Revised Summer 2016 Chapter Review

ACCOUNTING FOR TRANSACTIONS,

THE ACCOUNTING EQUATION AND
THE TRIAL BALANCE

Key Terms and Concepts to Know

The Accounting Cycle (first four steps):
• Analyze transactions to understand them and determine their effect on the
accounting equation
• Journalize transactions for the various types of transactions.
• Post transactions from the journal to the general ledger
• Prepare a trial balance
o Identify the types of errors a trial balance can and cannot help to locate
o How to correct the errors.

Accounting Equation and Components:

• Three basic elements: Assets, Liabilities, Stockholders Equity
• Stockholders’ Equity = Retained Earnings + Common Stock
• Retained earnings = Revenues - Expenses - Dividends
• The accounting equation must always balance

Business Transactions:
• Analyze each transaction to determine its impact on the accounting equation
• Analyze each transaction to determine its impact on accounts and financial
statements

Journal and Ledger

• Journal is used to record complete transactions
• Ledger is used to record all activity in each account and to maintain the balance in
each account
• Both a journal and a ledger are necessary because they provide different
information to management
• A chart of accounts is a listing of all possible accounts to be used in the journal
and ledger. Each account is assigned a number in the following order: assets,
liabilities, owners’ equity, revenues and expenses

Page 1 of 28
Revised Summer 2016 Chapter Review

The Rules of Debit and Credit:

• Debit is the left side of an account and Credit is the right side of an account
• Normal balances of accounts and how debits and credits increase or decrease
account balances

Normal Balance Increase Decrease

Balance Sheet Accounts
Assets Debit Debit Credit
Liabilities Credit Credit Debit
Owners’ Equity Credit Credit Debit
Capital Stock Credit Credit Debit
Retained Earnings Credit Credit Debit
Dividends Debit Debit Credit
Income Statement Accounts
Revenue Credit Credit Debit
Expenses Debit Debit Credit

Analyzing a general ledger account (T-account)

• Use the general equation:
Beginning Balance + Inflows – Outflows = Ending Balance.
• Remember that the inflows and outflows are renamed for the types of activity in
each specific account
o Cash has receipts and supplies has purchases but both are inflows into
(additions to) these accounts
o Accounts receivable as collections and accounts payable has payments but
both are outflows from (deductions from) these accounts
• The equation can be manipulated to solve for an unknown as any one of the four
terms.

Components of Stockholders equity:

• The two main components of Stockholders’ equity are Common Stock and
Retained Earnings
• Retained Earnings includes the balance in Retained earnings at the beginning of
the year plus Net Income and less Dividends for the year
• Net income equals Revenues less expenses

Page 2 of 28
Revised Summer 2016 Chapter Review

Trial Balance:
• A listing of all accounts in the general ledger at the balance sheet date with the
account balance; one column for debit balances and one column for credit
balances
• The totals of the two columns must be equal
• A trial balance is an intermediate step between the general ledger and the
financial statement, as the size and complexity of a general ledger for a large
company makes preparing financial statements from the general ledger
impractical.
• The trial balance also allows the company to find and correct certain types of
errors

Page 3 of 28
Revised Summer 2016 Chapter Review

Key Topics to Know

Transactions

• Transactions are the result of economic events that affect the accounting
equation.
• Transactions require a minimum or two items or parts.
• Since the rules of algebra apply to the accounting equation, transactions must
have one of three effects:
o Increase both sides of the equation
o Decrease both sides of the equation
o Have offsetting increases or decreases on one side of the equation
• These increases and decreases in the various account balances form the basis for
the use of debits and credits.

Example #1

X Company engaged in three transactions during May:

• Purchased a truck for $20,000 cash
• Paid a bill from VISA for $500 which was received and recorded in April
• Purchased office supplies for $1,000 which will be paid for in June

Required: Identify the accounts, amounts and increases/decreases for each

transaction.

