Chapter 2

COMPLETION

1. Most businesses recognize ____________________ when earned, even if cash has not yet
been received.
2. ____________________ represent the decrease in assets (or increase in liabilities) as a result
of efforts made to produce revenues.
3. The ____________________, sometimes called the profit and loss statement, reports the
profitability of business operations for a specific period of time.
4. ____________________ represent the amount a business charges customers for products
sold or services performed.
5. The relationship between the three basic accounting elements: ____________________,
____________________, and ____________________, can be expressed in the form of a
simple equation known as the accounting equation.
6. ____________________ represent something owed to another business entity.
7. A(n) ____________________ is a written promise to pay a supplier for assets purchased or
services received.
8. The report which shows a firm's assets, liabilities, and owner's equity as of a specific date is
called the ____________________.
9. The ____________________ reports the investments and withdrawals by the owner, the
profits and losses generated through operations, and how they have affected the capital
account.
10. A(n) ____________________ is a reduction in owner's equity as a result of the owner taking
cash or other assets out of the business for personal use.
11. ____________________ is the amount by which business assets exceed the business
liabilities.
12. Amounts owed to the business by its customers are called ____________________.
13. A(n) ____________________ is an economic event that has a direct impact on the business.
14. A(n) ____________________ is a separate record used to summarize changes in assets,
liabilities, and owner's equity of a business.
15. According to the ____________________, nonbusiness assets and liabilities are not included
in the business entity's accounting records.
16. Items that are owned by a business and will provide future benefits are called
____________________.

MATCHING

Match the terms with the definitions.

a. account
b. accounts payable
c. accounts receivable
d. accounting equation
e. assets
f. balance sheet
g. business entity
 h. business entity concept
i. business transaction
j. drawing
k. expenses
l. income statement
m. liability
n. net income
o. net loss
p. notes payable
q. owner's equity
r. revenues
s. statement of owner's equity

1. The amount by which the business assets exceed the business liabilities.

2. Reports assets, liabilities, and owner's equity on a specific date.

3. Withdrawals that reduce owner's equity as a result of the owner taking cash or other assets
out of the business for personal use.

4. The decrease in assets (or increase in liabilities) as a result of efforts to produce revenues.

5. A formal written promise to pay a supplier or lender a specified sum of money at a definite
future time.

6. The excess of total revenues over total expenses for the period.

7. Reports the profitability of business operations for a specific period of time.

8. Reports beginning capital, plus net income, less withdrawals to compute ending capital.

9. An economic event that has a direct impact on the business.

10. The concept that nonbusiness assets and liabilities are not included in the business' accounting
records.

11. Consists of the three basic accounting elements: assets = liabilities + owner's equity.

12. Items a business owns that will provide future benefits.

13. An unwritten promise to pay a supplier for assets purchased or services rendered.

14. A separate record used to summarize changes in each asset, liability, and owner's equity of a
business.
15. An amount owed to a business by its customers as a result of the sale of goods or services.

16. An individual, association, or organization that engages in economic activities and controls
specific economic resources.

PROBLEM

P-1. Transaction Analysis

The following transactions of Larson Services Inc. occurred during August 2023, its first month
of operations.

Aug 1 Issued share capital for $3,000 cash

.
1 Borrowed $10,000 cash from the bank
1 Paid $8,000 cash for a used truck
3 Signed a contract with a customer to do a $15,000 job beginning in November
4 Paid $600 for a one-year truck insurance policy effective August 1
5 Collected fees of $2,000 for work to be performed in September
7 Billed a client $5,000 for services performed today
9 Paid $250 for supplies purchased and used today
12 Purchased $500 of supplies on credit
15 Collected $1,000 of the amount billed August 7
16 Paid $200 for advertising in The News that ran the first two weeks of August
20 Paid $250 of the amount owing regarding the credit purchase of August 12
25 Paid the following expenses: rent for August, $350; salaries, $2,150; telephone, $50;
truck operation, $250
28 Called clients for payment of the balances owing from August 7
31 Billed a client $6,000 for services performed today
31 $500 of the amount collected on August 5 has been earned as of today

Required:

1. Create a table like the one below by copying the headings shown.

ASSETS = LIABILITIES + EQUITY

Acct. Ppd. Unused Bank Acct. Unearne Share Retained
d
Cas + Rec. + Exp + Supplie + Truck = Loan + Pay. + Revenue + Capital + Earnings
 h . s

2. Use additions and subtractions in the table created in Part 1 to show the effects of the
August transactions. For non-transactions that do not impact the accounting equation
items (such as August 3), indicate 'NE' for 'No Effect'.
3. Total each column and prove the accounting equation balances.

