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Unformatted text preview: 66124_c02_47-100.qxd 11/10/03 6:38 PM Page 47 2 ANALYZING TRANSACTIONS objectives After studying this chapter, you should be able to: PHOTO: © ELEKTRAVISION/INDEX STOCK IMAGERY 1 2 3 4 5 6 7 Explain why accounts are used to record and summarize the effects of transactions on financial statements. Describe the characteristics of an account. List the rules of debit and credit and the normal balances of accounts. Analyze and summarize the financial statement effects of transactions. Prepare a trial balance and explain how it can be used to discover errors. Discover errors in recording transactions and correct them. Use horizontal analysis to compare financial statements from different periods. 66124_c02_47-100.qxd 11/10/03 6:38 PM Page 48 A ssume that you have been hired by a pizza restaurant to deliver pizzas, using your own car. You will be paid $6.00 per hour plus $0.30 per mile plus tips. What is the best way for you to determine how many miles you have driven each day in delivering pizzas? One method would be to record the odometer mileage before work and then at quitting time. The difference would be the miles driven. For example, if the odometer read 56,743 at the start of work and 56,889 at the end of work, you would have driven 146 miles. This method is subject to error, however, if you copy down the wrong reading or make a math error. In the same way, business managers need information about the status of the business at different points in time. Such information is useful for analyzing the effects of transactions on the business and for making decisions. For example, the manager of your neighborhood dry cleaners needs to know how much cash is available, how much has been spent, and what services have been provided. In Chapter 1, we analyzed and recorded this kind of information by using the accounting equation, Assets ϭ Liabilities ϩ Owner’s Equity. Since such a format is not practical for most businesses, in Chapter 2 we will study more efficient methods of recording transactions. We will conclude this chapter by discussing how accounting errors may occur and how they may be detected by the accounting process. Usefulness of an Account objective 1 Explain why accounts are used to record and summarize the effects of transactions on financial statements. The increases and decreases in each financial statement item are shown in an account. Before making a major cash purchase, such as buying a digital camera, you need to know the balance of your bank account. Likewise, managers need timely, useful information in order to make good decisions about their businesses. How are accounting systems designed to provide this information? We illustrated a very simple design in Chapter 1, where transactions were recorded and summarized in the accounting equation format. However, this format is difficult to use when thousands of transactions must be recorded daily. Thus, accounting systems are designed to show the increases and decreases in each financial statement item in a separate record. This record is called an account. For example, since cash appears on the balance sheet, a separate record is kept of the increases and decreases in cash. Likewise, a separate record is kept of the increases and decreases for supplies, land, accounts payable, and the other balance sheet items. Similar records would be kept for income statement items, such as fees earned, wages expense, and rent expense. A group of accounts for a business entity is called a ledger. A list of the accounts in the ledger is called a chart of accounts. The accounts are normally listed in the order in which they appear in the financial statements. The balance sheet accounts are usually listed first, in the order of assets, liabilities, and owner’s equity. The income statement accounts are then listed in the order of revenues and expenses. Each of these major account classifications is briefly described below. Assets are resources owned by the business entity. These resources can be physical items, such as cash and supplies, or intangibles that have value, such as patent rights. Some other examples of assets include accounts receivable, prepaid expenses (such as insurance), buildings, equipment, and land. Liabilities are debts owed to outsiders (creditors). Liabilities are often identified on the balance sheet by titles that include the word payable. Examples of liabilities include accounts payable, notes payable, and wages payable. Cash received before services are delivered creates a liability to perform the services. These future service commitments are often called unearned revenues. Examples of unearned revenues are magazine subscriptions received by a publisher and tuition received by a college at the beginning of a term. Owner’s equity is the owner’s right to the assets of the business. For a proprietorship, the owner’s equity on the balance sheet is represented by the balance of 66124_c02_47-100.qxd 11/10/03 6:38 PM Page 49 Chapter 2 • Analyzing Transactions Procter & Gamble’s account numbers have over 30 digits to reflect P&G’s many different operations and regions. •Exhibit 1 49 the owner’s capital account. A drawing account represents the amount of withdrawals made by the owner. Revenues are increases in owner’s equity as a result of selling services or products to customers. Examples of revenues include fees earned, fares earned, commissions revenue, and rent revenue. The using up of assets or consuming services in the process of generating revenues results in expenses. Examples of typical expenses include wages expense, rent expense, utilities expense, supplies expense, and miscellaneous expense. A chart of accounts is designed to meet the information needs of a company’s managers and other users of its financial statements. The accounts within the chart of accounts are numbered for use as references. A flexible numbering system is normally used, so that new accounts can be added without affecting other account numbers. Exhibit 1 is NetSolutions’ chart of accounts that we will be using in this chapter. Additional accounts will be introduced in later chapters. In Exhibit 1, each account number has two digits. The first digit indicates the major classification of the ledger in which the account is located. Accounts beginning with 1 represent assets; 2, liabilities; 3, owner’s equity; 4, revenue; and 5, expenses. The second digit indicates the location of the account within its class. Chart of Accounts for NetSolutions Balance Sheet Accounts 11 12 14 15 17 18 21 23 31 32 Income Statement Accounts 1. Assets Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment 2. Liabilities Accounts Payable Unearned Rent 3. Owner’s Equity Chris Clark, Capital Chris Clark, Drawing 41 51 52 54 55 59 4. Revenue Fees Earned 5. Expenses Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Characteristics of an Account objective 2 Describe the characteristics of an account. An account, in its simplest form, has three parts. First, each account has a title, which is the name of the item recorded in the account. Second, each account has a space for recording increases in the amount of the item. Third, each account has a space for recording decreases in the amount of the item. The account form presented below is called a T account because it resembles the letter T. The left side of the account is called the debit side, and the right side is called the credit side.1 Title Left side debit Right side credit Amounts entered on the left side of an account, regardless of the account title, are called debits to the account. When debits are entered in an account, the account 1The terms debit and credit are derived from the Latin debere and credere. 66124_c02_47-100.qxd 11/10/03 6:38 PM Page 50 50 Chapter 2 • Analyzing Transactions Many times when accountants analyze complex transactions, they use T accounts to simplify the thought process. In the same way, you will find T accounts a useful device in this and later accounting courses. Amounts entered on the left side of an account are debits, and amounts entered on the right side of an account are credits. is said to be debited (or charged). Amounts entered on the right side of an account are called credits, and the account is said to be credited. Debits and credits are sometimes abbreviated as Dr. and Cr. In the cash account that follows, transactions involving receipts of cash are listed on the debit side of the account. The transactions involving cash payments are listed on the credit side. If at any time the total of the cash receipts is needed, the entries on the debit side of the account may be added and the total ($10,950) inserted below the last debit.2 The total of the cash payments, $6,850 in the example, may be inserted on the credit side in a similar manner. Subtracting the smaller sum from the larger, $10,950 Ϫ $6,850, identifies the amount of cash on hand, $4,100. This amount is called the balance of the account. It may be inserted in the account, next to the total of the debit column. In this way, the balance is identified as a debit balance. If a balance sheet were to be prepared at this time, cash of $4,100 would be reported. Cash Debit side of account 3,750 4,300 2,900 4,100 Balance of account (Total debits Ϫ Total credits) 850 1,400 700 2,900 1,000 10,950 6,850 Total debits Credit side of account Total credits A nalyzing and Summarizing Transactions in Accounts objective 3 List the rules of debit and credit and the normal balances of accounts. Every transaction affects at least two accounts. Every business transaction affects at least two accounts. To illustrate how transactions are analyzed and summarized in accounts, we will use the NetSolutions transactions from Chapter 1, with dates added. First, we illustrate how transactions (a), (b), (c), and (f) are analyzed and summarized in balance sheet accounts (assets, liabilities, and owner’s equity). Next, we illustrate how transactions (d), (e), and (g) are analyzed and summarized in income statement accounts (revenues and expenses). Finally, we illustrate how the withdrawal of cash by Chris Clark, transaction (h), is analyzed and summarized in the accounts. Transactions and Balance Sheet Accounts Chris Clark’s first transaction, (a), was to deposit $25,000 in a bank account in the name of NetSolutions. The effect of this November 1 transaction on the balance sheet is to increase assets and owner’s equity, as shown below. NetSolutions Balance Sheet November 1, 2005 Assets Cash 2This Owner’s Equity $25 0 0 0 00 Chris Clark, capital $25 0 0 0 00 amount, called a memorandum balance, should be written in small figures or identified in some other way to avoid mistaking the amount for an additional debit. 66124_c02_47-100.qxd 11/10/03 6:38 PM Page 51 51 Chapter 2 • Analyzing Transactions A journal can be thought of as being similar to an individual’s diary. This transaction is initially entered in a record called a journal. The title of the account to be debited is listed first, followed by the amount to be debited. The title of the account to be credited is listed below and to the right of the debit, followed by the amount to be credited. This process of recording a transaction in the journal is called journalizing. This form of recording a transaction is called a journal entry. The journal entry for transaction (a) is shown below. JOURNAL Date Entry A 1 Post. Ref. Description 2005 Nov. 1 2 3 Page 1 Cash Chris Clark, Capital Invested cash in NetSolutions. Debit Credit 1 2 5 0 0 0 00 2 5 0 0 0 00 2 3 The increase in the asset (Cash), which is reported on the left side of the balance sheet, is debited to the cash account. The increase in owner’s equity, which is reported on the right side of the balance sheet, is credited to the Chris Clark, capital account. As other assets are acquired, the increases are also recorded as debits to asset accounts. Likewise, other increases in owner’s equity will be recorded as credits to owner’s equity accounts. The effects of this transaction are shown in the accounts by transferring the amount and date of the journal entry to the left (debit) side of Cash and to the right (credit) side of Chris Clark, Capital, as follows: Cash Nov. 1 Chris Clark, Capital 25,000 Nov. 1 25,000 On November 5 (transaction b), NetSolutions bought land for $20,000, paying cash. This transaction increases one asset account and decreases another. It is entered in the journal as a $20,000 increase (debit) to Land and a $20,000 decrease (credit) to Cash, as shown below. Entry B 4 5 6 7 4 5 Land Cash Purchased land for building site. 5 2 0 0 0 0 00 2 0 0 0 0 00 6 7 The effect of this entry is shown in the accounts of NetSolutions as follows: Cash Nov. 1 25,000 Nov. 5 20,000 Land Chris Clark, Capital Nov. 5 20,000 Nov. 1 25,000 On November 10 (transaction c), NetSolutions purchased supplies on account for $1,350. This transaction increases an asset account and increases a liability account. It is entered in the journal as a $1,350 increase (debit) to Supplies and a $1,350 increase (credit) to Accounts Payable, as shown below. To simplify the illustration, the effect of entry (c) and the remaining journal entries for NetSolutions will be shown in the accounts later. Entry C 8 9 10 11 8 10 Supplies Accounts Payable Purchased supplies on account. 1 3 5 0 00 9 1 3 5 0 00 10 11 66124_c02_47-100.qxd 11/10/03 6:38 PM Page 52 52 Chapter 2 • Analyzing Transactions On November 30 (transaction f), NetSolutions paid creditors on account, $950. This transaction decreases a liability account and decreases an asset account. It is entered in the journal as a $950 decrease (debit) to Accounts Payable and a $950 decrease (credit) to Cash, as shown below. Entry F 23 24 25 26 The left side of all accounts is the debit side, and the right side is the credit side. 23 30 Accounts Payable Cash Paid creditors on account. 