ending cash balance equals the beginning cash balance plus cash receipts occurring during the period minus cash payments occurring during the period. The ending cash balance = $34,000 + 30,000 − 42,000 = $22,000.

$3,000 The basic accounting equation (i.e., Assets = Liabilities + Equity) must stay in balance. The accounting equation can be expanded as follows: Assets = Liabilities + Common stock + Retained earnings Wilson's assets include cash and prepaid insurance (i.e., 15,000 + 3,000 = 18,000). Wilson's liabilities include accounts payable and notes payable (i.e., 3,000 + 4,000 = 7,000). Wilson's retained earnings at the end of the first year is (i.e., 23,000 - 14,000 - 1,000 = 8,000). Common stock = Assets - liabilities - retained earnings Common stock = 18,000 - 7,000 - 8,000 = 3,000

Interest Expense and Salaries and Wages Payable Assets, expenses, and dividends are increased by dividends, and liabilities equities, and revenues are increased with credits. Salaries expense is an expense account so it is increased with debits. Unearned revenue is a liability account so it is increased with credits.

Analyze a transaction; record it in the journal; post it to the ledger The recording process does steps in a certain order. The first step is to analyze each transaction in terms of its effects on the accounts. The second step is to enter the transaction information in the journal (i.e., journalize the transaction). Third, transfer the journal information to the appropriate accounts in the ledger (i.e., post it to the ledger).

$184,000 Ending retained earnings = Beginning retained earnings + revenues for the current period - expenses for the current period - dividends for the current period. Ending retained earnings = $163,000 + $44,000 - 21,000 − 2,000 = $184,000 Retained earnings normally has a credit balance. This is a profitable company, so its retained earnings balance would be a credit balance. Note: signing a note increased notes payable (i.e., liabilities) and increased cash (i.e., assets); borrowing money did not affect net income or retained earnings.

the new balance in the accounts affected by the transaction. A journal entry requires a date (for a chronological record), at least one debited account followed by at least one credited account, and the date. A journal may be accompanied with a brief explanation of the transaction. The journal never report the accounts' balances; the ledger reports accounts' balances.

A debit to Cash and a credit to Notes Payable Issuing a note when borrowing money from a bank requires the company to record a liability called Notes Payable. The company also receives the cash from the bank so the balance in cash increases.

A chart of accounts is the list of the accounts in a given firm's ledger. A chart of accounts is the list of the accounts in a given firm's ledger. This includes all of the accounts used by a given firm regardless of the accounts' balances.. Also, the order of the accounts in the chart of accounts follows the order of the sections of the balance sheet and income statement, namely (1) assets, (2) liabilities, (3) stockholders' equity, (4) revenues, (5) expenses, and (6) dividends.

transfers journal entry amounts to ledger accounts. Posting transfers journal entry amounts to ledger accounts. Posting occurs after journalizing. The process of posting transfers the information contained in journal entries to the ledger. Posting is a required step in the recording process. If it is not done, the ledger accounts will not reflect changes in the accounts resulting from transactions and the ledger would report incorrect account balances.

the order that they appear in the ledger. Accounts will appear in the trial balance in the same order that they appear in the ledger. While the journals are in chronological order, the trial balance is in the order of the accounts as they appear in the ledger. Alphabetical order is seldom justified in financial presentations. The journal entries are posted to the ledger sequentially.

A credit balance of $38,000 Ending retained earnings = Beginning retained earnings + net income - dividends. Other transactions, such as purchased of equipment, are ignored. Ending retained earnings = $0 + $135,000 - $87,000 - $10,000 = $38,000. Retained earnings normally has a credit balance; it occurs when revenues exceed expenses and dividends.

increase assets and decrease assets by the same amount. Total assets do not change. Basic accounting equation: Assets = Liabilities + Stockholders' Equity Paying for a one-year insurance policy in advance decreases cash (i.e., decreases assets) and increases a different asset called Prepaid insurance. This is an asset exchange. Thus, total assets do not change.

income statement, retained earnings statement, cash flows statement, and balance sheet. When a company pays the current month's rent, it decreases cash which affects the balance sheet and the cash flows statement. It also records rent expense which affects the income statement. Since it affects net income, it indirectly affects retained earnings and the retained earnings statement.

