978-0078025549 Chapter 2 Lecture Note

Unlock access to all the studying documents.

View Full Document

Questions Learning

Objective(s) Topic

(Min.)

1 LO2-1 Understand the difference between external and

internal transactions

2 LO2-1 List steps to measure external transactions 5

3 LO2-2 Explain dual effect of transactions 5

4 LO2-2 Describe the impact of transactions on the

accounting equation

5 LO2-2 Explain dual effect of transactions 5

6 LO2-3 Identify normal accounting balances 5

7 LO2-3 Understand the effects of debits and credits on

account balances

8 LO2-3 Determine whether a debit or credit increases an

account balance

9 LO2-3 Determine whether a debit or credit decreases an

account balance

10 LO2-3 Explain the relation between retained earnings and

its revenue and expense components

11 LO2-4 Describe a journal and a journal entry 5

12 LO2-4 Understand the proper format for recording

transactions

13 LO2- Explain why debits equal credits 5

14 LO2-4 Record transactions 5

15 LO2-4 Describe recorded transactions 5

16 LO2-5 Explain a T-account 5

17 LO2-5 Post transactions 5

18 LO2-5 Describe a general ledger 5

19 LO2-6 Describe a trial balance 5

20 LO2-6 Understand total debits and total credits in a trial

balance

Brief

Exercises Learning

Objective(s) Topic

Time

(Min.)

BE2-1 LO2-1 List steps in the measurement process 5

BE2-2 LO2-2 Balance the accounting equation 5

BE2-3 LO2-2 Balance the accounting equation 10

BE2-4 LO2-2 Analyze the impact of transactions on the

accounting equation

BE2-5 LO2-3 Understand the effect of debits and credits on

accounts

BE2-6 LO2-3 Understand the effect of debits and credits on

accounts

BE2-7 LO2-4 Record transactions 10

BE2-8 LO2-4 Record transactions 10

BE2-9 LO2-5 Analyze T-accounts 10

BE2-10 LO2-2,2-3,2-4,

2-5

Analyze the impact of transactions on the

accounting equation, record transactions, and post

BE2-11 LO2-6 Prepare a trial balance 10

BE2-12 LO2-6 Correct a trial balance 10

Exercises Learning

Objective(s) Topic

Time

(Min.)

E2-1 LO2-1 Identify terms associated with the measurement

process

E2-2 LO2-2 Analyze the impact of transactions on the

accounting equation

E2-3 LO2-2 Analyze the impact of transactions on the

accounting equation

E2-4 LO2-2 Analyze the impact of transactions on the

accounting equation

E2-5 LO2-2 Understand the components of retained earnings 10

E2-6 LO2-3 Indicate the debit or credit balance of accounts 10

E2-7 LO2-3 Associate debits and credits with external

transactions

E2-8 LO2-4 Record transactions 10

E2-9 LO2-4 Identify transactions 5

E2-10 LO2-4 Record transactions 15

E2-11 LO2-4 Record transactions 15

E2-12 LO2-4 Correct recorded transactions 15

E2-13 LO2-4 Correct recorded transactions 15

E2-14 LO2-5 Post transactions to Cash T-account 10

E2-15 LO2-5 Post transactions to T-accounts 15

E2-16 LO2-5 Identify transactions 10

E2-17 LO2-6 Prepare a trial balance 10

E2-18 LO2-6 Prepare a trial balance 10

E2-19 LO2-4,2-5,2-6 Record transactions, post to T-accounts, and prepare

a trial balance

E2-20 LO2-4,2-5,2-6 Record transactions, post to T-accounts, and prepare

a trial balance

Problems Learning

Objective(s) Topic

Time

(Min.)

