Accountancy Simplified

UNIT 1 I.

THE ACCOUNTING EQUATION LIABILITIES = OWNER'SEQUITY

ASSETS ITEMS OF VALUE

WHAT IS

II.

OWED

NET

WORTH

DEFINITIONS

ACCOUNT- a storagearea for financialinformation. DEBIT- left side of an account. T ACCOUNT- a simplifiedaccount. CREDIT- right side of an account. III. BALANCE SHEET ACCOUNTS ASSETS are items of value.

CAPITAL is the Owner's Equity account for sole proprietorships and partnerships.

LIABILITIES are amounts owed.

COMMON STOCK is the primary account for tracking the invested equity of a corporation.

OWNER'S EQUITY is the net worth of a business.

RETAINED EARNINGS is the account used to store income earned but not distributed by a corporation.

IV.

DEBITS AND CREDITS

Please relate the definitions in Part accounting equation has been rewritten

ASSETS

=

DR. CR.

+

I

-

III to the schematic below. Note the to better explain debits and credits.

+

LIABILITIES DR. CR.

-

I

OWNER'S EQUITY CR. DR.

-

+

The DOUBLE ENTRY system of debits and credits facilitates the increasing and decreasing of the amounts stored in the Balance Sheet Accounts. The above schematic summarizes part of the system. After

+

I

rewriting the accounting equation it should be noted that Assets are on the opposite side of the equation from Liabilities and Owner's Equity and are therefore treated in an opposite manner by the system.

NOTE: The following example will show only the current transaction information in each T account.

v.

ANALYZINGTRANSACTIONS=

Assets

SAMPLE

+

Liabilities

PROBLEM

Owner IS Equity

1. Darin Jones, a sophomore at State University, started the Quick Clean Laundry Service with a $100 cash investment. Cash Capital. Darin Jones 100 2.

I

I

On Sept. 1, paid $50 for . ~id Advertising I 50 Cash I 50

3. On Sept. 1, purchased Laundzy Sqp,plies 25 I

5 ncnths

of ads

Laundry Supplies

in the

for

school

newspaper.

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$25 cash.

Cash

I

25

4. On Sept. 1, purchased LaundIy Eq!.l:i,pment 48

I I

$48 of Laundry Equipment paying Accounts Payable

I

Cash

I

$8 down.

40

8

5. Darin made an additional Cash 50

100

investment

of $50. Capital.

Darin Jones

I

50

6. Paid one-fourth the CllroUIltowed on the Laundry Equipment. Cash Accounts Payable I 10 10 I

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VI.

TEMPORARY

OWNER'S EQUITY STORAGE ACCOUNTS

WITHDRAWALS is

a storage account used to record periodic decreases in Owner's Equity by sole proprietors and partners.

EXPENSES represent a decrease in Owner's Equity caused by a decrease in Assets (usually Cash) or an increase in Liabilities (Salaries Payable, Accounts Payable, etc.) resulting from normal business activity. Examples include Salaries, Advertising, and Interest.

VII.

REVENUE represents an increase in Owner's Equity caused by an increase in Assets (usually Cash or Accounts Receivable) resulting from normal business activity. Examples include Sales, Interest Income, and Rent Revenue.

DEBITS AND CREDITS

Please relate the definitions in Part VI to the expanded schematic below.

=

ASSETS DR. CR.

LIABILITIES

OWNER'S

EOUITY

CR.

DR.

-

+

+

I

DR.

I

I

C~.

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+ WITHDRAWALS CR. R.I EXPENSES CR.

REVENUE

-

-

R.I Expense, Revenue, and Withdrawals are temporary storage accounts used to track changes in Owner's Equity and their positive or normal balance is consistent with the eventual change to be made in Owner's Equity. That is, expenses and withdrawals are debits because they will eventually lower Owner's Equity, and

VIII.

+

DR. ICR.

Revenue is a credit because it will eventually increase Owner's Equity. Revenue, Expense, and Withdrawals may also be thought of as changes in Assets and/or Liabilities which cause Owner's Equity to change. The logic of this system will become more apparent as you become more familiar with Part One of Quick Notes.

ANALYZING TRANSACTIONS - SAMPLE PROBLEM =

Assets

Liabilities

7. Darin withdrew $20 for personal use. cash 20 I

+

OWner's Equity

Withdrawals.

20

Darin

Jones

I

8. Cash collected for Laundry services performed during the month amounted to $140. $10 was also due for services rendered.

~ 140

Laundrv

Accounts Receivable 10

Revenue

150

I

I

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I

9. Paid $75 for the use of washers and dryers for September. Cash Washer/Drver Exoense 75 75 I

I

10. Received $5 on account. Cash

5

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I

Accounts

Receivable I

5

11. On Sept. 26, two students paid $10 for next week's Laundry Service. Cash Unearned Laundrv Revenue 20 20 I

I

12. Paid monthly phone bill of $10. Cash 10 I

3

TeleDhone 10

Exoense I

UNIT 2

RECORDING =

ASSETS DR. CR.

+

'

DR.

OWNER'SEOUITY DR. CR.

+

LIABILITIES

-

-

.

I

+

DR.

+ I

.

WITHDRAWAT ,R

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I.

