CHAPTER 3

THE ACCOUNTING INFORMATION SYSTEM

CHAPTER LEARNING OBJECTIVES

1. Analyze the effect of business transactions on the basic accounting equation. Each business transaction must have a dual effect on the accounting equation. For example, if an individual asset is increased, there must be a corresponding (a) decrease in another asset, or (b) increase in a specific liability, or (c) increase in stockholders’ equity.

2. Explain how accounts, debits, and credits are used to record business transactions. An account is an individual accounting record of increases and decreases in specific asset, liability, and stockholders’ equity items. The terms debit and credit are synonymous with left and right. Assets, dividends, and expenses are increased by debits and decreased by credits. Liabilities, common stock, retained earnings, and revenues are increased by credits and decreased by debits.

3. Indicate how a journal is used in the recording process. The basic steps in the recording process are (a) analyze each transaction in terms of its effect on the accounts, (b) enter the transaction information in a journal, and (c) transfer the journal information to the appropriate accounts in the ledger.

The initial accounting record of a transaction is entered in a journal before the data are entered in the accounts. A journal (a) discloses in one place the complete effect of a transaction, (b) provides a chronological record of transactions, and (c) prevents or locates errors because the debit and credit amounts for each entry can be readily compared.

4. Explain how a ledger and posting help in the recording process. The entire group of accounts maintained by a company is referred to collectively as a ledger. The ledger provides the balance in each of the accounts as well as keeps track of changes in these balances.

Posting is the procedure of transferring journal entries to the ledger accounts. This phase of the recording process accumulates the effects of journalized transactions in the individual accounts.

5. Prepare a trial balance. A trial balance is a list of accounts and their balances at a given time. The primary purpose of the trial balance is to prove the mathematical equality of debits and credits after posting. A trial balance also uncovers errors in journalizing and posting and is useful in preparing financial statements.

Difficulties:

Hard: 8

Medium: 120

Easy: 166

Question List by Section

Using the Accounting Equation to Analyze Transactions

Accounting Transactions: 1, 80, 82, 87

Analyzing Transactions: 2, 3, 4, 5, 55, 56, 57, 58, 59, 60, 61, 62, 63, 64, 65, 66, 67, 68, 69, 70, 71, 72, 73, 74, 75, 76, 77, 78, 79, 80, 81, 83, 84, 85, 86, 231, 240

Summary of Transactions: 230, 233, 244, 246, 247, 248, 249, 250, 251

Accounts, Debits, and Credits

Debits and Credits: 8, 10, 11, 13, 14, 15, 18, 23, 90, 91, 92, 93, 94, 95, 96, 97, 100

Debit and Credit Procedures: 6, 7, 9, 107, 128, 130

Dr./Cr. for Assets and Liabilities: 16, 17, 19, 20, 22, 24, 98, 99, 105, 115, 116, 117, 125, 127, 129, 131, 137, 138, 139, 140, 141, 145, 148, 149, 154, 155, 156

Dr./Cr. for Stockholders’ Equity: 12, 21, 25, 26, 27, 88, 89, 277

Stockholders’ Equity Relationships: 142, 143, 144, 146, 147, 153, 157, 289

Summary of Debit/ Credit Rules: 110, 120, 121, 126, 232, 235, 245, 253, 254, 256, 257, 258, 259, 260

Using a Journal

The Recording Process: 28, 29, 30, 31, 32, 158, 159, 160, 161, 162, 163, 164, 165, 278, 279, 285, 287

The Journal: 33, 34, 35, 36, 37, 166, 167, 168, 169, 170, 171, 172, 173, 174, 175, 176, 177, 178, 179, 180, 181, 182, 183, 184, 185, 186, 236, 237, 239, 242, 255, 261, 262, 263, 280

The Ledger and Posting

The Ledger: 39, 188, 192, 194, 195, 196, 197

Chart of Accounts: 38, 40, 41, 42, 43, 44, 187, 189, 190, 191, 193, 198, 200

Posting: 45, 46, 199, 201, 202, 203, 204, 205, 241, 281

The Recording Process Illustrated: 47, 48, 206, 207, 208, 209, 210, 211

Summary Illustration of Journalizing and Posting: 252, 266, 267

The Trial Balance: 51, 52, 53, 216, 217, 218, 220, 222, 224, 225, 227, 232, 233, 242, 247, 272, 276, 277, 296, 298

Limitations of a Trial Balance: 52, 215, 216, 219, 222, 224, 225, 226, 227, 269, 270, 271

TRUE-FALSE STATEMENTS

1. Economic events that require recording in the financial statements are called accounting transactions.

2. Revenue increases stockholders’ equity and should be recorded whenever cash is received from customers.

3. Collection of an account receivable will increase both cash and accounts receivable.

4. The payment of a liability decreases both cash and accounts payable.

5. If total assets are increased, there must be a corresponding increase in liabilities or a decrease in stockholders’ equity.

6. A new account is opened for each transaction entered into by a business firm.

7. The recording process becomes more efficient and informative if all transactions are recorded in one account.

8. An account consists of two parts: (1) a left or debit side and (2) a right or credit side.

9. The account balance is the difference in total dollars between total debit amounts and total credit amounts.

10. An account is often referred to as a T-account because of the way it is constructed.

11. A debit to an account always indicates an increase in that account.

12. If a revenue account is credited, the revenue account is increased.

13. The normal balance of all accounts is a debit.

14. Debit and credit can be interpreted to mean “bad” and “good”, respectively.

15. A credit means that an account has been increased.

16. A decrease in a liability account is recorded by a debit.

17. An increase in an asset is recorded by a debit.

18. The double-entry system of accounting refers to the placement of a double line at the end of a column of figures.

19. A credit balance in a liability account indicates that an error in recording has occurred.

20. The normal balance of an asset is a credit.

21. The normal balance of the dividend account is a credit.

22. Assets are decreased with a credit.

23. A debit means that an account has been decreased.

24. Liabilities are increased with debits and decreased with credits.

25. The dividends account is a subdivision of the retained earnings account and appears as an expense on the income statement.

26. Revenues are a subdivision of stockholders’ equity.

27. Under the double-entry system, revenues must always equal expenses.

28. Transactions are entered in the ledger first and then they are analyzed in terms of their effect on the accounts.

29. Source documents can provide evidence that a transaction has occurred.

30. Each transaction must be analyzed in terms of its effect on the accounts before it can be recorded in a journal.

31. Transactions are entered in the ledger accounts and then transferred to journals.

32. All business transactions must be entered first in the general ledger.

33. Transactions are recorded in alphabetical order in a journal.

34. The journal is a chronological record of all transactions.

35. A journal is an accounting record in which transactions are initially recorded.

36. The complete effect of a transaction on the accounts is disclosed in the journal.

37. The account titles used in journalizing transactions need not be identical to the account titles in the ledger.

38. The chart of accounts is a special ledger used in accounting systems.

39. A general ledger should be arranged in financial statement order beginning with the balance sheet accounts.

40. The entire group of accounts maintained by a company is referred to collectively as the journal.

41. Prepaid expenses are assets.

42. Salaries and wages payable is a type of expense.

43. Dividends are classified as an expense.

44. Unearned Service Revenue is classified as a liability on the balance sheet.

45. Posting is the process of proving the equality of debits and credits in the trial balance.

46. Entering transactions into the journal is called posting.

47. The journal entry to record the purchase of supplies on account includes a debit to the Supplies account and a credit to Accounts Payable.

48. The journal entry to record a payment for supplies previously purchased on account includes a debit to the Cash account and a credit to Accounts Payable.

49. A trial balance is prepared at the beginning of an accounting period.

50. A trial balance does not prove that all transactions have been recorded or that the ledger is correct.

51. In a trial balance, all debits are listed before all credits.

52. When the columns of the trial balance equal each other, it means that no errors have occurred in recording and posting the transactions.

MULTIPLE CHOICE QUESTIONS

53. If total liabilities decreased by $4,000, then

a. stockholders’ equity must have decreased by $4,000.

b. assets must have decreased by $4,000, or stockholders’ equity must have increased by $4,000.

c. assets and stockholders’ equity each increased by $2,000.

d. assets must have increased by $4,000.

54. Collection of a $600 Accounts Receivable

a. increases an asset $600; decreases an asset $600.

b. increases an asset $600; decreases a liability $600.

c. decreases a liability $600; increases stockholders’ equity $600.

d. decreases an asset $600; decreases a liability $600.

55. If an individual asset is increased, then

a. there could be an equal decrease in a specific liability.

b. there could be an equal decrease in stockholders’ equity.

c. there could be an equal decrease in another asset.