P2-1A LO2-2 Analyze the impact of transactions on the

accounting equation

P2-2A LO2-2 Analyze the impact of transactions on the

accounting equation

P2-3A LO2-3 Identify the type of account and its normal debit or

credit balance

P2-4A LO2-4 Record transactions 20

P2-5A LO2-2,2-4 Analyze the impact of transactions on the

accounting equation and record transactions

P2-6A LO2-6 Prepare a trial balance 20

P2-7A LO2-4,2-5,2-6 Complete the steps in the measurement of external

transactions

P2-8A LO2-4,2-5,2-6 Complete the steps in the measurement of external

transactions

P2-9A LO2-4,2-5,2-6 Complete the steps in the measurement of external

transactions

P2-1B LO2-2 Analyze the impact of transactions on the

accounting equation

P2-2B LO2-2 Analyze the impact of transactions on the

accounting equation

P2-3B LO2-3 Identify the type of account and its normal debit or

credit balance

P2-4B LO2-4 Record transactions 20

P2-5B LO2-2,2-4 Analyze the impact of transactions on the

accounting equation and record transactions

P2-6B LO2-6 Prepare a trial balance 20

P2-7B LO2-4,2-5,2-6 Complete the steps in the measurement of external

transactions

P2-8B LO2-4,2-5,2-6 Complete the steps in the measurement of external

transactions

P2-9B LO2-4,2-5,2-6 Complete the steps in the measurement of external

transactions

Additional

Perspectives Topic

Time

(Min.)

AP2-1 Continuing Problem: Great Adventures 45

AP2-2 Financial Analysis: American Eagle Outfitters, Inc. 15

AP2-3 Financial Analysis: The Buckle, Inc. 15

AP2-4 Comparative Analysis: American Eagle Outfitters, Inc., vs. The

Buckle, Inc.

AP2-5 Ethics 20

AP2-6 Internet Research 30

AP2-7 Written Communication 25

Chapter Quiz Questions

The following multiple-choice questions are 10 unique quiz questions that correspond to the 10

questions at the end of each chapter. Each question covers the same learning objective but with a

little different twist. The correct answer is highlighted in bold for each item.

LO2-1

1. Which of the following does not represent an external business transaction?

a. Purchasing office supplies.

b. Paying employees’ salaries.

c. Expiration of an insurance policy over time.

d. Providing services to customers.

LO2-1

2. Which step in the process of measuring external transactions involves assessing the equality of

total debits and total credits?

a. Use source documents to determine accounts affected by the transaction.

b. Preparing a trial balance.

c. Analyze the impact of the transaction on the accounting equation.

d. Post the transaction to the T-account in the general ledger.

LO2-2

3. Which of the following transactions causes an increase in total liabilities?

a. Pay maintenance expense for the current month.

b. Provide services to customers on account.

c. Pay dividends to stockholders.

d. Purchase office supplies on account.

LO2-2

4. Which of the following transactions causes a decrease in stockholders’ equity?

a. Pay salaries expense for the current month.

b. Repay amount borrowed from the bank.

c. Provide services to customers for cash.

d. Provide services to customers on account.

LO2-2

5. Which of the following is possible for a particular business transaction?

a. Increase assets; decrease liabilities.

b. Decrease assets; increase stockholders’ equity.

c. Decrease assets; decrease liabilities.

d. Decrease liabilities; increase expenses.

LO2-3

6. A debit is used to decrease which of the following accounts?

a. Salaries Expense.

b. Accounts Payable.

c. Dividends.

d. Supplies.

LO2-3

7. A credit is used to decrease which of the following accounts?

a. Service Revenue.

b. Common Stock.

c. Salaries Payable.

d. Cash.

LO2-4

8. Purchasing office supplies on account for $100 is recorded as:

a. Supplies 100

Accounts Payable 100

b. Cash 100

Supplies 100

c. Supplies 100

Cash 100

d. Accounts Payable 100

Supplies 100

LO2-5

9. Transferring the debit and credit information from a journal to individual accounts in the

general ledger is referred to as:

a. Balancing.

b. Analyzing.

c. Posting.

d. Journalizing.

