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Principles of Accounting, Volume 1: Financial Accounting

3.5 Use Journal Entries to Record Transactions and Post to T-Accounts

Principles of Accounting, Volume 1: Financial Accounting3.5 Use Journal Entries to Record Transactions and Post to T-Accounts
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  1. Preface
  2. 1 Role of Accounting in Society
    1. Why It Matters
    2. 1.1 Explain the Importance of Accounting and Distinguish between Financial and Managerial Accounting
    3. 1.2 Identify Users of Accounting Information and How They Apply Information
    4. 1.3 Describe Typical Accounting Activities and the Role Accountants Play in Identifying, Recording, and Reporting Financial Activities
    5. 1.4 Explain Why Accounting Is Important to Business Stakeholders
    6. 1.5 Describe the Varied Career Paths Open to Individuals with an Accounting Education
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
  3. 2 Introduction to Financial Statements
    1. Why It Matters
    2. 2.1 Describe the Income Statement, Statement of Owner’s Equity, Balance Sheet, and Statement of Cash Flows, and How They Interrelate
    3. 2.2 Define, Explain, and Provide Examples of Current and Noncurrent Assets, Current and Noncurrent Liabilities, Equity, Revenues, and Expenses
    4. 2.3 Prepare an Income Statement, Statement of Owner’s Equity, and Balance Sheet
    5. Key Terms
    6. Summary
    7. Multiple Choice
    8. Questions
    9. Exercise Set A
    10. Exercise Set B
    11. Problem Set A
    12. Problem Set B
    13. Thought Provokers
  4. 3 Analyzing and Recording Transactions
    1. Why It Matters
    2. 3.1 Describe Principles, Assumptions, and Concepts of Accounting and Their Relationship to Financial Statements
    3. 3.2 Define and Describe the Expanded Accounting Equation and Its Relationship to Analyzing Transactions
    4. 3.3 Define and Describe the Initial Steps in the Accounting Cycle
    5. 3.4 Analyze Business Transactions Using the Accounting Equation and Show the Impact of Business Transactions on Financial Statements
    6. 3.5 Use Journal Entries to Record Transactions and Post to T-Accounts
    7. 3.6 Prepare a Trial Balance
    8. Key Terms
    9. Summary
    10. Multiple Choice
    11. Questions
    12. Exercise Set A
    13. Exercise Set B
    14. Problem Set A
    15. Problem Set B
    16. Thought Provokers
  5. 4 The Adjustment Process
    1. Why It Matters
    2. 4.1 Explain the Concepts and Guidelines Affecting Adjusting Entries
    3. 4.2 Discuss the Adjustment Process and Illustrate Common Types of Adjusting Entries
    4. 4.3 Record and Post the Common Types of Adjusting Entries
    5. 4.4 Use the Ledger Balances to Prepare an Adjusted Trial Balance
    6. 4.5 Prepare Financial Statements Using the Adjusted Trial Balance
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  6. 5 Completing the Accounting Cycle
    1. Why It Matters
    2. 5.1 Describe and Prepare Closing Entries for a Business
    3. 5.2 Prepare a Post-Closing Trial Balance
    4. 5.3 Apply the Results from the Adjusted Trial Balance to Compute Current Ratio and Working Capital Balance, and Explain How These Measures Represent Liquidity
    5. 5.4 Appendix: Complete a Comprehensive Accounting Cycle for a Business
    6. Key Terms
    7. Summary
    8. Multiple Choice
    9. Questions
    10. Exercise Set A
    11. Exercise Set B
    12. Problem Set A
    13. Problem Set B
    14. Thought Provokers
  7. 6 Merchandising Transactions
    1. Why It Matters
    2. 6.1 Compare and Contrast Merchandising versus Service Activities and Transactions
    3. 6.2 Compare and Contrast Perpetual versus Periodic Inventory Systems
    4. 6.3 Analyze and Record Transactions for Merchandise Purchases Using the Perpetual Inventory System
    5. 6.4 Analyze and Record Transactions for the Sale of Merchandise Using the Perpetual Inventory System
    6. 6.5 Discuss and Record Transactions Applying the Two Commonly Used Freight-In Methods
    7. 6.6 Describe and Prepare Multi-Step and Simple Income Statements for Merchandising Companies
    8. 6.7 Appendix: Analyze and Record Transactions for Merchandise Purchases and Sales Using the Periodic Inventory System
    9. Key Terms
    10. Summary
    11. Multiple Choice
    12. Questions
    13. Exercise Set A
    14. Exercise Set B
    15. Problem Set A
    16. Problem Set B
    17. Thought Provokers
  8. 7 Accounting Information Systems
    1. Why It Matters
    2. 7.1 Define and Describe the Components of an Accounting Information System
    3. 7.2 Describe and Explain the Purpose of Special Journals and Their Importance to Stakeholders
    4. 7.3 Analyze and Journalize Transactions Using Special Journals
    5. 7.4 Prepare a Subsidiary Ledger
    6. 7.5 Describe Career Paths Open to Individuals with a Joint Education in Accounting and Information Systems
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  9. 8 Fraud, Internal Controls, and Cash
    1. Why It Matters
    2. 8.1 Analyze Fraud in the Accounting Workplace
    3. 8.2 Define and Explain Internal Controls and Their Purpose within an Organization
    4. 8.3 Describe Internal Controls within an Organization
    5. 8.4 Define the Purpose and Use of a Petty Cash Fund, and Prepare Petty Cash Journal Entries
    6. 8.5 Discuss Management Responsibilities for Maintaining Internal Controls within an Organization
    7. 8.6 Define the Purpose of a Bank Reconciliation, and Prepare a Bank Reconciliation and Its Associated Journal Entries
    8. 8.7 Describe Fraud in Financial Statements and Sarbanes-Oxley Act Requirements
    9. Key Terms
    10. Summary
    11. Multiple Choice
    12. Questions
    13. Exercise Set A
    14. Exercise Set B
    15. Problem Set A
    16. Problem Set B
    17. Thought Provokers
  10. 9 Accounting for Receivables
    1. Why It Matters
    2. 9.1 Explain the Revenue Recognition Principle and How It Relates to Current and Future Sales and Purchase Transactions
    3. 9.2 Account for Uncollectible Accounts Using the Balance Sheet and Income Statement Approaches
    4. 9.3 Determine the Efficiency of Receivables Management Using Financial Ratios
    5. 9.4 Discuss the Role of Accounting for Receivables in Earnings Management
    6. 9.5 Apply Revenue Recognition Principles to Long-Term Projects
    7. 9.6 Explain How Notes Receivable and Accounts Receivable Differ
    8. 9.7 Appendix: Comprehensive Example of Bad Debt Estimation
    9. Key Terms
    10. Summary
    11. Multiple Choice
    12. Questions
    13. Exercise Set A
    14. Exercise Set B
    15. Problem Set A
    16. Problem Set B
    17. Thought Provokers
  11. 10 Inventory
    1. Why It Matters
    2. 10.1 Describe and Demonstrate the Basic Inventory Valuation Methods and Their Cost Flow Assumptions
    3. 10.2 Calculate the Cost of Goods Sold and Ending Inventory Using the Periodic Method
    4. 10.3 Calculate the Cost of Goods Sold and Ending Inventory Using the Perpetual Method
    5. 10.4 Explain and Demonstrate the Impact of Inventory Valuation Errors on the Income Statement and Balance Sheet
    6. 10.5 Examine the Efficiency of Inventory Management Using Financial Ratios
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  12. 11 Long-Term Assets
    1. Why It Matters
    2. 11.1 Distinguish between Tangible and Intangible Assets
    3. 11.2 Analyze and Classify Capitalized Costs versus Expenses
    4. 11.3 Explain and Apply Depreciation Methods to Allocate Capitalized Costs
    5. 11.4 Describe Accounting for Intangible Assets and Record Related Transactions
    6. 11.5 Describe Some Special Issues in Accounting for Long-Term Assets
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  13. 12 Current Liabilities
    1. Why It Matters
    2. 12.1 Identify and Describe Current Liabilities
    3. 12.2 Analyze, Journalize, and Report Current Liabilities
    4. 12.3 Define and Apply Accounting Treatment for Contingent Liabilities
    5. 12.4 Prepare Journal Entries to Record Short-Term Notes Payable
    6. 12.5 Record Transactions Incurred in Preparing Payroll
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  14. 13 Long-Term Liabilities
    1. Why It Matters
    2. 13.1 Explain the Pricing of Long-Term Liabilities
    3. 13.2 Compute Amortization of Long-Term Liabilities Using the Effective-Interest Method
    4. 13.3 Prepare Journal Entries to Reflect the Life Cycle of Bonds
    5. 13.4 Appendix: Special Topics Related to Long-Term Liabilities
    6. Key Terms
    7. Summary
    8. Multiple Choice
    9. Questions
    10. Exercise Set A
    11. Exercise Set B
    12. Problem Set A
    13. Problem Set B
    14. Thought Provokers
  15. 14 Corporation Accounting
    1. Why It Matters
    2. 14.1 Explain the Process of Securing Equity Financing through the Issuance of Stock
    3. 14.2 Analyze and Record Transactions for the Issuance and Repurchase of Stock
    4. 14.3 Record Transactions and the Effects on Financial Statements for Cash Dividends, Property Dividends, Stock Dividends, and Stock Splits
    5. 14.4 Compare and Contrast Owners’ Equity versus Retained Earnings
    6. 14.5 Discuss the Applicability of Earnings per Share as a Method to Measure Performance
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  16. 15 Partnership Accounting
    1. Why It Matters
    2. 15.1 Describe the Advantages and Disadvantages of Organizing as a Partnership
    3. 15.2 Describe How a Partnership Is Created, Including the Associated Journal Entries
    4. 15.3 Compute and Allocate Partners’ Share of Income and Loss
    5. 15.4 Prepare Journal Entries to Record the Admission and Withdrawal of a Partner
    6. 15.5 Discuss and Record Entries for the Dissolution of a Partnership
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  17. 16 Statement of Cash Flows
    1. Why It Matters
    2. 16.1 Explain the Purpose of the Statement of Cash Flows
    3. 16.2 Differentiate between Operating, Investing, and Financing Activities
    4. 16.3 Prepare the Statement of Cash Flows Using the Indirect Method
    5. 16.4 Prepare the Completed Statement of Cash Flows Using the Indirect Method
    6. 16.5 Use Information from the Statement of Cash Flows to Prepare Ratios to Assess Liquidity and Solvency
    7. 16.6 Appendix: Prepare a Completed Statement of Cash Flows Using the Direct Method
    8. Key Terms
    9. Summary
    10. Multiple Choice
    11. Questions
    12. Exercise Set A
    13. Exercise Set B
    14. Problem Set A
    15. Problem Set B
    16. Thought Provokers
  18. Financial Statement Analysis
  19. Time Value of Money
  20. Suggested Resources
  21. Answer Key
    1. Chapter 1
    2. Chapter 2
    3. Chapter 3
    4. Chapter 4
    5. Chapter 5
    6. Chapter 6
    7. Chapter 7
    8. Chapter 8
    9. Chapter 9
    10. Chapter 10
    11. Chapter 11
    12. Chapter 12
    13. Chapter 13
    14. Chapter 14
    15. Chapter 15
    16. Chapter 16
  22. Index