56. If services are rendered on account, then

a. assets will decrease.

b. liabilities will increase.

c. stockholders’ equity will increase.

d. liabilities will decrease.

57. If services are rendered for cash, then

a. assets will increase.

b. liabilities will increase.

c. stockholders’ equity will decrease.

d. liabilities will decrease.

58. If expenses are paid in cash, then

a. assets will increase.

b. liabilities will decrease.

c. stockholders’ equity will increase.

d. assets will decrease.

59. An investment by the stockholders in a business increases

a. assets and stockholders’ equity.

b. assets and liabilities.

c. liabilities and stockholders’ equity.

d. assets only.

60. The purchase of an asset for cash

a. increases assets and stockholders’ equity.

b. increases assets and liabilities.

c. decreases assets and increases liabilities.

d. leaves total assets unchanged.

61. The purchase of an asset on credit

a. increases assets and stockholders’ equity.

b. increases assets and liabilities.

c. decreases assets and increases liabilities.

d. leaves total assets unchanged.

62. The payment of a liability

a. decreases assets and stockholders’ equity.

b. increases assets and decreases liabilities.

c. decreases assets and increases liabilities.

d. decreases assets and liabilities.

63. The sale of an asset on account for what it costs

a. increases assets and liabilities.

b. decreases assets and liabilities.

c. leaves total assets unchanged.

d. decreases assets and increases liabilities.

64. When collection is made on Accounts Receivable,

a. total assets will remain the same.

b. stockholders’ equity will increase.

c. total assets will increase.

d. total assets will decrease.

65. A revenue generally

a. increases assets and liabilities.

b. increases assets and stockholders’ equity.

c. increases assets and decreases stockholders’ equity.

d. leaves total assets unchanged.

66. A paid dividend

a. decreases assets and stockholders’ equity.

b. increases assets and stockholders’ equity.

c. increases assets and decreases stockholders’ equity.

d. decreases assets and increases stockholders’ equity.

67. Receiving payment of a portion of an accounts receivable will

a. not affect total assets.

b. increase liabilities.

c. increase stockholders’ equity.

d. decrease net income.

68. Incurring an expense

a. decreases assets and liabilities.

b. decreases stockholders’ equity.

c. leaves stockholders’ equity unchanged.

d. is basically the same as a liability.

69. Which of the following transactions has no effect on retained earnings?

a. Incurred expense

b. Paid dividends

c. Purchased land

d. Earned revenue

70. If a company buys a $1,700 machine on account, this transaction will affect the

a. income statement and retained earnings statement only.

b. income statement only.

c. income statement, retained earnings statement, and balance sheet.

d. balance sheet only.

71. A payment of a portion of an accounts payable will

a. not affect total assets.

b. increase liabilities.

c. not affect stockholders’ equity.

d. decrease net income.

72. Acme Corporation received a cash advance of $500 from a customer. As a result of this event,

a. assets increased by $500.

b. stockholders’ equity increased by $500.

c. liabilities decreased by $500.

d. Both assets and stockholders’ equity increased by $500.

73. Suppose that Target Corporation purchased equipment for $180,000 cash. As a result of this event,

a. stockholders’ equity decreased by $180,000.

b. assets increased by $180,000.

c. total assets remained unchanged.

d. Both assets and stockholders’ equity decreased by $180,000.

74. Suppose that EY Company provided consulting services and billed the client $29,500. As a result of this event,

a. total assets remained unchanged.

b. assets increased by $29,500.

c. stockholders’ equity increased by $29,500

d. Both assets and stockholders’ equity increased by $29,500.

75. Suppose that Microsoft Corporation paid a quarterly dividend of $422 million. As a result of this event, the

a. Dividends account was increased by $422 million.

b. Dividends account was decreased by $422 million.

c. Cash account was increased by $422 million.

d. Cash account was increased and the Dividends account was decreased by $422 million.

76. If a company pays dividends of $10,000,

a. total stockholders' equity will be reduced by $10,000.

b. net income will be reduced by $10,000.

c. retained earnings will be reduced by $10,000.

d. Both retained earnings and total stockholders' equity will be reduced by $10,000.

77. If a company issues common stock for $40,000 and uses $30,000 of the cash to purchase a truck, the net effect is that

a. assets will be increased by $10,000.

b. stockholders’ equity will be reduced by $40,000.

c. assets will be increased by $40,000.

d. assets will be unchanged.

78. Are advanced receipts from customers treated as revenue at the time of receipt? Why or why not?

a. Yes, they are treated as revenue at the time of receipt because the company has access to the cash.

b. No, the amount of revenue cannot be adequately determined until the company completes the work.

c. Yes, the intent of the company is to perform the work and the customer is confident that the services will be completed.

d. No, revenue cannot be recognized until the performance obligation is satisfied.

79. The receipt of cash in advance from a customer

a. increases assets and stockholders' equity.

b. increases assets and decreases stockholders' equity.

c. increases assets and liabilities.

80. Which one of the following contains the selected steps of the accounting cycle in the correct order?

1. Journalize the transactions.
2. Post transactions to ledger accounts.
3. Analyze transactions.
4. Prepare financial statements.
5. Prepare a trial balance.

a. 1, 2, 3, 5, 4

b. 3, 2, 1, 4, 5

c. 3, 1, 2, 5, 4

d. 3, 1, 2, 4, 5

81. At the beginning of June, assets totaled $45,600 and liabilities totaled $16,500. During the month, the company earned net income of $15,000 and its assets increased by $7,000. Stockholders’ equity increased by $3,200. What are total liabilities at the end of June?

a. $20,300

b. $29,100

c. $5,300

82. Suppose that on March 1, 2025, Amazon Company hires a new employee who will start to work on March 6. The employee will be paid on the last day of each month. Should a journal entry be made on March 6? Why or why not?

a. Yes, the company is now obligated to pay the employee, thus that event must be recorded.

b. No, hiring an employee is an important event; however it is not an economic event that should be recorded.

c. Yes, failure to record the event would cause the financial statements to be misleading.

d. No, the company's financial position has been changed; however, the dollar amount of the transaction is not yet known.

83. Suppose that Samsung Company had a transaction that caused a $5,000 increase in both assets and liabilities. This transaction could have been a(n)

a. purchase of office equipment for $12,000, paying $7,000 cash and issuing a note payable for the balance.

b. investment of $5,000 cash in the business by the stockholders.

c. purchase of office equipment for $5,000 cash.

d. repayment of a $5,000 bank loan.

84. Acme Service Company rendered services and collected half of the invoice in cash. The remaining balance is due at the end of the month. This transaction

a. increases assets, liabilities and stockholder’s equity.

b. increases assets and liabilities; decreases stockholders’ equity.

c. increases assets and stockholders’ equity.

d. has no effect on the basic accounting equation.

85. A1 Supply Company purchased equipment for $45,000, paying cash of $5,000 and signing a note payable for the balance due. This transaction

a. increases assets, liabilities and stockholder’s equity.

b. increases assets and liabilities; decreases stockholders’ equity.

c. increases assets and liabilities.

d. has no effect on the basic accounting equation.

86. Ace Enterprises received a bill from Acme Service Company for $14,500 in electrical services. They paid $5,000 on receipt of the bill and agreed to pay the remainder by the end of the month. This transaction

a. decreases assets, liabilities and stockholder’s equity.

b. increases liabilities; decreases assets and stockholders’ equity.

c. increases assets and liabilities.

d. has no effect on the basic accounting equation.

87. All of the following are characteristics of every accounting information system except it is a system

a. that collects transaction data.

b. that processes transaction data.

c. that communicates financial information to decision makers.

d. of data storage hardware for the chart of accounts.

88. A1 Service Company began the year 2025 with $126,000 in its Common Stock account and a debit balance in Retained Earnings of $54,000. During the year, the company earned net income of $27,000, and declared and paid $9,000 of dividends. In addition, the company sold additional common stock amounting to $33,000. Based on this information, what should the transaction analysis show for total stockholders' equity at the end of 2025?

a. $231,000

b. $249,000

c. $123,000

d. $165,000

89. Ace Construction Company started the year with $60,000 in its Common Stock account and a credit balance in Retained Earnings of $44,000. During the year, the company earned net income of $48,000, and declared and paid $20,000 of dividends. In addition, the company sold additional common stock amounting to $28,000. The amount reported for ending retained earnings on the retained earnings statement would be

a. $160,000.

b. $72,000.

c. $132,000.

d. $100,000.

90. The left side of an account is

a. blank.

b. a description of the account.

c. the debit side.

d. the balance of the account.

91. Which one of the following is not a part of an account?

a. Credit side

b. Trial balance

c. Debit side

d. Title

92. An account is a part of the financial information system and is described by each one of the following except

a. an account has a debit and credit side.

b. an account is a source document.

c. an account consists of three parts.

d. an account has a title.

