Resources:Financial Accounting: Tools for Business Decision Making

Writea minimum 150-word response to each of the following scenarios from Exercise E3-1 inFinancial Accounting(p. 132) describing the effect of each transaction on assets, liabilities, and stockholder's equity:

• Selected transactions for Thyme Advertising Company, Inc.
  • Issued common stock to investors in exchange for cash received from investors.
  • Paid monthly rent.
  • Received cash from customers when service was performed.
  • Billed customers for services performed.
  • Paid dividend to stockholders.
  • Incurred advertising expense on account.
  • Received cash from customers billed in (4).
  • Purchased additional equipment for cash.
  • Purchased equipment on account.

Usethe Excelspreadsheet to record your answers andsubmitwith your responses.

3 The Accounting Information System CHAPTER PREVIEW As indicated in the Feature Story, a reliable information system is a necessity for any company. The purpose of this chapter is to explain and illustrate the features of an accounting information system. Accidents Happen How organized are you financially? Take a short quiz. Answer yes or no to each question: Does your wallet contain so many cash machine receipts that you've been declared a walking fire hazard? Do you wait until your debit card is denied before checking the status of your funds? Was Aaron Rodgers (the quarterback for the Green Bay Packers) playing high school football the last time you verified the accuracy of your bank account? If you think it is hard to keep track of the many transactions that make up your life, imagine how difficult it is for a big corporation to do so. Not only that, but now consider how important it is for a big company to have good accounting records, especially if it has control of your life savings. MF Global Holdings Ltd was such a company. As a large investment broker, it held billions of dollars of investments for clients. If you had your life savings invested at MF Global, you might be slightly displeased if you heard this from one of its representatives: \"You know, I kind of remember an account for someone with a name like yoursnow what did we do with that?\" Unfortunately, that is almost exactly what happened to MF Global's clients shortly before it filed for bankruptcy. During the days immediately following the bankruptcy filing, regulators and auditors struggled to piece things together. In the words of one regulator, \"Their books are a disaster ... we're trying to figure out what numbers are real numbers.\" One company that considered buying an interest in MF Global walked away from the deal because it \"couldn't get a sense of what was on the balance sheet.\" That company said the information that should have been instantly available instead took days to produce. It now appears that MF Global did not properly segregate customer accounts from company accounts. And, because of its sloppy recordkeeping, customers were not protected when the company had financial troubles. Total customer losses were approximately $1 billion. As you can see, accounting matters! Source: S. Patterson and A. Lucchetti, \"Inside the Hunt for MF Global Cash,\" Wall Street Journal Online (November 11, 2011). LEARNING OBJECTIVE 1 Analyze the effect of business transactions on the basic accounting equation. The accounting cycle graphic above illustrates the steps companies follow each period to record transactions and eventually prepare financial statements. The system of collecting and processing transaction data and communicating financial information to decisionmakers is known as the accounting information system. Factors that shape an accounting information system include the nature of the company's business, the types of transactions, the size of the company, the volume of data, and the information demands of management and others. Most businesses use computerized accounting systemssometimes referred to as electronic data processing (EDP) systems. These systems handle all the steps involved in the recording process, from initial data entry to preparation of the financial statements. In order to remain competitive, companies continually improve their accounting systems to provide accurate and timely data for decisionmaking. For example, in a recent annual report, Tootsie Roll stated, \"We also invested in additional processing and data storage hardware during the year. We view information technology as a key strategic tool, and are committed to deploying leading edge technology in this area.\" In addition, many companies have upgraded their accounting information systems in response to the requirements of SarbanesOxley. Accounting information systems rely on a process referred to as the accounting cycle. As you can see from the graphic above, the accounting cycle begins with the analysis of business transactions and ends with the preparation of a postclosing trial balance. We explain each of the steps in this chapter as well as in Chapter 4. In this chapter, in order to emphasize the underlying concepts and principles, we focus on a manual accounting system. The accounting concepts and principles do not change whether a system is computerized or manual. ACCOUNTING TRANSACTIONS To use an accounting information system, you need to know which economic events to recognize (record). Not all events are recorded and reported in the financial statements. For example, suppose General Motors hired a new employee and purchased a new computer. Are these events entered in its accounting records? The first event would not be recorded, but the second event would. We call economic events that require recording in the financial statements accounting transactions. An accounting transaction occurs when assets, liabilities, or stockholders' equity items change as a result of some economic event. The purchase of a computer by General Motors, the payment of rent by Microsoft, and the sale of a multiday guided trip by Sierra Corporation are examples of events that change a company's assets, liabilities, or stockholders' equity. Illustration 3-1 summarizes the decision process companies use to decide whether or not to record economic events. ILLUSTRATION 3-1 Transaction identification process ANALYZING TRANSACTIONS In Chapter 1, you learned the basic accounting equation: Assets=Liabilities+Stockholders' EquityAssets=Liabilities+Stockholders' Equity In this chapter, you will learn how to analyze transactions in terms of their effect on assets, liabilities, and stockholders' equity. Transaction analysis is the process of identifying the specific effects of economic events on the accounting equation. The accounting equation must always balance. Each transaction has a dual (doublesided) effect on the equation. For example, if an individual asset is increased, there must be a corresponding: Decrease in another asset, or Increase in a specific liability, or Increase in stockholders' equity. Two or more items could be affected when an asset is increased. For example, if a company purchases a computer for $10,000 by paying $6,000 in cash and signing a note for $4,000, one asset (equipment) increases $10,000, another asset (cash) decreases $6,000, and a liability (notes payable) increases $4,000. The result is that the accounting equation remains in balanceassets increased by a net $4,000 and liabilities increased by $4,000, as shown below. Chapter 1 presented the financial statements for Sierra Corporation for its first month. You should review those financial statements (on page 16) at this time. To illustrate how economic events affect the accounting equation, we will examine events affecting Sierra during its first month. In order to analyze the transactions for Sierra, we will expand the basic accounting equation. This will allow us to better illustrate the impact of transactions on stockholders' equity. Recall from the balance sheets in Chapters 1 and 2 that stockholders' equity is comprised of two parts: common stock and retained earnings. Common stock is affected when the company issues new shares