24 9 5 0 00 9 5 0 00 25 26 In the preceding examples, you should observe that the left side of asset accounts is used for recording increases and the right side is used for recording decreases. Also, the right side of liability and owner’s equity accounts is used to record increases, and the left side of such accounts is used to record decreases. The left side of all accounts, whether asset, liability, or owner’s equity, is the debit side, and the right side is the credit side. Thus, a debit may be either an increase or a decrease, depending on the account affected. Likewise, a credit may be either an increase or a decrease, depending on the account. The general rules of debit and credit for balance sheet accounts may be thus stated as follows: Debit Asset accounts . . . . . . . . . . . . . . . . . . . . . . . Liability accounts . . . . . . . . . . . . . . . . . . . . . Owner’s equity (capital) accounts . . . . . . . . . Credit Increase (ϩ) Decrease (Ϫ) Decrease (Ϫ) Decrease (Ϫ) Increase (ϩ) Increase (ϩ) The rules of debit and credit may also be stated in relationship to the accounting equation, as shown below. Balance Sheet Accounts ASSETS Asset Accounts Debit for increases (ϩ) Credit for decreases (Ϫ) LIABILITIES Liability Accounts Debit for decreases (Ϫ) Credit for increases (ϩ) OWNER’S EQUITY Owner’s Equity Accounts Debit for decreases (Ϫ) Credit for increases (ϩ) Income Statement Accounts The analysis of revenue and expense transactions focuses on how each transaction affects owner’s equity. Transactions that increase revenue will increase owner’s equity. Just as increases in owner’s equity are recorded as credits, so, too, are increases in revenue accounts. Transactions that increase expense will decrease owner’s equity. Just as decreases in owner’s equity are recorded as debits, increases in expense accounts are recorded as debits. We will use NetSolutions’ transactions (d), (e), and (g) to illustrate the analysis of transactions and the rules of debit and credit for revenue and expense accounts. On November 18 (transaction d), NetSolutions received fees of $7,500 from customers for services provided. This transaction increases an asset account and in- 66124_c02_47-100.qxd 11/10/03 6:39 PM Page 53 Chapter 2 • Analyzing Transactions 53 FINANCIAL REPORTING AND DISCLOSURE THE HIJACKING RECEIVABLE A company’s chart of accounts should reflect the basic nature of its operations. Occasionally, however, transactions take place that give rise to unusual accounts. The following is a story of one such account. During the early 1970s, before strict airport security was implemented across the United States, several airlines experienced hijacking incidents. One such incident occurred on November 10, 1972, when a Southern Airways DC-9 en route from Memphis to Miami was hijacked during a stopover in Birmingham, Alabama. The three hijackers boarded the plane in Birmingham armed with handguns and hand grenades. At gunpoint, the hijackers took the plane, the plane’s crew of four, and 27 passengers to nine American cities, Toronto, and eventually to Havana, Cuba. During the long flight, the hijackers threatened to crash the plane into the Oak Ridge, Tennessee, nuclear facilities, insisted on talking with President Nixon, and demanded a ransom of $10 million. Southern Airways, however, was only able to come up with $2 million. Eventually, the pilot talked the hijackers into settling for the $2 million when the plane landed in Chattanooga for refueling. Upon landing in Havana, the Cuban authorities arrested the hijackers and, after a brief delay, sent the plane, passengers, and crew back to the United States. The hijackers and $2 million stayed in Cuba. How did Southern Airways account for and report the hijacking payment in its subsequent financial statements? As you might have analyzed, the initial entry credited Cash for $2 million. The debit was to an account entitled “Hijacking Payment.” This account was reported as a type of receivable under “other assets” on Southern’s balance sheet. The company maintained that it would be able to collect the cash from the Cuban government and that, therefore, a receivable existed. In fact, in August 1975, Southern Airways was repaid $2 million by the Cuban government, which was, at that time, attempting to improve relations with the United States. creases a revenue account. It is entered in the journal as a $7,500 increase (debit) to Cash and a $7,500 increase (credit) to Fees Earned, as shown below. Entry D 12 13 14 15 12 18 Cash Fees Earned Received fees from customers. 7 5 0 0 00 13 7 5 0 0 00 14 15 Throughout the month, NetSolutions incurred the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275. To simplify the illustration, the entry to journalize the payment of these expenses is recorded on November 30 (transaction e), as shown below. This transaction increases various expense accounts and decreases an asset account. Entry E 17 18 19 20 21 22 The sum of the debits must always equal the sum of the credits. 30 Wages Expense Rent Expense Utilities Expense Miscellaneous Expense Cash Paid expenses. 2 1 2 5 00 8 0 0 00 4 5 0 00 2 7 5 00 17 18 19 20 3 6 5 0 00 21 22 Regardless of the number of accounts, the sum of the debits is always equal to the sum of the credits in a journal entry. This equality of debits and credits for each transaction is built into the accounting equation: Assets ϭ Liabilities ϩ Owner’s Equity. It is also because of this double equality that the system is known as double-entry accounting. On November 30, NetSolutions recorded the amount of supplies used in the operations during the month (transaction g). This transaction increases an 66124_c02_47-100.qxd 11/10/03 6:39 PM Page 54 54 Chapter 2 • Analyzing Transactions expense account and decreases an asset account. The journal entry for transaction (g) is shown below. Entry G 30 Supplies Expense Supplies Supplies used during November. 28 29 30 28 8 0 0 00 8 0 0 00 29 30 The general rules of debit and credit for analyzing transactions affecting income statement accounts are stated as follows: Debit In 1494, Luca Pacioli, a Franciscan monk, invented the double-entry accounting system that is still used today. Revenue accounts Expense accounts Credit Decrease (Ϫ) Increase (ϩ) Increase (ϩ) Decrease (Ϫ) The rules of debit and credit for income statement accounts may also be summarized in relationship to the owner’s equity in the accounting equation, as shown below. Income Statement Accounts Expense Accounts Debit for increases (ϩ) Credit for decreases (Ϫ) Revenue Accounts Debit for decreases (Ϫ) Credit for increases (ϩ) Withdrawals by the Owner The owner of a proprietorship may withdraw cash from the business for personal use. This is common practice for owners devoting full time to the business, since the business may be the owner’s main source of income. Such withdrawals have the effect of decreasing owner’s equity. Just as decreases in owner’s equity are recorded as debits, increases in withdrawals are recorded as debits. Withdrawals are debited to an account with the owner’s name followed by Drawing or Personal. In transaction (h), Chris Clark withdrew $2,000 in cash from NetSolutions for personal use. The effect of this transaction is to increase the drawing account and decrease the cash account. The journal entry for transaction (h) is shown below. Entry H 1 2 3 4 2005 Nov. 30 Chris Clark, Drawing Cash Chris Clark withdrew cash for personal use. 1 2 0 0 0 00 2 0 0 0 00 2 INTEGRITY IN BUSINESS WILL JOURNALIZING PREVENT FRAUD? While journalizing transactions reduces the possibility of fraud, it by no means eliminates it. For example, embezzlement can be hidden within the double-entry bookkeeping system by creating fictitious suppliers to whom checks are issued. 3 4 66124_c02_47-100.qxd 11/10/03 6:39 PM Page 55 Chapter 2 • Analyzing Transactions 55 Normal Balances of Accounts The sum of the increases recorded in an account is usually equal to or greater than the sum of the decreases recorded in the account. For this reason, the normal balances of all accounts are positive rather than negative. For example, the total debits (increases) in an asset account will ordinarily be greater than the total credits (decreases). Thus, asset accounts normally have debit balances. The rules of debit and credit and the normal balances of the various types of accounts are summarized as follows: Increase (Normal Balance) A debit balance in which of the following accounts—Cash, Drawing, Wages Expense, Supplies, Fees Earned—would indicate that an error has occurred? Fees Earned Balance sheet accounts: Asset Liability Owner’s Equity: Capital Drawing Income statement accounts: Revenue Expense Decrease Debit Credit Credit Debit Credit Debit Debit Credit Credit Debit Debit Credit When an account normally having a debit balance actually has a credit balance, or vice versa, an error may have occurred or an unusual situation may exist. For example, a credit balance in the office equipment account could result only from an error. On the other hand, a debit balance in an accounts payable account could result from an overpayment. Illustration of Analyzing and Summarizing Transactions objective 4 Analyze and summarize the financial statement effects of transactions. In computerized accounting systems, some transactions may be automatically authorized and recorded when certain events occur. For example, the salaries of managers may be paid automatically at the end of each pay period. How does a transaction take place in a business? First, a manager or other employee authorizes the transaction. The transaction then takes place. The businesses involved in the transaction usually prepare documents that give details of the transaction. These documents then become the basis for analyzing and recording the transaction. For example, Chris Clark might authorize the purchase of supplies for NetSolutions by telling an employee to buy computer paper at the local office supply store. The employee purchases the supplies for cash and receives a sales slip from the office supply store listing the supplies bought. The employee then gives the sales slip to Chris Clark, who verifies and records the transaction. As we discussed in the preceding section, a transaction is first recorded in a journal. Thus, the journal is a history of transactions by date. Periodically, the journal entries are transferred to the accounts in the ledger. The ledger is a history of transactions by account. The process of transferring the debits and credits from the journal entries to the accounts is called posting. The flow of a transaction from its authorization to its posting in the accounts is shown in Exhibit 2. In practice, businesses use a variety of formats for recording journal entries. A business may use one all-purpose journal, sometimes called a two-column journal, or it may use several journals. In the latter case, each journal is used to record different types of transactions, such as cash receipts or cash payments. The journals may be part of either a manual accounting system or a computerized accounting system.3 3The use of special journals and computerized accounting systems is discussed in later chapters, after the basics of accounting systems have been covered. 66124_c02_47-100.qxd 11/10/03 6:39 PM Page 56 56 Chapter 2 • Analyzing Transactions •Exhibit 2 F LOW OF B U S I N E S S T RAN SACTI O N S 1 Transaction authorized JOU R 2 Transaction takes place NAL 4 Entry recorded in journal 3 Business document prepared LE DG E R 5 Entry posted to ledger The double-entry accounting system is a very powerful tool in analyzing the effects of transactions. Using this system to analyze transactions is summarized as follows: 1. Determine whether an asset, a liability, owner’s equity, revenue, or expense account is affected by the transaction. 2. For each account affected by the transaction, determine whether the account increases or decreases. 3. Determine whether each increase or decrease should be recorded as a debit or a credit. I was founded in 1866, when a pharmacist tried to develop an economical alternative to breast milk for mothers who couldn’t nurse their babies. Today I’m Switzerland’s largest industrial company and the world’s largest food company, employing nearly a quarter of a million people. My brands are available in almost every nation, and include Taster’s Choice, Carnation, Libby’s, PowerBar, Maggi, Buitoni, Stouffer’s, KitKat, Smarties, After Eight, Baby Ruth, Butterfinger, Friskies, Fancy Feast, Alpo, and Mighty Dog. I also hold a major interest in L’Oréal. Sales of my instant coffee more than doubled during World War II. Who am I? (Go to page 81 for answer.) To illustrate recording a transaction in an all-purpose journal and posting in a manual accounting system, we will use the December transactions of NetSolutions. The first transaction in December occurred on December 1. Dec. 1. NetSolutions paid a premium of $2,400 for a comprehensive insurance policy covering liability, theft, and fire. The policy covers a two-year period. Analysis When you purchased insurance for your automobile, you may have been required to pay the insurance premium in advance. In this case, your transaction was similar to NetSolutions. Advance payments of expenses such as insurance are prepaid expenses, which are assets. For NetSolutions, the asset acquired for the cash payment is insurance protection for 24 months. The asset Prepaid Insurance increases and is debited for $2,400. The asset Cash decreases and is credited for $2,400. The recording and posting of this transaction is shown in Exhibit 3. Note where the date of the transaction is recorded in the journal. Also note that the entry is explained as the payment of an insurance premium. Such explanations should be brief. For unusual and complex transactions, such as a long-term rental arrangement, the journal entry explanation may include a reference to the rental agreement or other business document. 66124_c02_47-100.qxd 11/10/03 6:39 PM Page 57 57 Chapter 2 • Analyzing Transactions •Exhibit 3 Diagram of the Recording and Posting of a Debit and a Credit JOURNAL Post. Ref. Date ① Description Dec. 1 Prepaid Insurance Cash Paid premium on two-year policy. 5 6 7 8 ③ Page 2 ④ ④ Debit Credit 5 15 11 2 4 0 0 00 6 2 4 0 0 00 7 8 ② ② ACCOUNT Prepaid Insurance Date ① Item 2005 Dec. 1 Post. Ref. 2 ACCOUNT NO. 15 ④ Balance Debit Credit 2 4 0 0 00 Debit Credit 2 4 0 0 00 ③ ACCOUNT Cash Date ① 30 Dec. 1 Item ACCOUNT NO. 11 Post. Ref. 2 2 Balance Debit Credit Debit 2 0 0 0 00 2 4 0 0 00 5 9 0 0 00 3 5 0 0 00 Credit ③ You will note that the T account form is not used in this illustration. Although the T account clearly separates debit and credit entries, it is inefficient for summarizing a large quantity of transactions. In practice, the T account is usually replaced with the standard form shown in Exhibit 3. The debits and credits for each journal entry are posted to the accounts in the order in which they occur in the journal. In posting to the standard account, (1) the date is entered, and (2) the amount of the entry is entered. For future reference, (3) the journal page number is inserted in the Posting Reference column of the account, and (4) the account number is inserted in the Posting Reference column of the journal. The remaining December transactions for NetSolutions are analyzed in the following paragraphs. These transactions are posted to the ledger in Exhibit 4, shown later. To simplify and reduce repetition, some of the December transactions are stated in summary form. For example, cash received for services is normally recorded on a daily basis. In this example, however, only summary totals are recorded at the middle and end of the month. Likewise, all fees earned on account during December ④ 66124_c02_47-100.qxd 11/10/03 6:39 PM Page 58 58 Chapter 2 • Analyzing Transactions are recorded at the middle and end of the month. In practice, each fee earned is recorded separately. Dec. 1. NetSolutions paid rent for December, $800. The company from which NetSolutions is renting its store space now requires the payment of rent on the 1st of each month, rather than at the end of the month. Analysis You may pay monthly rent on an apartment on the first of each month. Your rent transaction is similar to NetSolutions. The advance payment of rent is an asset, much like the advance payment of the insurance premium in the preceding transaction. However, unlike the insurance premium, this prepaid rent will expire in one month. When an asset that is purchased will be used up in a short period of time, such as a month, it is normal to debit an expense account initially. This avoids having to transfer the balance from an asset account (Prepaid Rent) to an expense account (Rent Expense) at the end of the month. Thus, when the rent for December is prepaid at the beginning of the month, Rent Expense is debited for $800 and Cash is credited for $800. 10 1 11 An error or an overdrawn cash account. 52 11 8 0 0 00 10 8 0 0 00 11 Paid rent for December. 12 What would likely cause the cash account to have a credit balance? Rent Expense Cash 12 Dec. 1. NetSolutions received an offer from a local retailer to rent the land purchased on November 5. The retailer plans to use the land as a parking lot for its employees and customers. NetSolutions agreed to rent the land to the retailer for three months, with the rent payable in advance. NetSolutions received $360 for three months’ rent beginning December 1. Analysis By agreeing to rent the land and accepting the $360, NetSolutions has incurred an obligation (liability) to the retailer. This obligation is to make the land available for use for three months and not to interfere with its use. The liability created by receiving the cash in advance of providing the service is called unearned revenue. Thus, the $360 received is an increase in an asset and is debited to Cash. The liability account Unearned Rent increases and is credited for $360. As time passes, the unearned rent liability will decrease and will become revenue. 