When we introduced debits and credits, you learned about the usefulness of T-accounts as a graphic representation of any account in the general ledger. But before transactions are posted to the T-accounts, they are first recorded using special forms known as journals.

Journals

Accountants use special forms called journals to keep track of their business transactions. A journal is the first place information is entered into the accounting system. A journal is often referred to as the book of original entry because it is the place the information originally enters into the system. A journal keeps a historical account of all recordable transactions with which the company has engaged. In other words, a journal is similar to a diary for a business. When you enter information into a journal, we say you are journalizing the entry. Journaling the entry is the second step in the accounting cycle. Here is a picture of a journal.

A journal entry shows four columns labeled left to right: Date, Account, Debit, Credit. Under the column headings is a blank line with no entry.

You can see that a journal has columns labeled debit and credit. The debit is on the left side, and the credit is on the right. Let’s look at how we use a journal.

When filling in a journal, there are some rules you need to follow to improve journal entry organization.

Formatting When Recording Journal Entries

  • Include a date of when the transaction occurred.
  • The debit account title(s) always come first and on the left.
  • The credit account title(s) always come after all debit titles are entered, and on the right.
  • The titles of the credit accounts will be indented below the debit accounts.
  • You will have at least one debit (possibly more).
  • You will always have at least one credit (possibly more).
  • The dollar value of the debits must equal the dollar value of the credits or else the equation will go out of balance.
  • You will write a short description after each journal entry.
  • Skip a space after the description before starting the next journal entry.

An example journal entry format is as follows. It is not taken from previous examples but is intended to stand alone.

A journal entry dated April 1, 2018. Debit Cash, 5,000. Credit Common Stock, 5,000. Explanation: “Received cash in exchange for common stock.”

Note that this example has only one debit account and one credit account, which is considered a simple entry. A compound entry is when there is more than one account listed under the debit and/or credit column of a journal entry (as seen in the following).

A journal entry dated April 1, 2018. Debit Cash, 3,000, and Supplies, 2,000. Credit Common Stock, 5,000. Explanation: “Received cash and supplies in exchange for common stock.”

Notice that for this entry, the rules for recording journal entries have been followed. There is a date of April 1, 2018, the debit account titles are listed first with Cash and Supplies, the credit account title of Common Stock is indented after the debit account titles, there are at least one debit and one credit, the debit amounts equal the credit amount, and there is a short description of the transaction.

Let’s now look at a few transactions from Printing Plus and record their journal entries.

Recording Transactions

We now return to our company example of Printing Plus, Lynn Sanders’ printing service company. We will analyze and record each of the transactions for her business and discuss how this impacts the financial statements. Some of the listed transactions have been ones we have seen throughout this chapter. More detail for each of these transactions is provided, along with a few new transactions.

  1. On January 3, 2019, issues $20,000 shares of common stock for cash.
  2. On January 5, 2019, purchases equipment on account for $3,500, payment due within the month.
  3. On January 9, 2019, receives $4,000 cash in advance from a customer for services not yet rendered.
  4. On January 10, 2019, provides $5,500 in services to a customer who asks to be billed for the services.
  5. On January 12, 2019, pays a $300 utility bill with cash.
  6. On January 14, 2019, distributed $100 cash in dividends to stockholders.
  7. On January 17, 2019, receives $2,800 cash from a customer for services rendered.
  8. On January 18, 2019, paid in full, with cash, for the equipment purchase on January 5.
  9. On January 20, 2019, paid $3,600 cash in salaries expense to employees.
  10. On January 23, 2019, received cash payment in full from the customer on the January 10 transaction.
  11. On January 27, 2019, provides $1,200 in services to a customer who asks to be billed for the services.
  12. On January 30, 2019, purchases supplies on account for $500, payment due within three months.

