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Chapter 2
Recording Business Transactions
Review Questions
1. Identify the three categories of the accounting equation, and list at least four accounts
associated with each category.
The three categories of the accounting equation are assets, liabilities, and equity. Assets
2. What is the purpose of the chart of accounts? Explain the numbering typically associated
with the accounts.
Companies need a way to organize their accounts so they use a chart of accounts. Accounts
3. What does a ledger show? What’s the difference between a ledger and the chart of accounts?
A chart of accounts and a ledger are similar in that they both list the account names and
4. Accounting uses a double-entry system. Explain what this sentence means.
With a double-entry you need to record the dual effects of each transaction. Every transaction
affects at least two accounts.
5. What is a T-account? On which side is the debit? On which side is the credit? Where does the
account name go on a T-account?
6. When are debits increases? When are debits decreases?
7. When are credits increases? When are credits decreases?
Credits are increases for liabilities, common stock, and revenue. Credits are decreases for
assets, dividends, and expenses.
8. Identify which types of accounts have a normal debit balance and which types of accounts
9. What are source documents? Provide examples of source documents that a business might
10. Where are transactions initially recorded?
Transactions are first recorded in a journal, which is the record of transactions in date order.
11. Explain the five steps in journalizing and posting transactions.
Step 1: Identify the accounts and the account type. You need this information before you can
complete the next step. Step 2: Decide if each account increases or decreases, then apply the
12. What are the four parts of a journal entry?
13. What is involved in the posting process?
When transactions are posted from the journal to the ledger, the dollar amount is transferred
from the debit and credit columns to the specific accounts in the ledger. The date of the
journal entry is also transferred to the accounts in the ledger. The posting reference columns
14. What is the purpose of the trial balance?
The trial balance is used to prove the equality of total debits and total credits of all accounts
in the ledger; it is also used to prepare the financial statements.
15. What is the difference between the trial balance and the balance sheet?
16. If total debits equal total credits on the trial balance, is the trial balance error-free? Explain
17. What is the calculation for the debt ratio? Explain what the debt ratio evaluates.
The debt ratio is calculated by dividing total liabilities by total assets and shows the
proportion of assets financed with debt. It can be used to evaluate a business’s ability to pay
its debts.
Short Exercises
S2-1 Identifying accounts
Learning Objective 1
Consider the following accounts and identify each account as an asset (A), liability (L), or equity
(E).
a. Notes Receivable
b. Common Stock
c. Prepaid Insurance
d. Notes Payable
e. Rent Revenue
f. Taxes Payable
g. Rent Expense
h. Furniture
i. Dividends
j. Unearned Revenue
SOLUTION
S2-2 Identifying increases and decreases in accounts
Learning Objective 2
For each account, identify whether the changes would be recorded as a debit (DR) or credit (CR).
a. Increase to Accounts Receivable
b. Decrease to Unearned Revenue
c. Decrease to Cash
d. Increase to Interest Expense
e. Increase to Salaries Payable
f. Decrease to Prepaid Rent
g. Increase to Common Stock
h. Increase to Notes Receivable
i. Decrease to Accounts Payable
j. Increase to Interest Revenue
SOLUTION
S2-3 Identifying normal balances
Learning Objective 2
For each account, identify whether the normal balance is a debit (DR) or credit (CR).
a. Notes Payable
b. Dividends
c. Service Revenue
d. Land
e. Unearned Revenue
f. Common Stock
g. Utilities Expense
h. Office Supplies
i. Advertising Expense
j. Interest Payable
SOLUTION
S2-4 Calculating the balance of a T-account
Learning Objective 2
Calculate the Accounts Payable balance.
SOLUTION
S2-5 Journalizing transactions
Learning Objective 3
John Daniel opened a medical practice in Sacramento, California, and had the following
transactions during the month of January.
Jan. 1 The business received $34,000 cash and issued common stock to Daniel.
2 Purchased medical supplies on account, $17,000.
4 Performed services for patients receiving $1,600.
12 Paid monthly office rent of $3,000.
15 Recorded $7,000 revenue for services rendered to patients on account.
Journalize the transactions of John Daniel, M.D. Include an explanation with each entry.
SOLUTION
S2-6 Journalizing transactions
Learning Objective 3
Harper Sales Consultants completed the following transactions during the latter part of January:
Jan.
22
Performed services for customers on account, $7,500.
30 Received cash on account from customers, $8,000.
31 Received a utility bill, $220, which will be paid during February.
31 Paid monthly salary to salesman, $2,500.
31 Received $2,310 for three months of consulting service to be performed starting in February.
31 Cash dividends of $950 were paid to stockholders.
Journalize the transactions of Harper Sales Consultants. Include an explanation with each journal
entry.
SOLUTION
S2-7 Journalizing transactions and posting to T-accounts
Learning Objective 3
Roland Foster Optical Dispensary completed the following transactions during the latter part of
March:
Mar. 15 Purchased office supplies on account, $3,400.
28 Paid $1,800 on account.
Requirements
1. Journalize the transactions of Roland Foster Optical Dispensary. Include an explanation with
each journal entry.
2. Open the following accounts (use T-account format): Cash (Beginning Balance of $21,000),
Office Supplies, and Accounts Payable. Post the journal entries from Requirement 1 to the
accounts, and compute the balance in each account.
SOLUTION
Requirement 1
S2-8 Preparing a trial balance
Learning Objective 4
Smithson Floor Coverings reported the following summarized data at December 31, 2018.
Accounts appear in no particular order, and all have normal balances.
Service Revenue $ 26,000 Salaries Payable $ 25,000
Equipment 36,000 Salaries Expense 1,600
Rent Expense 17,000 Cash 7,000
Common Stock 24,000 Accounts Receivable 3,600
Accounts Payable 2,200 Interest Payable 6,000
Dividends 16,100 Utilities Expense 1,900
Prepare the trial balance of Smithson Floor Coverings at December 31, 2018.
SOLUTION
S2-9 Calculating debt ratio
Learning Objective 5
Aladdin Carpet Care had the following total assets, liabilities, and equity as of October 31:
Assets $ 200,000
Liabilities 30,000
Equity 170,000
What is Aladdin Carpet Care’s debt ratio as of October 31?
SOLUTION
