## ACC100 Accounting Cycle week 3: Normal account balances

Normal account balances

Indicate whether each account has a normal debit or credit balance.

To find the normal balance of an account, let’s start with the basic accounting equation.

Assets = Liabilities + Owner’s equity

Accounts pertaining to the left side of the equation (Assets) have normally a debit balance. Accounts pertaining to the right side of the equation (Liabilities and Owner’s equity) have normally a credit balance.

 Assets [ debit ] = Liabilities + Owner’s equity [ credit ]

In particular, since Revenues increase Equity, Revenue accounts normally have a credit balance, like Equity.
However, since Expenses and Drawing reduce Equity, they normally have a debit balance.

In summary:

Accounts that normally have a debit (Dr.) balance are Assets, Expenses, and Drawing.

Accounts that normally have a credit (Cr.) balance are Liabilities, Revenues, and Equity.

We can now solve the problem.

Capital is an owner’s equity account and normally has a credit balance.

Service Revenue is a revenue account and normally has a credit balance.

Land is an asset account and normally has a debit balance.

Salaries Expense is an expense account and normally has a debit balance.

For the following transaction, answer the questions that follow in accordance with the rules of journalizing and the double-entry accounting system:

Transaction:

Allen Company paid \$1,000 for monthly advertising expenses.

When the bill for advertising for either the week or the month is paid, there are two accounts affected: Advertising Expense and Cash. The Advertising Expense account is used to record the costs incurred for advertising used during the operation of the business. The Advertising Expense account is an expense account with a debit balance. The Advertising Expense account increases, so the Advertising Expense account is debited.

The Cash account is an asset account with a debit balance. The Cash account decreases when cash is paid, so the Cash account is credited.

When an insurance policy is paid for in advance of its use, there are two accounts affected: Prepaid Insurance and Cash.

The Prepaid Insurance account is used to record the cost of an insurance policy that is paid for in advance of its use. The Prepaid Insurance account is an asset account with a debit balance. The Prepaid Insurance account increases when more insurance is acquired, so the Prepaid Insurance account is debited.

The Cash account is an asset account with a debit balance. The Cash account decreases when cash is paid, so the Cash account is credited.

When the company pays cash on account, there are two accounts affected: Accounts Payable and Cash.

The Accounts Payable account is a liability account with a credit balance. When the company purchases equipment on account, the company owes money for the purchase. The company is now paying part or all of what it owes. When the company pays part or all of what it owes, it owes less money. Therefore, the Accounts Payable account is decreased, so the Accounts Payable account is debited.

The Cash account is an asset account with a debit balance. The Cash account decreases when cash is paid, so the Cash account is credited.

Perez Company billed clients on account for services already performed, \$3,600.

Cox Company purchased equipment for \$4,900 cash.

Cooper Company placed an ad in the local paper for the current month to be paid next month, \$1,700.

Price Company received utility bill for the current month of \$1,700 and paid it.

Collins Company paid salaries for the current period of \$1,600.

Bailey Company paid \$2,600 to a supplier on account.

When the company pays cash to a supplier on account, there are two accounts affected: Accounts Payable and Cash.

The Accounts Payable account is a liability account with a credit balance. When the company purchases supplies on account, the company owes money for the purchase. The company is now paying part or all of what it owes. When the company pays part or all of what it owes, it owes less money. Therefore, the Accounts Payable account is decreased, so the Accounts Payable account is debited.

The Cash account is an asset account with a debit balance. The Cash account decreases when cash is paid, so the Cash account is credited.

Drawing by owner amounted to \$2,700.

Smith Company paid monthly rent, \$1,500.

Bailey Company paid \$2,000 cash for a one-year insurance policy in advance.

Owner deposited \$31,000 in business bank account.

Journalize the following transactions into the general journal in accordance with the rules of Journalizing, and the Double-entry accounting system.

March November 3 Cooper Company pays current month’s rent, \$1,600. 14 Cooper Company pays \$3,000 of monthly salaries.

