Accounting - First Year Course, Interactive Student Edition
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TABLE OF CONTENTS
Unit 1 Introduction to Accounting 2
Chapter 1 You and the World of Accounting 4
Thinking About a Career: National Geographic Society
Section 1 Exploring Careers 6
Assessment 12
Section 2 Accounting Careers: The Possibilities Are Endless! 13
Assessment 16
Accounting Careers in Focus 17
Chapter Summary 18
Chapter Review and Activities 20
Chapter Problems 21
Winning Competitive Events 23
Real-World Applications and Connections 24
Chapter 2 The World of Business and Accounting 26
Becoming an Entrepreneur: Aveda Corporation
Section 1 Exploring the World of Business 28
Assessment 32
Section 2 Accounting: The Universal Language of Business 33
Assessment 36
Accounting Careers in Focus 37
Chapter Summary 38
Chapter Review and Activities 40
Chapter Problems 41
Winning Competitive Events 43
Real-World Applications and Connections 44
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TABLE OF CONTENTS
Unit 2 The Basic Accounting Cycle 46
Chapter 3 Business Transactions and the Accounting Equation 48
Investing Capital: HARPO Productions, Inc.
Section 1 Property and Financial Claims 50
Assessment 53
Section 2 Transactions That Affect Owner’s Investment, 54
Cash, and Credit
Assessment 59
Section 3 Transactions That Affect Revenue, Expense, and 60
Withdrawals by the Owner
Assessment 63
Chapter Summary 64
Chapter Review and Activities 66
Computerized Accounting 67
Chapter Problems 68
Winning Competitive Events 73
Real-World Applications and Connections 74
Chapter 4 Transactions That Affect Assets, Liabilities, 76
and Owner’s Capital
Analyzing Business Transactions: Panda Restaurant Group
Section 1 Accounts and the Double-Entry Accounting System 78
Assessment 82
Section 2 Applying the Rules of Debit and Credit 83
Assessment 88
Accounting Careers in Focus 89
Chapter Summary 90
Chapter Review and Activities 92
Computerized Accounting 93
Chapter Problems 94
Winning Competitive Events 99
Real-World Applications and Connections 100
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TABLE OF CONTENTS
Chapter 5 Transactions That Affect Revenue, Expenses, and 102
Withdrawals
Analyzing Revenue and Expenses: Southwest Airlines
Section 1 Relationship of Revenue, Expenses, 104
and Withdrawals to Owner’s Equity
Assessment 110
Section 2 Applying the Rules of Debit and Credit to Revenue, 111
Expense, and Withdrawals Transactions
Assessment 116
Accounting Careers in Focus 117
Chapter Summary 118
Chapter Review and Activities 120
Computerized Accounting 121
Chapter Problems 122
Winning Competitive Events 127
Real-World Applications and Connections 128
Chapter 6 Recording Transactions in a General Journal 130
Recording Financial Information: Google Inc.
Section 1 The Accounting Cycle 132
Assessment 135
Section 2 Recording Transactions in the General Journal 136
Assessment 149
Chapter Summary 150
Chapter Review and Activities 152
Computerized Accounting 153
Chapter Problems 154
Winning Competitive Events 159
Real-World Applications and Connections 160
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TABLE OF CONTENTS
Chapter 7 Posting Journal Entries to General Ledger Accounts 162
Accounts and the General Ledger: Los Angeles Angels of Anaheim
Section 1 The General Ledger 164
Assessment 167
Section 2 The Posting Process 168
Assessment 175
Accounting Careers in Focus 176
Section 3 Preparing a Trial Balance 177
Assessment 181
Los Angeles Chapter Summary 182
Angels of Chapter Review and Activities 184
Anaheim Computerized Accounting 185
Chapter Problems 186
Winning Competitive Events 189
Real-World Applications and Connections 190
yo
Mini Practice Set 1 Canyon.com Web Sites 192
C a n n.com Setting Up Accounting Records for a Sole Proprietorship
WEB SITES
Chapter 8 The Six-Column Work Sheet 194
Summarizing Results: American Express Company
Section 1 Preparing the Work Sheet 196
Assessment 200
Section 2 Completing the Work Sheet 201
Assessment 207
Chapter Summary 208
Chapter Review and Activities 210
Computerized Accounting 211
Chapter Problems 212
Winning Competitive Events 215
Real-World Applications and Connections 216
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TABLE OF CONTENTS
Chapter 9 Financial Statements for a Sole Proprietorship 218
Preparing Financial Statements: Tapatío Hot Sauce Company
Section 1 The Income Statement 220
Assessment 224
Section 2 The Statement of Changes in Owner’s Equity 225
Assessment 229
Accounting Careers in Focus 230
Section 3 The Balance Sheet and the Statement of 231
Cash Flows
Assessment 237
Chapter Summary 238
Chapter Review and Activities 240
Computerized Accounting 241
Chapter Problems 242
Winning Competitive Events 245
Real-World Applications and Connections 246
Chapter 10 Completing the Accounting Cycle 248
for a Sole Proprietorship
Looking at Fiscal Year-End Activities: Radio Flyer
Section 1 Preparing Closing Entries 250
Assessment 259
Section 2 Posting Closing Entries and Preparing a Post- 260
Closing Trial Balance
Assessment 263
Chapter Summary 264
Chapter Review and Activities 266
Computerized Accounting 267
Chapter Problems 268
Winning Competitive Events 273
Real-World Applications and Connections 274
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TABLE OF CONTENTS
Chapter 11 Cash Control and Banking Activities 276
Controlling Cash: Jamba Juice
Section 1 Banking Procedures 278
Assessment 283
Section 2 Reconciling the Bank Statement 284
Assessment 292
Accounting Careers in Focus 293
Chapter Summary 294
Chapter Review and Activities 296
Computerized Accounting 297
Chapter Problems 298
Winning Competitive Events 301
Real-World Applications and Connections 302
Mini Practice Set 2 Fast Track Tutoring Service 304
TUTORI NG
SERVICE Completing the Accounting Cycle for a Sole Proprietorship
Unit 3 Accounting for a Payroll System 306
Chapter 12 Payroll Accounting 308
Moving Into the Workforce: Symantec Corporation
Section 1 Calculating Gross Earnings 310
Assessment 314
Section 2 Payroll Deductions 315
Assessment 319
Symantec
Section 3 Payroll Records 320
Corporation
Assessment 325
Chapter Summary 326
Chapter Review and Activities 328
Computerized Accounting 329
Chapter Problems 330
Winning Competitive Events 335
Real-World Applications and Connections 336
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TABLE OF CONTENTS
Chapter 13 Payroll Liabilities and Tax Records 338
Evaluating Payroll Costs: Verizon Wireless
Section 1 Journalizing and Posting the Payroll 340
Assessment 345
Section 2 Employer’s Payroll Taxes 346
Assessment 350
Section 3 Tax Liability Payments and Tax Reports 351
Assessment 360
Accounting Careers in Focus 361
Chapter Summary 362
Chapter Review and Activities 364
Computerized Accounting 365
Chapter Problems 366
Winning Competitive Events 369
Real-World Applications and Connections 370
Mini Practice Set 3 Green Thumb Plant Service 372
The Plant Service
Payroll Accounting
Unit 4 The Accounting Cycle for a Merchandising 376
Corporation
Chapter 14 Accounting for Sales and Cash Receipts 378
Analyzing Sales: Underground Station
Section 1 Accounting for a Merchandising Business 380
Assessment 383
Section 2 Analyzing Sales Transactions 384
Assessment 392
Section 3 Analyzing Cash Receipt Transactions 393
Underground Assessment 401
Station
Chapter Summary 402
Chapter Review and Activities 404
Computerized Accounting 405
Chapter Problems 406
Winning Competitive Events 411
Real-World Applications and Connections 412
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TABLE OF CONTENTS
Chapter 15 Accounting for Purchases and Cash Payments 414
Analyzing Purchases: Suncoast Motion Picture Company
Section 1 Purchasing Items Needed by a Business 416
Assessment 420
Section 2 Analyzing and Recording Purchases on Account 421
Assessment 427
Accounting Careers in Focus 428
Section 3 Analyzing and Recording Cash Payments 429
Assessment 435
Chapter Summary 436
Chapter Review and Activities 438
Computerized Accounting 439
Chapter Problems 440
Winning Competitive Events 445
Real-World Applications and Connections 446
Chapter 16 Special Journals: Sales and Cash Receipts 448
Analyzing Sales Growth: The Sharper Image
Section 1 The Sales Journal 450
Assessment 458
Section 2 The Cash Receipts Journal 459
Assessment 469
Chapter Summary 470
Chapter Review and Activities 472
Computerized Accounting 473
Chapter Problems 474
Winning Competitive Events 477
Real-World Applications and Connections 478
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TABLE OF CONTENTS
Chapter 17 Special Journals: Purchases and Cash Payments 480
Looking at the Role of Purchases: Adler Planetarium &
Astronomy Museum
Section 1 The Purchases Journal 482
Assessment 488
Adler Section 2 The Cash Payments Journal 489
Planetarium Assessment 502
& Astronomy Accounting Careers in Focus 503
Museum Chapter Summary 504
Chapter Review and Activities 506
Computerized Accounting 507
Chapter Problems 508
Winning Competitive Events 513
Real-World Applications and Connections 514
Chapter 18 Adjustments and the Ten-Column Work Sheet 516
Analyzing Adjustments: Plantronics, Inc.
Section 1 Identifying Accounts to Be Adjusted and 518
Adjusting Merchandise Inventory
Assessment 523
Section 2 Adjusting Supplies, Prepaid Insurance, and 524
Plantronics, Federal Corporate Income Tax
Inc. Assessment 528
Section 3 Completing the Work Sheet and Journalizing 529
and Posting the Adjusting Entries
Assessment 537
Chapter Summary 538
Chapter Review and Activities 540
Computerized Accounting 541
Chapter Problems 542
Winning Competitive Events 547
Real-World Applications and Connections 548
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TABLE OF CONTENTS
Chapter 19 Financial Statements for a Corporation 550
Analyzing Corporate Financial Statements: 99 Cents Only Stores
Section 1 The Ownership of a Corporation 552
Assessment 556
Section 2 The Income Statement 557
Assessment 564
Section 3 The Statement of Retained Earnings, Balance 565
Sheet, and Statement of Cash Flows
Assessment 571
Chapter Summary 572
Chapter Review and Activities 574
Computerized Accounting 575
Chapter Problems 576
Winning Competitive Events 579
Real-World Applications and Connections 580
IN-TOUCH Mini Practice Set 4 In-Touch Electronics 582
Electronics Recording Business Transactions in Special Journals
Chapter 20 Completing the Accounting Cycle 586
for a Merchandising Corporation
Closing the Books: PETsMART
Section 1 Journalizing Closing Entries 588
Assessment 592
Section 2 Posting Closing Entries 593
Assessment 599
Chapter Summary 600
Chapter Review and Activities 602
Computerized Accounting 603
Chapter Problems 604
Winning Competitive Events 609
Real-World Applications and Connections 610
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TABLE OF CONTENTS
Chapter 21 Accounting for Publicly Held Corporations 612
Analyzing Corporate Stock: Hewlett-Packard
Section 1 Publicly Held Corporations 614
Assessment 618
Section 2 Distribution of Corporate Earnings 619
Assessment 622
Accounting Careers in Focus 623
Section 3 Financial Reporting for a Publicly Held Corporation 624
Assessment 627
Chapter Summary 628
Chapter Review and Activities 630
Computerized Accounting 631
Chapter Problems 632
Winning Competitive Events 635
Real-World Applications and Connections 636
Unit 5 Accounting for Special Procedures 638
Chapter 22 Cash Funds 640
Protecting Cash: Applebee’s International
Section 1 The Change Fund 642
Assessment 646
Section 2 The Petty Cash Fund 647
Assessment 655
Chapter Summary 656
Chapter Review and Activities 658
Computerized Accounting 659
Chapter Problems 660
Winning Competitive Events 665
Real-World Applications and Connections 666
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TABLE OF CONTENTS
Chapter 23 Plant Assets and Depreciation 668
Depreciating Assets: Rush Trucking
Section 1 Plant Assets and Equipment 670
Assessment 673
Section 2 Calculating Depreciation 674
Assessment 676
Section 3 Accounting for Depreciation Expense at the 677
End of a Year
Assessment 684
Accounting Careers in Focus 685
Chapter Summary 686
Chapter Review and Activities 688
Computerized Accounting 689
Chapter Problems 690
Winning Competitive Events 693
Real-World Applications and Connections 694
Chapter 24 Uncollectible Accounts Receivable 696
Analyzing Credit Losses: U.S. Government Accountability Office
Section 1 The Direct Write-Off Method 698
Assessment 702
Section 2 The Allowance Method 703
Assessment 711
Section 3 Estimating Uncollectible Accounts Receivable 712
Assessment 715
Chapter Summary 716
Chapter Review and Activities 718
Computerized Accounting 719
Chapter Problems 720
Winning Competitive Events 723
Real-World Applications and Connections 724
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TABLE OF CONTENTS
Chapter 25 Inventories 726
Tracking Inventories: REI, Inc.
Section 1 Determining the Quantity of Inventories 728
Assessment 730
Section 2 Determining the Cost of Inventories 731
Assessment 735
Accounting Careers in Focus 736
Section 3 Choosing an Inventory Costing Method 737
Assessment 739
Chapter Summary 740
Chapter Review and Activities 742
Computerized Accounting 743
Chapter Problems 744
Winning Competitive Events 747
Real-World Applications and Connections 748
Chapter 26 Notes Payable and Receivable 750
Evaluating Notes: Advanced Micro Devices
Section 1 Promissory Notes 752
Assessment 756
Section 2 Notes Payable 757
Assessment 764
Section 3 Notes Receivable 765
Assessment 767
Chapter Summary 768
Chapter Review and Activities 770
Computerized Accounting 771
Chapter Problems 772
Winning Competitive Events 775
Real-World Applications and Connections 776
K
I Mini Practice Set 5 Kite Loft Inc. 778
T
E LOFT INC. Completing the Accounting Cycle for a Merchandising Corporation
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TABLE OF CONTENTS
Unit 6 Additional Accounting Topics 782
Chapter 27 Introduction to Partnerships 784
Looking at Partnerships: Moss Adams LLP
Section 1 Partnership Characteristics and Partners’ Equity 786
Assessment 789
Section 2 Division of Income and Loss 790
Assessment 795
Chapter Summary 796
Chapter Review and Activities 798
Computerized Accounting 799
Chapter Problems 800
Winning Competitive Events 803
Real-World Applications and Connections 804
Chapter 28 Financial Statements and Liquidation of a Partnership 806
Evaluating Partnership Financial Statements: King & King, Architects
Section 1 Financial Statements for a Partnership 808
Assessment 810
Section 2 Liquidation of a Partnership 811
Assessment 815
Chapter Summary 816
Chapter Review and Activities 818
Computerized Accounting 819
Chapter Problems 820
Winning Competitive Events 823
Real-World Applications and Connections 824
Fine Mini Practice Set 6 Fine Finishes 826
Finishes Completing the Accounting Cycle for a Partnership
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TABLE OF CONTENTS
Chapter 29 Ethics in Accounting 830
Assuring Responsible Governance: The Institute of Internal Auditors
Section 1 The Nature of Ethics 832
Assessment 835
Section 2 Ethics in the Accounting Profession 836
Assessment 839
Chapter Summary 840
Chapter Review and Activities 842
Chapter Problems 843
Real-World Applications and Connections 845
Appendix A Adjustments for a Service Business Using a A–2
Ten-Column Work Sheet
Appendix B Using the Numeric Keypad A–14
Appendix C Recording Transactions in the Combination Journal A–18
Appendix D The Accrual Basis of Accounting A–26
Appendix E Federal Personal Income Tax A–36
Appendix F Excerpts from the PETsMART, Inc. 2003 Annual Report A–42
Appendix G Additional Reinforcement Problems A–52
Appendix H Answers to Section Assessment Problems A–70
Glossary G–1
Index A I–1
Index B Real-World Applications and Connections I–11
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First-Year Course
GLENCOE
Donald J. Guerrieri F. Barry Haber William B. Hoyt Robert E. Turner
Norwin High School, Fayetteville State Wilton High School Northwestern State
Retired University, Retired Wilton, Connecticut University
North Huntingdon, Fayetteville, Natchitoches,
Pennsylvania North Carolina Louisiana
New York, New York Columbus, Ohio Chicago, Illinois Peoria, Illinois Woodland Hills, California
i-xxvii-FM-868829.indd i 9/29/05 6:05:12 PM
Notice. Information on featured companies, organizations, and their products
and services is included for educational purposes only and does not present or
imply endorsement of the Glencoe Accounting program. Permission to use all
business logos has been granted by the businesses represented in this text.
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Except as permitted under the United States Copyright Act, no
part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without
prior written permission of the publisher.
Printed in the United States of America.
Send all inquiries to:
Glencoe/McGraw-Hill
21600 Oxnard Street, Suite 500
Woodland Hills, CA 91367
ISBN-13: 978-0-07-868829-4 (Student Edition)
ISBN-10: 0-07-868829-9 (Student Edition)
ISBN-13: 978-0-07-873985-9 (Teacher Wraparound Edition)
ISBN-10: 0-07-873985-3 (Teacher Wraparound Edition)
2 3 4 5 6 7 8 9 079 10 09 08 07 06
i-xxvii-FM-868829.indd ii 4/6/06 5:23:48 PM
Meet Our Authors
Donald J. Guerrieri William B. Hoyt
Donald J. Guerrieri has taught accounting at both William B. Hoyt is an Accounting Instructor at Wilton
the secondary and college levels. His work for a firm High School, Wilton, Connecticut. He has been a force
of certified public accountants gave him hands- in accounting curriculum development for many years
on experience in working with real-world clients. and served as a member of the writing task force for the
Dr. Guerrieri has written numerous articles about National Standards for Business Education. The author
teaching accounting for a number of educational of various articles in professional journals, Mr. Hoyt was
journals. Now retired from his position as Accounting named Connecticut’s Outstanding Business Educator
Instructor at Norwin High School, North Huntingdon, of the Year in 1996, and in 1997 the National Business
Pennsylvania, he is a program speaker at business Education Association named him National Secondary
education seminars and conferences. Teacher of the Year.
F. Barry Haber Robert E. Turner
F. Barry Haber has taught accounting principles courses Robert E. Turner is an Assistant Professor in the College of
to literally thousands of students for more than 40 years. Business at Northwestern State University, Natchitoches,
Dr. Haber is a certified public accountant and has served Louisiana. Previously, he served as Vice President for
on the Minority Doctoral Fellows Committee of the Business Affairs at McNeese State University, Lake
American Institute of Certified Public Accountants Charles, Louisiana, and at the University of Louisiana
(AICPA). In addition to teaching accounting principles, at Monroe. Mr. Turner’s broad experience includes
Dr. Haber has authored three other textbooks in addition teaching accounting and other business subjects at the
to a number of articles and accounting cases. He is high school and college levels. He is a frequent speaker
retired from his position as Professor of Accounting at at educational conferences, seminars, and workshops
Fayetteville State University, Fayetteville, North Carolina. around the country.
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iii
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Contributing Editors
Cynthia A. Ash Patrick C. Hale Alice Sineath
Davenport University Angelina College Forsyth Technical Community College
Granger, Indiana Lufkin, Texas Winston-Salem, North Carolina
Louann Cummings Sandra S. Lang Kimberly D. Smith
The University of Findlay McKendree College County College of Morris
Findlay, Ohio Lebanon, Illinois Randolph, New Jersey
Educational Reviewers
Jayne Abernathy Patricia Kay Fordham Jeff Noyes
Accounting Teacher Business Teacher Business Education Teacher
Centerville High School Central High School Minnetonka High School
Centerville, Ohio Salt Lake City, Utah Minnetonka, Minnesota
Barbara A. Berg Patsy A. Frost Karen Poidomani
Vocational Business Teacher Business Department Chair Business Teacher
Carey High School Scituate High School William Floyd High School
Carey, Idaho North Scituate, Rhode Island Mastic Beach, New York
Sibyl Cole-Olfzewski Ruby Garr Martha Ramirez
Computer Tech. Teacher Business Department Head Business Teacher
Medina High School I.H. Kempner High School McCallum High School
Medina, Ohio Sugar Land, Texas Austin, Texas
Naomi Crane Karen King Gilliland William Sinai
Accounting Teacher Business Department Chair Computerized Accounting Dept.
Southwest High School Winchester Community High School Chair
Fort Worth, Texas Winchester, Indiana West Valley Occupational Center
Johnsie Crawford Norma C. Isassi Woodland Hills, California
Accounting Teacher Accounting Teacher Violet Snell
Brandon High School H.M. King High School Business Department Chair
Brandon, Florida Kingsville, Texas MacArthur High School
Carrie Davis Karen LaClair San Antonio, Texas
Business Teacher Business Department Chair Alfonso Vargas
Yoncalla High School Simsbury High School Accounting Teacher
Yoncalla, Oregon Simsbury, Connecticut Hueneme High School
Melinda G. Dibenedetto Chris Mendez Oxnard, California
Business Department Chair Accounting Teacher Karen Wood
Shades Valley High School Bel Air High School Accounting Teacher
Birmingham, Alabama El Paso, Texas Centerville High School
Christine Fink Regena Morris Centerville, Ohio
Business Teacher Business Education Teacher Dianne L. Young
Cocalico High School Arlington Heights High School Dean of Students
Denver, Pennsylvania Fort Worth, Texas Wilmington High School
Wilmington, Delaware
iv
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Educational Consultants
We wish to acknowledge the contributions of the following:
Jayne Abernathy, Xenia, OH Susan España, Rocklin, CA
Jim Adams, New Albany, IN Morris P. Fair, Sr., Jackson, TN
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Ron Baldini, Pulaski, WI Julie Fox, Wisconsin Rapids, WI
Alan Balog, Ravenna, OH Carolyn Francis, Baytown, TX
B. A. Banks-Burke, Hudson, OH Cherilynn Frost, Livonia, MI
Denise M. Barbaris, West Milford, NJ Patricia T. Gardella, Vineland, NJ
E. Patricia Barnes, Evansville, IN Robert D. Garrison, Belleview, FL
Lou Ellen Bass, Four Oaks, NC Kimberly Morris Gehres, Adrian, MI
Linda Becker, Cary, NC JoAnn Gipson, Garland, TX
Perry Beckerman, Brooklyn, NY Nancy Glavic, New Concord, OH
Kathleen Beetar, Houston, TX Joyce Greemon, Gastonin, NC
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Len C. Bigler, Grand Rapids, MI Andrea Gross, Vidor, TX
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Lee Birnbaum, Farmingdale, NJ Ronald L. Hainds, Jacksonville, IL
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Claudia Cullari, Fair Lawn, NJ Lori Jepson, Montclair, CA
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Inez Lauerman, Shingle Springs, CA Frank Rudnesky, Pine Hill, NJ
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Steve Leighton, Brooklyn, NY Lawrence Sakalas, Southgate, MI
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Sue Lewis, Littlerock, CA Donna M. Scheuerer, Farmingdale, NY
Stan Lewis, Champaign, IL Jerry Schlecher, Hartland, MI
Donna Lewis, Morehead City, NC Sue Smith, Whittier, CA
Theresa Lueras, Daly City, CA Pete Smith, Mishawaka, IN
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Pam Meyer, The Woodlands, TX Linda Stevens, Houston, TX
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vi
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To the Student
The Structure of This Book
Your textbook contains 29 chapters that are logically organized in six units. Each chapter consists of
two or three sections. This structure presents your accounting lessons clearly and simply. Your book also
contains a wide variety of features to clarify the lessons and tie them to real-life situations.
Units Each unit introduces a major aspect of accounting. The photo and
features in the unit opener are organized around a common theme
that indicates how people in the real world use accounting.
UNIT
The Basic
2 ycle
Accounting C WebQuest
Internet Pro
ject Internet Project
A Whole New
Ball Game
the world’s most
popular sports.
However, in the
money.
introduces an
Soccer is one of a history of losing
United States, profe
That situation is
ssional soccer has
changing as the
the business
U.S. fan base grows
side of profe
. In this project
ssional sports.
Internet activity that
you will explore
click on Student
ounting.glencoe.
Log on to glencoeacc Click on WebQuest and
Center.
your WebQuest
com and
by reading
you will perform
throughout the
select Unit 2. Begin
the Task.
2.
as you study Unit
your WebQuest
unit. It sends you
on
Continue working 3 6 9 10
11
Chapter
303
Page 75 161 247 275
THE BIG PICTU
RE to the Glencoe
MILLIONS OF DOLLA
RS Accounting Online
Learning Center for
soccer
h Premiership
UNITED, Englis
ce Q & A
MANCHESTER
Personal Finan about the YANKEES, Major
League Baseb
all
Q: Why do
I need to know
accounting cycle
?
cts of your life,
you will
NEW YORK
JUVENTUS,
Italian Serie A
soccer instructions.
A: In all aspe ert economic events
need to conv ion. soccer
l info rmat Italian Serie A
into usefu A.C. MILAN,
is an exam ple of useful
Q: What S, NFL
information? TON REDSKIN
rt showing how ASH
WAS INGT
HING
ple is a repo saved, and
to dollars
A: An exam you earned, *Revenues conver
ted from euros
Standard & Poor’s Personal Finance Q & A
much money Data: Deloitte BusinessWeek.
n period. by permission from
spent in a give ource: Reprinted
The BusinessWeek feature presents “The Big
Source 47
THINK IT OVER in your life
helps you identify how accounting material
What economic
events occur
th period? How
can you
glencoeaccou
nting.glencoe
.com
in a one-mon
organize that
information
so that it is
Picture” that graphically illustrates WebQuest
presented in the unit relates to your life in
useful to you?
46 statistics to help them come alive.
the real world.
Chapters
Reading strategies throughout the chapter guide you before you read each chapter, as you read
it, and after you have read it. They highlight the most important concepts in the chapter before
you read. As you read, these strategies prompt you to identify how accounting concepts affect
your daily life right now, recognize similarities and differences in concepts, recall previously
introduced ideas and apply them to new material, identify key concepts, and restate concepts in
your own words. After You Read strategies suggest activities to organize what you have learned.
ns
CHA PTE R 6 Recording Transactio
What You’ll Learn introduces ral Journal
in a Gene
the chapter topics. BEFORE
YOU
READ
Why It’s Important sets the Predict
What You’ll Learn title tell you?
stage and shows how chapter 1. Explain the first three steps
the accounting cycle.
in 1. What does the chapter
2. What do you already
know about this subject
about this in the earlier
from personal experience?
chapters?
3. What have you learned
materials are relevant to the 2. Give and describe several
examples of source
4. What gaps exist in your knowle dge of this subject?
business world.
documents.
ld of Business
3. Explain the purpose of Exploring the Real Wor
journalizing.
INFORMATION
Exploring the Real World 4. Apply information from
source documents.
RECORDING FINANCIAL
Google Inc.
Describe the steps to make ation on the
of Business spotlights a 5.
a general journal entry.
.
Think about how often
Internet, whether it
you look for inform
is for school or just
something you find
is Google.
6. Make general journal entries chance your first stop
successful, well-known
There is a good
interesting. at Stanford
l Brin were students
7. Correct errors in genera Larry Page and Sergey the next few
journal entries. met in 1995. During
University when they logy. They
company to illustrate an d
techno
Working in the Real Worl
together on Web search
8. Define the accounting terms years, they worked al computers
r. do searches using person
introduced in this chapte developed a way to NTING KNOWLEDGE Person al Connection
machi nes. APPLYING YOUR ACCOU is it important to keep
accounting topic discussed in
ive
Why It’s Important instead of big, expens
a garage in 1998. journal of the things 1. In your workplace, why
e Inc. was started in Have you ever kept a daily transactions?
The company Googl accurate records of daily
es a day. Within two that happen during your
day? The general in
Every transaction you The site performed
about 10,000 search
similar. The daily financia
l 2. List five business transactions that happen
▲
to 100 million. Today
the chapter.
is
have with a business is journal of a business
that number grew A company like your workplace.
and one-half years, company takes d there.
documented in some way. happenings are recorde
et search engine. The r
ent Google is the top Intern ing, invests in compute
Online Connection
Companies keep perman in advertising each
year, keeping its team Google sells advertis
engineers. You will coe.com and click
records of transactions. in billions of dollars equipment, and pays software Go to glencoeaccounting.glen
transactions in a on Working in the
of accountants busy. learn how to record business on Student Center. Click
journal in this chapter. Chapter 6.
Real World and select
ou Think?
What Do You ny,, what types of
g an Internet compa
If you were just startin
Working in the Real World establishes a bridge between
131
would you record?
financial information
lencoe.com
glencoeaccounting.g
130 Chapter 6 Record
ing Transactions in the chapter’s content and the real-world workplace.
a General Journal
xxii
i-xxvii-FM-868829.indd xxii 9/20/05 2:39:24 PM
To the Student
Summary The Chapter Summary organizes the chapter’s key
CH AP TER 6
concepts to help you review the main ideas.
Key Concepts below. The first
three steps are highlighte
d:
cycle is pictured
1. The accounting e documents.
and verify sourc
Step 1: Collect n.
each transactio
Step 2: Analyze n.
each transactio
Step 3: Journalize
The Chapter Review
Journalize
Analyze each each transaction Post to
transaction the ledger
GENERAL
Collect and verify
CH AP TE R 6
ACCOUNT JOURNAL
and Activities test your
source documents
Review and Ac
DEBIT CREDIT
ACCOUNT LEDGER
INVOICE
RECEIPT
2
DEBIT CREDIT
3 4 tivities
AFTER
READ
understanding of the
MEMORANDUM
1 YOU
5
9 6
TRIAL
BALANCE
Check Your Und
1. Accountin
g Cycle
erstanding main points and key
POST-CLOSING
8 7 a. List the first
terms in the chapter.
TRIAL BALANCE three steps of
WORK SHEET
b. What woul the accountin
d happen if you g cycle.
GENERAL
JOURNAL
INCOME 2. Source Documen skipped Step
STATEMENT
ts 2?
STATEMENT OF
CHANGES IN
OWNER'S EQUITY Prepare a Prepare a a. List four sourc
trial balance e documents
BALANCE work sheet b. Explain when and describe
LEDGER SHEET
each source docu the contents of
Prepare a 3. Journalizin ment is used. each.
post-closing g
trial balance post a. Why is a journ
Journalize and Prepare financial b. What is the
al sometimes
called the book
closing entries statements purpose of recor of original entry
4. Applying ding transactio ?
e documents are Information ns in a journal?
examples of sourc
ess transactions. Four a. Where do
you get the infor
ments are evidence of busin b. How do you mation needed
2. Source docu account determine the to make a journ
listed below. g of an item on 5. Steps to debit and credi al entry?
buying or sellin Make a Gene t parts of a journ
� describes the ess a. What six types
ral Journal Entry al entry?
Invoice received by a busin of information
� describes cash takes place within a
business b. In what orde are included in
each general
Receipt transactio n that nt balance r do you recor journal entry?
� describes a and shows the
checking accou 6. Making Gene
ral Journal Entri
d this informati
on?
Memorandum specific check es
� describes a ns in the order
a. How are the
two amount colum Winning Competitive Events
Check Stub
3. Businesses use
journals
ss
to
of
keep
recor
records of transactio
ding transactio
ns in a journ al is $
Date
250.00
November 2
Info-Systems
No. 110
20
-- b. Describe
7. Correcting
the spacing of
General Journ
ns of the gene
the information
ral journal used
in the Descriptio
to record dolla
r amounts?
CHAPTE R 6
proce
they occur. The al Errors n column.
To
fax/modem
g. alizing a. What proce
n needed for journ
For
called journalizin the informatio
Dollars Cents
b. What are
dure is used to
correct a gene Practice your test-taking skills! The questions
s conta in a sourc e ral on this page are reprinted with permission
4. Source docu
ment n to the right is 25,000 00 the possible cons journal entry
error in a man
check stub show equences of erasi from national organizations:
forward
to make the
Balance brought
ual syste
transactions. The mation is used ng an error in m?
highlighted infor the general journ
Add deposits
• Future Business Leaders of America
document. The al?
• Business Professionals of America
journal entry.
25,000 00
Total
Apply Key Ter
250 00
Less this check
Balance carried
forward 24,750 00 ms Use a separate sheet of paper to record your
answers.
Assume you are
keeps financial
an accountant
who
Future Business Leaders of America
records for smal MULTIPLE CHOICE
Write a one-page l businesses.
newsletter that 1. Recording account information in chronological
send to potential you might order is called
ary clients describin a. posting.
150 Chapter 6 Summ importance of g the
accounting recor b. journalizing.
of the terms ds. Use each
below in your c. analyzing.
newsletter.
d. processing.
accounting cycle 2. Every journal consists of four parts:
calendar year journal
check stub journalizing a. account title, date, post reference, amount.
fiscal year memorandum b. date, debit, credit, source document.
general journ receipt c. date, page number, debit, credit.
al source document
invoice d. date, post reference, debit, credit.
3. The amount of each asset in an opening
entry is recorded in a journal in the
CHAPTER 6 Problems a. General Debit column.
b. General Credit column.
Complete problems using: Manual Glencoe
Working Papers
OR
Peachtree Complete
Accounting Software
OR
QuickBooks
Templates The Chapter Problems
152 Chapter 6 Revie
w and Activities
c. both a and b.
d. neither a nor b.
4. An example of a business document that
indicates a transaction has occurred is
SMART GUIDE
Problem 6–4 Recording General Journal
Transactions
provide exercises so you a. a journal.
b. a ledger.
c. a memo.
Ronald Hicks owns and operates Wilderness Rentals. The following
can actively apply what you
Step–by–Step Instructions:
d. a balance sheet.
Problem 6–4 accounts are needed to journalize the month’s transactions.
1. Select the problem set Business Professionals of America
have learned by performing
for Wilderness Rentals General Ledger
(Prob. 6–4).
MULTIPLE CHOICE
101 Cash in Bank 301 Ronald Hicks, Capital
2. Rename the company 105 Accts. Rec.—Helen Katz 305 Ronald Hicks, Withdrawals 5. The source document used when a customer
makes a payment on his/her account
and set the system date. owed would be a
110 Accts. Rec.—Polk and Co. 310 Income Summary
actual accounting functions.
3. Enter all of the general
journal transactions 120 Office Equipment 401 Equipment Rental Revenue a. sales invoice.
using the General 125 Camping Equipment 501 Advertising Expense b. check.
Journal Entry option in 201 Accts. Pay.—Adventure 505 Maintenance Expense
the Tasks menu. c. receipt.
Equipment Inc. 515 Rent Expense
4. Print a General Journal
203 Accts. Pay.—Digital Tech 520 Salaries Expense d. memorandum.
report.
5. Proof your work and Computers 525 Utilities Expense
make any needed 205 Accts. Pay.—Greg Mollaro
corrections.
Need More Help?
6. Complete the Analyze
activity.
7. End the session.
Instructions: Record the following transactions on page 1 of the general
journal in your working papers. For each transaction:
1. Enter the date. Use the current year.
Winning Competitive Events gives you the Go to glencoeaccounting.glencoe.com and
click on Student Center. Click on Winning
Competitive Events and select Chapter 6.
QuickBooks
PROBLEM GUIDE
2. Enter the name of the account debited.
3. Enter the amount of the debit.
4. Enter the name of the account credited.
opportunity to practice your test-taking skills with • Practice Questions and Test-Taking Tips
• Concept Capsules and Terminology
Step–by–Step Instructions:
Problem 6–4
1. Restore the Problem
5. Enter the amount of the credit.
6. Enter a source document reference. questions provided by two national organizations, glencoeaccounting.glencoe.com
Chapter 6 Winning Competitive Events
159
Future Business Leaders of America and Business
6-4.QBB file. Date Transactions
2. Enter all of the general
journal transactions Jan. 1 Wrote Check 310 for the part-time secretary’s salary, $270.
using the Make General 3 Bought $2,000 of camping equipment on account from
Professionals of America.
Journal Entries option
in the Company menu. Adventure Equipment Inc., Invoice 320.
3. Print a Journal report. 5 Received $500 from a client for equipment rental, Receipt 150.
4. Proof your work and 7 Wrote Check 311 to pay the electricity bill of $110.
make any needed
corrections.
11 Billed a client, Polk and Co., $1,700 for rental equipment, Sales
5. Complete the Analyze Invoice 262.
activity. 12 Ronald Hicks withdrew $800 for personal use, Check 312.
6. Back up your work.
14 Bought a $300 scanner for the office computer from Digital
Tech Computers, on account, Invoice 270.
16 Wrote Check 313 for $1,000 as an installment payment toward
the amount owed to Adventure Equipment Inc.
25 Received $1,700 from Polk and Co. in payment on their
account, Receipt 151.
30 Paid Digital Tech Computers $300 for the amount owed,
Check 314.
CHAPTER 6 Real-World Applications and Connections Real-World Applications and Connections CHAPTER 6
Analyze Calculate the amount of cash deducted from the Cash in
Bank account in January.
Critical General Journal Entries ))
$ ))
Communicating
Describing Source Documents
154 Chapter 6 Problems
Thinking 1. What term describes any accounting period of 12 months? ACCOUNTING Write a paragraph describing the content of invoices, check stubs, memorandums,
2. How is the general journal entry for a cash purchase different from the entry and receipts. Explain how to verify and analyze these source documents before an
for a purchase on account? entry in the journal is made.
3. It is your first day on a new job. Your task is to journalize transactions. You
Skills Beyond Creative Thinking
just sat at your desk, which is covered with papers. What do you do next?
NUMBERS Congratulations! You’ve been chosen as the local Business Owner of the Year!
4. Compare a general journal entry
entr to a transaction recorded in T accounts. Write a one-page press release describing your business and why you’ve been
How is it similar? How is it different
different? successful. Be sure to include a brief description of your business, the skills
5. What items do you need to complete each of the first three steps of you use in running a successful business, and how you plan to continue being
Real-World Applications and the accounting cycle? Include office supplies and forms as well as any
information that will be needed.
6. What is the value of keeping the record of business transactions in INTERNATIONAL
successful in the future.
Dating Documents
Connections apply and extend C chronological order
order?
Service Business: Exercise and Fitness
Accounting Source documents from different countries can have different date formats:
United States
Date written out November 1, 2008
Australia
1 November 2008
the chapter concepts to enrich STUD
ASE
TUDY Elena Rodriguez started a business offering an exercise facility and personal Abbreviation 11/1/08 1/11/08
physical training. Elena has hired you as a financial consultant to help her set up Format MM/D/YY D/MM/YY
her accounting system. She has rented a space for her business, pur
purchased several
your accounting knowledge. They
As you can see in this example, writing out the month prevents confusion. The
exercise machines, and hired a part-time exercise instructor. Elena’s clients can International Organization for Standardization (ISO) promotes the worldwide use
either pay a fee for each visit or purchase a membership. of a single format: YYYY-MM-DD.
INSTRUCTIONS
include critical thinking questions,
INSTRUCTIONS Write the date November 1, 2008, using the recommended
1. W
Write
rite a plan for Elena Rodriguez explaining the types of financial international format.
information she needs to record. Describe the sour
source documents that might
Your Personal Finance Records
case studies, and activities to
be a part of her business. For example, should Elena send invoices to her Making It
non-membership clients or ask them to pay at each visit? Describe why it is Personal Your day-to-day source documents are personal financial records. Personal
important for Elena to record both the cost of doing business and the income financial records also include documents that are not related to everyday
develop skills in communicating
from the business. transactions. Vehicle titles, birth certificates, and tax returns are all personal
2. Suggest a chart of accounts for Elena’s
Elena business. financial documents. You can store your financial documents in home files, a
a eerr home safe, or a safe-deposit box. You can also keep some financial records on a
ETHI mattttte
accounting information, ethical CS
of Gossip in the W
Workplace home computer.
Assume that you are an accounting clerk for a large insurance company like PERSONAL FINANCE ACTIVITY Imagine a person
Farmers Insurance. Your boss introduces you to the newest hire, and you your age who drives to a part-time job and has
decision making, financial
Sally. You remember
recognize her as a former classmate from high school named Sally a credit card. Make a list of the types of records
that Sally had been suspended from school for a series of locker thefts. During
Transactions in Sports
and documents such a person would probably
lunch you consider telling other co-workers about Sally’s history. You also wonder The general journal can be used
have. Create a plan that describes which records
to record all types of transactions.
statement analysis, personal finance,
if your boss knows. and documents to store and where to store Visit glencoeaccounting
ETHICAL DECISION MAKING them. .glencoe.com and click
1. What are the ethical issues
issues? 4. How do the alternatives affect the PERSONAL FINANCE ONLINE Log on to on Student Center. Click on
international accounting and more. 2. What are the alternatives
alternatives?
3. Who are the affected parties
parties?
parties?
5. What would you do?
glencoeaccounting.glencoe.com and click
on Student Center. Click on Making It
Personal and select Chapter 6.
WebQuest and select Unit 2 to
continue your Internet project.
160 Chapter 6 Real-World Applications and Connections glencoeaccounting.glencoe.com Chapter 6 Real-World Applications and Connections 161
xxiii
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To the Student
Sections
SECTION 1
The Accounting Cycle
BEFORE
YOU READ In earlier chapters you
learned to use the accoun
ting equation
and T accounts to analyz
e business transactions
Each section opens with
you will learn how to . In this chapter
Main Idea record business transa
ctions in a journal.
The accounting cycle is a series
of The Steps of the Acc
the Main Idea of the steps done in each accoun
ting period
to keep records in an orderly
fashion.
What Is the Accou
ounting Cycle
nting Cycle?
section; Read to Learn…,
The accounting period
Read to Learn… ties called the accou
of a business is separa
ted into activi-
➤ the steps in the accounting nting cycle . These
cycle. ness keep its accounting activities help the busi-
(p. 132) records in an orderl
which lists the major topics ➤ the different types of accoun
periods. (p. 134)
ting
look at Figure 6–1,
their sequence.
which describes accou
y fashion. Take a
nting activities and
and their page numbers;
In this chapter you will
use Steps 1, 2, and 3
Key Terms ing cycle: of the account-
accounting cycle check 1. Collect and verify
stub
and Key Terms that you source document journal source documents.
2. Analyze each transa
Figures aid your
invoice ction.
journalizing 3. Journalize each transa
receipt ction.
will learn in that section.
fiscal year After studying Chapt
memorandum calendar year ers 3 through 10, you
visual learning
the entire accounting will have covered
cycle for a service busine
sole proprietorship. ss organized as a
Collect and verify
source documents
Analyze each
transaction
Journalize
each transaction
of key concepts,
relationships, and
ACCOUNT
DEBIT GENERAL Post to
CREDIT
INVOICE
JOURNAL
the ledger
ACCOUNT
RECEIPT
2 3 accounting forms
DEBIT CREDIT
MEMORANDUM
LEDGER
1 4
Delivery
Service
MEMORA
NDUM 3
and documents.
RoadrunnerGateway Blvd.
155
Sacramen
to, CA 94230 POST-CLOSING
TRIAL BALANCE
9 5
5
ans action Accounting
Clerk
8 7 6 TRIAL
BALANCE
e s s Tr
TO: chez
Maria San
Busin
e on FROM:
e telephon
11, 20-- GENERAL
October
r sold on
DATE: e JOURNAL
telephon $200. WORK SHEET
adrunne m 3. T: Sold pany for INCOME
morandu SUBJEC en Com
er 11 Ro unt to Gre STATEMENT
On Octob an y for $200, Me Sold one
telephon
e on acco STATEMENT OF
Prepare a
een Comp
CHANGES IN
LEDGER OWNER'S EQUITY
nt to Gr post-closing Prepare a
accou accounts
BALANCE
Prepare a
1. The Figure 6–1 Steps in the trial balance SHEET work sheet
trial balance
Identify Accounts — Accounting Cycle with Steps Journalize and post
IS ble
ANALYS Receiva 1, 2, 3 Highlighted closing entries
mpany Prepare financial
Gr n Co Equip-
ee statements
e fice
and Offic ected. $200. Of
are aff ounts. reased by 132 Chapter 6 Recording
me nt asset acc Company is inc Transa
ransact
ctions
ions in a
accounts are reen General Journal
2. Both ts Receivable—G $200.
fy un d by
Classi 3. Acco nt is decre
ase
/ Equipme
.
y for $200
Compan
—Green
Re ceivable 00.
De bit Accounts me nt for $2
4. uip
RULE Office Eq
CREDIT 5. Credit
DEBIT- nt uipme
e— Office Eq
Receivabl Credit
Accounts mpany
6. Green Co Debit
Each Business Transaction model
Credit 200
TS
T ACCOUN Debit
200
PAGE
1 is a step-by-step process for you to
JOURNAL
Y
7.
GENERAL
POST.
REF.
DEBIT
CREDIT
14
use in analyzing activities that affect
L ENTR PTION
2 0 0 00
JOURNA
a business.
DESCRI
2 0 0 00
15
DATE
mpany
Green Co
16
ts. Rec.—
14 Oc
t. 11 Acc ipment
17
Office Equ
dum 3
15 Memoran
16
17
No. 102
350.00 20
--
$ 12
October
Date re Auto
North Sho k
nt on truc
6
To
installme
ansa ction as the firs
t For
Dollars
Cents
e s s Tr 2 for $350
Busin
00
Check 10 tober 9. 22,000
r mailed to on Oc
Shore Au
forward
adrunne
brought
m North
Balance
Oc tober 12 Ro ased fro
On ch
ck purch
Assessment
—
osits
on the tru Pa ya ble Add dep
ent Accounts sh in
installm accounts 22,000
00
SECTION 2
1. The and Ca
ore Auto 350 00
Identify North Sh ected.
Total
ANALYS
IS
Bank are
aff th Shore check
ble—Nor
Less this 00
21,650
un ts Pa ya Ca sh in ard
2. Acco a liabilA account. READ
carr ied forw
ityFTER Balance
Classify Auto is
Bank is
an ass account.
YOU
et
are decre
ased by
eral The section Assessment helps
3. Both
accounts
e Main Idea Third Line of Gen
Reinforce th
General
Second Line of Journal Entry
/ $350.
Think of three diffe
rent types
transactions
Business
Tran theon
insacti General
First Line of Gen141
eral
nall Entry
Jourrna
Jou
Journal Entry
you reinforce the section’s
of business ons
main idea by creating a visual
Transacti
theg next
indin
mig
yoution2ht have
Recor
Sec e similar
month. Use a tabl
ribe the
to this one to desc for
general journal
entry organizer. After You Read
each transaction.
Do the Math pany puter system
on account
from Tech
price by 20
World. The
percent for
a helps you organize materials
bought a com reduced the ion.
Hania Dance
regular pric
Com
e for the syst
em is $3,000,
following
but
que
Tech World
stio ns about the jou
rnal entry for this transact
you learned in the section. A
. Answer the t amount?
storewide sale
1. Which acco
unt is debited
unt is credited
and for wha
and for wha
t amount? Do the Math activity sharpens
2. Which acco
Business Tra
nsactions
general journa
l are
2 Recording g a business transaction in theof paper, indicate the
your math skills. Problems
Problem 6–
check your understanding of the
rdin et
steps for reco
The six on a blank she
ers or
Instructions order. In you
r working pap
w, out of
shown belo transaction
s. D. Date of the
proper order
A. Am oun t
of these step
of the credit
unt credited
E. Amount
of the debit
the account
debited materials introduced. Answers to
the acco F. Name of
section assesment problems are
B. Name of
ce
ument referen
C. Source doc
Transactionss the following accounts.
3 Analyzing
Problem 6– ntly started a day-care center. She
n rece
use provided in Appendix H.
Glenda Hoh
n, Capital
General Led
ger Glenda Hoh ls
n, Withdrawa
Cash in Ban
k
sery Glenda Hoh
iny Tots Nur Day-Care Fee
s
Accts. Rec.—T ense
Office Fur niture Utilities Exp
e
Passeng er Van Van Expens
cme Bus Service transaction:
Accts. Pay .—A er, for each
e sheet of pap whether the
on a separat . Determine
r working papers or each account which
Instructions
In you
are affected. Classify acco unt is debited and
unts ch
which acco Indicate whi
Determine or decreased.
s are being increased
account
ited.
account is cred
Transactions: for cash.
passenger van
1. Bought a for the month
.
telephone bill -care services
.
2. Paid the tomers for day
cash from cus 149
3. Received in the General
Journal
sactions
Recording Tran
Section 2
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To the Student
Features
Connect to…
LANGUAGE The Connect to… feature links accounting
concepts to other subjects, such as history, MATH HINT S
ARTS science, and language arts. Using Algebra The
In accounting capital basic accounting eq
refers to money used to uation
The Math Hints feature with savvy is in the form a
start up or grow a new b c.
tips and instructions will help you • To find b, rewrite
business. The term comes the
understand and perform math functions equation as b a
from the Latin word for c.
related to accounting activities. • To find c, rewrite
head—caput. In ancient the
equation as c a
times nomadic herdsmen b.
measured their wealth by
the number of animals
CULTURAL
they had. They got this Diversity
number by counting Business Practices
heads. Giving business gifts
internationally can be
tricky. Some cultures
attach meaning to
The Cultural Diversity feature
certain gifts and
gives you information about
colors. For example,
practices and customs in other
countries and cultures. in Japan, white
chrysanthemums
are used only for
funerals.
cus
Careers in Fo
Accounting
T, FINANCE ...
VICE PRESIDy,ENCarlsbad, California Tips fr
om
3E Compan
Trish Lady age, co
mpanies
y do? On aver candidates for
s 3E Compan
Q: What doe t their environ
mental, health,
and six
interview ening. Disting ion
uish
Computerized Accoun
inesses mee
A: We help bus ibilities. each jo
b op
e compe
from th answers
tit
ting CHA PTE R 6
safety respons
oun ting career ? yourself g your
an acc ar sin th
Wh y did you choose atics but I didn’t kno
w by rehe
ial qu estions
wi
Q: tude in mat hem her to pote
nt ember. General Journal Entries
a strong apti an algebra teac family m ll
A: I knew I had that into a career. Luckily, I had tical application for a friend or eeting you wi
to turn ard a prac g the m ed,
how me tow Durin inform
ol who steered ross as Making the Transitio
in high scho
s: accounting. your come ac and confident. n from a Manual to a Compute
my math skill been key to prepared
, rized System
s that have Task
some factor Manual Methods
Q: What are For Recording Computerized Metho
ds
success? definitely help
s has
ed me.
te general journal
• Analyze the source
document to
opportunitie er for a real esta • Analyze the source
The individuals featured in the
determine which accoun document to
n to l offic t,
A: Being ope chief financia s developmen entries ts are affected.
working as a • Using a general journa determine which accoun
mple, I was s on busines ts are affected.
path to focu
er from that l form, enter the
exa skills I learned
• Enter the transaction
a different care m goals. The
details of the transac
tion. details in the
firm. I then took their long-ter ent role.
Accounting Careers in Focus
general journal using
from in my curr
• Check for equalit
panies reach und to draw
y of debits and credits the account
helping com a better backgro
. numbers for each ledger
account.
gav e me
your job?
• The software will
experience ut calculate the equalit
st abo presents. y
you like mo challenge it
introduce you to a wide range of
of debits and credits
Q: What do the intellectual finance?
.
onsibilities and
variety of resp president of
A: I like the ded to bec ome a vice to know
lls are nee It’s also importa
nt
Q: What ski
A: You need
a strong bac
kground in
time, money,
acco unting.
and other reso
urces. You mus
t be
to ways you
able to shift
can help you
r interesting and attainable career Peachtree Question
Q&A
how to allocate ng procedures
day accounti
choices in the field of accounting.
-to- How do I enter genera Answer
day
your focus from long -ter m goals. journal entries in
l 1. From the Tasks menu,
select General Journa
ieve its
company ach Peachtree?
2. Enter the date of
the transaction.
l Entry.
3. Enter the source docum
ent reference.
arch 4. Enter the account
CAREER FACTS
ral laws, rese number to be debited
state and fede 5. Enter a brief descrip .
pany follows budget proc
ess. tion of the transaction.
that the com manage the
Work: Ensure s, organize and s administrati
on; 6. Enter the debit amoun
Nature of the
t.
ent opportunitie nce or busines 7. Enter the account
▲
end inve stm deg ree in fina y companies number to be credite
and recomm Nee ded : A master’s firm or in finance. Man 8. Enter the credit amoun d.
cati on ng t.
Training or Edu nce in a public accounti 9. Click Save.
▲
rs of experie skills,
at least 10 yea s, negotiation
license. planning skill iding
require a CPA ls: Long-term process of dec
Aptitudes, Abi
lities, and Skil
s, and manage
ment skills. Man
agement is the
QuickBooks Q & A
▲
skill y
commun ication
urces of a bus
ines s. , and compan
use the reso on exp erie nce, location
how best to up, depending QuickBooks Question
$70,000 and roles of
Salary Range: ually assume
firm, and grad
▲
Answer
revenues. lic accounting How do I enter genera
nce in a pub l 1. From the Compa
Gain experie journal entries in ny menu, select Make
Career Path: 2. Enter the date of General Journal Entrie
s.
▲
onsibility. QuickBooks? the transaction.
increasing resp 3. Enter the account
to be debited.
4. Enter the debit amoun
work for? t, source document referen
y exciting to 5. Enter the account ce, and description.
e a compan
The Computerized Accounting feature helps
to be credited.
tes can mak
What attribu 37 6. Enter the credit amoun
tically Careers in Focus t, source document referen
Thinking Cri Chapter 2
Accounting 7. Click Save & Close. ce, and description.
you move from a manual accounting system to
a computerized system using the Peachtree and
For detailed instructions,
QuickBooks accounting software programs. see your Glencoe Accoun
ting Chapter Study Guides
and Working Papers.
Chapter 6 Compu
terized Accounting
153
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To the Student
Glencoe’s Reading Strategies
Use this menu for strategies to get the most from your reading.
Before You Read
Set a Purpose Draw from Your Background
• How does the subject of the section relate to your life? • What have you read or heard concerning new information
• How could you use what you learn in your own life? on the topic?
• How is the new information different from what you already
Preview
know?
• Read the chapter and section titles to preview the topics.
• How will the information that you already know help you
• Read the headings and questions related to them to learn
understand the new information?
more about the topic being introduced.
• Skim the figures, photos, forms, charts, and graphs. How do
they support the topic?
• Look for key terms that are boldfaced. How are they defined?
As You Read
Predict Notice Compare and Contrast Sentences
• Predict events or outcomes by using clues and information • Look for clue words and phrases that signal comparison,
that you already know. such as similarly, just as, both, in common, also, and too.
• Change your predictions as you read and gather new • Look for clue words and phrases that signal contrast, such as
information. on the other hand, in contrast to, however, different, instead
of, rather than, but, and unlike.
Connect
• Think about people, places, and events in your own life. Do Notice Cause-and-Effect Sentences
you see any similarities with those in your textbook? • Look for clue words and phrases, such as because, as a
• Can you relate the textbook information to other areas of result, therefore, that is why, since, so, for this reason, and
your life? consequently.
Question Notice Chronological Sentences
• What is the main idea? • Look for clue words and phrases, such as after, before, first,
• How do the figures, photos, forms, charts, and graphs next, last, during, finally, earlier, later, since, and then.
support the main idea?
Visualize
• Pay careful attention to details and descriptions.
• Create graphic organizers to show relationships that you find
in the information.
After You Read
Summarize • Did you learn anything new from the material?
• Describe the main idea and how the details support it. • Can you use this new information in other school subjects or
• Use your own words to explain what you have read. in your personal life?
• What other sources could you use to find more information
Assess
about the topic?
• What was the main idea?
• Did the text clearly support the main idea?
xxvi
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To the Student
Be an Active Reader!
Glencoe’s Top 10 Reasons to Become a Better Reader
10. Give yourself more choices in life. Reading well opens the door to a
wider variety of interesting career options.
9. Empower yourself through the written word. Teach yourself sailing,
computer skills, the latest techniques in skateboarding. Discover how to
create your own Web site.
8. Improve your chances of getting into and graduating from an
institution of higher learning. On the average, a person who gets a
postsecondary education makes three times more money than a high-
school dropout!
7. Increase your chances of getting a job when you look for one.
That’s important, considering that the average person will hold
11 different jobs over his or her lifetime.
6. Advance more quickly in your chosen career. In many positions,
people with strong reading skills are 10 times as likely to receive training
from their employer as those with limited reading skills.
5. Make the country economically stronger. More people reading well
means more people contributing to the progress and prosperity of the
country.
4. Save money and gain confidence. For example, you’ll be able to pass
your driver’s test and read the lease for your first apartment.
3. Be more civic minded. People who read well are more likely to vote
and to participate in democratic elections and in civic life.
2. Once learned, never forgotten. Reading is a lifelong skill, like riding a
bicycle—once you learn, you’ll never forget!
1. Enjoy life more! Reading not only helps you get ahead and stay ahead
in life—but also, it’s fun!
i-xxvii-FM-868829.indd 1 9/20/05 2:42:24 PM
UNIT
1 Introduction
to Accounting
Personal Finance Q & A
Q: Why is accounting important to me?
A: Learning accounting can help you to
keep track of your personal finances
or to start your own business. You
may even find that an accounting
career is a good fit for your talents
and personal interests.
Q: What do I need to know if I go into
business for myself?
A: You will need to know procedures
and standards. Accounting
procedures help you keep track of
your money. Accounting standards
provide rules for preparing financial
reports. You need financial reports
to get bank loans or to get other
people to invest in your business.
THINK IT OVER
Have you ever seen financial informa-
tion about a company? Where have you
seen it? Did you understand what it
reported?
002-003_UN01_868829.indd 2 9/15/05 11:19:17 AM
Internet Project
Risks and Rewards
An entrepreneur takes an idea and turns it into a business. This
involves risks, but those risks can turn into big rewards. The chart
shows the trend of risk-takers’ confidence over nine quarters.
You may wonder what chance you have to become a successful
entrepreneur. After you complete this project, you may have
the answer.
Log on to glencoeaccounting.glencoe.com and
click on Student Center. Click on WebQuest and
select Unit 1. Begin your WebQuest by reading
the Task.
Continue working on your WebQuest Chapter 1 2
as you study Unit 1. Page 25 45
THE BIG PICTURE
HAPPY DAYS Entrepreneurs confidence in the economy
over time.
Confidence
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9
Data: vFinance Investments Inc. Source: Reprinted by permission from BusinessWeek.
glencoeaccounting.glencoe.com 3
002-003_UN01_868829.indd 3 9/15/05 11:19:45 AM
CH A P T ER 1 You and the World
of Accounting
BEFORE
YOU READ
What You’ll Learn Predict
1. Describe how personal skills, 1. What does the chapter title tell you?
values, and lifestyle goals 2. What do you already know about this subject from personal experience?
affect career decisions. 3. What gaps exist in your knowledge of this subject?
2. Find information about a
variety of careers.
3. Set career goals. Exploring the Real World of Business
4. Identify career opportunities
in the accounting field.
THINKING ABOUT A CAREER
5. Describe the types of National Geographic Society
businesses and organizations Have you ever dreamed about hiking to a remote village in
that hire accountants. Costa Rica or boating to an untouched tropical island? Writers
6. Compare for-profit and photographers from National Geographic magazine may
businesses and not-for-profit have done it. Millions worldwide read National Geographic for
organizations. images and stories of cultures, nature, science, and technology.
7. Define the accounting terms It is the jewel of the National Geographic Society—the world’s
introduced in this chapter. largest nonprofit scientific and educational organization.
Why It’s Important The National Geographic Society makes films, books,
maps, and radio programs in addition to running a cable TV
To find out if an accounting
▲
channel and an award-winning Web site. In any given week,
career might be right for
you might find the organization sponsoring a fossil dig in
you, you need to get to know
yourself and learn about Africa or a study of sharks off the California coast. Producers
different opportunities. and accountants work together to fund these projects. The
Society employs more than 1,300 people who have a common
interest in expanding our vision of the world.
What Do You Think?
What type of job opportunities do you think exist at the
National Geographic Society?
4 Chapter 1 You and the World of Accounting
004-025_CH01_868829.indd 4 9/12/05 3:03:36 PM
Working in the Real World
APPLYING YOUR ACCOUNTING KNOWLEDGE
Personal Connection
It’s tough to figure out what you want to do 1. What type job do you have now or have
with the rest of your life! Career counselors say you had in the past? Is it in a field you might
that most people will have six to seven different continue to work in?
careers throughout their lives. Some of us change 2. Imagine yourself in five years. What type of
careers entirely—from archeologist to teacher, or job do you have? Where are you living? What
from freelance writer to photographer. Others skills are you using?
stay within the same industry, but change
specialties—from book designer to Web site Online Connection
designer, or from pediatrician to emergency care Go to glencoeaccounting.glencoe.com and click
physician. on Student Center. Click on Working in the
Real World and select Chapter 1.
glencoeaccounting.glencoe.com 5
004-025_CH01_868829.indd 5 9/12/05 3:03:42 PM
SECTION 1 Exploring Careers
Film producer? Animator? Web site designer? History teacher? Pedia-
BEFORE
YOU READ trician? Financial analyst? Environmental consultant? Who—me?
Main Idea Choosing a Career
A successful career choice What Do You Want to Do?
begins with learning about Let’s face it: Not many of us know what we want to do with the rest
yourself. of our lives, especially when we’re still in high school. You may be think-
Read to Learn… ing, “I’ll just take some liberal arts courses in college and something will
➤ the importance of come up” or “I’ll just work for a while to make some money and then fall
choosing a career. (p. 6) into a career.” You know what? Something may come up, and you may
➤ how to assess yourself in just fall into a career; but if you ask people who really love what they
terms of a career. (p. 7) do, odds are that they took some time to really get to know themselves
➤ the resources that are and what turned them on.
available to help you Danielle and Steve have been friends since their freshman year. Like
make career decisions. most students, they’ve been too wrapped up with classes, homework, and
(p. 10) activities to think about what their lives will be like after high school.
This all changed at the start of their senior year. Steve sees it as the end of
Key Terms a long haul, but Danielle sees it as the beginning of a whole new life.
skills
values Closing his locker door with his elbow, Steve turns to see Danielle
lifestyle smiling at him.
personality “Hey Dani! How’s it going?”
personal interest tests “Great,” says Danielle, holding up her class schedule. “They say
networking the last year in high school is always the best.”
“What are you taking?”
“Let’s see. I have chemistry, literature, algebra, speech, and
accounting.”
“Ouch, tough schedule! Did you say
accounting? I would have never guessed
you to be a number cruncher.”
“I don’t think I want to just ‘crunch
numbers.’ I’ve always aced math,
so I figured if I take accounting
now, I’ll know if I really like it
enough to study it as a career.
Besides, there are tons of ads
in the paper for accounting
jobs. If you’re good at it, you
can write your own ticket.
Think about it: Companies
6 Chapter 1 You and the World of Accounting
004-025_CH01_868829.indd 6 9/12/05 3:04:06 PM
need employees who know how to run their businesses. Plus
it’s not just sitting at a desk crunching numbers. My aunt is
a financial advisor. She loves her job and travels all over the
world.”
“Slow down, Dani, it’s only your senior year in high school. Don’t
you think it’s a bit too soon to be playing career woman?”
“The sooner the better, Steve!”
“Maybe you’re onto something here.”
Unlike a job, which is simply work for pay, a career is built on a founda-
tion of interest, knowledge, training, and experience. Have you thought of
what you may want your career to be? If not, you are not alone.
Assess Yourself in Terms of a
Career Vision
Who Are You?
Before choosing a career, you’ll want to do a little soul-searching. The
more you know about yourself, the easier it will be to make career choices.
• What are your personal interests and skills?
• What are your values, and how will they affect your career?
• What lifestyle interests you?
• How will your personality affect a career choice?
You have the answers to the questions but just don’t know it yet!
SKILLS & TRAITS CAREER EXAMPLE
Creative thinking Fine arts and humanities careers, such as actor,
artist, or musician
Knowing how to Training or teaching careers, such as business
learn consultant or training coordinator
Responsibility Health-related careers, such as surgeon, dental
hygienist, or home health aide
Friendliness Hospitality and recreation careers, including
cruise director, hotel manager, or park ranger
Honesty Child-care workers, veterinarians, and other
family and consumer science workers
Decision making Financial planners, accountants, and other
business and office careers
Analytical Construction careers, including surveyors,
general contractors, or electricians
Adaptability Any of the public service careers, such as teaching,
fire fighting, or serving in the armed forces
Self-control Entrepreneur or manager
Self-esteem Communications and media occupations, such as
computer artist or book editor
Section 1 Exploring Careers 7
004-025_CH01_868829.indd 7 9/12/05 3:04:26 PM
AS Your Interests, Skills, and Traits
YOU READ
You’re more likely to enjoy a career that uses your interests, skills , and
In Your Experience traits. Skills are activities that you do well. Consider John King. When John
Achieving Success was a kid, he built an elaborate fort in his yard. As a teen he studied major
Describe a time when metropolitan architecture. When he finished high school, he worked at a
you made a special effort graphics company making calendars. The pay was good, but John lost inter-
to achieve a goal. How est and enrolled in school to study his true passion, architecture. Today John
might this experience is a partner in a successful Los Angeles architecture firm and loves his job.
help you be successful in Are you good at math? Do you write well? Are you creative? Do you
your career? like to meet lots of new people, or like John, do you enjoy building things?
Everyone has different skills and abilities—it’s the combination that gives
you a unique selling point. The chart on page 7 lists some skills and traits
that employers have identified as being valuable. Although these skills and
traits are useful in various situations, the chart shows examples of careers
that require them.
How many of these traits do you have? Make a list. It will come in handy
when you begin to consider careers that interest you.
Values
One way to get to know yourself better is to examine your values.
Values are the principles you live by and the beliefs that are important to
you. Values are really about actions, not words. If you like to spend your
free time volunteering at a local hospital or senior center, one of your values
might be helping others.
What you value and believe may change as you get older. Most people,
though, have a basic set of values that they follow throughout their life.
As you read this section, think about your personal beliefs.
Remember, values are actions, not aspirations. Which values
are important to you? Can you think of careers that would
benefit from these values?
Responsibility. Being responsible means being
dependable and taking positive actions, such as showing up
on time to take a friend to an appointment or honoring a
commitment. If you value responsibility, you might think
about a career as a supervisor or manager.
Achievement. You value achievement if you try to be
successful in whatever you do. I know, you’re thinking, “Who
doesn’t want to be a success?” The truth is that wanting and
achieving are two different things. For example, if you take
action to train outside of regular practices to make first string
on the basketball team, you value achieving goals.
Relationships. If you especially value interacting
with your friends and family, relationships are important
to you. After all, sharing the joy of your accomplishments
is half the fun. Those who value these types of connections
might avoid occupations that require a lot of travel and
might base their career decisions on the ability to live close
to family and friends.
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Compassion. Do you care deeply about people, animals, or spe-
cial causes? For you, a career that allows you to show your compassion
may outweigh all the money in the world. For example, if you love being
around animals, you might enjoy a career in veterinary medicine or the
marine sciences.
Courage. Courage is not just being brave in the face of physical
danger. Courage is also about overcoming other fears. For example, it takes
courage to make a speech to the whole school, even if you are fearful or
nervous. If you can put your beliefs on the line, you may be headed for a
career in politics or law.
Recognition. If receiving acknowledgement and appreciation of
your work is important to you, then you value recognition. You might con-
sider a career as a novelist or a television news reporter.
Many people share the same values, but how they apply them is unique
to each person. To some, courage may be accepting the challenge of a job
they know little about. To others, it may be turning down the big money to
do something they really love. Think about your values. What can you learn
from your values that will help you narrow your career choices?
Lifestyle Goals
Your lifestyle is the way you use your time, energy, and resources. For
CULTURAL
example, many people devote themselves to work, earn lots of money, and Diversity
put off the benefits of free time until they’re older. Others accept smaller Local Dialog
paychecks and work fewer hours to spend more time with family and Although English is
the official language
friends now. If you want to work as a business manager or accountant for a
of business in
professional sports team, you’ll have to live in a city that has such a team,
numerous non-
even if the weather’s bad! If you want to be an actor, get ready for life on
English speaking
the road. countries, it is
• What’s really important to you? generally appreciated
• Do you want to go for the big bucks? if you make an
• Do you want to live in a big city with endless activities or a small town attempt to learn the
where everyone knows your name? local tongue. Learning
• Do you want to collaborate with a group of people or to work solo? polite phrases such
as “hello” and “thank
Make a list of how you’d like to spend your time, energy, and resources.
you” shows that you
These are your lifestyle goals. Try to focus on careers that closely match respect the local
them. culture.
Personality Traits
Imagine what it would be like if all your friends had the same per-
sonality. What if they were all shy or serious? Even worse, what if they
all had the same sense of humor? It’s a good thing we each have our own
personality —a set of unique qualities that makes us different from all
other people.
What is your personality? Are you confident, dependable, funny, friendly,
sympathetic? Be honest. Do you prefer being with people or spending your
time with things, such as reading books or working with computers? You
probably wonder what this has to do with accounting. Well, your personal-
ity affects your preferences for working with data, people, or things.
Section 1 Exploring Careers 9
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As you collect information about yourself, you’ll want to complete a per-
sonal career profile such as the one shown in Figure 1–1. Use this profile to
help you evaluate whether the careers you’re considering match your skills,
interests, values, and personality.
Making Career Decisions
Where Do You Go from Here?
Once you have a clear vision of yourself and how you want to live, you
are ready to research careers and set goals.
Research the Possibilities
How do you find the right career for you? Here are some places to start:
Guidance Counselors. School counselors do a lot more than just
show you the quickest way to get from your homeroom to the cafeteria.
They can help you identify the things you like to do. One way they accom-
plish this is through testing, called personal interest tests , which help you
identify your preferences.
Figure 1–1 Personal
Career Profile Form
PERSONAL CAREER PROFILE FORM
Name Date Career
Darla Johnson December 12 Marketing Manager, Music Industry
Your Values Career Values
I believe in equal opportunities for all people. I like All kinds of people work in the music industry. As a
to be creative. marketing manager, I would be able to use my
creativity, as well as work with other creative people.
Your Interests Career Duties and Responsibilities
I have a large collection of jazz and blues CDs and As a marketing manager, I would make contacts with
keep up with up-and-coming artists that are featured music stores and distributors, labels, and artists. I might
on independent labels. I love getting together with send out press releases, arrange for artist appearances,
friends and having parties. and map out company marketing strategies to increase
profits.
Your Personality Personality Type Needed
I am very outgoing and get bored with sitting in A marketing manager must work well with people.
class or reading. I have a great imagination and love Sharp communications skills and attention to details
group discussions. are important.
Skills and Aptitudes Skills and Aptitudes Required
My best subject is history, and I am president of my Good verbal communication skills are essential for a
school’s debate team. I am not big on writing letters marketing professional. Although history may not be
or grammar but love to communicate in person. particularly important, good perceptions of what works
and what doesn’t work might be important.
Education/Training Acceptable Education/Training Required
I would be interested in learning more about getting I suppose a degree in marketing might open a lot of
a business degree, but also believe that if I could get doors for me. A knowledge of how marketing and
in on the ground level in the music industry and accounting fits into the big picture of a music
learn the ropes, I could be successful as well. corporation would definitely help.
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Contacts. Networking is making contacts with people to share infor- AS
mation and advice. Find out about specific careers through networking. YOU READ
Library. Print materials on every career imaginable can be found in
It’s Not What It
your public library. Try books on careers or magazines that focus on your Seems
interests like House & Garden, Metropolitan Home, or BusinessWeek.
Internet. The Internet is a great source of educational and career Network A television
network is a group of
information. Check out ideas for putting together the perfect résumé or
linked stations. In your
browse through job opportunities at Paramount Pictures!
personal life, a network
Organizations. Professional organizations are groups of people
is the people you know
who have common career interests. You can learn about interesting careers or can get to know.
by getting to know the American Institute of Certified Public Accountants
(AICPA) and the Institute of Management Accountants (IMA).
Set Career Goals
Once you have a clear vision of your interests and the types of careers
you want to pursue, it’s time to put a plan into action.
Map Out a Plan. For starters you’ll need to make a list of the careers
you’ve researched and compare possibilities. The easiest way to do this is to
make a chart. List the careers you’re interested in along the top and list your
personal information along one side. Where they meet, X marks the spot.
After selecting the career choices that look the most promising, decide
which one you’ll pursue. Reaching your ultimate career goal is not going to
happen overnight. There are many intermediate goals to achieve along the
way. Here are some steps to help you achieve your career goals:
1. Decide on a long-term goal. Learn as much as you can about careers
that interest you. Visit job fairs to obtain information.
2. Identify actions that will lead to the long-term goal. What skills,
education, or training will you need? Make plans early.
3. Take action! Make your plans and put them to work.
4. Diversify your skills. Experience different work environments.
5. Realize your long-term goal. Setting and implementing these steps
will help you achieve a career that you desire.
Education. Most careers require some education or training beyond
high school. Unfortunately, deciding to further your education and finding
the cash to pay for it are two different things. For ideas on help in paying
tuition, you can turn to many of the same places you turned to for career
information: books, the Internet, and your friend, the guidance counselor.
On-the-Job Training. Imagine taking only your favorite school
subject and getting paid for it! That’s how on-the-job training works. Sup-
pose you’re thinking about eventually opening your own accounting firm.
While in school, you might work as an office assistant at a local accounting
firm to learn how accounting services are provided. It’s a great way to find
out if accounting is the career for you, and you’ll be paid for your efforts.
Internships. Another way to obtain career experience is to work as
an intern. Many companies offer summer or longer internships to students.
Some offer modest pay. Successful interns are often offered positions in the
company once their internships are completed. The key is to become so
valuable that they miss you when you’re gone!
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S E C T I O N 1# Assessment
AFTER
YOU READ
Reinforce the Main Idea
Draw a diagram like the
one shown here. Show
how people your age may
benefit in their careers by first
learning about themselves.
"ENEFITS OF
Add answer circles as needed. 3ELF +NOWLEDGE
Do the Math
Congratulations! The good news is that you’ve decided to attend a local community
college after high school. The bad news is that tuition for an 18-week semester is $1,820.
You estimate travel expenses of $20 per week and $300 for books and supplies. You plan
to work 20 hours a week, earning $6.75 per hour, and you will apply all your paychecks
toward college expenses. Social Security and income taxes will take about 15 percent of your
earnings.
1. What is the total cost for a semester?
2. Assume that you have already saved $300 toward your first semester’s costs.
Approximately how long will it take to save enough to cover your tuition and books for
one semester?
Problem 1–1 Studying Yourself
Instructions Think about the things you like to do and your particular skills. Make a list of
at least five personal interests or skills. After you complete your list, use the career resource
materials described in this section to identify one or more careers that match each interest
or skill. Choose one career and write a one-page description of how your skills and interests
fit this career.
Problem 1–2 Gathering Career Resources
Instructions Use the personal career profile form in Figure 1–1 as a guide, and compare
three careers that you find interesting. Use the resources mentioned in this section to
gather information: guidance counselors, networking, print materials, the Internet, and
professional organizations. You may find other references in your school or local public
library. After completing your comparison, write a brief summary; identify which of your
choices you prefer and explain why.
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SECTION 2 Accounting Careers: The
Possibilities Are Endless!
Intro Text
Some people believe accounting is boring. There, we said it. It’s a
BEFORE
pretty safe bet that you didn’t enroll in an accounting course because YOU READ
Heading 1
you thought it would lead to a career in the spotlight. How often do you
see Brad Pitt starring in an action thriller about a jet-setting accountant?
Text Question Main Idea
Exactly. However, who do you think develops and approves the budget
vocab If you learn accounting, you
Textfilms
for his to words
go intoFigure #–# Who do you think advises Mr. Pitt
production?
can choose from a wide
how to invest the hefty salary he makes? You got it—someone just like
variety of careers.
you, who is good with accounting concepts and knows how to handle
money. Read to Learn…
The point is: Accounting can be a lot of things you would never have ➤ how accounting careers
imagined. So, if an accounting career matches up with some of your can be exciting. (p. 13)
interests and goals, hang in there. We promise there is a lot more to it ➤ the different organizations
than crunching numbers! that hire accountants.
(p. 13)
The Changing Horizon Key Terms
Is Accounting More Than Arithmetic? accountant
accounting clerk
Sure, some careers in accounting can be a little dry, but there are
for-profit business
many more that are dynamic and exciting. Think of any business—War-
not-for-profit organization
ner Music, Nike, the Hard Rock Cafe. They all look to accountants to
public accounting firm
help run their businesses. Think of your favorite celebrities—maybe Will
audit
Smith or Natalie Portman. Most have financial advisors. Movie producers
certified public accountant
hire accountants to track production costs. Publishers of magazines, such
(CPA)
as PC World and Sports Illustrated, depend on accountants to work with
national advertisers to keep things running smoothly. In this chapter you
will identify career opportunities in the accounting field.
Accounting is not just adding and subtracting. An accountant handles
a broad range of responsibilities, makes business decisions, and prepares and
interprets financial reports. These are skills that successful businesses cannot
do without. If you are good, the sky is the limit.
Types of Organizations
What Career Opportunities Exist in Accounting?
If you still picture accountants huddled over pages of numbers in back
offices, the following scenarios should set you straight.
For-Profit Businesses
“Okay, everybody. Show time in five minutes.” The announcement
comes as the members of the band adjust guitar straps and prepare to go out
on stage. A crowd of 30,000 fans, dropping thirty-five bucks a head, waits
Section 2 Accounting Careers: The Possibilities Are Endless! 13
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for their entrance. Drew Taylor jokes with the band just offstage and then
AS
YOU READ watches as they head out to the fans’ applause.
Drew gets a rush being backstage amid all the excitement of a live show.
Key Point
As the financial assistant to the band’s business manager, he often spends
Where Accountants time at the performances. For Drew, working with numbers came as natu-
Work rally as his love for music. He studied accounting throughout high school
• For-profit businesses and college, and in his spare time he dabbled with the guitar and hung
• Not-for-profit around recording studios with friends who were in the music business.
organizations
It wasn’t long before Drew started working as an accounting clerk at a
• Public accounting firms
studio. An accounting clerk is an entry-level job that can vary from spe-
cializing in one part of the system to doing a wide range of tasks. Drew’s
accounting clerk experience and networking efforts landed him a position
with one of the music industry’s top business managers. Drew still dreams
of recording his own music one day, but for now, he’s quite content helping
orchestrate the financial security of his music idols.
Entertainers perform to earn a profit. For-profit businesses operate to
earn money for their owners. The majority of businesses in the United States
are for-profit businesses.
Today, computers handle much of the basic accounting work, freeing
accountants to do more planning for future operations. Computer tech-
nology means that accountants are no longer tied to a desk or an office. If
you worked for artists such as Alicia Keys, Maroon5, or Modest Mouse, you
would probably spend part of your time traveling. Laptop computers and
modems can connect you to your work as you travel to other cities and
countries.
In order to explore accounting career opportunities, you need to compare
the various types of business organizations. Not all organizations are for-
profit businesses.
Not-For-Profit Organizations
“Listen up, folks! Here’s the draft of the news release we’re sending out
tomorrow,” shouts Darin Korman, waving a stack of papers in the air. “We
need to get our position before the public while Congress is
still considering the environmental legislation. Questions?”
“What else are we doing to alert voters to the potential
value of this legislation?” a team member asks from the back
of the room.
Darin, the team leader, opens a folder. “Here’s our total
plan. We begin filming a TV spot tomorrow. Next week, the
art for our magazine ads will be finished, and they’ll run
in six different magazines. We’ll also post a call-to-action
on our Web site asking visitors for their support. We can
all thank Maya for putting together a budget for the media
campaign.”
Maya Cruz beams as her boss Darin describes a typical
campaign put together for a group—like Sierra Club or Audu-
bon Society—that works to protect and preserve the environ-
ment. Such groups operate as not-for-profit organizations,
also known as nonprofit organizations. These organizations
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operate for purposes other than making a profit. When Maya was very
AS
young, her parents founded a similar group dedicated to cleaning up the YOU READ
local waterways. Maya helped her parents in the difficult task of soliciting
Compare and
donations within their community. As she grew older, Maya pursued the
Contrast
study of accounting with the sole purpose of continuing her involvement
in environmental causes. For-Profits and Not-
It is important to identify the various accounting functions involved for-Profits What are the
similarities in the work
with each type of business organization. Most not-for-profit organizations
done by accountants
have the goal of balancing their income with expenses rather than earning a
at a for-profit business
profit for owners or investors. Some not-for-profit organizations, like United
and those employed
Way or Boy Scouts of America, get their income from donations. Other by a not-for-profit
organizations get income through tax dollars. Government agencies, such organization? How are
as your school or a federal agency, fall under this category. their tasks different?
There are thousands of opportunities in the not-for-profit arena. Like
Maya did, you may prefer to combine your interest in accounting with a
cause that you hold close to your heart.
Public Accounting Firms
“It seems like all the ducks are in a row.” Jana Passeno takes another look
at the Whitley Company accounting reports on her desk.
“Yes, we have identified the last few questions we need to go over with
Whitley’s accounting manager,” Greg Hally says as he finalizes a short list.
Jana and Greg work for the public accounting firm Radcliff & Pratt.
Public accounting firms provide clients a variety of accounting services
including the independent audit. An audit is the review of a company’s
accounting systems and financial statements to confirm that they follow
generally accepted accounting principles.
An independent audit is not done by company employees. For example, AS
the accountants who work at Whitley cannot do an independent audit. YOU READ
Instead, it is done by certified public accountants who work for public
In Your Own Words
accounting firms. A certified public accountant (CPA) is an accountant
who has met certain education and experience requirements and passed a Certified Explain the
national test. Like doctors and lawyers, CPAs are licensed by the states. significance of being
a “certified” public
Radcliff & Pratt is a small firm, but many certified public accountants
accountant.
work for the four largest accounting firms known as “The Big Four”: Ernst
& Young, Deloitte & Touche, KPMG, and PricewaterhouseCoopers.
Jana feels pride in her job. When companies such as Coca-Cola or
General Electric sell their stock on a U.S. stock exchange, potential buyers
depend on audited financial statements to make decisions. Once Jana signs
off on the financial statements of a company, the public has greater assur-
ance that the information is correct.
Public accounting firms have many job opportunities besides audit-
ing. Possibilities include financial planning and preparing tax returns. You
might be interested in a job as a forensic accountant. Forensic accountants
take cases that involve issues like fraud or employee theft. Did you know
that since 9/11, forensic accountants have played a major role in tracking
down suspected terrorists?
From entertainment to health care, conservation to entrepreneurship,
the career possibilities in accounting are endless!
Section 2 Accounting Careers: The Possibilities Are Endless! 15
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SECTION 2 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Create an organizer like the #AREER /PPORTUNITIES
one shown here. List at least
&OR 0ROFIT "USINESSES .OT FOR 0ROFIT /RGANIZATIONS 0UBLIC !CCOUNTING &IRMS
three accounting career
opportunities in each type of
organization.
Do the Math
Assume that the federal government pays new accountants without a master’s degree an
annual salary of approximately $23,500. The starting salary for new accountants with a
master’s degree is approximately $35,500. If you spent $21,000 to attend graduate school,
how many months would you work at a new job in the federal government before the
difference in salary pays for your graduate school expenses?
Problem 1–3 Checking Out Accounting Careers
Instructions Using the resources described in Section 1, research possible careers for
people with accounting degrees. List at least five different careers and the formal training
and work experience needed for each. Choose one career as your preference and write a
paragraph describing why this career appeals to you.
Problem 1–4 Matching Interests and Careers
Instructions Using the three career examples described in this section, make a list of
the personal interests and skills of the accountants described in each situation. Compare
the list to your own interests and skills. Then think of three types of businesses (or actual
companies) for which you might want to work. How would you learn about accounting
career opportunities in those companies? Aside from pursuing needed training or education,
what else would you do to prepare to work in that career? Share your ideas in class.
Problem 1–5 Researching Public Accounting Firms
Instructions Surf the Internet or conduct research in your library to find information
about “The Big Four” accounting firms. Create a table of information about each firm and
the services the firm provides.
Problem 1–6 Interviewing Accountants
Instructions Interview members of the accounting field to investigate entry-level job
requirements, career tracks for the profession, and projected trends for the future. Write a
short report about your findings.
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Accounting Careers in Focus
ACCOUNTING MANAGER
Keytroller, Inc., Tampa, Florida
..
Mandy Martensen Tips from .
Q: Why did you choose an accounting career?
ccess is
A: In college, I was majoring in a different subject and had to In business, su e
effort. Help th
take an accounting class as one of my requirements. I fell in usually a team g
d by lendin
love with accounting as soon as I took that first course. I enjoy group get ahea
hand. You will
math and problem solving. co-workers a
initiative but
Q: What are some factors that have been key to your not only show y
s who are likel
success? also gain allie en
stance wh
to provide assi
A: I’m a quick learner and willing to try anything at least once. I’m
you need it.
not afraid to ask questions or to try my hand at something new.
If you want to go far in the accounting field, you must be open
to new things.
Q: What do you find most challenging about your job?
A: Working in a team-based environment is especially stimulating. In today’s
world you can’t work alone. You usually work with others as a group, especially
on large projects. But you also need to learn how to step in and be a leader
when necessary.
Q: What advice do you have for accounting students just
beginning their careers?
A: You have to like what you do or you won’t get very far. If you aren’t sure what
path you want to follow, consider earning a degree in business; you’ll take at
least one class in every area and something you really enjoy will stand out.
CAREER FACTS
Nature of the Work: Review the accounting information to make sure that everything
▲
is recorded correctly; organize the budget process; hire, train, and supervise
accounting staff.
Training or Education Needed: A bachelor’s degree in accounting or finance, a master’s
▲
degree in business administration, and at least five years of experience. Some companies
require an accounting manager to have a CPA license.
Aptitudes, Abilities, and Skills: Communication skills, technology skills, and
▲
analytical skills.
Salary Range: $45,000 to $85,000 depending on location, level of responsibility, and
▲
company revenues.
Career Path: Start by working as an accounting clerk, and then move into positions of
▲
increasing responsibility.
Thinking Critically Why is it important to be willing to ask for help?
Chapter 1 Accounting Careers in Focus 17
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CH A P T ER 1 Summary
Key Concepts
1. A successful career begins with insight into your own personal skills, interests, goals, and
lifestyle preferences. Get to know yourself. What you value plays a vital role in deciding what
you want to pursue as a career.
Responsibility Compassion
Achievement Courage
Relationships Recognition
As you decide on a career, consider lifestyle goals and personality traits.
Length of Work Week Work in Teams or Independently
Size of Paycheck Work with People or Things
Work Environment Skill Strengths
Growth Potential Personality Traits
Geographic Location
2. Researching career possibilities can include meeting with a guidance counselor, networking with
friends and family, reading books and magazines, doing research on the Internet, and seeking
information from professional organizations. Do your homework. Research jobs, salaries,
geographic locations, work environments, and growth potentials. You want to know what you
are getting into, don’t you?
Library Magazine
Internet Work Experiences
Networking Professional and
Student Organizations
18 Chapter 1 Summary
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Summary CHAPT E R 1
3. Use these strategies to set and accomplish career goals:
• Map out a plan.
• Consider the education required.
• Find a part-time job to get some on-the-job training.
• Check into internships available in your field of interest.
4. Accounting career opportunities vary from the entry-level accounting clerk to the accountant
who handles a wide range of responsibilities. Some accountants work for public accounting
firms and are certified public accountants. A certified public accountant (CPA) is licensed by the
state to perform independent audits of corporations. Public accounting firms provide many job
opportunities including
• auditing,
• financial planning,
• preparing tax returns, and
• forensic accounting.
5. Accountants work for almost any organization you can think of. Find a company you are
interested in, and you can bet there is an accountant in the picture planning for next year’s
budget, chasing down an expense report from the owner, or advising managers on financial
issues. For-profit businesses, not-for-profit organizations, and public accounting firms all hire
accountants.
6. For-profit businesses operate to earn money for their owners. Not-for-profit organizations
operate for other reasons such as charitable or educational purposes. Most not-for-profit
organizations have the goal of balancing their income with expenses rather than earning a
profit.
Key Terms
accountant (p. 13) not-for-profit organization (p. 14)
accounting clerk (p. 14) personal interest tests (p. 10)
audit (p. 15) personality (p. 9)
certified public accountant (CPA) (p. 15) public accounting firm (p. 15)
for-profit business (p. 14) skills (p. 8)
lifestyle (p. 9) values (p. 8)
networking (p. 11)
Chapter 1 Summary 19
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C H A P T ER 1 Review and Activities
AFTER
YOU READ
Check Your Understanding
1. Personal Skills, Values, and Lifestyle Goals
a. Explain how your interests, skills, and values will affect your career choice.
b. What are six common values that people have?
2. Career Information
a. Describe at least three categories of career information resources.
b. Describe how networking is beneficial to career planning.
3. Career Goals
a. What is meant by mapping out a career plan?
b. Describe five steps that are helpful in achieving career goals.
4. Accounting Career Opportunities
a. What does an accountant do?
b. Name “The Big Four” accounting firms from which you could likely obtain information about
current career opportunities.
5. Organizations That Hire Accountants
a. List and describe three types of organizations that offer accounting career opportunities.
b. What task can be performed only by certified public accountants employed by public
accounting firms?
6. For-Profit Businesses and Not-for-Profit Organizations
a. What type of organization exists to earn money for the owners?
b. Why would a not-for-profit organization need an accounting professional?
Apply Key Terms
Suppose you are preparing to interview
a person who works in the accounting field.
On a separate sheet of paper, write a list of
questions that you will ask in the interview.
Incorporate each of the following terms in
your questions:
accountant not-for-profit
accounting clerk organization
audit personal interest tests
certified public personality
accountant (CPA) public accounting
for-profit business firm
lifestyle skills
networking values
20 Chapter 1 Review and Activities
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Problems CHAPT E R 1
Problem 1–7 Researching Careers in
Your Library
It is never too early to begin researching careers.
Instructions Complete your research project using these steps.
1. Using a reference book (such as the Occupational Outlook Handbook),
choose a career area that interests you.
2. Research the skills, education, and experience you would need to work
in that career area. Your research can utilize any number of resources
including books, magazines, and the Internet.
3. Write a brief profile of your chosen career, including a description
of jobs in the field, education or training requirements, potential
earnings, and working conditions.
4. Present your profile to the class.
Problem 1–8 Researching Careers in Your
Local Newspaper
Instructions Follow these steps to organize employment information.
1. Review the employment ads in a local or regional newspaper.
2. Collect information on at least 10 job titles plus the skills and
education required for each. Include at least two job titles related to the
accounting field.
3. Present your information in table format. If you have access to a word
processing program, use it to create and print your table.
Problem 1–9 Assessing Your Skills
and Interests
Instructions Complete an assessment of your personal skills and interests
by answering the questions in your working papers. Use the survey
included in the working papers, or you can ask your guidance counselor
to administer a personal interest test. Using the results of the test, find
at least three careers that match your skills and interests.
Problem 1–10 Working with Others
Instructions As an accountant for a large business, you might be put in
charge of training new hires in the accounting department. Or you might
be asked to discuss project cost overruns with a department manager or to
present operating results to senior managers. In these situations you need
skills other than just your accounting knowledge. For each situation make
a list of the skills needed; then decide whether you have those skills and,
if not, how you plan to acquire them.
Chapter 1 Problems 21
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C H A P T ER 1 Problems
Problem 1–11 Summarizing Personal Traits
Instructions Sometimes you can learn about yourself by asking other
people how they see you. Ask at least 10 people to name three words they
think describe you. Ask them to give you descriptive words such as these:
• Dependable
• Fun
• Quick-thinking
• Decisive
Do not just choose friends. Ask teachers, co-workers, relatives, and
others who are willing to give you an honest opinion. Make a list of each
person’s descriptions; then summarize your findings by identifying the
five characteristics or traits that were mentioned most often. Do these
descriptions match your self-perception? Why or why not?
Problem 1–12 Gathering Career Information
Instructions Arrange to interview someone who currently works in a
career area that interests you. Before the interview prepare a list of the
questions you want to ask. You may wish to cover the following topics:
• What are the major tasks that you perform?
• What do you enjoy most about your job?
• Is there much variety in your work?
• What specific skills are involved?
After the interview write two or three paragraphs describing your interview
and the information you learned. Explain how this information will help
you choose a career.
Problem 1–13 Exploring Careers in Accounting
Instructions Choose a local company that interests you, and find out
who works as an accountant for the company. Call and ask whether you
can observe the person at work for part of a day. Write a summary of your
observations, and share the information with the class.
CHALLENGE Problem 1–14 Exploring Global
PROBLEM
Careers
Instructions Many U.S. businesses operate in the global economy, which
means they need accountants who understand international business. Find
a local company that imports or exports products to or from one or more
countries. Interview the accounting manager, and find out the skills, formal
study, and personal traits he or she looks for in an accountant who works in
international accounting. Write a short report about your findings.
22 Chapter 1 Problems
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Winning Competitive Events CHAPTER 1
Practice your test-taking skills! The questions on this page are reprinted with permission
from national organizations:
• Future Business Leaders of America
• Business Professionals of America
Use a separate sheet of paper to record your answers.
Future Business Leaders of America
MULTIPLE CHOICE
1. Persons who plan, summarize, analyze, and interpret accounting information
are called
a. accountants.
b. audit supervisors.
c. bookkeepers.
d. accounting clerks.
e. none of these answers.
Business Professionals of America
MULTIPLE CHOICE
2. Solve: 2 3/8 1 1/2
(Reduce to lowest terms.)
a. 7/8
b. 14/16
c. 1 2/6
d. 1 1/8
3. An employee earns $2,300 each pay period. He is paid on the first and fifteenth of
each month. How much does he earn in one year?
a. $55,200
b. $59,800
c. $27,600
d. $55,220
4. Solve: 150% of $84
a. $42
b. $72
c. $126
d. $168
5. What is $580 increased by 1/5 of itself?
a. $116
b. $145
c. $696 Need More Help?
d. $725
Go to glencoeaccounting.glencoe.com and
click on Student Center. Click on Winning
Competitive Events and select Chapter 1.
• Practice Questions and Test-Taking Tips
• Concept Capsules and Terminology
glencoeaccounting.glencoe.com Chapter 1 Winning Competitive Events 23
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C H A P T ER 1 Real-World Applications and Connections
Critical Career Possibilities
Thinking 1. What term describes the way you use your time, energy, and resources?
2. Compare and contrast the tasks of an accounting clerk and a certified public
accountant. How are they similar? How are they different?
3. You have just graduated from high school and have found out about an
opening for a summer job as an accounting clerk for a popular family-owned
restaurant. Using the six components of personal values, predict whether this
entry-level accounting job would be fulfilling.
4. What new issues would an accountant face in moving from a job at a for-
profit business to a job at a not-for-profit organization?
5. A friend with an interest in an accounting career asked you for advice about
the type of job to pursue. You know she has helped organize fund-raising
events at school for diabetes research, and that she loves helping children.
Recommend an accounting career that you think your friend would find
fulfilling.
6. Make a list of the different ways discussed in this chapter to research careers.
Create a table that compares advantages and disadvantages of each of these
research options. Which one works best for you? Why?
CASE Career Advice
STUDY Sean Smith is a senior in high school. He is taking an accounting course this year
because he wants to be an accountant. Sean likes working with numbers, but he
also likes working with people. He plans to go to college but doesn’t know which
ones offer accounting programs and what costs are involved.
INSTRUCTIONS
Take the role of Sean’s career counselor. Write a one-page report advising Sean.
Include the following in your report:
• Information on how to find the resources he needs to choose a college.
• Details on how to set education and career goals.
• Steps Sean needs to take over the next several months.
• A list of resources Sean might use to learn more about accounting careers,
colleges, and financial help.
a
mattoefr ETHICS Padding a Résumé
Part of landing a great job is putting together a résumé that effectively represents
your skills and background. Imagine that BMW has just opened a new regional
headquarters in your area. You would like to work for BMW as a payroll clerk, but
you’re afraid you don’t have the right qualifications. A friend suggests that you
“change” your résumé to make yourself look better.
ETHICAL DECISION MAKING
1. What are the ethical issues? 4. How do the alternatives affect the
2. What are the alternatives? parties?
3. Who are the affected parties? 5. What would you do?
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Real-World Applications and Connections CHAPT E R 1
))
$ ))
Communicating
Writing an Article
ACCOUNTING Write a one-page article for a career newsletter. Describe the field of accounting
and the types of businesses and organizations where accountants might work.
Skills Beyond Acquiring and Evaluating Information
NUMBERS To make a decision, whether personal or business-related, you must be able to
acquire and analyze information.
ON THE JOB
You have graduated and are ready for a job to match your skills and interests!
INSTRUCTIONS
1. List the businesses that advertise in a local or regional newspaper. You may
want to use a Sunday issue since it is usually packed with ads.
2. Separate the businesses into for-profit and not-for-profit categories.
3. Write a summary of your findings, and describe the accounting career
opportunities you think these businesses and organizations might offer.
INTERNATIONAL An International Accounting Career
Accounting If you want to explore the world, the field of accounting can take you there. To
land a job with an international accounting firm, knowledge of international
trade laws and country-specific accounting standards will help. Experience with
local business customs and a familiarity with the language is also a bonus.
INSTRUCTIONS Go to the global Web site of PricewaterhouseCoopers and list five
countries in which the firm operates. In the Careers section, select a country from
your list and name two career opportunities in that country.
Making It
Your Career
Personal In this chapter you considered how interests, values, and lifestyle affect your
career goals. You can learn more about what you want in a career from personal
assessment tests. Meet with your guidance counselor or try an Internet search
engine to learn more about these tests.
PERSONAL FINANCE ACTIVITY Imagine you have
two job offers to work as an accountant. One is
for a for-profit business. The work is not very
exciting, but the company pays a high salary.
Be Your Own Boss
The other job is at a not-for-profit organization
How would you like to be your own
dedicated to a cause that is important to you, boss? Visit glencoeaccounting
but it pays about one-half as much. Based on .glencoe.com and click
what you discovered in your self-assessment, on Student Center. Click on
which job fits your goals? Why? WebQuest and select Unit 1 to
PERSONAL FINANCE ONLINE Log on to continue your Internet project.
glencoeaccounting.glencoe.com and click
on Student Center. Click on Making It
Personal and select Chapter 1.
glencoeaccounting.glencoe.com Chapter 1 Real-World Applications and Connections 25
004-025_CH01_868829.indd 25 9/12/05 3:06:01 PM
CH A P T ER 2 The World of Business
and Accounting
BEFORE
YOU READ
What You’ll Learn Predict
1. Describe profit, risk-taking, 1. What does the chapter title tell you?
and entrepreneurs. 2. What do you already know about this subject from personal experience?
3. What have you learned about this in the earlier chapters?
2. Describe service,
merchandising, and 4. What gaps exist in your knowledge of this subject?
manufacturing businesses.
3. Compare the sole
proprietorship, partnership, Exploring the Real World of Business
and corporate forms of
business. BECOMING AN ENTREPRENEUR
4. List the advantages and
disadvantages of each form of Aveda Corporation
business organization. Rosemary, peppermint, and almond bark—ingredients for
a pot of tea? No, it’s shampoo. Aveda Corporation founder
5. Describe the purpose of
accounting. Horst M. Rechelbacher believes that beauty begins with natural
ingredients and treating the environment kindly.
6. Explain financial and
At 14, Rechelbacher became an apprentice in the beauty and
management accounting.
salon business in Europe. Interest in the powers of plants led
7. Describe three basic him to launch Aveda in 1978 with one shampoo.
accounting assumptions.
When creating products, the company considers the impact
8. Define the accounting terms on the environment and on native communities. For example,
introduced in this chapter. Aveda stopped using an oil that could be poached from sacred
Why It’s Important trees in India. The company uses recyclable packaging in most
of its products and does not test on animals.
The U.S. free enterprise
▲
Today, Aveda products are found in more than 10,000
system offers many different
opportunities. salons and spas around the world.
What Do You Think?
What risks do you think Horst Rechelbacher faced when he
launched the Aveda product line?
26 Chapter 2 The World of Business and Accounting
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Working in the Real World
APPLYING YOUR ACCOUNTING KNOWLEDGE
Entrepreneurs wear many business hats. They
need to know how to sell products or services,
what the competition is doing, how to provide
good customer service, and how to manage a
business as well as understand the finances of
the business.
Personal Connection
1. At your workplace, or the workplace of family
or friends, who owns the business?
2. If you owned this business, how would you
use your accounting knowledge to manage
the business?
Online Connection
Go to glencoeaccounting.glencoe.com and click
on Student Center. Click on Working in the
Real World and select Chapter 2.
glencoeaccounting.glencoe.com 27
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SECTION 1 Exploring the World
of Business
In this chapter you will learn about different types of businesses and
BEFORE
YOU READ how they are organized. All businesses need information that is gener-
ated by accounting systems in the form of reports. You will learn about
the different types of accounting and accounting reports.
Main Idea
The United States has a
free enterprise system with The Environment of Business
various kinds of businesses. What Makes Up the Business Environment?
Read to Learn… When you hear the word business, what do you think of? Nike, Micro-
➤ about the environment soft, General Motors, IBM, Coca-Cola, or Tower Records? Large busi-
of business. (p. 28) nesses like these are certainly players in the world of business today. Your
➤ the three types of neighborhood convenience store, clothing boutique, video rental store,
business operations. and grocer are also important contributors in our free enterprise system.
(p. 29) In a free enterprise system , people are free to produce the goods and
➤ the three forms of services they choose. Individuals are free to use their money as they wish:
business organization. spend it, invest it, save it, or donate it. Business owners in this system
(p. 29) must compete to attract the customers they need to continue operating.
One measure of success in a business operation is the amount of
Key Terms profit it earns. The amount of money earned over and above the amount
free enterprise system
spent to keep the business operating is called profit . Businesses that
profit
spend more money than they earn operate at a loss . Whatever its size,
loss
a business must do two things to survive. It must operate at a profit, and
entrepreneur
it must attract and keep an individual willing to take the risk to run it.
capital
service business The Need for Profit
merchandising business
Continued operation and success of a business require profit. Your
manufacturing business
local pizza parlor must pay for raw materials (flour, sauce, cheese, top-
sole proprietorship
pings), equipment (mixers, ovens, freezers), employees, utilities, and
partnership
corporation rent. The selling price of the pizza must be high enough to cover all costs.
charter Once the owner pays these costs, the money left over is profit.
The Need for a Risk-Taker
In a business many people play different roles in daily operations, plan-
ning, and management. Inventors create ideas for new products or services.
Investors provide money to help businesses get started. Employees supply
the labor needed to operate the business. Managers supervise and plan.
Role of Entreprenuers. An entrepreneur is a person who trans-
forms ideas for products or services into real-world businesses. Owning a
business can offer flexible schedules, self-direction, and financial gain. Yet
business ownership is not free from risk. See Figure 2–1 for some pros and
cons of entrepreneurship.
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Pros Cons
• You are your own boss. • You probably need to work long hours.
• You create opportunities for earning money. • You lose the security of steady wages and medical
• You create and control your work schedule. benefits an employer provides.
• You choose the people you serve. • You market your own services or products.
• You select the people who work with you. • You pay for your own operating expenses.
• You benefit from the rewards of your own hard work. • You must be motivated and energetic each day.
• You choose your own work hours. • You face the possibility of losing money.
Figure 2–1
Traits of Entrepreneurs. Most entrepreneurs share certain behav- Entrepreneurship: Pros
iors and attitudes. They are motivated self-starters willing to take necessary and Cons
risks to create profitable and useful businesses. Strong organizational skills,
marketing knowledge, and accounting skills are three areas of expertise that
contribute to successful business ownership.
Entrepreneur—Who, Me? Have you ever considered owning a
business? If so, you must first inventory your skills and interests. Do you
have good writing and speaking skills? Are you creative? Mechanical? A self-
starter? Do you have accounting or marketing skills? If you have vision, great
energy, and imagination, you may have the makings of an entrepreneur! See
Figure 2–2 on pages 30–31 for the types of decisions entrepreneurs face.
Types and Forms of Businesses
What Do Businesses Do, and How Are They Organized?
Our free enterprise system allows an entrepreneur to choose the kind of
business to operate as well as its organizational form.
Types of Business Operations
The three types of business operations are service, merchandising, and
manufacturing. They are alike in many ways. Each sells products or services
to customers and incurs expenses. They differ, however, in some basic ways. Connect to…
Each type needs money to begin and maintain operations; buy or make LANGUAGE
products; and cover operating costs like rent, utilities, and wages. Money
that investors, banks, or business owners supply is called capital .
ARTS
In accounting, capital
Service Businesses. A service business provides a needed service refers to money used to
for a fee. Service businesses include travel agencies, salons like Fantastic start up or grow a new
Sam’s, repair shops, real estate offices like Century 21, and medical centers. business. The term comes
Merchandising Businesses. A merchandising business buys fin- from the Latin word for
ished products and resells them to individuals or other businesses. Examples are head—caput. In ancient
department stores, car dealers, supermarkets, drugstores, and hobby shops. times nomadic herdsmen
Manufacturing Businesses. A manufacturing business buys measured their wealth by
raw materials, uses labor and machinery to transform them into finished the number of animals
products, and sells the finished products to individuals or other businesses. they had. They got this
Examples are shipbuilders, bakeries, and tire factories. number by counting
heads.
Forms of Business Organization
To start a business, a potential owner must have a sufficient amount
of capital and must choose an appropriate form of business organization.
Section 1 Exploring the World of Business 29
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Traits of the Entrepreneur
FO
1. BE RE IN BETWEE
• No luthier (A luthier is
2. N
a maker and repairer of
Entrepreneurs are stringed instruments.) Entrepreneurs
aware of their • Does the community evaluate alternatives.
environment. want one?
• Customer preferences
• Accountant’s guidance
• New tools are
expensive. Use tools
from home and buy
new ones only when
necessary.
Figure 2–2 With a few exceptions, U.S. businesses are organized in one of three basic
ways: sole proprietorship, partnership, or corporation, illustrated in Figure
2–3. Notice that each of the different types of operations can use any form
of organization.
Type of Form of Business Organization
Business Sole
Partnership Corporation
Operation Proprietorship
Service X X X
Figure 2–3 Merchandising X X X
Forms of Business
Organization Manufacturing X X X
Sole Proprietorship. Sole means “single” or “one.” Proprietor means
“owner.” A sole proprietorship , therefore, is a business owned by one
person. It is sometimes simply called a proprietorship. Being a sole proprietor
does not mean working alone. Based on the operation’s size and scope, a
sole proprietorship may have many managers and employees. The oldest
and most common form of business organization, the sole proprietorship
is the easiest business form to start. Little or no legal paperwork (forms and
documents) is required. The success or failure of the business depends heav-
ily on the efforts and talent of the owner.
The advantages and disadvantages of organizing as a sole proprietorship
are shown in Figure 2–4.
Advantages Disadvantages
• Easy to set up • Limited expertise
Figure 2–4
• All profits go to owner • Hard to raise money
Advantages and
• Owner has total control • Owner has all the risks
Disadvantages of a Sole
• Few regulations to follow • Hard to attract talented employees
Proprietorship
Partnership. A partnership is a business owned by two or more per-
sons, called partners, who agree to operate the business as co-owners. Busi-
ness partners usually enter into a written, legal agreement. This agreement
30 Chapter 2 The World of Business and Accounting
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Traits of the Entrepreneur (continued)
Entrepreneurs seek
the best solution. 3. AFTER
Entrepreneurs
• Find commercial turn ideas into
space for rent near
actions.
a music school
and concert
• Second Life Instrument
hall. Distribute
Repair Shop quickly
fliers promoting
becomes the community’s
business at classes
top option for making
and concerts.
musical instruments sound
their best.
specifies each partner’s investment in money or property, responsibilities,
and percent of profits and losses. Partnerships are often formed when a
business needs more capital than one person can invest. Partnerships are
not always small. For example, partnerships like the large accounting firm
KPMG may have as many as 1,600 partners and more than 18,000 employ-
ees. Figure 2–5 lists some partnership advantages and disadvantages.
Advantages Disadvantages
Figure 2–5
• Easy startup • Risk of partner conflict
Advantages and
• Pooled skills and talents • Shared profits
Disadvantages of a
• More money available • Shared risks
Partnership
Corporation. A corporation is a business recognized by law to have
a life of its own. Unlike a sole proprietorship and a partnership, a corpora-
AS
tion must get permission from the state to operate. This legal permission,
YOU READ
called a charter , gives a corporation certain rights and privileges. It also
spells out the rules under which the corporation is to operate. In Your Own Words
Corporations often start as sole proprietorships or partnerships. The Corporation
business owner(s) may “incorporate” to obtain money needed to expand. A corporation is
To raise this money, organizers sell shares of stock to hundreds or even recognized by law “to
thousands of people. These shareholders, or stockholders, are the corporation’s have a life of its own.”
legal owners. Figure 2–6 outlines a few advantages and disadvantages of the What does this mean?
corporate form of organization.
Advantages Disadvantages
• Easier to raise money • More costs to start
Figure 2–6
• Easy to expand • More complex to organize
Advantages and
• Easy to transfer ownership • More regulations
Disadvantages of a
• Losses limited to investment • Higher taxes
Corporation
Regardless of their form as a sole proprietorship, partnership, or corpora-
tion, all businesses share common financial characteristics and methods for
recording and reporting financial changes.
Section 1 Exploring the World of Business 31
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S E C T I O N 1# Assessment
AFTER
YOU READ
Reinforce the Main Idea
Use a diagram like this one
to show details that support
-AIN )DEA
the following main idea:
The United States has a
free enterprise system with
$ETAILS
$ETAILS
$ETAILS
$ETAILS
various kinds of businesses.
Do the Math
Suppose that you bought 500 shares of Pinewood Dairy Corporation for $39 per share
several months ago. Yesterday you sold 200 of the shares at the current price of $45 per
share. How much money did you gain or lose on the shares that you sold? What was the
gain or loss per share? Based on the price of $45 per share, what was the market value of
your remaining shares yesterday?
Problem 2–1 Assess Your Entrepreneurship Potential
Instructions The characteristics or traits needed to set up an owner-operated business and
to run it successfully are listed below. Rank yourself, indicating whether this trait is most
like you or least like you. Use the form provided in your working papers.
Most Like Me Least Like Me
Persistent 5 4 3 2 1
Creative 5 4 3 2 1
Responsible 5 4 3 2 1
Inquisitive 5 4 3 2 1
Goal-oriented 5 4 3 2 1
Independent 5 4 3 2 1
Demanding 5 4 3 2 1
Self-confident 5 4 3 2 1
Risk-taking 5 4 3 2 1
Restless 5 4 3 2 1
List the categories in which you ranked 3 or lower. Identify experiences, activities, and ways
in which you could improve your entrepreneurial potential.
32 Chapter 2 The World of Business and Accounting
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SECTION 2 Accounting: The Universal
Language of Business
Intro you
Have Textever wondered how the band U2 determines which venues
BEFORE
they will play, the cost of a tour, how profitable CD sales have been, or YOU READ
Heading 1
how much ticket prices should be? All these issues are probably tackled by
the band’s financial team: accountants, clerks, and financial advisors.
Text Question Main Idea
The accounting system
The Accounting System
Text vocab words Figure #–#
produces information used
What Does the Accounting System Do? to make decisions.
Whether you are the accountant for a band or the financial Read to Learn…
manager for a chain of mountain bike stores, accounting methods ➤ how the accounting
are universal. The accounting system is designed to collect, docu- system works. (p. 33)
ment, and report on financial transactions affecting the business. In a ➤ how decision makers
manual accounting system , the accounting information is processed use accounting reports.
by hand. In a computerized accounting system , the financial infor- (p. 34)
mation is recorded by entering it into a computer. Owners and investors ➤ three important
who risk their money depend on accountants to report the results of accounting assumptions.
operations and the financial condition of the businesses in which they (p. 35)
invest. Figure 2–7 outlines the inputs, processes, and outputs of an
accounting system.
Key Terms
accounting system
All accountants follow the same set of rules to prepare financial
manual accounting system
reports. The Financial Accounting Standards Board (FASB) issues these
computerized accounting
rules. The rules are referred to as generally accepted accounting principles
system
or GAAP (pronounced “gap”).
GAAP
Accounting principles provide a way to communicate financial infor-
financial reports
mation in a form understood by those interested in the operations and financial accounting
financial condition of a business. management accounting
Because it is so fundamental to the communication of financial business entity
information, accounting is often called the “language of business.” accounting period
Financial reports are summarized information about the financial going concern
status of a business.
Inputs Processing Outputs
Source Documents Tasks Financial and
• Checks • Analyzing Management
• Invoices • Classifying Accounting Reports
• Sales Slips • Recording • Financial condition
• Receipts • Results of operations
• Investments by and
distributions to owners
Figure 2–7 How the Accounting System Works
Section 2 Accounting: The Universal Language of Business 33
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AS
YOU READ Using Accounting Reports for Making
Instant Recall
Business Decisions
Who Uses Accounting Reports?
Audits Many people
outside a business The purpose of accounting is to provide financial information about
depend on certified a business or a not-for-profit organization. Individuals also need financial
public accountants to information in order to make decisions.
audit the company’s The information found in accounting reports has a wide audience. In
financial statements. general there are two groups that use accounting reports:
• individuals outside the business who have an interest in the business
• individuals inside the business
Financial Accounting
Financial accounting focuses on reporting information to external
users. Financial accounting reports are prepared for individuals not directly
involved in the day-to-day operations of the business.
Who uses financial accounting reports? The following examples describe
just a few situations in which people use financial accounting reports.
• Suppose you wanted to invest in a business, such as Trek Mountain
Bikes Inc. You would analyze financial accounting reports to estimate if
an investment in the business would be profitable.
AS
YOU READ • Individuals or institutions, like banks that loan money to a business,
use financial accounting reports to determine whether or not the
Compare and business will be able to repay loans.
Contrast • Local, state, and federal governments review financial accounting
Accounting Reports reports. For example, the Internal Revenue Service may compare the
How is financial tax return and financial reports of a business to determine whether the
accounting similar business is paying the proper amount of taxes.
to management • Workers, consumers, union leaders, and competitors are interested in the
accounting? How is it performance of businesses as presented in financial accounting reports.
different?
Management
Accounting
Management accounting ,
which focuses on reporting informa-
tion to management, is often referred
to as accounting for internal users of
accounting information. Manage-
ment accounting reports are prepared
for managers involved in making the
day-to-day operating decisions like
purchasing, hiring, production, pay-
ments, sales, and collections.
Managers need accounting infor-
mation so they can decide what to
do, how to do it, when to do it, and
whether or not the results match the
34 Chapter 2 The World of Business and Accounting
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plans for the future. Figure 2–8 describes Owners and managers use accounting
some of these decisions. reports to make decisions.
• Can we purchase a
Accounting • Which flowers are
the best sellers?
new delivery van?
Assumptions
What Are Three Accounting
Assumptions?
An assumption is something taken
for granted as true. When you attend a
movie, you assume the volume will be at
a reasonable level, there will be a place • Should we hire
to sit, and the film will be in focus. If more designers?
• Can we afford to
these assumptions are wrong, the movie
attend floral
will be a disappointing experience.
conventions in
Each business sets up an account-
Amsterdam?
ing system for its specific needs, but all
businesses follow GAAP. These generally
accepted accounting principles include Figure 2–8
Managerial Decisions
three important assumptions:
• business entity
• accounting period
• going concern
Recall that the corporation is the only form of business that is a separate
legal entity. For accounting purposes, however, all businesses are separate
entities from their owners. A business entity exists independently of its
owner’s personal holdings. The accounting records and reports are main-
tained separately and contain financial information related only to the
business. The owner’s personal financial activities or other investments are
not included in the reports of the business.
For example, the personal residence of a flower shop owner, valued
at $100,000, is not reported in the accounting records of the flower shop.
Buildings owned by the business, however, are included in the financial
records and reports of the flower shop.
For reporting purposes, the life of a business is divided into specific
periods of time. An accounting period is a period of time covered by an
AS
accounting report. The accounting period can cover one month or three
months (quarterly), but the most common period is one year. This assump- YOU READ
tion is necessary when accountants assign the cost of buildings and equip- In Your Experience
ment over the estimated period of time they will be used. Comparison
Periodic Reports What
of reports from one period to the next also makes the accounting period
kinds of reports have you
concept necessary.
used to make important
Unless there is evidence to the contrary, accountants assume that a decisions?
business has the ability to survive and operate indefinitely. In other words a
business is expected to continue as a going concern . Although many busi-
nesses fail within the first five years, the accountant assumes the business
will continue to operate unless it is clear that it cannot survive.
Section 2 Accounting: The Universal Language of Business 35
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SECTION 2 Assessment
AFTER
YOU READ
Reinforce the Main Idea
List at least three ways people 5SES OF !CCOUNTING 2EPORTS
use each type of accounting
report. Use an organizer like
the one shown here.
&INANCIAL -ANAGEMENT
!CCOUNTING 2EPORTS !CCOUNTING 2EPORTS
Do the Math
Suppose that you are opening a 1,000-square-foot baseball card store in a shopping center.
You have signed a lease that requires you to pay a monthly rent of $1.75 per square foot,
plus 5 percent of your gross annual sales. What is the total amount of rent you will pay in
one year if you have sales of $85,000?
Problem 2–2 Using Financial Information
Instructions Imagine that you are the manager of Valley Skateboard Shop. The accountant
for the business has delivered the news that sales are down by 15 percent compared to last
month. She also reports that the rent on the building will be increasing next month by $100.
You believe the shop needs a more experienced salesperson and that the building needs
new paint and awnings. How might the information delivered by the accountant affect
your decisions and course of action?
Problem 2–3 Identifying Accounting Assumptions
Suppose you work for a company called Greenwood Sky Divers as a sky-diving instructor.
Since you have your pilot’s license, you also give flying lessons on the side. You and the
owner of Greenwood Sky Divers both belong to a local club, the Greenwood Eagles,
whose members get together for sky dives on weekends. Greenwood Sky Divers is a sole
proprietorship that has been in business for six years. The owner of the company regularly
reviews financial reports, and the company’s accountant prepares end-of-the-year reports to
compare results from one year to the next.
Instructions Decide what information in this paragraph is relevant to accounting for
Greenwood Sky Divers. Identify the accounting assumptions for Greenwood, and give an
example of each assumption from the information given here.
36 Chapter 2 The World of Business and Accounting
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Accounting Careers in Focus
VICE PRESIDENT, FINANCE
3E Company, Carlsbad, California
..
Trish Lady Tips from .
Q: What does 3E Company do?
mpanies
A: We help businesses meet their environmental, health, and On average, co
ndidates for
safety responsibilities. interview six ca h
ing. Distinguis
Q: Why did you choose an accounting career? each job open on
the competiti
yourself from
A: I knew I had a strong aptitude in mathematics but I didn’t know your answers
by rehearsing
how to turn that into a career. Luckily, I had an algebra teacher estions with
to potential qu
in high school who steered me toward a practical application for ily member.
a friend or fam
my math skills: accounting. ting you will
During the mee
informed,
Q: What are some factors that have been key to your come across as
confident.
success? prepared, and
A: Being open to opportunities has definitely helped me. For
example, I was working as a chief financial officer for a real estate
firm. I then took a different career path to focus on business development,
helping companies reach their long-term goals. The skills I learned from that
experience gave me a better background to draw from in my current role.
Q: What do you like most about your job?
A: I like the variety of responsibilities and the intellectual challenge it presents.
Q: What skills are needed to become a vice president of finance?
A: You need a strong background in accounting. It’s also important to know
how to allocate time, money, and other resources. You must be able to shift
your focus from day-to-day accounting procedures to ways you can help your
company achieve its long-term goals.
CAREER FACTS
Nature of the Work: Ensure that the company follows state and federal laws, research
▲
and recommend investment opportunities, organize and manage the budget process.
Training or Education Needed: A master’s degree in finance or business administration;
▲
at least 10 years of experience in a public accounting firm or in finance. Many companies
require a CPA license.
Aptitudes, Abilities, and Skills: Long-term planning skills, negotiation skills,
▲
communication skills, and management skills. Management is the process of deciding
how best to use the resources of a business.
Salary Range: $70,000 and up, depending on experience, location, and company
▲
revenues.
Career Path: Gain experience in a public accounting firm, and gradually assume roles of
▲
increasing responsibility.
Thinking Critically What attributes can make a company exciting to work for?
Chapter 2 Accounting Careers in Focus 37
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CH A P T ER 2 Summary
Key Concepts
1. Profit, which is the money left after the owner pays all operating costs, is required so that a
business can continue to operate and be successful. Entrepreneurs play an important role in
business by taking ideas for products and services and turning them into actual businesses. Most
entrepreneurs are willing to take risks, often by providing capital, to create profitable and useful
businesses.
Money Earned Money Spent to Profit
from Sales Operate Business
2. The three types of business operations follow:
• Service businesses provide needed services, such as medical, legal, hair styling, and lawn
mowing, for a fee.
• Merchandising businesses buy products and resell them.
• Manufacturing businesses use labor and machinery to transform raw materials into finished
products.
3. The three forms of business organization follow:
• A sole proprietorship is owned by one person.
• A partnership is owned by two or more persons. Partners usually enter into a written, legal
agreement.
• A corporation is owned by its shareholders. It is recognized by law to have a life of its own.
4. Each of the three business forms has certain advantages and disadvantages as summarized here.
Advantages Disadvantages
Sole Proprietorship • Easy to set up • Limited expertise
• All profits go to owner • Hard to raise money
• Owner has total control • Owner has all the risks
• Few regulations to follow • Hard to attract talented
employees
Partnership • Easy to start • Conflicts between partners
• Skills and talents are pooled • Profits must be shared
• More money available • Owners share all risks
38 Chapter 2 Summary
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Summary CHAPT E R 2
Advantages Disadvantages
Corporation • Easy to raise money • Costs more to start
• Easy to expand • Complex to organize
• Easy to transfer ownership • More regulations
• Losses limited to investment • Higher taxes
5. Accounting provides financial information that is used to make decisions. To ensure that all
financial information is presented in a consistent manner, accountants apply generally accepted
accounting principles (GAAP).
6. Financial accounting provides information to external users, people outside the business.
Management accounting provides information to internal users, people inside the business.
7. Three basic accounting assumptions follow:
• Business entity is the assumption that for accounting purposes, a business exists separately
from the personal holdings of its owner. The owner’s personal financial activities are not
included in the reports of the business.
• Accounting period is the assumption that the life of a business is divided into specific periods
of time that are covered by accounting reports. Examples of accounting periods are a
month, a quarter, and a year.
• Going concern is the assumption that a business has the ability to survive and operate
indefinitely unless evidence supports the fact that it cannot.
Key Terms
accounting period (p. 35) GAAP (p. 33)
accounting system (p. 33) going concern (p. 35)
business entity (p. 35) loss (p. 28)
capital (p. 29) management accounting (p. 34)
charter (p. 31) manual accounting system (p. 33)
computerized accounting system (p. 33) manufacturing business (p. 29)
corporation (p. 31) merchandising business (p. 29)
entrepreneur (p. 28) partnership (p. 30)
financial accounting (p. 34) profit (p. 28)
financial reports (p. 33) service business (p. 29)
free enterprise system (p. 28) sole proprietorship (p. 30)
Chapter 2 Summary 39
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C H A P T ER 2 Review and Activities
AFTER
YOU READ
Check Your Understanding
1. Profit, Risk-Taking, and Entrepreneurs
a. What is one measure of the success of a business?
b. What is an entrepreneur? List two characteristics of an entrepreneur.
2. Types of Business Operations
a. Name and describe the three types of business operations.
b. What is the major difference between a merchandising business and a manufacturing business?
3. Forms of Business Organization
a. Describe each of the three forms of business organization.
b. What is the purpose of a partnership agreement?
4. Advantages and Disadvantages of Forms of Business Organization
a. List two advantages and two disadvantages of each business form.
b. What disadvantage do a sole proprietorship and partnership share?
5. Purpose of Accounting
a. Describe the purpose of accounting.
b. What does the accounting system do?
6. Financial and Management Accounting
a. What is the major difference between financial accounting and management accounting?
b. Explain how managers use the information in accounting reports.
7. Basic Accounting Assumptions
a. What is meant by the term assumption?
b. What are three important assumptions of accounting, and what does each mean?
Apply Key Terms
On a separate sheet of paper, write a brief
definition for each of the following terms:
accounting period going concern
accounting system management
business entity accounting
charter manual accounting
computerized system
accounting system manufacturing
corporation business
entrepreneur merchandising
financial accounting business
financial reports partnership
free enterprise system service business
GAAP sole proprietorship
40 Chapter 2 Review and Activities
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Problems CHAPT E R 2
Problem 2–4 Identifying Types of Businesses
Instructions In your working papers, indicate whether each of the
following businesses is a service business, a merchandising business, or a
manufacturing business.
1. International Business Machines (IBM)
2. Gap
3. Glendale Memorial Hospital
4. Avis Rent A Car System
5. Ford Motor Company
6. Bank of America
7. Ace Hardware Stores
8. Michigan City Animal Hospital
9. Office Depot
10. Wal-Mart Stores
11. Allstate Insurance
12. U.S. Steel
Problem 2–5 Understanding Accounting
Assumptions
Instructions In your working papers, indicate the assumption from the
list below that best matches each numbered statement.
Accounting Period
Business Entity
Going Concern
1. Accounting reports may cover a month, a quarter, or a year.
2. Accountants expect a business to last indefinitely.
3. The personal property of a business owner is not included in the
accounting records of the business.
4. The business has been in operation for several years and is expected to
continue.
5. An owner’s personal activities or properties are not mixed with the
business activities or properties.
6. The accountant’s report shows how much profit the business earned
for one month.
Problem 2–6 Understanding Business
Operations
Mary Torres owns and operates a bakery. During the past week, she sold
500 loaves of bread at $2.25 per loaf. The raw materials for each loaf cost
Ms. Torres $1.80.
CONTINUE
Chapter 2 Problems 41
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C H A P T ER 2 Problems
Instructions In your working papers, write the answers to the following
questions:
1. What type of business does Ms. Torres operate?
2. What was the profit on bread sales for the week?
3. Aside from the costs for raw materials, what other costs will Ms. Torres
use to calculate her profit for the week?
Problem 2–7 Categorizing Forms of Business
Organizations
Instructions Match the letter next to each form of business with the
appropriate items in the following list of advantages and disadvantages.
You may use a letter more than once. Use the form provided in your
working papers.
A. Sole Proprietorship B. Partnership C. Corporation
1. Easier to raise money
2. Limited expertise
3. Higher start-up costs
4. Owner has total control
5. Shared profits
6. Higher taxes
7. Fewer regulations to follow
8. Easy transfer of ownership
9. Risk of conflict between owners
10. Easy to expand
CHALLENGE Problem 2–8 Working as an
PROBLEM
Entrepreneur
Instructions Using the form in your working papers, identify each of the
following as an advantage or disadvantage of being an entrepreneur. For
each item you label a disadvantage, decide what actions you would take to
overcome that disadvantage. Analyze and describe how your actions might
affect the profit your business earns.
1. Risking the loss of your savings
2. Deciding what you and everyone else needs to do each day
3. Lacking steady wages and employee benefits
4. Choosing when and where to work
5. Keeping the financial benefits of your hard work
6. Choosing the people you want to work with
7. Paying all the expenses of a new business
42 Chapter 2 Problems
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Winning Competitive Events CHAPTER 2
Practice your test-taking skills! The questions on this page are reprinted with permission
from national organizations:
• Future Business Leaders of America
• Business Professionals of America
Use a separate sheet of paper to record your answers.
Future Business Leaders of America
MULTIPLE CHOICE
1. A business in which two or more persons combine their assets is called a(an)
a. corporation.
b. sole proprietorship.
c. partnership.
d. merchandising business.
e. none of these answers.
2. An example of an accounting assumption is a(n)
a. accounting system.
b. accounting statement.
c. going concern.
d. computerized accounting.
3. A ________ buys raw materials and transforms them into finished products.
a. merchandising business
b. manufacturing business
4. The business entity concept means that
a. a business exists.
b. the business’s and owner’s personal records should not be mixed.
c. a business is successful.
d. none of the above.
Business Professionals of America
MULTIPLE CHOICE
5. A set of rules used by all accountants to provide a consistent form in which to
provide financial information is referred to as
a. American CPA Rules.
b. GAAP.
c. Financial Accounting.
d. Management Accounting.
Need More Help?
Go to glencoeaccounting.glencoe.com and
click on Student Center. Click on Winning
Competitive Events and select Chapter 2.
• Practice Questions and Test-Taking Tips
• Concept Capsules and Terminology
glencoeaccounting.glencoe.com Chapter 2 Winning Competitive Events 43
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C H A P T ER 2 Real-World Applications and Connections
Critical Free Enterprise
Thinking 1. Which accounting assumption separates the owner’s personal finances from
the financial activities of the business?
2. What is the difference between a sole proprietorship and a partnership?
3. Consider the businesses at your local mall. What type of business operation is
the most popular? How do you think most of the businesses are organized?
4. Compare and contrast merchandising and manufacturing businesses.
5. Think of a business you would like to start. Describe the business operation
and choose the best form of organization for your new business. Why did
you choose this particular form of business organization?
6. Evaluate the going concern principle. Why should we use it if many
businesses fail within the first five years?
CASE Entrepreneurship
STUDY Interview two or three local entrepreneurs. If you need help finding entrepreneurs,
contact your local chamber of commerce or other business organizations.
INSTRUCTIONS
1. Prepare questions such as these:
• How did you get the idea for your business?
• How did you finance the business?
• What skills have helped you start and run the business?
• What personal qualities have helped you be successful?
• What has been your biggest challenge in starting a business?
• What advice would you offer to other would-be entrepreneurs?
2. Conduct the interviews, and then write a general profile of the qualities and
skills of a successful entrepreneur. Use information from all of your interviews.
3. After writing your profile, decide whether you are entrepreneurial material.
Explain why or why not.
a
mattoefr ETHICS Becoming an Entrepreneur
Imagine that you work for a local day-care center. You attend a company meeting
to discuss new services that would help the center stand out from its competition.
You think you can use the services discussed to become an entrepreneur—by
opening your own day-care center.
ETHICAL DECISION MAKING
1. What are the ethical issues? 4. How do the alternatives affect the
2. What are the alternatives? parties?
3. Who are the affected parties? 5. What would you do?
$ )) ))
Communicating
Summarizing Success
ACCOUNTING Locate and read a current magazine article featuring a successful entrepreneur. Try
periodicals like BusinessWeek, Forbes, or Inc. Write a summary of the article, and
explain why you think the person succeeded.
44 Chapter 2 Real-World Applications and Connections
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Real-World Applications and Connections CHAPT E R 2
Skills Beyond Individual Responsibility
NUMBERS High-performance workers exhibit perseverance and excellence in their job
duties. Working well and showing a high level of concentration on any task
indicates you can assume individual responsibility for your work.
ON THE JOB
As an accounting clerk for Prints-in-a-Minute, you prepare the financial
statements for the owner, José Tirado. As you prepare for your year-end meeting
with Mr. Tirado, you locate an error in the financial reports. What do you do?
INSTRUCTIONS
1. Mr. Tirado relies on you for accuracy. Write a memo to him explaining what
has occurred and your plan for correcting the problem.
2. Mr. Tirado has read the memo and wants to talk with you. Pair up with
another student and role-play the conversation, one of you as the accounting
clerk, the other as Mr. Tirado. Discuss how you will fix the mistake.
INTERNATIONAL International Accounting Standards
Accounting When two companies from different countries prepare financial statements,
do you think they use the same accounting rules? If both companies use
International Accounting Standards (IAS), the statements would be comparable
and understandable. The International Accounting Standards Board (IASB)
develops accounting rules so that investors can compare financial statements
of publicly traded companies from any country. Since International Accounting
Standards are not always the same as U.S. generally accepted accounting
principles (GAAP), it is important to know which rules were used to prepare
financial statements.
INSTRUCTIONS Explain why a U.S. company might choose to prepare its financial
statements using both GAAP and IAS.
Your Job Application
Making It
Personal Almost all employers require you to fill out a job application as part of the hiring
process. The quality of your job application can determine whether you “get in
the door” for a job interview.
PERSONAL FINANCE ACTIVITY Suppose you
are preparing for a job interview two weeks
Getting the Word Out
from now. What type of questions do you
Does anybody really care
think you would have to answer on your job
about accounting information?
application form? Make a list of the parts of a Read all about it! Visit
job application you think you would have to fill glencoeaccounting
out. Do you think you are well prepared? Why .glencoe.com and click
or why not? on Student Center. Click on
PERSONAL FINANCE ONLINE Log on to WebQuest and select Unit 1 to
continue your Internet project.
glencoeaccounting.glencoe.com and
click on Student Center. Click on Making It
Personal and select Chapter 2.
glencoeaccounting.glencoe.com Chapter 2 Real-World Applications and Connections 45
026-045_CH02_868829.indd 45 8/29/05 1:02:36 PM
UNIT
2 The Basic
Accounting Cycle
Personal Finance Q & A
Q: Why do I need to know about the
accounting cycle?
A: In all aspects of your life, you will
need to convert economic events
into useful information.
Q: What is an example of useful
information?
A: An example is a report showing how
much money you earned, saved, and
spent in a given period.
THINK IT OVER
What economic events occur in your life
in a one-month period? How can you
organize that information so that it is
useful to you?
46
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Internet Project
A Whole New Ball Game
Soccer is one of the world’s most popular sports. However, in the
United States, professional soccer has a history of losing money.
That situation is changing as the U.S. fan base grows. In this project
you will explore the business side of professional sports.
Log on to glencoeaccounting.glencoe.com and
click on Student Center. Click on WebQuest and
select Unit 2. Begin your WebQuest by reading
the Task.
Continue working on your WebQuest as you study Unit 2.
Chapter 3 6 9 10 11
Page 75 161 247 275 303
THE BIG PICTURE
WINNERS The world s largest sports franchises, based on revenue.
MILLIONS OF DOLLARS
MANCHESTER UNITED, English Premiership soccer $303.4*
NEW YORK YANKEES, Major League Baseball $294.2
JUVENTUS, Italian Serie A soccer $263.4
A.C. MILAN, Italian Serie A soccer $241.6
WASHINGTON REDSKINS, NFL $238.6
Data: Deloitte *Revenues converted from euros to dollars
Source: Reprinted by permission from BusinessWeek.
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CH A P T ER 3 Business Transactions and
the Accounting Equation
BEFORE
YOU READ
What You’ll Learn Predict
1. Describe the relationship 1. What does the chapter title tell you?
between property and 2. What do you already know about this subject from personal experience?
financial claims. 3. What have you learned about this in the earlier chapters?
2. Explain the meaning of the 4. What gaps exist in your knowledge of this subject?
term equities as it is used in
accounting.
3. List and define each part of Exploring the Real World of Business
the accounting equation.
4. Demonstrate the effects INVESTING CAPITAL
of transactions on the
accounting equation. HARPO Productions, Inc.
Time magazine called her one of the “100 Most Influential
5. Check the balance of the
People of the 20th Century,” but millions of daytime television
accounting equation after a
business transaction has been viewers know her as Oprah. Breaking records at every turn,
analyzed and recorded. Oprah Winfrey was the youngest person to anchor the news
at Nashville’s WTVF-TV. She was the first woman to own and
6. Define the accounting terms
introduced in this chapter. produce her own talk show and the first African-American
woman to become a billionaire.
Why It’s Important In 1986, investing her own money, Winfrey created
To understand the financial HARPO Productions, Inc., the company that produces
▲
condition of any business, The Oprah Winfrey Show. Guests have included celebrities
you must first understand the such as Gwyneth Paltrow and Denzel Washington. The talk
accounting equation.
show generates a tidy $104 million each year. HARPO also
produces movies, videos, books, and O: The Oprah Magazine.
What Do You Think?
What kinds of assets do you think might have been
purchased with the capital that Oprah Winfrey invested in
HARPO Productions, Inc.?
48 Chapter 3 Business Transactions and the Accounting Equation
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Working in the Real World
APPLYING YOUR ACCOUNTING KNOWLEDGE
Personal Connection
Every business has assets, liabilities, and owner’s 1. In your workplace what types of assets does
equity—the elements in the basic accounting the business have?
equation that you will study in this chapter. A 2. What types of debts or liabilities would you
television studio’s assets include cameras and imagine the business to have?
computers. Its liabilities may include unpaid bills
to videotape suppliers. The owner’s equity of a Online Connection
business is what the business is worth. Go to glencoeaccounting.glencoe.com and click
on Student Center. Click on Working in the
Real World and select Chapter 3.
glencoeaccounting.glencoe.com 49
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SECTION 1 Property and
Financial Claims
In Chapter 2 you learned that accounting is the language of busi-
BEFORE
YOU READ ness. In this chapter you will learn how to apply basic accounting con-
cepts and terminology. You will also learn how the accounting equation
expresses the relationship between property and the rights, or claims, to
Main Idea the property.
Any item of property has
United Parcel Service (UPS), a corporation that provides global deliv-
at least one financial claim
ery services, uses accounting reports to communicate with its managers,
against it.
employees, and investors. The UPS financial reports identify the prop-
Read to Learn… erty used in the business, such as airplanes, trucks, and computers. The
➤ what it means to own reports also show how the company obtained the property, either from
property. (p. 50) loans or from funds provided by investors.
➤ the two types of financial
claims to property. (p. 51) Property
Key Terms What Is Property?
property The right to own property is basic to a free enterprise system.
financial claim Property is anything of value that a person or business owns and there-
credit fore controls. When you own an item of property, you have a legal right
creditor to that item. For example, suppose you paid $600 for a mountain bike.
assets
As a result of the payment, you own the bike. If you had rented the bike
equities
for the weekend instead of buying it, you would pay a much smaller
owner’s equity
amount of money, but you would have the bike for only a limited time.
liabilities
You would have the right to use the bike for the weekend, but you would
accounting equation
not own it.
Businesses also own property. One of the purposes of accounting
is to provide financial information about property and financial claims to
that property. A financial claim is a legal right to an item. In account-
ing, property and financial claims are measured in dollar amounts. Dollar
amounts measure both the cost of the property and the financial claims
to the property. In our mountain bike example, since you paid $600 cash
to buy the bike, you have ownership and a financial claim of $600 to the
bike. This relationship between property and financial claims is shown in
the following equation.
Property (Cost) Financial Claims
Bike Your Claim to the Bike
$600 $600
When you buy property with cash, you acquire all of the financial
claims to that property at the time of purchase. What happens to the
50 Chapter 3 Business Transactions and the Accounting Equation
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financial claim, however, when you don’t pay for the
property right away?
When you buy something and agree to pay for it
later, you are buying on credit . The business or per-
son selling you the item on credit is called a creditor .
A creditor can be any person or business to which you
owe money. When you buy property on credit, you
do not have the only financial claim to the property.
You share the financial claim to that property with
your creditor. For example, suppose you want to buy
a $100 lock for the mountain bike, but you have only
$60. You pay the store $60 and sign an agreement to
pay the remaining $40 over the next two months.
Since you owe the store (the creditor) $40, you share the financial claim to
the lock with the creditor. The creditor’s financial claim to the lock is $40
and your claim is $60. The combined claims equal the cost of the property.
Your purchase of the lock can be expressed as an equation:
PROPERTY FINANCIAL CLAIMS
Property Financial Claims
Bike Lock Creditor’s Financial Claim Owner’s Financial Claim
$100 $40 $60
As you can see, two (or more) people can have financial claims to the
same property.
Only the property owner has control of the property. For example, sup-
pose that you buy a used vehicle for $8,000. You pay $1,200 in cash and take
out a loan from the credit union for the remaining $6,800.
Property Financial Claims
Vehicle Creditor’s Financial Claim Owner’s Financial Claim
$8,000 $6,800 $1,200
As the owner, you have control of the vehicle. However, if you don’t
make the payments to the credit union, the credit union can exercise its
legal claim to the vehicle and you will lose ownership.
Financial Claims in Accounting
What Are the Two Types of Equities?
Property or items of value owned by a business are referred to as assets .
Businesses can have various types of assets, such as:
• cash
• office equipment
• manufacturing equipment
• buildings
• land
Section 1 Property and Financial Claims 51
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The accounting term for the financial claims to these assets is equities .
Let’s explore the meaning of the term equities by introducing Maria Sanchez
and her new business, Roadrunner Delivery Service, organized as a sole
proprietorship.
Suppose Roadrunner Delivery Service purchases a delivery truck for
$10,000. Roadrunner makes a cash down payment of $3,000 to the seller. A
local bank loans Roadrunner the remaining $7,000. Both Roadrunner and
the bank now have financial claims to the truck.
Creditor’s Financial Owner’s Financial
Property Claim Claim
Truck
$10,000 $7,000 $3,000
Over the years as Roadrunner repays the loan, its financial claim will
increase. As less money is owed, the financial claim of the creditor (the
bank) will decrease.
For example, after Roadrunner pays one-half of the loan ($7,000 ½
$3,500), the financial claims to the property will change as follows:
Creditor’s Financial Owner’s Financial
Property Claim Claim
Truck
$10,000 $3,500 $6,500
AS
YOU READ When the loan is completely repaid, the creditor’s financial claim will
be canceled. In other words the owner’s financial claim will then equal the
Compare and cost of the truck.
Contrast In accounting there are separate terms for owner’s claims and creditor’s
Assets and Liabilities claims. The owner’s claims to the assets of the business are called owner’s
How are assets and equity . Owner’s equity is measured by the dollar amount of the owner’s
liabilities similar? How claims to the total assets of the business.
are they different? The creditor’s claims to the assets of the business are called liabilities .
Liabilities are the debts of a business. They are measured by the amount of
money owed by a business to its creditors. The relationship between assets
and the two types of equities (liabilities and owner’s equity) is shown in
the accounting equation :
ASSETS LIABILITIES OWNER’S EQUITY
MATH HINTS
Using Algebra The Property Creditor’s Financial Claim Owner’s Financial Claim
basic accounting equation
is in the form a b c.
• To find b, rewrite the
equation as b a c.
Assets Liabilities Owner’s Equity
• To find c, rewrite the
equation as c a b.
52 Chapter 3 Business Transactions and the Accounting Equation
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SECTION 1 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Use a diagram like this one to
,IABILITIES /WNERS
describe the financial claims
%QUITY
of creditors and owners.
!SSETS
Do the Math
Owner’s equity can be expressed as a fraction of the total equities. It can also be expressed as
a decimal. Consider the following example:
Assets Liabilities Owner’s Equity
$10,000 $9,000 $1,000
Owner’s equity is equal to 1/10, or 10 percent, of the total equities:
Owner’s Equity Total Equities
$1,000 $10,000
1/10
0.10
Convert the following fractions into decimals.
1 1 1 4 7 7
1. ⁄2 2. ⁄5 3. ⁄3 4. ⁄5 5. ⁄8 6. ⁄10
Convert the following decimals into fractions.
7. 0.889 8. 0.60 9. 0.375 10. 0.25 11. 0.667 12. 0.75
Problem 3–1 Balancing the Accounting Equation
Instructions Determine the missing dollar amount indicated by the question mark in each
equation. Write each missing amount in your working papers.
ASSETS LIABILITIES OWNER’S EQUITY
1. $17,000 $ 7,000 ?
2. ? $ 6,000 $20,000
3. $10,000 ? $ 7,000
4. ? $ 9,000 $17,000
5. $ 8,000 $ 2,000 ?
6. $20,000 $ 7,000 ?
7. ? $12,000 $ 4,000
8. $30,000 ? $22,000
9. $22,000 $ 1,000 ?
10. $25,000 $ 5,000 ?
11. ? $10,000 $25,000
12. $ 7,500 ? $ 3,000
Section 1 Property and Financial Claims 53
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SECTION 2 Transactions That Affect
Owner’s Investment, Cash,
and Credit
When you purchased a new sweater, bought popcorn at the movies,
BEFORE
YOU READ or put cash in your savings account, you were participating in busi-
ness transactions. Business transactions involve the purchase, sale, or
exchange of goods and services.
Main Idea
Accounts are used to analyze
business transactions. Business Transactions
How Are Accounts Used?
Read to Learn…
➤ how businesses use A business transaction is an economic event that causes a change—
accounts. (p. 54) either an increase or a decrease—in assets, liabilities, or owner’s equity.
➤ the steps used to analyze The change is reflected in the accounting system of the business.
a business transaction. When a business buys a computer with cash, its cash decreases, but
(p. 55) its computer equipment increases. It records increases and decreases
caused by business transactions in specific accounts. An account is a
Key Terms subdivision under assets, liabilities, or owner’s equity. It shows the bal-
business transaction ance for a specific item and is a record of the increases or decreases for
account that item. Accounts represent things in the real world, such as money
accounts receivable invested in a business or owed to a creditor. An account for office furni-
accounts payable
ture represents the dollar cost of all office furniture the business owns.
investment
Every business sets up its accounts and its accounting system to meet
on account
its needs. The number of accounts needed varies. Some businesses use only
a few accounts, but others use hundreds. No matter how many accounts a
business has, all of its accounts may be classified as either assets, liabilities,
or owner’s equity. Roadrunner Delivery Service uses these accounts:
Assets Liabilities Owner’s Equity
AS
YOU READ Cash in Bank Accounts Payable Maria Sanchez, Capital
Accounts Receivable
It’s Not What It Computer Equipment
Seems Office Equipment
Accounts The word Delivery Equipment
accounts might bring to
mind checking accounts The second asset account listed is Accounts Receivable. Accounts
or credit card accounts. receivable is the total amount of money owed to a business—money to
In an accounting be received later because of the sale of goods or services on credit. The
system, accounts are Accounts Receivable account is an asset because it represents a claim to the
subdivisions of the assets of other people or businesses. It represents a future value that eventu-
accounting equation. ally will bring cash into the business. When the business receives payment,
it cancels the claim.
54 Chapter 3 Business Transactions and the Accounting Equation
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AS
The liability account is Accounts Payable. Accounts payable is the
YOU READ
amount owed, or payable, to the creditors of a business. The owner’s equity
account title is the owner’s name, a comma, and then the word Capital. Key Point
Business Transactions
Effects of Transactions on the Every business
transaction affects at
Accounting Equation least two accounts.
What Happens to the Accounting Equation?
When a business transaction occurs, an accounting clerk analyzes the
transaction to see how it affects each part of the accounting equation.
Analyzing business transactions is simple. Use the following steps.
B u s i n e s s Tr a n s a c t i o n
ANALYSIS Identify 1. Identify the accounts affected.
Classify 2. Classify the accounts affected.
/ 3. Determine the amount of increase or decrease for each account
affected.
Balance 4. Make sure the accounting equation remains in balance.
Most businesses have the following types of transactions: investments
by the owner, cash transactions, credit transactions, revenue and expense
transactions, and withdrawals by the owner.
Investments by the Owner
An investment is money or other property paid out in order to pro-
duce profit. Owner Maria Sanchez made two investments in her business,
Roadrunner Delivery Service. The first was a cash investment; the second
was a transfer of property.
B u s i n e s s Tr a n s a c t i o n 1
Maria Sanchez took $25,000 from personal savings and deposited that
amount to open a business checking account in the name of Roadrunner Delivery Service.
ANALYSIS Identify 1. Cash transactions are recorded in the account Cash in Bank. Maria
Sanchez is investing personal funds in the business. Her investment in
the business is recorded in the account called Maria Sanchez, Capital.
Classify 2. Cash in Bank is an asset account. Maria Sanchez, Capital is an owner’s
equity account.
/ 3. Cash in Bank is increased by $25,000. Maria Sanchez, Capital is
increased by $25,000.
Balance 4. The accounting equation remains in balance.
Assets Liabilities Owner’s Equity
Cash in Bank Maria Sanchez, Capital
Trans. 1 $25,000 0 $25,000
Section 2 Transactions That Affect Owner’s Investment, Cash, and Credit 55
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B u s i n e s s Tr a n s a c t i o n 2
Maria Sanchez transferred two telephones valued at $200 each from her home to the business.
ANALYSIS Identify 1. Maria Sanchez gave two telephones to the business. This affects the
account Office Equipment. The investment of these assets affects the
account Maria Sanchez, Capital.
Classify 2. Office Equipment is an asset account. Maria Sanchez, Capital is an
owner’s equity account.
/ 3. Office Equipment is increased by $400. Maria Sanchez, Capital is
increased by $400.
Balance 4. The accounting equation remains in balance.
Assets Liabilities Owner’s Equity
Cash Office Maria Sanchez,
AS in Bank Equipment Capital
YOU READ
Prev. Bal. $25,000 0 0 $25,000
Instant Recall Trans. 2 $400 400
Business Entity Balance $25,000 $400 0 $25,400
Assumption The
financial activities and
records of the owner are
Cash Payment Transactions
kept separate from those Transaction 3 is the cash purchase of an asset. Any asset purchased for
of the business. cash is recorded this way, but the account name of the asset purchased may
vary. Transaction 3 affects only the assets side of the equation. Roadrunner
exchanged one asset (cash) for another asset (computer equipment).
B u s i n e s s Tr a n s a c t i o n 3
Roadrunner issued a $3,000 check to purchase a computer system.
ANALYSIS Identify 1. Transactions involving any type of computer equipment are recorded
in the Computer Equipment account. The business paid cash for the
computer system, so the account Cash in Bank is affected. Check
payments are treated as cash payments and are recorded in Cash in
Bank.
Classify 2. Computer Equipment and Cash in Bank are both asset accounts.
/ 3. Computer Equipment is increased by $3,000. Cash in Bank is
decreased by $3,000.
Balance 4. The accounting equation remains in balance.
Assets Liabilities Owner’s Equity
Cash Computer Office Maria Sanchez,
in Bank Equipment Equipment Capital
Prev. Bal. $25,000 0 $400 0 $25,400
Trans. 3 3,000 $3,000
Balance $22,000 $3,000 $400 0 $25,400
56 Chapter 3 Business Transactions and the Accounting Equation
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AS
Credit Transactions YOU READ
Now that you have learned about cash transactions, let’s look at how In Your Experience
the use of credit affects the accounting equation. When a business buys an
item on credit, it is buying on account . In the next four transactions, you On Account Individuals
as well as businesses
will learn about a purchase on account, a sale on account, a payment made
buy things on account.
on account, and a payment received on account.
What are some items
that individuals buy on
B u s i n e s s Tr a n s a c t i o n 4 account?
Roadrunner bought a used truck on account from North Shore Auto for $12,000.
ANALYSIS Identify 1. Roadrunner purchased a truck to be used as a delivery vehicle, so the
account Delivery Equipment is affected. The business promised to pay
for the truck at a later time. The promise to pay is a liability; therefore,
the Accounts Payable account is affected.
Classify 2. Delivery Equipment is an asset account. Accounts Payable is a liability
account.
/ 3. Delivery Equipment is increased by $12,000. Accounts Payable is also
increased by $12,000.
Balance 4. The accounting equation remains in balance.
Assets Liabilities Owner’s Equity
Cash Computer Office Delivery Accounts Maria Sanchez,
in Bank Equipment Equipment Equipment Payable Capital
Prev. Bal. $22,000 $3,000 $400 0 0 $25,400
Trans. 4 $12,000 $12,000
Balance $22,000 $3,000 $400 $12,000 $12,000 $25,400
B u s i n e s s Tr a n s a c t i o n 5
Roadrunner sold one telephone to Green Company for $200 on account.
ANALYSIS Identify 1. Since Roadrunner has agreed to receive payment for the telephone at
a later time, the Accounts Receivable account is affected. The business
sold the telephone, so the account Office Equipment is also affected.
Classify 2. Both Accounts Receivable and Office Equipment are asset accounts.
/ 3. Accounts Receivable is increased by $200. Office Equipment is
decreased by $200.
Balance 4. The accounting equation remains in balance.
Assets Liabilities Owner’s Equity
Cash Accounts Computer Office Delivery Accounts Maria Sanchez,
in Bank Receivable Equipment Equipment Equipment Payable Capital
Prev. Bal. $22,000 0 $3,000 $400 $12,000 $12,000 $25,400
Trans. 5 $200 200
Balance $22,000 $200 $3,000 $200 $12,000 $12,000 $25,400
Section 2 Transactions That Affect Owner’s Investment, Cash, and Credit 57
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B u s i n e s s Tr a n s a c t i o n 6
Roadrunner issued a check for $350 in partial payment of the amount owed to its creditor, North
Shore Auto.
ANALYSIS Identify 1. The payment decreased the total amount owed to the creditor, so
Accounts Payable is affected. Payment was made by check, so the
account Cash in Bank is affected.
Classify 2. Accounts Payable is a liability account. Cash in Bank is an asset
account.
/ 3. Accounts Payable is decreased by $350. Cash in Bank is also
decreased by $350.
Balance 4. The accounting equation remains in balance.
Assets Liabilities Owner’s Equity
Cash Accounts Computer Office Delivery Accounts Maria Sanchez,
in Bank Receivable Equipment Equipment Equipment Payable Capital
Prev. Bal. $22,000 $200 $3,000 $200 $12,000 $12,000 $25,400
Trans. 6 350 350
Balance $21,650 $200 $3,000 $200 $12,000 $11,650 $25,400
B u s i n e s s Tr a n s a c t i o n 7
Roadrunner received and deposited a check for $200 from Green Co. The check received is full payment for
the telephone sold on account in Transaction 5.
ANALYSIS Identify 1. The check decreases the amount owed to Roadrunner, so Accounts
Receivable is affected. A check is given in payment, so Cash in Bank is
affected.
Classify 2. Accounts Receivable and Cash in Bank are asset accounts.
/ 3. Accounts Receivable is decreased by $200. Cash in Bank is increased
by $200.
Balance 4. The accounting equation remains in balance.
Assets Liabilities Owner’s Equity
Cash Accounts Computer Office Delivery Accounts Maria Sanchez,
in Bank Receivable Equipment Equipment Equipment Payable Capital
Prev. Bal. $21,650 $200 $3,000 $200 $12,000 $11,650 $25,400
Trans. 7 200 200
Balance $21,850 $0 $3,000 $200 $12,000 $11,650 $25,400
As you can see, each business transaction causes a change in assets,
liabilities, or owner’s equity. Analyzing each transaction to see how it affects
the accounting equation keeps everything in balance.
58 Chapter 3 Business Transactions and the Accounting Equation
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SECTION 2 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Create a diagram like the one
shown here. For the boxes
marked “?”, fill in the correct /WNERS %QUITY
labels and give one example
of a related account for each
category. ,EO *ONES #APITAL
Do the Math
The basic accounting equation is in the form of A L OE
1. What is the algebra equation to find L?
2. What is the algebra equation to find OE?
Using the rules of algebra, determine the missing dollar amount in each equation.
Assets Liabilities Owner’s Equity
? $9,000 $21,000
$25,000 ? $11,000
$10,000 $2,000 ?
Problem 3–2 Determining the Effects of Transactions
on the Accounting Equation
Instructions Use these accounts to analyze the business transactions of WordService.
Assets Liabilities Owner’s Equity
Cash in Bank Accounts Payable Jan Swift, Capital
Accounts Receivable
Computer Equipment
Office Furniture
On the form provided in your working papers, identify the accounts affected by each
transaction and the amount of increase or decrease in each account. Make sure the
accounting equation is in balance after each transaction.
1. Jan Swift, owner, deposited $30,000 in the business checking account.
2. The owner transferred to the business a desk and chair valued at $700.
3. WordService issued a check for $4,000 for the purchase of a computer.
4. The business bought office furniture on account for $5,000 from Eastern Furniture.
5. The desk and chair previously transferred to the business by the owner were sold on
account for $700.
6. WordService wrote a check for $2,000 in partial payment of the amount owed to
Eastern Furniture Company.
Section 2 Transactions That Affect Owner’s Investment, Cash, and Credit 59
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SECTION 3 Transactions That Affect
Revenue, Expense, and
Withdrawals by the Owner
United Parcel Service (UPS) has thousands of shareholders who
BEFORE
YOU READ expect a return on their investment in the business. The most common
way for a business to provide a return is by selling goods or providing
Main Idea services. UPS earns revenue by providing a global delivery service. To
Owner’s equity is changed provide the delivery service, UPS incurs expenses like salaries, transpor-
by revenue, expenses, tation, and insurance. In this section you will learn about revenue and
investments, and expense transactions as well as owner’s withdrawals.
withdrawals.
Read to Learn… Revenue and Expense Transactions
➤ how revenue and What Are Revenue and Expenses?
expenses affect owner’s Income earned from the sale of goods or services is called revenue .
equity. (p. 60) Examples of revenue are fees earned for services performed and cash
➤ how withdrawals affect received from the sale of merchandise. Revenue increases owner’s equity
owner’s equity. (p. 61) because it increases the assets of the business.
Both revenues and investments by the owner increase owner’s equity,
Key Terms but these represent very different transactions:
revenue
expense • Revenue is income from the sale of goods and services.
withdrawal • Investment by the owner is the dollar amount contributed to the
business by the owner.
To generate revenue most businesses must also incur expenses to buy
goods, materials, and services. An expense is the cost of products or
services used to operate a business. Examples of business expenses are
• rent,
• utilities, and
• advertising.
Expenses decrease owner’s equity
because they decrease the assets of
the business or increase liabilities.
The effects of revenue and ex-
penses are summarized as follows:
• Revenue increases assets and
increases owner’s equity.
• Expenses decrease assets and
decrease owner’s equity or
increase liabilities and decrease
owner’s equity.
60 Chapter 3 Business Transactions and the Accounting Equation
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B u s i n e s s Tr a n s a c t i o n 8
Roadrunner received a check for $1,200 from a customer, Sims Corporation, for delivery services.
ANALYSIS Identify 1. Roadrunner received cash, so Cash in Bank is affected. The payment
received is revenue. Revenue increases owner’s equity, so Maria
Sanchez, Capital is also affected.
Classify 2. Cash in Bank is an asset account. Maria Sanchez, Capital is an owner’s
equity account.
/ 3. Cash in Bank is increased by $1,200. Maria Sanchez, Capital is also
increased by $1,200.
Balance 4. The accounting equation remains in balance.
Assets Liabilities Owner’s Equity
Cash Accounts Computer Office Delivery Accounts Maria Sanchez,
in Bank Receivable Equipment Equipment Equipment Payable Capital
Prev. Bal. $21,850 $0 $3,000 $200 $12,000 $11,650 $25,400
Trans. 8 1,200 1,200
Balance $23,050 $0 $3,000 $200 $12,000 $11,650 $26,600
B u s i n e s s Tr a n s a c t i o n 9
Roadrunner wrote a check for $700 to pay the rent for the month.
ANALYSIS Identify 1. Roadrunner pays rent for use of building space. Rent is an expense.
Expenses decrease owner’s equity, so the account Maria Sanchez,
Capital is affected. The business is paying cash for the use of the
building, so Cash in Bank is affected.
Classify 2. Maria Sanchez, Capital is an owner’s equity account. Cash in Bank is
an asset account.
/ 3. Maria Sanchez, Capital is decreased by $700. Cash in Bank is
decreased by $700.
Balance 4. The accounting equation remains in balance.
Assets Liabilities Owner's Equity
Cash Accounts Computer Office Delivery Accounts Maria Sanchez,
in Bank Receivable Equipment Equipment Equipment Payable Capital
Prev. Bal. $23,050 $0 $3,000 $200 $12,000 $11,650 $26,600
Trans. 9 700 700
Balance $22,350 $0 $3,000 $200 $12,000 $11,650 $25,900
Withdrawals by the Owner
What Is a Withdrawal?
If a business earns revenue, the owner will take cash or other
assets from the business for personal use. This transaction is called a
Section 3 Transactions That Affect Revenue, Expense, and Withdrawals by the Owner 61
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withdrawal . Withdrawals and investments have opposite effects. A with-
AS
YOU READ drawal decreases both assets and owner’s equity.
A withdrawal is not the same as an expense. Both decrease owner’s
In Your Own Words
equity, but each represents a different transaction. An expense is the price
Withdrawal Explain how paid for goods and services used to operate a business. For example, a gar-
a withdrawal decreases dening service purchases fertilizer and lawncare supplies to conduct daily
owner’s equity. operations. Withdrawals by the owner are cash or other assets taken from
the business for the owner’s personal use. Transaction 10 illustrates the
impact of a withdrawal on the accounting equation.
B u s i n e s s Tr a n s a c t i o n 1 0
Maria Sanchez withdrew $500 from the business for her personal use.
ANALYSIS Identify 1. A withdrawal decreases the owner’s claim to the assets of the business,
so Maria Sanchez, Capital is affected. Cash is paid out, so the Cash in
Bank account is affected.
Classify 2. Maria Sanchez, Capital is an owner’s equity account. Cash in Bank is
an asset account.
/ 3. Maria Sanchez, Capital is decreased by $500. Cash in Bank is
decreased by $500.
Balance 4. The accounting equation remains in balance.
Assets Liabilities Owner’s Equity
Cash Accounts Computer Office Delivery Accounts Maria Sanchez,
in Bank Receivable Equipment Equipment Equipment Payable Capital
Prev. Bal. $22,350 $0 $3,000 $200 $12,000 $11,650 $25,900
Trans. 10 500 500
Balance $21,850 $0 $3,000 $200 $12,000 $11,650 $25,400
The following summarizes the transactions of this chapter. Can you
describe what is happening in each line?
Cash Accounts Computer Office Delivery Accounts Owner’s
in Bank Receivable Equipment Equipment Equipment Payable Equity
Prev. Bal. 0 0 0 0 0 0 0
Trans. 1 25,000 25,000
Trans. 2 400 400
Trans. 3 3,000 3,000
Trans. 4 12,000 12,000
Trans. 5 200 200
Trans. 6 350 350
Trans. 7 200 200
Trans. 8 1,200 1,200
Trans. 9 700 700
Trans. 10 500 500
Balance $21,850 $0 $3,000 $200 $12,000 $11,650 $25,400
62 Chapter 3 Business Transactions and the Accounting Equation
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SECTION 3 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Use a table like the one
$OES /WNERS %QUITY
shown here to describe 4YPE OF 4RANSACTION 4RANSACTION $ESCRIPTION )NCREASE OR $ECREASE
four transactions of a home
decorating business. Indicate 2EVENUE
how each transaction affects
%XPENSE
owner’s equity.
)NVESTMENT
7ITHDRAWAL
Do the Math
Determine the Cash in Bank balance for Wiemack Landscape Designs after the third
transaction that follows. All three transactions occurred on the same day. The Cash in
Bank balance before the first transaction was $10,000.
1. John Wiemack, the owner, withdrew $1,000 from personal savings and deposited that
amount in the business checking account.
2. Purchased computer equipment for $5,000; issued a check for 20 percent of the price
and agreed to pay the balance at a later date.
3. Issued a check for $100 to buy tools.
Problem 3–3 Determining the Effect of Transactions on the
Accounting Equation
Instructions Use the accounts of WordService to analyze these business transactions. The
beginning balance for each account is shown following the account name.
Assets Liabilities Owner’s Equity
Cash in Bank, $24,000 Accounts Payable Jan Swift, Capital
Accounts Receivable, $700 $3,000 $30,700
Computer Equipment, $4,000
Office Equipment, $5,000
On the form provided in your working papers, identify the accounts affected by each
transaction and the amount of the increase or decrease for each account. Make sure the
accounting equation is in balance after each transaction.
1. Paid $50 for advertising in the local newspaper.
2. Received $1,000 as payment for preparing a report.
3. Wrote a $600 check for the month’s rent.
4. Jan Swift withdrew $800 for her personal use.
5. Received $200 on account from the person who had purchased the old office furniture.
Section 3 Transactions That Affect Revenue, Expense, and Withdrawals by the Owner 63
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CH A P T ER 3 Summary
Key Concepts
1. Property is anything of value that a person or business owns and therefore controls. Property is
measured in dollars. In accounting, property appears in the records at the amount it cost the
owner. Financial claims are the legal rights to property and are also measured in dollars. The
relationship between property and financial claims is shown in the following equation:
PROPERTY FINANCIAL CLAIMS
2. As it is used in accounting, the term equities refers to the financial claims on assets (property).
The two types of equities in a business are
• creditors’ financial claims, called liabilities, and
• the owner’s financial claims, called owner’s equity.
3. The accounting equation is ASSETS LIABILITIES OWNER’S EQUITY
Property Financial Claims
ASSETS LIABILITIES OWNER’S EQUITY
Items of value owned Financial claims Financial claims
by the business of creditors of owners
4. A business transaction is an economic event that causes a change—either an increase or a
decrease—in assets, liabilities, or owner’s equity. The accounting equation remains in balance
after each transaction:
Assets Liabilities Owner’s Equity
Cash Computer Office Serge Toblek,
in Bank Equipment Equipment Capital
Trans. 1 $15,000 0 0 0 $15,000
Trans. 2 $600 $600
Balance $15,000 0 $600 0 $15,600
Trans. 3 $3,000 $3,000
Balance $15,000 $3,000 $600 $3,000 $15,600
$18,600 $18,600
64 Chapter 3 Summary
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Summary CHAPT E R 3
The following table shows the effects of typical business transactions on the parts of the
accounting equation.
Effects On:
Transaction
Assets Liabilities Owner’s Equity
Investment of cash by owner
Investment of property
Cash payment for office
equipment ,
Purchase of an asset on account
Sale of office equipment on
account ,
Make a payment on account
Record revenue from a cash sale
Record a cash payment for an
expense
Record a cash withdrawal by
the owner
5. Use the following steps to analyze a business transaction:
ANALYSIS Identify 1. Identify the accounts affected.
Classify 2. Classify the accounts affected.
/ 3. Determine the amount of increase or decrease for each account
affected.
Balance 4. Make sure the accounting equation remains in balance.
Key Terms
account (p. 54) expense (p. 60)
accounting equation (p. 52) financial claim (p. 50)
accounts payable (p. 55) investment (p. 55)
accounts receivable (p. 54) liabilities (p. 52)
assets (p. 51) on account (p. 57)
business transaction (p. 54) owner’s equity (p. 52)
credit (p. 51) property (p. 50)
creditor (p. 51) revenue (p. 60)
equities (p. 52) withdrawal (p. 62)
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C H A P T ER 3 Review and Activities
AFTER
YOU READ
Check Your Understanding
1. Property and Financial Claims
a. Define the terms property and financial claim.
b. What is the relationship between property and financial claims?
2. Equities
a. Describe the relationship between assets and equities.
b. Name the two types of equities in a business, and give an example of an account that is
used for each type.
3. The Accounting Equation
a. What is the accounting equation?
b. Give an example of an account for each part of the accounting equation.
4. Effects of Transactions
a. What is a business transaction?
b. How does each of the following transactions affect the three parts of the accounting
equation?
Trans. 1: Owner transferred cash from personal savings account to the business.
Trans. 2: Owner withdrew cash from the business for personal use.
Trans. 3: Purchased equipment for cash.
Trans. 4: Purchased equipment on credit.
Trans. 5: Issued a check for the first monthly payment for equipment purchased in
Transaction 4.
Trans. 6: Received payment on the date of service for design consulting.
Trans. 7: Issued a check to pay the telephone bill.
5. Accounting Equation in Balance
a. At least how many accounts must be affected by each business transaction? Why?
b. Describe the four-step process described in this chapter used to analyze business
transactions.
Apply Key Terms
Which of the following terms can be
considered assets? Which terms relate to
liabilities? Which terms do not fall easily
into either category?
accounts payable investment
accounts receivable on account
credit property
creditor revenue
expense withdrawal
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Computerized Accounting CHAPT E R 3
Exploring Electronic Spreadsheets
Computer spreadsheets are important tools for organizing and analyzing data. A spreadsheet is made
up of rows and columns. The columns are identified by letters and the rows are identified by numbers.
As you create a spreadsheet, you will enter numbers, labels, and formulas into cells. Microsoft® Excel®
is the most commonly used spreadsheet application in the business world. The following is an example
of a basic electronic spreadsheet:
1 2 5
6
A B C D E F G H ▲
1 Jan Feb March April May June July
2 Sales 2,500 5,000 1,650 10,000 3,100 8,200 12,500
3 Expenses 700 1,200 225 3,550 1,800 2,300 5,600
4 Net income 1,800 3,800 1,425 6,450 1,300 5,900 6,900
5
6 ▼
3 8 7
4
Before you create a computer spreadsheet, review the following spreadsheet terms.
Spreadsheet Terms Description
➀ Row Identified by numbers down the left side of the spreadsheet.
➁ Column Identified by letters along the top of the spreadsheet.
Identified by a column letter and row number. For example, the cell
➂ Cell address
address B4 indicates the cell where the number 1,800 is found.
➃ Active cell Indicated by a dark border.
➄ Scroll arrows Allows you to view other parts of the spreadsheet.
Text that identifies columns or rows of information; cannot be used for
➅ Labels
calculations.
➆ Values Numbers inserted in cells that can be used for calculations.
Mathematical functions entered in a particular cell that tells the software
➇ Formulas to add, subtract, divide, or multiply values. For example, E2 E3
represents 10,000 3,550, or 6,450
Chapter 3 Computerized Accounting 67
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C H A P T ER 3 Problems
Complete problems using: Manual Glencoe Spreadsheet
Spreadshee
OR
Working Papers Templates
Problem 3–4 Classifying Accounts
All accounts belong in one of the following classifications: Asset, Liability,
Owner’s Equity.
Instructions In your working papers, indicate the classification for each of
the following accounts.
1. John Jones, Capital 6. Delivery Equipment
2. Cash in Bank 7. Camping Equipment
3. Accounts Receivable 8. Building
4. Accounts Payable 9. Land
5. Office Equipment 10. Computer Equipment
Analyze Identify the accounts that represent financial claims to
property.
Problem 3–5 Completing the Accounting Equation
A business owned and operated by Mike Murray uses these accounts.
Instructions Look at the following list of accounts, and determine the
missing amount for each of the question marks.
Assets Liabilities Owner’s Equity
Cash in Bank $4,500 Accounts Payable Mike Murray,
Accounts Receivable 1,350 ? Capital $9,250
Office Equipment 5,000
?
Analyze Predict what would happen to owner’s equity if this business
paid all of its bills today.
Problem 3–6 Classifying Accounts
Within the Accounting Equation
Listed here are the account names and balances for Wilderness Rentals.
Accounts Payable $ 7,000 Cash in Bank $ 5,000
Accounts Receivable 2,000 Office Equipment 3,000
Camping Equipment 12,000 Ronald Hicks, Capital 15,000
Instructions Using these account names and balances:
1. List and total the assets of the business.
2. Determine the amount owed by the business.
3. Give the amount of the owner’s equity in the business.
Analyze Design a diagram that shows the accounting equation for
Wilderness Rentals.
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Problems CHAPT E R 3
Problem 3–7 Determining Increases and
Decreases in Accounts
Hot Suds Car Wash uses the following accounts:
Assets Liabilities Owner’s Equity
Cash in Bank Accounts Payable Regina Delgado,
Accounts Receivable Capital
Office Equipment
Office Furniture
Car Wash Equipment
Instructions Use a form similar to the one that follows. For each
transaction:
1. Identify the accounts affected.
2. Classify the accounts.
3. Determine the amount of the increase () or decrease () for each
account affected.
The first transaction is completed as an example.
Accounts Amount of Increase ()
Trans. Affected Classification or Decrease ()
1. Cash in Bank Asset $25,000
Regina
Delgado,
Capital Owner’s Equity $25,000
Date Transactions
Jan. 1 1. Regina Delgado, the owner, invested $25,000 cash in
the business.
4 2. Bought car wash equipment with cash for $12,000.
5 3. Purchased, on account, $2,500 of office equipment.
10 4. Wrote a check for the monthly rent, $800.
12 5. Received cash for services performed, $1,000.
15 6. The owner withdrew $600 cash from the business
for personal use.
20 7. Purchased a desk for $1,000, paying $200 cash
and agreeing to pay the balance of $800 in 30 days.
25 8. Provided services worth $600 on account.
Analyze Identify the transaction that affects the most accounts.
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C H A P T ER 3 Problems
Problem 3–8 Determining the Effects
of Transactions on the
Accounting Equation
After graduating from college, Abe Shultz decided to start a pet grooming
service called Kits & Pups Grooming.
Instructions Use a form similar to the one that follows. For each of the
following transactions:
1. Identify the accounts affected, using the account names on the form.
2. Determine the amount of the increase or decrease for each account.
3. Write the amount of the increase () or decrease () in the space under
each account affected.
4. On the following line, write the new balance for each account.
5. Transaction 1 is completed as an example.
Owner’s
Assets Liabilities Equity
Trans. Cash in Accts. Office Grooming
Accounts
Abe Shultz,
Bank Rec. Equip. Equip. Payable Capital
1 $10,000 $10,000
Date Transactions
Jan. 2 1. Abe Shultz began the business by depositing $10,000 in
a checking account at the Shoreline National Bank in the
name of the business, Kits & Pups Grooming.
3 2. Bought grooming equipment for cash, $1,000.
8 3. Issued a check for $900 for the monthly rent.
9 4. Bought $6,000 worth of new office equipment on account
for use in the business.
15 5. Received $700 cash for services performed for customers
during the first week of business.
21 6. Issued a $2,000 check to the creditor as partial payment
for the office equipment purchased on account.
29 7. Performed grooming services and agreed to be paid for
them later, $500.
Analyze Explain the difference between Transaction 5 and
Transaction 7.
Problem 3–9 Determining the Effects
of Transactions on the
Accounting Equation
Juanita Ortega is the owner of a professional guide service called Outback
Guide Service.
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Problems CHAPT E R 3
Instructions Use a form similar to the one below. Complete these steps for SPREADSHEET
SMART GUIDE
each of the following transactions:
Step–by–Step Instructions:
1. Identify the accounts affected.
Problem 3–9
2. Write the amount of the increase () or decrease () in the space
1. Select the spreadsheet
provided on the form in your working papers. template for Problem
3. Determine the new balance for each account. 3–9.
2. Enter your name and
Owner’s the date in the spaces
Assets Liabilities Equity provided on the
template.
Trans. Cash in Accts. Hiking Rafting Office Accounts Juanita 3. Complete the
Bank Rec. Equip. Equip. Equip. Payable Ortega, spreadsheet using the
Capital instructions in your
working papers.
4. Print the spreadsheet
Date Transactions and proof your work.
5. Complete the Analyze
Jan. 3 1. Ms. Ortega, the owner, opened a checking account for activity.
the business by depositing $60,000 of her personal funds. 6. Save your work and
6 2. Paid by check the monthly rent of $3,000. exit the spreadsheet
program.
8 3. Bought hiking equipment for the business by writing
a check for $3,000.
9 4. Purchased $24,000 of rafting equipment by writing a
check.
11 5. Purchased office equipment on account for $4,000.
15 6. Received payment for guide services, $2,500.
18 7. Ms. Ortega contributed a desk valued at $450 to the
business.
21 8. Withdrew $3,000 cash from the business for personal use.
26 9. Wrote a check to a creditor as partial payment on account,
$1,500.
30 10. Took a group on a tour and agreed to accept payment later,
$1,200.
Analyze Calculate the amount owed to creditors after Transaction 10.
Problem 3–10 Describing Business Transactions
Showbiz Video is a business owned by Greg Failla. The transactions that
follow are shown as they would appear in the accounting equation.
Instructions In your working papers, describe what has happened in each
transaction. Transaction 1 is completed as an example.
Example:
1. The owner invested $30,000 in the business.
CONTINUE
Chapter 3 Problems 71
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C H A P T ER 3 Problems
Owner’s
Assets Liabilities Equity
Trans. Cash in Accts. Office Video
Accounts
Greg Failla,
Bank Rec. Equip. Equip. Payable Capital
1 $30,000 $30,000
2 $ 2,000 $ 2,000
3 $ 8,000 $ 8,000
4 $ 700 $ 700
5 $ 500 $ 500
6 $ 200 $ 200
7 $ 3,000 $ 3,000
8 $ 200 $ 200
9 $ 500 $ 500
10 $ 1,000 $ 1,000
Analyze Calculate the balance of the account, Greg Failla, Capital.
CHALLENGE Problem 3–11 Completing the
PROBLEM
Accounting Equation
The account names and balances for Job Connect are listed below.
Instructions Determine the missing amount for each of the question marks.
Use the form in your working papers and write in the missing amounts.
Owner’s
Assets Liabilities Equity
Trans. Cash in Accounts Business Accounts
Richard Tang,
Bank Receivable Equipment Payable Capital
1 ? $ 2,000 $ 1,000 $ 500 $ 7,500
2 $ 3,000 $ 9,000 ? $ 2,000 $16,000
3 $ 8,000 $ 1,000 $10,000 ? $15,000
4 $ 4,000 ? $ 4,000 $ 1,000 $17,000
5 $ 9,000 $ 7,000 $ 6,000 $ 5,000 ?
6 $10,000 $14,000 ? $ 6,000 $32,000
7 $ 6,000 $ 4,000 $10,000 ? $15,000
8 ? $ 5,000 $ 9,000 $ 1,000 ?
Hint: In line 8, total assets are $18,000.
Analyze Explain the mathematical operations used to solve for the
accounting equation.
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Winning Competitive Events CHAPTER 3
Practice your test-taking skills! The questions on this page are reprinted with permission
from national organizations:
• Future Business Leaders of America
• Business Professionals of America
Use a separate sheet of paper to record your answers.
Future Business Leaders of America
MULTIPLE CHOICE
1. Things of value a business uses to generate income are known as
a. assets. c. expenses.
b. capital. d. revenue.
Business Professionals of America
MULTIPLE CHOICE
2. If a customer sends in a payment on his account owed, which of the following
statements is true?
a. One asset increases and another asset decreases.
b. One asset increases and one liability decreases.
c. One liability decreases and owner’s equity increases.
d. One liability increases and owner’s equity increases.
3. Use these account balances to complete the next two questions:
Cash in Bank $3,200.00 Amy Smith, Capital $6,200.00
Accounts Receivable ? Amy Smith, Drawing 1,000.00
Office Supplies 300.00 Boarding Revenue 1,400.00
Office Furniture 1,200.00 Grooming Revenue ?
Office Equipment 1,800.00 Salaries Expense 300.00
Accounts Payable ? Miscellaneous Expense 200.00
If the balance in Accounts Payable is $2,000.00 and Grooming Revenue is $400.00,
what is the correct balance for the Accounts Receivable account?
a. $800.00 c. $2,000.00
b. $1,500.00 d. $2,500.00
4. Use the above table in #3 to answer this question.
If the Accounts Receivable balance is $800.00 and Grooming Revenue is $600.00,
what is the balance in the Accounts Payable account?
a. $600.00 c. $1,200.00
b. $800.00 d. $2,000.00
5. If owner’s equity is $25,500, and assets are $37,600, liabilities are
a. $25,500.
b. $37,600.
c. $63,100. Need More Help?
d. $12,100. Go to glencoeaccounting.glencoe.com and
click on Student Center. Click on Winning
Competitive Events and select Chapter 3.
• Practice Questions and Test-Taking Tips
• Concept Capsules and Terminology
glencoeaccounting.glencoe.com Chapter 3 Winning Competitive Events 73
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C H A P T ER 3 Real-World Applications and Connections
Critical The Accounting Equation
Thinking 1. What term identifies the owner’s claims to assets of the business?
2. Does owner’s equity increase every time a business acquires a new asset?
Explain your answer.
3. You are analyzing transactions when you have to answer the telephone. After
you finish the conversation, how can you tell whether you completed the
transaction you were working on when the phone rang?
4. How is an expense similar to a withdrawal? How is it different?
5. Describe a series of transactions that could result in negative owner’s equity.
6. Assess the value of the four-step procedure for analyzing transactions.
CASE Service Business: Health and Fitness
STUDY The Fitness Center, owned by Gail Chan, has been in business for two years. The
business is successful with its expanded hours of operation.
You are a local business consultant and have worked with several other small
businesses in the area. Ms. Chan has asked you about possible ways to obtain
money for new equipment. She has already borrowed money from family mem-
bers and cannot use them as a source of more funds.
INSTRUCTIONS
1. Evaluate possible sources of money for your client. Use the Internet and
other sources to research alternatives with the Small Business Administration,
the Chamber of Commerce, and local banks.
2. Make a list of alternatives. Include costs, interest rates, and advantages or
disadvantages.
3. Make a recommendation to your client based on your list of alternatives.
4. Explain how the additional money will affect the accounting equation.
a
mattoefr ETHICS Company Property
Many companies provide office supplies for their employees’ use while on the
job. Imagine that you work for a large department store like JC Penney. Several of
your co-workers take company supplies home for their personal use, such as pens,
bags, hangers, and boxes. You need boxes to store some items at home, so you
consider taking them from the supply room.
ETHICAL DECISION MAKING
1. What are the ethical issues? 4. How do the alternatives affect the
2. What are the alternatives? parties?
3. Who are the affected parties? 5. What would you do?
$ )) ))
Communicating
Writing a Tip Sheet
ACCOUNTING Using the four-step approach to transaction analysis, write a “tip sheet” to help
a new employee remember the steps. Write a brief explanation and give an
example of each step in the analysis. Create a business transaction to use in your
explanation.
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Real-World Applications and Connections C HAPT E R 3
Skills Beyond Applying Technology
NUMBERS Whether you work in a small or large business, technology is critical to efficiency
in the workplace.
ON THE JOB
After graduating from college and working for a year as a junior accountant in
a CPA firm, you decide to open an accounting business from your home. You’ll
need a computer, software, and office furniture to get started. Complete the
activities below to help you select the right software for your needs.
INSTRUCTIONS
1. List the kinds of financial services you would like to provide.
2. Research three accounting software packages that would help you deliver the
services you listed. List the name, price, system requirements, and features of
each software package. Use the Internet and other sources.
3. Select the software package that best meets your anticipated needs. Write a
paragraph explaining why you selected this product.
INTERNATIONAL Money Around the World
If you were on vacation in Mexico, you would pay for your lunch in pesos. Just as
Accounting different countries use different languages, they also use their own type of money
or currency. Many countries in Europe use the euro. India uses the rupee, and
China uses the yuan. If you were an accountant recording business transactions
in Switzerland, you would use Swiss francs.
INSTRUCTIONS Find a Web site on the Internet that lists world currencies. What
currency is used in Japan? In the United Kingdom?
Making It
Your Earning Power
Personal Your future income will depend on various things including your career choice,
your education, and the region where you live.
PERSONAL FINANCE ACTIVITY List three jobs that are in different fields and
different regions of the United States. Use the Internet or your library to research
their education requirements and their salary
ranges. Create a table to organize the results of
your research.
PERSONAL FINANCE ONLINE Log on to Sports Property
glencoeaccounting.glencoe.com and Like many industries, a professional
click on Student Center. Click on Making It sport can have assets that are
Personal and select Chapter 3. unique to its type of business. Visit
glencoeaccounting
.glencoe.com and click
on Student Center. Click on
WebQuest and select Unit 2 to
continue your Internet project.
glencoeaccounting.glencoe.com Chapter 3 Real-World Applications and Connections 75
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CH A P T ER 4 Transactions That Affect
Assets, Liabilities, and
Owner’s Capital
BEFORE
What You’ll Learn YOU READ
1. Prepare a chart of accounts.
Predict
2. Explain the purpose of 1. What does the chapter title tell you?
double-entry accounting.
2. What do you already know about this subject from personal experience?
3. Identify the normal balance 3. What have you learned about this in the earlier chapters?
of accounts. 4. What gaps exist in your knowledge of this subject?
4. Use T accounts to illustrate
the rules of debit and credit
for asset accounts, liability
accounts, and the owner’s Exploring the Real World of Business
capital account and to express
the accounting equation. ANALYZING BUSINESS TRANSACTIONS
5. Use T accounts to analyze Panda Restaurant Group
transactions that affect assets,
When you think of a quick meal, do you think of Orange
liabilities, and the owner’s
capital account. Flavored Chicken and Beef with Broccoli? These are two of the
Chinese food entrées that Panda Express serves quickly and
6. Calculate the account
conveniently. Panda Express is part of the Panda Restaurant
balances after recording
business transactions. Group, owner of Panda Inn and Hibachi-San restaurants.
Andrew and Peggy Cherng opened their first Panda Inn
7. Define the accounting terms
in Pasadena, California, using recipes from Andrew’s father,
introduced in this chapter.
Master Chef Ming-Tsai Cherng. Panda Restaurant Group now
Why It’s Important has more than 700 stores in 36 states, Puerto Rico, and Japan.
In accounting you need to The Cherngs are on a mission to reach a goal of 10,000 Panda
▲
analyze transactions into Express restaurants. This means finding new locations and
debit and credit parts. buying a lot of kitchen equipment and dining room furniture.
What Do You Think?
When Panda Restaurant Group opens a new store, how do
you think its assets and liabilities are affected?
76 Chapter 4 Transactions That Affect Assets, Liabilities, and Owner’s Capital
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Working in the Real World
APPLYING YOUR ACCOUNTING KNOWLEDGE
Business transactions occur around us every day.
A music store sells thousands of CDs. You may
stop by for a meal at a local restaurant. A cruise
ship line may buy new furniture for its dining
cabins. Successful businesses have hundreds,
even thousands, of transactions each day.
Analyzing and recording these transactions are
key duties of the accounting staff.
Personal Connection
1. What types of business transactions occur
in your workplace or the workplace of your
family or friends?
2. Who records these transactions into the
accounting records?
Online Connection
Go to glencoeaccounting.glencoe.com and click
on Student Center. Click on Working in the
Real World and select Chapter 4.
glencoeaccounting.glencoe.com 77
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SECTION 1 Accounts and the Double-
Entry Accounting System
In Chapter 3 you learned about the accounting equation. In this
BEFORE
YOU READ chapter you will learn how to keep it in balance using the double-
entry accounting system. When The Coca-Cola Company records the dol-
lar amount of a transaction in one account, it records an equal amount
Main Idea in another account. The same is true of a small barbershop. In this and
The double-entry accounting
following chapters, we discuss accounting for a sole proprietorship.
system uses debits and
credits. Debit means “left
side” and credit means The Chart of Accounts
“right side.” How Is the Chart of Accounts Organized?
Read to Learn… A chart of accounts is a list of all accounts used by a business. A
➤ about the chart of small business may require only 20 or 30 accounts, but a large one may
accounts. (p. 78) have several thousand.
➤ about the double-entry Recall that an account is a record of changes and balances of a spe-
accounting system. cific asset, liability, or component of owner’s equity. Accounts may have
(p. 78) different physical forms, depending on the system. In a manual system,
each account may be a separate page in a book or a separate card in a tray.
Key Terms In an electronic system, accounts are stored on disks or hard drives.
chart of accounts Whether a system is manual or electronic, accounts are grouped
ledger
together in a ledger . The ledger is often referred to as the general ledger.
double-entry accounting
“Keeping the books” refers to maintaining accounts in the ledger. Group-
debit
ing accounts in a ledger makes information easy to find. Information is
credit
taken from the ledger and organized into financial statements.
T account
A system for numbering accounts makes it easy to locate individual
normal balance
accounts in the ledger. Account numbers have two or more digits used
for sorting information based on the kinds of reports the business needs.
A small company may use a three-digit system. A very large corporation may
use 35 or more digits. A typical numbering system used to prepare a chart
of accounts is as follows:
• Asset accounts begin with 1.
• Liability accounts begin with 2.
• Owner’s equity accounts begin with 3.
• Revenue accounts begin with 4.
• Expense accounts begin with 5.
Double-Entry Accounting
How Does Double-Entry Accounting Work?
In Chapter 3 you used the accounting equation for analyzing and
recording changes in account balances. This approach works well if a
78 Chapter 4 Transactions That Affect Assets, Liabilities, and Owner’s Capital
076-101_CH04_868829.indd 78 8/29/05 1:03:57 PM
CHART OF ACCOUNTS
ASSETS 101 Cash in Bank
105 Accounts Receivable—City News
110 Accounts Receivable—Green Company
115 Computer Equipment
120 Office Equipment
125 Delivery Equipment
LIABILITIES 201 Accounts Payable—Beacon Advertising
205 Accounts Payable—North Shore Auto
OWNER’S EQUITY 301 Maria Sanchez, Capital
302 Maria Sanchez, Withdrawals
303 Income Summary
REVENUE 401 Delivery Revenue
EXPENSES 501 Advertising Expense
505 Maintenance Expense
510 Rent Expense
515 Utilities Expense
business has only a few accounts. It becomes awkward, however, if a busi-
ness has many accounts and many transactions to analyze.
Accountants use the double-entry accounting system to analyze and
record a transaction. Double-entry accounting recognizes the different sides of
business transactions as debits and credits. A debit is an entry on the left side of
an account. A credit is an entry on the right side of an account. This system is
more efficient than updating the accounting equation for each transaction.
AS
T Accounts YOU READ
An efficient tool for using double-entry accounting is a T account. In Your Experience
The T account , so called because of its T shape, shows the dollar increase
Chart of Accounts
or decrease in an account that is caused by a transaction. T accounts help A chart of accounts is
the accountant analyze the parts of a business transaction. organized as a table.
As in the illustration here, a T account has an account name, a left side, What other tables have
and a right side. The account name is at the top of the T. The left side of T you worked with?
accounts is always used for debit amounts. Account Name
The right side of T accounts is always used
Left Side Right Side
for credit amounts. The words debit and
credit are simply the accountant’s terms Debit Side Credit Side
for left and right. Accountants sometimes
Debit Credit
use DR for debit and CR for credit.
The Rules of Debit and Credit
Debits and credits are used to record the increase or decrease in each
account affected by a business transaction. Under double-entry account-
ing, for each debit entry made in one account, a credit of an equal amount
must be made in another account. Debit and credit rules vary according to
whether an account is classified as an asset, a liability, or the owner’s capital
Section 1 Accounts and the Double-Entry Accounting System 79
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account. Regardless of the type of account, however, the left side of an
AS
YOU READ account is always the debit side and the right side is always the credit side.
Each account classification has a specific side that is its normal bal-
It’s Not What It
Seems ance side. An account’s normal balance is always on the side used to
record increases to the account. The word normal used here means usual.
Debit and Credit The Throughout this book, note that the normal balance side of each account
terms debit and credit
is shaded.
might remind you of
Rules for Asset Accounts. Asset accounts follow three rules of
debit cards and credit
debit and credit:
cards. In accounting
debit simply means the 1. An asset account is increased () on the debit side (left side).
left side of an account 2. An asset account is decreased () on the credit side (right side).
and credit means the 3. The normal balance for an asset account is the increase, or the debit
right side. side. The normal balance side is shaded in the following T account.
Notice that assets appear on the left side of the accounting equation.
ASSETS LIABILITIES OWNER’S EQUITY
Asset Accounts
Debit Credit
(1) Increase (2) Decrease
Side Side
(3) Normal
Balance
For asset accounts the increase side is the debit (left) side of the T account.
The decrease side is the credit (right) side of the T account. Notice the ()
and () signs that are used to indicate the increase and decrease sides of the
account. They do not mean the same thing as debit and credit.
Since the increase side of an asset account is always the debit side, asset
CULTURAL accounts have a normal debit balance. For example, in the normal course
Diversity of business, total increases to assets are larger than or exceed total decreases.
Business Practices You would expect an asset account, then,
Cash in Bank
Giving business gifts to have a normal debit balance.
internationally can be Debit Credit Let’s apply these rules to an actual
tricky. Some cultures
200 70
asset account. Look at the entries in the
attach meaning to 150 40 T account for Cash in Bank shown here.
certain gifts and 350 110 The increases in the account are recorded
colors. For example, Bal. 240 on the left, or debit, side. The decreases in
in Japan, white
the account are recorded on the right, or
chrysanthemums
credit, side. Total debits equal $350 ($200 $150). Total credits equal $110
are used only for
funerals. ($70 $40). To find the balance, subtract total credits from total debits
($350 $110). The debit balance is $240.
Rules for Liability and Owner’s Capital Accounts. The
rules of debit and credit for liability and the owner’s capital account are:
1. Liability and owner’s capital accounts are increased on the credit
(right) side.
2. Liability and owner’s capital accounts are decreased on the debit (left)
side.
3. The normal balance for liability and owner’s capital accounts is the
increase, or the credit side.
80 Chapter 4 Transactions That Affect Assets, Liabilities, and Owner’s Capital
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To illustrate these rules, let’s look again at the accounting equation and
the T accounts. Remember, the normal balance side is shaded.
Assets Liabilities Owner’s Equity
Debit Credit Debit Credit Debit Credit
Increase Decrease (2) Decrease (1) Increase (2) Decrease (1) Increase
Side Side Side Side Side Side
Normal (3) Normal (3) Normal
Balance Balance Balance
For all three types of accounts, the debit side is always the left side of the
T account, and the credit side is always the right side. Notice, however, that
the increase () and decrease () sides of the liability and owner’s capital
AS
accounts are the opposite of those for assets. This difference exists because
accounts classified as liabilities and owner’s capital are on the opposite side YOU READ
of the accounting equation from accounts classified as assets. As a result, Key Point
debit and credit rules on one side of the accounting equation—and the
Debit and Credit Debit
T accounts within it—are mirror images of those on the other side. and credit are neutral
Let’s apply these rules to actual accounts. First, look at the entries in terms that have no
the T account below for the liability account Accounts Payable. Increases relation to “good” and
are recorded on the right, or credit, side. The decreases are recorded on the “bad.” Debit means “left
left, or debit, side. Total credits equal $375 ($200 $175); total debits equal side” and credit means
$175 ($100 $75). To find the balance, subtract the total debits from the “right side.”
total credits ($375 $175). The credit balance is $200.
Accounts Payable
Debit Credit
100 200
75 175
175 375
Bal. 200
Now look at the entries in the T account for the owner’s equity account
Maria Sanchez, Capital. Remember that the rules of debit and credit for the
capital account are the same as those for a liability account.
Increases to owner’s capital are recorded on the right, or credit, side of
the account. Decreases are recorded on the left, or debit, side. The capital
account has a normal credit balance. If you subtract the total debits from the
total credits ($4,000 $550), you have a credit balance of $3,450.
Maria Sanchez, Capital
Debit Credit
350 1,500
200 2,500
550 4,000
Bal. 3,450
Section 1 Accounts and the Double-Entry Accounting System 81
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SECTION 1 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Create a chart like this one to
summarize the rules of debit !SSET !CCOUNTS ,IABILITY !CCOUNTS /WNERS #APITAL !CCOUNT
and credit. Fill in each blank
box with the word debit or the .ORMAL "ALANCE
word credit.
)NCREASE 3IDE
$ECREASE 3IDE
Do the Math
During the month of December, Poremba Pizza wrote checks totaling $4,800. Two-thirds of
this amount was used to purchase a computer for cash. The remaining amount was used to
pay an outstanding invoice for kitchen equipment purchased from Restaurant City.
1. List the account(s) debited and the debit amount(s).
2. List the account(s) credited and the credit amount(s).
Problem 4–1 Applying the Rules of Debit and Credit
Speedy Appliance Repair, owned by R. Lewis, uses the following accounts:
General Ledger
Cash in Bank
Accounts Receivable
Office Equipment
Accounts Payable
R. Lewis, Capital
Instructions In the form provided in your working papers:
1. Classify each account as an asset, liability, or owner’s capital account.
2. Indicate whether the increase side is a debit or a credit.
3. Indicate whether the decrease side is a debit or credit.
4. Indicate whether the normal balance for the account is a debit or credit balance.
The Cash in Bank account is completed as an example.
Account Account Increase Decrease Normal
Name Classification Side Side Balance
Cash in Bank Asset Debit Credit Debit
82 Chapter 4 Transactions That Affect Assets, Liabilities, and Owner’s Capital
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SECTION 2 Applying the Rules
of Debit and Credit
Now that you are familiar with the rules of debit and
BEFORE
credit for asset, liability, and owner’s capital accounts, you YOU READ
can use those rules to analyze business transactions.
Main Idea
Business Transaction Analysis Use T accounts to analyze transactions.
How Do You Analyze Transactions?
Read to Learn…
Whether a business is buying a new computer sys- ➤ a step-by-step method for analyzing
tem, paying its utility bills, or receiving money for sales, transactions. (p. 83)
the accountant must analyze how the transaction should ➤ how to apply the method to asset, liability,
be recorded. When analyzing business transactions, you and owner’s capital transactions. (p. 83)
should use the following step-by-step method:
B u s i n e s s Tr a n s a c t i o n
BUSINESS TRANSACTION ANALYSIS: Steps to Success
ANALYSIS Identify 1. Identify the accounts affected.
Classify 2. Classify the accounts affected.
/ 3. Determine the amount of increase or decrease for each account
affected.
DEBIT-CREDIT RULE 4. Which account is debited? For what amount?
5. Which account is credited? For what amount?
T ACCOUNTS 6. What is the complete entry in T-account form?
Account Name Account Name
Asset and Equities Transactions
How Do You Use T Accounts for Assets and Equities?
The business transactions that follow are for Roadrunner Delivery Ser-
vice. Throughout the next several pages, you will learn how to analyze each
Section 2 Applying the Rules of Debit and Credit 83
076-101_CH04_868829.indd 83 8/29/05 1:04:22 PM
Roadrunner transaction, apply the rules of debit and credit, and complete
AS
YOU READ the entry in T-account form. The T accounts demonstrate the effects of trans-
actions on the accounting equation. A debit in one account is offset by a
Instant Recall
credit in another account. Refer to the Roadrunner chart of accounts on page
Property and 79. These accounts will be used to analyze several business transactions.
Financial Claims
assets property Assets and Owner’s Capital
equities creditors’ Business Transactions 1 and 2 use T accounts to illustrate owner’s invest-
claims ments in the business.
owner’s
claim
B u s i n e s s Tr a n s a c t i o n 1
On October 1 Maria Sanchez took $25,000 from personal savings and deposited that amount to open a
business checking account in the name of Roadrunner Delivery Service.
ANALYSIS Identify 1. The accounts Cash in Bank and Maria Sanchez, Capital are affected.
Classify 2. Cash in Bank is an asset account. Maria Sanchez, Capital is an owner’s
capital account.
/ 3. Cash in Bank is increased by $25,000. Maria Sanchez, Capital is
increased by $25,000.
DEBIT-CREDIT RULE 4. Increases in asset accounts are recorded as debits. Debit Cash in Bank
for $25,000.
5. Increases in the owner’s capital account are recorded as credits. Credit
Maria Sanchez, Capital for $25,000.
T ACCOUNTS 6. Cash in Bank Maria Sanchez, Capital
Debit Credit
25,000 25,000
B u s i n e s s Tr a n s a c t i o n 2
On October 2 Maria Sanchez took two telephones valued at $200 each from her home and
transferred them to the business as office equipment.
ANALYSIS Identify 1. The accounts Office Equipment and Maria Sanchez, Capital are
affected.
Classify 2. Office Equipment is an asset account. Maria Sanchez, Capital is an
owner’s capital account.
/ 3. Office Equipment is increased by $400. Maria Sanchez, Capital is
increased by $400.
84 Chapter 4 Transactions That Affect Assets, Liabilities, and Owner’s Capital
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DEBIT-CREDIT RULE 4. Increases in asset accounts are recorded as debits. Debit Office
Equipment for $400.
5. Increases in owner’s capital accounts are recorded as credits. Credit
Maria Sanchez, Capital for $400.
T ACCOUNTS 6. Office Equipment Maria Sanchez, Capital
Debit Credit
400 400
Assets and Liabilities AS
READ
YOU
The following examples show changes to assets and liabilities in
T-account form: Compare and
Contrast
• Business Transaction 3: increases an asset and decreases another asset
• Business Transaction 4: increases an asset and increases a liability Transactions How are
Business Transactions 2
• Business Transaction 5: increases an asset and decreases another asset
and 3 similar? How are
• Business Transaction 6: decreases a liability and decreases an asset
they different?
• Business Transaction 7: increases an asset and decreases a liability
B u s i n e s s Tr a n s a c t i o n 3
On October 4 Roadrunner issued Check 101 for $3,000 to buy a computer system.
ANALYSIS Identify 1. The accounts Computer Equipment and Cash in Bank are affected.
Classify 2. Computer Equipment and Cash in Bank are asset accounts.
/ 3. Computer Equipment is increased by $3,000. Cash in Bank is
decreased by $3,000.
DEBIT-CREDIT RULE 4. Increases in asset accounts are recorded as debits. Debit Computer
Equipment for $3,000.
5. Decreases in asset accounts are recorded as credits. Credit Cash in
Bank for $3,000.
T ACCOUNTS 6. Computer Equipment Cash in Bank
Debit Credit
3,000 3,000
Section 2 Applying the Rules of Debit and Credit 85
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B u s i n e s s Tr a n s a c t i o n 4
On October 9 Roadrunner bought a used truck on account from North Shore Auto for $12,000.
ANALYSIS Identify 1. The accounts Delivery Equipment and Accounts Payable—North
Shore Auto are affected.
Classify 2. Delivery Equipment is an asset account. Accounts Payable—North
Shore Auto is a liability account.
/ 3. Delivery Equipment is increased by $12,000. Accounts Payable—
North Shore Auto is increased by $12,000.
DEBIT-CREDIT RULE 4. Increases in asset accounts are recorded as debits. Debit Delivery
Equipment for $12,000.
5. Increases in liability accounts are recorded as credits. Credit Accounts
Payable—North Shore Auto for $12,000.
T ACCOUNTS 6. Accounts Payable—
Delivery Equipment North Shore Auto
Debit Credit
12,000 12,000
B u s i n e s s Tr a n s a c t i o n 5
On October 11 Roadrunner sold one phone on account to Green Company for $200.
ANALYSIS Identify 1. The accounts Accounts Receivable—Green Company and Office
Equipment are affected.
Classify 2. Accounts Receivable—Green Company is an asset account. Office
Equipment is also an asset account.
/ 3. Accounts Receivable—Green Company is increased by $200. Office
Equipment is decreased by $200.
DEBIT-CREDIT RULE 4. Increases in asset accounts are recorded as debits. Debit Accounts
Receivable—Green Company for $200.
5. Decreases in asset accounts are recorded as credits. Credit Office
Equipment for $200.
T ACCOUNTS 6. Accounts Receivable—
Green Company Office Equipment
Debit Credit
200 200
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B u s i n e s s Tr a n s a c t i o n 6
On October 12 Roadrunner mailed Check 102 for $350 as the first installment payment on the truck
purchased from North Shore Auto on October 9.
ANALYSIS Identify 1. The accounts Accounts Payable—North Shore Auto and Cash in Bank
are affected.
Classify 2. Accounts Payable—North Shore Auto is a liability account. Cash in
Bank is an asset account.
/ 3. Accounts Payable—North Shore Auto is decreased by $350. Cash in
Bank is decreased by $350.
DEBIT-CREDIT RULE 4. Decreases in liability accounts are recorded as debits. Debit Accounts
Payable—North Shore Auto for $350.
5. Decreases in asset accounts are recorded as credits. Credit Cash in
Bank for $350.
T ACCOUNTS 6. Accounts Payable—
North Shore Auto Cash in Bank
Debit Credit
350 350
B u s i n e s s Tr a n s a c t i o n 7
On October 14 Roadrunner received and deposited a check for $200 from Green Company. The check is full
payment for the telephone sold on account to Green Company on October 11.
ANALYSIS Identify 1. The accounts Cash in Bank and Accounts Receivable—Green
Company are affected.
Classify 2. Cash in Bank is an asset account. Accounts Receivable—Green
Company is an asset account.
/ 3. Cash in Bank is increased by $200. Accounts Receivable—Green
Company is decreased by $200.
DEBIT-CREDIT RULE 4. Increases in asset accounts are recorded as debits. Debit Cash in Bank
for $200.
5. Decreases in asset accounts are recorded as credits. Credit Accounts
Receivable—Green Company for $200.
T ACCOUNTS 6. Accounts Receivable—
Cash in Bank Green Company
Debit Credit
200 200
Section 2 Applying the Rules of Debit and Credit 87
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SECTION 2 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Imagine that you have
your own business. Write
a description of a typical
transaction your business
would have. On a sheet of
paper, express the same
transaction in T-account form.
Do the Math
Diane Hendricks always dreamed of owning a recording studio. On February 1 Diane
withdrew $10,000 from personal savings and deposited it in a new business checking
account for Hendricks Sound. On February 2 Hendricks Sound made a $2,000 down
payment on equipment that cost $8,000. The remaining balance will be paid at a later date.
What is the accounting equation for Hendricks Sound after these transactions?
Problem 4–2 Identifying Increases and
Decreases in Accounts
Alice Roberts uses the following accounts in her business:
General Ledger
Cash in Bank Office Equipment
Accounts Receivable Accounts Payable
Office Furniture Alice Roberts, Capital
Instructions Analyze each of the following transactions. In your working papers, explain
the debit and the credit. Use the format shown in the example.
Example:
On June 2 Alice Roberts invested $5,000 of her own money in a business called Roberts
Employment Agency.
a. The asset account Cash in Bank is increased. Increases in asset accounts are recorded
as debits.
b. The owner’s capital account Alice Roberts, Capital is increased. Increases in the
owner’s capital account are recorded as credits.
Date Transactions
June 3 1. Purchased a computer on account from Computer Inc. for $2,500.
9 2. Transferred a desk (Office Furniture) to the business. The desk is
worth $750.
15 3. Made a partial payment on account of $1,000 to Computer Inc.
88 Chapter 4 Transactions That Affect Assets, Liabilities, and Owner’s Capital
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Accounting Careers in Focus
ACCOUNTING PROFESSOR
Francis Marion University, Florence, South Carolina
Tim Lowder
..
Tips from .
Q: Do you have other professional commitments
besides teaching at the university?
learn more
A: Yes, I also work with Winthrop University Small Business If you’d like to h,
tial career pat
Development Center and Florence-Darlington Technical about a poten in ter-
formational
College. I am also a management consultant. arrange an in
eone already
Q: What factors have been key to your success? view with som
field. You can
working in that if
A: I’ve realized that you can’t put all your faith in the short term. d insight and,
gain real-worl io n ,
To succeed, you must have a long-term vision and identify what od impress
you make a go
steps you must take to achieve your goals. be considered
you may even
Q: What do you like most about your job? vel position
for an entry-le .
omes available
A: I like knowing that I’ve left a positive impact on students. As a when one bec
consultant, I enjoy helping my clients improve their companies.
Teaching and consulting are the most rewarding pursuits I’ve
ever undertaken.
Q: What advice do you have for accounting students just
beginning their careers?
A: Get as broad a background as possible. Accounting is integrated with all the
other aspects of business, so you need to gain experience in things such as
information systems, marketing, and financial management.
Q: What advice do you have for accounting students who are
interested in pursuing your career path?
A: No matter what career you choose, you must do something because you love
it. Start thinking early about the education and certifications you’ll need.
CAREER FACTS
Nature of the Work: Create lesson plans and exams, teach classes, advise and motivate
▲
students.
Training or Education Needed: A master’s or doctoral degree in accounting or a related
▲
field. Relevant work experience and certifications can sometimes be substituted for an
advanced degree. A CPA license is an example of a certification.
Aptitudes, Abilities, and Skills: Time management skills, communication skills, and
▲
interpersonal skills.
Salary Range: $35,000 to $90,000 depending on experience, size of educational
▲
institution, and location.
Career Path: Pursue an advanced degree in accounting or a related field, or gain relevant
▲
work experience. Then become a graduate teaching assistant or part-time professor.
Thinking Critically What do you think are the greatest challenges of teaching accounting?
Chapter 4 Accounting Careers in Focus 89
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CH A P T ER 4 Summary
Key Concepts
1. A chart of accounts is a list of all accounts that a business uses. Each account is assigned a
number, and the accounts are listed in numerical order.
2. Double-entry accounting is a system that recognizes the different sides of business transactions
as debits and credits:
• debit: an entry on the left side of an account
• credit: an entry on the right side of an account
This system is more efficient than updating the accounting equation after each transaction, as
we did in Chapter 3.
3. An account’s usual balance is called its normal balance.
An asset has a normal debit balance:
• The increase side is the debit (left) side.
• The decrease side is the credit (right) side.
Asset Rule: Asset Accounts
Debit Credit
Increase Decrease
Side Side
Normal
Balance
Both a liability account and the owner’s capital account each have a normal credit balance:
• The increase side is the credit (right) side.
• The decrease side is the debit (left) side.
Liability and Owner’s Liability and Owner’s
Capital Rule: Capital Accounts
Debit Credit
Decrease Increase
Side Side
Normal
Balance
4. Use debit and credit rules to record increases and decreases in accounts.
Assets Liabilities Owner’s Equity
Debit Credit Debit Credit Debit Credit
Increase Decrease (2) Decrease (1) Increase (2) Decrease (1) Increase
Side Side Side Side Side Side
Normal (3) Normal (3) Normal
Balance Balance Balance
90 Chapter 4 Summary
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Summary CHAPT E R 4
5. Use a six-step method to analyze a transaction:
B u s i n e s s Tr a n s a c t i o n
BUSINESS TRANSACTION ANALYSIS: Steps to Success
ANALYSIS Identify 1. Identify the accounts affected.
Classify 2. Classify the accounts affected.
/ 3. Determine the amount of increase or decrease for each account
affected.
DEBIT-CREDIT RULE 4. Which account is debited? For what amount?
5. Which account is credited? For what amount?
T ACCOUNTS 6. What is the complete entry in T-account form?
Account Name Account Name
6. Account balances are calculated by following the rules of debit and credit:
Accounts Payable
Debit Credit
100 200
75 175
175 375
Bal. 200
Key Terms
chart of accounts (p. 78) ledger (p. 78)
credit (p. 79) normal balance (p. 80)
debit (p. 79) T account (p. 79)
double-entry
accounting (p. 79)
Chapter 4 Summary 91
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C H A P T ER 4 Review and Activities
AFTER
YOU READ
Check Your Understanding
1. Chart of Accounts
a. What is a chart of accounts?
b. Why are the accounts numbered?
2. Double-Entry Accounting
a. What is double-entry accounting?
b. Define the terms debit and credit.
3. Normal Balances
a. What is meant by the term normal balance?
b. What is the normal balance for asset accounts? For liability accounts? For the owner’s
capital account?
4. T Accounts
a. What is the purpose of a T account?
b. Name the three basic parts of a T account.
5. Transaction Analysis
a. What are the six steps used to analyze a business transaction?
b. Explain briefly what is meant by the following phrase:
A debit of $100 to Cash in Bank
6. Account Balances
a. How do you determine the balance of an account?
b. The following information is for the Cash in Bank account on a single day.
What is the balance of Cash in Bank at the end of the day?
Beginning balance: $3,000 debit
Transactions: $450 credit
$1,275 credit
$1,800 debit
Apply Key Terms
Your boss at Hillside Nurseries needs help
understanding the double-entry accounting
system. Using the key terms listed below, draft a list
of definitions and illustrations that would help in
your explanation.
chart of accounts ledger
credit normal balance
debit T account
double-entry accounting
92 Chapter 4 Review and Activities
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Computerized Accounting CHAPT E R 4
Introduction to Computerized Accounting Systems
Making the Transition from a Manual to a Computerized System
Manual Methods Computerized Methods
• Transactions are recorded into journals by hand. • Transactions are keyed to the appropriate screen in
• The details of each transaction are then posted in the the accounting system.
general ledger. • Posting to the general ledger accounts occurs
• The accountant computes account balances and automatically.
prepares a trial balance to verify that the accounting • The accounting system generates the trial balance.
equation is still in balance. • Financial reports pull the appropriate accounts
• Account names and balances are then transferred and their current balances from the general ledger
to the proper financial report and the report is computer files. The reports automatically summarize
summarized (totaled). and can be printed when the user chooses.
Q&A
Peachtree Question Answer
What types of • General journal entries
transactions can • Sales and cash receipts
be entered in • Purchases and cash payments
Peachtree Complete® • Inventory adjustments
Accounting? • Payroll entries
What else will • Reconciles bank statements
Peachtree do for the • Prepares financial reports automatically
accountant? • Prints checks and invoices
• Closes the accounting period
• Creates cash, collections, and payment management charts and graphs
QuickBooks
®
Q&A
QuickBooks Question Answer
What types of • General journal entries
transactions can be • Sales and cash receipts
entered in QuickBooks® • Purchases and cash payments
Pro? • Inventory adjustments
• Payroll entries
What else will • Reconciles bank statements
QuickBooks® do for the • Prepares financial reports automatically
accountant? • Prints checks and invoices
• Closes the accounting period
• Creates sales, collections, and payables charts and graphs
For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers.
Chapter 4 Computerized Accounting 93
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C H A P T ER 4 Problems
Complete problems using: Manual Glencoe Spreadsheet
Spreadshee
OR
Working Papers Templates
Problem 4–3 Identifying Accounts Affected
by Transactions
Ronald Hicks owns Wilderness Rentals and uses the following accounts in
his business:
General Ledger
101 Cash in Bank
105 Accounts Receivable— 201 Accounts Payable—
Helen Katz Adventure Equipment Inc.
120 Office Equipment 301 Ronald Hicks, Capital
125 Camping Equipment
Instructions For each of the following
transactions:
1. Indicate the two accounts affected.
2. Indicate whether each account is
debited or credited.
Date Transactions
May 11 1. Sold on account to
Helen Katz an unneeded
office typewriter.
19 2. Purchased camping
equipment on credit
from Adventure
Equipment Inc. Payment
is due within 30 days.
22 3. Ronald Hicks brought
a filing cabinet from
home and transferred it
to the business (Office
Equipment).
23 4. Purchased tents and
sleeping bags for cash.
Analyze Identify the transactions that affect the Cash in Bank
account.
94 Chapter 4 Problems
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Problems CHAPT E R 4
Problem 4–4 Using T Accounts to
Analyze Transactions
Regina Delgado owns a business called Hot Suds Car Wash. She uses the
following accounts:
General Ledger
101 Cash in Bank 201 Accounts Payable—
110 Accounts Receivable— Allen Vacuum Systems
Valley Auto 301 Regina Delgado, Capital
125 Office Equipment
130 Office Furniture
135 Car Wash Equipment
Instructions For each transaction:
1. Determine which accounts are affected.
2. Prepare T accounts for the accounts affected.
3. Enter the debit and credit amounts in the T accounts.
Date Transactions
May 5 1. Regina Delgado invested an additional $40,000 cash in her
business.
12 2. Bought another car wash system on account for $27,000
from Allen Vacuum Systems.
17 3. Regina Delgado transferred some of her personal office
furniture, valued at $3,750, to her business.
24 4. Hot Suds Car Wash purchased additional office equipment
for $7,500. Payment was made by check.
29 5. Hot Suds Car Wash sold some surplus car washing
equipment on account to Valley Auto for $1,200.
Analyze Calculate the ending balance for the liability account
Accounts Payable—Allen Vacuum Systems.
Chapter 4 Problems 95
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C H A P T ER 4 Problems
Problem 4–5 Analyzing Transactions into Debit
and Credit Parts
Abe Shultz owns Kits & Pups Grooming and uses the following accounts:
General Ledger
101 Cash in Bank 205 Accounts Payable—
115 Accounts Receivable— Dogs & Cats Inc.
Martha Giles 301 Abe Shultz, Capital
125 Office Equipment
130 Office Furniture
140 Grooming Equipment
Instructions For each transaction:
1. In your working papers, prepare a T account for each account listed.
2. Using the appropriate T accounts, analyze and record each of the
following business transactions. Identify each transaction by number.
3. After recording all transactions, write the word Balance on the normal
balance side of each T account. Then compute and record the balance
for each account.
Date Transactions
May 1 1. Abe Shultz invested an additional $45,000 cash in his
business.
5 2. Bought grooming equipment on account from Dogs &
Cats Inc. for $8,500.
10 3. Purchased an office lamp for $85, Check 150.
14 4. Abe Shultz transferred his personal typewriter, worth $200,
to the business.
19 5. Made a $3,000 payment on the grooming equipment
bought on account, Check 151.
22 6. Sold the typewriter on account to Martha Giles for $200.
29 7. Bought a photocopier for $1,500, Check 152.
31 8. Received a $100 payment for the typewriter sold on
account.
Analyze Calculate the total cash spent in the month of May.
96 Chapter 4 Problems
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Problems CHAPT E R 4
SPREADSHEET
Problem 4–6 Analyzing Transactions into Debit SMART GUIDE
and Credit Parts Step–by–Step Instructions:
Juanita Ortega runs Outback Guide Service. The accounts she uses to record Problem 4–6
and report business transactions are listed below. 1. Select the spreadsheet
template for Problem
General Ledger 4–6.
101 Cash in Bank 205 Accounts Payable— 2. Enter your name and
105 Accounts Receivable— Peak Equipment Inc. the date in the spaces
Mary Johnson 207 Accounts Payable— provided on the
template.
130 Office Equipment Premier Processors 3. Complete the
140 Computer Equipment 301 Juanita Ortega, Capital spreadsheet using the
145 Hiking Equipment instructions in your
150 Rafting Equipment working papers.
4. Print the spreadsheet
and proof your work.
Instructions For each transaction: 5. Complete the Analyze
1. In your working papers, prepare a T account for each account. activity.
6. Save your work and
2. Analyze and record each of the following business transactions in the exit the spreadsheet
appropriate T accounts. Identify each transaction by number. program.
3. After recording all transactions, compute and record the account
balance on the normal balance side of each T account.
4. Add the balances of those accounts with normal debit balances.
5. Add the balances of those accounts with normal credit balances.
6. Compare the two totals. Are they the same?
Date Transactions
May 2 1. Juanita Ortega transferred an additional $53,250 from
her personal savings account into the business checking
account.
6 2. Bought hiking equipment for $550, Check 367.
7 3. Bought rafting equipment on account from Peak
Equipment Inc. for $2,675.
11 4. Juanita Ortega transferred her own computer, valued at
$850, to the business.
16 5. Bought a cash register for the office on account from
Premier Processors for $1,250.
19 6. Sold the computer on credit for $850 to Mary Johnson.
22 7. Paid $500 on account to Peak Equipment Inc., Check 368.
24 8. Purchased shelves for the office for $650, Check 369.
28 9. Paid $1,250 on account to Premier Processors, Check 370.
31 10. Bought rafting oars for $175, Check 371.
Analyze Calculate the ending balance in the Computer Equipment
account.
Chapter 4 Problems 97
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C H A P T ER 4 Problems
CHALLENGE Problem 4–7 Analyzing Transactions
PROBLEM
Recorded in T Accounts
Richard Tang owns and operates a job placement service, Job Connect. The
T accounts below summarize several business transactions for May.
Instructions Use a form similar to the one presented below. For each of
the 10 transactions:
1. Identify the account debited, and record the account name in the
appropriate column.
2. Indicate whether the account debited is being increased or decreased.
3. Identify the account credited, and write the account name in the
appropriate column.
4. Indicate whether the account credited is being increased or decreased.
5. Write a short description of the transaction.
(1) (2) (3) (4) (5)
Trans Account Increase (I) Account Increase (I)
No. Debited or Decrease (D) Credited or Decrease (D) Description
1 Cash in I Richard I Richard Tang
Bank Tang, invested
Capital $15,000 in
the business.
Cash in Bank Accounts Receivable
Debit Credit Debit Credit
(1) 15,000 (4) 1,225 (5) 225 (9) 225
(9) 225 (6) 900
(7) 995
(8) 2,000
Office Equipment Office Furniture
Debit Credit Debit Credit
(2) 225 (5) 225 (6) 900
(3) 8,000 (10) 145
(4) 1,225
Computer Equipment Accounts Payable
Debit Credit Debit Credit
(7) 995 (8) 2,000 (3) 8,000
(10) 145
Richard Tang, Capital
Debit Credit
(1) 15,000
(2) 225
Analyze Design a diagram that shows the accounting equation for Job
Connect after all transactions have been completed.
98 Chapter 4 Problems
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Winning Competitive Events CHAPTER 4
Practice your test-taking skills! The questions on this page are reprinted with permission
from national organizations:
• Future Business Leaders of America
• Business Professionals of America
Use a separate sheet of paper to record your answers.
Future Business Leaders of America
MULTIPLE CHOICE
1. If a business purchases a calculator on account, the accounts affected by this
transaction are
a. Cash in Bank and Accounts Payable.
b. Office Equipment and Accounts Receivable.
c. Office Equipment and Cash in Bank.
d. Office Equipment and Accounts Payable.
2. A skeleton form of an account showing only the debit and credit columns is
called a(n)
a. accounting equation.
b. T account.
c. account balance.
d. work sheet.
e. none of these answers.
Business Professionals of America
ACCOUNT IDENTIFICATION
For each account name below, indicate its classification (A = Asset, L = Liability, OE =
Owner’s Equity, R = Revenue, E = Expense) by writing the correct capital letter(s) on
the blank.
Then indicate its normal balance side (DR = Debit, CR = Credit, N = Neither).
Account Name Classification Normal Balance
3. Cash ________ ________
4. Accounts Payable ________ ________
5. Owner’s Capital Account ________ ________
Need More Help?
Go to glencoeaccounting.glencoe.com and
click on Student Center. Click on Winning
Competitive Events and select Chapter 4.
• Practice Questions and Test-Taking Tips
• Concept Capsules and Terminology
glencoeaccounting.glencoe.com Chapter 4 Winning Competitive Events 99
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C H A P T ER 4 Real-World Applications and Connections
Critical Double-Entry Accounting
Thinking 1. Which side of an account is the debit side? Which is the credit side?
2. How is the term credit in Chapter 3 different from credit in Chapter 4?
3. For each of the following transactions, state whether Cash in Bank is
debited, credited, or not changed: (a) the business paid cash for a desk;
(b) the business bought a computer on account; (c) a customer paid an
outstanding invoice.
4. What is the relationship of a T account to a ledger account?
5. Think of a business you would like to open. Create a chart of accounts for the
business. Include at least 10 different accounts.
6. Evaluate the usefulness of double-entry accounting.
CASE Service Business: Landscaping
STUDY While in school Martin Hamilton gained experience working for a large
landscaping company. Martin plans to start a business called Landscapes and
Beyond. He has made a list of everything he owns, with the estimated value for
each category.
Lawn mowers $1,500
Shovels and lawn-care tools 180
Truck 8,700
Stereo equipment 1,000
50 books on landscaping 400
Desk, chair, and file cabinet 700
Martin also borrowed $5,000 from his family and will repay the debt in one year.
INSTRUCTIONS Write the accounting equation for Martin’s new business, listing
each item in the appropriate part of the equation.
a
mattoefr ETHICS Software Piracy
Imagine that you are a bookkeeper for an attorney who likes to use state-of-the-
art technology. The business just received the latest update on its Web site design
software. You would like to use the software at home, so your assistant offers to
make you a copy. Although you know that copyright laws protect software from
unauthorized use, you figure that one little copy can’t hurt a multimillion dollar
software company; and besides, you are not doing the actual copying.
ETHICAL DECISION MAKING
1. What are the ethical issues? 4. How do the alternatives affect the
2. What are the alternatives? parties?
3. Who are the affected parties? 5. What would you do?
$ )) ))
Communicating
Demonstrating the Double-Entry System
ACCOUNTING Your supervisor asks you to teach some basic accounting to the other managers.
Create a visual presentation to explain the double-entry accounting system. Use
the purchase of a computer to show how transactions affect different accounts.
100 Chapter 4 Real-World Applications and Connections
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Real-World Applications and Connections CHAPT E R 4
Skills Beyond Teaching Others
NUMBERS Keeping up with technology and learning new skills are important in today’s
workplace. Learning from co-workers and supervisors is often the best way to
increase your skills.
ON THE JOB
Assume that you work as the accountant for Westside Aquatics, a swim club in
Florida. The club has 250 members. While some individuals pay cash on each
visit, others are billed monthly for club use. A concession area featuring health
foods and juices is a popular gathering place for members after swim lessons.
INSTRUCTIONS
List account names that would be used in a business like this. Describe to a
classmate what kinds of transactions might affect each account. What is the
normal balance side for each account?
INTERNATIONAL Exchange Rates
Businesses use exchange rates to convert from one currency to another. Exchange
Accounting rates change all the time and are found in newspapers, at banks, and on the
Internet. Suppose that you want to convert U.S. dollars to Canadian dollars, and
$1.00 (U.S.) is currently worth $1.25182 (Canadian). You would multiply the U.S.
dollars by the exchange rate as follows:
U.S. dollars exchange rate Canadian dollars
$5.00 1.25182 $6.26
INSTRUCTIONS Using this exchange rate, analyze which company has the higher
value of total assets:
Company A $150,000 (U.S.)
Company B $176,000 (Canadian)
Making It
Your Spending Plan
Personal Cash is an asset. If you spend it, the asset decreases. A good way to safeguard your
cash is to create a spending and savings plan, and then follow it.
PERSONAL FINANCE ACTIVITY Suppose you want to save $20.00 per month. You
have kept track of your personal finances for several months and you see the
following pattern:
Money coming in each month: allowance, $20.00; part-time job, $112.00
Money going out each month: lunches, $25.00; snacks, $8.50; bus fare, $8.00;
CDs, $28.00; contributions to charity, $10.00; movie theatres, $22.00; pizza,
$18.00; school supplies, $14.50
Using the above information, create a spending plan that allows you to save
$20.00 per month.
PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and
click on Student Center. Click on Making It Personal and select Chapter 4.
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CH A P T ER 5 Transactions That Affect
Revenue, Expenses,
and Withdrawals
BEFORE
What You’ll Learn YOU READ
1. Explain the difference
between permanent accounts Predict
and temporary accounts. 1. What does the chapter title tell you?
2. What do you already know about this subject from personal experience?
2. List and apply the rules of
debit and credit for revenue, 3. What have you learned about this in the earlier chapters?
expense, and withdrawals 4. What gaps exist in your knowledge of this subject?
accounts.
3. Use the six-step method to
analyze transactions affecting Exploring the Real World of Business
revenue, expense, and
withdrawals accounts.
ANALYZING REVENUE AND EXPENSES
4. Test a series of transactions
for equality of debits and Southwest Airlines
credits. While other large airlines lost money after the 9/11 disaster,
5. Define the accounting terms Southwest Airlines was flying high. The airline has posted
introduced in this chapter. more than 30 years of consecutive profits and become a model
for newer airlines to follow.
Why It’s Important Southwest carries more than 65 million passengers every
Temporary accounts show
▲
year. Each one-way fare averaged over $88 per passenger.
the changes in owner’s equity Like any business, Southwest must consider expenses.
during each accounting
Operating expenses include the cost of more than 1 billion
period.
gallons of jet fuel and payroll expenses for more than 32,000
employees. Don’t forget the cost of snacks. Southwest serves
85 million bags of peanuts each year.
What Do You Think?
Aside from passenger fares, from what other sources do you
think Southwest Airlines generates revenues?
102 Chapter 5 Transactions That Affect Revenue, Expenses, and Withdrawals
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Working in the Real World
APPLYING YOUR ACCOUNTING KNOWLEDGE
When you receive a paycheck, you probably
think about the amount of money you have and
the things you would like to buy. Businesses like
Southwest Airlines also earn money and spend
it on items used to operate the business. In this
chapter you will learn to analyze transactions
involving the revenue and expenses of a business.
Personal Connection
1. How does your workplace (or the workplace
of family or friends) earn revenue?
2. What does the business buy with that revenue?
3. How do these revenue and expense
transactions affect the profits of a business?
Online Connection
Go to glencoeaccounting.glencoe.com and click
on Student Center. Click on Working in the
Real World and select Chapter 5.
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SECTION 1 Relationship of Revenue,
Expenses, and Withdrawals
to Owner’s Equity
In Chapter 4 you learned to record transactions in asset, liability,
BEFORE
YOU READ and owner’s capital accounts. In this chapter you will learn to record
transactions in revenue, expense, and owner’s withdrawals accounts.
These accounts provide information about how the business is doing. A
Main Idea pilot for Southwest Airlines would never take off in a 737 equipped with
Revenues, expenses, and
only a speedometer and a gas gauge. These two instruments, although
withdrawals are temporary
necessary, do not give a pilot all of the information needed to keep
accounts. They start each
such a complex aircraft on course and operating smoothly. Operating a
new accounting period with
business is a bit like operating a 737. Owners need revenue and expense
zero balances.
information to keep the business on course.
Read to Learn…
➤ how temporary account
transactions change
Temporary and Permanent Accounts
What Is the Difference Between Temporary Accounts
owner’s equity. (p. 104)
and Permanent Accounts?
➤ the rules of debit and
credit for temporary You learned earlier that the owner’s capital account shows the
accounts. (p. 106) amount of the owner’s investment, or equity, in a business. Owner’s
equity is increased or decreased by transactions other than owner’s
Key Terms investments. For example, the revenue, or income, earned by the busi-
temporary accounts ness increases owner’s equity. Both expenses and owner’s withdrawals
permanent accounts decrease owner’s equity. (Remember that revenue is not the same as
an owner’s investment, and expense is not the same as an owner’s
withdrawal.)
Revenue, expenses, and withdrawals could be recorded as increases
or decreases directly in the capital account. This method, however, makes
classifying information about these transactions difficult. A more informa-
tive way to record transactions affecting revenue and expenses is to set up
separate accounts for each type of revenue or expense. Such information
helps the owner decide, for example, whether some expenses need to be
reduced.
As you learned in Chapter 2, the life of a business is divided into peri-
ods of time called accounting periods. The activities for a given accounting
period are summarized and then the period is closed. A new period starts,
and transactions for the new period are entered into the accounting system.
The process continues as long as the business exists.
Using Temporary Accounts. Revenue, expense, and with-
drawals accounts are used to collect information for a single accounting
period. These accounts are called temporary accounts . Temporary
104 Chapter 5 Transactions That Affect Revenue, Expenses, and Withdrawals
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Utilities Expense
Accumulated telephone costs
for accounting period $2,857
Accumulated electricity costs
for accounting period 5,141
Total for accounting period $7,998
Utilities Expense balance transferred
to Owner’s Capital at end of accounting
period. Expenses decrease owner’s capital.
Owner’s Capital
Balance at Beginning of
Accounting Period $90,000
Balance of Utilities Expense $7,998
Balance at End of
Accounting Period $82,002
Figure 5–1 The Relationship of Temporary Accounts to the Owner’s Capital Account
accounts start each new accounting period with zero balances. That is, the
amounts in these accounts are not carried forward from one accounting
period to the next. Temporary accounts are not temporary in the sense that
they are used for a short time and then discarded. They continue to be used
in the accounting system, but the amounts recorded in them accumulate
for only one accounting period. At the end of that period, the balances in
the temporary accounts are transferred to the owner’s capital account. (The
procedure for transferring these balances to owner’s capital is explained in
Chapter 10.)
Let’s use Utilities Expense, a temporary account, as an example. Dur-
ing an accounting period, business transactions related to utilities such as
electricity and telephones are recorded in Utilities Expense. By using this
separate account, the owner can see at a glance how much money is being
spent on this expense. The individual transaction amounts accumulate in
the account as the accounting period progresses.
At the end of the period, the total spent is transferred to the owner’s
capital account and subtracted from the capital account balance. Remem-
ber, expenses decrease owner’s capital. In Figure 5–1, the account, Utilities
Expense, starts the next accounting period with a zero balance—ready for
the transactions in the new period.
Using Permanent Accounts. In contrast to the temporary
accounts, the owner’s capital account is a permanent account. Asset and
liability accounts are also permanent accounts. Permanent accounts are
continuous from one accounting period to the next. In permanent accounts
Section 1 Relationship of Revenue, Expenses, and Withdrawals to Owner’s Equity 105
102-129_CH05_868829.indd 105 8/29/05 1:06:59 PM
the dollar balances at the end of one accounting period become the dollar
AS
YOU READ balances for the beginning of the next accounting period.
For example, if a business has furniture totaling $2,875 at the end of
Instant Recall
one accounting period, the business will start with $2,875 in furniture at
Permanent Account the beginning of the next accounting period. The ending balances in per-
Normal Balances manent accounts are carried forward to the next accounting period as the
Assets → debit
beginning balances.
Liabilities → credit
End of Accounting Period Beginning of Next Accounting Period
Owner’s → credit
Capital Furniture Furniture
Debit Credit Debit Credit
End Bal. 2,875 Beg. Bal. 2,875
The permanent accounts show balances on hand or amounts owed at
any time. They also show the day-to-day changes in assets, liabilities, and
owner’s capital.
The Rules of Debit and Credit
for Temporary Accounts
AS What Are the Normal Balances of Revenue, Expense,
YOU READ and Withdrawals Accounts?
It’s Not What It In Chapter 4 you learned the rules of
Seems debit and credit for the asset, liability, and Owner’s Capital Account
owner’s capital accounts. In this chapter Debit Credit
Temporary The term
we will continue with the rules of debit
temporary might make Decrease Increase
you think of something and credit, this time for revenue, expense,
Side Side
that lasts for a limited and withdrawals accounts. Before looking Normal
time. A temporary at these rules, let’s review quickly the T Balance
account, however, account showing the rules of debit and
always stays in the credit for the owner’s capital account.
ledger. Its balance is As you will see, the rules of debit and credit for accounts classified as
reduced to zero at the revenue, expense, and withdrawals accounts are related to the rules for the
end of each accounting owner’s capital account.
period.
Rules for Revenue Accounts
Accounts set up to record business income are classified as reve-
nue accounts. The following rules of debit and credit apply to revenue
accounts:
Rule 1: A revenue account is increased () on the credit side.
Rule 2: A revenue account is decreased () on the debit side.
Rule 3: The normal balance for a revenue account is the increase side,
or the credit side. Revenue accounts normally have credit
balances.
Revenue earned from selling goods or services increases owner’s capital.
The relationship of revenue accounts to the owner’s capital account is shown
by the T accounts in Figure 5–2. Can you explain why the T account for
revenue is used to represent the credit (right) side of the capital account?
106 Chapter 5 Transactions That Affect Revenue, Expenses, and Withdrawals
102-129_CH05_868829.indd 106 8/29/05 1:07:05 PM
Permanent Account AS
Owner’s Capital YOU READ
Debit Credit
Te
m Key Point
po
ra
ry
Ac
Temporary Account
Decrease Side Increase Side
co Normal Balances
Normal Balance un
t Revenue → credit
Revenue Expense → debit
Owner’s → debit
Debit Credit
Withdrawals
Decrease Side Increase Side
Normal Balance
A credit balance is recorded
on the credit side.
Figure 5–2 Rules of Debit and Credit for Revenue Accounts
Increases in owner’s capital are shown on the credit side of that account.
Revenue increases owner’s capital, so the revenue account is used to repre-
sent the credit side of the owner’s capital account.
We can summarize the rules of debit and credit for revenue accounts
with a T account illustration.
Revenue Accounts
Debit Credit
(2) Decrease (1) Increase
Side Side
(3) Normal
Balance
Let’s apply the rules of debit and credit to an actual revenue account.
Look at the entries in the T account for the revenue account called Fees. The
increases to the revenue account are recorded on the right, or credit, side of
the T account. The decreases are recorded
Fees
on the left, or debit, side. To find the bal-
ance, subtract total debits ($200) from Debit Credit
total credits ($500 $1,000 $2,000 200 500
$3,500). You get a balance of $3,300 on 1,000
2,000
the credit side, the normal balance side
Bal. 3,300
for a revenue account. AS
YOU READ
Rules for Expense Accounts In Your Own Words
Accounts that record the costs of operating a business are expense
Temporary and
accounts. These debit and credit rules apply to expense accounts:
Permanent Explain how
Rule 1: An expense account is increased on the debit side. the terms temporary
Rule 2: An expense account is decreased on the credit side. and permanent apply to
Rule 3: The normal balance for an expense account is the increase side, or ledger accounts.
the debit side. Expense accounts normally have debit balances.
Section 1 Relationship of Revenue, Expenses, and Withdrawals to Owner’s Equity 107
102-129_CH05_868829.indd 107 8/29/05 1:07:06 PM
Expenses are the costs of doing business. Expenses decrease owner’s capi-
tal. Revenues have the opposite impact; revenues increase owner’s capital.
Look at the T accounts in Figure 5–3. Can you explain why the T account for
expenses is used to represent the debit (left) side of the capital account?
Permanent Account
Owner’s Capital
t Te
un Debit Credit m
co po
c ra
r yA Decrease Side Increase Side
ry
Ac
ra co
po Normal Balance un
m
Te t
Expenses Revenue
Debit Credit Debit Credit
Increase Side Decrease Side Decrease Side Increase Side
Normal Balance Normal Balance
Figure 5–3 Rules of
Debit and Credit for Expense A debit balance is recorded A credit balance is recorded
Accounts on the debit side. on the credit side.
Decreases in owner’s capital are shown on the debit side of that account.
Since expenses decrease owner’s capital, expense accounts are used to repre-
sent the debit side of the owner’s capital account.
Let’s use a T account to summarize the rules of debit and credit for
expense accounts.
Expense Accounts
Debit Credit
(1) Increase (2) Decrease
Side Side
(3) Normal
Balance
Now look at the entries recorded in the T account called Advertising
Expense. The increases to the expense account are recorded on the left, or
debit, side of the T account. The decreases
to the account are recorded on the right, Advertising Expense
or credit, side of the T account. When
Debit Credit
total credits ($125) are subtracted from
total debits ($600), there is a balance of 400 125
200
$475 on the debit side, which is the nor-
Bal. 475
mal balance side for expense accounts.
Rules for the Withdrawals Account
A withdrawal is an amount of money or an asset the owner takes out of
the business. The withdrawals account is classified as a temporary owner’s
equity account. Recall that the permanent owner’s equity account is the
owner’s capital account. Withdrawals, like expenses, decrease capital, so the
rules of debit and credit are the same as for expense accounts.
108 Chapter 5 Transactions That Affect Revenue, Expenses, and Withdrawals
102-129_CH05_868829.indd 108 8/29/05 1:07:07 PM
Withdrawals Account Rule 1: The withdrawals account is
AS
Debit Credit
increased on the debit side. YOU READ
Rule 2: The withdrawals account is
(1) Increase
(2) Decrease
Compare and
decreased on the credit side. Contrast
Side Side
(3) Normal Rule 3: The normal balance for the with-
Balance drawals account is the increase Capital and
Withdrawals Consider
side or debit side. The withdraw-
the owner’s capital
als account normally has a debit
W. Smith, Withdrawals account and the owner’s
balance.
withdrawals account.
Debit Credit
Review the entries in the T account W. How are they similar?
500 Smith, Withdrawals. The increases are
200 How are they different?
1,500 recorded on the left, or debit side, of the
Bal. 1,800
T account. The decreases are recorded on
the right, or credit, side of the T account.
When total credits ($200) are subtracted from total debits ($2,000), there is
a balance of $1,800 on the debit side, which is the normal balance side for
the withdrawals account.
Summary of the Rules of Debit and Credit
for Temporary Accounts
Figure 5–4 summarizes the rules of debit and credit for the temporary
accounts and the basic accounting relationships of these accounts to the
owner’s capital account.
Permanent Account
Owner’s Capital
t Te
un Debit Credit m
po
c co ra
r yA Decrease Side Increase Side
ry
Ac
ra co
po Normal Balance un
m
Te t
Expenses Revenue
Debit Credit Debit Credit
Increase Side Decrease Side Decrease Side Increase Side
Normal Balance Normal Balance
Withdrawals
Debit Credit
Increase Side Decrease Side
Normal Balance
A debit balance is recorded A credit balance is recorded
on the debit side. on the credit side.
Figure 5–4 Rules of Debit and Credit for Temporary Accounts
Section 1 Relationship of Revenue, Expenses, and Withdrawals to Owner’s Equity 109
102-129_CH05_868829.indd 109 8/29/05 1:07:07 PM
SECTION 1 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Create a chart like this one to
.ORMAL $EBIT "ALANCE .ORMAL #REDIT "ALANCE
illustrate the different types
of accounts. Fill in each blank
box with one or more of 0ERMANENT !CCOUNTS
the following terms: assets,
liabilities, owner’s capital,
4EMPORARY !CCOUNTS
revenue, expenses, owner’s
withdrawals.
Do the Math
A company had the following activity during the accounting period:
Made sales: $5,000
Incurred advertising expenses: 500
Incurred salaries expenses: 3,000
Deposited a check from the owner’s personal savings account: 1,200
Additionally, the owner removed a computer from the business for personal use. The
business had paid $650 for the computer. What was the total effect on owner’s equity?
Problem 5–1 Applying the Rules of Debit and Credit
Caroline Palmer uses the following accounts in her San Francisco–Los Angeles commuter
shuttle service.
General Ledger
Cash in Bank Caroline Palmer, Capital
Advertising Expense Accounts Receivable
Caroline Palmer, Withdrawals Food Expense
Airplanes Flying Fees
Fuel and Oil Expense Accounts Payable
Repairs Expense
Instructions In the form provided in your working papers, provide the following informa-
tion for each account. The first account is completed as an example.
1. Classify the account as an asset, liability, owner’s equity, revenue, or expense account.
2. Indicate whether the increase side is a debit or a credit.
3. Indicate whether the decrease side is a debit or a credit.
4. Indicate whether the account has a normal debit balance or a normal credit balance.
Account Account Increase Decrease Normal
Name Classification Side Side Balance
Cash in Bank Asset Debit Credit Debit
110 Chapter 5 Transactions That Affect Revenue, Expenses, and Withdrawals
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SECTION 2 Applying the Rules
of Debit and Credit to
Revenue, Expense, and
Withdrawals Transactions
In Section 1 you learned the rules of debit and credit for rev-
BEFORE
enue, expense, and withdrawals accounts. Learning to apply these YOU READ
rules to typical business transactions is our next task. In the course
of a week, a business might receive money, pay rent, or pay util-
Main Idea
ity bills. Let’s look at more transactions for Roadrunner Delivery
Double-entry accounting requires
Service.
that total debits and total credits are
always equal.
