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Financial Accounting 5ce
Chapter 2 – Recording Business Transactions
2-1
Chapter 2 Recording Business Transactions
2.1 Describe common types of accounts
There are no questions in this section.
2.2 Record the impact f business transactions on the accounting equation
1) All of the following accounts would be considered assets except for:
A) Cash
B) Common Shares
C) Prepaid Expenses
D) Notes Receivable
Answer: B
Diff: 2 Type: MC
L.O.: L.O. 2-2
2) The payment of an amount owed to a creditor would:
A) increase assets
B) increase liabilities
C) decrease net income
D) decrease liabilities
Answer: D
Diff: 2 Type: MC
L.O.: L.O. 2-2
3) When a company performs a service and immediately collects the cash from the customer, which of the
following would occur?
A) Net income would increase.
B) Expenses would decrease.
C) Assets would decrease.
D) Shareholders’ equity would decrease.
Answer: A
Diff: 2 Type: MC
L.O.: L.O. 2-2
4) Purchasing supplies and paying cash for them would:
A) increase total assets
B) decrease total assets
C) have no effect on total assets
D) increase total liabilities and shareholders’ equity
Answer: C
Diff: 2 Type: MC
L.O.: L.O. 2-2
Financial Accounting 5ce
Chapter 2 – Recording Business Transactions
2-2
5) Paying a utility bill when received would:
A) increase expenses
B) increase liabilities
C) increase owners’ equity
D) decrease revenues
Answer: A
Diff: 2 Type: MC
L.O.: L.O. 2-2
6) Borrowing money from the bank by signing a note payable would:
A) increase shareholders’ equity
B) increase net income
C) decrease liabilities
D) have no effect on shareholders’ equity
Answer: D
Diff: 2 Type: MC
L.O.: L.O. 2-2
7) Receiving a payment from a customer on account would:
A) have no effect on shareholders’ equity
B) increase net income
C) increase shareholders’ equity
D) increase liabilities
Answer: A
Diff: 2 Type: MC
L.O.: L.O. 2-2
8) The purchase of land for cash would:
A) increase total assets
B) decrease shareholders’ equity
C) increase the total debits on the trial balance
D) not affect the total of debits or credits on the trial balance
Answer: D
Diff: 3 Type: MC
L.O.: L.O. 2-2
9) An owner investment of a building, valued at $100,000 with an $80,000 outstanding mortgage,
transferring this asset into the business would:
A) increase assets by $20,000
B) increase assets by $80,000
C) increase shareholders’ equity by $20,000
D) increase shareholders’ equity by $100,000
Answer: C
Diff: 3 Type: MC
L.O.: L.O. 2-2
Financial Accounting 5ce
Chapter 2 – Recording Business Transactions
2-3
10) Performing services on account would:
A) increase assets and liabilities
B) increase assets and decrease shareholders’ equity
C) increase revenue and decrease shareholders’ equity
D) increase net income and shareholders’ equity
Answer: D
Diff: 3 Type: MC
L.O.: L.O. 2-2
11) The collection of cash from a customer on account would:
A) increase net income and shareholders’ equity
B) increase assets and decrease liabilities
C) increase assets and increase net income
D) have no effect on net income or shareholders’ equity
Answer: D
Diff: 3 Type: MC
L.O.: L.O. 2-2
12) Dividends paid to the shareholders when declared will:
A) increase assets and decrease liabilities
B) decrease assets and increase liabilities
C) have no effect on shareholders’ equity
D) decrease assets and decrease shareholders’ equity
Answer: D
Diff: 3 Type: MC
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13) What type of account is Prepaid Rent?
A) a liability
B) an expense
C) shareholders’ equity
D) an asset
Answer: D
Diff: 2 Type: MC
L.O.: L.O. 2-2
14) The costs of operating a business are usually called:
A) expenses
B) liabilities
C) assets
D) revenues
Answer: A
Diff: 1 Type: MC
L.O.: L.O. 2-2
Financial Accounting 5ce
Chapter 2 – Recording Business Transactions
2-4
15) Note payable, accounts payable, and salary payable are all examples of:
A) assets
B) revenue
C) expenses
D) liabilities
Answer: D
Diff: 1 Type: MC
L.O.: L.O. 2-2
16) Which of the following business events may not be recorded in a company’s general ledger?
A) The company paid each of its employees a Christmas bonus.
B) The company issued 100 shares of common stock.
C) The company purchased two acres of land for future plant expansion.
D) A lawsuit has been filed by one of the company’s customers (against the company).
