Solutions Manual

to accompany

Accounting:
Building Business
Skills
Fourth Edition

Prepared by

Shirley Carlon, Rosina Mladenovic-

McAlpine and Chrisann Palm

John Wiley & Sons Australia, Ltd 2012

 Chapter 2: The accounting information system

CHAPTER 2 – THE ACCOUNTING INFORMATION SYSTEM

ASSIGNMENT CLASSIFICATION TABLE

Brief
Learning Objectives Exercises Exercises Problems
1. Analyse the effect of accounting 1 1,2,3,10 1A,2A,3A,
transactions and events on the basic 1B,2B,3B
accounting equation.

2. Explain what an account is and how it

helps in the recording process.

3. Define debits and credits and explain 2 4,6 4A,5A,6A,7A,

how they are used to record accounting 8A, 4B,5B,6B
transactions. 7B,8B

4. Identify the basic steps in the recording 3

process.

5. Explain what a journal is and how it 4,7 5,7,9,10 4A,5A,6A,7A,8A,

helps in the recording process. 4B,5B,6B,7B 8B

6. Explain what a general ledger is and 10 5A,6A,7A,8A,

how it helps in the recording process. 5B,6B,7B, 8B

7. Explain what posting is and how it 5 8,10 5A,6A,7A,8A,

helps in the recording process. 5B,6B,7B,8B

8. Explain the purposes of a trial balance. 6,7 8,9,11,12, 5A,6A,7A,8A,9A,

13 10A,5B,6B,7B,
8B,9B,10B

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Solutions manual to accompany Accounting: building business skills 4e

CHAPTER 2 – THE ACCOUNTING INFORMATION SYSTEM

ANSWERS TO QUESTIONS

1. The system of collecting and processing transactions or data and communicating

financial information to interested parties is known as the accounting information
system. The first step of the accounting process is to identify transactions and events
that are to be recorded. Once identified and measured, the transactions and events
are recorded to provide a permanent history of the financial activities of the
organisation. Recording begins with a chronological record of transactions and
events in an orderly and systematic manner in a journal. The next step is to transfer
the journal information to the appropriate accounts in the ledger. (Note further steps
in the recording process are discussed in chapter 3.)

2. Accounting transactions and events of the enterprise are recorded by accountants

because they affect the basic equation (assets, liabilities and equity items).

(a) No, the death of a major shareholder of the company is not an accounting
transaction or event. Applying the accounting entity concept from Chapter 1
and therefore it does not affect the basic equation.

(b) Yes, Supplies purchased on account is an accounting transaction and it is

recorded as an increase in an asset, supplies and an increase in liabilities,
accounts payable .

(c) No, an employee being fired is not an accounting transaction or event which
is recorded. When the employee provides services (works), this is when the
event is recorded. Upon ceasing employment it is only the services which
have accrued which need to be accounted for.

(d) Yes, paying a cash dividend to shareholders is an accounting transaction

which is recorded as a decrease in an asset, cash and a decrease in equity,
retained earnings.

3. (a) Decrease assets, cash and decrease in equity, cleaning expenses.

(b) Increase assets, equipment and decrease assets cash.

(c) Increase assets, cash and increase equity, share capital

(d) Decrease assets, cash and decrease liabilities, accounts payable.

4. Charles is incorrect. The double-entry system merely records the dual (two-sided)
effect of a transaction on the accounting equation. A transaction is not recorded
twice; it is recorded once with a dual effect. In other words, for each transaction,
debits must equal credits.

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 Chapter 2: The accounting information system

5. Tanya is incorrect. A debit balance only means that debit amounts exceed credit
amounts in an account. Conversely, a credit balance only means that credit amounts
are greater than debit amounts in an account. Thus, a debit or credit balance is
neither favourable nor unfavourable.

6. (a) Asset accounts are increased by debits and decreased by credits.

(b) Liability accounts are decreased by debits and increased by credits.

(c) The share capital account is decreased by debits and increased by credits.

(d) Revenue accounts are decreased by debits and increased by credits.

(e) Expense accounts are increased by debits and decreased by credits.

(f) Dividend account are increased by debits and decreased by credits.

7. (a) Accounts Receivable – debit balance.

(b) Cash – debit balance.

(c) Machinery – debit balance.

(d) Accounts Payable – credit balance.

(e) Service Revenue – credit balance.

(f) Advertising Expense – debit balance.

(g) Share Capital – credit balance.

8. (a) The entire group of accounts maintained by an entity company, including all
the asset, liability, and equity accounts, is referred to collectively as the
ledger.

(b) The chart of accounts is important, particularly for an entity that has a large
number of accounts, because it helps organise the accounts, identify their
location in the ledger and facilitate the recording process.

9. A trial balance is a list of accounts and their balances at a given time. The primary
purpose of a trial balance is to prove the mathematical equality of debits and credits
after all journalised transactions have been posted. A trial balance also facilitates the
discovery of errors in journalising and posting. In addition, it is useful in preparing
financial statements.

10. (a) The trial balance would balance.

(b) The trial balance would not balance.

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SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 2.1

Assets Liabilities Equity

(a) + + NE
(b) + NE +
(c) - NE -

BRIEF EXERCISE 2.2

Debit Credit Normal
Effect Effect Balance

(a) Accounts Payable Decrease Increase Credit

(b) Advertising Expense Increase Decrease Debit
(c) Service Revenue Decrease Increase Credit
(d) Accounts Receivable Increase Decrease Debit
(e) Retained Earnings Decrease Increase Credit
(f) Dividends Increase Decrease Debit

BRIEF EXERCISE 2.3

Dudley Advertising Ltd
(a) Basic Analysis (b) Debit-Credit Analysis

Aug 1 The asset Cash is increased Debits increase assets:

$15,000; Share Capital (equity) debit Cash $15,000.
is increased. Credits increase equity:
credit Share Capital $15,000

4 The asset Prepaid Insurance is Debits increase assets:

increased; the asset Cash is debit Prepaid Insurance $1,800.
decreased. Credits decrease assets:
credit Cash $1,800.

16 The asset Cash is increased; the Debits increase assets:

revenue Service Revenue is debit Cash $9,000.
increased. Credits increase revenues:
credit Service Revenue $9,000.

27 The expense Salaries Expense Debits increase expenses:

is increased; the asset Cash is debit Salaries Expense $500.
decreased. Credits decrease assets:
credit Cash $500.

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 Chapter 2: The accounting information system

BRIEF EXERCISE 2.4

Dudley Advertising Ltd

DATE Description Debit Credit
Aug. 1 Cash 15,000
Share Capital 15,000
Being the issue of share for cash
4 Prepaid Insurance 1,800
Cash 1,800
Being the payment of the insurance
premium
16 Cash 9,000
Service Revenue 9,000
Being the receipt of cash for services
27 Salaries Expense 500
Cash 500
Being the payment of salaries

BRIEF EXERCISE 2.5

Gonzales Ltd

Accounts Receivable
5/5 Service Revenue* 13,200 12/5 Cash 12,400

*Service Revenue is the cross-reference. See pp. 105-109 of the text for further
explanation.

Service Revenue
5/5 Accounts Receivable 13,200
15/5 Cash 12,000

Cash
12/5 Accounts Receivable 12,400
15/5 Service Revenue 12,000

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Solutions manual to accompany Accounting: building business skills 4e

BRIEF EXERCISE 2.6

Carland Ltd
Trial Balance
as at 30 June 2013

Account name Debit Credit

$ $
Cash 3,800
Accounts Receivable 3,000
Equipment 17,000
Accounts Payable 4,000
Share Capital 20,000
Dividends 1,200
Service Revenue 6,000
Salaries Expense 4,000
Rent Expense 1,000             
$30,000 $30,000

BRIEF EXERCISE 2.7

Jagoda Ltd
Trial Balance
as at 31 December 2012

Account name Debit Credit

$ $
Cash 20,800
Prepaid Insurance 3,500
Accounts Payable 5,000
Revenue Received in Advance 4,200
Share Capital 10,000
Retained Earnings 9,000
Dividends 4,500
Service Revenue 11,600
Salaries Expense 8,600
Rent Expense 2,400             
$39,800 $39,800

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 Chapter 2: The accounting information system

SOLUTIONS TO EXERCISES

EXERCISE 2.1
Speedy Lawn Care Pty Ltd

1. Increase in assets and increase in equity.

2. Decrease in assets and decrease in equity.
3. Increase in assets and increase in equity.
4. Increase in assets and increase in equity.
5. Decrease in assets and decrease in equity.
6. Increase in liabilities and decrease in equity.
7. Increase in assets and decrease in assets.
8. Increase in assets and decrease in assets.
9. Increase in assets and increase in liabilities.

EXERCISE 2.2

Moscow Mowers Ltd

(a) 1. Shareholders invested $27,000 cash in the business.

2. Purchased office equipment for $7,000, paying $3,000 in cash and the balance
of $4,000 on account.
3. Paid $900 cash for supplies.
4. Recognised $18,500 in revenue, receiving $14,600 cash and $3,900 on
account.
5. Paid $1,500 cash on accounts payable.
6. Paid $400 cash dividends to shareholders.
7. Paid $750 cash for rent.
8. Collected $500 cash from customers on account.
9. Paid salaries of $3,900.
10. Received invoice for $1500 electricity used.

(b) Issued Share Capital $27,000

Service Revenue 18,500
Dividends (400)
Rent Expense (750)
Salaries Expense (3,900)
Electricity Expense (1,500)
Increase in Equity $38,950

(c) Service Revenue $18,500

Rent Expense (750)
Salaries Expense (3,900)
Electricity Expense (1,500)
Profit for the Month $12,350

(d)        The profit for the month is part of the increase in equity. The profit is part of the
retained earnings which has increased with the $12,350 profit and decreased by the
payment of the dividend of $400 leaving a balance of $11,950. At month end equity is
represented by the Share capital of $27,000 and the Retained earnings of $11,950
as per total equity of $38,950 as per part (b) above.