93. The right side of an account

a. is the correct side.

b. reflects all transactions for the accounting period.

c. shows the balances of all accounts in the system.

d. is the credit side.

94. An account consists of

a. a title, a debit balance, and a credit balance.

b. a title, a left side, and a debit balance.

c. a title, a debit side, and a credit side.

d. a title, a right side, and a debit balance.

95. A T-account is

a. a way of depicting the basic form of an account.

b. a special account used instead of a journal.

c. a special account used instead of a trial balance.

d. used for accounts that have both a debit and credit balance.

96. Which statement about an account is true?

a. In its simplest form, an account consists of two parts.

b. An account is an individual accounting record of increases and decreases in specific asset, liability, and stockholders’ equity items.

c. There are separate accounts for specific assets and liabilities but only one account for stockholders’ equity items.

d. The left side of an account is the credit or decrease side.

97. In its simplest form, an account consists of all of the following except

a. right (credit) side.

b. account title.

c. left side.

d. explanation column.

98. A debit to an asset account indicates a(n)

a. error.

b. credit was made to a liability account.

c. decrease in the asset.

d. increase in the asset.

99. Debits

a. increase both assets and liabilities.

b. decrease both assets and liabilities.

c. increase assets and decrease liabilities.

d. decrease assets and increase liabilities.

100. The normal balance of any account is the

a. left side.

b. right side.

c. side which increases that account.

d. side which decreases that account.

101. The double-entry system requires that each transaction must be recorded

a. in at least two different accounts.

b. in two sets of books.

c. in a journal and in a ledger.

d. first as a revenue and then as an expense.

102. A credit is not the normal balance for which account listed below?

a. Common Stock

b. Revenue

c. Accounts Payable

d. Dividends

103. The classification and normal balance of the Dividends account is

a. revenue with a credit balance.

b. an expense with a debit balance.

c. a liability with a credit balance.

d. stockholders’ equity with a debit balance.

104. Which of the following describes the classification and normal balance of the Retained Earnings account?

a. Asset, debit

b. Stockholders’ equity, credit

c. Revenues, credit

d. Expense, debit

105. Which of the following describes the classification and normal balance of the Unearned Rent Revenue account?

a. Asset, debit

b. Liability, credit

c. Revenues, credit

d. Expense, debit

106. A revenue account

a. is increased by debits.

b. is decreased by credits.

c. has a normal balance of a debit.

d. is increased by credits.

107. Which one of the following represents the expanded basic accounting equation?

a. Assets = Liabilities + Common Stock + Dividends – Revenue – Expenses

b. Assets + Dividends + Expenses = Liabilities + Common Stock + Revenues

c. Assets – Liabilities – Dividends = Common Stock + Revenues – Expenses

d. Assets = Revenues + Expenses – Liabilities

108. Which accounts normally have debit balances?

a. Assets, expenses, and revenues

b. Assets, expense, and retained earnings

c. Assets, liabilities, and dividends

d. Assets, expenses, and dividends

109. Which accounts normally have credit balances?

a. Revenues, liabilities, and dividends

b. Revenues, liabilities, and assets

c. Revenues, liabilities, and retained earnings

d. Revenues, liabilities, and expenses

110. Which of the following correctly identifies normal balances of accounts?

a. Assets Debit

Liabilities Credit

Common Stock Credit

Revenues Debit

Expenses Credit

b. Assets Debit

Liabilities Credit

Common Stock Credit

Revenues Credit

Expenses Credit

c. Assets Credit

Liabilities Debit

Common Stock Debit

Revenues Credit

Expenses Debit

d. Assets Debit

Liabilities Credit

Common Stock Credit

Revenues Credit

Expenses Debit

111. A credit will increase ________, but decrease ________.

1. accounts receivable; accounts payable
2. accounts receivable; expenses
3. accounts payable; common stock
4. common stock; prepaid insurance

112. The best interpretation of the word “credit” is the

a. offset side of an account.

b. increase side of an account.

c. right side of an account.

d. decrease side of an account.

113. In recording an accounting transaction in a double-entry system,

a. the number of debit accounts must equal the number of credit accounts.

b. there must always be entries made on both sides of the accounting equation.

c. the amount of the debits must equal the amount of the credits.

d. there must only be two accounts affected by any transaction.

114. A debit is not the normal balance for which account listed below?

a. Dividends

b. Cash

c. Accounts Receivable

d. Service Revenue

115. Suppose that an accountant for Tesla Inc. has debited an asset account for $1,000 and credited a liability account for $500. What can be done to complete the recording of the transaction?

a. Nothing further must be done.

b. Debit a stockholders’ equity account for $500.

c. Debit another asset account for $500.

d. Credit a different asset account for $500.

116. Suppose that an accountant for Ralph Lauren Inc. has debited an asset account for $800 and credited a liability account for $700. Which of the following would be an incorrect way to complete the recording of the transaction?

a. Credit an asset account for $100.

b. Credit another liability account for $100.

c. Credit a stockholders’ equity account for $100.

d. Debit a stockholders’ equity account for $100.

117. An accountant has debited an asset account for $900 and credited a liability account for $600. What can be done to complete the recording of the transaction?

a Debit a stockholders’ equity account for $300.

b. Debit another asset account for $300.

c. Credit a different asset account for $300.

d. Nothing further must be done.

118. Which of the following accounts is increased with a debit?

a. Dividends

b. Service Revenue

c. Interest Payable

d. Common Stock

119. Which of the following accounts is increased with a credit?

a. Supplies Expense

b. Supplies

c. Sales Revenue

d. Dividends

120. Which pair of accounts follows the rules of debit and credit in relation to increases and decreases in the same manner?

a. Dividends Payable and Rent Expense

b. Utilities Expense and Notes Payable

c. Prepaid Insurance and Advertising Expense

d. Service Revenue and Equipment

121. Which of the following accounts follows the rules of debit and credit in relation to increases and decreases in the opposite manner?

a. Prepaid Insurance and Dividends

b. Dividends and Interest Revenue

c. Interest Payable and Common Stock

d. Advertising Expense and Land

122. Which of the following is not true of the terms debit and credit?

a. They can be abbreviated as Dr. and Cr.

b. They can be interpreted to mean increase and decrease.

c. They can be used to describe the balance of an account.

d. They can be interpreted to mean left and right.

123. An account will have a credit balance if the

a. credits exceed the debits.

b. first transaction entered was a credit.

c. debits exceed the credits.

d. last transaction entered was a credit.

124. For the basic accounting equation to stay in balance, each transaction recorded must

a. affect two or less accounts.

b. affect two or more accounts.

c. always affect exactly two accounts.

d. affect the same number of asset and liability accounts.

125. Which of the following statements is true?

a. Debits increase assets and increase liabilities.

b. Credits decrease assets and decrease liabilities.

c. Credits decrease assets and increase liabilities.

d. Debits increase liabilities and decrease assets.

126. Which pair of the listed accounts follows the rules of debits and credits in relation to increases and decreases in the opposite manner?

a. Salaries and Wages Expense and Notes Payable

b. Common Stock and Unearned Rent Revenue

c. Prepaid Rent and Advertising Expense

d. Service Revenue and Notes Payable

127. When Samsung receives money in advance of performing a service, it

a. debits Cash and credits Unearned Service Revenue.

b. debits Unearned Service Revenue and credits Accounts Payable

c. debits Cash and credits Prepaid Insurance.

d. debits Cash and credits Accounts Receivable.

128. When Samsung performs a service but has not yet received payment, it

a. debits Service Revenue and credits Accounts Receivable.

b. debits Accounts Receivable and credits Service Revenue.

c. debits Service Revenue and credits Accounts Payable.

d. makes no entry until cash is received.

129. Assets normally show

a. credit balances.

b. debit balances.

c. debit and credit balances.

d. debit or credit balances.

130. An awareness of the normal balances of accounts would help you spot which of the following as an error in recording?

a. A debit balance in the Dividends account

b. A credit balance in an expense account

c. A credit balance in a liabilities account

d. A credit balance in a revenue account

131. If a company has overdrawn its bank balance, then

a. its Cash account will show a debit balance.

b. its Cash account will show a credit balance.

c. the Cash account debits will exceed the cash account credits.

d. it cannot be detected by observing the balance of the Cash account.

132. Which account below is not a subdivision of stockholders’ equity?

a. Dividends

b. Revenues

c. Expenses

d. Liabilities

133. When a corporation distributes a dividend, the

a. most common form of distribution is a cash dividend.

b. Dividends account will be increased with a credit.

c. Retained Earnings account will be directly increased with a debit.

d. Dividends account will be decreased with a debit.

