C H A P T E R

2
Recording Business
Transactions
CHAPTER OBJECTIVES
After studying this chapter, you should be able to
1 Define and use key accounting terms: account,
ledger, debit, and credit
2 Apply the rules of debit and credit
3 Record transactions in the journal
4 Post from the journal to the ledger
5 Prepare and use a trial balance
6 Set up a chart of accounts for a business
7 Analyze transactions without a journal

Chapter Two Recording Business Transactions 51

 ecause we are di- Columbia, Tremblant and Mont

“B versified across
numerous loca-
tions in North America, we
Ste. Marie in Quebec, Blue
Mountain in Ontario, Copper in
Colorado, Stratten in Vermont,
needed to put the right infor- Snowshoe in West Virginia,
mation systems in place. Mammoth in California, and
We’ve done that. We can now Mountain Creek in New
review on a moment’s notice Jersey. The company also has
the status of any one of the an investment in Compagnie
dozens of real estate projects des Alpes, France, the largest
we are developing across the ski company in the world, and
continent. Similar systems are a golf resort, Sandestin, in
now in place in our ski opera- Florida.
tions and this year we will have Like all other companies,
daily financial operating results for each resort available in Intrawest represents itself to outsiders through its
Vancouver by 10 o’clock the following morning. This infor- financial statements. But the accounting information is
mation intelligence has made our path of growth both clear also used internally. Intrawest managers at all levels use
and predictable.” (Joe S. Houssian, Chairman, President financial statement data for decision making. They keep
and Chief Executive Officer of Intrawest Corporation.) track of the revenue and expenses at the company’s many
The 2000 Intrawest Annual Report describes resort properties by using accounting records like those
Intrawest, headquartered in Vancouver, British Columbia, as we illustrate in this chapter. Accounting helps to measure
“the leading developer and operator of mountain resorts profits and losses for each resort and for the company
across North America.” The company owns year-round as a whole.
resorts at Whistler/Blackcomb and Panorama in British

ChapterCH1APTER
1 2 introduced transaction analysis and the financial state-
ments. But that chapter did not show how the financial statements are prepared.
Intrawest Corporation
www.intrawest.com Chapters 2, 3, and 4 cover the accounting process that results in the financial state-
ments.
Vancouver Grizzlies Chapter 2 discusses the processing of accounting information as it is actually
www.nba.com/grizzlies/index.html
done in practice. Throughout this chapter and the next two, we continue to illustrate
Hudson’s Bay Company accounting procedure with service businesses, such as Air & Sea Travel, a systems
www.hbc.com/english.asp design engineering company, or a sports franchise like the Vancouver Grizzlies. In
Zellers Chapter 5 we move into merchandising businesses such as The Bay and Zellers.
www.hbc.com/zellers/default.htm All these businesses use the basic accounting system that we illustrate in this book.
By learning how accounting information is processed, you will understand where
the facts and figures reported in the financial statements come from. This knowledge
will increase your confidence as you make decisions. It will also speed your progress
in your business career.

OBJECTIVE 1
Define and use key accounting
The Account
terms: account, ledger, debit,
and credit
The basic summary device of accounting is the account, the detailed record of the
changes that have occurred in a particular asset, liability, or item of owner’s equity
during a period of time. For convenient access to the information, accounts are
grouped together in a record called the ledger. In the phrases “keeping the books’’
and “auditing the books,’’ books refers to the ledger. Today the ledger usually takes
the form of a computer listing.
Accounts are grouped in three broad categories, according to the accounting
equation:
ASSETS = LIABILITIES + OWNER’S EQUITY

52 Part One The Basic Structure of Accounting

Recall that in Chapter 1, page 11, we learned that the accounting equation is the
most basic tool of the accountant. It measures the assets of the business and the
claims to those assets.

Assets
Assets are the economic resources that benefit the business and will continue to do
so in the future. Most firms use the following asset accounts.

Cash The Cash account shows the cash effects of a business’s transactions. Cash
means money and any medium of exchange that a bank accepts at face value, such
as bank account balances, paper currency, coins, certificates of deposit, and cheques.
Successful companies such as Intrawest usually have plenty of cash. Most business
failures result from a shortage of cash.

Accounts Receivable A business may sell its goods or services in exchange for an
oral or implied promise of future cash receipts. Such sales are made on credit (“on
account”). The Accounts Receivable account contains these amounts. Most sales in KEY POINT

Canada and in other developed countries are made on account. A receivable is always an asset. A
payable is always a liability.
Notes Receivable A business may sell its goods or services in exchange for a
promissory note, which is a written pledge that the customer will pay the business a
fixed amount of money by a certain date. The Notes Receivable account is a record
of the promissory notes that the business expects to collect in cash. A note receivable
offers more security for collection than a mere account receivable does.

Prepaid Expenses A business often pays certain expenses in advance. A prepaid ex-
pense is an asset because it provides future benefits to the business. The business
avoids having to pay cash in the future for the specified expense. The ledger holds
a separate asset account for each prepaid expense. Prepaid Rent, Prepaid Insurance,
and Office Supplies are accounted for as prepaid expenses.

Land The Land account is a record of the cost of land a business owns and uses in
its operations. Land held for sale is accounted for separately—in an investment account.
Building The cost of a business’s buildings—office, warehouse, garage, and the
like—appear in the Building account. Intrawest owns buildings at Whistler,
Tremblant, and its other resorts. Buildings held for sale are separate assets accounted
for as investments. Intrawest builds condominiums at its resorts and sells them.
These condominiums would, therefore, not be included in the Building account;
they would be a part of inventory, discussed in Chapter 5.
Equipment, Furniture, and Fixtures A business has a separate asset account for each
type of equipment—Computer Equipment, Office Equipment, and Store Equipment,
for example. The Furniture and Fixtures account shows the cost of these assets.
We will discuss other asset categories and accounts as needed. For example, many
businesses have an Investments account for their investments in the stocks and
bonds of other companies.

Liabilities
Recall that a liability is a debt. A business generally has fewer liability accounts than
asset accounts because a business’s liabilities can be summarized under relatively
few categories.

Accounts Payable This account is the opposite of the Accounts Receivable account.
The oral or implied promise to pay off debts arising from credit purchases appears in
the Accounts Payable account. Such purchases are said to be made on account. All com-
panies, including Intrawest, have accounts payable.

Chapter Two Recording Business Transactions 53

 Notes Payable The Notes Payable account is the opposite of the Notes Receivable
account. Notes Payable represents the amounts that the business must pay because
it signed a promissory note to borrow money to purchase goods or services.
Accrued Liabilities Liability categories and accounts are added as needed. Utilities
Payable, Interest Payable, and Salary Payable are liability accounts used by most com-
panies.

Owner’s Equity
The owner’s claims to the assets of a business are called owner’s equity. In a propri-
THINKING IT OVER
etorship, like that of Briana Weill or Gary Lyon, described in Chapter 1, or a part-
Name two things that (1) increase nership, owner’s equity is often split into separate accounts for the owner’s capital
owner’s equity;
(2) decrease owner’s equity.
balance and for the owner’s withdrawals. In a partnership, each partner would
have a capital balance and a withdrawal account.
A: (1) Investments by owner and
net income (revenue greater than Capital The Capital account shows the owner's claim to the assets of the busi-
expenses).
ness, whether it is Briana Weill or Gary Lyon of Air & Sea Travel. After total liabil-
(2) Withdrawals and net loss
(expenses greater than revenue).
ities are subtracted from total assets, the remainder is the owner's capital. Amounts
received from the owner's investment in the business are recorded directly in the
Capital account. The Capital balance equals the owner's investments in the busi-
ness plus net income minus net losses and owner withdrawals over the life of the
business. (See the statement of owner's equity in Chapter 1.)
THINKING IT OVER
Withdrawals When Gary Lyon withdraws cash or other assets from Air & Sea
Suppose you bought a Pontiac Travel for personal use, the business's assets and owner's equity decrease. The
Grand Am for $24,000 and had to amounts taken out of the business appear in a separate account entitled Gary Lyon,
borrow $18,000 to pay for the car.
Withdrawals, or Gary Lyon, Drawings. If withdrawals were recorded directly in
Write your personal accounting
equation for this transaction. the Capital account, the amount of owner withdrawals would not be highlighted and
decision making would be more difficult. The Withdrawals account shows a de-
A:
Assets = Liabilities + Owner’s Equity
crease in owner's equity.
$24,000 = $18,000 + $6,000
Revenues The increase in owner's equity created by delivering goods or services
to customers or clients is called revenue. Revenue increases shareholders’ equity.
The ledger contains as many revenue accounts as needed. Air & Sea Travel would
have a Service Revenue account for amounts earned by providing services for
clients. If a business loans money to an outsider, it will need an Interest Revenue ac-
count for the interest earned on the loan. If the business rents a building to a tenant,
it will need a Rent Revenue account.
Expenses Expenses use up assets or create liabilities in the course of operating a
business. Expenses have the opposite effect of revenues; they decrease owner’s eq-
uity. A business needs a separate account for each type of expense, such as Salary
Expense, Rent Expense, Advertising Expense, and Utilities Expense. Businesses
strive to minimize their expenses in order to maximize net income whether they
are Briana Weill, Air & Sea Travel, or Intrawest.
Exhibit 2-1 shows how asset, liability, and owner’s equity accounts can be grouped
into the ledger.

Double-Entry Accounting
Accounting is based on a double-entry system, which means that we record the dual
effects of a business transaction. Each transaction affects at least two accounts. For
example, in Chapter 1, Gary Lyon’s $50,000 cash investment in his travel agency
increased both the Cash account and the Capital account of the business. It would
be incomplete to record only the increase in the entity’s cash without recording the
increase in its owner’s equity.
Consider a cash purchase of supplies. What are the dual effects of this transaction?

54 Part One The Basic Structure of Accounting

 Exhibit 2-1
Cash
The Ledger (Asset, Liability,
and Owner’s Equity
Accounts)
Many individual
asset accounts

Ledger
Accounts
Payable

Many individual
liability accounts

Gary Lyon,
Capital

All individual accounts combined

Many individual
make up the company's ledger.
owner's equity
accounts

The purchase (1) decreases cash and (2) increases supplies. A purchase of supplies
on credit (1) increases supplies and (2) increases accounts payable. A cash payment
on account (1) decreases cash and (2) decreases accounts payable. All transactions
have at least two effects on the accounts of the entity.

The T-Account
How do we record transactions? The account format used for most illustrations in KEY POINT
this book is called the T-account because it takes the form of the capital letter “T.” The A T-account is a quick way to show
vertical line in the letter divides the account into its left and right sides. The ac- the effect of transactions on a
count title rests on the horizontal line. For example, the Cash account of a business particular account—a useful
appears in the following T-account format: shortcut in accounting.

Cash
KEY POINT
(Left side) (Right side)
Debit Credit The accounting equation must
balance after every transaction.
But verifying that total assets =
The left side of the account is called the debit side, and the right side is called the total liabilities + owner’s equity is
credit side. The words debit and credit can be confusing because they are new. To no longer necessary after every
become comfortable using them, simply remember this: transaction. The equation will
balance as long as the debits in
debit = left side each transaction equal the credits
credit = right side in the transaction.

Even though left side and right side may be more convenient, debit and credit are
deeply entrenched in business.1 Debit and credit are abbreviated as follows:
• Dr = Debit
• Cr = Credit

1 The words debit and credit have a Latin origin (debitum and creditum). Pacioli, the Italian monk who
wrote about accounting in the fifteenth century, used these terms.

Chapter Two Recording Business Transactions 55

 OBJECTIVE 2 Increases and Decreases in the Accounts
Apply the rules of debit and
credit The type of an account determines how increases and decreases in it are recorded.
For any given account, all increases are recorded on one side, and all decreases are
recorded on the other side. Increases in assets are recorded in the left (debit) side
of the account. Decreases in assets are recorded in the right (credit) side of the ac-
count. Conversely, increases in liabilities and owner’s equity are recorded by credits.
Decreases in liabilities and owner’s equity are recorded by debits. These are the
rules of debit and credit.
In everyday conversation, we may praise someone
Student to Student
by saying, “She deserves credit for her good work.”
In your study of accounting forget this general usage.
Remember that debit means left side and credit means
I can never remember which accounts are increased right side. Whether an account is increased or decreased
and decreased by debits and which accounts are by a debit or credit depends on the type of account
increased and decreased by credits. The easiest way (see Exhibit 2-2).
for me to remember is to memorize Exhibit 2-2. In a computerized accounting system, the computer
I picture Exhibit 2-2 in my mind when I look at a interprets debits and credits as increases or decreases
new transaction. by account type. For example, a computer reads a debit
Sandy H., Edmonton to Cash as an increase to that account and a credit to
Accounts Payable as an increase to that account.
This pattern of recording debits and credits is based
on the accounting equation:

ASSETS = LIABILITIES + OWNER’S EQUITY

Assets are on the opposite side from liabilities and owner’s equity. Therefore, in-
creases and decreases in assets are recorded in the opposite manner from liabili-
ties and owner’s equity. And liabilities and owner’s equity, which are on the same
side of the equal sign, are treated in the same way. Exhibit 2-2 shows the relationship
between the accounting equation and the rules of debit and credit.
To illustrate the ideas diagrammed in Exhibit 2-2, reconsider the first transac-
tion from Chapter 1. Gary Lyon invested $50,000 in cash to begin the travel agency.
The company received $50,000 cash from Lyon and gave him the owner’s equity. We
are accounting for the business entity, Air & Sea Travel. What accounts of Air &
Sea Travel are affected? By what amounts? On what side (debit or credit)? The an-
swer is that Assets and Capital would increase by $50,000, as the following T-accounts
show:
ASSETS = LIABILITIES + OWNER’S EQUITY

Cash Gary Lyon, Capital

Debit Credit
LEARNING TIP
for for
In all transactions, total debits Increase, Increase,
must equal total credits.
50,000 50,000

Notice that Assets = Liabilities + Owner’s Equity and that total debit amounts =
total credit amounts. Exhibit 2-3 on page 58 illustrates the accounting equation and
Air & Sea Travel’s first three transactions.

EXHIBIT 2-2 Accounting Owner's

The Accounting Equation and Equation: Assets = Liabilities + Equity
the Rules of Debit and Credit
Rule of
(The Effects of Debits and
Debit and
Credits on Assets, Liabilities, Debit Credit Debit Credit Debit Credit
Credit: + – – + – +
and Owner’s Equity)

56 Part One The Basic Structure of Accounting

 The amount remaining in an account is called its balance. This initial transaction
gives Cash a $50,000 debit balance, and Gary Lyon, Capital a $50,000 credit balance.
The second transaction is a $40,000 cash purchase of land. This transaction af-
fects two assets: Cash and Land. It decreases (credits) Cash and increases (debits)
Land, as shown in the T-accounts:

ASSETS = LIABILITIES + OWNER’S EQUITY

Cash Gary Lyon, Capital

Balance 50,000 Credit for Balance 50,000
Decrease,
40,000
Balance 10,000

Land
Debit for
Increase,
40,000
Balance 40,000

After this transaction, Cash has a $10,000 debit balance ($50,000 debit balance reduced
by the $40,000 credit amount), Land has a debit balance of $40,000, and Gary Lyon,
Capital has a $50,000 credit balance as shown in the middle section of Exhibit 2-3 (la-
belled Transaction 2).
Transaction 3 is a $500 purchase of office supplies on account. This transaction
increases the asset Office Supplies and the liability Accounts Payable, as shown in
the following accounts and in the right side of Exhibit 2-3 (labelled Transaction 3):

ASSETS = LIABILITIES + OWNER’S EQUITY

Cash Accounts Payable Gary Lyon, Capital

Balance 10,000 Credit for Balance 50,000

Increase, 500
Balance 500
Office Supplies
Debit for
Increase, 500
Balance 500

Land
Balance 40,000

We can create accounts as they are needed. The process of creating a new T-ac-
count in preparation for recording a transaction is called opening the account. For
Transaction 1, we opened the Cash account and the Gary Lyon, Capital account. For
Transaction 2, we opened the Land account, and for Transaction 3, Office Supplies
and Accounts Payable.
We could record all transactions directly in the accounts as we have shown for the
first three transactions. However, that way of accounting does not leave a clear
record of each transaction. You may have to search through all the accounts to find
both sides of a particular transaction. To save time, accountants keep a record of
each transaction in a journal and then transfer this information from the journal
into the accounts.