Transaction 1: On January 3, 2019, issues $20,000 shares of common stock for cash.

Analysis:

  • This is a transaction that needs to be recorded, as Printing Plus has received money, and the stockholders have invested in the firm.
  • Printing Plus now has more cash. Cash is an asset, which in this case is increasing. Cash increases on the debit side.
  • When the company issues stock, stockholders purchase common stock, yielding a higher common stock figure than before issuance. The common stock account is increasing and affects equity. Looking at the expanded accounting equation, we see that Common Stock increases on the credit side.
A journal entry dated January 3, 2019. Debit Cash, 20,000. Credit Common Stock, 20,000. Explanation: “To recognize issuance of common stock.”

Impact on the financial statements: Both of these accounts are balance sheet accounts. You will see total assets increase and total stockholders’ equity will also increase, both by $20,000. With both totals increasing by $20,000, the accounting equation, and therefore our balance sheet, will be in balance. There is no effect on the income statement from this transaction as there were no revenues or expenses recorded.

Heading: Assets equal Liabilities plus Stockholders’ Equity. Below the heading: plus $20,000 under Assets; plus $0 under Liabilities; plus $20,000 under Stockholders’ Equity. Next: horizontal lines under Assets, Liabilities, and Stockholders’ Equity. A final line of totals: $20,000 equals $0 plus $20,000.

Transaction 2: On January 5, 2019, purchases equipment on account for $3,500, payment due within the month.

Analysis:

  • In this case, equipment is an asset that is increasing. It increases because Printing Plus now has more equipment than it did before. Assets increase on the debit side; therefore, the Equipment account would show a $3,500 debit.
  • The company did not pay for the equipment immediately. Lynn asked to be sent a bill for payment at a future date. This creates a liability for Printing Plus, who owes the supplier money for the equipment. Accounts Payable is used to recognize this liability. This liability is increasing, as the company now owes money to the supplier. A liability account increases on the credit side; therefore, Accounts Payable will increase on the credit side in the amount of $3,500.
A journal entry dated January 5, 2019. Debit Equipment, 3,500. Credit Accounts Payable, 3,500. Explanation: “To recognize purchase of equipment on account.”

Impact on the financial statements: Since both accounts in the entry are balance sheet accounts, you will see no effect on the income statement.

Heading: Assets equal Liabilities plus Stockholders’ Equity. Below the heading: plus $3,500 under Assets; plus $3,500 under Liabilities; plus $0 under Stockholders’ Equity. Next: horizontal lines under Assets, Liabilities, and Stockholders’ Equity. A final line of totals: $3,500 equals $3,500 plus $0.

Transaction 3: On January 9, 2019, receives $4,000 cash in advance from a customer for services not yet rendered.

Analysis:

  • Cash was received, thus increasing the Cash account. Cash is an asset that increases on the debit side.
  • Printing Plus has not yet provided the service, meaning it cannot recognize the revenue as earned. The company has a liability to the customer until it provides the service. The Unearned Revenue account would be used to recognize this liability. This is a liability the company did not have before, thus increasing this account. Liabilities increase on the credit side; thus, Unearned Revenue will recognize the $4,000 on the credit side.
A journal entry dated January 9, 2019. Debit Cash, 4,000. Credit Unearned Revenue, 4,000. Explanation: “To recognize receipt of customer advanced payment for services yet to be rendered.”

Impact on the financial statements: Since both accounts in the entry are balance sheet accounts, you will see no effect on the income statement.

Heading: Assets equal Liabilities plus Stockholders’ Equity. Below the heading: plus $4,000 under Assets; plus $4,000 under Liabilities; plus $0 under Stockholders’ Equity. Next: horizontal lines under Assets, Liabilities, and Stockholders’ Equity. A final line of totals: $4,000 equals $4,000 plus $0.

Transaction 4: On January 10, 2019, provides $5,500 in services to a customer who asks to be billed for the services.

Analysis:

  • The company provided service to the client; therefore, the company may recognize the revenue as earned (revenue recognition principle), which increases revenue. Service Revenue is a revenue account affecting equity. Revenue accounts increase on the credit side; thus, Service Revenue will show an increase of $5,500 on the credit side.
  • The customer did not immediately pay for the services and owes Printing Plus payment. This money will be received in the future, increasing Accounts Receivable. Accounts Receivable is an asset account. Asset accounts increase on the debit side. Therefore, Accounts Receivable will increase for $5,500 on the debit side.
A journal entry dated January 10, 2019. Debit Accounts Receivable, 5,500. Credit Service Revenue, 5,500. Explanation: “To recognize revenue earned, billed customer.”

Impact on the financial statements: You have revenue of $5,500. Revenue is reported on your income statement. The more revenue you have, the more net income (earnings) you will have. The more earnings you have, the more retained earnings you will keep. Retained earnings is a stockholders’ equity account, so total equity will increase $5,500. Accounts receivable is going up so total assets will increase by $5,500. The accounting equation, and therefore the balance sheet, remain in balance.

Heading: Assets equal Liabilities plus Stockholders’ Equity. Below the heading: plus $5,500 under Assets; plus $0 under Liabilities; plus $5,500 under Stockholders’ Equity. Next: horizontal lines under Assets, Liabilities, and Stockholders’ Equity. A final line of totals: $5,500 equals $0 plus $5,500.

Transaction 5: On January 12, 2019, pays a $300 utility bill with cash.

Analysis:

  • Cash was used to pay the utility bill, which means cash is decreasing. Cash is an asset that decreases on the credit side.
  • Paying a utility bill creates an expense for the company. Utility Expense increases, and does so on the debit side of the accounting equation.
A journal entry dated January 12, 2019. Debit Utility Expense, 300. Credit Cash, 300. Explanation: “Paid utility bill with cash.”

Impact on the financial statements: You have an expense of $300. Expenses are reported on your income statement. More expenses lead to a decrease in net income (earnings). The fewer earnings you have, the fewer retained earnings you will end up with. Retained earnings is a stockholders’ equity account, so total equity will decrease by $300. Cash is decreasing, so total assets will decrease by $300, impacting the balance sheet.

Heading: Assets equal Liabilities plus Stockholders’ Equity. Below the heading: minus $300 under Assets; plus $0 under Liabilities; minus $300 under Stockholders’ Equity. Next: horizontal lines under Assets, Liabilities, and Stockholders’ Equity. A final line of totals: $300 equals $0 plus $300.

Transaction 6: On January 14, 2019, distributed $100 cash in dividends to stockholders.

Analysis:

  • Cash was used to pay the dividends, which means cash is decreasing. Cash is an asset that decreases on the credit side.
  • Dividends distribution occurred, which increases the Dividends account. Dividends is a part of stockholder’s equity and is recorded on the debit side. This debit entry has the effect of reducing stockholder’s equity.
A journal entry dated January 14, 2019. Debit Dividends, 100. Credit Cash, 100. Explanation: “Paid dividends with cash.”

Impact on the financial statements: You have dividends of $100. An increase in dividends leads to a decrease in stockholders’ equity (retained earnings). Cash is decreasing, so total assets will decrease by $100, impacting the balance sheet.