P-2. Transaction Analysis and Table

The following transactions occurred for Olivier Bondar Ltd., an restaurant management
consulting service, during May, 2024:

May 1 Received a cheque in the amount of $5,000 from TUV Restaurant Ltd., for a restaurant
food cleanliness assessment to be conducted in June.
May 1 Paid $5,000 for office rent for the month of May.
May 2 Purchased office supplies for $3,000 on account.
May 3 Completed a consultation project for McDanny's Restaurant and billed them $27,000
for the work.
May 4 Purchased a laptop computer for $3,000 in exchange for a note payable due in 45 days.
May 5 Olivier Bondar was a little short on cash, so the manager made an application for a
bank loan in the amount of $20,000. It is expected that the bank will make their
decision regarding the loan next week.
May 6 Received an invoice from the utilities company for electricity in the amount of $300.
May 10 Bank approved the loan and deposited $20,000 into Olivier Bondar's bank account.
First loan payment is due on June 10.
May 11 Paid for several invoices outstanding from April for goods and services received for a
total of $8,000. The breakdown of the invoice costs are: telephone expense $500;
advertising expense $3,000; office furniture $2,000; office supplies $2,500.
May 13 Paid employee salaries owing from May 1 to May 13 in the amount of $3,000.
May 14 Completed consulting work for a U.S. client and invoiced $18,000 US (US funds). The
Canadian equivalent is $25,000 CAD.
May 15 Received $25,000 cash for work done and invoiced in April.
May 18 Hired a new employee who will begin work on May 25. Salary will be $2,500 every
two weeks.
May 21 Placed an order request for new shelving for the office. Catalogue price is $2,500.
May 27 Paid employee salaries owing from May 14 to May 27 in the amount of $3,500.
May 29 The bookkeeper was going to be away for two weeks, so the June rent of $5,000 was
paid.
May 31 Reimbursed $50 in cash to an employee for use of his personal vehicle for company
 business on May 20.
May 31 Shelving unit ordered on May 21 was delivered and installed. Total cost was $3,000,
including labour.

Required: Create a table with the following column headings and opening balances. Below the
opening balance, number each row from 1 to 18:

Cash Accounts Office Prepaid Equipment Office Account Note/Loan Unearned Share Retained
s
receivable supplies expenses furniture payable payable revenue capital earnings
Open +10,000 +25,000 +2,000 0 +25,000 +15,000 +35,000 0 0 +8,000 +34,000
Bal
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
Bal
Using the table as shown in Figure 1.3 of the text, complete the table for the 18 items listed in
May and total each column. If any of the items are not to be recorded, leave the row blank.

P-3. Show the effects of each transaction on the accounting equation by indicating under the
proper heading the dollar amount of increase or decrease for each transaction listed below.
Compute the resulting accounting equation.
 a. Owner deposited $20,000 in his new business checking account.
b. Supplies were purchased for $300 on account.
c. Paid a $1,200 premium for six months of liability insurance.
d. Purchased supplies for $200 cash.
e. Purchased equipment for $4,000 by paying $1,000; the rest to be paid in six
months.
f. Paid the $300 bill outstanding (from transaction b).
g. Owner withdrew $700 from the business for personal use.

P- 4. Madame Shira began a fortune telling business on May 1. The following transactions
occurred:

1. Owner Madame Shira invested $5,000 cash in the business.

2. Purchased $2,000 of furniture with a down payment of $500; the rest by
issuing an account payable to be paid in three monthly installments.
3. Paid $700 rent.
4. Purchased a crystal ball for $300.
5. Paid $1,700 for a 12-month insurance policy.
6. During the first month received $2,500 from cash customers.
7. Sent billings of $2,000 for services rendered to credit customers.
8. Paid assistant $1,500 wages for the month.
9. Received $600 in payments from credit customers.
10. Borrowed $3,200 by signing a note.
11. Made a $500 payment on the furniture bill (from transaction 2).
12. Owner withdrew $300 cash for personal use.
13. Paid bills for advertising $60, utilities $39, and repairs $52.