Analyzing Transactions Read to Learn…
How Do You Analyze Transactions That Involve
➤ how to analyze revenue, expense,
Temporary Accounts?
and owner’s withdrawals
In Chapter 4 Roadrunner’s transactions dealt with asset and transactions. (p. 111)
liability accounts and with the permanent owner’s equity account, ➤ how to confirm that total debits
Maria Sanchez, Capital. Using the rules of debit and credit, let’s and total credits are equal in the
analyze several business transactions that affect revenue, expense, ledger. (p. 115)
and owner’s withdrawals accounts. Use the same six-step method
you learned in Chapter 4. Refer to Roadrunner’s chart of accounts Key Term
on page 79 to analyze the following transactions. revenue recognition
B u s i n e s s Tr a n s a c t i o n 8
On October 15 Roadrunner provided delivery services for Sims Corporation. A check for $1,200 was
received in full payment.
ANALYSIS Identify 1. The accounts Cash in Bank and Delivery Revenue are affected.
Classify 2. Cash in Bank is an asset account. Delivery Revenue is a revenue
account.
/ 3. Cash in Bank is increased by $1,200. Delivery Revenue is increased by
$1,200.
DEBIT-CREDIT RULE 4. Increases in asset accounts are recorded as debits. Debit Cash in Bank
for $1,200.
5. Increases in revenue accounts are recorded as credits. Credit Delivery
Revenue for $1,200.
Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Withdrawals Transactions 111
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T ACCOUNTS 6. Cash in Bank Delivery Revenue
Debit Credit Debit Credit
1,200 1,200
B u s i n e s s Tr a n s a c t i o n 9
On October 16 Roadrunner mailed Check 103 for $700 to pay the month’s rent.
ANALYSIS Identify 1. The accounts Rent Expense and Cash in Bank are affected.
Classify 2. Rent Expense is an expense account. Cash in Bank is an asset account.
/ 3. Rent Expense is increased by $700. Cash in Bank is decreased by $700.
DEBIT-CREDIT RULE 4. Increases in expense accounts are recorded as debits. Debit Rent
Expense for $700.
5. Decreases in asset accounts are recorded as credits. Credit Cash in
Bank for $700.
T ACCOUNTS 6. Rent Expense Cash in Bank
Debit Credit Debit Credit
700 700
B u s i n e s s Tr a n s a c t i o n 1 0
On October 18 Beacon Advertising prepared an advertisement for Roadrunner. Roadrunner will pay
Beacon’s $75 fee later.
ANALYSIS Identify 1. The accounts Advertising Expense and Accounts Payable—Beacon
Advertising are affected.
Classify 2. Advertising Expense is an expense account. Accounts Payable—
Beacon Advertising is a liability account.
/ 3. Advertising Expense is increased by $75. Accounts Payable—Beacon
Advertising is increased by $75.
DEBIT-CREDIT RULE 4. Increases in expense accounts are recorded as debits. Debit Advertising
Expense for $75.
5. Increases in liability accounts are recorded as credits. Credit Accounts
Payable—Beacon Advertising for $75.
112 Chapter 5 Transactions That Affect Revenue, Expenses, and Withdrawals
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T ACCOUNTS 6. Accounts Payable—
Advertising Expense Beacon Advertising
Debit Credit Debit Credit
75 75
B u s i n e s s Tr a n s a c t i o n 1 1
On October 20 Roadrunner billed City News $1,450 for delivery services.
ANALYSIS Identify 1. The accounts Accounts Receivable—City News and Delivery Revenue
are affected.
Classify 2. Accounts Receivable—City News is an asset account. Delivery
Revenue is a revenue account.
/ 3. Accounts Receivable—City News is increased by $1,450. Delivery
Revenue is increased by $1,450.
DEBIT-CREDIT RULE 4. Increases in asset accounts are recorded as debits. Debit Accounts
Receivable—City News for $1,450.
5. Increases in revenue accounts are recorded as credits. Credit Delivery
Revenue for $1,450.
T ACCOUNTS 6. Accounts Receivable—City News Delivery Revenue
Debit Credit Debit Credit
1,450 1,450
In Transaction 11 Roadrunner recorded revenue for services provided,
even though the money had not been collected. Following the GAAP prin-
ciple of revenue recognition , revenue is recorded on the date earned, even
if cash has not been received.
B u s i n e s s Tr a n s a c t i o n 1 2
On October 28 Roadrunner paid a $125 telephone bill with Check 104.
ANALYSIS Identify 1. The accounts Utilities Expense and Cash in Bank are affected.
Classify 2. Utilities Expense is an expense account. Cash in Bank is an asset
account.
/ 3. Utilities Expense is increased by $125. Cash in Bank is decreased
by $125.
DEBIT-CREDIT RULE 4. Increases in expense accounts are recorded as debits. Debit Utilities
Expense for $125.
5. Decreases in asset accounts are recorded as credits. Credit Cash in
Bank for $125.
Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Withdrawals Transactions 113
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T ACCOUNTS 6. Utilities Expense Cash in Bank
Debit Credit Debit Credit
125 125
B u s i n e s s Tr a n s a c t i o n 1 3
On October 29 Roadrunner wrote Check 105 for $600 to have the office repainted.
ANALYSIS Identify 1. The accounts Maintenance Expense and Cash in Bank are affected.
Classify 2. Maintenance Expense is an expense account. Cash in Bank is an asset
account.
/ 3. Maintenance Expense is increased by $600. Cash in Bank is decreased
by $600.
DEBIT-CREDIT RULE 4. Increases in expense accounts are recorded as debits. Debit
Maintenance Expense for $600.
5. Decreases in asset accounts are recorded as credits. Credit Cash in
Bank for $600.
T ACCOUNTS 6. Maintenance Expense Cash in Bank
Debit Credit Debit Credit
600 600
B u s i n e s s Tr a n s a c t i o n 1 4
On October 31 Maria Sanchez wrote Check 106 to withdraw $500 cash for personal use.
ANALYSIS Identify 1. The accounts Maria Sanchez, Withdrawals and Cash in Bank are
affected.
Classify 2. Maria Sanchez, Withdrawals is an owner’s equity account. Cash in
Bank is an asset account.
/ 3. Maria Sanchez, Withdrawals is increased by $500. Cash in Bank is
decreased by $500.
DEBIT-CREDIT RULE 4. Increases in the owner’s withdrawals account are recorded as debits.
Debit Maria Sanchez, Withdrawals for $500.
5. Decreases in assets are recorded as credits. Credit Cash in Bank
for $500.
114 Chapter 5 Transactions That Affect Revenue, Expenses, and Withdrawals
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T ACCOUNTS 6. Maria Sanchez, Withdrawals Cash in Bank
Debit Credit Debit Credit
500 500
Testing for the Equality of Debits
and Credits
Why Should You Make Sure the Ledger Is in Balance?
In a double-entry accounting system, correct analysis and recording of
business transactions should result in total debits being equal to total cred-
its. Testing for the equality of debits and credits is one way of finding out
whether you have made any errors in recording transaction amounts. To test
for the equality of debits and credits, follow these steps:
Step 1. Make a list of the account names used by the business.
Step 2. To the right of each account name, list the balance of the
account. Use two columns, one for debit balances and the other
for credit balances.
Step 3. Add the amounts in each column.
If you have recorded all the amounts correctly, the total of the debit
column will equal the total of the credit column. The test for equality of
debits and credits for the transactions in Chapters 4 and 5 shows that total
debits are equal to total credits, so the ledger is in balance.
DEBIT CREDIT MATH HINTS
ACCOUNT NAME BALANCES BALANCES
101 Cash in Bank $ 21,125 Showing Cents When
writing amounts of
105 Accounts Receivable—City News 1,450 money, be consistent
110 Accounts Receivable—Green Company in showing cents. If one
115 Computer Equipment 3,000 amount includes cents,
show cents for all the
120 Office Equipment 200 amounts. Be sure to
125 Delivery Equipment 12,000 align the amounts on the
201 Accounts Payable—Beacon Advertising $ 75 decimal points.
Incorrect:
205 Accounts Payable—North Shore Auto 11,650 $ 21,125
301 Maria Sanchez, Capital 25,400 1,450.77
302 Maria Sanchez, Withdrawals 500 Correct:
$ 21,125.00
303 Income Summary 1,450.77
401 Delivery Revenue 2,650
501 Advertising Expense 75
505 Maintenance Expense 600
510 Rent Expense 700
515 Utilities Expense 125
$ 39,775 $ 39,775
Section 2 Applying the Rules of Debit and Credit to Revenue, Expense, and Withdrawals Transactions 115
102-129_CH05_868829.indd 115 8/29/05 1:07:19 PM
SECTION 2 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Use a chart like this to $EBIT "ALANCES #REDIT "ALANCES
organize the test for the
equality of debits and credits.
Write each of these terms
in the appropriate box:
assets, liabilities, owner’s
capital, owner’s withdrawals,
revenue, expenses. (Don’t use
the shaded boxes.)
Do the Math
This bar chart shows the first $14,000
quarter’s revenue and expense. 12,000
In approximate amounts, Revenue F285937448B
10,000
what month had the most Expenses F285937448B
8,000
revenue and what was the
6,000
amount? What month had the
4,000
highest expense and what was
F285937448B
F285937448B
F285937448B
F285937448B
the amount? Overall, did the 2,000
F285937448B
F285937448B
business have a profit or loss? 0
January February March First Quarter
What was the amount?
Problem 5–2 Identifying Accounts Affected
by Transactions
John Albers uses the following accounts in his business.
General Ledger
Cash in Bank John Albers, Capital Advertising Expense
Accounts Receivable John Albers, Withdrawals Rent Expense
Office Equipment Service Fees Utilities Expense
Accounts Payable
Instructions In your working papers:
1. Identify the two accounts affected by each of the following transactions.
2. Indicate whether each account is debited or credited.
Date Transactions
July 1 1. Issued Check 543 to pay the electric bill for the month.
3 2. Billed a customer for services provided on account.
10 3. John Albers took cash from the business for his personal use.
17 4. Issued Check 544 to pay for an advertisement.
116 Chapter 5 Transactions That Affect Revenue, Expenses, and Withdrawals
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Accounting Careers in Focus
EQUITY RESEARCH ASSOCIATE
Eaton Vance Management, Boston, Massachusetts
Rukma Raybardhan
..
Tips from .
Q: What does Eaton Vance Management do?
A: We manage portfolios, or groups of investments.
to your
Q: What are your day-to-day responsibilities? When it comes t
owing the righ
job search, kn
A: I conduct preliminary research for analysts who cover certain ake all the dif-
person can m
industries and build and maintain financial models. My job job openings
ference. Many or
involves reviewing and summarizing financial statements and ord of mouth
are filled by w
attending meetings. als. Tell every-
through referr b
Q: What do you find exciting about your job? about your jo
one you know m ily ,
g your fa
A: I love the fact that I get to see the results of my work by hunt, includin h-
bors, and teac
following the performance of our investments. I enjoy learning friends, neigh by
t be surprised
about various industries and companies, and I learn something ers. You migh
help you.
new every day. who is able to
Q: What advice do you have for accounting students
just beginning their careers?
A: Work hard and get good grades. Also, concentrate on finding internships. The
internships I held worked in my favor when I was looking for my first job in
finance. Try to network as much as possible. You never know who can help
your career advancement and open doors for you.
CAREER FACTS
Nature of Work: Assist analysts with investment research.
▲ ▲
Training or Education Needed: A bachelor’s degree with a concentration in accounting
or finance.
Aptitudes, Abilities, and Skills: An understanding of the stock market; strong analytical
▲
skills; attention to detail.
Salary Range: $40,000 and up, depending on experience and employer.
▲ ▲
Career Path: Start in an entry-level position. As you gain experience and prepare to move
into higher-level roles, consider obtaining a master’s degree in business administration or
becoming a chartered financial analyst (CFA). The CFA title is an important credential for
people working in the investment field.
Thinking Critically What are some of the best ways to network with other accounting
professionals?
Chapter 5 Accounting Careers in Focus 117
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CH A P T ER 5 Summary
Key Concepts
1. The accounts used by a business can be separated into permanent accounts and temporary
accounts.
Permanent accounts carry balances forward from one accounting period to the next. The
following types of accounts are permanent accounts:
• assets
• liabilities
• owner’s capital
Temporary accounts accumulate dollar amounts for only one accounting period and then start
each new accounting period with a zero balance. The following types of accounts are temporary
accounts:
• revenue
• expenses
• owner’s withdrawals
2. The rules of debit and credit for permanent accounts are summarized as follows:
ASSETS LIABILITIES OWNER’S EQUITY
Permanent Accounts
Asset Accounts Liability Accounts Owner’s Capital Account
Debit Credit Debit Credit Debit Credit
Increase Decrease Decrease Increase Decrease Increase
Side Side Side Side Side Side
Normal Normal Normal
Balance Balance Balance
The rules of debit and credit for temporary accounts are summarized as follows:
Temporary Accounts
Revenue Expenses Withdrawals
Debit Credit Debit Credit Debit Credit
Decrease Increase Increase Decrease Increase Decrease
Side Side Side Side Side Side
Normal Normal Normal
Balance Balance Balance
118 Chapter 5 Summary
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Summary CHAPT E R 5
Revenue Accounts
Rule 1: A revenue account is increased () on the credit side.
Rule 2: A revenue account is decreased () on the debit side.
Rule 3: The normal balance for a revenue account is the increase side, or the credit side. Revenue
accounts normally have credit balances.
Expense Accounts
Rule 1: An expense account is increased on the debit side.
Rule 2: An expense account is decreased on the credit side.
Rule 3: The normal balance for an expense account is the increase side, or the debit side. Expense
accounts normally have debit balances.
The Withdrawals Account
Rule 1: The withdrawals account is increased on the debit side.
Rule 2: The withdrawals account is decreased on the credit side.
Rule 3: The normal balance for the withdrawals account is the increase side or debit side. The
withdrawals account normally has a debit balance.
3. Follow the six-step method you learned in Chapter 4 to analyze transactions affecting revenue,
expense, and withdrawals.
Step 1: Identify the accounts affected.
Step 2: Classify the accounts affected.
Step 3: Determine the amount of increase or decrease for each account affected.
Step 4: Determine which account is debited and for what amount.
Step 5: Determine which account is credited and for what amount.
Step 6: Use T accounts to describe the entry.
4. In a double-entry accounting system, total debits should always equal total credits. Use these
steps to test for the equality of debits and credits.
Step 1: List the account names the business uses.
Step 2: To the right of each account name, list its account balance. Use two columns, one for
debit balances and the other for credit balances.
Step 3: Add the amounts in each column.
Key Terms
permanent accounts (p. 105)
revenue recognition (p. 113)
temporary accounts (p. 104)
Chapter 5 Summary 119
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C H A P T ER 5 Review and Activities
AFTER
YOU READ
Check Your Understanding
1. Permanent and Temporary Accounts
a. Why are temporary accounts used?
b. What is the difference between a temporary account and a permanent account?
2. Debit and Credit Rules
a. State briefly the rules of debit and credit for increasing and decreasing each of the following
types of accounts:
• assets
• liabilities
• owner’s capital
b. State briefly the rules of debit and credit for increasing and decreasing each of the following
types of accounts:
• revenue
• expenses
• owner’s withdrawals
3. Temporary Account Transactions
a. Which account classification contains both a permanent account and a temporary account?
b. If one side of a transaction involves a revenue account, can the other side involve the owner’s
capital account? Why or why not?
4. Tests of Equality
a. Why should you test for the equality of debits and credits?
b. How would you test for the equality of debits and credits?
Apply Key Terms
You have been asked to make a
presentation to your company’s owners. For
the owners to understand the difference in
the accounts you manage, you must be able
to explain the following key terms:
permanent accounts temporary accounts
revenue recognition
Create three examples that could be
used as overhead transparencies. Each
example (master) should show a term, a brief
definition, and an illustration or example.
120 Chapter 5 Review and Activities
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Computerized Accounting CHAPT E R 5
The Chart of Accounts
Making the Transition from a Manual to a Computerized System
Task Manual Methods Computerized Methods
Setting up the • Accounts are set up in the general • Accounts are set up using defined
accounts in a ledger using general ledger account account numbers and account types.
general ledger forms. • Accounts can be set up with or without
• Accounts can be set up with or without beginning balances.
beginning balances. • Accounting software programs offer
hundreds of sample companies from
Chart of Accounts which you can copy the chart of
accounts instead of creating each
Assets Owner’s Equity
account individually.
Cash in Bank Maria Sanchez, Capital
Accounts Receivable Maria Sanchez, Withdrawals
Computer Equipment
Office Equipment Revenue
Delivery Equipment Delivery Revenue
Liabilities Expenses
Accounts Payable Advertising Expense
Maintenance Expense
Rent Expense
Q&A
Peachtree Question Answer
How do I create general 1. From the Maintain menu, select Chart of Accounts.
ledger accounts in 2. Enter the account number in the Account ID box.
Peachtree? 3. Enter the account name in the Description box.
4. From the Account Type drop-down list, select the account type.
5. Click Save.
QuickBooks Q & A
QuickBooks Question Answer
How do I create general 1. From the Lists menu, select Chart of Accounts.
ledger accounts in 2. Click the Account pull-down menu and choose New.
QuickBooks? 3. From the Type drop-down list, select the account type.
4. Enter the account number in the Number field and account name in the
Name field.
5. Click OK.
For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers.
Chapter 5 Computerized Accounting 121
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C H A P T ER 5 Problems
Complete problems using: Manual Glencoe Peachtree Complete Spreadshee
Spreadsheet
OR OR
Working Papers Accounting Software Templates
Problem 5–3 Identifying Increases
SMART GUIDE and Decreases in Accounts
Step–by–Step Instructions: Ronald Hicks uses these accounts in his business, Wilderness Rentals.
Problem 5–3
1. Select the problem set
General Ledger
for Wilderness Rentals 101 Cash in Bank 301 Ronald Hicks, Capital
(Prob. 5–3). 105 Accounts Receivable— 305 Ronald Hicks, Withdrawals
2. Rename the company Helen Katz 401 Equipment Rental Revenue
and set the system date. 120 Office Equipment 505 Maintenance Expense
3. Print a Chart of Accounts
using the General
125 Camping Equipment 525 Utilities Expense
Ledger option in the
Reports menu. Instructions Analyze each of the following transactions using the format
4. Review the Chart of shown in the example below. Record your answers in your working papers.
Accounts.
5. Complete the Analyze a. Explain the debit.
activity manually. b. Explain the credit.
6. End the session.
Example:
On Jan. 2 Ronald Hicks paid the bill for office cleaning, $100.
a. The expense account 505 Maintenance Expense is increased.
Increases in expenses are recorded as debits.
b. The asset account 101 Cash in Bank is decreased. Decreases in assets
are recorded as credits.
Date Transactions
Jan. 3 1. Ronald Hicks withdrew $500 from his business for his own
use, Check 225.
8 2. The business received $1,200 cash in rental fees from
various customers.
SMART GUIDE 12 3. The business paid a telephone bill of $85, Check 226.
Step–by–Step Instructions:
Problem 5–4 Analyze Calculate the amount of increase or decrease in the Cash in
1. Select the problem set Bank account.
for Hot Suds Car Wash
(Prob. 5–4).
2. Rename the company Problem 5–4 Using T Accounts to
and set the system date.
3. Print a Chart of Accounts Analyze Transactions
using the General Regina Delgado, owner of Hot Suds Car Wash, uses these accounts:
Ledger option in the
Reports menu. General Ledger
4. Review the Chart of
Accounts. 101 Cash in Bank 401 Wash Revenue
5. Complete the Analyze 125 Office Equipment 510 Maintenance Expense
activity manually. 205 Accounts Payable— 520 Rent Expense
6. End the session. O’Brian’s Office Supply
TIP: You will learn how 301 Regina Delgado, Capital
to enter transactions into 305 Regina Delgado, Withdrawals
the accounts in the next
chapter.
CONTINUE
122 Chapter 5 Problems
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Problems CHAPT E R 5
Instructions In your working papers:
1. Determine which accounts are affected for each transaction. SMART GUIDE
2. Prepare T accounts for the accounts affected. Step–by–Step Instructions:
3. Enter the amount of the debit and the amount of the credit in the Problem 5–5
T accounts. 1. Select the problem
set for Kits & Pups
Date Transactions Grooming (Prob. 5–5).
2. Rename the company
Jan. 7 1. Received a check for $1,675 for car wash services. and set the system date.
12 2. Paid the monthly rent of $450 by writing Check 212. 3. Add new general ledger
15 3. Regina Delgado withdrew $250 for her personal use, accounts using the
Chart of Accounts
Check 213. option in the Maintain
29 4. Had the computer repaired at O’Brian’s Office Supply for menu.
4. Enter beginning
$245 and was given until next month to pay. balances using the Chart
of Accounts option in
Analyze Identify the transactions that affect expense accounts. the Maintain menu.
5. Print a Chart of Accounts
using the General
Ledger option in the
Reports menu.
Problem 5–5 Analyzing Transactions into Debit 6. Proof your work.
and Credit Parts 7. Complete the Analyze
activity manually.
Abe Shultz, owner of Kits & Pups Grooming, uses the following accounts to 8. End the session.
record transactions for the month. TIP: When a report list
appears, double-click a
General Ledger report title to go directly to
101 Cash in Bank 401 Boarding Revenue that report.
105 Accounts Receivable— 405 Grooming Revenue
Juan Alvarez 501 Advertising Expense
140 Grooming Equipment 505 Equipment Repair Expense
QuickBooks
205 Accounts Payable— 510 Maintenance Expense PROBLEM GUIDE
Dogs & Cats Inc. 520 Rent Expense
301 Abe Shultz, Capital 530 Utilities Expense Step–by–Step Instructions:
Problem 5–5
305 Abe Shultz, Withdrawals
1. Restore the Problem
Instructions For each transaction: 5-5.QBB file.
2. Add new general ledger
1. Prepare a T account for each account listed. accounts using the
Chart of Accounts
2. Enter a balance of $15,000 in the Cash in Bank account; also enter a option in the Lists
balance of $15,000 in the Abe Shultz, Capital account. menu.
3. Analyze and record each of the following business transactions, using 3. Enter beginning
balances using the
the appropriate T accounts. Identify each transaction by number. Chart of Accounts
4. After all the business transactions have been recorded, write the word option in the Lists
menu.
Balance on the normal balance side of each account. 4. Print a Chart of Accounts
5. Compute and record the balance for each account. by selecting Print List in
the File menu.
5. Proof your work.
6. Complete the Analyze
activity manually.
7. Back up your work.
CONTINUE
Chapter 5 Problems 123
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C H A P T ER 5 Problems
Date Transactions
Jan. 1 1. Purchased grooming equipment for $12,700, Check 283.
10 2. Wrote Check 284 for advertising, $125.
12 3. Received $1,850 cash for dog boarding services.
15 4. Paid $150 for equipment repair, Check 285.
17 5. Purchased a dog cage on account from Dogs & Cats Inc. for
$75.
20 6. Abe Shultz withdrew $150 for personal use, Check 286.
22 7. Billed Juan Alvarez for $775 covering grooming services for
all of the dogs boarded at the kennels he owns. Payment
will be received later.
23 8. Paid the first two weeks’ rent by writing Check 287 for
$325.
25 9. Paid the electric bill at a cost of $115, Check 288.
Analyze Identify the transactions that affect owner’s equity.
Problem 5–6 Analyzing Transactions into Debit
SMART GUIDE and Credit Parts
Step–by–Step Instructions: Juanita Ortega operates Outback Guide Service. She uses the following
Problem 5–6 accounts to record and summarize her business transactions.
1. Select the problem
set for Outback Guide General Ledger
Service (Prob. 5–6). 101 Cash in Bank 301 Juanita Ortega, Capital
2. Rename the company 105 Accounts Receivable— 302 Juanita Ortega, Withdrawals
and set the system date.
Mary Johnson 401 Guide Service Revenue
3. Add new general ledger
accounts using the 150 Rafting Equipment 505 Maintenance Expense
Chart of Accounts 205 Accounts Payable— 515 Rent Expense
option in the Maintain Peak Equipment Inc. 520 Utilities Expense
menu.
4. Print a Chart of Accounts Instructions For each transaction:
using the General
Ledger option in the 1. Prepare a T account for each account the business uses.
Reports menu.
2. Analyze and record each of the following transactions using the
5. Proof your work.
6. Complete the Analyze appropriate T accounts. Identify each transaction by number.
activity manually. 3. After recording all transactions, compute and record the account
7. End the session.
balance on the normal balance side of each T account.
TIP: You can use General
4. Test for the equality of debits and credits.
Ledger Navigation Aid to
access the Maintain Chart Date Transactions
of Accounts window.
Jan. 2 1. Juanita Ortega invested $12,000 cash in her business.
7 2. Purchased two new whitewater rafts on account for $3,750
from Peak Equipment Inc.
10 3. Billed, but did not collect, $750 for guide services provided
to Mary Johnson. CONTINUE
124 Chapter 5 Problems
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Problems CHAPT E R 5
Date Transactions (cont.)
12 4. Repaired a raft at a cost of $123, Check 411.
14 5. Wrote Check 412 to pay the electric bill of $95.
17 6. Received $225 for guide service fees.
21 7. Paid the $225 rent for the month, Check 413.
24 8. Paid $1,750 toward the rafts bought on account, Check
414.
27 9. Juanita Ortega withdrew $250 cash for personal use,
Check 415.
29 10. Received guide service fees of $250.
Analyze Calculate the amount of revenue earned.
Problem 5–7 Analyzing Transactions
Greg Failla owns Showbiz Video. He uses the following accounts to record SMART GUIDE
business transactions. Step–by–Step Instructions:
Problem 5–7
General Ledger
101 Cash in Bank 205 Accounts Payable— 1. Select the problem
set for Showbiz Video
105 Accounts Receivable— Computer Horizons
(Prob. 5–7).
Gabriel Cohen 207 Accounts Payable— 2. Rename the company
110 Accounts Receivable— New Media Suppliers and set the system date.
James Coletti 301 Greg Failla, Capital 3. Add a new record for
140 Computer Equipment 305 Greg Failla, Withdrawals each of the general
ledger accounts.
145 Video Tapes 401 Video Rental Revenue
4. Print a Chart of
405 VCR Rental Revenue Accounts.
505 Equipment Repair Expense 5. Proof your work.
520 Rent Expense 6. Complete the Analyze
530 Utilities Expense activity manually.
7. End the session.
Instructions For each transaction: TIP: Peachtree requires
that you group accounts by
1. Prepare a T account for each account listed above. type: asset, liability, equity,
2. Analyze and record each of the following transactions using the income, and expense.
appropriate T accounts. Identify each transaction by number.
3. After recording all transactions, compute a balance for each account.
4. Test for the equality of debits and credits.
Date Transactions
Jan. 1 1. Greg Failla invested $17,500 cash in Showbiz Video.
3 2. Purchased computer equipment on account from
Computer Horizons for $2,400.
8 3. Purchased videos on account from New Media Suppliers
for $375.
10 4. Paid monthly rent of $750, Check 1183. CONTINUE
Chapter 5 Problems 125
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C H A P T ER 5 Problems
Date Transactions (cont.)
13 5. Wrote Check 1184 to pay for new videos, $265.
14 6. Sent a bill for $67 to Gabriel Cohen for a VCR rental.
16 7. Deposited the receipts from video rentals, $233.
19 8. Paid the gas and electric bill of $125, Check 1185.
21 9. Sent Check 1186 for $375 to New Media Suppliers as
payment on account.
22 10. Greg Failla withdrew $150 for his personal use, Check 1187.
25 11. Paid $45 for VCR repair, Check 1188.
30 12. Deposited VCR rental receipts of $264 in the bank.
Analyze Identify the permanent accounts that have normal
credit balances.
SPREADSHEET
SMART GUIDE CHALLENGE Problem 5–8 Completing the
PROBLEM
Step–by–Step Instructions:
Accounting Equation
Problem 5–8 With the addition of temporary accounts, the basic accounting equation
1. Select the spreadsheet can be expressed as follows:
template for Problem Owner’s Equity
5–8.
2. Enter your name and
the date in the spaces Assets Liabilities Owner’s Capital Withdrawals Revenue Expenses
provided on the
template. Instructions Using the expanded equation shown above, determine the
3. Complete the missing amounts for the following accounting equations. Use the form in
spreadsheet using the
instructions in your your working papers. The first equation is completed as an example.
working papers.
Owner’s
4. Print the spreadsheet
and proof your work. Assets Liabilities Capital Withdrawals Revenue Expenses
5. Complete the Analyze 1. $64,400 $8,200 $56,300 $ 500 $10,000 $ 9,600
activity manually. 2. $22,150 525 18,800 1,200 12,100 ?
6. Save your work and
exit the spreadsheet 3. 17,500 75 21,650 ? 4,115 3,250
program. 4. 49,450 ? 47,840 1,500 20,300 17,610
5. 21,900 1,150 20,005 950 ? 16,570
6. 72,640 2,790 ? 10,750 67,908 39,749
7. ? 1,988 41,194 6,196 52,210 42,597
8. ? 3,840 61,774 ? 40,163 21,637
(Expenses plus withdrawals equal $27,749.)
9. 64,070 ? 49,102 4,875 53,166 ?
(Total owner’s equity after adding revenue and subtracting expenses and
withdrawals is $50,643.)
Analyze For equation 7, calculate the sum of owner’s equity.
126 Chapter 5 Problems
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Winning Competitive Events CHAPTER 5
Practice your test-taking skills! The questions on this page are reprinted with permission
from national organizations:
• Future Business Leaders of America
• Business Professionals of America
Use a separate sheet of paper to record your answers.
Future Business Leaders of America
MULTIPLE CHOICE
1. Which of the following statements is incorrect?
a. The normal balance of the receivable account is a debit.
b. The normal balance of the owner’s personal account is a debit.
c. The normal balance of an unearned revenues account is a credit.
d. The normal balance of an expense account is a credit.
e. All of the above statements are correct.
2. If Tim Jones, the owner of Jones Hardware proprietorship, uses cash of the business
to purchase a family automobile, the business should record this use of cash with
an entry to
a. debit Salary Expense and credit Cash.
b. debit Tim Jones, Salary and credit Cash.
c. debit Cash and credit Tim Jones, Withdrawals.
d. debit Tim Jones, Capital and credit Cash.
e. none of the above.
Business Professionals of America
MULTIPLE CHOICE
3. Accounts that are continuous from one accounting period to the next and balances
are carried forward are referred to as
a. permanent accounts.
b. fiscally continuous.
c. post-closing assets.
d. signature accounts.
4. Each of the following is a business expense except a payment for
a. equipment
b. advertising
c. rent
d. utility bills
5. If the owner of a company takes merchandise for personal use, what account is
debited?
a. Owner’s capital Need More Help?
b. Owner’s withdrawals
Go to glencoeaccounting.glencoe.com and
c. Purchases click on Student Center. Click on Winning
d. Cash Competitive Events and select Chapter 5.
• Practice Questions and Test-Taking Tips
• Concept Capsules and Terminology
glencoeaccounting.glencoe.com Chapter 5 Winning Competitive Events 127
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C H A P T ER 5 Real-World Applications and Connections
Critical Temporary and Permanent Accounts
Thinking 1. What is the normal balance of the owner’s withdrawals account?
2. What is the difference between owner’s equity and the owner’s capital account?
3. Your business receives a refund check from the utility company because it
overcharged your business in the past. Which account is debited? Which
account is credited?
4. Which temporary accounts affect profit or loss for an accounting period?
5. Write an equation for owner’s equity at the end of an accounting period.
Start the equation with “Beginning Owner’s Capital” and end the equation
with “Ending Owner’s Equity.”
6. Evaluate the practice of using temporary accounts for recording certain
transactions, as opposed to using the owner’s capital account.
CASE Service Business: Web Site Design
STUDY Colleen Chapelli owns Web Design Source, a service that creates Web sites for
local businesses. While Colleen is an expert with computers and software pro-
gramming, her business finance expertise is limited. She has hired you as her
accountant to organize her business information and suggest business accounts.
Here are some of the items Colleen uses in the business:
• Computer • Desk and chair
• Printer • Bookcases
• Software • Computer supplies
Colleen has been advertising in the local newspaper to find new clients. She
manages the business from her home and has a separate telephone line for the
business.
INSTRUCTIONS
1. Prepare a chart of accounts for Web Design Source.
2. Explain to Colleen why it is important to collect and organize the financial
information resulting from business transactions.
a
mattoefr ETHICS Using a Toll-Free Number
Many businesses offer a toll-free telephone line for customers and business
associates. Suppose you’re an accountant for Procter & Gamble in Cincinnati,
Ohio. Your friend Mike just moved to Houston and asks if your company has an
800 number he can use to call you. Your company does offer an 800 number, and
you would like to hear from Mike. However, you also know that your company
pays for each incoming call.
ETHICAL DECISION MAKING
1. What are the ethical issues? 4. How do the alternatives affect the
2. What are the alternatives? parties?
3. Who are the affected parties? 5. What would you do?
128 Chapter 5 Real-World Applications and Connections
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Real-World Applications and Connections CHAPT E R 5
$ )) ))
Communicating
Promoting an Idea
ACCOUNTING As Southside Ballet Company’s financial director, you think Southside should
open a ballet supply and dancewear shop. Use word processing software to write
a memo to the ballet director and owner, Jonathan Booth, asking him to consider
it. Explain how you view the impact of additional revenue on his capital account.
Use the rules for revenue accounts in your explanation.
Skills Beyond Acquiring and Analyzing Data
NUMBERS To make a decision, whether business or personal, you must be able to acquire
and analyze data (information).
ON THE JOB
You are a senior at Highland College, a small liberal arts college. Eighty percent
of the students live in campus dorms or in apartments within one mile of the
college. The student activities center closes at 9:00 p.m. during the school week,
and students complain about the lack of food and beverage service for late night
study sessions. You decide to analyze the market potential of a limited food and
beverage delivery service.
INSTRUCTIONS
1. Develop a market survey of 5–10 questions related to the opening of an
off-campus food and beverage delivery service.
2. Decide what type of food and beverage you can provide in a delivery service.
How much investment would you need to begin? What do you anticipate
your customer base to be?
INTERNATIONAL Global E-Business
When you think about revenue and expenses for a company, consider how
Accounting the Internet makes it faster and cheaper to do business. Business is conducted
using Web sites, e-mail, and videoconferencing. Companies like Gap and K-Mart
use Web sites to sell products at lower costs than store locations. Managers can
communicate online with vendors or branch locations to avoid the high costs of
travel.
INSTRUCTIONS If you owned a small business and wished to expand your market
to a global audience, discuss how you might use the Internet.
Making It
Your Credit Card
Personal Do you have a credit card? If you do not use a credit card yet, it is likely you will
use one in the future. In either case, you need to know how to use your credit
card wisely.
PERSONAL FINANCE ACTIVITY Suppose your friend used a credit card unwisely
and lost the use of the card. You want to help your friend avoid future mistakes.
Conduct research at the library, on the Internet, or at your local bank. Write some
suggestions that will be helpful to your friend.
PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and
click on Student Center. Click on Making It Personal and select Chapter 5.
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CH A P T ER 6 Recording Transactions
in a General Journal
BEFORE
YOU READ
What You’ll Learn Predict
1. Explain the first three steps in 1. What does the chapter title tell you?
the accounting cycle. 2. What do you already know about this subject from personal experience?
3. What have you learned about this in the earlier chapters?
2. Give and describe several
examples of source 4. What gaps exist in your knowledge of this subject?
documents.
3. Explain the purpose of
journalizing. Exploring the Real World of Business
4. Apply information from
source documents. RECORDING FINANCIAL INFORMATION
5. Describe the steps to make Google Inc.
a general journal entry. Think about how often you look for information on the
6. Make general journal entries. Internet, whether it is for school or just something you find
interesting. There is a good chance your first stop is Google.
7. Correct errors in general
journal entries. Larry Page and Sergey Brin were students at Stanford
University when they met in 1995. During the next few
8. Define the accounting terms
years, they worked together on Web search technology. They
introduced in this chapter.
developed a way to do searches using personal computers
Why It’s Important instead of big, expensive machines.
Every transaction you The company Google Inc. was started in a garage in 1998.
▲
have with a business is The site performed about 10,000 searches a day. Within two
documented in some way. and one-half years, that number grew to 100 million. Today
Companies keep permanent Google is the top Internet search engine. The company takes
records of transactions.
in billions of dollars in advertising each year, keeping its team
of accountants busy.
What Do You Think?
If you were just starting an Internet company, what types of
financial information would you record?
130 Chapter 6 Recording Transactions in a General Journal
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Working in the Real World
APPLYING YOUR ACCOUNTING KNOWLEDGE
Personal Connection
Have you ever kept a daily journal of the things 1. In your workplace, why is it important to keep
that happen during your day? The general accurate records of daily transactions?
journal of a business is similar. The daily financial 2. List five business transactions that happen in
happenings are recorded there. A company like your workplace.
Google sells advertising, invests in computer
equipment, and pays software engineers. You will Online Connection
learn how to record business transactions in a Go to glencoeaccounting.glencoe.com and click
journal in this chapter. on Student Center. Click on Working in the
Real World and select Chapter 6.
glencoeaccounting.glencoe.com 131
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SECTION 1 The Accounting Cycle
In earlier chapters you learned to use the accounting equation
BEFORE
YOU READ and T accounts to analyze business transactions. In this chapter
you will learn how to record business transactions in a journal.
Main Idea
The accounting cycle is a series of The Steps of the Accounting Cycle
steps done in each accounting period What Is the Accounting Cycle?
to keep records in an orderly fashion. The accounting period of a business is separated into activi-
Read to Learn… ties called the accounting cycle . These activities help the busi-
➤ the steps in the accounting cycle. ness keep its accounting records in an orderly fashion. Take a
(p. 132) look at Figure 6–1, which describes accounting activities and
➤ the different types of accounting their sequence.
periods. (p. 134) In this chapter you will use Steps 1, 2, and 3 of the account-
ing cycle:
Key Terms 1. Collect and verify source documents.
accounting cycle check stub
2. Analyze each transaction.
source document journal
3. Journalize each transaction.
invoice journalizing
receipt fiscal year After studying Chapters 3 through 10, you will have covered
memorandum calendar year the entire accounting cycle for a service business organized as a
sole proprietorship.
Analyze each Journalize
transaction each transaction
Collect and verify ACCOUNT Post to
source documents GENERAL
JOURNAL the ledger
DEBIT CREDIT
INVOICE ACCOUNT
RECEIPT
2
DEBIT CREDIT
3 LEDGER
MEMORANDUM
1 4
5
9
6
POST-CLOSING TRIAL
8
TRIAL BALANCE BALANCE
GENERAL
JOURNAL
7 WORK SHEET
INCOME
STATEMENT
STATEMENT OF
CHANGES IN
OWNER'S EQUITY
Prepare a LEDGER Prepare a Prepare a
BALANCE
post-closing SHEET work sheet trial balance
trial balance
Figure 6–1 Steps in the Journalize and post
Accounting Cycle with Steps closing entries Prepare financial
1, 2, 3 Highlighted statements
132 Chapter 6 Recording Transactions in a General Journal
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The First Step in the Accounting Cycle:
Collecting and Verifying Source Documents
AS
Most business transactions take place during the daily operations of a
YOU READ
business. In the course of one day, a business may pay its rent, place an ad
in a local newspaper, contract to have a Web site created, pay its employees, Key Point
sell products, and purchase new equipment. When a business transaction Source Documents
occurs, a paper is prepared as evidence of that transaction. This paper is Source documents are
a source document . evidence of business
There are several types of source documents that can be prepared by transactions.
hand, by computer, or by a machine. The type of source document prepared
depends on the nature of the transaction. Figure 6–2 describes and illus-
trates commonly used source documents.
Invoice KELLY’S OFFICE SUPPLIES INVOICE NO. 479
354 Circle Drive. #150 DATE:
Lists specific information about a business
Dec. 1, 20--
Santa Monica, CA 90405
ORDER NO.: 150
SHIPPED BY:
transaction involving the buying or
Roadrunner Delivery Service Truck
TO 155 Gateway Blvd. TERMS: Payable in 30 days
Sacramento, CA 94230
selling of an item on account. The QTY. ITEM UNIT PRICE TOTAL
invoice contains the date of the 3 Office Chairs $ 99.00 $ 297.00
transaction; the quantity, description,
and cost of each item; and the payment
terms.
Receipt Roadrunner Delivery Service RECEIPT
155 Gateway Blvd.
A record of cash received by a business. Sacramento, CA 94230
No. 2
It indicates the date the payment was RECEIVED FROM Greer's Market
Nov. 26
$ 200.00
20 --
received, the name of the person or Two hundred and no/100 DOLLARS
business from whom the payment was FOR Deliveries 11/26/20--
received, and the amount of the payment. RECEIVED BY Maria Sanchez
Memorandum Roadrunner Delivery Service MEMORANDUM 1
155 Gateway Blvd.
A brief written message that describes Sacramento, CA 94230
a transaction that takes place within a TO:
FROM:
Accounting Clerk
Maria Sanchez
business. A memorandum is often used if DATE: October 1, 20--
Contributed personal funds to the business
SUBJECT:
no other source document exists for the I have contributed $25,000 from my personal savings to be deposited to the
business transaction. business, Roadrunner Delivery Service.
Check Stub $ 250.00 No. 110
November 2 20 --
The check stub lists the same information
Date
To Info-Systems
that appears on a check: the date written, For fax/modem
the person or business to whom the check Dollars Cents
was written, and the amount of the check. Balance brought forward 25,000 00
The check stub also shows the balance in Add deposits
the checking account before and after
each check is written.
Total 25,000 00
Less this check 250 00
Balance carried forward 24,750 00
Figure 6–2 Source Documents
Section 1 The Accounting Cycle 133
130-161_CH06_868829.indd 133 9/13/05 4:25:54 PM
The business owner, accountant, or accounting clerk (depending on the
size of the business) uses source documents generated by business transac-
tions to keep the records of the business. The accounting cycle starts by
collecting and verifying the accuracy of source documents. One important
activity is to check the arithmetic on each source document.
The Second Step in the Accounting Cycle:
Analyzing Business Transactions
After collecting and verifying source documents, the second step in the
accounting cycle can begin—analyzing information on the source docu-
ments to determine the debit and credit parts of each transaction.
You have already learned how to analyze business transactions using
the rules of debit and credit. When you learned to analyze transactions,
you were given a description of each transaction, such as: Roadrunner
Delivery Service bought a computer system from Info-Systems Inc. for
$3,000 and issued Check 101 in payment. On the job you will not get a
description of the transaction. Instead, you must examine a source docu-
ment to determine what occurred during a business transaction.
AS
The Third Step in the Accounting Cycle:
YOU READ Recording Business Transactions in a Journal
It's Not What It You are now ready to apply information from source documents. The
Seems third step in the accounting cycle is to record the debit and credit parts of
Journal In your each business transaction in a journal. A journal is a record of the trans-
personal life, a journal actions of a business. Journals are kept in chronological order, that is, the
can be a private diary order in which the transactions occur. The process of recording business
of your thoughts transactions in a journal is called journalizing . Keeping a journal can be
and experiences. In compared to keeping a diary in which all important events are written. A
accounting a journal journal is the only place where complete details of a transaction, including
is a formal record of both the debit and credit parts, are recorded. The journal is sometimes called
business transactions. the book of original entry because it is where transactions are first entered in
the accounting system.
The Accounting Period
What Are the Different Types of Accounting Periods?
As discussed in Chapter 2, accounting records are summarized for a
Connect to… certain period of time, called an accounting period. An accounting period
HISTORY may be for any designated length of time, such as a month, a quarter, or a
In 1494 Franciscan monk year. Most businesses use a year as their accounting period. An accounting
Luca Pacioli published a period of 12 months is called a fiscal year . If the fiscal year for a business
mathematics book that begins on January 1 and ends on December 31, it is
included a section on called a calendar year accounting period. Many
double-entry accounting. businesses start their accounting periods in months
In his book Pacioli other than January. For example, department stores
described most of the often have fiscal years that begin on February 1 and
accounting cycle as we end on January 31 of the following year. School dis-
know it today. tricts usually have fiscal years that begin on July 1
and end on June 30.
134 Chapter 6 Recording Transactions in a General Journal
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SECTION 1 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Create a table similar to this
(OW 4HIS 3TEP (ELPS /RGANIZE
one to describe how the first
3TEP .UMBER 3TEP $ESCRIPTION "USINESS 2ECORDS
three steps of the accounting
cycle help organize the
records of a business.
Do the Math
Glen’s Catering received an invoice from Conover Restaurant Suppliers for the following
supplies:
• 6 cartons of napkins at $4.88 per carton • 3 boxes of salt packets at $3.19 per box
• 3 boxes of paper plates at $7.28 per box • 4 boxes of medium paper cups at $8.24 per box
Calculate the total for each item on the invoice. Then calculate the total for all items.
Problem 6–1 Analyzing a Source Document
Instructions Analyze the invoice shown below and answer the following questions.
JAYMAX OFFICE SUPPLY INVOICE NO. 479
554 Town Square
Fort Myers, FL 33902 DATE: Apr. 9, 20--
ORDER NO.:
Dario’s Accounting Services SHIPPED BY: Truck
TO 5821 Gulf Blvd. TERMS: Payable in 30 days
Naples, FL 33940
QTY. ITEM UNIT PRICE TOTAL
1 Fax Machine $ 299.00 $ 299.00
1. What is the name of the company providing the service or merchandise?
2. What is the name of the business receiving the service or merchandise?
3. What is the date of the invoice?
4. What is the invoice number?
5. What item was sold?
6. What is the price for this item?
7. What are the payment terms?
Section 1 The Accounting Cycle 135
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SECTION 2 Recording Transactions in
the General Journal
In Section 1 you learned about the first three steps in the account-
BEFORE
YOU READ ing cycle. Let’s apply these steps to business transactions for Roadrunner
Delivery Service.
Main Idea
You can use the general Recording a General Journal Entry
journal to record all of the How Do You Record a General Journal Entry?
transactions of a business. Many kinds of accounting journals are used in business. One of
Read to Learn… the most common is the general journal. As its name suggests, the
➤ how to record a general general journal is an all-purpose journal in which all of the transac-
journal entry. (p. 136) tions of a business may be recorded. Figure 6–3 shows the general jour-
➤ how to correct errors nal you will be using throughout the accounting cycle for Roadrunner
in the general journal. Delivery Service. The general journal has two amount columns. The first
(p. 148) amount column, the amount column on the left, is used to record debit
amounts. (Remember that debit means left.) The second amount col-
Key Terms umn, the amount column on the right, is used to record credit amounts.
general journal (Remember that credit means right.) Look at Figure 6–3 to find where
each component of a general journal entry appears.
1 Date of the transaction
2 Name of the account debited 3 Amount of the debit
GENERAL JOURNAL PAGE
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 Year 1
AS
READ
2 Month Day Debited Account Name 1 0 0 0 00 2
YOU 3 Credited Account Name 1 0 0 0 00 3
4 Explanation 4
Instant Recall 5 5
Normal Debit Balance
6 Source document reference
Assets or an explanation
Expenses 4 Name of the account credited 5 Amount of the credit
Owner’s Withdrawals
Normal Credit Balance Figure 6–3 General Journal for Roadrunner Delivery Service
Liabilities
Revenue In Chapters 4 and 5, you learned a step-by-step method for analyzing
Owner’s Capital business transactions. In this chapter you will learn to complete the journal
entry for a business transaction in the same manner. Review the following
steps before you continue.
136 Chapter 6 Recording Transactions in a General Journal
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B u s i n e s s Tr a n s a c t i o n
BUSINESS TRANSACTION ANALYSIS: Steps to Success
ANALYSIS Identify 1. Identify the accounts affected.
Classify 2. Classify the accounts affected.
/ 3. Determine the amount of increase or decrease for each account
affected.
DEBIT-CREDIT RULE 4. Which account is debited? For what amount?
5. Which account is credited? For what amount?
T ACCOUNTS 6. What is the complete entry in T-account form?
JOURNAL ENTRY 7. What is the complete entry in general journal form?
Use these steps to determine the debit and credit parts of each journal
entry. Remember, it is always helpful to use T accounts to analyze transac-
tions. After analyzing many transactions, you will find that you need these
tools less and less to determine the debit and credit parts of a journal entry.
After the complete entry is recorded, verify that the total debits and total
credits are equal.
Now, let’s examine business transactions and their analysis for Roadrun-
ner Delivery Service.
Roadrunner Delivery Service MEMORANDUM 1
155 Gateway Blvd.
B u s i n e s s Tr a n s a c t i o n 1
Sacramento, CA 94230
TO: Accounting Clerk
Maria Sanchez
On October 1 Maria Sanchez took $25,000 FROM:
DATE: October 1, 20--
from personal savings and deposited that amount SUBJECT: Contributed personal funds to the business
to open a business checking account in the name of I have contributed $25,000 from my personal savings for a deposit to the
business, Roadrunner Delivery Service.
Roadrunner Delivery Service, Memorandum 1.
ANALYSIS Identify 1. The accounts
Cash in Bank
and Maria Sanchez, Capital are affected.
Classify 2. Cash in Bank is an asset account. Maria Sanchez, Capital is an owner’s
capital account.
/ 3. Cash in Bank is increased by $25,000. Maria Sanchez, Capital is
increased by $25,000.
DEBIT-CREDIT RULE 4. Increases in asset accounts are recorded as debits. Debit Cash in Bank
for $25,000.
5. Increases in the owner’s capital account are recorded as credits. Credit
Maria Sanchez, Capital for $25,000.
Section 2 Recording Transactions in the General Journal 137
130-161_CH06_868829.indd 137 9/13/05 4:26:08 PM
T ACCOUNTS 6. Cash in Bank Maria Sanchez, Capital
Debit Credit Debit Credit
25,000 25,000
JOURNAL ENTRY 7. GENERAL JOURNAL PAGE 1
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Oct. 1 Cash in Bank 25 0 0 0 00 2
3 Maria Sanchez, Capital 25 0 0 0 00 3
4 Memorandum 1 4
Look again at the general journal entry shown above. Notice that in the
upper right-hand corner there is a line for the page number. Journal pages
are numbered in consecutive order; that is, 1, 2, 3, and so on. When you fill
one page with journal entries, go on to the next page. Be sure to properly
number each new page.
Roadrunner Delivery Service MEMORANDUM 2
155 Gateway Blvd.
B u s i n e s s Tr a n s a c t i o n 2 Sacramento, CA 94230
TO: Accounting Clerk
On October 2 Maria Sanchez took two FROM: Maria Sanchez
October 2, 20--
DATE:
telephones valued at $200 each from her home and SUBJECT: Contributed personal phones
transferred them to the business as office equipment, I have contributed two telephones from my home to the business. The
phones are valued at $200 each. Total contribution $400.
Memorandum 2.
ANALYSIS Identify 1. The accounts
Office
Equipment
and Maria Sanchez, Capital are affected.
Classify 2. Office Equipment is an asset account. Maria Sanchez, Capital is an
owner’s capital account.
/ 3. Office Equipment is increased by $400. Maria Sanchez, Capital is
increased by $400.
DEBIT-CREDIT RULE 4. Increases in asset accounts are recorded as debits. Debit Office
Equipment for $400.
5. Increases in owner’s capital accounts are recorded as credits. Credit
Maria Sanchez, Capital for $400.
T ACCOUNTS 6. Office Equipment Maria Sanchez, Capital
Debit Credit Debit Credit
400 400
138 Chapter 6 Recording Transactions in a General Journal
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JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 1
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
5 Oct. 2 Office Equipment 4 0 0 00 5
6 Maria Sanchez, Capital 4 0 0 00 6
7 Memorandum 2 7
8 8
$ 3,000.00 No. 101
B u s i n e s s Tr a n s a c t i o n 3 Date October 4
Info-Systems Inc.
20 --
To
computer
On October 4 Roadrunner issued Check 101 for $3,000 to buy a For
computer system. Dollars Cents
Balance brought forward 25,000 00
ANALYSIS Identify 1. The accounts Computer Add deposits
Equipment and Cash in Bank
are affected. Total 25,000 00
Classify 2. Computer Equipment and Less this check 3,000 00
Cash in Bank are asset
22,000 00
accounts. Balance carried forward
/ 3. Computer Equipment is
increased by $3,000. Cash in Bank is decreased by $3,000.
DEBIT-CREDIT RULE 4. Increases in asset accounts are recorded as debits. Debit Computer
Equipment for $3,000.
5. Decreases in asset accounts are recorded as credits. Credit Cash in
Bank for $3,000.
T ACCOUNTS 6. Computer Equipment Cash in Bank
Debit Credit Debit Credit
3,000 3,000
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 1
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
8 Oct. 4 Computer Equipment 3 0 0 0 00 8
9 Cash in Bank 3 0 0 0 00 9
10 Check 101 10
11 11
Section 2 Recording Transactions in the General Journal 139
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INVOICE NO. 200
North Shore Auto
440 Lake Drive DATE: Oct. 9, 20--
B u s i n e s s Tr a n s a c t i o n 4 Sacramento, CA 94230 ORDER NO.:
SHIPPED BY:
99674
Roadrunner Delivery Service n/a
TO 155 Gateway Blvd. TERMS: Installment
On October 9 Roadrunner bought a used truck Sacramento, CA 94230
on account from North Shore Auto for $12,000, QTY. ITEM UNIT PRICE TOTAL
Invoice 200. 1 Dodge Truck Used $ 12,000.00 $ 12,000.00
ANALYSIS Identify 1. The accounts
Delivery
Equipment
and Accounts
Payable—North Shore Auto are affected.
Classify 2. Delivery Equipment is an asset account. Accounts Payable—North
Shore Auto is a liability account.
/ 3. Delivery Equipment is increased by $12,000. Accounts Payable—
North Shore Auto is increased by $12,000.
DEBIT-CREDIT RULE 4. Increases in asset accounts are recorded as debits. Debit Delivery
Equipment for $12,000.
5. Increases in liability accounts are recorded as credits. Credit Accounts
Payable—North Shore Auto for $12,000.
T ACCOUNTS 6. Accounts Payable—
Delivery Equipment North Shore Auto
Debit Credit Debit Credit
12,000 12,000
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 1
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
11 Oct. 9 Delivery Equipment 12 0 0 0 00 11
12 Accts. Pay.—North Shore Auto 12 0 0 0 00 12
13 Invoice 200 13
14 14
To separate the amounts to be paid to individual creditors, Roadrunner
AS
YOU READ uses a different account name for each creditor. The account name consists
of Accounts Payable followed by the name of the creditor. You may have
In Your Own Words
to abbreviate the name to fit it on one line of the journal. An acceptable
On Account In Business abbreviation in the preceding journal entry is Accts. Pay.—North
Transaction 4, Shore Auto.
Roadrunner “bought Roadrunner uses the same nam-
a used truck on ing system for the amounts to be paid
account… .” What by individual customers. The account
does this mean? name consists of Accounts Receivable
followed by the customer’s name.
140 Chapter 6 Recording Transactions in a General Journal
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Roadrunner Delivery Service MEMORANDUM 3
B u s i n e s s Tr a n s a c t i o n 5 155 Gateway Blvd.
Sacramento, CA 94230
On October 11 Roadrunner sold one telephone on TO:
FROM:
Accounting Clerk
Maria Sanchez
account to Green Company for $200, Memorandum 3. DATE: October 11, 20--
SUBJECT: Sold telephone
Sold one telephone on account to Green Company for $200.
ANALYSIS Identify 1. The accounts
Accounts
Receivable—
Green Company
and Office Equip-
ment are affected.
Classify 2. Both accounts are asset accounts.
/ 3. Accounts Receivable—Green Company is increased by $200. Office
Equipment is decreased by $200.
DEBIT-CREDIT RULE 4. Debit Accounts Receivable—Green Company for $200.
5. Credit Office Equipment for $200.
T ACCOUNTS 6. Accounts Receivable—
Green Company Office Equipment
Debit Credit Debit Credit
200 200
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 1
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
14 Oct. 11 Accts. Rec.—Green Company 2 0 0 00 14
15 Office Equipment 2 0 0 00 15
16 Memorandum 3 16
17 17
$ 350.00 No. 102
B u s i n e s s Tr a n s a c t i o n 6 Date October 12 20 --
To North Shore Auto
On October 12 Roadrunner mailed Check 102 for $350 as the first For installment on truck
installment on the truck purchased from North Shore Auto on October 9. Dollars Cents
Balance brought forward 22,000 00
ANALYSIS Identify 1. The accounts Accounts Payable— Add deposits
North Shore Auto and Cash in
Bank are affected.
Total 22,000 00
Classify 2. Accounts Payable—North Shore
Auto is a liability account. Cash in Less this check 350 00
Bank is an asset account. Balance carried forward 21,650 00
/ 3. Both accounts are decreased by
$350.
Section 2 Recording Transactions in the General Journal 141
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DEBIT-CREDIT RULE 4. Debit Accounts Payable—North Shore Auto for $350.
5. Credit Cash in Bank for $350.
T ACCOUNTS 6. Accounts Payable—
North Shore Auto Cash in Bank
Debit Credit Debit Credit
350 350
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 1
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
17 Oct. 12 Accts. Pay.—North Shore Auto 3 5 0 00 17
18 Cash in Bank 3 5 0 00 18
19 Check 102 19
20 20
Roadrunner Delivery Service RECEIPT
155 Gateway Blvd.
Sacramento, CA 94230
No. 1
B u s i n e s s Tr a n s a c t i o n 7
Oct. 14 20 --
On October 14 Roadrunner received and deposited RECEIVED FROM Green Company $ 200.00
a check for $200 from Green Company, Receipt 1. The Two hundred and no/100 DOLLARS
FOR Telephone
check is full payment for the telephone sold on account
Maria Sanchez
to Green on October 11. RECEIVED BY
ANALYSIS Identify 1. The accounts Cash in Bank and Accounts Receivable—Green
Company are affected.
Classify 2. Cash in Bank is an asset account. Accounts Receivable—Green
Company is an asset account.
/ 3. Cash in Bank is increased by $200. Accounts Receivable—Green
Company is decreased by $200.
DEBIT-CREDIT RULE 4. Debit Cash in Bank for $200.
5. Credit Accounts Receivable—Green Company for $200.
T ACCOUNTS 6. Accounts Receivable—
Cash in Bank Green Company
Debit Credit Debit Credit
200 200
142 Chapter 6 Recording Transactions in a General Journal
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JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 1
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
20 Oct. 14 Cash in Bank 2 0 0 00 20
21 Accts. Rec.—Green Company 2 0 0 00 21
22 Receipt 1 22
23 23
Roadrunner Delivery Service RECEIPT
B u s i n e s s Tr a n s a c t i o n 8 155 Gateway Blvd.
Sacramento, CA 94230
No. 2
On October 15 Roadrunner provided delivery Oct. 15 20 --
services for Sims Corporation. A check for $1,200 was RECEIVED FROM Sims Corporation $ 1,200.00
One thousand two hundred and no/100
received in full payment, Receipt 2. DOLLARS
FOR Delivery services
RECEIVED BY Maria Sanchez
ANALYSIS Identify 1. The accounts
Cash in Bank
and Delivery
Revenue are affected.
Classify 2. Cash in Bank is an asset account. Delivery Revenue is a revenue
account.
/ 3. Cash in Bank is increased by $1,200. Delivery Revenue is increased
by $1,200.
DEBIT-CREDIT RULE 4. Increases in asset accounts are recorded as debits. Debit Cash in Bank
for $1,200.
5. Increases in revenue accounts are recorded as credits. Credit Delivery
Revenue for $1,200.
T ACCOUNTS 6. Cash in Bank Delivery Revenue
Debit Credit Debit Credit
1,200 1,200
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 1
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
23 Oct. 15 Cash in Bank 1 2 0 0 00 23
24 Delivery Revenue 1 2 0 0 00 24
25 Receipt 2 25
26 26
Section 2 Recording Transactions in the General Journal 143
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B u s i n e s s Tr a n s a c t i o n 9 $ 700.00
October 16
No. 103
Date 20 --
Tooley & Co. Management
On October 16 Roadrunner mailed Check 103 for $700 to pay the To
For rent
month’s rent.
Dollars Cents
Balance brought forward 21,650 00
ANALYSIS Identify 1. The accounts Rent Expense and
Cash in Bank are affected. Add deposits 10/14 200 00
Classify 2. Rent Expense is an expense. Cash 10/15 1,200 00
in Bank is an asset. Total 23,050 00
/ 3. Rent Expense is increased by Less this check 700 00
$700. Cash in Bank is decreased
Balance carried forward 22,350 00
by $700.
DEBIT-CREDIT RULE 4. Increases in expense accounts are recorded as debits. Debit Rent
Expense for $700.
5. Decreases in asset accounts are recorded as credits. Credit Cash in
Bank for $700.
T ACCOUNTS 6. Rent Expense Cash in Bank
Debit Credit Debit Credit
700 700
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 1
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
Oct. 16 Rent Expense 7 0 0 00 26
Cash in Bank 7 0 0 00 27
Check 103 28
29
ACON INVOICE NO. 129
BE Beacon Advertising
10200 Prairie Parkway DATE: Oct. 18, 20--
Advertising Sacramento, CA 94206
B u s i n e s s Tr a n s a c t i o n 1 0
ORDER NO.: 699
SHIPPED BY: n/a
Roadrunner Delivery Service
TO 155 Gateway Blvd. TERMS: Payable in 30 days
On October 18 Beacon Advertising prepared an Sacramento, CA 94230
advertisement for Roadrunner. Roadrunner will pay QTY. ITEM UNIT PRICE TOTAL
1 Print Ad $ 75.00 $ 75.00
Beacon’s $75 fee later, Invoice 129.
ANALYSIS Identify 1. The accounts
Advertising
Expense and Accounts Payable—Beacon Advertising are affected.
Classify 2. Advertising Expense is an expense account. Accounts Payable—
Beacon Advertising is a liability account.
/ 3. Advertising Expense is increased by $75. Accounts Payable—Beacon
Advertising is increased by $75.
144 Chapter 6 Recording Transactions in a General Journal
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DEBIT-CREDIT RULE 4. Increases in expense accounts are recorded as debits. Debit Advertising
Expense for $75.
5. Increases in liability accounts are recorded as credits. Credit Accounts
Payable—Beacon Advertising for $75.
T ACCOUNTS 6. Accounts Payable—
Advertising Expense Beacon Advertising
Debit Credit Debit Credit
75 75
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 1
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
29 Oct. 18 Advertising Expense 7 5 00 29
30 Accts. Pay.—Beacon Adv. 7 5 00 30
31 Invoice 129 31
32 32
Roadrunner Delivery Service SALES INVOICE NO. 1
155 Gateway Blvd.
B u s i n e s s Tr a n s a c t i o n 1 1 Sacramento, CA 94230
DATE:
ORDER NO.:
Oct. 20, 20--
300
City News SHIPPED BY: n/a
TO 10900 Main St.
On October 20 Roadrunner provided delivery Sacramento, CA 94230
TERMS: Payable in 30 days
services for a customer, City News. Roadrunner billed QTY. ITEM UNIT PRICE TOTAL
City News $1,450, Sales Invoice 1. 1 Delivery Services $ 1,450.00 $ 1,450.00
ANALYSIS Identify 1. The accounts
Accounts
Receivable—City
News and Delivery Revenue are affected.
Classify 2. Accounts Receivable—City News is an asset account. Delivery
Revenue is a revenue account.
/ 3. Accounts Receivable—City News is increased by $1,450. Delivery
Revenue is increased by $1,450.
DEBIT-CREDIT RULE 4. Increases in asset accounts are recorded as debits. Debit Accounts
Receivable—City News for $1,450.
5. Increases in revenue accounts are recorded as credits. Credit Delivery
Revenue for $1,450.
T ACCOUNTS 6. Accounts Receivable—City News Delivery Revenue
Debit Credit Debit Credit
1,450 1,450
Section 2 Recording Transactions in the General Journal 145
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JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 1
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
32 Oct. 20 Accts. Rec.—City News 1 4 5 0 00 32
33 Delivery Revenue 1 4 5 0 00 33
34 Sales Invoice 1 34
35 35
B u s i n e s s Tr a n s a c t i o n 1 2 125.00 No. 104
$
October 28 20 --
On October 28 Roadrunner paid a $125 telephone bill with Date
Pacific Bell Telephone
To
Check 104. For telephone bill
Dollars Cents
ANALYSIS Identify 1. The accounts Utilities Expense Balance brought forward 22,350 00
and Cash in Bank are affected.
Add deposits
Classify 2. Utilities Expense is an expense
account. Cash in Bank is an
asset account. Total 22,350 00
/ 3. Utilities Expense is increased by Less this check 125 00
$125. Cash in Bank is decreased Balance carried forward 22,225 00
by $125.
DEBIT-CREDIT RULE 4. Increases in expense accounts are recorded as debits. Debit Utilities
Expense for $125.
5. Decreases in asset accounts are recorded as credits. Credit Cash in
Bank for $125.
T ACCOUNTS 6. Utilities Expense Cash in Bank
Debit Credit Debit Credit
125 125
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 1
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
35 Oct. 28 Utilities Expense 1 2 5 00 35
36 Cash in Bank 1 2 5 00 36
37 Check 104 37
38 38
146 Chapter 6 Recording Transactions in a General Journal
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$ 600.00 No. 105
B u s i n e s s Tr a n s a c t i o n 1 3 Date October 29 20 --
To Rainbow Painting
On October 29 Roadrunner wrote Check 105 for $600 to have the For office painted
office repainted. Dollars Cents
Balance brought forward 22,225 00
ANALYSIS Identify 1. The accounts Maintenance Add deposits
Expense and Cash in Bank are
affected.
22,225 00
Classify 2. Maintenance Expense is an Total
expense account. Cash in Bank Less this check 600 00
is an asset account. Balance carried forward 21,625 00
/ 3. Maintenance Expense is
increased by $600. Cash in Bank is decreased by $600.
DEBIT-CREDIT RULE 4. Increases in expense accounts are recorded as debits. Debit
Maintenance Expense for $600.
5. Decreases in asset accounts are recorded as credits. Credit Cash in
Bank for $600.
T ACCOUNTS 6. Maintenance Expense Cash in Bank
Debit Credit Debit Credit
600 600
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 1
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
38 Oct. 29 Maintenance Expense 6 0 0 00 38
39 Cash in Bank 6 0 0 00 39
40 Check 105 40
41 41
$ 500.00 No. 106
B u s i n e s s Tr a n s a c t i o n 1 4 Date October 31 20 --
To Maria Sanchez
On October 31 Maria Sanchez wrote Check 106 to withdraw $500 For withdrawal
cash for personal use. Dollars Cents
Balance brought forward 21,625 00
ANALYSIS Identify 1. The accounts Maria Sanchez, Add deposits
Withdrawals and Cash in Bank
are affected.
Total 21,625 00
Classify 2. Maria Sanchez, Withdrawals is
500 00
an owner’s withdrawals account. Less this check
Cash in Bank is an asset account. Balance carried forward 21,125 00
/ 3. Maria Sanchez, Withdrawals is
increased by $500. Cash in Bank is decreased by $500.
Section 2 Recording Transactions in the General Journal 147
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DEBIT-CREDIT RULE 4. Increases in the owner’s withdrawals account are recorded as debits.
Debit Maria Sanchez, Withdrawals for $500.
5. Decreases in asset accounts are recorded as credits. Credit Cash in
Bank for $500.
T ACCOUNTS 6. Maria Sanchez, Withdrawals Cash in Bank
Debit Credit Debit Credit
500 500
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 1
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
41 Oct. 31 Maria Sanchez, Withdrawals 5 0 0 00 41
42 Cash in Bank 5 0 0 00 42
43 Check 106 43
44 44
Correcting the General Journal
How Do You Correct Errors in the General Journal?
Occasionally, errors occur when journalizing transactions. When an
error is discovered, it must be corrected.
In a manual system, an error should never be erased. An erasure looks sus-
picious. It might be seen as an attempt to cover up a mistake or, worse, to
change the accounting records illegally. To correct errors, use a pen and a
ruler to draw a horizontal line through the entire incorrect item and write
the correct information above the crossed-out error. A correction for an
erroneous amount is shown in the general journal as follows:
GENERAL JOURNAL PAGE 1
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
20--
AS
1 1
YOU READ 2 Oct. 1 Cash in Bank
25 0 0 0 00
52 0 0 0 00
25 0 0 0 00
2
3 Maria Sanchez, Capital 52 0 0 0 00 3
Compare and 4 Memorandum 1 4
Contrast
Journal Errors What are To correct for an erroneous account name, cross out the incorrect infor-
the consequences of an mation and write the correct account name above.
error in an amount? In
an account name? How GENERAL JOURNAL PAGE 1
are the consequences DATE DESCRIPTION
POST.
DEBIT CREDIT
REF.
similar? How are they 20--
1 1
different? Oct. 1 Cash in Bank
2
Maria Sanchez, Capital 25 0 0 0 00 2
3 Delivery Revenue 25 0 0 0 00 3
4 Memorandum 1 4
148 Chapter 6 Recording Transactions in a General Journal
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SECTION 2 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Think of three different types
Business First Line of General Second Line of General Third Line of General
of business transactions
Transaction Journal Entry Journal Entry Journal Entry
you might have in the next
month. Use a table similar
to this one to describe the
general journal entry for
each transaction.
Do the Math
Hania Dance Company bought a computer system on account from Tech World. The
regular price for the system is $3,000, but Tech World reduced the price by 20 percent for a
storewide sale. Answer the following questions about the journal entry for this transaction.
1. Which account is debited and for what amount?
2. Which account is credited and for what amount?
Problem 6–2 Recording Business Transactions
Instructions The six steps for recording a business transaction in the general journal are
shown below, out of order. In your working papers or on a blank sheet of paper, indicate the
proper order of these steps.
A. Amount of the credit D. Date of the transaction
B. Name of the account credited E. Amount of the debit
C. Source document reference F. Name of the account debited
Problem 6–3 Analyzing Transactions
Glenda Hohn recently started a day-care center. She uses the following accounts.
General Ledger
Cash in Bank Glenda Hohn, Capital
Accts. Rec.—Tiny Tots Nursery Glenda Hohn, Withdrawals
Office Furniture Day-Care Fees
Passenger Van Utilities Expense
Accts. Pay.—Acme Bus Service Van Expense
Instructions In your working papers or on a separate sheet of paper, for each transaction:
Determine which accounts are affected. Classify each account. Determine whether the
accounts are being increased or decreased. Indicate which account is debited and which
account is credited.
Transactions:
1. Bought a passenger van for cash.
2. Paid the telephone bill for the month.
3. Received cash from customers for day-care services.
Section 2 Recording Transactions in the General Journal 149
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CH A P T ER 6 Summary
Key Concepts
1. The accounting cycle is pictured below. The first three steps are highlighted:
Step 1: Collect and verify source documents.
Step 2: Analyze each transaction.
Step 3: Journalize each transaction.
Analyze each Journalize
transaction each transaction
Collect and verify ACCOUNT Post to
source documents GENERAL
JOURNAL the ledger
DEBIT CREDIT
INVOICE ACCOUNT
RECEIPT
2
DEBIT CREDIT
3 LEDGER
MEMORANDUM
1 4
5
9
6
POST-CLOSING TRIAL
8
TRIAL BALANCE BALANCE
GENERAL
JOURNAL
7 WORK SHEET
INCOME
STATEMENT
STATEMENT OF
CHANGES IN
OWNER'S EQUITY
Prepare a LEDGER Prepare a Prepare a
BALANCE
post-closing SHEET work sheet trial balance
trial balance
Journalize and post
closing entries Prepare financial
statements
2. Source documents are evidence of business transactions. Four examples of source documents are
listed below.
Invoice ➤ describes the buying or selling of an item on account
Receipt ➤ describes cash received by a business
Memorandum ➤ describes a transaction that takes place within a business
Check Stub ➤
describes a specific check and shows the checking account balance
3. Businesses use journals to keep records of transactions in the order
they occur. The process of recording transactions in a journal is $ 250.00 No. 110
called journalizing. Date November 2 20 --
To Info-Systems
4. Source documents contain the information needed for journalizing For fax/modem
transactions. The check stub shown to the right is a source Dollars Cents
document. The highlighted information is used to make the Balance brought forward 25,000 00
journal entry. Add deposits
Total 25,000 00
Less this check 250 00
Balance carried forward 24,750 00
150 Chapter 6 Summary
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Summary CHAPT E R 6
5. Follow six steps to make a general journal entry:
GENERAL JOURNAL PAGE
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 (1) Date (2) Account to Debit (3) Debit Amt. 1
2 (4) Account to Credit (5) Credit Amt. 2
3 (6) Source Document Reference 3
4 4
6. Notice how information is applied from the source document (Check Stub 110) to the general
journal.
GENERAL JOURNAL PAGE 1
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Nov. 2 Office Equipment 2 5 0 00 2
3 Cash in Bank 2 5 0 00 3
4 Check 110 4
7. In a manual system, never erase a general journal error. The procedure to correct an error is
shown below.
GENERAL JOURNAL PAGE 1
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
Office Equipment
2 Nov. 2 Maintenence Expense 2 5 0 00 2
3 Cash in Bank 2 5 0 00 3
4 Check 110 4
Key Terms
accounting cycle (p. 132) journal (p. 134)
calendar year (p. 134) journalizing (p. 134)
check stub (p. 133) memorandum (p. 133)
fiscal year (p. 134) receipt (p. 133)
general journal (p. 136) source document (p. 133)
invoice (p. 133)
Chapter 6 Summary 151
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C H A P T ER 6 Review and Activities
AFTER
YOU READ
Check Your Understanding
1. Accounting Cycle
a. List the first three steps of the accounting cycle.
b. What would happen if you skipped Step 2?
2. Source Documents
a. List four source documents and describe the contents of each.
b. Explain when each source document is used.
3. Journalizing
a. Why is a journal sometimes called the book of original entry?
b. What is the purpose of recording transactions in a journal?
4. Applying Information
a. Where do you get the information needed to make a journal entry?
b. How do you determine the debit and credit parts of a journal entry?
5. Steps to Make a General Journal Entry
a. What six types of information are included in each general journal entry?
b. In what order do you record this information?
6. Making General Journal Entries
a. How are the two amount columns of the general journal used to record dollar amounts?
b. Describe the spacing of the information in the Description column.
7. Correcting General Journal Errors
a. What procedure is used to correct a general journal entry error in a manual system?
b. What are the possible consequences of erasing an error in the general journal?
Apply Key Terms
Assume you are an accountant who
keeps financial records for small businesses.
Write a one-page newsletter that you might
send to potential clients describing the
importance of accounting records. Use each
of the terms below in your newsletter.
accounting cycle journal
calendar year journalizing
check stub memorandum
fiscal year receipt
general journal source document
invoice
152 Chapter 6 Review and Activities
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Computerized Accounting CHAPT E R 6
General Journal Entries
Making the Transition from a Manual to a Computerized System
Task Manual Methods Computerized Methods
Recording • Analyze the source document to • Analyze the source document to
general journal determine which accounts are affected. determine which accounts are affected.
entries • Using a general journal form, enter the • Enter the transaction details in the
details of the transaction. general journal using the account
• Check for equality of debits and credits. numbers for each ledger account.
• The software will calculate the equality
of debits and credits.
Q&A
Peachtree Question Answer
How do I enter general 1. From the Tasks menu, select General Journal Entry.
journal entries in 2. Enter the date of the transaction.
Peachtree? 3. Enter the source document reference.
4. Enter the account number to be debited.
5. Enter a brief description of the transaction.
6. Enter the debit amount.
7. Enter the account number to be credited.
8. Enter the credit amount.
9. Click Save.
QuickBooks Q & A
QuickBooks Question Answer
How do I enter general 1. From the Company menu, select Make General Journal Entries.
journal entries in 2. Enter the date of the transaction.
QuickBooks? 3. Enter the account to be debited.
4. Enter the debit amount, source document reference, and description.
5. Enter the account to be credited.
6. Enter the credit amount, source document reference, and description.
7. Click Save & Close.
For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers.
Chapter 6 Computerized Accounting 153
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C H A P T ER 6 Problems
Complete problems using: Manual Glencoe Peachtree Complete QuickBooks
OR OR
Working Papers Accounting Software Templates
Problem 6–4 Recording General Journal
SMART GUIDE Transactions
Step–by–Step Instructions: Ronald Hicks owns and operates Wilderness Rentals. The following
Problem 6–4 accounts are needed to journalize the month’s transactions.
1. Select the problem set
for Wilderness Rentals General Ledger
(Prob. 6–4). 101 Cash in Bank 301 Ronald Hicks, Capital
2. Rename the company 105 Accts. Rec.—Helen Katz 305 Ronald Hicks, Withdrawals
and set the system date.
3. Enter all of the general
110 Accts. Rec.—Polk and Co. 310 Income Summary
journal transactions 120 Office Equipment 401 Equipment Rental Revenue
using the General 125 Camping Equipment 501 Advertising Expense
Journal Entry option in 201 Accts. Pay.—Adventure 505 Maintenance Expense
the Tasks menu. Equipment Inc. 515 Rent Expense
4. Print a General Journal
report.
203 Accts. Pay.—Digital Tech 520 Salaries Expense
5. Proof your work and Computers 525 Utilities Expense
make any needed 205 Accts. Pay.—Greg Mollaro
corrections.
6. Complete the Analyze Instructions: Record the following transactions on page 1 of the general
activity.
7. End the session.
journal in your working papers. For each transaction:
1. Enter the date. Use the current year.
QuickBooks 2. Enter the name of the account debited.
3. Enter the amount of the debit.
PROBLEM GUIDE
4. Enter the name of the account credited.
Step–by–Step Instructions: 5. Enter the amount of the credit.
Problem 6–4
6. Enter a source document reference.
1. Restore the Problem
6-4.QBB file. Date Transactions
2. Enter all of the general
journal transactions Jan. 1 Wrote Check 310 for the part-time secretary’s salary, $270.
using the Make General 3 Bought $2,000 of camping equipment on account from
Journal Entries option
in the Company menu. Adventure Equipment Inc., Invoice 320.
3. Print a Journal report. 5 Received $500 from a client for equipment rental, Receipt 150.
4. Proof your work and 7 Wrote Check 311 to pay the electricity bill of $110.
make any needed
corrections.
11 Billed a client, Polk and Co., $1,700 for rental equipment, Sales
5. Complete the Analyze Invoice 262.
activity. 12 Ronald Hicks withdrew $800 for personal use, Check 312.
6. Back up your work.
14 Bought a $300 scanner for the office computer from Digital
Tech Computers, on account, Invoice 270.
16 Wrote Check 313 for $1,000 as an installment payment toward
the amount owed to Adventure Equipment Inc.
25 Received $1,700 from Polk and Co. in payment on their
account, Receipt 151.
30 Paid Digital Tech Computers $300 for the amount owed,
Check 314.
Analyze Calculate the amount of cash deducted from the Cash in
Bank account in January.
154 Chapter 6 Problems
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Problems CHAPT E R 6
Problem 6–5 Recording General Journal
Transactions
Regina Delgado owns a business called Hot Suds Car Wash. She uses the
following chart of accounts. SMART GUIDE
General Ledger Step–by–Step Instructions:
101 Cash in Bank 401 Wash Revenue Problem 6–5
105 Accts. Rec.—Linda Brown 405 Wax Revenue 1. Select the problem set
110 Accts. Rec.—Valley Auto 410 Interior Detailing Revenue for Hot Suds Car Wash
125 Office Equipment 501 Advertising Expense (Prob. 6–5).
130 Office Furniture 505 Equipment Rental Expense 2. Rename the company
and set the system date.
135 Car Wash Equipment 510 Maintenance Expense 3. Enter all of the general
201 Accts. Pay.—Allen 520 Rent Expense journal transactions
Vacuum Systems 525 Salaries Expense using the General
205 Accts. Pay.—O’Brian’s 530 Utilities Expense Journal Entry option in
Office Supply the Tasks menu.
4. Print a General Journal
301 Regina Delgado, Capital report.
305 Regina Delgado, Withdrawals 5. Proof your work and
310 Income Summary make any needed
corrections.
Instructions: Record the following transactions on page 1 of the general 6. Complete the Analyze
activity.
journal in your working papers. 7. End the session.
Date Transactions TIP: You can use General
Ledger Navigation Aid
Jan. 1 Regina Delgado invested $12,000 in the business, as an alternative way to
Memorandum 41. access the General Journal
5 Purchased $5,000 in desks, chairs, and cabinets from O’Brian’s Entry window.
Office Supply on account, Invoice 1632.
8 Deposited $1,600 for income received from car washes for the
QuickBooks
week, Receipt 101. PROBLEM GUIDE
10 Paid the Village Bulletin $75 for running an ad, Check 301.
Step–by–Step Instructions:
13 Regina Delgado withdrew $900 for personal use, Check 302. Problem 6–5
17 Billed Valley Auto $400 for interior detailing, Sales Invoice 102. 1. Restore the Problem
18 Paid O’Brian’s Office Supply $2,500 as an installment payment 6-5.QBB file.
on account, Check 303. 2. Enter all of the general
journal transactions
20 Regina Delgado transferred to the business an electronic
using the Make General
calculator valued at $350, Memorandum 42. Journal Entries option
22 Wrote Check 304 for $600 to Shadyside Realty for the office in the Company menu.
rent. 3. Print a Journal report.
4. Proof your work and
24 Purchased $1,500 in car wash equipment from Allen Vacuum make any needed
Systems on account, Invoice 312. corrections.
26 Received a $400 check from Valley Auto in full payment of its 5. Complete the Analyze
activity.
account, Receipt 102. 6. Back up your work.
30 Issued Check 305 for $2,500 to O’Brian’s Office Supply for the
balance due on account.
Analyze Identify the revenue account that was not used in the month
of January.
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C H A P T ER 6 Problems
Problem 6–6 Recording General Journal
Transactions
Abe Shultz owns and operates a pet grooming business called Kits & Pups
SMART GUIDE Grooming. The following accounts are used to journalize transactions.
Step–by–Step Instructions: General Ledger
Problem 6–6 101 Cash in Bank 207 Accts. Pay.—Pet Gourmet
1. Select the problem 105 Accts. Rec.—Juan Alvarez 301 Abe Shultz, Capital
set for Kits & Pups 110 Accts. Rec.—N. Carlsbad 305 Abe Shultz, Withdrawals
Grooming (Prob. 6–6). 115 Accts. Rec.—Martha Giles 310 Income Summary
2. Rename the company 125 Office Equipment 401 Boarding Revenue
and set the system date.
3. Enter all of the general
130 Office Furniture 405 Grooming Revenue
journal transactions. 135 Computer Equipment 501 Advertising Expense
4. Print a General Journal 140 Grooming Equipment 505 Equipment Repair Expense
report. 145 Kennel Equipment 510 Maintenance Expense
5. Proof your work and 201 Accts. Pay.—Able Store 520 Rent Expense
make any needed
corrections.
Equipment 525 Salaries Expense
6. Complete the Analyze 205 Accts. Pay.—Dogs & 530 Utilities Expense
activity. Cats Inc.
7. End the session.
TIP: As a shortcut, you can Instructions: Record the following transactions on page 7 of the general
enter just the day of the journal in your working papers.
month for a transaction
date. Date Transactions
Jan. 1 Received $125 for boarding a client’s dog for one week,
Receipt 300.
3 Abe Shultz contributed to the business a computer valued at
$2,500, Memorandum 33.
5 Billed a client, Juan Alvarez, $80 for grooming his pets, Sales
Invoice 212.
9 Wrote Check 411 to Allegheny Power Co. for $150 in payment
for the month’s electricity bill.
11 Abe Shultz withdrew $700 for personal use, Check 412.
14 Purchased kennel equipment for $2,600 from Dogs & Cats Inc.,
on account, Invoice DC92.
16 Paid the part-time receptionist’s salary of $400 by issuing
Check 413.
18 Abe Shultz took from the business for his personal use a ten-key
adding machine valued at $65, Memorandum 34.
23 Juan Alvarez sent a check for $80 in full payment of his
account, Receipt 301.
28 Purchased on credit $250 in grooming equipment from the Pet
Gourmet, Invoice PG333.
31 Issued Check 414 for $1,300 as an installment payment for the
amount owed to Dogs & Cats Inc.
Analyze Calculate the total of the Accounts Receivable accounts as of
January 31.
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Problems CHAPT E R 6
Problem 6–7 Recording General Journal
Transactions
Juanita Ortega is the owner of Outback Guide Service. The following
accounts are used to record the transactions of her business. SMART GUIDE
General Ledger Step–by–Step Instructions:
101 Cash in Bank 205 Accts. Pay.—Peak Equipment Inc. Problem 6–7
105 Accts. Rec.—M. Johnson 207 Accts. Pay.—Premier Processors 1. Select the problem
110 Accts. Rec.—Feldman, 301 Juanita Ortega, Capital set for Outback Guide
Jones & Ritter 302 Juanita Ortega, Withdrawals Service (Prob. 6–7).
115 Accts. Rec.—Podaski 310 Income Summary 2. Rename the company
and set the system date.
Systems Inc. 401 Guide Service Revenue 3. Enter all of the general
130 Office Equipment 501 Advertising Expense journal transactions.
135 Office Furniture 505 Maintenance Expense 4. Print a General Journal
140 Computer Equipment 515 Rent Expense report.
145 Hiking Equipment 520 Salaries Expense 5. Proof your work and
make any needed
150 Rafting Equipment 525 Utilities Expense corrections.
201 Accts. Pay.—A-1 6. Complete the Analyze
Adventure Warehouse activity.
7. End the session.
Instructions: Record the following transactions on page 1 of the general TIP: Press SHIFT+? in an
journal in your working papers. Account No. field to display
an account list.
Date Transactions
Jan. 1 Juanita Ortega contributed the following assets to her business:
cash, $1,500; hiking equipment, $2,000; rafting equipment,
$2,500; and office furniture, $500; Memorandum 21.
2 Issued Check 515 to Town News for a $75 ad.
4 Purchased $3,000 in rafting equipment on account from A-1
Adventure Warehouse, Invoice AW45.
6 A group from Feldman, Jones & Ritter went on a hiking trip. The
group was billed $4,800 for guide services, Sales Invoice 300.
10 Paid $300 to Dunn’s Painting and Interior Co. for painting the
office, Check 516.
13 Made a $1,000 payment to A-1 Adventure Warehouse toward
the amount owed, Check 517.
15 Received a check for $4,800 from Feldman, Jones & Ritter in
payment of their account, Receipt 252.
18 Juanita Ortega paid herself $600 by issuing Check 518.
22 Billed a client, Mary Johnson, $1,200 for completing guide
services on a hiking expedition, Sales Invoice 301.
25 Paid the monthly telephone bill for $175 by issuing Check 519.
30 Purchased a $3,600 computer system from Premier Processors.
Made a down payment for $1,800 and agreed to pay the
balance within 30 days, Check 520 and Invoice 749.
Analyze Generalize about Outback’s cash sales and credit sales.
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C H A P T ER 6 Problems
CHALLENGE Problem 6–8 Recording General
PROBLEM
Journal Transactions
Greg Failla operates Showbiz Video. The following accounts are used to record
business transactions.
SOURCE DOCUMENT
PROBLEM General Ledger
101 Cash in Bank 207 Accts. Pay.—New Media Suppliers
Problem 6–8
105 Accts. Rec.—G. Cohen 209 Accts. Pay.—Palace Films
Use the source documents 110 Accts. Rec.—J. Coletti 301 Greg Failla, Capital
in your working papers to
complete this problem. 113 Accts. Rec.—S. Flannery 305 Greg Failla, Withdrawals
115 Accts. Rec.—Spring 310 Income Summary
Branch School District 401 Video Rental Revenue
130 Office Equipment 405 VCR Rental Revenue
SMART GUIDE 135 Office Furniture 501 Advertising Expense
140 Computer Equipment 505 Equipment Repair Expense
Step–by–Step Instructions:
145 Video Tapes 510 Maintenance Expense
Problem 6–8
150 Video Equipment 520 Rent Expense
1. Select the problem set 201 Accts. Pay.—Broad Street 525 Salaries Expense
for Showbiz Video
(Prob. 6–8). Office Supply 530 Utilities Expense
2. Rename the company 205 Accts. Pay.—Computer
and set the system date. Horizons
3. Enter all of the general
journal transactions.
4. Print a General Journal Instructions: Record the following transactions on page 5 of the general
report.
5. Proof your work and journal in your working papers.
make any needed
corrections. Date Transactions
6. Complete the Analyze
activity.
Jan. 1 Deposited $3,400 in receipts. Of that amount, $1,900 was VCR
7. End the session. rentals and $1,500 was video tape rentals, Receipt 435.
3 Wrote Check 1250 for $325 of equipment repairs.
5 Purchased $400 in video tapes from Palace Films on account,
Invoice PF32.
7 Bought from New Media Suppliers $2,600 in video equipment.
Made a down payment of $600 and agreed to pay the balance
in two installments, Check 1251 and Invoice NM101.
10 Rented videos to Spring Branch School District. The school
district agreed to pay $1,800 at a later date, Sales Invoice 1650.
12 Issued Check 1252 for $750 to Computer Horizons for the
amount owed to them.
15 Deposited $5,600 in receipts. VCR rentals amounted to $4,400
and video tape rentals were $1,200, Receipt 436.
18 Paid Clear Vue Window Cleaners $100 for monthly window
cleaning, Check 1253.
25 Made a $1,000 installment payment toward the amount owed
to New Media Suppliers by issuing Check 1254.
Analyze Calculate the total expenses incurred in January.
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Winning Competitive Events CHAPTER 6
Practice your test-taking skills! The questions on this page are reprinted with permission
from national organizations:
• Future Business Leaders of America
• Business Professionals of America
Use a separate sheet of paper to record your answers.
Future Business Leaders of America
MULTIPLE CHOICE
1. Recording account information in chronological order is called
a. posting.
b. journalizing.
c. analyzing.
d. processing.
2. Every journal consists of four parts:
a. account title, date, post reference, amount.
b. date, debit, credit, source document.
c. date, page number, debit, credit.
d. date, post reference, debit, credit.
3. The amount of each asset in an opening entry is recorded in a journal in the
a. General Debit column.
b. General Credit column.
c. both a and b.
d. neither a nor b.
4. An example of a business document that indicates a transaction has occurred is
a. a journal.
b. a ledger.
c. a memo.
d. a balance sheet.
Business Professionals of America
MULTIPLE CHOICE
5. The source document used when a customer makes a payment on his/her account
owed would be a
a. sales invoice.
b. check.
c. receipt.
d. memorandum.
Need More Help?
Go to glencoeaccounting.glencoe.com and
click on Student Center. Click on Winning
Competitive Events and select Chapter 6.
• Practice Questions and Test-Taking Tips
• Concept Capsules and Terminology
glencoeaccounting.glencoe.com Chapter 6 Winning Competitive Events 159
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C H A P T ER 6 Real-World Applications and Connections
Critical General Journal Entries
Thinking 1. What term describes any accounting period of 12 months?
2. How is the general journal entry for a cash purchase different from the entry
for a purchase on account?
3. It is your first day on a new job. Your task is to journalize transactions. You
just sat at your desk, which is covered with papers. What do you do next?
4. Compare a general journal entry to a transaction recorded in T accounts.
How is it similar? How is it different?
5. What items do you need to complete each of the first three steps of
the accounting cycle? Include office supplies and forms as well as any
information that will be needed.
6. What is the value of keeping the record of business transactions in
chronological order?
CASE Service Business: Exercise and Fitness
STUDY Elena Rodriguez started a business offering an exercise facility and personal
physical training. Elena has hired you as a financial consultant to help her set up
her accounting system. She has rented a space for her business, purchased several
exercise machines, and hired a part-time exercise instructor. Elena’s clients can
either pay a fee for each visit or purchase a membership.
INSTRUCTIONS
1. Write a plan for Elena Rodriguez explaining the types of financial
information she needs to record. Describe the source documents that might
be a part of her business. For example, should Elena send invoices to her
non-membership clients or ask them to pay at each visit? Describe why it is
important for Elena to record both the cost of doing business and the income
from the business.
2. Suggest a chart of accounts for Elena’s business.
a
mattoefr ETHICS Gossip in the Workplace
Assume that you are an accounting clerk for a large insurance company like
Farmers Insurance. Your boss introduces you to the newest hire, and you
recognize her as a former classmate from high school named Sally. You remember
that Sally had been suspended from school for a series of locker thefts. During
lunch you consider telling other co-workers about Sally’s history. You also wonder
if your boss knows.
ETHICAL DECISION MAKING
1. What are the ethical issues? 4. How do the alternatives affect the
2. What are the alternatives? parties?
3. Who are the affected parties? 5. What would you do?
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Real-World Applications and Connections CHAPT E R 6
$ )) ))
Communicating
Describing Source Documents
ACCOUNTING Write a paragraph describing the content of invoices, check stubs, memorandums,
and receipts. Explain how to verify and analyze these source documents before an
entry is made in the journal.
Skills Beyond Creative Thinking
NUMBERS Congratulations! You have been chosen as the local Business Owner of the
Year! Write a one-page press release describing your business and why you have
been successful. Be sure to include a brief description of your business, the skills
you use in running a successful business, and how you plan to continue being
successful in the future.
INTERNATIONAL Dating Documents
Source documents from different countries can have different date formats:
Accounting United States Australia
Date written out July 6, 2010 6 July 2010
Abbreviation 7/6/10 6/7/10
Format MM/DD/YY DD/MM/YY
As you can see in this example, writing out the month prevents confusion. The
International Organization for Standardization (ISO) promotes the worldwide use
of a single format: YYYY-MM-DD.
INSTRUCTIONS Write the date February 17, 2010, using the ISO recommended
format.
Making It
Your Personal Finance Records
Personal Your day-to-day source documents are personal financial records. Personal
financial records also include documents that are not related to everyday
transactions. Vehicle titles, birth certificates, and tax returns are all personal
financial documents. You can store your financial documents in home files, a
home safe, or a safe-deposit box. You can also keep some financial records on a
home computer.
PERSONAL FINANCE ACTIVITY Imagine a person
your age who drives to a part-time job and has
a credit card. Make a list of the types of records
Transactions in Sports
and documents such a person would probably
The general journal can be used
have. Create a plan that describes which records
to record all types of transactions.
and documents to store and where to store Visit glencoeaccounting
them. .glencoe.com and click
PERSONAL FINANCE ONLINE Log on to on Student Center. Click on
glencoeaccounting.glencoe.com and click WebQuest and select Unit 2 to
on Student Center. Click on Making It continue your Internet project.
Personal and select Chapter 6.
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CH A P T ER 7 Posting Journal Entries to
General Ledger Accounts
BEFORE
YOU READ
What You’ll Learn Predict
1. Describe the steps in the 1. What does the chapter title tell you?
posting process. 2. What do you already know about this subject from personal experience?
3. What have you learned about this in the earlier chapters?
2. Post general journal entries.
4. What gaps exist in your knowledge of this subject?
3. Prepare a trial balance.
4. Locate and correct trial
balance errors.
Exploring the Real World of Business
5. Record correcting entries in
the general journal. ACCOUNTS AND THE GENERAL LEDGER
6. Define the accounting terms
introduced in this chapter.
Los Angeles Angels of Anaheim
In the big-money world of professional sports, it is hard
Why It’s Important to imagine the new owner of a major team actually lowering
Up-to-date account balances the prices of tickets, food, and souvenirs. That is exactly what
▲
provide information for Arturo “Arte” Moreno did when he bought baseball’s Los
reports used by people Angeles Angels of Anaheim in 2003.
both inside and outside the Moreno was a big hit with fans for his lower-price strategy.
business.
In his first year, the Angels attracted 750,000 more paying
customers than in the previous season, when they won the
World Series.
Moreno has been called “the people’s owner” because he
likes to meet fans and enjoys seeing families having a good
time. “For baseball to exist as I’ve known it, the kids have to
come to the park,” he told USA Today.
What Do You Think?
What are some general ledger accounts that might be used
by the Angels?
162 Chapter 7 Posting Journal Entries to General Ledger Accounts
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Working in the Real World
APPLYING YOUR ACCOUNTING KNOWLEDGE
In the last chapter, you learned how to record Personal Connection
financial transactions in a journal. These journal What types of accounts would you imagine are
entries show individual daily activities but do not used for accounting in your workplace?
show the total of all transactions. In this chapter
you will learn that posting the journal entries is a Online Connection
means of organizing all transactions affecting the Go to glencoeaccounting.glencoe.com and click
accounts of a business. on Student Center. Click on Working in the
Real World and select Chapter 7.
glencoeaccounting.glencoe.com 163
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SECTION 1 The General Ledger
In Chapter 6 you learned to analyze business transactions and enter
BEFORE
YOU READ those transactions in a general journal.
In this chapter you will learn to post journal entries to the general ledger
and to prepare a trial balance (Steps 4 and 5 in the accounting cycle illus-
Main Idea trated in Figure 7–1). Posting is the process of transferring information
The general ledger is
from the journal to individual general ledger accounts.
a permanent record
The Jeep dealer in your area records all business transactions in the
organized by account
journal and posts them to the general ledger. An up-to-date ledger allows
number.
the dealer’s accountant to give management information such as sales of
Read to vehicles, service income, and salary and commission expense.
Learn… Analyze each Journalize
➤ how to set up the transaction each transaction
Collect and verify Post to
general ledger. source documents
ACCOUNT GENERAL
JOURNAL the ledger
(p. 164) DEBIT
+
CREDIT
-
INVOICE
➤ how managers use ACCOUNT
3
DEBIT CREDIT
2
RECEIPT LEDGER
journals and ledgers. + -
4
MEMORANDUM
(p. 166)
Key Terms 1
posting
general ledger
ledger account forms 5
9
6
POST-CLOSING TRIAL
8
TRIAL BALANCE BALANCE
GENERAL
7 WORK SHEET
JOURNAL INCOME
STATEMENT
STATEMENT OF
CHANGES IN
OWNER'S EQUITY
Prepare a LEDGER
BALANCE
Prepare a Prepare a
post-closing SHEET work sheet trial balance
trial balance
Figure 7–1 The Accounting Journalize and post
Cycle with Steps 4 and 5 closing entries Prepare financial
Highlighted statements
Setting Up the General Ledger
What Is a General Ledger?
Recall that the accounts used by a business are kept on separate pages
or cards in a book or file called a ledger. In a computerized accounting sys-
tem, the electronic files containing the accounts are still referred to as the
ledger, or the ledger accounts. In either system the ledger is often called
a general ledger. The general ledger is a permanent record organized by
account number.
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Posting journal entries to the ledger accounts creates a record of the
impact of business transactions on each account used by a business. After
journal entries have been posted, a business owner or manager can easily
find the current balance of a specific account. If, for example, Maria Sanchez
wants to know how much money Roadrunner Delivery Service has in its
bank account, she can look at the balance of the Cash in Bank account.
The Four-Column Ledger Account Form
In a manual accounting system, information about specific accounts
is recorded in ledger account forms . There are several common ledger
account forms. These forms and other accounting stationery are usually
described by the number of their amount columns. The number of columns
refers only to those columns in which dollar amounts are recorded.
Roadrunner uses the four-column ledger account form shown in Figure
7–2. The four-column ledger account form has spaces to enter the account
name, the account number, the date, a description of the entry, and the post-
ing reference. It also has four columns in which to record dollar amounts:
Debit, Credit, Debit Balance, and Credit Balance.
ACCOUNT ACCOUNT NO.
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
Debit and credit amounts are posted from journal entries to the first Figure 7–2 Four-Column
two amount columns. The new account balance is entered in one of the Ledger Account Form
last two amount columns. The type of account (expense, revenue, asset,
etc.) determines which balance column to use. For example, accounts with
a normal debit balance—such as asset or expense accounts—use the Debit CULTURAL
Balance column. Accounts with a normal credit balance—such as liability
Diversity
or revenue accounts—use the Credit Balance column. Business Etiquette
Americans shake
Accounts in the Ledger hands with a firm grip
Before journal entries can be posted, a general ledger account is opened to show confidence.
for each account listed on the chart of accounts. In some cultures,
Opening a General Ledger Account. Two steps are required: however, a firm
handshake can be
1. Write the account name at the top of the ledger account form.
considered a sign of
2. Write the account number on the ledger account form.
aggression. In many
These two steps are performed each time a ledger page is needed for countries the grip is
a new account. The accounts opened for the first three asset accounts limp and it can last up
on Roadrunner’s chart of accounts (page 79) are shown in Figure 7–3 on to 10 seconds. If you
page 166. meet someone from
The procedure in a computerized accounting system is similar. An account a different culture,
is opened by entering its name and number from the chart of accounts. let him or her set the
Computerized accounting systems vary, but all require entering information precedent.
such as the account numbers and names into the computer files.
Section 1 The General Ledger 165
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ACCOUNT Cash in Bank ACCOUNT NO. 101
DATE DESCRIPTION
POST.
DEBIT CREDIT
BALANCE 2
REF. DEBIT CREDIT
ACCOUNT Accounts Receivable—City News ACCOUNT NO. 105
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
ACCOUNT Accounts Receivable—Green Company ACCOUNT NO. 110
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
Figure 7–3 Opening
General Ledger Accounts
Starting a New Page for an Existing Account. When a led-
with Zero Balances ger account page is filled, continue posting on the next page. Six steps are
required to “open” a new page:
1. Write the account name at the top of the ledger account form.
2. Write the account number on the ledger account form.
3. Enter the complete date (year, month, and day) in the Date column.
4. Write the word Balance in the Description column.
5. Place a check mark (✓) in the Posting Reference column to show
the amount entered on this line is not being posted from a journal.
6. Enter the balance in the appropriate Balance column. Usually asset,
expense, and owner’s withdrawals accounts have debit balances.
Liability, owner’s capital, and revenue accounts have credit balances.
Figure 7–4 shows an example of a new page opened for an account.
1 2
ACCOUNT Cash in Bank ACCOUNT NO. 101
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
3 20-- 5 6
Oct. 31 Balance 4 ✓ 21 1 2 5 00
Figure 7– 4 Starting a
New Page for an Existing The Usefulness of Journals and Ledgers
Account How Are These Records Useful to Managers?
Managers continually use the information from accounting records. To
find information about a specific business transaction, a manager can refer
to the journal entry. To learn the current balance of important accounts like
Accounts Receivable and Accounts Payable, managers look at the general
ledger. Managers use ledgers to obtain summarized information.
166 Chapter 7 Posting Journal Entries to General Ledger Accounts
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SECTION 1 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Use a chart like this one
*OURNAL ,EDGER
to compare and contrast a
journal and a ledger. Add
answer lines as needed. (OW ARE THEY ALIKE
(OW ARE THEY DIFFERENT
Do the Math
The general ledger for Reese Delivery Service contains the following account balances:
Cash in Bank $ 8,000
Supplies $ 200
Delivery Equipment ?
Ed Reese, Capital $16,200
Delivery Income ?
Using the following clues, determine the balances of the Delivery Equipment account and
the Delivery Income account:
• Total debits equal $24,200.
• The balance of the Delivery Income account is one-half the balance of the Delivery
Equipment account.
Problem 7–1 Opening Ledger Accounts
Instructions Use the step-by-step processes presented in this chapter for starting new ledger
pages for the following accounts. Use the accounting stationery provided in your working
papers. January 1 of the current year is the date.
Account Name Account Number Balance
Cash in Bank 101 $10,000
Accounts Receivable—
Mark Cohen 104 2,000
Accounts Payable—
Jenco Industries 203 1,000
Tom Torrie, Capital 301 35,000
Admissions Revenue 401 -0-
Section 1 The General Ledger 167
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SECTION 2 The Posting Process
In the last section, you learned how to
BEFORE
YOU READ open accounts in the general ledger. In this
section you will learn how to post general
journal entries to the ledger. Recall that
Main Idea posting is the process of transferring infor-
Posting is the process of
mation from the general journal to indi-
transferring information
vidual general ledger accounts. To provide
from the journal to
current information to management, the
individual accounts in the
accountant for the Jeep dealer in your area
ledger.
probably posts journal entries to the general
Read to Learn… ledger every day.
➤ how to post transactions
to the general ledger.
(p. 168)
The Fourth Step in the
➤ how to compute account Accounting Cycle: Posting
balances. (p. 174) How Do You Post Transactions?
In Chapter 6 you learned that the general journal is a sort of busi-
ness diary containing all of the transactions of a business. It is not easy to
see the effect of changes in an account by looking at journal entries. To
provide a clear picture of how a business transaction changes an account’s
balance, the information in a journal entry is posted to the general ledger.
The purpose of posting, therefore, is to show the impact of business trans-
actions on the individual accounts. The ledger is sometimes called the book
of final entry.
AS The size of the business, the number of transactions, and whether the
YOU READ accounting system is manual or computerized all affect how often posting
Instant Recall occurs. Ideally, businesses post daily to keep their accounts up-to-date. Regard-
less of how often posting is performed, the process remains the same.
Journal The journal is
As in journalizing a transaction, posting to a ledger account is com-
sometimes called the
pleted from left to right. Let’s look at a journal entry for Roadrunner that is
book of original entry.
ready to be posted to the ledger.
Posting to the Roadrunner General Ledger
Roadrunner’s first transaction affects two accounts: Cash in Bank and
Maria Sanchez, Capital. The information in the journal entry is transferred
item by item from the journal to each of the accounts affected. As you read
about each step in the posting process, refer to Figure 7–5.
Locate the account to be debited in the ledger; in this example, Cash
in Bank is to be debited.
168 Chapter 7 Posting Journal Entries to General Ledger Accounts
162-191_CH07_868829.indd 168 9/16/05 5:55:38 PM
GENERAL JOURNAL PAGE 1
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Oct. 1 Cash in Bank 101 25 0 0 0 00 2
3 Maria Sanchez, Capital 301 25 0 0 0 00 3 6 Enter the account
4 Memorandum 1 4
number in the
general journal
5 5
Post. Ref. column
1 Enter date of the 3 Enter journal letter 5 Compute the new
journal entry and page number in account balance
2 Description column Post. Ref. column 4 Enter the debit
is usually blank amount
ACCOUNT Cash in Bank ACCOUNT NO. 101
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Oct. 1 G1 25 0 0 0 00 25 0 0 0 00
7 Repeat steps 1–6 for the
credit part of journal entry
ACCOUNT Maria Sanchez, Capital ACCOUNT NO. 301
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Oct. 1 G1 25 0 0 0 00 25 0 0 0 00
Figure 7–5 Posting from the General Journal to Ledger Accounts
1. Enter the date of the journal entry in the Date column of the
account debited. Use the date of the journal entry, not the date on
which the posting is done. Write the year and month in the left side
of the Date column. It is not necessary to write the year and month
for other postings to the same account on the same page unless the
month or year changes. The day, however, is always entered.
2. The Description column on the ledger account is usually left blank.
Some businesses use this space to write in the source document
number.
3. In the ledger account Posting Reference (Post. Ref.) column, identify
where the journal entry is recorded. Enter a letter for the specific
journal and the journal page number. In this example the letter “G”
represents the general journal and the “1” indicates page 1 of the
general journal.
4. Enter the debit amount in the Debit column of the ledger account.
5. Compute and record the new account balance in the appropriate
balance column. Every amount posted will either increase or
decrease the balance of that account.
Section 2 The Posting Process 169
162-191_CH07_868829.indd 169 4/6/06 5:41:01 PM
6. Return to the journal and, in the Posting Reference column, enter
AS
YOU READ the account number of the ledger account to which you just posted
the debit part of the journal entry. Be sure it is entered on the same
Key Point
line as the debit entry. In this example enter 101 in the Posting
Posting to General Reference column on the line for Cash in Bank.
Ledger Accounts For This step in the posting process is very important. The notation
every journal entry, you in the Posting Reference column of the journal indicates that the
will post to at least two
journal entry has been posted. The posting reference also shows
ledger accounts.
the account to which the entry was posted. If the posting process
is interrupted, perhaps by a telephone call, the posting reference
signals the point at which posting stopped. Never write an account
number in the Posting Reference column until after you have
posted.
7. Repeat steps 1–6 for the credit part of the journal entry.
• Locate the account to be credited. In this example Maria
Sanchez, Capital, is to be credited.
• Enter the date.
• Enter the posting reference on the ledger account form. In this
example, G1 represents the first page of the general journal.
• Enter the credit amount.
• Compute the new account balance.
• Enter the account number in the Posting Reference column of
the general journal. In the example enter 301 to show that the
credit was posted to Maria Sanchez, Capital.
The journal entries made in Chapter 6 for Roadrunner’s transactions are
shown in Figure 7–6.
The Importance of Posting
Posting organizes business transaction details into the proper accounts.
As discussed earlier, transactions that are itemized in the general journal are
helpful, but do not summarize similar transactions into the same location.
Posting summarizes all business transactions so managers can see the cumu-
lative effects on accounts like Utilities Expense or Salaries Expense.
General Journal
Utilities
Salaries
Repairs Revenue
170 Chapter 7 Posting Journal Entries to General Ledger Accounts
162-191_CH07_868829.indd 170 4/6/06 5:41:02 PM
GENERAL JOURNAL PAGE 1
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Oct. 1 Cash in Bank 101 25 0 0 0 00 2
3 Maria Sanchez, Capital 301 25 0 0 0 00 3
4 Memorandum 1 4
5 2 Office Equipment 120 4 0 0 00 5
6 Maria Sanchez, Capital 301 4 0 0 00 6
7 Memorandum 2 7
8 4 Computer Equipment 115 3 0 0 0 00 8
9 Cash in Bank 101 3 0 0 0 00 9
10 Check 101 10
11 9 Delivery Equipment 125 12 0 0 0 00 11
12 Accounts Payable—North Shore Auto 205 12 0 0 0 00 12
13 Invoice 200 13
14 11 Accounts Receivable—Green Co. 110 2 0 0 00 14
15 Office Equipment 120 2 0 0 00 15
16 Memorandum 3 16
17 12 Accounts Payable—North Shore Auto 205 3 5 0 00 17
18 Cash in Bank 101 3 5 0 00 18
19 Check 102 19
20 14 Cash in Bank 101 2 0 0 00 20
21 Accounts Receivable—Green Co. 110 2 0 0 00 21
22 Receipt 1 22
23 15 Cash in Bank 101 1 2 0 0 00 23
24 Delivery Revenue 401 1 2 0 0 00 24
25 Receipt 2 25
26 16 Rent Expense 510 7 0 0 00 26
27 Cash in Bank 101 7 0 0 00 27
28 Check 103 28
29 18 Advertising Expense 501 7 5 00 29
30 Accounts Payable—Beacon Advertising 201 7 5 00 30
31 Invoice 129 31
32 20 Accounts Receivable—City News 105 1 4 5 0 00 32
33 Delivery Revenue 401 1 4 5 0 00 33
34 Sales Invoice 1 34
35 28 Utilities Expense 515 1 2 5 00 35
36 Cash in Bank 101 1 2 5 00 36
37 Check 104 37
38 29 Maintenance Expense 505 6 0 0 00 38
39 Cash in Bank 101 6 0 0 00 39
40 Check 105 40
41 31 Maria Sanchez, Withdrawals 302 5 0 0 00 41
42 Cash in Bank 101 5 0 0 00 42
43 Check 106 43
44 44
Figure 7–6 General Journal Entries for October Business Transactions
The postings made to the general ledger accounts from these entries are
shown in Figure 7–7 on pages 172–173. Study these illustrations to check
your understanding of the posting process.
Section 2 The Posting Process 171
162-191_CH07_868829.indd 171 9/16/05 5:55:49 PM
ACCOUNT Cash in Bank ACCOUNT NO. 101
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Oct. 1 G1 25 0 0 0 00 25 000 00
4 G1 3 0 0 0 00 22 000 00
12 G1 3 5 0 00 21 650 00
14 G1 2 0 0 00 21 850 00
15 G1 1 2 0 0 00 23 050 00
16 G1 700 00 22 350 00
28 G1 125 00 22 225 00
29 G1 600 00 21 625 00
31 G1 500 00 21 125 00
ACCOUNT Accounts Receivable—City News ACCOUNT NO. 105
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Oct. 20 G1 1 4 5 0 00 1 4 5 0 00
ACCOUNT Accounts Receivable—Green Company ACCOUNT NO. 110
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Oct. 11 G1 2 0 0 00 2 0 0 00
14 G1 2 0 0 00
ACCOUNT Computer Equipment ACCOUNT NO. 115
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Oct. 4 G1 3 0 0 0 00 3 0 0 0 00
ACCOUNT Office Equipment ACCOUNT NO. 120
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Oct. 2 G1 4 0 0 00 4 0 0 00
11 G1 2 0 0 00 2 0 0 00
ACCOUNT Delivery Equipment ACCOUNT NO. 125
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Oct. 9 G1 12 0 0 0 00 12 0 0 0 00
ACCOUNT Accounts Payable—Beacon Advertising ACCOUNT NO. 201
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Oct. 18 G1 7 5 00 7 5 00
Figure 7–7 Postings to General Ledger Accounts for the Month of October
172 Chapter 7 Posting Journal Entries to General Ledger Accounts
162-191_CH07_868829.indd 172 9/16/05 5:55:51 PM
ACCOUNT Accounts Payable—North Shore Auto ACCOUNT NO. 205
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Oct. 9 G1 12 0 0 0 00 12 0 0 0 00
12 G1 3 5 0 00 11 6 5 0 00
ACCOUNT Maria Sanchez, Capital ACCOUNT NO. 301
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Oct. 1 G1 25 0 0 0 00 25 0 0 0 00
2 G1 4 0 0 00 25 4 0 0 00
ACCOUNT Maria Sanchez, Withdrawals ACCOUNT NO. 302
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Oct. 31 G1 5 0 0 00 5 0 0 00
ACCOUNT Income Summary ACCOUNT NO. 303
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
ACCOUNT Delivery Revenue ACCOUNT NO. 401
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Oct. 15 G1 1 2 0 0 00 1 2 0 0 00
20 G1 1 4 5 0 00 2 6 5 0 00
ACCOUNT Advertising Expense ACCOUNT NO. 501
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Oct. 18 G1 7 5 00 7 5 00
ACCOUNT Maintenance Expense ACCOUNT NO. 505
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Oct. 29 G1 6 0 0 00 6 0 0 00
ACCOUNT Rent Expense ACCOUNT NO. 510
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Oct. 16 G1 7 0 0 00 7 0 0 00
ACCOUNT Utilities Expense ACCOUNT NO. 515
POST. BALANCE
DATE DESCRIPTION DEBIT CREDIT
Figure 7–7 Postings REF. DEBIT CREDIT
to General Ledger 20--
Accounts for the Month Oct. 28 G1 1 2 5 00 1 2 5 00
of October (continued)
Section 2 The Posting Process 173
162-191_CH07_868829.indd 173 9/16/05 5:55:53 PM
General Ledger Account Balances
How Do You Compute Account Balances?
On a four-column ledger account form, each time you post to an account,
you also compute and show the new account balance.
Computing a New Account Balance
A rule of thumb for finding a new balance is that debits are added to deb-
its, credits are added to credits, but debits and credits are subtracted. After
you post to an account, compute the new account balance as follows:
When the existing account balance is a debit, and
• the amount posted is a debit, ADD the amounts.
• the amount posted is a credit, SUBTRACT the amounts.
When the existing account balance is a credit, and
• the amount posted is a debit, SUBTRACT the amounts.
• the amount posted is a credit, ADD the amounts.
A ledger account usually has space for several postings. Often, blank lines
remain after the month’s journal entries are posted. To save space the journal
entries for more than one month are entered on the same ledger page. The
new month and day are entered in the Date column, as in Figure 7–8.
ACCOUNT Cash in Bank ACCOUNT NO. 101
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Oct. 1 G1 25 0 0 0 00 25 0 0 0 00
31 G2 5 0 0 00 24 5 0 0 00
Nov. 1 G2 1 2 5 00 24 3 7 5 00
Figure 7–8 A Ledger
Account with Several Postings Showing a Zero Balance in a Ledger Account
To show a zero balance after you post a transaction, draw a line across
the center of the column—where the normal balance would appear. On
October 11 Roadrunner sold a phone for $200 on account to Green Com-
pany and received full payment on October 14. When the October 14
journal entry is posted, Accounts Receivable—Green Company has a zero
balance. The line across the Debit Balance column in Figure 7–9 means
that the account has a zero balance. The line is drawn in the Debit column
because the normal balance for this account is a debit.
ACCOUNT Accounts Receivable—Green Company ACCOUNT NO. 110
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Oct. 11 G1 2 0 0 00 2 0 0 00
14 G1 2 0 0 00
Figure 7–9 Showing a Ledger Account with a Zero Balance
174 Chapter 7 Posting Journal Entries to General Ledger Accounts
162-191_CH07_868829.indd 174 9/16/05 5:55:55 PM
SECTION 2 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Create a diagram like this one to show 4RANSACTION $ATE
how information is transferred between
3PECIFIC *OURNAL AND 0AGE .UMBER
the journal and the ledger. For each line,
*OURNAL ,EDGER
draw an arrowhead to show the direction $EBIT OR #REDIT !MOUNT
of the information transfer. The first line is !CCOUNT .UMBER
provided as an example.
Do the Math
As an employee of Always Fresh Bakery, you have been asked to analyze the impact that
different sales levels have on the ultimate profit or loss of the business. After posting is
completed, you prepare the following line graph to illustrate the sales figures for Always
Fresh Bakery. Review the line graph and write a one-paragraph analysis of the impact of
sales on the bakery’s profit.
ANNUAL SALES AND REVENUE
$3,000
Sales
2,000 Profit
Sales
1,000
0
January March May July September November
Months
Problem 7–2 Posting from the General Journal
to the Ledger
Instructions David Serlo made the following cash investment in his business. Use the six-
step process to post the entry to the ledger accounts in your working papers.
GENERAL JOURNAL PAGE 1
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 May 1 Cash in Bank 10 0 0 0 00 2
3 David Serlo, Capital 10 0 0 0 00 3
4 Memorandum 101 4
Section 2 The Posting Process 175
162-191_CH07_868829.indd 175 9/16/05 5:55:59 PM
Accounting Careers in Focus
COUNTY AUDITOR
Internal Audit Department,
..
Maricopa County, Arizona Tips from .
Ross Tate
ntinuous
Q: What does the internal audit department do? Learning is a co u
after yo
A: We audit and report on the county’s operational and financial process—even
from school.
activities. have graduated the job
s on
Build your skill
Q: What are your day-to-day responsibilities? g for projects
by volunteerin ea
A: I serve as the county government’s “eyes and ears” by forming immediate ar
beyond your
ty. You can so
al
teams to audit all county departments, and investigate financial of responsibili
d join industry
inconsistencies and possible theft. I meet with managers of take courses an ain at the
rem
different audit teams, assign tasks, and make sure the work associations to
gets done. fie ld .
top of your
Q: What are some of the factors that have been key to
your success?
A: Continuing education has been key. Through continuing education, you stay
on top of developments in your field. It is also recommended to maintain a
CPA license and other certifications that can advance your career. Professional
journals and industry associations are also great sources of information.
Q: What do you like most about your job?
A: It’s rewarding because the government serves the people of the county in many
important ways. I can help make a big difference by working in public service.
The variety of tasks also makes my job interesting.
Q: What advice do you have for accounting students just
beginning their careers?
A: Put in the extra time and effort whether it’s asked for or not. This will help you
to get ahead quickly and greatly improve the quality of your work.
CAREER FACTS
Nature of the Work: Supervise internal audits and communicate the results to
▲
management; always stay aware of new laws and rules.
Training or Education Needed: A bachelor’s degree in accounting or finance; a CPA or
▲
certified internal auditor (CIA) title.
Aptitudes, Abilities, and Skills: Advanced knowledge of generally accepted accounting
▲
principles; critical thinking, communication, and technology skills.
Salary Range: $35,000 to $120,000 depending on experience, level of responsibility,
▲
industry, and location.
Career Path: Start by working as an entry-level internal auditor, and then gradually
▲
assume more responsibility as you gain knowledge and experience.
Thinking Critically In what ways could you demonstrate to an employer that you are a valuable
employee?
176 Chapter 7 Accounting Careers in Focus
162-191_CH07_868829.indd 176 4/6/06 5:41:11 PM
SECTION 3 Preparing a Trial Balance
In the last section, you learned how to post to the ledger. In this
BEFORE
section you will learn how to prepare a trial balance. Accountants use a YOU READ
trial balance to prove that the accounting system is in balance. Prepar-
ing a trial balance is the fifth step in the accounting cycle. Every time
Main Idea
the accountant for the Jeep dealer in your area posts to the ledger, he or
The trial balance is a proof
she prepares a trial balance. The trial balance provides assurance that the
that total debits equal total
journal entries are posted properly.
credits in the ledger.
The Fifth Step in the Accounting Read to Learn…
➤ how to prepare a trial
Cycle: The Trial Balance balance. (p. 177)
What Is the Purpose of a Trial Balance? ➤ how to find and correct
errors in the trial balance.
After the journal entries have been posted to the accounts in the gen-
(p. 178)
eral ledger, the total of all of the debit balances should equal the total of
all of the credit balances. Adding all the debit balances, then adding all Key Terms
the credit balances, and finally comparing the two totals to see whether proving the ledger
they are equal is called proving the ledger . trial balance
A formal way to prove the ledger is to prepare a trial balance . A trial transposition error
balance is a list of all the account names and their current balances. All slide error
of the debit balances are added. All of the credit balances are added. The correcting entry
totals are compared. If the totals are the same, the trial balance is in bal-
ance. If the totals are not equal, an error was made in journalizing, posting,
or preparing the trial balance. You must find the error and correct it before
continuing with the next step in the accounting cycle.
The equality of debits and credits does not, however, guarantee that
the accounting records do not have errors. An amount might be posted to
the wrong account. For example, suppose a credit sale for $500 was posted
to the Cash in Bank account instead of Accounts Receivable. The trial
balance remains in balance, but the company’s cash is overstated by $500.
What if a transaction did not get posted? Two accounts have wrong bal-
ances, but the total debits still equal the total credits.
The trial balance for Roadrunner Delivery Service for the month of Octo-
ber is shown in Figure 7–10 on page 178. The trial balance was prepared on
two-column accounting stationery. The account numbers are listed
in the far left column. The account names are listed in the next
column. All of the debit balances are entered in the first amount
column, and all of the credit balances are entered in the second amount
column. Trial balances do not have to be prepared on accounting stationery,
however. They can be handwritten on plain paper, typed, or prepared on
a computer.
Section 3 Preparing a Trial Balance 177
162-191_CH07_868829.indd 177 4/6/06 5:41:14 PM
Roadrunner Delivery Service
Trial Balance
October 31, 20--
101 Cash in Bank 21 1 2 5 00
105 Accounts Receivable—City News 1 4 5 0 00
110 Accounts Receivable—Green Company
115 Computer Equipment 3 0 0 0 00
120 Office Equipment 2 0 0 00
125 Delivery Equipment 12 0 0 0 00
201 Accounts Payable—Beacon Advertising 7 5 00
205 Accounts Payable—North Shore Auto 11 6 5 0 00
301 Maria Sanchez, Capital 25 4 0 0 00
302 Maria Sanchez, Withdrawals 5 0 0 00
303 Income Summary
401 Delivery Revenue 2 6 5 0 00
501 Advertising Expense 75 00
505 Maintenance Expense 600 00
510 Rent Expense 700 00
515 Utilities Expense 125 00
Totals 39 7 7 5 00 39 7 7 5 00
Figure 7–10 Trial Balance
Finding and Correcting Errors
What Do You Do if You Are Out of Balance?
Anyone who works in accounting understands the saying, “To err is
human . . .” If the debits do not equal the credits, you need to find the errors
and correct them.
Finding Errors
Most trial balance errors can be located easily and quickly. When total
debits do not equal total credits, follow these steps:
1. Add the debit and credit columns again. You may have added one
or both of the columns incorrectly.
2. Find the difference between the debit and credit columns. If this
amount is 10, 100, 1,000, and so on, you probably made an addition
error. Suppose, for example, you have total debits of $35,245 and
total credits of $35,345. The difference is $100, which indicates an
AS addition error is likely. Add the columns again to find the error.
YOU READ 3. Check if the amount you are out of balance is evenly divisible by 9.
It’s Not What It For example, suppose the difference between the debits and credits
Seems is $27. That amount is evenly divisible by 9 (27 9 3). If the
Slide When you think difference is evenly divisible by 9, you may have a transposition
of the word slide, error or a slide error. A transposition error occurs when two digits
you might think of within an amount are accidentally reversed, or transposed. For
playground equipment. example, the amount $325 may have been written as $352.
In accounting a slide A slide error occurs when a decimal point is moved by mistake.
error is a number with If you write $1,800 as either $180 or $18,000, you made a slide error.
the decimal point in the To find a transposition error or a slide error, check the trial
wrong place. balance amounts against the general ledger account balances to
make sure you copied the balances correctly.
178 Chapter 7 Posting Journal Entries to General Ledger Accounts
162-191_CH07_868829.indd 178 9/16/05 5:56:12 PM
4. Make sure that you included all general ledger accounts in
the trial balance. Look in the general ledger for an account
balance equal to the amount you are out of balance. For
example, if the difference between total debits and credits
is $725, look in the general ledger for an account with a
balance of $725.
5. One of the account balances could have been recorded in
the wrong column. That is, a debit was entered in the credit
column or a credit was entered in the debit column. To find
out if this happened, divide the out-of-balance amount by
2 and check whether the result matches the balance of an
account. For example, suppose that the difference between
the two columns is $300; $300 divided by 2 is $150. Look in
the debit and credit columns for an account balance of $150.
Then check to see if the $150 is entered in the wrong column.
6. If you still have not found the error, recompute the balance in each
ledger account. You may have an addition or subtraction error on a
ledger account form.
7. Finally, check the general ledger accounts to verify that the correct
amounts are posted from the journal entries. Also, check to make
sure that debit amounts are posted to the debit column and credit
amounts are posted to the credit column.
Correcting Entries
When mistakes are made in accounting, one rule applies: Never erase an
error. The method for correcting an error depends on when and where the
error is found. There are three types of errors:
• Error in a journal entry that has not been posted.
• Error in posting to the ledger when the journal entry is correct.
• Error in a journal entry that has been posted.
In Chapter 6 you learned how to handle the first situation. When an
error in a journal entry is discovered before posting, you draw a single line
through the incorrect item in the journal and write the correction directly
above it.
If the journal entry is correct but is posted incorrectly to the ledger, you
draw a single line through the incorrect item in the ledger and write the
correction directly above it.
When an error in a journal entry is discovered after posting, make
a correcting entry to fix the error.
On November 15 the accountant for Roadrunner found an error in a
journal entry made on November 2. A $100 check to pay the electricity bill
was journalized and posted to the Maintenance Expense account by mis-
take. The original journal entry is shown in the following T accounts.
Maintenance Expense Cash in Bank
Debit Credit Debit Credit
100 100
Section 3 Preparing a Trial Balance 179
162-191_CH07_868829.indd 179 4/6/06 5:41:17 PM
The following T accounts show how the transaction should have been
recorded.
Utilities Expense Cash in Bank
Debit Credit Debit Credit
100 100
As you can see, the $100 credit to Cash in Bank is correct. The error is
in the debit part of the November 2 transaction. Maintenance Expense is
incorrectly debited for $100. To correct the error, Maintenance Expense is
credited for $100 and Utilities Expense is debited for $100.
The accountant wrote Memorandum 70 to notify the accounting clerk
of the mistake. The correcting entry, recorded in the general journal, is
shown in Figure 7–11.
GENERAL JOURNAL PAGE 3
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Nov. 15 Utilities Expense 1 0 0 00 2
3 Maintenance Expense 1 0 0 00 3
4 Memorandum 70 4
5 5
Figure 7–11 Correcting Entry Posting a correcting entry is similar to any other posting. In the
Description column of the ledger accounts, however, the words Correcting
Entry are written. Figure 7–12 shows how the correcting entry is posted to
the Maintenance Expense and Utilities Expense accounts.
ACCOUNT Maintenance Expense ACCOUNT NO. 505
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Oct. 29 G1 6 0 0 00
Nov. 2 G2 1 0 0 00 7 0 0 00
15 Correcting Entry G3 1 0 0 00 6 0 0 00
ACCOUNT Utilities Expense ACCOUNT NO. 515
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Oct. 28 G1 1 2 5 00 1 2 5 00
Nov. 15 Correcting Entry G3 1 0 0 00 2 2 5 00
Figure 7–12 Posting of Correcting Entry
180 Chapter 7 Posting Journal Entries to General Ledger Accounts
162-191_CH07_868829.indd 180 9/16/05 5:56:25 PM
SECTION 3 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Create a chart like this one to 7HERE %RROR 7AS &OUND 7HEN %RROR 7AS &OUND (OW TO #ORRECT THE %RROR
show how to correct errors in
*OURNAL "EFORE 0OSTING
three situations.
,EDGER !FTER 0OSTING
*OURNAL !FTER 0OSTING
Do the Math
1. Compare the numbers in Column 1 to those in Column 2. Find any transposition, slide,
or omission errors. Identify the type of error for each line.
2. Using a calculator or adding
Column 1 Column 2
machine, total Column 1.
Correct any errors in Column $18.00 $180.00
2, and then total Column 2. $15,000 $1,500
Do the totals of Columns 1 $222.52 $222.25
and 2 match? $187,235,499.05 $187,235,499.50
$47,988 $47,988
$578,334.99 $5,778,334.99
Problem 7–3 Analyzing FUUNNTTIM
IMEE MEMORANDUM 47
a Source A M U S E M E NT A RC A D E
Document TO:
FROM:
Accounting Clerk
Dan Vonderhaar
DATE: May 20, 20--
Instructions Analyze the transaction that SUBJECT: Correction of error
is described in Memorandum 47, and then On May 10, we purchased an office copier for $1,500. I noticed in the
general journal that the entry was recorded and posted to the Computer
record and post the required correcting Equipment account. Please record the necessary entry to correct this error.
entry in your working papers.
Problem 7–4 Recording and Posting a Correcting Entry
Instructions On July 7 Video Connection’s VIDEO MEMORANDUM 13
accounting supervisor discovered that a July Connection
3 transaction had been recorded incorrectly. TO: Accounting Clerk
The transaction, involving the purchase FROM: Accounting Manager
DATE: July 7, 20--
of advertising in the local newspaper with SUBJECT: Correction of error
a $300 check, was incorrectly journalized On July 3, we paid $300 for advertising in the Daily News Record that was
incorrectly journalized and posted to the Rent Expense account. Please
and posted to the Rent Expense account. record the necessary entry to correct this error.
In your working papers, record and post
the correcting entry using Memorandum
13 as the source document.
Section 3 Preparing a Trial Balance 181
162-191_CH07_868829.indd 181 9/16/05 5:56:30 PM
CH A P T ER 7 Summary
Key Concepts
1. Posting, which is the fourth step in the accounting cycle, is the process of transferring
information from a journal to specific ledger accounts. The general ledger is a permanent record
organized by account number. In a manual accounting system, information about specific
accounts is recorded in ledger account forms. In a computerized accounting system, information
about accounts is kept in a group of electronic files.
The purpose of posting is to show the impact of business transactions on the individual
accounts. The steps for posting from the general journal to the general ledger are described in
the following illustration.
2. Post general journal entries by following these steps:
GENERAL JOURNAL PAGE 1
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Oct. 1 Cash in Bank 101 25 0 0 0 00 2
3 Maria Sanchez, Capital 301 25 0 0 0 00 3 6 Enter the account
4 Memorandum 1 4
number in the
general journal
5 5
Post. Ref. column
1 Enter date of the 3 Enter journal letter 5 Compute the new
journal entry and page number in account balance
2 Description column Post. Ref. column 4 Enter the debit
is usually blank amount
ACCOUNT Cash in Bank ACCOUNT NO. 101
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Oct. 1 G1 25 0 0 0 00 25 0 0 0 00
7 Repeat steps 1–6 for the
credit part of journal entry
ACCOUNT Maria Sanchez, Capital ACCOUNT NO. 301
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Oct. 1 G1 25 0 0 0 00 25 0 0 0 00
182 Chapter 7 Summary
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Summary CHAPT E R 7
3. After posting has been completed, a trial balance is prepared to prove the ledger. This is the fifth
step in the accounting cycle. Proving the ledger is making sure that total debits equal total credits.
4. If total debits and total credits are not equal, you must locate and correct the errors. The
following trial balance errors are the most common:
• addition and subtraction errors
• transpositions
• slides
• omissions
• incorrect debiting or crediting
5. The method for correcting an error depends on when and where the error is found:
• If the journal entry is wrong and has not yet been posted, draw a line through the incorrect
item and write the correct information directly above it.
• If the journal entry is correct but the error occurred in posting, draw a line through the
incorrect item in the ledger and write the correct information directly above it.
• If the journal entry is wrong and has already been posted, make a correcting entry. The
correcting entry is posted to the general ledger. It is similar to any other posting except that
it includes the words Correcting Entry in the Description column.
Key Terms
correcting entry (p. 179)
general ledger (p. 164)
ledger account forms (p. 165)
posting (p. 164)
proving the ledger (p. 177)
slide error (p. 178)
transposition error (p. 178)
trial balance (p. 177)
Chapter 7 Summary 183
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C H A P T ER 7 Review and Activities
AFTER
YOU READ
Check Your Understanding
1. Steps in the Posting Process
a. What six steps are required to open a general ledger account?
b. List the steps in the posting process.
2. Posting General Journal Entries
a. What information is entered in the Posting Reference (Post. Ref.) column of the ledger
account? Give an example.
b. What information is entered in the Posting Reference (Post. Ref.) column of the general
journal entry? Give an example.
3. Trial Balance
a. What information does a trial balance contain?
b. What is the purpose of a trial balance?
4. Trial Balance Errors
a. What steps do you perform to locate trial balance errors?
b. Distinguish between a slide error and a transposition error and give an example of each.
5. Correcting Entries
a. What is the basic rule concerning mistakes in accounting?
b. How do you correct an error in a journal entry that has already been posted?
Apply Key Terms
As a junior accounting clerk for Action
Sports Outfitters, you are being evaluated for
a raise. Your boss wants to see how well you
understand basic accounting terminology.
He asks you to write a sentence for each
of the following terms, showing how you
would use each term in connection with
Action Sports Outfitters.
correcting entry proving the ledger
general ledger slide error
ledger account forms transposition error
posting trial balance
184 Chapter 7 Review and Activities
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Computerized Accounting CHAPT E R 7
Posting to the General Ledger
Making the Transition from a Manual to a Computerized System
Task Manual Methods Computerized Methods
Posting to the • Transfer the details of each journal • After each journal entry is entered,
General Ledger entry to individual ledger accounts. amounts are posted automatically into
• Calculate the new account balance for the general ledger.
each ledger account. • New account balances are calculated
for you.
Q&A
Peachtree Question Answer
How do I post general • After entering a journal entry, click Save.
journal transactions?
What if I find an error Changes to journal entries can be made before or after the entry has been posted.
in my journal entry 1. From the General Journal Entry window, drop down the Edit menu. Select Edit
after it has been posted? Record.
2. Select the entry you want to change.
3. Make the correction.
4. Click Save, and then click Close.
QuickBooks Q & A
QuickBooks Question Answer
How do I post general • After entering a journal entry, click Save & Close.
journal transactions?
What if I find an error Changes to journal entries can be made before or after the entry has been posted.
in my journal entry 1. In the Make General Journal Entries window, click the Previous or Next
after it has been posted? buttons until you locate the entry to be changed.
2. Make the correction.
3. Click Save & Close.
For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers.
Chapter 7 Computerized Accounting 185
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C H A P T ER 7 Problems
Complete problems using: Manual Glencoe Peachtree Complete QuickBooks
OR OR
Working Papers Accounting Software Templates
Problem 7–5 Posting General Journal
SMART GUIDE Transactions
Step–by–Step Instructions: The accounts used by Wilderness Rentals have been opened and are
Problem 7–5 included in the working papers accompanying this textbook. The general
1. Select the problem set journal transactions for March of the current year are also included.
for Wilderness Rentals
(Prob. 7–5). Instructions Post the transactions recorded on page 1 of the general
2. Rename the company journal to the accounts in the general ledger.
and set the system date.
3. Print a General Ledger Analyze Identify the account with the highest debit balance.
report.
4. Complete the Analyze
activity.
5. End the session.
Problem 7–6 Preparing a Trial Balance
QuickBooks The ledger accounts for Hot Suds Car Wash are shown in your working
PROBLEM GUIDE papers.
Step–by–Step Instructions: Instructions Prepare a trial balance as of March 31 of the current year.
Problem 7–5
Analyze Identify the account with the highest credit balance.
1. Restore the Problem
7-5.QBB file.
2. Print a General Ledger
report.
3. Complete the Analyze
activity.
Problem 7–7 Journalizing and Posting
4. Back up your work. Business Transactions
A partial chart of accounts for Kits & Pups Grooming follows.
General Ledger
SMART GUIDE 101 Cash in Bank 301 Abe Shultz, Capital
Step–by–Step Instructions: 105 Accts. Rec.—J. Alvarez 305 Abe Shultz, Withdrawals
Problem 7–6 120 Grooming Supplies 401 Boarding Revenue
1. Select the problem set 130 Office Furniture 405 Grooming Revenue
for Hot Suds Car Wash 140 Grooming Equipment 525 Salaries Expense
(Prob. 7–6). 205 Accts. Pay.—Dogs & Cats Inc.
2. Rename the company
and set the system date. Instructions
3. Print a General Ledger
Trial Balance report. 1. In your working papers, open an account in the general ledger for each
4. Complete the Analyze of these accounts.
activity.
5. End the session.
2. Record the March transactions on page 1 of the general journal.
3. Post each journal entry to the appropriate ledger account.
4. Prove the ledger by preparing a trial balance.
Date Transactions
Mar 1 Abe Shultz invested $5,000 in the business, Memorandum 51.
3 Abe Shultz transferred a desk and chairs valued at $1,200
to the business, Memorandum 52. CONTINUE
186 Chapter 7 Problems
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Problems CHAPT E R 7
Date Transactions QuickBooks
Mar. 5 Issued Check 551 for $300 for grooming supplies. PROBLEM GUIDE
7 Bought grooming equipment on account for $1,800 from Dogs
Step–by–Step Instructions:
& Cats Inc., Invoice DC201. Problem 7–6
9 Groomed Juan Alvarez’s show dogs on account, $400, Sales
1. Restore the Problem
Invoice 350. 7-6.QBB file.
12 Paid Dogs & Cats Inc. $900 on account, Check 552. 2. Print a Trial Balance
15 Issued Check 553 for $500 to pay the office secretary’s salary. report.
3. Complete the Analyze
18 Abe Shultz withdrew $1,000 cash from the business, activity.
Check 554. 4. Back up your work.
20 Deposited $1,400 received from clients for boarding their pets,
Receipts 477–480.
24 Wrote Check 555 for $900 to Dogs & Cats Inc. to apply
on account. SMART GUIDE
26 Received a check for $400 from Juan Alvarez on account, Step–by–Step Instructions:
Receipt 481. Problem 7–7
1. Select the problem
Analyze Identify the temporary accounts. set for Kits & Pups
Grooming (Prob. 7–7).
2. Rename the company
and set the system date.
3. Enter all of the general
Problem 7–8 Journalizing and Posting journal transactions.
4. Print a General Journal
Business Transactions report.
5. Proof your work.
The chart of accounts for Outback Guide Service follows.
6. Print a General Ledger
report and a General
General Ledger
Ledger Trial Balance
101 Cash in Bank 301 Juanita Ortega, Capital report.
115 Accts. Rec.—Podaski 302 Juanita Ortega, Withdrawals 7. Complete the Analyze
Systems Inc. 401 Guide Service Revenue activity.
140 Computer Equipment 501 Advertising Expense 8. End the session.
145 Hiking Equipment
150 Rafting Equipment QuickBooks
205 Accts. Pay.—Peak Equipment Inc. PROBLEM GUIDE
207 Accts. Pay.—Premier Processors
Step–by–Step Instructions:
Instructions Problem 7–7
1. In your working papers, open an account in the general ledger for each 1. Restore the Problem
7-7.QBB file.
account in the chart of accounts.
2. Enter all of the general
2. Record the following transactions on page 1 of the general journal. journal transactions.
3. Post each journal entry to the appropriate accounts in the ledger. 3. Print a Journal report.
4. Proof your work.
4. Prove the ledger by preparing a trial balance. 5. Print a General Ledger
Date Transactions report and a Trial
Balance report.
Mar. 1 Invested $20,000 in cash and transferred rafting equipment 6. Complete the Analyze
valued at $5,000 to the business, Memorandum 35. activity.
7. Back up your work.
3 Purchased $600 in hiking equipment on account from Peak
Equipment Inc., Invoice 101.
CONTINUE
Chapter 7 Problems 187
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C H A P T ER 7 Problems
Date Transactions
Mar. 5 Bought a $2,800 computer from Premier Processors and agreed
SOURCE DOCUMENT to pay for it within 60 days, Invoice 616.
PROBLEM 7 Deposited $700 cash received from clients, Receipts 310–315.
Problem 7–8
9 Paid $400 to the Daily Courier for an ad, Check 652.
Use the source documents
12 Sent a bill for $900 to Podaski Systems Inc. for conducting a
in your working papers to group rafting trip for them, Sales Invoice 352.
complete this problem. 15 Juanita Ortega wrote a check for $800 for personal use,
Check 653.
18 Paid Premier Processors $1,400 to apply on account,
Check 654.
SMART GUIDE
22 Received $900 from Podaski Systems Inc. in full payment for
Step–by–Step Instructions: the amount owed, Receipt 316.
Problem 7–8
27 Bought a $500 television ad with LIVE TV, Check 655.
1. Select the problem
28 Paid Peak Equipment Inc. $600 by writing Check 656.
set for Outback Guide
Service (Prob. 7–8).
2. Rename the company Analyze Calculate the total change in accounts payable.
and set the system date.
3. Enter all of the general
journal transactions.
4. Print a General Journal
report.
5. Proof your work. CHALLENGE Problem 7–9 Recording and Posting
6. Print a General Ledger PROBLEM
report and a General Correcting Entries
Ledger Trial Balance An auditor reviewed the accounting records of Showbiz Video. The auditor
report.
7. Complete the Analyze wrote a list of transactions, outlined below, describing the errors discovered
activity. in the March records. The general journal for March and a portion of the
8. End the session. general ledger are included in your working papers.
Instructions
1. Record correcting entries on general journal page 22. Use March 31 as
SMART GUIDE the date and Memorandum 50 as the source document for all correcting
Step–by–Step Instructions: entries.
Problem 7–9 2. Some errors will not require correcting entries but will require a general
1. Select the problem ledger correction. Make the appropriate general ledger corrections.
set for Showbiz Video
3. Post all correcting entries to the general ledger accounts.
(Prob. 7–9).
2. Rename the company Date Transactions
and set the system date.
3. Correct the general Mar. 3 The $125 purchase was for office supplies.
journal entries based on 7 A $200 payment to a creditor, Broad Street Office Supply, was
the auditor’s report. not posted to the account.
4. Print a General Journal
report and a General 13 Greg Failla withdrew $1,200 from the business for personal use.
Ledger report. 17 Cash totaling $2,000 was received for video rentals.
5. Proof your work. 19 A $75 receipt from Shannon Flannery was posted as $57.
6. Complete the Analyze
activity. 27 Greg Failla invested an additional $3,000 in the business.
7. End the session. 29 The revenue of $1,000 was for video rentals.
Analyze Compute the amount that Greg Failla, Capital was overstated
or understated before the correcting entries were posted.
188 Chapter 7 Problems
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Winning Competitive Events CHAPTER 7
Practice your test-taking skills! The questions on this page are reprinted with permission
from national organizations:
• Future Business Leaders of America
• Business Professionals of America
Use a separate sheet of paper to record your answers.
Future Business Leaders of America
MULTIPLE CHOICE
1. An account balance is
a. the total of the credit side of the account.
b. the total of the debit side of the account.
c. the difference between the increases and decreases recorded in the account.
d. Assets = Liabilities + Owner’s equity.
e. unchanged by posting debits and credits to the account.
2. An error in posting may cause
a. income to be overstated or understated on the income statement.
b. a business to pay too much to a vendor.
c. cash on hand to be less than the balance in the cash account.
d. all of the above.
3. When preparing a trial balance, which of the following would not be considered a
procedure?
a. Check to see if both columns equal.
b. Double rule both columns.
c. Write the general ledger account names in the work sheet account name
column.
d. All of these are correct procedures.
e. None of these answers.
Business Professionals of America
MULTIPLE CHOICE
4. When posting to the general ledger accounts, the information in the Post. Ref.
Column of each ledger account refers to
a. the transaction’s source document.
b. the account number.
c. the journal and page number.
d. the date.
5. The process of transferring information from
the journal to the individual general
ledger accounts is called Need More Help?
a. journalizing
Go to glencoeaccounting.glencoe.com and
b. carrying forward click on Student Center. Click on Winning
c. transferring Competitive Events and select Chapter 7.
d. posting • Practice Questions and Test-Taking Tips
• Concept Capsules and Terminology
glencoeaccounting.glencoe.com Chapter 7 Winning Competitive Events 189
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C H A P T ER 7 Real-World Applications and Connections
Critical The General Ledger and the Trial Balance
Thinking 1. What is the purpose of each amount column in the four-column ledger
account form?
2. Describe how correcting an error discovered after a transaction is posted is
different from correcting an error before it is posted.
3. In your trial balance, the debits equal $18,000 and the credits equal $18,810.
What are the most likely reasons for the difference?
4. Read the answer to “How do I post general journal transactions?” for
Peachtree or QuickBooks on page 185. Identify the step(s) of the accounting
cycle described in the answer.
5. Assume that you started a service business by depositing cash into a business
checking account, purchasing various assets, and incurring a number of
expenses. You have commitments from customers and you will start earning
revenue next week. Develop a system for keeping accounting records.
6. What if your trial balance were out of balance by a small amount, for
example by $8.39? Is it worthwhile to find the reason for differences? Why or
why not?
CASE Service Business: Accounting Services
STUDY Joel Rivlin studied accounting in college and then worked as an accountant for
a local real estate company. After becoming a CPA, Joel decided to start his own
company, Joel Rivlin, CPA.
Robert’s Excavating Services came to Joel with a problem. The company’s trial
balance shows total debits of $76,240 and total credits of $75,090. The owner
knows that clients paid for services worth at least $2,500 during the month, but the
Service Revenue account balance is only $800. The owner also wrote a check for
$550 for advertising, but the Advertising Expense account shows a zero balance.
INSTRUCTIONS
1. Describe what Joel should do to find the problems.
2. Suggest probable causes for the trial balance being out of balance.
a
mattoefr ETHICS Meeting a Deadline
Imagine that you are an accounting clerk for Ace Hardware. The store manager
has asked you to prepare the trial balance. The totals on the trial balance are not
equal and you cannot find the error. You realize that the trial balance is due at
the end of the day. You are frustrated and consider changing one of the account
balances just to get the trial balance to balance.
ETHICAL DECISION MAKING
1. What are the ethical issues? 4. How do the alternatives affect the
2. What are the alternatives? parties?
3. Who are the affected parties? 5. What would you do?
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Real-World Applications and Connections CHAPT E R 7
$ )) ))
Communicating
Teaching the Posting Process
ACCOUNTING You have been asked to teach new accounting clerks how to post business
transactions. Create a written step-by-step guide to give to clerks on their first day
on the job. Create an imaginary business transaction to illustrate the process.
Skills Beyond Interpreting and Communicating Information
NUMBERS Every worker must learn how to interpret information and communicate
effectively with co-workers, customers, and superiors.
ON THE JOB
As an accounting clerk for New Wave Inc., a surfboard manufacturer, one of your
duties is to audit the accounting records and make the necessary corrections.
Former employees did not always maintain the records accurately. The owner,
Ron Lee, has asked you to provide written explanations for each error discovered
in your audit.
INSTRUCTIONS
1. During an audit you discover a transposition error. An invoice for $510.00
payable to Marketing Pros was recorded and posted as $150.00. How do you
correct this error?
2. Using word processing software, write a memo to Mr. Lee explaining how
you corrected the error.
INTERNATIONAL English: The Link Language
If business people from Sweden and Japan were conducting business, they would
Accounting probably communicate in English—a language that both are likely to speak and
understand. In international business, English is known as the link language.
Although English is the third-most spoken native language in the world, it is the
most widely learned second language. Approximately 375 million people speak
English as a second language. The next time you turn on your computer, consider
that more than 80 percent of the information stored in the world’s computers is
in English.
INSTRUCTIONS Justify why you think English is or is not a good choice for an
international business “link” language.
Making It
Your Personal Balances
Personal Knowing how to find accounting errors can help you in your personal life.
Personal records that should be checked for accuracy include statements for
bank accounts and credit cards; catalog invoices; and bills for medical services,
insurance, and utilities. Verify all invoices before paying them.
PERSONAL FINANCE ACTIVITY Assume that you just received a statement from
your credit card company. How would you go about checking its accuracy? List
the items you would verify.
PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and
click on Student Center. Click on Making It Personal and select Chapter 7.
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CHAPTER 8 The Six-Column
Work Sheet
BEFORE
YOU READ
What You’ll Learn Predict
1. Explain the purpose of the 1. What does the chapter title tell you?
work sheet. 2. What do you already know about this subject from personal experience?
3. What have you learned about this in the earlier chapters?
2. Describe the parts of a
six-column work sheet. 4. What gaps exist in your knowledge of this subject?
3. Prepare a six-column work
sheet.
4. Calculate net income and
Exploring the Real World of Business
net loss.
SUMMARIZING RESULTS
5. Define the accounting terms
introduced in this chapter. American Express Company
Why It’s Important “Don’t leave home without it.” For decades, people and
businesses worldwide have followed the ad slogan’s advice
The work sheet is the tool
▲
and used their American Express card for purchases. The
used to complete the final
steps of the accounting cycle. American Express Company, originally founded as a delivery
service in 1850, is also the world’s top travel agency.
American Express would not want to leave home without
its chief executive officer, Kenneth Chenault. Described as
a tough-minded yet warm person, this CEO gets results. His
leadership during difficult times enabled the company to not
only survive, but thrive.
The company’s expenses include advertising, promotions,
and salaries. Commissions from retailers provide large
revenues. Accountants at American Express use tools like
work sheets to summarize revenues and expenses.
What Do You Think?
Why do you think summarizing expenses and revenues
might help manage a business like American Express?
194 Chapter 8 The Six-Column Work Sheet
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Working in the Real World
APPLYING YOUR ACCOUNTING KNOWLEDGE
Personal Connection
When you prepare to write a research paper, 1. How might your ability to organize
you probably use note cards, word processing information be valuable to your employer?
software, or a database program to collect and 2. Why is it important for financial and other
organize information. You may also write a information to be organized in a certain way?
rough draft of your paper, further organizing
the information. In accounting a work sheet is Online Connection
a tool used to collect and to organize financial Go to glencoeaccounting.glencoe.com and click
information. You will learn how to create a work on Student Center. Click on Working in the
sheet in this chapter. Real World and select Chapter 8 to learn more
about the real-world workplace.
glencoeaccounting.glencoe.com 195
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SECTION 1 Preparing the Work Sheet
As you learned in Chapter 6, the length of an
BEFORE
YOU READ accounting period can vary. The maximum period cov-
ered by the accounting cycle is one year. The first five
steps of the accounting cycle are performed frequently
Main Idea during the cycle. The last four steps—preparing a work
The work sheet organizes general ledger account
sheet, preparing financial statements, journalizing and
information for the financial statements.
posting closing entries, and preparing a post-closing
Read to Learn… trial balance—are performed at the end of the account-
➤ the purpose of a work sheet. (p. 197) ing period. Look at Figure 8–1. In this chapter you will
➤ the sections of a work sheet. (p. 197) learn how to prepare a work sheet, the sixth step of
the accounting cycle. With this step, businesses like
Key Terms your local Midas Muffler shop or a Nike Outlet collect
work sheet
information from their ledger accounts and record this
ruling
information on a single form.
Analyze each Journalize
transaction each transaction
Collect and verify Post to
ACCOUNT
source documents GENERAL
JOURNAL the ledger
DEBIT CREDIT
INVOICE ACCOUNT
3
DEBIT CREDIT
2
RECEIPT LEDGER
4
MEMORANDUM
5
9
6
POST-CLOSING TRIAL
8
TRIAL BALANCE BALANCE
GENERAL
7 WORK SHEET
JOURNAL INCOME
STATEMENT
STATEMENT OF
CHANGES IN
OWNER'S EQUITY
Prepare a LEDGER
BALANCE
Prepare a Prepare a
post-closing SHEET work sheet trial balance
trial balance
Journalize and post
closing entries Prepare financial
statements
Figure 8–1 Steps in the Accounting Cycle with Step 6 Highlighted
196 Chapter 8 The Six-Column Work Sheet
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The Sixth Step of the Accounting Cycle:
The Work Sheet
What Is the Purpose of a Work Sheet?
A work sheet is just what its name implies—a working paper used
to collect information from the ledger accounts in one place. Like the T
account, the work sheet is a tool that the accountant uses. With the work
sheet, an accountant gathers all of the information needed to prepare the
financial statements and to complete the other end-of-period activities.
A work sheet may be prepared in pencil on standard multicolumn
accounting paper. The paper comes in several sizes and is usually printed
without column headings. Blank spaces for column headings allow the
accountant to enter the headings needed by a particular business. The work
sheet can also be prepared using computer spreadsheet software.
The Work Sheet Sections
How Is the Work Sheet Organized?
The Roadrunner Delivery Service work sheet, shown in Figure 8–2, has
five sections:
1. the heading
2. the Account Name section
3. the Trial Balance section
4. the Income Statement section
5. the Balance Sheet section
Roadrunner Delivery Service Who?
1 Work Sheet What?
For the Month Ended October 31, 20-- When?
ACCT. TRIAL BALANCE INCOME STATEMENT BALANCE SHEET
NO. ACCOUNT NAME
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
1 1
2 2
3 3
2 3 4 5
The Account Name section includes a column for the account number Figure 8–2 Six-Column
Work Sheet
and a column for the account name. The Trial Balance, Income Statement,
and Balance Sheet sections have Debit and Credit amount columns. The six
amount columns give this work sheet its name: the six-column work sheet.
The Work Sheet Heading
The work sheet heading contains three kinds of information:
1. The name of the business (Who?)
2. The name of the accounting form (What?)
3. The period covered by the work sheet (When?)
Notice how these elements are positioned on the work sheet in Figure
8–2. Follow this format when preparing the heading of any work sheet.
Section 1 Preparing the Work Sheet 197
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Roadrunner Delivery Service
Work Sheet
For the Month Ended October 31, 20--
ACCT. TRIAL BALANCE INCOME STATEMENT BALANCE SHEET
NO. ACCOUNT NAME
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
1 101 Cash in Bank 21 1 2 5 00 1
2 105 Accts. Rec.—City News 1 4 5 0 00 2
3 110 Accts. Rec.—Green Company 3
4 115 Computer Equipment 3 0 0 0 00 4
5 120 Office Equipment 2 0 0 00 5
6 125 Delivery Equipment 12 0 0 0 00 6
7 201 Accts. Pay.—Beacon Advertising 7 5 00 7
8 205 Accts. Pay.—North Shore Auto 11 6 5 0 00 8
9 301 Maria Sanchez, Capital 25 4 0 0 00 9
10 302 Maria Sanchez, Withdrawals 5 0 0 00 10
11 303 Income Summary 11
12 401 Delivery Revenue 2 6 5 0 00 12
13 501 Advertising Expense 7 5 00 13
14 505 Maintenance Expense 6 0 0 00 14
15 510 Rent Expense 7 0 0 00 15
16 515 Utilities Expense 1 2 5 00 16
17 17
Figure 8–3 Work Sheet
with Account Names and Trial The Account Name Section
Balance Amounts Information for the Account Name and Trial Balance sections comes
from the general ledger accounts. In Chapter 7 you prepared a trial balance
by listing the account names and their final balances. A trial balance can
be prepared at any time during the accounting period to prove the general
ledger. When a trial balance is prepared at the end of an accounting period,
though, it is prepared as a part of the work sheet.
Look at the work sheet in Figure 8–3. The account numbers and names
are from Roadrunner’s general ledger and are listed on the work sheet in the
same order that they appear in the general ledger:
• Assets
• Liabilities
• Owner’s Equity
• Revenue
• Expenses
All of the general ledger accounts are listed on the work sheet, even
AS
YOU READ those that have a zero balance. Listing all of the accounts avoids accidentally
omitting an account and ensures that the work sheet contains all accounts
Key Point needed to prepare the financial reports.
The Work Sheet On
the work sheet, enter
The Trial Balance Section
the number, name, and The end-of-period balance in the general ledger for each account is entered
balance of every general in the appropriate amount column of the Trial Balance section. Accounts
ledger account. with debit balances are entered in the Trial Balance Debit column. Accounts
with credit balances are entered in the Trial Balance Credit column.
198 Chapter 8 The Six-Column Work Sheet
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If an account has a zero balance at the end of the period, a line is drawn
AS
in the normal balance column. Notice in Figure 8–3 that a line was drawn in YOU READ
the Trial Balance Debit column for Accounts Receivable—Green Company.
It’s Not What It
Lines were also recorded in the Trial Balance Debit and Credit columns for Seems
Income Summary since this account does not have a normal balance side.
You will learn more about the Income Summary account in Chapter 10. Rule We usually think
of a rule as a law or
Ruling the Trial Balance Section. Ruling means “drawing a
regulation. When we
line.” In accounting a single rule, or line, drawn under a column of amounts
prepare accounting
means that the entries above the rule are ready to be totaled. After all
reports, a rule is a
account names and balances have been entered on the work sheet, a single straight line that we draw
rule is drawn under the last entry and across both amount columns of the on the paper.
Trial Balance section as shown in Figure 8–4. The Debit and Credit columns
are now ready for totaling.
Totaling the Trial Balance Section. If the ledger balances, the
total debits will equal the total credits. Look at Figure 8–4. The totals match,
with each column totaling $39,775. Since total debits equal total credits, a
double rule is drawn across both amount columns just beneath the totals.
This double rule means that the amounts just above it are totals and that
no other entries will be made in the Trial Balance columns.
If the total debits do not equal the total credits, there is an error. Find
and correct the error before completing the work sheet. Procedures for locat-
ing errors are discussed in Chapter 7.
Roadrunner Delivery Service
Work Sheet
For the Month Ended October 31, 20--
ACCT. TRIAL BALANCE INCOME STATEMENT BALANCE SHEET
NO. ACCOUNT NAME
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
1 101 Cash in Bank 21 1 2 5 00 1
2 105 Accts. Rec.—City News 1 4 5 0 00 2
3 110 Accts. Rec.—Green Company 3
4 115 Computer Equipment 3 0 0 0 00 4
5 120 Office Equipment 2 0 0 00 5
6 125 Delivery Equipment 12 0 0 0 00 6
7 201 Accts. Pay.—Beacon Advertising 7 5 00 7
8 205 Accts. Pay.—North Shore Auto 11 6 5 0 00 8
9 301 Maria Sanchez, Capital 25 4 0 0 00 9
10 302 Maria Sanchez, Withdrawals 5 0 0 00 10
11 303 Income Summary 11
12 401 Delivery Revenue 2 6 5 0 00 12
13 501 Advertising Expense 7 5 00 13
14 505 Maintenance Expense 6 0 0 00 14
15 510 Rent Expense 7 0 0 00 15
16 515 Utilities Expense 1 2 5 00 16
17 39 7 7 5 00 39 7 7 5 00 17
18 18
Figure 8–4 Work Sheet with Trial Balance Section Completed
Section 1 Preparing the Work Sheet 199
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SECTION 1 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Create a diagram similar to this )NFORMATION 4RANSFERRED
one. List the information that
is transferred from the general 'ENERAL 7ORK
ledger to the worksheet. Add ,EDGER 3HEET
answer lines as needed.
Do the Math
The columns in the Trial Balance section of the work sheet have different totals:
Debit total $34,800 Credit total $35,600
The accountant discovered that the balance for Advertising Expense had been entered in
the Credit column instead of the Debit column. Calculate the balance for the Advertising
Expense account that should have been entered in the Debit column. What is the new total
of the Debit column and Credit column?
Problem 8–1 Entering Account Balances on the Work Sheet
The following accounts appear on the work sheet for Lee’s Bike Shop.
Store Equipment Scott Lee, Capital Scott Lee, Withdrawals
Rent Expense Advertising Expense Maintenance Expense
Service Fees Revenue Accts. Rec.—John Langer Office Supplies
Accts. Pay.—Rubino Supply
Instructions Use a form similar to the one below in your working papers. Classify each
account and use an “X” to indicate whether the account balance is entered in the Debit or
the Credit column of the Trial Balance section. The first account is completed as an example.
Trial Balance
Account Name Classification
Debit Credit
Store Equipment Asset X
Problem 8–2 Analyzing a Source Document
Instructions Based on the invoice presented Hailey Office Supply INVOICE NO. 220
here, answer the following questions in your
2763 East Meadow Ave.
DATE: June 3, 20--
Richardson, TX 75080
ORDER NO.: PO304
working papers. TO
Garmot Electrical Co.
15638 Lone Star Highway
SHIPPED BY:
TERMS:
Truck
Net 30
Plano, TX 75074
1. Which company shipped the supplies? QTY. ITEM UNIT PRICE TOTAL
2. Which company ordered the supplies? 2
1
Ring Binders, 37546
Bond Paper, 27361
$ 2.94
5.83
$ 5.88
5.83
3. On what date were the supplies received? 2
4
Rotary Cards, 62744
Fine-Tip Markers, 28733
1.75
.84
3.50
3.36
4. What does one box of file folders cost? 4 File Folders, Box 36206 6.23 24.92
$43.49
5. How many ring binders were ordered? REC'D 6/
15/20--
Sales Tax
Total
2.17
$45.66
6. What is the invoice number?
200 Chapter 8 The Six-Column Work Sheet
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SECTION 2 Completing the Work Sheet
In the previous section you learned how to set up the work sheet
BEFORE
and prove the Trial Balance section. In this section you will learn how to YOU READ
extend the account balances and compute net income or net loss.
Main Idea
The Balance Sheet and Income After completing the work
Statement Sections sheet, you will know the net
income or net loss for the
What Are the Balance Sheet and Income Statement? accounting period.
The balance sheet and income statement are financial statements
prepared at the end of the accounting period. The work sheet organizes
Read to Learn…
➤ how amounts are entered
the information for these reports.
in the work sheet sections.
The Balance Sheet Section (p. 201)
➤ how to calculate net
The Balance Sheet section of the work sheet contains the asset, liabil-
income. (p. 203)
ity, and owner’s equity accounts. After proving the Trial Balance section,
➤ how to enter totals.
extend, or transfer, the appropriate amounts to the Balance Sheet section. (p. 205)
To do this, copy the Trial Balance section amounts for the asset, liability, ➤ a summary of steps used
and owner’s equity accounts to the appropriate Balance Sheet amount to prepare a work sheet.
columns. Start with the first account and extend each account balance. (p. 206)
Extend debit amounts to the Balance Sheet Debit column. Extend credit
amounts to the Balance Sheet Credit column. Figure 8–5 on page 202 Key Terms
shows the balances extended to the Balance Sheet section. matching principle
net income
The Income Statement Section net loss
The next step in completing the work sheet is to extend the appro-
priate account balances to the Income Statement section. The Income
Statement section contains the revenue and expense accounts. After trans-
ferring the asset, liability, and owner’s equity account balances to the Bal-
ance Sheet section, extend the revenue and expense account balances to the
Income Statement section. Revenue accounts have a normal credit balance, AS
so extend their balances to the Income Statement Credit column. Since YOU READ
expense accounts have a normal debit balance, extend expense account Compare and
balances to the Debit column of the Income Statement section. Figure 8–6 Contrast
on page 202 shows the amounts in the Debit and Credit columns of the
Income Statement and
Income Statement section.
Balance Sheet Sections
How are the Income
Totaling the Income Statement and Balance
Statement and Balance
Sheet Sections Sheet sections similar?
After all amounts have been extended to the Balance Sheet and Income How are they different?
Statement sections, these sections are totaled. A single rule drawn across
Section 2 Completing the Work Sheet 201
194-217_CH08_868829.indd 201 4/6/06 5:42:36 PM
Roadrunner Delivery Service
Work Sheet
For the Month Ended October 31, 20--
ACCT. TRIAL BALANCE INCOME STATEMENT BALANCE SHEET
NO. ACCOUNT NAME
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
1 101 Cash in Bank 21 1 2 5 00 21 1 2 5 00 1
2 105 Accts. Rec.—City News 1 4 5 0 00 1 4 5 0 00 2
3 110 Accts. Rec.—Green Company 3
4 115 Computer Equipment 3 0 0 0 00 3 0 0 0 00 4
5 120 Office Equipment 2 0 0 00 2 0 0 00 5
6 125 Delivery Equipment 12 0 0 0 00 12 0 0 0 00 6
7 201 Accts. Pay.—Beacon Advertising 7 5 00 7 5 00 7
8 205 Accts. Pay.—North Shore Auto 11 6 5 0 00 11 6 5 0 00 8
9 301 Maria Sanchez, Capital 25 4 0 0 00 25 4 0 0 00 9
10 302 Maria Sanchez, Withdrawals 5 0 0 00 5 0 0 00 10
11 303 Income Summary 11
12 401 Delivery Revenue 2 6 5 0 00 12
13 501 Advertising Expense 7 5 00 13
14 505 Maintenance Expense 6 0 0 00 14
15 510 Rent Expense 7 0 0 00 15
16 515 Utilities Expense 1 2 5 00 16
17 39 7 7 5 00 39 7 7 5 00 17
18 18
Figure 8–5 Work Sheet with Trial Balance Amounts Extended to Balance Sheet Section
Roadrunner Delivery Service
Work Sheet
For the Month Ended October 31, 20--
ACCT. TRIAL BALANCE INCOME STATEMENT BALANCE SHEET
NO. ACCOUNT NAME
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
1 101 Cash in Bank 21 1 2 5 00 21 1 2 5 00 1
2 105 Accts. Rec.—City News 1 4 5 0 00 1 4 5 0 00 2
3 110 Accts. Rec.—Green Company 3
4 115 Computer Equipment 3 0 0 0 00 3 0 0 0 00 4
5 120 Office Equipment 2 0 0 00 2 0 0 00 5
6 125 Delivery Equipment 12 0 0 0 00 12 0 0 0 00 6
7 201 Accts. Pay.—Beacon Advertising 7 5 00 7 5 00 7
8 205 Accts. Pay.—North Shore Auto 11 6 5 0 00 11 6 5 0 00 8
9 301 Maria Sanchez, Capital 25 4 0 0 00 25 4 0 0 00 9
10 302 Maria Sanchez, Withdrawals 5 0 0 00 5 0 0 00 10
11 303 Income Summary 11
12 401 Delivery Revenue 2 6 5 0 00 2 6 5 0 00 12
13 501 Advertising Expense 7 5 00 7 5 00 13
14 505 Maintenance Expense 6 0 0 00 6 0 0 00 14
15 510 Rent Expense 7 0 0 00 7 0 0 00 15
16 515 Utilities Expense 1 2 5 00 1 2 5 00 16
17 39 7 7 5 00 39 7 7 5 00 17
18 18
Figure 8–6 Work Sheet with Trial Balance Amounts Extended to Income Statement Section
202 Chapter 8 The Six-Column Work Sheet
194-217_CH08_868829.indd 202 9/15/05 1:20:51 PM
Roadrunner Delivery Service
Work Sheet
For the Month Ended October 31, 20--
ACCT. TRIAL BALANCE INCOME STATEMENT BALANCE SHEET
NO. ACCOUNT NAME
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
1 101 Cash in Bank 21 1 2 5 00 21 1 2 5 00 1
2 105 Accts. Rec.—City News 1 4 5 0 00 1 4 5 0 00 2
3 110 Accts. Rec.—Green Company 3
4 115 Computer Equipment 3 0 0 0 00 3 0 0 0 00 4
5 120 Office Equipment 2 0 0 00 2 0 0 00 5
6 125 Delivery Equipment 12 0 0 0 00 12 0 0 0 00 6
7 201 Accts. Pay.—Beacon Advertising 7 5 00 7 5 00 7
8 205 Accts. Pay.—North Shore Auto 1 1 6 5 0 00 11 6 5 0 00 8
9 301 Maria Sanchez, Capital 25 400 00 25 4 0 0 00 9
10 302 Maria Sanchez, Withdrawals 5 0 0 00 5 0 0 00 10
11 303 Income Summary 11
12 401 Delivery Revenue 2 650 00 2 6 5 0 00 12
13 501 Advertising Expense 7 5 00 7 5 00 13
14 505 Maintenance Expense 6 0 0 00 6 0 0 00 14
15 510 Rent Expense 7 0 0 00 7 0 0 00 15
16 515 Utilities Expense 1 2 5 00 1 2 5 00 16
17 39 7 7 5 00 3 9 775 0 0 1 5 0 0 00 2 6 5 0 00 38 2 7 5 00 37 1 2 5 00 17
18 18
Figure 8–7 Work Sheet
the four Debit and Credit columns indicates that the columns are ready to
with Income Statement
be added. Unlike the Trial Balance section debit and credit totals, the Debit and Balance Sheet Sections
and Credit column totals in these two sections will not be equal until the Totaled
net income or net loss for the period is added. See Figure 8–7.
Showing Net Income or Net Loss
on the Work Sheet
What Is Meant by Net Income or Net Loss?
The work sheet’s Income Statement section shows the period’s revenue
and expenses. The GAAP matching principle requires matching expenses Connect to…
incurred in an accounting period with the revenue earned in the same LANGUAGE
period. Matching expenses with revenue gives a reliable measure of profit by
showing the dollar value of resources used to produce the revenue. Owners
ARTS
People often think of
and managers use this information to analyze results and make decisions.
accounting as dull and
Showing Net Income on the Work Sheet mechanical. Johann
von Goethe didn’t.
After the Income Statement section columns have been totaled, total The Romantic author
expenses (Debit column total) are subtracted from total revenue (Credit col- most famous for Faust
umn total) to find net income. Net income is the amount of revenue that described Luca Pacioli’s
remains after expenses for the period have been subtracted. Net income is system of accounting
entered as a debit at the bottom of the Income Statement section of the work as “among the finest
sheet. Look at Figure 8–8 on page 204. Roadrunner’s net income is $1,150. inventions of the human
1. Skip a line after the last account and write the words Net Income in mind.”
the Account Name column. A
Section 2 Completing the Work Sheet 203
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Roadrunner Delivery Service
Work Sheet
For the Month Ended October 31, 20--
ACCT. TRIAL BALANCE INCOME STATEMENT BALANCE SHEET
NO. ACCOUNT NAME
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
1 101 Cash in Bank 21 1 2 5 00 21 1 2 5 00 1
2 105 Accts. Rec.—City News 1 4 5 0 00 1 4 5 0 00 2
3 110 Accts. Rec.—Green Company 3
4 115 Computer Equipment 3 0 0 0 00 3 0 0 0 00 4
5 120 Office Equipment 2 0 0 00 2 0 0 00 5
6 125 Delivery Equipment 12 0 0 0 00 12 0 0 0 00 6
7 201 Accts. Pay.—Beacon Advertising 7 5 00 7 5 00 7
8 205 Accts. Pay.—North Shore Auto 11 6 5 0 00 11 6 5 0 00 8
9 301 Maria Sanchez, Capital 25 4 0 0 00 25 4 0 0 00 9
10 302 Maria Sanchez, Withdrawals 5 0 0 00 5 0 0 00 10
11 303 Income Summary 11
12 401 Delivery Revenue 2 6 5 0 00 2 6 5 0 00 12
13 501 Advertising Expense 7 5 00 7 5 00 13
14 505 Maintenance Expense 6 0 0 00 6 0 0 00 14
15 510 Rent Expense 7 0 0 00 7 0 0 00 15
16 515 Utilities Expense 1 2 5 00 1 2 5 00 16
17 39 7 7 5 00 39 7 7 5 00 1 5 0 0 00 2 6 5 0 00 38 2 7 5 00 37 1 2 5 00 17
18 Net Income 1 1 5 0 00 1 1 5 0 00 18
19 19
A B C
Figure 8–8 Partial Work 2. On the same line, enter the net income amount in the Income
Sheet with Net Income Statement Debit column. B
3. On the same line, enter the net income amount in the Balance
Sheet Credit column. C
Why is the net income also shown in the Balance Sheet section of
Figure 8–9 The Effects of the work sheet? Remember, revenue and expense accounts are temporary
Income or Loss on Capital accounts. As you can see in Figure 8–9, revenues increase capital, while
The Effects of Net Income or Net Loss on Capital
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204 Chapter 8 The Six-Column Work Sheet
194-217_CH08_868829.indd 204 9/15/05 1:20:57 PM
expenses decrease capital. Net income, therefore, increases capital since
AS
revenues exceed expenses. YOU READ
During the accounting period, revenue and expense amounts are
In Your Experience
recorded in the temporary accounts (like Delivery Revenue and Utilities
Expense). At the end of the period, net income will be transferred to the Revenue and Expenses
owner’s capital account. Since the capital account is increased by credits, the What types of revenue
amount of the net income is entered in the Credit column of the Balance and expenses would a
person your age have?
Sheet section of the work sheet.
To check the accuracy of the net income amount in the Balance Sheet
section, subtract the total of the Credit column from the total of the Debit
column. If the result does not equal net income, there is an error. Before
continuing, you must find and correct the error. To find the error, check that
the amounts from the Trial Balance section are extended correctly and that
the totals of all columns are added correctly. Figure 8–10 Completed
Work Sheet
Roadrunner Delivery Service
Work Sheet
For the Month Ended October 31, 20--
ACCT. TRIAL BALANCE INCOME STATEMENT BALANCE SHEET
NO. ACCOUNT NAME
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
1 101 Cash in Bank 21 1 2 5 00 21 1 2 5 00 1
2 105 Accts. Receivable—City News 1 4 5 0 00 1 4 5 0 00 2
3 110 Accts. Receivable—Green Company 3
4 115 Computer Equipment 3 0 0 0 00 3 0 0 0 00 4
5 120 Office Equipment 2 0 0 00 2 0 0 00 5
6 125 Delivery Equipment 12 0 0 0 00 12 0 0 0 00 6
7 201 Accts. Payable—Beacon Advertising 7 5 00 7 5 00 7
8 205 Accounts Pay.—North Shore Auto 11 6 5 0 00 11 6 5 0 00 8
9 301 Maria Sanchez, Capital 25 4 0 0 00 25 4 0 0 00 9
10 302 Maria Sanchez, Withdrawals 5 0 0 00 5 0 0 00 10
11 303 Income Summary 11
12 401 Delivery Revenue 2 6 5 0 00 2 6 5 0 00 12
13 501 Advertising Expense 7 5 00 7 5 00 13
14 505 Maintenance Expense 6 0 0 00 6 0 0 00 14
15 510 Rent Expense 7 0 0 00 7 0 0 00 15
16 515 Utilities Expense 1 2 5 00 1 2 5 00 16
17 39 7 7 5 00 39 7 7 5 00 1 5 0 0 00 2 6 5 0 00 38 2 7 5 00 37 1 2 5 00 17
18 Net Income 1 1 5 0 00 1 1 5 0 00
19 2 6 5 0 00 2 6 5 0 00 38 2 7 5 00 38 2 7 5 00
20 20
A BD E F G C
Completing the Work Sheet
The completed work sheet for Roadrunner is shown in Figure 8–10. To
complete the Income Statement and Balance Sheet sections, follow these
steps:
1. On the line under the net income amount, draw a single rule across
the four columns. D
2. In the Income Statement section Debit column, add the net income
amount to the previous total and enter the new total. Bring down
Section 2 Completing the Work Sheet 205
194-217_CH08_868829.indd 205 9/15/05 1:20:58 PM
the total of the Income Statement section Credit column. Total
debits should equal total credits. E
3. In the Balance Sheet section Credit column, add net income to the
previous total and enter the new total. Bring down the total of the
Balance Sheet section Debit column. The total debit amount should
equal the total credit amount. F
4. In the Balance Sheet and Income Statement sections, draw a double
rule under the four column totals. The double rule indicates that
the Debit and Credit columns are equal and that no more amounts
are to be entered in these columns. G
Showing a Net Loss on the Work Sheet
What if total expenses are more than total revenue? When that happens, a
net loss occurs. A net loss decreases owner’s equity. This decrease will
eventually be shown as a debit to the capital account. When a net loss
occurs, the steps to complete the work sheet are the same as described for
Net Income except that the words Net Loss are written in the Account Name
column. The net loss amount is entered in the Credit column of the Income
Statement section and in the Debit column of the Balance Sheet section.
The partial work sheet in Figure 8–11 shows a net loss. Expenses exceed
revenue by $746.
14 501 Maintenance Expense 3 7 5 00 3 7 5 00 14
15 510 Rent Expense 9 4 0 00 9 4 0 00 15
16 515 Utilities Expense 9 7 00 9 7 00 16
17 46 4 9 2 00 46 4 9 2 00 2 5 8 3 00 1 8 3 7 00 27 7 9 1 00 28 5 3 7 00 17
18 Net Loss 7 4 6 00 7 4 6 00 18
19 2 5 8 3 00 2 5 8 3 00 28 5 3 7 00 28 5 3 7 00 19
20 20
A B E F G DC
Figure 8–11 Partial Work
Sheet Showing a Net Loss A Review of the Steps in Preparing a
Six-Column Work Sheet
How Do You Prepare a Work Sheet?
Follow these steps when preparing a six-column work sheet:
1. Write the heading on the work sheet.
2. In the Account Name and Trial Balance sections, enter the account
numbers, names, and balances for all general ledger accounts.
3. Prove the equality of the Trial Balance total debits and total credits.
4. Extend the amounts of the Trial Balance section to the appropriate
columns in the Balance Sheet and Income Statement sections.
5. Total the columns in the Income Statement and Balance Sheet
sections.
6. Determine the amount of the net income or net loss for the period.
7. Enter the amount of the net income or net loss in the appropriate
columns in the Income Statement and Balance Sheet sections.
8. Total and rule the Income Statement and Balance Sheet sections.
206 Chapter 8 The Six-Column Work Sheet
194-217_CH08_868829.indd 206 9/15/05 1:21:00 PM
SECTION 2 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Create a chart like this one. )S THE RESULT A %XTEND TO WHICH
%XTEND TO WHICH
Fill in the blanks to describe 3ITUATION NET INCOME OR COLUMN IN THE )NCOME COLUMN IN THE "ALANCE
how net income and net loss A NET LOSS 3TATEMENT SECTION 3HEET SECTION
are shown on the work sheet. 2EVENUE %XPENSES
2EVENUE %XPENSES
Do the Math
For Art’s Sake is a sole proprietorship that sells artwork. The first two quarterly financial
statements for this year have been grim. Using the revenue and expense information for the
third quarter, calculate the net profit or loss. (Balances of the Accounts Receivable accounts
represent third-quarter revenue.) Compare the third-quarter figure with the figures from the
first and second quarters. What do you predict the future of For Art’s Sake will be?
Third Quarter
Rent Expense $2,000
Utilities Expense 800
Advertising Expense 3,000
Maintenance Expense 1,200
Accounts Receivable—Sammy Wong 500
Accounts Receivable—The Artist Collection 5,525
Accounts Receivable—Vera Samuels 3,200
Second Quarter Net Loss $1,200
First Quarter Net Loss $2,000
Problem 8–3 Extending Amounts Across the Work Sheet
The following accounts have balances and appear in the Account Name section of the work
sheet for Lee’s Bike Shop.
Store Equipment Advertising Expense
Rent Expense Accounts Receivable—John Langer
Service Fees Revenue Scott Lee, Withdrawals
Accounts Payable—Rubino Supply Maintenance Expense
Scott Lee, Capital Office Supplies
Instructions Use a form similar to the one below in your working papers or on a separate
sheet of paper. For the above accounts, enter an “X” in the column where the account
balance is transferred. The first account has been completed as an example.
Income Statement Balance Sheet
Account Name
Debit Credit Debit Credit
Store Equipment X
Section 2 Completing the Work Sheet 207
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CH A P T ER 8 Summary
Key Concepts
1. Preparing a work sheet is the sixth step in the accounting cycle. The purpose of the worksheet
is to gather all the information needed to complete the end-of-period activities. Its heading
contains the following information:
Who? Name of
What? the business
The fiscal period
covered by the When?
work sheet
Name of the
accounting form
2. The six-column work sheet has five sections:
(a) Heading
• Who
• What
• When
(b) Account Name section
• Account number
• Account name
• List all accounts in general ledger order
(c) Trial Balance section
(d) Income Statement section
(e) Balance Sheet section
Three of these sections have amount columns. Each of the following sections has a Debit
column and a Credit column:
• Trial Balance section
• Income Statement section
• Balance Sheet section
3. Use the following steps to prepare a work sheet:
(a) Create a heading.
(b) In the Account Name and Trial Balance sections, enter account numbers, names,
and balances.
(c) Complete the Trial Balance section, making sure that total debits equal total credits.
(d) Extend amounts from the Trial Balance section to the appropriate columns in the Balance
Sheet and Income Statement sections.
(e) Total the columns in the Income Statement and Balance Sheet columns.
208 Chapter 8 Summary
194-217_CH08_868829.indd 208 9/15/05 1:21:04 PM
Summary CHAPT E R 8
(f) Calculate the net income or net loss for the period.
(g) Enter net income or net loss on the worksheet as follows:
Income Statement Balance Sheet
Account Name
Debit Credit Debit Credit
Net Income X X
Income Statement Balance Sheet
Account Name
Debit Credit Debit Credit
Net Loss X X
(h) Total and rule the Income Statement and Balance Sheet sections.
4. The matching principle requires expenses incurred during an accounting period to be matched
with revenues earned in the same period. The result is net income or net loss:
If revenue expenses, then
Revenue
Expenses
Net Income
If revenue expenses, then
Expenses
Revenue
Net Loss
Key Terms
matching principle (p. 203)
net income (p. 203)
net loss (p. 206)
ruling (p. 199)
work sheet (p. 197)
Chapter 8 Summary 209
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C H A P T ER 8 Review and Activities
AFTER
YOU READ
Check Your Understanding
1. Purpose of a Work Sheet
a. Preparing the work sheet is which step of the accounting cycle?
b. What is the purpose of the work sheet?
2. Parts of a Six-Column Work Sheet
a. Name and briefly describe the five sections of a six-column worksheet.
b. List the items that are included in the work sheet heading.
3. Preparing a Six-Column Work Sheet
a. Which section of the work sheet should you complete first?
b. Why are all accounts, including those with zero balances, listed on the work sheet?
4. Net Income and Net Loss
a. Explain how to record net income or net loss on the work sheet.
b. How does net income affect owner’s equity? How does net loss affect owner’s equity?
Apply Key Terms
You just finished the work sheet for the
third quarter and it looks like your company
will make a considerable profit. In the
second quarter, the company had a net loss.
On a separate sheet of paper, write a memo
to your boss, Tonya Newman, asking her to
review your trial balance and work sheet.
Use the terms listed below in your memo.
matching principle ruling
net income work sheet
net loss
210 Chapter 8 Review and Activities
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Computerized Accounting CHAPT E R 8
The Trial Balance
Making the Transition from a Manual to a Computerized System
Task Manual Methods Computerized Methods
Preparing the • After all journal entries have been • Although the Trial Balance is not
trial balance posted and all general ledger balances necessary to check the equality of
have been updated, list account debits and credits since out-of-balance
names and balances on two-column entries cannot be posted, it is one of
accounting stationery. the most commonly used accounting
• List debit balances in one column and statements. It provides a clear list
credit balances in the other. format for reviewing accounts. You can
• Add all debit balances. view and print the Trial Balance from
• Add all credit balances. the Reports menu.
• Compare the totals. If totals are not
in balance, locate and correct any
journalizing or posting errors.
• The trial balance is correct when total
debits equal total credits.
Q&A
Peachtree Question Answer
How do I generate 1. From the Reports menu, select General Ledger.
a trial balance in 2. From the Reports list, select General Ledger Trial Balance.
Peachtree? 3. Click Print.
QuickBooks Q & A
QuickBooks Question Answer
How do I generate 1. From the Reports menu, select Accountant & Taxes.
a trial balance in 2. From the Accountant & Taxes submenu, select Trial Balance.
QuickBooks? 3. Click Print.
For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers.
Chapter 8 Computerized Accounting 211
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C H A P T ER 8 Problems
Complete problems using: Manual Glencoe Peachtree Complete QuickBooks Spreadsheet
Spreadshee
OR OR OR
Working Papers Accounting Software Templates Templates
Problem 8–4 Preparing a Six-Column Work Sheet
SPREADSHEET The ending balances in the general ledger accounts of Wilderness Rentals
SMART GUIDE for the period ended May 31 follow.
Step–by–Step Instructions:
Debit Credit
Problem 8–4
Balances Balances
1. Select the spreadsheet 101 Cash in Bank $5,814
template for Problem
8–4.
105 Accts. Rec.—Helen Katz 717
2. Enter your name and 110 Accts. Rec.—Polk and Co. 590
the date in the spaces 115 Office Supplies 847
provided on the 120 Office Equipment 4,360
template. 125 Camping Equipment 6,130
3. Complete the spread-
sheet using the
201 Accts. Pay.—Adventure Equipment Inc. $ 1,680
instructions in your 203 Accts. Pay.—Digital Tech Computers 3,554
working papers. 205 Accts. Pay.—Greg Mollaro 635
4. Print the spreadsheet 301 Ronald Hicks, Capital 12,760
and proof your work. 305 Ronald Hicks, Withdrawals 1,200
5. Complete the Analyze
activity.
310 Income Summary — —
6. Save your work and 401 Equipment Rental Revenue 9,716
exit the spreadsheet 501 Advertising Expense 1,940
program. 505 Maintenance Expense 1,083
515 Rent Expense 3,500
525 Utilities Expense 2,164
Instructions Prepare a work sheet for the period ended May 31.
1. Write the heading on the work sheet.
2. List all of the accounts in the Account Name and Trial Balance sections.
For each account, include the account number, name, and balance.
3. Total and rule the Trial Balance section. Do total debits equal total
credits? If not, find and correct the problem before continuing.
4. Extend the appropriate amounts to the Balance Sheet section.
5. Extend the appropriate amounts to the Income Statement section.
6. Total the amount columns in the Income Statement and Balance Sheet
sections.
7. Enter the amount of net income or net loss in the appropriate columns
in the Income Statement and Balance Sheet sections.
8. Total and rule the Income Statement and Balance Sheet sections.
Analyze Identify the permanent accounts on the work sheet that have
normal debit balances.
Problem 8–5 Preparing a Six-Column Work Sheet
The general ledger for Hot Suds Car Wash shows the following account
balances on May 31, the end of the period.
CONTINUE
212 Chapter 8 Problems
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Problems CHAPT E R 8
101 Cash in Bank $9,400
105 Accts. Rec.—Linda Brown 429 SMART GUIDE
110 Accts. Rec.—Valley Auto 372
Step–by–Step Instructions:
115 Detailing Supplies 694 Problem 8–5
120 Detergent Supplies 418
1. Select the problem set
125 Office Equipment 15,195 for Hot Suds Car Wash
130 Office Furniture 2,029 (Prob. 8–5).
135 Car Wash Equipment 7,486 2. Rename the company
201 Accts. Pay.—Allen Vacuum Systems 4,346 and set the system date.
205 Accts. Pay.—O’Brian’s Office Supply 2,730 3. Print a General Ledger
Trial Balance.
301 Regina Delgado, Capital 26,530 4. Complete the Analyze
305 Regina Delgado, Withdrawals 2,500 activity.
310 Income Summary 5. End the session.
401 Wash Revenue 7,957 TIP: As a shortcut, you can
405 Wax Revenue 5,329 choose to print the trial
410 Interior Detailing Revenue 2,970 balance from the General
501 Advertising Expense 1,940 Ledger Navigation Aid.
505 Equipment Rental Expense 3,836
510 Maintenance Expense 1,424 QuickBooks
520 Rent Expense 3,500
PROBLEM GUIDE
530 Utilities Expense 639
Step–by–Step Instructions:
Instructions Prepare a work sheet for Hot Suds Car Wash in your working Problem 8–5
papers. 1. Restore the Problem
8-5.QBB file.
Analyze Identify the temporary accounts on the work sheet that have 2. Print a Trial Balance.
normal credit balances. 3. Complete the Analyze
question.
4. Back up your work.
Problem 8–6 Preparing a Six-Column Work Sheet
The account balances in the general ledger of Kits & Pups Grooming at the
end of May are: SMART GUIDE
101 Cash in Bank $11,194 Step–by–Step Instructions:
105 Accts. Rec.—Juan Alvarez 357 Problem 8–6
110 Accts. Rec.—Nathan Carlsbad 547 1. Select the problem
115 Accts. Rec.—Martha Giles 1,450 set for Kits & Pups
120 Grooming Supplies 842 Grooming (Prob. 8–6).
2. Rename the company
125 Office Equipment 4,147 and set the system date.
130 Office Furniture 935 3. Print a General Ledger
135 Computer Equipment 2,200 Trial Balance.
140 Grooming Equipment 1,948 4. Complete the Analyze
145 Kennel Equipment 7,305 activity.
5. End the session.
201 Accts. Pay.—Able Store Equipment 7,945
205 Accts. Pay.—Dogs & Cats Inc. 1,205
207 Accts. Pay.—Pet Gourmet 2,846
301 Abe Shultz, Capital 23,048
305 Abe Shultz, Withdrawals 2,500
310 Income Summary —
CONTINUE
Chapter 8 Problems 213
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C H A P T ER 8 Problems
401 Boarding Revenue 11,596
405 Grooming Revenue 4,496
QuickBooks 501 Advertising Expense 3,675
505 Equipment Repair Expense 932
PROBLEM GUIDE 510 Maintenance Expense 2,658
Step–by–Step Instructions: 520 Rent Expense 7,500
Problem 8–6 530 Utilities Expense 2,946
1. Restore the Problem
8-6.QBB file. Instructions Prepare a work sheet for the month ended May 31 for Kits &
2. Print a Trial Balance. Pups Grooming in your working papers.
3. Complete the Analyze
question. Analyze Compute the total liabilities for Kits & Pups.
4. Back up your work.
Problem 8–7 Preparing a Six-Column Work Sheet
SMART GUIDE The general ledger account balances on May 31 for Outback Guide Service
Step–by–Step Instructions: are:
Problem 8–7
101 Cash in Bank $ 2,834
1. Select the problem 105 Accts. Rec.—Mary Johnson 384
set for Outback Guide
Service (Prob. 8–7).
125 Office Supplies 307
2. Rename the company 130 Office Equipment 5,902
and set the system date. 135 Office Furniture 2,804
3. Print a General Ledger 140 Computer Equipment 3,295
Trial Balance. 145 Hiking Equipment 922
4. Complete the Analyze
activity.
150 Rafting Equipment 8,351
5. End the session. 205 Accts. Pay.—Peak Equipment Inc. 1,204
301 Juanita Ortega, Capital 20,419
SPREADSHEET 302 Juanita Ortega, Withdrawals 1,800
SMART GUIDE 310 Income Summary —
401 Guide Service Revenue 9,179
Step–by–Step Instructions: 501 Advertising Expense 795
Problem 8–8 505 Maintenance Expense 125
1. Select the spreadsheet 515 Rent Expense 2,000
template for Problem 525 Utilities Expense 1,283
8–8.
2. Enter your name and
the date in the spaces
Instructions Prepare a work sheet for Outback Guide Service for the period
provided on the ended May 31 in your working papers.
template.
3. Complete the spread- Analyze Compute the total assets for Outback.
sheet using the
instructions in your
working papers.
4. Print the spreadsheet CHALLENGE Problem 8–8 Completing the
and proof your work. PROBLEM
5. Complete the Analyze Work Sheet
activity. The work sheet for Job Connect appears in your working papers. The
6. Save your work and
exit the spreadsheet
amounts that have been entered are correct. Several amounts, however, are
program. missing from various columns.
Instructions Calculate all missing amounts and complete the work sheet.
Analyze Calculate the owner’s equity. (Hint: Be sure to include the
temporary accounts.)
214 Chapter 8 Problems
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Winning Competitive Events CHAPTER 8
Practice your test-taking skills! The questions on this page are reprinted with permission
from national organizations:
• Future Business Leaders of America
• Business Professionals of America
Use a separate sheet of paper to record your answers.
Future Business Leaders of America
MULTIPLE CHOICE
1. A(n) ________ results when revenue is larger than expenses.
a. debit
b. net income
c. net loss
d. credit
2. The asset, liability, and owner’s equity accounts are extended to the ________ of the
work sheet.
a. Balance Sheet section
b. Income Statement section
c. Retained Earnings statement
d. Trial Balance
3. Revenue and expense accounts are listed in the Trial Balance section of the work
sheet and in the ________ of the work sheet.
a. Retained Earnings statement
b. Balance Sheet section
c. Income Statement section
d. Accounts Payable section
4. The amount of net income for the period is added to the Balance Sheet credit total
because it increases the balance in the ________ account.
a. accounts receivable
b. accounts payable
c. asset
d. capital
Business Professionals of America
MULTIPLE CHOICE
5. A net loss will appear
a. in the debit column of the Income Statement on the work sheet.
b. in the credit column of the Income
Statement on the work sheet.
c. in the debit column of the Trial Need More Help?
Balance.
Go to glencoeaccounting.glencoe.com and
d. on the Post-Closing Trial click on Student Center. Click on Winning
Balance. Competitive Events and select Chapter 8.
• Practice Questions and Test-Taking Tips
• Concept Capsules and Terminology
glencoeaccounting.glencoe.com Chapter 8 Winning Competitive Events 215
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C H A P T ER 8 Real-World Applications and Connections
Critical The Six-Column Work Sheet
Thinking 1. Name the types of accounts whose balances are extended to the Income
Statement section of the work sheet.
2. Explain why the Trial Balance section is completed first.
3. What items do you need to complete the six-column work sheet? Include
office supplies and forms as well as any information that will be needed.
4. Why is the net income amount entered in the Credit column of the Balance
Sheet section? Why is net loss entered in the Debit column?
5. Predict what would happen if a revenue account balance were not extended
to the Income Statement section of the work sheet.
6. What is the value of the matching principle?
CASE Service Business: Advertising Agency
STUDY You work for Creative Advertising as an assistant to the company’s accountant.
You are preparing a work sheet for the month of July. The trial balance totals are
$127,750, and you have extended the account balances to the amount columns
in the Balance Sheet and Income Statement sections. After adding the Balance
Sheet and Income Statement columns and calculating net income, you find that
the totals do not balance.
INSTRUCTIONS
1. List the steps you would take to find the problem.
2. Provide a likely reason to explain why the net income amounts do not match.
a
mattoefr ETHICS Padding Expense Accounts
Imagine that you are employed as an auditor for a public accounting firm like
PricewaterhouseCoopers. You and a co-worker, Mark, have been sent to Chicago
to perform an audit. You have an allowance of $200 a day to cover lodging, meals,
and transportation. At the end of the trip, you are to turn in an expense account
report detailing how you spent the allowance. Mark adds a few dollars to each
of his expenses so he can have some extra cash. You figure that the firm will not
miss a few dollars, so you consider doing the same.
ETHICAL DECISION MAKING
1. What are the ethical issues? 4. How do the alternatives affect the
2. What are the alternatives? parties?
3. Who are the affected parties? 5. What would you do?
$ )) ))
Communicating
Creating a Handout
ACCOUNTING Your accounting firm, AccountFast, volunteered to provide mentors to area
schools for accounting and math programs. As a mentor, you are assigned to work
with three accounting students. Your topic for this week is “Ruling and Totaling
the Trial Balance.” Create a handout to explain and illustrate this topic. Use any
company, accounts, and account balances you wish. Remember, it is helpful to
provide step-by-step instructions.
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Real-World Applications and Connections CHAPT E R 8
Skills Beyond Understanding Organizational Systems
NUMBERS • Can you read and interpret a company’s organizational chart?
• Can you identify who reports to whom?
If you can answer “yes” to these questions, then you can probably work and
operate effectively within an organizational system.
ON THE JOB
Your employer, The Teen Scene, was just bought out by a large, national clothing
chain—Natural Fibers. The buyout has created a huge reorganization.
INSTRUCTIONS
1. The change from a small clothing store to a national chain store has affected
employee morale. What do you think would help build loyalty to Natural
Fibers?
2. How would an organizational chart that depicts who reports to whom help
with the transition?
INTERNATIONAL Time Zones
What time is it now on your watch? What time is it in London or New York?
Accounting Without knowledge of the world’s time zones, the international businessperson
may have difficulty contacting a person at the right place and the right time.
There are 24 time zones in the world, each representing 15 degrees of longitude,
or one hour intervals.
INSTRUCTIONS Imagine that your company has manufacturing locations in
Dublin, Ireland and Denver, Colorado. Managers work from 8:00 a.m. to 3:30
p.m. at both locations. Dublin is 7 hours behind Denver. Schedule a telephone
meeting so that both managers are present. What will you need to consider when
scheduling the meeting?
Making It
Your Savings
Personal A business needs to save for expansion and unexpected expenses. You also need
to save to have money available when you want or need something. Without
savings, both you and a business could have a difficult time.
PERSONAL FINANCE ACTIVITY List some typical cash expenditures a high school
student might have in an average week. Include the amount spent on each item.
Identify the items that could be easily eliminated or reduced. By reducing this
spending, how much money would be saved in one year?
PERSONAL FINANCE ONLINE Go to glencoeaccounting.glencoe.com and click
on Student Center. Click on Making It Personal and select Chapter 8.
glencoeaccounting.glencoe.com Chapter 8 Real-World Applications and Connections 217
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CH A P T ER 9 Financial Statements for
a Sole Proprietorship
BEFORE
YOU READ
What You’ll Learn Predict
1. Explain the purpose of the 1. What does the chapter title tell you?
income statement. 2. What do you already know about this subject from personal experience?
3. What have you learned about this in the earlier chapters?
2. Prepare an income statement.
4. What gaps exist in your knowledge of this subject?
3. Explain the purpose of the
statement of changes in
owner’s equity.
4. Prepare a statement of
Exploring the Real World of Business
changes in owner’s equity.
PREPARING FINANCIAL STATEMENTS
5. Explain the purpose of the
balance sheet. Tapatío Hot Sauce Company
6. Prepare a balance sheet. Not all businesses take off like wildfire. Some begin
modestly, like Tapatío Hot Sauce Company. Jose-Luis
7. Explain the purpose of the
Saavedra Sr. started it in 1971 in a tiny warehouse. He drove
statement of cash flows.
his own van for deliveries to stores and restaurants.
8. Explain ratio analysis and As Tapatío grew, Saavedra enlisted family to help meet the
compute ratios.
increased product demand. His son Jose-Luis Jr., a physician,
9. Define the accounting terms became Tapatío’s general manager. Daughter Dolores uses
introduced in this chapter. her law degree to handle the company’s legal matters, and
Why It’s Important daughter Jacquie runs the office. Today the company owns a
state-of-the-art facility with a fully automated production line.
Financial statements provide
▲
Early on, Tapatío’s revenues were small, and its financial
essential information for
making sound decisions. statements were simple compared to those it prepares now to
reflect the company’s national and international distribution
of its hot sauce.
What Do You Think?
What types of accounts do you think Tapatío used in 1971?
What accounts do you think have been added?
218 Chapter 9 Financial Statements for a Sole Proprietorship
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Working in the Real World
APPLYING YOUR ACCOUNTING KNOWLEDGE
Personal Connection
A sole proprietorship can be a small business 1. In your work location, approximately how
with a few employees or a large business with many people are employed?
thousands of employees. In a small business, 2. If you were an accountant, do you think you
one person may handle the accounting duties. would prefer to work for a large organization
A larger business might have several employees or a small one? Why?
working in an accounting department. Whether
large or small, the preparation of financial Online Connection
statements is an important task. Go to glencoeaccounting.glencoe.com and click
on Student Center. Click on Working in the
Real World and select Chapter 9.
glencoeaccounting.glencoe.com 219
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SECTION 1 The Income Statement
To operate a business profitably, the owner needs to have current
BEFORE
YOU READ financial information. Businesses ranging from an oil company to a dairy
farm must organize financial information to evaluate profits or losses.
Financial statements summarize the changes resulting from business
Main Idea transactions that occur during an accounting period. As you can see in
The income statement
Figure 9–1, preparing financial statements is the seventh step in the
reports the net income
accounting cycle.
or net loss for an
accounting period.
Analyze each Journalize
Read to Collect and verify
transaction each transaction
Post to
Learn… source documents
ACCOUNT
DEBIT CREDIT
GENERAL
JOURNAL the ledger
➤ the four financial INVOICE ACCOUNT
statements prepared
3
DEBIT CREDIT
2
RECEIPT LEDGER
for a business.
4
MEMORANDUM
(p. 220)
➤ how to prepare an 1
income statement.
(p. 221)
5
Key Terms 9
6
POST-CLOSING TRIAL
financial statements
8
TRIAL BALANCE BALANCE
income statement
GENERAL
7 WORK SHEET
JOURNAL INCOME
STATEMENT
STATEMENT OF
CHANGES IN
OWNER'S EQUITY
Prepare a LEDGER
BALANCE
Prepare a Prepare a
post-closing SHEET work sheet trial balance
trial balance
Figure 9–1 The Accounting Journalize and post
Cycle with the Seventh Step closing entries Prepare financial
Highlighted statements
Financial Statements
What Are the Four Financial Statements?
The primary financial statements prepared for a sole proprietorship are
the income statement and the balance sheet. Two other statements, the
statement of changes in owner’s equity and the statement of cash flows, are
also often prepared. The financial statements may be handwritten or typed
but most often are prepared on a computer. With a computerized account-
ing system, the business owner can generate financial statements without
first preparing a work sheet. Let’s learn how to prepare financial statements
for a service business such as Roadrunner Delivery Service.
220 Chapter 9 Financial Statements for a Sole Proprietorship
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The Income Statement AS
YOU READ
What Is the Purpose of the Income Statement?
Key Point
The income statement reports the net income or net loss for a spe-
cific period of time. As you recall from Chapter 8, net income or net loss Income Statement The
is the difference between total revenue and total expenses. For this reason income statement covers
the income statement is sometimes called a profit-and-loss statement or an a specific period of time.
earnings statement.
Income Statement Sections
The income statement contains the following sections:
• the heading
• the revenue for the period
• the expenses for the period
• the net income or net loss for the period
Heading. Like the work sheet heading, the heading of an income
statement has three parts:
1. The name of the business (Who?)
2. The name of the report (What?)
3. The period covered (When?)
The heading for Roadrunner’s income statement is shown in Figure 9–2. ❶ (Who?)
Each line of the heading is centered on the width of the statement. ➋ (What?)
When preparing an ➌ (When?)
income statement heading,
be sure to follow the wording Roadrunner Delivery Service
Income Statement
and capitalization shown in
For the Month Ended October 31, 20--
Figure 9–2. The date line is
especially important because
the reporting period varies
from business to business.
Figure 9–2 The Heading
A business owner uses for an Income Statement
the same accounting periods year after year. This consistency allows the
owner to compare the information from one period to the next.
Revenue Section. After the heading has been completed, enter
the revenue earned for the period. Look at Figure 9–3 on page 222. The
information used to prepare the income statement comes from the Income
Statement section of the work sheet.
Roadrunner’s income statement is prepared on standard accounting sta-
tionery, which has a column for account names and two amount columns.
The first amount column is used to enter the balances of the individual
revenue and expense accounts. The second amount column is used to enter
totals: total revenue, total expenses, and net income (or net loss).
Refer to Figure 9–3 as you read the procedures for preparing an income
statement:
1. Write Revenue: on the first line at the left side of the form. A
2. Enter the revenue account names beginning on the second line,
indented about a half inch from the left edge of the form. B
Section 1 The Income Statement 221
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Roadrunner Delivery Service
Work Sheet
For the Month Ended October 31, 20--
ACCT. TRIAL BALANCE INCOME STATEMENT BALANCE SHEET
NO. ACCOUNT NAME
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
1 101 Cash in Bank 21 1 2 5 00 21 1 2 5 00 1
2 105 Accts. Rec.—City News 1 4 5 0 00 1 4 5 0 00 2
3 110 Accts. Rec.—Green Company 3
4 115 Computer Equipment 3 0 0 0 00 3 0 0 0 00 4
5 120 Office Equipment 2 0 0 00 2 0 0 00 5
6 125 Delivery Equipment 12 0 0 0 00 12 0 0 0 00 6
7 201 Accts. Pay.—Beacon Advertising 7 5 00 7 5 00 7
8 205 Accts. Pay.—North Shore Auto 11 6 5 0 00 11 6 5 0 00 8
9 301 Maria Sanchez, Capital 25 4 0 0 00 25 4 0 0 00 9
10 302 Maria Sanchez, Withdrawals 5 0 0 00 5 0 0 00 10
11 303 Income Summary 11
12 401 Delivery Revenue 2 6 5 0 00 2 6 5 0 00 12
13 501 Advertising Expense 7 5 00 7 5 00 13
14 505 Maintenance Expense 6 0 0 00 6 0 0 00 14
15 510 Rent Expense 7 0 0 00 7 0 0 00 15
16 515 Utilities Expense 1 2 5 00 1 2 5 00 16
17 39 7 7 5 00 39 7 7 5 00 1 5 0 0 00 2 6 5 0 00 38 2 7 5 00 37 1 2 5 00 17
18 Net Income 1 1 5 0 00 1 1 5 0 00 18
19 2 6 5 0 00 2 6 5 0 00 38 2 7 5 00 38 2 7 5 00 19
20 20
Roadrunner Delivery Service
Income Statement
For the Month Ended October 31, 20--
Revenue: A
Delivery Revenue B 2 6 5 0 00 C
Expenses: D
Advertising Expense 75 00
Maintenance Expense 600 00
E E
Rent Expense 700 00
Utilities Expense 125 00
F
Total Expenses G H 1 5 0 0 00
Net Income K J 1 1 5 0 00 I
L
Figure 9–3 Preparing an
Income Statement 3. Enter the balance of each revenue account. Since Roadrunner has
only one revenue account, Delivery Revenue, total revenue is the
same as the balance of the one revenue account. The balance is thus
written in the second, or totals, column. C
Many businesses have more than one source of revenue and thus have
a separate revenue account for each source. For example, a swim club might
have accounts such as Membership Fees and Pool Rental. Figure 9–4 illus-
trates the Revenue section of the income statement for a business with more
than one revenue account. Notice that the words Total Revenue are indented
about one inch from the left edge of the form.
222 Chapter 9 Financial Statements for a Sole Proprietorship
218-247_CH09_868829.indd 222 8/29/05 1:12:34 PM
Expenses Section.
Revenue:
The expenses incurred during
Rental Revenue 11 2 3 0 00
the period are reported next.
Repair Revenue 4 8 5 0 00
The expense account names Total Revenue 16 0 8 0 00
and the balances in the
Income Statement section
of the work sheet are used to Figure 9–4 Income
prepare the Expenses section of the income statement. Refer to Figure 9–3 as Statement with More Than
you read the following instructions: One Revenue Account
1. On the line following the revenue section, write Expenses: at the left
side of the form. D
2. On the following lines, write the names of the expense accounts,
indented half an inch, in the order that they appear on the work
sheet. Since there are several expense accounts, enter the individual
balances in the first amount column. E
3. Draw a single rule under the last expense account balance. F
4. Write the words Total Expenses on the line following the last
expense account name, indented about one inch. G
5. Add the balances for all expense accounts. Write the total expenses
amount in the second amount column, one line below the last
expense account balance. H
Net Income Section. The next step is to enter net income. Net AS
income, remember, occurs when total revenue is more than total expenses. YOU READ
Refer to Figure 9–3 as you read the following instructions for the prepara- In Your Experience
tion of the Net Income section.
Financial Reports What
1. Draw a single rule under the total expenses amount. I kinds of financial reports
2. Subtract the total expenses from the total revenue to find net would a high school
income. Enter the net income in the second amount column under student be familiar with?
the total expenses amount. J
3. On the same line, write Net Income at the left side of the form. K
4. If the amount of net income matches the amount on the work
sheet, draw a double rule under the net income amount. L
Reporting a Revenue:
Net Loss Delivery Revenue 3 1 7 0 00
If total expenses are
Expenses:
more than total revenue, a Advertising Expense 27 5 00
net loss exists. To determine Maintenance Expense 75 0 00
the amount of net loss, sub- Miscellaneous Expense 27 0 00
tract total revenue from Rent Expense 190 0 00
total expenses. Enter the net Utilities Expense 32 5 00
Total Expenses 3 5 2 0 00
loss in the second amount
column under the total Net Loss 3 5 0 00
expenses amount. Write the
words Net Loss on the same
line at the left side of the Figure 9–5 Income Statement Showing a Net Loss
form. Figure 9–5 illustrates
how to report a net loss.
Section 1 The Income Statement 223
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SECTION 1 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Using a diagram like this #REATING AN )NCOME 3TATEMENT
one, summarize the steps for
creating an income statement.
Add answer boxes for steps as
needed.
Do the Math
Earth-Friendly Cleaning Service prepares monthly financial statements. The two revenue
accounts show ending balances of $8,740.00 and $2,080.00. The following expense account
balances also appear in the Income Statement section of this month’s work sheet.
Advertising Expense $3,690.00
Maintenance Expense 2,745.00
Miscellaneous Expense 605.00
Rent Expense 3,400.00
Utility Expense 985.00
Calculate the amount of net income or net loss for the month.
Problem 9–1 Analyzing a Source Document
Instructions Based on the receipt shown here, answer the following questions in your
working papers.
1. What is the name of the business that received the money?
2. How much money was received?
3. Who paid the
money? Stratford Learning Center RECEIPT
243 Eastern Road
4. Why was the money Roxbury, NY 14752
No. 1834
paid? Aug. 21 20 --
5. When was the Sandra Miller
RECEIVED FROM $ 832.00
payment made?
Eight hundred thirty-two and no/100 DOLLARS
6. Who received the
money and made FOR On account
out the receipt?
7. Where is the business Rose Hughes
RECEIVED BY
that received the
money located?
224 Chapter 9 Financial Statements for a Sole Proprietorship
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SECTION 2 The Statement of Changes
in Owner’s Equity
An important concern of a business owner is whether the owner’s
BEFORE
equity has increased or decreased during the period. An increase in YOU READ
owner’s equity means the owner’s claims to the assets of the business
have grown. A decrease means the owner’s claims to the assets of the
Main Idea
business have been reduced.
The statement of changes
in owner’s equity shows
The Statement of Changes how the owner’s financial
in Owner’s Equity interest changed during the
accounting period.
Where Do You Find the Information Needed to Prepare
This Financial Statement? Read to Learn…
The statement of changes in owner’s equity summarizes changes ➤ the purpose of the
in the owner’s capital account as a result of business transactions that statement of changes in
occur during the period. Eventually, the balances of revenues, expenses,
owner’s equity. (p. 225)
➤ how to prepare the
and the owner’s withdrawal account will be transferred to the owner’s
statement of changes in
capital account. This statement is prepared at the end of the account-
owner’s equity. (p. 225)
ing period.
The heading of the statement of changes in owner’s equity is set up Key Terms
in the same manner as the heading for the income statement. statement of changes in
1. The first line consists of the name of the business. (Who?) owner’s equity
2. The second line indicates the name of the statement. (What?)
3. The third line indicates the period covered. (When?)
Because the statement of changes in owner’s equity and the income
statement cover the same period, the third line of the heading of both state-
ments will include the same wording and date.
The information to prepare this statement is found in three places:
• the work sheet
• the income statement AS
• the owner’s capital account in the general ledger YOU READ
Key Point
Completing the Statement of Changes Statement of Changes
in Owner’s Equity in Owner’s Equity The
statement of changes in
How Do You Prepare This Financial Statement? owner’s equity covers
Look at Figure 9–6 on page 226. It is the statement of changes in owner’s the same time period as
equity for Roadrunner Delivery Service for the month ended October 31. The the income statement.
illustration shows the steps needed to complete this financial statement.
Section 2 The Statement of Changes in Owner’s Equity 225
218-247_CH09_868829.indd 225 8/29/05 1:12:43 PM
Roadrunner Delivery Service
Statement of Changes in Owner’s Equity
For the Month Ended October 31, 20--
Beginning Capital, October 1, 20-- A B
C Add: Investments by Owner D 25 4 0 0 00
Net Income E 1 1 5 0 00
Total Increase in Capital 26 5 5 0 00 F
Subtotal 26 5 5 0 00 G
Less: Withdrawals by Owner 500 00 H
Ending Capital, October 31, 20-- I 26 0 5 0 00 J
Figure 9–6 Statement of
Changes in Owner’s Equity 1. On the first line, write the words Beginning Capital followed by a
comma and then by the first day of the period. For Roadrunner
that date is October 1, 20--. A
2. In the second amount column, enter the balance of the capital
account at the beginning of the period. The source of this
information is the capital account in the general ledger. Since
Roadrunner was formed after the beginning of the period, there is
no beginning capital balance. Place a line in the second amount
column. B
3. Next, enter the increases to the capital account:
• investments by the owner
• net income
Investments made by the owner during the period are recorded
in the capital account. Maria Sanchez, the owner of Roadrunner,
invested a total of $25,400 during October. This includes $25,000
cash and two phones valued at $400. Write Add: Investments by
Owner. C Enter the total investment in the first amount column. D
On the next line, write the words Net Income. Indent so that
Net Income aligns on the left with Investments by Owner in the line
above. In the first amount column, enter the net income amount
from the income statement. Draw a single rule under the net
income amount. E
4. Write the words Total Increase in Capital on the next line at the left
AS
YOU READ side of the form. Add the investments by owner and net income
amounts and enter the total in the second amount column. Draw a
Compare and single rule under the amount. F
Contrast
5. Write Subtotal on the next line, at the left side of the form. Add the
Income Statement and amounts for beginning capital and total increase in capital. Enter
Statement of Changes the result in the second amount column. G
in Owner’s Equity 6. The next section of the statement lists the decreases to the capital
In what ways are the account:
income statement and
statement of changes in • withdrawals
owner’s equity similar? • net loss
How are they different? Since Roadrunner did not have a net loss for the period, write the
words Less: Withdrawals by Owner at the left side of the form. Find
226 Chapter 9 Financial Statements for a Sole Proprietorship
218-247_CH09_868829.indd 226 8/29/05 1:12:48 PM
the withdrawals amount on the work sheet. Enter the withdrawals
amount in the second amount column. Draw a single rule under the
withdrawals amount. H
7. On the next line, at the left side of the form, write the words Ending
Capital followed by a comma and the last day of the period. I
8. Subtract the withdrawals amount from the subtotal to determine
the ending balance of the capital account. Finally, draw a double
rule below the ending capital amount. J
Statement of Changes in Owner’s
Equity for an Ongoing Business
To prepare the statement of changes in owner’s equity, you need to
know the beginning balance of the owner’s capital account. For an ongoing
business, the balance entered on the work sheet for the capital account may
not be the balance at the beginning of the period. If the owner made addi-
tional investments during the period, the investments would be recorded
in the general journal, posted to the general ledger, and included in the
amount shown on the work sheet.
For example, suppose the owner of Garo’s Tree Service, James Garo,
invested an additional $1,000 during the period. Look at Figure 9–7. The ledger
account reflects the additional capital investment. The amount entered on the
work sheet for James Garo, Capital includes the balance at the beginning of
the period ($23,800) and the investment made during the period ($1,000).
ACCOUNT James Garo, Capital ACCOUNT NO. 301
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Apr. 1 Balance ✓ 23 8 0 0 00
15 G1 1 0 0 0 00 24 8 0 0 00
Garo’s Tree Service
Work Sheet
For the Month Ended April 30, 20--
ACCT. TRIAL BALANCE INCOME STATEMENT BALANCE SHEET
NO. ACCOUNT NAME
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
12 301 James Garo, Capital 24 8 0 0 00 24 8 0 0 00 12
13 302 James Garo, Withdrawals 7 0 0 00 7 0 0 00 13
20 525 Utilities Expense 6 2 0 00 6 2 0 00 20
21 21 9 2 4 00 21 9 2 4 00 6 0 3 3 00 9 3 0 9 00 29 8 7 7 00 26 6 0 1 00 21
22 Net Income 3 2 7 6 00 3 2 7 6 00 22
23 9 3 0 9 00 9 3 0 9 00 29 8 7 7 00 29 8 7 7 00 23
24 24
Figure 9–7 Statement of Changes in Owner’s Equity for an Ongoing Business
Section 2 The Statement of Changes in Owner’s Equity 227
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Garo’s Tree Service
Statement of Changes in Owner’s Equity
For the Month Ended April 30, 20--
Beginning Capital, April 1, 20-- 23 8 0 0 00
Add: Investments by Owner 1 0 0 0 00
Net Income 3 2 7 6 00
Total Increase in Capital 4 276 00
Subtotal 28 0 7 6 00
Less: Withdrawals by Owner 700 00
Ending Capital, April 30, 20-- 27 3 7 6 00
Figure 9–7 Statement of Changes in Owner’s Equity for an Ongoing Business (continued)
There are two ways to determine the owner’s capital account balance at
the beginning of the period:
• Look at the ledger.
• Subtract the additional investments from the account balance shown
on the work sheet.
For James Garo, Capital, the $1,000 additional
investment in Garo’s Tree Service is subtracted from the
$24,800 account balance shown on the work sheet to
arrive at the beginning account balance of $23,800.
Figure 9–7 shows the statement of changes in owner’s
equity for an ongoing business.
Statement of Changes in Owner’s
Equity Showing a Net Loss
Figure 9–8 shows a statement of changes in owner’s
equity for an ongoing business with a net loss. Notice that since there is
only one item that increases capital—investments by owner—the amount
of the individual item is entered in the second amount column. Since there
are two items that decrease capital—withdrawals by owner and net loss—the
amounts of the individual items are entered in the first amount column. The
total decrease in capital is entered in the second amount column.
Island Burgers
Statement of Changes in Owner’s Equity
For the Month Ended April 30, 20--
Beginning Capital, April 1, 20-- 13 8 4 8 00
Add: Investments by Owner 1 5 0 0 00
Subtotal 15 3 4 8 00
Less: Withdrawals by Owner 9 0 0 00
Net Loss 8 3 5 00
Total Decrease in Capital 1 7 3 5 00
Ending Capital, April 30, 20-- 13 6 1 3 00
Figure 9–8 Statement of Changes in Owner’s Equity Showing a Net Loss
228 Chapter 9 Financial Statements for a Sole Proprietorship
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SECTION 2 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Using a diagram like this #REATING A 3TATEMENT OF #HANGES IN /WNERS %QUITY
one, summarize the steps
for creating a statement of
changes in owner’s equity.
Add answer boxes for steps
as needed.
Do the Math
Tracy Murphy is a fashion designer who works from her home. She contributed her own
funds and equipment to the business. She also continues to add new clients and increase
her revenue. Tracy’s investments in her business and the revenue she has earned over
the past 10 months are shown below. Create a line graph, by date, comparing Tracy’s
investments to her revenue. What can you determine from this chart?
Investments Revenue
1/01/20-- Cash $20,000 2/01/20-- $ 5,000
1/01/20-- Sewing machines 6,000 3/01/20-- 6,000
1/01/20-- Mannequins 3,500 4/01/20-- 12,000
1/01/20-- Material 25,000 5/01/20-- 15,000
1/01/20-- Computer equipment 5,600 6/01/20-- 17,500
1/01/20-- Business cards 500 7/01/20-- 19,000
2/15/20-- Cash 12,000 8/01/20-- 20,000
3/10/20-- Material 7,500 9/01/20-- 26,000
Total Investments $80,100 10/01/20-- 20,000
Problem 9–2 Determining Ending Capital Balances
The financial transactions affecting the capital accounts of several different businesses are
summarized below.
Instructions Use the form in your working papers. Determine the ending capital balance for
each business.
Beginning
Capital Investments Revenue Expenses Withdrawals
1. $60,000 $ 500 $ 5,100 $2,400 $ 700
2. 24,075 0 13,880 7,240 800
3. 28,800 1,000 6,450 6,780 0
4. 0 10,500 5,320 4,990 200
5. 6,415 0 4,520 3,175 700
6. 20,870 1,300 13,980 9,440 1,700
Section 2 The Statement of Changes in Owner’s Equity 229
218-247_CH09_868829.indd 229 8/29/05 1:13:29 PM
Accounting Careers in Focus
PARTNER
PricewaterhouseCoopers LLP, New York,
..
New York Tips from .
Alfred A. Peguero
not all a
Q: What is your main responsibility? A paycheck is ms
offer. Many fir
A: My job is to help the families and privately held corporations company can g
rofit-sharin
who are my clients. I look behind the numbers to show clients also provide p t,
reimbursemen
how to protect assets and pass them to the next generation. I plans, tuition
pportunities.
always ask myself what needs to be done to ensure that client and training o
benefits a
expectations are met. Being a partner is very much like owning Consider the
ployer offers
your own business—with some constraints, of course. prospective em
g whether to
Q: How did you become interested in accounting? when decidin
ffer.
accept a job o
A: I was an economics major in college, but in my senior year I
took two accounting classes that I really enjoyed. I realized this
is where the opportunities are. Accounting as a general profession is very broad.
The basic principles are the same but you can focus on areas and industries that
really interest you—anything from technology to farming.
Q: Which skills are most important?
A: Analytical, reasoning, and communication skills are critical. Mathematical ability
is also helpful.
Q: What do you enjoy most about your job?
A: I enjoy offering solutions to my clients. Helping real people solve their problems
and achieve peace of mind over their financial matters is very rewarding.
Q: What advice do you have for accountants just beginning their
careers?
A: Finding a good mentor is really important. Always follow through with what you
say you’re going to do and don’t be afraid to ask questions.
CAREER FACTS
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clients on complex accounting issues.
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regional firm. Once you have a flavor for the areas that most appeal to you, consider
getting a master’s degree. It usually takes 10 to 15 years to become a partner at most firms.
Thinking Critically What qualities do you think employers look for when hiring?
230 Chapter 9 Accounting Careers in Focus
218-247_CH09_868829.indd 230 8/29/05 1:13:33 PM
SECTION 3 The Balance Sheet and the
Statement of Cash Flows
The third and fourth financial statements prepared at
BEFORE
the end of the period are the balance sheet and the state- YOU READ
ment of cash flows. The balance sheet reflects the account-
ing equation at the end of the period. The statement of
Main Idea
cash flows shows how the business acquired and spent cash
The balance sheet reports the financial
during the period.
position at a specific point in time. The
statement of cash flows reports the
The Balance Sheet sources and uses of cash during the
What Is the Purpose of the Balance Sheet? accounting period.
The balance sheet is a report of the balances in the Read to Learn…
permanent accounts at the end of the period. The main pur- ➤ how to prepare a balance sheet.
pose of the balance sheet is to report the assets of the busi- (p. 231)
ness and the claims against those assets on a specific date. In ➤ the purpose of a statement of cash
other words, the balance sheet states the financial position flows. (p. 234)
of a business at a specific point in time. The balance sheet ➤ how to perform ratio analysis. (p. 235)
summarizes the following information:
Key Terms
• what a business owns balance sheet current assets
• what a business owes report form current
• what a business is worth statement of liabilities
For this reason the balance sheet is sometimes called a cash flows working capital
statement of financial position. ratio analysis liquidity ratio
The balance sheet is prepared from information in the profitability ratio current ratio
Balance Sheet section of the work sheet and from the state- return on sales quick ratio
ment of changes in owner’s equity. The balance sheet may
be handwritten, typed, or, as in most cases, prepared by
computer.
The Sections of the Balance Sheet
The balance sheet contains the following sections:
• the heading
• the assets section AS
• the liabilities and owner’s equity sections YOU READ
Heading. Like the heading of the income statement, the heading Install Recall
of the balance sheet answers the questions who? what? when? The balance Permanent Accounts
sheet heading includes: Permanent accounts are
1. The name of the business (Who?) assets, liabilities, and the
2. The name of the financial statement (What?) owner’s capital account.
3. The date of the balance sheet (When?)
Section 3 The Balance Sheet and the Statement of Cash Flows 231
218-247_CH09_868829.indd 231 8/29/05 1:13:39 PM
Roadrunner Delivery Service
Balance Sheet
October 31, 20-- Point in Time
Roadrunner Delivery Service
Income Statement
For the Month Ended October 31, 20-- Period of Time
Figure 9–9 Headings
of Financial Statements
Unlike the income statement, which covers the entire period, the bal-
AS
YOU READ ance sheet relates to a specific point in time. The amounts shown on the
balance sheet are the general ledger balances in the accounts on the last day
Key Point of the period. Notice the difference between the date lines on the balance
Balance Sheet The sheet and on the income statement in Figure 9–9.
balance sheet is a Assets Section. Refer to Roadrunner’s balance sheet in Figure 9–10
“snapshot” of a business as you read how to prepare the balance sheet. Roadrunner’s work sheet
at a specific point in and statement of changes in owner’s equity are also included to show the
time. information sources used to prepare the balance sheet. Roadrunner’s bal-
ance sheet is prepared in report form , listing the balance sheet sections
one under the other.
The Assets section of the balance sheet is prepared as follows:
1. Write the word Assets on the first line in the center of the column
containing the account names. A
2. On the following lines, list each asset account name and its balance
in the same order as they appear in the Balance Sheet section of the
work sheet. Enter the account balances in the first amount column.
Draw a single rule under the last account balance. B
3. On the next line, write the words Total Assets, indented about half
an inch. Add the individual asset balances and enter the total in the
second amount column. C
Do not draw a double rule under the total yet. Enter it when the Liabili-
ties and Owner’s Equity sections are complete and equal to total assets.
Liabilities and Owner’s Equity Sections. The information for
the Liabilities and Owner’s Equity sections is taken from the work sheet and
from the statement of changes in owner’s equity. Use the following steps to
complete the Liabilities and Owner’s Equity sections.
1. On the line after Total Assets, write the
heading Liabilities in the center of the column
containing the account names. D
2. On the following lines, list the liability
account names and their balances in the same
order as on the Balance Sheet section of the
work sheet. Enter the account balances in the
first amount column. Draw a single rule under
the last account balance. E
232 Chapter 9 Financial Statements for a Sole Proprietorship
218-247_CH09_868829.indd 232 4/6/06 5:44:27 PM
Roadrunner Delivery Service
Work Sheet
For the Month Ended October 31, 20--
ACCT. TRIAL BALANCE INCOME STATEMENT BALANCE SHEET
NO. ACCOUNT NAME
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
101 Cash in Bank 21 1 2 5 00 21 1 2 5 00 1
105 Accts. Rec.—City News 1 4 5 0 00 1 4 5 0 00 2
110 Accts. Rec.—Green Company 3
115 Computer Equipment 3 0 0 0 00 3 0 0 0 00 4
120 Office Equipment 2 0 0 00 2 0 0 00 5
125 Delivery Equipment 12 0 0 0 00 12 0 0 0 00 6
201 Accts. Pay.—Beacon Advertising 7 5 00 7 5 00 7
205 Accts. Pay.—North Shore Auto 11 6 5 0 00 11 6 5 0 00 8
9 301 Maria Sanchez, Capital 25 4 0 0 00 25 4 0 0 00 9
10 302 Maria Sanchez, Withdrawals 5 0 0 00 5 0 0 00 10
11 303 Income Summary 11
12 401 Delivery Revenue 2 6 5 0 00 2 6 5 0 00 12
13 501 Advertising Expense 7 5 00 7 5 00 13
14 505 Maintenance Expense 6 0 0 00 6 0 0 00 14
15 510 Rent Expense 7 0 000
Roadrunner 7 0 000
Delivery Service 15
16 515 Utilities Expense 1 2 500
Statement of Changes in Owner’s 1Equity
2 500 16
17 39 7 7 500 39 7 7 500 1 5 0 000
For the Month Ended October 31, 20-- 2 6 5 000 38 2 7 500 37 1 2 5 00 17
18 Net Income 1 1 5 000 1 1 5 0 00 18
19 Beginning Capital, October 1, 20-- 2 6 5 000 2 6 5 000 38 2 7 500 38 2 7 5 00 19
20 Add: Investments by Owner 25 4 0 0 00 20
Net Income 1 150 00
Total Increase in Capital 26 5 5 0 00
Subtotal 26 5 5 0 00
Less: Withdrawals by Owner 5 0 0 00
Ending Capital, October 31, 20-- 26 0 5 0 00
Roadrunner Delivery Service
Balance Sheet
October 31, 20--
A Assets
Cash in Bank 21 1 2 5 00
Accounts Receivable—City News 1 4 5 0 00
B Accounts Receivable—Green Company H
Computer Equipment 3 0 0 0 00
Office Equipment 2 0 0 00
Delivery Equipment 12 0 0 0 00
C Total Assets 37 7 7 5 00
D Liabilities K
Accounts Payable—Beacon Advertising 7 5 00
E
Accounts Payable—North Shore Auto 11 6 5 0 00
F Total Liabilities 11 7 2 5 00
G Owner’s Equity
H Maria Sanchez, Capital 26 0 5 0 00
I Total Liabilities and Owner’s Equity J 37 7 7 5 00
K
Figure 9–10 Preparing a Balance Sheet
Section 3 The Balance Sheet and the Statement of Cash Flows 233
218-247_CH09_868829.indd 233 8/29/05 1:13:59 PM
3. On the next line, write the words Total Liabilities, indented about
half an inch. Add the individual liability balances and enter the
total in the second amount column. F
4. On the next line, enter the heading Owner’s Equity in the center of
the column containing the account names. G
5. On the next line, write the name of the capital account. In the
second amount column, enter the ending balance of the capital
account as shown on the statement of changes in owner’s equity. H
Proving the Equality of the Balance Sheet
Recall that the basic accounting equation must always be in bal-
ance. The balance sheet represents the basic accounting equation,
so the Assets section total must equal the total of the Liabilities and
Owner’s Equity sections.
Assets Liabilities Owner’s Equity
To prove the equality of the balance sheet, follow these steps:
1. Draw a single rule under the balance of the capital account. On
the next line, write the words Total Liabilities and Owner’s Equity,
indented about half an inch. I
2. Add the total liabilities amount and the ending capital balance.
Enter the total in the second amount column. J This total must
equal the total assets amount. If the totals are not equal, there is an
error. Most errors occur when transferring amounts from the work
sheet or from the statement of changes in owner’s equity. Verify
that each account balance has been transferred properly. Find and
correct the error and then complete the balance sheet.
3. When total assets equal total liabilities and owner’s equity, draw
a double rule under the total assets amount and under the total
liabilities and owner’s equity amount. K The balance sheet is now
complete.
Refer again to the amounts and their placement in Figure 9–10. As you
can see, completion of the work sheet is the basis for preparing the three
financial statements studied so far.
The Statement of Cash Flows
What Is the Purpose of the Statement of Cash Flows?
Cash flowing through a business is like blood flowing through your body.
The flow of cash keeps a business alive. It is essential to have cash available
for the daily operations of the business and for unexpected expenses.
The statement of cash flows summarizes the following information:
• the amount of cash the business took in
• the sources of cash
• the amount of cash the business paid out
• the uses of cash
Like the income statement, the statement of cash flows covers a single
accounting period.
234 Chapter 9 Financial Statements for a Sole Proprietorship
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This information is essential for sound management and investment
decisions. You will learn more about the statement of cash flows in
Chapter 19.
Ratio Analysis
What Is Ratio Analysis?
Ratio analysis is the process of evaluating the relationship between
various amounts in the financial statements. Owners and managers use
ratio analysis to determine the financial strength, activity, and debt-paying
ability of a business.
Profitability Ratios MATH HINTS
Profitability ratios are used to evaluate the earnings performance of
Calculating Ratios
the business during the accounting period. The earning power of a busi- When calculating ratios,
ness is an important measure of its ability to grow and continue to earn be sure to use the correct
revenue. figures for the divisor and
One commonly used profitability ratio is return on sales. Business own- the dividend.
ers use the return on sales ratio to examine the portion of each sales dollar For example, to
calculate the ratio of net
that represents profit. To calculate this ratio, divide net income by sales. For
income to sales:
example, the return on sales for Roadrunner Delivery Service is calculated • the net income amount
as follows: is the dividend,
$1,150 net income • and the sales amount is
0.434 or 43.4% the divisor.
$2,650 sales
This percentage indicates that each dollar of sales produced 43.4 cents
of profit for Roadrunner. It can be compared to other accounting periods,
to determine whether it is increasing or decreasing.
For example, if net income next year is $2,750 and sales are $5,000, the
return on sales would be computed as follows:
$2,750 net income
0.550 or 55.0%
$5,000 sales
As you can see, profit per sales dollar would increase by 11.6 cents.
Liquidity Measures
Liquidity refers to the ease with which an asset can be converted to
cash. Current assets are those used up or converted to cash during the
normal operating cycle of the business. These might include Accounts
Receivable, Cash in Bank, and Supplies. Current liabilities are debts of
the business that must be paid within the next accounting period. Accounts
Payable is an example of a current liability.
The amount by which current assets exceed current liabilities is known
as working capital . Because current liabilities are usually paid out of cur-
rent assets, working capital represents the excess assets available to continue
operations. The working capital for Roadrunner is calculated as follows:
Current Assets Current Liabilities Working Capital
$22,575 $11,725 $10,850
Section 3 The Balance Sheet and the Statement of Cash Flows 235
218-247_CH09_868829.indd 235 4/6/06 5:44:37 PM
A liquidity ratio is a measure of the ability of a business to pay its cur-
AS
YOU READ rent debts as they become due and to provide for an unexpected need for
cash. Two common ratios that are used to determine liquidity follow.
It’s Not What It
Seems Current Ratio. The current ratio reflects the relationship between
current assets and current liabilities. The current ratio is calculated by divid-
Liquidity When you ing the dollar amount of current assets by the dollar amount of current
think of liquidity, you
liabilities. The current ratio for Roadrunner based on the balance sheet in
might think of water or
Figure 9–10 is:
other liquids that flow
freely. In accounting, Current Assets $22,575
Current Ratio 1.92 or 1.9:1
liquidity refers to how Current Liabilities $11,725
easily an asset can be
converted to cash. The current liabilities of a business must be paid within a year. These
liabilities are paid from current assets.
A ratio of 2:1 or higher is considered favorable by creditors. It indicates
that a business is able to pay its debts and that a business has twice as many
current assets as current liabilities. A low ratio may indicate that a company
could have trouble paying its debts.
Quick Ratio. A quick ratio is a measure of the relationship between
short-term assets and current liabilities. Short-term liquid assets—those that
can be quickly converted to cash—are cash and net receivables. The quick
ratio is computed by dividing the total cash and receivables by total current
liabilities.
The quick ratio for Roadrunner based on the Balance Sheet in Figure
9–10 is:
Cash and Receivables $22,575
Quick Ratio 1.92:1
Current Liabilities $11,725
In some instances the current ratio and the quick ratio can be the same,
as in the case in this example.
A quick ratio of 1:1 is considered adequate. This indicates that a business
can pay its current debts with cash from incoming receivables. If a business
has a quick ratio of 1:1 or higher, the business has $1.00 in liquid assets for
each $1.00 of current liabilities.
Quick ratios may also be compared
from one year to the next. For example,
suppose that cash and receivables for
the previous year were $48,653 and cur-
rent liabilities were $53,245. That year’s
quick ratio would be computed as:
$48,653
0.91:1
$53,245
As you can see, Roadrunner has
improved its liquidity position in the
current year. The $1.92 in liquid assets
per $1.00 in current liabilities (current
year) is stronger than $0.91 in liquid
assets per $1.00 in current liabilities
(previous year).
236 Chapter 9 Financial Statements for a Sole Proprietorship
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SECTION 3 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Using a diagram like this #REATING A "ALANCE 3HEET
one, summarize the steps for
creating a balance sheet. Add
answer boxes for steps as
needed.
Do the Math
Compute the four amounts that are missing from the balance sheet below. On a separate
sheet of paper, write the description and the dollar value of the four missing amounts.
Interactive Communication
Balance Sheet
December 31, 20--
Assets
Cash in Bank 944 0 0 0 00
Accounts Receivable—Chamber of Commerce 200 0 0 0 00
Office Equipment ?
Computer Equipment 1,000 0 0 0 00
Total Assets 2,994 0 0 0 00
Liabilities
Accounts Payable—Tip Top Advertising 275 5 0 0 00
Interest Payable ?
Salaries Payable 2 1 0 0 00
Total Liabilities ?
Owner’s Equity
Chuck Thompson, Capital 2,715 1 0 0 00
Total Liabilities and Owner’s Equity ?
Problem 9–3 Calculating Return on Sales
The Gawle Company is a family-owned and operated appliance rental and repair business.
The income statement for the month ended August 31 includes the following:
Rental Revenue $3,256 Rent Expense $2,100
Repair Revenue 2,140 Utilities Expense 483
Advertising Expense 575 Net Income 1,108
Maintenance Expense 1,130
Instructions Calculate the return on sales for the month for The Gawle Company.
Section 3 The Balance Sheet and the Statement of Cash Flows 237
218-247_CH09_868829.indd 237 8/29/05 1:14:20 PM
CH A P T ER 9 Summary
Key Concepts
1. The income statement reports revenue earned and the expenses incurred for a specific period of
time. It also reports the net income or net loss for the period.
2. Sections of the income statement:
Section Information Presented
Heading • Name of the business
• Name of the report
• Accounting period covered
Revenue Balance of each revenue account for the period. The information comes from
the Income Statement section of the work sheet.
Expenses Balance of each expense account for the period. The information comes from
the Income Statement section of the work sheet.
Net income Total expenses subtracted from total revenue. The result is net income or net
loss.
3. The statement of changes in owner’s equity summarizes the impact that the period’s business
transactions had on the capital account.
4. Sections of the statement of changes in owner’s equity:
Section Information Presented
Heading • Name of the business
• Name of the report
• Accounting period covered
Beginning The information comes from the owner’s capital account in the general ledger.
Capital
Increases in • Investments by Owner
Capital • Net Income
Information about investments by the owner comes from the owner’s capital
account in the general ledger. Information about net income comes from the
income statement.
Decreases in • Withdrawals by Owner
Capital • Net Loss
Information about withdrawals by the owner comes from the work sheet.
Information about net loss comes from the income statement.
Ending Beginning Capital Increases Decreases
Capital
238 Chapter 9 Summary
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Summary CHAPT E R 9
5. The balance sheet reports the balances in the permanent accounts at the end of the period. It
states the financial position of a business on a specific date. Information comes from the Balance
Sheet section of the work sheet and the statement of changes in owner’s equity.
6. Sections of the Balance Sheet:
Section Information Presented
Heading • Name of the business
• Name of the report
• Date of the last day of the accounting period
Assets Balance of each asset account. The information comes from the Balance Sheet
section of the work sheet.
Liabilities Balance of each liability account. The information comes from the Balance
Sheet section of the work sheet.
Owner’s The balance of the owner’s capital account. The information comes from the
Equity statement of changes in owner’s equity.
7. The statement of cash flows reports how much cash the business took in and paid out during the
period and why the Cash in Bank account increased or decreased.
8. Ratio analysis evaluates the relationship between various financial statement amounts.
Profitability ratio Earnings performance during the accounting period
Determines the percent of each sales dollar that is profit:
Return on sales
Return on Sales Net Income / Sales
Liquidity ratio Ease with which an asset can be converted to cash
Current Assets
Current ratio
Current Liabilities
Cash and Receivables
Quick ratio
Current Liabilities
Key Terms
balance sheet (p. 231) liquidity ratio (p. 236) statement of
current assets (p. 235) profitability ratio (p. 235) cash flows (p. 234)
current liabilities (p. 235) quick ratio (p. 236) statement of changes
in owner’s equity (p. 225)
current ratio (p. 236) ratio analysis (p. 235)
working capital (p. 235)
financial statements (p. 220) report form (p. 232)
income statement (p. 221) return on sales (p. 235)
Chapter 9 Summary 239
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C H A P T ER 9 Review and Activities
AFTER
YOU READ
Check Your Understanding
1. Income Statement
a. What is the purpose of the income statement?
b. What is the source of information used to prepare the income statement?
2. Preparing an Income Statement
a. List the sections of the income statement.
b. How is net income or net loss calculated?
3. Statement of Changes in Owner’s Equity
a. What is the purpose of the statement of changes in owner’s equity?
b. What sources of information are used to prepare the statement of changes in owner’s equity?
4. Preparing a Statement of Changes in Owner’s Equity
a. In a statement of changes in owner’s equity, what items are totaled in the “Add” section?
b. What items are subtracted from the subtotal?
5. Balance Sheet
a. What is the purpose of the balance sheet?
b. How does the date in a balance sheet heading differ from the other financial statements?
6. Preparing a Balance Sheet
a. What sources of information are used to prepare the balance sheet?
b. How are balance sheet account names shown using the report form?
7. Statement of Cash Flows
a. What is the purpose of the statement of cash flows?
b. Why does management need the information in the statement of cash flows?
8. Ratio Analysis
a. What is the purpose of computing ratios from amounts on financial statements?
b. Who might be interested in the profitability ratio of a business?
