Cash is decreasing, so total assets will decrease by $300, impacting the balance sheet. You want the total of your revenue account to increase to reflect this additional revenue. Experts are tested by Chegg as specialists in their subject area. In the same way, the $2,000 numerical amount added to the inventory total appears on the left (debit) side whereas the $2,000 change in accounts payable is clearly on the right (credit) side. Sold $20,000 of merchandise, which cost $15,000, on Mastercard credit cards. On January 26, the company sells 350 units. LO The customer owes the money, which increases Accounts Receivable. Accounts Payable has a debit of $3,500 (payment in full for the Jan. 5 purchase). (a) Issue stock for $1,000 cash (b) Purchase inventory for $500 cash (c) Sell inventory from (b) for $2,000 on credit (d) Record $500 for cost of inventory sold in (c) (e) Receive $2,000 cash on receivable from (c) Common Stock (+SE) Accounts Receivable (+A) This problem has been solved! The third step in the accounting cycle is to post journal information to the ledger. You record another weeks revenue for the lawns mowed over the past week. business must report any business activities that could affect what is reported on the financial statements, v. system of using a monetary unit by which to value the transaction, such as the US dollar, vi. 3.2Cromwell Corporation has the following trial balance account balances, given in no certain order, as of December 31, 2018. Figure 4.7 Journal Entry 4A: Sale Made on Account. LO Revenues are recognized when the earning process is substantially complete and the amount to be collected can be reasonably estimated. LO Note that the total of all the debit and credit balances do agree ($54,300) and that every account shows a positive balance. Accrued expenses. LO Understanding who buys gift cards, why, and when can be important in business planning. The debit account title(s) always come first and on the left. Cash had a debit of $20,000 in the journal entry, so $20,000 is transferred to the general ledger in the debit column. The record is placed on the debit side of the Accounts Receivable T-account underneath the January 10 record. Terms of the sale are 2/10, n/60; the invoice is dated November 5. Accounts Receivable was originally used to recognize the future customer payment; now that the customer has paid in full, Accounts Receivable will decrease. Payment is made here for past work so this cost represents an expense rather than an asset. Lets now look at a few transactions from Printing Plus and record their journal entries. Service Revenue is a revenue account affecting equity. A journal is the first place information is entered into the accounting system. Explain the purpose of the matching principle. (a) Issue stock for $1,000 cash (b) Purchase inventory for $500 cash (c) Sell inventory from (b) for $2,000 on credit (d) Record $500 for cost of inventory sold in (c) (e) Receive $2,000 cash on receivable from (c) Common Stock (+SE) Accounts Receivable (+A) Cash (+A) Inventory (+A). Round your final answers to the nearest whole dollar.) For example, your employees may work throughout the month but . Therefore, you will debit gas expense. Since T-accounts are kept together in a ledger (or general ledger), a trial balance reports the individual balances for each T-account maintained in the companys ledger. That entry is recorded above. DR Expense: Repair Cost: $1,860. Revenue accounts increase on the credit side; thus, Service Revenue will show an increase of $5,500 on the credit side. Transaction 6: On January 14, 2019, distributed $100 cash in dividends to stockholders. Depreciation Expense = Unit Production Rate x Units Produced. This creates a liability for Printing Plus, who owes the supplier money for the equipment. Creative Commons Attribution-NonCommercial-ShareAlike License Printing Plus provided the service, thus earning revenue. are licensed under a, Use Journal Entries to Record Transactions and Post to T-Accounts, Explain the Importance of Accounting and Distinguish between Financial and Managerial Accounting, Identify Users of Accounting Information and How They Apply Information, Describe Typical Accounting Activities and the Role Accountants Play in Identifying, Recording, and Reporting Financial Activities, Explain Why Accounting Is Important to Business Stakeholders, Describe the Varied Career Paths Open to Individuals with an Accounting Education, Describe the Income Statement, Statement of Owners