T Accounts, Debits and Credits, Trial Balance, and Financial Statements

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1 T Accounts, s and s, Trial Balance, and Financial Statements DISCUSSION QUESTIONS Suggested Responses 1. A trial balance is a list of all the account balances. It is used to prove that the total of all of the debit balances equals the total of all of the credit balances. A balance sheet shows only the balances of the asset, liability, and owner s Capital accounts. 2. means increase for asset accounts, the owner s Drawing account, and expense accounts; however, debit means decrease for liability accounts, the owner s Capital account, and revenue accounts. means decrease for asset accounts, the owner s Drawing account, and expense accounts; however, credit means increase for liability accounts, the owner s Capital account, and revenue accounts. refers to the left side of a T account, and credit to the right side. 3. Footings are the totals of each side of a T account, often written as small, pencil-written figures. 4. The net income or net loss from the income statement flows to the statement of owner s equity, which produces the ending Capital balance. The ending Capital from the statement of owner s equity flows to the balance sheet Owner s Equity section. 5. A compound entry is a transaction that involves more than one debit and/or more than one credit. 6. The trial balance might not balance because one-half of a transaction was omitted or because the transaction debits do not equal its credits. The trial balance will not reveal that transactions were omitted or repeated or that an incorrect amount was used for a transaction. 7. Slide: $890 for $89. Transposition: $327 for $723. You can determine whether there has been a slide or a transposition by dividing the difference between the two balances by 9. If the difference is evenly divisible, the error is due to either a slide or a transposition. 8. Revenue and expense accounts are under the umbrella of owner s equity because if a business earns revenue, there is an increase in owner s equity, and if a business incurs expenses, there is a decrease in owner s equity Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

2 T Accounts, s and s, Trial Balance, and Financial Statements Exercise 2-1 Owner's Assets = Liabilities Equity Revenue Expenses Income Accounts D. Barlow, from Wages Payable Capital Repairs Expense Accounts D. Barlow, Rent Receivable Drawing Expense Equipment Supplies Expense Exercise 2-2 Utilities Expense Miscellaneous Expense ACCOUNT CLASSIFICATION INCREASE SIDE DECREASE SIDE NORMAL BALANCE SIDE 0. A 1. Wages Expense E 2. Equipment A 3. L. Cross, Capital OE 4. Service Revenue R 5. L. Cross, Drawing OE 6. Accounts Receivable A 7. E 8. Fees Earned R 9. L 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 35

3 T Accounts, s and s, Trial Balance, and Financial Statements Exercise 2-3 Utilities Accounts Income from a. Expense f. Receivable Tours ,375 1,375 Supplies Accounts Gas b. Expense Payable g. Expense Prepaid Accounts c. Insurance h. Receivable ,458 1,458 Accounts R. Dalberg, d. Payable i. Drawing e. Utilities Expense Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

4 T Accounts, s and s, Trial Balance, and Financial Statements Exercise 2-4 a. The owner invested $3,200 cash in the business. b. Paid the rent for the current month, $525. c. Received and paid the advertising bill, $98. d. Bought supplies on account, $280. e. Received and paid the bill for a miscellaneous expense, $75. f. The owner invested personal equipment with a fair market value of $3,510 in the business. g. Bought equipment for $2,050, paying $1,050 in cash and placing the balance on account. h. Sold services on account, $615. i. Received and paid the utility bill, $92. j. The owner withdrew $345 in cash for personal use. k. Sold services for cash, $1,125. Exercise 2-5 Business Services Trial Balance December 31, 20-- ACCOUNT NAME Accounts Receivable Prepaid Insurance Equipment T. Morris, Capital T. Morris, Drawing Income from Services Wages Expense DEBIT CREDIT 3,200 7,700 1,300 26,000 8,700 24,800 1,900 33,000 17,500 3,700 1,800 3,400 66,500 66, Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 37

5 T Accounts, s and s, Trial Balance, and Financial Statements Exercise 2-6 Salary Expense (a) 8,200 (b) 350 (k) 2,800 (g) 3,400 (c) 8,400 (d) 1,600 (j) 82 (i) 7,580 (f) 175 Bal. 2,882 (g) 3,400 (h) 2,200 (d) 1,600 24,180 7,725 Bal. 16,455 Accounts Receivable R. Landish, Capital (e) 2,600 (a) 8,200 (j) 82 Office Furniture R. Landish, Drawing (b) 350 (h) 2,200 (f) 175 Modeling Fees (k) 2,800 (c) 8,400 (e) 2,600 (i) 7,580 Bal. 18,580 Landish Modeling Agency Trial Balance March 31, 20-- ACCOUNT NAME Accounts Receivable Office Furniture R. Landish, Capital R. Landish, Drawing Modeling Fees Salary Expense DEBIT CREDIT 16,455 2, ,800 2,882 8,200 2,200 18,580 3,400 1, ,662 29, Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