134. The Dividends account

a. appears on the income statement along with the expenses of the business.

b. must show transactions every accounting period.

c. is increased with debits and decreased with credits.

d. is not a proper subdivision of stockholders’ equity.

135. Amazon’s revenue account

a. is increased with a debit.

b. is decreased with a credit.

c. is increased with a credit.

d. has a normal balance of a debit.

136. Which of the following statements is not true?

a. Expenses increase stockholders’ equity.

b. Expenses have normal debit balances.

c. Expenses decrease stockholders’ equity.

d. Expenses are a negative factor in the computation of net income.

137. A credit to a liability account

a. indicates an increase in the amount owed to creditors.

b. indicates a decrease in the amount owed to creditors.

c. is an error.

d. must be accompanied by a debit to an asset account.

138. In the first month of operations, the total of the debit entries to the Cash account amounted to $7,000 and the total of the credit entries to the Cash account amounted to $4,000. At the end of the month, the Cash account has a

a. $4,000 credit balance.

b. $7,000 debit balance.

c. $3,000 debit balance.

d. $3,000 credit balance.

139. The Cash account balance of Acme Enterprises at July 1 is $500 (normal). The total of the debit entries to the Cash account amounted to $1,500 and the total of the credit entries to the Cash account amounted to $1,500 during July. At the end of the month, the Cash account has a

a. $1,500 credit balance.

b. $500 debit balance.

c. $2,000 debit balance.

d. $500 credit balance.

140. At May 1, A1 Manufacturing Supply Inc. reported a Cash account balance of $1,000 (normal). During the month, the total of the debit entries to the Cash account amounted to $2,000 and the total of the credit entries to the Cash account amounted to $1,800. At the end of May, A1’s Cash account has a

a. $1,800 credit balance.

b. $3,000 debit balance.

c. $1,200 debit balance.

d. $1,800 credit balance.

141. If the Cash account has a credit balance, which of the following statements is true?

a. This is the normal balance for cash.

b. An error has occurred and must be corrected before financial statements can be prepared.

c. The account needs to be analyzed to determine the reason for the credit balance.

d. Debit postings exceed the credit postings for the accounting period.

142. Which statement is incorrect?

a. Dividends represent a distribution by a corporation to its stockholders.

b. Dividends are shown on the income statement.

c. Dividends reduce stockholders’ equity thus the Dividends account increases on the left side.

d. The Dividends account has a normal debit balance.

143. Why are expenses increased with a debit?

a. They are always paid by cash, which is credited. Thus expenses are debited.

b. They decrease stockholders’ equity thus they are increased with a debit.

c. They have the same rules of debits and credits as the retained earnings account.

d. None of the statements are correct.

144. During January 2025, its first month of operation, A1 Enterprises earned net income of $6,800 and paid dividends to the owners of $2,000. At January 31, the amount reported for ending retained earnings on the retained earnings statement would be

a. $0.

b. $6,800.

c. $4,800.

d. $2,000.

145. On June 1, 2025, Ace Supply Inc. reported a debit cash balance of $42,000. During June, Ace made deposits of $16,000 and made disbursements totaling $48,000. What is the cash balance at the end of June?

a. $10,000 credit balance

b. $58,000 debit balance

c. $10,000 debit balance

d. $6,000 credit balance

146. At January 1, 2025, Acme Industries reported Retained Earnings of $350,000. During 2025, Acme had a net loss of $75,000 and paid dividends to the stockholders of $50,000. At December 31, 2025, the amount reported for ending retained earnings on the retained earnings statement would be

a. $350,000.

b. $300,000.

c. $275,000.

d. $225,000.

147. Suppose that during January 2025, Old Navy paid a cash dividend of $2,000,000. This transaction

a. reduces stockholders' equity by $2,000,000.

b. increases stockholders' equity by $2,000,000.

c. reduces net income by $2,000,000.

d. increases expenses by $2,000,000.

148. During February 2025, its first month of operations, the owner of A1 Enterprises invested cash of $100,000. A1 had cash sales of $20,000 and paid expenses of $35,000. Assuming no other transactions impacted the cash account, what is the balance in Cash at February 28, 2025?

a. $15,000 credit

b. $85,000 debit

c. $120,000 debit

d. $65,000 credit

149. Suppose that at September 1, 2025, a Home Depot store reported a cash balance of $140,000. During the month, the store collected cash of $60,000 and made disbursements of $100,000. At September 30, 2025, the cash balance is

a. $40,000 credit.

b. $100,000 credit.

c. $200,000 debit.

d. $100,000 debit.

150. All of the following statements regarding the double-entry system are true except

a. a two-sided effect of each transaction is recorded in appropriate accounts when using the double-entry system.

b. the double-entry system provides a logical method for recording transactions.

c. both sides of the accounting equation must be affected when recording a transaction using the double-entry system.

d. when using the double-entry system, the sum of all debits to the accounts must equal the sum of all credits.

151. Which of the following accounts has a normal debit balance?

a. Accounts Payable

b. Prepaid Rent

c. Retained Earnings

d. Common Stock

152. Which of the following accounts has a normal credit balance?

a. Prepaid Rent

b. Notes Receivable

c. Rent Revenue

d. Rent Expense

153. During 2025, its first year of operations, Acme Supply Co. had revenues of $130,000 and expenses of $66,000. The business paid cash dividends of $36,000. What is the amount reported for ending retained earnings on the December 31, 2025, retained earnings statement?

a. $0

b. $36,000

c. $28,000

d. $64,000

154. At February 1, 2025, the balance in a company’s supplies account was $3,500. During February, the company purchased supplies of $3,000 and used supplies of $4,000. At the end of February, the balance in the Supplies account should be

a. $3,500 debit.

b. $4,500 credit.

c. $10,500 debit.

d. $2,500 debit.

155. At December 1, 2025, a company's Accounts Receivable balance was $16,800. During December, the company had credit sales of $45,000 and collected accounts receivable of $36,000. At December 31, 2025, the Accounts Receivable balance is

a. $16,800 debit

b. $25,800 debit

c. $61,800 debit

d. $25,800 credit

156. At October 1, 2025, a company had an Accounts Payable balance of $140,000. During the month, the company made purchases on account of $100,000 and made payments on account of $160,000. At October 31, 2025, the Accounts Payable balance is

a. $140,000 debit

b. $20,000 credit

c. $80,000 credit

d. $160,000 credit

157. At September 1, 2025, a company reported Retained Earnings of $423,000. During the month, the company generated revenues of $60,000, incurred expenses of $36,000, purchased equipment for $15,000 and paid dividends of $6,000. What is the amount reported for ending retained earnings on the September 30, 2025, retained earnings statement?

a. $423,000

b. $24,000

c. $426,000

d. $441,000

158. The first step in the recording process is to

a. prepare financial statements.

b. analyze the transaction in terms of its effect on the accounts.

c. post to a journal.

d. prepare a trial balance.

159. Which of the following is not part of the recording process?

a. Analyzing transactions

b. Preparing a trial balance

c. Entering transactions in a journal

d. Posting journal entries

160. Evidence that would not help with determining the effects of a transaction on the accounts would be a(n)

a. cash register sales tape.

b. bill.

c. advertising brochure.

d. check.

161. After transaction information has been recorded in the journal, it is transferred to the

a. trial balance.

b. income statement.

c. general journal.

d. ledger.

162. The usual sequence of steps in the recording process is to

a. analyze each transaction, enter the transaction in the journal, and transfer the information to the ledger accounts.

b. analyze each transaction, enter the transaction in the ledger, and transfer the information to the journal.

c. analyze each transaction, enter the transaction in the book of accounts, and transfer the information to the journal.

d. analyze each transaction, enter the transaction in the book of original entry, and transfer the information to the journal.

163. The final step in the recording process is to transfer the journal information to the

a. trial balance.

b. financial statements.

c. ledger.

d. file cabinets.

164. The recording process occurs

a. once a year.

b. once a month.

c. repeatedly during the accounting period.

d. infrequently in a manual accounting system.

165. Which of the following is not an example of a source document that provides evidence of a transaction?

a. A cancelled check

b. A sales slip

c. A trial balance

d. A cash register tape

166. All of the following are significant contributions that the journal makes to the recording process except the journal

a. discloses the complete effect of a transaction in one place.

b. helps prevent or locate errors because debits and credits can be readily compared.

c. keeps complete information about changes in a specific account balance in one place.

d. provides a chronological record of transactions.

167. A journal provides

a. the balances for each account.

b. information about a transaction in several different places.

c. a list of all accounts used in the business.

d. a chronological record of transactions.