Equity, Balance Sheet, and Statement of Cash Flows, and How They Interrelate, Define, Explain, and Provide Examples of Current and Noncurrent Assets, Current and Noncurrent Liabilities, Equity, Revenues, and Expenses, Prepare an Income Statement, Statement of Owners Equity, and Balance Sheet, Describe Principles, Assumptions, and Concepts of Accounting and Their Relationship to Financial Statements, Define and Describe the Expanded Accounting Equation and Its Relationship to Analyzing Transactions, Define and Describe the Initial Steps in the Accounting Cycle, Analyze Business Transactions Using the Accounting Equation and Show the Impact of Business Transactions on Financial Statements, Explain the Concepts and Guidelines Affecting Adjusting Entries, Discuss the Adjustment Process and Illustrate Common Types of Adjusting Entries, Record and Post the Common Types of Adjusting Entries, Use the Ledger Balances to Prepare an Adjusted Trial Balance, Prepare Financial Statements Using the Adjusted Trial Balance, Describe and Prepare Closing Entries for a Business, Apply the Results from the Adjusted Trial Balance to Compute Current Ratio and Working Capital Balance, and Explain How These Measures Represent Liquidity, Appendix: Complete a Comprehensive Accounting Cycle for a Business, Compare and Contrast Merchandising versus Service Activities and Transactions, Compare and Contrast Perpetual versus Periodic Inventory Systems, Analyze and Record Transactions for Merchandise Purchases Using the Perpetual Inventory System, Analyze and Record Transactions for the Sale of Merchandise Using the Perpetual Inventory System, Discuss and Record Transactions Applying the Two Commonly Used Freight-In Methods, Describe and Prepare Multi-Step and Simple Income Statements for Merchandising Companies, Appendix: Analyze and Record Transactions for Merchandise Purchases and Sales Using the Periodic Inventory System, Define and Describe the Components of an Accounting Information System, Describe and Explain the Purpose of Special Journals and Their Importance to Stakeholders, Analyze and Journalize Transactions Using Special Journals, Describe Career Paths Open to Individuals with a Joint Education in Accounting and Information Systems, Analyze Fraud in the Accounting Workplace, Define and Explain Internal Controls and Their Purpose within an Organization, Describe Internal Controls within an Organization, Define the Purpose and Use of a Petty Cash Fund, and Prepare Petty Cash Journal Entries, Discuss Management Responsibilities for Maintaining Internal Controls within an Organization, Define the Purpose of a Bank Reconciliation, and Prepare a Bank Reconciliation and Its Associated Journal Entries, Describe Fraud in Financial Statements and Sarbanes-Oxley Act Requirements, Explain the Revenue Recognition Principle and How It Relates to Current and Future Sales and Purchase Transactions, Account for Uncollectible Accounts Using the Balance Sheet and Income Statement Approaches, Determine the Efficiency of Receivables Management Using Financial Ratios, Discuss the Role of Accounting for Receivables in Earnings Management, Apply Revenue Recognition Principles to Long-Term Projects, Explain How Notes Receivable and Accounts Receivable Differ, Appendix: Comprehensive Example of Bad Debt Estimation, Describe and Demonstrate the Basic Inventory Valuation Methods and Their Cost Flow Assumptions, Calculate the Cost of Goods Sold and Ending Inventory Using the Periodic Method, Calculate the Cost of Goods Sold and Ending Inventory Using the Perpetual Method, Explain and Demonstrate the Impact of Inventory Valuation Errors on the Income Statement and Balance Sheet, Examine the Efficiency of Inventory Management Using Financial Ratios, Distinguish between Tangible and Intangible Assets, Analyze and Classify Capitalized Costs versus Expenses, Explain and Apply Depreciation Methods to Allocate Capitalized Costs, Describe Accounting for Intangible Assets and Record Related Transactions, Describe Some Special Issues in Accounting for Long-Term Assets, Identify and Describe Current Liabilities, Analyze, Journalize, and Report Current Liabilities, Define and Apply Accounting Treatment for Contingent Liabilities, Prepare Journal Entries to Record Short-Term Notes Payable, Record Transactions Incurred in Preparing Payroll, Explain the Pricing of Long-Term Liabilities, Compute Amortization of Long-Term Liabilities Using the Effective-Interest Method, Prepare Journal Entries to Reflect the Life Cycle of