Chapter Two Recording Business Transactions 57

EXHIBIT 2-3
The Accounting Equation and the First Three Transactions of Air & Sea Travel

Transaction 1 Transaction 2 Transaction 3

Received $50,000 cash that the owner Paid $40,000 cash Purchased office supplies on account for $500.
invested in the business. to purchase land.
$500 $500
Office Supplies Accounts
$10,000 $10,000 Payable
Cash Cash

$50,000 $50,000 $40,000 $50,000 $40,000 $50,000

Cash Gary Land Gary Land Gary
Lyon, Lyon, Lyon,
Capital Capital Capital

Assets = Liabilities + Owner's Equity

S TOP & T HINK

Can you prepare a balance sheet for Air & Sea Travel after the first transaction on
April 2, 2002? Can you prepare an income statement?

Answer:
AIR & SEA TRAVEL
Balance Sheet
April 2, 2002

Assets Liabilities
Cash ........................................... $50,000 $ 0
Owner’s Equity
Gary Lyon, Capital $50,000
Total liabilities and
Total assets ................................ $50,000 owner’s equity $50,000

You could not yet prepare an income statement because the business has experi-
enced no revenues or expenses.

OBJECTIVE 3
Record transactions in the
journal
Recording Transactions in Journals
In practice, accountants record transactions first in a journal, which is a chrono-
logical record of the entity’s transactions. The journalizing process follows four
steps:

1. Identify the transactions from source documents, such as bank deposit slips,
sales invoices, or cheque stubs.
2. Specify each account affected by the transaction and classify it by type (asset,
liability, or owner’s equity).
3. Determine whether each account is increased or decreased by the transaction.

58 Part One The Basic Structure of Accounting

 Using the rules of debit and credit, determine whether to debit or credit the ac-
count to record its increase or decrease.
4. Enter the transaction in the journal, including a brief explanation for the journal
entry. The debit side of the entry is entered first and the credit side last.

Step 4, “Enter the transaction in the journal,’’ means to record the transaction
in the journal. This step is also called “making the journal entry’’ or “journalizing
the transaction.’’
These four steps are completed in a computerized accounting system as well as
in a manual system. In step 4, however, the journal entry is generally entered into
the computer by account number, and the account name is then listed automatically.
Most computer programs replace the explanation in the journal entry with some
other means of tracing the entry back to its source documents.
Let’s apply the four steps to journalize the first transaction of Air & Sea Travel—
the business’s receipt of Lyon’s $50,000 cash investment in the business.

Step 1. The source documents are Air & Sea Travel’s bank deposit slip and the KEY POINT
$50,000 cheque, which is deposited in the business bank account. In a journal entry, such as Exhibit
Step 2. The accounts affected by the transaction are Cash and Gary Lyon, Capital. 2-4, the account debited is always
Cash is an asset account, and Gary Lyon, Capital is an owner’s equity ac- written first (not indented). The
count. account credited is indented on
Step 3. Both accounts increase by $50,000. Therefore, Cash, the asset account, is in- the line below, and the
explanation is not indented on the
creased (debited), and Gary Lyon, Capital, the owner’s equity account,
next line. Journal entries should
is increased (credited). always be recorded in this format.
Step 4. The journal entry is
LEARNING TIP

Date Accounts and Explanation Debit Credit When analyzing a transaction, first
pinpoint the obvious effects on the
accounts. For example, cash
Apr. 2a Cashb ................................................................ 50,000d effects are easy to identify. Did
Gary Lyon, Capitalc .................................... 50,000e cash increase or decrease? Then
Received initial investment from owner.f find its effect on other accounts.

The journal entry includes (a) the date of the transaction, (b) the title of the account
debited (placed flush left), (c) the title of the account credited (indented slightly), the
dollar amounts of (d) the debit (left) and (e) the credit (right)—dollar signs are omit-
ted in the money columns—and (f) a short explanation of the transaction.
The journal offers information that the ledger accounts do not provide. Each
journal entry shows the complete effect of a business transaction. Consider Gary
Lyon’s initial investment. The Cash account shows a single figure, the $50,000 debit.
We know that every transaction has a credit, so in what account will we find the cor-
responding $50,000 credit? In this illustration, we know that the Capital account
holds this figure. But imagine the difficulties you would face trying to link debits and
credits for hundreds of daily transactions—without a separate record of each trans-
action. The journal solves this problem and presents the full story for each trans-
action. Exhibit 2-4 shows how Journal page 1 looks after the first transaction is
recorded.

EXHIBIT 2-4
Journal Page 1
The Journal
Date Accounts and Explanation Ref. Debit Credit

Apr. 2 Cash ................................................................. 50,000

Gary Lyon, Capital .................................... 50,000
Received initial investment from owner.

Chapter Two Recording Business Transactions 59

 Regardless of the accounting system in use, an accountant must analyze every
business transaction in the manner we are presenting in these opening chapters. Once
the transaction has been analyzed, a computerized accounting package performs the
MasterCard same actions as accountants do in a manual system. For example, when a sales clerk
www.mastercard.com
runs your MasterCard through the credit card reader, the underlying accounting sys-
tem records the store’s sales revenue and receivable from MasterCard. The computer
automatically records the transaction as a journal entry, but an accountant had to pro-
gram the computer to do so. A computer’s ability to perform routine tasks and math-
ematical operations quickly and without error frees accountants for decision making.

OBJECTIVE 4
Post from the journal to the
Transferring Information (Posting) from the Journal
ledger to the Ledger
Posting means transferring the amounts from the journal to the accounts in the
ledger. Debits in the journal are posted as debits in the ledger, and credits in the
journal as credits in the ledger. The initial investment transaction of Air & Sea Travel
is posted to the ledger as shown in Exhibit 2-5. Computers perform this tedious
task quickly and without error. In these introductory discussions we temporarily ig-
nore the date of each transaction in order to focus on the accounts and their dollar
amounts.

The Flow of Accounting Data

Exhibit 2-6 summarizes the flow of accounting data from the business transaction all
the way through the accounting system to the ledger. In the pages that follow, we con-
tinue the example of Air & Sea Travel and account for six of the business’s early
transactions. Keep in mind that we are accounting for the business entity, Air & Sea
Travel. We are not accounting for Gary Lyon’s personal transactions.

Transaction Analysis, Journalizing, and Posting to

the Accounts
1. Transaction: Gary Lyons invested $50,000 cash to begin his travel business,
Air & Sea Travel.

Analysis: Lyon’s investment in Air & Sea Travel increased its asset cash; to
record this increase, debit Cash. The investment also increased
its owner’s equity; to record this increase, credit Gary Lyon,
Capital.
Journal Cash ................................................ 50,000
Entry: Gary Lyon, Capital.............. 50,000
Received initial investment from owner.

Accounting ASSETS = LIABILITIES + OWNER’S EQUITY

Equation: Cash Gary Lyon, Capital
+50,000 = 0 + 50,000
The journal entry records the same information that you learned
by using the accounting equation in Chapter 1. Both accounts—
Cash and Gary Lyon, Capital—increased because the business
received $50,000 cash and gave Lyon $50,000 of capital (owner’s
equity) in the business.

60 Part One The Basic Structure of Accounting

 EXHIBIT 2-5
Panel A — Journal Entry Journal Entry and Posting to
the Ledger
Date Accounts and Explanation Debit Credit

April 2 Cash ..................................................................... 50,000

Gary Lyon, Capital ....................................... 50,000
Received initial investment from owner.

Panel B — Posting to Ledger

Cash

50,000

WORKING IT OUT

Prepare the journal entry to record

a $1,600 payment on account.
(1) Identify the accounts.
Gary Lyon, Capital (2) Are these accounts increased
or decreased? Should they be
50,000 debited or credited?
(3) Make the journal entry, with an
explanation.
A: (1) The company paid $1,600 on
account. The accounts affected are
Cash and Accounts Payable.
(2) Cash (an asset) decreases by
$1,600. Accounts Payable (a
Ledger liability) decreases by the same
Accounts: Cash Gary Lyon, Capital amount. To record a decrease in an
asset, we use a credit. To record a
(1) 50,000 (1) 50,000 decrease in a liability, we use a
debit. Review Exhibit 2-2.
(3) Accounts
Payable...... 1,600
2. Transaction: Air & Sea Travel paid $40,000 cash for land as a future office Cash ..... 1,600
location. Made payment on
account.
Analysis: The purchase decreased cash; therefore, credit Cash. The pur-
chase increased the entity’s asset land; to record this increase, Exhibit 2-6
debit Land.
Flow of Accounting Data

Source Transaction Transaction Amounts

Transaction Documents Analysis Entered in Posted to
Occurs Prepared Takes Place Journal Ledger

Page
File Edit View Arrange Type Window
Post.
A B C D
Date Accounts and Explanations Ref. Debit Credit
List Date Accounts and Explanations Debit Credit 20XX
GARY LYON
Cheques Assets Liabilities + Owner’s Equity 1 April 2 Cash $50,000
Apr. 2 Cash 101 50,000
= 2 Gary Lyon, Capital $50,000
Cash Gary Lyon, Capital 3 Received initial investment from Gary Lyon, Capital 301 50,000
April 2 19 4 owner. Initial investment by owner
April 2 2002 For Deposit Only +50,000 +50,000 5
6
Pay to the
7 3 Office supplies 103 500
order of Gary Lyon, CPA $50,000 8
Cash 101 500
9
Total Type of Owner’s Equity Transaction 10 Purchased office supplies.
11
THE00GENERIC
Fifty Thousand and /100 BANK OF CANADA DOLLARS 12
XXXXXX, XXXXXXXX, XXXXXXX
Owner investment 13
14
15
16
17

Cash
50,000

Chapter Two Recording Business Transactions 61

 S TOP & T HINK
Suppose you are a lender and Gary Lyon asks you to make a $10,000 business loan to
Air & Sea Travel. After the initial investment of $50,000, how would you evaluate Air
& Sea Travel as a credit risk? Would your evaluation differ if Lyon had invested only
$5,000 of his money and Air & Sea Travel owed $25,000 to another bank?

Answer: You would probably view the loan request favourably. Gary Lyon has
invested $50,000 of his own money in the business. The travel agency has no debts, so
it should be able to repay you. However, if the owner had invested only $5,000 in the
business and it had liabilities of $25,000, Air & Sea Travel would be a less attractive
credit risk.

Journal Land ............................................... 40,000

Entry: Cash ..................................... 40,000
Paid cash for land.
Accounting OWNER’S
Equation: ASSETS = LIABILITIES + EQUITY
Cash Land
– 40,000 +40,000 = 0 + 0

This transaction increased one asset, land, and decreased another

asset, cash. The net effect on the business’s total assets was zero,
and there was no effect on liabilities or owner’s equity. We use
the term net in business to mean an amount after a subtraction.

Ledger
Accounts: Cash Land

(1) 50,000 (2) 40,000 (2) 40,000

3. Transaction: The business purchased office supplies for $500 on account

payable.

Analysis: The credit purchase of office supplies increased this asset, so we

debit Office Supplies. The purchase also increased the liability ac-
counts payable; to record this increase, credit Accounts Payable.

Journal Office Supplies ............................. 500

Entry: Accounts Payable ............... 500
Purchased office supplies on account.
Accounting OWNER’S
Equation: ASSETS = LIABILITIES + EQUITY
Office Accounts
Supplies Payable
+500 = +500 + 0
Ledger
Accounts: Office Supplies Accounts Payable

(3) 500 (3) 500

62 Part One The Basic Structure of Accounting

4. Transaction: The business paid $400 on the account payable created in
Transaction 3.

Analysis: The payment decreased the asset cash; therefore, credit Cash.
The payment also decreased the liability accounts payable, so
we debit Accounts Payable.
Journal Accounts Payable ......................... 400
Entry: Cash ...................................... 400
Paid cash on account.
Accounting OWNER’S
Equation: ASSETS = LIABILITIES + EQUITY
Cash Accounts Payable
–400 = –400 + 0
Ledger
Accounts: Cash Accounts Payable

(1) 50,000 (2) 40,000 (4) 400 (3) 500

(4) 400

5. Transaction: Gary Lyon remodelled his personal residence with personal

funds and a loan from their bank.This is not a business
transaction of the travel business, so no journal entry is made.

6. Transaction: Gary Lyon withdrew $2,100 cash for personal living expenses.

Analysis: The withdrawal decreased the entity’s cash; therefore, credit Cash.
The transaction also decreased the owner’s equity of the entity.
Decreases in the owner’s equity of a proprietorship that result
from owner withdrawals are debited to a separate owner’s eq-
uity account entitled Withdrawals. Therefore, debit Gary Lyon,
Withdrawals.
Journal Gary Lyon, Withdrawals.............. 2,100
Entry: Cash ...................................... 2,100
Withdrawal of cash by owner.
Accounting ASSETS = LIABILITIES + OWNER’S EQUITY
Equation: Cash Gary Lyon, Withdrawals
–2,100 = 0 –2,100
Ledger
Accounts: Cash Gary Lyon, Withdrawals

(1) 50,000 (2) 40,000 (6) 2,100

(4) 400
(6) 2,100

Each journal entry posted to the ledger is keyed by date or by transaction number.
In this way any transaction can be traced from the journal to the ledger, and, if need be,
back to the journal. This linking allows you to locate efficiently any information needed.

Accounts after Posting

We next illustrate how the accounts look when the amounts of the preceding
transactions have been posted. The accounts are grouped under the accounting
equation’s headings.

Chapter Two Recording Business Transactions 63

 Each account has a balance, denoted as Bal. This amount is the difference between
the account’s total debits and its total credits. For example, the balance in the Cash
account is the difference between the debits, $50,000 and the credits, $42,500 (i.e.,
$40,000 + $400 + $2,100). Thus the cash balance is $7,500. The balances are residual
amounts left over after the journal entries have been posted to the accounts. We set
an account balance apart by horizontal lines. The final figure in an account below the
horizontal line is the balance of the account after the transactions have been posted.
If the sum of an account’s debits is greater than the sum of its credits, that ac-
count has a debit balance, as the Cash account does here. If the sum of its credits is
greater, that account has a credit balance, as Accounts Payable does.

ASSETS = LIABILITIES + OWNER’S EQUITY

Cash Accounts Payable Gary Lyon, Capital

(1) 50,000 (2) 40,000 (4) 400 (3) 500 (1) 50,000
(4) 400 Bal. 100 Bal. 50,000
(6) 2,100
Bal. 7,500

Office Supplies Gary Lyon, Withdrawals

(3) 500 (6) 2,100

Bal. 500 Bal. 2,100

Land

(2) 40,000
Bal. 40,000

OBJECTIVE 5
Prepare and use a trial
balance
The Trial Balance
A trial balance is a list of all accounts with their balances—assets first, followed
by liabilities and then owner’s equity—taken from the ledger. Before computers,
the trial balance provided a check on accuracy by showing whether the total debits
WORKING IT OUT equalled the total credits. The trial balance is still useful as a summary of all the
accounts and their balances. A trial balance may be taken at any time the postings
Assume that Gary Lyon, With- are up to date. The most common time is at the end of the accounting period. Exhibit
drawals, $2,100, is erroneously
listed as a credit amount on the
2-7 is the trial balance of the ledger of Air & Sea Travel after the six transactions
trial balance in Exhibit 2-7. have been journalized and posted.
(1) Recompute the trial balance
totals.
(2) To find the mistake, calculate Correcting Trial Balance Errors
the difference between the column In a trial balance, the total debits and total credits should be equal. If they are not
totals. equal, then accounting errors exist. Computerized accounting systems eliminate
(3) Then divide the difference by
two.
most recording errors by often prohibiting unbalanced journal entries from being
A: (1) Debit = $48,000; recorded. Computerized accounting systems also post journal amounts precisely
Credit = $52,200. as they have been journalized. But computers cannot eliminate all errors because
(2) $52,200 – $48,000 = $4,200. humans sometimes input the wrong data.
(3) $4,200 ÷ 2 = $2,100. Many out-of-balance conditions can be detected by computing the difference
If you find that amount somewhere between total debits and total credits on the trial balance. Then perform one or
on the trial balance, you may have more of the following actions:
entered it in the wrong column.
This is one easy way to find an
error if your trial balance does not
balance.

