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ACCOUNTING EQUATION: Ans: False – it’s debits that increase assets

and expense accounts.

Assets = Liabilities + Owner’s Equity (Capital) 6. Not all businesses use the same chart of
Ans: True
For Every Debit There Is A Credit 7. Payments made for an owner's personal
OR expenses are charged to owner's draws.
Debits = Credits Ans: True
8. If liabilities equal 75,000 and owner's
Debit (Left) equity equals 25,000, then assets are 50,000.
An entry (amount) entered on the left side Ans: False – since liabilities (75,000) plus
(column) of a journal or general ledger owner’s equity (25,000) must equal assets,
account that increases an asset, draw or an assets equal 100,000.
expense or an entry that decreases a liability, 9. An investment by the owner to his/her
owner's equity (capital) or revenue. business will decrease owner's capital.
Ans: False – an investment made by an owner
Credit (Right) increases not decreases owner’s equity
An entry (amount) entered on the right side (capital)
(column) of a journal or general ledger 10. The normal balance for the owner's
account that increases a liability, owner's drawing account is a credit balance.
equity (capital) or revenue, or an entry that Ans: False – the owner’s drawing account
decreases an asset, draw, or an expense. normally has a debit balance.
11. Supplies On Hand would be classified as
Now, let's just use the first letter of each an expense.
group to represent the type of account. Ans: False – supplies on hand is an asset
• Group 1 account; its supplies used or consumed
A (Asset), D (Draw), and E (Expense) that is an expense account.
• Group 2 12. Fees earned are classified as an asset
L(liability), O (Owner's Equity), and R account.
(Revenue) Ans: False – fees earned is a revenue account.
13. The cash account is increased with a
All A, D, and E (Asset, Draw, and Expense) credit.
types of accounts, which normally have a Ans: False – since cash is an asset account, its
debit balance, are increased with a debit and balance is increased with a debit.
decreased with a credit. 14. A credit to Accounts Payable increases the
All L,O, and R (Liability, Owner's Equity, and accounts balance.
Revenue) type accounts, which normally have Ans: True
a credit balance, are increased with a credit 15. A credit to fees earned will increase the
and decreased with a debit. balance of the fees earned account.
Ans: True
TRUE OR FALSE 16. Whether a debit or credit increases or
1. Assets are property or economic resources decreases an account's balance depends on
that are expected to provide a future benefit the type of account.
to a business. Ans: True
Ans: True 17. The profit or loss for a period is reported
2. Assets include accounts payable and notes using a balance sheet.
payable. Ans: False – the income statement is used to
Ans: False – assets include items such as report the profit or loss for a period.
cash, accounts receivable, vehicle, 18. The financial position of a business as of a
equipment, etc. specific date is reported using a balance
3. Assets are equal to liabilities plus owner's sheet.
equity. Ans: True
Ans: True 19. Accounts payable, notes payable, taxes
4. If assets equal 100,000 and liabilities equal payable, and accounts receivable are all types
25,000, then owner's equity is 125,000. of liability accounts.
Ans: False – since assets (100,000) must Ans: False – all the accounts listed are liability
equal liabilities (25,000) plus owner’s equity, accounts except accounts receivable which is
owner’s equity (capital) is 75,000. an asset.
5. Credits increase asset and expense 20. The amount calculated by subtracting
accounts. total liabilities from total assets is called
owner's equity or net assets.
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Ans: True – based on the accounting equation, The purpose of adjusting journal entries is to
this statement is true. Note: Net Assets is get:
another term that is often used to refer to this 1) revenues to be what is earned in this
difference. period only
21. The general journal is a book or file that 2) expenses to be what is incurred in this
contains all of a business's accounts and period only
balances. 3) assets to be what you have in future
Ans: False – the general ledger is the benefit at the end of the period
accounting record that contains all of a 4) liabilities to be what you owe at the end of
business’ accounts and balances. this period
22. A debit is a number entered on the right
side of an account and a credit is a number The adjustment is for things that have not yet
entered on the left side of an account. been recorded or for changes that have
Ans: False - just the opposite is true; a debit occurred since the original journal entry was
is entered on the left side and a credit on the made.
right side of an account.
23. A journal is a record in which transactions Common accounts that are used for
are initially recorded (recorded first). adjusting journal entries that go
Ans: True
24. A transaction that requires more than one
debit and/or more than one credit is called a
compound journal entry. Insurance expense --- Prepaid
Ans: True insurance
25. Posting is the process of transferring the Rent expense --- Prepaid
balances from the Journals to the General rent
Ledger. Supplies expense --- Supplies
Ans: True Salaries expense --- Salaries
26. The formal financial statement that payable
represents the basic accounting equation Interest expense --- Interest
Assets = Liabilities + Owner's Equity is called payable
the Income Statement. Tax expense --- Tax
Ans: False – the formal financial statement payable
based on the accounting equation is the Bad debt expense --- Allowance
Balance Sheet. for uncollectible
27. Nominal accounts are the temporary accounts
revenue, expense and draw accounts. Depreciation expense ---
Ans: True Accumulated depreciation
28. A contra account's balance is always a Interest revenue --- Interest
credit balance. receivable
Ans: False – a contra account’s balance is the Sales --- Accounts
opposite of the normal balance of its related receivable
account. Fee revenue --- Accounts
29. If the trial balance shows the equality of receivable
debits and credits, it guarantees that all Rent revenue --- Rent
transactions have been recorded. receivable
Ans: False - A Trial Balance that balances Unearned revenue --- Revenue
does not necessarily prove that all the
transactions have been recorded. There are
some kinds of error that can still cause the Items that Typically Require Adjustment
Trial Balance to balance and not easy to at Period End
30. One of the uses of Trial Balance is to test Supplies
the equality of the recorded debits and
credits. When supplies were purchased, we assumed
Ans: True in previous exercises that Supplies Asset was
debited. If Php5,000 of supplies are
ADJUSTING JOURNAL ENTRIES purchased the first year a business operates,
the business would do an inventory at year
Key things to know end. If the inventory shows that only
Php1,200 of supplies are still on hand, the
Supplies Asset account would need to be
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adjusted downward for the portion that is no date; Adjusting entry is required to show
longer on hand. The journal entry would be the receivable that exists at the balance
as follows: sheet date

