CHAPTER 3 ANALYZING BUSINESS TRANSACTIONS USING T ACCOUNTS Chapter Opener: Thinking Critically or would have increased and Equity or the Service Revenue account would have also increased. The equation would increase by the same amount on both sides. (Assets would increase and Owners Equity would increase.) Fast Facts Mobile data traffic on AT&T s network grew more than 20,000 percent, more than doubling in 2011 alone. Mobile data speeds on AT&T s network increased dramatically. The download speeds available on AT&T s 4G LTE network today are more than 50X faster than AT&T s 2G network five years ago. The number of smartphones, tablets and other advanced mobile Internet devices on AT&T s network soared to more than 43 million. Total mobile data connections on AT&T s network more than doubled to more than 74 million, and mobile data revenues increased 5X, from just over $4 billion to more than $22 billion. AT&T s total wireless subscribers grew nearly to 107 million in 2012, and AT&T s wireless revenues increased 17.8 percent. Managerial Implications: Thinking Critically Answers will vary but could include the following: is overstated and checks bounce. The credit rating of the business is affected. The business loses customers because payments on account are not recorded properly. Discussion Questions Note to instructor: These questions are designed to check students understanding of new terms, concepts, and procedures presented in the chapter. 1. Written records for all assets, liabilities, and owner s equity of a business. 2. Adding the figures on both sides of the account and subtracting the smaller total from the larger total. 3. a. debit b. credit c. credit d. credit e. debit 4. To provide a classified list of the names and numbers of a firm s accounts. 5. Order in which they appear on financial statements. Balance sheet accounts listed first, followed by income statement accounts. 6. Additional accounts can be added when needed. 7. Permanent account balances are carried forward to start a new accounting period. Temporary account balances are transferred to a summary account at the end of the period and are zero at the start of a new accounting period. 8. a, b, h, i, k: temporary c, d, e, f, g, j, l: permanent 9. Debit: entry on the left side of an account. Credit: entry on the right side of an account. 10. Payment of rent in advance affords the right to occupy the facility the number of months covered by the payment. 11. Each transaction produces at least two effects. distribution in any manner. 3-1
EXERCISE 3.1 Equipment 19,000 46,000 James Wilson, Capital 24,200 40,800 EXERCISE 3.2 Equipment (1) 90,000 (2) 30,000 (2) 30,000 (3) 9,000 (4) 3,800 (5) 3,000 Advertising Expense (3) 9,000 (4) 3,800 Supplies Denise Carswell, Capital (5) 3,000 (1) 90,000 EXERCISE 3.3 1. Credit 5. Debit 2. Debit 6. Debit 3. Credit 7. Debit 4. Credit 8. Debit EXERCISE 3.4 1 Credit, Credit, Debit 2 Debit, Debit, Credit 3 Debit, Debit, Credit 4 Credit, Credit, Debit 5 Credit, Credit, Debit distribution in any manner. 3-2