A decision to offer a company's services in a new geographic area/ an employee is terminated/ Discussing with a customer the services a company offers. All of these events are transactions that affect the company's financial statements with one exception. A decision to offer a company's products or services in a new geographic area is not a recordable event in the company's accounting records. Future revenues and expenses may be affected by the decision, but those items will be recorded in the future as they occur.

increases an asset and increases a liability Unearned revenue is a liability account used to report the services and/or merchandise owed to customers as a result of customers having paid in advance. Increasing unearned revenue increases liabilities. The liability is created by the customer's advance payment, so cash increases (i.e., assets increase). The company will not earn the revenue until later when it provides the services and/or merchandise to the customer.

assets increase and stockholders' equity increases Receiving cash from stockholders as an investment in the company by stockholders is a contribution to capital. This transaction increases the company's cash by the amount of cash received and it increases the company's stockholders' equity (specifically, it increases the common stock account)

increases assets and increases liability Issuing a note means that the company is borrowing money and signing a note payable as evidence of the loan. When a company borrows money by issuing a note, it receives cash but it also creates an obligation or a liability. This, assets increase because cash increases, and liabilities increase because notes payable increases.

decreases assets and decreases stockholders' equity When employees earn wages, the company incurs wage expense. Since the company records wages (i.e., wage expense) when it pays employees their wages, this transaction reduces assets (e.g., it reduces cash) and it reduces stockholders' equity (i.e., it increases wage expense which reduces retained earnings and stockholders' equity)

$9,000 Note: Retained earnings begins with a debit balance indicating the company has had a history of losses rather than profits. A debit balance rarely occurs except with new companies experiencing a slow start. This year's income eliminates is enough to eliminate the debit balance in retained earnings and change it to a credit balance. Ending retained earnings = Beginning retained earnings + net income - dividends. Ending retained earnings = $18,000 (debit) + 33,000 (i.e., credit Retained Earnings) - 6,000 (i.e., debit Retained Earnings) = $9,000 (i.e., credit balance in Retained Earnings).

is increased by credits Revenue is a temporary account that will be closed at the end of the period (such as at the end of the year). Its balance will be transferred to the retained earnings account. Revenue accounts are increased by credits. Some people remember this fact by remembering this simple phrase: "Take credit for your revenues."

liability and stockholders' equity Certain accounts normally have debit balances, including assets, expenses, and dividends. Liabilities, equities, and revenues normally have credit balances.

equipment and selling expense Assets, expenses, and dividends are increased by dividends, and liabilities equities, and revenues are increased with credits. Equipment is an asset account, and advertising expense is an expense account; both are increased by debits.

$166,000 credit Ending retained earnings = Beginning retained earnings + revenues for the current period - expenses for the current period - dividends for the current period. Ending retained earnings = $154,000 + $35,000 - 20,000 − 3,000 = $166,000 Retained earnings normally has a credit balance. This is a profitable company, so its retained earnings balance would be a credit balance. Note: selling (i.e., issuing) additional common stock to shareholders in exchange for cash increases stockholders' equity and assets; it does not affect net income or retained earnings.

The balance of each account affected by the transaction The current balance of an account is not needed nor is it shown when making journal entries. The accounts involved and the debit and credit amounts being recorded must be identified in the journal entry. The date of a journal entry is required to maintain the chronology of the journal and the accounts. A brief explanation clarifies the reason the journal entry was made. Account balances are shown in the ledger—not the journal.

A debit to Cash and a credit to Common Stock Issuing stock for cash is recorded by debiting Cash and crediting Common Stock. Recall: cash is an asset and assets increase with debits; common stock is an equity account and equity accounts increase with credits.

All the asset, liability, stockholders' equity, revenue, expense, and dividend accounts A general ledger lists all of the accounts of a company. These are the asset, liability, stockholders' equity, revenue, expense, and dividend accounts.

that account will be debited in the ledger. Posting transfers journal entry amounts to ledger accounts. If the account is debited in the journal entry, that account will be debited in the posting process.