Apply Key Terms
As a game store owner, you want to develop an informa-
tion sheet for the store manager. Explain the importance of
financial statement preparation using these key terms.
balance sheet quick ratio
current assets ratio analysis
current liabilities report form
current ratio return on sales
financial statements statement of cash flows
income statement statement of changes in
liquidity ratio owner’s equity
profitability ratio working capital
240 Chapter 9 Review and Activities
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Computerized Accounting CHAPT E R 9
Preparing Financial Statements
Making the Transition from a Manual to a Computerized System
Task Manual Methods Computerized Methods
Preparing an • Transfer all revenue and expense • From the Reports menu, select
income statement accounts and their balances from Income Statement or Profit and Loss,
the work sheet. depending on the accounting software.
• Subtract expenses from revenue to • Click Print.
determine net income or net loss.
Preparing a • Transfer the beginning balance of the • Since the software automatically
statement of capital account from the work sheet. computes the ending balance of
changes in • Add additional investments and net the capital account for you, it is not
owner’s equity income or loss. necessary to prepare this statement.
• Subtract withdrawals.
• Calculate the ending balance for the
capital account.
Preparing a • Transfer permanent accounts and their • From the Reports menu, select
balance sheet balances from the work sheet. Balance Sheet.
• Transfer the ending capital account • Click Print.
balance from the statement of changes
in owner’s equity.
• Total all asset account balances.
• Total all liabilities and owner’s equity
account balances.
• Verify that assets equal liabilities and
owner’s equity.
Q&A
Peachtree Question Answer
How do I prepare 1. From the Reports menu, select Financial Statements.
financial statements 2. Choose the statement you wish to print from the Reports list.
in Peachtree? 3. Click Print when the statement appears on the screen.
QuickBooks Q & A
QuickBooks Question Answer
How do I prepare 1. From the Reports menu, select Company & Financial.
financial statements 2. Choose the report you wish to print from the list.
in QuickBooks? 3. Click Print.
For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers.
Chapter 9 Computerized Accounting 241
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C H A P T ER 9 Problems
Complete problems using: Manual Glencoe Peachtree Complete QuickBooks Spreadsheet
Spreadshee
OR OR OR
Working Papers Accounting Software Templates Templates
Problem 9–4 Preparing an Income Statement
SMART GUIDE The work sheet for Wilderness Rentals for the month ended
Step–by–Step Instructions: September 30, 20-- is in your working papers.
Problems 9–4, 9–5 Instructions Using the work sheet, prepare an income statement for
1. Select the problem set Wilderness Rentals.
for Wilderness Rentals
(Prob. 9–4, 9–5). Analyze Compute the return on sales for the period.
2. Rename the company
and set the system date.
3. Print a General Ledger
Trial Balance, Income
Statement, Statement Problem 9–5 Preparing a Statement of Changes
of Changes in Owner’s
Equity, and Balance in Owner’s Equity
Sheet. Instructions Using the work sheet for Wilderness Rentals in your working
4. Complete the Analyze
activity. papers and the income statement prepared in Problem 9–4, prepare a
5. End the session. statement of changes in owner’s equity and a balance sheet. Ronald Hicks
made an additional investment in the business of $500 during the period.
Analyze Compute the current ratio for Wilderness Rentals as of
SMART GUIDE September 30.
Step–by–Step Instructions:
Problem 9–6
1. Select the problem set
Problem 9–6 Preparing Financial Statements
for Hot Suds Car Wash The trial balance for the Hot Suds Car Wash is listed below and in your
(Prob. 9–6). working papers.
2. Rename the company
and set the system date. Instructions
3. Print a General Ledger
1. Complete the work Hot Suds Car Wash
Trial Balance, Income
Trial Balance
Statement, Statement sheet in your working For the Quarter Ended September 30, 20--
of Changes in Owner’s papers. Debit Credit
Equity, and Balance
Sheet. 2. Prepare an income 101
105
Cash in Bank
Accts. Rec.—Linda Brown
8 457
584
00
00
4. Complete the Analyze statement for the 110 Accts. Rec.—Valley Auto 619 00
115 Detailing Supplies 810 00
activity.
quarter ended 120 Detergent Supplies 460 00
5. End the session. 125 Office Equipment 15 2 4 0 00
September 30, 20--. 130 Office Furniture 2 160 00
QuickBooks
135 Car Wash Equipment 7 522 00
3. Prepare a statement 201 Accts. Pay.—Allen Vacuum Systems 3 5 2 8 00
205 Accts. Pay.—O’Brian’s Office Supply 1 2 1 5 00
of changes in
PROBLEM GUIDE 301 Regina Delgado, Capital 23 8 4 5 00
owner’s equity. 305
310
Regina Delgado, Withdrawals
Income Summary
1 5 0 0 00
Step–by–Step Instructions: Regina Delgado 401 Wash Revenue 9 6 2 3 00
Problem 9–6 405 Wax Revenue 8 0 1 9 00
made no additional 410 Interior Detailing Revenue 2 6 2 8 00
1. Restore the Problem 501 Advertising Expense 1963 00
9-6.QBB file. investments during 505 Equipment Rental Expense 4137 00
510 Maintenance Expense 1186 00
2. Print a Trial Balance, the period. 520 Rent Expense 3500 00
Profit & Loss report, and 530 Utilities Expense 720 00
4. Prepare a balance
Balance Sheet. 48 8 5 8 00 48 8 5 8 00
3. Complete the Analyze sheet in report form.
activity.
4. Back up your work. Analyze Calculate the return on sales for the period.
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Problems CHAPT E R 9
Problem 9–7 Preparing Financial Statements
The general ledger accounts and balances for Kits & Pups Grooming follow. SMART GUIDE
General Ledger Step–by–Step Instructions:
101 Cash in Bank $ 4,296 Problem 9–7
105 Accts. Rec.—Juan Alvarez 1,528 1. Select the problem
110 Accts. Rec.—Nathan Carlsbad 904 set for Kits & Pups
Grooming (Prob. 9–7).
115 Accts. Rec.—Martha Giles 1,219 2. Rename the company
120 Grooming Supplies 1,368 and set the system date.
125 Office Equipment 8,467 3. Print a General Ledger
130 Office Furniture 3,396 Trial Balance, Income
135 Computer Equipment 2,730 Statement, Statement
of Changes in Owner’s
140 Grooming Equipment 1,974 Equity, and Balance
145 Kennel Equipment 7,412 Sheet.
201 Accts. Pay.—Able Store Equipment 3,876 4. Complete the Analyze
205 Accts. Pay.—Dogs & Cats Inc. 2,746 activity.
207 Accts. Pay.—Pet Gourmet 1,281 5. End the session.
301 Abe Shultz, Capital 30,928
305 Abe Shultz, Withdrawals 1,900 QuickBooks
310 Income Summary — PROBLEM GUIDE
401 Boarding Revenue 11,989
405 Grooming Revenue 4,420 Step–by–Step Instructions:
501 Advertising Expense 3,934 Problem 9–7
505 Equipment Repair Expense 943 1. Restore the Problem
510 Maintenance Expense 2,483 9-7.QBB file.
2. Print a Trial Balance,
520 Rent Expense 8,850 Profit & Loss report, and
530 Utilities Expense 3,836 Balance Sheet.
3. Complete the Analyze
Instructions activity.
4. Back up your work.
1. Prepare a work sheet for the month ended September 30, 20--.
2. Prepare an income statement for the period.
3. Prepare a statement of changes in owner’s equity. Abe Shultz made an
additional investment of $2,500 during the period.
4. Prepare a balance sheet in report form.
Analyze Compute the quick ratio as of September 30.
CHALLENGE Problem 9–8 Preparing a
PROBLEM
Statement of Changes
in Owner’s Equity
Instructions Use the balance sheet and income statement shown to
prepare a statement of changes in owner’s equity. (The owner made an
additional investment of $4,000 and withdrew $1,500 during the period.)
CONTINUE
Chapter 9 Problems 243
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C H A P T ER 9 Problems
Outback Guide Service
Income Statement
For the Month Ended September 30, 20--
SPREADSHEET Revenue:
SMART GUIDE Guide Service Revenue 8 9 1 3 00
Expenses:
Step–by–Step Instructions: Advertising Expense 375 00
Problem 9–8 Maintenance Expense 138 00
1. Select the spreadsheet Rent Expense 1 250 00
template for Problem Salaries Expense 1 500 00
9–8.
Utilities Expense 1 161 00
2. Enter your name and
the date in the spaces Total Expenses 4 4 2 4 00
provided on the Net Income 4 4 8 9 00
template.
3. Complete the spread-
sheet using the
instructions in your
working papers.
4. Print the spreadsheet Outback Guide Service
and proof your work. Balance Sheet
5. Complete the Analyze September 30, 20--
activity.
6. Save your work and Assets
exit the spreadsheet
Cash in Bank 3117 00
program.
Accounts Receivable—Mary Johnson 423 00
Accounts Receivable—Feldman, Jones & Ritter 443 00
Accounts Receivable—Podaski Systems Inc. 1008 00
Hiking Supplies 153 00
Office Supplies 338 00
Office Equipment 6492 00
Office Furniture 3084 00
Computer Equipment 3624 00
Hiking Equipment 1015 00
Rafting Equipment 9186 00
Total Assets 28 8 8 3 00
Liabilities
Accounts Payable—A-1 Adventure Warehouse 6 5 4 5 00
Accounts Payable—Peak Equipment Inc. 1 3 2 5 00
Accounts Payable—Premier Processors 6 4 2 00
Total Liabilities 8 5 1 2 00
Owner’s Equity
Juanita Ortega, Capital 20 3 7 1 00
Total Liabilities and Owner’s Equity 28 8 8 3 00
Analyze Identify the largest expense for this business during the
period.
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Winning Competitive Events CHAPTER 9
Practice your test-taking skills! The questions on this page are reprinted with permission
from national organizations:
• Future Business Leaders of America
• Business Professionals of America
Use a separate sheet of paper to record your answers.
Future Business Leaders of America
MULTIPLE CHOICE
1. The balance sheet shows how a business is doing
a. for a period of 12 months.
b. on a specific date during the year.
c. regarding its profit or loss.
d. All of the above
2. Financial statements are prepared in the following order:
a. income statement, balance sheet, owners’ equity.
b. income statement, statement of owners’ equity, balance sheet.
c. statement of owners’ equity, balance sheet, income statement.
d. balance sheet, income statement, statement of owners’ equity.
3. The purpose of the Income Statement is to report
a. all assets, liabilities, and owner’s equity at a specified time.
b. all the accounts used in journalizing a business’s transactions.
c. balances in the capital accounts in order to determine the net income or loss.
d. the net income or loss for a fiscal period.
Business Professionals of America
MULTIPLE CHOICE
4. At the end of a fiscal period when a balance sheet is prepared, from which
document may we find the ending owner’s capital balance?
a. Worksheet c. Trial Balance
b. Income Statement d. Statement of Changes in Owner’s Equity
5. During the month of February, Tom had the following transactions involving
revenue and expenses:
Paid $75 phone bill
Provided services to clients for $1,200 cash
Paid salaries of $650 to employees
Paid $125 for computer maintenance
Provided services on account totaling
$2,000
What was Tom’s net income or net Need More Help?
loss for the period? Go to glencoeaccounting.glencoe.com and
a. Net Income $350 click on Student Center. Click on Winning
b. Net Loss $1,650 Competitive Events and select Chapter 9.
c. Net Income $2,350 • Practice Questions and Test-Taking Tips
d. Net Income $3,200 • Concept Capsules and Terminology
glencoeaccounting.glencoe.com Chapter 9 Winning Competitive Events 245
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C H A P T ER 9 Real-World Applications and Connections
Critical Financial Statements
Thinking 1. Name the one piece of information that is included on both the income
statement and the statement of changes in owner’s equity.
2. Explain why the date line on the balance sheet is different from the one on
the other statements.
3. The net income computed on the income statement is different from the
amount computed on the work sheet. How do you resolve this problem?
4. Explain why the Withdrawals account is reported on the statement of
changes in owner’s equity but is not reported on the income statement.
5. What items are needed to complete the first three financial statements? List
office supplies, forms, and any information needed.
6. Assess the value of using the income statement, the statement of changes in
owner’s equity, and the balance sheet for making business decisions.
CASE Service Business: Video Arcade
STUDY Taki Yamamoto owns a video arcade business called Arcadia. Taki has hired your
accounting firm to record Arcadia’s financial information. Taki hands you a folder
containing these documents:
• Canceled checks with June dates: $800 for rent, $120 for electricity, $70 for
telephone service, $180 for insurance, $250 for newspaper advertising, and
$200 for a cleaning service.
• Invoice dated June 16 for a used video game sold on account for $2,000.
• Cash register tapes for June showing total cash sales of $5,890.
INSTRUCTIONS
1. Using the preceding information, make a list of accounts needed to record
the transactions indicated by the financial documents Taki has given you.
2. Prepare an income statement for Arcadia for the month of June.
a
mattoefr ETHICS Financial Report or Repair?
Your favorite uncle, who owns a restaurant, has asked you to help with his
bookkeeping. He desperately needs a bank loan and wants you to prepare the
financial statements. After going over his accounting records, you do not believe
a bank will give him a loan; but you notice that by leaving out an expense or two,
your uncle’s business could look more promising. After all, he does have some
good ideas for improving the business.
ETHICAL DECISION MAKING
1. What are the ethical issues? 4. How do the alternatives affect the
2. What are the alternatives? parties?
3. Who are the affected parties? 5. What would you do?
$ )) ))
Communicating
Presenting the Balance Sheet
ACCOUNTING Team up with a classmate and give a brief presentation of the purpose and use of
a balance sheet. Create a sample balance sheet for your presentation.
246 Chapter 9 Real-World Applications and Connections
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Real-World Applications and Connections CHAPT E R 9
Skills Beyond Using Computers to Process Information
NUMBERS Being able to use computers and software is essential for most business tasks.
ON THE JOB
As the accounting clerk for Jewels and Treasures, you manually prepared the
income statements in the past. This year you will use a spreadsheet program.
INSTRUCTIONS
Prepare a list of reasons why using a spreadsheet program is an improvement over
manually preparing financial statements.
INTERNATIONAL The Euro
Financial statements are generally prepared in the currency of the country in
Accounting which the business operates. Many European countries use a single currency, the
euro. Nations in the European Union began using the euro in 2002. Individuals
and businesses both benefit by having a single currency. Travelers can use
one currency in multiple countries. Businesses have a more stable business
environment due to the elimination of exchange rate fluctuations.
INSTRUCTIONS Imagine that you own a business with locations in Italy and
France. Describe how the adoption of the euro in both countries has changed
your financial statement preparation.
Making It
Your Business
Personal Do you dream of having your own business? The experience of tracking your own
finances can help you create the general ledger accounts for that business.
PERSONAL FINANCE ACTIVITY Create an income statement for a typical high
school student. List revenue and expense accounts, and identify expenses that
some, but not all, students would have.
PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and
click on Student Center. Click on Making It Personal and select Chapter 9.
Analyzing Return on Sales
Financial Business owners are especially interested in the return on sales (see page 235). This
Reports percentage shows how much of each revenue
dollar becomes profit for the business.
INSTRUCTIONS Use Roadrunner’s income state-
ment on page 222 to calculate its return on
Financial Statements
sales. (Use $1,100 as net income instead of
in Sports
$1,150.) If total sales are about equal from Financial statements summarize
results for owners, managers,
month to month but return on sales decreases
and other interested parties. Visit
each month, what does this say about the glencoeaccounting
business? What suggestions can you offer to .glencoe.com and click
improve the return on sales? on Student Center. Click on
WebQuest and select Unit 2 to
continue your Internet project.
glencoeaccounting.glencoe.com Chapter 9 Real-World Applications and Connections 247
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CH A P T ER 10 Completing the
Accounting Cycle for
a Sole Proprietorship
BEFORE
What You’ll Learn YOU READ
1. Explain why it is necessary
to update accounts through Predict
closing entries. 1. What does the chapter title tell you?
2. What do you already know about this subject from personal experience?
2. Explain the purpose of the
Income Summary account. 3. What have you learned about this in the earlier chapters?
4. What gaps exist in your knowledge of this subject?
3. Explain the relationship
between the Income
Summary account and the
capital account. Exploring the Real World of Business
4. Analyze and journalize the
closing entries. LOOKING AT FISCAL YEAR-END ACTIVITIES
5. Post the closing entries to the Radio Flyer
general ledger.
Many adults love to give children the same kinds of toys
6. Prepare a post-closing trial they enjoyed when they were young. A Radio Flyer wagon is
balance. that kind of toy. Antonio Pasin, an Italian immigrant living in
7. Define the accounting terms Chicago, crafted and sold the first wooden red wagons in 1917.
introduced in this chapter. The company has been passed down through the
Why It’s Important generations, just like the love of the toys it produces. Antonio’s
grandson, Robert Pasin, is now the chief executive officer of
For accounting purposes the
▲
Radio Flyer. He has taken the company in new directions by
life of a business is divided
adding tricycles, scooters, and other riding toys.
into specific periods of time.
Radio Flyer’s revenue comes from selling classic wagons and
newer toys. At the end of each accounting period, the company
closes its accounts and analyzes the revenues and expenses.
What Do You Think?
Why would Radio Flyer employees want to compare sales
of different toys from one accounting period to another?
248 Chapter 10 Completing the Accounting Cycle for a Sole Proprietorship
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Working in the Real World
APPLYING YOUR ACCOUNTING KNOWLEDGE
Personal Connection
Preparing financial statements can be a hectic 1. In your workplace are there especially hectic
time for the accounting staff of Radio Flyer. times of the day or year?
Professional accountants learn to manage 2. How do you and your co-workers handle
stressful times using good organizational these busy times?
skills. Once the financial statements have been
prepared, other tasks must be completed to Online Connection
close one accounting cycle and begin another. Go to glencoeaccounting.glencoe.com and click
You will learn about these tasks to complete the on Student Center. Click on Working in the
accounting cycle in this chapter. Real World and select Chapter 10.
glencoeaccounting.glencoe.com 249
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SECTION 1 Preparing Closing Entries
In Chapter 9 you learned how to prepare three financial statements:
BEFORE
YOU READ • The income statement reports revenue, expenses, and net income or
net loss for the accounting period.
Main Idea • The statement of changes in owner’s equity summarizes the impact
Closing entries transfer the of the business transactions on the owner’s capital account.
temporary account balances • The balance sheet reports the financial position of the business at
to the owner’s capital the end of the period.
account. Accountants for a company like Mattel prepare financial statements
and then journalize and post the closing entries. They prepare a post-
Read to Learn… closing trial balance to verify that the accounting records still balance.
➤ the last two steps of the
accounting cycle. (p. 250)
➤ the purpose of closing Completing the Accounting Cycle
entries. (p. 250) What Are the Last Two Steps of the Accounting Cycle?
➤ the purpose of the During the accounting period, the accountant records transactions
Income Summary involving revenue, expenses, and withdrawals in temporary accounts.
account. (p. 253) At the end of the period, the accountant transfers the balances in the
➤ how to journalize the
temporary accounts to the owner’s capital account to bring it up to date
closing entries. (p. 253)
and to prepare the accounting records for the next period.
Key Terms Closing entries are journal entries made to close, or reduce to zero,
closing entries the balances in the temporary accounts and to transfer the net income
Income Summary account or net loss for the period to the capital account.
compound entry After the closing entries have been journalized and posted, a trial
balance is prepared to prove the equality of the general ledger after the
closing process. The trial balance prepared after closing is called a post-
closing trial balance. As you can see in Figure 10–1, the closing process
and the post-closing trial balance complete the accounting cycle.
AS
Starting the Eighth Step in the
READ
YOU Accounting Cycle: Journalizing the
Instant Recall
Closing Entries
Accounting Period
What Is the Purpose of Closing Entries?
By dividing the life of
a business into time Preparing financial records for the start of a new period is a little like
periods, decision makers keeping stats for a basketball team. For basketball stats, individual and team
can see patterns and scores are recorded for every game, but each new game starts with a score
make comparisons. of zero. Similarly, in keeping the stats or accounting for a business, entries
are posted to the accounts during the accounting period (game), but the
250 Chapter 10 Completing the Accounting Cycle for a Sole Proprietorship
248-275_CH10_868829.indd 250 9/15/05 11:22:19 AM
Analyze each Journalize Figure 10–1 The
transaction each transaction Accounting Cycle with Steps 8
Collect and verify Post to
source documents
ACCOUNT GENERAL
the ledger and 9 Highlighted
DEBIT CREDIT JOURNAL
INVOICE ACCOUNT
3
DEBIT CREDIT
2
RECEIPT LEDGER
4
MEMORANDUM
5
9
6
POST-CLOSING TRIAL
8
TRIAL BALANCE BALANCE
GENERAL
7 WORK SHEET
JOURNAL INCOME
STATEMENT
STATEMENT OF
CHANGES IN
OWNER’S EQUITY
Prepare a LEDGER
BALANCE
Prepare a Prepare a
post-closing SHEET work sheet trial balance
trial balance
Journalize and post
closing entries Prepare financial
statements
temporary accounts (Rent Expense, Maintenance Expense, Revenue, etc.)
start each new accounting period (game) with zero balances.
CULTURAL
The income statement, you’ll remember, reports the net income or net Diversity
Setting Deadlines
loss for one accounting period. The statement is prepared from information
In international
recorded and accumulated in the revenue and expense accounts. At the end
business be aware of
of the period, the accountant records entries to close, or reduce to zero, the
cultural differences
revenue and expense accounts because their balances also apply to only one about time. Business
accounting period. These closing entries also transfer the net income or net is conducted at
loss for the period to the capital account. a faster pace in
The closing process is shown in Figure 10–2 on page 252. the United States
• Prior to the closing process, you know that net income or net loss is than in some other
calculated on the work sheet. A cultures. Tight
• The net income or net loss amount then appears on the income deadlines can cause
problems overseas
statement. B
if workers resent
• On the statement of changes in owner’s equity, the ending balance of
being pressured to do
the capital account includes net income or net loss. C
things at a pace other
• The ending balance of the capital account then appears on the balance than the one they are
sheet. D used to.
• At this point, however, the balance of the capital account in the general
ledger does not equal the amount on the balance sheet because the
closing entries need to be journalized and posted. E
For example, the balance on the work sheet for Maria Sanchez, Capital
is $25,400, but on the balance sheet, it is $26,050. These two amounts differ
because the withdrawals and the net income have not been recorded in the
capital account in the general ledger. The closing process updates accounts
through closing entries and brings the balance of the general ledger capital
account up to date.
Section 1 Preparing Closing Entries 251
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Roadrunner Delivery Service
Work Sheet
For the Month Ended October 31, 20--
ACCT. TRIAL BALANCE INCOME STATEMENT BALANCE SHEET
NO. ACCOUNT NAME
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
16 515 Utilities Expense 1 2 5 00 1 2 5 00 16
17 39 7 7 5 00 39 7 7 5 00 1 5 0 0 00 2 6 5 0 00 38 2 7 5 00 37 1 2 5 00 17
18 Net Income 1 1 5 0 00 1 1 5 0 00 18 A
19 2 6 5 0 00 2 6 5 0 00 38 2 7 5 00 38 2 7 5 00 19
20 20
Roadrunner Delivery Service
Income Statement
For the Month Ended October 31, 20--
Revenue:
Delivery Revenue 2 6 5 0 00
Expenses:
Advertising Expense 7 5 00
Maintenance Expense 6 0 0 00
Rent Expense 7 0 0 00
Utilities Expense 1 2 5 00
Total Expenses 1 5 0 0 00
Net Income 1 1 5 0 00 B
Roadrunner Delivery Service
Statement of Changes in Owner’s Equity
For the Month Ended October 31, 20--
Beginning Capital, October 1, 20--
Add: Investments by Owner 25 4 0 0 00
Net Income 1 1 5 0 00 C
Total Increase in Capital 26 5 5 0 00
Subtotal 26 5 5 0 00
Less: Withdrawals by Owner 500 00
Ending Capital, October 31, 20-- 26 0 5 0 00
Roadrunner Delivery Service
Balance Sheet
October 31, 20--
Assets
Cash in Bank 21 1 2 5 00
Accounts Receivable—City News 1 4 5 0 00
Accounts Receivable—Green Company
Computer Equipment 3 0 0 0 00
Office Equipment 2 0 0 00
Delivery Equipment 12 0 0 0 00
Total Assets 37 7 7 5 00
Liabilities
Accounts Payable—Beacon Advertising 7 5 00
Accounts Payable—North Shore Auto 11 6 5 0 00
Total Liabilities 11 7 2 5 00
Owner’s Equity
Maria Sanchez, Capital 26 0 5 0 00
D
Total Liabilities and Owner’s Equity 37 7 7 5 00
Roadrunner Delivery Service
Work Sheet
For the Month Ended October 31, 20-- E
ACCT. TRIAL BALANCE INCOME STATEMENT BALANCE SHEET
NO. ACCOUNT NAME
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
9 301 Maria Sanchez, Capital 25 4 0 0 00 25 4 0 0 00 9
10 302 Maria Sanchez, Withdrawals 5 0 0 00 5 0 0 00 10
Figure 10–2 The Closing Process
252 Chapter 10 Completing the Accounting Cycle for a Sole Proprietorship
248-275_CH10_868829.indd 252 9/15/05 11:22:37 AM
The Income Summary Account
What Is the Purpose of the Income Summary Account?
Before the closing entries are journalized and posted, no single account
in the general ledger shows all of the revenue and expenses for the period.
AS
This information is scattered among the individual revenue and expense YOU READ
accounts. There is, however, one general ledger account that, until this
point, has not been used. That is the Income Summary account.
Key Point
The Income Summary account is used to accumulate and summarize Income Summary
the revenue and expenses for the period. This account serves as a simple The Income Summary
income statement in the ledger. Expenses, which have debit balances, are account does not have a
transferred as debits to Income Summary. Revenues, which have credit normal balance.
balances, are transferred as credits to Income Summary. The balance of the
account equals the net income or net loss for the fiscal period.
Refer to the chart of accounts for Roadrunner Delivery Service on
page 79. Notice that Income Summary is in the Owner’s Equity section of
the general ledger. It is located there because of its relationship to the own-
er’s capital account. Remember that the revenue and expenses transferred
to the Income Summary account actually represent increases and decreases
to owner’s equity. The balance of Income Summary (the net income or net
loss for the period) is transferred to the capital account at the end of the
closing process.
Like the withdrawals account, Income Summary is a temporary account.
However, it is quite different from the other temporary accounts.
• Income Summary is used only at the end of the accounting period to
summarize the balances from the revenue and expense accounts.
• Income Summary does not have a normal balance, which means
that it does not have an increase or a decrease side. As shown in the
following T account, the debit and credit sides of the account are simply
used to summarize the period’s revenue and expenses.
• The balance of the Income Summary account before and after the
closing process is zero.
• The Income Summary account does not appear on any financial
statement.
Income Summary
Debit Credit
Expenses Revenue
If Revenue Expenses Balance is net income
If Revenue Expenses Balance is net loss
Preparing Closing Entries
How Do You Journalize Closing Entries?
Four journal entries are prepared to close the temporary accounts for
Roadrunner:
1. Transfer the balances of all revenue accounts to the credit side of the
Income Summary account.
Section 1 Preparing Closing Entries 253
248-275_CH10_868829.indd 253 9/15/05 11:22:37 AM
AS 2. Transfer all expense account balances to the debit side of the
YOU READ Income Summary account.
3. Transfer the balance of the Income Summary account to the
In Your Own Words
capital account (net income to the credit side; net loss to the
Income Summary debit side).
Describe how and why 4. Transfer the balance of the withdrawals account to the debit side of
the Income Summary the capital account.
account is used.
Closing Revenue to Income Summary
The first step in the closing procedure is to transfer the balance of
the revenue account to Income Summary. The balance for the revenue
account is found in the Income Statement section of the work sheet. (Refer
to the work sheet in Figure 9–3 on page 222 when reading about closing
entries.)
Closing Entry
First Closing Entry—Close Revenue to Income Summary
ANALYSIS Identify 1. Roadrunner has only one revenue account, Delivery Revenue. The
accounts affected are Delivery Revenue and Income Summary.
Classify 2. Delivery Revenue is a revenue account. Income Summary is a
temporary owner’s equity account.
/ 3. The Delivery Revenue account balance is decreased by $2,650 to zero.
That amount, $2,650, is transferred to the Income Summary account.
DEBIT-CREDIT RULE 4. Decreases in revenue accounts are recorded as debits. Debit Delivery
Revenue for $2,650.
5. To transfer the revenue to the Income Summary account, credit Income
Summary for $2,650.
T ACCOUNTS 6. Delivery Revenue Income Summary
Debit Credit Debit Credit
Closing 2,650 Balance 2,650 Closing 2,650
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 3
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- Closing Entries 1
2 Oct. 31 Delivery Revenue 2 6 5 0 00 2
3 Income Summary 2 6 5 0 00 3
4 4
254 Chapter 10 Completing the Accounting Cycle for a Sole Proprietorship
248-275_CH10_868829.indd 254 9/15/05 11:22:38 AM
To record closing entries in the general journal, follow these steps:
AS
1. Enter Closing Entries in the center of the Description column. YOU READ
2. Enter the date (the last day of the accounting period). In Your Experience
3. Enter the name(s) of the account(s) to be debited and the debit
Closing In your personal
amount(s).
life, what types of
4. Enter the name of the account, Income Summary, to be credited
“closing” activities do
and the amount to be credited.
you perform at the end
of a time period?
Closing Expenses to Income Summary
The second closing entry transfers the balances of the expense accounts
to Income Summary. The balances of the expense accounts are found in
the Income Statement section of the work sheet.
Closing Entry
Second Closing Entry—Close Expenses to Income Summary
ANALYSIS Identify 1. The accounts affected by the second closing entry are Advertising
Expense, Maintenance Expense, Rent Expense, Utilities Expense,
and Income Summary.
Classify 2. Advertising Expense, Maintenance Expense, Rent Expense, and
Utilities Expense are expense accounts. Income Summary is a
temporary owner’s equity account.
/ 3. The balances of the four expense accounts are decreased to zero; the
total decrease is $1,500. The total amount, $1,500, is transferred to the
Income Summary account.
DEBIT-CREDIT RULE 4. To transfer the expenses to the Income Summary account, debit
Income Summary for $1,500.
5. Decreases in expense accounts are recorded as credits. Credit
Advertising Expense, $75; Maintenance Expense, $600; Rent
Expense, $700; Utilities Expense, $125.
T ACCOUNTS 6. Income Summary Advertising Expense
Debit Credit Debit Credit
Closing 1,500 Balance 75 Closing 75
Maintenance Expense Rent Expense
Debit Credit Debit Credit
Balance 600 Closing 600 Balance 700 Closing 700
Utilities Expense
Debit Credit
Balance 125 Closing 125
Section 1 Preparing Closing Entries 255
248-275_CH10_868829.indd 255 9/15/05 11:22:39 AM
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 3
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
5 Oct. 31 Income Summary 1 5 0 0 00 5
6 Advertising Expense 7 5 00 6
7 Maintenance Expense 6 0 0 00 7
8 Rent Expense 7 0 0 00 8
9 Utilities Expense 1 2 5 00 9
10 10
It is not necessary to use a separate closing entry for each expense
account. As you can see, Roadrunner’s entry has one debit and four credits.
A journal entry with two or more debits or two or more credits is called
a compound entry . A compound entry saves both space and posting time.
For example, each of Roadrunner’s expense accounts could be closed to
Income Summary separately. That, however, requires four entries and post-
ings to the Income Summary account instead of one entry and posting.
Closing Income Summary to Capital
The third closing entry transfers the balance of the Income Summary
account to the capital account. As shown in the T account, after closing
Roadrunner’s revenue and expense accounts, Income Summary has a credit
balance of $1,150. A credit balance indicates net income for the period. It is
the same amount that appears on the work sheet.
Income Summary
2 Closing entry for expenses 1,500 1 Closing entry for revenue 2,650
Balance 1,150
Closing Entry
Third Closing Entry—Close Income Summary to Capital
ANALYSIS Identify 1. The accounts Income Summary and Maria Sanchez, Capital are affected.
Classify 2. Income Summary is a temporary owner’s equity account. Maria
Sanchez, Capital is an owner’s capital account.
/ 3. The Income Summary account balance is reduced to zero by
transferring $1,150, the net income amount, to the capital account.
Maria Sanchez, Capital is increased by $1,150.
DEBIT-CREDIT RULE 4. To reduce the Income Summary balance to zero, debit Income
Summary for $1,150.
5. Net income is recorded as a credit to the owner’s capital account. Credit
Maria Sanchez, Capital for $1,150.
256 Chapter 10 Completing the Accounting Cycle for a Sole Proprietorship
248-275_CH10_868829.indd 256 9/15/05 11:22:40 AM
T ACCOUNTS 6. Income Summary Maria Sanchez, Capital
Debit Credit Debit Credit
Closing 1,150 Balance 1,150 Balance 25,400
Closing 1,150
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 3
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
11 Oct. 31 Income Summary 1 1 5 0 00 11
12 Maria Sanchez, Capital 1 1 5 0 00 12
13 13
After the third closing entry has been posted, the Income Summary
account appears in T-account form as follows.
Income Summary
2 Closing entry for expenses 1,500 1 Closing entry for revenue 2,650
3 Closing balance to owner’s
capital account 1,150
If a business has a net loss, Income Summary has a debit balance. In
that case, the third closing entry debits the capital account and credits
Income Summary for the amount of the net loss. Figure 10–3 shows this
general journal entry.
GENERAL JOURNAL PAGE 3
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- Closing Entries 1
2 Oct. 31 Maria Sanchez, Capital 7 0 0 00 2
3 Income Summary 7 0 0 00 3
Figure 10–3 Closing
4 4
Income Summary for the
Amount of Net Loss
Closing Withdrawals to Capital
The fourth and last closing entry transfers the balance of the withdrawals
account to the capital account. As you recall, withdrawals decrease owner’s
equity. The balance of the withdrawals account is transferred to the capital
account to reflect the decrease in owner’s equity. The balance of the with-
drawals account is found in the Balance Sheet section of the work sheet.
Section 1 Preparing Closing Entries 257
248-275_CH10_868829.indd 257 9/15/05 11:23:14 AM
Closing Entry
Fourth Closing Entry—Close Withdrawals to Capital
ANALYSIS Identify 1. The accounts affected by the fourth closing entry are Maria Sanchez,
Withdrawals and Maria Sanchez, Capital.
Classify 2. Maria Sanchez, Withdrawals is a temporary owner’s equity account.
Maria Sanchez, Capital is an owner’s capital account.
/ 3. Maria Sanchez, Withdrawals is decreased by $500. Maria Sanchez,
Capital is decreased by $500.
DEBIT-CREDIT RULE 4. Decreases in owner’s capital accounts are recorded as debits. Debit
Maria Sanchez, Capital for $500.
5. Decreases in owner’s withdrawal accounts are recorded as credits.
Credit Maria Sanchez, Withdrawals for $500.
T ACCOUNTS 6. Maria Sanchez, Capital Maria Sanchez, Withdrawals
Debit Credit Debit Credit
Closing 500 Balance 26,550 Balance 500 Closing 500
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 3
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
14 Oct. 31 Maria Sanchez, Capital 5 0 0 00 14
15 Maria Sanchez, Withdrawals 5 0 0 00 15
Figure 10–4 summarizes the closing entries for Roadrunner.
GENERAL JOURNAL PAGE 3
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- Closing Entries 1
2 Oct. 31 Delivery Revenue 2 6 5 0 00 2
3 Income Summary 2 6 5 0 00 3
4 4
5 31 Income Summary 1 5 0 0 00 5
6 Advertising Expense 75 00 6
7 Maintenance Expense 600 00 7
8 Rent Expense 700 00 8
9 Utilities Expense 125 00 9
10 10
11 31 Income Summary 1 1 5 0 00 11
12 Maria Sanchez, Capital 1 1 5 0 00 12
13 13
14 31 Maria Sanchez, Capital 5 0 0 00 14
Figure 10–4 Journalizing 15 Maria Sanchez, Withdrawals 5 0 0 00 15
the Closing Entries
258 Chapter 10 Completing the Accounting Cycle for a Sole Proprietorship
248-275_CH10_868829.indd 258 9/15/05 11:23:17 AM
SECTION 1 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Use a table like this one to
'ENERAL *OURNAL %NTRY $ESCRIPTION !CCOUNT $EBITED !CCOUNT #REDITED
describe the closing entries
that are made at the end of
each accounting period.
Do the Math
Using these general ledger account balances, calculate the net income or net loss for the
period. Then calculate the increase or decrease in owner’s capital.
Anna Zarian, Capital $25,000
Anna Zarian, Withdrawals 5,000
Accounting Fees Revenue 9,000
Advertising Expense 1,000
Miscellaneous Expense 2,000
Rent Expense 1,500
Utilities Expense 500
Problem 10–1 Preparing Closing Entries
Instructions Prepare closing entries for the following in your working papers.
1. A closing entry must be made for the account Ticket Revenue, which has a balance
of $6,000.
2. A business has three expense accounts: Gas and Oil Expense (balance, $700),
Miscellaneous Expense (balance, $600), and Utilities Expense (balance, $1,800). The
end of the fiscal year is June 30.
Problem 10–2 Analyzing a Source Document
Instructions Using the source document:
DEPARTMENT OF WATER & POWER
1. Journalize the transaction in a general 455 Main Street
Sarasota, FL 34230
journal in your working papers. ACCOUNT NO.:
INVOICE NO.:
00384843848-339
32004
2. Post the entry to the appropriate Gulfview Tropical Fish and Supplies
T accounts. TO 4524 West Palm Bay Avenue
Sarasota, FL 34222
3. Assume it is the end of the accounting
DATES
period. Record the closing entry for FROM TO
USAGE RATE
AMOUNT
DUE
this account in the general journal. March 15, 20-- April 14, 20-- 1,000 kWh $.129 per kWh $129.00
4. Post the closing entry to the
appropriate T accounts.
Section 1 Preparing Closing Entries 259
248-275_CH10_868829.indd 259 9/15/05 11:23:28 AM
SECTION 2 Posting Closing Entries and
Preparing a Post-Closing
Trial Balance
In Section 1 you learned how to journalize the closing entries. In this
BEFORE
YOU READ section you will complete the accounting cycle.
Main Idea Completing the Eighth Step in the
After the closing entries are
posted, a post-closing trial
Accounting Cycle: Posting the Closing
balance is prepared to verify Entries to the General Ledger
that debits equal credits. What Is Special About Posting the Closing Entries?
Read to Learn… The next step in the closing process is to post the closing entries to
➤ how to post the closing the general ledger accounts. The posting procedure is the same as for any
entries to the general other general journal entry, with one exception. The words Closing Entries
ledger. (p. 260) are written in the Description column of the general ledger account. The
➤ how to prepare a post- posting of the closing entries for Roadrunner is shown in Figure 10–5.
closing trial balance. Note that Closing Entries can be abbreviated as Clos. Ent.
(p. 262)
Key Terms GENERAL JOURNAL PAGE 3
post-closing trial balance POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- Closing Entries 1
2 Oct. 31 Delivery Revenue 401 2 6 5 0 00 2
3 Income Summary 303 2 6 5 0 00 3
4 4
5 31 Income Summary 303 1 5 0 0 00 5
6 Advertising Expense 501 7 5 00 6
7 Maintenance Expense 505 60 0 00 7
8 Rent Expense 510 70 0 00 8
9 Utilities Expense 515 12 5 00 9
10 10
11 31 Income Summary 303 1 1 5 0 00 11
12 Maria Sanchez, Capital 301 1 1 5 0 00 12
13 13
14 31 Maria Sanchez, Capital 301 5 0 0 00 14
15 Maria Sanchez, Withdrawals 302 5 0 0 00 15
Figure 10–5 Closing Entries
16 16
Posted to the General Ledger
260 Chapter 10 Completing the Accounting Cycle for a Sole Proprietorship
248-275_CH10_868829.indd 260 4/6/06 5:46:25 PM
ACCOUNT Maria Sanchez, Capital ACCOUNT NO. 301
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Oct. 1 G1 25 0 0 0 00 25 0 0 0 00
2 G1 4 0 0 00 25 4 0 0 00
31 Clos. Ent. G3 1 1 5 0 00 26 5 5 0 00
31 Clos. Ent. G3 5 0 0 00 26 0 5 0 00
ACCOUNT Maria Sanchez, Withdrawals ACCOUNT NO. 302
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Oct. 31 G1 5 0 0 00 5 0 0 00
31 Clos. Ent. G3 5 0 0 00
ACCOUNT Income Summary ACCOUNT NO. 303
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Oct. 31 Clos. Ent. G3 2 6 5 0 00 2 6 5 0 00
31 Clos. Ent. G3 1 5 0 0 00 1 1 5 0 00
31 Clos. Ent. G3 1 1 5 0 00
ACCOUNT Delivery Revenue ACCOUNT NO. 401
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Oct. 15 G1 1 2 0 0 00 1 2 0 0 00
20 G1 1 4 5 0 00 2 6 5 0 00
31 Clos. Ent. G3 2 6 5 0 00
ACCOUNT Advertising Expense ACCOUNT NO. 501
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Oct. 18 G1 7 5 00 7 5 00
31 Clos. Ent. G3 7 5 00
ACCOUNT Maintenance Expense ACCOUNT NO. 505
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Oct. 29 G1 6 0 0 00 6 0 0 00
31 Clos. Ent. G3 6 0 0 00
Figure 10–5 Closing Entries Posted to the General Ledger (continued)
Section 2 Posting Closing Entries and Preparing a Post-Closing Trial Balance 261
248-275_CH10_868829.indd 261 9/15/05 11:23:46 AM
ACCOUNT Rent Expense ACCOUNT NO. 510
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Oct. 16 G1 7 0 0 00 7 0 0 00
31 Clos. Ent. G3 7 0 0 00
ACCOUNT Utilities Expense ACCOUNT NO. 515
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Oct. 28 G1 1 2 5 00 1 2 5 00
31 Clos. Ent. G3 1 2 5 00
Figure 10–5 Closing Entries Posted to the General Ledger (continued)
AS
YOU READ The Ninth Step in the Accounting Cycle:
Compare and Preparing a Post-Closing Trial Balance
Contrast If We Already Have a Trial Balance, Why Do We Need a
Post-Closing Trial Balance?
Post-Closing Trial
Balance How is the The last step in the accounting cycle is to prepare a post-closing trial bal-
post-closing trial ance. The post-closing trial balance is prepared to make sure total debits
balance similar to the equal total credits after the closing entries are posted. The post-closing trial
trial balance? How is it balance for Roadrunner is shown in Figure 10–6.
different? Notice that only accounts with balances are listed on the post-closing
trial balance. After the closing process, only permanent accounts have bal-
ances. Temporary accounts have zero balances, so there is no need to list
those accounts on the post-closing trial balance.
Roadrunner Delivery Service
Post-Closing Trial Balance
October 31, 20--
Cash in Bank 21 1 2 5 00
Accounts Receivable—City News 1 450 00
Computer Equipment 3 000 00
Office Equipment 200 00
Delivery Equipment 12 0 0 0 00
Accounts Payable—Beacon Advertising 75 00
Accounts Payable—North Shore Auto 11 6 5 0 00
Maria Sanchez, Capital 26 0 5 0 00
Total 37 7 7 5 00 37 7 7 5 00
Figure 10–6 Post-Closing Trial Balance
262 Chapter 10 Completing the Accounting Cycle for a Sole Proprietorship
248-275_CH10_868829.indd 262 9/15/05 11:23:56 AM
SECTION 2 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Create a table like this one to !CCOUNT 4YPE !PPEARS ON 0OST #LOSING 4RIAL "ALANCE
list the general ledger account !SSET
classifications. In the column ,IABILITY
titled “Appears on Post-
/WNERS #APITAL
Closing Trial Balance,” place
/WNERS 7ITHDRAWALS
an X next to each account that 2EVENUE
carries a balance into the next
%XPENSES
accounting period.
Do the Math
You work for a company with a large accounting department, and every accounting clerk
has specific duties. Your co-worker responsible for preparing the post-closing trial balance
is ill today. Your supervisor asked you to prepare the post-closing trial balance. Using your
computer or lined paper, draft the post-closing trial balance using the following account
balances: Cash, $27,800; Accounts Receivable, $33,000; Equipment, $81,000; Accounts
Payable, $24,500; and Owner’s Capital, $117,300.
Problem 10–3 Determining Accounts Affected
by Closing Entries
The following list contains some of the accounts used by Living Well Health Spa.
General Ledger
Accts. Pay.—The Fitness Exercise Equipment Rent Expense
Shop Income Summary Repair Tools
Accts. Rec.—Linda Laundry Equipment Ted Chapman, Capital
Brown Maintenance Expense Ted Chapman,
Advertising Expense Membership Fees Withdrawals
Cash in Bank Miscellaneous Expense Utilities Expense
Exercise Class Revenue Office Furniture
Instructions Using the form in your working papers:
1. In the first column, indicate the financial statement where each account appears: balance
sheet or income statement.
2. In the next column, indicate whether or not the account is affected by a closing entry.
3. In the last column, indicate whether or not the account appears on the post-closing trial
balance.
Is the account Does the account
The first Financial
Account Name affected by a appear on the post-
account is Statement closing entry? closing trial balance?
shown as an
Accts. Pay.—The
example. Fitness Shop Balance Sheet No Yes
Section 2 Posting Closing Entries and Preparing a Post-Closing Trial Balance 263
248-275_CH10_868829.indd 263 9/15/05 11:24:03 AM
CH A P T ER 10 Summary
Key Concepts
1. The eighth step in the accounting cycle is to journalize and post the closing entries:
• Closing is the process of transferring the balances in the temporary accounts to the owner’s
capital account.
• The asset, liability, and owner’s capital accounts are never closed.
2. The Income Summary account has two purposes:
• to accumulate the revenue and expenses for an accounting period, and
• to summarize the revenue and expenses for an accounting period.
3. Income Summary is a temporary owner’s equity account used to record net income or net loss:
• A credit balance (net income) in Income Summary increases capital.
• A debit balance (net loss) decreases capital.
• The Income Summary account does not have a normal balance. That is, it does not have an
increase side or a decrease side.
• The Income Summary account balance is zero before and after the closing process.
• The Income Summary account does not appear on any financial statements.
4. Prepare four closing entries:
a. Close the revenue account(s) to Income Summary.
1 20-- 1
2 Dec. 31 Revenue Account x x x xx 2
3 Income Summary x x x xx 3
b. Close the expense accounts to Income Summary.
4 31 Income Summary x x x xx 4
5 Expense Account x x x xx 5
6 Expense Account x x x xx 6
7 Expense Account x x x xx 7
c. Close Income Summary to the owner’s capital account.
8 31 Income Summary x x x xx 8
9 Owner’s Capital Account x x x xx 9
d. Close the owner’s withdrawals account to the owner’s capital account.
12 31 Owner’s Capital Account x x x xx 12
13 Withdrawals Account x x x xx 13
264 Chapter 10 Summary
248-275_CH10_868829.indd 264 9/15/05 11:24:07 AM
Summary C HAPT E R 1 0
Income Summary
Debit Credit
Expenses Revenue
If Revenue Expenses Balance is net income
If Revenue Expenses Balance is net loss
5. After the closing entries have been journalized, follow this procedure:
• Post them to the general ledger.
• For each posted entry, enter the words Closing Entry in the Description column of the general
ledger account.
6. The ninth step in the accounting cycle is to prepare a post-closing trial balance. Only the
permanent accounts are listed on the post-closing trial balance.
Roadrunner Delivery Service
Post-Closing Trial Balance
December 31, 20--
Cash in Bank 21 1 2 5 00
Accts. Rec.—City News 1 450 00
Computer Equipment 3 000 00
Office Equipment 200 00
Delivery Equipment 12 0 0 0 00
Accts. Pay.—Beacon Advertising 75 00
Accts. Pay.—North Shore Auto 11 6 5 0 00
Maria Sanchez, Capital 26 0 5 0 00
Totals 37 7 7 5 00 37 7 7 5 00
Key Terms
closing entries (p. 250)
compound entry (p. 256)
Income Summary account (p. 253)
post-closing trial balance (p. 262)
Chapter 10 Summary 265
248-275_CH10_868829.indd 265 9/15/05 11:24:14 AM
C H A P T ER 10 Review and Activities
AFTER
YOU READ
Check Your Understanding
1. Closing Entries
a. Which accounts are considered temporary accounts?
b. Why are temporary accounts closed at the end of the fiscal year?
2. Income Summary Account
a. What is the purpose of the Income Summary account?
b. How does the Income Summary account differ from the other temporary accounts?
3. Income Summary and Capital Accounts
a. Explain the relationship between the Income Summary account and the capital account.
b. Why doesn’t the Income Summary account have a normal balance?
4. Analyzing and Journalizing Closing Entries
a. What is the source of information for the closing entries?
b. List the steps for journalizing the closing entries.
5. Posting the Closing Entries
a. Classify the Income Summary account (asset, liability, owner’s equity, revenue, or expense).
b. How is the posting procedure for closing entries different from the posting procedure for
other general journal entries?
6. Post-Closing Trial Balance
a. What is the purpose of the post-closing trial balance?
b. Why does the post-closing trial balance have balances of only permanent accounts?
Apply Key Terms
On a separate sheet of paper, write a brief
definition for each of the following terms.
closing entries
compound entry
Income Summary account
post-closing trial balance
266 Chapter 10 Review and Activities
248-275_CH10_868829.indd 266 9/15/05 11:24:21 AM
Computerized Accounting C HAPT E R 1 0
Closing the Accounting Period
Making the Transition from a Manual to a Computerized System
Task Manual Methods Computerized Methods
Closing Entries • Using a general journal form, prepare • It is not necessary to journalize closing
closing entries for revenue, expense, entries. Closing entries are performed
income summary, and withdrawals by the computerized system.
accounts. Post the closing entries in the
general ledger accounts.
Q&A
Peachtree Question Answer
What is the difference • In Peachtree the accounting period refers to the period used to record
between changing the transactions. At the end of an accounting period (usually at month-end), you
accounting period and should change to the next accounting period. For example, at March 31, you
closing the fiscal year would select the next accounting period, April 1, 20-- through April 30, 20--.
in Peachtree? • The fiscal year should be closed only when you are sure that all entries have
been recorded and all reports have been printed for the year.
How do I close the 1. Post and print all journal entries before closing the fiscal year. Closing the fiscal
fiscal year? year cannot be reversed.
2. From the Tasks menu, select System.
3. Select Year-End Wizard.
4. You will be prompted to complete Year-End closing procedures.
QuickBooks Q & A
QuickBooks Question Answer
What is the difference • In QuickBooks the accounting period refers to the month used to record
between changing the transactions. Changing the accounting period is as simple as entering the first
accounting period and day of the next month. The software does not require that you manually adjust
closing the fiscal year accounting periods.
in QuickBooks? • The fiscal year should be closed only when you are sure that all entries have
been recorded and all reports have been printed for the year.
How do I close the 1. Record all journal entries before closing the fiscal year.
fiscal year? 2. From the Edit menu, select Preferences.
3. Choose the Accounting preference and click the Company Preferences tab.
4. In the Date field, enter the closing date and click the Set Password button.
5. Enter and confirm the password, and click OK.
For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers.
Chapter 10 Computerized Accounting 267
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C H A P T ER 10 Problems
Complete problems using: Manual Glencoe Spreadsheet
Spreadshee
OR
Working Papers Templates
Problem 10–4 Preparing Closing Entries
SMART GUIDE A portion of the work sheet for Wilderness Rentals for the period ended
Step–by–Step Instructions: December 31 follows.
Problem 10–4 Instructions Using the information from the work sheet, prepare the
1. Select the problem set journal entries to close the temporary accounts.
for Wilderness Rentals
(Prob. 10–4). 1. Record the closing entry for the revenue account.
2. Rename the company 2. Record the closing entry for the expense accounts.
and set the system date.
3. Select System from 3. Record the closing entry for the Income Summary account.
the Tasks menu and 4. Record the closing entry for the withdrawals account.
then choose Year-End
Wizard.
4. Complete the Analyze Wilderness Rentals
activity. Work Sheet
5. End the session. For the Period Ended December 31, 20--
TIP: Print the General ACCT. INCOME STATEMENT BALANCE SHEET
ACCOUNT NAME
Ledger or General Ledger NO. DEBIT CREDIT DEBIT CREDIT
Trial Balance report to find 1 101 Cash in Bank 7 0 0 0 00 1
an account balance. 2 105 Accts. Rec.—Helen Katz 2 0 0 0 00 2
3 110 Accts. Rec.—Polk and Co. 1 0 0 0 00 3
4 115 Office Supplies 9 0 0 00 4
5 120 Office Equipment 12 0 0 0 00 5
6 125 Camping Equipment 6 0 0 0 00 6
7 201 Accts. Pay.—Adventure Equip. Inc. 9 0 0 00 7
8 203 Accts. Pay.—Digital Tech Computers 4 0 0 00 8
9 205 Accts. Pay.—Greg Mollaro 5 0 0 00 9
10 301 Ronald Hicks, Capital 19 7 7 5 00 10
11 305 Ronald Hicks, Withdrawals 2 3 5 0 00 11
12 310 Income Summary 12
13 401 Equipment Rental Revenue 14 9 6 5 00 13
14 501 Advertising Expense 1 5 0 0 00 14
15 505 Maintenance Expense 1 5 6 0 00 15
16 515 Rent Expense 1 0 0 0 00 16
17 525 Utilities Expense 1 2 3 0 00 17
18 5 2 9 0 00 14 9 6 5 00 31 2 5 0 00 21 5 7 5 00 18
19 Net Income 9 6 7 5 00 9 6 7 5 00 19
20 14 9 6 5 00 14 9 6 5 00 31 2 5 0 00 31 2 5 0 00 20
21 21
Analyze Predict the balance of the capital account after the closing
entries are posted.
Problem 10–5 Preparing a Post-Closing
Trial Balance
Instructions Use the accounts shown on the next two pages to prepare
a Dec. 31 post-closing trial balance for Hot Suds Car Wash.
268 Chapter 10 Problems
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Problems C HAPT E R 1 0
Accounts Receivable—
Cash in Bank Linda Brown
Debit Credit Debit Credit
Balance 8,000 Balance 875 SMART GUIDE
Step–by–Step Instructions:
Accounts Receivable— Problem 10–5
Valley Auto Office Equipment 1. Select the problem set
for Hot Suds Car Wash
Debit Credit Debit Credit
(Prob. 10–5).
2. Rename the company
Balance 5,050 Balance 6,000
and set the system date.
3. Print a post-closing Trial
Balance.
Office Furniture Car Wash Equipment
4. Complete the Analyze
activity.
Debit Credit Debit Credit
5. End the session.
Balance 9,000 Balance 65,000 TIP: Print the General
Ledger Trial Balance after
you complete the closing
Accounts Payable— Accounts Payable— process to generate a post-
Allen Vacuum Systems O’Brian’s Office Supply closing trial balance.
Debit Credit Debit Credit
Balance 41,000 Balance 2,500
Regina Delgado, Capital Regina Delgado, Withdrawals
QuickBooks
Debit Credit Debit Credit
PROBLEM GUIDE
Closing 1,500 35,925 Balance 1,500 Closing 1,500
Closing 16,000 Step–by–Step Instructions:
Problem 10–5
1. Restore the Problem
Income Summary Wash Revenue 10-5.QBB file.
2. Print a Post-Closing Trial
Debit Credit Debit Credit
Balance.
3. Complete the Analyze
Closing 19,000 Closing 35,000 Closing 15,000 Balance 15,000
activity.
Closing 16,000
4. Back up your work.
Wax Revenue Interior Detailing Revenue
Debit Credit Debit Credit
Closing 8,000 Balance 8,000 Closing 12,000 Balance 12,000
Advertising Expense Equipment Rental Expense
Debit Credit Debit Credit
Balance 2,500 Closing 2,500 Balance 3,000 Closing 3,000
CONTINUE
Chapter 10 Problems 269
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C H A P T ER 10 Problems
Maintenance Expense Rent Expense
Debit Credit Debit Credit
Balance 5,000 Closing 5,000 Balance 5,000 Closing 5,000
- Utilities Expense
Debit Credit
Balance 3,500 Closing 3,500
Analyze Predict the balance of the temporary accounts after the
closing entries are posted.
Problem 10–6 Journalizing Closing Entries
SMART GUIDE The following account names and balances appear on the work sheet for
Step–by–Step Instructions: Kits & Pups Grooming for the month ended December 31.
Problem 10–6
1. Select the problem Kits & Pups Grooming
set for Kits & Pups Work Sheet
Grooming (Prob. 10–6). For the Month Ended December 31, 20--
2. Rename the company
and set the system date. ACCT.
NO. ACCOUNT NAME
INCOME STATEMENT BALANCE SHEET
DEBIT CREDIT DEBIT CREDIT
3. Close the current fiscal
year. 1 Cash in Bank 9 3 0 0 00 1
4. Complete the Analyze 2 Accts. Rec.—Juan Alvarez 3 0 0 0 00 2
activity. 3 Accts. Rec.—Nathan Carlsbad 10 0 0 0 00 3
5. End the session. 4 Accts. Rec.—Martha Giles 5 0 0 0 00 4
5 Office Equipment 8 0 0 0 00 5
6 Office Furniture 10 0 0 0 00 6
7 Computer Equipment 9 000 00 7
8 Grooming Equipment 15 000 00 8
9 Kennel Equipment 21 000 00 9
10 Accts. Pay.—Able Store Equip. 5 000 00 10
11 Accts. Pay.—Dogs & Cats Inc. 1 500 00 11
12 Accts. Pay.—Pet Gourmet 15 000 00 12
13 Abe Shultz, Capital 52 700 00 13
14 Abe Shultz, Withdrawals 7 0 0 0 00 14
15 Income Summary 15
16 Boarding Revenue 20 0 0 0 00 16
17 Grooming Revenue 8 0 0 0 00 17
18 Advertising Expense 7 0 0 00 18
19 Equipment Repair Expense 1 2 0 0 00 19
20 Maintenance Expense 5 0 0 00 20
21 Rent Expense 1 7 0 0 00 21
22 Utilities Expense 8 0 0 00 22
Instructions Using this information, record the closing entries for Kits &
Pups Grooming. Use general journal page 11.
Analyze Calculate the change in the capital account for the period.
270 Chapter 10 Problems
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Problems C HAPT E R 1 0
Problem 10–7 Posting Closing Entries and
Preparing a Post-Closing SMART GUIDE
Trial Balance Step–by–Step Instructions:
Problem 10–7
Period ending December 31 closing entries for Outback Guide Service are:
1. Select the problem
set for Outback Guide
1 Service (Prob. 10–7).
GENERAL JOURNAL PAGE
2. Rename the company
DATE DESCRIPTION
POST.
DEBIT CREDIT and set the system date.
REF.
3. Close the fiscal year.
1 20-- Closing Entries 1 4. Print a post-closing Trial
2 Dec. 31 Guide Service Revenue 16 3 0 0 00 2 Balance.
3 Income Summary 16 3 0 0 00 3 5. Complete the Analyze
4 31 Income Summary 10 0 0 0 00 4
activity.
6. End the session.
5 Advertising Expense 3 000 00 5
6 Maintenance Expense 1 100 00 6
7 Rent Expense 4 000 00 7
Utilities Expense 1 900 00
8 8
SMART GUIDE
9 31 Income Summary 6 3 0 0 00 9
10 Juanita Ortega, Capital 6 3 0 0 00 10 Step–by–Step Instructions:
11 31 Juanita Ortega, Capital 4 0 0 0 00 11
Problem 10–8
12 Juanita Ortega, Withdrawals 4 0 0 0 00 12 1. Select the problem set
13 13
for Showbiz Video
(Prob. 10–8).
2. Rename the company
and set the system date.
Instructions Using your working papers, post the closing entries to the 3. Print a General Ledger
appropriate general ledger accounts and prepare a post-closing trial balance. Trial Balance.
4. Print an Income State-
Analyze Calculate the balance of the capital account after closing. ment, Balance Sheet, and
Statement of Changes in
Owner’s Equity.
5. Close the fiscal year.
Problem 10–8 Completing Period-End Activities 6. Print a post-closing Trial
Balance.
The general ledger for Showbiz Video shows the following at December 31: 7. Complete the Analyze
activity.
General Ledger 8. End the session.
101 Cash in Bank 12,000 207 Accts. Pay.—
105 Accts. Rec.—G. Cohen 3,000 New Media Suppliers 3,000 QuickBooks
110 Accts. Rec.—J. Coletti 900 209 Accts. Pay.—Palace Films14,000
113 Accts. Rec.—S. Flannery 1,800 301 Greg Failla, Capital 33,775 PROBLEM GUIDE
115 Accts. Rec.—Spring 305 Greg Failla, Withdrawals 4,000 Step–by–Step Instructions:
Branch School District 1,500 310 Income Summary — Problem 10–8
130 Office Equipment 5,000 401 Video Rental Revenue 9,600 1. Restore the Problem
135 Office Furniture 8,000 405 VCR Rental Revenue 3,500 10-8.QBB file.
140 Computer Equipment 10,000 501 Advertising Expense 1,600 2. Print a Trial Balance, a
145 Video Tapes 20,000 505 Equipment Repair Profit & Loss report, and
a Balance Sheet.
150 Video Equipment 9,000 Expense 1,200 3. Close the fiscal year and
201 Accts. Pay.—Broad Street 510 Maintenance Expense 400 print a Trial Balance.
Office Supply 400 520 Rent Expense 1,000 4. Complete the Analyze
205 Accts. Pay.— 530 Utilities Expense 375 activity.
Computer Horizons 15,500 5. Back up your work.
CONTINUE
Chapter 10 Problems 271
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C H A P T ER 10 Problems
Instructions Using the preceding account names and balances:
1. Prepare the six-column work sheet. The period covered is one month.
2. Prepare the financial statements. Greg Failla invested $10,000 during
the month.
3. Record the closing entries on page 12 of the general journal.
4. Post the closing entries.
5. Prepare a post-closing trial balance.
Analyze Calculate the total amount of all the accounts receivable
accounts on December 31.
SPREADSHEET
SMART GUIDE CHALLENGE Problem 10–9 Completing End-of-
PROBLEM
Step–by–Step Instructions:
Period Activities
Problem 10–9 At the end of December, the general ledger for Job Connect showed the
1. Select the spreadsheet following account balances:
template for Problem
10–9. General Ledger
2. Enter your name and 101 Cash in Bank 6,000 207 Accts. Pay.—Wildwood
the date. 105 Accts. Rec.— Furniture Sales 2,000
3. Complete the CompuRite Systems 1,000 301 Richard Tang, Capital 23,600
spreadsheet using the
instructions in your
110 Accts. Rec.— 302 Richard Tang,
working papers. Marquez Manufact. 500 Withdrawals 3,000
4. Print the spreadsheet 113 Accts. Rec.—Roaring 303 Income Summary —
and proof your work. Rivers Water Park 600 401 Placement Fees Revenue 6,900
5. Complete the Analyze 115 Accts. Rec.—M. Spencer 200 405 Technology Classes
activity.
6. Save your work and
130 Office Equipment 7,000 Revenue 2,400
exit the spreadsheet 135 Office Furniture 5,000 501 Advertising Expense 3,000
program. 140 Computer Equipment 8,500 505 Maintenance Expense 800
201 Accts. Pay.—Micro 510 Miscellaneous Expense 800
Solutions Inc. 2,800 520 Rent Expense 2,000
205 Accts. Pay.—Vega 530 Utilities Expense 900
Internet Services 1,600
Instructions Using the preceding account names and balances:
1. Prepare the six-column work sheet. The period covered is one month.
2. Prepare the financial statements.
3. Record the closing entries on page 28 of the general journal.
4. Post the closing entries.
5. Prepare a post-closing trial balance.
Analyze Identify the largest expenditure for the period.
272 Chapter 10 Problems
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Winning Competitive Events CHAPTER 10
Practice your test-taking skills! The questions on this page are reprinted with permission
from national organizations:
• Future Business Leaders of America
• Business Professionals of America
Use a separate sheet of paper to record your answers.
Future Business Leaders of America
MULTIPLE CHOICE
1. Which of the following accounts needs no closing entries?
a. Capital
b. Supplies Expense
c. Fees Owed
d. All of the above
2. After adjusting and closing entries have been posted, a
a. balance sheet is prepared.
b. trial balance is prepared.
c. post-closing balance sheet is prepared.
d. post-closing trial balance is prepared.
3. The Capital account balance minus the net loss minus the Drawing account
balance equals
a. net loss.
b. total liabilities.
c. the capital amount shown on a balance sheet.
d. the capital amount shown on an income statement.
Business Professionals of America
MULTIPLE CHOICE
4. Which of the following will not appear on a post-closing trial balance?
a. Accounts Payable
b. Sales
c. Owner’s Capital
d. Cash
5. At the end of the fiscal period, the income summary account shows a credit
balance of $3,500. This income summary account balance will be closed out to
which account?
a. a debit to owner’s capital
b. a credit to owner’s capital
c. a debit to owner’s revenue
d. a credit to owner’s withdrawals Need More Help?
Go to glencoeaccounting.glencoe.com and
click on Student Center. Click on Winning
Competitive Events and select Chapter 10.
• Practice Questions and Test-Taking Tips
• Concept Capsules and Terminology
glencoeaccounting.glencoe.com Chapter 10 Winning Competitive Events 273
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C H A P T ER 10 Real-World Applications and Connections
Critical Completing the Accounting Cycle
Thinking 1. What is the last step of the accounting cycle?
2. Why are the temporary accounts closed to the owner’s capital account at the
end of the accounting period?
3. Make the closing entries for (a) a $5,000 net income for the year ending
December 31 and (b) a $4,000 net loss for the quarter ending June 30.
4. Compare and contrast the closing entry for an expense account and the
closing entry for the withdrawals account.
5. What items do you need to journalize the closing entries? Include office
supplies and forms as well as any information that will be needed.
6. What is the value of preparing a post-closing trial balance?
CASE Service Business: Computer Consulting
STUDY You note after preparing financial statements for Computer Works and completing
the closing entries below that the owner’s capital account balance is $34,400 in
the general ledger but is $43,400 on the statement of changes in owner’s equity.
The capital account balance was $38,900 at the beginning of the month.
INSTRUCTIONS (1) Identify the mistakes in the closing entries and (2) calculate the
correct capital account balance.
Date Description Debit Credit
Aug. 31 Consulting Fee Revenue 9,240
Income Summary 9,240
Aug. 31 Income Summary 870
Advertising Expense 300
Internet Access Expense 20
Rent Expense 550
Aug. 31 Rex Moran, Capital 8,100
Income Summary 8,100
a
mattoefr ETHICS Computer Viruses
Computer viruses “reproduce” themselves in computer programs, slowing the
system or destroying data. A friend gives you a computer game with a harmless
virus. To add some fun at work, you load the game onto the company’s network.
ETHICAL DECISION MAKING
1. What are the ethical issues? 4. How do the alternatives affect the
2. What are the alternatives? parties?
3. Who are the affected parties? 5. What would you do?
$ )) ))
Communicating
Explaining Cause and Effect
ACCOUNTING Your boss left you a note questioning the decrease in his owner’s capital account.
You see that his withdrawals were the cause. List some points to explain the
situation. Pick a classmate to listen to your explanation, which should prove that
you understand that the withdrawals account is closed to the capital account.
274 Chapter 10 Real-World Applications and Connections
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Real-World Applications and Connections C HAPT E R 1 0
Skills Beyond Working in a Team
NUMBERS Imagine that you work in the accounting department for the multimedia division
of MTV. The CD-ROM project manager wants to produce and sell a new CD-ROM
with clips from the latest music videos. You and your co-workers have questions.
INSTRUCTIONS Form a team of five students and list the questions you may
have. Compile your questions and opinions about the product (from a financial
perspective) into a one-page report and present it to the class.
INTERNATIONAL The World Trade Organization
The World Trade Organization (WTO) negotiates most trade agreements between
Accounting nations. The organization is dedicated to resolving disputes, stimulating
economic growth, and lowering trade barriers. It handles issues including tariffs,
customs processes, professional services, e-commerce, and import licensing.
INSTRUCTIONS List the issues the WTO is reviewing this month. Locate the Web
site for the WTO and click on the ‘Events calendar’ link.
Making It
Your Checking Account
Personal Whether you are a business owner or a consumer, you will probably use a
checking account. You are responsible for keeping track of your cash by recording
deposits and withdrawals on the check stubs in the checkbook.
PERSONAL FINANCE ACTIVITY Assume that you opened a checking account by
depositing $200 at the beginning of the month. During the month you wrote
three checks: 101 for $25, 102 for $50, and 103 for $75. When and where should
you record each deposit and check? Calculate the checking account balance.
PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and
click on Student Center. Click on Making It Personal and select Chapter 10.
Analyzing Calculating Return on Owner’s Equity
Financial One measure of business success is the return on owner’s equity (ROE):
Reports
Net Income $3,600
11.25%
Beginning Owner’s Equity Withdrawals $34,500 $2,500
The resulting percentage shows the amount
earned during the period on each dollar
invested by the owner. Closing Entries
INSTRUCTIONS Use Roadrunner’s income state- The closing entries for professional
ment (page 222) and statement of changes in sports teams are similar to those
owner’s equity (page 226) to calculate October’s for other types of businesses. Go to
glencoeaccounting
ROE. How does this return compare with a bank
.glencoe.com and click
savings account that pays 2 percent interest per on Student Center. Click on
year? WebQuest and select Unit 2 to
continue your Internet project.
glencoeaccounting.glencoe.com Chapter 10 Real-World Applications and Connections 275
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CH A P T ER 11 Cash Control and
Banking Activities
BEFORE
YOU READ
What You’ll Learn Predict
1. Describe the internal controls 1. What does the chapter title tell you?
used to protect cash. 2. What do you already know about this subject from personal experience?
3. What have you learned about this in the earlier chapters?
2. Describe the forms needed
to open and use a checking 4. What gaps exist in your knowledge of this subject?
account.
3. Record information on check
stubs. Exploring the Real World of Business
4. Prepare a check.
CONTROLLING CASH
5. Prepare bank deposits.
6. Reconcile a bank statement.
Jamba Juice
Snacking at school does not have to be about greasy chips,
7. Journalize and post entries candy bars, and sugary sodas. Across the nation schools are
relating to bank service
getting healthier about snacks. In many places students can
charges.
now choose from smoothies like the Tropical Awakening or the
8. Describe the uses of the Strawberry Nirvana—both popular drinks from Jamba Juice.
electronic funds transfer
Made with 100 percent fruit juices, Jamba smoothies provide
system.
three to six of the daily recommended servings of fruit.
9. Define the terms introduced Founded in 1990, the company now operates more than
in this chapter.
430 stores nationwide. You can imagine how important it is
Why It’s Important to control cash as customers buy smoothies, juice, and baked
goods. Companies like Jamba Juice use cash registers and
Banking tasks are basic
▲
practices in business and in specific bank deposit procedures to be sure that cash is properly
your personal life. accounted for.
What Do You Think?
What do you think is the most common problem that
occurs in Jamba Juice stores in regard to cash?
276 Chapter 11 Cash Control and Banking Activities
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Working in the Real World
APPLYING YOUR ACCOUNTING KNOWLEDGE
Personal Connection
You cash your paycheck, stuff the cash in your 1. Do you handle cash, checks, or credit cards in
wallet or billfold, and before you know it, the your job?
cash is gone! It is easy to lose track of how you 2. What procedures help protect cash?
spend your money. Businesses also have to watch
their money carefully. One way of safeguarding Online Connection
cash is to keep it in the bank and write checks to Go to glencoeaccounting.glencoe.com and click
make payments. You will learn about a business on Student Center. Click on Working in the
checking account in this chapter. Real World and select Chapter 11.
glencoeaccounting.glencoe.com 277
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SECTION 1 Banking Procedures
In any business, cash (currency, coins, and checks) is used in daily
BEFORE
YOU READ transactions. An important part of accounting for a business, therefore,
involves tracking the cash received and paid out. For example, Jamba
Juice has established procedures for processing the cash received from
Main Idea the sale of drinks and other items. Jamba Juice also has a system of moni-
Internal controls are steps
toring and controlling cash paid out for wages, utilities, supplies, and
taken to protect assets and
numerous other expenses.
keep reliable records.
Read to Learn… Protecting Cash
➤ how a business protects
How Does a Business Protect Cash?
cash. (p. 278)
➤ how to use a checking It is important to protect cash from loss, waste, theft, forgery, and
account. (p. 278) embezzlement. Cash is protected through internal controls and external
controls. Internal controls refer to procedures within the business that
Key Terms are designed to protect cash and other assets and to keep reliable records.
internal controls Internal controls for cash include:
external controls
1. Limiting the number of persons handling cash.
checking account
2. Separating accounting tasks involving cash. For example, one
check
person handles cash receipts, another handles cash payments,
depositor
signature card and a different person keeps the accounting records showing the
deposit slip amounts received or paid.
endorsement 3. Bonding (insuring) employees who handle cash or cash records.
blank endorsement 4. Using a cash register and a safe.
special endorsement 5. Depositing cash receipts in the bank daily.
restrictive endorsement 6. Making all cash payments by check.
payee 7. Reconciling the bank statement.
drawer External controls are the measures and procedures provided out-
drawee side the business to protect cash and other assets. For example, banks
voiding a check maintain controls to protect the funds their customers deposit. These
controls include verifying the accuracy of signatures on checks and
maintaining records of monetary transactions.
AS
YOU READ
It’s Not What It The Checking Account
Seems How Do You Maintain a Checking Account?
Cash is more than dollar A checking account allows a person or business to deposit cash in
bills. In accounting, cash a bank and to write checks against the account balance. A check is a
also means checks and written order from a depositor telling the bank to pay a stated amount
funds on deposit in a of cash to the person or business named on the check. A depositor is a
bank or credit union. person or business that has cash on deposit in a bank.
278 Chapter 11 Cash Control and Banking Activities
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Opening a Checking Account
A checking account helps protect cash and pro-
ACCT. NO. ACCOUNT
vides a record of cash transactions. ACCT. TYPE:
303443
✓ CKG. SAV. C.R.
NAME Roadrunner Delivery Service
The Signature Card. To open a checking NO. SIGNATURES REQUIRED 1
OTHER
SIGNATURE Maria Sanchez
account, a business owner fills out a signature card SOC. SEC. NO. OR TAXPAYER I.D. NO.
and deposits cash in the bank. A signature card con-
tains the signature(s) of the person(s) authorized to 1 SIGNATURE
write checks on the account. The bank keeps the sig-
nature card on file so that it can be matched against
2 SIGNATURE
THE INDIVIDUALS WHO HAVE SIGNED ABOVE ARE AUTHORIZED TO USE THIS ACCOUNT ACCORDING TO
signed checks presented for payment. The use of a
THE RULES AND REGULATIONS THAT APPLY TO IT AND ANY SPECIAL INSTRUCTIONS ON FILE WITH THE
BANK. EACH PERSON WHO SIGNS ACKNOWLEDGES THAT THESE RULES AND REGULATIONS HAVE BEEN
RECEIVED AND AGREES TO THEIR TERMS. EACH PERSON ALSO AUTHORIZES THE BANK TO REQUEST A
signature card protects both the account holder and CONSUMER REPORT FROM ANY CONSUMER REPORTING AGENCY.
the bank against checks with forged signatures. See
Figure 11–1 for the signature card used to open the FOR BANK USE
checking account for Roadrunner Delivery Service.
IDENTIFICATION
PRESENTED CA State License
The Checkbook. When a depositor opens a COMMENTS Sole Proprietorship—delivery service
checking account, checks are printed for the depos-
ACCOUNT
ADDRESS 155 Gateway Blvd., Sacramento, CA 94230
itor’s use. Printed checks are packaged together in a
HOME BUSINESS
PHONE 443-9696 PHONE 443-1692
✓ NEW ACCOUNT
checkbook like the one shown in Figure 11–2. Each CAPTION CHANGE NEW SIGNATURE ADDITIONAL SIGNATURE
INDIVIDUAL JOINT CORPORATE ✓BUSINESS FIDUCIARY
page has several detachable checks attached to check OTHER
stubs, and both are numbered in sequence. Using NCPS OPENED BY GLC BRANCH
DATE OPENED AMOUNT
checks with preprinted numbers helps a business OR CHANGED October 1, 20-- DEPOSITED $ 25,000.00
keep track of every check that it writes, an important
internal control.
Figure 11–1 Checking
The ABA Number. In addition to having a preprinted check num- Account Signature Card
ber, each check is printed with the account number and an American Bankers
Association (ABA) number. The ABA number is the fractional number printed
in the upper right corner of a check, just below the check number. The ABA
number identifies the bank and speeds the hand sorting of checks.
Look at the ABA number on the check in Figure 11–3 on page $ No. 101 No. 101
20
280. The number above the line and to the left of the hyphen rep- $
resents the city or state where the bank is located. The number to
the right of the hyphen indicates the specific bank. The number $ No. 102 No. 102
below the line is the code for the Federal Reserve district where $
20
the bank is located.
The ABA number was developed to speed the sorting of checks
No. 103 No. 103
by hand. An updated version of the ABA number is also printed
$
20
on the bottom of each check for electronic sorting. The ABA $
number, the account number, and the check number are printed
at the bottom of the check in a special ink and typeface. These $ No. 104 No. 104
specially printed numbers are called MICR (magnetic ink character $
20
recognition) numbers. Can you identify the MICR numbers on the
check in Figure 11–3?
Making Deposits Figure 11–2 Checkbook
A business makes regular deposits to protect the currency, coins, and
checks it receives. Most businesses make daily deposits.
Deposits are accompanied by a deposit slip , a bank form listing the
cash and checks to be deposited. The deposit slip, also called a deposit ticket,
Section 1 Banking Procedures 279
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Roadrunner Delivery Service No. 101
155 Gateway Blvd. 71-627
Sacramento, CA 94230 3222
DATE 20
PAY TO THE
ORDER OF $
DOLLARS
❖American National Bank
SACRAMENTO, CALIFORNIA
MEMO
Figure 11–3 Printed 322271627 303443
101
Check
gives both the depositor and the bank a detailed record of the deposit. Most
banks provide printed deposit slips with the depositor’s name, address, and
account number. A deposit slip for Roadrunner Delivery Service is shown
in Figure 11–4.
To complete a deposit slip, follow these steps:
1. Write the date on the Date line.
2. On the Cash line, indicate the total amount of currency and coins.
3. List checks separately by their ABA numbers. Write only the number
that appears above the line in the ABA number, including the
hyphen. If there are many checks, list the checks by amount on a
calculator tape and attach the tape to the deposit slip. On the first
Checks line, write “See tape listing,” followed by the total amount
of the checks.
4. Add the amounts, and write the total amount on the Total line.
The checks are arranged in the order listed on the deposit slip. The
deposit slip and the cash and checks are handed to a bank teller. The teller
verifies the deposit and gives the depositor a receipt. The deposit receipt is
usually a machine-printed form, although it may be a copy of the deposit
slip stamped and initialed by the teller.
❖American National Bank
BE SURE EACH ITEM IS ENDORSED
DOLLARS CENTS
SACRAMENTO, CALIFORNIA CASH 48 69 2
1 CHECKS (List Singly)
Date November 6 20 -- 1 5-2 300 00
3
Checks and other items are received for deposit subject to 2 53-116 250 00
the terms and conditions of this bank's collection agreement. 3
4
Roadrunner Delivery Service 5
6
155 Gateway Blvd.
7
Sacramento, CA 94230
8
322271627 303443
TOTAL 598 69 4
Figure 11– 4 Deposit Slip
Endorsing Checks. A check is a form of property. When a business
receives a check, it acquires the right to that check. To deposit the check in a
checking account, the depositor endorses the check to transfer ownership to
the bank. An endorsement is an authorized signature written or stamped
on the back of a check that transfers ownership of the check.
280 Chapter 11 Cash Control and Banking Activities
276-303_CH11_868829.indd 280 9/15/05 11:33:32 AM
A business can use three types of endorsements when transferring own- Blank Endorsement
ership of a check. The types of endorsements are shown in Figure 11–5: PLEASE ENDORSE HERE
• A blank endorsement includes only the signature or stamp of the
depositor. It transfers ownership of the check, but it does not indicate Rita Jain
who the new owner is. This is not a safe endorsement because the check
can be cashed by anyone who presents it for payment. DO NOT WRITE, STAMP OR SIGN BELOW THIS LINE
RESERVED FOR FINANCIAL INSTITUTION USE ★ (D)
• A special endorsement transfers ownership of the check to a specific
individual or business.
• A restrictive endorsement transfers ownership to a specific owner
and then limits, or restricts, how a check may be handled even after Special Endorsement
ownership is transferred. To protect checks from being cashed by PLEASE ENDORSE HERE
anyone else, Roadrunner uses a restrictive endorsement that reads “For Pay to the Order of
Deposit Only.” Roadrunner stamps the endorsement on the back of Harold Kauffman
each check as soon as it is received. Rita Jain
Recording Deposits. The check stubs in the checkbook are a record DO NOT WRITE, STAMP OR SIGN BELOW THIS LINE
RESERVED FOR FINANCIAL INSTITUTION USE ★ (D)
of the Cash in Bank account. That is, the completed stubs reflect all check-
ing account transactions: payments, deposits, and bank service charges.
To see how to record a deposit in the checkbook, refer to Figure 11–6
and follow these steps: Restrictive Endorsement
1. Enter the date of the deposit on the check stub for the next unused PLEASE ENDORSE HERE
check. Use the Add deposits line. FOR DEPOSIT ONLY
Roadrunner Delivery
2. Enter the total amount of the deposit on the same line in the
Service
Dollars and Cents (amount) columns. ACCT. 303443
3. Add the deposit amounts to the amount on the Balance brought DO NOT WRITE, STAMP OR SIGN BELOW THIS LINE
RESERVED FOR FINANCIAL INSTITUTION USE ★ (D)
forward line. Enter the result on the Total line. This total is the new
checkbook balance.
Writing Checks Figure 11–5
Writing a check is a simple procedure. You need to follow a few impor- Endorsements
tant rules, however, to ensure correct recordkeeping and proper handling of
the money represented by the check.
• Write checks in ink, or prepare typewritten or computer-generated
checks. Some businesses use a check-writing machine that perforates
the amount of the check in words on the Dollars line. These
perforations protect a check from alteration. Checks written in
No. 103
pencil are not acceptable because they can be easily altered. $
Date 20 --
• Complete the check stub before writing the check. This reduces To
the chance of forgetting to complete the stub. For
Completing the Check Stub. Because the stub serves as a Dollars Cents
permanent record of the check, it must be complete and accurate. A Balance brought forward 21,650 00
check stub has two parts. The upper part summarizes the details of Add deposits 1 10/14 200 00 2
the cash payment transaction. The lower part is a record of how the 10/15 1,200 00
transaction affects the checking account. To see how to complete the Total 23,050 00 3
check stub, refer to Figure 11–7 on page 282 and follow these steps: Less this check
1. In the upper part of the stub, enter the amount of the Balance carried forward
check, the date, the name of the payee (on the To line), and
the purpose of the check (on the For line). A payee is the Figure 11–6 Recording a
person or business to which a check is written. Deposit in the Checkbook
Section 1 Banking Procedures 281
276-303_CH11_868829.indd 281 4/6/06 5:49:49 PM
$ 700.00 No. 103
2. If it has not already been done, enter the balance on the
October 16 20 -- Total line on the lower part of the stub.
1 Date
To Tooley & Co. Management 3. Enter the amount of the check on the Less this check line.
Rent
For
This amount is the same as the amount shown on the first
Dollars Cents line in the upper part of the stub.
Balance brought forward 21,650 00 4. Subtract the check amount from the total. Enter the new
Add deposits 10/14 200 00 balance on the Balance carried forward line.
10/15 1,200 00 5. Enter the new balance on the first line of the bottom part
Total 23,050 00 2 of the next check stub, the Balance brought forward line.
Less this check 700 00 3 Filling Out the Check. To see how to write a check, refer
Balance carried forward 22,350 00 4 to Figure 11–8 and follow these steps:
1. Write the date on which the check is being issued.
$ No. 104
Date 20
2. Write the payee’s name on the Pay To The Order Of line.
To Start the payee’s name as far left as possible.
For 3. Enter the amount of the check in numbers. Write clearly,
Dollars Cents and begin the first number as close to the printed dollar
Balance brought forward 22,350 00 5 sign as possible.
Add deposits 4. On the next line, write the dollar amount of the check in
words. Start at the left edge of the line. Write any cents as
Total a fraction. For example, write 22 cents as 22/100. Draw a
Less this check
line from the cents fraction to the word Dollars.
Balance carried forward
5. Sign the check. Only an authorized person—one who has
signed the signature card for the account—may sign the
Figure 11–7 Filling Out check. The person who signs a check is the drawer . The
the Check Stub bank on which the check is written is the drawee .
The checkbook is now ready for the next transaction.
Voiding a Check. If an error is made while writing a check, the
check is marked “Void” in large letters across the front (in ink). This is
known as voiding a check . A new check is then prepared. When a check
is voided, the stub is also voided.
Since a business needs to account for each check used, a voided check
is never destroyed. Instead it is filed with the business records. A voided
check may be placed in a special file, or it may simply be folded and stapled
to the check stub.
2 1 3
700.00 No. 103
$
October 16
Roadrunner Delivery Service 103
Date 20 --
Tooley & Co. Management 155 Gateway Blvd. 71-627
To
Sacramento, CA 94230 3222
For Rent
DATE Oct. 16 20 --
Dollars Cents
PAY TO THE
ORDER OF Tooley & Co. Management $ 700.00
Balance brought forward 21,650 00
Add deposits 10/14 200 00 Seven hundred and no/100 DOLLARS
10/15 1,200 00
❖American National Bank
SACRAMENTO, CALIFORNIA
Total 23,050 00
Less this check 700 00 MEMO Maria Sanchez
Balance carried forward 22,350 00 322271627 303443
103
4 5
Figure 11–8 Completed Stub and Check
282 Chapter 11 Cash Control and Banking Activities
276-303_CH11_868829.indd 282 9/15/05 11:33:34 AM
SECTION 1 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Create a chart like this one !CTIVITY (OW 4HIS !CTIVITY 0ROTECTS #ASH
to list the activities involved
in maintaining a checking
account. Identify how each
activity helps protect cash.
Add more rows as needed.
Do the Math
Assume you work for a health food store that prepares two deposits each day. Using the
following cash register summaries, determine how much cash should be deposited after the
first shift ended at 3:00 p.m. and after the second shift ended at 9:00 p.m.
First Shift (9:00 a.m. – 3:00 p.m.) Second Shift (3:00 p.m. – 9:00 p.m.)
Cash Register Cash Register
1 2 3 1 2 3
Coins 35.40 29.35 18.75 24.62 19.21 14.32
Currency 395.00 425.00 300.00 218.00 349.00 216.00
Checks 900.00 875.00 725.00 725.00 645.00 829.00
Problem 11–1 Preparing a Deposit Slip and Writing Checks
On August 14 Loretta Harper, owner of Peabody Cards and Gifts, deposited the following
items in the checking account of the business.
Cash: $784.29
Checks: Charles Ling, drawn on American Bank of Commerce, ABA No. 32-7091;
$39.44
Keith Lopez, drawn on People’s Bank, ABA No. 84-268; $22.95
Marjorie Luke, drawn on Horizon Federal Savings and Loan, ABA No. 84-6249;
$52.95
Mable Parker, drawn on Security National Bank, ABA No. 84-2242; $67.45
On August 15 Peabody received the July bill from Northeast Telephone for $214.80.
On August 17 Peabody received an advertising bill from the Bayside News for $275.00.
Instructions Using the forms provided in your working papers:
1. Complete a deposit slip.
2. Record the deposit on the check stub for Check 41.
3. Record the information for paying the telephone bill on Check Stub 41 and complete
the check stub. Use August 16 as the date.
4. Prepare Check 41 to pay the telephone bill and sign your name as drawer.
5. Prepare the check stub and Check 42 to pay the bill for advertising. Use August 17 as the
date and sign your name as drawer.
Section 1 Banking Procedures 283
276-303_CH11_868829.indd 283 9/15/05 11:33:36 AM
SECTION 2 Reconciling the
Bank Statement
Have you ever been surprised to find that your bank account had
BEFORE
YOU READ less money than you thought because you forgot to record a with-
drawal? If so, you realize the importance of reconciling (bringing into
agreement) your checkbook with your bank statement. Business owners
Main Idea and their accountants also need to keep up-to-date records of cash.
The bank reconciliation is an
important internal control.
Proving Cash
Read to Learn… What Is Meant by Proving Cash?
➤ why businesses prove cash.
(p. 284) The balance in the Cash in Bank account in the general ledger
➤ how to read and reconcile a is regularly compared with the balance in the checkbook. If all cash
bank statement. (p. 284) receipts have been deposited, all cash payments have been made by
➤ about electronic funds check, and all transactions have been journalized and posted, the
transfer. (p. 290) Cash in Bank account balance should agree with the checkbook
balance. Comparing these two cash balances regularly is part of the
Key Terms internal control of cash. Some businesses prove cash daily or weekly,
bank statement while others prove cash on a monthly basis.
canceled checks If the Cash in Bank balance does not agree with the checkbook bal-
imaged checks ance, and the trial balance has been proved, the error is probably in the
reconciling the bank statement
checkbook. The following checkbook errors are the most common:
outstanding checks
outstanding deposits • faulty addition or subtraction
bank service charge • failure to record a deposit or a check
stop payment order • a mistake in copying the balance forward amount to the next
NSF check check stub
Check 21 If an error is made in the checkbook, the proper place to enter the
postdated check correction is on the next unused check stub. For example, suppose
electronic funds transfer system Check 22 for $84.60 was recorded on the check stub as $48.60. The
(EFTS) error is found when cash is proved. By this time several other checks
bankcard have been written, so the next unused check stub is 31. In this case
automated teller machine (ATM) the amount of the error ($84.60 $48.60 $36.00) is subtracted
from the balance brought forward on Check Stub 31 (see Figure
AS 11–9). A note is made on Check Stub 22 to indicate that the error is
YOU READ corrected on Check Stub 31.
Instant Recall
Proving To prove
The Bank Statement
something means to What Is a Bank Reconciliation?
compare balances and A bank statement is an itemized record of all transactions in
make sure they are a depositor’s account over a given period, usually a month. Typical
equal. bank statements include the following information:
284 Chapter 11 Cash Control and Banking Activities
276-303_CH11_868829.indd 284 9/15/05 11:33:38 AM
1. the checking account balance at the beginning of the $ No. 31
period Date 20--
2. a list of all deposits made by the business during the period To
3. a list of all checks paid by the bank For
4. a list of any other deductions from the depositor’s account Dollars Cents
5. the checking account balance at the end of the period Balance brought forward 4,750 00
Find each of these items on the bank statement for Roadrunner Add deposits
Delivery Service in Figure 11–10. Less: Error corr. Ck. 22 36 00
With the bank statement, a bank may include the canceled Total 4,714 00
checks that it paid and deducted from the depositor’s account. Less this check
Instead of the actual checks, banks are increasingly sending images Balance carried forward
of the checks or simply a list of them. These imaged checks or
substitute checks (copies of originals) or the list are used to verify the Figure 11–9 Entering
information on the bank statement. These checks and the bank statement an Error Correction on the
Check Stub
should be kept in a file or storage box in case they are needed later as proof
of payment or for other reasons.
Upon receipt, the bank statement is compared to the checkbook. The
process of determining any differences between the bank statement and the
checkbook is called reconciling the bank statement . It is also known as a
bank reconciliation. The ending balance on the bank statement seldom agrees
AS
❖ American National Bank YOU READ
SACRAMENTO, CALIFORNIA
Roadrunner Delivery Service
Compare and
155 Gateway Boulevard Contrast
Sacramento, CA 94230 Account Number: 303443
Cash Records What
FDIC Statement Date: 10/31/20-- are the similarities and
Deposits & Other Credits Checks & Other Debits
differences between
Balance Balance
Last Statement No. Amount No. Amount This Statement check stubs and the
Cash in Bank general
1 5
00.00 3 26,400.00 5 4,183.00 22,217.00 ledger account?
Checks & Deposits &
Description Other Debits Other Credits Date Balance
Balance Forward 00.00
Deposit 25,000.00 10/01 25,000.00
Check 101 3,000.00 10/04 22,000.00
Deposit 2 200.00 10/14 22,200.00
Check 102 3 350.00 10/15 21,850.00
Deposit 1,200.00 10/16 23,050.00
Check 103 700.00 10/20 22,350.00
Check 104 125.00 10/31 22,225.00
Service Charge 4 8.00 10/31 22,217.00
PLEASE EXAMINE YOUR STATEMENT AT ONCE. IF NO ERROR IS REPORTED IN 10 DAYS THE ACCOUNT WILL BE
CONSIDERED CORRECT AND VOUCHERS GENUINE. ALL ITEMS ARE CREDITED SUBJECT TO FINAL PAYMENT.
The Bank for All Your Business Needs Figure 11–10 Bank
Statement
Section 2 Reconciling the Bank Statement 285
276-303_CH11_868829.indd 285 4/6/06 5:49:56 PM
with the balance in the checkbook. There are three common reasons
that the bank statement balance and the checkbook balance disagree:
• outstanding checks
• outstanding deposits
• bank charges
Outstanding Checks and Deposits
In banking terms the word outstanding simply means “not yet
received.” Outstanding checks , therefore, are checks that have been
written but have not yet been presented to the bank for payment. It
is not unusual for checks written in one statement period to reach
the bank in a later period. Outstanding deposits are deposits that have
been made and recorded in the checkbook but do not appear on the bank
statement. A deposit made the same day the bank statement is prepared may
not appear on the statement.
Bank Service Charges
$ No. 107 The bank statement balance also reflects any service charges
Date 20 -- made by the bank during the statement period. Banks impose
To
a bank service charge , which is a fee for maintaining bank records
For
and processing bank statement items for the depositor. This charge
Dollars Cents
varies from bank to bank. It is frequently based on either the num-
21,125 00
Balance brought forward
ber of checks and deposits handled during the statement period
Add deposits
or the balance in the depositor’s account. The bank subtracts the
Less: Svc. Charge 8 00 service charge from the depositor’s account. The depositor usually
Total 21,117 00 does not know about the service charge, or other bank charges
Less this check handled in the same manner, until the statement is received.
Balance carried forward Before the bank statement is reconciled, the checkbook balance
is adjusted by the amount of the bank service charge. As shown in
Figure 11–11 Entering a Figure 11–11, the words Less: Service Charge are written on the next unused
Bank Service Charge on the
check stub on the line above the Total line. The amount of the service charge
Check Stub
is entered in the amount column, preceded by a minus sign. The balance is
recalculated and entered on the Total line.
Connect to… Interest Paid
ECONOMICS Some banks pay interest on funds in a checking account. This is not a
common practice, and the account must maintain a minimum balance to
In the early Middle Ages,
Europe’s economy used qualify. The interest appears on the bank statement. The amount of interest
the barter system. Goods must be recorded in the checkbook, journalized, and posted. The journal
and services were paid entry for interest paid follows:
for with other goods and Debit Cash in Bank
services. As trade spread Credit Interest Income
throughout Europe, the
long distances made The Bank Reconciliation
barter unwieldy. The
Promptly reconciling the bank statement is a good way to ensure orderly
use of currency, banks,
cash records and guard against cash losses. The bank expects to be notified
and credit was far more
convenient. immediately of any errors on the statement. Failure to do so may release the
bank from responsibility for the errors.
286 Chapter 11 Cash Control and Banking Activities
276-303_CH11_868829.indd 286 9/15/05 11:33:43 AM
On the back of the bank
statement is a form for rec- BANK RECONCILIATION FORM
onciling the bank state- PLEASE EXAMINE YOUR STATEMENT AT ONCE.
CHECKS OUTSTANDING
ment. This form documents ANY DISCREPANCY SHOULD BE REPORTED TO
THE BANK IMMEDIATELY. Number Amount
the differences between 600 00
105
the bank balance and the
1. Record any transactions appearing on this statement 1
but not listed in your checkbook. 106 500 00
checkbook balance. Refer
2. List any checks still outstanding in the space provided
to Figure 11–12 and follow to the right.
these steps to reconcile a 3. Enter the balance shown on this
bank statement: statement here. 2 22,217 00
1. Arrange the 4. Enter deposits recorded in your
checkbook but not shown on this 3
canceled checks in statement.
numerical order.
5. Total lines 3 and 4 and enter here. 22,217 00
Compare the
6. Enter total checks outstanding here.
canceled checks 4 1,100 00
with those listed 7. Subtract line 6 from line 5. This
adjusted bank balance should agree
on the statement with your checkbook balance. 5 21,117 00 TOTAL 1,100 00
and with the stubs.
When you match
a check and a stub, place a check mark beside the check amount on Figure 11–12 Bank
the bank statement and on the check stub. The stubs without check Reconciliation Using a Bank
Statement Form
marks represent outstanding checks. List the outstanding check
numbers and amounts on the bank reconciliation form.
2. Enter the ending balance shown on the bank statement.
3. Compare deposits listed on the bank statement to deposits listed in
the checkbook. Enter the total of any outstanding deposits on the
reconciliation form. Add this total to the bank statement balance
and enter the result on the form.
4. Subtract the total of the outstanding checks from the amount
calculated in Step 3. The result is the adjusted bank balance.
5. Compare the adjusted bank balance to the checkbook balance.
When the balances match, the bank statement is reconciled.
Figure 11–13 illustrates a two-column account form.
If the adjusted bank bal-
ance does not match the Roadrunner Delivery Service
checkbook balance, find and Bank Reconciliation Statement
correct the error. Notify the October 31, 20--
bank immediately if it is a Balance on bank statement 22 2 1 7 00
bank error. It is more likely, Additions:
however, that the error is in Deposits in transit
the checkbook. Check the 22 2 1 7 00
addition and subtraction on Deductions for outstanding checks:
Check 105 6 0 0 00
the check stubs and on the
Check 106 5 0 0 00
bank reconciliation form. Total outstanding checks 1 100 00
Also look for any outstand- Adjusted bank balance 21 117 00
ing checks or deposits that
have not been included in
your calculations. Figure 11–13 Bank Account Reconciliation Using a Two-Column Account Form
Section 2 Reconciling the Bank Statement 287
276-303_CH11_868829.indd 287 9/15/05 11:33:49 AM
Journalizing Bank Service Charges
Like any other business, banks charge fees for their services. A bank ser-
vice charge is an expense that is recorded in the accounting records.
The bank deducted the service charge from Roadrunner’s account, so it
is not necessary to write a check for this expense. The bank statement is the
source document for recording the bank service charge.
B u s i n e s s Tr a n s a c t i o n
On November 1 Roadrunner received the bank statement. A bank service charge of $8 appeared
on the statement.
ANALYSIS Identify 1. Bank service charges are often recorded in the Miscellaneous Expense
account. Therefore, Miscellaneous Expense and Cash in Bank are
affected.
Classify 2. Miscellaneous Expense is an expense account. Cash in Bank is an
asset account.
/ 3. Miscellaneous Expense is increased by $8. Cash in Bank is decreased
by $8.
DEBIT-CREDIT RULE 4. Increases in expense accounts are recorded as debits. Debit
Miscellaneous Expense for $8.
5. Decreases in asset accounts are recorded as credits. Credit Cash in
Bank for $8.
T ACCOUNTS 6. Miscellaneous Expense Cash in Bank
Debit Credit Debit Credit
8 8
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 42
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Nov. 1 Miscellaneous Expense 8 00 2
3 Cash in Bank 8 00 3
4 4
Special Banking Procedures
Checks are usually written or received and deposited without any prob-
lems. However, three problems may occur:
• A business does not want the bank to pay a check that was issued.
• A business receives and deposits a check from a customer whose
account does not have enough money to cover the check.
• A customer presents a check that has a date in the future.
288 Chapter 11 Cash Control and Banking Activities
276-303_CH11_868829.indd 288 9/15/05 11:33:52 AM
Stopping Payment on a Check. Occasionally, a drawer Check Stub for Stopped Check
(Roadrunner) orders the drawee (bank) not to honor, or pay, a
$ 500.00 No. 633
check. A stop payment order is a demand by the drawer, usually Date January 12 20 --
in writing, that the bank not honor a specific check. A stop pay- To Smith Engineering
Electrical Work
ment order is often used when a check is lost. The bank must receive For
the stop payment order before the check is presented for payment. Dollars Cents
Otherwise, it is too late. Balance brought forward 12,723 00
To record a stop payment order, the accountant writes the Add deposits
P ED T
words Stopped Payment on the check stub for the stopped check. O P N
The accountant then adds the amount of the stopped check on the ST YME
A
Total
next unused check stub, illustrated in Figure 11–14. If appropriate, Less this check P 500 00
the accountant then issues a replacement check. Balance carried forward 12,223 00
Most banks charge a fee for a stop payment order. The fee
appears on the bank statement. A journal entry, similar to that made Next Unused Check Stub
for the bank service charge, is prepared. Most businesses record the $ No. 652
fee in Miscellaneous Expense. The source document for this entry Date 20
is the bank statement. To
Recording NSF Checks. An NSF check is a check returned
For
to the depositor by the bank because the drawer’s checking account Dollars Cents
does not have enough funds to cover the amount. NSF stands for Balance brought forward 10,452 00
Not Sufficient Funds. An NSF check is also known as a dishonored check Add deposits Stopped
or a bounced check. Payment on Ck 633 500 00
Suppose that Burton Company (the drawer) wrote a check to Total 10,952 00
Roadrunner (the payee) to pay for delivery services. What if Burton’s Less this check
account does not have sufficient funds to cover the amount of the Balance carried forward
check? American National Bank (the drawee) has already shown this
check as being deposited to Roadrunner’s account. When American Figure 11–14 Recording
National Bank finds out that Burton does not have enough funds to cover a Stopped Check on the
this check, it deducts the amount from Roadrunner’s account. The bank also Check Stub
sends the check back to Roadrunner (not to Burton Company).
When the bank returns an NSF check, Roadrunner subtracts the amount
of the dishonored check from the checkbook balance. Roadrunner also
makes a journal entry to record the returned check. At this point Roadrunner
has not yet been paid for the delivery services and must go back to Burton
Company to collect payment. Burton can then deposit enough money in
its own bank to cover the check or find another way to pay.
The Check Clearing for the 21st Century Act, known as Check 21 , went
AS
into effect in 2004. It allows the conversion of a paper check to an electronic
YOU READ
image that can be processed quickly. A bank can now pay a check on the
day it is written, instead of several days later. However, Check 21 does not Key Point
require banks to process deposits more quickly. As a result, the speed of NSF Check A dishonored
check processing could cause an increase in the number of NSF checks. check “bounces” back to
Postdated Checks. A business might accept a check that has a future the depositor, not to the
date instead of the actual date. This check is called a postdated check . It person who signed the
should not be deposited until the date on the check. Businesses sometimes check.
accept postdated checks as a convenience to customers.
Section 2 Reconciling the Bank Statement 289
276-303_CH11_868829.indd 289 9/15/05 11:34:28 AM
B u s i n e s s Tr a n s a c t i o n
On November 15 a check for $450, written by Burton Company for payment on account and deposited by
Roadrunner, was returned by the bank because of insufficient funds in Burton’s account.
ANALYSIS Identify 1. Accounts Receivable—Burton Company and Cash in Bank are
affected.
Classify 2. Accounts Receivable—Burton Company and Cash in Bank are both
asset accounts.
/ 3. Accounts Receivable—Burton Company is increased by the amount
of the check returned by the bank, $450. Cash in Bank is decreased by
$450.
DEBIT-CREDIT RULE 4. Increases in asset accounts are recorded as debits. Debit Accounts
Receivable—Burton Company for $450.
5. Decreases in asset accounts are recorded as credits. Credit Cash in
Bank for $450.
T ACCOUNTS 6. Accounts Receivable—
Burton Company Cash in Bank
Debit Credit Debit Credit
450 450
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 43
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Nov. 15 Accts. Rec.—Burton Company 4 5 0 00 2
3 Cash in Bank 4 5 0 00 3
4 4
Electronic Funds Transfer System
What Is EFTS?
Look at Figure 11–15. It illustrates the route a check follows from the
time it is written until the time it is returned with the bank statement.
Since millions of checks are written each day, the transfer of checks and
funds is routine. This transfer of funds among banks is a huge job, however.
Banks use the electronic funds transfer system (EFTS) to handle such a
large volume of transfers. The EFTS allows banks to transfer funds among
accounts quickly and accurately without the exchange of checks.
The EFTS has a tremendous impact on banking activities:
• Direct payroll deposit. Employers can electronically transfer
employees’ pay to each employee’s bank account.
290 Chapter 11 Cash Control and Banking Activities
276-303_CH11_868829.indd 290 9/15/05 11:34:29 AM
• Automated bill paying. A depositor can authorize the bank to transfer
funds from his or her checking account to the creditor’s bank account.
• Bankcards. A bankcard , also known as an ATM card, is a bank-issued
card that can be used at an automated teller machine (ATM) to
conduct banking activities. An ATM is a computer terminal outside a
bank or at a different location entirely. When a bankcard can be used for
transactions at other businesses besides the bank, it is called a debit card.
• Bank-by-phone service. Account holders can complete transactions
with their banks’ computer systems by telephone.
• Online banking. Using the Internet, an account holder can access the
bank’s Web site to conduct banking transactions.
When using any electronic banking procedure, be sure to record all
transactions to avoid errors in the checking account.
Routing of Checks
Roadrunner Delivery Service
700.00 No. 103
$
October 16 Roadrunner Delivery Service 103
Date 20 --
Tooley & Co. Management 155 Gateway Blvd. 71-627
To
Rent
Sacramento, CA 94230 3222
1 Roadrunner writes Check
For
DATE Oct. 16 20 --
Dollars Cents
PAY TO THE
103 to Tooley & Co.
Balance brought forward 21,650 00 ORDER OF Tooley & Co. Management $ 700.00
Add deposits 10/14 200 00
Seven hundred and no/100 DOLLARS
Total
10/15 1,200 00
23,050 00
❖American National Bank SACRAMENTO, CALIFORNIA
Management for $700
Less this check 700 00 MEMO
for rent.
❖ American National Bank
SACRAMENTO, CALIFORNIA
Balance carried forward 22,350 00 A322271627A 303443C 103
Roadrunner Delivery Service
155 Gateway Boulevard
Sacramento, CA 94230 Account Number: 303443
FDIC Statement Date: 10/31/20--
Balance Deposits & Other Credits Checks & Other Debits Balance
Last Statement No. Amount No. Amount This Statement
00.00 3 26,400.00 5 4,183.00 22,217.00 Tooley & Co. Management
Checks & Deposits &
Description Date Balance
Other Debits Other Credits Roadrunner Delivery Service 103
Balance Forward 00.00 155 Gateway Blvd. 71-627
Sacramento, CA 94230 3222
2 Tooley & Company
Deposit 25,000.00 10/01 25,000.00
Check 101 3,000.00 10/04 22,000.00 DATE Oct. 16 20 --
Deposit 200.00 10/14 22,200.00 PAY TO THE
Tooley & Co. Management
Management deposits the
ORDER OF $ 700.00
Check 102 350.00 10/15 21,850.00
Deposit 1,200.00 10/16 23,050.00
Seven hundred and no/100
check in its account at
DOLLARS
Check 103 700.00 10/20 22,350.00
Check 104 125.00 10/31 22,225.00 ❖American National Bank SACRAMENTO, CALIFORNIA
First National Bank.
Service Charge 8.00 10/31 22,217.00
MEMO
A322271627A 303443C 103
PLEASE EXAMINE YOUR STATEMENT AT ONCE. IF NO ERROR IS REPORTED IN 10 DAYS THE ACCOUNT WILL BE
CONSIDERED CORRECT AND VOUCHERS GENUINE. ALL ITEMS ARE CREDITED SUBJECT TO FINAL PAYMENT.
The Bank for All Your Business Needs
6 American National Bank returns FIRST NATIONAL BANK
the canceled check or a substitute
DO NOT WRITE, STAMP OR SIGN BELOW THIS LINE
RESERVED FOR FINANCIAL INSTITUTION USE ★ (D)
FOR DEPOSIT ONLY
check to Roadrunner with the 3 First National Bank increases
ACCT. 864772
Management
Tooley & Co.
monthly bank statement. the balance in Tooley’s
PLEASE ENDORSE HERE
checking account by $700.
5 American National
Bank sends $700 to Tooley’s account increased $700
First National Bank
and deducts this
amount from Road- American National Bank
runner’s account. 4 First National Bank sends
Roadrunner Delivery Service 103
the $700 check or an
155 Gateway Blvd. 71-627
Sacramento, CA 94230 3222
electronic image of it to
DATE Oct. 16 20 --
PAY TO THE
ORDER OF Tooley & Co. Management $ 700.00
Seven hundred and no/100 DOLLARS American National Bank,
❖American National Bank SACRAMENTO, CALIFORNIA Roadrunner’s bank, for
collection.
MEMO
A322271627A 303443C 103
Roadrunner’s account decreased $700
Figure 11–15 Routing of Checks
Section 2 Reconciling the Bank Statement 291
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SECTION 2 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Create a chart like this one to 2ECONCILING THE "ANK 3TATEMENT
list the adjustments that might #HECKBOOK "ALANCE !DJUSTMENTS "ANK 3TATEMENT "ALANCE !DJUSTMENTS
be needed to reconcile the
bank statement. Add answer
rows as needed.
Do the Math
The balance in the checkbook of Valleyview Tennis Center on April 30 is $2,944.20. The
balance shown on the April bank statement is $3,085.95. A deposit of $345.00 was made on
April 29, and another deposit of $290.00 was made on April 30. Neither of these deposits
appears on the bank statement. The service charge for the month was $5.25. Valleyview has
four outstanding checks:
Check 344 $202.00 Check 350 $ 25.00
Check 346 55.00 Check 351 500.00
Instructions
1. Record the bank service charge in the checkbook.
2. Reconcile the bank statement.
Problem 11–2 Analyzing a Source Document
Instructions Review the Global Travel
Agency bank statement and answer the
following questions in your working
papers.
1. What is the amount of the returned
check?
2. How much did the bank charge
Global Travel Agency for the
returned check?
3. What account will be debited for
the $12 bank service charge?
292 Chapter 11 Cash Control and Banking Activities
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Accounting Careers in Focus
RECRUITING MANAGER
Robert Half Finance & Accounting
..
Washington, D.C. Tips from .
Raj Khanna
communicate
Q: What does Robert Half Finance & Accounting do? Being able to
ecessary
A: We help companies locate highly skilled financial professionals your ideas is n
any work
for full-time positions. for success in
Know the
environment. g,
Q: How did you become a recruiter? are addressin
audience you ur
A: I was a CPA for eight years, working in both public and private icing yo
think before vo
ep your
accounting environments, when my sister introduced me to opinion, and ke
n simple and
a friend who owned a small recruiting firm. I had been there communicatio s
your message
just a few months when the firm was acquired by Robert Half brief to ensure r.
loud and clea
International. That’s when things really started to happen for me. come through
I had the opportunity to travel and attend key training workshops,
which really gave my career momentum.
Q: What are some factors that have been key to your
success?
A: Intense daily activity is critical. When it comes to providing customer service,
thinking outside the box is important. These factors have helped me to
establish longstanding relationships with my clients and candidates.
Q: Why do you think an accounting degree is valuable?
A: Accounting is one of the most solid business foundations out there. It is a
discipline that transcends any industry and is relevant at any level throughout
one’s career.
CAREER FACTS
Nature of the Work: Identify skilled candidates for available employment opportunities
▲
with client companies.
Training or Education Needed: A bachelor’s degree in accounting or related experience.
▲ ▲
Aptitude, Abilities, and Skills: Interpersonal and communication skills, aptitude for
sales, familiarity with jobs in different industries.
Salary Range: $50,000 and up depending on personal performance, company
▲
performance, and company size.
Career Path: Work in a public accounting firm or corporate accounting department to
▲
gain experience and knowledge, and then transfer to a recruiting position with a firm that
specializes in accounting and finance.
Thinking Critically What do you think is meant by the term company culture? What might you
look for in deciding whether or not a company’s culture is right for you?
Chapter 11 Accounting Careers in Focus 293
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CH A P T ER 11 Summary
Key Concepts
1. The term internal controls refers to steps that a business takes to protect its cash and other assets,
and to keep reliable records:
• Limit the number of persons who handle cash.
• Separate accounting tasks that involve cash.
• Bond (insure) employees who handle cash or cash records.
• Use a cash register and a safe.
• Make daily deposits in the bank of cash received.
• Make all cash payments by check.
• Reconcile the bank statement promptly.
2. To open a checking account, a business owner fills out a signature card and deposits cash in the
bank.
The following forms are used to maintain a checking account:
• deposit slip
• check
• checkbook in which deposits and checks are recorded on check stubs
3. All checks written and deposits made are recorded on the check stub, which serves as a
permanent record of the check. The stub should be completed before writing a check.
4. Checks should be written in ink, or by typewriter, computer, or check-writing machine. Follow
these steps: (a) Write the issue date; (b) write the payee’s name on the Pay To The Order Of line
starting as far left as possible; (c) write the amount of the check in numbers clearly, and begin
the first number as close to the printed dollar sign as possible; (d) on the next line, write the
dollar amount of the check in words starting at the left edge of the line, and write any cents as a
fraction; (e) sign the check.
5. Checks are endorsed before they are deposited. Most businesses stamp a restrictive endorsement
on a check as soon as it is received. A restrictive endorsement limits how checks are handled.
PLEASE ENDORSE HERE PLEASE ENDORSE HERE PLEASE ENDORSE HERE
Pay to the Order of FOR DEPOSIT ONLY
Roadrunner Delivery
Rita Jain Harold Kauffman
Service
Rita Jain ACCT. 303443
DO NOT WRITE, STAMP OR SIGN BELOW THIS LINE DO NOT WRITE, STAMP OR SIGN BELOW THIS LINE
DO NOT WRITE, STAMP OR SIGN BELOW THIS LINE
RESERVED FOR FINANCIAL INSTITUTION USE ★ (D) RESERVED FOR FINANCIAL INSTITUTION USE ★ (D)
RESERVED FOR FINANCIAL INSTITUTION USE ★ (D)
Blank Endorsement Special Endorsement Restrictive Endorsement
6. One way to prove cash is to reconcile the bank statement. Follow these steps to do a bank
reconciliation: (a) Identify outstanding checks and list them on the bank reconciliation form,
(b) enter the ending balance from the bank statement on the reconciliation form, (c) identify
outstanding deposits and add them to the bank statement balance, (d) subtract outstanding
checks from the bank statement balance, and (e) compare the adjusted bank statement balance
with the checkbook balance. The bank statement is reconciled when the checkbook balance and
the adjusted bank balance are equal.
294 Chapter 11 Summary
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Summary CHAPT E R 1 1
7. A bank statement balance generally reflects any fees that a bank charged during the statement
period. These service charges are for maintaining bank records and processing bank statement
items. The depositor usually is not notified about the service charge or other bank fees until the
statement arrives.
The bank statement is the source document for service charges. Write the bank service charge on
the check stub. Also journalize and post the service charge:
GENERAL JOURNAL PAGE 1
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Date Miscellaneous Expense xx xx 2
3 Cash in Bank xx xx 3
4 10/31/20—Bank Statement 4
5 5
8. The electronic funds transfer system (EFTS) allows banks to transfer funds without the exchange
of checks. EFTS makes the following services available to individuals:
• direct payroll deposit
• automated bill paying
• bankcards
• bank-by-phone service
• online banking
Key Terms
automated teller machine (ATM) (p. 291) endorsement (p. 280)
bank service charge (p. 286) external controls (p. 278)
bank statement (p. 284) imaged check (p. 285)
bankcard (p. 291) internal controls (p. 278)
blank endorsement (p. 281) NSF check (p. 289)
canceled check (p. 285) outstanding checks (p. 286)
check (p. 278) outstanding deposits (p. 286)
Check 21 (p. 289) payee (p. 281)
checking account (p. 278) postdated check (p. 289)
deposit slip (p. 279) reconciling the bank statement (p. 285)
depositor (p. 278) restrictive endorsement (p. 281)
drawee (p. 282) signature card (p. 279)
drawer (p. 282) special endorsement (p. 281)
electronic funds transfer stop payment order (p. 289)
system (EFTS) (p. 290) voiding a check (p. 282)
Chapter 11 Summary 295
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C H A P T ER 11 Review and Activities
AFTER
YOU READ
Check Your Understanding
1. Internal Controls
a. Why do businesses need internal controls?
b. What internal controls can a business use to protect cash?
2. Checking Account Forms
a. What is the purpose of a signature card?
b. In addition to a signature card, what other forms are involved in using a checking account?
3. Check Stubs
a. What is the purpose of a check stub?
b. Why should you complete the check stub before writing the check?
4. Writing a Check
a. How should the amount be written on the check?
b. Why should checks be written in ink or by typewriter, computer, or check-writing machine?
5. Bank Deposit
a. How often should a business deposit cash as part of its internal controls?
b. What information should you include on a deposit slip?
6. Bank Reconciliation
a. What information does a bank statement contain?
b. List the steps to reconcile a bank statement.
7. Bank Service Charges
a. What is a bank service charge?
b. How does a business record bank service charges in its checkbook and in its accounting records?
8. Electronic Funds Transfer System
a. How do banks use the electronic funds transfer system (EFTS)?
b. What are some of the ways customers make electronic purchases?
Apply Key Terms
The manager of Valley View
Bowling Center is concerned automated teller drawee payee
about cash control and banking machine (ATM) drawer postdated check
bank service charge electronic funds reconciling the bank
procedures for the business. On
bank statement transfer system statement
a separate sheet of paper, write a bankcard (EFTS) restrictive
memo explaining how the terms blank endorsement endorsement endorsement
here relate to protecting cash. canceled check external controls signature card
check imaged check special endorsement
Check 21 internal controls stop payment order
checking account NSF check voiding a check
deposit slip outstanding checks
depositor outstanding deposits
296 Chapter 11 Review and Activities
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Computerized Accounting CHAPT E R 1 1
Reconciling the Bank Statement
Making the Transition from a Manual to a Computerized System
Task Manual Methods Computerized Methods
Reconciling the • Using the form on the back of the bank • Before attempting to reconcile the bank
bank statement statement or accounting stationery, statement, make sure all transactions
follow the steps on page 287 to for the month have been posted.
reconcile the bank statement. • A computerized system will list all cash
transactions and allow you to check off
the appropriate cleared items.
• You may enter adjustments such as
bank fees. These will be posted to the
general ledger.
Q&A
Peachtree Question Answer
How do I reconcile 1. Select Account Reconciliation from the Tasks menu.
the cash account in 2. Select the cash account to be reconciled.
Peachtree? 3. Type the bank statement date.
4. Type the ending bank statement balance.
5. Click the Clear box for all items that appear on the bank statement.
6. When the unreconciled difference is $0.00, the account has been reconciled.
7. Click OK to save the reconciliation.
QuickBooks Q & A
QuickBooks Question Answer
How do I reconcile 1. Choose Reconcile from the Banking menu.
the cash account in 2. Select the bank account in the Account field.
QuickBooks? 3. Type the bank statement date.
4. Type the ending balance and click Continue.
5. Click each line for each item that appears on the bank statement to mark it as
cleared.
6. When the Difference field shows 0.00, the account has been reconciled.
7. Click Reconcile Now to save the reconciliation.
For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers.
Chapter 11 Computerized Accounting 297
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C H A P T ER 11 Problems
Complete problems using: Manual Glencoe Peachtree Complete QuickBooks Spreadsheet
Spreadshee
OR OR OR
Working Papers Accounting Software Templates Templates
Problem 11–3 Handling Deposits
On October 4 the owner of Wilderness Rentals deposited the following
in the business checking account at First National Bank. The beginning
balance in the account is $3,306.54 before these transactions.
Cash: Currency, $374.00; Coins, $7.42
Checks: Bob Warner, drawn on Consumers
SMART GUIDE Bank, ABA No. 63-706; $64.98
Step–by–Step Instructions: Joan Walkman, drawn on Mountain
Problems 11–4 Bank, ABA No. 63-699; $349.81
1. Select the problem set Ernesto Garcia, drawn on Progressive
for Hot Suds Car Wash
(Prob. 11–4). Savings and Loan, ABA No. 63-710; $29.44
2. Rename the company
and set the system date. Instructions In your working papers:
3. Use the Payments 1. Place a restrictive endorsement on each check. Use “Wilderness
option in the Tasks
menu to record the Rentals.”
checks issued. 2. Fill out a deposit slip. Use the ABA number to identify each check.
4. Record the deposits
using the General 3. Record the deposit in the checkbook on Check Stub 651.
Journal Entry option.
5. Print an Account
Analyze Calculate the checkbook balance after the deposit is
Register report using the recorded on the check stub.
Account Reconciliation
option from the Reports
menu.
6. Complete the Analyze
Problem 11–4 Maintaining the Checkbook
activity. As the accounting clerk for Hot Suds Car Wash, you write checks and make
7. End the session. deposits. The current checkbook balance is $3,486.29.
Instructions For each transaction:
1. Record the necessary information on the check stub. Determine
SMART GUIDE the new balance and carry the balance forward.
Step–by–Step Instructions: 2. Prepare the necessary checks and sign your name as drawer.
Problem 11–5
1. Select the problem
Date Transactions
set for Kits & Pups Oct. 3 Issued Check 504 for $868.45 to Custom Construction for
Grooming (Prob. 11–5).
2. Rename the company
construction supplies.
and set the system date. 3 Deposited $601.35 in the checking account.
3. Reconcile the bank 6 Issued Check 505 for $299.60 to CP Lumber for paint.
statement. 7 Issued Check 506 to Laverne Brothers for $1,000.00 for
4. Print the Account
Reconciliation reports: completing a painting job.
Account Register, 10 Deposited $342.80 in the checking account.
Account Reconciliation, 10 Issued Check 507 to Union Utilities for the September
Deposits in Transit, and
Outstanding Checks. electricity bill of $175.50.
5. Complete the Analyze
activity. Analyze Calculate the balance brought forward amount on Check
6. End the session. Stub 508.
298 Chapter 11 Problems
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Problems CHAPT E R 1 1
QuickBooks
Problem 11–5 Reconciling the Bank Statement
On October 31 George Flaum, the accountant for Kits & Pups Grooming, PROBLEM GUIDE
received the bank statement dated October 30. After comparing the Step–by–Step Instructions:
company’s checkbook with the bank statement, George found the Problem 11–5
following: 1. Restore the Problem
11-5.QBB file.
1. The checkbook balance on October 31 is $960. 2. Reconcile the bank
2. The ending bank statement balance is $1,380. statement using the
3. The bank statement shows a service charge of $10. Reconcile option in the
Banking menu.
4. A deposit of $405 was made on October 30, but does not appear on the 3. Print a Detail reconcilia-
bank statement. tion report and the Cash
in Bank register.
5. Check 768 for $529 and Check 772 for $306 are outstanding. 4. Complete the Analyze
Instructions In your working papers: activity.
5. Back up your work.
1. Record the bank service charge in the checkbook.
2. Reconcile the bank statement. SPREADSHEET
3. Journalize the bank service charge in the general journal, page 4. SMART GUIDE
4. Post the bank service charge journal entry to the appropriate general Step–by–Step Instructions:
ledger accounts. Problem 11–6
1. Select the spreadsheet
Analyze How many checks are outstanding? Identify the total amount
template for Problem
that is outstanding. 11–6.
2. Complete the spread-
sheet using the
Problem 11–6 Reconciling the Bank Statement instructions in your
working papers.
On October 31 Juanita Ortega, owner of Outback Guide Service, received a 3. Print the spreadsheet
bank statement dated October 30. Juanita found the following: and proof your work.
4. Save your work and
1. The checkbook has a balance of $2,551.34.
exit the spreadsheet
2. The bank statement shows a balance of $2,272.36. program.
3. The statement shows a bank service charge of $20.00.
4. A check from Podaski Systems for $62.44, deposited on October 18,
was returned by the bank. There is no fee for handling the NSF check.
SMART GUIDE
5. A deposit of $672.48 made on October 30 does not appear on the bank
Step–by–Step Instructions:
statement.
Problem 11–7
6. These checks are outstanding:
1. Select the problem set
Check 872 for $126.84 Check 883 for $192.80 for Showbiz Video
Check 881 for 87.66 Check 887 for 68.64 (Prob. 11–7).
2. Rename the company
Instructions Using the preceding information: and set the system date.
3. Reconcile the bank
1. Record the service charge and the NSF check in the checkbook. statement using the
2. Reconcile the bank statement. Account Reconciliation
option in the Tasks
3. Record the service charge and NSF check on page 7 of the general menu.
journal. 4. Print the Account
Reconciliation reports.
4. Post the journal entries to the appropriate general ledger accounts.
5. Complete the Analyze
Analyze Review the Miscellaneous Expense account found in your activity.
6. End the session.
working papers. Identify the Miscellaneous Expense account
balance after posting the October 31 entry.
Chapter 11 Problems 299
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C H A P T ER 11 Problems
Problem 11–7 Reconciling the Bank Statement
On October 31 Showbiz Video received the bank statement dated October
QuickBooks 30. The accountant reviewed it and found the following:
PROBLEM GUIDE 1. The checkbook balance on October 31 is $13,462.96.
2. The ending bank statement balance is $13,883.80.
Step–by–Step Instructions:
Problem 11–7 3. The bank statement shows a service charge of $17.50.
1. Restore the Problem 4. Deposits of $675.00 on October 28 and $925.00 on October 29 do not
11-7.QBB file. appear on the bank statement.
2. Reconcile the bank
5. The following checks are outstanding:
statement.
3. Print a Detail reconcilia- Check 1766 $125.00 Check 1770 $1,462.19
tion report and the Cash Check 1768 69.42 Check 1771 381.73
in Bank register.
4. Complete the Analyze Instructions In your working papers:
activity.
5. Back up your work. 1. Record the bank service charge in the checkbook in your working papers.
2. Reconcile the bank statement.
3. Record the entry for the bank service charge on general journal page 13.
4. Post the bank service charge journal entry to the proper ledger accounts.
Analyze Calculate the Cash in Bank balance after the October 31
posting. Does it agree with the adjusted checkbook balance?
CHALLENGE Problem 11–8 Reconciling the Bank
PROBLEM
SOURCE DOCUMENT Statement Using the
PROBLEM Account Form
Problem 11–8 On October 20 Job Connect received its bank statement dated October 18.
Use the source document 1. The checkbook balance on October 20 is $880.84.
in your working papers to 2. The ending bank statement balance is $344.58.
complete this problem.
3. A $14.00 service charge appears on the bank statement.
4. The following checks are outstanding:
Check 864 $ 88.41 Check 871 $129.88
SMART GUIDE Check 869 69.34 Check 873 14.25
Step–by–Step Instructions: 5. A $68.42 check from Tom McCrary deposited on October 13 was
Problem 11–8 returned by the bank for insufficient funds. The bank charged Job
1. Select the problem Connect’s account $7.00 for the NSF check. No journal entry was made
set for Job Connect
(Prob. 11–8). for the NSF check.
2. Rename the company 6. A $938.72 deposit on October 19 is not on the bank statement.
and set the system date.
7. A check for $200.00 to Fontenot Inc. was lost in the mail and has not
3. Reconcile the bank
statement. been deposited. A stop payment order, which cost $10.00, was issued on
4. Print the Account October 15. No new check was issued.
Reconciliation reports.
5. Complete the Analyze Instructions Reconcile the bank statement using the account form in your
activity. working papers.
6. End the session.
Analyze Identify the account that will be debited for both the NSF
check and the bank handling charge on the check.
300 Chapter 11 Problems
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Winning Competitive Events CHA PTER 11
Practice your test-taking skills! The questions on this page are reprinted with permission
from national organizations:
• Future Business Leaders of America
• Business Professionals of America
Use a separate sheet of paper to record your answers.
Future Business Leaders of America
MULTIPLE CHOICE
Use the following choices for questions 1–3.
Indicate whether the following items in a bank reconciliation should be
a. added to the checkbook balance.
b. deducted from the checkbook balance.
c. added to the bank statement balance.
d. deducted from the bank statement balance.
1. Outstanding deposit of $1,200
2. An NSF check from customer Anne Campbell for $52
3. An outstanding check for $185 written to Cole Realty
4. The bank statement shows a checking account balance of $5,500. There are
outstanding checks totaling $600, an outstanding deposit of $400, and a bank
service charge of $15. The cash account balance should be
a. $5,300.
b. $5,700.
c. $5,285.
d. none of the above.
Business Professionals of America
MULTIPLE CHOICE
5. The first step in balancing a checkbook is
a. subtracting fees on the bank statement from the checkbook balance.
b. comparing checks in the check record with those on the statement.
c. adding interest earned to the checkbook balance.
d. adding recent deposits to the bank statement balance.
Need More Help?
Go to glencoeaccounting.glencoe.com and
click on Student Center. Click on Winning
Competitive Events and select Chapter 11.
• Practice Questions and Test-Taking Tips
• Concept Capsules and Terminology
glencoeaccounting.glencoe.com Chapter 11 Winning Competitive Events 301
276-303_CH11_868829.indd 301 10/13/05 10:10:50 PM
C H A P T ER 11 Real-World Applications and Connections
Critical Cash Control
Thinking 1. Define internal controls.
2. Explain why the balance in the checkbook can differ from the balance on the
bank statement.
3. Your bank sent you a dishonored check. What should you do?
4. Contrast check processing before Check 21 to check processing after
Check 21. What are the differences?
5. Suppose you carry out all your transactions electronically. How do you
reconcile your bank statement?
6. Assess the value of the electronic funds transfer system.
CASE Service Business: Entertainment
STUDY Dexter Shuman owns a bowling alley called Ten Pin Alley. Each night, Dexter
counts the cash in the two cash registers and makes a night deposit at the local
bank. For the month of May, Dexter made deposits totaling $6,400. During May,
Dexter wrote checks totaling $2,900. The last three checks he wrote were Check
1408 for $180; Check 1409 for $560; and Check 1410 for $212. The beginning
cash balance for the month was $13,840, which is the amount shown as the
beginning balance on the May bank statement. That statement also includes a
$12 service charge and an $18 charge for printing new checks.
INSTRUCTIONS
1. Determine the ending bank statement balance if all checks written have
cleared.
2. Determine the ending bank statement balance if Checks 1408, 1409, and
1410 are outstanding.
3. Calculate the balance of the Cash in Bank account.
a
mattoefr ETHICS Pocketing Differences
Imagine that you are a cashier at a grocery store like Ralphs. In a four-hour shift,
you handle thousands of dollars. At the end of your shift, you total receipts and
cash to see if they match. One day cash comes up short, and you report the
discrepancy to the manager. A few weeks later, cash is over by $2. You know a
couple of cashiers who pocket extra cash. You wonder who would miss $2.
ETHICAL DECISION MAKING
1. What are the ethical issues? 4. How do the alternatives affect the
2. What are the alternatives? parties?
3. Who are the affected parties? 5. What would you do?
$ )) ))
Communicating
Making the Case for Daily Deposits
ACCOUNTING Assume that you work for a sporting goods store that is open six days a week,
12 hours a day. A major promotion is resulting in record sales, and the manager
has been too busy to make daily cash deposits. Discuss with your classmates and
teacher the importance of taking time to make cash deposits every day.
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Real-World Applications and Connections CHAPT E R 1 1
Skills Beyond Customer Service
NUMBERS As a personal banker for Citizen’s First National Bank, your duties include
opening personal bank accounts, taking loan applications, and serving bank
customers. Today Ms. Kelley wants to open a checking account. What items
would you put in an information packet about opening her account? Pair up with
another student and role-play teaching the new client to write a check and fill out
a deposit slip. Model the customer service principles of thoroughness, courtesy,
and respect.
INTERNATIONAL Cash Management
Imagine how difficult it would be to control cash for hundreds of locations in the
Accounting United States, Europe, and Asia. Many international companies select one large
bank that can handle transactions in multiple currencies and countries.
INSTRUCTIONS Identify reasons why you would prefer to work with one bank if
you were in charge of cash control for an international business.
Making It
Your Bank Statement
Personal If you have a checking account, you know that the balances on the bank
statement and in the checkbook seldom agree. You recognize the importance of
reconciling the two balances so that you will know exactly how much money
you have in the account.
PERSONAL FINANCE ACTIVITY Imagine that you just received your monthly bank
statement. When comparing it to the checkbook, you found a $200.00 deposit
that was not on the bank statement and two checks totaling $145.00 that were
outstanding. The bank statement balance was $1,370.00 and the checkbook
balance is $1,425.00. What is the reconciled balance?
PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and
click on Student Center. Click on Making It Personal and select Chapter 11.
Analyzing Evaluating Working Capital
Financial One measure of a company’s ability to pay debts is its working capital.
Reports
Working Capital Current Assets Current Liabilities
Current assets are cash and assets that will be
converted to cash within the next accounting Bank Reconciliations
period. Current liabilities are debts that must be A big-name sports team must
paid within the next accounting period. reconcile its bank statements just
INSTRUCTIONS Refer to Roadrunner’s balance like your local batting cage business.
sheet on page 233. If Maria Sanchez had made Visit glencoeaccounting
a $1,000 withdrawal, how would each of the .glencoe.com and click
on Student Center. Click on
following change?
WebQuest and select Unit 2 to
1. Current assets continue your Internet project.
2. Current liabilities
3. Working capital
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MINI Completing the Accounting Cycle
PRACTICE for a Sole Proprietorship
SET 2
Fast Track TUTORING
Tutoring Service
SE RVIC E
Main Task
Set up the accounting records
▲
and complete the accounting Company Background:
cycle for Fast Track Tutoring Fast Track Tutoring Service is owned and
Service. managed by Jennifer Rachael. It has been
in business for one month. The business
Summary of Steps is organized as a sole proprietorship and
provides tutoring services in a number
Open general ledger accounts.
▲
of disciplines for students from pre-
Analyze, journalize, and post kindergarten through high school. The
▲
transactions. business earns revenue from tuition
charged for one-on-one instruction and
Reconcile the bank statement.
▲
special classes.
Journalize and post the bank Your Job Responsibilities: As the accounting clerk for this business,
▲
service charge. use the accounting stationery in your working papers to complete the
following activities.
Prepare a trial balance, a
▲
(1) Open a general ledger account for each account in the chart of
work sheet, and the financial accounts.
statements. (2) Analyze each business transaction.
Journalize and post the closing (3) Enter each business transaction in the general journal. Begin
▲
entries. on journal page 1.
(4) Post each journal entry to the appropriate accounts in the
Prepare a post-closing trial
▲
general ledger.
balance. (5) Reconcile the bank statement that was received on December
31. The statement is dated December 30. The checkbook
Why It’s Important has a current balance of $9,631. The bank statement shows
This project pulls together a balance of $9,844. The bank service charge is $15. These
▲
all of the concepts and checks are outstanding: Check 108, $183 and Check 109, $45.
procedures you have learned. There are no outstanding deposits.
(6) Make any necessary adjustments to the checkbook balance.
(7) Journalize and post the entry for the bank service charge.
(8) Prepare a trial balance and complete the work sheet.
(9) Prepare an income statement, a statement of changes in
owner’s equity, and a balance sheet.
(10) Journalize and post the closing entries.
(11) Prepare a post-closing trial balance.
Business Transactions: Fast Track Tutoring Service began
business operations on December 1 of this year.
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Fast Track Tutoring Service (continued)
Complete the project using: Manual Glencoe Peachtree Complete QuickBooks
OR OR
Working Papers Accounting Software Templates
SMART GUIDE
CHART OF ACCOUNTS
Step–by–Step Instructions:
Fast Track Tutoring Service
1. Select the problem set
ASSETS 305 Jennifer Rachael, Withdrawals for Fast Track Tutoring
310 Income Summary Service (MP–2).
101 Cash in Bank
2. Rename the company
110 Accts. Rec.—Carla DiSario REVENUE and set the system
120 Accts. Rec.—George McGarty date.
401 Group Lessons Fees
140 Office Supplies 3. Record all of the
405 Private Lessons Fees
150 Office Equipment transactions.
155 Instructional Equipment EXPENSES 4. Reconcile the bank
LIABILITIES 505 Maintenance Expense statement.
510 Miscellaneous Expense 5. Print a General Journal
210 Accts. Pay.—Educational Software report and proof your
515 Rent Expense
215 Accts. Pay.—T & N School Equip. work.
525 Utilities Expense
6. Print the Account
OWNER’S EQUITY
Reconciliation reports.
301 Jennifer Rachael, Capital 7. Print a General Ledger
and a Trial Balance.
8. Print the financial
statements.
Date Transactions 9. Close the fiscal year.
10. Print a post-closing
Dec. 1 Jennifer Rachael invested $25,000 in the business, Memo 1. trial balance.
11. Complete the Analyze
2 Bought a cash register (Office Equipment) for $525, Check 101.
activity and complete
2 Purchased $73 in office supplies, Check 102. the Audit Test.
12. End the session.
5 Purchased instructional computers for $13,924, Check 103.
5 Received $950 for private instruction, Receipt 1. QuickBooks
6 Bought $8,494 of instructional materials, Invoice 395, from PROBLEM GUIDE
Educational Software on account.
Step–by–Step Instructions:
8 Billed Carla DiSario for two group classes, $36, Invoice 101.
1. Restore the Mini
9 Wrote Check 104 for $850 for the December rent. Practice Set 2.QBB file.
2. Record all of the
10 Billed George McGarty $275 for special group classes, Invoice 102.
transactions.
10 Received Invoice 5495 for a $2,375 microcomputer system, for office 3. Reconcile the bank
use, bought on account from T & N School Equipment. statement.
4. Print a Detail
11 Prepared Receipt 2 for $695 for 20 private lessons given between Reconciliation report.
December 1 and December 10. 5. Print a Journal report.
6. Print the register for the
13 Received $36 from Carla DiSario on account, Receipt 3. Cash in Bank account.
14 Sent Check 105 for $200 to Educational Software on account. 7. Print a General Ledger.
8. Print a Trial Balance.
15 Wrote Check 106 for $750 to repaint two classrooms. 9. Print a Profit and Loss
report and Balance
18 Jennifer Rachael withdrew $500 for personal use, Check 107.
Sheet.
20 Sent Check 108 for the electric bill of $183. 10. Close the fiscal year.
11. Print a post-closing Trial
24 Issued Check 109 for $45 for stamps (Miscellaneous Expense). Balance.
12. Complete the Analyze
activity and the Audit
Analyze Identify the creditor to which Fast Track Tutoring Service Test.
owed the most money on December 31. 13. Back up your work.
Mini Practice Set 2 305
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UNIT
3 Accounting
for a Payroll
System
Personal Finance Q & A
Q: Why should I learn about payroll?
A: Payroll is important to everyone.
When you are paid at your job, you
want to be sure the amounts are
correct. The business also wants to
be sure that all employees are paid
in a legal and correct manner.
Q: What is the minimum wage?
A: The current federal minimum wage
is $5.15 per hour. A business must
also meet its state’s minimum wage
requirement, which is sometimes
higher.
THINK IT OVER
Do you agree with the law requiring
employees to pay taxes on their
earnings? Why or why not?
306
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Internet Project
You’re the Boss
Employees have different goals and are motivated to work for a
variety of reasons. You need to know how to pay your employees
in a way that is appropriate and that motivates them to do the best
job possible. In this online activity, you will learn different ways to
pay and motivate your employees.
Log on to glencoeaccounting.glencoe.com and
click on Student Center. Click on WebQuest and
select Unit 3. Begin your WebQuest by reading
the Task.
Continue working on your Chapter 12 13
WebQuest as you study Unit 3. Page 337 371
THE BIG PICTURE
A CAUTIOUS BONUS BOOST Estimated bonus
pay for the lucky workers expected to receive such a windfall,
as a percentage of base salary:
35%
30
25
20
15
10
5
0
EXECUTIVES SUPERVISORS PROFESSIONALS CLERKS/ NONUNION
AND MANAGERS ADMINISTRATIVE HOURLY
ASSISTANTS WORKERS
Data: Mercer Human Resources Consulting
Source: Reprinted by permission from BusinessWeek.
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CH A P T ER 12 Payroll Accounting
BEFORE
YOU READ
What You’ll Learn Predict
1. Explain the importance of 1. What does the chapter title tell you?
accurate payroll records. 2. What do you already know about this subject from personal experience?
3. What have you learned about this in the earlier chapters?
2. Compute gross pay using
different methods. 4. What gaps exist in your knowledge of this subject?
3. Explain and compute
employee-paid withholdings.
4. Compute net pay.
Exploring the Real World of Business
5. Prepare payroll registers. MOVING INTO THE WORKFORCE
6. Explain the methods of
distributing payroll funds.
Symantec Corporation
Since 1982 Symantec Corporation has designed programs
7. Prepare an employee’s to help users manage and protect their computer systems and
earnings record.
files. Under John Thompson, CEO since 1999, Symantec has
8. Define the accounting terms become a market leader with $1 billion in annual revenue.
introduced in this chapter. Symantec believes in treating its employees right. It has one
Why It’s Important of the lowest employee loss rates in the United States. From
software engineers to accountants, more than 5,000 employees
Tax and labor laws protect the
▲
deliver award-winning products and services.
rights of both the employee
and the employer. CEO Thompson believes employees stay at Symantec
because the work is challenging and morale is high. The long
list of benefits—health-care plans, educational assistance,
retirement plans, performance bonuses, and stock options—are
just a few perks that keep employees happy.
What Do You Think?
Describe the kind of company culture and benefits that
would make you happy in a job.
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Working in the Real World
APPLYING YOUR ACCOUNTING KNOWLEDGE
Personal Connection
When you get your paycheck, do you look at it Look at your last pay stub. If money was
carefully to see how much you have earned and deducted from your earnings, what do you think
what amounts have been deducted from the it was taken for?
total? Employers are required to make certain
deductions from your pay. You may also request Online Connection
voluntary deductions. You will learn about both Go to glencoeaccounting.glencoe.com and click
types of deductions in this chapter. on Student Center. Click on Working in the
Real World and select Chapter 12.
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SECTION 1 Calculating Gross Earnings
In a private enterprise economy, people are free to work for any busi-
BEFORE
YOU READ ness they choose—as long as they meet the requirements for employ-
ment. Employers such as Ford Motor Company, Pier 1, and Symantec
Corporation rely on their employees to operate the business and pay
Main Idea their employees for the services they perform. In paying their employees,
Gross earnings is the total
businesses follow certain guidelines. For example, both federal and state
amount an employee earns
laws require businesses to keep accurate payroll records and to report
in a pay period.
employees’ earnings.
Read to Learn… Most companies set up a payroll system to ensure that their employ-
➤ the two main functions of ees are paid on time and that payroll checks are accurate. In this chapter
a payroll system. (p. 310) you will learn about the payroll system.
➤ the different methods
of computing gross pay.
(p. 311)
Using a Payroll System
What Is a Payroll System?
Key Terms A payroll is a list of the employees and the payments due to each
payroll employee for a specific pay period. A pay period is the amount of
pay period time over which an employee is paid. Most businesses use weekly,
payroll clerk biweekly (every two weeks), semimonthly (twice a month), or monthly
gross earnings
pay periods.
salary
The payroll expense is a major expense for most companies. To
wage
compute salary expenses, most businesses set up a payroll system for
time card
recording and reporting employee earnings information. A well-designed
electronic badge readers
payroll system achieves two goals:
commission
piece rate 1. The collection and processing of all information needed to
overtime rate prepare and issue payroll checks.
2. The generation of payroll records needed for accounting
purposes and for reporting to government agencies,
management, and others.
Businesses with many employees often hire a payroll clerk . The pay-
roll clerk responsible for preparing the payroll
• makes sure employees are paid on time,
• makes sure each employee is paid the correct amount,
• completes payroll records,
• submits payroll reports, and
• pays payroll taxes.
All payroll systems have certain tasks in common, as shown in
Figure 12–1.
310 Chapter 12 Payroll Accounting
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THE PAYROLL SYSTEM
ns
ng
s deductio
i Calculates
rn
ea
es
at
ul
lc
Ca
Prepares payroll checks
roll
ts pay
Repor ati n
o
inform ment
ern
Records earnings to gov
and deductions
in the payroll
and accounting
records
Figure 12–1 The Payroll
Computing Gross Pay System
How Do You Calculate Gross Earnings?
Most employees are paid for the specific amount of time they work
during a pay period. The total amount of money an employee earns in a pay
period is the employee’s gross earnings , or gross pay. The gross earnings
expense is sometimes called salary expense. The method used to compute
gross pay depends on the basis on which an employee is paid. Employees
can be grouped into different pay categories:
• salary • salary plus commission or bonus
• hourly wage • piece rate
• commission
Some employees are entitled to overtime pay. Let’s look at each method
of paying employees. AS
YOU READ
Salary It’s Not What It
One common method of paying employees, especially those who are Seems
managers or supervisors, is by salary. A salary is a fixed amount of money Gross In accounting
paid to an employee for each pay period. In other words, an employee who gross does not have
is paid a salary earns the same amount regardless of the number of hours a negative meaning.
worked during the pay period. For example, Paula Ferguson, an adminis- The term gross refers
trative assistant, is paid a salary of $2,000 a month. Her gross earnings are to an amount before
$2,000 for each monthly pay period. Paula may work 160 hours in one anything is deducted or
month and 170 hours in the next, but her gross earnings for each of the two subtracted.
months are the same—$2,000.
Section 1 Calculating Gross Earnings 311
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Hourly Wage
Another common way of paying employees is the hourly wage. A wage is
an amount of money paid to an employee at a specified rate per hour worked.
The number of hours worked multiplied by the hourly wage equals the gross
earnings for the pay period. For example, Emily Kardos, a delivery driver for
Roadrunner, is paid $6.75 per hour. During the last weekly pay period, she
worked 36 hours. Emily’s gross earnings are $243.00 (36 hours $6.75).
Many employees are required to use time cards to accurately record
their work hours during each pay period. A time card is a record of the
times an employee arrives at work and leaves each day. The times may be
recorded manually or by a time clock. The time card also shows the total
hours worked each day. Figure 12–2 shows a manual time card.
Many businesses divide an hour into four 15-minute quar-
NO. 11 ters to measure employee work time. These quarter hours are
NAME Emily Kardos determined as follows:
SOC. SEC. NO. 201-XX-XXXX Quarter Hour Example
WEEK ENDING 6/30/20-- On the hour 2:00 p.m.
DAY IN OUT IN OUT IN OUT TOTAL
15 minutes after the hour 2:15 p.m.
M 7:58 12:25 1:32 4:18 7 1/4 30 minutes after the hour 2:30 p.m.
T 8:00 12:00 12:45 4:00 7 1/4
45 minutes after the hour 2:45 p.m.
W 7:56 12:01 1:10 4:15 7 Employees seldom arrive and leave exactly on the quarter
Th 8:01 11:55 1:02 4:16 7 1/4 hour. As a result, some companies round arrival and departure
F 7:45 12:02 1:05 3:58 7 1/4 times to the nearest quarter hour. Employees, therefore, are
S paid for working to the nearest quarter hour. Look at Figure
S
12–2. The times appearing on the time card for Emily Kardos
for Monday will be rounded to the nearest quarter hour as
TOTAL HOURS 36
follows:
HOURS RATE AMOUNT
Actual Time Recorded Nearest Quarter Hour
REGULAR 36 $6.75 $243.00
7:58 a.m. 8:00 a.m.
OVERTIME 0
12:25 p.m. 12:30 p.m.
TOTAL EARNINGS $243.00
1:32 p.m. 1:30 p.m.
SIGNATURE Emily Kardos DATE 6/30/20-- 4:18 p.m. 4:15 p.m.
Emily will be paid for working on Monday from 8:00 a.m.
Figure 12–2 An Employee to 12:30 p.m. (4½ hours) and from 1:30 p.m. to 4:15 p.m.
Time Card (2¾ hours) for a total of 7¼ hours.
Some businesses use computer technology to track employee arrival
and departure times. One method uses electronic badge readers . The
employee has an identification badge with a magnetic strip that contains
employee information. The employee inserts the identification badge into
a reader, which scans the magnetic strip and transfers the following infor-
mation directly to the computer: the employee’s name, the department
or area where the employee works, and the arrival or departure time. This
electronic equipment makes it fast and easy to prepare a daily printout of
employee work hours.
Regardless of how employee work hours are recorded (manually, time
clock, or electronic reader), business owners and supervisors check the accu-
racy of the hours reported and analyze the labor costs for every pay period.
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Commission
A commission is an amount paid to an
employee based on a percentage of the employee’s
sales. Sales employees are often paid a commission
to encourage them to increase their sales. For exam-
ple, Joyce Torrez is paid a 5% commission on all
her sales. Last week Joyce’s total sales were $8,254.
Joyce’s gross earnings for the week are $412.70
($8,254 .05).
Salary Plus Commission or Bonus
Some salespeople earn a base salary plus a com-
mission or a bonus on the amount of their sales. For
example, Juan Espito, who works at a car stereo shop, is paid a salary of $200
per week plus a commission of 3% of his sales. Juan’s sales were $4,810 last
week. His gross earnings are $344.30 [$200 ($4,810 .03)].
Piece Rate
Some manufacturing companies pay employees a specific amount of
money for each item the employee produces. This method of payment is
called piece rate . Businesses often pay a low hourly rate in addition to the
piece rate.
Overtime Pay
State and federal laws regulate the number of hours some employees
may work in a week. Generally, employers are required to pay overtime
when employees covered by these laws work more than 40 hours per week.
The overtime rate , set by the Fair Labor Standards Act of 1938, is 1½ (1.5)
times the employee’s regular hourly pay rate. For example, Jesse Dubow, a
photo-lab clerk at Fast Photo, worked 43 hours last week. Jesse’s hourly rate
of pay is $6.60. His hourly overtime rate is $9.90 ($6.60 1.5). His gross AS
earnings for the week are $293.70 determined as follows: YOU READ
Hours Rate In Your Experience
Regular 40 $6.60 $264.00 Pay Categories If you or
Overtime 3 $9.90 29.70 your friends have part-
Total $293.70 time jobs, what is the
Some employees who are paid a salary are also entitled to overtime pay. pay category?
If a salaried employee is paid overtime, the salary is converted to an hourly
rate using a standard number of hours for the period covered by the salary.
Then the hourly overtime rate is calculated. For example, Jim Halley’s salary
is $600 per week. His hourly rate is $15 assuming a standard 40-hour work
week ($600 40). His hourly overtime rate is $22.50 ($15 1.5). Jim’s gross
earnings for a 44-hour week are $690, determined as follows:
Hours Rate
Regular $600.00
Overtime 4 $22.50 90.00
Total $690.00
Section 1 Calculating Gross Earnings 313
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SECTION 1 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Create a table similar to this -ETHOD 3OURCE OF )NFORMATION
one. For each category of
employee, list the source of 3ALARY
information for calculating (OURLY 7AGE
gross earnings in a single pay
period. #OMMISSION
3ALARY PLUS #OMMISSION
Do the Math
You have been interviewing with several financial consulting firms for entry-level
management positions, and you received two job offers. One company, Bryson Consulting,
offers you a starting salary of $30,000 with a 2% bonus (on salary) if you can bring 10 new
clients into the firm. The other company, The Patterson Group, offers a salary of $25,000
plus a 3% commission on all new client billings. If you bring 10 new clients to Bryson,
what would the amount of your bonus be? How much in new business would you have to
bring to Patterson to equal the bonus from Bryson? Which offer seems to have the higher
earnings potential? Why?
Problem 12–1 Calculating Gross Earnings
Cleary’s Music Center has nine employees. The employees are paid weekly with overtime
after 40 hours per week. The overtime rate is 1½ times the regular rate of pay. Payroll
information for the week ending June 12 follows:
Employee Pay Rate Hours
David Clune $6.95 331⁄2
Richard Lang $7.80 38
Jane Longas $7.25 43
Betty Quinn $8.30 441⁄4
John Sullivan $8.30 391⁄2
Kelly Talbert $7.50 40
Gene Trimbell $9.75 421⁄2
Heidi Varney $8.75 341⁄4
Kevin Wallace $9.25 46
Instructions Prepare a form similar to the one that follows. Calculate regular earnings,
overtime earnings, and gross earnings for each employee.
Total Pay Regular Overtime Gross
Employee Hours Earnings Earnings Earnings
Rate
Clune, David 331/2 $6.95 $232.83 –0– $232.83
314 Chapter 12 Payroll Accounting
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SECTION 2 Payroll Deductions
Whether you work at Target, McDonald’s, or CompUSA, your earn-
BEFORE
ings and deductions are determined in the same way. In this section you YOU READ
will compute the amounts withheld from an employee’s earnings.
The first time you received a payroll check, you were probably sur-
Main Idea
prised that its amount was less than you expected. Various amounts had
Payroll deductions are
been taken out of your gross earnings. An amount subtracted from gross
amounts withheld from an
earnings is a deduction . Deductions include those required by law and
employee’s gross earnings.
those an employee wishes to have withheld from earnings.
Read to Learn…
Deductions Required by Law ➤ the deductions required
by law. (p. 315)
What Amounts Must Be Deducted from Earnings?
➤ the deductions an
An employer is required by law to withhold payroll taxes. These taxes employee can choose.
include the federal income tax and the social security tax. In addition, (p. 318)
employers often must withhold city and state income tax.
Key Terms
Federal Income Tax deduction
withholding allowance
Most people pay the federal government a tax based on their annual
401(k) plan
income. To ensure that employees have the funds to pay their income
taxes, employers are required to withhold a certain amount of money
from each payroll check. The employer acts as a collection agent and sends
the money withheld to the federal government.
The amount of income tax withheld is based on the estimated income
tax the employee will actually owe. The exact income tax amount is deter-
mined when the employee prepares an income tax return. If too much
money was withheld, the Internal Revenue Service (IRS) refunds the over-
payment. If too little money was withheld, the employee pays the amount
due when the income tax return is filed. To avoid penalties, an employee
should have at least 90% of the actual tax liability deducted.
Form W-4. The federal income tax amount withheld depends on
three factors: (1) the employee’s marital status, (2) the number of allow-
ances the employee claims, and (3) the employee’s gross earnings. The first
two items are found on Form W-4, the Employee’s Withholding Allowance
Certificate. Each employee fills out a Form W-4 when starting a job and files
a revised Form W-4 if the marital status or number of allowances changes.
Employers keep a current Form W-4 on file for each employee.
Figure 12–3 on page 316 shows the completed Form W-4 for Emily Kar-
dos. The Form W-4 includes the employee’s name, address, social security
number, and marital status. The employee also lists the number of allowances
claimed (refer to line 4). A withholding allowance reduces the amount of
Section 2 Payroll Deductions 315
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Cut here and give the certificate to your employer. Keep the top portion for your records. income tax to be withheld.
The more allowances a
W-4 Employee’s Withholding Allowance Certificate OMB No. 1545-0010
taxpayer claims, the lower
20 --
Form
Department of the Treasury
Internal Revenue Service For Privacy Act and Paperwork Reduction Act Notice, see reverse.
1 Type or print your first name and middle initial Last Name 2 Your social security number
the amount of income tax
Emily M. Kardos 201-XX-XXXX
Home address (number and street or rural route)
✓Single Married
withheld from earnings.
809 East Main Street
City or town, state, and ZIP code
3 Marital
Status
Married, but withhold at higher Single rate A taxpayer is usually
Note: If married, but legally separated, or spouse is a
Sacramento, CA 94230 nonresident alien, check the Single box. allowed one personal
0
4 Total number of allowances you are claiming (from line G above or from the Worksheets on back if they apply) . . . 4
5 Additional amount, if any, you want deducted from each pay . . . . . . . . . . . . . . . . 5 $ allowance and one allow-
6 I claim exemption from withholding and I certify that I meet ALL of the following conditions for exemption:
• Last year I had a right to a refund of ALL federal income tax withheld because I had NO tax liability: AND
ance for each person he
• This year I expect a refund of ALL Federal income tax withheld because I expect to have NO tax liability; AND
• This year if my income exceeds $500 and includes nonwage income, another person cannot claim me as a dependent.
or she supports (such as a
If you meet all of the above conditions, enter the year effective and “EXEMPT” here . . . . 6 child).
7 Are you a full-time student? (Note: Full-time students are not automatically exempt.) . . . . . . . . . 7 Yes ✓No
Under penalty of perjury, I certify that I am entitled to the number of withholding allowances claimed on this certificate or entitled to claim exempt status. Some employees are
Employee’s signature Emily M. Kardos Date January 3 20 -- exempt from federal income
8 Employer’s name and address (Employer: Complete 8 and 10 only if sending to IRS) 9 Office 10 Employee identification number
155 Gateway Blvd.
code
(optional) tax withholding. An
Roadrunner Delivery Service 31-8042398
Sacramento, CA 94230 employee is not required to
have income tax withheld
Figure 12–3 Employee’s Withholding Allowance Certificate—Form W-4
if he or she
• did not have a federal income tax liability in the previous year,
• expects no tax liability this year,
• has income of $700 or less including nonwage income such as savings
account interest, and
• cannot be claimed as a dependent on someone else’s tax return.
An exempt employee writes EXEMPT on Form W-4 so the employer will
know not to withhold federal income tax.
Tax Tables. An employee’s gross earnings affect the amount withheld
for federal income taxes. Most employers use IRS tables to determine the
amount of federal tax to withhold. See Figure 12– 4 for tables for single and
married persons paid weekly. Other tax tables are available.
Let’s use the tables to determine the tax withheld for Emily Kardos. She
is single and claims no allowances. For the week ending June 30, she earned
$243. This amount falls between $240 and $250 on the tax table for single
persons. Reading across this line to the column for zero withholding allow-
ances, you find that $29 is withheld from Emily’s gross earnings.
Social Security Tax
Employers also collect social security taxes for the federal government.
Established by the Federal Insurance Contributions Act (FICA) in 1935,
social security taxes are often called FICA taxes. FICA taxes have two com-
ponents: social security and Medicare. Each is listed separately on payroll
records. The social security tax funds programs that provide income to
certain individuals:
1. The old-age and disability insurance programs provide income to
people who are retired or disabled and their dependent children.
2. The survivors’ benefits program provides income to the spouse and
dependent children of a deceased worker.
The Medicare tax finances health insurance benefits for people who are
elderly or disabled.
316 Chapter 12 Payroll Accounting
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SINGLE Persons—WEEKLY Payroll Period
If the wages are – And the number of withholding allowances claimed is –
At least But less 0 1 2 3 4 5 6 7 8 9 10
than
The amount of income tax to be withheld is –
$0 $55 0 0 0 0 0 0 0 0 0 0 0
55 60 1 0 0 0 0 0 0 0 0 0 0
60 65 2 0 0 0 0 0 0 0 0 0 0
65 70 2 0 0 0 0 0 0 0 0 0 0
70 75 3 0 0 0 0 0 0 0 0 0 0
75 80 4 0 0 0 0 0 0 0 0 0 0
80 85 5 0 0 0 0 0 0 0 0 0 0
85 90 5 0 0 0 0 0 0 0 0 0 0
90 95 6 0 0 0 0 0 0 0 0 0 0
95 100 7 0 0 0 0 0 0 0 0 0 0
100 105 8 0 0 0 0 0 0 0 0 0 0
105 110 8 1 0 0 0 0 0 0 0 0 0
110 115 9 2 0 0 0 0 0 0 0 0 0
115 120 10 2 0 0 0 0 0 0 0 0 0
120 125 11 3 0 0 0 0 0 0 0 0 0
125 130 11 4 0 0 0 0 0 0 0 0 0
130 135 12 5 0 0 0 0 0 0 0 0 0
135 140 13 5 0 0 0 0 0 0 0 0 0
140 145 14 6 0 0 0 0 0 0 0 0 0
145 150 14 7 0 0 0 0 0 0 0 0 0
150 155 15 8 0 0 0 0 0 0 0 0 0
155 160 16 8 1 0 0 0 0 0 0 0 0
160 165 17 9 1 0 0 0 0 0 0 0 0
165 170 17 10 2 0 0 0 0 0 0 0 0
170 175 18 11 3 0 0 0 0 0 0 0 0
175 180 19 11 4 0 0 0 0 0 0 0 0
180 185 20 12 4 0 0 0 0 0 0 0 0
185 190 20 13 5 0 0 0 0 0 0 0 0
190 195 21 14 6 0 0 0 0 0 0 0 0
195 200 22 14 7 0 0 0 0 0 0 0 0
200 210 23 15 8 0 0 0 0 0 0 0 0
AS
READ
210 220 25 17 9 2 0 0 0 0 0 0 0
220 230 26 18 11 3 0 0 0 0 0 0 0
230
240
240
250
28
29
20
21
12
14
5
6
0
0
0
0
0
0
0
0
0
0
0
0
0
0
YOU
250
260
260
270
31
32
23
24
15
17
8
9
0
2
0
0
0
0
0
0
0
0
0
0
0
0
Key Point
270 280 34 26 18 11 3 0 0 0 0 0 0
280
290
290
300
35
37
27
29
20
21
12
14
5
6
0
0
0
0
0
0
0
0
0
0
0
0
Form W-4 The Form
300 310 38 30 23 15 8 0 0 0 0 0 0 W-4 indicates whether
310
320
320
330
40
41
32
33
24
26
17
18
9
11
1
3
0
0
0
0
0
0
0
0
0
0 the employee is single
330 340 43 35 27 20 12 4 0 0 0 0 0
340 350 44 36 29 21 14 6 0 0 0 0 0 or married. It also
shows the number of
MARRIED Persons—WEEKLY Payroll Period withholding allowances.
If the wages are – And the number of withholding allowances claimed is –
At least But less 0 1 2 3 4 5 6 7 8 9 10
than
The amount of income tax to be withheld is –
$0 $125 0 0 0 0 0 0 0 0 0 0 0
125 130 1 0 0 0 0 0 0 0 0 0 0
130 135 1 0 0 0 0 0 0 0 0 0 0
135 140 2 0 0 0 0 0 0 0 0 0 0
140 145 3 0 0 0 0 0 0 0 0 0 0
145 150 4 0 0 0 0 0 0 0 0 0 0
150 155 4 0 0 0 0 0 0 0 0 0 0
155 160 5 0 0 0 0 0 0 0 0 0 0
160 165 6 0 0 0 0 0 0 0 0 0 0
165 170 7 0 0 0 0 0 0 0 0 0 0
170 175 7 0 0 0 0 0 0 0 0 0 0
175 180 8 0 0 0 0 0 0 0 0 0 0
180 185 9 1 0 0 0 0 0 0 0 0 0
185 190 10 2 0 0 0 0 0 0 0 0 0
190 195 10 3 0 0 0 0 0 0 0 0 0
195 200 11 3 0 0 0 0 0 0 0 0 0
200 210 12 5 0 0 0 0 0 0 0 0 0
210 220 14 6 0 0 0 0 0 0 0 0 0
220 230 15 8 0 0 0 0 0 0 0 0 0
230 240 17 9 1 0 0 0 0 0 0 0 0
240 250 18 11 3 0 0 0 0 0 0 0 0
250 260 20 12 4 0 0 0 0 0 0 0 0
260 270 21 14 6 0 0 0 0 0 0 0 0
270 280 23 15 7 0 0 0 0 0 0 0 0
280 290 24 17 9 1 0 0 0 0 0 0 0
290 300 26 18 10 3 0 0 0 0 0 0 0
300 310 27 20 12 4 0 0 0 0 0 0 0
310 320 29 21 13 6 0 0 0 0 0 0 0
320 330 30 23 15 7 0 0 0 0 0 0 0
330 340 32 24 16 9 1 0 0 0 0 0 0
Figure 12– 4 Internal Revenue Service Tax Tables
Section 2 Payroll Deductions 317
308-337_CH12_868829.indd 317 9/15/05 11:44:57 AM
AS The FICA taxes are exact taxes in that, unlike the federal income tax,
YOU READ they do not involve estimation and are not affected by allowances or mari-
tal status. Congress sets FICA tax rates and can change them at any time.
Key Point
Most employees are subject to FICA taxes, even those who are exempt from
FICA Taxes federal income taxes. The FICA tax rates are as follows:
Social security tax: 6.2%
Social security tax 6.20%
(.062) of annual gross
Medicare tax 1.45%
earnings up to $90,000.
Total FICA taxes 7.65%
Medicare tax: 1.45%
(.0145) of total annual The social security tax is deducted from the employee’s earnings until
gross earnings. the maximum taxable earnings amount for the year is reached. This amount
increases each year. For 2005, the maximum taxable earnings amount was
$90,000. The maximum amount of social security tax that could be withheld
from an employee in that year was $5,580.00 ($90,000 .062). There is no
maximum taxable earnings amount for the Medicare tax. For example, Lisa
Gus earns $93,000 per year as a manager at a CPA firm. She has $6,928.50
in FICA taxes withheld from her earnings:
Earnings
Subject to Tax Tax Rate Tax
Social security tax $90,000 .062 $5,580.00
Medicare tax 93,000 .0145 1,348.50
Total withheld $6,928.50
State and Local Income Taxes
Most states and some cities tax the earnings of the people who live or
work within their boundaries. Sometimes the withholdings are a percentage
of gross earnings, like social security taxes. Amounts to be deducted also can
be determined by tables similar to the ones for federal income tax.
Voluntary Deductions
What Deductions Can an Employee Choose?
Most employers agree to deduct other amounts from their employees’
payroll check at the request of the employees. These deductions are with-
held from each payroll check until the employee notifies the employer to
stop. Voluntary employee deductions include union dues, health insurance
payments, life insurance payments, pension and other retirement contribu-
AS
YOU READ tions, credit union deposits and payments, U.S. savings bonds, and chari-
table contributions.
Compare and The 401(k) plan is a popular voluntary payroll deduction. The employee
Contrast does not pay income tax on earnings contributed to the 401(k) plan until
Deductions What the money is withdrawn from the plan, usually after age 59½. In other
are the similarities words, taxable income is reduced by the amount of the contribution. Some
between legally required employers make matching contributions to employees’ 401(k) accounts.
deductions and voluntary Angelo Cappelli, a graphic artist, earns $644 each week and contributes
deductions? What are $75 to his 401(k) account. Angelo will pay income tax on $569 ($644
the differences? $75). He will not pay income tax on his $75 contribution until he withdraws
it from his 401(k) account.
318 Chapter 12 Payroll Accounting
308-337_CH12_868829.indd 318 9/15/05 11:45:33 AM
SECTION 2 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Use an organizer like this one ,EGALLY 2EQUIRED 6OLUNTARY
to list one major advantage
4YPE !DVANTAGE $ISADVANTAGE 4YPE !DVANTAGE $ISADVANTAGE
and one major disadvantage,
from the employee’s point
of view, for each type of
deduction. Add as many
answer rows as needed.
Do the Math
As the president of Creative Craft Memory Books, you have decided to add five new sales
consultants to your sales force. You offer these sales consultants a gross salary of $23,000
each, but the consultants will not take home $23,000. Calculate the FICA taxes to be
withheld from each consultant’s gross pay. What remains of their gross pay after you deduct
FICA taxes?
Problem 12–2 Determining Taxes on Gross Earnings
Information related to the just-completed pay period of MegaCom Computer Upgrades
is provided in the following chart. Determine the amounts to be withheld from each
employee’s gross earnings for FICA and income taxes. It is a weekly pay period, so use the
tables on page 317 to determine the amount of federal income tax to be withheld. The state
income tax is 2% of gross earnings. The social security tax rate is 6.2%, and the Medicare tax
rate is 1.45%. Use the format shown in your working papers.
Employee Marital Status Allowances Gross Earnings
Cleary, Kevin S 0 $155.60
Halley, James S 1 184.10
Hong, Kim S 0 204.65
Jackson, Marvin M 1 216.40
Sell, Richard M 2 196.81
Total $957.56
Problem 12–3 Analyzing a Source Document
Examine the following partially completed payroll check stub. The employee, Melanie
Galvin, is single and claims one allowance. What amount should be deducted for:
1. Medicare Employee Pay Statement
260
tax? Detach and retain this statement.
Earnings Deductions
2. Social Period Net
Security tax? Ending Regular Overtime Total
Social
Security
Med. Pay
Federal
Income
State
Income
Hosp.
Other Total
Tax Ins.
Tax Tax Tax
3. Federal
1/15/20-- 315.00 315.00
Income tax?
Section 2 Payroll Deductions 319
308-337_CH12_868829.indd 319 9/15/05 11:45:35 AM
SECTION 3 Payroll Records
In the previous sections
BEFORE
YOU READ you learned how to calculate
gross earnings and deduc-
tions. Now you will learn how
Main Idea to compute net pay, prepare
Businesses must keep accurate
the payroll records for each
payroll records to comply with
period, and prepare payroll
federal and state laws.
checks. Whether a business
Read to Learn… has many employees, like
➤ what a payroll register is the Boeing Corporation, or a
and how to prepare one. small staff, like a veterinari-
(p. 320) an’s office, it is essential that
➤ how employees receive the payroll be prepared on
their pay. (p. 322) time and accurately.
➤ how to maintain
employees’ earnings
records. (p. 323)
Preparing the Payroll Register
➤ how owners and managers What Is the Purpose of a Payroll Register?
use payroll information to Federal and state laws require businesses to keep accurate payroll
make decisions. (p. 324) records. To help meet these requirements, businesses use a payroll
register. The payroll register is a form that summarizes information
Key Terms about employees’ earnings for each pay period. Let’s learn how to pre-
payroll register
pare payroll registers.
net pay
Figure 12–5 shows the payroll register for Roadrunner. As you can
direct deposit
see, the payroll register lists each employee’s I.D. number, name, mari-
employee’s earnings record
tal status, and the number of allowances claimed. Refer to Figure 12–5
accumulated earnings
as you read the descriptions of the payroll register.
1 2 3 4 5 6
PAYROLL REGISTER
PAY PERIOD ENDING June 30 20 -- DATE OF PAYMENT June 30, 20--
MAR. STATUS
EMPLOYEE
ALLOW.
NUMBER
HOURS
EARNINGS DEDUCTIONS
TOTAL
NET CK.
NAME RATE SOC. SEC. MEDICARE FED. INC. STATE HOSP. PAY NO.
REGULAR OVERTIME TOTAL TAX TAX TAX INC. TAX INS. OTHER TOTAL
1 4 Cole, Amy M 1 31 7.60 235 60 235 60 14 61 3 42 9 00 4 71 5 75 37 49 198 11 258 1
2 9 Eng, James M 0 41 7.20 288 00 10 80 298 80 18 53 4 33 26 00 5 98 5 75 60 59 238 21 259 2
3 11 Kardos, Emily S 0 36 6.75 243 00 243 00 15 07 3 52 29 00 4 86 3 20 (b)15 00 70 65 172 35 260 3
4 12 Phiffer, Alicia M 2 42 7.20 288 00 21 60 309 60 19 20 4 49 12 00 6 19 5 75 47 63 261 97 261 4
5 14 Terzian, Garo S 1 39 6.75 263 25 263 25 16 32 3 81 24 00 5 27 3 20 (b)10 00 62 60 200 65 262 5
24 24
25 25
7 TOTALS 1,317 85 32 40 1,350 25 83 73 19 57 100 00 27 01 23 65 (b)25 00 278 96 1,071 29
Other Deductions: Write the appropriate code letter to the left of the amount: B–U.S. Savings Bonds; C–Credit Union: UD–Union Dues; UW–United Way.
Figure 12–5 Completed Payroll Register
320 Chapter 12 Payroll Accounting
308-337_CH12_868829.indd 320 9/15/05 11:45:40 AM
1. Total Hours Column. Regular and overtime hours from the
employee’s time card are added together, and the total is entered
in this column.
2. Rate Column. This column shows the employee’s current rate of
pay, found on the employee’s earnings record.
3. Earnings Section. The earnings section is divided into three
columns:
• regular
• overtime
• total earnings
To complete these columns, the payroll clerk multiplies the
hours worked by the employee’s regular hourly rate or, when
applicable, overtime hourly rate.
Employee 4, Amy Cole, worked 31 hours. Her regular hourly rate is
$7.60. Amy earned $235.60 (31 $7.60) for the week. Since there are no
overtime hours, regular and total earnings are the same.
Alicia Phiffer, employee 12, worked 2 overtime hours in addition to 40
regular hours. Her regular hourly rate is $7.20. Her overtime hourly rate is
$10.80 ($7.20 1.5). Her regular earnings are $288.00 (40 $7.20) and her
overtime earnings are $21.60 (2 $10.80). Her total earnings are $309.60
($288.00 $21.60).
4. Deductions Section. The illustrated payroll register has seven
deduction columns. The number of deduction columns, however,
varies among businesses depending on the specific needs of
each business. In the illustration, columns are provided for the
deductions required by law:
• social security tax
• Medicare tax
• federal income tax
• state income tax
Columns are also provided for voluntary deductions. Certain
voluntary deductions taken by many employees on a regular
basis will usually have their own columns, such as the column
shown in the illustration for hospital insurance. Deductions taken
less frequently are often placed in a column titled Other. In the
illustration these deductions include credit union, union dues,
savings bonds, and charitable contributions. Finally, a column is AS
provided for the total deductions of each employee. YOU READ
Look at the deductions for Garo Terzian, employee 14. Garo’s deductions In Your Own Words
include the taxes required by law. He also has two voluntary deductions,
Net Pay “Net pay is
$3.20 for hospital insurance and $10.00, shown in the Other column, for
the amount left after
U.S. Savings Bonds. The total deductions for Garo are $62.60 as shown in
total deductions are
the Total column. subtracted.” What does
5. Net Pay Column. Net pay is the amount left after total deductions this mean?
have been subtracted from gross earnings. The net pay for Garo
Terzian is $200.65.
Section 3 Payroll Records 321
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CULTURAL 6. Check Number Column. Most employees are paid by check. The
payroll check numbers are recorded in this column.
Diversity 7. Column Totals. Each amount column is totaled, and the totals are
Proper Names
entered on the last line of the payroll register. To ensure that there
Not all countries use
are no mathematical errors, subtract the Total Deductions column
the “first name-last
name” style that is total from Total Earnings column total. The result should equal the
used in the United Net Pay column total.
States. For example,
in Spanish-speaking
Latin America, the
Paying Employees
surname includes How Are Employees Paid?
the mother and Once the accuracy of the payroll register has been verified, a payroll
father’s last names. check is prepared for each employee. Most businesses pay their employ-
The father’s name ees by check as a means of cash control. When a company has only a few
comes first and is employees, payroll checks are written from the company’s regular check-
the only one used in ing account. Companies with many employees have a separate checking
conversation.
account for payroll.
When a separate payroll checking account is used, funds are transferred
to this account each pay period. A check for the total net pay amount is
written from the company’s regular checking account and deposited in
the payroll checking account. Then individual payroll checks are issued to
employees from the payroll account.
The payroll register is the source of information for preparing the pay-
roll checks. Along with a payroll check, each employee is given a written
or printed explanation showing how the employee’s net pay is calculated.
This explanation is provided on a stub attached to the payroll check. Figure
12–6 shows a typical payroll check and stub. Notice that for Emily Kardos,
the amounts on the stub are the same as the amounts in the payroll register.
After each payroll check has been written, the check number is recorded in
the payroll register.
Roadrunner Delivery Service 260
155 Gateway Blvd. 63-947
Sacramento, CA 94230 Date June 30 20 --
670
Pay to the
Order of Emily Kardos $ 172.35
One hundred seventy-two and 35/100 Dollars
❖ American National Bank
SACRAMENTO, CALIFORNIA
Maria Sanchez
067009471 3939 043 417
260
Employee Pay Statement
260
Detach and retain this statement.
Earnings Deductions
Period Net
Ending Regular Overtime Total
Social
Security
Med.
Federal
Income
State
Income
Hosp.
Other Total
Pay
Tax Ins.
Tax Tax Tax
6/30/20-- 243.00 243.00 15.07 3.52 29.00 4.86 3.20 15.00 70.65 172.35
Figure 12–6 Completed Payroll Check and Stub
322 Chapter 12 Payroll Accounting
308-337_CH12_868829.indd 322 9/15/05 11:46:21 AM
Employees can be paid by check or by direct deposit. The employer
makes a direct deposit of the net pay electronically in the employee’s
personal bank account. No payroll check is prepared. The employee does,
however, receive a printed record of the payroll calculation. Direct deposits
are made through electronic funds transfer. With this system the employer
informs the employee’s bank of the amount to be deposited.
The Employee’s Earnings Record
What Is the Purpose of an Employee’s Earnings Record?
In addition to the payroll register, an employer must also keep an
employee’s earnings record for each employee. This record contains all
of the payroll information related to an employee. Figure 12–7 on page 324
shows an example of an employee’s earnings record. The earnings record
and payroll register have the same amount columns:
• three earnings columns
• four columns for deductions required by law
• additional columns for voluntary deductions (in this case,
two columns)
• the Total column
• the Net Pay column
An additional column for the employee’s accumulated earnings is also
provided. Accumulated earnings are the employee’s year-to-date gross
earnings. That is the amount of the employee’s gross earnings from the
beginning of the year through the end of the pay period just completed.
The accumulated earnings for Emily Kardos as of June 30 are computed
by adding her gross earnings for the pay period just completed to her accu-
mulated earnings for the previous pay period as follows:
Gross Earnings Accumulated Earnings Accumulated Earnings
for Pay Period for Previous for Pay Period
Just Completed Pay Period Just Completed
$243.00 $4,178.60 $4,421.60
Businesses keep employees’ earnings records on a quarterly basis. This
makes it easier to complete government reports that are required each
quarter. At the end of a quarter, the amount columns on each employee’s
earnings record are totaled. The final amount in the Accumulated Earnings
column is carried forward to the top of the employee’s earnings record for
the next quarter. Figure 12–7 on page 324 illustrates how accumulated earn-
ings amounts are carried forward.
As you can see from this chapter, preparing payroll is time consuming
and detail oriented. A mistake that is not promptly detected and corrected
can mean hours of rework. To reduce simple mathematical errors and to
improve productivity, many businesses use computers and special software
to prepare payroll. In a computerized system, the computer
• performs all payroll calculations,
• prepares and prints the payroll register,
• prints the payroll checks and stubs, and
• maintains the employees’ earnings records.
Section 3 Payroll Records 323
308-337_CH12_868829.indd 323 4/6/06 5:57:31 PM
This amount was
carried forward from the
previous quarter’s record.
EMPLOYEE'S EARNINGS RECORD FOR QUARTER ENDING June 30, 20--
Kardos Emily M EMPLOYEE NO. 11 MARITAL STATUS S ALLOWANCES 0
Last Name First Initial
809 East Main Street POSITION Delivery Driver
Address
Sacramento, CA 94230 RATE OF PAY 6.75 SOC. SEC. NO. 201-XX-XXXX
ACCUMULATED
PAY PERIOD EARNINGS DEDUCTIONS EARNINGS
NET
SOC. SEC. MEDICARE FED. INC. STATE HOSP. PAY
NO. ENDED REGULAR OVERTIME TOTAL TAX TAX TAX INC. TAX INS. OTHER TOTAL 1,490 39
199 13 199 13 12 35 2 89 22 00 3 98 3 20 (B) 15 1,689 52
1 4/07/-- 00 59 42 139 71
2 4/14/-- 205 88 205 88 12 76 2 99 23 00 4 12 3 20 46 07 159 81 1,895 40
3 4/21/-- 270 00 30 38 300 38 18 62 4 36 38 00 6 01 3 20 70 19 230 19 2,195 78
4 4/28/-- 222 75 222 75 13 81 3 23 26 00 4 46 3 20 50 70 172 05 2,418 53
229 50 229 50 14 23 3 33 26 00 4 59 3 20 (B) 15 35 163 15 2,648 03
5 5/05/-- 00 66
6 5/12/-- 162 00 162 00 10 04 2 35 17 00 3 24 3 20 35 83 126 17 2,810 03
7 5/19/-- 256 50 256 50 15 90 3 72 31 00 5 13 3 20 58 95 197 55 3,066 53
8 5/26/-- 270 00 20 25 290 25 18 00 4 21 37 00 5 81 3 20 68 22 222 03 3,356 78
204 19 204 19 12 66 2 96 23 00 4 08 3 20 (B) 15 90 143 29 3,560 97
9 6/02/-- 00 60
10 6/09/-- 212 63 212 63 13 18 3 08 25 00 4 25 3 20 48 71 163 92 3,773 60
11 6/16/-- 189 00 189 00 11 72 2 74 20 00 3 78 3 20 41 44 147 56 3,962 60
12 6/23/-- 216 00 216 00 13 39 3 13 25 00 4 32 3 20 49 04 166 96 4,178 60
243 00 243 00 15 07 3 52 29 00 4 86 3 20 (B) 15 65 172 35
13 6/30/-- 00 70 4,421 60
QUARTERLY 2,880 58 50 63 2,931 21 181 73 42 51 342 00 58 63 41 60 47 2,204 74
TOTALS 60 00 726
Other Deductions: B—U.S. Savings Bonds; C—Credit Union; UD—Union Dues; UW—United Way.
This amount will be
Figure 12–7 Employee’s Earnings Record carried forward to the
next quarter’s record.
Managerial Implications for
Payroll Accounting
How Do Managers Use Payroll Information?
Wages and salaries form a large part of a company’s expenses. Accurate
and timely payroll records will assist management in planning and control-
ling these expenses. This information can be used in the following ways:
• To determine whether overtime is justified or is a sign of possible
inefficiency.
• To compare actual amounts to budgeted amounts to reveal any
unplanned overtime and the reason for it.
This information helps managers investigate any amounts that were not
expected or were unusual. After identifying any irregularities, managers can
determine what caused them and how to resolve them.
Management should also put internal controls in place to prevent errors
and fraud. For example, payroll records should be audited carefully and
payroll procedures should be evaluated periodically.
324 Chapter 12 Payroll Accounting
308-337_CH12_868829.indd 324 9/15/05 11:46:23 AM
SECTION 3 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Use a diagram like this one Table Title Table Title Table Title Table Title
to show the similarities
and differences between
the payroll register and the
employee’s earnings record.
0AYROLL 2EGISTER %MPLOYEES %ARNINGS 2ECORD
Do the Math
While reviewing the payroll records from the past two years for Sports Junction, an athletic
supply store, you notice that the increasing payroll cost could be holding down overall
company profits. The company’s payroll costs and revenue for the last eight quarters are
provided. Use spreadsheet, accounting, or graphics software to create a line chart to compare
the costs and revenue graphically. Analyze the chart, and make a recommendation to Sports
Junction’s management about the salary levels. Do you recommend downsizing to increase
profit?
Year 1 Year 2
Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4
Payroll 24,000 24,500 28,670 35,280 34,000 42,000 53,000 68,000
Revenue 136,700 151,200 183,500 234,000 143,000 142,500 143,000 138,500
Problem 12–4 Preparing a Payroll Check
Use the information on the payroll register for Heather’s Dance School and the form in the
working papers to prepare a payroll check for Janice Burns for the week ending March 23, 20--.
PAYROLL REGISTER
PAY PERIOD ENDING March 23 20 -- DATE OF PAYMENT March 23, 20--
MAR. STATUS
EMPLOYEE
ALLOW.
NUMBER
HOURS
EARNINGS DEDUCTIONS
TOTAL
NET CK.
NAME RATE SOC. SEC. MEDICARE FED. INC. STATE HOSP. PAY NO.
REGULAR OVERTIME TOTAL TAX TAX TAX INC. TAX INS. OTHER TOTAL
1 18 Burns, Janice S 1 42 7.80 312 00 23 40 335 40 20 79 4 86 35 00 6 71 4 10 71 46 263 94 79 1
2 2
Section 3 Payroll Records 325
308-337_CH12_868829.indd 325 9/15/05 2:23:41 PM
CH A P T ER 12 Summary
Key Concepts
1. Federal and state laws require employers to keep accurate records of all payroll information.
Most employers use a payroll system to ensure that employees are paid on time and that their
payroll checks and records are accurate. A well-designed payroll system achieves two goals:
• To collect and process all information needed to prepare and issue payroll checks.
• To generate payroll records needed for accounting purposes and for reporting to government
agencies, management, and others.
A computerized system does the following:
• Performs all payroll calculations
• Prepares and prints a payroll register
• Prints the payroll checks and stubs
• Maintains employee’s earnings records
2. Gross pay is the amount an employee earns before deductions. It may be calculated by various
methods including
• salary,
• hourly wage,
• commission,
• salary plus commission or bonus,
• piece rate, or
• a combination of these methods.
Some employees who work more than 40 hours in a week are paid overtime. The overtime rate is
usually 1½ times the regular rate of pay.
Regular Overtime
Hourly Rate Hourly Rate
$8.20 1.5 $12.30
3. Withholdings from gross earnings are called deductions. Some deductions are required by law.
Other deductions are voluntary.
Deductions Required By Law
• federal income tax:
determined by Form W-4 and tax tables
• social security tax:
6.2% of total gross earnings up to $90,000
• Medicare tax:
1.45% of total gross earnings
• state or local tax:
determined by the state or city
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Summary CHAPT E R 1 2
Voluntary Deductions
• union dues
• insurance payments
• charitable contributions
• 401(k) plans
• other retirement-related contributions
4. Net pay is the amount of money actually received by the employee.
Gross Pay Total Payroll Deductions Net Pay
5. A payroll register summarizes information for all employees in a single pay period. A pay period is
the amount of time over which employees are paid (for example, once a week or twice a month).
The payroll register includes
• total hours;
• rate of pay;
• regular earnings, overtime earnings, and total earnings;
• deductions;
• net pay;
• payroll check number; and
• totals.
6. Payroll funds can be distributed to employees by check or by direct deposit through electronic
funds transfer.
7. The employee’s earnings record contains all information for a single employee. This record is
kept quarterly to make it easier for the business to complete reports and forms required by
the government.
The earnings record has the same amount columns that appear on the payroll register plus
an additional column for accumulated earnings. These are the employee’s earnings from the
beginning of the year through the pay period just completed.
Key Terms
accumulated earnings (p. 323) pay period (p. 310)
commission (p. 313) payroll (p. 310)
deduction (p. 315) payroll clerk (p. 310)
direct deposit (p. 323) payroll register (p. 320)
electronic badge readers (p. 312) piece rate (p. 313)
employee’s earnings record (p. 323) salary (p. 311)
401(k) plan (p. 318) time card (p. 312)
gross earnings (p. 311) wage (p. 312)
net pay (p. 321) withholding allowance (p. 315)
overtime rate (p. 313)
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C H A P T ER 12 Review and Activities
AFTER
YOU READ
Check Your Understanding
1. Payroll Records
a. What are two goals of a payroll system?
b. List five tasks that an effective payroll system performs.
2. Gross Pay
a. List and describe five employee bases or categories used to compute gross pay.
b. Define overtime rate.
3. Withholdings
a. List the three federal taxes that businesses are required to withhold from employees’ wages.
b. What three factors determine the amount of federal income tax withheld from an employee’s
earnings each period?
4. Net Pay
a. How is net pay calculated?
b. Does an individual’s net pay appear on the payroll register, the employee’s earnings record, or
both?
5. Payroll Register
a. What information does the payroll register contain?
b. Each page of the payroll register covers a period of time. What time period does it cover?
6. Payroll Funds Distribution
a. Explain how direct deposit of earnings works.
b. How does an employee who receives a payroll check know how the amount of net pay was
determined?
7. Employee’s Earnings Record
a. What is the purpose of the employee’s earnings record?
b. What information does the Accumulated Earnings column on the employee’s earnings record
contain?
Apply Key Terms
You are the payroll clerk for Wild West
Amusement Park. The new sales manager for accumulated earnings overtime rate
commission pay period
the Western region, Will Klein, called and
deduction payroll
asked you to explain the items on his payroll direct deposit payroll clerk
check, dated January 31, 20--. He also asked electronic badge readers payroll register
you to explain any relevant company payroll employee’s earnings piece rate
procedures. Use these key terms in your record salary
written explanation. Use your imagination! 401(k) plan time card
gross earnings wage
net pay withholding allowance
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Computerized Accounting CHAPT E R 1 2
Preparing the Payroll
Making the Transition from a Manual to a Computerized System
Task Manual Methods Computerized Methods
Enter and • Calculate employee gross earnings • Set up information related to employee
maintain based on time cards or salary earnings and deductions in employees’
employee information. records.
information; • Calculate required and voluntary • Based on rate, deduction, and
process payroll. deductions for each employee. withholding information for each
• Complete the payroll register. employee, the software automatically
• Prepare payroll checks. calculates gross earnings and
• Update employee earnings records. deductions.
• Prepare journal entries. • The payroll checks, journal entries,
• Post journal entries to the general and ledger postings are generated
ledger. automatically.
Q&A
Peachtree Question Answer
How do I process a 1. Select Payroll Entry from the Tasks menu.
payroll? 2. Select the employee(s) to be paid.
3. Verify the pay amounts that are automatically entered for you. (These amounts
are pulled from employee records stored in the system.)
4. Type the hours worked or the commission amounts.
5. Click Save.
6. To print payroll checks, click on Open, select checks to print and click OK.
7. Click Print.
QuickBooks Q & A
QuickBooks Question Answer
How do I process a 1. Select Pay Employees from the Employees menu.
payroll? 2. Set the date of payment and end of payroll period.
3. Select the employees to be paid and click Create.
4. Verify the pay amounts that are automatically entered for you. (These amounts
are pulled from employee records stored in the system.)
5. Type the hours worked or the commission amounts.
6. Click Create.
7. To print payroll checks, click on File, select Print Forms, and then Paychecks.
8. Click OK and then Print.
For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers.
Chapter 12 Computerized Accounting 329
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C H A P T ER 12 Problems
Complete problems using: Manual Glencoe Peachtree Complete QuickBooks Spreadsheet
Spreadshee
OR OR OR
Working Papers Accounting Software Templates Templates
Problem 12–5 Calculating Gross Pay
SMART GUIDE Wilderness Rentals pays employees either an hourly wage or a salary plus
Step–by–Step Instructions: commission based on rental revenue. Hourly wage employees can earn
Problems 12–5 overtime. The overtime rate is 1½ times the regular hourly rate of pay for
1. Select the problem set hours worked over 40 in a week.
for Wilderness Rentals
(Prob. 12–5).
Instructions For each of the following employees, determine the total
2. Rename the company gross pay for the pay period.
and set the system date.
3. Enter John Gilmartin’s John Gilmartin
regular and overtime • Earns an hourly wage of $6.80.
pay rates using the
Employees/Sales Reps
• Worked 43 hours this week.
option in the Maintain
menu.
Arlene Stone
4. Calculate the • Receives a salary of $250 per week plus a 3% commission
employees’ gross pay on rental revenue.
using the Payroll Entry
option. • Had rental revenue of $760 this week.
5. Print a Payroll Register
report. Tom Driscoll
6. Proof your work. • Earns an hourly wage of $7.35.
7. Complete the Analyze
activity.
• Worked 39 hours this week.
8. End the session.
Ann Ryan
QuickBooks • Receives a salary of $185 per week plus 3% commission.
• Had rental revenue of $1,235 this week.
PROBLEM GUIDE
Analyze Identify the employee who had the lowest gross pay for the
Step–by–Step Instructions: week.
Problem 12–5
1. Restore the Problem
12-5.QBB file.
2. Enter John Gilmartin’s
Problem 12–6 Preparing a Payroll Register
regular and overtime Hot Suds Car Wash has four employees. They are paid on a weekly basis
pay rates using the with overtime paid for all hours worked over 40 in a week. The overtime
Employee List option in
the Employees menu.
rate is 1½ times the regular rate of pay. The payroll information follows.
3. Calculate the Employee Rate per Marital Union
employee’s gross Employee Number Hour Status Allowances Member
pay using the Pay
Employees option in
James Dumser 108 $6.40 Single 0 No
the Employees menu. Gail Job 112 $7.22 Married 1 Yes
4. Print an Employee James Liptak 102 $6.70 Married 2 Yes
Earnings Summary Bruce Stern 109 $7.80 Single 1 Yes
report using the
Employees & Payroll During the week ending October 9, Dumser worked 39 hours, Job
option in the Reports worked 41 hours, and Liptak and Stern each worked 36 hours.
menu.
5. Proof your work.
6. Complete the Analyze
activity.
7. Back up your work.
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Problems CHAPT E R 1 2
Instructions On the forms provided in your working papers: SPREADSHEET
SMART GUIDE
1. Prepare a payroll register for the week ending October 9. The date of
Step–by–Step Instructions:
payment is also October 9. List employees in alphabetical order by
Problem 12–6
last name. Use the tables on page 317 to determine the federal income
1. Select the spreadsheet
tax withholding. The rate for the state income tax is 2%. Compute template for Problem
social security tax at 6.2% and Medicare tax at 1.45%. Union members 12–6.
2. Enter your name and
pay weekly dues of $4.50. Both Gail Job and Bruce Stern had $6.75 the date in the spaces
deducted for health and hospital insurance. provided on the
template.
2. Total the amount columns. Subtract total deductions from total
3. Complete the spread-
earnings. Does the result equal the sum of the Net Pay column? If not, sheet using the
find and correct any error(s) on the payroll register. instructions in your
working papers.
Analyze Identify the employee who had the highest amount withheld 4. Print the spreadsheet
for federal income tax for the week. and proof your work.
5. Complete the Analyze
activity.
6. Save your work and
Problem 12–7 Preparing Payroll Checks and exit the spreadsheet
program.
Employee’s Earnings Records
The payroll register for Kits & Pups Grooming is presented here and also
appears in your working papers.
PAYROLL REGISTER
PAY PERIOD ENDING October 17 20 -- DATE OF PAYMENT October 17, 20--
MAR. STATUS
EMPLOYEE
ALLOW.
NUMBER
HOURS
EARNINGS DEDUCTIONS
TOTAL
NET CK.
NAME RATE SOC. SEC. MEDICARE FED. INC. STATE HOSP. PAY NO.
REGULAR OVERTIME TOTAL TAX TAX TAX INC. TAX INS. OTHER TOTAL
162 Hurd, Mildred S 0 38 7.60 288 80 288 80 17 91 4 19 35 00 7 22 (B) 5 00 69 32 219 48
1 1
2 157 Montego, José S 1 39 7.90 308 10 308 10 19 10 4 47 30 00 7 70 5 10 66 37 241 73 2
3 151 Pilly, Amanda M 2 36 8.10 291 60 291 60 18 08 4 23 10 00 7 29 7 60 (B) 5 00 52 20 239 40 3
4 163 Steams, Margaret S 0 41 7.60 304 00 11 40 315 40 19 55 4 57 40 00 7 89 72 01 243 39 4
24 24
25 25
TOTALS 1,192 50 11 40 1,203 90 74 64 17 46 115 00 30 10 12 70 (B)10 00 259 90 944 00
Other Deductions: Write the appropriate code letter to the left of the amount: B–U.S. Savings Bonds; C–Credit Union: UD–Union Dues; UW–United Way.
Instructions On the forms in your working papers:
1. Prepare a payroll check and stub for each employee. Where would you SMART GUIDE
record the check numbers in the payroll register?
Step–by–Step Instructions:
2. Record the payroll information in the employee’s earnings records for Problem 12–7
José Montego and Amanda Pilly. 1. Select the problem
set for Kits & Pups
Analyze Identify the net pay for José Montego for this week. Grooming (Prob. 12–7).
2. Rename the company
and set the system date.
3. Print payroll checks using
Problem 12–8 Preparing the Payroll the Payroll Entry option.
4. Print a Payroll Register
Outback Guide Service has six employees and pays each week. Hourly report and a Current
employees are paid overtime for all hours worked over 40 in a week. Earnings report.
5. Complete the Analyze
The overtime rate is 1½ times the regular rate of pay. Outback pays its activity.
employees by hourly rate, salary, or salary plus a 5% commission on total 6. End the session.
amount of sales.
CONTINUE
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C H A P T ER 12 Problems
Method of Computing Earnings
Salary Plus
Employee Hourly Wage Salary Commission
Cummings, Carol $270.00
SMART GUIDE Dame, Ted $6.95
Step–by–Step Instructions: Lengyel, Tom $160.00 plus 5%
Problem 12–8 Robinson, Jean $140.00 plus 5%
1. Select the problem Usdavin, James $6.65
set for Outback Guide Wong, Kim $140.00 plus 5%
Service (Prob. 12–8).
2. Rename the company Employee deductions include federal income taxes (use the tables on
and set the system date.
page 317), FICA taxes at 6.2% for social security and 1.45% for Medicare,
3. Record the payroll and
print a check for each state income taxes of 1.5%, and hospital insurance premiums of $5.43 for
employee using the single employees and $9.37 for married employees. Also, Kim Wong and
Payroll Entry option.
4. Print a Payroll Register Tom Lengyel have $10.00 withheld each week to purchase U.S. savings
report and a Current bonds.
Earnings report.
During the pay period ending October 17, the sales were: Tom Lengyel
5. Proof your work and
make any needed $1,204.76, Jean Robinson $1,925.80, and Kim Wong $2,135.65.
corrections. The hourly employees filled in the following time cards.
6. Complete the Analyze
activity.
7. End the session. NO. 73
TIP: Use the Windows NAME Ted Dame
calculator accessory if you SOC. SEC. NO. 093-XX-XXXX NO. 92
need to make a calculation
WEEK ENDING 10/17/20-- NAME James Usdavin
(e.g., commission).
SOC. SEC. NO. 087-XX-XXXX
DAY IN OUT IN OUT IN OUT TOTAL
WEEK ENDING 10/17/20--
M 8:58 12:03 12:55 5:09
T 8:55 11:55 1:00 4:00 DAY IN OUT IN OUT IN OUT TOTAL
W 9:30 12:10 1:04 3:30
M 8:55 12:06 1:01 5:35
Th 8:57 12:03 12:59 6:00
T 7:58 11:01 12:03 6:38
F 8:58 12:00 1:00 6:05
W 9:03 1:10 2:00 6:00
S 9:00 12:00
Th 7:59 11:55 1:10 4:51
S
F 9:01 12:06 1:05 3:47
TOTAL HOURS
S 9:00 12:03
S
HOURS RATE AMOUNT
TOTAL HOURS
REGULAR
HOURS RATE AMOUNT
OVERTIME
TOTAL EARNINGS REGULAR
OVERTIME
SIGNATURE DATE
TOTAL EARNINGS
SIGNATURE DATE
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Problems CHAPT E R 1 2
Instructions On the forms in your working papers:
1. Complete the time cards to the nearest quarter hour.
2. Prepare a payroll register for the week ending October 17. The date of
payment is also October 17. Each employee’s number, marital status,
and number of allowances claimed are listed on her or his employee’s
earnings record.
3. Prepare a payroll check and stub for each employee.
4. Record the payroll information for each employee on her or his
employee’s earnings record.
Analyze Calculate the total amount deducted from employees’ gross
pay for FICA taxes (social security and Medicare).
Problem 12–9 Preparing the Payroll Register
Showbiz Video has six employees who are paid weekly. The hourly SMART GUIDE
employees are paid overtime for hours worked over 40 in a week, at a rate Step–by–Step Instructions:
1½ times their regular rate of pay. Employee information follows: Problem 12–9
1. Select the problem
Employee Employee Number Marital Status Allowances
set for Showbiz Video
Mary Arcompora 105 Married 2 (Prob. 12–9).
Barbara Fox 137 Married 1 2. Rename the company
John French 135 Single 1 and set the system date.
Chris German 141 Married 4 3. Record the payroll for
each employee.
David Izbecki 139 Single 0
4. Print a Payroll Register
Susan Tilbert 129 Married 1 report.
5. Proof your work.
Mary Arcompora, the store manager, NO. 141 6. Complete the Analyze
is paid a salary of $300.00 per week NAME Chris German activity.
7. End the session.
plus 1% of all rental sales. Barbara Fox SOC. SEC. NO. 449-XX-XXXX
WEEK ENDING October 24, 20--
and John French, salespeople, are paid
DAY IN OUT IN OUT IN OUT TOTAL
a salary of $200.00 per week plus a 6% M 8:05 12:03 1:00 5:05
commission on all rentals from the T 8:00 12:05 1:10 5:00
“Oldies but Goodies” section. Chris W 9:05 12:05 1:15 6:05
German and David Izbecki, office Th 8:30 11:55 1:15 6:00
workers, are paid an hourly wage of F 8:00 12:00 1:00 6:15
S
$7.25. Susan Tilbert, a stock person, is
S
paid $6.40 per hour.
TOTAL HOURS
The payroll deductions include HOURS RATE AMOUNT
federal income tax, social security tax of REGULAR
6.2%, Medicare tax of 1.45%, and state OVERTIME
income tax of 1.8%. Chris German and TOTAL EARNINGS
Susan Tilbert have $12.50 deducted each
week for hospital insurance.
During the week ending October 24, “Oldies but Goodies” rentals were
$484.90 for Barbara Fox and $641.70 for John French. Total rental revenue
for the week was $3,917.30.
CONTINUE
Chapter 12 Problems 333
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C H A P T ER 12 Problems
Instructions NO. 139
Prepare a payroll NAME David Izbecki
SOC. SEC. NO. 461-XX-XXXX NO. 129
register in your WEEK ENDING October 24, 20-- NAME Susan Tilbert
working papers DAY IN OUT IN OUT IN OUT
SOC. SEC. NO.
TOTAL
401-XX-XXXX
WEEK ENDING October 24, 20--
for the week M 8:00 12:05 1:00 5:00
ending October 24.
T 8:10 12:00 1:00 5:05 DAY IN OUT IN OUT IN OUT TOTAL
W 8:05 12:30 1:30 5:00
M 8:05 12:00 1:00 5:00
Complete time Th 8:00 12:00 1:00 5:10
T 8:10 12:00 1:15 5:00
cards to the nearest 8:30 12:00 1:00 6:00
W
F 8:05 12:05 1:05 3:30
S
Th 9:00 12:00 12:45 5:00
quarter of an hour. S
F 9:00 11:50
Use the federal TOTAL HOURS
S
income tax tables
S
HOURS RATE AMOUNT
TOTAL HOURS
provided in the
REGULAR
HOURS RATE AMOUNT
OVERTIME
chapter. TOTAL EARNINGS REGULAR
OVERTIME
SIGNATURE DATE
TOTAL EARNINGS
SIGNATURE DATE
Analyze Compute the total net pay of all employees for the pay
period.
SOURCE DOCUMENT CHALLENGE Problem 12–10 Calculating
PROBLEM
PROBLEM Gross Earnings
Job Connect has seven employees, all of whom are paid weekly. For hourly
Problem 12–10
Use the source documents
wage employees, overtime is paid at 1½ times the regular rate of pay for
in your working papers to hours worked over 40 in a week.
complete this problem. Barbara Miller, the office manager, is paid a salary of $375.00 per week
plus a bonus of 3% of all revenue over $6,000 per week. Lynn Austin, an office
assistant, is paid a salary of $250.00 per week plus 5% of all telephone sales
SMART GUIDE made in the office. Charlene Womack, the office secretary, is paid a salary
Step–by–Step Instructions: of $230.00 per week. Susan Dilloway and Doris Franco, placement workers,
Problem 12–10 are paid an hourly wage of $8.95. Pam Darrah is also a placement worker but
1. Select the problem is paid a commission of $35.00 for every job placement that she completes.
set for Job Connect David Facini, a part-time maintenance worker, is paid $6.75 per hour.
(Prob. 12–10).
2. Rename the company For the week ending October 24, the office recorded the following
and set the system date. payroll information.
3. Calculate the
employees’ gross pay
• Total office sales for the week were $8,420.00.
using the Payroll Entry • Susan Dilloway worked a total of 38½ hours.
option. • Doris Franco worked a total of 41¼ hours.
4. Print a Payroll Register
report. • Phone sales for the week were $1,375.00.
5. Proof your work. • Pam Darrah made seven job placements.
6. Complete the Analyze
activity.
• David Facini worked a total of 23 hours.
7. End the session. Instructions Using the form provided in your working papers, calculate the
gross earnings for the workers at Job Connect for the week ending October 24.
Analyze Identify the employee who had the highest gross earnings.
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Winning Competitive Events CHAPTER 12
Practice your test-taking skills! The questions on this page are reprinted with permission
from national organizations:
• Future Business Leaders of America
• Business Professionals of America
Use a separate sheet of paper to record your answers.
Future Business Leaders of America
MULTIPLE CHOICE
1. Which form is considered the Withholding Allowance Certificate?
a. W-2
b. W-4
c. 1040
d. 1099
e. none of these answers
2. Julie earns $18.50 per hour. She is paid overtime (time and one-half) for hours
worked on Sunday. The first Sunday in June she worked 6 hours, giving her
46 hours for the week. What were her gross wages if total taxes withheld equaled
18%?
a. $851.00
b. $1,069.67
c. $743.33
d. $906.50
Business Professionals of America
MULTIPLE CHOICE
3. The Accumulated Earnings column of the employee earnings record
a. shows net pay for the year.
b. is the total earnings since the first of the year.
c. shows net pay for one quarter.
d. is the gross earnings for one quarter.
4. The Medicare tax is calculated by
a. multiplying total earnings by the tax rate.
b. multiplying net earnings by the tax rate.
c. using a tax table.
d. none of these
5. Jacqueline earns 18% commission on sales. Her sales for three months were:
$2,870, $3,150, and $3,940. What was her total commission for the three months?
a. $9,960.00
b. $1,792.08 Need More Help?
c. $1,792.80
Go to glencoeaccounting.glencoe.com and
d. $1,792.81 click on Student Center. Click on Winning
Competitive Events and select Chapter 12.
• Practice Questions and Test-Taking Tips
• Concept Capsules and Terminology
glencoeaccounting.glencoe.com Chapter 12 Winning Competitive Events 335
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C H A P T ER 12 Real-World Applications and Connections
Critical Payroll Accounting
Thinking 1. Define gross earnings.
2. Compare and contrast gross earnings and net pay.
3. Classify the following deductions as voluntary or required by law: county
income tax, dental insurance payment, federal income tax, Medicare
insurance payment, United Way donation, vision insurance payment.
4. Refer to the payroll register on page 320 and look at the entry for Amy Cole.
What documents were used to calculate Amy’s net pay?
5. You need to create a new employee’s earnings record for an employee whose
record has been lost. What information will you need, and where will you
find it?
6. Justify the fact that a business can have different pay categories for
employees.
CASE Payroll: Financial Planning
STUDY You are employed by Tallman Financial Advisors, owned by Marcy Tallman.
Parker’s Framing hired Tallman to design its payroll system. Parker’s Framing
will offer group health insurance to its employees and a retirement plan that will
require contributions from both the employer and employees. Marcy has assigned
the Parker’s Framing payroll project to you.
INSTRUCTIONS
1. Draft a one-page report describing the payroll system you would design for
Parker’s Framing. Include information on payroll forms, how hours worked
will be collected, and payroll deductions.
2. Proofread the draft. Make sure there is a supporting paragraph for each main
point. Also check for correct spelling, grammar, and punctuation.
3. Prepare the final document.
a
mattoefr ETHICS Payroll Information
Payroll clerks have access to personal information about employees, such as rate
of pay and marital status. Imagine that you are the payroll clerk for a clothing
store like Gap. Your friend Janet, who also works at the store, is interested in one
of the sales clerks. She wants you to find out how much money he makes and
whether he is married.
ETHICAL DECISION MAKING
1. What are the ethical issues? 4. How do the alternatives affect the
2. What are the alternatives? parties?
3. Who are the affected parties? 5. What would you do?
$ )) ))
Communicating
Evaluating Direct Deposit
ACCOUNTING A new co-worker has the choice of receiving a paycheck or using direct deposit.
She asks for your recommendation. Write a paragraph explaining direct deposit
and recommending whether or not your co-worker should use it.
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Real-World Applications and Connections CHAPT E R 1 2
Skills Beyond Integrity
NUMBERS Employees who demonstrate integrity are able to make ethical decisions.
ON THE JOB As a payroll clerk for Fun ‘n’ Games Amusement Park, you have
access to confidential information about employees. Your friend and co-worker,
Mark Arnold, asked you to divulge payroll information about Melissa Porter, who
has the same job title he has. Melissa just received a pay raise. Mark did not.
INSTRUCTIONS Write a few sentences explaining how you would respond to
Mark’s request.
INTERNATIONAL Offshoring
Offshoring is the practice of U.S. companies using overseas providers for certain
Accounting tasks. For example, technology companies like IBM and Microsoft have used
programmers in India, mainly because overseas salaries are lower than U.S.
salaries. Results have been mixed. Some companies report problems in employee
turnover and communication. Others find that investors like the lower costs.
INSTRUCTIONS Define offshoring in your own words and discuss its potential
advantages and disadvantages for a business.
Making It
Your Part-Time Job
Personal Students often seek part-time jobs to earn some spending money.
PERSONAL FINANCE ACTIVITY Ask your friends who have jobs how their hours
worked are reported to the payroll accountant. Write a report discussing the
different methods of reporting hours worked.
PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and
click on Student Center. Click on Making It Personal and select Chapter 12.
Analyzing Analyzing Employee Productivity
Financial One measure of productivity is the average sales dollars generated by each
Reports employee. For example, in a company with total revenue of $1,480,000 and 20
employees, sales per employee are $74,000, calculated as follows:
Total Revenue
Sales per Employee
Number of Employees
Calculating this measure from period to period Internet Project
or one part of a company to another can identify How do people get paid? Visit
productivity changes. If sales per employee glencoeaccounting
.glencoe.com and click
change greatly, the owner needs to learn why.
on Student Center. Click on
INSTRUCTIONS Answer these questions using WebQuest and select Unit 3 to
Roadrunner’s income statement on page 222. continue your Internet project.
1. If Roadrunner has two employees including
the owner, what is the revenue per employee?
2. Suppose Roadrunner hires two more delivery people. The next month’s
revenue increases to $5,400. How has the productivity per employee
changed?
glencoeaccounting.glencoe.com Chapter 12 Real-World Applications and Connections 337
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CH A P T ER 13 Payroll Liabilities
and Tax Records
BEFORE
YOU READ
What You’ll Learn Predict
1. Record payroll transactions in 1. What does the chapter title tell you?
the general journal. 2. What do you already know about this subject from personal experience?
3. What have you learned about this in the earlier chapters?
2. Describe the employer’s
payroll taxes. 4. What gaps exist in your knowledge of this subject?
3. Compute and complete
payroll tax expense forms.
4. Record the payment of tax
Exploring the Real World of Business
liabilities in the general
journal. EVALUATING PAYROLL COSTS
5. Complete payroll tax reports. Verizon Wireless
6. Define the accounting terms Can you imagine the paperwork involved in preparing
introduced in this chapter. paychecks for 51,000 workers at Verizon Wireless? What if
many of these workers are temporary or contract employees?
Why It’s Important
Gathering all these time sheets and job assignments is a huge
Employers are legally
▲
task. That’s why Verizon Wireless decided to find a better way
required to make tax deposits to automate the process for managing its contract work force.
on time and to report the
The company now uses a Web-based payroll system called
earnings of each employee.
InSite. Requests and approvals for hiring contract employees,
time sheets, and paychecks are handled online, faster and less
costly than before. Now Verizon Wireless can spend more of
its time and money fine-tuning new technologies like picture
messaging, wireless Internet access, and 3-D games for its more
than 43 million wireless phone customers.
What Do You Think?
Why do you think a company like Verizon Wireless chooses
to hire temporary or contract employees rather than full-time
employees?
338 Chapter 13 Payroll Liabilities and Tax Records
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Working in the Real World
APPLYING YOUR ACCOUNTING KNOWLEDGE
Almost everyone must pay taxes. You learned
about the taxes you pay on your earnings in
the last chapter. Your employer also pays taxes
on what you earn. That money must be paid to
the appropriate government agency within a
certain amount of time. You will learn about the
employer’s payroll taxes in this chapter.
Personal Connection
1. Do you receive your paycheck in person, in
the mail, or by direct deposit?
2. What do you imagine would happen if the
accounting department failed to pay the taxes
collected to the appropriate government
agencies?
Online Connection
Go to glencoeaccounting.glencoe.com and click
on Student Center. Click on Working in the
Real World and select Chapter 13.
glencoeaccounting.glencoe.com 339
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SECTION 1 Journalizing and Posting
the Payroll
Employees, ranging from
BEFORE
YOU READ design engineers at Ford Motor
Company to the waitresses at
a neighborhood coffee shop,
Main Idea expect their payroll checks to
The release of cash for
arrive on time and to be accu-
payroll is a transaction. It
rate. You have learned that
must be journalized and
various amounts are with-
posted.
held from employees’ earn-
Read to Learn… ings for taxes and voluntary
➤ how to analyze and deductions. When the payroll
journalize the payroll register is complete, the pay-
transaction. (p. 340) roll entry is journalized and
➤ how to post the payroll the amounts are posted to the
transaction. (p. 343) general ledger.
Key Terms After the payroll has been
Salaries Expense prepared, a check is written
to transfer the total net pay
amount from the regular checking account of a business to its payroll
checking account. The check is deposited in the payroll account, and all
payroll checks for the period are written on the payroll account. The next
step is to record the payment of the payroll in the accounting records.
Analyzing and Journalizing the Payroll
How Do You Journalize Payroll?
Let’s analyze the effect of payroll on the employer’s accounting sys-
tem. Each pay period, the business pays out a certain amount of money
to its employees in the form of wages and salaries. Employee earnings
are a normal operating expense of a business. The expense account
often used to record employees’ earnings is called Salaries Expense . To
increase the amount in Salaries Expense, the account is debited for the
AS
YOU READ gross earnings for the pay period.
The business withholds various deductions, such as income and
Instant Recall FICA taxes, from gross earnings each pay period. Employees also request
voluntary withholdings such as premiums for insurance coverage. The
Total Earnings
Gross Pay employer retains the amounts withheld until it is time to pay the appro-
Total Payroll Deductions priate government agencies and businesses. The amounts withheld but
Net Pay not yet paid are liabilities of the business. Remember, a liability is an
amount owed by a business.
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Each type of payroll liability is recorded in a separate account.
AS
Type of Deduction Ledger Account YOU READ
Federal income tax Employees’ Federal In Your Own Words
Income Tax Payable Salaries Expense
Social security tax Social Security Tax Payable “Employee earnings
Medicare tax Medicare Tax Payable are a normal operating
Hospital insurance premiums Hospital Insurance expense of the business.”
Premiums Payable What does this mean?
Depending on the business, it is possible that several different types of
deductions are recorded in the Other Deductions column of the payroll reg-
ister. If so, the total for each type of deduction is credited to the appropriate
liability account. Refer to the Roadrunner Delivery Service payroll register
shown in Figure 12–5 on page 320. The deductions that may appear in the
Other Deductions column each have an account in Roadrunner’s general
ledger:
• U.S. Savings Bonds Payable
• Credit Union Payable
• Union Dues Payable
• United Way Payable
The credit part of the payroll journal entry is made up of several items.
The largest item is for net pay. Net pay is the amount actually paid out in
cash by the employer to the employees. Cash in Bank is credited for total
net pay.
The difference between gross earnings and net pay equals the employer’s
payroll liabilities. Each payroll liability account is separately credited for the
total amount shown on the payroll register.
B u s i n e s s Tr a n s a c t i o n
Roadrunner’s payroll register in Figure 12–5 on page 320 is the source document for the payroll
journal entry.
ANALYSIS Identify 1. The accounts Salaries Expense, Employees’ Federal Income Tax
Payable, Employees’ State Income Tax Payable, Social Security
Tax Payable, Medicare Tax Payable, Hospital Insurance Premiums
Payable, U.S. Savings Bonds Payable, and Cash in Bank are affected.
Classify 2. Salaries Expense is an expense account. Employees’ Federal Income
Tax Payable, Employees’ State Income Tax Payable, Social Security
Tax Payable, Medicare Tax Payable, Hospital Insurance Premiums
Payable, and U.S. Savings Bonds Payable are liability accounts. Cash
in Bank is an asset account.
/ 3. Salaries Expense is increased by $1,350.25; Employees’ Federal
Income Tax Payable is increased by $100.00; Employees’ State
Income Tax Payable is increased by $27.01; Social Security Tax
Payable is increased by $83.73; Medicare Tax Payable is increased by
$19.57; Hospital Insurance Premiums Payable is increased by $23.65;
U.S. Savings Bonds Payable is increased by $25.00; Cash in Bank is
decreased by $1,071.29
Section 1 Journalizing and Posting the Payroll 341
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DEBIT-CREDIT RULE 4. Increases in expense accounts are recorded as debits. Debit Salaries
Expense for $1,350.25.
5. Decreases in asset accounts are recorded as credits. Credit Cash in
Bank for $1,071.29. Increases in liability accounts are recorded as
credits. Credit Employees’ Federal Income Tax Payable for $100;
Employees’ State Income Tax Payable for $27.01; Social Security
Tax Payable for $83.73; Medicare Tax Payable for $19.57; Hospital
Insurance Premiums Payable for $23.65; U.S. Savings Bonds Payable
for $25.00.
T ACCOUNTS 6. Employees’ Federal Income
Salaries Expense Tax Payable
Debit Credit Debit Credit
1,350.25 100.00
Employees’ State Income
Tax Payable Social Security Tax Payable
Debit Credit Debit Credit
27.01 83.73
Hospital Insurance
Medicare Tax Payable Premiums Payable
Debit Credit Debit Credit
19.57 23.65
U.S. Savings Bonds Payable Cash in Bank
Debit Credit Debit Credit
25.00 1,071.29
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 29
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 June 30 Salaries Expense 1 3 5 0 25 2
3 Emplys’ Fed. Inc. Tax Pay. 1 0 0 00 3
4 Emplys’ State Inc. Tax Pay. 2 7 01 4
5 Social Sec. Tax Pay. 8 3 73 5
6 Medicare Tax Pay. 1 9 57 6
7 Hosp. Ins. Premiums Pay. 2 3 65 7
8 U.S. Savings Bonds Pay. 2 5 00 8
9 Cash in Bank 1 0 7 1 29 9
10 Pay. Reg. 6/30—Ck 186 10
11 11
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The payroll expense is $1,350.25. The employees receive $1,071.29 in
AS
cash (net pay). Later the business will pay the federal government $203.30 YOU READ
($100.00 federal income tax, $83.73 social security tax, and $19.57 Medicare
Key Point
tax). The business will also pay the state $27.01 for state income tax. A check
for $23.65 will be written to the insurance company for hospital insurance The Payroll Entry
premiums. Finally, a check for $25 will be sent to the federal government Gross pay:
to purchase savings bonds. debited to Salaries
Expense
These liabilities are the result of deductions that were taken from
Payroll deductions:
employees’ earnings. In the next section, you will learn about the payroll
credited to liability
tax liabilities of the employer.
accounts
Net pay:
Posting the Payroll Entry credited to Cash in
How Do You Post the Payroll? Bank
Figure 13–1 shows the general journal entry and the individual ledger
accounts after posting.
GENERAL JOURNAL PAGE 29
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 June 30 Salaries Expense 514 1 3 5 0 25 2
3 Employees’ Fed. Inc. Tax Pay. 210 100 00 3
4 Employees’ State Inc. Tax Pay. 215 27 01 4
5 Social Security Tax Pay. 220 83 73 5
6 Medicare Tax Pay. 225 19 57 6
7 Hosp. Ins. Premiums Pay. 230 23 65 7
8 U.S. Savings Bonds Pay. 235 25 00 8
9 Cash in Bank 101 1071 29 9
10 Payroll Reg. 6/30—Ck. 186 10
11 11
ACCOUNT Salaries Expense ACCOUNT NO. 514
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
June 23 Balance ✓ 34 6 8 3 10
30 G29 1 3 5 0 25 36 0 3 3 35
ACCOUNT Employees’ Federal Income Tax Payable ACCOUNT NO. 210
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
June 23 Balance ✓ 2 9 3 18
30 G29 1 0 0 00 3 9 3 18
CONTINUE
Figure 13–1 Posting the Payroll Entry to the General Ledger
Section 1 Journalizing and Posting the Payroll 343
338-371_CH13_868829.indd 343 9/15/05 1:26:47 PM
ACCOUNT Employees’ State Income Tax Payable ACCOUNT NO. 215
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
June 23 Balance ✓ 3 2 1 12
30 G29 2 7 01 3 4 8 13
ACCOUNT Social Security Tax Payable ACCOUNT NO. 220
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
June 23 Balance ✓ 2 5 0 35
30 G29 8 3 73 3 3 4 08
ACCOUNT Medicare Tax Payable ACCOUNT NO. 225
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
June 23 Balance ✓ 5 8 63
30 G29 1 9 57 7 8 20
ACCOUNT Hospital Insurance Premiums Payable ACCOUNT NO. 230
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
June 23 Balance ✓ 4 73
30 G29 2 3 65 2 8 38
ACCOUNT U.S. Savings Bonds Payable ACCOUNT NO. 235
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
June 23 Balance ✓ 7 5 00
30 G29 2 5 00 1 0 0 00
ACCOUNT Cash in Bank ACCOUNT NO. 101
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
June 23 Balance ✓ 19 6 1 0 30
30 G29 1 0 7 1 29 18 5 3 9 01
Figure 13–1 Posting the Payroll Entry to the General Ledger (continued)
344 Chapter 13 Payroll Liabilities and Tax Records
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SECTION 1 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Use an organizer like this one
to express the payroll journal
entry as an equation. Use
broad account categories.
(For example, use liabilities
instead of listing all possible
accounts.) Draw arrows
(↑↓) in each box to show
whether the account category
increases or decreases.
Do the Math
You are the payroll clerk for Queen City Motors. As you review the payroll records, you notice
that two employees are nearing the $90,000 limit for social security tax. As commission-
only sales employees, Marcie Laliberte and Kevin Hogan have earned $87,200 and $88,700,
respectively.
1. How much more must Marcie and Kevin earn in commission to reach the social security
tax limit?
2. If Marcie and Kevin are paid 7% commission on each sale, how much more in sales must
each make to reach the social security tax limit?
Problem 13–1 Determining Payroll Amounts
SweepIt Cleaning Service reported the following amounts for the week ending November 4.
The total amount earned by all employees is $2,193.40. The amount withheld for federal
income tax is $263.00. Social security tax is $136.00, and Medicare tax is $31.80. Three of the
employees each have $11.25 deducted for hospital insurance. The amount withheld for state
income tax is $38.70.
Instructions Answer the following questions concerning the November 4 payroll for
SweepIt Cleaning Service.
1. What amount is recorded in the Salaries Expense account?
2. What amount is recorded in the Medicare Tax Payable account?
3. What is the total amount of liabilities for the weekly payroll?
4. What amount is entered in the Hospital Insurance Premiums Payable account?
5. What amount is recorded as a credit for the Cash in Bank account?
Section 1 Journalizing and Posting the Payroll 345
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SECTION 2 Employer’s Payroll Taxes
In Section 1 you learned how to journalize and post the
BEFORE
YOU READ payroll entry. This entry, in part, records taxes that employees
are required to pay on their earnings. Your local florist, employ-
ing designers, delivery workers, and sales clerks, must also pay
Main Idea taxes on these workers’ earnings. These amounts need to be
Employers must pay taxes in addition
calculated, journalized, and posted.
to the amounts withheld from their
employees. This is an expense for the
business. Computing Payroll Tax Expenses
Which Payroll Taxes Are Paid by the Employer?
Read to Learn…
➤ how to compute payroll tax In addition to withholding taxes from employees’ wages,
expense. (p. 346) the employer pays taxes on these wages. The employer’s taxes,
➤ how to journalize payroll tax considered operating expenses of the business, consist of the
expense. (p. 347) employer’s FICA taxes, the federal unemployment tax, and the
➤ how to post payroll tax expense. state unemployment tax.
(p. 349)
The Employer’s FICA Taxes
Key Terms Under the Federal Insurance Contributions Act, both the
Federal Unemployment Tax Act (FUTA)
employee and the employer pay FICA taxes. As you recall, the
State Unemployment Tax Act (SUTA)
employer withholds a percentage of gross earnings for social
unemployment taxes
security and Medicare taxes. In addition, the employer pays
Payroll Tax Expense
FICA taxes using the same percentage of gross earnings. Recall
that the current rates are 6.2% for social security tax and 1.45%
for Medicare tax.
The employer and the employee pay social security tax on gross earn-
ings up to the maximum taxable limit per employee ($90,000 in 2005). The
employer and the employee pay Medicare tax on all gross earnings; there
is no maximum taxable limit. The payroll clerk checks the accumulated
earnings on each employee’s earnings record to determine whether that
employee has reached the maximum taxable amount. When an employee
reaches the limit, the social security tax is no longer computed.
In determining social security tax and Medicare tax for both employee
AS
YOU READ and employer, it makes no difference whether an employee is full-time, part-
time, temporary, or permanent. A full-time adult employee and a student
Key Point employed part-time only for the summer are subject to the same taxes.
FICA Taxes At Roadrunner Delivery Service for the week ending June 30, the
Both employees and employees’ total social security taxes are $83.73 and total Medicare taxes are
employers pay the same $19.57. The employer’s taxes on the total gross earnings are $83.72 (6.2%
amount of FICA taxes. of $1,350.25) and $19.58 (1.45% of $1,350.25), respectively. Notice that the
social security tax for the employees ($83.73) and the employer ($83.72) do
346 Chapter 13 Payroll Liabilities and Tax Records
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not match. The same situation exists for the Medicare tax. This is because
the employer’s tax is calculated on the total gross earnings ($1,350.25). The
employees’ taxes are calculated on each employee’s gross earnings and the
individual tax amounts are totaled. This may result in small differences
between the employees’ and employer’s taxes.
Federal and State Unemployment Taxes
Two unemployment laws, the Federal Unemployment Tax Act (FUTA)
and the State Unemployment Tax Act (SUTA) , require employers to pay
unemployment taxes. Unemployment taxes are collected to provide funds
for workers who are temporarily unemployed. Unemployment taxes are
based on a percentage of the employees’ gross earnings.
The employer pays both federal and state unemployment taxes. The
maximum federal unemployment tax is 6.2% on the first $7,000 of an
employee’s annual wages. State unemployment tax rates and maximum tax-
able amounts vary among states.
Employers may deduct up to 5.4%
of the state unemployment taxes
from federal unemployment taxes.
Most employers, therefore, pay a
federal tax of .8% (6.2% 5.4%)
of taxable gross earnings.
In a few states, employees are
also required to pay unemployment
taxes. The percentage amount var-
ies among these states.
For Roadrunner, since none
of the employees has reached the
maximum taxable amount, the
federal unemployment tax for
the week ended June 30 is $10.80
($1,350.25 .008, or .8%). The
state unemployment tax is $72.91
($1,350.25 .054, or 5.4%).
Journalizing the Employer Payroll Taxes
How Do You Journalize Payroll Tax Expense? AS
The employer’s payroll taxes are business expenses recorded in the YOU READ
Payroll Tax Expense account. Until paid, the employer’s payroll taxes are It’s Not What It
liabilities of the business. Seems
Use the Social Security Tax Payable and the Medicare Tax Payable Unemployment Taxes
accounts to record both the employees’ and the employer’s FICA taxes. Unemployment taxes are
Record the employer’s unemployment taxes in the Federal Unemployment not paid by the people
Tax Payable and State Unemployment Tax Payable accounts. who might become
In the next business transaction, we will analyze the accounts affected unemployed. These taxes
when an employer pays its payroll taxes. This entry takes place in each are paid by employers.
payroll period.
Section 2 Employer’s Payroll Taxes 347
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B u s i n e s s Tr a n s a c t i o n
Roadrunner’s payroll register in Figure 12–5 on page 320 is the source document for the payroll tax
journal entry.
ANALYSIS Identify 1. The accounts Payroll Tax Expense, Social Security Tax Payable,
Medicare Tax Payable, State Unemployment Tax Payable, and
Federal Unemployment Tax Payable are affected.
Classify 2. Payroll Tax Expense is an expense account. Social Security Tax
Payable, Medicare Tax Payable, State Unemployment Tax Payable,
and Federal Unemployment Tax Payable are liability accounts.
/ 3. Payroll Tax Expense is increased by $187.01; Social Security Tax
Payable is increased by $83.72; Medicare Tax Payable is increased
by $19.58; State Unemployment Tax Payable is increased by $72.91;
Federal Unemployment Tax Payable is increased by $10.80.
DEBIT-CREDIT RULE 4. Increases in expense accounts are recorded as debits. Debit Payroll Tax
Expense for $187.01.
5. Increases in liability accounts are recorded as credits. Credit Social
Security Tax Payable for $83.72; Medicare Tax Payable for $19.58;
State Unemployment Tax Payable for $72.91; Federal Unemployment
Tax Payable for $10.80.
T ACCOUNTS 6. Payroll Tax Expense Social Security Tax Payable
Debit Credit Debit Credit
187.01 83.72
Medicare Tax Payable State Unemployment Tax Payable
Debit Credit Debit Credit
19.58 72.91
Federal Unemployment Tax Payable
Debit Credit
10.80
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 30
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 June 30 Payroll Tax Expense 1 8 7 01 2
3 Social Security Tax Pay. 8 3 72 3
4 Medicare Tax Pay. 1 9 58 4
5 State Unemplymnt. Tax Pay. 7 2 91 5
6 Fed. Unemplymnt. Tax Pay. 1 0 80 6
7 Payroll Reg. 6/30 7
348 Chapter 13 Payroll Liabilities and Tax Records
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Posting Payroll Taxes to CULTURAL
the General Ledger Diversity
Communication
How Do You Post Payroll Tax Expense? “Yes” does not mean
Figure 13–2 shows the individual ledger accounts after posting the “yes” in every culture.
payroll taxes entry. In Saudi Arabia
Notice that the Social Security Tax Payable and the Medicare Tax Pay- “yes” usually means
“possibly.” When the
able accounts have two entries for the June 30 payroll. The first entry is the
Japanese say “yes,” it
amount of taxes withheld from the employees’ earnings. The second entry is
can mean “Yes, I hear
the amount of taxes paid by the employer.
you,” not “Yes, I agree
with you.” In Japan
ACCOUNT Payroll Tax Expense ACCOUNT NO. 520 people prefer not
POST. BALANCE to say “no” because
being negative is
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20-- impolite and disrupts
June 23 Balance ✓ 4 7 8 4 10 harmony.
30 G30 1 8 7 01 4 9 7 1 11
ACCOUNT Social Security Tax Payable ACCOUNT NO. 220
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
June 23 Balance ✓ 2 5 0 35
30 G29 8 3 73 3 3 4 08
30 G30 8 3 72 4 1 7 80
ACCOUNT Medicare Tax Payable ACCOUNT NO. 225
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
June 23 Balance ✓ 5 8 63
30 G29 1 9 57 7 8 20
30 G30 1 9 58 9 7 78
ACCOUNT State Unemployment Tax Payable ACCOUNT NO. 240
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
June 23 Balance ✓ 7 9 3 41
30 G30 7 2 91 8 6 6 32
ACCOUNT Federal Unemployment Tax Payable ACCOUNT NO. 245
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
June 23 Balance ✓ 1 1 8 80
30 G30 1 0 80 1 2 9 60
Figure 13–2 General Ledger Accounts after Posting the Payroll Taxes Entry
Section 2 Employer’s Payroll Taxes 349
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SECTION 2 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Employer payroll taxes are %MPLOYER 0AYROLL 4AX 2ATES
paid at different rates. Use a
4AX 0ERCENT OF 4OTAL %ARNINGS %ARNINGS ,IMIT
chart like this one to show the
rates of the employer payroll 3OCIAL SECURITY
taxes. &EDERAL UNEMPLOYMENT
-EDICARE
3TATE UNEMPLOYMENT
Do the Math
Calculate the employer’s federal unemployment tax rate for each of the following states:
State State Unemployment Tax Rate
State A 1.5%
State B 3.0%
State C 4.5%
State D 5.4%
State E 6.0%
Problem 13–2 Calculating Employer’s Payroll Taxes
For the week ending June 30, EZ Copy Center’s payroll has total gross earnings of $4,836.60.
Calculate the employer’s payroll taxes. Use the following percentages:
Social security tax 6.2% Federal unemployment tax 0.8%
Medicare tax 1.45% State unemployment tax 5.4%
Problem 13–3 Identifying Entries for Payroll Liabilities
The following list includes several payroll-related items used in preparing the weekly
payroll for Outdoor Adventures. These items are included in either the entry to record the
payroll or the entry to record the employer’s payroll taxes.
Employees’ federal income tax Employees’ state income tax
Employer’s social security tax Union dues
U.S. savings bonds Employees’ social security tax
Employer’s Medicare tax State unemployment tax
Federal unemployment tax Employees’ Medicare tax
Instructions Use the form provided in your working papers. Place a check mark in the
column that describes the entry in which the item is recorded:
• entry to record the payroll
• entry to record the employer’s payroll taxes.
350 Chapter 13 Payroll Liabilities and Tax Records
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SECTION 3 Tax Liability Payments
and Tax Reports
After journalizing and posting the payroll entries, a business pays the
BEFORE
amounts owed to government agencies and other institutions. YOU READ
Paying the Payroll Tax Liabilities Main Idea
How and When Do Employers Pay Their Liabilities? Employers make tax deposits
Payroll liabilities are paid at regular intervals. and send payroll reports to
the government.
FICA and Federal Income Taxes Read to Learn…
A business makes one payment combining (1) social security and Medi- ➤ how employers send
care taxes (for both employees and employer), and (2) employees’ federal payroll tax payments to
income taxes withheld. It makes the payment at an authorized financial the government. (p. 351)
institution or Federal Reserve Bank. Most small businesses, like Roadrun- ➤ how employers report
ner, make this payment monthly. It is due by the 15th day of the month payroll information to the
following the payroll month. Payment for the month ending June 30 is government. (p. 357)
due by July 15. Larger businesses make the payment every two weeks.
Many small businesses prepare and send a Form 8109 with the
Key Terms
Form 8109
check. The Form 8109, or Federal Tax Deposit Coupon, identifies the type
Electronic Federal Tax
of tax and the tax period. Notice the ovals on the right side of Form 8109
Payment System (EFTPS)
in Figure 13–3. The 941 oval indicates FICA and federal income taxes.
Form W-2
The 2nd Quarter oval indicates the period ending June 30.
Form W-3
AMOUNT OF DEPOSIT (Do NOT type, please print.) Darken only one
TYPE OF TAX
Darken only one
TAX PERIOD
Form 941
DOLLARS CENTS
1st Form 940
TAX YEAR
MONTH 06 , ,
9 0 8 .7 6 941
990-
945 Quarter
2nd
1120 Quarter
C
EMPLOYER IDENTIFICATION NUMBER
BANK NAME/
31 8042398 943 990-T
3rd
Quarter
DATE STAMP 990- 4th
IRS USE 720 PF Quarter
ONLY
ROADRUNNER DELIVERY SERVICE CT-1 1042
155 GATEWAY BLVD.
940
SACRAMENTO CA 94230 35
FOR BANK USE IN MICR ENCODING
Federal Tax Deposit Coupon
Figure 13–3 Federal Tax
Form 8109 Deposit Coupon (Form 8109) for
FICA and Federal Income Taxes
The Electronic Federal Tax Payment System (EFTPS) is used by larger
businesses to make deposits. Eventually even small businesses will use EFTPS.
B u s i n e s s Tr a n s a c t i o n
Roadrunner pays $908.76 payroll tax liabilities July 15 including $393.18 employees’ federal income taxes,
$417.80 social security taxes, and $97.78 Medicare taxes (refer to ledger accounts in Figures 13–1 and 13–2).
Section 3 Tax Liability Payments and Tax Reports 351
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ANALYSIS Identify 1. The accounts Employees’ Federal Income Tax Payable, Social Security
Tax Payable, Medicare Tax Payable, and Cash in Bank are affected.
Classify 2. Employees’ Federal Income Tax Payable, Social Security Tax Payable,
and Medicare Tax Payable are liability accounts. Cash in Bank is an
asset account.
/ 3. Employees’ Federal Income Tax Payable is decreased by $393.18;
Social Security Tax Payable is decreased by $417.80; Medicare Tax
Payable is decreased by $97.78; Cash in Bank is decreased by $908.76.
DEBIT-CREDIT RULE 4. Decreases in liability accounts are recorded as debits. Debit Employees’
Federal Income Tax Payable for $393.18; Social Security Tax Payable
for $417.80; Medicare Tax Payable for $97.78.
5. Decreases in asset accounts are recorded as credits. Credit Cash in
Bank for $908.76.
T ACCOUNTS 6. Employees’ Federal
Income Tax Payable Social Security Tax Payable
Debit Credit Debit Credit
393.18 417.80
Medicare Tax Payable Cash in Bank
Debit Credit Debit Credit
97.78 908.76
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 31
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 July 15 Emplys’ Fed. Inc. Tax Pay. 3 9 3 18 2
3 Social Security Tax Pay. 4 1 7 80 3
4 Medicare Tax Pay. 9 7 78 4
5 Cash in Bank 9 0 8 76 5
6 Check 208 6
State and Local Income Taxes
At regular intervals businesses pay the amounts withheld for state and
local income taxes. Each state and local government determines how and
when the payments are made and what reports are filed.
B u s i n e s s Tr a n s a c t i o n
Roadrunner pays $348.13 to the state. This is the amount of state income tax withheld from employees’
earnings, as indicated in the Employees’ State Income Tax Payable account shown in Figure 13–1.
352 Chapter 13 Payroll Liabilities and Tax Records
338-371_CH13_868829.indd 352 9/15/05 1:27:14 PM
ANALYSIS Identify 1. The accounts Employees’ State Income Tax Payable and Cash in Bank
are affected.
Classify 2. Employees’ State Income Tax Payable is a liability account. Cash in
Bank is an asset account.
/ 3. Employees’ State Income Tax Payable is decreased by $348.13. Cash
in Bank is decreased by $348.13.
DEBIT-CREDIT RULE 4. Decreases in liabilities are debits. Debit Employees’ State Income Tax
Payable for $348.13.
5. Decreases in assets are credits. Credit Cash in Bank for $348.13.
T ACCOUNTS 6. Employees’ State
Income Tax Payable Cash in Bank
Debit Credit Debit Credit
348.13 348.13
JOURNAL ENTRY 7. 32
GENERAL JOURNAL PAGE
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 July 15 Emplys’ State Inc. Tax Pay. 3 4 8 13 2
3 Cash in Bank 3 4 8 13 3
4 Check 209 4
Federal Unemployment Taxes
Most businesses pay the FUTA tax quarterly. If a business has accumu-
lated FUTA taxes of less than $100, only one annual payment is necessary.
B u s i n e s s Tr a n s a c t i o n
Roadrunner pays $129.60 for FUTA taxes. This is the balance of the Federal Unemployment Tax
Payable account shown in Figure 13–2.
ANALYSIS Identify 1. Federal Unemployment Tax Payable and Cash in Bank are affected.
Classify 2. Federal Unemployment Tax Payable is a liability account. Cash in
Bank is an asset account.
/ 3. Federal Unemployment Tax Payable is decreased by $129.60. Cash in
Bank is decreased by $129.60.
DEBIT-CREDIT RULE 4. Decreases in liabilities are debits. Debit Federal Unemployment Tax
Payable for $129.60.
5. Decreases in assets are credits. Credit Cash in Bank for $129.60.
Section 3 Tax Liability Payments and Tax Reports 353
338-371_CH13_868829.indd 353 9/15/05 1:27:14 PM
T ACCOUNTS 6. Federal Unemployment
Tax Payable Cash in Bank
Debit Credit Debit Credit
129.60 129.60
JOURNAL ENTRY 7. 33
GENERAL JOURNAL PAGE
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 July 15 Fed. Unemployment Tax Pay. 1 2 9 60 2
3 Cash in Bank 1 2 9 60 3
4 Check 210 4
A Form 8109 is prepared and sent with the check for the FUTA tax. To
indicate that FUTA taxes are being paid, the 940 oval is filled in. Figure 13–4
shows the Form 8109 that Roadrunner sends with the FUTA payment.
AMOUNT OF DEPOSIT (Do NOT type, please print.) Darken only one Darken only one
TYPE OF TAX TAX PERIOD
DOLLARS CENTS
1st
TAX YEAR
MONTH 06 , ,
1 2 9 .6 0 941
990-
945 Quarter
2nd
1120 Quarter
C
EMPLOYER IDENTIFICATION NUMBER
BANK NAME/
31 8042398 943 990-T
3rd
Quarter
DATE STAMP 990- 4th
IRS USE 720 PF Quarter
ONLY
ROADRUNNER DELIVERY SERVICE CT-1 1042
155 GATEWAY BLVD.
940
SACRAMENTO CA 94230 35
Figure 13–4 Federal Tax
FOR BANK USE IN MICR ENCODING
Deposit Coupon (Form 8109)
Federal Tax Deposit Coupon
for Federal Unemployment Form 8109
Taxes
State Unemployment Taxes
State unemployment taxes are usually paid on a quarterly basis.
B u s i n e s s Tr a n s a c t i o n
Roadrunner pays $866.32 to the state, as shown in Figure 13–2.
ANALYSIS Identify 1. State Unemployment Tax Payable and Cash in Bank are affected.
Classify 2. State Unemployment Tax Payable is a liability account. Cash in Bank
is an asset account.
/ 3. State Unemployment Tax Payable is decreased by $866.32. Cash in
Bank is decreased by $866.32.