March 3:

Debit Rent Expense:

It is an accepted policy to record the rent cost as an expense when it is paid, even though, technically, it will not become an expense until it is used up at the end of the month. Therefore, if a cost is going to be completely used by the end of the month, it is typically expensed at the time of payment. This is the usual practice with rent. Rent Expense is an expense account with a debit balance. Rent Expense is debited (increased) because expenses increase when costs are incurred.

Credit Cash:

When the company pays the rent expense, the Cash account is affected. Cash is an asset account with a debit balance. Cash is credited (decreased) because cash decreases when the company pays the rent.

November 14:

Debit Salaries Expense:

When the company pays employees a salary for services performed, the Salaries Expense account is affected. Salary Expense is an expense account with a debit balance. Salaries Expense is debited (increased) because expenses increase when costs are incurred.

Credit Cash:

When the company pays the salaries, the Cash account is affected. Cash is an asset account with a debit balance. Cash is credited (decreased) because cash decreases when the company pays salaries.

 April August 10 Wilson Company pays balance due of \$2,900 on tools previously purchased. 10 Wilson Company pays \$3,600 of monthly salaries.

April 10:

Debit Accounts Payable:

When the company pays a balance due, it indicates that the company has an outstanding balance owed to a vendor. The company is now paying the previously created liability. When the company pays the amount owed, the Accounts Payable account is affected. Accounts Payable is a liability account with a credit balance. Accounts Payable is debited (decreased) because the company owes the vendor less money.

Credit Cash:

When the business pays a vendor, the Cash account is affected. Cash is an asset account with a debit balance. Cash is credited (decreased) because cash decreases when the business pays an amount owed to a vendor.

August 10:

Debit Salaries Expense:

When the company pays employees a salary for services performed, the Salaries Expense account is affected. Salary Expense is an expense account with a debit balance. Salaries Expense is debited (increased) because expenses increase when costs are incurred.

Credit Cash:

When the company pays the salaries, the Cash account is affected. Cash is an asset account with a debit balance. Cash is credited (decreased) because cash decreases when the company pays salaries.

 March October 11 Taylor Company receives and pays a bill for a two-year insurance policy premium, \$3,700. The policy begins on April 1. 5 Taylor Company receives \$6,200 payment from a customer on account.

March 11:

Debit Prepaid Insurance:

When the company pays for insurance in advance of its use, the Prepaid Insurance account is affected. Prepaid Insurance is an asset account with a debit balance. Prepaid Insurance is debited (increased) because the asset increases when the company pays for it in advance of its use.

Credit Cash:

When the company pays for the insurance, the Cash account is affected. Cash is an asset account with a debit balance. Cash is credited (decreased) because cash decreases when the company pays for the insurance policy.

October 5:

Debit Cash:

When cash is received by the business, the Cash account is affected. Cash is an asset account with a debit balance. Cash is debited (increased) because there is more cash in the business.

Credit Accounts Receivable:

When customers pay part or all of what is owed to the company, the Accounts Receivable account is affected. Accounts Receivable is an asset account with a debit balance. Accounts Receivable is credited (decreased) because the company’s customers owe the company less money.

 June September 21 Owner deposits \$30,000 in business bank account as an initial investment. 7 Perez Company pays \$1,200 for monthly advertising expenses.
 May November 15 Brown Company receives \$3,100 payment from a customer on account. 5 Owner deposits \$48,000 in business bank account as an initial investment.
 April October 18 Murphy Company purchases land for \$50,000 on account. 8 Murphy Company receives utility bill of \$500 and pays it.

April 18:

Debit Land:

When the company purchases land, the Land account is affected. Land is an asset account with a debit balance. Land is debited (increased) because the company has purchased more land.

Credit Accounts Payable:

When land is purchased on account, it is not paid for immediately. The company now owes money. When the company owes money, the Accounts Payable account is affected. Accounts Payable is a liability account with a credit balance. Accounts Payable is credited (increased) because the company owes the vendor money.

October 8:

Debit Utilities Expense:

When the company pays for the cost of utilities used for a period, the Utilities Expense account is affected. Utilities Expense is an expense account with a debit balance. Utilities Expense is debited (increased) because expenses increase when costs are incurred.