Solution #1

• Two assets accounts are used: Cash is decreased $20,000 and Truck is increased
$20,000
• One asset account and one liability account are used: the asset account Cash is
decreased $500 and the liability account Accounts Payable is decreased $500
• One asset account and one liability account are used: the asset account Office
Supplies is increased $1,000 and the liability account Accounts Payable is
increased $1,000

Page 4 of 28
Revised Summer 2016 Chapter Review

Debits and Credits

• Debit means left

• Credit means right
• They DO NOT mean increase or decrease or plus or minus or anything else by
themselves.
• Each of the 6 types of accounts is assigned a normal or typical balance according
to the following table.
• Each of the 6 types of accounts is assigned debits and credits as increases or
decreases based on the following table:

DEBIT SIDE CREDIT SIDE

After – Assets Let’s – Liabilities
Eating – Expenses Read – Revenues and Retained
Earnings
Dinner – Dividends Comics – Capital Stock

Normal balance on the DEBIT side Normal balance on the CREDIT side
Increase on the DEBIT side Increase on the CREDIT side
Decrease on the CREDIT side Decrease on the DEBIT side

• Another approach to understanding is based on the accounting equation:

Assets = Liabilities + Owners’ Equity

debits credits debits credits debits credits

+ - - + - +

• Owners’ equity is not an account in the general ledger. Rather it is a collection of

four accounts:

Capital Stock Revenue

debits credits debits credits
- + - +

Expenses Dividends
debits credits debits credits
+ - + -

• Capital Stock and Revenue mirror owners’ equity; that is, increases in these two
accounts increase owners’ equity.
Page 5 of 28
Revised Summer 2016 Chapter Review

• Expenses and Dividends have the opposite effect on owners’ equity; that is,
increases in these two accounts decrease owners’ equity.
• Retained Earnings is the accumulation of all revenues, expenses and dividends
since the inception of the company. Since a company is in business to make a
profit (revenues > expenses) and it would not distribute all of its net income to
shareholders through dividends, Retained Earnings also mirrors Owners’ equity:

Retained Earnings

debits credits
- +

• However, if the company is not profitable, then revenues have been less than
expenses and Retained earnings would have a negative or debit balance.

Example #2

X Company engaged in three transactions during May:

• Purchased a truck for $30,000 cash
• Paid a bill from VISA for $500 which was received and recorded in April
• Purchased office supplies for $1,000 which will be paid for in June

Required: Identify the accounts, amounts and debits and credits for each
transaction.

Solution #2

• Two assets accounts are used: Cash is credited (decreased) $20,000 and Truck is
debited (increased) $20,000
• One asset account and one liability account are used: the asset account Cash is
credited (decreased) $500 and the liability account Accounts Payable is debited
(decreased) $500
• One asset account and one liability account are used: the asset account Office
Supplies is debited (increased) $1,000 and the liability account Accounts Payable
is credited (increased) $1,000

Page 6 of 28
Revised Summer 2016 Chapter Review

Journals and Ledgers

• Accounting uses two books to record transactions.

• The Journal is the book of original entry; transactions are first recorded in the
journal using journal entries.
• Each journal entry records an entire transaction at the time it is completed.
• Total debits must equal total credits for each journal entry.
• Journal entries are posted to the General Ledger, one entry at a time.
• Posting separates each transaction into its parts, account by account, and records
each part on the Page(s) dedicated to that account.
• The General Ledger accumulates all the transactions for an account and maintains
a running balance of all postings for each account.
• The shorthand for a Ledger account is called a T-account.

Example #3

W Company uses a chart of accounts which includes the following accounts.

Cash Capital Stock Rent expense

Accounts Receivable Dividends Automobile expense
Supplies Sales Commissions Supplies expense
Accounts Payable Office Salaries Expense Misc. expense

During the first month of operation, W Company had the following transactions;

a) Issued capital stock for $16,000.

b) Paid rent on office building for the month, $3,000.
c) Purchased supplies on account, $1,200.
d) Paid creditor on account, $800.
e) Earned sales commissions and sent invoices to customers, $22,500.
f) Paid automobile expenses for month, $2,900, and miscellaneous
expenses, $1,450.
g) Paid office salaries, $4,200.
h) Determined the cost of supplies used was $960.
i) Paid cash dividends, $1,400.

