APPENDIX A — Double-Entry Accounting Systems

If you wish for your students to have more exercises to reinforce their understanding of the double-entry accounting system, Handout A1 provides that opportunity. They involve restating the required portion of selected exercises and problems in the text to utilize double-entry accounting. Solutions for these exercises are provided with transparency masters A-1 to A-12.

SUGGESTED APPROACH

You may wish to point out to students that although they are taking a course that is emphasizing theory rather than procedure, there is a rationale for the study of such mundane topics as debit, credit, journals, and ledgers. A basic understanding of these topics is useful for two reasons:(1)Having taken an introductory accounting course there is the expectation that they will have a fundamental understanding of these topics and(2)a simple understanding of debits, credits, T accounts, and journal entries serves as a very useful and efficient means of communication. They will find that in class or on the job, people can quickly illustrate the impact of events and decisions by the use of these tools.

Confining their exposure to these topics to just an appendix in your book may not be sufficient to firmly plant these concepts in memory. It is with this in mind that a reworking of previous homework assignments using these concepts is provided.

You could illustrate that this textutilizes the integrated financial statement framework to analyze the effects of transactions. An example of the format can be found on page 47, exhibit 1.

Note that the accounts are listed across the top, horizontally, and the effects of the transactions listed below. This may be useful for classroom illustration, but it would be very impractical for recording events in the “real world.” Medium- and large-sized companies would have thousands of accounts and possibly tens of thousands of transactions a month.

Point out that while it would not be too difficult to prepare a balance sheet, preparing an income statement would be much more difficult, as you need to examine all of the events that affect Retained Earnings.

It would probably be useful to illustrate a few simple transactions using double-entry accounting, and to go over key terms.

Account. Explain that the word “account” just means category. When firms speak of their “chart of accounts,” that just means “list of categories.” For example, cash would be an account, land would be an account, and rent expense would be an account. This would indicate that a particular firm wants to keep track of its cash, land, and rent expense. It is easier to visualize and explain when looking at an example from a manual accounting system, although the principles involved are the same for a computerized system.

Below is an example of a typical account—in this case, Cash.

Cash

Date / Debit / Credit / Balance

Debits and Credits.Each account has two sides. A left side called “debit” and a right side called “credit.” Remind the students that it is very important to remember not to attach any more significance to debit and credit than numbers entered on the left and right side of accounts.

Journal.Tell the students that a journal is like a diary. It keeps a list of events that happened, and identifies which accounts are to receive entries on the left (debit) side, and which are to receive entries on the right side (credit).

Next, follow with an illustration, without explanation. Tell the students that the logic and explanation will follow the illustration, when they have something to relate to.

This would be a journal entry to record John Doe’s investing $5,000 in his firm. The typical format of a journal entry is to list the accounts to be debited first, followed by the accounts to be credited, with those account titles indented.

(Illustration 1)

Cash5,000

Capital Stock5,000

The question they will ask is, “How do you know whether to place numbers on the right or left side of an account?” Tell them to be patient. The explanation will follow shortly. First, let us examine our example of an account, Cash. Transferring the information from the journal to the ledger is called posting. Placing the $5,000 on the left side of cash would appear as follows.

Cash

Date / Debit / Credit / Balance
5,000 / 5,000

As they can imagine, at work, in the classroom, or in a text, if every time the need arose to illustrate a transaction you had to prepare a ledger account, it would be very time consuming. Instead, explain that a substitute is used, called a T account. It is a shorthand way of representing an account page. In the illustration below, cash will go up $5,000, then down $500. You will notice the darker lines on the account in the shape of a T.

Cash

Date / Debit / Credit / Balance
/ 5,000 / / 5,000
500 / 4,500

Illustrating this same account, using a T account would look like this:

Cash

5,000

500

4,500

Have them note that the left and right side of the T to represent the debit (left) and credit (right) side of an account. A line is then drawn where the balance is entered on the appropriate side when all transactions are complete.