168. The basic format of a journal would not include a(n)

a. brief explanation.

b. account title column.

c. T-account.

d. date column.

169. Transactions in a journal are initially recorded in

a. account number order.

b. dollar amount order.

c. alphabetical order.

d. chronological order.

170. A journal is not useful for

a. disclosing in one place the complete effect of a transaction.

b. preparing financial statements.

c. providing a record of transactions.

d. locating and preventing errors.

171. A complete journal entry does not show

a. the date of the transaction.

b. the new balance in the accounts affected by the transaction.

c. a brief explanation of the transaction.

d. the accounts and amounts to be debited and credited.

172. The term referring to entering transaction data in the journal is

a. chronicling.

b. listing.

c. posting.

d. journalizing.

173. The basic form of a journal entry has the

a. debit account entered first and indented.

b. credit account entered first and indented.

c. debit account entered first at the extreme left margin.

d. credit account entered first at the extreme left margin.

174. Which of the following journal entries is recorded correctly and in the basic format?

a. Salaries and Wages Expense 550

Cash 1,500

Advertising Expense 950

b. Salaries and Wages Expense 550

Advertising Expense 950

Cash 1,600

c. Cash 1,500

Salaries and Wages Expense 550

Advertising Expense 950

d. Salaries and Wages Expense 550

Advertising Expense 950

Cash 1,500

175. If a company has performed a service but has not yet received payment, the journal entry to record the transaction

a. debits accounts receivable and credits service revenue.

b. debits service revenue and credits accounts receivable.

c. debits service revenue and credits accounts payable.

d. makes no entry until the cash is received.

176. If a company receives money in advance of performing a service, the journal entry to record the transaction

a. debits cash and credits prepaid services.

b. debits unearned fees and credits accounts payable.

c. debits cash and credits unearned service revenue.

d. debits cash and credits accounts receivable.

177. When a company receives a utility bill but will not pay it right away, it should make a journal entry that

a. debits Utilities Expense and credits Accounts Receivable.

b. debits Utilities Expense and credits Accounts Payable.

c. debits Accounts Payable and credits Utilities Expense.

d. make no entry until the bill is paid.

178. When a service has been performed but no cash has been received, which of the following statements is true?

a. No journal entry is made.

b. The entry includes a debit to accounts payable.

c. The entry includes a credit to unearned revenue.

d. The entry includes a debit to accounts receivable.

179. Equipment costing $20,000 is purchased by paying $5,000 cash and signing a note payable for the remainder. The journal entry to record this transaction should include a

a. credit to Notes Payable.

b. debit to Cash.

c. credit to Notes Receivable.

d. credit to Equipment.

180. Equipment costing $20,000 is purchased by paying $5,000 cash and signing a note payable for the remainder. The journal entry to record this transaction should include a

a. debit to Notes Payable.

b. credit to Cash.

c. credit to Notes Receivable.

d. credit to Equipment.

181. Equipment with a cost of $200,000 is purchased by paying $50,000 cash and signing a note for the remainder. The journal entry to record this transaction should include a

a. credit to Notes Payable for $200,000.

b. debit to Cash for $50,000.

c. credit to Notes Receivable for $150,000.

d. debit to Equipment for $200,000.

182. Equipment costing $300,000 is purchased by paying $80,000 cash and signing a note for the remainder. The journal entry to record this transaction should include a

a. debit to Notes Payable for $120,000.

b. credit to Cash for $80,000.

c. debit to Notes Receivable for $120,000.

d. credit to Equipment for $300,000.

183. Which of the following journal entries is recorded correctly and in the basic format?

a. Equipment 1,550

Cash 550

Notes Payable 1,000

b. Equipment 1,550

Notes Payable 1,000

Cash 550

c. Cash 550

Equipment 1,550

Notes Payable 1,000

d. Equipment 1,550

Notes Payable 1,000

Cash 550

184. Which of the following journal entries is recorded correctly and in the basic format?

a. Supplies 700

Cash 200

Accounts Payable 500

b. Supplies 700

Accounts Payable 500

Cash 200

c. Cash 200

Supplies 700

Accounts Payable 500

d. Supplies 700

Accounts Payable 500

Cash 200

185. Which one of the following is incorrect concerning the journal?

a. It provides a chronological record of transactions.

b. It helps prevent or locate errors.

c. It contains a record of each account maintained by the company.

d. It discloses in one place the complete effect of a transaction.

186. A journal

a. contains only asset and liability accounts.

b. is a collection of the entire group of accounts maintained by a company.

c. provides a chronological record of transactions.

d. should show accounts in alphabetical order.

187. Typically, the chart of accounts begins with

a. asset accounts.

b. liability accounts.

c. revenue accounts.

d. expense accounts.

188. The purpose of the ledger is to

a. record chronologically the day’s transactions.

b. keep a record of documentation to support each transaction.

c. keep in one place all information about changes in specific account balances.

d. make sure that all assets, liabilities, etc., have normal balances at all times.

189. Which of the following accounts would likely be listed before the others in a chart of accounts?

a. Accumulated Depreciation—Buildings

b. Insurance Expense

c. Dividends

d. Notes Payable

190. Which of the following accounts would likely be listed last in a chart of accounts?

a. Buildings

b. Insurance Expense

c. Dividends

d. Notes Payable

191. The Unearned Service Revenue account is classified as a(n)

a. asset.

b. revenue.

c. expense.

d. liability.

192. A ledger

a. contains only asset and liability accounts.

b. is a collection of the entire group of accounts and their respective transaction amounts.

c. provides a chronological record of transactions.

d. should show accounts in alphabetical order.

193. Which of the following accounts is an asset?

a. Service Revenue

b. Notes Payable

c. Supplies Expense

d. Prepaid Rent

194. A person needing to determine the balance of a particular account should refer to the

a. ledger.

b. source document.

c. chart of accounts.

d. journal.

195. The usual ordering of accounts in the general ledger is

a. assets, liabilities, stockholders’ equity, revenues, and expenses.

b. assets, liabilities, stockholders’ equity, expenses, and revenues.

c. liabilities, assets, stockholders’ equity, revenues, and expenses.

d. stockholders’ equity, assets, liabilities, expenses, and revenues.

196. Management could determine the amounts due from customers by examining which of the following ledger accounts?

a. Service Revenue

b. Accounts Payable

c. Accounts Receivable

d. Supplies

197. The ledger accounts are typically arranged in

a. chronological order.

b. alphabetical order.

c. accounting equation order.

d. order of appearance in the journal.

198. Which of the following statements is incorrect?

a. A chart of accounts is a listing of the accounts used by a business.

b. New accounts can be added to the chart of accounts.

c. Stockholders’ Equity is an account that is included in the chart of accounts.

d. Account titles for the chart of accounts are used in general journal entries.

199. The procedure of transferring journal entries to the ledger accounts is called

a. journalizing.

b. analyzing.

c. reporting.

d. posting.

200. A chart of accounts for a business firm

a. is a graph.

b. indicates the amount of profit or loss for the period.

c. lists the accounts used in the ledger.

d. shows the balance of each account in the general ledger.

201. Posting

a. should be performed in account number order.

b. accumulates the effects of journalized transactions in the individual accounts.

c. involves transferring all debits and credits on a journal page to the trial balance.

d. is accomplished by examining ledger accounts and seeing which ones need updating.

202. The principal purpose of posting is to

a. help identify errors made in the journal.

b. accumulate the effects of journalized transactions in the individual accounts.

c. enter transactions directly into the ledger.

d. help determine if the financial statements are ready to be prepared.

203. Posting is performed by transferring information from the

a. source documents to the journal.

b. ledger to the journal.

c. source documents to the ledger.

d. journal to the ledger.

204. Posting

a. transfers journal entries to ledger accounts.

b. transfers ledger transaction data to the journal.

c. involves transferring all debits and credits on a journal page to the trial balance.

d. provides a chronological record of transactions.

205. NYC Nail Bar is a nail salon that caters to college students. The accountant transferred journal entries to the ledger accounts at the end of the month. What is the name of this process?

a. Ledgering

b. Closing

c. Recording

d. Posting

206. Suppose that on January 14, Ralph Lauren Company purchased supplies of $500 on account. The entry to record the purchase will include

a. a debit to Supplies and a credit to Accounts Payable.

b. a debit to Supplies Expense and a credit to Accounts Receivable.

c. a debit to Supplies and a credit to Cash.

d. a debit to Accounts Receivable and a credit to Supplies.

207. On July 7, 2025, Acme Enterprises received cash of $1,400 for services rendered. The entry to record this transaction will include

a. a debit to Service Revenue of $1,400.

b. a credit to Accounts Receivable of $1,400.

c. a debit to Cash of $1,400.

d. a credit to Accounts Payable of $1,400.