Heading: Assets equal Liabilities plus Stockholders’ Equity. Below the heading: minus $100 under Assets; plus $0 under Liabilities; minus $100 under Stockholders’ Equity. Next: horizontal lines under Assets, Liabilities, and Stockholders’ Equity. A final line of totals: $100 equals $0 plus $100.

Transaction 7: On January 17, 2019, receives $2,800 cash from a customer for services rendered.

Analysis:

  • The customer used cash as the payment method, thus increasing the amount in the Cash account. Cash is an asset that is increasing, and it does so on the debit side.
  • Printing Plus provided the services, which means the company can recognize revenue as earned in the Service Revenue account. Service Revenue increases equity; therefore, Service Revenue increases on the credit side.
A journal entry dated January 17, 2019. Debit Cash, 2,800. Credit Service Revenue, 2,800. Explanation: “Collected cash for services rendered.”

Impact on the financial statements: Revenue is reported on the income statement. More revenue will increase net income (earnings), thus increasing retained earnings. Retained earnings is a stockholders’ equity account, so total equity will increase $2,800. Cash is increasing, which increases total assets on the balance sheet.

Heading: Assets equal Liabilities plus Stockholders’ Equity. Below the heading: plus $2,800 under Assets; plus $0 under Liabilities; plus $2,800 under Stockholders’ Equity. Next: horizontal lines under Assets, Liabilities, and Stockholders’ Equity. A final line of totals: $2,800 equals $0 plus $2,800.

Transaction 8: On January 18, 2019, paid in full, with cash, for the equipment purchase on January 5.

Analysis:

  • Cash is decreasing because it was used to pay for the outstanding liability created on January 5. Cash is an asset and will decrease on the credit side.
  • Accounts Payable recognized the liability the company had to the supplier to pay for the equipment. Since the company is now paying off the debt it owes, this will decrease Accounts Payable. Liabilities decrease on the debit side; therefore, Accounts Payable will decrease on the debit side by $3,500.
A journal entry dated January 18, 2019. Debit Accounts Payable, 3,500. Credit Cash, 3,500. Explanation: “Paid liability for equipment in full.”

Impact on the financial statements: Since both accounts in the entry are balance sheet accounts, you will see no effect on the income statement.

Heading: Assets equal Liabilities plus Stockholders’ Equity. Below the heading: minus $3,500 under Assets; minus $3,500 under Liabilities; plus $0 under Stockholders’ Equity. Next: horizontal lines under Assets, Liabilities, and Stockholders’ Equity. A final line of totals: $3,500 equals $3,500 plus $0.

Transaction 9: On January 20, 2019, paid $3,600 cash in salaries expense to employees.

Analysis:

  • Cash was used to pay for salaries, which decreases the Cash account. Cash is an asset that decreases on the credit side.
  • Salaries are an expense to the business for employee work. This will increase Salaries Expense, affecting equity. Expenses increase on the debit side; thus, Salaries Expense will increase on the debit side.
A journal entry dated January 20, 2019. Debit Salaries Expense, 3,600. Credit Cash, 3,600. Explanation: “Paid employee salaries.”

Impact on the financial statements: You have an expense of $3,600. Expenses are reported on the income statement. More expenses lead to a decrease in net income (earnings). The fewer earnings you have, the fewer retained earnings you will end up with. Retained earnings is a stockholders’ equity account, so total equity will decrease by $3,600. Cash is decreasing, so total assets will decrease by $3,600, impacting the balance sheet.

Heading: Assets equal Liabilities plus Stockholders’ Equity. Below the heading: minus $3,600 under Assets; plus $0 under Liabilities; minus $3,600 under Stockholders’ Equity. Next: horizontal lines under Assets, Liabilities, and Stockholders’ Equity. A final line of totals: $3,600 equals $0 plus $3,600.

Transaction 10: On January 23, 2019, received cash payment in full from the customer on the January 10 transaction.

Analysis:

  • Cash was received, thus increasing the Cash account. Cash is an asset, and assets increase on the debit side.
  • Accounts Receivable was originally used to recognize the future customer payment; now that the customer has paid in full, Accounts Receivable will decrease. Accounts Receivable is an asset, and assets decrease on the credit side.
A journal entry dated January 23, 2019. Debit Cash, 5,500. Credit Accounts Receivable, 5,500. Explanation: “Received customer payment from January 10.”

Impact on the financial statements: In this transaction, there was an increase to one asset (Cash) and a decrease to another asset (Accounts Receivable). This means total assets change by $0, because the increase and decrease to assets in the same amount cancel each other out. There are no changes to liabilities or stockholders’ equity, so the equation is still in balance. Since there are no revenues or expenses affected, there is no effect on the income statement.

Heading: Assets equal Liabilities plus Stockholders’ Equity. Below the heading: plus $5,500 and minus 5,500 under Assets; plus $0 under Liabilities; plus $0 under Stockholders’ Equity. Next: horizontal lines under Assets, Liabilities, and Stockholders’ Equity. A final line of totals: $0 equals $0 plus $0.

Transaction 11: On January 27, 2019, provides $1,200 in services to a customer who asks to be billed for the services.

Analysis:

  • The customer does not pay immediately for the services but is expected to pay at a future date. This creates an Accounts Receivable for Printing Plus. The customer owes the money, which increases Accounts Receivable. Accounts Receivable is an asset, and assets increase on the debit side.
  • Printing Plus provided the service, thus earning revenue. Service Revenue would increase on the credit side.
A journal entry dated January 27, 2019. Debit Accounts Receivable, 1,200. Credit Service Revenue, 1,200. Explanation: “Billed customer for services rendered.”

Impact on the financial statements: Revenue is reported on the income statement. More revenue will increase net income (earnings), thus increasing retained earnings. Retained earnings is a stockholders’ equity account, so total equity will increase $1,200. Cash is increasing, which increases total assets on the balance sheet.

Heading: Assets equal Liabilities plus Stockholders’ Equity. Below the heading: plus $1,200 under Assets; plus $0 under Liabilities; plus $1,200 under Stockholders’ Equity. Next: horizontal lines under Assets, Liabilities, and Stockholders’ Equity. A final line of totals: $1,200 equals $0 plus $1,200.

Transaction 12: On January 30, 2019, purchases supplies on account for $500, payment due within three months.

Analysis:

  • The company purchased supplies, which are assets to the business until used. Supplies is increasing, because the company has more supplies than it did before. Supplies is an asset that is increasing on the debit side.
  • Printing Plus did not pay immediately for the supplies and asked to be billed for the supplies, payable at a later date. This creates a liability for the company, Accounts Payable. This liability increases Accounts Payable; thus, Accounts Payable increases on the credit side.
A journal entry dated January 30, 2019. Debit Supplies, 500. Credit Accounts Payable, 500. Explanation: “Purchased supplies on account.”

Impact on the financial statements: There is an increase to a liability and an increase to assets. These accounts both impact the balance sheet but not the income statement.

Heading: Assets equal Liabilities plus Stockholders’ Equity. Below the heading: plus $500 under Assets; plus $500 under Liabilities; plus $0 under Stockholders’ Equity. Next: horizontal lines under Assets, Liabilities, and Stockholders’ Equity. A final line of totals: $500 equals $500 plus $0.