Credit Cash:

When the company pays the utilities expense, the Cash account is affected. Cash is an asset account with a debit balance. Cash is credited (decreased) because cash decreases when the company pays the utility bill.

 April November 15 Lee Company pays \$2,400 of monthly salaries. 15 Lee Company purchases equipment costing \$5,300, paying 40% down and the rest on account.
 March October 22 Alexander Company pays \$1,400 for monthly advertising expenses. 1 Alexander Company pays \$2,700 of monthly salaries.
 June August 6 Wood Company pays current month’s rent, \$1,700. 18 Wood Company purchases equipment costing \$5,000, paying 40% down and the rest on account.
 May September 13 Walker Company receives and pays a bill for a two-year insurance policy premium, \$1,600. The policy begins on June 1. 13 Walker Company purchases equipment costing \$3,600, paying 40% down and the rest on account.
March26Owner deposits \$17,000 in business bank account as an initial investment. November28Sanchez Company receives \$5,600 payment from a customer on account.
May30Peterson Company pays balance due of \$3,600 on tools previously purchased.September20Peterson Company receives \$3,200 payment from a customer on account.

To start her own business, Barbara Bailey put \$27,800 of her personal cash into the business account.

Given the following additional transactions calculate the ending balance of each of the following accounts after all journal entry amounts are posted:

Cash account:
Cash is an asset account with a debit balance.
Cash increases on the debit side and decreases on the credit side.
The ending balance in the Cash account is the investment of cash by the owner minus cash paid for supplies plus cash received from customers on account:
             Ending Cash balance = \$27,800 – \$830 + \$1,300 = \$28,270
Supplies account:
Supplies is an asset account with a debit balance.
Supplies increases on the debit side and decreases on the credit side.
The ending balance in the Supplies account is Supplies purchased minus the amount of Supplies used during the period:
             Ending Supplies balance = \$830 – \$400 = \$430
Supplies Expense account:
Supplies Expense is an expense account with a debit balance.
Supplies Expense increases on the debit side and decreases on the credit side.
The ending balance in the Supplies Expense account is the amount of Supplies used during the period:
Ending Supplies Expense balance = \$400
Accounts Receivable account:
Accounts Receivable is an asset account with a debit balance.
Accounts Receivable increases on the debit side and decreases on the credit side.
The ending balance in the Accounts Receivable account is the amount of services performed on account minus the amount received from customers on account:
             Ending Accounts Receivable balance = \$1,300 – \$1,300 = \$0
Service Revenue account:
Service Revenue is a revenue account with a credit balance.
Service Revenue increases on the credit side and decreases on the debit side.
The ending balance in the Service Revenue account is the amount earned during the period:
Ending Service Revenue balance = \$1,300

To start his own business, Bob Gonzales put \$30,000 of his personal cash into the business account.

Cash = 30000 – 285-515 = 29200

Utilities Expense = 315

Account Payable = 315-285=30

Wage Expense = 565

Wage Payable = 565-515=50

To start her own business, Janet Bennett put \$20,400 of her personal cash into the business account.

Cash = 20,400 + 1700 + 1910 = 24,010

Accounts Receivable = 1700 – 1700 = 0

Service Revenue = 1700 + 1260 = 2960

Unearned Revenue = 1910 – 1260 = 650

To start her own business, Kim Taylor put \$21,900 of her personal cash into the business account.

Cash = 21,900 – 590 – 1230 = 20,080

Wages Expense = 720

Wages Payable = 720 – 590 = 130

Supplies = 1230 – 530 = 700

Supplies Expense = 530

To start her own business, Linda Moore put \$26,100 of her personal cash into the business account.

Cash = 26100 + 1725 – 235 = 27,590

Unearned Revenue = 1725 – 1095 = 630

Service Revenue = 1095

Utilities Expense = 250

Accounts Payable = 250 – 235 = 15

On January 1, Lopez Company paid \$49,200 to purchase a large piece of equipment that will last 6 years.

Required:

1.How much is depreciated by the end of the first year?

 Depreciation expense per year = \$49,2006 = \$8,200

2. What will be the book value of the equipment at the end of the first year, after the adjusting entries have been prepared and posted?