of stock in exchange for cash. Retained earnings is affected when the company recognizes revenue, incurs expenses, or pays dividends. Illustration 3-2 shows the expanded equation. ILLUSTRATION 3-2 Expanded accounting equation If you are tempted to skip ahead after you've read a few of the following transaction analyses, don't do it. Each has something unique to teach, something you'll need later. (We assure you that we've kept them to the minimum needed!) DECISION TOOLS The accounting equation is used to determine if an accounting transaction has occurred. EVENT (1). INVESTMENT OF CASH BY STOCKHOLDERS. On October 1, cash of $10,000 is invested in the business by investors in exchange for $10,000 of common stock. This event is an accounting transaction that results in an increase in both assets and stockholders' equity. The equation is in balance after the issuance of common stock. Keeping track of the source of each change in stockholders' equity is essential for later accounting activities. In particular, items recorded in the revenue and expense columns are used for the calculation of net income. EVENT (2). NOTE ISSUED IN EXCHANGE FOR CASH. On October 1, Sierra borrowed $5,000 from Castle Bank by signing a 3 month, 12%, $5,000 note payable. This transaction results in an equal increase in assets and liabilities. The specific effect of this transaction and the cumulative effect of the first two transactions are as follows. Total assets are now $15,000, and liabilities plus stockholders' equity also total $15,000. EVENT (3). PURCHASE OF EQUIPMENT FOR CASH. On October 2, Sierra purchased equipment by paying $5,000 cash to Superior Equipment Sales Co. This transaction results in an equal increase and decrease in Sierra's assets. The total assets are now $15,000, and liabilities plus stockholders' equity also total $15,000. EVENT (4). RECEIPT OF CASH IN ADVANCE FROM CUSTOMER. On October 2, Sierra received a $1,200 cash advance from R. Knox, a client. Sierra received cash, it does not record revenue until it has performed the work. In some industries, such as the magazine and airline industries, customers are expected to prepay. These companies have a liability to the customer until they deliver the magazines or provide the flight. When the company eventually provides the product or service, it records the revenue. Since Sierra received cash prior to performance of the service, Sierra has a liability for the work due. EVENT (5). SERVICES PERFORMED FOR CASH. On October 3, Sierra received $10,000 in cash (an asset) from Copa Company for guide services performed for a corporate event. Guide service is the principal revenueproducing activity of Sierra. Revenue increases stockholders' equity. This transaction, then, increases both assets and stockholders' equity. Often companies perform services \"on account.\" That is, they perform services for which they are paid at a later date. Revenue, however, is recorded when services are performed. Therefore, revenues would increase when services are performed, even though cash has not been received. Instead of receiving cash, the company receives a different type of asset, an account receivable. Accounts receivable represent the right to receive payment at a later date. Suppose that Sierra had performed these services on account rather than for cash. This event would be reported using the accounting equation as: Later, when Sierra collects the $10,000 from the customer, Accounts Receivable decreases by $10,000, and Cash increases by $10,000. Note that in this case, revenues are not affected by the collection of cash. Instead Sierra records an exchange of one asset (Accounts Receivable) for a different asset (Cash). EVENT (6). PAYMENT OF RENT. On October 3, Sierra paid its office rent for the month of October in cash, $900. This rent payment is a transaction that results in a decrease in an asset, cash. Rent is a cost incurred by Sierra in its effort to generate revenues. It is treated as an expense because it pertains only to the current month. Expenses decrease stockholders' equity. Sierra records the rent payment by decreasing cash and increasing expenses to maintain the balance of the accounting equation. EVENT (7). PURCHASE OF INSURANCE POLICY FOR CASH. On October 4, Sierra paid $600 for a oneyear insurance policy that will expire next year on September 30. Payments of expenses that will benefit more than one accounting period are identified as assets called prepaid expenses or prepayments. The balance in total assets did not change; one asset account decreased by the same amount that another increased. EVENT (8). PURCHASE OF SUPPLIES ON ACCOUNT. On October 5, Sierra purchased an estimated three months of supplies on account from Aero Supply for $2,500. In this case, \"on account\" means that the company receives goods or services that it will pay for at a later date. This transaction increases both an asset (supplies) and a liability (accounts payable). EVENT (9). HIRING OF NEW EMPLOYEES. On October 9, Sierra hired four new employees to begin work on October 15. Each employee will receive a weekly salary of $500 for a fiveday work week, payable every two weeks. Employees will receive their first paychecks on October 26. On the date Sierra hires the employees, there is no effect on the accounting equation because the assets, liabilities, and stockholders' equity of the company have not changed. EVENT (10). PAYMENT OF DIVIDEND. On October 20, Sierra paid a $500 cash dividend. Dividends are a reduction of stockholders' equity but not an expense. Dividends are not included in the calculation of net income. Instead, a dividend is a distribution of the company's assets to its stockholders. EVENT (11). PAYMENT OF CASH FOR EMPLOYEE SALARIES. Employees have worked two weeks, earning $4,000 in salaries, which were paid on October 26. Salaries and Wages Expense is an expense that reduces stockholders' equity. In this transaction, both assets and stockholders' equity are reduced. INVESTOR INSIGHT Why Accuracy Matters While most companies record transactions very carefully, the reality is that mistakes still happen. For example, bank regulators fined Bank One Corporation (now JPMorgan Chase) $1.8 million because they felt that the unreliability of the bank's accounting system caused it to violate regulatory requirements. Also, in recent years Fannie Mae, the governmentchartered mortgage association, announced a series of large accounting errors. These announcements caused alarm among investors, regulators, and politicians because they feared that the errors might suggest larger, undetected problems. This was important because the homemortgage market depends on Fannie Mae to buy hundreds of billions of dollars of mortgages each year from banks, thus enabling the banks to issue new mortgages. Finally, before a major overhaul of its accounting system, the financial records of Waste Management Company were in such disarray that of the company's 57,000 employees, 10,000 were receiving pay slips that were in error. The SarbanesOxley Act was created to minimize the occurrence of errors like these by increasing every employee's responsibility for accurate financial reporting. In order for these companies to prepare and issue financial statements, their accounting equations (debits and credits) must have been in balance at yearend. How could these errors or misstatements have occurred? (Go to WileyPLUS for this answer and additional questions.) SUMMARY OF TRANSACTIONS Illustration 3-3 summarizes the transactions of Sierra Corporation to show their cumulative effect on the basic accounting equation. It includes the transaction number in the first column on the left. The rightmost column shows the specific effect of any transaction that affects stockholders' equity. Remember that Event (9) did not result in a transaction, so no entry is included for that event. The illustration demonstrates three important points: 1. Each transaction is analyzed in terms of its effect on assets, liabilities, and stockholders' equity. 2. The two sides of the equation must always be equal. 