Bonds, Appendix: Special Topics Related to Long-Term Liabilities, Explain the Process of Securing Equity Financing through the Issuance of Stock, Analyze and Record Transactions for the Issuance and Repurchase of Stock, Record Transactions and the Effects on Financial Statements for Cash Dividends, Property Dividends, Stock Dividends, and Stock Splits, Compare and Contrast Owners Equity versus Retained Earnings, Discuss the Applicability of Earnings per Share as a Method to Measure Performance, Describe the Advantages and Disadvantages of Organizing as a Partnership, Describe How a Partnership Is Created, Including the Associated Journal Entries, Compute and Allocate Partners Share of Income and Loss, Prepare Journal Entries to Record the Admission and Withdrawal of a Partner, Discuss and Record Entries for the Dissolution of a Partnership, Explain the Purpose of the Statement of Cash Flows, Differentiate between Operating, Investing, and Financing Activities, Prepare the Statement of Cash Flows Using the Indirect Method, Prepare the Completed Statement of Cash Flows Using the Indirect Method, Use Information from the Statement of Cash Flows to Prepare Ratios to Assess Liquidity and Solvency, Appendix: Prepare a Completed Statement of Cash Flows Using the Direct Method, Summary of T-Accounts for Printing Plus. 3.1For the following accounts please indicate whether the normal balance is a debit or a credit. Assuming again that a perpetual inventory system is in use, both the sale and the related expense are recorded immediately. Retained earnings is a stockholders equity account, so total equity will increase $1,200. Chapter 1: Why Is Financial Accounting Important? Service Revenue has a credit balance of $2,800. Also, knowing when and how to determine that a gift card will not likely be redeemed will affect both the companys balance sheet (in the liabilities section) and the income statement (in the revenues section). Next: Chapter 5: Why Must Financial Information Be Adjusted Prior to the Production of Financial Statements? Apparently, the $1,000 salary expense appearing in the above trial balance reflects earlier payments made during the period by the company to its employees. business may only report activities on financial statements that are specifically related to company operations, not those activities that affect the owner personally, Received cash from issuance of common stock, Collected cash from customer sales made in previous month, Paid cash to vendors for supplies delivered last month, Bought supplies, to be paid for next month, Paid for inventory purchased on account last month. Assume now that these same transactions are to be recorded as journal entries. This can happen with recurring bills, like utilities or payroll. explanation 3.5Post the following November transactions to T-accounts for Accounts Payable and Inventory, indicating the ending balance (assume no beginning balances in these accounts). The company had a great year and earned a net income of$190,000 this year and paid dividends of $14,000. This shows where the account stands after each transaction, as well as the final balance in the account. It is not taken from previous examples but is intended to stand alone. The new entry is recorded under the Jan 10 record, posted to the Service Revenue T-account on the credit side. LO At the same time, inventory costing $2,000 is surrendered by the company. Cash Transaction 9: On January 20, 2019, paid $3,600 cash in salaries expense to employees. These cards charges a 4% fee. Cash is decreasing, so total assets will decrease by $100, impacting the balance sheet. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) The first transaction analyzed at the start of this chapter was the purchase of inventory on credit for $2,000. then you must include on every physical page the following attribution: If you are redistributing all or part of this book in a digital format, 1.1 Making Good Financial Decisions about an Organization, 1.2 Incorporation and the Trading of Capital Shares, 1.3 Using Financial Accounting for Wise Decision Making, 2.1 Creating a Portrait of an Organization That Can Be Used by Decision Makers, 2.3 The Need for Generally Accepted Accounting Principles, 2.4 Four Basic Terms Found in Financial Accounting, 3.1 The Construction of an Income Statement, 3.2 Reported Profitability and the Principle of Conservatism, 3.3 Increasing the Net Assets of a Company, 3.4 Reporting a Balance Sheet and a Statement of Cash Flows, 4.5 The Connection