CHAPTER 3

THE ACCOUNTING INFORMATION SYSTEM

Summary of Question TYPEs by LEARNING Objective, Level of difficulty, BLOOM’S TAXONOMY, CPA CODES, and AACSB Codes

LOD: E = Easy M = Medium

Bloom’s: C = Comprehension K = Knowledge

CPA: F = Financial Reporting

AACSB: AN = Analytic

Summary of Question TYPEs by LEARNING Objective, Level of difficulty, BLOOM’S TAXONOMY, CPA CODES, and AACSB Codes

(Cont’d)

LOD: E = Easy M = Medium H = Hard

Bloom’s: C = Comprehension K = Knowledge

CPA: F = Financial Reporting

AACSB: AN = Analytic

Summary of Question TYPEs by LEARNING Objective, Level of difficulty, BLOOM’S TAXONOMY, CPA CODES, and AACSB Codes

(Cont’d)

LOD: E = Easy M = Medium H = Hard

Bloom’s: AN = Analysis AP = Application C = Comprehension K = Knowledge

CPA: F = Financial Reporting

AACSB: AN = Analytic

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Note: TF = True/False MC = Multiple Choice Ma = Matching

Ex = Exercise SAE = Short-Answer Essay CP = CPA

CHAPTER LEARNING OBJECTIVES

1. Analyze the effects of transactions on the accounting equation. Each accounting transaction has a dual effect on the accounting equation: assets = liabilities + shareholders’ equity. For example, if an individual asset is increased, there must be a corresponding decrease in another asset, an increase in a specific liability, or an increase in shareholders’ equity.
2. Explain how accounts, debits, and credits are used to record transactions. An account is an individual accounting record of increases and decreases in specific asset, liability, and shareholders’ equity (common shares, retained earnings, revenues, expenses, and dividends declared) accounts. The terms debit and credit are synonymous with left and right. Assets, expenses, and dividends declared are increased by debits and decreased by credits. The normal balance of these accounts is a debit balance (the increase side). Liabilities, common shares, retained earnings, and revenues are increased by credits and decreased by debits. The normal balance of these accounts is a credit balance (the increase side).

3. Journalize transactions in the general journal. The initial record of an accounting transaction is entered in a general journal. The journal discloses in one place the complete effect of a transaction, provides a chronological record of transactions, and helps prevent or locate errors because the debit and credit amounts for each entry can be readily compared.

4. Post transactions to the general ledger. Posting is the process of transferring journal entries from the general journal to the general ledger. This accumulates the effects of the journalized transactions in the individual accounts (T accounts) contained in the general ledger.

5. Prepare a trial balance. A trial balance is a list of general ledger accounts and their balances at a specific time. The main purpose of the trial balance is to prove the mathematical equality of debits and credits after posting. A trial balance also can help uncover errors in journalizing and posting and is useful in preparing financial statements.

TRUE-FALSE STATEMENTS

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

2. Revenue is only recorded when cash is received.

3. Collection of an account receivable will increase total assets.

4. Cash received from a customer in advance of work being performed or goods provided is recorded as revenue.

5. In its simplest form, a T account consists of three parts: (1) its title, (2) a left or credit side and (3) a right or debit side.

6. An individual accounting record for a specific asset, liability or shareholders’ equity item is called an account.

7. A debit increases an account and a credit decreases an account.

8. If a revenue account is credited, this must increase shareholders’ equity.

9. The normal balance of a liability account is a debit.

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

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

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

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

14. The double-entry accounting system records the dual effect of each transaction.

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

16. The normal balance of the Dividends Declared account is a debit.

17. Assets are decreased with a credit.

18. An expense account is a subdivision of the retained earnings account and decreases shareholders’ equity.

19. Revenues are a subdivision of shareholders’ equity.

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

21. The first step in the recording process is entering the transaction into the general journal.

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

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

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

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

26. Entering transactions into the journal is called posting.

27. The account to be credited is entered first in a journal entry.

28. A compound journal entry affects more than two accounts.

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

30. A general ledger should be arranged in financial statement order beginning with the statement of financial position accounts.

31. The chart of accounts is the framework for the accounting database.

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

33. A list of accounts and their account numbers is called the chart of accounts.

34. A trial balance can still balance even if an entry is posted to the wrong account.

35. The main purpose of the trial balance is to check that debits equal credits.

36. If a journal entry is posted twice, this will be discovered by preparing a trial balance.

37. The retained earnings on the trial balance prepared immediately after posting represents the retained earnings at the beginning of the period.

Answers to True-False Statements

MULTIPLE CHOICE QUESTIONS

38. If total assets are increased, there must be a corresponding

(a) increase in liabilities only.

(b) increase in shareholders’ equity only.

(c) increase in liabilities and decrease in shareholders’ equity.

(d) increase in liabilities and/or increase in shareholders’ equity.

39. An increase in the Dividends Declared account will result in

(a) an increase in the Retained Earnings account.

(b) an increase in expenses.

(c) a decrease in the Retained Earnings account.

(d) a decrease in expenses.

40. Prepaid expenses are recorded as

(a) expenses on the statement of income.

(b) assets on the statement of financial position.

(c) revenues on the statement of income.

(d) liabilities on the statement of financial position.

41. The payment of an account payable

(a) decreases total assets.

(b) increases total assets.

(c) has no effect on total assets.

