Lewis University Exam 1 Accounting September 7, 2013 Trial B

Lewis Universityexam 1accounting 1sept 7 20131 Trial Balance A Ex

Lewis University Exam #1 Accounting #1 Sept 7, Trial Balance – a. Explain the purpose of the trial balance. b. If the trial balance balances, does that indicate all of journal entries have been posted correctly and in the proper month? Please explain 2 Create a transaction that will decrease an asset and decrease equity. 3 Customer ‘Over There’ owes the Wood Company $16,000 on August 31, 2013. On Sept 7, 2013, Over There sent a check for 50%, to Wood Company, of the amount due. Please explain how the Sept 7 transaction affects the income statement for Wood Company. 4 The Shore Company has sent you a puzzle to solve. They heard you love puzzles. The pieces for the puzzle are: a. Assets on Aug 1, 2013 $ 732,000 b. Assets in Aug 31, 2013 1,005,000 c. Liabilities on Aug 1, 2013 $ 300,000 d. Liabilities on Aug 31, 2013 $ 350,000 e. During the month of August 2013, the owners invested an additional $85,000 into the company. f. During the month of August 2013, the owners withdrew $40,000 from the company. Required --- calculate the net income for the company during the month of August. Show your work. 5. The Woody Shore Company opened their doors to the business on August 31, 2013. The company incurred the following transactions during August 2013. August 1 The owners deposited $87,000 into the business August 2 Purchased supplies on credit, total $800. August 2 Company purchased a 12 month insurance policy for their business $3,600 August 3 Paid rent for their office $2,800 August 5 Purchased equipment for $15,000 paid cash of $3,000 and signed a note with the bank for the remaining balance. August 9 Completed service for customers and issued invoices, $7,500 August 14 Automobile expense for the company was $825 August 15 Received cash from customer for services provided $2,800 August 18 Paid monthly salary for the employees $4,000 August 22 Paid first installment for note on August 5, 450 August 25 Paid $300 on amount due from August 2 August 30 Customers from August 9 sent you cash for $3,000 August 31 Owners withdrew $2,100 from the company Required: 1. Prepare the journal entries for the above transaction using the accounts in the Chart of Accounts; Cash, Accounts Receivable, Supplies, Prepaid Insurance, Equipment, Accounts Payable, Notes Payable, Capital, Owners Withdrawal, Insurance Expense, Rent Expense, Automobile Expense, Salary Expense. 2. Create T accounts for all of the accounts and post the journal entries into the proper accounts. 3. Compute the ending balances for each T Account. 4. Prepare a Trial Balance as of August 31. 5. Prepare the Income Statement, Statement of Owners Equity and the Balance Sheet for the month of August 2013.**

Paper For Above instruction

The purpose of a trial balance is to verify the accuracy of a company's bookkeeping system. It involves listing all the ledger account balances at a particular point in time to ensure that total debits equal total credits. This process helps identify whether the entries in the ledger are mathematically correct. However, it does not guarantee that there are no errors in journal entries, such as omitted transactions, incorrect amounts, or misclassifications. Therefore, a balanced trial balance indicates that the sum of debits and credits match, but it does not necessarily confirm the correctness of each individual posting or that all journal entries have been made in the proper month.

Creating a transaction that decreases both an asset and equity involves a scenario where the company expends resources that directly reduce assets and simultaneously impacts owners’ equity. For example, paying owner’s personal expenses from business funds decreases cash (asset) and reduces owner’s equity (specifically, the drawing account). Alternatively, recording an owner’s withdrawal might be illustrated as: "Owner withdraws cash for personal use," which increases Owner’s Withdrawals (a contra-equity account) and decreases Cash.

Regarding the September 7 transaction where Over There sends a check for 50% of the amount owed ($8,000) on August 31, 2013, the payment affects the income statement of Wood Company by reducing accounts receivable and recognizing revenue when services were completed. The partial payment reduces accounts receivable, but since the revenue was already recognized when the service was performed, this transaction does not directly affect the current income statement except in reducing receivables. If the company uses accrual accounting, the revenue from the service provided in August remains recognized in the income statement of August. The partial payment on September 7 reduces the receivables asset but has no immediate impact on income unless the initial revenue was not previously recognized.

The puzzle from The Shore Company involves calculating net income for August 2013, considering asset and liability changes, owner investments, and withdrawals. Initial assets on August 1 were $732,000, increasing to $1,005,000 by August 31. The liabilities rose from $300,000 to $350,000 during the same period. Part of the analysis involves adjusting for owner investments of $85,000 and withdrawals of $40,000. Using accounting equation principles:

Assets = Liabilities + Owner's Equity

Initial Equity on August 1:

$732,000 (Assets) - $300,000 (Liabilities) = $432,000

Assets on August 31:

$1,005,000 (Assets) - $350,000 (Liabilities) = $655,000

Change in Assets:

$1,005,000 - $732,000 = $273,000

Change in Liabilities:

$350,000 - $300,000 = $50,000

Owner’s equity change is computed as:

Ending Equity = Beginning Equity + Investments - Withdrawals + Net Income

> Net Income can thus be derived from the change in equity, considering owner transactions.

From the initial and ending equity calculations:

Beginning Equity: $432,000

Plus owner investments: $85,000

Minus withdrawals: $40,000

Remaining Equity increase must be due to net income, which is:

Net Income = Ending Equity - Beginning Equity - Investments + Withdrawals

= ($655,000 - $350,000) - ($432,000) - $85,000 + $40,000 = $138,000

Therefore, the net income for August is approximately $138,000.

The Woody Shore Company's detailed transactions for August involve recording journal entries across various accounts and preparing financial statements. Initially, the owner’s deposit of $87,000 increases cash and capital account balances. The purchase of supplies on credit debits Supplies and credits Accounts Payable. The prepaid insurance increases the asset account, and rent expense reflects rent paid. Equipment purchase updates fixed assets, while installment payments on notes payable reduce liabilities. Service revenues are recorded through accounts receivable and later cash collection reduces accounts receivable and increases cash. Expenses such as automobile expenses, salaries, and utilities are recorded appropriately. Owner withdrawals are reflected in the Owner’s Withdrawal account, reducing equity.

The general process involves creating journal entries for each transaction, then posting these into T-accounts. The T-accounts reflect the beginning balances and the postings from journal entries, culminating in ending balances that feed into the trial balance. Preparing the trial balance ensures total debits and credits match, verifying the ledger's accuracy. Financial statements such as the income statement, statement of owner’s equity, and balance sheet are constructed from these ledger balances. The income statement summarizes revenues and expenses to determine net income, which is then used in the statement of owner’s equity alongside owner investments and withdrawals. The balance sheet presents the financial position at month-end, showing assets, liabilities, and owner’s equity.

References

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