3. The cause of each change in stockholders' equity must be indicated. ILLUSTRATION 3-3 Summary of transactions DO IT! 1 Transaction Analysis A tabular analysis of the transactions made by Roberta Mendez & Co., a certified public accounting firm, for the month of August is shown below. Each increase and decrease in stockholders' equity is explained. Describe each transaction that occurred for the month. Action Plan Analyze the tabular analysis to determine the nature and effect of each transaction. Keep the accounting equation in balance. Remember that a change in an asset will require a change in another asset, a liability, or in stockholders' equity. SOLUTION 1. 2. 3. 4. The company issued shares of stock to stockholders for $25,000 cash. The company purchased $7,000 of equipment on account. The company received $8,000 of cash in exchange for services performed. The company paid $850 for this month's rent. Related exercise material: BE3-1, BE3-2, BE3-3, DO IT! 3-1, E3-1, E3-2, E3-3, and E34. LEARNING OBJECTIVE 2 Explain how accounts, debits, and credits are used to record business transactions. Rather than using a tabular summary like the one in Illustration 3-3 for Sierra Corporation, an accounting information system uses accounts. An account is an individual accounting record of increases and decreases in a specific asset, liability, stockholders' equity, revenue, or expense item. For example, Sierra Corporation has separate accounts for Cash, Accounts Receivable, Accounts Payable, Service Revenue, Salaries and Wages Expense, and so on. (Note that whenever we are referring to a specific account, we capitalize the name.) In its simplest form, an account consists of three parts: (1) the title of the account, (2) a left or debit side, and (3) a right or credit side. Because the alignment of these parts of an account resembles the letter T, it is referred to as a Taccount. The basic form of an account is shown in Illustration 3-4. ILLUSTRATION 3-4 Basic form of account We use this form of account often throughout this textbook to explain basic accounting relationships. DEBITS AND CREDITS The term debit indicates the left side of an account, and credit indicates the right side. They are commonly abbreviated as Dr. for debit and Cr. for credit. They do not mean increase or decrease, as is commonly thought. We use the terms debit and credit repeatedly in the recording process to describe where entries are made in accounts. For example, the act of entering an amount on the left side of an account is called debiting the account. Making an entry on the right side is crediting the account. When comparing the totals of the two sides, an account shows a debit balance if the total of the debit amounts exceeds the credits. An account shows a credit balance if the credit amounts exceed the debits. Note the position of the debit side and credit side in Illustration 3-4. The procedure of recording debits and credits in an account is shown in Illustration 3-5 for the transactions affecting the Cash account of Sierra Corporation. The data are taken from the Cash column of the tabular summary in Illustration 3-3. ILLUSTRATION 3-5 Tabular summary and account form for Sierra Corporation's Cash account Every positive item in the tabular summary represents a receipt of cash; every negative amount represents a payment of cash. Notice that in the account form, we record the increases in cash as debits and the decreases in cash as credits. For example, the $10,000 receipt of cash (in blue) is debited to Cash, and the $5,000$5,000 payment of cash (in red) is credited to Cash. Having increases on one side and decreases on the other reduces recording errors and helps in determining the totals of each side of the account as well as the account balance. The balance is determined by netting the two sides (subtracting one amount from the other). The account balance, a debit of $15,200, indicates that Sierra had $15,200 more increases than decreases in cash. That is, since it started with a balance of zero, it has $15,200 in its Cash account. DEBIT AND CREDIT PROCEDURES Each transaction must affect two or more accounts to keep the basic accounting equation in balance. In other words, for each transaction, debits must equal credits. The equality of debits and credits provides the basis for the doubleentry accounting system. Under the doubleentry system, the twosided effect of each transaction is recorded in appropriate accounts. This system provides a logical method for recording transactions. The doubleentry system also helps to ensure the accuracy of the recorded amounts and helps to detect errors such as those at MF Global as discussed in the Feature Story. If every transaction is recorded with equal debits and credits, then the sum of all the debits to the accounts must equal the sum of all the credits. The doubleentry system for determining the equality of the accounting equation is much more efficient than the plus/minus procedure used earlier. INTERNATIONAL NOTE Rules for accounting for specific events sometimes differ across countries. For example, European companies rely less on historical cost and more on fair value than U.S. companies. Despite the differences, the doubleentry accounting system is the basis of accounting systems worldwide. Dr./Cr. Procedures for Assets and Liabilities In Illustration 3-5 for Sierra Corporation, increases in Cashan assetare entered on the left side, and decreases in Cash are entered on the right side. We know that both sides of the basic equation (Assets=Liabilities+Stockholders' Equity) (Assets=Liabilities+Stockholders' Equity) must be equal. It therefore follows that increases and decreases in liabilities have to be recorded opposite from increases and decreases in assets. Thus, increases in liabilities are entered on the right or credit side, and decreases in liabilities are entered on the left or debit side. The effects that debits and credits have on assets and liabilities are summarized in Illustration 3-6. ILLUSTRATION 3-6 Debit and credit effects-assets and liabilities Asset accounts normally show debit balances. That is, debits to a specific asset account should exceed credits to that account. Likewise, liability accounts normally show credit balances. That is, credits to a liability account should exceed debits to that account. The normal balances may be diagrammed as in Illustration 3-7. ILLUSTRATION 3-7 Normal balances-assets and liabilities Knowing which is the normal balance in an account may help when you are trying to identify errors. For example, a credit balance in an asset account, such as Land, or a debit balance in a liability account, such as Salaries and Wages Payable, usually indicates errors in recording. Occasionally, however, an abnormal balance may be correct. The Cash account, for example, will have a credit balance when a company has overdrawn its bank balance by spending more than it has in its account. In automated accounting systems, the computer is programmed to flag violations of the normal balance and to print out error or exception reports. In manual systems, careful visual inspection of the accounts is required to detect normal balance problems. HELPFUL HINT The normal balance is the side where increases in the account are recorded. Dr./Cr. Procedures for Stockholders' Equity In Chapter 1, we indicated that stockholders' equity is comprised of two parts: common stock and retained earnings. In the transaction events earlier in this chapter, you saw that revenues, expenses, and the payment of dividends affect retained earnings. Therefore, the subdivisions of stockholders' equity are common stock, retained earnings, dividends, revenues, and expenses. COMMON STOCK Common stock is issued to investors in exchange for the stockholders' investment. The Common Stock account is increased by credits and decreased by debits. For example, when cash is invested in the business, Cash is debited and Common Stock is credited. The effects of debits and credits on the Common Stock account are shown in Illustration 3-8. ILLUSTRATION 