of the Journal and the Ledger, 4.1 The Essential Role of Transaction Analysis, 4.2 The Effects Caused by Common Transactions, 4.3 An Introduction to Double-Entry Bookkeeping, 5.3 Preparing Financial Statements Based on Adjusted Balances, 6.1 The Need for the Securities and Exchange Commission, 6.2 The Role of the Independent Auditor in Financial Reporting, 6.5 The Purpose and Content of an Independent Auditors Report, 7.1 Accounts Receivable and Net Realizable Value, 7.2 Accounting for Uncollectible Accounts, 7.4 Estimating the Amount of Uncollectible Accounts, 7.5 Remeasuring Foreign Currency Balances, 7.6 A Companys Vital SignsAccounts Receivable, 8.1 Determining and Reporting the Cost of Inventory, 8.2 Perpetual and Periodic Inventory Systems, 8.3 The Calculation of Cost of Goods Sold, 8.4 Reporting Inventory at the Lower-of-Cost-or-Market, 9.1 The Necessity of Adopting a Cost Flow Assumption, 9.2 The Selection of a Cost Flow Assumption for Reporting Purposes, 9.4 Merging Periodic and Perpetual Inventory Systems with a Cost Flow Assumption, 9.5 Applying LIFO and Averaging to Determine Reported Inventory Balances, 10.1 The Reporting of Property and Equipment, 10.2 Determining Historical Cost and Depreciation Expense, 10.3 Recording Depreciation Expense for a Partial Year, 10.4 Alternative Depreciation Patterns and the Recording of a Wasting Asset, 10.5 Recording Asset Exchanges and Expenditures That Affect Older Assets, 10.6 Reporting Land Improvements and Impairments in the Value of Property and Equipment, 11.1 Identifying and Accounting for Intangible Assets, 11.2 The Balance Sheet Reporting of Intangible Assets, 11.3 Recognizing Intangible Assets Owned by a Subsidiary, 11.4 Accounting for Research and Development, 11.5 Acquiring an Asset with Future Cash Payments, 12.1 Accounting for Investments in Trading Securities, 12.2 Accounting for Investments in Securities That Are Available for Sale, 12.3 Accounting for Investments by Means of the Equity Method, 12.4 The Reporting of Consolidated Financial Statements, 13.2 Reporting Current Liabilities Such as Gift Cards, 14.5 Issuing and Accounting for Serial Bonds, 14.6 Bonds with Other Than Annual Interest Payments, 15.2 Operating Leases versus Capital Leases, 15.3 Recognition of Deferred Income Taxes, 16.1 Selecting a Legal Form for a Business, 16.3 Issuing and Accounting for Preferred Stock and Treasury Stock, 16.4 The Issuance of Cash and Stock Dividends, 16.5 The Computation of Earnings per Share, 17.1 The Structure of a Statement of Cash Flows, 17.2 Cash Flows from Operating Activities: The Direct Method, 17.3 Cash Flows from Operating Activities: The Indirect Method, 17.4 Cash Flows from Investing and Financing Activities. Let's look at the journal entries for Printing Plus and post each of those entries to their respective T-accounts. The OpenStax name, OpenStax logo, OpenStax book covers, OpenStax CNX name, and OpenStax CNX logo This current listing of accounts is commonly referred to as a trial balance. More revenue will increase net income (earnings), thus increasing retained earnings. On January 20, 2019, paid $3,600 cash in salaries expense to employees. Chapter 15: In Financial Statements, What Information Is Conveyed about Other Noncurrent Liabilities? Thus, if specific revenue is to be recognized in the year 2019, any associated costs should be reported as expenses in that same time period. Figure 4.5 Journal Entry 2: Salary Paid to Employees. The general ledger account for Cash would look like the following: In the last column of the Cash ledger account is the running balance. Rotation system that uses the newest products first, Sells 320 of the oldest units, 30 of the middle, 0 of the newest, Sells 100 of the newest units, 50 of the middle, 0 of the last. Assume all accounts have normal balances. Accountants use special forms called journals to keep track of their business transactions. 