14 1 15 16 17 Cash Unearned Rent Received advance payment for three months’ rent on land. 11 23 3 6 0 00 14 3 6 0 00 15 16 17 Dec. 4. NetSolutions purchased office equipment on account from Executive Supply Co. for $1,800. Analysis The asset account Office Equipment increases and is therefore debited for $1,800. The liability account Accounts Payable increases and is credited for $1,800. Magazines that receive subscriptions in advance must record the receipts as unearned revenues. Likewise, airlines that receive ticket payments in advance must record the receipts as unearned revenues until the passengers use the tickets. 19 20 21 22 4 Office Equipment Accounts Payable Purchased office equipment on account. 18 21 1 8 0 0 00 Dec. 6. NetSolutions paid $180 for a newspaper advertisement. 19 1 8 0 0 00 20 21 22 66124_c02_47-100.qxd 11/10/03 6:39 PM Page 59 Chapter 2 • Analyzing Transactions 59 Analysis An expense increases and is debited for $180. The asset Cash decreases and is credited for $180. Expense items that are expected to be minor in amount are normally included as part of the miscellaneous expense. Thus, Miscellaneous Expense is debited for $180. 6 24 25 26 Miscellaneous Expense Cash Paid for newspaper ad. 59 11 24 1 8 0 00 1 8 0 00 25 26 Dec. 11. NetSolutions paid creditors $400. Analysis This payment decreases the liability account Accounts Payable, which is debited for $400. Cash also decreases and is credited for $400. 11 Accounts Payable Cash Paid creditors on account. 28 29 30 21 11 28 4 0 0 00 4 0 0 00 29 30 Dec. 13. NetSolutions paid a receptionist and a part-time assistant $950 for two weeks’ wages. Analysis This transaction is similar to the December 6 transaction, where an expense account is increased and Cash is decreased. Thus, Wages Expense is debited for $950, and Cash is credited for $950. JOURNAL Date Description 2005 1 2 3 Dec. 13 Wages Expense Cash Paid two weeks’ wages. Page 3 Post. Ref. 51 11 Debit Credit 1 9 5 0 00 9 5 0 00 2 3 Dec. 16. NetSolutions received $3,100 from fees earned for the first half of December. Analysis Cash increases and is debited for $3,100. The revenue account Fees Earned increases and is credited for $3,100. 5 6 7 16 Cash Fees Earned Received fees from customers. 11 41 5 3 1 0 0 00 3 1 0 0 00 6 7 Dec. 16. Fees earned on account totaled $1,750 for the first half of December. Analysis Assume that you have agreed to take care of a neighbor’s dog for a week for $100. At the end of the week, you agree to wait until the first of the next month to receive the $100. Like NetSolutions, you have provided services on account and thus have a right to receive the payment from your neighbor. When a business agrees that payment for services provided or goods sold can be accepted at a later date, the firm has an account receivable, which is a claim against the 66124_c02_47-100.qxd 11/10/03 6:39 PM Page 60 60 Chapter 2 • Analyzing Transactions customer. The account receivable is an asset, and the revenue is earned even though no cash has been received. Thus, Accounts Receivable increases and is debited for $1,750. The revenue account Fees Earned increases and is credited for $1,750. 9 10 11 16 Accounts Receivable Fees Earned Recorded fees earned on account. 12 41 1 7 5 0 00 9 1 7 5 0 00 10 11 Dec. 20. NetSolutions paid $900 to Executive Supply Co. on the $1,800 debt owed from the December 4 transaction. Analysis 13 14 15 16 This is similar to the transaction of December 11. 20 Accounts Payable Cash Paid part of amount owed to Executive Supply Co. 21 11 9 0 0 00 13 9 0 0 00 14 15 16 Dec. 21. NetSolutions received $650 from customers in payment of their accounts. Analysis When customers pay amounts owed for services they have previously received, one asset increases and another asset decreases. Thus, Cash is debited for $650, and Accounts Receivable is credited for $650. 18 19 20 21 21 Cash Accounts Receivable Received cash from customers on account. 11 12 6 5 0 00 18 6 5 0 00 19 20 21 Dec. 23. NetSolutions paid $1,450 for supplies. Analysis The asset account Supplies increases and is debited for $1,450. The asset account Cash decreases and is credited for $1,450. 23 24 25 23 Supplies Cash Purchased supplies. 14 11 1 4 5 0 00 23 1 4 5 0 00 24 25 Dec. 27. NetSolutions paid the receptionist and the part-time assistant $1,200 for two weeks’ wages. Analysis 27 28 29 This is similar to the transaction of December 13. 27 Wages Expense Cash Paid two weeks’ wages. 51 11 1 2 0 0 00 Dec. 31. NetSolutions paid its $310 telephone bill for the month. 27 1 2 0 0 00 28 29 66124_c02_47-100.qxd 11/10/03 6:39 PM Page 61 Chapter 2 • Analyzing Transactions 61 Analysis You pay a telephone bill each month. Businesses, such as NetSolutions, also must pay monthly utility bills. Such transactions are similar to the transaction of December 6. The expense account Utilities Expense is debited for $310, and Cash is credited for $310. 31 Utilities Expense Cash Paid telephone bill. 31 32 33 54 11 31 3 1 0 00 3 1 0 00 32 33 Dec. 31. NetSolutions paid its $225 electric bill for the month. Analysis This is similar to the preceding transaction. JOURNAL Date Description 2005 1 Dec. 31 Utilities Expense 2 3 Cash Paid electric bill. Page 4 Post. Ref. Debit 54 11 2 2 5 00 Credit 1 2 2 5 00 2 3 Dec. 31. NetSolutions received $2,870 from fees earned for the second half of December. Analysis 5 6 7 This is similar to the transaction of December 16. 31 Cash Fees Earned Received fees from customers. 11 41 2 8 7 0 00 5 2 8 7 0 00 6 7 Dec. 31. Fees earned on account totaled $1,120 for the second half of December. Analysis 9 10 11 This is similar to the transaction of December 16. 31 Accounts Receivable Fees Earned Recorded fees earned on account. 12 41 1 1 2 0 00 9 1 1 2 0 00 10 11 Dec. 31. Chris Clark withdrew $2,000 for personal use. Analysis This transaction resulted in an increase in the amount of withdrawals and is recorded by a $2,000 debit to Chris Clark, Drawing. The decrease in business cash is recorded by a $2,000 credit to Cash. 13 14 15 16 31 Chris Clark, Drawing Cash Chris Clark withdrew cash for personal use. 32 11 2 0 0 0 00 13 2 0 0 0 00 14 15 16 66124_c02_47-100.qxd 11/10/03 6:39 PM Page 62 62 Chapter 2 • Analyzing Transactions The journal for NetSolutions since it was organized on November 1 is shown in Exhibit 4. Exhibit 4 also shows the ledger after the transactions for both November and December have been posted. •Exhibit 4 Journal and Ledger—NetSolutions JOURNAL Date 1 2005 1 Nov. 2 3 Page 1 Post. Ref. Description Cash Chris Clark, Capital Invested cash in NetSolutions. 11 31 Land Cash Purchased land for building site. 17 11 Supplies Accounts Payable Purchased supplies on account. 14 21 Cash Fees Earned Received fees from customers. 11 41 Wages Expense Rent Expense Utilities Expense Miscellaneous Expense Cash Paid expenses. 51 52 54 59 11 Accounts Payable Cash Paid creditors on account. 21 11 Supplies Expense Supplies Supplies used during November. 55 14 Debit Credit 25 0 0 0 00 1 25 0 0 0 00 2 3 4 4 5 5 6 7 20 0 0 0 00 5 20 0 0 0 00 6 7 8 8 10 9 10 11 1 3 5 0 00 9 1 3 5 0 00 10 11 12 12 18 13 14 15 7 5 0 0 00 13 7 5 0 0 00 14 15 16 16 30 17 18 19 20 21 22 2 1 2 5 00 8 0 0 00 4 5 0 00 2 7 5 00 17 18 19 20 3 6 5 0 00 21 22 23 23 30 24 25 26 9 5 0 00 24 9 5 0 00 25 26 27 27 30 28 29 30 8 0 0 00 30 JOURNAL Date 1 2 3 4 2005 Nov. 30 Description Chris Clark, Drawing Cash Chris Clark withdrew cash for personal use. 28 8 0 0 00 29 Page 2 Post. Ref. 32 11 Debit 2 0 0 0 00 Credit 1 2 0 0 0 00 2 3 4 66124_c02_47-100.qxd 11/10/03 6:40 PM Page 63 63 Chapter 2 • Analyzing Transactions •Exhibit 4 (continued) JOURNAL Date 2005 6 Dec. 1 7 8 Page 2 Post. Ref. Description Prepaid Insurance Cash Paid premium on two-year policy. 15 11 Rent Expense Cash Paid rent for December. 52 11 Cash Unearned Rent Received advance payment for three months’ rent on land. 11 23 Office Equipment Accounts Payable Purchased office equipment on account. 18 21 Miscellaneous Expense Cash Paid for newspaper ad. 59 11 Accounts Payable Cash Paid creditors on account. 21 11 Debit Credit 2 4 0 0 00 6 2 4 0 0 00 7 8 9 9 1 10 11 12 8 0 0 00 10 8 0 0 00 11 12 13 13 1 14 15 16 17 3 6 0 00 14 3 6 0 00 15 16 17 18 18 4 19 20 21 22 1 8 0 0 00 19 1 8 0 0 00 20 21 22 23 23 6 24 25 26 1 8 0 00 24 1 8 0 00 25 26 27 27 11 28 29 30 4 0 0 00 30 JOURNAL Date 2005 1 Dec. 13 2 3 Description Page 3 Post. Ref. Wages Expense Cash Paid two weeks’ wages. 51 11 Cash Fees Earned Received fees from customers. 11 41 Accounts Receivable Fees Earned Recorded fees earned on account. 12 41 Accounts Payable Cash Paid part of amount owed to Executive Supply Co. 21 11 Debit 9 5 0 00 7 3 3 1 0 0 00 7 8 16 10 11 1 7 5 0 00 15 16 9 1 7 5 0 00 10 11 12 14 5 3 1 0 0 00 6 8 13 1 4 16 6 9 Credit 9 5 0 00 2 4 5 28 4 0 0 00 29 12 20 9 0 0 00 13 9 0 0 00 14 15 16 66124_c02_47-100.qxd 11/10/03 6:40 PM Page 64 64 Chapter 2 • Analyzing Transactions •Exhibit 4 (continued) JOURNAL Date 2005 18 Dec. 21 19 20 21 Page 3 Post. Ref. Description Cash Accounts Receivable Received cash from customers on account. 11 12 Supplies Cash Purchased supplies. 14 11 Wages Expense Cash Paid two weeks’ wages. 51 11 Utilities Expense Cash Paid telephone bill. 54 11 Debit Credit 6 5 0 00 18 6 5 0 00 19 20 21 22 22 23 23 24 25 1 4 5 0 00 23 1 4 5 0 00 24 25 26 26 27 27 28 29 1 2 0 0 00 27 1 2 0 0 00 28 29 30 30 31 31 32 33 3 1 0 00 33 JOURNAL Date Description 2005 Dec. 31 Utilities Expense Cash Paid electric bill. 3 1 2 Page 4 Post. Ref. 54 11 Debit 2 2 5 00 6 7 10 11 4 31 Cash Fees Earned Received fees from customers. 11 41 31 Accounts Receivable Fees Earned Recorded fees earned on account. 12 41 31 Chris Clark, Drawing Cash Chris Clark withdrew cash for personal use. 32 11 2 8 7 0 00 14 15 16 5 2 8 7 0 00 6 7 8 1 1 2 0 00 9 1 1 2 0 00 10 11 12 13 1 3 8 9 Credit 2 2 5 00 2 4 5 31 3 1 0 00 32 12 2 0 0 0 00 13 2 0 0 0 00 14 15 16 66124_c02_47-100.qxd 11/10/03 6:40 PM Page 65 Chapter 2 • Analyzing Transactions •Exhibit 4 (continued) LEDGER ACCOUNT Cash Date Item 2005 1 5 18 30 30 30 Dec. 1 1 1 6 11 13 16 20 21 23 27 31 31 31 31 ACCOUNT NO. 11 Post. Ref. 1 1 1 1 1 2 2 2 2 2 2 3 3 3 3 3 3 3 4 4 4 Nov. Balance Debit Credit 25 0 0 0 00 20 0 0 0 00 7 5 0 0 00 3 6 5 0 00 9 5 0 00 2 0 0 0 00 2 4 0 0 00 8 0 0 00 3 6 0 00 1 8 0 00 4 0 0 00 9 5 0 00 3 1 0 0 00 9 0 0 00 6 5 0 00 1 4 5 0 00 1 2 0 0 00 3 1 0 00 2 2 5 00 2 8 7 0 00 2 0 0 0 00 ACCOUNT Accounts Receivable Date Item 2005 Post. Ref. 3 3 4 Dec. 16 21 31 Date Nov. 10 30 Dec. 23 Item Credit 25 0 0 0 00 5 0 0 0 00 12 5 0 0 00 8 8 5 0 00 7 9 0 0 00 5 9 0 0 00 3 5 0 0 00 2 7 0 0 00 3 0 6 0 00 2 8 8 0 00 2 4 8 0 00 1 5 3 0 00 4 6 3 0 00 3 7 3 0 00 4 3 8 0 00 2 9 3 0 00 1 7 3 0 00 1 4 2 0 00 1 1 9 5 00 4 0 6 5 00 2 0 6 5 00 ACCOUNT NO. 12 Balance Debit Credit 1 7 5 0 00 6 5 0 00 1 1 2 0 00 ACCOUNT Supplies 2005 Debit Debit Credit 1 7 5 0 00 1 1 0 0 00 2 2 2 0 00 ACCOUNT NO. 14 Post. Ref. 1 1 3 Balance Debit Credit 1 3 5 0 00 8 0 0 00 1 4 5 0 00 Debit 1 3 5 0 00 5 5 0 00 2 0 0 0 00 Credit 65 66124_c02_47-100.qxd 11/10/03 6:40 PM Page 66 66 Chapter 2 • Analyzing Transactions •Exhibit 4 (continued) ACCOUNT Prepaid Insurance Date 2005 Dec. Item Balance Post. Ref. Debit 2 1 ACCOUNT NO. 15 Credit 2 4 0 0 00 Date Item ACCOUNT NO. 17 Balance Post. Ref. 1 Nov. 5 Debit Credit 20 0 0 0 00 Date Dec. Item Post. Ref. 2 4 Date Item 2005 1 1 2 2 3 Nov. 10 30 Dec. 4 11 20 Balance Debit Credit 1 8 0 0 00 Date 2005 Dec. 1 Item 2 Debit Credit 1 8 0 0 00 ACCOUNT NO. 21 Balance Debit Credit Debit 1 3 5 0 00 Credit 1 3 5 0 00 4 0 0 00 2 2 0 0 00 1 8 0 0 00 9 0 0 00 9 5 0 00 1 8 0 0 00 4 0 0 00 9 0 0 00 ACCOUNT Unearned Rent Post. Ref. Credit ACCOUNT NO. 18 ACCOUNT Accounts Payable Post. Ref. Debit 20 0 0 0 00 ACCOUNT Office Equipment 2005 Credit 2 4 0 0 00 ACCOUNT Land 2005 Debit ACCOUNT NO. 23 Balance Debit Credit 3 6 0 00 Debit Credit 3 6 0 00 66124_c02_47-100.qxd 11/10/03 6:41 PM Page 67 Chapter 2 • Analyzing Transactions •Exhibit 4 (continued) ACCOUNT Chris Clark, Capital Date Item 2005 Post. Ref. ACCOUNT NO. 31 Balance Debit 1 Nov. 1 Credit 25 0 0 0 00 ACCOUNT Chris Clark, Drawing Date Item 2005 Nov. 30 Dec. 31 Post. Ref. 2 4 Date Item 2005 Debit Credit 2 0 0 0 00 2 0 0 0 00 Date Item 2005 Nov. 30 Dec. 13 27 1 3 3 Date 2005 Nov. 30 Dec. 1 Item 1 2 Credit ACCOUNT NO. 41 Balance Debit Credit Debit 7 5 0 0 00 3 1 0 0 00 1 7 5 0 00 2 8 7 0 00 1 1 2 0 00 Credit 7 5 0 0 00 10 6 0 0 00 12 3 5 0 00 15 2 2 0 00 16 3 4 0 00 ACCOUNT NO. 51 Balance Debit Credit 2 1 2 5 00 9 5 0 00 1 2 0 0 00 Debit Credit 2 1 2 5 00 3 0 7 5 00 4 2 7 5 00 ACCOUNT Rent Expense Post. Ref. Debit 2 0 0 0 00 4 0 0 0 00 ACCOUNT Wages Expense Post. Ref. 25 0 0 0 00 Balance 1 3 3 4 4 Nov. 18 Dec. 16 16 31 31 Credit ACCOUNT NO. 32 ACCOUNT Fees Earned Post. Ref. Debit ACCOUNT NO. 52 Balance Debit 8 0 0 00 8 0 0 00 Credit Debit 8 0 0 00 1 6 0 0 00 Credit 67 66124_c02_47-100.qxd 11/10/03 6:41 PM Page 68 68 Chapter 2 • Analyzing Transactions •Exhibit 4 (concluded) ACCOUNT Utilities Expense Date Item 2005 Nov. 30 Dec. 31 31 Post. Ref. 1 3 4 ACCOUNT NO. 54 Balance Debit Credit 4 5 0 00 3 1 0 00 2 2 5 00 Item 2005 Post. Ref. 1 Nov. 30 ACCOUNT NO. 55 Balance Debit Credit 8 0 0 00 2005 Nov. 30 Dec. 6 Item Post. Ref. 1 2 Debit Credit 8 0 0 00 ACCOUNT Miscellaneous Expense Date Credit 4 5 0 00 7 6 0 00 9 8 5 00 ACCOUNT Supplies Expense Date Debit ACCOUNT NO. 59 Balance Debit 2 7 5 00 1 8 0 00 Credit Debit Credit 2 7 5 00 4 5 5 00 Trial Balance objective 5 Prepare a trial balance and explain how it can be used to discover errors. If you incorrectly record $1,000 received on account as a debit to Cash and a credit to Accounts Payable, will the trial balance totals be equal? Yes. The proof of the equality of the How can you be sure that you have debit and credit balances is called not made an error in posting the deba trial balance because a “trial” is its and credits to the ledger? One way a process of proving or testing. is to determine the equality of the debits and credits in the ledger. This equality should be proved at the end of each accounting period, if not more often. Such a proof, called a trial balance, may be in the form of a computer printout or in the form shown in Exhibit 5. The first step in preparing the trial balance is to determine the balance of each account in the ledger. When the standard account form is used, the balance of each account appears in the balance column on the same line as the last posting to the account. The trial balance does not provide complete proof of the accuracy of the ledger. It indicates only that the debits and the credits are equal. This proof is of value, however, because errors often affect the equality of debits and credits. If the two totals of a trial balance are not equal, an error has occurred. In the next section of this chapter, we will discuss procedures for discovering and correcting errors. 66124_c02_47-100.qxd 11/10/03 6:41 PM Page 69 Chapter 2 • Analyzing Transactions •Exhibit 5 69 Trial Balance NetSolutions Trial Balance December 31, 2005 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscelleous Expense 2 0 6 5 00 2 2 2 0 00 2 0 0 0 00 2 4 0 0 00 20 0 0 0 00 1 8 0 0 00 9 0 0 00 3 6 0 00 25 0 0 0 00 4 0 0 0 00 16 3 4 0 00 4 2 7 5 00 1 6 0 0 00 9 8 5 00 8 0 0 00 4 5 5 00 42 6 0 0 00 42 6 0 0 00 Discovery and Correction of Errors objective 6 Discover errors in recording transactions and correct them. Errors will sometimes occur in journalizing and posting transactions. In some cases, however, an error might not be significant enough to affect the decisions of management or others. In such cases, the materiality concept implies that the error may be treated in the easiest possible way. For example, an error of a few dollars in recording an asset as an expense for a business with millions of dollars in assets would be considered immaterial, and a correction would not be necessary. In the remaining paragraphs, we assume that errors discovered are material and should be corrected. Discovery of Errors Many large corporations such as Microsoft and Quaker Oats round the figures in their financial statements to millions of dollars. As mentioned previously, preparing the trial balance is one of the primary ways to discover errors in the ledger. However, it indicates only that the debits and credits are equal. If the two totals of the trial balance are not equal, it is probably due to one or more of the errors described in Exhibit 6. Among the types of errors that will not cause the trial balance totals to be unequal are the following: 1. Failure to record a transaction or to post a transaction. 