Chapter Three Questions
1. State the accounting equation.
Assets = liabilities + stockholders' equity.
2. Identify the three primary sources of resources.
Borrowing, owners' investments, and management's
operation of the company (net income).
3. What is the major benefit of the double-entry system (debits = credits)?
Debits = credits guarantees assets = liabilities +
stockholders' equity.
4. What are the two points you must remember in order to be able to convert most business events into debits and credits?
Assets increase with debits.
Debits = credits.
5. Define the term account. Give three examples of accounts.
An account is a data storage device. It is used to
store accounting information. Examples are cash, accounts receivable, supplies,
accounts payable, and common stock.
6. What is a chart of accounts?
A chart of accounts is a list of all the accounts in
which accounting information can be stored.
7. What is liquidity?
Liquidity is a resource's ability to be converted into
cash or used up in operations. The more liquid a resource is, the more quickly
it can be converted into cash or used up.
8. How is liquidity important to the asset section of the chart of accounts?
Assets are organized in the chart of accounts
according to their liquidity. More liquid assets are listed before less liquid
assets.
9. What does a general ledger contain?
A general ledger contains accounting data stored in
all accounts. A cash account stores cash information, while accounts receivable
information is stored in the accounts receivable account.
10. What is the purpose of the general journal?
The general journal is the place where business
events are converted into debits and credits. The information in the general
journal is in the form of journal entries. Information is transferred from the
general journal to the general ledger through the posting process.
11. What is a journal entry?
A journal entry is a business event converted into
debits and credits.
12. Why is prepaid rent a resource?
Prepaid rent is a resource because it is valuable.
It can be used. Prepaid rent allows a company to use something, such as an
office, for a certain amount of time in the future.
13. Why are accounts receivable resources?
Accounts receivable are resources because they are
valuable. They can be held until they are converted into cash when customers
pay. They can be used a collateral for loans. They can be sold for cash.
14. Why is prepaid insurance a resource?
Prepaid insurance is a resource because it is
valuable. It can be used. Prepaid insurance provides a company with protection
for a certain amount of time in the future.
15. What is a compound journal entry?
A compound journal entry is one with more than one
debit or more than one credit. Like all journal entries, in a compound journal
entry the total dollar amount of debits equals the total dollar amount of
credits.
16. What is the posting process?
The posting process transfers information in the
general journal to the proper accounts in the general ledger. For example, cash
debits and credits are transferred to the cash account.
17. What is the purpose of a trial balance?
The purpose of a trial balance is to check that the
general ledger's debits equal its credits.
Chapter Three Exercises
Exercise 3.1: Chart of Accounts
Johnson Corporation began business on August 12. The company's chart of accounts included the following: accounts payable, accounts receivable, cash, common stock, dividends, fees revenue, office supplies, rent expense, retained earnings, salary expense.
Prepare the Johnson Corporation's chart of accounts. List the accounts
in their proper order.
|
Johnson Corporation |
|
Assets |
|
Cash |
|
Accounts Receivable |
|
Office Supplies |
|
Liabilities |
|
Accounts Payable |
|
Stockholders' Equity |
|
Common Stock |
|
Retained Earnings |
|
Dividends |
|
Revenues |
|
Fees Revenue |
|
Expenses |
|
Rent Expense |
|
Salary Expense |
Exercise 3.2: Journal Entries
During October, the Petit Corporation engaged in the transactions listed below. Record the transactions in the general journal, using the following accounts and account numbers: cash (111), accounts receivable (113), supplies (115), prepaid rent (117), prepaid insurance (119), accounts payable (211), common stock (311), retained earnings (313), dividends (315), and fees revenue (411). Before you prepare each journal entry, determine the transaction's effects on the company's resources and sources of resources. The first transaction has been completed for you.