(d) increases total liabilities.

42. Shareholders’ equity is increased by

(a) dividends declared.

(b) revenues.

(c) expenses.

(d) liabilities.

43. If total liabilities increased by $22,500, then

(a) assets must have increased by $22,500.

(b) only shareholders’ equity must have increased by $22,500.

(c) assets must have increased by $22,500, or shareholders’ equity must have decreased by $22,500.

(d) assets and shareholders’ equity must have both decreased by $22,500.

44. Collection of an $800 accounts receivable

(a) increases an asset $800; decreases a liability $800.

(b) decreases a liability $800; increases shareholders’ equity $800.

(c) decreases an asset $800; decreases a liability $800.

(d) has no effect on total assets.

45. 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 shareholders’ equity.

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

(d) none of these is possible.

46. If services are performed on credit, then

(a) assets will decrease.

(b) liabilities will increase.

(c) shareholders’ equity will increase.

(d) liabilities will decrease.

47. If expenses are paid in cash, then

(a) assets will increase.

(b) liabilities will decrease.

(c) shareholders’ equity will increase.

(d) assets will decrease.

48. Accounting systems should record

(a) all economic events.

(b) events that result in a change in assets, liabilities, or shareholders’ equity items.

(c) only events that involve cash.

(d) only events that include revenues, expenses, and cash.

49. An investment by the shareholders in a company increases

(a) assets and shareholders’ equity.

(b) assets and liabilities.

(c) liabilities and shareholders’ equity.

(d) assets only.

50. The purchase of an asset for cash

(a) increases assets and shareholders’ equity.

(b) increases assets and liabilities.

(c) decreases assets and increases liabilities.

(d) has no effect on total assets.

51. The purchase of an asset on credit

(a) increases assets and shareholders’ equity.

(b) increases assets and liabilities.

(c) decreases assets and increases liabilities.

(d) has no effect on total assets.

52. The payment of a liability

(a) decreases assets and shareholders’ equity.

(b) increases assets and decreases liabilities.

(c) decreases assets and increases liabilities.

(d) decreases assets and liabilities.

53. Recording revenue

(a) increases assets and liabilities.

(b) increases assets and shareholders’ equity.

(c) increases assets and decreases shareholders’ equity.

(d) has no effect on total assets.

54. A paid dividend

(a) decreases assets and shareholders’ equity.

(b) increases assets and shareholders’ equity.

(c) increases assets and decreases shareholders’ equity.

(d) decreases assets and increases shareholders’ equity.

55. An expense

(a) decreases assets and liabilities.

(b) decreases shareholders’ equity.

(c) has no effect on shareholders’ equity.

(d) increases assets and decreases shareholder’ equity.

56. Which of the following items has no effect on retained earnings?

(a) expenses

(b) dividends declared

(c) revenues

(d) hiring a new employee

57. A paid income tax instalment

(a) increases assets and shareholders’ equity.

(b) decreases assets and shareholders’ equity.

(c) increases assets and decreases shareholders’ equity.

(d) decreases assets and increases shareholders’ equity.

58. A payment of a portion of accounts payable will

(a) not affect total assets.

(b) increase liabilities.

(c) not affect shareholders’ equity.

(d) decrease net income.

59. When an asset increases which of the following does not occur:

(a) decrease in another asset

(b) increase in revenue

(c) increase in common shares

(d) decrease in a liability

60. When a liability decreases:

(a) the account is credited and the normal balance is a debit balance.

(b) the account is debited and the normal balance is a credit balance.

(c) the account is credited and the normal balance is a credit.

(d) the account is debited and the normal balance is a credit.

61. Debit and credit can be interpreted to mean

(a) “bad” and “good,” respectively.

(b) increase and decrease, respectively.

(c) decrease and increase, respectively.

(d) either an increase or decrease depending on the account.

62. The left side of a T account is the

(a) credit side.

(b) debit side.

(c) description of the account.

(d) balance of the account.

63. An individual accounting record of increases and decreases in a specific asset, liability, or shareholders’ equity item is called a(n)

(a) single-entry accounting system.

(b) accounting transaction.

(c) account.

(d) normal balance.

64. The equality of debits and credits is the basis for

(a) the double-entry accounting system.

(b) the single-entry accounting system.

(c) the T account.

(d) all accounting systems.

65. The right side of an account is

(a) always used to record increases.

(b) the credit side.

(c) the debit side.

(d) always used to record decreases.

66. A T 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.

67. A T account is

(a) a way of illustrating the basic form of an account.

(b) a special account used to record only debits.

(c) a special account used to record only credits.

(d) the actual account form used in real accounting systems.

68. A credit 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.

69. The normal balance of any account is the

(a) left side.

(b) right side.

(c) side which increases the account.

(d) side which decreases the account.

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

(a) in at least two different accounts.

(b) in a T account.

(c) first as a revenue and then as an expense.

(d) twice.

71. A credit is not the normal balance for

(a) common shares.

(b) revenues.

(c) liabilities.

(d) cash.

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

(a) Assets = Liabilities + Common Shares + Retained Earnings + Revenues – Expenses – Dividends Declared.

(b) Assets + Liabilities = Dividends Declared + Expenses + Common Shares + Revenues.

(c) Assets – Liabilities – Dividends Declared = Common Shares + Revenues – Expenses.

(d) Assets = Revenues + Expenses – Liabilities.