TRANSACTIONS

-

I

CR.

EXPENSES

REVENUE

+ DR.

+ DR. CR.

I

CR.

I

JOURNALENTRIES

In the preceding learning unit, transactions were recorded in T accounts because students find it easier to analyze transactions with T accounts. This learning unit makes the transition from T accounts to Journal Entries, the first step of the accounting process.

JOURNALIZING TRANSACTIONS DR. CR.

ANALYZING TRANSACI'IONS Assets

+

Liabilities

Account Debited Account Credited

Owner IS Equity

1. Darin Jones, a sophomore at State University, started the Quick Clean Laundry Service with a $100 cash investment. Cash Capital. Darin Jones

100

I

100

I

2. On Sept. 1, paid $50 for 5 months of ads in the school newspaper. Pr~id Advertising

50

Cash Capital,Darin Jones

XXX XXX

100 100

Prepaid Advertising Cash

50

Laundry Supplies

25

LaundryEquipment Cash

48

50

I

~ 50

I

3. On Sept. 1, purchased Laundry Supplies for $25 cash. Laundry S~plies

25

25

Cash

I

Cash

25

I

4. On Sept. 1, purchased Laundry Eq\l:i.pment

48

$48 of Laundry Equipment Accounts Payable

I

paying

down.

$8

40

I

Cash

8 40

Accounts Payable

8

I

5. Darin made an additional investment

of $50. Capital.

Cash Capital,Darin Jones

50

6. Paid one-fourth the amount owed on the Laundry Equipment. Cash Accounts Payable

Accounts Payable

10

10 10 7. Darin withdrew$20 for personaluse. Cash Withdrawals.Darin Jones 20 20

Withdrawals,Darin Jones 20 Cash

~ 50

Darin

I

Jones

50

[ I

50

10

Cash

I

I

20

I

8. Cash collected for Laundry Services performed during the month amounted to $140. $10 was also due for services rendered.

~ 140

Laundry Revenue I

I

150

Cash Accounts Receivable Laundry Revenue

140 10 150

Accounts Receivable

10

I

9. Paid $75 for the use of washers and dryers for September. Cash Washer/DJ:yer~e

75

I

10. Received

75

75 75

I

$5 on account.

Cash AccountsReceivable

Cash

5

Washer/Dryer Expense Cash

I

5 5

Accounts Receivable I

5

11. On Sept. 26, two students paid $10 for next week I s Laundry Service.

Cash

20

Unearned LaundryRevenue

I

12. Paid monthly phone bill of $10. Cash 10 I

I

20 Telephone~se

10

I

8

Cash UnearnedLaundry Revenue

20

Telephone Expense

10

Cash

20 10

II. (1) (5) (8) (10) (11) -

100 50 140 5 -2Q 315

Bal.

117

Accounts (8) 10

Accounts (6) 10

50 25 8 10 20 75 JQ 198

(2) (3) (4) (6) (7) (9) (12)

Receivable I (10)

GENERAL LEDGER

Payable (4) 40

I

Capital. 1

Unearned

LaunCb:y Revenues I (11) 20

Darin (1) (5)

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Withdrawals, Darin Jones (7) 201

5

Washer Dryer ~se (9) 7S1

Pre~aid Advertising I (2) 50 LaunCb:y (3) 25

Sup.plies

LaunCb:y (4)8 !

E~ipment

Jones 100 50

!

Laundry Revenue 1(8)

150

Tele~hone ~nse (12) 10 I

III.

TRIAL Quick

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BALANCE

Clean Laundry

Service Trial Balance September 30, 1991

Cash Accounts Receivable Prepaid Advertising Laundry Supplies Laundry Equipment Accounts Payable Unearned Laundry Revenue Capital, Darin Jones Withdrawals, Darin Jones Laundry Revenue Washer/Dryer Expense Telephone Expense

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$117 5 50 2S 48 $ 30 20 150 20 150 7S -ll. $350

$350

Note: Transaction No.1 has been formally journalized and posted below. PR stands for Post Reference. The relevant account number or General Journal page number is placed in the PR column at the time of posting.

IV. DATE

ACCOUNTTITLE

GENERAL JOURNAL

AND EXPLANATION

PR

Page DEBIT

Sept.

1

Cash

1

Capital, To record

Darin cash

Sept.

Sept.

00 100

00

investment.

