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Chapter 2: Problem 8

Identify each of the following accounts of Universal Services Co. as asset, liability, owner's equity, revenue, or expense, and state in each case whether the normal balance is a debit or a credit. a. Accounts Payable f. Fees Earned b. Accounts Receivable g. Office Equipment c. Cash h. Rent Expense d. Cindy Yost, Capital i. Supplies e. Cindy Yost, Drawing j. Wages Expense

Short Answer

Expert verified
Assets are debit, and liabilities and revenues are credit accounts.

Step by step solution

01

Understanding Account Types

Understand the five types of accounts in accounting: assets, liabilities, owner's equity, revenues, and expenses. Assets are resources owned by a company; liabilities are obligations; owner's equity is the owner's share; revenues are earnings; and expenses are costs incurred.
02

Classify Accounts

Match each account to its type based on its function and usual nature. For example, liabilities include accounts like "Accounts Payable," while expenses include "Rent Expense."
03

Determine Normal Balance

Identify the normal balance of each account. Assets, expenses, and the drawing account typically have a normal debit balance, whereas liabilities, owner's equity, and revenues usually have a normal credit balance.
04

Apply to Exercise

Place each item in the exercise into its correct category and state the normal balance: a. Accounts Payable (Liability, Credit) b. Accounts Receivable (Asset, Debit) c. Cash (Asset, Debit) d. Cindy Yost, Capital (Owner's Equity, Credit) e. Cindy Yost, Drawing (Contra Owner's Equity, Debit) f. Fees Earned (Revenue, Credit) g. Office Equipment (Asset, Debit) h. Rent Expense (Expense, Debit) i. Supplies (Asset, Debit) j. Wages Expense (Expense, Debit)

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Assets and Liabilities
In accounting, it is important to distinguish between assets and liabilities, as they represent two fundamental components of a company's financial position.
  • Assets refer to resources that a company owns and are expected to provide future economic benefits. Examples include cash, accounts receivable, office equipment, and supplies. Assets are crucial because they help a business operate effectively and gain revenue.
  • Liabilities, on the other hand, are obligations that the company needs to repay in the future. They represent what the company owes to others. Common examples include accounts payable, which are amounts a company must pay to suppliers for goods or services received.
Understanding the difference between assets and liabilities helps in assessing the financial health of a company. Generally, assets lead to inflows of cash (benefits), while liabilities require outflows (obligations). It鈥檚 important to track these carefully to ensure that liabilities do not exceed assets, which would indicate financial trouble.
Normal Balance
Every account in accounting has a normal balance, which is the side (debit or credit) that increases the account's value.
  • For assets and expenses, the normal balance is a debit. This means that when these accounts increase, you record the transaction on the debit side. For example, when a company receives cash or incurs an expense, these accounts will be debited.
  • Conversely, for liabilities, owner鈥檚 equity, and revenues, the normal balance is a credit. Thus, these accounts increase on the credit side. For instance, when a company earns income, the revenue account is credited.
This system helps ensure accuracy in the accounting records, as it conforms to the double-entry accounting method. Each transaction must have equal debits and credits, maintaining the accounting equation in balance at all times.
Owner's Equity
Owner's equity represents the owner's interest in the company after liabilities are subtracted from assets. It can be seen as the net worth or book value of the business.
  • The main components of owner's equity are the capital provided by the owner and accumulated earnings not distributed as dividends.
  • In accounting, owner's equity typically increases with profits and capital contributions and decreases with losses and withdrawals.

The 'Cindy Yost, Capital' account reflects the total amount of capital invested by the owner, while 'Cindy Yost, Drawing' represents withdrawals made by the owner. Keeping track of these accounts helps in understanding how much of the business's resources actually belong to the owner, which is crucial for business valuation and decision-making.
Revenues and Expenses
Revenues and expenses are the backbone of a company's income statement. They determine the financial performance of a business over a particular period.
  • Revenues refer to the income generated from normal business operations, such as selling goods or providing services. For instance, 'Fees Earned' is a type of revenue account that tracks income from services provided by Universal Services Co.
  • Expenses, on the other hand, are the costs incurred in the course of earning revenues. They include costs such as rent, wages, and utilities. Accounts like 'Rent Expense' and 'Wages Expense' represent these outlays.