208. On January 4, Acme Enterprises paid its social media consultant $500 for the current month’s services. The entry to record the payment will include

a. a debit to Advertising Expense and a credit to Cash.

b. a debit to Prepaid Advertising and a credit to Accounts Payable.

c. a debit to Accounts Payable and a credit to Cash.

d. a debit to Accounts Receivable and a credit to Cash.

209. On July 17, 2025, Acme Enterprises received cash of $1,400 for services to be performed in August. The entry to record this transaction will include

a. a debit to Cash and a credit to Service Revenue.

b. a credit to Accounts Payable and a credit to Cash.

c. a debit to Cash and a credit to Unearned Service Revenue.

d. a debit to Cash and a credit to Accounts Payable.

210. Acme Enterprises purchased equipment by signing a note payable for $50,000. The entry to record the purchase will include

a. a debit to Equipment and credits to Cash and Accounts Payable.

b. a debit to Equipment Expense and a credit to Notes Payable.

c. a debit to Equipment and a credit to Notes Payable.

d. a debit to Notes Receivable and a credit to Cash.

211. On May 7, 2025, Acme Enterprises paid the current month’s insurance premium. The entry to record this transaction will include

a. a debit to Insurance Expense and a credit to Cash.

b. a debit to Prepaid Insurance and a credit to Accounts Payable.

c. a debit to Cash and a credit to Prepaid Insurance.

d. a debit to Insurance Expense and a credit to Accounts Payable.

212. An accounting record that includes a list of accounts and their balances at a given time is called a

a. trial balance.

b. general journal.

c. general ledger.

d. chart of accounts.

213. A list of accounts and their respective debit and credit balances at a given time is called a(n)

a. journal.

b. posting.

c. trial balance.

d. income statement.

214. The primary purpose of the trial balance is to

a. disclose the complete effect of a transaction in one place.

b. make sure a journal entry is not posted twice.

c. transfer journal entries to the ledger accounts.

d. prove the equality of the debit and credit amounts after posting.

215. The accountant for Ace Stores, Inc. should have recorded the following correct entry:

Jan. 15 Notes Receivable 243

Equipment 243

Instead, he misunderstood the transaction and recorded an incorrect entry. Which of the following wrong entries pertaining to this transaction could have been detected as erroneous when using a trial balance?

a. Jan 15 Notes Payable 243

Cash 243

b. Jan 15 Notes Receivable 234

Equipment 234

c. Jan 15 Equipment 243

Notes Receivable 243

d. Jan 15 Notes Receivable 243

Equipment 234

216. If the sum of the debit column equals the sum of the credit column in a trial balance, it indicates

a. no errors have been made.

b. no errors can be discovered.

c. that all accounts reflect correct balances.

d. the mathematical equality of the accounting equation.

217. A trial balance is a listing of

a. transactions in a journal.

b. the chart of accounts.

c. general ledger accounts and balances.

d. the totals from the journal pages.

218. Customarily, a trial balance is prepared

a. at the end of each day.

b. after each journal entry is posted.

c. at the end of an accounting period.

d. only at the inception of the business.

219. A trial balance would only help in detecting which one of the following errors?

a. A transaction that is not journalized

b. A journal entry that is posted twice

c. Offsetting errors made in recording the transaction

d. A transposition error when transferring the debit side of a journal entry to the ledger

220. Ace Company’s trial balance at the end of its first month of operations reported the following accounts and amounts with normal balances:

Cash $16,000

Prepaid insurance 500

Accounts receivable 2,500

Accounts payable 2,000

Notes payable 3,000

Common stock 5,000

Dividends 500

Revenues 22,000

Expenses 12,500

Total credits on Ace Company’s trial balance are

a. $32,500.

b. $32,000.

c. $31,500.

d. $33,000.

221. A trial balance proves

a. the mathematical equality of debits and credits after the posting process.

b. the ledger is posted correctly.

c. that all transactions have been recorded correctly.

d. that all transactions have been posted.

222. A trial balance

a. is a list of accounts with their balances at a given point in time.

b. will not balance if a correct journal entry is posted twice.

c. will tell you if a transaction is not posted at all.

d. proves the factual accuracy of journalized transactions.

223. Acme Company’s trial balance reported the following normal balances at the end of its first year:

Cash $19,000

Prepaid insurance 700

Accounts receivable 3,500

Accounts payable 2,800

Notes payable 4,200

Common stock 5,400

Dividends 700

Revenues 29,000

Expenses 17,500

What amount did Acme Company’s trial balance show as total credits?

a. $42,100

b. $41,400

c. $40,700

d. $42,800

224. A trial balance will not balance if

a. a correcting journal entry is posted twice.

b. a $50 cash dividend is debited to dividends for $500 and credited to cash for $50.

c. a $300 payment on accounts payable is debited to accounts payable for $30 and credited to cash for $30.

d. a transaction is not posted at all.

225. Which of the following errors, each considered individually, would cause the trial balance to be out of balance?

a. A payment of $148 to a creditor was posted as a debit to Accounts Payable and a debit of $148 to Cash.

b. Cash of $530 received from a customer on account was posted as a debit of $350 to Cash and as a credit of $350 to Accounts Payable.

c. A payment of $59 for supplies was posted as a debit of $95 to Supplies and a credit of $95 to Cash.

d. A transaction was not posted.

226. A trial balance will balance even if

a. a journal entry to record the purchase of equipment for cash of $45,000 is not posted.

b. a $10,000 cash dividend is debited to dividends for $10,000 and credited to cash for $1,000.

c. a $300 collection on accounts receivable is credited to accounts receivable for $300 without a corresponding debit.

d. a purchase of supplies for $575 on account is debited to supplies for $575 and credited to accounts payable for $557.

227. Which one of these errors would still allow a trial balance to balance?

a. a $500 payment of advertising expense is debited to advertising for $500 and credited to cash for $50.

b. a journal entry to record the purchase of supplies for cash of $700 is not posted.

c. a $225 collection on accounts receivable is credited to accounts receivable for $225 without a corresponding debit.

d. a purchase of equipment for $575 on account is debited to supplies for $575 and credited to accounts payable for $557.

228. The ledger account balances for A1 Construction Corporation at December 31, 2025 are as follows:

Cash $ 300

Accounts Receivable 522

Prepaid Insurance 82

Supplies 180

Equipment 4,000

Accumulated Depreciation – Equipment 600

Accounts Payable 384

Common Stock 1,200

Retained Earnings 1,400

Service Revenue 3,000

Salaries and Wages Expense 1,000

Rent Expense 500

If all accounts have normal balances, what would be total debits on the trial balance at December 31, 2025?

a. $6,584.

b. $6,556.

c. $6,940.

d. $7,200.

229. A1 Service Corporation reports the following ledger account balances at June 30, 2025:

Cash $1,662

Accounts receivable 2,098

Inventory 3,124

Prepaid rent 86

Equipment 300

Accumulated depreciation – equipment 52

Accounts payable 82

Unearned rent revenue 122

Common stock 206

Retained earnings 6,610

Service revenue 368

Interest revenue 56

Salaries and wages expense 160

Insurance expense 66

Assuming that all of the accounts have normal balances, what are total credits on the company’s trial balance at June 30, 2025?

a. $7,440.

b. $7,496.

c. $7,444.

d. $7,526.

1. Received cash for services rendered.

2. Purchased supplies on account.

3. Paid employees' salaries.

4. Dividends paid in cash.

5. Expenses paid in cash.

Ex. 244

Suppose that Target Company had the following transactions during May. List the number of the transaction and then describe the effect of each transaction on assets, liabilities, and stockholders’ equity.

Sample: Made initial cash investment in the business.

1. Paid monthly utility bill.

2. Purchased new display case for cash.

3. Paid cash for repair work on the company security system.

4. Billed customers for services performed.

5. Received cash from customers billed in the previous transaction (transaction 4).

6. Dividends paid to owners.

7. Incurred advertising expenses on account.

8. Paid monthly rent.

9. Received cash from customers when service was rendered.

Ex. 245

Suppose that these are selected accounts from the ledger of Walmart Corporation appear below. For each account, indicate the following:

1. In the first column at the right, indicate the nature of each account, using the following abbreviations:

Asset - A Liability - L None of the above - N

Expense - E Revenues - R

(b) In the second column, indicate the normal balance by inserting Dr. or Cr.