Book Value = 49200 – 8200 = 41,000

On January 1, Wilson Company purchased \$2,810 of supplies on account. By the end of the calendar year, \$2,610 of supplies remains.

Required:

1. How much has been expensed by the end of the year?

 Amount expensed = Amount paid – Amount remaining

= 2810 – 2610 = 200

2. How much will be in the Supplies account at the end of the year, after the adjusting entries have been prepared and posted?

In the problem, it is stated that \$2,610 of supplies remain. So the answer is \$2,610.

1. Amount expensed: \$200.

2. Amount in the Supplies account: \$2,610.

On September 1, Richardson Company received \$13,200 for six months of rent in advance.

Required:

1.How much would be recognized as rent revenue by the end of the year?

2. How much will be in the Unearned Rent account by the end of the year, after the adjusting entries have been prepared and posted?

1.Since the rent was received on September 1, there are 4 months remaining during which the rent will be earned this year. If we divide \$13,200 by 6 months, this results in \$2,200 per month. Multiplying that by 4 gives us the amount to be recognized as revenue this year, \$8,800.

 Rent Revenue = Amount ReceivedPeriod (months) × Number of months of rent earned this year = \$13,2006×4 = \$8,800

2. Since the total rent received in advance was \$13,200, and since we have recognized \$8,800, the difference, \$4,400, remains in the Unearned Rent Revenue account.

 Unearned rent = \$13,200 – \$8,800 = \$4,400

On January 1, Brown Company paid \$41,800 to purchase a large piece of equipment that will last 5 years.

Required:

1. How much is depreciated by the end of the first year?

2. What will be the book value of the equipment at the end of the first year, after the adjusting entries have been prepared and posted?

On June 1, King Company purchased \$3,000 of supplies on account. By the end of the calendar year, \$2,190 of supplies remains.

Required:

1. How much has been expensed by the end of the year?

2. How much will be in the Supplies account at the end of the year, after the adjusting entries have been prepared and posted?

Problem states that 2190 remain at end of year.

On May 1, Moore Company paid \$14,400 for two years of insurance in advance.

Required:

1. How much will be expensed by the end of the calendar year?

2. How much will be in the Prepaid Insurance account at the end of the year, after the adjusting entries have been prepared and posted?

On February 1, Wood Company paid \$6,300 for one year of advertising in advance.

Required:

1. How much will be expensed by the end of the year?

2. How much will be in the Prepaid Advertising account at the end of the year, after the adjusting entries have been prepared and posted?

On December 31, Peterson Company estimates the utility expense for December to be \$410. The bill will not be received and paid until January.

Required:

Journalize the adjusting entry on December 31

On December 31, Sanchez Company has earned interest revenue of \$2,800 on outstanding notes, even though the company will not actually receive the interest until the following year.

Required:

Journalize the adjusting entry on December 31.

By the end of December, Gray Company has completed work, earning \$4,800. Gray company has neither billed the clients nor recorded any of the revenue.

Hill Company’s employees earn \$260 per day and are paid every Friday for a five-day work week. This year, December 31 is a Tuesday.

On December 31, Brown Company has incurred interest expense of \$6,200 on outstanding notes, even though the company will not actually pay the interest until the following year.

On December 31, Thomas Company estimates the utility expense for December to be \$700. The bill will not be received and paid until January.

On December 31, Richardson Company has earned interest revenue of \$2,300 on outstanding notes, even though the company will not actually receive the interest until the following year.

By the end of December, Garcia Company has completed work, earning \$3,300. Garcia company has neither billed the clients nor recorded any of the revenue.

Spur Co. purchases tools on account, \$3,200.

Required:

For the transaction above, complete the following:

(a) Select the accounts that are affected (there will be at least two).

(b) Are the selected accounts increased or decreased?

(c) What is the dollar amount of change in the accounts?

(d) If Equity is selected, choose the reason that it has changed

Since the tools are purchased for use in the business, the account Tools increases. Since no money is paid at the time of the purchase, the business owes the entire amount, \$3,200. When an amount is owed, the liability account Accounts Payable increases.

Sun Co. pays monthly rent, \$2,000.

Required:

For the transaction above, complete the following:

(a) Select the accounts that are affected (there will be at least two).

