Chapter 2 : Chapter 2 Transaction Analysis & the recording process
Q1 : Q1 The law firm should recognise the income in April.
The income recognition principle states that income should be recognised in the accounting period in which it is earned.
Q2 : Q2 Information presented on an accrual basis is more useful than on a cash basis because it reveals relationships that are likely to be important in predicting future results.
To illustrate, under accrual accounting, income is recognised when earned. Trends in income are thus more meaningful.
Q3 : Q3 Expenses of $4500 should be deducted from the income in April.
Under the matching principle efforts (expenses) should be matched with accomplishments (income).
Q4 : A number of factors could have caused an increase in cash despite the net loss.
These are:
(1) high cash revenues relative to low cash expenses;
(2) sales of property, plant and equipment;
(3) sales of investments; and
(4) issue of debt or shares. Q4
Q10 : Disagree.
The terms debit and credit mean left and right respectively. Q10
Q12 : Kathy is incorrect.
A debit balance only means that debit amounts exceed credit amounts in an account.
Conversely, a credit balance only means that credit amounts are greater than debit amounts in an account.
Thus, a debit or credit balance is neither favorable nor unfavorable. Q12
Q14 : Accounts Receivable — debit balance.
Cash — debit balance.
Owner’s Drawings — debit balance.
Accounts Payable — credit balance.
Service Revenue — credit balance.
Salaries Expense — debit balance.
Owner’s Capital — credit balance. Q14
Q24 : (a) Cash 7000
Albert Darman, Capital 7000
(Invested cash in the business)
(b) Prepaid Insurance 800
Cash 800
(Paid one-year insurance policy)
(c) Supplies 1,000
Accounts Payable 1,000
(Purchased supplies on account)
(d) Cash 7500
Service Revenue 7500
(Received cash for services rendered) Q24
Q25 : (a) The entire group of accounts maintained by an entity, including all the asset, liability, and owner’s equity accounts, is referred to collectively as the ledger.
(b) The chart of accounts is important, particularly for an entity that has a large number of accounts, because it helps organise the accounts and identify their location in the ledger.
The numbering system used to identify the accounts usually starts with the balance sheet accounts and follows with the income statement accounts. Q25
Q26 : A trial balance is a list of accounts and their balances at a given time.
The primary purpose of a trial balance is to prove the mathematical equality of debits and credits after all journalised transactions have been posted.
A trial balance also facilitates the discovery and correction of errors in journalising and posting.
In addition, it is useful in preparing financial statements. Q26
BE2.1 : BE2.1
Q28 : (a) The trial balance would balance.
(b) The trial balance would not balance Q28
BE2.13 : P. J. COTTON
Trial Balance as at 30,June 2010
Debit Credit
Cash $ 6,800
Accounts Receivable 3,000
Equipment 17,000
Accounts Payable $ 9,000
P. J. Cotton, Capital 20,000
P. J. Cotton, Drawings 1,200
Service Revenue 6,000
Salaries Expense 6,000
Rent Expense 1,000
$35,000 $35,000 BE2.13
BE2.14 : CHEN COMPANY
Trial Balance as at 31 December 2010
Debit Credit
Cash $16,800
Prepaid Insurance 3,500
Accounts Payable $ 3,000
Unearned Income 4,200
P. Chen, Capital 13,000
P. Chen, Drawings 4,500
Service Revenue 25,600
Salaries Expense 18,600
Rent Expense 2,400
$45,800 $45,800 BE2.14
E2.1 : E2.1 1. Increase in assets and increase in owner’s equity.
2. Decrease in assets and decrease in owner’s equity.
3. Increase in assets and increase in liabilities.
4. Increase in assets and increase in owner’s equity.
5. Decrease in assets and decrease in owner’s equity.
6. Increase in assets and decrease in assets.
7. Increase in liabilities and decrease in owner’s equity.
8. Increase in assets and decrease in assets.
9. Increase in assets and increase in owner’s equity.
E2.6 : Oct.
1 Debits increase assets: debit Cash $20,000.
Credits increase owner’s equity: credit Lynn Sinclair, Capital $20,000.
2 No transaction.
3 Debits increase assets: debit Office Furniture $1900.Credits increase liabilities: credit Accounts Payable $1900.
6 Debits increase assets: debit Accounts Receivable $3200.Credits increase income: credit Service Revenue $3200.
27 Debits decrease liabilities: debit Accounts Payable $700.Credits decrease assets: credit Cash $700.
30 Debits increase expenses: debit Salaries Expense $2000.Credits decrease assets: credit Cash $2000. E2.6
E2.10 (a) General Journal : E2.10 (a) General Journal
E2.10 (b) : E2.10 (b) Cash No 101 Ian Campbell, Capital No. 301
E2.10 (b) : E2.10 (b) Cash No 101 Equipment No. 157 Account Payable No 201
E2.10 (b) : E2.10 (b) Cash No 101 Account Payable No 201
E2.10 (b) : E2.10 (b) Cash No 101 Ian Campbell, Drawings No. 306
P2.8 a : P2.8 a
P2.8 b : P2.8 b
P2.8 b : P2.8 b
P2.8 c : P2.8 c
P2.8 c : P2.8 c
P2.8 c : P2.8 c
P2.8 c : P2.8 c
P2.8 c : P2.8 c
P2.8 c : P2.8 c
P2.8 c : P2.8 c
P2.8 c : P2.8 c
P2.8 c : P2.8 c
Thank you. : Thank you.