EXERCISE 3.5, $160,300 Dr., $7,000 Dr. Supplies, $46,000 Dr. Equipment, $80,000 Dr., $80,000 Cr. Wade Wilson, Capital $190,000 Cr., $40,000 Cr. Telephone Expense, $700 Dr. Salaries Expense, $11,000 Dr. Wade Wilson, Drawing, $5,000 Dr. EXERCISE 3.6 ACCOUNT NAME Supplies Equipment Wade Wilson, Capital Wade Wilson, Drawing Salaries Expense Telephone Expense Totals Housing Locators Trial Balance December 31, 2016 DEBIT CREDIT 160 3 0 0 00 7 0 0 0 00 46 0 0 0 00 80 0 0 0 00 80 0 0 0 00 190 0 0 0 00 5 0 0 0 00 40 0 0 0 00 11 0 0 0 00 7 0 0 00 310 0 0 0 00 310 0 0 0 00 Housing Locators Income Statement Month Ended December 31, 2016 Revenue Expenses Salaries Expense 11 0 0 0 00 Telephone Expense 7 0 0 00 Total Expenses Net Income 40 0 0 0 00 11 7 0 0 00 28 3 0 0 00 distribution in any manner. 3-3
EXERCISE 3.7 Housing Locators Statement of Owner's Equity Month Ended December 31, 2016 Wade Wilson, Capital, Dec. 1, 2016 Net Income for December Less Withdrawals for December Increase in Capital Wade Wilson, Capital, Dec. 31, 2016 28 3 0 0 00 5 0 0 0 00 190 0 0 0 00 23 3 0 0 00 213 3 0 0 00 Housing Locators Balance Sheet December 31, 2016 Assets Liabilities 160 3 0 0 00 80 0 0 0 00 7 0 0 0 00 Supplies 46 0 0 0 00 Owner's Equity Equipment 80 0 0 0 00 Wade Wilson, Capital 213 3 0 0 00 Total Assets 293 3 0 0 00 Total Liabilities & Owner's Equity 293 3 0 0 00 distribution in any manner. 3-4
EXERCISE 3.8 Three Brothers Moving Company Chart of Accounts Account Number Account Name Account Number Account Name 100-199 ASSETS 300-399 OWNER'S EQUITY 101 301 Trey Calhoun, Capital 111 302 Trey Calhoun, Drawing 121 Office Supplies 400-499 REVENUE 131 Prepaid Rent 401 141 Office Equipment 500-599 EXPENSES 200-299 LIABILITIES 511 Salaries Expense 202 514 Utilities Expense 517 Telephone Expense distribution in any manner. 3-5
PROBLEM 3.1A 1. Hunter Thompson, Capital + 21,000 + 21,000 2. Equipment + 10,000-10,000 3. Office Furniture + 1,700-1,700 4. Office Equipment + 3,700 + 3,700 5. Office Equipment + 11,200 + 11,200 6. Nancy Fowler, Drawing + 6,000-6,000 7. Delivery Truck + 37,000 + 37,000 8. - 3,500-3,500 Analyze: Transactions 1 and 6 directly affect the owner's equity account. distribution in any manner. 3-6
PROBLEM 3.2A 1. Gloria Williams, Capital + 70,000 + 70,000 2. Office Furniture + 17,000-17,000 3. Office Equipment +1,050 +1,050 4. Automobile + 17,000-17,000 5. Gloria Williams, Capital + 11,000 + 11,000 6. Office Equipment + 4,000 + 4,000 7. -1,050-1,050 8. Gloria Williams, Drawing + 5,000-5,000 Analyze: All transactions affected asset accounts. distribution in any manner. 3-7
PROBLEM 3.3A 1. Office Supplies + 3,000-3,000 2. + 26,000 + 26,000 3. Rent Expense + 5,000-5,000 4. + 4,000 + 4,000 5. + 2,000-2,000 6. Salaries Expense + 4,600-4,600 7. Telephone Expense + 580-580 8. + 3,000 + 3,000 9. Office Supplies + 1,100 + 1,100 10. Salaries Expense + 4,600-4,600 distribution in any manner. 3-8
