2.1 Questions

Chapter 2: Questions & Answers
CHAPTER 2
The Recording
Process
69
Accounting Principles Manual
Questions & Answers

1 Describe the parts of a T account.
Answer: A T account has the following three parts:
(1) The title of the account,
(2) The left or debit side,
(3) The right or credit side.
2 “The terms debit and credit mean increase and decrease, respectively.” Is
this true? Explain why or why not.
Answer: We are disagreed with the statement. Because, the terms debit and
credit mean left and right respectively.
3 Pete Harcourt, a fellow student, contends that the double-entry system
means each transaction must be recorded twice. Is Pete correct? Explain.
Answer: Pete is incorrect.
Explanation: The double-entry system merely records the dual effect
of a transaction on the accounting equation. A transaction is not recorded twice,
it is recorded once, with a dual effect.
4 Melissa Estes, a beginning accounting student, believes debit balances are
favorable and credit balances are unfavorable. Is Melissa correct? Explain.
Answer: Melissa is incorrect.
Explanation: A debit balance only means that debit amounts exceeds
credit amount 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.
5 State the rules of debit and credit as applied to (a) asset accounts, (b)
liability accounts, and (c) the owner’s equity accounts (revenues, expenses,
owner’s drawing, and owner’s capital).
Answer: The rules of debit and credit as applied to the given three cases are
stated below:
(a) Assets accounts are increased by debits and decreased by credits.
(b) Liability accounts are decreased by debits and increased by credits.
(c) Owner’s equity accounts are decreased by debits and increased by
credit.
6 What is the normal balance for each of the following accounts? (a)
Accounts Receivable. (b) Cash. (c) Owner’s Drawings. (d) Accounts
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Payable. (e) Service Revenue. (f) Salaries and Wages Expense. (g) Owner’s
Capital.
Answer: The normal balance for each of the given accounts is as follows:
No. Name of Accounts Normal Balance
(a) Accounts Receivable Debit balance
(b) Cash Debit balance
(c) Owner’s Drawing Debit balance
(d) Accounts Payable Credit balance
(e) Service Revenue Credit balance
(f) Salaries and Wages Expense Debit balance
(g) Owner’s Capital Credit balance
7 Indicate whether each of the following accounts is an asset, a liability, or
an owner’s equity account and whether it has a normal debit or credit
balance: (a) Accounts Receivable, (b) Accounts Payable, (c) Equipment, (d)
Owner’s Drawings, and (e) Supplies.
Answer: The normal balance for each of the given accounts is as follows:
No. Name of Accounts Type of Accounts Normal Balance
(a) Accounts Receivable Asset Debit balance
(b) Accounts Payable Liability Credit balance
(c) Equipment Asset Debit balance
(d) Owner’s Drawings Owner’s Equity Debit balance
(e) Supplies Asset Debit balance
8 For the following transactions, indicate the account debited and the
account credited.
(a) Supplies are purchased on account.
(b) Cash is received on signing a note payable.
(c) Employees are paid salaries in cash.
Answer: The account is to be debited and the account is to be credited for each
of the given transaction is as follow:
No. Debit Account Credit Account
(a) Supplies Accounts Payable
(b) Cash Notes Payable
(c) Salaries Expense Cash
9 Indicate whether the following accounts generally will have (a) debit
entries only, (b) credit entries only, or (c) both debit and credit entries.
(1) Cash. (4) Accounts Payable.
(2) Accounts Receivable. (5) Salaries and Wages Expense.
(3) Owner’s Drawings. (6) Service Revenue.
Answer: The given accounts generally will have
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(1) Cash – both debit and credit entries.
(2) Accounts Receivable – both debit and credit entries.
(3) Owner’s Drawing – debit entries only.
(4) Accounts Payable – both debit and credit entries.
(5) Salaries and Wages Expense – debit entries only.
(6) Service Revenue – credit entries only.
10 What are the basic steps in the recording process?
Answer: The basic steps in the recording process are:
(1) Analyze each transaction in terms of its effect on the accounts.
(2) Enter the transaction information in a journal.
(3) Transfer the journal information to the appropriate accounts in the ledger.
11 What are the advantages of using a journal in the recording process?
Answer: The advantages of using a journal in the recording process are:
(1) It discloses in one place the complete effect of a transaction.
(2) It provides a chronological record of all transactions.
(3) It helps to prevent or locate errors because the debit and credit amounts
for each entry can be readily compared.
12 (a) When entering a transaction in the journal, should the debit or credit
be written first?
(b) When entering a transaction in the journal, which should be
indented, the debit or credit?
Answer: (a) The debit should be entered first.
(b) The credit should be indented.
13 Describe a compound entry, and provide an example?
Answer: Compound Entry: When three or more accounts are required in one
journal, the entry is referred to as a compound entry.
Example: An example of a compound entry is the purchase of
equipment, part of which is paid for with cash and the remainder is on account.
14 Should business transaction debits and credits be recorded directly in
the ledger accounts?
Answer: No, debits and credits should not be recorded directly in the ledger.
15 The account number is entered as the last step in posting the accounts
from the journal to the ledger. What is the advantage of this step?
Answer: The advantage of the last step in the posting process is to indicate that
the item has been posted.
16 Journalize the following business transactions:
(a) Wes Lee invests $7000 cash in the business.
(b) Insurance of $800 is paid for the year.
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(c) Supplies of $2000 are purchased on account.
(d) Cash of $8500 is received for services performed.
Answer:
Journal Entries
Date/ No. Account Titles and Explanations Ref. Debit Credit
(a) Cash 7000
Owner’s Capital 7000
(Invested cash in the business)
(b) Prepaid Insurance 800
Cash 800
(Paid one-year insurance policy)
(c) Supplies 2000
Accounts Payable 2000
(Purchase supplies on account)
(d) Cash 8500
Service Revenue 8500
(Received cash for services rendered)
17 (a) What is a ledger?