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Solutions manual to accompany Accounting: building business skills 4e

EXERCISE 2.3

Moscow Mowers Ltd

Income Statement
for the month ended 31 August 2013

$ $
Revenues:
Service revenue 18,500
Expenses:
Salaries expense 3,900
Rent expense 750
Electricity expense 1,500
Total expenses 6,150
Profit $12,350

Moscow Mowers Ltd

Statement of financial position
as at 31 August 2013

Assets: $ $
Cash 31,650
Accounts receivable 3,400
Supplies 900
Office equipment 7,000
Total assets 42,950
Liabilities:
Accounts payable 4,000
Net Assets $38,950
Equity:
Share capital 27,000
Retained Earnings 11,950
Total equity $38,950

Moscow Mowers Ltd

Calculation of Retained earnings
for the month ended 31 August 2013

$
Retained Earnings 1 August 0
Add: Profit 12,350
12,350
Less: Dividends (400)
Retained Earnings 31 August $11,950

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 Chapter 2: The accounting information system

EXERCISE 2.4
Expensive Designs Pty Ltd

Account debited Account credited

(a) (b) (c) (d) (a) (b) (c) (d)

Basic Specific Normal Basic Specific Normal
Transaction type account Effect balance type account Effect balance

1 Asset Cash Increase Debit Equity Share Increase Credit

Capital

2 Asset Equipment/ Increase Debit Asset Cash Decrease Debit

Motor
Vehicles

3 Asset Supplies Increase Debit Liability Accounts Increase Credit

Payable

4 Asset Accounts Increase Debit Equity Service Increase Credit

Receivable Revenue

5 Equity Advertising Increase Debit Asset Cash Decrease Debit

Expense

6 Asset Cash Increase Debit Asset Accounts Decrease Debit

Receivable

7 Liability Accounts Decrease Credit Asset Cash Decrease Debit

Payable

8 Equity Dividends Increase Debit Asset Cash Decrease Debit

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Solutions manual to accompany Accounting: building business skills 4e

EXERCISE 2.5
Expensive Designs Pty Ltd
General Journal

Transaction Account Titles Debit Credit

$ $
1 Cash 10,000
Share Capital 10,000
(Issued shares to investors for cash)
2 Equipment/Motor Vehicles 5,000
Cash 5,000
(Purchased car for business for cash)

3 Supplies 500
Accounts Payable 500
(Purchased supplies on account)

4 Accounts Receivable 1,800

Service Revenue 1,800
(Invoiced customers for services performed)

5 Advertising Expense 200

Cash 200
(Paid advertising expense)

6 Cash 700
Accounts Receivable 700
(Received cash from customers on account)

7 Accounts Payable 300

Cash 300
(Paid amount owing to accounts payable)

8 Dividends 400
Cash 400
(Paid dividends to shareholders)

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 Chapter 2: The accounting information system

EXERCISE 2.6
Better Books Pty Ltd

Account debited Account credited

(a) (b) (c) (d) (a) (b) (c) (d)

Basic Specific Normal Basic Specific Normal
Transaction type account Effect balance type account Effect balance

1 Asset Cash Increase Debit Equity Share Increase Credit

Capital

2 Asset Equipment/ Increase Debit Liability Accounts Increase Credit

Photocopier Payable

3 Asset Supplies Increase Debit Liability Accounts Increase Credit

Payable

4 Asset Accounts Increase Debit Equity Service Increase Credit

Receivable Revenue

5 Equity Advertising Increase Debit Asset Cash Decrease Debit

Expense

6 Asset Cash Increase Debit Asset Accounts Decrease Debit

Receivable

7 Liability Accounts Decrease Credit Asset Cash Decrease Debit

Payable

8 Equity Rent Increase Debit Asset Cash Decrease Debit

Expense

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Solutions manual to accompany Accounting: building business skills 4e

EXERCISE 2.7
Better Books Pty Ltd
General Journal

Transaction Account Titles Debit Credit

$ $
1 Cash 20,000
Share Capital 20,000
(Issued shares to investors for cash)
2 Equipment/Photocopier 6,000
Cash 6,000
(Purchased photocopier for business on
account)

3 Supplies 800
Accounts Payable 800
(Purchased supplies on account)

4 Accounts Receivable 3,600

Service Revenue 3,600
(Invoiced customers for services performed)

5 Advertising Expense 600

Cash 600
(Paid advertising expense)

6 Cash 1,500
Accounts Receivable 1,500
(Received cash from customers on account)

7 Accounts Payable 6,300

Cash 6,300
(Paid amount owing to accounts payable)

8 Rent Expense 1,200

Cash 1,200
(Paid dividends to shareholders)

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 Chapter 2: The accounting information system

EXERCISE 2.8
Ink Pad Printers Ltd
(a)

Cash
1/8 Share Capital 17,000 12/8 Office Equipment 1,000
10/8 Service Revenue 12,400 31/8 Closing Balance 29,000
31/8 Accounts Receivable 600         
30,000 30,000
1/9 Opening Balance 29,000

Accounts Receivable
25/8 Service Revenue 1,500 31/8 Cash 600
         Closing Balance 900
1,500 1,500
1/9 Opening Balance 900
Office Equipment
12/8 Cash/Bank Loan 4,000

Bank Loan
12/8 Office Equipment 3,000

Share Capital
1/8 Cash 17,000

Service Revenue
31/8 Closing balance 13,900 10/8 Cash 12,400
           25/8 Accounts Receivable 1,500
13,900 13,900
31/8 Balance 13,900

(b)
Ink Pad Printers Ltd
Trial Balance
as at 31 August 2014

Account Name Debit Credit

$ $
Cash 29,000
Accounts Receivable 900
Office Equipment 4,000
Bank Loan 3,000
Share Capital 17,000
Service Revenue               13,900
$33,900 $33,900

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Solutions manual to accompany Accounting: building business skills 4e

EXERCISE 2.9
Zebra Tours Ltd
(a)
General Journal

Date Account Titles and Explanation Debit Credit

Apr. 1 Cash 10,000

Share Capital 10,000
(Sold shares for cash)

4 Supplies 4,800
Accounts Payable 4,800
(Purchased supplies on account)

7 Accounts Receivable 2,400

Service Revenue 2,400
(Invoiced customers for services rendered)

12 Cash 1,900
Service Revenue 1,900
(Received cash for services performed)

15 Salaries Expense 750

Cash 750
(Paid salaries)

25 Accounts Payable 3,500

Cash 3,500
(Paid creditors on account)

29 Cash 200
Accounts Receivable 200
(Received cash from customers on account)

30 Cash 700
Revenue Received in Advance 700
(Received cash for services to be performed in
the future)

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 Chapter 2: The accounting information system

(b)
Zebra Tours Ltd
Trial Balance
as at 30 April 2013

Account Name Debit Credit

$ $
Cash 8,550
Accounts Receivable 2,200
Supplies 4,800
Accounts Payable 1,300
Revenue Received in Advance 700
Share Capital 10,000
Service Revenue 4,300
Salaries Expense 750             
$16,300 $16,300

EXERCISE 2.10
Landsdowne Ltd

(a)
Assets = Liabilities + Equity
Accounts
Cash + Equipment = Payable + Equity

Sept 1 + 15,000 +15,000 Issued shares

5 - 5,000 + 10,000 + 5,000
10,000 + 10,000 = 5,000 + 15,000
25 - 3,000 - 3,000
7,000 + 10,000 = 2,000 + 15,000
30 - 500 - 500 Dividends
6,500 + 10,000 = 2,000 + 14,500

$16,500 $16,500

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Solutions manual to accompany Accounting: building business skills 4e

(b)
Landsdowne Ltd
General Journal
Date Account Titles and Explanation Ref Debit Credit

Sept 1 Cash 100 15,000

Share Capital 300 15,000
(Issued shares for cash)

5 Equipment 120 10,000

Cash 100 5,000
Accounts Payable 200 5,000
(Purchased equipment part cash, part
on account)

25 Accounts Payable 200 3,000

Cash 100 3,000
(Paid amount owed on account)

30 Dividends 320 500

Cash 100 500
(Paid cash dividend)

(c)
General Ledger
Cash 100
1/9 Share Capital 15,000 5/9 Equipment 5,000
25/9 Accounts Payable 3,000
30/9 Dividend 500

Equipment 120
5/9 Cash/Accounts Payable 10,000

Accounts Payable 200

25/9 Cash 3,000 5/9 Equipment 5,000

Share Capital 300

1/9 Cash 15,000

Dividends 320
30/9 Cash 500

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 Chapter 2: The accounting information system

EXERCISE 2.11
Equipment Repair Pty Ltd
(a)
(a) (b) (c)
Error In Balance Difference Column with larger total

1 No $400 Debit
2 Yes - -
3 Yes - -
4 No 300 Credit
5 Yes - -
6 No 9 Credit

(b) The trial balance will not detect postings to the correct side of the ledger but the incorrect
ledger account, omitted transactions, transactions posted incorrect amounts on both sides of
the ledger. That is the trial balance detects when debits do not equal credits.