(b) Are the selected accounts increased or decreased?

(c) What is the dollar amount of change in the accounts?

(d) If Equity is selected, choose the reason that it has changed.

Since cash is paid for the rent, the account Cash decreases. When the rent is paid, an expense account (Rent Expense) increases. An increase in an expense account causes the Equity to decrease. It is accepted policy to expense the cost of the rent even though, technically, it will not become an expense until it is fully used by the end of the month. If a cost is going to be fully used by the end of the month, the usual practice is to expense it at the time of the payment. Expenses reduce Net Income and in turn reduce Equity. Revenues increase net income and in turn increase Equity.

Sun Co. purchases supplies for \$1,400. Sun Co. pays 20% of the balance in cash and owes the balance.

Required:

For the transaction above, complete the following:

(a) Select the accounts that are affected (there will be at least two).

(b) Are the selected accounts increased or decreased?

(c) What is the dollar amount of change in the accounts?

(d) If Equity is selected, choose the reason that it has changed.

Bull Co. receives utility bill of \$1,200 and paid it.

Maverick Co. pays \$1,200 for monthly advertising expenses.

In this problem, you will be given three errors that may or may not affect the trial balance.

Second problem: The trial balance will still balance. Even though there has been an error, the trial balance will balance because the error does not affect the total credit or the total debit.

• First problem: The trial balance will still balance. Even though there has been an error, the trial balance will balance because the error does not affect the total credit or the total debit.

Third problem: The trial balance will not balance. The Drawing account normally has a debit balance. The credit column will be larger by \$1,360. This is because the difference between crediting an account for \$680 and debiting that same account for \$680 is \$1,360.

First problem: The trial balance will not balance. The omitted debit of \$145 will cause Cash to be understated, because Cash normally has a debit balance. The credit total will be larger by \$145.

Second problem: The trial balance will not balance. The credit should have been to Accounts Receivable, not to Service Revenue. Nevertheless, the amount of the credit was \$900 too little. In summary, Service Revenue will be overstated by \$100, since Service Revenue normally has a credit balance, making the credit balance larger. However, Accounts Receivable will be overstated by \$1,000, since Accounts Receivable should have been reduced by \$1,000. This will make the debit total larger by \$100. The net effect is that the debit total will be larger by \$900.

Third problem: The trial balance will not balance. The extra credit of \$110 will cause Accounts Payable to be overstated, because Accounts Payable normally has a credit balance. The credit total will be larger by \$110.

First problem: The trial balance will still balance. Even though there has been an error, the trial balance will balance because the error does not affect the total credit or the total debit.

Second problem: The trial balance will not balance. The Service Revenue account normally has a credit balance. The debit column will be larger by \$700. This is because the difference between crediting an account for \$350 and debiting that same account for \$350 is \$700.

Third problem: The trial balance will still balance. Even though there has been an error, the trial balance will balance because the error does not affect the total credit or the total debit.

First problem: The trial balance will still balance. Even though there has been an error, the trial balance will balance because the error does not affect the total credit or the total debit.

Second problem: The trial balance will still balance. Even though there has been an error, the trial balance will balance because the error does not affect the total credit or the total debit.

Third problem: The trial balance will not balance. The Drawing account normally has a debit balance. The credit column will be larger by \$1,750. This is because the difference between crediting an account for \$875 and debiting that same account for \$875 is \$1,750.

First problem: The trial balance will still balance. Even though there has been an error, the trial balance will balance because the error does not affect the total credit or the total debit.

Second problem: The trial balance will not balance. The omitted debit of \$520 will cause Cash to be understated, because Cash normally has a debit balance. The credit total will be larger by \$520.

Third problem: The trial balance will not balance. The credit to Cash was for \$540 too much. Therefore, Cash will be understated because the additional credit amount reduces Cash. Since Cash normally has a debit balance, the credit total will be larger by \$540.

First problem: The trial balance will not balance. The debit to Cash was \$450 short. Therefore, Cash will be understated since Cash normally has a debit balance. The credit total will be larger by \$450.

