Name: ANJELIKA B.

VIESCA BSA 1-A

Subject: Accounting 2

Chapter 3: Recording Business Transactions

Discussion Questions, pg 136

1. The accounting cycle involves ten steps to accomplish the accounting process.
Enumerate.
Answer:

Step 1: Identification of Events to be Recorded

Step 2: Transactions are Recorded in the Journal
Step 3: Journal Entries are Posted to the Ledger
Step 4: Preparation of a Trial Balance
Step 5: Preparation of the Worksheet including Adjusting Entries
Step 6: Preparation of the Financial Statements
Step 7: Adjusting Journal Entries are Journalized and Posted
Step 8: Closing Journal Entries are Journalized and Posted
Step 9: Preparation of a Post-Closing Trial Balance
Step 10: Reversing Journal Entries are Journalized and Posted

2. What are the four basic steps that should be followed to attain a structured analysis of
transactions?
Answer:

1. Identify the transaction from source documents.

2. Indicate the accounts – either assets, liabilities, equity, income or expenses –
affected by the transaction.
3. Ascertain whether each account is increased or decreased by the transaction.
4. Using the rules of debit and credit, determine whether to debit or credit the account
to record its increase to decrease.

3. Journal entries are based on documents evidencing the occurrence of a transaction.

Give at least five examples of these source documents.
Answer:

1. Official Receipt
2. Bank Deposit Slips
3. Sales Invoices
4. Cash Register Tapes
5. Purchase Orders

4. State the rules of the double-entry system.

Answer:

An account is debited when an amount is entered on the left side of the account and
credited when an amount is entered on the right side.
5. Debit means increase and credit means decrease. Is this statement always true?
Explain.
Answer:

No, because it depends on the transactions to be recorded. For example, when a liability
has occurred, it is credited for increase which means if the liability has been paid, it is
debited for decrease.

6. What are the information contained in the general journal? Discuss each briefly.
Answer:

 Date – the year and month are not rewritten for every entry unless the year or
month changes or a new page is needed.
 Account Titles and Explanation – the account to be debited is entered at the
extreme left of the first line while the account to be credited is entered slightly
indented on the next line. A brief description of the transaction is usually made on
the line below the credit.
 P.R. (posting reference) – used when the entries are posted, that is, until the
amounts are transferred to the related ledger accounts.
 Debit – the debit amount for each account is entered in this column.
 Credit – the credit amount for each account is entered in this column.

7. What is a compound journal entry?

Answer:

A compound journal entry is when three or more accounts are required in a journal entry.

8. Discuss the features of a chart of accounts.

Answer:

The chart is arranged in the financial statement order, that is, assets first, followed by
liabilities, owner’s equity, income and expenses. The accounts should be numbered in a
flexible manner to permit indexing and cross-referencing.

9. The normal balance of assets, withdrawals and expenses is debit, while that of liabilities,
owner’s equity and income is credit. Why is this so?
Answer:

The normal balance of any account refers to the side of the account – debit or credit –
where increases are recorded. Assets, withdrawals, and expenses accounts normally
debit balances; liabilities, owner’s equity, and income accounts normally have credit
balances. This occurs because increases in an account are usually greater than or equal
to decreases.

10. Describe the act of posting. What difficulties could arise if no cross-indexing exists
between the general journal and the ledger accounts.
Answer:

Posting means transferring the amounts from the journal to the appropriate accounts in
the ledger. It would be exceedingly difficult to trace the source of errors and
inconsistencies in reported transactions if no cross-indexing occurred between the
general journal and the ledger account. In addition, the inability to cross-index makes it
hard to prove that the transaction has been fully registered. A lack of cross-indexing
could raise liability and make it more difficult to defend.
11. A trial balance is a list showing all account titles in the general ledger and the total debits
and total credits in each account. Is this statement true? Why or why not?
Answer:

It is true because the trial balance is prepared to verify the equality of debits and credits
in the ledger.

12. Cite some errors that will cause the debits and credits of the trial balance not to balance.
Answer:

1. Error in posting a transaction to the ledger

2. Error in determining the account balances
3. Error in preparing the trial balance

13. Cite some occurrences which, despite the presence of errors, will still make the debit
and credit columns of the trial balance equal.
Answer:

1. Failure to record or post a transaction

2. Recording the same transaction more than once
3. Recording an entry but with the same erroneous debit and credit amounts
4. Posting a part of a transaction correctly as a debit or credit but to the wrong account

14. You found out that the total of the debits column of the trial balance is P 200,000 while
the total of the credits column is P 180,000. What are some possible causes of this
difference? If the difference between the columns is divisible by 9, what types of errors
are possible?
Answer:

One of the columns of the trial balance was incorrectly added, an amount of an account
balance was incorrectly recorded on the trial balance or a debit balance may have been
recorded on the trial balance as a credit or vice versa. If it the difference between the
columns is divisible by 9, a transposition error may have occurred.