The complete journal for these transactions is as follows:

A journal entry dated January 3, 2019. Debit Cash, 20,000. Credit Common Stock, 20,000. Recognize issue of common stock. January 5, 2019. Debit Equipment, 3,500. Credit Accounts Payable, 3,500. Recognize purchase of equipment on account. January 9, 2019. Debit Cash, 4,000. Credit Unearned Revenue, 4,000. Received advanced payments for services yet rendered. January 10, 2019. Debit Accounts Receivable, 5,500. Credit Service Revenue, 5,500. Revenue earned, billed customer. January 12, 2019. Debit Utility expense, 300. Credit Cash, 300. Paid utility bill. January 14, 2019. Debit Dividends, 100. Credit Cash, 100. Paid out dividends. January 17, 2019. Debit Cash, 2,800. Credit Service Revenue, 2,800. Collected cash for services rendered. January 18, 2019. Debit Accounts Payable, 3,500. Credit Cash, 3,500. Paid liability for equipment in full. January 20, 2019. Debit Salaries expense, 3,600. Credit Cash, 3,600. Paid employee salaries. January 23, 2019. Debit Cash, 5,500. Credit Accounts Receivable, 5,500. Received customer payment from January 10. January 27, 2019. Debit Accounts Receivable, 1,200. Credit Service Revenue, 1,200. Billed customers for services rendered. January 30, 2019. Debit Supplies, 500. Credit Accounts Payable, 500. Purchased supplies on account.

We now look at the next step in the accounting cycle, step 3: post journal information to the ledger.

Continuing Application

Colfax Market

Colfax Market is a small corner grocery store that carries a variety of staple items such as meat, milk, eggs, bread, and so on. As a smaller grocery store, Colfax does not offer the variety of products found in a larger supermarket or chain. However, it records journal entries in a similar way.

Grocery stores of all sizes must purchase product and track inventory. While the number of entries might differ, the recording process does not. For example, Colfax might purchase food items in one large quantity at the beginning of each month, payable by the end of the month. Therefore, it might only have a few accounts payable and inventory journal entries each month. Larger grocery chains might have multiple deliveries a week, and multiple entries for purchases from a variety of vendors on their accounts payable weekly.

This similarity extends to other retailers, from clothing stores to sporting goods to hardware. No matter the size of a company and no matter the product a company sells, the fundamental accounting entries remain the same.

Posting to the General Ledger

Recall that the general ledger is a record of each account and its balance. Reviewing journal entries individually can be tedious and time consuming. The general ledger is helpful in that a company can easily extract account and balance information. Here is a small section of a general ledger.

A General Ledger titled “Cash Account No. 101” with four columns labeled from left to right: Date, Description, Reference, Debit, Credit, Balance. Date 2019. Remaining columns are blank.

You can see at the top is the name of the account “Cash,” as well as the assigned account number “101.” Remember, all asset accounts will start with the number 1. The date of each transaction related to this account is included, a possible description of the transaction, and a reference number if available. There are debit and credit columns, storing the financial figures for each transaction, and a balance column that keeps a running total of the balance in the account after every transaction.

Let’s look at one of the journal entries from Printing Plus and fill in the corresponding ledgers.

A journal entry dated January 3, 2019. Debit Cash., 20,000. Credit Common Stock, 20,000. Explanation: Received cash in exchange for common stock. Below the journal entry is a General Ledger titled “Cash Account No. 101” with six columns, from left to right: Date; 2019, January 3. Description; Cash for Common Stock. Debit; 20,000. Balance; 20,000. Below is a General Ledger titled “Common Stock Account No. 301”. Date; 2019, January 3. Description; Cash for common stock. Credit; 20,000. Balance; 20,000.

As you can see, there is one ledger account for Cash and another for Common Stock. Cash is labeled account number 101 because it is an asset account type. The date of January 3, 2019, is in the far left column, and a description of the transaction follows in the next column. 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 balance in this account is currently $20,000, because no other transactions have affected this account yet.

Common Stock has the same date and description. Common Stock had a credit of $20,000 in the journal entry, and that information is transferred to the general ledger account in the credit column. The balance at that time in the Common Stock ledger account is $20,000.

Another key element to understanding the general ledger, and the third step in the accounting cycle, is how to calculate balances in ledger accounts.

Calculating Account Balances

When calculating balances in ledger accounts, one must take into consideration which side of the account increases and which side decreases. To find the account balance, you must find the difference between the sum of all figures on the side that increases and the sum of all figures on the side that decreases.

For example, the Cash account is an asset. We know from the accounting equation that assets increase on the debit side and decrease on the credit side. If there was a debit of $5,000 and a credit of $3,000 in the Cash account, we would find the difference between the two, which is $2,000 (5,000 – 3,000). The debit is the larger of the two sides ($5,000 on the debit side as opposed to $3,000 on the credit side), so the Cash account has a debit balance of $2,000.

Another example is a liability account, such as Accounts Payable, which increases on the credit side and decreases on the debit side. If there were a $4,000 credit and a $2,500 debit, the difference between the two is $1,500. The credit is the larger of the two sides ($4,000 on the credit side as opposed to $2,500 on the debit side), so the Accounts Payable account has a credit balance of $1,500.

The following are selected journal entries from Printing Plus that affect the Cash account. We will use the Cash ledger account to calculate account balances.

A journal entry dated January 3, 2019. Debit Cash, 20,000. Credit Common Stock, 20,000. Recognize issue of common stock. January 9, 2019. Debit Cash, 4,000. Credit Unearned Revenue, 4,000. Received advanced payments for services yet rendered. January 12, 2019. Debit Utility expense, 300. Credit Cash, 300. Paid utility bill. January 14,2019. Debit Dividends, 100. Credit Cash, 100. Paid out dividends. January 17, 2019. Debit Cash, 2,800. Credit Service Revenue, 2,800. Collected cash for services rendered. January 18, 2019. Debit Accounts Payable, 3,500. Credit Cash, 3,500. Paid liability for equipment in full. January 20, 2019. Debit Salaries expense, 3,600. Credit Cash, 3,600. Paid employee salaries. January 23, 2019. Debit Cash, 5,500. Credit Accounts Receivable, 5,500. Received customer payment from January 10.

The general ledger account for Cash would look like the following:

A General Ledger titled “Cash Account No. 101” with six columns labeled left to right: Date, Item, Reference, Debit, Credit, Balance. Date: 2019, January 3; Item: Cash for common stock; Debit: 20,000; Balance: 20,000. Date: January 9; Item: Payment from client; Debit: 4,000; Balance: 24,000. Date: January 12; Item: Utility bill; Credit: 300; Balance: 23,700. Date: January 14; Item: Dividends payment; Credit: 100; Balance: 23,600. Date: January 17; Item: Cash for services; Debit: 2,800; Balance: 26,400. Date: January 18; Item: Paid cash for equipment; Credit: 3,500; Balance: 22,900. Date: January 20; Item: Paid employee salaries; Credit: 3,600; Balance: 19,300. Date: January 23; Item: Customer payment; Debit: 5,500; Balance: 24,800.

In the last column of the Cash ledger account is the running balance. This shows where the account stands after each transaction, as well as the final balance in the account. How do we know on which side, debit or credit, to input each of these balances? Let’s consider the general ledger for Cash.

On January 3, there was a debit balance of $20,000 in the Cash account. On January 9, a debit of $4,000 was included. Since both are on the debit side, they will be added together to get a balance on $24,000 (as is seen in the balance column on the January 9 row). On January 12, there was a credit of $300 included in the Cash ledger account. Since this figure is on the credit side, this $300 is subtracted from the previous balance of $24,000 to get a new balance of $23,700. The same process occurs for the rest of the entries in the ledger and their balances. The final balance in the account is $24,800.