A credit balance of $38,000 Ending retained earnings = Beginning retained earnings + net income - dividends. Other transactions, such as purchased of equipment, are ignored. Ending retained earnings = $0 + $135,000 - $87,000 - $10,000 = $38,000. Retained earnings normally has a credit balance; it occurs when revenues exceed expenses and dividends.

source document The recording process does steps in a certain order. The first step is to analyze each transaction in terms of its effects on the accounts. What is examined is the transaction's source document (e.g., sales receipts is an example of a source document). A source documents is evidence that a transaction has occurred. By the way, the second step is to enter the transaction information in the journal (i.e., journalize the transaction).

the mathematical equality of the accounting equation. A trial balance where debits equal credits simply states the mathematical equality of the accounting equation. If the trial balance' debits equals credits, errors can still exist (e.g., perhaps a company's accountant forgot to record a transaction causing debits and credits to both be wrong by the same amount).

decrease assets and decrease stockholders' equity. Basic accounting equation: Assets = Liabilities + Stockholders' Equity Paying rent for the month decreases cash (i.e., decreases assets) and increases the company's expenses (i.e., Rent Expense), and an increase in expenses decreases the company's retained earnings and equity. Thus, assets decrease and equity decreases.

balance sheet and cash flows statement only. When purchasing equipment for cash, the company pays cash (which decreases its assets) and increases its equipment (which is an asset). Thus, assets increase and decrease by the same amount. This is an asset exchange affecting the balance sheet, such as affecting how much cash is reported on the balance sheet. This also affects the cash flows statement. It does not affect income statement accounts (e.g., revenues and expenses). It also does not affect retained earnings or the retained earnings statement.

expenses Retained earnings is net income that a company retains in the business. It includes net income since the inception of the business—not just the current year's net income. Retained earnings is increased by net income (which is increased by revenues and decreased by expenses) and decreased by distributions to owners (such as dividends). The costs that a firm incurs when operating its business (i.e., its expenses) cause retained earnings to decrease.

$160,000 Note: Retained earnings begins with a debit balance indicating the company has had a history of losses rather than profits. A debit balance rarely occurs except with new companies experiencing a slow start. This year's income eliminates is enough to eliminate the debit balance in retained earnings and change it to a credit balance. Ending retained earnings = Beginning retained earnings + net income - dividends. Ending retained earnings = $14,000 (debit balance) + $33,000 (i.e., credit Retained Earnings because of net income) - 5,000 (i.e., debit Retained Earnings because of dividends) = $14,000 (i.e., the $15,000 ending balance in Retained Earnings account is a credit balance). Ending common stock = beginning common stock + additional common stock issued Ending common stock = $109,000 + 37,000 = $146,000 Ending stockholders' equity = ending common stock + ending retained earnings. Ending stockholders' equity = $146,000 + $14,000 = $160,000

expenses and assets Certain accounts normally have debit balances, including assets, expenses, and dividends. Liabilities, equities, and revenues normally have credit balances.

a debit to cash and a credit to revenue Performing services in exchange for cash indicates that the company has earned the revenue so it records it as Revenue. Cash is also received so the balance in cash increases.

$13,000 The basic accounting equation (i.e., Assets = Liabilities + Equity) must stay in balance. The accounting equation can be expanded as follows: Assets = Liabilities + Common stock + Retained earnings Wilson's assets include cash and prepaid insurance (i.e., 22,000 + 5,000 = 27,000). Wilson's liabilities include accounts payable and notes payable (i.e., 4,000 + 3,000 = 7,000). Wilson's retained earnings at the end of the first year is (i.e., 28,000 - 17,000 - 4,000 = 7,000). Common stock = Assets - liabilities - retained earnings Common stock = 27,000 - 7,000 - 7,000 = 13,000

a debit to cash and a credit to revenue Performing services in exchange for cash indicates that the company has earned the revenue so it records it as Revenue. Cash is also received so the balance in cash increases.

increase assets and increase stockholders' equity Basic accounting equation: Assets = Liabilities + Stockholders' Equity A purchase of equipment for cash is recorded as an increase in equipment (which is an asset) and a decrease in cash (which is an asset). Thus, an asset exchange occurs with one asset increasing and another decreasing.

income statement, retained earnings statement, cash flows statement, and balance sheet. When a company performs services it recognizes revenue as earned. This affects the income statement, and it also affects net income which appears on the retained earnings statement. So, earning revenue has an indirect effect on the retained earnings statement. Collecting cash from customers increases its assets which affects the balance sheet. Collecting cash also affects the cash flows statement. This transaction does not affect income statement accounts (e.g., revenues and expenses). It also does not affect retained earnings or the retained earnings statement.