Oct. 2 Owners invested an additional $27,000 cash in the company and
received common stock.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
$0 |
= |
$0 |
+ |
$0 |
+ |
$0 |
|
+ $27,000 |
= |
|
|
+ $27,000 |
|
|
|
$27,000 |
= |
$0 |
+ |
$27,000 |
+ |
$0 |
|
Date |
Description |
Posting |
Debits |
Credits |
|
Oct. 2 |
Cash |
111 |
27,000 |
|
|
|
Common Stock |
311 |
|
27,000 |
|
|
Owners' investment |
|
|
|
Oct. 5 The company paid $500 to rent office space for October.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
$27,000 |
= |
$0 |
+ |
$27,000 |
+ |
$0 |
|
+ $500 |
|
|
|
|
|
|
|
- $500 |
|
|
|
|
|
|
|
$27,000 |
= |
$0 |
+ |
$27,000 |
+ |
$0 |
|
Date |
Description |
Posting |
Debits |
Credits |
|
Oct. 5 |
Prepaid Rent |
117 |
500 |
|
|
|
Cash |
111 |
|
500 |
|
|
October rent payment |
|
|
|
Oct. 9 Performed $2,200 services for customers who promised to pay by Nov. 15.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
$27,000 |
= |
$0 |
+ |
$27,000 |
+ |
$0 |
|
+ $2,200 |
= |
|
|
|
|
+ $2,200 |
|
$29,200 |
= |
$0 |
+ |
$27,000 |
+ |
$2,200 |
|
Date |
Description |
Posting |
Debits |
Credits |
|
Oct. 9 |
Accounts Receivable |
113 |
2,200 |
|
|
|
Fees Revenue |
411 |
|
2,200 |
|
|
Service performed |
|
|
|
Oct. 13 Purchased $350 of supplies. Supplies will be paid for by Nov. 4.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
$29,200 |
= |
$0 |
+ |
$27,000 |
+ |
$2,200 |
|
+ $350 |
= |
+ $350 |
|
|
|
|
|
$29,550 |
= |
$350 |
+ |
$27,000 |
+ |
$2,200 |
|
Date |
Description |
Posting |
Debits |
Credits |
|
Oct. 13 |
Supplies |
115 |
350 |
|
|
|
Accounts Payable |
211 |
|
350 |
|
|
Supplies purchased on account |
|
|
|
Oct. 16 Performed $1,300 services for customers and received cash.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
$29,550 |
= |
$350 |
+ |
$27,000 |
+ |
$2,200 |
|
+ $1,300 |
= |
|
|
|
+ |
+ $1,300 |
|
$30,850 |
= |
$350 |
+ |
$27,000 |
+ |
$3,500 |
|
Date |
Description |
Posting |
Debits |
Credits |
|
Oct. 16 |
Cash |
111 |
1,300 |
|
|
|
Fees Revenue |
411 |
|
1,300 |
|
|
Service performed |
|
|
|
Oct. 20 Paid $88 cash dividends to owners.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
$30,850 |
= |
$350 |
+ |
$27,000 |
+ |
$3,500 |
|
- $88 |
= |
|
|
|
+ |
- $88 |
|
$30,762 |
= |
$350 |
+ |
$27,000 |
+ |
$3,412 |
|
Date |
Description |
Posting |
Debits |
Credits |
|
Oct. 20 |
Dividends |
315 |
88 |
|
|
|
Cash |
111 |
|
88 |
|
|
October dividends payment |
|
|
|
Oct. 23 Received $1,500 cash from customers serviced on Oct. 9.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
$30,762 |
= |
$350 |
+ |
$27,000 |
+ |
$3,412 |
|
+ $1,500 |
|
|
|
|
|
|
|
- $1,500 |
|
|
|
|
|
|
|
$30,762 |
= |
$350 |
+ |
$27,000 |
+ |
$3,412 |
|
Date |
Description |
Posting |
Debits |
Credits |
|
Oct. 23 |
Cash |
111 |
1,500 |
|
|
|
Accounts Receivable |
113 |
|
1,500 |
|
|
Accounts receivable collection |
|
|
|
Oct. 27 Paid $300 to insure the company for the month of November.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
$30,762 |
= |
$350 |
+ |
$27,000 |
+ |
$3,412 |
|
+ $300 |
|
|
|
|
|
|
|
- $300 |
|
|
|
|
|
|
|
$30,762 |
= |
$350 |
+ |
$27,000 |
+ |
$3,412 |
|
Date |
Description |
Posting |
Debits |
Credits |
|
Oct. 27 |
Prepaid Insurance |
119 |
300 |
|
|
|
Cash |
111 |
|
300 |
|
|
October insurance payment |
|
|
|
Oct. 31 Made $225 partial payment for supplies purchased on Oct. 13.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
$30,762 |
= |
$350 |
+ |
$27,000 |
+ |
$3,412 |
|
- $225 |
= |
- $225 |
|
|
|
|
|
$30,537 |
= |
$125 |
+ |
$27,000 |
+ |
$3,412 |
|
Date |
Description |
Posting |
Debits |
Credits |
|
Oct. 31 |
Accounts Payable |
211 |
225 |
|
|
|
Cash |
111 |
|
225 |
|
|
Accounts payable payment |
|
|
|
Exercise 3.3: Posting to General Ledger
At the beginning of December, the Eaton Corporation had the following
balances in some of its accounts: cash of $8,620, accounts receivable of
$1,875, supplies of $366, accounts payable of $883, fees revenue of $0, and
rent expense of $0. During the first week of December, the Eaton Corporation
recorded the following journal entries.