EXERCISE 2.12
Sushi To Go Ltd
Trial Balance
as at 31 July 2013

Account Name Debit Credit

$ $
Cash ($193,314 – Debit total without Cash $163,880) 29,434
Accounts Receivable 27,184
Prepaid Insurance 3,836
Delivery Equipment 118,620
Bank Loan $56,800
Accounts Payable 14,692
Salaries Payable 1,530
Share Capital 79,900
Retained Earnings 9,172
Dividends 1,300
Service Revenue 31,220
Salaries Expense 8,756
Fuel Expense 1,416
Repair Expense 1,822
Insurance Expense 946             
$193,314 $193,314

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Solutions manual to accompany Accounting: building business skills 4e

EXERCISE 2.13
Tyne Ltd
Trial Balance
as at 31 March 2014

Account Name Debit Credit

$ $
Cash 44,151
Accounts Receivable 40,776
Prepaid Insurance 5,754
Delivery Equipment 177,930
Accounts Payable 22,038
Salaries Payable 2,295
Bank Loan 85,200
Share Capital 119,850
Retained Earnings ($289971– $276,213 ) 13,758
Dividends 1,950
Service Revenue 46,830
Salaries Expense 13,134
Fuel Expense 2,124
Repair Expense 2,733
Insurance Expense 1,419             
$289,971 $289,971

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 Chapter 2: The accounting information system
Key to Retained Earnings column above.
(a) Rent Expense
SOLUTIONS TO PROBLEM (b) Advertising Expense
SET A (c) Service Revenue
(d) Dividends
(e) Salaries Expense
PROBLEM SET A 2.1
a)
Matrix Travel Agency Ltd
Cash + Accounts + Supplies + Office = Accounts + Share + Retained
Receivable Equipment Payable Capital Profit

1. +$20,000 +$20,000
20,000 = 20,000
2 -400             -400 (a)
19,600 = 20,000 + (400)
3. -2,500 +2,500                     
17,100 + 2,500 = 20,000 + (400)
4.                       +300             -300 (b)
17,100 + 2,500 = 300 + 20,000 + (700)
5. -600 +600                                       
16,500 + 600 + 2,500 = 300 + 20,000 + (700)
6. +1,000 +8,000 +                                      +9,000 (c)
17,500 + 8,000 + 600 + 2,500 = 300 + 20,000 + 8,300
7. -200                                               -200 (d)
17,300 + 8,000 + 600 + 2,500 = 300 + 20,000 + 8,100
8. -300                             -300                     
17,000 + 8,000 + 600 + 2,500 = 0 + 20,000 + 8,100
9. -1,200                                           -1,200 (e)
15,800 + 8,000 + 600 + 2,500 = 0 + 20,000 + 6,900
10. +8,000 -8,000                                           

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Solutions manual to accompany Accounting: building business skills 4e

$23,800 + $0 + $600 + $2,500 = $0 + $20,000 + $6,900

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 Chapter 2: The accounting information system

(b) Calculation of profit or loss for the year

Service Revenue $9,000
Expenses:
Salaries Expense $1,200
Rent Expense 400
Advertising Expense 300 1,900
Profit $7,100

OR

Increase in retained earnings ($6,900 - $0) $6,900

Add: Dividends 200
Profit $7,100

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PROBLEM SET A 2.2

(a)
Bell Consulting Pty Ltd

Assets Liabilities Equity

Date Cash + Accounts + Supplies + Office = Bank + Accounts + Share + Retained
Receivable Equipment Loan Payable Capital Earnings
1/5 $20,000 $20,000
2/5 (2,100) = ($2,100) Rent Expense
3/5 $500 $500
5/5 (150) (150) Advertising
Expense
9/5 2,500 2,500 Service Revenue
12/5 (200) (200) Telephone
15/5 $7,000 7,000 Service Revenue
17/5 (4,000) (4,000) Salaries Expense
20/5 (500) (500)
23/5 4,500 (4,500)
26/5 5,000 $5,000
29/5 $2,400 2,400
30/5 (250)                                                                        (250) Electricity Expense
$24,800 + $2,500 + $500 + $2,400 = $5,000 + $2,400 + $20,000 + $2,800

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 Chapter 2: The accounting information system

(b)
Bell Consulting Pty Ltd
Income Statement
for the month ended 31 May 2013

$ $
Revenues:
Service revenue 9,500
Expenses:
Salaries expense 4,000
Rent expense 2,100
Electricity expense 250
Telephone expense 200
Advertising expense 150
Total expenses 6,700
Profit $2,800

(c)
Bell Consulting Pty Ltd
Statement of financial position
as at 31 May 2013

Assets: $ $
Cash 24,800
Accounts receivable 2,500
Supplies 500
Office equipment 2,400
Total assets 30,200
Liabilities:
Accounts payable 2,400
Bank loan 5,000
Total liabilities 7,400
Net Assets $22,800
Equity:
Share capital 20,000
Retained Earnings 2,800
Total equity $22,800

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PROBLEM SET A 2.3

(a) Ivan Izo Pty Ltd
Assets Liabilities Equity
Cash + Accounts + Supplies + Office = Bank + Accounts + Share + Retained
Receivable Equipment Loan Payable Capital Earnings
Bal. $4,000 + $1,500 + $500 + $5,000 = + $4,200 + $6,500 + $300
1. +1,400 -1,400                                                   
5,400 + 100 + 500 + 5,000 = 4,200 + 6,500 + 300
2 -2,700                               -2,700                  
2,700 + 100 + 500 + 5,000 = 1,500 + 6,500 + 300
3. +3,000 +3,400                                        +6,400 (a)
5,700 + 3,500 + 500 + 5,000 = 1,500 + 6,500 + 6,700
4. -400                      +1,000 +600                      
5,300 + 3,500 + 500 + 6,000 = 2,100 + 6,500 6,700
5. -1,500 -1,500 (b)
-900 -900 (c)
     - 350                                                              - 350  (d)
2,550 + 3,500 + 500 + 6,000 = 2,100 + 6,500 + 3,950
6. -550                                                     -550 (e)
2,000 + 3,500 + 500 + 6,000 = 2,100 + 6,500 + 3,400
7. +2,000                                +$2,000                              
4,000 + 3,500 + 500 + 6,000 = 2,000 + 2,100 + 6,500 + 3,400
8.                                                       +250           -250 (f)
$4,000 + $3,500 + $500 + $6,000 = $2,000 + $2,350 + $6,500 + $3,150

Key to Retained Earnings column above:

(a) Service Revenue.
(b) Salaries Expense.
(c) Rent Expense.
(d) Advertising Expense
(e) Dividends
(f) Electricity Expense.

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(b)
Ivan Izo Pty Ltd
Income Statement
for the month ended 31 August 2013

$ $
Revenues:
Service revenue 6,400
Expenses:
Salaries expense 1,500
Rent expense 900
Advertising expense 350
Electricity expense 250
Total expenses 3,000
Profit $3,400

Ivan Izo Pty Ltd

Statement of financial position
as at 31 August 2013

$ $
Current assets:
Cash 4,000
Accounts receivable 3,500
Supplies 500
Total current assets 8,000
Non-current assets:
Office equipment 6,000
Total assets 14,000

Current liabilities:
Accounts Payable 2,350

Non-current liabilities:
Bank loan* 2,000
Total liabilities 4,350
Net Assets $9,650
Equity:
Share capital 6,500
Retained Earnings ** 3,150 19,600
Total Equity $9,650

* Loan could be current or non-current shown as non-current

**Retained earnings $300 + Profit $3,400-less dividend $550 =$3,150

2.25
Solutions manual to accompany Accounting: building business skills 4e

PROBLEM SET A 2.4

Fantasy Miniature Golf and Driving Range Pty Ltd

Date Account Titles and Explanation Post Debit Credit

Ref

Mar. 1 Cash 100 60,000

Share Capital 300 60,000
(Issued shares for cash)

3 Land 130 23,000

Buildings 135 9,000
Equipment 138 6,000
Cash 100 38,000
(Purchased Lee’s Golf Land)

5 Advertising Expense 500 1,600

Cash 100 1,600
(Paid for advertising)

6 Prepaid Insurance 112 1,480

Cash 100 1,480
(Paid for one-year insurance policy)

10 Equipment 138 1,600

Accounts Payable 200 1,600
(Purchased equipment on account)

18 Cash 100 800

Golf Revenue 400 800
(Revenue received in cash)

19 Cash 100 1,500

Golf Revenue received in Advance 1,500
(Received cash for voucher books sold)

25 Dividends 320 500

Cash 100 500
(Payment of cash dividend)

30 Salaries Expense 510 600

Cash 100 600
(Paid salaries expense)

30 Accounts Payable 200 1,600

Cash 100 1,600
(Paid creditor on account)

31 Cash 100 800

Golf Revenue 400 800
(Revenue received in cash)

2.26
 Chapter 2: The accounting information system

PROBLEM SET A 2.5

Liu Advertising Pty Ltd

(a)

Date Account Titles and Explanation Post Debit Credit

Ref

Apr. 1 Cash 100 25,500

Share Capital 300 25,500
(Issued shares for cash)

1 No entry – not a transaction.

2 Rent Expense 510 950

Cash 100 950
(Paid monthly office rent)

3 Supplies 115 2,550

Accounts Payable 200 2,550
(Purchased supplies on account from Speedy
Art Supplies)

10 Accounts Receivable 110 1,350

Service Revenue 400 1,350
(Invoiced clients for services rendered)

11 Cash 100 550

Revenue Received in Advance 209 550
(Received cash advance for future service)

20 Cash 100 3,150

Service Revenue 400 3,150
(Revenue received in cash)

30 Salaries Expense 500 1,950

Cash 100 1,950
(Paid monthly salary)

30 Accounts Payable 200 1,150

Cash 100 1,150
(Paid Speedy Art Supplies on account)

2.27
 Solutions manual to accompany Accounting: building business skills 4e

(b)

Cash 100
¼ Share Capital 25,500 2/4 Rent Expense 950
11/4 Revenue Received in 550 30/4 Salaries Expense 1,950
Advance
20/4 Service Revenue 3,150 30/4 Accounts Payable 1,150
           30/4 Closing Balance 25,150
29,200 29,200
1/5 Opening Balance 25,150

Accounts Receivable 110

10/4 Service Revenue 1,350

Supplies 115
¾ Accounts Payable 2,550

Accounts Payable 200

30/4 Cash 1,150 3/4 Supplies 2,550
30/4 Closing Balance 1,400         
2,250 2,250
1/5 Opening Balance 1,400

