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Unformatted text preview: CHAPTER 2 ANALYZING TRANSACTIONS CLASS DISCUSSION QUESTIONS 1. An account is a form designed to record changes in a particular asset, liability, stock- holders equity, revenue, or expense. A ledger is a group of related accounts. 2. The terms debit and credit may signify either an increase or decrease, depending upon the nature of the account. For example, deb- its signify an increase in asset, expense, and dividends accounts but a decrease in li- ability, capital stock, retained earnings, and revenue accounts. 3. Creditors and owners both have rights or claims to assets as indicated by the ac- counting equation, Assets = Liabilities + Stockholders Equity. Therefore, the same rules of debit and credit apply to both liabilit- ies and stockholders equity. 4. a. Decrease in retained earnings b. Increase in expense 5. a. Increase in retained earnings b. Increase in revenue 6. a . Assuming no errors have occurred, the credit balance in the cash account resul- ted from drawing checks for $3,000 in excess of the amount of cash on depos- it. b. The $3,000 credit balance in the cash account as of August 31 is a liability owed to the bank. It is usually referred to as an "overdraft" and should be clas- sified on the balance sheet as a liability. 7. a. The revenue was earned in May. b. (1) Debit Accounts Receivable and credit Fees Earned or another ap- propriately titled revenue account in May. (2) Debit Cash and credit Accounts Re- ceivable in June. 8. The trial balance is a proof of the equality of the debits and the credits in the ledger. 9. No. Errors may have been made that had the same erroneous effect on both debits and credits, such as failure to record and/or post a transaction, recording the same transaction more than once, and posting a transaction correctly but to the wrong ac- count. 10. The listing of $18,590 is a transposition; the listing of $720 is a slide. 11. a. No. Because the same error occurred on both the debit side and the credit side of the trial balance, the trial balance would not be out of balance. b. Yes. The trial balance would not bal- ance. The error would cause the credit total of the trial balance to exceed the debit total by $270. 12. a. The equality of the trial balance would not be affected. b. On the income statement, total operat- ing expenses (salary expense) would be overstated by $7,500, and net income would be understated by $7,500. On the retained earnings statement, the begin- ning and ending retained earnings would be correct. However, net income and di- vidends would be understated by $7,500. These understatements offset one another, and thus, ending retained earnings is correct. The balance sheet is not affected by the error....
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- Spring '07