6 T Accounts, s and s, Trial Balance, and Financial Statements Exercise 2-6 (concluded) Landish Modeling Agency Income Statement For Month Ended March 31, 20-- Revenue: Modeling Fees Expenses: Salary Expense Total Expenses Net Income $3,400 1, $18,580 5,257 $13,323 R. Landish, Capital, March 1, 20-- Investment during March Net Income for March Subtotal Less Withdrawals for March Increase in Capital R. Landish, Capital, March 31, 20-- Landish Modeling Agency Statement of Owner's Equity For Month Ended March 31, 20-- $ 8,200 13,323 $21,523 2,200 $ 0 19,323 $19,323 Landish Modeling Agency Balance Sheet March 31, 20-- Accounts Receivable Office Furniture Total Assets Assets $16,455 2, ,800 $22,205 Liabilities $ 2,882 Owner's Equity R. Landish, Capital Total Liabilities and Owner's Equity 19,323 $22, Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 39

7 T Accounts, s and s, Trial Balance, and Financial Statements Exercise 2-7 DESCRIPTION AMOUNT OF DIFFERENCE DEBIT OR CREDIT COLUMN OF TRIAL BALANCE UNDERSTATED OR OVERSTATED 0. Example: A $149 debit to Accounts Receivable was not recorded. a. A $42 debit to was recorded as $420. $149 column understated 378 column overstated b. A $155 debit to Accounts Receivable was recorded twice. 155 column overstated c. A $179 debit to Prepaid Insurance was not recorded. 179 column understated d. A $65 credit to was not recorded. e. A $190 debit to Equipment was recorded twice. f. A $57 debit to was recorded as $ column understated column overstated column overstated Exercise 2-8 a. Equal totals in the trial balance because $38 was debited to and $38 was credited to. Since the correct amount is $380, is understated by $342 and is overstated by $342. b. Equal totals in the trial balance because $280 was debited to Accounts Receivable and $280 was credited to. Since the $280 should have been debited to, not Accounts Receivable, the error caused Accounts Receivable to be overstated by $280 and to be overstated by $280. c. Equal totals in the trial balance because $245 was debited to Equipment and $245 was credited to. Since the $245 should have been debited to, not Equipment, the error caused Equipment to be overstated by $245 and Supplies Expense to be understated by $245. d. Unequal totals in the trial balance because $76 was debited correctly to Accounts Payable but the credit to was transposed as $67. The error caused to be overstated by $ Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

8 T Accounts, s and s, Trial Balance, and Financial Statements Problem 2-1A Assets = Liabilities Owner's Equity Revenue Expenses G. Elden, Capital Income from Services (a) 35,000 (b) 8,150 (g) 200 (c) 105 (a) 35,000 (h) 800 (c) 105 (h) 800 (g) 200 (d) 790 (f) 1,200 35,800 8,350 (e) 185 Bal. 36,200 Bal. 27,450 1,080 Bal. 880 Exercise Equipment (b) 8,150 (f) 1,200 Bal. 9,350 Store Equipment (d) 790 (e) Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 41

9 T Accounts, s and s, Trial Balance, and Financial Statements Problem 2-2A Assets Liabilities = Revenue Expenses Owner's Equity B. Kelso, Capital Income from Services Wages Expense (a) 45,000 (b) 1,800 (j) 285 (d) 1,000 (a) 45,000 (h) 1,245 (l) 925 (h) 1,245 (c) 790 (e) 1,350 (f) 600 (k) 1,450 (k) 1,450 (d) 1,700 (g) 365 Bal. 45,600 Bal. 2,695 47,695 (i) 345 (o) 115 (j) 285 2,830 B. Kelso, Drawing Bal. 40,925 Computer Software (l) 925 Bal. 2,545 (b) 1,800 (m) 75 (n) 850 (n) 850 6,770 (o) 115 Advertising Expense (f) 600 (g) 365 (c) 790 (d) 2,700 (i) 345 Bal. 3,490 Miscellaneous Neon Sign Expense (e) 1,350 (m) Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