Revenue Received in Advance 209

11/4 Cash 550

Share Capital 300

1/4 Cash 25,500

Service Revenue 400

10/4 Accounts Receivable 1,350
20/4 Cash 3,150
4,500

Salaries Expense 500

30/4 Cash 1,950

Rent Expense 510

2/4 Cash 950

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 Chapter 2: The accounting information system

(c)

Liu Advertising Pty Ltd

Trial Balance
as at 30 April 2012

Account Name Debit Credit

$ $
Cash 25,150
Accounts Receivable 1,350
Supplies 2,550
Accounts Payable 1,400
Revenue Received in Advance 550
Share Capital 25,500
Service Revenue 4,500
Salaries Expense 1,950
Rent Expense 950             
$31,950 $31,950

PROBLEM SET A 2.6

Pinky’s Beauty Centre Pty Ltd

(a) & (c)

Cash 100
1/10 Opening Balance 16,400 15/10 Salaries Expense 1,800
5/10 Accounts Receivable 1,200 20/10 Accounts Payable 2,600
29/10 Dividend 400
31/10 Electricity Expense 800
           31/10 Closing Balance 12,000
17,600 17,600
1/11 Opening Balance 12,000

Accounts Receivable 115

1/10 Opening Balance 3,800 5/10 Cash 1,200
10/10 Service Revenue 6,400 31/10 Closing Balance 9,000
10,200 10,200
1/11 Opening Balance 9,000

Supplies 120
1/10 Opening Balance 2,800

Equipment 130
1/10 Opening Balance 15,400

2.29
 Solutions manual to accompany Accounting: building business skills 4e

Accounts Payable 200

20/10 Cash 2,600 1/10 Opening Balance 9,400
31/10 Closing Balance 6,800         
9,400 9,400
1/11 Opening Balance 6,800

Revenue Received in Advance 210

17/10 Service Revenue 600 1/10 Opening Balance 800
31/10 Closing Balance 200       
800 800
1/11 Opening Balance 200

Share Capital 300

1/10 Opening Balance 28,200

Dividends 310
29/10 Cash 400

Service Revenue 400

10/10 Accounts Receivable 6,400
17/10 Revenue Received in 600
Advance
7,000

Salaries Expense 500

15/10 Cash 1,800

Electricity Expense 510

31/10 Cash 800

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 Chapter 2: The accounting information system

(b)

Date Account Titles and Explanation Post Debit Credit

Ref

Oct 5 Cash 100 1,200

Accounts Receivable 115 1,200
(Received cash from customers on account)

10 Accounts Receivable 115 6,400

Service Revenue 400 6,400
(Invoiced customers for services performed)

15 Salaries Expense 500 1,800

Cash 100 1,800
(Paid employee salaries)

17 Revenue Received in Advance 210 600

Service Revenue 400 600
(Performed services for customers who paid in
advance)

20 Accounts Payable 200 2,600

Cash 100 2,600
(Paid creditors on account)
29 Dividends 310 400
Cash 100 400
(Payment of cash dividend)

31 Electricity Expense 510 800

Cash 100 800
(Paid electricity)

2.31
 Solutions manual to accompany Accounting: building business skills 4e

(d)
Pinky’s Beauty Centre Pty Ltd
Trial Balance
as at 31 October 2013

No. Account Name Debit Credit

$ $
100 Cash 12,000
115 Accounts Receivable 9,000
120 Supplies 2,800
130 Equipment 15,400
200 Accounts Payable 6,800
210 Revenue Received in Advance 200
300 Share Capital 28,200
310 Dividends 400
400 Service Revenue 7,000
500 Salaries Expense 1,800
510 Electricity Expense 800             
$42,200 $42,200

PROBLEM SET A 2.7

Central Laundry Services Pty Ltd

(a) & (c)

Cash 100
1/5 Opening Balance 8,500 12/5 Salaries Expense 1,200
2/5 Accounts Receivable 900 18/5 Accounts Payable 1,600
25/5 Dividend 500
31/5 Electricity Expense 700
           31/5 Closing Balance 5,400
9,400 9,400
1/11 Opening Balance 5,400

Accounts Receivable 115

1/5 Opening Balance 2,200 2/5 Cash 900
8/5 Service Revenue 3,500 31/5 Closing Balance 4,800
5,700 5,700
1/11 Opening Balance 4,800

Supplies 120
1/5 Opening Balance 1,700

Equipment 130
1/5 Opening Balance 8,000

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 Chapter 2: The accounting information system

Accounts Payable 200

18/5 Cash 1,600 1/5 Opening Balance 5,000
31/5 Closing Balance 3,400         
5,000 5,000
1/11 Opening Balance 3,400

Revenue Received in Advance 210

15/5 Service Revenue 600 1/5 Opening Balance 700
31/5 Closing Balance 100       
700 700
1/11 Opening Balance 100

Share Capital 300

1/5 Opening Balance 14,700

Dividends 310
25/5 Cash 500

Service Revenue 400

8/5 Accounts Receivable 3,500
15/5 Revenue Received in
Advance 600
4,100

Salaries Expense 500

12/5 Cash 1,200

Electricity Expense 510

31/5 Cash 700

2.33
Solutions manual to accompany Accounting: building business skills 4e

(b)

Date Account Titles and Explanation Post Debit Credit

Ref

May 2 Cash 100 900

Accounts Receivable 115 900
(Received cash from customers on account)

8 Accounts Receivable 115 3,500

Service Revenue 400 3,500
(Invoiced customers for services performed)

12 Salaries Expense 500 1,200

Cash 100 1,200
(Paid employee salaries)

15 Revenue Received in Advance 210 600

Service Revenue 400 600
(Performed services for customers who paid in
advance)

18 Accounts Payable 200 1,600

Cash 100 1,600
(Paid creditors on account)
25 Dividends 310 500
Cash 100 500
(Payment of cash dividend)

31 Electricity Expense 510 700

Cash 100 700
(Paid electricity)

2.34
 Chapter 2: The accounting information system

(d)
Central Laundry Services Pty Ltd
Trial Balance
as at 31 May 2013

No. Account Name Debit Credit

$ $
100 Cash 5,400
115 Accounts Receivable 4,800
120 Supplies 1,700
130 Equipment 8,000
200 Accounts Payable 3,400
210 Revenue Received in Advance 100
300 Share Capital 14,700
310 Dividends 500
400 Service Revenue 4,100
500 Salaries Expense 1,200
510 Electricity Expense 700             
$22,300 $22,300

2.35
 Solutions manual to accompany Accounting: building business skills 4e

PROBLEM SET A 2.8

The Drive-in Movie Palace Ltd

(a) & (c)

Cash 100
1/3 Opening Balance 19,100 2/3 Film Rental Expense 8,000
9/3 Admission Revenue 11,600 10/3 Accounts Payable 14,200
20/3 Admission Revenue 10,300 12/3 Advertising 3,900
31/3 Coffee Cart Revenue 1,110 20/3 Film Rental Expense 5,000
31/3 Admission Revenue 21,600 31/3 Salaries Expense 6,900
            31/3 Closing Balance 25,710
63,710 63,710
1/4 Opening Balance 25,710

Accounts Receivable 105

31/3 Coffee Cart Revenue 1,110

Equipment 110
1/3 Opening Balance 19,100

Land 120
1/3 Opening Balance 45,100

Buildings 130
1/3 Opening Balance 21,100

Accounts Payable 200

10/3 Cash 14,200 1/3 Opening Balance 15,100
31/3 Closing Balance 8,000 2/3 Film Rental Expense 7,100
22,200 22,200
1/4 Opening Balance 8,000

Share Capital 300

1/3 Opening Balance 89,300

Admission Revenue 400

9/3 Cash 11,600
20/3 Cash 10,300
31/3 Cash 21,600
43,500

Coffee Cart Revenue 410

31/3 Cash/Accounts Receivable 2,220

2.36
 Chapter 2: The accounting information system

Advertising Expense 500

12/3 Cash 3,900

Film Rental Expense 510

2/3 Accounts Payable/Cash 15,100
20/3 Cash 5,000
20,100

Salaries Expense 520

31/ Cash 6,900
3

2.37
Solutions manual to accompany Accounting: building business skills 4e

(b)

Date Account Titles and Explanation Post Ref Debit Credit

Mar. 2 Film Rental Expense 510 15,100
Accounts Payable 200 7,100
Cash 100 8,000
(Rented films for cash and on account)

3 No entry.

9 Cash 100 11,600

Admission Revenue 400 11,600
(Received cash for admissions)

10 Accounts Payable ($7,100 + $7,100) 200 14,200

Cash 100 14,200
(Paid creditors on account)

11 No entry.
12 Advertising Expense 500 3,900
Cash 100 3,900
(Paid advertising expenses)

20 Cash 100 10,300

Admission Revenue 400 10,300
(Received cash for admissions)

20 Film Rental Expense 510 5,000

Cash 100 5,000
(Paid film rental)

31 Salaries Expense 520 6,900

Cash 100 6,900
(Paid salaries expense)

31 Cash 100 1,110

Accounts Receivable 105 1,110
Coffee Cart Revenue 410 2,220
(Received cash and balance on account
for coffee cart revenue)

31 Cash 100 21,600

Admission Revenue 400 21,600
(Received cash for admissions)

2.38
 Chapter 2: The accounting information system

(d)
The Drive-in Movie Palace Ltd
Trial Balance
as at 31 March 2012

No. Account Name Debit Credit

$ $
100 Cash 25,710
105 Accounts Receivable 1,110
110 Equipment 19,100
120 Land 45,100
130 Buildings 21,100
200 Accounts Payable 8,000
300 Share Capital 89,300
400 Admission Revenue 43,500
410 Coffee Cart Revenue 2,220
500 Advertising Expense 3,900
510 Film Rental Expense 20,100
520 Salaries Expense 6,900               
$143,020 $143,020

2.39
Solutions manual to accompany Accounting: building business skills 4e

PROBLEM SET A 2.9

Willoughby Ltd
Trial Balance
as at 30 June 2014
Account Name Debit Credit
$ $
Cash ($5,980 + $300) 6,280
Accounts Receivable ($6,762 - $300) 6,462
Supplies ($1,900 - $980) 920
Equipment ($6,300 + $980) 7,280
Accounts Payable ($5,632 - $712 - $712) 4,208
Revenue Received in Advance 2,700
Share Capital 19,722
Dividends ($1,900 + $1,100) 3,000
Rental Revenue ($5,060 + $1,872) 6,932
Salaries Expense ($7,100 + $1,500 - $1,100) 7,500
Office Expense 2,120             
$33,562 $33,562

Explanation: The first number in the brackets is the balance as per the initial trial balance on
page 137. The subsequent numbers are the corrections.

