Concept explainers
Cornerstone Exercise 2-23 Debit and Credit Procedures
Refer ID the accounts listed below.
a. Accounts Payable e. Equipment
b. Accounts Receivable f. Common Stock
c. Retained Earnings g. Salary Expense
d. Sales h. Repair Expense
Required:
For each of the acmums1 complete the following table by entering the normal balance of the account (debit or credit) and the word increase or decrease in the debit and credit columns.
Concept Introduction:
‘T’ Account -: A ‘T’ account shows the effect of a financial transaction on two sides or a dual effect where left side of the ‘T’ is referred as debit side and the right side is known as credit side of account. A ‘normal balance’ in the account is assigned based on increases and decreases in the account. Assets, expenses and owner’s drawings have normal debit balance which increase with debit and decreases with credits while liabilities, revenue and stock holder’s equity have a normal credit balance which decreased with debit and increase with credits.
Requirement 1:
To show the impact on normal balance, debit side and credit side in an accounts payable account.
Answer to Problem 23CE
In an accounts payable account, there will be normal credit balance and debit will decrease and credit will increase.
Explanation of Solution
The primary activity that affects the account payable account is purchase of goods on credit(increase in accounts payable) and cash payment made related to these credit purchases(decrease in accounts payable). Since amount is due to be paid for purchases made, therefore it is a liability. Also, liabilities are recorded on the credit side and normal balance is assigned on the side where increases go. Therefore, normal balance will be on the credit side of ‘T’account. This will be shown as:
Concept Introduction:
‘T’ Account -: A ‘T’ account shows the effect of a financial transaction on two sides or a dual effect where left side of the ‘T’ is referred as debit side and the right side is known as credit side of account. A ‘normal balance’ in the account is assigned based on increases and decreases in the account. Assets, expenses and owner’s drawings have normal debit balance which increase with debit and decreases with credits while liabilities, revenue and stock holder’s equity have a normal credit balance which decreased with debit and increase with credits.
Requirement 2:
To show the impact on normal balance, debit side and credit side in an accounts receivable account.
Answer to Problem 23CE
In an accounts receivable account, there will be normal debit balance and debit will increase the account and credit side will decrease the account.
Explanation of Solution
The primary activity that affects the account receivable account is sale of goods on credit (increase in accounts receivable account) and cash received from customers (decrease in accounts receivable account). Since amount is due to be collected from customers, therefore assets will increase in the form of cash. Also, asset (accounts receivable account) are recorded on the debit side and normal balance is assigned on the side where increases go. Therefore, in case accounts receivable account increases, normal balance will be on the debit side of ‘T’account. This will be shown as:
Concept Introduction:
‘T’ Account -: A ‘T’ account shows the effect of a financial transaction on two sides or a dual effect where left side of the ‘T’ is referred as debit side and the right side is known as credit side of account. A ‘normal balance’ in the account is assigned based on increases and decreases in the account. Assets, expenses and owner’s drawings have normal debit balance which increase with debit and decreases with credits while liabilities, revenue and stock holder’s equity have a normal credit balance which decreased with debit and increase with credits.
Requirement 3:
To show the impact on normal balance, debit side and credit side in a retained earnings account.
Answer to Problem 23CE
In retained earnings account, there will be normal credit balance and credit side will increase the account and debit side will decrease the account.
Explanation of Solution
Retained earnings is calculated by deducting dividends paid to stockholders from the net income. Since it is a part of equity account, therefore, it has a normal credit balance and it increases with a credit and decrease with a debit. This is shown as:
Concept Introduction:
‘T’ Account -: A ‘T’ account shows the effect of a financial transaction on two sides or a dual effect where left side of the ‘T’ is referred as debit side and the right side is known as credit side of account. A ‘normal balance’ in the account is assigned based on increases and decreases in the account. Assets, expenses and owner’s drawings have normal debit balance which increase with debit and decreases with credits while liabilities, revenue and stock holder’s equity have a normal credit balance which decreased with debit and increase with credits.
