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Normal balances in accounts and effects to the balance sheet

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A debit is not the normal balance for which account listed below?
a. Dividends.
b. Cash.
c. Accounts Receivable.
d. Service Fees Earned.

An awareness of the normal balances of accounts would help you spot which of the following as an error in recording?
a. A debit balance in the Dividends account.
b. A credit balance in an expense account.
c. A credit balance in a liabilities account.
d. A credit balance in a revenue account.

A law firm received $2,000 cash for legal services to be rendered in the future. The full amount was credited to the liability account Unearned Service Revenue. If the legal services have been rendered at the end of the accounting period and no adjusting entry is made, this would cause
a. expenses to be overstated.
b. net income to be overstated.
c. liabilities to be understated.
d. revenues to be understated.

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Solution Preview

Review the accounting equation:
Assets = liabilities + equity
Assets are normally debits; liabilities and equity are normally credits
Within equity, revenue increases equity and expenses decrease equity

Cash and accounts receivable are debits because they are assets.
Dividends are a ...

Solution Summary

The 186 word response answers questions about normal balances in accounts and effects to the balance sheet. The accounting equation is reviewed as it applies to the questions. Unearned service revenue of a law firm can result of over/understatement of categories of accounts.

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Similar Posting

Use of accounting equation, Gomez increase or decrease, LIFO

1. Use the following information to calculate for the year ended December 31.

Supplies $1,000
Operating expenses $12,000
Accounts payable $9,000
Accounts receivable $3,000
Beginning Stockholders' $5,000
Equity

Revenues $23,000
Cash $15,000
Dividends $1,000
Notes payable $1,000
Equipment $6,000

a. net income (net loss) ___________
b. ending stockholders' equity ___________
c. total assets ___________

2. For each of the following accounts indicate the effect of a debit or a credit on the account and the normal balance (debit or credit). Increase (+), Decrease (-).

Debit Credit Normal Balance
a. Salary expense _________ ____________ _______________

b. Accounts receivable __________ ____________ _______________

c. Service revenue __________ ____________ _______________

d. Retained Earnings __________ ____________ _______________

3. On December 31, Gomez Company prepared an income statement and balance sheet and failed to take into account three adjusting entries. The incorrect income statement showed net income of $40,000. The balance sheet showed total assets, $120,000; total liabilities, $45,000; and stockholders' equity, $75,000.

The data for the three adjusting entries were:
(1) Depreciation of $9,000 was not recorded on equipment
(2) Wages amounting to $8,000 for the last two days in December were not paid and not recorded. The next payroll will be in January next year.
(3) Rent of $14,000 was paid for two months in advance on December 1. The entire amount was debited to Rent Expense when paid.

Instructions
Complete the following tabulation to correct the financial statement amounts shown (indicate deductions with parenthesis):

Net Income Total Assets Total Liabilities Stockholders' Equity
Incorrect balances $40,000 $120,000 $45,000 $75,000

Effects of:
Depreciation ___________ ____________ _________________ _______________

Wages ___________ ____________ _________________ _______________

Rent ___________ ____________ _________________ _______________

4. Indicate the effect of inventory method (LIFO or FIFO) in the period of inflation.

a. ________________ provides the highest ending inventory
b. ________________ provides the highest cost of goods sold
c. ________________ results in the highest net income
d. ________________ results in the lowest income tax expense

5. Use the following information to calculate three profitability ratios for CMP Inc. for the year:

Net income $12,000
Sales $88,000
Total assets $140,000
Total common stockholders' equity $96,000

a. Profit margin percentage ________________
b. Return on assets _______________
c. Return on stockholders' equity _____________________

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