|
Date |
Description |
Posting |
Debits |
Credits |
|
Dec. 1 |
Cash |
111 |
900 |
|
|
|
Accounts Receivable |
113 |
|
900 |
|
|
Accounts receivable collection |
|
|
|
|
|
|
|
|
|
|
2 |
Rent Expense |
519 |
500 |
|
|
|
Cash |
111 |
|
500 |
|
|
December rent payment |
|
|
|
|
|
|
|
|
|
|
3 |
Supplies |
115 |
375 |
|
|
|
Accounts Payable |
211 |
|
375 |
|
|
Supplies purchased on account |
|
|
|
|
|
|
|
|
|
|
4 |
Accounts Receivable |
113 |
1,200 |
|
|
|
Fees Revenue |
411 |
|
1,200 |
|
|
Services provided |
|
|
|
|
|
|
|
|
|
|
5 |
Accounts Payable |
211 |
520 |
|
|
|
Cash |
111 |
|
520 |
|
|
Accounts payable payment |
|
|
|
1. Set up T accounts for the Eaton Corporation's cash, accounts receivable, supplies,
accounts payable, fees revenue, and rent expense.
|
Cash |
|
Accounts Receivable |
|
Supplies |
|||
|
|
|
|
|
|
|
|
|
|
Accounts Payable |
|
Fees Revenue |
|
Rent Expense |
|||
|
|
|
|
|
|
|
|
|
2. Enter the beginning of December balances into the T accounts.
|
Cash |
|
Accounts Receivable |
|
Supplies |
|||
|
12/1 8,620 |
|
|
12/1 1,875 |
|
|
12/1 366 |
|
|
Accounts Payable |
|
Fees Revenue |
|
Rent Expense |
|||
|
|
883 12/1 |
|
|
0 12/1 |
|
12/1 0 |
|
3. Post the December journal entries to the T accounts.
|
Cash |
|
Accounts Receivable |
|
Supplies |
|||
|
12/1 8,620 |
500 12/2 |
|
12/1 1,875 |
900 12/1 |
|
12/1 366 |
|
|
Accounts Payable |
|
Fees Revenue |
|
Rent Expense |
|||
|
520 12/5 |
883 12/1 |
|
|
0 12/1 |
|
12/1
0 |
|
4. Calculate the balances in the T accounts at the end of the first week in
December.
|
Cash |
|
Accounts Receivable |
|
Supplies |
|||
|
12/1 8,620 |
500 12/2 |
|
12/1 1,875 |
900 12/1 |
|
12/1 366 |
|
|
12/7 8,500 |
|
|
12/7 2,175 |
|
|
12/7 741 |
|
|
Accounts Payable |
|
Fees Revenue |
|
Rent Expense |
|||
|
520 12/5 |
883 12/1 |
|
|
0 12/1 |
|
12/1
0 |
|
|
|
738 12/7 |
|
|
1,200 12/7 |
|
12/7 500 |
|
Exercise 3.4: General Ledger
The Garabedian Corporation's general ledger cash account for January is
shown below.
|
Account Name: Cash |
Account Number: 111 |
||||||
|
|
|
Post. |
|
|
Balance |
||
|
Date |
Item |
Ref. |
Debits |
Credits |
Debits |
Credits |
|
|
Dec. 31 |
Balance |
|
|
|
6,124 |
|
|
|
Jan. 1 |
Accounts receivable collected |
J1 |
975 |
|
7,099 |
|
|
|
3 |
January rent |
J1 |
|
450 |
6,649 |
|
|
|
9 |
Services provided |
J1 |
850 |
|
7,499 |
|
|
|
15 |
Wages paid |
J1 |
|
500 |
6,999 |
|
|
|
17 |
Accounts receivable collected |
J1 |
700 |
|
7,699 |
|
|
|
21 |
Accounts payable paid |
J2 |
|
650 |
7,049 |
|
|
|
24 |
Owners' investment |
J2 |
2,000 |
|
9,049 |
|
|
|
27 |
January insurance |
J2 |
|
350 |
8,699 |
|
|
|
28 |
Services provided |
J2 |
900 |
|
9,599 |
|
|
|
29 |
Cash dividend |
J2 |
|
150 |
9,449 |
|
|
|
31 |
Wages paid |
J2 |
|
450 |
8,999 |
|
|
1. What was the dollar amount of the company's cash at the beginning of
January?