2. Recording the same erroneous amount for both the debit and the credit parts of a transaction. 3. Recording the same transaction more than once. 4. Posting a part of a transaction correctly as a debit or credit but to the wrong account. 66124_c02_47-100.qxd 11/10/03 6:41 PM Page 70 70 Chapter 2 • Analyzing Transactions •Exhibit 6 Errors Causing Unequal Trial Balance Column incorrectly added. Trial balance preparation errors Amount incorrectly entered on trial balance. Balance entered in wrong column or omitted. Balance incorrectly computed. Errors Account balance errors Balance entered in wrong column of account. Wrong amount posted to an account. Posting errors Debit posted as credit, or vice versa. Debit or credit posting omitted. What type of error occurs when $14,500 is recorded as $15,400? A transposition. It is obvious that care should be used in recording transactions in the journal and in posting to the accounts. The need for accuracy in determining account balances and reporting them on the trial balance is also evident. Errors in the accounts may be discovered in various ways: (1) through audit procedures, (2) by looking at the trial balance or (3) by chance. If the two trial balance totals are not equal, the amount of the difference between the totals should be determined before searching for the error. The amount of the difference between the two totals of a trial balance sometimes gives a clue as to the nature of the error or where it occurred. For example, a difference of 10, 100, or 1,000 between two totals is often the result of an error in addition. A difference between totals can also be due to omitting a debit or a credit posting. If the difference can be evenly divided by 2, the error may be due to the posting of a debit as a credit, or vice versa. For example, if the debit total is $20,640 and the credit total is $20,236, the difference of $404 may indicate that a credit posting of $404 was omitted or that a credit of $202 was incorrectly posted as a debit. Two other common types of errors are known as transpositions and slides. A transposition occurs when the order of the digits is changed mistakenly, such as writing $542 as $452 or $524. In a slide, the entire number is mistakenly moved one or more spaces to the right or the left, such as writing $542.00 as $54.20 or $5,420.00. If an error of either type has occurred and there are no other errors, the difference between the two trial balance totals can be evenly divided by 9. If an error is not revealed by the trial balance, the steps in the accounting process must be retraced, beginning with the last step and working back to the entries in the journal. Usually, errors causing the trial balance totals to be unequal will be discovered before all of the steps are retraced. Correction of Errors The procedures used to correct an error in journalizing or posting vary according to the nature of the error and when the error is discovered. These procedures are summarized in Exhibit 7. 66124_c02_47-100.qxd 11/10/03 6:41 PM Page 71 71 Chapter 2 • Analyzing Transactions •Exhibit 7 Procedures for Correcting Errors Error Correction Procedure 1. Journal entry is incorrect but not posted. Draw a line through the error and insert correct title or amount. 2. Journal entry is correct but posted incorrectly. Draw a line through the error and post correctly. 3. Journal entry is incorrect and posted. Journalize and post a correcting entry. Correcting the first two types of errors shown in Exhibit 7 involves simply drawing a line through the error and inserting the correct title or amount. Usually, the person making corrections initials the correction in case questions arise later. Correcting the third type of error in Exhibit 7 is more complex. To illustrate, assume that on May 5 a $12,500 purchase of office equipment on account was incorrectly journalized and posted as a debit to Supplies and a credit to Accounts Payable for $12,500. This posting of the incorrect entry is shown in the following T accounts. Supplies Incorrect: Accounts Payable 12,500 12,500 Before making a correcting entry, it is best to determine the debit(s) and credit(s) that should have been recorded. These are shown in the following T accounts. Office Equipment Correct: Accounts Payable 12,500 12,500 Comparing the two sets of T accounts shows that the incorrect debit to Supplies may be corrected by debiting Office Equipment for $12,500 and crediting Supplies for $12,500. The following correcting entry is then journalized and posted: Entry to Correct Error: 18 May 19 20 21 22 31 Office Equipment Supplies To correct erroneous debit to Supplies on May 5. See invoice from Bell Office Equipment Co. 18 14 12 5 0 0 00 18 12 5 0 0 00 19 20 21 22 Financial Analysis and Interpretation objective 7 Use horizontal analysis to compare financial statements from different periods. A single item appearing in a financial statement is often useful in interpreting the financial results of a business. However, comparing this item in a current statement with the same item in prior statements often makes the financial information more useful. Horizontal analysis is the term used to describe such comparisons. In horizontal analysis, the amount of each item on the current financial statements is compared with the same item on one or more earlier statements. The increase or decrease in the amount of the item is computed, together with the percent of increase or decrease. When two statements are being compared, the earlier statement is used as the base for computing the amount and the percent of change. 66124_c02_47-100.qxd 11/10/03 6:41 PM Page 72 72 Chapter 2 • Analyzing Transactions To illustrate, the horizontal analysis of two income statements for J. Holmes, Attorney-at-Law, is shown in Exhibit 8. Exhibit 8 indicates both favorable and unfavorable trends affecting the income statement of J. Holmes, Attorney-at-Law. The increase in fees earned is a favorable trend, as is the decrease in supplies expense. Unfavorable trends include the increase in wages expense, utilities expense, and miscellaneous expense. These expenses increased faster than the increase in revenues, with total operating expenses increasing by 30.6%. Overall, net income increased by $15,800, or 19.9%, a favorable trend. The significance of the various increases and decreases in the revenue and expense items in Exhibit 8 should be investigated to see if operations could be further improved. For example, the increase in utilities expense of 38.9% was the result of renting additional office space for use by a part-time law student in performing paralegal services. This explains the increase in rent expense of 25% and the increase in wages expense of 33.3%. The increase in revenues of 25% reflects the fees generated by the new paralegal. The preceding example illustrates how horizontal analysis can be useful in interpreting and analyzing financial statements. Horizontal analyses similar to that shown in Exhibit 8 can also be performed for the balance sheet, the statement of owner’s equity, and the statement of cash flows. •Exhibit 8 Horizontal Analysis of Income Statement J. Holmes, Attorney-at-Law Income Statement For the Years Ended December 31, 2005 and 2006 Increase (Decrease) 2006 Fees earned Operating expenses: Wages expense Rent expense Utilities expense Supplies expense Miscellaneous expense Total operating expenses Net income 2005 Amount Percent $187,500 $150,000 $37,500 25.0%* $ 60,000 15,000 12,500 2,700 2,300 $ 92,500 $ 95,000 $ 45,000 12,000 9,000 3,000 1,800 $ 70,800 $ 79,200 $15,000 3,000 3,500 (300) 500 $21,700 $15,800 33.3% 25.0% 38.9% (10.0)% 27.8% 30.6% 19.9% *$37,500 Ϭ $150,000 SPOTLIGHT ON STRATEGY GOT THE FLU? WHY NOT CHEW SOME GUM? F acing a slumping market for sugared chewing gum, such as Juicy Fruit and Doublemint, Wm. J. Wrigley Jr. Company is reinventing itself with a strategy to expand its product lines and introduce new chewing gum applications. Wrigley’s new products include sugarless breath mints and more powerful flavored mint chewing gum, like Extra Polar Ice. In addition, Wrigley is experimenting with health-care applications of chewing gum. Wrigley’s Health Care Division has already developed Surpass, an antacid chewing gum to compete with Rolaids and Mylanta. In addition, Wrigley is experimenting with a cold-relief chewing gum and a gum that would provide dental benefits, such as whitening teeth and reducing plaque. Given that the U.S. population is aging, the company figures that people might prefer chewing gum to taking pills for sore throats, colds, or the flu. The effects of these new strategic initiatives will ultimately be reflected in Wrigley’s financial statements. Source: Adapted from “A Young Heir Has New Plans at Old Company,” by David Barboza, The New York Times, August 28, 2001. 66124_c02_47-100.qxd 11/10/03 6:41 PM Page 73 Chapter 2 • Analyzing Transactions 73 Key Points 1 Explain why accounts are used to record and summarize the effects of transactions on financial statements. The record used for recording individual transactions is an account. A group of accounts is called a ledger. The system of accounts that make up a ledger is called a chart of accounts. The accounts are numbered and listed in the order in which they appear in the balance sheet and the income statement. 2 Describe the characteristics of an account. The simplest form of an account, a T account, has three parts: (1) a title, which is the name of the item recorded in the account; (2) a left side, called the debit side; (3) a right side, called the credit side. Amounts entered on the left side of an account, regardless of the account title, are called debits to the account. Amounts entered on the right side of an account are called credits. Periodically, the debits in an account are added, the credits in the account are added, and the balance of the account is determined. 3 List the rules of debit and credit and the normal balances of accounts. General rules of debit and credit have been established for recording increases or decreases in asset, liability, owner’s equity, revenue, ex- pense, and drawing accounts. Each transaction is recorded so that the sum of the debits is always equal to the sum of the credits. Transactions are initially entered in a record called a journal. The sum of the increases recorded in an account is usually equal to or greater than the sum of the decreases recorded in the account. For this reason, the normal balance of an account is indicated by the side of the account (debit or credit) that receives the increases. The rules of debit and credit and normal account balances are summarized in the following table: Increase (Normal Balance) Balance sheet accounts: Asset Liability Owner’s Equity: Capital Drawing Income statement accounts: Revenue Expense 4 Decrease Debit Credit Credit Debit Credit Debit Debit Credit Credit Debit Debit Credit Analyze and summarize the financial statement effects of transactions. Transactions are analyzed by determining whether: (1) an asset, liability, owner’s equity, revenue, or expense account is affected, (2) each account affected increases or decreases, and (3) each increase or decrease is recorded as a debit or a credit. A journal is used for recording the transaction initially. The journal entries are periodically posted to the accounts. 5 Prepare a trial balance and explain how it can be used to discover errors. A trial balance is prepared by listing the accounts from the ledger and their balances. If the two totals of the trial balance are not equal, an error has occurred. 6 Discover errors in recording transactions and correct them. 7 Use horizontal analysis to compare financial statements from different periods. Errors may be discovered (1) by audit procedures, (2) by looking at the trial balance or (3) by chance. The procedures for correcting errors are summarized in Exhibit 7. In horizontal analysis, the amount of each item on the current financial statements is compared with the same item on one or more earlier statements. The increase or decrease in the amount of the item is computed, together with the percent of increase or decrease. Key Terms account (48) assets (48) balance of the account (50) chart of accounts (48) credits (50) debits (49) double-entry accounting (53) drawing (49) expenses (49) horizontal analysis (71) journal (51) journal entry (51) journalizing (51) ledger (48) liabilities (48) materiality concept (69) owner’s equity (48) posting (55) revenues (49) slide (70) T account (49) transposition (70) trial balance (68) two-column journal (55) unearned revenue (58) 66124_c02_47-100.qxd 11/10/03 6:41 PM Page 74 74 Chapter 2 • Analyzing Transactions Illustrative Problem J. F. Outz, M.D., has been practicing as a cardiologist for three years. During April, 2005, Outz completed the following transactions in her practice of cardiology. April 1. 3. 5. 8. 9. 12. 17. 20. 24. 27. 30. 30. 30. 30. 30. Paid office rent for April, $800. Purchased equipment on account, $2,100. Received cash on account from patients, $3,150. Purchased X-ray film and other supplies on account, $245. One of the items of equipment purchased on April 3 was defective. It was returned with the permission of the supplier, who agreed to reduce the account for the amount charged for the item, $325. Paid cash to creditors on account, $1,250. Paid cash for renewal of a six-month property insurance policy, $370. Discovered that the balances of the cash account and the accounts payable account as of April 1 were overstated by $200. A payment of that amount to a creditor in March had not been recorded. Journalize the $200 payment as of April 20. Paid cash for laboratory analysis, $545. Paid cash from business bank account for personal and family expenses, $1,250. Recorded the cash received in payment of services (on a cash basis) to patients during April, $1,720. Paid salaries of receptionist and nurses, $1,725. Paid various utility expenses, $360. Recorded fees charged to patients on account for services performed in April, $5,145. Paid miscellaneous expenses, $132. Outz’s account titles, numbers, and balances as of April 1 (all normal balances) are listed as follows: Cash, 11, $4,123; Accounts Receivable, 12, $6,725; Supplies, 13, $290; Prepaid Insurance, 14, $465; Equipment, 18, $19,745; Accounts Payable, 22, $765; J. F. Outz, Capital, 31, $30,583; J. F. Outz, Drawing, 32; Professional Fees, 41; Salary Expense, 51; Rent Expense, 53; Laboratory Expense, 55; Utilities Expense, 56; Miscellaneous Expense, 59. Instructions 1. Open a ledger of standard four-column accounts for Dr. Outz as of April 1. Enter the balances in the appropriate balance columns and place a check mark () in the posting reference column. (Hint: Verify the equality of the debit and credit balances in the ledger before proceeding with the next instruction.) 2. Journalize each transaction in a two-column journal. 3. Post the journal to the ledger, extending the month-end balances to the appropriate balance columns after each posting. 4. Prepare a trial balance as of April 30. 66124_c02_47-100.qxd 11/10/03 6:42 PM Page 75 75 Chapter 2 • Analyzing Transactions Solution 2. and 3. JOURNAL Date 2005 1 April 1 2 3 Page 27 Post. Ref. Description Rent Expense Cash Paid office rent for April. 53 11 Equipment Accounts Payable Purchased equipment on account. 18 22 Cash Accounts Receivable Received cash on account. 11 12 Supplies Accounts Payable Purchased supplies. 