PROBLEM 3.3A (continued) 11. + 3,000-3,000 12. + 9,100 + 9,100 Analyze: $17,780 in cash was spent in June. PROBLEM 3.4A (a) + 160,000 (b) - 6,000 (f) + 14,000 (h) - 7,000 (d) + 8,200 (c) - 16,720 (n) + 16,000 (o) - 8,000 (h) + 7,000 (e) - 1,250 Bal. 15,000 (m) + 14,500 (g) - 13,000 (o) + 8,000 (i) - 4,000 (k) - 20,000 (l) - 9,400 (p) - 2,900 (q) - 700 (r) - 1,220 Bal. 113,510 (s) - 9,000 Office Equipment Office Furniture (g) + 38,000 (c) + 16,720 (k) + 40,000 (j) + 5,800 Bal. 78,000 Bal. 22,520 Horace Brock, Capital (p) - 2,900 (g) + 25,000 (a) + 160,000 (j) + 5,800 (k) + 20,000 Bal. 47,900 distribution in any manner. 3-9
PROBLEM 3.4A (continued) Horace Brock, Drawing Rent Expense (s) + 9,000 (d) + 8,200 (b) + 6,000 (f) + 14,000 (m) + 14,500 (n) + 16,000 Bal. 52,700 Utilities Expense Salaries Expense Telephone Expense (r) + 1,220 (l) + 9,400 (e) + 1,250 Miscellaneous Expense (i) + 4,000 (q) + 700 Bal. 4,700 Analyze: The company owes $47,900 (accounts payable). distribution in any manner. 3-10
PROBLEM 3.5A Horace Brock, Landscape Consultant Trial Balance June 30, 2016 ACCOUNT NAME Office Equipment Office Furniture Horace Brock, Capital Horace Brock, Drawing Miscellaneous Expenses Rent Expense Salaries Expense Telephone Expense Utilities Expense Total DEBIT CREDIT 113 5 1 0 00 15 0 0 0 00 78 0 0 0 00 22 5 2 0 00 47 9 0 0 00 160 0 0 0 00 9 0 0 0 00 52 7 0 0 00 4 7 0 0 00 6 0 0 0 00 9 4 0 0 00 1 2 5 0 00 1 2 2 0 00 260 6 0 0 00 260 6 0 0 00 Revenue Expenses Miscellaneous Expenses Rent Expense Salaries Expense Telephone Expense Utilities Expense Total Expenses Net Income Horace Brock, Landscape Consultant Income Statement Month Ended June 30, 2016 4 7 0 0 00 6 0 0 0 00 9 4 0 0 00 1 2 5 0 00 1 2 2 0 00 52 7 0 0 00 22 5 7 0 00 30 1 3 0 00 distribution in any manner. 3-11
PROBLEM 3.5A (Continued) Horace Brock, Landscape Consultant Statement of Owner's Equity Month Ended June 30, 2016 Horace Brock, Capital, June 1, 2016 160 0 0 0 00 Net Income for June 30 1 3 0 00 Less Withdrawals for June 9 0 0 0 00 Increase in Capital 21 1 3 0 00 Horace Brock, Capital, June 30, 2016 181 1 3 0 00 Horace Brock, Landscape Consultant Balance Sheet June 30, 2016 Assets Liabilities 113 5 1 0 00 47 9 0 0 00 15 0 0 0 00 Office Equipment 78 0 0 0 00 Owner's Equity Office Furniture 22 5 2 0 00 Horace Brock, Capital 181 1 3 0 00 Total Assets 229 0 3 0 00 Total Liabilities & 229 0 3 0 00 Owner's Equity Analyze: The net increase in owner's equity during the month of June was $21,130. distribution in any manner. 3-12
PROBLEM 3.1B 1. Equipment + 32,000-32,000 2. Gloria Bahamon, Drawing + 8,000-8,000 3. Equipment + 6,000-6,000 4. Delivery Truck + 24,000-24,000 5. - 7,200-7,200 6. Office Equipment + 10,000 + 10,000 7. Kevin Fralicks, Capital + 40,000 + 40,000 8. - 3,000-3,000 Analyze: The transactions that affect the liability accounts are transactions 5, 6 and 8. distribution in any manner. 3-13
