CHAPTERS 4 & 5 REVIEW

BAF 3MI NAME: _________________________

Complete Chart: Assets = Liabilities + Owner’s Equity

+ - - + - +
Drawings Capital
Expenses Revenue
DR CR DR CR DR CR
1. Review the following list of the key terminology and Accounting Principles
from Chapters 4 & 5.
Account – a record that documents each change to items in the accounting
equation
Ledger – is a group or file of accounts
trial balance – a list of all the account balances in a ledger used to check
that the sum of the debits equals the sum of the credits
double-entry system of accounting – system of accounting in general use in
which every transaction is recorded both as a debit in one or more
accounts and as a credit in one or more accounts.
fiscal period – period of time over which earnings are measured.

general journal – simple journal with two money columns, one for debit and
one for credit amounts. Part of the five-journal system
chart of accounts – list of the accounts of a business and their numbers,
arranged according to their order in the ledger
income statement – financial statement that summarizes the items of
revenue and expenses over a period of time (video). Shows the net income
or net loss of a business.
payment on account – money paid to a creditor to reduce the balance owned
to that creditor
purchase on account – purchase that is not paid for at the time it is made
sale on account – sale of which no money is received at the time it is made

received on account – money received from a debtor to reduce the balance

owned by that debtor
expense – a decrease in equity resulting from the cost of the materials and
services used to produce revenue (operating the business)

posting – the process of transferring the accounting entries from the journal
to the ledger
transposition error – a mistake caused by the interchanging of digits when
transferring figures from one place to another. The trial balance difference
that results from such an error is always exactly divisible by 9

assets- anything owned that has a dollar value

Matching Principle – principle that each expense item related to revenue
earned must be recorded in the same fiscal period as the revenue it helped
to earn
Liabilities- a debt of an individual, or business, or other organization
Time Period Concept – concept that accounting must take place over
specific fiscal periods that are of equal length and are used when
measuring the financial progress of a business
owner’s equity- the difference between the total assets and total liabilities of
a business.
Revenue Recognition Principle – principle that states revenue is to be
recorded in the accounts at the time the transaction is completed
Revenue- and increase in equity resulting from the proceeds of the sale of
goods or services
Debit- to record an amount on the left-hand side of an account
cash-
Credit- record an amount on the right-hand side of an account

balance sheet- statement showing the financial position (a,l,oe) of an

individual, company, or other organization on a certain date.
net income/net loss- difference between total revenue and total expenses

accounts payable- money that a business owes to its creditors. Liability to

the company
accounts receivable - money that is owed to a business by its customers.
Asset to the company
drawings- decrease in owner’s equity resulting from a personal withdrawal
of funds or other assets by the owner.
accounting cycle (steps 1-6)- 1) Transaction occurs  2) Record in the
General Journal  3) Post to the Ledger (t-accounts)  4) Trial Balance 
5) Income Statement  6) Balance sheet

2. As a result of one error, the trial balance prepared by your company at the
end of the month did not balance. In reviewing the entries for the month, the
accountant noticed that one of the transactions, for the purchase of furniture and
fixtures, was recorded as a debit to Furniture and Fixtures of $500, and a debit to
Bank of $500.

a. Was the Bank account overstated (too much), understated (not

enough), or correctly stated on the trial balance? If incorrect, by how much?
Bank was overstated by $1000 because instead of being credit $500, it was
debit $500, therefore a difference of $1000

b. What caused the trial balance to be out-of-balance? Bank was

overstated by $1000, therefore the trial balance was out-of-balance by
$1000

c. Record the journal entry needed to correct this error.

DR CR
Reverse error: Furniture & Equipment 500
Bank 500

New Entry Furniture & Equipment 500

Bank 500
 3. As a result of one error, the trial balance prepared by your company at the
end of the month did not balance. In reviewing the entries for the month, the
accountant noticed that one of the transactions, for the purchase of furniture and
fixtures, was recorded as a debit to Furniture and Fixtures of $500, and a debit to
Bank of $500.

a. Was the Bank account overstated (too much), understated (not

enough), or correctly stated on the trial balance? If incorrect, by how much?
Bank was overstated by $1000 because instead of being credit $500, it was
debit $500, therefore a difference of $1000

b. What caused the trial balance to be out-of-balance? Bank was

overstated by $1000, therefore the trial balance was out-of-balance by
$1000

c. Record the journal entry needed to correct this error.

DR CR
Reverse error: Furniture & Equipment 500
Bank 500

New Entry Furniture & Equipment 500

Bank 500

4. A partially completed summary of the financial data is given below for the Doris
Closed Company over a period of two years. Using the following data, calculate
the missing figures below and fill the chart. Show your work in the space
provided.

a. Revenues for 2004 are $42 000.

b. Expenses for 2004 are $22 000.
c. Drawings for 2004 are $18 000.
d. Assets increased by $5 000 from the end of 2003 to the end of 2004.

