1. The nature of the {b}account{n} and how entries are made to accounts.
2. The meaning of debit and credit.
3. Use of the ledger and the journal.
4. The closing process.
@
4.1 The Account
In Part 3 you recorded the effect of each transaction by changing the
appropriate items on a balance sheet. This would be a(n) {1,11,3}
(A) practical (B) impractical
method for handling the large number of transactions that occur in most
businesses.
*1
- POST - {b}{a,6,31}{r}
IMPRACTICAL - OK - {a,21,1}Right -- it's more practical to keep track of each change separately {a,22,1}and change the balance sheet only for a summary of them.
B - OK - {a,21,1}Right -- it's more practical to keep track of each change separately {a,22,1}and change the balance sheet only for a summary of them.
PRACTICAL - QUIT - {a,21,1}No, the balance sheet would quickly become crowded and confusing if you made {a,22,1}a change for every transaction!
A - QUIT - {a,21,1}No, the balance sheet would quickly become crowded and confusing if you made {a,22,1}a change for every transaction!
@
4.2
Instead of changing balance sheet items directly, we use in practice
a device called an {b}account{n} to record each change. In its simplest form an
account looks like a large letter T, and it is therefore called a T-account.
@
4.3
The title of the account is written on top of the T. Enter the word
"Cash" as the title of this account. {a,7,38}{1,4}
{a,8,20}{l,41}
{a,8,40}{c,194}
{a,9,40}{c,179}
{a,10,40}{c,179}
{a,11,40}{c,179}
{a,12,40}{c,179}
*1
- POST - {a,7,38}{b}CASH
- POST - {a,21,1}Note: As a matter of accounting custom, the name of an account is capitalized.
CASH - OK - Right.
- HINT - You were supposed to type the word Cash as the title here.
@
4.4
Following is how a T-account looks at the beginning of an accounting
period.
{a,6,38}{b}Cash
{a,7,20}{l,41}
{a,7,40}{c,194}
{a,8,40}{c,179} {a,8,20}Beg. bal. 10,000
{a,9,40}{c,179}
{a,10,40}{c,179}
{a,11,40}{c,179}
{a,14,1}Evidently the amount of cash at the beginning of the accounting period
{a,15,1}was ${1,-6}.
*1
- POST - {a,21,1}(Note that although the amounts are in dollars, the dollar sign is not used.)
10,000 - OK - Correct.
10000 - OK - Correct.
- HINT - Look again, the beginning balance is $10,000.
@
4.5
Transactions that affect the Cash account during the accounting period
can either {b}increase{n} Cash or {b}decrease{n} Cash. Thus one side of the T-account
is for increases, and the other side is for decreases.
{a,9,38}{b}Cash
{a,10,20}{l,41} {a,10,40}{c,194}
{a,11,28}(Increases) │ (Decreases)
{a,12,40}{c,179}
{a,13,40}{c,179}
{a,14,40}{c,179}
@
4.6
Increases in cash add to the beginning balance. Because the beginning
balance is recorded on the left side of the T-account, increases in cash are
recorded on the {1,5} side of the T-account.
(A) left (B) right
Decreases are recorded on the {2,5} side.
(A) left (B) right
*1
- POST - {b}{a,8,13}left
LEFT - OK - Correct.
A - OK - Correct.
RIGHT - QUIT - No, cash increases are recorded on the same side as the beginning balance.
B - QUIT - No, cash increases are recorded on the same side as the beginning balance.
- HINT - Cash increases are recorded on the same side as the beginning balance.
*2
- POST - {b}{a,12,25}{r}
RIGHT - OK - Correct.
B - OK - Correct.
LEFT - QUIT - No, decreases are recorded on the RIGHT side.
A - QUIT - No, decreases are recorded on the RIGHT side.
@
4.7{s}
Here is the T-account for Cash.
{a,4,38}{b}Cash
{a,5,20}{l,41} {a,5,40}{c,194}
{a,6,28}(Increases) {c,179} (Decreases)
{a,7,40}{c,179} {a,7,20}Beg. bal. 10,000
{a,8,40}{c,179}
{a,9,40}{c,179}
{a,10,40}{c,179}
{a,11,40}{c,179}
{s}{a,13,1}Record the effect of each of the following transactions on Cash. Type "I" to
record the item under Increases, or "D" to record the item under Decreases.
- The entity borrowed $5,000 cash from a bank. {1,1}
- The entity paid $2,000 cash to a supplier. {2,1}
- The entity received $300 cash from a customer. {3,1}
- The entity sold merchandise for $800 cash. {4,1}
*1
- POST - {a,8,33} 5,000
INCREASES - OK - Correct.
I - OK - Correct.
D - QUIT - No, since the bank gave the entity $5,000, cash has INCREASED.
- HINT - Respond with either "I" or "D".
*2
- POST - {a,7,42}2,000
DECREASES - OK - Correct.
D - OK - Yes.
I - QUIT - No, this time the entity spends, or DECREASES, cash.
*3
- POST - {a,9,33} 300
INCREASES - OK - Right.
I - OK - Right.
D - QUIT - No, cash came in from a customer, thus INCREASING Cash.
*4
- POST - {a,10,33} 800
INCREASES - OK - Yes.
I - OK - Yes.
D - QUIT - No, Cash INCREASED (although merchandise went out).
@
4.8{s}
At the end of the accounting period the increases are added to the
beginning balance, and the total of the decreases is subtracted from it.
The result is the {b}New balance{n}. Calculate the Totals and the New balance
for the Cash account shown below.
{b} Cash
{l,20}{c,194}{l,20}
(Increases) {c,179} (Decreases)
Beg. bal. 10,000 {c,179} 2,000
5,000 {c,179}
300 {c,179}
800 {c,179}
{l,7 } {c,179} {l,6 }
Total {1,6 } {c,179} {2,6 } Total
{l,7 } {c,179}
{c,179}
New balance {3,6 } {c,179}
*1
16,100 - OK - Correct.
16100 - OK - Correct.
- HINT - Total increases add up to $16,100.
*2
2,000 - OK - Correct.
2,000 - OK - Correct.
2000 - OK - Correct.
- HINT - Just carry down the $2,000 here.
*3
14,100 - OK - Correct.
14100 - OK - Correct.
- HINT - The New balance equals $16,100 minus $2,000.