Required: a) Journalize the transactions

b) Prepare T-accounts and post the entries to the appropriate
accounts. Determine balances after all entries are posted.

Page 7 of 28
Revised Summer 2016 Chapter Review

Solution #3

a) Cash 16,000
Capital Stock 16,000

b) Rent Expense 3,000

Cash 3,000

c) Supplies 1,200
Accounts Payable 1,200

d) Accounts Payable 800

Cash 800

e) Accounts Receivable 22,500

Sales Commissions 22,500

f) Automobile Expenses 2,900

Misc. Expenses 1,450
Cash 4,350

g) Salaries Expense 4,200

Cash 4,200

h) Supplies Expense 960

Supplies 960

i) Dividends 1,400
Cash 1,400

Page 8 of 28
Revised Summer 2016 Chapter Review

Cash A/R Supplies

a) 16,000 3,000 b) e) 22,500 c) 1,200 960 h)
800 d)
4,350 f)
4,200 g)
1,400 i)
2,250 22,500 240

A/P Capital Stock Dividends

d) 800 1,200 e) 16,000 c) i) 1,400

400 16,000 1,400

Sales Commission Salaries Expense Rent Expense

22,500 e) g) 4,200 b) 3,000

22,500 4,200 3,000

Auto Expense Supply Expense Misc. Expense

f) 2,900 h) 960 f) 1,450

2,900 960 1,450

Page 9 of 28
Revised Summer 2016 Chapter Review

Stockholders’ Equity

• The components of Stockholders’’ equity are reported in various places in the

financial statements:

Statement of
Income
Retained Balance Sheet
Statement
Earnings

Common
Stock

Retained
Earnings Stockholders’
beginning Equity
balance
Retained
Earnings
ending
balance
Revenues
Net Income
Expenses
Dividends

Trial Balance

• A trial balance is a listing of the balances in all general ledger accounts.

• It is used to prepare financial statements.
• It may be used to find errors in the ledger caused by debits not equal to credits.
• It may also highlight illogical account balances such as a debit balance in sales or
account balances that illogically high or low.

Page 10 of 28
Revised Summer 2016 Chapter Review

Example #4

The debit and credit totals of the following trial balance are unequal as a result of the
following errors. Prepare a corrected trial balance as of June 30.

Cash $26,500
Accounts Receivable 37,775
Prepaid Insurance 800
Office Supplies 960
Accounts Payable $11,410
Notes Payable 6,000
Capital Stock 7,500
Retained Earnings 25,340
Dividends 2,000
Fees Earned 126,500
Wages Expense 84,100
Rent Expense 5,500
Advertising Expense 3,900
Automobile Expense 275
Miscellaneous Expense 1,550
Totals $161,360 $178,750

Errors noted:
a) The balance of cash was understated by $750. (Cash +$750)
b) A cash receipt of $2,100 was posted as a debit to Cash of $1,200. (Cash
+$900)
c) A debit of $3,000 for a cash dividend was posted as a credit to Retained
Earnings. (Dividends +$3,000; RE –$3,000)
d) The balance of $2,750 in Automobile Expense was entered in the trial
balance as $275. (Auto Exp. = $2,750)
e) A debit of $975 to Accounts Receivable was not posted. (A/R +975)
f) A return of $125 of defective supplies was erroneously posted as a $215
credit to Supplies. (Supplies +$90)
g) An insurance policy acquired at a cost of $150 was posted as a credit to
Prepaid Insurance. (Prepaid Ins. +$300)
h) A debit of $900 in Accounts Payable was overlooked when determining
the balance of the account. (A/P –$900)
i) The balance of Notes Payable was overstated by $5,000. (Notes Payable
–$5,000)

Required: Prepare a corrected trial balance.