64 Part One The Basic Structure of Accounting

 EXHIBIT 2-7
AIR & SEA TRAVEL
Trial Balance
Trial Balance
April 30, 2002

Balance

Account Titles Debit Credit

Cash ................................................................................. $ 7,500

Office supplies................................................................ 500
Land ................................................................................. 40,000
Accounts payable........................................................... $ 100
Gary Lyon, Capital ........................................................ 50,000
Gary Lyon, Withdrawals............................................... 2,100
Total ............................................................................... $50,100 $50,100

1. Search the trial balance for a missing account. For example, suppose the ac-
countant omitted Gary Lyon, Withdrawals from the trial balance in Exhibit 2-7.
The total amount of the debts would be $48,000 ($50,100 – $2,100). Trace each
account and its balance from the ledger to the trial balance, and you will locate
the missing account.
2. Search the journal for the amount of difference. For example, suppose the total
credits on Air & Sea Travel’s trial balance equal $50,100 and total debits equal
$49,700. A $400 transaction may have been recorded incorrectly in the journal
or posted incorrectly to the ledger. Search the journal for a $400 transaction.
3. Divide the difference between total debits and total credits by 2. A debit treated
as a credit, or vice versa, doubles the amount of error. Suppose Air & Sea Travel
debited $500 to Cash instead of crediting the Cash account, or assume the ac-
countant posted a $500 credit as a debit. Total debits contain the $500, and total
credits omit the $500. The out-of-balance amount is $1,000, and dividing by 2
identifies the $500 of the transaction. Then search the journal for a $500 trans-
action and trace to the account affected.
4. Divide the out-of-balance amount by 9. If the result is evenly divisible by 9, the
error may be a slide, which is adding or deleting one or several zeroes in a figure
(example: writing $61 as $610), or a transposition (example: treating $61 as $16).
Suppose Air & Sea Travel listed the $2,100 Gary Lyon, Withdrawals balance as
$21,000 on the trial balance—a slide-type error. Total debits would differ from
total credits by $18,900 (i.e., $21,000 – $2,100 = $18,900). Dividing $18,900 by 9
yields $2,100, the correct amount of the withdrawals. Trace this amount through
the ledger until you reach the Gary Lyon, Withdrawals account with a balance of
$2,100. Computer-based systems avoid such errors.

A warning: Do not confuse the trial balance with the balance sheet. A trial balance
is an internal document seen only by the company’s owners, managers, and accoun-
tants. The company reports its financial position—both inside the business and to the
public—on the balance sheet, a formal financial statement. And remember that the fi-
nancial statements are the focal point of the accounting process. The trial balance is
merely a step in the preparation of the financial statements.

Chapter Two Recording Business Transactions 65

 Mid-Chapter Summary Problem
for Your Review
On August 1, 2003, Mary Woo opens Woo Computer Consulting. During the busi-
ness’s first ten days of operations, it completes the following transactions:
a. To begin operations, Mary Woo deposits $40,000 of personal funds in a bank ac-
count entitled Woo Computer Consulting. The business receives the cash and
gives Woo capital (owner’s equity).
b. Woo Computer Consulting pays $20,000 cash for a small house to be used as an
office and $10,000 for the land on which the house is located.
c. The business purchases office supplies for $500 on account.
d. The business pays $6,000 cash for office furniture.
e. The business pays $150 on the account payable created in Transaction (c).
f. Woo withdraws $1,000 cash for personal use.

Required
1. Prepare the journal entries to record these transactions. Key the journal entries by
letter.
2. Post the entries to T-accounts and calculate the ending balance.
3. Prepare the trial balance of Woo Computer Consulting at August 10, 2003.

Solution to Review Problem

Requirement 1

Accounts and Explanation Ref. Debit Credit

a. Cash ................................................................................ 40,000

Mary Woo, Capital .................................................. 40,000
Record initial investment from owner.

b. Building ......................................................................... 20,000

Land ................................................................................ 10,000
Cash ........................................................................... 30,000
Purchased building for an office and land.

c. Office Supplies .............................................................. 500

Accounts Payable .................................................... 500
Purchased office supplies on account.

d. Office Furniture ............................................................ 6,000

Cash ........................................................................... 6,000
Purchased office furniture.

e. Accounts Payable ......................................................... 150

Cash ........................................................................... 150
Paid cash on account.

f. Mary Woo, Withdrawals ............................................. 1,000

Cash ........................................................................... 1,000
Withdrew cash for personal use.

66 Part One The Basic Structure of Accounting

 Requirement 2

ASSETS
Cash Office Supplies

(a) 40,000 (b) 30,000 (c) 500

(d) 6,000 Bal. 500
(e) 150
(f) 1,000 Land
Bal. 2,850
(b) 10,000
Bal. 10,000
Office Furniture Building

(d) 6,000 (b) 20,000

Bal. 6,000 Bal. 20,000

LIABILITIES OWNER’S EQUITY

Accounts Payable Mary Woo, Capital Mary Woo, Withdrawals

(e) 150 (c) 500 (a) 40,000 (f) 1,000

Bal. 350 Bal. 40,000 Bal. 1,000

Requirement 3

WOO COMPUTER CONSULTING

Trial Balance
August 10, 2003

Balance

Account Titles Debit Credit

Cash ................................................................................ $ 2,850

Office supplies ............................................................... 500
Office furniture .............................................................. 6,000
Building .......................................................................... 20,000
Land ................................................................................. 10,000
Accounts payable .......................................................... $ 350
Mary Woo, Capital......................................................... 40,000
Mary Woo, Withdrawals .............................................. 1,000
Total ........................................................................... $40,350 $40,350

Visit the Student Resources area of the Accounting Companion

Cyber Website for extra practice with the new material in Chapter 2.
Coach
www.pearsoned.ca/horngren

Chapter Two Recording Business Transactions 67

 Details of Journals and Ledgers
To focus on the main points of journalizing and posting, we purposely omitted cer-
tain essential data. In practice, the journal and the ledger provide additional de-
tails that create a “trail’’ through the accounting records for future reference. For
example, a supplier may bill us twice for the same item we purchased on account.
To prove we paid the bill, we would search the accounts payable records and work
backward to the journal entry that recorded our payment. To see how this works, let’s
take a closer look at the journal and the ledger.
Details in the Journal Exhibit 2-8, Panel B presents a widely used journal for-
mat. The journal page number appears in the upper-right corner. As the column
headings indicate, the journal displays the following information:
1. The date, which indicates when the transaction occurred. The year appears only
when the journal is started or when the year has changed. The date of the trans-
action is recorded for every transaction.
2. The account title and explanation of the transaction, as in Exhibit 2-4.
3. The posting reference, abbreviated Post. Ref. How this column helps the accoun-
tant becomes clear when we discuss the details of posting.
4. The debit column, which shows the amount debited.
5. The credit column, which shows the amount credited.

Details in the Ledger Exhibit 2-8, Panel C presents the ledger in three-column
format. The first two amount columns are for the debit and credit amounts posted
from the journal. The third amount column is for the account’s balance. This three-
column format keeps a running balance in the account. The balance is usually in-
dicated by the letters Dr or Cr (indicating a debit or credit respectively) appearing
in the third amount column. Each account has its own record in the illustrative
ledger. Our example shows Air & Sea Travel’s Cash account, Office Supplies ac-
count, and Gary Lyon, Capital account. Each account in the ledger has its own iden-
tification number.
The column headings identify the ledger account’s features:
1. The date.
2. The item column. This space is used for any special notation.
3. The journal reference column, abbreviated Jrnl. Ref. The importance of this col-
umn becomes clear when we discuss the mechanics of posting.
4. The debit column, with the amount debited.
5. The credit column, with the amount credited.
6. The balance column, with the debit or credit running balance.

Posting from the Journal to the Ledger

We know that posting means transferring information from the journal to the ledger
accounts. But how do we handle the additional details that appear in the journal and
the ledger formats that we have just seen? Exhibit 2-8 illustrates the steps in full
detail. Panel A lists the first two transactions of the business entity Air & Sea Travel;
Panel B presents the journal; and Panel C shows the ledger. The posting process
includes four steps:
After recording the transaction in the journal:
Arrow ①—Copy (post) the transaction date from the journal to the ledger.
Arrow ②—Copy (post) the journal page number from the journal to the ledger. We
use several abbreviations:
Jrnl. Ref. means Journal Reference. J. 1 refers to Journal page 1.

68 Part One The Basic Structure of Accounting

 Exhibit 2-8
Details of Journalizing and
Posting
Panel A: Two of Air & Sea’s Transactions

Date Transaction
Apr. 2, 2002 Gary Lyon invested $50,000 in travel
agency. The business received cash and gave
Lyon owner's equity in the business.
Apr. 3, 2002 Paid $500 cash for office supplies.

Panel B: The Journal

Page 1

Post.
Date Accounts and Explanation Debit Credit
Ref.
2002
Apr. 2 Cash 1100 50,000
Gary Lyon, Capital 3000 50,000
Received initial investment from
owner.

3 Office Supplies 1400 500

Cash 1100 500
Purchased office supplies.

1 2 3 4
Panel C: The Ledger

Account: Cash Account No. 1100

Jrnl.
Date Item Ref. Debit Credit Balance
4 Enter the
2002
account number
Apr. 2 J.1 50,000 50,000 Dr
in the posting
Apr. 3 J.1 500 49,500 Dr
reference column
1 Transfer the of the journal
date of the
2 Transfer the page 3 Post the debit figure from
number from the journal the journal as a debit figure once the figure
transaction
to the journal reference in the ledger account. has been posted
from the
column of the ledger. to the ledger.
journal to
the ledger.

Account: Office Supplies Account No. 1400

Jrnl.
Date Item Ref. Debit Credit Balance
2002
Apr. 3 J.1 500 500 Dr

Account: Gary Lyon, Capital Account No. 3000

Jrnl.
Date Item Ref. Debit Credit Balance
2002
Apr. 2 J.1 50,000 50,000 Cr

Chapter Two Recording Business Transactions 69

 This step indicates where the information in the ledger came from: Journal
page 1.
Arrow ③—Copy (post) the dollar amount of the debit ($50,000) from the journal
as a debit to the same account (Cash) in the ledger. Likewise, post the dollar
amount of the credit (also $50,000) from the journal to the appropriate account in
the ledger. Now the ledger accounts have their correct amounts.
Arrow ④—Copy (post) the account number (1100) from the ledger back to the jour-
nal. This step indicates that the $50,000 debit to Cash has been posted to the
Cash account in the ledger. Also, copy the account number (3000) for Gary Lyon,
Capital back to the journal to show that the $50,000 amount of the credit has
been posted to the ledger.
Post. Ref. is the abbreviation for Posting Reference.
After posting, you can prepare the trial balance, as we discussed earlier.

OBJECTIVE 6
Set up a chart of accounts for Chart of Accounts in the Ledger
a business
As you know, the ledger contains the business’s accounts grouped under these
headings:
1. Balance Sheet Accounts: Assets, Liabilities, and Owner’s Equity
2. Income Statement Accounts: Revenues and Expenses.
To keep track of their accounts, organizations have a chart of accounts, which lists
all the accounts in the ledger and their account numbers. These account numbers are
used as posting references, as illustrated by Arrow 4 in Exhibit 2-8. This numbering
system makes it easy to locate individual accounts in the ledger.
Accounts are identified by account numbers with two or more digits. Assets are
often numbered beginning with 1, liabilities with 2, owner’s equity with 3, rev-
enues with 4, and expenses with 5. The second, third, and higher digits in an account
number indicate the position of the individual account within the category. For ex-
ample, Cash might be account number 1001, which is the first asset account. Accounts
receivable may be account number 1101, the second asset account. Accounts payable
may be number 2001, the first liability account. All accounts are numbered by this
system.
Organizations with many accounts use lengthy account numbers; some may
have more than 25 digits. The account number can provide much useful information.
For example, the account number might indicate the type of account (for example,
Petty Cash) and the location of the account within the organization (for example, the
Yorkton branch). The chart of accounts of Brown and Hansell, a law partnership, (in
Exhibit 2-9) uses a four-digit account number. The assignment material reflects the
variety found in practice.
The chart of accounts for Air & Sea Travel appears in Exhibit 2-10. Notice the
gap in account numbers between 1200 and 1400. Gary Lyon realizes that at some later
date the business may need to add another category of receivables—for example,
Notes Receivable, to be numbered 1210.
Appendix C at the end of Volume I and Volume II gives three expanded charts of
accounts that you will find helpful as you work through this course. The first chart lists
the typical accounts of a large service proprietorship. The second chart is for a mer-
chandising corporation, one that sells a product rather than a service. The third chart
lists some accounts a manufacturing company uses. These accounts will be used in
connection with Chapters 19–26. Study the service proprietorship chart of accounts
now, and refer to the other charts of accounts as needed later.
The expense accounts are listed in alphabetical order throughout this chapter.

70 Part One The Basic Structure of Accounting

 EXHIBIT 2-9
Account Account
Number Name Partial Chart of Accounts—
Law Practice of Brown and
Hansell
1101 Petty Cash
1110 Cash in Bank
1201 Accounts Receivable
1300 Office Supplies
1601 Office Furniture
1701 Computers
2201 Accounts Payable
2250 Notes Payable
2300 Employee Withholdings Payable
3000 H. Brown, Capital
3001 B. Hansell, Capital
3100 H. Brown, Withdrawals
3101 B. Hansell, Withdrawals
4000 Fee Revenue
5001 Rent Expense
5101 Supplies Expense
5401 Wages Expense

EXHIBIT 2-10
Balance Sheet Accounts:
Assets Liabilities Owner’s Equity Chart of Accounts—
Air & Sea Travel
1100 Cash 2100 Accounts Payable 3000 Gary Lyon, Capital
1200 Accounts Receivable 2300 Notes Payable 3100 Gary Lyon,
1400 Office Supplies Withdrawals
1500 Office Furniture Income Statement Accounts
1900 Land (part of Owner’s Equity)
Revenues Expenses
4000 Service 5100 Rent Exp.
Revenue 5200 Salary Exp.
5300 Utilities Exp.

Many businesses follow such a scheme for their records and financial statements
since computer programs often list accounts alphabetically. The other ordering is by
balance or size, with the accounts with the largest balances listed first; the service,
merchandising, and manufacturing accounts shown in Appendix C are taken from
the financial statements of real companies and are listed in the order used by those
companies.