@
4.9
The amount of Cash shown on the balance sheet at the end of the
accounting period would be ${1,-6}. Thus the amount shown as the
beginning balance of Cash in the next accounting period would be
${2,-6}.
*1
- POST - {a,21,1}{c, ,78}
14,100 - OK - Correct.
14100 - OK - Correct.
- HINT - {a,21,1}At the end of the period, the amount of Cash would equal the New balance.
*2
14,100 - OK - {a,20,1}Right, the balance at the end of one accounting period becomes the beginning {a,21,1}balance for the next period.
14100 - OK - {a,20,1}Right, the balance at the end of one accounting period becomes the beginning {a,21,1}balance for the next period.
- HINT - The balance at the end of one accounting period becomes the beginning {a,22,1}balance for the next period.
@
4.10 Rules for Increases and Decreases
In the T-account for cash, increases were recorded on the {1,5}-hand
(A) left (B) right
side. This is the rule for {u}all{n} asset accounts; that is, increases in
asset accounts are recorded on the {2,5} -hand side.
(A) left (B) right
*1
- POST - {b}{a,4,13}left
LEFT - OK - Correct.
A - OK - Correct.
RIGHT - QUIT - Cash INCREASES were recorded on the LEFT hand side.
B - QUIT - Cash INCREASES were recorded on the LEFT hand side.
*2
- POST - {b}{a,10,13}left
LEFT - OK - Correct.
A - OK - Correct.
RIGHT - QUIT - No, increases in asset accounts are recorded on the left.
B - QUIT - No, increases in asset accounts are recorded on the left.
@
4.11
Suppose Ellen Jones pays $100 cash to Brown Company to settle her
account receivable. In the T-account below, the increase in Brown Company's
cash that results is recorded on the {1,5}-hand side.
(A) left (B) right
{a,11,38}{b}Cash
{a,12,20}{l,41} {a,12,40}{c,194}
{a,13,28}(Increases) {c,179} (Decreases)
{a,14,28} 100 {c,179}
{a,15,40}{c,179}
{a,16,40}{c,179}
*1
- POST - {b}{a,8,13}left
LEFT - OK - Sure!
A - OK - Sure!
RIGHT - QUIT - Look again, the $100 is on the left side.
B - QUIT - Look again, the $100 is on the left side.
@
4.12
When the customer of Brown Company paid $100 to settle her account
receivable, the Cash account increased by $100. To balance this, the
{b}Accounts Receivable{n} account decreased by $100. In the T-account below,
enter the name of this second account that must be changed to complete the
- HINT - The second T-account is titled Accounts Receivable.
@
4.13
Accounts Receivable is an asset account. The dual-aspect concept
requires that if the asset account, Cash, increases by $100, the change in the
other asset account, Accounts Receivable, must be a(n) {1,8} of $100.
(A) increase
(B) decrease
*1
- POST - {b}{a,10,13}{r}
DECREASE - OK - Yes, it must decrease so that total assets will still equal total equities.
B - OK - Yes, it must decrease so that total assets will still equal total equities.
INCREASE - QUIT - No, it must decrease so that total assets will still equal total equities.
A - QUIT - No, it must decrease so that total assets will still equal total equities.
@
4.14
Record the change in Accounts Receivable resulting from the $100
payment in the account below.
{a,7,31}{b}Accounts Receivable
{a,8,20}{l,41} {a,8,40}{c,194}
{a,9,28}(Increases) │ (Decreases)
{a,10,40}│ {1,3}
{a,11,40}│
*1
100 - OK - That's right.
@
4.15
The decrease in Accounts Receivable was recorded on the {1,5}-hand
side of the account.
(A) left (B) right {s}
{d}
This balanced the {2,5}-hand amount for the increase in Cash.
(A) left (B) right
*1
- POST - {b}{a,6,25}{r}
RIGHT - OK - Yes.
B - OK - Yes.
LEFT - QUIT - No, on the right.
A - QUIT - No, on the right.
*2
- POST - {b}{a,11,13}left
LEFT - OK - Correct.
A - OK - Correct.
RIGHT - QUIT - {a,21,1}No, the Cash increase (left-hand side) was balanced by the Accounts Receivable {a,22,1}decrease (right-hand side). Remember, these are both asset accounts.
B - QUIT - {a,21,1}No, the Cash increase (left-hand side) was balanced by the Accounts Receivable {a,22,1}decrease (right-hand side). Remember, these are both asset accounts.
@
4.16{s}
Another customer of Brown Company settled a $500 Account Receivable by
paying $300 cash and giving a note for $200. Record this transaction in each
of the Brown Company's accounts, given below.
{b} Cash{n}
{l,17}{c,194}{l,17} How should this one be changed? {d}{1,-1}{s}
(Increases) │ (Decreases) (I = increased, D = decreased)
100 │
│
{b} Accounts Receivable{n}
{l,17}{c,194}{l,17} How should this one be changed? {d}{3,-1}{s}
(Increases) │ (Decreases)
│ 100
│
{b} Notes Receivable{n}
{l,17}{c,194}{l,17} How should this one be changed? {d}{5,-1}{s}
(Increases) │ (Decreases)
│
{a,9,16}{2,3} {a,15,22}{4,3}{a,20,16}{6,3}
*1
- POST - {a,9,44}Now enter the appropriate number.
I - OK - Yes.
D - QUIT - No, Cash will INCREASE.
*2
- POST - {a,14,45}(I = increased, D = decreased)
300 - OK - Good.
500 - NO - No, only $300 was paid in cash.
- HINT - Cash increased by $300.
*3
- POST - {a,15,44}Enter the appropriate number.
D - OK - Right.
I - QUIT - No, Accounts Rec. must DECREASE to balance increases in the other 2 accounts.
*4
- POST - {a,20,45}(I = increased, D = decreased)
500 - OK - OK.
300 - NO - The customer did settle her entire account.
- HINT - Accounts Rec. is decreased by the entire amount of $500.
*5
- POST - {a,21,44}Enter the appropriate number.
I - OK - Correct.
D - QUIT - No, Notes Receivable INCREASES.
*6
200 - OK - Good!
- HINT - Brown received a note for $200.
@
4.17
As you can see, accounting practice requires each transaction to give
rise, in the accounts that it changes, to {1,7} totals of left- and
right-hand amounts.
(A) equal (B) unequal
*1
- POST - {b}{a,8,13}equal
EQUAL - OK - Yes -- an important point to remember.