GENERAL LEDGER CASH PR

EXPLANATION 1

DATE

100

100

Jones

v. DATE

CREDIT

II

I

1

I

ACCOUNT NO.1 DEBIT II

100

l");l\.RTN r(')N'R PR DEBIT

EXPLANATION 1

1

BALANCE

CREDIT I

00

100

NO lO( BALANCE

CREDIT 100

00

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9

00

100

00

UNIT 3

CASH VERSUS ACCRUAL ACCOUNTING

I. Introduction A. The income statement measures business activity. B. This activity affects the financial condition of a business as pictured by the balance sheet. C. Procedural choices exist when measuring business activity. 1. For example, there are a number of inventory methods to choose from when valuing inventory. Each results in a different value for ending inventory, a different cost of goods sold, a different gross profit, and a different measure of income. All for the same business activity. 2. Different possible measures of business activity lead to different possible financial pictures for the same company. 3. Understanding these procedural choices and their effect on the financial picture of a company are an important aspect of accounting. II. Recognizing Revenue and Expenses A. In accounting, recognition is when a financial activity is recorded and becomes part of the financial statements. B. Recognizing revenue and expenses determines their distribution to particular accounting periods. Profit is thus being allocated among periods. 1. How do you account for goods sold for $25,000 in December 1996, which were paid for in March 1997, if the accounting period ends on December 31, 1996? The goods were gone when the 1996 balance sheet was made, but the money did not come in until 1997. 2. How do you account for a $7,000 computer paid for in November that will last three years? III. Cash Basis Accounting A. Cash basis accounting records revenue and expenses when cash enters and leaves the business. B. Advantages of cash basis accounting 1. It is easy to do. 2. It is objective, with few choices to make. Cash either comes in or goes out, period! C. Disadvantages of cash basis accounting 1. No attempt is made to match an expense with the revenue it generates. This means that the income statement and balance sheet may not be good pictures of recent business activity and present business conditions. 2. For example, the cash purchase of an expensive computer will all be charged in the year of purchase, even though it will last a number of years. This means that income in the year of purchase would be understated and income would be overstated in the following years. 3. When business activity involves inventory assets, cash basis accounting is not. allowed for income tax purposes by the Internal Revenue Service.

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16 to help with many popular software programs. Software Tutorial Internet Library has material

IV. Accrual Basis Accounting A. Accrual basis accounting records the financial effects of a business activity in the period the effect occurs. 1. Revenue is recognized (recorded) when earned (the goods were legally transferred or the service performed). a. Cash may come in before revenue is earned, as with a subscription magazine. b. Cash may come in when revenue is earned, as with the sale of a Domino's pizza. c. Cash may come in after revenue is earned, as with the acceptance of a credit card for the sale of a television. d. In all cases revenue is earned when the item changes legal ownership. 2. Expenses are recognized when their benefit is received. a. Cash may go out before the benefit, as with the payment of next year's annual property taxes in September. b. Cash may go out when the benefit is received, as with the payment of a bridge toll. c. Cash may go out after the benefit is received, as with the payment of this period's payroll in the next period. d. In all cases the expense is recorded when the benefit is received. 3. Accrual accounting is based on matching an expense with the revenue it helps generate (matching principle). 4. When an accounting activity spans more than one accounting period, an adjustment is needed at the end of the first period to assure that the revenue is recorded when earned and the expenses are recognized with their benefit. B. Accruals and deferrals 1. Accruals and deferrals are required to conform with the matching principle. 2. Accruals are needed when something has affected the income statement and is unrecorded. a. Accrued revenues have been earned but not recorded. Example: Construction work has been done but not received. It must be recorded with the amount to be received reported as construction revenue on the income statement and accounts receivable on the balance sheet. b. Accrued expenses have been incurred but not recorded. Example: Salaries are earned by employees but not paid. They must be recorded with the a~ount to be paid reported as salaries expense on the income statement and salaries payable on the balance sheet. 3. Deferrals refer to situations where cash is received or paid and the income statement has not been affected. a. Deferred revenue has been received in advance. Example: Revenue from a two-year magazine subscription is received in October and the first magazine won't be sent until next year. This deferred revenue is reported as the liability unearned subscription revenue on the balance sheet. b. Deferred expenses have been paid in advance. Example: Liability insurance for one year is paid in March and coverage begins in April. This deferred expense is reported as the asset prepaid insurance on the balance sheet. C. The advantages and disadvantages of accrual basis accounting 1. Accrual accounting measures current income more accurately than the cash method. a. This means that the balance sheet is a more accurate estimate of financial position (value). b. Accurate, current information makes it easier to predict future income and financial position. 2. Accrual accounting is difficult to understand. a. Confusion exists because net income does not equal the period's change in cash. b. The cash balance of a company with high income may even decrease during the year. c. For example, a rapidly growing, profitable retailer may face a shortage of cash for many reasons. 1) Rapid growth often requires large inventories. New retailers often find that suppliers will not grant credit. This combination increases cash outflows. 2) Gaining market share may require a retailer to grant easy credit terms. This decreases cash inflows. 3) As a result, a very successful business may not have adequate cash.

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UNIT 4

ADJUSTMENTS, WORKSHEET, AND STATEMENTS

Adjusting Entries are needed because it is uneconomical to make changes daily to some accounts, and for others, vital information is not known until the end of the account period. When analyzing these September 30 Adjusting Entries, consider the relevant account balances listed in the Trial Balance, the change described in the

transaction descriptions, and the relevant Journal Entries on page

8.

II.

DEBITS AND CREDITS

I.

TRIAL BALANCE

Quick

~ ~R.I

+

LIABILITIES CR.. DR. + I

CR..

OWNER'S DR.

-

WITHDRAWAlS

+

I

REVENUE DR. CR.. - I +

EXPENSES

~R'I~'

Clean Laundry Se:z:vice Trial Balance September 30, 1991

EOUITY CR..

~R'I CR..

