Kap 1 5th workbook te ch 2 PDF

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Chapter 2 Linking PersonaL aCCounting to Business aCCounting Learning oBjeCtives LO 1

List the differences between personal accounts and business accounts

LO 2

Describe the three main types of businesses

LO 3

Record revenue based on the concept of accruals

LO 4

Record expenses based on the concept of accruals

LO 5

Record business transactions in T-accounts

LO 6

Identify the four required financial statements and prepare three financial statements

LO 7

Describe ethics relating to financial statement reporting

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assessment Questions as-1 LO 1 Net worth in personal accounting is similar to which item in accounting for businesses? Net worth in personal accounting is similar to equity in business accounting.

as-2 LO 1 What is equity? Equity = Assets – Liabilities. If the business sells all the assets for the values reflected in the balance sheet and uses the cash received to pay all the debts, the remaining cash would represent equity.

as-3 LO 1 What is the formula for calculating the ending owner’s equity balance? Ending Owner’s Equity = Beginning Owner’s Equity + Owner’s Contributions + Net Income (Loss) – Owner’s Withdrawals as-4 LO 1 Describe owner’s contributions and owner’s withdrawals and explain how they affect the balance sheet. Owner’s contributions are when an owner of the business invests personal assets into the business. Owner withdrawals are when an owner withdraws assets from the business for personal use. These transactions affect assets (generally cash) and owner’s equity. as-5 LO 2 List the three main types of businesses. The three main types of businesses are service, merchandising and manufacturing.

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as-6 LO 2 Describe what a service business does. Provide two examples of service businesses. A service business provides a service to customers instead of a physical product. Examples of service businesses include accounting firms, consulting firms, lawn maintenance services and general contracting.

as-7 LO 2 Describe what a merchandising business does. Provide an example of a merchandising business. A merchandising business buys goods to resell to customers. Any type of retail store is an example of a merchandising business.

as-8 LO 2 Describe what a manufacturing business does. Provide two examples of a manufacturing business. A manufacturing business makes the product that it sells. Examples of manufacturers include auto makers, steel mills, furniture makers and technology manufacturers. as-9 LO 3 What does it mean to recognize revenue? Recognizing revenue simply means to record the revenue in the accounting records (i.e. on the income statement). as-10 LO 3 Describe the three different times cash can be received from a customer related to earning revenue. 1.

Before services are performed.

2.

When the services are performed.

3.

After the services are performed.

as-11 LO 3 What is the entry to record revenue if a customer pays when the service is delivered? Increase cash (asset, balance sheet) and increase revenue (income statement).

as-12 LO 3 What is the entry to record revenue if a customer pays after the service is delivered? Increase accounts receivable (asset, balance sheet) and increase revenue (income statement).

as-13 LO 3 What is the entry if a customer pays before the service is delivered? Increase cash (asset, balance sheet) and increase unearned revenue (liability, balance sheet).

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Linking Personal Accounting to Business Accounting

Chapter 2

as-14 LO 3 What type of account is unearned revenue? Unearned revenue is a liability account on the balance sheet.

as-15 LO 4 Give three examples of expenses that businesses commonly prepay. 1.

Insurance

2.

Rent

3.

Legal/Consulting Fees

as-16 LO 4 Describe the three different times cash can be paid to a supplier related to an expense. 1.

Before the expense is incurred.

2.

When the expense is incurred.

3.

After the expense is incurred.

as-17 LO 4 What does it mean to incur an expense? An expense is incurred by a company if the activities related to the expense have been used or consumed.

as-18 LO 4 What is the entry to record an expense if a company pays when the expense is incurred? Decrease cash (asset, balance sheet) and increase the specific expense account (income statement).

as-19 LO 4 What is the entry to record an expense if a company pays after the expense is incurred? Increase accounts payable (liability, balance sheet) and increase the specific expense account (income statement).

as-20 LO 4 What is the entry to record an expense if a company pays before the expense is incurred? Decrease cash (asset, balance sheet) and increase prepaid expenses (asset, balance sheet).