Page 11 of 28
Revised Summer 2016 Chapter Review

Solution #4

Corrected Trial Balance

Cash $28,150
Accounts Receivable 38,750
Prepaid Insurance 1,100
Office Supplies 1,050
Accounts Payable $10,510
Notes Payable 1,000
Capital Stock 7,500
Retained Earnings 22,340
Dividends 1,000
Fees Earned 126,500
Wages Expense 84,100
Rent Expense 5,500
Advertising Expense 3,900
Automobile Expense 2,750
Miscellaneous Expense 1,550
Total $167,850 $167,850

Page 12 of 28
Revised Summer 2016 Chapter Review

Practice Problems
Practice Problem #1

K Company had the following transactions during August:

a) Issued capital stock for cash, $27,500

b) Paid rent on office for month, $2,500
c) Purchased office supplies for cash, $2,225
d) Paid insurance premiums, $1,500
e) Purchased office equipment on account, $10,000
f) Received cash for services completed, $3,800
g) Received an invoice for utilities, $475
h) Billed customers for services completed, $1,800
i) Received cash from customers on account, $900
j) Paid $4,200 on account
k) Paid cash dividends, $2,800

The company uses this chart of accounts:

Cash Accounts Payable Rent Expense

Accounts Receivable Capital Stock Utilities Expense
Supplies Dividends Equipment
Prepaid Insurance Fees Earned

Required: Journalize the transactions and post the entries to T-accounts

Page 13 of 28
Revised Summer 2016 Chapter Review

Practice Problem #2

The debit and credit totals of the following Trial Balance are unequal as a result of the
following errors:

a) The balance of cash was overstated by $850.

b) A cash payment of $3,600 was posted as a credit to Cash of $6,300.
c) A debit of $3,000 for a cash dividend was posted as a credit to Delivery
Expense.
d) The balance of $8,900 in Advertising Expense was entered as $890 in the
Trial Balance.
e) A credit of $250 to Accounts Receivable was not posted.
f) A purchase of $250 in supplies was posted as a credit to Supplies.
g) The balance of Retained Earnings was overstated by $1,500.
h) An insurance policy acquired at a cost of $315 was erroneously posted as
a $135 debit to Prepaid Insurance.
i) Rent Expense, with a balance of $19,000 was omitted from the trial
balance.
j) A credit of $700 in Accounts Payable was overlooked when determining
the balance of the account.

Trial Balance
Cash $27,650
Accounts Receivable 38,850
Prepaid Insurance 570
Supplies 125
Land 0
Accounts Payable $12,550
Capital Stock 15,000
Retained Earnings 49,525
Dividends 7,000
Fees Earned 158,725
Salary Expense 123,075
Advertising Expense 890
Delivery Expense 950
Miscellaneous Expense 600
Total $199,710 $235,800

Required: Prepare a corrected trial balance as of September 30 of the

current year.

Page 14 of 28
Revised Summer 2016 Chapter Review

Practice Problem #3

T Company owned a tugboat and provides day tugboat tours to tourists along the
Mississippi River near St. Louis. T Company had the following transactions during the
first month of business.

Butler invested $20,000 cash and his tugboat valued at $90,000 in

May 1
the business.
T Company paid $3,000 cash for office equipment to keep track of
May 2
business activities.
May 3 T Company bought boating supplies costing $2,500 on credit.
B T Company paid the river master $500 cash for the first month’s
May 4
dock rental.
May 5 T Company paid $1,800 cash for a six-month insurance policy.
May 10 T Company received $2,000 cash from clients for his first tour.
T Company provided a $3,500 tour on credit; the customer has
May 12
agreed to pay within 10 days.
May 19 T Company paid for the supplies originally purchased on May 3.
T Company receives payment on the account from the client entry
May 22
on May 12.
May 25 T Company received $2,750 cash for additional tours provided.
May 31 T Company paid his crewmember a salary of $1,000.
May 31 T Company paid $2,000 cash in dividends to the owner.

Required: Prepare journal entries to record the following transactions.