15. The accountant mistakenly recorded a P 500 purchase supplies on account as a P 5,000
purchase. He debited Supplies and credited Accounts Payable for P 5,000. Does this
error cause the trial balance to be out of balance? Explain.
Answer:

No, because recording an entry but with the same erroneous debit and credit amounts
cannot be detected by the trial balance, thus, the trial balance can be still balanced.

16. How would balance sheet accounts be affected if an expense was erroneously recorded
for P 22,000 rather than P 16,000.
Answer:

The balance sheet or statement of financial position may become unbalanced due to an
expense being erroneously recorded.
Fill in the Blanks, pg 137

1. Book of Final Entry accumulate information in a book called the ledger.

2. The process of determining the balance of an account starts with identifying and

analyzing of business transactions.

3. The Chart of Accounts indicates the names and numbering system of accounts.

4. When supplies are used up or consumed, they become a (n) Expense.

5. The book of original entry usually refer to a (n) Journal.

6. The process of transferring information from a journal to a ledger is called Posting.

7. A Ledger is a group of accounts.

8. A Trial Balance is an accounting period that lists accounts and their balances.

9. A Fiscal Year is an accounting period that runs for any 12 consecutive months.

10. Posting deals with the process of updating the PR of the journal from the account

number of the ledger to indicate to which account in the ledger information has been

posted.

11. Recording P 885.000 as P 85.50 is an example of a Slide.

12. The process of recording transactions in a journal is called Journalizing.

13. Entries are journalized in a General Journal.

14. A ledger is often called a Reference Book.

15. Income Statement are prepared for parts of a fiscal year (monthly, quarterly).

16. The positive balance of each account is referred to as its normal balance.

17. The credit portion of a journal entry is indented and place below the debit portion.

18. A journal entry requiring three or more accounts is called a compound entry.

19. Prepaid rent is a (n) Asset on the balance sheet.

True or False, pg 138

True 1. Transactions are analyzed on the basis of source documents.

True 2. Every business transaction affects a minimum of two accounts.
True 3. A credit entry to an expense account will increase it.
True 4. Normally, income accounts have debit balances.
True 5. An account titled Unearned Revenues is a liability account.
6. A group of accounts in a ledger is called a chart of accounts.
True 7. A listing of the accounts in a ledger is called a chart of accounts.
True 8. A journal entry may include debits to more than one account and credits to
more than one account, but the total of the debits must always equal the total
of the credits.

False 9. The double-entry system means that transactions are recorded both in the
journal and in the ledger.
False 10. The accounting cycle begins with the recording of the transactions and ends
with the preparation of the financial statements.
False 11. Debit means decrease and credit means increase.
False 12. The T-account is sometimes called the book of original entry.
True 13. In some transactions, the accounting equation may not be maintained.
True 14. Income statement accounts are also known as temporary accounts.
False 15. Amounts entered on the left side of an account, regardless of the account title,
are called credits or charges to the account

True 16. The chart of accounts is a system of organizing and numbering the accounts in
the general ledger.

True 17. Notes receivable are claims against debtors evidenced by a written promise to
pay a certain sum of money at definite time to the order of a specified person
or to bearer.

True 18. A trial balance may balance but may not be correct.
False 19. A transposition error means a posting of journal entry to the wrong ledger
account.

True 20. A trial balance with equal debit and credit totals proves that all transactions
have been correctly journalized and posted to the proper ledger accounts.

False 21. Double posting of a transaction causes the debits and credits not to balance.
False 22. The sequence of the account titles in a trial balance depends upon the size of
the account balances.
True 23. An expense may be recognized and recorded although no cash outlay has
been made.
False 24. The normal balance of any account refers to the side of the account-debit or
credit-where decreases are recorded.