LO2-6

10. Which of the following is true about a trial balance?

a. Only income statement accounts are shown.

b. Total debit amounts should always equal total credit amounts.

c. Only balance sheet accounts are shown.

d. The trial balance shows the change in all account balances over the accounting period.

Alternate Let’s Review

Problem #1

A company has the following transactions during June:

June 2 Provide services to customers for cash, $4,300

June 8 Purchase office supplies on account, $1,000.

June 11 Pay workers’ salaries for the current period, $1,400.

June 15 Issue additional shares of common stock, $6,000.

June 28 Pay one-half of the amount owed for supplies purchased on June 8.

Required:

Indicate how each transaction affects the accounting equation.

Solution:

Assets =

=Liabilities 

Stockholders’ Equity

June 2 + $4,300 =++ $4,300

June 8 + $1,000 = + $1,000 +

June 11 − $1,400 = +− $1,400

June 15 + $6,000 = ++ $6,000

June 28 − $500 = − $500 +

+ $9,400 = + $500 ++ $8,900

Alternate Let’s Review

Problem #2

A company has the following transactions during June:

June 2 Provide services to customers for cash, $4,300

June 8 Purchase office supplies on account, $1,000.

June 11 Pay workers’ salaries for the current period, $1,400.

June 15 Issue additional shares of common stock, $6,000.

June 28 Pay one-half of the amount owed for supplies purchased on June 8.

Required:

For each transaction, (1) identify the two accounts involved, (2) the type of account, (3) whether

the transaction increases or decreases the account balance, and (4) whether the increase or

decrease would be recorded with a debit or credit.

Solution:

Date

(1)

Accounts Involved

(2)

Account Type

(3)

Increase or

Decrease

(4)

Debit or Credit

June 2 Cash Asset Increase Debit

Service Revenue Revenue Increase Credit

June 8 Supplies Asset Increase Debit

Accounts Payable Liability Increase Credit

June 11 Salaries Expense Expense Increase Debit

Cash Asset Decrease Credit

June 15 Cash Asset Increase Debit

Common Stock Stockholders’ Eq. Increase Credit

June 28 Accounts Payable Liability Decrease Debit

Cash Asset Decrease Credit

Alternate Let’s Review

Problem #3

A company has the following transactions during June:

June 2 Provide services to customers for cash, $4,300

June 8 Purchase office supplies on account, $1,000.

June 11 Pay workers’ salaries for the current period, $1,400.

June 15 Issue additional shares of common stock, $6,000.

June 28 Pay one-half of the amount owed for supplies purchased on June 8.

Required:

Record each transaction.

Solution:

Debit Credit

June 2

Cash

4,300

Service Revenue

(Provide services for cash)

4,300

June 8

Supplies

1,000

Accounts Payable

(Purchase supplies on account)

1,000

June 11

Salaries Expense

1,400

Cash

(Pay salaries)

1,400

June 15

Cash

6,000

Common Stock

(Issue common stock for cash)

6,000

June 28

Accounts Payable

500

Cash

(Pay on account)

500

Key Points by Learning Objective

LO2-1 Identify the basic steps in measuring external transactions.

External transactions are transactions between the company and separate economic entities.

Internal transactions do not include an exchange with a separate economic entity.

The six-step measurement process (Illustration 2–1) is the foundation of financial accounting.

LO2-2 Analyze the impact of external transactions on the accounting equation.

After each transaction, the accounting equation must always remain in balance. In other words,

assets always must equal liabilities plus stockholders’ equity.

The expanded accounting equation demonstrates that revenues increase retained earnings while

expenses and dividends decrease retained earnings. Retained earnings is a component of

stockholders’ equity.

LO2-3 Assess whether the impact of external transactions results in a debit or credit to an

account balance.

For the basic accounting equation (Assets = Liabilities + Stockholders’ Equity), assets (left side)

increase with debits. Liabilities and stockholders’ equity (right side) increase with credits. The

opposite is true to decrease any of these accounts.