10 Problem 2-2A (concluded) ACCOUNT NAME Computer Software Neon Sign B. Kelso, Capital B. Kelso, Drawing Income from Services Wages Expense Advertising Expense Miscellaneous Expense CHAPTER 2 T Accounts, s and s, Trial Balance, and Financial Statements Computer Wizards Trial Balance November 30, 20-- DEBIT CREDIT 40, ,490 1,350 2,545 45, , , ,840 50, Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 43

11 T Accounts, s and s, Trial Balance, and Financial Statements Problem 2-3A Assets = Liabilities Owner's Equity Revenue Expenses R. Morgis, Capital (a) 40,000 (c) 200 (j) 300 (b) 1,330 (a) 40,000 (f) 1,484 (l) 880 (i) 2,575 (e) 155 (c) 395 (i) 2,575 (n) 885 (g) 190 (d) 375 R. Morgis, Drawing Bal. 4,059 43,460 (h) 450 2,100 (j) 300 Bal. 1,800 (k) 940 (m) 800 (k) 940 Bal. 39,545 (l) 880 (m) 800 3,915 Accounts Receivable (f) 1,484 (n) 885 Bal. 599 (c) 595 (d) 375 Bal. 970 Professional Fees Salary Expense (e) 155 (g) 190 Bal. 345 Miscellaneous Expense (h) 450 Office Furniture (b) 1, Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

12 Problem 2-3A (continued) ACCOUNT NAME Accounts Receivable Office Furniture R. Morgis, Capital R. Morgis, Drawing Professional Fees Salary Expense Miscellaneous Expense CHAPTER 2 T Accounts, s and s, Trial Balance, and Financial Statements Morgis Clinic Trial Balance June 30, 20-- DEBIT CREDIT 39, ,330 1,800 40, , ,859 45,859 Morgis Clinic Income Statement For Month Ended June 30, 20-- Revenue: Professional Fees Expenses: Salary Expense Miscellaneous Expense Total Expenses Net Income $ $ 4,059 2,615 $ 1,444 R. Morgis, Capital, June 1, 20-- Investments during June Net Income for June Subtotal Less Withdrawals for June Increase in Capital R. Morgis, Capital, June 30, 20-- Morgis Clinic Statement of Owner's Equity For Month Ended June 30, 20-- $40,000 1,444 $41, $ 0 40,644 $40, Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 45

13 T Accounts, s and s, Trial Balance, and Financial Statements Problem 2-3A (concluded) Morgis Clinic Balance Sheet June 30, 20-- Accounts Receivable Office Furniture Total Assets Assets $39, ,330 $42,444 Liabilities $ 1,800 Owner's Equity R. Morgis, Capital Total Liabilities and Owner's Equity 40,644 $42, Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

14 T Accounts, s and s, Trial Balance, and Financial Statements Problem 2-4A Laundry Revenue (a) 35,000 (b) 1,870 (h) 1,800 (c) 225 (f) 1,925 (f) 1,925 (d) 875 (m) 225 (e) 8,900 (j) 1,835 (j) 1,835 (e) 3,600 2,025 9,125 Bal. 3,760 38,760 (g) 1,560 Bal. 7,100 (h) 1,800 Wages Expense (i) 285 B. Bangle, Capital (k) 940 (l) 800 (k) 940 (m) 225 (a) 35,000 (n) ,235 B. Bangle, Drawing Bal. 26,525 (d) 875 Prepaid Insurance (l) 800 (g) 1,560 (c) 225 Equipment (e) 12,500 Furniture and Fixtures (b) 1,870 (i) 285 Miscellaneous Expense (n) Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 47

15 T Accounts, s and s, Trial Balance, and Financial Statements Problem 2-4A (continued) Self-Wash Laundry Trial Balance May 31, 20-- ACCOUNT NAME Prepaid Insurance Equipment Furniture and Fixtures B. Bangle, Capital B. Bangle, Drawing Laundry Revenue Wages Expense Miscellaneous Expense DEBIT CREDIT 26,525 1,560 12,500 1,870 7,100 35, , ,860 45,860 Self-Wash Laundry Income Statement For Month Ended May 31, 20-- Revenue: Laundry Revenue Expenses: Wages Expense Miscellaneous Expense Total Expenses Net Income $ $3,760 2,605 $1, Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