Required: Enter the above transactions in an accounting equation work sheet.

P- 5. Kristin Holden started her own consulting business in July, 20--. During the first month,
the following transactions occurred:

a. Owner invested $12,000 cash in the business.

b. Purchased office equipment for $7,500 cash.
c. Purchased computer equipment costing $11,500 on account.
d. Paid $1,100 office rent for the month.
e. Received $1,700 cash from a client for services rendered.
f. Paid water bill for the month, $170.
g. Paid $2,400 on account for computer equipment purchased in transaction (c).
h. Paid the electric bill for the month, $200.

Required:
Record the effects of these transactions in an accounting equation worksheet.
EXERCISE

E-1. Calculating Missing Amounts

Required: Calculate the missing amounts for companies A to E.

A B C D E
Cash $3,000 $1,000 ? $6,000 $2,500
Equipment 8,000 6,000 4,000 7,000 ?
Accounts Payable 4,000 ? 1,500 3,000 4,500
Share Capital 2,000 3,000 3,000 4,000 500
Retained Earnings ? 1,000 500 ? 1,000

E-2. Calculating Missing Amounts

Assets = Liabilities + Equity
Balance, Jan. 1, 2023 $50,000 $40,000 ?
Balance, Dec. 31, 2023 40,000 20,000 ?

Required: Using the information above, calculate net income under each of the following
assumptions.

a. During 2023, no share capital was issued and no dividends were declared.
b. During 2023, no share capital was issued and dividends of $5,000 were declared.
c. During 2023, share capital of $12,000 was issued and no dividends were declared.
d. During 2023, share capital of $8,000 was issued and $12,000 of dividends were declared.

E-3. Identifying Assets, Liabilities, Equity Items

Required: Indicate whether each of the following is an asset (A), liability (L), or an equity (E)
item.

a. Accounts Payable k. Dividends

b Accounts Receivable l. Interest Receivable
.
c. Bank Loan Payable m. Retained Earnings
d Building n. Interest Revenue
.
e. Cash o. Interest Payable
f. Share Capital p. Interest Expense
g. Loan Payable q. Prepaid Insurance
h Office Supplies r. Insurance Expense
.
i. Prepaid Insurance s. Insurance Revenue
j. Utilities Expense t. Machinery

E-4. Equity – What Causes it to Change

Assets = Liabilities + Equity
Balances at April 1, 2023 $100,000 $60,000 $40,00
0
? Shares issued in April

? April net income(loss)

? Dividends paid in April

Balances at April 30, 2023 $180,000 = $130,000 + ?

Required: Using the information provided above, calculate the net income or net loss realized
during April under each of the following independent assumptions.

a. No shares were issued in April and no dividends were paid.

b. $50,000 of shares were issued in April and no dividends were paid.
c. No shares were issued in April and $4,000 of dividends were paid in April.

E-5. Impact of Transactions on the Accounting Equation

The following list shows the various ways in which the accounting equation might be affected by
financial transactions.

Assets = Liabilities + Equity

1 (+) (+)
.
2 (+) (+)
.
3 (+)(-)
.
4 (-) (-)
.
5 (-) (-)
.
6 (+) (-)
.
7 (-) (+)
.
8 (+)(-)
.
9 (+)(-)
.

Required: Match one of the above to each of the following financial transactions. If the
description below does not represent a financial transaction, indicate 'NT' for 'No Transaction'.
The first one is done as an example.

a. 3 Purchased a truck for cash.

b. Issued share capital for cash.
c. Incurred a bank loan as payment for equipment.
d. Made a deposit for electricity service to be provided to the company in the
future.
e. Paid rent expense.
f. Signed a new union contract that provides for increased wages in the future.
g. Wrote a letter of complaint to the prime minister about a mail strike and hired
a messenger service to deliver letters
h. Received a collect telegram from the prime minister; paid the messenger.
i. Billed customers for services performed.
j. Made a cash payment to satisfy an outstanding obligation.
k. Received a payment of cash in satisfaction of an amount owed by a customer.
l. Collected cash from a customer for services rendered.
m. Paid cash for truck operation expenses.
n. Made a monthly payment on the bank loan; this payment included a payment
on part of the loan and also an amount of interest expense. (Hint: This
transaction affects more than two parts of the accounting equation.)
o. Issued shares in the company to pay off a loan.