Requirement 4:
To show the impact on normal balance, debit side and credit side in a sales account.
Answer to Problem 23CE
In sales account, there will be normal credit balance and debit will decrease the account and credit side will increase the account.
Explanation of Solution
An entity usually includes earning from cash sales and credit sales. Since revenue has normal credit balance, likewise, sales account also has a normal credit balance and debit decreases the account and credit increases the account. This is shown as:
Concept Introduction:
‘T’ Account -: A ‘T’ account shows the effect of a financial transaction on two sides or a dual effect where left side of the ‘T’ is referred as debit side and the right side is known as credit side of account. A ‘normal balance’ in the account is assigned based on increases and decreases in the account. Assets, expenses and owner’s drawings have normal debit balance which increase with debit and decreases with credits while liabilities, revenue and stock holder’s equity have a normal credit balance which decreased with debit and increase with credits.
Requirement 5:
To show the impact on normal balance, debit side and credit side in an equipment account.
Answer to Problem 23CE
In an equipment account, there will be normal debit balance and debit will increase the account and credit side will decrease the account.
Explanation of Solution
Equipment’s are classified as a long-term asset and asset (equipment account) are recorded on the debit side and normal balance is assigned on the side where increases go. Therefore, in an equipment account debit increases and credit decreases the account while normal balance will be on the debit side of T-account. This will be shown as:
Concept Introduction:
‘T’ Account -: A ‘T’ account shows the effect of a financial transaction on two sides or a dual effect where left side of the ‘T’ is referred as debit side and the right side is known as credit side of account. A ‘normal balance’ in the account is assigned based on increases and decreases in the account. Assets, expenses and owner’s drawings have normal debit balance which increase with debit and decreases with credits while liabilities, revenue and stock holder’s equity have a normal credit balance which decreased with debit and increase with credits.
Requirement 6:
To show the impact on normal balance, debit side and credit side in a Common Stock account.
Answer to Problem 23CE
In Common stock account, there will be normal credit balance and credit side will increase the account and debit side will decrease the account.
Explanation of Solution
Common stock includes both contributed capital and retained earnings and it has a normal credit balance. Since they have a normal credit balance, therefore, it is increased by credits and decreased by debits. This will be shown as:
Concept Introduction:
‘T’ Account -: A ‘T’ account shows the effect of a financial transaction on two sides or a dual effect where left side of the ‘T’ is referred as debit side and the right side is known as credit side of account. A ‘normal balance’ in the account is assigned based on increases and decreases in the account. Assets, expenses and owner’s drawings have normal debit balance which increase with debit and decreases with credits while liabilities, revenue and stock holder’s equity have a normal credit balance which decreased with debit and increase with credits.
Requirement 7:
To show the impact on normal balance, debit side and credit side in a salary expense account.
Answer to Problem 23CE
In a salary expense account, there will be normal debit balance and debit will increase the account and credit side will decrease the account.
Explanation of Solution
Salary expense is treated as an expense which decreases the stockholder’s equity through retained earnings. Therefore, it has a normal debit balance. This means that debits will increase the salary expense account and credits will decrease the salary expense account.
Concept Introduction:
‘T’ Account -: A ‘T’ account shows the effect of a financial transaction on two sides or a dual effect where left side of the ‘T’ is referred as debit side and the right side is known as credit side of account. A ‘normal balance’ in the account is assigned based on increases and decreases in the account. Assets, expenses and owner’s drawings have normal debit balance which increase with debit and decreases with credits while liabilities, revenue and stock holder’s equity have a normal credit balance which decreased with debit and increase with credits.
Requirement 8:
To show the impact on normal balance, debit side and credit side in repair expense account.
Answer to Problem 23CE
In a repair expense account, there will be normal debit balance and debit will increase the account and credit side will decrease the account.
Explanation of Solution
Repair expense is treated as an expense which decreases the stockholder’s equity through retained earnings. Therefore, it has a normal debit balance. This means that debits will increase the repair expense account and credits will decrease the repair expense account.
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Chapter 2 Solutions
Cornerstones of Financial Accounting
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