Answer: D
Diff: 2 Type: MC
L.O.: L.O. 2-2
17) The payment of salaries to employees when earned would:
A) increase assets
B) increase net income
C) increase liabilities
D) decrease shareholders’ equity
Answer: D
Diff: 2 Type: MC
L.O.: L.O. 2-2
18) A transaction involving the cash purchase of equipment will decrease one asset account and increase
another asset account.
Answer: TRUE
Diff: 2 Type: TF
L.O.: L.O. 2-2
19) A balance sheet is organized in order of the accounting equation, with liabilities first, followed by
assets and shareholders’ equity.
Answer: FALSE
Diff: 1 Type: TF
L.O.: L.O. 2-2
20) A balance sheet is a required financial statement that reports the financial position of the company as
of a given day in time.
Answer: TRUE
Diff: 2 Type: TF
L.O.: L.O. 2-2
Financial Accounting 5ce
Chapter 2 – Recording Business Transactions
2-5
21) Notes Payable is a typical example of a liability account.
Answer: TRUE
Diff: 1 Type: TF
L.O.: L.O. 2-2
22) The account called Accrued Liabilities is really an expense account and not a liability account.
Answer: FALSE
Diff: 1 Type: TF
L.O.: L.O. 2-2
23) The retained earnings account represents the money invested by shareholders into the business since
its inception.
Answer: FALSE
Diff: 1 Type: TF
L.O.: L.O. 2-2
24) The purchase of office equipment on account would increase an asset and decrease a liability account.
Answer: FALSE
Diff: 2 Type: TF
L.O.: L.O. 2-2
Financial Accounting 5ce
Chapter 2 – Recording Business Transactions
2-6
25) Analyze the following transactions. Indicate which accounts are affected and whether they will
increase or decrease. Transaction (a) is completed as an example.
a. Owner investment of cash into the business.
b. Payment of a utility bill.
c. Purchase of inventory for cash.
d. Payment of an accounts payable.
e. Performing a service on account.
f. Collecting cash from a customer as payment on his account.
Transaction Accounts Increase Decrease
a. Cash x
Common
shares x
b.
c.
d.
e.
f.
Answer:
Transaction Accounts Increase Decrease
a. Cash x
Common
shares x
b. Utility expense x
Cash x
c. Inventory x
Cash x
d.
Accounts
Payable x
Cash x
e.
Accounts
Receivable x
Service
Revenue x
f. Cash x
Accounts
Receivable x
Diff: 2 Type: ES
L.O.: L.O. 2-2
Financial Accounting 5ce
Chapter 2 – Recording Business Transactions
2-7
26) Explain the following terms in your own words and give an example of each for Humpty’s
Equipment Inc.
a. asset
b. liability
c. shareholders’ equity
d. dividend
e. revenue
f. expense
Answer:
a. Assets are resources stemming from past transactions expected to provide economic benefits in the
future by contributing to earning revenues. Humpty uses a significant amount of machinery and
equipment to manufacture its products.
b. A liability is an obligation to provide goods or services in the future due to a past transaction. Some
examples are accounts payables and loans. Humpty borrows money (loan) from several sources
including PEI business development Inc.
c. Shareholders’ equity is direct or indirect investment in an entity by its owners. Examples are common
shares and preferred shares. Humpty issues common shares and they trade on the Toronto Stock
Exchange under the symbol SNX.
d. Dividends are amounts paid to the owners from the earnings of the firm. Examples are common share
dividends and preferred dividends. As of January 2014, Humpty did not declare dividends.
e. Revenues are economic benefits earned by providing goods or services to customers. Examples are
sales and fees earned.
f. Expenses are costs incurred to earn revenue. Examples include cost of goods sold and wages.
Diff: 1 Type: ES
L.O.: L.O. 2-2
27) For each of the following independent scenarios, fill in the blanks with the appropriate dollar amount.
Assets – Liabilities = Shareholders’ Equity
Scenario A $ 270,000 $ $ 75,000
Scenario B 600,000 1,500,000
Scenario C 450,000 400,000
Scenario D 410,000 95,000
Answer: Assets – Liabilities = Shareholders’ Equity
Scenario A $ 270,000 $ 195,000 $ 75,000
Scenario B 2,100,000 600,000 1,500,000
Scenario C 450,000 400,000 50,000
Scenario D 410,000 315,000 95,000
Diff: 1 Type: ES
L.O.: L.O. 2-2
Financial Accounting 5ce
Chapter 2 – Recording Business Transactions
2-8
28) Slick Corporation has summarized financial statements as shown below. Fill in the blank areas to
complete the financial statements. Begin in 2012 and move forward from there.