73. The best interpretation of the word credit is the

(a) left side of an account.

(b) increase side of an account.

(c) right side of an account.

(d) decrease side of an account.

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

(a) the number of accounts to be debited must equal the number of accounts to be credited.

(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.

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

(a) Assets Debit

Liabilities Credit

Common Shares Credit

Revenues Debit

Expenses Credit

(b) Assets Debit

Liabilities Credit

Common Shares Credit

Revenues Credit

Expenses Credit

(c) Assets Credit

Liabilities Debit

Common Shares Debit

Revenues Credit

Expenses Debit

(d) Assets Debit

Liabilities Credit

Common Shares Credit

Revenues Credit

Expenses Debit

76. An accountant has debited an asset account for $5,000 and credited a revenue account for $10,000. What can be done to complete the recording of the transaction?

(a) Nothing further can be done.

(b) Credit a shareholders’ equity account for $5,000.

(c) Debit another asset account for $5,000.

(d) Credit another asset account for $5,000.

77. An accountant has debited an asset account for $2,000 and credited an expense account for $4,000. Which of the following would be the correct way to complete the recording of the transaction?

(a) Credit an asset account for $4,000.

(b) Credit a liability account for $2,000.

(c) Credit a shareholders’ equity account for $2,000.

(d) Debit a shareholders’ equity account for $2,000.

78. Which pair of accounts follows the rules of debit and credit in the same manner?

(a) Accounts Payable and Rent Expense

(b) Repair and Maintenance Expense and Bank Loan Payable

(c) Prepaid Insurance and Advertising Expense

(d) Service Revenue and Accounts Receivable

79. 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.

80. 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.

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

(a) affect two or fewer accounts.

(b) affect two or more accounts.

(c) always affect exactly two accounts.

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

82. 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.

83. Assets normally show

(a) credit balances.

(b) debit balances.

(c) debit and credit balances.

(d) debit or credit balances.

84. A knowledge 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 Declared 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

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

(a) the cash account will show a debit balance.

(b) the cash account will show a credit balance.

(c) the cash account debits will exceed the cash account credits.

(d) this cannot be detected by observing the balance of the cash account.

86. Which account below is not a subdivision of shareholders’ equity?

(a) Dividends Declared

(b) Revenues

(c) Expenses

(d) Liabilities

87. When a corporation pays a dividend, the

(a) Cash account will be increased with a debit.

(b) Dividends Declared account will be increased with a credit.

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

(d) Dividends Declared account will be increased with a debit.

88. The Dividends Declared account

(a) appears on the statement of income 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 shareholders’ equity.

89. Which of the following statements is not true?

(a) Expenses increase shareholders’ equity.

(b) Expenses have normal debit balances.

(c) Expenses decrease shareholders’ equity.

(d) Expenses are a negative factor in the calculation of net income.

90. 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) will always increase shareholders’ equity.

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

91. In the first month of operations, the total of the debit entries to the cash account amounted to $1,900 and the total of the credit entries to the cash account amounted to $1,500. Therefore, at the end of the month, the cash account has a

(a) $500 credit balance.

(b) $900 debit balance.

(c) $400 debit balance.

(d) $400 credit balance.

92. Which of the following is NOT true regarding the general journal?

(a) It discloses the complete effect of a transaction.

(b) It provides a chronological record of transactions.

(c) It helps to prevent and locate errors.

(d) Transactions are posted to the general journal.

93. The sequence of steps in the transaction recording process is

(a) journal  analyze  ledger.

(b) analyze  journal  ledger.

(c) journal  ledger  analyze.

(d) ledger  journal  analyze.

94. In recording accounting transactions, evidence that a transaction has taken place is obtained from

(a) source documents.

(b) the bank.

(c) the public relations department.

(d) the chart of accounts.

95. 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) post to the ledger.

96. 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) invoice.

(c) advertising brochure.

(d) cheque.

97. 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.

98. The recording process occurs

(a) once a year.

(b) once a month.

(c) repeatedly during the accounting period.

(d) infrequently – usually every two or three months.

99. A simple journal entry affects

(a) one account.

(b) two accounts.

(c) two or more accounts.

(d) three accounts.

100. 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.

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

(a) brief explanation.

(b) account title column.

(c) T account.

(d) date column.

102. Transactions recorded in a journal are done in

(a) account number order.

(b) financial statement order.

(c) alphabetical order.

(d) chronological order.

103. A journal is not useful for

(a) recording in one place the complete effect of a transaction.

(b) finding account balances.

(c) providing a record of transactions.

(d) locating and preventing errors.

104. 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.

105. The name given to entering transaction data in the journal is

(a) transacting.

(b) listing.

(c) posting.

(d) journalizing.

106. Which of the following journal entries is recorded correctly in the basic format (ignoring explanations)?

(a) Salaries Expense 600

Cash 1,350

Advertising Expense 750

(b) Salaries Expense 600

Advertising Expense 750

Cash 1,350

(c) Salaries Expense 600

Advertising Expense 750

Cash 1,350

(d) Cash 1,350

Salaries Expense 600

Advertising Expense 750

107. When a company has performed a service but has not yet received payment, it

(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.

108. A company that receives money in advance of performing a service

(a) debits Cash and credits a Prepaid account.

(b) debits Deferred Revenue and credits Accounts Payable.

(c) debits Cash and credits Deferred Revenue.