True 25. A recording error caused by the erroneous rearrangement of digits, such as
writing P627 as P672, is called transposition.
True 26. The process of recording a transaction in a journal is called journalizing.
False 27. The journal is used to classify and summarize transactions, and to prepare
data for basic financial statements.
Multiple Choice, pg 140

1. Which of the following steps in the accounting cycle are listed in a logical order?
a. Post the closing entries, take a post-closing trial balance, and journalize the
closing entries
b. Post the journal entries to the general ledger accounts, prepare a worksheet, and
then take a trial balance
c. Take a trial balance, prepare a worksheet, then prepare financial statements
d. Prepare the income statement, prepare the balance sheet and then prepare a
trial balance

2. The debit and credit analysis of a transaction normally takes place

a. before any entry is recorded in a journal
b. when the entry is posted to the ledger
c. when the trial balance is prepared
d. at some other point in the accounting cycle

3. A sale on account would be recorded by

a. debiting revenue
b. crediting assets
c. crediting liabilities
d. debiting assets
4. Incurring an expense for advertising on account would be recorded by
a. debiting liabilities
b. crediting assets
c. debiting an expense
d. debiting assets

5. A trial balance
a. Proves that debits and credits are equal in the ledger
b. Supplies a listing of open accounts and their balances that are used in preparing
financial statements
c. Is normally prepared three times in the accounting cycle
d. All of these

6. First statement: A ledger is where the entity initially records transactions and selected
other events.

Second statement: Nominal (temporary) accounts are income and expense accounts
and are periodically closed.

a. True, True c. False, True

b. True, False d. False, False

7. First statement: The withdrawals account is considered a real account.

Second Statement: Basic steps in the recording process include transferring the journal
information to the appropriate account in the statement of financial position.

a. True, True c. False, True

b. True, False d. False, False
 8. First statement: The first step in the accounting cycle is the journalizing of transactions
and selected other events

Second statement: Basic steps in the recording process include transferring the journal
information to the appropriate account in the statement of financial position.

a. True, True c. False, True

b. True, False d. False, False

9. First statement: The trial balance uncovers any errors in journalizing and posting prior to
the preparation of the statement of financial position.

Second statement: The trial balance is a listing of all the accounts and their balances in
the order the accounts appear on the statement of financial position.

a. True, True c. False, True

b. True, False d. False, False

10. First statement: One purpose of a trial balance is to prove that debits and credits of an
equal amount are in the general ledger.

Second statement: A general journal chronologically lists transactions and other events,
expressed in terms of debits and credits to accounts.

a. True, True c. False, True

b. True, False d. False, False

Multiple Choice, pg 142-146

1. The first step in recording a transaction in a journal is to

a. Record the debit
b. Record the date
c. Record the credit
d. Write an explanation

2. Which of the following accounts is classified differently from the others listed?
a. Notes Payable
b. Unearned Revenues
c. Mortgage Payable
d. Art Revenues

3. Which of the following accounting steps is accomplished after the others listed?
a. Post the entry
b. Prepare the trial balance
c. Apply the rules of the double entry
d. Record the entry

4. Which of the following is a business event that is not considered a recordable

transaction?
a. An entity receives a product previously ordered
b. An entity pays an employee for work performed
 c. A customer inquires about the availability of a service
d. A customer purchases a service.

5. Which of the following is a business event that is also considered a recordable

transaction?
a. An entity hires a new employee
b. A customer purchases merchandise
c. An entity orders a product from a supplier
d. An employee sends a purchase requisition to the purchasing department

6. Balance sheet accounts are

a. Permanent accounts
b. Temporary accounts
c. Accounts with debit balances only
d. Adjusting accounts

7. A journal entry that contains more than two accounts is called

a. A posted journal entry
b. A compound journal entry
c. An adjusting journal entry
d. An erroneous journal entry

8. When accounting information is accumulated in individual accounts, a chart of accounts

is
a. Limited to those accounts that will appear in the balance sheet
b. Changed each year by an entity depending on the results of operations
c. A listing of each account that will be used to accumulate information
d. Used to determine whether a debit or credit balance will appear in each of the
accounts at the end of the accounting period

9. Which of the following events would not be considered an accounting transaction?

a. Payment of fees to a tax consultant
b. Purchase of print advertising space for a new service
c. Sales of new product during the first month of operations
d. Tabulation of the results of a customer satisfaction survey

10. The term footing refers to the

a. Process of obtaining the top number in an account
b. Process of obtaining the bottom number in an account
c. Process of posting
d. Addition of a column of figures

11. What function do general ledgers serve in the accounting process?

a. Summarizing
b. Recording
c. Classifying
d. Reporting

12. A chart of accounts is a (an)

a. Journal
b. Flowchart of all transactions
c. List of names of all account titles
d. Accounting procedure manual
e.
13. 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. Maintain a separate account for each balance sheet and income statement
accounts
d. Make sure that all balance sheet and income statement accounts have normal
balances at all times

14. Which of the following does not directly or indirectly affect the owner’s Capital account?
a. Paying an accounts payable
b. Withdrawals by the owner
c. Earning of revenues
d. Incurring of expenses

15. Which of the following transactions correctly maintains the equality in the accounting
equation?
a. To record collections on account, cash and accounts receivable are increased by
P 160,000.
b. To record the purchase of computer equipment, computer equipment is
increased and cash is decreased by P 46,000.
c. To record payment of notes, notes payable is decreased and cash is increased
by P 70,000.
d. To record payment of rent, rent expense and cash are increased by P 8,000.