Checking to make sure the final balance figure is correct; one can review the figures in the debit and credit columns. In the debit column for this cash account, we see that the total is $32,300 (20,000 + 4,000 + 2,800 + 5,500). The credit column totals $7,500 (300 + 100 + 3,500 + 3,600). The difference between the debit and credit totals is $24,800 (32,300 – 7,500). The balance in this Cash account is a debit of $24,800. Having a debit balance in the Cash account is the normal balance for that account.

Posting to the T-Accounts

The third step in the accounting cycle is to post journal information to the ledger. To do this we can use a T-account format. A company will take information from its journal and post to this general ledger. Posting refers to the process of transferring data from the journal to the general ledger. It is important to understand that T-accounts are only used for illustrative purposes in a textbook, classroom, or business discussion. They are not official accounting forms. Companies will use ledgers for their official books, not T-accounts.

Let’s look at the journal entries for Printing Plus and post each of those entries to their respective T-accounts.

The following are the journal entries recorded earlier for Printing Plus.

Transaction 1: On January 3, 2019, issues $20,000 shares of common stock for cash.

A journal entry dated January 3, 2019. Debit Cash, 20,000. Credit Common Stock, 20,000. Explanation: “To recognize issuance of common stock.” Below the journal entry are two T-accounts. The left account is labeled Cash, with a debit entry dated January 3 for 20,000, and a balance of 20,000. The right account is labeled Common Stock, with a credit entry dated January 3 for 20,000, and a balance of 20,000.

In the journal entry, Cash has a debit of $20,000. This is posted to the Cash T-account on the debit side (left side). Common Stock has a credit balance of $20,000. This is posted to the Common Stock T-account on the credit side (right side).

Transaction 2: On January 5, 2019, purchases equipment on account for $3,500, payment due within the month.

A journal entry dated January 5, 2019. Debit Equipment, 3,500. Credit Accounts Payable, 3,500. Explanation: “To recognize purchase of equipment on account.” Below the journal entry are two T-accounts. The left account is labeled Equipment, with a debit entry dated January 5 for 3,500, and a balance of 3,500. The right account is labeled Accounts Payable, with a credit entry dated January 5 for 3,500, and a balance of 3,500.

In the journal entry, Equipment has a debit of $3,500. This is posted to the Equipment T-account on the debit side. Accounts Payable has a credit balance of $3,500. This is posted to the Accounts Payable T-account on the credit side.

Transaction 3: On January 9, 2019, receives $4,000 cash in advance from a customer for services not yet rendered.

A journal entry dated January 9, 2019. Debit Cash, 4,000. Credit Unearned revenue, 4,000. Explanation: “To recognize receipt of customer advanced payment for services yet to be rendered.” Below the journal entry are two T-accounts. The left account is labeled Cash, with a debit entry dated January 3 for 20,000, a debit entry dated January 9 for 4,000, and a balance of 24,000. The right account is labeled Unearned Revenue, with a credit entry dated January 9 for 4,000, and a balance of 4,000.

In the journal entry, Cash has a debit of $4,000. This is posted to the Cash T-account on the debit side. You will notice that the transaction from January 3 is listed already in this T-account. The next transaction figure of $4,000 is added directly below the $20,000 on the debit side. Unearned Revenue has a credit balance of $4,000. This is posted to the Unearned Revenue T-account on the credit side.

Transaction 4: On January 10, 2019, provides $5,500 in services to a customer who asks to be billed for the services.

A journal entry dated January 10, 2019. Debit Accounts Receivable, 5,500. Credit Service Revenue, 5,500. Explanation: “To recognize revenue earned, billed customer.” Below the journal entry are two T-accounts. The left account is labeled Accounts Receivable, with a debit entry dated January 10 for 5,500, and a balance of 5,500. The right account is labeled Service Revenue, with a credit entry dated January 10 for 5,500, and a balance of 5,500.

In the journal entry, Accounts Receivable has a debit of $5,500. This is posted to the Accounts Receivable T-account on the debit side. Service Revenue has a credit balance of $5,500. This is posted to the Service Revenue T-account on the credit side.

Transaction 5: On January 12, 2019, pays a $300 utility bill with cash.

A journal entry dated January 12, 2019. Debit Utility Expense, 300. Credit Cash, 300. Explanation: “Paid utility bill with cash.” Below the journal entry are two T-accounts. The left account is labeled Utility Expense, with a debit entry dated January 12 for 300, and a balance of 300. The right account is labeled Cash, with a debit entry dated January 3 for 20,000, a debit entry dated January 9 for 4,000, a credit entry dated January 12 for 200, and a balance of 23,700.

In the journal entry, Utility Expense has a debit balance of $300. This is posted to the Utility Expense T-account on the debit side. Cash has a credit of $300. This is posted to the Cash T-account on the credit side. You will notice that the transactions from January 3 and January 9 are listed already in this T-account. The next transaction figure of $300 is added on the credit side.

Transaction 6: On January 14, 2019, distributed $100 cash in dividends to stockholders.

A journal entry dated January 14, 2019. Debit Dividends, 100. Credit Cash, 100. Explanation: “Paid dividends with cash.” Below the journal entry are two T-accounts. The left account is labeled Dividends, with a debit entry dated January 14 for 100, and a balance of 100. The right account is labeled Cash, with a debit entry dated January 3 for 20,000, a debit entry dated January 9 for 4,000, a credit entry dated January 12 for 300, a credit entry dated January 14 for 100, and a balance of 23,600.

In the journal entry, Dividends has a debit balance of $100. This is posted to the Dividends T-account on the debit side. Cash has a credit of $100. This is posted to the Cash T-account on the credit side. You will notice that the transactions from January 3, January 9, and January 12 are listed already in this T-account. The next transaction figure of $100 is added directly below the January 12 record on the credit side.

Transaction 7: On January 17, 2019, receives $2,800 cash from a customer for services rendered.

A journal entry dated January 17, 2019. Debit Cash, 2,800. Credit Service Revenue, 2,800. Explanation: “Collected cash for services rendered.” Below the journal entry are two T-accounts. The left account is labeled Cash, with a debit entry dated January 3 for 20,000, a debit entry dated January 9 for 4,000, a debit entry dated January 17 for 2,800, a credit entry dated January 12 for 300, a credit entry dated January 14 for 100, and a balance of 26,400. The right account is labeled Service Revenue, with a credit entry dated January 10 for 5,500, a credit entry dated January 17 for 2,800, and a balance of 8,300.

In the journal entry, Cash has a debit of $2,800. This is posted to the Cash T-account on the debit side. You will notice that the transactions from January 3, January 9, January 12, and January 14 are listed already in this T-account. The next transaction figure of $2,800 is added directly below the January 9 record on the debit side. Service Revenue has a credit balance of $2,800. This too has a balance already from January 10. The new entry is recorded under the Jan 10 record, posted to the Service Revenue T-account on the credit side.

Transaction 8: On January 18, 2019, paid in full, with cash, for the equipment purchase on January 5.

A journal entry dated January 18, 2019. Debit Accounts Payable, 3,500. Credit Cash, 3,500. Explanation: “Paid liability for equipment in full.” Below the journal entry are two T-accounts. The left account is labeled Cash, with a debit entry dated January 3 for 20,000, a debit entry dated January 9 for 4,000, a debit entry dated January 17 for 2,800, a credit entry dated January 12 for 300, a credit entry dated January 14 for 100, a credit entry dated January 18 for 3,500 and a balance of 22,900. The right account is labeled Accounts Payable, with a credit entry dated January 5 for 3,500, a debit entry dated January 18 for 3,500, and a balance of 0.