(d) debits Cash and credits Accounts Receivable.

109. When a company receives a utility bill but will not pay it right away, it should

(a) debit Utilities Expense and credit Accounts Receivable.

(b) debit Utilities Expense and credit Accounts Payable.

(c) debit Accounts Payable and credit Utilities Expense.

(d) make no entry until the bill is paid.

110. 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 Deferred Revenue.

(d) The entry includes a debit to Accounts Receivable.

111. A $50,000 machine is purchased by paying $35,000 cash and signing a bank loan payable for the balance. The journal entry should include a

(a) credit to Bank Loan Payable.

(b) debit to Cash.

(c) credit to Accounts Receivable.

(d) credit to Machinery.

112. The first step in the accounting cycle involves analyzing transactions, based on this analysis, which of the following would not be recorded?

(a) sales receipt

(b) rental contract

(c) cheque

(d) invoice

113. Which of the following is not true regarding the chart of accounts?

(a) It lists the account names that are in the ledger.

(b) It lists the account numbers that identify where the accounts are in the ledger.

(c) It is a standard listing of accounts that are in the ledger.

(d) It is the framework for the accounting information system.

114. After a business transaction has been analyzed and entered in the journal, the next step in the recording process is to transfer the information to

(a) the company's bank.

(b) shareholders’ equity.

(c) ledger accounts.

(d) financial statements.

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

(a) chart of accounts.

(b) statement of income.

(c) book of original entry.

(d) ledger.

116. The chart of accounts begins with

(a) asset accounts.

(b) liability accounts.

(c) revenue accounts.

(d) expense accounts.

117. The purpose of the ledger is to

(a) record the day’s transactions in date order.

(b) keep documentation to support each transaction.

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

(d) make sure that all assets and liabilities have normal balances at all times.

118. Which of the following accounts probably would be listed before the others in a chart of accounts?

(a) Buildings

(b) Insurance Expense

(c) Dividends Declared

(d) Service Revenue

119. All transactions

(a) are entered in the general ledger and then transferred to the general journal.

(b) are non-economic events that are recorded.

(c) are recorded and reported.

(d) are entered in the general journal and posted to the general ledger.

120. Deferred revenues are classified as

(a) assets on the statement of financial position.

(b) liaiblities on the statement of financial position.

(c) shareholders’ equity on the statement of financial position.

(d) revenue on the statement of income.

121. The Deferred Revenue account is classified as a(n)

(a) asset.

(b) revenue.

(c) expense.

(d) liability.

122. Which of the following is an asset?

(a) Service Revenue

(b) Bank Loan Payable

(c) Supplies Expense

(d) Prepaid Rent

123. A person who wants to determine the balance of a particular account should refer to the

(a) ledger.

(b) source document.

(c) chart of accounts.

(d) journal.

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

(a) assets, liabilities, shareholders’ equity, revenues, and expenses.

(b) assets, liabilities, shareholders’ equity, expenses, and revenues.

(c) liabilities, assets, shareholders’ equity, revenues, and expenses.

(d) shareholders’ equity, assets, liabilities, expenses, and revenues.

125. Management could determine the amounts due from customers by examining which ledger account?

(a) Service Revenue

(b) Accounts Payable

(c) Accounts Receivable

(d) Supplies

126. The ledger accounts should be arranged in

(a) date order.

(b) order of the chart of accounts.

(c) financial statement order.

(d) order of appearance in the journal.

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

(a) journalizing.

(b) posting.

(c) reporting.

(d) analyzing.

128. A chart of accounts

(a) is a chart created in Excel.

(b) indicates the amount of net income or loss for the period.

(c) lists the accounts in the ledger.

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

129. Which of the following guidelines should be applied when choosing an account name to be included in the chart of accounts?

(a) Account names should identify the nature and content of each account.

(b) Account names should be used consistently.

(c) Account names should use titles and not explanations.

(d) All of the above are correct.

130. 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 general ledger.

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

131. 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.

132. Crystal Credit recently started work with Carcrashian Ltd. It is her first job and she doesn’t have a lot of accounting experience. When recording the sales for the day, she debited sales and credited cash. The entry is

(a) correct.

(b) an error.

(c) an irregularity.

(d) not necessary.

133. Jane Doe has prepared the trial balance for Braven Corp. Total debits are $25,678 while total credits are $30,034. Which of the following errors has Jane likely made?

(a) a journal entry is posted twice

(b) a transposition error

(c) a correct journal entry is not posted

(d) posted a debit as a credit

134. A trial balance is prepared

(a) on a monthly basis only.

(b) on a quarterly basis only.

(c) on an annual basis only.

(d) at the end of an accounting period which could be monthly, quarterly or annually.

135. A trial balance will not balance when

(a) a one-sided entry is posted.

(b) a journal entry is posted twice.

(c) a correct journal entry is not posted.

(d) incorrect accounts are used in journalizing or posting.

136. The trial balance will not balance when

(a) a transaction is not journalized.

(b) a correction journal entry is not posted.

(c) a debit and a credit amount are unequal in a journal entry.

(d) a journal entry is posted twice.

137. An accounting report that lists all assets, liabilities, and shareholders’ equity accounts and their balances at a specific date is called a

(a) trial balance.

(b) general journal.

(c) general ledger.

(d) chart of accounts.

138. 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.

139. A trial balance is a listing of the

(a) transactions in a journal.