16. Which of the following combinations of trial balance totals suggest the presence of either
a transposition error or a number slide?
a. P 65,470 debit and P 68,170 credit
b. P 33,220 debit and P 35,420 credit
c. P 25,670 debit and P 26,670 credit
d. P 14, 517 debit and P 15,477 credit

17. The first financial statement that is prepared from the trial balance is the
a. Statement of cash flows
b. Statement of changes in equity
c. Income statement
d. Balance sheet

18. The amount of cash received or paid during a period is not an adequate measure of the
economic consequences of an organization’s activities because
a. Many activities may not involve the use of cash
b. Cash inflows may represent the result of activities completed in a previous period
c. Cash outflows may precede or follow the activities with which they are associated
d. All of the above reasons are correct

19. At the end of an accounting period, the equation Assets = Liabilities + Owner’s Equity
does not necessarily balance. Which of the following actions balances the equation?
a. Subtract revenues and add expenses to owner’s equity
b. Subtract revenues from owner’s equity and add expenses to assets
c. Add the difference between revenues and expenses to owner’s equity
d. Add revenues and subtract expenses from assets
 20. Which of the following steps in the accounting cycle are listed in logical order?
a. Prepare the income statement, prepare the statement of financial position and
then prepare a worksheet
b. Post the journal entries to the ledger accounts, prepare a worksheet, and then
take a trial balance
c. Journalize the closing entries, post the closing entries, and then take a post-
closing trial balance
d. Post the closing entries, take a post-closing trial balance, then journalize the
closing entries

Use the following information to answer the questions below. The following is the trial balance
for Jennifer Perez Ads:

Jennifer Perez Ads

Trial Balance
January 31, 2020
Cash P 30,000
Accounts Receivable 20,000
Art Supplies 30,000
Office Supplies 50,000
Prepaid Rent 70,000
Prepaid Insurance 50,000
Art Equipment 50,000
Office Equipment 30,000
Accounts Payable P 50,000
Perez, Capital 150,000
Perez, Withdrawals ?
Advertising Revenues ?
Salaries Expense ?
Utilities Expense 50,000
Telephone Expense 30,000
P A P B

21. If the balance of the Perez, Withdrawals account were P 120,000 and the balance of the
Salaries Expense account were P 50,000, what would be the amount of B?
a. P 180,000
b. P 580,000
c. P 370,000
d. P 380,000

22. If the trial balance showed a balance of P 70,000 in the Perez, Withdrawals account and
a balance of P 50,000 in the Salaries Expense account, what would be the amount of
Advertising Revenues for the period?
a. P 330,000
b. P 480,000
c. P 180,000
d. P 430,000

23. In the trial balance, total assets equal

a. 330,000
b. 230,000
c. 430,000
d. 410,000
 24. If the trial balance showed a balance of P 80,000 in the Salaries Expense account and a
balance of P 350,000 in the Advertising Revenues account, what would be the amount
of A?
a. P 500,000
b. P 550,000
c. P 450,000
d. P 600,000

25. If the trial balance showed a balance of P 40,000 in the Salaries Expense account and a
balance of P 300,000 in the Advertising Revenues account, what would be the amount
of the Perez, Withdrawals account?
a. P 250,000
b. P 190,000
c. P 140,000
d. P 50,000

Multiple Choice, pg 147-151

1. The primary function of an account in the accounting system is to

a. store accounting transactions until they are classified
b. identify the type of organization
c. accumulate accounting information
d. determine at what point a transaction should be recorded

2. When a customer buys services on credit, the contract is regarded as complete when
a. the services are rendered
b. the bill is presented
c. the cash payment is received
d. the date specified in the contract is at hand

3. Most companies use a chart of accounts prepared by the

a. Accounting standards council
b. Securities and exchange commission
c. Bureau of internal revenue
d. entity’s accounting department