3-8 Debit and credit effects-common stock The normal balance in the Common Stock account may be diagrammed as in Illustration 3-9. ILLUSTRATION 3-9 Normal balance-common stock RETAINED EARNINGS Retained earnings is net income that is retained in the business. It represents the portion of stockholders' equity that has been accumulated through the profitable operation of the company. Retained Earnings is increased by credits (for example, by net income) and decreased by debits (for example, by a net loss), as shown in Illustration 3-10. ILLUSTRATION 3-10 Debit and credit effects-retained earnings The normal balance for the Retained Earnings account may be diagrammed as in Illustration 3-11. ILLUSTRATION 3-11 Normal balance-retained earnings DIVIDENDS A dividend is a distribution by a corporation to its stockholders. The most common form of distribution is a cash dividend. Dividends result in a reduction of the stockholders' claims on retained earnings. Because dividends reduce stockholders' equity, increases in the Dividends account are recorded with debits. As shown in Illustration 3-12, the Dividends account normally has a debit balance. ILLUSTRATION 3-12 Normal balance-dividends REVENUES AND EXPENSES When a company recognizes revenues, stockholders' equity is increased. Revenue accounts are increased by credits and decreased by debits. Expenses decrease stockholders' equity. Thus, expense accounts are increased by debits and decreased by credits. The effects of debits and credits on revenues and expenses are shown in Illustration 3-13. ILLUSTRATION 3-13 Debit and credit effects-revenues and expenses Credits to revenue accounts should exceed debits; debits to expense accounts should exceed credits. Thus, revenue accounts normally show credit balances, and expense accounts normally show debit balances. The normal balances may be diagrammed as in Illustration 3-14. ILLUSTRATION 3-14 Normal balances-revenues and expenses INVESTOR INSIGHT Chicago Cubs Keeping Score The Chicago Cubs baseball team has these major revenue and expense accounts: Revenues Expenses Admissions (ticket sales) Players' salaries Concessions Administrative salaries Television and radio Travel Advertising Ballpark maintenance Do you think that the Chicago Bears football team would be likely to have the same major revenue and expense accounts as the Cubs? (Go to WileyPLUS for this answer and additional questions.) STOCKHOLDERS' EQUITY RELATIONSHIPS Companies report the subdivisions of stockholders' equity in various places in the financial statements: Common stock and retained earnings: in the stockholders' equity section of the balance sheet. Dividends: on the retained earnings statement. Revenues and expenses: on the income statement. Dividends, revenues, and expenses are eventually transferred to retained earnings at the end of the period. As a result, a change in any one of these three items affects stockholders' equity. Illustration 3-15 shows the relationships of the accounts affecting stockholders' equity. ILLUSTRATION 3-15 Stockholders' equity relationships SUMMARY OF DEBIT/CREDIT RULES Illustration 3-16 summarizes the debit/credit rules and effects on each type of account. Study this diagram carefully. It will help you understand the fundamentals of the doubleentry system. No matter what the transaction, total debits must equal total credits in order to keep the accounting equation in balance. ILLUSTRATION 3-16 Summary of debit/credit rules DO IT! 2 Debits and Credits for Balance Sheet Accounts Kate Browne, president of Hair It Is Inc., has just rented space in a shopping mall for the purpose of opening and operating a beauty salon. Long before opening day and before purchasing equipment, hiring assistants, and remodeling the space, Kate was strongly advised to set up a doubleentry set of accounting records in which to record all of her business transactions. Identify the balance sheet accounts that Hair It Is Inc. will likely need to record the transactions necessary to establish and open for business. Also, indicate whether the normal balance of each account is a debit or a credit. Action Plan First identify asset accounts for each different type of asset invested in the business. Then identify liability accounts for debts incurred by the business. Hair It Is Inc. needs only one stockholders' equity account, Common Stock, when it begins the business. The other stockholders' equity account, Retained Earnings, will be needed after the business is operating. SOLUTION Hair It Is Inc. would likely need the following accounts in which to record the transactions necessary to establish and ready the beauty salon for opening day: Cash (debit balance); Equipment (debit balance); Supplies (debit balance); Accounts Payable (credit balance); Notes Payable (credit balance), if the business borrows money; and Common Stock (credit balance). Related exercise material: BE3-4, BE3-5, DO IT! 3-2, E3-6, E3-7, and E3-8. LEARNING OBJECTIVE 3 Indicate how a journal is used in the recording process. THE RECORDING PROCESS Although it is possible to enter transaction information directly into the accounts, few businesses do so. Practically every business uses these basic steps in the recording process (an integral part of the accounting cycle): 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. The actual sequence of events begins with the transaction. Evidence of the transaction comes in the form of a source document, such as a sales slip, a check, a bill, or a cash register document. This evidence is analyzed to determine the effect of the transaction on specific accounts. The transaction is then entered in the journal. Finally, the journal entry is transferred to the designated accounts in the ledger. The sequence of events in the recording process is shown in Illustration 3-17. ILLUSTRATION 3-17 The recording process THE JOURNAL Transactions are initially recorded in chronological order in a journal before they are transferred to the accounts. For each transaction, the journal shows the debit and credit effects on specific accounts. (In a computerized system, journals are kept as files, and accounts are recorded in computer databases.) ETHICS NOTE Business documents provide evidence that transactions actually occurred. International Outsourcing Services, LLC was accused of submitting fraudulent documents (store coupons) to companies such as Kraft Foods and PepsiCo for reimbursement of as much as $250 million. Use of proper business documents reduces the likelihood of fraudulent activity. Companies may use various kinds of journals, but every company has at least the most basic form of journal, a general journal. The journal makes three significant contributions to the recording process: 1. It discloses in one place the complete effect of a transaction. 2. It provides a chronological record of transactions. 3. It helps to prevent or locate errors because the debit and credit amounts for each entry can be readily compared. Entering transaction data in the journal is known as journalizing. To illustrate the technique of journalizing, let's look at the first three transactions of Sierra Corporation in equation form. On October 1, Sierra issued common stock in exchange for $10,000 cash: On October 1, Sierra borrowed $5,000 by signing a note: On October 2, Sierra purchased equipment for $5,000: Sierra makes separate journal entries for each transaction. A complete entry consists of (1) the date of the transaction, (2) the accounts and amounts to be debited and credited, and (3) a brief explanation of the transaction. These transactions are journalized in Illustration 3-18. ILLUSTRATION 3-18 Recording transactions in journal form Note the following features of the journal entries. 1. The date of the transaction is entered in the Date column. 2. The account to be debited is entered first at the left. The account to be credited is then entered on the next line, indented under the line above. The indentation differentiates debits from credits and decreases the possibility of switching the debit and credit amounts. 