Acct 11
Chapter 5 Review Key
1. Complete each of the following statements by supplying the missing word or words. (10 pts)
credit
debit
net loss
net
matching drawings
increasing
decrease
income
principle
decreasing time
increase
fiscal
income
accounting revenue
period
statement
recognition
concept
convention
a) If drawings are greater than net income in a year, and the owner makes no other investments,
then Capital will decrease.
b) Expenses are recorded on the debit side of the expense account because owner’s equity is
decreasing.
c) A net loss results when expenses are greater than revenue.
d) The period of time over which earnings are measured is called the fiscal period or the
accounting period.
e) Revenue is recorded in the Fees Earned account as a credit, because owner’s equity is
increasing.
f) If J. Smith, an owner, takes money out of the business to pay a personal bill, these 2 entries
would need to be recorded in the Accounts: a debit to the J. Smith, __drawings___ account,
and a __credit______ to the bank account
g) The _income statement_ is used to determine the amount of income tax a business will pay.
h) The ____revenue recognition convention_ states that revenue must be recorded in the
accounts at the time the transaction is completed
i) The ___matching principle__ states that each expense item related to revenue earned must be
recorded in the same time period as the revenue it helped to earn.
j) The ___time period concept__states that accounting will take place over a specific time period
known as the fiscal periold.
2. Name the four types of accounts found in the equity section of the ledger, and the type of
balance they usually have (debit or credit)?
(5 pts)
Account Type
1) Capital
2) Revenue
3) Expenses
4) Drawings
Type of Balance
credit
credit
debit
debit
1
3. Indicate which accounts you would debit and credit for the following transactions for
Splinters Building Supplies. Write complete account titles.
(10 pts)
September
3 Issued a bill for $560 to W. Thomson for services
performed on account.
9 Issued a cheque for $200 to the owner,
P. Schelling, for his personal use.
12 Received a bill from Imperial Garage for repairs to
the company car.
14 Received a memo from the owner stating the bank
had reduced the bank loan by $500.
16 Issued a cheque for $80 in payment of the
telephone bill.
19 Received cash from a customer for services
performed.
20 Issued a cheque for $400, the wages of
an employee.
22 Received a cheque from W. Thomson for $300
in partial payment of his account balance.
24 Purchased supplies on account from Home
Hardware, $380.
27 Issued Cheque No. 3 to Comeau Hardware
on account.
Debit Account
A/R—W. Thomson
P. Schelling,
Drawings
Credit Account
Fees Earned
Car Expense
Bank
A/P—Imperial
Garage
Bank Loan
Bank
Telephone Expense
Bank
Bank
Fees Earned
Wages Expense
Bank
Bank
Supplies
A/P—Comeau
Hardware
A/R—W. Thomson
A/P—Home
Hardware
Bank
4. P. Simpson began business as an engineering consultant on October 1, 2005. He set up the
following chart of accounts to be used in his business:
101 Bank
110
111
120
125
130
210
A/R—R. Arthur
A/R—J. Morrison
Supplies
Equipment
Automobile
A/P—Ace Finance Co.
A/P—Grand’s
211 Stationers
212 A/P—Star Oil Co.
2
301 P. Simpson, Capital
P. Simpson,
302 Drawings
401 Fees Earned
505 Car Expense
510 Office Expense
515 Rent Expense
520 Wages Expense
a) work out the changes for the transaction and record these changes in the T-accounts (20 pts)
b) Calculate and record the account balances.
(10 pts)
Transactions
1. On October 1, 20—, Mr. Simpson started his business with the following assets and
liabilities: Bank $4 651; Equipment $2 465; Automobile $8 460; A/P—Ace Finance Co.
$2 850; and
A/P—Grand’s Stationers $1 000.