3.3From the following list, identify which items are considered original sources: LO 1b. Increasing an expense is always shown by means of a debit; decreasing an asset is reflected through a credit. Transaction 1: On January 3, 2019, issues $20,000 shares of common stock for cash. These rules can be learned quickly but only by investing a bit of effort. In the journal entry, Utility Expense has a debit balance of $300. Note that this example has only one debit account and one credit account, which is considered a simple entry. Credit Equipment XXX 1In larger organizations, similar transactions are often grouped, summed, and recorded together for efficiency. Electrical work required for installation - Included To help focus on the mechanics of the accounting process, the journal entries recorded for the transactions in this textbook will be prepared individually. The local community center will allow you to use its parking lot and water supply for $10.00 per hour from 9:00 A.M. to 5:00 p.M. on a Saturday. When the company issues stock, stockholders purchase common stock, yielding a higher common stock figure than before issuance. The revenue realization principle provides authoritative direction as to the proper timing for the recognition of revenue. LO Expenses go up with debit entries. Assume a perpetual inventory system. Trumpet and Trombone Manufacturing, Inc. began the year with a retained earnings balance of $545,000. This is posted to the Cash T-account on the credit side beneath the January 14 transaction. On January 30, 2019, purchases supplies on account for $500, payment due within three months. You earned $1,200. Earlier in this chapter, a number of transactions were analyzed to determine their impact on account balances. Revenue accounts increase with credit entries, so credit lawn-mowing revenue. As an Amazon Associate we earn from qualifying purchases. Accrual accounting provides an excellent example of how U.S. GAAP guides the reporting process in order to produce fairly presented financial statements that can be understood by all decision makers around the world. Unearned Revenue has a credit balance of $4,000. On January 1, the Matthews Band pays $65,800 for sound equipment. Lets consider the general ledger for Cash. Our mission is to improve educational access and learning for everyone. Using our vehicle example above, you must identify what transaction took place. Using the information provided, prepare Cromwells annual financial statements (omit the Statement of Cash Flows). Depreciation Per Concert: $319 (63,800/200) You are now paying down some of the money you owe on that account. The same process occurs for the rest of the entries in the ledger and their balances. The debit is on the left side, and the credit is on the right. are licensed under a, Explain the Importance of Accounting and Distinguish between Financial and Managerial Accounting, Identify Users of Accounting Information and How They Apply Information, Describe Typical Accounting Activities and the Role Accountants Play in Identifying, Recording, and Reporting Financial Activities, Explain Why Accounting Is Important to Business Stakeholders, Describe the Varied Career Paths Open to Individuals with an Accounting Education, Describe the Income Statement, Statement of Owners Equity, Balance Sheet, and Statement of Cash Flows, and How They Interrelate, Define, Explain, and Provide Examples of Current and Noncurrent Assets, Current and Noncurrent Liabilities, Equity, Revenues, and Expenses, Prepare an Income Statement, Statement of Owners Equity, and Balance Sheet, Describe Principles, Assumptions, and Concepts of Accounting and Their Relationship to Financial Statements, Define and Describe the Expanded Accounting Equation and Its Relationship to Analyzing Transactions, Define and Describe the Initial Steps in the Accounting Cycle, Analyze Business Transactions Using the Accounting Equation and Show the Impact of Business Transactions on Financial Statements, Use Journal Entries to Record Transactions and Post to T-Accounts, Explain the Concepts and Guidelines Affecting Adjusting Entries, Discuss the Adjustment Process and Illustrate Common Types of Adjusting Entries, Record and Post the Common Types of Adjusting Entries, Use the Ledger Balances to Prepare an Adjusted Trial Balance, Prepare Financial Statements Using the Adjusted Trial Balance, Describe and Prepare Closing Entries for a Business, Apply the Results from the Adjusted Trial Balance to Compute Current Ratio and Working Capital Balance, and Explain How These Measures Represent Liquidity, Appendix: Complete a Comprehensive Accounting Cycle for a Business, Compare and Contrast Merchandising versus Service Activities and Transactions, Compare and Contrast Perpetual versus Periodic Inventory Systems, Analyze and Record Transactions for Merchandise Purchases Using the Perpetual Inventory System, Analyze and Record Transactions for the Sale of Merchandise Using the Perpetual Inventory System, Discuss and Record Transactions Applying the Two Commonly Used Freight-In Methods, Describe and Prepare Multi-Step and Simple Income