A - OK - Yes -- an important point to remember.
UNEQUAL - QUIT - Never! This is a very important point.
B - QUIT - Never! This is a very important point.
- HINT - No. This is a very important point.
@
4.18
An {b}increase{n} in any asset account is recorded on the left-hand
side. Therefore, since the totals of left- and right-hand amounts must
equal each other, a {u}decrease{n} in any asset must always be recorded on
the {1,5}-hand side.
(A) left (B) right
*1
- POST - {b}{a,10,29}{r}
RIGHT - OK - Correct.
B - OK - Correct.
LEFT - QUIT - No. For assets, increases are always on the left and decreases on the right.
A - QUIT - No. For assets, increases are always on the left and decreases on the right.
- HINT - For assets, increases are always on the left and decreases on the right.
@
4.19
Black Company borrowed $700 from Federal Bank, signing a note.
{s}
{d}Black Company's Cash account {1,9,3} by $700, and its Notes Payable
(A) increased (B) decreased
account, which is one of the equities, {2,9,3} by the same amount.
(A) increased (B) decreased
*1
- POST - {b}{a,7,13}increased
INCREASED - OK - Sure -- cash increased.
A - OK - Sure -- cash increased.
DECREASED - QUIT - No, INCREASED -- Black Company owes the bank $700.
B - QUIT - No, INCREASED -- Black Company owes the bank $700.
*2
- POST - {b}{a,11,13}increased
INCREASED - OK - Good -- Notes Payable is an equity account, not an asset, and indeed increased.
A - OK - Good -- Notes Payable is an equity account, not an asset, and indeed increased.
DECREASED - QUIT - No, Notes Payable INCREASED. Notice that it's an equity, not an asset account.
B - QUIT - No, Notes Payable INCREASED. Notice that it's an equity, not an asset account.
@
4.20{s}
Black Company borrowed $700 from Federal Bank, signing a note.
The increase in Black Company's cash is recorded on the {1,5}-hand
(A) left (B) right
side of its Cash account.
{b} Cash Notes Payable
{l,17}{c,194}{l,17} {l,17}{c,194}{l,17}
(Increases) │ (Decreases) │
│ │
│ │
*1
- POST - {b}{a,7,13}left
- POST - {a,15,16}{2,3}
- POST - {a,21,1}Now record the $700 increase in the Cash account above.
LEFT - OK - Correct.
A - OK - Correct.
RIGHT - QUIT - No, increases in asset accounts are always recorded on the left-hand side.
B - QUIT - No, increases in asset accounts are always recorded on the left-hand side.
*2
700 - OK - Correct.
- HINT - $700 is the increase in cash.
@
4.21{s}
Black Company borrowed $700 from Federal Bank, signing a note.
In order to show equal totals of right- and left-hand amounts, the
corresponding change in the Notes Payable account should be recorded on
the {b}right-hand{n} side. Complete the record of this transaction in the
accounts below.
{b} Cash Notes Payable
{l,17}{c,194}{l,17} {l,17}{c,194}{l,17}
(Increases) │ (Decreases) │
700 │ │ {1,3}
│ │
*1
700 - OK - That's right.
- HINT - The increase in Notes Payable is $700.
@
4.22
Since left- and right-hand amounts must have equal totals, and since
increases in assets are always recorded on the left-hand side, increases in
equities accounts, such as Notes Payable, are always recorded on the
{1,5}-hand side.
(A) left (B) right
*1
- POST - {b}{a,10,26}{r}
RIGHT - OK - Yes, you've got it now!
B - OK - Yes, you've got it now!
LEFT - QUIT - Increases in EQUITY accounts are recorded on the RIGHT.
A - QUIT - Increases in EQUITY accounts are recorded on the RIGHT.
@
4.23{s}
Similarly, since {b}decreases{n} in assets are always recorded on the
{u}right{n}-hand side, {b}decreases{n} in equities will always be recorded on
the {u}left{n}-hand side.
Show which side of the Notes Payable account is used to record increases
and which side is used to record decreases by filling in the blanks below.
{b} Cash Notes Payable
{l,17}{c,194}{l,17} {l,17}{c,194}{l,17}
(Increases) │ (Decreases) │
700 │ │
│ │
│ │ 700
{d}{a,14,47}{1,-11,3} │
{a,14,64}{2,-11,3}
*1
(Decreases) - OK - Yes. So the right-hand side must record Increases.
(DECREASES) - OK - Yes. So the right-hand side must record Increases.
DECREASES - OK - Yes. So the right-hand side must record Increases.
D - OK - Yes. So the right-hand side must record Increases.
(INCREASES) - QUIT - No, Note Payable is an EQUITY account so DECREASES are recorded on the left.
INCREASES - QUIT - No, Note Payable is an EQUITY account so DECREASES are recorded on the left.
I - QUIT - No, Note Payable is an EQUITY account so DECREASES are recorded on the left.
*2
(Increases) - OK - Certainly.
(INCREASES) - OK - Certainly.
INCREASES - OK - Certainly.
I - OK - Certainly.
(DECREASES) - QUIT - No, this is an equity account so the right-hand side records INCREASES.
DECREASES - QUIT - No, this is an equity account so the right-hand side records INCREASES.
D - QUIT - No, this is an equity account so the right-hand side records INCREASES.
@
4.24 Debit and Credit
In the language of accounting, the left-hand side of an account is
called the {b}debit{n} side, and the right-hand side is called the {b}credit{n}
side.
Thus, instead of saying that increases in cash are recorded on the left-hand
side of the Cash account and decreases are recorded on the right-hand side,
accountants say that increases are recorded on the {1,6} side, and
(A) debit (B) credit
decreases are recorded on the {2,6} side.
(A) debit (B) credit
*1
- POST - {b}{a,14,13}debit
DEBIT - OK - Yes.
A - OK - Yes.
CREDIT - QUIT - No, increases in asset accounts are recorded on the left-hand, or DEBIT, side.
B - QUIT - No, increases in asset accounts are recorded on the left-hand, or DEBIT, side.
*2
- POST - {b}{a,18,29}{r}
CREDIT - OK - Correct.
B - OK - Correct.
DEBIT - QUIT - Decreases in asset accounts are recorded on the right-hand, or CREDIT, side.