Type of Normal

Account Balance

1. Supplies ………………………………..

2. Notes Payable ………………………….

3. Service Revenue……………………….

4. Dividends……………………………….

5. Accounts Payable……………………..

6. Salaries and Wages Expense…………

7. Common Stock…………………………

8. Accounts Receivable…………………..

9. Equipment……………………………..

10. Notes Receivable………………………

Ex. 246

Analyze the transactions of a business organized as a corporation described below and indicate their effect on the basic accounting equation. Use a plus sign (+) to indicate an increase and a minus sign (–) to indicate a decrease.

Stockholders’

Assets = Liabilities + Equity

1. Received cash for services rendered.

2. Purchased office equipment on account.

3. Paid employees' salaries.

4. Received cash from customer in payment

on account.

5. Paid telephone bill for the month.

6. Paid for office equipment purchased in

transaction 2.

7. Purchased office supplies on account.

8. Dividends were paid.

9. Obtained a loan from the bank.

10. Billed customers for services rendered.

Ex. 247

Wing Xi decides to open a pizza parlor near the local college campus that will operate as a corporation. Analyze the following transactions for the month of June in terms of their effect on the basic accounting equation. Record each transaction by increasing (+) or decreasing (–) the dollar amount of each item affected. Indicate the new balance of each item after a transaction is recorded. It is not necessary to identify the cause of changes in stockholders’ equity.

Transactions

(1) Xi invests $25,000 cash in exchange for common stock on June 1.

(2) Purchased equipment for $4,000 paying $2,000 in cash and the remainder due in 30 days.

(3) Purchased supplies for $1,200 cash.

(4) Received a bill from Campus News for $200 for advertising in the campus newspaper.

(5) Cash receipts from customers for pizza sales amounted to $1,500.

(6) Paid salaries of $200 to student workers.

(7) Billed the Tiger Football Team $300 for pizzas ordered.

(8) Paid $200 to Campus News for advertising that was previously billed in Transaction 4.

(9) Xi paid dividends of $1,200.

(10) Incurred utility expenses for the month on account, $100.

Trans- Accounts Accounts Common Retained

action Cash + Receivable + Supplies + Equipment = Payable + Stock + Earnings

(1)

Balance

(2)

Balance

(3)

Balance

(4)

Balance

(5)

Balance

(6)

Balance

(7)

Balance

(8)

Balance

(9)

Balance

(10)

Totals

Ex. 248

Analyze the following transactions in terms of their effect on the basic accounting equation. Record each transaction by increasing (+) or decreasing (–) the dollar amount of each item affected. Indicate the new balance of each item after a transaction is recorded.

1. Issued stock to investors for $20,000 in cash.
2. Purchased supplies on credit for $700.
3. Billed customers $1,000 for services provided.
4. Paid for supplies purchased in transaction 2.
5. Paid dividends of $300 cash to stockholders.
6. Received half from customers billed in transaction 3.
7. Received and paid utility bill for $100.

Trans- Accounts Accounts Common Retained

action Cash + Receivable + Supplies = Payable + Stock + Earnings

(1)

Balance

(2)

Balance

(3)

Balance

(4)

Balance

(5)

Balance

(6)

Balance

(7)

Totals

Ex. 249

A tabular analysis of the transactions made during August 2025 by Acme Company during its first month of operations is shown below. Each increase and decrease in stockholders' equity is explained.

Instructions

(a) Determine how much stockholders' equity increased for the month.

(b) Compute the net income for the month.

Ex. 250

The tabular analysis of transactions for A1 Service Company for the month of August, 2025 is presented below. Assume that the beginning balance of Retained Earnings is $0.

Instructions

Prepare a retained earnings statement for August and a classified balance sheet at August 31, 2025.

Ex. 251

The accounts in the ledger of A1 Delivery Service contain the following balances on July 31, 2025.

Instructions

Prepare an income statement and a retained earnings statement for the month of July 2025, and a classified balance sheet for July 31, 2025.

Ex. 252

Selected transactions for Acme Corporation during its first month in business are presented below:

Sept. 1 Issued common stock in exchange for $30,000 cash received from investors.

5 Purchased equipment for $20,000, paying $2,000 in cash and the balance on account.

25 Paid $6,000 cash on balance owed for equipment.

30 Paid $1,000 cash dividend.

Acme's chart of accounts shows: Cash, Equipment, Accounts Payable, Common Stock, and Dividends.

Instructions

(a) Prepare a tabular analysis of the September transactions. The column headings should be: Cash + Equipment = Accounts Payable + Stockholders' Equity. For transactions affecting stockholders' equity, provide explanations in the right margin.

(b) Journalize the transactions. Do not provide explanations.

(c) Post the transactions to T-accounts.

Ex. 253

For each item below, indicate whether a debit or credit applies.

1. Decrease in Notes Payable ____ __

2. Increase in Dividends ____ __

3. Increase in Common Stock ____ __

4. Increase in Unearned Rent Revenue ____ __

5. Decrease in Interest Payable ____ __

6. Increase in Prepaid Insurance ____ __

7. Decrease in Salaries and Wages Expense ____ __

8. Decrease in Supplies ____ __

9. Increase in Revenues ____ __

10. Decrease in Accounts Receivable ____ __

Ex. 254

For each item below, indicate whether a debit or credit applies.

1. Decrease in Prepaid Rent ____ __

2. Increase in Service Revenue ____ __

3. Decrease in Unearned Rent Revenue ____ __

4. Decrease in Equipment ____ __

5. Decrease in Interest Receivable ____ __

6. Increase in Depreciation Expense ____ __

7. Decrease in Accounts Payable ____ __

8. Increase in Supplies ____ __

9. Increase in Salaries and Wages Expense ____ __

10. Increase in Accounts Receivable ____ __

Ex. 255

The chart of accounts used by A1 Printing Company is listed below. You are to indicate the proper accounts to be debited and credited for the following transactions by writing the account number(s) in the appropriate boxes.

CHART OF ACCOUNTS

1 Cash 8 Common Stock

2 Accounts Receivable 9 Retained Earnings

3 Supplies 10 Dividends

4 Equipment 11 Service Revenue

5 Accounts Payable 12 Advertising Expense

6 Notes Payable 13 Rent Expense

7 Unearned Service Revenue

Number(s) Number(s)

of account(s) of account(s)

debited credited

1. Stockholders invest $90,000 cash to start the business.

2. Purchased three digital copy machines for $400,000, paying $100,000 cash and signing a 5-year, 6% note for the remainder.

3. Purchased $5,000 paper supplies on credit.

4. Cash received for photocopy services amounted to $7,000.

5. Paid $500 cash for social media consulting .

6. Paid $800 on account for paper supplies purchased in transaction 3.

7. Dividends of $1,500 were paid to stockholders.

8. Paid $1,200 cash for rent for the current month.

9. Received $2,000 cash advance from a customer for future copying.

10. Billed a customer for $450 for photocopy services completed.

Ex. 256

Show how the entry in each statement is entered in the ledger by using debit or credit to indicate the increase or decrease in the affected account.

Debit or Credit

1. An increase in Salaries and Wages Expense.

2. An increase in Accounts Payable.

3. An increase in Prepaid Insurance.

4. An increase in Common Stock.

5. An increase in Supplies.

6. An increase in Dividends.

7. An increase in Service Revenue.

8. A decrease in Accounts Receivable.

9. An increase in Rent Expense.

10. A decrease in Equipment.

Ex. 257

For the accounts listed below, indicate if the normal balance of the account is a debit or credit.

Normal Balance

Accounts Debit or Credit

1. Service Revenue

2. Rent Expense

3. Accounts Receivable

4. Accounts Payable

5. Common Stock

6. Supplies

7. Insurance Expense

8. Dividends

9. Buildings

10. Notes Payable

Ex. 258

During an accounting period, a business has numerous transactions affecting each of the following accounts. State for each account whether it is likely to have (a) debit entries only, (b) credit entries only, or (c) both debit and credit entries.

(1) Advertising Expense (6) Dividends

(2) Service Revenue (7) Cash

(3) Accounts Payable (8) Salaries and Wages Expense

(4) Accounts Receivable (9) Notes Payable

(5) Common Stock (10) Insurance Expense

Ex. 259

Eight transactions are recorded in the following T-accounts:

Indicate for each debit and each credit: (a) whether an asset, liability, common stock, dividends, revenue, or expense account was affected and (b) whether the account was increased (+) or (–) decreased. Answers should be presented in the following chart form:

Transaction Account Debited Account Credited

No. Type Effect Type Effect

(1) (Example) Asset + Common Stock +

(2)

(3)

(4)

(5)

(6)

(7)

(8)

Ex. 260

For each of the following accounts indicate (a) the type of account (Asset, Liability, Stockholders’ Equity, Revenue, and Expense), (b) the debit and credit effects, and (c) the normal account balance.