Practice Problem #4

The following information is from M Company’s financial records for the last 3 years:

Assets Liabilities Owners’ Equity

End of Year 1 $200,000 ? ?
Change during Year 2 ? ? -30,000
End of Year 2 ? ? 100,000
Change during Year 3 -40,000 ? ?
End of Year 3 ? ? 130,000

Required: Fill in the missing dollar amounts.

Page 15 of 28
Revised Summer 2016 Chapter Review

Practice Problem #5

After preparing an unadjusted trial balance at year-end, R Company discovered the

following errors:

1. Cash payment of the $225 telephone bill for December was recorded twice.
2. Cash payment of a note payable was recorded as a debit to Cash and a debit to
Notes Payable for $1,000.
3. The balance in the Retained Earnings account was a debit of $413. It was listed
on the trial balance as a credit of the same amount.
4. An additional investment of $5,000 cash by the owner was recorded as a debit
to Common Stock and a credit to Cash.
5. A credit purchase of office equipment for $1,800 was recorded as a debit to the
Office Equipment account with no offsetting credit entry.
6. Payment of $3,000 for the purchase of furniture was not recorded.
7. Sale of $700 of merchandise on account to a customer was recorded as credit
Revenue $700 and debit Accounts Receivable $70.
8. Sale of $700 of merchandise to a customer was recorded as credit Revenue
$700 and debit Accounts Receivable $700.
9. The revenue account balance of $79,817 was listed on the trial balance as
$97,817.
10. A $900 cash payment for dividends was recorded to the correct accounts as $90.

Required: Complete the following chart for the errors noted.

Would the error

cause the trial
balance to be out Correcting journal
of balance? entry required?
Debits or
Amount of Credits
Error Yes No Imbalance higher? Yes No
1
2
3
4
5
6
7
8
9
10

Page 16 of 28
Revised Summer 2016 Chapter Review

True / False Questions

1. A list of a general ledger accounts and their account numbers is a chart of
accounts.
True False

2. After recording each transaction, total assets must equal total liabilities plus
stockholders' equity.
a)True False

3. A company's general ledger provides a chronological record of its business

transactions.
True False

4. Paying cash to a supplier for services causes assets to increase and

stockholders' equity to increase.
True False

5. Increases in expenses have the effect of decreasing retained earnings.

True False

6. A liability account normally has a debit balance.

True False

7. A credit to an account balance always results in the balance decreasing.

True False

8. For each transaction, there must be at least one debit amount and one credit
amount.
True False

9. Any error in the accounting system will cause the trial balance to be out of
balance.
True False

10. Double entry accounting requires that every entry must include at least one
debit and at least one credit.
True False

11. The process of transferring the debit and credit information from the journal to
individual accounts in the general ledger is called journalizing.

Page 17 of 28
Revised Summer 2016 Chapter Review

True False

12. A trial balance is a list of all accounts and their balances at a particular date,
showing that assets equal liabilities.
True False

13. If total debits equal total credits in the trial balance, then all balances are
correct.
True False

14. Financial statements are prepared from the general ledger.

True False

15. The left side of a T-account is the credit side.

True False

Page 18 of 28
Revised Summer 2016 Chapter Review

Multiple Choice Questions

1. Accounts:
a) Are records of increases and decreases in individual financial statement
items
b) Are only used by large entities with many transactions.
c) Do not reflect money amounts.
d) Are used only by entities that manufacture products.

2. Which of the following accounts is a liability account?

a) Dividends
b) Cash
c) Accounts Payable
d) Capital Stock

3. The debit side of an account:

a) Is the right-hand side of the account.
b) Is the left-hand side of the account.
c) Depends on whether the account is an asset, liability, or stockholder’s
equity.
d) Can be either side of the account depending on how the accountant set up
the system.

4. A debit may signify a(n):

a) Increase in asset accounts
b) Increase in liability accounts
c) Increase in the capital account
d) Decrease in expense accounts

5. A credit may signify a(n):

a) Increase in assets
b) Increase in liabilities
c) Decrease in capital
d) Decrease in revenue

Page 19 of 28
Revised Summer 2016 Chapter Review

6. Which of the following applications of the rules of debit and credit is true?
a) Increase rent expense with debits and the normal balance is a debit.
b) Decrease accounts receivable with credits and the normal balance is a
credit.
c) Increase accounts payable with credits and the normal balance is a debit.
d) Decrease cash with debits and the normal balance is a credit.