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as-21 LO 6 In what order are the assets of a business listed? Explain. The assets of a business are typically listed in sequence according to their level of liquidity. Liquidity is the ease with which the asset can be converted to cash.

AS-22 LO 6 In what order are the liabilities of a business listed? Explain. The liabilities of a business are listed in order of their due dates, with those due earliest first followed by those due later.

AS-23 LO 6 What are the three categories on the statement of cash flows? The three categories are cash flow from operating activities, cash flow from investing activities and cash flow from financing activities.

as-24 LO 6 On the statement of cash flows, where would cash received from customers be reported, and is it an inflow or outflow of cash? Cash received from customers is an inflow of cash and is reported in the cash flow from operating activities.

as-25 LO 7 What factors can lead a person to commit fraud? The three factors for fraud are pressure, rationalization and opportunity.

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Linking Personal Accounting to Business Accounting

Chapter 2

application Questions group a aP-1a LO 1 3 4 For each transaction, indicate whether the total assets, liabilities or owner’s equity increased (+), decreased (−) or did not change (o) by placing the symbol in the appropriate column.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

assets − + o + + − + − o o

Paid salaries for current month Purchased equipment on credit Purchased furniture using cash Made an additional investment into the business Received payment for services to be provided next month Made partial payment for equipment purchased on credit Billed customers for services performed Withdrew cash for personal use Received payment from customers already billed Received bills for utilities to be paid next month

Liabilities o + o o + − o o o +

owner’s equity − o o + o o + − o −

aP-2a LO 1 3 4 The given transactions were completed by Juliet’s Delivery Services during May 2019. Indicate the effects of each transaction by placing the appropriate letter in the space provided. A B C D E

Increase in asset, decrease in another asset Increase in asset, increase in liability Increase in asset, increase in owner’s equity Decrease in asset, decrease in liability Decrease in asset, decrease in owner’s equity

C D C E C B E A B E

Received cash for providing delivery services Paid amount owing that was outstanding to a creditor Owner invested additional cash in the business Paid advertising expense with cash Billed customers for delivery services on account Purchased office furniture on account Paid rent for the month Received cash from customers on account Received cash in advance for services to be provided in the next month Owner withdrew cash for personal use

aP-3a LO 6 Organize the following asset and liability accounts in the order they are likely to appear in a balance sheet. assets

Liabilities

Accounts Receivable

Bank Loan

Cash

Accounts Payable

Equipment

Unearned Revenue

Prepaid Expenses Assets: Cash, Accounts Receivable, Prepaid Expenses, Equipment Liabilities: Accounts Payable, Unearned Revenue, Bank Loan

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aP-4a LO 3 4 Simpson Moving had the following transactions during the month. Indicate whether assets, liabilities or owner’s equity will increase or decrease and by how much, based on each transaction. Provide an explanation only if equity is affected. The first entry has been done for you. Always ensure the accounting equation is balanced. assets= Liabilities + 1. Paid $200 cash for maintenance expense 2. The owner invested $4,000 cash in the business 3. Paid $2,400 cash for one year of insurance 4. Received a telephone bill for $150, which will be paid later 5. Purchased equipment worth $1,000 on account 6. Provided services and collected $4,200 cash 7. Paid $500 toward the bank loan 8. Paid $50 interest related to the bank loan 9. Paid $700 of accounts payable

owner’s explanation equity −200 Paid for maintenance expense +4,000 Owner investment

−200 +4,000 −2,400 +2,400 +150 +1,000 +4,200 −500 −50 −700

−150 Received phone bill

+1,000 +4,200 Provided services −500 −50 Paid for interest expense −700

aP-5a LO 3 4 5 Dry Cleanest offers extensive dry cleaning services. Riya Kapoor started this company one year ago. The opening balances of the accounts on August 1, 2019, are shown below. Cash Accounts Receivable Prepaid Expenses Machinery Accounts Payable Bank Loan Kapoor, Capital

$980 620 300 3,800 1,020 0 4,680

required a)

Indicate whether assets, liabilities or owner’s equity will increase or decrease and by how much, based on each transaction during August. Provide an explanation only if equity is affected. The first one has been done for you. Always ensure the accounting equation is balanced.

