Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

2. Transaction Analysis

Journal Entries: Debits and Credits

Financial Accounting

2. Transaction Analysis

Journal Entries: Debits and Credits

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Multiple Choice

When a company determines that a potential legal claim is probable and the amount can be reasonably estimated, how should it record this event in its journal entries?

Debit a revenue account and credit a liability account

Debit a liability account and credit an expense account

Debit an expense account and credit a liability account

No journal entry is required until the claim is settled

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Verified step by step guidance

Understand the concept of contingent liabilities: A contingent liability is a potential obligation that may arise depending on the outcome of a future event. If the liability is probable and the amount can be reasonably estimated, it must be recorded in the financial statements.

Identify the correct accounts to use: When recording a probable legal claim, the company should recognize an expense to reflect the cost associated with the claim and a liability to show the obligation to pay in the future.

Determine the journal entry structure: The expense account is debited to increase expenses, and the liability account is credited to increase obligations. This follows the double-entry accounting principle.

Write the journal entry: The journal entry would be formatted as follows: Debit the appropriate expense account (e.g., Legal Expense) and Credit the appropriate liability account (e.g., Legal Claims Payable).

Understand why no entry is required until settlement if the claim is not probable or cannot be reasonably estimated: If the legal claim is not probable or the amount cannot be reasonably estimated, it is disclosed in the notes to the financial statements rather than recorded as a journal entry.