(b) What is a chart of accounts and why is it important?
Answer: (a) Ledger: The entire group of accounts maintained by a company,
including all the asset, liability, and owners’ equity accounts, is referred to
collectively as the ledger.
(b) Chart of Accounts: A list of accounts and the account numbers
that identify their location in the ledger is called a chart of accounts.
Importance of Chart of Accounts: The chart of accounts is important,
particularly for a company that has a large number of accounts, because it helps
organize the accounts and identify their location in the ledger. A chart of
accounts lists the accounts and accounts numbers that identify their location in
the ledger. The numbering system is used to identify the accounts. The chart of
accounts defined the level of details that a company desires in its accounting
system.
18 What is a trail balance and what are its purposes?
Answer: Trial Balance: A trial balance is a list of accounts and their balances
at a given time.
Purposes of Trial Balance: The primary purpose of a trial balance is
to prove the mathematical equality of debits and credits after all journalized
transactions have been posted. A trial balance also facilitates the discovery of
errors in journalizing and posting. In addition, it is useful in preparing financial
statements.
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19 Victor Grimm is confused about how accounting information flows
through the accounting system. He believes the flow of information is as
follows:
(a) Debits and credits posted to the ledger.
(b) Business transaction occurs.
(c) Information entered in the journal.
(d) Financial statements are prepared.
(e) Trial balance is prepared.
Is Victor correct? It not, indicate to Victor the proper flow of the
information.
Answer: No, Victor is not correct. The proper sequence is as follows:
(a) Business transaction occurs.
(b) Information entered in the journal.
(c) Debits and credits posted to the ledger.
(d) Trial balance is prepared.
(e) Financial statements are prepared.
20 Two students are discussing the use of a trial balance. They wonder
whether the following errors, each considered separately, would prevent
the trial balance from balancing.
(a) The bookkeeper debited Cash for $600 and credited Salaries and
Wages Expense for $600 for payment of wages.
(b) Cash collected on account was debited to Cash for $800 and Service
Revenue was credited for $80.
What would you tell them?
Answer: (a) In this case, the trial balance would balance.
(b) In this case, the trial balance would not balance.
21 What are the normal balances (debit or credit) for Apple’s Cash,
Accounts Payable, and Interest Expense accounts?
Answer: The normal balances are Cash debit, Accounts Payable credit, and
Interest Expense debit.
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Chapter 2: Questions & Answers

Questions & Answers

Answer: The given accounts generally will have

17 (a) What is a ledger?

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