13 22 Accounts Payable Equipment Returned defective equipment. 22 18 Accounts Payable Cash Paid creditors on account. 22 11 Prepaid Insurance Cash Renewed 6-month property policy. 14 11 Accounts Payable Cash Recorded March payment to creditor. 22 11 Debit Credit 8 0 0 00 1 8 0 0 00 2 3 4 4 3 5 6 7 2 1 0 0 00 5 2 1 0 0 00 6 7 8 8 5 9 10 11 3 1 5 0 00 9 3 1 5 0 00 10 11 12 12 8 13 14 15 2 4 5 00 13 2 4 5 00 14 15 16 16 9 17 18 19 3 2 5 00 17 3 2 5 00 18 19 20 20 12 21 22 23 1 2 5 0 00 21 1 2 5 0 00 22 23 24 24 17 25 26 27 3 7 0 00 25 3 7 0 00 26 27 28 28 20 29 30 31 32 2 0 0 00 29 2 0 0 00 30 31 32 33 33 JOURNAL Date 2005 1 April 24 2 3 4 Description Laboratory Expense Cash Paid for laboratory analysis. Page 28 Post. Ref. 55 11 Debit 5 4 5 00 Credit 1 5 4 5 00 2 3 4 66124_c02_47-100.qxd 11/10/03 6:42 PM Page 76 76 Chapter 2 • Analyzing Transactions JOURNAL Date 2005 5 April 27 6 7 8 Page 28 Post. Ref. Description J. F. Outz, Drawing Cash J. F. Outz withdrew cash for personal use. 32 11 Cash Professional Fees Received fees from patients. 11 41 Salary Expense Cash Paid salaries. 51 11 Utilities Expense Cash Paid utilities. 56 11 Accounts Receivable Professional Fees Recorded fees earned on account. 12 41 Miscellaneous Expense Cash Paid expenses. 59 11 Debit Credit 1 2 5 0 00 5 1 2 5 0 00 6 7 8 9 9 30 10 11 12 1 7 2 0 00 10 1 7 2 0 00 11 12 13 13 30 14 15 16 1 7 2 5 00 14 1 7 2 5 00 15 16 17 17 30 18 19 20 3 6 0 00 18 3 6 0 00 19 20 21 21 30 22 23 24 5 1 4 5 00 22 5 1 4 5 00 23 24 25 25 30 26 27 28 1 3 2 00 26 1 3 2 00 27 28 1. and 3. ACCOUNT Cash Date 2005 April Item 1 Balance 1 5 12 17 20 24 27 30 30 30 30 ACCOUNT NO. 11 Post. Ref. Balance Debit Credit ✓ 27 27 27 27 27 28 28 28 28 28 28 8 0 0 00 3 1 5 0 00 1 2 5 0 00 3 7 0 00 2 0 0 00 5 4 5 00 1 2 5 0 00 1 7 2 0 00 1 7 2 5 00 3 6 0 00 1 3 2 00 Debit 4 1 2 3 00 3 3 2 3 00 6 4 7 3 00 5 2 2 3 00 4 8 5 3 00 4 6 5 3 00 4 1 0 8 00 2 8 5 8 00 4 5 7 8 00 2 8 5 3 00 2 4 9 3 00 2 3 6 1 00 Credit 66124_c02_47-100.qxd 11/10/03 6:42 PM Page 77 Chapter 2 • Analyzing Transactions ACCOUNT Accounts Receivable Date 2005 April Item 1 Balance 5 30 Post. Ref. ACCOUNT NO. 12 Balance Debit Credit ✓ 27 28 3 1 5 0 00 5 1 4 5 00 ACCOUNT Supplies Date 2005 April 1 8 Item Balance Date Post. Ref. April 1 Balance 17 Debit Credit ✓ Post. Ref. Date April 1 3 9 Item Balance Post. Ref. Balance Debit Credit Date 2005 April Item 1 Balance 3 8 9 12 20 Balance Debit Credit 2 1 0 0 00 3 2 5 00 Debit Credit 19 7 4 5 00 21 8 4 5 00 21 5 2 0 00 ACCOUNT NO. 22 Balance Debit Credit ✓ 27 27 27 27 27 Credit ACCOUNT NO. 18 ACCOUNT Accounts Payable Post. Ref. Debit 4 6 5 00 8 3 5 00 3 7 0 00 ✓ 27 27 Credit ACCOUNT NO. 14 ✓ 27 Debit 2 9 0 00 5 3 5 00 2 4 5 00 ACCOUNT Equipment 2005 6 7 2 5 00 3 5 7 5 00 8 7 2 0 00 Balance 27 Item Credit ACCOUNT NO. 13 ACCOUNT Prepaid Insurance 2005 Debit 2 1 0 0 00 2 4 5 00 3 2 5 00 1 2 5 0 00 2 0 0 00 Debit Credit 7 6 5 00 2 8 6 5 00 3 1 1 0 00 2 7 8 5 00 1 5 3 5 00 1 3 3 5 00 77 66124_c02_47-100.qxd 11/10/03 6:42 PM Page 78 78 Chapter 2 • Analyzing Transactions ACCOUNT J. F. Outz, Capital Date 2005 April 1 Item Balance Post. Ref. ACCOUNT NO. 31 Balance Debit Credit Date Item Post. Ref. 28 April 27 3 0 5 8 3 00 ACCOUNT NO. 32 Balance Debit Credit 1 2 5 0 00 Date Item Post. Ref. Balance Debit Credit Date Item 2005 28 April 30 Date Item 2005 Debit Credit 1 7 2 5 00 Date 2005 April 24 Item 28 Debit Credit 1 7 2 5 00 ACCOUNT NO. 53 Balance Debit Credit 8 0 0 00 Debit Credit 8 0 0 00 ACCOUNT Laboratory Expense Post. Ref. 1 7 2 0 00 6 8 6 5 00 Balance 27 April 1 Credit ACCOUNT NO. 51 ACCOUNT Rent Expense Post. Ref. Debit 1 7 2 0 00 5 1 4 5 00 ACCOUNT Salary Expense Post. Ref. Credit ACCOUNT NO. 41 28 28 April 30 30 Debit 1 2 5 0 00 ACCOUNT Professional Fees 2005 Credit ✓ ACCOUNT J. F. Outz, Drawing 2005 Debit ACCOUNT NO. 55 Balance Debit 5 4 5 00 Credit Debit 5 4 5 00 Credit 66124_c02_47-100.qxd 11/10/03 6:43 PM Page 79 Chapter 2 • Analyzing Transactions ACCOUNT Utilities Expense Date Item 2005 Post. Ref. 28 April 30 ACCOUNT NO. 56 Balance Debit Credit 3 6 0 00 Date Item 2005 April 30 28 Debit Credit 3 6 0 00 ACCOUNT Miscellaneous Expense Post. Ref. 79 ACCOUNT NO. 59 Balance Debit Credit 1 3 2 00 Debit Credit 1 3 2 00 4. J. F. Outz, M.D. Trial Balance April 30, 2005 Cash Accounts Receivable Supplies Prepaid Insurance Equipment Accounts Payable J. F. Outz, Capital J. F. Outz, Drawing Professional Fees Salary Expense Rent Expense Laboratory Expense Utilities Expense Miscellaneous Expense 2 3 6 1 00 8 7 2 0 00 5 3 5 00 8 3 5 00 21 5 2 0 00 1 3 3 5 00 30 5 8 3 00 1 2 5 0 00 6 8 6 5 00 1 7 2 5 00 8 0 0 00 5 4 5 00 3 6 0 00 1 3 2 00 38 7 8 3 00 Self-Examination Questions 1. A debit may signify: A. an increase in an asset account. B. a decrease in an asset account. C. an increase in a liability account. D. an increase in the owner’s capital account. 38 7 8 3 00 (Answers at End of Chapter) 2. The type of account with a normal credit balance is: A. an asset. C. a revenue. B. drawing. D. an expense. 66124_c02_47-100.qxd 11/10/03 6:43 PM Page 80 80 Chapter 2 • Analyzing Transactions 3. A debit balance in which of the following accounts would indicate a likely error? A. Accounts Receivable B. Cash C. Fees Earned D. Miscellaneous Expense 4. The receipt of cash from customers in payment of their accounts would be recorded by a: A. debit to Cash; credit to Accounts Receivable. B. debit to Accounts Receivable; credit to Cash. C. debit to Cash; credit to Accounts Payable. D. debit to Accounts Payable; credit to Cash. 5. The form listing the titles and balances of the accounts in the ledger on a given date is the: A. income statement. B. balance sheet. C. statement of owner’s equity. D. trial balance. C lass Discussion Questions 1. What is the difference between an account and a ledger? 2. Do the terms debit and credit signify increase or decrease or can they signify either? Explain. 3. Explain why the rules of debit and credit are the same for liability accounts and owner’s equity accounts. 4. What is the effect (increase or decrease) of a debit to an expense account (a) in terms of owner’s equity and (b) in terms of expense? 5. What is the effect (increase or decrease) of a credit to a revenue account (a) in terms of owner’s equity and (b) in terms of revenue? 6. Kemp Company adheres to a policy of depositing all cash receipts in a bank account and making all payments by check. The cash account as of August 31 has a credit balance of $3,000, and there is no undeposited cash on hand. (a) Assuming no errors occurred during journalizing or posting, what caused this unusual balance? (b) Is the $3,000 credit balance in the cash account an asset, a liability, owner’s equity, a revenue, or an expense? 7. McElwee Company performed services in May for a specific customer, for a fee of $7,500. Payment was received the following June. (a) Was the revenue earned in May or June? (b) What accounts should be debited and credited in (1) May and (2) June? 8. What proof is provided by a trial balance? 9. If the two totals of a trial balance are equal, does it mean that there are no errors in the accounting records? Explain. 10. Assume that a trial balance is prepared with an account balance of $18,950 listed as $18,590 and an account balance of $7,200 listed as $720. Identify the transposition and the slide. 11. Assume that when a purchase of supplies of $1,250 for cash was recorded, both the debit and the credit were journalized and posted as $1,520. (a) Would this error cause the trial balance to be out of balance? (b) Would the trial balance be out of balance if the $1,250 entry had been journalized correctly but the credit to Cash had been posted as $1,520? 12. Assume that Margarita Consulting erroneously recorded the payment of $7,500 of owner withdrawals as a debit to salary expense. (a) How would this error affect the equality of the trial balance? (b) How would this error affect the income statement, statement of owner’s equity, and balance sheet? 13. Assume that Blitzkrieg Realty Co. borrowed $25,000 from First Union Bank and Trust. In recording the transaction, Blitzkrieg erroneously recorded the receipt of $25,000 as a debit to cash, $25,000, and a credit to fees earned, $25,000. (a) How would this error affect the equality of the trial balance? (b) How would this error affect the income statement, statement of owner’s equity, and balance sheet? 66124_c02_47-100.qxd 11/10/03 6:43 PM Page 81 Chapter 2 • Analyzing Transactions 81 14. In journalizing and posting the entry to record the purchase of supplies on account, the accounts receivable account was credited in error. What is the preferred procedure to correct this error? 15. Banks rely heavily upon customers’ deposits as a source of funds. Demand deposits normally pay interest to the customer, who is entitled to withdraw at any time without prior notice to the bank. Checking and NOW (negotiable order of withdrawal) accounts are the most common form of demand deposits for banks. Assume that Kennon Storage has a checking account at Livingston Savings Bank. What type of account (asset, liability, owner’s equity, revenue, expense, drawing) does the account balance of $15,600 represent from the viewpoint of (a) Kennon Storage and (b) Livingston Savings Bank? Remember! If you need additional help, visit South-Western’s Web site. See page 28 for a description of the online and printed materials that are available. http://warren.swlearning.com Answer: Nestlé E xercises EXERCISE 2-1 Chart of accounts Objective 1 The following accounts appeared in recent financial statements of Continental Airlines: Accounts Payable Aircraft Fuel Expense Air Traffic Liability Cargo and Mail Revenue Commissions Flight Equipment Landing Fees Passenger Revenue Purchase Deposits for Flight Equipment Spare Parts and Supplies Identify each account as either a balance sheet account or an income statement account. For each balance sheet account, identify it as an asset, a liability, or owner’s equity. For each income statement account, identify it as a revenue or an expense. EXERCISE 2-2 Chart of accounts Objective 1 Clarendon Interiors is owned and operated by Corey Krum, an interior decorator. In the ledger of Clarendon Interiors, the first digit of the account number indicates its major account classification (1—assets, 2—liabilities, 3—owner’s equity, 4—revenues, 5—expenses). The second digit of the account number indicates the specific account within each of the preceding major account classifications. Match each account number with its most likely account in the list below. The account numbers are 11, 12, 13, 21, 31, 32, 41, 51, 52, and 53. Accounts: Accounts Payable Accounts Receivable Cash Corey Krum, Capital Corey Krum, Drawing Fees Earned Land Miscellaneous Expense Supplies Expense Wages Expense 66124_c02_47-100.qxd 11/10/03 6:43 PM Page 82 82 Chapter 2 • Analyzing Transactions EXERCISE 2-3 Chart of accounts Objective 1 The Inflorescence School is a newly organized business that teaches people how to inspire and influence others. The list of accounts to be opened in the general ledger is as follows: Accounts Payable Accounts Receivable Cash Equipment Fees Earned Millard Fillmore, Capital Millard Fillmore, Drawing Miscellaneous Expense Prepaid Insurance Rent Expense Supplies Supplies Expense Unearned Rent Wages Expense List the accounts in the order in which they should appear in the ledger of The Inflorescence School and assign account numbers. Each account number is to have two digits: the first digit is to indicate the major classification (1 for assets, etc.), and the second digit is to identify the specific account within each major classification (11 for Cash, etc.). EXERCISE 2-4 Identifying transactions Malta Co. is a travel agency. The nine transactions recorded by Malta during February 2006, its first month of operations, are indicated in the following T accounts: Objectives 2, 3 Cash (1) 40,000 (7) 9,500 Equipment (2) (3) (4) (6) (8) 1,800 9,000 3,050 7,500 5,000 (3) 24,000 Accounts Receivable (5) 12,000 (7) 9,500 (8) 5,000 Accounts Payable (6) 7,500 Supplies (2) 1,800 Ira Janke, Drawing Service Revenue (3) 15,000 (5) 12,000 Ira Janke, Capital (9) 1,050 Operating Expenses (1) 40,000 (4) 3,050 (9) 1,050 Indicate for each debit and each credit: (a) whether an asset, liability, owner’s equity, drawing, revenue, or expense account was affected and (b) whether the account was increased (ϩ) or decreased (Ϫ). Present your answers in the following form, with transaction (1) given as an example: Account Debited Transaction Journal entries Type Effect Type Effect (1) EXERCISE 2-5 Account Credited asset ϩ owner’s equity ϩ Based upon the T accounts in Exercise 2-4, prepare the nine journal entries from which the postings were made. Journal entry explanations may be omitted. Objectives 3, 4 EXERCISE 2-6 Trial balance Objective 5 Total Debit Column: $59,500 Based upon the data presented in Exercise 2-4, prepare a trial balance, listing the accounts in their proper order. 66124_c02_47-100.qxd 11/10/03 6:43 PM Page 83 Chapter 2 • Analyzing Transactions EXERCISE 2-7 Normal entries for accounts Objective 3 During the month, Orion Labs Co. has a substantial number of transactions affecting each of the following accounts. State for each account whether it is likely to have (a) debit entries only, (b) credit entries only, or (c) both debit and credit entries. 1. 2. 3. 4. EXERCISE 2-8 Normal balances of accounts Objective 3 EXERCISE 2-9 Rules of debit and credit 83 Accounts Payable Accounts Receivable Cash Fees Earned 5. Heidi Ibach, Drawing 6. Insurance Expense 7. Supplies Expense Identify each of the following accounts of Universal Services Co. as asset, liability, owner’s equity, revenue, or expense, and state in each case whether the normal balance is a debit or a credit. a. b. c. d. e. Accounts Payable Accounts Receivable Cash Cindy Yost, Capital Cindy Yost, Drawing f. g. h. i. j. Fees Earned Office Equipment Rent Expense Supplies Wages Expense The following table summarizes the rules of debit and credit. For each of the items (a) through (l), indicate whether the proper answer is a debit or a credit. Objective 3 Increase Balance sheet accounts: Asset Liability Owner’s Equity: Capital Drawing Income statement accounts: Revenue Expense EXERCISE 2-10 Capital account balance Objectives 2, 3 EXERCISE 2-11 Cash account balance Objectives 2, 3 EXERCISE 2-12 Account balances Objectives 2, 3 c. $20,800 Decrease Normal Balance Debit (b) (a) (c) Debit (d) Credit (g) (e) Credit (f) (h) Credit (k) (i) (l) (j) Debit As of January 1, Seth Fite, Capital, had a credit balance of $10,500. During the year, withdrawals totaled $4,000 and the business incurred a net loss of $8,000. a. Calculate the balance of Seth Fite, Capital, as of the end of the year. b. Assuming that there have been no recording errors, will the balance sheet prepared at December 31 balance? Explain. During the month, Wembley Co. received $212,500 in cash and paid out $183,750 in cash. a. Do the data indicate that Wembley Co. earned $28,750 during the month? Explain. b. If the balance of the cash account is $36,300 at the end of the month, what was the cash balance at the beginning of the month? a. On April 1, the cash account balance was $7,850. During April, cash receipts totaled $41,850 and the April 30 balance was $9,150. Determine the cash payments made during April. b. On July 1, the accounts receivable account balance was $15,500. During July, $61,000 was collected from customers on account. Assuming the July 31 balance was $17,500, determine the fees billed to customers on account during July. c. During January, $40,500 was paid to creditors on account and purchases on account were $57,700. Assuming the January 31 balance of Accounts Payable was $38,000, determine the account balance on January 1. 