2. Performed a service for S. Stewart and received $200 cash in payment.
3. Received a bill from Grand’s Stationers for $400 of supplies purchased on account.
4. Issued a cheque to O. Mack for wages, $500.
5. Received a bill from Star Oil Co. for gasoline and oil used in the business car, $60.
6. Issued a cheque to Ace Finance Company for regular monthly payment, $400.
7. Issued a cheque to J. Mahoney for the rent for the month, $700.
8. Issued a bill to J. Morrison for services performed, $500.
9. Issued a cheque for postage stamps, $30.
10. Issued a cheque for car repairs, $120.
11. Received a cheque from J. Morrison on account, $300.
12. Issued a cheque to R. Gordon for cleaning the office, $100.
13. Issued a cheque to P. Simpson, the owner, for personal use, $800.
14. Issued a bill to R. Arthur for services performed, $1 000.
3
ASSETS
Bank
1
2
11
5 151
2 501
Supplies
3
A/R—R. Arthur
101
4 651
200
300
500
400
700
30
120
100
800
2 650
4
6
7
9
10
12
13
14
8
1 000
120
Equipment
1
400
A/R—J. Morrison
110
1 000
400
111
300 11
500
200
125
Automobile
1
2 465
2 465
130
8 460
8 460
LIABILITIES AND EQUITY
A/P—Ace Finance Co.
6
400
A/P—Grand’s Stationers
210
2 850
1
2 660
P. Simpson, Capital
P. Simpson, Drawings
1
13
11 726
Car Expense
5
10
505
180
Wages Expense
4
500
500
4
5
272
302
Fees Earned
401
200
500
1 000
800
2 101
30
100
130
520
212
60
800
Office Expense
9
12
60
120
1
3
1 611
301
11 726
A/P—Star Oil Co.
211
1 000
400
510
Rent Expense
7
700
700
515
2
8
14
c)Balance the ledger of P. Simpson by means of a trial balance dated October 31, 2005.
(10 pts)
P. Simpson
Trial Balance
October 31, 20—
Accounts
Debits
Bank
2 501
A/R—R. Arthur
1 000
A/R—J. Morrison
200
Supplies
400
Equipment
2 465
Automobile
8 460
Credits
A/P—Ace Finance Co.
2 450
A/P—Grand’s Stationers
1 400
A/P—Star Oil Co.
60
P. Simpson, Capital
P. Simpson, Drawings
11 726
800
Fees Earned
1 700
Car Expense
180
Office Expense
130
Rent Expense
700
Wages Expense
500
17 336
17 336
5
d)
Prepare an income statement for P. Simpson as of October 31, 2005.
(20 pts)
P. Simpson
Income Statement
Month Ended October 31, 20—
REVENUE
Fees Earned
$1 700.00
EXPENSES
Car Expense
$ 180.00
Office Expense
130.00
Rent Expense
700.00
Wages Expense
500.00
Total Expenses
1 510.00
NET INCOME
$ 190.00
d) Prepare the equity section of the balance sheet for P. Simpson as of October 31, 2005. (10 pts)
P. Simpson, Capital
Balance October 1
Net Income
Drawings
Decrease in Capital
Balance October 31
6
$11 726.00
$ 190.00
800.00
( 610.00)
$11 116.00
5. Mrs. D. Reynolds started a business on January 1, investing $10 000 cash in it at this time.
During the year, the business had revenues of $50 000 and expenses of $38 000. Mrs.
Reynolds withdrew $15 000 for her personal use and invested an additional $4 000.
a) What is the net income of the business for the year? Show your calculations.
Net Income was $12 000 ($50 000 – $38 000).
b) What is the equity balance of the business at the end of the year? Show all calculations.
January 1st = $10 000
December 31st = $11 000 ($10 000 + $12 000 – $15 000 + $4 000)
c) What caused the increase or decrease in capital during the year?
Capital increased because even though there was a net loss, 4 000 was invested in the business.
6. The balance in the Capital account of O.K. Suppliers on January 1, 2005, was $26 000. The
balance in this account was $27 500 at the end of the year. Net income for the year was $5
000. Explain why the balance in the Capital account was not $31 000.
The owner withdrew $3 500 during the year for personal use.
7. Complete the following schedule. Each row is a separate business.
Net Income or
Opening Capital Net Loss (–)
Drawings
Ending
Capital
a) $35 000
$22 000
$18 000
$39 000
b) 51 000
76 000
52 000
75 000
c) 32 000
18 000
15 000
35 000
d) 40 000
–5 000
20 000
15 000
e)120 000
–30 000
20 000
70 000
7