Slick Corporation
For the Year Ended June 30
2014 2013 2012
Revenues $ $2,100,000 $2,500,000
Expenses 1,470,000 1,430,000
Net Income 130,000 550,000
Retained Earnings beginning 0
Dividends declared 336,000
Retained earnings end 350,000 50,000
Common Shares end 250,000 250,000
Liabilities end 200,000 180,000
Assets end 830,000 430,000
Answer: Slick Corporation
For the Year Ended June 30
2014 2013 2012
Revenues $1,600,000 $2,100,000 $2,500,000
Expenses 1,470,000 1,430,000 1,950,000
Net Income 130,000 670,000 550,000
Retained Earnings beginning 384,000 50,000 0
Dividends declared 164,000 336,000 500,000
Retained earnings end 350,000 384,000 50,000
Common Shares end 280,000 250,000 250,000
Liabilities end 200,000 180,000 130,000
Assets end 830,000 814,000 430,000
Diff: 2 Type: ES
L.O.: L.O. 2-2
Financial Accounting 5ce
Chapter 2 – Recording Business Transactions
2-9
29) The following is a summary of the balance sheet accounts for Betty’s Bacon Inc. Organize the accounts
into Betty’s Bacon’s Balance Sheet.
Accounts Payable 37,500 Land 62,500
Inventory 42,500 Salary Payable 12,000
Prepaid Insurance 5,000 Tax Payable 50,000
Common Shares 75,000 Accounts Receivable 17,500
Furniture and Fixtures 125,000 Retained Earnings 40,000
Bank loan 44,000 Cash 6,000
Answer: Betty’s Bacon Inc.
Balance Sheet
Cash $6,000 Bank loan $44,000
Accounts Receivable 17,500 Accounts Payable 37,500
Inventory 42,500 Salary Payable 12,000
Prepaid Insurance 5,000 Tax Payable 50,000
Land 62,500
Furniture and Fixtures 125,000 Retained Earnings 40,000
Common Shares 75,000
Total assets $258,500 Total liabilities $258,500
and equity
Diff: 1 Type: ES
L.O.: L.O. 2-2
30) Prepare a Statement of Retained Earnings for the year ended June 30, 2014.
Chedacorn was incorporated on July 1, 2012 by 10 shareholders who each invested $100,000 in cash in
exchange for common shares. Chedacorn’s year end is June 30th. In its first year of business Chedacorn
had a net income of $243,750. For its years ended June 30, 2013 and 2014, its second and third years of
operation, Chedacorn reported net income of $472,500 and $560,000 respectively. In its first year
Chedacorn did not pay any dividends, but in fiscal 2013 it paid $62,500 in dividends and in 2014 it paid
$100,000 in dividends.
Answer: Chedacorn Corporation
Statement of Retained Earnings
For the year ended June 30, 2014
Retained Earnings, July 1, 2013 $ 653,750
Net income for the year 560,000
Less dividends (100,000)
Retained Earnings, June 30, 2014 $ 1,113,750
Note: To solve the exercise, retained earnings on July 1, 2013 must be calculated. This amount is $243,750
+ $472,500 – $62,500.
Diff: 1 Type: ES
L.O.: L.O. 2-2
Financial Accounting 5ce
Chapter 2 – Recording Business Transactions
2-10
31) What criteria are used to determine if a transaction has occurred?
Answer: If the event affects the entity’s financial position and can be reliably recorded, then a transaction
has occurred. If both of these criteria are not met, a transaction has not occurred. Some business events do
not lead to transactions, such as the retirement of an executive officer in the company, or changing the
company’s logo. However, if these events have some financial impact, then a transaction has occurred.
Diff: 2 Type: ES
L.O.: L.O. 2-2
32) List the types of accounts that appear on the income statement. List the types of accounts that appear
on the balance sheet.
Answer: The income statement contains accounts classified as revenues and expenses. The balance sheet
contains accounts classified as assets, liabilities, and owners’ equity.