Note that Cash should start in the debit and Revenue received in advance should start in the
credit.

Brief explanation of each error:

1. $1440 – $1140 = $300. Need to decrease Accounts Receivable by $300 and

increase cash by $300 to correctly record the collection of $1440 on account.

2. Calculator should not be included in Supplies so decrease Supplies by $980.

Calculators should be included in Equipment, so increase Equipment by $980.

3. Rental Revenue needs to be adjusted upwards by $1872 ($2080 – $208).

4. Increase Salaries Expenses by $750.

5. A payment on account should be debit to Accounts Payable. The amount of $356

was incorrectly credited. To correct this entry, the balance of Accounts Payable must
be reduced by $712. To correctly record the payment of $712 on account, Accounts
Payable is reduced further by $712.

6. Need to reduce Salaries Expense by $1100 and increase Dividends by $1100.

2.40
 Chapter 2: The accounting information system

PROBLEM SET A 2.10

About Town Maintenance Services Ltd

Trial Balance
as at 30 June 2012
Account Name Debit Credit
$ $
Cash ($2,840 + $180) 3,020
Accounts Receivable ($3,231 - $180) 3,051
Supplies ($800 - $340) 460
Equipment ($3,000 + $340) 3,340
Accounts Payable ($2,666 - $260 - $206) 2,200
Revenue Received in Advance 1,200
Share Capital 9,000
Dividends ($800 + $400) 1,200
Rental Revenue ($2,380 + $801) 3,181
Salaries Expense ($3,400 + $600 - $400) 3,600
Office Expense ……910             
$15,581 $15,581

Explanation: The first number in the brackets is the balance as per the initial trial balance on
page 127. The subsequent numbers are the corrections.

Note that Cash should start in the debit and Revenue received in advance should start in the
credit.

Brief explanation of each error:

1. $750 – $570 = $180. Need to decrease Accounts Receivable by $180 and increase
cash by $180 to correctly record the collection of $750 on account.

2. Calculator should not be included in Supplies so decrease Supplies by $340.

Calculators should be included in Equipment, so increase Equipment by $340.

3. Rental Revenue needs to be adjusted upwards by $801 ($890– $89).

4. Increase Salaries Expenses by $600.

5. A payment on account should be debit to Accounts Payable. The amount of $260

was incorrectly credited. To correct this entry, the balance of Accounts Payable must
be reduced by $260. To correctly record the payment of $206 on account, Accounts
Payable is reduced further by $206.

6. Need to reduce Salaries Expense by $550 and increase Dividends by $550.

2.41
Solutions manual to accompany Accounting: building business skills 4e
Key to Retained Earnings column
a) Rent Expense
SOLUTIONS TO PROBLEM b) Advertising Expense
SET B c) Service Revenue
d) Dividends
e) Salaries Expense
PROBLEM SET B 2.1 CRAZY BOB’S REPAIR SHOP LTD f) Electricity Expense
g) Service Revenue

(a) Cash + Accounts + Supplies + Office Equip = Accounts + Share + Retained

Receivable Payable Capital Earnings

(1) + 16,000 + 16,000

16,000 16,000

(2) - (5,000) + 5,000

11,000 5,000 16,000

(3) - (400) - (400) (a)

10,600 (400)

(4) - (500) 500

10,100 500

(5) + 550 - (550) (b)

10,100 500 5,000 550 16,000 (950)

(6) + 4,100 + 4,100 (c)

14,200 500 5,000 550 16,000 3,150

(7) - (500) (500) (d)

13,700 500 5,000 550 16,000 2,650

(8) - (1,200) (1,200) (e)

12,500 500 5,000 550 16,000 1,450

(9) - (140) (140) (f)

12,360 500 5,000 550 16,000 1,310

(10) + 400 + 400 (g)

12,360 400 500 5,000 550 16,000 1,710

(11) + 120 - (120)

2.42
 Chapter 2: The accounting information system

(a) Cash + Accounts + Supplies + Office Equip = Accounts + Share + Retained

Receivable Payable Capital Earnings

12,480 280 500 5,000 550 16,000 1,710

2.43
Solutions manual to accompany Accounting: building business skills 4e

(b) Service Revenue ............................................................ $4,500

Expenses
Salaries Expense .................................................$1,200
Rent Expense .................................................   400
Advertising Expense .................................................   550
Electricity Expense .................................................   140  2,290
Profit ............................................................ $2,210

Increase in retained earnings ($1,710 – $0) ............................................ $1,710

Add: Dividends ............................................    500
Profit ........................................ $2,210

2.44
 Chapter 2: The accounting information system

PROBLEM SET B 2.2 ALEX DELIVERIES LTD

(a) Assets Liabilities Shareholders

Equity
Date Cash + Accounts + Supplies + Delivery = Accounts + Share + Retained
Receivable van Payable Capital Earnings
01/06 + 15,000 15,000
15,000 15,000

02/06 - (2,000) + 10,000 + 8,000

13,000 10,000 8,000 15,000

03/06 - (500) - (500) a

12,500 10,000 8,000 15,000 (500)

05/06 + 1,000 + 1,000 b

12,500 1,000 10,000 8,000 15,000 500

09/06 - (200) - (200) c

12,300 1,000 10,000 8,000 15,000 300

12/06 + 150 + 150

12,300 1,000 150 10,000 8,150 15,000 300

15/06 + 750 - (750)

13,050 250 150 10,000 8,150 15,000 300

17/06 + 100 - (100) d

13,050 250 150 10,000 8,250 15,000 200

20/06 + 1,500 + 1,500 e

14,550 250 150 10,000 8,250 15,000 1,700

23/06 - (500) - (500)

14,050 250 150 10,000 7,750 15,000 1,700

26/06 (250) (250) f

2.45
Solutions manual to accompany Accounting: building business skills 4e

(a) Assets Liabilities Shareholders

Equity
Date Cash + Accounts + Supplies + Delivery = Accounts + Share + Retained
Receivable van Payable Capital Earnings
13,800 250 150 10,000 7,750 15,000 1,450

29/06 (100) (100)

13,700 250 150 10,000 7,650 15,000 1,450

30/06 (500) (500) g

13,200 250 150 10,000 7,650 15,000 950

Key:
(a) Rent expense
(b) Service revenue
(c) Dividend
(d) Petrol expense
(e) Service revenue
(f) Electricity expense
(g) Salary expense

2.46
 Chapter 2: The accounting information system

(b) ALEX DELIVERIES LTD

Income statement
for the Month Ended 30 June 2013

$ $
Revenues:
Service revenue 2,500
Expenses:
Salaries expense 500
Rent expense 500
Electricity expense 250
Petrol expense 100
Total expenses 1,350
Profit $1,150

(c)
ALEX DELIVERIES LTD
Statement of financial position
as at 30 June 2013

Assets: $ $
Cash 13,200
Accounts receivable 250
Supplies 150
Delivery Van 10,000
Total assets 23,600
Liabilities:
Accounts payable 7,650
Total liabilities 7,650
Net Assets $15,950
Equity:
Share capital 15,000
Retained Earnings* 950
Total equity $15,950

*Retained earnings = Profit $1150 less dividends $200 = $950

2.47
Solutions manual to accompany Accounting: building business skills 4e

PROBLEM SET B 2.3 HEALTHY PAWS LTD

Equity
(a) Assets Liabilities
Cash + Accounts + Supplies + Office = Accounts + Bank Loan + Share + Retained
Receivable equipment Payable Capital Earnings

O/B 9,000 1,700 600 6,000 3,600 13,000 700

1 - (3,100) - (3,100)
5,90 1,700 600 6,000 500 13,000 700
0

2 + 1,300 (1,300)
7,20 400 600 6,000 500 13,000 700
0

3 - (800) + 4,100 + 3,300

6,400 400 600 10,100 3,800 13,000 700

4 + 2,500 + 6,400 + 8,900 (a)

8,900 6,800 600 10,100 3,800 13,000 9,600

5 - (600) - (600) (b)

8,300 6,800 600 10,100 3,800 13,000 9,000

6 (700) (700) (c )
(900) (900) (d)
(300) (300) (e)
6,400 6,800 600 10,100 3,800 13,000 7,100

7 + 170 - (170) (f)

6,400 6,800 600 10,100 3,970 13,000 6,930

8 + 7,000 + 7,000
13,400 6,800 600 10,100 3,970 7,000 13,000 6,930

2.48
 Chapter 2: The accounting information system

Key to Retained Earnings column on previous page.