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Cash Accounts Receivable Prepaid Advertising Laundry Supplies Laundry Equipment Accounts Payable Unearned Laundry Revenue Capital, Darin Jones Withdrawals, Darin Jones Laundry Revenue Washer7DI:yer

Expense

Telephone Expense

Sample Problem Adjustments

150 75 $350

$350

JOURNALIZING TRANSACTIONS

Liabilities

+

Owner IS Equity

a. One month of scheduled advertising appeared in the school newspaper. See transaction 2 page 8. Prepaid Advertising

DR.

Advertising Expense

10

10

I

b. A count of Laundry SUpplies revealed $5 worth on hand.

Laun~ 20

Laundry Sqpplies I

20

- Wednesday, September 30, 1991

ANALYZING TRANSACTIONS

I

$ 30 20 150

ADJUSTING JOURNAL ENTRIES

III.

Assets

$117 5 50 25 48

20

~ly

Expense

a. Advertising Expense Prepaid Advertising To record advertising expired.

CR..

10 10

b. Laundry Supply Expense 20 Laundry Supplies To record Laundry Supplies used.

20

c. Depreciation was taken on $48 of equipment with a useful life of 4 years. AcCt.U1lUlated

Depreciation Expense, Laundry Eq\l:i,pment

Depreciation,

Laundty ~ipment

I

1

1

I

Note: Depreciation is accumulated and subtracted from the relevant asset on the Balance Sheet.

c. Depreciation Expense, Laundry Equipment 1 Accumulated Depreciation, Laundry Equipment September's Depreciation

1

recorded.

d. On Friday, October 2nd, Darin would pay his first enployee, who worked Monday, Wednesday and Friday, $15 for the week. Salaries Payable I 10

e.

Laundry

Se:z:vices for one

of the

two students

Salaries Expense 10 I who had paid

d. SalariesExpense

10

Salaries Payable To record salaries earned but not paid.

10

in advance had been performed as of 9/30/91. Unearned 10 f.

Laundry

I

Revenue

Laundty

I

Revenue 10

e. Unearned Laundry Revenue Laundry Revenue To record Laundry Fees earned.

10

f. Accounts Receivable Laundry Revenue To record Laundry Fees earned.

30

10

On Tuesday, September 29, services had been finished for 3 studentswho promised to pay $10 each on 10/5. Accounts Receivable 30 I

30 Laun&:y Revenue

18

30

IV.

WORKSHEET

A worksheet begins with a Trial Balance. Adjustments based upon data accumulated during the period are made. Horizontal extensions, with like balances being added and unlike balances being subtracted, result in an Adjusted Trial Balance. Each account is then extended to the proper (similar) column of the Income Statement or Balance Sheet. Income is then added to both the Income Statement and Balance Sheet to prove the Worksheet. r

I I ICash IAccounts

Receivable

Adjustments (f)

30 (a) 10 M..2..Q

1

Prepaid Advertising Launfuy SttPplies I Laundry Equipment IAccounts Payable 1Unearned Laundry Revenue

Trip.l Balance 117 5 50 2..5.

48 30 20 J.5.Q.

I

Capital. Darin Jones - Darin Jones Laundry Revenue

20

1

IWithdrawals

(e)

10

150

(e) (f)

I

1Washer/Dryer

75 lQ 350

Expense

[TelePhone ~e I I

350

Laundry Supplies Expense

(a) (b)

10 20

Depreciation Expense, LaundJ:y Equ:i,pment

i.cl

1

IAdvertising

Expense

I

IAccumulated

I

I

I I I I

35 40 5

48

I I

30 10

.liLl 20

1

190

1

I

75 .lQ

75 12

10 20

10 20

I

I I I I I II

.1

.....l

I

Depreciation,

(c)

Laundry Equipment (d)

Salaries Expense

ISalaries I

10 30

1 Balance' Sheet I 117 I

Income Statement

Adjusted Trial Balance 117 35 40 5 48 30 10 150 20 190

1

1

10

10

-

Payable

1

.Ml l.Q. Bl__Rl

,

10

--

JQ 391

391

126

I

190

--H 190

I

l

190...

265

JQ I 201 I

265

--H 1 26.5 II

Note: Income represents the net changes in assets and liabilities occurring during the period. Because Revenue (asset increases) were greater than expenses (asset decreases or liability increases), the debit column of the Balance Sheet is higher than the credit column by an amount equal to net income. This occurred because equity changes have been temporarily stored in Income Statement accounts. The Closing Process, explained in the next unit, will formally increase Owner's Equity by the proper amount. .

V.

ACCOUNTING STATEMENTS r I

1

'arranged to show how Balance 'Sheet accounts come from the top of the Trial Balance, and

I

IncomeStatementaccounts come from the bottomof the Trial Balance. I

I

r

I

I

1

I

I

I

1

I

I

I

I

I

r

I 1 I

Quick Clean LaundryService Income Statement Ended

Sept.