DEBIT-CREDIT RULE 4. Decreases in liability accounts are recorded as debits. Debit State
Unemployment Tax Payable for $866.32.
5. Decreases in asset accounts are recorded as credits. Credit Cash in
Bank for $866.32.
354 Chapter 13 Payroll Liabilities and Tax Records
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T ACCOUNTS 6. State Unemployment
Tax Payable Cash in Bank
Debit Credit Debit Credit
866.32 866.32
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 34
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 July 15 State Unemployment Tax Pay. 8 6 6 32 2
3 Cash in Bank 8 6 6 32 3
4 Check 211 4
Other Payroll Liabilities
Employers also make payment for employees’ voluntary deductions.
B u s i n e s s Tr a n s a c t i o n
On July 15 Roadrunner pays $28.38 for hospital insurance premiums. (Refer to Figure 13–1.)
ANALYSIS Identify 1. The accounts Hospital Insurance Premiums Payable and Cash in
Bank are affected.
Classify 2. Hospital Insurance Premiums Payable is a liability account. Cash in
Bank is an asset account.
/ 3. Hospital Insurance Premiums Payable is decreased by $28.38. Cash
in Bank is decreased by $28.38.
DEBIT-CREDIT RULE 4. Decreases in liabilities are debits. Debit Hospital Insurance Premiums
Payable for $28.38.
5. Decreases in assets are credits. Credit Cash in Bank for $28.38.
T ACCOUNTS 6. Hospital Insurance
Premiums Payable Cash in Bank
Debit Credit Debit Credit
28.38 28.38
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 35
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 July 15 Hospital Ins. Premiums Pay. 2 8 38 2
3 Cash in Bank 2 8 38 3
4 Check 212 4
Section 3 Tax Liability Payments and Tax Reports 355
338-371_CH13_868829.indd 355 9/15/05 1:29:17 PM
Posting the Payment of Payroll Liabilities
After the payments for the employer’s payroll liabilities have been jour-
nalized, the entries are posted to the appropriate general ledger accounts.
Figure 13–5 shows Roadrunner’s general ledger accounts after posting.
ACCOUNT Employee’s Federal Income Tax Payable ACCOUNT NO. 210
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
June 23 Balance ✓ 2 9 3 18
30 G29 1 0 0 00 3 9 3 18
July 15 G31 3 9 3 18
ACCOUNT Employee’s State Income Tax Payable ACCOUNT NO. 215
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
June 23 Balance ✓ 3 2 1 12
30 G29 2 7 01 3 4 8 13
July 15 G32 3 4 8 13
ACCOUNT Social Security Tax Payable ACCOUNT NO. 220
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
June 23 Balance ✓ 2 5 0 35
30 G29 8 3 73 3 3 4 08
30 G30 8 3 72 4 1 7 80
July 15 G31 4 1 7 80
ACCOUNT Medicare Tax Payable ACCOUNT NO. 225
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
June 23 Balance ✓ 5 8 63
30 G29 1 9 57 7 8 20
30 G30 1 9 58 9 7 78
July 15 G31 9 7 78
ACCOUNT Hospital Insurance Premium Payable ACCOUNT NO. 230
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
June 23 Balance ✓ 4 73
30 G29 2 3 65 2 8 38
Figure 13–5 General
July 15 G35 2 8 38
Ledger Accounts after Posting
of Payroll Liabilities Payments
356 Chapter 13 Payroll Liabilities and Tax Records
338-371_CH13_868829.indd 356 9/15/05 1:29:19 PM
ACCOUNT State Unemployment Tax Payable ACCOUNT NO. 240
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
June 23 Balance ✓ 7 9 3 41
30 G30 7 2 91 8 6 6 32
July 15 G34 8 6 6 32
ACCOUNT Federal Unemployment Tax Payable ACCOUNT NO. 245
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
June 23 Balance ✓ 1 1 8 80
Figure 13–5 General
30 G30 1 0 80 1 2 9 60
Ledger Accounts after Posting
July 15 G33 1 2 9 60
of Payroll Liabilities Payments
(continued)
Preparing Payroll Tax Forms
How Does the Government Receive Payroll Information?
Employers must complete a variety of payroll-related tax forms.
Form Name of Form When Filed
W-2 Wage and Tax Statement Annually
W-3 Transmittal of Wage and Tax Statements Annually
941 Employer’s Quarterly Federal Tax Return Quarterly
940 Employer’s Annual Federal Annually
Unemployment (FUTA) Tax Return
Forms W-2 and W-3
The Wage and Tax Statement, Form W-2 , summarizes an employ-
ee’s earnings and withholdings for the calendar year. Form W-2 reports
(1) gross earnings, (2) federal income tax withheld, (3) FICA taxes withheld,
and (4) state and local income taxes withheld.
Each employee receives a Form W-2 by January 31 of the following year.
Employees use Form W-2 to prepare their individual income tax returns.
Figure 13–6 on page 358 shows the Form W-2 for Emily Kardos.
Employers prepare many copies of Form W-2. The employer sends Copy
A to the IRS and gives Copies B and C to the employee. The employer keeps
Copy D. Additional copies are sent to city or state government if necessary.
The employer files Form W-3 , Transmittal of Wage and Tax Statements,
with the federal government along with the Forms W-2. Form W-3 sum-
marizes the information on the Forms W-2. Forms W-2 and W-3 are due
by February 28. The federal government uses the Form W-2 information
to check individual income tax returns. Figure 13–7 on page 358 shows
Roadrunner’s Form W-3.
Section 3 Tax Liability Payments and Tax Reports 357
338-371_CH13_868829.indd 357 9/15/05 1:29:21 PM
a Control number
OMB No. 1545-0008
b Employer’s identification number 1 Wages, tips, other compensation 2 Federal income tax withheld
31-8042398 8,246.00 664.00
c Employer’s name, address, and ZIP code 3 Social security wages 4 Social security tax withheld
Roadrunner Delivery Service 8,246.00 511.25
5 Medicare wages and tips 6 Medicare tax withheld
155 Gateway Blvd. 8,246.00 119.57
Sacramento, CA 94230 7 Social security tips 8 Allocated tips
d Employee’s social security number 9 Advance EIC payment 10 Dependent care benefits
201-XX-XXXX
e Employee’s name, address, and ZIP code 11 Nonqualified plans 12 Benefits included in box 1
Emily M. Kardos 13 14 Other
809 East Main Street
Sacramento, CA 94230
15 Statutory Deceased Pension Legal Hshld. Subtotal Deferred
employee plan rep. emp. compensation
16 State Employer’s state I.D. no. 17 State wages, tips, etc. 18 State income tax 19 Locality name 20 Local wages, tips, etc. 21 Local income tax
CA 484972 8,246.00 128.74
W-2
Wage and Tax Department of the Treasury – Internal Revenue Service
Form
Figure 13–6 Form W-2
Statement 20
Copy 1 For State, City, or Local Tax Department
Wage and Tax Statement
✓ 67,210.35 5,396.00
67,210.35 4,167.04
5 7210 67,210.35 974.55
31-8042398
Roadrunner Delivery Service
155 Gateway Blvd.
Sacramento, CA 94230
Maria Sanchez Owner 1/29/20--
Figure 13–7 Transmittal
of Wage and Tax Statements
Forms 941 and 940
Form 941 , illustrated in Figure 13–8, is the employer’s quarterly federal
tax return that reports accumulated amounts of FICA and federal income
taxes withheld from employees’ earnings, as well as FICA tax owed by the
employer. The employer’s federal unemployment tax is reported annually
on Form 940 .
358 Chapter 13 Payroll Liabilities and Tax Records
338-371_CH13_868829.indd 358 9/15/05 1:29:23 PM
Roadrunner Delivery Service June 30, 20--
31-8042398
155 Gateway Blvd. Sacramento, CA
94230
9,252 96
747 64
0 00
773 55
9,252 96 1,147 37
0 00
9,252 96 268 33
1,415 70
0 00
1,415 70
2,163 34
0 00
2,163 34
2,163 34
0 00
627.29 627.29 908.76 2,163.34
Maria Sanchez Maria Sanchez, Owner 6/30/20--
Figure 13–8 Form 941
Section 3 Tax Liability Payments and Tax Reports 359
338-371_CH13_868829.indd 359 9/15/05 1:29:30 PM
SECTION 3 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Different payroll tax forms are ���� �������
used for different purposes. ���
Using a chart like this one, ���
indicate the purpose of each ���
form.
���
Do the Math
Small businesses (those that have revenues Annual Revenue in Dollars
of less than $200,000 per year) pay their Morgan
$158,000 $215,000
federal taxes by the 15th day of the Manufacturing
$125,000
month following the payroll month. Ziggy's Ice Cream
Large businesses pay their taxes every two Lights and More
weeks. Review the graph, and answer the Beverly Drive Spa
following questions. Stanford Tools
1. Which businesses pay their taxes every Plains Educational
$420,000
two weeks? Supply
$95,000 $220,000
2. What percent of businesses represented
in the circle graph are large businesses?
Problem 13–4 Payment of Payroll Liabilities
The following account balances appear
General Ledger
in the general ledger for Soap Box Social Security Tax Payable $318.55
Laundry on April 30. State Income Tax Payable 205.60
Instructions Record the payment of Medicare Tax Payable 113.28
the four liability accounts on page 34 Employees’ Federal
Income Tax Payable 286.00
of the general journal. (Hint: Two
checks are written.)
Problem 13–5 Analyzing a Source Document
PAYROLL REGISTER
PAY PERIOD ENDING May 19 20 -- DATE OF PAYMENT May 19, 20--
MAR. STATUS
EMPLOYEE
EARNINGS DEDUCTIONS
ALLOW.
NUMBER
HOURS
TOTAL
NET CK.
NAME RATE SOC. SEC. MEDICARE FED. INC. STATE HOSP. PAY NO.
REGULAR OVERTIME TOTAL TAX TAX TAX INC. TAX INS. OTHER TOTAL
25 25
TOTALS 1,218 93 109 14 1,328 07 82 34 19 26 184 00 26 56 20 00 332 16 995 91
Other Deductions: Write the appropriate code letter to the left of the amount: B–U.S. Savings Bonds; C–Credit Union: UD–Union Dues; UW–United Way.
Instructions Based on this payroll register, record the appropriate journal entry in your
working papers. Use page 14 in the general journal.
360 Chapter 13 Payroll Liabilities and Tax Records
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Accounting Careers in Focus
DIRECTOR OF SHARED SERVICES
Lear Corporation, Dearborn, Michigan
..
Bonnie Sims Tips from .
Q: What does Lear Corporation do?
ould always
A: We manufacture parts for the interiors of automobiles. Your résumé sh
along with a
Q: What are the responsibilities of your job? be submitted
tter. The letter
strong cover le y
A: I oversee a unit of our company that is called a shared service d upon the ke
should expan
center. Shared service centers allow companies to centralize résumé, high-
points in your nce
their financial, administrative, or customer support functions. s and experie
light your skill th e
relevant to
Q: Why did you choose an accounting career? that are most
d explain
A: I was born into a family of accountants. Accounting was job opening, an it the
benef
something in which I was always interested. how you can
em ployer.
Q: What has helped you succeed? prospective
A: My success is due in large part to hard work and dedication.
I started my career as an accounts payable clerk, eventually
became an accountant, and then worked in the shared services center at Lear.
I’m now the director. Always keep your goals in mind and continually work
toward them.
Q: What do you like most about your job?
A: I like that it involves accounting, finance, and project management. This mix
provides me with many challenges.
Q: What types of challenges?
A: The biggest is dealing with periods like quarter-end. Things get extremely busy
and hectic!
CAREER FACTS
Nature of the Work: Oversee accounts payable, expense reporting, and payroll
▲
departments; hire, train, and manage accounting staff.
Training or Education Needed: A bachelor’s degree in accounting or finance; at least
▲
seven years’ experience.
Aptitudes, Abilities, and Skills: Strong communication, technology, analytical, and
▲
management skills.
Salary Range: $45,000 to $115,000 depending on experience, company size, industry,
▲
and location.
Career Path: Gain public accounting experience, and then move to a corporate
▲
environment. Gradually assume positions with increasing responsibility.
Thinking Critically Why is it important for managers to be able to see the big picture?
Chapter 13 Accounting Careers in Focus 361
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CH A P T ER 13 Summary
Key Concepts
1. Total gross earnings are often recorded in the Salaries Expense account. Amounts withheld
from employees’ earnings are liabilities of the business. The payroll register is the source
document for paying the payroll. The payroll transaction is journalized here:
GENERAL JOURNAL PAGE 9
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Date Salaries Expense xxx xx 2
3 Emplys’ Fed. Inc. Tax Pay. x x x xx 3
4 Emplys’ State Inc. Tax Pay. x x x xx 4
5 Social Sec. Tax Pay. x x x xx 5
6 Medicare Tax Pay. x x x xx 6
7 Hosp. Ins. Premiums Pay. x x x xx 7
8 U.S. Savings Bonds Pay. x x x xx 8
9 Cash in Bank x x x xx 9
2. Employers pay taxes on employees’ gross earnings. These taxes are in addition to the amounts
withheld from earnings. The employer payroll taxes are an operating expense of the business.
(Withheld taxes are not an expense. The business merely serves as the collection agent for the
government.) Employers pay the following payroll taxes:
social security
FICA
Medicare
FUTA—federal unemployment insurance
SUTA—state unemployment insurance
3. The employer sends tax deposits to government agencies at regular intervals:
Paid by
Tax Type Tax Rate Employee Employer How Paid
(Withholding) (Expense)
EFTPS or Form
Federal income tax Based on W-4 ✓ 8109 (941 oval)
6.2% of earnings
EFTPS or Form
Social security up to $90,000 ✓ ✓ 8109 (941 oval)
(2 6.2% 12.4%)
1.45% of total earnings EFTPS or Form
Medicare
(2 1.45% 2.9%) ✓ ✓ 8109 (941 oval)
6.2% minus SUTA rate
up to 5.4% (usually EFTPS or Form
FUTA
6.2% 5.4% .8%) of ✓ 8109 (940 oval)
earnings up to $7,000
362 Chapter 13 Summary
338-371_CH13_868829.indd 362 9/15/05 1:29:55 PM
Summary C HAPT E R 1 3
State Income Tax Based on W-4 ✓ Varies by state
SUTA Varies by state ✓ Varies by state
4. The deposit for FICA and federal income tax is journalized here:
GENERAL JOURNAL PAGE 12
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Date Emplys’ Fed. Inc. Tax Pay. x x x xx 2
3 Social Security Tax Pay. x x x xx 3
4 Medicare Tax Pay. x x x xx 4
5 Cash in Bank x x x xx 5
5. A business is legally required to make various reports to different government agencies at
specified time intervals. They report this information on various payroll-related tax forms:
1. Form W-2—Wage and Tax Statement—is filed annually. It summarizes each employee’s
calendar-year earnings and withholdings.
2. Form W-3—Transmittal of Wage and Tax Statements—is filed annually. It summarizes the
information on the employees’ Forms W-2 and is sent along with the Forms W-2.
3. Form 941—Employer’s Quarterly Federal Tax Return—is filed quarterly. It reports the federal
income tax and the FICA tax (for both employee and employer).
4. Form 940—Employer’s Annual Federal Unemployment (FUTA) Tax Return—is filed annually.
It reports the employer’s federal unemployment taxes.
Key Terms
Electronic Federal Tax Payment Form W-2 (p. 357)
System (EFTPS) (p. 351) Form W-3 (p. 357)
Federal Unemployment Tax Act Payroll Tax Expense (p. 347)
(FUTA) (p. 347)
Salaries Expense (p. 340)
Form 8109 (p. 351)
State Unemployment Tax Act
Form 940 (p. 358) (SUTA) (p. 347)
Form 941 (p. 358) unemployment taxes (p. 347)
Chapter 13 Summary 363
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C H A P T ER 13 Review and Activities
AFTER
YOU READ
Check Your Understanding
1. Journalizing Payroll Transactions
a. In what expense account are employees’ earnings often recorded?
b. List the accounts in which the payroll liabilities for federal income tax and Medicare tax are
recorded.
2. Employer’s Payroll Taxes
a. Which payroll taxes are expenses to the business?
b. On what amount are the employer’s FICA taxes computed?
3. Computing Payroll Tax Expense
a. How is the employer’s share of FICA tax calculated?
b. The share of both the employer’s and employee’s FICA tax is calculated using the same
percentages, but the amount for each can differ slightly. What causes this?
4. Journalizing Tax Liabilities
a. What is the journal entry to record the FUTA tax expense?
b. The amount of the FICA tax deposit is twice as much as the employer’s FICA tax expense.
Why?
5. Payroll Tax Reports and Forms
a. What is the difference between Form 940 and Form 941?
b. What information does Form W-3 contain?
Apply Key Terms
You are the owner of Accurate Financial Services.
You have just been hired by Brad Justice, the owner
of a new company called Snack Shack, to help
establish a payroll system. As a new business owner,
Brad understands the importance of complying
with government requirements, but he is concerned
that he may not be aware of all of the requirements
related to payroll. Using the following key terms,
prepare a presentation for Brad describing the
government requirements for payroll.
Electronic Federal Tax Form W-2
Payment System (EFTPS) Form W-3
Federal Unemployment Payroll Tax Expense
Tax Act (FUTA) Salaries Expense
Form 8109 State Unemployment Tax
Form 940 Act (SUTA)
Form 941 unemployment taxes
364 Chapter 13 Review and Activities
338-371_CH13_868829.indd 364 4/6/06 6:09:20 PM
Computerized Accounting C HAPT E R 1 3
Recording and Paying Payroll Tax Liabilities
Making the Transition from a Manual to a Computerized System
Task Manual Methods Computerized Methods
Record and post • Prepare the payroll journal entry based • When the payroll checks are generated,
payroll entries; on the payroll register totals. the payroll tax journal entries are
pay payroll tax • Post the payroll entries to the general automatically prepared and posted.
liabilities ledger.
• Prepare tax liability checks to pay
federal, state, and local taxing
authorities.
• Prepare journal entries to record the
payment of the liabilities.
Q&A
Peachtree Question Answer
How do I journalize • When payroll checks are issued, Peachtree automatically journalizes the tax
the employer’s tax liabilities.
liabilities?
How do I pay the 1. Select Payments from the Tasks menu.
payroll tax liabilities? 2. Select the taxing authority ID to be paid.
3. Enter the amount and cash account number.
4. Enter description and general ledger account (tax liability account).
5. Click Print.
QuickBooks Q & A
QuickBooks Question Answer
How do I journalize • When payroll checks are issued, QuickBooks Payroll service automatically
the employer’s tax journalizes the liabilities.
liabilities?
How do I pay the 1. Select Process Payroll Liabilities from the Employees menu, and then select
payroll tax liabilities? Pay Payroll Liabilities.
2. Enter the date range for the liabilities you want to pay, and click OK.
3. In the Pay by Check tab, enter the bank account and the check date, and then
mark the items to be paid.
4. Click Create.
For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers.
Chapter 13 Computerized Accounting 365
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C H A P T ER 13 Problems
Complete problems using: Manual Glencoe Peachtree Complete QuickBooks Spreadsheet
Spreadshee
OR OR OR
Working Papers Accounting Software Templates Templates
Problem 13–6 Calculating Employer’s
SPREADSHEET Payroll Taxes
SMART GUIDE
Instructions For each of the total gross earnings amounts recorded in the
Step–by–Step Instructions:
past five pay weeks for Hot Suds Car Wash, determine these taxes:
Problem 13–6
1. Select the spreadsheet • employer’s FICA taxes (social security 6.2%, Medicare 1.45%)
template for Problem • federal unemployment tax (.8%)
13–6.
• state unemployment tax (5.4%)
2. Enter your name and
the date in the spaces Use the form provided in the working papers. None of the employees has
provided on the
template.
reached the taxable earnings limit.
3. Complete the spread- Total gross earnings:
sheet using the
instructions in your 1. $914.80 4. $791.02
working papers. 2. $1,113.73 5. $1,245.75
4. Print the spreadsheet
3. $2,201.38
and proof your work.
5. Complete the Analyze Analyze Explain the relationship between federal and state
activity.
unemployment tax rates.
6. Save your work and
exit the spreadsheet
program.
Problem 13–7 Recording the Payment
of the Payroll
SMART GUIDE The totals of the payroll register for Kits & Pups Grooming are shown in
your working papers. On December 31 the owner, Abe Shultz, wrote Check
Step–by–Step Instructions:
Problem 13–7 1400 to pay the payroll.
1. Select the problem Instructions In your working papers:
set for Kits & Pups
Grooming (Prob. 13–7). 1. Record the payroll entry in the general journal.
2. Rename the company 2. Post the entry to the general ledger accounts.
and set the system date.
3. Record the payroll Analyze Identify the payroll liability account that has the largest
entry using the General credit entry.
Journal Entry option.
4. Print a General Journal
report and a General
Ledger report. Problem 13–8 Journalizing Payroll Transactions
5. Proof your work. The Outback Guide Service payroll register for the week ending Dec. 31
6. Complete the Analyze
follows:
activity.
7. End the session.
PAYROLL REGISTER
PAY PERIOD ENDING Dec. 31 20 -- DATE OF PAYMENT Dec. 31, 20--
MAR. STATUS
EMPLOYEE
ALLOW.
NUMBER
HOURS
EARNINGS DEDUCTIONS
TOTAL
NET CK.
NAME RATE SOC. SEC. MEDICARE FED. INC. STATE HOSP. PAY NO.
REGULAR OVERTIME TOTAL TAX TAX TAX INC. TAX INS. OTHER TOTAL
1 31 Coleman, Clarence M 1 41 7.60 304 00 11 40 315 40 19 55 4 57 21 00 6 31 51 43 263 97 1
2 28 Lorman, Victoria S 1 30 8.00 240 00 240 00 14 88 3 48 21 00 4 80 (UD)5 40 49 56 190 44 2
3 33 Peterson, Peg S 1 38 7.25 275 50 275 50 17 08 3 99 26 00 5 51 52 58 222 92 3
4 35 Torrez, Joyce M 2 36 7.25 261 00 261 00 16 18 3 78 6 00 5 22 (UD)5 40 36 58 224 42 4
24 24
25 25
TOTALS 1,080 50 11 40 1,091 90 67 69 15 82 74 00 21 84 10 80 190 15 901 75
Other Deductions: Write the appropriate code letter to the left of the amount: B–U.S. Savings Bonds; C–Credit Union: UD–Union Dues; UW–United Way.
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Problems C HAPT E R 1 3
Instructions In your working papers:
1. Record the entry for the payment of the payroll on page 15 of the SMART GUIDE
general journal. (Check 1201, dated Dec. 31). Step–by–Step Instructions:
2. Use the information in the payroll register to compute the employer’s Problem 13–8
payroll taxes: 1. Select the problem
set for Outback Guide
• FICA taxes (6.2% for social security, 1.45% for Medicare) Service (Prob. 13–8).
• federal unemployment tax (0.8%) 2. Rename the company
and set the system date.
• state unemployment tax (5.4%)
3. Record the payment
None of the employees has reached the taxable earnings limit. of the payroll and the
employer’s payroll taxes.
3. Record the entry for the employer’s payroll taxes on page 15 of the 4. Print a General Journal
general journal. and a General Ledger
report.
Analyze Examine the entry recording the payment of payroll. Which 5. Proof your work.
account, Social Security Tax Payable or Employees’ Federal 6. Complete the Analyze
Income Tax Payable, had the larger credit? activity.
7. End the session.
Problem 13–9 Recording and Posting QuickBooks
Payroll Transactions PROBLEM GUIDE
Showbiz Video completed the following payroll transactions during the
Step–by–Step Instructions:
first two weeks of December. Showbiz Video pays its employees on a
Problem 13–8
biweekly basis (every two weeks).
1. Restore the Problem
Instructions In your working papers: 13-8.QBB file.
2. Enter the payroll
1. Record the December 13 transactions on page 38 in the general transactions using Make
journal. General Journal Entries
and Write Checks
2. Post both payroll entries to the appropriate general ledger accounts. options.
3. Journalize and post the December 16 transactions. 3. Print a Journal report
and a General Ledger
Date Transactions report.
4. Proof your work.
Dec. 13 Wrote Check 2206 to pay the payroll of $3,840.58 (gross 5. Complete the Analyze
earnings) for the pay period ending December 13. The activity.
following amounts were withheld: FICA taxes, $238.12 for 6. Back up your work.
social security and $55.69 for Medicare; employees’ federal
income taxes, $639.00; employees’ state income taxes, $96.02;
insurance premium, $21.00; U.S. savings bonds, $20.00. SOURCE DOCUMENT
13 Recorded the employer’s payroll taxes (FICA tax rates, 6.2% for
PROBLEM
social security and 1.45% for Medicare; federal unemployment Problem 13–9
tax rate, 0.8%; state unemployment tax rate, 5.4%). No Use the source documents
employee has reached the maximum taxable amount. in your working papers to
16 Paid the amounts owed to the federal government for complete this problem.
employees’ federal income taxes and FICA taxes, Check 2215.
16 Purchased U.S. savings bonds for employees for $100.00,
Check 2216.
CONTINUE
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C H A P T ER 13 Problems
Date Transactions (cont.)
16 Paid $148.00 to American Insurance Company for employees’
insurance, Check 2217.
SMART GUIDE Analyze Identify the payroll accounts that have a balance after entries
Step–by–Step Instructions: have been posted.
Problem 13–9
1. Select the problem
set for Showbiz Video CHALLENGE Problem 13–10 Recording and Posting
(Prob. 13–9). PROBLEM
2. Rename the company Payroll Transactions
and set the system date. Job Connect pays its employees twice a month. Employee earnings and tax
3. Record the transactions.
4. Print a General Journal
amounts for the pay period ending December 31 are:
report and a General Gross earnings $12,543.40
Ledger report.
5. Proof your work. Social security tax 777.69
6. Complete the Analyze Medicare tax 181.88
activity.
Employees’ federal income tax 662.00
7. End the session.
Employees’ state income tax 250.87
QuickBooks Instructions In your working papers:
PROBLEM GUIDE 1. Prepare Check 1602 (payable to “Job Connect Payroll Account”) to
Step–by–Step Instructions:
transfer the net pay amount to the payroll checking account.
Problem 13–9 2. On page 19 of the general journal, record the payment of the payroll.
1. Restore the Problem 3. Post the payroll transaction to the general ledger.
13-9.QBB file. 4. Compute payroll tax expense forms and journalize the entry to record
2. Enter the payroll
transactions. employer’s payroll taxes using these rates:
3. Print a Journal and a • social security, 6.2% • state unemployment, 5.4%
General Ledger report.
4. Complete the Analyze • Medicare, 1.45% • federal unemployment, 0.8%
activity. No employee has reached the taxable earnings limit.
5. Back up your work.
5. Post the entry to the general journal.
6. Prepare checks dated December 31 to pay the following payroll liabilities:
(a) Federal unemployment taxes, payable to First City Bank (Check
SMART GUIDE 1603).
Step–by–Step Instructions: (b) State unemployment taxes, payable to the State of North
Problem 13–10 Carolina (Check 1604).
1. Select the problem (c) Employees’ federal income taxes and FICA taxes, payable to First
set for Job Connect
(Prob. 13–10).
City Bank (Check 1605).
2. Rename the company 7. Journalize and post the entries for the payment of the payroll liabilities.
and set the system date. 8. Complete payroll tax expense forms. Prepare a Form 8109 for each of
3. Record all transactions.
4. Print a General Journal the two federal tax deposits paid in Instruction 6, parts (a) and (c). The
report and a General oval for FICA and federal income tax is 941. The oval for the federal
Ledger report.
5. Proof your work.
unemployment tax is 940.
6. Manually prepare Form
8109. Analyze Calculate the employer’s total payroll-related expense for the
7. Complete the Analyze pay period.
activity.
8. End the session.
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Winning Competitive Events CHAPTER 13
Practice your test-taking skills! The questions on this page are reprinted with permission
from national organizations:
• Future Business Leaders of America
• Business Professionals of America
Use a separate sheet of paper to record your answers.
Future Business Leaders of America
MULTIPLE CHOICE
1. When a semimonthly payroll is paid, the credit to Cash is equal to the
a. total earnings of all employees.
b. total deductions for income tax and social security tax.
c. total deductions.
d. net pay for all employees.
2. The form that accompanies the payment of taxes to the federal government is a
a. Form W-2.
b. Form 8109.
c. Form 940.
d. Form 941.
Business Professionals of America
MULTIPLE CHOICE
3. The account payroll taxes expense is used for
a. recording employees’ federal income taxes withheld.
b. recording employees’ social security and Medicare taxes.
c. recording the employer’s social security and Medicare taxes.
d. recording the employer’s social security, Medicare, FUTA, and SUTA taxes.
4. Until the amounts withheld from employee salaries are paid by the employer, they
are recorded as
a. assets.
b. liabilities.
c. salary expense.
d. revenue.
5. The accounting document that provides a basis for recording payroll
transactions is
a. the payroll register.
b. the employee earnings records.
c. the general ledger.
d. the general journal.
Need More Help?
Go to glencoeaccounting.glencoe.com and
click on Student Center. Click on Winning
Competitive Events and select Chapter 13.
• Practice Questions and Test-Taking Tips
• Concept Capsules and Terminology
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C H A P T ER 13 Real-World Applications and Connections
Critical Payroll Records and Reports
Thinking 1. When employees are paid, what amount is credited to Cash in Bank?
2. Why do employees’ paycheck deductions become liabilities of the business?
3. Suppose that a business is located in a state that has an income tax. The
business allows employees to take deductions for U.S. savings bonds. List the
payroll liability accounts this business would have.
4. Predict what might happen to the Social Security Tax Payable account
balance if the Salaries Expense entry was posted but the Payroll Tax
Expense entry was never posted.
5. Design a diagram that shows FICA taxes from the payroll date through the
tax deposit date.
6. Employers must deposit payroll taxes before they file the payroll tax returns.
Do you agree with this practice? Why or why not?
CASE Payroll: Warehousing Center
STUDY Morrison Distribution Center offers warehousing services. The company is
considering adding a third shift with 12 new employees. Estimate the third shift
payroll costs assuming: (1) The average warehouse employee earns $21,000 per
year. (2) The state unemployment tax rate is 5.4% and the federal rate is 0.8%
(both apply to the first $7,000 of earnings). (3) The employer’s cost of health
insurance averages 22% of an employee’s earnings.
INSTRUCTIONS
1. Calculate the salary expense related to adding the 12 new employees.
2. Compute the additional payroll taxes Morrison will pay.
3. Determine the total cost to add the third shift.
a
mattoefr ETHICS Money Shuffling
Suppose that you are an accounting clerk at Cybercafé. The business owner wants
you to use employees’ 401(k) withholdings to pay off a pressing debt. She believes
she can replace the funds within two months and that the employees will not
lose very much by not having their money invested during that time.
ETHICAL DECISION MAKING
1. What are the ethical issues? 4. How do the alternatives affect the
2. What are the alternatives? parties?
3. Who are the affected parties? 5. What would you do?
$ )) ))
Communicating
Public Speaking
ACCOUNTING As the senior payroll clerk for Fashion Square Gift Shop, you are to explain the
deductions from employees’ payroll checks at a new employee orientation.
1. Prepare an outline and visuals of the items you need to discuss.
2. Pair with a classmate and give your presentations to each other. Focus on both
verbal and nonverbal communication skills (eye contact, gestures, and facial
expressions). Give each other feedback and suggestions for improvements.
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Real-World Applications and Connections C HAPT E R 1 3
Skills Beyond Self-Management
NUMBERS People with self-management skills can set attainable goals and motivate themselves.
ON THE JOB
As a payroll clerk, you process all payroll and tax reports. It is December. What do
you need to do now to make sure you process the payroll tax reports on time?
INSTRUCTIONS
Describe the reports you will need to file, and name the payroll records you will
need to complete each one.
INTERNATIONAL Cultural Values of Employees
Dutch sociologist Geert Hofstede interviewed thousands of employees worldwide
Accounting to understand their cultures and values. One value dimension he studied was
individualism—emphasis on the individual and individual achievement. He
found that individualism is important in the United States, where workers prefer
to work independently and do not expect organizations to take care of them. In
Latin American countries like Mexico, employees value group experience, expect
close supervision, and want their company to take care of their interests.
INSTRUCTIONS Discuss these differences found by Hofstede.
Making It
Your Payroll Deductions
Personal You may have wondered how your employer pays the taxes and other deductions
from your paycheck.
PERSONAL FINANCE ACTIVITY Ask your friends what deductions are taken from
their paychecks (categories, not amounts). Identify the forms related to the
deductions and write a brief report about the deductions and forms.
PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and
click on Student Center. Click on Making It Personal and select Chapter 13.
Analyzing Employee Costs
Financial Employee benefits might include paid vacations and health insurance. Many
Reports employers calculate the cost of benefits as a percentage of total salaries.
INSTRUCTIONS Use the payroll register on page
320 and payroll tax information in this chapter
to answer these questions.
1. If the employee benefits cost 24% of
Tax Obligations
employee regular earnings, what is the As you explore different ways
of compensating employees,
benefits cost for this salary period?
remember that taxes still apply.
2. If a new employee is to be hired for a Visit glencoeaccounting
40-hour work week at wages of $8 an hour, .glencoe.com and click
what would be the total weekly cost for the on Student Center. Click on
new employee? (The company estimates its WebQuest and select Unit 3 to
continue your Internet project.
employee benefits cost at 22%.)
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MINI
PRACTICE Payroll Accounting
SET 3
The Plant Service
Green Thumb
Main Task Plant Service
Prepare the weekly payroll for
▲
Green Thumb Plant Service. Company Background: Green Thumb Plant
Service is a plant maintenance company
Summary of Steps that is located in Kingsbury, Michigan. It is
Calculate gross earnings, a service business that is organized as a sole
▲
deductions, and net pay. proprietorship. It is owned and operated
by Joanna Ecke. The company places and
▲
Prepare the payroll register.
maintains plants, flowers, and small trees
Write paychecks for the in offices and corporate buildings.
▲
employees. The business has been in operation for
almost five years. During that time its rev-
Enter information on
▲
enue has increased each year, additional
employee’s earnings records. employees have been hired, and the busi-
Journalize and post the payroll ness is now showing a good profit.
▲
transaction. Payroll Information: The business presently employs eight people.
A Form W-4 is on file for each employee. The list that follows
▲
Calculate, journalize, and post summarizes the data on those documents.
the employer’s payroll tax
liability. Michael Alter Single claims 1 exemption
Christine Cuddy Single claims 0 exemptions
Make the payroll tax deposit.
▲
Jesse Dubow Single claims 0 exemptions
Journalize and post the payroll Joclyn Filley Single claims 1 exemption
▲
tax deposit. Greg Millette Married claims 2 exemptions
Heather Repicky Married claims 3 exemptions
Pay the insurance premium,
▲
Daniel Ripp Married claims 2 exemptions
and journalize and post the Yourself Single claims 1 exemption
entry.
The business pays its employees on a weekly basis. Overtime
Why It’s Important is paid at the rate of 1½ times the regular rate of pay for all hours
worked over 40. The weekly pay period runs from Monday through
Payroll is a basic cost of doing
▲
Saturday, with employees being paid on Saturday for the week’s
business. work. Because most office buildings are closed on Sunday, the busi-
ness is also closed.
The employees are paid by one of three methods: hourly rate,
salary, or salary plus 10% commission on any new accounts they ac-
quire for the company. The following table lists the employees, the
method by which their wages are computed, and other pertinent
information. Next, you will find the time cards for the employees
who are paid on an hourly basis.
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Green Thumb Plant Service (continued)
Complete the project using: Manual Glencoe Peachtree Complete QuickBooks
OR OR
Working Papers Accounting Software Templates
Empl. Employee
Employee No. Position Status Rate of Pay
SMART GUIDE
Heather Repicky 010 Manager Full-time $725.00/weekly salary Step–by–Step Instructions:
Greg Millette 011 Salesperson Full-time $450.00/week plus
1. Select the problem set
10% Commission for Green Thumb Plant
Jesse Dubow 012 Bookkeeper Part-time $250.00/week Service (MP–3).
Joclyn Filley 013 Supply clerk Full-time $7.40/hour 2. Rename the company
and set the system
Daniel Ripp 016 Service Full-time $8.30/hour date.
Christine Cuddy 018 Service Full-time $8.30/hour 3. Enter your name for
Michael Alter 019 Supply clerk Part-time $7.10/hour employee record 022.
4. Record the weekly
Yourself 022 Accounting Part-time $175.00/week payroll and print
clerk checks for all
employees using the
Payroll Entry option.
The time cards for the hourly-rate employees are shown here. 5. Print a Payroll Register
for the current week
NO. 019 NO. 018 and proof your work.
NAME Michael Alter NAME Christine Cuddy 6. Print a Payroll Journal
SOC. SEC. NO. 049-XX-XXXX SOC. SEC. NO. 223-XX-XXXX report.
WEEK ENDING 7/25/20-- WEEK ENDING 7/25/20-- 7. Calculate and record
the employer’s payroll
DAY IN OUT IN OUT IN OUT TOTAL DAY IN OUT IN OUT IN OUT TOTAL
tax expense using the
M 2:00 5:00 M 9:00 12:00 12;30 5:00 General Journal Entry
T 2:00 6:00 T 9:00 11:30 12:00 5:00 option.
W 3:00 5:00 W 9:00 1:00 8. Record the deposit for
Th 2:00 6:00 Th 9:00 12:00 12:30 4:00 the taxes owed to the
F 2:00 6:00 F 8:30 1:00 1:30 3:00 federal government
S 9:00 2:00 S 9:00 1:30 and enter the monthly
S S insurance premium
TOTAL HOURS 016 TOTAL HOURS
using the General
NO. 013 NO.
JoclynHOURS
Filley DanielHOURS
Ripp
Journal Entry option.
NAME RATE AMOUNT NAME RATE AMOUNT
042-XX-XXXX SOC. SEC. NO. 011-XX-XXXX
9. Manually complete
SOC. SEC. NO.
Form 8109.
REGULAR REGULAR
WEEK ENDING 7/25/20-- WEEK ENDING 7/25/20--
OVERTIME OVERTIME
10. Print a General Journal
DAY IN OUT
TOTAL EARNINGS
IN OUT IN OUT TOTAL DAY IN OUT
TOTAL EARNINGS
IN OUT IN OUT TOTAL report and proof your
M
SIGNATURE
9:00 12:00 1:00 3:00
DATE
M
SIGNATURE
9:00 12:00 12:30 5:00
DATE
work.
T 9:00 12:00 1:00 5:00 T 9:00 12:30 1:00 6:00 11. Print a General Ledger
W 8:00 12:00 1:00 5:00 W 9:00 12:00 1:00 4:30 report.
Th 9:00 12:00 1:00 3:30 Th 8:30 12:30 1:00 5:00 12. Print Quarterly
F 9:00 12:00 1:00 4:00 F 9:00 11:30 12:00 5:00
Earnings reports for
S 9:00 1:00
Michael Alter and Greg
S 9:00 12:00
S S
Millette.
13. Complete the Analyze
activity and complete
TOTAL HOURS TOTAL HOURS
HOURS RATE AMOUNT HOURS RATE AMOUNT
the Audit Test.
REGULAR REGULAR 14. End the session.
OVERTIME OVERTIME
TOTAL EARNINGS TOTAL EARNINGS
SIGNATURE DATE SIGNATURE DATE
Use the federal tax tables in the working papers to determine federal
income tax withholding. These are the rates for other taxes: state income
tax, 2%; FICA (employee and employer contributions) social security tax,
6.2% and Medicare tax, 1.45%; state unemployment tax, 5.4%; and federal
unemployment tax, 0.8%.
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MINI PRACTICE Green Thumb Plant Service
SET 3 (CONTINUED)
QuickBooks YOUR JOB RESPONSIBILITIES
Green Thumb Plant Service
PROBLEM GUIDE
Step–by–Step Instructions: The business entered the third (c) Jesse Dubow, Heather
1. Restore the Mini quarter of its fiscal year at the Repicky, and Daniel Ripp
Practice Set 3.QBB file.
2. Enter your name in the beginning of July. It is presently the each have $4.00 deducted for
Employee List. last week of July. Jesse Dubow, the donations to the United Way.
3. Record the weekly bookkeeper, is leaving on vacation. (d) All employees pay an
payroll using the Pay
Employees option and In his absence you are to prepare insurance premium each
print the checks for all this week’s payroll. week. Married employees
employees using the
Write Checks option. (1) Complete the timecards for the pay $9.00 and single
4. Print paychecks and four hourly employees. Enter employees pay $6.00.
an Employee Earnings the total hours worked at the (e) None of Green Thumb’s
Summary report.
5. Calculate and record bottom of each card. Complete employees has reached the
the employer’s payroll each timecard to the nearest maximum taxable amount
tax expense using the
Make General Journal quarter hour. for the social security tax.
Entries option. (2) Greg Millette recorded (5) Calculate the net pay for each
6. Record the deposit for additional clients that brought employee.
the taxes owed to the
federal government, in $925.00 in new business. (6) Total all amount columns in
and enter the monthly Calculate his commission and the payroll register. Prove the
insurance premium
using the Write Checks add it to his salary to determine accuracy of the totals.
option. his gross earnings. (7) Write Check 972 for the amount
7. Manually complete (3) Enter the payroll information of the total net pay on the
Form 8109.
8. Print a Journal report for all employees in the payroll regular checking account of
for July 21–25 and register. Each employee was the business. Make the check
proof your work.
9. Print a General Ledger recently assigned an employee payable to the Green Thumb
report. number because the business Plant Service—Payroll Account.
10. Print a Payroll Summary is soon converting to an In Jesse’s absence Joanna Ecke
report.
11. Complete the Analyze automated payroll preparation will sign the check for you.
activity using the Profit system. Since this payroll is Complete the deposit slip for
& Loss Standard and
Journal reports, and being prepared manually, list the payroll account.
complete the Audit the employees in the payroll (8) Record the payroll transaction
Test. register in alphabetical order by in the general journal, page 21.
12. Back up your work.
last name. Use the information contained
(4) Use the following information in the payroll register and Check
to complete the payroll register. 972 as the source documents.
(a) Use the federal tax chart Post the transaction to the
to determine income tax general ledger accounts.
amounts to be withheld. (9) Write the paychecks for the
(b) Michael Alter, Christine employees. Use the information
Cuddy, Joclyn Filley, and in the payroll register to
Greg Millette each have complete the check stubs. After
$5.00 deducted for the a check has been written for
purchase of U.S. savings an employee, enter the check
bonds. number in the payroll register.
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Green Thumb Plant Service (continued)
(10) Enter this week’s payroll employees’ federal income
information on the employee’s tax, social security tax, and
earnings records for Michael Medicare tax. Complete Form
Alter and Greg Millette only. 8109 by entering the amount
Be sure to add the current owed. Write Check 973,
gross earnings amount to the payable to the First Federal
accumulated total. Bank for the taxes.
(11) Calculate and record the (13) Enter the transaction in the
employer’s taxes for this pay general journal and post the
period in the general journal. entry to the general ledger.
The source of information is (14) Pay the monthly insurance
the payroll register. Post the premium by writing Check
journal entry to the general 974 to the American Insurance
ledger. Company for $228.00. Record
(12) Make a deposit for the the payment in the general
taxes owed to the federal journal and post the entry to
government. The total includes the general ledger.
the amounts withheld for
Analyze Identify the pay method that had the highest employee gross
earnings this week.
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UNIT
4 The Accounting
Cycle for a
Merchandising
Corporation
Personal Finance Q & A
Q: Why is learning about
merchandising corporations
important to me?
A: Most of the things you buy
are probably purchased at
merchandising corporations.
Learning about these businesses
can help you make wise consumer
decisions.
Q: Where can I find financial
information about these
corporations?
A: The financial sections of newspapers
and magazines often have
information about well-known
corporations.
THINK IT OVER
Name several large merchandising
corporations. What are some of the most
popular items sold at each company?
376
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Internet Project
Cyber-Shopping
Online shopping is a growing business with more than $100 million in
annual sales. Consumers shop online for convenience and sometimes
out of necessity. Because of their remote locations, people in Hawaii
and Alaska make the most Internet purchases. In this project you will
learn how to shop safely online.
Log on to glencoeaccounting.glencoe.com and click
on Student Center. Click on WebQuest and select
Unit 4. Begin your WebQuest by reading the Task.
Continue working on your Chapter 14 16 18 20 21
WebQuest as you study Unit 4. Page 413 479 549 611 637
THE BIG PICTURE
HAPPY HOL-E-DAYS Some 54% of Americans
will use the Web to find holiday gifts. Here is what they will do online:
COMPARE PRICES 66%
BROWSE FOR GIFT IDEAS 62%
PURCHASE PRESENTS 57%
SEND CARDS OR PHOTOS 42%
Data: American Express Retail Index Source: Reprinted by permission from BusinessWeek.
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CH A P T ER 14 Accounting for Sales
and Cash Receipts
BEFORE
YOU READ
What You’ll Learn Predict
1. Explain the difference 1. What does the chapter title tell you?
between a service business 2. What do you already know about this subject from personal experience?
and a merchandising 3. What have you learned about this in the earlier chapters?
business. 4. What gaps exist in your knowledge of this subject?
2. Analyze transactions relating
to the sale of merchandise.
3. Explain the difference Exploring the Real World of Business
between a retailer and a
wholesaler. ANALYZING SALES
4. Record a variety of sales and
cash receipt transactions in a Underground Station
general journal. If you are looking for the latest in urban-savvy footwear,
Underground Station has you covered. From Puma to Fila,
5. Define the accounting terms
introduced in this chapter. Phat Farm to GBX, this store has the brands that can take you
from the basketball court to the dance floor.
Why It’s Important Until recently Underground Station retail stores were
As a consumer, you have found exclusively in malls. This changed with the grand
▲
frequent contact with opening of a large “street store” in the main shopping district
merchandising businesses. in the heart of Brooklyn, New York. With the popularity of the
brands it carries, Underground Station thinks the new sales
strategy will be a good fit.
Underground Station wants to attract more women
shoppers in the coming years. The company hopes that a new
advertising campaign and more cutting-edge buyers in the
shoe division will do the trick.
What Do You Think?
When shoppers purchase shoes at Underground Station,
what general ledger accounts do you think are affected?
378 Chapter 14 Accounting for Sales and Cash Receipts
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Working in the Real World
APPLYING YOUR ACCOUNTING KNOWLEDGE
Personal Connection
Making sales is key to the financial success 1. Does your work or the work of friends or
of a business. Sales dollars come from selling family involve selling merchandise?
products or services to customers. Companies 2. What information from these sales do you
like Underground Station, Target, and Foot think should be recorded in the accounting
Locker buy merchandise and sell it to customers. records?
Accurate tracking of sales transactions helps
these businesses decide what merchandise to Online Connection
offer. Journalizing cash receipts is an essential Go to glencoeaccounting.glencoe.com and click
part of recording sales revenue. on Student Center. Click on Working in the
Real World and select Chapter 14.
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SECTION 1 Accounting for a
Merchandising Business
As you remember, a service business is one that provides a service
BEFORE
YOU READ to the public for a fee. In contrast a merchandising business buys goods
(such as computers, clothing, and furniture) and then sells those goods
to customers for a profit. You’re probably familiar with merchandising
Main Idea businesses like Tower Records or Wal-Mart. Most merchandising busi-
A wholesaler sells to
nesses operate either as retailers or as wholesalers. Some merchandising
retailers, and a retailer sells
businesses are both retailers and wholesalers. A retailer is a business that
to the final users.
sells to the final user, that is, to you—the consumer. A wholesaler is a
Read to Learn… business that sells to retailers. In this chapter we will analyze transactions
➤ the operating cycle for a relating to the sale of merchandise for On Your Mark Athletic Wear, a
merchandising business. retailer. Refer to the chart of accounts for On Your Mark Athletic Wear.
(p. 380)
➤ the accounts used in a
merchandising business.
The Operating Cycle of a
(p. 382) Merchandising Business
➤ issues relating to How Is the Operating Cycle Different
international sales. from the Accounting Cycle?
(p. 382)
Recall that the accounting cycle is a series of tasks performed in a
Key Terms single period to maintain records. The merchandising business operating
retailer cycle is a series of transactions, as illustrated in Figure 14–1.
wholesaler The collection of cash from sales enables the business to purchase
merchandise more items to sell, pay expenses, and make a profit. As long as the com-
inventory pany is in business, this is a continuous, repeating sequence.
Sales
1
Purchase of goods
for resale
2 Sale of goods 2 Sale of goods
for cash on account
(customer account)
4 3
Cash Collect cash
from accounts
Pay expenses
•utilities •employee earnings
Figure 14–1 The Operating •rent •miscellaneous
Profit
Cycle for a Merchandising
Business
380 Chapter 14 Accounting for Sales and Cash Receipts
378-413_CH14_868829.indd 380 4/6/06 5:58:36 PM
ON YOUR MARK
ATHLETIC WEAR
595 Leslie Street, Dallas, TX 75207
CHART OF ACCOUNTS
ASSETS
101 Cash in Bank 130 Supplies
105 Change Fund 135 Prepaid Insurance
110 Petty Cash Fund 140 Delivery Equipment
115 Accounts Receivable 142 Accumulated Depreciation—Delivery Equipment
117 Allowance for Uncollectible Accounts 145 Office Equipment
118 Notes Receivable 147 Accumulated Depreciation—Office Equipment
120 Interest Receivable 150 Store Equipment
125 Merchandise Inventory 152 Accumulated Depreciation—Store Equipment
LIABILITIES
201 Accounts Payable 212 Social Security Tax Payable
202 Notes Payable 213 Medicare Tax Payable
203 Discount on Notes Payable 214 Federal Unemployment Tax Payable
204 Federal Corporate Income Tax Payable 215 State Unemployment Tax Payable
205 Employees’ Federal Income Tax Payable 220 Sales Tax Payable
211 Employees’ State Income Tax Payable
STOCKHOLDERS’ EQUITY
301 Capital Stock 310 Income Summary
305 Retained Earnings
REVENUE
401 Sales 410 Sales Returns and Allowances
405 Sales Discounts 415 Interest Income
COST OF MERCHANDISE
501 Purchases 510 Purchases Discounts
505 Transportation In 515 Purchases Returns and Allowances
EXPENSES
601 Advertising Expense 645 Loss/Gain on Disposal of Plant Assets
605 Bankcard Fees Expense 650 Maintenance Expense
610 Cash Short and Over 655 Miscellaneous Expense
612 Delivery Expense 657 Payroll Tax Expense
615 Depreciation Expense—Delivery Equipment 660 Rent Expense
620 Depreciation Expense—Office Equipment 665 Salaries Expense
625 Depreciation Expense—Store Equipment 670 Supplies Expense
630 Federal Corporate Income Tax Expense 675 Uncollectible Accounts Expense
635 Insurance Expense 680 Utilities Expense
640 Interest Expense
▼
▼
Accounts Receivable Subsidiary Ledger Accounts Payable Subsidiary Ledger
....................................
BRE Break Point Sports Club CHA Champion Store Supply
DIM Dimaio, Joe COM Computer Solutions
GAL Galvin, Robert DAR Dara’s Delivery Service
KLE Klein, Casey FAS FastLane Athletics
MON Montero, Anita GEA Geary Office Supply
RAH Rahim, Shashi PRO Pro Runner Warehouse
RAM Ramos, Gabriel SLF Sports Link Footwear
SOU South Branch High School Athletics SNS Sports Nutrition Supply
SUL Sullivan, Megan
TAM Tammy’s Fitness Club
WON Wong, Kim
YOU Young, Lara
Section 1 Accounting for a Merchandising Business 381
378-413_CH14_868829.indd 381 9/12/05 3:09:46 PM
AS
YOU READ Accounts Used by a
Compare and
Contrast
Merchandising Business
What Accounts Does a Merchandising Business Use?
Merchandise Inventory
A merchandising business buys goods from a wholesaler or a manufac-
and Sales Accounts
turing business and then sells these goods to its customers. Goods bought
How are the two
accounts, Merchandise for resale are called merchandise . The items of merchandise the business
Inventory and Sales, has in stock are referred to as inventory .
similar? How are they
different? Merchandise Inventory Account
The inventory of a business is represented in the general ledger by the
asset account Merchandise Inventory. Increases to Merchandise Inventory
are recorded as debits, and decreases are recorded as credits. The normal bal-
ance of the Merchandise Inventory account is a debit. At the beginning of
each period, the dollar amount of merchandise in stock is indicated by
Merchandise Inventory the debit balance in Merchandise Inventory.
Debit Credit During the operating cycle, the business sells merchandise that is in
stock and purchases new items to replace the inventory sold. The sale
Increase Side Decrease Side
of merchandise and the purchase of new merchandise are recorded in
Normal Balance
separate accounts.
Sales Sales Account
Debit Credit When a retail merchandising business sells goods to a customer,
the amount of the merchandise sold is recorded in the Sales account.
Decrease Side Increase Side
Normal Balance Sales is a revenue account. Increases to the Sales account are recorded as
credits, and decreases are recorded as debits. The normal balance of the
Sales account is a credit. Both cash sales and sales on account are recorded
as credits to the Sales account.
Sales on account affect the Accounts Receivable account, and cash sales
affect the Cash in Bank account.
International Sales
What Challenges Face a Company That Has
International Sales?
When companies have sales transactions on an international level,
many complexities arise. The obligations and rights of each party to the
sale extend across borders and into different sets of legal
requirements.
The United Nations Convention on Contracts for the Inter-
national Sales of Goods (CISG) was created to provide guide-
lines and laws governing the international sale of goods.
While “The Convention” does not cover sales of all goods,
it governs most business-to-business transactions.
International sales also introduce the challenge of
multiple currencies. Which currency will be used for the
transaction? How will currency exchange rates affect rev-
enue? These are just a few considerations that must be
examined when conducting international sales.
382 Chapter 14 Accounting for Sales and Cash Receipts
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SECTION 1 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Create a table similar
to this one to describe "USINESS 4YPE 7HAT IS 3OLD 7HO IS THE #USTOMER
service businesses and
merchandising businesses.
3ERVICE
2ETAILER
7HOLESALER
Do the Math
Alpine Outfitters estimates the annual cost of maintaining merchandise inventory to be 10%
of the inventory value. Alpine’s accountants are preparing a budget for the coming year, and
they plan to maintain an inventory valued at $1.5 million. Answer the following questions:
1. What is the estimated cost of maintaining the inventory?
2. If the inventory was valued at $2 million, and the estimated rate of maintenance was
11%, what would be the estimated annual maintenance cost?
Problem 14–1 Recording Merchandising Transactions
Instructions Record the following transactions in T-account form in your working papers
for Sharp Shot Camera Shop. A partial chart of accounts follows:
General Ledger
Cash in Bank
Accounts Receivable
Merchandise Inventory
Accounts Payable
Sales
Date Transactions
Apr. 4 Sold 10 Canon cameras on account for $3,000, Sales Slip 224.
10 Sold 2 dozen photo albums for $150, cash, Sales Slip 225.
20 Sold 4 rolls of 35mm film for $24 cash, Sales Slip 226.
25 Sold a Canon camera to a customer for $380 cash, Sales Slip 227.
Section 1 Accounting for a Merchandising Business 383
378-413_CH14_868829.indd 383 4/6/06 5:58:44 PM
SECTION 2 Analyzing Sales
Transactions
In a merchandising business, the most frequent transaction is the
BEFORE
YOU READ sale of merchandise. Some businesses sell on a cash-only basis. Others sell
only on credit. Most businesses handle both cash and credit sales.
Main Idea
In addition to using the Sales on Account
general ledger, a business What Does a Sale on Account Involve?
keeps a subsidiary ledger The sale of merchandise that will be paid for at a later date is called a
of individual customer sale on account , a charge sale, or a credit sale. The sale on account is made
accounts. to a charge customer ; this credit option is also called a charge account.
Read to Learn… Store Credit Card Sales
➤ what a sale on account
involves. (p. 384) Charge customers use credit cards issued by a business such as
➤ the purpose of the Target to make their purchases. A store credit card, imprinted with the
accounts receivable customer’s name and account number, facilitates the sale on account.
subsidiary ledger. (p. 385)
➤ how to journalize sales on Nonbank Credit Card Sales
account. (p. 386) In the next section, you will learn about bank credit cards. We con-
➤ how to journalize and sider nonbank credit cards here because they are similar to a store credit
post sales returns and card. A nonbank credit card is a credit card issued by corporations such as
allowances. (p. 389) American Express and Diners Club. Nonbank credit card sales are consid-
ered a form of credit sales because payment is collected at a later date.
Key Terms
sale on account Items Related to Sales on Account
charge customer
credit cards A charge sale involves a sales slip, which shows the amount of tax
sales slip charged and the credit terms.
sales tax The Sales Slip. A sales slip is a form that lists these details: date
credit terms of the sale; customer account identification; and description, quantity,
accounts receivable and price of the item(s) sold.
subsidiary ledger The description may include the physical details (such as “white
subsidiary ledger athletic socks”), a stock number, or both. A sales slip is usually prepared
controlling account in multiple copies. The customer receives the original as a receipt and as
sales return proof of purchase. The number of copies kept by the business varies with
sales allowance its needs. A copy is always used for accounting purposes as the source
credit memorandum document for recording the journal entry.
contra account Prenumbered sales slips help businesses keep track of all sales made
on account. On Your Mark uses prenumbered sales slips printed with its
name and address. On Your Mark’s sales slip is shown in Figure 14–2.
Notice that the total amount on the sales slip includes cost of the
items sold and sales tax.
384 Chapter 14 Accounting for Sales and Cash Receipts
378-413_CH14_868829.indd 384 9/12/05 3:09:57 PM
Sales Tax. Most states and some cities tax the retail sale
ON YOUR MARK
of goods and services with a sales tax . Items subject to sales
ATHLETIC WEAR
tax and sales tax rates vary from state to state. The sales tax rate 595 Leslie Street, Dallas, TX 75207
is usually stated as a percentage of the sale, such as 5%. Sales tax DATE: December 1, 20-- NO. 50
rates are determined by the proper taxing authority. Casey Klein
SOLD 3345 Spring Creek Parkway
The sales tax is paid by the customer and collected by the TO
Plano, Texas 75074
business. The business acts as the collection agent for the state CLERK CASH CHARGE TERMS
or city government. (In the future we will refer only to the state B.E. ✓ n/30
UNIT
government.) At the time of the sale, the business adds the sales QTY. DESCRIPTION PRICE AMOUNT
tax to the total selling price of the goods. Periodically, the busi- 1 Pair Running Shoes $ 100.00 $ 100 00
ness sends the collected sales tax to the state. Until the state is 6 Pair Athletic Socks 10.00 60 00
1 Vinyl Jacket/Pants 40.00 40 00
paid, however, the sales tax collected from customers represents
a liability of the business. The business keeps a record of the
sales tax owed to the state in
Sales Tax Payable
a liability account called Sales SUBTOTAL $ 200 00
Debit Credit Tax Payable. For Sales Tax SALES TAX 12 00
Payable, the increase and Thank You! TOTAL $ 212 00
Decrease Side Increase Side
Normal Balance balance side is a credit and
the decrease side is a debit.
To calculate the sales tax, multiply the merchandise subto- Figure 14–2 On Your
tal by the sales tax rate (see Figure 14–2). Casey Klein bought $200 worth of Mark Athletic Wear Sales Slip
merchandise. The sales tax rate is 6%. The sales clerk multiplied $200 by 6%
(.06) to compute the $12 sales tax. The total transaction amount is $212.
Not all sales of retail merchandise are taxed. In most states, sales to tax-
exempt organizations, such as schools, are not taxed. For example, South
Branch High School purchased $1,500 worth of merchandise on account.
Schools are tax exempt, so no sales tax is added to the amount of the sale.
Credit Terms. The sales slip in Figure 14–2 has space to indicate the
credit terms of the sale. Credit terms state the time allowed for payment.
MATH HINTS
The credit terms for the sale to Casey Klein are n/30. The “n” stands for the Combining Math
net, or total, amount of the sale. The “30” stands for the number of days the Functions When
customer has to pay for the merchandise. Casey Klein owes On Your Mark combining mathematical
$212 (the net amount) by December 31 (30 days after December 1). functions such as
calculating and adding
The Accounts Receivable sales tax to a sale
amount, keep the order
Subsidiary Ledger of operations in mind:
multiply first, then add.
What Is a Subsidiary Ledger? Compute the trans-
Businesses with few charge customers usually include an Accounts action amount of a $184
Receivable account for each customer in the general ledger. A large busi- sale of merchandise with
a 6% sales tax:
ness, however, with many charge customers sets up a separate ledger that
• multiply first
contains an account for each charge customer. This ledger is called the ($184.00 0.06)
accounts receivable subsidiary ledger . A subsidiary ledger is a ledger, $11.04
or book, that contains detailed data summarized to a controlling account • then add
in the general ledger. For example, the accounts receivable subsidiary ledger ($184.00 $11.04)
contains details of all the individuals and businesses that owe money to a $195.04
company. Summary information about accounts receivable appears in the
Accounts Receivable account in the general ledger. Accounts Receivable is a
Section 2 Analyzing Sales Transactions 385
378-413_CH14_868829.indd 385 9/12/05 3:10:00 PM
controlling account because its balance equals the total of all account
balances in the subsidiary ledger. The balance of Accounts Receivable thus
serves as a control on the accuracy of the balances in the accounts receivable
subsidiary ledger after all posting is complete.
General Ledger
Accounts Receivable—controlling account $10,000
Accounts Receivable Subsidiary Ledger Controlling account
Individual Accounts Within Ledger: balance equals total
Brown, Joshua $2,000 of accounts in
Clark, Gillian 3,000 subsidiary ledger.
Greene, Jason 1,000
Perez, Sarita 4,000
Total $10,000
Figure 14–3 shows the accounts receivable subsidiary ledger form used
by On Your Mark. The subsidiary ledger account form has lines at the top
for the name and address of the customer. In a manual accounting system,
subsidiary ledger accounts are arranged in alphabetical order. They are not
usually numbered. In a computerized system, however, each charge cus-
tomer is assigned a specific account number.
Notice that the subsidiary ledger account form has only three amount
columns. The Debit and Credit columns are used to record increases and
decreases to the customer’s account. There is only one Balance column.
Since Accounts Receivable is an asset account, the normal balance is a
debit, so one balance amount is sufficient.
NAME
ADDRESS
POST.
DATE DESCRIPTION REF. DEBIT CREDIT BALANCE
Figure 14–3 Subsidiary Ledger Account Form
Recording Sales on Account
How Are Sales on Account Recorded?
AS
YOU READ According to the revenue recognition principle, revenue for a sale on
account is recognized and recorded at the time of the sale, when it is earned.
Key Point Revenue must also be realizable, which means that it is expected to be con-
verted to cash. Look at On Your Mark’s sale on account to Casey Klein in
Sale on Account The
accounts receivable part the next business transaction.
of the journal entry is Notice that the debit in the general journal entry is to “Accounts
posted to two places: Receivable/Casey Klein.” The slash indicates that two accounts are debited:
• general ledger Accounts Receivable (controlling) and Accounts Receivable—Casey Klein
controlling account (subsidiary).
• subsidiary ledger As mentioned earlier, when merchandise is sold to tax-exempt organiza-
customer account tions, such as school districts, sales tax is not charged. An example of such
a transaction follows on page 388.
386 Chapter 14 Accounting for Sales and Cash Receipts
378-413_CH14_868829.indd 386 4/6/06 5:58:50 PM
ON YOUR MARK
B u s i n e s s Tr a n s a c t i o n ATHLETIC WEAR
595 Leslie Street, Dallas, TX 75207
DATE: December 1, 20-- NO. 50
On December 1 On Your Mark sold merchandise on account to Casey Casey Klein
SOLD
Klein for $200 plus sales tax of $12, Sales Slip 50. TO 3345 Spring Creek Parkway
Plano, Texas 75074
CLERK CASH CHARGE TERMS
B.E. ✓ n/30
ANALYSIS Identify 1. The accounts affected are QTY. DESCRIPTION AMOUNT
UNIT
PRICE
Accounts Receivable (controlling), 1 Pair Running Shoes $ 100.00 $ 100 00
Accounts Receivable—Casey Klein
6 Pair Athletic Socks 10.00 60 00
1 Vinyl Jacket/Pants 40.00 40 00
(subsidiary), Sales, and Sales Tax
Payable.
Classify 2. Accounts Receivable (controlling)
SUBTOTAL $ 200 00
and Accounts Receivable—Casey SALES TAX 12 00
Klein (subsidiary) are asset Thank You! TOTAL $ 212 00
accounts. Sales is a revenue
account. Sales Tax Payable is a
liability account.
/ 3. Accounts Receivable (controlling) and Accounts Receivable—Casey
Klein (subsidiary) are increased by the total amount, $212 (the dollar
amount of merchandise sold plus sales tax). Sales is increased by
the dollar amount of merchandise sold, $200. Sales Tax Payable is
increased by the amount of sales tax charged, $12.
DEBIT-CREDIT RULE 4. Increases to asset accounts are recorded as debits. Debit Accounts
Receivable (controlling) for $212. Also debit Accounts Receivable—
Casey Klein (subsidiary) for $212.
5. Increases to revenue and liability accounts are recorded as credits.
Credit Sales for $200 and Sales Tax Payable for $12.
T ACCOUNTS 6. Accounts Receivable Sales
Debit Credit Debit Credit
212 200
Accounts Receivable
Subsidiary Ledger
Casey Klein Sales Tax Payable
Debit Credit Debit Credit
212 12
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 20
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Dec. 1 Accts. Rec./Casey Klein 2 1 2 00 2
3 Sales 2 0 0 00 3
4 Sales Tax Payable 1 2 00 4
5 Sales Slip 50 5
Section 2 Analyzing Sales Transactions 387
378-413_CH14_868829.indd 387 9/12/05 3:10:06 PM
B u s i n e s s Tr a n s a c t i o n
On December 3 On Your Mark sold merchandise on account to South Branch High School Athletics for
$1,500, Sales Slip 51.
JOURNAL ENTRY
GENERAL JOURNAL PAGE 20
ON YOUR MARK POST.
DATE DESCRIPTION DEBIT CREDIT
ATHLETIC WEAR REF.
595 Leslie Street, Dallas, TX 75207
DATE: December 3, 20-- NO. 51 6 3 Accts. Rec./So. Branch H.S. 1 5 0 0 00 6
South Branch High School Athletics
SOLD
TO 1750 Rutgers Dr. 7 Sales 1 5 0 0 00 7
Dallas, TX 75207
CLERK CASH CHARGE TERMS
8 Sales Slip 51 8
B.E. ✓ 2/10, n/30 9 9
UNIT
QTY. DESCRIPTION PRICE AMOUNT
15 Baseball Uniforms $ 40.00 $ 600 00
15 Baseball Caps 20.00 300 00
15 Baseball Mitts 35.00 525 00
2 Baseballs 15.00 30 00 This transaction is analyzed and recorded in the same manner as the
3 Baseball Bats 15.00 45 00
December 1 entry for Casey Klein except there is no sales tax. On Your
SUBTOTAL $ 1,500 00 Mark’s accountant debits Accounts Receivable/South Branch High School
0 00
Athletics for $1,500 and credits the Sales account for $1,500.
SALES TAX
Thank You! TOTAL $ 1,500 00
Sales Returns and Allowances
All merchandising businesses expect that some customers will be dis-
satisfied with their purchases. The reasons for dissatisfaction vary. An item
may be damaged or defective. The color or size may be incorrect. Whatever
the reason, merchants usually allow dissatisfied customers to return mer-
chandise. Any merchandise returned for credit or a cash refund is called
a sales return .
Sometimes a customer discovers that merchandise is damaged or
defective but still usable. When this happens, the merchant may reduce
the sales price for the damaged merchandise. A price reduction granted for
damaged goods kept by the customer is called a sales allowance .
The Credit Memorandum. If the sales return or allowance occurs
on a charge sale, the business usually prepares a credit memorandum.
A credit memorandum lists the details of a sales return or allowance. The
charge customer’s account is credited (decreased) for the amount of the
return or allowance.
Figure 14–4 shows a credit memorandum, or credit memo, used by On
Your Mark. The credit memo was prepared when Gabriel Ramos returned
AS
YOU READ merchandise that he bought on account on November 29. Note that the
credit memo includes a description of the returned item, the reasons for the
In Your Experience return, and the amount to be credited to Gabriel Ramos’ account.
Sales Returns Have On Your Mark’s credit memo also includes spaces for the date and sales
you ever tried to return slip number of the original sale. Notice too that the total on the credit memo
something you bought? includes the sales tax charged on the original sale.
Why did you want to The same form is used if Gabriel Ramos is instead given a sales allow-
return it? What was the ance. Of course, the amount credited to his account would be less. The credit
result? granted for an allowance is the difference between the original sales price
and the reduced price.
388 Chapter 14 Accounting for Sales and Cash Receipts
378-413_CH14_868829.indd 388 9/12/05 3:10:11 PM
On Your Mark’s credit ON YOUR MARK CREDIT MEMORANDUM NO. 124
ATHLETIC WEAR ORIGINAL ORIGINAL APPROVAL
memos are prenumbered 595 Leslie Street, Dallas, TX 75207 SALES DATE SALES SLIP
✕ MDSE
RET
Nov. 29, 20-- No. 35 J.R.
and prepared in duplicate.
QTY DESCRIPTION AMOUNT
The original is given to the DATE: December 4, 20--
1 Athletic Suit $ 150 00
customer. The copy is kept
NAME: Gabriel Ramos
by the business and is the 278 Summit Avenue
ADDRESS:
source document used for Dallas, TX 75206
the journal entry to record
REASON FOR RETURN SUB
the transaction. wrong color TOTAL $ 150 00
The Sales Returns Gabriel Ramos THE TOTAL SHOWN AT THE
RIGHT WILL BE CREDITED
SALES
TAX 9 00
and Allowances
TO YOUR ACCOUNT.
CUSTOMER SIGNATURE
TOTAL
$ 159 00
Account. Sales returns
and allowances decrease the
total revenue earned by a business. This decrease, however, is not recorded Figure 14–4
Credit Memorandum
in the Sales account. Instead, a separate account called Sales Returns and
Allowances is used. Sales Returns and Allowances summarizes the total
returns and allowances for damaged, defective, or otherwise unsatisfactory
merchandise. If the Sales Returns and Allowances account balance is large
in proportion to the Sales account balance, there may be merchandising
problems. The Sales Returns and Allowances account is carefully analyzed
to detect any trouble.
The Sales Returns and Allowances account is a contra account. As
AS
a contra account , its balance decreases the balance of its related account. YOU READ
Sales Returns and Allowances is more specifically classified as a contra
Key Point
revenue account because it is related to a revenue account, Sales. Since the
normal balance side of Sales is a credit, the normal balance side of Sales Contra Accounts
Returns and Allowances is a debit. This relationship is shown here: The normal balance of
a contra account is the
Sales Sales Returns and Allowances opposite of its related
Debit Credit Debit Credit account.
Decrease Side Increase Side Increase Side Decrease Side
Normal Balance Normal Balance
Cash Refunds
Sometimes a merchant will give a customer a cash refund instead of
a credit. On Your Mark’s store policy is to give a cash refund only if the
original sale was a cash sale. For cash refunds the Cash in Bank account is
credited instead of Accounts Receivable.
Posting to the Accounts
Receivable Subsidiary Ledger
How Do You Post to the Accounts Receivable
Subsidiary Ledger?
Refer to Figure 14–5 on page 391. Look at the general
journal entry. The credit is to Accts Rec./Gabriel Ramos. The
slash indicates that both Accounts Receivable (controlling)
and Accounts Receivable—Gabriel Ramos (subsidiary) are
Section 2 Analyzing Sales Transactions 389
378-413_CH14_868829.indd 389 9/12/05 3:10:13 PM
ON YOUR MARK CREDIT MEMORANDUM NO. 124
B u s i n e s s Tr a n s a c t i o n
ORIGINAL ORIGINAL APPROVAL
ATHLETIC WEAR SALES DATE SALES SLIP
595 Leslie Street, Dallas, TX 75207
Nov. 29, 20-- No. 35 J.R. ✕ MDSE
RET
QTY DESCRIPTION AMOUNT
DATE:
December 4, 20--
On December 4 On Your Mark issued Credit Memo-
1 Athletic Suit $ 150 00
NAME:Gabriel Ramos
randum 124 to Gabriel Ramos for the return of merchan- ADDRESS: 278 Summit Avenue
Dallas, TX 75206
dise purchased on account, $150 plus $9 sales tax. REASON FOR RETURN SUB
wrong color TOTAL $ 150 00
Gabriel Ramos THE TOTAL SHOWN AT THE
RIGHT WILL BE CREDITED
TO YOUR ACCOUNT.
SALES
TAX 9 00
ANALYSIS Identify 1. The accounts CUSTOMER SIGNATURE
$ 159 00 TOTAL
affected are
Accounts Receivable (controlling), Accounts Receivable—Gabriel
Ramos (subsidiary), Sales Returns and Allowances, and Sales Tax
Payable.
Classify 2. Accounts Receivable (controlling) and Accounts Receivable—Gabriel
Ramos (subsidiary) are asset accounts. Sales Returns and Allowances
is a contra revenue account. Sales Tax Payable is a liability account.
/ 3. Sales Returns and Allowances is increased by $150. Sales Tax Payable
is decreased by $9. Accounts Receivable (controlling) and Accounts
Receivable—Gabriel Ramos (subsidiary) are decreased by $159.
DEBIT-CREDIT RULE 4. Increases to a contra revenue account are recorded as debits. Debit
Sales Returns and Allowances for $150. Decreases to liability accounts
are recorded as debits. Debit Sales Tax Payable for $9.
5. Decreases to asset accounts are recorded as credits. Credit Accounts
Receivable (controlling) for $159. Also credit Accounts Receivable—
Gabriel Ramos (subsidiary) for $159.
T ACCOUNTS 6. Accounts Receivable Sales Returns and Allowances
Debit Credit Debit Credit
159 150
Accounts Receivable
Subsidiary Ledger
Gabriel Ramos Sales Tax Payable
Debit Credit Debit Credit
159 9
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 20
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
9 4 Sales Returns and Allowances 1 5 0 00 9
10 Sales Tax Payable 9 00 10
11 Accts. Rec./Gabriel Ramos 1 5 9 00 11
12 Credit Memorandum 124 12
13 13
390 Chapter 14 Accounting for Sales and Cash Receipts
378-413_CH14_868829.indd 390 9/12/05 3:10:20 PM
credited. Notice that a diagonal line is entered in the Post. Ref. column. This
diagonal line indicates that the amount, $159, is posted in two places: first to
the Account Receivable controlling account in the general ledger and then to
the Gabriel Ramos account in the accounts receivable subsidiary ledger.
After the amount is posted to the Accounts Receivable controlling
account, the account number (115) is entered to the left of the diagonal line
in the Posting Reference column. After the amount is posted to the subsid-
iary ledger account, Gabriel Ramos, a check mark (✓) is entered to the right
of the diagonal line.
GENERAL JOURNAL PAGE 20
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
9 4 Sales Returns and Allowances 410 1 5 0 00 9
10 Sales Tax Payable 220 9 00 10
Accts. Rec./Gabriel Ramos 115 1 5 9 00
11 ✓ 11
12 Credit Memorandum 124 12
13
1 Post this amount
ACCOUNT Accounts Receivable ACCOUNT NO. 115 to the Accounts
Receivable control-
BALANCE
DATE
POST.
DESCRIPTION REF. DEBIT CREDIT ling account
DEBIT CREDIT
20-- 2 Post this amount
Dec. 1 Balance ✓ 6 259 00 to the subsidiary
1 G20 2 1 2 00 6 471 00 ledger account.
3 G20 1 5 0 0 00 7 971 00
4 G20 1 5 9 00 7 812 00
ACCOUNT Sales Tax Payable ACCOUNT NO. 220
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 1 3 0 0 00
1 G20 1 2 00 1 3 1 2 00
4 G20 9 00 1 3 0 3 00
ACCOUNT Sales Returns and Allowances ACCOUNT NO. 410
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 1 8 5 0 00
4 G20 1 5 0 00 2 0 0 0 00
NAME Gabriel Ramos
ADDRESS 278 Summit Ave., Dallas, TX 75206
POST.
DATE DESCRIPTION REF. DEBIT CREDIT BALANCE
20--
Dec. 1 Balance ✓ 1 5 9 00
Figure 14–5 Posting to 4 G20 1 5 9 00
the Accounts Receivable
Subsidiary Ledger
Section 2 Analyzing Sales Transactions 391
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SECTION 2 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Create a flowchart like this 3ALES 4RANSACTIONS
one. Enter labels in the boxes
and next to the arrows.
Use these terms to create
the labels: general ledger,
journal, posted to, recorded
in, sales slip, subsidiary
ledger. Terms can be used
more than once.
Do the Math
Assume the lighting fixture industry has $.065 in sales returns and allowances for every $1.00
in sales (in other words, an industry average of 6.5%). Last year Light House Gallery had sales
of $900,000 and returns and allowances of $46,800. Answer the following questions:
1. What was Light House Gallery’s percentage of returns and allowances to sales?
2. Is the percentage favorable or unfavorable compared to the industry average?
Problem 14–2 Recording Sales on Account and Sales
Returns and Allowances Transactions
Instructions In your working papers, record the following transactions of Alpine Ski Shop
on page 2 of the general journal. Use the following accounts:
General Ledger
Cash in Bank Sales Tax Payable
Accounts Receivable Accounts Payable
Merchandise Inventory Sales
Sales Returns and Allowances
Accounts Receivable Subsidiary Ledger
Palmer, James
Rodriguez, Anna
Date Transactions
Sept. 1 Sold $300 in merchandise plus sales tax of $18 on account to James Palmer,
Sales Slip 101.
4 Sold $600 in merchandise plus $36 sales tax to Anna Rodriguez on account,
Sales Slip 102.
7 Issued Credit Memorandum 15 to James Palmer for the return of $300 in
merchandise plus sales tax of $18.
19 Anna Rodriguez telephoned the manager of Alpine Ski Shop and said that the
zipper on her ski jacket is broken. The manager agreed to give her a $40 credit
on her purchase, plus a $2.40 sales tax credit, Credit Memorandum 16.
392 Chapter 14 Accounting for Sales and Cash Receipts
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SECTION 3 Analyzing Cash Receipt
Transactions
Each business must account for the cash it receives. In this sec-
BEFORE
tion you will explore cash sales, charge sales, bankcard sales, and YOU READ
cash discounts.
Main Idea
Cash Transactions Merchandising businesses
How Does Cash Come into a Business? receive cash from cash sales,
A transaction in which money is received by a business is called payments on account, bankcard
a cash receipt . The three most common sources of cash for a mer- sales, and occasionally from
chandising business are payments for cash sales, charge sales, and
other types of transactions.
bankcard sales. Cash is also received, though much less frequently, Read to Learn…
from other types of transactions. Let’s learn how to handle these four ➤ how and why businesses
kinds of cash receipts. receive cash. (p. 393)
➤ how to calculate a cash
Cash Sales discount. (p. 394)
In a cash sale transaction, the business receives full payment ➤ how to record cash receipts.
for the merchandise sold at the time of the sale. The proof of sale and (p. 395)
the source document generated by a cash sale transaction differ from
those for a sale on account.
Key Terms
cash receipt
Most retailers use a cash register to record cash sales. Instead of
cash sale
using preprinted sales slips, cash sales are recorded on two rolls of
cash discount
paper tape inside the cash register. The details of a cash sale are printed
sales discount
on the two tapes at the same time. The portion of one tape that con-
tains a record of the sale is torn off and given to the customer as a
receipt. The other tape remains in the register.
A business totals and clears its cash register daily. The cash register tape Cash Sales
lists the total cash sales and the total sales tax collected on these sales. The
tape also shows the day’s total charge sales. A proof is usually prepared to
show that the amount of cash in the cash register equals the amount of Dec. 15
cash sales and sales tax recorded on the cash register tape. The proof and Tape
the tape are sent to the accounting clerk, who uses the tape like the one
in Figure 14–6 as the source document for the journal entry to record the 3000.00 CA
180.00 ST
day’s cash sales.
Charge Customer Payments
Businesses record cash received on account from charge customers by
preparing receipts. A receipt, shown in Figure 14–7 on page 394, is a form
Sales Tax
that serves as a record of cash received. Receipts are prenumbered and may
be prepared in multiple copies. The receipt is a source document for the Figure 14–6
journal entry. Cash Register Tape
Section 3 Analyzing Cash Receipt Transactions 393
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RECEIPT
Bankcard Sales
ON YOUR MARK
Many businesses accept
ATHLETIC WEAR No. 301
595 Leslie Street, Dallas, TX 75207 bankcards. Unlike a store
credit card, which is issued
Dec. 5 20 --
by a business and is used
RECEIVED FROM Casey Klein $ 212.00 only at that business, a bank-
no
Two hundred twelve and /100 DOLLARS card is issued by a bank and
honored by many businesses.
FOR On account
The most widely used bank
RECEIVED BY Michael Smith credit cards in North America
are VISA, MasterCard, and
Discover.
Figure 14–7 Receipt for
A debit card requires the entry of a personal identification number (PIN)
Cash Received from a Charge
Customer on a keypad. The advantage of both cards to a store is that it does not have
to wait to receive payment until the bank collects from the cardholder.
Both bank credit card and debit card transactions are usually recorded as
though they are cash sales. However, some companies use a separate account
for credit card sales.
Bankcard sales can be processed manually using multicopy bankcard
slips or electronically. Either way, the total bankcard sales and related sales
AS taxes are totaled and listed on the end-of-day cash register tape. Figure 14–8
YOU READ shows a cash register tape indicating the day’s bankcard sales and related
Key Point sales tax. The cash register tape is the source document to record bankcard
sales. Bankcard sales are included on the daily cash proof.
Bankcard Account
In a manual system, the business uses a special deposit slip to deposit the
The cardholder has an
bankcard and credit card slips in its checking account. There is often a three-
account with the bank,
or four-day delay before the amount is credited to the checking account.
not with the store.
This is due to the time it takes the store’s bank to collect the funds from the
various banks that issued the customers’ bankcards. In an electronic system,
bankcard and credit cards are usually transmitted in daily batches, and the
amount may be credited to the checking account of the business on the
same or the next business day. Deposits of bankcard sales slips or electronic
batch transmittal records are treated the same as cash deposits.
Bankcard Sales Other Cash Receipts
Merchants may also receive cash from infrequent transactions, such as a
bank loan or the sale of assets other than merchandise. A receipt is prepared
Dec. 15
Tape 55 to indicate the source of the cash received.
700.00 BCS Cash Discounts
42.00 ST Why Do Businesses Give Cash Discounts?
To encourage charge customers to pay promptly, some merchandisers
offer a cash discount. A cash discount , or sales discount , is the amount
a customer can deduct from the amount owed for purchased merchandise if
Sales Tax
payment is made within a certain time. A cash discount is an advantage to
Figure 14–8 Bankcard both the buyer, who receives merchandise at a reduced cost, and the seller,
Sales Tape who receives cash quickly.
394 Chapter 14 Accounting for Sales and Cash Receipts
378-413_CH14_868829.indd 394 4/6/06 5:59:00 PM
Businesses do not offer cash discounts to all customers. Some offer them
only to business customers. On Your Mark offers a cash discount to charge
customers who buy merchandise in large quantities. Its credit terms are 2/10,
n/30. These terms mean that the customer can deduct 2% of the merchan-
dise cost if it pays within 10 days of the sale date. Otherwise, the full (net)
amount is due within 30 days. A cash discount decreases the amount the
business actually receives from the sale. Let’s look at an example.
On December 3 On Your Mark sold $1,500 worth of merchandise on
account to South Branch High School Athletics. It records the transaction
as a credit to Sales and a debit to Accounts Receivable for $1,500. If South
AS
Branch pays within 10 days (by December 13), it will receive a cash discount. YOU READ
On Your Mark will receive $1,470, or the original price less the cash discount
In Your Own Words
of $30.
Cash Discount “South
Merchandise Sold Discount Rate Discount Branch High School
1.
$1,500 .02 $30 received a cash
discount.” What does
Amount Paid this mean?
Sales Slip Amount Discount Amount Within Discount Period
2.
$1,500 $30 $1,470
Cash in Bank is debited for $1,470, the amount of cash actually received.
Accounts Receivable is credited for the full $1,500 because the customer
paid for the merchandise and does not owe any more on the purchase. The
difference between $1,500 and $1,470, $30, is the discount amount. A cash
discount is recorded only when the customer pays for the merchandise
within the time stated. The discount is on the price of the merchandise
before taxes.
A separate account is used to record cash discounts taken by customers.
The $30 discount is entered in the contra revenue account Sales Discounts,
which reduces the revenue earned from sales. The normal balance of the
Sales account is a credit. The normal balance of the Sales Discounts account
is a debit.
Sales Sales Discounts
AS
Debit Credit Debit Credit YOU READ
Decrease Side Increase Side Increase Side Decrease Side It’s Not What It
Normal Balance Normal Balance Seems
Cash Receipt In a sales
Recording Cash Receipts transaction, a cash
receipt is not a source
How Do Businesses Record the Receipt of Cash?
document. In this
This section discusses recording cash from the four sources. sense the term receipt
means something that is
Charge Customer Payments received.
Let’s look at a payment from a charge customer.
Section 3 Analyzing Cash Receipt Transactions 395
378-413_CH14_868829.indd 395 4/6/06 5:59:02 PM
RECEIPT
B u s i n e s s Tr a n s a c t i o n
ON YOUR MARK
ATHLETIC WEAR No. 301
595 Leslie Street, Dallas, TX 75207
On December 5 On Your Mark received Dec. 5 20 --
$212 from Casey Klein to apply to her account, RECEIVED FROM Casey Klein $ 212.00
Receipt 301. Two hundred twelve and no/100 DOLLARS
FOR On account
RECEIVED BY Michael Smith
ANALYSIS Identify 1. The accounts
affected are
Cash in Bank, Accounts Receivable (controlling), Accounts
Receivable—Casey Klein (subsidiary).
Classify 2. Cash in Bank, Accounts Receivable (controlling), and Accounts
Receivable—Casey Klein (subsidiary) are asset accounts.
/ 3. Cash in Bank increases by $212. Accounts Receivable (controlling)
and Accounts Receivable—Casey Klein (subsidiary) decrease by $212.
DEBIT-CREDIT RULE 4. Increases to asset accounts are recorded as debits. Debit Cash in Bank
for $212.
5. Decreases to asset accounts are recorded as credits. Credit Accounts
Receivable (controlling) for $212. Also credit Accounts Receivable—
Casey Klein (subsidiary) for $212.
T ACCOUNTS 6. Cash in Bank Accounts Receivable
Debit Credit Debit Credit
212 212
Accounts Receivable
Subsidiary Ledger
Casey Klein
Debit Credit
212
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 20
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
13 5 Cash in Bank 2 1 2 00 13
14 Accts. Rec./Casey Klein 2 1 2 00 14
15 Receipt 301 15
16 16
Cash Discount Payments
When a customer pays for a purchase on account within the discount
period, the amount paid equals the invoice amount less the cash discount.
396 Chapter 14 Accounting for Sales and Cash Receipts
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RECEIPT
B u s i n e s s Tr a n s a c t i o n
ON YOUR MARK
ATHLETIC WEAR No. 302
595 Leslie Street, Dallas, TX 75207
On December 12 On Your Mark received $1,470 Dec. 12 20 --
from South Branch High School Athletics in payment RECEIVED FROM South Branch H.S. Athletics $ 1,470.00
of Sales Slip 51 for $1,500 less the discount of $30, One thousand four hundred seventy and no/100 DOLLARS
Receipt 302. FOR On account
RECEIVED BY Michael Smith
ANALYSIS Identify 1. The accounts
affected are Cash in Bank, Sales Discounts, Accounts Receivable
(controlling), and Accounts Receivable—South Branch High School
Athletics (subsidiary).
Classify 2. Cash in Bank, Accounts Receivable (controlling), and Accounts
Receivable—South Branch High School Athletics (subsidiary) are
asset accounts. Sales Discounts is a contra revenue account.
/ 3. Cash in Bank is increased by $1,470. Sales Discounts is increased by
$30. Accounts Receivable (controlling), and Accounts Receivable—
South Branch High School Athletics (subsidiary) are decreased by
$1,500.
DEBIT-CREDIT RULE 4. Increases to asset accounts are recorded as debits. Debit Cash in Bank
for $1,470. Increases to contra revenue accounts are recorded as debits.
Debit Sales Discounts for $30.
5. Decreases to asset accounts are recorded as credits. Credit Accounts
Receivable (controlling) for $1,500. Also credit Accounts Receivable—
South Branch High School Athletics (subsidiary) for $1,500.
T ACCOUNTS 6. Cash in Bank Accounts Receivable
Debit Credit Debit Credit
1,470 1,500
Accounts Receivable
Subsidiary Ledger
Sales Discounts South Branch High School Athletics
Debit Credit Debit Credit
30 1,500
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 20
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
16 12 Cash in Bank 1 4 7 0 00 16
17 Sales Discounts 3 0 00 17
18 Accts. Rec./South Br. H.S. 1 5 0 0 00 18
19 Receipt 302 19
20 20
Section 3 Analyzing Cash Receipt Transactions 397
378-413_CH14_868829.indd 397 9/12/05 3:10:30 PM
Cash Sales
As a rule, businesses journalize cash sales and make cash deposits
daily. Let’s analyze transactions relating to sale of merchandise for cash on
December 15.
B u s i n e s s Tr a n s a c t i o n Dec. 15
Tape 55
On December 15 On Your Mark had cash sales of $3,000 and collected
$180 in sales taxes, Tape 55. 3000.00 CA
180.00 ST
ANALYSIS Identify 1. The accounts affected are Cash in Bank,
Sales, and Sales Taxes Payable.
Classify 2. Cash in Bank is an asset account. Sales
is a revenue account. Sales Tax Payable
is a liability account.
/ 3. Cash in Bank is increased by $3,180. Sales is increased by $3,000.
Sales Tax Payable is increased by $180.
DEBIT-CREDIT RULE 4. Increases in asset accounts are recorded as debits. Debit Cash in Bank
for $3,180.
5. Increases in revenue and liability accounts are recorded as credits.
Credit Sales for $3,000, and Sales Tax Payable for $180.
T ACCOUNTS 6. Cash in Bank Sales
Debit Credit Debit Credit
3,180 3,000
Sales Tax Payable
Debit Credit
180
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 20
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
20 15 Cash in Bank 3 1 8 0 00 20
21 Sales 3 0 0 0 00 21
22 Sales Tax Payable 1 8 0 00 22
23 Tape 55 23
398 Chapter 14 Accounting for Sales and Cash Receipts
378-413_CH14_868829.indd 398 9/12/05 3:10:36 PM
Bankcard Sales
Let’s record sales paid by bankcard. Note the similarity to cash sales.
Dec. 15
B u s i n e s s Tr a n s a c t i o n Tape 55
On Your Mark had bankcard sales of $700 and collected $42 in related 700.00 BCS
sales taxes on December 15, Tape 55. 42.00 ST
ANALYSIS Identify 1. The accounts affected are Cash in Bank,
Sales, and Sales Tax Payable.
Classify 2. Cash in Bank is an asset account. Sales
is a revenue account. Sales Tax Payable is a liability account.
/ 3. Cash in Bank is increased by $742. Sales is increased by $700. Sales
Tax Payable is increased by $42.
DEBIT-CREDIT RULE 4. Increases in asset accounts are recorded as debits. Debit Cash in Bank
for $742.
5. Increases in revenue and liability accounts are recorded as credits.
Credit Sales for $700 and Sales Tax Payable for $42.
T ACCOUNTS 6. Cash in Bank Sales
Debit Credit Debit Credit
742 700
Sales Tax Payable
Debit Credit
42
JOURNAL ENTRY 7. 20
GENERAL JOURNAL PAGE
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
24 15 Cash in Bank 7 4 2 00 24
25 Sales 7 0 0 00 25
26 Sales Tax Payable 4 2 00 26
27 Tape 55 27
Other Cash Receipts
Occasionally a business receives cash from a transaction that does not
involve the sale of merchandise. The Sales account is not used because the
item is not a merchandise item.
Section 3 Analyzing Cash Receipt Transactions 399
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ON YOUR MARK RECEIPT
ATHLETIC WEAR No. 303
595 Leslie Street, Dallas, TX 75207
B u s i n e s s Tr a n s a c t i o n Dec. 16 20 --
RECEIVED FROM Mandy Harris $ 30.00
On December 16 On Your Mark received Thirty and no/100 DOLLARS
$30 from Mandy Harris, an office employee. She FOR calculator
purchased a calculator that the business was no RECEIVED BY Michael Smith
longer using, Receipt 303.
JOURNAL ENTRY
GENERAL JOURNAL PAGE 20
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
28 16 Cash in Bank 3 0 00 28
29 Office Equipment 3 0 00 29
30 Receipt 303 30
Figure 14–9 shows the transactions discussed in this chapter.
GENERAL JOURNAL PAGE 20
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Dec. 1 Accts. Rec./Casey Klein 2 1 2 00 2
3 Sales 2 0 0 00 3
4 Sales Tax Payable 1 2 00 4
5 Sales Slip 50 5
6 3 Accts. Rec./South Branch H.S. 1 5 0 0 00 6
7 Sales 1 5 0 0 00 7
8 Sales Slip 51 8
9 4 Sales Returns and Allowances 1 5 0 00 9
10 Sales Tax Payable 9 00 10
11 Accts. Rec./Gabriel Ramos 1 5 9 00 11
12 Credit Memorandum 124 12
13 5 Cash in Bank 2 1 2 00 13
14 Accts. Rec./Casey Klein 2 1 2 00 14
15 Receipt 301 15
16 12 Cash in Bank 1 4 7 0 00 16
17 Sales Discounts 3 0 00 17
18 Accts. Rec./South Branch H.S. 1 5 0 0 00 18
19 Receipt 302 19
20 15 Cash in Bank 3 1 8 0 00 20
21 Sales 3 0 0 0 00 21
22 Sales Tax Payable 1 8 0 00 22
23 Tape 55 23
24 15 Cash in Bank 7 4 2 00 24
25 Sales 7 0 0 00 25
26 Sales Tax Payable 4 2 00 26
27 Tape 55 27
28 16 Cash in Bank 3 0 00 28
29 Office Equipment 3 0 00 29
Figure 14–9 Sales and
30 Receipt 303 30
Cash Receipt Transactions
400 Chapter 14 Accounting for Sales and Cash Receipts
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SECTION 3 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Create a table similar to #ASH 4RANSACTION !CCOUNTS $EBITED !CCOUNTS #REDITED 3OURCE $OCUMENT
this one to analyze four
different types of cash receipt
transactions, the debit and
credit parts of each type, and
the source document for
each.
Do the Math FLOWER SALES
This graph illustrates the sales
6,000
of flowers throughout the year 5,000
Roses
for Randy’s Florist. 4,000
Carnations
Iris
1. The sale of tulips was 3,000
Tulips
highest in which month? 2,000
Lilies
2. Which type of flower sells 1,000
0
at a steady rate, regardless
January February March April May June
of the month?
Problem 14–3 Analyzing a
May 15
Source Document Tape 40
As the accounting clerk for Super Cycle Shop, you record the
1000.00 CA
business transactions. The store’s manager hands you the source
60.00 ST
document shown here. 800.00 BCS
Instructions Analyze the source document and record the 48.00 ST
necessary entries on page 17 of the general journal.
Problem 14–4 Recording Cash Receipts
Commerce Technology, a computer equipment retailer, had the following selected tran-
sactions in March.
Instructions Record each transaction on page 4 of the general journal in your working
papers.
Date Transactions
Mar. 1 Sold one modem for $130 plus $10.40 sales tax, Sales Slip 49.
5 Sold one computer monitor to Kelly Wilson on account for $300 plus $24 sales
tax, Sales Slip 55.
17 Bankcard sales totaled $750 plus $60 sales tax, Tape 65.
Section 3 Analyzing Cash Receipt Transactions 401
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CH A P T ER 14 Summary
Key Concepts
1. A service business provides a service to the public for a fee. In contrast a merchandising business
buys goods and sells them to customers for a profit.
2. Accounts used by merchandising businesses include Merchandise Inventory, Sales, Sales Tax
Payable, Sales Returns and Allowances, Sales Discounts, the Accounts Receivable controlling
account, and individual customer accounts.
The Merchandise Inventory account is an asset account used to record the value of the
merchandise in stock.
Merchandise Inventory
Debit Credit
Increase Side Decrease Side
Normal Balance
The Sales account is a revenue account used to record the sale of merchandise.
Sales
Debit Credit
Decrease Side Increase Side
Normal Balance
Most states and some cities tax the retail sale of goods. Businesses collect sales tax and record it
as a liability in the Sales Tax Payable account. Later the business sends a check to the state or
city for the sales tax collected.
Sales Tax Payable
Debit Credit
Decrease Side Increase Side
Normal Balance
The Sales Returns and Allowances account is used to record the cash refund or the credit
granted to charge customers for returned or damaged merchandise.
Sales Returns and Allowances
Debit Credit
Increase Side Decrease Side
Normal Balance
The Sales Discounts account is used to record the amount of any cash discount taken by charge
customers.
Sales Discounts
Debit Credit
Increase Side Decrease Side
Normal Balance
Accounts Receivable is a controlling account. Its balance must equal the sum of the customer
account balances in the accounts receivable subsidiary ledger.
402 Chapter 14 Summary
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Summary CHAPT E R 1 4
3. A retailer is a business that sells goods to the final user. A wholesaler sells goods to retailers.
4. The following summarizes the accounts involved in journalizing sales and cash receipts:
Cash sales:
Debit Credit
Cash in Bank Sales
Sales Tax Payable
Sales on account:
Debit Credit
Accounts Receivable— Sales
Customer’s Name Sales Tax Payable
Payment for a sale on account:
Debit Credit
Cash in Bank Accounts Receivable—Customer’s Name
Payment on account with a cash discount taken:
Debit Credit
Cash in Bank Accounts Receivable—Customer’s Name
Sales Discounts
Return of merchandise purchased on account:
Debit Credit
Sales Returns and Allowances Accounts Receivable—Customer’s Name
Sales Tax Payable
Return of merchandise purchased for cash:
Debit Credit
Sales Returns and Allowances Cash in Bank
Sales Tax Payable
Key Terms
accounts receivable credit cards (p. 384) sales allowance (p. 388)
subsidiary ledger (p. 385) credit memorandum (p. 388) sales discount (p. 394)
cash discount (p. 394) credit terms (p. 385) sales return (p. 388)
cash receipt (p. 393) inventory (p. 382) sales slip (p. 384)
cash sale (p. 393) merchandise (p. 382) sales tax (p. 385)
charge customer (p. 384) retailer (p. 380) subsidiary ledger (p. 385)
contra account (p. 389) sale on account (p. 384) wholesaler (p. 380)
controlling account (p. 386) Sales (p. 382)
Chapter 14 Summary 403
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C H A P T ER 14 Review and Activities
AFTER
YOU READ
Check Your Understanding
1. Service Business and Merchandising Business
a. Contrast a service business and a merchandising business.
b. What are the two types of merchandising businesses?
2. Sale of Merchandise
a. What accounts are posted for a sale on account?
b. How does a merchandising business act as a collection agency for the state government?
3. Retailer and Wholesaler
a. Which of the following businesses collects sales tax from customers: a wholesaler, a retailer,
or both?
b. What is the term for goods that a retailer buys from a wholesaler or a manufacturer to resell?
4. Journalizing Sales and Cash Receipts
a. Classify the following accounts: Merchandise Inventory, Sales, Sales Returns and
Allowances, Sales Discounts, and Sales Tax Payable.
b. Which accounts are affected when a business receives a payment from a charge customer
who has taken a cash discount?
Apply Key Terms
You have just hired Geoffrey
Hillman to be the accounting clerk
for the Hats Off Corporation, a
merchandiser of hats, caps, and
scarves. Geoffrey has worked as a
payroll clerk, but not in sales or
cash receipts jobs. To help him you
have offered to make note cards
with the definitions of the following
terms. Provide an example of each
term when possible.
accounts receivable credit cards sales allowance
subsidiary ledger credit memorandum sales discount
cash discount credit terms sales return
cash receipt inventory sales slip
cash sale merchandise sales tax
charge customer retailer subsidiary ledger
contra account sale on account wholesaler
controlling account Sales
404 Chapter 14 Review and Activities
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Computerized Accounting CHAPT E R 1 4
Sales and Cash Receipts
Making the Transition from a Manual to a Computerized System
Task Manual Methods Computerized Methods
Recording sales • Prepare general journal entries based on • Invoices can be created with the
transactions a sales slip or an invoice. software and posted to the general
• Post journal entries to the appropriate ledger accounts at the same time.
general ledger accounts. • New account balances are calculated
• Calculate new account balances. for you.
Recording • Prepare journal entries based on deposit • Deposits are recorded and posted to the
cash receipts slips, receipts, or cash register tapes. general ledger using the cash receipts
transactions • Post journal entries to the appropriate task item.
general ledger accounts. • General ledger accounts are updated
• Calculate new account balances. automatically.
Q&A
Peachtree Question Answer
How do I record a sale 1. From the Tasks menu, select Sales/Invoicing.
on account? 2. Enter customer ID and invoice number.
3. Click on the Apply to Sales tab.
4. Enter details of the invoice and amount, and click Save.
How do I record a 1. From the Tasks menu, select Receipts.
cash receipt from a 2. In the Cash Account list, select the bank account in which the receipt
customer on account? is to be deposited.
3. Select the Apply to Invoices tab. Then select the invoices being paid.
4. Click Save.
QuickBooks Q & A
QuickBooks Question Answer
How do I record a sale 1. From the Customers menu, select Create Invoices.
on account? 2. Enter the customer’s name, the date, and invoice number.
3. Enter the quantity and item code. QuickBooks will automatically fill in the
description, price, and amount.
4. Click Save & Close.
How do I record a 1. From the Customers menu, select Receive Payments.
cash receipt from a 2. Enter the customer’s name, the date, and the amount received.
customer on account? 3. In the Applied to section, select the invoices being paid.
4. Deposit the money either directly into a bank account or group with other
undeposited funds to deposit at a later date, and click Save & Close.
For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers.
Chapter 14 Computerized Accounting 405
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C H A P T ER 14 Problems
Complete problems using: Manual Glencoe Peachtree Complete QuickBooks
OR OR
Working Papers Accounting Software Templates
Problem 14–5 Recording Sales and
SMART GUIDE Cash Receipts
Step–by–Step Instructions: Sunset Surfwear, a California-based merchandising store, had the following
Problem 14–5 sales and cash receipt transactions for January. The partial chart of accounts
1. Select the problem set for Sunset Surfwear follows.
for Sunset Surfwear
(Prob. 14–5).
2. Rename the company
General Ledger
and set the system date. 101 Cash in Bank 401 Sales
3. Enter all sales on account 115 Accounts Receivable 405 Sales Discounts
transactions using the 215 Sales Tax Payable 410 Sales Returns and Allowances
Sales/Invoicing option
in the Tasks menu. Accounts Receivable Subsidiary Ledger
4. Process all credit ADA Adams, Martha MOU Moulder, Nate
memorandums using
the Credit Memos
HAM Hamilton, Alex WES Westwood High School Athletics
option. JUN1 Jun, Helen
5. Record all cash receipts
transactions using the
Receipts option.
Instructions Record the following transactions on page 20 of the general
6. Print a Sales Journal journal.
report and a Cash
Receipts Journal report. Date Transactions
7. Proof your work.
8. Complete the Analyze Jan. 1 Sold $300 in merchandise plus a sales tax of $18 on account to
activity. Martha Adams, Sales Slip 777.
9. End the session.
5 Sold $1,500 in merchandise on account to Westwood High
QuickBooks School Athletics, Sales Slip 778.
7 Received $400 from Alex Hamilton on account, Receipt 345.
PROBLEM GUIDE 10 Issued Credit Memorandum 102 to Martha Adams for $318
Step–by–Step Instructions: covering $300 in returned merchandise plus $18 sales tax.
Problem 14–5 15 Recorded cash sales of $800 plus $48 in sales tax, Tape 39.
1. Restore the Problem 15 Recorded bankcard sales of $900 plus $54 in sales tax,
14-5.QBB file. Tape 39.
2. Enter all sales on
account using the Create 20 Received $1,500 from Westwood High School Athletics in
Invoice options from the payment of Sales Slip 778, Receipt 346.
Customers menu. 25 Sold $1,200 in merchandise plus sales tax of $72 on account to
3. Process all credit
Helen Jun, Sales Slip 779.
memorandums using
the Create Credit 28 Granted a $106 sales allowance to Helen Jun, which includes
Memos/Refunds option $100 for damaged merchandise she kept and sales tax of $6,
from the Customers Credit Memorandum 103.
menu.
4. Record all cash receipts 30 Received $500 from a charge customer, Nate Moulder, in
using the Receive payment of his $500 account, Receipt 347.
Payments option from
the Customers menu. Analyze Calculate the sum of all the debits to the Sales Returns and
5. Print a Journal report.
6. Proof your work.
Allowances account during January.
7. Complete the Analyze
activity.
8. Back up your work.
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Problems CHAPT E R 1 4
Problem 14–6 Posting Sales and Cash Receipts
The January transactions for InBeat CD Shop are recorded on page 15 SMART GUIDE
of the general journal. Step–by–Step Instructions:
Instructions Post the transactions to the general ledger and subsidiary Problem 14–6
ledger in your working papers. 1. Select the problem set
for InBeat CD Shop
(Prob. 14–6).
GENERAL JOURNAL PAGE 15 2. Rename the company
and set the system date.
DATE DESCRIPTION
POST.
REF. DEBIT CREDIT 3. Choose General Ledger
from the Reports menu.
1 20-- 1
4. Print a General Ledger
2 Jan. 1 Cash in Bank 3 8 8 00 2 (GL) report.
3 Sales Discounts 1 2 00 3 5. Select the Accounts
4 Accts. Rec./Alicia Alvarez 4 0 0 00 4 Receivable report area.
5 Receipt 92 5
6. From the list on the
right, select and print
6 4 Accts. Rec./Dena Greenburg 7 3 5 00 6
the Customer Ledgers
7 Sales 7 0 0 00 7 report.
8 Sales Tax Payable 3 5 00 8 7. Compare each GL
9 Sales Slip 60 9 entry in your working
10 6 Cash in Bank 2 1 0 0 00 10
papers to the GL report
and Customer Ledgers
11 Sales 2 0 0 0 00 11
report.
12 Sales Tax Payable 1 0 0 00 12 8. Use the GL report to
13 Tape 32 13 complete the Analyze
14 6 Cash in Bank 3 1 5 0 00 14 activity.
15 Sales 3 0 0 0 00 15
9. End the session.
16 Sales Tax Payable 1 5 0 00 16
17 Tape 32 17
18 8 Sales Returns and Allowances 7 0 0 00 18
19 Sales Tax Payable 3 5 00 19
20 Accts. Rec./ Dena Greenburg 7 3 5 00 20
21 Credit Memorandum 15 21
22 10 Cash in Bank 1 3 5 8 00 22
23 Sales Discounts 4 2 00 23
24 Accts. Rec./Joe Montoya 1 4 0 0 00 24
25 Receipt 93 25
26 15 Accts. Rec./Alicia Alvarez 4 2 0 00 26
27 Sales 4 0 0 00 27
28 Sales Tax Payable 2 0 00 28
29 Sales Slip 61 29
30 27 Cash in Bank 1 3 6 5 00 30
31 Accts. Rec./Chelsea Wright 1 3 6 5 00 31
32 Receipt 94 32
33 33
Analyze Identify the customer with the highest balance at the end
of January.
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C H A P T ER 14 Problems
Problem 14–7 Recording Sales and
Cash Receipts
Shutterbug Cameras had the following transactions during January. The
SMART GUIDE partial chart of accounts for Shutterbug is shown here.
Step–by–Step Instructions: General Ledger
Problem 14–7 101 Cash in Bank 401 Sales
1. Select the problem set 115 Accounts Receivable 405 Sales Discounts
for Shutterbug Cameras 130 Supplies 410 Sales Returns and Allowances
(Prob. 14–7). 215 Sales Tax Payable
2. Rename the company
and set the system date. Accounts Receivable Subsidiary Ledger
3. Enter all sales on
account transactions
DIA Diaz, Arturo NAK Nakata, Yoko
using the Sales/ FAS FastForward Productions SUL Sullivan, Heather
Invoicing option.
4. Process all credit
memorandums using
Instructions Record the transactions on page 5 of the general journal in
the Credit Memos your working papers.
option.
5. Record all cash receipts
Date Transactions
using the Receipts
option. Jan. 1 Sold merchandise on account to Yoko Nakata for $250 plus a
6. Print a Sales Journal and 4% sales tax of $10, Sales Slip 90.
a Cash Receipts Journal
report. 3 Received $50 in cash from the sale of supplies to Betty’s
7. Proof your work. Make Boutique, Receipt 201.
any needed corrections. 7 Sold $300 in merchandise plus a sales tax of $12 to Arturo
8. Print a GL report to
complete the Analyze Diaz on account, Sales Slip 91.
activity. 12 Sold on account $1,500 in merchandise plus a sales tax of
9. End the session. $60 to FastForward Productions, credit terms 2/10, n/30,
Sales Slip 92.
QuickBooks 13 Issued Credit Memorandum 20 for $312 to Arturo Diaz,
PROBLEM GUIDE which includes $300 in merchandise returned by him plus
sales tax of $12.
Step–by–Step Instructions:
14 Received a check for $260 from Yoko Nakata in full payment
Problem 14–7
of his account, Receipt 202.
1. Restore the Problem
14-7.QBB file. 15 Cash sales amounted to $2,500 plus $100 in sales tax, Tape 75.
2. Enter all sales on 15 Bankcard sales were $3,000 plus $120 in sales tax, Tape 75.
account using the 21 Received a check for $1,530 from FastForward Productions
Create Invoice option.
3. Process all credit in payment of their $1,560 account balance less a cash discount
memorandums using of $30, Receipt 203.
the Create Credit 28 Granted Heather Sullivan a $104 allowance for damaged
Memos/Refunds
merchandise of $100 plus a 4% sales tax of $4, Credit
option.
4. Record all cash receipts Memorandum 21.
using the Receive
Payments option. Analyze Compute the net amount of sales tax for the month based on
5. Print a Journal report. these transactions.
6. Proof your work.
7. Print a General Ledger
report to complete the
Analyze activity.
8. Back up your work.
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Problems CHAPT E R 1 4
Problem 14–8 Recording Sales and Cash
Receipt Transactions SMART GUIDE
River’s Edge Canoe & Kayak is a merchandising business in Wyoming. The Step–by–Step Instructions:
partial chart of accounts follows: Problem 14–8
1. Select the problem
General Ledger set for River’s Edge
101 Cash in Bank 401 Sales (Prob. 14–8).
2. Rename the company
115 Accounts Receivable 405 Sales Discounts and set the system date.
135 Supplies 410 Sales Returns and Allowances 3. Enter all sales on
215 Sales Tax Payable account transactions
using the Sales/
Accounts Receivable Subsidiary Ledger Invoicing option.
ADV Adventure River Tours WILD Wildwood Resorts 4. Process all credit
DRA Drake, Paul WU Wu, Kim memorandums using
the Credit Memos
option.
Instructions Record January transactions on page 10 of the general 5. Record all cash receipts
using the Receipts
journal. option.
6. Print a Sales Journal and
Date Transactions Cash Receipts journal
report.
Jan. 1 Sold $2,000 in merchandise on account to Wildwood Resorts, 7. Proof your work.
a tax-exempt agency, credit terms 3/15, n/30, Sales Slip 103. 8. Print a GL report to
5 Granted Wildwood Resorts a $150 credit allowance for complete the Analyze
activity.
defective merchandise, Credit Memorandum 33. 9. End the session.
8 Received $485 from Adventure River Tours for $500 in
merchandise sold to it on Dec. 27 less a 3% cash discount of
$15, Receipt 96.
10 Sold $500 in merchandise plus a 5% sales tax of $25 to Paul
Drake on account, credit terms 3/15, n/30, Sales Slip 104.
12 Received a check for $1,794.50 from Wildwood Resorts on
account ($1,850 less a 3% cash discount of $55.50), Receipt 97.
15 Cash sales were $3,500 plus sales tax of $175, Tape 22.
15 Bankcard sales amounted to $4,000 plus sales tax of $200,
Tape 22.
20 Sold to Adventure River Tours $75 in supplies. Cash received
recorded on Receipt 98.
22 Granted Kim Wu $63 credit for $60 in damaged merchandise
sold to her last month and 5% sales tax of $3 on the
merchandise, Credit Memorandum 34.
25 Paul Drake sent a check for $510 in payment of his account.
The account balance was $525 ($500 in merchandise and
$25 sales tax). He took a 3% cash discount of $15 on the
merchandise, Receipt 99.
Analyze Compute the amount of cash that would have been collected
in January if customers had not taken any cash discounts.
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C H A P T ER 14 Problems
CHALLENGE Problem 14–9 Recording and Posting
PROBLEM
Sales and Cash
Receipts
SOURCE DOCUMENT Buzz Newsstand had the following transactions for the month of January.
PROBLEM
General Ledger
Problem 14–9 101 Cash in Bank 401 Sales
Use the source documents 115 Accounts Receivable 405 Sales Discounts
in your working papers to 135 Supplies 410 Sales Returns and Allowances
complete this problem.
215 Sales Tax Payable
Accounts Receivable Subsidiary Ledger
ADK Adkins, Lee NAD Nadal, Saba
SMART GUIDE JAV Java Shops Inc. ROL Rolling Hills Pharmacies
Step–by–Step Instructions:
Problem 14–9 Instructions
1. Select the problem set
for Buzz Newsstand 1. Record the transactions on page 9 of the general journal.
(Prob. 14–9). 2. Post each transaction to the appropriate general ledger and accounts
2. Rename the company
receivable subsidiary ledger accounts. A partial general ledger and
and set the system date.
3. Enter all sales on accounts receivable subsidiary ledger are included in the working
account transactions. papers. The current account balances are recorded in the accounts.
4. Process all credit
memorandums. Date Transactions
5. Record all cash receipts.
6. Print the following Jan. 1 Lee Adkins returned $200 in damaged merchandise purchased
reports: Sales Journal, on account last month, issued Credit Memorandum 10 for
Cash Receipts Journal,
Customer Ledgers, and $212 ($200 in merchandise plus 6% sales tax of $12).
General Ledger. 3 Received a check from Rolling Hills Pharmacies for $2,256.62
7. Proof your work. in payment of its account of $2,300 less a 2% cash discount of
8. Use the GL report to
complete the Analyze
$43.38, Receipt 75.
activity. 7 Gave credit to Saba Nadal for the return of $300 in merchan-
9. End the session. dise sold to him on account, plus sales tax of $18. Issued Credit
Memorandum 11 for $318.
10 Java Shops Inc. sent a check for $1471.70 in payment of
its account of $1,500 less a 2% cash discount of $28.30,
Receipt 76.
15 Cash sales were $2,500 plus $150 in sales tax, Tape 25.
15 Bankcard sales were $2,000 plus $120 in sales tax, Tape 25.
20 Janson Lee, a neighboring store, needed supplies urgently.
Sold it $40 in supplies and received cash from the sale,
Receipt 77.
25 Received a check for $636 from Lee Adkins on account,
Receipt 78.
31 Sold $3,000 in merchandise plus sales tax of $180 on account
to Rolling Hills Pharmacies, Sales Slip 114.
Analyze Calculate the net sales for January, which is Sales less Sales
Discounts and Sales Returns and Allowances.
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Winning Competitive Events CHA PTER 14
Practice your test-taking skills! The questions on this page are reprinted with permission
from national organizations:
• Future Business Leaders of America
• Business Professionals of America
Use a separate sheet of paper to record your answers.
Future Business Leaders of America
MULTIPLE CHOICE
1. If the merchandise is purchased for $1,000 on August 1, with terms of sale of 2/10,
n/30, the amount due to the vendor on August 9 is
a. $1,000.
b. $990.
c. $980.
d. $20.
2. The journal entry for a cash receipt on account is
a. debit Cash; credit Accounts Receivable.
b. debit Cash; credit Accounts Payable.
c. debit Accounts Payable; credit Cash.
d. debit Accounts Payable; credit Accounts Receivable.
3. When a customer is given a price reduction on an item (for example, a damaged
item), the bookkeeper will use which one of the following accounts?
a. Purchase Allowance
b. Purchase Discount
c. Sales Discount
d. Sales Allowance
4. To decrease the Sales Returns and Allowances account, the bookkeeper will
a. credit the account.
b. debit the account.
c. both debit and credit the account.
d. use the Purchase Returns and Allowances account.
Business Professionals of America
MULTIPLE CHOICE
5. When bankcard sales are entered in the general journal, what account is debited?
a. Bankcard Sales
b. Cash
c. Bankcard Sales Expense
d. Sales
Need More Help?
Go to glencoeaccounting.glencoe.com and
click on Student Center. Click on Winning
Competitive Events and select Chapter 14.
• Practice Questions and Test-Taking Tips
• Concept Capsules and Terminology
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C H A P T ER 14 Real-World Applications and Connections
Critical Accounting for a Merchandising Business
Thinking 1. Define merchandising business.
2. Explain how a purchase made with a store credit card is different from a
purchase made with a bank credit card.
3. A sales slip shows that $1,500 in merchandise has been sold and the sales tax
rate is 4%. Compute the cash receipt.
4. How are a bank credit card and a debit card similar? How are they different?
5. Your accounting supervisor has instructed you to verify the accuracy of the
day’s bank credit card sales and then deposit that amount into the business
checking account. Summarize what you need to do.
6. Evaluate the practice of using a contra account to record sales returns and
allowances.
CASE Merchandising Business: Videos
STUDY Felix Andersen is a film buff. His business, Video Source, specializes in foreign
titles and classic film collections. Video Source uses a manual accounting system.
Sales are recorded from cash register tapes at the end of the day. Felix is thinking
of updating to an electronic cash register that records sales information directly
into a computerized accounting system.
INSTRUCTIONS
1. Describe the benefits of converting to an electronic system.
2. Explain how an analysis of sales would help when making decisions about
what types of videos to stock.
a
mattoefr ETHICS Confidentiality
Imagine that you work as an accounting clerk for a fast-food franchise like Taco
Bell. You have access to all of the accounting records for the business.
A friend of yours has promised to hire you as an accountant when he opens his
own Mexican food restaurant. He has asked you to share information about Taco
Bell’s sales and expenses.
ETHICAL DECISION MAKING
1. What are the ethical issues? 4. How do the alternatives affect the
2. What are the alternatives? parties?
3. Who are the affected parties? 5. What would you do?
$ )) ))
Communicating
Presenting Your Case
ACCOUNTING You and your best friend, Inga Swenson, graduated from a prestigious art school.
You have a degree in art history and business management; Inga has a degree
in fine art. Inga is an award-winning weaver and creates wall hangings that are
extremely popular in your community. Together you decide to form a business
partnership. You want to open a retail store. Inga wants to sell directly to the
customers at fairs and art shows. Draft a report to Inga that explains why selling
art through a retail store is more profitable than seasonal shows and fairs.
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Real-World Applications and Connections CHAPT E R 1 4
Skills Beyond Allocating Resources
NUMBERS When you operate a business, you must constantly evaluate the effective use of
resources, including time, money, materials, space, and staff. You own Retro Café,
a late-night spot for young professionals and college students, open 11 a.m. until
midnight. Your review of the month’s financial reports reveals that the café is
showing a net loss for the third month in a row.
INSTRUCTIONS
Design a form to gather opinions on the menu, staffing, and operating hours.
What are the staffing implications if most sales occur after 3 p.m.?
INTERNATIONAL International Product Life Cycle
The international product life cycle (IPLC) theory explains how a product that is
Accounting an export eventually becomes an import. At first sales are strong when a U.S.
company sells to both U.S. and foreign consumers. Then foreign producers make
the item at a lower cost, and U.S. exports decline. Finally foreign competitors
undercut U.S. prices, and consumers buy the less expensive imported product.
INSTRUCTIONS Use a product such as a DVD player to illustrate the IPLC.
Making It
Your Budget
Personal Businesses plan ahead, estimating their revenue and expenses. It is important
for you to plan ahead and spend your money wisely. This is accomplished by
developing a budget, which is a plan for spending money.
PERSONAL FINANCE ACTIVITY Develop a weekly budget for a person your age.
Create two columns on a sheet of paper. Label one Income and the other Expenses.
List all sources of income for the week in the first column and the planned
spending in the second.
PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and
click on Student Center. Click on Making It Personal and select Chapter 14.
Analyzing Dear Fellow Stockholders Letter
Financial Public corporations publish annual reports giving financial and other information
Reports they want to make public. One item in most
annual reports is a letter from the company’s
top executive officer.
INSTRUCTIONS
Safe and Secure
Use the PETsMART Dear Fellow Stockholders letter When buying online, always use an
Internet-friendly credit card. Visit
in the PETsMART annual report in Appendix F
glencoeaccounting
to answer these questions: .glencoe.com and click
1. Name three measures of PETsMART’s 2003 on Student Center. Click on
financial results. WebQuest and select Unit 4 to
2. Would this letter influence your decision continue your Internet project.
to purchase PETsMART stock? Why or
why not?
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CH A P T ER 15 Accounting for Purchases
and Cash Payments
BEFORE
YOU READ
What You’ll Learn Predict
1. Explain the procedures for 1. What does the chapter title tell you?
processing a purchase on 2. What do you already know about this subject from personal experience?
account. 3. What have you learned about this in the earlier chapters?
2. Describe the accounts used in 4. What gaps exist in your knowledge of this subject?
the purchasing process.
3. Identify controls over cash.
4. Analyze transactions
Exploring the Real World of Business
relating to the purchase of
merchandise. ANALYZING PURCHASES
5. Record a variety of Suncoast Motion Picture Company
purchases and cash payment If you were searching for The Lord of the Rings: The Return
transactions.
of the King DVD, would you care if it was new or used? In
6. Post to the accounts payable the DVD business, used is often as good as new. Sales of
subsidiary ledger. “previously viewed” DVDs have become a huge source of
7. Define the accounting terms revenue for retailers like Suncoast Motion Picture Company,
introduced in this chapter. attracting customers by providing more choices.
Why It’s Important Suncoast Motion Picture Company purchases used DVDs
for resale. Customers either sell them to Suncoast for cash or
The purchasing process
▲
trade in older titles for new or different ones.
results in a large outflow
Suncoast stores also offer movie memorabilia like posters,
of cash.
T-shirts, and books. Movie posters and T-shirts are purchased
from various commercial printers.
What Do You Think?
If Suncoast purchased 5,000 posters from a commercial
printer on credit, which accounts do you think would
be affected?
414 Chapter 15 Accounting for Purchases and Cash Payments
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Working in the Real World
APPLYING YOUR ACCOUNTING KNOWLEDGE
Personal Connection
Have you ever gone shopping only to find 1. If you work for a retail store, does it usually
that the store is out of the item you wanted? have most of its items in stock?
The store may have had a big sale and not yet 2. If it were up to you to decide on a new item to
received new merchandise. Stores order new offer to your customers, what would it be?
items to replace the ones sold. In this chapter
you will learn about the purchasing process and Online Connection
how to record purchases of merchandise and Go to glencoeaccounting.glencoe.com and click
other items. on Student Center. Click on Working in the
Real World and select Chapter 15.
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SECTION 1 Purchasing Items Needed
by a Business
In Chapter 14 you learned that the primary source of income for a
BEFORE
YOU READ merchandising business is from the sale of its merchandise. However,
to sell merchandise, a business must first buy the items. The items you
find for sale at Wal-Mart—housewares, clothing, sporting goods, jew-
Main Idea elry—are all purchased from wholesalers and suppliers. In this chapter
Merchandising businesses
you will learn how to analyze transactions relating to the purchase of
follow an orderly process
merchandise.
for purchasing merchandise,
supplies, and equipment.
The Purchasing Process
Read to Learn… What Are the Four Stages of Purchasing?
➤ the four stages in
purchasing items for All businesses, from the corner grocery store to a giant international
a business and the corporation, are involved in the purchasing process. Retail businesses
processes and documents need shopping bags for customers, sales slips, and cash register tapes.
related to each stage. They also need to purchase supplies, equipment, and merchandise.
(p. 416) The purchase of supplies, equipment, and merchandise is divided
➤ the purpose of the into four stages:
Purchases account. • requesting needed items
(p. 419) • ordering from a supplier
Key Terms • verifying items received
purchase requisition • processing the supplier’s invoice
purchase order Let’s take a look at each of these stages.
packing slip
processing stamp Requesting Needed Items
purchases discount In a small business, the owner does all the buying. In a large busi-
discount period ness, a separate purchasing department buys items for the entire com-
Purchases account pany. When the company needs to buy equipment or supplies, or when
cost of merchandise the inventory of merchandise on hand is low, a purchase requisition is
prepared.
A purchase requisition is a written request to order a specified item
or items. Usually a purchase requisition is a prenumbered, multicopy
form. The manager of the department requesting the item(s) approves
the purchase requisition. Then the original copy of the purchase requi-
sition goes to the purchasing department or the purchasing agent. The
person making the request keeps a copy. Figure 15–1 shows the purchase
requisition form used by On Your Mark Athletic Wear.
Ordering from a Supplier
A purchase order is a written offer to a supplier to buy specified
items. Much of the information on the purchase order comes directly
416 Chapter 15 Accounting for Purchases and Cash Payments
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ON YOUR MARK ATHLETIC WEAR
Figure 15–1
PURCHASE REQUISITION Purchase Requisition
NO. 9421
FOR DEPARTMENT Shoes DATE Nov. 12, 20--
NOTIFY Vic Ventura ON DELIVERY DATE WANTED Dec. 15, 20--
QUANTITY DESCRIPTION STOCK NO.
20 Pair Soft Cushion, White 94682
10 Pair Soft Cushion, Black 94788
10 Pair Low Cut, White 94281
AS
10 Pair Low Cut, Black 94666
YOU READ
ORDER FROM Pro Runner Warehouse APPROVED BY Jennifer Mack Key Point
SHOE DEPARTMENT MANAGER
Forms Used in
Purchasing The
from the purchase requisition. Other information may be obtained from purchase requisition
the supplier’s catalog. stays inside the
Look at the purchase order prepared by On Your Mark in Figure 15–2. company. The purchase
The purchase order contains: order goes outside the
company.
1. quantity 5. supplier’s name and address
2. description 6. date needed
3. unit price 7. shipping method (optional)
4. total cost
AS
The purchase order is a prenumbered multicopy form. The original of YOU READ
the purchase order goes to the supplier. One copy goes to the department
requesting the items. The purchasing department keeps another copy. Compare and
Contrast
Purchase Requisition
ON YOUR MARK PURCHASE ORDER
and Purchase Order
ATHLETIC WEAR No. 9784
595 Leslie Street, Dallas, TX 75207 How are a purchase
requisition and a
Pro Runner Warehouse 5 Date: November 15, 20--
6
purchase order similar?
To 22009 Ben White Blvd. Date Needed: December 15, 20-- How are they different?
Austin, TX 78705
Quantity 1 Item 2 Unit Price 3 Total 4
20 pair Soft Cushion: White, #94682 $ 50.00 $ 1,000.00
10 pair Soft Cushion: Black #94788 50.00 500.00
10 pair Low Cut: White, #94281 40.00 400.00
10 pair Low Cut: Black, #94666 40.00 400.00
Total $ 2,300.00
Figure 15–2
Purchase Order
Verifying Items Received
Note that a purchase order is only an offer to buy items. Until the items
are actually received, the buyer does not know whether or not the supplier
has accepted the offer. A supplier may not be able to fill the purchase order
Section 1 Purchasing Items Needed by a Business 417
414-447_CH15_868829.indd 417 9/12/05 3:13:00 PM
because an item is out of stock or has been discontinued. The mailing of a
MATH HINTS purchase order, therefore, does not require a journal entry. A supplier accepts
Estimate by Rounding a purchase order by shipping the items requested and billing the buyer for
When you need an these items.
estimate of an answer to When a supplier ships to a buyer, the shipment includes a packing slip ,
check for reasonableness,
which is a form that lists the items included in the shipment. When a
you can use rounding as
shown: shipment arrives, the buyer immediately unpacks and checks the contents
against the quantities and items listed on the packing slip. If the shipment
4,682 5,000
14,289 14,000 contents do not agree with those listed on the packing slip, a note about
18,971 19,000 the differences is made on the packing slip. The packing slip is then sent to
the accounting department to be checked against both the purchase order
Round to the nearest
and the supplier’s bill. A buyer does not have to pay for items that it did not
thousand and add to get
an estimate of 19,000. receive, or that were damaged, or not ordered and returned to the supplier.
Because this is close to
the calculated sum of Processing the Supplier’s Invoice
18,971, the answer is When it ships to a buyer, the supplier prepares a bill called an invoice.
reasonable. It lists the credit terms; the quantity, description, unit price, and total cost
of the items shipped; the buyer’s purchase order number; and the method
of shipment.
The supplier sends the invoice directly to the buyer’s accounting depart-
ment, where it is date stamped to indicate when the invoice was received.
AS
YOU READ The accounting clerk checks each detail (item, quantity, and price) on the
invoice against the packing slip and the purchase order. This procedure veri-
Key Point fies that the buyer is billed for the quantities and items actually ordered and
Purchase Order received and that the prices are correct.
A purchase order does Once verified, the invoice is the source document for a journal entry.
not require a journal Before the invoice is recorded, a processing stamp is placed on the invoice
entry. It is only an offer to enter the following information: the date the invoice is to be paid, the
to buy. discount amount, if any, the amount to be paid, and the check number.
The first three lines on the processing stamp are completed at the time
the invoice is received. The check number is entered later, when the check
is issued.
Look at the invoice in Figure 15–3. Notice the date stamp, which
indicates when the invoice was received. The processing stamp informa-
tion is complete except for the check number, which means that the
invoice has been verified but not yet paid.
When a small business grows too large for one person to handle all
the financial responsibilities, it may adopt the voucher system to provide
internal control. A voucher is a document that serves as written autho-
rization for a cash payment. The business prepares a voucher for every
invoice received. The voucher, with invoice attached, is circulated within
the company for approval signatures. The approved voucher is authori-
zation to issue a check.
Purchases Discounts
Suppliers frequently offer charge customers a cash discount for early
payment. For the buyer this discount is called a purchases discount . A
purchases discount and cash discount are calculated in the same way.
418 Chapter 15 Accounting for Purchases and Cash Payments
414-447_CH15_868829.indd 418 9/12/05 3:13:03 PM
Figure 15–3 Invoice
INVOICE NO. 7894
--
14, 20 DATE:
DEC.
Dec. 14, 20--
REC’D ORDER NO.: 9784
On Your Mark Athletic Wear SHIPPED BY: Federal Trucking
TO 595 Leslie Street
TERMS: 2/10, n/30
Dallas, TX 75207
QTY. ITEM UNIT PRICE TOTAL
20 pair Soft Cushion: White, #94682 $ 50.00 $ 1,000.00
10 pair Soft Cushion: Black, #94788 50.00 500.00
10 pair Low Cut: White, #94281 40.00 400.00
10 pair Low Cut: Black, #94666 40.00 400.00
Total $ 2,300.00
Due Date: 12/24
Discount: $ 46.00
Net Amount: $ 2,254.00
Check No.:
AS
For example, On Your Mark purchased $2,300 of merchandise on
YOU READ
account from Pro Runner Warehouse. Figure 15–3 shows the invoice dated
December 14. The credit terms are 2/10, n/30. If On Your Mark pays for the Key Point
merchandise on or before December 24, it may deduct 2% of the value of the Discount Period
merchandise. The 10 days, called the discount period , is the time within The discount period
which an invoice must be paid if the discount is taken. If On Your Mark does is calculated from the
not pay for the merchandise within the discount period, it pays the net, or date of the invoice, not
total amount, within 30 days of the invoice date. the date the invoice is
On Your Mark can save $46 if it pays the invoice within the 10-day dis- received.
count period ending December 24. The end of the discount period can be
determined by adding 10 days to the date of the invoice (December 14
10 days December 24). The amount to be paid within the discount period
is calculated as follows:
Merchandise Purchased Discount Rate Discount
1.
$2,300 .02 $46
Amount Paid Within
Invoice Amount Discount Amount Discount Period
2.
$2,300 $46 $2,254
The Purchases Account
What Is the Purpose of the Purchases Account?
Purchases
When a business buys merchandise to sell to customers, the cost of
the merchandise is recorded in the Purchases account . The Purchases Debit Credit
account is a temporary account, classified as a cost of merchandise Increase Side Decrease Side
account. Cost of merchandise accounts contain the actual cost to the Normal Balance
business of the merchandise sold to customers.
Merchandise that is purchased for resale is a cost of doing business. There-
fore, the Purchases account follows the rules of debit and credit for expense
accounts. The Purchases account is increased by debits and decreased by
credits. The normal balance of the Purchases account is a debit.
Section 1 Purchasing Items Needed by a Business 419
414-447_CH15_868829.indd 419 9/12/05 3:13:13 PM
SECTION 1 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Create a table similar to this 3TAGE 3TAGE 4ITLE !CTIVITY $OCUMENT
one to identify the four stages
in the purchasing process, the
activity involved in each stage,
and the document used in
that stage.
Do the Math
As a new accountant for the South City School District, one of your primary duties involves
preparing purchase requisitions. For each item ordered, you compute the extensions
(quantity ordered multiplied by the cost per unit). On a separate sheet of paper, calculate
the extensions for each of the following items ordered.
Quantity Item Description Unit Price
1 Box of copy paper $34.00/box
5 Reams of art paper $12/ream
2 Globes $55/ea.
100 No. 2 pencils $.12/ea.
4 doz. Transparency markers $6.50/doz.
Problem 15–1 Analyzing a Purchase Order
Instructions Analyze the pur- PURCHASE ORDER
chase order shown here and No. 7894
answer the following questions
Westmoreland Paint and Supply Co.
in your working papers. To 1714 Peak Road
Date: November 15, 20--
Date Needed: December 1, 20--
Cleveland, OH 44109
1. What company ordered
the merchandise? Quantity Item Unit Price Total
2. What company was 4 gal. Exterior paint, white, #682 $ 20.00 $ 80.00
4 gal. Exterior paint, gray, #788 20.00 80.00
asked to supply the 6 gal. Exterior paint, brown, #281 20.00 120.00
merchandise? 6 gal. Exterior paint, beige, #66 20.00 120.00
3. What is the purchase 5 gal. Exterior paint, peach, #711 20.00 100.00
Total $ 500.00
order number?
4. When was the purchase
order prepared?
5. When is the merchandise needed?
6. How many gallons of paint were ordered?
7. How many different colors of paint were ordered?
8. What colors were ordered?
9. How much does each gallon of paint cost?
10. What is the total cost of the order?
420 Chapter 15 Accounting for Purchases and Cash Payments
414-447_CH15_868829.indd 420 9/12/05 3:13:16 PM
SECTION 2 Analyzing and Recording
Purchases on Account
Small retailers may rely on a bookkeeper or part-time accountant to
BEFORE
record purchase transactions. Large companies such as Kohl’s Department YOU READ
Store can have thousands of suppliers. They need an entire accounts pay-
able department to verify invoices and correct any discrepancies before
Main Idea
recording purchases in the accounting records.
Individual accounts payable
transactions are posted to a
Purchases of Assets on Account subsidiary ledger.
How Are the Purchases of Assets on Account Recorded?
Read to Learn…
Regardless of its type, size, or purpose, a retail business needs to ➤ how to journalize
buy supplies, equipment, and other assets. Most importantly, it buys purchases on account.
merchandise to resell. Merchandise can be bought on a cash basis or on (p. 421)
account. The business posts purchases on account in the accounts pay- ➤ how to journalize and
able subsidiary ledger. post purchases returns
and allowances. (p. 424)
The Accounts Payable Subsidiary Ledger
In Chapter 14 you learned that when a business sells to many custom-
Key Terms
accounts payable subsidiary
ers on credit, using an accounts receivable subsidiary ledger is efficient.
ledger
Likewise, a business that purchases from many suppliers on account
tickler file
finds it efficient to set up an accounts payable subsidiary ledger with
due date
an account for each supplier or creditor. These individual accounts are
purchases return
summarized in the general ledger controlling account, Accounts Pay-
purchases allowance
able. The balance of the Accounts Payable controlling account and the
debit memorandum
total of all account balances in the accounts payable subsidiary ledger
must agree after posting.
The Accounts Payable Subsidiary Ledger Form
The ledger account form in Figure 15–4 on page 422 is used for both the
accounts payable subsidiary ledger and the accounts receivable subsidiary
ledger. The ledger account form has lines for the creditor’s name and address.
A manual accounting system arranges the accounts payable subsidiary ledger
in alphabetical order with no account numbers. A computerized accounting
General Ledger
Accounts Payable—controlling account $4,500
Accounts Payable Subsidiary Ledger Controlling account
Individual Accounts Within Ledger: balance equals total
Sandals Etc. $ 900 of accounts in
Shoe Warehouse 2,100 subsidiary ledger.
Shoe Wholesale Inc. 1,000
Store Supply Shop 500
Total $4,500
Section 2 Analyzing and Recording Purchases on Account 421
414-447_CH15_868829.indd 421 9/12/05 3:13:21 PM
system assigns each creditor an
NAME
ADDRESS
account number.
POST.
The ledger account form
DATE DESCRIPTION DEBIT CREDIT BALANCE
has three amount columns. The
REF.
normal balance of an Accounts
Payable subsidiary account is a
Figure 15–4 Subsidiary credit. The Debit column for payments to creditors records decreases to the
Ledger Account Form account. The Credit column for purchases on account is for increases to it.
The Balance column shows the amount owed to the creditor.
Merchandise Purchases on Account
On Your Mark’s first purchase transaction in December involves a pur-
chase of merchandise on account. When this entry is recorded in the jour-
nal, a diagonal line in the Posting Reference column indicates that the credit
amount is posted in two places.
• First post to the Accounts Payable controlling account in the general
ledger.
• Then post to the Pro Runner Warehouse account in the accounts
payable subsidiary ledger.
After the invoice from Pro Runner Warehouse is journalized, it is put in
a tickler file , which has a folder for each day of the month. Each invoice
is placed in a folder according to its due date , the date it is to be paid. For
example, an invoice due December 24 is placed in the “24” folder.
INVOICE NO. 7894
--
EC. 14, 20 DATE: Dec. 14, 20--
RE C’D D ORDER NO.: 9784
B u s i n e s s Tr a n s a c t i o n TO
On Your Mark Athletic Wear
595 Leslie Street
SHIPPED BY:
TERMS:
Federal Trucking
2/10, n/30
Dallas, TX 75207
On December 14 On Your Mark purchased QTY. ITEM UNIT PRICE TOTAL
$ 50.00 $ 1,000.00
$2,300 in merchandise on account from Pro Runner
20 pair Soft Cushion: White, #94682
10 pair Soft Cushion: Black, #94788 50.00 500.00
Warehouse, Invoice 7894. 10 pair
10 pair
Low Cut: White, #94281
Low Cut: Black, #94666
40.00
40.00
400.00
400.00
Total $ 2,300.00
Due Date: 12/24
Discount: $ 46.00
ANALYSIS Identify 1. The accounts Net Amount: $ 2,254.00
affected are Check No.:
Purchases,
Accounts Payable (controlling), and Accounts Payable—Pro Runner
Warehouse (subsidiary).
Classify 2. Purchases is a cost of merchandise account. Accounts Payable
(controlling) and Accounts Payable—Pro Runner Warehouse
(subsidiary) are liability accounts.
/ 3. Purchases is increased by $2,300. This is the cost of the merchandise
purchased. Accounts Payable (controlling) and Accounts Payable—Pro
Runner Warehouse (subsidiary) are increased by $2,300.
DEBIT-CREDIT RULE 4. Increases to cost of merchandise accounts are recorded as debits. Debit
Purchases for $2,300.
5. Increases to liability accounts are recorded as credits. Credit Accounts
Payable (controlling) for $2,300. Also credit Accounts Payable—Pro
Runner Warehouse (subsidiary) for $2,300.
422 Chapter 15 Accounting for Purchases and Cash Payments
414-447_CH15_868829.indd 422 9/12/05 3:13:25 PM
T ACCOUNTS 6. Purchases Accounts Payable
Debit Credit Debit Credit
2,300 2,300
Accounts Payable
Subsidiary Ledger
Pro Runner Warehouse
Debit Credit
2,300
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 21
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Dec. 14 Purchases 2 3 0 0 00 2
3 Accts. Pay./Pro Runner Whs. 2 3 0 0 00 3
4 Invoice 7894 4
Other Purchases on Account
On Your Mark purchases assets other than merchandise, such as sup-
plies, computer equipment, and store equipment. The following example
illustrates the purchase of store equipment on account.
CHAMPION STORE SUPPLY 20--
INVOICE NO. 3417
C. 15,
B u s i n e s s Tr a n s a c t i o n DE DATE: Dec. 13, 20--
47249 Randall Parkway
Dallas, TX 75207 REC’D ORDER NO.: 9795
On Your Mark Athletic Wear SHIPPED BY: Federal Trucking
TO 595 Leslie Street
On December 15 On Your Mark received Invoice 3417,
TERMS: n/30
Dallas, TX 75207
dated December 13, from Champion Store Supply for store QTY. ITEM UNIT PRICE TOTAL
3 Corner Shelf Units $ 300.00 $ 900.00
equipment bought on account for $1,200, terms n/30. 1 Shirt Rack 300.00 300.00
Total $ 1,200.00
Due Date: 1/12
ANALYSIS Identify 1. The accounts affected Discount: $0.00
are Store Equipment, Net Amount: $1,200.00
Check No.:
Accounts Payable
(controlling), and
Accounts Payable—Champion Store Supply (subsidiary).
Classify 2. Store Equipment is an asset account. Accounts Payable (controlling)
and Accounts Payable—Champion Store Supply (subsidiary) are
liability accounts.
/ 3. Store Equipment is increased by $1,200. Accounts Payable
(controlling) and Accounts Payable—Champion Store Supply
(subsidiary) are increased by $1,200.
DEBIT-CREDIT RULE 4. Increases to asset accounts are recorded as debits. Debit Store
Equipment for $1,200.
5. Increases to liability accounts are recorded as credits. Credit Accounts
Payable (controlling) for $1,200. Also credit Accounts Payable—
Champion Store Supply (subsidiary) for $1,200.
Section 2 Analyzing and Recording Purchases on Account 423
414-447_CH15_868829.indd 423 9/12/05 3:13:26 PM
T ACCOUNTS 6. Store Equipment Accounts Payable
Debit Credit Debit Credit
1,200 1,200
Accounts Payable
Subsidiary Ledger
Champion Store Supply
Debit Credit
1,200
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 21
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
5 Dec. 15 Store Equipment 1 2 0 0 00 5
6 Accts. Pay./Champion Store 1 2 0 0 00 6
7 Invoice 3417 7
8 8
Purchases Returns and Allowances
How Are Purchases Returns and Allowances Recorded?
Occasionally, a business buys merchandise that, upon inspection, is unac-
ceptable. A purchases return occurs when a business returns merchandise
to the supplier for full credit. A purchases allowance occurs when a busi-
ness keeps less than satisfactory merchandise and pays a reduced price.
A debit memorandum , or debit memo, is used to notify suppliers
(creditors) of a return or to request an allowance. The “debit” in debit memo-
randum indicates that the creditor’s account will be debited, or decreased.
Figure 15–5
Figure 15–5 shows a debit memorandum prepared by On Your Mark.
Debit Memorandum
As you can see, the debit memo-
randum is prenumbered and has
DEBIT MEMORANDUM No. 51
spaces for the creditor’s name and
December 16, 20--
address and the invoice number.
Date:
Invoice No.: FL610
ON YOUR MARK The original is sent to the credi-
ATHLETIC WEAR
595 Leslie Street, Dallas, TX 75207 tor. The copy is the source docu-
ment for the journal entry.
FastLane Athletics
A debit memorandum always
To:
This day we have
35992 Fletcher Blvd. #334 debited your
Boston, MA 02206 account as follows: results in a debit (decrease) to the
Accounts Payable controlling
Quantity Item Unit Price Total
account in the general ledger and
5 pair All-Star Athletic Shoes $ 40.00 $ 200.00
to the creditor’s account in the
subsidiary ledger. The account
credited depends on whether the
debit memorandum is for mer-
chandise or another asset.
424 Chapter 15 Accounting for Purchases and Cash Payments
414-447_CH15_868829.indd 424 9/12/05 3:13:27 PM
Purchases The Purchases Returns and Allow-
AS
Debit Credit
ances account is used to record the return YOU READ
of merchandise to a supplier or to record
Increase Side Decrease Side Instant Recall
an allowance. It is classified as a contra cost
Normal Balance
of merchandise account to the Purchases Contra Account A
Purchases Returns and Allowances account. The normal balance of Pur- contra account is an
chases is a debit, so the normal balance account whose balance
Debit Credit is a decrease to another
of Purchases Returns and Allowances
Decrease Side Increase Side related account.
is a credit. This relationship is shown in
Normal Balance
these T accounts.
Recording a Purchases Returns
and Allowances Transaction
On Your Mark prepared and sent the debit memo- DEBIT MEMORANDUM No. 51
Date: December 16, 20--
randum shown in Figure 15–5. ON YOUR MARK
Invoice No.: FL610
ATHLETIC WEAR
595 Leslie Street, Dallas, TX 75207
B u s i n e s s Tr a n s a c t i o n To: FastLane Athletics
35992 Fletcher Blvd. #334
This day we have
debited your
Boston, MA 02206 account as follows:
On December 16 On Your Mark issued Debit Quantity Item Unit Price Total
Memorandum 51 for the return of $200 in merchandise 5 pair All-Star Athletic Shoes $ 40.00 $ 200.00
purchased on account from FastLane Athletics.
ANALYSIS Identify 1. The accounts affected are Accounts Payable (controlling), Accounts
Payable—FastLane Athletics (subsidiary), and Purchases Returns and
Allowances.
Classify 2. Accounts Payable (controlling) and Accounts Payable—FastLane
Athletics (subsidiary) are liability accounts. Purchases Returns and
Allowances is a contra cost of merchandise account.
/ 3. Accounts Payable (controlling) and Accounts Payable—FastLane
Athletics (subsidiary) are decreased by $200. Purchases Returns and
Allowances is increased by $200.
DEBIT-CREDIT RULE 4. Decreases to liability accounts are recorded as debits. Debit Accounts
Payable (controlling) for $200. Also debit Accounts Payable—FastLane
Athletics (subsidiary) for $200.
5. Increases to contra cost of merchandise accounts are recorded as
credits. Credit Purchases Returns and Allowances for $200.
T ACCOUNTS 6. Accounts Payable Purchases Returns and Allowances
Debit Credit Debit Credit
200 200
Accounts Payable Subsidiary Ledger
FastLane Athletics
Debit Credit
200
Section 2 Analyzing and Recording Purchases on Account 425
414-447_CH15_868829.indd 425 9/12/05 3:13:28 PM
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 21
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
8 Dec. 16 Accts. Pay./FastLane Athletics 2 0 0 00 8
9 Purchases Returns and Allow. 2 0 0 00 9
10 Debit Memorandum 51 10
11 11
Posting to the Accounts Payable
Subsidiary Ledger
In Figure 15–6 note how the transaction is posted. The $200 debit is
posted to two accounts—the Accounts Payable controlling account and
the accounts payable subsidiary ledger account, FastLane Athletics. After
it is posted to Accounts Payable, the account number 201 is entered to the
left of the diagonal in the Posting Reference column. After the amount is
posted to FastLane Athletics, a check mark (✓) is entered to the right of the
diagonal line.
GENERAL JOURNAL PAGE 21
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
Dec. 16 Accounts Payable/FastLane Athletics 201 2 0 0 00
8 ✓ 8
9 Purchases Returns and Allowances 515 2 0 0 00 9
10 Debit Memorandum 51 10
11
ACCOUNT Accounts Payable ACCOUNT NO. 201
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 6 300 00
14 G21 2 3 0 0 00 8 600 00
15 G21 1 2 0 0 00 9 800 00
16 G21 2 0 0 00 9 600 00
ACCOUNT Purchases Returns and Allowances ACCOUNT NO. 515
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 1 6 0 0 00
16 G21 2 0 0 00 1 8 0 0 00
NAME FastLane Athletics
ADDRESS 35992 Fletcher Blvd. #334, Boston, MA 02206
POST.
DATE DESCRIPTION REF. DEBIT CREDIT BALANCE
20--
Figure 15–6 Dec. 1 ✓ 1 0 0 0 00
Posting to General Ledger 16 G21 2 0 0 00 8 0 0 00
and Accounts Payable Ledger
426 Chapter 15 Accounting for Purchases and Cash Payments
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SECTION 2 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Create a flowchart like this
one and write the correct
labels in the boxes and next to
the arrows. Create the labels
from these terms: general
ledger, invoice, journal,
posted to, recorded in,
subsidiary ledger. Terms can
be used more than once.
Do the Math
Alpha Enterprises received an invoice dated May 2 for the purchase of $3,000 of merchandise.
Terms of sale are 2/10, n/30. Answer the following questions:
1. What is the due date of the invoice?
2. What is the amount of the cash discount?
3. What is the net amount to be paid?
4. If the discount period is missed, what is the last day the invoice is to be paid? How much
would be paid?
Problem 15–2 Recording Purchases Transactions
Instructions Record the following purchases transactions on page 7 of the general journal
in your working papers.
Date Transactions
Sept. 2 Purchased $900 in merchandise on account from Sunrise Novelty Supply,
Invoice SN110.
7 Issued Debit Memorandum 18 to Sunrise Novelty Supply for a $50 allowance
granted on damaged merchandise.
Problem 15–3 Analyzing a Source Document
As an accounting intern for Kaleidoscope Com-
DEBIT MEMORANDUM No. 559
ics, you perform a variety of accounting tasks. Date:
Invoice No.:
November 12, 20--
2260
The accountant hands you this debit memo.
Instructions To: Randall’s Cafe and Bookstore This day we have
debited your
1. Analyze the source document. Determine
account as follows:
Quantity Item Unit Price Total
which accounts are to be debited or credited. 1 dz Best of Dilbert $ 7.50 $ 7.50
1 dz Banzai Anime 8.50 8.50
2. Record the entry on page 15 of the general $ 16.00
journal in your working papers.
Section 2 Analyzing and Recording Purchases on Account 427
414-447_CH15_868829.indd 427 9/12/05 3:13:36 PM
Accounting Careers in Focus
ANALYST
Morgan Stanley, Teaneck, New Jersey
..
Anwar Beatty Tips from .
Q: What has helped you in your career?
ga
A: Networking. I always try to get to know people in different When reviewin
s re su me,
positions and fields and learn what they do. job candidate’ managers
h ir ing
Q: What are your day-to-day responsibilities? 53 percent of nt
first for releva
say they look ur
A: I help maintain the in-house computer systems for one of u can build yo
experience. Yo er
our business groups. I conduct systems checks, help resolve rough volunte
work history th s, an d
user issues, and carry through enhancements that allow for , internship
opportunities
greater productivity and efficiency. In addition, I’m responsible signments.
temporary as
for compiling a variety of reports and filing them with senior
management and the Securities and Exchange Commission.
Q: What is the biggest challenge you face in your job?
A: Learning aspects of the finance industry that were not part of my
coursework in school. Education should be ongoing—you must be able to pick
up new things, digest them, and apply them the next day.
Q: What advice would you give students who are interested in
becoming analysts?
A: Get involved with professional associations. They can help prepare you for your
first job. They’ll also help you build professional skills that you’ll need in the
business world. If you do your research, you’ll find that there are a great deal
more opportunities available in finance than you might realize. I never thought
I would be involved in this aspect of the business, for example.
CAREER FACTS
Nature of the Work: Work with stock traders to monitor stock positions and companies’
▲
earnings reports; interact with personnel from various financial institutions to resolve
customer queries and problems concerning stock trades.
Training or Education Needed: A bachelor’s degree in accounting or finance is preferred.
▲ ▲
Aptitudes, Abilities, and Skills: Strong communication skills, organizational skills, and
multitasking abilities.
Salary Range: $30,000 to $50,000 depending on experience, level of responsibility, and
▲
firm size.
Career Path: Start as an entry-level analyst, and then assume roles of increasing
▲
responsibility.
Thinking Critically How might you acquire the basic accounting experience you need for an
entry-level position?
428 Chapter 15 Accounting Careers in Focus
414-447_CH15_868829.indd 428 9/12/05 3:13:38 PM
SECTION 3 Analyzing and Recording
Cash Payments
If cash is the lifeblood of a business, the accounting department is its
BEFORE
heart. All cash entering or leaving a business is “pumped” through the YOU READ
accounting department at some time. If it is not, cash losses can occur.
Main Idea
Controls over Cash The accounting department
How Does a Business Manage Cash Payments? is responsible for making
Earlier chapters explained ways to guard against losses of cash the cash payments for the
receipts. For example, businesses should deposit all cash receipts in a business.
bank account. Businesses must also properly manage cash payments so Read to Learn…
that losses do not occur. The following are procedures to manage cash ➤ the procedures for
payments: managing cash payments.
• Require proper authorization of all cash payments. Support each (p. 429)
payment with an approved source document, such as an invoice. ➤ how to record the
• Write checks for all payments. Allow only authorized persons to sign different types of cash
checks. payment transactions.
• Use prenumbered checks. (p. 429)
• Retain and account for spoiled checks. Mark these checks “Void,” Key Terms
and file them in sequence. premium
FOB destination
Cash Payment Transactions FOB shipping point
bankcard fee
How Does a Merchandising Business
Make Cash Payments?
Businesses buy merchandise and other assets on account or by paying
cash. On Your Mark makes all cash payments by check. When it makes a
cash payment, the clerk records the details on the check stub. The check
AS
stub is the source document for the journal entry. Then the clerk prepares a
YOU READ
check, which an authorized person signs. Let’s look at how to record several
types of cash payment transactions that occur frequently. Instant Recall
Internal Controls One
Recording Cash Purchase of Insurance of the key purposes of
Businesses buy insurance to protect against losses from hazards such as internal controls is to
theft, fire, and flood. Insurance policies cover varying time periods, such protect cash and other
as six months or one year. The cost of insurance protection is called the assets.
premium . A premium is paid in advance at the beginning of the covered
period. Insurance paid in advance is an asset because until the insurance
protection expires, it represents a benefit to the company. The insurance
premium is recorded in the asset account, Prepaid Insurance.
Section 3 Analyzing and Recording Cash Payments 429
414-447_CH15_868829.indd 429 9/12/05 3:13:42 PM
ON YOUR MARK 1001
B u s i n e s s Tr a n s a c t i o n ATHLETIC WEAR
595 Leslie Street, Dallas, TX 75207
22-523
4210
DATE Dec. 17 20 --
On December 17 On Your Mark paid $1,500 to
PAY TO THE
ORDER OF Keystone Insurance Company $ 1,500.00
Keystone Insurance Company for the premium on a One thousand five hundred and no/100 DOLLARS
Security National Bank
six-month insurance policy, Check 1001. DALLAS, TEXAS
MEMO Michael Brown
421022523 727596 1001
ANALYSIS Identify 1. The accounts affected
are Prepaid Insurance and Cash in Bank.
Classify 2. Both Prepaid Insurance and Cash in Bank are asset accounts.
/ 3. Prepaid Insurance is increased by $1,500. Cash in Bank is decreased
by $1,500.
DEBIT-CREDIT RULE 4. Increases to asset accounts are recorded as debits. Debit Prepaid
Insurance for $1,500.
5. Decreases to asset accounts are recorded as credits. Credit Cash in
Bank for $1,500.
T ACCOUNTS 6. Prepaid Insurance Cash in Bank
Debit Credit Debit Credit
1,500 1,500
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 21
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
11 Dec. 17 Prepaid Insurance 1 5 0 0 00 11
12 Cash in Bank 1 5 0 0 00 12
13 Check 1001 13
Recording Cash Purchases of Merchandise
Usually businesses purchase merchandise on account. Sometimes a busi-
ness buys merchandise for cash. Let’s look at an example of a cash purchase
of merchandise.
ON YOUR MARK 1002
ATHLETIC WEAR 22-523
595 Leslie Street, Dallas, TX 75207 4210
B u s i n e s s Tr a n s a c t i o n PAY TO THE
DATE Dec. 19 20 --
ORDER OF FastLane Athletics $ 1,300.00
On December 19 On Your Mark purchased merchandise One thousand three hundred and no/100 DOLLARS
from FastLane Athletics for $1,300, Check 1002. Security National Bank
DALLAS, TEXAS
MEMO Michael Brown
421022523 727596 1002
ANALYSIS Identify 1. The accounts affected
are Purchases and Cash in Bank.
Classify 2. Purchases is a cost of merchandise account. Cash in Bank is an asset
account.
/ 3. Purchases is increased by $1,300. Cash in Bank is decreased by $1,300.
430 Chapter 15 Accounting for Purchases and Cash Payments
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DEBIT-CREDIT RULE 4. Increases to cost of merchandise accounts are recorded as debits. Debit
Purchases for $1,300.
5. Decreases to asset accounts are recorded as credits. Credit Cash in
Bank for $1,300.
T ACCOUNTS 6. Purchases Cash in Bank
Debit Credit Debit Credit
1,300 1,300
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 21
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
14 Dec. 19 Purchases 1 3 0 0 00 14
15 Cash in Bank 1 3 0 0 00 15
16 Check 1002 16
17 17
Recording Cash Payments
for Items Purchased on Account
An invoice received by a business is verified for items, quantities, and
prices, recorded in the journal, and filed by due date in a tickler file.
Each day, the invoices due for payment are removed from the tickler
file. Checks are prepared, signed by an authorized person, and mailed to
creditors.
The amount of the check in payment of an invoice depends on the credit
terms and the payment date. For example, On Your Mark purchased $2,300
of merchandise on account from Pro Runner Warehouse. The invoice, dated
December 14, listed credit terms of 2/10, n/30. If On Your Mark pays for the
merchandise on or before December 24, it can take a discount of $46.
When it pays the invoice on December 24, On Your Mark debits
Accounts Payable (controlling) and Accounts Payable—Pro Runner Ware-
house for the full amount of the invoice, $2,300. On Your Mark is paying for
all of the merchandise and doesn’t owe any more money on this purchase.
Cash in Bank is credited for $2,254, the
Purchases
actual amount of the check. The differ-
Debit Credit ence between $2,300 and $2,254 is the
Increase Side Decrease Side
cash discount, which is credited to the
Normal Balance Purchases Discounts account.
The Purchases Discounts account
Purchases Discounts tracks the cash discounts a business takes.
Purchases Discounts is a contra cost of
Debit Credit
merchandise account. Its balance reduces
Decrease Side Increase Side the balance of the Purchases account. Its
Normal Balance
normal balance is therefore a credit.
Section 3 Analyzing and Recording Cash Payments 431
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ON YOUR MARK 1003
B u s i n e s s Tr a n s a c t i o n ATHLETIC WEAR
595 Leslie Street, Dallas, TX 75207
22-523
4210
DATE Dec. 24 20 --
On December 24 On Your Mark paid $2,254 to Pro
PAY TO THE
ORDER OF Pro Runner Warehouse $ 2,254.00
Runner Warehouse for merchandise purchased on account, Two thousand two hundred fifty-four and no/100 DOLLARS
Security National Bank
$2,300 less a discount of $46, Check 1003. DALLAS, TEXAS
MEMO Michael Brown
421022523 727596 1003
ANALYSIS Identify 1. The accounts affected
are Accounts Payable (controlling), Accounts Payable—Pro Runner
Warehouse (subsidiary), Cash in Bank, and Purchases Discounts.
Classify 2. Accounts Payable (controlling) and Accounts Payable—Pro Runner
Warehouse (subsidiary) are liability accounts. Cash in Bank is an asset
account. Purchases Discounts is a contra cost of merchandise account.
/ 3. Accounts Payable (controlling) and Accounts Payable—Pro Runner
Warehouse (subsidiary) are decreased by $2,300. Cash in Bank is
decreased by $2,254. Purchases Discounts is increased by $46.
DEBIT-CREDIT RULE 4. Decreases to liability accounts are recorded as debits. Debit Accounts
Payable (controlling) for $2,300. Also debit Accounts Payable—Pro
Runner Warehouse (subsidiary) for $2,300.
5. Decreases to asset accounts are recorded as credits. Credit Cash in
Bank for $2,254. Increases to contra cost of merchandise accounts are
recorded as credits. Credit Purchases Discounts for $46.
T ACCOUNTS 6. Accounts Payable Cash in Bank
Debit Credit Debit Credit
2,300 2,254
Accounts Payable
Subsidiary Ledger
Pro Runner Warehouse Purchases Discounts
Debit Credit Debit Credit
2,300 46
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 21
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
17 Dec. 24 Accts. Pay./Pro Runner Ware. 2 3 0 0 00 17
18 Cash in Bank 2 2 5 4 00 18
19 Purchases Discounts 4 6 00 19
20 Check 1003 20
Other Cash Payments
When a company buys merchandise from a supplier, there is often a
charge for shipping the goods. The shipping terms determine whether the
buyer or shipper will pay the shipping charges.
432 Chapter 15 Accounting for Purchases and Cash Payments
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AS
Shipping terms are stated as either FOB destination or FOB shipping
YOU READ
point. “FOB” stands for “free on board.” FOB destination means that the
supplier pays the shipping cost to the buyer’s destination or location. When In Your Own Words
merchandise is shipped FOB shipping point , the buyer pays the shipping FOB Shipping Point In
charge from the supplier’s shipping point. your own words, explain
Terms Shipping Cost Paid By what the term FOB
FOB destination Supplier shipping point means.
FOB shipping point Buyer
A shipping charge is an additional cost of the merchandise. The Transportation In
account set up to handle shipping charges is Transportation In, which
Debit Credit
is a cost of merchandise account. Transportation In follows the rules of
debit and credit for expense accounts. Transportation In is increased by Increase Side Decrease Side
Normal Balance
debits and decreased by credits. The normal balance of Transportation
In is a debit.
Here is an example of the payment of shipping charges.
ON YOUR MARK 1004
ATHLETIC WEAR 22-523
B u s i n e s s Tr a n s a c t i o n 595 Leslie Street, Dallas, TX 75207 4210
DATE Dec. 24 20 --
PAY TO THE
ORDER OF Dara’s Delivery Service $ 275.00
On December 24 On Your Mark issued Check 1004
Two hundred seventy-five and no/100 DOLLARS
for $275 to Dara’s Delivery Service for shipping charges on Security National Bank
DALLAS, TEXAS
merchandise purchased from Sports Link Footwear. MEMO Michael Brown
421022523 727596 1004
JOURNAL ENTRY
GENERAL JOURNAL PAGE 21
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
21 Dec. 24 Transportation In 2 7 5 00 21
22 Cash in Bank 2 7 5 00 22
23 Check 1004 23
Recording Bankcard Fees
On Your Mark makes the following entry to record the bankcard fee
deducted from the business checking account. Banks charge a fee for han-
dling bankcard sales slips. This bankcard fee is usually a percentage of the
total of the amounts recorded on the bankcard sales slips processed.
B u s i n e s s Tr a n s a c t i o n
On December 31 On Your Mark records the bankcard fee of $75, December bank statement.
JOURNAL ENTRY
GENERAL JOURNAL PAGE 21
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
24 Dec. 31 Bankcard Fees Expense 7 5 00 24
25 Cash in Bank 7 5 00 25
26 December Bank Statement 26
Section 3 Analyzing and Recording Cash Payments 433
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The journal entries for all of the transactions discussed and illustrated
in this chapter are shown in Figure 15–7.
GENERAL JOURNAL PAGE 21
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Dec. 14 Purchases 2 3 0 0 00 2
3 Accounts Payable/Pro Runner Warehouse 2 3 0 0 00 3
4 Invoice 7894 4
5 15 Store Equipment 1 2 0 0 00 5
6 Accounts Payable/Champion Store Supply 1 2 0 0 00 6
7 Invoice 3417 7
8 16 Accounts Payable/FastLane Athletics 2 0 0 00 8
9 Purchases Returns & Allowances 2 0 0 00 9
10 Debit Memorandum 51 10
11 17 Prepaid Insurance 1 5 0 0 00 11
12 Cash in Bank 1 5 0 0 00 12
13 Check 1001 13
14 19 Purchases 1 3 0 0 00 14
15 Cash in Bank 1 3 0 0 00 15
16 Check 1002 16
17 24 Accounts Payable/Pro Runner Warehouse 2 3 0 0 00 17
18 Cash in Bank 2 2 5 4 00 18
19 Purchases Discounts 4 6 00 19
20 Check 1003 20
21 24 Transportation In 2 7 5 00 21
22 Cash in Bank 2 7 5 00 22
23 Check 1004 23
24 31 Bankcard Fees Expense 7 5 00 24
25 Cash in Bank 7 5 00 25
26 December Bank Statement 26
27 27
Figure 15–7 Journal Entries for December Business Transactions
434 Chapter 15 Accounting for Purchases and Cash Payments
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SECTION 3 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Create a chart similar to the
!CTION !CCOUNTS !FFECTED !CCOUNT TO #REDIT !CCOUNT TO $EBIT
one here to analyze each
cash payment transaction for
a merchandising business
discussed in the chapter.
Identify the accounts affected,
the account(s) credited, and
the account(s) debited.
Do the Math
Clara’s Designs is a crafts store with a large inventory of seasonal crafts items. As the
inventory clerk, you are to create a chart or graph to compare the cost of the items purchased
and the related shipping charges. Using the data provided, design a chart or graph that
depicts both sets of data. What conclusions can you draw from your chart or graph?
Cost of Item Shipping Charges
Holiday decorator ribbon $2,000 $200
Door wreaths and hangers 3,200 320
Potpourri 1,200 120
Styrofoam trees 4,350 435
Problem 15–4 Recording Cash Payment Transactions
Meadow Link Golf Club had the following cash payment transactions.
Instructions Record the following transactions on page 6 of the general journal in your
working papers.
Date Transactions
May 1 Purchased $10,500 in golf equipment (merchandise) from TopMax Golf
Manufacturers, Check 1150.
5 Issued Check 1151 for $325 to Franco’s Trucking for delivery charges on
merchandise bought from TopMax Golf Manufacturers.
7 Paid Lone Star Insurance Company $2,500 for the annual premium on an
insurance policy, Check 1152.
Section 3 Analyzing and Recording Cash Payments 435
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CH A P T ER 15 Summary
Key Concepts
1. Four documents are used in the purchasing process:
• The purchase requisition is a request to order goods.
• The purchase order is an offer to buy goods.
• The packing list is a list of the goods shipped.
• The invoice lists the credit terms; the quantity, description, unit price, and total cost of the
items; the buyer’s purchase order number; and the method of shipment.
2. The four accounts used in the purchasing process and their classifications are:
Purchases—cost of merchandise
Purchases Discounts—contra cost of merchandise
Purchases Returns and Allowances—contra cost of merchandise
Transportation In—cost of merchandise
3. Cash is the lifeblood of a business and must be protected from loss, waste, theft, forgery, and
embezzlement. Good internal controls include the proper management of cash payments,
requiring that they be authorized, made by check, and signed by an authorized person.
4. The Purchases account is used to record the cost of merchandise purchased during the period.
The rules of debit and credit for Purchases are the same as those for expense accounts.
Purchases
Debit Credit
Increase Side Decrease Side
Normal Balance
Suppliers may offer cash discounts to their credit customers to encourage prompt payment.
Buyers who take a cash discount record it in the Purchases Discounts account.
Purchases Discounts
Debit Credit
Decrease Side Increase Side
Normal Balance
When the buyer receives credit for returned or damaged merchandise, the amount is recorded in
the Purchases Returns and Allowances account.
Purchases Returns and Allowances
Debit Credit
Decrease Side Increase Side
Normal Balance
The shipping charges for merchandise purchased from suppliers are considered an additional
cost of merchandise. Shipping charges are debited to the Transportation In account.
Transportation In
Debit Credit
Increase Side Decrease Side
Normal Balance
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Summary CHAPT E R 1 5
5. The following summarizes the accounts involved in journalizing purchases and cash payments:
Purchase of merchandise on account:
Debit: Purchases Credit: Accounts Payable—Creditor’s Name
Other purchase on account (for example, store equipment):
Debit: Store Equipment Credit: Accounts Payable—Creditor’s Name
Return or allowance for merchandise purchased on account:
Debit: Accounts Payable— Credit: Purchases Returns
Creditor’s Name and Allowances
Cash purchase (for example, insurance coverage):
Debit: Prepaid Insurance Credit: Cash in Bank
Cash purchase of merchandise:
Debit: Purchases Credit: Cash in Bank
Payment for merchandise purchased on account (with a cash discount taken):
Debit: Accounts Payable— Credit: Cash in Bank
Creditor’s Name Purchases Discounts
Cash payment for cost of shipping merchandise:
Debit: Transportation In Credit: Cash in Bank
Bankcard Fee
Debit: Bankcard Fees Expense Credit: Cash in Bank
6. The accounts payable subsidiary ledger contains an account for each creditor. The total of the
account balances in the subsidiary ledger must match the balance of the Accounts Payable
controlling account in the general ledger. Figure 15–6 on page 426 summarizes how to post
purchases on account to the general ledger and the accounts payable subsidiary ledger.
Key Terms
accounts payable FOB destination (p. 433) Purchases account (p. 419)
subsidiary ledger (p. 421) FOB shipping point (p. 433) purchases allowance (p. 424)
bankcard fee (p. 433) packing slip (p. 418) purchases discount (p. 418)
cost of merchandise (p. 419) premium (p. 429) purchases return (p. 424)
debit memorandum (p. 424) processing stamp (p. 418) tickler file (p. 422)
discount period (p. 419) purchase order (p. 416)
due date (p. 422) purchase requisition (p. 416)
Chapter 15 Summary 437
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C H A P T ER 15 Review and Activities
AFTER
YOU READ
Check Your Understanding
1. Processing a Purchase on Account
a. List the steps in making a purchase on account.
b. Why is an invoice checked against both the purchase order and the packing slip?
2. Accounts Used in Purchasing
a. What accounts are used when a business purchases merchandise on account?
b. What type of account is Transportation In?
3. Controls over Cash
a. Why must each payment be supported by an approved source document?
b. List four procedures that a business should use to control its cash payments.
4. Merchandise Purchases
a. Which accounts are debited and credited when merchandise is purchased for cash?
b. Which accounts are debited and credited when merchandise is purchased on account?
5. Recording Purchases and Cash Payments
a. What term is used to describe the payment for insurance coverage?
b. What account is debited when insurance is purchased?
6. Accounts Payable Subsidiary Ledger
a. What is the purpose of the accounts payable subsidiary ledger?
b. Why do you post a purchase on account to two different ledgers?
Apply Key Terms
Work with a partner to pair these
terms. Discuss the relationship between
the terms. Is one the result of another? Are
they opposite? Once you agree, write out
your explanation for each pair.
accounts payable premium
subsidiary ledger processing stamp
bankcard fee purchase order
cost of merchandise purchase requisition
debit memorandum Purchases account
discount period purchases allowance
due date purchases discount
FOB destination purchases return
FOB shipping point tickler file
packing slip
438 Chapter 15 Review and Activities
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Computerized Accounting CHAPT E R 1 5
Recording Purchases and Cash Payments
Making the Transition from a Manual to a Computerized System
Task Manual Methods Computerized Methods
Recording • Prepare general journal entries and • The system automatically generates
purchase post them based on an invoice for journal entries from the invoice
transactions merchandise purchased on account or information and posts them to the
for cash. general ledger.
Recording • Write checks in payment of an invoice • The system automatically generates
cash payment or memorandum. journal entries as it prepares the check
transactions • Prepare journal entries to record the for payment.
checks and post them to the general • The system posts journal entries and
ledger. updates account balances.
• Calculate new account balances.
Q&A
Peachtree Question Answer
How do I record 1. From the Tasks menu, select Purchases/Receive Inventory.
the purchase of 2. Enter Vendor ID, Invoice No., and Date.
merchandise on 3. Select the Apply to Purchases tab.
account? 4. Enter quantity, description, general ledger account, and unit price for each item.
How do I record 1. From the Tasks menu, select Payments.
payments on account? 2. Enter the Vendor ID, Check No., Date, and Cash account number.
3. Click the Apply to Invoices tab.
4. Select the invoice to be paid.
QuickBooks Q & A
QuickBooks Question Answer
How do I record 1. From the Vendors menu, select Enter Bills.
the purchase of 2. Enter the vendor’s name, date, purchase amount, reference number, and
merchandise on memo.
account? 3. From the Items tab, select the item purchased.
4. Enter the quantity in the Qty field.
How do I record 1. From the Vendors menu, select Pay Bills.
payments on account? 2. Select the Due on or before button, and enter the due date of the bills to pay.
3. Place a check mark to the left of the vendor to be paid, and set discounts or
credits if applicable.
4. Select the Assign check no. radio button.
5. Enter the date of the transactions in the Payment Date field.
For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers.
Chapter 15 Computerized Accounting 439
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C H A P T ER 15 Problems
Complete problems using: Manual Glencoe Peachtree Complete QuickBooks Spreadsheet
Spreadshee
OR OR OR
Working Papers Accounting Software Templates Templates
Problem 15–5 Determining Due Dates and
SPREADSHEET Discount Amounts
SMART GUIDE
Sunset Surfwear frequently purchases merchandise on account. When it
Step–by–Step Instructions: receives invoices, a clerk puts a processing stamp on the invoice indicating
Problem 15–5
the due date, the amount of any discount, and the amount to be paid. The
1. Select the spreadsheet
template for Problem following invoices were received during March.
15–5. Invoice Invoice Credit Invoice
2. Enter your name and Number Date Terms Amount
the date in the spaces
provided on the 1. 24574 March 5 2/10, n/30 $3,000.00
template. 2. 530992 March 7 3/10, n/30 5,550.00
3. Complete the
spreadsheet using the
3. 211145 March 12 2/15, n/60 729.95
instructions in your 4. 45679 March 16 n/45 345.67
working papers. 5. 34120 March 23 2/10, n/30 1,526.50
4. Print the spreadsheet
and proof your work. 6. 00985 March 27 n/30 700.00
5. Complete the Analyze Instructions Prepare a form similar to the one that follows. The first
activity.
6. Save your work and invoice has been completed as an example. For each invoice do the
exit the spreadsheet following:
program.
1. Determine the due date. Assume that Sunset Surfwear always pays
invoices within the discount period.
2. Compute the discount amount, if any.
3. Compute the amount to be paid.
Invoice Invoice Credit Invoice Due Discount Amout To
Number Date Terms Amount Date Amount Be Paid
24574 Mar. 5 2/10, n/30 $3,000.00 Mar. 15 $60.00 $2,940.00
Analyze Compute how much money Sunset Surfwear will save by
taking all discounts.
440 Chapter 15 Problems
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Problems CHAPT E R 1 5
Problem 15–6 Analyzing Purchases and
Cash Payments SMART GUIDE
InBeat CD Shop had the following transactions in March. Step–by–Step Instructions:
Problem 15–6
Instructions Use the T accounts in your working papers. For each
1. Select the problem set
transaction: for InBeat CD Shop
1. Determine which accounts are affected. (Prob. 15–6).
2. Rename the company
2. Enter the debit and credit amounts in the T accounts. and set the system date.
3. Enter all of the
Date Transactions purchases on account
transactions using the
Mar. 2 Purchased merchandise on account from NightVision and
Purchases/Receive
Company, $2,000, Invoice NV-20, terms 2/10, n/30. Inventory option in the
6 Issued Check 250 for $85 to Penn Trucking Company for Tasks menu.
delivering merchandise from NightVision and Company. 4. Process all debit
memorandums using
7 Purchased $300 in supplies on account from Temple Store the Vendor Credit
Supply, Invoice 6011, terms n/30. Memos option in the
12 Issued Check 251 for $1,960 to NightVision and Company Tasks menu.
5. Record all cash
in payment of Invoice NV-20 for $2,000 less a cash discount payments using the
of $40. Payments option.
15 Paid Keystone Insurance Company $2,500 for the annual 6. Print a Purchases
Journal report, a Cash
premium on business insurance, Check 252.
Disbursements Journal,
16 Purchased $3,000 in merchandise on account from NightVision and a Vendor Ledgers
and Company, Invoice NV-45, terms 2/10, n/30. report.
18 Issued Debit Memorandum 25 for $100 to NightVision and 7. Proof your work.
8. Print a General Ledger
Company for the return of merchandise. report to complete the
20 Purchased $900 in merchandise from Dandelion Records, Analyze activity.
Check 253. 9. End the session.
22 Issued Check 254 to Temple Store Supplies for $300 for TIP: To save time entering
Invoice 6011. transactions, group them
by type and then enter the
transactions in batches.
Analyze Calculate the Purchases account balance at the end
of March.
Problem 15–7 Recording Purchases Transactions
Shutterbug Cameras, a retail merchandising store, had the following
purchases transactions in March.
Instructions In your working papers, record the transactions on page 31
of the general journal.
Date Transactions
Mar. 3 Purchased $4,500 in merchandise on account from Photo
Emporium, Invoice 1221, terms 2/10, n/30.
5 Bought $750 in supplies on account from State Street Office
Supply, Invoice 873, terms n/30. CONTINUE
Chapter 15 Problems 441
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C H A P T ER 15 Problems
Date Transactions (cont.)
Mar. 9 Returned $225 in merchandise to Photo Emporium, issued
Debit Memorandum 72.
10 Purchased $3,600 in merchandise on account from Video
SMART GUIDE Optics Inc., Invoice VO94, terms 3/15, n/45.
Step–by–Step Instructions: 15 State Street Office Supply granted a $60 credit for damaged
Problem 15–7 supplies purchased on August 5, Debit Memorandum 73.
1. Select the problem set 20 Bought $4,800 in store equipment from Digital Precision
for Shutterbug Cameras
Equipment on account, Invoice 1288, terms n/30.
(Prob. 15–7).
2. Rename the company 25 Issued Debit Memorandum 74 to Video Optics Inc. for the
and set the system date. return of $120 in merchandise.
3. Enter all of the 28 Purchased $1,800 in merchandise on account from U-Tech
purchases on account
transactions using the Products, Invoice UT66, terms n/30.
Purchases/Receive 29 Bought $270 in supplies on account from ProStudio Supply,
Inventory option in the Invoice 4574, terms n/30.
Tasks menu.
4. Process all debit
30 Returned $150 in merchandise to U-Tech Products, Debit
memorandums using Memorandum 75.
the Vendor Credit 31 Issued Debit Memorandum 76 to ProStudio Supply for the
Memos option in the return of $35 in supplies bought on March 29.
Tasks menu.
5. Print a Purchases
Journal report and a Analyze Identify the total credit amount made to the Purchases
Vendor Ledgers report. Returns and Allowances account for the month.
6. Proof your work.
7. Print a general ledger
report to complete the
Analyze activity. Problem 15–8 Recording Cash
8. End the session. Payment Transactions
Cycle Tech Bicycles had the following cash payment transactions in March.
QuickBooks Instructions In your working papers, record the transactions on page 19
PROBLEM GUIDE of the general journal.
Step–by–Step Instructions:
Date Transactions
Problem 15–7
1. Restore the Problem Mar. 1Purchased $1,800 in merchandise from Summit Bicycles,
15-7.QBB file. Check 2111.
2. Enter all purchases on 3 Issued Check 2112 for $2,450 to Spaulding Inc. in payment of
account transactions
using the Bill option the $2,500 account balance less a 2% cash discount of $50.
from the Enter Bills 7 Issued Check 2113 for $3,100 to Desert Palms Insurance
window in the Vendors Company for the annual business insurance premium.
menu.
3. Process all debit
12 Paid $175 to Viking Express for delivery of merchandise
memorandums using purchased from Schwinn Inc., FOB shipping point, Check
the Credit option from 2114.
the Enter Bills window.
17 Issued Check 2115 to Suspension Specialists for $3,880 in
4. Print a Journal report,
a Vendor Balance payment of Invoice 1492 for $4,000 less a 3% cash discount
Summary, and a General of $120.
Ledger report. 20 Received the March bank statement and recorded bankcard
5. Complete the Analyze
activity. fees of $275. CONTINUE
6. Back up your work.
442 Chapter 15 Problems
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Problems CHAPT E R 1 5
Date Transactions (cont.)
Mar. 24 Paid All-Star News $130 to run an advertisement promoting the SMART GUIDE
store, Check 2116. Step–by–Step Instructions:
28 Bought $100 in supplies and $700 in store equipment from Problem 15–8
Superior Store Equipment Inc., Check 2117 for $800. 1. Select the problem
31 Issued Check 2118 for $2,185.50 in payment of monthly wages set for Cycle Tech
of $3,000 less deductions for the following taxes: Employees’ (Prob. 15–8).
2. Rename the company
Federal Income Tax Payable, $480; Employees’ State Income and set the system date.
Tax Payable, $105; Social Security Tax Payable, $186; and 3. Record all cash
Medicare Tax Payable, $43.50. payments.
4. Print a Cash Disburse-
ments Journal and a
Analyze Determine the total decrease to the checking account for the General Journal report.
month. 5. Complete the Analyze
activity.
6. End the session.
Problem 15–9 Recording Purchases and
QuickBooks
Cash Payment Transactions
River’s Edge Canoe & Kayak had the following purchases and cash payment PROBLEM GUIDE
transactions for the month of March. Step–by–Step Instructions:
Problem 15–8
Instructions In your working papers, record the following transactions on
1. Restore the Problem
page 16 of the general journal.
15-8.QBB file.
2. Record all cash
Date Transactions payments.
3. Print a Journal report.
Mar. 1 Purchased $8,200 in merchandise on account from Trailhead 4. Complete the Analyze
Canoes, Invoice TC202, terms 2/10, n/30. activity.
5 Issued Check 887 for $98 to Santini Trucking Company for 5. Back up your work.
delivery of merchandise purchased from Trailhead Canoes.
7 Bought $230 in supplies on account from StoreMart Supply,
Invoice SM101, terms n/30. SMART GUIDE
9 Issued Check 888 to World-Wide Insurance Company for
$2,500 in payment of business insurance premium. Step–by–Step Instructions:
Problem 15–9
11 Issued Check 889 to Trailhead Canoes for $8,036 in payment of
1. Select the problem
Invoice TC202 for $8,200 less a 2% cash discount of $164. set for River’s Edge
15 Purchased $6,200 in merchandise on account from Mohican (Prob. 15–9).
Falls Kayak Wholesalers, Invoice 45332, terms 3/15, n/45. 2. Rename the company
18 Issued Debit Memorandum 67 for $25 to StoreMart Supply for and set the system date.
3. Enter all of the
damaged supplies purchased on March 7. purchases on account.
21 Paid StoreMart Supply the balance due on their account, $205 4. Process all debit
($230 less $25 credit), Check 890. memorandums.
5. Record all cash
25 Returned $200 in merchandise to Mohican Falls Kayak payments.
Wholesalers, Debit Memorandum 68. 6. Print a Purchases
28 Rollins Plumbing Service completed $120 in repair work Journal, Cash Disburse-
ments Journal, and a
(Maintenance Expense) on account, Invoice RP432. General Ledger.
7. Proof your work.
Analyze State the total debit amount to the Purchases account for 8. Complete the Analyze
the month. activity.
9. End the session.
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C H A P T ER 15 Problems
CHALLENGE Problem 15–10 Recording and
PROBLEM
Posting Purchases
SOURCE DOCUMENT and Cash Payment
PROBLEM Transactions
Problem 15–10 Buzz Newsstand’s purchases and cash payment transactions for the month
Use the source documents of March are described below.
in your working papers to Instructions In your working papers:
complete this problem.
1. Record the transactions in the general journal, page 7.
2. Post the transactions to the ledger accounts.
SMART GUIDE Date Transactions
Step–by–Step Instructions: Mar. 1 Purchased $5,600 in merchandise on account from ADC
Problem 15–10 Publishing, Invoice 785, terms 3/15, n/45.
1. Select the problem set 3 Issued Check 1400 for $735 to Pine Forest Publications in
for Buzz Newsstand payment of Invoice PFP98 for $750 less a 2% cash discount
(Prob. 15–10).
2. Rename the company of $15.
and set the system date. 5 Issued Check 1401 for $275 to Rizzo’s Trucking Company for
3. Enter all of the transportation charges.
purchases on account.
4. Process all debit
7 Issued Check 1402 for $588 to Delta Press in payment of
memorandums. Invoice DP166 for $600 less a 2% cash discount of $12.
5. Record all cash 9 American Trend Publishers granted a $100 allowance for
payments.
damaged merchandise, Debit Memorandum 33.
6. Print the following
reports: Purchases 11 Issued Check 1403 for $3,200 to Keystone Insurance Company
Journal, Cash for the annual premium for business insurance.
Disbursements Journal, 15 Issued Check 1404 for $5,432 to ADC Publishing in payment of
Vendor Ledgers, and
General Ledger. Invoice 785 for $5,600 less a 3% cash discount of $168.
7. Proof your work. 18 Bought $2,800 in merchandise on account from Delta Press,
8. Complete the Analyze Invoice DP204, terms 2/10, n/30.
activity.
9. End the session.
22 Issued Debit Memorandum 34 to Delta Press for the return
of $300 in merchandise.
28 Paid American Trend Publishers the balance due on their
account, $800, no discount, Check 1405.
30 Bought $120 in merchandise for cash from ADC Publishing,
Check 1406.
Analyze Calculate how much Buzz Newsstand saved in March by
taking cash discounts.
444 Chapter 15 Problems
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Winning Competitive Events CHA PTER 15
Practice your test-taking skills! The questions on this page are reprinted with permission
from national organizations:
• Future Business Leaders of America
• Business Professionals of America
Use a separate sheet of paper to record your answers.
Future Business Leaders of America
MULTIPLE CHOICE
1. If bankcard fees are automatically deducted from the checking account of a
business, how will the bookkeeper journalize the fee?
a. Capital account is increased by the amount of the fee.
b. Cash account is increased by the amount of the fee.
c. Bank Card Fees Expense is increased by the amount of the fee and Cash is
decreased.
d. Cash account is increased by the amount of the fee and Bank Card Fees Expense
is decreased.
2. A business transaction that involves a purchase on account is considered to be a(n)
a. cash transaction.
b. credit transaction.
c. investment of the owner.
d. expense transaction.
3. A liability resulting from the purchase of goods or services on credit is usually
recorded as
a. an account receivable.
b. an account payable.
c. a revenue.
d. a reduction of equity.
e. a net loss.
Business Professionals of America
MULTIPLE CHOICE
4. If an invoice dated September 9 and received on September 12 shows terms of 2/10
n/30, what is the last day that a discount may be taken?
a. September 11
b. September 19
c. September 22
d. October 9
5. A form prepared by the customer
showing the price deducted taken Need More Help?
by the customer for a return is a
Go to glencoeaccounting.glencoe.com and
a. Purchases Discount. click on Student Center. Click on Winning
b. Sales Return. Competitive Events and select Chapter 15.
c. Credit Memorandum. • Practice Questions and Test-Taking Tips
d. Debit Memorandum. • Concept Capsules and Terminology
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C H A P T ER 15 Real-World Applications and Connections
Critical Processing Purchases
Thinking 1. What is a purchases discount?
2. How do a purchase requisition and a purchase order differ?
3. In your job in the receiving department of a business, you are responsible for
verifying the accuracy of a shipment. What do you do?
4. How are a purchases return and a purchases allowance similar? How are they
different?
5. Explain the importance of using a purchase requisition, a purchase order, a
packing slip, and a processing stamp in the purchasing process of a business.
6. Evaluate the usefulness of subsidiary ledgers.
CASE Merchandising Business: Sportswear Store
STUDY The Sports Loft is a retail store that sells sports clothing, accessories, and
equipment. Janet Loftis wants you to design a more automated system for
ordering merchandise that will free her for other management duties.
INSTRUCTIONS
1. Identify issues involved in creating a new purchasing process. For example,
how will it identify low stock?
2. Write a one-page report suggesting a purchasing system for The Sports
Loft. Specify the information it should collect and how it would trigger
new orders. Draw a diagram if necessary. Include a description of any
forms needed.
a
mattoefr ETHICS Showing Favoritism
Manufacturers make purchases to conduct their business. Imagine that you work
in the purchasing department of a large toy manufacturer like Mattel. Your job is
to place orders for the parts used to make toy cars and trucks. One supplier, whose
prices are only slightly higher than others, has indicated that it would send free
tickets to a sports event if you order most of the parts from it.
ETHICAL DECISION MAKING
1. What are the ethical issues? 4. How do the alternatives affect the
2. What are the alternatives? parties?
3. Who are the affected parties? 5. What would you do?
$ )) ))
Communicating
A Plan for Quality
ACCOUNTING You were recently hired as an accounting clerk at The Writer’s Desk. One of your
tasks is to process the invoices to be paid. The previous clerk did not pay invoices
within the discount period and often paid them late. Write out a plan to improve
and maintain quality regarding accounts payable. Address how you will use a
ticker file to implement the plan.
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Real-World Applications and Connections CHAPT E R 1 5
Skills Beyond Monitoring and Correcting Performance of Systems
NUMBERS Identifying trends, predicting changes, finding problems, and applying solutions
are skills of a systems thinker.
ON THE JOB
Your town is hosting a big mountain bike competition. As an Action Athletics
employee, you know the event offers a chance to increase cycling gear sales. You
recommend adjusting and upgrading the cycling merchandise line for this event.
INSTRUCTIONS
1. Pair up with a student and role-play your “sales pitch” to persuade your
employer to add to the current merchandise line.
2. Using a spreadsheet program, list 10 biking accessories to include in
inventory. Make reasonable estimates for each item’s price and its sales for
the month of the bike event when about 200 cyclists will visit the store.
INTERNATIONAL Utilizing E-Procurement
When Schlumberger Oilfield Services needed supplies for its global operations, it
Accounting used an e-procurement system to connect buyers and suppliers via the Internet.
Bidders around the world can compete online for contracts in different currencies
and languages. The easy-to-use system saves Schlumberger nearly $400,000 a
month in transaction costs and has decreased its order fulfillment time.
INSTRUCTIONS Imagine that your company has manufacturing plants in both the
United States and Japan. Describe how an e-procurement system might be helpful.
Making It
Applying for a Loan
Personal You may soon apply for a loan from a financial institution to pay for your
education or to buy a vehicle. When you borrow money, you must understand
the loan’s finance charges and what the application process involves.
PERSONAL FINANCE ACTIVITY Assume that you plan to borrow $6,000 from your
bank to purchase a five-year-old automobile. What questions do you expect the
bank to ask you? What questions will you ask?
PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and
click on Student Center. Click on Making It Personal and select Chapter 15.
Analyzing Identifying Corporate Goals
Financial The information in an annual report is directed to many audiences: existing and
Reports potential stockholders; financial analysts and advisors; government regulators,
such as the Securities and Exchange Commission (SEC); employees; and creditors.
INSTRUCTIONS
Use the Dear Fellow Stockholders letter in PETsMART’s annual report in Appendix F
at the back of your textbook to complete the following.
1. List three of PETsMART’s goals for 2004 and beyond that are measurable.
2. Name PETsMART’s most powerful asset, and explain how PETsMART is
investing in this asset.
Chapter 15 Real-World Applications and Connections 447
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CH A P T ER 16 Special Journals:
Sales and Cash Receipts
BEFORE
YOU READ
What You’ll Learn Predict
1. Identify the special journals 1. What does the chapter title tell you?
and explain how they are 2. What do you already know about this subject from personal experience?
used in a merchandising 3. What have you learned about this in the earlier chapters?
business. 4. What gaps exist in your knowledge of this subject?
2. Record transactions in sales
and cash receipts journals.
3. Post from the sales and cash Exploring the Real World of Business
receipts journals to customer
accounts in the accounts ANALYZING SALES GROWTH
receivable subsidiary ledger.
4. Foot, prove, total, and rule The Sharper Image
the sales and cash receipts The Sharper Image has everything you never thought you
journals. needed. How about a robotic massage chair? A heat sensitive
5. Post column totals from foam pillow? Wireless outdoor speakers? The Sharper Image is
the sales and cash receipts known for its selection of innovative and fun lifestyle products.
journals to general ledger Founded in 1977, the company sells products in more
accounts. than 175 stores, through its primary Web site, and through
6. Prepare a schedule of a monthly catalog. The Sharper Image also sells close-out
accounts receivable. inventory through an online auction Web site.
Companies like The Sharper Image often track and try to
7. Define the accounting terms
introduced in this chapter. identify customer shopping trends. For example, over a one
year period, the company reported an increase of 22 percent in
Why It’s Important its Internet sales. Catalog sales in that period were also up by
▲
Using special journals instead 20 percent. Meanwhile, in-store sales for the same time frame
of the general journal can decreased by 1 percent.
save time and reduce errors.
What Do You Think?
How do you think data on customer shopping habits might
be used to improve overall financial performance?
448 Chapter 16 Special Journals: Sales and Cash Receipts
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Working in the Real World
APPLYING YOUR ACCOUNTING KNOWLEDGE
Personal Connection
In earlier chapters you learned about the cycle 1. In your job, do you handle cash and personal
of buying and selling merchandise. Dollars from checks? Do you handle credit card sales?
sales are used to buy merchandise, which is in 2. If a business did not accept credit cards, how
turn sold to customers. Some sales dollars come do you think this would affect overall sales?
from customers who pay cash, while others come
from sales on credit. Both types are recorded in Online Connection
the accounting records. In this chapter you will Go to glencoeaccounting.glencoe.com and click
see how special journals simplify the process of on Student Center. Click on Working in the
recording sales. Real World and select Chapter 16.
glencoeaccounting.glencoe.com 449
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SECTION 1 The Sales Journal
You have learned how to record a variety of business transactions in
BEFORE
YOU READ a general journal. A merchandising business can record all of its transac-
tions in a general journal. However, each transaction requires at least
three journal lines—one line for the debit, one line for the credit, and
Main Idea one line for the explanation. Each debit and credit is posted separately to
The sales journal is used
the general ledger. For merchandising businesses with many sales trans-
to record credit sales of
actions, such as Crate & Barrel, this would be very time consuming. To
merchandise.
improve efficiency many merchandising businesses use special journals.
Read to Learn… In this chapter and the next chapter, you will learn how to record trans-
➤ the purpose of special actions in special journals.
journals. (p. 450)
➤ how to use the sales
journal. (p. 450)
Using Special Journals
Why Are Special Journals Used?
Key Terms Special journals have amount columns that are used to record
special journals debits and credits to specific general ledger accounts. Most transactions
sales journal are recorded on one line. Special journals thus simplify the journalizing
footing and posting process. The four most commonly used special journals and
the type of transaction recorded in each journal are:
Journal Transaction
Sales journal sale of merchandise on account
Cash receipts journal receipt of cash
Purchases journal purchase of any asset on account
Cash payments journal payment of cash, including payment by check
Businesses that use special journals still need the general journal to
record transactions that cannot be entered in the special journals. Let’s first
look at the sales journal.
Journalizing and Posting
to the Sales Journal
How Do You Use the Sales Journal?
The sales journal is a special journal used to record sales of merchan-
dise on account. Figure 16–1 shows a page from the sales journal used by
On Your Mark Athletic Wear.
Like the general journal, the sales journal has a space for the page
number and columns for the date and the posting reference. There is a
separate column in which to record the sales slip number and a column
450 Chapter 16 Special Journals: Sales and Cash Receipts
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SALES JOURNAL PAGE
SALES SALES TAX ACCOUNTS
SLIP POST. SALES
DATE CUSTOMER’S ACCOUNT DEBITED PAYABLE RECEIVABLE
NO. REF. CREDIT CREDIT DEBIT
1 1
2 2
3 3
Record the amount of the merchandise sold on account
Record the amount of sales tax on the sale
Record the total amount to be received from the customer on account
Figure 16–1 Sales Journal
in which to record the name of the charge customer. There are also three
special amount columns. Figure 16–1 illustrates what is to be recorded in
each column.
ON YOUR MARK
Recording Sales of Merchandise on Account ATHLETIC WEAR
595 Leslie Street, Dallas, TX 75207
Are you ready to record a sale on account in the sales journal? It’s DATE: December 1, 20-- NO. 50
simple. Let’s look at the same transactions you analyzed in Chapter 14 SOLD
Casey Klein
3345 Spring Creek Parkway
TO
Plano, Texas 75094
for On Your Mark Athletic Wear. This time we will record transactions
CLERK CASH CHARGE TERMS
using the sales journal. B.E. ✓ n/30
UNIT
QTY. DESCRIPTION PRICE AMOUNT
1 Pair Running Shoes $ 100.00 $ 100 00
6 Pair Athletic Socks 10.00 60 00
B u s i n e s s Tr a n s a c t i o n 1 Vinyl Jacket/Pants 40.00 40 00
On December 1 On Your Mark sold merchandise on account to Casey
SUBTOTAL $ 200 00
Klein for $200 plus $12 sales tax, Sales Slip 50.
SALES TAX 12 00
TOTAL $ 212 00
JOURNAL ENTRY
SALES JOURNAL PAGE 12
SALES SALES TAX ACCOUNTS
DATE SLIP CUSTOMER’S ACCOUNT DEBITED POST. SALES PAYABLE RECEIVABLE
NO. REF. CREDIT CREDIT DEBIT
1 20-- 1
2 Dec. 1 50 Casey Klein 2 0 0 00 1 2 00 2 1 2 00 2
3 1 2 3 4 5 6 3
To record the transaction in the sales journal, journalize from left to
right by following these steps.
1. Enter the date of the sales slip in the Date column.
2. Enter the sales slip number in the Sales Slip No. column.
3. Enter the name of the customer in the Customer’s Account Debited
column.
4. Enter the total of the merchandise sold in the Sales Credit column.
(This is the amount shown in the subtotal box of the sales slip.)
5. Enter the amount of the sales tax in the Sales Tax Payable Credit
column.
6. Enter the total amount to be received from the customer in the
Accounts Receivable Debit column. (This is the amount shown in
the total box of the sales slip.)
Section 1 The Sales Journal 451
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You learned in Chapter 14 that ON YOUR MARK
businesses do not impose sales tax on ATHLETIC WEAR
595 Leslie Street, Dallas, TX 75207
the sale of merchandise to tax-exempt DATE: December 3, 20-- NO. 51
organizations. The next business trans- SOLD
South Branch High School Athletics
TO 1750 Rutgers Dr.
action involves a sale that On Your Dallas, TX 75207
CLERK CASH CHARGE TERMS
Mark makes to an organization that B.E. ✓ 2/10, n/30
UNIT
has tax-exempt status. QTY. DESCRIPTION PRICE AMOUNT
15 Baseball Uniforms $ 40.00 $ 600 00
This transaction is analyzed in the 15 Baseball Caps 20.00 300 00
same manner as the previous transac- 15 Baseball Mitts 35.00 525 00
2 Baseballs 15.00 30 00
3 Baseball Bats 15.00 45 00
B u s i n e s s Tr a n s a c t i o n
SUBTOTAL $ 1,500 00
SALES TAX 0 00
On December 3 On Your Mark sold merchandise on account to South
TOTAL $ 1,500 00
Branch High School Athletics for $1,500, Sales Slip 51.
JOURNAL ENTRY
SALES JOURNAL PAGE 12
SALES SALES TAX ACCOUNTS
DATE SLIP CUSTOMER’S ACCOUNT DEBITED POST. SALES PAYABLE RECEIVABLE
NO. REF. CREDIT CREDIT DEBIT
3 3 51 South Branch H.S. Ath. 1 5 0 0 00 1 5 0 0 00 3
4 1 2 3 4 5 4
tion—except there is no sales tax. Journalizing this transaction involves only
five steps. The first four steps are the same. There is no sales tax so the fifth
step is to enter the total amount to be received from the customer in the
Accounts Receivable Debit column.
For sales that do not include a sales tax, amounts entered in the Sales
Credit column and in the Accounts Receivable Debit column are the same.
AS Posting a Sales Journal Entry to the
YOU READ
Accounts Receivable Subsidiary Ledger
Key Point In Chapter 14 you learned about posting to the accounts receivable
Sales Journal Entry subsidiary ledger. To keep the balances of the customer accounts current,
For each line of the sales journal transactions are posted daily to the accounts receivable subsid-
sales journal, make iary ledger. Whether you use the general journal or the sales journal when
sure that the credits posting to the accounts receivable subsidiary ledger, the process is similar.
(Sales and Sales Tax Refer to Figure 16–2 and follow these steps.
Payable) equal the debit
1. Enter the date of the transaction in the Date column of the
(Accounts Receivable).
subsidiary ledger account. Use the same date as the journal entry.
2. In the Posting Reference column of the subsidiary ledger account,
enter the journal letter and the journal page number. Use the letter
S for the sales journal.
3. In the Debit column of the subsidiary ledger account, enter the total
amount to be received from the customer.
4. Compute the new balance and enter it in the Balance column. To
find the new balance, add the amount in the Debit column to the
previous balance amount.
452 Chapter 16 Special Journals: Sales and Cash Receipts
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SALES JOURNAL PAGE 12
SALES SALES TAX ACCOUNTS
SLIP POST. SALES
DATE CUSTOMER’S ACCOUNT DEBITED PAYABLE RECEIVABLE
NO. REF. CREDIT CREDIT DEBIT
1 20-- 1
2 Dec. 1 50 Casey Klein ✓ 2 0 0 00 1 2 00 2 1 2 00 2
3 5 3
NAME Casey Klein 3
1 ADDRESS 3345 Spring Creek Parkway, Plano, TX 75094 2
POST.
DATE DESCRIPTION REF. DEBIT CREDIT BALANCE
20--
Dec. 1 Balance ✓ 5 0 0 00
1 S12 2 1 2 00 7 1 2 00 4
Figure 16–2 Posting
5. Return to the sales journal and enter a check mark (✓) in the Posting
a Sales Journal Entry to
Reference column. The check mark indicates that the transaction the Accounts Receivable
has been posted to the accounts receivable subsidiary ledger. In Subsidiary Ledger
manual accounting systems, customer accounts are not numbered,
so a check mark is used in the Posting Reference column.
Completing the Sales Journal
All special journals have amount columns used to record debits and
credits to specific general ledger accounts. These amount columns simplify
posting. Instead of posting each transaction separately to the general led-
ger, only the amount column totals are posted. For the sales journal, the
column totals posted are the Sales Credit, the Sales Tax Payable Credit, and
the Accounts Receivable Debit. Therefore, only three postings are made to
the general ledger from the sales journal.
Footing, Proving, Totaling, and
Ruling the Sales Journal
AS
Before posting amounts to the general ledger, calculate and verify the
YOU READ
column totals. Refer to Figure 16–3 on page 454 for each step.
1. Draw a single rule across the three amount columns, just below the
Key Point
last transaction. Erasing a Footing
2. Foot the amount columns. A footing is a column total written in A footing can be erased
small penciled figures. A footing must be verified. It is written in to correct an error
pencil so that it can be erased if a mistake is discovered. because it is not a formal
3. On a separate sheet of paper, test for the equality of debits and entry in the accounting
records. It is an interim
credits. The total of the debit column should equal the total of the
step that is done to
two credit columns.
prove the journal.
Debit Column Credit Columns
Accounts Receivable $11,305 Sales Tax Payable $ 555
Sales 10,750
Total $11,305 Total $11,305
Section 1 The Sales Journal 453
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SALES JOURNAL PAGE 12
SALES SALES TAX ACCOUNTS
SLIP POST. SALES
DATE CUSTOMER’S ACCOUNT DEBITED PAYABLE RECEIVABLE
NO. REF. CREDIT CREDIT DEBIT
1 20-- 1
2 Dec. 1 50 Casey Klein ✓ 200 00 1 2 00 212 00 2
3 3 51 South Branch High School Athletics ✓ 1 500 00 1 500 00 3
4 5 52 Break Point Sports Club ✓ 3 500 00 210 00 3 710 00 4
5 9 53 Gabriel Ramos ✓ 300 00 18 00 318 00 5
6 10 54 Kim Wong ✓ 100 00 6 00 106 00 6
7 12 55 Robert Galvin ✓ 250 00 15 00 265 00 7
8 18 56 Joe Dimaio ✓ 400 00 24 00 424 00 8
9 20 57 Megan Sullivan ✓ 500 00 30 00 530 00 9
10 24 58 Tammy’s Fitness Club ✓ 1 000 00 60 00 1 060 00 10
11 26 59 Anita Montero ✓ 350 00 21 00 371 00 11 1
12 28 60 Shashi Rahim ✓ 200 00 12 00 212 00 12
13 30 61 Lara Young ✓ 2 450 00 147 00 2 597 00 13
2
10 7 5 0 00 5 5 5 00 11 3 0 5 00
14 31 Totals 10 7 5 0 00 5 5 5 00 11 3 0 5 00 14
15 15 6
4 5 3 7
Figure 16–3 Totaled and 4. In the Date column, on the line below the single rule, enter the date
Ruled Sales Journal
the journal is being totaled.
5. On the same line, in the Customer’s Account Debited column, enter
the word Totals.
6. Enter the column totals, in ink, just below the footings.
7. Double-rule the three amount columns. A double rule, as you know,
indicates that the totals have been verified.
After the sales journal has been footed, proved, totaled, and ruled, the
column totals are posted to the general ledger.
AS
YOU READ Posting the Total of the Sales Credit Column
Refer to Figure 16–4 as you read the procedure for posting the total of
Key Point
the Sales Credit column to the Sales account in the general ledger.
Posting from a
1. In the Date column of the Sales account in the general ledger, enter
Special Journal Post
the date from the Totals line of the sales journal.
information from left to
right across the ledger 2. Enter the sales journal letter and page number in the Posting
form. By following this Reference column. Remember that S is the letter for the sales
procedure, you will post journal.
all information from the 3. In the Credit column, enter the total from the Sales Credit column
journal entry. of the sales journal.
4. Compute the new balance and enter it in the Credit Balance
column. To determine the new balance, add the amount entered in
the Credit column to the previous balance.
5. Return to the sales journal and enter the Sales account number, in
parentheses, below the double rule in the Sales Credit column. The
number written in parentheses indicates that the column total has
been posted to the general ledger account.
454 Chapter 16 Special Journals: Sales and Cash Receipts
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SALES JOURNAL PAGE 12
SALES SALES TAX ACCOUNTS
SLIP POST. SALES
DATE CUSTOMER’S ACCOUNT DEBITED PAYABLE RECEIVABLE
NO. REF. CREDIT CREDIT DEBIT
1 20-- 1
2 Dec. 1 50 Casey Klein ✓ 2 0 0 00 1 2 00 2 1 2 00 2
13 30 61 Lara Young ✓ 2 4 5 0 00 1 4 7 00 2 5 9 7 00 13
10 7 5 0 00 5 5 5 00 11 3 0 5 00
14 31 Totals 10 7 5 0 00 5 5 5 00 11 3 0 5 00 14
15 (401) 15
16 5 16
1 3 2
ACCOUNT Sales ACCOUNT NO. 401
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 300 0 0 0 00
31 S12 10 7 5 0 00 310 7 5 0 00 4
Posting the Total of the Figure 16–4 Posting
Sales Tax Payable Credit Column the Sales Credit Total to the
General Ledger Account
The next amount to be posted is the Sales Tax Payable Credit column
total. Refer to Figure 16–5 as you read the following procedure.
1. In the Date column of the Sales Tax Payable account, enter the
date from the Totals line of the sales journal.
2. Enter the sales journal letter and page number in the Posting
Reference column. Figure 16–5 Posting the
3. In the Credit column, enter the total from the Sales Tax Payable Sales Tax Payable Credit Total
Credit column of the sales journal. to the General Ledger
SALES JOURNAL PAGE 12
SALES SALES TAX ACCOUNTS
SLIP POST. SALES
DATE CUSTOMER’S ACCOUNT DEBITED PAYABLE RECEIVABLE
NO. REF. CREDIT CREDIT DEBIT
1 20-- 1
2 Dec. 1 50 Casey Klein ✓ 2 0 0 00 1 2 00 2 1 2 00 2
13 31 61 Lara Young ✓ 2 4 5 0 00 1 4 7 00 2 5 9 7 00 13
10 7 5 0 00 5 5 5 00 11 3 0 5 00
14 31 Totals 10 7 5 0 00 5 5 5 00 11 3 0 5 00 14
15 ( 4 0 1) ( 2 2 0) 15
16 16
5
1 3 2
ACCOUNT Sales Tax Payable ACCOUNT NO. 220
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 1 3 0 0 00
4 G20 9 00 1 2 9 1 00
31 S12 5 5 5 00 1 8 4 6 00 4
Section 1 The Sales Journal 455
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4. Compute the new balance and enter it in the Credit Balance
AS
YOU READ column.
5. Return to the sales journal and enter the Sales Tax Payable account
Key Point
number, in parentheses, below the double rule in the Sales Tax
Posting a Special Payable Credit column.
Journal Column Total
Entering an account Posting the Total of the Accounts Receivable
number in parentheses
under a column total Debit Column
means that the column The last column of the sales journal to be posted is the Accounts
total has been posted to Receivable Debit column. Refer to Figure 16–6 as you read these steps.
the general ledger.
1. In the Date column of the Accounts Receivable account, enter the
date from the Totals line of the sales journal.
2. Enter the sales journal letter and page number in the Posting
Reference column.
3. In the Debit column, enter the total from the Accounts Receivable
Debit column of the sales journal.
4. Compute the new balance and enter it in the Debit Balance column.
5. Return to the sales journal and enter the Accounts Receivable
account number, in parentheses, below the double rule in the
Accounts Receivable Debit column.
SALES JOURNAL PAGE 12
SALES SALES TAX ACCOUNTS
SLIP POST. SALES
DATE CUSTOMER’S ACCOUNT DEBITED PAYABLE RECEIVABLE
NO. REF. CREDIT CREDIT DEBIT
1 20-- 1
2 Dec. 1 50 Casey Klein ✓ 2 0 0 00 1 2 00 2 1 2 00 2
13 30 61 Lara Young ✓ 2 4 5 0 00 1 4 7 00 2 5 9 7 00 13
10 7 5 0 00 5 5 5 00 11 3 0 5 00
14 31 Totals 10 7 5 0 00 5 5 5 00 11 3 0 5 00 14
15 ( 4 0 1) ( 2 2 0) ( 1 1 5) 15
16 16
5
1 2
ACCOUNT Accounts Receivable ACCOUNT NO. 115
BALANCE
DATE DESCRIPTION
POST.
REF. DEBIT CREDIT 3
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 6 2 5 9 00
4 G20 1 5 9 00 6 1 0 0 00
31 S12 11 3 0 5 00 17 4 0 5 00 4
Figure 16–6 Posting
Accounts Receivable Debit
Total to the General Ledger
456 Chapter 16 Special Journals: Sales and Cash Receipts
448-479_CH16_868829.indd 456 4/17/06 7:04:16 AM
SALES JOURNAL PAGE 12
SALES SALES TAX ACCOUNTS
SLIP POST. SALES
DATE CUSTOMER’S ACCOUNT DEBITED PAYABLE RECEIVABLE
NO. REF. CREDIT CREDIT DEBIT
16 Jan. 2 62 Casey Klein 6 0 0 00 3 6 00 6 3 6 00 16
32 23 79 Kim Wong 9 0 0 00 5 4 00 9 5 4 00 32
33 24 80 Robert Galvin 1 1 0 0 00 6 6 00 1 1 6 6 00 33
1
12 5 0 0 00 6 9 0 00 13 1 9 0 00
34 24 Carried Forward ✓ 12 5 0 0 00 6 9 0 00 13 1 9 0 00 34
35 35 5
2 3 4 10
6
SALES JOURNAL PAGE 13
SALES SALES TAX ACCOUNTS
SLIP POST. SALES
DATE CUSTOMER’S ACCOUNT DEBITED PAYABLE RECEIVABLE
NO. REF. CREDIT CREDIT DEBIT
1 20-- 1
2 Jan. 24 ✓ Brought Forward ✓ 12 5 0 0 00 6 9 0 00 13 1 9 0 00 2
3 3
7 8 9
Figure 16–7 Starting a
Proving the Sales Journal at the End of a Page New Journal Page
All special journals are totaled and proved at the end of every month.
Sometimes, however, a business has so many transactions in one month that
it is impossible to fit them all on one journal page. When this occurs, the
journal page is totaled and ruled before a new page is started.
Refer to Figure 16–7 and follow these steps to record the totals and carry
them forward to the next page. AS
YOU READ
1. Draw a single rule across the three amount columns below the last
transaction. Foot the columns and prove the equality of debits and In Your Experience
credits. Proving Accuracy
2. On the line following the last transaction, enter the date of the last How have you proved
transaction in the Date column. the accuracy of your
3. In the Customer’s Account Debited column, write Carried Forward. personal financial
4. Place a check mark (✓) in the Posting Reference column. This check documents?
mark indicates that these totals are not to be posted.
5. Enter the column totals in ink. Do not place a double rule under the
columns.
6. On the next journal page, enter the new page number.
7. On lines 1 and 2, enter the complete date (year, month, and day)
in the Date column. Use the same date as on the last line of the
previous page.
8. Place a check mark (✓) in the Sales Slip No. column and write
Brought Forward in the Customer’s Account Debited column.
9. Place a check mark (✓) in the Posting Reference column.
10. Enter the column totals from the previous page on line 2.
The journal page is now ready for the recording of the next transaction.
Section 1 The Sales Journal 457
448-479_CH16_868829.indd 457 4/17/06 7:04:17 AM
SECTION 1 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Create a table similar to 3PECIAL *OURNAL +IND OF 4RANSACTION
this one to identify the four
special journals and the kind
of transaction recorded in
each.
Do the Math
Vijay Products had the following amounts entered in the Sales Credit Column of its October
Sales Journal.
Oct. 2 $1,500
10 3,400
17 8,200
30 7,600
Assume a 3% sales tax was imposed on each sale. Answer the following questions.
1. What amount should be entered in the Sales Tax Payable Credit Column for each sale?
2. What amount should be entered in the Accounts Receivable Debit Column for each sale?
Problem 16–1 Posting Column Totals from the Sales Journal
Instructions Here are the
SALES JOURNAL PAGE 4
column totals of the sales SALES SALES TAX ACCOUNTS
SLIP CUSTOMER’S ACCOUNT DEBITED POST. SALES PAYABLE RECEIVABLE
journal for the month of DATE
NO. REF. CREDIT CREDIT DEBIT
April. In your working 1 20-- 1
2 Apr. 1 47 Amy Anderson ✓ 8 0 0 00 4 8 00 8 4 8 00 2
papers, post these totals
to the appropriate general 32 30 Totals 12 0 0 0 00 7 2 0 00 12 7 2 0 00 32
33 33
ledger accounts.
Problem 16–2 Analyzing a Source METR
Document DATE:
June 15, 20-- NO. 113
Metro Sports Distributors had this transaction that occurred M&M Consultants
SOLD 2816 Mt. Odin Drive
TO
on June 15. Williamsburg, VA 23185
CLERK CASH CHARGE TERMS
Instructions RDP ✓ 3/15, n/45
UNIT
QTY. DESCRIPTION PRICE AMOUNT
1. Analyze the sales slip shown. In your working papers, 10 Golf Bags $ 50.00 $ 500 00
2 doz. Ladies Golf Shirts 100.00/doz 200 00
record the required entry on page 3 of the sales journal.
20 Golf Caps 6.00 120 00
2. Post to the customer’s account in the accounts receivable
SUBTOTAL $ 820 00
subsidiary ledger. SALES TAX 41 00
TOTAL $ 861 00
458 Chapter 16 Special Journals: Sales and Cash Receipts
448-479_CH16_868829.indd 458 4/17/06 7:04:17 AM
SECTION 2 The Cash Receipts Journal
In Chapter 14 you learned that the three most common sources of
BEFORE
cash for a merchandising business are payments from charge customers, YOU READ
cash sales, and bankcard sales. These businesses also receive cash, but less
frequently, from the sale of other business assets.
Main Idea
Can you imagine how many checks local cable television, electric, and
The cash receipts journal is
telephone companies receive daily? They must have a streamlined cash
used to record the cash a
receipts process to record checks efficiently. In this section you will learn
business receives.
to use a cash receipts journal as an efficient way to record cash receipts.
Read to Learn…
Journalizing and Posting ➤ how to use the cash
receipts journal. (p. 459)
to the Cash Receipts Journal ➤ the purpose of the
How Do You Use the Cash Receipts Journal? schedule of accounts
receivable. (p. 466)
The cash receipts journal is a special journal used to record all cash
➤ about Internet sales.
receipt transactions. It always has a Cash in Bank Debit column since
(p. 468)
every transaction in it debits the Cash in Bank account. The number
of credit columns varies, depending on the company’s needs. On Your Key Terms
Mark’s cash receipts journal in Figure 16–8 has six amount columns cash receipts journal
plus the date, source document, account name, and posting reference schedule of accounts
columns. receivable
To keep the customer account balances current, the entries in the
Accounts Receivable Credit column are posted daily to the accounts
CASH RECEIPTS JOURNAL PAGE 13
SALES TAX ACCOUNTS SALES CASH
DOC. POST. GENERAL SALES
DATE ACCOUNT NAME PAYABLE RECEIVABLE DISCOUNTS IN BANK
NO. REF. CREDIT CREDIT CREDIT CREDIT DEBIT DEBIT
1 1
2 2
3 3
• Record credits to accounts for which
there is no special column
• Record amount of merchandise purchased
by customers using cash or bankcards
• Record amount of sales tax collected on cash or bankcard sales
• Record payments from charge customers here
• Record the amount of cash discounts taken by charge customers
• Record the amount of cash actually received in the transaction
Figure 16–8 Cash Receipts Journal
Section 2 The Cash Receipts Journal 459
448-479_CH16_868829.indd 459 4/17/06 7:04:19 AM
receivable subsidiary ledger. The entries in the General Credit column are
also posted daily to the individual general ledger accounts. At month-end
all special amount column totals are posted to the general ledger accounts
named in the column headings.
AS Recording Cash from Charge Customers
YOU READ
Follow these steps when journalizing cash receipts from charge customers.
Key Point The source document for this transaction is the receipt.
Cash Receipts Journal 1. Enter the date of the transaction in the Date column.
Entry Be sure that the 2. Enter the receipt number in the Document Number column. Write
debit and credit entries the letter R (for receipt) before the receipt number.
on each line of the cash 3. Enter the name of the customer in the Account Name column.
receipts journal are 4. Enter the decrease in the amount owed by the customer in the
equal. Accounts Receivable Credit column.
5. Enter the amount of cash received in the Cash in Bank Debit column.
ON YOUR MARK RECEIPT
B u s i n e s s Tr a n s a c t i o n ATHLETIC WEAR
595 Leslie Street, Dallas, TX 75207
No. 301
On December 5 On Your Mark received $212 Dec. 5 20 --
from Casey Klein to apply on account, Receipt 301. RECEIVED FROM Casey Klein $ 212.00
Two hundred twelve and no/100 DOLLARS
FOR On account
JOURNAL ENTRY RECEIVED BY Michael Smith
CASH RECEIPTS JOURNAL PAGE 13
GENERAL SALES SALES TAX ACCOUNTS SALES CASH
DOC. POST. PAYABLE RECEIVABLE DISCOUNTS IN BANK
DATE NO. ACCOUNT NAME REF. CREDIT CREDIT CREDIT CREDIT DEBIT DEBIT
1 20-- 1
2 Dec. 5 R301 Casey Klein 2 1 2 00 2 1 2 00 2
3 1 2 3 4 5 3
When this entry has been posted to the customer’s account in the
accounts receivable subsidiary ledger, enter a check mark (✓) in the Posting
Reference column of the cash receipts journal.
AS
YOU READ Recording Cash Received on Account,
Key Point Less a Cash Discount
Journalizing Cash Let’s use these steps to record a cash receipt transaction with a cash
Receipts When discount.
journalizing a cash
1. Enter the date of the receipt in the Date column.
receipt transaction
involving a sales discount, 2. Enter the receipt number in the Document Number column.
be sure to credit Remember to write the letter R before the receipt number.
Accounts Receivable 3. Enter the name of the customer in the Account Name column.
for the amount of the 4. In the Accounts Receivable Credit column, enter the amount of the
original sales transaction original sales transaction (the amount that was debited in the sales
less any related sales journal) less any related sales returns or allowances.
returns or allowances. 5. Enter the cash discount amount in the Sales Discounts Debit column.
6. Enter the amount of cash received in the Cash in Bank Debit column.
460 Chapter 16 Special Journals: Sales and Cash Receipts
448-479_CH16_868829.indd 460 4/17/06 7:04:20 AM
ON YOUR MARK RECEIPT
B u s i n e s s Tr a n s a c t i o n ATHLETIC WEAR
595 Leslie Street, Dallas, TX 75207
No. 302
Dec. 12 20 --
On December 12 On Your Mark received $1,470 from
RECEIVED FROM South Branch H.S. Athletics $ 1,470.00
South Branch High School Athletics in payment of Sales One thousand four hundred seventy and no/100 DOLLARS
Slip 51 for $1,500 less the discount of $30, Receipt 302. FOR On account
RECEIVED BY Michael Smith
JOURNAL ENTRY
CASH RECEIPTS JOURNAL PAGE 13
SALES TAX ACCOUNTS SALES CASH
DOC. POST. GENERAL SALES PAYABLE IN BANK
DATE ACCOUNT NAME CREDIT CREDIT RECEIVABLE DISCOUNTS
NO. REF. CREDIT CREDIT DEBIT DEBIT
3 12 R302 South Branch H.S. Ath. 1 5 0 0 00 3 0 00 1 4 7 0 00 3
4 1 2 3 4 5 6 4
Recording Cash Sales
On Your Mark records cash sales every two weeks, but many businesses
journalize cash sales and deposit cash daily. Follow these steps to enter
cash sales in the cash receipts journal. The source document is the cash
register tape.
1. Enter the date written on the cash register tape in the Date column.
2. Enter the number of the tape in the Document Number column.
Write the letter T (for tape) before the tape number.
3. Enter the words Cash Sales in the Account Name column.
4. Enter a dash in the Posting Reference column to indicate that no
entry has been posted individually to the general ledger accounts.
Cash sales amounts are posted to the general ledger as part of the
column totals at month-end.
5. Enter the amount of merchandise sold in the Sales Credit column.
6. Enter the amount of the sales taxes collected in the Sales Tax
Payable Credit column.
7. Enter the total cash received in the Cash in Bank Debit column.
Dec. 15
B u s i n e s s Tr a n s a c t i o n Tape 55
On December 15 On Your Mark records the cash sales for the first two
weeks of December, $3,000, and $180 in related sales taxes, Tape 55. 3000.00 CA
180.00 ST
JOURNAL ENTRY
CASH RECEIPTS JOURNAL PAGE 13
SALES TAX ACCOUNTS SALES CASH
DOC. POST. GENERAL SALES PAYABLE IN BANK
DATE ACCOUNT NAME CREDIT CREDIT RECEIVABLE DISCOUNTS
NO. REF. CREDIT CREDIT DEBIT DEBIT
4 15 T55 Cash Sales — 3 0 0 0 00 1 8 0 00 3 1 8 0 00 4
5 1 2 3 4 5 6 7 5
Section 2 The Cash Receipts Journal 461
448-479_CH16_868829.indd 461 4/17/06 7:04:21 AM
AS Recording Bankcard Sales
YOU READ
A business can record and deposit bankcard sales slips at any interval.
Instant Recall On Your Mark processes them every two weeks. Follow these steps to enter
Normal Credit Balances bankcard sales in the cash receipts journal. Note the similarity to recording
Sales a cash sale. The entry’s source document is the cash register tape.
Sales Tax Payable 1. Enter the date of the cash register tape in the Date column.
2. Enter the number of the tape in the Document Number column.
Remember to write the letter T before the tape number.
3. Enter the words Bankcard Sales in the Account Name column.
4. Enter a dash in the Posting Reference column. The amounts
recorded in the bankcard sales entry will be posted to the general
ledger as part of the column totals at the end of the month.
5. Enter the amount of merchandise sold in the Sales Credit column.
6. Enter the sales taxes collected in the Sales Tax Payable Credit
column.
7. Enter the total cash received in the Cash in Bank Debit column.
Dec. 15
B u s i n e s s Tr a n s a c t i o n Tape 55
On December 15 On Your Mark recorded bankcard sales of $700 for the
first two weeks of December and related sales taxes of $42, Tape 55. 700.00 BCS
42.00 ST
JOURNAL ENTRY
CASH RECEIPTS JOURNAL PAGE 13
GENERAL SALES SALES TAX ACCOUNTS SALES CASH
DOC. POST. PAYABLE RECEIVABLE DISCOUNTS IN BANK
DATE NO. ACCOUNT NAME REF. CREDIT CREDIT CREDIT CREDIT DEBIT DEBIT
5 15 T55 Bankcard Sales — 7 0 0 00 4 2 00 7 4 2 00 5
6 1 2 3 4 5 6 7 6
Recording Other Cash Receipts
Occasionally, a retail business receives cash from a transaction that does
not involve the sale of merchandise. Since the business is receiving cash,
it enters the transaction in the cash receipts journal. These are the steps to
enter the next business transaction in the cash receipts journal:
1. Enter the date of the receipt in the Date column.
AS
YOU READ 2. Enter an R and the receipt number in the Document Number
column.
Instant Recall 3. Enter Office Equipment in the Account Name column.
Normal Debit Balances 4. Enter the amount of the credit in the General Credit column. Use
Accounts Receivable the General Credit column when the credit part of the entry is to an
Sales Discounts account that does not have a special amount column.
Cash in Bank 5. Enter the amount of cash received in the Cash in Bank Debit
column.
462 Chapter 16 Special Journals: Sales and Cash Receipts
448-479_CH16_868829.indd 462 4/17/06 7:04:21 AM
B u s i n e s s Tr a n s a c t i o n ON YOUR MARK RECEIPT
ATHLETIC WEAR No. 303
On December 16 On Your Mark received $30 from 595 Leslie Street, Dallas, TX 75207
Dec. 16 20 --
Mandy Harris, an office employee. She purchased a cal-
RECEIVED FROM Mandy Harris $ 30.00
culator that the business was no longer using, Receipt 303.
Thirty and no/100 DOLLARS
FOR calculator
JOURNAL ENTRY RECEIVED BY Michael Smith
CASH RECEIPTS JOURNAL PAGE 13
SALES TAX ACCOUNTS SALES CASH
DOC. POST. GENERAL SALES PAYABLE IN BANK
DATE ACCOUNT NAME CREDIT CREDIT RECEIVABLE DISCOUNTS
NO. REF. CREDIT CREDIT DEBIT DEBIT
6 16 R303 Office Equipment 3 0 00 3 0 00 6
7 1 2 3 4 5 7
Posting to the Accounts
Receivable Subsidiary Ledger
A business posts daily from the Accounts Receivable Credit column to the
accounts receivable subsidiary ledger so that customer accounts are always
current. To post a cash receipt transaction to an account in the accounts
receivable subsidiary ledger, follow these steps. Refer to Figure 16–9.
1. Enter the date of the transaction in the Date column of the
subsidiary ledger account.
2. In the subsidiary ledger Posting Reference column, enter the journal
letters and the page number. Use CR for the cash receipts journal.
3. In the subsidiary ledger Credit column, enter the amount from the
Accounts Receivable Credit column of the cash receipts journal. Figure 16–9 Posting from
4. Compute and enter the new balance in the Balance column. If the the Cash Receipts Journal
to the Accounts Receivable
account balance is zero, draw a line through the Balance column.
Subsidiary Ledger
CASH RECEIPTS JOURNAL PAGE 13
SALES TAX ACCOUNTS SALES CASH
DOC. POST. GENERAL SALES
DATE ACCOUNT NAME PAYABLE RECEIVABLE DISCOUNTS IN BANK
NO. REF. CREDIT CREDIT CREDIT CREDIT DEBIT DEBIT
1 20-- 1
2 Dec. 5 R301 Casey Klein ✓ 2 1 2 00 2 1 2 00 2
3 5 3
NAME Casey Klein 3
1 ADDRESS 3345 Spring Creek Parkway, Plano, TX 75094 2
POST.
DATE DESCRIPTION REF. DEBIT CREDIT BALANCE
20--
Dec. 1 Balance ✓ 5 0 0 00
1 S12 2 1 2 00 7 1 2 00
5 CR13 2 1 2 00 5 0 0 00 4
Section 2 The Cash Receipts Journal 463
448-479_CH16_868829.indd 463 4/17/06 7:04:22 AM
5. Return to the cash receipts journal and enter a check mark (✓) in
AS
YOU READ the Posting Reference column.
Key Point
Posting the General Credit Column
Posting from the
A business posts daily from the General Credit column of the cash
Cash Receipts Journal
receipts journal to the appropriate accounts in the general ledger. Refer to
When posting a cash
Figure 16–10 as you read the steps for posting amounts from this column.
receipts journal entry to
the accounts receivable 1. Enter the transaction date in the general ledger account Date column.
subsidiary ledger, be 2. Enter the journal letters and page number in the Posting Reference
sure to post the amount column of the ledger account. Use CR for cash receipts journal.
recorded in the Accounts 3. In the Credit column of the ledger account, enter the amount from
Receivable Credit the General Credit column of the cash receipts journal.
column. 4. Compute and enter the new account balance in the proper
Balance column. For the Office Equipment account shown in
Figure 16–10, use the Debit Balance column. If the account balance
is zero, draw a line through the appropriate Balance column.
5. Return to the cash receipts journal and enter the general ledger
account number in the Posting Reference column.
The cash receipts journal entry for the December 16 transaction is now
posted. All transactions in the General Credit column are posted this way.
Footing, Proving, Totaling, and
Ruling the Cash Receipts Journal
Follow these steps to complete the cash receipts journal. Refer to
Figure 16–11.
1. Draw a single rule across the six amount columns, just below the
Figure 16–10 Posting
from the General Credit last transaction.
Column of the Cash Receipts 2. Foot the columns.
Journal 3. Test for the equality of debits and credits as follows.
CASH RECEIPTS JOURNAL PAGE 13
SALES TAX ACCOUNTS SALES CASH
DOC. POST. GENERAL SALES
DATE ACCOUNT NAME PAYABLE RECEIVABLE DISCOUNTS IN BANK
NO. REF. CREDIT CREDIT CREDIT CREDIT DEBIT DEBIT
1 20-- 1
2 Dec. 5 R301 Casey Klein ✓ 2 1 2 00 2 1 2 00 2
3 12 R302 South Branch H.S. Ath. ✓ 1 5 0 0 00 3 0 00 1 4 7 0 00 3
4 15 T55 Cash Sales – 3 0 0 0 00 1 8 0 00 3 1 8 0 00 4
5 15 T55 Bankcard Sales – 7 0 0 00 4 2 00 7 4 2 00 5
6 16 R303 Office Equipment 145 3 0 00 3 0 00 6
7 7
1 3 5 2
ACCOUNT Office Equipment ACCOUNT NO. 145
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 9 8 5 5 00
16 CR13 3 0 00 9 8 2 5 00 4
464 Chapter 16 Special Journals: Sales and Cash Receipts
448-479_CH16_868829.indd 464 4/17/06 7:04:22 AM
Debit Columns Credit Columns AS
Sales Discounts $ 30 General $ 30 YOU READ
Cash in Bank 17,283 Sales 9,700 In Your Own Words
Sales Tax Payable 582
What does it mean to
Accounts Receivable 7,001
“foot” the journal?
Total $ 17,313 Total $ 17,313
4. In the Date column, on the line below the single rule, enter the date
the journal is being totaled.
5. On the same line in the Account Name column, enter the word Totals.
6. Enter the column totals, in ink, just below the footings.
7. Double-rule the amount columns.
Review the completed cash receipts journal. Consider time saved by
using this special journal to record cash receipts in one location instead of on
many general journal pages. After the cash receipts journal is footed, proved,
totaled, and ruled, the column totals are posted to the general ledger.
Posting Column Totals to the General Ledger
On Your Mark uses a cash receipts journal with six amount columns.
Only five of them are posted to the general ledger. The General Credit col-
umn total is not posted. The entries in this column have already been posted
individually to the general ledger accounts. (See Figure 16–10.)
The total in each amount column is posted to the general ledger account
named in the column heading. See Figure 16–12 on page 467. The column
heading indicates whether to post the amount to the ledger account’s Debit
or Credit column. Figure 16–11 Totaled and
Ruled Cash Receipts Journal
CASH RECEIPTS JOURNAL PAGE 13
SALES TAX ACCOUNTS SALES CASH
DOC. POST. GENERAL SALES PAYABLE IN BANK
DATE ACCOUNT NAME CREDIT CREDIT RECEIVABLE DISCOUNTS
NO. REF. CREDIT CREDIT DEBIT DEBIT
1 20-- 1
2 Dec. 5 R301 Casey Klein ✓ 2 1 2 00 2 1 2 00 2
3 12 R302 South Branch H.S. Ath. ✓ 1 5 0 0 00 3 0 00 1 4 7 0 00 3
4 15 T55 Cash Sales – 3 0 0 0 00 1 8 0 00 3 1 8 0 00 4
5 15 T55 Bankcard Sales – 7 0 0 00 4 2 00 7 4 2 00 5
6 16 R303 Office Equipment 145 3 0 00 3 0 00 6
7 18 R304 Break Point Sports Club ✓ 1 0 0 0 00 1 0 0 0 00 7
8 20 R305 Anita Montero ✓ 1 0 0 00 1 0 0 00 8
9 22 R306 Gabriel Ramos ✓ 5 0 0 00 5 0 0 00 9
10 23 R307 South Branch H.S. Ath. ✓ 1 0 0 0 00 1 0 0 0 00 10
11 24 R308 Tammy’s Fitness Club ✓ 1 3 0 0 00 1 3 0 0 00 11
12 26 R309 Kim Wong ✓ 3 0 0 00 3 0 0 00 12
13 27 R310 Lara Young ✓ 2 0 0 00 2 0 0 00 13
14 27 R311 Robert Galvin ✓ 4 6 5 00 4 6 5 00 14
15 28 R312 Joe Dimaio ✓ 4 2 4 00 4 2 4 00 15
16 31 T56 Cash Sales – 5 0 0 0 00 3 0 0 00 5 3 0 0 00 16
1
17 31 T56 Bankcard Sales – 1 0 0 0 00 6000 1 0 6 000 17
3 0 00 97 0 0 0 0 5 8 2 00 70 0 1 0 0 3 0 00 17 2 8 30 0 2
18 31 Totals 3 0 00 9 7 0 0 00 5 8 2 00 7 0 0 1 00 3 0 00 17 2 8 3 00 18
19 (✓) 19 6
4 5 3 7
Section 2 The Cash Receipts Journal 465
448-479_CH16_868829.indd 465 4/17/06 7:04:22 AM
Refer to Figure 16–12 on page 467 and follow these steps to post column
CULTURAL totals to the general ledger.
Diversity 1. Place a check mark in parentheses under the General Credit column
Misinterpreting total to indicate that this total is not posted.
Gestures Gestures 2. Post the Sales total to the Sales account Credit column.
that are common 3. Post the Sales Tax Payable total to the Sales Tax Payable account
in the United States Credit column.
can be offensive to 4. Post the Accounts Receivable total to the Accounts Receivable
other cultures. For controlling account Credit column.
example, the okay 5. Post the Sales Discounts total to the Sales Discounts account Debit
symbol (the thumb
column.
and forefinger making
6. Post the Cash in Bank total to the Cash in Bank account Debit
a circle) is considered
column.
rude in parts of South
America and Eastern 7. Compute new balances for each general ledger account.
Europe. 8. Write each account number in parentheses below the double rule in
the cash receipts journal.
Using the Schedule
of Accounts Receivable
What Is a Schedule of Accounts Receivable?
Accountants prepare a schedule for each subsidiary ledger to determine
whether the subsidiary ledger’s sum equals the controlling account’s ending
balance.
AS
YOU READ Proving the Accounts Receivable
It’s Not What It Subsidiary Ledger
Seems To prove the accounts receivable subsidiary ledger, accountants prepare
Schedule You might a schedule of accounts receivable that lists each charge customer, the
think of a schedule as a balance in the customer’s account, and the total amount due from all cus-
timetable. In accounting, tomers. The Accounts Receivable account is the controlling account for the
a schedule is a detailed accounts receivable subsidiary ledger. That is, the controlling account is a
list of the items that summary of all customer accounts in the subsidiary ledger. At month-end
make up a general
after all posting is completed, the balance of Accounts Receivable (con-
ledger account balance.
trolling) in the general ledger should equal the total of the balances of the
individual accounts receivable subsidiary ledger accounts.
The schedule of accounts receivable may be prepared on plain paper,
accounting stationery, or on a computer. The heading identifies the sched-
ule type and the date. All customer accounts appear in alphabetical order,
as they do in the accounts receivable subsidiary ledger. All accounts are
included, even those with zero balances. This prevents omitting a customer
by mistake. Figure 16–13 on page 468 shows On Your Mark’s schedule of
accounts receivable for the end of December. Its total amount to be received
from all customers is $10,404, which matches the balance of the Accounts
Receivable account in the general ledger. This proves the accounts receiv-
able subsidiary ledger.
466 Chapter 16 Special Journals: Sales and Cash Receipts
448-479_CH16_868829.indd 466 4/17/06 7:04:23 AM
CASH RECEIPTS JOURNAL PAGE 13
SALES TAX ACCOUNTS SALES CASH
DOC. POST. GENERAL SALES
DATE ACCOUNT NAME PAYABLE RECEIVABLE DISCOUNTS IN BANK
NO. REF. CREDIT CREDIT CREDIT CREDIT DEBIT DEBIT
1 20-- 1
2 Dec. 5 R301 Casey Klein ✓ 2 1 2 00 2 1 2 00 2
17 31 T56 Bankcard Sales — 1 0 0 0 00 6 0 00 1 0 6 0 00 17
3 0 00 9 7 0 0 00 5 8 2 00 7 0 0 1 00 3 0 00 17 2 8 3 00
18 31 Totals 3 0 00 9 7 0 0 00 5 8 2 00 7 0 0 1 00 3 0 00 17 2 8 3 00 18
19 (✓) ( 401) ( 220) ( 115) ( 405) ( 101) 19
20 20
ACCOUNT Cash in Bank ACCOUNT NO. 101
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 15 0 0 0 00
31 CR13 17 2 8 3 00 32 2 8 3 00
ACCOUNT Accounts Receivable ACCOUNT NO. 115
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 6 259 00
4 G20 1 5 9 00 6 100 00
31 S12 11 3 0 5 00 17 405 00
31 CR13 7 0 0 1 00 10 404 00
ACCOUNT Sales Tax Payable ACCOUNT NO. 220
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 1 300 00
8 G20 9 00 1 291 00
31 S12 5 5 5 00 1 846 00
31 CR13 5 8 2 00 2 428 00
ACCOUNT Sales ACCOUNT NO. 401
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 300 0 0 0 00
31 S12 10 7 5 0 00 310 7 5 0 00
31 CR13 9 7 0 0 00 320 4 5 0 00
ACCOUNT Sales Discounts ACCOUNT NO. 405
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 7 0 0 00
31 CR13 3 0 00 7 3 0 00
Figure 16–12 Posting Column Totals from the Cash Receipts Journal
Section 2 The Cash Receipts Journal 467
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ACCOUNT Accounts Receivable ACCOUNT NO. 115
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 6 259 00
4 G20 1 5 9 00 6 100 00
31 S12 11 3 0 5 00 17 405 00
31 CR13 7 0 0 1 00 10 404 00
On Your Mark Athletic Wear
Schedule of Accounts Receivable
December 31, 20--
Break Point Sports Club 3 7 1 0 00
Joe Dimaio
Robert Galvin The balance of the
Accounts Receivable
Casey Klein 500 00
account should equal
Anita Montero 371 00 the total of the schedule
Shashi Rahim 212 00 of accounts receivable.
Gabriel Ramos 318 00
South Branch High School Athletics 1 000 00
Megan Sullivan 530 00
Tammy’s Fitness Club 1 060 00
Kim Wong 106 00
Lara Young 2 597 00
Total Accounts Receivable 10 4 0 4 00
Figure 16–13 Schedule Detecting Errors in the Subsidiary Ledger
of Accounts Receivable
Proving the accounts receivable subsidiary ledger with the controlling
account verifies that the sum of the subsidiary ledger equals the controlling
account’s ending balance. This internal control procedure uncovers certain
errors such as failing to post a transaction, or miscalculating an account bal-
ance. It does not ensure that transactions were posted to the correct customer
account. The subsidiary ledger and the controlling account can balance even
if an amount was posted to the wrong account. Often this type of error is
discovered when a customer finds the error on a bill and reports it.
Internet Sales
How Do Internet Companies Receive Cash?
Companies can sell products with little expense and effort over the
Internet, but they must have procedures and systems for processing online
sales transactions. Companies can use an Internet merchant account for credit
and debit card payments or an online payment service such as PayPal. Most
Internet sales systems batch transactions daily to provide updated sales and
inventory entries for the company’s computer systems.
Online sales transactions must be secure. Businesses can use a card
verification service to authenticate credit card security codes and personal
identification data to protect against online fraud.