PROBLEM 3.2B 1. Royce West, Capital + 40,000 + 40,000 2. Shop Equipment + 3,600-3,600 3. Store Equipment + 2,400 + 2,400 4. Truck + 20,000-20,000 5. Shop Equipment Royce West, Capital + 6,000 + 6,000 6. Store Equipment + 5,000 + 5,000 7. - 800-800 8. Royce West, Drawing + 3,200-3,200 Analyze: The transactions that affect the cash account are transactions 1, 2, 4, 7, and 8. PROBLEM 3.3B 1. Rent Expense + 7,500-7,500 distribution in any manner. 3-14
PROBLEM 3.3B (continued) 2. + 9,000 + 9,000 3. Salaries Expense + 6,800-6,800 4. + 12,200 + 12,200 5. Telephone Expense + 1,580-1,580 6. + 8,000-8,000 7. Telephone Expense - 380-380 8. + 8,560 + 8,560 9. Utilities Expense + 950-950 10. Gasoline Expense + 1,590-1,590 11. + 6,250-6,250 distribution in any manner. 3-15
PROBLEM 3.3B (continued) 12. + 9,400 +9,400 Analyze: The total cash collected for during the month was $14,250.00. PROBLEM 3.4B (a) + 140,000 (b) - 7,800 (f) + 11,280 (h) - 5,400 (d) +10,500 (c) - 38,500 (n) +6,500 (p) - 4,200 (h) + 5,400 (e) - 1,850 Bal. 8,180 (m) + 7,450 (i) - 3,800 (p) + 4,200 (j) - 1,590 (k) - 11,400 Office Furniture (l) - 18,900 (g) +6,500 (o) - 967 (r) - 900 Bal. 73,843 (s) - 8,000 Office Equipment Automobile (k) + 22,800 (c) + 38,500 (q) + 6,880 Bal. 29,680 Conner McAllister, Capital (i) - 3,800 (g) + 6,500 (a) + 140,000 (k) + 11,400 (q) +6,880 Bal. 20,980 distribution in any manner. 3-16
PROBLEM 3.4B (continued) Conner McAllister, Drawing Rent Expense (s) + 8,000 (d) + 10,500 (b) + 7,800 (f) + 11,280 (m) +7,450 (n) + 6,500 Bal. 35,730 Auto Expense Utilities Expense Salaries Expense (e) + 1,850 (j) + 1,590 (l) + 18,900 (r) +900 Bal. 2,750 Telephone Expense (o) + 967 Analyze: Credit customers owe the company $8,180 (). distribution in any manner. 3-17
PROBLEM 3.5B Conner McAllister, Counselor and Attorney at Law Trial Balance April 30, 2016 ACCOUNT NAME DEBIT CREDIT Automobile Office Equipment 73 8 4 3 00 8 1 8 0 00 38 5 0 0 00 29 6 8 0 00 Office Furniture 6 5 0 0 00 20 9 8 0 00 Conner McAllister, Capital 140 0 0 0 00 Conner McAllister, Drawing 8 0 0 0 00 35 7 3 0 00 Auto Expense 2 7 5 0 00 Rent Expense 7 8 0 0 00 Salaries Expense 18 9 0 0 00 Utilities Expense 1 5 9 0 00 Telephone Expense 9 6 7 00 Total 196 7 1 0 00 196 7 1 0 00 Conner McAllister, Counselor and Attorney at Law Income Statement Month Ended April 30, 2016 Revenue Expenses Auto Expense Rent Expense Salaries Expense Utilities Expense Telephone Expense Total Expenses Net Income 2 7 5 0 00 7 8 0 0 00 18 9 0 0 00 1 5 9 0 00 9 6 7 00 35 7 3 0 00 32 0 0 7 00 3 7 2 3 00 distribution in any manner. 3-18
PROBLEM 3.5B (continued) Conner McAllister, Counselor and Attorney at Law Statement of Owner's Equity Month Ended April 30, 2016 C. McAllister, Capital, April 1, 2016 Net Income for April Less Withdrawals for April Decrease in Capital C. McAllister, Capital, April 30, 2016 3 7 2 3 00 8 0 0 0 00 140 0 0 0 00 (4 2 7 7 00) 135 7 2 3 00 Conner McAllister, Counselor and Attorney at Law Balance Sheet April 30, 2016 Assets Liabilities 73 8 4 3 00 20 9 8 0 00 8 1 8 0 00 Automobile 38 5 0 0 00 Office Equipment 29 6 8 0 00 Owner's Equity Office Furniture 6 5 0 0 00 Conner McAllister, Capital 135 7 2 3 00 Total Assets 156 7 0 3 00 Total Liabilities & Owner's Equity 156 7 0 3 00 Analyze: The net decrease in owner's equity during the month of April was $4,277. distribution in any manner. 3-19