The relationship between revenues and expenses dictates the profitability of the business. When revenues exceed expenses, the business makes a profit; when the opposite is true, it incurs a loss. Therefore, managing both efficiently is essential for achieving financial success.

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Most popular questions from this chapter

The following selected transactions were completed during May of the current year: 1\. Billed customers for fees earned, \(\$ 12,190\). 2\. Purchased supplies on account, \(\$ 1,250\). 3\. Received cash from customers on account, \(\$ 9,150\). 4\. Paid creditors on account, \(\$ 750\). a. Journalize the above transactions in a two-column journal, using the appropriate number to identify the transactions. Journal entry explanations may be omitted. b. Post the entries prepared in (a) to the following T accounts: Cash, Supplies, Accounts Receivable, Accounts Payable, Fees Earned. To the left of each amount posted in the accounts, place the appropriate number to identify the transactions.

The following errors occurred in posting from a two-column journal: 1\. A debit of \(\$ 1,250\) to Supplies was posted twice. 2\. A debit of \(\$ 3,575\) to Wages Expense was posted as \(\$ 3,557\). 3\. A credit of \(\$ 4,175\) to Accounts Payable was not posted. 4\. A debit of \(\$ 400\) to Accounts Payable was posted as a credit. 5\. An entry debiting Accounts Receivable and crediting Fees Earned for \(\$ 6,000\) was not posted. 6\. A credit of \(\$ 350\) to Cash was posted as \(\$ 530\). 7\. A debit of \(\$ 1,000\) to Cash was posted to Miscellaneous Expense. Considering each case individually (i.e., assuming that no other errors had occurred), indicate: (a) by "yes" or "no" whether the trial balance would be out of balance; (b) if answer to (a) is "yes," the amount by which the trial balance totals would differ; and (c) whether the debit or credit column of the trial balance would have the larger total. Answers should be presented in the following form, with error (1) given as an example:

a. On April 1, the cash account balance was \(\$ 7,850\). During April, cash receipts totaled \(\$ 41,850\) and the April 30 balance was \(\$ 9,150\). Determine the cash payments made during April. b. On July 1 , the accounts receivable account balance was \(\$ 15,500\). During July, \(\$ 61,000\) was collected from customers on account. Assuming the July 31 balance was \(\$ 17,500\), determine the fees billed to customers on account during July. c. During January, \(\$ 40,500\) was paid to creditors on account and purchases on account were \(\$ 57,700\). Assuming the January 31 balance of Accounts Payable was \(\$ 38,000\), determine the account balance on January \(1 .\)

The following accounts appeared in recent financial statements of Continental Airlines: \(\begin{array}{ll}\text { Accounts Payable } & \text { Flight Equipment } \\\ \text { Aircraft Fuel Expense } & \text { Landing Fees } \\ \text { Air Traffic Liability } & \text { Passenger Revenue } \\ \text { Cargo and Mail Revenue } & \text { Purchase Deposits for Flight Equipment } \\ \text { Commissions } & \text { Spare Parts and Supplies }\end{array}\) Identify each account as either a balance sheet account or an income statement account. For each balance sheet account, identify it as an asset, a liability, or owner's equity. For each income statement account, identify it as a revenue or an expense.

The Inflorescence School is a newly organized business that teaches people how to inspire and influence others. The list of accounts to be opened in the general ledger is as follows: \(\begin{array}{lll}\text { Accounts Payable } & \text { Millard Fillmore, Capital } & \text { Supplies } \\ \text { Accounts Receivable } & \text { Millard Fillmore, Drawing } & \text { Supplies Expense } \\ \text { Cash } & \text { Miscellaneous Expense } & \text { Unearned Rent } \\ \text { Equipment } & \text { Prepaid Insurance } & \text { Wages Expense } \\ \text { Fees Earned } & \text { Rent Expense } & \end{array}\) List the accounts in the order in which they should appear in the ledger of The Inflorescence School and assign account numbers. Each account number is to have two digits: the first digit is to indicate the major classification ( 1 for assets, etc.), and the second digit is to identify the specific account within each major classification (11 for Cash, etc.).
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