468 Chapter 16 Special Journals: Sales and Cash Receipts
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SECTION 2 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Create a table similar to this 4RANSACTION *OURNAL !CCOUNTS $EBITED !CCOUNTS #REDITED
one to identify the journal to
be used and the accounts to "ANKCARD 3ALES
be debited and credited for
each transaction. 3ALE OF -ERCHANDISE ON !CCOUNT
3ALE OF !SSET FOR #ASH
#ASH 3ALES
Do the Math
You are hired to audit the books for a computer software retailer, Software Biz. As you review
the books, you realize that the sales tax was not calculated on a sales slip. You also want
to estimate cash receipts from a sale. On a separate sheet of paper, make the following
calculations:
1. Accounts Receivable—Business World; Sales Slip 47: software for $550; sales tax at 6%.
What is the total due?
2. Accounts Receivable—Cindy Caskey; Sales Slip 48:
Software $46.53
Sales tax 2.79
Total $49.32
Terms: 1/10, n/30.
How much will be received if it is paid within the discount period?
Problem 16–3 Completing the Cash Receipts Journal
The cash receipts journal for the month of January is provided in your working papers and
illustrated here.
Instructions In your working papers, foot, prove, total, and rule the cash receipts journal.
CASH RECEIPTS JOURNAL PAGE 10
SALES TAX ACCOUNTS SALES CASH
DOC. POST. GENERAL SALES
DATE ACCOUNT NAME PAYABLE RECEIVABLE DISCOUNTS IN BANK
NO. REF. CREDIT CREDIT
CREDIT CREDIT DEBIT DEBIT
1 20-- 1
2 Jan. 3 R502 Jennifer Smith ✓ 8 0 00 8 0 00 2
3 5 R503 Wilton High School ✓ 3 1 0 0 00 6 2 00 3 0 3 8 00 3
4 8 R504 Store Equipment 155 7 5 00 7 5 00 4
5 15 T42 Cash Sales — 5 0 0 0 00 3 0 0 00 5 3 0 0 00 5
6 15 T42 Bankcard Sales — 1 2 0 0 00 7 2 00 1 2 7 2 00 6
7 20 R505 Norwin High School ✓ 2 4 0 0 00 4 8 00 2 3 5 2 00 7
8 30 R506 Supplies 115 3 0 00 3 0 00 8
9 9
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CH A P T ER 16 Summary
Key Concepts
1. Businesses that have many transactions use special journals to simplify the process of recording
transactions. Special journals
• have amount columns to record debits and credits to specific general ledger accounts
• use one line to record most transactions
Four special journals are commonly used in merchandising businesses:
• sales journal • purchases journal
• cash receipts journal • cash payments journal
2. A sales journal is used when two conditions are met:
• merchandise is sold, and
• the sale is on account instead of for cash
The sales journal entry to record the sale of merchandise on account is illustrated here.
SALES JOURNAL PAGE 1
SALES SALES TAX ACCOUNTS
SLIP POST. SALES
DATE CUSTOMER’S ACCOUNT DEBITED PAYABLE RECEIVABLE
NO. REF. CREDIT CREDIT DEBIT
1 Date Sales Customer’s Account Name x x x xx x x xx x x x xx 1
2 Slip 2
No.
3 3
The cash receipts journal is used to record all cash that a business receives. The following types of
transactions are recorded in the cash receipts journal:
(a) cash received from a charge customer
(b) cash received from a charge customer less a cash discount
(c) cash sales
(d) bankcard sales
(e) cash received from the sale of other assets
CASH RECEIPTS JOURNAL PAGE 1
SALES TAX ACCOUNTS SALES CASH
DOC. POST. GENERAL SALES PAYABLE IN BANK
DATE ACCOUNT NAME CREDIT CREDIT RECEIVABLE DISCOUNTS
NO. REF. CREDIT CREDIT DEBIT DEBIT
Date of Receipt
(a) 1 Receipt No. Customer’s Name x x x xx x x x xx 1
Date of Receipt
(b) 2 Receipt No. Customer’s Name x x x xx x x xx x x x xx 2
Date of Tape
(c) 3 Tape No. Cash Sales x x x xx x x xx x x x xx 3
Date of Tape
(d) 4 Tape No. Bankcard Sales x x x xx x x xx x x x xx 4
Date of Receipt
(e) 5 Receipt No. Account Affected x x x xx x x x xx 5
470 Chapter 16 Summary
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Summary C HAPT E R 1 6
3. Post these columns’ individual amounts daily:
Journal Individual Column Amounts Are Posted To:
Sales Journal Accounts Receivable Debit column ➤ Subsidiary ledger customer account
Cash Receipts Accounts Receivable Credit column ➤ Subsidiary ledger customer account
Journal
General Credit column ➤ General ledger account
4. Complete seven steps before you post special journal column totals to the general ledger:
(a) Rule the amount columns.
(b) Foot the amount columns.
(c) Prove the journal.
(d) Under the last transaction, enter the date the journal is totaled in the Date column.
(e) On the same line, enter the word Totals in the Customer’s Account Debited column (sales
journal) or the Account Name column (cash receipts journal).
(f) Enter the column totals, in ink, just below the footings.
(g) Double-rule the amount columns.
5. Post these column totals at month-end:
Journal Column Total Is Posted To:
Sales Journal Sales Credit column ➤ Sales account
Sales Tax Payable Credit column ➤ Sales Tax Payable account
Accounts Receivable Debit column ➤ Accounts Receivable account
Cash Receipts Sales Credit column ➤ Sales account
Journal
Sales Tax Payable Credit column ➤ Sales Tax Payable account
Accounts Receivable Credit column ➤ Accounts Receivable account
Sales Discounts Debit column ➤ Sales Discounts account
Cash in Bank Debit column ➤ Cash in Bank account
6. To prove the accounts receivable subsidiary ledger, prepare a schedule of accounts receivable, which
lists each charge customer, the balance in the customer’s account, and the total amount due
from all customers. Accounts Receivable is the controlling account for the accounts receivable
subsidiary ledger. Review this relationship in Figure 16–13 on page 468.
Key Terms
cash receipts journal (p. 459) schedule of accounts
footing (p. 453) receivable (p. 466)
sales journal (p. 450) special journals (p. 450)
Chapter 16 Summary 471
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C H A P T ER 16 Review and Activities
AFTER
YOU READ
Check Your Understanding
1. Special Journals
a. When are special journals used in an accounting system?
b. Name four commonly used special journals and describe the transactions entered in each.
2. Sales Journal and Cash Receipts Journal
a. List the steps to record transactions in the sales journal.
b. What are the source documents for transactions recorded in the cash receipts journal?
3. Posting Single Transactions
a. When are sales transactions posted to the accounts receivable subsidiary ledger? Why?
b. When are transactions in the cash receipts journal posted to the accounts receivable
subsidiary ledger? Why?
4. Footing, Proving, Totaling, and Ruling
a. What is a footing?
b. Which columns in the sales journal are double-ruled? What does the double rule indicate?
5. Posting Column Totals
a. Which sales journal column total is posted to the general ledger Sales account?
b. When posting column totals from the cash receipts journal to the general ledger, which total
is not posted?
6. Schedule of Accounts Receivable
a. What is the purpose of a schedule of accounts receivable?
b. The schedule of accounts receivable does not uncover what type of error?
Apply Key Terms
Imagine that you are the accounting
manager for EarthWear Clothing. Recently
you noticed that several sales associates
are not keeping good records of sales
transactions. Write an informational
memorandum to the sales staff about the
need for accurate, complete sales records.
Use the following terms to describe a
systematic method to track sales.
cash receipts journal schedule of accounts
footing receivable
sales journal special journals
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Computerized Accounting C HAPT E R 1 6
Mastering Sales and Cash Receipts
Making the Transition from a Manual to a Computerized System
Task Manual Methods Computerized Methods
Setting up • Ledger sheets or cards are prepared • Assign each customer an ID code.
customer with customer account details such as • Record details of customer accounts
records customer name, address, and contact into customer records.
information. • The customer’s sales and payment
• Account activities are posted to the history is maintained automatically.
customer’s subsidiary ledger account.
Issuing and • A credit memorandum is prepared. • The accounting software will create
Recording • A journal entry is prepared to record a credit memo and apply it to the
a Credit the credit memorandum. appropriate outstanding customer
Memorandum • The journal entry is posted to the invoice.
customer’s account and to the general • The credit memo is posted
ledger. automatically to the customer account
and to the general ledger.
Q&A
Peachtree Question Answer
How do I set up a new 1. From the Maintain menu, select Customers/Prospects.
customer account? 2. Assign a Customer ID to the customer account.
3. Enter customer name and contact information.
4. Click on the Sales Defaults tab.
5. Verify or enter the appropriate sales default GL account number.
How do I issue 1. From the Tasks menu, select Sales/Invoicing.
and record a credit 2. Enter a customer ID and a reference number.
memorandum? 3. Click on the Apply to Sales tab and fill out the Apply to Invoice.
QuickBooks Q & A
QuickBooks Question Answer
How do I set up a new 1. From the Lists menu, select Customer:Job List.
customer account? 2. Click the Customer:Job drop-down list and select New.
3. Enter customer name and contact information.
4. Click on the Additional Info tab and enter any additional customer data.
How do I issue 1. From the Customers menu, select Create Credit Memos/Refunds.
and record a credit 2. Enter customer name, date, and credit invoice number.
memorandum? 3. In the Item column, select the item returned.
4. Enter the number returned in the Qty field.
For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers.
Chapter 16 Computerized Accounting 473
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C H A P T ER 16 Problems
Complete problems using: Manual Glencoe Peachtree Complete QuickBooks
OR OR
Working Papers Accounting Software Templates
Problem 16–4 Recording and Posting Sales
SMART GUIDE Transactions
Step–by–Step Instructions: Shutterbug Cameras records its transactions in special journals. The
Problem 16–4 accounts receivable subsidiary ledger and certain general ledger accounts
1. Select the problem set are included in your working papers.
for Shutterbug Cameras
(Prob. 16–4). Instructions In your working papers:
2. Rename the company
and set the system date. 1. Record each transaction on page 12 of the sales journal or on page 13
3. Enter all sales on of the cash receipts journal.
account transactions
using the Sales/
2. Post to the customer accounts in the accounts receivable subsidiary
Invoicing option. ledger on a daily basis.
4. Record all cash sales 3. Foot, prove, total, and rule the sales journal.
using the Receipts
option. 4. Post the column totals from the sales journal and the cash receipts
5. Print a Sales Journal journal to the general ledger accounts named in the column headings.
report and a Cash
Receipts Journal report.
5. Prepare a schedule of accounts receivable.
6. Proof your work.
7. Print a General Ledger Date Transactions
report and Customer May 1 Sold merchandise on account to Yoko Nakata, $500 plus 4%
Ledgers report.
8. Complete the Analyze sales tax of $20, Sales Slip 220.
activity. 3 Cash sales totaled $1,500 plus $60 in sales tax, Tape 10.
9. End the session. 7 Cash sales totaled $200 plus $8 in sales tax, Tape 11.
TIP: When you print a 9 Sold merchandise on account to Heather Sullivan for $100 plus
report, such as the General sales tax of $4, Sales Slip 223.
Ledger, you can use the
12 Cash sales totaled $400 plus $16 in sales tax, Tape 12.
filter options to customize
the information that 15 Sold $3,000 in merchandise on account to FastForward
appears on the report. Productions plus sales tax of $120, Sales Slip 225.
18 Sold merchandise on account to Yoko Nakata, $200 plus sales
tax of $8, Sales Slip 226.
Analyze Based on these transactions, calculate how much cash was
collected for the month.
Problem 16–5 Recording and Posting
Cash Receipts
River’s Edge Canoe & Kayak uses special journals and an accounts receivable
subsidiary ledger for recording business transactions. The accounts
receivable subsidiary ledger accounts and certain general ledger accounts
are included in your working papers. The current account balances are
recorded in the accounts.
474 Chapter 16 Problems
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Problems C HAPT E R 1 6
Instructions In your working papers:
1. Record the transactions on page 7 in the cash receipts journal. SMART GUIDE
2. Post the amounts from the Accounts Receivable Credit column to the Step–by–Step Instructions:
customers’ accounts in the accounts receivable subsidiary ledger. Post Problem 16–5
the individual amounts in the General Credit column to the general 1. Select the problem set
for River’s Edge Canoe &
ledger accounts.
Kayak (Prob. 16–5).
3. Foot, prove, total, and rule the cash receipts journal. 2. Rename the company
4. Post the column totals to the general ledger accounts named in the and set the system date.
3. Record all cash receipts
column headings. using the Receipts
5. Prepare a schedule of accounts receivable. option.
4. Print the following
Date Transactions reports: Cash Receipts
Journal, General Ledger,
May 2 Received $400 from Paul Drake to apply on his account, and Customer Ledgers.
Receipt 505. 5. Proof your work.
5 Received $2,940 from Adventure River Tours in payment of its 6. Complete the Analyze
activity.
$3,000 account less a 2% cash discount of $60, Receipt 506. 7. End the session.
7 Sold old shelving (Store Equipment) for $50, Receipt 507.
TIP: You can apply a partial
10 Wildwood Resorts sent us a check for $2,425 in payment of its payment from a customer.
account, $2,500 less a 3% cash discount of $75, Receipt 508.
15 Cash sales totaled $2,000 plus $100 in sales tax, Tape 20. QuickBooks
15 Bankcard sales were $3,000 plus $150 in sales tax, Tape 20.
18 Celeste Everett sent us a check for $150 to apply on her
PROBLEM GUIDE
account, Receipt 509. Step–by–Step Instructions:
20 Isabel Rodriquez sent us $100 to apply on her account, Problem 16–5
Receipt 510. 1. Restore the Problem
16-5.QBB file.
30 Cash sales were $4,500 plus $225 sales tax, Tape 21. Bankcard
2. Enter all cash receipts
sales totaled $3,800 plus sales tax of $190, Tape 21. using the Receive
Payments option.
Analyze Identify the source document that would be used to record 3. Print a Journal report,
bankcard sales and cash sales. a Customer Balance
Summary, and a General
Ledger.
4. Proof your work.
CHALLENGE Problem 16–6 Recording and Posting 5. Complete the Analyze
PROBLEM activity.
Sales and Cash Receipts 6. Back up your work.
Buzz Newsstand had the following sales and cash receipt transactions for
May. In your working papers, the accounts receivable subsidiary ledger
and general ledger accounts have been opened with current balances. SOURCE DOCUMENT
PROBLEM
Instructions
1. Record the sales and cash receipts for May on page 11 of the sales Problem 16–6
Use the source documents
journal and page 11 of the cash receipts journal.
in your working papers to
2. Post to the customer accounts in the accounts receivable subsidiary complete this problem.
ledger on a daily basis.
3. Post from the General Credit column of the cash receipts journal on a
daily basis.
CONTINUE
Chapter 16 Problems 475
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C H A P T ER 16 Problems
4. Foot, prove, total, and rule both journals.
5. Post the column totals of the sales journal to the general ledger
accounts named in the column headings.
6. Post the column totals from the cash receipts journal to the general
SMART GUIDE ledger accounts named in the column headings.
Step–by–Step Instructions: 7. Prepare a schedule of accounts receivable.
Problem 16–6
1. Select the problem set Date Transactions
for Buzz Newsstand May 1 Sold $300 in merchandise plus 6% sales tax of $18 on account
(Prob. 16–6).
2. Rename the company to Ilya Bodonski, Sales Slip 170.
and set the system date. 3 Received $490 from Katz Properties in payment of its $500
3. Enter all sales on account balance less a 2% discount of $10, Receipt 145.
account transactions.
4. Record all cash receipts. 5 As a favor, sold $60 in supplies to Straka Stores, received cash,
5. Print a Sales Journal Receipt 146.
report and a Cash 7 Rothwell Management Inc. sent us a check for $294 in payment
Receipts Journal report.
of its $300 account balance less a $6 cash discount, Receipt 147.
6. Proof your work.
7. Print a General Ledger 9 Sold $100 in merchandise plus $6 sales tax on account to Saba
report and Customer Nadal, Sales Slip 171.
Ledgers report. 10 Sold $600 in merchandise plus $36 sales tax on account to Java
8. Complete the Analyze
activity. Shops Inc., terms 2/10, n/30, Sales Slip 172.
9. End the session. 12 Sold $50 in merchandise plus $3 sales tax on account to Lee
Adkins, Sales Slip 173.
QuickBooks 15 Received a check for $196 from Rolling Hills Pharmacies in
PROBLEM GUIDE payment of its $200 account less a 2% cash discount of $4,
Receipt 148.
Step–by–Step Instructions: 15 Cash sales were $2,400 plus $144 sales tax, Tape 33.
Problem 16–6
15 Bankcard sales totaled $2,000 plus sales tax of $120, Tape 33.
1. Restore the Problem
18 Sold $1,000 in merchandise plus sales tax of $60 on account to
16-6.QBB file.
2. Enter all sales on Katz Properties, terms 2/10, n/30, Sales Slip 174.
account transactions. 20 Received $100 from Ilya Bodonski to apply on her account,
3. Record all cash receipts. Receipt 149.
4. Print a Journal report,
a Customer Balance 22 Sold $800 in merchandise plus $48 sales tax on account to
Summary, and a General Rothwell Management Inc., terms 2/10, n/30, Sales Slip 175.
Ledger report. 23 Lee Adkins sent us a check for $53 in payment of his account,
5. Proof your work.
6. Complete the Analyze Receipt 150.
activity. 24 Received a $106 check from Saba Nadal to apply on account,
7. Back up your work. Receipt 151.
26 Java Shops Inc. sent us a check for $200 to apply on account,
Receipt 152.
27 Sold $200 in merchandise plus sales tax of $12 on account to
Lee Adkins, Sales Slip 176.
28 Received $75 from the sale of excess store equipment, Receipt 153.
30 Cash sales totaled $2,600 plus $156 sales tax, Tape 34.
30 Bankcard sales were $2,200 plus sales tax of $132, Tape 34.
Analyze Calculate the percent of sales discounts given in May to total
May sales.
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Winning Competitive Events C HAPT E R 1 6
Practice your test-taking skills! The questions on this page are reprinted with permission
from national organizations:
• Future Business Leaders of America
• Business Professionals of America
Use a separate sheet of paper to record your answers.
Future Business Leaders of America
MULTIPLE CHOICE
1. ABC Corporation uses special journals to account for detailed transactions. Which
of the following would not be considered a special journal?
a. purchases journal
b. cash payments journal
c. sales journal
d. general journal
e. none of these answers
2. Check marks are placed in parentheses below both General amount column totals
in a journal to show that the column totals
a. are not posted.
b. have been posted.
c. balance.
d. none of the above
3. The Accounts Receivable controlling account in the general ledger
a. shows the total amount owed by all customers when posting is complete.
b. helps keep the general ledger a balancing ledger in which debits equal credits.
c. offers a means of testing the accuracy of the customer account balances.
d. does all of the foregoing.
e. does none of the foregoing.
4. A journal amount column that is not headed with an account name is called a
a. special amount column.
b. general amount column.
c. date column.
d. posting reference column.
e. none of these answers
Business Professionals of America
MULTIPLE CHOICE
5. A list of all customer accounts, account
balances, and total amount due from
all customers is a Need More Help?
a. Schedule of Accounts Payable.
Go to glencoeaccounting.glencoe.com and
b. Worksheet. click on Student Center. Click on Winning
c. Schedule of Accounts Competitive Events and select Chapter 16.
Receivable. • Practice Questions and Test-Taking Tips
d. none of the above • Concept Capsules and Terminology
glencoeaccounting.glencoe.com Chapter 16 Winning Competitive Events 477
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C H A P T ER 16 Real-World Applications and Connections
Critical Special Journals: Sales and Cash Receipts
Thinking 1. Describe the purpose of a special journal.
2. How is the sales journal different from the cash receipts journal?
3. Your new job assignment is to prove the accounts receivable subsidiary
ledger. All postings have been made. What do you do to prove the ledger?
4. Compare and contrast the receipt of cash from a charge customer with the
receipt of cash at the time of the merchandise sale.
5. The schedule of accounts receivable total does not agree with the general
ledger’s Accounts Receivable balance. Develop a plan to locate the error(s).
6. What is the value of maintaining special journals?
CASE Merchandising Business: Movie Theater
STUDY You work in the accounting department for Springdale Movie Theater. The owners
are considering enlarging the concession area one and one-half times its current
size to offer a wider variety of foods. No theater seats would be lost. The cost is
estimated at $200,000. Sales figures for the past three years follow.
Year Ticket Sales Concession Sales
Year 1 $4,800,000 $1,800,000
Year 2 5,100,000 1,600,000
Year 3 5,400,000 1,480,000
INSTRUCTIONS
1. Use a spreadsheet program to analyze the sales and planned expansion. What
percent of total sales are ticket sales and concession sales each year?
2. Assuming concession sales remain at $1,480,000, what percentage increase in
concession revenue is needed to pay for the renovation costs in one year?
a
mattoefr ETHICS Working for a Competitor
Accounting clerks use sales journals to record sales on account, giving them
direct access to the company’s customer lists. As an accounting clerk at Haverty’s
Furniture Store, you work with Bob, a part-time accounting clerk. Recently Bob
confided in you that during the mornings, he works at World Classic Furniture, a
competitor of Haverty’s.
ETHICAL DECISION MAKING
1. What are the ethical issues? 4. How do the alternatives affect the
2. What are the alternatives? parties?
3. Who are the affected parties? 5. What would you do?
$ )) ))
Communicating
Explaining a Transaction
ACCOUNTING You work for Equestrian Steps—Horse Boarding and Lessons. During an equestrian
competition last weekend, you purchased grain on account from the local feed
store for $85 plus 6% sales tax. On a separate sheet of paper, write a brief memo
to the accounting clerk explaining the transaction so she can record it in the
accounting records.
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Real-World Applications and Connections C HAPT E R 1 6
Skills Beyond Designing and Improving Systems
NUMBERS At Ice Cream Express, you keep the financial records and maintain inventory.
You noticed that some ice cream flavors are popular only during certain seasons.
For example peppermint ice cream is very popular during winter but not in the
summer. You decide to get feedback about your customers’ likes and dislikes.
INSTRUCTIONS Design a survey that will help identify your customers’ preferences.
Include questions to gather data about respondents’ gender, age, and income
level. What incentives will you offer to prompt customers to participate?
INTERNATIONAL Tariffs and Duties
Accounting Thinking of boosting your company’s sales by selling products in another
country? Consider the impact of tariffs. A tariff, or duty, is a tax imposed on
imports of specific products. For example if your U.S.-based company sells
computer hardware in Venezuela, a 5 percent tariff will be charged on each item.
INSTRUCTIONS Assume that Venezuelan competitors sell Model AB computer
monitors for $210. You typically charge $205. Will your price be competitive after
considering the tariff? Why or why not?
Making It
Examining Your Currency
Personal You have learned that businesses have cash receipts in various forms including
transactions with charge cards and bankcards; checks; and currency.
PERSONAL FINANCE ACTIVITY What do you know about the cash you use? Write a
brief report about U.S. paper currency. Address what they are made of, the seven
denominations in circulation today and the portrait appearing on each, the
purpose of a security thread, and whether torn bills are acceptable.
PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and
click on Student Center. Click on Making It Personal and select Chapter 16.
Analyzing Interpreting Sales
Financial
Reports In addition to financial results, most annual reports contain management’s
analysis and interpretation of the financial data. For example if revenue has
increased, the report might provide reasons
for the increase and projections for the next
fiscal period.
INSTRUCTIONS Use the Fiscal 2003 Compared to
Safe and Secure
Fiscal 2002 section of PETsMART’s annual report Always research the company
before buying something on the
in Appendix F to answer these questions.
Internet. Beware of scams! Visit
1. Did store sales increase or decrease over the glencoeaccounting
prior year? What reasons are given for this .glencoe.com and click
change? on Student Center. Click on
2. Why would an analysis of sales be WebQuest and select Unit 4 to
continue your Internet project.
important to people reading an annual
report?
glencoeaccounting.glencoe.com Chapter 16 Real-World Applications and Connections 479
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CH A P T ER 17 Special Journals:
Purchases and
Cash Payments
BEFORE
What You’ll Learn YOU READ
1. Explain the purpose of the
purchases and cash payments Predict
journals. 1. What does the chapter title tell you?
2. What do you already know about this subject from personal experience?
2. Record transactions in the
purchases and cash payments 3. What have you learned about this in the earlier chapters?
journals. 4. What gaps exist in your knowledge of this subject?
3. Record payroll transactions in
the cash payments journal.
4. Post from the purchases and Exploring the Real World of Business
cash payments journals to
the general ledger and the LOOKING AT THE ROLE OF PURCHASES
accounts payable subsidiary
ledger. Adler Planetarium & Astronomy Museum
Millions of people visit Chicago’s Adler Planetarium &
5. Total, prove, and rule
the purchases and cash Astronomy Museum where the sky’s the limit when it comes
payments journals. to finding new ways to view the cosmos. If you want to know
more about our galaxy, the Adler has something for you.
6. Prepare a schedule of
accounts payable. Visitors can observe a simulated night sky in action on the Sky
Theater’s 68-foot dome or build a solar system on a computer.
7. Prove cash.
Operations like the Adler make many purchases. Its Galileo
8. Define the accounting terms Café buys food and utensils. Exhibits might need giant models
introduced in this chapter. of planets or moons. The gift shop needs to stock puzzles,
Why It’s Important telescopes, and jewelry. The museum’s accounting system
documents each purchase.
Cash must be protected and
▲
accounted for. What Do You Think?
When the Adler Planetarium gift shop purchases items for
resale, what general ledger accounts are affected?
480 Chapter 17 Special Journals: Purchases and Cash Payments
480-515_CH17_868829.indd 480 9/16/05 11:41:35 AM
Working in the Real World
APPLYING YOUR ACCOUNTING KNOWLEDGE
Do you, or anyone you know, make regular
payments to anyone—perhaps for car insurance
or for a purchase you made on an installment
plan? Businesses make many similar payments.
Retail businesses buy the merchandise they sell
to customers. They also buy many items used
to operate the business, such as china and silver-
ware for a restaurant. Businesses buy most items
on credit and must keep track of when payments
are due. You will learn how that is done in the
accounting records as you study this chapter.
Personal Connection
1. What items might your employer buy on
credit?
2. Do you have any ideas on how you might
keep track of purchases and when payments
are due on those items?
Online Connection
Go to glencoeaccounting.glencoe.com and click
on Student Center. Click on Working in the
Real World and select Chapter 17.
glencoeaccounting.glencoe.com 481
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SECTION 1 The Purchases Journal
In the last chapter, you learned
BEFORE
YOU READ that businesses use special journals to
record transactions that are similar and
occur frequently. If the accounting sys-
Main Idea tem were like a transit system, special
The purchases journal
journals would be like traffic police in
is used to record credit
helping avoid accounting traffic jams
purchases.
by chan neling incoming data into
Read to Learn… appropriate “lanes.” They also provide
➤ how to use the purchases a shortcut for much of the data headed
journal. (p. 482) for the general ledger.
➤ how to post transactions You also learned in the last chapter that the sales and cash receipts
from the purchases journals record the sale of merchandise and other assets. In this chapter
journal. (p. 484) you will learn how accountants use purchases and cash payments jour-
nals to record the purchase of merchandise and other assets. You will also
Key Terms
purchases journal learn about the accounts payable subsidiary ledger.
Businesses like Target purchase merchandise for resale from hundreds
of suppliers. Target and other companies use purchases and cash pay-
ments journals to simplify the purchase and payment processes.
Using the Purchases Journal
What Is the Purpose of the Purchases Journal?
Accountants use the purchases journal as a special journal to record
all purchases on account. Figure 17–1 shows the purchases journal that On
Your Mark Athletic Wear uses.
The purchases journal includes space for the page number, a column for
Figure 17–1 the date, a column for the invoice number, a column for the name of the
Purchases Journal creditor, and a column for the posting reference. It also has three amount
PURCHASES JOURNAL PAGE
ACCOUNTS GENERAL
DATE INVOICE CREDITOR’S ACCOUNT CREDITED POST. PAYABLE PURCHASES
NO. REF. DEBIT POST.
CREDIT ACCOUNT DEBITED REF. DEBIT
1 1
2 2
3 3
Used to record increases in Used to record amounts Used to enter debits
the accounts payable subsidiary of purchases of merchandise to general ledger accounts
ledger and Accounts Payable on account. for which there are no
controlling account. special columns.
482 Chapter 17 Special Journals: Purchases and Cash Payments
480-515_CH17_868829.indd 482 9/16/05 11:42:39 AM
columns. Refer to Figure 17–1 for a description of what amounts should be
AS
recorded in each column. YOU READ
Recording the Purchase Key Point
of Merchandise on Account Purchasing Merchandise
on Account
After verifying an invoice, the accounting clerk records the purchase in
Debit Purchases
the purchases journal. Refer to the purchases journal and follow these steps: Credit Accounts
1. Enter the date in the Date column. Use the date the invoice was Payable
received, not the date the invoice was prepared.
2. Enter the invoice number in the Invoice Number column.
3. Enter the creditor’s name in the Creditor’s Account Credited
column.
4. Enter the total of the invoice in the Accounts Payable Credit
column.
5. For purchases of merchandise on account, enter the total amount of
the invoice in the Purchases Debit column.
INVOICE NO. 7894
--
EC. 14, 20 DATE: Dec. 14, 20--
REC’D D ORDER NO.: 9784
B u s i n e s s Tr a n s a c t i o n
On Your Mark Athletic Wear SHIPPED BY: Federal Trucking
TO 595 Leslie Street
TERMS: 2/10, n/30
Dallas, TX 75207
On December 14 On Your Mark received Invoice QTY. ITEM UNIT PRICE TOTAL
20 pair Soft Cushion: White, #94682 $ 50.00 $ 1,000.00
7894 from Pro Runner Warehouse for merchandise 10 pair Soft Cushion: Black, #94788 50.00 500.00
purchased on account, $2,300, terms 2/10, n/30. 10 pair
10 pair
Low Cut: White, #94281
Low Cut: Black, #94666
40.00
40.00
400.00
400.00
Total $ 2,300.00
Due Date: 12/24
Discount: $ 46.00
JOURNAL ENTRY Net Amount: $ 2,254.00
Check No.:
PURCHASES JOURNAL PAGE 12
ACCOUNTS GENERAL
DATE INVOICE CREDITOR’S ACCOUNT CREDITED POST. PAYABLE PURCHASES
NO. REF. DEBIT POST.
CREDIT ACCOUNT DEBITED REF. DEBIT
6 14 7894 Pro Runner Warehouse 2 3 0 0 00 2 3 0 0 00 6
7 1 2 3 4 5 7
After journalizing the invoice from Pro Runner Warehouse, the account-
ing clerk places it in a tickler file by due date. In this case it is filed in the
December 24 folder. On Your Mark plans to take the discount, and December
24 is ten days after the invoice date.
Journalizing Other Purchases on Account
AS
On Your Mark also purchases supplies and other assets on account.
These purchases do not occur often enough to set up special columns in the YOU READ
purchases journal. When these purchases do occur, they are recorded in the Instant Recall
General Debit column of the purchases journal.
Merchandisers A
Refer to the purchases journal on page 484 and follow these steps: merchandising business
1. Enter the date the invoice was received in the Date column. purchases merchandise
2. Enter the invoice number in the Invoice Number column. from a supplier and
3. Enter the creditor’s name in the Creditor’s Account Credited column. resells it.
4. Enter the total of the invoice in the Accounts Payable Credit column.
Section 1 The Purchases Journal 483
480-515_CH17_868829.indd 483 9/16/05 11:43:03 AM
CHAMPION STORE SUPPLY --
INVOICE NO. 3417
15, 20
B u s i n e s s Tr a n s a c t i o n DEC.
47249 Randall Parkway DATE: Dec. 13, 20--
Dallas, TX 75207 REC’D ORDER NO.: 9795
On Your Mark Athletic Wear SHIPPED BY: Federal Trucking
TO 595 Leslie Street TERMS: n/30
On December 15 On Your Mark received Invoice 3417, Dallas, TX 75207
dated December 13, from Champion Store Supply for store QTY.
3 Corner Shelf Units
ITEM UNIT PRICE
$ 300.00 $
TOTAL
900.00
equipment bought on account, $1,200, terms n/30. 1 Shirt Rack 300.00 300.00
Total $ 1,200.00
Due Date: 1/12
Discount: $0.00
JOURNAL ENTRY Net Amount: $1,200.00
Check No.:
PURCHASES JOURNAL PAGE 12
ACCOUNTS GENERAL
DATE INVOICE CREDITOR’S ACCOUNT CREDITED POST. PAYABLE PURCHASES
NO. REF. DEBIT POST.
CREDIT ACCOUNT DEBITED REF. DEBIT
7 15 3417 Champion Store Supply 1 2 0 0 00 Store Equipment 1 2 0 0 00 7
8 1 2 3 4 5 6 8
5. Store equipment is not merchandise purchased for resale, so this
transaction is not recorded in the Purchases Debit column. Instead,
it is recorded in the General column. Write the name of the general
ledger account being debited in the General Account Debited
column.
6. Enter the total amount of the invoice in the General Debit column.
After journalizing the invoice, the accounting clerk places it in
the tickler file. Because Champion Store Supply does not offer its
credit customers a cash discount, the due date is January 12, 30 days
after the date of the invoice. The invoice is filed in folder “12” to
indicate this date.
Posting from the Purchases Journal
How Do You Post Entries from the Purchases Journal?
As you have learned, special journals save time in recording and
posting business transactions. Each transaction in the purchases
journal is a purchase on account. Therefore, each transaction is
separately posted daily to the accounts payable subsidiary ledger to keep
creditor accounts current.
Refer to Figure 17–2 as you read about posting to the accounts payable
subsidiary ledger.
1. In the Date column of the subsidiary ledger account, enter the date
of the transaction.
2. In the Posting Reference column of the subsidiary ledger account,
record the journal letter and the page number. P is the letter used
for the purchases journal.
3. In the Credit column of the subsidiary ledger account, enter the
amount owed to the creditor.
4. Compute the new account balance by adding the amount in the
Credit column to the previous balance amount. Since there was
no previous balance in Pro Runner’s account, enter $2,300 in the
Balance column.
484 Chapter 17 Special Journals: Purchases and Cash Payments
480-515_CH17_868829.indd 484 9/16/05 11:43:06 AM
PURCHASES JOURNAL PAGE 12
ACCOUNTS GENERAL
DATE INVOICE CREDITOR’S ACCOUNT CREDITED POST. PAYABLE PURCHASES
NO. REF. DEBIT POST.
CREDIT ACCOUNT DEBITED REF. DEBIT
1 20-- 1
2 Dec. 8 CS56 Computer Solutions ✓ 8 0 000 8 0 000 2
6 14 7894 Pro Runner Warehouse ✓ 2 3 0 000 2 3 0 000 6
7 5 7
2
Pro Runner Warehouse 3
NAME
1 ADDRESS 22009 Ben White Blvd., Austin, TX 78705
POST.
DATE DESCRIPTION REF. DEBIT CREDIT BALANCE
20--
Dec. 14 P12 2 3 0 0 00 2 3 0 0 00
4
Figure 17–2 Posting from the Purchases Journal to the Accounts Payable Subsidiary Ledger
5. Return to the purchases journal and place a check mark (✓) in the
first Posting Reference column (next to the Creditor’s Account
Credited column).
Posting from the General Debit Column
The clerk makes daily postings from the General Debit column of the
purchases journal to the appropriate accounts in the general ledger. Refer to
Figure 17–3 on page 486 as you read the following steps:
1. Enter the date of the transaction in the Date column of the general
ledger account.
2. In the Posting Reference column of the general ledger account,
record the journal letter (P for purchases journal) and page number.
3. In the Debit column of the general ledger account, enter the
amount recorded in the General Debit column of the purchases
journal.
4. Compute and record the new balance in the Debit Balance column.
5. Return to the purchases journal and place the general ledger
account number in the General Posting Reference column
AS
(following the General Account Debited column). YOU READ
Totaling, Proving, and Ruling Key Point
the Purchases Journal Ruling the Purchases
Journal When ruling
To complete the purchases journal, refer to Figure 17– 4 on page 486 the purchases journal,
and follow these steps: the ruling is drawn
1. Draw a single rule across the three amount columns: Accounts across the amount
Payable Credit, Purchases Debit, and General Debit. columns only.
2. Foot each amount column.
Section 1 The Purchases Journal 485
480-515_CH17_868829.indd 485 9/16/05 11:43:13 AM
PURCHASES JOURNAL PAGE 12
ACCOUNTS GENERAL
DATE INVOICE CREDITOR’S ACCOUNT CREDITED POST. PAYABLE PURCHASES
NO. REF. DEBIT POST.
CREDIT ACCOUNT DEBITED REF. DEBIT
1 20-- 1
2 Dec. 8 CS56 Computer Solutions ✓ 8 0 0 00 8 0 0 00 2
7 15 3417 Champion Store Supply ✓ 1 2 0 0 00 Store Equipment 150 1 2 0 0 00 7
8 5 8
2
ACCOUNT Store Equipment ACCOUNT NO. 150
1
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
3
20--
Dec. 1 Balance ✓ 4 0 0 0 00
15 P12 1 2 0 0 00 5 2 0 0 00 4
Figure 17–3 Posting from the Purchases Journal to the General Ledger
3. Test for the equality of debits and credits.
Debit Columns Credit Column
AS
YOU READ Purchases $15,400 Accounts Payable $16,850
General 1,450
In Your Own Words
$16,850 $16,850
Proving the Purchases
4. In the Date column, on the line below the single rule, enter the date
Journal What does
“proving the purchases the journal is being totaled.
journal” mean? 5. On the same line, write the word Totals in the Creditor’s Account
Credited column.
6. Enter the three column totals, in ink, just below the footings.
7. Draw a double rule across the three amount columns.
PURCHASES JOURNAL PAGE 12
ACCOUNTS GENERAL
DATE INVOICE CREDITOR’S ACCOUNT CREDITED POST. PAYABLE PURCHASES
NO. REF. DEBIT POST.
CREDIT ACCOUNT DEBITED REF. DEBIT
1 20-- 1
2 Dec. 8 CS56 Computer Solutions ✓ 8 0 0 00 8 0 0 00 2
3 10 4692 Sports Link Footwear ✓ 4 0 0 0 00 4 0 0 0 00 3
4 12 SN63 Sports Nutrition Supply ✓ 6 0 0 00 6 0 0 00 4
5 14 2560 FastLane Athletics ✓ 3 0 0 0 00 3 0 0 0 00 5
6 14 7894 Pro Runner Warehouse ✓ 2 3 0 0 00 2 3 0 0 00 6
7 15 3417 Champion Store Supply ✓ 1 2 0 0 00 Store Equipment 150 1 2 0 0 00 7
8 15 9881 Geary Office Supply ✓ 2 5 0 00 Supplies 130 2 5 0 00 8
9 18 8560 FastLane Athletics ✓ 2 0 0 0 00 2 0 0 0 00 9
10 20 6593 Computer Solutions ✓ 1 2 0 0 00 1 2 0 0 00 10
11 27 5200 Sports Link Footwear ✓ 1 5 0 000 1 5 0 0 00 1 11
12 31 Totals 2 16 8 5 0 00 15 4 0 0 00
16 8 5 0 00 15 4 0 0 00
1 4 5 0 00
1 4 5 0 00 12
2
13 4 5 6 7 13 6
Figure 17–4 The Completed Purchases Journal
486 Chapter 17 Special Journals: Purchases and Cash Payments
480-515_CH17_868829.indd 486 4/6/06 6:18:57 PM
The completed purchases journal is a quick reference tool for the
accountant to review current transactions that affect the Purchases account
and the Accounts Payable account. Miscellaneous purchases are also
reflected in the purchases journal. If a general journal had been used, these
transactions would have been mixed with other transactions (cash receipts,
payments, and more) of the period.
What else can the accountant verify from the completed purchases
journal? A quick review of the Post. Ref. column tells the accountant that
amounts have been posted to the accounts payable subsidiary ledger.
Posting the Special Column Totals
to the General Ledger
After totaling and ruling the purchases journal, the clerk posts the totals
of the Accounts Payable Credit column and the Purchases Debit column to
the general ledger accounts. Then the clerk calculates the new balance for
each account, and enters the new balance in the appropriate Balance col-
umn. Figure 17–5 shows the posting of these column totals.
After posting each column total, write the general ledger account num-
ber, in parentheses, in the column below the double rule as shown in Figure
17–5. The total of the General Debit column is not posted because the indi-
vidual amounts were posted during the month. Place a check mark (✓) in
parentheses below the double rule in the General Debit column to indicate
that the total is not posted.
PURCHASES JOURNAL PAGE 12
ACCOUNTS GENERAL
DATE INVOICE CREDITOR’S ACCOUNT CREDITED POST. PAYABLE PURCHASES
NO. REF. DEBIT POST.
CREDIT ACCOUNT DEBITED REF. DEBIT
1 20-- 1
2 Dec. 8 CS56 Computer Solutions ✓ 8 0 0 00 8 0 0 00 2
11 27 5200 Sports Link Footwear ✓ 1 5 0 0 00 1 5 0 0 00 11
16 8 5 0 00 15 4 0 0 00 1 4 5 0 00
12 31 Totals 16 8 5 0 00 15 4 0 0 00 1 4 5 000 12
13 ( 201) ( 501) (✓) 13
14 14
ACCOUNT Accounts Payable ACCOUNT NO. 201
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 6 3 0 0 00
16 G21 2 0 0 00 6 1 0 0 00
31 P12 16 8 5 0 00 22 9 5 0 00
ACCOUNT Purchases ACCOUNT NO. 501
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Figure 17–5
Dec. 1 Balance ✓ 190 0 0 0 00
Posting Column
19 CP14 1 3 0 0 00 191 3 0 0 00
Totals from the
31 P12 15 4 0 0 00 206 7 0 0 00
Purchases Journal to
the General Ledger
Section 1 The Purchases Journal 487
480-515_CH17_868829.indd 487 9/16/05 11:43:16 AM
SECTION 1 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Create a table similar to this
!CCOUNT !CCOUNT !MOUNT #OLUMN !MOUNT #OLUMN
one to describe how these 4RANSACTION $EBITED #REDITED $EBITED #REDITED
three separate transactions
would appear in the 0URCHASED
purchases journal. -ERCHANDISE
ON !CCOUNT
0URCHASED 3TORE
%QUIPMENT ON
!CCOUNT
0URCHASED
3UPPLIES ON
!CCOUNT
Do the Math
Dynamo Industries received an invoice from Santos Suppliers for merchandise purchased
on July 5 for $12,000 with terms of 3/15, n/30. Answer the following questions:
1. What is the due date of the invoice?
2. What is the amount of cash discount?
3. What is the net amount to be paid?
4. What account is debited and for what amount?
5. What account is credited and for what amount?
Problem 17–1 Recording Transactions in the
Purchases Journal
The Design Den, a retail merchandising business, uses special journals. On page 3 of the
purchases journal in the working papers, record the following purchases:
Date Transactions
Feb. 1 Purchased $1,400 in merchandise on account from Woodstock Furnishings,
terms 3/15, n/30, Invoice WF39.
2 Bought $900 in store equipment on account from Holmes Equipment
Company, terms n/30, Invoice 98.
4 Purchased $700 in merchandise from Fuller Fabrics, terms 3/10, n/30,
Invoice 72.
7 Purchased computer speakers on account for $50 from Digital Solutions, terms
2/10, n/30, Invoice AB220.
10 Purchased fabric from Valley Upholstery for $1,500, terms 2/10, n/30,
Invoice 947.
488 Chapter 17 Special Journals: Purchases and Cash Payments
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SECTION 2 The Cash Payments Journal
You have learned about three special journals: the sales journal, the
BEFORE
cash receipts journal, and the purchases journal. Now you will study the YOU READ
cash payments journal. For many businesses like grocers who must pay
for the purchases of a wide variety of merchandise, frequent payments
Main Idea
make the use of the cash payments journal necessary.
The cash payments journal
is used to record the cash a
Using the Cash Payments Journal business pays out.
How Do You Record Cash Payments?
Read to Learn…
The cash payments journal is used to record all transactions in ➤ how to record cash
which cash is paid out or decreased. These transactions include: pay- payment transactions.
ments to creditors for items bought on account, cash purchases of mer- (p. 489)
chandise and other assets, payments for various expenses, payments ➤ how to post from the
for wages and salaries, and cash decreases for bank service charges and cash payments journal.
bankcard fees. The source documents for the journal entries are check (p. 494)
stubs and the bank statement. The cash payments journal is also called
the cash disbursements journal.
Key Terms
cash payments journal
Figure 17–6 shows the cash payments journal that On Your Mark
schedule of accounts payable
uses. Notice that it has five amount columns.
proving cash
The seven transactions that follow are typical of those recorded in
the cash payments journal. Note that each transaction in the cash pay-
ments journal results in a credit to the Cash in Bank account.
CASH PAYMENTS JOURNAL PAGE
DOC POST. GENERAL ACCOUNTS PURCHASES CASH
DATE NO. ACCOUNT NAME REF. PAYABLE DISCOUNTS IN BANK
DEBIT CREDIT DEBIT CREDIT CREDIT
1 1
2 2
3 3
Used to enter debits and credits to general ledger
accounts for which there are no special columns.
Used to record decreases to accounts in the accounts Every transaction
payable subsidiary ledger and to the Accounts Payable recorded here
controlling account. decreases
Cash in Bank.
Used to enter the amount of purchases discounts taken.
Figure 17–6 Cash Payments Journal
Section 2 The Cash Payments Journal 489
480-515_CH17_868829.indd 489 9/16/05 11:43:21 AM
Recording the Cash Purchase of an Asset
Cash purchases of various assets are recorded in the cash payments
journal. One asset commonly purchased for cash is insurance. Let’s record
a transaction involving a cash purchase of insurance.
ON YOUR MARK 1001
B u s i n e s s Tr a n s a c t i o n ATHLETIC WEAR
595 Leslie Street, Dallas, TX 75207
22-523
4210
DATE Dec. 17 20 --
On December 17 On Your Mark paid $1,500 to PAY TO THE
Keystone Insurance Company
ORDER OF $ 1,500.00
Keystone Insurance Company for the premium on a One thousand five hundred and no/100 DOLLARS
six-month insurance policy, Check 1001. Security National Bank
DALLAS, TEXAS
MEMO Michael Brown
JOURNAL ENTRY
421022523 727596 1001
CASH PAYMENTS JOURNAL PAGE 14
DOC POST. GENERAL ACCOUNTS PURCHASES CASH
DATE NO. ACCOUNT NAME REF. PAYABLE DISCOUNTS IN BANK
DEBIT CREDIT DEBIT CREDIT CREDIT
1 20-- 1
2 Dec. 17 1001 Prepaid Insurance 1 5 0 0 00 1 5 0 0 00 2
3 1 2 3 4 5 3
Refer to the cash payments journal above and follow these steps:
AS
YOU READ 1. Enter the date of the transaction in the Date column.
Compare and 2. Enter the check number in the Document Number column.
Contrast 3. Enter the name of the account debited in the Account Name column.
4. Because there is no special column for Prepaid Insurance, enter the
Purchases and Cash
amount of the debit in the General Debit column.
Payments Journals
How are the purchases 5. Enter the amount of the credit in the Cash in Bank Credit column.
journal and the cash After payment, the invoice for the insurance is filed.
payments journal
similar? How are they Recording a Cash Purchase of Merchandise
different? Retail businesses are constantly purchasing merchandise for resale.
While they make most purchases on account, many are for cash. Let’s record
a cash purchase of merchandise for resale.
ON YOUR MARK 1002
B u s i n e s s Tr a n s a c t i o n ATHLETIC WEAR
595 Leslie Street, Dallas, TX 75207
22-523
4210
DATE Dec. 19 20 --
On December 19 On Your Mark purchased mer- PAY TO THE
FastLane Athletics
ORDER OF $ 1,300.00
chandise from FastLane Athletics for $1,300, Check 1002. One thousand three hundred and no/100 DOLLARS
Security National Bank
DALLAS, TEXAS
JOURNAL ENTRY MEMO Michael Brown
421022523 727596 1002
CASH PAYMENTS JOURNAL PAGE 14
DOC POST. GENERAL ACCOUNTS PURCHASES CASH
DATE NO. ACCOUNT NAME REF. PAYABLE DISCOUNTS IN BANK
DEBIT CREDIT DEBIT CREDIT CREDIT
3 19 1002 Purchases 1 3 0 0 00 1 3 0 0 00 3
4 1 2 3 4 5 4
490 Chapter 17 Special Journals: Purchases and Cash Payments
480-515_CH17_868829.indd 490 9/16/05 11:43:25 AM
Refer to On Your Mark’s purchase from FastLane Athletics and the cash
AS
payments journal as you follow these steps: YOU READ
1. Enter the date of the transaction in the Date column. Key Point
2. Enter the check number in the Document Number column.
The General Column
3. Enter the name of the account debited in the Account Name
The General column of a
column.
special journal refers to
4. Because there is no special column for Purchases, enter the amount
the general ledger. The
of the debit in the General Debit column. account named in the
5. Enter the amount of the check in the Cash in Bank Credit column. Account Name column
After recording the transaction, the receipt for the cash purchase is filed. is the general ledger
account affected by the
Recording a Payment on Account transaction.
Now let’s learn how to make a payment on account and take a purchase
discount.
ON YOUR MARK 1003
B u s i n e s s Tr a n s a c t i o n ATHLETIC WEAR
595 Leslie Street, Dallas, TX 75207
22-523
4210
DATE Dec. 24 20 --
On December 24 On Your Mark paid $2,254 to PAY TO THE
ORDER OF Pro Runner Warehouse $ 2,254.00
Pro Runner Warehouse for merchandise purchased on Two thousand two hundred fifty-four and no/100 DOLLARS
account, $2,300 less a discount of $46, Check 1003. Security National Bank
DALLAS, TEXAS
MEMO Michael Brown
421022523 727596 1003
JOURNAL ENTRY
CASH PAYMENTS JOURNAL PAGE 14
DOC POST. GENERAL ACCOUNTS PURCHASES CASH
DATE NO. ACCOUNT NAME REF. PAYABLE DISCOUNTS IN BANK
DEBIT CREDIT DEBIT CREDIT CREDIT
4 24 1003 Pro Runner Warehouse 2 3 0 0 00 4 6 00 2 2 5 4 00 4
5 1 2 3 4 5 6 5
Refer to the purchases journal above and follow these steps:
1. Enter the date of the transaction in the Date column.
2. Enter the check number in the Document Number column.
3. Enter the creditor’s name in the Account Name column.
4. Enter the amount of the original purchase in the Accounts Payable
Debit column.
5. Enter the amount of the purchase discount in the Purchases
Discounts Credit column.
6. Enter the amount of the check in the Cash in Bank Credit column.
Remember that a processing stamp is placed on each invoice when it is
verified. After the cash payment has been journalized, the accounting clerk
records the check number on the “Check No.” line of the processing stamp.
The paid invoice is then filed.
Companies offer no discount for some purchases. For others they offer a
discount, but the business cannot pay within the discount period. In these
cases the check is written for the full amount of the purchase.
Section 2 The Cash Payments Journal 491
480-515_CH17_868829.indd 491 9/16/05 11:43:27 AM
Recording Other Cash Payments
Let’s record a check written to pay for shipping charges when merchan-
dise is sent FOB shipping point.
ON YOUR MARK 1004
B u s i n e s s Tr a n s a c t i o n ATHLETIC WEAR
595 Leslie Street, Dallas, TX 75207
22-523
4210
DATE Dec. 24 20 --
On December 24 On Your Mark issued Check 1004 PAY TO THE
ORDER OF Dara’s Delivery Service $ 275.00
for $275 to Dara’s Delivery Service for shipping charges Two hundred seventy-five and no/100 DOLLARS
on merchandise purchased from Sports Link Footwear. Security National Bank
DALLAS, TEXAS
MEMO Michael Brown
421022523 727596 1004
JOURNAL ENTRY
CASH PAYMENTS JOURNAL PAGE 14
DOC POST. GENERAL ACCOUNTS PURCHASES CASH
DATE NO. ACCOUNT NAME REF. PAYABLE DISCOUNTS IN BANK
DEBIT CREDIT DEBIT CREDIT CREDIT
5 24 1004 Transportation In 2 7 5 00 2 7 5 00 5
6 1 2 3 4 5 6
Refer to the cash payments journal above and follow these steps:
1. Enter the date of the transaction in the Date column.
2. Enter the check number in the Document Number column.
3. Enter the name of the account debited in the Account Name
column.
4. Because there is no special column for Transportation In, enter the
amount in the General Debit column.
5. Enter the amount of the check in the Cash in Bank Credit column.
Recording Payment of Payroll
In an earlier chapter, you learned how to record the payroll entry in
the general journal. When a business uses special journals, the entry for
payment of the payroll is recorded in the cash payments journal. The infor-
mation to record payroll transactions in journals is taken from the payroll
register.
To record the payroll transaction, refer to the cash payments journal
Connect to… and follow these steps:
MATHEMATICS 1. On the first line of the entry, enter the date of the transaction in the
A 1946 contest was held
Date column.
to determine whether a
2. Enter the check number in the Document Number column.
modern electric adding
3. Enter the name of the account debited in the Account Name
machine or an ancient
abacus could calculate column.
problems faster. The 4. Enter the amount of the payroll (gross pay) in the General Debit
abacus won all rounds column.
except multiplication. 5. Enter the net pay in the Cash in Bank Credit column.
6. On the next four lines, enter the names of the accounts credited in
the Account Name column. Enter the amount of each liability in
the General Credit column.
492 Chapter 17 Special Journals: Purchases and Cash Payments
480-515_CH17_868829.indd 492 9/16/05 11:43:29 AM
B u s i n e s s Tr a n s a c t i o n
On December 31 On Your Mark wrote Check 1012 for $2,974 to pay the payroll of $4,000 (gross earnings)
for the pay period ended December 31. The following amounts were withheld: Employees’ Federal Income Tax,
$640; Employees’ State Income Tax, $80; Social Security Tax, $248; and Medicare Tax, $58.
JOURNAL ENTRY
CASH PAYMENTS JOURNAL PAGE 14
DOC POST. GENERAL ACCOUNTS PURCHASES CASH
DATE NO. ACCOUNT NAME REF. PAYABLE DISCOUNTS IN BANK
DEBIT CREDIT DEBIT CREDIT CREDIT
13 31 1012 Salaries Expense 3 4 0 0 0 00 5 2 9 7 4 00 13
14 1 2 Employees’ Fed. Inc. Tax Pay. 4 6 4 0 00 14
Employees’ State Inc. Tax Pay. 8 0 00
6
15 15
16 Social Security Tax Pay. 2 4 8 00 16
17 Medicare Tax Pay. 5 8 00 17
18 18
Recording Bank Service Charges
Bank service charges are automatically deducted from the checking
account. Although no check is written to pay these charges, the transactions
are recorded in the cash payments journal because the charges decrease the
Cash in Bank account.
B u s i n e s s Tr a n s a c t i o n
On December 31 On Your Mark recorded a bank service charge for $20 indicated on the bank statement.
JOURNAL ENTRY
CASH PAYMENTS JOURNAL PAGE 14
DOC POST. GENERAL ACCOUNTS PURCHASES CASH
DATE NO. ACCOUNT NAME REF. PAYABLE DISCOUNTS IN BANK
DEBIT CREDIT DEBIT CREDIT CREDIT
18 31 Miscellaneous Expense 2 0 00 2 0 00 18
19 19
Recording Bankcard Fees AS
YOU READ
Most banks charge a fee for handling bankcard sales. This fee is automat-
ically deducted from the business’s checking account. For example, On Your In Your Experience
Mark’s bank deducted a bankcard fee of $75. The fee appeared on the bank Bank Service Charges
statement as a deduction from the checking account balance. The account- What bank service
ing clerk recorded this decrease in cash in the cash payments journal. charges, if any, has your
bank charged you?
Section 2 The Cash Payments Journal 493
480-515_CH17_868829.indd 493 9/16/05 11:43:41 AM
B u s i n e s s Tr a n s a c t i o n
On December 31 On Your Mark recorded the bankcard fee of $75 that appeared on the bank statement.
JOURNAL ENTRY
CASH PAYMENTS JOURNAL PAGE 14
DOC POST. GENERAL ACCOUNTS PURCHASES CASH
DATE NO. ACCOUNT NAME REF. PAYABLE DISCOUNTS IN BANK
DEBIT CREDIT DEBIT CREDIT CREDIT
19 31 Bankcard Fees Expense 7 5 00 7 5 00 19
20 20
The clerk also enters the bank charges in the checkbook records.
Figure 17–7 illustrates one way to adjust the balance on the check stub. The
deposit heading is crossed out, and the words Bankcard Fees are written in its
place. A deduction of $75 is entered on the stub. On the next line, the words
Less Bank Service Charge are written and an entry is made for the $20 deduc-
tion. Both amounts are subtracted from the balance brought forward.
AS
READ Posting from the Cash
YOU
Key Point
Payments Journal
How Do You Post from the Cash Payments Journal?
Posting from the Cash
Payments Journal Individual amounts in the Accounts Payable Debit column and the
Every day accounting General Debit column are posted daily. Column totals are posted at the end
clerks post individual of the month.
amounts in the Accounts To keep creditors’ accounts current, clerks make daily postings from the
Payable Debit column Accounts Payable Debit column to the accounts payable subsidiary ledger.
to the accounts payable Refer to Figure 17–8 and follow these steps:
subsidiary ledger. 1. Enter the date of the transaction in the Date column of the
subsidiary ledger account.
2. In the subsidiary ledger account’s Posting Reference column, enter
the journal letters (CP for the
cash payments journal) and $ No. 1013
Date 20
the page number.
To
3. In the Debit column of the For
subsidiary ledger account, Dollars Cents
enter the amount recorded in Balance brought forward 15,274 00
the Accounts Payable Debit Bankcard
Add deposits Fees 75 00
column of the journal.
Less Bank Svc. Chg. 20 00
4. Compute the new account
Total 15,179 00
balance and enter it in the
Less this check
Balance column. If the
Balance carried forward
account has a zero balance,
draw a line through the
Figure 17–7 Recording Bankcard Fees
Balance column.
and Service Charges in the Checkbook
494 Chapter 17 Special Journals: Purchases and Cash Payments
480-515_CH17_868829.indd 494 9/16/05 11:43:43 AM
CASH PAYMENTS JOURNAL PAGE 14
DOC POST. GENERAL ACCOUNTS PURCHASES CASH
DATE NO. ACCOUNT NAME REF. PAYABLE DISCOUNTS IN BANK
DEBIT CREDIT DEBIT CREDIT CREDIT
1 20-- 1
2 Dec. 17 1001 Prepaid Insurance 135 1 5 0 0 00 1 5 0 0 00 2
3 19 1002 Purchases 501 1 3 0 0 00 1 3 0 0 00 3
4 24 1003 Pro Runner Warehouse ✓ 2 3 0 0 00 4 6 00 2 2 5 4 00 4
5 5 5
Pro Runner Warehouse 3 2
NAME
1 ADDRESS 22009 Ben White Blvd., Austin, TX 78705
POST.
DATE DESCRIPTION REF. DEBIT CREDIT BALANCE
20--
Dec. 14 P12 2 3 0 0 00 2 3 0 0 00
24 CP14 2 3 0 0 00
4
Figure 17–8 Posting from the Cash Payments Journal to the Accounts Payable Subsidiary Ledger
5. Return to the cash payments journal and enter a check mark (✓) in
the Posting Reference column.
Figure 17–9 shows On Your Mark’s accounts payable subsidiary ledger
after all postings have been made. Notice that the accounts contain entries
from the purchases, cash payments, and general journals.
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Figure 17–9 The Completed Accounts Payable Subsidiary Ledger
Section 2 The Cash Payments Journal 495
480-515_CH17_868829.indd 495 9/16/05 11:43:44 AM
NAME Dara’s Delivery Service
ADDRESS 14500 Ellis Blvd., Plano, TX 75093
POST.
DATE DESCRIPTION REF. DEBIT CREDIT BALANCE
20--
Dec. 1 Balance ✓ 3 0 0 00
30 CP14 3 0 0 00
NAME FastLane Athletics
ADDRESS 35992 Fletcher Blvd. #334, Boston, MA 02106
POST.
DATE DESCRIPTION REF. DEBIT CREDIT BALANCE
20--
Dec. 1 Balance ✓ 1 000 00
14 P12 3 0 0 0 00 4 000 00
16 G21 2 0 0 00 3 800 00
18 P12 2 0 0 0 00 5 800 00
28 CP14 2 0 0 0 00 3 800 00
NAME Geary Office Supply
ADDRESS 3300 Fulton Street, Dallas, TX 75219
POST.
DATE DESCRIPTION REF. DEBIT CREDIT BALANCE
20--
Dec. 15 P12 2 5 0 00 2 5 0 00
NAME Pro Runner Warehouse
ADDRESS 22009 Ben White Blvd., Austin, TX 78705
POST.
DATE DESCRIPTION REF. DEBIT CREDIT BALANCE
20--
Dec. 14 P12 2 3 0 0 00 2 3 0 0 00
24 CP14 2 3 0 0 00
NAME Sports Link Footwear
ADDRESS 300 Page St. #910, San Francisco, CA 94107
POST.
DATE DESCRIPTION REF. DEBIT CREDIT BALANCE
20--
Dec. 1 Balance ✓ 2 0 0 0 00
10 P12 4 0 0 0 00 6 0 0 0 00
27 P12 1 5 0 0 00 7 5 0 0 00
31 CP14 1 5 0 0 00 6 0 0 0 00
NAME Sports Nutrition Supply
ADDRESS 348 11th Street, Cleveland, OH 44112
POST.
DATE DESCRIPTION REF. DEBIT CREDIT BALANCE
20--
Dec. 1 Balance ✓ 1 5 0 0 00
12 P12 6 0 0 00 2 1 0 0 00
27 CP14 6 0 0 00 1 5 0 0 00
Figure 17–9 The Completed Accounts Payable Subsidiary Ledger (continued)
496 Chapter 17 Special Journals: Purchases and Cash Payments
480-515_CH17_868829.indd 496 9/16/05 11:43:47 AM
CASH PAYMENTS JOURNAL PAGE 14
DOC POST. GENERAL ACCOUNTS PURCHASES CASH
DATE NO. ACCOUNT NAME REF. PAYABLE DISCOUNTS IN BANK
DEBIT CREDIT CREDIT CREDIT CREDIT
1 20-- 1
2 Dec. 17 1001 Prepaid Insurance 135 1 5 0 0 00 1 5 0 0 00 2
3 5 3
ACCOUNT Prepaid Insurance 3 ACCOUNT NO. 135
1 POST. BALANCE 2
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 17 CP14 1 5 0 0 00 1 5 0 0 00 4
Figure 17–10 Posting from the General Debit Column of the Cash Payments Journal
Posting from the General Debit Column AS
YOU READ
Accountants post daily from the General Debit column to the appropri-
ate general ledger accounts. Refer to Figure 17–10 as you read the following Instant Recall
steps. Totaling Special Journal
1. Enter the date of the transaction in the Date column of the general Columns First, foot
ledger account. columns with the totals
2. Enter the journal letters (CP for the cash payments journal) and the entered in pencil. After
page number in the Posting Reference column of the general ledger verifying the totals, write
account. them in ink.
3. In the Debit column, enter the amount from the General Debit
column of the cash payments journal.
4. Compute the new balance and enter it in the appropriate Balance
column. (Because the example used here has no previous balance,
the amount recorded in the Debit column is also entered in the
Debit Balance column.)
5. Return to the cash payments journal and enter the account number
in the Posting Reference column.
All the transactions in the General Debit column are posted to the gen-
eral ledger accounts in the same way.
Accountants also post entries daily from the General Credit column to
the appropriate general ledger accounts. This is done in the same way as
shown for General Debit Column entries.
Totaling, Proving, and Ruling the Cash
Payments Journal
Accountants total the cash payments journal following the same steps
that they use for other special journals. Before they rule the journal, they
prove the equality of debits and credits.
Section 2 The Cash Payments Journal 497
480-515_CH17_868829.indd 497 9/16/05 11:43:50 AM
CASH PAYMENTS JOURNAL PAGE 14
DOC POST. GENERAL ACCOUNTS PURCHASES CASH
DATE NO. ACCOUNT NAME REF. PAYABLE DISCOUNTS IN BANK
DEBIT CREDIT DEBIT CREDIT CREDIT
1 20-- 1
2 Dec. 17 1001 Prepaid Insurance 135 1 5 0 0 00 1 5 0 0 00 2
3 19 1002 Purchases 501 1 3 0 0 00 1 3 0 0 00 3
4 24 1003 Pro Runner Warehouse ✓ 2 3 0 0 00 4 6 00 2 2 5 4 00 4
5 24 1004 Transportation In 505 2 7 5 00 2 7 5 00 5
6 26 1005 Champion Store Supply ✓ 1 2 0 0 00 1 2 0 0 00 6
7 27 1006 Sports Nutrition Supply ✓ 6 0 0 00 6 0 0 00 7
8 28 1007 FastLane Athletics ✓ 2 0 0 0 00 4 0 00 1 9 6 0 00 8
9 30 1008 Dara’s Delivery Service ✓ 3 0 0 00 3 0 0 00 9
10 31 1009 Rent Expense 660 2 0 0 0 00 2 0 0 0 00 10
11 31 1010 Computer Solutions ✓ 1 2 0 0 00 2 4 00 1 1 7 6 00 11
12 31 1011 Sports Link Footwear ✓ 1 5 0 0 00 3 0 00 1 4 7 0 00 12
13 31 1012 Salaries Expense 665 4 0 0 0 00 2 9 7 4 00 13
14 Employee’s Federal Inc. Tax Pay. 205 6 4 0 00 14
15 Employee’s State Inc. Tax Pay. 211 8 0 00 15
16 Social Security Tax Payable 212 2 4 8 00 16
17 Medicare Tax Payable 213 5 8 00 17
18 31 — Miscellaneous Expense 655 2 0 00 2 0 00 18
19 31 — Bankcard Fees Expense 605 7 500 7 5 00 19
9 1 7 0 00 1 0 2 6 00 9 1 0 0 00 1 4 0 00 17 1 0 4 00
20 31 Totals 9 1 7 0 00 1 0 2 6 00 9 1 0 0 00 1 4 0 00 17 1 0 4 00 20
21 21
Figure 17–11 The Completed Cash Payments Journal
Debit Columns Credit Columns
General $ 9,170 General $ 1,026
Accounts Payable 9,100 Purchases Discounts 140
Cash in Bank 17,104
$18,270 $18,270
Since debits equal credits, the cash payments journal can be double-
ruled, as shown in Figure 17–11.
Posting Column Totals to the General Ledger
At the end of the month, the accountant posts the total of each special
amount column to the general ledger account named in the column head-
ing. For the cash payments journal, column totals are posted to Accounts
Payable, Purchases Discounts, and Cash in Bank. Figure 17–12 shows
the posting of the three special column totals to the general
ledger accounts. Note that the account numbers for the three
general ledger accounts are written in parentheses below the
double rule in the appropriate columns of the cash payments
journal.
The totals of the General Debit and Credit columns are
not posted. Each entry in those columns was posted indi-
vidually to the general ledger accounts. A check mark (✓)
is entered below the double rule in the General Debit and
Credit columns.
498 Chapter 17 Special Journals: Purchases and Cash Payments
480-515_CH17_868829.indd 498 9/16/05 11:43:51 AM
CASH PAYMENTS JOURNAL PAGE 14
DOC POST. GENERAL ACCOUNTS PURCHASES CASH
DATE NO. ACCOUNT NAME REF. PAYABLE DISCOUNTS IN BANK
DEBIT CREDIT DEBIT CREDIT CREDIT
1 20-- 1
2 Dec. 17 1001 Prepaid Insurance 135 1 5 0 0 00 1 5 0 0 00 2
19 31 — Bankcard Fees Expense 605 7 5 00 7 5 00 19
9 1 7 0 00 1 0 2 6 00 9 1 0 0 00 1 4 0 00 17 1 0 4 00
20 31 Totals 9 1 7 0 00 1 0 2 6 00 9 1 0 0 00 1 4 0 00 17 1 0 4 00 20
21 (✓) (✓) ( 201) ( 510) ( 101) 21
22 22
ACCOUNT Cash in Bank ACCOUNT NO. 101
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 15 0 0 0 00
31 CR13 17 2 8 3 00 32 2 8 3 00
31 CP14 17 1 0 4 00 15 1 7 9 00
ACCOUNT Accounts Payable ACCOUNT NO. 201
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 6 3 0 0 00
16 G21 2 0 0 00 6 1 0 0 00
31 P12 16 8 5 0 00 22 9 5 0 00
31 CP14 9 1 0 0 00 13 8 5 0 00
ACCOUNT Purchases Discounts ACCOUNT NO. 510
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 1 2 0 0 00
31 CP14 1 4 0 00 1 3 4 0 00
Figure 17–12 Posting Column Totals from the Cash Payments Journal
Proving the Accounts Payable Subsidiary Ledger
The accountant prepares a schedule of accounts payable after posting
the column totals. This schedule lists all creditors in the accounts payable
subsidiary ledger, the balance in each account, and the total amount owed
to all creditors. The clerk proves the accounts payable subsidiary ledger
when the total of the schedule of accounts payable agrees with the balance
of the Accounts Payable (controlling) account in the general ledger.
Figure 17–13 on page 500 shows On Your Mark’s schedule of accounts
payable for December. The accounts are listed in alphabetical order. All
creditors are listed, even those with zero balances. Notice that the total listed
on the schedule ($13,850) agrees with the balance of the Accounts Payable
(controlling) account.
Section 2 The Cash Payments Journal 499
480-515_CH17_868829.indd 499 9/16/05 11:43:58 AM
ACCOUNT Accounts Payable ACCOUNT NO. 201
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 6 300 00
16 G21 2 0 0 00 6 100 00
31 P12 16 8 5 0 00 22 950 00
31 CP14 9 1 0 0 00 13 850 00
On Your Mark Athletic Wear
Schedule of Accounts Payable
December 31, 20--
Champion Store Supply 1 0 0 0 00
Computer Solutions 1 3 0 0 00
Dara’s Delivery Service The balance of the
Accounts Payable
FastLane Athletics 3 8 0 0 00
account should equal
Geary Office Supply 2 5 0 00 the total of the schedule
Pro Runner Warehouse of accounts payable.
Sports Link Footwear 6 0 0 0 00
Sports Nutrition Supply 1 5 0 0 00
Total Accounts Payable 13 8 5 0 00
Figure 17–13 Schedule of Accounts Payable
Proving Cash
Proving cash is the process of verifying that cash recorded in the
accounting records agrees with the amount entered in the checkbook. Ide-
ally businesses should prove cash each day. When a business uses special
journals, however, it updates the Cash in Bank account in the general ledger
at the end of the month. For many businesses, then, proving cash is done
at the end of the month.
500 Chapter 17 Special Journals: Purchases and Cash Payments
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The cash proof may be prepared on plain paper, on accounting stationery,
on a special cash proof form, or on a computer. The cash proof for On Your
Mark, shown in Figure 17–14, is prepared on two-column accounting sta-
tionery. To prove cash, follow these steps:
1. On the first line, record the beginning balance of Cash in Bank
according to the general ledger account.
2. On the next line, enter the total cash received during the month.
This is the total of the Cash in Bank Debit column from the cash
receipts journal.
3. Add the first and second lines.
4. From this subtotal subtract the cash payments for the month.
This is the total of the Cash in Bank Credit column from the cash
payments journal.
5. Compare this figure to the balance shown on the last check stub
in the checkbook. If the ending balance of Cash in Bank and the
balance on the check stub match, you have proved cash. In this
example the ending balance of Cash in Bank is $15,179. The
balance shown on the last check stub is also $15,179; therefore,
cash is proved.
If the balances are not equal, you should look for errors. Recording a
bank service charge or a bankcard fee in the checkbook but not in the gen-
eral ledger can cause the cash proof to be out of balance. Next, you should
verify that all disbursements and deposits were recorded in the accounting
records. If cash is being proved at month-end, the accountant can then
continue making month-end entries.
On Your Mark Athletic Wear
Cash Proof
December 31, 20--
Beginning Cash in Bank Balance 15 000 00
Plus: Cash Receipts for the Month 17 283 00
Subtotal 32 283 00
Less: Cash Payments for the Month 17 104 00
Ending Cash in Bank Balance 15 179 00
Check Stub Balance 15 1 7 9 00
Figure 17–14 Cash Proof
Note that proving cash is different from reconciling a bank statement,
which is taught in Chapter 11 (pages 284–287). Proving cash verifies that
amounts recorded in the general ledger, cash receipts journal, and cash pay-
ments journal agree with the checking account balance. It does not confirm
that the bank has processed all the deposits from the business or that all
outstanding checks have cleared.
Section 2 The Cash Payments Journal 501
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SECTION 2 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Create a table similar to 4RANSACTION *OURNAL !CCOUNTS $EBITED !CCOUNTS #REDITED
the one here to identify the 3OLD MERCHANDISE ON ACCOUNT
journal in which each of the 0URCHASED MERCHANDISE ON ACCOUNT
following transactions should 0AID A CREDITOR
be recorded. Identify debit 3OLD MERCHANDISE FOR CASH
and credit parts for each "ANKCARD SALES
transaction. 0AID THE PAYROLL
$ISCOVERED THAT PURCHASE OF SUPPLIES
WAS INCORRECTLY DEBITED TO 0URCHASES
Do the Math
At Car Wash Palace, hourly wage earners are paid weekly. These employees earned $8,000 in
total gross earnings this week.
1. Calculate each withholding amount.
2. What is the total net pay for this week?
Tax Rate
Social Security 6.2%
Medicare 1.45%
Federal Unemployment 0.8%
State Unemployment 5.4%
State Income 4.0%
Problem 17–2 Preparing a Cash Proof
Apple Tree Boutique uses special journals. On September 30 the total of the Cash in Bank
Debit column of the cash receipts journal is $18,750.12. The total of the Cash in Bank
Credit column of the cash payments journal is $16,890.43. The checkbook balance on
September 30 is $5,610.59.
Instructions Prepare a cash proof for September in your working papers. The balance of
Cash in Bank on September 1 is $3,750.90.
$ 873.00 No. 104
Problem 17–3 Analyzing a Date November 2 20 --
To Colonial Products Inc.
Source Document For Inv. 323 $900 less 3% disc. $27.00
The Country Peddler, which is a retail merchandising Dollars Cents
business, had the following transaction that occurred Balance brought forward 3,468 29
on November 2. Add deposits
Instructions Analyze Check Stub 104 that is shown
here. In your working papers, make the necessary Total 3,468 29
entry to record the transaction on page 11 of the cash Less this check 873 00
payments journal. Balance carried forward 2,595 29
502 Chapter 17 Special Journals: Purchases and Cash Payments
480-515_CH17_868829.indd 502 9/16/05 11:44:05 AM
Accounting Careers in Focus
DIRECTOR OF FINANCE
Leslie Karnauskas
..
Cobe Cardiovascular, Arvada, Colorado Tips from .
Q: What does Cobe Cardiovascular do?
ing your
A: We identify and develop products that help treat Before submitt
forget to
cardiovascular disease. résumé, don’t
eread the
Q: What are your day-to-day responsibilities? proofread it. R
ral times and
document seve
A: I manage the general ledger, financial reporting, accounts do the same.
ask a friend to al
payable, and cost accounting groups at three of our company’s or grammatic
A single typo g
sites. I am part of a team responsible for budgeting and use a hirin
mistake can ca
forecasting, internal and external audit, and financial analysis. uestion your
manager to q n
m and attentio
Q: What has been key to your success? professionalis
A: I have always set high standards for myself and those I manage. to detail.
I continually look for new and better ways to get things done,
not just in accounting but in all aspects of the business. I’ve also
learned the importance of being proactive and taking initiative.
Q: What is most challenging about your job?
A: Finding the time and resources to meet our company’s goals. I constantly
reprioritize my tasks and manage several initiatives at once to make sure I meet
all deadlines and still focus on growing the business.
Q: What advice do you have for accounting students?
A: Learn as much as you can about the company you join—its products, market,
and strategy. Involve yourself in every aspect of the business. Join a professional
organization and volunteer on a committee or its board to build leadership
skills. Also, pursue interests outside of work to balance your life.
CAREER FACTS
Nature of the Work: Maintain budgeting and forecasting models; assist with business-
▲
funding decisions; hire, train, and motivate finance staff.
Training or Education Needed: At least 10 years of public accounting or finance
▲
experience. A master’s degree in business administration, as well as a CPA or CMA
designation is preferred.
Aptitudes, Abilities, and Skills: Strong leadership abilities, technology skills, analytical
▲
skills, and communication skills.
Salary Range: $80,000 to $180,000 depending on location, experience, and company size.
▲ ▲
Career Path: Obtain the required degrees and certifications. Gain job experience by
either working for a public accounting firm or in management accounting. Once in a
corporate environment, gradually take on increased responsibility and move into a
management position.
Thinking Critically How can you improve your time-management skills and increase productivity?
Chapter 17 Accounting Careers in Focus 503
480-515_CH17_868829.indd 503 9/16/05 11:44:07 AM
CH A P T ER 17 Summary
Key Concepts
1. A purchases journal is used to record purchases made on credit instead of with cash. The
Purchases Debit column is used for merchandise purchases only. Other purchases are recorded in
the General column. The cash payments journal is used to record all decreases to cash.
2. The following illustrates the purchases journal entry to record the purchase of merchandise on
account.
PURCHASES JOURNAL PAGE 12
ACCOUNTS GENERAL
DATE INVOICE CREDITOR’S ACCOUNT CREDITED POST. PAYABLE PURCHASES
NO. REF. DEBIT POST.
CREDIT ACCOUNT DEBITED REF. DEBIT
1 Date Invoice Creditor’s Name x x xx x x xx 1
2 No. 2
3 3
The following types of transactions are recorded in the cash payments journal:
(a) merchandise purchased for cash
(b) payment to a creditor
(c) payment to a creditor with a cash discount taken
(d) cash paid out but no check written (for example, a bank service charge)
CASH PAYMENTS JOURNAL PAGE 14
DOC POST. GENERAL ACCOUNTS PURCHASES CASH
DATE NO. ACCOUNT NAME REF. PAYABLE DISCOUNTS IN BANK
DEBIT CREDIT DEBIT CREDIT CREDIT
(a) 1 Date Ck # Purchases x x xx x x xx 1
(b) 2 Date Ck # Creditor’s Account Name x x xx x x xx 2
(c) 3 Date Ck # Creditor’s Account Name x x xx x x xx x x xx 3
(d) 4 Date --- Account Name to be Debited x x xx x x xx 4
5 5
3. Follow these steps to record payroll transactions in the cash payments journal:
(a) Enter the date of the transaction in the Date column.
(b) Enter the check number in the Document Number column.
(c) Enter the name of the account debited in the Account Name column.
(d) Enter the amount of the payroll (gross pay) in the General Debit column.
(e) Enter the net pay amount in the Cash in Bank Credit column.
(f) On the next four lines, enter the names of the accounts credited in the Account Name
column, and enter the amount of each liability in the General Credit column.
4. Post these columns’ individual amounts daily:
Journal Individual Column Amounts Are Posted To:
Purchases Accounts Payable Credit column ➤ Subsidiary ledger creditor account
Journal
General Debit column ➤ General ledger account
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Summary CHAPT E R 1 7
Journal Individual Column Amounts Are Posted To:
Cash Accounts Payable Debit column ➤ Subsidiary ledger creditor account
Payments
Journal General Debit column ➤ General ledger account
General Credit column ➤ General ledger account
Post these column totals at month-end:
Journal Individual Column Amounts Are Posted To:
Purchases Accounts Payable Credit column ➤ Accounts Payable account
Journal
Purchases Debit column ➤ Purchases account
Cash Accounts Payable Debit column ➤ Accounts Payable account
Payments
Journal Purchases Discounts Credit column ➤ Purchases Discounts account
Cash in Bank Credit column ➤ Cash in Bank account
5. Complete seven steps before you post special journal column totals to the general ledger:
(a) Rule the amount columns.
(b) Foot the amount columns.
(c) Prove the journal.
(d) Under the last transaction, enter the date the journal is totaled in the Date column.
(e) On the same line, enter the word Totals
• in the purchases journal Creditors’ Account Credited column
• in the cash payments journal Account Name column
(f) Enter the column totals, in ink, just below the footings.
(g) Double-rule the amount columns.
6. To prove the accounts payable subsidiary ledger, accountants prepare a schedule of accounts
payable, which is a list of each creditor, the balance in the creditor’s account, and the total
amount due to all creditors. The Accounts Payable account is the controlling account
for the accounts payable subsidiary ledger. Review this relationship in Figure 17–13 on
page 500.
7. At the end of each month, prove cash by verifying that the cash recorded in the accounting
records agrees with the amount shown in the checkbook.
Key Terms
cash payments journal (p. 489) purchases journal (p. 482)
proving cash (p. 500) schedule of accounts payable (p. 499)
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C H A P T ER 17 Review and Activities
AFTER
YOU READ
Check Your Understanding
1. Purchases and Cash Payments Journals
a. What are the source documents for the purchases journal?
b. What are the source documents for the cash payments journal?
2. Recording Transactions
a. List the steps to record transactions in the purchases journal.
b. Bank service charges are automatically deducted from the bank account. Why are these
charges recorded in the cash payments journal?
3. Recording Payroll Payments
a. Where do you find the information for recording payroll transactions in the cash payments
journal?
b. In recording payroll, what four liabilities are entered in the General Credit column of the cash
payments journal?
4. Posting from Special Journals
a. When are purchases transactions posted to the accounts payable subsidiary ledger? Why?
b. When are cash payments transactions posted to the accounts payable subsidiary ledger? Why?
5. Totaling, Proving, and Ruling
a. When totaling, proving, and ruling the purchases journal, where are the double rules placed?
b. What does the check mark (✓) in the first Posting Reference column indicate?
6. Schedule of Accounts Payable
a. What information does the schedule of accounts payable include?
b. With what account in the general ledger must the total of the schedule of accounts payable
agree when proving the accounts payable subsidiary ledger?
7. Proving Cash
a. When does a business that uses special journals update the Cash in Bank account in the
general ledger?
b. How does an accountant prove cash?
Apply Key Terms
You are an applicant for an accounting clerk
position with PETCO and asked to write definitions
for these terms. Make sure you connect your
knowledge of these accounting terms to the financial
activities you believe take place at PETCO.
cash payments journal schedule of accounts
proving cash payable
purchases journal
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Computerized Accounting CHAPT E R 1 7
Mastering Purchases and Cash Payments
Making the Transition from a Manual to a Computerized System
Task Manual Methods Computerized Methods
Setting up • Ledger sheet or card is prepared with • Record details of vendor accounts into
vendor records vendor details such as name, address, vendor records.
and contact information. • The software will access this
• Account activities are posted to the information automatically each time
vendor subsidiary ledger accounts. the vendor ID code is used.
Recording • A journal entry is prepared to record • The accounting software creates a credit
a debit the debit memorandum. memo and applies it to the appropriate
memorandum • The journal entry is posted to the outstanding vendor invoice.
subsidiary account and to the general • The accounting software automatically
ledger. posts the credit memo to the vendor
account and to the general ledger.
Q&A
Peachtree Question Answer
How do I set up a new 1. From the Maintain menu, select Vendors.
vendor account? 2. Assign a Vendor ID to the new vendor.
3. Enter vendor name and contact information.
4. Click on the Purchases Defaults tab.
5. Verify or enter the appropriate purchase default GL account number.
How do I record a 1. From the Tasks menu, select Vendor Credit Memos.
debit memorandum? 2. Select the appropriate vendor from the Vendor ID drop-down list.
3. Enter the Vendor Credit number in the Credit Number field.
4. Click on the Apply to Invoices tab, select the invoice to which the credit memo
is applied, and enter the credit amount.
QuickBooks Q & A
QuickBooks Question Answer
How do I set up a new 1. From the Lists menu, select Vendor List.
vendor record? 2. Click the Vendor pull-down menu and choose New.
3. Enter vendor name and contact information.
4. Click on the Additional Info tab and enter any additional vendor information.
How do I issue 1. From the Vendors menu, select Enter Bills.
and record a debit 2. Click the Credit radio button and enter the vendor name.
memorandum? 3. Click on the Items tab and select the item to which the credit memo is applied.
4. Enter the quantity and select a customer from the Customer:Job field.
For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers.
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C H A P T ER 17 Problems
Complete problems using: Manual Glencoe Peachtree Complete QuickBooks
OR OR
Working Papers Accounting Software Templates
Problem 17–4 Recording Payment of the Payroll
SMART GUIDE Denardo’s Country Store pays its employees on a biweekly basis. This week
Step–by–Step Instructions: the payroll is $2,000. You issued Check 949 for $1,487 in payment of the
Problem 17–4 payroll less the following amounts: Employees’ Federal Income Tax, $320;
1. Select the problem set Employees’ State Income Tax, $40; Social Security Tax, $124; and Medicare
for Denardo’s Country Tax, $29.
Store (Prob. 17–4).
2. Rename the company Instructions In your working papers, record the July 15 payroll on page 4
and set the system date. of the cash payments journal.
3. Record the payment of
the payroll using the Analyze Calculate the total deductions from employees’ wages for
Payments option. federal, state, social security, and Medicare taxes. What
4. Print a Cash Disburse-
percentage of gross payroll is this amount?
ments Journal report.
5. Proof your work.
6. Complete the Analyze
activity. Problem 17–5 Recording Transactions in the
7. End the session.
Purchases Journal
TIP: Remember to update
the G/L Account field for
Sunset Surfwear had the following purchases transactions for the month
each line of a multipart of July.
cash payment transaction.
Instructions Use the purchases journal in your working papers.
1. Record each of the following transactions on page 4 of the purchases
journal.
SMART GUIDE 2. Foot, prove, total, and rule the purchases journal.
Step–by–Step Instructions:
Date Transactions
Problem 17–5
1. Select the problem set July 1 Purchased merchandise on account from Waverunner Designs
for Sunset Surfwear for $1,200, Invoice WD121.
(Prob. 17–5). 3 Received Invoice CA552 from Capital Accessories for the
2. Rename the company
and set the system date. purchase of $1,600 in merchandise on account.
3. Record all purchases 5 Purchased $2,000 in store equipment on account from Neilson
on account using the Store Equipment, Invoice NS444.
Purchases/Receive
9 Purchased $870 in merchandise on account from Kelley
Inventory option.
4. Print a Purchases Apparel Inc., Invoice KA772.
Journal report. 12 Purchased $250 in supplies from Moore Paper & Office Supply
5. Proof your work. Co., Invoice MPS266.
6. Complete the Analyze
activity. 15 Purchased $1,800 in merchandise on account from AcaTan
7. End the session. Products, Invoice ATP99. CONTINUE
TIP: Remember to change
the G/L Account field
as needed for general
purchases.
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Problems CHAPT E R 1 7
QuickBooks
Date Transactions (cont.)
July 18 Purchased $500 in office equipment on account from Moore PROBLEM GUIDE
Paper & Office Supply Co., Invoice MPS275. Step–by–Step Instructions:
22 Received Invoice WD156 from Waverunner Designs for the Problem 17–5
purchase of $900 in merchandise on account. 1. Restore the Problem
25 Purchased $475 in merchandise on account from Capital 17-5.QBB file.
2. Enter all purchases on
Accessories, Invoice CA560. account using the Enter
28 Purchased from Kelley Apparel Inc. $390 in merchandise on Bills option.
account, Invoice KA800. 3. Print a Journal report.
4. Proof your work.
30 Received Invoice NS460 from Neilson Store Equipment for the 5. Print a Vendor Balance
purchase of $1,200 in store equipment on account. Summary.
6. Complete the Analyze
Analyze Calculate the total purchases on account for the month. activity.
7. Back up your work.
Problem 17–6 Recording and Posting Purchases
Shutterbug Cameras, a retail merchandising business, had the following SMART GUIDE
purchases on account for the month of July. In the working papers, the Step–by–Step Instructions:
beginning balances in the accounts are opened for you. Problem 17–6
Instructions In your working papers: 1. Select the problem set
for Shutterbug Cameras
1. Record July’s transactions on page 18 of the purchases journal. (Prob. 17–6).
2. Post to the accounts payable subsidiary ledger accounts daily. 2. Rename the company
and set the system date.
3. Post amounts entered in the General Debit column daily. 3. Record all purchases
4. Foot, prove, total, and rule the purchases journal at the end of the on account using the
Purchases/Receive
month.
Inventory option.
5. Post the column totals at the end of the month to the account named 4. Print a Purchases
in the column heading. Journal report.
5. Proof your work.
6. Prepare a schedule of accounts payable. 6. Print a General Ledger
report and a Vendor
Date Transactions Ledgers report.
July 1 Purchased $1,200 in merchandise on account from U-Tech 7. Complete the Analyze
activity.
Products, Invoice UT220. 8. End the session.
3 Purchased $140 in supplies on account from State Street Office
TIP: Remember to change
Supply, Invoice 983, n/30. the G/L Account field for
6 Received Invoice 1338 from Photo Emporium for the purchase purchases other than
of $150 in merchandise on account, 2/10, n/30. merchandise.
9 Invoice 445 for $90 was sent by Allen’s Repair for plumbing
repairs completed at the store (Maintenance Expense).
12 Purchased $800 in merchandise on account from Video Optics
Inc., Invoice VO167, 3/15, n/45.
15 Received Invoice 1322 from Digital Precision Equipment for
the purchase of $2,500 in store equipment on account, n/30.
CONTINUE
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C H A P T ER 17 Problems
Date Transactions (cont.)
July 18 Purchased $1,300 in merchandise on account from U-Tech
Products, Invoice UT257.
20 Purchased $400 in supplies on account from ProStudio Supply,
Invoice 4677.
23 Photo Emporium sent Invoice 1359 for the purchase of $600 of
merchandise on account.
26 Received Invoice 478 for $120 from Allen’s Repair for
additional plumbing work completed at the store.
28 Purchased $200 in merchandise on account from Video Optics
Inc., Invoice VO183.
Analyze Explain what problems would occur if the transaction of
July 23 (Photo Emporium) was posted to the accounts
payable subsidiary ledger as $60.
Problem 17–7 Recording and Posting
SMART GUIDE Cash Payments
Step–by–Step Instructions: River’s Edge Canoe & Kayak is a retail merchandising business located in
Problem 17–7 Jackson Hole, Wyoming. The beginning balances of the accounts needed to
1. Select the problem set complete this problem are opened in your working papers.
for River’s Edge Canoe &
Kayak (Prob. 17–7). Instructions In your working papers:
2. Rename the company
and set the system date. 1. Record the transactions on page 19 of the cash payments journal.
3. Record all cash 2. Post the individual amounts in the Accounts Payable Credit column
payments using the
on a daily basis to the creditors’ accounts.
Payments option.
4. Print a Cash Disburse- 3. Post the individual amounts in the General Debit and Credit columns
ments Journal report. on the date the transaction occurred.
5. Proof your work.
6. Print a General Ledger 4. Foot, prove, total, and rule the cash payments journal.
report and a Vendor 5. Post the column totals at the end of the month.
Ledgers report.
6. Prepare a schedule of accounts payable.
7. Complete the Analyze
activity. 7. Prove cash at the end of the month. The beginning Cash in Bank
8. End the session. balance was $8,000; cash receipts were $7,000; and the ending check
TIP: Sometimes you may stub balance is $8,402.
have to manually enter a
cash discount when you Date Transactions
record a cash payment.
July 1 Issued Check 1405 for $1,372 to North American Waterways
Suppliers in payment on account of $1,400 invoice less a
2% discount.
3 Received insurance premium statement from Rocky Mountain
Insurance Company. Issued Check 1406 for $1,800. CONTINUE
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Problems CHAPT E R 1 7
Date Transactions (cont.)
July 5 Issued Check 1407 to Pacific Wholesalers for $500 to apply SMART GUIDE
on account. Step–by–Step Instructions:
8 Received an invoice for $300 from Jackson News for Problem 17–8
advertising. Issued Check 1408. 1. Select the problem set
12 Issued Check 1409 for $686 to Trailhead Canoes in payment on for Buzz Newsstand
account of $700 invoice less a 2% discount. (Prob. 17–8).
2. Rename the company
15 Issued Check 1410 for $200 to Rollins Plumbing Service in full and set the system date.
payment of the amount owed on account. 3. Enter the purchases on
18 Issued Check 1411 for $75 to Ben Jacobs for completing odd account.
4. Record all cash
jobs in the store (Miscellaneous Expense). payments.
20 Purchased $90 in supplies from StoreMart Supply by issuing 5. Print the following
Check 1412. reports: Purchases
Journal, Cash
22 Paid StoreMart Supply $400 to apply on account, Check 1413.
Disbursements Journal,
24 Issued Check 1414, $700 to Office Max, store equipment. and Vendor Ledgers.
25 Paid Mohican Falls Kayak Wholesalers $200 to apply on 6. Proof your work.
account, Check 1415. 7. Print a General Ledger
report.
26 Issued Check 1416 to Office Max, $150 to apply on account. 8. Complete the Analyze
28 Paid transportation charges of $125 to Stein’s Trucking, activity.
Check 1417. 9. End the session.
Analyze Identify the amount that River’s Edge owes its creditors at QuickBooks
month end. PROBLEM GUIDE
Step–by–Step Instructions:
CHALLENGE Problem 17–8 Recording and Posting Problem 17–8
PROBLEM
Purchases and 1. Restore the Problem
17-8.QBB file.
Cash Payments 2. Enter the purchases on
account.
Buzz Newsstand had the following purchases and cash payment 3. Record all cash
transactions for July. The balance in the accounts payable subsidiary ledger payments.
4. Print a Journal report
and general ledger accounts are opened in the working papers. and a Vendor Balance
Instructions In your working papers: Summary.
5. Proof your work.
1. Record the purchases and cash payment transactions on page 12 of the 6. Print a General Ledger
purchases journal and page 12 of the cash payments journal. report.
7. Complete the Analyze
2. Post to the creditors’ accounts in the accounts payable subsidiary activity.
ledger daily. 8. Back up your work.
3. Post from the General Debit and Credit columns of the journals on the
date the transaction occurred.
SOURCE DOCUMENT
4. Foot, prove, total, and rule both journals. PROBLEM
5. Post the column totals of the purchases journal to the general ledger
accounts named in the column headings. Problem 17–8
Use the source documents
6. Post the column totals of the cash payments journal to the general
in your working papers to
ledger accounts named in the column headings. complete this problem.
7. Prepare a schedule of accounts payable.
CONTINUE
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C H A P T ER 17 Problems
8. Prepare a cash proof at the end of the month. The beginning Cash in
Bank balance was $9,000. Cash receipts were $10,500. The check stub
balance on July 31 is $10,178.
Date Transactions
July 1 Issued Check 2455 for $1,552 to ADC Publishing in payment
on account of $1,600 invoice less a 3% discount.
2 Purchased $400 in merchandise on account from Pine Forest
Publications, Invoice PFP144, terms 2/10, n/30.
2 Paid Candlelight Software $1,358 in payment of $1,400
account less a 3% discount, Check 2456.
4 Issued Check 2457 to Nomad Computer Sales for $350 to apply
on account.
5 Purchased $2,000 in store equipment on account from
CorpTech Office Supply, Invoice CT67.
7 Issued Check 2458 for $125 to Wolfe Trucking for
transportation charges.
9 Purchased $900 in merchandise on account from American
Trend Publishers, Invoice ATP98.
12 Purchased $300 in supplies on account from CorpTech Office
Supply, Invoice CT72.
14 Issued Check 2459 to Delta Press for $750 to apply on account.
15 Received insurance premium statement from SeaTac Insurance
Co. for $1,600. Issued Check 2460.
16 Check 2461 was issued for $882 to American Trend Publishers
in payment of $900 account less a 2% discount.
18 Purchased $500 in merchandise on account from Candlelight
Software, Invoice CS101, terms n/30.
20 Purchased $200 in merchandise on account from Nomad
Computer Sales, Invoice NC56, terms 2/10, n/30.
22 Paid Pine Forest Publications $100 to apply on account,
Check 2462.
23 Issued Check 2463 for $2,000 to CorpTech Office Supply to
apply on account.
25 Purchased $600 in merchandise on account from ADC
Publishing, Invoice ADC70.
28 Issued Check 2464 for $450 to Nomad Computer Sales to apply
on account.
30 Recorded the bank service charge of $25. Recorded the
bankcard fees, $130. July bank statement.
Analyze Examine the purchases made during July and determine the
dollar amount by which merchandise inventory increased.
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Winning Competitive Events CHA PTER 17
Practice your test-taking skills! The questions on this page are reprinted with permission
from national organizations:
• Future Business Leaders of America
• Business Professionals of America
Use a separate sheet of paper to record your answers.
Future Business Leaders of America
MULTIPLE CHOICE
1. A listing of vendor accounts, account balances, and total amount due all
vendors is a
a. schedule of accounts payable.
b. schedule of accounts receivable.
c. schedule of vendors.
d. schedule of creditors.
Use the following choices for questions 2–4. Write the letter for the correct
journal used to journalize each transaction.
a. Purchases Journal
b. Cash Receipts Journal
c. Cash Payments Journal
d. General Journal
e. Sales Journal
2. Purchased merchandise for cash.
3. Paid cash on account.
4. Purchased merchandise on account.
Business Professionals of America
MULTIPLE CHOICE
5. Just for You Shoes purchased shoes for its two retail locations. The mall store
ordered 20 pairs at $29.90/pair and 40 pairs at $18.50/pair. The downtown store
ordered 35 pairs at $29.90/pair and 24 pairs at $18.50/pair. What was the total cost
of the shoes for the two stores?
a. $96.50
b. $193.50
c. $2,828.50
d. $2,703.10
Need More Help?
Go to glencoeaccounting.glencoe.com and
click on Student Center. Click on Winning
Competitive Events and select Chapter 17.
• Practice Questions and Test-Taking Tips
• Concept Capsules and Terminology
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C H A P T ER 17 Real-World Applications and Connections
Critical Special Journals: Purchases and Cash Payments
Thinking 1. Describe the purpose of the purchases and the cash payments journals.
2. Your test for the equality of debits and credits of the purchases journal does
not balance. Explain how you would go about finding the error(s).
3. You are instructed to prepare a schedule of accounts payable and prove its
accuracy. How do you perform the task?
4. Explain why the purchase of supplies is not recorded in the special columns
of the purchases journal, store equipment is not recorded in the journal’s
Purchases Debit column, and the General Debit column of the purchases
journal is not posted to the general ledger.
5. Your accounting supervisor asks you to prepare a cash proof for the month.
What accounting documents do you need? What steps will you perform?
6. Explain why it is important to prove cash.
CASE Merchandising Business: Books & More
STUDY Books & More sells hardcover and paperback books, music tapes, and CDs. It
keeps a large stock of merchandise and orders new products often. The store may
place an order for fast-selling items, such as a popular new CD, weekly.
You recently noticed two invoices for three dozen CDs ordered from the same
music wholesaler. The CDs ordered and the amounts on both invoices are identical.
INSTRUCTIONS
1. Explain how you would determine whether the invoices are for two different
orders or are duplicate invoices for one order.
2. Suggest steps to ensure that the company does not pay duplicate invoices.
a
mattoefr ETHICS Insufficient Funds
As the owner of a sporting goods store, you manage the accounting records. Your
delivery van has been in the shop for repairs and you need it back as soon as
possible. The mechanic calls with the repair cost, which is much higher than you
expected. Your checking account cannot cover the bill, but you authorize the
work anyway. If you write a check for the repairs, you believe the account will
have enough money when the mechanic cashes the check.
ETHICAL DECISION MAKING
1. What are the ethical issues? 4. How do the alternatives affect the
2. What are the alternatives? parties?
3. Who are the affected parties? 5. What would you do?
$ )) ))
Communicating
Requesting Information
ACCOUNTING Thomas Sampson is a purchasing agent for Complete Offices. He gave you an
envelope full of receipts from a 10-day business trip without any explanations.
Write a memo asking Thomas to identify which are cash purchases and which
are purchases on account. Refer specifically to payment terms as you explain the
information you need to analyze the transactions.
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Real-World Applications and Connections CHAPT E R 1 7
Skills Beyond Selecting Equipment and Tools
NUMBERS Web Works is an online computer assistance service specializing in applications
accessible through the Internet. In a recent staff meeting, Shelly Lazarus, your
manager, asked you to assess online invoice payment.
INSTRUCTIONS
1. Use the Internet and read software reviews to explore different options for
paying invoices online. Prepare a table showing the comparative data.
2. Draft a memorandum with your recommendations for the hardware and
software Web Works will need to facilitate online invoice payment. Proofread
the draft, make corrections as needed, and prepare the final memorandum.
INTERNATIONAL International Competitive Advantage
If your company has resources, products, or skills that are valuable, unique, or
Accounting difficult to imitate globally, it has an international competitive advantage. For
example Wal-Mart has developed its inventory management and purchasing
system into a powerful resource that has given it a sustained competitive
advantage in the international retailing industry.
INSTRUCTIONS Brainstorm other resources or skills a company might use to gain
international competitive advantage.
Making It
Your Federal Income Tax
Personal If you are working, you know that your employer withholds federal income tax
from your earnings each payday as required by law. You may also be required to
file a federal tax return each year, either manually or electronically.
PERSONAL FINANCE ACTIVITY Assume you have a part-time job. List the
information that you need to know about filing a federal income tax return.
PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and
click on Student Center. Click on Making It Personal and select Chapter 17.
Analyzing Cost of Sales
Financial To increase profits, corporations must increase sales or decrease costs. They share
Reports information about both in their annual reports. PETsMART’s annual report has
a section labeled Management’s Discussion and Analysis of Financial Condition and
Results of Operations. It includes a comparison of net sales and gross profit for the
current year and previous year. Here is how gross profit is calculated:
Sales Cost of Sales Gross Profit
INSTRUCTIONS
Refer to the Fiscal 2003 Compared to Fiscal 2002 section of PETsMART’s annual
report in Appendix F to answer these questions.
1. What items do you think would be included in PETsMART’s cost of sales?
2. What factors contributed to a higher gross profit in 2003 versus 2002?
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CH A P T ER 18 Adjustments and the
Ten-Column Work Sheet
BEFORE
YOU READ
What You’ll Learn Predict
1. Describe the parts of a 1. What does the chapter title tell you?
ten-column work sheet. 2. What do you already know about this subject from personal experience?
3. What have you learned about this in the earlier chapters?
2. Generate trial balances and
end-of-period adjustments. 4. What gaps exist in your knowledge of this subject?
3. Determine which general
ledger accounts to adjust.
4. Calculate the adjustments.
Exploring the Real World of Business
5. Prepare a ten-column work ANALYZING ADJUSTMENTS
sheet.
6. Journalize the adjustments.
Plantronics, Inc.
“That’s one small step for man, one giant leap for mankind.”
7. Define the accounting terms As Neil Armstrong stepped onto the moon’s surface in 1969,
introduced in this chapter.
his famous words were delivered via a Plantronics headset.
Why It’s Important Since then, Plantronics, Inc. has taken giant steps in the
lightweight communications headset industry. Some of its best
Not all financial changes
▲
are caused by transactions sellers include wireless headsets for cell phones and iPods. U.S.
with other businesses or soldiers, emergency response teams, and air traffic controllers
individuals. Some financial also use the company’s headsets.
changes occur within a Plantronics, like other companies, takes a physical count of
business.
inventory at the end of every fiscal period. Then it adjusts the
accounting records so the Merchandise Inventory account
matches the inventory it actually holds.
What Do You Think?
Can you think of other general ledger accounts like
Merchandise Inventory that might need an adjustment?
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Working in the Real World
APPLYING YOUR ACCOUNTING KNOWLEDGE
Personal Connection
A merchandising business uses the work 1. In your workplace are you asked to participate
sheet for collecting and organizing financial in group or team assignments?
information. In large businesses, several people 2. How do team members work with each other?
might work on different parts of the work sheet.
3. What skills are needed to work well in a team?
For example, one person might be responsible
for accounts payable information and others for Online Connection
accounts receivable and payroll. The staff works Go to glencoeaccounting.glencoe.com and click
as a team to prepare the work sheet. A team or on Student Center. Click on Working in the
project leader makes sure all team members Real World and select Chapter 18 to learn more
complete their assigned sections. about the real-world workplace.
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SECTION 1 Identifying Accounts to Be
Adjusted and Adjusting
Merchandise Inventory
Recall that the work sheet is the basis for preparing end-of-period jour-
BEFORE
YOU READ nal entries and financial statements. The purpose of all period-end reports
is to provide essential information about a company’s financial position.
Main Idea
Adjustments transfer the Completing End-of-Period Work
cost of “used up” assets What Is the Purpose of the Ten-Column Work Sheet?
to expense accounts. The general ledger summarizes the effects of business transactions on
Adjustments for changes in individual accounts for an accounting period. Managers, stockholders,
merchandise inventory are and creditors need more than account totals, however, to evaluate per-
made directly to the Income formance. They need to know net income and the value of stockholders’
Summary account.
equity, which for a corporation is like owner’s equity for a sole proprietor-
Read to Learn… ship. They need this information to make sound business decisions.
➤ the purpose of the Earlier you worked with a six-column work sheet prepared for a ser-
ten-column work sheet. vice business organized as a sole proprietorship. In this chapter you will
(p. 518) prepare a ten-column work sheet for a merchandising business organized
➤ how to use the as a corporation. This work sheet is the basis for preparing end-of-period
ten-column work sheet financial statements, adjusting entries, and closing entries.
for adjustments. (p. 518)
Key Terms The Ten-Column Work Sheet
adjustment How Is the Ten-Column Work Sheet Different from the
beginning inventory Six-Column Work Sheet?
ending inventory The work sheet in Chapter 8 had six amount columns. The work
physical inventory sheet in this chapter, however, has ten amount columns. The additional
columns are for the Adjustments and Adjusted Trial Balance sections.
Prepared in the same way as the six-column work sheet, the ten-
column work sheet has five amount sections instead of three:
• Trial Balance • Income Statement
• Adjustments • Balance Sheet
• Adjusted Trial Balance
Completing the Trial Balance Section
A trial balance is prepared to prove the equality of debits and credits in
the general ledger. Figure 18–1 shows the end-of-period trial balance for On
Your Mark Athletic Wear.
To prepare the trial balance, the number and name of each account in
the general ledger are entered on the work sheet in the Account Number
518 Chapter 18 Adjustments and the Ten-Column Work Sheet
516-549_CH18_868829.indd 518 9/14/05 5:50:34 PM
and Account Name columns. The accounts are listed in the order that they
appear in the general ledger (Asset, Liability, Stockholders’ Equity, Revenue,
Cost of Merchandise, Expense). The balance of each account is entered in the
appropriate Debit or Credit column of the Trial Balance section. Notice that
every general ledger account is listed, even those with zero balances. After all
balances are entered, the Trial Balance Debit and Credit columns are ruled,
totaled, and proved. Then a double rule is drawn across both columns.
Calculating Adjustments
Not all changes in account balances result from daily business transac-
tions. Some result from internal business operations or the passage of time.
CULTURAL
ACCT. TRIAL BALANCE
NO. ACCOUNT NAME
DEBIT CREDIT
1 101
115
Cash in Bank
Accounts Receivable
15 1 7 9 00
10 4 0 4 00
Diversity
Holiday
2
3 125 Merchandise Inventory 84 9 2 1 00
4 130 Supplies 5 5 4 9 00
Observances When
5 135 Prepaid Insurance 1 5 0 0 00 working with clients
6 140 Delivery Equipment 19 8 3 1 00 from other countries,
7 145 Office Equipment 9 8 2 5 00 be aware of their
8 150 Store Equipment 5 2 0 0 00 holiday schedules.
9 201 Accounts Payable 13 8 5 0 00 There are over 800
10 204 Fed. Corp. Inc. Tax Payable holidays around the
11 205 Employees’ Fed. Inc. Tax Pay. 6 4 0 00 world during which
12 211 Employees’ State Inc. Tax Pay. 8 0 00 businesses shut
13 212 Social Security Tax Payable 2 4 8 00 down. Some countries
213 Medicare Tax Payable 5 8 00
14
have such diverse
15 214 Fed. Unemployment Tax Payable 1 8 36
ethnic populations
16 215 State Unemployment Tax Payable 1 1 4 73
that they observe
17 220 Sales Tax Payable 2 4 2 8 00
18 301 Capital Stock 75 0 0 0 00 religious holidays
19 305 Retained Earnings 19 7 7 1 19 for over 10 major
20 310 Income Summary religions!
21 401 Sales 320 4 5 0 00
22 405 Sales Discounts 7 3 0 00
23 410 Sales Returns & Allowances 2 0 0 0 00
24 501 Purchases 206 7 0 0 00
25 505 Transportation In 4 0 3 6 18
26 510 Purchases Discounts 1 3 4 0 00
27 515 Purchases Returns & Allowances 1 8 0 0 00
28 601 Advertising Expense 2 4 5 0 00
29 605 Bankcard Fees Expense 4 1 9 9 27
30 630 Fed. Corp. Income Tax Expense 9 8 4 0 00
31 635 Insurance Expense
32 650 Maintenance Expense 3 5 1 9 25
33 655 Miscellaneous Expense 3 4 8 28
34 657 Payroll Tax Expense 3 8 2 6 83
35 660 Rent Expense 14 0 0 0 00
36 665 Salaries Expense 29 3 7 4 60
37 670 Supplies Expense
38 680 Utilities Expense 2 3 6 4 87
39 435 7 9 8 28 435 7 9 8 28
Figure 18–1 The Trial Balance
40
Section of the Work Sheet
Section 1 Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory 519
516-549_CH18_868829.indd 519 9/14/05 5:50:40 PM
For example, supplies such as paper, pens, shopping bags, and
sales slips are bought for use by the business. They are recorded in
an asset account called Supplies. These supplies are used gradu-
ally during the accounting period. Another example is insurance
premiums, which cover a certain period of time. The premiums
are recorded in an asset account called Prepaid Insurance. Dur-
ing the period some insurance is used up, or expires. At the end
of the period, the balances in accounts such as Supplies and
Prepaid Insurance are brought up to date.
To illustrate, suppose that supplies costing $500 were pur-
chased during an accounting period and recorded in the Supplies
account. At the end of the period, the Supplies account balance
is $500; however, only $200 of supplies are still on hand. The
account balance for Supplies is adjusted downward to show that
the business used $300 of supplies.
Permanent Accounts and Temporary Accounts. Up to this
point, the general ledger account balances have been changed by journal
entries made to record transactions that are supported by source documents.
There are no source documents, however, for the changes in account balances
caused by the internal operations of a business or the passage of time. Such
changes are recorded through adjustments made at the end of the period to
the account balance. An adjustment is an amount that is added to or sub-
tracted from an account balance to bring that balance up to date. Every adjust-
ment affects at least one permanent account and one temporary account.
At the end of the period, adjustments are made to transfer the costs
of the assets consumed from the asset accounts (permanent accounts) to
the appropriate expense accounts (temporary accounts). Accountants say
that these assets are “expensed” because the costs of consumed assets are
expenses of doing business. Thus, when an adjustment is recorded, the
expenses for a given period are matched with the revenue for that period.
The work sheet’s Adjustments section is used to record the adjustments
made at the period-end to bring various account balances up to date.
Determining the Adjustments Needed. How do you generate
AS
YOU READ end-of-period adjustments? Review each account balance in the work sheet’s
Trial Balance section. If the balance for an account is not up to date as of the
Instant Recall
last day of the fiscal period, that account balance must be adjusted.
Matching Principle Refer to Figure 18–1 on page 519. The first account listed is Cash in
The matching principle Bank. All cash received or paid out during the period was journalized and
requires revenue to be posted to the Cash in Bank account. This balance is up to date. The next
recorded in the same
account, Accounts Receivable (controlling), is also up to date since all
period as the expenses
amounts owed or paid by charge customers were journalized and posted.
incurred to earn it.
The third account is Merchandise Inventory, used to report the cost
of merchandise on hand. The balance reported in the Trial Balance section
($84,921) is the merchandise on hand at the beginning of the period.
The amount of merchandise on hand is constantly changing during
the period. The changes are not recorded in the Merchandise Inventory
account. During the period the cost of merchandise purchased is recorded in
the Purchases account. As merchandise sales reduce inventory, the amount
of each sale is recorded in the Sales account, not Merchandise Inventory.
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At the end of the period, the balance in the Merchandise Inventory account
does not reflect the amount of merchandise on hand. So the Merchandise
Inventory account balance must be adjusted.
The other account balances on the work sheet are reviewed in the same
manner. Additional adjustments are made as described later in this chapter.
Adjusting the Merchandise Inventory Account AS
Merchandise Inventory is an asset account used by merchandising YOU READ
businesses. Beginning inventory is the merchandise a business has on Key Point
hand and available for sale at the beginning of a period. Ending inventory Adjustments
is the merchandise on hand at the end of a period. The ending inventory for Adjustments help match
one period becomes the beginning inventory for the next period. expenses with related
The account balance of Merchandise Inventory does not change revenue.
during the period. It is changed only when a physical inventory is taken.
A physical inventory is an actual count of all merchandise on hand and
available for sale. A physical inventory can be taken at any time. One is
always taken at the end of a period.
For example, if a toy store counts inventory at the end of a period, it can
calculate the cost of inventory. This is done by multiplying the quantity of
each item by its unit cost.
At the end of each period, after the physical inventory has been taken and
the cost of ending inventory has been calculated, the ending inventory amount
replaces the beginning inventory amount recorded in Merchandise Inventory.
This is accomplished by an adjustment to Merchandise Inventory.
Calculating the Adjustment for Merchandise Inventory.
When calculating the adjustment for Merchandise Inventory, you need to
know (1) the Merchandise Inventory account balance and (2) the physical
inventory amount. For On Your Mark, this is:
Merchandise Inventory account balance $84,921
Physical inventory 81,385
Adjustment
To adjust the Merchandise Inventory account to reflect the physical inventory amount ($81,385), the
following transaction is recorded.
ANALYSIS Identify 1. The accounts Merchandise Inventory and Income Summary
are affected.
Classify 2. Merchandise Inventory is an asset account (permanent). Income
Summary is a stockholder’s equity account.
/ 3. Merchandise Inventory is decreased by $3,536. This amount is
transferred to Income Summary.
DEBIT-CREDIT RULE 4. To transfer the decrease in Merchandise Inventory, debit Income
Summary for $3,536.
5. Decreases to asset accounts are recorded as credits. Credit
Merchandise Inventory for $3,536.
Section 1 Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory 521
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T ACCOUNTS 6. Income Summary Merchandise Inventory
Debit Credit Debit Credit
3,536 3,536
The effect of all the purchases and sales during the period is a decrease to
Merchandise Inventory of $3,536 ($84,921 $81,385). This reduction in
inventory needs to be recorded as an adjustment in the accounting records.
The two accounts affected by the inventory adjustment are Merchandise
Inventory and Income Summary.
Merchandise Inventory If the ending inventory amount is higher than beginning inventory,
Merchandise Inventory is debited and Income Summary is credited.
Debit Credit
For example, suppose that the beginning inventory was $84,921 and the
3,305 ending inventory is $88,226. Inventory increased by $3,305 ($88,226
$84,921). The Merchandise Inventory account is debited for $3,305,
Income Summary and Income Summary is credited for $3,305.
Debit Credit
Entering the Adjustment for Merchandise Inventory
on the Work Sheet. Adjustments are entered in the Adjustments
3,305 columns of the work sheet. The debit and credit parts of each adjustment
are given a unique label. The label consists of a small letter in parenthe-
ses and is placed just above and to the left of the adjustment amounts. The
adjustments are labeled as follows:
First adjustment (a)
Second adjustment (b)
Third adjustment (c)
The number of adjustments varies depending on the business. Once the
adjustments have been entered, the work sheet provides the information
needed to make the adjusting journal entries.
Use the T accounts in step 6 of the preceding example as a guide to
entering the inventory adjustment on the work sheet. Refer to Figure 18–2.
To record the adjustment for Merchandise Inventory:
1. In the Adjustments Debit column, enter the debit amount of the
adjustment on the Income Summary line. Label this amount (a).
2. In the Adjustments Credit column, enter the credit amount of the
adjustment on the Merchandise Inventory line. Label it (a) also.
ACCT. TRIAL BALANCE ADJUSTMENTS
NO. ACCOUNT NAME
DEBIT CREDIT DEBIT CREDIT
1 101 Cash in Bank 15 1 7 9 00
115 Accounts Receivable 10 4 0 4 00
Figure 18–2 2
125 Merchandise Inventory 84 9 2 1 00 (a) 3 5 3 6 00
Recording the 3
Adjustment for (a) 3 5 3 6 00
20 310 Income Summary
Merchandise Inventory
21
on the Work Sheet
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SECTION 1 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Using a diagram like this 4HE -ERCHANDISE )NVENTORY !DJUSTMENT
one, summarize the steps for
determining the Merchandise
Inventory adjustment and
entering it on the work sheet.
Add answer boxes for steps as
needed.
Do the Math
Your company, Photo Shots, is looking to expand its merchandise, but the accounting
manager wants to analyze inventory data for the last three years before recommending
expansion. Using the data given, create a bar graph to depict the total amount of
merchandise sold by year. Use the formula (Beginning Inventory + Purchases) – Ending
Inventory = Cost of Merchandise Sold. Write a short paragraph summarizing your analysis of
the results.
Merchandise Inventory in U.S.$
Year Beginning Ending Purchases
Year 1 900 1,000 5,000
Year 2 1,000 2,000 8,000
Year 3 2,000 1,500 7,500
Problem 18–1 Analyzing the Adjustment for
Merchandise Inventory
Ely Corporation, a custom furniture manufacturer, has a general ledger account balance of
$73,395 for Merchandise Inventory as of July 1. On the following June 30, the end of the
fiscal period, Ely took a physical inventory and determined it had $74,928 in merchandise
on hand. In your working papers, answer the following questions regarding the adjustment
for Merchandise Inventory:
1. Is the value of the ending inventory more or less than the value of the beginning
inventory?
2. What is the amount of the inventory adjustment?
3. Which account is debited?
4. Which account is credited?
Section 1 Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory 523
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SECTION 2 Adjusting Supplies, Prepaid
Insurance, and Federal
Corporate Income Tax
In Section 1 you learned that at the end of the period, the accoun-
BEFORE
YOU READ tant must update the Merchandise Inventory account and adjust other
accounts in the general ledger. For example insurance is a costly expense
for high-risk businesses, such as building construction and demolition.
Main Idea Thus, the financial statements must reflect the proper insurance expenses
Adjustments show the dollar
each period. Supplies and federal corporate income taxes also represent
amount of assets consumed
significant expenses that must be reported accurately.
during the period. They also
recognize the corporation’s
income tax expense. Adjusting the Supplies Account
Why Do You Make an Adjustment for Supplies?
Read to Learn…
➤ how and why the A merchandising business buys various supplies for employees to
Supplies account is use in the everyday operations of the business. Pencils, pens, computer
adjusted. (p. 524) paper, shopping bags, sales slips, price tags, and cash register tapes are
➤ how and why the Prepaid purchased, and the cost is debited to the Supplies account.
Insurance account is Supplies are used daily. As they are consumed, they become expenses
adjusted. (p. 525) of the business. Keeping daily records of each item as it is used is inef-
➤ how and why the Federal ficient, so the Supplies account is updated at the end of the period.
Corporate Income Tax In the Trial Balance section of the work sheet in Figure 18–1 on page
Expense account is 519, the balance of the Supplies account is $5,549. This amount is the
adjusted. (p. 527) cost of the supplies on hand on January 1 plus the cost of the additional
supplies purchased during the period.
Key Terms At the end of December, On Your Mark took a physical inventory. It
prepaid expense
found that $1,839 of supplies were on hand, meaning that it used $3,710
of supplies during the period ($5,549 $1,839 $3,710). The amount
of supplies on hand decreased by $3,710. Therefore, Supplies (a permanent
asset account) is credited for $3,710. Supplies Expense (a temporary account)
is debited (increased) to record the cost of supplies used in the period.
Adjustment
Record the adjustment for supplies.
ANALYSIS Identify 1. The accounts affected are Supplies and Supplies Expense.
Classify 2. Supplies is an asset account (permanent). Supplies Expense is an
expense account (temporary).
/ 3. Supplies is decreased by $3,710. Supplies Expense is increased by
$3,710.
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DEBIT-CREDIT RULE 4. Increases to expense accounts are recorded as debits. Debit Supplies
Expense for $3,710.
5. Decreases to asset accounts are recorded as credits. Credit Supplies
for $3,710.
T ACCOUNTS 6. Supplies Expense Supplies
Debit Credit Debit Credit
3,710 3,710
The adjustment for supplies is shown in Figure 18–3 on page 526. To
enter the adjustment on the work sheet, follow these steps:
1. In the Adjustments Debit column, enter the debit amount of the
adjustment on the Supplies Expense line. Since this is the second
adjustment, label it (b).
2. In the Adjustments Credit column, enter the credit amount of the
adjustment on the Supplies line. Label it (b) also.
Adjusting the Prepaid Insurance Account AS
YOU READ
Why Do You Make an Adjustment for Insurance?
In Your Experience
On December 17 On Your Mark purchased an insurance policy for six
months, mid-December through mid-May. The accounting clerk debited the Prepaid Have you heard
premium of $1,500 ($250 per month) to the Prepaid Insurance account. the term prepaid before
now? What type of
This is an example of a prepaid expense , an expense paid in advance.
product or service can
At the end of December, the Prepaid Insurance balance is $1,500 (see
be prepaid?
the work sheet’s Trial Balance section in Figure 18–1). However, the coverage
for half of a month, costing $125, has expired. The value of the unexpired
portion of the coverage has decreased to $1,375 ($1,500 $125), so the
clerk adjusts Prepaid Insurance with a $125 credit to update its balance.
The adjustment records the expired portion as a business expense.
Adjustment
Record the adjustment for the expiration of one-half month’s insurance coverage.
ANALYSIS Identify 1. The accounts affected are Insurance Expense and Prepaid Insurance.
Classify 2. Insurance Expense is an expense account (temporary). Prepaid
Insurance is an asset account (permanent).
/ 3. Insurance Expense is increased by $125. Prepaid Insurance is
decreased by $125.
DEBIT-CREDIT RULE 4. Increases to expense accounts are recorded as debits. Debit Insurance
Expense for $125.
5. Decreases to asset accounts are recorded as credits. Credit Prepaid
Insurance for $125.
Section 2 Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax 525
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T ACCOUNTS 6. Insurance Expense Prepaid Insurance
Debit Credit Debit Credit
125 125
ACCT. TRIAL BALANCE ADJUSTMENTS
NO. ACCOUNT NAME
DEBIT CREDIT DEBIT CREDIT
1 101 Cash in Bank 15 1 7 9 00
2 115 Accounts Receivable 10 4 0 4 00
3 125 Merchandise Inventory 84 9 2 1 00 (a) 3 5 3 6 00
4 130 Supplies 5 5 4 9 00 (b) 3 7 1 0 00
5 135 Prepaid Insurance 1 5 0 0 00 (c) 1 2 5 00
6 140 Delivery Equipment 19 8 3 1 00
7 145 Office Equipment 9 8 2 5 00
8 150 Store Equipment 5 2 0 0 00
9 201 Accounts Payable 13 8 5 0 00
10 204 Fed. Corp. Inc. Tax Payable (d) 1 5 5 00
11 205 Employees’ Fed. Inc. Tax Pay. 6 4 0 00
12 211 Employees’ State Inc. Tax Pay. 8 0 00
13 212 Social Security Tax Payable 2 4 8 00
14 213 Medicare Tax Payable 5 8 00
15 214 Fed. Unemployment Tax Payable 1 8 36
16 215 State Unemployment Tax Payable 1 1 4 73
17 220 Sales Tax Payable 2 4 2 8 00
18 301 Capital Stock 75 0 0 0 00
19 305 Retained Earnings 19 7 7 1 19
20 310 Income Summary (a) 3 5 3 6 00
21 401 Sales 320 4 5 0 00
22 405 Sales Discounts 7 3 0 00
23 410 Sales Returns and Allowances 2 0 0 0 00
24 501 Purchases 206 7 0 0 00
25 505 Transportation In 4 0 3 6 18
26 510 Purchases Discounts 1 3 4 0 00
27 515 Purchases Returns and Allowances 1 8 0 0 00
28 601 Advertising Expense 2 4 5 0 00
29 605 Bankcard Fees Expense 4 1 9 9 27
30 630 Fed. Corp. Income Tax Expense 9 8 4 0 00 (d) 1 5 5 00
31 635 Insurance Expense (c) 1 2 5 00
32 650 Maintenance Expense 3 5 1 9 25
33 655 Miscellaneous Expense 3 4 8 28
34 657 Payroll Tax Expense 3 8 2 6 83
35 660 Rent Expense 14 0 0 0 00
36 665 Salaries Expense 29 3 7 4 60
37 670 Supplies Expense (b) 3 7 1 0 00
Figure 18–3
38 680 Utilities Expense 2 3 6 4 87
Recording the
39 435 7 9 8 28 435 7 9 8 28 7 5 2 6 00 7 5 2 6 00
Adjustments on the
40
Work Sheet
The adjustment for Prepaid Insurance is shown in Figure 18–3. To
enter the adjustment on the work sheet, follow these steps:
1. In the Adjustments Debit column, enter the debit amount of the
adjustment on the Insurance Expense line. Since this is the third
adjustment, label it (c).
526 Chapter 18 Adjustments and the Ten-Column Work Sheet
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2. In the Adjustments Credit column, enter the credit
amount of the adjustment on the Prepaid Insurance
line. Label it (c) also.
Adjusting the Federal Corporate
Income Tax Accounts
Why Does This Company Make an Adjustment
for Income Tax?
On Your Mark is organized as a corporation. A corporation
is considered to be a legal entity separate from its owners. On
Your Mark owns assets, pays its own debts, and enters into legal
contracts.
A corporation pays federal corporate income taxes on its
net income. Many states and cities also tax corporate income.
For now, we will discuss only federal corporate income taxes. A
corporation’s accountant estimates its federal corporate income
taxes for the coming year and pays that amount to the federal
government in quarterly installments. At the end of the year,
the exact net income and the tax on that income are deter-
mined. If the corporation owes additional taxes, it pays them
when it files its corporate income tax return.
At the beginning of the year, On Your Mark’s accountant estimated
that its federal corporate income taxes would be $9,840. The business made
quarterly payments of $2,460 in March, June, September, and December.
These payments were journalized as debits to Federal Corporate Income
Tax Expense and credits to Cash in Bank.
At the end of the year, On Your Mark’s accountant determined that
the federal corporate income tax for the year is $9,995. On Your Mark has
already paid $9,840 (2,460 4). Therefore the business owes an additional
$155 ($9,995 $9,840).
To bring the accounting records up to date, Federal Corporate Income
Tax Expense and Federal Corporate Income Tax Payable must both be
increased by $155. The following T accounts illustrate this adjustment.
Federal Corporate Federal Corporate
Income Tax Expense Income Tax Payable
Debit Credit Debit Credit
155 155
The adjustment for Federal Corporate Income Tax Expense is shown
in Figure 18–3. Since this is the fourth adjustment, it is labeled (d).
After all adjustments have been entered, the Adjustments section of
the work sheet is totaled and ruled. Each adjustment has an equal debit
and credit, so the totals of the Adjustments Debit and Credit columns
should be the same. When the Adjustments section has been proved, a
double rule is drawn under the totals and across both columns, as shown in
Figure 18–3.
Section 2 Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax 527
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SECTION 2 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Use a chart like this one to
describe three adjustments $ESCRIPTION OF !DJUSTMENT !CCOUNT $EBITED !CCOUNT #REDITED
discussed in Section 2. List the
accounts to be debited and
credited for each adjustment.
Do the Math
You own a personal-training franchise called Your Body. You want to provide health
insurance for your 10 employees. As you review the alternative plans, you have to make
a decision based not only on affordability, but also on total benefits. Determine the total
annual premium of each plan and decide which plan best fits your needs.
Type of plan Plan #1 Plan #2 Plan #3
Monthly cost per employee $600 $500 $800
Co-pay for each employee $10 $20 None
Problem 18–2 Analyzing Adjustments
Information related to accounts requiring adjustment on the work sheet for the year ended
December 31 for Star City Resorts Corporation follows. Indicate in your working papers the
amount of each adjustment, which account is debited, and which account is credited.
1. The Trial Balance section shows a balance of $3,347.45 for Supplies. The amount of
supplies actually on hand is $892.75.
2. Star City paid an annual insurance premium of $4,440 on November 1.
3. Star City made quarterly federal corporate income tax payments of $945 each. Its actual
tax, calculated at the end of the year, is $3,885.
528 Chapter 18 Adjustments and the Ten-Column Work Sheet
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SECTION 3 Completing the Work Sheet
and Journalizing and Posting
the Adjusting Entries
After the adjustments have been entered in the Adjustments sec-
BEFORE
tion of the work sheet, proving that the accounts are still in balance is YOU READ
important. This is done by completing an adjusted trial balance. After
proving the Adjusted Trial Balance section, the accountant can complete
Main Idea
the work sheet.
Adjustments affect the
amount of net income (or
Extending Work Sheet Balances net loss).
What Does Extending Balances Involve?
Read to Learn…
At this point the amounts for each account must be extended to, or ➤ how to complete the
carried over to, the Adjusted Trial Balance, the Income Statement, and ten-column work sheet.
the Balance Sheet sections. (p. 529)
➤ how to journalize and
Completing the Adjusted Trial Balance Section post the adjusting entries.
The next step after entering all adjustments is to finish the Adjusted (p. 531)
Trial Balance section. This work sheet section shows the updated balances
of all general ledger accounts. To complete this section, the accountant
Key Terms
adjusting entries
combines the balance of each account in the Trial Balance section with
the adjustment, if any, in the Adjustments section. The new balance is
then entered in the appropriate Adjusted Trial Balance column.
Note the way new balances are computed in Figure 18–4 on page 530.
If there is no adjustment, the account balance shown in the Trial Balance
section is simply extended to the same column (Debit or Credit) in the
Adjusted Trial Balance section. The first two accounts, Cash in Bank and
Accounts Receivable, have no adjustments, so those balances are extended
to the Adjusted Trial Balance Debit column.
If the account balance in the Trial Balance section has an adjustment,
the accountant calculates a new balance. The amount of the adjustment
(from the Adjustments section) is added to or subtracted from the amount
in the Trial Balance section. Add debits to debits; add credits to credits;
subtract debits and credits.
The first account in the Trial Balance section to have an adjustment
is Merchandise Inventory. As you know from Section 1, Merchandise
Inventory has an unadjusted debit balance of $84,921. Adjustment (a)
is a credit of $3,536. To calculate the new balance, the accountant sub-
tracts the credit adjustment from the debit balance. The adjusted balance
of $81,385 ($84,921 $3,536) is extended to the Adjusted Trial Balance
Debit column.
Section 3 Completing the Work Sheet and Journalizing and Posting the Adjusting Entries 529
516-549_CH18_868829.indd 529 4/6/06 6:16:26 PM
ACCT. TRIAL BALANCE ADJUSTMENTS ADJUSTED TRIAL BALANCE
NO. ACCOUNT NAME
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
1 101 Cash in Bank 15 1 7 9 00 15 1 7 9 00
2 115 Accounts Receivable 10 4 0 4 00 10 4 0 4 00
3 125 Merchandise Inventory 84 9 2 1 00 (a) 3 5 3 6 00 81 3 8 5 00
4 130 Supplies 5 5 4 9 00 (b) 3 7 1 0 00 1 8 3 9 00
5 135 Prepaid Insurance 1 5 0 0 00 (c) 1 2 5 00 1 3 7 5 00
6 140 Delivery Equipment 19 8 3 1 00 19 8 3 1 00
7 145 Office Equipment 9 8 2 5 00 9 8 2 5 00
8 150 Store Equipment 5 2 0 0 00 5 2 0 0 00
9 201 Accounts Payable 13 8 5 0 00 13 8 5 0 00
10 204 Fed. Corp. Inc. Tax Payable (d) 1 5 5 00 1 5 5 00
11 205 Employees’ Fed. Inc. Tax Pay. 6 4 0 00 6 4 0 00
12 211 Employees’ State Inc. Tax Pay. 8 0 00 8 0 00
13 212 Social Security Tax Payable 2 4 8 00 2 4 8 00
14 213 Medicare Tax Payable 5 8 00 5 8 00
15 214 Fed. Unemployment Tax Payable 1 8 36 1 8 36
16 215 State Unemployment Tax Payable 1 1 4 73 1 1 4 73
17 220 Sales Tax Payable 2 4 2 8 00 2 4 2 8 00
18 301 Capital Stock 75 0 0 0 00 75 0 0 0 00
19 305 Retained Earnings 19 7 7 1 19 19 7 7 1 19
20 310 Income Summary (a) 3 5 3 6 00 3 5 3 6 00
21 401 Sales 320 4 5 0 00 320 4 5 0 00
22 405 Sales Discounts 7 3 0 00 7 3 0 00
23 410 Sales Returns and Allowances 2 0 0 0 00 2 0 0 0 00
24 501 Purchases 206 7 0 0 00 206 7 0 0 00
25 505 Transportation In 4 0 3 6 18 4 0 3 6 18
26 510 Purchases Discounts 1 3 4 0 00 1 3 4 0 00
27 515 Purchases Returns and Allowances 1 8 0 0 00 1 8 0 0 00
28 601 Advertising Expense 2 4 5 0 00 2 4 5 0 00
29 605 Bankcard Fees Expense 4 1 9 9 27 4 1 9 9 27
30 630 Fed. Corp. Income Tax Expense 9 8 4 0 00 (d) 1 5 5 00 9 9 9 5 00
31 635 Insurance Expense (c) 1 2 5 00 1 2 5 00
32 650 Maintenance Expense 3 5 1 9 25 3 5 1 9 25
33 655 Miscellaneous Expense 3 4 8 28 3 4 8 28
34 657 Payroll Tax Expense 3 8 2 6 83 3 8 2 6 83
35 660 Rent Expense 14 0 0 0 00 14 0 0 0 00
36 665 Salaries Expense 29 3 7 4 60 29 3 7 4 60
37 670 Supplies Expense (b) 3 7 1 0 00 3 7 1 0 00
38 680 Utilities Expense 2 3 6 4 87 2 3 6 4 87
39 435 7 9 8 28 435 7 9 8 28 7 5 2 6 00 7 5 2 600 435 9 5 3 28 435 9 5 3 28
40
Figure 18–4 Extending Balances to the Adjusted Trial Balance Section of the Work Sheet
The adjusted balances for Supplies, Prepaid Insurance, and Federal
Corporate Income Tax Expense are calculated in the same way.
If an account has a zero balance in the Trial Balance section, the amount
listed in the Adjustments section is extended to the Adjusted Trial Balance
section. Federal Corporate Income Tax Payable, for example, has a zero
balance in the Trial Balance section. Adjustment (d) is a credit of $155. This
amount is extended to the Adjusted Trial Balance Credit column.
After extending all account balances to the Adjusted Trial Balance
section, the accountant totals both columns. If total debits equal total
credits, this section has been proved. The accountant then draws a double
530 Chapter 18 Adjustments and the Ten-Column Work Sheet
516-549_CH18_868829.indd 530 9/14/05 5:52:07 PM
rule under the totals and across both columns. If total debits do not equal
total credits, an error exists. To find it, re-add each column. If the error still
exists, ensure that the Trial Balance and Adjustment amounts were extended
properly to the Adjusted Trial Balance section.
Extending Amounts to the Balance Sheet and
Income Statement Sections
Beginning with line 1, each account balance in the Adjusted Trial Bal-
ance section is extended to the appropriate column of either the Balance
Sheet or the Income Statement section. See these extensions in Figure 18–5
on pages 532 and 533.
The Income Statement section contains the balances of all temporary
accounts. You will find the Income Summary and all revenue, cost of mer-
chandise, and expense accounts in this section.
The Balance Sheet section contains the balances of all permanent
accounts. In that section you will find all asset, liability, and capital accounts
(Capital Stock and Retained Earnings).
Completing the Work Sheet
After all amounts have been extended to the Balance Sheet and Income
Statement sections, the accountant draws a single rule across the columns
in these sections and totals all four columns (see Figure 18–5). Notice that
the words Net Income have been written in the Account Name column on
the same line as the net income amount.
As you learned in Chapter 8, the totals of the debit and credit columns
within the Balance Sheet and Income Statement sections are not equal at
this point. The difference between the two column totals in each section is
the amount of net income (or net loss) for the period. After the net income
(or net loss) has been recorded, the columns in the Balance Sheet and
Income Statement sections are ruled and totaled as shown in Figure 18–5.
If the totals of the two Income Statement columns are equal, and the
totals of the two Balance Sheet columns are equal, a double rule is drawn
across all four columns. The double rule indicates that these sections of the
work sheet have been proved.
Journalizing and Posting
Adjusting Entries
How Do You Journalize and Post Adjusting Entries?
The journal entries that update the general ledger accounts at the end of
a period are called adjusting entries . The Adjustments section of the work
sheet is the source of information for journalizing the adjusting entries. The
accounts debited and credited in the Adjustments section are entered in the
general journal.
Journalizing Adjustments
Before recording the first adjusting entry, the accountant writes the
words Adjusting Entries in the Description column of the general journal.
Section 3 Completing the Work Sheet and Journalizing and Posting the Adjusting Entries 531
516-549_CH18_868829.indd 531 9/14/05 5:52:10 PM
On Your Mark
Work
For Year Ended
ACCT. TRIAL BALANCE ADJUSTMENTS
NO. ACCOUNT NAME
DEBIT CREDIT DEBIT CREDIT
1 101 Cash in Bank 15 1 7 9 00
2 115 Accounts Receivable 10 4 0 4 00
3 125 Merchandise Inventory 84 9 2 1 00 (a) 3 5 3 6 00
4 130 Supplies 5 5 4 9 00 (b) 3 7 1 0 00
5 135 Prepaid Insurance 1 5 0 0 00 (c) 1 2 5 00
6 140 Delivery Equipment 19 8 3 1 00
7 145 Office Equipment 9 8 2 5 00
8 150 Store Equipment 5 2 0 0 00
9 201 Accounts Payable 13 8 5 0 00
10 204 Fed. Corp. Inc. Tax Payable (d) 1 5 5 00
11 205 Employees’ Fed. Inc. Tax Pay. 6 4 0 00
12 211 Employees’ State Inc. Tax Pay. 8 0 00
13 212 Social Security Tax Payable 2 4 8 00
14 213 Medicare Tax Payable 5 8 00
15 214 Fed. Unemployment Tax Payable 1 8 36
16 215 State Unemployment Tax Payable 1 1 4 73
17 220 Sales Tax Payable 2 4 2 8 00
18 301 Capital Stock 75 0 0 0 00
19 305 Retained Earnings 19 7 7 1 19
20 310 Income Summary (a) 3 5 3 6 00
21 401 Sales 320 4 5 0 00
22 405 Sales Discounts 7 3 0 00
23 410 Sales Returns and Allowances 2 0 0 0 00
24 501 Purchases 206 7 0 0 00
25 505 Transportation In 4 0 3 6 18
26 510 Purchases Discounts 1 3 4 0 00
27 515 Purchases Returns and Allowances 1 8 0 0 00
28 601 Advertising Expense 2 4 5 0 00
29 605 Bankcard Fees Expense 4 1 9 9 27
30 630 Fed. Corp. Income Tax Expense 9 8 4 0 00 (d) 1 5 5 00
31 635 Insurance Expense (c) 1 2 5 00
32 650 Maintenance Expense 3 5 1 9 25
33 655 Miscellaneous Expense 3 4 8 28
34 657 Payroll Tax Expense 3 8 2 6 83
35 660 Rent Expense 14 0 0 0 00
36 665 Salaries Expense 29 3 7 4 60
37 670 Supplies Expense (b) 3 7 1 0 00
38 680 Utilities Expense 2 3 6 4 87
39 435 7 9 8 28 435 7 9 8 28 7 5 2 6 00 7 5 2 6 00
40 Net Income
41
Figure 18–5 On
42
Your Mark Athletic Wear
43
Completed Work Sheet
Writing this heading eliminates the need for an explanation to be written
after each adjusting entry.
The following entries are recorded in the Adjustments columns of the
work sheet:
532 Chapter 18 Adjustments and the Ten-Column Work Sheet
516-549_CH18_868829.indd 532 9/14/05 5:52:10 PM
Athletic Wear
Sheet
December 31, 20--
ADJUSTED TRIAL BALANCE INCOME STATEMENT BALANCE SHEET
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
15 1 7 9 00 15 1 7 9 00 1
10 4 0 4 00 10 4 0 4 00 2
81 3 8 5 00 81 3 8 5 00 3
1 8 3 9 00 1 8 3 9 00 4
1 3 7 5 00 1 3 7 5 00 5
19 8 3 1 00 19 8 3 1 00 6
9 8 2 5 00 9 8 2 5 00 7
5 2 0 0 00 5 2 0 0 00 8
13 8 5 0 00 13 8 5 0 00 9
1 5 5 00 1 5 5 00 10
6 4 0 00 6 4 0 00 11
8 0 00 8 0 00 12
2 4 8 00 2 4 8 00 13
5 8 00 5 8 00 14
1 8 36 1 8 36 15
1 1 4 73 1 1 4 73 16
2 4 2 8 00 2 4 2 8 00 17
75 0 0 0 00 75 0 0 0 00 18
19 7 7 1 19 19 7 7 1 19 19
3 5 3 6 00 3 5 3 6 00 20
320 4 5 0 00 320 4 5 0 00 21
7 3 0 00 7 3 0 00 22
2 0 0 0 00 2 0 0 0 00 23
206 7 0 0 00 206 7 0 0 00 24
4 0 3 6 18 4 0 3 6 18 25
1 3 4 0 00 1 3 4 0 00 26
1 8 0 0 00 1 8 0 0 00 27
2 4 5 0 00 2 4 5 0 00 28
4 1 9 9 27 4 1 9 9 27 29
9 9 9 5 00 9 9 9 5 00 30
1 2 5 00 1 2 5 00 31
3 5 1 9 25 3 5 1 9 25 32
3 4 8 28 3 4 8 28 33
3 8 2 6 83 3 8 2 6 83 34
14 0 0 0 00 14 0 0 0 00 35
29 3 7 4 60 29 3 7 4 60 36
3 7 1 0 00 3 7 1 0 00 37
2 3 6 4 87 2 3 6 4 87 38
435 9 5 3 28 435 9 5 3 28 290 9 1 5 28 323 5 9 0 00 145 0 3 8 00 112 3 6 3 28 39
32 6 7 4 72 32 6 7 4 72 40
323 5 9 0 00 323 5 9 0 00 145 0 3 8 00 145 0 3 8 00 41
Figure 18–5 On Your Mark
42
Athletic Wear Completed Work
43
Sheet (continued)
(a) adjusting merchandise inventory
(b) adjusting supplies
(c) adjusting insurance
(d) adjusting income tax
Section 3 Completing the Work Sheet and Journalizing and Posting the Adjusting Entries 533
516-549_CH18_868829.indd 533 9/14/05 5:52:13 PM
GENERAL JOURNAL PAGE 22
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- Adjusting Entries 1
2 Dec. 31 Income Summary 3 5 3 6 00 2
3 Merchandise Inventory 3 5 3 6 00 3
4 31 Supplies Expense 3 7 1 0 00 4
5 Supplies 3 7 1 0 00 5
6 31 Insurance Expense 1 2 5 00 6
7 Prepaid Insurance 1 2 5 00 7
8 31 Fed. Corporate Income Tax Exp. 1 5 5 00 8
9 Fed. Corp. Income Tax Pay. 1 5 5 00 9
10 10
Figure 18–6 Recording Adjusting Entries in the General Journal
The first adjustment, which was labeled (a) on the work sheet, is recorded
in the general journal in Figure 18–6 as a debit to Income Summary for
$3,536 and a credit to Merchandise Inventory for $3,536. The label (a) is
not recorded in the general journal.
Remaining adjustments are entered in the general journal in the same
manner, with the debit part of the entry recorded first. The date for each
adjusting entry is the last day of the period.
Posting Adjusting Entries to the General Ledger
After the adjusting entries have been recorded in the general journal, the
accountant posts them to the general ledger accounts. Once the adjusting
entries have been posted, the general ledger accounts are up to date. The
balances in the general ledger accounts all agree with the amounts entered
on the Income Statement and Balance Sheet sections of the work sheet.
Posting these entries accomplishes the following:
• The Supplies Expense account has been “charged” with the value of
the supplies used in the period.
• The Supplies account reflects only the amount of items still remaining
in inventory.
• The Merchandise Inventory account reflects the correct inventory
value.
• The Income Summary account has been “charged” with the cost of
goods sold for the period.
• The Insurance Expense account reflects the appropriate insurance
expense for the period.
• The Prepaid Insurance account has been reduced by the amount of
insurance expired.
• The Federal Corporate Income Tax Payable account has been
increased to reflect the appropriate payable amount.
• The Federal Corporate Income Tax Expense account reflects the tax
expense for the period.
534 Chapter 18 Adjustments and the Ten-Column Work Sheet
516-549_CH18_868829.indd 534 9/14/05 5:52:15 PM
Figure 18–7 shows the general journal and the general ledger accounts
after the posting of the adjusting entries has been completed. Notice that
the words Adjusting Entry have been written in the Description column of
the general ledger accounts.
GENERAL JOURNAL PAGE 22
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- Adjusting Entries 1
2 Dec. 31 Income Summary 310 3 5 3 6 00 2
3 Merchandise Inventory 125 3 5 3 6 00 3
4 Supplies Expense 670 3 7 1 0 00 4
5 Supplies 130 3 7 1 0 00 5
6 Insurance Expense 635 1 2 5 00 6
7 Prepaid Insurance 135 1 2 5 00 7
8 Fed. Corporate Income Tax Exp. 630 1 5 5 00 8
9 Fed. Corp. Income Tax Pay. 204 1 5 5 00 9
10 10
11 11
ACCOUNT Merchandise Inventory ACCOUNT NO. 125
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Jan. 1 Balance ✓ 84 9 2 1 00
Dec. 31 Adjusting Entry G22 3 5 3 6 00 81 3 8 5 00
ACCOUNT Supplies ACCOUNT NO. 130
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 5 2 9 9 00
15 P12 2 5 0 00 5 5 4 9 00
31 Adjusting Entry G22 3 7 1 0 00 1 8 3 9 00
ACCOUNT Prepaid Insurance ACCOUNT NO. 135
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 17 CP14 1 5 0 0 00 1 5 0 0 00
31 Adjusting Entry G22 1 2 5 00 1 3 7 5 00
Figure 18–7 Adjusting Entries Posted to the General Ledger
Section 3 Completing the Work Sheet and Journalizing and Posting the Adjusting Entries 535
516-549_CH18_868829.indd 535 4/6/06 6:16:33 PM
ACCOUNT Federal Corporate Income Tax Payable ACCOUNT NO. 204
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 31 Adjusting Entry G22 1 5 5 00 1 5 5 00
ACCOUNT Income Summary ACCOUNT NO. 310
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 31 Adjusting Entry G22 3 5 3 6 00 3 5 3 6 00
ACCOUNT Federal Corporate Income Tax Expense ACCOUNT NO. 630
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 9 8 4 0 00
31 Adjusting Entry G22 1 5 5 00 9 9 9 5 00
ACCOUNT Insurance Expense ACCOUNT NO. 635
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 31 Adjusting Entry G22 1 2 5 00 1 2 5 00
ACCOUNT Supplies Expense ACCOUNT NO. 670
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 31 Adjusting Entry G22 3 7 1 0 00 3 7 1 0 00
Figure 18–7 Adjusting Entries Posted to the General Ledger (continued)
536 Chapter 18 Adjustments and the Ten-Column Work Sheet
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SECTION 3 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Use a diagram like this one 5PDATING THE 'ENERAL ,EDGER !CCOUNTS
to describe the process of
updating the general ledger
accounts.
Do the Math
The following column totals appear in the Balance Sheet section of the work sheet for
Tonya’s Toys on December 31.
Debit column $317,290
Credit column $323,730
Calculate the net income or net loss for the period.
Problem 18–3 Analyzing the Work Sheet
Refer to Figure 18–5 and answer the following questions in your working papers:
1. What amount is extended to the Income Statement section for Federal Corporate
Income Tax Expense?
2. To which section of the work sheet is the balance of Prepaid Insurance extended?
3. What is the total amount of supplies consumed during the period?
4. What is the total amount still owed to the federal government for corporate income tax?
Problem 18–4 Analyzing a Source Document
Answer these questions, based
on the debit memorandum DEBIT MEMORANDUM No. 284
Date: May 4, 20--
shown here. Invoice No.: 378456
ROTARY SUPPLY CORPORATION
1. Which company is 634 West Washington Avenue, Lincoln, SC 30856
returning the merchandise? To: K & L Electrical
845 Morgan Street
This day we have
debited your
2. How many items are being Plantsville, SC 30455 account as follows:
returned? Quantity Item Unit Price Total
3. What amount is entered in 4 Locking Fixture #27304-78 $ 36.95 $ 147.80
2 Mirror/Reflectors #8935-231 11.24 22.48
the journal entry? Subtotal $ 170.28
4. Which account is debited? Tax 6.81
5. Which account is credited? Total $ 177.09
Section 3 Completing the Work Sheet and Journalizing and Posting the Adjusting Entries 537
516-549_CH18_868829.indd 537 9/14/05 5:52:24 PM
CH A P T ER 18 Summary
Key Concepts
1. The ten-column work sheet contains Debit and Credit columns for these five sections:
• Trial Balance—includes all general ledger accounts, even those with zero balances.
• Adjustments—records the adjustments made at the end of the period to bring various account
balances up to date.
• Adjusted Trial Balance—shows the updated balances of all general ledger accounts.
• Income Statement—contains the balances of all temporary accounts, including Income
Summary and revenue, cost of merchandise, and expense accounts.
• Balance Sheet—contains the balances of all permanent accounts, including assets, liabilities,
and stockholders’ equity.
2. To prepare the Trial Balance section, enter the number and name of each account in the general
ledger in the appropriate columns in the order that they appear in the general ledger:
• Asset
• Liability
• Stockholders’ Equity
• Revenue
• Cost of Merchandise
• Expense
An adjustment is an amount that is added to or subtracted from an account balance to bring that
balance up to date.
• Adjustments reflect changes in account balances caused by the internal operations of the
business or the passage of time.
• Adjustments are made to match revenue with the expenses incurred to earn it.
• Every adjustment affects one permanent and one temporary general ledger account.
• Adjustments are recorded in the Adjustments section of the work sheet.
3. A general ledger account needs to be adjusted if the balance shown is not up to date as of the last
day of the period.
4. Common adjusting entries and the information needed to calculate them:
Adjustment Information Needed
Merchandise • Merchandise Inventory account balance
Inventory • Physical inventory amount
Supplies • Supplies account balance
• Cost of supplies on hand
Prepaid • Expired portion of insurance coverage
Insurance
Federal • Federal Corporate Income Tax Expense account balance (estimated
Corporate quarterly payments)
Income Tax • Federal corporate income tax based on exact income
538 Chapter 18 Summary
516-549_CH18_868829.indd 538 9/14/05 5:52:27 PM
Summary CHAPT E R 1 8
5. A work sheet is prepared
• to organize all of the data needed to update the accounts
• to prepare the financial statements
• to record end-of-period adjusting entries and closing entries
The completed work sheet lists all general ledger accounts and their updated balances and shows
the net income (or net loss) for the period.
To prepare a ten-column work sheet:
• Complete the Trial Balance section. Enter the account numbers, names and balances for all
general ledger accounts. Total, prove, and rule the section.
• Calculate the adjustments needed and enter them in the Adjustments section.
• Complete the Adjusted Trial Balance section. For each account, combine the Trial Balance
section amount with the Adjustment section amount and enter the total in the Adjusted Trial
Balance section.
• Add debits to debits
• Add credits to credits
• Subtract debits and credits
• Total, prove, and rule the Adjustments and Adjusted Trial Balance sections.
• Extend the amounts in the Adjusted Trial Balance section to the appropriate columns in the
Balance Sheet and Income Statement sections.
• Complete the work sheet. Calculate the net income (or net loss) and enter it in the appropriate
columns in the Income Statement and Balance Sheet sections. Total, prove, and rule the
Income Statement and Balance Sheet sections.
6. The adjustments entered on the work sheet must be recorded in the general journal. The source
of information for journalizing adjustments is the Adjustments section of the work sheet.
Adjusting Entries is written in the Description column immediately above the first adjusting
entry, eliminating the need to write an explanation after each entry. The debit part of the entry
is recorded first. The date for each adjusting entry is the last day of the period.
Key Terms
adjusting entries (p. 531) ending inventory (p. 521)
adjustment (p. 520) physical inventory (p. 521)
beginning inventory (p. 521) prepaid expense (p. 525)
Chapter 18 Summary 539
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C H A P T ER 18 Review and Activities
AFTER
YOU READ
Check Your Understanding
1. Components of the Ten-Column Work Sheet
a. What are the five sections of the ten-column work sheet?
b. What sections does the ten-column work sheet contain that the six-column work sheet does not?
2. Trial Balance and Period-End Adjustments
a. What is the purpose of preparing a trial balance?
b. What is an adjustment?
3. Adjusted General Ledger Accounts
a. Why must some general ledger accounts be updated at the end of the period?
b. What is the step to follow after adjusting entries have been recorded in the general journal?
4. Adjustment Calculation
a. How is the amount of merchandise on hand determined at the end of a period?
b. After the physical inventory is taken, what happens to the Merchandise Inventory account?
5. Completion of the Ten-Column Work Sheet
a. Which accounts are included on the Balance Sheet section of the work sheet?
b. Which accounts are included on the Income Statement section of the work sheet?
6. Adjustments
a. What is an adjusting entry?
b. What is the source of information for journalizing adjusting entries?
Apply Key Terms
As the accounting manager for several
Homemade Fresh Ice Cream stores in your
region, you oversee the preparation of end-
of-period financial statements. Before you
complete your end-of-period reports, you
need your staff to verify their work sheets
and trial balances. Write a memorandum
to the staff to remind them to verify their
data, make adjustments where needed, give
beginning and ending inventory figures,
and complete a physical inventory. In the
body of your memorandum, provide a brief
definition of each term.
adjusting entries ending inventory
adjustment physical inventory
beginning inventory prepaid expense
540 Chapter 18 Review and Activities
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Computerized Accounting CHAPT E R 1 8
Adjusting Entries
Making the Transition from a Manual to a Computerized System
Task Manual Methods Computerized Methods
Recording • From the general ledger, prepare a trial • Print a Trial Balance.
adjusting entries balance in the first two columns of a • Record the adjusting entries in the
work sheet. general journal.
• Record adjustments on the work sheet. • General ledger accounts are
• Calculate adjusted account balances in automatically updated.
the Adjusted Trial Balance columns.
• Extend account balances to Income
Statement or Balance Sheet columns in
the work sheet.
• Calculate net income (loss) for the
accounting period.
• Record adjusting entries in the general
journal.
• Post adjusting entries to general ledger
accounts.
Q&A
Peachtree Question Answer
How do I generate a 1. From the Reports menu, select General Ledger.
trial balance for use in 2. From the Report list, select Working Trial Balance.
preparing adjustments? 3. Click the Print button.
How do I journalize 1. List necessary adjustments on the Working Trial Balance form.
the adjusting entries? 2. From the Tasks menu, select General Journal Entry.
3. Enter the adjusting entries.
4. Click Save.
QuickBooks Q & A
QuickBooks Question Answer
How do I generate a 1. From the Reports menu, select Accountant & Taxes.
trial balance for use in 2. From the Accountant & Taxes submenu, select Trial Balance.
preparing adjustments? 3. Click the Print button.
How do I journalize 1. Use the Trial Balance to help you prepare the adjusting entries.
the adjusting entries? 2. From the Company menu, select Make General Journal Entries.
3. Enter the adjusting entries.
4. Click Save & Close.
For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers.
Chapter 18 Computerized Accounting 541
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C H A P T ER 18 Problems
Complete problems using: Manual Glencoe Peachtree Complete QuickBooks Spreadsheet
Spreadshee
OR OR OR
Working Papers Accounting Software Templates Templates
Problem 18–5 Completing a Ten-Column
SPREADSHEET Work Sheet
SMART GUIDE
The August 31 trial balance for InBeat CD Shop is entered on the work
Step–by–Step Instructions:
Problem 18–5 sheet in your working papers. Listed below is the data needed to make the
1. Select the spreadsheet adjustments.
template for Problem
18–5. Instructions In your working papers, complete the ten-column work sheet
2. Enter your name and for InBeat CD Shop for the month ended August 31.
the date in the spaces
provided on the
template. Data for Adjustments
3. Complete the spread-
sheet using the Merchandise Inventory, August 31 $ 77,872
instructions in your
working papers. Supplies consumed during the period 2,171
4. Print the spreadsheet
and proof your work. Insurance premium expired during the period 489
5. Complete the Analyze
activity. Additional federal corporate income taxes owed 118
6. Save your work and
exit the spreadsheet
program. Analyze After the adjustments are entered on the work sheet, assess
which expense account has the highest balance.
Problem 18–6 Completing a Ten-Column
Work Sheet
The August 31 trial balance for Shutterbug Cameras is listed on the next
page. Also listed is the data needed for the adjustments.
Instructions In your working papers, complete the ten-column work sheet
for Shutterbug Cameras for the month ended August 31.
542 Chapter 18 Problems
516-549_CH18_868829.indd 542 9/14/05 5:52:40 PM
Problems CHAPT E R 1 8
Trial Balance
Debit Credit SMART GUIDE
101 Cash in Bank $13,873
Step–by–Step Instructions:
115 Accounts Receivable 5,382
Problem 18–6
125 Merchandise Inventory 82,981
1. Select the problem set
130 Supplies 2,397 for Shutterbug Cameras
135 Prepaid Insurance 1,350 (Prob. 18–6).
2. Rename the company
140 Store Equipment 30,769
and set the system date.
201 Accounts Payable $ 8,481 3. Print a Working Trial
207 Federal Corporate Income Tax Payable — Balance and use it to
help you prepare the
210 Employees’ Federal Income Tax Payable 194 adjustments.
211 Employees’ State Income Tax Payable 48 4. Record the adjustments
212 Social Security Tax Payable 119 using the General
Journal Entry option.
213 Medicare Tax Payable 25 5. Print a General Journal
215 Sales Tax Payable 381 report and proof your
216 Federal Unemployment Tax Payable 19 work.
6. Print a General Ledger
217 State Unemployment Tax Payable 92 Trial Balance report.
301 Capital Stock 80,000 7. Complete the Analyze
305 Retained Earnings 28,568 activity.
8. End the session.
310 Income Summary — —
401 Sales 95,487 TIP: Use the Inventory
Adjustment account, not
405 Sales Discounts 37 the Income Summary
410 Sales Returns and Allowances 945 account, to record
the adjustment for
501 Purchases 39,491
Merchandise Inventory.
505 Transportation In 2,039
510 Purchases Discounts 656
515 Purchases Returns and Allowances 219
601 Advertising Expense 128
605 Bankcard Fees Expense 219
620 Federal Corporate Income Tax Expense 1,580
630 Insurance Expense —
640 Maintenance Expense 2,513
645 Miscellaneous Expense 652
647 Payroll Tax Expense 1,953
650 Rent Expense 9,000
655 Salaries Expense 18,631
660 Supplies Expense —
670 Utilities Expense 349
Data for Adjustments
Merchandise Inventory, August 31 $78,672
Supplies on hand, August 31 389
Insurance premium expired during the period 490
Additional federal income taxes owed 252
Analyze Identify which account in the Balance Sheet section,
Accounts Payable or Accounts Receivable, has the higher
balance.
Chapter 18 Problems 543
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C H A P T ER 18 Problems
Problem 18–7 Completing a Ten-Column
Work Sheet
The balances of the general ledger accounts of Cycle Tech Bicycles,
SMART GUIDE as of August 31, are listed below. Also listed is the data needed for the
adjustments.
Step–by–Step Instructions:
Problem 18–7 Instructions In your working papers:
1. Select the problem set Prepare a ten-column work sheet for Cycle Tech Bicycles for the month
for Cycle Tech Bicycles ended August 31.
(Prob. 18–7).
2. Rename the company 101 Cash in Bank $ 22,323
and set the system date. 115 Accounts Receivable 1,737
3. Print a Working Trial
Balance and use it to 125 Merchandise Inventory 23,654
help you prepare the 130 Supplies 3,971
adjustments. 135 Prepaid Insurance 1,800
4. Record the adjustments 140 Store Equipment 25,395
using the General 145 Office Equipment 15,239
Journal Entry option.
5. Print a General Journal 201 Accounts Payable 11,051
report and proof your 210 Federal Corporate Income Tax Payable —
work. 211 Employees’ Federal Income Tax Payable 519
6. Print a General Ledger 212 Employees’ State Income Tax Payable 142
Trial Balance report. 213 Social Security Tax Payable 408
7. Complete the Analyze
activity.
214 Medicare Tax Payable 137
8. End the session. 215 Sales Tax Payable 1,871
216 Federal Unemployment Tax Payable 51
QuickBooks 217 State Unemployment Tax Payable 263
301 Capital Stock 40,000
PROBLEM GUIDE 305 Retained Earnings 14,908
Step–by–Step Instructions: 310 Income Summary —
Problem 18–7 401 Sales 128,231
1. Restore the Problem
405 Sales Discounts 214
18-7.QBB file. 410 Sales Returns and Allowances 1,289
2. Print a Trial Balance 501 Purchases 67,118
and use it to help 505 Transportation In 1,172
you prepare the 510 Purchases Discounts 810
adjustments.
3. Record the adjustments
515 Purchases Returns and Allowances 322
using the Make General 601 Advertising Expense 2,938
Journal Entries option. 605 Bankcard Fees Expense 185
4. Print a Journal report 625 Federal Corporate Income Tax Expense 3,650
and proof your work. 630 Insurance Expense —
5. Print a Trial Balance.
6. Complete the Analyze
645 Maintenance Expense 2,450
activity. 650 Miscellaneous Expense 3,929
7. Back up your work. 655 Payroll Tax Expense 834
657 Rent Expense 10,750
660 Salaries Expense 4,670
665 Supplies Expense —
675 Utilities Expense 5,395
544 Chapter 18 Problems
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Problems CHAPT E R 1 8
Data for Adjustments
Ending merchandise inventory $ 24,188 SMART GUIDE
Ending supplies inventory 1,049
Step–by–Step Instructions:
Insurance premium expired 675 Problem 18–8
Federal income tax expense for the month 3,827 1. Select the problem set
for River’s Edge Canoe &
Analyze Determine which section of the work sheet, the Trial Balance
Kayak (Prob. 18–8).
section or the Balance Sheet section, had the higher balance 2. Rename the company
for Merchandise Inventory. and set the system date.
3. Print a Working Trial
Balance and use it to
Problem 18–8 Completing a Ten-Column help you prepare the
adjustments.
Work Sheet 4. Record the adjustments
The balances of the general ledger accounts of River’s Edge Canoe using the General
Journal Entry option.
& Kayak, as of August 31, are listed below. 5. Print a General Journal
Instructions In your working papers: report and proof your
work.
1. Prepare a ten-column work sheet for River’s Edge Canoe & Kayak for 6. Print a General Ledger
the month ended August 31. The account names are entered on the report.
7. Print a General Ledger
work sheet. The data for the adjustments follows: Trial Balance report.
(a) The cost of the ending merchandise inventory is $45,669. 8. Complete the Analyze
activity.
(b) The cost of the supplies on hand on August 31 is $619. 9. End the session.
(c) The one-year insurance premium of $1,680 was paid on April 1.
TIP: Enter the adjustments
(d) The total federal income taxes owed for the year are $2,635. as one multipart entry to
2. Enter the journal entries for the adjustments on page 31 of the general save time.
journal.
3. Post the journal entries to the general ledger accounts.
QuickBooks
101 Cash in Bank $ 15,387 PROBLEM GUIDE
115 Accounts Receivable 2,852 Step–by–Step Instructions:
130 Merchandise Inventory 49,205 Problem 18–8
135 Supplies 3,027
1. Restore the Problem
140 Prepaid Insurance 1,680 18-8.QBB file.
145 Delivery Equipment 19,437 2. Print a Trial Balance
150 Store Equipment 29,504 and use it to help
201 Accounts Payable 13,339 you prepare the
204 Federal Corporate Income Tax Payable — adjustments.
3. Record the adjustments
210 Employees’ Federal Income Tax Payable 632 using the Make General
211 Employees’ State Income Tax Payable 117 Journal Entries option.
212 Social Security Tax Payable 472 4. Print a Journal report
213 Medicare Tax Payable 108 and proof your work.
215 Sales Tax Payable 2,931 5. Print a General Ledger
report.
216 Federal Unemployment Tax Payable 77 6. Print a Trial Balance
217 State Unemployment Tax Payable 315 report.
219 U.S. Savings Bonds Payable 150 7. Complete the Analyze
301 Capital Stock 50,000 activity.
305 Retained Earnings 25,425 8. Back up your work.
310 Income Summary —
CONTINUE
Chapter 18 Problems 545
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C H A P T ER 18 Problems
401 Sales 144,945
405 Sales Discounts 203
410 Sales Returns and Allowances 1,381
501 Purchases 79,310
505 Transportation In 1,192
510 Purchases Discounts 1,292
515 Purchases Returns and Allowances 576
601 Advertising Expense 3,151
605 Bankcard Fees Expense 288
625 Federal Corporate Income Tax Expense 2,480
635 Insurance Expense —
650 Maintenance Expense 1,381
655 Miscellaneous Expense 3,772
658 Payroll Tax Expense 1,219
660 Rent Expense 10,350
665 Salaries Expense 11,965
670 Supplies Expense —
680 Utilities Expense 2,595
Analyze Calculate River’s Edge net income (net loss) if it had not
taken any purchases discounts for paying creditors within
the discount period.
CHALLENGE Problem 18–9 Locating Errors on the
PROBLEM
Work Sheet
The Trial Balance and adjustment sections for Buzz Newsstand have been
prepared in your working papers. It is apparent from the totals on the work
sheet that errors have been made in preparing these portions of the work
sheet.
The accounting records show:
1. The merchandise on hand at the end of the month is valued at
$12,950.
2. The supplies on hand on August 31 are valued at $529.
3. The insurance premium was paid on August 1. The premium was $980
and covers the period from August 1 to November 30.
4. The total federal income tax owed for the period is $249.
Instructions In your working papers:
1. Find and correct the error(s) in the Trial Balance section.
2. On the line provided on the work sheet, write in the corrected totals
for the Trial Balance section.
3. Find and correct the error(s) in the Adjustments section.
4. Write in the corrected totals for the Adjustments columns.
Analyze Explain your calculations for the Merchandise Inventory
adjustment.
546 Chapter 18 Problems
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Winning Competitive Events CHAPT E R 1 8
Practice your test-taking skills! The questions on this page are reprinted with permission
from national organizations:
• Future Business Leaders of America
• Business Professionals of America
Use a separate sheet of paper to record your answers.
Future Business Leaders of America
MULTIPLE CHOICE
1. Which of the following statements is incorrect concerning an adjusted trial balance?
a. An adjusted trial balance lists account balances and their locations in the ledger.
b. An adjusted trial balance shows proper balance sheet and income statement
amounts.
c. An adjusted trial balance is prepared before the adjusting entries have been
journalized and posted.
d. An adjusted trial balance can be used to prepare the financial statements.
e. All of the above are true statements.
2. A store purchased a one-year insurance policy for $1,800 on September 1. Its fiscal
period ended December 31. What is the amount of the adjustment and what
accounts are debited and credited on December 31?
a. $1,800; insurance expense and prepaid insurance
b. $600; insurance expense and prepaid insurance
c. $1,200; insurance expense and prepaid insurance
d. $600; prepaid insurance and insurance expense
3. The Income Summary amount in a work sheet’s Adjustments Debit column
represents the
a. decrease in Merchandise Inventory.
b. increase in Merchandise Inventory.
c. beginning Merchandise Inventory.
d. ending Merchandise Inventory.
Business Professionals of America
MULTIPLE CHOICE
4. The ending balance of the Supplies account appears
a. in the Trial Balance columns of the work sheet.
b. in the Balance Sheet columns of the work sheet.
c. in the Income Statement columns of the work sheet.
d. on the statement of changes in owner’s
equity.
5. What entries are recorded at the Need More Help?
end of the fiscal period to update
Go to glencoeaccounting.glencoe.com and
general ledger accounts?
click on Student Center. Click on Winning
a. Closing Competitive Events and select Chapter 18.
b. Adjusting • Practice Questions and Test-Taking Tips
c. Post-closing • Concept Capsules and Terminology
d. Reversing
glencoeaccounting.glencoe.com Chapter 18 Winning Competitive Events 547
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C H A P T ER 18 Real-World Applications and Connections
Critical Adjustments and the Ten-Column Work Sheet
Thinking 1. What is the term for the actual counting of merchandise on hand and
available for sale at the end of the fiscal period?
2. Explain what expensing an asset means.
3. Compute the adjustment for Supplies if the business had $3,000 in supplies
at the beginning of the period, bought $4,000 during the period, and
estimated that it had used 60% of all supplies during the period.
4. Compare the Federal Corporate Income Tax Expense account with the
Federal Corporate Income Tax Payable account. How are they different?
5. Explain where you could obtain the information needed to determine the
amount of the insurance adjustment in the work sheet’s Adjustments section.
6. Defend the concept that businesses cannot track supplies as they are used.
CASE Merchandising Business: Training Videos
STUDY You are an accountant for EZ Training Systems. The company CEO has asked you
to prepare financial statements without the appropriate adjusting entries.
INSTRUCTIONS Analyze this information for adjustments and complete the tasks.
Beginning Ending
Supplies $5,000 $1,200
Prepaid Insurance 6,400 800
1. Net income before adjustments is $22,400. Calculate net income after the
adjustments have been made.
2. Explain why the financial statements do not present an accurate picture of
the company without considering the adjusting entries.
a
mattoefr ETHICS Out-of-Date Goods
The local bakery where you work as an accounting clerk does not sell its day-old
baked goods but allows employees to have them. One day a mother with three
children who cannot afford fresh donuts asks to buy some day-old ones. You
consider giving her several that are about to be thrown away.
ETHICAL DECISION MAKING
1. What are the ethical issues? 4. How do the alternatives affect the
2. What are the alternatives? parties?
3. Who are the affected parties? 5. What would you do?
$ )) ))
Communicating
Training New Employees
ACCOUNTING You are preparing a presentation for the board of directors of Kids-n-Teens. As you
review the quarterly financial statements, you see that the new clerk extended
the account balances from the Adjusted Trial Balance section to the Balance Sheet
section but not to the Income Statement section. Select a classmate and practice
an explanation of how to extend to both sections.
548 Chapter 18 Real-World Applications and Connections
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Real-World Applications and Connections CHAPT E R 1 8
Skills Beyond Leadership
NUMBERS You have just been promoted to Accounting Director for a national toy store chain.
In reviewing the end-of-period financial reports, you see that net income was lower
than in past periods. You believe a new line of toys could boost net income for the
next period. Lee Rainwater, the Marketing Director, has been with the company
for 25 years, and his decisions are rarely questioned.
INSTRUCTIONS Explain how you would approach Lee to discuss adding a new
toy line.
INTERNATIONAL Accounting for Inflation
If your money does not go as far as it used to, the cause is probably inflation.
Accounting When there is a general increase in the cost of goods and services, inflation exists.
Countries use different methods of accounting for inflation.
INSTRUCTIONS Explain why investors should know how inflation accounting is
handled when reviewing financial statements.
Making It
Your Household Supplies
Personal Your family probably handles its kitchen supplies the way a business handles its
supplies. That is, a family member buys them as needed. No one tracks them.
When the supply gets low, someone decides to buy more.
PERSONAL FINANCE ACTIVITY List supplies a family might purchase weekly,
monthly, and once or twice a year. Identify the group with the most items and
methods to determine when to reorder items.
PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and
click on Student Center. Click on Making It Personal and select Chapter 18.
Analyzing Classifying the Balance Sheet—Assets and Liabilities
Financial Accounts on the balance sheet are classified or grouped into related categories.
Reports These classifications provide subtotals which can be used to compute ratios and
do comparisons. For example any portion of a long-term liability that is due
within the next year is classified as a current liability. This affects the company’s
liquidity ratios and working capital. (See pages
235–236 in Chapter 9.)
INSTRUCTIONS Use PETsMART’s balance sheet in
Appendix F to answer these questions.
Online Business
1. What is the working capital as of
Transactions
February 1, 2004? Online transactions usually
update general ledger
2. Obtain PETsMART’s most recent annual accounts automatically. Visit
report from the Internet or library. What glencoeaccounting
is the working capital as of the balance .glencoe.com and click
sheet date? on Student Center. Click on
3. Describe any change from the fiscal year WebQuest and select Unit 4 to
continue your Internet project.
ending February 1, 2004.
glencoeaccounting.glencoe.com Chapter 18 Real-World Applications and Connections 549
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CH A P T ER 19 Financial Statements
for a Corporation
BEFORE
YOU READ
What You’ll Learn Predict
1. Explain how to record 1. What does the chapter title tell you?
ownership of a corporation. 2. What do you already know about this subject from personal experience?
3. What have you learned about this in the earlier chapters?
2. Explain the relationship
between the work sheet and 4. What gaps exist in your knowledge of this subject?
the financial statements for a
merchandising corporation.
3. Explain how a corporation’s Exploring the Real World of Business
financial statements differ
from a sole proprietorship’s. ANALYZING CORPORATE FINANCIAL STATEMENTS
4. Prepare an income statement,
statement of retained 99 Cents Only Stores
earnings, and balance Do you think it is possible to buy a new 19-inch color TV
sheet, and describe the for 99 cents? It was for the first nine customers at a recent
statement of cash flows for a grand opening of a 99 Cents Only Store. Promoting its 223rd
merchandising corporation.
store, 99 Cents Only Stores tempted customers with all kinds
5. Analyze the financial data of bargains for 99 cents or less: name-brand and private-
contained on the statements. label foods, beverages, health and beauty products, toys, and
6. Define the accounting terms household goods.
introduced in this chapter. How can selling products at such a low price make the
Why It’s Important company a profit? This retailer focuses on close-out inventory
and distressed products purchased at discount prices.
The corporate form
▲
The financial condition and performance of 99 Cents Only
of business and the
Stores can be examined using statements like the balance sheet
merchandising operation
both have unique financial and income statement and accompanying notes. Companies also
reporting requirements. publish growth trends, expansion plans, and financial milestones.
What Do You Think?
In purchasing stock in a company like 99 Cents Only
Stores, what would you review on its financial statements?
550 Chapter 19 Financial Statements for a Corporation
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Working in the Real World
APPLYING YOUR ACCOUNTING KNOWLEDGE
Personal Connection
Once the work sheet has been completed, the 1. Is your employer a public corporation?
accounting staff is ready to prepare financial 2. Are the financial statements available for you
statements. Many corporations are required by to review?
law to disclose their financial information to the
3. Can they be found on the Internet or in your
public. If you have listened to the evening news
local library?
on television, you might remember an announcer
reporting earnings increases or decreases for Online Connection
a large national corporation. This information Go to glencoeaccounting.glencoe.com and click
is found in the financial statements or annual on Student Center. Click on Working in the
reports of the company. Real World and select Chapter 19.
glencoeaccounting.glencoe.com 551
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SECTION 1 The Ownership
of a Corporation
In Chapter 18 you learned
BEFORE
YOU READ that the work sheet organizes
data for preparing financial state-
ments and end-of-period journal
Main Idea entries. In this chapter you will
Owners’ equity in a
use it to prepare financial state-
corporation is called
ments for a merchandising cor-
stockholders’ equity.
poration. This is an important
Read to Learn… task for all businesses.
➤ the accounts used to
record ownership of a
corporation. (p. 552)
Accounting for a Corporation
Who Owns a Corporation?
➤ the qualities expected
in financial statements. One person owns a sole proprietorship. A corporation may be owned
(p. 554) by one person or by thousands of people. The ownership of a corporation
➤ the financial statements is represented by shares of stock.
of a corporation. (p. 555)
Recording the Ownership of a Corporation
Key Terms As you recall, investments by the owner of a sole proprietorship are
Capital Stock
recorded in the owner’s capital account. A $25,000 owner’s investment
stockholders’ equity
in a sole proprietorship is recorded as shown in the T accounts. Cash in
retained earnings
Bank is debited for $25,000, and Maria Sanchez, Capital is credited for
comparability
$25,000.
reliability
relevance Cash in Bank Maria Sanchez, Capital
full disclosure
Debit Credit Debit Credit
materiality
25,000 25,000
Businesses organized as corporations have a Capital Stock account
instead of the owner’s capital account in a sole proprietorship. Capital Stock
represents investments in the corporation by its stockholders (owners).
Capital Stock is classified as a stockholders’ equity account.
Stockholders’ equity is the value of the stockholders’ claims to the corpo-
ration. Like the owner’s capital account in a sole proprietorship, increases to
Capital Stock are recorded as credits and decreases are recorded as debits.
Reporting Stockholders’ Equity in a Corporation
The form of business organization does not affect the amount of equity
in the business. That is, one person may have an ownership interest in a
552 Chapter 19 Financial Statements for a Corporation
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B u s i n e s s Tr a n s a c t i o n
On January 1 stockholders invested $25,000 in exchange for shares of stock of the corporation,
Receipt 997.
ANALYSIS Identify 1. The accounts affected are Cash in Bank and Capital Stock.
Classify 2. Cash in Bank is an asset account. Capital Stock is a stockholders’
equity account.
/ 3. Cash in Bank is increased by $25,000. Capital Stock is increased by
$25,000.
DEBIT-CREDIT RULE 4. Increases to asset accounts are recorded as debits. Debit Cash in Bank
for $25,000.
5. Increases to stockholders’ equity accounts are recorded as credits.
Credit Capital Stock for $25,000.
T ACCOUNTS 6. Cash in Bank Capital Stock
Debit Credit Debit Credit
25,000 25,000
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 1
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Jan. 1 Cash in Bank 2 5 0 0 0 00 2
3 Capital Stock 25 0 0 0 00 3
4 Receipt 997 4
sole proprietorship worth $80,000, or 10 people may have shares of stock
in a corporation worth a total of $80,000. The difference is in the way these
two amounts are reported on the balance sheet.
A sole proprietorship reports the balance of the owner’s capital account
in the owner’s equity section of the balance sheet. For a corporation the own-
er’s equity section of the balance sheet is called stockholders’ equity. The law
requires that stockholders’ equity be reported in two parts: (1) equity contrib-
uted by stockholders and (2) equity earned through business profits.
Equity Contributed by Stockholders
The first part of stockholders’ equity is the amount of money invested
by stockholders. This amount is comparable to the investments made by the
owner in a sole proprietorship. In a corporation stockholders contribute to
equity by buying shares of stock issued by the corporation. Stockholders’
investments are recorded in the Capital Stock account.
Section 1 The Ownership of a Corporation 553
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Equity Earned Through Business Profits
The second part of stockholders’ equity is the amount of accumulated
net income earned and retained by the corporation. This amount is compa-
rable to the amount of net income less any withdrawals by the owner in a
sole proprietorship. In a corporation this amount, called retained earnings ,
represents the increase in stockholders’ equity from the portion of net
income not distributed to the stockholders.
Retained Earnings Earnings retained by a corporation are recorded in the Retained
Earnings account. Retained Earnings is classified as a stockholders’
Debit Credit
equity account. Like the Capital Stock account, it is increased by cred-
Decrease Side Increase Side its and decreased by debits. Retained Earnings has a normal credit
Normal Balance
balance.
In a sole proprietorship, net income increases owner’s capital. This
increase in owner’s capital represents an increase in the assets of the business.
In a corporation net income increases retained earnings, which represents
the growth, or increase, in the assets of the corporation.
Balance Sheet Presentation
A comparison of the capital section of the balance sheet for a sole pro-
prietorship and for a corporation follows:
Sole Proprietorship Corporation
Owner’s Equity: Stockholders’ Equity:
Owner’s Capital Capital Stock
Retained Earnings
AS
READ Characteristics of Financial Information
YOU
What Qualities Are Required in Financial Statements?
Key Point At the end of a period, a business prepares various financial statements.
The Accounting These statements summarize the changes that have taken place during the
Equation The basic period and report the financial condition of the business at the end of the
accounting equation period. Financial statements are used by many groups:
applies to any business
• Managers analyze financial statements to evaluate past performance
regardless of the form of
and to make informed decisions and predictions for future operations.
business organization:
• Stockholders are interested in the performance, potential future growth,
Assets Liabilities
and success of the business.
Stockholders’ Equity
• Creditors want to know a company’s ability to pay its debts in a timely
manner and the amount of credit that should be extended to the
company.
• Government agencies, employees, consumers, and the general public
are also interested in the financial position of the business.
Comparability
For accounting information to be useful, it must be understandable
and comparable. The data must be presented in a way that lets users rec-
ognize similarities, differences, and trends from one period to another.
Comparability allows accounting information to be compared from one
554 Chapter 19 Financial Statements for a Corporation
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fiscal period to another. The same types of statements, therefore, are pre-
pared at the end of each period for the same length of time (for example,
one month or one year). By comparing financial statements in different
periods of equal length, financial patterns and relationships can be identi-
fied and analyzed, and the information from the analysis can be used to
make decisions regarding business operations. Comparability also allows the
comparison of financial information between businesses.
Reliability
The users of accounting data assume that the data is reliable. Reliability
refers to the confidence users have that the financial information is reason-
ably free from bias and error.
Relevance
Relevance is the requirement that
all information that would affect the
decisions of financial statement users be
disclosed in the financial reports.
Full Disclosure
“To disclose” means “to uncover
or to make known.” Full disclosure
means that financial reports include
enough information to be complete.
Materiality
If something is “material,” it is
important. In accounting, materiality
means that relevant information should
be included in financial reports.
A Corporation’s Financial Statements
What Financial Statements Does a Merchandising
Corporation Prepare?
On Your Mark Athletic Wear, a merchandising corporation, prepares four
financial statements: the income statement, the statement of retained earn-
ings, the balance sheet, and the statement of cash flows. Three statements
report the changes that have taken place over the period. One statement,
the balance sheet, shows the financial position of the business on a specific
date—the last day of the period. The work sheet provides most of the infor-
mation needed to complete all four statements.
Today most businesses rely on automated equipment or computers to
maintain the general and subsidiary ledgers and to prepare the end-of-period
financial statements. Computers offer the advantages of speed and accuracy.
The impact of a change in an estimate, operating procedure, or accounting
method can be seen instantaneously. For example, electronic spreadsheets
allow what-if analysis, which is when one or more variables are changed to
see how the final outcome would be affected.
Section 1 The Ownership of a Corporation 555
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SECTION 1 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Use a diagram like this one to
describe the basic accounting
equation for a corporation.
Use three key terms from
Section 1.
!CCOUNT .AME !CCOUNT .AME
Do the Math
Stock in Middlewood Corporation sells for $20 per share. The balance in the Capital Stock
account at the beginning of the period was $72,400. The amount entered in the Balance
Sheet section of the end-of-period work sheet is $83,100. How many shares of stock were
sold during the fiscal period?
Problem 19–1 Analyzing Stockholders’ Equity Accounts
1. An investment of $60,000 by Kevin Cleary in his sole proprietorship is recorded as a
credit to which account?
2. The sale of 100 shares of stock for $8,500 by the Sims Corporation is recorded as a credit
to which account?
3. Stockholders’ equity consists of which two accounts?
Cindy’s Curtains
Problem 19–2 Analyzing a Source
432 Meadowbrook Street
Wilcoxson, Georgia 30345-8417
404-555-2488
Document DATE: June 26, 20-- NO. 1441
A sales slip for Cindy’s Curtains is presented at right. SOLD
Rachel C. Washington
TO 59 Priscilla Drive
The accountant noticed errors in the calculations. Park Ridge, IL 60068
CLERK CASH CHARGE TERMS
Instructions Check all calculations and recalculate K.C. ✓
the sales tax using a rate of 4 percent.
UNIT
QTY. DESCRIPTION PRICE AMOUNT
2 Curtain Rods #21847 $ 14.95 $ 29 09
4 Anchor Pieces #23104 6.75 27 00
15 Feet of ribbon per ft. 0.89 13 00
SUBTOTAL $ 69 09
SALES TAX 2 76
Thank You! TOTAL $ 71 85
556 Chapter 19 Financial Statements for a Corporation
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SECTION 2 The Income Statement
In Section 1 you learned that corporations prepare four financial
BEFORE
statements at the end of each period. In this section you will learn how YOU READ
to prepare and analyze the income statement.
Main Idea
The Income Statement A merchandiser’s income
How Is a Merchandising Business Income Statement statement has a Cost of
Different from a Service Business Income Statement? Merchandise Sold section,
As you know, the income statement reports the net income or loss and a corporation’s income
earned by a business. In Chapter 9 you prepared an income statement for statement shows income tax
Roadrunner Delivery Service, a service business organized as a sole propri- expense.
etorship. You subtracted total expenses from revenue to find the period’s Read to Learn…
net income or loss. When preparing the income statement, whether ➤ how to prepare an
for a service or merchandising business, the revenue realization principle income statement
is applied. Revenue for a credit sale is recorded at the time of the sale for a merchandising
because the account receivable is expected to be converted to cash. The business organized as a
matching principle is also applied when preparing the income statement. corporation. (p. 557)
Expenses are matched with revenue earned during the same period. ➤ how to apply vertical
Merchandising businesses have an additional cost—the cost of the analysis to a financial
merchandise that is purchased and then resold to customers. The income statement. (p. 562)
statement for a merchandising business is thus expanded to include the
cost of merchandise sold.
Key Terms
net sales
An income statement for a merchandising business has five sections:
net purchases
• Revenue • Operating Expenses gross profit on sales
• Cost of Merchandise Sold • Net Income (or Loss) operating expenses
• Gross Profit on Sales selling expenses
A comparison of the income statements for a service business and administrative expenses
for a merchandising business follows: operating income
vertical analysis
Service Business Merchandising Business
Roadrunner Delivery Service On Your Mark Athletic Wear
Revenue Revenue
Expenses Cost of Merchandise Sold
Net Income (Loss) Gross Profit on Sales
Operating Expenses
Net Income (Loss)
On Your Mark’s income statement has four amount columns (see Fig-
ure 19–1). Totals are entered in the far right column. Balances that are
added or subtracted are entered in the other columns. The format of a
computer-generated income statement can vary from the format of an
Section 2 The Income Statement 557
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On Your Mark Athletic Wear
Income Statement
For the Year Ended December 31, 20--
Revenue:
Sales 320 4 5 0 00
Less: Sales Discounts 7 3 0 00
Sales Returns and Allowances 2 0 0 0 00 2 7 3 0 00
Net Sales 317 7 2 0 00
Figure 19–1 The Heading
income statement prepared manually on accounting stationery. Regardless
and Revenue Section of the
Income Statement of how an income statement is prepared, the formats are very similar.
All information needed to prepare the income statement comes from
the work sheet, particularly the Income Statement section. As with all other
financial statements, the income statement begins with a three-line head-
ing. The income statement for On Your Mark is prepared for the year ended
December 31.
The Revenue Section
The first section on the income statement is the revenue section. This
section reports the net sales for the period. The balances of the Sales revenue
account and the Sales Discounts and Sales Returns and Allowances contra
revenue accounts are reported in this section. Remember that contra revenue
accounts decrease the revenue account. Therefore, net sales is the amount
of sales for the period less any sales discounts, returns, and allowances. Refer
to Figure 19–1 as you learn how to complete the revenue section.
1. On the first line, enter the classification Revenue: at the left edge of
the stationery.
2. On the second line, enter the name of the revenue account Sales,
indented about half an inch. Enter the balance of the account in the
third amount column.
3. On the next lines, enter the deductions from Sales. Write the word
Less: followed by the names and balances of the two contra revenue
accounts. (You may have to abbreviate the account names.) Enter
the balances of the accounts in the second amount column.
4. Add the balances of the two contra revenue accounts. Write the
total below the Sales balance on the fourth line, in the third amount
column.
5. On the next line, enter the words Net Sales, indented about an inch.
Subtract the total of the two contra accounts from the balance of
the Sales account. Enter the amount in the fourth amount column.
On Your Mark’s net sales for the year are $317,720.
The Cost of Merchandise Sold Section
The cost of merchandise sold section follows the revenue section. As the
words indicate, the cost of merchandise sold is the actual cost to the business
of the merchandise it sold to customers during the period.
558 Chapter 19 Financial Statements for a Corporation
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The cost of merchandise sold is calculated as follows:
Beginning Merchandise Inventory
Net Purchases During the Period
Cost of Merchandise Available for Sale
Ending Merchandise Inventory
Cost of Merchandise Sold
Computing the cost of merchandise sold requires two steps:
1. Determine the cost of all merchandise available for sale.
2. Calculate the cost of merchandise sold.
Calculating Cost of Merchandise Available for Sale. To
calculate the cost of merchandise available for sale, add net purchases to the
beginning inventory amount. Net purchases represents all costs related
to merchandise purchased during the period. To calculate net purchases,
add the transportation charges for the period (Transportation In) to the
Purchases balance and then subtract the balances of Purchases Discounts
and Purchases Returns and Allowances.
Purchases
Transportation In
Cost of Delivered Merchandise
Purchases Discounts
Purchases Returns and Allowances
Net Purchases
Calculating Cost of Merchandise Sold. To calculate the cost of
merchandise sold, subtract the ending merchandise inventory amount from
the cost of merchandise available for sale. Refer to Figure 19–2 on page 560
as you learn how to complete the cost of merchandise sold section.
1. On the line below net sales, enter the words Cost of Merchandise Sold:
at the left edge.
2. Next, enter Merchandise Inventory, January 1, 20— indented about
half an inch. Enter the amount of the beginning inventory in
the third amount column. (The beginning inventory is found on
the work sheet, in the Trial Balance section, on the Merchandise
Inventory line.)
3. Next, enter Purchases, indented about half an inch, and place the
Purchases account balance in the first amount column.
4. On the next line, enter Plus: Transportation In indented about half
an inch. Enter the balance of Transportation In in the first amount
column, below the Purchases amount. Draw a line across the first
amount column under the Transportation In amount.
5. On the next line, write Cost of Delivered Merchandise indented about
half an inch. Add the balances of Purchases and Transportation
In. Enter the result in the second amount column.
6. On the next line, write Less: Purchases Discounts, indented about
half an inch, and place the Purchases Discounts account balance
in the first amount column.
7. On the next line, write Purchases Returns and Allowances so that it
lines up with Purchases Discounts in the line above and place the
Section 2 The Income Statement 559
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On Your Mark Athletic Wear
Income Statement
For the Year Ended December 31, 20--
Revenue:
Sales 320 4 5 0 00
Less: Sales Discounts 7 3 0 00
Sales Returns and Allowances 2 0 0 0 00 2 7 3 0 00
Net Sales 317 7 2 0 00
Cost of Merchandise Sold:
Merchandise Inventory, January 1, 20-- 84 9 2 1 00
Purchases 206 7 0 0 00
Plus: Transportation In 4 0 3 6 18
Cost of Delivered Merchandise 210 7 3 6 18
Less: Purchases Discounts 1 3 4 0 00
Purchases Returns and Allowances 1 8 0 0 00 3 1 4 0 00
Net Purchases 207 5 9 6 18
Cost of Merchandise Available 292 5 1 7 18
Merchandise Inventory, December 31, 20-- 81 3 8 5 00
Cost of Merchandise Sold 211 1 3 2 18
Gross Profit on Sales 106 5 8 7 82
Figure 19–2 Income Purchases Returns and Allowances account balance in the first
Statement Through Gross amount column.
Profit on Sales 8. To find the total deduction from Purchases, add the balances of
the Purchases Discounts and Purchases Returns and Allowances
accounts. Enter the total on the Purchases Returns and Allowances
line, in the second amount column. Draw a line across the first and
second amount columns under this total.
9. On the next line, write Net Purchases indented about half an inch.
Subtract the total of the Purchases Discounts and Purchases
Returns and Allowances accounts from the cost of delivered
merchandise. The difference is the amount of net purchases for the
period. Enter the amount in the third amount column. Draw a line
across the third amount column under this amount.
10. On the next line, write Cost of Merchandise Available indented about
half an inch. Add the net purchases amount to the beginning
inventory amount. The total is the cost of merchandise available for
sale. Enter the total in the third amount column.
11. On the next line, write Merchandise Inventory, December 31, 20—
indented about half an inch. Enter the amount of the ending
inventory in the third amount column. (The ending inventory
is found on the work sheet, in the Balance Sheet section, on the
Merchandise Inventory line.) Draw a line across the third amount
column under this amount.
12. On the next line, write Cost of Merchandise Sold indented about
one inch. Subtract the ending inventory amount from the cost
of merchandise available for sale. The difference is the cost of
merchandise sold during the period. Enter the amount in the fourth
amount column. Draw a line across the fourth amount column
under this amount.
560 Chapter 19 Financial Statements for a Corporation
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The Gross Profit on Sales Section AS
YOU READ
After the cost of merchandise sold has been calculated, the gross profit
on sales can be determined. The gross profit on sales during the period Instant Recall
is the profit made before operating expenses are deducted. Gross profit on Gross Recall that gross
sales is found by subtracting the cost of merchandise sold from net sales. means the total amount
Gross Profit on Sales is entered at the left edge, and the amount is placed in before deductions or
the fourth amount column. In Figure 19–2 you can see that On Your Mark’s subtractions.
gross profit on sales is $106,587.82.
The Operating Expenses Section
The next section of the income statement shows the operating expenses
for the period. Operating expenses are the costs of the goods and services
used in the process of earning revenue for the business. Some businesses
choose to further classify operating expenses into selling expenses (incurred
to sell or market the merchandise sold) and administrative expenses
(related to the management of the business). Look at Figure 19–3 on
page 562. Operating Expenses is entered at the left edge on the line following
the gross profit on sales. On the following lines, the names and balances
of all expense accounts except Federal Corporate Income Tax Expense
are listed in the same order as on the work sheet. Federal corporate income
tax is a normal expense for a corporation, but it is not considered to be an
operating expense. Rather than a cost related to earning revenue, income
tax represents a cost resulting from the revenue earned.
Notice that the balances of the expense accounts are entered in the third
amount column. The balances are totaled. The total, $63,918.10, is entered
in the fourth amount column.
The Net Income Section AS
YOU READ
The final section of the income statement reports the net income (or net
loss) for the period, both before and after federal corporate income taxes. It Compare and
is customary to present the federal corporate income tax amount separately Contrast
on the income statement. This is done so that the income statement shows Explain the difference
the amount of operating income. Operating income is the excess of gross between operating
profit over operating expenses. It is the amount of income earned before income and net income.
deducting federal corporate income taxes.
Look at Figure 19–3 again. To calculate operating income, subtract the
total operating expenses from the gross profit on sales. On Your Mark’s
operating income for the period is $42,669.72.
To calculate net income, follow these steps.
1. Enter Less: Federal Corporate Income Tax Expense on the next line,
indented about half an inch.
2. Enter the amount of income taxes, $9,995, in the fourth amount
column. Federal corporate income taxes appear in the Income
Statement section of the work sheet. Draw a line across the fourth
column under this amount.
3. Enter Net Income (or Net Loss) on the next line at the left edge.
4. Subtract the amount of federal corporate income taxes from the
operating income. The result is net income or net loss.
Section 2 The Income Statement 561
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On Your Mark Athletic Wear
Income Statement
For the Year Ended December 31, 20--
Revenue:
Sales 320 4 5 0 00
Less: Sales Discounts 7 3 0 00
Sales Returns and Allowances 2 0 0 0 00 2 7 3 0 00
Net Sales 317 7 2 0 00
Cost of Merchandise Sold:
Merchandise Inventory, January 1, 20-- 84 9 2 1 00
Purchases 206 7 0 0 00
Plus: Transportation In 4 0 3 6 18
Cost of Delivered Merchandise 210 7 3 6 18
Less: Purchases Discounts 1 3 4 0 00
Purchases Returns and Allowances 1 8 0 0 00 3 1 4 0 00
Net Purchases 207 5 9 6 18
Cost of Merchandise Available 292 5 1 7 18
Merchandise Inventory, December 31, 20-- 81 3 8 5 00
Cost of Merchandise Sold 211 1 3 2 18
Gross Profit on Sales 106 5 8 7 82
Operating Expenses:
Advertising Expense 2 450 00
Bank Card Fees Expense 4 199 27
Insurance Expense 125 00
Maintenance Expense 3 519 25
Miscellaneous Expense 348 28
Payroll Tax Expense 3 826 83
Rent Expense 14 0 0 0 00
Salaries Expense 29 3 7 4 60
Supplies Expense 3 710 00
Utilities Expense 2 364 87
Total Operating Expenses 63 9 1 8 10
Operating Income 42 6 6 9 72
Less: Federal Corporate Income Tax Expense 9 9 9 5 00
Net Income 32 6 7 4 72
Figure 19–3 On Your 5. Enter the difference, $32,674.72, in the fourth amount column. Net
Mark’s Completed Income
income on the income statement must agree with the net income
Statement
shown on the work sheet. If it does, draw a double rule under the
amount to show that the income statement is proved and complete.
If it does not, check the addition and subtraction on the income
statement. Also check that all the accounts and balances in the
Income Statement section of the work sheet appear correctly on the
income statement.
Analyzing Amounts on the
Income Statement
Why Do People Look at Percentages?
Managers use financial analysis to evaluate the company’s financial
performance. The information reported on the income statement and other
562 Chapter 19 Financial Statements for a Corporation
550-581_CH19_868829.indd 562 9/15/05 11:49:15 AM
financial statements is expressed in dollars. Dollar amounts are useful, but
AS
the analysis can be expanded and made more meaningful by expressing the YOU READ
dollar amounts as percentages. These percentages more clearly indicate the
Key Point
relationships among the items on the financial statements. They also enable
financial statement users to compare the relationships within an account- Vertical Analysis
ing period and changes in these relationships between accounting periods. Vertical analysis
One type of analysis is called vertical analysis . With vertical analysis, expresses financial
statement items as
each dollar amount reported on a financial statement is also reported as a
percentages of a base
percentage of another amount, called a base amount, appearing on that
amount.
same statement. For example, on the income statement, each amount is
reported as a percentage of net sales. Current-period percentages can be
compared with percentages from past periods or with percentages from
other companies within the same industry.
Figure 19–4 shows a comparative income statement. As you can see, the
net sales amount for each year is assigned a percentage of 100. Every other
amount on the income statement is stated as a percentage of the net sales
amount. Notice that net income was 14.68 percent of net sales in the previ-
ous year and only 10.28 percent of net sales for the current year. Managers
would want to find the cause to interpret (explain) the decrease. Analysis like
this helps managers make informed decisions about future operations.
Figure 19–4 Comparative
On Your Mark Athletic Wear
Comparative Income Statement
Income Statement Showing
For the Current and Previous Years Ended December 31 Vertical Analysis
Current Year Previous Year
Dollars Percent Dollars Percent
Revenue:
Sales $ 320,450.00 100.86 % $ 296,350.00 100.79 %
Less: Sales Discounts 730.00 0.23 625.00 0.21
Sales Ret. and Allow. 2,000.00 0.63 1,700.00 0.58
Net Sales $ 317,720.00 100.00 % $ 294,025.00 100.00 %
Cost of Merchandise Sold:
Merch. Inventory, Jan. 1 $ 84,921.00 26.73 % $ 82,100.00 27.92 %
Net Purchases 207,596.18 65.34 186,836.56 63.54
Merch. Available for Sale 292,517.18 92.07 % $ 268,936.56 91.47 %
Merch. Inventory, Dec. 31 81,385.00 25.62 84,921.00 28.88
Cost of Merchandise Sold $ 211,132.18 66.45 % $ 184,015.56 62.59 %
AS
READ
Gross Profit on Sales $ 106,587.82 33.55 % $ 110,009.44 37.41 %
Operating Expenses: YOU
Advertising Expense $ 2,450.00 0.77 % $ 1,779.00 0.61 %
Bankcard Fees Expense 4,199.27 1.32 3,569.37 1.21 In Your Own
Insurance Expense 125.00 0.04 0.00 0.00 Experience
Maintenance Expense 3,519.25 1.11 3,308.10 1.13
Miscellaneous Expense 348.28 0.11 742.00 0.25
Name a corporation
Payroll Tax Expense 3,826.83 1.20 3,444.15 1.17 whose profits or losses
Rent Expense 14,000.00 4.41 13,200.00 4.49 have been reported
Salaries Expense 29,374.60 9.25 26,437.14 8.99 in a newspaper, on
Supplies Expense 3,710.00 1.17 2,968.00 1.01
TV or radio, or on the
Utilities Expense 2,364.87 0.74 2,305.75 0.78
Total Operating Expenses
Internet. Why was this
$ 63,918.10 20.12 % $ 57,753.51 19.64 %
Operating Income $ 42,669.72 13.43 % $ 52,255.93 17.77 % information important
Fed. Corp. Inc. Tax Exp. 9,995.00 3.15 9,085.00 3.09 enough to be reported in
Net Income $ 32,674.72 10.28 % $ 43,170.93 14.68 % the mass media?
Section 2 The Income Statement 563
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SECTION 2 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Use a diagram like this 0REPARING AN )NCOME 3TATEMENT FOR A -ERCHANDISING #ORPORATION
one to describe the
steps for preparing an
income statement for a
merchandising corporation.
Do the Math Comparative Income Statement
For the Current and Previous Years Ended December 31
Look at the comparative income statement Current Year Previous Year
provided here and answer the following
Dollars Percent Dollars Percent
Revenue:
questions using the vertical analysis of this Sales
Less: Sales Ret. and Allow.
$ 1,500,000
2,000
100.13 %
0.13
$ 850,000
2,200
100.26 %
0.26
financial statement.
Net Sales $ 1,498,000 100.00 % $ 847,800 100.00 %
Cost of Merchandise Sold:
1. What is the trend in sales?
Merch. Inventory, Jan. 1 $ 250,000 16.69 % $ 100,000 11.80 %
Net Purchases 800,000 53.40 650,000 76.67
2. How is that trend affecting the net
Merch. Available for Sale $ 1,050,000 70.09 % $ 750,000 88.46 %
Merch. Inventory, Dec. 31 60,000 4.01 250,000 29.49
Cost of Merchandise Sold $ 990,000 66.09 % $ 500,000 58.98 %
income? Gross Profit on Sales $ 508,000 33.91 % $ 347,800 41.02 %
Operating Expenses:
3. What expenses have decreased in the Advertising Expense $ 50,000 3.34 % $ 25,000 2.95 %
Bankcard Fees Expense 10,000 0.67 8,000 0.94
past year (as a percent of sales)? Insurance Expense 5,300 0.35 5,300 0.63
Maintenance Expense 9,000 0.60 7,500 0.88
4. Are there any significant changes in Payroll Tax Expense 6,200 0.41 3,200 0.38
Rent Expense 20,000 1.34 20,000 2.36
inventory? Salaries Expense
Supplies Expense
58,000
3,000
3.87
0.20
48,000
2,200
5.66
0.26
5. What is the largest expense? Utilities Expense
Total Operating Expenses $
2,400
163,900
0.16
10.94 %
1,850
$ 121,050
0.22
14.28 %
6. Would you invest your money in this Operating Income
Fed. Corp. Inc. Tax Exp.
$ 344,100
44,940
22.97
3.00
% $ 226,750
25,434
26.75
3.00
%
business? Why or why not? Net Income $ 299,160 19.97 % $ 201,316 23.75 %
Problem 19–3 Calculating Amounts on the
Income Statement
Instructions
For each group of figures that follows, determine the missing amount.
1. Beginning merchandise inventory $81,367
Net purchases 15,139
Cost of merchandise available for sale ?
2. Net sales $52,935
Cost of merchandise sold 36,232
Gross profit on sales ?
3. Purchases $26,472
Transportation in 1,311
Cost of delivered merchandise ?
4. Cost of merchandise available for sale $49,769
Ending merchandise inventory 32,621
Cost of merchandise sold ?
564 Chapter 19 Financial Statements for a Corporation
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SECTION 3 The Statement of Retained
Earnings, Balance Sheet, and
Statement of Cash Flows
In the previous section, you learned how to prepare and analyze the
BEFORE
income statement, which reports the net income or loss for the period. YOU READ
In this section you will learn about a corporation’s statement of retained
earnings, balance sheet, and statement of cash flows.
Main Idea
In addition to the income
The Statement of Retained Earnings statement, a corporation
What Does This Statement Report? prepares the statement
A corporation has two stockholders’ equity accounts, Capital Stock of retained earnings, the
and Retained Earnings. The Capital Stock account represents the stock-
balance sheet, and the
statement of cash flows.
holders’ investment in the corporation. Its balance changes only when
the corporation issues additional shares of stock. The Retained Earnings Read to Learn…
account summarizes the accumulated profits of a corporation minus any ➤ how and why a statement
amounts paid to stockholders as returns on their investments. of retained earnings is
In Chapter 9 you learned about the statement of changes in owner’s prepared. (p. 565)
equity for a sole proprietorship. It shows the changes in the owner’s ➤ how to prepare a balance
capital account during the period. A corporation prepares a similar state- sheet for a merchandising
ment, the statement of retained earnings , that reports the changes in business organized as a
the Retained Earnings account during the period. These changes result corporation. (p. 566)
from business operations and dividends, which are the distributions of ➤ how to apply horizontal
earnings to stockholders. analysis to a financial
The changes to Retained Earnings are summarized as follows: statement. (p. 568)
➤ about the statement of
Retained Earnings cash flows. (p. 569)
Debit
Credit
Key Terms
Decreased by Increased by statement of retained
net loss net income earnings
dividends
horizontal analysis
base period
The statement of retained earnings is prepared from information cash inflows
found on the work sheet. The statement of retained earnings is a support- cash outflows
ing document for the balance sheet. The final balance of the Retained operating activities
Earnings account, as calculated on the statement of retained earnings, investing activities
is used when preparing the balance sheet. financing activities
Figure 19–5 shows the statement of retained earnings for On Your
Mark. The first line shows the balance of the Retained Earnings account
at the beginning of the period. This balance comes from the Balance
Section 3 The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows 565
550-581_CH19_868829.indd 565 9/15/05 11:49:22 AM
Sheet section of the work sheet. The second line is the net income for the
period. This is from the Income Statement columns of the work sheet. Add
net income to the beginning balance of the Retained Earnings account.
Since On Your Mark did not distribute any of its net income to stockholders
during the period, there are no deductions from Retained Earnings. The
new balance of the Retained Earnings account is $52,445.91.
On Your Mark Athletic Wear
Statement of Retained Earnings
For the Year Ended December 31, 20--
Retained Earnings, January 1, 20-- 19 7 7 1 19
Net Income 32 6 7 4 72
Retained Earnings, December 31, 20-- 52 4 4 5 91
Figure 19–5 Statement of Retained Earnings
The Balance Sheet
How Is the Balance Sheet for a Corporation
Different from the Balance Sheet for a
Sole Proprietorship?
The balance sheet reports the balances of all asset, liability, and
stockholders’ equity accounts for a specific date. The balance sheet
is prepared from the information in the Balance Sheet section of
the work sheet and from the statement of retained earnings.
Figure 19–6 shows On Your Mark’s balance sheet. This balance
sheet is prepared in report form. In the report form, classifications
(assets, liabilities, and stockholders’ equity) are shown one under
the other.
The assets are listed first. The classification Assets is centered on the first
line. The account names are listed at the left edge in the same order as they
appear on the work sheet. The individual balances are entered in the first
amount column. Total Assets is entered on the line below the last account
name, indented about half an inch. The total assets amount is entered in
the second amount column. The double rule, however, is not drawn until
the Liabilities and Stockholders’ Equity sections are complete, and the total
of these two sections equals the total of the Assets section.
The Liabilities section begins with Liabilities centered on the second line
below total assets. As in the Assets section, the account names are listed at
the left edge in the same order as they appear on the work sheet. The indi-
vidual balances are entered in the first amount column. Total Liabilities fol-
lows on the line below the last account name, indented about half an inch.
The total liabilities amount is then entered in the second amount column.
Next, the Stockholders’ Equity section begins on the second line below
total liabilities. Stockholders’ Equity, which is centered on this line, consists
of two accounts, Capital Stock and Retained Earnings. The Capital Stock
account balance is from the work sheet’s Balance Sheet section. The Retained
Earnings account balance is from the statement of retained earnings. Again,
566 Chapter 19 Financial Statements for a Corporation
550-581_CH19_868829.indd 566 4/6/06 6:28:03 PM
the account names are listed at the left edge, and their individual balances
are listed in the first amount column. Total Stockholders’ Equity follows on the
line below the last account name, indented about half an inch. The stock-
holders’ equity total is entered in the second amount column.
On the line following total stockholders’ equity, Total Liabilities and
Stockholders’ Equity is entered at the left edge. The total of the Liabilities sec-
tion and the total of the Stockholders’ Equity section are added. The total
is entered in the second amount column. This total must agree with the
total assets amount. If it does, double rule the balance sheet. If it does not,
check the addition on the balance sheet. Also check that the accounts and
amounts have been transferred from the work sheet accurately.
On Your Mark Athletic Wear
Balance Sheet
December 31, 20--
Assets
Cash in Bank 15 179 00
Accounts Receivable 10 404 00
Merchandise Inventory 81 385 00
Supplies 1 839 00
Prepaid Insurance 1 375 00
Delivery Equipment 19 831 00
Office Equipment 9 825 00
Store Equipment 5 200 00
Total Assets 145 0 3 8 00
Liabilities
Accounts Payable 13 8 5 0 00
Federal Corporate Income Tax Payable 155 00
Employees’ Federal Income Tax Payable 640 00
Employees’ State Income Tax Payable 80 00
Social Security Tax Payable 248 00
Medicare Tax Payable 58 00
Federal Unemployment Tax Payable 18 36
State Unemployment Tax Payable 114 73
Sales Tax Payable 2 428 00
Total Liabilities 17 5 9 2 09
Stockholders’ Equity
Capital Stock 75 0 0 0 00
Retained Earnings 52 4 4 5 91
Total Stockholders’ Equity 127 4 4 5 91
Total Liabilities and Stockholders’ Equity 145 0 3 8 00
Figure 19–6 On Your
Mark’s Balance Sheet
Section 3 The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows 567
550-581_CH19_868829.indd 567 9/15/05 11:49:39 AM
Analyzing Amounts on the
Balance Sheet
How Can You Detect Trends?
When analyzing financial statements, you learned that while the dollar
amounts provided on the statements are useful, the analysis can be expanded
and made more meaningful by expressing the dollar amounts as percent-
ages. Percentage amounts are used in vertical analysis and also in horizon-
tal analysis. Horizontal analysis is the comparison of the same items on
financial statements for two or more accounting periods or dates, and the
determination of changes from one period or date to the next. In horizontal
analysis, each amount on the current statement is compared with its cor-
responding amount on the previous statement. A base period is a period,
usually a year, that is used for comparison.
Look at the example of a comparative balance sheet in Figure 19–7. By
comparing the amounts for the two years, you can see that Cash in Bank
increased by 49.76 percent and Accounts Payable decreased by 50.73 per-
cent. The accountant might use this information to assess why cash has
MATH HINTS On Your Mark Athletic Wear
Comparative Balance Sheet
Percentage Change December 31, Current Year and Previous Year
To find the percent of Increase (Decrease)
increase, subtract the Current over Previous
Current Previous
base year amount from Year Year Dollars Percent
the current year amount, Assets
and then divide by the Cash in Bank $ 15,179.00 $ 10,135.28 $ 5,043.72 49.76 %
base year amount. Accounts Receivable 10,404.00 8,220.00 2,184.00 26.57
For example: Merchandise Inventory 81,385.00 84,921.00 (3,536.00) (4.16)
• if assets in the base Supplies 1,839.00 1,587.00 252.00 15.88
year are $240,000 and Prepaid Insurance 1,375.00 0.00 1,375.00 —
$280,000 this year, Delivery Equipment 19,831.00 12,462.00 7,369.00 59.13
Office Equipment 9,825.00 5,854.00 3,971.00 67.83
• the increase is $40,000.
Store Equipment 5,200.00 3,500.00 1,700.00 48.57
• The percentage change
Total Assets $ 145,038.00 $ 126,679.28 $ 18,358.72 14.49 %
is 17 percent Liabilities
($40,000 $240,000). Accounts Payable $ 13,850.00 $ 28,113.14 $ (14,263.14) (50.73)%
Fed. Corp. Inc. Tax Payable 155.00 140.00 15.00 10.71
Employees’ Fed. Inc. Tax Pay. 640.00 685.00 (45.00) 6.57
Employees’ State Inc. Tax Pay. 80.00 72.00 8.00 11.11
Social Security Tax Payable 248.00 241.00 7.00 2.90
Medicare Tax Payable 58.00 56.35 1.65 2.93
Federal Unemployment Tax Pay. 18.36 16.50 1.86 11.27
State Unemployment Tax Pay. 114.73 103.10 11.63 11.14
Sales Tax Payable 2,428.00 2,481.00 (53.00) 2.14
Total Liabilities $ 17,592.09 $ 31,908.09 $ (14,316.00) (44.87)%
Stockholders’ Equity
Capital Stock $ 75,000.00 $ 75,000.00 $ 0.00 0.00 %
Retained Earnings 52,445.91 19,771.19 32,674.72 165.26
Total Stockholders’ Equity $ 127,445.91 $ 94,771.19 $ 32,674.72 34.48 %
Total Liab. and Stockhldrs’ Equity $ 145,038.00 $ 126,679.28 $ 18,358.72 14.49 %
Figure 19–7 Comparative Balance Sheet Showing Horizontal Analysis
568 Chapter 19 Financial Statements for a Corporation
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increased or why accounts payable have decreased. Perhaps the business is
receiving more sales in cash instead of on account. The business may also
be purchasing less inventory on account. These are trends that would be of
interest to management.
The Statement of Cash Flows
What Does the Statement of Cash Flows Report?
As you learned in Chapter 9, the statement of cash flows reports how
the activities of a business caused the cash balance to change during the
accounting period. This information is vital for sound decision making. See
Figure 19–8 on page 570 for On Your Mark’s statement of cash flows.
Most businesses consider cash to be a major asset, and they need a suf-
ficient amount to operate efficiently. Maintaining a positive cash flow is a
primary goal of financial management. An adequate amount of available
cash allows a business to pay its debts in a timely manner, take advantage of
discounts, purchase equipment, and fund expansion. Creditors and inves-
tors use the statement of cash flows to evaluate a company’s ability to pay
its debts and pay dividends.
Cash inflows (receipts of cash) come into and cash outflows (pay-
ments of cash) go out of a business from different activities. The statement
of cash flows classifies these activities as operating, investing, or financing.
Cash Flows from Operating Activities
Operating activities include all transactions that
occurred during the accounting period as part of normal
business operations. The information needed to complete
this section is taken from On Your Mark’s income statement
(Figure 19–3) and comparative balance sheet (Figure 19–7).
Recall that revenue is recorded when it is earned and
expenses are recorded when they are incurred, regardless of
when items are actually paid. This is called the accrual basis
of accounting.
To determine operating cash inflows and outflows for the
accounting period, the accountant must convert income state-
ment and balance sheet amounts to the cash basis of account-
ing, which records revenues only when cash is received and
expenses only when cash is paid out. This is the reason that On
Your Mark’s net sales reported on the income statement is $317,720.00, but
sales to customers reported on the statement of cash flows is $315,536.00.
Cash Flows from Investing Activities
Investing activities include loans the business makes, payments
received for those loans, purchase and sale of plant assets, and investments.
Plant assets are property that will be used in the business for more than
one year.
During the current accounting period, On Your Mark purchased delivery
equipment, office equipment, and store equipment for cash. When a plant
asset is purchased for cash, the appropriate general ledger asset account is
Section 3 The Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows 569
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On Your Mark Athletic Wear
Statement of Cash Flows
For the Year Ended December 31, 20--
Cash Flows from Operating Activities
Cash Receipts from:
Sales to Customers $ 315,536.00
Total Cash Receipts from Operating Activities $ 315,536.00
Cash Payments for:
Purchases (221,859.32)
Accrued Payables (67.86)
Operating Expenses (65,545.10)
Federal Corporate Income Tax Expense (9,980.00)
Total Cash Payments from Operating Activities (297,452.28)
Net Cash Flows from Operating Activities $ 18,083.72
Cash Flows from Investing Activities
Purchase of Plant Assets (13,040.00)
Net Cash Flows from Investing Activities (13,040.00)
Cash Flows from Financing Activities -0-
Net Increase in Cash $ 5,043.72
Figure 19–8 Statement of Cash Flows
debited and Cash in Bank is credited. Since the purchase of plant assets is
a cash outflow, the $13,040.00 is placed in parentheses on the statement of
cash flows.
Cash Flows from Financing Activities
Financing activities are the borrowing activities needed to finance the
company operations and the repayment of these debts. On Your Mark had
no financing activities during this accounting period.
The statement of cash flows indicates that cash increased by $5,043.72
during the period. This amount agrees with the increase in cash shown on
the comparative balance sheet.
Typical cash inflows and outflows for the three activities of a business
are shown here.
Activity Cash Inflows (receipts) Cash Outflows (payments)
Operating • Sales • Merchandise Purchases
Activities • Interest Income • Operating Expenses
• Interest Expense
• Fed. Corp. Income Tax
Investing • Selling plant assets • Purchasing plant assets
Activities • Selling investments • Purchasing investments
Financing • Long-term borrowing • Repaying loans (principal,
Activities • Issuing stock not interest)
• Paying dividends on stock
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SECTION 3 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Use a chart like this one to
describe how stockholders 3TOCKHOLDERS #REDITORS
and creditors use each of the
listed financial statements.
3TATEMENT OF 2ETAINED %ARNINGS
"ALANCE 3HEET
3TATEMENT OF #ASH &LOWS
Do the Math
Larry Campbell is the owner of Craftsman Furniture, a successful family-owned furniture
store. As the accountant for Craftsman Furniture, it is your responsibility to run a vertical
analysis on the income statement. Mr. Campbell asks you to prepare an Executive Summary
of a three-year vertical analysis. Using the information provided, calculate the percentages
for each year in your working papers and complete the columns of the draft report.
Mr. Campbell will review the draft with you so he clearly understands the trends in sales for
Craftsman Furniture.
Year 1 Year 2 Year 3
Net Sales $ 1,000,000 $ 1,500,000 $ 1,600,000
Gross Profit on Sales 600,000 750,000 780,000
Total Operating Expenses 25,000 21,000 23,000
Net Income $ 575,000 $ 729,000 $ 757,000
Problem 19–4 Analyzing a Balance Sheet
Use the comparative balance sheet for On Your Mark in Figure 19–7 to answer the
following questions.
1. Which asset account has the larger percentage of increase in the two years? Larger
decrease?
2. Which liability account has the larger percentage increase in the two years?
3. Did the overall value (total assets) of the corporation increase or decrease in the two
years? What is the dollar amount? What is the percentage?
4. What is the percentage increase in retained earnings in the two years?
5. What conclusions might you draw based on the change in Accounts Receivable?
Accounts Payable?
6. Can you provide a possible explanation for the difference in the balance of the Prepaid
Insurance account?
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CH A P T ER 19 Summary
Key Concepts
1. Individuals become owners of a corporation by buying shares of stock. This ownership is known
as stockholders’ equity.
Here is the entry to record ownership of a corporation:
GENERAL JOURNAL PAGE 1
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Date 1 Cash in Bank x x xxx xx 2
3 Capital Stock xx xxx xx 3
4 4
2. The work sheet is a tool that organizes all the accounting information needed to prepare the
financial statements. Corporations prepare the income statement, the statement of retained
earnings, the balance sheet, and the statement of cash flows.
• Most of the information needed to complete the income statement comes from the work sheet’s
Income Statement section.
• The statement of retained earnings reports the changes in the Retained Earnings account.
• The corporate balance sheet information comes from the work sheet’s Balance Sheet section.
• Information for the statement of cash flows comes from the income statement and the
comparative balance sheet.
3. The primary difference between financial statements for a sole proprietorship and a corporation
involves how ownership is presented on the balance sheet.
Sole Proprietor Corporation
Balance Sheet Owner’s Equity Stockholders’ Equity
Section
Account(s) Owner’s Capital—the • Capital Stock—the investments by
owner’s investment of stockholders (owners)
cash and assets in the • Retained Earnings—earnings the corporation
business generated in past periods and retained instead
of distributing to stockholders as dividends
4. For a merchandising business, the income statement contains the following elements:
• Net sales (total sales minus deductions for sales discounts, returns, and allowances).
• Net purchases (total cost of merchandise bought plus transportation charges minus deductions
for purchases discounts, returns, and allowances).
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Summary CHAPT E R 1 9
• Cost of merchandise sold calculated as follows:
Beginning Merchandise Inventory
Net Purchases During the Period
Cost of Merchandise Available for Sale
Ending Merchandise Inventory
Cost of Merchandise Sold
• Gross profit on sales (net sales minus cost of merchandise sold)
• Operating expenses
• Operating income
• Federal income tax paid by a corporation (listed separately)
• Net income or net loss
The statement of retained earnings reports the changes in the corporate Retained Earnings
account that occurred during the period as a result of business operations and the distribution of
earnings to stockholders through dividends.
The balance sheet reports asset, liability, and stockholders’ equity accounts for a specific date and
comes from the work sheet’s Balance Sheet section.
The statement of cash flows reports how the activities of a business caused the cash balance to
increase or decrease during the accounting period.
5. Vertical analysis helps the accountant determine the relationships among items on a financial
statement and the changes in these relationships from one period to another.
Horizontal analysis compares amounts for the same item on a financial statement for two or
more accounting periods.
Key Terms
administrative expenses (p. 561) net purchases (p. 559)
base period (p. 568) net sales (p. 558)
Capital Stock (p. 552) operating activities (p. 569)
cash inflows (p. 569) operating expenses (p. 561)
cash outflows (p. 569) operating income (p. 561)
comparability (p. 554) relevance (p. 555)
financing activities (p. 570) reliability (p. 555)
full disclosure (p. 555) retained earnings (p. 554)
gross profit on sales (p. 561) selling expenses (p. 561)
horizontal analysis (p. 568) statement of retained earnings (p. 565)
investing activities (p. 569) stockholders’ equity (p. 552)
materiality (p. 555) vertical analysis (p. 563)
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C H A P T ER 19 Review and Activities
AFTER
YOU READ
Check Your Understanding
1. Ownership of a Corporation
a. How are stockholders’ equity and owner’s equity similar?
b. What is retained earnings?
2. Work Sheet and Financial Statements
a. What four financial statements are prepared by a corporation?
b. How is the work sheet used to prepare financial statements?
3. Financial Statement Differences
a. How does an income statement for a merchandising business differ from that for a
service business?
b. How does the stockholders’ equity section of a balance sheet differ from the owner’s
equity section?
4. Merchandising Corporation Financial Statements
a. What type of expense appears on the income statement of a corporation but not on those
of a sole proprietorship or partnership?
b. What is the difference between the cost of merchandise available for sale and the cost of
merchandise sold?
5. Financial Statement Analysis
a. Why would you analyze financial statement information using horizontal analysis?
b. How is vertical analysis helpful?
Apply Key Terms
Your company, The Bookworm, was purchased several months
ago by an international bookstore chain—The Best Seller. Your
new boss, Gabriella Sitta, asks you to create the end-of-year
financial statements. Gabriella is not native to the United States
and does not understand all the English-language business terms.
On a separate sheet of paper, write each term’s definition and its
relationship to the preparation of financial statements.
administrative gross profit on sales relevance
expenses horizontal analysis reliability
base period investing activities retained earnings
Capital Stock materiality selling expenses
cash inflows net purchases statement of
cash outflows net sales retained earnings
comparability operating activities stockholders’ equity
financing activities operating expenses vertical analysis
full disclosure operating income
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Computerized Accounting CHAPT E R 1 9
Preparing Financial Statements
Making the Transition from a Manual to a Computerized System
Task Manual Methods Computerized Methods
Preparing • After all business transactions have • After all business transactions have
financial been journalized and posted, prepare been journalized and posted, print a
statements the trial balance. working trial balance.
• Calculate, journalize, and post the • Journalize the adjusting entries.
adjusting entries. • Print the income statement, statement
• Prepare the income statement, of retained earnings, and balance sheet.
statement of retained earnings, and
balance sheet.
Q&A
Peachtree Question Answer
How do I print the 1. From the Reports menu, select Financial Statements.
Income Statement, 2. Select Income Statement, Retained Earnings Statement, or Balance Sheet
Statement of Retained from the Preview list.
Earnings, and Balance 3. Click the Screen icon to display the Options window.
Sheet? 4. Select a time frame for the information to be included in the report. Current
period is the default.
5. Review the statement on the screen.
6. Click Print.
QuickBooks Q & A
QuickBooks Question Answer
How do I print the 1. From the Reports menu, select Company & Financial.
Profit & Loss report 2. Select Profit & Loss Standard or Balance Sheet Standard.
and Balance Sheet? 3. Enter the correct dates for the statement.
4. Review the statement on the screen.
5. Click Print.
For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers.
Chapter 19 Computerized Accounting 575
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C H A P T ER 19 Problems
Complete problems using: Manual Glencoe Peachtree Complete QuickBooks Spreadsheet
Spreadshee
OR OR OR
Working Papers Accounting Software Templates Templates
Problem 19–5 Preparing an
SPREADSHEET Income Statement
SMART GUIDE
The work sheet for Sunset Surfwear for the year ended December 31 is
Step–by–Step Instructions: shown in your working papers.
Problem 19–5
Instructions Prepare an income statement for Sunset Surfwear in your
1. Select the spreadsheet
template for Problem working papers. Refer to Figure 19–3 for guidance in setting up the
19–5. income statement.
2. Enter your name and
the date in the spaces Analyze Identify which general ledger account, Purchases Discounts
provided on the or Purchases Returns & Allowances, had a higher amount
template. this period.
3. Complete the spread-
sheet using the
instructions in your
working papers. Problem 19–6 Preparing a Statement
4. Print the spreadsheet
and proof your work.
of Retained Earnings
5. Complete the Analyze
activity.
and a Balance Sheet
6. Save your work and Instructions Use the work sheet and the income statement from
exit the spreadsheet Problem 19–5 to prepare a statement of retained earnings and a balance
program.
sheet for Sunset Surfwear. Use the accounting stationery provided in your
working papers.
SMART GUIDE Analyze Calculate the ending balance of Retained Earnings assuming
Sunset Surfwear had a net loss of $6,492 instead of a net
Step–by–Step Instructions: income for the period.
Problem 19–6
1. Select the problem set
for Sunset Surfwear Problem 19–7 Preparing Financial Statements
(Prob. 19–6).
2. Rename the company Instructions The partially completed work sheet for Shutterbug Cameras
and set the system date. is included in your working papers.
3. Print a Statement of
Retained Earnings and a 1. Complete the work sheet.
Balance Sheet. 2. Prepare an income statement.
4. Complete the Analyze
activity. 3. Prepare a statement of retained earnings.
5. End the session. 4. Prepare a balance sheet.
QuickBooks Analyze Identify the biggest asset account, the biggest liability
account, and the highest expense account shown on the
PROBLEM GUIDE financial statements.
Step–by–Step Instructions:
Problem 19–6
1. Restore the Problem
19-6. QBB file.
2. Print a Balance Sheet.
3. Complete the Analyze
activity.
4. Back up your work.
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Problems CHAPT E R 1 9
Problem 19–8 Completing a Work Sheet and
Financial Statements SMART GUIDE
The trial balance for Cycle Cycle Tech Bicycles
Step–by–Step Instructions:
Tech Bicycles, prepared on Work Sheet Problem 19–7
For the Year Ended December 31, 20-- 1. Select the problem set
a ten-column work sheet, is
for Shutterbug Cameras
included in your working ACCT. TRIAL BALANCE
NO. ACCOUNT NAME
DEBIT CREDIT (Prob. 19–7).
papers. 1 101 Cash in Bank 21 9 3 1 00 2. Rename the company
2 115 Accounts Receivable 1 7 8 2 00 and set the system date.
Instructions 3 125 Merchandise Inventory 24 0 2 8 00 3. Print the following
4 130 Supplies 4 1 5 9 00 reports: Adjusted Trial
1. Complete the work 5 135 Prepaid Insurance 1 8 0 0 00
Balance, Balance Sheet,
140 Store Equipment 24 8 9 5 00
sheet for the year ended 6
7 145 Office Equipment 16 1 1 3 00
Income Statement, and
December 31. Use the 8 201 Accounts Payable 11 2 2 4 00 Statement of Retained
210 Fed. Corp. Income Tax Payable Earnings.
following information to
9
10 211 Emplys’ Fed. Inc. Tax Payable 5 2 2 00 4. Complete the Analyze
make the adjustments. 11 212 Emplys’ State Inc. Tax Payable 1 4 4 00 activity.
12 213 Social Security Tax Payable 4 1 3 00 5. End the session.
Ending merchandise 13 214 Medicare Tax Payable 1 3 4 00
14 215 Sales Tax Payable 1 9 1 5 00
inventory $25,191 15 216 Fed. Unemployment Tax Payable 5 4 00
16 217 State Unemployment Tax Payable 2 7 1 00
Ending supplies 17 301 Capital Stock 40 0 0 0 00 SMART GUIDE
11 0 9 1 00
inventory 1,221 18 305 Retained Earnings
19 310 Income Summary Step–by–Step Instructions:
Expired insurance 825 20 401 Sales 127 1 5 1 00 Problem 19–8
21 405 Sales Discounts 2 4 6 00
Total federal 22 410 Sales Returns and Allowances 1 3 2 8 00 1. Select the problem set
23 501 Purchases 66 1 0 7 00 for Cycle Tech Bicycles
corporate income 24 505 Transportation In 9 8 3 00 (Prob. 19–8).
taxes for the year 3,472 25 510 Purchases Discounts 8 2 2 00 2. Rename the company
26 515 Purchases Ret. and Allowances 3 7 6 00 and set the system date.
601 Advertising Expense 2 3 8 0 00
2. Prepare an income 27
28 605 Bankcard Fees Expense 1 8 1 00
3. Print a Working Trial
Balance to help
statement. 29 625 Fed. Corp. Income Tax Expense 3 3 4 000
630 Insurance Expense you prepare the
3. Prepare a statement of
30
31 645 Maintenance Expense 1 9 5 0 00 adjustments.
retained earnings. 32 650 Miscellaneous Expense 1 8 3 1 00 4. Record the adjustments
33 655 Payroll Tax Expense 8 3 4 00 using the General
4. Prepare a balance sheet. 34 657 Rent Expense 10 8 0 0 00 Journal Entry option.
35 660 Salaries Expense 4 7 3 4 00 5. Print a General Journal
36 665 Supplies Expense report and proof your
675 Utilities Expense 4 6 9 5 00
37
work.
38
39 194 1 1 7 00 194 1 1 7 00
6. Print the following
40 Net Income reports: Adjusted
41 Trial Balance, Income
42 Statement, Statement of
Retained Earnings, and
Balance Sheet.
Analyze Predict whether net income would be higher or lower 7. Complete the Analyze
if the ending value of Merchandise Inventory was activity.
actually $28,000. 8. End the session.
Chapter 19 Problems 577
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C H A P T ER 19 Problems
CHALLENGE Problem 19–9 Evaluating the Effect of
PROBLEM
QuickBooks
an Error on the Income
Statement
PROBLEM GUIDE The accounting clerk for River’s Edge Canoe & Kayak prepared the income
Step–by–Step Instructions: statement for the year ended December 31. The accounting supervisor at
Problem 19–8
River’s Edge noticed that the balance of the Transportation In account was
1. Restore the Problem
erroneously omitted from this statement. Transportation In has a balance
19-8.QBB file.
2. Print a Trial Balance to of $562.
help you prepare the
Instructions Use the income statement shown in your working papers to
adjustments.
3. Record the adjustments answer the following questions.
using the Make General
Journal Entries option. 1. In which section of the income statement is the account
4. Print a Journal report Transportation In entered?
and proof your work.
2. How is net purchases affected by this omission (understated or
5. Print the following
reports: Trial Balance, overstated)? By what amount?
Profit & Loss, and 3. How does the omission of the Transportation In balance affect gross
Balance Sheet.
6. Complete the Analyze profit on sales? By what amount?
activity. 4. What is the correct amount for the cost of merchandise sold for the
7. Back up your work.
period?
5. What is the correct amount for net income?
Analyze Determine the effect that an overstatement of expenses
would have on net income.
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Winning Competitive Events CHAPTER 19
Practice your test-taking skills! The questions on this page are reprinted with permission
from national organizations:
• Future Business Leaders of America
• Business Professionals of America
Use a separate sheet of paper to record your answers.
Future Business Leaders of America
MULTIPLE CHOICE
1. One way to increase gross profit on sales is to
a. increase sales revenue.
b. increase cost of merchandise sold.
c. decrease sales revenue.
d. decrease expenses.
2. The ________ account represents the increase in stockholders’ equity from net
income that is held by the corporation and not distributed to stockholders as a
return on their investment.
a. operating income
b. retained earnings
c. working capital
d. net sales
3. When using ________, each dollar amount on a financial statement is also stated as
a percentage of a base amount on the same statement.
a. horizontal analysis
b. vertical analysis
c. statement of retained earnings
d. comparability
4. You are given the following information: cost of merchandise sold, $404,000;
operating expenses, $785,122; and net sales, $557,225. What is the company’s
gross profit on sales?
a. $381,122
b. $227,897
c. $267,135
d. $153,225
Business Professionals of America
MULTIPLE CHOICE
5. Beginning merchandise inventory plus net
purchases minus ending inventory
equals Need More Help?
a. net income.
Go to glencoeaccounting.glencoe.com and
b. gross profit on sales. click on Student Center. Click on Winning
c. total expenses. Competitive Events and select Chapter 19.
d. cost of goods sold. • Practice Questions and Test-Taking Tips
• Concept Capsules and Terminology
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C H A P T ER 19 Real-World Applications and Connections
Critical Financial Statements for a Corporation
Thinking 1. Name the two parts of stockholders’ equity.
2. Explain the difference between gross profit on sales and operating income.
3. Compare the statement of retained earnings and the statement of cash flows,
and explain how they are similar.
4. Look at vertical and horizontal analysis of financial statements. Explain why
the percentages on comparative income statements and balance sheets add
vital information for analysis by owners and managers.
5. Write a statement to explain why financial statements are prepared in this
order: income statement, statement of retained earnings, balance sheet, and
statement of cash flows.
6. Support the statement that all four financial statements must be examined to
obtain an accurate understanding of a corporation’s financial condition.
CASE Merchandising Business: Gourmet Food Gifts
STUDY Gourmet Express sells cookies, candies, food baskets, and other gourmet gift items
in retail stores and catalogs. Prices increased recently for sugar and chocolate,
causing net income to decrease. The manager, Tara, does not want to use lower-
priced ingredients because they may lower the products’ quality.
In preparation for the Valentine’s Day rush, Tara has asked you to suggest some
ideas for increasing net income.
INSTRUCTIONS
1. Identify the items that affect net income.
2. List some possible areas to cut costs.
a
mattoefr ETHICS Reporting a Mistake
You are an accounting clerk for a major league sports franchise. Your responsibilities
do not include any end-of-period activities. You learn that a co-worker made
a significant error on the work sheet. It will affect the financial statements. You
wonder whether to report the error or assume that someone else will catch it.
ETHICAL DECISION MAKING
1. What are the ethical issues? 4. How do the alternatives affect the
2. What are the alternatives? parties?
3. Who are the affected parties? 5. What would you do?
$ )) ))
Communicating
Explaining Financial Statements
ACCOUNTING As the CEO of First Rate Products, you regularly present the financial results at
stockholders’ meetings. It is imperative that your recently hired accounting clerk,
James Van, understands the importance of accurate financial statements. Write a
clear, concise memo to him outlining each financial statement’s purpose and its
relationship to the company’s overall performance.
580 Chapter 19 Real-World Applications and Connections
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Real-World Applications and Connections CHAPT E R 1 9
Skills Beyond Sociability
NUMBERS You work for Big League Sports—a professional-sports merchandising company.
Your boss, Lily Chang, asks you to make a simple but colorful presentation about
trends in professional sports at the annual stockholders’ meeting and reception.
INSTRUCTIONS With several classmates, make an outline for the presentation.
Decide on topics to cover and visuals to use. Practice presenting to one another.
Brainstorm questions for the question-and-answer segment. Give feedback on
each speaker’s presentation—both verbal and nonverbal communication skills
including eye contact, stance, gestures, facial expressions, and use of visual aids.
INTERNATIONAL Financial Statement Formats
The format of financial statements can vary by country. An example is the
Accounting balance sheet of the German car manufacturer, BMW. It presents noncurrent
assets before current assets, and stockholders’ equity before liabilities.
INSTRUCTIONS Illustrate how the BMW balance sheet differs from the balance
sheet of most U.S. companies as taught in this book.
Making It
Your Nest Egg
Personal Social Security provides the only retirement funds for many people. Some
analysts believe that it is in trouble and could become insolvent. You need to
become educated about retirement funding and begin to plan early for it.
PERSONAL FINANCE ACTIVITY Use library resources or the Internet to research and
compare the advantages and disadvantages of two retirement saving options.
PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and
click on Student Center. Click on Making It Personal and select Chapter 19.
Analyzing Statement of Cash Flows
Financial Look at PETsMART’s statement of cash flows in Appendix F. It shows cash flows
Reports from operating activities, investing activities, and financing activities. It also
shows the net cash provided (or used) by each activity. A company’s sources of
cash can be revealing. For long term success, a company’s cash inflows must be
from operating activities. If its main source of cash was investing activities, it
may have sold some of its plant assets. If its main source of cash was financing
activities, it may have issued stock or borrowed money. A firm that must sell its
assets or borrow money to stay in business cannot do so indefinitely. A company’s
use of cash can also be revealing. A large use of cash for investing activities may
indicate company expansion. A large use of cash for financing activities may
mean that the company paid off its loans.
INSTRUCTIONS Use PETsMART’s statements of cash flows in Appendix F to answer
these questions.
1. For each of the three years shown, which activity provided the largest source
of cash: operating, investing, or financing?
2. For each of the three years shown, which activity used the most cash:
operating, investing, or financing?
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MINI Recording Business Transactions
PRACTICE in Special Journals
SET 4
IN-TOUCH
Main Task In-Touch Electronics Electronics
Use special journals to
▲
Company Background: Pedro
complete the accounting tasks and Justina Cordova own and
for In-Touch Electronics.
operate In-Touch Electronics, a
Summary of Steps merchandising business orga-
nized as a corporation. The
Journalize and post retail business is a small elec-
▲
transactions. tronics store providing a unique
service to the local community.
Prove cash.
▲
This husband and wife team has
Prepare a schedule of accounts been operating successfully for
▲
receivable and a schedule of 10 years.
accounts payable. Keeping the Accounting Records for In-Touch Electronics: Since
In-Touch Electronics has a large volume of business transactions,
Prepare a trial balance.
▲
the business uses special journals and a general journal. The chart
Why It’s Important of accounts for In-Touch Electronics appears on the next page.
The previous accounting clerk, Manny Canseco, has journalized
Special journals are used more
▲
and posted the business transactions for May 1 through May 15.
than the general journal for Those transactions are included in the accounting stationery in the
routine transactions. working papers accompanying this textbook. The transactions that
follow took place between May 16 and May 31.
Your Job Responsibilities: The forms for completing this activity
are included in the working papers accompanying this textbook.
(1) Record the remaining May transactions in the sales journal
(page 18), cash receipts journal (page 15), purchases journal
(page 12), cash payments journal (page 14), and general
journal (page 7).
(2) Post the individual amounts from the five journals to the
accounts receivable and accounts payable subsidiary ledgers
on a daily basis.
(3) Post the individual amounts from the General columns of the
cash receipts, purchases, cash payments, and general journals
on a daily basis.
(4) Foot, prove, total, and rule the special journals.
(5) Post the column totals of the special journals to the general
ledger accounts. Use the following order for posting: sales
journal, cash receipts journal, purchases journal, and cash
payments journal.
582 Mini Practice Set 4
582-585_MPS04_868829.indd 582 9/19/05 4:15:33 PM
In-Touch Electronics (continued)
Complete the project using: Manual Glencoe Peachtree Complete QuickBooks
OR OR
Working Papers Accounting Software Templates
(6) Prove cash. The balance shown on check stub 899 is $6,109.45.
(7) Prepare a schedule of accounts receivable and a schedule of
accounts payable.
(8) Prepare a trial balance.