Sample: What is the adjusting entry for P200

Supplies Expense 3800
of services performed but not billed before
Supplies 3800 October 31?
Accounts Receivable 200
The original Supplies asset of Php5,000 Revenue 200
MINUS current amount of the Supplies asset
of Php1,200 EQUALS Php3,800 Supplies
expense for the cost of the supplies used up.

Accrued Expenses Depreciation

- expenses incurred but not yet paid in - the cost of assets with long lives must
cash or recorded at the statement date; be allocated over their useful lives; As
Adjusting entry is required to show the we use the asset, we recognize a portion
payable that exists at the balance sheet of its cost as expense; Depreciation
date expense is an estimate; Accounting
depreciation is not an attempt to
Salaries determine the market value decline for
Employees typically receive their paycheck an asset, but a means of systematically
monthly, once every two weeks, or perhaps assigning the cost of the asset to the
once a week. If the last day of the month periods it is used.
does not fall on a payday, some salary has Straight-Line Method of Depreciation:
been earned but is not yet due. If Tuesday is
the last day of the month, and employees Depreciation = (Original Cost – Salvage Value)
have earned Php500 for their unpaid work on / No. of Useful
Monday and Tuesday this needs to be Life
recorded as an expense of the period even
though it is not expected to be paid in cash
until next Friday. The entry would be as For example, if a Php300,000 vehicle is
follows: expected to last 4 years and then be sold for
Php60,000 it would be treated as
Salary Expense 500 depreciating Php6000 per year.
Salaries Payable 500
D = (300,000 – 60,000) / 4
Unearned Revenues = Php60,000 per year or
- Cash received and recorded as Php5,000 per month
liabilities before revenue is earned.
(cash received in advance); Earned when The monthly entry for the adjusting entry
services are provided would be as follows:

Sample: October 2 - What is the entry when

Depreciation Expense 500
you are paid in advance for services
Php1,200? Accumulated
Cash 1,200
Unearned Revenue 1,200
The Accumulated Depreciation account is a
new type of account called a CONTRA-ASSET
Oct. 31: Some of the work has been
account. Contra means negative. In other
performed, Php400 has been earned. What is
words this is similar to the concept covered
the adjusting entry?
we called Expense as a negative capital
Unearned Revenue 400 account. Assets increase with a dr. Since
Revenue 400 Accumulated Depreciation is a negative Asset
account it increases with a cr. On the balance
sheet both the related asset and the
Accrued Revenue
accumulated depreciation account are
- revenues earned but not yet received
shown. After one year the example vehicle
in cash or recorded at the statement
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above would appear on the balance sheet as

Vehicle 300,000
Less Accumulated
Equals Book Value of

Showing both the Vehicle at its original cost

and the separate Accumulated Depreciation
account provides more information than if the
depreciation had been credited directly to the
Vehicle account. With the separate
accounts, users of the financial statements
can more readily see that this is a fairly new
vehicle. If all they saw was a net balance of
Php240,000, financial statement users would
not know if this were an old Php1,000,000
asset or a relatively new Php300,000 asset.

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