A - QUIT - Decreases in asset accounts are recorded on the right-hand, or CREDIT, side.
@
4.25
{b}Debit{n} and {b}credit{n} are also verbs. To record an increase in cash,
you debit the Cash account. To record a decrease in cash, you credit the
Cash account. Instead of saying, "Record an amount on the left-hand side
of the Cash account," the accountant simply says, "{1,6} Cash."
(A) debit (B) credit
*1
- POST - {b}{a,10,13}debit
DEBIT - OK - Correct.
A - OK - Correct.
CREDIT - QUIT - You DEBIT Cash to record an increase in Cash.
B - QUIT - You DEBIT Cash to record an increase in Cash.
@
4.26
Increases in all asset accounts, such as Cash, are recorded on the
{b}debit{n} side. To increase an asset account you {b}debit{n} the account.
@
4.27
The rules we just developed in terms of "left-hand" and "right-hand"
can now be stated in terms of {b}debit{n} and {b}credit{n}. {s}
{d}
Respond to each statement with either (A) debits or (B) credits.
Increases in assets are {1,7}.
Decreases in assets are {2,7}.
Increases in equities are {3,7}.
Decreases in equities are {4,7}.
*1
DEBITS - OK - Yes.
A - OK - Yes.
CREDITS - QUIT - No, they are DEBITS.
B - QUIT - No, they are DEBITS.
*2
CREDITS - OK - Okay.
B - OK - Okay.
DEBITS - QUIT - No, decreases in assets are CREDITS.
A - QUIT - No, decreases in assets are CREDITS.
*3
CREDITS - OK - Correct.
B - OK - Correct.
DEBITS - QUIT - For equity accounts, increases are CREDITS.
A - QUIT - For equity accounts, increases are CREDITS.
*4
DEBITS - OK - Good.
A - OK - Good.
CREDITS - QUIT - No, they are DEBITS.
B - QUIT - No, they are DEBITS.
@
4.28
In everyday language the word {b}credit{n} means something "good," and
{b}debit{n} means something "bad."
In the language of accounting, {b}debit{n} means {u}only{n} {1,5}, and
{b}credit{n}
(A) left (B) right
means {u}only{n} {2,5}.
(A) left (B) right
*1
- POST - {b}{a,10,13}left
LEFT - OK - Good.
A - OK - Good.
RIGHT - QUIT - No, debit means LEFT.
B - QUIT - No, debit means LEFT.
*2
- POST - {b}{a,14,29}{r}
RIGHT - OK - Correct.
B - OK - Correct.
LEFT - QUIT - No, credit means the right-hand side.
A - QUIT - No, credit means the right-hand side.
@
4.29
The word {b}debit{n} is abbreviated as "Dr.," and the word {b}credit{n} is
abbreviated as "Cr." Label the two sides of the Cash account below with
these abbreviations.
{s}
{b} Cash
{l,20}{c,194}{l,20}
│
{d} │ {2,-3} {s}
│
Beg. bal. 1,000 │
{d}{a,12,33}{1,-3}{s}
*1
DR. - OK - Yes, that's correct.
DR - QUIT - You omitted the period, but otherwise that's correct.
CR. - NO - No, the right-hand side is the credit side.
CR - NO - No, the right-hand side is the credit side.
*2
- POST - {a,20,1}(In practice, these labels are not shown in the accounts, but we shall use them
- POST - {a,21,1}in the next few screens so as to help you fix them in your mind.)
CR. - OK - Correct.
CR - QUIT - You left out the period, but otherwise that's correct.
DR. - NO - This was already used!
DR - NO - This was already used!
@
4.30
Exhibit 4 shows the accounts for Green Company arranged as they would
appear on a balance sheet. The sum of the debit balances is ${1,-6}, and
the sum of the credit balances is ${2,-6}.
*1
18,000 - OK - OK.
18000 - OK - OK.
*2
18,000 - OK - Correct.
18000 - OK - Correct.
- HINT - Credit balances are: Accounts Payable, $2,000; Capital Stock, $7,000;{a,22,1}and Retained Earnings, $9,000. The total is $18,000, as before.
@
4.31
These totals are equal in accordance with the dual-aspect concept,
that is, assets = equities.
@
4.32a
Record each of the following transactions in the two appropriate {s}
accounts, reproduced below, of Exhibit 4. Record increases in assets on
the debit side and make sure that in each transaction the debit and credit
amounts are equal.
{c,16} 1. Inventory costing $600 is purchased for cash.
2. Inventory costing $400 is purchased on credit.
3. Green Company pays $300 to a creditor.
4. Green Company receives $500 in cash to settle a customer's account.
Which two accounts are affected by the {b}first{n} transaction?
(Fill in the names.)
{1,5} {2,9,3}
{l,17}┬{l,17} {l,17}┬{l,17}
(Dr.) │ (Cr.) (Dr.) │ (Cr.)
{c,32,19}│{c,32,40}│
{c,32,19}│{c,32,40}│
{c,32,19}│{c,32,40}│
*1
- POST - {a,18,3}Beg. Bal. 1,000
CASH - OK - Right -- and the other affected account?
INVEN - NO - Okay, but let's begin with the other account.
- HINT - Name one of the accounts from Exhibit 4.
*2
- POST - {a,13,1}Now go ahead and fill in the amounts. (Use "NC" to signify "no change here.")
- POST - {a,18,44}Beg. Bal. 4,000
- POST - {a,19,14}{3,5}
INVENTORY - OK - Good.
- HINT - Remember that cash was exchanged for inventory.
*3
- POST - {a,19,14}{c, ,5}
- POST - {a,18,22}{4,5}
NC - OK - That's right.
600 - NO - No, the decrease is recorded as a credit.
- HINT - The decrease is recorded as a credit.
*4
- POST - {a,19,55}{5,5}
600 - OK - Correct.
600 - OK - Correct.
NC - NO - No, the cost of the inventory was $600.
- HINT - The cost of the inventory was $600.
*5
- POST - {a,22,1}Press "ENTER" to continue.
600 - OK - Good.
600 - OK - Good.
NC - NO - No, record an increase in an asset on the Dr. side.
@
4.32b
Record each of the following transactions in the two appropriate {s}
accounts, reproduced below, of Exhibit 4. Record increases in assets on
the debit side and make sure that in each transaction the debit and credit
amounts are equal.
