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Chapter 2: Problem 7

During the month, Genesis Labs Co. has a substantial number of transactions affecting each of the following accounts. State for each account whether it is likely to have (a) debit entries only, (b) credit entries only, or (c) both debit and credit entries. 1\. Accounts Payable 5\. Insurance Expense 2\. Accounts Receivable 6\. Meg Abdel, Drawing 3\. Cash 7\. Supplies Expense 4\. Fees Earned

Short Answer

Expert verified
1. c, 5. a, 2. c, 6. a, 3. c, 7. a, 4. b

Step by step solution

01

Analyze Accounts Payable

Accounts Payable is a liability account. Generally, it will increase with credits as new liabilities are recognized (e.g., purchases on credit) and decrease with debits when liabilities are paid off. Hence, it will have (c) both debit and credit entries.
02

Analyze Insurance Expense

Insurance Expense is an expense account, which normally increases with a debit entry as the company incurs additional expenses. Expense accounts typically do not receive credit entries. Hence, it will have (a) debit entries only.
03

Analyze Accounts Receivable

Accounts Receivable is an asset account. It typically increases with debits when sales are made on credit and decreases with credits when payments are received. Therefore, Accounts Receivable will have (c) both debit and credit entries.
04

Analyze Cash

Cash is an asset account that increases with debit entries when more cash is received, and decreases with credit entries when cash is paid out. Thus, the Cash account will have (c) both debit and credit entries.
05

Analyze Meg Abdel, Drawing

The Drawing account represents withdrawals made by the owner from the business. It typically increases with debit entries (withdrawals) and not credits. Consequently, Meg Abdel, Drawing, will have (a) debit entries only.
06

Analyze Supplies Expense

Similar to other expense accounts, Supplies Expense will increase with debit entries as expenses are incurred. It does not generally involve credits. Thus, it will have (a) debit entries only.
07

Analyze Fees Earned

Fees Earned (or Revenue) is an income account. It generally increases with credit entries when services are performed or sales are made. It doesn't typically involve debits, so it will have (b) credit entries only.

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Key Concepts

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

Debit and Credit Entries
In accounting, the terms "debit" and "credit" are fundamental to recording financial transactions. Each transaction affects at least two accounts in what is called a double-entry bookkeeping system.

  • **Debit Entries:** Represent an increase in asset accounts or expense accounts and a decrease in liability accounts or income accounts.
  • **Credit Entries:** Indicate a decrease in asset accounts or expense accounts and an increase in liability accounts or income accounts.
For example, when a business incurs an insurance expense, a debit entry is made to the insurance expense account, increasing its balance. Alternatively, when services are performed and money is earned, a credit entry increases the fees earned account.

Thus, understanding how and where to apply these entries ensures the accuracy of financial records and reflects the true financial position of a business.
Asset and Liability Accounts
Asset and liability accounts are crucial in understanding a company's financial standing.

  • **Asset Accounts:** Include resources owned by a company, such as cash, accounts receivable, and inventory. They typically increase with a debit and decrease with a credit.
  • **Liability Accounts:** Represent obligations a company owes, like accounts payable or loans. These accounts increase with a credit and decrease with a debit.
For instance, if a company sells goods on credit, it impacts the accounts receivable account, an asset, increasing it with a debit. Conversely, when a business buys supplies on credit, the accounts payable account, a liability, increases with a credit to reflect the obligation to pay.

This structured approach helps in tracking what the business owns and owes, providing a clear picture of its financial commitments.
Expense and Revenue Recognition
Recognizing expense and revenue accurately is vital for presenting the true financial performance of a company.
  • **Expense Recognition:** Occurs when a company incurs costs related to operation, such as salaries or rent. These are recorded as debits, enhancing the expense accounts, thus reducing total income.
  • **Revenue Recognition:** Pertains to recording income when it is earned, not necessarily when payment is received. Such transactions credit the revenue accounts, illustrating the income generated.
In practice, if a business provides services in one month but collects payment in another, it should still recognize the revenue in the month the services were provided.

This principle ensures that the financial statements reflect the true timing of transactions, enabling more accurate financial analysis and reporting.

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Most popular questions from this chapter

During the month, Racoon Co. received \(\$ 319,750\) in cash and paid out \(\$ 269,900\) in cash. a. Do the data indicate that Racoon Co. earned \(\$ 49,850\) during the month? Explain. b. If the balance of the cash account is \(\$ 72,350\) at the end of the month, what was the cash balance at the beginning of the month?

The following selected transactions were completed during February of the current year: 1\. Billed customers for fees earned, \(\$ 41,730\). 2\. Purchased supplies on account, \(\$ 1,800\). 3\. Received cash from customers on account, \(\$ 39,150\). 4\. Paid creditors on account, \(\$ 1,100\). 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.

As of January 1, Oh Kwon, Capital, had a credit balance of \(\$ 37,100\). During the year, withdrawals totaled \(\$ 1,000\), and the business incurred a net loss of \(\$ 52,300\). a. Calculate the balance of Oh Kwon, Capital, as of the end of the year. b. Assuming that there have been no recording errors, will the balance sheet prepared at December 31 balance? Explain.

The accounts in the ledger of Aznar Co. as of October 31, 2010, are listed in alphabetical order as follows. All accounts have normal balances. The balance of the cash account has been intentionally omitted. \(\begin{array}{lrlrr} & & & \\ \text { Accounts Payable } & \$ 28,000 & \text { Notes Payable } & \$ 60,000 \\ \text { Accounts Receivable } & 56,250 & \text { Prepaid Insurance } & 4,500 \\ & ? & \text { Rent Expense } & 90,000 \\\ & 129,850 & \text { Supplies } & 3,150 \\ \text { Ellen Kubota, Capital } & 30,000 & \text { Supplies Expense } & 11,850 \\ \text { Ellen Kubota, Drawing } & 465,000 & \text { Unearned Rent } & 13,500 \\ \text { Fees Eamed } & 9,000 & \text { Utilities Expense } & 62,250 \\ \text { Insurance Expense } & 127,500 & \text { Wages Expense } & 262,500 \\ \text { Land } & 13,350 & & \end{array}\) Prepare an unadjusted trial balance, listing the accounts in their proper order and inserting the missing figure for cash.

Identify each of the following accounts of Sesame 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. Billy Eldrod, Capital h. Rent Expense d. Billy Eldrod, Drawing i. Supplies e. Cash j. Wages Expense
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