30,

1991

I

I

Revenue: Laundry Revenue

IAccounts Receivable I Prepaid Advertising ILaundry Supplies Laundry Equipment AccurmJlated Depreciation, j Laundry Equipment IAccounts Payable ISalaries Payable

Darin Jones ILaundry Revenue Advertising Expense Salaries Expense I Washer/Dryer Expense ITelephone Expense ILaundry Supply Expense Depreciation Expense, Laundry Equipment

I

I

I

I

I

I

Operating Expenses: Advertising Salaries

$10 10 75 10 20

Washer/Dryer Telephone Laundry Supplies Depreciation,

I

Laundry Equipment Total Operating Net Income

I

--1. Expenses

~I $ 64

I ,

,

[

20 190

I

10 10 75 10 20

~

Current Assets:

Cash Accounts Receivable PrepaidAdvertising Laundry Supplies Plant and Equipment: Laundry Equipment Less AccurmJlated

$117

35 40 5

I

1

1

I

I

I

-1.

,

---fl

$244 -I

LIABILITIES Liabilities:

CUrrent

I I I I I I

I

$48

11 Depreciation 301 Total Assets 10 10 1501

$391

!

I

$

I

I

,

,

Unearned Laundry Revenue Capital, Darin Jones

ASSETS

I

$117 35 40 5 48

IWithdrawals,

$190

I

I

I Cash

1

For the Month

j

Quick Clean Laundry Service Adjusted Trial Balance September 30, 1991

,

1

Note: SectionV hasbeen

1

I I

1

Quick Clean Laundry Service Balance Sheet September 30, 1991

I 1

1 I

Accounts Payable Salaries Payable Unearned Laundry Revenue Total CUrrent Liabilities

$ 30 10

I

I

~, $ 50 , I

OWNER

I

S EQUITY

I I

J $3911

Capital Sept. 1 Net Income Withdrawals

Capital Sept. 30 Total Liabilities+ Owner

I

s Equity

$150

$64

-2.Q...M

~I $244

I I I I 1

Note: Now that the concept of normal balances has been fIrmly established; that is assets and expenses have debit balances and revenues, liabilities, equity, and contra assets (accumulated depreciation) have credit balances, it will no longer be necessary to restrict statement presentations to two columns with debit balances always to the left of credit balances. The above statements have been so constructed. 19

UNIT 5

COMPLETING THE ACCOUNTING CYCLE

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I. ACCOUNTING STATEMENTS

Quick

Clean Laundry Service Balance Sheet September 30, 1991

ASSETS Current Assets: Cash Accounts Receivable Prepaid Advertising Laundry Supplies Plant and Equipment: Laundry Equipment Less Accumulated Depreciation Total Assets

$48 ---1. -fl $244

Quick For

~

$190

Revenue

SalariesExpense

$75

10 10 20

1 1.Q.

~ $ 64

Total Operating Expenses

Net Income

$244

III.

CLOSING PROCESS LOGIC

Owner

1

s Equity

20 I

Bal. (3)

CLOSING JOURNAL ENTRIES

Sept. 30

Step 1 Reduce Expenses to zero Step 2 Reduce Revenues to zero Step 3 Reduce Income Summary to zero Step 4 Reduce Withdrawals to zero (4)

the

Operating Expenses: Washer/Dryer Expense Telephone Expense Advertising Expense Laundry Supply Expense Depreciation Expense

EQUITY

$150 Capital Sept.1 Income $64 Withdrawals -2.Q. ~ Capital Sept. 30 Total Liabilities + Owner's Equity

Clean Laundry Service Income Statement Month Ended Sept. 30, 1991

Revenue: Laundry

$ 30 10 ---1..Q. $ 50

Total Current Liabilities

II.

Financial Statements have been made, amounts temporarily stored in expense, revenue, and the withdrawals accounts may be moved to the equity account. A new account entitled Income Summary will be used to calculate income which will then be moved to Owner's Equity.

$117 35 40 5

LIABILITIES Current Liabilities: Accounts Payable Salaries Payable Unearned Laundry Revenue OWNER'S

Now that

150 64

Income Summary Washer/Dryer Expense Telephone Expense Advertising Expense Laundry Supply Expense Depreciation Expense Salaries Expense

Sept. 30 Laundry Income

DR. 126

CR. 75 10 10 20 1 10

190

Revenue Summary

190

Withdrawals

Bal.

20

I

(4)

Income

20

(1)126 (3) 64 126

Summary (2) 190

I

(1) 126

Capital,

Darin

64

Jones

Sept. 30 Capital,Darin Jones

(2)190 IBal. 190

IV.

64

Sept. 30 Income Summary

Revenue

~es

Bal.

I

20 20

Withdrawals, Darin Jones

POST-CLOSING TRIAL BALANCE Our 28 Free Internet Libraries have academic and career materials for students, teachers, and professional.

Quick Clean Laundry Service Post-Closing Trial Balance September30, 1991 Cash Accounts Receivable Prepaid Advertising Laundry Supplies Laundry Equipment Accumulated Depreciation, Laundry Equipment Accounts Payable Salaries Payable Unearned Laundry Revenue Capital, Darin Jones 24

$117 35 40 5 48 $

$245

1 30 10 10

~ $245

Note: The closing of all expense and revenue accounts results in a Post-Closing Trial Balance consisting of only Balance Sheet accounts.