On this transaction, Cash has a credit of $3,500. This is posted to the Cash T-account on the credit side beneath the January 14 transaction. Accounts Payable has a debit of $3,500 (payment in full for the Jan. 5 purchase). You notice there is already a credit in Accounts Payable, and the new record is placed directly across from the January 5 record.

Transaction 9: On January 20, 2019, paid $3,600 cash in salaries expense to employees.

A journal entry dated January 20, 2019. Debit Salaries Expense, 3,600. Credit Cash, 3,600. Explanation: “Paid employee salaries.” Below the journal entry are two T-accounts. The left account is labeled Cash, with a debit entry dated January 3 for 20,000, a debit entry dated January 9 for 4,000, a debit entry dated January 17 for 2,800, a credit entry dated January 12 for 300, a credit entry dated January 14 for 100, a credit entry dated January 18 for 3,500, a credit entry dated January 20 for 3,600, and a balance of 19,300. The right account is labeled Salaries Expense, with a debit entry dated January 20 for 3,600, and a balance of 3,600.

On this transaction, Cash has a credit of $3,600. This is posted to the Cash T-account on the credit side beneath the January 18 transaction. Salaries Expense has a debit of $3,600. This is placed on the debit side of the Salaries Expense T-account.

Transaction 10: On January 23, 2019, received cash payment in full from the customer on the January 10 transaction.

A journal entry dated January 23, 2019. Debit Cash, 5,500. Credit Accounts Receivable, 5,500. Explanation: “Received customer payment from January 10.” Below the journal entry are two T-accounts. The left account is labeled Cash, with a debit entry dated January 3 for 20,000, a debit entry dated January 9 for 4,000, a debit entry dated January 17 for 2,800, a debit entry dated January 23 for 5,500, a credit entry dated January 12 for 300, a credit entry dated January 14 for 100, a credit entry dated January 18 for 3,500, a credit entry dated January 20 for 3,600, and a balance of 24,800. The right account is labeled Accounts Receivable, with a debit entry dated January 10 for 5,500, a credit entry dated January 23 for 5,500, and a balance of 0.

On this transaction, Cash has a debit of $5,500. This is posted to the Cash T-account on the debit side beneath the January 17 transaction. Accounts Receivable has a credit of $5,500 (from the Jan. 10 transaction). The record is placed on the credit side of the Accounts Receivable T-account across from the January 10 record.

Transaction 11: On January 27, 2019, provides $1,200 in services to a customer who asks to be billed for the services.

A journal entry dated January 27, 2019. Debit Accounts Receivable, 1,200. Credit Service Revenue, 1,200. Explanation: “Billed customer for services rendered.” Below the journal entry are two T-accounts. The left account is labeled Accounts Receivable, with a debit entry dated January 10 for 5,500, a debit entry dated January 27 for 1,200, a credit entry dated January 23 for 5,500, and a balance of 1,200. The right account is labeled Service Revenue, with a credit entry dated January 10 for 5,500, a credit entry dated January 17 for 2,800, a credit entry dated January 27 for 1,200, and a balance of 9,500.

On this transaction, Accounts Receivable has a debit of $1,200. The record is placed on the debit side of the Accounts Receivable T-account underneath the January 10 record. Service Revenue has a credit of $1,200. The record is placed on the credit side of the Service Revenue T-account underneath the January 17 record.

Transaction 12: On January 30, 2019, purchases supplies on account for $500, payment due within three months.

A journal entry dated January 30, 2019. Debit Supplies, 500. Credit Accounts Payable, 500. Explanation: “Purchased supplies on account.” Below the journal entry are two T-accounts. The left account is labeled Supplies, with a debit entry dated January 30 for 500, and a balance of 500. The right account is labeled Accounts Payable, with a debit entry dated January 18 for 3,500, a credit entry dated January 9 for 3,500, a credit entry dated January 30 for 500, and a balance of 500.

On this transaction, Supplies has a debit of $500. This will go on the debit side of the Supplies T-account. Accounts Payable has a credit of $500. You notice there are already figures in Accounts Payable, and the new record is placed directly underneath the January 5 record.

T-Accounts Summary

Once all journal entries have been posted to T-accounts, we can check to make sure the accounting equation remains balanced. A summary showing the T-accounts for Printing Plus is presented in Figure 3.10.

Three columns headed Assets equal Liabilities plus Equity. The Asset column has four T-accounts. Cash, with a debit entry dated January 3 for 20,000, a debit entry dated January 9 for 4,000, a debit entry dated January 17 for 2,800, a debit entry dated January 23 for 5,500, a credit entry dated January 12 for 300, a credit entry dated January 14 for 100, a credit entry dated January 18 for 3,500, a credit entry dated January 20 for 3,600, and a balance of 24,800. Accounts Receivable, with a debit entry dated January 10 for 5,500, a debit entry dated January 27 for 1,200, a credit entry dated January 23 for 5,500, and a balance of 1,200. Supplies, with a debit entry dated January 30 for 500, and a balance of 500. Equipment, with a debit entry dated January 5 for 3,500, and a balance of 3,500. The Liability column has two T-accounts. Accounts Payable, with a debit entry dated January 18 for 3,500, a credit entry dated January 9 for 3,500, a credit entry dated January 30 for 500, and a balance of 500. Unearned Revenue, with a credit entry dated January 9 for 4,000, and a balance of 4,000. The Equity column has five T-accounts. Common Stock, with a credit entry dated January 3 for 20,000, and a balance of 20,000. Dividends, with a debit entry dated January 14 for 100, and a balance of 100. Service Revenue, with a credit entry dated January 10 for 5,500, a credit entry dated January 17 for 2,800, a credit entry dated January 27 for 1,200, and a balance of 9,500. Salaries Expense, with a debit entry dated January 20 for 3,600, and a balance of 3,600. Utility Expense, with a debit entry dated January 12 for 300, and a balance of 300.
Figure 3.10 Summary of T-Accounts for Printing Plus. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

The sum on the assets side of the accounting equation equals $30,000, found by adding together the final balances in each asset account (24,800 + 1,200 + 500 + 3,500). To find the total on the liabilities and equity side of the equation, we need to find the difference between debits and credits. Credits on the liabilities and equity side of the equation total $34,000 (500 + 4,000 + 20,000 + 9,500). Debits on the liabilities and equity side of the equation total $4,000 (100 + 3,600 + 300). The difference $34,000 – $4,000 = $30,000. Thus, the equation remains balanced with $30,000 on the asset side and $30,000 on the liabilities and equity side. Now that we have the T-account information, and have confirmed the accounting equation remains balanced, we can create the unadjusted trial balance.

Your Turn

Journalizing Transactions

You have the following transactions the last few days of April.

Account Numbering System
Apr. 25 You stop by your uncle’s gas station to refill both gas cans for your company, Watson’s Landscaping. Your uncle adds the total of $28 to your account.
Apr. 26 You record another week’s revenue for the lawns mowed over the past week. You earned $1,200. You received cash equal to 75% of your revenue.
Apr. 27 You pay your local newspaper $35 to run an advertisement in this week’s paper.
Apr. 29 You make a $25 payment on account.
Table 3.3
  1. Prepare the necessary journal entries for these four transactions.
  2. Explain why you debited and credited the accounts you did.
  3. What will be the new balance in each account used in these entries?