Normal Balance of an Account KEY POINT

The normal balance of an account
An account’s normal balance appears on the side of the account—debit or credit— is the side on which increases are
recorded.
where increases are recorded. That is, the normal balance is on the side that is pos-
itive. For example, Cash and other assets usually have a debit balance (the debit
side is positive and the credit side negative), so the normal balance of assets is on the
debit side, and assets are called debit-balance accounts. Conversely, liabilities and
owner’s equity usually have a credit balance, so their normal balances are on the

Chapter Two Recording Business Transactions 71

 Accounting and the -World

Using Computers and the Internet to Be Successful

Computers and the internet are two reasons that companies have been able to
grow to sizes unimaginable a decade ago and to spread throughout the world.
Computers process vast amounts of data quickly and the internet allows companies
to maintain constant contact with far-flung operations.
Bombardier Inc. (http://www.bombardier.com) has operations in twelve
countries on three continents covering four major lines of business. Imagine the dif-
ficulty that Bombardier would have in gathering together all the company’s financial
data to prepare its 2000 financial statements if it did not have computers and world-
wide data linkage through the internet.
Magna International (http://www.magna.com) employs 59,000 people at
174 manufacturing divisions and 33 product development and engineering centres
in 19 countries—and Magna is able to produce its annual financial statements
within five weeks of its December 31 year end. Magna can do this because of its
extensive use of computers and because all its world-wide operations are con-
nected by means of an electronic network.
Both of these companies are successful because they produce excellent prod-
ucts and are world leaders at what they do. Their success is based on their ability
to make good decisions, and they are able to do this because they have excellent
information technology working for them. Their accounting systems around the
world are compatible with each other. Management is confident that the informa-
tion they receive daily is both accurate and current. Computers and the internet
provide this accurate information for decision making in real time.

credit side, and they are called credit-balance accounts. Exhibit 2-11 illustrates the
normal balances of assets, liabilities, and owner’s equity.
An account that normally has a debit balance may occasionally have a credit
balance, which indicates a negative amount of the item. For example, Cash will
have a temporary credit balance if the entity overdraws its bank account. Similarly,
the liability Accounts Payable—normally a credit balance account—will have a
debit balance if the entity overpays its accounts payable. In other instances, the
shift of a balance amount away from its normal column may indicate an accounting
error. For example, a credit balance in Office Furniture or Buildings indicates an
error because negative amounts of these assets cannot exist.

EXHIBIT 2-11
Normal Balances of Balance
Assets = Liabilities + Owner’s Equity
Sheet Accounts
Normal Normal Normal
Bal. Bal. Bal.
Debit Credit Credit

72 Part One The Basic Structure of Accounting

 As we saw earlier in the chapter, owner’s equity usually contains several ac-
counts. In total, these accounts show a normal credit balance. An individual owner’s
equity account with a normal credit balance represents an increase in owner’s equity.
An owner’s equity account that has a normal debit balance represents a decrease in
owner’s equity.

Expanding the Accounting Equation to KEY POINT

Because withdrawals reduce owner’s
Account for Owner’s Equity Accounts: equity, the Withdrawals account is
sometimes referred to as a contra
Revenues and Expenses equity account, meaning that it has
the opposite balance of owner’s
Owner’s equity includes Revenues and Expenses because revenues and expenses equity.
make up net income or net loss, which flows into owner’s equity. As we have dis-
cussed, revenues are increases in owner’s equity that result from delivering goods and
services to customers in the course of operating the business. Expenses are decreases
in owner’s equity that occur from using assets or increasing liabilities in the course
of operating the business. Therefore, the accounting equation may be expanded as
shown in Exhibit 2-12. Revenues and expenses appear in parentheses to highlight
the fact that their net effect—revenues minus expenses—equals net income, which
increases owner’s equity. If expenses are greater than revenues, the net effect of
operations is a net loss, which decreases owner’s equity.
We can now express the rules of debit and credit in final form as shown in Panel
A of Exhibit 2-13. Panel B shows the normal balances of the five types of accounts:
Assets; Liabilities; and Owner’s Equity and its subparts, Revenue and Expenses. All of
accounting is based on these five types of accounts. You should not proceed until
you have learned the rules of debit and credit and the normal balances of the
five types of accounts.

Expanded Problem Including Revenues

and Expenses
Let’s account for the revenues and expenses of Sarah Gunz’s law practice for the
month of July 2003. We follow the same steps illustrated earlier in this chapter:
Analyze the transaction, journalize, post to the ledger, and prepare the trial balance.

EXHIBIT 2-12
Assets Liabilities Expansion of the Accounting
+
Equation
Capital

–
Withdrawals

Owner’s Equity
+
Revenues

–
Expenses
Liabilities
Assets = +
Owner's
Capital – Withdrawals + (Revenues – Expenses)
Equity

Chapter Two Recording Business Transactions 73

EXHIBIT 2-13
Rules of Debit and Credit, and
Panel A: Rules of Debit and Credit
Normal Balances of
Accounts Assets = Liabilities + Capital

Debit Credit Debit Credit Debit Credit

for for for for for for
Increase Decrease Decrease Increase Decrease Increase

Withdrawals

Debit Credit
for for
Increase Decrease

Revenues

Debit Credit
for for
Decrease Increase

Expenses

Debit Credit
for for
Increase Decrease

Panel B: Normal Balances

Assets .............................................................................. Debit

Liabilities ........................................................................ Credit
Owner’s equity—overall ............................................. Credit
Capital ....................................................................... Credit
Withdrawals ............................................................. Debit
Revenue ..................................................................... Credit
Expenses .................................................................... Debit

Transaction Analysis, Journalizing, and Posting

1. Transaction: Sarah Gunz invested $10,000 cash in a business bank account
to open her law practice. The business received the cash and
gave Gunz owner’s equity.

Analysis: The business asset cash is increased; therefore, debit Cash. The
owner’s equity of the business is increased, so credit Sarah Gunz,
Capital.
Journal Cash ............................................... 10,000
Entry: Sarah Gunz, Capital ........... 10,000
Received investment from owner.
Accounting ASSETS = LIABILITIES + OWNER’S EQUITY
Equation: Cash Sarah Gunz, Capital
+10,000 = 0 + 10,000

74 Part One The Basic Structure of Accounting

 Ledger WORKING IT OUT
Accounts: Cash Sarah Gunz, Capital
Compute the missing amounts:
(1) 10,000 (1) 10,000 (1) Cash
Bal. 10,000
20,000 13,000
2. Transaction: Gun\provided legal services for a client and received $3,000 cash. Bal. X
(2) Accounts Payable
Analysis: The asset cash is increased; therefore, debit Cash. The revenue ac-
X Bal. 12,800
count service revenue is increased; credit Service Revenue. 45,600
Journal Cash ............................................... 3,000 Bal. 23,500
Entry: Service Revenue ................. 3,000 (3) S. Scully, Capital
Performed service and received Bal. X
cash. 22,000 56,000
15,000
OWNER’S
Bal. 73,000
Accounting ASSETS = LIABILITIES + EQUITY + REVENUES
Equation: Cash Service Revenue A: (1) The ending balance (X) for
+3,000 = 0 + 3,000 Cash is
X = $10,000 + 20,000 – $13,000
Ledger X = $17,000
Accounts: Cash Service Revenue (2) We are given the beginning and
ending balances. We can compute
(1) 10,000 (2) 3,000 the debit entry as follows:
(2) 3,000 $12,800 + $45,600 – X
= $23,500
$12,800 + $45,600
– $23,500 = X
3. Transaction: Gunz provided legal services to JM Co. and billed the client for X = $34,900
$500 on account. This means JM Co. owes the business $500 (3) The Capital account has an
and Gunz expects to collect the $500 later. ending credit balance of $73,000.
We can calculate the beginning
credit balance as follows:
Analysis: The asset accounts receivable is increased; therefore, debit
X + $56,000 + $15,000
Accounts Receivable. Service revenue is increased; credit Service – $22,000 = $73,000
Revenue. X = $73,000 – $56,000
– $15,000 + $22,000
Journal Accounts Receivable .................... 500
X = $24,000
Entry: Service Revenue ................. 500
Performed service on account.
OWNER’S
Accounting ASSETS = LIABILITIES + EQUITY + REVENUES
Equation: Accounts Service
Receivable Revenue
+500 = 0 + 500
Ledger
Accounts: Accounts Receivable Service Revenue

(3) 500 (2) 3,000

(3) 500

4. Transaction: Gunz provided and billed legal services of $700 to a doctor, who
paid $300 cash immediately. Gunz billed the remaining $400 to
the doctor on accounts receivable.

Analysis: The assets cash and accounts receivable are increased; therefore,
debit both of these asset accounts. Service revenue is increased;
credit Service Revenue for the sum of the two debit amounts.

Chapter Two Recording Business Transactions 75

 Journal Cash ............................................... 300
Entry: Accounts Receivable .................... 400
Service Revenue ................. 700
Performed service for cash and
on account.
Accounting
Equation:
OWNER’S
ASSETS = LIABILITIES + EQUITY + REVENUES
Accounts Service
Cash Receivable Revenue
+300 +400 = 0 + 700
Note: Because this transaction affects more than two accounts at the
same time, the entry is called a compound entry. No matter how
many accounts a compound entry affects—there may be any
number—total debits must equal total credits.
Ledger
Accounts: Cash Accounts Receivable

(1) 10,000 (3) 500

(2) 3,000 (4) 400
(4) 300

Service Revenue

(2) 3,000
(3) 500
(4) 700

5. Transaction: Gunz paid the following cash expenses: office rent, $900;
employee salary, $1,500; and utilities, $500.

Analysis: The asset cash is decreased; therefore, credit Cash for each of
the three expense amounts. The following expenses are increased:
Rent Expense, Salary Expense, and Utilities Expense. Each should
be debited for the appropriate amount.
Journal Rent Expense ................................ 900
Entry: Salary Expense ............................. 1,500
Utilities Expense .......................... 500
Cash ........................................... 2,900
Issued three cheques to pay cash
expenses.
Accounting
Equation:
OWNER’S
ASSETS = LIABILITIES + EQUITY – EXPENSES
Rent Salary Utilities
Cash Expense Expense Expense
–2,900 = 0 –900 –1,500 –500
Note: In practice, the business would record these three transactions
separately. To save space, we can record them together in a com-
pound journal entry.

76 Part One The Basic Structure of Accounting

 Ledger
Accounts: Cash Rent Expense

(1) 10,000 (5) 2,900 (5) 900

(2) 3,000
(4) 300

Salary Expense Utilities Expense

(5) 1,500 (5) 500

6. Transaction: Gunz received a telephone bill for $120 and will pay this expense
next week.

Analysis: Utilities expense is increased; therefore, debit this expense. The

liability accounts payable is increased, so credit Accounts Payable.
Journal Utilities Expense .......................... 120
Entry: Accounts Payable ............... 120
Received utility bill.
OWNER’S
Accounting ASSETS = LIABILITIES + EQUITY – EXPENSES
Equation: Accounts Utilities
Payable Expense
0 = +120 – 120
Ledger
Accounts: Accounts Payable Utilities Expense

(6) 120 (5) 500

(6) 120

LEARNING TIP
7. Transaction: Gunz received $200 cash from JM Co., the client discussed in
Transaction 3. Recording an expense does not
necessarily involve a credit to
cash. In Transaction 6 the expense
Analysis: The asset cash is increased; therefore, debit Cash. The asset is recorded now, but the cash will
accounts receivable is decreased; therefore, credit Accounts be paid later. Likewise, a debit to
Receivable. cash does not always reflect
revenue. Transaction 7 records
Journal Cash ............................................... 200 cash collected on a receivable (the
Entry: Accounts Receivable .......... 200 revenue was recorded in
Received cash on account. Transaction 3).

OWNER’S
Accounting ASSETS = LIABILITIES + EQUITY
Equation: Accounts
Cash Receivable
+200 –200 = 0 + 0

Note: This transaction has no effect on revenue; the related revenue

is accounted for in Transaction 3.
Ledger
Accounts: Cash Accounts Receivable

(1) 10,000 (5) 2,900 (3) 500 (7) 200

(2) 3,000 (4) 400
(4) 300
(7) 200

Chapter Two Recording Business Transactions 77

 8. Transaction: Gunz paid the telephone bill that was received and recorded in
Transaction 6.

Analysis: The asset cash is decreased; credit Cash. The liability accounts
payable is decreased; therefore, debit Accounts Payable.
Journal Accounts Payable ......................... 120
Entry: Cash ...................................... 120
Paid cash on account.
Accounting ASSETS = LIABILITIES + OWNER’S EQUITY
Equation: Accounts
Cash Payable
–120 = –120 + 0
Note: This transaction has no effect on expense because the related
expense was recorded in Transaction 6.
Ledger
Accounts: Cash Accounts Payable

(1) 10,000 (5) 2,900 (8) 120 (6) 120

(2) 3,000 (8) 120
(4) 300
(7) 200

9. Transaction: Gunz withdrew $1,100 cash for personal use.

Analysis: The asset cash decreased; credit Cash. The withdrawal decreased
owner’s equity; therefore, debit Sarah Gunz, Withdrawals.
Journal Sarah Gunz, Withdrawals ........... 1,100
Entry: Cash ...................................... 1,100
Withdrew cash for personal use.
Accounting ASSETS = LIABILITIES + OWNER’S EQUITY
Equation: Cash Sarah Gunz, Withdrawals
–1,100 = 0 –1,100
Ledger
Accounts: Cash Sarah Gunz, Withdrawals

(1) 10,000 (5) 2,900 (9) 1,100

(2) 3,000 (8) 120
(4) 300 (9) 1,100
(7) 200

S TOP & T HINK

Review the chapter-opening story and concentrate on Intrawest’s need for financial
statement information. How will the procedures you have applied in this chapter
help Intrawest convince potential investors that the business is financially stable?
Answer: The end product of the accounting process is a set of financial statements.
Intrawest’s accounting records will generate the income statement, cash flow state-
ment, and balance sheet that potential investors require of companies before investing.

78 Part One The Basic Structure of Accounting

Ledger Accounts after Posting
ASSETS LIABILITIES OWNER’S EQUITY REVENUE EXPENSES
Cash Accounts Payable Sarah Gunz, Capital Service Revenue Rent Expense

(1) 10,000 (5) 2,900 (8) 120 (6) 120 (1) 10,000 (2) 3,000 (5) 900
(2) 3,000 (8) 120 Bal. 0 Bal.10,000 (3) 500 Bal. 900
(4) 300 (9) 1,100 (4) 700
(7) 200 Sarah Gunz, Withdrawals Bal. 4,200 Salary Expense
Bal. 9,380
(9) 1,100 (5) 1,500
Bal. 1,100 Bal. 1,500

Accounts Receivable Utilities Expense

(3) 500 (7) 200 (5) 500

(4) 400 (6) 120
Bal. 700 Bal. 620

Trial Balance
To prepare the trial balance, we list and summarize the balances from the ledger
accounts.

SARAH GUNZ, LAWYER

Trial Balance
July 31, 2003

Balance

Account Title Debit Credit THINKING IT OVER

Which side of the trial balance is
Cash ....................................................................... $ 9,380 affected by a debit to accounts
Accounts receivable ............................................ 700 payable?
Accounts payable ................................................ $ 0 A: The credit side. (Students may
Sarah Gunz, Capital ............................................ 10,000 want to say debit.) Illustration:
Sarah Gunz, Withdrawals .................................. 1,100
Accounts Payable
Service revenue .................................................... 4,200
Bal. 6,000
Rent expense ........................................................ 900
Salary expense ...................................................... 1,500 A debit to accounts payable
Utilities expense ................................................... 620 reduces the credit balance of
Total .................................................................. $14,200 $14,200 Accounts Payable.
Accounts Payable

You have now seen how to record business transactions, post to the ledger ac- Bal. 6,000
counts, and prepare a trial balance. Solidify your understanding of the accounting 1,000
process by reviewing the Decision Guidelines feature, described on page 80. Bal. 5,000

Use of Accounting Information OBJECTIVE 7

for Quick Decision Making Analyze transactions without a
journal
Often businesspeople make decisions without taking the time to follow all the steps in
an accounting system. For example, suppose Intrawest, which owns a number of ski
resorts, needs an additional ski lift at Blackcomb to meet skiers’ demand. The com-
pany can either build an additional lift and increase revenues or not build the lift. The
decision to build the lift will depend upon the different effects on the company.