(a) Service Revenue

(b) Dividends
(c) Salaries Expense
(d) Rent Expense
(e) Advertising Expense
(f) Electricity Expense

(b) Healthy Paws Ltd

Income statement
for the Month Ended 30 September 2012

$ $
Revenues:
Service revenue 8,900
Expenses:
Rent expense 900
Salaries expense 500
Advertising expense 300
Electricity expense 170
Total expenses 2,070
Profit $6,830

Healthy Paws Ltd

Calculation of Retained earnings
for the Month Ended 30 September 2012

$
Retained Earnings 1 September 700
Add: Profit 6,830
7,530
Less: Dividends (600)
Retained Earnings 30 September $6,930

2.49
Solutions manual to accompany Accounting: building business skills 4e

Healthy Paws Ltd

Statement of financial position
as at 30 September 2012

$ $
Current assets:
Cash 13,400
Accounts receivable 6,800
Supplies 600
Total current assets 20,800
Non-current assets:
Office equipment 10,100
Total assets 30,900

Current liabilities:
Accounts Payable 3,970

Non-current liabilities:
Bank loan* 7,000
Total liabilities 10,970
Net Assets $19,930
Equity:
Share capital 13,000
Retained Earnings 6,930
Total Equity $19,930

2.50
 Chapter 2: The accounting information system

PROBLEM SET B 2.4

Too Much Fun Park
Date Account Titles and Explanation Debit Credit
Apr. 1 Cash 60,000
Share capital 60,000
  (Issued shares for cash)
4 Land 30,000
Cash 30,000
  (Purchased land for cash)
8 Advertising Expense  1,800
Accounts Payable  1,800
  (Incurred advertising expense on account)
11 Salaries Expense  1,700
Cash  1,700
  (Paid salaries)
12 No entry.
13 Prepaid Insurance  3,000
Cash  3,000
  (Paid for one-year insurance policy)
17 Dividends    600
Cash    600
  (Payment of cash dividend)
20 Cash  5,700
Admission Revenue  5,700
  (Received cash for services rendered)
25 Cash  2,500
Revenue received in advance  2,500
  (Received advance for future services)
30 Cash 7,900
Admission Revenue 7,900
  (Received cash for services provided)
30 Accounts Payable   700
Cash   700
  (Paid creditor on account)

2.51
Solutions manual to accompany Accounting: building business skills 4e

PROBLEM SET B 2.5

(a) Skeptical Accountants
Date Account Titles and Explanation Ref Debit Credit
$ $
May 1 Cash 100 52,000
Share capital 300 52,000
(Issued shares for cash)

2 No entry—not a transaction.

3 Supplies 115  1,200

Accounts Payable 200  1,200
(Purchased supplies on account)

7 Rent Expense 510    900

Cash 100    900
(Paid office rent)

11Accounts Receivable 110  1,100

Service Revenue 400  1,100
(Billed client for services provided)

12Cash 100  4,500

Revenue received in advance 210  4,500
(Received an advance for future services)

17Cash 100  1,200

Service Revenue 400  1,200
(Received cash for revenue earned)

31Salaries Expense 500  1,000

Cash 100  1,000
(Paid salaries)

31Accounts Payable ($1,200 X 40%) 200    480

Cash 100    480
(Paid creditor on account)

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 Chapter 2: The accounting information system

(b) Skeptical Accountants’ general ledger

Cash 100
1-May Share capital 52,000 7-May Rent expense 900
12-May Revenue received 4,500 31-May Salaries expense 1,000
in advance
17-May Service revenue 1,200 31-May Accounts payable 480
31 May Closing balance 55,320
57,700 57,700
1-Jun Opening balance 55,320

Accounts Receivable 110

11-May Service revenue 1,100

Supplies 115
3-May Accounts Payable 1,200

Accounts Payable 200

31-May Cash 480 3-May Supplies 1,200
31 May Closing balance 720
1,200 1,200
1 June Opening balance 720

Revenue received in advance 210

12-May Cash 4,500

Share Capital 300

1-May Cash 52,000

Service Revenue 400

11-May Accounts receivable 1,100
31 May Closing balance 2300 17-May Cash 1,200
2,300 2,300
1 June Opening balance 2,300

Salaries Expense 500

31-May Cash 1,000

Rent Expense 510

7-May Cash 900

2.53
Solutions manual to accompany Accounting: building business skills 4e

(c)
Skeptical Accountants
Trial balance
as at 31 May 2012

No. Account Name Debit Credit

$ $
100 Cash 53,320
110 Accounts Receivable 1,100
115 Supplies 1,200
200 Accounts Payable 720
210 Revenue Received in Advance 4,500
300 Share Capital 52,000
400 Service Revenue 2,300
500 Salaries Expense 1,000
510 Rent Expense 900             
$59,520 $59,520

(d) Skeptical Accountants

Income statement
for the month ended 31 May 2012

$ $
Revenues:
Service revenue 2,300
Expenses:
Salaries expense 1,000
Rent expense 900
Total expenses 1,900
Profit $ 400

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Skeptical Accountants
Statement of financial position
as at 31 May 2012

$ $
Current assets:
Cash 55,320
Accounts receivable 1,100
Supplies 1,200
Total assets 57,620

Current liabilities:
Accounts Payable 720
Rent revenue received in advance 4,500
Total liabilities 5,220
Net Assets $52,400
Equity:
Share capital 52,000
Retained Earnings 400
Total Equity $52,400

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PROBLEM SET B 2.6

Alice Springs Dry Cleaners
(a) and (c)

100 Cash
1-Jul Opening balance 12,532 9-Jul Salaries expense 2,100
8-Jul Accounts receivable 4,936 14-Jul Accounts payable 10,750
11-Jul Dry cleaning revenue 4,925 30-Jul Various expenses 5,190

31-Jul Dividends 500

31-Jul Closing balance 3,853
22,393 22,393
1-Aug Opening balance 3,853

110 Accounts Receivable

1-Jul Opening balance 10,536 8-Jul Cash 4,936
22-Jul Dry cleaning revenue 4,700 31-Jul Closing balance 10,300

15,236 15,236
1-Aug Opening balance 10,300

120 Supplies
1-Jul Opening balance 4,844
17-Jul Accounts payable 554 31-Jul Closing balance 5,398
5,398 5,398
1-Aug Opening balance 5,398

130 Equipment
1-Jul Opening balance 25,950

200 Accounts Payable

14-Jul Cash 10,750 1-Jul Opening balance 15,878
31-Jul Closing balance 5,682 17-Jul Supplies 554
16,432 16,432
1-Aug Opening balance 5,682

210 Revenue received in advance

1-Jul Opening balance 1,730

300 Share Capital

1-Jul Opening balance 36,254

310 Dividends
31-Jul Cash 500

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400 Dry Cleaning Revenue

11-Jul Cash 4,925
31-Jul Closing balance 9,625 22-Jul Accounts receivable 4,700
9,625 9,625
1-Aug Opening balance 9,625

500 Repair Expense

30-Jul Cash 492

510 Salaries Expense

9-Jul Cash 2,100
30-Jul Cash 3,114 31-Jul Closing balance 5,214
5,214 5,214
1-Aug Opening balance 5,214

520 Electricity Expense

30-Jul Cash 1,584

(b)
Date Account Titles and Explanation Debit Credit
July  8 Cash  4,936
Accounts Receivable  4,936
  (Received cash on account)

9 Salaries Expense  2,100

Cash  2,100
  (Paid salaries)

11 Cash  4,925
Dry Cleaning Revenue  4,925
  (Received cash for services provided)

14 Accounts Payable 10,750

Cash 10,750
  (Paid creditors)

17 Supplies    554
Accounts Payable    554
  (Purchased supplies on account)

22 Accounts Receivable  4,700

Dry Cleaning Revenue  4,700
  (Billed for services provided)

30 Salaries Expense  3,114

Electricity Expense  1,584
Repair Expense    492
Cash  5,190
  (Paid for various expenses)

31 Dividends    500
Cash    500
  (Payment of cash dividend)

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d)
Alice Springs Dry Cleaners
Trial Balance
as at 31 July, 2012

No. Account Name Debit Credit

$ $
100 Cash 3,853
110 Accounts Receivable 10,300
120 Supplies 5,398
130 Equipment 25,950
200 Accounts Payable 5,682
210 Revenue received in advance 1,730
300 Share Capital  36,254
310 Dividends 500
400 Dry Cleaning Revenue   9,625
500 Repairs Expense 492
510 Salaries Expense 5,214
520 Electricity Expense   1,584             
$53,291 $53,291

(e) Alice Springs Dry Cleaners

Income statement
for the month ended 31 July 2012

$ $
Revenues:
Service revenue 9,625
Expenses:
Salaries expense 5,214
Repairs expense 492
Electricity expense 1,584
Total expenses 7,290
Profit $2,335

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Alice Springs Dry Cleaners

Statement of financial position
as at 31 July 2012

$ $
Current assets:
Cash 3,853
Accounts receivable 10,300
Supplies 5,398
Total current assets 19,551
Non-current assets:
Equipment 25,590
Total assets 45,501

Current liabilities:
Accounts Payable 5,682
Revenue received in advance 1,730
Total liabilities 7,412
Net Assets $38,089
Equity:
Share capital 36,254
Retained Earnings * 1,835
Total Equity $38,089

*retained earnings profit $2,335 less dividend $500= $1,835

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PROBLEM SET B 2.7

(a) Busy Bookkeepers Pty Ltd
Date Account Titles and Explanation Ref Debit Credit
$ $
Jan 2 Cash 100 88,000
Share capital 300 88,000
(Issued shares for cash)

3 No entry—not a transaction.

4 Supplies 115  1,600

Accounts Payable 200  1,600
(Purchased supplies on account)

7 Rent Expense 510 2,400

Cash 100 2,400
(Paid office rent)

11 Accounts Receivable 110 3,800

Service Revenue 400 3,800
(Billed client for services provided)

12 Cash 100  3,000

Revenue received in advance 210 3,000
(Received an advance for future services)

17 Cash 100 1,700

Service Revenue 400 1,700
(Received cash for revenue earned)

31 Salaries Expense 500 2000

Cash 100 2,000
(Paid salaries)

31 Accounts Payable ($1,600 X 40%) 200 640

Cash 100 640
(Paid creditor on account)