The retained earnings account is a stockholders’ equity account that normally has a credit

balance. The retained earnings account has three components—revenues, expenses, and

dividends. Revenues increase the balance of retained earnings, while expenses and dividends

decrease the balance of retained earnings. Therefore, we increase revenues with a credit (similar

to increasing retained earnings) and increase expenses and dividends with a debit (similar to

decreasing retained earnings).

LO2-4 Record transactions using debits and credits.

For each transaction, total debits must equal total credits.

LO2-5 Post transactions to T-accounts in the general ledger.

Posting is the process of transferring the debit and credit information from transactions recorded

in the journal to the T-accounts in the general ledger.

LO2-6 Prepare a trial balance.

A trial balance is a list of all accounts and their balances at a particular date. Debits must equal

credits, but that doesn’t necessarily mean that all account balances are correct.

Common Mistakes

Common Mistake

It’s sometimes tempting to decrease cash as a way of recording an investor’s

initial investment. However, we account for transactions from the company’s

perspective, and the company received cash from the stockholder.

Common Mistake

Don’t let the account name fool you. Even though the term revenue appears in

the account title for unearned revenue, this is not a revenue account.

Unearned indicates that the company has yet to earn this revenue and

therefore is still obligated to provide the service in the future. This current

obligation creates a liability.

Common Mistake

Students often believe a payment of dividends to owners increases

stockholders’ equity. Remember, you are accounting for the resources of the

company. While stockholders have more personal cash after dividends have

been paid, the company in which they own stock has fewer resources (less

cash).

Common Mistake

Some students think the term “debit” always means increase and “credit”

always means decrease. While this is true for assets, it is not true for liabilities

and stockholders’ equity. Liabilities and stockholders’ equity increase with a

credit and decrease with a debit.

Common Mistake

Many students forget to indent the credit account names. For the account

credited, be sure to indent both the account name and the amount.

Common Mistake

Students sometimes hear the phrase “assets are the debit accounts” and

believe it indicates that assets can only be debited. This is incorrect! Assets, or

any account, can be either debited or credited. Rather, this phrase indicates

that debiting the asset account will increase the balance, and that an asset

account normally will have a debit balance. Similarly, the phrase “liabilities

and stockholders’ equity are the credit accounts” does not mean that these

accounts cannot be debited. They will be debited when their balances

decrease. Rather, the phrase means that crediting the liabilities and

stockholders’ equity accounts increases their balances, and they normally will

have a credit balance.

Common Mistake

Be careful. Just because the debits and credits are equal in a trial balance does

not necessarily mean that all balances are correct. A trial balance could

contain offsetting errors. For example, if we overstate cash and revenue each

by $1,000, both accounts will be in error, but the trial balance will still

balance, since the overstatement to cash increases debits by $1,000 and the

overstatement to revenue increases credits by $1,000.

Decision Points

Question Accounting

Information

Analysis & Decision

How much profit

has a company

earned over its

lifetime for its

owners and

retained for use in

the business?

Retained earnings The balance of retained

earnings provides a record of

all revenues and expenses

(which combine to make net

income) less dividends over

the life of the company.

Question Accounting

Information

Analysis & Decision

How does the

accounting

system capture

the effects of a

company’s

external

transactions?

Journal entries, General

ledger, Account balances

The effects of external

transactions are summarized by

recording increases and

decreases to account balances

during the year.

Career Corner

The accuracy of account balances is essential for providing useful information

to decision makers, such as investors and creditors. That’s why the Securities

and Exchange Commission (SEC) requires all companies with publicly traded

stock to have their reported account balances verified by an independent

auditor. Independent auditors use their understanding of accounting principles

and business practices to provide an opinion of reasonable assurance that

account balances are free from material misstatements resulting from errors

and fraud. Tens of thousands of audits are conducted each year, and auditors

are highly successful in detecting and correcting both intentional and

unintentional errors. Because of the huge demand for auditors, many

accounting majors choose auditing, also referred to as public accounting, as

their first career. Only a Certified Public Accountant (CPA) may sign an audit

opinion.