Problem 7 - Accounting

Question

During the month, Orion Labs Co. has a substantial number of transactions affecting each of the following accounts. State for each account whether it is likely to have (a) debit entries only, (b) credit entries only, or (c) both debit and credit entries. 1\. Accounts Payable 5\. Heidi Ibach, Drawing 2\. Accounts Receivable 6\. Insurance Expense 3\. Cash 7\. Supplies Expense 4\. Fees Earned

Step-by-Step Solution

Answer

1. Both debit and credit. 2. Both debit and credit. 3. Both debit and credit. 4. Credit only. 5. Debit only. 6. Debit only. 7. Debit only.

Step 1: Analyze Accounts Payable

Accounts Payable is a liability account that increases with credits and decreases with debits, generally reflecting the company's obligations to pay its suppliers. In this case, it is common to have both debit and credit entries as payments to suppliers (debits) and new obligations incurred (credits) occur regularly.

Step 2: Analyze Accounts Receivable

Accounts Receivable is an asset account, representing money owed to the company by customers. It typically increases with debit entries when sales are made on credit and decreases with credit entries when payments from customers are received. Thus, both debits and credits are expected in this account.

Step 3: Analyze Cash

The Cash account is an asset account where the company records cash transactions. It generally increases with debit entries (when cash is received) and decreases with credit entries (when cash is paid out), meaning both debits and credits are likely to be recorded.

Step 4: Analyze Fees Earned

Fees Earned is a revenue account, which typically only increases with credits as it represents income from business operations. Therefore, it is expected to have credit entries only.

Step 5: Analyze Heidi Ibach, Drawing

The Drawing account, also known as the Owner's Draw account, reflects withdrawals made by the owner. This account reduces the owner's equity and typically has only debit entries when the owner takes out funds, making (a) debit entries only more likely.

Step 6: Analyze Insurance Expense

The Insurance Expense account is used to record the cost of insurance over a period of time. Expenses generally increase with debit entries, indicating (a) debit entries only for this account.

Step 7: Analyze Supplies Expense

Similar to Insurance Expense, Supplies Expense records the usage of supplies over time. Expenses are recorded as debits, so this account is likely to have (a) debit entries only.

Key Concepts

Understanding Debit and Credit Entries

In accounting, entries are recorded in terms of debits and credits, which help to track a company's financial transactions.
For each transaction, there is a corresponding debit and credit entry. This is known as double-entry accounting.

• **Debit Entries**: Typically increase asset and expense accounts, and decrease liability and equity accounts.


• **Credit Entries**: Usually increase liability, equity, and revenue accounts, and decrease asset and expense accounts.

The sum of debits must always equal the sum of credits to keep the accounts balanced.
This rule is fundamental in ensuring that all financial records are accurate and reliable.

Liability Accounts Explained

Liability accounts record the financial obligations the company owes to others. Examples include Accounts Payable and Loans Payable.
These accounts reflect what the business has to pay in the future.
Liabilities are increased with credit entries because they represent amounts the company owes.
For instance, when a business purchases goods on credit, the amount is credited to Accounts Payable.
Here are some key points about liability accounts:

• Liabilities decrease with debit entries, as this reflects payments made to settle obligations.


• They show how much of a company's assets have been financed through debt.


• Helping assess a business's financial health is one of their primary functions.

Asset Accounts Uncovered

Asset accounts keep track of all the resources a business owns or controls, offering future benefits.
Examples include Cash, Accounts Receivable, and Equipment.
Assets typically have debit balances, and they increase with debit entries and decrease with credit entries.
When a business receives cash from a customer, this is recorded as a debit to the Cash account.
Important points about asset accounts include:

• They represent resources expected to bring future economic benefits.


• They provide a snapshot of what the company owns at any given time.


• Asset values can change over time due to things like depreciation or sale.

Revenue Accounts Explored

Revenue accounts capture the flow of earnings from delivering goods or services.
Common examples include Sales Revenue and Fees Earned.
Revenue increases a company’s equity and is primarily recorded with credit entries.
This is because revenue represents income generated by business activities.

• Revenues show the success of a company's core operations in generating income.


• They reflect the total value of goods sold or services provided to customers.


• Revenue accounts provide crucial insight into growth trends and operational efficiency.

These entries are critical for understanding a company's performance and financial health over time.