$6,124
2. What was the dollar amount of cash received from customers?
$3,425 = $975 (1/1) + $850 (1/9) + $700 (1/17) +
$900 (1/28)
3. What was the dollar amount of cash paid to employees?
$950 = $500 (1/15) + $450 (1/31)
4. What was the dollar amount of the company's cash at the end of January?
$8,999
Exercise 3.5: Trial Balance
On December 31, the Keener Corporation had the following account balances.
|
Accounts Payable |
$5,000 |
|
Accounts Receivable |
$12,500 |
|
Cash |
$18,000 |
|
Common Stock |
$10,000 |
|
Dividends |
$1,200 |
|
Fees Revenue |
$6,500 |
|
Office Supplies |
$800 |
|
Rent Expense |
$2,400 |
|
Retained Earnings |
$17,000 |
|
Salary Expense |
$3,600 |
1. Prepare the December 31 trial balance for the Keener Corporation.
|
Account Name |
Debits |
Credits |
|
Cash |
$18,000 |
|
|
Accounts Receivable |
$12,500 |
|
|
Office Supplies |
$800 |
|
|
Accounts Payable |
|
$5,000 |
|
Common Stock |
|
$10,000 |
|
Retained Earnings |
|
$17,000 |
|
Dividends |
$1,200 |
|
|
Fees Revenue |
|
$6,500 |
|
Rent Expense |
$2,400 |
|
|
Salary Expense |
$3,600 |
_____ |
|
Totals |
$38,500 |
$38,500 |
2. Determine the company's net income for the period ended December 31.
|
Revenues |
|
|
|
Fees Revenue |
|
$6,500 |
|
Expenses |
|
|
|
Rent Expense |
$2,400 |
|
|
Salary Expense |
$3,600 |
$6,000 |
|
Net Income |
|
$500 |
3. Determine the company's December 31 assets.
|
Cash |
$18,000 |
|
Accounts Receivable |
12,500 |
|
Office Supplies |
800 |
|
Total Assets |
$31,300 |
4. Determine the company's December 31 liabilities.
Accounts Payable = $5,000
5. Determine the company's December 31 stockholders' equity.
|
Common Stock |
$10,000 |
|
Retained Earnings |
16,300 |
|
Total Stockholders' Equity |
$26,300 |
Note: ending retained earnings was calculated as
follows.
|
Retained Earnings, Dec. 1 |
$17,000 |
|
Plus: Net Income |
500 |
|
Subtotal |
$17,500 |
|
Less: Dividends |
1,200 |
|
Retained Earnings, Dec. 31 |
$16,300 |
Note: assets ($31,300) = liabilities ($5,000) +
stockholders' equity ($26,300).
Exercise 3.6: Financial Statements
The Parker Corporation's January 31 trial balance is shown below.
|
Parker Corporation |
|
|
|
Account Name |
Debits |
Credits |
|
Cash |
$8,500 |
|
|
Accounts Receivable |
$1,200 |
|
|
Supplies |
$450 |
|
|
Prepaid Rent |
$950 |
|
|
Prepaid Insurance |
$400 |
|
|
Accounts Payable |
|
$1,400 |
|
Unearned Fees Revenue |
|
$300 |
|
Common Stock |
|
$8,000 |
|
Retained Earnings |
|
$1,100 |
|
Dividends |
$200 |
|
|
Fees Revenue |
|
$3,650 |
|
Utilities Expense |
$200 |
|
|
Telephone Expense |
$150 |
|
|
Wages Expense |
$2,400 |
________ |
|
Totals |
$14,450 |
$14,450 |
1. Determine the dollar amount of resources obtained from customers for
services provided to them in the period ended January 31.
Fees Revenue = $3,650
2. Determine the dollar amount of resources used up in providing service to
customers in the period ended January 31.
$2,750 = $200 Utilities Expense + $150 Telephone
Expense + $2,400 Wages Expense
3. Determine the net dollar amount by which the company's resources increased
through management operations in the period ended January 31.
Net Income = $900: $3,650 revenues - $2,750 expenses
4. Determine the dollar amount of resources paid to owners.
Dividends = $200
5. Determine the dollar amount of resources generated through operations and
retained in the company by January 31.
Retained Earnings = $1,800
|
Retained Earnings, Jan. 1 |
$1,100 |
|
Plus: Net Income |
$900 |
|
Subtotal |
$2,000 |
|
Less: Dividends |
$200 |
|
Retained Earnings, Jan. 31 |
$1,800 |
6. Determine the dollar amount of resources on January 31.
|
Cash |
$8,500 |
|
Accounts Receivable |
$1,200 |
|
Supplies |
$450 |
|
Prepaid Rent |
$950 |
|
Prepaid Insurance |
$400 |
|
Total Assets |
$11,500 |
7. Determine the dollar amount of borrowed resources.
|
Accounts Payable |
$1,400 |
|
Unearned Fees Revenue |
$300 |
|
Total Liabilities |
$1,700 |
8. Determine the dollar amount of resources invested by owners.
Common Stock = $8,000