Chapter Two Recording Business Transactions 79

 Analyzing and Recording Transactions
Decision Guidelines

Has a transaction occurred? If the event affects the entity’s financial position and can be
reliably recorded—Yes
If either condition is absent—No
Where to record the transaction? In the journal, the chronological record of transactions
What to record for each transaction? Increases and/or decreases in all the accounts affected by the
transaction (at cost)
How to record an increase/decrease Rules of debit and credit:
in a(an) Increase Decrease
Asset Debit Credit
Liability Credit Debit
Owner’s equity Credit Debit
Revenue Credit Debit
Expense Debit Credit
Where to store all the information for each account? In the ledger, the book of accounts and their balances
Where to list all the accounts and their balances? In the trial balance
Where to report the
Results of operations? In the income statement
(revenues – expenses = net income or net loss)
Financial position? In the balance sheet (assets = liabilities + owner’s equity)

Intrawest management does not need to record in the journal all the transactions
that would be affected by its decision. After all, the company has not completed a
transaction yet. But management does need to know how Intrawest will be affected
by the decision. If the decision makers know accounting, they can skip the journal and
go directly to the ledger accounts that would be affected. The following accounts
summarize the immediate effects of building the lift and not building the lift.

BUILD THE LIFT DO NOT BUILD THE LIFT

Cash Revenue Cash Revenue

1,000,000 300,000 No effect No effect

per year for
ten years
Expenses

100,000
per year for
ten years

Immediately Intrawest’s management can see that building the additional lift will
require more cash. But management can also see that Intrawest will generate more
revenues if the lift is built. This may motivate Intrawest’s management to use cash
to build the lift.
Companies do not actually keep their records in this short-cut fashion. But a
decision maker who needs information immediately can quickly analyze the effect
of a set of transactions on the company’s financial statements.

80 Part One The Basic Structure of Accounting

Summary Problem
for Your Review
The trial balance of Tomassini Computer Service Centre on March 1, 2003, lists the
company’s assets, liabilities, and owner’s equity on that date.

Balance

Account Titles Debit Credit

Cash ...................................................................................... $26,000

Accounts receivable ............................................................ 4,500
Accounts payable ................................................................ $ 2,000
John Tomassini, Capital ...................................................... 28,500
Total .................................................................................. $30,500 $30,500

During March the business engaged in the following transactions:

a. Borrowed $45,000 from the bank and signed a note payable in the name of the
business.
b. Paid cash of $40,000 to a real estate company to acquire land.
c. Performed service for a customer and received cash of $5,000.
d. Purchased supplies on account, $300.
e. Performed customer service and earned revenue on account, $2,600.
f. Paid $1,200 of the Accounts Payable at March 1, 2003.
g. Paid the following cash expenses: salaries, $3,000; rent, $1,500; and interest, $400.
h. Received $3,100 of the Accounts Receivable at March 1, 2003.
i. Received a $200 utility bill that will be paid next week.
j. Tomassini withdrew $1,800 for personal use.

Required
1. Open the following accounts, with the balances indicated, in the ledger of
Tomassini Computer Service Centre. Use the T-account format.
Assets: Cash, $26,000; Accounts Receivable, $4,500; Supplies, no balance; Land,
no balance
Liabilities: Accounts Payable, $2,000; Note Payable, no balance
Owner’s Equity: JohnTomassini, Capital, $28,500; JohnTomassini, Withdrawals,
no balance
Revenues: Service Revenue, no balance
Expenses: (none have balances) Salary Expense, Rent Expense, Utilities Expense,
Interest Expense
2. Journalize the preceding transactions. Key journal entries by transaction letter.
3. Post to the ledger.
4. Prepare the trial balance of Tomassini Computer Service Centre at March 31, 2003.
5. Compute the net income or net loss of the entity during the month of March by
producing an income statement. List expenses in alphabetical order.

Chapter Two Recording Business Transactions 81

 Solution to Review Problem
Requirement 1
ASSETS LIABILITIES OWNER’S EQUITY
Cash Accounts Payable John Tomassini, Capital EXPENSES
Interest Expense
Bal. 26,000 Bal. 2,000 Bal. 28,500

Accounts Receivable Note Payable John Tomassini,

Withdrawals Rent Expense
Bal. 4,500

Supplies
Salary Expense
REVENUE
Service Revenue
Land
Utilities Expense

Requirement 2
Accounts and Explanation Debit Credit

a. Cash ..................................................................... 45,000

Note Payable .............................................. 45,000
Borrowed cash on note payable.
b. Land..................................................................... 40,000
Cash ............................................................. 40,000
Purchased land for cash.
c. Cash ..................................................................... 5,000
Service Revenue ......................................... 5,000
Performed service and received cash.
d. Supplies............................................................... 300
Accounts Payable....................................... 300
Purchased supplies on account.
e. Accounts Receivable ......................................... 2,600
Service Revenue ......................................... 2,600
Performed service on account.
f. Accounts Payable .............................................. 1,200
Cash ............................................................. 1,200
Paid cash to reduce accounts payable.
g. Salary Expense ................................................... 3,000
Rent Expense...................................................... 1,500
Interest Expense ................................................ 400
Cash ............................................................. 4,900
Issued three cheques to pay cash expenses.
h. Cash ..................................................................... 3,100
Accounts Receivable.................................. 3,100
Received cash on account.
i. Utilities Expense ................................................ 200
Accounts Payable....................................... 200
Received utility bill.
j. John Tomassini, Withdrawals .......................... 1,800
Cash ............................................................. 1,800
Withdrew cash for personal use.

82 Part One The Basic Structure of Accounting

Requirement 3
ASSETS LIABILITIES OWNER’S EQUITY EXPENSES
Cash Accounts Payable John Tomassini, Capital Interest Expense
Bal. 26,000 (b) 40,000 (f) 1,200 Bal. 2,000 Bal. 28,500 (g) 400
(a) 45,000 (f) 1,200 (d) 300 Bal. 400
(c) 5,000 (g) 4,900 (i) 200 John Tomassini,
(h) 3,100 (j) 1,800 Bal. 1,300 Withdrawals Rent Expense
Bal. 31,200
(j) 1,800 (g) 1,500
Note Payable
Bal. 1,800 Bal. 1,500
Accounts Receivable
(a) 45,000
Bal. 4,500 (h) 3,100 Bal. 45,000 Salary Expense
(e) 2,600 REVENUE
(g) 3,000
Bal. 4,000 Service Revenue
Bal. 3,000
(c) 5,000
Supplies
(e) 2,600 Utilities Expense
(d) 300 Bal. 7,600
(i) 200
Bal. 300
Bal. 200
Land
(b) 40,000
Bal. 40,000

Requirement 4

TOMASSINI COMPUTER SERVICE CENTRE

Trial Balance
March 31, 2003

Balance
Account Title Debit Credit

Cash ...................................................................................... $31,200

Accounts receivable............................................................ 4,000
Supplies ................................................................................ 300
Land ...................................................................................... 40,000
Accounts payable................................................................ $ 1,300
Note payable........................................................................ 45,000
John Tomassini, capital ...................................................... 28,500
John Tomassini, withdrawals............................................ 1,800
Service revenue ................................................................... 7,600
Interest expense................................................................... 400
Rent expense........................................................................ 1,500
Salary expense..................................................................... 3,000
Utilities expense .................................................................. 200
Total ...................................................................................... $82,400 $82,400

Chapter Two Recording Business Transactions 83

 Requirement 5

TOMASSINI COMPUTER SERVICE CENTRE

Income Statement
For the Month Ended March 31, 2003

Revenues
Service revenue .............................................................. $7,600
Expenses:
Interest expense.............................................................. $ 400
Rent expense................................................................... 1,500
Salary expense................................................................ 3,000
Utilities expense............................................................. 200
Total expenses ............................................................ 5,100
Net income........................................................................... $2,500

Visit the Student Resource area of the Accounting Companion Website

Cyber for extra practice with tne new material in Chapter 2.
Coach
www.pearsoned.ca/horngren

Summary
1. Define and use key accounting terms: account, 4. Post from the journal to the ledger. Posting means
ledger, debit, and credit. Accounts can be viewed in transferring to the ledger accounts. Posting references
the form of the letter “T.” The left side of each T-account are used to trace amounts back and forth between the
is its debit side. The right side is its credit side. The ledger, journal and the ledger.
which contains a record for each account groups and
5. Prepare and use a trial balance. The trial balance is a
numbers accounts by category in the following order:
summary of all the account balances in the ledger. When
assets, liabilities, and owner’s equity (and its subparts,
double-entry accounting has been done correctly, the total
revenues and expenses).
debits and the total credits in the trial balance are equal.
2. Apply the rules of debit and credit. Assets and expenses
6. Set up a chart of accounts for a business. A chart of
are increased by debits and decreased by credits.
accounts lists all the accounts in the ledger and their ac-
Liabilities, owner’s equity, and revenues are increased by
count numbers.
credits and decreased by debits. An account’s normal
balance is the side of the account—debit or credit—in 7. Analyze transactions without a journal. Decision
which increases are recorded. Thus the normal balance makers must often make decisions without a complete
of assets and expenses is a debit, and the normal bal- accounting system. They can analyze the transactions
ance of liabilities, owner’s equity, and revenues is a without a journal.
credit. The Withdrawals account, which decreases
owner’s equity, normally has a debit balance. Revenues, We can now trace the flow of accounting information
which are increases in owner’s equity, have a normal through these steps:
credit balance. Expenses, which are decreases in owner’s
equity, have a normal debit balance. Business Transaction Source Documents

3. Record transactions in the journal. The accountant Journal Entry Posting to Ledger
begins the recording process by entering the transac-
tion’s information in the journal, a chronological list of all Trial Balance
the entity’s transactions.

84 Part One The Basic Structure of Accounting

Self-Study Questions
Test your understanding of the chapter by marking c. Speed the collection of cash receipts from cus-
the correct answer for each of the following questions: tomers
d. Increase assets and owner’s equity
1. An account has two sides called the (p. 55) 7. What is the normal balance of the Accounts
a. Debit and credit c. Revenue and expense Receivable, Office Supplies, and Rent Expense ac-
b. Asset and liability d. Journal and ledger counts? (p. 71)
2. Increases in liabilities are recorded by (p. 56) a. Debit b. Credit
a. Debits b. Credits 8. A business has Cash of $3,000, Notes Payable of
3. Why do accountants record transactions in the $2,500, Accounts Payable of $4,300, Service
journal? (p. 58) Revenue of $7,000 and Rent Expense of $1,800.
a. To ensure that all transactions are posted to the Based on these data, how much are its total liabil-
ledger ities? (p. 74)
b. To ensure that total debits equal total credits a. $5,500 c. $9,800
c. To have a chronological record of all transac- b. $6,800 d. $13,800
tions 9. Smale Transport earned revenue on account. The
d. To help prepare the financial statements earning of revenue on account is recorded by a
4. Posting is the process of transferring information (pp. 74–78)
from the (p. 60) a. Debit to Cash and a credit to Revenue
a. Journal to the trial balance b. Debit to Accounts Receivable and a credit to
b. Ledger to the trial balance Revenue
c. Ledger to the financial statements c. Debit to Accounts Payable and a credit to
d. Journal to the ledger Revenue
5. The purchase of land for cash is recorded by a d. Debit to Revenue and a credit to Accounts
(p. 61) Receivable
a. Debit to Cash and a credit to Land 10. The account credited for a receipt of cash on ac-
b. Debit to Cash and a debit to Land count is (p. 77)
c. Debit to Land and a credit to Cash a. Cash c. Service Revenue
d. Credit to Cash and a credit to Land b. Accounts Payable d. Accounts Receivable
6. The purpose of the trial balance is to (p. 64) Answers to the Self-Study Questions follow the Similar
a. List all accounts with their balances Accounting Terms.
b. Ensure that all transactions have been recorded

Accounting Vocabulary
Account (p. 52) Journal (p. 58)
Chart of accounts (p. 70) Ledger (p. 52)
Credit (p. 55) Posting (p. 60)
Debit (p. 55) Trial balance (p. 64)

Similar Accounting Terms

Cr Credit; right
Dr Debit; left
The Ledger The Books; the General Ledger
Entering the transaction in a journal Making the journal entry; journalizing the transaction
Withdrawals by owner(s) In a proprietorship or partnership,
distributions from a company to its
owner(s).

Answers to Self-Study Questions

1. a 3. c 5. c 7. a 9. b
2. b 4. d 6. a 8. b ($6,800 = $2,500 + $4,300) 10. d

Chapter Two Recording Business Transactions 85

Assignment Material
Questions
1. Name the basic summary device of accounting. ___ Borrowing money on a note payable
What letter of the alphabet does it resemble? Name ___ Sale of services on account
its two sides.
11. What four steps does posting include? Which step
2. Is the following statement true or false? Debit is the fundamental purpose of posting?
means decrease and credit means increase. Explain
your answer. 12. Rearrange the following accounts in their logical
sequence in the chart of accounts:
3. Write two sentences that use the term debit differ-
ently. Notes Payable Cash
Accounts Receivable Jane East, Capital
4. What are the three basic types of accounts? Name Sales Revenue Salary Expense
two additional types of accounts. To which one of
the three basic types are these two additional types 13. What is the meaning of the statement, Accounts
of accounts most closely related? Payable has a credit balance of $1,700?
5. Suppose you are the accountant for Smith Courier 14. Jack Brown Campus Cleaners launders the shirts
Service. Keeping in mind double-entry book- of customer Bobby Baylor, who has a charge ac-
keeping, identify the dual effects of Mary Smith’s count at the cleaners. When Bobby picks up his
investment of $10,000 cash in her business. clothes and is short of cash, he charges it. Later,
when he receives his monthly statement from the
6. Briefly describe the flow of accounting informa- cleaners, Bobby writes a cheque on his bank ac-
tion. count and mails the cheque to the cleaners. Identify
7. To what does the normal balance of an account the two business transactions described here.
refer? Which transaction increases the business’s owner’s
8. Indicate the normal balance of the five types of ac- equity? Which transaction increases Jack Brown
counts. Campus Cleaners’ cash?
Account Type Normal Balance 15. Explain the difference between the ledger and the
Assets __________________________ chart of accounts.
Liabilities __________________________ 16. Why do accountants prepare a trial balance?
Owner’s equity __________________________ 17. What is a compound journal entry?
Revenues __________________________ 18. The accountant for Bower Construction mistak-
Expenses __________________________ enly recorded a $500 purchase of supplies on ac-
9. What does posting accomplish? Why is it impor- count as $5,000. He debited Supplies and credited
tant? Does it come before or after journalizing? Accounts Payable for $5,000. Does this error cause
the trial balance to be out of balance? Explain your
10. Label each of the following transactions as in-
answer.
creasing owner’s equity (+), decreasing owner’s
equity (–), or as having no effect on owner’s eq- 19. What is the effect on total assets of collecting cash
uity (0). Write the appropriate symbol in the space on account from customers?
provided. 20. What is the advantage of analyzing and record-
___ Investment by owner ing transactions without the use of a journal?
___ Bill customer for services Describe how this “journal-less” analysis works.
___ Purchase of supplies on credit 21. Briefly summarize the similarities and differences
___ Pay expenses between manual and computer-based accounting
___ Cash payment on account systems in terms of journalizing, posting, and
___ Withdrawal by owner preparing a trial balance.

86 Part One The Basic Structure of Accounting

Exercises
Exercise 2-1 Using accounting vocabulary (Obj. 1)
Your employer, OceanTours, has just hired an office manager who does not un-
derstand accounting. The Ocean Tours’ trial balance lists Cash of $43,900. Write a
short memo to the office manager, explaining the accounting process that produced
this listing on the trial balance. Mention debits, credits, journal, ledger, posting, and
trial balance.