1. Inventory costing $600 is purchased for cash.
{c,016} 2. Inventory costing $400 is purchased on credit.
3. Green Company pays $300 to a creditor.
4. Green Company receives $500 in cash to settle a customer's account.
Which two accounts are affected by the {b}second{n} transaction?
(Fill in the names.)
{1,9,3} {2,16,10}
{l,17}┬{l,17} {l,17}┬{l,17}
(Dr.) │ (Cr.) (Dr.) │ (Cr.)
{c, ,19}│{c, ,40 }│
{c, ,19}│{c, ,40 }│
{c, ,19}│{c, ,40 }│
*1
- POST - {a,18,3}Beg. Bal. 4,000
- POST - {a,19,3} 600
INVENTORY - OK - Right -- and the other affected account?
ACCOUNTS PAYABLE - NO - Okay, but let's begin with the other account.
*2
- POST - {a,13,1}Now go ahead and fill in the amounts. (Use "NC" to signify "no change here.")
- POST - {a,18,63}2,000 Beg. Bal.
- POST - {a,20,14}{3,5}
ACCOUNTS PAYABLE - OK - Yes.
- HINT - The credit purchase is recorded under Accounts Payable.
*3
- POST - {a,18,55}{4,5}
400 - OK - That's right.
400 - OK - That's right.
NC - NO - No, something should be written here.
- HINT - The $400 increase in inventory belongs here.
*4
- POST - {a,18,55}{c, ,5}
- POST - {a,19,63}{5,5}
NC - OK - Correct -- No changes here.
400 - NO - No, this must be a Cr. to balance the Inventory Dr.
*5
400 - OK - Sure.
400 - OK - Sure.
- HINT - The $400 credit purchase should be recorded here.
@
4.33a
Record each of the following transactions in the two appropriate {s}
accounts, reproduced below, of Exhibit 4. Record increases in assets on
the debit side and make sure that in each transaction the debit and credit
amounts are equal.
1. Inventory costing $600 is purchased for cash.
2. Inventory costing $400 is purchased on credit.
{c,016} 3. Green Company pays $300 to a creditor.
4. Green Company receives $500 in cash to settle a customer's account.
Which two accounts are affected by the {b}third{n} transaction?
(Fill in the names.)
{1,5} {2,16,10}
{l,17}┬{l,17} {l,17}┬{l,17}
(Dr.) │ (Cr.) (Dr.) │ (Cr.)
{c, ,19}│{c, ,40 }│
{c, ,19}│{c, ,40 }│
{c, ,19}│{c, ,40 }│
*1
- POST - {a,18,3}Beg. Bal. 1,000 │ 600
CASH - OK - Yes.
- HINT - Let's begin with the Cash account.
*2
- POST - {a,18,63}2,000 Beg. Bal. {a,19,63} 400
- POST - {a,19,14}{3,5}
- POST - {a,13,1}Now go ahead and fill in the amounts. (Use "NC" to signify "no change here.")
ACCOUNTS PAYABLE - OK - Correct.
- HINT - Payment to a creditor affects Accounts payable.
*3
- POST - {a,19,14}{c, ,5}
- POST - {a,19,22}{4,5}
NC - OK - Correct.
300 - NO - Nothing changes here.
*4
- POST - {a,18,55}{5,5}
300 - OK - Correct.
300 - OK - Correct.
*5
- POST - {a,22,1}Press ENTER to continue.
300 - OK - Right.
300 - OK - Right.
NC - NO - No, record $300 under Dr. to balance the Cash Cr.
@
4.33b
Record each of the following transactions in the two appropriate {s}
accounts, reproduced below, of Exhibit 4. Record increases in assets on
the debit side and make sure that in each transaction the debit and credit
amounts are equal.
1. Inventory costing $600 is purchased for cash.
2. Inventory costing $400 is purchased on credit.
3. Green Company pays $300 to a creditor.
{c,016} 4. Green Company receives $500 in cash to settle a customer's account.
Which two accounts are affected by the {b}fourth{n} transaction?
(Fill in the names.)
{1,5} {2,19,12}
{l,17}┬{l,17} {l,17}┬{l,17}
(Dr.) │ (Cr.) (Dr.) │ (Cr.)
{c, ,19}│{c, ,40 }│
{c, ,19}│{c, ,40 }│
{c, ,19}│{c, ,40 }│
*1
- POST - {a,18,3}Beg. Bal. 1,000 │ 600
- POST - {a,19,3} │ 300
CASH - OK - Sure. And the other affected account?
*2
- POST - {a,18,44}Beg. Bal. 3,000
- POST - {a,13,1}Now go ahead and fill in the amounts. (Use "NC" to signify "no change here.")
- POST - {a,19,14}{3,5}
ACCOUNTS RECEIVABLE - OK - Correct.
ACCOUNTS PAYABLE - NO - No, the account is for money owed TO Green Company.
*3
- POST - {a,19,55}{4,5}
500 - OK - Right!
500 - OK - Right!
NC - NO - No, remember an increase in an asset is a Dr.
*4
- POST - {a,19,55}{c, ,5}
- POST - {a,18,63}{5,5}
NC - OK - Correct -- no change takes place there.
500 - NO - In each transaction the debits and credits must be equal.
*5
500 - OK - Good!
500 - OK - Good!
@
4.34
Here are the {u}new{n} balances for each account of Exhibit 4. {s}
Cash .................. 600 Dr. Accounts Payable ...... 2,100 Cr.
Accounts Receivable ... 2,500 Dr. Capital Stock ......... 7,000 Cr.
Inventory ............. 5,000 Dr. Retained Earnings ..... 9,000 Cr.
Other Assets .......... 10,000 Dr.
{d}The total of the new balances of the asset accounts is ${1,-6}. The
{s}
{d}total of the new balances of the equity accounts is ${2,-6}. Also, the
{s}
{d}total of the debit balances equals the total of the C{3,6,2} balances.
*1
18,100 - OK - Correct.
18100 - OK - Correct.
*2
18,100 - OK - Sure.
18100 - OK - Sure.
*3
REDIT - OK - Correct.
CREDIT - OK - Correct.
@
4.35
Because the total of the debit entries for any transaction will always
equal the total of the credit entries, it is {1,9} to check the
(A) difficult (B) easy
accuracy with which bookkeeping is done. (We owe this ingenious arrangement
to Venetian merchants, who invented it more than 500 years ago.)