4. Which of the following accounts is classified differently from the others listed?
a. Prepaid Rent
b. Cash
c. Accounts Receivable
d. Owner’s Capital

5. When owner’s equity decreases, one of the following must occur:

a. withdrawals decreases
b. an asset increases
c. an income increases
d. a liability increases
6. What function do accounting journals serve in the accounting process?
a. Classifying c. Reporting
b. Summarizing d. Recording

7. The normal balance of an account is on the

a. side represented by decrease in the account balance
b. debit side of the account
c. side represented by increases in the account balance
d. credit side of the account

8. When cash is debited, a typical credit is to

a. withdrawals
b. accounts payable
c. accounts receivable
d. expenses

9. Payment of insurance premiums in advance gives rise to

a. prepaid expense
b. unearned income
c. accrued income
d. accrued expense

10. The manner in which the accounting records are organized and employed within a
business is referred to as
a. business document
b. voucher system
c. special journal
d. accounting information system

11. The accounting cycle us

a. the length of time it takes to complete as set of financial statement after the
books are closed
b. a process that begins with adjusting entries and ends with the preparation of the
financial statements
c. applicable only to manual systems, not to computerized systems
d. the sequence of procedures used by a business to process economic information
and to produce financial statements

12. A ledger is defined as a collection of

a. all statement of financial position accounts
b. all income statement accounts
c. account titles – assets, liability, equity, income and expense accounts
d. transactions

13. The equality of debits and credits in the ledger should be verified at the end of each
accounting period by preparing
a. an accounting statement
b. an account verification report
c. a trial balance
d. a balance report
14. Of the following errors, the one that will cause an inequality in the trial balance totals is
a. failure to record a transaction
b. recording the same transaction more than once
c. posting a transaction to the wrong account
d. incorrectly computing an account balance

15. Office supplies are expensed

a. at no time, since they are assets
b. when they are paid for
c. when they are purchased
d. when they are consumed (used)

16. Which of the following statements is false about a proper journal entry?
a. It may have more than one debit or credit entry
b. A space should be skipped between journal entries
c. Credits are always indented
d. Accounts that are increased are always listed first

17. Transactions are recorded chronologically in the

a. ledger c. daybook
b. T-account d. journal

18. When an entity pays for goods or services before actual receipt, the payment should be
recorded as a decrease in Cash and an increase in
a. an asset c. an owner’s equity account
b. an expense d. a liability

19. Entries recorded on the right side of any account are called
a. debits
b. increases
c. credits
d. decreases

20. Which of the following accounts probably would be listed after the others in a chart of
accounts
a. Unearned Art Fees
b. Prepaid Rent
c. Owner’s Capital
d. Art Revenue

21. Unearned Revenues are recorded by companies that

a. pay money in advance of the performance of a service
b. pay money at the time performance of a service is complete
c. receive money in advance of the performance of a service is complete

22. Which of the following statements regarding a trial balance is incorrect?

a. A trial balance helps to localize errors within an identifiable time period
b. A trial balance is a test of the equality of the debit and credit balances in the
ledger
c. A trial balance is a list of all of the open accounts in the ledger with their balances
as of a given date
d. A trial balance proves that no errors of any kind have been made in the accounts
during the accounting period
23. A simple journal entry
a. consists of two debits and one credit
b. consists of one debit and two credits
c. is a memorandum entry
d. consists of one debit and one credit

24. The Posting Reference column in the ledger shows that an item has been posted when
which of the following is placed in it?
a. An “X”
b. The account number
c. The journal page number
d. A check mark

25. Which of the following transaction does not affect the balance sheet totals?
a. Purchasing P 50,000 supplies account
b. Collecting P 40,000 from customers on account
c. Paying P 300,000 note payable
d. Withdrawal of P 80,00 by the firm’s owner

26. The accrual basis of accounting recognizes

a. revenues when cash is received
b. expenses when cash is paid
c. revenues when products are produced as part of operating activities
d. expenses when resources are consumed as part of operating activities

27. An error of original entry occurs when

a. either the debit entry or the credit entry for a particular transaction is recorded in
the wrong class of account
b. a correct figure is entered in the double-entry accounting records, once in the
correct ledger account and once in the wrong person’s account
c. an incorrect figure is entered on the correct sides of the correct ledger accounts
d. none of the above

28. Which of the following statements is true about a proper journal entry?
a. An explanation must follow each debit and each credit
b. The name of the month should be repeated for each entry
c. The posting reference column is filled in prior to posting
d. All debits are listed before any credits