Exercise 2-2 Using debits and credits with the accounting equation (Obj. 1, 2)
Link Back to Chapter 1 (Accounting Equation). Canadian National Railway Company
(CN) is one of North America’s leading railroads. At the end of 1999, CN had total
assets of $16.4 billion and total liabilities of $10.3 billion.
Required
1. Write the company’s accounting equation, and label each element as a debit
amount or a credit amount.
2. CN’s total revenues for 1999 were $5.2 billion, and total expenses for the year
were $4.4 billion. How much was CN’s net income (or net loss) for 1999? Write
the equation to compute CN’s net income, and indicate which element is a debit
amount and which element is a credit amount. Does net income represent a net
debit or a net credit? Does net loss represent a net debit or a net credit? Review
Exhibit 1-8, page 22, if needed.
3. During 1999, the owners of CN were paid $118 million in the form of dividends
(this is the same as owner’s withdrawals). Did the dividends represent a debit
amount or a credit amount?
4. Considering both CN’s net income (or net loss) and dividends for 1999, by how
much did the company’s owner’s equity increase or decrease during 1999? Was
the increase in owner’s equity a debit amount or a credit amount?

Exercise 2-3 Analyzing and journalizing transactions (Obj. 2, 3)

Analyze the following transactions in the manner shown for the December 1 trans-
action of Rotman Strategic Consulting. Also, record each transaction in the journal.

Dec. 1 Paid monthly utilities expense of $700. (Analysis: The expense, utilities ex-
pense, is increased; therefore, debit Utilities Expense. The asset, cash, is de-
creased; therefore, credit Cash.)
1 Utilities Expense ........................................... 700
Cash ........................................................... 700
4 Borrowed $8,000 cash, signing a note payable.
8 Performed service on account for a customer, $1,600.
12 Purchased office furniture on account, $1,000.
19 Sold for $74,000 land that had cost this same amount.
24 Purchased building for $140,000; signed a note payable.
27 Paid the liability created on December 12.

Exercise 2-4 Applying the rules of debit and credit (Obj. 2)

Refer to Exercise 2-3 for the transactions of Rotman Strategic Consulting.
Required
1. Open the following T-accounts with their December 1 balances: Cash, debit bal-
ance $6,000; Land, debit balance $74,000; S. Rotman, Capital, credit balance
$80,000.

Chapter Two Recording Business Transactions 87

 2. Record the transactions of Exercise 2-3 directly in the T-accounts affected. Use
dates as posting references in the T-accounts. Journal entries are not required.
3. Compute the December 31 balance for each account, and prove that total debits
equal total credits.

Exercise 2-5 Journalizing transactions (Obj. 3)

Wellness Health Club engaged in the following transactions during March 2002,
its first month of operations:
Mar. 1 Louise Chen invested $45,000 cash to start the business.
2 Purchased supplies for $500 on account.
4 Paid $40,000 cash for building to use as an office.
6 Presented a wellness seminar for a corporate customer and received cash,
$2,500.
9 Paid $100 on accounts payable.
17 Performed wellness assessments for customers on account, $1,000.
23 Received $800 cash from a customer on account.
31 Paid the following expenses: salary, $1,200; rent, $500.

Required
Record the preceding transactions in the journal of Wellness Health Club. Key trans-
actions by date and include an explanation for each entry, as illustrated in the chapter
and Exhibit 2-4. Use the following accounts: Cash; Accounts Receivable; Office Supplies;
Building; Accounts Payable; L. Chen, Capital; Service Revenue; Salary Expense; Rent
Expense.

Exercise 2-6 Posting to the ledger and preparing a trial balance (Obj. 4, 5)
Refer to Exercise 2-5 for the transactions of Wellness Health Club.

Required
1. After journalizing the transactions of Exercise 2-5, post the entries to the ledger,
using T-account format. Key transactions by date. Date the ending balance of
each account Mar. 31.
2. Prepare the trial balance of Wellness Health Club at March 31, 2002.

Exercise 2-7 Describing transactions and posting (Obj. 3, 4)

The journal of Mountain Snowboards for August 2003 is on page 89.
Required
1. Describe each transaction.
2. Post the transactions to the ledger using the following account numbers: Cash,
1000; Accounts Receivable, 1200; Supplies, 1400; Accounts Payable, 2000; Note
Payable, 2100; Karli Rees, Capital, 3000; Sales Revenue, 4000; Advertising
Expense, 5100; Rent Expense, 5600; Utilities Expense, 5800. Use dates, journal ref-
erences, and posting references as illustrated in Exhibit 2-8. You may write the
account numbers as posting references directly in your book unless directed
otherwise by your instructor.
3. Compute the balance in each account after posting. Prepare Mountain
Snowboard’s trial balance at August 31, 2003.

88 Part One The Basic Structure of Accounting

Journal Page 5

Post
Date Accounts and Explanation Ref. Debit Credit

Aug. 2 Cash .............................................................. 18,000

Karli Rees, Capital .............................. 18,000
5 Cash .............................................................. 15,000
Note Payable ....................................... 15,000
9 Supplies........................................................ 270
Accounts Payable................................ 270
11 Accounts Receivable................................... 8,100
Sales Revenue...................................... 8,100
14 Rent Expense ............................................... 2,000
Cash ...................................................... 2,000
22 Cash .............................................................. 1,400
Accounts Receivable........................... 1,400
25 Advertising Expense .............................. 350
Cash ...................................................... 350
27 Accounts Payable........................................ 270
Cash ...................................................... 270
31 Utilities Expense ......................................... 320
Accounts Payable................................ 320

Exercise 2-8 Journalizing transactions (Obj. 3)

The first five transactions of Dale Hoch Archery School have been posted to the
company’s accounts as shown below:

Cash Supplies Archery Equipment

(1) 60,000 (3) 42,000 (2) 600 (5) 6,000

(4) 11,000 (5) 6,000

Land Accounts Payable Note Payable

(3) 42,000 (2) 600 (4) 11,000

D. Hoch, Capital

(1) 60,000
Required
Prepare the journal entries that served as the sources for the five transactions. Date
each entry April 30, 2002, and include an explanation for each entry as illustrated in
the chapter.

Exercise 2-9 Preparing a trial balance (Obj. 5)

Prepare the trial balance of Dale Hoch Archery School at April 30, 2002, using the account
data from Exercise 2-8.

Exercise 2-10 Preparing a trial balance (Obj. 5)

The accounts of Klassen Consulting are listed on page 90 with their normal bal-
ances at October 31, 2002. The accounts are listed in no particular order.
Required
Prepare the company’s trial balance at October 31, 2002, listing accounts in the

Chapter Two Recording Business Transactions 89

 sequence illustrated in the chapter. Supplies comes before Building and Land. List
the expenses alphabetically.

Account Balance

L. Klassen, Capital ........................................ $48,800

Advertising expense .................................... 1,650
Accounts payable ......................................... 5,300
Services revenue ........................................... 27,000
Land ................................................................ 29,000
Note payable ................................................. 45,000
Cash ................................................................ 5,000
Salary expense ............................................... 6,000
Building ......................................................... 65,000
Computer rental expense ............................ 7,000
L. Klassen, withdrawals .............................. 6,000
Utilities expense ............................................ 400
Accounts receivable ..................................... 5,500
Supplies expense .......................................... 300
Supplies .......................................................... 250

Exercise 2-11 Correcting errors in a trial balance (Obj. 5)

The trial balance of Archway Travel at February 28, 2003, does not balance.

Cash ................................................................................. $ 4,200

Accounts receivable ...................................................... 2,900
Supplies........................................................................... 600
Land................................................................................. 66,000
Accounts payable .......................................................... $23,000
B. Reynolds, capital ....................................................... 41,600
Service revenue.............................................................. 10,700
Rent expense .................................................................. 800
Salary expense................................................................ 1,800
Utilities expense............................................................. 300
Total ................................................................................. $76,600 $75,300

Investigation of the accounting records reveals that the bookkeeper

a. Recorded a $400 cash revenue transaction by debiting Accounts Receivable. The
credit entry was correct.
b. Posted a $1,000 credit to Accounts Payable as $100.
c. Did not record utilities expense or the related account payable in the amount of
$200.
d. Understated B. Reynolds, Capital by $400.
Required
Prepare the correct trial balance at February 28, 2003 complete with a heading.
Journal entries are not required.

Exercise 2-12 Recording transactions without a journal (Obj. 7)

Open the following T-accounts for Picard Pension Consulting at May 1, 2002: Cash;
Accounts Receivable; Office Supplies; Office Furniture; Accounts Payable; Paule
Picard, Capital; Paule Picard, Withdrawals; Service Revenue; Rent Expense; Salary
Expense.
Record the following May transactions directly in the T-accounts of the business
without using a journal. Use the letters to identify the transactions.
a. Paule Picard opened a pension consulting firm by investing $12,400 cash and
office furniture valued at $5,400.

90 Part One The Basic Structure of Accounting

b. Paid monthly rent of $1,500.
c. Purchased office supplies on account, $600.
d. Paid employee salary, $1,000.
e. Paid $400 of the account payable credited in c.
f. Performed consulting service on account, $2,300.
g. Withdrew $2,000 for personal use.

Exercise 2-13 Preparing a trial balance (Obj. 5)

After recording the transactions in Exercise 2-12, prepare the trial balance of Picard
Pension Consulting at May 31, 2002.

Exercise 2-14 Analyzing transactions without a journal (Obj. 7)

AltaVista Nursing Services began when Elaine Peugeot deposited $45,000 cash in the
business bank account. During the first week, the business purchased supplies on
credit for $5,000 and paid $8,000 cash for equipment. AltaVista later paid $3,000 on
account.
Required
1. Open the following T-accounts: Cash; Supplies; Equipment; Accounts Payable; E.
Peugot, Capital.
2. Record the transactions described above directly in the T-accounts without using
a journal.
3. Compute the balance in each account. Show that total debits equal total credits
after you have recorded all the transactions.

Serial Exercise
Exercise 2-15 begins an accounting cycle that is completed in Chapter 5.

Exercise 2-15 Recording transactions and preparing a trial balance (Obj. 2, 3, 4, 5)

Anya Perreault Architects completed these transactions during early December
2002:
Dec. 2 Received $14,000 cash from Anya Perreault. The business gave owner’s equity in
the business to Perreault.
2 Paid monthly office rent, $500.
3 Paid cash for a Dell computer, $3,000. The computer is expected to remain in ser-
vice for five years.
4 Purchased office furniture on account, $5,600. The furniture should last for five
years.
5 Purchased supplies on account, $300.
9 Performed design services for a client and received cash for the full amount of
$1,000.
12 Paid utility expenses, $200.
18 Performed design services for a client on account, $1,700.

Required
1. Open T-accounts in the ledger: Cash; Accounts Receivable; Supplies; Equipment;
Furniture; Accounts Payable; Anya Perreault, Capital; Anya Perreault, With-
drawals; Service Revenue; Rent Expense; Salaries Expense; and Utilities Expense.
(Some of these T-accounts will be used in later chapters.)
2. Journalize the transactions. Explanations are not required.
3. Post to the T-accounts. Key all items by date, and denote an account balance as
Bal. Formal posting references are not required.
4. Prepare a trial balance at December 18, 2002. In the Serial Exercise of Chapter 3,

Chapter Two Recording Business Transactions 91

 we will add transactions for the remainder of December and will require a trial
balance at December 31, 2002.

Challenge Exercises
Exercise 2-16 Computing financial statement amounts without a journal (Obj. 7)
The owner of Auch Technical Services is an engineer with little understanding of ac-
counting. She needs to compute the following summary information from the ac-
counting records:
a. Net income for the month of March.
b. Total cash paid during March.
c. Cash collections from customers during March.
d. Cash paid on a note payable during March.
The quickest way to compute these amounts is to analyze the following accounts:

Additional Information
Balance for the Month of March
Account Feb. 28 Mar. 31
a. S. Auch, Capital ................... $ 9,000 $15,000 Withdrawals, $4,000
b. Cash ....................................... 5,000 4,000 Cash receipts, $67,000
c. Accounts Receivable ........... 24,000 26,000 Sales on account, $63,500
d. Notes Payable ...................... 13,000 16,000 New note borrowing, $6,300

The net income for March can be computed as follows:

S. Auch, Capital

March Withdrawals 4,000 Feb. 28 Bal. 9,000

March Net Income x = $10,000
March 31 Bal. 15,000

Use a similar approach to compute the other three items of summary information
the shareholder needs.

Exercise 2-17 Analyzing accounting errors (Obj. 2, 3, 4, 5)

Stan has trouble keeping his debits and credits equal. During a recent month he
made the following errors:
a. In journalizing a cash receipt, Stan debited Cash for $1,000 instead of the cor-
rect amount of $1,900. He credited Service Revenue for $1,000, the incorrect
amount.
b. Stan posted a $700 utility expense as $70. The credit posting to Cash was the
correct amount of $700.
c. In preparing the trial balance, Stan omitted an $8,000 note payable.
d. Stan recorded a $120 purchase of supplies on account by debiting Supplies and
crediting Accounts Payable for $210.
e. In recording a $700 payment on account, Stan debited Supplies and credited
Accounts Payable.
Required
1. For each of these errors, state whether the total debits equal total credits on the
trial balance.
2. Identify any accounts with misstated balances, and indicate the amount and di-
rection of the error (account balance too high or too low).

92 Part One The Basic Structure of Accounting

Beyond the Numbers
Beyond the Numbers 2-1
Joan McMullen asks your advice in setting up the accounting records for her new
business, Joan’s Photo Shoppe. The business will be a photography studio and will
operate in a rented building. Joan’s Photo Shoppe will need office equipment and
cameras. The business will borrow money on notes payable to buy the needed
equipment. Joan’s Photo Shoppe will purchase on account photographic supplies and
office supplies. Each asset has a related expense account, some of which have not yet
been discussed. For example, equipment wears out (amortizes) and thus needs an
amortization account. As supplies are used up, the business must record a supplies
expense.
The business will need an office manager. This person will be paid a weekly
salary of $900. Other expenses will include advertising and insurance. Since Joan’s
Photo Shoppe will want to know which aspects of the business generate the most
and the least revenue, it will use a separate service revenue account for portraits,
school pictures, and weddings. Joan’s Photo Shoppe’s better customers will be al-
lowed to open accounts receivable with the business.

Required
List all the accounts Joan’s Photo Shoppe will need, starting with the assets and
ending with the expenses. Indicate which accounts will be reported on the balance
sheet and which accounts will appear on the income statement.

Ethical Issue
Associated Charities Inc., a charitable organization in Brandon, Manitoba, has a
standing agreement with Prairie Trust. The agreement allows Associated Charities
Inc. to overdraw its cash balance at the bank when donations are running low. In the
past, Associated Charities Inc. managed funds wisely and rarely used this privi-
lege. Greg Osadchuk has recently become the president of Associated Charities Inc.
To expand operations, Osadchuk is acquiring office equipment and spending large
amounts for fund-raising. During his presidency, Associated Charities Inc. has
maintained a negative bank balance (a credit Cash balance) of approximately $14,000.
Required
What is the ethical issue in this situation? State why you approve or disapprove of
Osadchuk’s management of Associated Charities Inc.’s funds.

Problems (Group A)
Problem 2-1A Analyzing a trial balance (Obj. 1)
The owner of Drolet Logistics, Sean Drolet, is selling the business. He offers the
trial balance shown on page 94 to prospective buyers.
Your best friend is considering buying Drolet Logistics. He seeks your advice in
interpreting this information. Specifically, he asks whether this trial balance is the
same as a balance sheet and an income statement. He also wonders whether Drolet
Logistics is a sound company because all the accounts are in balance.
Required
Write a short note to answer your friend’s questions. To aid his decision, state how
he can use the information on the trial balance to compute the Drolet Logistics net
income or net loss for the current period. State the amount of net income or net
loss in your note.