Solution

A journal entry dated April 25, 2018. Debit Gas expense, 28. Credit Accounts payable, 28. Explanation: “Purchased gas on account.” April 26, 2018. Debit Cash, 900. Debit Accounts receivable, 300. Credit Lawnmowing revenue, 1,200. Explanation: “Earned $1,200 revenue: received 75 percent in cash.” April 27, 2018. Debit Advertising expense, 35. Credit Cash, 35. Explanation: “Paid cash to run an ad in the newspaper.” April 29, 2018. Debit Accounts payable, 25. Credit Cash, 25. Explanation: “Made a payment on account.”

April 25

  • You have incurred more gas expense. This means you have an increase in the total amount of gas expense for April. Expenses go up with debit entries. Therefore, you will debit gas expense.
  • You purchased the gas on account. This will increase your liabilities. Liabilities increase with credit entries. Credit accounts payable to increase the total in the account.

April 26

  • You have received more cash from customers, so you want the total cash to increase. Cash is an asset, and assets increase with debit entries, so debit cash.
  • You also have more money owed to you by your customers. You have performed the services, your customers owe you the money, and you will receive the money in the future. Debit accounts receivable as asset accounts increase with debits.
  • You have mowed lawns and earned more revenue. You want the total of your revenue account to increase to reflect this additional revenue. Revenue accounts increase with credit entries, so credit lawn-mowing revenue.

April 27

  • Advertising is an expense of doing business. You have incurred more expenses, so you want to increase an expense account. Expense accounts increase with debit entries. Debit advertising expense.
  • You paid cash for the advertising. You have less cash, so credit the cash account. Cash is an asset, and asset account totals decrease with credits.

April 29

  • You paid “on account.” Remember that “on account” means a service was performed or an item was received without being paid for. The customer asked to be billed. You were the customer in this case. You made a purchase of gas on account earlier in the month, and at that time you increased accounts payable to show you had a liability to pay this amount sometime in the future. You are now paying down some of the money you owe on that account. Since you paid this money, you now have less of a liability so you want to see the liability account, accounts payable, decrease by the amount paid. Liability accounts decrease with debit entries.
  • You paid, which means you gave cash (or wrote a check or electronically transferred) so you have less cash. To decrease the total cash, credit the account because asset accounts are reduced by recording credit entries.

Your Turn

Normal Account Balances

Calculate the balances in each of the following accounts. Do they all have the normal balance they should have? If not, which one? How do you know this?

A General Ledger titled “Cash Account No. 101” with six columns. Date: 2019. Six columns labeled left to right: Date, Item, Reference, Debit, Credit, Balance. Debit: 9,500; Balance: 9,500. Credit: 3,500; Balance: 6,000. Debit: 1,750; Balance: 7,750. Credit: 5,800; Balance: 1,950. Debit: 500; Balance: 2,450. Credit: 1,500; Balance: 950. A General Ledger titled “Accounts Receivable No. 111” with six columns. Date: 2019. Debt column entries: 4,500, 3,650, 825. Credit column entries: 4,250, 3,500. A General Ledger titled “Accounts Payable No. 201” with six columns. Date: 2019. Debit column entries: 500, 650. Credit column entries: 1,500, 875, 325.

Solution

A General Ledger titled “Cash Account No. 101” with six columns. Date: 2019. Six columns labeled left to right: Date, Item, Reference, Debit, Credit, Balance. Debit: 9,500; Balance: 9,500. Credit: 3,500; Balance: 6,000. Debit: 1,750; Balance: 7,750. Credit: 5,800; Balance: 1,950. Debit: 500; Balance: 2,450. Credit: 1,500; Balance: 950. Credit: 1,200; Balance: 250. A General Ledger titled “Accounts Receivable No. 111” with six columns. Date: 2019. Six columns labeled left to right: Date, Item, Reference, Debit, Credit, Balance. Debit: 4,500; Balance: 4,500. Debit: 3,650; Balance: 8,150. Credit: 4,250; Balance: 3,900. Credit: 3,500; Balance: 400. Debit: 825; Balance: 1,225. A General Ledger titled “Accounts Payable No. 201” with six columns. Date: 2019. Six columns labeled left to right: Date, Item, Reference, Debit, Credit, Balance. Credit: 1,500; Balance: 1,500. Credit: 875; Balance: 2,375. Debit: 500; Balance: 1,875. Credit: 325; Balance: 2,200. Debit: 650; Balance: 1,550.

Think It Through

Gift Cards

Gift cards have become an important topic for managers of any company. Understanding who buys gift cards, why, and when can be important in business planning. Also, knowing when and how to determine that a gift card will not likely be redeemed will affect both the company’s balance sheet (in the liabilities section) and the income statement (in the revenues section).

According to a 2017 holiday shopping report from the National Retail Federation, gift cards are the most-requested presents for the eleventh year in a row, with 61% of people surveyed saying they are at the top of their wish lists.6 CEB TowerGroup projects that total gift card volume will reach $160 billion by 2018.7

How are all of these gift card sales affecting one of America’s favorite specialty coffee companies, Starbucks?

In 2014 one in seven adults received a Starbucks gift card. On Christmas Eve alone $2.5 million gift cards were sold. This is a rate of 1,700 cards per minute.8

The following discussion about gift cards is taken from Starbucks’s 2016 annual report:

When an amount is loaded onto a stored value card we recognize a corresponding liability for the full amount loaded onto the card, which is recorded within stored value card liability on our consolidated balance sheets. When a stored value card is redeemed at a company-operated store or online, we recognize revenue by reducing the stored value card liability. When a stored value card is redeemed at a licensed store location, we reduce the corresponding stored value card liability and cash, which is reimbursed to the licensee. There are no expiration dates on our stored value cards, and in most markets, we do not charge service fees that cause a decrement to customer balances. While we will continue to honor all stored value cards presented for payment, management may determine the likelihood of redemption, based on historical experience, is deemed to be remote for certain cards due to long periods of inactivity. In these circumstances, unredeemed card balances may be recognized as breakage income. In fiscal 2016, 2015, and 2014, we recognized breakage income of $60.5 million, $39.3 million, and $38.3 million, respectively.9

As of October 1, 2017, Starbucks had a total of $1,288,500,000 in stored value card liability.

Footnotes

  • 6 National Retail Federation (NRF). “NRF Consumer Survey Points to Busy Holiday Season, Backs Up Economic Forecast and Import Numbers.” October 27, 2017. https://nrf.com/media-center/press-releases/nrf-consumer-survey-points-busy-holiday-season-backs-economic-forecast
  • 7 CEB Tower Group. “2015 Gift Card Sales to Reach New Peak of $130 Billion.” PR Newswire. December 8, 2015. https://www.prnewswire.com/news-releases/2015-gift-card-sales-to-reach-new-peak-of-130-billion-300189615.html
  • 8 Sara Haralson. “Last-Minute Shoppers Rejoice! Starbucks Has You Covered.” Fortune. December 22, 2015. http://fortune.com/video/2015/12/22/starbucks-gift-cards/
  • 9 U.S. Securities and Exchange Commission. Communication from Starbucks Corporation regarding 2014 10-K Filing. November 14, 2014. https://www.sec.gov/Archives/edgar/data/829224/000082922415000020/filename1.htm
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