1. Borrowed $10,000 from the bank 2. Purchased machinery for $7,300 cash 3. Billed clients $2,950 for completed services, which is due in 30 days 4. Paid $130 cash for regular maintenance on the machine 5. Collected $1,300 from clients who owed money 6. Paid $3,000 in advance for four months of rent 7. Recorded $1,600 of cash sales for the month 8. Paid $700 owed to a supplier

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assets=

Liabilities +

+10,000 –7,300 +7,300 +2,950

+10,000

explanation

+2,950 Performed services on account

–130

–130 Paid for maintenance expense

+1,300 –1,300 –3,000 +3,000 +1,600 –700

owner’s equity

+1,600 Sold services for cash –700

Linking Personal Accounting to Business Accounting

Chapter 2

b) Based on the information provided, first record the opening balances in the T-accounts. Then, record the transactions for the month of August in the T-accounts, and complete the calculations at the bottom of the table. Dry Cleanest income statement

Dry Cleanest Balance sheet

For the Month ended august 31, 2019

as at august 31, 2019

assets INCREASE +

LiaBiLities

DECREASE Cash

Opening

$980

1.

10,000

5.

1,300

7.

1,600

DECREASE

−

−

revenue

INCREASE

aCCounts PayaBLe

DECREASE

+

serviCe revenue

$1,020 Opening 8. 2.

7,300

4.

130

6.

3,000

8.

700

700

+

3.

2,950

7.

1,600 $4,550

$320

Less exPenses DECREASE

$2,750

−

INCREASE

Bank Loan

DECREASE

INCREASE

+ $0 Opening

INCREASE

−

INCREASE

1.

+

DECREASE

insuranCe exPense

−

10,000

+ aCCounts reCeivaBLe − Opening

$620

3.

2,950

$0 $10,000 5.

1,300

INCREASE oWner's eQuity

$2,270

DECREASE −

INCREASE +

PrePaiD exPenses

Opening

$300

6.

3,000

INCREASE

kaPoor, CaPitaL

DECREASE

+

DECREASE

MaintenanCe exPense 4.

−

130

+

$4,680 Opening

$130

− INCREASE +

DECREASE

saLaries exPense

−

$4,680 $3,300 INCREASE INCREASE +

DECREASE

MaChinery

Opening

$3,800

2.

7,300

$0 INCREASE

− +

$11,100

total assets

DECREASE

+ kaPoor, WithDraWaLs − DECREASE

utiLities exPense

−

$0

$19,420

}

total Liabilities

10,320

owner’s equity

9,100*

*$4,680 + $0 + $4,420 − $0 = $9,100

$19,420

total revenue Less total expenses net income (Loss)

$4,550 130 $4,420

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analysis The owner of Dry Cleanest wants to withdraw cash from the business, but she does not want the net income to fall below $4,000. What is the maximum amount of cash she can withdraw in order to keep net income above $4,000? Explain. An owner’s withdrawal of cash does not affect the income statement. It is recorded in a separate account that is not an expense account. Therefore, the owner could withdraw all of the remaining cash in the business ($2,750) without reducing net income at all. However, without any cash to pay bills, the business might not last much longer. aP-6a LO 1 6 Alex Limbo is the owner of Double Duplicator. The following is a list of Double Duplicator’s accounts and balances as at March 31, 2019. Cash Limbo, Capital

$4,700 2,000

Accounts Payable

5,000

Unearned Revenue Prepaid Insurance

2,000 2,300

Bank Loan

10,000

Automobile Loan Prepaid Rent

18,000 5,000

Automobile

25,000

Prepare a balance sheet as at March 31, 2019, using the above information. Double Duplicators Balance sheet as at March 31, 2019 assets Cash Prepaid Insurance Prepaid Rent Automobile