Chapter Two Recording Business Transactions 93

 DROLET LOGISTICS
Trial Balance
December 31, 2003

Cash....................................................................... $ 12,000
Accounts receivable ............................................ 27,000
Prepaid expenses................................................. 4,000
Land for future expansion ................................. 76,000
Accounts payable ................................................ $ 35,000
Note payable........................................................ 32,000
Sean Drolet, Capital ............................................ 30,000
Sean Drolet, Withdrawals .................................. 48,000
Sales revenue ....................................................... 134,000
Advertising expense ........................................... 3,000
Rent expense ........................................................ 26,000
Supplies expense ................................................. 7,000
Wage expense ...................................................... 28,000
Totals ..................................................................... $231,000 $231,000

Problem 2-2A Analyzing and journalizing transactions (Obj. 2, 3)

Valleyfield Theatre Co. owns movie theatres in the shopping centres of a major
metropolitan area. The business engaged in the following transactions in 2002:
Feb. 1 Received cash of $100,000 from the owner Mary Clark.
1 Paid February rent on a theatre building, $2,000.
2 Paid $50,000 cash to purchase land for a theatre site.
5 Borrowed $220,000 from the bank to finance the first phase of construction of
the new theatre. The business signed a note payable to the bank.
7 Received $20,000 cash from ticket sales and deposited this amount in the bank.
(Label the revenue as Sales Revenue.)
10 Purchased theatre supplies on account, $1,700.
15 Paid theatre employee salaries, $2,800.
15 Paid property tax expense on a theatre building, $1,600.
16 Paid $800 on account.
17 The owner withdrew $6,500 for personal expenses.
Valleyfield Theatre Co. uses the following accounts: Cash; Supplies; Land; Accounts
Payable; Notes Payable; Mary Clark, Capital; Mary Clark, Withdrawals; Sales
Revenue; Property Tax Expense; Rent Expense; Salary Expense.
Required
1. Prepare an analysis of each business transaction of Valleyfield Theatre Co. as
shown for the February 1 transaction:
Feb. 1 The asset Cash is increased. Increases in assets are recorded by debits; therefore,
debit Cash. The owner’s equity of the entity is increased. Increases in owner’s
equity are recorded by credits; therefore, credit Mary Clark, Capital.
2. Record each transaction in the journal, using the account titles given. Key each
transaction by date. Explanations are not required.

Problem 2-3A Journalizing transactions, posting to T-accounts, and preparing a trial

balance (Obj. 2, 3, 4, 5)
L. da Vinci opened a renovation business called Renaissance Renovations on
September 3, 2003. During the first month of operations, the business completed
the following transactions:

94 Part One The Basic Structure of Accounting

Sept. 3 L. da Vinci deposited his cheque for $35,000 into the business bank account.
The business gave da Vinci owner’s equity in the business.
4 Purchased supplies, $200, and furniture, $1,800, on account.
5 Paid September rent expense, $500.
6 Performed design services for a client and received $4,000 cash.
7 Paid $15,000 cash to acquire land for a future office site.
10 Designed a bathroom for a client, billed the client, and received her promise to
pay the $1,000 within one week.
14 Paid for the furniture purchased September 4 on account.
15 Paid assistant’s salary, $600.
17 Received partial payment from client on account, $500.
20 Prepared a recreation room design for a client on account, $1,800.
28 Received $1,500 cash from a client for renovation of a cottage.
30 Paid assistant’s salary, $600.
30 L. da Vinci withdrew $2,400 for personal use.

Required
Open the following T-accounts: Cash; Accounts Receivable; Supplies; Furniture;
Land; Accounts Payable; L. da Vinci, Capital; L. da Vinci, Withdrawals; Service
Revenue; Rent Expense; Salary Expense.
1. Record each transaction in the journal, using the account titles given. Key each
transaction by date. Explanations are not required.
2. Post the transactions to the T-accounts, using transaction dates as posting references
in the T-accounts. Label the balance of each account Bal., as shown in the chapter.
3. Prepare the trial balance of Renaissance Renovations at September 30, 2003.

Problem 2-4A Journalizing transactions, posting to ledger accounts, and preparing a trial
balance (Obj. 2, 3, 4, 5)
The trial balance of Sutherland Designs is dated February 14, 2003.

SUTHERLAND DESIGNS
Trial Balance
February 14, 2003

Account
Number Account Debit Credit

1100 Cash............................................................ $ 2,000

1200 Accounts receivable ................................. 8,000
1300 Supplies ..................................................... 800
1600 Automobile ............................................... 18,600
2000 Accounts payable ..................................... $ 3,000
3000 H. Sutherland, Capital............................. 25,000
3100 H. Sutherland, Withdrawals................... 1,200
5000 Service revenue......................................... 7,200
6100 Rent expense ............................................. 1,000
6200 Salary expense .......................................... 3,600
Total............................................................ $35,200 $35,200

During the remainder of February, Sutherland Designs completed the following

transactions:

Feb. 15 Collected $3,000 cash from a client on account.

16 Designed a system for a client on account, $2,900.
20 Paid on account, $1,600.
21 Purchased supplies on account, $100.
21 H. Sutherland withdrew $1,000 for personal use.

Chapter Two Recording Business Transactions 95

 Feb. 21 Received a verbal promise of a $10,000 contract.
22 Received cash of $3,100 for consulting work just completed.
28 Paid employees’ salaries, $1,600.

Required
1. Record the transactions that occurred during February 15 through 28 in Page 3 of
the journal. Include an explanation for each entry.
2. Open the ledger accounts listed in the trial balance, together with their balances
at February 14. Use the three-column account format illustrated in the chapter.
Enter Bal. (for previous balance) in the Item column, and place a check mark (✓)
in the journal reference column for the February 14 balance in each account.
Post the transactions to the ledger, using dates, account numbers, journal refer-
ences, and posting references.
3. Prepare the trial balance of Sutherland Designs at February 28, 2003.

Problem 2-5A Correcting errors in a trial balance (Obj. 2, 5)

Link Back to Chapter 1 (Income Statement). The following trial balance does not balance:

HAMMOND LANDSCAPE CONSULTING

Trial Balance
June 30, 2002

Cash....................................................................... $ 2,000
Accounts receivable ............................................ 10,000
Supplies ................................................................ 900
Office furniture .................................................... 3,600
Land for future expansion ................................. 47,000
Accounts payable ................................................ $ 4,000
Note payable........................................................ 23,000
K. Hammond, Capital ........................................ 31,600
K. Hammond, Withdrawals .............................. 2,000
Consulting service revenue ............................... 6,500
Advertising expense ........................................... 500
Rent expense ........................................................ 1,000
Salary expense ..................................................... 2,100
Utilities expense .................................................. 400
Total....................................................................... $69,500 $65,100

The following errors were detected:

a. The cash balance is understated by $900.
b. The cost of the land was $44,600, not $47,000.
c. A $400 purchase of supplies on account was neither journalized nor posted.
d. A $3,800 credit to Consulting Service Revenue was not posted.
e. Rent Expense of $200 was posted as a credit rather than a debit.
f. The balance of Advertising Expense is $600, but it was listed as $500 on the trial
balance.
g. A $300 debit to Accounts Receivable was posted as $30. The credit to Consulting
Service Revenue was correct.
h. The balance of Utilities Expense is overstated by $70.
i. A $900 debit to the K. Hammond, Withdrawals account was posted as a debit
to K. Hammond, Capital.

Required
1. Prepare the correct trial balance at June 30, 2002. Journal entries are not required.

96 Part One The Basic Structure of Accounting

2. Prepare the company’s income statement for the month ended June 30, 2002.
Use it to determine the Hammond Landscape Consulting net income or net loss
for the month.

Problem 2-6A Recording transactions directly in the ledger; preparing a trial balance
(Obj. 2, 5, 7)
Sharon Yee started an investment counselling business, Coast Partners, in Prince
George, British Columbia on June 1, 2003. During the first month of operations, the
business completed the following selected transactions:
a. Yee began the business with an investment of $20,000 cash, land valued at $20,000,
and a building valued at $40,000. The business gave Yee owner’s equity in the
business for the value of the cash, land, and building.
b. Coast Partners borrowed $30,000 from the bank; signed a note payable.
c. Purchased office supplies on account, $1,300.
d. Paid $18,000 for office furniture.
e. Paid employee salary, $2,200.
f. Performed consulting service on account for client, $5,100.
g. Paid $800 of the account payable created in transaction c.
h. Received a $2,000 bill for advertising expense that will be paid in the near fu-
ture.
i. Performed consulting service for customers and received cash, $1,600.
j. Received cash on account, $1,200.
k. Paid the following cash expenses:
(1) Rent of photocopier, $700.
(2) Utilities, $400.
l. Sharon Yee withdrew $2,500 for personal use.
Required
1. Open the following T-accounts: Cash; Accounts Receivable; Office Supplies;
Office Furniture; Land; Building; Accounts Payable; Note Payable; Sharon Yee,
Capital; Sharon Yee, Withdrawals; Service Revenue; Advertising Expense;
Equipment Rental Expense; Salary Expense; Utilities Expense.
2. Record each transaction directly in the T-accounts without using a journal. Use
the letters to identify the transactions.
3. Prepare the trial balance of Coast Partners at June 30, 2003.

Problem 2-7A Preparing the financial statements (Obj. 5)

Link Back to Chapter 1 (Income Statement, Statement of Owner’s Equity, Balance Sheet).
Refer to Problem 2-6A. After completing the trial balance in Problem 2-6A, prepare
the following final statements for Coast Partners:
1. Income statement for the month ended June 30, 2003.
2. Statement of owner’s equity for the month ended June 30, 2003.
3. Balance sheet at June 30, 2003.
Draw arrows linking the financial statements. If needed, use Exhibit 1-8, page 22, as
a guide for preparing the financial statements.

Problem 2-8A Applying the rules of debit and credit, and recording transactions in the
journal (Obj. 2, 3)
Bobby Reynolds operated a fishing charter business, Atlantic Charters. The business
had the following transactions in September, 2002:

Chapter Two Recording Business Transactions 97

 Sept. 1 Reynolds invested $20,000 cash and his 10-metre power boat in the charter busi-
ness. The business gave Reynolds owner’s equity in the business. The boat had
originally cost him $40,000, but had a fair market value of $25,000 on September
1, 2002.
3 Purchased a new boat by paying $7,000 cash and promising to pay another $14,000
in one week. Reynolds felt that this was an excellent bargain as the boat had a
catalogue price of $30,000 and he knew it was worth at least $25,000.
4 Paid moorage fees of $1,400 for the month of September. These fees covered two
moorage slips—one for each charter boat.
5 Hired a deckhand at a rate of $400 per week.
9 Took clients out on a charter for $1,300. They paid $600 and promised to pay the
balance in 30 days.
10 Paid $1,000 of the amount owing on the boat purchased on September 3. Signed
a promissory note for the balance as the company was unable to pay the full
amount that day.
15 Purchased $5,000 of equipment from a supplier. To pay for the equipment, Atlantic
Charters took the supplier and her employees out on a day charter and also paid
the supplier $3,000 cash.
20 Received $300 from the clients of September 9 as payment on the charter.
26 Paid the deckhand for three weeks’ work.
29 A client chartered the two boats for two days for $4,000. In payment, the client, the
owner of a service station, provided Atlantic Charters with $600 of gas for the
boats, $1,400 of repair parts that can be used on the boats, and cash.
30 Used $400 of repair parts on each of the two boats.

Required
Record each transaction in the journal. Key each transaction by date. Explanations
are not required.

Problem 2-9A Applying the rules of debit and credit, and recording transactions
(Obj. 2, 3, 4, 5)
Reliable Movers had the following account balances, in random order, on
December 15, 2002 (all accounts have their “normal” balances):
Moving fees earned.................. $ 87,200 Cash ............................................ $ 2,400
Accounts receivable ................. 5,800 Storage fees earned .................. 19,300
Rent expense ............................. 15,700 Notes receivable........................ 15,000
R. Sprott, Capital ...................... 50,000 Utilities expense........................ 800
Office supplies expense ........... 700 Office supplies .......................... 3,200
Mortgage payable..................... 13,000 Accounts payable ..................... 11,000
Salaries expense ........................ 53,700 Office equipment ...................... 4,100
Insurance expense .................... 2,100 Moving equipment................... 77,400

The following events took place during the final days of the year:
Dec. 16 The accountant discovered that an error had been made in posting an entry to
the Moving Fees Earned account. The entry was correctly journalized but $1,200
was accidentally posted as $2,100 in the account.
17 Moved a customer’s goods to Reliable’s rented warehouse for storage. The mov-
ing fees were $1,000. Storage fees are $200 per month and are due from the cus-
tomer in 30 days.
18 Collected a $5,000 note owed to Reliable Movers and collected interest of $600.
21 Purchased storage racks for $4,000. Paid $1,200, provided moving services for
$500, and promised to pay the balance in 60 days.
23 Collected $1,000; $750 of this was for moving goods on December 15 (recorded
as an accounts receivable at that time) and the balance was for storage fees for
the period of December 16 to 23.
24 Reliable Movers paid $6,000 owing on the mortgage.
27 Réal Sprott withdrew $2,000 for personal use.
29 Provided moving services to a lawyer for $800. The lawyer paid Reliable Movers
$500 and provided legal work for the balance.

98 Part One The Basic Structure of Accounting

Dec. 31 Réal Sprott, the owner of Reliable Movers, sold 1,000 shares he held in Whitehorse
Haulage Inc. for $4,000.

Required
Where appropriate, record each transaction from December 16 to 31 in the journal.
Explanations are not required.

Problems (Group B)
Problem 2-1B Analyzing a trial balance (Obj. 1)
Link Back to Chapter 1 (Balance Sheet, Income Statement). Sylvie Fortin, the owner of
Fortin Designs, is selling the business. She offers the following trial balance to
prospective buyers:

FORTIN DESIGNS
Trial Balance
December 31, 2003

Cash....................................................................... $ 7,000
Accounts receivable ............................................ 15,000
Prepaid expenses................................................. 2,000
Land for future expansion ................................. 34,000
Accounts payable ................................................ $ 31,000
Note payable........................................................ 22,000
Sylvie Fortin, Capital .......................................... 33,000
Sylvie Fortin, Withdrawals ................................ 21,000
Service revenue.................................................... 70,000
Advertising expense ........................................... 8,000
Rent expense ........................................................ 12,000
Supplies expense ................................................. 9,000
Wage expense ...................................................... 48,000
Total....................................................................... $156,000 $156,000

Your best friend is considering buying Fortin Designs. She seeks your advice in in-
terpreting this information. Specifically, she asks whether this trial balance is the
same as a balance sheet and an income statement. She also wonders whether Fortin
Designs is a sound company. She thinks it must be because the accounts are in
balance.
Required
Write a short note to answer your friend’s questions. To aid her decision, state how
she can use the information on the trial balance to compute the Fortin Designs net
income or net loss for the current period. State the amount of net income or net
loss in your note.

Problem 2-2B Analyzing and journalizing transactions (Obj. 2, 3)

Ray Tam practises civil engineering under the business title Ray Tam Consulting.
During April 2003 the company engaged in the following transactions:
Apr. 1 Tam deposited $35,000 cash in the business bank account. The business gave
Tam owner’s equity in the business.
5 Paid monthly rent on drafting equipment, $700.
9 Paid $22,000 cash to purchase land for an office site.
10 Purchased supplies on account, $1,500.
19 Paid $1,000 on account for supplies purchased on April 10.
22 Borrowed $20,000 from the bank for business use. Tam signed a note payable to the
bank in the name of the business.

Chapter Two Recording Business Transactions 99

 Apr. 30 Revenues earned during the month included $6,000 cash and $7,000 on
account.
30 Paid employee salaries of $2,400, office rent of $1,600, and utilities of $400.
30 Ray Tam withdrew $4,000 from the business for personal use.

Ray Tam Consulting uses the following accounts: Cash; Accounts Receivable;
Supplies; Land; Accounts Payable; Notes Payable; R. Tam, Capital; R. Tam,
Withdrawals; Service Revenue; Rent Expense; Salary Expense; Utilities Expense.
Required
1. Prepare an analysis of each business transaction of Ray Tam Consulting, as shown
for the April 1 transaction:
Apr. 1 The asset Cash is increased. Increases in assets are recorded by debits;
therefore, debit Cash. The owner’s equity is increased. Increases in owner’s
equity are recorded by credits; therefore, credit R. Tam, Capital.

2. Record each transaction in the journal, using the account titles given. Key each
transaction by date. Explanations are not required.