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(b) Busy Bookkeepers Pty Ltd

Cash 100
2-Jan Share capital 88,000 7-Jan Rent expense 2,400
12-Jan Revenue received 3,000 31-Jan Salaries expense 2,000
in advance
17-Jan Service revenue 1,700 31-Jan Accounts payable 640
31 Jan Closing balance 87,660
92,700 92,700
1-Feb Opening balance 87,660

Accounts Receivable 110

11-Jan Service revenue 3,800

Supplies 115
4-Jan Accounts Payable 1,600

Accounts Payable 200

31-Jan Cash 640 4-Jan Supplies 1,600
31 Jan Closing balance 960
1,600 1,600
1 Feb Opening balance 960

Revenue received in advance 210

12-Jan Cash 3,000

Share Capital 300

2-Jan Cash 88,000

Service Revenue 400

11-Jan Accounts receivable 3,800
31 Jan Closing balance 5,500 17-Jan Cash 1,700
5,500 5,500
1 Feb Opening balance 5,500

Salaries Expense 500

31-Jan Cash 2,000

Rent Expense 510

7-Jan Cash 2,400

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(c)
Busy Bookkeepers Pty Ltd
Trial Balance
as at 31 January 2013

No. Account Name Debit Credit

$ $
100 Cash 87,660
110 Accounts Receivable 3,800
115 Supplies 1,600
200 Accounts Payable 960
210 Revenue Received in Advance 3,000
300 Share Capital 88,000
400 Service Revenue 5,500
500 Salaries Expense 2,000
510 Rent Expense 2,400             
$97460 $97460

(d) Busy Bookkeepers Pty Ltd

Income statement
for the month ended 31 January 2013
$ $
Revenues:
Service revenue 5,500
Expenses:
Salaries expense 2,000
Rent expense 2,400
Total expenses 4,400
Profit $1,100

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Busy Bookkeepers Pty Ltd

Statement of financial position
as at 31 January 2013

$ $
Current assets:
Cash 87,660
Accounts receivable 3,800
Supplies 1,600
Total assets 93,060

Current liabilities:
Accounts Payable 960
Revenue received in advance 3,000
Total liabilities 3,960
Net Assets $89,100
Equity:
Share capital 88,000
Retained Earnings 1,100
Total Equity $89,100

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PROBLEM SET B 2.8

Lights Out Theatre Ltd
(a) and (c)

100 Cash
1-Apr Opening balance 6,000 2-Apr Rental expense 800
9-Apr Admission revenue 3,800 10-Apr Accounts payable 1,000
25-Apr Admission revenue 3,200 10-Apr Mortgage payable 2,000
30-Apr Candy bar revenue 85 12-Apr Advertising expense 300
29-Apr Salaries expense 1,600
30-Apr Prepaid rent 700
Closing balance 6,685
13,085 13,085
Opening balance 6,685

105 Accounts Receivable

30-Apr Candy bar revenue 85

107 Prepaid Rent

30-Apr Cash 700

120 Land
1-Apr Opening balance 10,000

130 Building
1-Apr Opening balance 8,000

140 Equipment
1-Apr Opening balance 6,000

200 Accounts Payable

10-Apr Rent expense 1,000 1-Apr Opening balance 2,000
30-Apr Closing balance 1,500 20-Apr Rent expense 500
2,500 2,500
1-May Opening balance 1,500

210 Mortgage Payable

10-Apr Cash 2,000 1-Apr Opening balance 8,000
30-Apr Closing balance 6,000
8,000 8,000
Opening balance 6,000

300 Share Capital

Opening balance 20,000

400 Admission Revenue

9-Apr Cash 3,800
Closing balance 7,000 25-Apr Cash 3,200
7,000 7,000
1-May Opening balance 7,000

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410 Candy Bar Revenue

30-Apr Cash 85
30-Apr Closing balance 170 30-Apr Accounts receivable 85
170 170
1-May Opening balance 170

510 Advertising Expense

12-Apr Cash 300

520 Film Rental Expense

2-Apr Cash 800
20-Apr Cash 500 30-Apr Closing balance 1,300
1,300 1,300
1-May Opening balance 1,300

530 Salaries Expense

29-Apr Cash 1,600

(b)

Date Account Titles and Explanation Debit Credit

Apr. 2 Film Rental Expense   800
Cash   800
  (Paid film rental)

3 No entry—not a transaction.

9 Cash 3,800
Admission Revenue 3,800
  (Received cash for admissions)

10 Mortgage Payable 2,000

Accounts Payable 1,000
Cash 3,000
  (Made payments on mortgage
   and accounts payable)

11 No entry—not a transaction.

12 Advertising Expense   300

Cash   300
  (Paid advertising expenses)

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20 Film Rental Expense   500

Accounts Payable   500
  (Rented film on account)

25 Cash 3,200
Admission Revenue 3,200
  (Received cash for admissions)

29 Salaries Expense 1,600

Cash 1,600
  (Paid salaries expense)

30 Cash    85
Accounts Receivable    85
Candy Bar Revenue (17% X $1,000)   170
  (Received cash and balance on
   account for concession revenue)

30 Prepaid Rentals   700

Cash   700
  (Paid cash for future film rental)

(d) Lights Out Theatre Ltd

Trial Balance
as at 30 April 2013

No. Account Name Debit Credit

100 Cash....................................................................................
$ 6,685
105 Accounts Receivable...........................................................
     85
107 Prepaid Rentals...................................................................
    700
120 Land....................................................................................
 10,000
130 Buildings..............................................................................
  8,000
140 Equipment...........................................................................
  6,000
200 Accounts Payable................................................................ $ 1,500
210 Mortgage Payable...............................................................   6,000
300 Share Capital......................................................................  20,000
400 Admission Revenue............................................................   7,000
410 Candy Bar Revenue............................................................     170
510 Advertising Expense............................................................
    300
520 Film Rental Expense...........................................................
  1,300
530 Salaries Expense................................................................
  1,600 000,000
$34,670 $34,670

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(e)

Lights Out Theatre Ltd

Income statement
for the month ended 30 April 2013
Revenues
Admission revenue 7000
Candy bar revenue 170
Total revenue 7170
Expenses
Advertising expense 300
Film rental expense 1300
Salaries expense 1600
Total expenses 3,200
Profit $3,970

Lights Out Theatre Ltd

Statement of financial position
as at 30 April 2013
Assets: $ $
Current assets
Cash 6,685
Account receivable 85
Prepaid rentals 700
Total current assets 7,470

Non-current assets
Land 10,000
Buildings 8,000
Equipment 6,000
Total non current assets 24,000
Total assets 31,470

Liabilities:
Current liabilities
Accounts payable 1,500

Non current liabilities

Mortgage payable 6,000
Total liabilities 7,500
Net Assets $23,970

Equity
Share capital 20,000
Retained Earnings 3,970
Total equity $23,970

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PROBLEM SET B 2.9

New Trial Balance as follows:

Theatre Adelaide Ltd

Trial Balance
as at 31 May 2013

Debit Credit
Account Names $ $
Cash ($5,850 + $420 – $225).............................................................. 6,045
Accounts Receivable ($2,750 – $180 – $210)...................................... 2,360
Prepaid Insurance ($700 + $100)......................................................... 800
Supplies ($0 + $420)............................................................................ 420
Equipment ($8,000 – $420).................................................................. 7,580
Accounts Payable ($4,500 – $100 + $420 – $210).............................. 4,610
Rates and Taxes Payable.................................................................... 560
Share Capital ($5,700 + $700)............................................................. 6,400
Retained Earnings .............................................................................. 6,000
Dividends ($0 + $700).......................................................................... 700
Service Revenue ($6,690 + $270)....................................................... 6,960
Salaries Expense ($4,200 + $200)....................................................... 4,400
Advertising Expense ($1,100 + $225).................................................. 1,325
Rates and Taxes Expense ($800 + $100)............................................    900 000,000
$24,530 $24,530

The following explanations assume normal balances (i.e. an increase in a debit account =
debit the relevant amount):
1 Prepaid insurance, Rates and taxes expense each increase by $100; Accounts
payable decreases by $100
2 Accounts receivable decreases by $(2750-2570) = 180; Service revenue
increases by $(6960 – 6690) = 270
3 Salaries expense increases by $200
4 Dividends increases by $700, Share capital increases by $700
5 Equipment decreases by $420; Supplies increases by $420; Cash increases by
$420; Accounts payable increases by $420
6 Cash decreases by $(250 – 25) = 225; Advertising expense increases by $225
7 Accounts payable decreases by $210; Account receivable decreases by $210
Note also-Accounts receivable, Rates and taxes payable, Service revenue and Advertising
expense were listed on the incorrect sides for their normal balances

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PROBLEM SET B 2.10

New Trial Balance as follows:

Client Services Pty Ltd

Trial Balance
as at 31 December 2012

Debit Credit
Account Names $ $
Cash ($3,902 -$360)............................................................................ 3,542
Accounts Receivable ($5,752 +$360).................................................. 6,112
Supplies ($1,820 -$220)....................................................................... 1,600
Equipment ($7,780 +$220).................................................................. 8,000
Accounts Payable ($5,399 -$490-$409)............................................... 4,500
Revenue Received in Advance............................................................ 1,600
Share Capital....................................................................................... 9,000
Dividends ($600 + $600)...................................................................... 1,200
Service Revenue ($9,904 +$576)........................................................ 10,480
Salaries Expense ($6,300 +$900-$600)............................................... 6,600
Office Expense.................................................................................... 2,410
$29,464 $25,580

Explanation: The first number in the brackets is the balance as per the initial trial balance on
page 143. The subsequent numbers are the corrections.

Note that Cash should start in the debit and Revenue received in advance should start in the
credit.

Brief explanation of each error:

1. $840 – $480 = $360. Need to decrease Accounts Receivable by $360 and increase
cash by $360 to correctly record the collection of $480 on account.