16 T Accounts, s and s, Trial Balance, and Financial Statements Problem 2-4A (concluded) Self-Wash Laundry Statement of Owner's Equity For Month Ended May 31, 20-- B. Bangle, Capital, May 1, 20-- Investments during May $35,000 Plus Net Income for May 1,155 Subtotal $36,155 Withdrawals for May 800 Increase in Capital B. Bangle, Capital, May 31, 20-- $ 0 35,355 $35,355 Self-Wash Laundry Balance Sheet May 31, 20-- Prepaid Insurance Equipment Furniture and Fixtures Total Assets Assets $26,525 1,560 12,500 1,870 $42,455 Liabilities $ 7,100 Owner's Equity B. Bangle, Capital Total Liabilities and Owner's Equity 35,355 $42, Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 49

17 T Accounts, s and s, Trial Balance, and Financial Statements Problem 2-1B Assets Liabilities = Owner's Equity Revenue Expenses R. Willard, Capital Income from Services (a) 25,000 (b) 1,525 (f) 750 (c) 325 (a) 25,000 (h) 250 (c) 325 (h) 250 (e) 225 (d) 750 (g) 800 (f) 750 (e) 400 Bal. 25,800 25,250 2,500 1,475 Bal. 22,750 Bal. 725 Shop Equipment (b) 1,525 (g) 800 Bal. 2,325 Store Equipment (d) 750 (e) Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

18 T Accounts, s and s, Trial Balance, and Financial Statements Problem 2-2B Assets = Liabilities Owner's Equity Revenue Expenses (a) 30,000 (b) 1,850 (j) 245 (c) 290 (a) 30,000 (e) 1,575 (l) 930 (e) 1,575 (c) 350 (f) 900 (m) 1,000 (k) 3,474 (k) 3,474 (d) 950 (g) 445 Bal. 31,000 Bal. 5,049 35,049 (f) 435 (h) 460 Bal. 29,034 Computer Software (c) 640 (i) 380 2,095 J. Carrie, Drawing (j) 245 Bal. 1,850 (l) 930 (d) 950 (n) 800 (n) 800 (o) 75 6,015 J. Carrie, Capital Income from Services Wages Expense (b) 1,850 (m) 1,000 (i) 380 Bal. 2,850 (h) 460 Advertising Expense (g) 445 Miscellaneous Neon Sign Expense (f) 1,335 (o) Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 51

19 T Accounts, s and s, Trial Balance, and Financial Statements Problem 2-2B (concluded) Carrie Photo Tours Trial Balance June 30, 20-- ACCOUNT NAME Computer Software Neon Sign J. Carrie, Capital J. Carrie, Drawing Income from Services Wages Expense Advertising Expense Miscellaneous Expense DEBIT CREDIT 29, ,850 1,335 1,850 31, , ,899 37, Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

20 T Accounts, s and s, Trial Balance, and Financial Statements Problem 2-3B Assets = Liabilities Owner's Equity Revenue Expenses (a) 35,000 (c) 835 (j) 250 (b) 560 (a) 35,000 (f) 2,255 (m) 960 (i) 1,940 (d) 250 (d) 400 (l) 1,950 (l) 1,950 (e) D. Julia, Drawing Bal. 4,205 38,890 (g) 445 Bal. 710 (h) 335 (j) 250 (n) 1,200 (k) 1,245 (k) 1,245 (m) 960 (n) 1,200 5,705 Bal. 33,185 (e) 185 (h) 335 Accounts Receivable (f) 2,255 (i) 1,940 Bal. 315 (b) 560 (d) 650 Bal. 1,210 D. Julia, Capital Professional Fees Salary Expense Bal. 520 Miscellaneous Expense (g) 445 Office Furniture (c) Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 53

21 T Accounts, s and s, Trial Balance, and Financial Statements Problem 2-3B (continued) Julia's Clinic Trial Balance July 31, 20-- ACCOUNT NAME Accounts Receivable Office Furniture D. Julia, Capital D. Julia, Drawing Professional Fees Salary Expense Miscellaneous Expense DEBIT CREDIT 33, , ,000 1,200 4, , ,915 39,915 Julia's Clinic Income Statement For Month Ended July 31, 20-- Revenue: Professional Fees Expenses: Salary Expense Miscellaneous Expense Total Expenses Net Income $ 960 1, $4,205 3,170 $1,035 Julia's Clinic Statement of Owner's Equity For Month Ended July 31, 20-- D. Julia, Capital, July 1, 20-- Investments during July Net Income for July Subtotal Less Withdrawals for July Increase in Capital D. Julia, Capital, July 31, 20-- $35,000 1,035 $36,035 1,200 $ 0 34,835 $34, Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