However, the critical question of, “How do I know which side to place numbers?” has not yet been answered. In a moment we will go through a step-by-step explanation, but first review the recording process:

  1. Transactions are recorded as journal entries. (See illustration in page 668.)
  2. The information is transferred (posted) to the accounts.

The process will be very useful for students in working with debits and credits.

Explain to them that when they have a transaction to be recorded, they should ask themselves the following three questions:

  1. What accounts are involved?
  2. What kind of accounts are they? (i.e., asset, liability, owners’ equity, revenue, or expense)
  3. Are they (the accounts) increasing or decreasing?

For example, consider the event of John Doe investing $5,000 into the business.

  1. What accounts are involved?

Answer: Cash and Capital Stock

  1. What kind of accounts are they? (i.e., asset, liability, owners’ equity, revenue, or expense)

Answer: Cash is an asset; Capital Stock is owners’ equity.

  1. Are they (the accounts) increasing or decreasing?

Answer: They are both increasing.

Given the answers to the above, look at the balance sheet equation:

Assets=Liabilities + Owners’ Equity

Note that assets are on the left side of the equal sign, and liabilities and owners’ equity are on the right side. This means that to increase an asset, we would place a number on the left side of the assets account. To increase owners’ equity (because it is on the right side of the equal sign) we would place a number on the right side. Therefore, the journal entry would look like this:

Cash5,000

Capital Stock5,000

And posted to the T accounts, it would appear as follows:

Cash Capital Stock

5,000 5,000

Try one more example:

Suppose the firm purchased $2,000 of land, paying $500 down and signing a note payable for the balance.

First, answer the following three questions:

  1. What accounts are involved?

Answer: Cash, Land, and Notes Payable

  1. What kind of accounts are they? (i.e., asset, liability, owners’ equity, revenue, orexpense)

Answer: Cash is an asset, Land is an asset, and Notes Payable is a liability.

  1. Are they (the accounts) increasing or decreasing?

Answer: Cash is decreasing, Land is increasing, and Notes Payable is increasing.

Now make the journal entry. Cash is an asset. It is on the left side of the accounting equation, so we debit (left) an asset account to increase it. In this case, we will place a number on the right side (credit) because cash is decreasing.

Land is an asset that is increasing, so we will debit (left) that account.

NotesPayable is a liability (the right side of the equal sign), so we will credit this account to show that it is increasing.

The journal entry will look like this:

Land2,000

Cash 500

Note Payable1,500

And posting to the T accounts will look like this:

Cash Land

5,000 2,000

500

4,500

Notes Payable

1,500

Note that in the cash account, there is the original $5,000 invested, then the $500 payment on the land, and finally, a line was drawn, and the balance of cash was indicated as a debit of $4,500.

What about the rules of debit and credit for revenues and expenses?

Point out that instead of entering revenue and expense transactions directly in Retained Earnings, we will enter the events into specific revenue and expense accounts. Then, at the end of an accounting period it will be very easy to prepare an income statement. Explain that these revenue and expense accounts are temporary accounts, and after they have been used to prepare the financial statements, the information will be moved from the temporary revenue and expense accounts into Retained Earnings. Tell the students this is called “closing,” or “closing the books.”

Reinforce that understanding the rules of debit and credit for revenues and expenses is quite simple. Remind them of the balance sheet equation and to remember that revenues and expenses are temporary equity accounts.

As an example, revenues increase owners’ equity. Therefore, an increase in revenue is recorded with a credit.Expenses decrease owners’ equity. So an increase in an expense is recorded with a debit, because a debit will decrease owners’ equity.

Transparency master A-14 has a blank journal form and T accounts to facilitate illustrating the above events.

Handout A1

Revised Exercises and Problems for Chapter 2

Exercise 2-10

Required:

For each of the 10 listed transactions, prepare journal entries and post to the appropriate T accounts.

Problem 2-1

Required:

For each of the transactions, a through i, prepare journal entries and post to the appropriate T accounts.

Revised Exercises and Problems for Chapter 3

Exercise 3-8

Required:

Prepare the journal entry for the necessary year-end adjustment using the information given in situation (a).

