1. Introduction to Accounting 120
Chapter 5:
Review Answers

2. Section Review: Page 131 – 4pts
The new accounts are revenues, expenses and drawings.
The purpose of the Capital account in the expanded ledger is to contain the equity figure at the beginning of the fiscal period, plus new capital from the owner, if any.
The income statement is prepared from data found in the new accounts in the expanded ledger.
“Revenue” is an increase in equity resulting from the sale of goods or services.

3. Section Review: Page 131 – 5pts
“Expense” is a decrease in equity resulting from the cost of materials and services used to produce the revenue.
“Drawings” represents a decrease in equity resulting from the withdrawal of assets from the business by the owner for personal use.
Revenues and expenses.

4. Section Review: Page 131 – 5pts
Three examples are:
The owner withdraws cash from the business for personal use
The owner takes a computer permanently out of the business for personal use
The owner collects a debt from a customer and keeps the money for personal use
The revenue recognition convention provides that revenue be taken into the accounts (recognized) at the same time as the transaction is completed. Usually, this is when the bill is sent to the customer.
The matching principle states that each expense item related to revenue earned must be recorded in the same fiscal period as the revenue it helped to earn.

5. Section Review: Page 140 – 3pts
A chart of accounts is a list of accounts and their account numbers in ledger order.
A chart of accounts is used by anyone who needs to work on the accounts but is not familiar with the ledger or the account nunbers. A new auditor is an examples of such a person.
Assets are numbers in the 100s. Liabilities in the 200s. Capital and Drawings are in the 300s. Revenues in the 400s. And Expenses in the 500s.

6. Section Review: Page 140 – 6pts
The chart as shown below:
Item
Increase
Decrease
Asset
Debt
Credit
Liability
Debit
Capital
Drawings
Revenue
Expenses

7. Section Review: Page 140 – 6pts
The equity equation is:
Beginning Capital + Net Income – Net Loss – Drawings = Ending Capital
Buying on credit gives the pruchaser and opportunity to make sure the goods or services are satisfactory before making payment. Then, if there is a problem, there is usually no difficulty having it corrected.
The term “on account” is used as follows:
Purchase on account, 2. sale on account, 3. payment on account, 4. recepit on account

8. Section Review: Page 140 – 5pts
You must have sold on account to a customer before you would receive on account from that customer.
The fiscal period is the period for time over which earnings are measured.
Revenue and expense accounts make up the income statement.
The time period concept provides that account will take place over specific time periods know as fiscal periods.
The income statement headings reads “Month Ended” followed by the date, but the balance sheet is dated for a certain day.

9. Exercise #2 – 5 points

10. Exercise 5.2 - #2 Cont’d 5 Points

11. Exercise 5.2 - #4, pg. 142 5 Points Increase Decrease Assets
Liabilities
Capital
Revenue
Debit
Credit
Increase
Decrease
Drawings
Expenses

12. Exercise 5.2 - #4, pg. 143 15 Points Financial Information Company 1
Beginning Capital
6 000
15 000
5 000
62 000
Total Revenues
10 000
25 000
29 000
50 000
30 000
Total Expenses
8 000
11 000
18 000
35 000
Net Income or Loss (-)
2 000
14 000
20 000
-5 000
Drawings
3 000
12 000
17 000
Increase/Decrease in Equity (-)
-1 000
-6 000
Ending Capital
9 000
52 000