3. The amounts for the debits are recorded in the Debit (left) column, and the amounts for the credits are recorded in the Credit (right) column. 4. A brief explanation of the transaction is given. It is important to use correct and specific account titles in journalizing. Erroneous account titles lead to incorrect financial statements. Some flexibility exists initially in selecting account titles. The main criterion is that each title must appropriately describe the content of the account. For example, a company could use any of these account titles for recording the cost of delivery trucks: Equipment, Delivery Equipment, Delivery Trucks, or Trucks. Once the company chooses the specific title to use, however, it should record under that account title all subsequent transactions involving the account. ACCOUNTING ACROSS THE ORGANIZATION Microsoft Boosting Profits Microsoft originally designed the Xbox 360 to have 256 megabytes of memory. But the design department said that amount of memory wouldn't support the best special effects. The purchasing department said that adding more memory would cost $30 which was 10% of the estimated selling price of $300. The marketing department, however, \"determined that adding the memory would let Microsoft reduce marketing costs and attract more game developers, boosting royalty revenue. It would also extend the life of the console, generating more sales.\" As a result of these changes, Xbox enjoyed great success. But, it does have competitors. Its newest video game console, Xbox One, is now in a battle with Sony's Playstation4 for market share. How to compete? First, Microsoft bundled the critically acclaimed Titanfall with its Xbox One. By including the game most Xbox One buyers were going to purchase anyway, Microsoft was making its console more attractive. In addition, retailers are also discounting the Xbox, which should get the momentum going for increased sales. What Microsoft is doing is making sure that Xbox One is the center of the home entertainment system in the long run. Sources: Robert A. Guth, \"New Xbox Aim for Microsoft: Profitability,\" Wall Street Journal (May 24, 2005), p. C1; and David Thier, \"Will Microsoft Give the Xbox One a $50 Price Cut? www.Forbes.com (March 26, 2014). In what ways is this Microsoft division using accounting to assist in its effort to become more profitable? (Go to WileyPLUS for this answer and additional questions.) DO IT! 3 Journal Entries The following events occurred during the first month of business of Hair It Is Inc., Kate Browne's beauty salon: 1. Issued common stock to shareholders in exchange for $20,000 cash. 2. Purchased $4,800 of equipment on account (to be paid in 30 days). 3. Interviewed three people for the position of stylist. Prepare the entries to record the transactions. Action Plan Make sure to provide a complete and accurate representation of the transactions' effects on the assets, liabilities, and stockholders' equity of the business. SOLUTION The three activities are recorded as follows. Related exercise material: BE3-6, BE3-9, DO IT! 3-3, E3-7, E3-9, E3-10, E3-11, and E3-12. LEARNING OBJECTIVE 4 Explain how a ledger anda posting help in the recording process. THE LEDGER The entire group of accounts maintained by a company is referred to collectively as the ledger. The ledger provides the balance in each of the accounts as well as keeps track of changes in these balances. Companies may use various kinds of ledgers, but every company has a general ledger. A general ledger contains all the asset, liability, stockholders' equity, revenue, and expense accounts, as shown in Illustration 3-19 (page 120). Whenever we use the term ledger in this textbook without additional specification, it will mean the general ledger. ILLUSTRATION 3-19 The general ledger CHART OF ACCOUNTS The number and type of accounts used differ for each company, depending on the size, complexity, and type of business. For example, the number of accounts depends on the amount of detail desired by management. The management of one company may want one single account for all types of utility expense. Another may keep separate expense accounts for each type of utility expenditure, such as gas, electricity, and water. A small corporation like Sierra Corporation will not have many accounts compared with a corporate giant like Ford Motor Company. Sierra may be able to manage and report its activities in 20 to 30 accounts, whereas Ford requires thousands of accounts to keep track of its worldwide activities. Most companies list the accounts in a chart of accounts. They may create new accounts as needed during the life of the business. Illustration 3-20 shows the chart of accounts for Sierra in the order that they are typically listed (assets, liabilities, stockholders' equity, revenues, and expenses). Accounts shown in red are used in this chapter; accounts shown in black are explained in later chapters. ILLUSTRATION 3-20 Chart of accounts for Sierra Corporation POSTING The procedure of transferring journal entry amounts to ledger accounts is called posting. This phase of the recording process accumulates the effects of journalized transactions in the individual accounts. Posting involves these steps: 1. In the ledger, enter account(s) the date 2. In the ledger, enter account(s) the date in the appropriate columns of the debited and debit amount shown in the journal. in the appropriate columns of the credited and credit amount shown in the journal. ETHICS INSIGHT Credit Suisse Group A Convenient Overstatement Sometimes a company's investment securities suffer a permanent decline in value below their original cost. When this occurs, the company is supposed to reduce the recorded value of the securities on its balance sheet (\"write them down\" in common financial lingo) and record a loss. It appears, however, that during the financial crisis of 2008, employees at some financial institutions chose to look the other way as the value of their investments skidded. A number of Wall Street traders that worked for the investment bank Credit Suisse Group were charged with intentionally overstating the value of securities that had suffered declines of approximately $2.85 billion. One reason that they may have been reluctant to record the losses is out of fear that the company's shareholders and clients would panic if they saw the magnitude of the losses. However, personal selfinterest might have been equally to blamethe bonuses of the traders were tied to the value of the investment securities. Source: S. Pulliam, J. Eaglesham, and M. Siconolfi, \"U.S. Plans Changes on Bond Fraud,\" Wall Street Journal Online (February 1, 2012). What incentives might employees have had to overstate the value of these investment securities on the company's financial statements? (Go to WileyPLUS for this answer and additional questions.) THE RECORDING PROCESS ILLUSTRATED Illustrations 3-21 through 3-31 on the following pages show the basic steps in the recording process using the October transactions of Sierra Corporation. Sierra's accounting period is a month. A basic analysis and a debit-credit analysis precede the journalizing and posting of each transaction. Study these transaction analyses carefully. The purpose of transaction analysis is first to identify the type of account involved and then to determine whether a debit or a credit to the account is required. You should always perform this type of analysis before preparing a journal entry. Doing so will help you understand the journal entries discussed in this chapter as well as more complex journal entries to be described in later chapters. ILLUSTRATION 3-21 Investment of cash by stockholders Issue of note payable Purchase of equipment ILLUSTRATION 3-22 ILLUSTRATION 3-23 ILLUSTRATION 3-24 Receipt of cash in advance from customer HELPFUL HINT Many liabilities have the word \"payable\" in their title. But, note that Unearned Service Revenue is considered a liability even though the word payable is not used. ILLUSTRATION 3-25 Services performed for cash Payment of rent with cash