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v. REVERSmG

ENTRIES

Adjusting entries sometimes require a unique nonroutine entry early in the next cycle to complete a particular transaction. The September 30th payroll adjustment of $10 to Salaries Expense and Salaries Payable associated with the $15 weekly payroll is an example. A unique entry must be made on the October 2nd payday to complete the payroll. Reversing the September 30 adjustment on October 1 will allow the regular payroll entry on October 2 to complete the payroll. Regardless of the alternative chosen, $10 is charged to Salaries Expense in September, $5 in October, and the salary liability has been brought to zero. Paying

Salaries- No Reversing Entry

DR. 10

Sept. 30 SalariesExpense Salaries

Oct.

Payable

Paying SalarJ.es

CR.

Sept.

10

5 10

2 SalariesExpense SalariesPayable Cash

15

30

Oct.

1

Oct.

2

-

ReversingEntry

DR. 10

Salaries Expense Salaries Payable Salaries Payable Salaries Expense Salaries Expense Cash

CR. 10

10 10 15 15

VI. CORRECTING ENTRIES Erasing is never allowed. A line may be drawn through journal entry errors discovered before posting. After posting, errors must be corrected with journal entries. If a $5 purchase of Laundry Supplies had been posted to Laundry Equipment, the following Correcting Entry would be necessary: Oct. 5

Laundry Supplies Laundry Equipment

VII. 1. Journal Entries 2. Post to Ledger 3. Trial Balance

VIII.

THE THIRTEEN

4. Adjusting Entries 5. Post to Ledger 6. Adjusted Trial Balance

OWNER I S

DR. CR. 5 5

ACCOUNTING

STEPS

9. Closing Entries 10. Post to Ledger 11. Post-Closing Trial

7. Income Statement 8. Balance Sheet

12. Reversing Entries 13. Correcting

Entries

Balance

EQUITY

VS.

STOCKHOLDERS I EQUITY

Sole proprietorships and partnerships account for Owner's Equity in essentially the same manner, only the number of capital and withdrawal accounts differ. Corporations, on the other hand, replace the capital account with contributed capital (stock) accounts, use dividends to distribute equity to owners, and accumulated undistributed profits in the Retained Earnings account. September's equity transactions for Quick Clean contrasting a sole proprietorship with a corporation appear below. Also contrasted are the equity sections of the Balance Sheet. STARTING A BUSINESS

Cash Capital,Darin Jones

DR. 150

DR. 150 Cash Comnon Stock Issued 150 shares of $1 par Common Stock.

CR. 150

CR.

150

RECORDING EARNINGS Income

SUI!UTlary

64

Income

64

Capital, Darin Jones

SUI!UTlary

64

64

Retained Earnings DISTlUBUTING EARNINGS

Withdrawals,Darin Jones Cash

20

Retained Earnings Dividend Payable Declared a 13 1/3<::per share stock dividend. Dividend Payable

20

20 Capital,Darin Jones Withdrawals,Darin Jones

20

20 20 20

Cash

20

EQUITY SECTION OF BALANCE SHEET

OWner's Equity Darin Jones, Capital,September1, 1992

Net Income

Withdrawals Capital,September30

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Stockholders I Equity $150

$ 64 2Q. --M S194

25

Comnon Stock, $1 par 150 shares authorized and outstanding Retained Earnings Total Stockholders' Equity

$150

-H

S194

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UNIT 6 MERCHANDISING A merchandising company is a Retailer. Retailers buy merchandise from manufacturers and/or wholesalers, mark the merchandise up enough to cover operating expenses and make a profit. Merchandise bought for re-sale is charged to Purchases. Cost of merchandise sold is calculated by subtracting Ending Inventory from Beginning Inventory plus Net Purchases (including

I.

LOGIC OF MERCHANDISING DEBITS AND CREDITS Debits

Credits <

>

Note: Sales and Purchases are opposites and therefore have opposite nonnal balances. Their return and discount accounts also have opposite

Sales

I

I

Purchases

I

transportation costs). Sales Discounts and Purchase Discounts are given to those who pay early. An example of discount terms would be 2/10,n30 which means 2% is taken off if paid within 10 days, otherwise pay within 30 days. Unsatisfactory goods are accounted for by charging Sales Returns and Allowance or Purchase Returns and Allowance.

Sales Returns Sales Discounts

<

>

Purchase Returns Purchase Discounts

balances.

DARIN'S MUSIC EMPORIUM

Darin Jones graduated in December of 1994, and after a brief vacation, took the accumulation from his Laundry business and invested $10,000 in Darin's Music Emporium, a retailer of computerized musical instruments. Sample Journal Entries and 1995 statements along with Closing Entries appear below. Please read transaction descriptions first.

II. Jan.

3

READ FIRST-->

Merchandisepurchased from L. Co.

Jan.

Jan.

Jan.

Jan.

7

11

12

14

Jan. 18

JOURNAL ENTRIES

Purchases Accounts Payable invoice

4000 4000

for $4,000 on credit dated

1/1,

terms

2/10,n30. 500

Accounts Payable Purchase Returns and Allowances Returned $500 of merchandise purchased

500 1/1.

Accounts Payable Purchase Discount Cash Paid L. Co. for purchase of 1/1 less return and discount.

3500

Cash Sales Recorded

2000 Sales

of $2,000.

Accounts Receivable Sales Recorded credit sale of $5,000 to M. Co. terms 2/10,n30.