(b) chart of accounts.

(c) general ledger accounts and balances.

(d) totals from the journal pages.

140. Usually, 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 when the business is started.

141. A trial balance usually

(a) lists all the debit balances first, then all the credit balances.

(b) lists all the credit balances first, then all the debit balances.

(c) lists all the accounts in alphabetical order.

(d) lists all the accounts and balances in financial statement order.

142. 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) the debit side of a transaction is posted incorrectly to the ledger

143. A trial balance proves

(a) the mathematical equality of debits and credits in the ledger.

(b) the ledger is posted correctly.

(c) that all transactions have been recorded correctly.

(d) that all transactions have been posted.

144. If the totals of a trial balance are not equal, it could be due to

(a) a failure to record or post a transaction.

(b) recording the same incorrect amount for both the debit and the credit parts of a transaction.

(c) an error in calculating the account balances.

(d) recording the transaction more than once.

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

(a) A payment of $229 to a creditor was posted as a debit to Accounts Payable and a debit of $229 to Cash.

(b) Cash received from a customer on account was posted as a debit of $400 to Cash and a credit of $400 to Accounts Payable.

(c) A payment of $75 for supplies was posted as a debit of $57 to Supplies and a credit of $57 to Cash.

(d) A transaction was not posted.

146. The retained earnings on the trial balance prepared immediately after posting adjusting entries represents the

(a) retained earnings at the end of the period.

(b) retained earnings at the beginning of the period.

(c) net income for the period.

(d) total shareholders’ equity at the trial balance date.

ANSWERS TO MULTIPLE CHOICE QUESTIONS

EXERCISES

Ex. 147

Selected transactions for Markley Ltd. are listed below. Describe the effect of each transaction on assets, liabilities, and shareholders’ equity for the following independent transactions:

Sample: Made initial cash investment in the business.

Answer: Increase in assets and increase in shareholders’ equity.

1. Paid monthly utility bill.

2. Purchased new office furniture with cash.

3. Paid cash for repair work on security system.

4. Billed customers for services performed.

5. Received cash from customers billed in transaction 4.

6. Dividends declared paid to shareholders.

7. Incurred advertising expenses on account.

8. Paid monthly rent.

9. Received cash from customers at the time service was provided.

10. Paid monthly tax instalment.

Ex. 148

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.

Shareholders’

Assets = Liabilities + Equity

1. Received cash for services provided.

2. Purchased office equipment on credit.

3. Paid employees' salaries.

4. Received cash from customer in payment

of his account receivable.

5. Paid telephone bill for the month.

6. Paid for office equipment purchased in

transaction 2. _______

7. Received cash from a customer for

work to be done later.

8. Dividends declared were paid.

9. Obtained a loan from the bank.

10. Billed customers for services performed.

Ex. 149

Jim Cohen decides to open a courier business near the local university campus. Analyze the following transactions for the month of November in terms of their effect on the basic accounting equation. Record each transaction by increasing (+) or decreasing (–) the dollar amount of each item affected.

1. Jim Cohen invests $25,000 cash in exchange for common shares to start a courier business on November 1.

2. Purchased bicycles for $5,000 paying $3,000 in cash and the remainder due in 30 days.

3. Purchased courier bags for $1,200 cash.

4. Received a bill from Campus News for $300 for advertising in the campus newspaper.

5. Cash receipts from customers for courier sales amounted to $1,600.

6. Paid salaries of $300 to student workers.

7. Billed the Maple Leaf Football Team $100 for delivering banners.

8. Paid $300 to Campus News for advertising that was previously billed in Transaction 4.

9. Jim Cohen was paid dividends of $700.

10. Received a bill from City Electric for $200 for utilities for November.

Trans- Assets Liabilities Shareholders’ Equity

Accounts Courier Accounts Common Retained Earnings

Cash + Receivable + Bicycles + Bags = Payable + Shares + Revenue – Expenses - Dividends Declared

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

Totals

——————————————————————————————————————————

Ex. 150

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.

1. Issued shares to investors for $25,000 cash.

2. Purchased supplies on credit for $1,500.

3. Billed customers $2,500 for services provided.

4. Paid for supplies purchased in transaction 2.

5. Paid dividends of $400 cash to shareholders.

6. Received half of the money from customers billed in transaction 3.

7. Received and paid utility bill for $75.

Trans- Assets Liabilities Shareholders’ Equity

Accounts Accounts Common Retained Earnings

Cash + Receivable + Supplies = Payable + Shares + Revenue - Expenses - Dividends Declared

1.

2.

3.

4.

5.

6.

7.

——————————————————————————————————————————————————————————

Totals

——————————————————————————————————————————————————————————

Ex. 151. Explain how to record the hiring of a great hockey player to a National Hockey League.

Ex. 152

For each of the following:

1. Identify what type of account it is (Asset, Liability, Shareholders’ Equity, Revenue, or Expense); and
2. its normal balance (debit or credit).

1. Supplies

2. Mortgage Payable

3. Service Revenue

4. Accounts Payable

5. Salaries Expense

6. Common Shares

7. Accounts Receivable

8. Deferred Revenue

9. Income Tax Expense

Ex. 153. What does the “normal balance” of an account mean?