Statements for Merchandising Companies, Appendix: Analyze and Record Transactions for Merchandise Purchases and Sales Using the Periodic Inventory System, Define and Describe the Components of an Accounting Information System, Describe and Explain the Purpose of Special Journals and Their Importance to Stakeholders, Analyze and Journalize Transactions Using Special Journals, Describe Career Paths Open to Individuals with a Joint Education in Accounting and Information Systems, Analyze Fraud in the Accounting Workplace, Define and Explain Internal Controls and Their Purpose within an Organization, Describe Internal Controls within an Organization, Define the Purpose and Use of a Petty Cash Fund, and Prepare Petty Cash Journal Entries, Discuss Management Responsibilities for Maintaining Internal Controls within an Organization, Define the Purpose of a Bank Reconciliation, and Prepare a Bank Reconciliation and Its Associated Journal Entries, Describe Fraud in Financial Statements and Sarbanes-Oxley Act Requirements, Explain the Revenue Recognition Principle and How It Relates to Current and Future Sales and Purchase Transactions, Account for Uncollectible Accounts Using the Balance Sheet and Income Statement Approaches, Determine the Efficiency of Receivables Management Using Financial Ratios, Discuss the Role of Accounting for Receivables in Earnings Management, Apply Revenue Recognition Principles to Long-Term Projects, Explain How Notes Receivable and Accounts Receivable Differ, Appendix: Comprehensive Example of Bad Debt Estimation, Describe and Demonstrate the Basic Inventory Valuation Methods and Their Cost Flow Assumptions, Calculate the Cost of Goods Sold and Ending Inventory Using the Periodic Method, Calculate the Cost of Goods Sold and Ending Inventory Using the Perpetual Method, Explain and Demonstrate the Impact of Inventory Valuation Errors on the Income Statement and Balance Sheet, Examine the Efficiency of Inventory Management Using Financial Ratios, Distinguish between Tangible and Intangible Assets, Analyze and Classify Capitalized Costs versus Expenses, Explain and Apply Depreciation Methods to Allocate Capitalized Costs, Describe Accounting for Intangible Assets and Record Related Transactions, Describe Some Special Issues in Accounting for Long-Term Assets, Identify and Describe Current Liabilities, Analyze, Journalize, and Report Current Liabilities, Define and Apply Accounting Treatment for Contingent Liabilities, Prepare Journal Entries to Record Short-Term Notes Payable, Record Transactions Incurred in Preparing Payroll, Explain the Pricing of Long-Term Liabilities, Compute Amortization of Long-Term Liabilities Using the Effective-Interest Method, Prepare Journal Entries to Reflect the Life Cycle of Bonds, Appendix: Special Topics Related to Long-Term Liabilities, Explain the Process of Securing Equity Financing through the Issuance of Stock, Analyze and Record Transactions for the Issuance and Repurchase of Stock, Record Transactions and the Effects on Financial Statements for Cash Dividends, Property Dividends, Stock Dividends, and Stock Splits, Compare and Contrast Owners Equity versus Retained Earnings, Discuss the Applicability of Earnings per Share as a Method to Measure Performance, Describe the Advantages and Disadvantages of Organizing as a Partnership, Describe How a Partnership Is Created, Including the Associated Journal Entries, Compute and Allocate Partners Share of Income and Loss, Prepare Journal Entries to Record the Admission and Withdrawal of a Partner, Discuss and Record Entries for the Dissolution of a Partnership, Explain the Purpose of the Statement of Cash Flows, Differentiate between Operating, Investing, and Financing Activities, Prepare the Statement of Cash Flows Using the Indirect Method, Prepare the Completed Statement of Cash Flows Using the Indirect Method, Use Information from the Statement of Cash Flows to Prepare Ratios to Assess Liquidity and Solvency, Appendix: Prepare a Completed Statement of Cash Flows Using the Direct Method, Creative Commons Attribution-NonCommercial-ShareAlike License, https://openstax.org/books/principles-financial-accounting/pages/1-why-it-matters, https://openstax.org/books/principles-financial-accounting/pages/3-exercise-set-a, Creative Commons Attribution 4.0 International License, i. if uncertainty in a potential financial estimate, a company should err on the side of caution and report the most conservative amount, ii.
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