Step 1)NI/NL= Revenue – Expenses

= 42 000 – 22 000
NI = 20 000

Step 2)Increase/ decrease in Capital = Net Income – Drawings

= 20 000 – 18 000
Increase = 2 000
Step 3)
Beginning capital + Increase in capital = Ending Capital
Beginning capital + 2000 = 19 300
Beginning capital = 19 300 – 2000
Beginning capital = 17 300 (Beginning capital of 2004 is the ending capital of 2003)

Step 4)
Assets = Liabilities + Owner’s Equity
Assets = 27 400 + 17 300
= 44 700
Step 5)
Assets increase by $5 000
Assets of 2004 = 44 700 + 5 000
= 49 700

Step 6)
Assets = Liabilities + Owner’s Equity
49 700 = Liabilities + 19 300
Liabilities = 49 700 – 19 300
= 30 400
Assets Liabilities Owner’s Equity

End of 2003 ___44 700___ $27 400 ___17 300_____

End of 2004 ____49 700____ ___30 400____ $19 300

4. Ferreria’s Auto Centre repairs cars on a cash or credit basis. The general ledger
includes these accounts: Cash; Accounts Receivable; Tools; P. Ferreria, Capital;
P. Ferreria, Drawings; Service Revenue; Advertising Expense; Rent Expense;
Telephone Expense.

a. Journalize the following transactions for September on page 12 of the journal.

b. Record the transactions on the t-account ledger.
c. Prepare a trial balance.
d. Prepare an income statement.
e. Prepare a balance sheet with the expanded Owner’s Equity section.

Sept. 2 P. Ferreira invested $2 000 in his business.

3 Repaired the car of a customer and billed her $580.
5 Paid the monthly rent of $800 to Urban Holdings.
8 Purchased tools on account for $400 from Husky Tools.
8 Received a bill for $225 from The Herald newspaper for advertising.
9 Paid Husky Tools for the amounts owing to them.
12 Paid the telephone bill received today for $36.
14 Repaired a customer’s car and received $900 cash.
15 The owner withdrew $150 for his own use.
20 Received $350 cash from a customer to pay the balance of his account
from a bill sent last month.
Sep 2 Bank 2 0 0 0 --
P. Ferreria, Capital 2 0 0 0 --
To record investment into company

3 Accounts Receivable 5 8 0 --
Service Revenue 5 8 0 --
To record service performed

5 Rent Expense 8 0 0 --
Cash 8 0 0 --
To record payment of rent

8 Tools 4 0 0 --
Accounts Payable 4 0 0 --
To record purchase of tools on account

8 Advertising Expense 2 2 5 --
Accounts Payable 2 2 5 --
To record bill received for advertising

9 Accounts Payable 4 0 0 --
Cash 4 0 0 --
To Record payment of accounts payable

12 Telephone Expense 3 6 --
Cash 3 6 --
To record payment of Telephone bill

14 Cash 9 0 0 --
Service Revenue 9 0 0 --
To Record service performed

15 P. Ferreria, Drawings 1 5 0 --
Cash 1 5 0 --
To record owner withdrawal
 20 Cash 3 5 0 --
Accounts Receivable 3 5 0 --
To record payment received from accounts receivable

Cash
Accounts
(2) 2 000 (5) 800 Receivable Tools
(14) 900 (9) 400
(20) 350 (3) 580 (20) 350 (8) 400
(12) 36
(15) 150 230
1386
3250
1864

Accounts P. Ferreria, P. Ferreria,

Payable Capital Drawings

(9) 400 (8) 400 (2) 2 000 (15) 150

(8) 225
225

Service Revenue Advertising Telephone

Expense Rent Expense Expense

(3) 580 (8) 225 (5) 800 (12) 36

(14) 900
1480
 Ferreria's Auto Centre
Income Statement
For the month ended September 30, 2014

Revenue
$148
Service Revenue 0

Expenses
$22
Advertising Expense 5
Rent Expense 800
Telephone Expense 36
Total Expenses 1061
Net Income $419

Ferreria's Auto Centre

Balance Sheet
As of September 30, 2014

Assets
$186
Cash 4
Accounts Receivable 230
Tools 400
Total Assets $2494

Liabilities
Accounts Payable $225
Total Liabilities $225

Owner's Equity
$200
P. Ferreria, Capital, Sept. 01 0
$41
Net Income 9
(150
Drawings )
Increase in Capital 269
P. Ferreria, Capital, Sept. 30 2269
Total Liabilities & Owner's Equity $2494