ILLUSTRATION 3-26 ILLUSTRATION 3-27 Purchase of insurance policy with cash Purchase of supplies on account Hiring of new employees ILLUSTRATION 3-28 ILLUSTRATION 3-29 ILLUSTRATION 3-30 Payment of dividend ILLUSTRATION 3-31 Payment of cash for employee salaries SUMMARY ILLUSTRATION OF JOURNALIZING AND POSTING The journal for Sierra Corporation for the month of October is summarized in Illustration 3-32. The ledger is shown in Illustration 3-33 (on page 118) with all balances highlighted in red. ILLUSTRATION 3-32 General journal for Sierra Corporation General ledger for Sierra Corporation DO IT! 4 ILLUSTRATION 3-33 Posting Selected transactions from the journal of Faital Inc. during its first month of operations are presented below. Post these transactions to Taccounts. Action Plan Journalize transactions to keep track of financial activities (receipts, payments, receivables, payables, etc.). To make entries useful, classify and summarize them by posting the entries to specific ledger accounts. SOLUTION Related exercise material: BE3-10, DO IT! 3-4, and E3-14. LEARNING OBJECTIVE 5 Prepare a trial balance. A trial balance lists accounts and their balances at a given time. A company usually prepares a trial balance at the end of an accounting period. The accounts are listed in the order in which they appear in the ledger. Debit balances are listed in the left column and credit balances in the right column. The totals of the two columns must be equal. The trial balance proves the mathematical equality of debits and credits after posting. Under the doubleentry system, this equality occurs when the sum of the debit account balances equals the sum of the credit account balances. A trial balance may also uncover errors in journalizing and posting. For example, a trial balance may well have detected the error at MF Global discussed in the Feature Story. In addition, a trial balance is useful in the preparation of financial statements. These are the procedures for preparing a trial balance: 1. List the account titles and their balances. 2. Total the debit column and total the credit column. 3. Verify the equality of the two columns. Illustration 3-34 presents the trial balance prepared from the ledger of Sierra Corporation. Note that the total debits, $28,700, equal the total credits, $28,700. ILLUSTRATION 3-34 Sierra Corporation trial balance DECISION TOOLS A trial balance proves that debits equal credits. HELPFUL HINT Note that the order of presentation in the trial balance is: U U U U U Assets Liabilities Stockholders' equity Revenues Expenses LIMITATIONS OF A TRIAL BALANCE A trial balance does not prove that all transactions have been recorded or that the ledger is correct. Numerous errors may exist even though the trial balance column totals agree. For example, the trial balance may balance even when any of the following occurs: (1) a transaction is not journalized, (2) a correct journal entry is not posted, (3) a journal entry is posted twice, (4) incorrect accounts are used in journalizing or posting, or (5) offsetting errors are made in recording the amount of a transaction. In other words, as long as equal debits and credits are posted, even to the wrong account or in the wrong amount, the total debits will equal the total credits. Nevertheless, despite these limitations, the trial balance is a useful screen for finding errors and is frequently used in practice. ETHICS NOTE An error is the result of an unintentional mistake. It is neither ethical nor unethical. An irregularity is an intentional misstatement, which is viewed as unethical. KEEPING AN EYE ON CASH The Cash account shown below reflects all of the inflows and outflows of cash that occurred during October for Sierra Corporation (see Illustrations 3-21 to 3-31). We have also provided a description of each transaction that affected the Cash account. 1. 2. 3. 4. 5. 6. 7. 8. 9. Oct. Oct. Oct. Oct. Oct. Oct. Oct. Oct. Oct. 1 Issued stock for $10,000 cash. 1 Issued note payable for $5,000 cash. 2 Purchased equipment for $5,000 cash. 2 Received $1,200 cash in advance from customer. 3 Received $10,000 cash for services performed. 3 Paid $900 cash for October rent. 4 Paid $600 cash for oneyear insurance policy. 20 Paid $500 cash dividend to stockholders. 26 Paid $4,000 cash salaries. The Cash account and the related cash transactions indicate why cash changed during October. However, to make this information useful for analysis, it is summarized in a statement of cash flows. The statement of cash flows classifies each transaction as an operating activity, an investing activity, or a financing activity. A user of this statement can then determine the amount of net cash provided by operating activities, the amount of cash used for investing purposes, and the amount of cash provided by financing activities. Operating activities are the types of activities the company performs to generate profits. Sierra is an outdoor guide business, so its operating activities involve providing guide services. Activities 4, 5, 6, 7, and 9 relate to cash received or spent to directly support its guide services. Investing activities include the purchase or sale of longlived assets used in operating the business, or the purchase or sale of investment securities (stocks and bonds of companies other than Sierra). Activity 3, the purchase of equipment, is an investing activity. The primary types of financing activities are borrowing money, issuing shares of stock, and paying dividends. The financing activities of Sierra are Activities 1, 2, and 8. DO IT! 5 Trial Balance The following accounts come from the ledger of SnowGo Corporation at December 31, 2017. Equipment $88,000 Common Stock $20,000 Dividends 8,000 2,000 Accounts Payable 22,000 Notes Payable (due in 3 months) 19,000 Salaries and Wages Payable Salaries and Wages Expense 42,000 Utilities Expense 3,000 Accounts Receivable 4,000 6,000 Service Revenue 95,000 Cash Prepare a trial balance in good form. Prepaid Insurance 7,000 Action Plan Determine normal balances and list accounts in the order they appear in the ledger. Accounts with debit balances appear in the left column, and those with credit balances in the right column. Total the debit and credit columns to prove equality. SOLUTION Related exercise material: BE3-11, BE3-12, DO IT! 3-5, E3-13, E3-15, E3-16, E3-17, E3-18, E3-19, E3-20, E3-21, and E3-22. USING DECISION TOOLSKANSAS FARMERS' VERTICALLY INTEGRATED COOPERATIVE, INC. The Kansas Farmers' Vertically Integrated Cooperative, Inc. (KVIC) was formed by over 200 northeast Kansas farmers in the late 1980s. Its purpose is to process raw materials, primarily grain and meat products grown by KVIC's members, into enduser food products and then to distribute the products nationally. Profits not needed for expansion or investment are returned to the members annually, on a pro rata basis, according to the fair value of the grain and meat products received from each farmer. Assume that the following trial balance was prepared for KVIC. Because the trial balance is not in balance, you have checked with various people responsible for entering accounting data and have discovered the following. 1. The purchase of 35 new trucks, costing $7 million and paid for with cash, was not recorded. 2. A data entry clerk accidentally deleted the account name for an account with a credit balance of $472 million, so the amount was added to the Mortgage Payable account in the trial balance. 