66124_c02_47-100.qxd 11/10/03 6:43 PM Page 84 84 Chapter 2 • Analyzing Transactions EXERCISE 2-13 Transactions Objectives 3, 4 The Zuni Co. has the following accounts in its ledger: Cash; Accounts Receivable; Supplies; Office Equipment; Accounts Payable; Gayle McCall, Capital; Gayle McCall, Drawing; Fees Earned; Rent Expense; Advertising Expense; Utilities Expense; Miscellaneous Expense. Journalize the following selected transactions for August 2005 in a two-column journal. Journal entry explanations may be omitted. August 1. 2. 4. 6. 8. 12. 20. 25. 30. 31. 31. EXERCISE 2-14 Journalizing and posting Objectives 3, 4 Paid rent for the month, $1,500. Paid advertising expense, $700. Paid cash for supplies, $1,050. Purchased office equipment on account, $7,500. Received cash from customers on account, $3,600. Paid creditor on account, $1,150. Withdrew cash for personal use, $1,000. Paid cash for repairs to office equipment, $500. Paid telephone bill for the month, $195. Fees earned and billed to customers for the month, $10,150. Paid electricity bill for the month, $380. On October 27, 2006, Lintel Co. purchased $1,320 of supplies on account. In Lintel Co.’s chart of accounts, the supplies account is No. 15 and the accounts payable account is No. 21. a. Journalize the October 27, 2006 transaction on page 43 of Lintel Co.’s two-column journal. Include an explanation of the entry. b. Prepare a four-column account for Supplies. Enter a debit balance of $585 as of October 1, 2006. Place a check mark () in the posting reference column. c. Prepare a four-column account for Accounts Payable. Enter a credit balance of $6,150 as of October 1, 2006. Place a check mark () in the posting reference column. d. Post the October 27, 2006 transaction to the accounts. EXERCISE 2-15 Transactions and T accounts Objectives 2, 3, 4 The following selected transactions were completed during May of the current year: 1. 2. 3. 4. Billed customers for fees earned, $12,190. Purchased supplies on account, $1,250. Received cash from customers on account, $9,150. Paid creditors on account, $750. a. Journalize the above transactions in a two-column journal, using the appropriate number to identify the transactions. Journal entry explanations may be omitted. b. Post the entries prepared in (a) to the following T accounts: Cash, Supplies, Accounts Receivable, Accounts Payable, Fees Earned. To the left of each amount posted in the accounts, place the appropriate number to identify the transactions. EXERCISE 2-16 Trial balance Objective 5 Total Credit Column: $464,350 The accounts in the ledger of Haleakala Park Co. as of March 31, 2006, are listed in alphabetical order as follows. All accounts have normal balances. The balance of the cash account has been intentionally omitted. Accounts Payable Accounts Receivable Cash Fees Earned Insurance Expense Land Miscellaneous Expense Neil Orzeck, Capital Neil Orzeck, Drawing $ 18,710 37,500 ? 310,000 6,000 85,000 8,900 86,640 20,000 Notes Payable Prepaid Insurance Rent Expense Supplies Supplies Expense Unearned Rent Utilities Expense Wages Expense $ 40,000 3,000 60,000 2,100 7,900 9,000 41,500 175,000 Prepare a trial balance, listing the accounts in their proper order and inserting the missing figure for cash. 66124_c02_47-100.qxd 11/10/03 6:43 PM Page 85 Chapter 2 • Analyzing Transactions EXERCISE 2-17 Effect of errors on trial balance 85 Indicate which of the following errors, each considered individually, would cause the trial balance totals to be unequal: Objective 5 a. A payment of $7,000 for equipment purchased was posted as a debit of $700 to Equipment and a credit of $700 to Cash. b. Payment of a cash withdrawal of $12,000 was journalized and posted as a debit of $21,000 to Salary Expense and a credit of $12,000 to Cash. c. A fee of $1,850 earned and due from a client was not debited to Accounts Receivable or credited to a revenue account, because the cash had not been received. d. A payment of $1,475 to a creditor was posted as a debit of $1,475 to Accounts Payable and a debit of $1,475 to Cash. e. A receipt of $325 from an account receivable was journalized and posted as a debit of $325 to Cash and a credit of $325 to Fees Earned. EXERCISE 2-18 The following preliminary trial balance of Escalade Co., a sports ticket agency, does not balance: Errors in trial balance Objective 5 Escalade Co. Trial Balance December 31, 2006 Total of Credit Column: $181,600 Cash . . . . . . . . . . . . . Accounts Receivable . . Prepaid Insurance . . . . Equipment . . . . . . . . . Accounts Payable . . . . Unearned Rent . . . . . Erin Capelli, Capital . . Erin Capelli, Drawing . Service Revenue . . . . . Wages Expense . . . . . Advertising Expense . . Miscellaneous Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,350 22,100 8,000 57,000 12,980 4,520 82,420 10,000 83,750 42,000 7,200 226,070 1,425 152,675 When the ledger and other records are reviewed, you discover the following: (1) the debits and credits in the cash account total $47,350 and $33,975, respectively; (2) a billing of $2,500 to a customer on account was not posted to the accounts receivable account; (3) a payment of $1,800 made to a creditor on account was not posted to the accounts payable account; (4) the balance of the unearned rent account is $4,250; (5) the correct balance of the equipment account is $75,000; and (6) each account has a normal balance. Prepare a corrected trial balance. EXERCISE 2-19 Effect of errors on trial balance Objective 5 The following errors occurred in posting from a two-column journal: 1. 2. 3. 4. 5. A debit of $1,250 to Supplies was posted twice. A debit of $3,575 to Wages Expense was posted as $3,557. A credit of $4,175 to Accounts Payable was not posted. A debit of $400 to Accounts Payable was posted as a credit. An entry debiting Accounts Receivable and crediting Fees Earned for $6,000 was not posted. 6. A credit of $350 to Cash was posted as $530. 7. A debit of $1,000 to Cash was posted to Miscellaneous Expense. Considering each case individually (i.e., assuming that no other errors had occurred), indicate: (a) by “yes” or “no” whether the trial balance would be out of balance; (b) if answer to (a) is “yes,” the amount by which the trial balance totals would differ; and (c) whether the debit or credit column of the trial balance would have the larger total. Answers should be presented in the following form, with error (1) given as an example: (continued) 66124_c02_47-100.qxd 11/10/03 6:43 PM Page 86 86 Chapter 2 • Analyzing Transactions Error (b) Difference (c) Larger Total 1. EXERCISE 2-20 (a) Out of Balance yes $1,250 debit Identify the errors in the following trial balance. All accounts have normal balances. Errors in trial balance Dinero Co. Trial Balance For the Month Ending January 31, 2006 Objective 5 Total of Credit Column: $125,000 EXERCISE 2-21 Entries to correct errors Objective 6 Cash . . . . . . . . . . . . . . Accounts Receivable . . . Prepaid Insurance . . . . . Equipment . . . . . . . . . . Accounts Payable . . . . . Salaries Payable . . . . . . Susan Appleby, Capital . Susan Appleby, Drawing Service Revenue . . . . . . Salary Expense . . . . . . . Advertising Expense . . . Miscellaneous Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500 16,400 3,600 50,000 1,850 1,250 43,200 6,000 78,700 32,810 7,200 1,490 152,750 152,750 The following errors took place in journalizing and posting transactions: a. A withdrawal of $15,000 by Gerald Owen, owner of the business, was recorded as a debit to Wages Expense and a credit to Cash. b. Rent of $4,500 paid for the current month was recorded as a debit to Rent Expense and a credit to Prepaid Rent. Journalize the entries to correct the errors. Omit explanations. EXERCISE 2-22 Entries to correct errors Objective 6 The following errors took place in journalizing and posting transactions: a. A $550 purchase of supplies on account was recorded as a debit to Miscellaneous Expense and a credit to Prepaid Rent. b. Cash of $3,750 received on account was recorded as a debit to Accounts Payable and a credit to Cash. Journalize the entries to correct the errors. Omit explanations. EXERCISE 2-23 Horizontal analysis of income statement The financial statements for The Home Depot are presented in Appendix E at the end of the text. Objective 7 a. For Home Depot, comparing 2003 with 2002, determine the amount of change in millions and the percent of change for 1. net sales (revenues) and 2. total operating expenses. b. What conclusions can you draw from your analysis of the net sales and the total operating expenses? EXERCISE 2-24 The following data were adapted from the financial statements of Kmart Corporation, prior to its filing for bankruptcy: Horizontal analysis of income statement In millions Objective 7 For years ending January 31 2000 1999 Sales Cost of sales (expense) Selling, general, and administrative expenses Operating income (loss) $37,028 (29,658) (7,415) (45) $35,925 (28,111) (6,514) 1,300 66124_c02_47-100.qxd 11/10/03 6:43 PM Page 87 Chapter 2 • Analyzing Transactions 87 a. Prepare a horizontal analysis for the income statement showing the amount and percent of change in each of the following: 1. Sales 2. Cost of sales 3. Selling, general, and administative expenses 4. Operating income (loss) b. Comment on the results of your horizontal analysis in (a). Problems Series A PROBLEM 2-1A Entries into T accounts and trial balance Objectives 2, 3, 4, 5 3. Total of Debit Column: $39,875 Shaun Wilcox, an architect, opened an office on April 1, 2006. During the month, he completed the following transactions connected with his professional practice: a. Transferred cash from a personal bank account to an account to be used for the business, $17,500. b. Purchased used automobile for $15,300, paying $4,000 cash and giving a note payable for the remainder. c. Paid April rent for office and workroom, $2,200. d. Paid cash for supplies, $660. e. Purchased office and computer equipment on account, $5,200. f. Paid cash for annual insurance policies on automobile and equipment, $1,200. g. Received cash from a client for plans delivered, $3,725. h. Paid cash to creditors on account, $1,800. i. Paid cash for miscellaneous expenses, $235. j. Received invoice for blueprint service, due in May, $650. k. Recorded fee earned on plans delivered, payment to be received in May, $3,500. l. Paid salary of assistant, $1,300. m. Paid cash for miscellaneous expenses, $105. n. Paid installment due on note payable, $200. o. Paid gas, oil, and repairs on automobile for April, $115. Instructions 1. Record the foregoing transactions directly in the following T accounts, without journalizing: Cash; Accounts Receivable; Supplies; Prepaid Insurance; Automobiles; Equipment; Notes Payable; Accounts Payable; Shaun Wilcox, Capital; Professional Fees; Rent Expense; Salary Expense; Blueprint Expense; Automobile Expense; Miscellaneous Expense. To the left of each amount entered in the accounts, place the appropriate letter to identify the transaction. 2. Determine the balances of the T accounts having two or more debits or credits. A memorandum balance should be inserted in accounts having both debits and credits, in the manner illustrated in the chapter. For accounts with entries on one side only (such as Professional Fees), there is no need to insert the memorandum balance in the item column. For accounts containing only a single debit and a single credit (such as Notes Payable), the memorandum balance should be inserted in the appropriate item column. Accounts containing a single entry only (such as Prepaid Insurance) do not need a memorandum balance. 3. Prepare a trial balance for Shaun Wilcox, Architect, as of April 30, 2006. PROBLEM 2-2A Journal entries and trial balance Objectives 2, 3, 4, 5 On March 1, 2006, Tim Cochran established Star Realty, which completed the following transactions during the month: a. Tim Cochran transferred cash from a personal bank account to an account to be used for the business, $12,000. b. Purchased supplies on account, $850. c. Earned sales commissions, receiving cash, $12,600. 66124_c02_47-100.qxd 11/10/03 6:43 PM Page 88 88 Chapter 2 • Analyzing Transactions d. e. f. g. 4. c. $4,920 Paid rent on office and equipment for the month, $2,000. Paid creditor on account, $450. Withdrew cash for personal use, $1,500. Paid automobile expenses (including rental charge) for month, $1,700, and miscellaneous expenses, $375. h. Paid office salaries, $3,000. i. Determined that the cost of supplies used was $605. Instructions 1. Journalize entries for transactions (a) through (i), using the following account titles: Cash; Supplies; Accounts Payable; Tim Cochran, Capital; Tim Cochran, Drawing; Sales Commissions; Rent Expense; Office Salaries Expense; Automobile Expense; Supplies Expense; Miscellaneous Expense. Journal entry explanations may be omitted. 2. Prepare T accounts, using the account titles in (1). Post the journal entries to these accounts, placing the appropriate letter to the left of each amount to identify the transactions. Determine the account balances, after all posting is complete, for all accounts having two or more debits or credits. A memorandum balance should be inserted in accounts having both debits and credits, in the manner illustrated in the chapter. For accounts with entries on one side only, there is no need to insert a memorandum balance in the item column. For accounts containing only a single debit and a single credit, the memorandum balance should be inserted in the appropriate item column. 3. Prepare a trial balance as of March 31, 2006. 4. Determine the following: a. Amount of total revenue recorded in the ledger. b. Amount of total expenses recorded in the ledger. c. Amount of net income for March. PROBLEM 2-3A Journal entries and trial balance Objectives 2, 3, 4, 5 3. Total of Credit Column: $40,880 On July 1, 2006, Leon Cruz established an interior decorating business, Ingres Designs. During the remainder of the month, Leon Cruz completed the following transactions related to the business: July 1. Leon transferred cash from a personal bank account to an account to be used for the business, $18,000. 5. Paid rent for period of July 5 to end of month, $1,500. 10. Purchased a truck for $15,000, paying $5,000 cash and giving a note payable for the remainder. 13. Purchased equipment on account, $4,500. 14. Purchased supplies for cash, $975. 15. Paid annual premiums on property and casualty insurance, $3,000. 15. Received cash for job completed, $4,100. 21. Paid creditor a portion of the amount owed for equipment purchased on July 13, $2,400. 24. Recorded jobs completed on account and sent invoices to customers, $6,100. 26. Received an invoice for truck expenses, to be paid in August, $580. 27. Paid utilities expense, $950. 27. Paid miscellaneous expenses, $315. 29. Received cash from customers on account, $3,420. 30. Paid wages of employees, $2,500. 31. Withdrew cash for personal use, $2,000. Instructions 1. Journalize each transaction in a two-column journal, referring to the following chart of accounts in selecting the accounts to be debited and credited. (Do not insert the account numbers in the journal at this time.) Journal entry explanations may be omitted. 66124_c02_47-100.qxd 11/10/03 6:43 PM Page 89 Chapter 2 • Analyzing Transactions 11 12 13 14 16 18 21 22 Cash Accounts Receivable Supplies Prepaid Insurance Equipment Truck Notes Payable Accounts Payable 31 32 41 51 53 54 55 59 89 Leon Cruz, Capital Leon Cruz, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Truck Expense Miscellaneous Expense 2. Post the journal to a ledger of four-column accounts, inserting appropriate posting references as each item is posted. Extend the balances to the appropriate balance columns after each transaction is posted. 