Liabilities $4,700 Accounts Payable 2,300 Unearned Revenue 5,000 Automobile Loan 25,000 Bank Loan total Liabilities owner's equity

total assets

Limbo, Capital $37,000 total Liabilities + owner's equity

$5,000 2,000 18,000 10,000 35,000 2,000 $37,000

aP-7a LO 6 Alex Papanov operates a construction company as a sole proprietorship called Papanov Construction. Alex is creating some financial records for the company for the end of April 2019 and has come up with the following account balances. Accounts Payable Accounts Receivable Bank Loan Cash Storage Warehouse Tools and Equipment Vehicle

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$750 350 5,000 11,250 36,200 7,900 13,800

Linking Personal Accounting to Business Accounting

Chapter 2

Prepare the balance sheet as at April 30, 2019, for Papanov Construction. Papanov Construction Balance sheet as at april 30, 2019 Liabilities $11,250 Accounts Payable 350 Bank Loan 7,900 total Liabilities 13,800  36,200 owner's equity  Papanov, Capital $69,500 total Liabilities + owner’s equity

assets Cash Accounts Receivable Tools and Equipment Vehicle Storage Warehouse  total assets

$750 5,000 5,750   63,750 $69,500

aP-8a LO 5 Paul Stiles runs a small landscaping business. During the month of July 2019, he had the following transactions. For each transaction, provide the appropriate T-account names and fill in the amounts. 1.

Earned service revenue from a client and received $600 cash Cash 600

2.

Paid $150 cash for gas for the lawn cutting equipment Cash 150

3.

Gas Expense 150

Purchased a new lawn mower for $700 and will pay for it next month Equipment 700

4.

Service Revenue 600

Accounts Payable 700

Went to the bank and took out a $3,000 loan Cash 3,000

Bank Loan 3,000

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aP-9a LO 5 Brad Picton operates a consulting business. During the month of December 2019, he had the following transactions. For each transaction, provide the appropriate T-account names and fill in the amounts. 1.

Invested $4,000 cash into the business Cash 4,000

2.

Paid $1,400 cash for a one-year insurance policy Cash 1,400

3.

Prepaid Insurance 1,400

Received a $300 bill for utilities, which will be paid next month Accounts Payable 300

4.

Picton, Capital 4,000

Utilities Expense 300

A customer paid $500 cash for work that was completed last month Cash 500

Accounts Receivable 500

aP-10a LO 6 Isabela Paloma owns a painting business called Paloma Painters. She has recorded all the transactions for the month of July 2019. The balances of the accounts are shown below. account Accounts Payable Accounts Receivable Cash Equipment Maintenance Expense Bank Loan Paloma, Capital Paloma, Withdrawals Prepaid Insurance Rent Expense Service Revenue Telephone Expense Travel Expense Unearned Revenue

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Balance $1,000 500 1,500 10,000 100 5,000 3,750 1,400 1,200 200 5,200 150 300 400

Linking Personal Accounting to Business Accounting

Chapter 2

required a)

Using the information provided, prepare the income statement for Paloma Painters for the month of July. Paloma Painters income statement For the Month ended july 31, 2019 revenue Service Revenue

$5,200

expenses Maintenance Expense Rent Expense Telephone Expense

$100 200 150

Travel Expense

300 750 $4,450

total expenses net income

b) Prepare the statement of owner’s equity for Paloma Painters for the month of July. Isabela did not make any investments in the business during the month. Paloma Painters statement of owner’s equity For the Month ended july 31, 2019 Paloma, Capital July 1, 2019

$3,750

Add: Investment

$0

Net Income

4,450

Less: Paloma, Withdrawals

1,400

Paloma, Capital July 31, 2019

c)

$6,800

Prepare the balance sheet for Paloma Painters as at July 31, ...