Diff: 2 Type: ES
L.O.: L.O. 2-2
2.3 Record the impact of business transactions in T-accounts
1) The right side of a T-account is always the:
A) increase side
B) credit side
C) debit side
D) decrease side
Answer: B
Diff: 1 Type: MC
L.O.: L.O. 2-3
2) The entry to record the purchase of supplies on account would include a:
A) credit to the Accounts Payable account
B) debit to the Retained Earnings account
C) credit to the Cash account
D) credit to the Supplies account
Answer: A
Diff: 2 Type: MC
L.O.: L.O. 2-3
3) Credits to revenue accounts ultimately result in:
A) a decrease in owners’ equity
B) an increase in owners’ equity
C) a decrease in assets
D) an increase in liabilities
Answer: B
Diff: 2 Type: MC
L.O.: L.O. 2-3
Financial Accounting 5ce
Chapter 2 – Recording Business Transactions
2-11
4) The purchase of office equipment for cash would include a:
A) debit to Cash
B) debit to Office Equipment
C) credit to Accounts Payable
D) credit to Office Equipment
Answer: B
Diff: 2 Type: MC
L.O.: L.O. 2-3
5) An owner makes an investment of cash into the business. Such a transaction would include a:
A) debit to Common shares
B) credit to Cash
C) debit to Cash
D) debit to Accounts Receivable
Answer: C
Diff: 2 Type: MC
L.O.: L.O. 2-3
6) A business purchases a truck by signing a note payable to the seller. Such a transaction would include
a:
A) credit to Truck
B) debit to Note Payable
C) credit to Note Payable
D) debit to an expense account
Answer: C
Diff: 2 Type: MC
L.O.: L.O. 2-3
7) The accounting transaction to record payment of the heating bill would include a:
A) debit to Cash
B) credit to Accounts Payable
C) debit to Utilities Expense
D) debit to Accounts Receivable
Answer: C
Diff: 2 Type: MC
L.O.: L.O. 2-3
8) The accounting transaction to record payment of the advertising bill would include a:
A) debit to Cash
B) credit to Accounts Payable
C) debit to Advertising Expense
D) debit to Accounts Receivable
Answer: C
Diff: 2 Type: MC
L.O.: L.O. 2-3
Financial Accounting 5ce
Chapter 2 – Recording Business Transactions
2-12
9) The accounting transaction to record payment of the telephone bill would include a:
A) credit to Cash
B) credit to Accounts Payable
C) credit to Utilities Expense
D) debit to Accounts Receivable
Answer: A
Diff: 2 Type: MC
L.O.: L.O. 2-3
10) The accounting transaction to record the payment of salaries to employees would include a:
A) credit to Salary Expense
B) debit to Accounts Payable
C) debit to Salary Expense
D) debit to Cash
Answer: C
Diff: 2 Type: MC
L.O.: L.O. 2-3
11) An owners’ investment of land and a building into the business would include a:
A) debit to Land and a credit to Common shares
B) debit to Land and a credit to Building
C) debit to Common shares and a credit to Building
D) debit to Building and a debit to Common shares
Answer: A
Diff: 3 Type: MC
L.O.: L.O. 2-3
12) The purchase of an automobile with a cash down payment and a written promise to pay the balance
in the future would include a:
A) credit to Cash and a credit to Note Payable
B) debit to Cash and a credit to Automobile
C) debit to Note Payable and a credit to Cash
D) debit to Cash and a debit to Note Payable
Answer: A
Diff: 2 Type: MC
L.O.: L.O. 2-3
13) The purchase of a building with a cash down payment and a written promise to pay the balance in the
future would include a:
A) credit to Cash and a credit to Note Payable
B) debit to Cash and a credit to Buildings
C) debit to Note Payable and a credit to Cash
D) debit to Cash and a debit to Note Payable
Answer: A
Diff: 2 Type: MC
L.O.: L.O. 2-3
Financial Accounting 5ce
Chapter 2 – Recording Business Transactions
2-13
14) Paying a dividend to the company’s shareholders would include a:
A) debit to Cash and a credit to Dividends
B) debit to Dividends and a credit to Cash
C) debit to Retained Earnings and a credit to Dividends
D) debit to Accounts Payable and a credit to Retained Earnings
Answer: B
Diff: 2 Type: MC
L.O.: L.O. 2-3
15) Receiving a cheque from a customer on account would include a:
A) debit to Accounts Receivable and a credit to Cash
B) debit to Cash and a credit to Accounts Payable
C) debit to Accounts Payable and a credit to Cash
D) debit to Cash and a credit to Accounts Receivable
Answer: D
Diff: 3 Type: MC
L.O.: L.O. 2-3
16) Receiving cash from a customer on account would include a:
A) debit to Accounts Receivable and a credit to Cash
B) debit to Cash and a credit to Accounts Payable
C) debit to Accounts Payable and a credit to Cash