3. Prepare a trial balance for Ingres Designs as of July 31, 2006. PROBLEM 2-4A Journal entries and trial balance Fickle Realty acts as an agent in buying, selling, renting, and managing real estate. The account balances at the end of July 2006 are as follows: 11 Cash 12 Accounts Receivable 13 Prepaid Insurance 14 Office Supplies 16 Land 21 Accounts Payable 22 Unearned Rent 23 Notes Payable 31 Larissa Sanchez, Capital 32 Larissa Sanchez, Drawing 41 Fees Earned 51 Salary and Commission Expense 52 Rent Expense 53 Advertising Expense 54 Automobile Expense 59 Miscellaneous Expense Objectives 2, 3, 4, 5 4. Total of Debit Column: $374,650 31,200 45,750 2,800 1,000 0 5,200 0 0 39,700 16,000 224,000 133,000 17,500 14,300 6,400 950 268,900 268,900 The following business transactions were completed by Fickle Realty during August 2006: Aug. 1. 2. 3. 5. 9. 17. 23. 29. 30. 31. 31. 31. 31. 31. 31. Purchased office supplies on account, $1,760. Paid rent on office for month, $2,500. Received cash from clients on account, $38,720. Paid annual insurance premiums, $3,600. Returned a portion of the office supplies purchased on August 1, receiving full credit for their cost, $240. Paid advertising expense, $3,450. Paid creditors on account, $2,670. Paid miscellaneous expenses, $350. Paid automobile expense (including rental charges for an automobile), $1,360. Discovered an error in computing a commission; received cash from the salesperson for the overpayment, $800. Paid salaries and commissions for the month, $17,400. Recorded revenue earned and billed to clients during the month, $41,900. Purchased land for a future building site for $75,000, paying $10,000 in cash and giving a note payable for the remainder. Withdrew cash for personal use, $2,500. Rented land purchased on August 31 to local university for use as a parking lot during football season (September, October, and November), received advance payment of $1,500. Instructions 1. Record the August 1 balance of each account in the appropriate balance column of a four-column account, write Balance in the item section, and place a check (continued) mark () in the posting reference column. 66124_c02_47-100.qxd 11/10/03 6:43 PM Page 90 90 Chapter 2 • Analyzing Transactions 2. Journalize the transactions for August in a two-column journal. Journal entry explanations may be omitted. 3. Post to the ledger, extending the account balance to the appropriate balance column after each posting. 4. Prepare a trial balance of the ledger as of August 31, 2006. If the working papers correlating with this textbook are not used, omit Problem 2-5A. PROBLEM 2-5A Errors in trial balance Objectives 5, 6 7. Total of Credit Column: $43,338.10 The following records of Cypress TV Repair are presented in the working papers: • Journal containing entries for the period July 1–31. • Ledger to which the July entries have been posted. • Preliminary trial balance as of July 31, which does not balance. Locate the errors, supply the information requested, and prepare a corrected trial balance according to the following instructions. The balances recorded in the accounts as of July 1 and the entries in the journal are correctly stated. If it is necessary to correct any posted amounts in the ledger, a line should be drawn through the erroneous figure and the correct amount inserted above. Corrections or notations may be inserted on the preliminary trial balance in any manner desired. It is not necessary to complete all of the instructions if equal trial balance totals can be obtained earlier. However, the requirements of instructions (6) and (7) should be completed in any event. Instructions 1. Verify the totals of the preliminary trial balance, inserting the correct amounts in the schedule provided in the working papers. 2. Compute the difference between the trial balance totals. 3. Compare the listings in the trial balance with the balances appearing in the ledger, and list the errors in the space provided in the working papers. 4. Verify the accuracy of the balance of each account in the ledger, and list the errors in the space provided in the working papers. 5. Trace the postings in the ledger back to the journal, using small check marks to identify items traced. Correct any amounts in the ledger that may be necessitated by errors in posting, and list the errors in the space provided in the working papers. 6. Journalize as of July 31 the payment of $210.00 for gas and electricity. The bill had been paid on July 31 but was inadvertently omitted from the journal. Post to the ledger. (Revise any amounts necessitated by posting this entry.) 7. Prepare a new trial balance. PROBLEM 2-6A Onyx Videography has the following trial balance as of August 31, 2006: Corrected trial balance Objectives 5, 6 1. Total of Debit Column: $156,000 Cash Accounts Receivable Supplies Prepaid Insurance Equipment Notes Payable Accounts Payable Jerri Orr, Capital Jerri Orr, Drawing Fees Earned Wages Expense Rent Expense Advertising Expense Gas, Electricity, and Water Expense 4,700 8,450 1,464 140 36,000 16,500 3,470 19,800 7,200 118,680 68,000 13,900 630 3,780 144,264 158,450 The debit and credit totals are not equal as a result of the following errors: a. The balance of cash was overstated by $3,500. 66124_c02_47-100.qxd 11/10/03 6:43 PM Page 91 Chapter 2 • Analyzing Transactions 91 b. A cash receipt of $2,100 was posted as a credit to Cash of $1,200. c. A debit of $1,750 to Accounts Receivable was not posted. d. A return of $115 of defective supplies was erroneously posted as a $151 credit to Supplies. e. An insurance policy acquired at a cost of $500 was posted as a credit to Prepaid Insurance. f. The balance of Notes Payable was overstated by $4,500. g. A credit of $250 in Accounts Payable was overlooked when the balance of the account was determined. h. A debit of $1,800 for a withdrawal by the owner was posted as a debit to Jerri Orr, Capital. i. The balance of $6,300 in Advertising Expense was entered as $630 in the trial balance. j. Miscellaneous Expense, with a balance of $1,680, was omitted from the trial balance. Instructions 1. Prepare a corrected trial balance as of August 31 of the current year. 2. Does the fact that the trial balance in (1) is balanced mean that there are no errors in the accounts? Explain. Problems Series B PROBLEM 2-1B Entries into T accounts and trial balance Objectives 2, 3, 4, 5 3. Total of Debit Column: $43,475 Christina Kiff, an architect, opened an office on July 1, 2006. During the month, she completed the following transactions connected with her professional practice: a. Transferred cash from a personal bank account to an account to be used for the business, $18,000. b. Paid July rent for office and workroom, $1,500. c. Purchased used automobile for $16,500, paying $1,500 cash and giving a note payable for the remainder. d. Purchased office and computer equipment on account, $6,500. e. Paid cash for supplies, $1,050. f. Paid cash for annual insurance policies, $1,200. g. Received cash from client for plans delivered, $2,750. h. Paid cash for miscellaneous expenses, $140. i. Paid cash to creditors on account, $3,000. j. Paid installment due on note payable, $450. k. Received invoice for blueprint service, due in August, $525. l. Recorded fee earned on plans delivered, payment to be received in August, $4,150. m. Paid salary of assistant, $1,000. n. Paid gas, oil, and repairs on automobile for July, $130. Instructions 1. Record the foregoing transactions directly in the following T accounts, without journalizing: Cash; Accounts Receivable; Supplies; Prepaid Insurance; Automobiles; Equipment; Notes Payable; Accounts Payable; Christina Kiff, Capital; Professional Fees; Rent Expense; Salary Expense; Automobile Expense; Blueprint Expense; Miscellaneous Expense. To the left of the amount entered in the accounts, place the appropriate letter to identify the transaction. 2. Determine the balances of the T accounts having two or more debits or credits. A memorandum balance should be inserted in accounts having both debits and credits, in the manner illustrated in the chapter. For accounts with entries on one side only (such as Professional Fees), there is no need to insert the memorandum balance in the item column. For accounts containing only a single debit and 66124_c02_47-100.qxd 11/10/03 6:43 PM Page 92 92 Chapter 2 • Analyzing Transactions a single credit (such as Notes Payable), the memorandum balance should be inserted in the appropriate item column. Accounts containing a single entry only (such as Prepaid Insurance) do not need a memorandum balance. 3. Prepare a trial balance for Christina Kiff, Architect, as of July 31, 2006. PROBLEM 2-2B Journal entries and trial balance Objectives 2, 3, 4, 5 4. c. $3,795 On January 2, 2006, Lela Peterson established Acadia Realty, which completed the following transactions during the month: a. Lela Peterson transferred cash from a personal bank account to an account to be used for the business, $9,000. b. Paid rent on office and equipment for the month, $2,000. c. Purchased supplies on account, $700. d. Paid creditor on account, $290. e. Earned sales commissions, receiving cash, $10,750. f. Paid automobile expenses (including rental charge) for month, $1,400, and miscellaneous expenses, $480. g. Paid office salaries, $2,500. h. Determined that the cost of supplies used was $575. i. Withdrew cash for personal use, $1,000. Instructions 1. Journalize entries for transactions (a) through (i), using the following account titles: Cash; Supplies; Accounts Payable; Lela Peterson, Capital; Lela Peterson, Drawing; Sales Commissions; Office Salaries Expense; Rent Expense; Automobile Expense; Supplies Expense; Miscellaneous Expense. Explanations may be omitted. 2. Prepare T accounts, using the account titles in (1). Post the journal entries to these accounts, placing the appropriate letter to the left of each amount to identify the transactions. Determine the account balances, after all posting is complete, for all accounts having two or more debits or credits. A memorandum balance should also be inserted in accounts having both debits and credits, in the manner illustrated in the chapter. For accounts with entries on one side only, there is no need to insert a memorandum balance in the item column. For accounts containing only a single debit and a single credit, the memorandum balance should be inserted in the appropriate item column. 3. Prepare a trial balance as of January 31, 2006. 4. Determine the following: a. Amount of total revenue recorded in the ledger. b. Amount of total expenses recorded in the ledger. c. Amount of net income for January. PROBLEM 2-3B Journal entries and trial balance Objectives 2, 3, 4, 5 3. Total of Credit Column: $41,425 On November 2, 2006, Nicole Oliver established an interior decorating business, Devon Designs. During the remainder of the month, Nicole completed the following transactions related to the business: Nov. 2. Nicole transferred cash from a personal bank account to an account to be used for the business, $15,000. 5. Paid rent for period of November 5 to end of month, $1,750. 6. Purchased office equipment on account, $8,500. 8. Purchased a used truck for $18,000, paying $10,000 cash and giving a note payable for the remainder. 10. Purchased supplies for cash, $1,115. 12. Received cash for job completed, $7,500. 15. Paid annual premiums on property and casualty insurance, $2,400. 23. Recorded jobs completed on account and sent invoices to customers, $3,950. 24. Received an invoice for truck expenses, to be paid in December, $600. 29. Paid utilities expense, $750. 29. Paid miscellaneous expenses, $310. 30. Received cash from customers on account, $2,200. 30. Paid wages of employees, $2,700. 66124_c02_47-100.qxd 11/10/03 6:43 PM Page 93 Chapter 2 • Analyzing Transactions 93 Nov. 30. Paid creditor a portion of the amount owed for equipment purchased on November 6, $2,125. 30. Withdrew cash for personal use, $1,400. Instructions 1. Journalize each transaction in a two-column journal, referring to the following chart of accounts in selecting the accounts to be debited and credited. (Do not insert the account numbers in the journal at this time.) Explanations may be omitted. 11 12 13 14 16 18 21 22 Cash Accounts Receivable Supplies Prepaid Insurance Equipment Truck Notes Payable Accounts Payable 31 32 41 51 53 54 55 59 Nicole Oliver, Capital Nicole Oliver, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Truck Expense Miscellaneous Expense 2. Post the journal to a ledger of four-column accounts, inserting appropriate posting references as each item is posted. Extend the balances to the appropriate balance columns after each transaction is posted. 3. Prepare a trial balance for Devon Designs as of November 30, 2006. PROBLEM 2-4B Journal entries and trial balance Boomerang Realty acts as an agent in buying, selling, renting, and managing real estate. The account balances at the end of October 2006 are as follows: 11 Cash 12 Accounts Receivable 13 Prepaid Insurance 14 Office Supplies 16 Land 21 Accounts Payable 22 Unearned Rent 23 Notes Payable 31 Drew Felkel, Capital 32 Drew Felkel, Drawing 41 Fees Earned 51 Salary and Commission Expense 52 Rent Expense 53 Advertising Expense 54 Automobile Expense 59 Miscellaneous Expense Objectives 2, 3, 4, 5 4. Total of Debit Column: $465,275 36,300 97,500 2,200 2,100 0 23,020 0 0 68,680 2,000 253,000 148,200 30,000 17,800 5,500 3,100 344,700 344,700 The following business transactions were completed by Boomerang Realty during November 2006: Nov. 1. 2. 5. 10. 15. 17. 20. 23. 27. 28. 29. 30. Paid rent on office for month, $7,000. Purchased office supplies on account, $1,675. Paid annual insurance premiums, $4,800. Received cash from clients on account, $52,000. Purchased land for a future building site for $90,000, paying $10,000 in cash and giving a note payable for the remainder. Paid creditors on account, $9,100. Returned a portion of the office supplies purchased on November 2, receiving full credit for their cost, $400. Paid advertising expense, $2,050. Discovered an error in computing a commission; received cash from the salesperson for the overpayment, $700. Paid automobile expense (including rental charges for an automobile), $1,100. Paid miscellaneous expenses, $390. Recorded revenue earned and billed to clients during the month, $48,400. 66124_c02_47-100.qxd 11/10/03 6:43 PM Page 94 94 Chapter 2 • Analyzing Transactions Nov. 30. Paid salaries and commissions for the month, $24,000. 30. Withdrew cash for personal use, $7,500. 30. Rented land purchased on November 15 to local merchants association for use as a parking lot in December and January, during a street rebuilding program, received advance payment of $2,000. Instructions 1. Record the November 1, 2006 balance of each account in the appropriate balance column of a four-column account, write Balance in the item section, and place a check mark () in the posting reference column. 2. Journalize the transactions for November in a two-column journal. Journal entry explanations may be omitted. 3. Post to the ledger, extending the account balance to the appropriate balance column after each posting. 4. Prepare a trial balance of the ledger as of November 30, 2006. If the working papers correlating with this textbook are not used, omit Problem 2-5B. PROBLEM 2-5B Errors in trial balance Objectives 5, 6 7. Total of Debit Column: $43,338.10 The following records of Cypress TV Repair are presented in the working papers: • Journal containing entries for the period July 1–31. • Ledger to which the July entries have been posted. • Preliminary trial balance as of July 31, which does not balance. Locate the errors, supply the information requested, and prepare a corrected trial balance according to the following instructions. The balances recorded in the accounts as of July 1 and the entries in the journal are correctly stated. If it is necessary to correct any posted amounts in the ledger, a line should be drawn through the erroneous figure and the correct amount inserted above. Corrections or notations may be inserted on the preliminary trial balance in any manner desired. It is not necessary to complete all of the instructions if equal trial balance totals can be obtained earlier. However, the requirements of instructions (6) and (7) should be completed in any event. Instructions 1. Verify the totals of the preliminary trial balance, inserting the correct amounts in the schedule provided in the working papers. 