Introduction to Accounting 120
Chapter 5:
Review Answers
Section Review: Page 131 –
4pts
1. The new accounts are revenues,
expenses and drawings.
2. The purpose of the Capital account in
the expanded ledger is to contain the
equity figure at the beginning of the
fiscal period, plus new capital from the
owner, if any.
3. The income statement is prepared from
data found in the new accounts in the
expanded ledger.
4. “Revenue” is an increase in equity
resulting from the sale of goods or
Section Review: Page 131 –
5pts
5. “Expense” is a decrease in equity
resulting from the cost of materials
and services used to produce the
revenue.
6. “Drawings” represents a decrease
in equity resulting from the
withdrawal of assets from the
business by the owner for personal
use.
Section Review: Page 131 –
5pts
8. Three examples are:
–
–
–
The owner withdraws cash from the business for
personal use
The owner takes a computer permanently out of the
business for personal use
The owner collects a debt from a customer and
keeps the money for personal use
9. The revenue recognition convention provides
that revenue be taken into the accounts
(recognized) at the same time as the
transaction is completed. Usually, this is
when the bill is sent to the customer.
10. The matching principle states that each
expense item related to revenue earned must
be recorded in the same fiscal period as the
revenue it helped to earn.
Section Review: Page 140 –
3pts
1. A chart of accounts is a list of accounts
and their account numbers in ledger
order.
2. A chart of accounts is used by anyone
who needs to work on the accounts but
is not familiar with the ledger or the
account nunbers. A new auditor is an
examples of such a person.
3. Assets are numbers in the 100s.
Liabilities in the 200s. Capital and
Drawings are in the 300s. Revenues in
Section Review: Page 140 –
6pts
4. The chart as shown below:
Item
Asset
Liability
Capital
Drawings
Revenue
Expenses
Increase
Debt
Credit
Credit
Debit
Credit
Debit
Decrease
Credit
Debit
Debit
Credit
Debit
Credit
Section Review: Page 140 –
6pts
6. The equity equation is:
•
Beginning Capital + Net Income – Net Loss – Drawings =
Ending Capital
7. Buying on credit gives the pruchaser
and opportunity to make sure the goods
or services are satisfactory before
making payment. Then, if there is a
problem, there is usually no difficulty
having it corrected.
8. The term “on account” is used as
follows:
Section Review: Page 140 –
5pts
9. You must have sold on account to a customer
before you would receive on account from that
customer.
10. The fiscal period is the period for time over
which earnings are measured.
11. Revenue and expense accounts make up the
income statement.
12. The time period concept provides that account
will take place over specific time periods know
as fiscal periods.
13. The income statement headings reads “Month
Ended” followed by the date, but the balance
sheet is dated for a certain day.
Exercise 5.2 - #2 – 5 points
Exercise 5.2 - #2 Cont’d
5 Points
Exercise 5.2 - #4, pg. 142
5 Points
Assets
Liabilities
Capital
Revenue
Debit
Credit
Debit
Credit
Debit
Credit
Debit
Credit
Increase
Decrease
Decrease
Increase
Decrease
Increase
Decrease
Increase
Drawings
Increase
Decrease
Expenses
Increase
Decrease
Exercise 5.2 - #4, pg. 143
15 Points
Financial Information
Company 1
Company 2
Company 3
Company 4
Company 5
Beginning Capital
6 000
6 000
15 000
5 000
62 000
Total Revenues
10 000
25 000
29 000
50 000
30 000
Total Expenses
8 000
11 000
18 000
30 000
35 000
Net Income or Loss (-)
2 000
14 000
11 000
20 000
-5 000
Drawings
3 000
12 000
17 000
15 000
5 000
Increase/Decrease in Equity (-)
-1 000
2 000
-6 000
5 000
-10 000
Ending Capital
5 000
8 000
9 000
10 000
52 000