5000 5000

Sales Returns and Allowances

100

Accounts

Receivable M. Co. returned $100 of merchandise Jan.

24

Cash Sales Discount Accounts Receivable less

2

Feb. 28

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1/14.

4900

discount.

return,

Purchases Accounts Payable fromZ Co. with a value Merchandise purchased of $4,000, terms 1/10,n30 Net Method.

3960 3960

-

Feb. 28

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4802 98

Receivedpayment from M. Co. less Feb.

100 purchased

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70 3430

2000 Cash

Note: Related transactions have been boxed.

3960 Accounts Payable Purchase Discount Lost 40 Cash Paid Z Co. for purchase of 2/2 plus discount lost. Transportation-In Cash Paid Transportation charges of $50 for merchandise purchased 2/2.

30

4000

50 50

Note: The net method of recording purchases assumes the Purchase Discount will be taken. If it is not taken, a Purchase Discount Lost is recorded. Purchase Discounts Lost are not considered an operating expense and are reported after operating income in an Income Statement section entitled Other Revenue and Expenses.

III.

LOGIC OF INCOME STATEMENT

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IV.

Gross Sales Gross Profit

Qperati~ ~es

-

Inc~

from Operations

v.

INCOME STATEMENT Statement

For the Year Ended December 31, ,/

1995

ASSETS CUrrent Assets:

Sales Revenue: Gross Sales Sales Retuxns and Allowances Sales Discounts Net Sales

$98,000 $1,000 2...QQQ

.hQ.Q.Q

$95,000

Cost of Goods Sold: Merchandise Inventory,

$10,000 January 1, 1995 Purchases $38,000 PurchaseRetuxns and Allowances $1,000 PurchaseDiscounts~ ...J QQQ. Net Purchases $35,000 Plus Transportation-In ~

Cash Accounts Receivable Office Supplies Merchandise Inventory Prepaid Rent Total CUrrent Assets

Merchandise Inventory, December 31, 1995 Cost of Goods Sold 2L..QQQ 2.5...Q.QQ Gross Profit $70,000 Operating Expenses: Selling Expenses $22,500 General and Administrative 'Z~ Expenses 3JL..Q.Q.Q Total Operating Expenses $40.000 Income from Operations Note: Being a Sole Proprietorship, no federal income tax is owed by the business. Darin will file an individual return.

DR.

$ $

6,000 ---2.QQ $5,400 5,000 L..QQQ

9.400 $36.000

CUrrent Liabilities: Accounts Payable Total Liabilities

S22.000 $22,000 OWNER'S EQUITY $10,000

Darin Jones Capital,January 1, 1995 Net Income Withdrawals Increase in Capital

$40,000 I

--L.Q.QQ 14.000 $36.000

Darin Jones Capital,December 31,

1995 Total Liabilities and Owner's Equity

CLOSING ENTRIES CR.

82,000

Beginning Inventory Sales Retuxns and Allowances Sales Discounts Purchases Transportation-In Selling Expenses General and Administrative Expenses

$26,600

LIABILITIES

$46,000

VI.

$4,000 1,000 250 21,000

Plant and Equipment: Store Equipment Less Accumulated Depreciation Office Equipment Less Accumulated Depreciation Total Assets

~

Costof GoodsPurchased

Goods Availablefor Sale

Dec. 31 Income Summary

BALANCE SHEET' Darin's Music Emporium Balance Sheet December 31, 1995

Darin I s Music Etrporium Income

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- Cost of Goods Sold

10,000 1,000 2,000 38,000 1,000 22,500 7,500

DR.

Dec. 31 Ending Inventory Sales PurchaseRetuxns and Allowances PurchaseDiscounts Income Surrmary Dec. 31 Income Surrmary Capital, Darin Jones Dec. 31 Capital, Darin Jones Withdrawals, Darin Jones

CR.

21,000 98,000 1,000 2,000 122,000 40,000 36,000

40,000 36,000

Note: An al ternative method to closing Beginning Inventory with a $10,000 credit and creating the Ending Inventory with a $21,000 debit would be to adjust inventory with an $11,000 debit. Either adjusts for all purchases being treated as an expense.

Note: When the list price of an item does not represent its true price and a discount is stated, said discount, called a trade discount, is used to lower the historical cost of the item.

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UNIT 7

ACCOUNTING

Accounting Systems are designed to eliminate much of the duplication involved in a manual accounting system. Using carbonized receipts, special journals as shown here, and ledger cards allow for much of the accounting

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SYSTEMS

work to be accomplished as receipts are processed and checks written. Special journals are important because they provide the basis for computerized accounting systems.

Special Journal: Purchases Journal is used for Credit Purchases Sales Journal is for Credit Sales Cash Payments Journal is used when Cash is Credited Cash Receipts Journal is used when Cash is Debited

Note: The following transactions were originally recorded in the General Journal on page 30. In this section, when possible, they have been recorded in special journals. The abbreviation of the journal used follows each transaction. 1/3 1/7 1/11 1/12 1/14 1/18 1/24

Purchased merchandise for $4,000 on credit from L. Company, invoice dated 1/1, terms 2/10,n30. PJ Return $500 of defective merchandise purchased 1/1 from L. Company. GJ Paid L. Company for purchases of 1/1 less return and discount. CPJ DA'IE Recorded Cash Sales of $2,000. CRJ 1/3 Sold $5,000 of merchandise to M. company termS 2/10,n30. SJ 2/2 M. Company returned $100 of merchandise purchased 1/14. GJ M. Company paid for sale of 1/14 less return and discount. CRJ

Note: Only credit purchases are allowed in the Purchase Journal.