CHART OF ACCOUNTS
In-Touch Electronics
ASSETS REVENUE
101 Cash in Bank 401 Sales
105 Accounts Receivable 405 Sales Discounts
110 Merchandise Inventory 410 Sales Returns and Allowances
115 Supplies
COST OF MERCHANDISE
120 Prepaid Insurance
150 Store Equipment 501 Purchases
155 Office Equipment 505 Transportation In
510 Purchases Discounts
LIABILITIES
515 Purchases Returns and
201 Accounts Payable Allowances
205 Sales Tax Payable
EXPENSES
210 Employees’ Federal Income
Tax Payable 605 Advertising Expense
211 Employees’ State Income 610 Bankcard Fees Expense
Tax Payable 615 Miscellaneous Expense
212 Social Security Tax Payable 620 Payroll Tax Expense
213 Medicare Tax Payable 625 Rent Expense
214 Federal Unemployment Tax 630 Salaries Expense
Payable 635 Utilities Expense
215 State Unemployment Tax
Payable
STOCKHOLDERS’ EQUITY Accounts Payable
Subsidiary Ledger
301 Capital Stock
302 Retained Earnings COM Computer Systems Inc.
303 Income Summary DES Desktop Wholesalers
HIT Hi-Tech Electronics Outlet
LAS Laser & Ink-Jet Products
Accounts Receivable OFF Office Suppliers Inc.
Subsidiary Ledger
LOR Sam Lorenzo
MAR Marianne Martino
MCC Mark McCormick
SCO Sue Ellen Scott
TRO Tom Trout
Mini Practice Set 4 583
582-585_MPS04_868829.indd 583 9/19/05 4:15:55 PM
MINI PRACTICE Recording Business Transactions in Special Journals
SET 4 (CONTINUED)
Business Transactions: In-Touch Electronics had the following trans-
actions May 16 through May 31.
SMART GUIDE
Step–by–Step Instructions: Date Transactions
1. Select the problem set
for In-Touch Electronics May 16 Sold $120.00 in merchandise plus 5% sales tax to Sam Lorenzo on
(MP–4). account, Sales Slip 607.
2. Rename the company
17 Received $126.00 from Tom Trout to apply on his account,
and set the system date.
3. Enter all sales on Receipt 356.
account using the 17 Issued Check 892 for $800.00 to Desktop Wholesalers in payment of
Sales/Invoicing option.
our account balance.
4. Record and apply any
sales returns using the 18 Issued Debit Memo 38 to Laser & Ink Jet Products for our return of
Credit Memos option. $75.00 in merchandise.
5. Process all cash
receipts using the 19 Wrote Check 893 for $1,200.00 to Computer Systems Inc. to apply on
Receipts option. our account.
6. Enter the purchases
on account using the 19 Paid Hi-Tech Electronics Outlet $1,750.00 in full payment of our
Purchases/Receive account balance by issuing Check 894.
Inventory option.
19 Issued Check 895 to Office Suppliers, Inc. for $770.00 in full payment
7. Record and apply any
purchases returns using of our account balance.
the Vendor Credit 20 Sold $90.00 in office equipment for cash to an employee, Bob Bell,
Memos option.
Receipt 357.
8. Process all cash
payments with the 20 Purchased $1,200.00 in store equipment on account from Desktop
Payments option. Wholesalers, DW87, n/30.
9. Use the General
Journal Entry option 20 Received $210.00 from Mark McCormick to apply on his account,
to record the error Receipt 358.
discovered on May 26.
10. Record the employer’s 20 Sue Ellen Scott sent us a check for $308.70 in payment of her $315.00
payroll taxes using the account less a 2% discount, Receipt 359.
General Journal Entry
21 Purchased $1,500.00 in merchandise on account from Hi-Tech
option.
11. Print a General Journal, Electronics Outlet, Invoice HT99, terms 2/10, n/30.
Purchases Journal, Cash 21 Marianne Martino sent us a $94.50 check to apply on her account,
Disbursements Journal,
Receipt 360.
Sales Journal, and Cash
Receipts Journal. 21 Sold $400.00 in merchandise plus 5% sales tax to Mark McCormick on
12. Proof your work. account, Sales Slip 608, terms 2/10, n/30.
13. Print the following
reports: General Ledger, 22 Issued Check 896 for $1,200.00 to Desktop Wholesalers, in payment
Vendor Ledgers, and of our account.
Customer Ledgers.
14. Print a General Ledger 23 Sold $500.00 in merchandise to Sue Ellen Scott on account plus 5%
Trial Balance. sales tax, Sales Slip 609, terms 2/10, n/30.
15. Complete the Analyze
24 Mark McCormick returned merchandise purchased on account,
activity and complete
the Audit Test. $100.00, plus 5% sales tax, Credit Memo 55.
16. End the session. 25 Paid the annual insurance premium of $1,600.00 by issuing Check
TIP: Remember that you 897 to Surfside Insurance Co.
need to change the G/L
26 Discovered that Transportation In account should have been debited
Account in the Receipts
window to enter a cash last month for $50.00 instead of the Purchases account. Recorded the
receipt for the sale of an correcting entry, Memorandum 26.
asset (e.g., supplies, office
27 Bought $1,400.00 in merchandise on account from Computer
equipment).
Systems, Inc., CS75, terms 2/10, n/30.
CONTINUE
584 Mini Practice Set 4
582-585_MPS04_868829.indd 584 9/19/05 4:16:04 PM
In-Touch Electronics (continued)
Date Transactions (cont.) QuickBooks
May 28 Sold $200.00 in merchandise on account plus 5% sales tax to PROBLEM GUIDE
Marianne Martino, Sales Slip 610, terms 2/10, n/30. Step–by–Step Instructions:
29 Purchased $150.00 in supplies on account from Office Suppliers Inc., 1. Restore the Problem
Invoice 9489. Mini Practice 4.QBB file.
2. Enter all sales on
30 Issued Check 898 for $1,500.00 in payment for the monthly rent. account using the
31 Recorded cash sales of $1,200.00 plus 5% sales tax, Tape 22. Create Invoices option.
3. Record and apply any
31 Recorded bankcard sales of $900.00 plus 5% sales tax, Tape 22. sales returns using the
31 Recorded bank service charge of $25.00 and bankcard fees of Create Credit Memos/
Refunds option.
$100.00, May bank statement (record compound entry). 4. Process all cash
31 Wrote Check 899 to pay the payroll of $2,500.00 (gross earnings) receipts.
for the pay period ended May 31. The following amounts were 5. Enter the purchases on
account using the Enter
withheld: employees’ federal income taxes, $400.00; employees’ state
Bills option.
income taxes, $50.00; FICA taxes: $155.00 for social security and 6. Record and apply any
$36.25 for Medicare. purchase returns using
the Credit option from
31 Recorded the employer’s payroll taxes for the May 31 payroll: FICA
the Enter Bills window
tax rate, 6.2% for social security and 1.45% for Medicare; federal in the Vendors menu.
unemployment tax rate, 0.8%; and state unemployment tax rate, 7. Process all cash
5.4%. payments.
8. Use the Make General
Journal Entries option
Analyze 1. Compute the amount by which the Cash in Bank account to record the error
discovered on May 26.
changed during the month.
9. Record the employer’s
2. Identify the two accounts that have the greatest impact on payroll taxes using the
the trial balance total. Make General Journal
3. Calculate the total percentage of tax withholdings for the Entries option.
May 31 payroll. 10. Print a Journal report.
11. Proof your work.
12. Print the following
reports: General
Ledger, Vendor
Balance Summary,
and Customer Balance
Summary.
13. Print a Trial Balance.
14. Complete the Analyze
activity and complete
the Audit Test.
15. Back up your work.
Mini Practice Set 4 585
582-585_MPS04_868829.indd 585 4/6/06 6:25:33 PM
CHAPTER 20 Completing the Accounting
Cycle for a Merchandising
Corporation
BEFORE
What You’ll Learn YOU READ
1. Journalize closing entries for
a merchandising corporation. Predict
1. What does the chapter title tell you?
2. Post closing entries to the
2. What do you already know about this subject from personal experience?
general ledger accounts.
3. What have you learned about this in the earlier chapters?
3. Prepare a post-closing trial 4. What gaps exist in your knowledge of this subject?
balance.
4. Describe the steps in the
accounting cycle.
Exploring the Real World of Business
Why It’s Important
Like a sole proprietorship,
CLOSING THE BOOKS
▲
a corporation “cleans the
slate” to prepare for the next
PETsMART
accounting period. Is your pet like a member of the family? The loyalty that
leads to spoiling a cat with a heated cuddle bed or purchasing
vitamins for a pet iguana is what contributes to making
PETsMART the leader in the retail pet food and supply industry.
A strong product mix, combined with pet services like grooming
and boarding, have made the company a success. PETsMART’s
net income has risen to $68.1 million, more than double the
earnings of its nearest competitor.
At the end of a fiscal period, companies like PETsMART
prepare closing entries to transfer all temporary account
balances to a permanent account. The general ledger is then
ready for a new accounting period.
What Do You Think?
What might happen if temporary accounts were not closed
before the next accounting period begins?
586 Chapter 20 Completing the Accounting Cycle for a Merchandising Corporation
586-611_CH20_868829.indd 586 9/15/05 12:07:33 PM
Working in the Real World
APPLYING YOUR ACCOUNTING KNOWLEDGE
You have almost completed another accounting
cycle—this time for a merchandising company.
After the financial statements have been prepared,
closing entries are made to get the accounting
records ready for the next fiscal period. Closing
entries for a merchandising business are similar
to those you learned about for a service business.
There are just more of them.
Personal Connection
1. In your job are there duties that you perform
at the end of a night or week that “wipe the
slate clean” or “close out” the day’s activities?
2. If you were preparing the closing entries
for your workplace, what accounts do you
imagine would be involved?
Online Connection
Go to glencoeaccounting.glencoe.com and click
on Student Center. Click on Working in the
Real World and select Chapter 20.
glencoeaccounting.glencoe.com 587
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SECTION 1 Journalizing Closing Entries
In Chapter 10 you journalized and posted the closing entries
BEFORE
YOU READ for a sole proprietorship service business. In this chapter you will
learn to journalize and post the closing entries for a merchandis-
ing corporation. The journalizing procedures are the same.
Main Idea
A corporation’s net income (or net
loss) is closed to Retained Earnings. Steps for Closing the Ledger
How Are Closing Entries for a Corporation Different
Read to Learn… from Closing Entries for a Sole Proprietorship?
➤ how to journalize closing entries
In Chapter 10 you made four entries to close the temporary
for a merchandising corporation.
(p. 588) general ledger accounts of a sole proprietorship:
➤ how to journalize a net loss. 1. Close the temporary accounts with credit balances to
(p. 591) Income Summary.
2. Close the temporary accounts with debit balances to
Income Summary.
On Your Mark
Work
For the Year Ended
ACCT. TRIAL BALANCE ADJUSTMENTS
NO. ACCOUNT NAME
DEBIT CREDIT DEBIT CREDIT
20 310 Income Summary (a) 3 5 3 6 00
21 401 Sales 320 4 5 0 00
22 405 Sales Discounts 7 3 0 00
23 410 Sales Returns and Allowances 2 0 0 0 00
24 501 Purchases 206 7 0 0 00
25 505 Transportation In 4 0 3 6 18
26 510 Purchases Discounts 1 3 4 0 00
27 515 Purchases Returns and Allow. 1 8 0 0 00
28 601 Advertising Expense 2 4 5 0 00
29 605 Bankcard Fees Expense 4 1 9 9 27
30 630 Fed. Corporate Income Tax Exp. 9 8 4 0 00 (d) 1 5 5 00
31 635 Insurance Expense (c) 1 2 5 00
32 650 Maintenance Expense 3 5 1 9 25
33 655 Miscellaneous Expense 3 4 8 28
34 657 Payroll Tax Expense 3 8 2 6 83
35 660 Rent Expense 14 0 0 0 00
36 665 Salaries Expense 29 3 7 4 60
37 670 Supplies Expense (b) 3 7 1 0 00
38 680 Utilities Expense 2 3 6 4 87
39 435 7 9 8 28 435 7 9 8 28 7 5 2 6 00 7 5 2 6 00
Figure 20–1 Closing 40 Net Income
Entries Needed for a 41
Corporation
588 Chapter 20 Completing the Accounting Cycle for a Merchandising Corporation
586-611_CH20_868829.indd 588 9/15/05 12:08:31 PM
3. Close the balance of Income Summary to capital. Income Summary
4. Close the withdrawals account to capital.
Debit Credit
Only the first three closing entries are made to close the temporary
Adj. 3,536.00 Clos. 323,590.00
accounts for a merchandising business organized as a corporation. Since
a corporation does not have a withdrawals account, the fourth closing
Sales
entry is not needed.
The portion of On Your Mark’s work sheet in Figure 20–1 shows the Debit Credit
account balances that are closed. Let’s look closely at each closing entry.
Clos. 320,450.00 Bal. 320,450.00
1. Close the accounts with balances in the Credit column of the
Income Statement section of the work sheet (revenue and Purchases Discounts
contra cost of merchandise accounts) to Income Summary.
Debit Credit
After this closing entry has been journalized and posted, the
Sales, Purchases Discounts, and Purchases Returns and Clos. 1,340.00 Bal. 1,340.00
Allowances accounts have zero balances.
Purchases Returns and Allowances
GENERAL JOURNAL PAGE 23
POST. Debit Credit
DATE DESCRIPTION DEBIT CREDIT
REF.
1 20-- Closing Entries 1 Clos. 1,800.00 Bal. 1,800.00
2 Dec. 31 Sales 320 4 5 0 00 2
3 Purchases Discounts 1 3 4 0 00 3
4 Purchases Returns and Allow. 1 8 0 0 00 4
5 Income Summary 323 5 9 0 00 5
Athletic Wear
Sheet
December 31, 20--
ADJUSTED TRIAL BALANCE INCOME STATEMENT BALANCE SHEET
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
3 5 3 6 00 3 5 3 6 00 20
320 4 5 0 00 320 4 5 0 00 21
7 3 0 00 7 3 0 00 22
2 0 0 0 00 2 0 0 0 00 23
206 7 0 0 00 206 7 0 0 00 24 1 Close temporary accounts with
4 0 3 6 18 4 0 3 6 18 25 balances in the Income Statement
1 3 4 0 00 1 3 4 0 00 26
Credit column to Income Summary.
1 8 0 0 00 1 8 0 0 00 27
2 4 5 0 00 2 4 5 0 00 28
4 1 9 9 27 4 1 9 9 27 29
9 9 9 5 00 9 9 9 5 00 30 2 Close temporary accounts with
1 2 5 00 1 2 5 00 31
balances in the Income Statement
Debit column to Income Summary.
3 5 1 9 25 3 5 1 9 25 32
3 4 8 28 3 4 8 28 33
3 8 2 6 83 3 8 2 6 83 34
14 0 0 0 00 14 0 0 0 00 35
29 3 7 4 60 29 3 7 4 60 36 3 Close Income Summary to Retained
Earnings by the amount of the net
3 7 1 0 00 3 7 1 0 00 37
income or loss.
2 3 6 4 87 2 3 6 4 87 38
435 9 5 3 28 435 9 5 3 28 290 9 1 5 28 323 5 9 0 00 145 0 3 8 00 112 3 6 3 28 39
32 6 7 4 72 32 6 7 4 72 40
323 5 9 0 00 323 5 9 0 00 145 0 3 8 00 145 0 3 8 00 41 Figure 20–1 Closing Entries
Needed for a Corporation (continued)
Section 1 Journalizing Closing Entries 589
586-611_CH20_868829.indd 589 9/15/05 12:08:38 PM
Income Summary Sales Discounts Sales Returns and Allowances
Debit Credit Debit Credit Debit Credit
Adj. 3,536.00 Clos. 323,590.00 Bal. 730.00 Clos. 730.00 Bal. 2,000.00 Clos. 2,000.00
Clos. 287,379.28
Purchases Transportation In Advertising Expense
Debit Credit Debit Credit Debit Credit
Bal. 206,700.00 Clos. 206,700.00 Bal. 4,036.18 Clos. 4,036.18 Bal. 2,450.00 Clos. 2,450.00
Bankcard Fees Expense Federal Corporate Income Tax Expense Insurance Expense
Debit Credit Debit Credit Debit Credit
Bal. 4,199.27 Clos. 4,199.27 Bal. 9,995.00 Clos. 9,995.00 Bal. 125.00 Clos. 125.00
Maintenance Expense Miscellaneous Expense Payroll Tax Expense
Debit Credit Debit Credit Debit Credit
Bal. 3,519.25 Clos. 3,519.25 Bal. 348.28 Clos. 348.28 Bal. 3,826.83 Clos. 3,826.83
Rent Expense Salaries Expense Supplies Expense
Debit Credit Debit Credit Debit Credit
Bal. 14,000.00 Clos. 14,000.00 Bal. 29,374.60 Clos. 29,374.60 Bal. 3,710.00 Clos. 3,710.00
Utilities Expense
2. Close the accounts with balances in the Debit column of the
Debit Credit
Income Statement section of the work sheet (contra revenue,
Bal. 2,364.87 Clos. 2,364.87 cost of merchandise, and expense accounts) to Income
Summary. After this closing entry has been journalized and
posted, the contra revenue, cost of merchandise, and expense
accounts have zero balances.
Income Summary now has a credit balance of $32,674.72.
$ 323,590.00 closing credit
3,536.00 adjustment debit
287,379.28 closing debit
$ 32,674.72 credit balance
3. Close Income Summary to Retained Earnings.
Income Summary Retained Earnings
Debit Credit Debit Credit
Adj. 3,536.00 Clos. 323,590.00 Bal. 19,771.19
Clos. 287,379.28 Clos. 32,674.72
Clos. 32,674.72 Bal. 52,445.91
After the entry to close Income Summary to Retained Earnings
has been journalized and posted, Income Summary has a zero balance.
The balance of Retained Earnings is increased to $52,445.91.
590 Chapter 20 Completing the Accounting Cycle for a Merchandising Corporation
586-611_CH20_868829.indd 590 4/6/06 6:29:23 PM
GENERAL JOURNAL PAGE 23
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
6 Dec. 31 Income Summary 287 3 7 9 28 6
7 Sales Discounts 730 00 7
8 Sales Returns and Allow. 2 000 00 8
9 Purchases 206 700 00 9
10 Transportation In 4 036 18 10
11 Advertising Expense 2 450 00 11
12 Bankcard Fees Expense 4 199 27 12
13 Fed. Corp. Inc. Tax Expense 9 995 00 13
14 Insurance Expense 125 00 14
15 Maintenance Expense 3 519 25 15
16 Miscellaneous Expense 348 28 16
17 Payroll Tax Expense 3 826 83 17
18 Rent Expense 14 000 00 18
19 Salaries Expense 29 374 60 19
20 Supplies Expense 3 710 00 20
21 Utilities Expense 2 364 87 21
22 Dec. 31 Income Summary 32 6 7 4 72 22
23 Retained Earnings 32 6 7 4 72 23
24 24
Closing Entry to Transfer a Net Loss
How Do You Close a Net Loss to Retained Earnings?
Sometimes businesses incur net losses. Suppose that after posting the Income Summary
first two entries closing the temporary accounts, the Income Summary Debit Credit
account is as shown. Before it is closed, Income Summary has a debit
balance of $5,000.00: Adj. 3,612.00 Clos. 63,790.00
Clos. 65,178.00
$ 3,612.00 adjustment debit
65,178.00 closing debit
63,790.00 closing credit
$ 5,000.00 debit balance
To close Income Summary, credit it for $5,000 and debit Retained
Earnings for $5,000. The net loss amount decreases the earnings the business
retains. This closing entry is recorded in the general journal as follows:
AS
YOU READ
GENERAL JOURNAL 23
PAGE
In Your Own Words
POST.
DATE DESCRIPTION DEBIT CREDIT
REF.
Closing In your own
1 Closing Entries 1
words, explain the
concept of closing the
22 Dec. 31 Retained Earnings 5 0 0 0 00 22
23 Income Summary 5 0 0 0 00 23
ledger.
24 24
Section 1 Journalizing Closing Entries 591
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SECTION 1 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Using a diagram like this one, *OURNALIZING A -ERCHANDISING #ORPORATIONS #LOSING %NTRIES
describe the step-by-step
process for journalizing a
merchandising corporation’s
closing entries. Add or
remove answer boxes as
needed.
Do the Math
The closing debit entry to the Income Summary account was $263,000, and the closing
credit entry was $300,000. If the Income Summary account had a $42,000 credit balance
after these entries, was the inventory adjustment a debit or credit? What was the amount?
Problem 20–1 Identifying Accounts Affected
by Closing Entries
The following account names appear in the chart of accounts of Larkin’s Department Store.
Accounts Receivable Purchases
Bankcard Fees Expense Purchases Discounts
Capital Stock Purchases Returns and Allowances
Cash in Bank Retained Earnings
Equipment Sales
Fed. Corp. Income Tax Expense Sales Discounts
Fed. Corp. Income Tax Payable Sales Returns and Allowances
Income Summary Sales Tax Payable
Insurance Expense Supplies
Merchandise Inventory Supplies Expense
Miscellaneous Expense Transportation In
Prepaid Insurance Utilities Expense
Instructions Use the form in your working papers to answer the following questions about
each account. Assume that all accounts have normal balances.
1. Is the account affected by a closing entry?
2. During closing, is the account debited or credited?
3. During closing, is Income Summary debited or credited?
592 Chapter 20 Completing the Accounting Cycle for a Merchandising Corporation
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SECTION 2 Posting Closing Entries
Closing entries recorded in the general journal are posted to the
BEFORE
general ledger. YOU READ
Closing the General Ledger Main Idea
How Do You Close a Merchandising Corporation’s After posting the closing
General Ledger? entries, prepare a post-
Figure 20–2 shows the portion of On Your Mark’s general ledger closing trial balance.
affected by the closing process after the closing entries have been posted. Read to Learn…
Write the term Closing Entry (abbreviated Clos. Ent. here) for each posting ➤ how to post the
in the Description column of the general ledger account. closing entries for
a merchandising
ACCOUNT Retained Earnings ACCOUNT NO. 305 corporation. (p. 593)
POST. BALANCE ➤ how to prepare a post-
closing trial balance
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20-- for a merchandising
Dec. 1 Balance ✓ 19 7 7 1 19 corporation. (p. 597)
31 Clos. Ent. G23 32 6 7 4 72 52 4 4 5 91
➤ about a review of the
accounting cycle for a
merchandising business.
(p. 598)
ACCOUNT Income Summary ACCOUNT NO. 310
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 31 Adj. Ent G22 3 5 3 6 00 3 5 3 6 00
31 Clos. Ent. G23 323 5 9 0 00 320 0 5 4 00
31 Clos. Ent. G23 287 3 7 9 28 32 6 7 4 72 AS
31 Clos. Ent. G23 32 6 7 4 72 YOU READ
Instant Recall
Posting to the General
ACCOUNT Sales ACCOUNT NO. 401
Ledger Begin with the
BALANCE
DATE DESCRIPTION
POST.
REF. DEBIT CREDIT date, and continue
DEBIT CREDIT
20--
posting by moving from
Dec. 1 Balance ✓ 300 0 0 0 00 the left to the right.
31 S12 10 7 5 0 00 310 7 5 0 00 Remember to enter
31 CR13 9 7 0 0 00 320 4 5 0 00 the account number in
31 Clos. Ent. G23 320 4 5 0 00 the Posting Reference
column of the general
journal.
Figure 20–2 Partial General Ledger at the End of the Fiscal Period
Section 2 Posting Closing Entries 593
586-611_CH20_868829.indd 593 9/15/05 12:09:05 PM
ACCOUNT Sales Discounts ACCOUNT NO. 405
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 7 0 0 00
31 CR13 3 0 00 7 3 0 00
31 Clos. Ent. G23 7 3 0 00
ACCOUNT Sales Returns and Allowances ACCOUNT NO. 410
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 1 8 5 0 00
4 G20 1 5 0 00 2 0 0 0 00
31 Clos. Ent. G23 2 0 0 0 00
ACCOUNT Purchases ACCOUNT NO. 501
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 190 0 0 0 00
19 CP14 1 3 0 0 00 191 3 0 0 00
31 P12 15 4 0 0 00 206 7 0 0 00
31 Clos. Ent. G23 206 7 0 0 00
ACCOUNT Transportation In ACCOUNT NO. 505
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 3 7 6 1 18
24 CP14 2 7 5 00 4 0 3 6 18
31 Clos. Ent. G23 4 0 3 6 18
ACCOUNT Purchases Discounts ACCOUNT NO. 510
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 1 2 0 0 00
31 CP14 1 4 0 00 1 3 4 0 00
31 Clos. Ent. G23 1 3 4 0 00
Figure 20–2 Partial General Ledger at the End of the Fiscal Period (continued)
594 Chapter 20 Completing the Accounting Cycle for a Merchandising Corporation
586-611_CH20_868829.indd 594 9/15/05 12:09:16 PM
ACCOUNT Purchases Returns and Allowances ACCOUNT NO. 515
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 1 6 0 0 00
16 G21 2 0 0 00 1 8 0 0 00
31 Clos. Ent. G23 1 8 0 0 00
ACCOUNT Advertising Expense ACCOUNT NO. 601
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 2 4 5 0 00
31 Clos. Ent. G23 2 4 5 0 00
ACCOUNT Bankcard Fees Expense ACCOUNT NO. 605
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 4 1 2 4 27
31 CP14 7 5 00 4 1 9 9 27
31 Clos. Ent. G23 4 1 9 9 27
ACCOUNT Federal Corporate Income Tax Expense ACCOUNT NO. 630
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 9 8 4 0 00
31 Adj. Ent. G22 1 5 5 00 9 9 9 5 00
31 Clos. Ent. G23 9 9 9 5 00
ACCOUNT Insurance Expense ACCOUNT NO. 635
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 31 Adj. Ent. G22 1 2 5 00 1 2 5 00
31 Clos. Ent. G23 1 2 5 00
Figure 20–2 Partial General Ledger at the End of the Fiscal Period (continued)
Section 2 Posting Closing Entries 595
586-611_CH20_868829.indd 595 9/15/05 12:09:23 PM
ACCOUNT Maintenance Expense ACCOUNT NO. 650
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 3 5 1 9 25
31 Clos. Ent. G23 3 5 1 9 25
ACCOUNT Miscellaneous Expense ACCOUNT NO. 655
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 3 2 8 28
31 CP14 2 0 00 3 4 8 28
31 Clos. Ent. G23 3 4 8 28
ACCOUNT Payroll Tax Expense ACCOUNT NO. 657
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 3 8 2 6 83
31 Clos. Ent. G23 3 8 2 6 83
ACCOUNT Rent Expense ACCOUNT NO. 660
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 12 0 0 0 00
31 CP14 2 0 0 0 00 14 0 0 0 00
31 Clos. Ent. G23 14 0 0 0 00
ACCOUNT Salaries Expense ACCOUNT NO. 665
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 25 3 7 4 60
31 CP14 4 0 0 0 00 29 3 7 4 60
31 Clos. Ent. G23 29 3 7 4 60
Figure 20–2 Partial General Ledger at the End of the Fiscal Period (continued)
596 Chapter 20 Completing the Accounting Cycle for a Merchandising Corporation
586-611_CH20_868829.indd 596 9/15/05 12:09:28 PM
ACCOUNT Supplies Expense ACCOUNT NO. 670
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 31 Adj. Ent. G22 3 7 1 0 00 3 7 1 0 00
31 Clos. Ent. G23 3 7 1 0 00
ACCOUNT Utilities Expense ACCOUNT NO. 680
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 2 3 6 4 87
31 Clos. Ent. G23 2 3 6 4 87
Figure 20–2 Partial General Ledger at the End of the Fiscal Period (continued)
Preparing a Post-Closing Trial Balance AS
YOU READ
How Do You Prepare a Post-Closing Trial Balance?
Key Point
A post-closing trial balance is prepared at the end of the accounting
period to prove that the general ledger accounts are in balance after all Post-Closing Trial
adjusting and closing entries have been posted. Figure 20–3 shows the post- Balance The post-closing
closing trial balance for On Your Mark. trial balance and the
balance sheet list the
same account balances.
On Your Mark Athletic Wear
Post-Closing Trial Balance
December 31, 20--
Cash in Bank 15 179 00
Accounts Receivable 10 404 00
Merchandise Inventory 81 385 00
Supplies 1 839 00 Connect to…
Prepaid Insurance
Delivery Equipment
1
19
375
831
00
00
HISTORY
Office Equipment 9 825 00
After the stock market
Store Equipment 5 200 00 crash in 1929 and the
Accounts Payable 13 8 5 0 00 Great Depression that
Fed. Corp. Income Tax Payable 155 00 followed, Congress
Employees’ Fed. Income Tax Payable 640 00 created the Securities and
Employees’ State Income Tax Payable 80 00 Exchange Commission
Social Security Tax Payable 248 00 (SEC) in 1934 to protect
Medicare Tax Payable 58 00 investors.
Fed. Unemployment Tax Payable 18 36
State Unemployment Tax Payable 114 73
Sales Tax Payable 2 428 00
Capital Stock 75 0 0 0 00
Retained Earnings 52 4 4 5 91
Totals 145 0 3 8 00 145 0 3 8 00
Figure 20–3 Post-Closing
Trial Balance
Section 2 Posting Closing Entries 597
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AS
YOU READ Completing the Accounting Cycle
Compare and for a Merchandising Business
Contrast What Is the Accounting Cycle for a
Merchandising Business?
Corporation and Sole
Proprietorship How You have completed the study of the accounting cycle for a merchandising
is closing the general business organized as a corporation, which consists of the following steps:
ledger for these forms of 1.Collect and verify source documents.
businesses similar? How 2.Analyze each business transaction.
is it different? 3.Journalize each transaction.
4.Post to the general and subsidiary ledgers.
5.Prepare a trial balance.
6.Complete a work sheet.
7.Prepare the financial statements—income statement, statement of
retained earnings, and balance sheet. Publicly held corporations
also prepare a statement of cash flows.
8. Journalize and post the adjusting entries.
9. Journalize and post the closing entries.
10. Prepare a post-closing trial balance.
The accounting cycle for a service and a manufacturing business follows
the same steps. Also, regardless of how a business is organized—sole pro-
prietorship, partnership, or corporation—the basic steps of the accounting
cycle are the same. Figure 20–4 illustrates the accounting cycle.
!NALYZE EACH *OURNALIZE
TRANSACTION EACH TRANSACTION 0OST TO THE
#OLLECT AND VERIFY GENERAL AND
"1 /
SOURCE DOCUMENTS
, Ê
"1, SUBSIDIARY LEDGERS
/
,
/
6"
"1 /
,
*/
/
,
/
,
", 1
/, Ê
*"-/
"-
/, Ê
, Ê
"1,
7", Ê-
/
0REPARE A
, Ê
"
"1, -//
/ TRIAL BALANCE
0REPARE A -//
/Ê"Ê
POST
CLOSING
,
,
/
Ê
, -
,
TRIAL BALANCE
-
/ 0REPARE A
WORK SHEET
*OURNALIZE AND
POST THE CLOSING *OURNALIZE AND
Figure 20–4 POST THE ADJUSTING
0REPARE FINANCIAL
ENTRIES STATEMENTS
The Accounting Cycle ENTRIES
The accounting system used, whether manual or computerized, does
not affect the steps in the accounting cycle. In a computerized accounting
system, however, the computer performs many of the routine procedures
such as posting.
598 Chapter 20 Completing the Accounting Cycle for a Merchandising Corporation
586-611_CH20_868829.indd 598 4/6/06 6:29:33 PM
SECTION 2 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Using a diagram like this 0OSTING A -ERCHANDISING #ORPORATIONS #LOSING %NTRIES
one, describe the step-by-
step process for posting a
merchandising corporation’s
closing entries. Add or
remove answer boxes as
needed.
Do the Math
Totals on the post-closing trial balance were assets, $156,000, and liabilities, $75,000. If the
ending balance of Retained Earnings was $45,000, what was the capital stock account’s
ending balance?
Problem 20–2 Analyzing a Source Document
Instructions Review the
MEMORANDUM
source document and Your Backpack Inc. No. 42
prepare the journal entry 29000 White Road
Cold Springs, TX 77282-4513
to record this transaction
TO: Robert Chan, Chief Accountant
in your working papers. FROM: James Perkins, President
Your Backpack Inc. uses a DATE: July 12, 20--
SUBJECT: New Storage Facility Rent
cash payments journal to
record disbursements. Would you please make a check out to Warehouse Inc. for $750. The check
is for the new storage facility we are renting. Please mail the check to:
Mr. James Skiller, Controller
Warehouse Inc.
7576 County Line Highway
Crossplains, TX 77361-8411
Problem 20–3 Organizing the Steps in the
Accounting Cycle
Instructions List the following steps of the accounting cycle in their proper order. Use the
form provided in your working papers or a separate sheet of paper.
Analyzing business transactions Journalizing and posting closing entries
Collecting and verifying source documents Posting journal entries to ledgers
Completing the work sheet Preparing financial statements
Journalizing business transactions Preparing a post-closing trial balance
Journalizing and posting adjusting entries Preparing a trial balance
Section 2 Posting Closing Entries 599
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CH A P T ER 2 0 Summary
Key Concepts
1. The information for journalizing closing entries comes from the Income Statement section of
the work sheet. Only three steps are necessary to close the temporary accounts of a corporate
merchandising business.
a. Close all temporary accounts with credit balances to Income Summary.
GENERAL JOURNAL PAGE XX
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- Closing Entries 1
2 Date Sales xx x x x xx 2
3 Purchases Discounts xx x x x xx 3
4 Purchases Returns and Allow. xx x x x xx 4
5 Income Summary xx x x x xx 5
6 6
b. Close all temporary accounts with debit balances to Income Summary.
GENERAL JOURNAL PAGE XX
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
6 Date Income Summary xx x x x xx 6
7 Sales Discounts xxx xx 7
8 Sales Returns and Allow. xxx xx 8
9 Purchases xxx xx 9
10 Transportation In xxx xx 10
11 Expense Account xxx xx 11
12 Expense Account xxx xx 12
13 Expense Account xxx xx 13
14 14
c. Close the balance of Income Summary to the Retained Earnings account.
GENERAL JOURNAL PAGE XX
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 Closing Entries 1
22 Date Income Summary x x x x xx 22
23 Retained Earnings x x x x xx 23
24 24
2. After you have recorded closing entries in the general journal, post them to the general
ledger. Write Closing Entry in the Description column of the general ledger account.
Refer to Figure 20–2 on pages 593–597 to review a partial general ledger at the end of the
accounting period.
600 Chapter 20 Summary
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Summary CHAPT E R 20
3. A post-closing trial balance is prepared at the end On Your Mark Athletic Wear
of the accounting period to prove that the general Post-Closing Trial Balance
December 31, 20--
ledger accounts are in balance, that is, their debits Cash in Bank 15 179 00
equal their credits. The following is an example of Accounts Receivable 10 404 00
Merchandise Inventory 81 385 00
a post-closing trial balance. Supplies 1 839 00
Prepaid Insurance 1 375 00
Delivery Equipment 19 831 00
Office Equipment 9 825 00
Store Equipment 5 200 00
Accounts Payable 13 8 5 0 00
Fed. Corp. Income Tax Payable 155 00
Employees’ Fed. Income Tax Payable 640 00
Employees’ State Income Tax Payable 80 00
Social Security Tax Payable 248 00
Medicare Tax Payable 58 00
Fed. Unemployment Tax Payable 18 36
State Unemployment Tax Payable 114 73
Sales Tax Payable 2 428 00
Capital Stock 75 0 0 0 00
Retained Earnings 52 4 4 5 91
Totals 145 0 3 8 00 145 0 3 8 00
4. The basic accounting cycle is the same whether
• the business is a service provider or merchandiser
• the business is organized as a sole proprietorship, corporation, or partnership
• the business uses a manual or computerized accounting system
The following illustrates the complete accounting cycle.
!NALYZE EACH *OURNALIZE
TRANSACTION EACH TRANSACTION 0OST TO THE
#OLLECT AND VERIFY GENERAL AND
"1 /
SOURCE DOCUMENTS
, Ê
"1, SUBSIDIARY LEDGERS
/
,
/
6"
"1 /
,
*/
/
,
/
,
", 1
/, Ê
*"-/
"-
/, Ê
, Ê
"1,
7", Ê-
/
0REPARE A
, Ê
"
"1, -//
/ TRIAL BALANCE
0REPARE A -//
/Ê"Ê
POST
CLOSING
,
,
/
Ê
, -
,
TRIAL BALANCE
-
/ 0REPARE A
WORK SHEET
*OURNALIZE AND
POST THE CLOSING *OURNALIZE AND
0REPARE FINANCIAL
ENTRIES POST THE ADJUSTING
STATEMENTS
ENTRIES
Chapter 20 Summary 601
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C H A P T ER 2 0 Review and Activities
AFTER
YOU READ
Check Your Understanding
1. Journalizing the Closing Entries
a. Which account(s) are used to close temporary accounts with debit and credit balances?
b. How are temporary accounts with debit balances closed?
2. Posting the Closing Entries
a. What is written in the Description column of the general ledger account as the closing entries
are posted?
b. What is entered in the Posting Reference column of the general ledger account?
3. Post-Closing Trial Balance
a. What is the purpose of preparing a post-closing trial balance?
b. Does the Income Summary account appear on the post-closing trial balance? Why or why not?
4. Accounting Cycle
a. Name the 10 steps in the accounting cycle.
b. Which tasks in the accounting cycle are performed automatically in a computerized
accounting system?
Apply Key Terms
The following key terms were introduced
in Chapter 10. Let’s review the terms as
they relate to a merchandising corporation
such as PETsMART. What differences exist
between the closing entries for a sole
proprietorship and the closing entries for
a merchandising corporation? Use the
following terms in your explanation.
closing entries temporary accounts
permanent accounts
602 Chapter 20 Review and Activities
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Computerized Accounting CHAPT E R 20
Closing the Fiscal Year
Making the Transition from a Manual to a Computerized System
Task Manual Methods Computerized Methods
Closing a fiscal • Journalize the entries to close the • Closing the fiscal year is performed
year revenue, expense, Income Summary, only if you want to clear income and
and Withdrawals accounts. expense accounts at the end of the
• Post the closing entries. fiscal year.
• If you have selected the closing option,
the software journalizes closing entries.
Preparing a • After the closing entries have been • A post-closing trial balance can be
post-closing trial posted to the ledger, prepare a trial printed to verify that all revenue and
balance balance to verify the equality of debits expense accounts have been closed.
and credits.
• All expense and revenue accounts
should have zero balances.
Q&A
Peachtree Question Answer
What tasks should I 1. Post and print all journal entries and reports before you close the fiscal year.
perform before closing 2. Back up all files before closing. Closing the fiscal year cannot be reversed.
a fiscal year?
How do I close the 1. From the Tasks menu, select System.
fiscal year? 2. Choose Year-End Wizard.
3. You will be prompted if any procedures need to be completed before the system
continues the closing process.
QuickBooks Q & A
QuickBooks Question Answer
What tasks should I 1. Post and print all journal entries and reports before you close the fiscal year.
perform before closing 2. Back up the company file before closing.
a fiscal year?
How do I close the 1. From the Company menu, select Set Up Users.
fiscal year? 2. Click Closing Date.
3. Enter the date on which you want to close your books and enter a password.
For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers.
Chapter 20 Computerized Accounting 603
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C H A P T ER 2 0 Problems
Complete problems using: Manual Glencoe Peachtree Complete QuickBooks Spreadsheet
Spreadshee
OR OR OR
Working Papers Accounting Software Templates Templates
Problem 20–4 Journalizing Closing Entries
SMART GUIDE The following amounts appeared in the Income Statement section of Sunset
Step–by–Step Instructions: Surfwear’s work sheet.
Problem 20–4 Instructions In your working papers, record the closing entries for the
1. Select the problem set year ended December 31. Start with general journal page 13.
for Sunset Surfwear
(Prob. 20–4).
2. Rename the company ACCT.
ACCOUNT NAME
INCOME STATEMENT
and set the system date. NO. DEBIT CREDIT
3. Choose System from
the Tasks menu and 13 310 Income Summary 7 0 0 0 00
then select Year-End 14 401 Sales 90 0 0 0 00
Wizard to close the
15 405 Sales Discounts 1 0 0 0 00
fiscal year.
4. Print a post-closing trial 16 410 Sales Returns and Allowances 2 4 0 0 00
balance. 17 501 Purchases 25 0 0 0 00
5. Complete the Analyze 18 505 Transportation In 3 0 0 0 00
activity. 19 510 Purchases Discounts 5 0 0 00
6. End the session.
20 515 Purchases Returns and Allowances 1 5 0 0 00
TIP: Choose the General 21 625 Federal Corporate Income Tax Exp. 5 5 3 2 00
Ledger Trial Balance 22 635 Insurance Expense 3 0 0 00
report whenever you are
23 650 Miscellaneous Expense 6 0 0 0 00
instructed to print a Post-
Closing Trial Balance. 24 655 Rent Expense 12 0 0 0 00
25 665 Supplies Expense 4 5 0 00
26 675 Utilities Expense 14 0 0 0 00
27 69 6 8 2 00 99 0 0 0 00
28 Net Income 29 3 1 8 00
29 99 0 0 0 00 99 0 0 0 00
30
Analyze Identify the effect of the closing entries on the Retained
Earnings account.
604 Chapter 20 Problems
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Problems CHAPT E R 20
Problem 20–5 Journalizing and Posting
Closing Entries SMART GUIDE
The following account balances appeared in the Income Statement section Step–by–Step Instructions:
of the work sheet of Shutterbug Cameras. Problem 20–5
1. Select the problem set
Instructions for Shutterbug Cameras
1. Journalize the closing entries for the year ended December 31. Start (Prob. 20–5).
2. Rename the company
with page 14 of a general journal (in your working papers). and set the system date.
2. Post the closing entries to the general ledger accounts, which are 3. Close the fiscal year.
4. Print a post-closing trial
included in your working papers. balance.
5. Complete the Analyze
INCOME STATEMENT
activity.
ACCT.
NO. ACCOUNT NAME 6. End the session.
DEBIT CREDIT
20 310 Income Summary 4 0 0 0 00 QuickBooks
401 Sales 150 0 0 0 00
21
PROBLEM GUIDE
22 410 Sales Returns and Allowances 5 0 0 0 00
23 501 Purchases 90 0 0 0 00 Step–by–Step Instructions:
24 505 Transportation In 5 0 0 0 00 Problem 20–5
25 510 Purchases Discounts 1 0 0 0 00 1. Restore the Problem
26 515 Purchases Returns and Allowances 1 5 0 0 00 20-5.QBB file.
4 7 0 0 00 2. Enter the closing entries.
27 620 Federal Corporate Income Tax Exp.
3. Print a post-closing trial
28 645 Miscellaneous Expense 3 0 0 00 balance.
29 650 Rent Expense 6 0 0 0 00 4. Complete the Analyze
30 660 Supplies Expense 1 6 3 0 00 activity.
31 670 Utilities Expense 3 0 0 0 00 5. Back up your work.
32 119 6 3 0 00 152 5 0 0 00
33 Net Income 32 8 7 0 00
34 152 5 0 0 00 152 5 0 0 00
35
Analyze Describe what would happen if the accountant for
Shutterbug Cameras made a mistake and did not close the
Transportation In account.
Problem 20–6 Identifying Accounts for
Closing Entries
A partial list of the accounts used by Cycle Tech Bicycles appears on
page 606. All of the accounts have nonzero balances.
CONTINUE
Chapter 20 Problems 605
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C H A P T ER 2 0 Problems
General Ledger
101 Cash in Bank
650 Miscellaneous Expense
125 Merchandise Inventory
SMART GUIDE 665 Supplies Expense
215 Sales Tax Payable
Step–by–Step Instructions:
Problem 20–6 505 Transportation In
305 Retained Earnings
1. Select the problem set
for Cycle Tech Bicycles 401 Sales
(Prob. 20–6). 405 Sales Discounts
2. Rename the company 310 Income Summary
and set the system date. 501 Purchases
3. Print a Chart of Accounts 515 Purchases Returns and Allowances
report.
4. List the accounts that 601 Advertising Expense
will be debited and 625 Federal Corporate Income Tax Expense
those that will be 657 Rent Expense
credited when closed. 135 Prepaid Insurance
5. Complete the Analyze
activity.
6. End the session. Instructions In your working papers, list all account numbers and
names for accounts that will be debited when closed. Next, list all account
numbers and names for accounts that will be credited when closed.
Analyze Examine your list. Determine whether it contains all of the
accounts. If it does not, explain why.
SPREADSHEET
SMART GUIDE
Problem 20–7 Completing End-of-Period
Step–by–Step Instructions:
Activities
Problem 20–7 The general ledger accounts for River’s Edge Canoe & Kayak as of
1. Select the spreadsheet December 31, the end of the period, appear in the working papers.
template for Problem Instructions In your working papers:
20–7.
2. Enter your name and 1. Prepare a trial balance on a ten-column work sheet.
the date in the spaces
provided on the
2. Complete the work sheet. Use the following adjustment information.
template. Merchandise inventory, December 31 $20,000
3. Complete the spread- Supplies inventory, December 31 900
sheet using the
instructions in your Unexpired insurance, December 31 1,800
working papers. Total federal corporate income taxes for the year 2,965
4. Print the spreadsheet
and proof your work.
3. Prepare an income statement from the work sheet information.
5. Complete the Analyze 4. Prepare a statement of retained earnings.
activity. 5. Prepare a balance sheet.
6. Save your work and exit
the spreadsheet 6. Journalize and post the adjusting entries. Begin on general journal
page 14.
7. Journalize and post the closing entries.
8. Prepare a post-closing trial balance.
Analyze Conclude whether the company made a profit for the year.
606 Chapter 20 Problems
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Problems CHAPT E R 20
CHALLENGE Problem 20–8 Preparing Adjusting
PROBLEM
and Closing Entries SMART GUIDE
In the middle of the end-of-period activities, the accountant for Buzz Step–by–Step Instructions:
Newsstand was called away because of an illness in the family. Before Problem 20–8
leaving, the accountant prepared the work sheet and the financial 1. Select the problem set
for Buzz Newsstand
statements. However, the business manager can locate only the trial (Prob. 20–8).
balance shown here (before adjustments) and the income statement shown 2. Rename the company
and set the system date.
on page 608. 3. Print a Working Trial
Instructions In your working papers: Balance to help
you prepare the
1. Journalize the adjusting and closing entries on page 16 of the general adjustments.
journal. 4. Record the adjustments
using the General
2. Using the information provided, prepare a post-closing trial balance. Journal Entry option.
5. Print a General Journal
report and proof your
Buzz Newsstand
work.
Trial Balance, Before Adjustments 6. Complete the Analyze
December 31, 20-- activity.
7. Close the fiscal year.
101 Cash in Bank 12 035 00 8. Print a post-closing trial
115 Accounts Receivable 6 106 00 balance.
9. End the session.
130 Merchandise Inventory 64 800 00
135 Supplies 3 916 00 TIP: Peachtree automati-
140 Prepaid Insurance 5 400 00 cally updates the general
ledger accounts when you
145 Delivery Truck 46 106 00
close the fiscal year.
201 Accounts Payable 4 6 9 0 00
204 Fed. Corp. Income Tax Pay.
QuickBooks
215 Sales Tax Payable 4 1 6 00
301 Capital Stock 40 0 0 0 00 PROBLEM GUIDE
305 Retained Earnings 24 6 0 3 00
Step–by–Step Instructions:
310 Income Summary
Problem 20–8
401 Sales 299 1 5 6 00
1. Restore the Problem
410 Sales Returns and Allowances 9 5 0 0 00
20-8.QBB file.
501 Purchases 168 6 2 4 00 2. Print a Trial
505 Transportation In 8 2 3 6 00 Balance.
510 Purchases Discounts 2 9 5 0 00 3. Record the
515 Purchases Returns and Allowances 2 1 0 8 00 adjustments.
4. Print a Journal report.
601 Advertising Expense 4 0 0 0 00
5. Complete the Analyze
625 Fed. Corp. Income Tax Expense 12 5 0 0 00 activity.
635 Insurance Expense 6. Enter the closing
650 Miscellaneous Expense 1 6 0 0 00 entries.
660 Salaries Expense 26 9 0 0 00 7. Print a post-closing trial
balance.
665 Supplies Expense
8. Back up your work.
675 Utilities Expense 4 2 0 0 00
Totals 373 9 2 3 00 373 9 2 3 00
CONTINUE
Chapter 20 Problems 607
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C H A P T ER 2 0 Problems
Buzz Newsstand
Income Statement
For the Year Ended December 31, 20--
Revenue:
Sales 299 1 5 6 00
Less: Sales Ret. and Allow. 9 5 0 0 00
Net Sales 289 6 5 6 00
Cost of Merch. Sold:
Merch. Inv., Jan 1, 20-- 64 8 0 0 00
Purchases 168 6 2 4 00
Plus: Transportation In 8 2 3 6 00
Cost of Del. Merch. 176 8 6 0 00
Less: Purch. Discounts 2 9 5 0 00
Purch. Ret. and Allow. 2 1 0 8 00 5 0 5 8 00
Net Purchases 171 8 0 2 00
Cost of Merch. Avail. 236 6 0 2 00
Merch. Inv., Dec. 31, 20-- 60 4 0 0 00
Cost of Merch. Sold 176 2 0 2 00
Gross Profit on Sales 113 4 5 4 00
Operating Expenses:
Advertising Expense 4 000 00
Insurance Expense 1 800 00
Miscellaneous Expense 1 600 00
Salaries Expense 26 900 00
Supplies Expense 2 744 00
Utilities Expense 4 200 00
Total Oper. Expenses 41 244 00
Operating Income 72 210 00
Less: Fed. Inc. Tax Exp. 14 913 00
Net Income 57 297 00
Analyze Determine the impact of adjusting entries on net income.
608 Chapter 20 Problems
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Winning Competitive Events CHAPTER 20
Practice your test-taking skills! The questions on this page are reprinted with permission
from national organizations:
• Future Business Leaders of America
• Business Professionals of America
Use a separate sheet of paper to record your answers.
Future Business Leaders of America
MULTIPLE CHOICE
1. Closing entries for a corporation are made from information in a work sheet’s
a. Trial Balance columns.
b. Adjustments columns.
c. Income Statement columns.
d. Balance Sheet columns.
e. none of these answers
2. The procedure for transferring information from a journal to ledger accounts
is called
a. journalizing.
b. adjusting.
c. file maintenance.
d. posting.
e. none of these answers
3. Proving the accuracy of the adjusting and closing entries is best defined as
a. preparing a post-closing trial balance.
b. preparing the statements.
c. closing the temporary accounts.
d. adjusting the ledger accounts.
e. none of these answers
4. To close the Income Summary account of a corporation with a net loss, the balance
is closed into the
a. Retained Earnings account with a debit.
b. Retained Earnings account with a credit.
c. account which caused the net loss with a debit.
d. none of the above
Business Professionals of America
MULTIPLE CHOICE
5. Which of the following accounts is closed at
the end of a fiscal period?
a. Membership Fees Income Need More Help?
b. Accounts Receivable
Go to glencoeaccounting.glencoe.com and
c. Delivery Equipment click on Student Center. Click on Winning
d. Retained Earnings Competitive Events and select Chapter 20.
• Practice Questions and Test-Taking Tips
• Concept Capsules and Terminology
glencoeaccounting.glencoe.com Chapter 20 Winning Competitive Events 609
586-611_CH20_868829.indd 609 10/13/05 10:37:26 PM
C H A P T ER 2 0 Real-World Applications and Connections
Critical Completing the Accounting Cycle
Thinking 1. What is the source of information for journalizing the closing entries?
2. How are temporary accounts with credit balances closed?
3. Describe the journal entry to record a net loss.
4. Analyze the closing of the Income Summary and Retained Earnings
accounts when the business has net income and when it has a net loss.
5. Create a memory device to help you remember all the closing entries for a
corporation.
6. Justify the use of only three closing entries for a corporation although a sole
proprietorship uses four.
CASE Merchandising Business: Department Store
STUDY You work in the accounting department for Pearl’s, a trendy department store.
The accounting manager asked you to review the work of an accounting intern
who completed the closing process. Some temporary accounts in the post-closing
trial balance still have balances.
INSTRUCTIONS
1. Explain how to tell which accounts should have zero balances after closing.
2. Explain how to determine which accounts have and have not been closed.
3. Suggest ways to explain to the intern why temporary accounts have zero
balances after closing.
4. List human-relations skills you might use in your explanation to the intern.
a
mattoefr ETHICS Handling Sales Returns
Most retail stores give employees specific instructions on how to process a sales
return. For example, a cash refund can only be given if cash was paid. Imagine
that you work for a large sporting goods store like The Sports Authority. Your
friend, Martin, comes in to return a sweatshirt he purchased recently. You know
he purchased the sweatshirt on sale, but he wants you to give him a full refund.
ETHICAL DECISION MAKING
1. What are the ethical issues? 4. How do the alternatives affect the
2. What are the alternatives? parties?
3. Who are the affected parties? 5. What would you do?
$ )) ))
Communicating
Explaining Results
ACCOUNTING As you are completing the closing entries for the fourth quarter, you realize that
your company, Dynamic Sound, has a net loss. You know that management is not
aware that the fourth quarter financial statements are so bleak. Select a partner
from your class and role-play an explanation of how the Income Summary and
Retained Earnings accounts are affected by the loss. In your explanation, model
customer service principles of accuracy, thoroughness, and respect.
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Real-World Applications and Connections CHAPT E R 20
Skills Beyond Maintaining and Troubleshooting Technologies
NUMBERS In the accounting department of KidsWear Inc., you process the closing entries.
This morning the printer will not print the ledgers or journals.
INSTRUCTIONS
List the steps you need to take to troubleshoot this problem. For each step
indicate whom to call if the problem is not resolved.
INTERNATIONAL Number Conventions
Many countries use decimal points instead of commas to separate thousands and
Accounting use a comma instead of a decimal point as a decimal marker. For example the
number 45,255.08 becomes 45.255,08.
INSTRUCTIONS Convert these numbers: (1) 121,309,411.98 (2) 74,520.229
Making It
Your Stocks
Personal Your future savings may include stock. Your stock investment becomes an asset
for you and part of stockholders’ equity for the company.
PERSONAL FINANCE ACTIVITY Choose a company to investigate as an investment.
List how you could find the stock’s current price.
PERSONAL FINANCE ONLINE Go to glencoeaccounting.glencoe.com and click
on Student Center. Click on Making It Personal and select Chapter 20.
Analyzing Calculating Return on Stockholders’ Equity
Financial One measure of a corporation’s profitability is the return on stockholders’ equity.
Reports It shows how much the business earned for each dollar invested by stockholders.
Net Income $20,990
0.1045 or 10.45%
Average Stockholders’ Equity $200,832
Average stockholders’ equity (beginning stockholders’ equity ending
stockholders’ equity) 2.
INSTRUCTIONS
Use PETsMART’s financial statements in Appendix F to complete the following.
1. Calculate the return on stockholders’ equity
for the year ending February 1, 2004.
2. Explain why you think this calculation
is important to potential buyers of a Closing the Books
company’s stock. How do business activities affect
net income or net loss? Visit
glencoeaccounting
.glencoe.com and click
on Student Center. Click on
WebQuest and select Unit 4 to
continue your Internet project.
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CH A P T ER 2 1 Accounting for Publicly
Held Corporations
BEFORE
YOU READ
What You’ll Learn Predict
1. Describe the characteristics 1. What does the chapter title tell you?
of the corporate form of 2. What do you already know about this subject from personal experience?
business organization. 3. What have you learned about this in the earlier chapters?
2. Prepare journal entries to 4. What gaps exist in your knowledge of this subject?
record the issue of stock to
investors.
3. Prepare journal entries to Exploring the Real World of Business
record the distribution of
earnings to owners. ANALYZING CORPORATE STOCK
4. Prepare financial statements
for publicly held corporations. Hewlett-Packard
What do vitamins and network systems have in common?
5. Define the accounting terms
When Vitamin Shoppe, a high-quality vitamin retailer, decided
introduced in this chapter.
to open 100 new stores in one month, Hewlett-Packard (HP)
Why It’s Important went to work. It designed and implemented standardized
processes and equipment to connect all the new stores quickly.
▲
Many individuals and
institutions buy the stock of With HP’s support, Vitamin Shoppe opened all its new stores
publicly held corporations. on target.
You might think of your printer or computer when you hear
Hewlett-Packard’s name, but its information technology services
department is one of the world’s largest. Other satisfied clients
include 7-11, Frontier Airlines, and Brandywine School District.
Investors like to hear success stories like these. They also like
to see positive financial results, such as dividend payments to
stockholders.
What Do You Think?
If you were considering purchasing stock in Hewlett-
Packard or IBM, what factors would you investigate?
612 Chapter 21 Accounting for Publicly Held Corporations
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Working in the Real World
APPLYING YOUR ACCOUNTING KNOWLEDGE
Many people, both inside and outside the
organization, review a corporation’s financial
reports. Some analyze the reports to decide
whether to buy or sell stock in the company.
Others evaluate the reports to decide whether to
loan money to the company. Still others study the
reports to plan for the future including staffing,
purchasing, and budget plans. Because so many
people make decisions based on financial reports,
they must be prepared accurately.
Personal Connection
1. If your employer’s financial statements are
available, did it earn a profit last year?
2. If your employer’s statements are not
available, locate a public company’s annual
report on the Internet or in your library. Did it
earn a profit or record a loss last year?
Online Connection
Go to glencoeaccounting.glencoe.com and click
on Student Center. Click on Working in the
Real World and select Chapter 21.
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SECTION 1 Publicly Held Corporations
The United States has more sole proprietorships and partnerships
BEFORE
YOU READ than corporations. Corporations, however, account for more business
activity than the other two forms of business combined. Many high
profile companies like The Coca-Cola Company and General Motors are
Main Idea organized as corporations.
Investors from the general
public purchase stock of
publicly held corporations. Characteristics of a Corporation
How Is a Corporation Different from Other Forms of
Read to Learn… Business Organization?
➤ the unique features of a
In Chapters 14 to 20 you learned to record business transactions for
corporation. (p. 614)
corporations. A closely held corporation is a corporation owned by a
➤ how to account for the
issue of stock. (p. 615) few persons or by a family. The stock of a closely held corporation is not
sold to the general public.
Key Terms In this chapter you will learn about transactions that apply spe-
closely held corporation cifically to publicly held corporations. A publicly held corporation
publicly held corporation is one whose stock is widely held, has a large market, and is usually
board of directors traded on a stock exchange such as the New York Stock Exchange.
authorized capital stock In previous chapters On Your Mark could have been either a closely
par value held or publicly held corporation. In this chapter On Your Mark will
common stock illustrate transactions for a publicly held corporation.
proxy The corporation has several unique features:
preferred stock
• Legal Permission to Operate—To operate a business as a
Paid-in Capital in Excess
corporation, its incorporators (organizers) file an application with
of Par
state officials for permission to operate. When the application has
been approved, it becomes the corporation’s charter. The charter
indicates the purpose of the business and spells out the rules under
which the business is to operate. The charter also states the type and
amount of stock a corporation is authorized to issue.
• Separate Legal Entity—A corporation is a separate legal entity
AS
YOU READ that is created and exists only by law. A corporation may enter into
contracts, borrow money, and conduct business in the same manner
Key Point as a person. It may acquire, own, and sell property in its name. It can
also sue and be sued in the courts.
Publicly Held
and Closely Held • Stockholders—The ownership of a corporation is divided into
Corporations A closely units called shares of stock. The owners of a corporation are called
held corporation’s stock stockholders. Each stockholder receives a stock certificate as proof of
is not sold to the public. ownership. The stock certificate lists the name of the stockholder,
the number of shares issued, and the date the shares were issued.
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• Professional Management—Stockholders own the corporation, but
AS
they do not manage it. The stockholders elect a board of directors , YOU READ
who govern and are responsible for the affairs of the corporation.
In Your Own Words
Capital Stock In your
Capital Stock own words, explain the
How Do You Measure Ownership of a Corporation? meaning of capital stock.
Stockholders’ equity is the value of the stockholders’ claims to the
corporation’s assets. As you learned in Chapter 19, corporations report
stockholders’ equity in two parts:
• the equity paid into the corporation by stockholders
• the equity earned by the corporation and retained in the business
AS
The maximum number of shares a corporation may issue is called its
YOU READ
authorized capital stock . The authorized number of shares is usually
much higher than the number of shares the corporation plans to sell right It’s Not What It
away. This allows the corporation to sell additional shares at a later time. Seems
State laws may require that an amount or value be assigned to each Par Value Par value is
share of stock before the corporation sells it to the public. The amount a fixed amount and is
assigned to each share is referred to as par value , the per-share dollar almost never the current
amount printed on the stock certificates. The par value is used to determine value of a share of stock.
the amount credited to the capital stock account. Par values of $1, $5, and A stock’s current selling
$25 are common. price on the stock market
The corporate charter specifies the types of capital stock that a corpora- is called market value.
tion may issue. The two main types of stock are common and preferred.
Common Stock
If the corporation issues only one class of capital stock, it is called
common stock . The owners of common stock participate in the corpora-
tion as follows:
• Elect the board of directors and, through it, exercise control over the
MATH HINTS
operations of the corporation. Stockholders are entitled to one vote for Multiply by Tens To
each share of stock they own. The election occurs at the stockholders’ multiply by a power of 10,
meeting, which is usually held once a year. If a stockholder cannot move the decimal point
attend the meeting, he or she may send in a proxy , which gives the to the right the same
stockholder’s voting rights to someone else. number of places as there
are zeros in the power
• Share in the earnings of the corporation by receiving dividends declared
of 10.
by the board of directors.
• Are entitled to share in the assets of the corporation if it goes out of $6.00 100 $600.00
business.
Two zeros
Preferred Stock The decimal point
moved two places
To appeal to as many investors as possible, a corporation may also issue
preferred stock. Preferred stock has certain privileges (or preferences) over $7.50 1,000 $7,500.00
common stock. Preferred stockholders participate as follows:
• Are entitled to receive dividends before common stockholders. The Three zeros
preferred stock dividend is stated in specific dollars, such as $6, or as a The decimal point
percentage of the stock’s par value, such as 6 percent. The stock itself is moved three places
then referred to as “preferred $6 stock” or “preferred 6% stock.”
Section 1 Publicly Held Corporations 615
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• Are given preference over common stockholders to distributions of
the corporate assets should the company go out of business.
In return for these special privileges, the preferred stockholders give
up two rights:
• to vote
• to participate in the control of the corporation.
Usually, investors buy preferred stock to receive the stated dividend.
Issuing Common Stock
When a corporation issues common stock, the Common Stock
account is credited for the par value of the stock. Let’s look at some
examples.
Issuing Common Stock at Par Value. When On Your
Mark was incorporated, it had the following transaction.
B u s i n e s s Tr a n s a c t i o n
On January 3 On Your Mark Athletic Wear issued 10,000 shares of $10 par common stock at $10 per
share. On Your Mark received $100,000 for the shares, Memorandum 3.
JOURNAL ENTRY
GENERAL JOURNAL PAGE 46
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Jan. 3 Cash in Bank 100 0 0 0 00 2
3 Common Stock 100 0 0 0 00 3
4 Memorandum 3 4
5 5
Issuing Common Stock in Excess of Par Value. In-
vestors are often willing to pay more than par value for the stock of a
AS corporation. When a corporation sells its stock at a price that is above
YOU READ par, the excess over par is credited to a separate stockholders’ equity
Key Point account called Paid-in Capital in Excess of Par . Paid-in Capital in
Excess of Par appears in the chart of accounts immediately following
Recording the Issuance the Common Stock account. The amounts recorded in this account are
of Common Stock
not profits to the corporation. Instead, they represent part of the stock-
When a corporation
holders’ investment in the corporation. This account follows the same
issues common stock,
rules of debit and credit as other stockholders’ equity accounts.
it credits
• Common Stock for Paid-in Capital in Excess of Par
the par value of the
Debit Credit
stock.
• Paid-in Capital in Decrease Side Increase Side
Excess of Par for any Normal Balance
amount received in
excess of par value. One year after On Your Mark was incorporated, it had the following
transaction.
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B u s i n e s s Tr a n s a c t i o n
On January 5 On Your Mark issued 5,000 shares of $10 par common stock at $11.50 per share,
Memorandum 147. On Your Mark received $57,500 for the shares.
Before recording the transaction, determine how much of the
$57,500 is credited to Common Stock and how much is credited to
Paid-in Capital in Excess of Par.
Credit to Common Stock:
5,000 shares at $10 par value $ 50,000
Credit to Paid-in Capital in Excess of Par:
5,000 shares at $1.50
($11.50 issue price ⴚ $10.00 par value) per share ⴙ 7,500
Total cash received $ 57,500
Remember, the amount credited to the Common Stock account is the par value of the shares issued.
JOURNAL ENTRY
GENERAL JOURNAL PAGE 99
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Jan. 5 Cash in Bank 57 5 0 0 00 2
3 Common Stock 50 0 0 0 00 3
4 Paid-in Cap. in Ex. of Par 7 5 0 0 00 4
5 Memorandum 147 5
6 6
Issuing Preferred Stock
When preferred stock is issued, a corporation credits the Preferred Stock
account for the stock’s par value. Preferred stock is almost always issued at
its par value.
On Your Mark was incorporated on January 3. It was authorized to issue
1,000 shares of preferred stock with a par value of $100 and a stated divi-
dend of $6. The next day the company had the following transaction.
B u s i n e s s Tr a n s a c t i o n
On January 4 On Your Mark issued 250 shares of preferred $6 stock, $100 par, at $100 per share. On Your
Mark received $25,000 for the shares, Memorandum 5.
JOURNAL ENTRY
GENERAL JOURNAL PAGE 47
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Jan. 4 Cash in Bank 25 0 0 0 00 2
3 Preferred Stock 25 0 0 0 00 3
4 Memorandum 5 4
5 5
Section 1 Publicly Held Corporations 617
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SECTION 1 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Create a chart like this one to
compare common stock and #HARACTERISTIC #OMMON 3TOCK 0REFERRED 3TOCK
preferred stock. Add answer
rows as needed.
Do the Math
A corporation sells 3,000 shares of $25 par common stock and receives $97,500. How much
did each share sell for? What was the per share amount of paid-in capital in excess of par?
Problem 21–1 Examining Capital Stock Transactions
Dublin Corporation was organized and authorized to issue 10,000 shares of $100 par,
preferred 8% stock and 500,000 shares of $10 par common stock. The three transactions
recorded in the following T accounts took place during the first month of operations.
Instructions In your working papers, describe each of the three transactions.
Cash in Bank Preferred Stock
Debit Credit Debit Credit
(1) 300,000 (2) 200,000
(2) 200,000
(3) 700,000
Common Stock Paid-in Capital in Excess of Par
Debit Credit Debit Credit
(1) 300,000 (3) 200,000
(3) 500,000
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SECTION 2 Distribution of
Corporate Earnings
In Section 1 you learned to record stock issue transactions for a
BEFORE
corporation. In this section you will learn how corporations distribute YOU READ
earnings to the stockholders. Corporations like General Motors have a
long history of distributing a portion of earnings to their stockholders
Main Idea
every year, making their stock an attractive investment.
A corporation distributes
a portion of its earnings to
Dividend Accounts stockholders in the form of
What Are Corporate Dividends? dividends.
When an owner of a sole proprietorship or a partnership wishes Read to Learn…
to take money out of the business, a check is written on the checking ➤ how to account for
account of the business. The amount of the check is recorded as a debit dividends. (p. 619)
in the owner’s withdrawals account, which reduces the owner’s equity. ➤ how to record dividend
The owners (stockholders) of a publicly held corporation cannot transactions. (p. 620)
withdraw cash whenever they want. Instead, they receive dividends.
A dividend is a distribution of cash to stockholders. Dividends reduce
Key Terms
dividend
retained earnings.
The corporation’s board of directors declares, or authorizes, divi-
dends. Before a dividend is declared, the corporation should have a suf-
ficient amount of cash available to pay the dividend. In addition, since
dividends decrease retained earnings, there must be an adequate balance
in the Retained Earnings account. Figure 21–1 on page 620 illustrates the
important dates in the dividend process.
A separate account named Dividends
Dividends
is used to record dividends declared.
The Dividends account is a contra- Debit Credit
stockholders’ equity account. At the end Increase Side Decrease Side
of the accounting period, the Dividends Normal Balance
account is closed to the Retained Earn-
ings account. The rules of debit and credit for Dividends are shown in this
T account. Notice that they are the opposite of the rules for the stockhold-
ers’ equity accounts.
Dividend amounts could be debited directly to the Retained Earnings
account. Most corporations, however, prefer to use a separate account so
that the dividend amounts can be easily determined.
A liability account, Dividends Payable, is used to record the amount of
dividends that will be paid on the payment date. Like all liability accounts,
Dividends Payable is increased by credits and decreased by debits. The
normal balance of the Dividends Payable account is a credit balance.
Section 2 Distribution of Corporate Earnings 619
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THREE IMPORTANT DATES IN THE DIVIDEND PROCESS
Date of Declaration Date of Record Date of Payment
The date on which the Persons who own the The date on which the
board of directors declares stock on this date, called dividend is paid.
or authorizes a dividend. stockholders of record, are
When a cash dividend is entitled to the dividend.
declared, a liability is The date of record is
created for the amount of usually one or two weeks
the total cash dividend to after the date of
be paid. declaration.
Record Journal Entry No Journal Entry is recorded Record Journal Entry
Figure 21–1 Important
Dates in the Dividend Process Dividend Transactions
How Do You Journalize Dividend Transactions?
A corporation authorized to issue two types of stock uses separate dividend
and dividend payable accounts for each type. On Your Mark uses these:
Dividends—Preferred Dividends Payable—Preferred
Dividends—Common Dividends Payable—Common
Let’s look at the transactions involved when dividends are declared by the
board of directors of On Your Mark during its second year of incorporation.
Dividends on Preferred Stock
As mentioned, preferred stockholders have certain preferences over
common stockholders; one is the right to receive dividends before com-
mon stockholders. The preferred stock dividend amount is predetermined,
or stated. The stated dividend indicates the amount to be paid to preferred
stockholders per year. On Your Mark issued 250 shares of preferred $6 stock;
that is, it will pay a $6 dividend for each share of preferred stock annually
or in semiannual or quarterly installments:
Annually $6.00
Semiannually $3.00 ($6.00 ⴜ 2)
Quarterly $1.50 ($6.00 ⴜ 4)
Date of Declaration. A journal entry records the dividend on pre-
ferred stock on the date of declaration, the date the board declares it.
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B u s i n e s s Tr a n s a c t i o n
On November 15 On Your Mark’s board of directors declared an annual cash dividend on the 250 shares of
preferred $6 stock issued. It is payable to preferred stockholders of record on November 29 and will be paid on
December 15. The total preferred dividends amount is $1,500 (250 shares $6), Memorandum 215.
JOURNAL ENTRY GENERAL JOURNAL PAGE 72
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Nov. 15 Dividends—Preferred 1 5 0 0 00 2
3 Dividends Payable—Preferred 1 5 0 0 00 3
4 Memorandum 215 4
Date of Record. On November 29 the corporation checks its records
and prepares a list of preferred stockholders entitled to receive the dividend.
No journal entry is required on this date.
Date of Payment. On December 15 a check for $1,500, the total
dividend payable on preferred stock, is written and deposited in a special div-
idends checking account. Separate checks written on this account are made
payable to each preferred stockholder entitled to receive the dividend.
B u s i n e s s Tr a n s a c t i o n
On December 15 On Your Mark issued Check 1373 for $1,500 in payment of the dividend on preferred
stock declared November 15.
JOURNAL ENTRY GENERAL JOURNAL PAGE 81
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Dec. 15 Dividends Payable—Preferred 1 5 0 0 00 2
3 Cash in Bank 1 5 0 0 00 3
4 Check 1373 4
Dividends on Common Stock
Dividends on common stock may be declared in one of two ways.
1. The board of directors may declare a dividend amount per common
share. On Your Mark’s board declared a 50¢ per common share
dividend. It will pay a 50¢ dividend for each share of common stock.
2. The board may decide to declare the total cash dividend for both
preferred and common stock. In this case the company first pays the
preferred dividends and then divides the remainder equally among
the common stockholders. For example, On Your Mark’s board of
directors declared a $3,000 total cash dividend. Preferred stockholders
will receive $1,500 (250 shares $6). It splits the remainder, $1,500
($3,000 $1,500), among the common stockholders. Each share of
common stock receives a 10¢ dividend ($1,500 15,000 shares).
Dividends on common stock, like preferred stock, can be paid annually,
semiannually, or quarterly. Most publicly held corporations pay quarterly.
Section 2 Distribution of Corporate Earnings 621
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SECTION 2 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Create a diagram like this one
%VENT !CCOUNT $EBITED !CCOUNT #REDITED
to describe which accounts (if
any) are debited and credited
for each event. $IVIDEND ON COMMON STOCK
DATE OF DECLARATION
$IVIDEND ON COMMON STOCK
DATE OF RECORD
$IVIDEND ON COMMON STOCK
DATE OF PAYMENT
Do the Math
On January 28 the board of directors for Jelly Bean Works declared an annual cash dividend
on 200 shares of preferred $10 stock. What is the total amount of the dividend? How is this
dividend accounted for in the company’s books?
Problem 21–2 Distributing Corporate Earnings
During its first year of operation, Longhorn Corporation issued 17,500 shares of $10 par
common stock. At the end of the year, the corporation had a net income of $350,000. The
board of directors declared a cash dividend of $5 per share.
Instructions Answer these questions in your working papers. 1.) How much of the net
income did Longhorn distribute to the stockholders? 2.) How much of the net income did
the corporation retain?
Problem 21–3 Analyzing a Source Document
This memorandum contains data
Rob Williams Thrift Market Inc.
about the first quarter dividend 2347 Eastern Parkway
Orange, IA 50322-6922
on the common stock of Rob
Williams Thrift Market Inc.
Instructions Prepare the journal
! " !!"
entries to record the following in "# * !
0
your working papers. Use general
# 1, %
journal page 18.
! " # " $ # %
• declaration of the dividend &'() # # ! " ** # "+ ##, - ! " # & -
! .* # / -
• payment of the dividend,
Check 221
622 Chapter 21 Accounting for Publicly Held Corporations
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Accounting Careers in Focus
CONTROLLER
National Association of Black Accountants,
..
Inc. (NABA), Greenbelt, Maryland Tips from .
Reginald Nance
little idea
Q: What does NABA do? You may have
expect when
A: We work to expand the influence of minority professionals in what salary to
your first job
the fields of accounting and finance. presented with t
ine fair marke
offer. Determ
Q: What are your day-to-day responsibilities? by conducting
compensation -
A: I manage the overall finances of the organization. I make sure e Internet, read
research on th an d
ublications,
cash flow is where it should be and the financials are in order. ing industry p
fing firms like
Basically, I ensure that all revenue and expenses are accounted contacting staf r
ternational fo
for properly. If it has to do with finance, it goes through me. Robert Half In io ns.
publicat
Q: What do you like most about your job? annual salary
A: I like that my job allows me to see the basis of the business.
If you know how an organization is doing financially, you can
determine where it is going. From a nonprofit standpoint, I enjoy the peace of
mind of knowing that I’m working for something greater than just the bottom
line—I’m helping the community at large.
Q: What is most challenging about your job?
A: The most challenging aspect is managing deadlines. An efficient time-
management system is necessary to keep on top of things.
Q: What advice do you have for accounting students interested in
becoming controllers?
A: Sit for the CPA exam as soon as possible. It is looked upon as a high
achievement in the industry and will allow you to advance your career quickly.
Also, identify a mentor; I’ve been fortunate to find several mentors in my career.
And develop your written and oral communication skills as much as possible.
CAREER FACTS
▲
Nature of the Work: Coordinate and prepare financial statements; design and implement
internal control policies and procedures; hire, train, and retain accounting staff.
Training or Education Needed: A bachelor’s degree in accounting or finance; a master’s
▲
degree in business administration; CPA or CMA designation is preferred; at least seven
years of experience.
Aptitudes, Abilities and Skills: Solid communication skills, technology skills,
▲
organizational skills, and management skills.
Salary Range: $60,000 to $150,000 depending on location, level of responsibility and
▲
company revenues.
Career Path: Gain public accounting experience, and then accept a position in a corporate
▲
environment, such as accounting manager, director of accounting, or assistant controller.
Thinking Critically What kind of advice would you ask of a mentor?
Chapter 21 Accounting Careers in Focus 623
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SECTION 3 Financial Reporting for a
Publicly Held Corporation
Many corporations prepare a statement of stockholders’ equity
BEFORE
YOU READ instead of a statement of retained earnings. This section examines the
information reported on the statement of stockholders’ equity, how this
statement is prepared, and how stockholders’ equity is reported on a
Main Idea corporation’s balance sheet.
Corporate financial
statements report stock
issues and dividends. The Income Statement
Does a Publicly Held Corporation’s Income Statement
Read to Learn… Differ from That of a Closely Held Corporation?
➤ about a corporate income
The income statement of a publicly held corporation is similar to
statement. (p. 624)
that prepared by a closely held corporation. Remember, the federal cor-
➤ how and why
corporations prepare porate income taxes paid by a corporation are reported separately on the
a statement of income statement.
stockholders’ equity
(p. 624) The Statement of Stockholders’ Equity
➤ about a corporate What Is a Statement of Stockholders’ Equity?
balance sheet. (p. 625)
In Chapter 19 you learned how to prepare a statement of retained
➤ about a corporate
earnings for a closely held corporation. That statement reports the changes
statement of cash flows.
in the Retained Earnings account during the period. It showed:
(p. 626)
Retained Earnings, beginning balance
Key Terms Net Income
statement of stockholders’
Retained Earnings, ending balance
equity
An increasing number of corporations prepare a statement of stock-
holders’ equity rather than a statement of retained earnings. In contrast to
the statement of retained earnings, the statement of stockholders’ equity
reports the changes in all stockholders’ equity accounts during the period.
It also provides information about the transactions affecting stockholders’
equity during the period. The information reported on a statement of stock-
holders’ equity includes
• the number of shares of each type of stock issued,
• the total amount received for those shares,
• the net income or net loss for the period, and
• dividends declared during the period.
Figure 21–2 shows the statement of stockholders’ equity for On Your
Mark at the end of its second year of incorporation. The information needed
to prepare the statement comes from the work sheet and from the general
ledger accounts. The statement is prepared as follows:
624 Chapter 21 Accounting for Publicly Held Corporations
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On Your Mark Athletic Wear
Statement of Stockholders’ Equity
For the Year Ended December 31, 20--
Paid-in
$100 Par $10 Par Capital in Retained
Preferred $6 Common Excess of Earnings Totals
Stock Stock Par
1 Balance, January 1, 20-- 25 0 0 0 00 100 0 0 0 00 27 6 0 0 00 152 6 0 0 00 1
2 Issuance of 5,000 shares of common stock 50 0 0 0 00 7 5 0 0 00 57 5 0 0 00 2
3 Net Income 13 5 2 5 00 13 5 2 5 00 3
4 Cash Dividends: 4
5 Preferred Stock (1 5 0 0 00) (1 5 0 0 00) 5
6 Common Stock (7 5 0 0 00) (7 5 0 0 00) 6
7 Balance, December 31, 20-- 25 0 0 0 00 150 0 0 0 00 7 5 0 0 00 32 1 2 5 00 214 6 2 5 00 7
8 8
Figure 21–2 Statement of
• The names of the four stockholders’ equity accounts appear at the top
Stockholders’ Equity
of the amount columns. There is also a Totals column at the far right.
• The first line shows the balance of each account at the beginning of the
period.
• The next lines describe various transactions affecting the stockholders’
equity accounts, such as issuance of stock, net income, and dividends
declared. The transactions are described in the left column. The
increase or decrease amounts are recorded in the individual account
columns and in the Totals column. For example, the second line on the
statement indicates that the company issued 5,000 shares of common
stock during the period. The issuance of the 5,000 shares increased the
balance of the Common Stock account by $50,000. Since the shares
were issued at a price above par value, the Paid-in Capital in Excess of
Par account increased by $7,500.
• The final line shows the balance of each account at period-end.
As you review Figure 21–2, notice that the amounts
that decrease account balances, like dividends declared, are
enclosed in parentheses. The cash dividends declared are listed
separately for preferred and common stock. Also notice that
the Retained Earnings column of the statement of stockhold-
ers’ equity contains the same information that is reported on
a statement of retained earnings. Remember that net income
increases retained earnings, and dividends declared decrease
retained earnings. The statement of stockholders’ equity is
used to prepare the corporation’s balance sheet.
The Balance Sheet
How Do You Prepare the Stockholders’ Equity Section
of the Balance Sheet?
The assets and liabilities sections of a balance sheet for a publicly held
corporation are similar to those of a balance sheet for a closely held cor-
poration. Notice in Figure 21–3 on page 626 that the Dividends Payable
accounts are reported in the liabilities section. Since On Your Mark paid the
Section 3 Financial Reporting for a Publicly Held Corporation 625
612-637_CH21_868829.indd 625 4/17/06 7:09:56 AM
dividends before the end
On Your Mark Athletic Wear
of the year, it reports zero
Balance Sheet
December 31, 20-- balances in these liability
accounts.
The stockholders’ eq-
Liabilities
Accounts Payable
uity section of a publicly
14 5 6 2 10
held corporation’s balance
Dividends Payable—Preferred sheet is more detailed than
Dividends Payable—Common that of a closely held cor-
poration. As you can see
Total Liabilities 27 0 1 6 00
in Figure 21– 4, each type
of stock issued by On Your
Mark is listed separately
Figure 21–3 Reporting
under the heading “Paid-in Capital.” Preferred stock is listed before com-
the Balances of the Dividends
Payable Accounts on the mon stock. Each listing describes the following:
Balance Sheet • the par value,
• the number of shares authorized, and
• the number of shares issued.
The Dividends accounts are not listed in the stockholders’ equity sec-
tion because they are closed to Retained Earnings at the end of the year.
Thus, the retained earnings amount shown on the balance sheet has been
reduced by the dividends declared during the period.
The Statement of Cash Flows
Where Are Stock Issues and Dividends Reported on
This Statement?
The Financing Activities section of the statement of cash flows reflects
activities related to ownership of the corporation. A stock issue results in
a cash inflow from a financing activity. Payment of dividends is a cash
outflow.
On Your Mark Athletic Wear
Balance Sheet
December 31, 20--
Stockholders’ Equity
Paid-in Capital:
$6 Preferred Stock, $100 par, 1,000 shares authorized,
250 shares issued 25 0 0 0 00
Common stock, $10 par, 20,000 shares authorized,
15,000 shares issued 150 0 0 0 00
Paid-in Capital in Excess of Par 7 5 0 0 00
Total Paid-in Capital 182 5 0 0 00
Retained Earnings 32 1 2 5 00
Total Stockholders’ Equity 214 6 2 5 00
Total Liabilities and Stockholders’ Equity 241 6 4 1 00
Figure 21–4 The Stockholders’ Equity Section of the Balance Sheet
626 Chapter 21 Accounting for Publicly Held Corporations
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SECTION 3 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Create a chart like this one
to identify the financial 3TATEMENT OF 3TOCKHOLDERS %QUITY "ALANCE 3HEET
statement on which each of
the following appear: cash
dividends, common stock,
dividends payable, paid-
in capital in excess of par,
preferred stock, retained
earnings. Add answer rows
as needed.
Do the Math
Ron Kanai, president of Sunny Days, a Hawaiian-based sun care products manufacturer
and retailer, is looking for a buyer. He believes an analysis of stock prices and dividends
will appeal to potential corporate buyers. As the company’s accounting manager, use
spreadsheet, accounting, or graphics software to prepare the following information in a
clustered column chart showing the stock price and dividends declared for the past two
years. What does the chart say about Sunny Days’ financial condition that could attract
potential buyers?
Year 1 Year 2
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Stock Price 13.50 13.60 14.90 17.00 17.50 20.00 23.00 25.50
Dividend Declared 2.50 2.50 2.90 3.00 3.25 3.50 4.90 4.95
Problem 21–4 Examining the Statement
of Stockholders’ Equity
The following transactions of Victor Jewelry Corporation took place during the period.
Instructions Use the form in your working papers to indicate which of the transactions is
reported on the statement of stockholders’ equity.
Transactions:
1. Paid accounts payable of $50,000.
2. Issued 2,000 shares of $10 par common stock, receiving $15 per share.
3. The board of directors declared a cash dividend of $12,000 for all common stockholders.
4. Bought equipment on account at a total cost of $125,000.
5. Paid the cash dividend declared in Transaction 3.
6. Issued 500 shares of $100 par, $7 preferred stock.
7. Paid the federal income tax installment of $5,000.
8. Earned a net income of $150,000 for the period.
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CH A P T ER 2 1 Summary
Key Concepts
1. The corporation has several unique characteristics:
• legal permission from the state to operate
• recognized as a separate legal entity
• owned by stockholders
• operated by professional managers hired by a board of directors that is elected by stockholders
Two types of corporations are:
• closely held, owned by a few persons or by a family
• publicly held, whose stock is widely held, has a large market, and is usually traded on a
stock exchange
2. Corporations may issue two types of stock, common and preferred. The T-account analysis of
issuance of stock follows.
a. Issuing preferred stock at par value:
Cash in Bank Preferred Stock
Debit Credit Debit Credit
xxx xxx
b. Issuing common stock at par value:
Cash in Bank Common Stock
Debit Credit Debit Credit
xxx xxx
c. Issuing common stock in excess of par (the issue of stock at a higher price than its par value):
Cash in Bank Common Stock
Debit Credit Debit Credit
xxx xxx
Paid-in Capital in Excess of Par
Debit Credit
xxx xxx
628 Chapter 21 Summary
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Summary CHAPT E R 21
3. Corporations may distribute part of their earnings to stockholders in the form of dividends. These
are the journal entries required.
Event Importance Journal Entry Required
Dividend is Corporation’s board of directors votes Debit Dividends
declared to distribute earnings to owners. Credit Dividends Payable
Dividend date of The corporation makes a list to show No journal entry is made.
record who owns stock on the date of record.
Dividend is paid The corporation writes the dividend Debit Dividends Payable
checks to owners. Credit Cash in Bank
End of the year The corporation closes the Dividends Debit Retained Earnings
account. Credit Dividends
4. Publicly held corporations prepare the following financial reports:
• income statement
• statement of stockholders’ equity
• the balance sheet
• the statement of cash flows
The statement of stockholders’ equity reports all changes in stockholders’ equity accounts
during the period. It usually replaces the statement of retained earnings. The statement of
stockholders’ equity includes information about
• the number of shares of each type of stock issued,
• the total amount received for those shares,
• net income (or loss) for the period, and
• the dividends declared during the period.
Refer to Figure 21–2 on page 625 to review the statement of stockholders’ equity.
Key Terms
authorized capital stock (p. 615) par value (p. 615)
board of directors (p. 615) preferred stock (p. 615)
closely held corporation (p. 614) proxy (p. 615)
common stock (p. 615) publicly held corporation (p. 614)
dividend (p. 619) statement of stockholders’ equity (p. 624)
Paid-in Capital in Excess of Par (p. 616)
Chapter 21 Summary 629
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C H A P T ER 2 1 Review and Activities
AFTER
YOU READ
Check Your Understanding
1. Corporation Characteristics
a. Name three characteristics of a corporation.
b. Explain the difference between a closely held corporation and a publicly held corporation.
2. Record Stock Issue
a. When stock is sold at a price above its par value, what amount is credited to the capital
stock account?
b. What is the classification of the Paid-in Capital in Excess of Par account? What is its
normal balance?
3. Record Earnings Distribution
a. When a dividend is declared, which accounts are debited and which accounts are credited?
b. Name and explain the three dates important to the dividend process.
4. Corporate Financial Statements
a. What type of information is reported on the statement of stockholders’ equity?
b. Explain the difference between the statement of retained earnings and the statement of
stockholders’ equity.
Apply Key Terms
For each key term, give or find an
example of the term in a newspaper,
periodical, annual report, or on an Internet
site. Then use the example in a sentence.
authorized capital par value
stock preferred stock
board of directors proxy
closely held publicly held
corporation corporation
common stock statement of
dividend stockholders’
Paid-in Capital in equity
Excess of Par
630 Chapter 21 Review and Activities
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Computerized Accounting CHAPT E R 21
Customizing Financial Statements
Making the Transition from a Manual to a Computerized System
Task Manual Methods Computerized Methods
Customizing • Using accounting stationery, you may • Accounting software gives you the
financial reorganize information or add details to option to select and sort data that
statements financial statements. appears on each financial statement.
• You may also customize information on
a report.
Q&A
Peachtree Question Answer
How do I change the 1. From the Reports menu, select Financial Stmts.
appearance or content 2. Select the report you wish to customize from the list.
of financial reports in 3. Display it on the screen.
Peachtree? 4. Select the Design icon above the report.
5. You can adjust the size of the columns, the types of information displayed in
the report, the font style and size, and the report layout.
6. If you wish to save the report in the new format, rename the file, leaving the
original files in their original form.
How do I filter 1. After you have selected a report from the list, click Preview to display it on
information on your screen.
preformatted reports? 2. At the Filter option, you may accept the current settings or make changes to
the displayed fields. The information that can be filtered varies according to
the report.
QuickBooks Q & A
QuickBooks Question Answer
How do I change the 1. From the Reports menu, select Company & Financial.
appearance or content 2. Select the report you wish to customize.
of financial reports in 3. Click the Modify Report button. You can adjust the size of columns, the types
QuickBooks? of information displayed in the report, the font style and size, and the report
layout.
4. If you wish to save the report in the new format, click the Memorize button
and give the report a new name.
How do I filter 1. After you have selected a report, click the Modify Report button.
information on 2. In the Filters tab, choose the item you wish to filter and enter the filter criteria.
preformatted reports? The information that can be filtered varies according to the report.
3. Click OK.
For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers.
Chapter 21 Computerized Accounting 631
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C H A P T ER 2 1 Problems
Complete problems using: Manual Glencoe Peachtree Complete QuickBooks Spreadsheet
OR OR OR
Working Papers Accounting Software Templates Templates
Problem 21–5 Distributing Corporate Earnings
SMART GUIDE During the first year of operations, Sunset Surfwear issued 18,500 shares
Step–by–Step Instructions: of $10 par common stock. At the end of the year, the corporation had net
Problem 21–6 income of $380,000. The board of directors declared a $5 cash dividend per
1. Select the problem set share of common stock.
for InBeat CD Shop
(Prob. 21–6).
Instructions Answer the following questions in your working papers:
2. Rename the company 1. How much of the net income earned for the year was paid to the
and set the system date.
3. Record all transactions common stockholders?
using the General 2. How much of the net income was retained by the corporation?
Journal Entry option.
4. Print a General Journal Analyze Compare the date of declaration and date of payment with
report and proof your the date of record. Explain what entry or action is required
work. on each date.
5. Complete the Analyze
activity.
6. End the session.
Problem 21–6 Journalizing the Issue of Stock
QuickBooks On June 1 InBeat CD Shop was incorporated and authorized to issue
1,000 shares of $100 par, preferred 9% stock, and 10,000 shares of $25 par
PROBLEM GUIDE
common stock.
Step–by–Step Instructions:
Instructions In your working papers, record the following transactions on
Problem 21–6
general journal page 1.
1. Restore the Problem
21-6.QBB file. Date Transactions
2. Record all transactions
using the Make General June 1 Issued 200 shares of preferred 9% stock at $100 per share,
Journal Entries option.
Memorandum 3.
3. Print a Journal report
and proof your work. 2 Issued 3,000 shares of common stock at $25 per share,
4. Complete the Analyze Memorandum 7.
activity. 6 Received $31 per share for 2,000 shares of common stock
5. Back up your work.
issued, Memorandum 10.
7 Issued 50 shares of preferred 9% stock at par, Memorandum 11.
Analyze Identify the stock issued at a price above par. Calculate the
total amount of capital that InBeat CD Shop received in the
first week of June.
632 Chapter 21 Problems
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Problems CHAPT E R 21
Problem 21–7 Journalizing Common and
Preferred Stock Dividend SMART GUIDE
Transactions Step–by–Step Instructions:
Problem 21–7
Shutterbug Cameras issued 8,000 shares of $80 par, preferred 7% stock and
1. Select the problem set
35,000 shares of $25 par common stock. for Shutterbug Cameras
Instructions In your working papers: (Prob. 21–7).
2. Rename the company
1. Record the following transactions on general journal page 14. and set the system date.
3. Record all transactions
2. Post the transactions to the general ledger accounts provided in your using the General
working papers. Net income was $296,490. Journal Entry option.
Enter each transaction
Date Transactions in the proper accounting
Oct. 15 The board of directors declared an annual cash dividend on the period (month).
4. Print a General Journal
preferred 7% stock, payable on December 1, Memorandum 407. report for the entire
Nov. 5 Declared an annual cash dividend of $1.25 on 35,000 shares of quarter and proof your
common stock, payable on December 17, Memorandum 415. work.
5. Print a General Ledger
Dec. 1 Paid the dividend declared on October 15, Check 1163.
report.
17 Paid the dividend declared on November 5, Check 1201. 6. Complete the Analyze
activity.
Analyze Calculate the amount of dividends payable on common 7. End the session.
stock and dividends payable on preferred stock at the end TIP: Set the date filter
of December. options to print a General
Journal report that includes
all of the entries for the
Problem 21–8 Preparing Corporate quarter.
Financial Statements SPREADSHEET
River’s Edge Canoe & Kayak is authorized to issue 10,000 shares of $100 SMART GUIDE
par, preferred 9% stock and 500,000 shares of $5 par common stock. The Step–by–Step Instructions:
following balances appeared in the Balance Sheet section of the company’s Problem 21–8
work sheet for the year ended December 31. 1. Select the spreadsheet
template for Problem
Instructions
21–8.
1. Prepare the statement of stockholders’ equity. 2. Enter your name and
the date in the spaces
a. During the period the corporation issued 500 shares of 9% preferred
provided on the
stock at par and 25,000 shares of common stock at $9. template.
b. The net income for the year was $425,000. 3. Complete the spread-
sheet using the
2. Prepare the balance sheet. instructions in your
working papers.
101 Cash in Bank $506,010
4. Print the spreadsheet
115 Accounts Receivable 850,680 and proof your work.
120 Notes Receivable 400,000 5. Complete the Analyze
130 Merchandise Inventory 388,815 activity.
135 Prepaid Ins. 3,600 6. Save your work and
exit the spreadsheet
140 Supplies 10,500
program.
145 Delivery Truck 139,298
150 Store Equipment 363,009
201 Accounts Payable 62,412
202 Dividends Payable—Preferred 22,500
CONTINUE
Chapter 21 Problems 633
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C H A P T ER 2 1 Problems
203 Dividends Payable—Common $150,000
210 Fed. Corp. Income Tax Payable 20,000
215 Sales Tax Payable 4,500
301 Preferred Stock 500,000
303 Common Stock 750,000
304 Paid-in Capital in Excess of Par 300,000
305 Retained Earnings 735,000
307 Dividends—Common 262,500
308 Dividends—Preferred 45,000
Analyze Identify the total stockholders’ equity on December 31.
SMART GUIDE
Step–by–Step Instructions:
Problem 21–9
1. Select the problem set CHALLENGE Problem 21–9 Recording
for Buzz Newsstand PROBLEM
(Prob. 21–9).
Stockholders’
2. Rename the company
and set the system date.
Equity Transactions
3. Record all transactions. Buzz Newsstand is authorized to issue 100,000 shares of $5 par common
Enter each transaction stock and 5,000 shares of $100 par, preferred 8% stock. On January 1,
in the proper accounting
period (month).
the beginning of the period, the stockholders’ equity accounts had the
4. Print a General Journal following balances:
report and proof your
work. 301 Preferred Stock $150,000
5. Print a Balance Sheet. 302 Paid-in Capital in Excess of Par—Preferred 11,250
6. Complete the Analyze 303 Common Stock 225,000
activity. 304 Paid-in Capital in Excess of Par—Common 112,500
7. End the session.
305 Retained Earnings 366,800
307 Dividends—Preferred 0
SOURCE DOCUMENT 308 Dividends—Common 0
PROBLEM Instructions In your working papers:
Problem 21–9 1. Record the following transactions on general journal page 42. Close
Use the source documents the Dividends and Retained Earnings accounts.
in your working papers to 2. Prepare the stockholders’ equity section of the balance sheet.
complete this problem.
Date Transactions
QuickBooks Mar. 15 The board of directors approved a semiannual cash dividend
of $62,250 for both preferred and common stockholders. The
PROBLEM GUIDE
dividend is payable to stockholders of record as of April 15 with
Step–by–Step Instructions: payment on May 1, Memorandum 635.
Problem 21–9
Apr. 19 Issued 500 shares of preferred stock at $108, Memorandum 651.
1. Restore the Problem May 1 Paid the dividends declared on March 15, Check 1256.
21-9.QBB file.
2. Record all transactions. Sept. 1 The board of directors approved a semiannual cash dividend
3. Print a Journal report of $79,250 for both preferred and common stockholders. The
and proof your work. dividend is payable to stockholders of record as of October 1
4. Print a Balance Sheet.
5. Complete the Analyze with payment on November 1, Memorandum 828.
activity. Nov. 1 Paid the dividend declared on September 1, Check 2451.
6. Back up your work.
Analyze Compare the December 31 Retained Earnings balance with
the beginning balance of $366,800. Why did the balance
change?
634 Chapter 21 Problems
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Winning Competitive Events CHAPT E R 21
Practice your test-taking skills! The questions on this page are reprinted with permission
from national organizations:
• Future Business Leaders of America
• Business Professionals of America
Use a separate sheet of paper to record your answers.
Future Business Leaders of America
MULTIPLE CHOICE
1. Earnings distributed to stockholders are called
a. retained earnings.
b. revenue.
c. capital gains.
d. dividends.
e. none of these answers
2. ________ stock is the type of stock issued by a corporation when only one class of
stock is issued.
a. Preferred
b. Common
c. Capital
d. Dividend
3. When 10,000 shares of $10 par-value common stock are issued at $14 per share,
Paid-In Capital in Excess of Par, Common Stock is credited for
a. $140,000.
b. $40,000.
c. $100,000.
d. none of the above
4. When a dividend is paid in cash, the accounts debited and credited are
a. Dividends Received and Dividends Payable.
b. Cash and Dividends Payable.
c. Dividends Payable and Cash.
d. Common Stock and Cash.
Business Professionals of America
MULTIPLE CHOICE
5. A legal form that asks stockholders to transfer their voting rights is called a
a. security.
b. proxy.
c. preemptive right.
d. stock split. Need More Help?
Go to glencoeaccounting.glencoe.com and
click on Student Center. Click on Winning
Competitive Events and select Chapter 21.
• Practice Questions and Test-Taking Tips
• Concept Capsules and Terminology
glencoeaccounting.glencoe.com Chapter 21 Winning Competitive Events 635
612-637_CH21_868829.indd 635 4/17/06 7:10:19 AM
C H A P T ER 2 1 Real-World Applications and Connections
Critical Publicly Held Corporations
Thinking 1. What is a publicly held corporation?
2. Describe the components of stockholders’ equity.
3. Summarize the accounting entries when a corporation sells 200 shares of
9% preferred stock, with a par value of $100, for $125 per share.
4. Compare and contrast preferred and common stock.
5. Write a rule expressing when a dividend becomes a liability for a corporation.
Explain the reason for the rule.
6. Justify the fact that corporations that sell their stock for an amount in excess
of par cannot record the excess as profit.
Merchandising Business: Coffee Shop
CASE
STUDY Cyber Café is a retail store that sells a variety of coffees, gourmet pastries, and other
snacks. The store also offers computer stations where customers can surf the Web.
Early success helped the owners of Cyber Café to incorporate and franchise
the business. They now have franchises in 15 cities and want to raise additional
money to open cafés in Japan.
INSTRUCTIONS
1. List at least three ways the business could raise money for the new franchises.
2. If you were considering investing in Cyber Café, describe the ratios and
analyses you would calculate from its financial statements.
3. Explain how these calculations would help you make an investment decision.
a Using Insider Information
mattoefr ETHICS You are an accountant for a large shipping company, like United Parcel Service
(UPS). Through your work, you learn that your company is planning to buy a
company that makes shipping containers. It’s a small company whose stock is
traded on the stock exchange. You think about purchasing several thousand
shares of this company’s stock, expecting to make a profit when your company
purchases it.
ETHICAL DECISION MAKING
1. What are the ethical issues? 4. How do the alternatives affect the
2. What are the alternatives? parties?
3. Who are the affected parties? 5. What would you do?
Describing Corporations
))
$ ))
Communicating You work for a locally owned partnership that was just purchased by a
ACCOUNTING corporation. You decide to share information about corporations with your co-
workers. Create a one-page information sheet identifying the characteristics of a
corporation. Write a paragraph explaining each characteristic.
636 Chapter 21 Real-World Applications and Connections
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Real-World Applications and Connections CHAPT E R 21
Skills Beyond Working in Teams
NUMBERS Annabelle Bradly owns Aussie Diners in Australia and North America. The
corporation is considering going public and offering common stock on the
New York Stock Exchange. She calls you to invite the North American executive
management team to meet before she makes the final decision to go public.
INSTRUCTIONS
1. Describe how to get all executive management team members together quickly.
2. In groups of five, role-play holding an executive team meeting. Each
student will be a manager: Marketing, Accounting, Personnel, Facilities, or
Purchasing. List your department’s concerns about going public.
INTERNATIONAL World Federation of Exchanges
Accounting The World Federation of Exchanges (WFE) is the trade organization for regulated
securities markets and organizations that serve the industry. Over 97 percent
of the world’s exchanges belong to the WFE, including the New York Stock
Exchange and the Tokyo Stock Exchange. Enforcement, trading policies, business
conduct, and self-regulation are a few of the issues that it studies.
INSTRUCTIONS Locate the WFE Web site and describe its general mission.
Making It
Your Investment Choices
Personal In some ways your future depends on how well you plan for financial security.
You can make wiser investment decisions when you know the choices available.
PERSONAL FINANCE ACTIVITY Use the library or Internet to find basic information
about stock, bond, and real estate investments. Explain which investment most
appeals to you and why.
PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and
click on Student Center. Click on Making It Personal and select Chapter 21.
Analyzing Evaluating Stockholders’ Equity
Financial
Reports The statement of stockholders’ equity provides details about changes in the
stockholders’ equity accounts during the period. This information helps investors
and analysts better understand the company’s
capital. Successful companies earn money for
future operations (reported as retained earnings)
Why Invest?
through sales and rely less on raising new
Not all companies pay
capital through the issuance of stock.
dividends. So, why invest? Visit
INSTRUCTIONS Use PETsMART’s statement of glencoeaccounting
stockholders’ equity in Appendix F to answer .glencoe.com and click
these questions. on Student Center. Click on
1. Explain how retained earnings changed WebQuest and select Unit 4 to
from a balance of $40,239,000 in 2003 to a continue your Internet project.
balance of $174,053,000 in 2004.
2. How much did additional paid-in capital
increase during this same time?
glencoeaccounting.glencoe.com Chapter 21 Real-World Applications and Connections 637
612-637_CH21_868829.indd 637 4/17/06 7:10:23 AM
UNIT
5 Accounting
for Special
Procedures
Personal Finance Q & A
Q: I already know the accounting cycle;
why do I need to learn special
procedures?
A: A lot happens in Step 2 of the
accounting cycle: Analyze each
transaction. Many transactions are
not as straightforward as those
discussed so far.
Q: Can I continue to use the same
method to analyze transactions?
A: Yes, and also use the basic
accounting assumptions such as
the matching principle, revenue
recognition, and accounting period.
THINK IT OVER
Do you think individuals have special
financial activities in their personal
lives? Name some financial activities an
individual or family might experience
that are not everyday occurrences.
638
638-639_UN05_868829.indd 638 4/6/06 6:33:09 PM
Internet Project
The Magic of Matching
A company can pay millions of dollars for an office building.
A small business might buy just a used truck and a computer,
as Roadrunner Delivery Service did in Unit 2. In this project you
will find out how to use the matching principle to assign asset
costs to the revenue they generate.
Log on to glencoeaccounting.glencoe.com and
click on Student Center. Click on WebQuest and
select Unit 5. Begin your WebQuest by reading
the Task.
Continue working on your WebQuest as you study Unit 5.
Chapter 23 24 25
Page 695 725 749
THE BIG PICTURE
PRICEY PLACES Most expensive areas for commercial real estate.
CITY RENT, PER SQUARE FOOT
LONDON, WEST END $137.31
TOKYO 102.56
PARIS 89.28
NEW YORK, MIDTOWN 71.53
MOSCOW 67.73
Data: Cushman & Wakefield
Source: Reprinted by permission from BusinessWeek.
glencoeaccounting.glencoe.com 639
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CH A P T ER 2 2 Cash Funds
BEFORE
YOU READ
What You’ll Learn Predict
1. Record the entry to establish 1. What does the chapter title tell you?
a change fund. 2. What do you already know about this subject from personal experience?
3. What have you learned about this in the earlier chapters?
2. Prove the cash in the cash regis-
ter drawers each business day. 4. What gaps exist in your knowledge of this subject?
3. Open and replenish a petty
cash fund.
4. Journalize opening a petty
Exploring the Real World of Business
cash fund.
PROTECTING CASH
5. Prepare a petty cash
requisition to replenish the Applebee’s International
petty cash fund. Applebee’s International owns restaurants with great
6. Use a petty cash register food and work environments. Applebee’s is a People Report™
to record petty cash “Heart of the Workplace Award” winner. This honor is given
disbursements. to companies that go the extra mile to care for employees and
7. Journalize replenishing a support their efforts to give back to the community.
petty cash fund. The average guest spends about $10 on a meal at
8. Determine whether cash is Applebee’s, so you can imagine its daily cash inflow.
short or over, and record the Applebee’s employees follow company rules for all financial
shortage or overage. transactions, including specific policies for cash control and
record retention. Restaurants keep cash on hand to make
9. Define the accounting terms
introduced in this chapter. change for customers and pay for small expenses like delivery
fees or office supplies. Accounting for and protecting this cash
Why It’s Important is an important function in managing each restaurant.
Cash is an asset, and it must
▲
be protected. What Do You Think?
What documentation should businesses like Applebee’s
International keep for small cash payments?
640 Chapter 22 Cash Funds
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Working in the Real World
APPLYING YOUR ACCOUNTING KNOWLEDGE
Waiters and waitresses are important employees
in the restaurant industry. A portion of their
earnings is likely to be cash tips from their
customers. Businesses that take in significant cash
need to protect their money from theft or loss.
You will learn about the records used to account
for cash funds in this chapter.
Personal Connection
1. What measures does your workplace take to
protect cash?
2. If you were a store manager, how would you
prevent employee theft of cash?
Online Connection
Go to glencoeaccounting.glencoe.com and click
on Student Center. Click on Working in the
Real World and select Chapter 22 to learn more
about the real-world workplace.
glencoeaccounting.glencoe.com 641
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SECTION 1 The Change Fund
In earlier chapters you learned that businesses use checking
BEFORE
YOU READ accounts for depositing cash receipts and making cash payments.
Merchandising businesses, such as Sears or Blockbuster, keep some
cash on hand so that they can make change for customers who pay
Main Idea for purchases with cash.
Some businesses keep cash
on hand to make change for
customers. The accounts used Establishing a Change Fund
for this cash are Change Fund What Is a Change Fund?
and Cash Short & Over. A change fund is an amount of money, consisting of varying
Read to Learn… denominations of bills and coins, that is used to make change in cash
➤ how and why to set up a transactions. For example, a customer who pays for a $13.80 purchase
change fund. (p. 642) with a $20 bill will receive $6.20 in change.
➤ how to use the change fund. When a business first establishes a change fund, the amount
(p. 643) needed for the fund is estimated. The size of the fund does not change
➤ how to record a discrepancy unless the business finds that it needs more or less change than it had
in the change fund. (p. 644) originally estimated. The change fund is established by writing a check
for the amount of the fund. The check is made payable to the person in
Key Terms charge of the change fund. That person cashes the check and places the
change fund
bills and coins in the cash register drawer. The transaction is recorded
in an asset account called Change Fund. Let’s look at On Your Mark’s
establishment of a change fund as an example.
B u s i n e s s Tr a n s a c t i o n
On May 1 the accountant for On Your Mark wrote Check 2150 for $100 to establish a change fund.
ANALYSIS Identify 1. The accounts affected are Change Fund and Cash in Bank.
Classify 2. Both Change Fund and Cash in Bank are asset accounts.
/ 3. Change Fund is increased by $100. Cash in Bank is decreased by $100.
DEBIT-CREDIT RULE 4. Increases to asset accounts are recorded as debits. Debit Change Fund
for $100.
5. Decreases to asset accounts are recorded as credits. Credit Cash in
Bank for $100.
642 Chapter 22 Cash Funds
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T ACCOUNTS 6. Change Fund Cash in Bank
Debit Credit Debit Credit
100 100
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 32
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 May 1 Change Fund 1 0 0 00 2
3 Cash in Bank 1 0 0 00 3
4 Check 2150 4
5 5
If the business needs to increase the amount in the change fund, the
accountant writes a check for the amount of the cash increase. For example,
suppose that On Your Mark needs to increase the change fund from $100
to $125. The amount of the check is $25. The journal entry debits Change
Fund for $25 and credits Cash in Bank for $25. This brings the Change
Fund account balance to $125. AS
YOU READ
Using the Change Fund In Your Experience
How Do You Use the Change Fund? Change How do you
The amount of cash in the change fund is put into the cash register verify that the change
drawer at the beginning of the day. When a cash sale occurs, the salesclerk you receive from a
rings the sale on the cash register. The sale is automatically recorded on the clerk after a purchase is
cash register tape. At the end of the day, the cash in the cash register drawer correct?
is counted. A cash proof is prepared to verify that the amount of cash in
the drawer equals the total cash sales for the day plus the change fund. The
amount of cash in the change fund is set aside for use as change for the next
day. The balance of the cash from the drawer is deposited in the checking
account.
Let’s look at an example. Suppose On Your Mark has $470 in the cash
register drawer at the end of the day on May 15. The cash register tape shows
that cash sales, including sales tax, total $370. Figure 22–1 on page 644
shows the cash proof. As you can see, the amount of cash in the drawer at
the end of the day minus the amount of cash in the change fund equals the
total sales shown on the cash register tape.
Most businesses require that salesclerks sign the cash proof to indicate
that they have counted the cash in the drawer and verified its accuracy,
both when they receive the drawer and turn it in. The supervisor also checks
these amounts and signs the cash proof. The cash proof form is attached to
the cash register tape, which is the source document for recording the cash
sales for the day.
Section 1 The Change Fund 643
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CASH PROOF
Date May 15, 20--
Cash Register No. 1
May 15 Total cash sales (from
370.00
Tape 71 cash register tape) $
Cash in drawer $ 470.00
348.00 CA 100.00
Less change fund
22.00 ST
$ 370.00
370.00 Net cash received
Cash short
Cash over
Salesclerk Tom Blake
Supervisor Greta Keegan
Figure 22–1 Cash Proof
Form
Recording Cash Short and Over
What If Cash in the Drawer Does Not Match
the Records?
Many cash transactions occur during each business day. Occasion-
ally, a salesclerk makes an error and gives the incorrect amount of
change to a customer. When this happens, the amount of cash in the
cash register drawer, less the beginning change fund, does not agree
with the cash sales amount recorded on the cash register tape. If the
salesclerk gives a customer too much change, the amount of cash in
Connect to…
SCIENCE the drawer at the end of the day is short, or less than it should be. If the
salesclerk gives a customer too little change, the cash amount is over, or
Science has provided more than it should be.
technology to make The amount of cash either gained or lost because of errors is recorded
counterfeiting money
in the Cash Short & Over account. Cash Short & Over is a temporary
more difficult. Some
account. Because cash shortages are expenses to the business, they are
technology used with
recorded as debits to Cash Short & Over. Cash overages are revenue
$50 notes includes
• a watermark imbedded for the business; they are recorded as credits to the Cash Short & Over
in the paper account. Note that the Cash Short & Over account does not have a
• a security thread in the normal balance.
paper that glows yellow Cash Short & Over
under an ultraviolet
light Debit Credit
Cash Cash
• color shifting ink that Shortages Overages
changes from copper
to green based on the At the end of the accounting period, the balance of the Cash Short
viewing angle & Over account is closed to Income Summary. Let’s look at an example
of a shortage.
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B u s i n e s s Tr a n s a c t i o n
On May 2 the cash register tape shows that cash sales are $520 and sales taxes are $26, for a
total of $546. The actual cash in the cash register drawer, after subtracting the amount of the change
fund, is $545.
T ACCOUNTS Cash in Bank Cash Short & Over
Debit Credit Debit Credit
545 1
Sales Sales Tax Payable
Debit Credit Debit Credit
520 26
JOURNAL ENTRY
GENERAL JOURNAL PAGE 33
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 May 2 Cash in Bank 5 4 5 00 2
3 Cash Short & Over 1 00 3
4 Sales 5 2 0 00 4
5 Sales Tax Payable 2 6 00 5
6 Cash Proof—Cash reg. tape 6
7 7
The journal entry to record a cash
AS
overage is similar to that for a cash short- YOU READ
age. The only difference is that Cash
Instant Recall
Short & Over is credited for the amount
of the overage. Debit-Credit Rules
In the previous example, suppose Expenses are increased
that the amount of cash in the drawer by debits. Revenue is
increased by credits.
is $547 after the amount of the change
fund is subtracted. The journal entry
would debit Cash in Bank for $547 and
credit Cash Short & Over for $1. The
credits to Sales and Sales Tax Payable
remain the same.
Section 1 The Change Fund 645
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SECTION 1 Assessment
AFTER
YOU READ
Reinforce the Main Idea
A business that uses a cash 0ROVING #ASH
register prepares a cash proof
each day. Create a diagram
similar to this one to show
the step-by-step method for
proving cash and recording
any discrepancy.
Do the Math
The Children’s Consignment Shop operates primarily with cash transactions. One of your
responsibilities is to prove cash register cash. The cash register tape showed cash received from
sales and sales taxes collected to be $620.40. The count of cash in the drawer was: 16 $20 bills,
18 $10 bills, 26 $5 bills, 44 $1 bills, 66 quarters, 30 dimes, 52 nickels, and 130 pennies. The
change fund is $75 dollars. What was the net cash received? Was cash short, over, or in balance?
If the total sales tax Rate is 10%, what is the amount of cash sales and the sales tax payable?
Problem 22–1 Preparing a Cash Proof
The change fund for Messina’s Grocery Store is $200 per cash Mar 31
register. On March 31 total cash sales from cash register 6 Tape 49
are $964 and sales taxes are $57.84. A count of cash shows
964.00 CA
$1,216.84 in the cash register drawer.
57.84 ST
Instructions
1. Use the form in your working papers to prepare a cash
proof. Sign your name as the salesclerk.
2. Record the March 31 cash sales on page 2 of a general
journal.
Problem 22–2 Recording a Cash Overage
The change fund for Visions Hair Salon is $300 per register. On April 14, at the end of the
business day, the manager counts the funds in the register. Cash sales total $1,496 and sales
taxes amount to $89.77 in register 2. The cash drawer contains $1,895.77.
Instructions
1. Use the form in your working papers to prepare a cash proof. Sign your name as the
salesclerk.
2. Record the April 14 cash sales and overage on page 4 of the general journal.
646 Chapter 22 Cash Funds
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SECTION 2 The Petty Cash Fund
Businesses often make small cash payments for delivery fees, postage
BEFORE
stamps, supplies, and other similar purchases. YOU READ
Establishing the Petty Cash Fund Main Idea
What Is a Petty Cash Fund? Businesses use petty cash
Small, incidental cash payments are made from the petty cash fund . funds because writing
The word petty indicates that only small amounts of cash are paid out of checks for small amounts
this fund. When setting up a petty cash fund, each business determines is impractical, costly, and
the maximum amount that will be paid out by a petty cash disburse-
time consuming.
ment. A petty cash disbursement is any payment made from the petty Read to Learn…
cash fund. All payments over the maximum amount are paid by check. ➤ how and why to set up a
The person responsible for maintaining the petty cash fund and for mak- petty cash fund. (p. 647)
ing cash disbursements is called the petty cashier . ➤ how to use the petty cash
To establish a petty cash fund, a business estimates the amount of fund. (p. 648)
cash needed in the fund for a certain period of time, usually a month. ➤ how to record a
This estimate is based on the company’s past experiences. discrepancy in the petty
On Your Mark decides to establish a petty cash fund. Crystal Casteel, cash fund. (p. 653)
an office clerk, is appointed petty cashier. The petty cash fund will
contain $100. Any payments under $10 will be paid from the petty
Key Terms
petty cash fund
cash fund. Any payments over $10 will be paid by check. The com-
petty cash disbursement
pany accountant, Greta Keegan, prepares a check for $100, payable to
petty cashier
“Petty Cashier Crystal Casteel,” to establish the fund. The transaction
petty cash voucher
is recorded in an asset account called Petty Cash Fund. Crystal cashes
petty cash requisition
the check and places the money, consisting of small denominations of petty cash register
bills and coins, in a petty cash box. For internal control purposes, the
petty cash box is kept in an office safe or a locked desk drawer. Crystal is
responsible for the $100 in the petty cash fund. When members of the
staff need small amounts of cash for items like stamps or office supplies,
Crystal will disburse the cash and store the receipts in the petty cash box.
Let’s learn how to journalize transactions to open a petty cash fund.
B u s i n e s s Tr a n s a c t i o n
On May 1 Check 2151 for $100 was issued to establish the petty cash fund.
ANALYSIS Identify 1. The accounts affected are Petty Cash Fund and Cash in Bank.
Classify 2. Both Petty Cash Fund and Cash in Bank are asset accounts.
/ 3. Petty Cash Fund is increased by $100. Cash in Bank is decreased
by $100.
Section 2 The Petty Cash Fund 647
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DEBIT-CREDIT RULE 4. Increases to asset accounts are recorded as debits. Debit Petty Cash
Fund for $100.
5. Decreases to asset accounts are recorded as credits. Credit Cash in
Bank for $100.
T ACCOUNTS 6. Petty Cash Fund Cash in Bank
Debit Credit Debit Credit
100 100
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 32
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
5 May 1 Petty Cash Fund 1 0 0 00 5
6 Cash in Bank 1 0 0 00 6
7 Check 2151 7
8 8
Sometimes petty cash disbursements occur more often than expected,
and the petty cash fund is used up before the end of the specified time
period. If this happens often, the company may decide to increase the fund’s
amount. To increase the petty cash fund, the accountant debits the Petty
Cash Fund account and credits the Cash in Bank account for the amount
of the increase.
Using the Petty Cash Fund
How Do You Use the Petty Cash Fund?
The petty cashier is responsible for making payments from the petty cash
fund. Whenever a cash payment is made, a petty cash voucher is completed.
A petty cash voucher is a proof of payment from the petty cash fund.
Figure 22–2 shows a petty cash voucher. These vouchers are usually
prenumbered. If they are not, the petty cashier numbers them when issu-
ing them.
The petty cash voucher includes the following information:
1. the date of the payment
2. the person or business to whom the payment is made
3. the amount of the payment
4. the reason for the payment
5. the account to be debited
6. the signature of the person approving the payment (usually the
petty cashier)
7. the signature of the person receiving the payment
After the petty cash disbursement is made, the voucher is filed in the
petty cash box until the fund is reimbursed.
648 Chapter 22 Cash Funds
640-667_CH22_868829.indd 648 9/17/05 1:26:39 PM
PETTY CASH VOUCHER
1
No. 001 Date May 2, 20--
2 3
Paid to Premier Office Supply Co. $ 7.10
4 Printer paper
For
5 Supplies
Account
Approved by Payment received by
6 Crystal Casteel 7 John Marks Figure 22–2 Petty Cash
Voucher
Replenishing the Petty Cash Fund
To replenish a petty cash fund means to restore the fund to its original
cash balance. As the cashier makes payments from the fund, the amount
of cash in the petty cash box decreases. Some businesses set a minimum
amount that must be kept. When the amount of cash in the petty cash box
reaches the minimum or a low amount, the accountant replenishes the
petty cash fund.
On Your Mark replenishes its petty cash fund once a month, when the
balance reaches the minimum amount, or at the end of the accounting
period. Replenishing the petty cash fund affects the general ledger accounts
that the petty cash disbursements impact (such as Supplies and Delivery
Fees), which must be updated.
Replenishing the petty cash fund requires reconciling the cash balance
in the fund and then preparing a petty cash requisition form.
Reconciling the Petty Cash Fund
The petty cashier reconciles the petty cash fund to
determine whether it is in balance. To reconcile the petty
cash fund, the petty cashier first adds all paid petty cash
vouchers. This total is then subtracted from the original
cash balance of the petty cash fund. The difference is the
reconciled petty cash balance, or the amount of money that
should be in the petty cash box. If the count of the cash in
the petty cash box agrees with the reconciled balance, the
petty cash fund is in balance. If the two amounts do not
agree, the petty cash fund is either short or over.
On May 31 the total of all the petty cash vouchers for
the month was $87.75. As you recall, the original petty
cash balance was $100. The reconciled petty cash balance is:
Original balance $100.00
Total of paid petty cash vouchers 87.75
Reconciled petty cash balance $ 12.25
The amount of cash in the petty cash box that Crystal counted was
$12.25. The petty cash fund, therefore, is in balance.
Section 2 The Petty Cash Fund 649
640-667_CH22_868829.indd 649 9/17/05 1:26:40 PM
Preparing a Petty Cash Requisition Form
After reconciling the petty cash fund, the petty cashier prepares a
petty cash requisition , which is a form requesting money to replenish the
petty cash fund. Figure 22–3 shows a typical petty cash requisition. This
form serves as the source of information for the check written to replenish
the petty cash fund. The check stub then serves as the source document for
the entry recorded in the general journal.
To prepare the petty cash requisition, the petty cashier
PETTY CASH REQUISITION first sorts the paid petty cash vouchers by account and
totals the vouchers for each account. The cashier records
Accounts for which the account title and total amount to be debited to it on the
payments were made: Amount
petty cash requisition. Review Figure 22–3 again. During
May On Your Mark made petty cash disbursements affecting
Supplies $24.45 the general ledger accounts Supplies, Delivery Expense,
Delivery Expense 19.00
Miscellaneous Expense, and Advertising Expense.
Miscellaneous Expense 29.50
Advertising Expense 14.80 The total of all paid petty cash vouchers is the amount of
cash needed to replenish the petty cash fund. After receiving
the petty cash requisition from the petty cashier, the accoun-
tant writes a check for the total of the paid vouchers. The
TOTAL CASH NEEDED
TO REPLENISH FUND $87.75
check is made payable to the petty cashier, who cashes the
check and places the money in the petty cash box.
Requested by:
Crystal Casteel Date
5/31/20--
Approved by:
Greta Keegan Date
5/31/20-- Using a Petty Cash Register
Check No.
2341 Some businesses use a petty cash register to record all
disbursements made from the petty cash fund. The petty
cash register is a supplemental record that summarizes the
Figure 22–3 Petty Cash types of petty cash disbursements. It is not an accounting journal because
Requisition
amounts from it are not posted to general ledger accounts.
Recording Petty Cash Vouchers in a Petty Cash Register.
Not all businesses that have a petty cash fund use a petty cash register. Those
who do might use a form similar to that shown in Figure 22–4. This illustra-
tion shows a typical petty cash register with vouchers recorded. It shows the
month’s disbursements following the fund’s establishment.
The establishment of the petty cash fund on May 1 is noted on line 2
of the register. On each line that follows, each petty cash payment is identi-
fied by date, voucher number, and a brief explanation. The amount of each
disbursement is entered in the Payments column and in the appropriate
Distribution of Payments column. The register has three special amount col-
umns: Supplies, Delivery Expense, and Miscellaneous Expense. The General
AS
YOU READ Amount column is used for petty cash payments that do not belong in one
of the three special amount columns. This column has two subdivisions,
Compare and one for the account name and the other for the amount.
Contrast
Totaling and Proving the Petty Cash Register. Replenishing
Change Fund and Petty the petty cash fund requires totaling and proving the petty cash register.
Cash Fund How is a Refer to Figure 22–4 as you read the following steps on totaling and proving
petty cash fund similar to a petty cash register:
a change fund? How is it
different? 1. Enter the date the fund is being replenished in the Date column.
Also enter the word Totals in the Description column.
650 Chapter 22 Cash Funds
640-667_CH22_868829.indd 650 9/17/05 1:26:45 PM
2. Single rule the amount columns.
3. Foot each amount column.
4. Verify that the total of the Payments column is equal to the total of
the Distribution of Payments columns.
Payments Distribution of Payments
$24.45 Supplies
19.00 Delivery Expense
29.50 Miscellaneous Expense
14.80 Advertising Expense
$87.75 $ 87.75
Once verified, the totals are recorded below the footings.
5. Draw a double rule under the amount columns to show that the
totals have been proved.
6. You will now enter the petty cash fund replenishment information.
Skip one line, and then enter the reconciled petty cash balance
(the amount of cash that should be in the petty cash box before it is
replenished). For On Your Mark, that amount is $12.25.
7. On the next line, write the amount of the check written to replenish
the petty cash fund.
8. Add the balance that should be in the petty cash fund and the
amount of the check. The sum should equal the original amount of
the petty cash fund.
PETTY CASH REGISTER PAGE 1
DISTRIBUTION OF PAYMENTS
DATE VOU. GENERAL
NO. DESCRIPTION PAYMENTS DELIVERY MISC.
SUPPLIES EXPENSE EXPENSE ACCOUNT NAME AMOUNT
1 20-- 1
2 May 1 — Est. Petty Cash ($100) 2
3 2 1 Printer paper 7 10 7 10 3
4 3 2 Postage on incoming mail 2 50 2 50 4
5 4 3 Newspaper Ad. 9 80 Adv. Expense 9 80 5
6 5 4 Gas & Parking 9 50 9 50 6
7 7 5 Daily newspaper 3 50 3 50 7
8 8 6 Collect telegram 1 25 1 25 8
9 10 7 Pens and pencils 2 50 2 50 9
10 12 8 Dara’s Delivery Service 9 50 9 50 10
11 16 9 Daily newspaper 3 50 3 50 11
12 18 10 Memo pads 8 45 8 45 12
13 20 11 Postage stamps 1 00 1 00 13
14 22 12 Ad in H.S. yearbook 5 00 Adv. Expense 5 00 14
15 26 13 File folders 6 40 6 40 15
16 29 14 Dara’s Delivery Service 9 50 9 50 16
17 30 15 Gas & tolls 8 25 8 25 17
8 7 75 2 4 45 1 9 00 2 9 50 1 4 80
18 31 Totals 8 7 75 2 4 45 1 9 00 2 9 50 1 4 80 18
19 19
20 Reconciled bal. $ 12.25 20
21 Replen. check 87.75 21
22 Total $100.00 22
23 23
Figure 22–4 A Typical Petty Cash Register
Section 2 The Petty Cash Fund 651
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AS As you can see, the petty cash register helps the petty cashier keep track
YOU READ of the petty cash disbursements by account. When the petty cash fund is
replenished, the totals of the special columns and the amounts recorded in
Key Point
the General column are listed on the petty cash requisition form.
Petty Cash Fund There
are only two instances Using a Petty Cash Envelope
when the Petty Cash
Small businesses sometimes use petty cash envelopes to record petty cash
Fund account is debited.
disbursements. A form very similar to the petty cash register is printed on
• to initially establish
the front of the petty cash envelope. Petty cash disbursements are recorded
the fund
• to increase the amount on the form on the envelope.
of money in it The paid petty cash vouchers are placed in the petty cash envelope.
When the petty cash fund is replenished, the petty cash envelope, contain-
ing all paid vouchers for the period, is sealed and filed. A new envelope is
used to record the next period’s petty cash disbursements.
Journalizing the Check to Replenish
the Petty Cash Fund
The check stub and the petty cash requisition are the source documents
for recording the journal entry for a check written to replenish the petty
cash fund. Let’s learn how to journalize transactions to replenish a petty
cash fund.
Notice that this transaction does not affect the Petty Cash Fund account.
Replenishing petty cash requires crediting Cash in Bank and debiting the
accounts for which petty cash payments were made.
B u s i n e s s Tr a n s a c t i o n
On May 31 Check 2341 is written to replenish the petty cash fund.
ANALYSIS Identify 1. The accounts affected are Supplies, Delivery Expense, Miscellaneous
Expense, Advertising Expense, and Cash in Bank.
Classify 2. Supplies is an asset account. Delivery Expense, Miscellaneous
Expense, and Advertising Expense are expense accounts. Cash in
Bank is an asset account.
/ 3. Supplies is increased by $24.45. Delivery Expense is increased by $19.
Miscellaneous Expense is increased by $29.50. Advertising Expense is
increased by $14.80. Cash in Bank is decreased by $87.75.
DEBIT-CREDIT RULE 4. Increases in asset accounts are recorded as debits. Debit Supplies for
$24.45. Increases in expense accounts are recorded as debits. Debit
Delivery Expense for $19; and Miscellaneous Expense for $29.50.
Debit Advertising Expense for $14.80.
5. Decreases in asset accounts are recorded as credits. Credit Cash in
Bank for $87.75.
652 Chapter 22 Cash Funds
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T ACCOUNTS 6. Supplies Delivery Expense
Debit Credit Debit Credit
24.45 19.00
Miscellaneous Expense Advertising Expense
Debit Credit Debit Credit
29.50 14.80
Cash in Bank
Debit Credit
87.75
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 41
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 May 31 Supplies 2 4 45 2
3 Delivery Expense 1 9 00 3
4 Miscellaneous Expense 2 9 50 4
5 Advertising Expense 1 4 80 5
6 Cash in Bank 8 7 75 6
7 Check 2341 7
8 8
Handling Cash Short and Over in the
Petty Cash Fund
How Do You Handle Shortages and Overages in the Petty
AS
Cash Fund?
YOU READ
The petty cashier could occasionally make an error when paying cash
from the petty cash fund. This will cause the amount of cash in the petty In Your Own Words
cash box not to agree with the reconciled petty cash balance. Any amounts Handling Cash Short
of cash gained or lost through errors made by the petty cashier are recorded and Over The journal
in the Cash Short & Over account. entry to replenish the
Let’s look at an example. At the end of June, Crystal Casteel, On Your petty cash fund debits
Mark’s petty cashier, classified and totaled the petty cash vouchers. The various accounts,
accounts affected by the petty cash disbursements follow: sometimes including
Cash Short and Over.
Supplies $15.75 Why debit these
Delivery Expense 20.45 accounts rather than the
Miscellaneous Expense 21.80 petty cash fund account?
Advertising Expense 25.00
83.00
Section 2 The Petty Cash Fund 653
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GENERAL JOURNAL PAGE 43
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 June 30 Supplies 15 75 2
3 Delivery Expense 20 45 3
4 Miscellaneous Expense 21 80 4
5 Advertising Expense 25 00 5
6 Cash Short & Over 1 50 6
Figure 22–5 Journal Entry
7 Cash in Bank 8 4 50 7
to Replenish the Petty Cash
8 8
Fund
The June petty cash disbursements totaled $83. Crystal then reconciled
the petty cash fund.
Original balance $100
Total of paid petty cash vouchers 83
Reconciled petty cash balance $ 17
Crystal counted the cash in the petty cash box and found only $15.50—
a shortage of $1.50 ($17.00 15.50). Bringing the petty cash fund up to the
original $100.00 requires $84.50 ($83.00 $1.50). The $1.50 cash shortage
is an expense and is debited to the Cash Short & Over account.
When Crystal prepared the petty cash requisition form, she listed the
accounts to be debited for the petty cash disbursements. She also indicated
that the Cash Short & Over account is to be debited for $1.50. The journal
entry to record the replenishment is shown in Figure 22–5.
A petty cash overage is recorded in a similar manner. If, for example, the
cash in the petty cash box is $17.75, a cash overage of 75¢ exists. Cash Short
& Over is credited for that amount in the journal entry. Instead of needing
$83.00 to replenish the fund, only $82.25 is required.
The cash shortage or overage is also reported in the petty cash register if
Figure 22–6 Recording a business uses one. Figure 22–6 shows how the June cash shortage of $1.50
a Cash Shortage in the Petty
is recorded in the petty cash register.
Cash Register
PETTY CASH REGISTER PAGE 2
DISTRIBUTION OF PAYMENTS
DATE VOU. GENERAL
NO. DESCRIPTION PAYMENTS DELIVERY MISC.
SUPPLIES EXPENSE EXPENSE ACCOUNT NAME AMOUNT
1 20-- 1
2 June 1 16 Postage stamps 5 00 5 00 2
14 30 29 Button 1 25 Adv. Expense 1 25 14
8 3 00 1 5 75 2 0 45 2 1 80 2 5 00
15 30 Totals 8 3 00 1 5 75 2 0 45 2 1 80 2 5 00 15
16 16
17 Reconciled bal. $ 17.00 17
18 Cash short (1.50) 18
19 Replen. check 84.50 19
20 Total $100.00 20
21 21
654 Chapter 22 Cash Funds
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SECTION 2 Assessment
AFTER
YOU READ
Reinforce the Main Idea
The journal entry to replenish
4RANSACTION $ESCRIPTION !CCOUNT $EBITED !CCOUNT #REDITED
the petty cash fund depends
on whether the fund is in
balance, over, or short. Use
a diagram like this one to
show the three possible
journal entries using the
accounts Cash in Bank,
Supplies, Delivery Expense,
Miscellaneous Expense,
and Cash Short and Over.
Do the Math
It is another busy day at Olde Time Swimming Hole, a private swimming facility for your
neighborhood. You have a summer job running the concession stand, and you maintain the
petty cash fund. To make your accounting easier, you record the cash sales and the petty cash
transactions in one report at the end of the day. You always attach the cash register tape to
prove the cash drawer. Using the following figures, determine the revenue and expenses for
the day. How much money will remain in the cash drawer?
Opening cash drawer $225
Petty cash fund 100
Cash sales 600
Pool supplies bought 55
Photocopy paper purchased 8
Problem 22–3 Analyzing PETTY CASH REQUISITION
a Source Accounts for which
Document payments were made: Amount
The petty cash clerk for Riddle’s Card Shop
Office Supplies $12.40
prepared the accompanying petty cash Postage Expense 12.00
requisition. Misc. Expense 16.00
Cash Short and Over ( .89)
Instructions Review the document and
prepare Check 973 to replenish the petty cash
TOTAL CASH NEEDED
fund in your working papers. TO REPLENISH FUND $39.51
Requested by:
Brent Roy Date
2/28/20--
Approved by:
Hugh Morrison Date
Check No.
941
Section 2 The Petty Cash Fund 655
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CH A P T ER 2 2 Summary
Key Concepts
1. A change fund is the money used to make change for cash transactions. To establish a change
fund, write a check for the fund amount payable to the person in charge of the fund. This
person will cash it and place the money in the designated cash register drawer. Here is the entry
to establish a change fund:
GENERAL JOURNAL PAGE
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Date Change Fund x x x xx 2
3 Cash in Bank x x x xx 3
4 4
2. At the end of each business day, a cash proof is prepared to reconcile the amount of cash in the
register to the recorded cash sales. To prove cash, count the cash in the cash register drawer,
subtract the change fund, and compare that amount with the amount of total cash sales, shown
on the cash register tape.
Counted cash in Total cash sales
cash register drawer Change Fund from cash register tape
If the two amounts do not agree, the shortage or overage is recorded in the Cash Short & Over
account.
Cash Short & Over
Debit Credit
Cash Cash
Shortages Overages
3. A petty cash fund is the cash a business has on hand for making small, incidental cash
payments. To open a petty cash fund:
• Estimate the amount of cash needed in the fund for a specific period.
• Write a check to the petty cashier, who is responsible for the cash.
• Record the transaction in the asset account Petty Cash Fund.
A petty cash fund is replenished by restoring the fund to its original amount. The cash balance
in the fund must be reconciled with the petty cash vouchers and then a petty cash requisition
form is prepared to replenish it.
4. Here is the entry to establish a petty cash fund:
GENERAL JOURNAL PAGE
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Date Petty Cash Fund x x x xx 2
3 Cash in Bank x x x xx 3
4 4
656 Chapter 22 Summary
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Summary C HAPT E R 22
5. The petty cashier prepares a petty cash requisition form to request that the petty cash fund be
replenished. The petty cash requisition includes this information:
• Name and total of each account for which payments were made
• Total amount of cash needed to replenish the fund
6. In some businesses, the petty cashier records petty cash disbursements in a petty cash register.
The following is recorded for each petty cash payment:
• date
• voucher number
• brief explanation for the payment
• amount paid
7. The journal entry to replenish a petty cash fund depends on its balance.
• If petty cash has no shortages or overages:
Debit: Various Assets and Expenses Credit: Cash in Bank
• If petty cash has a shortage:
Debit: Various Assets and Expenses Credit: Cash in Bank
Debit: Cash Short & Over
• If petty cash has an overage:
Debit: Various Assets and Expenses Credit: Cash in Bank
Credit: Cash Short & Over
8. At the end of each business day, a cash proof is prepared to reconcile the cash in the register to
the recorded cash sales.
• To record a cash shortage:
Debit: Cash in Bank Credit: Sales
Debit: Cash Short & Over Credit: Sales Tax Payable
• To record a cash overage:
Debit: Cash in Bank Credit: Sales
Credit: Sales Tax Payable
Credit: Cash Short & Over
Key Terms
change fund (p. 642) petty cash requisition (p. 650)
petty cash disbursement (p. 647) petty cash voucher (p. 648)
petty cash fund (p. 647) petty cashier (p. 647)
petty cash register (p. 650)
Chapter 22 Summary 657
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C H A P T ER 2 2 Review and Activities
AFTER
YOU READ
Check Your Understanding
1. Change Fund
a. What is a change fund?
b. Which accounts are debited and credited when a change fund is established?
2. Cash Register Proof
a. When is the amount in the cash register proved?
b. How is the cash register proof performed?
3. Petty Cash Fund
a. Why would a business set up a petty cash fund?
b. Explain the procedure for replenishing the petty cash fund.
4. Opening a Petty Cash Fund
a. Which accounts are debited and credited to establish a petty cash fund?
b. To whom is the check to establish a petty cash fund made payable?
5. Petty Cash Requisition
a. What is a petty cash requisition?
b. Explain how to prepare a petty cash requisition.
6. Petty Cash Register
a. What information is included on each line of the petty cash register?
b. Why is the petty cash register not considered a journal?
7. Replenishing a Petty Cash Fund
a. What is meant by reconciling the petty cash fund?
b. What accounts are debited when replenishing a petty cash fund?
8. Cash Short and Over
a. When does a cash shortage occur?
b. Explain why a cash shortage is treated like an expense.
Apply Key Terms
As the financial manager of The Tennis
Center, you believe a petty cash fund should
be established. Using these terms, prepare
a one-page memorandum to convince your
boss, Megan Long, to open a petty cash fund.
change fund petty cash register
petty cash petty cash requisition
disbursement petty cash voucher
petty cash fund petty cashier
658 Chapter 22 Review and Activities
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Computerized Accounting C HAPT E R 22
Maintaining Cash Funds
Making the Transition from a Manual to a Computerized System
Task Manual Methods Computerized Methods
Maintaining the • A check stub or deposit slip is the • Checks and deposits are automatically
check register source document for journalizing cash entered in the check register when
payments. transactions are journalized and posted.
• Add deposits/deduct the checks to keep • The checking account balance is
a running balance in the check register. updated as each transaction is posted.
Reconciling the • Compare the check register with the • Enter the bank statement balance.
bank statement bank statement. • Verify outstanding checks and deposits
• Add deposits in transit to the statement not included on statement.
balance. Deduct outstanding checks. • Record bank charges as a payment.
• Deduct bank charges from the check
register.
• Journalize and post bank charges.
Q&A
Peachtree Question Answer
How do I review the 1. From the Reports menu, select Accounts Payable.
check register? 2. From the Reports list, select Check Register and click Preview.
3. At the Filter window, set the range of checks to be displayed.
How do I reconcile the 1. From the Tasks menu, choose Account Reconciliation.
bank statement? 2. Select the account you wish to reconcile.
3. Enter the bank statement ending balance and date.
4. Mark the Clear box for each check and deposit listed on the statement.
5. Click Adjust to record the journal entry for the service charge.
6. If the unreconciled difference is $0.00, the reconciliation is complete.
QuickBooks Q & A
QuickBooks Question Answer
How do I review the 1. From the Reports menu, select Banking.
check register? 2. Select Check Detail, and enter the date range for this report.
How do I reconcile the 1. From the Banking menu, select Reconcile.
bank statement? 2. Select the account you wish to reconcile.
3. Enter the bank statement date and ending balance, and click Continue.
4. Mark each check and deposit that have cleared.
5. If the unreconciled difference is 0.00, the reconciliation is complete.
6. Click Reconcile Now to save the reconciliation.
For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers.
Chapter 22 Computerized Accounting 659
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C H A P T ER 2 2 Problems
Complete problems using: Manual Glencoe Peachtree Complete QuickBooks
OR OR
Working Papers Accounting Software Templates
Problem 22–4 Establishing a Change Fund
SMART GUIDE On February 1 Sunset Surfwear issued Check 115 to establish a change
Step–by–Step Instructions: fund of $150. At the end of the business day on February 2, the shop’s cash
Problem 22–4 register tape showed cash sales of $340 plus sales taxes of $17. An actual
1. Select the problem set cash count of the money indicated that $505 was in the cash register
for Sunset Surfwear drawer.
(Prob. 22–4).
2. Rename the company Instructions
and set the system date.
3. Record the entry to 1. Record the entry to establish the change fund on page 1 of the general
establish the change journal.
fund using the General
Journal Entry option.
2. Prepare a cash proof for Feb. 2. Sign your name on the
4. Manually prepare a cash Salesclerk line.
proof. 3. Record the cash sales for Feb. 2 on page 1 of the general journal.
5. Record the cash sales
using the General Analyze Determine whether the shortage or overage represents
Journal Entry option. revenue or expense to the business.
6. Print a General Journal
report and proof your
work.
7. Complete the Analyze Problem 22–5 Establishing and Replenishing a
activity.
8. End the session. Petty Cash Fund
InBeat CD Shop established a petty cash fund for $100.
Instructions
SMART GUIDE 1. In your working papers, record the entry to establish the petty cash
Step–by–Step Instructions: fund on page 6 of a general journal.
Problem 22–5 2. Record the entry for replenishing the petty cash fund on page 10 of
1. Select the problem set the general journal. There was $5 cash in the petty cash fund box on
for InBeat CD Shop February 28.
(Prob. 22–5).
2. Rename the company Date Transactions
and set the system date.
3. Record the entry to Feb. 1 Issued Check 112 for $100 to establish the petty cash fund.
establish the petty cash 28 Issued Check 146 to replenish the petty cash fund. Paid
fund. petty cash vouchers included Supplies, $40; Advertising
4. Record the entry to
replenish the petty cash
Expense, $16; Maintenance Expense, $27; and Miscellaneous
fund. Expense, $12.
5. Print a General Journal
report and proof your Analyze Conclude whether cash was short or over.
work.
6. Complete the Analyze
activity.
7. End the session.
TIP: Use the General
Journal Entry option to
record the petty cash fund
transactions.
660 Chapter 22 Problems
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Problems C HAPT E R 22
Problem 22–6 Establishing and Replenishing
a Petty Cash Fund SMART GUIDE
Shutterbug Cameras, a camera store, decided to establish a petty cash fund. Step–by–Step Instructions:
On February 1 the accountant, Al Rosen, issued Check 1018 for $70 to Problem 22–6
establish the fund. The following disbursements were made. 1. Select the problem set
for Shutterbug Cameras
Instructions (Prob. 22–6).
2. Rename the company
1. In your working papers, record the entry to establish the petty cash and set the system date.
fund on page 9 of a general journal. 3. Record the entry to
2. Make a list of the paid petty cash vouchers. establish the petty cash
fund.
3. Classify the petty cash disbursements by account. Calculate the total 4. List the petty cash
amount paid out for each account. vouchers and then
manually prepare a
4. Prepare a petty cash requisition, signing your name as the petty petty cash requisition.
cashier. On February 28 there was $1.50 in the petty cash box. 5. Record the entry to
5. Record the entry in the general journal (page 11) to replenish the petty replenish the petty cash
fund.
cash fund on February 28. Use Check 1191. 6. Print a General Journal
Date Transactions report and proof your
work.
Feb. 1 Purchased memo pads for the office, $2.75, Voucher 101 7. Complete the Analyze
(Supplies). activity.
8. End the session.
3 Prepared Voucher 102 for a newspaper ad, $7.50 (Advertising
Expense). TIP: Use the General
Journal Entry option to
5 Prepared Voucher 103 for the postage on an outgoing package, record the petty cash fund
$1.75 (Miscellaneous Expense). transactions.
8 Paid Dandy Delivery Service $5.65, Voucher 104 (Delivery
Expense). QuickBooks
10 Prepared Voucher 105 for pens and pencils, $3.75 (Supplies). PROBLEM GUIDE
12 Paid $2.20 for postage stamps, Voucher 106 (Miscellaneous
Expense). Step–by–Step Instructions:
Problem 22–6
15 Paid Dandy Delivery Service $6.75, Voucher 107 (Delivery
1. Restore the Problem
Expense).
22-6.QBB file.
20 Paid the news carrier $4.25 for delivery of the daily newspaper, 2. Record the entry to
Voucher 108 (Miscellaneous Expense). establish the petty cash
22 Bought typing paper for $7.50, Voucher 109 (Supplies). fund using the Write
Checks option.
25 Paid $4.50 to Dandy Delivery Service, Voucher 110 3. Record the petty cash
(Delivery Expense). vouchers using the Use
27 Prepared Voucher 111 for an advertisement, $10 (Advertising Register option.
4. Record the entry to
Expense). replenish the petty cash
28 Paid $4.40 for postage stamps, Voucher 112 (Miscellaneous fund using the Write
Expense). Checks option.
5. Print a Journal report
28 Prepared Voucher 113 for an advertisement, $7.50 (Advertising
and proof your work.
Expense). 6. Complete the Analyze
activity.
Analyze Calculate the total petty cash disbursements for Delivery 7. Back up your work.
Expense during February.
Chapter 22 Problems 661
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C H A P T ER 2 2 Problems
Problem 22–7 Using a Petty Cash Register
Cycle Tech Bicycles decided to establish a petty cash fund. On February 1
SOURCE DOCUMENT the accountant issued Check 3724 for $120 to establish the fund. The
PROBLEM following disbursements were made.
Problem 22–7 Instructions
Use the source documents 1. In your working papers, record the entry to establish the petty cash
in your working papers to
complete this problem.
fund in a general journal, page 5.
2. Enter the information about the establishment of the petty cash fund
on line 1 of a petty cash register, page 1.
3. Record the petty cash disbursements in the petty cash register.
SMART GUIDE 4. Foot, total, and prove the petty cash register on February 28.
Step–by–Step Instructions: 5. Record the petty cash fund replenishment information in the
Problem 22–7
explanation column below the totals. On February 28 there was $4.35
1. Select the problem set
for Cycle Tech Bicycles
in the petty cash box.
(Prob. 22–7). 6. Prepare a petty cash requisition form. Use the form provided in your
2. Rename the company working papers and sign your name as petty cashier.
and set the system date.
3. Record the entry to a 7. Record the issuance of Check 3875 to replenish the petty cash fund in
petty cash fund. the general journal, page 8.
4. Manually record petty
cash disbursements. Date Transactions
5. Manually prepare a
Feb. 2 Prepared Voucher 1 for a $9.25 newspaper advertisement
petty cash requisition.
6. Record the entry to (Advertising Expense).
replenish petty cash. 5 Prepared Voucher 2 for pens and pencils, $5 (Supplies).
7. Print a General Journal. 9 Paid $12.50 for flowers for an employee’s birthday, Voucher 3
8. Complete the Analyze
activity. (Miscellaneous Expense).
9. End the session. 12 Bought cash register tape for $3.95, Voucher 4 (Supplies).
19 Prepared Voucher 5 for $15 to pay National Express for parts
QuickBooks delivered (Delivery Expense).
PROBLEM GUIDE 20 Paid $3.90 for postage stamps, Voucher 6 (Miscellaneous
Expense).
Step–by–Step Instructions: 22 Paid $16 to have the show window cleaned, Voucher 7
Problem 22–7
(Miscellaneous Expense).
1. Restore the Problem
24 Bought an $11 advertisement in the local newspaper,
22-7.QBB file.
2. Record the entry to Voucher 8 (Advertising Expense).
establish the petty cash 25 Bought stationery for $10, Voucher 9 (Supplies).
fund using the Write 26 Prepared Voucher 10 to National Express for packages
Checks option.
3. Record the petty cash delivered, $8.25 (Delivery Expense).
vouchers using the Use 27 Prepared Voucher 11 incorrectly and voided it.
Register option. 27 Purchased memo pads for the office for $3, Voucher 12
4. Record the entry to
replenish the petty cash
(Supplies).
fund using the Write 28 Paid the news carrier a $4 tip for the daily newspaper
Checks option. delivery, Voucher 13 (Miscellaneous Expense). CONTINUE
5. Print a Journal report.
6. Complete the Analyze
activity.
7. Back up your work.
662 Chapter 22 Problems
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Problems C HAPT E R 22
Date Transactions (cont.)
28 Paid $6.80 for postage stamps, Voucher 14 (Miscellaneous
Expense).
28 Prepared Voucher 15 for a $10 newspaper advertisement
(Advertising Expense).
Analyze Identify the number of payments that were made from the
petty cash fund during the month of February.
Problem 22–8 Handling a Petty Cash Fund
River’s Edge Canoe & Kayak petty cash fund was established on February 1 SMART GUIDE
for $100, by writing check 1763. The accounts for which petty cash Step–by–Step Instructions:
disbursements are likely to be made include Supplies, Gas Expense, Problem 22–8
Advertising Expense, Delivery Expense, and Miscellaneous Expense. 1. Select the problem set
for River’s Edge Canoe
Instructions & Kayak (Prob. 22–8).
1. In your working papers, record the entry to establish the petty cash 2. Rename the company
and set the system
fund on page 12 of a general journal.
date.
2. Record the establishment of the fund on the first line of the petty cash 3. Record the entry to
register, page 1. establish the petty cash
fund.
3. Record each petty cash disbursement in the petty cash register. 4. Manually record
4. Foot, prove, total, and rule the petty cash register on February 28. the petty cash
disbursements.
5. Reconcile the petty cash fund. The amount in the petty cash box
5. Reconcile the petty
is $1.50. cash register and
6. Prepare a petty cash requisition. Sign your name as petty cashier. manually prepare a
petty cash requisition.
7. Record the entry to replenish the petty cash fund by issuing Check 6. Record the entry to
1798 in the general journal, page 15. replenish the petty cash
fund.
8. Record the replenishment information in the petty cash register.
7. Record the entry to
9. The accountant believes the petty cash fund should be increased by increase the petty cash
$25. Record the issuance of Check 1799 on February 28. fund.
8. Print a General Journal
Date Transactions report and proof your
work.
Feb. 1 Bought an $8 advertisement in the local newspaper, 9. Complete the Analyze
Voucher 101. activity.
2 Prepared Voucher 102 for $7.50 to pay Mercury Messenger for 10. End the session.
packages delivered.
3 Bought adding machine tape for 75¢, Voucher 103.
5 Paid $9.50 for flowers for an employee’s birthday,
Voucher 104. CONTINUE
Chapter 22 Problems 663
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C H A P T ER 2 2 Problems
Date Transactions (cont.)
7 Prepared Voucher 105 for $5.25 for a typewriter ribbon.
9 Paid $4.40 for postage stamps, Voucher 106.
12 Bought $9 worth of gasoline, Voucher 107.
15 Paid $8.50 to have the shop’s windows washed, Voucher 108.
18 Bought memo pads, pencils, and pens for office use, $6.30,
Voucher 109.
20 Prepared Voucher 110 for $7.50 to pay Mercury Messenger for
packages delivered.
23 Prepared Voucher 111 incorrectly and voided it.
23 Bought stationery for $8, Voucher 112.
27 Paid the news carrier $4.75 for the daily newspaper,
Voucher 113.
28 Prepared Voucher 114 for $7.50 to pay Mercury Messenger for
packages delivered.
28 Bought gasoline, $5.80, Voucher 115.
28 Prepared Voucher 116 for a newspaper advertisement, $5.
Analyze List the petty cash disbursements that are charged to the
Miscellaneous Expense account.
CHALLENGE Problem 22–9 Locating Errors in a
PROBLEM
Petty Cash Register
On February 1 a petty cash fund of $150 was established for Buzz
Newsstand, Check 1198. The petty cashier writes a voucher for each petty
cash disbursement. The vouchers are entered in a petty cash register, which
is included in your working papers. When the petty cash register was
totaled on February 28, the accounting clerk discovered that the footings
of the Distribution of Payments columns did not equal the total of the
Payments column.
Instructions
1. Compare the petty cash disbursement information in your working
papers with the entries in the petty cash register.
2. Correct any errors you find in the petty cash register by drawing a line
through the incorrect item and writing the correction above it.
3. Total all columns after the corrections are made.
4. Record the replenishment information on the register. The amount in
the petty cash box on February 28 was $8.10.
Analyze Explain how you determined the amount of the check to
replenish the petty cash fund on February 28.
664 Chapter 22 Problems
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Winning Competitive Events CHAPTER 22
Practice your test-taking skills! The questions on this page are reprinted with permission
from national organizations:
• Future Business Leaders of America
• Business Professionals of America
Use a separate sheet of paper to record your answers.
Future Business Leaders of America
MULTIPLE CHOICE
1. An amount of cash kept on hand and used for making small payments is called
a. revenue. d. prepaid interest.
b. cash. e. none of these answers
c. petty cash.
2. A form showing proof of a petty cash payment is a
a. check. c. petty cash check stub.
b. petty cash slip. d. journal.
3. A petty cash on hand amount that is more than a recorded amount is called
a. cash over. c. cash credit.
b. cash short. d. cash debit.
Business Professionals of America
MULTIPLE CHOICE
4. The entry to replenish the petty cash fund requires
Debit Credit
a. Petty Cash Fund Cash
b. Petty Cash Expense Petty Cash Fund
c. Cash Petty Cash Fund
d. Various Expense accounts Cash
5. Michelle is a cashier for The Pet Store. When she counted the cash in her register
drawer at the end of the day, the total was $959.74. According to the electronic
register, she should have had a balance of $969.85. Was Michelle short or over in
her drawer and by how much?
a. $10.11 short c. $10.38 short
b. $10.11 over d. $10.38 over
Need More Help?
Go to glencoeaccounting.glencoe.com and
click on Student Center. Click on Winning
Competitive Events and select Chapter 22.
• Practice Questions and Test-Taking Tips
• Concept Capsules and Terminology
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C H A P T ER 2 2 Real-World Applications and Connections
Critical Cash Funds
Thinking 1. What form is used to control payments from the petty cash fund?
2. What happens to cash in a cash register drawer at the end of a business day?
3. You are the petty cashier responsible for the petty cash fund. You counted the
cash in the petty cash box and found that you will likely run out of petty cash
soon. What would you do to restore the fund to its original cash balance?
4. How do you find out whether a petty cash fund amount is short or over?
5. Summarize the steps involved in replenishing the petty cash fund. What are
the source document(s) for recording the journal entry, and which account(s)
is (are) used to make the journal entry?
6. Which problem do you think is more serious in a change fund: cash short or
cash over? Why?
CASE Merchandising Business: Health Foods
STUDY The Healthy Alternative sells vitamins and natural health-care products. It has
two electronic cash registers that track inventory and record sales directly to
the computerized accounting system. The store owner is concerned because the
actual cash on hand is usually short when it is compared to the sales records.
INSTRUCTIONS
1. You work for a local CPA firm that is auditing The Healthy Alternative’s
accounting records. What advice would you give the owner about cash
controls and protection?
2. Explain to the owner why it is important for the cash records to match the
accounting records.
a
mattoefr ETHICS Borrowing from Petty Cash
You are the petty cashier for a local theater group. Its petty cash fund pays for taxi
fares to and from the airport for actors, directors, and set designers. Today you
forgot to bring cash for your lunch. You consider borrowing $5 from the petty
cash fund and leaving an IOU. After all, you will pay it back tomorrow.
ETHICAL DECISION MAKING
1. What are the ethical issues? 4. How do the alternatives affect the
2. What are the alternatives? parties?
3. Who are the affected parties? 5. What would you do?
$ )) ))
Communicating
Process to Increase the Change Fund
ACCOUNTING Retro Threads sells designer vintage clothing on consignment. The shop is open
only on Fridays and Saturdays and does a brisk business. You maintain the
accounting records for the shop. Dorothy Douglas, the owner, wants to increase
the change fund from $100 to $200. Write her a note explaining the transaction.
Remind her to notify the salesclerks that the change fund will increase by $100.
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Real-World Applications and Connections C HAPT E R 22
Skills Beyond Integrity
NUMBERS Fun Farm is a hands-on, educational working farm where elementary students
learn about planting crops and raising animals. In auditing its petty cash fund,
you notice some unusual disbursements and cash shortages. You suspect an
employee is taking funds from it and not preparing a voucher or falsifying one.
Discuss with a partner how you should handle this situation.
INTERNATIONAL International Monetary Fund
When Kenya suffered a severe drought in 2000, the International Monetary Fund
Accounting (IMF) helped with a $52 million loan. The IMF helps promote a healthy world
economy through exchange rate stability, the growth of international trade, and
monitoring economic developments. Its members can get technical advice and
training or financial assistance to correct underlying economic problems.
INSTRUCTIONS Summarize benefits available to IMF members.
Making It
Your Spending Records
Personal You should track your cash daily to be aware of the cash you have at the start
and end of each day. If the amounts differ, you should have receipts for expenses
or estimate where the remainder went such as for cold drinks or snacks. If
you cannot account for the difference, you should pay more attention to
spending cash.
PERSONAL FINANCE ACTIVITY For three days, track your personal expenses like a
petty cash fund. Record how much you spend on each item on an envelope or
sheet of paper. At the end of each day, is your cash over or short?
PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and
click on Student Center. Click on Making It Personal and select Chapter 22.
Analyzing Calculating Price-Earnings Ratio
Financial To decide whether to buy stock, analysts and investors look at stock prices over
Reports time and calculate the price-earnings (PE) ratio. It compares a stock’s current
market value with its earnings per share. Suppose a company has a PE ratio of
10. At that price, investors are willing to pay $10 for every dollar of last year’s
earnings. Companies that are expected to grow will have a higher PE ratio than
companies in decline. To calculate the PE ratio:
Current market value per share
Price-earnings ratio
Earnings per share
INSTRUCTIONS Use PETsMART’s consolidated statements of operations in
Appendix F to answer these questions. Use the “Basic” earnings per share figure,
and round your answer to the nearest whole number.
1. For the fiscal year ended February 1, 2004, calculate the PE ratio assuming
PETsMART stock is selling at (a) $32.50 per share and (b) $35.00 per share.
2. Describe how stock price affects the PE ratio. How would you use this ratio in
deciding which stocks to buy?
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CH A P T ER 2 3 Plant Assets
and Depreciation
BEFORE
YOU READ
What You’ll Learn Predict
1. Identify plant assets. 1. What does the chapter title tell you?
2. What do you already know about this subject from personal experience?
2. Explain the need to depreciate
3. What have you learned about this in the earlier chapters?
plant assets.
4. What gaps exist in your knowledge of this subject?
3. Calculate annual depreciation
of plant assets.
4. Calculate partial-year
depreciation of plant assets.
Exploring the Real World of Business
5. Determine the book value of DEPRECIATING ASSETS
a plant asset.
6. Record depreciation of plant
Rush Trucking
assets. If you owned a trucking company, would you get up at
3 a.m. to deliver shipments yourself? Andra Rush did when she
7. Prepare depreciation
started Rush Trucking in 1984. She also worked the phones as
schedules.
dispatcher, made sales calls, and repaired trucks.
8. Define the accounting terms Rush started her company with only three trucks purchased
introduced in this chapter.
with her savings. “I believed that if we could get the business,
Why It’s Important we would do a good job and that would lead to repeat business
and bigger contracts,” Rush said about her business strategy.
The matching principle
▲
requires expenses to be Rush Trucking now earns over $125 million annually and
matched with revenues. operates 2,000 tractors and 3,900 trailers.
Companies like Rush Trucking generate revenue with long-
term assets. Depreciation allows them to match the cost of
assets to revenue over several accounting periods.
What Do You Think?
What do you think Rush Trucking considers when it
matches truck costs to revenue?
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Working in the Real World
APPLYING YOUR ACCOUNTING KNOWLEDGE
Personal Connection
All businesses have assets. Some of those In your workplace are there assets that are
assets become less useful because over time wearing out or need to be replaced? What
they wear out or become obsolete. Examples are they?
of these depreciable assets are company trucks
and computers. You will learn how to identify Online Connection
depreciable assets, how to set up depreciation Go to glencoeaccounting.glencoe.com and click
schedules, and how to make the adjusting entry on Student Center. Click on Working in the
for depreciation expense in this chapter. Real World and select Chapter 23.
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SECTION 1 Plant Assets and Equipment
Businesses own many different types of assets. One category of asset
BEFORE
YOU READ requires special treatment in the accounting records. These assets, such
as office equipment and buildings, have two things in common:
Main Idea • They are expected to produce benefits for the business for more than
A business uses plant one year.
assets for more than one • They are purchased for use in operating the business, not for resale.
accounting period, so it Rush Trucking owns many assets in this category, including com-
spreads the cost of these puter equipment, office equipment, and trucks. Let’s explore how busi-
assets over a number of nesses account for these types of assets.
years.
Read to Learn… Current and Plant Assets
➤ the difference between How Do You Match the Cost of Assets to the Revenue They
current assets and plant Help Generate?
assets. (p. 670) Throughout this textbook you have learned about various assets that
➤ four factors used to a business uses in its operation. These assets can be classified as current
estimate the depreciation assets or plant assets.
of plant assets. (p. 671)
Current Assets Plant Assets
Key Terms
plant assets Assets that are either consumed Long-lived assets that are used in
depreciation or converted to cash during the the production or sale of other
disposal value normal operating cycle of the assets or services over several
straight-line depreciation business, usually one year. accounting periods.
Examples are: Examples are:
• cash • land
• accounts receivable (cash to • buildings
AS
YOU READ be collected from customers
within a short period of time)
•
•
delivery equipment
store equipment
Key Point • merchandise (sold within a • office equipment
short period of time)
Plant and Current
Assets Current assets
will be consumed or In Chapter 18 you learned about assets such as supplies and prepaid
converted to cash in insurance. As these assets are used, their costs are converted to expenses.
one accounting period. This conforms to the matching principle of accounting, which states that
Plant assets will be during an accounting period, expenses must be matched with the rev-
used for more than one enue earned. Since current assets are consumed within one accounting
accounting period. period, the costs of current assets can be easily matched to the revenue
for the period.
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Estimating Depreciation AS
YOU READ
of a Plant Asset Compare and
What Four Factors Are Used to Estimate Depreciation? Contrast
Plant assets are used over a number of accounting periods. To follow the Current and Plant
matching principle, the cost of a plant asset is spread over, or allocated to, Assets How are current
the periods in which the asset will be used to produce revenue. assets and plant assets
Allocating, or spreading the cost of a plant asset over that asset’s useful similar and different?
life is called depreciation . For accounting purposes businesses depreciate
all plant assets except land. The cost of land is not depreciated because land
is considered to have an unlimited useful life. In this chapter you will learn
how to calculate and record the depreciation of plant assets.
For example, suppose that a plant asset costs $40,000 and has a useful
life of 10 years. The cost of the asset is depreciated over 10 years. A portion of
the $40,000 is transferred to an expense account each year. At the end of 10
years, the cost of this plant asset will have been recognized as an expense.
It is important to remember that
depreciation is an estimate. No one
can predict with certainty the useful
life or the disposal value of an asset.
Four factors are used to calculate
depreciation of a plant asset:
• its cost
• its estimated useful life
• its estimated disposal value
• the depreciation method used
Plant Asset Cost
The cost of a plant asset is the
price the business paid to purchase it
plus any sales taxes, delivery charges,
and installation charges. The total
cost is the amount debited to the
plant asset account (for example,
Delivery Equipment) at the time of
purchase.
AS
YOU READ
Estimated Useful Life of a Plant Asset
The estimated useful life of a plant asset is the number of years it is In Your Experience
expected to be used before it wears out, becomes outdated, or is no longer What personal assets do
needed by the business. The number of years a plant asset can be used varies individuals use for more
from one asset to another. A delivery truck might have a useful life of six than one year?
years. A building, on the other hand, might have a useful life of 30 years.
Section 1 Plant Assets and Equipment 671
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In estimating useful life, the accountant considers past experiences with
MATH HINTS the same type of asset. The Internal Revenue Service (IRS) also publishes
Rounding Cents guidelines on the estimated useful lives for many types of assets.
• Look at the digit to the
right of the hundredths Estimated Disposal Value of a Plant Asset
digit.
At some point a plant asset will be replaced or discarded. Usually this
• If it is 5 or more, round
up. occurs while the asset still has some monetary value. For example, if a busi-
• If it is less than 5, do not ness buys a new delivery truck, the old delivery truck can often be traded in
change the hundredths to reduce the price of the new truck.
digit. The estimated amount that a plant asset will be worth at the time of its
Correct: replacement is called the disposal value . The disposal value assigned to a
8.0347 8.03 4 is less
plant asset is an estimate that is based on previous experience. The IRS also
than 5 so the hundredths
digit does not change. publishes guidelines on disposal values.
Incorrect:
8.0347 8.035 8.04 Depreciation Methods
Several methods for computing depreciation expense are acceptable. In
this course you will learn a simple, widely used depreciation method called
the straight-line method. Straight-line depreciation equally distributes the
depreciation expense over the asset’s estimated useful life. Other methods
of computing depreciation include units-of-production and accelerated
methods.
• Units-of-production method estimates useful life measured in units of use
rather than units of time.
• Accelerated depreciation methods are based on the theory that an asset
loses more value in the early years of its useful life than in the later
years. Two types of accelerated depreciation are the sum-of-the-years’-
digits method and the declining-balance method.
Depreciation for Tax Reporting
The federal income tax law has rules for depreciating assets. These rules
include the accelerated cost recovery system (ACRS). It is called acceler-
ated because it allows the business to recognize depreciation expense over
a shorter period of time. The ACRS method does not take disposal value
into consideration. Con-
gress modified ACRS in
1986 resulting in MACRS
(pronounced makers), the
modified accelerated cost
recovery system. This system
is used for tax accounting
purposes only. It is not
used for business financial
reports. It is intended to be
an incentive for businesses
to invest in plant assets.
The higher depreciation
expense results in a lower
income tax liability.
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SECTION 1 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Use a diagram like this one
to show the four factors that
are used to calculate a plant
asset’s depreciation.
#ALCULATING
$EPRECIATION
Do the Math
You work for Island Tropics, a trendy clothing store. It recently purchased a computer system
for $20,000. The computers have an estimated useful life of five years. The $20,000 cost
can be depreciated over the useful life of the asset as an expense on the tax return of the
business. What is the amount that can be deducted each year as an expense if the computer’s
estimated disposal value is $1,000 and the straight-line depreciation method is used?
Problem 23–1 Classifying Asset Accounts
Listed here are the assets of New England Sports Equipment Inc.
Accounts Receivable Office Equipment
Building Office Furniture
Cash in Bank Petty Cash Fund
Change Fund Prepaid Insurance
Delivery Equipment Store Equipment
Land Supplies
Merchandise Inventory
Instructions In your working papers, indicate whether each asset listed is a current asset or
a plant asset by placing a check mark in the correct column. The first account is completed as
an example.
Asset Current Asset Plant Asset
Accounts
✔
Receivable
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SECTION 2 Calculating Depreciation
On Your Mark Athletic Wear purchased a delivery truck on January 5
BEFORE
YOU READ for $16,500 cash. The truck has an estimated disposal value of $1,500
and an estimated useful life of five years.
Main Idea
Businesses maintain a Calculating Depreciation
record of each plant asset How Do You Calculate Plant Asset Depreciation?
and its related depreciation. To calculate depreciation you need to know the cost of the truck, its
Read to Learn… estimated useful life, and its estimated disposal value.
➤ how to calculate First calculate the amount to be depreciated:
depreciation. (p. 674) Original Estimated Amount
➤ how to determine book Cost Disposal Value to Be Depreciated
value. (p. 675)
$16,500 $1,500 $15,000
Key Terms
accumulated depreciation The estimated disposal value represents the part of the asset’s cost
book value that the business expects to recover. Therefore, the estimated disposal
value should not be treated as an expense.
Straight-Line Depreciation
Calculate the annual depreciation expense using the straight-line
method:
Amount Estimated Annual
to Be Depreciated Useful Life Depreciation Expense
$15,000 5 $3,000
The annual depreciation expense for the delivery truck is $3,000.
For straight-line depreciation, the depreciation rate is 1 divided by the
years of useful life. In this example the depreciation rate is 20% per year
(1 5 years).
Note that the $3,000 depreciation expense is for a full year. Suppose that
On Your Mark purchased the delivery truck on April 5 instead of January 5.
During the first year, the delivery truck will be used for only nine months.
Therefore, the depreciation expense is calculated for nine months.
Annual Fraction Partial Year
Depreciation Expense of Year Depreciation Expense
$3,000 9/12 $2,250
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Declining-Balance Depreciation AS
YOU READ
With the declining-balance method, the annual depreciation expense is
the asset’s book value multiplied by the declining-balance rate. The declining- Key Point
balance rate can vary, but it is usually double the straight-line rate. For a Original Cost
five-year asset, the rate is 40% (2 [1 5]). Accumulated
Disposal value is not used in the computation. However, after the last Depreciation
year of depreciation, the total depreciation expense “stops” at the asset’s Book Value
disposal value. The annual depreciation expense for the truck’s first year is
$6,600 ($16,500 40%).
Plant Asset Records
Where Do You Record Plant Asset Values?
Businesses maintain records for each plant asset and the depreciation
taken for that asset. The record in Figure 23–1 provides detailed information
about the delivery truck, including:
1. the date of purchase 4. annual depreciation
2. the original cost 5. accumulated depreciation
3. the estimated useful life 6. book value at the end of each year
The lower part of the plant asset record contains the depreciation
schedule. The amount of depreciation expense accumulates from one year
to the next. Accumulated depreciation is the total amount of depreciation
for a plant asset that has been recorded up to a specific point in time. The
accumulated depreciation at the end of the third year is $9,000.
The far right column of the depreciation schedule shows the book value
of the plant asset, the original cost less accumulated depreciation.
At the end of the third year, the book value of the delivery truck is
$7,500 ($16,500 $9,000). Note that the delivery truck’s book value at
the end of five years is $1,500. This is the truck’s estimated disposal value.
Under the straight-line method, it cannot be depreciated below its estimated
disposal value.
PLANT ASSET RECORD
ITEM
Delivery Truck GENERAL LEDGER ACCOUNT
Delivery Equipment
SERIAL NUMBER
2911-50041 MANUFACTURER
VanPower
PURCHASED FROM
Winding Creek Auto EST. DISPOSAL VALUE
$1,500.00
ESTIMATED LIFE
5 years 3 LOCATION
Company Garage
4
DEPRECIATION DEPRECIATION
METHOD
Straight-line PER YEAR
$3,000.00
5
ASSET ACCUMULATED DEPRECIATION
BOOK
DATE EXPLANATION
VALUE
DEBIT CREDIT BALANCE DEBIT CREDIT BALANCE
1 1/5/2008 Purchased 16,500 2 16,500 6 16,500
12/31/2008 3,000 3,000 13,500
12/31/2009 3,000 6,000 10,500
12/31/2010 3,000 9,000 7,500
12/31/2011 3,000 12,000 4,500
12/31/2012 3,000 15,000 1,500
Figure 23–1 Plant Asset
Record
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SECTION 2 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Using a diagram like this 3TEPS TO 2ECORD $EPRECIATION
one, show the step-by-step
procedure to record the first
year’s depreciation using the
straight-line method.
Do the Math
Office furniture for Teen Counseling Center is estimated at a total value of $45,000 with a
10% disposal value. The estimated useful life is four years. Calculate the annual depreciation
expense for the office furniture using the straight-line method.
Problem 23–2 Calculating Depreciation Expense
Instructions
For each of the following plant assets:
1. calculate the amount to be depreciated,
2. calculate the annual depreciation expense using the straight-line method,
3. calculate the depreciation expense for the first year.
Use the form provided in your working papers.
Months Estimated
Owned Original Disposal Estimated
Plant Asset First Year Cost Value Useful Life
1. Cash register 8 $ 450 $ 30 7 years
2. Computer 2 6,500 1,500 5 years
3. Conference table 6 1,900 100 25 years
4. Delivery truck 3 36,400 6,400 5 years
5. Desk 11 3,180 300 20 years
Problem 23–3 Completing a Plant Asset Record
Use the following information to complete the blank asset record found in your working
papers. The company uses the straight-line method for depreciating all plant assets. Item
Purchased: Xerox Copier—Serial No. X42599757, $12,500, from K&C Office Equipment.
Purchased: 10/1/2011
Estimated Life: 5 years
Location: Executive Offices
Estimated Disposal Value: $1,700
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SECTION 3 Accounting for Depreciation
Expense at the End of a Year
After depreciation on plant assets has been calculated, adjustments
BEFORE
are made to record depreciation for the period. These adjustments bring YOU READ
the general ledger into agreement with the plant asset records.
Main Idea
Adjusting for Depreciation Expense An end-of-period
How Do You Adjust for Depreciation Expense? adjusting entry is made for
When a plant asset is purchased, the accountant sets up a deprecia- depreciation expense.
tion schedule for the asset like the one in Figure 23–1 on page 675. The Read to Learn…
amount of depreciation expense for each plant asset is recorded in the ➤ the accounts used to
accounting records at the end of the year. The information to record the record depreciation.
adjustments for depreciation comes from the plant asset records. (p. 677)
Many businesses prepare a summary of depreciation expense for ➤ how to journalize
each type of plant asset. For example, a business may have 10 delivery adjusting and closing
trucks. Each truck has its own plant asset record. At the end of the year, entries for depreciation
the depreciation expense for all 10 trucks is totaled. This total is entered expense. (p. 681)
on a summary form under the name of the asset account, in this case,
Delivery Equipment. Figure 23–2 shows On Your Mark’s depreciation
summary form for its plant assets.
On Your Mark’s total depreciation expense for the year is $33,000. This
amount includes the depreciation expense for all plant assets. The accumu-
lated depreciation for all of On Your Mark’s plant assets is $100,250.
Making the Depreciation Expense Adjustment
The adjustment for depreciation affects two accounts: Depreciation
Expense and Accumulated Depreciation.
The Depreciation Expense Account. Depreciation Expense is
an expense account. During the year the account has a zero balance because
2008 SUMMARY OF DEPRECIATION EXPENSE
December 31, 2008
Depreciation Depreciation
Asset Cost Expense to Date
Building 50,000 2,500 8,125
Delivery Equipment 16,500 3,000 9,000
Office Equipment 50,000 2,500 8,125
Store Equipment 250,000 25,000 75,000
Totals 366,500 33,000 100,250
Figure 23–2 Depreciation
Summary Form
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the adjustment for depreciation is recorded at the end of the period. Depre-
AS
YOU READ ciation Expense is reported on the income statement. At the end of the
year, Depreciation Expense is closed to Income Summary.
Instant Recall
Businesses have a depreciation expense account for each type of plant
Adjusting Entries An asset. Some examples are:
adjusting entry affects
• Depreciation Expense—Delivery Equipment (trucks, vans, automobiles)
one permanent account
• Depreciation Expense—Office Furniture (desks, chairs, filing cabinets)
and one temporary
account. The Accumulated Depreciation Account. The balance of
Accumulated Depreciation represents the total amount of depreciation
expensed since the business purchased the asset. Each type of plant asset has
an accumulated depreciation account. Typical account names are:
• Accumulated Depreciation—Delivery Equipment
• Accumulated Depreciation—Building
Accumulated Depreciation is classified as a contra asset account. Recall
that the balance of a contra account reduces the balance of its related
account. In the case of an accumulated depreciation account, the related
account is a plant asset account. For
Accumulated Depreciation
example, if the asset account is Delivery
Equipment, the contra asset account is Debit Credit
Accumulated Depreciation—Delivery Decrease Side Increase Side
Equipment. Normal Balance
The debit and credit rules for an accu- Side
mulated depreciation account are oppo-
site those for an asset account. The balance of an accumulated depreciation
account is reported on the balance sheet as a decrease to its related plant
asset account.
Account Name
Asset Expense Contra Asset
Del. Equip. Depr. Exp.—Del. Equip. Accum. Depr.—Del. Equip.
Office Equip. Depr. Exp.—Office Equip. Accum. Depr.—Office Equip.
Store Equip. Depr. Exp.—Store Equip. Accum. Depr.—Store Equip.
The Adjustment. Let’s learn how to record depreciation of plant
assets. Look at On Your Mark’s depreciation schedule in Figure 23–1 on
page 675. The delivery truck annual depreciation expense is $3,000.
Adjustment
On December 31 the accounting clerk for On Your Mark records the depreciation for the delivery truck.
ANALYSIS Identify 1. The accounts affected are Depreciation Expense—Delivery Equipment
and Accumulated Depreciation—Delivery Equipment.
Classify 2. Depreciation Expense—Delivery Equipment is an expense account.
Accumulated Depreciation—Delivery Equipment is a contra asset
account.
/ 3. Both Depreciation Expense—Delivery Equipment and Accumulated
Depreciation—Delivery Equipment are increased by $3,000.
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DEBIT-CREDIT RULE 4. Increases to expense accounts are recorded as debits. Debit
Depreciation Expense—Delivery Equipment for $3,000.
5. Increases to contra asset accounts are recorded as credits. Credit
Accumulated Depreciation—Delivery Equipment for $3,000.
T ACCOUNTS 6. Depreciation Expense— Accumulated Depreciation—
Delivery Equipment Delivery Equipment
Debit Credit Debit Credit
3,000 3,000
Accountants make similar adjustments to record depreciation for other
plant assets, such as buildings and office equipment.
Analysis of the Accumulated Depreciation Account. Sup-
pose this is the end of the third year of the estimated useful life of On Your
Mark’s delivery truck. For each year the same adjustment was made to record
the depreciation of the delivery truck:
• a debit to Depreciation Expense—Delivery Equipment
• a credit to Accumulated Depreciation—Delivery Equipment
After the books have been closed each year, the Depreciation Expense—
Delivery Equipment account has a zero balance. (Remember that expense
accounts are closed at the end of each year.) In contrast the Accumulated
Depreciation—Delivery Equipment account shows the total amount of
depreciation expensed since the asset was purchased. At the end of the third
year, the total is $9,000.
Accumulated Depreciation—
Delivery Equipment
Debit Credit
3,000 (first year depreciation)
3,000 (second year depreciation)
3,000 (third year depreciation)
Bal. 9,000
Recording Depreciation Adjustments AS
on a Work Sheet YOU READ
After preparing the adjustment for depreciation, the accountant enters In Your Own Words
it in the Adjustments section of the work sheet. Recording Depreciation
Refer to Figure 23–3 on pages 680 and 681. Locate the accumulated On December 31 the
depreciation accounts in the Trial Balance Credit column ($6,000 and accounting clerk records
$5,625). Note that the depreciation expense accounts do not have balances the depreciation for a
in the Trial Balance section. Adjustments (e) and (f) are entered in the plant asset. What does
Adjustments section to show the depreciation adjustments for the year. Note this mean?
that the depreciation expense accounts are debited and the accumulated
depreciation accounts are credited. Also note that no adjustments are made
to the asset accounts.
Section 3 Accounting for Depreciation Expense at the End of a Year 679
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On Your Mark
Work
For the Year Ended
ACCT. TRIAL BALANCE ADJUSTMENTS
NO. ACCOUNT NAME
DEBIT CREDIT DEBIT CREDIT
8 140 Delivery Equipment 16 5 0 0 00
9 142 Accum. Depr.—Delivery Equip. 6 0 0 0 00 (e) 3 0 0 0 00
10 145 Office Equipment 50 0 0 0 00
11 147 Accum. Depr.—Office Equipment 5 6 2 5 00 (f ) 2 5 0 0 00
23 615 Depr. Expense—Delivery Equip. (e) 3 0 0 0 00
Figure 23–3 Work (f )
24 620 Depr. Expense—Office Equip. 2 5 0 0 00
Sheet with Depreciation
25
Adjustments
Each amount is extended to the other work sheet columns.
Column Extended to
Account Adjusted Trial Balance Financial Statement
Del. Equip. Debit (unchanged) Balance Sheet
Accum. Depr.—Del. Equip. Credit (increased) Balance Sheet
Office Equip. Debit (unchanged) Balance Sheet
Accum. Depr.—Office Equip. Credit (increased) Balance Sheet
Depr. Exp.—Del. Equip. Debit (increased) Income Statement
Depr. Exp.—Office Equip. Debit (increased) Income Statement
Reporting Depreciation Expense
and Accumulated Depreciation
on Financial Statements
Figure 23–4 shows placement of the depreciation expense accounts on
the partial income statement of On Your Mark.
On Your Mark Athletic Wear
Income Statement
For the Year Ended December 31, 20--
Operating Expenses
Depreciation Expense—Delivery Equip. 3 0 0 0 00
Depreciation Expense—Office Equip. 2 5 0 0 00
Total Operating Expenses 94 3 5 1 00
Operating Income 51 3 4 2 00
Figure 23–4 Income
Statement Figure 23–5 shows placement of the plant asset and related accumulated
depreciation accounts. Both types of accounts appear in the Assets section
of the balance sheet. Notice that the accumulated depreciation account is
listed immediately below the related plant asset account.
680 Chapter 23 Plant Assets and Depreciation
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Athletic Wear
Sheet
December 31, 20--
ADJUSTED TRIAL BALANCE INCOME STATEMENT BALANCE SHEET
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
16 5 0 0 00 16 5 0 0 00 8
9 0 0 0 00 9 0 0 0 00 9
50 0 0 0 00 50 0 0 0 00 10
8 1 2 5 00 8 1 2 5 00 11
3 0 0 0 00 3 0 0 0 00 23
Figure 23–3 Work
2 5 0 0 00 2 5 0 0 00 24
Sheet with Depreciation
25
Adjustments (continued)
For Delivery Equipment:
• The original cost is entered in the first amount column on the first line
($16,500).
• The accumulated depreciation is entered in the first amount column on
the second line ($9,000).
• The difference between cost and accumulated depreciation is entered in
the second amount column on the second line ($7,500).
The book value of the delivery equipment is $7,500. The book value of
each plant asset reported on the balance sheet should be the same as that
shown on the plant asset record.
On Your Mark Athletic Wear
Balance Sheet
December 31, 20--
Assets
Delivery Equipment 16 500 00
Less: Accum. Depr.—Delivery Equip. 9 000 00 7 5 0 0 00
Office Equipment 50 000 00
Less: Accum. Depr.—Office Equip. 8 125 00 41 8 7 5 00
Figure 23–5
Balance Sheet
Adjusting and Closing Entries
for Depreciation Expense
What Are the Adjusting and Closing Entries
for Depreciation?
After the accountant has completed the work sheet and prepared the
financial statements, the adjustments for depreciation expense are recorded
in the general journal. The information for the journal entries is taken
directly from the Adjustments section of the work sheet.
Section 3 Accounting for Depreciation Expense at the End of a Year 681
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Adjustment
Record the December 31 adjusting journal entries for depreciation.
ANALYSIS Identify 1. The accounts affected are Depreciation Expense—Delivery
Equipment, Depreciation Expense—Office Equipment, Accumulated
Depreciation—Delivery Equipment, and Accumulated Depreciation—
Office Equipment.
Classify 2. Depreciation Expense—Delivery Equipment and Depreciation
Expense—Office Equipment are expense accounts. Accumulated
Depreciation—Delivery Equipment and Accumulated Depreciation—
Office Equipment are contra asset accounts.
/ 3. Depreciation Expense—Delivery Equipment is increased by $3,000.
Depreciation Expense—Office Equipment is increased by $2,500.
Accumulated Depreciation—Delivery Equipment is increased by
$3,000. Accumulated Depreciation—Office Equipment is increased
by $2,500.
DEBIT-CREDIT RULE 4. Increases in expense accounts are recorded as debits. Debit
Depreciation Expense—Delivery Equipment for $3,000 and
Depreciation Expense—Office Equipment for $2,500.
5. Increases in contra asset accounts are recorded as credits. Credit
Accumulated Depreciation—Delivery Equipment for $3,000 and
Accumulated Depreciation—Office Equipment for $2,500.
T ACCOUNTS 6. Depreciation Expense— Accumulated Depreciation—
Delivery Equipment Delivery Equipment
Debit Credit Debit Credit
3,000 3,000
Depreciation Expense— Accumulated Depreciation—
Office Equipment Office Equipment
Debit Credit Debit Credit
2,500 2,500
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 21
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Dec. 31 Depr. Exp.—Del. Equip. 3 0 0 0 00 2
3 Accum. Depr.—Del. Equip. 3 0 0 0 00 3
4 31 Depr. Exp.—Office Equip. 2 5 0 0 00 4
5 Accum. Depr.—Office Equip. 2 5 0 0 00 5
6 6
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After adjusting entries have been journalized and posted, the next step
in the accounting cycle is to close the ledger. In the second closing entry,
you’ll remember, accounts with debit balances in the Income Statement
Debit column of the work sheet are closed to Income Summary. This clos-
ing entry includes the depreciation expense accounts.
After this closing entry has been posted to the general ledger, the bal-
ances of the depreciation expense accounts are reduced to zero.
ON YOUR MARK
Closing
ATHLETIC WEAR
Second Closing Entry—Depreciation accounts only. 595 Leslie Street, Dallas, TX 75207
ANALYSIS Identify 1. The accounts affected are Depreciation Expense—Delivery Equipment,
Depreciation Expense—Office Equipment, and Income Summary.
Classify 2. Depreciation Expense—Delivery Equipment and Depreciation
Expense—Office Equipment are expense accounts. Income Summary
is a temporary capital account.
/ 3. Depreciation Expense—Delivery Equipment is decreased by $3,000
and Depreciation Expense—Office Equipment is decreased by $2,500;
the total decrease is $5,500. The $5,500 is transferred to the Income
Summary account.
DEBIT-CREDIT RULE 4. To transfer the expenses to the Income Summary account, debit
Income Summary for $5,500.
5. Decreases in expense accounts are recorded as credits. Credit
Depreciation Expense—Delivery Equipment for $3,000 and
Depreciation Expense—Office Equipment for $2,500.
T ACCOUNTS 6. Depreciation Expense—
Income Summary Delivery Equipment
Debit Credit Debit Credit
5,500 3,000 Clos. 3,000
Depreciation Expense—
Office Equipment
Debit Credit
2,500 Clos. 2,500
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 22
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Dec. 31 Income Summary 5 5 0 0 00 2
3 Depr. Exp.—Del. Equip. 3 0 0 0 00 3
4 Depr. Exp.—Office Equip. 2 5 0 0 00 4
5 5
Section 3 Accounting for Depreciation Expense at the End of a Year 683
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SECTION 3 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Use a diagram like this one 3TEP .UMBER (OW 4HIS 3TEP 2ELATES TO $EPRECIATION
to show the last five steps of %ND OF 0ERIOD
!CCOUNTING
the accounting cycle as they #YCLE 3TEPS
relate to depreciation.
Do the Math
You are preparing a depreciation schedule for a new piece of equipment you purchased for
your business, Supreme T-Shirt Outfitters, for $5,000. It has a five-year estimated useful life
and a $500 estimated disposal value. Calculate its annual depreciation using the straight-
line method. Next calculate the accumulated depreciation and the equipment’s book value
at the end of each of the five years. Use a table like this one. Add rows for years 2 through 5.
%ND OF 0URCHASE 0RICE $EPRECIATION %XPENSE !CCUMULATED $EPRECIATION "OOK 6ALUE
ST 9EAR
Problem 23–4 Analyzing a Source Document
Instructions In your working papers: INVOICE NO. 14492
All Purpose Office Equipment
1. Record the purchase in the general 996 Lake Drive, Sacramento, CA 94203 DATE: June 4, 20--
journal, page 4. ORDER NO.: 22688
Universal Auto Supply SHIPPED BY: UPS
2. Record the partial depreciation TO 1422 Central Blvd. TERMS: Cash
Sacramento, CA 94203
expense for the first year in the
general journal, page 7. QTY. ITEM UNIT PRICE TOTAL
1 Xerox Copy Machine $ 3,200.00 $ 3,200.00
a. Disposal value—$200 Serial Number 24X612987
b. Estimated useful life—5 years Sales Tax 256.00
Total $ 3,456.00
c. Fiscal year end—December 31.
d. Method—straight-line
3. Record the annual depreciation, one year later, in the general journal, page 13.
Problem 23–5 Preparing a Depreciation Schedule
and Journalizing the Depreciation
Adjusting Entry
Quade Corporation bought a copy machine on January 7 of the current year for $2,360. It
has an estimated useful life of five years and an estimated disposal value of $100.
Instructions In your working papers:
1. Prepare a depreciation schedule for the copy machine using the straight-line method of
depreciation. (Use the form provided in your working papers.)
2. Journalize the adjustment for the copy machine’s depreciation at the end of the first year.
3. Journalize the closing entry for the expense account affected by the adjusting entry.
4. What is the book value of the asset after five years? Is this the same as the disposal value?
684 Chapter 23 Plant Assets and Depreciation
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Accounting Careers in Focus
U.S. OPERATIONS CONTROLLER
Viasystems, Mishawaka, Indiana
..
Brenda Engel Tips from .
Q: What does Viasystems do?
age your
A: We provide firms in a variety of industries with components for Learn to man ch
ing ahead. Ea
their manufacturing processes. time by plann
a quick “to
morning, draft r
Q: How did you get into accounting? cludes all you
do” list that in s.
A: I became interested in accounting at a young age when my mom g-term project
short- and lon p you
let me help her with the bookkeeping for the family business. t will hel
This documen
resources
Q: What is most challenging about your job? determine the
allow you to
A: Managing my time and attending to a variety of tasks. I’m you need and
r tasks.
responsible for overseeing the company’s assets, as well as prioritize you
advising and training others in accounting software systems and
overall business philosophy.
Q: What skills are needed for your job?
A: Strong analytical skills and patience are critical. It’s equally important to have
good communication and people skills. Being able to apply what you’ve learned
in school to a work setting is also vital if you want to succeed in your job.
Q: What advice do you have for accounting students just
beginning their careers?
A: Work in as many different settings and with as many different people as
possible while you’re in high school and college. You’ll not only gain experience
in different areas, but also meet other professionals who can guide you on
an appropriate and exciting career path. In addition, make sure you learn and
master software such as Microsoft Office. Computer skills are indispensable.
CAREER FACTS
Nature of the Work: Prepare and consolidate financial statements; manage all aspects of
▲
the general ledger; in some cases, supervise the accounts receivable, accounts payable,
and general accounting departments.
Training or Education Needed: A bachelor’s degree in accounting or finance; a master’s
▲
degree in business administration; CPA or CMA designation is preferred; at least five years
of experience.
Aptitudes, Abilities, and Skills: Strong analytical skills, technology skills, communication
▲
skills, and organizational skills.
Salary Range: $45,000 to $115,000 depending on location, level of responsibility, and
▲
company revenues.
Career Path: Start by working for a small company to learn a variety of skills, then
▲
gradually move into a management position.
Thinking Critically Why is it important for accounting professionals to have strong
communication skills?
Chapter 23 Accounting Careers in Focus 685
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CH A P T ER 2 3 Summary
Key Concepts
1. The assets of a business can be classified as current assets or plant assets. Recall that current assets
are either consumed or converted to cash during the normal operating cycle, usually one year.
Examples are
• cash
• merchandise that will be sold shortly
• supplies such as paper, pencils, and printer toner
Plant assets are long-lived assets used in the production or sale of other assets or services over
several accounting periods. Examples are
• computers
• copiers
• cash registers
• manufacturing equipment
• office furniture
• telephone systems
• vehicles used in the business
• the buildings that house the business
2. A plant asset is depreciated so that its cost is spread over its useful life. This spreads the cost over
the periods that the asset will be used to generate revenue. This allows the business to conform
to the matching principle of accounting, which requires that expenses be matched with the
revenues the expenses helped to earn.
Four factors used to calculate the depreciation of an asset are
• its cost
• its estimated useful life
• its estimated disposal value
• the depreciation method used
The estimated useful life of a plant asset is the number of years it is expected to be used before it
wears out. Depreciation is an estimate because no one can be certain how long an asset will last.
3. To match the cost of an asset with the revenue it is used to generate during a year, annual
straight-line depreciation is calculated:
Original Estimated Amount to
Cost Disposal Value Be Depreciated
Amount to Estimated Annual
Be Depreciated Useful Life Depreciation Expense
686 Chapter 23 Summary
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Summary C HAPT E R 23
4. To calculate depreciation for part of a year:
Annual Fraction Partial Year
Depreciation Expense of Year Depreciation Expense
5. An asset’s book value is its original cost less its accumulated depreciation. To calculate book
value:
Original Cost Accumulated Book Value
Depreciation
6. To record depreciation:
Depreciation Expense— Accumulated Depreciation—
Description of Asset Description of Asset
Debit Credit Debit Credit
xx xx
7. When a business purchases a plant asset, it sets up a depreciation schedule for the asset. The
amount of depreciation expense for each plant asset is recorded at the end of the year. The
schedule typically has a column for each of the following:
• the date
• the asset’s cost
• annual depreciation expense
• accumulated depreciation
• book value at the end of each year
Key Terms
accumulated depreciation (p. 675)
book value (p. 675)
depreciation (p. 671)
disposal value (p. 672)
plant assets (p. 670)
straight-line depreciation (p. 672)
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C H A P T ER 2 3 Review and Activities
AFTER
YOU READ
Check Your Understanding
1. Plant Assets
a. Explain the meaning of the term plant asset.
b. Give four examples of plant assets.
2. Plant Asset Depreciation
a. Depreciation is an application of what accounting principle?
b. What distinguishes a plant asset from a current asset?
3. Annual Depreciation
a. What four factors affect the depreciation calculation?
b. How is the annual depreciation expense for a plant asset calculated under the
straight-line method?
4. Partial-Year Depreciation
a. Explain how depreciation for part of a year is calculated.
b. What is meant by “allocating the cost” of a plant asset?
5. Book Value of Plant Assets
a. What is accumulated depreciation?
b. How is book value calculated?
6. Record Depreciation
a. What is the classification of the Accumulated Depreciation account?
b. Which two accounts are affected by an adjusting entry for depreciation?
7. Prepare Depreciation Schedule
a. What is the purpose of a depreciation schedule?
b. When is the depreciation of a plant asset recorded?
Apply Key Terms
You have just been hired as the plant accountant for Fast
Runner, a large manufacturer of inline skates and skateboards.
To do your job well, you must be able to understand and apply
accounting procedures for plant assets and depreciation. Your
immediate boss is the CEO for Fast Runner, Rob Myers. Rob wants
you to define the following terms and give him some examples
related to Fast Runner. Pair up with a colleague to discuss each
term and find an example. Then write your ideas on a note pad
for quick reference during your meeting with Rob. Good luck!
accumulated depreciation straight-line
depreciation disposal value depreciation
book value plant assets
688 Chapter 23 Review and Activities
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Computerized Accounting C HAPT E R 23
Recording Depreciation
Making the Transition from a Manual to a Computerized System
Task Manual Methods Computerized Methods
Recording • Estimated annual depreciation is • Estimated annual depreciation is
depreciation calculated when a fixed asset is calculated when a fixed asset is
purchased. purchased.
• Each accounting period, an adjusting • A depreciation journal entry is recorded
entry is journalized and posted for for the month’s amount. The journal
each plant asset account in the general entry can be automatically posted each
ledger. month as a recurring entry.
• Recording depreciation affects two • Amounts are posted to the Deprecia-
accounts, Accumulated Depreciation tion Expense and Accumulated
and Depreciation Expense. Depreciation accounts. Their balances
• The Depreciation Expense account is are automatically updated.
closed at the end of the fiscal year.
Q&A
Peachtree Question Answer
How do I record 1. From the Tasks menu, select General Journal Entry.
depreciation for fixed 2. Enter the transaction to record the depreciation expense for the current period.
assets in Peachtree? 3. Select the Recur icon.
4. Select the number of times and how often you want this transaction
to recur. (Each month? Each quarter? Each year?)
5. Click OK.
QuickBooks Q & A
QuickBooks Question Answer
How do I record 1. From the Company menu, select Make General Journal Entries.
depreciation for fixed 2. Enter the transaction to record the depreciation expense for the current period.
assets in QuickBooks? 3. Memorize the recurring entry using Memorize General Journal from the Edit
menu.
4. Set the number of times you want the entry to occur and click OK.
5. Click Save & Close.
For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers.
Chapter 23 Computerized Accounting 689
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C H A P T ER 2 3 Problems
Complete problems using: Manual Glencoe Peachtree Complete QuickBooks
OR OR
Working Papers Accounting Software Templates
Problem 23–6 Opening a Plant Asset Record
SMART GUIDE On July 10 Sunset Surfwear purchased a scanner from Taunton Equipment
Step–by–Step Instructions: for $1,500. Taunton Equipment charged Sunset Surfwear $200 to install the
Problem 23–7 scanner. The scanner has an estimated useful life of four years
1. Select the problem set and an estimated disposal value of $260.
for InBeat CD Shop
(Prob. 23–7).
Instructions Prepare a plant asset record, including the depreciation
2. Rename the company schedule for the new scanner. Use the form provided in your working
and set the system date. papers.
3. Record the depreciation
adjusting entries. Serial number: TMC46312
4. Print a General Journal
report and proof your General ledger account: Office Equipment
work. Location: Main Street store
5. Complete the Analyze
activity.
Depreciation method: Straight-line
6. End the session. Manufacturer: Brothers Company
TIP: Use the General Analyze Describe how you determined the book value at the end of
Journal Entry option to each period.
record adjusting entries.
Problem 23–7 Recording Adjusting Entries
SMART GUIDE for Depreciation
Step–by–Step Instructions: The following adjustments for depreciation were entered on the work sheet
Problem 23–8 for InBeat CD Shop for the year ended December 31.
1. Select the problem set Adjustments
for Shutterbug Cameras
(Prob. 23–8). Debit Credit
2. Rename the company Store Equipment
and set the system date.
3. Record the adjustments Accumulated Depreciation—Store Equipment (e) 3,800
for depreciation using Office Equipment
the General Journal Accumulated Depreciation—Office Equipment (f) 1,400
Entry option.
4. Print a General Journal Depreciation Expense—Store Equipment (e) 3,800
report and proof your Depreciation Expense—Office Equipment (f) 1,400
work.
5. Print an Income Instructions Record the adjusting entries on general journal page 11.
Statement, a Statement
of Retained Earnings, Analyze Explain how the adjustment affects the book value of the
and a Balance Sheet. store equipment.
6. Complete the Analyze
activity.
7. End the session.
690 Chapter 23 Problems
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Problems C HAPT E R 23
QuickBooks
Problem 23–8 Reporting Depreciation Expense
PROBLEM GUIDE
on the Work Sheet and Financial
Step–by–Step Instructions:
Statements Problem 23–8
The trial balance of Shutterbug Cameras appears on the work sheet 1. Restore the Problem
included in your working papers. All adjustments, except those for 23-8.QBB file.
depreciation, are already recorded on the work sheet. 2. Record the adjustments
for depreciation using
Instructions the Make General
Journal Entries option.
1. Record the following adjustments for depreciation expense on the 3. Print a Journal report
work sheet. and proof your work.
a. Depreciation for office equipment is $2,500. 4. Print a Profit & Loss
report and Balance
b. Depreciation for store equipment is $1,200. Sheet.
2. Complete the work sheet. 5. Complete the Analyze
activity.
3. Prepare an income statement, statement of retained earnings, and 6. Back up your work.
balance sheet for Shutterbug Cameras for the year ended December 31.
Analyze Calculate the total current assets.
SMART GUIDE
Step–by–Step Instructions:
Problem 23–9 Calculating and Recording Problem 23–9
Depreciation Expense 1. Select the problem set
for Cycle Tech Bicycles
Cycle Tech Bicycles purchased manufacturing equipment on August 1 (Prob. 23–9).
for $410,000. The equipment has an estimated useful life of 25 years and 2. Rename the company
and set the system date.
an estimated disposal value of $20,000. Cycle Tech uses the straight-line 3. Calculate the depre-
method of depreciation. The partial depreciation schedule found in your ciation for the first two
working papers is set up for the equipment. years.
4. Record the depreciation
Instructions adjustment for the first
year using the General
1. Calculate annual depreciation, accumulated depreciation, and book Journal Entry option.
value for each of the first two years. The fiscal year ends December 31. 5. Print a General Journal
Use the form provided in your working papers. report and a General
Ledger report for
2. Calculate the depreciation adjustment to be entered on the work the manufacturing
sheet at the end of the first year. Use T accounts to show the accounts equipment accounts
and proof your work.
debited and credited. 6. Complete the Analyze
3. Journalize the adjustment for depreciation at the end of the first year, activity.
general journal page 21. 7. End the session.
Analyze Determine the balance of the accumulated depreciation
account at the end of the first and second years.
Chapter 23 Problems 691
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C H A P T ER 2 3 Problems
Problem 23–10 Calculating and Recording
Adjustments
The December 31 trial balance of Rivers Edge Canoe & Kayak is included in
SMART GUIDE your working papers.
Step–by–Step Instructions:
Instructions
Problem 23–10 1. Calculate and record end-of-period adjustments on the work sheet.
1. Select the problem set a. Ending Merchandise Inventory is $15,000.
for River’s Edge Canoe & b. Supplies on hand total $1,450.
Kayak (Prob. 23–10).
2. Rename the company c. The amount of the expired insurance premium is $5,000.
and set the system date. d. Use the following information to calculate the estimated annual
3. Calculate and record
the end-of-period depreciation expense using the straight-line method.
adjustments. Estimated Estimated
4. Print a General Journal Plant Asset Cost Disposal Value Useful Life
report and proof your
work. Store Equipment $ 13,000 $ 1,000 10 years
5. Print an Income Delivery Truck 32,000 2,000 10 years
Statement and a Building 160,000 10,000 25 years
Balance Sheet.
6. Close the fiscal year. e. The total federal income tax expense for the year is $4,250.
7. Print a Post-Closing Trial 2. Complete the work sheet.
Balance.
8. Complete the Analyze 3. Journalize and post the adjusting entries on page 16 of the general
activity. journal.
9. End the session. 4. Journalize and post the closing entries on page 16 of the general journal.
QuickBooks Analyze Calculate the total depreciation expense for the year.
PROBLEM GUIDE
Step–by–Step Instructions:
Problem 23–10 CHALLENGE Problem 23–11 Examining Depre-
PROBLEM
1. Restore the Problem ciation Adjustments
23-10.QBB file.
On May 2 Buzz Newsstand purchased a new machine for $2,700. It has an
2. Calculate and record
the end-of-period estimated disposal value of $100 and an estimated useful life of eight years.
adjustments. Buzz uses the straight-line method.
3. Print a Journal report
and proof your work. On December 31 the adjustment for depreciation for the first year was
4. Print a Profit & Loss entered: Accumulated Depreciation—Store Equipment was credited for
report and Balance
$325, and Depreciation Expense—Store Equipment was debited for $325.
Sheet.
5. Enter the closing entries Instructions
and print a Journal
report. Answer the following questions regarding this adjustment:
6. Print a Post-Closing Trial 1. What is wrong with the adjustment for depreciation made on
Balance.
December 31? What is the correct entry?
7. Complete the Analyze
activity. 2. One year from now, another adjustment for this machine will be
entered on the work sheet. Assume the error from the previous year
is not corrected. What amount should be entered in the Adjustments
section for annual depreciation expense?
Analyze Determine whether the current period net income will be too
high or too low if the original error is not corrected.
692 Chapter 23 Problems
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Winning Competitive Events C HAPTER 23
Practice your test-taking skills! The questions on this page are reprinted with permission
from national organizations:
• Future Business Leaders of America
• Business Professionals of America
Use a separate sheet of paper to record your answers.
Future Business Leaders of America
MULTIPLE CHOICE
1. A truck used in daily operations of a corporation would be considered a(n)
a. long-term asset. d. either A or B.
b. plant asset. e. none of these answers
c. intangible asset.
2. A method that allocates an equal portion of the total depreciation for a plant asset
(cost minus salvage) to each accounting period in its service life is
a. accelerated depreciation. d. sum-of-the-years’-digits depreciation.
b. units-of-production. e. declining-balance depreciation.
c. straight-line depreciation.
3. The Crimson Cartage Company purchased a new truck at a cost of $42,000 on
July 1. The truck is estimated to have a useful life of 6 years and a salvage value of
$6,000. Using the straight-line method, how much depreciation expense will be
recorded for the truck during the first year ended December 31?
a. $3,000 d. $6,000
b. $3,500 e. $7,000
c. $4,000
4. The adjusting entry for the depreciation of a plant asset such as equipment
involves a credit to
a. equipment expense. c. depreciation expense.
b. accumulated equipment. d. accumulated depreciation.
Business Professionals of America
MULTIPLE CHOICE
5. The entry to record depreciation for the fax machine at the end of the fiscal period
a. Debit Accumulated Depreciation—Maintenance Equipment, credit
Depreciation Expense—Maintenance Equipment
b. Debit Depreciation Expense—Maintenance Equipment, credit Accumulated
Depreciation—Maintenance Equipment
c. Debit Accumulated Depreciation—Office
Equipment, credit Depreciation
Expense—Office Equipment Need More Help?
d. Debit Depreciation Expense—
Go to glencoeaccounting.glencoe.com and
Office Equipment, credit click on Student Center. Click on Winning
Accumulated Depreciation— Competitive Events and select Chapter 23.
Office Equipment • Practice Questions and Test-Taking Tips
• Concept Capsules and Terminology
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C H A P T ER 2 3 Real-World Applications and Connections
Critical Plant Assets
Thinking 1. Name several plant assets that a business might use to sell merchandise.
2. Explain how current assets and plant assets differ.
3. A company purchased plant assets for $100,000. It expects to sell them in
4 years for 20 percent of the cost. What is the depreciation expense?
4. Classify these assets: land, building, cash, accounts receivable, computer
equipment, merchandise inventory, supplies, and prepaid insurance into
(a) plant assets or (b) current assets. Identify the assets to be depreciated.
5. Set up the formulas for calculating the amount to be depreciated, the annual
depreciation expense, the accumulated depreciation, and book value.
6. Justify crediting the Accumulated Depreciation account rather than the
Plant Asset account when recording depreciation expense.
CASE Merchandising Business: Photography Studio
STUDY Karina Ludmiko is turning her photography hobby into a business called The
Photo Studio. She asked you to set up the company’s asset records.
INSTRUCTIONS
1. Assume that The Photo Studio’s photography equipment cost $25,000, has a
10-year useful life, and no salvage value. Set up a depreciation schedule.
2. Explain to Karina how depreciation appears on the financial statements.
a
mattoefr ETHICS Whom Will They Believe?
After working for a year as payroll clerk for a small publishing company, you
believe you have evidence of embezzlement—and suspect the department
manager or senior accountant. Whom can you tell? Who would believe you?
ETHICAL DECISION MAKING
1. What are the ethical issues? 4. How do the alternatives affect the
2. What are the alternatives? parties?
3. Who are the affected parties? 5. What would you do?
$ )) ))
Communicating
Promoting Technology
ACCOUNTING As accountant for Playtime Preschool, you want to convince the owner to
purchase computers for the children to use. Explain that the company can
depreciate the $10,000 investment and deduct the depreciation on its tax return.
With a classmate, brainstorm the four factors affecting the depreciation estimate.
List your recommendations and practice presenting them to the owner.
Skills Beyond Acquiring and Evaluating Information
NUMBERS As Westside Wholesale’s newly hired manager, you plan for and control its plant
assets. One standard you will be measured by is your budget and the controls
you use to stay within that budget. Describe the information you will need to
prepare a budget for equipment purchases and maintenance. List internal control
procedures to help prevent asset loss and theft. Explain how the budget can be
used to evaluate your performance.
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Real-World Applications and Connections C HAPT E R 23
INTERNATIONAL Plant Assets
Global companies may use the revaluation model allowed by International
Accounting
Accounting Standard 16 to record plant assets. After initially recording an asset
at cost, this model revalues an asset at its fair market value less subsequent
depreciation, if fair market value can be measured reliably.
INSTRUCTIONS Define fair market value. How would revaluation affect the income
statement?
Making It
Your Vehicle
Personal A vehicle is a valuable asset. The vehicle declines in value each year, but if you
keep it properly maintained, it will have a higher resale value when you sell it.
PERSONAL FINANCE ACTIVITY Determine the book value of your vehicle. It cost
$20,000. Its value declined $6,000 in the first year, $4,000 in the second year, and
$2,500 in the third year.
PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and
click on Student Center. Click on Making It Personal and select Chapter 23.
Analyzing Vertical Analysis
Financial Vertical analysis makes it easy to compare financial statements with industry
Reports standards, which are average percentages for companies in the same industry.
Assume these partial vertical analyses of an income statement and balance sheet
are for the pet food and pet supply industry.
Income Statement Vertical Analysis
Net sales 100.0%
Cost of sales 68.9
Gross profit 31.1%
Balance Sheet Vertical Analysis
Current assets 34.3%
Property & equipment 49.3
All other assets 16.4
Total assets 100.0%
INSTRUCTIONS Use PETsMART’s financial state-
ments in Appendix F for these tasks.
Depreciation
1. Complete a vertical analysis of PETsMART’s
Proper procedures can save time
cost of sales and gross profit for the year
in calculating depreciation. Visit
ended February 1, 2004. Compare them to glencoeaccounting
the industry standards above. .glencoe.com and click
2. Complete a vertical analysis of PETsMART’s on Student Center. Click on
assets using the classifications above, as of WebQuest and select Unit 5 to
February 1, 2004. Compare PETsMART’s continue your Internet project.
asset mix with the industry standard.
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CH A P T ER 2 4 Uncollectible Accounts
Receivable
BEFORE
YOU READ
What You’ll Learn Predict
1. Explain methods used to write 1. What does the chapter title tell you?
off uncollectible accounts. 2. What do you already know about this subject from personal experience?
3. What have you learned about this in the earlier chapters?
2. Determine uncollectible
accounts receivable. 4. What gaps exist in your knowledge of this subject?
3. Use the direct write-off method
for uncollectible accounts.
4. Calculate bad debts expense.
Exploring the Real World of Business
5. Make an adjusting entry for ANALYZING CREDIT LOSSES
uncollectible accounts.
6. Use the allowance method to
U.S. Government Accountability Office
record uncollectible accounts. Do you ever wonder who keeps watch on how your federal
tax dollars are spent? The Government Accountability Office
7. Record the collection of an
(GAO) has you covered. Independent and nonpartisan, the
account previously written off.
GAO recommends ways for government agencies to be more
8. Describe two methods effective, audits federal expenditures, investigates fraudulent
to estimate uncollectible
activities, and issues legal opinions.
accounts expense.
You may hear news reports about budget deficits or social
9. Define the accounting terms security shortfalls. Many Americans are worried about funding
introduced in this chapter.
homeland security and health care. Business owners and
Why It’s Important farmers can secure government loans but may fail to repay
them due to bad economic times. Elected officials express
When a business extends
▲
credit, it assumes the risk of concern that the government is not collecting its outstanding
uncollectible accounts. loans and debts. In light of all these issues, the watchdog GAO
is clearly the taxpayer’s best friend.
What Do You Think?
Why is it important for the federal government to have
good collection policies for the money it is owed?
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Working in the Real World
APPLYING YOUR ACCOUNTING KNOWLEDGE
Personal Connection
When people cannot pay their debts, businesses 1. Does your workplace have customers who fail
must decide what to do about these losses. to pay what they owe?
Retailers and banks are examples of businesses 2. How does the business handle amounts it
that are likely to have customers who fail to cannot collect?
pay what they owe. When a business cannot
collect the amounts it is owed, it records them in Online Connection
the accounting records. In this chapter you will Go to glencoeaccounting.glencoe.com and click
learn how to estimate and record uncollectible on Student Center. Click on Working in the
amounts. Real World and select Chapter 24.
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SECTION 1 The Direct Write-Off
Method
In previous chapters you learned that many businesses sell goods or
BEFORE
YOU READ services on account. Some charge customers cannot or will not pay the
amounts they owe.
Main Idea
A business using the direct Extending Credit
write-off method converts Why Do Businesses Extend Credit?
an account receivable to an Selling goods and services on credit is a standard practice for busi-
expense when it becomes nesses of all sizes and types. They offer credit because they expect to sell
clear the customer will not more than they would by accepting only cash.
pay the bill. Retail stores typically ask customers seeking to purchase on account
Read to Learn… to complete a credit application. Before a business extends credit, it
➤ how and why businesses should check each prospective customer’s credit rating to help determine
extend credit. (p. 698) the customer’s ability to pay the amounts charged on account. Businesses
➤ how to write off an get these credit ratings from the national consumer-credit-reporting
uncollectible account companies Equifax, Experian, and TransUnion. Wholesalers and manu-
using the direct method. facturers use reports from wholesale credit bureaus and national credit-
(p. 698) rating organizations such as Dun & Bradstreet.
An uncollectible account , or bad debt, is an account receivable that
Key Terms the business cannot collect. The business eventually removes the account
uncollectible account
receivable from its records, and the amount becomes an expense to the
direct write-off method
business. Businesses account for bad debts by using the direct write-off
method or the allowance method.
The Direct Write-Off Method
What Is the Direct Write-Off Method?
The direct write-off method is used primarily by small businesses and
those with few charge customers. Under the direct write-off method ,
when the business determines that the amount owed is not going to be
paid, the uncollectible account is removed from the accounting records.
Uncollectible Accounts Expense is debited and Accounts Receivable (both
AS
YOU READ controlling and subsidiary) is credited. The direct write-off method is the
only method a business can use for income tax purposes.
Key Point
Uncollectible
Writing Off an Uncollectible Account
Accounts Writing off an On June 4 On Your Mark Athletic Wear sold football equipment on
uncollectible account account to Robert Galvin for $250 plus $15 sales tax. It recorded the transac-
converts an asset to an tion as a $265 debit to Accounts Receivable (controlling) and the subsidiary
expense. account Accounts Receivable—Robert Galvin and as a credit to Sales for
$250 and Sales Tax Payable for $15.
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For over a year, On Your Mark tried to collect this account. The length of
time is one consideration used to determine uncollectible accounts receiv-
able. It is now apparent that Robert Galvin is not going to pay the $265.
In effect, a business must decrease total assets and increase total
expenses when a customer fails to pay a debt. On Your Mark must decrease
its Accounts Receivable account and increase its expense related to uncol-
lectible accounts.
B u s i n e s s Tr a n s a c t i o n
On August 25, 2011, On Your Mark wrote off as uncollectible Galvin’s account for $265, Memorandum 170.
ANALYSIS Identify 1. The accounts affected are Uncollectible Accounts Expense, Accounts
Receivable (controlling), and Accounts Receivable—Robert Galvin
(subsidiary).
Classify 2. Uncollectible Accounts Expense is an expense account. Accounts
Receivable (controlling) and Accounts Receivable—Robert Galvin
(subsidiary) are asset accounts.
/ 3. Uncollectible Accounts Expense is increased by $265. Accounts
Receivable (controlling) and Accounts Receivable—Robert Galvin
(subsidiary) are decreased by $265.
DEBIT-CREDIT RULE 4. Increases to expense accounts are recorded as debits. Debit
Uncollectible Accounts Expense for $265.
5. Decreases to asset accounts are recorded as credits. Credit Accounts
Receivable (controlling) and Accounts Receivable—Robert Galvin
(subsidiary) for $265.
T ACCOUNTS 6. Uncollectible Accounts Expense Accounts Receivable
Debit Credit Debit Credit
265 265
Accounts Receivable Subsidiary Ledger
Robert Galvin
Debit Credit
265
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 13
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 2011 1
2 Aug. 25 Uncollectible Accounts Expense 2 6 5 00 2
3 Accts. Rec./Robert Galvin 2 6 5 00 3
4 Memorandum 170 4
5 5
Section 1 The Direct Write-Off Method 699
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ACCOUNT Accounts Receivable ACCOUNT NO. 115
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
2011
Aug. 1 Balance ✓ 7 8 2 1 42
25 Write-off G13 2 6 5 00 7 5 5 6 42
ACCOUNT Uncollectible Accounts Expense ACCOUNT NO. 675
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
2011
Aug. 25 G13 2 6 5 00 2 6 5 00
NAME Robert Galvin
ADDRESS 10223 Riggs Circle, Mesquite, TX 75181
POST.
DATE DESCRIPTION REF. DEBIT CREDIT BALANCE
2010
June 4 S14 2 6 5 00 2 6 5 00
2011
Aug. 25 Written off as uncollectible G13 2 6 5 00
Figure 24–1 Ledger
Figure 24–1 shows how this transaction is posted to the general
Accounts After an
Uncollectible Write-Off ledger and the accounts receivable subsidiary ledger.
Notice the explanation entered in Robert Galvin’s account. When
an account is written off as uncollectible, it is important to note on the
subsidiary ledger that the account was not paid off but was written off.
Collecting a Written-Off Account
Occasionally, a charge customer whose account was written off as
uncollectible later pays the amount owed. When this happens:
• First, reinstate the customer’s account, or reenter it in the
accounting records.
• Second, record the cash receipt.
B u s i n e s s Tr a n s a c t i o n
On September 5 On Your Mark received $265 from Robert Galvin, whose account was written off as
uncollectible on August 25, Memorandum 176 and Receipt 1109. First reinstate the account receivable.
ANALYSIS Identify 1. The accounts affected are Accounts Receivable (controlling), Accounts
Receivable—Robert Galvin (subsidiary), and Uncollectible Accounts
Expense.
Classify 2. Accounts Receivable (controlling) and Accounts Receivable—Robert
Galvin (subsidiary) are asset accounts. Uncollectible Accounts
Expense is an expense account.
/ 3. Accounts Receivable (controlling) and Accounts Receivable—Robert
Galvin (subsidiary) are increased by $265. Uncollectible Accounts
Expense is decreased by $265.
700 Chapter 24 Uncollectible Accounts Receivable
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DEBIT-CREDIT RULE 4. Increases to asset accounts are recorded as debits. Debit Accounts
Receivable (controlling) and Accounts Receivable—Robert Galvin
(subsidiary) for $265.
5. Decreases to expense accounts are recorded as credits. Credit
Uncollectible Accounts Expense for $265.
T ACCOUNTS 6. Accounts Receivable Uncollectible Accounts Expense
Debit Credit Debit Credit
265 265
Accounts Receivable Subsidiary Ledger
Robert Galvin
Debit Credit
265
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 14
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 2011 1
2 Sept. 5 Accts. Rec./Robert Galvin 2 6 5 00 2
3 Uncollectible Accts. Expense 2 6 5 00 3
4 Memorandum 176 4
5 5
After this transaction has been posted, the cash receipt is recorded as
a debit to Cash in Bank for $265 and a credit to Accounts Receivable
(controlling) for $265. Also, the subsidiary account Accounts Receivable—
Robert Galvin is credited for $265. Receipt 1109 is the source document
for this entry.
Robert Galvin’s subsidiary ledger account in Figure 24–2 contains data
about the sale, write-off, reinstatement, and cash receipt.
NAME Robert Galvin
ADDRESS 10223 Riggs Circle, Mesquite, TX 75181
POST.
DATE DESCRIPTION REF. DEBIT CREDIT BALANCE
2010
June 4 S14 2 6 5 00 2 6 5 00
2011
Aug. 25 Written off as uncollectible G13 2 6 5 00
Sept. 5 Reinstated G14 2 6 5 00 2 6 5 00
5 G14 2 6 5 00
Figure 24–2 Robert Galvin Account
Section 1 The Direct Write-Off Method 701
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SECTION 1 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Create a diagram similar to 4RANSACTION $ESCRIPTION *OURNAL %NTRY
the one here to show four
journal entries related to the
direct write-off method of
accounting for uncollectible
accounts receivable.
Do the Math
You are the accounts receivable clerk for Fast and Friendly Shipping. The balance of the
Accounts Receivable account is $25,000. For six months you have been trying to collect
the amounts owed by three companies: ABC Company, $450; XYZ Company, $500; and
Nice Try Company, $350. These accounts are still unpaid. Your supervisor asked you to
write off these accounts using the direct write-off method. What is the balance of Accounts
Receivable after you write off these accounts as uncollectible?
Problem 24–1 Using the Direct Write-Off Method
The Parker Supply Company uses the
MEMORANDUM 78
direct write-off method of accounting
for uncollectible accounts.
Instructions In your working papers:
TO: Accounting Clerk
FROM: Jon Herbert, Collection Manager
1. Record the following transactions DATE:
SUBJECT:
November 30, 20--
Account write-off
on page 21 of the general journal. It has been determined by the collection department that Account
2. Post the transactions to the No. 4698214, Sonya Dickson, in the amount of $630, is uncollectible.
This memo is your authorization to write this amount off as uncollectible.
appropriate accounts. Thank you.
Date Transactions
Apr. 10 Sold merchandise on account to Sonya Dickson, $600 plus $30 sales tax, Sales
Slip 928.
Nov. 30 Wrote off Sonya Dickson’s account as uncollectible, $630, Memorandum 78.
Dec. 30 Received $630 from Sonya Dickson in full payment of her account. This account
was written off on November 30, Memorandum 89 and Receipt 277.
702 Chapter 24 Uncollectible Accounts Receivable
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SECTION 2 The Allowance Method
In Section 1 you
BEFORE
learned that the direct YOU READ
write-off method is
used by
Main Idea
• small businesses, A business using the
• businesses allowance method estimates
with few credit the bad debt expense and
customers, and writes off that amount.
• all businesses for
tax purposes. Read to Learn…
➤ why businesses apply
In contrast, busi-
the matching principle
nesses that have many
to accounts receivable.
credit customers use (p. 703)
the allowance method ➤ how businesses use
of accounting for uncollectible accounts. This method allows businesses the matching principle
to match revenue with the expenses incurred to earn that revenue. In to recognize bad debt
this section you will learn about the allowance method and continue to expense. (p. 704)
journalize transactions involving uncollectible accounts.
Key Terms
Matching Uncollectible Accounts allowance method
book value of accounts
Expense with Revenue receivable
Why Do Businesses Use the Matching Principle to Report
Uncollectible Accounts?
When the direct write-off method of accounting for uncollectible
accounts is used, an unpaid account is written off when the business
determines that it will not be paid. Under the direct write-off method, it
often happens that the sale is recorded in one period, and the uncollect-
ible accounts expense is recorded in the following period. This violates the
matching principle.
One of the fundamental principles of accounting is that revenue should
be matched with the expenses incurred in generating that revenue. This means
that expenses incurred to earn revenue should be deducted in the same
period that the revenue is recorded. The uncollectible accounts expense
should be reported in the year in which the sale takes place. However, the
uncollectible account expense is usually not determined with certainty until
some future period. That is, a credit sale in the year 2010 may not be deter-
mined to be uncollectible until some time in 2011. In order to conform to
the matching principle, the credit sales are recorded in the year 2010 and an
estimate of the uncollectible accounts expense is also recorded in 2010.
Section 2 The Allowance Method 703
696-725_CH24_868829.indd 703 9/15/05 1:40:55 PM
The estimate of uncollectible accounts expense is recorded as an end-of-
period adjustment. The adjusting entry meets two objectives:
1. Accounts Receivable is reduced to the amount the business can
reasonably expect to receive.
2. The estimated uncollectible accounts expense is charged to the
current period.
AS
READ The Allowance Method
YOU How Do You Use the Allowance Method to Report
Compare and Uncollectible Accounts Expense?
Contrast The allowance method of accounting for uncollectible accounts
Reporting Uncollectible matches the estimated uncollectible accounts expense with sales made
Accounts How are the during the same period. At the end of the period, the accountant must
direct write-off method calculate the uncollectible accounts expense that will result from the sales
and the allowance made during the period. The estimated uncollectible accounts expense is
method similar? How are recorded as an adjustment on the work sheet. The two accounts affected by
they different? this adjustment are Uncollectible Accounts Expense and Allowance for
Uncollectible Accounts.
When the adjustment is made, the business does not know exactly
which charge customers will not pay the amounts they owe. Therefore, the
estimated uncollectible amount cannot be credited to Accounts Receivable
(neither the controlling nor the subsidiary). Since the Accounts Receiv-
able account cannot be used to record the estimated uncollectible amount,
another account is opened. This account is Allowance for Uncollectible
Accounts.
Allowance for Uncollectible Accounts is used to summarize the esti-
mated uncollectible accounts receivable of the business. It is classified as a
contra asset account.
Allowance for
Uncollectible Accounts
Debit Credit
Decrease Side Increase Side
Normal Balance
On Your Mark
Work
For the Year Ended
ACCT. TRIAL BALANCE ADJUSTMENTS
NO. ACCOUNT NAME
DEBIT CREDIT DEBIT CREDIT
1 101 Cash in Bank 12 6 5 0 00
2 115 Accounts Receivable 44 8 9 3 00
3 117 Allowance for Uncollectible Accts. 1 2 5 00 (b)1 3 5 0 00
Figure 24–3 Recording
23 670 Supplies Expense 6 0 0 00
the Adjustment for
24 675 Uncollectible Accounts Expense (b)1 3 5 0 00
Uncollectible Accounts
25
on the Work Sheet
704 Chapter 24 Uncollectible Accounts Receivable
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B u s i n e s s Tr a n s a c t i o n
On December 31 On Your Mark estimates its uncollectible accounts expense for the year ended December 31
to be $1,350. (Various methods are used to estimate uncollectible accounts expense. You will learn about two of
these methods later in this chapter.)
ANALYSIS Identify 1. The accounts affected are Uncollectible Accounts Expense and
Allowance for Uncollectible Accounts.
Classify 2. Uncollectible Accounts Expense is an expense account. Allowance for
Uncollectible Accounts is a contra asset account.
/ 3. Uncollectible Accounts Expense is increased by $1,350. Allowance for
Uncollectible Accounts is increased by $1,350.
DEBIT-CREDIT RULE 4. Increases to expense accounts are recorded as debits. Debit
Uncollectible Accounts Expense for $1,350.
5. Increases to contra asset accounts are recorded as credits. Credit
Allowance for Uncollectible Accounts for $1,350.
T ACCOUNTS 6. Allowance for
Uncollectible Accounts Expense Uncollectible Accounts
Debit Credit Debit Credit
1,350 1,350
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 15
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- Adjusting Entries 1
2 Dec. 31 Uncollectible Accts. Expense 1 3 5 0 00 2
3 Allow. for Uncollectible Accts. 1 3 5 0 00 3
4 4
5 5
Athletic Wear
Sheet
December 31, 20--
ADJUSTED TRIAL BALANCE INCOME STATEMENT BALANCE SHEET
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
12 6 5 0 00 12 6 5 0 00 1
44 8 9 3 00 44 8 9 3 00 2
1 4 7 5 00 1 4 7 5 00 3
6 0 0 00 6 0 0 00 23
Figure 24–3 Recording the Adjustment
1 3 5 0 00 1 3 5 0 00 24
for Uncollectible Accounts on the Work
25
Sheet (continued)
Section 2 The Allowance Method 705
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Allowance for Uncollectible Accounts appears on the balance sheet
AS
YOU READ as a deduction from Accounts Receivable. By using Allowance for Uncol-
lectible Accounts:
Instant Recall
• The balance of Accounts Receivable still equals the total of the
Book Value Book
customer accounts in the subsidiary ledger.
value of a plant asset
• The balance of Allowance for Uncollectible Accounts represents the
is the initial cost
amount the business estimates to be uncollectible.
minus accumulated
depreciation. Book value • The difference between Accounts Receivable and Allowance for Uncol-
of accounts receivable lectible Accounts represents the book value of accounts receivable.
is the controlling The book value of accounts receivable is the amount the business can
account balance minus reasonably expect to collect from its accounts receivable. Figure 24–3 on
the allowance for pages 704 and 705 illustrates how this adjustment is recorded and extended
uncollectible accounts. on the work sheet.
Notice that Allowance for Uncollectible Accounts has a $125 bal-
ance in the Trial Balance Credit column. This balance is carried over from
previous years. If the previous years’ uncollectible accounts exactly equaled
the estimate, Allowance for Uncollectible Accounts would have a zero
balance. This seldom happens.
Also notice that the new balance is extended first to the Adjusted Trial
Balance Credit column and then to the Balance Sheet Credit column.
Reporting Estimated Uncollectible Amounts
on the Financial Statements
The Uncollectible Accounts Expense account appears on On Your
Mark’s income statement as an expense. See Figure 24– 4 for the place-
Figure 24–4 Reporting
Uncollectible Accounts on the ment of the Uncollectible Accounts Expense account in its partial income
Income Statement statement.
On Your Mark Athletic Wear
Income Statement
For the Year Ended December 31, 20--
Operating Expenses
Supplies Expense 6 0 0 00
Uncollectible Accounts Expense 1 3 5 0 00
Total Operating Expenses 38 3 4 5 00
Operating Income 24 6 9 8 00
On Your Mark Athletic Wear
Balance Sheet
December 31, 20--
Assets
Cash in Bank 12 6 5 0 00
Figure 24–5 Reporting
Accounts Receivable 44 8 9 3 00
Allowance for Uncollectible
Less: Allowance for 1 4 7 5 00 43 4 1 8 00
Accounts on the Balance
Uncollectible Accounts
Sheet
706 Chapter 24 Uncollectible Accounts Receivable
696-725_CH24_868829.indd 706 9/15/05 1:41:11 PM
On the balance sheet, Allowance for Uncollectible Accounts is listed
AS
immediately below Accounts Receivable in the Assets section. See On Your YOU READ
Mark’s partial balance sheet in Figure 24–5.
Instant Recall
Notice that the balances of Accounts Receivable and Allowance for
Uncollectible Accounts are entered in the first amount column. The Adjusting Entry An
difference between the two balances—the book value of accounts receiv- adjusting entry affects
able—is entered in the second amount column. one temporary account
and one permanent
Journalizing the Adjusting Entry account.
for Uncollectible Accounts
After the work sheet has been completed and the financial statements
have been prepared, the adjusting entries are journalized. The information
for the adjusting entries is found in the Adjustments section of the work
sheet as shown in Figure 24–3 on pages 704 and 705.
GENERAL JOURNAL PAGE 14
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- Adjusting Entries 1
2 Dec. 31 Uncollectible Accounts Expense 675 1 3 5 0 00 2
3 Allowance for Uncollectible Accounts 117 1 3 5 0 00 3
4 4
ACCOUNT Allowance for Uncollectible Accounts ACCOUNT NO. 117
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 1 Balance ✓ 1 2 5 00
31 Adjusting Entry G14 1 3 5 0 00 1 4 7 5 00
ACCOUNT Uncollectible Accounts Expense ACCOUNT NO. 675
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 31 Adjusting Entry G14 1 3 5 0 00 1 3 5 0 00
Figure 24–6 Journalizing
See Figure 24–6 for the way the adjusting entry for the estimated uncol-
and Posting the Adjusting
lectible accounts expense is recorded in the general journal and posted to Entry for Uncollectible
the appropriate general ledger accounts. Accounts
At the end of the period, the balance of the Uncollectible Accounts
Expense account is closed, along with the balances of the other expense
accounts, to Income Summary. Uncollectible Accounts Expense has a
zero balance at the beginning of the next period. The balance of Allow-
ance for Uncollectible Accounts is not affected by the closing entries. It is
a permanent account, and its balance at the beginning of the next period
remains $1,475.
Section 2 The Allowance Method 707
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Writing Off Uncollectible
Accounts Receivable
When it becomes clear that a charge customer is not
going to pay the amount owed, the accountant removes the
uncollectible account from the accounting records.
Allowance for Uncollectible Accounts acts as a reser-
voir; that is, at the end of the period, the adjusting entry
“fills it up.” The account balance is saved until it is needed
some time in the future. When a charge customer’s account
finally proves uncollectible, the business dips into that reser-
voir to write off the account. In other words Allowance for
Uncollectible Accounts is reduced when a specific account
is written off. Let’s look at an example.
B u s i n e s s Tr a n s a c t i o n
On April 18, after many attempts to collect the amount owed, On Your Mark decides to write off the
account of Megan Sullivan for $150, Memorandum 236.
ANALYSIS Identify 1. The accounts affected are Allowance for Uncollectible Accounts,
Accounts Receivable (controlling), and Accounts Receivable—Megan
Sullivan (subsidiary).
Classify 2. Allowance for Uncollectible Accounts is a contra asset account.
Accounts Receivable (controlling) and Accounts Receivable—Megan
Sullivan (subsidiary) are asset accounts.
/ 3. Allowance for Uncollectible Accounts is decreased by $150. Accounts
Receivable (controlling) and Accounts Receivable—Megan Sullivan
(subsidiary) are decreased by $150.
DEBIT-CREDIT RULE 4. Decreases to contra asset accounts are recorded as debits. Debit
Allowance for Uncollectible Accounts for $150.
5. Decreases to asset accounts are recorded as credits. Credit Accounts
Receivable (controlling) and Accounts Receivable—Megan Sullivan
(subsidiary) for $150.
T ACCOUNTS 6. Allowance for
Uncollectible Accounts Accounts Receivable
Debit Credit Debit Credit
150 150
Accounts Receivable Subsidiary Ledger
Megan Sullivan
Debit Credit
150
708 Chapter 24 Uncollectible Accounts Receivable
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JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 16
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Apr. 18 Allow. for Uncollectible Accts. 1 5 0 00 2
3 Accts. Rec./Megan Sullivan 1 5 0 00 3
4 Memorandum 236 4
5 5
Under the allowance method, the write-off of a specific account does
not affect an expense account. Recall that the expense was already recorded
as an adjusting entry.
AS
The adjusting entry recorded the entire estimated expense for the period,
YOU READ
not just this one customer’s bad debt.
In Your Own Words
Collecting an Account Written Off by the Reinstatement What
Allowance Method does it mean to reinstate
A charge customer whose account was written off as uncollectible might an account receivable?
later pay the amount owed. When this happens:
• First, reinstate the customer’s account.
• Second, record the cash receipt.
B u s i n e s s Tr a n s a c t i o n
On November 19 On Your Mark received a check for $150 from Megan Sullivan, whose account was
written off April 18, Memorandum 294 and Receipt 2243.
ANALYSIS Identify 1. The accounts affected are Accounts Receivable (controlling), Accounts
Receivable—Megan Sullivan (subsidiary), and Allowance for
Uncollectible Accounts.
Classify 2. Accounts Receivable (controlling) and Accounts Receivable—Megan
Sullivan (subsidiary) are asset accounts. Allowance for Uncollectible
Accounts is a contra asset account.
/ 3. Accounts Receivable (controlling) and Accounts Receivable—
Megan Sullivan (subsidiary) are increased by $150. Allowance for
Uncollectible Accounts is increased by $150.
DEBIT-CREDIT RULE 4. Increases to asset accounts are recorded as debits. Debit Accounts
Receivable (controlling) and Accounts Receivable—Megan Sullivan
(subsidiary) for $150.
5. Increases to contra asset accounts are recorded as credits. Credit
Allowance for Uncollectible Accounts for $150.
Section 2 The Allowance Method 709
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T ACCOUNTS 6. Allowance for
Accounts Receivable Uncollectible Accounts
Debit Credit Debit Credit
150 150
Accounts Receivable Subsidiary Ledger
Megan Sullivan
Debit Credit
150
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 18
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Nov. 19 Accts. Rec./Megan Sullivan 1 5 0 00 2
3 Allow. for Uncollectible Accts. 1 5 0 00 3
4 Memorandum 294 4
5 5
After this transaction to reinstate the customer’s account is posted,
the cash receipt transaction is journalized and posted. Figure 24–7 shows
Megan Sullivan’s account after the cash receipt transaction is posted. The
account shows that:
1. The account had been declared uncollectible and was written off.
2. The account was reinstated.
3. The account was collected in full.
NAME Megan Sullivan
ADDRESS 883 Bisbee Drive, Dallas, TX 75211
POST.
DATE DESCRIPTION REF. DEBIT CREDIT BALANCE
20--
Jan. 1 Balance ✓ 1 5 0 00
Apr. 18 Written off as uncollectible G16 1 5 0 00
Nov. 19 Reinstated G18 1 5 0 00 1 5 0 00
19 G18 1 5 0 00
Figure 24–7 Megan Sullivan Account
710 Chapter 24 Uncollectible Accounts Receivable
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SECTION 2 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Use a diagram like the one 7HEN 0AYMENT IS 2ECEIVED FOR AN !CCOUNT 2ECEIVABLE 4HAT 7AS 7RITTEN /FF
shown here to describe what
happens when payment
is received for an account
receivable that had been
written off.
Do the Math
A review of the accounting records for Mary Sawyer’s business, Secret Garden, revealed a
disturbing trend. Her uncollectible accounts continue to increase. You suspect that Mary is
far too nice about extending “in store” credit. You strongly recommend that she change her
credit policies and collect on the outstanding accounts for this year. However Mary does not
seem to understand the big picture, and she requested an illustration. Use a line graph to
chart the uncollectibles for the past five years using the following figures.
Year 1 $1,500 Year 4 $2,422
Year 2 $1,875 Year 5 $2,800
Year 3 $2,300
Problem 24–2 Writing Off Accounts Using the
Allowance Method
Taylor Furniture Company Inc. uses the allowance method to account for uncollectible
accounts.
Instructions In your working papers:
1. Record the following transactions in the general journal on page 24.
2. Post the transactions to the appropriate accounts.
3. Prepare the Assets section of the balance sheet for Taylor Furniture Company Inc. using
the partial general ledger in your working papers. The balance of other asset accounts are
Merchandise Inventory, $42,000; Supplies, $1,500; and Prepaid Insurance, $1,200.
Date Transactions
May 4 Using the allowance method, wrote off the account of Jack Bowers for $1,050
as uncollectible, Memorandum 241.
Nov. 18 Received $1,050 from Jack Bowers in full payment of his account, which was
written off May 4, Memorandum 321 and Receipt 1078.
Dec. 31 The adjusting entry for the estimated uncollectible accounts expense for the year
ended December 31 was $1,850.
Section 2 The Allowance Method 711
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SECTION 3 Estimating Uncollectible
Accounts Receivable
As you learned in the previous section, businesses estimate the uncol-
BEFORE
YOU READ lectible accounts expense at the end of the period using the allowance
method. In this section you will learn about the percentage of net sales
and the aging of accounts receivable methods. These two ways to esti-
Main Idea mate uncollectible accounts expenses are based on judgment and past
Different methods can
experience.
be used to estimate the
allowance for uncollectible
accounts. Two methods Percentage of Net Sales Method
are percentage of net sales How Do You Use Net Sales to Compute
and aging of accounts Uncollectible Amounts?
receivable. When using the percentage of net sales method for estimating
Read to Learn… uncollectible accounts expense, the business assumes that a certain per-
➤ how to use the centage of each year’s net sales will be uncollectible. To find the adjust-
percentage of net sales ment for uncollectible accounts expense:
method. (p. 712) 1. Determine the percentage.
➤ how to use the aging 2. Calculate net sales.
of accounts receivable 3. Multiply net sales by the percentage.
method. (p. 713) 4. Enter the amount calculated above on the work sheet.
Key Terms Let’s see how this method works. First, the percentage is determined.
percentage of net sales As you can see, in recent years On Your Mark’s actual uncollectible
method accounts have been approximately 2 percent of net sales. On this basis,
aging of accounts receivable On Your Mark’s accountant believes that the 2 percent figure should be
method used to estimate uncollectible accounts expense.
Uncollectible
Year Net Sales Accounts Percentage
2008 $ 59,000 $1,062 (1.8%)
2009 65,000 1,430 (2.2%)
2010 67,000 1,273 (1.9%)
Totals $191,000 $3,765 (2.0%)
Second, the amount of net sales is calculated. Remember that net sales
equals sales minus sales discounts and sales returns and allowances.
As shown, net sales for On Your Mark is $67,500.
Sales $74,500
Less: Sales Discounts $3,000
Sales Returns and Allowances 4,000 7,000
Net Sales $67,500
Third, the uncollectible accounts expense for the current year is
determined by multiplying net sales by the percentage. On Your Mark’s
712 Chapter 24 Uncollectible Accounts Receivable
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uncollectible accounts expense for the period is estimated to be $1,350
($67,500 .02). CULTURAL
Under this method the amount calculated is recorded as the adjustment
on the work sheet and later is entered into the accounting records by jour-
Diversity
Mealtime When
nalizing the adjusting entry. At the beginning of the next period, Allowance you host a business
for Uncollectible Accounts will have a credit balance of $1,475 ($1,350 meal, be aware that
adjustment plus $125 existing balance in the account). your guests’ eating
and drinking choices
Aging of Accounts Receivable Method may be tied to their
religion or culture.
How Do You Use Accounts Receivable to Compute
Several religions
Uncollectible Amounts?
prohibit pork. The
The aging of accounts receivable method classifies the accounts Islamic religion
receivables according to the number of days each account is past due. This outlaws both pork
method assumes that the longer an account is overdue, the less likely it and alcohol. Hindus
is to be collected. Use these steps to find the adjustment for uncollectible do not eat beef. Some
accounts expense: cultures and religions
are vegetarian.