3. December cash sales revenue of $75 million was credited to the Sales Revenue account, but the other half of the entry was not made. 4. $50 million of salaries expense were mistakenly charged to Maintenance and Repairs Expense. INSTRUCTIONS Answer these questions. (a) Which mistake(s) have caused the trial balance to be out of balance? (b) Should all of the items be corrected? Explain. (c) What is the name of the account the data entry clerk deleted? (d) Make the necessary corrections and prepare a correct trial balance with accounts listed in proper order. (e) On your trial balance, write BAL beside the accounts that go on the balance sheet and INC beside those that go on the income statement. SOLUTION (a) Only mistake #3 has caused the trial balance to be out of balance. (b) All of the items should be corrected. The misclassification error (mistake #4) on the salaries expense would not affect bottomline net income, but it does affect the amounts reported in the two expense accounts. (c) There is no Common Stock account, so that must be the account that was deleted by the data entry clerk. (d) and (e) REVIEW AND PRACTICE LEARNING OBJECTIVE REVIEW 1. Analyze the effect of business transactions on the basic accounting equation. Each business transaction must have a dual effect on the accounting equation. For example, if an individual asset is increased, there must be a corresponding (a) decrease in another asset, or (b) increase in a specific liability, or (c) increase in stockholders' equity. 2. Explain how accounts, debits, and credits are used to record business transactions. 3. An account is an individual accounting record of increases and decreases in specific asset, liability, and stockholders' equity items. 4. The terms debit and credit are synonymous with left and right. Assets, dividends, and expenses are increased by debits and decreased by credits. Liabilities, common stock, retained earnings, and revenues are increased by credits and decreased by debits. 5. Indicate how a journal is used in the recording process. 6. The basic steps in the recording process are (a) analyze each transaction in terms of its effect on the accounts, (b) enter the transaction information in a journal, and (c) transfer the journal information to the appropriate accounts in the ledger. 7. The initial accounting record of a transaction is entered in a journal before the data are entered in the accounts. A journal (a) discloses in one place the complete effect of a transaction, (b) provides a chronological record of transactions, and (c) prevents or locates errors because the debit and credit amounts for each entry can be readily compared. 8. Explain how a ledger and posting help in the recording process. 9. The entire group of accounts maintained by a company is referred to collectively as a ledger. The ledger provides the balance in each of the accounts as well as keeps track of changes in these balances. 10. Posting is the procedure of transferring journal entries to the ledger accounts. This phase of the recording process accumulates the effects of journalized transactions in the individual accounts. 11. Prepare a trial balance. A trial balance is a list of accounts and their balances at a given time. The primary purpose of the trial balance is to prove the mathematical equality of debits and credits after posting. A trial balance also uncovers errors in journalizing and posting and is useful in preparing financial statements. DECISION TOOLS REVIEW GLOSSARY REVIEW Account An individual accounting record of increases and decreases in specific asset, liability, stockholders' equity, revenue, or expense items. Accounting information system The system of collecting and processing transaction data and communicating financial information to decisionmakers. Accounting transactions Events that require recording in the financial statements because they affect assets, liabilities, or stockholders' equity. Chart of accounts A list of a company's accounts. Credit The right side of an account. Debit The left side of an account. Doubleentry system A system that records the twosided effect of each transaction in appropriate accounts. General journal The most basic form of journal. General ledger A ledger that contains all asset, liability, stockholders' equity, revenue, and expense accounts. Journal An accounting record in which transactions are initially recorded in chronological order. Journalizing The procedure of entering transaction data in the journal. Ledger The group of accounts maintained by a company. Posting The procedure of transferring journal entry amounts to the ledger accounts. Taccount The basic form of an account. Trial balance A list of accounts and their balances at a given time. PRACTICE MULTIPLECHOICE QUESTIONS (LO 1) 1. The effects on the basic accounting equation of performing services for cash are to: (a) increase assets and decrease stockholders' equity. (b) increase assets and increase stockholders' equity. (c) increase assets and increase liabilities. (d) increase liabilities and increase stockholders' equity. (LO 1) 2. Genesis Company buys a $900 machine on credit. This transaction will affect the: (a) income statement only. (b) balance sheet only. (c) income statement and retained earnings statement only. (d) income statement, retained earnings statement, and balance sheet. (LO 1) 3. Which of the following events is not recorded in the accounting records? (a) Equipment is purchased on account. (b) An employee is terminated. (c) A cash investment is made into the business. (d) Company pays dividend to stockholders. (LO 1) 4. During 2017, Gibson Company assets decreased $50,000 and its liabilities decreased $90,000. Its stockholders' equity therefore: (a) increased $40,000. (b) decreased $140,000. (c) decreased $40,000. (d) increased $140,000. (LO 2) 5. Which statement about an account is true? (a) In its simplest form, an account consists of two parts. (b) An account is an individual accounting record of increases and decreases in specific asset, liability, and stockholders' equity items. (c) There are separate accounts for specific assets and liabilities but only one account for stockholders' equity items. (d) The left side of an account is the credit, or decrease, side. (LO 2) 6. Debits: (a) increase both assets and liabilities. (b) decrease both assets and liabilities. (c) increase assets and decrease liabilities. (d) decrease assets and increase liabilities. (LO 2) 7. A revenue account: (a) is increased by debits. (b) is decreased by credits. (c) has a normal balance of a debit. (d) is increased by credits. (LO 2) 8. Which accounts normally have debit balances? (a) Assets, expenses, and revenues. (b) Assets, expenses, and retained earnings. (c) Assets, liabilities, and dividends. (d) Assets, dividends, and expenses. (LO 2) 9. Paying an account payable with cash affects the components of the accounting equation in the following way: (a) Decreases stockholders' equity and decreases liabilities. (b) Increases assets and decreases liabilities. (c) Decreases assets and increases stockholders' equity. (d) Decreases assets and decreases liabilities. (LO 3) 10. Which is not part of the recording process? (a) Analyzing transactions. (b) Preparing an income statement. (c) Entering transactions in a journal. (d) Posting journal entries. (LO 3) 11. Which of these statements about a journal is false? (a) It contains only revenue and expense accounts. (b) It provides a chronological record of transactions. (c) It helps to locate errors because the debit and credit amounts for each entry can be readily compared. (d) It discloses in one place the complete effect of a transaction. (LO 4) 12. A ledger: (a) contains only asset and liability accounts. (b) should show accounts in alphabetical order. (c) is a collection of the entire group of accounts maintained by a company. (d) provides a chronological record of transactions. (LO 4) 13. Posting: (a) normally occurs before journalizing. (b) transfers ledger transaction data to the journal. (c) is an optional step in the recording process. (d) transfers journal entries to ledger accounts. (LO 5) 14. A trial balance: (a) is a list of accounts with their balances at a given time. (b) proves that proper account titles were used. (c) will not balance if a correct journal entry is posted twice. (d) proves that all transactions have been recorded. (LO 5) 15. A trial balance will not balance if: (a) a correct journal entry is posted twice. (b) the purchase of supplies on account is debited to Supplies and credited to Cash. (c) a $100 cash dividend is debited to Dividends for $1,000 and credited to Cash for $100. (d) a $450 payment on account is debited to Accounts Payable for $45 and credited to Cash for $45. SOLUTIONS 1. (b) When services are performed for cash, assets are increased and stockholders' equity is increased. The other choices are therefore incorrect. 