*1
- POST - {b}{a,6,31}{r}
EASY - OK - Sure -- if they don't balance, there must be a mistake.
B - OK - Sure -- if they don't balance, there must be a mistake.
DIFFICULT - QUIT - No, easy -- if they don't balance, there must be a mistake.
A - QUIT - No, easy -- if they don't balance, there must be a mistake.
@
4.36 Income Statement Accounts
The accounts in Exhibit 4 were for items that appear on the balance
sheet. Accounts are also kept for items that appear on the other financial
statement, the {1,6} statement. As we saw in Part 3, this statement
reports the revenues and the expenses of an accounting period and the
difference between them, which is income.
*1
INCOME - OK - That's right.
- HINT - {a,21,1}The other financial statement you studied in Part 3 was the INCOME statement.
@
4.37
Revenues are {1,9,3} in owners' equity during a period, and
(A) increases (B) decreases
expenses are {2,9,3} in owners' equity.
(A) increases (B) decreases
*1
- POST - {b}{a,4,13}increases
INCREASES - OK - Yes, revenues increase owners' equity.
A - OK - Yes, revenues increase owners' equity.
DECREASES - QUIT - No, revenues INCREASE owners' equity.
B - QUIT - No, revenues INCREASE owners' equity.
*2
- POST - {b}{a,8,32}{r}
DECREASES - OK - That's right.
B - OK - That's right.
INCREASES - QUIT - No, expenses DECREASE owners' equity.
A - QUIT - No, expenses DECREASE owners' equity.
@
4.38
For owners' equity, as for all equities accounts, increases are
recorded as {1,7}. Since revenues are increases in owners' equity,
(A) debits (B) credits
revenues are recorded as {2,7}.
(A) debits (B) credits
*1
- POST - {b}{a,6,29}{r}
CREDITS - OK - Good.
B - OK - Good.
DEBITS - QUIT - Careful! For equities accounts, increases are credits.
A - QUIT - Careful! For equities accounts, increases are credits.
*2
- POST - {b}{a,10,29}{r}
CREDITS - OK - Right.
B - OK - Right.
DEBITS - QUIT - No, credits -- increases in equity accounts are credits.
A - QUIT - No, credits -- increases in equity accounts are credits.
@
4.39
Similarly, decreases in owners' equities are recorded as {1,7}.
(A) debits (B) credits
Since expenses are decreases in owners' equity, expenses are recorded as
{2,7}.
(A) debits (B) credits
*1
- POST - {b}{a,4,13}debits
DEBITS - OK - Right, a decrease in an equity is a debit.
A - OK - Right, a decrease in an equity is a debit.
CREDITS - QUIT - No, a decrease in an equity is a debit.
B - QUIT - No, a decrease in an equity is a debit.
*2
- POST - {b}{a,10,13}debits
DEBITS - OK - Good -- you've got it.
A - OK - Good -- you've got it.
CREDITS - QUIT - No, expenses decrease an equity account, so they are debits.
B - QUIT - No, expenses decrease an equity account, so they are debits.
@
4.40
The complete set of rules for making entries to accounts is as follows:
(Complete each statement with either (A) debits or (B) credits.) {s}
{d}
Increases in assets are {1,7}.
Decreases in assets are {2,7}.
Increases in equities are {3,7}.
Decreases in equities are {4,7}.
Increases in revenues are {5,7}.
Increases in expenses are {6,7}.
*1
DEBITS - OK - Correct.
A - OK - Correct.
CREDITS - QUIT - No, debits.
B - QUIT - No, debits.
*2
CREDITS - OK - Correct.
B - OK - Correct.
DEBITS - QUIT - No, credits.
A - QUIT - No, credits.
*3
CREDITS - OK - Correct.
B - OK - Correct.
DEBITS - QUIT - No, credits.
A - QUIT - No, credits.
*4
DEBITS - OK - Correct.
A - OK - Correct.
CREDITS - QUIT - No, debits.
B - QUIT - No, debits.
*5
CREDITS - OK - Correct.
B - OK - Correct.
DEBITS - QUIT - No, credits.
A - QUIT - No, credits.
*6
DEBITS - OK - Correct.
A - OK - Correct.
CREDITS - QUIT - No, debits.
B - QUIT - No, debits.
@
4.41 The Ledger and the Journal
A group of accounts, such as those for Green Company in Exhibit 4, is
called a {b}ledger{n}. There is no standard form, so long as there is space to
record the debits and credits to each account. Exhibit 6 is the {b}ledger{n} of
Glendale Market, the same company we studied in Part 3.
@
4.42
In practice, transactions are not recorded directly in the ledger.
First, they are written in a record such as Exhibit 5. The title of
Exhibit 5 shows that this record is called a {1,8,3}. The record for
each transaction is called an {b}entry{n}.
*1
JOURNAL - OK - Yes.
ACCOUNTS - NO - No, that's a heading in the JOURNAL.
- HINT - Transactions are recorded in a JOURNAL.
@
4.43
In the journal, entries are recorded as they happen; that is,
transactions for January 3 are recorded {1,6} transactions for
January 2.
(A) before
(B) after
*1
- POST - {b}{a,10,13}{r}
AFTER - OK - Correct.
B - OK - Correct.
BEFORE - QUIT - No. Jan. 3 transactions occur after, so are recorded after, those of Jan. 2.
A - QUIT - No. Jan. 3 transactions occur after, so are recorded after, those of Jan. 2.
@
4.44
As Exhibit 5 shows, the account to be {1,8} is listed
(A) debited (B) credited
first, and the {2,3} amounts appear in the first of the two money
(C) Dr. (D) Cr.
columns. The account to be {3,8} appears below and is indented.
(A) debited (B) credited
The {4,3} amounts appear in the second money column.
(C) Dr. (D) Cr.
*1
- POST - {b}{a,4,13}debited
DEBITED - OK - Good.
A - OK - Good.
CREDITED - QUIT - No. In each entry, the DEBITED account is listed first.
B - QUIT - No. In each entry, the DEBITED account is listed first.
*2
- POST - {b}{a,8,13}Dr.
DR. - OK - Right.
C - OK - Right.
DR - OK - Okay. (check spelling)
CR. - QUIT - No, these are debits so the column is heade Dr.
D - QUIT - No, these are debits so the column is headed Dr.
CR - QUIT - No, these are debits so the column is headed Dr.