7. In which of the following types of accounts are increases recorded by credits?

a) Liability, Revenue
b) Dividends, Asset
c) Expense, Liability
d) Revenue, Dividends

8. A credit balance in which of the following accounts would indicate a likely

error?
a) Dividends
b) Accounts Payable
c) Fees Earned
d) Capital Stock

9. Which of the following entries records the receipt of a utility bill from the
power company?
a) Debit Utilities Payable, credit Accounts Payable
b) Debit Accounts Payable, credit Utilities Payable
c) Debit Utilities Expense, credit Accounts Payable
d) Debit Accounts Payable, credit Utilities Expense

10. The process of initially recording a business transaction is called:

a) Sliding
b) Posting
c) Journalizing
d) Transposing

11. Which of the following entries records the payment of rent for the current
month?
a) Cash, debit; Rent Expense, credit
b) Rent Expense, debit; Cash, credit
c) Rent Expense, debit; Accounts Payable, credit
d) Accounts Payable, debit; Rent Expense, credit

Page 20 of 28
Revised Summer 2016 Chapter Review

12. Which of the following entries records the collection of cash from cash
customers?
a) Accounts Receivable, debit; Fees Earned, credit
b) Fees Earned, debit; Accounts Receivable, credit
c) Fees Earned, debit; Cash credit
d) Cash, debit; Fees Earned, credit

13. The verification that the sum of the debits and the sum of the credits in the
ledger are equal is called:
e) A journal
f) A ledger
g) Posting
h) A trial balance

14. Which of the following errors, each considered individually, would cause the
trial balance totals to be unequal?
a) A payment of $248 to a creditor was posted as a debit of $248 to Accounts
Payable and a debit of $248 to Accounts Receivable.
b) Cash received from customers on account was posted as a debit of $450 to
Cash and a credit of $450 to Accounts Payable.
c) A payment of $79 for supplies was posted as a debit of $97 to Supplies and
a credit of $97 to Cash.
d) A transaction was not posted.

15. Accounts with normal debit balances include:

a) Assets and liabilities
b) Liabilities and expenses
c) Stockholder’s equity and revenues
d) Expenses and assets

Page 21 of 28
Revised Summer 2016 Chapter Review

Solutions to Practice Problems

Practice Problem #1

a) Cash 27,500
Capital Stock 27,500
b) Rent Expense 2,500
Cash 2,500
c) Supplies 2,225
Cash 2,225
d) Prepaid Insurance 1,500
Cash 1,500
e) Equipment 10,000
Accounts Payable 10,000
f) Cash 3,800
Fees Earned 3,800
g) Utilities Expense 475
Accounts Payable 475
h) Accounts Receivable 1,800
Fees earned 1,800
i) Cash 900
Accounts Receivable 900
j) Accounts Payable 4,200
Cash 4,200
k) Dividends 2,800
Cash 2,800

Page 22 of 28
Revised Summer 2016 Chapter Review

Cash A/R Supplies

a) 27,500 2,500 b) h) 1,800 900 i) c) 2,225
f) 3,800 2,225 c)
i) 900 1,500 d)
4,200 j)
2,800 k)
18,975 900 2,225

A/P Capital Stock Dividends

j) 4,200 10,000 e) 27,500 a) k) 2,800
475 g)
400 27,500 2,800

Fees Earned Utilities Expense Rent Expense

3,800 f) g) 475 b) 2,500
1,800 h)
5,600 475 2,500

Prepaid Insurance Equipment

d) 1,500 e) 10,000

1,500 10,000

Page 23 of 28
Revised Summer 2016 Chapter Review

Practice Problem #2

Corrections required:
a) Cash -850
b) Cash +2,700
c) Dividend +3,000; Delivery Expense +3,000
d) Advertising Expense change to 8,900
e) A/R –250
f) Supplies +500
g) Retained Earnings –1,500
h) Prepaid Expenses +180
i) Rent Expense should be included at $19,000
j) A/P +700