Second problem: The trial balance will not balance. The omitted credit of \$585 will cause Accounts Payable to be understated, because Accounts Payable normally has a credit balance. The debit total will be larger by \$585.

Third problem: The trial balance will still balance. Even though the debited account is incorrect (Accounts Payable should have been debited instead of Supplies Expense), as long as the debits equal credits, the trial balance will balance.

On July 1, Evans Company paid \$24,000 for two years of insurance in advance. Evans Company recorded the transaction by debiting Prepaid Insurance and crediting Cash.

To solve this problem, the amount of insurance used during the fiscal year must be calculated. First, we must determine the number of months used in the current fiscal year. Since the insurance was purchased on July 1, there are 6 months remaining in the year during which the insurance will be used.

Second, we must determine the amount of insurance used each month:

Finally, we must determine the total insurance expense over the fiscal year:

 Total insurance expense = Monthly insurance expense × Months used in the fiscal year

Now that the amount of insurance used has been determined, the adjusting entry can be made.

Debit Insurance Expense:

Insurance Expense, an expense account, is debited (increased) by the amount of insurance used during the fiscal year.

Credit Prepaid Insurance:

Prepaid Insurance, an asset account, is credited (decreased) by the amount of insurance used during the fiscal year.

On June 1, Phillips Company purchased \$2,490 of supplies. Phillips Company recorded the transaction by debiting Supplies and crediting Cash.

By the end of the calendar year, \$2,080 of supplies remains.

To solve this problem, the amount of supplies used during the fiscal year must be calculated. Since the cost of the supplies purchased and the cost of the supplies remaining is known, we can determine the supplies expense for the year (cost of the supplies used):

 Supplies expense = Cost of supplies – Cost of supplies remaining = \$2,490 – \$2,080 = \$410.

Solution:

Now that the amount of supplies expense has been determined, the adjusting entry can be made.

Debit Supplies Expense:

Supplies Expense, an expense account, is debited (increased) by the amount of the supplies used for the fiscal year.

Credit Supplies:

Supplies, an asset account, is credited (decreased) by the amount of supplies used for the fiscal year.

On September 1, Moore Company received \$9,600 for six months of rent in advance. Moore Company recorded the transaction by debiting Cash and crediting Unearned Rent Revenue.

On January 1, Rodriguez Company purchased a large piece of equipment for \$23,000. It has an estimated useful life of 10 years.

On June 1, Cook Company paid \$2,400 for one year of advertising, in advance. Cook Company recorded the transaction by debiting Prepaid Advertising and crediting Cash.

On September 1, Miller Company paid \$16,800 for two years of insurance in advance. Miller Company recorded the transaction by debiting Prepaid Insurance and crediting Cash.

On September 1, Roberts Company purchased \$2,990 of supplies. Roberts Company recorded the transaction by debiting Supplies and crediting Cash.

By the end of the calendar year, \$1,750 of supplies remains.

On October 1, Diaz Company received \$13,800 for six months of rent in advance. Diaz Company recorded the transaction by debiting Cash and crediting Unearned Rent Revenue.

On January 1, Thompson Company purchased a large piece of equipment for \$65,600. It has an estimated useful life of 8 years.

On April 1, Hernandez Company purchased \$3,050 of supplies on account. On April 1, Hernandez Company debited Supplies Expense, which is an alternate way of recording the initial expenditure. By the end of the calendar year, \$1,110 of supplies was used.

On November 1, Richardson Company paid \$7,800 for one year of advertising in advance. On November 1, Richardson Company debited Advertising Expense, which is an alternate way of recording the initial expenditure. Assume that the advertising is used evenly throughout the year.

On October 1, Murphy Company received \$31,800 for six months of rent in advance. On October 1, Murphy Company credited Rent Revenue, which is an alternate way of recording the initial receipt of cash.

On October 1, Williams Company paid \$10,800 for two years of insurance in advance. On October 1, Williams Company debited Insurance Expense, which is an alternate way of recording the initial expenditure.

On April 1, Barnes Company purchased \$2,490 of supplies on account. On April 1, Barnes Company debited Supplies Expense, which is an alternate way of recording the initial expenditure. By the end of the calendar year, \$510 of supplies was used.