Question

15-6 True or False Study Appendix 15B. Use T or F to indicate whether each of the following statements is true or false. For each false statement, explain why it is false. 1. Purchase of inventory on account should be credited to Inventory and debited to Accounts Payable. 2. Increases in asset accounts must always be entered on the right. 3. Increases in stockholders' equity should always be entered as credits. 4. Decreases in liability accounts should be recorded on the right. 5. Debit entries must always be recorded on the left. Credit entries can be recorded either on the right or on the left. 6. Money borrowed from the bank should be credited to Cash and debited to Notes Payable. 7. Decreases in accounts must be shown on the credit side. 8. Both increases in liabilities and decreases in assets should be entered on the right. 9. Asset credits should be entered on the right and liability credits on the left. 10. Payments on mortgages should be debited to Cash and credited to Mortgages Payable. Mortgages are liabilities.

Answer 1

1. F.    Reason: As Inventory is a Real Account, the principal should be followed is Debit what comes in. And therefore, Inventory Account should be debited and Creditors Account [Accounts Payable] should be credited.

2. F.    Reason: Right side of any account is Credit Side and Left side of any account is Debit Side. And an Asset Account is a Real Account. And thus any increase in Asset Account Should be written on LEFT SIDE.

3. T.

4. F.    Reason: Right side of any account is Credit Side and Left side of any account is Debit Side. And a Liability Account is a Personal Account. And thus any decrease in Liability Account Should be written on LEFT SIDE. Because decrease in liability account means paying cash or settling off the liability which tends to cash outflow.

5. F.   Reason: Right side of any account is Credit Side and Left side of any account is Debit Side. And thus all the Debit entries must be recorded on left and all the Credit entries must be recorded on right.

6. F. Reason: we are receiving loan and loan is a Personal Account. And Personal Account states that Debit the receiver & Credit the giver; thus we are here at receiving end. Therefore, Cash/Bank Account Debited and Notes Payable Account should be credited.

7. F. Reason: It all depends on account type i.e. Real, Personal & Nominal Account.

Any Increase / Decrease in the following types of account should be shown in the following sides:

Type of Account	INCREASE	DECREASE
Real Account	Left Side / Debit Side	Right Side / Credit Side
Personal Account	Right Side / Credit Side	Left Side / Debit Side
Nominal Account Income Expense	Right Side / Credit Side Left Side / Debit Side	Left Side / Debit Side Right Side / Credit Side

8. T.

9. F.    Reason: Both Assets & Libility Credits should be entered on the RIGHT SIDE.

10. F. Reason: As Mortgages are liabilities, any payment made to liability account must be debited and because there is a cash outflow it must be credited. Therefore, Mortgages Payable should be debited and cash should be credited.