2. Printer should not be included in Supplies so decrease Supplies by $220. Printers

should be included in Equipment, so increase Equipment by $2200.

3. Service Revenue needs to be adjusted upwards by $576 ($640– $64).

4. Increase Salaries Expenses by $900.

5. A payment on account should be debit to Accounts Payable. The amount of $490

was incorrectly credited. To correct this entry, the balance of Accounts Payable must
be reduced by $490. To correctly record the payment of $409 on account, Accounts
Payable is reduced further by $409

6. Need to reduce Salaries Expense by $600 and increase Dividends by $600.

This problem is incorrect and does not balance by $3,884. There must be other errors not listed.

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BUILDING BUSINESS SKILLS

FINANCIAL REPORTING AND

ANALYSIS

BUILDING BUSINESS SKILLS 2.1 FINANCIAL REPORTING PROBLEM

Domino’s Pizza Enterprises Ltd

(a)

Account 1. Increase 2. Decrease 3. Normal

Side Side Balance

Issued Capital Right Left Credit

Trade and other Payables (Accounts Right Left Credit
Payable)
Trade and other Receivables (Accounts Left Right Debit
Receivable)
Marketing expenses Left Right Debit
Prepayments (in Note 11) Left Right Debit
Property, Plant and Equipment (net) Left Right Debit
Revenue from Sale of Goods(Note 2) Right Left Credit

(b) 1. Cash is increased.

2. Cash is decreased.
3. Cash is decreased.

(c) 1. Cash is decreased.

2. Cash is decreased or Bank Loan is increased.

BUILDING BUSINESS SKILLS 2.2 COMPARATIVE ANALYSIS PROBLEM

Domino’s Pizza Enterprises Ltd vs. Freedom Nutritional Products Limited

(a)
Domino’s Pizza Enterprises Ltd Freedom Nutritional Products Limited

1. Cash debit 1. Inventories: debit

2. Goodwill debit 2. Income Tax Payable credit
3. Borrowings credit 3. Provisions: credit
4. Retained Earnings : credit 4. Issued Capital credit
5. Revenue from Sale of Goods: credit 5. Administrative Expenses debit

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(b) The following other accounts are ordinarily involved:

1. Increase in accounts receivable: Service Revenue or Sales Revenue is

increased (credited).

2. Bank loan is decreased: Cash is decreased (credited).

3. Increase in machinery: Bank Loan is increased (credited) or Cash is

decreased (credited).

4. Interest Revenue is increased: Cash or Interest Receivable are increased

(debited).

BUILDING BUSINESS SKILLS 2.3 INTERPRETING FINANCIAL STATEMENTS

Nike International Ltd

(a) Possible advantages of long-term debt:

 Reebok International could expand operations and earn a greater return for its
shareholders.
 Long-term debt does not have to be repaid in the short-term which gives the
entity time to generate cash to cover interest payments and accumulate the cash
needed to repay the loan.
 Reebok International does not need to raise funds using a share issue – this
offers a number of advantages, e.g. creditors do not share profits (dividends),
they only receive interest and principal when it is due.

Possible disadvantages of long-term debt:

 Reebok International’s financial risk is increased when additional funds are raised
via long-term debt than from a new share issue. That is, dividend will only be paid
to shareholders if the company is profitable, however, interest payments must be
made when they fall due regardless of whether the company is profitable. This
makes debt more risky than issuing new shares.
 If Reebok International cannot pay the interest payments on the long-term debt
when they fall due, it may go into bankruptcy. If the entity is bankrupt, creditors
will have to be paid in full before any payments can be made to the shareholders.

(b) Advantages to Reebok International from having a large cash balance is that cash is
available to finance such things as repaying debt when it falls due, purchasing more
inventory for sale and investing in new equipment. New opportunities may be seized
and expansions may be undertaken at the time most advantageous for the business.

A disadvantage is that cash earns little or no interest. A higher rate of return might be
generated on excess cash by some other type of investment.

(c) Accounts payable, as purchases on credit, represent interest-free loans. Business

enterprises don’t pay cash unless the supplier requires immediate payment. Nearly
all exchange transactions are conducted on 30-day or more credit.

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(d) Reebok International’s main earning activity is the sale of goods to customers – this
may explain its large inventory balance.

Advantages of holding a large inventory balance include:

 Not missing out on sales because the inventory is not available.
 Being able to obtain “bulk” buying discounts from suppliers or manufacturing in
bulk.

Disadvantages of holding a large inventory balance include:

 Opportunity cost of using funds to invest in other activities earning a higher
return.
 Need for storage space which may involve large rental costs.

CRITICAL THINKING

BUILDING BUSINESS SKILLS 2.4 GROUP DECISION CASE

Outback Riding School Pty Ltd

(a)

May 1 Correct.

5 Cash 500
Lesson Revenue 500

7 Cash 1,500
Revenue Received in Advance 1,500

9 Hay and Feed Supplies 2,500

Accounts Payable 2,500

14 Office Equipment 1,800

Cash 1,800

15 Dividends 3,200
Cash 3,200

20 Cash 4,500
Riding Revenue 4,500

31 Veterinary Expense 750 750

Accounts Payable

(b) The error in the entries of May 14 and May 20 would prevent the trial balance from
balancing.

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(c)
Profit as reported $6,200
Add: May 5 Lesson fees $500
May 9, Hay and Feed Expense 2,500
May 15, Salaries Expense (Dividends declared and paid) 3,200 6,200
12,400
Less: May 7, Boarding Revenue Received in Advance (1,500)
Correct Profit $10,900

(d) Cash as reported............................................................................. $14,210

Add: 9/5, Purchase on account.................................... $2,500
...............................................................................16,710
Less: 20/5, Transposition error.......................................   (900)
$15,810

BUILDING BUSINESS SKILLS 2.5 COMMUNICATION ACTIVITY

Fancy Flowers Limited

To: Assistant Accountant – Fancy Flowers Limited
From: Accounting Student
Re: Steps in Recording Process

In the first transaction, invoices totalling $8,500 were sent to customers for services
provided. Therefore, the asset Accounts Receivable is increased $8,500 and the revenue
Service Revenue is increased $8,500. Debits increase assets and credits increase
revenues, so the journal entry is:

Accounts Receivable 8,500

Service Revenue 8,500
(Invoice customer for services provided)

The $8,500 amount is then posted to the debit side of the general ledger account Accounts
Receivable and to the credit side of the general ledger account Service Revenue.

In the second transaction, $3,200 was paid in salaries to employees. Therefore, the expense
Salaries Expense is increased $3,200 and the asset Cash is decreased $3,200. Debits
increase expenses and credits decrease assets, so the journal entry is:

Salaries Expense 3,200

Cash 3,200
(Salaries paid)

The $3,200 amount is then posted to the debit side of the general ledger account Salaries
Expense and to the credit side of the general ledger account Cash.

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BUILDING BUSINESS SKILLS 2.6 COMMUNICATION ACTIVITY

John Jones
To: John Jones Assistant Accountant – ABC Accounting Practice
From: Accounting Student
Re: Purposes of a Trial Balance

A trial balance is a list of the accounts in the general ledger and their balances at a given
time. The trial balance is usually prepared at the end of an accounting period, for example
monthly and the accounts are listed in the order they appear in the general ledger. The debit
balances are listed in one column and the credit balances in the other and the totals of the
two columns must be equal.

The purpose of the trial balance is primarily to check the mathematical equality after the
postings have been completed. This is necessary particularly in a manual accounting
system. In today’s accounting environment the transactions are often processed with the use
of computers so the programs are written as such that the debits will equal the credits.
However the use of computers does not ensure the transactions have been processed
correctly, nor if the trial balance balances does it ensure the transactions have been
processed and posted correctly.

The types of errors the trail balance detects is where the debits do not equal the credits such
as omitting one side of the posting or transposing a figure when the entry was posted. The
trial balance will not specifically identify if the posting was to the correct side of the ledger,
say a debit to an assets account when the item should have been expensed, nor will it
identify an omitted transaction, a journal entry posted twice, incorrect amounts are posted to
both sides or errors where co-incidentally offset one another so the debits still equal the
credits. However the listing of the balances would facilitate in the identification of posting
errors, where you as the accountant use your knowledge of the expected balances. For
example you would not expect Accounts receivable to have a credit balance or the
miscellaneous expense account to have a large balance. So despite the limitation the trail
balance is a useful screen in identifying recording errors.

The trail balance is also useful in providing an overview of the account balances for review
and preparation of the financial statements.

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BUILDING BUSINESS SKILLS 2.7 ETHICS RESEARCH

(a) The word ethics comes from the Greek word ethicos meaning related to custom or
habit. The second edition of the Macquarie concise dictionary (page 320) defines
ethical as ‘1. pertaining to or dealing with morals or the principles of morality;
pertaining to right and wrong conduct 2. in accordance with the rules or standards for
right conduct or practice, esp. the standards of a profession’.

(b) The student answer could include: ethical behaviour is acting morally, acting in a way
that is right or appropriate, acting in a way that people should behave, acting
according to rules or agreed and acceptable ways of behaving, acting for the good or
benefit of others rather than harm…etc…

(c) Criteria that an accountant was behaving ethically could include:

acts credibly and honestly – eg Provides credible information/advice and acts
honestly
abides by the professional rules/standards
fair cost for service provided
safeguard the interests of clients and the public
integrity – honest and sincere approach to their work
objectivity – fair and not prejudice or bias – treat all clients equally
Reliability – can be relied upon to get the job done

(d) Personal and financial costs of Unethical behaviour include:

feeling of shame, remorse or guilt for acting unethically
if caught - being disgraced, discredited
if caught - damaged reputation and loss of current and future employment
if caught - jail sentence or fine or be excluded from the profession and unable to
practice as a professional
cause harm to others – eg financial loss

(e) Students’ own experiences …

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