*3
- POST - {b}{a,12,29}{r}
CREDITED - OK - Correct.
B - OK - Correct.
DEBITED - QUIT - No, the lower, indented account is a credit.
A - QUIT - No, the lower, indented account is a credit.
*4
- POST - {b}{a,16,29}{r}
CR. - OK - Yes.
D - OK - Yes.
CR - OK - Yes. (but remember the period)
DR. - QUIT - No, the lower, indented account is a CREDIT.
C - QUIT - No, the lower, indented account is a CREDIT.
DR - QUIT - No, the lower, indented account is a CREDIT.
@
4.45
On January 8 merchandise costing $600 was sold for $900, the customer
agreeing to pay $900 within 30 days. {s}
{d}
Using the two journal entries for January 7 (in Exhibit 5) as a guide, record
the two parts of this transaction in the screens that follow.
@
4.46{s}
On January 8 merchandise costing $600 was sold for $900, the customer
agreeing to pay $900 within 30 days.
The first part of this transaction is that the business earned {b}revenues{n} of
$900, and an asset, Accounts Receivable, increased by $900. Record this part
of the transaction by completing the blanks below.
{d}
Dr. {1,-18,9} ........................... 900 {s}
{d}
Cr. {2,-18} ....................... 900
{s}
{a,17,1}(Hint: If in doubt as to whether a particular account is to be debited or
{a,18,1}credited, you usually can find out by referring to the OTHER account in the
{a,19,1}entry. For example, the entry to Account Receivable is an increase in an
{a,20,1}asset, which is a debit, so the entry to Revenues must be a credit.)
*1
ACCOUNT RECEIVABLE - OK - Yes.
B - OK - Yes.
REVENUE - QUIT - No -- since revenues increase owners' equity, what increase is a credit.
A - QUIT - No -- since revenues increase owners' equity, that increase is a credit.
*2
REVENUES - OK - Good. It's recorded as a credit because it increases an equity account.
REVENUE - OK - Good.
A - OK - Good. It's recorded as a credit because it increases an equity account.
ACCOUNT RECEIVABLE - QUIT - No. That would just cancel the debt.
B - QUIT - No -- that would just cancel out the debit.
@
4.47{s}
On January 8 merchandise costing $600 was sold for $900, the customer
agreeing to pay $900 within 30 days.
The other part of this transaction is that the business had an {b}expense{n} of
$600 because its {b}inventory{n} was decreased by $600. Record this part of the
transaction by completing the blanks below.
{d}
Dr. {1,-9,3 } .................................... 900 {s}
The entries through January 7 have already been posted to the ledger,
as indicated by the check mark (√) opposite each. Post the journal entries
for January 8, shown again above, to the proper ledger accounts of Exhibit 6,
reproduced below. (To indicate "no change here," enter "NC".)
{b} Accounts Receivable Revenues
{l,15}┬{l,15} {l,15}┬{l,15}
{1,5} │ │ 300
│ │ 800
│ │
{b} Inventory Expenses
{l,15}┬{l,15} {l,15}┬{l,15}
2,000 │ 200 200 │
2,000 │ 500 500 │
│ │
*1
- POST - {a,12,54}{2,5}
900 - OK - Good, the Dr. goes on the left.
900 - OK - Good, the Dr. goes on the left.
- HINT - The Dr. goes on the left.
*2
- POST - {a,12,54}{c, ,5}
- POST - {a,14,62}{3,5}
NC - OK - Correct.
900 - NO - No, not here.
*3
- POST - {a,20,14}{4,5}
900 - OK - Right. Now post the other part of the transaction.
900 - OK - Right. Now post the other part of the transaction.
*4
- POST - {a,20,14}{c, ,5}
- POST - {a,20,22}{5,5}
NC - OK - Correct.
600 - NO - No, a Cr. always goes on the right side.
*5
- POST - {a,20,54}{6,5}
600 - OK - Sure.
600 - OK - Sure.
*6
600 - OK - That's right. You've completed the ledger for January 8.
600 - OK - That's right. You've completed the ledger for January 8.
NC - NO - No, something does go here.
@
4.50
To summarize, any transaction gives rise to at least {1,3} change(s)
[how many?] in the accounts. {s}
{d}
These changes are recorded first in the {2,7}, and are then posted
(A) ledger (B) journal
to the {3,7}.
(A) ledger (B) journal
*1
TWO - OK - That's right.
2 - OK - That's right.
ONE - NO - No, you need at least one debit entry and one credit entry.
1 - NO - No, you need at least one debit entry and one credit entry.
- HINT - At least one debit entry and one credit entry are needed.
*2
- POST - {b}{a,9,29}{r}
JOURNAL - OK - Yes.
B - OK - Yes.
LEDGER - QUIT - No, the changes are made first in the JOURNAL.
A - QUIT - No, the changes are made first in the JOURNAL.
*3
- POST - {b}{a,13,13}ledger
LEDGER - OK - Right.
A - OK - Right.
JOURNAL - QUIT - Changes made first in the journal are posted to the ledger.
B - QUIT - Changes made first in the journal are posted to the ledger.
@
4.51 The Closing Process
The Revenues account in Exhibit 6 shows {1,9} in owner's
(A) increases (B) decreases
equity during the period, and the Expenses account shows {2,9}
(A) increases (B) decreases
in owner's equity. The difference between revenues and expenses is the
{b}income{n} of the period.
*1
- POST - {b}{a,6,13}increases
INCREASES - OK - Yes. (Which is why it is recorded on the right-hand side.)
A - OK - Yes. (Which is why it is recorded on the right-hand side.)
DECREASES - QUIT - No, revenues INCREASE owner's equity (and are thus recorded on the right).
B - QUIT - No, revenues INCREASE owner's equity (and are thus recorded on the right).
*2
- POST - {b}{a,10,33}{r}
DECREASES - OK - Good.
B - OK - Good.
INCREASES - QUIT - No, expenses DECREASE owner's equity.
A - QUIT - No, expenses DECREASE owner's equity.
@
4.52
The income for the period is an increase in owner's equity.
In the ledger for Glendale Market (Exhibit 6), owner's equity is shown
in the {1,19,4} [give its title] account. Income is added to
owner's equity by a series of journal entries called {b}closing entries.
*1
JOHN SMITH, CAPITAL - OK - Right.