Exercise 3-9

Required:

Prepare the journal entry for the necessary year-end adjustment using the information given in situation (a), and then in situation (b).

Exercise 3-13

Required:

Prepare the necessary year-end adjusting journal entry to accrue salaries, assuming that the accounting period ends (a) on Tuesday and (b) on Wednesday.

Exercise 3-20

Required:

Prepare the journal entry for the necessary year-end adjustment for fees earned.

Problem 3-1

Required:

Prepare journal entries for the listed January transactions and enter them into the appropriate T accounts.

Problem 3-2 (a continuation of Problem 3-1)

Required:

Prepare adjusting journal entries based on the given information (items 1 to 6) and post them to the T accounts in Problem 3-1.

Handout A1 (continued)

Revised Exercises for Chapter 4

Exercise 4-18

Required:

Prepare the journal entries for (a) the purchase, (b) the merchandise return, and (c) the payment.

Exercise 4-22

Required:

Prepare the journal entries for (a) the sale of merchandise and (b) for payment of the sales tax.

Exercise 4-23

Required:

Prepare the journal entries for (a) the sale of the merchandise, (b) the return of the merchandise, and (c) the receipt of the check.

Exercise 4-24 (a continuation of 4-23)

Required:

Prepare the journal entries for (a) the purchase of the merchandise, (b) the return of the merchandise, and (c) the payment.

Revised Exercises for Chapter 5

Exercise 5-17 (a continuation of Exercise 5-16)

Required:

Prepare the journal entries for adjusting the depositor’s accounts based on the data in Exercise 5-16.

Exercise 5-19 (a continuation of Exercise 5-18)

Required:

Prepare the journal entries for adjusting the depositor’s accounts based on the data in Exercise 5-18.

Revised Exercises for Chapter 6

Exercise 6-5

Required:

Prepare the journal entry for (a) writing off the account and (b) the subsequent collection of the account.

Exercise 6-8 (a continuation of Exercise 6-7)

Required:

Prepare the journal entry for recording the uncollectible accounts expense.

Handout A1 (continued)

Exercise 6-9

Required:

Prepare the journal entries for recording the uncollectible accounts expense under each of the situations a, b, c, and d.

.

Revised Exercises for Chapter 7

Exercise 7-3

Required:

  1. Prepare journal entries for recording (a) the purchase of the lot, (b) the payment of the legal fees, (c) the payment of delinquent taxes, (d) demolition costs, (e) the sale of the salvaged materials, and (f) the construction of the new warehouse.
  2. Post the journal entries in part one to the T accounts of Land and Warehouse.

Exercise 7-9

Required:

Prepare the journal entries for the first two years using (a) the straight-line method and (b) the double-declining-balance method.

Exercise 7-10

Required:

Prepare the journal entries for the first two years using (a) the straight-line method and (b) the double-declining-balance method.

Exercise 7-13

Required:

  1. Prepare the following T accounts: Cash; Equipment; Accumulated Depreciation; Depreciation Expense; and Gain or Loss on Sale of Equipment.
  2. Enter $360,000 into the equipment account as a beginning balance.
  3. Compute the amount of accumulated depreciation that would be in the account as of January 3, 2013 and enter that amount into the account.
  4. Prepare and post the journal entry for depreciation (six months) for the year 2013.
  5. Prepare and post the journal entry for the sale of the equipment for $285,000.

Exercise 7-15

Required:

Prepare the journal entry to record depletion for the year.

Exercise 7-16

Required:

Prepare journal entries (a) for the acquisition of the patent, (b) for lawsuit costs, and (c) to record the amortization costs for 2012.

Handout A1 (continued)

Revised Exercises for Chapter 8

Exercise 8-2

Required:

Prepare journal entries for (a) the issuance of the note and (b) the payment of the note at maturity.

Exercise 8-5

Required:

Prepare journal entries for (a) the adjustment estimating the warranty expense for January and (b) the warranty work performed in February.

Exercise 8-9

Required:

Prepare the journal entry to record the payroll for the week.

Appendix A-1

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