2. Compute the difference between the trial balance totals. 3. Compare the listings in the trial balance with the balances appearing in the ledger, and list the errors in the space provided in the working papers. 4. Verify the accuracy of the balance of each account in the ledger, and list the errors in the space provided in the working papers. 5. Trace the postings in the ledger back to the journal, using small check marks to identify items traced. Correct any amounts in the ledger that may be necessitated by errors in posting, and list the errors in the space provided in the working papers. 6. Journalize as of July 31 the payment of $175 for advertising expense. The bill had been paid on July 31 but was inadvertently omitted from the journal. Post to the ledger. (Revise any amounts necessitated by posting this entry.) 7. Prepare a new trial balance. PROBLEM 2-6B Corrected trial balance Objectives 5, 6 1. Total of Debit Column: $125,000 Montero Carpet has the trial balance at the top of the following page as of October 31, 2006. The debit and credit totals are not equal as a result of the following errors: a. The balance of cash was understated by $1,500. b. A cash receipt of $2,500 was posted as a debit to Cash of $5,200. c. A debit of $2,000 for a withdrawal by the owner was posted as a credit to Tyca Seagle, Capital. d. The balance of $4,480 in Advertising Expense was entered as $448 in the trial balance. e. A debit of $750 to Accounts Receivable was not posted. 66124_c02_47-100.qxd 11/10/03 6:43 PM Page 95 Chapter 2 • Analyzing Transactions 95 f. A return of $125 of defective supplies was erroneously posted as a $215 credit to Supplies. g. The balance of Notes Payable was overstated by $5,000. h. An insurance policy acquired at a cost of $200 was posted as a credit to Prepaid Insurance. i. Gas, Electricity, and Water Expense, with a balance of $4,400, was omitted from the trial balance. j. A credit of $625 in Accounts Payable was overlooked when determining the balance of the account. Cash Accounts Receivable Supplies Prepaid Insurance Equipment Notes Payable Accounts Payable Tyca Seagle, Capital Tyca Seagle, Drawing Fees Earned Wages Expense Rent Expense Advertising Expense Miscellaneous Expense 5,200 7,825 1,450 370 35,000 26,000 4,850 23,825 9,200 76,700 43,540 10,400 448 1,095 114,528 131,375 Instructions 1. Prepare a corrected trial balance as of October 31, 2006. 2. Does the fact that the trial balance in (1) is balanced mean that there are no errors in the accounts? Explain. C ontinuing Problem The transactions completed by Dancin Music during April 2006 were described at the end of Chapter 1. The following transactions were completed during May, the second month of the business’s operations: 4. Total of Debit Column: $31,760 May 1. Shannon Burns made an additional investment in Dancin Music by depositing $3,000 in Dancin Music’s checking account. 1. Instead of continuing to share office space with a local real estate agency, Shannon decided to rent office space near a local music store. Paid rent for May, $1,600. 1. Paid a premium of $3,360 for a comprehensive insurance policy covering liability, theft, and fire. The policy covers a two-year period. 2. Received $1,200 on account. 3. On behalf of Dancin Music, Shannon signed a contract with a local radio station, KPRG, to provide guest spots for the next three months. The contract requires Dancin Music to provide a guest disc jockey for 80 hours per month for a monthly fee of $2,400. Any additional hours beyond 80 will be billed to KPRG at $40 per hour. In accordance with the contract, Shannon received $4,800 from KPRG as an advance payment for the first two months. 3. Paid $250 on account. 4. Paid an attorney $150 for reviewing the May 3rd contract with KPRG. (Record as Miscellaneous Expense.) 5. Purchased office equipment on account from One-Stop Office Mart, $5,000. 8. Paid for a newspaper advertisement, $200. 66124_c02_47-100.qxd 11/10/03 6:43 PM Page 96 96 Chapter 2 • Analyzing Transactions May 11. Received $600 for serving as a disc jockey for a college fraternity party. 13. Paid $500 to a local audio electronics store for rental of digital recording equipment. 14. Paid wages of $1,200 to receptionist and part-time assistant. 16. Received $1,100 for serving as a disc jockey for a wedding reception. 18. Purchased supplies on account, $750. 21. Paid $240 to Rocket Music for use of its current music demos in making various music sets. 22. Paid $500 to a local radio station to advertise the services of Dancin Music twice daily for the remainder of May. 23. Served as disc jockey for a party for $1,560. Received $400, with the remainder due June 4, 2006. 27. Paid electric bill, $560. 28. Paid wages of $1,200 to receptionist and part-time assistant. 29. Paid miscellaneous expenses, $170. 30. Served as a disc jockey for a charity ball for $1,200. Received $600, with the remainder due on June 9, 2006. 31. Received $2,000 for serving as a disc jockey for a party. 31. Paid $600 royalties (music expense) to Federated Clearing for use of various artists’ music during May. 31. Withdrew $2,000 cash from Dancin Music for personal use. Dancin Music’s chart of accounts and the balance of accounts as of May 1, 2006 (all normal balances), are as follows: 11 12 14 15 17 21 23 31 32 Cash Accounts Receivable Supplies Prepaid Insurance Office Equipment Accounts Payable Unearned Revenue Shannon Burns, Capital Shannon Burns, Drawing $6,160 1,200 170 — — 250 — 7,000 250 41 50 51 52 53 54 55 56 59 Fees Earned Wages Expense Office Rent Expense Equipment Rent Expense Utilities Expense Music Expense Advertising Expense Supplies Expense Miscellaneous Expense $4,750 400 1,000 650 300 940 600 180 150 Instructions 1. Enter the May 1, 2006 account balances in the appropriate balance column of a four-column account. Write Balance in the Item column, and place a check mark () in the Posting Reference column. (Hint: Verify the equality of the debit and credit balances in the ledger before proceeding with the next instruction.) 2. Analyze and journalize each transaction in a two-column journal, omitting journal entry explanations. 3. Post the journal to the ledger, extending the account balance to the appropriate balance column after each posting. 4. Prepare a trial balance as of May 31, 2006. Special Activities ACTIVITY 2-1 Ethics and professional conduct in business At the end of the current month, Ross Heimlich prepared a trial balance for Main Street Motor Co. The credit side of the trial balance exceeds the debit side by a significant amount. Ross has decided to add the difference to the balance of the miscellaneous expense account in order to complete the preparation of the current month’s financial statements by a 5 o’clock deadline. Ross will look for the difference next week when he has more time. Discuss whether Ross is behaving in a professional manner. 66124_c02_47-100.qxd 11/10/03 6:43 PM Page 97 Chapter 2 • Analyzing Transactions ACTIVITY 2-2 Account for revenue ACTIVITY 2-3 Record transactions 97 Krypton College requires students to pay tuition each term before classes begin. Students who have not paid their tuition are not allowed to enroll or to attend classes. What journal entry do you think Krypton College would use to record the receipt of the students’ tuition payments? Describe the nature of each account in the entry. The following discussion took place between Heather Sims, the office manager of Sedgemoor Data Company, and a new accountant, Ed Hahn. Ed: I’ve been thinking about our method of recording entries. It seems that it’s inefficient. Heather: In what way? Ed: Well—correct me if I’m wrong—it seems like we have unnecessary steps in the process. We could easily develop a trial balance by posting our transactions directly into the ledger and bypassing the journal altogether. In this way we could combine the recording and posting process into one step and save ourselves a lot of time. What do you think? Heather: We need to have a talk. What should Heather say to Ed? ACTIVITY 2-4 Debits and credits The following excerpt is from a conversation between Peter Kaiser, the president and chief operating officer of Sprocket Construction Co., and his neighbor, Doris Nesmith. Doris: Peter, I’m taking a course in night school, “Intro to Accounting.” I was wondering—could you answer a couple of questions for me? Peter: Well, I will if I can. Doris: Okay, our instructor says that it’s critical we understand the basic concepts of accounting, or we’ll never get beyond the first test. My problem is with those rules of debit and credit . . . you know, assets increase with debits, decrease with credits, etc. Peter: Yes, pretty basic stuff. You just have to memorize the rules. It shouldn’t be too difficult. Doris: Sure, I can memorize the rules, but my problem is I want to be sure I understand the basic concepts behind the rules. For example, why can’t assets be increased with credits and decreased with debits like revenue? As long as everyone did it that way, why not? It would seem easier if we had the same rules for all increases and decreases in accounts. Also, why is the left side of an account called the debit side? Why couldn’t it be called something simple . . . like the “LE” for Left Entry? The right side could be called just “RE” for Right Entry. Finally, why are there just two sides to an entry? Why can’t there be three or four sides to an entry? In a group of four or five, select one person to play the role of Peter and one person to play the role of Doris. 1. After listening to the conversation between Peter and Doris, help Peter answer Doris’s questions. 2. What information (other than just debit and credit journal entries) could the accounting system gather that might be useful to Peter in managing Sprocket Construction Co.? ACTIVITY 2-5 Transactions and income statement Kercy Hepner is planning to manage and operate Eagle Caddy Service at Helena Golf and Country Club during June through August 2006. Kercy will rent a small maintenance building from the country club for $300 per month and will offer caddy 66124_c02_47-100.qxd 11/10/03 6:43 PM Page 98 98 Chapter 2 • Analyzing Transactions services, including cart rentals, to golfers. Kercy has had no formal training in record keeping. Kercy keeps notes of all receipts and expenses in a shoe box. An examination of Kercy’s shoe box records for June revealed the following: June 1. Withdrew $2,250 from personal bank account to be used to operate the caddy service. 1. Paid rent to Helena Golf and Country Club, $300. 2. Paid for golf supplies (practice balls, etc.), $225. 3. Arranged for the rental of forty regular (pulling) golf carts and ten gasolinedriven carts for $1,500 per month. Paid $1,125 in advance, with the remaining $375 due June 20. 7. Purchased supplies, including gasoline, for the golf carts on account, $270. Helena Golf and Country Club has agreed to allow Kercy to store the gasoline in one of its fuel tanks at no cost. 15. Received cash for services from June 1–15, $1,680. 17. Paid cash to creditors on account, $270. 20. Paid remaining rental on golf carts, $375. 22. Purchased supplies, including gasoline, on account, $255. 25. Accepted IOUs from customers on account, $570. 28. Paid miscellaneous expenses, $180. 30. Received cash for services from June 16-30, $2,200. 30. Paid telephone and electricity (utilities) expenses, $160. 30. Paid wages of part-time employees, $390. 30. Received cash in payment of IOUs on account, $270. 30. Determined the amount of supplies on hand at the end of June, $140. Kercy has asked you several questions concerning her financial affairs to date, and she has asked you to assist with her record keeping and reporting of financial data. a. To assist Kercy with her record keeping, prepare a chart of accounts that would be appropriate for Eagle Caddy Service. b. Prepare an income statement for June in order to help Kercy assess the profitability of Eagle Caddy Service. For this purpose, the use of T accounts may be helpful in analyzing the effects of each June transaction. c. Based on Kercy’s records of receipts and payments, calculate the amount of cash on hand on June 30. For this purpose, a T account for cash may be useful. d. A count of the cash on hand on June 30 totaled $3,180. Briefly discuss the possible causes of the difference between the amount of cash computed in (c) and the actual amount of cash on hand. ACTIVITY 2-6 Business strategy Assume that you are considering developing a nationwide chain of women’s clothing stores. You have contacted a Houston-based firm that specializes in financing new business ventures and enterprises. Such firms, called venture capital firms, finance new businesses in exchange for a percentage of the ownership. 1. In groups of four or five, discuss the different business strategies that you might use in your venture. 2. For each strategy you listed in (1), provide an example of a real world business using the same strategy. 3. What percentage of the ownership would you be willing to give the venture capital firm in exchange for its financing? ACTIVITY 2-7 Opportunities for accountants The increasing complexity of the current business and regulatory environment has created an increased demand for accountants who can analyze business transactions and interpret their effects on the financial statements. In addition, a basic ability to analyze the effects of transactions is necessary to be successful in all fields of business as well as in other disciplines, such as law. To better understand the 66124_c02_47-100.qxd 11/10/03 6:43 PM Page 99 Chapter 2 • Analyzing Transactions 99 importance of accounting in today’s environment, search the Internet or your local newspaper for job opportunities. One possible Internet site is http:/ /www.jobweb .com. Then do one of the following: 1. Print a listing of at least two ads for accounting jobs. Alternatively, bring to class at least two newspaper ads for accounting jobs. 2. Print a listing of at least two ads for nonaccounting jobs for which some knowledge of accounting is preferred or necessary. Alternatively, bring to class at least two newspaper ads for such jobs. A nswers to Self-Examination Questions 1. A A debit may signify an increase in an asset account (answer A) or a decrease in a liability or owner’s capital account. A credit may signify a decrease in an asset account (answer B) or an increase in a liability or owner’s capital account (answers C and D). 2. C Liability, capital, and revenue (answer C) accounts have normal credit balances. Asset (answer A), drawing (answer B), and expense (answer D) accounts have normal debit balances. 3. C Accounts Receivable (answer A), Cash (answer B), and Miscellaneous Expense (answer D) would all normally have debit balances. Fees Earned should normally have a credit balance. Hence, a debit balance in Fees Earned (answer C) would indicate a likely error in the recording process. 4. A The receipt of cash from customers on account increases the asset Cash and decreases the asset Accounts Receivable, as indicated by answer A. Answer B has the debit and credit reversed, and answers C and D involve transactions with creditors (accounts payable) and not customers (accounts receivable). 5. D The trial balance (answer D) is a listing of the balances and the titles of the accounts in the ledger on a given date, so that the equality of the debits and credits in the ledger can be verified. The income statement (answer A) is a summary of revenue and expenses for a period of time. The balance sheet (answer B) is a presentation of the assets, liabilities, and owner’s equity on a given date. The statement of owner’s equity (answer C) is a summary of the changes in owner’s equity for a period of time. 66124_c02_47-100.qxd 11/10/03 6:43 PM Page 100 ...
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