@
4.53
First, an account called {b}Income Summary{n} is established. The balances
in Revenues and Expenses are transferred to this Income Summary account.
@
4.54
In order to do this, we first must find the balance in the account
that is to be closed. What is the balance in the Revenues account?
(Include the $900 that was posted January 8.) ${1,-5}
{b} Revenues {s}
{l,17}┬{l,17}
│ 300
│ 800
│ 900
│
*1
2,000 - OK - Sure.
2000 - OK - Sure.
- HINT - Add up the credit entries to find the balance.
@
4.55
An entry is made that reduces the balance in the account to be closed
to zero and records the same amount on the opposite side of Income Summary.
Since the Revenues account has a {1,3} balance, the entry that reduces
(A) Dr. [or debit] (B) Cr. [or credit]
Revenues to zero must be on the opposite side; that is, it must be a {2,3}.
(A) Dr. [or debit] (B) Cr. [or credit]
*1
- POST - {b}{a,8,37}Cr.
CR. - OK - Correct.
B - OK - Correct.
DR. - QUIT - Note that the balance is on the RIGHT-HAND side, so it is a credit.
A - QUIT - Note that the balance is on the RIGHT-HAND side, so it is a credit.
*2
- POST - {b}{a,12,13}Dr.
DR. - OK - Good.
A - OK - Good.
CR. - QUIT - No, the "opposite side" in this case is the left-hand or debit side.
B - QUIT - No, the "opposite side" in this case is the left-hand or debit side.
@
4.56{s}
Write the journal entry that closes the $2,000 balance in the Revenues
account to Income Summary.
(This entry would be dated January 8, the end of the accounting period, and
would immediately follow the entries shown in Exhibit 5.)
{d}
Dr. {1,-14,3 } ............................... 2,000 {s}
{d}
Cr. {2,-14,3 } ........................... 2,000
{s}
Complete each blank with the appropriate choice from below.
(A) Income Summary
(B) Revenues
*1
REVENUES - OK - Yes.
B - OK - Yes.
INCOME SUMMARY - QUIT - No, remember that you need a DEBIT to Revenues to reduce the balance to zero.
A - QUIT - No, remember that you need a DEBIT to Revenues to reduce the balance to zero.
*2
INCOME SUMMARY - OK - Correct.
A - OK - Correct.
REVENUES - QUIT - No, you've debited Revenues and now need a matching credit to Income Summary.
B - QUIT - No, you've debited Revenues and now need a matching credit to Income Summary.
@
4.57{s}
Using similar reasoning, write the journal entry that closes the
$1,300 balance in the Expenses account to Income Summary. (This entry is
also dated January 8.)
{d}
Dr. {1,-14,3 } ............................... 1,300 {s}
{d}
Cr. {2,-14,3 } ........................... 1,300
{s}
Complete each blank with the appropriate choice from below.
(A) Income Summary
(B) Expenses
*1
INCOME SUMMARY - OK - Good.
A - OK - Good.
EXPENSES - QUIT - No, you already have a debit in Expenses.
B - QUIT - No, you already have a debit in Expenses.
*2
EXPENSES - OK - Yes, that's right.
B - OK - Yes, that's right.
INCOME SUMMARY - QUIT - No, Income Summary was just debited.
A - QUIT - No, Income Summary was just debited.
@
4.58
Next, these two entries are posted to the ledger in Exhibit 6 like this: {s}
Revenues
{l,17}┬{l,17}
{b} 2,000{n} │ 300
│ 800
│ 900
Expenses
{l,17}┬{l,17}
200 │ {b}1,300
500 │
600 │
Income Summary
{l,17}┬{l,17}
{b} 1,300{n} │ {b}2,000
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Receivable, it needs an account for each customer so that the amount owed
by each customer is known. Therefore the ledger usually contains
{1,-1} accounts than there are items on the financial statements.
(A) the same number of
(B) many more
*1
- POST - {b}{a,14,13}{r}
B - OK - Sure -- there is much more detail in the ledger than in the statements.
A - QUIT - No, the ledger is much more detailed than the financial statements.
@
4.66
After the closing process, the Revenues, Expenses, and Income Summary
accounts have {1,6} balances. These accounts are therefore {b}temporary{n}
accounts. They are started over at the beginning of each period. By
contrast, the asset accounts have {2,6} balances, and the equities
accounts have {3,6} balances, and these balances are carried forward
to the next period. Income statement accounts are {b}temporary{n} accounts, and
balance sheet accounts are {b}permanent{n} accounts.
{a,19,1}Complete each blank with (A) debit, (B) credit, or (C) zero.
*1
- POST - {a,21,1}{c, ,78}
ZERO - OK - Yes, closing these accounts reduces the balances to zero. {a,21,1}{c, ,78}
C - OK - Yes, closing these accounts reduces the balances to zero. {a,21,1}{c, ,78}
- HINT - {a,21,1}The closing process by definition reduces balances in these accounts to zero. {d}
*2
DEBIT - OK - Yes, assets usually have debit balances.
A - OK - Yes, assets usually have debit balances.
- HINT - Conceivably, but normally asset accounts have debit balances.
*3
CREDIT - OK - Right, equity accounts have credit balances as a rule.
B - OK - Right, equity accounts have credit balances as a rule.
- HINT - Equity accounts have credit balances as a rule.
@
{s}Key Points to Remember
- Debit refers to the left-hand side of an account and credit to the right.
- Increases in asset and expense accounts are debits. Increases in equities
and revenue accounts are credits. Decreases are the opposite.
- For any transaction, debits must equal credits. For the whole set of
accounts, debit balances must equal credit balances.
- Transactions are first recorded in a journal. The account to be debited
is recorded first. The account to be credited is recorded below it and
is indented. Amounts are then posted to the accounts in a ledger.
- Revenue and expense accounts are temporary accounts. At the end of each
accounting period, they are closed to owners' equity. The change in
owners' equity during a period is described on an income statement.
- Asset and equities accounts are permanent accounts. Their balances are
carried forward to the next accounting period.
<continued>
@
You have now completed Part 4 of this program. If you have understood
the material in this part, you should now take Post Test 4. If you feel you
would like to review the material before taking the post test, please do so. {s}
{d}
The post test will serve both to test your comprehension and to review the
highlights of Part 4. After taking the post test, you may find that you are
unsure about certain points the test raises. You should review these points