Corrected Trial Balance

Cash $29,500
Accounts Receivable 38,600
Prepaid Insurance 750
Supplies 625
Land 0
Accounts Payable $13,250
Capital Stock 15,000
Retained Earnings 48,025
Dividends 10,000
Fees Earned 158,725
Salary Expense 123,075
Rent Expense 19,000
Advertising Expense 8,900
Delivery Expense 3,950
Miscellaneous Expense 600
Total $235,000 $235,000

Page 24 of 28
Revised Summer 2016 Chapter Review

Practice Problem #3

May 1 Cash 20,000

Tugboat 90,000
Common Stock 110,000
2 Office Equipment 3,000
Cash 3,000
3 Boating Supplies 2,500
Accounts Payable 2,500
4 Rent expense 500
Cash 500
5 Prepaid Insurance 1,800
Cash 1,800
10 Cash 2,000
Tugboat Tour Revenue 2,000
12 Accounts Receivable 3,500
Tugboat Tour Revenue 3,500
19 Accounts Payable 2,500
Cash 2,500
22 Cash 3,500
Accounts Receivable 3,500
25 Cash 2,750
Tugboat Tour Revenue 2,750
31 Salary expense 1,000
Cash 1,000
31 Dividends 2,000
Cash 2,000

Page 25 of 28
Revised Summer 2016 Chapter Review

Practice Problem #4

Step (1) Year 1 Owners’ Equity 100,000 + 30,000 = 130,000

Step (2) Year 1 Liabilities 200,000 – 130,000 = 70,000
Step (3) Change in Year 2 Assets 92,000 – 30,000 = 62,000
Step (4) Year 2 Liabilities 70,000 + 92,000 = 162,000
Step (5) Year 2 Assets 200,000 + 62,000 = 262,000
Step (6) Year 3 Assets 262,000 – 40,000 = 222,000
Step (7) Change in Year 3 Owners’ Equity 130,000 – 100,000 = 30,000
Step (8) Year 3 Liabilities 222,000 – 130,000 = 92,000
Step (9) Change in Year 3 Liabilities 92,000 – 162,000 = -70,000

Proof: Change in Year 3 Liabilities -40,000 – 30,000 = -70,000

Practice Problem #5

Would the error

cause the trial Correcting
balance to be out journal entry
of balance? required?
Debits or
Amount of Credits
Error Yes No Imbalance higher? Yes No
1 X X
2 X $2,000 Debits (1)
3 X $826 Credits X
4 X X
5 X $1,800 Debits (1)
6 X X
7 X $630 Credits (1)
8 X X
9 X $18,000 Credits X
10 X X

Page 26 of 28
Revised Summer 2016 Chapter Review

Solutions to True / False Problems

1. True
2. True
3. False - the general journal provides a chronological record of
business transactions.
4. False – paying cash for services causes assets to decrease and
stockholders’ equity to decrease.
5. True
6. False – a liability account normally has a credit balance because
increases to liabilities are recorded as credits.
7. False - a credit decreases assets, dividends, and expense, but
increases liabilities, stockholders' equity, and revenues.
8. True
9. False - errors that involve posting an entry to the wrong account,
posting an entry twice or failing to post an entry will not cause the
trial balance to be out of balance.
10. True
11. False - the process is called posting.
12. False - the trial balance shows that total debits equal total credits.
13. False - a trial balance could contain offsetting errors where the
balance of one account is overstated or understated but the
balance of another account (with the same type of debit or credit
balance) is understated or overstated by the same amount
14. False – financial statements are prepared from a trial balance.
15. False – the left side of a T-account is the debit side

Page 27 of 28
Revised Summer 2016 Chapter Review

Solutions to Multiple Choice Questions

1. A
2. C
3. B
4. A
5. B
6. A
7. A
8. A
9. C
10. C
11. B
12. D
13. D
14. A
15. D

Page 28 of 28