Accounting 1 3 Application Problem Answers

Accounting 101: Application Problem Answers & Concepts Explained

Accounting can seem daunting, especially when faced with application problems. This comprehensive guide tackles common Accounting 101 application problems, providing detailed solutions and explanations to build your understanding. We'll cover core accounting principles and demonstrate how to apply them practically. This isn't just about getting the right answer; it's about grasping the why behind the numbers.

Understanding the Fundamentals: Debits and Credits

Before diving into problem-solving, let's refresh the cornerstone of accounting: debits and credits. Remember the basic accounting equation: Assets = Liabilities + Equity. Every transaction affects this equation, and debits and credits are used to record these changes.

• Debits increase the balance of asset, expense, and dividend accounts. They decrease the balance of liability, equity, and revenue accounts.
• Credits increase the balance of liability, equity, and revenue accounts. They decrease the balance of asset, expense, and dividend accounts.

This seemingly simple rule is crucial for accurate bookkeeping. Understanding this is the key to unlocking complex accounting problems.

Common Application Problems and Solutions

Let's tackle some typical Accounting 101 application problems. We'll walk through the steps required to solve them, emphasizing the reasoning behind each entry.

Problem 1: Recording a Cash Sale

Scenario: A company sells goods for $500 cash.

Solution:

This transaction increases cash (an asset) and increases sales revenue (a revenue account). Therefore:

• Debit: Cash $500 (Increase in asset)
• Credit: Sales Revenue $500 (Increase in revenue)

Explanation: The debit increases the cash account reflecting the money received. The credit increases the sales revenue account, recording the income generated from the sale. The accounting equation remains balanced ($500 = $500).

Problem 2: Recording a Purchase on Account

Scenario: A company purchases supplies for $200 on account (credit).

Solution:

This transaction increases supplies (an asset) and increases accounts payable (a liability).

• Debit: Supplies $200 (Increase in asset)
• Credit: Accounts Payable $200 (Increase in liability)

Explanation: The debit increases the supplies account, reflecting the increase in the company's resources. The credit increases the accounts payable account, showing the company's obligation to pay for the supplies later. Again, the equation remains balanced.

Problem 3: Recording Payment of Salaries

Scenario: A company pays its employees $1,000 in salaries.

Solution:

This transaction decreases cash (an asset) and increases salaries expense (an expense account).

• Debit: Salaries Expense $1,000 (Increase in expense)
• Credit: Cash $1,000 (Decrease in asset)

Explanation: The debit increases the salaries expense account, reflecting the cost incurred. The credit decreases the cash account, showing the outflow of cash. The accounting equation remains in balance.

Problem 4: Recording Depreciation

Scenario: A company's equipment depreciates by $500 during the year.

Solution:

Depreciation is a non-cash expense that reduces the value of an asset over time.

• Debit: Depreciation Expense $500 (Increase in expense)
• Credit: Accumulated Depreciation $500 (Increase in contra-asset account)

Explanation: The debit increases depreciation expense, reflecting the expense incurred due to the equipment's wear and tear. The credit increases accumulated depreciation, a contra-asset account that reduces the book value of the equipment. This doesn't affect the total assets, but it correctly reflects the equipment's reduced value.

Problem 5: Recording a Bank Reconciliation

Scenario: A company's bank statement shows a balance of $10,000. However, the company's books show a balance of $9,500. Outstanding checks total $300, and a deposit of $200 is in transit. The bank also charged a $50 service fee.

Solution:

A bank reconciliation adjusts the book balance to match the bank balance.

1. Start with the book balance: $9,500
2. Add deposits in transit: $9,500 + $200 = $9,700
3. Subtract outstanding checks: $9,700 - $300 = $9,400
4. Subtract bank charges: $9,400 - $50 = $9,350

This adjusted book balance should now match the adjusted bank balance. The discrepancy is resolved through these adjustments.

Explanation: Outstanding checks haven't cleared the bank yet, so they are subtracted from the book balance. Deposits in transit haven't been recorded by the bank, so they are added to the book balance. Bank charges are deducted from the book balance.

Beyond the Basics: More Complex Scenarios

Let's explore some more advanced application problems that integrate multiple accounting principles.

Problem 6: Journal Entries with Multiple Accounts

Scenario: A company purchased equipment for $5,000, paying $1,000 in cash and the remaining balance on account.

Solution:

This transaction involves several accounts.

• Debit: Equipment $5,000 (Increase in asset)
• Credit: Cash $1,000 (Decrease in asset)
• Credit: Accounts Payable $4,000 (Increase in liability)

Explanation: The debit increases the equipment account. The credits reflect the cash payment and the outstanding balance on account.

Problem 7: Accrual Accounting vs. Cash Accounting

Scenario: A company provides services worth $2,000 but hasn't received payment yet. Under both accrual and cash accounting, how would this be recorded?

Solution:

• Accrual Accounting: Accrual accounting recognizes revenue when earned, regardless of when cash is received.

  • Debit: Accounts Receivable $2,000 (Increase in asset)
  • Credit: Service Revenue $2,000 (Increase in revenue)

• Cash Accounting: Cash accounting recognizes revenue only when cash is received. No entry would be made until payment is received.

Explanation: Accrual accounting provides a more accurate picture of a company's financial performance, while cash accounting focuses on the actual cash flows.

Mastering Accounting 101: Practice and Resources

Solving accounting application problems requires consistent practice. The more problems you solve, the better you'll become at identifying the correct accounts and applying the debit/credit rules.

Tips for Success:

• Understand the fundamental accounting equation: This is the foundation upon which all accounting principles are built.
• Master debits and credits: This is essential for accurate record-keeping.
• Practice regularly: Work through numerous problems to build your skills and confidence.
• Seek clarification: Don't hesitate to ask questions if you're struggling with a concept.
• Utilize online resources: There are numerous websites, tutorials, and practice problems available to assist you.

By diligently applying these strategies and working through a variety of problems, you'll build a solid understanding of accounting principles and confidently tackle even the most challenging application problems. Remember that accuracy and attention to detail are critical in accounting. Each entry must balance, ensuring the integrity of the financial records. Consistent practice is the key to mastering this vital skill. Good luck!