assets increase and liabilities increase. Receiving cash from a customer before the company provides the merchandise or performs services being sold to the customer creates an obligation or a liability to the company. We call this liability "unearned revenue." Liabilities increase and assets (i.e., cash) increase.

increases assets and decreases assets Paying for a one-year insurance policy reduces the company's cash so assets decrease. In exchange for the cash, the company receives insurance coverage that will benefit the company for the next 12 months, and that coverage is an asset. So, assets increase and decrease by equal amounts, and liabilities and stockholders' equity are not affected.

liability The unearned revenue account is classified as a liability. Unearned revenues are payments for future services to be performed or goods to be delivered. Until a company performs the services or delivers the goods, the amount is owed to the party that made the payment.

$15,000 Note: Retained earnings begins with a debit balance indicating the company has had a history of losses rather than profits. A debit balance rarely occurs except with new companies experiencing a slow start. This year's income eliminates is enough to eliminate the debit balance in retained earnings and change it to a credit balance. Ending retained earnings = Beginning retained earnings + net income - dividends. Ending retained earnings = $20,000 (debit balance) + $43,000 (i.e., credit Retained Earnings because of net income) - 8,000 (i.e., debit Retained Earnings because of dividends) = $15,000 (i.e., the $15,000 ending balance in Retained Earnings account is a credit balance).

$2,600 debit balance When a company begins, all of its accounts have a zero balance. This company has debit entries for cash of $27,500 and credits of $24,900 in its cash account during its first month. Debits increase asset accounts' balances, such as cash, and credits decrease assets' accounts balances. The balance in the cash account at the end of the period will be $2,600 debit balance (i.e., $27,500 dr. − $24,900 cr. = $2,600 dr.; when an account's debits exceed its credits, the account has a debit balance).

Cash and Income Tax Expense Assets, expenses, and dividends are increased by dividends, and liabilities equities, and revenues are increased with credits. Cash is an asset account, and salaries expense is an expense account; both are increased by debits. Note that Accumulated Depreciation—Equipment is reported among assets but the company reports the asset (such as equipment) less accumulated depreciation. In this sense, accumulated depreciation accounts are the opposite of assets and accumulated depreciation accounts are decreased by debits.

journalize, post, prepare a trial balance The recording process does steps in a certain order. The first step is to analyze each transaction in terms of its effects on the accounts. The second step is to enter the transaction information in the journal (i.e., journalize the transaction). Third, transfer the journal information to the appropriate accounts in the ledger (i.e., post it to the ledger). Fourth, the company prepares a trial balance to confirm the equality of debits and credits. Other steps follow and are described in the next chapter. Collectively, these steps are sometimes called "the accounting cycle."

a $100 cash dividend is debited to Dividends for $1,000 and credited to Cash for $100 The entry will cause the trial balance to be out of balance. If a correct journal entry is posted twice, the trial balance will still balance. If the purchase of supplies on account is debited to Supplies and credited to Cash, the trial balance will still balance. If a $450 payment on account is debited to Accounts Payable for $45 and credited to Cash for $45, the trial balance will still balance.

Assets decreases and liabilities decrease Accounts payable is a liability (i.e., it is an obligation). Paying an account payable reduces the liability and the payment of cash reduces cash (i.e., it reduces assets)

balance sheet only When buying equipment, the buyer acquires the equipment (which is an asset). Therefore, assets increase. The buyer did not pay for the equipment. Instead, the buyer purchased it on credit which is to say that the buyer promises to pay in the future. This is the same as buying "on account." The promise to pay in the future (and similarly buying on account) indicates the buyer increases its liabilities. Since assets and liabilities are both balance sheet accounts, this transaction affects only the balance sheet.

increases asses and decreases assets Buying supplies indicates that supplies are acquired, and supplies are assets so assets increase. Paying cash indicates that cash is decreased and cash is an asset so assets decrease. This transaction is an asset exchange where one asset (i.e., cash) is exchanged for another asset (i.e., supplies). Liabilities and stockholders' equity are not affected.

in the journal The first place entries are recorded is the journal. The journal is sometimes referred to as "the book of original entry."