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Unformatted text preview: 53 CHAPTER 2 ANALYZING TRANSACTIONS EYE OPENERS 1. An account is a form designed to record changes in a particular asset, liability, own- er’s equity, revenue, or expense. A ledger is a group of related accounts. 2. The terms debit and credit may signify either an increase or decrease, depending upon the nature of the account. For example, deb- its signify an increase in asset, expense, and dividend accounts but a decrease in li- ability, capital stock, retained earnings, and revenue accounts. 3. Liabilities and stockholders’ equity both have rights or claims to assets as indicated by the accounting equation, Assets = Liabili- ties + Stockholders’ Equity. Therefore, the same rules of debit and credit apply to both liabilities and stockholders’ equity. 4. a. Decrease in stockholders’ equity (re- tained earnings) b. Increase in expense 5. a. Increase in stockholders’ equity (re- tained earnings) b. Increase in revenue 6. a. Assuming no errors have occurred, the credit balance in the cash account re- sulted from drawing checks for $1,250 in excess of the amount of cash on de- posit. b. The $1,250 credit balance in the cash account as of March 31 is a liability owed to the bank. It is usually referred to as an “overdraft” and should be clas- sified on the balance sheet as a liability. 7. a. The revenue was earned in July. b. (1) Debit Accounts Receivable and credit Fees Earned or another ap- propriately titled revenue account in July. (2) Debit Cash and credit Accounts Receivable in August. 8. The trial balance is a proof of the equality of the debits and the credits in the ledger. 9. No. Errors may have been made that had the same erroneous effect on both debits and credits, such as failure to record and/or post a transaction, recording the same transaction more than once, and posting a transaction correctly but to the wrong ac- count. 10. The listing of $1,850 is a slide; the listing of $3,860 is a transposition. 11. a. No. Because the same error occurred on both the debit side and the credit side of the trial balance, the trial balance would not be out of balance. b. Yes. The trial balance would not bal- ance. The error would cause the debit total of the trial balance to exceed the credit total by $90. 12. a. The equality of the trial balance would not be affected. b. On the income statement, total operat- ing expenses (salary expense) would be overstated by $10,000, and net income would be understated by $10,000. On the retained earnings statement, the be- ginning and ending retained earnings would be correct. However, net income and dividends would be understated by $10,000. These understatements offset one another, and, thus, ending retained earnings is correct. The balance sheet is not affected by the error....
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- Spring '10