CRITICAL THINKING PROBLEM 3.1 Bal. 1,000 Equipment and Tools 6,000 2,000 2,300 2,000 1,200 3,600 1,000 400 1,000 200 Truck Jack Walls, Capital 3,600 6,000 1,200 2,300 1,000 Bal. 4,500 Salary Expense Gasoline Expense Advertsing Expense 1,000 400 200 distribution in any manner. 3-20
CRITICAL THINKING PROBLEM 3.1 (continued) Elegant Lawn Care Income Statement Three Months Ended August 31, 2016 Revenue 4 5 0 0 00 Expenses Salary Expense 1 0 0 0 00 Gasoline Expense 4 0 0 00 Advertising Expense 2 0 0 00 Total Expenses 1 6 0 0 00 Net income 2 9 0 0 00 Elegant Lawn Care Statement of Owner's Equity Three Months Ended August 31, 2016 Jack Wells, Capital, June 1, 2016 6 0 0 0 00 Net Income for June-August 2 9 0 0 00 Jack Wells, Capital, Jaugust 31, 2016 8 9 0 0 00 Elegant Lawn Care Balance Sheet August 31, 2016 Assets Liabilities 1 0 0 0 00 2 3 0 0 00 Equipment/Tool 2 0 0 0 00 Owner's Equity Truck 3 6 0 0 00 Jack Wells, Capital 8 9 0 0 00 Total Assets 8 9 0 0 00 Total Liabilities & Owner's Equity 8 9 0 0 00 Jack is better off than he would have been had he left his money in the savings account. He earned a profit of $2,900 from his Elegant Lawn Care business, compared to approximately $90.00 in interest his money would have earned over the three summer months (assuming a bank interest rate of 6%; $6,000 0.06 3/12). Jack needs to look beyond his current checking account balance of $1,000 and realize that this balance will increase to $3,300 when he collects the $2,300 still owed to him. He also owns a truck and power mowers that he could sell for additional cash. distribution in any manner. 3-21
CRITICAL THINKING PROBLEM 3.2 Office Furniture (a) + 40,000 (b) - 4,000 (f) + 3,120 (i) - 4,260 (c) + 4,600 (d) + 9,100 (c) - 4,600 (0) + 4,300 (p) - 1,800 (j) 1,090 (i) + 4,260 (e) - 420 Bal. 1,360 Bal. 5,690 (m) +4,600 (g) - 150 (p) + 1,800 (h) -1,100 (k) - 8,000 (l) - 550 (n) - 920 (q) - 5,000 Bal. 33,820 (r) -1,200 Office Equipment John Arrow, Capital (g) + 650 (l) - 550 (g) + 500 (a) + 40,000 (j) +1,090 Bal. 1,040 John Arrow, Drawing Advertising Expense (q) + 5,000 (d) + 9,100 (b) + 4,000 (f) + 3,120 (m) + 4,600 (o) + 4,300 Bal. 21,120 Utilities Expense Salaries Expense Telephone Expense (n) +920 (k) +8000 (e) +420 Miscellaneous Expense (h) +1,100 (r) +1,200 Bal. 2,300 distribution in any manner. 3-22
CRITICAL THINKING PROBLEM 3.2 (continued) ACCOUNT NAME Office Furniture Office Equipment John Arrow, Architect Trial Balance January 31, 2016 DEBIT 33 8 2 0 00 1 3 6 0 00 5 6 9 0 00 6 5 0 00 CREDIT John Arrow, Capital 1 0 4 0 00 40 0 0 0 00 John Arrow, Drawing 5 0 0 0 00 21 1 2 0 00 Advertising Expense Utilities Expense Salaries Expense Telephone Expense Miscellaneous Expense 4 0 0 0 00 9 2 0 00 8 0 0 0 00 4 2 0 00 2 3 0 0 00 Totals 62 1 6 0 00 62 1 6 0 00 Revenue Expenses Advertising Expense Utilities Expense Salaries Expense Telephone Expense Miscellaneous Expense Total Expenses Net Income John Arrow, Architect Income Statement Month Ended January 31, 2016 4 0 0 0 00 9 2 0 00 8 0 0 0 00 4 2 0 00 2 3 0 0 00 21 1 2 0 00 15 6 4 0 00 5 4 8 0 00 distribution in any manner. 3-23