22 Problem 2-3B (concluded) CHAPTER 2 T Accounts, s and s, Trial Balance, and Financial Statements Julia's Clinic Balance Sheet July 31, 20-- Accounts Receivable Office Furniture Total Assets Assets $33, , $35,545 Liabilities $ 710 Owner's Equity D. Julia, Capital Total Liabilities and Owner's Equity 34,835 $35, Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 55

23 T Accounts, s and s, Trial Balance, and Financial Statements Problem 2-4B Laundry Revenue (a) 25,000 (b) 725 (h) 700 (d) 11,700 (f) 1,742 (f) 1,742 (c) 1,750 (j) 315 (e) 535 (k) 1,820 (k) 1,820 (d) 4,000 1,015 12,235 Bal. 3,562 28,562 (g) 1,375 Bal. 11,220 (h) 700 Wages Expense (i) 438 K. Resser, Capital (j) 315 (l) 75 (m) 1,200 (m) 1,200 (a) 25,000 (n) ,278 K. Resser, Drawing Bal. 17,284 (c) 1,750 Prepaid Insurance (n) 700 (g) 1,375 (e) 535 Equipment (d) 15,700 Furniture and Fixtures (b) 725 (i) 438 Miscellaneous Expense (l) Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

24 Problem 2-4B (continued) ACCOUNT NAME Prepaid Insurance Equipment Furniture and Fixtures K. Resser, Capital K. Resser, Drawing Laundry Revenue Wages Expense Miscellaneous Expense CHAPTER 2 T Accounts, s and s, Trial Balance, and Financial Statements Resser's Quick Clean Trial Balance July 31, 20-- DEBIT CREDIT 17,284 1,375 15, ,220 25, ,562 1,200 1, ,782 39,782 Resser's Quick Clean Income Statement For Month Ended July 31, 20-- Revenue: Laundry Revenue Expenses: Wages Expense Miscellaneous Expense Total Expenses Net Loss $1,200 1, $3,562 3,998 $ (436) 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 57

25 T Accounts, s and s, Trial Balance, and Financial Statements Problem 2-4B (concluded) Resser's Quick Clean Statement of Owner's Equity For Month Ended July 31, 20-- K. Resser, Capital, July 1, 20-- Investment during July Less Net Loss for July Subtotal Less Withdrawals for July Increase in Capital K. Resser, Capital, July 31, 20-- $25, $24, $ 0 23,864 $23,864 Resser's Quick Clean Balance Sheet July 31, 20-- Prepaid Insurance Equipment Furniture and Fixtures Total Assets Assets $17,284 1,375 15, $35,084 Liabilities $11,220 Owner's Equity K. Resser, Capital Total Liabilities and Owner's Equity 23,864 $35, Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

26 T Accounts, s and s, Trial Balance, and Financial Statements SOLUTIONS TO ACTIVITIES CONSIDER AND COMMUNICATE Suggested Response First, debits must equal credits in a transaction. Second, it is possible to have more than one debit or credit on one side of the equation as long as they offset each other or there are debits or credits on the other side to offset them. In this case, on the left side of the equals sign, there is a $7,000 debit to Equipment (which is a plus) and a $3,000 credit to (which is a minus); on the right side of the equals sign, there is a $4,000 credit to (which is a plus). Thus, a $4,000 net increase to the left side of the equation is offset by a $4,000 increase on the right side of the equation. 7,000 3,000 = 4,000 WHAT S WRONG WITH THIS PICTURE? Suggested Response The bookkeeper has acted irresponsibly. She should have requested assistance and should never have removed the materials from the business. To further complicate her situation, she has violated the privacy of the business s financial materials by having her uncle attempt to assist her. It is likely she could be fired for this unethical behavior. She should make a note of the difference and also her efforts in attempting to find the errors. This information should then be taken to her supervisor. Financial materials should never be removed from the business and shared with someone outside of the circle of people who have the right to see them Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 59

EXERCISES. Does not normally require adjustment. Normally requires adjustment (AE).

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