1. Age, or classify and group, each account according to the number of
days it is past due.
2. Use past experience to determine the percentage of each group that
will be uncollectible.
3. Multiply the uncollectible amount for each group by the percentage
for that group.
4. Add the results for all groups.
5. Enter on the work sheet the total estimated uncollectible amount
(calculated above) adjusted by any balance in Allowance for
Uncollectible Accounts.
Let’s look at an example. First, each customer account is aged, or classi-
fied and grouped according to the number of days it is overdue. The com-
puter printout in Figure 24–8 is a schedule of On Your Mark’s aged accounts
receivable that has grouped each customer account.
On Your Mark Athletic Wear
ANALYSIS OF ACCOUNTS RECEIVABLE
December 31, 20--
Total Days Past Due
Account CustomerÕs Amount Not Yet
ID Name Owed Due 1Ð30 31Ð60 61Ð90 Over 90
DIM Joe Dimaio $ 300.00 $ 300.00
GAL Robert Galvin 50.00 $ 50.00
KLE Casey Klein 800.00 $ 800.00
MON Anita Montero 200.00 200.00
RAH Shashi Rahim 175.00 $ 175.00
RAM Gabriel Ramos 1,000.00 1,000.00
SUL Megan Sullivan 40.00 $ 40.00
TAM TammyÕs Fitness 225.00 225.00
WON Kim Wong 306.50 306.50
YOU Lara Young 750.00 750.00
Figure 24–8 Computer-
TOTALS $ 3,846.50 $ 2,475.00 $ 356.50 $ 175.00 $ 40.00 $ 800.00
Generated Analysis of
Accounts Receivable
Section 3 Estimating Uncollectible Accounts Receivable 713
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On Your Mark Athletic Wear
AGING OF ACCOUNTS RECEIVABLE
Estimated Uncollectible Amount
December 31, 20--
Estimated Estimated
Percentage Uncollectible
Age Group Amount Uncollectible Amount
Not yet due $ 2,475.00 2% $ 49.50
1Ð30 days past due 356.50 4% 14.26
31Ð60 days past due 175.00 10% 17.50
61Ð90 days past due 40.00 20% 8.00
Over 90 days past due 800.00 80% 640.00
Total $ 3,846.50 $ 729.26
Figure 24–9 Accounts Receivable Aging Schedule
Next, On Your Mark’s accountant estimates what percentage of each
group will be uncollectible based on past experience. The percentages range
from 2 to 80 percent.
Third, the total uncollectible amount for each group is multiplied
by the percentage for that group. The resulting amounts are the esti-
mated uncollectible amounts for each group. The computer printout
in Figure 24–9 illustrates how the estimated uncollectible amount
is determined from the accounts receivable analysis in Figure 24–8.
As you can see, On Your Mark estimates that a total of $729.26 of its
accounts will be uncollectible. This total represents the end-of-period
balance of Allowance for Uncollectible Accounts.
Finally, an adjustment is entered on the work sheet. This adjust-
ment will bring the balance of Allowance for Uncollectible Accounts
to $729.26, the estimated amount.
Suppose the balance of Allowance for Uncollectible Accounts
reported in the Trial Balance Credit column is $49.80. To determine
the adjustment, subtract the balance of Allowance for Uncollectible
Accounts from the total estimated uncollectible amount. The adjust-
ment amount is $679.46 ($729.26 $49.80).
After the adjusting entry has been journalized and posted, the
balance of Allowance for Uncollectible Accounts is $729.26 (the
balance as determined by the aging schedule).
Allowance for
Uncollectible Accounts Expense Uncollectible Accounts
Debit Credit Debit Credit
Adj. 679.46 Bal. 49.80
Adj. 679.46
Bal. 729.26
714 Chapter 24 Uncollectible Accounts Receivable
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SECTION 3 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Use a diagram like this one
to compare and contrast the
two methods for estimating
uncollectible accounts
discussed in Section 3.
Do the Math
Hernando’s Card Shop is planning to expand. Before it expands, the owner wants to review
the uncollectible accounts. Hernando asks you to calculate the percentage of uncollectible
accounts per year.
Net Sales Uncollectible Accounts
Year 1 $23,000 $ 800
Year 2 28,750 1,200
Year 3 46,000 1,345
Year 4 52,000 1,150
Problem 24–3 Estimating Uncollectible Accounts Expense
Using the Percentage of Net Sales Method
Following are the end-of-period account balances for several stationery and office
supply companies. Each company uses the percentage of net sales method to estimate its
uncollectible accounts expense. The percentage used by each company is also listed.
Instructions Using the form provided in your working papers:
1. Calculate the amount of the adjustment for uncollectible accounts expense using the
percentage of net sales method.
2. Record the adjusting entry for the estimated uncollectible accounts expense for Davis Inc.
Percentage
Sales Sales Returns of Net Sales
Sales Discounts and Allowances Uncollectible
Andrews Co. $142,360 $1,423 $ 936 2
The Book Nook 209,100 3,180 1,139 1
Cable Inc. 173,270 1,730 1,540 11⁄2
Davis Inc. 65,460 650 690 2
Ever-Sharp Co. 95,085 900 1,035 11⁄4
Section 3 Estimating Uncollectible Accounts Receivable 715
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CH A P T ER 2 4 Summary
Key Concepts
1. Customer accounts that are uncollectible are expenses to the business. When it is apparent that
a customer account is uncollectible, it is written off using either the direct write-off method or
the allowance method. The allowance method enables the business to match sales revenue and
uncollectible accounts expense in the same period.
2. An uncollectible account, or bad debt, is created Allowance for
when a customer fails to pay the amount due Uncollectible Accounts
on account. Allowance for Uncollectible
Debit Credit
Accounts is used to summarize the estimated
uncollectible accounts receivable of a Decrease Side Increase Side
business. The estimate is based on judgment Normal Balance
and past experience.
3. Write off a specific uncollectible account using the direct write-off method:
Uncollectible Accounts Expense Accounts Receivable (controlling/subsidiary)
Debit Credit Debit Credit
xxx xxx
4. At the end of the fiscal period, the accountant calculates the amount of bad debt expense that will
result from sales during the period. This estimated uncollectible account expense appears as an
adjustment on the work sheet.
5. Record the adjusting entry using the allowance method:
Uncollectible Accounts Expense Allowance for Uncollectible Accounts
Debit Credit Debit Credit
xxx xxx
6. Write off a specific account using the allowance method:
Allowance for Uncollectible Accounts Accounts Receivable (controlling/subsidiary)
Debit Credit Debit Credit
xxx xxx
7. When a charge customer whose account was previously written off pays the amount owed,
a. reinstate the customer’s account, and
b. record the cash receipt.
Collection of an account that was written off using the direct write-off method.
a. Reinstate the customer’s account.
Accounts Receivable (controlling/subsidiary) Uncollectible Accounts Expense
Debit Credit Debit Credit
xxx xxx
716 Chapter 24 Summary
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Summary C HAPT E R 24
b. Record the cash receipt by debiting Cash in Bank and crediting Accounts Receivable
(controlling and subsidiary).
Collection of an account that was written off using the allowance method.
a. Reinstate the customer’s account.
Accounts Receivable (controlling/subsidiary) Allowance for Uncollectible Accounts
Debit Credit Debit Credit
xxx xxx
b. Record the cash receipt by debiting Cash in Bank and crediting Accounts Receivable
(controlling and subsidiary).
8. Two common methods used to estimate uncollectible Accounts Receivable are the percentage of
net sales method and the aging of accounts receivable method.
Percentage of net sales method:
Net Sales Percentage of Net Sales Estimated Uncollectible Uncollectible Accounts Expense
Aging of accounts receivable method:
Estimated Estimated
Percentage Uncollectible
Age Group Amount Uncollectible Amount
Not yet due xxxxx xx xxxx
1–30 days past due xxxxx xx xxxx
31–60 days past due xxxxx xx xxxx
61–90 days past due xxxxx xx xxxx
91–180 days past due xxxxx xx xxxx
Over 180 days past due xxxxx xx xxxx
Total xxxx
Allowance for Uncollectible Accounts, end of period
Key Terms
aging of accounts receivable direct write-off method (p. 698)
method (p. 713) percentage of net sales method (p. 712)
allowance method (p. 704) uncollectible account (p. 698)
book value of accounts receivable (p. 706)
Chapter 24 Summary 717
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C H A P T ER 2 4 Review and Activities
AFTER
YOU READ
Check Your Understanding
1. Accounting for Uncollectible Accounts
a. Explain the difference between the direct write-off method and the allowance method.
b. Which method is likely to be used by a business with many charge customers? Which is likely
to be used by a business that sells mainly on a cash basis?
2. Determining Uncollectible Accounts Receivable
a. How does the direct write-off method identify the uncollectible accounts expense amount?
b. What factors does the allowance method consider in determining bad debt expense?
3. Direct Write-Off Method
a. Which accounting principle does the direct write-off method violate?
b. In the direct write-off method of recording an uncollectible account receivable, which
accounts are debited and credited?
4. Bad Debts Expense
a. What is another term for bad debts expense?
b. What can businesses do to prevent bad debts?
5. Adjusting Entry
a. What accounts are debited and credited in the adjusting entry to record uncollectible accounts
using the allowance method?
b. What is the account classification of Allowance for Uncollectible Accounts?
6. Allowance Method
a. When does the allowance method recognize the bad debt expense for a year’s sales?
b. When a specific account receivable is written off using the allowance method, which accounts
are debited and credited?
7. Collecting a Written-Off Account
a. What is the first journal entry made when a customer pays an amount that was previously
written off? Name the accounts debited and credited for both methods.
b. In the second journal entry, which accounts are debited and credited?
8. Estimating Uncollectible Accounts Expense
a. Describe the percentage of net sales method.
b. Describe the aging of accounts receivable method.
Apply Key Terms
As a quick review of uncollectible accounts, define each of the
following key terms and explain its relationship to Accounts Receivable.
aging of accounts book value of accounts percentage of net sales
receivable method receivable method
allowance method direct write-off method uncollectible account
718 Chapter 24 Review and Activities
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Computerized Accounting C HAPT E R 24
Writing Off Uncollectible Accounts Receivable
Making the Transition from a Manual to a Computerized System
Task Manual Methods Computerized Methods
Preparing an • Examine each customer account and • A preformatted report feature allows
aged accounts organize it based on its due date. the accountant to generate an aging
receivable report • Using accounting stationery, list schedule. The software pulls data from
each customer’s account in the information stored in the accounts
appropriate past due columns. receivable ledgers.
Writing off an • Determine the method to be used to • Determine the method to be used to
uncollectible write off uncollectible accounts. write off uncollectible accounts.
account • Record a general journal entry to record • Outstanding invoices due are tied to
the write-off and post it to the general the customer’s ID and assigned to the
ledger and subsidiary ledger. account, Allowance for Uncollectible
• Calculate new balances. Accounts.
Q&A
Peachtree Question Answer
How do I set up 1. From the Maintain menu, select Default Information.
defaults for the aging 2. Select Customers to set or to change default information. (In Peachtree,
of Accounts Receivable Accounts Receivable ledgers are referred to as customer accounts.)
ledgers in Peachtree? 3. Click on the Account Aging tab, and set the account defaults.
How do I write off an 1. From the Tasks menu, select Receipts and enter the Customer ID.
uncollectible account 2. In the Cash Account field, select Allowance for Uncollectible Accounts.
in Peachtree? 3. Click the Apply to Invoices tab.
4. Select the Pay box next to the invoices you wish to write off.
QuickBooks Q & A
QuickBooks Question Answer
How do I set up 1. From the Edit menu, select Preferences and click on Reports & Graphs.
defaults for the aging 2. Click the Company Preferences tab.
of Accounts Receivable 3. Choose either the Age from due date or Age from transaction radio button to
ledgers in QuickBooks? set how Accounts Receivable are aged.
How do I write off an 1. From the Company menu, select Make General Journal Entries.
uncollectible account 2. Enter the date and reference, the debit amount, the description, and
in QuickBooks? Uncollectible Accounts Expense as the account to be debited.
3. Enter the credit amount, the description, the customer name, and Accounts
Receivable as the account to be credited.
For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers.
Chapter 24 Computerized Accounting 719
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C H A P T ER 2 4 Problems
Complete problems using: Manual Glencoe Peachtree Complete QuickBooks
OR OR
Working Papers Accounting Software Templates
Problem 24–4 Using the Direct
SMART GUIDE Write-Off Method
Step–by–Step Instructions: Sunset Surfwear uses the direct write-off method of accounting for
Problem 24–4 uncollectible accounts.
1. Select the problem set
for Sunset Surfwear.
Instructions
2. Rename the company 1. In your working papers, record the following transactions on
and set the system date.
3. Record the transactions
page 14 in the general journal.
to write off bad debts 2. Post the transactions to the appropriate accounts.
and reinstate Alex
Hamilton’s account.
Date Transactions
4. Print a Cash Receipts June 1Wrote off the $288.75 account of Alex Hamilton as
Journal, Sales Journal,
Customer Ledgers, and uncollectible, Memorandum 223.
General Ledger. 4 Wrote off the $243.60 account of Helen Jun as uncollectible,
5. Complete the Analyze Memorandum 249.
activity.
14 Wrote off the $57.75 account of Nate Moulder as uncollectible,
6. End the session.
Memorandum 255.
Step–by–Step Instructions:
22 Received $288.75 from Alex Hamilton in full payment of his
Problem 24–5
account, Memorandum 298 and Receipt 944.
1. Select the problem set
for InBeat CD Shop. 29 Wrote off the $100.80 account of Martha Adams as
2. Rename the company uncollectible, Memorandum 329.
and set the system date.
3. Record the uncollectible
accounts adjustment.
Analyze Describe the impact on Accounts Receivable and Uncollect-
4. Print the General Journal ible Accounts Expense when an account is written off.
and General Ledger.
5. Complete the Analyze
activity. Problem 24–5 Calculating and Recording
6. End the session.
Estimated Uncollectible
QuickBooks Accounts Expense
PROBLEM GUIDE InBeat CD Shop uses the percentage of net sales method of accounting for
uncollectible accounts. At the end of the period, the following account
Step–by–Step Instructions:
Problem 24–4 balances appeared on InBeat’s trial balance:
1. Restore the Problem Accts. Rec. $110,000 Allow. for Uncoll. Accts. $ 4,000
24-4.QBB file.
Sales 900,000 Sales Ret. and Allow. 50,000
2. Record the transactions
to write off bad debts Sales Disc. 10,000 Uncoll. Accts. Expense —
and reinstate Alex
Hamilton’s account. Instructions
3. Print a Journal, General
1. In your working papers, calculate the amount of the adjustment for
Ledger report, and
Customer Balance uncollectible accounts for the period ended June 30. Management
Summary report. estimates that uncollectible accounts will be 1 percent of net sales.
4. Complete the Analyze
activity. 2. Journalize the adjusting entry on page 8 in the general journal.
5. Back up your work. 3. Post the adjusting entry to the general ledger accounts.
Analyze Determine the book value of accounts receivable.
720 Chapter 24 Problems
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Problems C HAPT E R 24
Problem 24–6 Writing Off Accounts Under the SOURCE DOCUMENT
Allowance Method PROBLEM
Shutterbug Cameras uses the allowance method of accounting for Problem 24–6
uncollectible accounts. Use the source documents
Instructions in your working papers to
record the transactions for
1. In your working papers, record the following transactions on page 9 in this problem.
the general journal.
2. Post the transactions to the appropriate accounts.
3. Prepare the Assets section of the balance sheet for Shutterbug Cameras
SMART GUIDE
using the partial general ledger in the working papers. The balances of
Step–by–Step Instructions:
other asset accounts are Merchandise Inventory, $33,000; Supplies,
Problem 24–6
$2,000; and Prepaid Insurance, $1,200.
1. Select the problem set
Date Transactions for Shutterbug Cameras.
2. Rename the company
June 2 Wrote off the $593.25 account of Kalla Booth as uncollectible, and set the system date.
Memorandum 329. 3. Record the transactions.
9 Wrote off the $840 account of Click Studios as uncollectible, 4. Record the uncollectible
accounts adjustment.
Memorandum 343. 5. Record the closing
10 Received $131.25 from Jimmy Thompson in full payment entry for Uncollectible
of his account, which was written off on November 10, Accounts Expense.
6. Print Cash Receipts and
Memorandum 349 and Receipt 210. Sales Journals, Customer
12 Wrote off the $945 account of FastForward Productions as Ledgers, General
uncollectible, Memorandum 474. Journal, General Ledger,
and Balance Sheet.
30 Recorded the adjusting entry for estimated uncollectible
7. Complete the Analyze
accounts for the period. The uncollectible accounts expense activity.
estimate is based on 2 percent of the net sales of $150,000. 8. End the session.
30 Recorded the closing entry for Uncollectible Accounts
Expense. QuickBooks
PROBLEM GUIDE
Analyze Calculate the book value of the accounts receivable after the
closing entries have been posted. Step–by–Step Instructions:
Problem 24–6
1. Restore the Problem
Problem 24–7 Estimating Uncollectible 24-6.QBB file.
2. Record the transactions.
Accounts Expense 3. Record the adjustment
for estimated
Cycle Tech Bicycles uses the allowance method of accounting for
uncollectible accounts.
uncollectible accounts. The company estimates the uncollectible amount 4. Record the closing
by aging its accounts receivable accounts. entry for Uncollectible
Accounts Expense.
Instructions 5. Print a Journal, Balance
Sheet, General Ledger,
1. Complete the analysis of accounts receivable that is included in
and Customer Balance
your working papers. Summary.
2. Calculate the estimated uncollectible amount. Use the form provided 6. Complete the Analyze
activity.
in your working papers. 7. Back up your work.
CONTINUE
Chapter 24 Problems 721
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C H A P T ER 2 4 Problems
3. Journalize the June 30 adjusting entry for uncollectible accounts
expense on page 11 of the general journal. Before the adjusting entry,
Allowance for Uncollectible Accounts had a credit balance of $142.
4. Post the adjusting entry to the general ledger accounts.
SMART GUIDE
Analyze Calculate the book value of accounts receivable.
Step–by–Step Instructions:
Problem 24–7
1. Select the problem set
for Cycle Tech Bicycles.
2. Rename the company
Problem 24–8 Reporting Uncollectible Amounts
and set the system date. on the Financial Statements
3. Complete the analysis of
the accounts receivable
The work sheet for River’s Edge Canoe & Kayak is included in your working
in your workbook. papers. The trial balance is complete, and all of the adjustments except the
4. Record the uncollectible one required for uncollectible accounts have been entered.
accounts adjustment.
5. Print a General Journal Instructions
and General Ledger.
6. Complete the Analyze
1. Record the adjustment for uncollectible accounts expense in the
activity. Adjustments section of the work sheet. Uncollectible accounts are
7. End the session. estimated to be 1.5 percent of net sales. Label the adjustment (a).
Step–by–Step Instructions: 2. Complete the work sheet.
Problem 24–8
3. Prepare an income statement, a statement of retained earnings, and a
1. Select the problem set
for River’s Edge Canoe.
balance sheet.
2. Rename the company 4. Record the adjusting entries on page 18 of the general journal.
and set the system date. 5. Post the adjusting entries. Record and post the closing entries.
3. Record the uncollectible
accounts adjustment. Analyze Compute the balance of Allowance for Uncollectible
4. Print a General Journal. Accounts before and after the adjusting entry.
5. Print a Balance Sheet, a
Statement of Retained
Earnings, and an
Income Statement.
6. Click the Save Pre- CHALLENGE Problem 24–9 Using the Allowance
closing Balances PROBLEM
button. Method for Write-Offs
7. Close the fiscal year. Buzz Newsstand uses the allowance method for uncollectible accounts.
8. Print a post-closing Trial
Balance. Instructions
9. Complete the Analyze In your working papers, journalize the following transactions on page 13 in
activity.
10. End the session. the general journal. Post the transactions to the account of Lee Adkins.
Step–by–Step Instructions: Date Transactions
Problem 24–9 Jan. 14 Wrote off the $194.50 account of Lee Adkins as uncollectible,
1. Select the problem set Memorandum 498.
for Buzz Newsstand.
2. Rename the company June 25 Received a check for $30 from Lee Adkins on account,
and set the system date. Memorandum 767 and Receipt 98.
3. Record the uncollectible Dec. 10 Received notice that Lee Adkins declared bankruptcy.
accounts transactions.
4. Print a Cash Receipts
Received 40 percent of the balance not paid, Receipt 288 and
Journal, Sales Journal, Memorandum 941.
and Customer Ledgers.
5. Complete the Analyze Analyze Conclude which account you would debit when writing off
activity.
an account using the direct write-off method instead of the
6. End the session.
allowance method.
722 Chapter 24 Problems
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Winning Competitive Events CHA PTER 24
Practice your test-taking skills! The questions on this page are reprinted with permission
from national organizations:
• Future Business Leaders of America
• Business Professionals of America
Use a separate sheet of paper to record your answers.
Future Business Leaders of America
MULTIPLE CHOICE
1. The ________ of accounting for uncollectible accounts matches potential bad debts
expense with the sales from the same period.
a. direct write-off method
b. matching principle
c. aging of accounts receivable method
d. allowance method
2. Under the allowance method, the entry to record the estimated bad debts expense
a. has no effect on net income. c. has no effect on total assets.
b. increases net income. d. reduces total assets.
3. Cameron Corporation ages accounts receivable to estimate uncollectibles. The
aging schedule estimates $2,340 of uncollectible accounts. Prior to adjustment,
allowance for uncollectible accounts has a debit balance of $300. The expense
reported on the income statement for uncollectibles will be
a. $2,640. c. $2,340.
b. $2,040. d. $300.
4. Vasquez Construction uses the percentage of sales method to estimate
uncollectibles. Net credit sales for the current year amount to $500,000 and
management estimates 2% will be uncollectible. Allowance for doubtful accounts
prior to adjustment has a debit balance of $890. The amount of expense reported
on the income statement will be
a. $10,000. c. $9,110.
b. $10,890. d. $890.
Business Professionals of America
MULTIPLE CHOICE
5. SPH, Inc. uses the direct write-off method for uncollectible accounts. The entry to
record the $64 invoice that Dave Case did not pay is
a. debit Accounts Receivable/Dave Case, credit Uncollectible Accounts Expense.
b. debit Allowance for Uncollectible
Accounts, credit Accounts
Receivable/Dave Case. Need More Help?
c. debit Uncollectible Accounts
Go to glencoeaccounting.glencoe.com and
Expense, credit Accounts click on Student Center. Click on Winning
Receivable/Dave Case. Competitive Events and select Chapter 24.
d. debit Uncollectible Accounts • Practice Questions and Test-Taking Tips
Expense, credit Cash. • Concept Capsules and Terminology
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C H A P T ER 2 4 Real-World Applications and Connections
Critical Uncollectible Accounts Receivable
Thinking 1. Before a business extends credit, it should determine whether potential credit
customers are likely to pay their bills. Explain why this is important.
2. Contrast the direct write-off method and the allowance method.
3. Prepare the journal entry to write off an uncollectible account using (a) the
direct write-off method and (b) the allowance method.
4. Compare the journal entries to reinstate a customer account that had been
written off using (a) the direct write-off method and (b) the allowance method.
5. To determine the amount of the adjustment for uncollectible accounts
expense, develop (a) a formula for the percentage of net sales method and
(b) a step-by-step procedure for the aging of accounts receivable method.
6. Evaluate (a) the direct write-off method and (b) the allowance method.
CASE Merchandising Business: Formal Wear
STUDY The Black Tie rents formal attire. It accepts cash, debit cards, credit cards, and
personal checks. To reserve an outfit requires a down payment. The balance, due
10 days after the return, is recorded as an account receivable. Lately the store has
had problems collecting accounts receivable. Customers say they do not receive
an invoice for the balance until it is past due.
INSTRUCTIONS
1. Develop a plan for quality that will reduce uncollectible accounts. Your plan
must be attainable and measurable.
2. Determine how to implement your plan. Will you need to change
procedures, modify the accounts receivable system, hire another clerk, or
retrain personnel?
a
mattoefr ETHICS Early Write-Off
Suppose you are an accounts receivable clerk for an advertising agency. Your
friend, Hector, owns a deli and has hired your agency to create an ad for a local
magazine. Hector’s business is having financial difficulties, and he asks you to
write off his account although it should not be considered uncollectible yet.
ETHICAL DECISION MAKING
1. What are the ethical issues? 4. How do the alternatives affect the
2. What are the alternatives? parties?
3. Who are the affected parties? 5. What would you do?
$ )) ))
Communicating
Collecting an Outstanding Account
ACCOUNTING At The Music Connection, you handle accounts receivable and uncollectible
accounts. Six months ago a new dance club bought an expensive, state-of-the-art
music system on account. It is still unpaid. Write the customer a letter requesting
payment. State that if payment is not received within 30 days, you will turn the
account over to a collection agency.
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Real-World Applications and Connections C HAPT E R 24
Skills Beyond Communicating Information
NUMBERS The Clothes Horse, a well-known retailer of men’s apparel, is closing. Before it
does it wants to collect all its accounts receivable.
INSTRUCTIONS Write a collection letter to send to all customers with outstanding
balances now and a second letter to send in four weeks.
INTERNATIONAL Transaction Risks
International companies strive to collect accounts receivable as quickly as
Accounting possible. A firm that expects to receive payment in a foreign currency faces a
transaction risk that currency values will change to its disadvantage between the
time the contract is entered and the time payment is made.
INSTRUCTIONS Assume that British Airways purchases airplanes from Boeing,
a U.S. manufacturer. Boeing agrees to accept British pounds for the purchase.
British Airways takes three months to pay. Describe the transaction risk involved.
Making It
Credit Check
Personal To obtain credit, you must complete a credit application. The business will check
your income, banking record, current debt amount, debt payment record, age,
employment history, current employer, address, and so on.
PERSONAL FINANCE ACTIVITY Imagine that you just graduated from high school,
have a part-time job, and plan to work your way through college. What are some
steps you can take to establish a good credit rating?
PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and
click on Student Center. Click on Making It Personal and select Chapter 24.
Analyzing Horizontal Analysis
Financial Horizontal analysis compares the same items on a financial statement for two
Reports or more accounting periods. For example you might compare the change in
accounts receivable from one year to the next. Look at PETsMART’s balance sheet
in Appendix F on page A-46. To complete a horizontal analysis, subtract the item’s
base year amount (2003) from the current year amount (2004). Then calculate the
result as a percentage of the base year amount.
The result is the increase or decrease over the
base year.
INSTRUCTIONS Use PETsMART’s balance sheet in
Write It Off
Appendix F to complete the following. All types of companies can
experience uncollectible
1. Calculate the amount and percentage that
accounts receivable. Visit
total assets and total stockholders’ equity glencoeaccounting
changed from 2003 to 2004. .glencoe.com and click
2. How does horizontal analysis provide on Student Center. Click on
useful information to a reader of a WebQuest and select Unit 5 to
continue your Internet project.
financial statement?
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CH A P T ER 2 5 Inventories
BEFORE
YOU READ
What You’ll Learn Predict
1. Explain the importance 1. What does the chapter title tell you?
of maintaining accurate 2. What do you already know about this subject from personal experience?
inventory records. 3. What have you learned about this in the earlier chapters?
2. Explain the difference 4. What gaps exist in your knowledge of this subject?
between a periodic and a
perpetual inventory system.
3. Take a physical inventory Exploring the Real World of Business
count and record inventories.
4. Determine the cost of TRACKING INVENTORIES
merchandise inventory using
the specific identification; REI, Inc.
first-in, first-out; last-in, first- Grill some French toast on a camp stove, practice your
out; and weighted average climbing skills on a 30-foot wall, and then take a spin on a
cost methods. mountain bike. Does this sound like the great outdoors? You
5. Assign a value to merchandise can do all this at your local REI retail store. From cycling shoes
inventory using the lower-of- to skis, sleeping bags to windbreakers, REI stocks everything
cost-or-market rule. you will need for outdoor adventures.
6. Explain the accounting How does a retail store like REI keep track of the inventory
principles of consistency and at its stores? REI’s computerized software program analyzes
conservatism. which products are selling at specific stores on a day-to-day
7. Define the accounting terms basis. The system also tracks what is on order and what is in
introduced in this chapter. stock at the distribution center. With this data on hand, REI
employees ensure that the right products are purchased and
Why It’s Important
available to customers at the right stores at the right time.
Merchandise inventory is
▲
typically the largest current What Do You Think?
asset of a business. What might happen if a company like REI could not
effectively evaluate which products it should carry in
inventory?
726 Chapter 25 Inventories
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Working in the Real World
APPLYING YOUR ACCOUNTING KNOWLEDGE
Personal Connection
Have you ever noticed a sign on a store that says 1. What kinds of inventory does your workplace
“Closed for Inventory”? Or gotten a great deal carry?
from a special “Pre-Inventory Sale”? At the end of 2. How often does your employer take an
a fiscal period, many businesses physically count inventory?
items of merchandise they have in stock. Seasonal
3. Who counts the items?
businesses often perform physical inventory
counts after their peak season, when stock on Online Connection
hand tends to be lowest. In this chapter you will Go to glencoeaccounting.glencoe.com and click
learn about several ways to track inventory and on Student Center. Click on Working in the
assign a value to it at the end of a fiscal period. Real World and select Chapter 25.
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SECTION 1 Determining the Quantity
of Inventories
Maintaining control over inventory is essential. To maintain this
BEFORE
YOU READ control, a business establishes a system of inventory-tracking procedures.
A manufacturer controls inventories of raw materials, work in process,
and finished goods. Wholesalers and retailers maintain control over mer-
Main Idea chandise inventory. Can you imagine the problems that a store like Wal-
Two methods of tracking
Mart would encounter if it did not have an inventory control system?
merchandise are the
perpetual inventory system
and the periodic inventory Merchandise Inventory
system. How Is Tracking Merchandise Helpful?
Read to Learn… Earlier you learned that merchandise refers to goods a business pur-
➤ how businesses use chases for resale to customers. The Merchandise Inventory account
inventory control shows the cost of goods purchased for resale. By tracking merchandise,
information. (p. 728) a business knows how much merchandise is sold and which items are
➤ how businesses keep selling well. Merchandise Inventory is the only account reported on
track of inventory. both the balance sheet (as a current asset) and the income statement (to
(p. 728) calculate the cost of merchandise sold).
Key Terms
perpetual inventory system Methods of Tracking Inventory
point-of-sale terminal (POS) How Do You Keep Track of Inventory?
online Businesses can choose between two methods to track merchandise:
periodic inventory system the perpetual inventory system and the periodic inventory system.
Perpetual Inventory System
Figure 25–1 Computer
Printout from a Perpetual Most large businesses and smaller ones with automated accounting
Inventory System systems use the perpetual inventory system , which keeps a constant,
up-to-date record of merchandise on
Wilton Outdoor Center hand at any point in time. When a busi-
DAILY INVENTORY REPORT
Department 47 ness uses a perpetual inventory system,
October 13, 20-- management can obtain the quantity
Stock
No. Item Unit Quantity
Unit
Cost
Total
Value on hand and cost of any item at any
7651 Kilmer Rods Each 8 $ 31.80 $ 254.40 point in time. The business can use the
7560 Tyon Rods Each 12 36.40 436.80 information to determine when to reor-
7762 Peterson Rods Each 11 29.75 327.25
7785 K & R Rods Each 6 26.30 157.80
der items. This avoids loss of sales due
7208 Weber Reels Each 5 35.20 176.00 to inadequate inventory. Figure 25–1
7338 Pro Reels Each 8 41.40 331.20 shows an example of a computer print-
7193 Artcraft Reels Each 4 47.10 188.40
7525 #7 Fishing Hook Box 26 4.86 126.36 out for a perpetual inventory system.
7937 #9 Fishing Hook Box 31 5.24 162.44 The perpetual inventory system
records an entry in the Merchan-
Total $ 2,160.65
dise Inventory account every time a
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purchase or sale occurs. After each sale the system also enters
STOCK CARD
the cost of merchandise sold in the accounting records. The
perpetual inventory system uses a Cost of Merchandise Sold STOCK NO. ITEM
C 1297 Altmore Disc Player
account.
Computers update a perpetual inventory system through
SUPPLIER SUPPLIER’S CATALOGUE NO.
Star Electric 91246
electronic cash registers, or point-of-sale terminals (POS) , UNIT MINIMUM MAXIMUM
that are online (linked to a central computer system). Such Each 15 60
machines read bar codes that identify the item being sold.
DATE EXPLANATION IN OUT BALANCE
The computer records the sale and automatically updates
7/1/20-- Balance on Hand 48
the inventory information. Merchandise purchases are also 7/8/20-- Shipping Order 21928 6 42
entered into the computer to update the inventory records. 7/12/20-- Shipping Order 22201 10 32
Businesses that have not yet automated their operations 7/20/20-- Shipping Order 22456 8 24
can also use a perpetual inventory system. They use stock 7/24/20-- Shipping Order 22719 12 12
7/24/20-- Purchase Req. 19426
cards or sheets like the one in Figure 25–2 to record the
7/31/20-- Receiving Report 21563 48 60
amount of increase or decrease for every purchase and sale.
For example, a business records the quantity of merchandise
purchased in the stock card’s In column and the quantity of
Figure 25–2 Stock Card
sold items in the Out column. Used in a Perpetual Inventory
System
Periodic Inventory System
In the periodic inventory system , inventory records are updated
only after a physical count of merchandise on hand is made. This system AS
does not adjust inventory records for every purchase and sale. Instead, an YOU READ
adjusting entry is made at the end of the accounting period. See Chapter 18,
In Your Experience
pages 521–522 for a review of how to calculate the inventory adjustment.
Small businesses that maintain manual accounting records generally use Give an example of
this system. a store that gave you
information regarding an
Physical Inventory Count inventory item. Did it use
a manual or computer
In either inventory tracking system, a business takes a physical count of system to obtain the
its merchandise at least once a year. This is called taking inventory and is part information?
of the system of internal controls. Businesses using the periodic inventory
system must use the physical count to update their accounting records.
The process of identifying and counting all items of merchandise for
businesses with many items in inventory is very time consuming. There- Figure 25–3 Inventory
fore, inventory is usually counted when it is at its lowest level. Seasonal Sheet
businesses take physical counts and
record inventories at the end of the INVENTORY SHEET
peak selling period after they have sold DATE Jan. 5, 20-- CLERK Arlene Stone PAGE 8
most of the merchandise. A ski shop,
for instance, probably takes inventory STOCK NO. ITEM UNIT QUANTITY UNIT COST TOTAL VALUE
in May or June. 1901 Needles Pkg 24 1 14 27 36
The total number of a particular 2132 Thread Spool 12 65 7 80
2136 Thread Spool 18 55 9 90
item on hand is recorded on an inven-
3245 Zipper Each 18 1 50 27 00
tory card or an inventory sheet. Figure 1917 Pins Box 24 79 18 96
25–3 shows a typical inventory sheet. It 4971 Buttons Pkg 12 89 10 68
lists each item’s stock number, descrip- 4993 Tape Measure Each 15 1 49 22 35
tion, quantity on hand, unit cost, and
the total cost of its inventory on hand. TOTAL FOR THIS SHEET 789 14
Section 1 Determining the Quantity of Inventories 729
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SECTION 1 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Identify three facts about each
inventory tracking system 4RACKING 3YSTEM &ACT &ACT &ACT
covered in this section. Create
a chart similar to this one.
Do the Math
Katie’s Ceramic Emporium received 9 dozen ceramic elephants for a total cost of $306.72.
The invoice also includes 17 dozen songbird figurines in various colors, with a cost of
$822.12. Based on the information on the invoice, calculate the unit cost of the elephants
and the songbirds.
Problem 25–1 Preparing Inventory Reports
In your working papers, complete the manual inventory sheet for Carole’s Gift Shop. Use
today’s date and your name as the clerk.
Stock No. Item Unit Quantity Unit Cost
1790 Greeting Cards Doz. 32 6.00
2217 Plush Toys Each 20 2.50
1900 Balloons Doz. 12 .50
1201 Wrapping Paper Each 30 1.12
1205 Ribbon Spool 25 .75
3495 Novelty Buttons Doz. 12 2.50
2722 Music Boxes Doz. 6 60.00
4200 Party Supplies Doz. 10 6.50
1907 Gift Boxes Doz. 5 2.75
1742 Vases Doz. 2 12.50
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SECTION 2 Determining the Cost
of Inventories
Once a business determines the quantity of merchandise it has on
BEFORE
hand, it calculates the cost of that merchandise. There are four inventory YOU READ
costing methods used to assign costs to merchandise.
Main Idea
Inventory Costs Businesses can choose one
Why Is It Difficult to Determine Inventory Costs? of four methods to assign
When merchandise is purchased, it is recorded in the accounting cost values to inventories.
records at cost. However, assigning a cost to each item in inventory can Read to Learn…
be complicated. A business may purchase the same item many times ➤ why determining
within a single inventory period, and the cost may change from one inventory costs can be
purchase to the next. The challenge is to decide which cost applies to difficult. (p. 731)
each item. ➤ the methods for assigning
costs to inventory. (p. 731)
Methods of Assigning Costs Key Terms
to Inventories specific identification method
first-in, first-out method
How Do You Set the Cost of Inventory?
(FIFO)
Businesses use one of four methods to determine inventory cost: last-in, first-out method
• specific identification • last-in, first-out (LIFO) (LIFO)
• first-in, first-out (FIFO) • weighted average cost weighted average cost
method
The Specific Identification Costing Method
Under the specific identification method , the exact cost of each item
is determined and assigned to that item. The actual cost of each item is
obtained from the invoice.
Businesses that sell a small number of
items with high unit prices most often use
the specific identification method. Appli-
ance stores, automobile dealerships, and
furniture stores often use this method.
The Entertainment Store uses the peri-
odic inventory system. It started the year
with a beginning inventory of 15 DVD
players. During the period the store pur-
chased an additional 50 players. When a
physical inventory count was taken on May
31, there were 12 players still on hand. The
cost of the players was calculated as shown
on page 732.
Section 2 Determining the Cost of Inventories 731
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Date Description Units Cost Total
June 1 Beginning inventory 15 $250 $ 3,750
Aug. 4 Purchase 20 250 5,000
Dec. 8 Purchase 10 253 2,530
Feb. 27 Purchase 10 258 2,580
May 1 Purchase 10 260 2,600
Total 65 $16,460
Using the specific identification method, the accountant checks the
AS
YOU READ invoices to find the actual cost of each of the 12 players still on hand at the
end of May. The accountant found the following:
In Your Own Words
Specific Identification 4 purchased @ $253 each $1,012
Costing Explain why all 5 purchased @ $258 each 1,290
businesses do not use 3 purchased @ $260 each 780
the specific identification 12 players (ending inventory) $3,082
costing method.
The cost of ending inventory is $3,082. Once the cost of ending inven-
tory has been calculated, the cost of merchandise sold can be computed:
Purchases available for sale
Cost of ending inventory
Cost of merchandise sold
In this example the cost of merchandise sold using the specific identifi-
cation method is $13,378:
Units Cost
Cost of players available for sale 65 $16,460
Less ending inventory 12 3,082
Cost of merchandise sold 53 $13,378
The First-In, First-Out Costing Method
The first-in, first-out method (FIFO) of assigning cost assumes that
the first items purchased (first in) are the first items sold (first out). The
FIFO method assumes that the items purchased most recently are the ones
on hand at the end of the period. The physical flow of most merchandise is
first-in, first-out. For example, think about milk that is stocked by a super-
market. Since milk is perishable, the supermarket stocks the shelves with
the milk it purchased first. As that milk is sold, later purchases of milk are
added at the back of the shelves.
Let’s apply the FIFO costing method to our DVD player example.
Date Description Units Cost Total
June 1 Beginning inventory 15 $250 $ 3,750
Aug. 4 Purchase 20 250 5,000
Dec. 8 Purchase 10 253 2,530
Feb. 27 Purchase 10 258 2,580
May 1 Purchase 10 260 2,600
Total 65 $16,460
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Under the FIFO method, the items purchased first are assumed to be
the items sold first. In other words the 53 players sold are assumed to be as
follows:
Units
Beginning inventory 15
Aug. 4 20
Dec. 8 10
Feb. 27 8
Total sold 53
The items remaining in inventory are:
Units
Feb. 27 (10 bought 8 sold) 2
May 1 10
Total 12
The cost of the ending inventory using the FIFO method is:
10 units @ $260 each $2,600
2 units @ $258 each 516
12 units $3,116
The cost of merchandise sold using the FIFO method is $13,344:
Units
Cost of players available for sale 65 $16,460
Less ending inventory 12 3,116
Cost of merchandise sold 53 $13,344
The Last-In, First-Out Costing Method AS
YOU READ
The last-in, first-out method (LIFO) of assigning inventory cost
assumes that the last items purchased (last in) are the first items sold (first Compare and
out). The LIFO method assumes that the items purchased first are still on Contrast
hand at the end of the period. The earliest costs, therefore, are the ones used Cost Flow Assumptions
to assign a cost to the inventory. The physical flow of a stone and gravel How are FIFO and LIFO
company is last-in, first-out. When new gravel is purchased and delivered, similar? How are they
it is deposited on top of the existing gravel. As gravel is taken from the top different?
of the pile, the first gravel used is the last gravel delivered.
Let’s return to the DVD player example and apply the LIFO costing
method.
Date Description Units Cost Total
June 1 Beginning inventory 15 $250 $ 3,750
Aug. 4 Purchase 20 250 5,000
Dec. 8 Purchase 10 253 2,530
Feb. 27 Purchase 10 258 2,580
May 1 Purchase 10 260 2,600
Total 65 $16,460
Using the LIFO method, the 12 players remaining in stock are from the
beginning inventory of 15 units. The cost of the ending inventory is $3,000
(12 units @ $250 each).
Section 2 Determining the Cost of Inventories 733
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The cost of merchandise sold using the LIFO method is $13,460:
Connect to… Units
SCIENCE Cost of players available for sale 65 $16,460
How much the human Less ending inventory 12 3,000
body is worth depends Cost of merchandise sold 53 $13,460
on the method used to
value it. Broken down
into its basic elements The Weighted Average Cost Method
and minerals, it is worth A fourth method of assigning inventory costs is the weighted average
only a few dollars. But cost method. The weighted average cost method assigns the average cost
when broken down to each unit in inventory. The average cost is calculated by:
to its valuable fluids,
• adding the number of units on hand at the beginning of the period and
tissues, and germ-fighting
antibodies, it is worth the number of units purchased
$45 million according to a • adding the cost of the units on hand at the beginning of the period and
recent Wired article. the cost of the units purchased
• dividing the total cost by the total number of units
The average cost per unit is used to determine the cost of the ending
inventory. Again, we will use the The Entertainment Store example to apply
the weighted average cost method.
Date Description Units Cost Total
June 1 Beginning inventory 15 $250 $ 3,750
Aug. 4 Purchase 20 250 5,000
Dec. 8 Purchase 10 253 2,530
Feb. 27 Purchase 10 258 2,580
May 1 Purchase 10 260 2,600
Total 65 $16,460
The average cost per player is $253.23 ($16,460 65 units).
The cost of the ending merchandise inventory using the weighted
average cost method is $3,038.76 (12 units $253.23).
The cost of merchandise sold using the weighted average cost method
is $13,421.24:
Units
Cost of players available for sale 65 $16,460.00
Less ending inventory 12 3,038.76
Cost of merchandise sold 53 $13,421.24
The following table illustrates the different inventory costing methods
for The Entertainment Store’s inventory of DVD players. After the company
selects an inventory costing method, it is applied consistently as you will
see in the next section.
Method Cost of Players Sold Ending Inventory
Specific identification $13,378.00 $3,082.00
FIFO 13,344.00 3,116.00
LIFO 13,460.00 3,000.00
Weighted average 13,421.24 3,038.76
734 Chapter 25 Inventories
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SECTION 2 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Identify two facts about each
inventory costing method #OSTING -ETHOD &ACT &ACT
covered in this section. Create
a chart similar to this one.
Do the Math
Foxfire Golf Club Pro Shop uses the first-in, first-out method for inventory costing. At
the beginning of the year, Foxfire had 30 golf club sets on hand. The golf club sets were
purchased for $800 each. An additional 12 golf club sets were purchased during the year at
$875 each. When inventory was taken at the end of the season, 5 golf sets were still on hand.
Using the FIFO method of inventory valuation, what was the total cost of merchandise sold?
Problem 25–2 Determining Inventory Costs
The following items were purchased by Kudos Leather Goods during the month of April:
April 2 34 wallets @ $12.95 each
April 8 24 wallets @ $13.10 each
April 18 15 wallets @ $13.25 each
April 26 20 wallets @ $13.27 each
On April 1 the business had in inventory 19 wallets valued at $12.90 each. On April 30 the
business had 36 wallets in inventory; of these wallets, 8 were purchased on April 2, 15 were
purchased on April 8, 3 were purchased on April 18, and 10 were purchased on April 26.
Instructions In your working papers, calculate the cost of the ending inventory using:
a. the specific identification method
b. the FIFO method
c. the LIFO method
d. the weighted average method
Section 2 Determining the Cost of Inventories 735
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Accounting Careers in Focus
CHIEF FINANCIAL OFFICER
Water Replenishment District of Southern
..
California, Cerritos, California Tips from .
Scott M. Ota
for a job,
Q: Why is accounting appealing to you? When looking vi-
ideal work en
A: Accounting is like learning a different language. Some people consider your wo rk
you want to
think because you are an accountant, you must be good at ronment. Do y?
small compan
math. That is true, but the key is actually knowing how to for a large or
important, pay
balance accounts and understanding their relationships. Which is more
t opportunity?
o r advancemen ro-
Q: What key factors are necessary for success? more about p
You can learn
A: As you move up the corporate ladder, your success will depend yers through
spective emplo
ucted on the
a great deal on how effectively you communicate and relate to research cond r
your library o
others. When working with nonaccountants, know your audience Internet or at
and bring the conversation to their level of understanding. career center.
Q: Do you have any advice for accounting students?
A: Don’t get discouraged. If accounting were easy, everyone would do it. Stay on
target and make definite, attainable goals and stick to them. There are so many
different careers in accounting—the options are limitless.
Q: What advice would you offer those interested in a career track
leading to a chief financial officer position?
A: Talk to people in the industry. Investigate the requirements for becoming a
CFO to determine whether you are willing to put in the time and effort. The
background and experience that you develop over the early part of your career
is very important. It will lay the foundation for things to come.
CAREER FACTS
Nature of the Work: Direct the company’s accounting policies, procedures, and finance
▲
functions; ensure the integrity of the company’s financial information; identify and
manage business risks and insurance requirements.
Training or Education Needed: At least 10 years of experience, including public
▲
accounting experience and a minimum of five years in a management role; a master’s
degree in business administration. Many companies require a CPA license.
Aptitudes, Abilities, and Skills: This is an executive-level position. Strong analytical skills,
▲
long-term planning skills, and communication skills are required. CFOs work directly with
a company’s chief executive officer, board members, and other senior executives.
Salary Range: $85,000 to $350,000 depending on experience, location, and company
▲
revenue.
Career Path: Gain experience in a public accounting firm and then accept positions of
▲
increasing responsibility in a corporate environment, such as director of finance, director
of accounting, or controller.
Thinking Critically What qualities do you think are important to be a good manager?
736 Chapter 25 Accounting Careers in Focus
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SECTION 3 Choosing an Inventory
Costing Method
A business may use any one of the four inventory costing methods.
BEFORE
Careful consideration is given to this choice because it affects the gross YOU READ
profit reported by the business.
Main Idea
Consistency and Inventory Costing Apply consistency and
How Do You Apply the Consistency Principle? conservatism when reporting
When a business applies the same accounting methods in the merchandise inventory on
same way from one period to the next, the business is applying the the financial statements.
GAAP consistency principle . Once a business chooses an inventory Read to Learn…
costing method, the business must use it consistently. This helps owners ➤ about the consistency
and creditors compare financial reports from one period to another. principle and inventory
Businesses are permitted to change costing methods but must declare costing methods. (p. 737)
the reasons for changing and how the change will affect the financial ➤ how the inventory
statements. In addition the business must get permission for the change costing method affects
from the Internal Revenue Service. the reported gross profit.
(p. 737)
Comparison of the Four Inventory ➤ about the conservatism
principle and the lower-
Costing Methods of-cost-or-market rule.
How Does the Inventory Costing Method Affect the (p. 738)
Reported Gross Profit?
Key Terms
When deciding which inventory costing method to use, the owner consistency principle
or manager compares the four methods and selects the one that is likely lower-of-cost-or-market rule
to be the most beneficial to the company. The owner or manager consid- market value
ers the present economic conditions and the future economic outlook. conservatism principle
He or she will also consider whether prices and demand for the product
will remain stable, increase, or decrease.
The cost of ending inventory affects the cost of merchandise sold,
which in turn affects the income or loss reported on the income state-
AS
ment. The following table compares The Entertainment Store’s gross
YOU READ
profit on sales using the four inventory costing methods. The com-
pany sold all of the DVD players for $320 each. Total sales are $16,960 Instant Recall
(53 units $320). Income Statement
Specific First-In, Last-In, Weighted Sales
Identification First-Out First-Out Average Cost of merchandise sold
Sales $16,960.00 $16,960.00 $16,960.00 $16,960.00 Gross profit on sales
Less: Cost of Operating expenses
merchandise sold 13,378.00 13,344.00 13,460.00 13,421.24
Net income (loss)
Gross profit
on sales $ 3,582.00 $ 3,616.00 $ 3,500.00 $ 3,538.76
Section 3 Choosing an Inventory Costing Method 737
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Over the year, the price that The Entertainment Store paid to purchase
AS
YOU READ each player increased from $250 to $260. As the table on page 737 shows, in
a period of rising prices, the LIFO method results in the lowest gross profit
Key Point
on sales. The FIFO method results in the highest gross profit on sales.
The Effect of Inventory Businesses pay income taxes on income earned. As this example indi-
Costing on Net Income cates, the inventory costing method used by a business can increase or
A company’s gross decrease its taxes.
profit on sales and net
income are affected by
the inventory costing Conservatism and the
method used.
Lower-of-Cost-or-Market Rule
How Do You Apply the Conservatism Principle?
Merchandise inventory appears the income statement and the balance
sheet. Cost is the most common basis for reporting inventory. However,
inventory might be worth less than its cost. For example, some merchandise
items may deteriorate or become obsolete. If their value becomes less than
the recorded cost, the difference is a loss to the business.
The lower-of-cost-or-market rule requires that the cost of the ending
inventory that appears on the financial statements is the lower of its cost
(calculated using one of the four inventory methods) or its market value.
Market value of an item is the current price that is charged for a similar
item of merchandise in the market. That is, it is the price that a retailer
like The Entertainment Store would pay a wholesaler or manufacturer for a
specific item. Market value is the cost at which the inventory item could be
replaced at the date of the financial statements.
Let’s look at an example. Assume that The Entertainment Store deter-
AS
YOU READ mines that the current market value of the DVD players is $248 each. At
market the players are worth $2,976 ($248 12 units). Assume also that
It’s Not What It
The Entertainment Store uses the FIFO inventory costing method. Under
Seems
this method the cost of the ending inventory was $3,116.
Market Value For Following the lower-of-cost-or-market rule, The Entertainment Store will
inventory purposes, report inventory at $2,976.
market value is not the
retail price you pay at Lower of
the store for an item. It Cost (FIFO) $3,116
is the wholesale price or
a store would pay a Market 2,976
supplier to replace that
item. The GAAP conservatism principle of accounting states that it is best to
present amounts that are least likely to result in an overstatement of income
or assets. To be conservative is to take the safe route. The lower-of-cost-or-
market rule is conservative for two reasons:
1. Decreases in inventory value (losses) are recognized when they
occur, but increases in inventory value are not recorded.
2. Inventory as reported on the balance sheet is never more, but may
be less, than the actual cost of the inventory.
738 Chapter 25 Inventories
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SECTION 3 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Create a chart like this one to !CCOUNTING 0RINCIPLE $ESCRIPTION !PPLICATION TO )NVENTORY
describe the two accounting
principles covered in this
section. Also describe how
each principle applies to
merchandise inventory.
Do the Math
The management of Baby Steps Gross Profit
Children’s Store wants to report the
Weighted
largest gross profit on sales. Using average
the graph, compare the gross profit Last-in,
on sales for the four inventory first-out
costing methods. Which method First-in,
first-out
results in the largest gross profit on
sales? Specific
identification
119,500 120,000 120,500 121,000 121,500 122,000
Problem 25–3 Analyzing a Source Document
Read the following memorandum and complete the assigned task.
MEMORANDUM
Toys & Things
TO: Accounting Clerk
FROM: Accounting Manager
DATE: June 30, 20--
SUBJECT: Change in Inventory Method
We have received approval to change from the LIFO to the FIFO method of
determining our inventory costs. Please calculate the cost of the Walk-A-
Long Dolls using the FIFO method. There are 36 dolls in inventory.
Walk-A-Long Dolls Beginning inventory 8@ $15.45
Purchases 6/11 12@ $15.95
6/17 10@ $16.25
6/22 6@ $16.40
Instructions
1. What is the new value of the ending inventory?
2. Assume that all 36 dolls were sold for $21.95. What is the gross profit for this item?
Section 3 Choosing an Inventory Costing Method 739
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CH A P T ER 2 5 Summary
Key Concepts
1. Merchandise inventory is often the largest current asset of a business. Merchandise Inventory is
the only account that appears on both the balance sheet and the income statement:
• as a current asset on the balance sheet
• as part of the calculation for cost of merchandise sold on the income statement
To control its merchandise, a merchandising business establishes a system of inventory
procedures that identifies:
• how much of its merchandise has been sold
• which items are selling well
• which items should not be replaced after they are sold
2. Differences between a periodic and perpetual inventory system:
Periodic Inventory System Perpetual Inventory System
Used by small businesses with manual Used by most large businesses and smaller
accounting records. ones with automated accounting systems.
Requires a physical count of the Provides current inventory records at any
merchandise on hand to update point in time.
inventory records.
How inventory accounting records are How inventory accounting records are
updated: updated:
• An adjusting entry is made to the • When a sale is made, the decrease to
Merchandise Inventory account at inventory is handled electronically using
the end of the accounting period. point of sale terminals that scan in the
(To review this, see Chapter 18, product’s bar code.
pages 521–522.) • When merchandise is purchased, the
• The cost of merchandise sold increase to inventory is entered directly
is calculated at the end of the into the inventory system.
accounting period (To review this,
see Chapter 19, page 559.)
3. At least once a year, a business takes inventory by physically counting its merchandise. This is a
good practice for all merchandisers, regardless of the inventory tracking system used. The count
is usually made when inventory is at its lowest level, generally after a company’s peak selling
period.
An inventory card or inventory sheet is used to record the following information about each
item at a particular date:
• stock number
• item name
• unit description
• quantity on hand
• unit cost
740 Chapter 25 Summary
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Summary CHAPT E R 25
4. Businesses choose one of four methods to assign costs to the merchandise that it has on hand. A
company’s gross profit on sales and net income are affected by the inventory costing method it
uses.
Inventory Costing Methods:
Specific identification method Tracks the exact cost of each item.
First-in, first-out method (FIFO) Assumes that the first items purchased
are the first items sold.
Last-in, first-out method (LIFO) Assumes that the last items purchased
are the first items sold.
Weighted average cost method Uses an average cost for each
inventory item.
5. The lower-of-cost-or-market rule applies the conservatism principle to reporting inventory on
financial statements. It requires a business to report its ending inventory using whichever of
these two is lower:
• the inventory’s cost as calculated using the costing method selected by the company (specific
identification method, FIFO, LIFO, or weighted average method)
• the inventory’s market value, which is the wholesale cost to replace the inventory at the date of
the financial statements
6. In reporting its inventory, a business must follow two accounting principles:
• Consistency This principle requires that once a business chooses an inventory costing
method, it must use that method consistently. If it changes methods, it must obtain
permission from the Internal Revenue Service and then report the reasons for the change and
how it affects the financial statements.
• Conservatism This accounting principle requires that when they can choose among
procedures, accountants must choose the safer, or more conservative, route by presenting
amounts that are least likely to result in an overstatement of income or assets.
Key Terms
conservatism principle (p. 738) online (p. 729)
consistency principle (p. 737) periodic inventory system (p. 729)
first-in, first-out method (FIFO) (p. 732) perpetual inventory system (p. 728)
last-in, first-out method (LIFO) (p. 733) point-of-sale terminal (POS) (p. 729)
lower-of-cost-or-market rule (p. 738) specific identification method (p. 731)
market value (p. 738) weighted average cost method (p. 734)
Chapter 25 Summary 741
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C H A P T ER 2 5 Review and Activities
AFTER
YOU READ
Check Your Understanding
1. Inventory Records
a. Why does a company need a control system for its merchandise inventory?
b. What information does tracking inventory provide to a business?
2. Inventory Tracking Systems
a. What is the difference between a periodic and a perpetual inventory system?
b. What is the advantage to using a perpetual inventory system? Why is it difficult for some
businesses to use it?
3. Physical Inventory Count
a. When is the best time for a business to take a physical inventory?
b. Which tracking system requires a physical inventory count for financial reporting purposes?
4. Inventory Costing Methods
a. What is meant by the phrase “with the FIFO method, the inventory cost is based on the most
recent costs”?
b. Why does the inventory costing method used affect gross profit on sales and net income?
5. Lower-of-Cost-or-Market Rule
a. In this rule, what is meant by the term cost? By the term market?
b. State the lower-of-cost-or-market rule using your definitions of cost and market.
6. Consistency and Conservatism
a. How does the consistency principle help the owners, creditors, and the general public?
b. What approach to presenting income does the conservatism principle require?
Apply Key Terms
Grandma’s Toy Attic is changing from a manual to an
automated inventory control system. As the owner, you plan
to hire an inventory supervisor who understands accounting
principles, inventory control, and business economics as well
as computer applications. Use the following terms to write
a job description for this position. Then write a newspaper
advertisement to attract the most qualified individual.
Suggest some layout ideas for the advertisement.
conservatism principle market value
consistency principle online
first-in, first-out method periodic inventory system
(FIFO) perpetual inventory system
last-in, first-out method point-of-sale terminal (POS)
(LIFO) specific identification method
lower-of-cost-or-market rule weighted average cost method
742 Chapter 25 Review and Activities
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Computerized Accounting CHAPT E R 25
Inventory Costing
Making the Transition from a Manual to a Computerized System
Task Manual Methods Computerized Methods
Determining • Enter purchases of merchandise onto • When the accounting system is set
the cost of stock cards. up, the costing method must be
inventories • Enter sales of items onto stock cards. determined.
in a perpetual • At period end, calculate the number • Purchases of merchandise update not
inventory and value of remaining inventory only the general ledger but also update
system items. the inventory records.
• As sales are made, the system updates
the inventory records.
• Inventory quantities and values are
available when needed.
Q&A
Peachtree Question Answer
How is inventory set 1. From the Maintain menu, select Default Information.
up and tracked in 2. Select Inventory Items.
Peachtree? 3. Click the GL Accts/Costing tab and enter the GL account numbers for sales and
purchases.
4. Click the Taxes/Shipping tab and enter a (✓) if sales taxes are to be collected on
items sold. Click OK.
5. From the Maintain menu, select Inventory Items.
6. Enter Item ID codes, descriptions, price, and cost method (FIFO, LIFO, or
Average) for all inventory items.
7. When recording sales or purchases of inventory items, use the established item
codes. With each transaction, the system will update the inventory records.
QuickBooks Q & A
QuickBooks Question Answer
How is inventory set 1. From the Lists menu, select Item List.
up and tracked in 2. Click the Item drop-down menu, and choose New.
QuickBooks? 3. From the Type field, choose Inventory Part.
4. Complete the Purchase, Sales, and Inventory Information sections.
5. Click OK.
6. When recording sales, purchases, or returns of inventory, use the established
item codes. QuickBooks will automatically update the inventory records.
For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers.
Chapter 25 Computerized Accounting 743
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C H A P T ER 2 5 Problems
Complete problems using: Manual Glencoe Peachtree Complete QuickBooks Spreadsheet
Spreadshee
OR OR OR
Working Papers Accounting Software Templates Templates
Problem 25–4 Calculating the Cost of
SMART GUIDE Ending Inventory
Step–by–Step Instructions: Sunset Surfwear sells wet suits. On January 2 there were 21 wet suits at a
Problem 25–4 total cost of $4,809 in inventory.
1. Select the problem set
for Sunset Surfwear. Date Description Wet Suits Cost Total
2. Rename the company
Jan. 2 Beginning inventory 21 $229 $ 4,809
and set the system date.
3. Print an Inventory Jan. 3 Purchase 10 235 2,350
Valuation Report, Cost Mar. 17 Purchase 6 238 1,428
of Goods Sold Journal,
and Item Costing July 27 Purchase 12 240 2,880
Report. Sept. 27 Purchase 10 241 2,410
4. Complete the Analyze
Nov. 29 Purchase 6 244 1,464
activity.
5. End the session. Total 65 $15,341
At the end of the year, there were 17 wet suits in ending inventory. Of
QuickBooks
these, 1 was purchased on July 27, 10 were purchased on September 27, and
PROBLEM GUIDE 6 were purchased on November 29.
Step–by–Step Instructions: Instructions Assign a cost to the ending inventory using the following:
Problem 25–4
a. the specific identification method
1. Restore the Problem
25-4.QBB file. b. the FIFO method
2. Print an Inventory c. the LIFO method
Valuation Detail report.
d. the weighted average cost method
3. Complete the Analyze
activity. Analyze Determine which inventory method resulted in the lowest
4. Back up your work.
cost of ending inventory.
SPREADSHEET
SMART GUIDE Problem 25–5 Completing an Inventory Sheet
Step–by–Step Instructions: InBeat CD Shop assigns a cost to its inventory using the lower-of-cost-or-
Problem 25–6 market rule. In your working papers, there is a partial inventory record. As
1. Select the spreadsheet an example, the first line of the inventory record has been completed.
template for Problem
25–6.
2. Enter your name and INVENTORY RECORD
the date in the spaces
provided on the Current
template. Item
Item
Ending Cost
Market
Price to Total
3. Complete the spread- No. Inventory per Unit
Value
be Used Cost
sheet using the
instructions in your 0247 Blank CDs 24 2.67 2.88 2.67 64.08
working papers.
4. Print the spreadsheet
and proof your work.
5. Complete the Analyze
activity.
6. Save your work and
exit the spreadsheet
program.
744 Chapter 25 Problems
726-749_CH25_868829.indd 744 9/16/05 12:51:19 PM
Problems CHAPT E R 25
Instructions Complete the inventory record. Do the following:
1. Select the lower-of-cost-or-market value. Enter that amount in the Price SMART GUIDE
to be Used column. Step–by–Step Instructions:
2. Calculate the total cost of each item by multiplying the units in ending Problem 25–7
inventory by the Price to be Used column. 1. Select the problem set
3. Add the amounts in the Total Cost column to determine the total cost for Cycle Tech Bicycles.
2. Rename the company
of the ending inventory. and set the system date.
3. Print an Inventory
Analyze Identify how many items used market value rather than Valuation Report, Cost
actual cost. of Goods Sold Journal,
and Item Costing
Report.
Problem 25–6 Calculating Gross Profit on Sales 4. Print an Income
Statement and a
Using the four inventory costing methods, Shutterbug Cameras
Balance Sheet.
summarized the cost of its ending inventory as follows: 5. Complete the Analyze
activity.
Specific First-In, Last-In, Weighted 6. End the session.
Identification First-Out First-Out Average Cost
$21,476.00 $21,581.40 $21,410.93 $21,447.36
Shutterbug Cameras also reported the following amounts: SMART GUIDE
Net sales $53,874.92 Step–by–Step Instructions:
Purchases available for sale 57,621.31 Problem 25–8
Instructions Using the preceding information, determine the cost of 1. Select the problem set
for Buzz Newsstand.
merchandise sold and the gross profit on sales for each of the inventory
2. Rename the company
costing methods. and set the system date.
3. Record all purchases
Analyze Conclude which method resulted in the largest gross profit transactions using the
on sales. Purchases/Receive
Inventory option.
4. Record the
Problem 25–7 Reporting Ending Inventory on transportation charges
using the Payments
the Income Statement option.
5. Record the camera
Cycle Tech Bicycles operates on a fiscal year beginning January 1. At the sales using the Receipts
beginning of the year, the shop had in stock six Model #8274, 10-speed option.
6. Print a Purchases
bicycles, valued at $2,364 (6 bicycles @ $394 each). During the year the
Journal, Cash
business made the following purchases: Disbursements Journal,
and a Cash Receipts
Date Bicycles Cost Total Journal to proof your
Jan. 20 4 $399 $ 1,596 work.
Mar. 5 5 415 2,075 7. Print an Inventory
Valuation Report, Cost
Apr. 23 7 419 2,933 of Goods Sold Journal,
Aug. 14 4 423 1,692 and Item Costing
Report.
Oct. 3 6 430 2,580 8. Print an Income
Nov. 17 3 435 1,305 Statement.
Total Purchases 29 $12,181 9. Complete the Analyze
activity.
There were seven bicycles in inventory at the end of the period. During the 10. End the session.
year the bicycles sold for $675 each.
CONTINUE
Chapter 25 Problems 745
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C H A P T ER 2 5 Problems
Instructions
1. Calculate the cost of the ending inventory using the FIFO, LIFO, and
weighted average cost methods.
2. Using the costs calculated in (1), determine the cost of merchandise
sold for each inventory costing method.
3. Prepare a partial income statement for each inventory costing method
showing sales and the calculation of gross profit on sales. Assume that
the sales and purchases are net amounts.
Analyze Identify the method that resulted in the lowest cost of
merchandise sold.
SOURCE DOCUMENT CHALLENGE Problem 25–8 Calculating Cost of
PROBLEM PROBLEM
Merchandise Sold and
Problem 25–8 Gross Profit on Sales
Use the source documents Buzz Newsstand started the month of May with the following inventory of
in your working papers to
complete this problem. disposable cameras:
Units on
QuickBooks Stock No. Brand Hand Unit Cost Selling Price
PROBLEM GUIDE 3845 Lenox 4 $9.60 $ 17.95
4931 Lancaster 6 8.40 17.29
Step–by–Step Instructions:
9265 Paterson 3 8.10 16.88
Problem 25–8
4850 McMahon 5 7.60 15.95
1. Restore the Problem
25-8.QBB file. Buzz Newsstand uses the FIFO method to calculate the cost of its
2. Record all purchase
transactions using the
merchandise inventory. The May 31 physical inventory count indicated:
Enter Bills option. Lenox 4 cameras Paterson 7 cameras
3. Record the
transportation charges Lancaster 5 cameras McMahon 5 cameras
using the Write Checks
option.
Instructions
4. Record the camera sales 1. How many units of each of the four cameras were sold during May?
using the Enter Sales
Receipts option.
2. Using the chart provided in your working papers, calculate the gross
5. Print an Inventory profit on sales for each type of camera.
Valuation Detail, a
Journal report, and a
Date Transactions
Profit & Loss report. May 2 Purchased 10 Lancaster cameras at $8.45 each.
6. Complete the Analyze
activity. 4 Purchased 5 McMahon cameras at $7.80 each.
7. Back up your work. 9 Purchased 6 Lenox cameras at $9.95 each plus a $4
transportation charge.
14 Purchased 5 Paterson cameras at $8.25 each.
17 Purchased 8 Lancaster cameras at $8.60 each.
19 Purchased 4 Lenox cameras at $10.10 each plus a $5
transportation charge.
27 Purchased 8 Paterson cameras at $8.30 each.
29 Purchased 4 Lancaster cameras at $8.85 each.
Analyze Conclude which camera sold the most number of units.
746 Chapter 25 Problems
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Winning Competitive Events CHAPT E R 25
Practice your test-taking skills! The questions on this page are reprinted with permission
from national organizations:
• Future Business Leaders of America
• Business Professionals of America
Use a separate sheet of paper to record your answers.
Future Business Leaders of America
MULTIPLE CHOICE
1. The inventory system in which a constant, up-to-date record of merchandise on
hand is maintained is called the
a. first-in, first-out system. c. perpetual inventory system.
b. last-in, first-out system. d. periodic inventory system.
Use the following information to answer questions 2–4.
Johnson, Inc. had the following inventory data: Inventory item T25 had 1,600 units
at a unit price of $14 in inventory on January 1. The first purchase during the year
was for 1,000 units at $15. The second purchase was for 1,000 units at $18. The
December 31 inventory consisted of 1,200 units. The market price is $15.
2. The total cost of the ending inventory using FIFO is
a. $16,800. c. $18,468.
b. $18,000. d. $21,000.
3. The weighted average unit price is
a. $14.50. c. $15.67.
b. $15.39. d. $16.00.
4. Assume the weighted average cost method is used. Calculate the ending inventory
using the lower-of-cost-or-market rule.
a. $16,000 c. $18,468
b. $18,000 d. $21,000
Business Professionals of America
MULTIPLE CHOICE
5. FIFO
a. Assumes that old goods are sold first and that goods which are on hand are
valued at current prices.
b. Assumes that new goods are sold first and inventory is valued at old prices.
c. Assumes that the cost of current inventory at the conclusion of a period and
the cost of goods sold is the overall representation of all the costs that were
incurred during this period.
d. Assumes that amounts charged
as expenses are actual cost of Need More Help?
goods sold. Go to glencoeaccounting.glencoe.com and
click on Student Center. Click on Winning
Competitive Events and select Chapter 25.
• Practice Questions and Test-Taking Tips
• Concept Capsules and Terminology
glencoeaccounting.glencoe.com Chapter 25 Winning Competitive Events 747
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C H A P T ER 2 5 Real-World Applications and Connections
Critical Inventories
Thinking 1. Name and describe the two systems used to determine the quantity of
merchandise on hand.
2. Explain what is meant by an inventory system that is online.
3. Compute the cost of merchandise sold if the cost of the ending inventory is
$35,280 and the cost of the merchandise available for sale is $97,200.
4. Explain why the specific identification costing method is the most accurate
in determining inventory cost.
5. Explain why an ice cream stand would not use the LIFO method of inventory
costing.
6. Defend the practice of most businesses to estimate the cost of their inventory
using a method other than specific identification, which is the most accurate.
CASE Merchandising Business: Home Building and Supply
STUDY Remodeling a kitchen? Adding a deck to your home? Home Helper is a building
supply store that sells everything from lightbulbs to lumber, cabinet fixtures to
appliances. Because it stocks many sizes and varieties of building products, the
store has a huge inventory.
You work for a local CPA firm hired to evaluate the store’s inventory
procedures. The store manager wants to make sure the store is using the most
appropriate inventory costing method.
INSTRUCTIONS
Think about the types of products stocked by such a store. Of the four inventory
costing methods you studied in this chapter, recommend the best method for
Home Helper. Assume that costs are expected to remain stable over the next few
years. Explain the reasons for your recommendation.
a
mattoefr ETHICS Keeping Promotional Items
Imagine that you work in the cosmetics department of a large department store
like Macy’s. You have access to free samples—shampoo, moisturizer, lipstick, and
nail polish—offered by manufacturers to get customers to try their products. This
is great! You will never have to buy these products again. You figure that by using
them, you are helping to promote them.
ETHICAL DECISION MAKING
1. What are the ethical issues? 4. How do the alternatives affect the
2. What are the alternatives? parties?
3. Who are the affected parties? 5. What would you do?
$ )) ))
Communicating
Inventory Systems
ACCOUNTING Natural Wonder offers products organically grown or made from organic
materials. Its products include clothing, jewelry, gardening materials, and hair
and body care products. The store is interested in a system that will keep an
accurate count of inventory. Discuss the different inventory systems and explain
how frequently each system is updated.
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Real-World Applications and Connections CHAPT E R 25
Skills Beyond Selecting Equipment and Tools
NUMBERS Your manager, Richard Smythe, is considering switching from a manual inventory
system to an automated perpetual system. Write a proposal to Mr. Smythe that
emphasizes the benefits of a perpetual inventory system. Specifically address time
savings and revenue possibilities.
INTERNATIONAL Inventory Measurement
Many countries use International Accounting Standards (IAS) as their national
Accounting GAAP. IAS No. 2 allows inventory valuation using the specific identification,
FIFO, and weighted average methods. It does not allow the LIFO method
although countries such as the United States, Japan, and Mexico permit its use.
INSTRUCTIONS Explain why you think IAS do not permit the use of LIFO.
Making It
Inventory Value
Personal When shopping for a vehicle, you probably want a wide selection from which
to choose. For this reason dealers try to have a large inventory, yet not so large it
becomes impossible to track and control.
PERSONAL FINANCE ACTIVITY Businesses often cannot estimate the cost of their
inventory merely by looking. To understand why, choose a room at your school
and estimate the cost of its entire contents. Next, individually list all the large
items in the room and estimate the cost of each, then total them. How do the
two estimates compare?
PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and
click on Student Center. Click on Making It Personal and select Chapter 25.
Analyzing Inventory Levels
Financial Knowing how much inventory is on hand helps managers make decisions about
Reports how much merchandise to purchase. Too much inventory means the business
has not sold what it purchased and its money is tied up in inventory. A business
that holds too little inventory may run out often and need to make frequent
purchases which increases costs. It also can lose business when customers go to
a competitor to purchase an out-of-stock item.
Higher costs and out-of-stock situations mean
lower profits.
INSTRUCTIONS Use PETsMART’s balance sheet
Tracking and Costing
and Dear Fellow Stockholders letter in Appendix F Some businesses store
inventory in warehouses. Visit
to answer the following questions.
glencoeaccounting
1. How did PETsMART’s merchandise .glencoe.com and click
inventory change from 2003 to 2004? on Student Center. Click on
2. What could have caused this change? WebQuest and select Unit 5 to
continue your Internet project.
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CH A P T ER 2 6 Notes Payable
and Receivable
BEFORE
YOU READ
What You’ll Learn Predict
1. Explain how businesses use 1. What does the chapter title tell you?
promissory notes. 2. What do you already know about this subject from personal experience?
3. What have you learned about this in the earlier chapters?
2. Calculate and record notes
payable and notes receivable. 4. What gaps exist in your knowledge of this subject?
3. Explain the difference
between interest-bearing and
non-interest-bearing notes. Exploring the Real World of Business
4. Journalize transactions
involving notes payable. EVALUATING NOTES
5. Journalize transactions Advanced Micro Devices
involving notes receivable. When Hector Ruiz took over as Chief Executive Officer
6. Define the accounting terms of Advanced Micro Devices (AMD), his work was cut out
introduced in this chapter. for him. Competition from Intel was fierce, and sales were
Why It’s Important down. From his start in a research lab at Texas Instruments to
president of Motorola’s Semiconductor Products Sector, Ruiz
Businesses often borrow and
▲
was known for profitable operations in the ever-changing
lend money.
semiconductor industry.
Believing the time was right for expansion, Ruiz began
building AMD’s newest “fab” (manufacturing facility) in
Dresden, Germany. Fab 36 was expected to cost $2.4 billion
over four years.
Companies like AMD often issue notes for cash needs.
Fab 36’s funding is from bank loans, grants from the Federal
Republic of Germany, and company equity.
What Do You Think?
When a bank loans money to a company like Advanced
Micro Devices, what factors do you think it considers?
750 Chapter 26 Notes Payable and Receivable
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Working in the Real World
APPLYING YOUR ACCOUNTING KNOWLEDGE
Personal Connection
Have you or your parents ever bought a new Have you noticed any items that your employer
or used car? Chances are you made a down purchased that required signing a note payable?
payment and then signed a note payable for the This could include purchases like equipment,
rest of the purchase price. When businesses buy buildings, vehicles, or land.
costly items, such as manufacturing equipment
or even an office building, they also sign a note Online Connection
payable. In this chapter you will learn how to Go to glencoeaccounting.glencoe.com and click
calculate the interest on a business note and on Student Center. Click on Working in the
record the total amount payable. Real World and select Chapter 26.
glencoeaccounting.glencoe.com 751
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SECTION 1 Promissory Notes
Many people sign a note to pay for the purchase of a
BEFORE
YOU READ vehicle over a certain period of time. The note may be with
a company like Ford Motor Credit or a financial institution.
In this chapter you will learn about notes payable and notes
Main Idea receivable.
The formula for calculating interest is
Principal Interest Rate Time.
A Promise to Pay
Read to Learn… What Is a Promissory Note?
➤ how promissory notes are used. (p. 752)
➤ how to calculate the interest on a note A promissory note , often shortened to note, is a written
(p. 754) promise to pay a certain amount of money at a specific time.
Promissory notes are formal documents that are evidence of
Key Terms credit granted or received. Laws require a promissory note to
promissory note payee contain certain information as shown in Figure 26–1.
note payable interest rate
note receivable maturity date Notes Payable and Notes Receivable
principal maker A note payable is a promissory note that a business
face value interest
issues to a creditor when it borrows or buys on credit. A
term maturity value
note receivable is a promissory note that a business accepts
issue date
from a credit customer.
Principal or Face Value— Term of note—amount Issue Date—date on
amount being borrowed of time the borrower has which a note is written
to repay the note
NOTE 42
$ 2,500.00 Date Sept. 14 20 --
Ninety days after date I promise to pay to
Payee—person or Athletic Equipment Inc. the sum of
business to which
payment will be made
Two thousand five hundred dollars with interest at the rate of
11.5% per year.
Due date December 13, 20--
Michael Brown
Interest Rate—fee charged Maturity Date—due Maker—the person or
for use of money; stated as a date of the note business promising to repay
percentage of the principal the principal and interest
Figure 26–1 Promissory Note
752 Chapter 26 Notes Payable and Receivable
750-777_CH26_868829.indd 752 4/6/06 6:38:06 PM
The Maturity Date of a Note AS
YOU READ
When a note is signed, the maker of the note agrees to repay the amount
of the note within a certain period of time, usually stated in days, months, Key Point
or years. This time period is the term of the note. Both the term and the Number of Days in
issue date (date on which the note is signed) are needed to determine the Months January, March,
maturity date (due date) of a note. May, July, August,
In the note in Figure 26–1, Michael Brown, manager of On Your Mark October, and December
Athletic Wear, agreed to pay Athletic Equipment Inc. the principal plus have 31 days.
interest 90 days from September 14. To determine the maturity date: April, June, September,
and November have
1. Determine the number of days remaining 30 days.
in the month in which the note is issued. 30 days in September February has 28 days
No interest is charged for the issue date, so 14 days issue date is (29 days in a leap year).
September 14
subtract the date of the note from the
16 days
number of days in the month.
2. Determine the number of days remaining
90 days term of note
after the first month. To do this subtract
➛16 days in September
the number of days calculated in Step 1
74 days remaining
from the term of the note.
3. Subtract the number of days in the next ➛ 74 days
month (October) from the number of days 31 days in October
remaining after Step 2. 43 days remaining
4. Subtract the number of days in the next ➛ 43 days
month (November) from the days 30 days in November AS
remaining after Step 3. 13 days remaining YOU READ
In Your Own Words
5. Since there are only 13 days remaining,
the due date is 13 days into the next
The due date for this note is Maker and Payee
December 13. Explain who the maker
month (December).
and the payee of a
note are.
Some businesses and banks use time calendars to calculate a note’s matu-
rity date. Figure 26–2 on page 754 shows an example of a time calendar. The
time calendar has two sets of days: (1) the day of the month (left and right
columns), and (2) the day of the year, by month (middle column).
To calculate a maturity date using the time calendar, follow these steps:
1. Locate the issue date of the note (for example, 14) in the Day of
month column. Move across the month columns to the issue
month (September). In our example September 14 is the 257th day
of the year.
2. Add the number of days in the term of the note (90) to the day of
the year. The sum of the two numbers is 347 (257 90).
3. Find the number 347 in the month columns. The 347th day of the
year is in December. The maturity month is December. Move across to
the Day of month column. The 347th day of the year corresponds to
the 13th day of the month. The due date of the note is December 13.
Section 1 Promissory Notes 753
750-777_CH26_868829.indd 753 9/15/05 1:57:53 PM
Day of
Day of
month
month
Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.
1 1 32 60 91 121 152 182 213 244 274 305 335 1
2 2 33 61 92 122 153 183 214 245 275 306 336 2
3 3 34 62 93 123 154 184 215 246 276 307 337 3
4 4 35 63 94 124 155 185 216 247 277 308 338 4
5 5 36 64 95 125 156 186 217 248 278 309 339 5
6 6 37 65 96 126 157 187 218 249 279 310 340 6
7 7 38 66 97 127 158 188 219 250 280 311 341 7
8 8 39 67 98 128 159 189 220 251 281 312 342 8
9 9 40 68 99 129 160 190 221 252 282 313 343 9
10 10 41 69 100 130 161 191 222 253 283 314 344 10
11 11 42 70 101 131 162 192 223 254 284 315 345 11
12 12 43 71 102 132 163 193 224 255 285 316 346 12
13 13 44 72 103 133 164 194 225 256 286 317 347 13
14 14 45 73 104 134 165 195 226 257 287 318 348 14
15 15 46 74 105 135 166 196 227 258 288 319 349 15
16 16 47 75 106 136 167 197 228 259 289 320 350 16
17 17 48 76 107 137 168 198 229 260 290 321 351 17
18 18 49 77 108 138 169 199 230 261 291 322 352 18
19 19 50 78 109 139 170 200 231 262 292 323 353 19
20 20 51 79 110 140 171 201 232 263 293 324 354 20
21 21 52 80 111 141 172 202 233 264 294 325 355 21
22 22 53 81 112 142 173 203 234 265 295 326 356 22
23 23 54 82 113 143 174 204 235 266 296 327 357 23
24 24 55 83 114 144 175 205 236 267 297 328 358 24
25 25 56 84 115 145 176 206 237 268 298 329 359 25
26 26 57 85 116 146 177 207 238 269 299 330 360 26
27 27 58 86 117 147 178 208 239 270 300 331 361 27
28 28 59 87 118 148 179 209 240 271 301 332 362 28
29 29 ... 88 119 149 180 210 241 272 302 333 363 29
30 30 ... 89 120 150 181 211 242 273 303 334 364 30
31 31 ... 90 ... 151 ... 212 243 ... 304 ... 365 31
NOTE: For leap years, after February 28, the number of the day is one greater than that given in
the table.
Figure 26–2 Time Calendar
Calculation of Interest on a Note
How Do You Calculate Interest on a Note?
Interest is the fee charged for the use of money. The interest rate
is the interest stated as a percentage of the principal. The interest on
a promissory note is based on three factors: principal, interest rate, and
Connect to… term of the note.
ECONOMICS
Napoleon created the Calculating Interest Using a Formula
Bank of France in 1800 The formula used to calculate interest follows:
to control inflation and
high prices. He required Interest Principal Interest Rate Time
every citizen to pay taxes. Interest rates are usually stated on an annual basis, that is, on a bor-
The government used the rowing period of one year. To find the interest on a one-year promissory
taxes to make loans to note, multiply the principal by the interest rate. The interest on an 11.5%,
businesses, which created one-year $2,500 promissory note is $287.50 ($2,500 .115 $287.50).
jobs for the middle If the term of a promissory note is less than one year, the time in the
class. This policy made calculation is expressed as a fraction of one year. The fraction may be
Napolean popular.
stated in days or months. For example, on September 14 On Your Mark
signed a note for $2,500 at 11.5% interest for 90 days. Since the term
754 Chapter 26 Notes Payable and Receivable
750-777_CH26_868829.indd 754 9/15/05 1:57:56 PM
of the note is expressed in days, 365 days is used as the denominator of the
AS
time fraction. The interest is calculated as follows: YOU READ
Principal Interest Rate Time Interest Key Point
$2,500 .115 90/365 $70.89
Interest Rates Interest
The interest on the note shown in Figure 26–1 on page 752 is $70.89. rates are stated for a
On the maturity date, On Your Mark will repay the maturity value of the period of one year. To
calculate interest on a
note. Maturity value is the amount due at the due date. In our example
note signed for a period
the maturity value is $2,570.89 ($2,500.00 $70.89).
of less than one year,
If the term of this note had been three months instead of 90 days, the
express the term of the
denominator of the time fraction would be 12. The interest would be cal- note as a fraction of
culated as follows: one year.
Principal Interest Rate Time Interest
$2,500 .115 3/12 $71.88
The maturity value would be $2,571.88 ($2,500.00 $71.88).
Calculating Interest Using an Interest Table
To calculate interest, businesses and banks often use an interest table
similar to the one in Figure 26–3. We use On Your Mark’s note to illustrate.
• Find the term of the note in the Day column, 90.
• Follow the row across until you reach the column for the interest rate,
11.5%. Where the Day row and the Interest column meet is a factor,
2.835616. The factor is based on a principal amount of $100.
• Divide the principal of the note by 100. The result is 25 ($2,500 100).
• Multiply the result by the factor to find the interest. The interest is
$70.89 (25 2.835616).
In this example the interest calculated using both the equation and the
interest table are the same. Sometimes small differences occur due to
rounding.
SIMPLE INTEREST ON $100 (365 DAY BASIS)
11.50 % 11.75 % 12.00 % 12.25 % 12.50 % 12.75 %
DAY INTEREST DAY INTEREST DAY INTEREST DAY INTEREST DAY INTEREST DAY INTEREST
30 0.945205 30 0.965753 30 0.986301 30 1.006849 30 1.027397 30 1.047945
60 1.890411 60 1.931507 60 1.972603 60 2.013699 60 2.054795 60 2.095890
90 2.835616 90 2.897260 90 2.958904 90 3.020548 90 3.082192 90 3.143836
120 3.780822 120 3.863014 120 3.945205 120 4.027397 120 4.109589 120 4.191781
150 4.726027 150 4.828767 150 4.931507 150 5.034247 150 5.136986 150 5.239726
180 5.671233 180 5.794521 180 5.917808 180 6.041096 180 6.164384 180 6.287671
210 6.616438 210 6.760274 210 6.904110 210 7.047945 210 7.191781 210 7.335616
240 7.561644 240 7.726027 240 7.890411 240 8.054795 240 8.219178 240 8.383562
270 8.506849 270 8.691781 270 8.876712 270 9.061644 270 9.246575 270 9.431507
300 9.452055 300 9.657534 300 9.863014 300 10.068493 300 10.273973 300 10.479452
330 10.397260 330 10.623288 330 10.849315 330 11.075342 330 11.301370 330 11.527397
360 11.342466 360 11.589041 360 11.835616 360 12.082192 360 12.328767 360 12.575342
365 11.500000 365 11.750000 365 12.000000 365 12.250000 365 12.500000 365 12.750000
366 11.531507 366 11.782192 366 12.032877 366 12.283562 366 12.534247 366 12.784932
Figure 26–3 Interest Table
Section 1 Promissory Notes 755
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SECTION 1 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Using a chart like this, $ETERMINING THE -ATURITY 6ALUE OF A 0ROMISSORY .OTE
describe the step-by-step
procedure for determining
the maturity value of a
promissory note.
Do the Math
Marty Herick is the owner of CyberAction, a new computer-game store. Marty has just
signed a promissory note with Excelsior Bank. He plans to use the loan to purchase and
update his computer-game inventory. Using the formula, what is the interest on the
$20,000, 90-day note with a 10.5% interest rate? What is the maturity value?
Problem 26–1 Calculating Interest and Finding
Maturity Values
Instructions Using the formula, compute the interest and maturity values for each of
the following notes. Record your answers in your working papers. Use the interest table to
check your computations.
Principal Interest Rate Term
1. $ 4,000 11.5% 60 days
2. 10,000 11.75% 90 days
3. 6,500 12.75% 60 days
4. 900 12.25% 120 days
Problem 26–2 Calculating Interest
Instructions Calculate the interest for each of the following notes. Record your answers in
your working papers.
Principal Interest Rate Term
1. $ 600 15% 90 days
2. 3,500 12% 60 days
3. 9,600 9% 4 months
4. 2,500 10% 180 days
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SECTION 2 Notes Payable
In this section you will journalize transactions involving notes
BEFORE
payable. Recall that a note payable is a promissory note issued YOU READ
to a creditor. For example, a business may issue a note payable
to borrow money from a bank. Notes that a business issues are
Main Idea
recorded in the Notes Payable account. Notes Payable is a liability
Businesses issue and accept two
account; its normal balance is a credit. When the due date of a note
types of notes: interest-bearing
extends beyond one year, the note is classified as a long-term liability.
notes and non-interest-bearing
Long-term liabilities are debts that become due after one year. notes.
Businesses frequently issue two types of notes: interest-bearing
notes and non-interest-bearing notes. We consider both types of Read to Learn…
notes in this section. ➤ what an interest-bearing
promissory note is. (p. 757)
Interest-Bearing Notes Payable ➤ why a “non-interest-bearing”
note does have interest
What Is an Interest-Bearing Note Payable? expense. (p. 759)
A note that requires the principal plus interest to be paid on
the maturity date is called an interest-bearing note payable . The
Key Terms
long-term liabilities
note issued by On Your Mark (in Section 1) is an interest-bearing
interest-bearing note payable
note. Its maturity value is $2,570.89 ($2,500.00 principal $70.89
non-interest-bearing note payable
interest).
bank discount
Recording the Issuance of an proceeds
other expense
Interest-Bearing Note Payable
Let’s record On Your Mark’s interest-bearing note payable as
an example.
B u s i n e s s Tr a n s a c t i o n
On April 3 On Your Mark borrowed $7,000 from State Street Bank and issued a 90-day, 12% note
payable to the bank, Note 6.
ANALYSIS Identify 1. The accounts affected are Cash in Bank and Notes Payable.
Classify 2. Cash in Bank is an asset account. Notes Payable is a liability account.
/ 3. Cash in Bank is increased by $7,000. Notes Payable is increased by
$7,000.
Section 2 Notes Payable 757
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DEBIT-CREDIT RULE 4. Increases to asset accounts are recorded as debits. Debit Cash in Bank
for $7,000.
5. Increases to liability accounts are recorded as credits. Credit Notes
Payable for $7,000.
T ACCOUNTS 6. Cash in Bank Notes Payable
Debit Credit Debit Credit
7,000 7,000
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 12
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Apr. 3 Cash in Bank 7 0 0 0 00 2
3 Notes Payable 7 0 0 0 00 3
4 Note 6 4
5 5
Recording the Payment of an Interest-Bearing
Note Payable
The maturity date of On Your Mark’s note payable to State Street Bank
is July 2. You can verify this by using the time calendar in Figure 26–2 on
page 754. The interest is $207.12, calculated as follows:
Principal Interest Rate Time Interest
$7,000 .12 90/365 $207.12
The maturity value of the note is $7,207.12 ($7,000.00 principal
$207.12 interest).
B u s i n e s s Tr a n s a c t i o n
On July 2 On Your Mark issued Check 3892 for $7,207.12 payable to State Street Bank in payment of the
note payable issued April 3.
ANALYSIS Identify 1. The accounts affected are Notes Payable, Interest Expense, and Cash
in Bank.
Classify 2. Notes Payable is a liability account. Interest Expense is an expense
account. Cash in Bank is an asset account.
/ 3. Notes Payable is decreased by $7,000. Interest Expense is increased
by $207.12. Cash in Bank is decreased by $7,207.12.
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DEBIT-CREDIT RULE 4. Decreases to liability accounts are recorded as debits. Debit Notes
Payable for $7,000. Increases to expense accounts are recorded as
debits. Debit Interest Expense for $207.12.
5. Decreases to asset accounts are recorded as credits. Credit Cash in
Bank for $7,207.12.
T ACCOUNTS 6. Notes Payable Cash in Bank
Debit Credit Debit Credit
7,000 7,207.12
Interest Expense
Debit Credit
207.12
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 22
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 July 2 Notes Payable 7 0 0 0 00 2
3 Interest Expense 2 0 7 12 3
4 Cash in Bank 7 2 0 7 12 4
5 Check 3892 5
Non-Interest-Bearing Notes Payable
How Is Interest Paid on a Non-Interest-Bearing Note?
Sometimes a bank requires a borrower to pay the interest on a note in
advance. On the issue date, the bank deducts the interest from the face
value of the note. This reduces the amount of money
the borrower receives. When interest is deducted in
advance from the face value of the note, the note is
called a non-interest-bearing note payable . The
note is “non-interest-bearing” because no interest rate
is stated on the note. The interest deducted in advance
is called the bank discount . The interest rate used
to calculate the bank discount is called the discount
rate. The cash received by the borrower is called the
proceeds . The proceeds equal the face value of the
note minus the bank discount.
For a non-interest-bearing note payable, the matu-
rity value is the same as the face value. This is because
the interest is deducted from the face value on the
issue date. Figure 26–4 on page 760 shows an example
of a non-interest-bearing note payable.
Section 2 Notes Payable 759
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NOTE 13
$ 1,500.00 Date June 12 20 --
Ninety days after date I promise to pay to
First Federal Bank the sum of
One thousand five hundred dollars.
Due date September 10, 20--
Figure 26–4 Non- Michael Brown
Interest-Bearing Note Payable
Calculating Non-Interest-Bearing Notes Payable
Let’s calculate the proceeds of the non-interest-bearing note payable
shown in Figure 26– 4. The note was discounted at a rate of 12% by First
Federal Bank, Note 13.
AS The first step in calculating the proceeds on a non-interest-bearing
YOU READ note is to calculate the bank discount. This is the interest on the note.
It’s Not What It (Notice that the formula is similar to the one used to compute interest on
Seems an interest-bearing note.)
Non-Interest-Bearing Face Value Discount Rate Time Bank Discount
Note The term non- $1,500 .12 90/365 $44.38
interest-bearing might
imply that the note has The bank discount is subtracted from the face value of the note to determine
no interest charge. This the proceeds. The proceeds are $1,455.62 ($1,500.00 $44.38).
is not the case.
Recording the Issuance of a
Non-Interest-Bearing Note Payable
The bank discount is recorded in a contra liability account called
Discount on Notes Payable. The normal balance of Discount on Notes
Payable is a debit. The bank discount is the future interest expense on the
note. However, the bank discount is not recorded in an expense account
until the note matures and the interest expense has been incurred.
Now that we calculated the discount, let’s record the issuance of the
non-interest-bearing note for On Your Mark.
B u s i n e s s Tr a n s a c t i o n
On June 12 On Your Mark signed a $1,500, 90-day non-interest-bearing note payable that First Federal
Bank discounted at a rate of 12%, Note 13.
ANALYSIS Identify 1. The accounts affected are Cash in Bank, Discount on Notes Payable,
and Notes Payable.
Classify 2. Cash in Bank is an asset account. Discount on Notes Payable is a
contra liability account. Notes Payable is a liability account.
/ 3. Cash in Bank is increased by $1,455.62. Discount on Notes Payable is
increased by $44.38. Notes Payable is increased by $1,500.00.
760 Chapter 26 Notes Payable and Receivable
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DEBIT-CREDIT RULE 4. Increases to asset accounts are recorded as debits. Debit Cash in Bank
for $1,455.62. Increases to contra liability accounts are recorded as
debits. Debit Discount on Notes Payable for $44.38.
5. Increases to liability accounts are recorded as credits. Credit Notes
Payable for $1,500.00.
T ACCOUNTS 6. Cash in Bank Notes Payable
Debit Credit Debit Credit
1,455.62 1,500.00
Discount on Notes Payable
Debit Credit
44.38
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 20
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 June 12 Cash in Bank 1 4 5 5 62 2
3 Discount on Notes Payable 4 4 38 3
4 Notes Payable 1 5 0 0 00 4
5 Note 13 5
6 6
Businesses report the Discount on Notes Payable account on the bal-
ance sheet as a deduction from Notes Payable. The difference between the
Notes Payable account and the Discount on Notes Payable account is the
book value of notes payable. Figure 26–5 shows the Liabilities section of the
balance sheet for On Your Mark on June 30. It shows that the book value of
AS
notes payable is $1,455.62 ($1,500 $44.38).
YOU READ
On Your Mark Athletic Wear Compare and
Balance Sheet Contrast
June 30, 20-- Types of Notes Payable
How is an interest-
Liabilities
Notes Payable
bearing note payable
1 5 0 0 00
Less: Discount on Notes Payable 4 4 38 1 4 5 5 62 similar to a non-interest-
bearing note payable?
How are they different?
Figure 26–5 Reporting Non-Interest-Bearing Notes Payable on the Balance Sheet
Section 2 Notes Payable 761
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Recording the Payment of a
Non-Interest-Bearing Note Payable
When the non-interest-bearing note payable matures and is due, On
Your Mark will
• pay First Federal Bank $1,500, the face value of the note, and
• record the interest expense by transferring the bank discount to interest
expense.
We will look at each of these individually and as a compound journal entry.
B u s i n e s s Tr a n s a c t i o n
On September 10 On Your Mark issued Check 4241 for $1,500 to First Federal Bank in payment of the
June 12 non-interest-bearing note payable.
ANALYSIS Identify 1. The accounts affected are Notes Payable and Cash in Bank.
Classify 2. Notes Payable is a liability account. Cash in Bank is an asset
account.
/ 3. Notes Payable is decreased by $1,500. Cash in Bank is decreased
by $1,500.
DEBIT-CREDIT RULE 4. Decreases to liability accounts are recorded as debits. Debit Notes
Payable for $1,500.
5. Decreases to asset accounts are recorded as credits. Credit Cash in
Bank for $1,500.
T ACCOUNTS 6. Notes Payable Cash in Bank
Debit Credit Debit Credit
1,500 1,500
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 42
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Sept. 10 Notes Payable 1 5 0 0 00 2
3 Cash in Bank 1 5 0 0 00 3
4 Check 4241 4
5 5
762 Chapter 26 Notes Payable and Receivable
750-777_CH26_868829.indd 762 9/15/05 1:58:14 PM
When a non-interest-bearing note payable matures, the amount of the
bank discount is recognized as an expense. The bank discount is transferred
from the Discount on Notes Payable account to the Interest Expense
account. As the following T accounts demonstrate, Interest Expense is
debited for $44.38 and Discount on Notes Payable is credited for $44.38.
When this transaction is recorded, the balance of the Discount on Notes
Payable account is reduced to zero.
Interest Expense Discount on Notes Payable
Debit Credit Debit Credit
9/10 44.38 6/12 44.38 9/10 44.38
You could record two separate journal entries:
1. the payment of the non-interest-bearing note payable (in the cash
payments journal), then
2. the interest expense (in the general journal)
It is simpler, however, to prepare one compound entry in the general
journal as shown.
GENERAL JOURNAL PAGE 43
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Sept. 10 Notes Payable 1 5 0 0 00 2
3 Interest Expense 4 4 38 3
4 Cash in Bank 1 5 0 0 00 4
5 Discount on Notes Payable 4 4 38 5
6 Check 4241 6
7 7
The Interest Expense account is classified as an other expense account.
An other expense is a nonoperating expense. This means that the expense
does not result from the normal operations of the business. Other expenses
appear in a separate section on the income statement, as deductions from
operating income.
Section 2 Notes Payable 763
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SECTION 2 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Create a table similar to this
one to list three facts about 4YPE OF .OTE &ACT &ACT &ACT
the types of notes covered in
this section.
Do the Math
Franklin Enterprises can borrow $10,000 for 30 days at 5% at the Jefferson City Bank or
$10,000 for 45 days at 4.5% at Lincoln National Bank. Answer the following questions.
1. Which bank note results in the least amount of interest expense?
2. How much in interest expense can be saved?
Problem 26–3 Recording the Issuance of an
Interest-Bearing Note Payable
On June 12 Frank’s Lobster Pound issued a $9,000, 120-day, 12% note payable to American
Bank of Commerce.
1. Which account is debited? What is the debit amount?
2. Which account is credited? What is the credit amount?
3. What is the classification of each account?
4. What is the maturity value of the note?
Problem 26–4 Recording the Issuance of a
Non-Interest-Bearing Note Payable
On October 14 Canton Car Care Center issued a $10,000, 60-day, 12% non-interest-
bearing note payable to Canton National Bank.
1. Which accounts are debited and which are credited? What are the debit and credit
amounts?
2. Compute the bank discount. What is the amount of the proceeds?
764 Chapter 26 Notes Payable and Receivable
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SECTION 3 Notes Receivable
In this section you will journalize transactions involving notes receiv-
BEFORE
able. If you have ever loaned someone money and asked the person to YOU READ
repay the loan by a specific date, you understand the basic concept of a
note receivable. Sometimes such a loan includes payment of a specified
Main Idea
amount of interest; other times no interest is expected.
Businesses record the receipt
of a note receivable as well
Recording the Receipt as the payment of the note.
of a Note Receivable Read to Learn…
How Do You Convert an Account Receivable ➤ how to record a note
to a Note Receivable? receivable. (p. 765)
When a customer needs additional time to pay an account receiv- ➤ how to record the
able, he or she may be asked to sign a promissory note. The note replaces payment of a note
the account receivable. Promissory notes that a business accepts from
receivable. (p. 766)
customers are called notes receivable. Key Terms
Notes Receivable is an asset account, and its normal balance is a other revenue
debit. A note receivable is due on a specific date and carries an interest
charge for the term of the note.
The interest earned on a note receivable is recorded in the Interest Income
account. Interest Income is an other revenue account. Other revenue ,
also known as nonoperating revenue accounts, track revenue that a business
receives from activities other than its normal operations. Other revenue
appears in a separate section on the income statement, as an increase to
operating income.
B u s i n e s s Tr a n s a c t i o n
On March 1 On Your Mark sold $1,750 of merchandise on account to Joe Dimaio. That transaction was
recorded in On Your Mark’s sales journal. Joe cannot pay his account by the due date. On April 8 On Your Mark
received a 60-day, 12.5% note dated April 6 for $1,750 from Joe Dimaio to settle the account receivable, Note 4.
ANALYSIS Identify 1. The accounts affected are Notes Receivable, Accounts Receivable
(controlling), and Accounts Receivable—Joe Dimaio (subsidiary).
Classify 2. Notes Receivable, Accounts Receivable (controlling), and Accounts
Receivable—Joe Dimaio (subsidiary) are asset accounts.
/ 3. Notes Receivable is increased by $1,750. Accounts Receivable
(controlling) and Accounts Receivable—Joe Dimaio (subsidiary) are
decreased by $1,750.
Section 3 Notes Receivable 765
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DEBIT-CREDIT RULE 4. Increases to asset accounts are recorded as debits. Debit Notes
Receivable for $1,750.
5. Decreases to asset accounts are recorded as credits. Credit Accounts
Receivable (controlling) for $1,750. Also credit Accounts Receivable—
Joe Dimaio (subsidiary) for $1,750.
T ACCOUNTS 6. Notes Receivable Accounts Receivable
Debit Credit Debit Credit
1,750 1,750
Accounts Receivable Subsidiary Ledger
Accounts Receivable—Joe Dimaio
Debit Credit
1,750
JOURNAL ENTRY 7. GENERAL JOURNAL 13
PAGE
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Apr. 8 Notes Receivable 1 7 5 0 00 2
3 Accts. Rec./Joe Dimaio 1 7 5 0 00 3
4 Note 4 4
Recording the Payment
of a Note Receivable
How Do You Record Payment of a Note?
The note from Joe Dimaio is due on June 5. The maturity value of the
note is $1,785.96 ($1,750.00 principal $35.96 interest).
Principal Interest Rate Time Interest
$1,750 .125 60/365 $35.96
B u s i n e s s Tr a n s a c t i o n
On June 7 On Your Mark received a check dated June 5 for $1,785.96 from Joe Dimaio in payment of the
$1,750 note of April 6 plus interest of $35.96, Receipt 996.
JOURNAL ENTRY GENERAL JOURNAL PAGE 18
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 June 7 Cash in Bank 1 7 8 5 96 2
3 Notes Receivable 1 7 5 0 00 3
4 Interest Income 3 5 96 4
5 Receipt 996 5
766 Chapter 26 Notes Payable and Receivable
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SECTION 3 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Create a table similar to the
4RANSACTION !CCOUNTS $EBITED !CCOUNTS #REDITED
one here to determine which
accounts to debit and credit 3OLD MERCHANDISE ON ACCOUNT
for each transaction. Choose TO A CHARGE CUSTOMER PLUS
SALES TAX
from these accounts and
write the account title in the 2ECEIVED AN INTEREST BEARING
NOTE IN PAYMENT OF THE
proper column: Accounts ACCOUNT RECEIVABLE
Receivable/Customer; Cash
in Bank; Interest Income; 2ECEIVED PAYMENT
Sales; Sales Tax Payable; FOR THE NOTE
and Notes Receivable.
Do the Math
Your accounting manager has just finished a graph illustrating the possible interest-
bearing notes available from the region’s banks. Review the graph and give your boss your
recommendation of which bank will provide the best loan value.
90-DAY NOTES
7.50 7.75 8.00 8.25
Central Bankers 7.875
Syracuse National 8.250
New York Bankcorp 7.750
First Federal 8.000
Percentage Rates
Problem 26–5 Analyzing a Source Document
Instructions Examine the NOTE 55
note illustrated here. In your $ 2,500.00 Date June 12 20 --
working papers, make the Ninety days after date I promise to pay to
appropriate journal entry on First Federal Bank the sum of
page 14 of the general journal Two thousand five hundred and no/100 dollars.
for Eli’s Catering Company. The
note was discounted at a rate of Due date September 10, 20--
12% by First Federal Bank. Owner, Eli's Catering Co.
Section 3 Notes Receivable 767
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CH A P T ER 2 6 Summary
Key Concepts
1. A promissory note, often just called a note, is a written promise to pay an amount of money by a
specific future date. It allows businesses to make purchases and pay for them at a later date.
2. A note payable is a promissory note that a business issues to a creditor or to a bank to obtain a
loan. A note receivable is a promissory note that a business accepts from a credit customer. Laws
require a promissory note to contain certain information:
• maker: person or business signing a note and promising to repay the principle and interest
• payee: person or business the payment will be made to
• principal or face value: amount borrowed
• interest rate: fee charged for use of money; stated as a percentage of the principal
• term: amount of time the borrower has to repay the note
• issue date: date on which a note is written
• maturity date: due date of the note
The formula used to calculate interest is:
Interest Principal Interest Rate Time
3. Here is a comparison of interest-bearing and non-interest-bearing notes payable:
Interest-Bearing Note Payable Non-Interest-Bearing Note Payable
Distinction Interest rate is stated on note. No interest rate is stated on the note.
Interest Interest is paid at maturity date. Interest is called bank discount. It is deducted
from the face value on the note’s issue date.
Example Interest rate 6% Bank discount 6%
Face value $1,000 Face value $1,000
Term 3 months Term 3 months
Calculation Interest Principal Interest Bank Discount Face Value Discount
Rate Time Rate Time
Interest $1,000 0.06 3/12 Bank Discount $1,000 0.06 3/12
Interest $15 Bank Discount $15
Proceeds Proceeds Face Value Proceeds Face Value Bank Discount
Proceeds $1,000 Proceeds $1,000 $15 $985
Issuance Cash in Bank 1,000 Cash in Bank 985
of Note Notes Payable 1,000 Discount on Notes Payable 15
Notes Payable 1,000
Payment Notes Payable 1,000 Notes Payable 1,000
of Note Interest Expense 15 Interest Expense 15
Cash in Bank 1,015 Cash in Bank 1,000
Discount on Notes Payable 15
4. To record the issuance Cash in Bank Notes Payable
of an interest-bearing
Debit Credit Debit Credit
note payable:
xxx xxx
768 Chapter 26 Summary
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Summary CHAPT E R 26
To record the payment of an interest-bearing note payable:
Notes Payable Interest Expense Cash in Bank
Debit Credit Debit Credit Debit Credit
xxx xxx xxx
To record the issuance of a non-interest-bearing note payable:
Cash in Bank Discount on Notes Payable Notes Payable
Debit Credit Debit Credit Debit Credit
xxx xxx xxx
To record the payment of a non-interest-bearing note payable:
Notes Payable Interest Expense Cash in Bank Discount on Notes Payable
Debit Credit Debit Credit Debit Credit Debit Credit
xxx xxx xxx xxx
5. To record the receipt Notes Receivable Accounts Receivable (controlling/subsidiary)
of a note receivable
converted from an Debit Credit Debit Credit
account receivable: xxx xxx
To record the payment of a note receivable:
Cash in Bank Notes Receivable Interest Income
Debit Credit Debit Credit Debit Credit
xxx xxx xxx
Key Terms
bank discount (p. 759) maker (p. 752) other revenue (p. 765)
face value (p. 752) maturity date (p. 752) payee (p. 752)
interest (p. 754) maturity value (p. 755) principal (p. 752)
interest-bearing note non-interest-bearing proceeds (p. 759)
payable (p. 757) note payable (p. 759) promissory note (p. 752)
interest rate (p. 752) note payable (p. 752) term (p. 752)
issue date (p. 752) note receivable (p. 752)
long-term liabilities (p. 757) other expense (p. 763)
Chapter 26 Summary 769
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C H A P T ER 2 6 Review and Activities
AFTER
YOU READ
Check Your Understanding
1. Promissory Notes
a. Name the two parties to a promissory note. Which party issues the note? Which party receives
the note?
b. Describe a situation in which a business might (a) receive a promissory note and (b) issue a
promissory note.
2. Notes Payable and Notes Receivable
a. What type of account is Notes Payable, and what is its normal balance?
b. What type of account is Notes Receivable, and what is its normal balance?
3. Interest-Bearing and Non-Interest-Bearing Notes
a. What is the difference between interest-bearing and non-interest-bearing notes?
b. What is the difference between interest and a bank discount?
4. Notes Payable
a. What accounts are affected by the issuance of an interest-bearing note payable, and how are
they affected?
b. What accounts are affected by the payment of an interest-bearing note payable, and how are
they affected?
5. Journalizing Notes Receivable
a. What accounts are affected by the receipt of a note receivable, and how are they affected?
b. What accounts are affected by the payment of a note receivable, and how are they affected?
Apply Key Terms
As a staff accountant for Advanced Micro Devices, you
have been asked to discuss the company’s notes payable
and receivable with the accounting clerks. Prepare note
cards containing the terms below. Arrange these terms in
meaningful groups. Explain why you have grouped terms
together. Are they related? Are they part of the same
thing? Is one the result of another? Are they opposites?
bank discount maker other revenue
face value maturity date payee
interest maturity value principal
interest-bearing non-interest- proceeds
note payable bearing note promissory note
interest rate payable term
issue date note payable
long-term note receivable
liabilities other expense
770 Chapter 26 Review and Activities
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Computerized Accounting CHAPT E R 26
Notes Receivable and Payable
Making the Transition from a Manual to a Computerized System
Task Manual Methods Computerized Methods
Recording • Using the general journal, record the • Using the general journal, record the
notes receivable receipt or issuance of the note. receipt or issuance of the note. The
and payable • Post the entry to the appropriate entry is automatically posted to the
transactions accounts in the general ledger and appropriate accounts.
subsidiary ledgers. • Record receipts or payment of notes.
• Journalize and post the entry to record
the receipt or payment of cash and
interest.
• Calculate new balances for all accounts
affected.
Q&A
Peachtree Question Answer
How do I record the 1. From the Tasks menu, select Receipts.
issuance of a note 2. Accept the Cash in Bank account number as the Cash account.
payable? 3. Enter a Reference number, usually the note number.
4. Click on the Apply to Revenues tab.
5. Enter the Notes Payable account number and the note amount.
How do I record the 1. From the Tasks menu, select Receipts.
receipt of a note 2. Accept the Cash in Bank account number as the Cash account.
receivable payment? 3. Enter a Reference number, usually the note number.
4. Enter the Notes Receivable account number and the note amount.
5. Enter the Interest Income account number and amount.
QuickBooks Q & A
QuickBooks Question Answer
How do I record the 1. From the Banking menu, select Make Deposits.
issuance of a note 2. Accept Cash in Bank in the Deposit To field and enter the date.
payable? 3. Enter the name of the payee.
4. Enter Notes Payable as the account, an explanation, and the note amount.
How do I record the 1. From the Customers menu, select Make General Journal Entries.
receipt of a note 2. Enter the date and reference.
receivable payment? 3. Debit the Cash account for the total amount received.
4. Credit Notes Receivable for the note portion of the amount received.
5. Credit Interest Income for the interest portion of the amount received.
For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers.
Chapter 26 Computerized Accounting 771
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C H A P T ER 2 6 Problems
Complete problems using: Manual Glencoe Peachtree Complete QuickBooks
OR OR
Working Papers Accounting Software Templates
Problem 26–6 Recording Transactions for
SMART GUIDE Interest-Bearing Notes Payable
Step–by–Step Instructions: Instructions In your working papers, record the following transactions in
Problem 26–6
a cash receipts journal (page 22) and a cash payments journal (page 26).
1. Select the problem set
for Sunset Surfwear Date Transactions
(Prob. 26–6).
2. Rename the company Jan. 14 Sunset Surfwear borrowed $1,500 from First One Bank by
and set the system date. issuing a 90-day, 12% interest-bearing note payable, Note 78.
3. Record the transactions
Apr. 14 Issued Check 168 for $1,544.38 to First One Bank in payment
using the Receipts and
Payments options. of the $1,500 note issued on January 14, plus interest of $44.38.
Enter each transaction May 31 Borrowed $12,400 from Merchant’s Bank and Trust by issuing a
in the proper accounting 90-day, 12.5% interest-bearing note, Note 79.
period (month).
4. Print a Cash Receipts Aug. 29 Paid Merchant’s Bank and Trust the maturity value of the note
Journal and a Cash issued on May 31, $12,782.19, Check 284.
Disbursements Journal
to proof your work.
5. Complete the Analyze Analyze Calculate the amount of interest paid on notes in January.
activity.
6. End the session.
TIP: Set the date range on
the journal reports to print Problem 26–7 Recording Transactions for
the transactions for all of
the periods.
Non-Interest-Bearing
Notes Payable
QuickBooks Instructions In your working papers, record the following transactions in
PROBLEM GUIDE a cash receipts journal (page 14) and a cash payments journal (page 16).
Step–by–Step Instructions: Date Transactions
Problem 26–6
June 10 InBeat CD Shop borrowed $6,000 from BankOne by issuing
1. Restore the Problem
26-6.QBB file. a 60-day, non-interest-bearing note payable (proceeds,
2. Record the transactions $5,901.37) that the bank discounted at 10%, Note 67.
using the Make Aug. 9 Issued Check 205 for $6,000 in payment of the note issued
Deposits and Write
Checks options. Enter June 10 and recorded the interest expense.
each transaction in 30 Borrowed $16,000 from Citizens Bank by issuing a 120-day,
the proper accounting non-interest-bearing note payable less the 10.5% bank discount
period (month).
3. Print a Journal report.
of $552.33, Note 68.
4. Complete the Analyze Dec. 28 Issued Check 398 in payment of the note issued on August 30
activity. and recorded the interest expense.
5. Back up your work.
Analyze Explain why the account Discount on Notes Payable is used.
772 Chapter 26 Problems
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Problems CHAPT E R 26
Problem 26–8 Recording Notes Payable and
Notes Receivable SMART GUIDE
Instructions In your working papers, record the following transactions Step–by–Step Instructions:
Problem 26–7
in a cash receipts journal (page 47), cash payments journal (page 56), and
1. Select the problem set
general journal (page 19) for Cycle Tech Bicycles. for InBeat CD Shop.
2. Rename the company
Date Transactions and set the system date.
Mar. 19 Borrowed $9,000 from Desert Palms Savings and Loan by 3. Record the transactions.
4. Print a Cash Receipts
issuing a 90-day, 12% interest-bearing note payable, Note 87. Journal and a Cash
June 4 Received a 120-day, 13% note receivable for $1,900 from Greg Disbursements Journal
Kellogg as a time extension on his account receivable, Note 6. to proof your work.
5. Complete the Analyze
17 Paid Desert Palms Savings and Loan the maturity value of the
activity.
note issued on March 19, Check 2784. 6. End the session.
Sept. 29 Received a check from Greg Kellogg for the maturity value of
the note dated June 1, Receipt 628. Step–by–Step Instructions:
Oct. 6 Borrowed $2,700 from Jonesboro Bank and Trust by issuing a Problem 26–8
60-day, non-interest-bearing note payable discounted at 11.5%, 1. Select the problem set
for Cycle Tech Bicycles.
Note 88.
2. Rename the company
Dec. 5 Prepared a check for the note issued on October 6 and recorded and set the system date.
the interest expense, Check 3954. 3. Record the transactions.
4. Print a Cash Receipts
Journal and a Cash
Analyze Compute the amount of interest Cycle Tech Bicycles will earn Disbursements Journal
on Greg Kellogg’s June 4 note. to proof your work.
5. Complete the Analyze
activity.
6. End the session.
Problem 26–9 Recording Notes Payable
and Notes Receivable Step–by–Step Instructions:
Problem 26–9
The following is a partial list of accounts used by River’s Edge Canoe &
1. Select the problem set
Kayak. for River’s Edge Canoe &
Kayak.
101 Cash in Bank 205 Notes Payable 2. Rename the company
115 Accounts Receivable 207 Discount on Notes Payable and set the system date.
120 Notes Receivable 415 Interest Income 3. Record the transactions.
201 Accounts Payable 640 Interest Expense 4. Print a Cash Receipts
Journal and a Cash
Disbursements Journal
Instructions In your working papers, record the following transactions
to proof your work.
in a cash receipts journal (page 67), cash payments journal (page 73), and 5. Complete the Analyze
general journal (page 27). activity.
6. End the session.
CONTINUE
Chapter 26 Problems 773
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C H A P T ER 2 6 Problems
Date Transactions (cont.)
May 7
Borrowed $4,000 from Union Bank by issuing a 60-day, 9.5%
non-interest-bearing note, Note 284.
15 Issued a $3,000, 90-day, 9% interest-bearing note to Trailhead
Canoes in place of the amount owed on account, Note 285.
21 Received a 120-day, 10% note for $1,200 from Cathy Wilcox
for an extension of time on her account, Note 94.
July 6 Issued Check 4711 in payment of the non-interest-bearing note
SMART GUIDE given to Union Bank on May 7.
Aug. 13 Issued Check 5044 for the maturity value of the note issued to
Step–by–Step Instructions:
Problem 26–10
Trailhead Canoes on May 15.
Sept. 18 Received a check from Cathy Wilcox for the maturity value of
1. Select the problem set
for Buzz Newsstand. the note dated May 21, Receipt 5921.
2. Rename the company
and set the system date. Analyze Compare Notes 284 and 285. Which of the two notes was
3. Record the transactions most advantageous to River’s Edge Canoe & Kayak?
in the correct period.
4. Print a Sales Journal,
Cash Receipts Journal,
and a General Journal. CHALLENGE Problem 26–10 Renewing a
PROBLEM
5. Complete the Analyze
activity. Note Receivable
6. End the session. Occasionally, on the maturity date, a note may be renewed instead of being
paid. When this occurs, (1) the interest on the first note is paid, (2) the
QuickBooks first note is canceled, and (3) a new note for the same principal amount is
PROBLEM GUIDE issued, usually at a higher interest rate. Buzz Newsstand had the following
Step–by–Step Instructions:
transactions.
Problem 26–10 Instructions In your working papers, record the following transactions on
1. Restore the Problem general journal page 24.
26-10.QBB file.
2. Record the transactions Date Transactions
in the correct period.
3. Print a Journal report. Mar. 14 Sold merchandise on account to Saba Nadal for $1,800, plus
4. Complete the Analyze sales tax of $108.00, terms 30 days, Sales Slip 388.
activity. Apr. 13 Accepted a 60-day, 9% note for $1,908.00 from Saba Nadal in
5. Back up your work.
place of the account receivable, Note 416.
June 12 Received the interest due from Saba Nadal for the note dated
SOURCE DOCUMENT April 13 and agreed to renew the note at 10% for 90 days,
PROBLEM Receipt 1387 and Note 417.
Problem 26–10 Sept. 10 Received a check from Saba Nadal for the maturity value of the
Use the source documents note issued June 12, Receipt 1555.
in your working papers to
record the transactions for Analyze Calculate the total amount of interest earned in March.
this problem.
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Winning Competitive Events C HAPTER 26
Practice your test-taking skills! The questions on this page are reprinted with permission
from national organizations:
• Future Business Leaders of America
• Business Professionals of America
Use a separate sheet of paper to record your answers.
Future Business Leaders of America
MULTIPLE CHOICE
1. Signed a 90-day, 10% note
a. Debit Cash, credit Notes Receivable
b. Debit Cash, credit Notes Payable
c. Debit Accounts Receivable, credit Cash
d. Debit Cash, credit Accounts Receivable
Use the following information for questions 2 & 3.
October 15, Morton Co. accepts a 60-day, 11% note from Anderson Imports for an extension
of time on its account, $990.00 Notes Receivable No. 5.
2. The credit for this transaction would be made to
a. Accounts Payable.
b. Accounts Receivable.
c. Notes Payable.
d. Notes Receivable.
3. The effect of this transaction on the customer’s account in the accounts receivable
ledger is
a. to decrease the account balance.
b. to increase the account balance.
c. no change in the account balance.
d. not known.
4. Find the interest and maturity value for a 60-day note with principal of $1,500 and
interest at 8 percent.
a. $120.00 interest; $1,620.00 maturity value
b. $32.88 interest; $1,532.88 maturity value
c. $3.29 interest; $1,503.29 maturity value
d. $19.74 interest; $1,519.74 maturity value
Business Professionals of America
MULTIPLE CHOICE
5. Qupre, Inc. signed a 90-day, 9.75% note
with First State Bank for $1,200 on
Need More Help?
August 1. The maturity date for the
note is Go to glencoeaccounting.glencoe.com and
a. October 30. click on Student Center. Click on Winning
Competitive Events and select Chapter 26.
b. November 1.
• Practice Questions and Test-Taking Tips
c. October 28.
• Concept Capsules and Terminology
d. November 2.
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C H A P T ER 2 6 Real-World Applications and Connections
Critical Notes Payable and Receivable
Thinking 1. Explain what a promissory note is and distinguish between the two types,
notes payable and notes receivable.
2. Explain how an interest-bearing note and a non-interest-bearing note differ.
3. Calculate the amount of interest to be charged on a $12,000, 8.5%, 90-day
interest-bearing note.
4. Explain the difference between interest expense and interest income.
5. You need to borrow $10,000 for six months. Interest rates are expected to
drop from 7% to 5.5% within the next week. How much would you save by
waiting an additional week to obtain your loan?
6. Consider a $5,000, 6%, 180-day interest-bearing note and a non-interest-
bearing note for the same amount and time period with a bank discount of
6%. From the borrower’s point of view, which is the better loan and why?
CASE Merchandising Business: Restaurant/Retail Shop
STUDY Moreno’s Italian Oven is open seven days a week for lunch and dinner. The
restaurant seats 60 patrons in a day and averages 90 percent capacity. It is
considering expanding into the space adjacent to the restaurant. The cost
to remodel the area and buy additional kitchen and restaurant equipment is
estimated at $200,000. The rent on the additional space is $1,200 a month.
INSTRUCTIONS
1. If Moreno’s could double the number of customers served weekly, calculate
how many it could serve per week.
2. If each customer spends an average of $12 per meal, calculate the additional
revenue the restaurant would earn per day if it expands and maintains
90 percent capacity.
a
mattoefr ETHICS Is the Boss Always Right?
You work for a large property management company. Your boss, Joan, is the senior
accountant; and her boss, Frank, is vice president. For the past several months,
Joan has been coming to work late, taking long lunches, and leaving early. When
Frank calls, she has asked you to tell him that she is “away from her desk.” You
think Frank is getting suspicious, and you are starting to feel guilty about lying.
ETHICAL DECISION MAKING
1. What are the ethical issues? 4. How do the alternatives affect the
2. What are the alternatives? parties?
3. Who are the affected parties? 5. What would you do?
$ )) ))
Communicating
Promote Your Project
ACCOUNTING You write the copy for and design brochures to highlight New South Bank’s many
financial products. Today you were asked to prepare a brochure explaining the
value of non-interest-bearing notes. Write the copy for this brochure. Design it by
hand or on a computer.
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Real-World Applications and Connections CHAPT E R 26
Skills Beyond Allocating Time and Money
NUMBERS Good Times Amusement Park has offered you a full-time job. Before you can
accept it, you must arrange for transportation.
INSTRUCTIONS List estimated costs of owning a car compared to using other
transportation. How would each impact the use of your time and your budget?
INTERNATIONAL Long-Term International Loans
The International Finance Corporation (IFC) helps finance projects in developing
Accounting countries to reduce poverty and improve people’s lives. Projects must be
profitable and benefit the host country’s economy. For instance, it has provided
loans of about $44 million to build a hospital and clinic in Mexico City. Other
recipient sectors include transportation, education, and tourism.
INSTRUCTIONS Describe how IFC affects people in developing countries.
Making It
Your Vehicle Loan
Personal If you want to buy a vehicle but cannot pay cash, you need to borrow from a
financial institution. To do so, you will be required to sign a legally binding note
to make monthly payments for a required period of time.
PERSONAL FINANCE ACTIVITY Assume you want to buy a preowned vehicle but do
not have all of the cash needed, and prefer not to ask your parents for it. Write a
plan considering all aspects of the purchase.
PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and
click on Student Center. Click on Making It Personal and select Chapter 26.
Analyzing Evaluating Long-Term Debt
Financial When considering a borrower’s long-term debt, lenders often consider the
Reports debt to equity ratio. This ratio compares the resources the lender will provide
to the borrower’s resources. It is calculated by dividing total liabilities by total
stockholders’ equity. Here’s an example:
Total liabilities $125,670
1.21
Total stockholder’s equity $103,680
This debt to equity ratio of 1.21 to 1 means that lenders would provide more
resources than the borrower has. The higher the ratio, the higher is the lender’s
claims on the applicant’s assets. A heavy reliance on creditors increases the risk
that a business may not be able to meet its financial obligations during a business
downturn.
INSTRUCTIONS
Obtain PETsMART’s most recent balance sheet from the Internet or a public
library. Use this and the February 2004 balance sheet in Appendix F for the
following tasks.
1. Calculate PETsMART’s debt to equity ratio for both years.
2. Compare how the ratio has changed. As a creditor, how would you interpret
this change?
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MINI Completing the Accounting Cycle
PRACTICE for a Merchandising Corporation
SET 5
K
I
T
Main Task Kite Loft Inc. E LOFT INC.
Complete the accounting cycle
▲
Company Background: The Ramspart
within an assigned time frame. family owns and operates a wholesale-
Summary of Steps retail merchandising business organized
as a corporation. The business, called
Record transactions in various Kite Loft Inc., sells a variety of kites and
▲
journals. paper airplanes to regional and local toy
store businesses.
Post individual transactions to
▲
Your teacher will assign a due date
various ledgers.
for this project. Working with Kite Loft
Prove the special journals and Inc. will give you an opportunity to
▲
post the column totals. complete the accounting cycle within
an assigned time frame.
Prove cash.
▲
Keeping the Accounting Records for Kite Loft Inc.: Kite Loft Inc. uses
Prepare schedules of accounts special journals and a general journal to record its business activity.
▲
receivable and accounts Max Martin, Kite Loft’s previous accounting clerk, has already
payable. journalized and posted the transactions for December 1 through
December 15. The transactions recorded thus far are included in the
Complete the work sheet.
▲
accounting stationery in your working papers. The transactions for
Prepare financial statements. December 16 through December 31 are shown on the following pages.
▲
Your Job Responsibilities: The forms for completing this activity
Journalize and post the
▲
are included in the working papers. As the accountant for Kite Loft,
adjusting and closing entries.
you are to complete these tasks:
Prepare a post-closing trial (1) Record the remaining December transactions in the sales, cash
▲
balance. receipts, purchases, cash payments, and general journals.
(2) Post the individual amounts from the five journals to the
Why It’s Important accounts receivable and accounts payable subsidiary ledgers daily.
(3) Post the individual amounts from the General columns of the
Whether you are taking a test
▲
cash receipts, purchases, cash payments, and general journal daily.
or working at a job, you will
(4) Foot, prove, total, and rule the special journals at the end of
have time constraints.
the month.
(5) Post the column totals of the special journals to the general
ledger. Use this order for posting: sales, cash receipts,
purchases, and cash payments.
(6) Prove cash. The balance shown on check stub 619 is $22,752.83.
(7) Prepare a schedule of accounts receivable and a schedule of
accounts payable.
(8) Prepare a trial balance on a ten-column work sheet for the year
ended December 31.
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Kite Loft Inc. (continued)
Complete the project using: Manual Glencoe Peachtree Complete QuickBooks
OR OR
Working Papers Accounting Software Templates
(9) Complete the work sheet. Use this December 31 adjustment information:
Merchandise Inventory $24,850.43
Supplies inventory 120.00
Unexpired insurance 660.00
Total federal income taxes 4,500.00
(10) Prepare the income statement from the work sheet information.
(11) Prepare a statement of retained earnings.
(12) Prepare a balance sheet.
(13) Journalize and post the adjusting entries.
(14) Journalize and post the closing entries.
(15) Prepare a post-closing trial balance.
CHART OF ACCOUNTS
Kite Loft Inc.
ASSETS COST OF MERCHANDISE
101 Cash in Bank 501 Purchases
105 Accounts Receivable 505 Transportation In
110 Merchandise Inventory 510 Purchases Discounts
115 Supplies 515 Purchases Returns and
120 Prepaid Insurance Allowances
125 Office Equipment
EXPENSES
130 Store Equipment
605 Advertising Expense
LIABILITIES
610 Bankcard Fees Expense
201 Accounts Payable 615 Insurance Expense
205 Federal Corp. Income 620 Miscellaneous Expense
Tax Payable 625 Rent Expense
210 Sales Tax Payable 630 Salaries Expense
635 Supplies Expense
STOCKHOLDERS’ EQUITY
640 Utilities Expense
301 Capital Stock 650 Federal Corp. Income Tax
305 Retained Earnings Expense
310 Income Summary
REVENUE
401 Sales
405 Sales Discounts
410 Sales Returns and Allowances
Accounts Receivable Accounts Payable
Subsidiary Ledger Subsidiary Ledger
BES Best Toys BRA Brad’s Kites Ltd.
LAR Lars’ Specialties CRE Creative Kites Inc.
SER Serendipity Shop EAS Easy Glide Co.
SMA Small Town Toys RED Reddi-Bright Manufacturing
TOY The Toy Store STA Stars Kites Outlet
TAY Taylor Office Suppliers
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MINI PRACTICE Completing the Accounting Cycle for a Merchandising Corporation
SET 5 (CONTINUED)
Business Transactions: Kite Loft Inc. had the following transactions
December 16 through December 31.
SMART GUIDE
Step–by–Step Instructions: Date Transactions
1. Select the problem set
for Kite Loft Inc. (MP–5). Dec. 16 Received Invoice 410 from Reddi-Bright Manufacturing for
2. Rename the company merchandise purchased on account, $1,475.00.
and set the system date.
16 Paid the quarterly federal income tax installment of $1,050.00,
3. Enter all of the sales
on account using the Check 610.
Sales/Invoicing option. 16 Issued Check 611 for $2,548.00 to Brad’s Kites Ltd. in payment of
4. Record and apply any
Invoice 112 for $2,600.00 less discount of $52.00.
sales returns using the
Credit Memos option. 17 Paid the monthly salaries by issuing Check 612 for $4,750.00.
5. Process the cash
receipts using the 17 Purchased $80.00 of supplies from Taylor Office Suppliers on account,
Receipts option. Invoice 830.
6. Enter the purchases
17 Received a check for $1,965.60 from Best Toys in payment of Sales
on account using the
Purchases/Receive Slip 479 for $2,003.40 less a cash discount of $37.80, Receipt 358.
Inventory option. 19 Sold merchandise on account to Best Toys, $2,600.00 plus $156.00
7. Record and apply any
sales tax, Sales Slip 484.
purchases returns using
the Vendor Credit 19 Prepared Receipt 359 for a $1,716.00 check received from Lars’
Memos option. Specialties in payment of Sales Slip 480 for $1,749.00 less a $33.00
8. Process all of the cash
cash discount.
payments with the
Payments option. 20 Purchased merchandise on account from Brad’s Kites Ltd., Invoice
9. Record the adjusting 215, $1,560.00.
entries.
10. Print the following 20 Wrote Check 613 to Creative Kites Inc. to apply on account, $375.00.
reports: General
21 Prepared Credit Memorandum 44 for $106.00 for the return of
Journal, Purchases
Journal, Cash $100.00 in merchandise by Best Toys, plus sales tax of $6.00.
Disbursements Journal, 23 Sold merchandise to Lars’ Specialties on account, $1,580.00 plus sales
Sales Journal, and Cash
tax of $94.80, Sales Slip 485.
Receipts Journal.
11. Proof your work. 23 Received a check from Serendipity Shop to apply on account,
12. Print the following Receipt 360 for $300.00.
reports: General Ledger,
Vendor Ledgers, and 23 Paid Easy Glide Co. for Invoice 326 for $1,890.00 less a
Customer Ledgers. $37.80 discount, Check 614 for $1,852.20.
13. Print a General Ledger
Trial Balance. 26 Received from The Toy Store a check for $1,102.40 in payment of Sales
14. Print an Income Slip 483 for $1,123.60 less a cash discount of $21.20, Receipt 361.
Statement.
26 Returned defective merchandise purchased on account from Brad’s
15. Print a Statement of
Retained Earnings. Kites Ltd., $150.00, Debit Memorandum 28.
16. Print a Balance Sheet. 26 Received Invoice 335 from Easy Glide Co. for merchandise purchased
17. Close the fiscal year.
on account totaling $1,630.00.
18. Print a post-closing trial
balance. 28 Wrote Check 615 for $120.00 to the Daily Examiner for a monthly
19. Complete the Analyze advertisement.
activity and the Audit
Test. 28 Small Town Toys sent a check for $450.00 to apply on account,
20. End the session. Receipt 362.
TIP: You should back up 29 Paid Stars Kites Outlet $1,625.00 on account, Check 616.
your Peachtree files before CONTINUE
you perform the year-end
closing.
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Kite Loft Inc. (continued)
Date Transactions (cont.) QuickBooks
29 Sold to The Toy Store $1,990.00 of merchandise on account, plus PROBLEM GUIDE
$119.40 sales tax, Sales Slip 486. Step–by–Step Instructions:
30 Issued Check 617 to Reddi-Bright Manufacturing for $700.00 to apply 1. Restore the Problem
on account. Mini Practice 5.QBB file.
2. Enter all sales on
30 Sold merchandise totaling $560.00 plus $33.60 sales tax to the account using the
Serendipity Shop on account, Sales Slip 487. Create Invoices option.
31 Recorded the bank service charge of $10.00 and the bankcard fee of 3. Record and apply any
sales returns using the
$150.00, from December bank statement. Create Credit Memos/
31 Paid transportation charges of $51.60 for merchandise shipped from Refunds option.
Easy Glide Co., Check 618. 4. Process all cash
receipts.
31 Recorded cash sales of $3,995.10 plus $239.71 in sales tax, Tape 41. 5. Enter the purchases on
account using the Enter
31 Recorded bankcard sales of $1,736.27 plus sales tax of $104.18,
Bills option.
Tape 41. 6. Record and apply any
purchase returns using
the Credit option from
Analyze 1. Identify where Kite Loft’s outstanding customer balances the Enter Bills window
are kept, and report which customer has the largest in the Vendors menu.
balance outstanding and the amount owed. 7. Process all cash
2. Locate the cash receipts journal, and identify the amount payments.
of cash to be debited to the general ledger Cash in Bank 8. Record the adjusting
entries.
account.
9. Print a Journal report.
3. Calculate Kite Loft’s working capital at December 31. 10. Proof your work.
11. Print the following
reports: General
Ledger, Vendor
Balance Summary,
and Customer Balance
Summary.
12. Print a Trial Balance.
13. Print a Profit & Loss
report.
14. Print a Balance Sheet.
15. Close the fiscal year.
16. Print a post-closing Trial
Balance.
17. Complete the Analyze
activity and the Audit
Test.
18. Back up your work.
Mini Practice Set 5 781
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UNIT
6 Additional
Accounting
Topics
Personal Finance Q & A
Q: Why do I need to know about
partnerships?
A: Partnership accounting is different
from accounting for corporations
and sole proprietorships.
Q: What does ethics have to do with
accounting?
A: Everything. Accountants are held to
high ethical standards because they
are the keepers and communicators
of important information. People
rely on accountants.
THINK IT OVER
Since partnerships are a common
form of business enterprise, would
you consider having a partner in your
business? Give several reasons that
you would or would not be in favor
of this idea.
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Internet Project
Introduction
The Sarbanes-Oxley Act (SOX), signed into law in 2002, applies
to publicly held companies and the accounting firms that audit
them. The law was passed in response to corporate failures and
accounting irregularities that resulted in job losses, massive
bad debts, and deep plunges in the values of certain stocks and
retirement plans.
Log on to glencoeaccounting.glencoe.com and
click on Student Center. Click on WebQuest and
select Unit 6. Begin your WebQuest by reading
the Task.
Continue working on your WebQuest Chapter 27 28 29
as you study Unit 6. Page 805 825 846
THE BIG PICTURE
PROGRESS Since passage of the Sarbanes-Oxley Act, more U.S.
companies have implemented the following governance reforms:
FINANCIAL EXPERT ON AUDIT COMMITTEE:
95%
BOARD EVALUATION POLICIES:
90%
DIRECTOR TRAINING:
80%
AUDITOR ROTATION POLICIES:
42%
Data: Governance Metrics International
Source: Reprinted by permission from BusinessWeek.
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CH A P T ER 2 7 Introduction to
Partnerships
BEFORE
YOU READ
What You’ll Learn Predict
1. Identify the characteristics of 1. What does the chapter title tell you?
a partnership. 2. What do you already know about this subject from personal experience?
3. What have you learned about this in the earlier chapters?
2. Identify the various
accounting functions involved 4. What gaps exist in your knowledge of this subject?
with a partnership.
3. Account for investments in a
partnership. Exploring the Real World of Business
4. Account for partners’
withdrawals. LOOKING AT PARTNERSHIPS
5. Allocate profits and losses Moss Adams LLP
to the partners by different Moss Adams LLP claims its spot as the 11th largest
methods.
accounting and consulting firm in the United States. Its staff
6. Define the accounting terms of 1,400 offers audit and tax services, business consulting, risk
introduced in this chapter. management services, and asset valuations.
Why It’s Important When this accounting partnership began in 1913, it
primarily served local forest product businesses in the Seattle,
Many businesses are
▲
Washington area. The firm now earns approximately $180
organized as partnerships.
million per year with clients in a variety of industries.
Moss Adams attributes its success to a decision to become
the dominant accounting service provider in selected
industries. The firm’s partners and accountants have skills
specific to industries like auto sales, apparel, forestry,
construction, and health care.
What Do You Think?
If you were looking for an accounting firm to handle your
audit, why would it be important to you that the firm have
specialized experience in your industry?
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Working in the Real World
APPLYING YOUR ACCOUNTING KNOWLEDGE
Personal Connection
Going into business with someone can be smart 1. What are some rules in your workplace?
when two or more people have complementary 2. How do these rules help you and your
business skills and resources that can help a co-workers avoid conflict?
business succeed. Business partners should agree
3. If conflicts occur, how are they resolved?
about each person’s role in the business and how
to share profits and losses. In this chapter you Online Connection
will learn how a partnership agreement helps Go to glencoeaccounting.glencoe.com and click
avoid conflict and contributes to the smooth on Student Center. Click on Working in the
operation of the business. Real World and select Chapter 27.
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SECTION 1 Partnership Characteristics
and Partners’ Equity
As you learned in Chapter 2, a partnership is an association of two or
BEFORE
YOU READ more persons as co-owners to operate a business for profit. Any type of busi-
ness may be organized as a partnership, but it is more common for those
providing professional services such as accounting and legal firms.
Main Idea
The partnership form of
business organization has Characteristics of a Partnership
unique features. What Are the Characteristics of a Partnership?
Read to Learn… The partnership organizational form has certain unique features.
➤ the characteristics of a
partnership. (p. 786)
Ease of Formation
➤ how to account for equity No special legal requirements must be met to form a partnership.
in a partnership. (p. 787) A Voluntary Arrangement. A partnership is formed when
two or more persons agree to operate as partners. No one can be forced
Key Terms into a partnership or required to continue as a partner.
partnership agreement The Partnership Agreement. A partnership may be formed
mutual agency when two or more individuals verbally agree to operate a business as
co-owners. However, it is advisable to have a partnership agreement
in writing that states the terms under which the partnership will operate.
It should include (1) each partner’s name and address; (2) the name, loca-
tion, and nature of the partnership; (3) the agreement date and the length
of time the partnership is to exist; (4) each partner’s investment; (5) each
partner’s duties, rights, and responsibilities; (6) the amount of withdrawals
allowed each partner; (7) the procedure for sharing profits and losses; and (8)
the procedures to follow when the partnership ceases to exist. Each partner
should sign the agreement.
AS Unlimited Liability
YOU READ Each partner is personally liable for the partnership’s debts. This means
Instant Recall that if the assets of the partnership cannot pay its creditors, the partners’
personal assets may be used to pay those debts.
Other Forms of
Organization A sole
proprietorship is owned
Limited Life
by one person. A A partnership may end for a number of reasons, including any partner’s
corporation is owned by death, withdrawal, bankruptcy, or incapacity. It may also end upon the
any number of people completion of the project for which the partnership was formed, or at the
and is a separate entity expiration of the time set by the partners. For example, two architects may
for legal purposes. agree to combine their talents to design and oversee the construction of a
building. When the building is completed, the partnership is dissolved.
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Mutual Agency AS
YOU READ
Each partner is an agent of the partnership. In other words any partner
has the legal right, in the name of the firm, to enter into agreements that In Your Own Words
are binding on all other partners. This is known as mutual agency . Partnership Explain
what a partnership is in
Co-ownership of Partnership Property your own words.
When a partner invests assets in the partnership, he or she gives up all
personal rights of ownership. The partners co-own all partnership assets.
Advantages and Disadvantages of a Partnership
A partnership combines the abilities, experiences, and resources of two
or more individuals. It is easy to form and requires only the partners’ agree-
ment. Partners can usually make decisions without meeting formally. A
partnership must have a legal purpose but has few other restrictions. Finally,
it does not pay federal or state income taxes because each partner pays per-
sonal income taxes on his or her share of the net income of the business.
Of course, a partnership has disadvantages. It has a limited life, each
partner is personally liable for the partnership’s debts, and all partners may
be held responsible for one partner’s decisions. A partner cannot transfer his
or her partnership interest without the other partners’ consent. The partners
need to be able to work together without major disagreements.
Accounting for Partners’ Equity
How Do You Account for a Partnership?
Accounting for owner’s equity for a partnership is basically the same as
AS
for a sole proprietorship. A sole proprietorship has only one capital account, YOU READ
but a partnership has two or more capital accounts. A separate capital
Key Point
account is set up for each partner to record that partner’s investment in the
business. Each partner also has a separate withdrawals account. Partnership Accounts
A partnership has
Recording Partner Investments separate capital and
When a partnership is formed, the value of cash and other assets invested withdrawals accounts for
each partner.
by each partner is listed in the partnership agreement. Separate entries then
record each partner’s investment in the business. Let’s look at an example.
On January 1 Molly Gill and Don Putman agree to form a partnership to
operate a business. The name of the partnership is Surfside Bike & Skate Rent-
als. Each partner agrees to invest the following assets in the new business.
Gill Putman
Cash $12,000
Office supplies 1,000
Office equipment (market value) 12,000
Building (market value) $30,000
Land 15,000
Total assets invested $45,000 $25,000
When assets other than cash are invested in a partnership, the asset
accounts are debited for the market value of the assets.
Section 1 Partnership Characteristics and Partners’ Equity 787
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B u s i n e s s Tr a n s a c t i o n
On January 1 Molly Gill and Don Putman contributed cash and other assets to form a partnership,
Memorandum 1.
JOURNAL ENTRY
GENERAL JOURNAL PAGE 1
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Jan. 1 Building 3 0 0 0 0 00 2
3 Land 15 0 0 0 00 3
4 Molly Gill, Capital 4 5 0 0 0 00 4
5 Memorandum 1 5
6 1 Cash in Bank 1 2 0 0 0 00 6
7 Office Supplies 1 0 0 0 00 7
8 Office Equipment 1 2 0 0 0 00 8
9 Don Putman, Capital 2 5 0 0 0 00 9
10 Memorandum 1 10
11 11
AS Recording Additional Partner Investments
YOU READ
Any additional investments by the partners are recorded in a similar
Key Point manner. For example, in April each partner agreed to invest $5,000 cash
Partnership in the business. Cash in Bank is debited for $10,000 and the two partners’
Investments A partner’s capital accounts are credited for $5,000 each.
investment of noncash
assets is recorded at Recording Partner Withdrawals
the market value of the Because partners do not receive a salary, they may withdraw cash or
assets. other assets for personal use during the year. The withdrawal amounts
must follow the terms of the partnership agreement. The amount is deb-
ited to the partner’s withdrawals account and is credited to the appropriate
asset account.
B u s i n e s s Tr a n s a c t i o n
On May 12 Molly Gill withdrew $1,800 cash for personal use, Check 123, and Don Putman withdrew
$1,200 cash for personal use, Check 124.
JOURNAL ENTRY
GENERAL JOURNAL PAGE 36
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 May 12 Molly Gill, Withdrawals 1 8 0 0 00 2
3 Cash in Bank 1 8 0 0 00 3
4 Check 123 4
5 Don Putman, Withdrawals 1 2 0 0 00 5
6 Cash in Bank 1 2 0 0 00 6
7 Check 124 7
788 Chapter 27 Introduction to Partnerships
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SECTION 1 Assessment
AFTER
YOU READ
Reinforce the Main Idea
The partnership form of #(!2!#4%2)34)#3 /& ! 0!24.%23()0
business organization is
different from the other forms %ASE OF &ORMATION
you have studied. Make a
chart like this one and fill
in the blanks with a short
definition of each partnership 5NLIMITED ,IABILITY
characteristic.
,IMITED ,IFE
-UTUAL !GENCY
#O
OWNERSHIP OF
0ARTNERSHIP 0ROPERTY
Do the Math
A partnership has two partners. Assume that assets total $123,400, liabilities are $18,700,
and partner A has a capital balance of $63,234. What is the capital balance of partner B?
Problem 27–1 Recording Partners’ Investments
On June 1 Matthew Deck and Jennifer Rusk agree to combine their sole proprietorships into
a new business, Dreamscapes Catering, organized as a partnership. The partnership will take
over all assets of the two proprietorships. The assets invested by Deck and Rusk follow.
Instructions Prepare the journal entries required to record the investment by each
partner. Use page 1 of the general journal in your working papers. The source document is
Memorandum 1.
Investments Deck Rusk
Cash $ 1,200 $ 2,300
Accounts receivable 2,000 7,000
Merchandise 8,000 5,000
Equipment 5,000 12,000
Van 12,000 —
Office Furniture 1,000 500
Section 1 Partnership Characteristics and Partners’ Equity 789
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SECTION 2 Division of Income and Loss
At the end of each accounting period, the net income or net loss
BEFORE
YOU READ from partnership operations is divided among the partners. Partners may
divide the income or loss among themselves in any way they choose.
The specific method should be defined in the partnership agreement. If
Main Idea it is not, the law provides that net income or net loss be divided equally
Partners divide profits and
among the partners.
losses in several different
There are many ways for partners to divide profits and losses. The
ways.
division of profits and losses is generally based on the services and capi-
Read to Learn… tal contributed by the partners to the partnership. For example, if the
➤ how to divide net income partners share equally in the work of the business, but one partner has
and net loss equally. invested more capital, it seems only fair that the one who has invested
(p. 790) more should profit more.
➤ how to divide net When the profits of the accounting period are divided, each partner’s
income and net loss on a capital account is increased. If the business incurs a net loss for the
fractional basis. (p. 791) accounting period, the capital account of each partner is decreased.
➤ how to divide net income A number of methods can be used to distribute partnership profits
and net loss based on or losses. We consider three of these methods:
capital investments.
• equal basis
(p. 793)
• fractional share basis
• capital investment basis
We will look at two examples for Surfside Bike & Skate Rentals for each
method: a net income of $24,000 and a net loss of $12,000.
Dividing Profits and
Losses Equally
What Is the Journal Entry to Divide
AS
YOU READ Income or Loss Equally?
The easiest way to divide a partnership’s net income
Key Point
or net loss is on an equal basis. This method is often
Distribution of Net used when all partners invest equal amounts of capital
Income or Net Loss and share equally in the work of the business.
If the partnership The partnership agreement for Surfside Bike & Skate
agreement does not Rentals states that the profits or losses are to be divided between the two
explain how net income
partners equally. During the first year of operation, the partnership earned
or net loss is to be
a net income of $24,000. Each partner’s share is $12,000 ($24,000 2).
distributed, it is divided
Remember that the balance of the Income Summary account is the
equally among the
partners. net income or net loss for the period. In the third closing entry, Income
Summary is closed to capital. On December 31 the balance of Income
Summary, a $24,000 credit, is divided equally between the two partners.
790 Chapter 27 Introduction to Partnerships
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GENERAL JOURNAL PAGE 66
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- Closing Entries 1
2 Dec. 31 Income Summary 24 0 0 0 00 2
3 Molly Gill, Capital 1 2 0 0 0 00 3
4 Don Putman, Capital 1 2 0 0 0 00 4
After the journal entry has been posted, the balance of Molly Gill’s capi-
tal account is $62,000 and the balance of Don Putman’s capital account is
$42,000.
Molly Gill, Capital Don Putman, Capital
Debit Credit Debit Credit
Bal. 50,000 Bal. 30,000
Clos. 12,000 Clos. 12,000
Bal. 62,000 Bal. 42,000
If the partnership incurs a net loss of $12,000 for the period, each
partner’s share of the net loss is $6,000 ($12,000 2).
On December 31 the balance of Income Summary, a $12,000 debit, is
AS
divided equally between the two partners. YOU READ
In Your Experience
GENERAL JOURNAL PAGE 66
POST.
Partnership Have
DATE DESCRIPTION DEBIT CREDIT
REF.
you, a friend, or a
1 20-- Closing Entries 1
family member ever
Dec. 31 Molly Gill, Capital 6 0 0 0 00
2 2
done business with a
3 Don Putman, Capital 6 0 0 0 00 3
partnership?
4 Income Summary 1 2 0 0 0 00 4
After the journal entry has been posted, the balance of Molly Gill’s capi-
tal account is $44,000 and the balance of Don Putman’s capital account is
$24,000.
Molly Gill, Capital Don Putman, Capital
Debit Credit Debit Credit
Clos. 6,000 Bal. 50,000 Clos. 6,000 Bal. 30,000
Bal. 44,000 Bal. 24,000
Dividing Profits and Losses
on a Fractional Share Basis
How Do You Compute and Record Profit
or Loss Based on Fractions?
Another way to divide net income or net loss is to assign each partner
a stated fraction of the total. The size of the fraction usually depends on (1)
the amount of each partner’s investment and (2) the value of each partner’s
services to the business.
Section 2 Division of Income and Loss 791
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Suppose that the Surfside Bike & Skate Rentals partnership agree-
ment states that the net income or net loss is to be divided between the
two partners on the following basis:
• Gill, two-thirds
• Putman, one-third
When partners agree to share net income or net loss on a fractional
share basis, that basis is often stated as a ratio. For example, Molly Gill’s
two-thirds share and Don Putman’s one-third share could be expressed
as a 2:1 ratio (2 to 1). To turn a ratio into a fraction, add the figures
and use the total as the denominator of the fraction. In this particular
example, the ratio is converted to fractions as follows:
2:1 ( 2 1 3) 2⁄ 3 and 1⁄3
The division of the $24,000 net income based on a 2:1 ratio is cal-
culated as follows:
Gill’s share: $24,000 2⁄3 $16,000
Putman’s share: $24,000 1⁄ 3 $8,000
The December 31 closing entry follows:
GENERAL JOURNAL PAGE 66
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- Closing Entries 1
2 Dec. 31 Income Summary 24 0 0 0 00 2
3 Molly Gill, Capital 16 0 0 0 00 3
4 Don Putman, Capital 8 0 0 0 00 4
After the journal entry has been posted, the balance of Molly
Gill’s capital account is $66,000 and the balance of Don Putman’s
capital account is $38,000. Refer to the following T account for each of
the partners.
Molly Gill, Capital Don Putman, Capital
Debit Credit Debit Credit
Bal. 50,000 Bal. 30,000
Clos. 16,000 Clos. 8,000
Bal. 66,000 Bal. 38,000
If the partnership incurs a net loss of $12,000 for the period, the
December 31 distribution to the partners based on a 2:1 ratio is calcu-
lated as follows:
Gill’s share: ($12,000) 2⁄3 ($8,000)
Putman’s share: ($12,000) 1⁄3 ($4,000)
792 Chapter 27 Introduction to Partnerships
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On December 31 the partnership makes the following closing entry:
MATH HINTS
GENERAL JOURNAL PAGE 66 Fractions, Decimals,
POST.
and Percents
DATE DESCRIPTION REF. DEBIT CREDIT
• To change a fraction
1 20-- Closing Entries 1 to a decimal, divide
2 Dec. 31 Molly Gill, Capital 8 0 0 0 00 2 the numerator by the
3 Don Putman, Capital 4 0 0 0 00 3 denominator.
4 Income Summary 1 2 0 0 0 00 4 3/8 0.375
• To change a decimal
to a percent, move
Molly Gill, Capital Don Putman, Capital the decimal point two
Debit Credit Debit Credit places to the right and
add the percent symbol.
Clos. 8,000 Bal. 50,000 Clos. 4,000 Bal. 30,000 0.375 37.5%
Bal. 42,000 Bal. 26,000 • To change a percent
to a fraction, replace
the percent symbol with
1/100.
After the journal entry has been posted, the balance of Molly Gill’s capi- 37.5% 37.5(1/100)
37.5/100
tal account is $42,000 and the balance of Don Putman’s capital account is
$26,000.
Dividing Profits and Losses
Based on Capital Investments
How Do You Use Capital Investment
to Divide Profit or Loss?
Net income and net loss can also be divided on the basis
of the amount of capital contributed by the individual part-
ners. To do this, compute the percentage of each partner’s
capital investment as follows:
Individual Partner’s Investment
Partner’s Percentage
Total Partnership Investment
Then multiply the net income or net loss by each partner’s
percentage.
Molly Gill and Don Putman made the following capital investments:
Molly Gill $50,000
Don Putman $30,000
Total investment $80,000
Gill’s Percentage Putman’s Percentage
50,000 30,000
62.5% 37.5%
80,000 80,000
The share of the $24,000 net income for each partner is calculated
as follows:
Gill’s share $24,000 .625 $15,000
Putman’s share $24,000 .375 $9,000
Section 2 Division of Income and Loss 793
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On December 31 the partnership makes the following closing entry:
GENERAL JOURNAL PAGE 66
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- Closing Entries 1
2 Dec. 31 Income Summary 24 0 0 0 00 2
3 Molly Gill, Capital 1 5 0 0 0 00 3
4 Don Putman, Capital 9 0 0 0 00 4
5 5
Molly Gill, Capital Don Putman, Capital
Debit Credit Debit Credit
Bal. 50,000 Bal. 30,000
Clos. 15,000 Clos. 9,000
Bal. 65,000 Bal. 39,000
After the journal entry has been posted, the balance of Molly Gill’s capi-
tal account is $65,000 and the balance of Don Putman’s capital account is
$39,000.
If the partnership incurs a net loss of $12,000 for the period, the
December 31 distribution is calculated as follows:
Gill’s share ($12,000) .625 ($7,500)
Putman’s share ($12,000) .375 ($4,500)
On December 31 the closing entry is as follows:
GENERAL JOURNAL PAGE 66
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- Closing Entries 1
2 Dec. 31 Molly Gill, Capital 7 5 0 0 00 2
3 Don Putman, Capital 4 5 0 0 00 3
4 Income Summary 1 2 0 0 0 00 4
5 5
After the journal entry has been posted, the balance of Molly Gill’s capi-
tal account is $42,500, and the balance of Don Putman’s capital account is
$25,500.
Molly Gill, Capital Don Putman, Capital
Debit Credit Debit Credit
Clos. 7,500 Bal. 50,000 Clos. 4,500 Bal. 30,000
Bal. 42,500 Bal. 25,500
794 Chapter 27 Introduction to Partnerships
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SECTION 2 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Identify two facts about
-ETHOD OF $IVIDING 0ROFITS AND ,OSSES &ACT &ACT
the methods of dividing
partnership profits and losses
covered in this section. Use a
chart like this one to organize
the information.
Do the Math
You and your best friend, Mary Jo Perry, operate an ice cream kiosk at the local outdoor
shopping mall. You agree to divide profits and losses based on the capital investments made
by each partner. Calculate the share of profit and loss due to each partner.
Your investment $15,000
Mary Jo Perry’s investment 25,000
Net income 32,000
1. What is the percentage of investment by each partner?
2. What is your share of the profit?
3. If there is a loss, which partner will have the largest share of the loss?
Problem 27–2 Determining Partners’ Fractional Shares
Following are the ratios used by several partnerships to divide net income or net loss.
Instructions Determine the fractions that are used to calculate each partner’s share of net
income or net loss. Use the form provided in your working papers.
1. 3:1 4. 2:1:1
2. 5:3:1 5. 2:1
3. 3:2:2:1
BE SURE EACH ITEM IS ENDORSED
DOLLARS CENTS
CASH
Problem 27–3 Analyzing a
CHECKS (List Singly)
1 234/67 8,000 00
Date November 13 20 -- 2 Walter
Checks and other items are received for deposit subject to
Source Document
the terms and conditions of this bank's collection agreement. 3
4
5
The deposit slips for Mr. Walter’s and Ms. 200 Market Square 6
Rockford, Alabama 35136 7
8
Yount’s investments in the partnership of 01100653456 450987 TOTAL 8,000 00
Walter and Yount Tax Service are presented
BE SURE EACH ITEM IS ENDORSED
DOLLARS CENTS
here. CASH
CHECKS (List Singly)
1 234/89 12,000 00
Instructions Prepare a journal entry to Date November 13 20 --
Checks and other items are received for deposit subject to
2
3
Yount
the terms and conditions of this bank's collection agreement.
record the investments by the partners. Use
4
5
the journal provided in your working papers. 200 Market Square 6
Rockford, Alabama 35136 7
8
01100653456 450987 TOTAL 12,000 00
Section 2 Division of Income and Loss 795
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CH A P T ER 2 7 Summary
Key Concepts
1. A partnership is an association of two or more persons to operate, as co-owners, a business for
profit. The actions of one partner acting on behalf of the partnership are binding on all partners.
Partnership characteristics include:
• the ease of formation
• unlimited liability for the partnership’s debts
• limited life
• mutual agency
• co-ownership of partnership property
Advantages include:
• brings together abilities, experiences, and resources of two or more individuals
• requires only the partners’ agreement to form
• allows one or more partners to make decisions without a formal meeting of all partners
• does not pay federal or state income taxes; each partner pays taxes on his or her share of the
net income of the business
Disadvantages include:
• limited life
• personal liability for partnership debts
• responsibility for actions of other partners
• restriction of transfer of a partner’s interest without permission of other partners
• potential for disagreements between partners
It is advisable to have a partnership agreement signed by each partner that states the following
in writing:
• each partner’s name and address
• the name, location, and nature of the partnership
• the agreement date and the length of time the partnership is to exist
• each partner’s investment
• each partner’s duties, rights, and responsibilities
• the amount of withdrawals allowed each partner
• the procedure for sharing profits and losses
• the procedures to follow when the partnership ceases to exist
2. Accounting for a partnership involves recording partners’ original and subsequent investments
in separate capital accounts and recording partners’ withdrawals in separate withdrawals
accounts.
Partner 1, Capital Partner 1, Withdrawals Partner 2, Capital Partner 2, Withdrawals
Debit Credit Debit Credit Debit Credit Debit Credit
xxx xxx xxx xxx
796 Chapter 27 Summary
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Summary CHAPT E R 27
3. The formation of a partnership involves recording the value of cash and other assets that each
partner invests. To record a partner’s investment in a partnership:
Cash in Bank (or other asset) Individual Partner’s Capital
Debit Credit Debit Credit
xxx xxx
4. The terms of a partnership agreement should determine how partners may withdraw cash or
assets from the business. To record a partner’s cash withdrawal from the partnership:
Individual Partner’s Withdrawals Cash in Bank
Debit Credit Debit Credit
xxx xxx
5. The net income or net loss of a partnership is divided among the partners according to the terms
set forth in the partnership agreement. The division is usually based on the contribution of
services and capital by the partners.
The division may be determined
• on an equal basis
• on a fractional share basis
• on the basis of investment
Dividing profits among partners:
Individual Partner’s Capital Income Summary
Debit Credit Debit Credit
xxx xxx
Dividing losses among partners:
Individual Partner’s Capital Income Summary
Debit Credit Debit Credit
xxx xxx
Key Terms
mutual agency (p. 787)
partnership agreement (p. 786)
Chapter 27 Summary 797
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C H A P T ER 2 7 Review and Activities
AFTER
YOU READ
Check Your Understanding
1. Partnership Form of Organization
a. List five characteristics of a partnership.
b. List three advantages and three disadvantages of the partnership form of business.
2. Partnership Accounting
a. What information is usually included in a partnership agreement?
b. How does accounting for a partnership differ from that for a sole proprietorship?
3. Partnership Investments
a. When assets other than cash are invested in a partnership, at what amount are the
assets recorded?
b. What is the journal entry to record a partner’s investment of cash?
4. Partnership Withdrawals
a. What accounts are affected when a partner withdraws cash for personal use?
b. What determines the amount of cash or other assets a partner may withdraw from the
business for personal use?
5. Allocation of Profits and Losses
a. What factors do partners usually consider when deciding on how the profits and losses of the
partnership will be divided?
b. Name three methods partners might use to divide profits and losses.
Apply Key Terms
You and your friend Marianne Shelton
have discussed forming a partnership to
provide desktop publishing and layout
services to local businesses. You have
chosen a business name: The Perfect
Paper. You are ready to launch your
business idea, but you need Marianne to
agree so that you can obtain a business
loan. Using the terms listed here, write a
letter to Marianne and formally invite her
to join you in this venture.
mutual agency
partnership agreement
798 Chapter 27 Review and Activities
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Computerized Accounting CHAPT E R 27
Starting a New Company
Making the Transition from a Manual to a Computerized System
Task Manual Methods Computerized Methods
Starting a new • Determine the form of business • Use the new company setup guide
company ownership. offered with most computerized
• Create a chart of accounts. accounting systems.
• Open a general ledger account for each • Follow the steps that will prompt you
account. to enter general information about the
• Record the journal entry for the initial business, as well as specific information
investment by the owner(s). about the accounting records.
• Post the opening entry to the
appropriate ledger accounts.
Q&A
Peachtree Question Answer
What information • Company information
will I enter in the • Chart of accounts
New Company Setup • Accounting method
wizard? • Posting method
• Accounting periods
• Defaults
• Beginning balances
QuickBooks Q & A
QuickBooks Question Answer
What information • Company information
will I enter in the new • Fiscal year start date
company EasyStep • Company preferences
Interview? • Chart of accounts
• Opening balances
For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers.
Chapter 27 Computerized Accounting 799
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C H A P T ER 2 7 Problems
Complete problems using: Manual Glencoe Peachtree Complete QuickBooks Spreadsheet
Spreadshee
OR OR OR
Working Papers Accounting Software Templates Templates
SPREADSHEET Problem 27–4 Dividing Partnership Earnings
SMART GUIDE Listed here are the net income and the method of dividing net income or
Step–by–Step Instructions: net loss for several partnerships.
Problem 27–5 Instructions Use the form provided in your working papers to determine
1. Select the spreadsheet each partner’s share of the net income.
template for Problem
27–5. Net Income Method of Dividing Partnership Earnings
2. Enter your name and
the date in the spaces
1. $45,000 Equally: 2 partners
provided on the 2. $89,700 Fractional share: 2/3, 1/3
template. 3. $22,000 Fractional share: 3:1
3. Complete the spread-
sheet using the 4. $32,000 Fractional share: 2/5, 2/5, 1/5
instructions in your 5. $92,700 Equally: 3 partners
working papers.
4. Print the spreadsheet Analyze Identify the accounts affected when net income is distributed
and proof your work. to the partners.
5. Complete the Analyze
activity.
6. Save your work and
exit the spreadsheet
program. Problem 27–5 Calculating the Percentage of a
Partner’s Capital Investment
Listed here are an individual partner’s investments for several partnerships.
SMART GUIDE Instructions Using the form provided in your working papers, calculate
Step–by–Step Instructions: Partner A’s percentage ownership in each partnership.
Problem 27–6
Partnership Partner A’s Investment Total Partnership Investment
1. Select the problem set
for JR Landscaping 1. $60,000 $180,000
(Prob. 27–6). 2. 25,000 125,000
2. Rename the company,
change the accounting 3. 11,250 28,125
period to May 1– 4. 30,000 40,000
May 31, 2010 and set
the system date. Analyze Calculate the percentage of ownership for the other
3. Enter the transactions to partner(s) in partnerships 1 and 4.
record the investment
by each partner using
the General Journal
Entry option.
4. Print a General Journal Problem 27–6 Recording Investments
report and proof your
work.
of Partners
5. Complete the Analyze On May 1 Jason Pua and Roy Nelson formed the partnership called
activity. JR Landscaping. Jason contributed $8,100 cash and all of his landscaping
6. End the session.
equipment. Jason had purchased the equipment for $2,500 last year. The
market value of this equipment is now $1,800. Roy contributed $1,000 cash
and his truck to the partnership. The truck currently has a market value
of $5,600.
800 Chapter 27 Problems
784-805_CH27_868829.indd 800 4/6/06 6:47:07 PM
Problems CHAPT E R 27
Instructions Prepare the journal entries required to record the investment
that each partner contributed in creating the partnership. Use page 1 of SMART GUIDE
the general journal in your working papers. The source document for this
Step–by–Step Instructions:
assignment is Memorandum 1. Problem 27–7
Analyze Compare the balance of Jason Pua’s capital account with the 1. Select the problem set
capital account of Roy Nelson. for In Shape Fitness
(Prob. 27–7).
2. Rename the company
and set the system date.
3. Record the entry to
Problem 27–7 Sharing Losses Based divide the loss between
the two partners using
on Capital Balances the General Journal
Mariela DeJesus and Natasha Faircloth started the partnership In Shape Entry option.
4. Print a General Journal.
Fitness. Mariela contributed a capital balance of $35,000. Natasha’s capital 5. Complete the Analyze
contribution totaled $45,000. Their partnership agreement specified activity.
sharing net profits and net losses on the basis of their capital balances. The 6. End the session.
net loss for their first year of operation for In Shape Fitness was $28,500.
QuickBooks
Instructions Prepare the journal entry required to divide the net loss
between the partners. Use the journal in your working papers to record PROBLEM GUIDE
your entry. Step–by–Step Instructions:
Problem 27–7
Analyze If Mariela took a $1,500 withdrawal, what was her capital
1. Restore the Problem
account balance on December 31 after the closing entries 27-7.QBB file.
were posted? 2. Record the entry to
divide the loss between
the two partners using
the Make General
Problem 27–8 Partners’ Withdrawals Journal Entries option.
3. Print a Journal report.
Toni Graff, Ahmad Nu, and Lindsay Pane are partners in Travel Essentials. 4. Complete the Analyze
Their partnership agreement stated that withdrawals would be 10 percent activity.
5. Back up your work.
for each partner based on the partnership’s net profits or net losses recorded
for the year. In the first year of operation, the partnership reported $25,000
in net profit.
Instructions Prepare the entry to record the withdrawals of Graff, Nu, and SMART GUIDE
Pane based on the partnership agreement. Use the journal paper provided Step–by–Step Instructions:
in your working papers. Problem 27–8
1. Select the problem set
Analyze Explain how the $25,000 in profit would be shared among for Travel Essentials
Graff, Nu, and Pane. (Prob. 27–8).
2. Rename the company
and set the system date.
3. Enter the transactions
to record the partners’
withdrawals.
4. Print a General Journal.
5. Complete the Analyze
activity.
6. End the session.
Chapter 27 Problems 801
784-805_CH27_868829.indd 801 9/15/05 2:05:27 PM
C H A P T ER 2 7 Problems
Problem 27–9 Preparing Closing Entries
QuickBooks
for a Partnership
Barbara Scott and Martin Towers are partners in the firm of Ten Column
PROBLEM GUIDE Accounting Services. Their partnership agreement states that Scott and
Step–by–Step Instructions: Towers share net income or net loss in a 3:2 ratio.
Problem 27–8 At the end of the period, December 31, the business had a net loss of
1. Restore the Problem $9,700. During the period Scott withdrew $6,600 and Towers withdrew
27-8.QBB file.
$5,400.
2. Enter the transaction
to record the partners’ Instructions In your working papers, do the following:
withdrawals using the
Make General Journal 1. Journalize the closing entries to divide the net loss between the
Entries option. partners and to close the withdrawals accounts. Use general journal
3. Print a Journal report.
page 14.
4. Complete the Analyze
activity. 2. Post the closing entries to the general ledger accounts.
5. Back up your work.
Analyze Calculate the reductions in the Scott and Towers capital
accounts.
SMART GUIDE
Step–by–Step Instructions: CHALLENGE Problem 27–10 Evaluating Methods
Problem 27–9 PROBLEM
1. Select the problem
of Dividing
set for Ten Column
Accounting Services
Partnership Earnings
(Prob. 27–9). Jo Garrity, Maureen O’Riley, and David White decided to form a partnership
2. Rename the company called OnTime Copy Shop. The partners will invest the following assets in
and set the system date.
3. Record the entry to
the business:
divide net loss between Garrity O’Riley White
partners using General
Journal Entry option.
Cash 0 $22,000 $40,000
4. Print a General Journal Supplies 0 5,000 2,000
report and proof your Equipment 0 7,500 4,000
work.
5. Complete the Analyze Building $50,000 0 0
activity. Land 15,000 0 0
6. End the session.
They are considering the following plans for the division of net income or
net loss:
1. Equally
2. Garrity, 20%; O’Riley, 40%; White, 40%
3. In the same ratio as the beginning balances of their capital accounts
Instructions Assume that the business had a net income of $17,500 in its
first year of operations. Calculate the division of net income under each of
the three plans.
Analyze Identify which method O’Riley would prefer and why.
802 Chapter 27 Problems
784-805_CH27_868829.indd 802 4/6/06 6:47:09 PM
Winning Competitive Events CHA PTER 27
Practice your test-taking skills! The questions on this page are reprinted with permission
from national organizations:
• Future Business Leaders of America
• Business Professionals of America
Use a separate sheet of paper to record your answers.
Future Business Leaders of America
MULTIPLE CHOICE
1. The drawing account shows each partner’s
a. withdrawal of cash only.
b. withdrawal of all assets.
c. additional investments.
d. all of the above.
e. none of these answers
2. The right of all partners to contract for a partnership is called
a. mutual agency.
b. a partnership.
c. a partner’s agreement.
d. voting rights.
e. none of these answers
3. Assume that Bernard’s Novelty is a partnership. Which transaction would occur if
Partner A withdraws cash for personal use to purchase an automobile?
a. Debit Salary Expense and credit Cash
b. Debit Cash and credit Partner A, Withdrawal
c. Debit Partner A, Withdrawal and credit Cash
d. Debit Capital and credit Cash
4. If a partner invests a noncash asset in the partnership, the amount to be debited
and credited would be
a. the asset’s cost.
b. the asset’s book value.
c. the asset’s current market value.
d. an amount determined by the investing partner.
Business Professionals of America
MULTIPLE CHOICE
5. Rewrite: 3/5 as a decimal.
a. 1.67
b. .4
c. .6 Need More Help?
d. .0167
Go to glencoeaccounting.glencoe.com and
click on Student Center. Click on Winning
Competitive Events and select Chapter 27.
• Practice Questions and Test-Taking Tips
• Concept Capsules and Terminology
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C H A P T ER 2 7 Real-World Applications and Connections
Critical Introduction to Partnerships
Thinking 1. Name three methods partners can use to divide net income and net loss.
2. Explain what mutual agency means in terms of a partnership.
3. Three people form a partnership. A invests $10,000; B, $25,000; and C, $35,000.
If they share net income of $100,000 based on their original investments, what
is the profit sharing ratio, and how much would each partner receive?
4. Explain the purpose of withdrawals accounts for a partnership.
5. Analyze what you believe to be the most important advantage and
disadvantage of the partnership form of organization.
6. Defend the statement that a partnership agreement is advisable.
CASE Partnership: Dentists
STUDY Arturo Garcia and Marcela Melendez are partners in Family Dental Center. They
share equally the income and the costs of office rent, utilities, insurance, and
salaries for the four people who work for them.
You just graduated from dental school. Arturo and Marcela offer you a
partnership in their practice. Since you lack their years of experience, they offer
you a 20 percent interest in return for a $40,000 investment.
INSTRUCTIONS
1. Assume that the revenue for the dental practice averages $10,000 a week. If
you become a partner, you could generate additional revenue of $3,500 a
week. Compute your 20 percent share of the income.
2. Compute your share of the expenses if total weekly expenses are $6,000.
3. Do you think that the 20% interest return in the partnership is a good deal?
Would you negotiate a different arrangement? Explain.
a
mattoefr ETHICS Partner Loyalty
You and your best friend Harold have started a jewelry business. He manages the
business while you make the jewelry. Your designs are very successful, but because
of Harold’s mismanagement, the business is not making any money. He suggests
“doctoring” the financial statements and using them to raise capital from other
investors. You are afraid that the business will not grow as long as Harold is
running it, but he is a good friend and has some good ideas.
ETHICAL DECISION MAKING
1. What are the ethical issues? 4. How do the alternatives affect the
2. What are the alternatives? parties?
3. Who are the affected parties? 5. What would you do?
$ )) ))
Communicating
Creating a Partnership Agreement
ACCOUNTING Choose a classmate and discuss a partnership for a business the two of you might
like to own and operate. Use your creativity. Prepare a partnership agreement that
spells out the details. Include information about what each partner will contribute
to the business. Be sure to sign the agreement to make it legal and binding.
804 Chapter 27 Real-World Applications and Connections
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Real-World Applications and Connections CHAPT E R 27
Skills Beyond Negotiating
NUMBERS Two of your friends own The Gold Medal, a sports restaurant. They may have to
close it because, as partners, they disagree about expanding.
INSTRUCTIONS
1. Acting as a mediator, role-play the partners’ conflict with two classmates.
Have them discuss their expansion disagreement.
2. Write down all the problems they mention and possible solutions for each.
3. Present your solutions, and help the partners decide whether to expand.
INTERNATIONAL Joint Ventures
One way a company can increase sales is to enter a foreign market in a joint
Accounting venture with a local firm. The two companies share capital, technology, risks,
rewards, and control. The local company offers cultural knowledge and business
contacts. Joint ventures require a lower investment than other entry methods,
but control is diluted and they can be difficult to manage.
INSTRUCTIONS Brainstorm factors to consider before forming a joint venture.
Making It
Your Entrepreneurial Traits
Personal Entrepreneurs recognize and meet the needs of the business world. They must
organize, manage, and assume risks. If you plan to be a sole proprietor, partner, or
corporate executive, you will need the same traits.
PERSONAL FINANCE ACTIVITY Microsoft’s Bill Gates and TV executive and
personality Oprah Winfrey are two well-known entrepreneurs. List the
characteristics you think made them successful.
PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and
click on Student Center. Click on Making It Personal and select Chapter 27.
Analyzing Analyzing Partners’ Equity
Financial The net income or net loss from a partnership represents a return on the equity
Reports the partners invested in the business. Return on equity states a company’s net
profit or net loss as a percentage of equity.
To compute it, divide net income by equity.
Partners may invest different amounts of equity,
so each partner’s return may be different.
Evolution of a
INSTRUCTIONS Use the beginning balances in
Business
the T accounts for Putman and Gill on page 792
Some large corporations
to complete these tasks. started as partnerships. Visit
1. If total net income is $24,000, calculate the glencoeaccounting
return on total partnership equity. .glencoe.com and click
2. Using an equal split of net income, calculate on Student Center. Click on
the return on each partner’s equity. WebQuest and select Unit 6 to
continue your Internet project.
3. Which partner earned the better return?
Explain why. Why is this percentage
different than the return on total equity?
glencoeaccounting.glencoe.com Chapter 27 Real-World Applications and Connections 805
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CH A P T ER 2 8 Financial Statements
and Liquidation
of a Partnership
BEFORE
What You’ll Learn YOU READ
1. Prepare an income statement
for a partnership. Predict
1. What does the chapter title tell you?
2. Prepare a statement of
2. What do you already know about this subject from personal experience?
changes in partners’ equity.
3. What have you learned about this in the earlier chapters?
3. Prepare the Partners’ Equity 4. What gaps exist in your knowledge of this subject?
section of a balance sheet.
4. Account for partnership
liquidation losses.
Exploring the Real World of Business
5. Account for partnership
liquidation gains. EVALUATING PARTNERSHIP FINANCIAL STATEMENTS
6. Prepare the final entry to
liquidate a partnership. King & King, Architects, LLP
How can a 19th century business express itself in the 21st
7. Define the accounting terms
century? Founded in 1868 by Archimedes Russell, King & King
introduced in this chapter.
Architects, LLP, is the oldest architectural firm in New York
Why It’s Important state. Specializing in highly technical spaces like labs, media
Partners’ equity receives centers, and intensive care units, King & King also designs
▲
specific treatment on financial hospitals, schools, and shopping centers.
statements and at the When a partnership like King & King begins a new project,
termination of a business. it evaluates the costs and decides how much to charge for its
services. Aging buildings and an increase in enrollment make
school projects a significant portion of the firm’s business.
Since 1990, King & King has grown from a staff of 25 to more
than 65, and seen a comparable increase in revenues.
What Do You Think?
How do you think income is allocated among partners in a
company like King & King?
806 Chapter 28 Financial Statements and Liquidation of a Partnership
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Working in the Real World
APPLYING YOUR ACCOUNTING KNOWLEDGE
Personal Connection
In previous chapters you have learned how 1. If your workplace went out of business, what
to prepare financial statements for a sole do you think would happen to the assets of
proprietorship and for a corporation. Preparing the business?
financial statements for a partnership is similar. In 2. What would happen to the debts?
this chapter you will learn how to use partnership
capital accounts in the preparation of financial Online Connection
statements and when a partnership business Go to glencoeaccounting.glencoe.com and click
ceases its operations. on Student Center. Click on Working in the
Real World and select Chapter 28.
glencoeaccounting.glencoe.com 807
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SECTION 1 Financial Statements
for a Partnership
At the end of the year,
BEFORE
YOU READ Deloitte & Touche LLP, one of
The Big Four accounting firms,
prepares its financial state-
Main Idea ments including an income
Financial statements for
statement, a statement of
a partnership report the
changes in partners’ equity,
details of each partner’s
and a balance sheet. You will
capital.
learn about these statements in
Read to Learn… this section.
➤ how to prepare a
partnership income
statement. (p. 808)
The Income Statement
What Does a Partnership Income Statement Report?
➤ how to prepare a
statement of changes in A partnership’s income statement is prepared in the same way as that
partners’ equity. (p. 809) for any business. If the partnership is a service business, expenses are
➤ how to prepare the subtracted from revenue to determine the net income or loss. It is not
Partners’ Equity section required, but the division of net income or net loss among the partners
of the balance sheet. may be shown on the income statement.
(p. 809) The partnership agreement of Surfside Bike & Skate Rentals states
that net income or net loss will be divided equally between the partners.
Key Terms At the end of the year, the firm had a net income of $24,000. Each part-
statement of changes in
ner’s share is $12,000. Figure 28–1 illustrates how to report the division
partners’ equity
of net income on the income statement.
Surfside Bike & Skate Rentals
Income Statement
For the Year Ended December 31, 20--
Net Income 24 0 0 0 00
Division of Net Income:
Molly Gill 12 0 0 0 00
Don Putman 12 0 0 0 00
Net Income 24 0 0 0 00
Figure 28–1 Reporting the Division of Net Income on the Income Statement
808 Chapter 28 Financial Statements and Liquidation of a Partnership
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AS
Surfside Bike & Skate Rentals
Statement of Changes in Partners’ Equity YOU READ
For the Year Ended December 31, 20-- In Your Own Words
Gill Putman Totals Statement of Changes
Beginning Capital, Jan. 1, 20-- in Partners’ Equity
Add: Investments 50 000 00 30 000 00 80 0 0 0 00 Explain the purpose of
Net Income 12 000 00 12 000 00 24 0 0 0 00 the statement of changes
Subtotal 62 000 00 42 000 00 104 0 0 0 00
in partners’ equity.
Less: Withdrawals 5 000 00 3 000 00 8 000 00
Ending Capital, Dec. 31, 20-- 57 000 00 39 000 00 96 0 0 0 00
Figure 28–2 Statement of Changes in Partners’ Equity
The Statement of Changes
in Partners’ Equity
What Is Unique About Reporting Equity
in a Partnership?
The statement of changes in partners’ equity reports the change in
each partner’s capital account resulting from business operations, invest-
ments, and withdrawals. It is similar to the statement of changes in owner’s
equity for a sole proprietorship, except it has a separate column for each
partner. See the statement of changes in partners’ equity for Surfside Bike &
Skate Rentals in Figure 28–2. Notice that the net income is divided between
the partners.
The Balance Sheet
What Does a Partnership Balance Sheet Report?
The owners’ equity section of the balance sheet for a partnership is
called the Partners’ Equity section. This section lists each partner’s capital
account separately. (See Figure 28–3.) The capital account amounts on the
balance sheet are the ending capital amounts from the statement of changes
in partners’ equity.
AS
Surfside Bike & Skate Rentals YOU READ
Balance Sheet
December 31, 20--
Instant Recall
Characteristics of
a Partnership The
Partners’ Equity
characteristics include
Molly Gill, Capital 57 0 0 0 00
Don Putman, Capital 39 0 0 0 00 ease of formation,
Total Partners’ Equity 96 0 0 0 00 unlimited liability, limited
Total Liabilities and Partners’ 126 0 0 0 00 life, mutual agency,
Equity and co-ownership of
partnership property.
Figure 28–3 The Partners’ Equity Section of the Balance Sheet
Section 1 Financial Statements for a Partnership 809
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SECTION 1 Assessment
AFTER
YOU READ
Reinforce the Main Idea
The financial statements for $IFFERENCES IN 0ARTNERSHIP &INANCIAL 3TATEMENTS
a partnership are the same
as those for other forms of 34!4%-%.4 $)&&%2%.#%
business except for items
related to owners’ equity. )NCOME 3TATEMENT
Make a chart like this one to
describe how partnership 3TATEMENT OF #HANGES IN 0ARTNERS %QUITY
financial statements are
different from those of a sole "ALANCE 3HEET
proprietorship.
Do the Math
On January 1 Don had a capital balance of $23,000 and Ruth’s capital balance was $34,000.
Compute each partner’s capital balance on December 31 given the following:
• Net income of $28,000 is divided equally between the two partners.
• Don withdrew $3,600.
• Ruth withdrew $4,000.
Problem 28–1 Preparing the Income Statement and
Balance Sheet for a Partnership
Information related to the operations of the Goldman and Jones partnership follows.
Instructions In your working papers, prepare the Division of Net Income section of the
income statement and the Partners’ Equity section of the balance sheet.
1. Goldman and Jones share profits in the ratio of 2:3.
2. Net income for the year ended December 31, 20--, was $35,000.
3. The January 1 capital balance for Goldman was $23,000.
4. The January 1 capital balance for Jones was $47,000.
Problem 28–2 N Buie Norman & Company
Analyzing a Source CERTIFIED PUBLIC ACCOUNTANTS
Document Minutes of the PartnersÕ Meeting
January 12, 20--
Instructions In your working papers The partnership sold equipment for a gain of $26,400. The partners
or on a separate sheet of paper, agreed to share the gain as follows:
determine each partner’s share of the Larry Bass, CPA 6/22
John Buie, CPA 6/22
gain. Teri Anderson, CPA 3/22
Robert Norman, CPA 3/22
Paula Dunham, CPA 2/22
John Ruppe, CPA 2/22
810 Chapter 28 Financial Statements and Liquidation of a Partnership
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SECTION 2 Liquidation of a Partnership
A partnership does not have an unlimited life. Partnerships end
BEFORE
because of death or incapacity of a partner, upon the completion of a YOU READ
project, or at the end of a specified time period. In this section you will
learn about the procedures followed to end a partnership.
Main Idea
In a liquidation the assets
Ending a Partnership are sold, creditors are paid,
What Is the Difference Between Dissolving and any remaining cash is
and Liquidating? distributed to the partners.
A partnership can be either dissolved or liquidated. Both are legal ter- Read to Learn…
minations of the partnership. A dissolution occurs when the partners ➤ two types of legal
change, but the partnership continues operations. For example, when termination of a
a new partner is admitted, the partnership dissolves and a new partner- partnership. (p. 811)
ship begins. ➤ how to liquidate a
A liquidation occurs when the business ceases to exist. The liquida- partnership. (p. 811)
tion converts all partnership assets to cash and pays all partnership debts.
The individual partners then are paid any remaining cash. The process Key Terms
involves four steps: dissolution
liquidation
1. Sell all noncash assets for cash.
2. Add all gains (or deduct all losses) resulting from the sale of
noncash assets to or from the capital accounts of the partners based
on the partnership agreement.
3. Pay all partnership creditors.
4. After the creditors have been paid, distribute any cash remaining to
the partners based on the final balance in their capital accounts.
Liquidating Surfside
Bike & Skate Rentals
How Do You Liquidate a Partnership?
Let’s explore the liquidation of the Surfside Bike & Skate Rentals part-
nership. Figure 28–4 on page 812 shows the balance sheet on the date the
partners decided to end Surfside Bike & Skate Rentals.
Molly Gill and Don Putman share profits and losses equally and agree
to end the partnership based on the April 15 balance sheet. The liquida-
tion requires converting all partnership assets to cash, paying all debts, and
distributing the remaining cash to the partners. Ending the partnership
required five transactions over a period of weeks.
Section 2 Liquidation of a Partnership 811
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AS
YOU READ Surfside Bike & Skate Rentals
Balance Sheet
In Your Own April 15, 20--
Experience
Assets
Liquidation of a Cash in Bank 18 0 0 0 00
Business Have you ever Accounts Receivable 33 0 0 0 00
attended a “going-out-of- Merchandise Inventory 35 0 0 0 00
business” sale? Explain Equipment 48 0 0 0 00
Less: Accumulated Depreciation (8 0 0 0 00)
how this sale uses a type
40 0 0 0 00
of liquidation.
Total Assets 126 0 0 0 00
Liabilities
Note Payable 10 0 0 0 00
Accounts Payable 20 0 0 0 00
Total Liabilities 30 0 0 0 00
Partners’ Equity
Molly Gill, Capital 57 0 0 0 00
Don Putman, Capital 39 0 0 0 00
Total Partners’ Equity 96 0 0 0 00
Total Liabilities and Partners’ Equity 126 0 0 0 00
CULTURAL
Diversity
Personal Space Figure 28–4 Surfside Bike & Skate Rentals Balance Sheet
Personal space
refers to the amount Sale of Partnership Accounts
of space around a
person that he or Receivable at a Loss
she needs to feel On April 20 Surfside sold its $33,000 in accounts receivable to a finance
comfortable. This broker for $29,000. The receivables sale resulted in a $4,000 ($29,000
space varies among $33,000) loss to the partnership. Gill and Putman divided the loss equally.
cultures. For example, The following entry records the company’s sale of the receivables and loss
Americans naturally distribution:
stand about an arm’s
length away from
GENERAL JOURNAL 109
each other when PAGE
talking. In Latin DATE DESCRIPTION
POST.
REF. DEBIT CREDIT
American countries, 1 20-- 1
people stand very 2 Apr. 20 Cash in Bank 2 9 0 0 0 00 2
close and may find it 3 Molly Gill, Capital 2 0 0 0 00 3
rude if a person backs 4 Don Putman, Capital 2 0 0 0 00 4
away while talking 5 Accounts Receivable 3 3 0 0 0 00 5
with them. Knowing 6 Receipt 341 6
about personal space 7 7
can help prevent
misunderstandings. The individual balances in the accounts receivable subsidiary ledger are
credited for a total of $33,000.
812 Chapter 28 Financial Statements and Liquidation of a Partnership
806-825_CH28_868829.indd 812 9/15/05 2:13:46 PM
Sale of Partnership Merchandise at a Loss AS
YOU READ
On April 29 Surfside sold its merchandise inventory, which cost $35,000,
for $32,000 to a discounter. The sale resulted in a $3,000 ($32,000 $35,000) Compare and
loss to the partnership. The partners divided the loss equally. The following Contrast
entry records the sale of the inventory and the distribution of the loss to Sale of Merchandise
the partners: How does the sale
of a partnership’s
merchandise during
GENERAL JOURNAL 110
PAGE regular business
DATE DESCRIPTION
POST.
REF. DEBIT CREDIT operations differ from
1 20-- 1 the sale of merchandise
2 Apr. 29 Cash in Bank 3 2 0 0 0 00 2 during a liquidation?
3 Molly Gill, Capital 1 5 0 0 00 3
4 Don Putman, Capital 1 5 0 0 00 4
5 Merchandise Inventory 3 5 0 0 0 00 5
6 Receipt 363 6
7 7
Sale of Partnership Equipment at a Gain
The partnership owns equipment that cost $48,000 and has accumu-
lated depreciation of $8,000. The book value of the equipment is $40,000
($48,000 $8,000).
On May 5 Surfside sold the equipment to a dealer for $42,000 result-
ing in a gain of $2,000 ($42,000 $40,000). The gain was divided equally
between the partners. The entry to record the sale of the equipment and
distribution of the gain is as follows:
GENERAL JOURNAL PAGE 111
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 May 5 Accum. Depr.—Equipment 8 0 0 0 00 2
3 Cash in Bank 4 2 0 0 0 00 3
4 Molly Gill, Capital 1 0 0 0 00 4
5 Don Putman, Capital 1 0 0 0 00 5
6 Equipment 4 8 0 0 0 00 6
7 Receipt 371 7
8 8
Payment of
Partnership Liabilities
On May 11 the partnership mailed
Check 234 to pay the bank note and
Checks 235 through 238 to pay the
accounts payable balances. The entry
to record the transactions follows.
Section 2 Liquidation of a Partnership 813
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GENERAL JOURNAL PAGE 112
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 May 11 Notes Payable 1 0 0 0 0 00 2
3 Accounts Payable 20 0 0 0 00 3
4 Cash in Bank 3 0 0 0 0 00 4
5 Checks 234–238 5
6 6
The individual balances in the accounts payable subsidiary ledger are
debited for a total of $20,000. This entry brings the Accounts Payable
account to zero.
Only three accounts remain in the ledger after all noncash assets have
been sold and the debts of the partnership have been paid: Cash in Bank;
Molly Gill, Capital; and Don Putman, Capital.
Cash in Bank Molly Gill, Capital
Debit Credit Debit Credit
Bal. 18,000 30,000 2,000 Bal. 57,000
29,000 1,500 1,000
32,000
42,000
Bal. 91,000 Bal. 54,500
Don Putman, Capital
Debit Credit
2,000 Bal. 39,000
1,500 1,000
Bal. 36,500
Now cash can be distributed to the partners based on the final balances
in their capital accounts: Gill, $54,500 and Putman, $36,500.
Final Distribution of Cash
On May 15 the partnership is ended by distributing the balance of Cash
in Bank to Gill and Putman. The final transaction to end the partnership
is recorded as follows:
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0/34
$!4% $%3#2)04)/. 2%& $%")4 #2%$)4
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814 Chapter 28 Financial Statements and Liquidation of a Partnership
806-825_CH28_868829.indd 814 4/6/06 6:39:52 PM
SECTION 2 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Use a diagram like this one to ,IQUIDATING A 0ARTNERSHIP
describe the actions needed
to liquidate a partnership.
Add answer boxes as needed.
Do the Math
Max & Tex novelty store, a partnership, is ending. You are to help liquidate the partnership.
Listed below are the remaining assets and liabilities of the business. Max & Tex share profits
and losses equally.
Assets Liabilities
Cash in Bank $20,000 Accounts Payable $15,500
Accounts Receivable $12,000 Partners’ Equity
Merchandise Inventory $42,000 Marilyn Max, Capital $59,250
Equipment $60,000 Tom Tex, Capital $59,250
Liquidation Transactions:
1. Customers will pay their accounts in full before the liquidation date.
2. Merchandise inventory was sold for $40,000 resulting in a $2,000 loss to the partnership.
3. Equipment was sold to a local retailer for $70,000 resulting in a gain of $10,000.
4. Accounts payable will be paid in full.
Instructions How much cash will each partner receive at final liquidation?
Problem 28–3 Recording a Loss and a Gain on the
Sale of Noncash Assets by a Partnership
Partners Gunther and Pertee share profits equally. In the process of ending the business, they
sell all of the partnership’s noncash assets. The transactions for the sales follow.
Instructions Record the transactions in general journal form in your working papers. Use
general journal page 275.
Date Transactions
Sept. 4 The merchandise inventory, which cost $45,000, was sold for $38,000.
15 The office equipment, with a book value of $27,000, was sold for $29,000.
Section 2 Liquidation of a Partnership 815
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CH A P T ER 2 8 Summary
Key Concepts
1. The income statement of a partnership may have a special section showing the division of
profits or losses among partners.
ABC Partnership
Income Statement
For the Year Ended July 31, 20--
Net Income 56 0 0 0 00
Division of Net Income:
Partner A 14 0 0 0 00
Partner B 14 0 0 0 00
Partner C 28 0 0 0 00
Net Income 56 0 0 0 00
2. A partnership prepares a statement of changes in partners’ equity. This statement reflects beginning
balances, investments, and withdrawals by each partner.
ABC Partnership
Statement of Changes in Partners’ Equity
For the Year Ended July 31, 20--
A B C Totals
Beginning Capital, Aug 1, 20--
Add: Investments 7 500 00 7 500 00 15 000 00 30 0 0 0 00
Net Income 14 000 00 14 000 00 28 000 00 56 0 0 0 00
Subtotal 21 500 00 21 500 00 43 000 00 86 0 0 0 00
Less: Withdrawals 8 000 00 12 500 00 18 000 00 38 5 0 0 00
Ending Capital, July 31, 20-- 13 500 00 9 000 00 25 000 00 47 5 0 0 00
3. The balance sheet of a partnership contains a capital section titled Partners’ Equity:
ABC Partnership
Balance Sheet
July 31, 20--
Partners’ Equity
Partner A, Capital 13 5 0 0 00
Partner B, Capital 9 0 0 0 00
Partner C, Capital 25 0 0 0 00
Total Partners’ Equity 47 5 0 0 00
Total Liabilities and Partners’ 60 5 0 0 00
Equity
4. Dissolution refers to the legal termination of a partnership due to a change in partners. Business
operations continue, and a new partnership is formed.
Liquidation refers to the legal termination of a partnership due to the termination of its
business operations. It is the process of settling the partnership’s business affairs when it ends.
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Summary C HAPT E R 28
Liquidation involves the following four steps:
a. Sell all noncash partnership assets for cash.
b. Add all gains from the sale of the assets to the capital accounts based on the partnership
agreement. If the asset sales result in a loss, deduct the amount from the capital accounts
based on the partnership agreement.
c. Pay all partnership liabilities.
d. Distribute any remaining cash to the partners based on the final balance in the partners’
capital accounts.
For example, the sale of accounts receivable at a loss is recorded as follows, with the loss
divided and debited to each partner according to the partnership agreement:
Debit Cash in Bank.
Debit the capital account of each partner.
Credit Accounts Receivable.
Sale of merchandise at a loss is recorded as follows:
Debit Cash in Bank.
Debit the capital account of each partner.
Credit Merchandise Inventory.
When plant equipment is sold, its book value is zeroed out by crediting the asset and debiting
the related Accumulated Depreciation account. If the equipment is sold at a loss, the loss is
divided and debited to each partner according to the partnership agreement:
Debit Accumulated Depreciation—Equipment.
Debit Cash in Bank.
Debit the capital account of each partner.
Credit Equipment.
5. If sale of an asset results in a gain, the gain is divided and credited to each partner according to
the partnership agreement:
Debit Cash in Bank.
Credit the capital account of each partner.
Credit the asset.
6. After all noncash assets have been sold and the partnership liabilities have been paid, the only
accounts that remain in the ledger are:
• Cash in Bank
• the capital account for each partner
The final transaction to liquidate a partnership is to distribute the cash to the partners based on
the ending balances in their capital accounts:
Debit the capital account of each partner.
Credit Cash in Bank.
Key Terms
dissolution (p. 811) statement of changes
liquidation (p. 811) in partners’ equity (p. 809)
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C H A P T ER 2 8 Review and Activities
AFTER
YOU READ
Check Your Understanding
1. Partnership Income Statement
a. What does a partnership income statement report?
b. How may the income statement for a partnership differ from that of a sole proprietorship?
2. Statement of Changes in Partners’ Equity
a. Explain what a statement of partners’ equity shows.
b. How does a statement of changes in partners’ equity differ from a statement of changes in
owner’s equity?
3. Partnership Balance Sheet
a. What does a partnership balance sheet report?
b. How does the balance sheet for a partnership differ from that of a sole proprietorship
and a corporation?
4. Liquidation Losses
a. When selling partnership accounts receivable at a loss, what accounts are affected?
b. What happens to the partners’ capital accounts when noncash assets are sold at a loss?
5. Liquidation Gains
a. What happens to the partners’ capital accounts when noncash assets are sold at a gain?
b. What basis is used to distribute gains and losses from the sale of noncash assets?
6. Final Liquidation Entry
a. Which accounts remain on the ledger after all noncash assets have been sold and the
partnership liabilities have been paid?
b. When liquidating a partnership, what is the final transaction?
Apply Key Terms
Imagine that you have been asked to
explain the following terms and how they
might relate to a timber company organized
as a partnership.
dissolution
liquidation
statement of changes
in partners’ equity
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Computerized Accounting C HAPT E R 28
Setting Up the General Ledger
Making the Transition from a Manual to a Computerized System
Task Manual Methods Computerized Methods
Setting up • Using accounting stationery, open • Create a chart of accounts, selecting
general ledger general ledger accounts based on the from predefined charts offered, or by
accounts with expected transactions of the business. entering select accounts based on
balances • Record the balance of each account. the expected transactions for the
Ideally, end-of-period balances business.
should be used. This ensures that the • Enter the beginning balance for each
accounting records were in balance account.
when they were transferred.
Q&A
Peachtree Question Answer
How do I convert a 1. Create a general ledger account in Peachtree for each account in the manual
manual accounting system. From the Maintain menu, select Chart of Accounts.
general ledger system 2. Enter the account number, name, and account type for all accounts.
into Peachtree? 3. Click the arrow for Beginning Balances.
4. Select the period from which the balance was taken.
5. Enter the beginning balance for each account.
6. Click OK when all balances have been entered and the Trial Balance Difference
at the bottom of the screen is 0.00.
7. Click Save.
QuickBooks Q & A
QuickBooks Question Answer
How do I convert a 1. Create a general ledger account in QuickBooks for each account in the manual
manual accounting system. From the Lists menu, select Chart of Accounts.
general ledger system 2. Click the Account drop-down list, and select New.
into QuickBooks? 3. Enter the account type, number, name, and description.
4. Enter the beginning balance in the Opening Balance field and the date.
5. Click Next to enter additional accounts.
6. Click OK when you have finished.
For detailed instructions, see your Glencoe Accounting Chapter Study Guides and Working Papers.
Chapter 28 Computerized Accounting 819
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C H A P T ER 2 8 Problems
Complete problems using: Manual Glencoe Peachtree Complete QuickBooks Spreadsheet
Spreadshee
OR OR OR
Working Papers Accounting Software Templates Templates
Problem 28–4 Preparing an Income Statement
SPREADSHEET and Balance Sheet for a
SMART GUIDE
Step–by–Step Instructions:
Partnership
Problem 28–4 Joy Webster and Diana Ruiz have been in business since the beginning
1. Select the spreadsheet of the year. Now at the end of the year, they would like to know how the
template for Problem partnership has done in its first year of operation. Joy and Diana stated
28–4. in the partnership agreement that they will share profits equally. The net
2. Enter your name and
the date in the spaces income for the year was $5,780. The January 1 capital balances for both
provided on the partners were $0. Joy invested $6,000 cash in the partnership throughout
template.
3. Complete the spread-
the year and withdrew $1,800. Diana invested $5,500 cash in the
sheet using the partnership and withdrew $1,200.
instructions in your
working papers.
Instructions In your working papers, prepare the Division of Net Income
4. Print the spreadsheet section of the income statement and the Partners’ Equity section of the
and proof your work. balance sheet for the partnership.
5. Complete the Analyze
activity. Analyze Identify the ending balances in the partners’ capital
6. Save your work and accounts.
exit the spreadsheet
program.
Problem 28–5 Liquidating the Partnership
with Losses on the Sale
SMART GUIDE
of Noncash Assets
Step–by–Step Instructions:
Problem 28–5
Guice and Ward decide to end their partnership on September 21. They
1. Select the problem set
share profits and losses equally. The account balances of the partnership as
Problem 28–5. of that date follow.
2. Rename the company
and set the system date. Cash $6,500
3. Record the transactions Inventory 8,800
to liquidate the partner- Equipment (book value) 2,700
ship using the General
Journal Entry option. Accounts Payable 4,000
4. Print a General Journal Guice, Capital 6,800
report and proof your
work. Ward, Capital 7,200
5. Complete the Analyze The partnership sold the inventory for $5,000 and the equipment for
activity.
6. End the session. $2,000. All of the accounts payable will be paid in full with the cash.
Instructions In your working papers, prepare the journal entries to record
the liquidation of this partnership. Use general journal page 85.
Analyze Conclude whether the partners’ capital accounts increased
or decreased as a result of the liquidation (before the final
distribution). Explain why.
820 Chapter 28 Problems
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Problems C HAPT E R 28
Problem 28–6 Recording a Gain or a Loss
on the Sale of Noncash Assets SMART GUIDE
by a Partnership Step–by–Step Instructions:
Problem 28–6
Hudson and Franklin are in the process of liquidating their partnership.
1. Select the problem set
They share profits and losses in a 3:1 ratio. They have sold all of the Problem 28–6.
partnership’s noncash assets. The transactions for the sales follow. 2. Rename the company
and set the system date.
Date Transactions 3. Record the transactions
to liquidate the partner-
May 29 The equipment, with a book value of $14,500, was sold for
ship using the General
$12,775. Journal Entry option.
June 2 The $7,800 in accounts receivable was sold to a finance broker 4. Print a General Journal
for $6,900. report and proof your
work.
4 The merchandise inventory, which cost $2,800, was sold 5. Complete the Analyze
for $1,900. activity.
6. End the session.
Instructions In your working papers, record the journal entries for the sale
of noncash assets. Use general journal page 120. QuickBooks
Analyze Explain why losses are distributed to the partners’ capital PROBLEM GUIDE
accounts before any cash is paid out to the partners.
Step–by–Step Instructions:
Problem 28–6
Problem 28–7 Preparing a Statement of 1. Restore the Problem
28-6.QBB file.
Changes in Partners’ Equity 2. Record the transactions
to liquidate the
On January 1 Carol Farmer and Jim Romans formed a partnership, Research partnership using the
Consultants. Each partner invested $50,000 in cash on that date. The Make General Journal
partnership agreement stated that the partners would share net income or Entries option.
3. Print a Journal report
loss equally. and proof your work.
During the year Farmer invested an additional $2,000 and withdrew 4. Complete the Analyze
activity.
$7,500 for personal use. Romans invested an additional $1,500 and 5. Back up your work.
withdrew $8,500. Net income for the first year was $33,176.
Instructions In your working papers, prepare a statement of changes in
partners’ equity for the year ended December 31.
Analyze Identify the amount of partners’ equity for Carol Farmer that
will appear on the December 31 balance sheet.
Chapter 28 Problems 821
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C H A P T ER 2 8 Problems
Problem 28–8 Liquidating the Partnership
On October 15 Martinez and Royka decide to end their partnership. Their
assets consist of $10,000 in cash and inventory that cost $105,000 and was
sold for $95,000. Their only liability is a note payable for $10,000 that will
SMART GUIDE
be paid in full. Their capital balances are Martinez, $60,000 and Royka,
Step–by–Step Instructions:
$45,000. They share profits and losses equally.
Problem 28–8
1. Select the problem set Instructions In your working papers, prepare the journal entries to record
Problem 28–8. the liquidation of the partnership.
2. Rename the company
and set the system date. Analyze Calculate how much cash each partner would receive at the
3. Record the transactions liquidation if the inventory was sold for $80,000.
to liquidate the
partnership.
4. Print a General Journal
report. Proof your work. CHALLENGE Problem 28–9 Completing End-of-
PROBLEM
5. Complete the Analyze
activity.
Period Activities
6. End the session. for a Partnership
Richard Smooth and Carrie Overhill are partners in the firm of R&C
QuickBooks Roofing. They agreed to divide net income or loss on the following basis:
PROBLEM GUIDE Smooth, ¾; Overhill, ¼.
Step–by–Step Instructions: The completed work sheet for R&C Roofing for the year ended
Problem 28–8 December 31 appears in your working papers.
1. Restore the Problem Instructions In your working papers:
28-8.QBB file.
2. Record the transactions 1. Prepare an income statement for the partnership.
to liquidate the 2. Prepare a statement of changes in partners’ equity.
partnership.
3. Print a Journal report
3. Prepare a balance sheet.
and proof your work. 4. Journalize the adjusting and closing entries, beginning on page 27 of
4. Complete the Analyze the general journal.
activity.
5. Back up your work. Analyze Calculate the total year-end partners’ equity if neither
Smooth nor Overhill had withdrawn any cash from the
SPREADSHEET business.
SMART GUIDE
Step–by–Step Instructions:
Problem 28–9
1. Select the template for
Problem 28–9.
2. Enter your name and
the date in the spaces
provided.
3. Complete the spread-
sheet using the
instructions in your
working papers.
4. Print the spreadsheet
and proof your work.
5. Complete the Analyze
activity.
6. Save your work and exit
the program.
822 Chapter 28 Problems
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Winning Competitive Events CHAPTER 28
Practice your test-taking skills! The questions on this page are reprinted with permission
from national organizations:
• Future Business Leaders of America
• Business Professionals of America
Use a separate sheet of paper to record your answers.
Future Business Leaders of America
MULTIPLE CHOICE
1. When there is a net loss, the
a. Capital account is increased by the amount of the net loss.
b. Drawing (Withdrawals) account is increased by the amount of the net loss.
c. Capital account is decreased by the amount of the net loss.
d. Drawing (Withdrawals) account is decreased by the amount of the net loss.
2. A partnership may be terminated by the
a. partners’ mutual agreement.
b. death of a partner.
c. admission of a new partner.
d. all of the above.
e. none of these answers
3. A partnership’s capital accounts are changed if
a. net income or net loss is recorded.
b. partners invest additional cash in the business.
c. partners withdraw cash from the business.
d. all of the above.
e. none of these answers
4. When both a partnership and the partnership business end, this is called a
a. mutual understanding.
b. dissolution.
c. termination.
d. liquidation.
Business Professionals of America
MULTIPLE CHOICE
5. The ________ shows the picture of a firm’s financial position at a point in time.
a. income statement
b. balance sheet
c. distribution of net income
d. none of the above
Need More Help?
Go to glencoeaccounting.glencoe.com and
click on Student Center. Click on Winning
Competitive Events and select Chapter 28.
• Practice Questions and Test-Taking Tips
• Concept Capsules and Terminology
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C H A P T ER 2 8 Real-World Applications and Connections
Critical Partnerships
Thinking 1. What happens when a partnership dissolves?
2. How is dissolution different from liquidation?
3. For each of the following transactions, state whether partners’ capital is
debited or credited.
a. Sold an asset at a loss.
b. Sold an asset at a gain.
c. Sold an asset at book value.
4. Why does the final partnership liquidation entry involve just one asset account?
5. After selling all partnership assets and paying all creditors, the capital account
balance of partner A is a $10,000 credit and of partner B is a $2,000 debit.
What is the Cash in Bank balance? What entries would close the books?
6. Defend the requirement that creditors must be paid before partners can
distribute remaining cash in a liquidation process.
CASE Partnership: Building and Design
STUDY Barnes Construction is a homebuilder that wants to expand into commercial real
estate. It has a client who owns 10 acres of land on which she wants to build an
apartment complex. Barnes is looking for a partner to help design and build it.
Slater Architectural Design is looking for new projects. Barnes and Slater form a
partnership to design and build the complex for $10,400,000. Based on estimated
costs, the project should earn net profits of 18 percent.
INSTRUCTIONS
1. If Barnes and Slater agree to share revenue and expenses equally, how much
profit will each partner earn?
2. To limit each partner’s liability to this project only, list the information that
should be in the partnership agreement.
a
mattoefr ETHICS Using Another Person’s Idea
You are an accounting clerk for two dentists who are partners. The partners
recently began a program to give a bonus to employees for making suggestions that
are implemented and result in cost savings. You submitted a suggestion for which
you received a $1,000 bonus. A co-worker had originally mentioned the idea.
ETHICAL DECISION MAKING
1. What are the ethical issues? 4. How do the alternatives affect the
2. What are the alternatives? parties?
3. Who are the affected parties? 5. What would you do?
$ )) ))
Communicating
Presenting Your Case
ACCOUNTING Maurice Lance and Terry Klaus are partners in M&T Computer Solutions. Maurice
wants to contribute more money to the partnership, but Terry is satisfied with his
initial investment. Choose a classmate for a role-play situation involving partners.
Discuss the pros and cons of making additional investments.
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Real-World Applications and Connections CHAPT E R 28
Skills Beyond Decision to Liquidate
NUMBERS You and a partner operate a small sports center. A large national sports complex
recently opened in a nearby mall, causing your business to drop sharply. You have
decided to close the center and liquidate the assets.
INSTRUCTIONS List all of the pros and cons of liquidating a business. List and
prioritize the tasks necessary to complete the liquidation.
INTERNATIONAL Organization of Petroleum Exporting Countries (OPEC)
OPEC is an alliance of 11 oil producing nations. It seeks to stabilize oil prices and
Accounting help producers achieve a reasonable rate of return. OPEC members discuss oil
production levels, pricing, demand, and environmental issues. OPEC can increase
its oil production in order to prevent price increases or reduce oil production to
hedge against falling prices.
INSTRUCTIONS List the ways in which OPEC impacts the oil market.
Making It
Your Understanding of Accounting
Personal You have been studying accounting for almost a year and have some ideas about
what it takes to be an accountant. In the last two decades, computer technology
has changed the profession from one providing number-crunching services to
one that provides knowledge-based services.
PERSONAL FINANCE ACTIVITY Based on what you know about accounting, make a
list of the qualities and skills a person would need to be a successful accountant.
PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and
click on Student Center. Click on Making It Personal and select Chapter 28.
Analyzing Evaluating Partnership Operating Results
Financial You learned earlier how to use ratio analysis to evaluate the financial health of a
Reports business. Partnerships are also interested in these measures of financial health.
Return on sales is a measure of how much profit the business is earning for each
dollar of total revenue. The current ratio and quick ratio show a company’s ability
to repay its debts.
INSTRUCTIONS Review the ratios on pages 235–
236, then use the balance sheet on page 812 for
the following tasks.
1. Calculate the return on sales for Surfside
Liquidation
Bike & Skate Rentals, assuming a revenue of A liquidation is a busy
time for accountants. Visit
$192,000 and net income of $24,000 for the
glencoeaccounting
fiscal period just ended. .glencoe.com and click
2. Analyze Surfside’s liquidity based on the on Student Center. Click on
current ratio and the quick ratio. WebQuest and select Unit 6 to
3. Write one to two paragraphs describing continue your Internet project.
Surfside’s financial health based on your
analysis of its financial information.
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MINI Completing the Accounting Cycle
PRACTICE for a Partnership
SET 6
Fine
Finishes
Main Task Fine Finishes
Complete the accounting cycle for Fine
▲
Finishes for its first month of business. Company Background:
Fine Finishes is an interior and
Summary of Steps exterior painting company
organized as a partnership. The
Set up new general ledger accounts.
▲
partners are Laura Andersen,
Analyze the transactions. Sean Woo, and David Ingram.
▲
The business earns revenue from
Journalize and post the transactions.
▲
consultation and painting fees.
The partnership divides income
Prepare a trial balance and a work sheet.
▲
and losses as follows: Laura and
Prepare the financial statements.
▲
Sean each receive 33 percent,
and David receives 34 percent.
Journalize and post the closing entries.
▲
Prepare a post-closing trial balance.
▲
Why It’s Important
You might work for a partnership
▲
someday. Maybe you will even open
your own business with some partners.
While you create the best product or
service, you also need to know what
is happening with your company’s
finances.
826 Mini Practice Set 6
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Fine Finishes (continued)
Complete problems using: Manual Glencoe Peachtree Complete QuickBooks
OR OR
Working Papers Accounting Software Templates
Your Job Responsibilities: As the accountant for Fine Finishes, use the
accounting stationery in your working papers to complete the following
activities.
(1) Open a general ledger account for each account in the chart
of accounts.
(2) Analyze each business transaction.
(3) Enter each business transaction in the general journal. Begin
on journal page 1.
(4) Post each journal entry to the appropriate accounts in the general
ledger.
(5) Prepare a trial balance and then complete the work sheet.
(6) Prepare an income statement.
(7) Prepare a statement of partners’ equity.
(8) Prepare a balance sheet.
(9) Journalize and post the closing entries.
(10) Prepare a post-closing trial balance.
CHART OF ACCOUNTS
Fine Finishes
ASSETS PARTNERS’ EQUITY
101 Cash in Bank 301 Laura Andersen, Capital
105 Accts. Rec.—Mountain View City 302 Laura Andersen, Withdrawals
School District 303 David Ingram, Capital
120 Computer Equipment 304 David Ingram, Withdrawals
130 Office Supplies 305 Sean Woo, Capital
135 Office Equipment 306 Sean Woo, Withdrawals
140 Painting Supplies 310 Income Summary
145 Painting Equipment
REVENUE
LIABILITIES
401 Painting Fees
205 Accts. Pay.—Custom Color 405 Consultation Fees
210 Accts. Pay.—J & J Hardware and
EXPENSES
Lumber
215 Accts. Pay.—Paint Palace 505 Advertising Expense
510 Miscellaneous Expense
515 Rent Expense
520 Utilities Expense
Business Transactions: Fine Finishes began business operations
on February 1 of this year. During the month of February, the business
completed the transactions that follow.
Mini Practice Set 6 827
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MINI PRACTICE Completing the Accounting Cycle for a Partnership
SET 6 (CONTINUED)
Date Transactions
SMART GUIDE Feb. 1 Laura Andersen, David Ingram, and Sean Woo agreed to form a
partnership and invest the following assets, Memorandum 1:
Step–by–Step Instructions:
1. Select the problem
set for Fine Finishes Contributed Assets Andersen Ingram Woo
(MP–6).
2. Rename the company Cash $1,500 $1,000 $1,200
and set the system
date. Computer Equipment 2,800
3. Record all of the
business transactions Office Equipment 100
using the General
Journal Entry option. Painting Supplies 150 225
4. Print a General Journal
report and proof your Painting Equipment 1,375 1,675
work.
5. Print a General Ledger Total assets invested $3,125 $3,800 $3,100
report.
6. Print a General Ledger
Trial Balance. 1 Signed a one-year rental agreement for a warehouse and small office at
7. Print an Income state- $1500 per month. The first month’s rent was paid, Check 1101.
ment and a Balance
1 Put an ad in the Call an Expert circular for $25, Check 1102.
Sheet.
8. Click the Save 1 Paid $100 to the utility company to start electric service, Check 1103.
Pre-Closing Balances
button in the Glencoe 1 Paid telephone company $175 to begin phone service and run
Smart Guide window. dedicated line for computer, Check 1104.
9. Record the closing
2 Awarded a contract to paint a kitchen and family room for the
entries using the
General Journal Entry McGuires. Collected $250 deposit, Receipt 1.
option. 2 Bought paint and border stencils from Custom Color for $200 on
10. Print a general journal
account, Invoice 742.
report and proof your
work. 2 Issued check 1105 for $55 for a business license to operate in the city
11. Print a Post-Closing of Mountain View, Alabama (Miscellaneous Expense).
Trial Balance.
12. Complete the Analyze 4 Purchased $115 in office supplies, Check 1106.
activity and the Audit
5 Finished painting the kitchen and family room for the McGuires.
Test.
13. End the session. Collected final payment of $450, Receipt 2.
TIP: Peachtree can only 6 Joined Mountain View Chamber of Commerce by purchasing
close a fiscal year. To close membership of $45 (Miscellaneous Expense), Check 1107.
a monthly fiscal period,
8 Bought painting equipment on account for $375 from Paint Palace,
enter the closing entries
using the General Journal Invoice 1162.
Entry option. 10 Received $60 for color and painting consultation, Receipt 3.
CONTINUE
828 Mini Practice Set 6
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Fine Finishes (continued)
Date Transactions (cont.) QuickBooks
12 Finished painting the cafeteria at the elementary school. Issued PROBLEM GUIDE
Invoice 101 to Mountain View City School District for $835. Step–by–Step Instructions:
14 Sent Check 1108 for $200 to Custom Color on account. 1. Restore the Mini
15 Andersen, Ingram, and Woo each made a withdrawal of $650 for Practice 6.QBB file.
2. Enter all of the business
personal use, Checks 1109, 1110, and 1111, respectively. transactions using the
15 Awarded a contract to paint exterior of the Wicker and Hartel law Make General Journal
office building. Received deposit of $1,000, Receipt 4. Entries option in the
Company menu.
16 Spent $135 for new paint brushes (Painting Supplies), Check 1112. 3. Print a Journal report, a
General Ledger report,
16 Bought paint from Custom Color for $395 on account, Invoice 750. a Trial Balance, an
17 Received and paid Invoice 303 from Mountain View Realtors for ad Income Statement, and
in real estate brochure for $77, Check 1113. a Balance Sheet.
4. Enter the closing
18 Received $125 for painting consultation, Receipt 5. entries using the
Make General Journal
19 Wrote Check 1114 for $85 to repair computer printer (Miscellaneous Entries option in the
Expense). Company menu.
21 Paid Paint Palace $375 on account, Check 1115. 5. Print a Journal report
displaying only the
22 Finished painting the Wicker and Hartel law office building. closing entries.
Collected final payment of $2,000, Receipt 6. 6. Print a Post-Closing
Trial Balance.
24 Bought $90 of lumber (Painting Supplies) on account from J & J 7. Proof your work and
Hardware and Lumber, Invoice 207. make any needed
corrections.
25 Received $575 for painting and making minor repairs to a garage, 8. Complete the Analyze
Receipt 7. activity and the Audit
28 Andersen, Ingram, and Woo each made a withdrawal of $650 for Test.
9. Back up your work.
personal use, Checks 1116, 1117, and 1118, respectively.
Analyze For each partner, calculate the rate of return on equity for
February, the first month of operations. Use the Partners’
original investments of equity in the formula: Return on
Equity = Net Income Equity. How does each partner’s
return compare to the overall return for the partnership?
Mini Practice Set 6 829
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CH A P T ER 2 9 Ethics in Accounting
BEFORE
YOU READ
What You’ll Learn Predict
1. Explain the meaning of ethics. 1. What does the chapter title tell you?
2. What do you already know about this subject from personal experience?
2. Describe the components of
3. What have you learned about this in the earlier chapters?
business ethics.
4. What gaps exist in your knowledge of this subject?
3. Identify the role of the
accountant in business ethics.
4. Discuss how ethical behavior
benefits individuals,
Exploring the Real World of Business
businesses, and society.
ASSURING RESPONSIBLE GOVERNANCE
5. Explain the key principles an
accountant is expected to The Institute of Internal Auditors
follow. The success or failure of business depends on ethical
6. Identify the accounting corporate governance and accounting practices. The term
organizations that establish governance refers to the exercise of authority, administration,
codes of ethics for the and decision making for an organization. The Institute of
profession.
Internal Auditors, an international professional organization,
7. Describe the Sarbanes-Oxley believes that the internal auditor must play a strong and visible
Act. role in governance.
8. Define the accounting terms Internal auditors work independently within a business to
introduced in this chapter. review and improve the company’s operations and internal
control processes. They use strict standards to make sure
Why It’s Important that the business sticks to its agreements with suppliers,
The business community and government, and customers. In addition, the internal auditor
▲
the public place their trust in designs plans to protect assets and to make the best use of the
the accounting profession. company’s resources.
What Do You Think?
Internal auditors evaluate procedures used to safeguard the
resources of a business. What are some of these resources?
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Working in the Real World
APPLYING YOUR ACCOUNTING KNOWLEDGE
Personal Connection
Do you, or anyone you know, work for a fast- 1. What risks do you think a fast-food restaurant
food restaurant? Whether selling burgers, tacos, faces in regard to customer health?
or salads, these restaurants must ensure that the 2. What kinds of controls would you suggest to
food they sell is safe for consumption. They must guard against these risks?
also provide a safe and sanitary place for their
customers to eat. Companies establish controls Online Connection
to ensure that their quality standards are met. In Go to glencoeaccounting.glencoe.com and click
this chapter we will look at ethical standards that on Student Center. Click on Working in the
accountants are expected to follow. Real World and select Chapter 29.
glencoeaccounting.glencoe.com 831
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SECTION 1 The Nature of Ethics
Have you ever had to make a difficult decision about a particular
BEFORE
YOU READ course of action or behavior? Did you consider how you would feel about
the action or how others would view your choice? Did you consider how
your behavior would affect others? If so, you have probably encountered
Main Idea an ethical dilemma.
All elements of society
benefit from ethical
behavior. Ethics
What Is Meant by Ethics?
Read to Learn…
➤ what is meant by the term Ethics is the study of our notions of right and wrong. In its broadest
ethics. (p. 832) sense, ethics deals with human conduct in relation to what is morally
➤ who benefits from ethical good and bad. The term ethics often refers to a set of basic principles. Life
behavior. (p. 834) is complex and individuals must face a variety of situations. A person’s
ethics, or basic principles, can provide guidelines for action when facing
Key Terms ethical dilemmas.
ethics The basic values found in a system of personal ethics exist in systems
business ethics of business ethics as well. Business ethics are not very different from eth-
code of ethics ics in general.
ethics officer
How Are Business Ethics Determined?
Business ethics refers to the policies and practices that reflect a
company’s core values such as honesty, trust, respect, and fairness. The
ethics of a business can be seen by the way it treats employees and custom-
ers and how it attends to shareholder value, community service, supplier
relationships, and regulatory law. Review the following components to
understand how a business ethics program can be established.
The Law As a Guide. A discussion of ethical performance should
consider the relationship between law and ethics. While law and ethics both
define proper and improper behavior, law attempts to formally define the
general public’s ideas about what makes something right or wrong. The law
AS
YOU READ describes a minimum acceptable level of correct behavior.
In contrast, ethical concepts have more subtle implications and are
Key Point more complex than written rules of law. For example, although a business
Modeling Behavior may be well within the law to advertise certain products to teenagers, it
Employees learn may not be the “right” or “ethical” thing to do. A business may use law as a
ethical standards of an guide, but it must consider ethical principles and standards as well.
organization by watching Statements of Company Values. If you have heard the phrase,
the behaviors of their “actions speak louder than words,” then you already know one of the best
employers and managers. methods of maintaining a strong business ethics program. A person learns
standards and values by observing what others do, not by what they say.
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In addition to having management and employees set good examples of
AS
ethical behavior, a business must state a well-defined framework of ethical YOU READ
concerns and core values. A code of ethics is a formal policy of rules and
Compare and
guidelines that describes the standards of conduct that a company expects Contrast
from all its employees. The following topics are often addressed within a
code of ethics: The Law and Ethics
How are laws and ethical
• Conflicts of interest • Political contributions concepts similar? How
• Product quality and testing • Environmental actions do they differ?
• Customer relations • International business
• Employee relations • Workplace safety
• Suppliers and consultants • Technology
• Expense reports • Whistle-blowing
• Security
Training and Outreach. After a code
of ethics has been created, it is important to
communicate that policy properly. Distribution
of the written code, along with formal training,
helps employees understand the importance of
these policies and gives them realistic and con-
crete examples of what to do when they face an
ethical dilemma.
Ethics Committees. Ethics commit-
tees and ethics officers play an important role
in developing and enforcing ethical processes.
An ethics officer is the employee directly
responsible for creating business conduct programs, evaluating perfor-
mance, and enforcing standards of conduct. As ethical dilemmas surface,
these officials help settle disputed issues and resolve problems. Once a hear-
ing has been held and all issues have been resolved, an enforcement phase
may follow.
Enforcement. Effective enforcement is necessary to achieve an ethi-
cal work environment. A company’s code of ethics might contain penalties
for violations that include performance appraisal notes, probation, suspen-
sion, demotion, and termination.
What Is the Accountant’s Role? AS
Accountants play a major role in the operation, management, and devel- YOU READ
opment of business. In this role, they can face many ethical dilemmas. For In Your Own Words
example, if an accountant’s manager gives instructions to record the physi-
Business Ethics Explain
cal inventory at its original costs when it is obvious that the inventory’s the meaning of business
value has decreased, what should the accountant do? If an auditor finds ethics in your own
questionable accounting practices within a client’s financial reporting, but words.
knows the client is a major source of revenue for his or her firm, what action
should he or she take?
As you can see, the actions and behaviors of accountants play a critical
role in the maintenance of public trust in the business community. The
accountant’s opinions, practices, and behaviors directly impact how the
company is viewed and how the profession, in turn, is assessed.
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In general, the accountant should focus on the following goals:
AS
YOU READ • Avoid harm to stockholders.
Key Point • Optimize the interests of the public.
• Adhere to universal standards of what is right.
Positive Returns
• Respect the human rights of all people.
Practicing good ethics
is good for business. Specific responsibilities of the accounting profession are expressed in
Positive returns include the various codes of ethics created by major organizations. These codes of
employee loyalty, ethics are addressed in Section 2 of this chapter.
improved sales and
company reputation,
strengthened financial
Ethical Behavior
What Are the Benefits of Acting Ethically?
performance, and a
decrease in consumer While it may seem obvious that ethical behavior naturally benefits indi-
complaints. viduals, business, and society, the following discussion addresses specific
benefits to each group.
Individuals
Acting ethically produces benefits that can affect the course of your life
and the lives of others. These benefits include increased self-esteem, con-
tentment, and self-respect. Ethical behavior also paves the way for achiev-
ing life goals. Your honesty, trustworthiness, and integrity will allow you to
find a satisfying career with the type of organization that shares your core
values.
As you act ethically, you will also enjoy the benefit of acceptance in a
society that rewards and honors appropriate behavior. As you focus more
on the common good rather than selfish interests, you will earn trust and
respect from friends, co-workers, employers, and society in general. Finally,
ethical behavior will dramatically improve the quality of your decisions.
Businesses
A DePaul University study found that companies that made commit-
Connect to… ments to an ethics code provided more than twice the value to sharehold-
MATHEMATICS ers than those that did not. A study by Walker Information, a shareholder
research firm, supports this finding, reporting that “good corporate behav-
Cost/benefit analysis
ior” leads to positive business outcomes.
is a decision model for
comparing alternatives.
Society
To use it you subtract
each alternative’s costs Society can be viewed as the sum of all social relationships between
from its financial benefits. humans. Therefore, it is easy to understand why our individual actions con-
Not all costs and benefits tribute to the overall nature of our society. We cannot expect our society to
can be measured in become more ethical unless individuals and businesses commit to ethical
dollars, though. You behaviors.
should also consider the As businesses act in ethical ways, new wealth for society is created. In
potential impact each the realm of ethical financial reporting, the public can be confident in the
alternative would have on data provided and make informed investment decisions. In turn, greater
other people.
capital funding is available for growth and productivity, yielding strong and
healthy economies.
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SECTION 1 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Identify five components of a
#OMPONENT OF A "USINESS %THICS 0ROGRAM %XAMPLE %XAMPLE
business ethics program that
were discussed in this section.
Use a chart like this one to
list two examples of each
component.
Do the Math
Assume that you are the chief financial officer for a major manufacturer of infant car seats.
The lead product designer has informed management that the installation of a new latch
system would improve product safety by 25 percent. The new latch system will add $4 to
production costs per car seat. Current production costs are $52.50 per seat, and the product
sells for $69.50. Management wants to compare the effect on net income if the product price
increases by (a) $1, (b) $2, or (c) $5.
1. If the company sells 8,000 car seats in a year, what is the effect on net income for each
proposed price increase scenario? Assume fixed operating costs are $115,000 annually.
2. As an officer of the company, what factors (other than pricing) do you think should be
considered when making product design changes?
Problem 29–1 Reporting Ethics Violations
Instructions Results from Walker Information’s study on business integrity state that 65
percent of employees who know about an ethical violation choose not to report it. What
weaknesses in a company’s ethical environment might be responsible for such a finding?
Discuss the components of a strong business ethics plan that management could apply to
resolve this situation.
Problem 29–2 Exploring the Difference Between
Ethics and Law
Instructions Adhering to legal regulations is the first step in behaving ethically. Explain
why ethical behavior extends beyond the law. Describe one situation in which a company
might act within the boundaries of the law yet still engage in an unethical act.
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SECTION 2 Ethics in the
Accounting Profession
Professional organizations are often separated from other organizations
BEFORE
YOU READ by a code of conduct or a code of ethics. To build public trust, most accoun-
tants voluntarily join a professional organization and accept the standards
of conduct expected by the organization.
Main Idea However, ethical behavior requires commitment beyond abiding by a
The accounting profession
few rules of conduct. No ethics code or written rules can apply to all situa-
requires its members to
tions that might arise on the job. Day-to-day job experiences often test an
follow a code of ethics.
individual’s personal judgment and personal ethics.
Read to Learn… Written codes of ethics are generally designed to encourage ideal behav-
➤ the key principles an ior. However, the codes must be both realistic and enforceable. Professional
accountant is expected to organizations are charged with enforcing the rules of conduct outlined in
observe. (p. 836) their codes.
➤ the guidelines that
accounting organizations
provide for decision
Key Principles
making. (p. 838) What Is the Foundation for Ethics in Accounting?
➤ the impact of the Certain principles provide the framework for rules of conduct that an
Sarbanes-Oxley Act accountant is expected to follow. These principles include integrity, objectiv-
on the accounting ity, independence, competence, and confidentiality.
profession. (p. 838)
Integrity
Key Terms The principle of integrity requires that accountants choose what is
integrity
right and just over what is wrong. Guidance for behaving with integrity
objectivity
suggests that the accountant ask the following questions: Is this what a
independence
person of integrity would do? Have I made a right and just decision? Have
competence
confidentiality I maintained the spirit of ethical conduct?
How do you explain the concept of integrity as related to the accounting
profession? Making false or misleading entries in a client’s books violates
AS
YOU READ the accounting principle of integrity. Failing to correct false and misleading
financial statements also violates integrity. Integrity helps accountants estab-
Key Point lish the trust necessary for others to rely on their professional judgment.
Public Trust
Objectivity
The practices of the
accountant directly Every year publicly traded corporations must submit financial state-
reflect the credibility of ments to the Securities and Exchange Commission. Certified public accoun-
a business and the trust tants (CPAs) audit these financial statements.
the public has in the CPAs who perform audits are known as independent auditors. They do
accounting profession. not work for the companies they audit. For example, suppose that Paul
Corporation needs to give audited financial statements to the SEC. Paul
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Corporation hires Findlay & Partners, a public accounting firm. Five CPAs
AS
who work for Findlay & Partners go to the offices of Paul Corporation and YOU READ
perform the audit. Paul Corporation is the client and Findlay & Partners
Key Point
is the independent auditor. The work of the independent auditor is critical.
Many different users of financial information depend on audited financial The Sum of the
statements when making decisions. Parts The behavior
The principle of objectivity requires that accountants be impartial, of individuals and
businesses contributes
honest, and free of conflicts of interest. When forming professional judg-
to the overall ethical
ments, accountants should not be influenced by personal interests or rela-
performance of society.
tionships with others or behave in a way that would give even the appearance
of improper behavior.
Independence
CPAs who audit public companies must maintain a position of
independence. Independence in this sense means that the CPA does not
have a financial interest in or a loan from the company he or she is audit-
ing. An investment in the company or a loan from the company would
interfere with the independence required of an auditor. Serving as a direc-
tor, officer, or employee of the company would also demonstrate a lack of
independence.
An accountant must act in such a way that maintains the general pub-
lic’s confidence in the services provided by the profession. Even if the
accountant’s financial interest is minor, the relationship could be suspect,
and the accountant would be considered to lack independence. Even non-
CPA employees in a public accounting firm may not accept more than token
gifts from clients.
Competence
Competence refers to the knowledge, skills, and experience needed to
complete a task. Accountants must perform only those services that they are
competent to provide. Accountants are expected to maintain an appropri-
ate level of competence through continuing education and to continually
improve the quality of professional services. Services should be rendered
promptly, carefully, thoroughly, and in accordance with appropriate techni-
cal and ethical standards. Accountants must be committed to learning and
professional improvement throughout
their professional lives.
Confidentiality
Accountants learn about everything
from individual salaries to the business
strategies of their clients. Confidentiality
as related to the accounting profession is
the requirement that accountants who
acquire information in the course of work
protect it and not disclose it without the
appropriate legal or professional respon-
sibility to do so. Above all, information
should not be used for personal gain.
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AS
YOU READ Codes of Ethics
What Accounting Organizations Provide Guidelines?
Key Point
Several accounting organizations provide guidelines to assist in ethical
Guidelines A code of decision making.
ethics cannot cover the
details of every situation American Institute of Certified Public
that might occur. Accountants
Instead, a code provides
principles that people AICPA is the national organization of certified public accountants.
can apply to a variety of The preamble to the AICPA Principles of Professional Conduct states that
unexpected situations. membership is voluntary and by accepting membership, a CPA assumes an
obligation of self-discipline above and beyond the requirements of laws and
regulations.
The AICPA Code also expresses the profession’s recognition of its respon-
sibilities to the public, to clients, and to colleagues. It calls for an unswerv-
ing commitment to honorable behavior, even at the sacrifice of personal
advantage.
Institute of Management Accountants
The IMA is the leading professional organization devoted exclusively
to management accountants and financial managers. Members of the IMA
have a responsibility to maintain professional competence, uphold profes-
sional standards of confidentiality, avoid conflicts of interest, and commu-
nicate information fairly and objectively.
Institute of Internal Auditors
The IIA expects its members to demonstrate competence and to follow
the principles of integrity, objectivity, and confidentiality. The IIA’s code
AS
YOU READ of ethics is necessary and appropriate because of the public trust placed in
internal auditors.
It’s Not What It
Seems Sarbanes-Oxley Act
Code The word code How Does Federal Legislation Affect Accounting?
as used in code of
In recent years, the need for stricter accounting regulations to protect
ethics is not a symbol
with hidden meanings. investors arose from several corporate financial scandals. Certain major cor-
Codes of ethics are clear porations were accused of misrepresenting their financial position. Public
statements of principles. accounting firms that audited them failed to identify and prevent it.
Congress decided that the accounting profession and publicly held
corporations needed to abide by legal standards of conduct. The most sig-
nificant changes to corporate governance and accounting practice since the
1930s were implemented when the Sarbanes-Oxley (SOX) Act was signed
into law in 2002. SOX requires that CEOs, financial officers, accountants,
and auditing firms comply with the new regulations and procedures. It also
established an accounting board to oversee and investigate the audits and
auditors of public companies.
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SECTION 2 Assessment
AFTER
YOU READ
Reinforce the Main Idea
Identify five key principles
for accountants that were 0RINCIPLE 3ITUATION 3ITUATION
discussed in this section.
Use a chart like this one to
describe two situations in
which the accountant would
need to apply each principle.
Do the Math
Assume that the cost per CPA employee to maintain professional competence is as follows:
continuing professional education course, $900; travel, $350; lodging, $135; meals, $75;
and lost work time, $480. If the firm has 37 CPA employees, what is the total cost of the
commitment to quality work? What is the cost per employee? What is the possible cost of
not maintaining professional competence?
Problem 29–3 Promoting Principles of Conduct
Instructions Read the following scenario. Identify and discuss behaviors that you believe
might violate the key principles of conduct for accountants.
In your new position as accounting manager with Triple B Markets, you supervise three staff
accountants: Jennifer, Marcus, and Ing. You become aware of the following situations:
• Jennifer, a new employee, has never worked as an accountant but scored high
marks in her college math classes.
• Marcus often records payments of utilities as assets instead of expenses because
he wants to show a higher net income for the business.
• You overheard Ing talking with a friend on the phone about the payroll details of
the company.
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CH A P T ER 2 9 Summary
Key Concepts
1. Ethics is the study of our notions of right and wrong. The word ethics also refers to a set of basic
principles.
2. Business ethics are the policies and practices that reflect a company’s core values such as honesty,
trust, respect, and fairness. A business ethics program can be established with the following
components:
• adherence to written law
• statement of company values
• training and outreach
• ethics committees
• enforcement
A business code of ethics often addresses these topics:
• Conflicts of interest • Political contributions
• Product quality and testing • Environmental actions
• Customer relations • International business
• Employee relations • Workplace safety
• Suppliers and consultants • Technology
• Expense reports • Whistle-blowing
• Security
3. The behaviors and practices of the accountant are critical to public trust in the business as well
as the integrity of the accounting profession. An accountant should focus on the following
goals:
• avoiding harm to stockholders
• optimizing the interests of the public
• adhering to the universal standards of what is right
• respecting the human rights of all people
4. Ethical behavior benefits these groups:
• increases one’s self-esteem, contentment, and self-respect
Individuals • earns the trust and respect of one’s friends, co-workers, employers, and
society
• improves business outcomes and shareholder value
Businesses • increases employee loyalty
• enhances company reputation
• provides confidence in financial data which leads to informed investor
decisions
Society at large
• informed investors provide capital funding for growth and
productivity, which yields a strong and healthy economy
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Summary CHAPT E R 29
5. Accountants are expected to follow these key principles:
Integrity Choosing what is right and just over what is wrong
Being impartial, honest, and free from conflicts of interest, including
Objectivity personal interests or relationships that could influence professional
judgment
Independence Having no financial interest in the company being audited
Possessing the knowledge, skills and experience to perform assigned
Competence
duties
Protecting information gained during the course of work, not disclosing
Confidentiality that information without the appropriate legal or professional
responsibility to do so, and not using that information for personal gain
6. Professional accountants are distinguished by their willingness to accept a high degree of
responsibility to the public. Several professional accounting organizations have created
guidelines for making ethical decisions. The primary organizations and major ethical principles
follow.
• American Institute of Certified Public Accountants (AICPA) is a national professional
organization of certified public accountants. The preamble to the AICPA Principles of
Professional Conduct states that by accepting membership, a CPA assumes an obligation of
self-discipline. It also expresses the profession’s recognition of its responsibilities to the public,
clients, and colleagues, and calls for an unswerving commitment to honorable behavior.
• Institute of Management Accountants (IMA) serves management accountants and financial
managers. Its members have the responsibility to maintain professional competence, uphold
professional standards of confidentiality, avoid conflicts of interest, and communicate
information fairly and objectively.
• Institute of Internal Auditors (IIA) is a global professional group specializing in internal
auditing. Its members are expected to demonstrate competence and follow the principles of
integrity, objectivity, and confidentiality.
7. The Sarbanes-Oxley Act (SOX) was signed into law in 2002 to implement new regulations of
corporate governance and accounting practice when some major companies were accused of
misrepresenting their financial position.
Key Terms
business ethics (p. 832) ethics officer (p. 833)
code of ethics (p. 833) independence (p. 837)
competence (p. 837) integrity (p. 836)
confidentiality (p. 837) objectivity (p. 837)
ethics (p. 832)
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C H A P T ER 2 9 Review and Activities
AFTER
YOU READ
Check Your Understanding
1. Ethics
a. What does ethics mean?
b. How can personal ethics help an individual face the dilemmas that are part of
life’s complexities?
2. Ethics in Business
a. How can a company communicate a code of ethics to its employees?
b. Name five topics often addressed in a code of ethics.
3. Ethics in Accounting
a. List four goals of an ethically trained accountant.
b. What role does the accountant play in maintaining public trust in the business community?
4. Benefits of Ethical Behavior
a. How does acting ethically benefit an individual?
b. How does a business benefit from acting ethically?
5. Key Principles
a. Explain the concepts of integrity, objectivity, and independence as related to the
accounting profession.
b. Explain the concepts of competence and confidentiality as related to the
accounting profession.
6. Codes of Ethics
a. What is the purpose of a code of ethics for a professional organization?
b. Name three professional accounting organizations that have codes of ethics for their members.
Apply Key Terms
As the new training director for a public
accounting firm, you are to design and present
a program to employees on the importance
of ethical behavior. A list of terms, which you
are to use in your program, follows. Write a
complete definition for each term, and write
one or two sentences describing the importance
of each term to the success of the firm.
business ethics ethics officer
code of ethics independence
competence integrity
confidentiality objectivity
ethics
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Problems CHAPT E R 29
Problem 29–4 Researching Ethics in the News
Instructions Use the library, newspaper, or Internet to find three recent
examples of businesses accused of engaging in unethical practices. For each
example describe the company’s practices, any legal charges involved, and
why you think the business chose this course of action.