2. (b) When equipment is purchased on credit, assets are increased and liabilities are increased. These are both balance sheet accounts. The other choices are incorrect because neither the income statement nor the retained earnings statement is affected. 3. (b) Termination of an employee is not a recordable event in the accounting records. The other choices all represent events that are recorded. 4. (a) Since assets decreased by $50,000 and liabilities decreased by $90,000, stockholders' equity has to increase by $40,000 to keep the accounting equation balanced. The other choices are therefore incorrect. 5. (b) An account is an individual accounting record of increases and decreases in specific asset, liability, and stockholders' equity items. The other choices are incorrect because (a) in its simplest form, an account consists of three parts: a title and debit and credit side; (c) there are specific accounts for different types of stockholders' equity, such as Common Stock, Retained Earnings, and Dividends; and (d) the left side of an account is the debit side. 6. (c) Debits increase assets and decrease liabilities. The other choices are therefore incorrect. 7. (d) Revenues are increased by credits. Revenues have a normal credit balance. The other choices are therefore incorrect. 8. (d) Assets, dividends, and expenses have normal debit balances. The other choices are incorrect because (a) revenues have a normal credit balance, (b) retained earnings has a normal credit balance, and (c) liabilities have a normal credit balance. 9. (d) When paying an account payable with cash, the asset cash decreases. Accounts payable, a liability, decreases as well. The other choices are therefore incorrect. 10. (b) Preparing an income statement is not part of the recording process. Choices (a) analyzing transactions, (c) entering transactions in a journal, and (d) posting transactions are all steps in the recording process. 11. (a) A journal contains entries affecting all accounts, not just revenue and expense accounts. The other choices are true statements. 12. (c) A ledger is a collection of the entire group of accounts maintained by a company. The other choices are therefore incorrect. 13. (d) Posting transfers journal entries to ledger accounts. The other choices are incorrect because posting (a) occurs after journalizing, (b) transfers the information contained in journal entries to the ledger, and (c) is a required step in the recording process. If posting is not done, the ledger accounts will not reflect changes in the accounts resulting from transactions. 14. (a) A trial balance is a list of accounts with their balances at a given time. The other choices are incorrect because (b) it does not confirm that proper account titles were used; (c) if a journal entry is posted twice, the trial balance will still balance; and (d) a trial balance does not prove that all transactions have been recorded. 15. (c) The entry will cause the trial balance to be out of balance. The other choices are incorrect because although these entries are incorrect, they will still allow the trial balance to balance. PRACTICE EXERCISES Prepare a tabular presentation. (LO 1) 1. Legal Services Inc. was incorporated on July 1, 2017. During the first month of operations, the following transactions occurred. 1. Stockholders invested $10,000 in cash in exchange for common stock of Legal Services Inc. 2. Paid $800 for July rent on office space. 3. Purchased office equipment on account $3,000. 4. Performed legal services for clients for cash $1,500. 5. Borrowed $700 cash from a bank on a note payable. 6. Performed legal services for client on account $2,000. 7. Paid monthly expenses: salaries $500, utilities $300, and advertising $100. INSTRUCTIONS Prepare a tabular summary of the transactions. Journalize transactions. (LO 3) 2. Presented below is information related to Conan Real Estate Agency. Oct 1 Arnold Conan begins business as a real estate agent with a cash . investment of $18,000 in exchange for common stock. 2 Hires an administrative assistant. 3 Purchases office equipment for $1,700, on account. 6 Sells a house and lot for B. Clinton; bills B. Clinton $4,200 for realty services performed. 2 Pays $900 on the balance related to the transaction of October 7 3. 3 Pays the administrative assistant $2,800 in salary for October. 0 INSTRUCTIONS Journalize the transactions. (You may omit explanations.) PRACTICE PROBLEM Journalize transactions, post, and prepare a trial balance. (LO 3, 4, 5) Bob Sample and other student investors opened Campus Carpet Cleaning, Inc. on September 1, 2017. During the first month of operations, the following transactions occurred. Sep 1 Stockholders invested $20,000 cash in the business. t. 2 Paid $1,000 cash for store rent for the month of September. 3 Purchased industrial carpetcleaning equipment for $25,000, paying $10,000 in cash and signing a $15,000 6month, 12% note payable. 4 Paid $1,200 for 1year accident insurance policy. 1 Received bill from the Daily News for advertising the opening 0 of the cleaning service, $200. 1 Performed services on account for $6,200. 5 2 Paid a $700 cash dividend to stockholders. 0 3 Received $5,000 from customers billed on September 15. 0 The chart of accounts for the company is the same as for Sierra Corporation except for the following additional account: Advertising Expense. INSTRUCTIONS (a) Journalize the September transactions. (b) Open ledger accounts and post the September transactions. (c) Prepare a trial balance at September 30, 2017. WileyPLUS Brief Exercises, DO IT! Exercises, Exercises, Problems, and many additional resources are available for practice in WileyPLUS. QUESTIONS 1. Describe the accounting information system. 2. Can a business enter into a transaction that affects only the left side of the basic accounting equation? If so, give an example. 3. Are the following events recorded in the accounting records? Explain your answer in each case. 4. (a) A major stockholder of the company dies. 5. (b) Supplies are purchased on account. 6. (c) An employee is fired. 7. (d) The company pays a cash dividend to its stockholders. Indicate how each business transaction affects the basic accounting equation. 9. (a) Paid cash for janitorial services. 10. (b) Purchased equipment for cash. 11. (c) Issued common stock to investors in exchange for cash. 12. (d) Paid an account payable in full. 13. Why is an account referred to as a Taccount? 14. The terms debit and credit mean \"increase\" and \"decrease,\" respectively. Do you agree? Explain. 15. Barry Barack, a fellow student, contends that the doubleentry system means each transaction must be recorded twice. Is Barry correct? Explain. 16. Misty Reno, a beginning accounting student, believes debit balances are favorable and credit balances are unfavorable. Is Misty correct? Discuss. 17. State the rules of debit and credit as applied to (a) asset accounts, (b) liability accounts, and (c) the Common Stock account. 18. What is the normal balance for each of these accounts? 19. (a) Accounts Receivable. 20. (b) Cash. 21. (c) Dividends. 22. (d) Accounts Payable. 23. (e) Service Revenue. 24. (f) Salaries and Wages Expense. 25. (g) Common Stock. 26. Indicate whether each account is an asset, a liability, or a stockholders' equity account, and whether it would have a normal debit or credit balance. 27. (a) Accounts Receivable. 28. (b) Accounts Payable. 29. (c) Equipment. 30. (d) Dividends. 31. (e) Supplies. 32. For the following transactions, indicate the account debited and the account credited. 33. (a) Supplies are purchased on account. 34. (b) Cash is received on signing a note payable. 35. (c) Employees are paid salaries in cash. 36. For each account listed here, indicate whether it generally will have debit entries only, credit entries only, or both debit and credit entries. 37. (a) Cash. 38. (b) Accoun