Problem 2-3B Journalizing transactions, posting to T-accounts, and preparing a trial

balance (Obj. 2, 3, 4, 5)
Marie Goyette opened a translation business on January 2, 2002. During the first
month of operations the business completed the following transactions:

Jan. 2 Goyette deposited $40,000 cash in a business bank account entitled Marie Goyette
Translation Service.
3 Purchased supplies, $500, and furniture, $4,200, on account.
3 Paid January rent expense, $900.
4 Performed translation services for a client and received cash, $1,500.
7 Paid $22,000 cash to acquire land for a future office site.
11 Translated a brochure for a client and billed the client $800.
15 Paid secretary salary, $650.
16 Paid for the furniture purchased January 3 on account.
18 Received partial payment from client on account, $400.
19 Translated legal documents for a client on account, $900.
22 Paid the water and electricity bills, $230.
29 Received $1,800 cash for translation for a client in an overseas business transaction.
31 Paid secretary salary, $650.
31 Marie Goyette withdrew $2,500 for personal use.

Required
Open the following T-accounts: Cash; Accounts Receivable; Supplies; Furniture;
Land; Accounts Payable; Marie Goyette, Capital; Marie Goyette, Withdrawals;
Translation Revenue; Rent Expense; Salary Expense; Utilities Expense.
1. Record each transaction in the journal, using the account titles given. Key each
transaction by date. Explanations are not required.
2. Post the transactions to the ledger, using transaction dates in the ledger. Label the
balance of each account Bal. as shown in the chapter.
3. Prepare the trial balance of Marie Goyette Translation Service at January 31, 2002.
4. How will what you have learned in this problem help you manage a business?

Problem 2-4B Journalizing transactions, posting to ledger accounts, and preparing a trial
balance (Obj. 2, 3, 4, 5)
The trial balance of the desktop publishing business of Steven Chang at November 15,
2003, is shown on page 101.

100 Part One The Basic Structure of Accounting

 STEVEN CHANG PUBLISHING
Trial Balance
November 15, 2003

Account
Number Account Debit Credit

1100 Cash ............................................................ $ 3,000

1200 Accounts receivable ................................. 8,000
1300 Supplies...................................................... 600
1900 Land............................................................ 35,000
2100 Accounts payable ..................................... $ 4,600
4000 S. Chang, Capital ...................................... 40,000
4100 S. Chang, Withdrawals ............................ 2,300
5000 Service revenue......................................... 7,100
6000 Rent expense ............................................. 1,000
6100 Salary expense........................................... 1,800
Total ............................................................ $51,700 $51,700

During the remainder of November, the business completed the following trans-
actions:

Nov. 16 Collected $4,000 cash from a client on account.

17 Performed publishing services for a client on account, $2,100.
21 Paid on account, $2,600.
22 Purchased supplies on account, $600.
23 Steven Chang withdrew $2,100 for personal use.
24 Was advised that Desk Top Inc. was prepared to buy all of Steven Chang
Publishing for $60,000.
26 Received $1,900 cash for design work just completed.
30 Paid employees’ salaries, $2,400.

Required
1. Record the transactions that occurred during November 16 through 30 in Page 6
of the journal. Include an explanation for each entry.
2. Post the transactions to the ledger, using dates, account numbers, journal references
and posting references. Open the ledger accounts listed in the trial balance together
with their balances at November 15. Use the three-column account format illus-
trated in the chapter. Enter Bal. (for previous balance) in the Item column, and place
a check mark (✓) in the journal reference column for the November 15 balance of
each account.
3. Prepare the trial balance of Steven Chang Publishing at November 30, 2003.

Problem 2-5B Correcting errors in a trial balance (Obj. 2, 5)

Link Back to Chapter 1 (Income Statement). The trial balance for Lethbridge Copy
Centre shown below, does not balance. The following errors were detected:
a. The cash balance is overstated by $400.
b. Rent expense of $200 was posted as a credit rather than a debit.
c. The balance of Advertising Expense is $300, but it is listed as $400 on the trial
balance.
d. A $600 debit to Accounts Receivable was posted as $60.
e. The balance of Utilities Expense is understated by $60.
f. A $1,300 debit to the S. Scotty, Withdrawals account was posted as a debit to S.
Scotty, Capital.
g. A $100 purchase of supplies on account was neither journalized nor posted.

Chapter Two Recording Business Transactions 101

 h. A $5,800 credit to Service Revenue was not posted.
i. Office furniture should be listed in the amount of $1,300.

LETHBRIDGE COPY CENTRE

Trial Balance
October 31, 2002

Cash....................................................................... $ 3,800
Accounts receivable ............................................ 2,000
Supplies ................................................................ 500
Office furniture .................................................... 2,300
Land ...................................................................... 46,000
Accounts payable ................................................ $ 2,000
Note payable........................................................ 18,300
S. Scotty, Capital .................................................. 29,500
S. Scotty, Withdrawals ........................................ 3,700
Service revenue.................................................... 4,900
Salary expense ..................................................... 1,500
Rent expense ........................................................ 600
Advertising expense ........................................... 400
Utilities expense .................................................. 200
Total....................................................................... $61,000 $54,700

Required
1. Prepare the correct trial balance at October 31, 2002. Journal entries are not re-
quired.
2. Prepare Lethbridge Copy Centre’s income statement for the month ended October
31, 2002. Determine the company’s net income or net loss for the month. Refer to
Exhibit 1-8, page 22 if necessary.

Problem 2-6B Recording transactions directly in the ledger; preparing a trial balance
(Obj. 2, 5, 7)
George Tatulis started a catering service called Tatulis Catering in the province of
New Brunswick. During the first month of operations, January, 2002, the business
completed the following selected transactions:
a. Tatulis began the company with an investment of $15,000 cash and a van (auto-
mobile) valued at $13,000. The business gave Tatulis owner’s equity in the busi-
ness.
b. Borrowed $25,000 from the bank; signed a note payable.
c. Paid $3,000 for food service equipment.
d. Purchased supplies on account, $2,400.
e. Paid employee salary, $1,300.
f. Received $2,000 for a catering job.
g. Performed services at a wedding on account, $3,300.
h. Paid $1,000 of the account payable created in transaction d.
i. Received an $800 bill for advertising expense that will be paid in the near future.
j. Received cash on account, $1,100.
k. Paid the following cash expenses:
(1) Rent, $1,000.
(2) Insurance, $800.
l. George Tatulis withdrew $3,000 for personal use.

102 Part One The Basic Structure of Accounting

Required
1. Open the following T-accounts: Cash; Accounts Receivable; Supplies; Food Service
Equipment; Automobile; Accounts Payable; Note Payable; G. Tatulis, Capital;
G. Tatulis, Withdrawals; Service Revenue; Advertising Expense; Insurance
Expense; Rent Expense; Salary Expense.
2. Record the transactions directly in the T-accounts without using a journal. Use the
letters to identify the transactions.
3. Prepare the trial balance of Tatulis Catering at January 31, 2002.

Problem 2-7B Preparing the financial statements (Obj. 5)

Link Back to Chapter 1 (Income Statement, Statement of Owner’s Equity, Balance Sheet).
Refer to Problem 2-6B. After completing the trial balance in Problem 2-6B, prepare
the following financial statements for Tatulis Catering.
1. Income statement for the month ended January 31, 2002.
2. Statement of owner’s equity for the month ended January 31, 2002.
3. Balance sheet at January 31, 2002.
Draw arrows linking the financial statements. If needed, use Exhibit 1-8, page 22, as
a guide for preparing the financial statements.

Problem 2-8B Applying the rules of debit and credit, recording transactions in the journal
(Obj. 2, 3)
Arnold Ziffle operates a heavy equipment transport company, Red Deer Transport.
The company had the following transactions for the month of August, 2002:
Aug. 1 Red Deer Transport received $15,000 cash and a truck and trailer from Ziffle. The
truck and trailer had originally cost Ziffle $150,000, but had a fair market value of
$130,000 on August 1.
3 Purchased a new trailer by paying $8,000 cash and promising to pay another
$30,000 in one week. The trailer had a list price of $47,000 and Ziffle knew it was
worth at least $43,000.
4 Paid parking space rental fees of $900 for the month of August. These fees covered
three spaces—two for the trailers and one for the truck.
5 Hired an assistant at a rate of $500 per week.
9 Transported equipment for clients for $1,600. They paid $800 and promised to
pay the balance in 30 days.
10 Paid $6,000 of the amount owing on the trailer purchase on August 3. Signed a
promissory note for the balance as the company was unable to pay the full amount
that day.
20 Received $800 from the clients of August 9 as payment on the haulage.
26 Paid the assistant for three weeks’ work.
29 Billed a client $2,500 for hauling equipment from Red Deer to Edmonton. The
client, who was the owner of a service station, paid the bill by providing the com-
pany with $500 of gas for the truck as well as $2,000 of repair parts that can be
used on the truck.
30 Used $300 of repair parts on the truck.

Required
Record each transaction in the journal. Key each transaction by date. Explanations
are not required.

Problem 2-9B Applying the rules of debit and credit, recording transactions, posting to the
ledger, preparing a trial balance (Obj. 2, 3, 4, 5)
Ocean Rest, owned by Larry LaRue, had the following account balances, in ran-
dom order, on December 15, 2002 (all accounts have their “normal” balances):

Chapter Two Recording Business Transactions 103

 Guest revenue ............................... $104,500 Furniture.................................... $28,900
Accounts receivable ..................... 4,400 Cash............................................ 1,900
Equipment rental expense........... 5,900 Notes receivable ....................... 13,000
L. LaRue, Capital .......................... 46,900 Utilities expense ....................... 500
Supplies expense .......................... 1,400 Supplies inventory................... 2,900
Mortgage payable......................... 15,000 Accounts payable..................... 6,000
Salaries expense ............................ 40,500 Office equipment...................... 5,100
Insurance expense ........................ 3,400 Boating equipment................... 48,400

The following events also took place during the final days of the year:
Dec. 16 The accountant discovered that an error had been made in posting an entry to
the Guest Revenue account. The entry was correctly journalized but $2,100 was ac-
cidentally posted as $1,200 in the account.
17 Agreed to let a retired professor move in in the off season for a long stay, beginning
today. The monthly rate will be $1,600.
18 Collected a $6,000 note owed to Ocean Rest and collected interest of $600.
21 Purchased boating equipment for $7,000 from Boats Unlimited. Ocean Rest paid
$1,500, provided room rentals for $800 to Boats Unlimited and promised to pay the
balance in 60 days.
23 Collected $1,200 for rooms for a conference held from December 16 to 23.
24 Ocean Rest paid $2,000 owing on the mortgage.
27 Larry LaRue withdrew $3,500 for personal use.
29 Provided meeting rooms to a lawyer for $1,000. The lawyer paid Ocean Rest $600
and provided legal work for the balance.

Required
Where appropriate, record each transaction from December 16 to 31 in the journal.
Explanations are not required.

Challenge Problems
Problem 2-1C Understanding the rules of debit and credit (Obj. 2)
Some individuals, for whatever reason, do not pay income tax or pay less than they
should. Often their business transactions are cash transactions so there is no paper
trail to prove how much or how little they actually earned. Canada Customs and
Revenue Agency, however, has a way of dealing with these individuals; they use a
model (based on the accounting equation), to calculate how much the individual
must have earned.
Canada Customs and Revenue Agency is about to audit Cathy Mackenzie for
the period January 1, 2001, to December 31, 2001. Cathy buys and sells used cars for
cash; the purchaser is responsible for having the car certified so it can be licensed and
insured. Cathy had $2,000 cash, and no other assets or liabilities at January 1, 2001.
Required
1. Use the accounting equation to explain how the Canada Customs and Revenue
Agency model will be used to audit Cathy.
2. What do you think are the accounting concepts underlying the model?

Problem 2-2C Using a formal accounting system. (Obj. 3, 4, 6)

Over the years you have become friendly with a farmer, Kay Hudson, who raises
crops, which she sells, and has small herds of beef cattle and sheep. Kay maintains
her basic herds and markets the calves and lambs each fall. Her accounting system
is quite simple; all her transactions are in cash. Kay pays tax each year on her income,
which she estimates. She indicated to you once that she must be doing it right be-
cause Canada Customs and Revenue Agency audited her recently and assessed no
additional tax.

104 Part One The Basic Structure of Accounting

 You are taking your first accounting course and are quite impressed with the
information one can gain from a formal accounting system.
Required
Explain to Kay Hudson why it would be to her advantage to have a more formal ac-
counting system with accounts, ledgers, and journals.

Extending Your Knowledge

Decision Problems
1. Recording transactions directly in the ledger, preparing a trial balance, and
measuring net income or loss (Obj. 2, 5, 7)
Your friend, Charles Lee, has asked your advice about the effects that certain busi-
ness transactions will have on his business. His business, Car Finders, finds the
best deals on automobiles for clients. Time is short, so you cannot journalize trans-
actions. Instead, you must analyze the transactions without the use of a journal.
Lee will continue in the business only if he can expect to earn monthly net income
of $4,000. The business had the following transactions during March 2002:
a. Lee deposited $10,000 cash in a business bank account.
b. The business borrowed $4,000 cash from the bank and issued a note payable
due within one year.
c. Paid $300 cash for supplies.
d. Paid cash for advertising in the local newspaper, $600.
e. Paid the following cash expenses for one month: secretary (part-time) salary,
$1,200; office rent, $400; utilities, $300; interest, $100.
f. Earned revenue on account, $5,300.
g. Earned $2,500 revenue and received cash.
h. Collected cash from customers on account, $1,200.
Required
1. Open the following T-accounts: Cash; Accounts Receivable; Supplies; Notes
Payable; Charles Lee, Capital; Service Revenue; Advertising Expense; Interest
Expense; Rent Expense; Salary Expense; Utilities Expense.
2. Record the transactions directly in the T- accounts without using a journal. Key
each transaction by letter.
3. Prepare a trial balance at March 31, 2002. List expenses alphabetically.
4. Compute the amount of net income or net loss for this first month of operations.
Would you recommend Lee continue in business?

2. Using the accounting equation (Obj. 2)

Although all the following questions deal with the accounting equation, they are not
related:
1. Explain the advantages of double-entry bookkeeping over single-entry book-
keeping to a friend who is opening a used-book store.
2. When you deposit money in your bank account, the bank credits your account.
Is the bank misusing the word credit in this context? Why does the bank use the
term credit to refer to your deposit, and not debit?
3. Your friend asks, “When revenues increase assets and expenses decrease assets,
why are revenues credits and expenses debits and not the other way around?”
Explain to your friend why revenues are credits and expenses are debits.

Chapter Two Recording Business Transactions 105

 Financial Statement Problems
Journalizing transactions (Obj. 2, 3)
This problem helps to develop journalizing skill by using an actual company’s
account titles. Refer to the Intrawest Corporation financial statements (reported in
U.S. dollars) in Appendix A. Assume Intrawest completed the following selected
transactions during November 2000:
Nov. 5 Earned ski and resort operations revenues on account, $6,000,000.
9 Borrowed $8,000,000 by signing a note payable (long-term other indebted-
ness).
12 Purchased ski and resort operations equipment on account, $9,000,000.
17 Paid $1,200,000, which represents payment of $1,000,000 on long-term debt
plus interest expense of $200,000.
19 Earned resort revenues and immediately received cash of $500,000.
22 Collected the cash on account that was earned on November 5.
29 Received an electricity bill for $10,000 for Whistler and Blackcomb resorts,
which will be paid in December. (This is a ski and resort operations expense.)
29 Paid half the account payable created on November 12.

Required
Journalize these transactions using the following account titles taken from the
financial statements of Intrawest Corporation: Cash; Amounts Receivable; Ski and
Resort Operations Assets; Amounts Payable; Long-Term Bank and Other
Indebtedness; Ski and Resort Operations Revenue; Ski and Resort Operations
Expenses; Interest. Explanations are not required.

106 Part One The Basic Structure of Accounting