D) debit to Cash and a credit to Accounts Receivable
Answer: D
Diff: 3 Type: MC
L.O.: L.O. 2-3
17) Making a cash payment to settle a debt would include a:
A) debit to Cash and a credit to Accounts Receivable
B) debit to Accounts Receivable and a credit to Cash
C) debit to Accounts Payable and a credit to Cash
D) debit to Accounts Payable and a credit to Accounts Receivable
Answer: C
Diff: 3 Type: MC
L.O.: L.O. 2-3
18) Sending out a cheque to settle a debt would include a:
A) debit to Cash and a credit to Accounts Receivable
B) debit to Accounts Receivable and a credit to Cash
C) debit to Accounts Payable and a credit to Cash
D) debit to Accounts Payable and a credit to Accounts Receivable
Answer: C
Diff: 3 Type: MC
L.O.: L.O. 2-3
Financial Accounting 5ce
Chapter 2 – Recording Business Transactions
2-14
19) Performing a service on account would include a:
A) debit to Cash
B) debit to Revenue
C) credit to Accounts Receivable
D) debit to Accounts Receivable
Answer: D
Diff: 2 Type: MC
L.O.: L.O. 2-3
20) Purchasing a three-year insurance policy for cash would include a:
A) debit to Cash and a credit to Accounts Receivable
B) debit to Insurance Expense and a credit to Dividends
C) debit to Prepaid Insurance and a credit to Accounts Payable
D) debit to Prepaid Insurance and a credit to Cash
Answer: D
Diff: 3 Type: MC
L.O.: L.O. 2-3
21) The payment for rent of the office building for one month would include a:
A) debit to Cash
B) credit to Accounts Payable
C) debit to Rent Expense
D) credit to Revenue
Answer: C
Diff: 2 Type: MC
L.O.: L.O. 2-3
22) The purchase of office furniture on account (that is, on credit) would include a:
A) credit to Accounts Payable
B) credit to Office Furniture
C) debit to Accounts Receivable
D) credit to Cash
Answer: A
Diff: 2 Type: MC
L.O.: L.O. 2-3
23) Which of the following statements regarding accounts is false?
A) An asset is increased by a debit and decreased by a credit.
B) Revenue is increased by a debit and an expense is increased by a credit.
C) A liability is decreased by a debit and increased by a credit.
D) Revenue is increased by a credit and an expense is increased by a debit.
Answer: B
Diff: 3 Type: MC
L.O.: L.O. 2-3
Financial Accounting 5ce
Chapter 2 – Recording Business Transactions
2-15
24) Which of the following statements regarding accounts is true?
A) Assets are decreased by debits.
B) Expenses are decreased by debits.
C) Revenues are increased by debits.
D) Liabilities are decreased by debits.
Answer: D
Diff: 3 Type: MC
L.O.: L.O. 2-3
25) Which of the following accounts normally has a debit balance?
A) Dividends
B) Retained Earnings
C) Share capital
D) Revenue
Answer: A
Diff: 2 Type: MC
L.O.: L.O. 2-3
26) The account credited when supplies are purchased on account is:
A) Cash
B) Supplies
C) Supplies Expense
D) Accounts Payable
Answer: D
Diff: 2 Type: MC
L.O.: L.O. 2-3
27) When the owner of a business invests cash into the business, which of the following accounts is
debited?
A) Dividends
B) Cash
C) Common Shares
D) Accounts Receivable
Answer: B
Diff: 2 Type: MC
L.O.: L.O. 2-3
28) When a business sells inventory in exchange for cash, which of the following accounts is credited?
A) Revenue
B) Cash
C) Owners’ Equity
D) Accounts Payable
Answer: A
Diff: 3 Type: MC
L.O.: L.O. 2-3
Financial Accounting 5ce
Chapter 2 – Recording Business Transactions
2-16
29) The account credited when cash is received from a customer on account is:
A) Cash
B) Accounts Payable
C) Revenue
D) Accounts Receivable
Answer: D
Diff: 2 Type: MC
L.O.: L.O. 2-3
30) A debit increases the balance of which types of accounts?
A) assets and liabilities
B) assets and expenses
C) liabilities and expenses
D) assets and shareholders’ equity
Answer: B
Diff: 2 Type: MC
L.O.: L.O. 2-3
31) A credit decreases the balance of which types of accounts?
A) expenses and assets
B) liabilities and expenses
C) assets and liabilities
D) assets and shareholders’ equity
Answer: A
Diff: 2 Type: MC
L.O.: L.O. 2-3
32) A credit increases the balance of which types of accounts?
A) revenue and assets
B) liabilities and assets
C) liabilities and expenses
D) shareholders’ equity and liabilities
Answer: D
Diff: 2 Type: MC
L.O.: L.O. 2-3
33) Which type of account is credited when a company pays its employees?
A) an expense account
B) an asset account
C) a liability account
D) the owners’ equity account
Answer: B
Diff: 2 Type: MC
L.O.: L.O. 2-3
Financial Accounting 5ce
Chapter 2 – Recording Business Transactions
2-17