PURCHASES

JOURNAL

ACCOUNT

Page 1

'IERMS

POST REF.

AMOUNT

,/

4,000

2/10,n30 1/10,n30

L. Company Z. Company

./

7,960 (51) (31)

CASH PA"2MENTS JOURNAL

I

DATE I EXPLANATIOO 1/11 2/28

Paid Paid

L. Co. Z. Co.

2/28 3/5

Paid Paid

Trans. Travel

II

- In

I'RRTl

TS

DEBITS

POST

PURCHASE

ACCOUNTS

CASH DISCOUNTS REF. 1 2 3 4

I

50 --ZQQ 7,680

PAYABLE

./ ./

70

3,430 4,000

PURCHASES

TRAVEL EXPENSE

(53)

I

I

OTHER DEBITS

REF. POST

Purchase Discount Lost Trans. In

3,500 3,960

70

(1)

Page 1

7,460

2QQ. 200

(31)

(68)

AMOUNT I

70 55

40 50 I

90 I

Note: When posting, place the number of the ledger account below the amount posted. A check (./) should be placed in the Post Reference Column to indicate posting to a Subsidiary Ledger.

GENERAL LEDGER (1)

CASH

ACCOUNTS

RECEIVABLE

11,000 Bal.

15,122

22.802

(3)

f.5.1l

PURCHASES

10,900

I

--1.Q.Q. I

7.680

7,960 PURCHASE

I

RETURNS

I

(52)

500

ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER

PURCHASE PIi~ M

5,000

CO!!1PaIl¥

A

{531

CO!!1Pany

6.000 It~gg

I

6.000

I

TRANS~iArCN-TN (0<1 TRAVEL EXPENSES

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200

36

I

PURCHASE DISCOUNT 40

(68)

I

LOST

(70)

-

used.PJ

2/2 Purchase $4,000of merchandisefrom Z. Company,terms 1/10,n30 Net Method 2/28 Paid Z. Company for purchase of 2/2 plus purchase discount lost. CPJ 2/28 Paid transportation charges of $50 for merchandise purchased 10/2. CPJ Addi tiona.1

Signed a $10,000 Note Payable with First Bank Corporation, cash deposited today. CRJ Sold $6,000 of merchandise to A. Company terms 2/10,n30. SJ Paid Travel Expense of $200. CPJ A. Company paid today. CRJ Note: The General Journal is used for entries that do not easily fit into special journal. Also included are Adjusting, Closing, Reversing, and Correcting Entries.

Note: Only Credit Sales are allowed in the Sales Journal.

SALES

DATE

ACCOUNT

1/14 3/2

DATE

1 2

J' J'

5,000

1/7

Accounts Payable Purchase Returns

11,000 (3) (41)

1/18

Sales Returns Accounts Receivable M. Co.

CASH RECEIPTS

JOURNAL

I

Weekly Sales M. Company Signed Note A. Company

CASH 2,000 4,802 10,000 22,802 (1)

POST REF.

SALES DISCOUNTS

NOTES PAYABLE I

J'

ACCOUNTS

I i

i

I

4,000

SALES

I

Notes Payable

....hQ.QQ

100

I

32

AMOUNT

10,000 10,000

2,000 (40)

10,900 (3)

Darin

I

I

I

(32)

11,000

I

=~ir

I

s Music

Emporium

Trial Balance March 31, 1996

(41)

10,000

3.960

100

OTHER I POST CREDITS REF.

CASH SALES

2,000

f.Ul

4.000

42 3

(40)

SALES RETURNS AND ALLOWANCES (42) 100

~

-

500

4,900 I

98 (43)

I

ACCOCINTSPAYABLE SUBSIDIARY LEDGER L. CO\1:Pany Z. Corqpany

500

2,000

CREDIT

(32)

31 52

- L. Co.

CR

Page 1

RECEIVABLE

J'

98

I

(31)

DR

('R1<TIIT

CASH SALES

ACCOUNTS PAYABLE 7,460 I 7,960 ~ ~ Bal. -0-

PR

EXPLANATION

AMOUNT

a

Page1

JOURNAL

POST REF.

DEBT'i'

EXPLANATION

1/12 1/24 3/1 3/30

GENERAL

INVOICE NUMBER

M. Conpany A. Company

I

Page1

JOURNAL

I

3/1 3/2 3/5 3/30

Transactions

Cash

$ 15,122

Purchases Purchase Returns Purchase Discounts

7,960

500 70

$

Transportation-In TravelExpense

50 200 Purchase Discount Lost 40 Notes Payable Cash Sales Credit Sales Sales Returns and 100 Allowances Sales Discounts ~ ~5JQ

10,000 2,000 11,000

~570

3.960

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Our 28 Free Internet Libraries have academic and career materials for students, teachers, and professional.

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