Problem 29–5 Creating a Business
Ethics Program
Instructions As the ethics officer for a national chain of coffeehouses,
you must prepare a one- or two-page outline for a business ethics plan that
covers the main issues you think are relevant to the company’s operations.
Include outline headings for a code of ethics, enforcement measures, and
how you will communicate the ethics plan to the company’s employees
and managers.
Problem 29–6 Making Ethical Decisions
Instructions Sean McGee works as a graphics designer for a large design
firm. In his job he utilizes dozens of expensive software programs that the
company purchased for its employees to use to complete client projects.
Because Sean often takes work home to meet deadlines, he copied all
software programs and installed them on his personal home computer. In
addition to the work he does for his employer, he takes freelance jobs for
extra cash. What are the ethical issues? Who are the affected parties? Do
you think Sean has made an ethically correct decision? Why or why not?
What would you have done?
Problem 29–7 Making Ethical Decisions
Instructions Randy Simpson and Kyung Won worked as recruiters for a
national job placement company. The company provided them a database
of potential companies that might use a placement service as well as
qualified applicants seeking jobs. After working together for several years,
Randy and Kyung decided to open their own recruiting agency. When
they worked for the national job placement company, both had signed an
agreement not to take any company property with them if they left.
When Randy and Kyung were setting up their new offices, Kyung
noticed Randy downloading files from a CD-ROM to his computer. When
questioned, Randy said he had copied his list of clients in addition to names
of potential new clients and qualified applicants. Kyung was worried that
this act violated the agreement they had signed. Randy maintained that
he had built solid relationships with his clients, and that he was entitled to
CONTINUE
Chapter 29 Problems 843
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C H A P T ER 2 9 Problems
take their contact information. As for the names of applicants, he argued,
“These people need jobs. If I can help make that happen, I should.” What
are the ethical issues? What would you do if you were Kyung?
Problem 29–8 Examining the Impact of
Unethical Decisions
Instructions Assume that the accountant for a drug manufacturing
company made the decision to record the company’s ending drug
inventory at an amount higher than its actual worth. How does this
decision affect gross profit and net income for that accounting period? In
what ways might this decision affect shareholder value? How might this
affect confidence in the company’s financial statements in the future?
Problem 29–9 Finding Out What Ethical
Principles Mean to
Your Classmates
Instructions Make a list of the five ethical principles discussed in this
chapter. Ask your friends how they think the principles might influence
their everyday life. Report your results in class.
Problem 29–10 Finding Out What Ethical
Principles Mean to Adults
Instructions Ask adults how they think the five principles of ethics
influence professional behavior. Share your results in class.
Problem 29–11 Applying a Code of Ethics
to Personal Behavior
Instructions Write a code of ethics to guide student behavior in school
organizations. Interview students outside your class to get ideas.
CHALLENGE Problem 29–12 Analyzing the
PROBLEM
Preamble to the
Principles Section of
the AICPA Code of
Professional Conduct
Instructions Review the AICPA Preamble in the text. List two key points
covered in each of the two paragraphs. Are the points important to your
everyday behavior? Why or why not?
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Real-World Applications and Connections CHAPT E R 29
Critical Ethics
Thinking 1. Define business ethics.
2. What is the purpose of a code of ethics?
3. If you were on a committee to establish a student code of ethics for your
school, what would you include in it?
4. Compare and contrast ethics and the law.
5. If accountants had no code of conduct, what behavioral guide should be used?
6. The Sarbanes-Oxley Act of 2002 requires that independent auditors report
to the client’s audit committee, not to the client’s management. The audit
committee is independent of the management. Defend this requirement.
CASE CPA Firm: Audits
STUDY Chris Snyder is an audit supervisor for an accounting firm. She and her staff are
scheduled to audit Gemma Industries. Gemma’s CEO invites Chris and her staff
to arrive one day before the audit for a round of golf and dinner at an exclusive
country club.
INSTRUCTIONS
1. Determine whether Chris and the audit staff should accept the invitation.
2. If not, explain how Chris could decline the invitation without offending the
CEO and possibly losing a client.
3. What ethical issue could arise if Chris accepts the invitation?
a
mattoefr ETHICS Working Conditions
You are a stockholder of a corporation that manufactures sports apparel. The
company recently moved its operations to a developing country where labor is
cheaper. Employees work more than 16 hours per day and the factory conditions
are far below those in the United States. While not comparable to U.S. standards,
the conditions are better than those found in other local factories, and the rate
of pay is nearly double what local workers earned in the past. The company has
offered to pay for any work-related injuries. As a stockholder do you agree with
this manufacturing strategy?
ETHICAL DECISION MAKING
1. What are the ethical issues? 4. How do the alternatives affect the
2. What are the alternatives? parties?
3. Who are the affected parties? 5. What would you do?
$ ))))
Communicating
Writing E-mail
ACCOUNTING Your friend Samantha recently graduated with a degree in accounting. As a
member of the American Institute of Certified Public Accountants, you encourage
her to become a CPA and join the organization. Draft an e-mail message to
Samantha that includes reasons you think she should join the AICPA and how
she will benefit from the membership. Use the Internet or your library to learn
more about the AICPA.
Chapter 29 Real-World Applications and Connections 845
830-846_CH29_868829.indd 845 9/15/05 2:34:08 PM
C H A P T ER 2 9 Real-World Applications and Connections
Skills Beyond Working with Diverse Cultures
NUMBERS Your ability to work with a variety of ethnic, social, educational, and gender
groups indicates your acceptance of cultural diversity.
ON THE JOB As the owner of Say it Right, an interpreting service, you hire
employees from many cultures. You decide to offer your employees workshops on
cultural acceptance techniques.
INSTRUCTIONS List 10 items to discuss in these workshops. Include issues that deal
with cultural awareness and gender issues in the workplace.
INTERNATIONAL The Decade of Education for Sustainable Development (DESD)
Global ethics include concern for the future of humankind, respect for the planet,
Accounting and recognition of diverse cultures. Such values are being addressed during the
Decade of Education for Sustainable Development (DESD), established by the
United Nations for 2005 through 2014. DESD initiatives will address education,
corporate citizenship, and network building for a sustainable future.
INSTRUCTIONS Outline how the DESD might impact future trade policies. Consider
the effect of trade policies on the environment and human rights.
Making It
Your Ethics
Personal Some decisions you will face have no clear-cut answers and require choosing
between actions that could hurt someone close to you.
PERSONAL FINANCE ACTIVITY Review the five key principles discussed on pages
836–837. Write a report describing situations in which a high school student
would need to apply the principles. Provide one situation for each principle.
PERSONAL FINANCE ONLINE Log on to glencoeaccounting.glencoe.com and
click on Student Center. Click on Making It Personal and select Chapter 29.
Analyzing Corporate Responsibility
Financial An ethical corporation makes a commitment to manage its roles in society—
Reports as a producer, employer, customer, and citizen—in a responsible manner.
Implementing policies and practices in these areas is generally considered
sound management. Many companies publish their
commitment to corporate responsibility in their
annual reports.
INSTRUCTIONS Use PETsMART’s statement of corporate
Fallen Giants
responsibility in Appendix F for these activities. Many people are affected
by accounting scandals and
1. Explain why it is crucial for a board of directors to
corporate failures. Go to
be independent from management. glencoeaccounting
2. Identify any key principles of conduct discussed .glencoe.com and click
on pages 836–837 that this statement of on Student Center. Click on
responsibility addresses. WebQuest and select Unit 6 to
continue your Internet project.
3. In what areas does management want its financial
statement users to have confidence?
846 Chapter 29 Real-World Applications and Connections
830-846_CH29_868829.indd 846 9/15/05 2:34:16 PM
PHOTO CRE DIT S
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David Young-Wolff/PhotoEdit 20, 613; Kwame Zikomo/SuperStock 418, 604.
949-950_CR-868829.indd 2 9/27/05 1:47:59 PM
A P P EN D I X ES
Appendix A Adjustments for a Service Business Using a A–2
Ten-Column Work Sheet
Appendix B Using the Numeric Keypad A–14
Appendix C Recording Transactions in the Combination Journal A–18
Appendix D The Accrual Basis of Accounting A–26
Appendix E Federal Personal Income Tax A–36
Appendix F Excerpts from the PETsMART, Inc. 2003 Annual Report A–42
Appendix G Additional Reinforcement Problems A–52
Appendix H Answers to Section Assessment Problems A–70
A–1
A1-TOC-APPF-868829.indd 1 9/19/05 7:30:33 PM
APPENDIX A Adjustments for a
Service Business Using a
Ten-Column Work Sheet
In Chapter 8 you prepared a six-column work sheet for a service
BEFORE
YOU READ business. If you completed Chapter 18, you prepared a ten-column work
sheet for a merchandising business. The ten-column work sheet has the
same additional columns whether it is used for a service or merchan-
Main Idea dising business. The additional columns are for the Adjustments and
Some general ledger
Adjusted Trial Balance sections.
accounts must be adjusted
Information for the Account Name and Trial Balance sections comes
to bring their balances
from the general ledger accounts. Each account’s end-of-period balance
up to date.
is entered in the appropriate amount column of the Trial Balance section.
Read to Learn… In Chapter 8 you entered the final account balances and completed the
➤ how to make adjusting Trial Balance section by totaling and ruling the columns.
entries. (p. A–2)
➤ how to complete the
ten-column work sheet.
Adjusting Entries
How Do You Make Adjusting Entries?
(p. A–6)
➤ how to journalize and To this point the general ledger account balances have been changed
post adjusting entries. by journal entries that record transactions supported by source docu-
(p. A–7) ments. Changes in account balances caused by the internal operations of
➤ about the additional step a business or the passage of time, however, have no source documents.
in the ten-step accounting Such changes are recorded by making adjustments to the account bal-
cycle. (p. A–8) ances at the end of the period. An adjustment is an amount that is
added to or subtracted from an account balance to bring that balance
Key Terms up to date. If an account balance is not up to date as of the last day of the
adjustment
accounting period, then that account must be updated. Adjustments help
premium
match expenses and revenue for a given accounting period.
In this appendix you will learn how to calculate end-of-period adjust-
ments for a service business, Maximum Delivery Service. Every adjustment
affects at least one permanent account and one temporary account. Two
examples of general ledger accounts that need adjusting at the end of the
accounting period are Supplies and Prepaid Insurance.
Adjusting the Supplies Account
All businesses purchase supplies such as paper, ink cartridges, and staples
in order to operate. When businesses purchase supplies, the asset account
Supplies is debited (increased). Supplies may be purchased by paying cash
or by charging them on account.
A–2 Appendix A Adjustments for a Service Business Using a Ten-Column Work Sheet
A02-A13_AppA_868829.indd A–2 9/12/05 6:08:06 PM
Recording the Purchase of Supplies. When a business pur-
chases supplies for cash, the asset account Supplies is increased, so it is deb-
ited for the amount of the purchase. Cash in Bank is also an asset account,
and it is decreased (credited). On February 14 Maximum Delivery Service
purchased supplies for $300, Check 229.
GENERAL JOURNAL PAGE 11
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Feb. 14 Supplies 3 0 0 00 2
3 Cash in Bank 3 0 0 00 3
4 Check 229 4
5 5
When supplies are purchased on account, the Supplies account is again
debited. Since additional money is owed to a creditor, the liability account
Accounts Payable is credited. On August 21 Maximum Delivery Service
purchased $400 worth of supplies on account from Shade Supply Company,
Invoice 28714.
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Calculating the Adjustment for Supplies. Each time Maxi-
mum Delivery Service purchases supplies, its Supplies account must be
debited for the amount of the purchase. For example, Maximum Delivery
Service had $100 in supplies on hand at the beginning of the period. During
AS
the period the company made two purchases of supplies for $300 and $400.
YOU READ
The final balance in the Supplies account in the general ledger on December
31 is $800 ($100 $300 $400). However, some of these supplies were used Instant Recall
or consumed during the period. Although businesses use supplies every day, Matching Principle
it is inefficient to update the records of all supplies used on a daily basis. The matching principle
At the end of the period, Maximum Delivery Service does not have all requires revenue to be
$800 worth of supplies because most of them have been used. By examin- recorded in the same
ing the remaining supplies, Maximum determines that only $200 worth of period as the expenses
the supplies are still on hand. This means that $600 of supplies have been incurred to earn it.
used or consumed during the period ($800 $200 $600). The Supplies
Appendix A Adjustments for a Service Business Using a Ten-Column Work Sheet A–3
A02-A13_AppA_868829.indd A–3 4/6/06 6:49:21 PM
account balance must be adjusted to report a final balance of $200. The
account balance must be reduced by $600.
As supplies are used, they become expenses of the business. At the end
of the period, adjustments are made to transfer the costs of the assets con-
sumed from the asset accounts (permanent accounts) to the appropriate
expense accounts (temporary accounts).
Entering the Supplies Adjustment on the Work Sheet. The
Adjustments section of the work sheet is used to enter the necessary adjust-
ments for the period. Since $600 worth of supplies were used during the
period, the Supplies account is decreased, or credited, for this amount. The
account Supplies Expense is increased, or debited, for $600.
Adjustment
ANALYSIS Identify 1. The accounts affected are Supplies and Supplies Expense.
Classify 2. Supplies is an asset account (permanent). Supplies Expense is an
expense account (temporary).
/ 3. Supplies is decreased by $600. Supplies Expense is increased by $600.
DEBIT-CREDIT RULE 4. Increases to expense accounts are recorded as debits. Debit Supplies
Expense for $600.
5. Decreases to asset accounts are recorded as credits. Credit Supplies
for $600.
T ACCOUNTS 6. Supplies Expense Supplies
Debit Credit Debit Credit
600 600
The adjustment for Supplies in the Adjustments section of the work
AS sheet is shown in Figure A–1. To enter the adjustment on the work sheet,
YOU READ follow these steps:
Key Point 1. In the Adjustments Debit column, enter the debit amount of the
adjustment ($600) on the Supplies Expense line.
Labeling Adjustments
2. In the Adjustments Credit column, enter the credit amount of the
On the work sheet, an
adjustment ($600) on the Supplies line.
adjustment’s debit and
credit parts are labeled On the work sheet, the debit and credit parts of each adjustment are
with a lower case letter given a unique label. The label consists of a small letter in parentheses. It is
in parentheses, such placed just above and to the left of the adjustment amounts. The supplies
as (a). adjustment is the first adjustment, so it is labeled (a). The next adjustment
will be labeled (b), then (c), and so on.
A–4 Appendix A Adjustments for a Service Business Using a Ten-Column Work Sheet
A02-A13_AppA_868829.indd A–4 9/12/05 6:08:24 PM
Maximum Delivery Service
Work Sheet
For the Year Ended December 31, 20--
ACCT. TRIAL BALANCE ADJUSTMENTS ADJUSTED TRIAL BALANCE
NO. ACCOUNT NAME
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
1 101 Cash in Bank 7 2 6 4 00 7 2 6 4 00
2 105 Accts. Rec.—Wein Corp. 3 3 6 00 3 3 6 00
3 110 Accts. Rec.—Mike Cassidy 9 1 7 00 9 1 7 00
4 115 Supplies 8 0 0 00 (a) 6 0 0 00 2 0 0 00
5 120 Prepaid Insurance 7 5 0 00 (b) 2 5 0 00 5 0 0 00
6 125 Office Equipment 11 3 6 4 00 11 3 6 4 00
7 130 Delivery Equipment 14 6 0 0 00 14 6 0 0 00
8 201 Accts. Pay.—Gillespie Co. 1 774 00 1 774 00
9 205 Accts. Pay.—Shade Supply Co. 2 0 0 00 2 0 0 00
10 210 Accts. Pay.—Trip Travel 2 632 00 2 632 00
11 301 Kevin Chan, Capital 16 7 3 4 00 16 7 3 4 00
12 302 Kevin Chan, Withdrawals 2 500 00 2 500 00
13 303 Income Summary
14 401 Delivery Revenue 28 7 2 4 00 28 7 2 4 00
15 501 Advertising Expense 3 0 8 3 00 3 0 8 300
16 505 Insurance Expense (b) 2 5 000 2 5 000
17 510 Maintenance Expense 7 1 0 00 7 1 000
18 515 Rent Expense 6 5 0 0 00 6 5 0 000
19 520 Supplies Expense (a) 6 0 000 6 0 000
20 525 Utilities Expense 1 2 4 0 00 1 2 4 0 00
21 Totals 50 0 6 4 00 50 0 6 4 00 8 5 000 8 5 000 50 0 6 400 50 0 6 4 00
22
Figure A–1 Ten-Column Work Sheet (Partial) Showing the Adjusted Trial Balance
Adjusting the Prepaid Insurance Account
Businesses buy insurance to protect against losses from hazards such as
theft, fire, and flood. Insurance policies cover varying time periods, such
as six months or one year. The cost of insurance protection is called the
premium . A premium is paid in advance at the beginning of the covered
period. Insurance paid in advance is an asset because, until the insurance
protection expires, it represents a benefit to the business. The insurance
premium is recorded in the asset account Prepaid Insurance.
On November 1 Maximum Delivery Service paid a six-month insurance
premium of $750, Check 314.
GENERAL JOURNAL PAGE 19
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Nov. 1 Prepaid Insurance 7 5 0 00 2
3 Cash in Bank 7 5 0 00 3
4 Check 314 4
5 5
Appendix A Adjustments for a Service Business Using a Ten-Column Work Sheet A–5
A02-A13_AppA_868829.indd A–5 9/12/05 6:08:24 PM
At the end of December, the balance in the Prepaid Insurance account
is still $750. However, two months of the six months of coverage have
expired.
Nov. 1–Dec. 31 Jan. 1–Apr. 30
Expired Not Expired
$250 $500 $750
The monthly cost of the insurance is $125 ($750 6 $125). Since the
coverage for November and December has expired, $250 ($125 2) of the
$750 in the premium has been used. The asset account Prepaid Insurance
must be decreased (credited) for $250. The amount of insurance expired is
charged to the expense account Insurance Expense. In this adjustment
Insurance Expense is debited for $250.
Adjustment
ANALYSIS Identify 1. The accounts affected are Prepaid Insurance and Insurance Expense.
Classify 2. Prepaid Insurance is an asset account (permanent). Insurance
Expense is an expense account (temporary).
/ 3. Prepaid Insurance is decreased by $250. Insurance Expense is
increased by $250.
DEBIT-CREDIT RULE 4. Increases to expense accounts are recorded as debits. Debit Insurance
Expense for $250.
5. Decreases to asset accounts are recorded as credits. Credit Prepaid
Insurance for $250.
T ACCOUNTS 6. Insurance Expense Prepaid Insurance
Debit Credit Debit Credit
250 250
To enter the adjustment on the work sheet, follow these steps:
1. In the Adjustments Debit column, enter the debit amount of the
adjustment ($250) on the Insurance Expense line. Since this is the
second adjustment, label it (b).
2. In the Adjustments Credit column, enter the credit amount of the
adjustment ($250) on the Prepaid Insurance line. Label it (b) also.
Completing the Work Sheet
How Do You Complete the Ten-Column Work Sheet?
After the adjustments have been entered on the work sheet, the Adjusted
Trial Balance section can be completed. This section of the work sheet shows
the updated balances of all general ledger accounts.
A–6 Appendix A Adjustments for a Service Business Using a Ten-Column Work Sheet
A02-A13_AppA_868829.indd A–6 9/12/05 6:08:26 PM
Completing the Adjusted Trial Balance Section
To complete this section, the balance of each account in the Trial Bal-
ance section is combined with the adjustment, if any, in the Adjustments
section. The new balance is then entered in the appropriate Adjusted Trial
Balance column.
Refer to Figure A–2 on pages A–8 and A–9 and look at how new bal-
ances are computed. If there is no adjustment, the account balance shown
on the Trial Balance section is simply extended to the same column (Debit
or Credit) in the Adjusted Trial Balance section. After all account balances
have been extended to the Adjusted Trial Balance section, both columns are
totaled. If total debits equal total credits, this section is proved. A double
rule is drawn under the totals and across both columns.
Extending Amounts to the Balance Sheet
and Income Statement Sections
Beginning with line 1, each account balance in the Adjusted Trial Bal-
ance section is extended to the appropriate column of either the Balance
Sheet section or the Income Statement section. Remember that the Balance
Sheet section includes the asset, liability, and owner’s equity accounts. The
Income Statement section includes the revenue and expense accounts.
Showing Net Income on the Work Sheet
The Income Statement and Balance Sheet sections of the work sheet are
totaled. The net income (or net loss) is entered on the work sheet as shown
in Figure A–2.
Journalizing and Posting the
Adjusting Entries
How Do You Record and Post Adjustments?
The journal entries that update the general ledger accounts at the end
of a period are called adjusting entries. The source of information for jour-
nalizing the adjusting entries is the Adjustments section of the work sheet.
The accounts debited and credited in the Adjustments section are entered
in the general journal.
Before recording the first adjusting entry, the words Adjusting Entries
AS
are written in the Description column of the general journal. This heading
YOU READ
eliminates the need to write an explanation after each adjusting entry.
The first adjustment, labeled (a) on the work sheet, is recorded in the Key Point
general journal as a debit to Supplies Expense for $600 and a credit to Sup- Adjusting Journal
plies for $600. The second adjustment is a debit to Insurance Expense for Entries The Adjustments
$250 and a credit to Prepaid Insurance for $250. section of the work sheet
After the adjusting entries have been recorded in the general journal, is the source for the
they are posted to the general ledger accounts. Once the adjusting entries adjusting journal entries
have been posted, the general ledger accounts are up to date. Refer to entered in the general
Figure A–3 on page A–10 to see how to record end-of-period adjustments journal.
and update accounts through adjusting entries.
Appendix A Adjustments for a Service Business Using a Ten-Column Work Sheet A–7
A02-A13_AppA_868829.indd A–7 9/12/05 6:08:27 PM
The Steps in the Accounting Cycle
What Is the Additional Step in the Ten-Step
Accounting Cycle?
There are additional general ledger accounts that need to be adjusted
at the end of the period. The reasons and procedures for adjusting other
accounts are presented throughout this textbook.
Figure A–2 Work Sheet
Maximum
Showing Ending Adjusted
Work
Balances and Net Income
For Year Ended
ACCT. TRIAL BALANCE ADJUSTMENTS
NO. ACCOUNT NAME
DEBIT CREDIT DEBIT CREDIT
1 101 Cash in Bank 7 2 6 4 00
2 105 Accts. Rec.—Wein Corp. 3 3 6 00
3 110 Accts. Rec.—Mike Cassidy 9 1 7 00
4 115 Supplies 8 0 0 00 (a) 6 0 0 00
5 120 Prepaid Insurance 7 5 0 00 (b) 2 5 0 00
6 125 Office Equipment 11 3 6 4 00
7 130 Delivery Equipment 14 6 0 0 00
8 201 Accts. Pay.—Gillespie Co. 1 77400
9 205 Accts. Pay.—Shade Supply Co. 2 0 0 00
10 210 Accts. Pay.—Trip Travel 2 63200
11 301 Kevin Chan, Capital 16 7 3 4 00
12 302 Kevin Chan, Withdrawals 2 500 00
13 303 Income Summary
14 401 Delivery Revenue 28 7 2 4 00
15 501 Advertising Expense 3 0 8 3 00
16 505 Insurance Expense (b) 2 5 000
17 510 Maintenance Expense 7 1 0 00
18 515 Rent Expense 6 5 0 0 00
19 520 Supplies Expense (a) 6 0 000
20 525 Utilities Expense 1 2 4 0 00
21 50 0 6 4 00 50 0 6 4 00 8 5 000 8 5 000
22 Net Income
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
A–8 Appendix A Adjustments for a Service Business Using a Ten-Column Work Sheet
A02-A13_AppA_868829.indd A–8 9/12/05 6:08:27 PM
When adjustments are made at the end of the period, this procedure
becomes an additional step in the accounting cycle. After Step 7, Prepare
financial statements, Step 8 is Journalize and post the adjusting entries. The
final two steps in the cycle remain the same. We now have a ten-step cycle
instead of a nine-step cycle.
Figure A–2 Work Sheet
Delivery Service
Showing Ending Adjusted
Sheet
Balances and Net Income
December 31, 20--
(continued)
ADJUSTED TRIAL BALANCE INCOME STATEMENT BALANCE SHEET
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
7 2 6 4 00 7 2 6 4 00 1
3 3 6 00 3 3 6 00 2
9 1 7 00 9 1 7 00 3
2 0 0 00 2 0 0 00 4
5 0 0 00 5 0 0 00 5
11 3 6 4 00 11 3 6 4 00 6
14 6 0 0 00 14 6 0 0 00 7
1 774 00 1 77400 8
2 0 0 00 2 0 0 00 9
2 632 00 2 632 00 10
16 7 3 4 00 16 7 3 4 00 11
2 50000 2 50000
AS
READ
12
13
YOU
28 7 2 4 00 28 7 2 400 14
3 0 8 300 3 0 8 3 00 15 Key Point
2 5 000 2 5 0 00 16
Step 8 Journalizing and
7 1 000 7 1 0 00 17
posting the adjusting
6 5 0 000 6 5 0 0 00 18
6 0 000 6 0 0 00 19
entries is the 8th step in
1 2 4 0 00 1 2 4 0 00 20
the accounting cycle. It
50 0 6 400 50 0 6 4 00 12 3 8 3 00 28 724 00 37 681 00 21 340 00 21 is done after preparing
16 341 00 16 341 00 22 the financial statements
28 724 00 28 724 00 37 681 00 37 681 00 23 (step 7) and before
24 journalizing and posting
25 the closing entries
26 (step 9).
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
Appendix A Adjustments for a Service Business Using a Ten-Column Work Sheet A–9
A02-A13_AppA_868829.indd A–9 9/12/05 6:08:30 PM
GENERAL JOURNAL PAGE 22
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- Adjusting Entires 1
2 Dec. 31 Supplies Expense 520 6 0 0 00 2
3 Supplies 115 6 0 0 00 3
4 31 Insurance Expense 505 2 5 0 00 4
5 Prepaid Insurance 120 2 5 0 00 5
6 6
ACCOUNT Supplies ACCOUNT NO. 115
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Jan. 1 Balance 100 00
Feb. 14 G11 3 0 0 00 400 00
Aug. 21 G14 4 0 0 00 800 00
Dec. 31 Adjusting Entry G22 6 0 0 00 200 00
ACCOUNT Prepaid Insurance ACCOUNT NO. 120
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Nov. 1 G19 7 5 0 00 7 5 0 00
Dec. 31 Adjusting Entry G22 2 5 0 00 5 0 0 00
ACCOUNT Insurance Expense ACCOUNT NO. 505
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 31 Adjusting Entry G22 2 5 0 00 2 5 0 00
ACCOUNT Supplies Expense ACCOUNT NO. 520
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 31 Adjusting Entry G22 6 0 0 00 6 0 0 00
Figure A–3 Adjusting Entries Posted to the General Ledger
A–10 Appendix A Adjustments for a Service Business Using a Ten-Column Work Sheet
A02-A13_AppA_868829.indd A–10 9/12/05 6:08:34 PM
Problems APPE NDIX A
Problem A–1 Analyzing Adjustments
Information related to accounts requiring adjustments on the work sheet
for the year ended December 31 for Magner’s Advertising Center follows.
Instructions In your working papers, identify the amount of each
adjustment, which account is debited, and which account is credited.
1. The Trial Balance section shows a balance of $4,239.80 for Supplies.
The amount of supplies actually on hand at the end of the period is
$912.15.
2. Magner’s paid an annual insurance premium of $4,920.00 on October 1.
Problem A–2 Analyzing Adjustments
Ace Advertising Agency has the following information regarding supplies.
The beginning balance in the general ledger account Supplies on August 1
was $214.00. On August 13 the agency purchased $302.00 worth of
supplies. On August 26 it purchased additional supplies for $176.00. At
the end of August, Ace counted the supplies and determined that supplies
worth $273.00 were still on hand.
Instructions Analyze the preceding information and then answer the
following questions regarding the Supplies account.
1. What amount should be entered in the Trial Balance section of the
work sheet for Supplies? Which column should be used?
2. What amount should be entered in the Adjustments section of the
work sheet for Supplies? Which column should be used?
3. Should any other amount be entered in the Adjustments section? If
yes, answer these questions:
a. Which account?
b. Which column?
c. What amount?
4. What amounts should be entered in the Adjusted Trial Balance
section? For each amount list the name of the account and specify
which column should be used (Debit or Credit).
Appendix A Problems A–11
A02-A13_AppA_868829.indd A–11 9/12/05 6:08:41 PM
A PP EN D I X A Problems
Problem A–3 Entering Adjustments and
Preparing an Adjusted
Trial Balance
The general ledger for Schellhorn’s Water Slide shows the following account
balances on December 31, the end of the fiscal period.
Instructions In your working papers:
1. Prepare the Trial Balance section of the work sheet. The account names
are entered on the work sheet.
2. Enter the adjustments for Office Supplies and Prepaid Insurance in
the Adjustments section. The data for the adjustments is as follows:
a. The amount of supplies on hand on December 31 is $492.
b. The insurance premium expired is $860.
3. Extend the amounts and complete the Adjusted Trial Balance section.
101 Cash in Bank $10,230
105 Accts. Rec.—Chiara Adin 519
110 Accts. Rec.—Miguel Hendrickson 207
115 Office Supplies 1,820
120 Prepaid Insurance 1,290
125 Office Equipment 3,117
130 Water Slide Equipment 14,204
201 Accts. Pay.—Northern Slide Co. 6,281
205 Accts. Pay.—Advertising World 1,559
210 Accts. Pay.—Merit Cleaning 332
301 Phil Schellhorn, Capital 12,641
302 Phil Schellhorn, Withdrawals 1,400
303 Income Summary —
401 Slide Revenue 29,209
501 Advertising Expense 1,350
505 Insurance Expense —
510 Maintenance Expense 719
515 Rent Expense 12,800
520 Office Supplies Expense —
525 Utilities Expense 2,366
A–12 Appendix A Problems
A02-A13_AppA_868829.indd A–12 9/12/05 6:08:42 PM
Problems APPE NDIX A
Problem A–4 Preparing a Ten-Column
Work Sheet
The general ledger for Ryan’s Canoe Rentals shows the following account
balances on December 31, the end of the fiscal period.
Instructions In your working papers:
1. Prepare the Trial Balance section of the work sheet. The account names
are entered on the work sheet.
2. Enter the adjustments for Office Supplies and Prepaid Insurance in
the Adjustments section. The data for the adjustments is as follows:
a. Ryan’s determines that 20 percent of the supplies purchased are still
on hand on December 31.
b. The insurance premium expired is $1,337.
3. Extend the amounts and complete the Adjusted Trial Balance section.
4. Extend the appropriate amounts to the Balance Sheet and Income
Statement sections and determine the net income or net loss for
the period.
101 Cash in Bank $13,826
105 Accts. Rec.—Nancy Burrows 803
110 Accts. Rec.—Patrick Chang 519
115 Supplies 2,880
120 Prepaid Insurance 2,292
125 Office Equipment 3,117
130 Rental Equipment 14,204
135 Canoes 20,182
201 Accts. Pay.—South Canoe Co. 6,991
205 Accts. Pay.—H & T Advertising 2,046
210 Accts. Pay.—Cassidy’s Equipment 855
301 Ryan Gillespie, Capital 38,619
305 Ryan Gillespie, Withdrawals 3,700
310 Income Summary —
401 Rental Revenue 31,624
402 Lesson Revenue 3,475
501 Advertising Expense 2,730
505 Insurance Expense —
510 Maintenance Expense 1,664
515 Rent Expense 14,900
520 Supplies Expense —
525 Utilities Expense 2,793
Appendix A Problems A–13
A02-A13_AppA_868829.indd A–13 9/12/05 6:08:44 PM
APPENDIX B Using the Numeric Keypad
Electronic calculators and computer keyboards have ten-key numeric
BEFORE
YOU READ keypads. When you key numerical data, your ability to use the numeric
keypad by touch will make your task easier and faster.
Main Idea
Using a numeric keypad Locating Keys
by touch will help you How Are Keys Arranged on a Numeric Keypad?
enter numbers quickly and The ten-key numeric keypad
accurately. 7 8 9 7 8 9
is usually arranged in four rows
Read to Learn… of three keys. The locations of the 4 5 6 4 5 6
➤ about the key locations. 1 to 9 keys are the same on all equip-
ment. The locations of the 0 (zero),
1 2 3 1 2 3
(p. A–14)
➤ how to enter numbers by decimal, Enter, and other function Ø . ENTER
Ø RETURN
ENTER
touch. (p. A–15) keys vary. Some typical arrange-
ments are illustrated here.
Key Terms On the ten-key
home keys numeric keypad, the
4-5-6 keys are called (
9
)
0
—
-
+
BACK
SPACE
= 7 8 9
the home keys .
These keys are the “start- O P [ ] RETURN
4 5 6
ing point” from which L ;
: "ENTER
1 2 3
'
you operate the other
number keys. The index
<
,
>
.
?
/
SHIFT
Ø . ENTER
finger of your right hand
should rest on the 4 key,
your middle finger on
the 5 key, and your ring
finger on the 6 key. Most
keypads have a special “help” on the home keys so you can easily locate
them: the 5 key may have a raised dot or the surfaces of the 4-5-6 keys may
be concave (indented).
From the home keys, you reach up or down to tap other keys. The index
finger is also used for the 7 and 1 keys. The middle finger is used for the
8 and 2 keys. The ring finger is used for the 9 and 3 keys.
The fingers used for the 0 (zero), decimal, and Enter keys depend on
the keypad’s arrangement. On some keypads, the thumb taps the 0 (zero)
key and the ring finger taps the decimal key. Depending on its loca-
tion, the Enter key on a computer may be operated by the little finger or
the thumb.
A–14 Appendix B Using the Numeric Keypad
A14-A17_AppB_868829.indd A–14 9/12/05 3:15:39 PM
On an electronic calculator, numbers are entered by using function keys:
plus (), minus (), multiply (), divide (), and so on. A computer keypad
has different function keys for multiply (*) and divide (/). On an electronic
calculator, the asterisk (*) is used for the total.
The fingers used to operate these keys depend on the keys’ location on
the keyboard. Locate these keys on your keypad and determine the correct
fingers to use to operate them.
Entering Numbers by Touch
How Do You Use the Keys by Touch?
Throughout the remaining pages of this appendix, you will demonstrate
use of the numeric keypad by touch. That is, you will enter numbers on the
keypad without looking at your fingers.
Your practice consists of adding columns of numbers. If you are using an
electronic calculator, tap the plus () key after you have entered a number
in a column. After entering all the numbers in a column, tap the total (*)
key. If you are using a computer spreadsheet program, tap the Enter key after
you have entered a number in a column. This will force a line break; each
time you strike the Enter key, the cursor will move to the next line. After
entering all the numbers in a column, use the software function or formula
to add the numbers.
Using the 4-5-6 Keys
1. Demonstrate use of the numeric keypad by touch. 7 8 9
Locate the 4-5-6 keys (the home keys) on your keypad.
Also locate the Enter key if you are using a computer 4 5 6
or the plus key if you are using a calculator.
2. Place your index finger on the 4 key, your middle
1 2 3
finger on the 5 key, and your ring finger on the 6 key. Ø . ENTER
3. To enter a number, tap the number keys, one at a
time, in the same order as you read the digits from left
to right. Always keep your fingers on the home keys.
4. When you have entered the last digit, tap the Enter key (computer) or
the plus key (calculator).
5. Using the following problems, practice entering columns of numbers at
a comfortable pace until you feel confident about each key’s location.
6. After entering all of the numbers in a column, add the numbers using
the software (computer) or tap the total key once (calculator).
1. 2. 3. 4. 5. 6.
444 555 666 456 554 664
555 666 454 654 445 445
666 444 545 465 564 566
456 654 446 556 664 645
564 546 646 656 565 465
646 465 546 465 655 654
Appendix B Using the Numeric Keypad A–15
A14-A17_AppB_868829.indd A–15 9/12/05 3:15:43 PM
Using the 1, 7 and 0 Keys
1. Demonstrate use of the numeric keypad by touch. 7 8 9
Locate the 1, 7 and 0 (zero) keys on your keypad.
2. Place your fingers on the home keys. 4 5 6
3. Practice the reach from the home keys to each new
key. Reach down to the 1 key and up to the 7 key with
1 2 3
your index finger. Be sure to return your finger to the Ø . ENTER
home keys after tapping the 1 and 7 keys. Strike the
0 (zero) key with your thumb.
4. Using the following problems, practice adding columns of numbers
containing the new keys. Practice at a comfortable pace until you feel
confident about each key’s location. Be sure to keep your fingers in
home-key position.
1. 2. 3. 4. 5. 6.
444 014 140 107 011 141
471 107 701 074 170 117
174 740 701 104 710 417
741 101 704 007 004 047
710 114 471 411 471 104
407 441 117 047 174 114
Using the 3 and 9 Keys
1. Locate the 3 and 9 keys on your keypad.
7 8 9
2. Place your fingers on the home keys.
3. Practice the reach from the home keys to each new 4 5 6
key. Reach down to the 3 key and up to the 9 key with
your ring finger. Be sure to return your finger to the
1 2 3
home keys after tapping the 3 and 9 keys. Ø . ENTER
4. Using the following problems, practice adding
columns of numbers containing the new keys.
Practice at a comfortable pace until you feel confident about each key’s
location. Be sure to keep your fingers in home-key position.
1. 2. 3. 4. 5. 6.
666 669 339 966 939 699
999 663 363 393 363 936
333 936 336 966 393 939
963 396 936 633 639 336
639 936 636 393 369 696
399 363 996 993 369 939
Using the 2 and 8 Keys
1. Locate the 2 and 8 keys on your keypad.
7 8 9
2. Place your fingers on the home keys.
3. Practice the reach from the home keys to each new 4 5 6
key. Reach down to the 2 key and up to the 8 key with
your middle finger. Be sure to return your finger to the
1 2 3
home keys after tapping the 2 and 8 keys. Ø . ENTER
A–16 Appendix B Using the Numeric Keypad
A14-A17_AppB_868829.indd A–16 9/12/05 3:15:47 PM
4. Using the following problems, practice adding columns of numbers
containing the new keys. Practice at a comfortable pace until you feel
confident about each key’s location. Be sure to keep your fingers in
home-key position.
1. 2. 3. 4. 5. 6.
555 228 885 285 582 828
888 852 285 258 558 825
222 522 825 525 582 852
582 252 588 858 825 258
822 528 258 582 525 885
522 855 852 825 582 282
Using the Decimal Key
1. Locate the decimal key on your keypad.
7 8 9
2. Place your fingers on the home keys.
3. Depending on the arrangement of keys on your 4 5 6
numeric keypad, you may use your thumb, your
middle finger, or your ring finger to tap the decimal
1 2 3
key. Practice the reach from the home keys to the Ø . ENTER
decimal key. Be sure to return your finger to the home
keys after tapping the decimal key.
4. Using the following problems, practice adding columns of numbers
containing the decimal key. Practice at a comfortable pace until you
feel confident about the key’s location. Be sure to keep your fingers in
home-key position.
1. 2. 3. 4. 5. 6.
.777 .978 .998 8.78 7.88 8.79
.888 .987 .879 8.89 7.87 7.98
.999 .878 .787 8.87 8.97 9.89
.789 .987 .878 7.88 9.77 9.87
.897 .789 .797 9.87 7.97 7.89
.978 .797 .899 7.98 8.79 9.78
7. 8. 9. 10. 11. 12.
468. 48.2 .8 284.0 41.87 154.88
.489 2,537. 5,827. 100. 4,057.4 888.
214.2 852. .024 8.45 89.45 .0082
7.12 3.978 18.73 56.0 2.25 200.08
6,394.4 257.0 85.00 23.00 20.0 632.48
.58 .2684 1.045 .89 36.248 64.1
13. 14. 15. 16. 17. 18.
267.50 425.21 1.25 467.54 65.27 9.78
4.19 414.50 0.18 95.14 102.38 5.94
87.64 1,684.84 585.56 6,926.95 8,216.58 652.25
654.84 49.95 7.50 35.00 1,852.84 3,782.70
1,750.67 720.65 11.60 7.13 4.60 39.25
141.82 77.61 23.55 154.95 79.15 36.87
Appendix B Using the Numeric Keypad A–17
A14-A17_AppB_868829.indd A–17 9/12/05 3:15:48 PM
APPENDIX C Recording Transactions in
the Combination Journal
Businesses with a large volume of financial transactions use special
BEFORE
YOU READ journals to record those transactions. If you completed Chapters 16 and
17, you learned that special journals are designed for recording a specific
type of business transaction. For example the sales journal is used to record
Main Idea the sale of merchandise on account.
Small businesses often use
Although the use of special journals is ideal for large businesses,
a multicolumn combination
they are not practical for small service and retail businesses that usually
journal that combines the
have only one accounting clerk. It is impractical for one clerk to record
features of the general
transactions in five different journals. At the same time, using only a
journal and the special
journals into one book of general journal is very time consuming. Many small businesses use one
original entry. journal—a combination journal.
Read to Learn… Using the Combination Journal
➤ how to use the
combination journal. How Do You Use a Combination Journal?
(p. A–18) As its name implies, a combination journal is a multicolumn
➤ posting the journal’s journal that combines the features of the general journal and the spe-
columns. (p. A–19) cial journals into one book of original entry. Like special journals, the
combination journal has special amount columns to record transactions
Key Terms that occur frequently. It also has General Debit and Credit columns for
combination journal
recording transactions for which there are no special amount columns.
Therefore all the transactions of a business can be recorded in a single,
multicolumn journal.
A business designs its combination journal to fit its own special
needs. The number of columns and the selection and arrangement of the
special columns depend on the type of business and the transactions that
occur. Most combination journals have between 10 and 13 columns.
The arrangement of the columns varies from one business to another.
The columns should be arranged to make recording and posting easy and
accurate. For example, look at On Your Mark Athletic Wear’s combination
journal in Figure C–1. The Date, Account Name, Document Number, and
Posting Reference columns are located at the far left. These columns are
Figure C–1 The Combination
followed by the General Debit and Credit columns.
Journal
COMBINATION
DOC. POST. GENERAL ACCOUNTS RECEIVABLE
DATE ACCOUNT NAME NO. REF. DEBIT CREDIT DEBIT CREDIT
A–18 Appendix C Recording Transactions in the Combination Journal
A18-A25_AppC_868829.indd A–18 9/12/05 6:11:43 PM
The General columns are followed by the special amount columns for
AS
Accounts Receivable, Sales, Sales Tax Payable, Accounts Payable, Pur- YOU READ
chases, and Cash in Bank.
Key Point
Notice that the line numbers appear to the left and right sides of each
page of the journal. These line numbers help the accounting clerk avoid Recording Transactions
writing amounts on the wrong lines. When recording
A properly designed combination journal can be used efficiently for transactions, use the line
numbers as a guide to
recording every possible business transaction.
avoid writing amounts
• Receipts of cash are recorded in the Cash in Bank Debit column. on the wrong line.
• Cash payments are entered in the Cash in Bank Credit column.
• The purchase of merchandise, for cash or on account, is recorded in the
Purchases Debit column.
• Transactions affecting creditor accounts are written in the Accounts
Payable Debit and Credit columns.
• The sale of merchandise is recorded in the Sales Credit and Sales Tax
AS
Payable Credit columns. YOU READ
• Transactions affecting charge customer accounts are entered in the
Accounts Receivable Debit and Credit columns.
Key Point
• General ledger accounts for which there are no special columns are Recording Transactions
recorded in the General Debit and Credit columns. Adjusting and The General columns
closing entries, for example, would be recorded in the General Debit are used to record any
and Credit columns. amount for which no
special columns are
On Your Mark Athletic Wear’s business transactions for the month of
provided.
June are recorded in the combination journal shown in Figure C–2.
Proving and Posting the Journal
What Columns Are Posted Daily? Monthly?
Like special journals, an important feature of the combination journal is
that it saves time in both recording and posting transactions. The amounts
entered in the General columns are posted on a daily basis to the appropriate
general ledger accounts. Amounts entered in the Accounts Receivable and
Accounts Payable columns are also posted on a daily basis to the appropri-
ate charge customer or creditor accounts in the accounts receivable and
accounts payable subsidiary ledgers. At the end of the month, the combi-
nation journal is footed, proved, totaled, and ruled. Totals of the special
amount columns of the combination journal are then posted to the general
ledger accounts named in the column headings. Figure C–2 shows how the
combination journal will look at the end of the month after all postings
have been made.
JOURNAL PAGE
SALES TAX ACCOUNTS PAYABLE CASH IN BANK
SALES PAYABLE PURCHASES
CREDIT CREDIT DEBIT CREDIT DEBIT DEBIT CREDIT
Appendix C Recording Transactions in the Combination Journal A–19
A18-A25_AppC_868829.indd A–19 9/12/05 6:11:50 PM
COMBINATION
DOC. POST. GENERAL ACCOUNTS RECEIVABLE
DATE ACCOUNT NAME NO. REF. DEBIT CREDIT DEBIT CREDIT
1 20--
2 June 6 Cash Sales T61 —
3 8 Sales Discounts R62 405 8 00
4 Casey Klein ✓ 4 2 4 00
5 10 Tammy’s Fitness Club S75 ✓ 5 3 0 00
6 13 Office Equipment I011 145 6 5 0 00
7 Geary Office Supply ✓
8 14 Sales Returns and Allowances CM5 410 9 0 00
9 Sales Tax Payable 220 5 40
10 Lara Young ✓ 9 5 40
11 15 Gabriel Ramos M12 ✓ 8 0 00
12 Shashi Rahim ✓ 8 0 00
13 16 Computer Solutions I003 ✓
14 18 Supplies I214 130 1 0 0 00
15 Geary Office Supplies ✓
16 21 FastLane Athletics CK350 ✓
17 Purchases Discounts 510 6 00
18 23 Utilities Expense CK351 680 1 7 5 00
19 24 Purchases CK352 —
20 26 Salaries Expense CK353 665 3 2 0 0 00
21 Social Security Tax Payable 212 1 9 8 40
22 Medicare Tax Payable 213 4 6 40
23 Employees’ Federal Income Tax Payable 205 4 8 0 00
24 Employees’ State Income Tax Payable 206 7 0 40
25 26 Payroll Tax Expense P.Reg. 657 4 5 6 00
26 Social Security Tax Payable 212 1 9 8 40
27 Medicare Tax Payable 213 4 6 40
28 Federal Unemployment Tax Payable 214 2 5 60
29 State Unemployment Tax Payable 215 1 8 5 60
30 27 Supplies CK354 130 5 0 0 00
31 28 Champion Store Supply DM10 ✓
32 Purchases Returns and Allowances 515 9 0 00
33 29 Supplies M13 130 1 2 5 00
34 30 Purchases 501 1 2 5 00
5 3 0 9 40 1 4 7 2 20 6 1 0 00 5 9 9 40
35 30 Totals 5 3 0 940 1 4 7 2 20 6 1 0 00 5 9 9 40
36 (✓) (✓) ( 115 ) ( 115 )
37
Daily Daily Daily
Post each individual amount Post each individual amount in the Post each individual amount in
in the General columns to the Accounts Receivable columns to the Accounts Payable columns to
general ledger. Put the general the accounts receivable subsidiary the accounts payable subsidiary
ledger account number in the ledger. Put a check mark in the ledger. Put a check mark in the
Post. Ref. column to indicate that Post. Ref. column to indicate that Post. Ref. column to indicate that
posting has been completed. posting has been completed. posting has been completed.
Figure C–2 Recording Transactions in a Combination Journal
A–20 Appendix C Recording Transactions in the Combination Journal
A18-A25_AppC_868829.indd A–20 9/12/05 6:11:53 PM
JOURNAL PAGE 7
SALES TAX ACCOUNTS PAYABLE CASH IN BANK
SALES PAYABLE PURCHASES
CREDIT CREDIT DEBIT CREDIT DEBIT DEBIT CREDIT
1
1 2 5 0 00 7 5 00 1 3 2 5 00 2
4 1 6 00 3
4
5 0 0 00 3 000 5
6
6 5 0 00 7
10
11
12
4 2 0 0 00 4 2 0 0 00 13
14
1 0 0 00 15
2 0 0 00 16
1 9 4 00 17
1 7 5 00 18
3 0 0 00 3 0 0 00 19
20
21
22
23
2 4 0 4 80 24
25
26
27
28
29
5 0 0 00 30
9 0 00 31
32
33
34
1 7 5 0 00 1 0 5 00 2 9 0 00 4 9 5 0 00 4 5 0 0 00 1 7 4 1 00 3 5 7 3 80
1 7 5 0 00 1 0 5 00 2 9 0 00 4 9 5 0 00 4 5 0 0 00 1 7 4 1 00 3 5 7 3 80 35
( 401) ( 220) ( 201) ( 201) ( 501 ) ( 101) ( 101) 36
37
End of Month
Post the column totals for Accounts Receivable, Sales,
Sales Tax Payable, Accounts Payable, Purchases, and
Cash in Bank to the general ledger. The General
column totals are not posted. Put the general ledger
account numbers in parentheses below the column
totals to indicate that posting has been completed.
Figure C–2 Recording Transactions in a Combination Journal (continued)
Appendix C Recording Transactions in the Combination Journal A–21
A18-A25_AppC_868829.indd A–21 9/12/05 6:11:57 PM
A PP EN D I X C Problems
Problem C–1 Analyzing Transactions for
Combination Journal Entries
John Dunn owns The Country Store, a small retail store. He uses a
combination journal with the following columns.
General Debit Accounts Payable Debit
General Credit Accounts Payable Credit
Accounts Receivable Debit Purchases Debit
Accounts Receivable Credit Cash in Bank Debit
Sales Credit Cash in Bank Credit
Sales Tax Payable Credit
Instructions Use the form provided in your working papers. For each
of the following selected transactions, indicate in which column(s) of
the combination journal the debit and credit parts of the entry would be
recorded. The first transaction has been completed as an example.
Accounts Accounts Cash
General Receivable Sales Sales Tax Payable Purchases in Bank
Date Trans. Payable
Cr. Cr. Dr.
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Dec. 1 Debit ✓
Credit ✓
Date Transactions
Dec. 1 Purchased a computer on account from King’s Computer
Outlet.
2 John Dunn withdrew cash for personal use.
5 Sold merchandise on account to Bernard Peterson, plus
sales tax.
10 Issued Credit memo 14 to Tom Tray, a charge customer, for the
return of merchandise sold on account plus sales tax.
13 Issued Debit Memo 20 to Cory Distributors for the return of
merchandise purchased from them on account.
15 Received a check from Bernard Peterson in full payment of his
account.
18 Issued a check to Cory Distributors in payment of our account
less the purchases return and less a purchases discount.
22 John Dunn invested a calculator in the business.
25 Issued a check for the monthly payroll less deductions for
FICA.
25 Recorded the employer’s payroll tax liabilities for FICA taxes,
federal unemployment tax, and state unemployment tax.
30 Recorded cash sales plus sales tax.
31 Recorded the adjusting entry for the office supplies consumed
during the period.
A–22 Appendix C Problems
A18-A25_AppC_868829.indd A–22 9/12/05 6:11:59 PM
Problems APPE NDIX C
Problem C–2 Recording Transactions, Totaling,
Proving, and Ruling the
Combination Journal
Craig Glasser is a physician who operates a family medical practice, Glasser
Family Medical Center. He uses the combination journal found in your
working papers.
Instructions
1. Record the following transactions on page 17 of the combination
journal.
2. Total, prove, and rule the combination journal.
Date Transactions
Oct. 1 Received $2,100 in medical fees from patients, Receipt 90.
2 Issued Check 414 for the cash purchase of $120 of office
supplies.
4 Purchased medical supplies on account from Wharton
Laboratories, Invoice 14006 for $1,950, terms n/60.
6 Craig Glasser invested medical equipment valued at $750 in
the medical practice, Memorandum 30.
8 Billed a patient, Daniel O’Connell, $150 for his annual
physical, Statement 40.
9 Completed lab services for Carl Fisher and billed him $160,
Statement 41.
11 Purchased a new examination table (medical equipment) on
account from Medical Suppliers, Invoice L163 for $1,452.50,
terms n/45.
13 Billed Patricia Vallano $300 for medical services, Statement 42.
15 Issued Check 415 for $2,004.81 for the monthly salaries
expense of $2,500.00 less deductions: social security tax,
$155.00; Medicare tax, $36.25; employees’ federal income
taxes, $209.00; employees’ state income taxes, $94.94.
15 Recorded the employer’s payroll tax liabilities: social security
tax, $155; Medicare tax, $36.25; federal unemployment taxes,
$20; state unemployment taxes, $145; payroll register.
18 Issued Debit memo 16 to Wharton Laboratories for $200 for
the return of medical supplies purchased on account.
20 Paid the telephone bill, Check 416 for $110.
22 A check for $110 was received from John Marshall
to apply on his account, Receipt 91. CONTINUE
Appendix C Problems A–23
A18-A25_AppC_868829.indd A–23 4/6/06 6:55:49 PM
A PP EN D I X C Problems
Date Transactions (cont.)
25 Craig Glasser withdrew $1,250 cash from the business,
Check 417.
28 Received $75 from Daniel O’Connell to apply on his account,
Receipt 92.
31 Completed lab services for Donna Gordon and billed her $95,
Statement 43.
31 Issued Check 418 for the November rent of $900.
Problem C–3 Recording Transactions,
Totaling, Proving, and Ruling
the Combination Journal
Sunset Surfwear is a small merchandise business specializing in a variety
of surfwear items. Sunset Surfwear uses a combination journal with these
amount columns.
General Debit Accounts Payable Debit
General Credit Accounts Payable Credit
Accounts Receivable Debit Purchases Debit
Accounts Receivable Credit Cash in Bank Debit
Sales Credit Cash in Bank Credit
Sales Tax Payable Credit
Instructions In your working papers:
1. Record these transactions on page 12 of the combination journal.
2. Total, prove, and rule the combination journal.
Date Transactions
Dec. 1 Issued Check 151 for $700 to Pine Valley Realty for the
monthly rent.
2 Received a check for $204.82 from Martha Adams in payment
of her account of $209 less a discount of $4.18, Receipt 303.
3 Purchased $400 of merchandise on account from Kelley
Apparel, Invoice 479 dated December 2, terms 2/10, n/30.
4 Issued Check 152 for $75 to The Knight Crier for
advertisements.
5 Issued Check 153 for $230.30 to Neilson Store Equipment in
payment of its invoice for $235.
6 Sent Credit Memo 35 to Alex Hamilton for damaged
merchandise returned, $50 plus $2.25 sales tax.
8 Sold merchandise on account to Nate Moulder, $100
plus sales tax of $4.50, Sales Slip 205. CONTINUE
A–24 Appendix C Problems
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Problems APPE NDIX C
Date Transactions (cont.)
10 Discovered that $95 received on account from Helen Jan on
November 16 had been journalized and posted to Harriett
Junell’s account, Memorandum 16.
11 Recorded the monthly salaries of $2,100 less deductions: social
security tax, $130.20; Medicare tax, $30.45; employees’ federal
income taxes, $326; and employees’ state income taxes, $48.09;
Check 154 for $1,565.26.
11 Recorded the employer’s payroll tax liabilities: social security
tax, $130.20; Medicare tax, $30.45; federal unemployment tax,
$16.80; state unemployment tax, $121.80; payroll register.
12 Sent Check 155 for $392 to Kelley Apparel in payment of
Invoice 479 less a discount of $8.
15 Received $150 from Martha Adams to apply on her account,
Receipt 304.
18 Issued Debit Memorandum 20 to Waverunner Designs for $25
for the return of merchandise purchased on account.
24 Sold $200 in merchandise on account to Westwood High
School Athletics plus sales tax of $9, Sales Slip 206.
26 Purchased $300 of merchandise on account from Capital
Accessories, Invoice 601.
28 Purchased store equipment on account from Neilson Store
Equipment, $200, Invoice 609.
29 Paid a $150 electric bill for the month by issuing Check 156 to
Dukane Power Company.
31 Recorded cash sales of $3,000, plus $135 sales taxes, Tape 52.
Problem C–4 Recording Adjusting and Closing
Entries in a Combination Journal
A partial work sheet for December 31 for In Beat CD Shop is shown in your
working papers.
Instructions
1. Record the adjusting entries in the combination journal. Then total,
prove, and rule the General columns of the journal.
2. Record the closing entries in the combination journal. Then total,
prove, and rule the General columns of the journal.
Appendix C Problems A–25
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APPENDIX D The Accrual Basis
of Accounting
Some small businesses keep their financial records on a cash basis.
BEFORE
YOU READ The cash basis of accounting recognizes and records revenues when
cash is received and expenses only when cash is paid out. Often, how-
ever, cash is received and payments are made in an accounting period
Main Idea other than the period in which the original transaction took place. For
Accrual accounting
example, a landscaping service performs work for a client in Decem-
recognizes when revenue
ber, but the customer may not be required to pay until January of the
and expenses are earned
next year. However, if the revenue is not recorded for the service per-
and incurred rather than
formed in December, the financial statements may not present fairly
when they are collected
and paid. the business earnings for the year just ended. To overcome this, the
accounting profession requires that most businesses use what is called
Read to Learn… the accrual basis of accounting . In accrual accounting, revenues are
➤ how to record accrual recognized and recorded when earned, and expenses are recognized
entries. (p. A–26) and recorded when they are actually incurred. The system for accrual
➤ how to record deferral accounting focuses on when earned and incurred rather than on when
entries. (p. A–30) collected and paid.
➤ how to use reversing The accrual basis of accounting requires that accountants recognize
entries. (p. A–32) revenue when the business makes a sale or performs a service, regard-
Key Terms less of when the company receives the cash. Expenses are recognized as
cash basis of accounting incurred, whether or not the business has paid out the cash. To accrue
accrual basis of accounting revenue means to record an amount in anticipation of future receipts
accruals and to accrue an expense means to record an amount in anticipation of
accrued revenue a future payment. Accrual accounting involves two types of revenue and
accrued expense expenses: accruals and deferrals.
deferrals
unearned revenue Accruals
prepaid expense How Do You Record Accruals?
reversing entry
Accruals relate to transactions which have not yet been recorded in the
accounts. The word accrue means to accumulate or amass. Accruals for
unrecorded revenue and expenses are required when:
1. A revenue has been earned but not yet received. For example, interest
earned on a note receivable in one accounting period but not
collected until the next accounting period.
2. An expense has been incurred but not yet paid. For example, you
may earn wages from April 27 to April 30, but your employer
may not pay your check to you until May 5.
A–26 Appendix D The Accrual Basis of Accounting
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Accruals are revenues or expenses that are gradually earned or incurred
AS
over time. In order to report a company’s financial position fairly, accruals YOU READ
should be recognized in the accounting period in which they belong.
Key Point
Accrued Revenue Accrual Basis of
Accrued revenue is revenue that has been earned but not received or Accounting With
recorded. Examples of unrecorded accrued revenues include unpaid fees for the accrual basis of
accounting, revenue
services completed and rent earned but not yet received. The accrued revenue
is recorded when it is
example that follows is for unpaid interest earned on a note receivable.
earned, and expenses
are recorded when they
are incurred.
Adjustment
On December 5, 2010, Rapid Growth Co. accepted a $5,000, 90-day, 9% note receivable from a charge
customer, Janie Pippa. Pippa issued the note as an extension on her charge account. Rapid Growth Co. recorded
the transaction as a debit of $5,000 to Notes Receivable and a credit of $5,000 to Accounts Receivable and
Janie Pippa’s account in the subsidiary ledger. On December 31, 26 days of interest had been earned (accrued)
on the note receivable: $5,000 .09 26/365 $32.05. An adjusting entry is required on December 31 to
record the amount of interest income earned from December 5 to December 31.
ANALYSIS Identify 1. For the adjusting entry, the accounts Interest Receivable and Interest
Income are affected.
Classify 2. Interest Receivable is an asset account. Interest Income is a revenue
account.
/ 3. Interest Receivable is increased and Interest Income is increased.
DEBIT-CREDIT RULE 4. Increases to assets are recorded as debits. Debit Interest Receivable
for $32.05.
5. Increases to revenues are recorded as credits. Credit Interest Income
for $32.05.
T ACCOUNTS 6. Interest Receivable Interest Income
Debit Credit Debit Credit
Adj. 32.05 Adj. 32.05
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 18
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 2010 Adjusting Entries 1
2 Dec. 31 Interest Receivable 3 2 05 2
3 Interest Income 3 2 05 3
4 4
Appendix D The Accrual Basis of Accounting A–27
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On March 5, 2011, Rapid received a check from Janie Pippa for $5,110.96,
AS
YOU READ the maturity value of the note ($5,000.00 principle $110.96 interest). Of
the total interest, $32.05 had been earned and recorded in the previous
Key Point
accounting period. The remaining $78.91 should be recorded as income
Adjusting Entries earned in the current fiscal year.
Adjusting entries must be In the entry for the receipt of Janie’s payment, Cash in Bank is deb-
recorded when (1) there ited for $5,110.96, the total amount of cash received. Notes Receivable
are unrecorded revenues
is credited for $5,000.00. Interest Receivable is credited for $32.05 since
and expenses at the
the amount owed has now been received. Interest Income is credited
end of the accounting
for $78.91, the amount of the interest earned that applies to the current
period, and (2) there
are recorded revenues accounting period. The entry for this transaction is shown below.
and expenses that must
be allocated over two 7
GENERAL JOURNAL PAGE
or more accounting
POST.
periods. DATE DESCRIPTION REF. DEBIT CREDIT
1 2011 1
2 Mar. 5 Cash in Bank 5 1 1 0 96 2
3 Notes Receivable 5 0 0 0 00 3
4 Interest Receivable 3 2 05 4
5 Interest Income 7 8 91 5
6 Receipt 416 6
7 7
Accrued Expenses
Most expenses are recorded when they are paid or when a liability is
incurred. There are, however, some business expenses that have not been
paid—but accrue daily—and are not recorded until an adjusting entry is made
at the end of the fiscal period. Some examples of these accrued expenses
are salaries or wages earned by working employees but not yet paid to them,
property taxes owed but not yet paid, and interest accrued on unpaid notes
payable. The example that follows shows how to calculate interest due
and payable.
Adjustment
On November 1, 2010, Rapid Growth Co. signed a $2,000, 90-day, 12% note payable for the purchase
of equipment from Taylor Equipment. Rapid Growth Co. recorded the transaction as a debit of $2,000 to
Equipment and a credit of $2,000 to Notes Payable. On December 31, 60 days of interest was owed
(accrued) on the note payable: $2,000 .12 60/365 $39.45. An adjusting entry is required on
December 31 to record the amount of interest expense incurred from November 1 to December 31.
ANALYSIS Identify 1. For the adjusting entry, the accounts Interest Expense and
Interest Payable are affected.
Classify 2. Interest Expense is an expense account. Interest Payable is a
liability account.
/ 3. Interest Expense is increased and Interest Payable is increased.
A–28 Appendix D The Accrual Basis of Accounting
A26-A35_AppD_868829.indd A–28 9/15/05 2:38:40 PM
DEBIT-CREDIT RULE 4. Increases to expenses are recorded as debits. Debit Interest Expense
for $39.45.
5. Increases to liabilities are recorded as credits. Credit Interest Payable
for $39.45.
T ACCOUNTS 6. Interest Expense Interest Payable
Debit Credit Debit Credit
Adj. 39.45 Adj. 39.45
JOURNAL ENTRY 7.
GENERAL JOURNAL PAGE 18
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
4 Dec. 31 Interest Expense 3 9 45 4
5 Interest Payable 3 9 45 5
6 6
On March 5 Rapid sent a check to Taylor Equipment for $2,059.18, the
maturity value of the note ($2,000.00 principal $59.18 interest). Of the total
interest expense, $39.45 was already owed as of December 31. That amount
was recorded as an adjusting entry in the previous accounting period. The
remaining $19.73 should be recorded as an expense for the current account-
ing period.
In the entry for the payment of the note, Notes Payable is debited for
$2,000.00. Interest Expense is debited for $19.73, the amount of interest
expense incurred that applies to the current accounting period. Interest
Payable is debited for $39.45 since the amount that was accrued has now
been paid. Cash in Bank is credited for $2,059.18, the total amount of cash
paid. The entry for this transaction is shown below.
GENERAL JOURNAL PAGE 7
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
7 Mar. 5 Notes Payable 2 0 0 0 00 7
8 Interest Expense 1 9 73 8
9 Interest Payable 3 9 45 9
10 Cash in Bank 2 0 5 9 18 10
11 Check # 1597 11
To acquire cash with which to provide services, communities impose a
tax on real property. Property taxes are usually paid twice a year, with each
payment covering a six-month period or one-half the annual tax.
Appendix D The Accrual Basis of Accounting A–29
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Underwood Merchandisers operates in a building on its own land. The
value of the real property is $300,000. The total annual property taxes are
$7,800. Underwood is located in a state where property taxes must be paid
in May and November. The May payment covers the first six months of the
calendar year, and the November payment covers the last six months of the
calendar year.
Underwood’s fiscal period ends on April 30. As a result, at the end of its
fiscal period, Underwood owes property taxes of $2,600 ($7,800 4/12 or
$3,900 4/6) for the months of January, February, March and April. These
taxes, however, are not due to be paid until May.
On April 30 Underwood makes the following adjustment to the account-
ing records to reflect the correct amount of property tax for the period.
GENERAL JOURNAL PAGE 26
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- Adjusting Entries 1
2 Apr. 30 Property Tax Expense 2 6 0 0 00 2
3 Property Tax Payable 2 6 0 0 00 3
4 4
On May 15 Underwood wrote a check for the semiannual property tax
payment of $3,900. Of this amount, $2,600 is an expense that was already
charged to the prior fiscal period, and $1,300 is an expense charged to the
current accounting period. The entry in May to record this payment is
shown in the general journal below.
GENERAL JOURNAL PAGE 3
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 May 15 Property Tax Expense 1 3 0 0 00 2
3 Property Tax Payable 2 6 0 0 00 3
4 Cash in Bank 3 9 0 0 00 4
5 Check 401 5
Deferrals
How Do You Record Deferrals?
Deferrals are for transactions that have been recorded in the accounts. The
word defer means to wait or delay. Deferrals are for receipts that are not yet
earned and for payments that are not yet expenses.
1. Cash may have been received but not yet earned. For example, rent
received in advance when some of the rental time is in one
accounting period and the balance is in the next accounting period.
2. Cash may have been paid but the expenses not incurred. For example,
when premiums on insurance are paid covering part of one
accounting period and the balance covers the next accounting period.
A–30 Appendix D The Accrual Basis of Accounting
A26-A35_AppD_868829.indd A–30 4/6/06 6:54:41 PM
Adjusting entries are required to: (1) recognize unrecorded accrued rev-
AS
enues and expenses or (2) allocate recorded deferred revenues and expenses YOU READ
to the appropriate accounting period.
Key Point
Unearned Revenue Unearned Revenue
Unearned revenue is revenue received before it is actually earned. Revenue received in
Examples include cash received in advance for rental properties, for season advance is usually
recorded in a liability
tickets to various events, for insurance premiums, and for work to be per-
account. That account
formed in the future. Because the business has an obligation to deliver the
must be adjusted at the
merchandise or perform the service for which it has already received pay-
end of the fiscal period
ment, unearned revenue represents a current liability for the business. to recognize the amount
Boyce Real Estate rents space in its building to a tax accountant. On of revenue earned
November 1 the accountant paid Boyce $1,200 in advance for rent covering during the period.
the months of November through April. The entry to record this transaction
is shown below.
GENERAL JOURNAL PAGE 55
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- 1
2 Nov. 1 Cash in Bank 1 2 0 0 00 2
3 Unearned Rental Income 1 2 0 0 00 3
4 Receipt 181 4
As the business delivers the merchandise or performs the service, it earns
a part of the advance payment. The earned portion must be transferred from
the liability account to a revenue account through an adjusting entry made
at the end of the period.
When Boyce’s fiscal period ends on December 31, the company will have
earned rental income of $400 for two of the six months paid in advance
($1,200 13). The adjusting entry to record the rental income is shown
below.
GENERAL JOURNAL PAGE 65
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20-- Adjusting Entries 1
2 Dec. 31 Unearned Rental Income 4 0 0 00 2
3 Rental Income 4 0 0 00 3
4 4
Prepaid Expenses
A prepaid expense is an expense paid in advance. Examples include
the purchase of office supplies, premiums paid on insurance policies, rent
paid in advance on the use of property or equipment, and bank discounts
on non-interest-bearing notes payable. Examples of adjustments for prepaid
expenses appear in Chapter 18 of this textbook.
Appendix D The Accrual Basis of Accounting A–31
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Reversing Entries
What Are Reversing Entries?
After the financial statements have been prepared and the books are
closed, many accountants find it helpful to reverse some of the adjusting
entries before starting to record routine transactions for the new accounting
period. A reversing entry is an optional general journal entry that is the
exact opposite of a specific adjusting entry. Reversing entries are made on
the first day of the new accounting period and simplify the recordkeeping
in the new period.
We will use the note receivable accrual on page A–27 to see how revers-
ing entries work. But first, we will review it without using reversing entries.
The adjusting entry recorded accrued revenue of $32.05 in 2010 as a debit
to Interest Receivable and a credit to Interest Income:
Interest Receivable Interest Income
Debit Credit Debit Credit
Adj. 32.05 Adj. 32.05
Refer to the general journal entry on page A–28. When Janie paid the
note on March 5, 2011, the total amount of interest received was $110.96.
Since the interest owed was received, the accountant credited Interest
Receivable for $32.05. The remaining interest of $78.91 ($110.96 $32.05)
was recorded as interest income. Notice that the accountant had to allocate
the total interest to Interest Receivable and Interest Income based on the
adjusting entry made in the prior period. These two accounts appear as fol-
lows after posting:
Interest Receivable Interest Income
Debit Credit Debit Credit
Adj. 32.05 3/5 32.05 3/5 78.91
Bal. 0 Bal. 78.91
Now let’s use a reversing entry instead. The adjusting entry is recorded
the same way whether reversing entries are used or not:
GENERAL JOURNAL PAGE 18
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 2010 Adjusting Entries 1
2 Dec. 31 Interest Receivable 3 2 05 2
3 Interest Income 3 2 05 3
4 4
The accountant records the following reversing entry on January 1, 2011.
Note that it is the exact opposite of the December 31 adjusting entry.
A–32 Appendix D The Accrual Basis of Accounting
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GENERAL JOURNAL PAGE 1
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 2011 Reversing Entries 1
2 Jan. 1 Interest Income 3 2 05 2
3 Interest Receivable 3 2 05 3
The accountant writes the words Reversing Entries in the Description
column of the General Journal before recording the first reversing entry.
This heading eliminates the need for an explanation to be written after each
reversing entry. The date of each reversing entry is the first day of the new
accounting period. After recording reversing entries, the accountant posts
them to the general ledger accounts.
The Interest Income account is a temporary account that is closed at
the end of each accounting period. It begins the new period with a zero bal-
ance. After the reversing entry is posted in the new period, Interest Income
has a $32.05 debit balance. This is not the normal balance for this account.
As you recall, income accounts have a normal credit balance. Here are the
accounts after the reversing entry is posted:
Interest Income Interest Receivable
Debit Credit Debit Credit
Rev. 32.05 Adj. 32.05 Rev. 32.05
Bal. 32.05 Bal. 0
When the note is paid, the accountant records it in the normal manner:
GENERAL JOURNAL PAGE 7
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 2011 1
2 Mar. 5 Cash in Bank 5 1 1 0 96 2
3 Notes Receivable 5 0 0 0 00 3
4 Interest Income 1 1 0 96 4
5 Receipt 416 5
Notice that the accountant does not need to allocate the interest between
the receivable and income accounts based on the adjusting entry. Instead,
all interest is credited to Interest Income. Here is Interest Income after
posting:
Interest Income
Debit Credit
Rev. 32.05 3/5 110.96
Bal. 78.91
The Interest Income account balance is $78.91, the same as it would
have been if reversing entries had not been used. The reversing entry simpli-
fies the entry made in the new period to record the note’s interest. Reversing
entries save time and help prevent errors in the new period.
Appendix D The Accrual Basis of Accounting A–33
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A PP EN D I X D Problems
Problem D–1 Identifying Accruals and Deferrals
Instructions Use the form in your working papers that is similar to the
one below. For each item listed below, indicate by placing a check mark
in the correct column whether the item is a prepaid expense, unearned
revenue, an accrued expense, or accrued revenue. The first item has been
completed as an example.
1. Rent received in advance for a two-year rental of a computer.
2. A two-year premium paid on a fire insurance policy.
3. Advance tuition collected by a university.
4. Interest on an interest-bearing note payable due next year.
5. Cash received for a three-year subscription to a magazine.
6. Fees due for the completed designs for three of five buildings.
7. Property taxes incurred for the last three months of the fiscal period.
8. Salaries owed but not yet paid.
9. Interest on an interest-bearing note receivable that matures in the next
accounting period.
10. Office supplies purchased.
11. Cash received for season tickets for home football games.
Prepaid Unearned Accrued Accrued
Item Expense Revenue Expense Revenue
1. ✓
Problem D–2 Recording Adjusting Entries
The Gore Paper Company uses the accrual basis of accounting. Its fiscal
period ends on June 30. The following account balances appear in the
company’s general ledger as of year-end.
Cash in Bank $34,616 Office Supplies Expense $0
Interest Receivable 0 Salaries Expense 75,000
Office Supplies 8,335 Rental Income 0
Salaries Payable 0 Interest Income 0
Unearned Rental Income 1,000
A–34 Appendix D Problems
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Problems APPE NDIX D
Instructions Record the adjusting entries on general journal page 14 in
your working papers.
1. The office supplies on hand as of June 30 are valued at $935.
2. Gore’s 5-day weekly payroll totals $1,500. Salaries have been earned
but not yet paid or recorded for June 28–30.
3. On June 30, 30 days of interest had accrued on an $8,000, 90-day,
9% note receivable from a charge customer.
4. Of the $1,000 recorded in the Unearned Rental Revenue account,
$250 had been earned as of June 30.
Problem D–3 Recording Transactions
for Notes Payable
The Villareal Corporation uses the accrual basis of accounting. Its fiscal
period ends on December 31. On November 15, the Villareal Corporation
borrowed $9,500 from the Second National Bank by issuing a 120-day,
9.5% interest-bearing note payable.
Instructions Record the following transactions on general journal
page 41.
1. The issuance of the note payable (Note 7).
2. The adjusting entry to record the amount of accrued interest payable at
year-end.
3. The payment of the note on the maturity date (Check 411).
Problem D–4 Recording Accrued Expenses
The Cassenada Dance Company uses the accrual basis of accounting.
Located in Seattle, Washington, the company’s fiscal year-end is July 31.
Property taxes are paid in June and December. Total annual property taxes
on the studio and parking lot are $12,000.
Instructions
1. Record the payment made on June 30 for the first six months’ property
tax in the general journal, page 22.
2. Record the adjusting entry necessary at the fiscal year-end, July 31.
Appendix D Problems A–35
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APPENDIX E Federal Personal
Income Tax
In order to become an informed and contributing member of society,
BEFORE
YOU READ every individual should have a basic knowledge of the federal income
tax system. For the system to work fairly and efficiently, everyone must
pay their fair share in an accurate and timely manner.
Main Idea
Every income-earning
individual must file an Creation of the Federal Income
income tax return to report
taxable income and to
Tax System
calculate income tax owed. How Was the Federal Tax System Created?
At its founding in 1776, this country did not have a federal personal
Read to Learn… income tax system. Individual states taxed their residents to raise rev-
➤ how the federal tax
enue for needed expenditures. The first personal income tax was created
system was created.
in 1862 to finance the Civil War. A commission levied taxes on a small
(p. A–36)
percentage of people to generate needed revenue. However, this tax was
➤ the purpose of some
abolished in 1872, soon after the war ended. A federal personal income
common federal tax
tax was again proposed in 1895 but was declared unconstitutional.
forms.(p. A–36)
In 1913 Congress ratified the 16th Amendment to the Constitution
➤ how a federal income
allowing the federal government to levy a tax on individuals based on
tax return is prepared.
personal income. The income tax system was established under the prin-
(p. A–37)
➤ how to file a return ciple of voluntary compliance . This means that all individual taxpay-
online. (p. A–38) ers are responsible for filing their tax return. All taxpayers must report
their taxable income, accurately calculate the income tax owed, and file
Key Terms the necessary forms on time.
voluntary compliance The Internal Revenue Service (IRS) also has responsibilities under
Form W-4 our present tax system. The IRS must administer the tax laws fairly and
Form 1099 process tax returns in an efficient manner.
Form 1040EZ
adjusted gross income
taxable income
Tax Forms and Procedures
e-file What Are Three Common Tax-Related Forms?
For the federal tax system to run efficiently, all income-earning indi-
viduals must prepare and file certain tax forms. For personal income tax,
the earning period is from January 1 through December 31. Every individual
has from January 1 until April 15 each year to file a tax return and pay the
government any taxes owed on income earned in the previous year.
For most taxpayers the most common and largest form of income is the
gross earnings paid to them by employers. Other common forms of taxable
income include interest earned on savings accounts and investments, stock
dividends, rental income, and profits from business operations run as sole
proprietorships or partnerships.
A–36 Appendix E Federal Personal Income Tax
A36-A41_AppE_868829.indd A–36 4/17/06 6:59:29 AM
Federal Withholding Tax Estimation
As you have learned, the employer withholds a certain amount from
each employee’s paycheck for taxes. This system of “pay as you earn” was
enacted during the early 1940s.
Since the exact amount earned for the year will not be determined until
the end of December, the amount of taxes withheld from each employee’s
paycheck is an estimate of the amount the employee will owe at the end of
the year. As you learned in Chapter 12, all employees fill out a Form W-4
when they begin work. This indicates to the employer how much to with-
hold for federal income tax from each paycheck. For more information on
completing Form W-4, refer back to Chapter 12, pages 315–316.
Earned Income
Individual taxpayers receive two common federal forms to report income
for the year. The first is Form W-2. This form is prepared by employers and
reports to employees and the federal government the total gross wages for
the year and the amount withheld from employees’ wages to pay the federal
income tax. This form is given to the employees in the month of January so
the information is available for employees to complete their individual tax
returns. To review the Form W-2, refer to Chapter 13, page 358.
Interest Income
The other common form used to report income is Form 1099 . This
form reports interest earned in savings accounts and is prepared by banks
or other institutions. Interest from all 1099 forms is added together and the
total interest earned for the year is reported on your federal tax return.
The Federal Income Tax Return
What Tax Form Do Most Students File?
The most common tax return prepared by students is Form 1040EZ. AS
YOU READ
Preparing Form 1040EZ Key Point
To file Form 1040EZ , several requirements must be met including:
Completing Your Tax
1. Taxable income from wages and tips must be less than $100,000. Form You must receive
2. Taxable interest cannot be more than $1,500. all of your W-2 and
A completed Form 1040EZ is presented in Figure E–1 on pages A–39 and 1099 forms before you
A–40. To complete this form, follow these steps: complete your tax return.
1. Enter your name, address, and social security number.
2. Check the box on the next line if you want $3 to go to the
Presidential Election Campaign Fund.
3. Add the amount(s) in box 1 of your Form(s) W-2 and put that
amount on line 1 of the form. This should be the total gross
earnings from all of your jobs this year.
4. Add the total interest received, as reported on Form(s) 1099, and
enter the total amount of interest on line 2.
5. Add lines 1 and 2 and put the total on line 4. This is your total
income for the year, called adjusted gross income .
Appendix E Federal Personal Income Tax A–37
A36-A41_AppE_868829.indd A–37 4/17/06 6:59:34 AM
6. Since you are a student, you are probably claimed as a dependent by
your parents or guardians. On line 5, check YES.
7. Go to the worksheet for dependents on the back of the form and
complete A through G. Enter the amount from G on line 5 on the
front of the form.
8. Subtract line 5 from line 4 and enter the amount on line 6. This is
your taxable income , the amount of income that is taxed.
9. Add the amounts in box 2 of your Form(s) W-2 and enter the
amount on line 7. This is the amount already deducted from your
wages to pay your federal tax liability.
10. Enter the amount from line 7 on line 9.
11. Take the amount entered on line 6, and look up the amount of your
actual tax liability on the tax table in your working papers. Enter
this amount on line 10.
12. If line 9 is greater than line 10, then you have paid in more than
you owe and are entitled to a refund. Enter the amount of the
overpayment on line 11a.
13. If line 10 is greater than line 9, then you owe the federal government
more money. Enter the amount you owe on line 12.
If you owe additional money, you must include a check for the entire
amount when you file the tax return. Sign the return and enter the date and
your occupation on the designated lines.
Before your file your tax return, Form 1040EZ, make sure you:
1. Check all calculations.
2. Attach Copy B (one copy) of each of your W-2s, which are supplied
to you by your employer(s).
3. File the return by April 15.
Filing a Tax Return Electronically
How Do I File My Return Online?
Most taxpayers are eligible to file their tax returns online. The Internal
Revenue Service (IRS) offers the e-file option as a quick, easy, and accurate
way to file tax returns. Detailed information about e-file is available on the
IRS Web site.
Paid income tax preparers can use e-file if they are an Authorized IRS
e-file Provider. If you prepare your own tax return, you can use e-file with a
personal computer connected to the Internet. In most states, you can also
file your state return at the same time.
You have several options to prepare and e-file your own tax return:
• purchase commercially available software,
• download software from an Internet site, or
• prepare and file your return online.
The IRS does not provide e-file software or offer online filing. A number
of companies, tested and approved by the IRS, offer it. Some charge a fee
and others do not. The IRS Web site provides additional information. Like
any product or service, you must shop around and choose the product that
is right for you.
A–38 Appendix E Federal Personal Income Tax
A36-A41_AppE_868829.indd A–38 4/17/06 6:59:36 AM
After you transmit your return, you are notified whether it has been
accepted or rejected. If it is not accepted, you are provided with customer
support to correct the return and resubmit it.
If you owe money, you can authorize an electronic funds withdrawal
from your bank account or use a credit card. If you are due to receive a refund,
Department of the Treasury—Internal Revenue Service
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Appendix E Federal Personal Income Tax A–39
A36-A41_AppE_868829.indd A–39 4/17/06 6:59:36 AM
it can be deposited directly into your bank account. Refunds are received
much faster using this system compared to mailing your tax return.
The IRS also offers a service called Tele-Tax. You can call the IRS 24 hours
a day and hear recorded messages on over 150 common tax topics. These
topics can also be accessed on the IRS Web site.
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vÀÊv 20– –. If you were born on January 1, 19– –, you are considered to be age 65 at the end of 20––.
3 You do not claim any dependents. For information on dependents, use TeleTax topic 354
(see page 6).
3 Your taxable income (line 6) is less than $100,000.
3 You do not claim any adjustments to income. For information on adjustments to income, use
TeleTax topics 451-458 (see page 6).
3 The only tax credit you can claim is the earned income credit. For information on credits, use
TeleTax topics 601-608 and 610 (see page 6).
3 You had only wages, salaries, tips, taxable scholarship or fellowship grants, unemployment
compensation, or Alaska Permanent Fund dividends, and your taxable interest was not over
$1,500. But if you earned tips, including allocated tips, that are not included in box 5 and box 7
of your Form W-2, you may not be able to use Form 1040EZ (see page 12). If you are planning
to use Form 1040EZ for a child who received Alaska Permanent Fund dividends, see page 13.
3 You did not receive any advance earned income credit payments.
If you cannot use this form, use TeleTax topic 352 (see page 6).
}Ê If you received a scholarship or fellowship grant or tax-exempt interest income, such as on
ÞÕÀ municipal bonds, see the booklet before filling in the form. Also, see the booklet if you received a
Form 1099-INT showing federal income tax withheld or if federal income tax was withheld from
ÀiÌÕÀ your unemployment compensation or Alaska Permanent Fund dividends.
For tips on how Remember, you must report all wages, salaries, and tips even if you do not get a Form W-2 from
to avoid common your employer. You must also report all your taxable interest, including interest from banks,
mistakes, see
page 20. savings and loans, credit unions, etc., even if you do not get a Form 1099-INT.
7ÀÃ
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vÀ spouse if married filing jointly) as a dependent, even if that person chooses not to do so. To find
out if someone can claim you as a dependent, use TeleTax topic 354 (see page 6).
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If you checked “No” on line 5 because no one can claim you (or your spouse if married filing
jointly) as a dependent, enter on line 5 the amount shown below that applies to you.
3 Single, enter $7,950. This is the total of your standard deduction ($4,850) and your exemption
($3,100).
3 Married filing jointly, enter $15,900. This is the total of your standard deduction ($9,700), your
exemption ($3,100), and your spouse’s exemption ($3,100).
>} Mail your return by April 15, 20– –. Use the envelope that came with your booklet. If you do not
ÀiÌÕÀ have that envelope or if you moved during the year, see the back cover for the address to use.
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A–40 Appendix E Federal Personal Income Tax
A36-A41_AppE_868829.indd A–40 4/17/06 6:59:40 AM
Problems APPE NDIX E
Problem E–1 Preparing Form 1040EZ
Michael Feld is a junior at Lewiston High School. He lives with his parents
at 274 West Polomia Drive in Hanksville, Ohio, 03856. Mike’s social
security number is 036-23-8825. Mike wants to contribute $3 to the
Presidential Election Campaign Fund.
Mike worked full-time last summer at Harriet’s Sub Shop as a counter
clerk. He received a Form W-2, which stated that he had total gross wages of
$6,201.00 and $192.00 was deducted for federal income tax.
Mike also had a savings account. The Kingsman National Bank sent
him Form 1099, which stated he had earned interest of $113.00 on his
account.
Mike lives at home with his parents and is claimed as a dependent on
their tax return.
Instructions Using this information, prepare Form 1040EZ for Mike Feld.
A blank Form 1040EZ is provided in your working papers. Use the tax chart
in your working papers to calculate the federal income tax.
Problem E–2 Preparing Form 1040EZ
Alicia DeSantis is a senior at Georgetown High School. She lives at 825
Patterson Street in Montville, Texas, 09436. Her social security number is
043-73-8217. She worked part-time during the school year at Hilltop Deli
and full-time during the summer as a lifeguard and swimming instructor at
Montville’s town pool.
Alicia wants to contribute $3 to the Presidential Election Campaign
Fund. Alicia lives with her mother and is claimed as a dependent on her
mother’s tax return.
Her Form W-2 from the deli reported that she earned $2,143.60 during
the year and $112.00 was deducted for federal income tax. The town of
Montville sent her a W-2 that reported she earned $4,815.00 during the
summer and $206.00 was deducted for federal income tax.
Alicia opened a savings account at the local bank that sent her a Form
1099 that stated she earned $118.50 in interest last year. She also had
another savings account set up for college that paid her $201.70 in interest.
Instructions Prepare Form 1040EZ for Alicia. A blank Form 1040EZ is
provided in your working papers. Use the tax charts in your working papers
to calculate the tax owed.
Appendix E Problems A–41
A36-A41_AppE_868829.indd A–41 4/17/06 6:59:43 AM
APPENDIX F
Building a Powerful Brand
Excerpts from the PETsMART, Inc. 2003 Annual Report
Intended for Use in Chapters 14–26, 29
In this appendix, we present excerpts from the 2003 Annual Report of
PETsMART, a publicly held corporation. These excerpts were selected to
illustrate many of the concepts discussed in this textbook. Not all of the
terminology and policies appearing in this report are consistent with our text
discussions. This illustrates some of the diversity that exists in financial
reporting. For the complete annual report, visit the PETsMART Web site.
April 26, 2004
Dear Fellow Stockholders:
In 2003, we made strides in our quest to
drive strong, sustainable results, and we set the
foundation for the next phase of our evolution—
building a powerful brand.
For the year, PETsMART earned $0.95 per share,
compared to $0.63 per share in 2002. Topline sales
grew 11.2 percent year over year, and comparable
store sales increased 7.0 percent. Our pet services
business continued to surpass expectations,
growing at 25.4 percent for the year. And, we
generated $246.4 million in cash from operations,
further strengthening our balance sheet and our and further differentiating PETsMART from the
ability to finance new growth initiatives. competition. The format is flexible and gives us
We ended the year with 60 net new stores, giving the ability to easily adapt to an ever-changing
us a presence in nearly all of North America’s top marketplace. In 2004, we’re building on that
60 markets. In 2004, we will open 90 net new format. By the fourth quarter, each of our stores
stores, adding up to annual square footage growth will have new in-store signage that’s designed to
of about 12 percent. improve our communications with customers.
We completed reformats of virtually every store
in the chain, changing the shopping experience in
“Once pet parents discover our services,
ways that matter to our customer, driving returns they do not leave us.”
A–42 Appendix F
A42-A51-APPF-868829.indd 42 9/19/05 6:26:05 PM
And, we’re testing other in-store enhancements to “When it comes to customer
make our stores easier to shop and to build long-
relationships, our associates are our
term relationships with our customers.
Pet services continue to be an engine of profitable
most powerful asset.”
growth and give us the opportunity to create and
enhance our relationships with our customers. When it comes to customer relationships, our
And, once pet parents discover our services, they do associates are our most powerful asset. That’s why
not leave us. Our pet services are three times more we’re continuing to make investments in associate
profitable than the core store and have consistently education. We’ve enhanced our hiring and training
grown at or above our target of 20 percent. We programs to bring in and keep the highest quality
expect these growth rates to continue for at least candidates in our stores. In 2004 and beyond, we’re
the next two years. Our customers trust us, and dedicated to ensuring our associates have the tools
by providing high-quality grooming and training they need to provide our customers with superior
services, we’ve earned the right to move into new service and solutions.
service adjacencies. Over the next two years, we’ll rollout a customer
During the year, we expanded the test of the relationship marketing program to better meet
PETsMART PETsHOTELSM, a unique boarding our customers’ unique needs. These concepts have
and day care concept. We opened six additional the potential to increase business and reinforce
locations inside our larger PETsMART stores and PETsMART’s position as the destination for the
incorporated one hotel into the construction of a Total Lifetime Care for pets.
new store. Based on the results of our small initial In addition to all we’ve accomplished and
test, we believe the PETsHOTEL concept is working all that’s ahead, I’d like to point out the lives
and we’re expanding the test to an additional 14 or saved through PETsMART Charities® Adoption
so hotels in 2004. Centers. Taking care of pets is who we are and
we’re committed to making a difference in the
communities we serve. In 2003, more than 311,000
homeless pets found families through our in-store
adoption centers—and I’m very proud of that.
Our accomplishments in 2003 were many, and
we’re bullish about PETsMART’s ability to build
long-term relationships with our customers—
relationships that translate into continued
profitability and returns for our shareholders.
Sincerely,
Philip L. Francis
Chairman and Chief Executive Officer
Appendix F A–43
A42-A51-APPF-868829.indd 43 9/19/05 6:26:32 PM
Statement of Corporate Responsibility
The management of PETsMART is dedicated to ensuring • PETsMART has a clear code of business ethics
our high standards of corporate governance are and policies.
maintained, including compliance with our established • PETsMART has complaint procedures in place for
financial accounting policies and for reporting our results both associates and others.
with objectivity and the highest degree of integrity. The
culture at PETsMART demands integrity and we have • The internal audit department of PETsMART reviews
the highest confidence in our people and our underlying key areas of our business and financial processes and
systems of internal controls. Management fully embraces controls, and reports directly to the Audit Committee.
and understands its responsibility for the integrity and We are committed to improving stockholder value and
accuracy of our financial statements. fully understand and embrace our oversight responsibilities.
Here we share a few of the various aspects of our It is a PETsMART tenet that investors and other users of
corporate governance: our financial statements have confidence the financial
information we provide is timely, complete, relevant, fair,
• Our Board of Directors has adopted and posted on and accurate. We will continue to strive to strengthen
our Web site our Corporate Governance Guidelines your confidence by our actions.
and related information.
• Eight of the nine members of the Board of Directors
are independent of PETsMART and our management.
• The Lead Director and all members of the board Philip L. Francis
committees—the Audit Committee, the Compensation Chairman and Chief Executive Officer
Committee, and the Corporate Governance
Committee—are independent.
• The independent board members regularly meet without
management present. Timothy E. Kullman
Senior Vice President, Chief Financial Officer
• The charters for these board committees clearly
establish committee member roles and responsibilities.
A–44 Appendix F
A42-A51-APPF-868829.indd 44 9/19/05 6:26:43 PM
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Except for the historical information contained herein, the following discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results could materially differ from those discussed here.
Overview
Based on our 2003 sales of $3.0 billion, we are the leading provider of products, services, and solutions for the lifetime
needs of pets in North America. As of February 1, 2004, we operated 643 retail stores in North America, typically ranging
in size from 19,000 to 27,000 square feet. We also reach customers through our direct marketing channels, including
PETsMART.com, the internet’s most popular pet e-commerce site, a separate web-site dedicated to equine products, and
two major branded catalogs.
We complement our extensive
product assortment with a wide
selection of value-added pet services,
including grooming and pet training.
Virtually all our stores offer complete
pet training services and feature
pet styling salons that provide high
quality grooming services. In addition,
through our strategic relationship
with Banfield, The Pet Hospital, full-
service veterinary care is available in
approximately 350 of our stores.
During 2003, we opened 60 net
new stores, and remodeled the final
group of approximately 145 stores
under a new store format. The new
store format eliminates most of
the high-steel shelving, organizes
consumable and hard good products by
pet species, and also places a stronger
visual emphasis on in-store services
like pet training, grooming, adoptions,
and veterinary care. We continue to
invest in training for our approximately
26,500 associates as part of our on-
going cultural shift with an emphasis
on customer service and providing pet
solutions. In 2004, we expect to open
approximately 90 new stores, net of
store closures.
Fiscal 2003 Compared to Fiscal 2002
Net Sales
Net sales increased $300.9 million, or 11.2%, to $2,996.1 million for 2003, from 2002 sales of $2,695.2 million. Store
sales increased by $310.6 million as a result of 60 additional net new stores and a 7.0% increase in comparable store sales.
Included in store sale, services sales increased by 25.4%, or $39.2 million. The increase in services revenue, which includes
grooming, training, and PETsHOTEL operations, was due primarily to higher volume. The increases were partially offset
by a decrease in direct marketing channel sales of $9.7 million. As of February 1, 2004, we operated 643 stores, compared
with 583 stores as of February 2, 2003.
Gross Profit
Gross profit increased as a percentage of net sales to 30.4% for 2003, from 29.2% for 2002. The increase primarily
reflected lower product cost of goods sold and increased sales of higher margin products during 2003, compared with 2002.
We also continued to leverage expenses in 2003 through lower inventory shrinkage and occupancy costs as a percentage of
sales, compared with 2002.
Appendix F A–45
A42-A51-APPF-868829.indd 45 9/19/05 6:26:45 PM
PETsMART, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 1, February 2,
2004 2003
(In thousands,
except par value)
ASSETS
Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 327,810 $ 253,936
Receivables, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,628 9,657
Merchandise inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 309,140 257,090
Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,876 8,809
Prepaid expenses and other current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,198 31,656
Total current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 687,652 561,148
Property and equipment, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 577,182 489,947
Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33,694 33,694
Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 47,463 46,061
Goodwill, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,422 14,422
Intangible assets, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,621 2,838
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,661 10,746
Total assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,376,695 $1,158,856
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and bank overdraft ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 128,303 $ 102,169
Accrued payroll, bonus, and employee beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 73,058 70,256
Accrued occupancy expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27,971 24,285
Current maturities of capital lease obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,964 7,564
Other current liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 105,518 84,190
Total current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 339,814 288,464
Capital lease obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 165,738 159,443
Deferred rents and other noncurrent liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,988 29,750
Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 537,540 477,657
Commitments and contingencies Stockholders' Equity:
Preferred stock; $.0001 par value; 10,000 shares authorized, none issued and
outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì
Common stock; $.0001 par value; 250,000 shares authorized, 144,813 and
139,914 shares issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14 14
Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 705,265 642,767
Deferred compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6,658) (19)
Retained earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 174,053 40,239
Accumulated other comprehensive income (loss)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,458 (1,802)
Less: treasury stock, at cost, 1,406 and 0 shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (34,977) Ì
Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 839,155 681,199
Total liabilities and stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,376,695 $1,158,856
The accompanying notes are an integral part of these consolidated Ñnancial statements.
[Note to the student: For the complete accompanying notes, refer to the 2003 Annual Report on the PETsMART Web site.]
uity
+ Stockholders’ Eq
Assets = Liabilities
+ $839,155
6,695 = $537,540
Feb. 1, 2004: $1,37
A–46 Appendix F
A42-A51-APPF-868829.indd 46 9/19/05 6:26:48 PM
PETsMART, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended
February 1, February 2, February 3,
2004 2003 2002
(In thousands, except per share data)
Net salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,996,051 $2,695,184 $2,501,012
Cost of sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,086,117 1,907,144 1,827,527
Gross proÑtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 909,934 788,040 673,485
Operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 551,388 498,343 483,657
General and administrative expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 114,618 117,851 119,156
Operating income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 243,928 171,846 70,672
Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,358 2,803 2,007
Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (19,454) (20,836) (27,436)
Income before income tax expense, and minority interest ÏÏÏÏÏÏÏÏÏÏ 227,832 153,813 45,243
Income tax expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 88,283 64,958 7,972
Income before minority interestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 139,549 88,855 37,271
Minority interest in subsidiary loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 2,296
Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 139,549 88,855 39,567
Other comprehensive income (loss), net of income tax expense
(beneÑt):
Foreign currency translation adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,260 1,003 (357)
Comprehensive income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 142,809 $ 89,858 $ 39,210
Basic earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 0.99 $ 0.66 $ 0.35
Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 0.95 $ 0.63 $ 0.35
The accompanying notes are an integral part of these consolidated Ñnancial statements.
[Note to the student: For the complete accompanying notes, refer to the 2003 Annual Report on the PETsMART Web site.]
Statement of Operations
• Net sales. Total sales of the com
pany minus the value of products
• Cost of sales. Actual cost the bus discounted or returned.
iness incurred for the merchandise
to customers during the accounting sold and services provided
period.
• Gross profit. Net sales minus cost
of sales.
• Operating expenses.
• General and administrative exp
enses.
• Operating income. Income earn
ed from normal business activities.
• Income tax expense. Federal and
state income taxes based on the com
• Minority interest in subsidiary pany’s taxable income.
loss. This refers to the loss from PET
PETsMART products through its Web sMART.com, which sells
site. In the fiscal year ending Februar
owned less than 100 percent of PET y 3, 2002, PETsMART
sMART.com’s stock.
• Net income. The “bottom line,”
or final income after taxes and min
• Foreign currency translation adju ority interest.
stments. PETsMART has stores that
This line reports the adjustments to use Canadian currency.
convert Canadian financial stateme
• Comprehensive income. Compreh nts into U.S. dollars.
ensive income includes items that
but report separately from net inco bus ines ses must disclose
me. PETsMART’s only comprehens
foreign currency translation adjustm ive income item is the
ents.
Appendix F A–47
A42-A51-APPF-868829.indd 47 9/19/05 6:26:48 PM
PETsMART, INC. AND SUBSIDIARIES
A–48
CONSOLIDATED
CONSOLIDATEDSTATEMENTS
STATEMENTS OF STOCKHOLDERS' EQUITY
OF STOCKHOLDERS’ EQUITY
Accumulated
A42-A51-APPF-868829.indd 48
Retained Other Notes
Shares Additional Deferred Earnings/ Comprehensive Receivable
Common Treasury Common Paid-In Compen- (Accumulate Income from Treasury
Stock Stock Stock Capital sation DeÑcit) (Loss) OÇcers Stock Total
Appendix F
Amounts (In thousands, except per share data)
BALANCE AT JANUARY 28, 2001 ÏÏÏÏÏÏ 117,753 (6,350) 12 403,758 (663) (88,183) (2,448) (4,319) (27,578) 280,579
Tax beneÑt from exercise of stock options ÏÏÏ 172 172
Issuance of common stock under stock
incentive plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,231 5,909 5,909
Amortization of deferred compensation, net of
award reacquisitions and adjustments ÏÏÏÏÏ (25) (263) 367 104
Other comprehensive loss, net of income tax:
Foreign currency translation adjustments ÏÏ (357) (357)
Accrued interest on notes receivable issued to
oÇcers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (511) (511)
Repayments of notes receivable issued to
oÇcers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 343 343
Retirement of treasury stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6,350) 6,350 (1) (27,577) 27,578 Ì
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 39,567 39,567
BALANCE AT FEBRUARY 3, 2002 ÏÏÏÏÏÏ 112,609 Ì 11 381,999 (296) (48,616) (2,805) (4,487) Ì 325,806
Tax beneÑt from exercise of stock options ÏÏÏ 14,112 14,112
Issuance of common stock under stock
incentive plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,037 1 27,188 27,189
Issuance of common stock under an oÅering 3,492 43,925 43,925
Conversion of 63/4% Subordinated Convertible
Notes to common stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19,797 2 174,730 174,732
Amortization of deferred compensation, net of
award reacquisitions and adjustments ÏÏÏÏÏ (21) (351) 277 (74)
Compensation expense related to options held
by non-employeesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,164 1,164
Other comprehensive income, net of income
tax:
Foreign currency translation adjustments ÏÏ 1,003 1,003
Accrued interest on notes receivable issued to
oÇcers and notes issued to oÇcers ÏÏÏÏÏÏÏ (717) (717)
Repayments of notes receivable issued to
oÇcers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,204 5,204
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 88,855 88,855
9/19/05 6:26:49 PM
PETsMART, INC. AND SUBSIDIARIES
A42-A51-APPF-868829.indd 49
CONSOLIDATED
CONSOLIDATEDSTATEMENTS
STATEMENTS OF STOCKHOLDERS' EQUITY
OF STOCKHOLDERS’ EQUITY (continued)
Accumulated
Retained Other Notes
Shares Additional Deferred Earnings/ Comprehensive Receivable
Common Treasury Common Paid-In Compen- (Accumulate Income from Treasury
Stock Stock Stock Capital sation DeÑcit) (Loss) OÇcers Stock Total
Amounts (In thousands, except per share data)
BALANCE AT FEBRUARY 2, 2003 ÏÏÏÏÏÏ 139,914 Ì 14 642,767 (19) 40,239 (1,802) Ì Ì 681,199
Tax beneÑt from exercise of stock options ÏÏÏ 17,743 17,743
Issuance of common stock under stock
incentive plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,344 36,007 36,007
Amortization of deferred compensation, net of
award reacquisitions and adjustments ÏÏÏÏÏ 555 8,748 (6,639) 2,109
Cash Dividends ($0.02 per share) ÏÏÏÏÏÏÏÏÏÏ (5,735) (5,735)
Other comprehensive income, net of income
tax:
Foreign currency translation adjustments ÏÏ 3,260 3,260
Purchase of treasury stock, at cost ÏÏÏÏÏÏÏÏÏÏ (1,406) (34,977) (34,977)
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 139,549 139,549
BALANCE AT FEBRUARY 1, 2004 ÏÏÏÏÏÏ 144,813 (1,406) $14 $705,265 $(6,658) $174,053 $ 1,458 $ Ì $(34,977) $839,155
The accompanying notes are an integral part of these consolidated Ñnancial statements.
[Note to the student: For the complete accompanying notes, refer to the 2003 Annual Report on the PETsMART Web site.]
uity pany.
Stockholders’ Eq e of the owners’
stake in the com
book valu al and
This is called the e co m pa ny re ce ived from the initi
ds that th its,
It includes procee accumulated prof
sales of stoc k to the public, plus
subsequent
rnings. ic stock
called retained ea k’s value on the publ
e as th e stoc its own
t the sam ar ket determines in
Book value is no e. The st ock m
arket valu e of
market, called m an the book valu
er th e co m pa ny is worth more th m pany ’s st ock
ways wheth t it ow es . For ex ample, a co
sets and
Appendix F
us wha the value of the as
what it owns min ith ou t re ga rd to
larly w
price changes regu .
us es to run the company
liabilities it
A–49
9/19/05 6:26:50 PM
PETsMART, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended
February 1, February 2, February 3,
2004 2003 2002
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 139,549 $ 88,855 $ 39,567
Adjustments to reconcile net income to net cash provided by
operating activities Ì
Depreciation and amortizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 95,948 77,268 58,709
Loss on disposal of property and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,655 4,377 5,796
Elimination of goodwill in PETsMART.comÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 8,575
Impairment charge and write-down of subsidiary assets ÏÏÏÏÏÏ Ì Ì 9,747
Minority interest in subsidiary ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (2,296)
Capital assets received through vendor settlement ÏÏÏÏÏÏÏÏÏÏÏ (1,288) (3,442) Ì
Gain on early extinguishment of debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (1,190)
Compensation expense related to non-employee options ÏÏÏÏÏÏ Ì 1,164 Ì
Tax beneÑt from exercise of stock optionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,743 14,112 172
Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,532 (15,941) (26,556)
Changes in assets and liabilities:
Receivables, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6,646) 13,654 13,525
Merchandise inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (50,504) 14,609 48,651
Prepaid expenses and other current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,021 (2,250) (12,134)
Other noncurrent assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,977) 1,844 (242)
Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,400 5,299 (37,651)
Accrued payroll, bonus, and employee beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,858 18,433 26,251
Accrued occupancy expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,723 (2,584) 6,643
Other current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,305 7,052 48,397
Deferred rents and other noncurrent liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,114 320 4,030
Net cash provided by operating activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 246,433 222,770 189,994
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (172,227) (163,698) (105,104)
Investment in equity holdings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (9,500) (741)
Proceeds from sales of property and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 315 674 28,481
Net cash used in investing activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (171,912) (172,524) (77,364)
Statement of Cash Flows ence between
se. Thi s fin an cia l sta tement explains the differ
Pu rpo h during the
com pa ny’ s be gin nin g and ending balances of cas
the
accounting period.
h and cash
h flows includes both cas
Definition. The term cas uid investments with a
ale nts. PE TsM AR T con siders any liq
eq uiv nts.
or less to be cash equivale
maturity of three months
irect method to
Co mp an ies can use either the direct or ind
Me tho d. ults are the same.
cas h flo ws fro m op erating activities. The res
rep ort starts with net
T use s the ind ire ct method. This method
PE TsM AR tion) to arrive at
om e an d ad jus ts no nca sh items (such as deprecia
inc .
ed by operating activities
the net cash flows provid
h payments from
direct me tho d rep ort s all cash receipts and cas
The
operating activities.
A–50 Appendix F
A42-A51-APPF-868829.indd 50 9/19/05 6:26:51 PM
PETsMART, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Fiscal Year Ended
February 1, February 2, February 3,
2004 2003 2002
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36,007 71,114 5,909
Net repayments (issuances) of notes receivable from oÇcersÏÏÏÏ Ì 4,487 (168)
Purchase of treasury stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (34,977) Ì Ì
Borrowings from bank credit facilityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 171,200
Repayments of bank credit facility ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (171,200)
Purchases of subordinated convertible notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (275) (6,382)
Payments on capital lease obligationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (7,892) (12,304) (12,733)
Increase (decrease) in bank overdraft ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,716 3,397 (3,806)
Payments of deferred Ñnancing fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (464) Ì (2,280)
Cash dividends paid to stockholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,871) Ì Ì
Net cash (used in) provided by Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏÏ (481) 66,419 (19,460)
EFFECT OF EXCHANGE RATE CHANGES ON CASH ÏÏÏÏÏ (166) 160 114
INCREASE IN CASH AND CASH EQUIVALENTSÏÏÏÏÏÏÏÏÏ 73,874 116,825 93,284
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 253,936 137,111 43,827
CASH AND CASH EQUIVALENTS AT END OF YEARÏÏÏÏÏ $ 327,810 $ 253,936 $ 137,111
The accompanying notes are an integral part of these consolidated Ñnancial statements.
[Note to the student: For the complete accompanying notes, refer to the 2003 Annual Report on the PETsMART Web site.]
ting Activities.
Cash Flows from Opera
d events that are the
Include transactions an
operations.
result of actual business
ing Activities
Cash Flows from Invest
an d events that involve
Include transactions
nt assets except
plant assets and investme
uivalents.
those classified as cash eq
g Activities
Cash Flows from Financin
and eve nts that affect
Include transactions
d stockh olders’
long-term liabilities an
equity accounts.
Appendix F A–51
A42-A51-APPF-868829.indd 51 9/19/05 6:26:52 PM
APPENDIX G Additional Reinforcement
Problems
Complete appendix problems using: Manual Glencoe Spreadsheet
Spreadshee
OR
Working Papers Templates
SPREADSHEET
SMART GUIDE
Chapter 3, Determining the Effects of
Step–by–Step Instructions:
Problem 3A Business Transactions on the
Problem 3A Accounting Equation
1. Select the spreadsheet Pamela Wong started her own business called Thunder Graphics Desktop
template for Problem Publishing.
3A.
2. Enter your name and Instructions Use the form provided in your working papers. For each of the
the date in the spaces following transactions:
provided on the 1. Identify the accounts affected.
template. 2. Write the amount of the increase () or decrease () in the space provided on
3. Complete the spread-
sheet using the the form.
instructions in your 3. Determine the new balance for each account.
working papers. Trans. No. Transactions
4. Print the spreadsheet
and proof your work. 1 Pamela Wong, the owner, opened a checking account for the business
5. Complete the Analyze by depositing $48,000 of her personal funds.
activity.
2 Paid the monthly rent of $1,500.
6. Save your work and
exit the spreadsheet 3 Bought office furniture on account for $1,000.
program. 4 Pamela Wong invested $3,000 of office equipment in the business.
5 Paid cash for a new computer for the business, $5,000.
6 Paid for an advertisement in the local newspaper, $200.
7 Completed graphic desktop publishing services for a client and sent a
bill for $800.
8 Paid $700 on account for the office furniture bought earlier.
9 Received $500 on account from a client.
10 Pamela Wong withdrew $1,000 for personal use.
11 Received $400 cash for desktop publishing services completed for
a client.
Analyze After analyzing all of the transactions, complete the following tasks.
(a) Compute the amount of total equipment assets.
(b) Compute the amount of total assets.
(c) Compute the total liabilities and owner’s equity.
(d) Conclude whether the accounting equation is in balance.
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Problems APPE NDIX G
Chapter 4, Analyzing Transactions Affecting
Problem 4A Assets, Liabilities, and
Owner’s Equity
Thunder Graphics Desktop Publishing had the following transactions. A partial list
of the accounts used to record and report business transactions appear below.
101 Cash in Bank 201 Accounts Payable—
110 Accounts Receivable— Computer Warehouse, Inc.
Roger McFall 205 Accounts Payable—
125 Office Equipment Pro Computer Company
130 Office Furniture 301 Pamela Wong, Capital
135 Computer Equipment
Instructions On the forms provided in your working papers:
1. Prepare a T account for each account listed above.
2. Analyze and record each of the following business transactions in the
appropriate T accounts. Identify each transaction by number.
3. After recording all transactions, compute and record the account balance and
identify the normal side of each T account.
4. Add the balances of those accounts with normal debit balances.
5. Add the balances of those accounts with normal credit balances.
Trans. No. Transactions
1 Pamela Wong invested $30,000 into the business.
2 Invested office equipment, valued at $650, into the business.
3 Bought a computer on account from Computer Warehouse, Inc.
for $9,360.
4 Bought new office equipment for $1,550, Check 100.
5 Bought new office furniture on account from Computer Warehouse,
Inc. for $1,250.
6 Sold the older office equipment on account to Roger McFall for $650.
7 Paid $3,000 on account to Computer Warehouse Inc., Check 101.
8 Received $400 on account from Roger McFall.
9 Paid $3,500 on account to Computer Warehouse Inc., Check 102.
10 Bought computer on account from Pro Computer Company for $775.
Analyze Appraise whether the accounting equation is in balance.
Chapter 5, Analyzing Transactions Affecting
Problem 5A Revenue, Expenses, and Withdrawals
Pamela Wong owns and operates Thunder Graphics Desktop Publishing.
A partial list of the chart of accounts appears in your working papers.
Instructions On the forms provided in your working papers:
1. Prepare a T account for each account listed.
2. Analyze and record each of the following business transactions in the
appropriate T accounts. Identify each transaction by number.
3. After recording all transactions, compute a balance for each account.
4. Test for the equality of debits and credits.
CONTINUE
Appendix G Additional Reinforcement Problems A–53
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A PP EN D I X G Problems
Trans. No. Transactions
1 Pamela Wong invested $25,000 in the business.
2 Bought a new computer on account from Computer Warehouse, Inc.
for $1,400.
3 Ms. Wong invested office equipment, valued at $650, in the business.
4 Paid the rent for the month, $750, Check 207.
5 Wrote Check 208 for $145 for minor repairs to the equipment.
6 Completed graphics design work on account for Adams, Bell, and Cox,
Inc., $850.
7 Paid the $175 utility bill, Check 209.
8 Deposited the daily design receipts in the bank, $1,200.
9 Sent Check 210 for $700 to Computer Warehouse, Inc. as payment
on account.
10 Received $425 from Adams, Bell, and Cox, Inc.
11 Ms. Wong withdrew $150 for personal needs.
12 Paid the $85 telephone bill, Check 211.
Analyze Calculate the total expenses the business recorded in the above
transactions.
Chapter 6, Recording General
Problem 6A Journal Transactions
Instructions On the form provided in your working papers, record the following
transactions for the month of January on page 7 of the general journal for Thunder
Graphics Desktop Publishing.
Date Transactions
Jan. 1 Received $900 for completion of design work for Designers Boutique,
Receipt 545.
3 Purchased a desk, chairs, and table valued at $2,400 from Computer
Warehouse, Inc. Made a down payment of $400 and agreed to pay the
balance within 60 days, Check 801/Invoice CW402.
7 Ran a $300 special feature ad in Solutions Software’s monthly
magazine on account, Invoice SS60.
10 Completed a $3,500 print production job for Adams, Bell, and Cox,
Inc. Received a down payment of $500 and agreed to receive the
balance within 30 days, Receipt 546/ Invoice TG90.
15 Pamela Wong withdrew $1,500 from the business for personal use,
Check 802.
17 Paid a carpenter $175 to install a new office door, Check 803.
20 Purchased a $4,000 computer system from Pro Computer Company
on account, Invoice 783.
27 Paid Computer Warehouse, Inc. $1,000 to apply on our account,
Check 804.
29 Wrote Check 805 for $300 to Solutions Software in payment of an ad
purchased on July 7.
31 Pamela Wong invested a $200 file cabinet in the business, Memo 40.
Analyze Calculate the total cash the business received during January.
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Problems APPE NDIX G
Chapter 7, Journalizing and
Problem 7A Posting Transactions
The balances in the general ledger accounts of Thunder Graphics are shown below.
101 Cash in Bank $ 10,000
110 Accounts Receivable—Roger McFall —
125 Office Equipment 2,500
135 Computer Equipment 3,000
201 Accts. Pay.—Computer Warehouse, Inc. —
301 Pamela Wong, Capital 8,000
302 Pamela Wong, Withdrawals 4,000
401 Design Revenue 9,000
405 Print Production Revenue 4,000
505 Maintenance Expense 1,200
510 Miscellaneous Expense 300
Instructions On the forms provided in your working papers:
1. Open the accounts in the general ledger with their beginning balances as of
March 1 of the current year.
2. Record March transactions on page 15 of the general journal.
3. Post each journal entry to the appropriate accounts in the ledger.
4. Prove the ledger by preparing a trial balance.
Date Transactions
Mar. 1 Pamela Wong invested additional assets in the business: cash, $3,000,
and office equipment, $500, Memorandum 75.
5 Paid $600 to Premier Painters for painting the office, Check 912.
7 Discovered that $1,500 in design revenue was incorrectly journalized
and posted to the Print Production Revenue account last month,
Memorandum 76.
9 Purchased $3,600 computer system from Computer Warehouse, Inc.
on account, Invoice CW204.
12 Deposited $4,000 into the checking account. $3,000 was earned from
design revenue and $1,000 from print production revenue, Receipts
300–310.
15 Completed print production for Roger McFall. Sent him a bill for
$600, Invoice TG601.
20 Discovered that $50 in miscellaneous expense was incorrectly
journalized and posted to the Maintenance Expense account,
Memorandum 77.
25 Pamela Wong withdrew $2,000 from the business, Check 913.
28 Received $300 from Roger McFall to apply to his account, Receipt 311.
31 Issued Check 914 for $1,800 to Computer Warehouse, Inc. to apply on
our account.
Analyze Compute the change in the cash account for March.
Appendix G Additional Reinforcement Problems A–55
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A PP EN D I X G Problems
Chapter 8, Preparing a Six-Column
Problem 8A Work Sheet
The final balances in the general ledger of Thunder Graphics Desktop Publishing at
the end of May are listed below.
101 Cash in Bank $16,095
105 Accts. Rec.—Adams, Bell, and Cox Inc. 1,729
110 Accts. Rec.—Roger McFall 281
113 Accts. Rec.—Designers Boutique —
115 Accts. Rec.—Pat Cooper 714
120 Office Supplies 228
125 Office Equipment 5,027
130 Office Furniture 2,940
135 Computer Equipment 8,200
201 Accts. Pay.—Computer Warehouse, Inc. 4,027
205 Accts. Pay.—Pro Computer Company 2,441
207 Accts. Pay.—Solutions Software —
301 Pamela Wong, Capital 24,927
305 Pamela Wong, Withdrawals 2,400
310 Income Summary —
401 Design Revenue 8,116
405 Print Production Revenue 4,050
501 Advertising Expense 735
505 Maintenance Expense 1,335
510 Miscellaneous Expense 285
520 Rent Expense 3,100
530 Utilities Expense 492
Instructions Use the form in your working papers to prepare a work sheet for the
month ended May 30.
Analyze Identify the net income or net loss for the month of May, and
explain its effect on the Pamela Wong, Capital account.
Chapter 9, Interpreting Financial Information
Problem 9A
You are applying for a job with Thunder Graphics Desktop Publishing. The job
includes preparing financial statements. In order to determine your ability to do
the job, the owner, Pamela Wong, has given you the following information. At the
beginning of the last fiscal period, the Pamela Wong, Capital account had a
balance of $46,295. At the end of the period, the account showed a balance of
$49,152. During the period, Ms. Wong made an additional investment of $2,000
and had withdrawals of $600. The revenue for the period was $12,948.
Analyze Use the form provided in your working papers to compute the total
expenses for the period.
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Problems APPE NDIX G
Chapter 10, Preparing Closing Entries
Problem 10A
The work sheet of Thunder Graphics Desktop Publishing for the year ended
December 31 is presented in your working papers.
Instructions Using the information in the work sheet, prepare the four journal
entries to close the temporary capital accounts. Use general journal page 21
provided in your working papers.
Analyze Compute the balance in the Pamela Wong, Capital account after
the closing entries.
Chapter 11, Recording Deposits in
Problem 11A the Checkbook
On October 20, Pamela Wong, owner of Thunder Graphics Desktop Publishing,
deposited the following in the checking account of the business.
Cash: $800
Checks: Boyden Company; drawn on National Bank of Commerce;
Monroe; ABA No 45-1204; $50.29.
Gail’s Supplies; drawn on Regent Bank; Rayville; ABA No 49-3401;
$255.48.
Clinton Co.; drawn on Sun Federal Savings and Loan; Bastrop;
ABA No 52-6429; $788.40.
On October 21, Pamela Wong received the electricity bill from Central Utilities
for $314.69 for September 17 to October 18 service.
The October bank statement for Thunder Graphics listed a bank service charge
of $21.80, dated October 23.
Instructions On the forms provided in your working papers:
1. Complete a deposit slip using the October 20 information.
2. Record the deposit on check stub 1068 using $2,468.14 as the balance brought
forward.
3. Complete check stub 1068 and prepare Check 1068 to Central Utilities. Use
October 22 as the date and sign your name as drawer.
4. Record this service charge in the checkbook on check stub 1069.
5. Journalize the entry for the bank service charge in the general journal. Use
October 25 as the date.
6. Answer the following questions.
a. What was the amount carried forward from check stub 1067?
b. What was the checkbook balance before writing Check 1068?
c. What was the total amount deposited on October 20?
d. Identify the payee of Check 1068.
e. What was the balance brought forward on check stub 1069?
Analyze Assess the effect on net income if the bank service charge was not
journalized.
Appendix G Additional Reinforcement Problems A–57
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A PP EN D I X G Problems
Chapter 12, Preparing a Payroll Register
Problem 12A
Thunder Graphics Desktop Publishing has four employees. They are paid on a
weekly basis with overtime paid for all hours worked over 40. The overtime rate is
1½ times the regular hourly rate of pay. The names of the employees and other
information needed to prepare the payroll are as follows.
Employee No. Employee Status Exemptions Rate/Hour Union
173 Don Hoffman M 1 $6.95 No
168 Manual Gongas S 0 7.10 Yes
167 Riley Sullivan M 2 7.40 Yes
175 Marcy Jackson S 1 6.95 Yes
During the week ended Oct. 15, Gongas worked 41 hours, Sullivan worked 39¼
hours, Jackson worked 42½ hours, and Hoffman worked 38¾ hours.
Instructions On the form provided in your working papers:
1. Prepare a payroll register. The date of payment is October 15. List employees in
alphabetical order by last name.
a. Compute FICA taxes at 6.2% for social security and 1.45% for Medicare.
b. Use the tax table in Chapter 12 to determine federal income taxes. The
state income tax is 1.5% of gross earnings.
c. All employees have a deduction for hospital insurance that is $4.75 for
single employees and $7.85 for married employees.
d. Union members pay weekly dues of $3.25.
2. After the payroll information is entered in the payroll register, total the
columns and check the accuracy of the totals.
Analyze Identify the employee with the highest gross pay and the employee
with the highest net pay.
Chapter 13, Recording Payroll Transactions
Problem 13A
Thunder Graphics Desktop Publishing pays its employees each week. The payroll
register for the week ended December 17 is shown in your working papers.
Instructions On the general journal form provided in your working papers:
1. Record the December 17 payment of the payroll on page 34, Check 831.
2. Compute the employer’s payroll taxes (FICA tax rates, 6.2% social security,
1.45% Medicare; state unemployment tax rate, 5.4%; federal unemployment tax
rate, 0.8%).
3. Record the journal entry for the employer’s payroll taxes.
4. Record the payment of all FICA and employees’ federal income taxes, Check
832. The previous account balances were: Employees’ Federal Income Tax
Payable, $189, Social Security Tax Payable, $191.48, and Medicare Tax
Payable, $44.92.
5. Record the income tax payment to the state, Check 833. The balance in the
Employees’ State Income Tax Payable account before the December 17
payroll was $178.40.
Analyze Calculate the company’s total FICA liability for the week ended
December 17.
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Problems APPE NDIX G
Chapter 14, Recording and Posting Sales and
Problem 14A Cash Receipt Transactions
On January 1, T-Shirt Trends, a merchandising business, had the following
balances in its general ledger and accounts receivable subsidiary ledger.
General Ledger
101 Cash In Bank $ 7,500
115 Accounts Receivable 10,920
215 Sales Tax Payable 1,500
401 Sales 18,620
405 Sales Discounts 1,400
410 Sales Returns and Allowances 300
Accounts Receivable Subsidiary Ledger
MOR Morales, Gabriela $ 420
ROU Roundabout Fashions 3,150
SAM Samstead Fashions 5,250
SAN Sandpiper Sports Club 2,100
Instructions On the forms provided in your working papers:
1. Open the general ledger accounts and record the January 1 balances.
2. Open the customer accounts in the accounts receivable subsidiary ledger and
record the January 1 balances.
3. Record the January transactions. Use page 12 in the general journal.
4. Post the transactions to the general ledger and accounts receivable subsidiary
ledger accounts.
Date Transactions
Jan. 1 Received a check for $3,087 from Roundabout Fashions payment of
their $3,150 account less a 2% cash discount of $63, Receipt 82.
4 Gabriela Morales notified us that $40 in T-shirts were defective. Issued
Credit Memorandum 20 for $42, which includes a 5% sales tax of $2.
9 Sold $1,000 in merchandise plus a sales tax of $50 to Roundabout
Fashions on account, Sales Slip 90.
15 Sandpiper Sports Club sent us a check in payment of their $2,100
account less a 2% cash discount, Receipt 83.
17 Granted Samstead Fashions $252 credit for the return of $240 in
merchandise plus a $12 sales tax, Credit Memorandum 21.
20 Received a check from Roundabout Fashions in payment of their
$1050 account balance less a cash discount of $21, Receipt 84.
25 Samstead Fashions sent us a check for $2,000 to apply on their
account, Receipt 85.
31 Cash sales for the month were $5,000 plus $250 in sales tax, Tape 44.
31 Bankcard transactions for the month were $6,000 plus $300 in sales
tax, Tape 44.
Analyze Break down January’s sales into cash sales (including bankcard)
and sales on account.
Appendix G Additional Reinforcement Problems A–59
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A PP EN D I X G Problems
Chapter 15, Recording Purchases and Cash
Problem 15A Payment Transactions
Business transactions for the month of March for T-Shirt Trends are presented
below. A partial general ledger appears in your working papers.
Instructions On the form provided in your working papers, record March
transactions on page 11 of the general journal.
Date Transactions
Mar. 2 Issued Check 5500 for $6,790 to Dancing Wind Clothing
Manufacturers in payment of their $7,000 invoice less a 3% cash
discount.
4 Purchased $2,800 in merchandise on account from Wilmington Shirt
Factory, Invoice WSF123, terms 2/10, n/30.
6 Wrote Check 5501 for $180 to Mario’s Trucking for delivery of
merchandise shipped from Wilmington Shirt Factory, FOB shipping
point.
8 Received a credit allowance of $300 from Wilmington Shirt Factory for
damaged merchandise, issued Debit Memo 44.
10 Received a premium notice from Keystone Insurance Company for
$3,400, issued Check 5502.
12 Bought $175 in supplies from Carter Office Supply on account,
Invoice 97, terms n/30.
14 Paid Wilmington Shirt Factory the $2,500 balance owed less a 2% cash
discount, Check 5503.
19 Returned $50 in supplies to Carter Office Supply, issued Debit
Memorandum 45.
25 Paid employees gross earnings of $4,000. Rates for taxes withheld are:
Employees’ Federal Income Tax, 15%; State Income Tax, 6%; Social
Security Tax, 6.2%; and Medicare Tax, 1.45%. Issued Check 5504 for
the net amount.
30 Wrote Check 5505 to Carter Office Supply for the amount due on
our account.
Analyze Determine the number of postings to the accounts payable
subsidiary ledger based on the transactions provided.
Chapter 16, Recording and Posting Sales,
Problem 16A Cash Receipts, and General
Journal Transactions
T-Shirt Trends, a retail merchandising store, uses special journals for recording its
business transactions. On May 1, the store had the following balances in its general
ledger and accounts receivable subsidiary ledger accounts.
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General Ledger
101 Cash in Bank $ 4,700
115 Accounts Receivable 7,250
135 Supplies 300
215 Sales Tax Payable 600
401 Sales 40,000
405 Sales Discounts 1,500
410 Sales Returns and Allowances 500
Accounts Receivable Subsidiary Ledger
HAL Hal’s Fitness Studios $ 1,500
HIO Dave Hioki 200
MOR Gabriela Morales 100
ROU Roundabout Fashions 2,000
SAM Samstead Fashions 2,500
SAN Sandpiper Sports Club 900
WIL Virginia Williams 50
Instructions On the forms provided in your working papers:
1. Open the accounts and enter beginning balances in T-Shirt Trends’ general
ledger.
2. Open the customer accounts in the accounts receivable subsidiary ledger and
record the beginning balances.
3. Record the following transactions in the sales journal (page 9), the cash
receipts journal (page 10), and the general journal (page 2).
4. Post to the customer accounts daily from the journals.
5. Post the entries in the General Credit column of the cash receipts journal daily.
6. Post general journal entries daily.
7. Foot, prove, total, and rule the sales and cash receipts journals.
8. Post the column totals from the special journals.
9. Prepare a schedule of accounts receivable.
Date Transactions
May 1 Received a check for $50 from Virginia Williams in payment of her
account, Receipt 202.
3 Sandpiper Sports Club sent a check for $882 in payment of their $900
account less 2% cash discount, Receipt 203.
5 Sold Virginia Williams $300 in merchandise plus 5% sales tax of $15,
Sales Slip 404.
7 Received a check for $1,470 from Hal’s Fitness Studios in payment of
their $1,500 account balance less 2% cash discount, Receipt 204.
9 Virginia Williams returned $100 in merchandise plus sales tax of $5,
issued Credit Memo 50.
11 Sold $700 in merchandise on account to Sandpiper Sports Club plus
sales tax of $35, terms, 2/10, n/30, Sales Slip 405.
13 Dave Hioki sent a check for $100 to apply on his account, Receipt 205.
14 Received $25 from the sale of supplies to Hanson’s Market,
Receipt 206.
15 Cash sales amounted to $2,000 plus sales tax of $100, Tape 27.
15 Bankcard sales were $1,500 plus sales tax of $75, Tape 27.
18 Issued Credit Memo 51 to Roundabout Fashions for $210, which
included $200 in defective merchandise and a sales tax of $10. CONTINUE
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A PP EN D I X G Problems
Date Transactions (cont.)
22 Sold $3,000 in merchandise on account to Hal’s Fitness Studios plus
5% sales tax of $150, Sales Slip 406.
23 Samstead Fashions sent us a check for $1,250 to apply to their
account, Receipt 207.
24 Received a check for $100 from Gabriela Morales in payment of her
account, Receipt 208.
27 Sold Gabriela Morales $200 in merchandise plus 5% sales tax of $10,
Sales Slip 407.
28 Roundabout Fashions sent us a check for $900 to apply on their
account, Receipt 209.
Analyze Calculate the percentage of sales on account to total sales in May.
Chapter 17, Recording Special Journal and
Problem 17A General Journal Transactions
T-Shirt Trends, a retail merchandising business, uses special journals to record its
business transactions.
Instructions On the forms provided in your working papers:
1. Record the July transactions in the sales journal (page 15), cash receipts journal
(page 16), purchases journal (page 15), cash payments journal (page 16), and
general journal (page 3).
2. Foot, prove, total, and rule the special journals.
3. Prove cash. The beginning cash in bank balance is $7,500. The check stub
balance at the end of the month is $13,409.
Date Transactions
July 2 Sold $500 in merchandise on account to Dave Hioki plus 5% sales tax,
Sales Slip 333.
2 Purchased $1,400 in merchandise on account from Cherokee
Productions, Inc., Invoice 7001, terms 2/10, n/30.
3 Issued Check 535 for $1,960 in payment of Dancing Wind Clothing
Manufacturers $2,000 invoice less a 2% discount.
4 Received $1,764 from Hal’s Fitness Studios in payment of our $1,800
invoice less a 2% discount, Receipt 200.
5 Issued Credit Memo 27 to Gabriela Morales for the return of $100 in
merchandise plus $5 sales tax.
6 Purchased $2,000 in store equipment on account from Carter Office
Supply, Invoice CO123, terms n/30.
6 Received $2,450 from Sandpiper Sports Club in payment of our $2,500
invoice less a 2% discount, Receipt 201.
7 Sold $1,000 in merchandise on account plus 5% sales tax
to Virginia Williams, Sales Slip 334. CONTINUE
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Problems APPE NDIX G
Date Transactions (cont.)
7 Issued Debit Memo 14 for $300 to Wilmington Shirt Factory for credit
taken on damaged merchandise.
8 Wrote Check 536 to Chapel Hills Realtors in payment of monthly rent
of $900.
8 Sold old office equipment for $75 cash to Ann Martin, an employee,
Receipt 202.
9 Purchased $3,000 in merchandise on account from CompuRite
Solutions, Invoice CR79, terms 2/10, n/30.
10 Sold $3,500 in merchandise plus 5% sales tax on account to
Roundabout Fashions, Sales Slip 335.
12 Bought $150 in supplies from Palace Party Supplies, on account,
Invoice 876.
13 Issued Check 537 for $1,600 to Academy Insurance Company for
annual business insurance premium.
14 Wrote Check 538 to CompuRite Solutions for $2,940 in payment of
Invoice CR79 for $3,000 less 2% discount.
15 Cash sales amounted to $3,000 plus 5% sales tax, Tape 29.
15 Bankcard sales were $5,000 plus 5% sales tax, Tape 29.
18 Purchased $1,100 in merchandise on account from Sullivan Screen
Printers, Invoice 423, terms 2/10, n/30.
20 Purchased $750 in merchandise for cash from Cherokee Productions,
Inc., Check 539.
22 Paid the monthly utility bill, $150, Check 540.
23 Purchased $4,500 in merchandise on account from Dancing Wind
Clothing Manufacturers, Invoice 777, terms, 2/10, n/30.
24 Received $525 from Dave Hioki to apply on his account, Receipt 203.
24 Wrote Check 541 to Sullivan Screen Printers for $1,078 in payment of
Invoice 423 for $1,100 less a 2% discount.
26 Issued Debit Memo 15 for $200 to Dancing Wind Clothing
Manufacturers for the return of merchandise.
31 Cash sales amounted to $2,200 plus $110 sales tax, Tape 30.
31 Bank card sales amounted to $1,500 plus $75.00 sales tax, Tape 30.
31 Wrote Check 542 to pay the payroll of $2,000 (Gross Earnings) for
the pay period ended July 31. The following amounts were withheld:
employees’ federal income taxes, $300; FICA taxes, $124 for social
security and $29 for Medicare; employees’ state income taxes, $60.
31 Recorded the employer’s payroll taxes (FICA tax rate, 6.2% for social
security, and 1.45% for Medicare; federal unemployment tax rate,
0.8%; and state unemployment rate, 5.4%).
Analyze Identify any transactions recorded in the purchases journal that
were not for merchandise to resell.
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A PP EN D I X G Problems
Chapter 18, Calculating Adjustments and
Problem 18A Preparing the Ten-Column
Work Sheet
A partially completed work sheet for T-Shirt Trends is shown in your working
papers. Adjustments need to be made to the following items at year-end.
Data for Adjustments
Merchandise Inventory, December 31 $47,394
Supplies on hand, December 31 678
Insurance premium expired during the period 1,260
Additional federal corporate income tax owed 168
Instructions On the form provided in your working papers, complete the
December 31 work sheet including adjustments for T-Shirt Trends.
Analyze Identify which asset accounts are affected by adjustments.
Chapter 19, Preparing Financial Statements
Problem 19A
The completed work sheet for T-Shirt Trends for the year ended December 31
appears in your working papers.
Instructions On the forms provided in your working papers, prepare the
following financial statements:
1. The income statement for the fiscal year ended December 31.
2. A statement of retained earnings.
3. A balance sheet.
Analyze Identify the change in the Retained Earnings account during
the year.
Chapter 20, Journalizing Closing Entries
Problem 20A
The account balances for T-Shirt Trends appear in your working papers as of
December 31.
Instructions On the form provided in your working papers, journalize all the
closing entries on page 17 in the general journal.
Analyze Identify the balance in the Income Summary account before it was
closed to Retained Earnings.
Chapter 21, Recording Stockholders’
Problem 21A Equity Transactions
T-Shirt Trends was organized as a publicly held corporation on September 1 and
authorized to issue 10,000 shares of $100 par, $8 preferred stock, and 25,000 shares
of $50 par common stock.
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Problems APPE NDIX G
Instructions On the form provided in your working papers, record the following
transactions on page 1 of the general journal.
Date Transactions
2010
Sept. 1 Issued 4,000 shares of $8 preferred stock at $100 per share,
Receipt 101.
12 Issued 12,000 shares of common stock at $50 per share, Receipt 102.
Nov. 15 Received $52.50 per share for 2,500 shares of common stock issued,
Receipt 215.
Dec. 16 Received $5,000 for 50 shares of $8 preferred stock issued, Receipt 298.
2011
Mar. 24 Issued 1,000 shares of common stock at $55 per share, Receipt 389.
Aug. 15 Declared a dividend of $32,400 on 4,050 shares of $8 preferred stock
outstanding, payable on September 15 to stockholders of record on
September 1, Memorandum 316.
15 Declared cash dividend of 25¢ per share on 15,500 shares of common
stock outstanding, payable on September 30 to stockholders of record
on September 1, Memorandum 317.
Sept. 15 Paid preferred stock dividend declared August 15, Check 1763.
30 Paid common stock dividend declared August 15, Check 1802.
Dec. 31 Prepared the closing entries in the general journal to close Income
Summary for the net income of $102,600 and to close the two
Dividends accounts.
Analyze Identify the effect on Retained Earnings of the dividends declared
on August 15.
Chapter 22, Maintaining a Petty Cash Register
Problem 22A
Maureen Miller operates T-Shirt Trends, a T-shirt specialty business. She established
a petty cash fund on February 1 by writing Check 336 for $100. She also records
all petty cash disbursements in a petty cash register. Petty cash disbursements are
usually made for expenses such as office supplies, delivery expense, miscellaneous
expenses, and advertising expense.
Instructions On the forms provided in your working papers:
1. Record the establishment of the petty cash fund on the first line of the petty
cash register, page 1.
2. Record each of the following petty cash disbursements in the petty cash
register.
3. Foot, prove, total, and rule the petty cash register at the end of the month.
4. Reconcile the petty cash fund. An actual cash count of the fund shows a
balance of $5.68.
5. Check 362 was issued to replenish the petty cash fund. Record the
replenishment information in the petty cash register.
CONTINUE
Appendix G Additional Reinforcement Problems A–65
A52-A69_AppG_868829.indd A–65 9/17/05 1:30:25 PM
A PP EN D I X G Problems
Date Transactions
Feb. 1 Paid $1.20 for postage due on a letter, Voucher 101.
3 Purchased a $9 ad in the Towne Sentinel paper, Voucher 102.
5 Bought a ream of typing paper for $4.75, issued Voucher 103.
6 Paid $6 for a mailgram, Voucher 104.
8 Issued Voucher 105 for $9.90 to Express Couriers in payment for the
delivery of packages.
10 Paid the newscarrier $4.10 for daily newspapers and issued Voucher 106.
13 Bought pens, pencils, and memo pads for $6.60, Voucher 107.
15 Purchased a $9.50 advertisement in a local trade journal, Voucher 108.
19 Issued Voucher 109 for $8.70 for office supplies.
22 Express Couriers delivered financial data from a client, $9.90,
Voucher 110.
26 Issued Voucher 111 for $2.12 for additional postage due on mail.
27 Bought an ad in the Towne Sentinel for $8.70 and issued Voucher 112.
28 Purchased a typewriter ribbon for $5.50, issuing Voucher 113.
28 Voided Voucher 114 due to an error.
28 Issued Voucher 115 for $4.10 to the newscarrier.
Analyze At the end of February, conclude whether cash was short or over, by
what amount, and whether this should be recorded as a revenue or
an expense.
SPREADSHEET
SMART GUIDE
Chapter 23, Calculating and Recording
Step–by–Step Instructions:
Problem 23A Depreciation Expense
Problem 23A The T-Shirt Trends Company purchased a delivery truck on October 12, 2009, at a
cost of $78,900. The delivery truck has an estimated useful life of three years and an
1. Select the spreadsheet
template for Problem estimated disposal value of $900.
23A. Instructions On the forms provided in your working papers:
2. Enter your name and 1. Prepare a depreciation schedule for the delivery truck using the straight-line
the date in the spaces
provided on the method.
template. 2. Record the following transactions on general journal page 41. Post the
3. Complete the spread- transactions to the ledger accounts provided.
sheet using the 3. Answer the following questions.
instructions in your a. How did you determine the depreciation from October 12 to December 31?
working papers.
4. Print the spreadsheet b. What was the book value of the truck on December 31, 2009?
and proof your work. c. What was the book value of the truck on December 31, 2010?
5. Complete the Analyze d. How did you determine the annual depreciation on December 31, 2012?
activity.
6. Save your work and Date Transactions
exit the spreadsheet 2009
program.
Dec. 31 Recorded the adjusting entry for the year’s depreciation expense on
the delivery truck.
2010
Dec. 31 Recorded the adjusting entry for the year’s depreciation expense on
the delivery truck.
Analyze Identify how much depreciation expense will be recorded over
the useful life of the asset. Identify which account will show the
depreciation recorded over the asset’s useful life.
A–66 Appendix G Additional Reinforcement Problems
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Problems APPE NDIX G
Chapter 24, Calculating and Recording
Problem 24A Uncollectible Accounts Expense
T-Shirt Trends uses the allowance method of accounting for uncollectible
accounts. At the end of the fiscal period, the following accounts appeared on
T-Shirt’s trial balance.
Accounts Receivable $ 18,647.25
Allowance for Uncollectible Accounts 1,060.50
Sales 452,612.00
Sales Discounts 5,431.35
Sales Returns and Allowances 13,578.36
Uncollectible Accounts Expense 0.00
Instructions On the forms provided in your working papers:
1. Determine the amount of the adjustment for uncollectible accounts for the
fiscal period ended December 31. Management estimates that uncollectible
accounts will be 1.25% of net sales.
2. Journalize the adjusting entry in the general journal, page 10.
3. Post the adjusting entry to the general ledger accounts.
4. Determine the book value of accounts receivable.
Analyze When an account is written off in the next fiscal period, identify the
account to be debited.
Chapter 25, Accounting for Inventories
Problem 25A
The Shoooot-It Camera Shop uses a one-year fiscal period beginning January 1.
At the beginning of the fiscal period, the shop had a beginning inventory of film
valued at $867.90 (526 rolls at $1.65 per roll). During the year, the shop made the
following purchases:
January 13 400 rolls of film @ $1.67 $ 668
March 2 600 rolls of film @ $1.73 1,038
April 14 300 rolls of film @ $1.76 528
July 8 700 rolls of film @ $1.79 1,253
September 3 200 rolls of film @ $1.81 362
November 19 300 rolls of film @ $1.83 549
Totals 2,500 rolls $4,398
There were 621 rolls of film in inventory at the end of the fiscal year.
Instructions On the form provided in your working papers, calculate the cost of
the ending inventory using the specific identification, FIFO, LIFO, and weighted
average cost methods. For the specific identification method, 165 of the rolls were
purchased on September 3 and 456 were purchased on July 8.
Analyze Conclude which inventory valuation method gives the highest value
to Shoooot-It’s ending inventory.
Appendix G Additional Reinforcement Problems A–67
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A PP EN D I X G Problems
Chapter 26, Calculating Current and
Problem 26A Future Interest
Frequently, notes that are issued or received in one fiscal period do not mature until
the next fiscal period. As a result, the interest expense paid or the interest
SPREADSHEET income received applies to two different fiscal periods. Listed below is the
SMART GUIDE information for 10 different notes.
Step–by–Step Instructions: Instructions On the form provided in your working papers, determine the
Problem 26A following for each note.
1. Select the spreadsheet 1. Determine the maturity date. Assume February has 28 days.
template for Problem 2. Determine what portion of the interest applies to the current year and what
26A. portion of the interest applies to the following year. December 31 is the end of
2. Enter your name and
the fiscal period.
the date in the spaces
provided on the Amount Issue Date Interest Rate Term
template. 1. $ 1,100 December 10 9% 30 days
3. Complete the spread- 2. 700 November 21 12% 60 days
sheet using the 3. 17,100 October 10 10% 90 days
instructions in your
4. 4,000 December 5 15% 60 days
working papers.
4. Print the spreadsheet 5. 15,000 November 10 6.5% 120 days
and proof your work. 6. 3,000 September 8 7% 180 days
5. Complete the Analyze 7. 6,600 November 17 10% 70 days
activity. 8. 840 October 1 9.5% 6 months
6. Save your work and
9. 1,200 December 1 10% 3 months
exit the spreadsheet
program. 10. 2,700 August 1 8% 9 months
Analyze Identify which notes will have more interest expense for the
following year as compared to the current year.
Chapter 26, Recording Non-Interest-Bearing
Problem 26B Notes Payable
Your company, National Paper Supplies, frequently borrows money for short
periods from First Bank by issuing promissory notes.
Instructions In your working papers, record the following transactions on
page 6 of the general journal.
Date Transactions
Jan. 15 Borrowed $12,000 from First Bank by issuing a 90-day, non-interest-
bearing note payable that the bank discounted at 12%, Note 45.
Apr. 15 Issued Check 2561 for $12,000 in payment of the note issued Jan.15
and recorded the interest expense.
Oct. 31 Borrowed $18,000 from First Bank by issuing a 120-day, non-interest-
bearing note payable that the bank discounted at 13%, Note 46.
Dec. 31 Made an adjusting entry to record the accrued interest expense for
Note 46 at year-end.
Analyze Calculate the amount of interest expense incurred in the current
year for Notes 45 and 46.
A–68 Appendix G Additional Reinforcement Problems
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Problems APPE NDIX G
Chapter 27, Recording Partners’ Investments
Problem 27A
On June 15, Walter Cohen and Janice Connor agreed to combine their individual
sole proprietorships into one firm organized as a partnership called Cohen &
Connor Legal Services. The partners were to invest all the assets of their two former
businesses. Those assets are listed below.
Cohen Connor
Cash $247,000 $517,500
Accounts Receivable 78,000
Merchandise Inventory 123,000
Equipment 154,500
Instructions Prepare the general journal entries (page 1) required to record the
partners’ investments. The source document is Memorandum 1.
Analyze Calculate the total of all the assets contributed to the new
partnership.
Chapter 28, Liquidation of a Partnership
Problem 28A
The partnership of Joyce, Jane, and Jill is liquidating. The partnership account
balances as of November 30 are:
Cash $ 8,000 Accounts Payable $ 8,000
Accounts Receivable 16,000 Joyce, Capital 10,800
Inventory 8,000 Jane, Capital 13,200
Equipment 3,000 Jill, Capital 3,000
Profits and losses are shared 4:5:1 to Joyce, Jane, and Jill respectively.
Date Transactions
Dec. 1 The accounts receivable are sold for $15,000.
8 The inventory is sold for $7,000.
15 The equipment is sold for $5,000.
23 The accounts payable are paid in full.
24 The balance of cash is distributed to the partners.
Instructions Prepare the entries required to liquidate the partnership. Start with
general journal page 213.
Analyze Calculate the gain or loss on each asset that was sold.
Appendix G Additional Reinforcement Problems A–69
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APPENDIX H Answers to Section
Assessment Problems
Chapter 1 Problem 2-3
Greenwood Sky Divers is the name of the business
Problem 1-1
entity. It has been in business for six years, and is a
Perform an honest analysis of likes and dislikes. Use
“going concern.” The accounting period for Green-
the chart on page 7 to help identify skills and traits
wood Sky Divers is one year.
you possess.
Problem 1-2 Chapter 3
Use the personal career profile form (Figure 1-1) as Problem 3-1
a reference for the types of information. List personal 1. $10,000
information (values, interests, skills, etc.) and then 2. $26,000
select three possible careers. 3. $3,000
4. $26,000
Problem 1-3
5. $6,000
The possibility for individuals with accounting degrees
6. $13,000
vary but include careers as: tax accountants, auditors,
7. $16,000
management accountants, controllers, or chief finan-
8. $8,000
cial officers.
9. $21,000
Problem 1-4 10. $20,000
For the accountants mentioned in the section: 11. $35,000
Drew Taylor – Interested in working with numbers 12. $4,500
and music.
Problem 3-2
Maya Cruz – Involved in environmental causes,
1. Cash in Bank increased $30,000. Jan Swift, Capital
studied accounting.
increased $30,000.
Jana Passeno – Interested in serving the public;
2. Office Furniture increased $700. Jan Swift, Capital
good at decision making.
increased $700.
Problem 1-5 3. Cash in Bank decreased $4,000. Computer
Answers will vary. Equipment increased $4,000.
4. Office Furniture increased $5,000. Accounts
Problem 1-6 Payable increased $5,000.
Answers will vary. 5. Accounts Receivable increased by $700. Office
Furniture decreased $700.
6. Cash in Bank decreased $2,000. Accounts Payable
Chapter 2 decreased $2,000.
Problem 2-1
Perform an honest analysis of personal traits. Try to Problem 3-3
relate the answers to personal activities and experi- 1. Cash in Bank decreased by $50. Jan Swift, Capital
ences that correspond with entrepreneurship. decreased by $50.
Problem 2-2
The situations such as these have opposing viewpoints.
The drop in sales could signal that a new salesperson is
needed or some improvements are in order. Some own-
ers, though, may be reluctant to invest more money in
a business where sales are down. You might ask for new
paint and awnings in return for the higher rent.
A–70 Appendix H Answers to Section Assessment Problems
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Answers APPE NDIX H
2. Cash in Bank increased by $1,000. Jan Swift, Chapter 6
Capital increased by $1,000.
Problem 6-1
3. Cash in Bank decreased by $600. Jan Swift, Capital
1. JayMax Office Supply
decreased by $600.
2. Dario’s Accounting Services
4. Cash in Bank decreased by $800. Jan Swift, Capital
3. April 9, 20--
decreased by $800.
4. 479
5. Cash in Bank increased by $200. Accounts
5. Fax Machine
Receivable decreased by $200.
6. $299
7. Payable in 30 days
Chapter 4 Problem 6-2
Problem 4-1 Step 1 D
Office Equipment – asset, debit, credit, debit Step 2 F
Accounts Payable – liability, credit, debit, credit Step 3 E
Accounts Receivable – asset, debit, credit, debit Step 4 B
R. Lewis, Capital – owner’s equity, credit, debit, credit Step 5 A
Problem 4-2 Step 6 C
1a. The asset Office Equipment is increased. Increases Problem 6-3
in assets are recorded as debits. 1. Passenger Van, asset, increase, debit; Cash in Bank,
b. The liability Accounts Payable is increased. asset, decrease, credit
Increases in liabilities are recorded as credits. 2. Utilities Expense, expense, increase, debit; Cash in
2a. The asset Office Furniture is increased. Increases in Bank, asset, decrease, credit
assets are recorded as debits. 3. Cash in Bank, asset, increase, debit; Day Care Fees,
b. The owner’s capital account Alice Roberts, Capital revenue, increase, credit
is increased. Increases in the owner’s capital
account are recorded as credits. Chapter 7
3a. The liability Accounts Payable is decreased.
Problem 7-1
Decreases in liabilities are recorded as debits.
Cash in Bank $10,000 Dr.
b. The asset Cash in Bank is decreased. Decreases in
Accounts Receivable – Mark Cohen $2,000 Dr.
assets are recorded as credits.
Accounts Payable – Jenco Industries $1,000 Cr.
Tom Torrie, Capital $35,000 Cr.
Chapter 5 Admissions Revenue $0
Problem 5-1 Problem 7-2
Cash in Bank—asset, debit, credit, debit Account Balances:
Accounts Receivable—asset, debit, credit, debit Cash in Bank $10,000 (Dr.)
Airplanes—asset, debit, credit, debit David Serlo, Capital $10,000 (Cr.)
Accounts Payable—liability, credit, debit, credit Problem 7-3
Caroline Palmer, Capital—owner’s equity, credit, May 20: Dr. Office Equip. $1,500;
debit, credit Cr. Computer Equip. $1,500; Memorandum 47
Caroline Palmer, Withdrawals—owner’s equity, Problem 7-4
debit, credit, debit July 7: Dr. Advertising Expense $300;
Flying Fees—revenue, credit, debit, credit Cr. Rent Expense $300; Memoradum 13
Advertising Expense—expense, debit, credit, debit
Food Expense—expense, debit, credit, debit
Fuel and Oil Expense—expense, debit, credit, debit Chapter 8
Repairs Expense—expense, debit, credit, debit Problem 8-1
Problem 5-2 Store Equipment, asset, debit
1. Dr. Utilities Expense; Cr. Cash in Bank Rent Expense, expense, debit
2. Dr. Accounts Receivable; Cr. Service Fees Service Fees Revenue, revenue, credit
3. Dr. John Albers, Withdrawals; Cr. Cash in Bank Accounts Payable–Rubino Supply, liability, credit
4. Dr. Advertising Expense; Cr. Cash in Bank Scott Lee, Capital, owner’s equity, credit
Appendix H Answers to Section Assessment Problems A–71
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A PP EN D I X H Answers
Problem 10-3
Accts. Rec.–Linda Brown, Balance Sheet, No, Yes
Advertising Expense, Income Statement, Yes, No
Cash in Bank, Balance Sheet, No, Yes
Advertising Expense, expense, debit
Exercise Class Revenue, Income Statement, Yes, No
Accounts Receivable–John Langer, asset, debit
Exercise Equipment, Balance Sheet, No, Yes
Scott Lee, Withdrawals, owner’s equity, debit
Income Summary, N/A, Yes, No
Maintenance Expense, expense, debit
Laundry Equipment, Balance Sheet, No, Yes
Office Supplies, asset, debit
Maintenance Expense, Income Statement, Yes, No
Problem 8-2
Membership fees, Income Statement, Yes, No
1. Hailey Office Supply
Miscellaneous Expense, Income Statement, Yes, No
2. Garmot Electrical Co.
Office Furniture, Balance Sheet, No, Yes
3. June 15
Rent Expense, Income Statement, Yes, No
4. $6.23
Repair Tools, Balance Sheet, No, Yes
5. Two
Ted Chapman, Capital, Balance Sheet, Yes, Yes
6. The invoice number is 220
Ted Chapman, Withdrawals, Balance Sheet, Yes, No
Problem 8-3
Utilities Expense, Income Statement, Yes, No
Store Equipment, Balance Sheet, debit
Rent Expense, Income Statement, debit
Service Fees Revenue, Income Statement, credit
Chapter 11
Accounts Payable–Rubino Supply, Balance Sheet, credit Problem 11-1
Scott Lee, Capital, Balance Sheet, credit 1.,2. Total Deposit $967.08
Advertising Expense, Income Statement, debit 3. Balance $2,394.24
Accounts Receivable–John Langer, Balance Sheet, debit 4. Balance $2,394.24
Scott Lee, Withdrawals, Balance Sheet, debit 5. Balance $2,119.24
Maintenance Expense, Income Statement, debit Problem 11-2
Office Supplies, Balance Sheet, debit 1. $100
2. $25
3. Miscellaneous Expense
Chapter 9
Problem 9-1 Chapter 12
1. Stratford Learning Ctr. 5. August 21
Problem 12-1
2. $832 6. Rose Hughes
Longas, Jane: 43, $7.25, $290, $32.63, $322.63
3. Sandra Miller 7. Roxbury
Lang, Richard: 38, $7.80, $296.40, $0, $296.40
4. Payment on account
Quinn, Betty: 44 1/4, $8.30, $332.00, $52.91, $384.91
Problem 9-2
Sullivan, John: 39 1/2, $8.30, $327.85, $0, $327.85
1. $62,500 4. $10,630
Talbert, Kelly: 40, $7.50, $300.00, $0, $300.00
2. $29,915 5. $7,060
Trimbell, Gene: 42 1/2, $9.75, $390.00, $36.56, $426.56
3. $29,470 6. $25,010
Varney, Heidi: 34 1/4, $8.75, $299.69, $0, $299.69
Problem 9-3
Wallace, Kevin: 46, $9.25, $370.00, $83.25, $453.25
Return on Sales = 20.53%
Problem 12-2
Cleary, Kevin: S, 0, $155.60, $9.65, $2.26, $16, $3.11,
Chapter 10 $31.02, $124.58
Problem 10-1 Halley, James: S, 1, $184.10, $11.41, $2.67, $12, $3.68,
1. Dr. Ticket Revenue $6,000; Cr. Income Summary $29.76, $154.34
$6,000 Hong, Kim: S, 0, $204.65, $12.69, $2.97, $23, $4.09,
2. Dr. Income Summary $3,100; Cr. Gas and Oil $42.75, $161.90
Expense $700, Miscellaneous Expense $600, Jackson, Marvin: M, 1, $216.40, $13.42, $3.14, $6,
Utilities Expense $1,800 $4.33, $26.89, $189.51
Problem 10-2 Sell, Richard: M, 2, $196.81, $12.20, $2.85, $0, $3.94,
1.,2. Dr. Utilities Expense $129; Cr. Cash in Bank $129 $18.99, $177.82
3.,4. Dr. Income Summary $129; Cr. Utilities Exp. $129 Totals: $957.56, $59.37, $13.89, $57, $19.15, $149.41,
$808.15
A–72 Appendix H Answers to Section Assessment Problems
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Answers APPE NDIX H
Problem 12-3 Cr. Accts. Rec./James Palmer $318; Credit Memo. 15
Medicare $4.57 Sept. 19: Dr. Sales Ret. + Allow. $40, Sales Tax Pay.
Social Security $19.53 $2.40; Cr. Accts. Rec./Anna Rodriguez $42.40;
Federal Income Tax $32.00 Credit Memo. 16
Problem 12-4 Problem 14-3
Check number 79, net pay $263.94 May 15: Dr. Cash in Bank $1908; Cr. Sales $1800,
Sales Tax Payable $108; Tape 40
Chapter 13 Problem 14-4
Problem 13-1 Mar. 1: Dr. Cash in Bank $140.40; Cr. Sales $130,
1. $2,193.40 4. $33.75 Sales Tax Payable $10.40; Sales Slip 49
2. $31.80 5. $1,690.15 Mar. 5: Dr. Accts. Rec./Kelly Wilson $324; Cr. Sales
3. $503.25 $300, Sales Tax Payable $24; Sales Slip 55
Problem 13-2 Mar. 17: Dr. Cash in Bank $810; Cr. Sales $750,
Social Security Tax Payable $299.87 Sales Tax Payable $60; Tape 65
Medicare Tax Payable $70.13
Federal Unemployment Tax Payable $38.69 Chapter 15
State Unemployment Tax Payable $261.18 Problem 15-1
Problem 13-3 1. Case Construction Company
Employees’ federal income tax, payroll entry 2. Westmoreland Paint and Supply Company
Employer’s social security tax, payroll tax entry 3. 7894
U.S. savings bonds, payroll entry 4. November 15, 20--
Employer’s Medicare tax, payroll tax entry 5. December 1, 20--
Federal unemployment tax, payroll tax entry 6. 25 gallons
Employees’ state income tax, payroll entry 7. 5
Union dues, payroll entry 8. White, gray, brown, beige and peach.
Employees’ social security tax, payroll entry 9. $20.00
State unemployment tax, payroll tax entry 10. $500.00
Employees’ Medicare tax, payroll entry Problem 15-2
Problem 13-4 Sept. 2: Dr. Purchases $900; Cr. Accts. Pay./Sunrise
April 30: Dr. Social Security Tax Payable $318.55, Novelty Supply $900; Invoice SN110
Medicare Tax Payable $113.28, Employees’ Federal Sept 7: Dr. Accts. Pay./Sunrise Novelty Supply $50;
Income Tax Payable $286; Cr. Cash in Bank $717.83 Cr. Purchases Returns and Allowances $50; Debit
April 30: Dr. State Income Tax Payable $205.60; Memorandum 18
Cr. Cash in Bank $205.60 Problem 15-3
Problem 13-5 Nov. 12: Dr. Accts. Pay./Randall’s Café and Bookstore
Dr. Salaries Exp. $1,328.07, Cr. Soc. Sec. Tax Pay. $82.34, $16.00; Cr. Purchases Ret. and Allow. $16.00; Debit
Cr. Medicare Tax Payable $19.26, Cr. Fed. Inc. Tax Pay. Memo 559
$184.00, Cr. State Inc. Tax. Pay. $26.56, Cr. Hosp. Ins. Problem 15-4
Prem. Pay. $20.00, Cr. Cash in Bank $995.91 May 1: Dr. Purchases $10,500; Cr. Cash in Bank
$10,500; Check 1150
Chapter 14 May 5: Dr. Transportation In $325; Cr. Cash in Bank
Problem 14-1 $325; Check 1151
Ending account balances: May 7: Dr. Prepaid Insurance $2,500; Cr. Cash in Bank
Cash in Bank $554 $2,500; Check 1152
Accounts Receivable $3,000
Sales $3,554 Chapter 16
Problem 14-2 Problem 16-1
Sept. 1: Dr. Accts. Rec./James Palmer $318; Cr. Sales Ending debit balance:
$300, Sales Tax Pay. $18; Sales Slip 101 Accounts Receivable $27,720
Sept. 4: Dr. Accts. Rec./Anna Rodriguez $636; Cr. Ending credit balances:
Sales $600, Sales Tax Pay. $36; Sales Slip 102 Sales Tax Payable $2,020
Sept. 7: Dr. Sales Ret. + Allow. $300, Sales Tax Pay. $18; Sales $37,000
Appendix H Answers to Section Assessment Problems A–73
A70-A77_AppH_868829.indd A–73 4/6/06 6:48:44 PM
A PP EN D I X H Answers
3. $3,710
4. $155
Problem 18-4
1. Rotary Supply Corporation
Problem 16-2
2. 6
1. Sales credit $820, Sales Tax Payable credit $41,
3. $177.09
Accounts Receivable debit $861
4. Accounts Payable—K & L Electrical
2. Ending Balance $1,161
5. Purchases Returns and Allowances
Problem 16-3
Totals: Chapter 19
General credit $105
Problem 19-1
Sales credit $6,200
1. Kevin Cleary, Capital
Sales Tax Payable credit $372
2. Capital Stock
Accounts Receivable credit $5,580
3. Capital Stock and Retained Earnings
Sales Discounts debit $110
Problem 19-2
Cash in Bank debit $12,147
Subtotal $70.25, sales tax $2.81
Total debits/credits $12,257
Total $73.06
Problem 19-3
Chapter 17 1. $96,506
Problem 17-1 2. $16,703
Column totals: 3. $27,783
Accounts Payable $4,550 4. $17,148
Purchases $3,600 Problem 19-4
General $950 1. Office Equipment, Merchandise Inventory.
Problem 17-2 2. Federal Unemployment Tax Payable.
Ending Cash in Bank balance $5,610.59 3. It increased by $18,358.72, or 14.49%.
Problem 17-3 4. 165.26%
Nov. 2: Dr. Accts. Pay./Colonial Products Inc. $900; 5. The increase in Accounts Receivable indicates that
Cr. Purchases Discounts $27, Cash in Bank $873; either the company is selling more product or is
Check 104 less efficient at collecting payments. The decrease
in Accounts Payable indicates that the company
Chapter 18 is paying bills earlier. In order to see the whole
Problem 18-1 picture, one would need to analyze the data in
1. More relation to the other financial statements.
2. $1,533 6. The company prepaid for a new insurance contract.
3. Merchandise Inventory
4. Income Summary Chapter 20
Problem 18-2 Problem 20-1
1. Amount $2,454.70 Accounts Receivable, no
Account debited, Supplies Expense Bankcard Fees Expense, yes, credited, debited
Account credited, Supplies Capital Stock, no
2. Amount $740 Cash in Bank, no
Account debited, Insurance Expense Equipment, no
Account credited, Prepaid Insurance Fed. Corp. Income Tax Expense, yes, credited, debited
3. Amount $105 Fed Corp. Income Tax Payable, no
Account debited, Federal Corporate Income Income Summary, yes, depends (loss = credit),
Tax Expense depends (loss = credit)
Account credited, Federal Corporate Income Insurance Expense, yes, credited, debited
Tax Payable Merchandise Inventory, no
Problem 18-3 Miscellaneous Expense, yes, credited, debited
1. $9,995 Prepaid Insurance, no
2. Balance Sheet Purchases, yes, credited, debited
A–74 Appendix H Answers to Section Assessment Problems
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Answers APPE NDIX H
Purchases Discounts, yes, debited, credited 2. Mar 31: Dr. Cash in Bank $1,016.84, Cash
Purchases Returns and Allowances, yes, debited, Short and Over $5; Cr. Sales $964, Sales Tax
credited Payable $57.84
Retained Earnings, yes, depends (loss = debit), Problem 22-2
depends (loss = credit) 1. Net cash $1,595.77
Sales, yes, debited, credited Cash over $10
Sales Discounts, yes, credited, debited 2. Apr. 14: Dr. Cash in Bank $1,595.77; Cr. Sales 1,496,
Sales Returns and Allowances, yes, credited, debited Sales Tax Pay. $89.77, Cash Short and Over $10
Sales Tax Payable, no Problem 22-3
Supplies, no Check $39.51; new check stub balance $77,393.35
Supplies Expense, yes, credited, debited
Transportation In, yes, credited, debited
Chapter 23
Utilities Expense, yes, credited, debited Problem 23-1
Problem 20-2 Accounts Receivable, current
July 12: Dr. Rent Exp. $750; Cr. Cash in Bank $750 Building, plant
Problem 20-3 Cash in Bank, current
Collecting and verifying source documents Change Fund, current
Analyzing business transactions Delivery Equipment, plant
Journalizing business transactions Land, plant
Posting journal entries to ledgers Merchandise Inventory, current
Preparing a trial balance Office Equipment, plant
Completing the work sheet Office Furniture, plant
Preparing financial statements Petty Cash Fund, current
Journalizing and posting adjusting entries Prepaid Insurance, current
Journalizing and posting closing entries Store Equipment, plant
Preparing a post-closing trial balance Supplies, current
Problem 23-2
Chapter 21 Cash register $420, $60, $40
Problem 21-1 Computer $5,000, $1,000, $166.67
1. 30,000 shares of common stock were issued at par, Conference table $1,800, $72, $36
$10 per share in cash. Delivery truck $30,000, $6,000, $1,500
2. 2,000 shares of preferred stock were issued at par, Desk $2,880, $144, $132
$100 per share in cash. Problem 23-3
3. 50,000 shares of common stock, par $10, were Book Value:
issued at $14 per share. 10/01/2011, $12,500
Problem 21-2 12/31/2011, $11,960
1. $87,500 12/31/2012, $9,800
2. $262,500 12/31/2013, $7,640
Problem 21-3 12/31/2014, $5,480
Apr. 1: Dr. Dividends—Common $5,679; Cr. 12/31/2015, $3,320
Dividends Payable—Common $5,679; 09/31/2016, $1,700
Memorandum 37 Problem 23-4
Apr. 30: Dr. Dividends Payable—Common $5,679; 1. June 4: Dr. Office Equipment $3,456; Cr. Cash in
Cr. Cash in Bank $5,679; Check 221 Bank $3,456; Invoice 14492
Problem 21-4 2. Dec. 31: Dr. Depreciation Expense $379.87; Cr.
The transactions that are reported on the statement Accumulated Depreciation $379.87
of stockholders’ equity are 2, 3, 6, and 8. 3. Dec. 31: Dr. Depreciation Expense $651.20; Cr.
Accumulated Depreciation $651.20
Chapter 22 Problem 23-5
Problem 22-1 1. Book Value:
1. Net cash $1,016.84 Jan. 7, $2,360
Cash short $5 First year, $1,908
Appendix H Answers to Section Assessment Problems A–75
A70-A77_AppH_868829.indd A–75 4/6/06 6:48:46 PM
A PP EN D I X H Answers
Accounts Receivable $19,350
Uncollectible Account Expense $1,850
Accts. Rec.—Jack Bowers $0
Ending credit balances:
Second year, $1,456
Allowance for Uncollectible Accounts $3,050
Third year, $1,004
Problem 24-3
Fourth year, $552
(1) Uncollectible Accounts Expense:
Fifth year, $100
Andrews Co. $2,800.02
2. Dec. 31: Dr. Depr. Exp.—Office Equip. $452; Cr.
The Book Nook $2,047.81
Accum. Depr.—Office Equip. $452
Cable Inc. $2,550.00
3. Dec. 31: Dr. Income Summary $452; Cr. Depr.
Davis Inc. $1,282.40
Exp.—Office Equip. $452
Ever-Sharp Co. $1,164.38
4. $100, Yes
(2) Dec. 31: Dr. Uncollectible Accounts Expense
$1,282.40; Cr. Allowance for Uncollect-
Chapter 24 ible Accounts $1,282.40
Problem 24-1
Journal Entries Chapter 25
Apr. 10: Dr. Accts. Rec./Sonya Dickson $630; Cr. Sales Problem 25-1
$600, Sales Tax Pay. $30; Sales Slip 928 Preparing Inventory Reports
Nov. 30: Dr. Uncollectible Accounts Expense $630; Total value of inventory $794.10
Cr. Accts. Rec./Sonya Dickson $630; Memo- Problem 25-2
randum 78 Determining Inventory Costs
Dec. 30: Dr. Accts. Rec./Sonya Dickson $630; Cr. a. $472.55
Uncollectible Accounts Expense $630; b. $477.25
Memorandum 89 c. $465.25
Dec. 30: Dr. Cash in Bank $630; Cr. Accts. Rec./Sonya d. $470.52
Dickson $630; Receipt 277 Problem 25-3
Ledger Balances 1. Ending inventory $575.90
Ending debit balances: 2. Gross profit $214.30
Cash in Bank $10,058
Accounts Receivable $7,290 Chapter 26
Uncollectible Accounts Expense $928 Problem 26-1
Accts. Rec.—Sonya Dickson $0 1. Interest $75.62, Maturity value $4,075.62
Ending credit balances: 2. Interest $289.73, Maturity value $10,289.73
Sales Tax Pay. $278 3. Interest $136.23, Maturity value $6,636.23
Sales $24,760 4. Interest $36.25, Maturity value $936.25
Problem 24-2 Problem 26-2
Journal Entries 1. Interest $22.19
May 4: Dr. Allowance for Uncollectible Accounts 2. Interest $69.04
$1,050; Cr. Accts. Rec./Jack Bowers $1,050; 3. Interest $288.00
Memorandum 241 4. Interest $123.29
Nov. 18: Dr. Accts. Rec./Jack Bowers $1,050; Cr. Problem 26-3
Allowance for Uncollectible Accounts 1. Cash in Bank $9,000
$1,050; Memorandum 321 2. Notes Payable $9,000
Nov. 18: Dr. Cash in Bank $1,050; Cr. Accts. Rec./Jack 3. Cash in Bank, asset; Notes Payable, liability
Bowers $1,050; Receipt 1078 4. $9,355.07
Dec. 31: Dr. Uncollectible Accounts Expense $1,850; Cr. Problem 26-4
Allowance for Uncollectible Accounts $1,850 1. Cash in Bank is debited for $9,802.74; Discount
Ledger Balances on Notes Payable is debited for $197.26; Notes
Ending debit balances: Payable is credited for $10,000.
Cash in Bank $10,470 2. Discount $197.26, Proceeds $9,802.74
A–76 Appendix H Answers to Section Assessment Problems
A70-A77_AppH_868829.indd A–76 4/6/06 6:48:47 PM
Answers APPE NDIX H
Problem 26-5 Problem 28-3
June 12: Dr. Cash in Bank $2,426.03, Discount on Sept. 4: Dr. Cash in Bank $38,000, Gunther, Capital
Notes Payable $73.97; Cr. Notes Payable $3,500, Pertee, Capital $3,500; Cr. Merchan-
$2,500; Note 55 dise Inventory $45,000
Sept. 15: Dr. Cash in Bank $29,000; Cr. Gunther,
Chapter 27 Capital $1,000, Pertee, Capital $1,000,
Office Equipment $27,000
Problem 27-1
June 1: Dr. Cash in Bank $1,200, Accts. Rec. $2,000,
Merchandise Inventory $8,000, Equiment Chapter 29
$5,000, Van $12,000, Office Furniture Problem 29-1
$1,000; Cr. Matthew Deck, Capital $29,200; Weaknesses might include ethics programs that do
Memorandum 1 not provide clear guidelines for action when faced
June 1: Dr. Cash in Bank $2,300, Accts. Rec. $7,000, with various situations. Some employees might not
Merchandise Inventory $5,000, Equipment report violations out of fear of retribution. A busi-
$12,000, Office Furniture $500; Cr. Jennifer ness ethics plan that includes well-communicated
Rusk, Capital $26,800; Memorandum 1 methods for reporting violations (like a Web site, an
ethics office, or ethics seminars) could help remedy
Problem 27-2
this problem.
1. 3/4, 1/4
2. 5/9, 3/9, 1/9 Problem 29-2
3. 3/8, 2/8, 2/8, 1/8 The law covers most major ideas about the public’s
4. 2/4, 1/4, 1/4 definition of proper and improper behavior, but it does
5. 2/3, 1/3 not offer guidance on every dilemma. Ethical concepts
cover more subtle instances, where the proper course
Problem 27-3
of action might not be so clear-cut. Use the following
Nov. 13: Dr. Cash in Bank $20,000; Cr. Walter,
resources to find an example in which the actions of
Capital $8,000, Yount, Capital $12,000
a business were legal but might be considered unethi-
cal: Business Week Online, The Wall Street Journal, local
Chapter 28 newspapers, and business magazines.
Problem 28-1
Division of Net Income: Problem 29-3
Goldman $14,000 The following behaviors are possible violations of
Jones $21,000 principles of professional conduct. Marcus appears
Partners’ Equity: to be recording transactions in a misleading manner
Goldman $37,000 in order to increase the amount of profit reported for
Jones $68,000 the business. This violates the accounting principle of
integrity. Jennifer has not been appropriately trained
Problem 28-2 and educated for accounting work. This violates the
Shares of gain: principle of competence. Ing’s behavior violates con-
Bass $7,200 fidentiality when he shares confidential financial in-
Buie $7,200 formation with anyone not approved to receive it.
Anderson $3,600
Norman $3,600
Dunham $2,400
Ruppe $2,400
Appendix H Answers to Section Assessment Problems A–77
A70-A77_AppH_868829.indd A–77 9/13/05 4:23:46 PM
GL O S S A R Y
A accumulated depreciation The total amount of
depreciation for a plant asset that has been recorded up
account A subdivision under assets, liabilities, or to a specific point in time.
owner’s equity that summarizes the changes and
accumulated earnings The employee’s year-to-date
shows the balance for a specific item.
gross earnings.
accountant A person who handles a broad range of
adjusted gross income The total income for the year
responsibilities, makes business decisions, and prepares
after adjustments on a federal income tax return.
and interprets financial reports.
adjusting entries Journal entries that update the
accounting clerk An entry-level job that can vary
general ledger accounts at the end of a period.
from specializing in one part of the system to doing
a wide range of tasks. adjustment An amount that is added to or subtracted
from an account balance to bring that balance up
accounting cycle Activities performed in an
to date.
accounting period that help the business keep its
records in an orderly fashion. administrative expenses Costs related to
the management of a business (for example,
accounting equation The accounting relationship
office expenses).
between assets and the two types of equities.
Assets liabilities owner’s equity. aging of accounts receivable method A method of
estimating the uncollectible accounts expense in which
accounting period The period of time covered by an
each customer’s account is classified by age; the age
accounting report.
classifications are multiplied by certain percentages;
accounting system A system designed to collect, and the total estimated uncollectible amounts are
document, and report on business transactions. added to determine the end-of-period balance of
Glossary
Allowance for Uncollectible Accounts.
accounts payable The amount of money owed, or
payable, to the creditors of a business. allowance method A procedure for uncollectible
accounts receivable; the business matches the
accounts payable subsidiary ledger A separate
estimated uncollectible accounts expense with the sales
ledger that contains accounts for all creditors; it is
made during the same period.
summarized in the Accounts Payable controlling
account in the general ledger. assets Property or items of value owned by a business.
accounts receivable The amount of money owed to a audit The review of a company’s accounting systems
business by its credit customers. and financial statements to confirm that they follow
generally accepted accounting principles.
accounts receivable subsidiary ledger A separate
ledger that contains accounts for each charge authorized capital stock The maximum number of
customer; it is summarized in the Accounts shares of stock a corporation may issue.
Receivable controlling account in the general ledger.
automated teller machine (ATM) Computer
accrual basis of accounting A system that recognizes terminal where account holders can conduct various
and records revenues and expenses when they are banking activities.
earned and incurred rather than when cash is collected
and paid.
B
accruals Transactions that have not yet been recorded in balance sheet A report of the balances in the
the accounts because a revenue has been earned but permanent accounts on a specific date.
not yet received or an expense has been incurred but bank discount The interest charge deducted in
not yet paid. advance on a non-interest-bearing note payable.
accrued expense A business expense that has been bank service charge A fee the bank charges for
incurred but not paid or recorded. maintaining bank records and processing bank
accrued revenue Business revenue that has been statement items for the depositor.
earned but not received or recorded. bank statement An itemized record of all the
transactions in a depositor’s account over a given
period, usually a month.
G–1 Glossary
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G L OSSARY
bankcard A bank-issued card honored by many cash basis of accounting A system that recognizes
businesses that can be used to withdraw cash and and records revenue only when cash is received and
to make payments for goods and services at many expenses only when cash is paid out.
businesses instead of writing checks; also called a
cash discount The amount a customer can deduct
debit card, ATM card, or check card.
from the total owed for purchased merchandise if
bankcard fee A fee charged for handling bankcard payment is made within a certain time; also called
sales slips; usually based on the total amounts recorded sales discount.
on the sales slips processed.
cash inflows Receipts of cash.
base period A period that is used for comparison in
cash outflows Payments of cash.
financial statements analysis.
cash payments journal A special journal used to
beginning inventory The merchandise a business has
record all transactions in which cash is paid out
on hand at the beginning of a period.
or decreased.
blank endorsement A check endorsement that
cash receipt The cash received by a business in a
includes only the signature or stamp of the depositor.
single transaction.
It does not specify the new owner of the check.
cash receipts journal A special journal used to record
board of directors A group of people, elected by the
all transactions in which cash is received.
stockholders, who govern and are responsible for the
affairs of a corporation. cash sale A transaction in which the business receives
full payment for the merchandise sold at the time of
book value The original cost of a plant asset minus
the sale.
accumulated depreciation.
certified public accountant (CPA) A licensed
Glossary
book value of accounts receivable The amount
professional who has met certain education and
the business can reasonably expect to collect from its
experience requirements and passed a national test.
accounts receivable.
change fund An amount of money, consisting of
business entity The accounting assumption that a
varying denominations of bills and coins, that is used
business exists independently of its owner’s personal
to make change in cash transactions.
holdings. The accounting records and reports
are maintained separately and contain financial charge customer A customer to whom a sale on
information related only to the business. account is made.
business ethics The policies and practices that reflect chart of accounts A list of all accounts used by
a company’s core values such as honesty, trust, respect, a business.
and fairness.
charter The legal permission, granted by a state, that
business transaction An economic event that causes gives a corporation certain rights and privileges and
a change—either an increase or a decrease—in assets, spells out the rules under which the corporation is
liabilities, or owner’s equity. to operate.
C check A written order from a depositor telling the
bank to pay a stated amount of cash to the person or
calendar year Accounting period that begins on business named on the check.
January 1 and ends on December 31.
Check 21 The Check Clearing for the 21st Century
canceled check A check paid by the bank, deducted Act; it allows the conversion of a paper check to
from the depositor’s account, and returned with the an electronic image that can be quickly processed
bank statement to the account holder. between banks.
capital Money supplied by investors, banks, or owners check stub A source document that lists the same
of a business. information that appears on a check and shows the
Capital Stock The account that represents the total balance in the checking account before and after each
amount of investment in the corporation by its check is written.
stockholders (owners).
Glossary G–2
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GL O S S A R Y
checking account An account that allows a person contra account An account whose balance is a
or business to deposit cash in a bank and then write decrease to its related account.
checks and make ATM withdrawals and purchases
controlling account An account that serves as a
against the account balance.
control on the accuracy of the account balances in the
closely held corporation A corporation, often owned subsidiary ledger; its balance must equal the total of all
by a few people or by a family, that does not offer its account balances in the subsidiary ledger.
stock for sale to the general public.
corporation A business organization recognized by
closing entries Journal entries made to close, or law to have a life of its own.
reduce to zero, the balances in the temporary accounts
correcting entry An entry made to correct an error in
and to transfer the net income or net loss for the
a journal entry discovered after posting.
period to the capital account.
cost of merchandise The actual cost to the business
code of ethics A formal policy of rules and guidelines
of the merchandise sold to customers.
that describes the standards of conduct that a
company expects from all its employees. credit An agreement to pay for a purchase at a later
time; an entry on the right side of an account.
combination journal A multicolumn journal that
combines the features of the general journal and the credit card A card, issued by a business and bearing
special journals into one book of original entry. a customer’s name and account number, which
facilitates the sale on account.
commission An amount paid to an employee based
on a percentage of the employee’s sales. credit memorandum A form that lists the details of a
sales return or sales allowance.
common stock The stock issued by a corporation
when it issues only one class of stock. credit terms Terms that state the time allowed for
Glossary
payment for a sale on account.
comparability Accounting characteristic that allows
the financial information to be compared from one creditor A business or person to whom money
period to another period; also allows the comparison is owed.
of financial information between businesses.
current assets The assets that are either used up or
competence The principle that requires accountants converted to cash during the normal operating cycle of
to have the knowledge, skills, and experience needed the business.
to complete a task.
current liabilities The debts of the business that must
compound entry A journal entry with two or more be paid within the next accounting period.
debits or two or more credits.
current ratio The relationship between current assets
computerized accounting system A type of and current liabilities; calculated by dividing current
accounting system in which information is recorded assets by current liabilities.
by entering it into a computer.
D
confidentiality The principle that requires
accountants to protect and not disclose information debit An entry on the left side of an account.
acquired in the course of work unless they have the debit memorandum The form a business uses to
appropriate legal or professional responsibility to notify its suppliers (creditors) of a return or to request
do so. an allowance.
conservatism principle Accounting principle deduction An amount that is subtracted from an
requiring that when there is a choice, accountants employee’s gross earnings.
choose the safer or more conservative method that
is least likely to result in an overstatement of income deferrals Transactions that have been recorded in the
or assets. accounts because cash has been received but not yet
earned or cash has been paid but the expenses not
consistency principle Accounting principle requiring yet incurred.
a business to apply the same accounting methods in
the same way from one period to the next. deposit slip A bank form used to list the cash and
checks to be deposited.
G–3 Glossary
G1-G10_Glossary_868829.indd 3 4/6/06 6:49:41 PM
G L OSSARY
depositor A person or business that has cash on endorsement An authorized signature written
deposit in a bank. or stamped on the back of a check that transfers
ownership of the check.
depreciation Allocating a plant asset’s cost over its
useful life. entrepreneur A person who transforms ideas for
products or services into real-world businesses.
direct deposit Depositing net pay directly into an
employee’s personal bank account through electronic equities The total financial claims to the assets of
funds transfer. a business.
direct write-off method A procedure for uncollectible ethics The study of our notions of right and wrong; a
accounts receivable; the business removes the set of basic principles.
uncollectible account from its accounting records
ethics officer The employee directly responsible
when it determines the amount is not going to be paid.
for creating business conduct programs, evaluating
discount period The period of time within which an performance, and enforcing standards of conduct.
invoice must be paid if a discount is to be taken.
expense The cost of goods or services used to operate
disposal value The estimated value of a plant asset at a business.
its replacement time; also called salvage value.
external controls Measures and procedures provided
dissolution A legal change to the partnership such as outside the business to protect cash and other assets.
a change in partners that does not generally affect the
operations of the business.
F
dividend A distribution of cash to stockholders face value The amount written on the face of a
of a corporation; reduces the corporation’s promissory note; also called principal.
Glossary
retained earnings. Federal Unemployment Tax Act (FUTA) Law that
double-entry accounting A system that recognizes requires employers to pay unemployment taxes to the
the different sides of business transactions as debits federal government.
and credits. financial accounting The type of accounting that
drawee The bank on which a check is written. focuses on reporting information to external users.
drawer The person who signs a check. financial claim Legal right to an item.
due date The date by which an invoice must be paid. financial reports Documents that present
summarized information about the financial status of
E a business.
e-file A system for filing tax returns with the IRS using financial statements Reports prepared to summarize
a computer connected to the Internet. the changes resulting from business transactions that
occur during an accounting period.
electronic badge reader An electronic device
that scans the magnetic strip containing employee financing activities Business activities involving debt
information on an employee’s identification badge and and equity transactions.
then transfers the information directly to a computer.
first-in, first-out method (FIFO) An inventory costing
Electronic Federal Tax Payment System (EFTPS) method that assumes that the first items purchased
System used by large businesses to deposit income tax (first in) were the first items sold (first out).
payments by electronic funds transfer.
fiscal year An accounting period of twelve months.
electronic funds transfer system (EFTS) A system
that allows banks to transfer funds among accounts FOB destination Shipping term specifying that
quickly and accurately without the exchange of checks. the supplier pays the shipping cost to the buyer’s
destination.
employee’s earnings record A record prepared for
each employee that contains all payroll information FOB shipping point Shipping term specifying that
related to the employee; it is kept on a quarterly basis. the buyer pays the shipping charge from the supplier’s
shipping point.
ending inventory The merchandise a business has on
hand at the end of a period. footing A column total written in small pencil figures.
Glossary G–4
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GL O S S A R Y
Form 940 Form that reports the employer’s federal gross earnings The total amount of money an
unemployment taxes. employee earns in a pay period; also called gross pay.
Form 941 Employer’s Quarterly Federal Tax Return; gross profit on sales The amount of profit made
form used to report accumulated amounts of FICA during the fiscal period before expenses are deducted;
and federal income tax withheld from employees’ it is found by subtracting the cost of merchandise sold
earnings for the quarter, as well as FICA tax owed by from net sales.
the employer.
H
Form 1040EZ Federal income tax return; most
students file this return. home keys The 4, 5, 6 keys on a numeric keypad.
Form 1099 Form used by banks and other institutions horizontal analysis The comparison of the same
to report interest earned on savings accounts and item(s) on financial statements for two or more
other income. accounting periods or dates; used to determine changes
from one period to another.
Form 8109 Federal Deposit Tax Coupon; form sent
with payment for FICA and federal income taxes or I
federal unemployment taxes.
imaged check A copy of a canceled check; it is sent
Form W-2 Wage and Tax Statement; form that with the bank statement in place of the original
summarizes an employee’s earnings and amounts canceled check.
withheld for federal, state, and local taxes.
income statement A report of the net income or
Form W-3 Transmittal of Wage and Tax Statements; net loss for a specific period; sometimes called a
summarizes the information contained on the profit-and-loss statement or earnings statement.
employees’ Forms W-2 and accompanies the Forms
Glossary
Income Summary account The general ledger
W-2 sent to the federal government.
account used to summarize the revenue and expenses
Form W-4 A form employees complete when they for the period.
begin work; it indicates to the employer how much to
independence The principle that requires accountants
withhold for federal income tax from each paycheck.
to have no financial interest in the company
for-profit business A business that operates to earn being audited.
money for its owners.
integrity The principle that requires accountants to
401(k) plan A voluntary payroll deduction from gross choose what is right and just over what is wrong.
earnings; the employee does not pay income tax on
interest The fee charged for the use of money.
the amount contributed until the money is withdrawn
from the plan, usually after age 59½. interest rate The fee charged for the use of money
stated as a percentage of the principal.
free enterprise system A system in which individuals
are free to produce the goods and services they choose. interest-bearing note payable A note that requires
the face value plus interest to be paid on the
full disclosure Accounting principle requiring a
maturity date.
financial report to include enough information so that
it is complete. internal controls Procedures within the business that
are designed to protect cash and other assets and to
G keep reliable records.
general journal An all-purpose journal in which all inventory The items of merchandise a business has
the transactions of a business may be recorded. in stock.
general ledger A permanent record organized by investing activities Business activities involving
account number. investments and plant assets.
generally accepted accounting principles (GAAP)
investment Money or other property provided for the
The set of rules that all accountants use to prepare
purpose of making a profit.
financial reports.
invoice A source document that lists the quantity,
going concern The accounting assumption that a
description, unit price, and total cost of the items sold
business is expected to operate indefinitely.
and shipped to a buyer.
G–5 Glossary
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G L OSSARY
issue date The date on which a promissory note manufacturing business A business that buys raw
is written. materials and transforms them into finished products
by using labor and machinery.
J
market value The current price that is charged for a
journal A chronological record of the transactions of similar item of merchandise in the market.
a business.
matching principle Principle requiring that the
journalizing The process of recording business expenses incurred in an accounting period are matched
transactions in a journal. with revenue earned in the same period.
L materiality An accounting guideline stating that
information considered important (relative to the other
last-in, first-out method (LIFO) An inventory costing
information) should be included in financial reports.
method that assumes that the last items purchased (last
in) are the first items sold (first out). maturity date The due date of a promissory note; the
date on which the principal and interest must be paid.
ledger A group of accounts; also referred to as a
general ledger. maturity value The principal plus interest that must
be paid on a promissory note’s due date.
ledger account form The accounting stationery used
to record financial information about specific accounts. memorandum A brief written message that describes
a transaction that takes place within a business.
liabilities Amounts owed to creditors; the claims of
creditors to the assets of a business. merchandise Goods bought to resell to customers.
lifestyle The way a person uses time, energy, merchandising business A business that buys
and resources. finished goods and resells them to individuals or
Glossary
other businesses.
liquidation When the business ceases to exist
and dissolution is complete, all partnership assets mutual agency The legal right of any partner to enter
are converted to cash, all debts are paid, and any into agreements for the business that are binding on
remaining cash is distributed to the individual partners. all other partners.
liquidity ratio The measure of a business’s ability N
to pay its current debts as they become due and to
provide for an unexpected need for cash. net income The amount by which total revenue
exceeds total expenses for the accounting period.
long-term liabilities Debts that are not required to be
paid within the next accounting period. net loss The amount by which total expenses exceed
total revenue for the accounting period.
loss The result when a business spends more money
than it earns. net pay The amount left after total deductions have
been subtracted from gross earnings.
lower-of-cost-or-market The requirement that ending
merchandise inventory be stated at the lesser of cost net purchases The total cost of all merchandise
(calculated using one of the four inventory costing purchased during a period, less any purchases
methods) or market value. discounts, returns, and allowances.
M net sales The amount of sales for the period less any
sales discounts, returns, and allowances.
maker The person or business promising to repay the
networking Making contacts with people to share
principal and interest when a loan is made.
information and advice.
management accounting The type of accounting
non-interest-bearing note payable A note from
that focuses on reporting information to management;
which the interest is deducted in advance from the
often referred to as accounting for internal users of
face value of the note; no interest rate is stated on
accounting information.
the note.
manual accounting system A type of accounting
normal balance The increase side of an account. The
system in which information is processed by hand.
word normal here means usual.
note payable A promissory note issued to a creditor.
Glossary G–6
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GL O S S A R Y
note receivable A promissory note that a business par value The dollar amount assigned to each share of
accepts from a customer. stock before it is sold to the public; used to determine
the amount credited to the capital stock account.
not-for-profit organization An organization that
operates for purposes other than making a profit. partnership A business owned by two or more
persons, called partners, who agree to operate the
NSF check A check returned to the depositor by the
business as co-owners.
bank because the drawer’s checking account does not
have sufficient funds to cover the amount; also called partnership agreement A written agreement
dishonored check. that states the terms under which the partnership
will operate.
O
pay period The amount of time over which an
objectivity The principle that requires accountants to employee is paid.
be impartial, honest, and free of conflicts of interest.
payee The person or business to whom a check is
on account The purchase of an item on credit. written or a note is payable.
online The link of a terminal or cash register to a payroll A list of the employees and the payments due
centralized computer system. to each employee for a specific pay period.
operating activities Business activities involving payroll clerk An employee responsible for preparing
normal business operations. the payroll.
operating expenses The cash spent or assets payroll register A form that summarizes information
consumed to earn revenue for a business; operating about employees’ earnings for each pay period.
expenses do not include federal income tax expense.
Payroll Tax Expense The expense account used to
Glossary
operating income The excess of gross profit over record the employer’s payroll taxes (FICA, FUTA, SUTA).
operating expenses; taxable income.
percentage of net sales method A method of
other expense A nonoperating expense; an expense estimating uncollectible accounts expense in which
that does not result from the normal operations of a business assumes that a certain percentage of each
the business. year’s net sales will be uncollectible.
other revenue Nonoperating revenue that a periodic inventory system An inventory system
business receives from activities other than its which requires a physical count of the merchandise on
normal operations. hand to update inventory records.
outstanding check A check that has been written but permanent accounts Accounts that are continuous
has not yet been presented to the bank for payment. from one accounting period to the next; balances are
outstanding deposit A deposit that has been made carried forward to the next period (for example, assets,
and recorded in the checkbook but does not yet appear liabilities, and the owner’s capital account).
on the bank statement. perpetual inventory system An inventory system
overtime rate Pay rate employers are required to pay that keeps a constant, up-to-date record of the amount
certain employees covered by state and federal laws; of merchandise on hand.
the Fair Labor Standards Act of 1938 sets the rate at 1½ personal interest tests Tests that help individuals to
times the regular hourly rate after 40 hours per week. identify their preferences and to match interests to
owner’s equity The owner’s claims to the assets of potential careers.
the business. personality A set of unique qualities that makes a
P person different from all other people.
petty cash disbursement Any payment made from
packing slip A form that lists the items included in
the petty cash fund.
the shipment.
petty cash fund Cash kept on hand for making small,
Paid-in Capital in Excess of Par The account
incidental cash payments.
that represents the amount of cash received by a
corporation over the stock’s par value. petty cash register A record of all disbursements
made from the petty cash fund.
G–7 Glossary
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G L OSSARY
petty cash requisition A form requesting money to proving cash The process of verifying that cash
replenish the petty cash fund. recorded in the accounting records agrees with the
amount entered in the checkbook.
petty cash voucher A form that provides proof of
payment from the petty cash fund. proving the ledger Adding all debit balances and all
credit balances of ledger accounts, and then comparing
petty cashier The person responsible for
the two totals to see whether they are equal.
maintaining the petty cash fund and for making
petty cash disbursements. proxy A document that transfers a stockholder’s
voting rights to someone else.
physical inventory An actual count of all
merchandise on hand and available for sale. public accounting firm A business that provides
a variety of accounting services including the
piece rate A rate of pay based on the number of
independent audit.
items produced.
publicly held corporation A corporation whose stock
plant assets Long-lived assets that are used in the
is widely held, has a large market, and is usually traded
production or sale of other assets or services over
on a stock exchange.
several accounting periods.
purchase order A written offer to a supplier to buy
point-of-sale terminal (POS) An electronic
specified items.
cash register.
purchase requisition A written request that a
post-closing trial balance A list of the permanent
specified item or items be ordered.
general ledger account balances; it is prepared to prove
the ledger after the closing entries are posted. Purchases account The account used to record the
cost of merchandise purchased during a period.
postdated check A check that has a future date
Glossary
instead of the actual date; it should not be deposited purchases allowance A price reduction given
until the date on the check. when a business keeps unsatisfactory merchandise it
has bought.
posting The process of transferring information from
the journal to individual general ledger accounts. purchases discount The buyer’s cash discount for
early payment of an invoice on account.
preferred stock Stock whose owners have certain
privileges over common stockholders. purchases journal A special journal used to record all
transactions in which items are bought on account.
premium The amount paid for insurance.
purchases return The return of merchandise bought
prepaid expense An expense paid in advance.
on account to the supplier for full credit.
principal The amount of money borrowed on a
promissory note.
Q
proceeds The cash actually received by the borrower quick ratio A measure of the relationship between
on a non-interest-bearing note payable. short-term assets and current liabilities; calculated
by dividing the total cash and receivables by the
processing stamp A stamp placed on a creditor’s current liabilities.
invoice that outlines the steps to be followed in
processing the invoice for payment. R
profit The amount earned above the amount of ratio analysis The process of evaluating the
expense incurred to keep the business operating. relationship between various amounts in the
financial statements.
profitability ratio A ratio used to evaluate the
earnings performance of a business during the receipt A source document that serves as a record of
accounting period. cash received.
promissory note A written promise to pay a certain reconciling the bank statement The process of
amount of money at a specific time. determining any differences between a bank statement
balance and a checkbook balance.
property Anything of value that a business or person
owns and therefore controls.
Glossary G–8
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GL O S S A R Y
relevance An accounting characteristic requiring sales journal A special journal used to record only the
that all information that would affect the decisions sale of merchandise on account.
of financial statement users be disclosed in the
sales return Any merchandise returned for credit or a
financial reports.
cash refund.
reliability A characteristic requiring that accounting
sales slip A form that lists the details of a sale.
information be reasonably free of bias and error.
sales tax A tax levied by a city or state on the retail
report form A balance sheet format that lists
sale of goods and services.
classifications one under another.
schedule of accounts payable A list of all creditors
restrictive endorsement A check endorsement that
in the accounts payable ledger, the balance in each
transfers ownership to a specific owner and limits
account, and the total amount owed to all creditors.
how the check may be handled (for example, For
Deposit Only). schedule of accounts receivable A list of each charge
customer, the balance in the customer’s account, and
retailer A business that sells to the final user,
the total amount due from all customers.
the consumer.
selling expenses Expenses a business incurs to sell or
retained earnings A corporation’s accumulated net
market its merchandise or services.
income that is not distributed to stockholders.
service business A business that provides a needed
return on sales A ratio that examines the portion of
service for a fee.
each sales dollar that represents profit; calculated by
dividing net income by sales. signature card A bank form containing the
signature(s) of the person(s) authorized to write checks
revenue Income earned from the sale of goods
on a checking account.
Glossary
and services.
skills The activities that a person does well.
revenue recognition The GAAP principle that
revenue is recorded on the date it is earned even if slide error Error that occurs when a decimal point is
cash has not been received. moved by mistake.
reversing entry An optional general journal entry sole proprietorship A business owned by one person.
recorded on the first day of the new period that is the
source document A paper prepared as evidence that a
exact opposite of a specific adjusting entry made in the
transaction occurred.
previous period; it simplifies the recordkeeping in the
new period. special endorsement A check endorsement that
transfers ownership of the check to a specific
ruling Drawing a line; a single rule (line) drawn under
individual or business.
a column of figures indicates that the entries above the
rule are to be added or subtracted. If an amount is a special journals Journals that have amount columns
total and no further processing is needed, a double rule for recording debits and credits to specific general
is drawn under it. ledger accounts.
S specific identification method An inventory
costing method in which the exact cost of each item
Salaries Expense The expense account used to record in inventory is determined and assigned; used most
employees’ earnings. often by businesses that have a low unit volume of
salary A fixed amount of money paid to an employee merchandise with high unit prices.
for each pay period. State Unemployment Tax Act (SUTA) Law that
sale on account The sale of merchandise that will be requires employers to pay unemployment taxes to
paid for at a later date. individual states.
Sales A revenue account to record the amount of the statement of cash flows A financial statement that
merchandise sold. summarizes the cash receipts and cash payments
resulting from business activities during a period.
sales allowance A price reduction granted for
damaged goods kept by the customer.
sales discount See cash discount.
G–9 Glossary
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G L OSSARY
statement of changes in owner’s equity A financial trial balance A list of all the general ledger account
statement that summarizes changes in the owner’s names and balances; it is prepared to prove the ledger.
capital account as a result of business transactions
during the period.
U
statement of changes in partners’ equity A financial uncollectible account An account receivable that the
statement that reports the change in each partner’s business cannot collect; also called a bad debt.
capital account resulting from business operations, unearned revenue Revenue that is received before it
investments, and withdrawals. is actually earned.
statement of retained earnings A financial statement unemployment taxes Taxes collected to provide
that reports the changes in the Retained Earnings funds for workers who are temporarily out of work;
account during the period. usually paid only by the employer (FUTA and SUTA).
statement of stockholders’ equity A financial V
statement that reports the changes that have taken
place in all of the stockholders’ equity accounts during values The principles a person lives by and the beliefs
the period. that are important to the person.
stockholders’ equity The value of the stockholders’ vertical analysis A method of analysis that expresses
claims to the corporation. financial statement items as percentages of a base
amount.
stop payment order A demand by the drawer, usually
in writing, that the bank not honor a specific check. voiding a check Making a check unusable by writing
the word Void in ink across the front of the check.
straight-line depreciation A method that equally
distributes the depreciation expense over an asset’s voluntary compliance The principle that all
Glossary
estimated useful life. taxpayers are responsible for filing their tax returns
accurately and on time.
subsidiary ledger A ledger with detailed data
that is summarized in a controlling account in the W
general ledger.
wage An amount of money paid to an employee at a
T specified rate per hour worked.
T account A visual representation of a ledger account. weighted average cost method An inventory costing
The T account is a tool used to analyze transactions. method in which all purchases of an item are added to
the beginning inventory of that item; the total cost is
taxable income The amount of income that is taxed
then divided by the total units to obtain the average
on a federal income tax return.
cost per unit.
temporary accounts Accounts used to collect
wholesaler A business that sells to retailers.
information that will be transferred to a permanent
capital account at the end of the accounting period withdrawal The removal of cash or another asset
(for example, revenue, expense, and the owner’s from the business by the owner for personal use.
withdrawals account).
withholding allowance An allowance an individual
term The length of time the borrower has to repay a claims on a Form W-4; it is used to calculate
promissory note. the amount of income tax withheld from an
employee’s paycheck.
tickler file A file that contains a folder for each day of
the month into which invoices are placed according to work sheet A working paper used to collect
their due dates. information from the ledger accounts for use in
completing end-of-period activities.
time card A record of the time an employee arrives
at work, leaves work, and the total number of hours working capital The amount by which current assets
worked each day. exceed current liabilities.
transposition error Error that occurs when two
digits within an amount are accidentally reversed,
or transposed.
Glossary G–10
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I N D EX A
A accounts
chart of, 78, 79
ABA (American Bankers Association) number, 279 classifying, 54–55
account, 54. See also specific accounts opening, 165–166
cash received on, 396–397 permanent, 105–106
contra, 389 temporary capital, 104, 105, 106–109
controlling, 386 accounts payable, 55
determining balance of, 80 accounts payable subsidiary ledger, 421
four-column form, 165 posting to the, 426
normal balance of, 80 accounts payable subsidiary ledger form, 421, 422
number, 78 accounts receivable, 54, 385
opening an, 165–166 aging of, 713–714
payment on, 431–432 book value of, 706
purchase on, 421–424 collecting a written-off account, 700, 709
sale on, 381 uncollectible, 719
subsidiary, 385 accounts receivable subsidiary ledger, 385–386
T, 79, 83–84 posting to the, 389, 391
temporary, 104–105, 106–109 proving, 466, 468
uncollectible, 698–699 accrual basis of accounting, A-26
zero balance, 174 accruals, A-26
account name section accrued expenses, A-28
on work sheet, 198 accrued revenue, A-27
accountant, 13. See also careers accumulated depreciation, 675
accounting, 50 account for, 678–679, 680, 681
basic concepts, 50–52, 78–81, 104–109 accumulated earnings, 323
Index
basic terminology, 50–52, 78–81, 104–109 adjusted gross income, A-37
careers in, 13–15, 17, 37, 89, 117, 176, 230, 293, adjusting entries, 531
361, 428, 503, 623, 685 for depreciation expense, 677–680
financial, 34 in computerized accounting, 541
management, 34–35 updating accounts through, 534, A-2, A-7, A-10
payroll, 308 adjustments, 520, A-2. See also adjusting entries
purpose of, 13, 40 calculating, 519, A-3–A-6
reports, 34 in ten-column work sheet, 518–522, A-4–A-7
system, 33 recording, 531–532, A-7, A-10
accounting clerk, 14 to Merchandise Inventory, 521–522
accounting cycle, 132–134, 164, A-8 to Prepaid Insurance, 525–527, A-5
analyze business transactions, 55, 134 to Supplies, 524–525, A-3
collecting source documents, 133 to tax accounts, 527
for merchandising business, 598 administrative expenses, 561
journalizing adjusting entries, 136, 520–521, 534 aging of accounts receivable method, 713–714
journalizing business transactions, 136–137 allowance method, 704
journalizing closing entries, 250–252 American Institute of Certified Public Accountants
posting, 168–170 (AICPA), 838
posting closing entries to general ledger, 260–261 analysis
preparing a post-closing trial balance, 262 horizontal, 568
preparing a trial balance, 177–180 ratio, 235–236
preparing financial statements, 220 vertical, 563, 695
preparing the work sheet, 197–199 annual report, 447, 479
steps in, 132 asset and equities transactions, 83–84
accounting equation, 52, 55 assets, 51, 80
effects of transactions on, 55, 81 current, 235, 670
accounting period, 35, 134 plant, 671, 672, 695
at end of the, 250 assets and liabilities, 85–87
closing the, 267 assets and owner’s capital, 84–85
accounting system, 33
I–1 Index A
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INDE X A
assets section business ethics, 832
of balance sheet, 232 business organizations, forms of, 29–31
audit, 15 business transactions, 54
authorized capital stock, 615 analysis of, 83, 84–87, 111–115
automated teller machine (ATM), 291 cash payment, 56
credit, 57–58
B double-entry accounting, 78–81
bad debts, 698. See also uncollectible accounts revenue and expense, 60–61
receivable source documents for, 133
balance sheet, 231–234, 566–567, 625–626 withdrawals, 61–62
analysis of, 231, 568–570
and ratio analysis, 235 C
assets section, 232 calendar year, 134
classifying, 549 canceled checks, 285
for corporation, 566–567 capital, 29
for partnership, 809 capital account, 104
heading, 231–232 capital investments
liabilities and owner’s equity section, 232–234 division of profits and losses, 793–794
of ten-column work sheet, 532 Capital Stock, 552, 553
of a work sheet, 201, 203 authorized, 615
proving the, 234 common, 615
bank discount, 759 issuing, 616
bank service charges, 286 par value, 615
journalizing, 288 preferred, 615, 617
bank statement, 284–285 careers
Index
reconciling, 285–286, 297 choosing, 6–9
bankcard, 291, 394 in accounting, 13–15, 17, 37, 89, 117, 176, 230, 293,
bankcard fees, 433 361, 428, 503, 623, 685
bankcard sales, 394 researching, 10–11
recording, 399 setting goals for, 11
banking procedures, 288–289 cash
endorsing checks, 280–281 proving, 284, 500, 501
opening a checking account, 279 cash basis of accounting, A-26
preparing commercial bank deposits, 279–280 cash discount, 394–395
protecting cash, 278 recording cash received on account with, 396–397
recording deposits, 281 cash flows, 569-570
writing checks, 281–282 cash funds, 659
base period, 568 cash inflows, 569
beginning inventory, 521 cash outflows, 569
blank endorsement, 281 cash payment
board of directors, 615 and purchases, 439, 507
book of original entry, 134 controls, 429
book value, 675 for account purchases, 431, 432
of accounts receivable, 706 other, 432
of notes payable, 757 transactions, 56
of plant assets, 672 cash payments journal, 489, 497–498
bookkeeper, 78 posting from, 494–497, 498, 499
business, 28–29 proving, 499, 500, 501
decisions, 34–35 recording in, 490–492, 493–494
for-profit, 13–14 recording payroll in, 492, 493
not-for-profit, 14–15 cash proof, 500, 501
operations, 29 for change fund, 643
organizations, 29–31 cash purchases
business entity, 35 recording, 429, 430
Index A I–2
I01-I10_IN-A-868829.indd 2 9/19/05 5:54:48 PM
I N D EX A
cash receipt, 393 closing the accounting period, 267
and sales, 405, 473 closing the fiscal year, 603
journalizing and posting, 395–400, 459 closing the general ledger, 588–591, 593–597
transactions, 393–394 code of ethics, 833
cash receipts journal, 459, 464 collecting and verifying source documents, 133–134
posting, 459–460, 463–464, 465–467 combination journal, A-18
proving, 464–465 commission, 313
recording in, 460–462 common stock, 615
cash received on account, 396–397 dividends, 619–621
cash refunds, 389 issuing, 616
cash register, 393 comparability, 554–555
cash register tape as source document, 643 comparative income statement, 563
cash sale, 393 competence, 837
recording, 398 compound entry, 256
cash short and over, 644–645 computerized accounting system, 33, 93, 421
in petty cash fund, 653–654 adjusting entries, 541
certified public accountant (CPA), 15 closing accounting period, 267
change fund, 642–643 closing fiscal year, 603
charge customers, 384 customizing financial statements, 631
payments, 393, 395–396 electronic spreadsheets, 67
chart of accounts, 78 financial statements, 555
for a merchandising corporation, 381 general journal entries, 153
for a sole proprietorship service business, 79 inventory costing, 743
preparing, 78, 121 maintaining cash funds, 659
charter, 31 payroll and, 323, 324
Index
Check 21, 289 posting to the general ledger, 185
checkbook, 279 preparing a trial balance, 211
checking account, 278 preparing financial statements, 241, 575
making deposits to, 279–281 preparing payroll, 329
opening, 279 purchases and cash payments in, 507
recording deposits to, 281 receipts, 405
check-less system, 290 reconciling bank statements, 297
checks, 278 recording and paying payroll taxes, 365
canceled, 285 recording depreciation, 689
endorsing, 280–281 recording general journal entries, 153
filling out, 282 recording notes receivable and payable, 771
imaged, 285 recording purchases and cash payments, 439
NSF, 289 recording sales and cash receipts, 405
payroll, 322 sales and cash receipts in, 473
routing of, 291 setting up the general ledger, 121, 771
stub, 133, 281–282 starting new company, 799
voiding, 282 writing-off uncollectible accounts receivable, 719
writing, 281–282 confidentiality, 837
closely held corporations, 614. See also corporations, conservatism principle, 738
publicly held corporations consistency principle, 737
closing entries, 250, 253 contra account, 389
for depreciation expense, 681, 682, 683 contra asset, 678, 704
for expenses, 255–256 contra cost of merchandise, 425
for revenue, 254–255 controlling account, 386, 421
for temporary accounts, 253–258 corporation, 30, 31. See also publicly held corporations
for withdrawals, 257–258 accounting functions involved with a, 527,
journalizing, 250–252, 588–591 552–554, 588–591, 616, 617, 619–621
updating accounts through, 260–262 characteristics of, 614–615
closing process, 251–252 recording ownership for, 552
I–3 Index A
I01-I10_IN-A-868829.indd 3 9/19/05 5:54:48 PM
INDE X A
correcting entry, 179 dissolution, 811
correcting errors dividends, 619–621
in journal entries, 148 division of profits and losses, 790
in trial balance, 179–180 capital investment, 793–794
cost of merchandise, 419 equal, 790
cost of merchandise sold, 558 fractional share, 791–793
CPA (certified public accountant), 15 double-entry accounting, 79, 115
credit, 51, 79 double rule, 199, 232
equality with debits, 115 drawee, 282
purchasing on, 51 drawer, 282
credit balance column, 165 due date, 422
credit cards, 384
credit memorandum, 388–389 E
credit terms, 385 e-file, A-38
credit transactions, 57 EFTPS (Electronic Federal Tax Payment System), 351
creditor, 51 EFTS (Electronic Funds Transfer System), 290
current assets, 235, 670 electronic badge readers, 312
current liabilities, 235 electronic funds withdrawal, A-39
current ratio, 236 electronic spreadsheets, 67
employees
D paying, 322–323
debit, 79 employee’s earnings record, 323–324
equality with credits, 115 employer’s payroll taxes, 346–347
rules of, 79, 80 journalizing, 347–348
debit balance column, 165 posting to general ledger, 349
Index
debit-credit rule, 79–81, 83 quarterly report, 358, 359
debit memorandum, 424 ending inventory, 521
declining-balance depreciation, 675 adjustment for, 521, 522
deductions, payroll, 315, 340–341 determining cost of, 731
required, 315–316 end-of-period reports, 518
voluntary, 318, 355 endorsement, 280–281
deferrals, A-30 entrepreneurs, 27, 28, 29
deposit slip, 279, 280 traits of, 29, 30, 31
deposit ticket, 279, 280 entries, adjusting, 541
depositor, 278 closing, 250
depreciation, 671 equality of debits and credits, 115
accumulated, 675, 678–679, 680–681 equities, 51, 52
ACRS, 672 statement of stockholders’, 624–625
adjusting entries for, 681, 683 stockholders’, 552–553, 614, 637
adjusting for depreciation expense, 677–680 transactions, 83–84
calculating, 671, 674–675 errors
closing entries for, 681, 683 correcting, 148, 179–180
MACRS, 672 erasing an error, 179–180
of plant assets, 671, 672 finding, 115, 178–179
rate, 674–675 in a cash proof, 501
recording, 682, 689 in balance sheet section, 205
reporting on financial statements, 679–680 in checkbook, 284
schedule, 675, 677 in subsidiary ledger, 466, 468
summary of, 677 preventing in payroll, 323, 324
direct deposit, 290, 323 slide, 178
direct write-off method, 698 transposition, 178
disclosure, full, 555 when reconciling bank statement, 287
discount period, 419 when writing checks, 282
disposal value, 672, 675 estimated useful life, of plant asset, 671–672
Index A I–4
I01-I10_IN-A-868829.indd 4 9/19/05 5:54:49 PM
I N D EX A
ethics, 832 fiscal year (period), 134
in accounting, 24, 44, 74, 100, 128, 190, 216, 246, closing the, 603
274, 302, 336, 370, 412, 446, 478, 514, 548, 580, FOB destination, 433
610, 636, 666, 694, 724, 748, 776, 804, 824, 845 FOB shipping point, 433
ethics officer, 833 footing, 453
expense, 60, 104 Form 940, 358
accrued, A-28 Form 941, 358, 359
depreciation, 677, 679 Form 1040EZ, A-37
operating, 561 Form 1099, A-37
prepaid, A-31 Form 8109, 351–352
section of income statement, 223 Form W-2, 357, 358, A-37–A-38
section on worksheet, 223 Form W-3, 357, 358
uncollectible, 703 Form W-4, 315–316, A-37
expense accounts, 104, 107–108 for-profit business, 14
closing, 255–256 four-column ledger account form, 165
external controls, 278 401 (k) plan, 318
fractional share basis, 791–793
F free enterprise system, 28
face value of note, 752 full disclosure, 555
federal income tax FUTA (Federal Unemployment Tax Act), 347, 353–354
EFTPS, 351
paying, 351, 353 G
payroll deductions for, 315–318 GAAP (generally accepted accounting principles), 33
Federal Insurance Contributions Act (FICA), 316 accounting period, 35
employer’s, 346–347 business entity, 35
Index
Federal Tax Deposit Coupon, 351, 354 conservatism, 738
Federal Unemployment Tax Act (FUTA), 347, 353–354 consistency, 737
FICA (Federal Insurance Contributions Act), 316 going concern, 35
employee’s, 318 matching, 203, 557, 670, 703
employer’s, 346–347 revenue recognition, 113, 386
FIFO (first-in, first-out), 732–733 general journal, 136
financial accounting, 34 adjusting entries in, 531, A-7
Financial Accounting Standards Board (FASB), 33 closing entries in, 250
financial claim, 50, 51, 52 correcting errors in, 148
financial reports, 33 recording entries in, 136–140
financial statements, 78, 220. See also specific financial general ledger, 164
statements closing, 588–591, 593–597
analyzing, 247, 275, 303, 337, 413, 447, 479, 549, posting closing entries to the, 260–261
581, 611, 637, 667, 695, 725, 749, 777, 805, 825 posting payroll to the, 343–344
balance sheet, 231–234, 566-567, 625-626 setting up the, 164–165, 185, 819
customizing, 631 generally accepted accounting principles. See GAAP
end-of-period, 554 going concern, 35
income statement, 221–223, 557 gross earnings, 311
preparing computerized, 241, 575 gross pay. See gross earnings
preparing manual, 221, 557 gross profit on sales, 561
recording depreciation on, 680–681
statement of cash flows, 234, 569–570, 626 H
statement of changes in owner’s equity, 225–228 heading
statement of changes in partner’s equity, 809 on balance sheet, 231–232
statement of retained earnings, 565–566 on financial statements, 221, 225
financing activities, 570 work sheet, 196
finding errors. See also errors home keys, A-14
in trial balance, 115, 178–179 horizontal analysis, 568, 725
first-in, first-out method (FIFO), 732 hourly wage, 312
I–5 Index A
I01-I10_IN-A-868829.indd 5 9/19/05 5:54:49 PM
INDE X A
I J
imaged checks, 285 journalizing, 134
income statement, 220, 221, 557 cash payments, 489, 497–498
analysis of, 562–563, 695 cash receipts, 459, 464
cost of merchandise sold, 558, 559, 560 closing entries, 253–258, 588–591
expenses section, 223 correcting entries, 179
gross profit on sales, 561 employer’s payroll taxes, 347–348
net income section, 223, 561–562 payroll, 340–343
operating expenses, 561 purchases, 482–483, 485, 486
revenue section, 221, 558 sales, 450, 451, 453, 454
section of a work sheet, 201, 203 work sheet adjustments, 531
Income Summary account, 253 journals, 134. See also specific journals
closing entries to, 353–356 closing entries in, 558–591
closing to capital, 256–258 special, 450
independence, 837 usefulness of, 166
Institute of Internal Auditors (IIA), 830, 838
Institute of Management Accountants (IMA), 838 K
insurance keeping the books, 78
prepaid, 429
recording payment of, 429, 430 L
integrity, 836 last-in, first-out (LIFO) method, 733
interest, 754 ledger, 78. See also specific ledgers
calculating on a note, 754, A-26, A-28 ledger, general. See general ledger
payable, A-28 ledger account form, 165
Index
receivable, A-27 ledger accounts
interest-bearing notes payable, 757 opening, 165–166
interest rate, 752 ledgers
interest table, 755 usefulness of, 166
interests, personal, 8 liabilities, 52
internal controls, 278, 324, 729 assets and, 85–87
Internal Revenue Service (IRS), 315, 357, 672, A-36, current, 235
A38, A-40 long term, 757
inventory, 382 payroll, 340–341
beginning, 521 rules of debit and credit, 79–81
ending, 521 liabilities section
merchandise, 521, 522 on balance sheet, 232–234
methods of tracking, 728–729 liability accounts, 80–81
physical, 729 lifestyle, 9
recording, 729 LIFO (last-in, first-out), 733–734
sheet, 729 liquidation, 811–814
inventory costing, 743 liquidity ratio, 236
consistency and, 737 local taxes, 318, 352–353
FIFO, 732–733 long-term liabilities, 757
LIFO, 733–734 loss, 28
specific identification, 731–732 lower-of-cost-or-market method, inventory
weighted average cost, 734 valuation, 738
investing activities, 569
investment, 55 M
invoice, 133 maker, 752
processing supplier’s, 418 management
issue date, 752 and payroll accounting, 324
use of income statements, 563
use of journals and ledgers, 166
use of work sheet, 203
Index A I–6
I01-I10_IN-A-868829.indd 6 9/19/05 5:54:49 PM
I N D EX A
management accounting, 34 online, 729
manual accounting system, 33, 78, 422 opening a checking account, 279
accounts receivable subsidiary ledger in a, 386 operating activities, 569
general ledger in a, 164 operating cycle for merchandising business, 380, 382
manufacturing business, 29 operating expenses, 561
market value, 738 operating income, 561
matching principle, 203, 557, 670, 703 other expense, 763
materiality, 555 other revenue, 765
maturity date, 752 outstanding checks, 286
maturity value, 755 outstanding deposits, 286
memorandum, 133 overtime rate, 313
credit, 388–389 owner’s capital accounts, 80–81
debit, 424 owner’s capital and assets, 84–85
merchandise, 382 owner’s equity, 52
cost of, 419 return on, 275
purchase of, 416–425, 429, 430 owner’s equity section on balance sheet, 234
sale of, 380–389, 398 owner withdrawals, 61–62
merchandise inventory, 382, 521, 522, 728
merchandising business, 29, 380 P
contrasting with a service business, 380 packing slip, 418
operating cycle, 380, 382 Paid-in Capital in Excess of Par, 616
sales, 382 par value, 615
MICR number, on check, 279 partners’ equity, 787, 788, 803
mutual agency, 787 statement of changes to, 809
partnership, 30, 31
N
Index
accounting functions involved with a, 787–794
net income, 203 agreement, 786
closing entry for, 588 analysis of a, 825
division of, for partnership, 790–794 characteristics of a, 786–787
on a work sheet, 223 dissolution of, 811
on an income statement, 203, 204 division of profits and losses, 790–794
net loss, 206 financial statements for, 808–809
at closing, 256–257, 591 liquidation of, 811–814
on a work sheet, 206 pay period, 310
on an income statement, 223 payee, 281, 752
net pay, 321 paying employees, 322–323
net purchases, 559 payroll, 310
net sales, 558 accounting, 324
networking, 11 deductions, 315–318, 340–341
non-interest-bearing notes payable, 759 employee-paid withholdings. See deductions
nonprofit. See not-for-profit organization employee’s earnings record, 323–324
normal balance, 80 employer’s taxes, 346–347
note payable, 752 funds, dissemination of, 322–323
interest-bearing, 757–759 gross pay, 311
non-interest-bearing, 759–763 journalizing, 340–343, 492–493
note receivable, 752, 765–766. See also promissory managerial importance of, 324
notes net pay, 321
not-for-profit organization, 14 posting to general ledger, 343–344
NSF checks, 289 preparing computerized, 329
numeric keypad, A-14 registers, 320–322, 341
salary expenses, 311
O payroll clerk, 310
objectivity, 837 payroll liabilities, 340–341
on account, 57 posting to, 356–357
cash received, 396–397
I–7 Index A
I01-I10_IN-A-868829.indd 7 9/19/05 5:54:50 PM
INDE X A
payroll taxes, employer’s processing stamp, 418
FICA, 346–347 profit, 28
FUTA and SUTA, 347 profitability ratios, 235
journalizing, 347–348 promissory notes, 752. See also notes payable; notes
posting to general ledger, 349 receivable
Payroll Tax Expense, 347–348 bank discount, 759
payroll tax expense forms, 351–354 calculating interest on, 754–755
payroll tax forms. See payroll tax reports determining maturity date of, 753–754
payroll tax liabilities, 351–357, 365 property, 50
payroll tax reports, 351, 357–358 proprietorship. See sole proprietorship
percentage of net sales method, 712 protecting cash, 278
periodic inventory system, 729 proving cash, 284, 500, 501
permanent accounts, 105 proving equality of balance sheet, 234
after closing, 262 proving the ledger, 177
perpetual inventory system, 728 proxy, 615
personal interest tests, 10 public accounting firm, 15
personality, 9 publicly held corporations, 614
petty cash disbursement, 647 dividends, 619–621
petty cash envelope, 652 financial reporting for, 624–626
petty cash fund, 647 stock, 615–617
cash short and over in, 653–654 purchase allowance, 424–425
opening a, 647–648 purchase discounts, 418, 419
replenishing a, 649, 652 purchase order, 416
petty cashier, 647 purchase requisition, 416
petty cash register, 650 Purchases account, 419
Index
petty cash requisition, 650 purchases allowance, 424
petty cash voucher, 648 purchases and cash payments, 439, 507
physical inventory, 521 purchases journal, 482–483, 485, 486
piece rate, 313 posting from the purchases journal, 484, 485
plant assets, 670, 671, 672. See also depreciation posting special column totals to general ledger, 487
records of, 675 recording and journalizing purchases on
point-of-sale terminals (POS), 729 account, 483
post-closing trial balance, 262, 597 purchases on account
postdated check, 289 accounts payable subsidiary ledger, 421
posting, 164, 169–173 posting to accounts payable subsidiary ledger, 426
closing entries to general ledger, 260–261 recording purchases on, 422–424, 431, 432, 483–484
a correcting entry, 180 purchases return, 424, 425
employer’s payroll taxes to general ledger, 349 purchasing process, 416–419
from work sheet, 534–536
general journal entries, 168–169 Q
importance of, 170 quick ratio, 236
payroll liabilities to general ledger, 356–357
payroll to general ledger, 343–344 R
sales journal to general ledger, 453 ratio
to accounts payable subsidiary ledger, 426 analysis, 235
to accounts receivable subsidiary ledger, 389, 391 current, 236
preferred stock, 615, 617 debt to equity, 777
dividends, 621 liquidity, 235–236
premium, 429, A-5 price-earnings, 667
prepaid expense, 525, A-31 profitability, 235
price-earnings ratio, 667 quick, 236
principal, 752 return on sales, 236
proceeds, 759 receipt, 133
processing bankcard sales, 394 receipts, cash and sales, 473
Index A I–8
I01-I10_IN-A-868829.indd 8 9/19/05 5:54:50 PM
I N D EX A
reconciling the bank statement, 284-287, 297 sales returns, 388
reinstatement, of written-off account receivable, Sales Returns and Allowances account, 389
700, 709 sales slips, 384
relevance, 555 bankcard, 394
reliability, 555 sales tax, 385
report form, 232, 566 Sarbanes-Oxley Act, 783, 838, 841, 845
restrictive endorsement, 281 schedule of accounts payable, 499
retailer, 380 schedule of accounts receivable, 466
retained earnings, 554 Securities and Exchange Commission (SEC), 447,
closing entries, 591 597, 836
statement of, 565–566 selling expenses, 561
return on sales, 235 service business, 29
revenue, 60, 104 contrasting with a merchandising business, 380
accrued, A-27 service change, bank, 286
unearned, A-31 shareholders, 31
revenue accounts, 106–107 shipping charge, 433
closing, 254–255 showing net income, 203
on an income statement, 221 showing net loss, 206
rules of debit and credit, 79–80 signature card, 279
revenue realization, 386, 557 six-column work sheet. See also ten-column work sheet;
revenue recognition, 113, 386, A-26 work sheet
revenue section account name section, 198
on income statement, 221, 558 completing the, 205
reversing entry, A-32 heading for, 197
routing checks, 291 preparing the, 196–199, 206
Index
rules of debit and credit, 79–80 showing net income, 203–205
applying, 83–87, 111–115 showing net loss, 206
and equality, 115 skills, 8, 11
for temporary capital accounts, 106–109 slide error, 178
ruling, 199 social security tax, 316. See also FICA
special journals, 453 sole proprietorship, 30, 31
work sheet, 199, 530 accounting functions involved with a, 105–109
source documents, 133
S applying information from, 134
salary, 311, 324 bank statements as, 288, 289
and commission, 313 cash register tapes as, 393, 643
expense, 340 credit memos as, 389
sales, debit memos as, 424
account, 382 examination of, 134
international, 382 for cash payments journal, 489
internet, 468 sales slips as, 384
sales allowances, 388 special endorsement, 281
sales and cash receipts, 473 special journals, 450. See also specific journals
sales credit column specific identification method, 731
posting to Sales, 454 spreadsheets, electronic, 67
sales discount, 394 state taxes, 318, 352–353
sales journal, 450, 451, 453, 454 State Unemployment Tax Act (SUTA), 347, 354–355
posting to ledger, 452, 453 statement of cash flows, 234, 555, 569–570, 626
posting totals of, 454–456 statement of changes in owner’s equity, 220, 225–228
recording sales of merchandise on account, 451–452 statement of changes in partners’ equity, 809
sales of merchandise on account statement of retained earnings, 565–566
recording, 451–452 statement of stockholders’ equity, 624
sales on account, 384 stock
recording, 386–388 capital, 552, 553, 615
I–9 Index A
I01-I10_IN-A-868829.indd 9 4/7/06 3:31:54 PM
INDE X A
common, 615, 616, 617 preparing a computerized, 211
dividends, 619–621 preparing a manual, 177–179, 518–519
preferred, 615, 617 preparing a post-closing, 262, 597
stockholders, 31, 614
stockholders’ equity, 552, 611, 615 U
statement of, 624–625 uncollectible accounts receivable, 698, 719
stop payment order, 289 allowance method, 704–710
stopping payment on a check, 289 calculating, 704, 712–714
straight-line depreciation, 672, 674 determining, 699
subsidiary ledgers, 385 direct write-off method, 698–701
errors in the, 468 expense, 703
preparing schedules for, 466, 499 journalizing transactions involving, 698–701,
summary of depreciation, 677 705–710
SUTA (State Unemployment Tax Act), 347, 354–355 recording, 698
reinstating, 700, 709
T writing off, 698–699
T accounts, 79, 83–84 unearned revenue, A-31
tax reports unemployment taxes, 347
payroll, 357–359
tax tables, 316 V
taxable income, A-38 values, personal, 8
taxes verifying and collecting source documents, 133–134
EFTPS, 351 vertical analysis, 563, 695
employer’s payroll, 346–348 voiding a check, 282
federal income, 315–318 voluntary compliance, A-36
Index
FICA, 316, 346–347 voucher, 418
sales, 385 petty cash, 648–649
social security, 316, 318 system, 418
state and local, 318
unemployment, 347 W
tele-tax, A-40 wage and tax statements
temporary accounts, 104 Form W-2, 357, 358
closing entries for, 253–258 Form W-3, 357, 358
ten-column work sheet, 518, A-2. See also six–column wages, 312, 324
work sheet; work sheet hourly, 312
adjustments in, 519–522, 524–527, A-4–A-6 overtime, 313
extending amounts, 531, A-7 weighted average cost method, 734
journalizing adjustments of, 531, 534, A-7, A-10 wholesaler, 380
trial balance section, 518–519, 529–531, A-2 withdrawals, 62, 104
term, of promissory note, 752 withdrawals account, 104, 108–109
tickler file, 422 closing to capital, 257–258
time calendar, 754 withholding allowance, 316
time card, 312 work sheet, 197
traits adjusted trial balance section of, 529–530, A-6–A-7
of entrepreneurs, 27, 28, 29, 30, 44 adjustment for uncollectible accounts, 707
personal, 8, 9–10 six-column, 196–199, 201–206
Transmittal of Wage and Tax statements (form W-3), ten-column, 524–527, 529–536, A-2–A-7
357, 358 working capital, 235, 303
transposition error, 178
trial balance, 177, 518–519 Z
errors in, 178–179 zero balance, 174
on work sheet, 198–199
Index A I–10
I01-I10_IN-A-868829.indd 10 4/7/06 3:31:55 PM
I N D EX B
Academics dear fellow stockholders letter, 413
economics, 286, 754 employee costs, 371
history, 134, 597 evaluating long-term debt, 777
language arts, 29, 203 evaluating partnership operating results, 825
mathematics, 492, 834 evaluating stockholders’ equity, 637
science, 644, 734 evaluating working capital, 303
horizontal analysis, 725
Adler Planetarium and Astronomy Museum. See
identifying corporate goals, 447
Businesses
interpreting sales, 479
Advanced Micro Devices. See Businesses inventory levels, 749
return on sales, 247
A Matter of Ethics
statement of cash flows, 581
becoming an entrepreneur, 44
vertical analysis, 695
borrowing from petty cash, 666
company property, 74 Applebee’s International. See Businesses
Real-World Applications and Connections
computer viruses, 274
Aveda Corporation. See Businesses
confidentiality, 412
early write-off, 724 Businesses
financial report or repair, 246 99 Cents Only Stores, 550
gossip in the workplace, 160 Adler Planetarium and Astronomy
handling sales returns, 610 Museum, 480
insufficient funds, 514 Advanced Micro Devices, 750
is the boss always right, 776 American Express Company, 194
keeping promotional items, 748 Applebee’s International, 640
meeting a deadline, 190 Aveda Corporation, 26
money shuffling, 370 Google Inc., 130
out-of-date goods, 548 HARPO Productions, Inc., 48
padding a résumé, 24 Hewlett-Packard, 612
padding expense accounts, 216 The Institute of Internal Auditors, 830
partner loyalty, 804 Jamba Juice, 276
payroll information, 336 King & King, Architects, LLP, 806
pocketing differences, 302 Los Angeles Angels of Anaheim, 162
reporting a mistake, 580 Moss Adams, LLP, 784
showing favoritism, 446 National Geographic society, 4
software piracy, 100 Panda Restaurant Group, 76
using another person’s idea, 824 PETsMART, 586
using a toll-free number, 128 Plantronics, 516
using insider information, 636 Radio Flyer, 248
whom will they believe, 694 REI, Inc., 726
working conditions, 845 Rush Trucking, 668
working for a competitor, 478 The Sharper, Image, 448
Southwest Airlines, 102
American Express Company. See Businesses
Suncoast Motion Picture Company, 414
Analyzing Financial Reports Symantec Corporation, 308
analyzing employee productivity, 337 Tapatío Hot Sauce Company, 218
analyzing partners’ equity, 805 Underground Station, 378
calculating price-earnings ratio, 667 U.S. Government Accountability Office, 696
calculating return on owner’s equity, 275 Verizon Wireless, 338
calculating return on stockholders’
Careers
equity, 611
accounting manager, 17
classifying the balance sheet–assets and
accounting professor, 89
liabilities, 549
analyst, 428
corporate responsibility, 846
chief financial officer, 736
cost of sales, 515
I–11 Index B
I11-I15_IN-B-868829.indd 11 9/19/05 5:54:13 PM
INDE X B
controller, 623 explaining a transaction, 478
county auditor, 176 explaining cause and effect, 274
director of finance, 503 explaining financial statements, 580
director of shared services, 361 explaining results, 610
equity research associate, 117 inventory systems, 748
partner, 230 making the case for daily deposits, 302
recruiting manager, 293 a plan for quality, 446
U.S. operations controller, 685 presenting the balance sheet, 246
vice president, finance, 37 presenting your case, 412, 824
process to increase the change fund, 666
Case Study
promote your project, 776
career advice, 24
promoting an idea, 129
CPA firm
promoting technology, 694
audits, 845
public speaking, 370
entrepreneurship, 44
Real-World Applications and Connections
requesting information, 514
merchandising business
summarizing success, 44
books and more, 514
teaching the posting process, 191
coffee shop, 636
training new employees, 548
department store, 610
writing an article, 25
formal wear, 724
writing a tip sheet, 74
gourmet food gifts, 580
writing e-mail, 845
health foods, 666
home building and supply, 748 Computerized Accounting
movie theater, 478 adjusting entries, 541
photography studio, 694 chart of accounts, 121
restaurant/retail shop, 776 closing the accounting period, 267
sportswear store, 446 closing the fiscal year, 603
training videos, 548 customizing financial statements, 631
videos, 412 exploring electronic spreadsheets, 67
partnership general journal entries, 153
building and design, 824 introduction to computerized accounting
dentists, 804 systems, 93
payroll inventory costing, 743
financial planning, 336 maintaining cash funds, 659
warehousing center, 370 mastering purchases and cash payments, 507
service business mastering sales and cash receipts, 473
accounting services, 190 notes receivable and payable, 771
advertising agency, 216 posting to the general ledger, 185
computer consulting, 274 preparing financial statements, 241, 575
entertainment, 302 preparing the payroll, 329
exercise and fitness, 160 reconciling the bank statement, 297
health and fitness, 74 recording and paying payroll tax
landscaping, 100 liabilities, 365
video arcade, 246 recording depreciation, 689
web site design, 128 recording purchases and cash payments, 439
sales and cash receipts, 405
Communicating Accounting
setting up the general ledger, 819
collecting an outstanding account, 724
starting a new company, 799
creating a handout, 216
trial balance, 211
creating a partnership agreement, 804
writing off uncollectible accounts
demonstrating the double-entry system, 100
receivable, 719
describing corporations, 636
describing source documents, 161 Critical Thinking
evaluating direct deposit, 336 the accounting equation, 74
Index B I–12
I11-I15_IN-B-868829.indd 12 9/19/05 5:54:15 PM
I N D EX B
accounting for a merchandising business, 412 assuring responsible governance, 830
adjustments and the ten-column work becoming an entrepreneur, 26
sheet, 548 closing the books, 586
career possibilities, 24 controlling cash, 276
cash control, 302 depreciating assets, 668
cash funds, 666 evaluating notes, 750
completing the accounting cycle, 274, 610 evaluating partnership financial
double-entry accounting, 100 statements, 806
ethics, 845 evaluating payroll costs, 338
financial statements, 246 investing capital, 48
financial statements for a corporation, 580 looking at fiscal year-end activities, 248
free enterprise, 44 looking at partnerships, 784
general journal entries, 160 looking at the role of purchases, 480
general ledger and the trial balance, 190 moving into the work force, 308
Real-World Applications and Connections
introduction to partnerships, 804 preparing financial statements, 218
inventories, 748 protecting cash, 640
notes payable and receivable, 776 recording financial information, 130
partnerships, 824 summarizing results, 194
payroll accounting, 336 thinking about a career, 4
payroll records and reports, 370 tracking inventories, 726
plant assets, 694
Google Inc. See Businesses
processing purchases, 446
publicly held corporation, 636 HARPO Productions, Inc. See Businesses
six-column work sheet, 216
History. See Academics
special journals
purchases and cash payments, 514 Institute of Internal Auditors. See Businesses
sales and cash receipts, 478
International Accounting
temporary and permanent accounts, 128
accounting for inflation, 549
uncollectible accounts receivable, 724
cash management, 303
Cultural Diversity cultural values of employees, 371
business etiquette, 165 dating documents, 161
business practices, 80 DESD, 846
communication, 349 English: the link language, 191
holiday observances, 519 the euro, 247
local dialogue, 9 exchange rates, 101
mealtime, 713 financial statement formats, 581
misinterpreting gestures, 466 global e-business, 129
personal space, 812 international accounting career, 25
proper names, 322 international accounting standards, 45
setting deadlines, 251 international competitive advantage, 515
International Monetary Fund, 667
Economics. See Academics
International Product Life Cycle, 413
Exploring the Real World of Business inventory measurement, 749
accounts and the general ledger, 162 joint ventures, 805
analyzing adjustments, 516 long-term international loans, 777
analyzing business transactions, 76 money around the world, 75
analyzing corporate financial statements, 550 number conventions, 611
analyzing corporate stock, 612 offshoring, 337
analyzing credit losses, 696 OPEC, 825
analyzing purchases, 414 plant assets, 695
analyzing revenue and expenses, 102 tariffs and duties, 479
analyzing sales, 378 time zones, 217
analyzing sales growth, 448 transaction risks, 725
I–13 Index B
I11-I15_IN-B-868829.indd 13 9/19/05 5:54:15 PM
INDE X B
utilizing e-procurement, 447 99 Cents Only Stores. See Businesses
World Federation of Exchanges, 637
Panda Restaurant Group. See Businesses
World Trade Organization, 275
PETsMART. See Businesses
Jamba Juice. See Businesses
Plantronics. See Businesses
King & King, Architects, LLP. See Businesses
Radio Flyer. See Businesses
Language Arts. See Academics
REI, Inc. See Businesses
Los Angeles Angels of Anaheim. See Businesses
Rush Trucking. See Businesses
Making It Personal
applying for a loan, 447 Science. See Academics
credit check, 725
Sharper Image. See Businesses
evaluating inventory, 749
examining your currency, 479 Skills Beyond Numbers
Real-World Applications and Connections
your bank statement, 303 acquiring and analyzing data, 129
your budget, 413 acquiring and evaluating information, 25,
your business, 247 694
your career, 25 allocating resources, 413
your checking account, 275 allocating time and money, 777
your credit card, 129 applying technology, 75
your earning power, 75, 101 communicating information, 725
your entrepreneurial traits, 805 creative thinking, 161
your ethics, 846 customer service, 303
your federal income tax, 515 decision to liquidate, 825
your household supplies, 549 designing and improving systems, 479
your investment choices, 637 individual responsibility, 45
your job application, 45 integrity, 337, 667
your nest egg, 581 interpreting and communicating
your part-time job, 337 information, 191
your payroll deductions, 371 leadership, 549
your personal balances, 191 maintaining and troubleshooting
your personal finance records, 161 technologies, 611
your savings, 217 monitoring and correcting performance of
your spending plan, 101 systems, 447
your spending records, 667 negotiating, 805
your stocks, 611 notes payable and receivable, 776
your understanding of accounting, 825 selecting equipment and tools, 515, 749
your vehicle, 695 self-management, 371
your vehicle loan, 777 sociability, 581
teaching others, 101
Mathematics. See Academics
understanding organizational systems, 217
Math Hints using computers to process information, 247
calculating ratios, 235 working in a team, 275, 637
combining math functions, 385 working with diverse cultures, 846
fractions, decimals, and percents, 793
Southwest Airlines. See Businesses
multiply by tens, 615
percentage change, 568 Suncoast Motion Picture Company. See Businesses
rounding cents, 672
Symantec Corporation. See Businesses
showing cents, 115
using algebra, 52 Tapatío Hot Sauce Company. See Businesses
Moss Adams, LLP. See Businesses Underground Station. See Businesses
National Geographic Society. See Businesses
Index B I–14
I11-I15_IN-B-868829.indd 14 9/19/05 5:54:16 PM
I N D EX B
U.S. Government Accountability Office. See business transactions, 77
Businesses careers, 5
closing entries for a merchandising
Verizon Wireless. See Businesses
business, 587
WebQuest completing the accounting cycle, 249
bank reconciliations, 303 employer’s payroll taxes, 339
be your own boss, 25 entrepreneurs, 27
cyber-shopping, 377 estimating and recording uncollectible
introduction, 783 amounts, 697
depreciation, 695 financial statements for a corporation, 551
evolution of a business, 805 financial statements for a sole
fallen giants, 846 proprietorship, 219
financial statements in sports, 247 food preparation, 831
investing, 637 keeping track of inventory and determining
Real-World Applications and Connections
liquidation, 825 its value, 727
the magic of matching, 639 notes payable, 751
online business transactions, 549 partnership agreements, 785
risks and rewards, 3 payroll deductions, 309
safe and secure, 413, 479 posting journal entries, 163
tax obligations, 371 preparing financial statements for a
tracking and costing, 749 partnership, 807
transactions in sports, 161 recording business purchases, 481
a whole new ball game, 47 recording business transactions in a general
write it off, 725 journal, 131
you’re the boss, 307 recording cash and credit sales, 449
recording purchases of merchandise, 415
Working in the Real World
records for cash funds, 641
analyzing financial statements, 613
sales, 379
assets, liabilities, and owner’s equity, 49
teamwork in preparing the work sheet, 517
assets and depreciation, 669
work sheets, 195
business checking accounts, 277
business expenses and revenues, 103
I–15 Index B
I11-I15_IN-B-868829.indd 15 9/19/05 5:54:16 PM
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