Ex. 154

For each item below, indicate whether the account will be debited or credited:

1. Decrease in Accounts Payable

2. Increase in Dividends Declared

3. Increase in Common Shares

4. Increase in Deferred Revenue

5. Decrease in Mortgage Payable

6. Increase in Prepaid Insurance

7. Decrease in Salaries Expense

8. Decrease in Supplies

9. Increase in Revenues

10. Decrease in Accounts Receivable

Ex. 155

For each item below, indicate whether the account will be debited or credited:

1. Decrease in Prepaid Rent

2. Decrease in Revenues

3. Decrease in Deferred Revenues

4. Decrease in Dividends Declared

5. Decrease in Inventory

6. Increase in Salaries Payable

7. Increase in Supplies

8. Increase in Salaries Expense

9. Increase in Accounts Receivable

Ex. 156

For each item below, indicate whether the account will be debited or credited:

1. Increase in Salary Expense

2. Decrease in Accounts Payable

3. Increase in Prepaid Insurance

4 Increase in Common Shares

5. Decrease in Supplies

6. Increase in Dividends Declared

7. Increase in Service Revenue

8. Decrease in Accounts Receivable

9. Increase in Rent Expense

10. Decrease in Equipment

Ex. 157

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 Shares

6. Supplies

7. Insurance Expense

8. Dividends Declared

9. Buildings

10. Bank Loan Payable

Ex. 158

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 Declared

2. Service Revenue 7. Cash

3. Accounts Payable 8. Salaries Expense

4. Accounts Receivable 9. Bank Loan Payable

5. Common Shares 10. Insurance Expense

Ex. 159

Eight transactions are recorded in the following T accounts:

Cash Accounts Receivable

1. 35,000 2. 3,500 5. 27,500 7. 22,500

7. 22,500 3. 1,950

4. 2,225

6. 8,000

8. 4,500

Supplies Equipment

3. 1,950 2. 13,500

Common Shares Service Revenue

1. 35,000 5. 27,500

Accounts Payable Dividends Declared

6. 8,000 2. 10,000 8. 4,500

Salaries Expense

4. 2,225

Indicate for each debit and each credit: (a) whether an Asset, Liability, Common Shares, Dividends Declared, Revenue, or Expense account was affected and (b) whether the account was increased (+) or (–) decreased. Answers should be presented in the following chart form, in which the first one has been done for you as an example:

Account Debited Account Credited

Transaction No. Type Effect Type Effect

——————————————————————————————————————————

1. Asset + Common Shares +

——————————————————————————————————————————

2.

——————————————————————————————————————————

3.

——————————————————————————————————————————

4.

——————————————————————————————————————————

5.

——————————————————————————————————————————

6.

——————————————————————————————————————————

7.

——————————————————————————————————————————

8.

Ex. 160

For each of the following accounts indicate (a) the type of account (Asset, Liability, Shareholders’ Equity, Revenue, 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 Shares 7. Bank Loan Payable

4. Dividends Declared 8. Equipment

Ex. 161

Now that you are taking an accounting course, your brother decided to ask you to help him with his own finances. He has kept his receipts, automated teller machine (ATM) slips, and other information for the last week and is ready for you to record the information.

1. Pay stub from his part time job showing net pay of $249.98 and ATM slip showing deposit of $249.98.

2. Receipts from grocery store for $45.89 and $15.32.

3. Receipt from video store for $3.44.

4. Notice from the bank that the $5,500 loan he applied for has been deposited to his account.

5. Receipt for the purchase of his car for $6,000.

6. Receipt from the garage for maintenance for $450.00.

7. Receipt from JapanTown Restaurant for $12.45.

8. Notice of overdue books from the library—the fine is $5.00.

9. Receipt from the coffee shop for $4.55.

10. Notice that there is a package for him at the post office.

Instructions

(a) Prepare a list of accounts that you will require and indicate whether each account is a(n) Asset (A), Liability (L), Revenue (R) or Expense (E).

(b) Prepare journal entries to record the above transactions, identifying them by number. Use cents in your answer. You may omit explanations.

Ex. 162

The chart of accounts used by Kopy Kat Corporation 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

100 Cash 280 Deferred Revenue

120 Accounts Receivable 300 Common Shares

150 Supplies 350 Retained Earnings

170 Prepaid Insurance 370 Dividends Declared

180 Equipment 400 Service Revenue

220 Accounts Payable 510 Advertising Expense

250 Bank Loan Payable 530 Rent Expense

Number(s) Number(s)

of account(s) of account(s)

debited credited

1. Shareholders invested $75,000 cash to start the corporation.

——————————————————————————————————————————

2. Purchased three photocopy machines for $120,000, paying $60,000 cash and signing a 5-year, 3% bank loan for the remainder.

——————————————————————————————————————————

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

——————————————————————————————————————————

4. Cash photocopy revenue received was $15,000.

——————————————————————————————————————————

5. Paid $250 cash for radio advertising.

——————————————————————————————————————————

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

——————————————————————————————————————————

7. Paid a $200 cash dividend to shareholders.

——————————————————————————————————————————

8. Paid $1,500 cash for rent for the current month.

——————————————————————————————————————————

9. Received $1,200 cash advance from a customer for future copying.

——————————————————————————————————————————

10. Billed a customer for $750 for photocopy work done.

——————————————————————————————————————————

11. Paid $1,800 for a one-year insurance policy.

——————————————————————————————————————————

12. Hired four employees to begin work in one month. Weekly salary is $600 per week.

Ex. 163. While it is possible to enter transaction information directly into a T account, it is not practical to do so. Rather, the transaction information is recorded as a journal entry in the general journal (a book of original entry). What are the three contributions a general journal makes to the recording process.