Example

0. Cash a. Asset account

b. Debit increases, credit decreases

c. Normal balance - debit

Accounts

1. Accounts Payable 5. Service Revenue

2. Accounts Receivable 6. Insurance Expense

3. Common Stock 7. Notes Payable

4. Dividends 8. Equipment

Ex. 261

Journalize the following business transactions in general journal form. Identify each transaction by number. You may omit explanations of the transactions.

1. Stockholders invest $40,000 in cash in starting a real estate office operating as a corporation.

2. Purchased $500 of supplies on credit.

3. Purchased equipment for $25,000, paying $3,500 in cash and signed a 30-day, $21,500, note payable.

4. Real estate commissions billed to clients amount to $4,000.

5. Paid $700 in cash for the current month's rent.

6. Paid $250 cash on account for office supplies purchased in transaction 2.

7. Received a bill for $800 for advertising for the current month.

8. Paid $2,500 cash for office salaries.

9. Paid $1,200 cash dividends to stockholders.

10. Received a check for $2,000 from a client in payment on account for commissions billed in transaction 4.

Ex. 262

Journalize the following business transactions in general journal form. Identify each transaction by number. You may omit explanations of the transactions.

1. Received $50,000 from stockholders in exchange for the issuance of stock.

2. Purchased equipment for $75,000, paying $15,000 in cash and signing a note payable for the remainder.

3. Paid $3,000 rent for the month.

4. Recorded $12,500 of services provided on account.

5. Paid wages of $9,500.

6. Received $7,000 in cash for services provided.

7. Collected $2,000 from customers as payment on account.

Ex. 263

Transactions for the Ace Company for the month of November are presented below. Journalize each transaction and identify each transaction by number. You may omit journal explanations.

1. Stockholders invested an additional $40,000 cash in the business.

2. Purchased land costing $18,000 for cash.

3. Purchased equipment costing $45,000 for $4,500 cash, with the remainder due in 30 days..

4. Purchased supplies on account for $800.

5. Paid $3,000 for a one-year insurance policy.

6. Received $2,000 cash for services performed.

7. Received $5,000 for services previously performed on account.

8. Paid wages to employees for $2,500.

9. Paid dividends to stockholders of $400.

Ex. 264

This information relates to Acme Real Estate Agency for the month of October, 2025.

Oct. 1 Stockholders invested $35,000 in exchange for common stock of the corporation.

2 An administrative assistant is hired at an annual salary of $36,000.

3 Equipment is purchased for $3,500 on account.

6 A house and lot are sold for M. Springer; commissions due from Springer are $10,000 (not paid by Springer at this time).

10 Cash is received in the amount of $140 as commission for acting as rental agent renting an apartment.

27 Cash of $700 is paid on account for the equipment purchased on October 3.

30 The administrative assistant is paid a $3,000 in salary for October.

Instructions

(a) Journalize the transactions. Do not provide explanations.

(b) Post the transactions to T accounts.

Ex. 265

These T accounts summarize the ledger of Acme Garden Supply Company Inc. at the end of the first month of operations, April 2025.

Ex. 265 (Cont.)

Instructions

(a) Prepare in the order they occurred the journal entries (including explanations) that resulted in the amounts posted to the accounts.

(b) Prepare a trial balance at April 30, 2025.

Ex. 266

The transactions of the Ace Delivery Service for the month of May, 2025 are recorded in the general journal below. You are to post the journal entries to the accounts in the general ledger. After all entries have been posted, you are to prepare a trial balance on the form provided.

General Journal

Date Account Titles and Explanation Debit Credit

2025

May 1 Cash 25,000

Common Stock 25,000

(Stockholders invested cash in business)

4 Equipment 60,000

Cash 10,000

Notes Payable 50,000

(Paid cash and issued 2-year, 6%, note for

delivery trucks)

8 Rent Expense 1,000

Cash 1,000

(Paid May rent)

15 Prepaid Insurance 1,400

Cash 1,400

(Paid one-year liability insurance)

18 Cash 4,500

Service Revenue 4,500

(Received cash for delivery services)

Ex. 266 (Cont.)

20 Salaries and Wages Expense 500

Cash 500

(Paid salaries for current period)

25 Utilities Expense 100

Accounts Payable 100

(Received a bill for May utilities)

30 Dividends 750

Cash 750

(Paid dividends)

30 Accounts Receivable 1,000

Service Revenue 1,000

(Billed customer for delivery service)

General Ledger

Ex. 266 (Cont.)

Ex. 267

Selected transactions from the journal of Acme Inc. during its first month of operations, August 2025, are presented here.

Ex. 267 (Cont.)

Instructions

(a) Post the transactions to T-accounts.

(b) Prepare a trial balance at August 31, 2025.

Ex. 268

The accounts in the ledger of A1 Limo Service contain the following balances on July 31, 2025. All accounts have normal balances.

Instructions

Prepare a trial balance with the accounts arranged as illustrated in the chapter, and fill in the missing amount for Cash.

Ex. 269

The trial balance of the Ace Service Company shown below does not balance.

ACE SERVICE COMPANY

Trial Balance

June 30, 2025

Debit Credit

Cash $ 5,600

Accounts Receivable 7,600

Supplies 600

Equipment 8,300

Accounts Payable $ 12,766

Common Stock 1,941

Dividends 1,500

Service Revenue 15,200

Salaries and Wages Expense 3,800

Maintenance and Repairs Expense 1,600

Totals $29,000 $29,907

An examination of the ledger and journal reveals the following errors:

1. Each of the above listed accounts has a normal balance per the general ledger.

2. Cash of $350 received from a customer on account was debited to Cash $530 and credited to Accounts Receivable $530.

3. Dividends of $300 paid to stockholders were posted as a credit to Dividends, $300, and a credit to Cash $300.

4. Salaries and Wages Expense of $300 was omitted from the trial balance.

5. The purchase of equipment on account for $700 was recorded as a debit to Maintenance and Repairs Expense and a credit to Accounts Payable for $700.

6. Services were performed on account for a customer, $510, for which Accounts Receivable was debited $510 and Service Revenue was credited $51.

7. A payment on account for $215 was credited to Cash for $215 and credited to Accounts Payable for $251.

Instructions

Prepare a correct trial balance.

Ex. 270

Some of the following errors would cause the debit and credit columns of the trial balance to have unequal totals. For each of the four cases, state whether the error would cause unequal totals in the trial balance. If the error causes unequal totals, indicate the amount of difference between the columns and state whether the debit or credit is larger. Each case is to be considered independently of the others.

1. A payment of $700 to a creditor was recorded by a debit to Accounts Payable of $70 and a credit to Cash of $700.

2. A $340 payment for a printer was recorded by a debit to Equipment of $34 and a credit to Cash for $34.

3. An account receivable in the amount of $2,000 was collected in full. The collection was recorded by a debit to Cash for $2,000 and a debit to Accounts Payable for $2,000.

4. An account payable was paid by issuing a check for $800. The payment was recorded by debiting Accounts Payable $800 and crediting Accounts Receivable $800.

Ex. 271

Some of the following errors would cause the debit and credit columns of the trial balance to have unequal totals. For each of the four cases, state whether the error would cause unequal totals in the trial balance. If the error causes unequal totals, indicate the amount of difference between the columns and state whether the debit or credit is larger. Each case is to be considered independently of the others.

1. A collection on account of $400 was journalized and posted as a debit to Cash $400 and a credit to Service Revenue $400.

2. A $950 purchase of supplies on account was recorded as a debit of $950 to Equipment and a credit of $950 to Accounts Payable.

3. A purchase of equipment for $3,500 on account was not recorded.

4. A $270 receipt on account was recorded as a $720 debit to Cash and a $270 credit to Accounts Receivable.

Ex. 272

The account balances for Ace Electrical Service Company at December 31, 2025 are shown by the following alphabetical list:

Accounts Payable $34,000

Accounts Receivable 16,000

Buildings 120,000

Cash 24,500

Common Stock 167,700

Equipment 79,300

Land 47,000

Notes Payable (due 2029) 95,000

Notes Receivable 9,100

Supplies 800

Instructions

Prepare a trial balance with the accounts arranged in financial statement order. All accounts have normal balances.

Ex. 273

The ledger accounts of Acme Gym at July 31, 2025, its first period of operations, are shown below:

Accounts Payable $ 12,100

Accounts Receivable 1,050

Buildings 55,400

Common Stock 65,100

Cash 9,000

Equipment 45,900

Notes Payable (due 2027) 45,000

Supplies 350

Dividends 10,500

Instructions

Prepare a trial balance with the ledger accounts arranged in the proper financial statement order. Include the appropriate heading. All accounts have normal balances.