CRITICAL THINKING PROBLEM 3.2 (continued) John Arrow, Architect Statement of Owner's Equity Month Ended January 31, 2016 John Arrow, Capital, January 1, 2016 40 0 0 0 00 Net Income for January 5 4 8 0 00 Less Withdrawals for January 5 0 0 0 00 Increase in Capital 4 8 0 00 John Arrow, Capital, January 31, 2016 40 4 8 0 00 John Arrow, Architect Balance Sheet January 31, 2016 Assets Liabilities 33 8 2 0 00 1 0 4 0 00 1 3 6 0 00 Office Furniture 5 6 9 0 00 Owner's Equity Office Equipment 6 5 0 00 John Arrow, Capital 40 4 8 0 00 Total Assets 41 5 2 0 00 Total Liabilities & 41 5 2 0 00 Owner's Equity Analyze: Assets ($41,520) = Liabilities ($1,040) + Owner's Equity ($40,480) distribution in any manner. 3-24
SOLUTIONS TO BUSINESS CONNECTIONS Managerial Focus: 1. Net income (or net loss) for the period. 2. Reduce expenses; increase sales volume or raise sales prices. 3. Review of financial records containing cash available, amounts due, and dates due. 4. Provide summaries of: a. Income Statement revenues and expenses, b. Balance Sheet assets, liabilities, and owner s equity. Ethical Dilemma: Do not open the account New Expenses without approval from the controller. You must identify what expenses will be put into that account. If the account is not monitored, the clerk might enter personal expenses, which would not be appropriate. Financial Statement Analysis: 1. Financial data, operational information, plans for the future. 2. $4.4 billion. 3. $3,538,353 of cash, cash equivalents, and short-term investments were on hand at December 31, 2012. 4. Financial results are relatively the same. GAAP net income was $832,775 or fiscal year 2012 compared to $832847 in fiscal year 2011. 5. Adobe is targeting revenue of $950 million to $1 billion for the first quarter of 2013. Teamwork: All companies would have a cash account and accounts payable. A plumbing service would have accounts receivable whereas a clothing store would also have a credit card receivable. Both grocery store and clothing store would have inventory. All would have wages expense except the real estate would have sales commission. All would have office supplies expense. Depending on whether the company owned the building most would have rent expense. Internet Connection: For Fiscal Year 2012, Honeywell is the most profitable, and has the most cash and assets. distribution in any manner. 3-25
SOLUTIONS TO PRACTICE TEST Part A True-False 1. TRUE 2. TRUE 3. FALSE 4. FALSE 5. FALSE 6. TRUE 7. FALSE 8. FALSE 9. TRUE 10. FALSE 11. TRUE 12. TRUE 13. TRUE 14. TRUE 15. TRUE Part B Matching 1. i 2. c 3. h 4. f 5. b 6. d 7. e 8. g 9. a Part C Completion 1. trial balance 2. normal balance 3. footing 4. transposition 5. slide distribution in any manner. 3-26