Ex. 164

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

1. Invested $50,000 in exchange for common shares of the corporation.
2. Hired an employee to be paid $800 per week, starting tomorrow.
3. Paid six months’ rent in advance, $12,000.
4. Paid the worker’s weekly salary.
5. Recorded service revenue earned and received for the week, $3,500.

Ex. 165

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

1. Received $50,000 from shareholders in payment for common shares issued.

2. Purchased equipment for $90,000, paying $30,000 in cash and signing a bank loan for the balance.

3. Paid $1,200 for a one-year insurance policy.

4. Recorded $25,000 for services provided on account.

5. Paid salaries of $6,500.

6. Received $15,000 in cash for services provided.

7. Collected $4,000 from customers on account.

8. Received $2,000 from a new customer for services to be provided next month.

Ex. 166

The August transactions for AllenKey Limited are presented below:

1. Cash of $100,000 was invested in AllenKey Limited in exchange for 50,000 common shares.

2. Purchased equipment costing $25,000 in exchange for a $15,000 bank loan and paid $10,000 cash for the remainder.

3. Purchased land costing $50,000 for cash.

4. Paid $2,400 cash for a one-year insurance policy.

5. Received $3,500 cash for services to be performed in September.

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

7. Paid employee salaries for $13,500.

8. Declared and paid dividends of $500.

Instructions

Prepare the journal entry for each transaction.

Ex. 167

A tabular analysis of the transactions made during December 2022 by Sacha Enterprises Ltd. is shown below. Each increase and decrease in shareholders’ equity is explained.

Instructions

(a) For each transaction, record the appropriate journal entry.

(b) Using T Accounts, calculate the ending balance for each account. Note that the opening balance for Expenses is comprised of the following: Salaries Expense of $3,800, Depreciation Expense of $1,000, and Supplies Expense of $700.

(c) Prepare a trial balance as at December 31, 2022.

Ex. 168

You have been hired as the accountant for a newly formed real estate company called Antsy Real Estate Limited. The following business transactions occurred during the month of September, 2022:

1. Shareholders invested $35,000 in cash for 35,000 common shares to start the corporation.

2. Signed a lease for office space, at $9,500 per year for five years.

3. Paid $250 cash for supplies.

4. Purchased equipment for $12,000, paying $7,000 in cash and signing a 30-day bank loan payable for the balance.

5. Purchased $200 of supplies on account.

6. Real estate commission fees billed to clients totalled $9,700.

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

8. Paid $100 cash on account for supplies purchased in transaction 5.

9. Received a bill for $500 for advertising for the current month.

10. Paid $3,500 cash for office salaries.

11. Paid $1,000 cash dividends to shareholders.

12. Received a cheque for $5,000 from a client in payment on account for commissions billed in transaction 6.

Instructions

(a) Record the transactions for September 2022. You may omit explanations.

(b) Prepare a trial balance.

Ex. 169. What does posting to the general ledger refer to?

Ex. 170

The transactions of Finkel Brothers Limited are recorded in the general journal below. You are to post the journal entries to the accounts in the general ledger (use T accounts). After all entries have been posted, you are to prepare a trial balance at September 30, 2022.

General Journal

——————————————————————————————————————————

Date Account Titles and Explanation Debit Credit

2022

Sep 1 Cash 20,000

Common Shares 20,000

(Shareholders invested cash in business)

4 Vehicles 40,000

Cash 15,000

Bank Loan Payable 25,000

(Paid cash and issued 2-year, 9% bank loan for balance)

8 Rent Expense 1,200

Cash 1,200

(Paid September rent)

15 Prepaid Insurance 500

Cash 500

(Paid one-year liability insurance)

18 Cash 3,200

Service Revenue 3,200

(Received cash for delivery services)

20 Salaries Expense 750

Cash 750

(Paid salaries for current period)

25 Utilities Expense 125

Accounts Payable 125

(Received a bill for September utilities)

30 Dividends Declared 800

Cash 800

(Paid dividends)

30 Accounts Receivable 1,450

Service Revenue 1,450

(Billed customer for delivery service)

——————————————————————————————————————————

Ex. 171

Although the trial balance of Howcome Limited shown below is in balance, upon further investigation a number of errors were discovered

HOWCOME LIMITED

Trial Balance

July 31, 2022

——————————————————————————————————————————

Debit Credit

Cash $ 3,200

Accounts receivable 13,200

Supplies 1,200

Equipment 16,600

Accounts payable $19,500

Common shares 3,000

Dividends declared 3,000

Service revenue 29,500

Salaries expense 7,600

Repair and maintenance expense 3,200

Income tax expense 4,000

Totals $52,000 $52,000

An examination of the ledger and journal reveals the following:

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

2. Cash of $240 received from a customer on account was debited to Cash as $420 and credited to Accounts Receivable as $420.

3. Dividends of $450 paid to shareholders were posted as a credit to Dividends Declared of $450 and a credit to Cash of $450.

4. Salaries Expense was posted as $7,600 rather than the correct amount of $6,668 to the general ledger.

5. The purchase of equipment on account for $900 was recorded as a debit to Repair and Maintenance Expense and a credit to Accounts Payable.

6. Services were performed on account for a customer for $820. Accounts Receivable was debited $820 and Service Revenue was credited $82.

7. A payment on account for $340 was credited to Cash for $340 and credited to Accounts Payable for $430.

Instructions

Prepare a correct trial balance.

Ex. 172

Some of the following errors could 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 so, 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 $600 to a creditor was recorded by a debit to Accounts Payable of $60 and a credit to Cash of $600.

2. A $480 payment for a printer was recorded by a debit to Computer Equipment of $48 and a credit to Cash of $48.

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

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

Ex. 173

Some of the following errors could 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 so, 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 $550 was journalized and posted as a debit to Cash $550 and a credit to Service Revenue $550.

2. A $1.500 purchase of supplies on account was recorded as a debit of $1,500 to Equipment and a credit of $1,500 to Accounts Payable.

3. A purchase of equipment for $6,000 on account was not recorded.

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

Ex. 174

Archer Corporation is a financial planning service. The account balances at December 31, 2022 are shown below, in alphabetical order:

Accounts Payable $ 6,000

Accounts Receivable 27,000

Bank Loan Payable 142,500

Building 180,000

Cash 27,750

Common Shares 224,550

Equipment 39,300

Inventory 12,150

Land 89,400

Retained Earnings 45,000

Supplies 1,200

Vehicles 41,250

Instructions

Prepare a trial balance with the accounts arranged in the correct financial statement order. Include the appropriate heading. Assume all accounts have a normal balance.

Ex. 175

The ledger accounts of the Fitness Guru Limited at October 31, 2022 are shown below, in alphabetical order:

Accounts Payable $ 9,200

Accounts Receivable 3,050

Bank Loan Payable 29,000

Building 64,500

Cash 11,800

Common Shares 57,100

Dividends Declared 4,500

Equipment 51,900

Fees Earned 6,000

Office Expense 3,500

Rent 3,500

Retained Earnings 43,700

Supplies 2,250

Instructions

Prepare a trial balance with the ledger accounts arranged in the correct financial statement order. Include the appropriate heading. Assume all accounts have a normal balance.

Ex. 176

The adjusted trial balance at October 31, 2022 is presented below for Carnegie & Hurst Limited:

CARNEGIE & HURST LIMITED

Trial Balance

October 31, 2022

——————————————————————————————————————————

Debit Credit

Cash $ 5,200

Accounts receivable 70,100

Prepaid insurance 19,100

Supplies 2,150

Equipment 34,000

Accumulated depreciation—equipment $ 1,700

Building 81,785

Accumulated depreciation—building 8,179

Accounts payable 39,200

Deferred revenue 42,600

Bank loan payable 37,100

Common shares 69,500

Retained earnings 13,700

Service revenue 113,300

Salaries expense 58,099

Rent expense 25,200

Insurance expense 13,100

Utilities expense 6,650

Supplies expense 4,500

Depreciation expense 3,745

Interest expense 1,500

Income tax expense 150

Totals $325,279 $325,279

Instructions

Prepare a statement of income, statement of changes in equity, and statement of financial position for the year ended October 31, 2022.

Ex. 177

The following trial balance for McMurtry Ltd. does not balance at December 31, 2022:

MCMURTRY LTD.

Trial Balance

December 31, 2022

——————————————————————————————————————————

Debit Credit

Cash $15,400

Accounts receivable 6.530

Supplies 1,800

Building 7,350

Accumulated depreciation—building $ 2,940

Accounts payable 1,980

Salaries payable 900

Deferred revenue 200

Common shares 15,000

Dividends declared 500

Retained earnings 8,649

Service revenue 8,650

Salaries expense 3,700

Depreciation expense 1,270

Supplies expense 1,100

Income tax expense 669

Totals $52,819 $23,819

Additional Information:

1. A journal entry to record a $320 purchase of supplies on account was not recorded or posted.
2. A journal entry to record a customer deposit of $350 for services not yet performed was debited to Cash and credited to Service Revenue.

Instructions

Prepare a corrected trial balance. Journal entries are not required.

Ex. 178

The trial balance shown below for Cohen’s Inc. does not balance:

COHEN’S INC.

Trial Balance

October 31, 2022

——————————————————————————————————————————

Debit Credit

Cash $ 7,710

Accounts receivable 24.650

Supplies 800

Equipment 36,200

Accumulated depreciation - equipment $ 6,520

Accounts payable 26,020

Salaries payable 900

Deferred revenue 200

Retained earnings 21,847

Service revenue 47,221

Salaries expense 16,785

Rent expense 12,000

Depreciation expense 3,260

Supplies expense 700

Income tax expense 4,442

Totals $106,547 $102,708

Upon review of the ledger accounts the following errors were identified:

1. A payment on account for $234 was credited to Cash for $324 and debited to Accounts Payable for $234.
2. Supplies expense of $200 was posted as a credit rather than a debit.
3. Services performed on account for $810 was posted as a debit to Accounts Receivable for $810 and a credit to Service Revenue for $81.
4. The cost of equipment is $32,600, not $36,200.
5. A journal entry to record a $400 purchase of supplies on account was recorded as a debit to Supplies and a credit to Cash.

Instructions

Prepare a corrected trial balance. Journal entries are not required.

Ex. 179 What is the main purpose of a trial balance and how is it useful?