Century 21 AccountingBook
Uploaded by
petitmar1Century 21 AccountingBook
Uploaded by
petitmar1Century 21
VVÕÌ} M u lti c olu m n J ou r n a l
Claudia Bienias Gilbertson, CPA
Teaching Professor
North Hennepin Community College
Brooklyn Park, Minnesota
Mark W. Lehman, CPA
Associate Professor
Richard C. Adkerson School of Accountancy
Mississippi State University
Starkville, Mississippi
Multicolumn Journal, Century 21 Accounting, 9E © 2009, 2006 South-Western, a part of Cengage Learning
Claudia Bienias Gilbertson, CPA; ALL RIGHTS RESERVED. No part of this work covered by the
Mark W. Lehman, CPA copyright herein may be reproduced, transmitted, stored
or used in any form or by any means graphic, electronic,
VP/Editorial Director: Jack W. Calhoun or mechanical, including but not limited to photocopying,
VP/Editor-in-Chief: Karen Schmohe recording, scanning, digitizing, taping, Web distribution,
VP/Director of Marketing: Bill Hendee information networks, or information storage and retrieval
systems, except as permitted under Section 107 or 108 of the
Sr. Marketing Manager: Courtney Schulz
1976 United States Copyright Act, without the prior written
Marketing Coordinator: Gretchen Wildauer permission of the publisher.
Marketing Communications Manager: Terron Sanders
Production Manager: Patricia Matthews Boies
Content Project Manager: Diane Bowdler For product information and technology assistance,
contact us at Cengage Learning Academic Resource
Consulting Editor: Bill Lee
Center, 1-800-423-0563
Special Consultants: Sara Wilson, Robert E. First
Manager of Technology, Editorial: Liz Wilkes For permission to use material from this
Technology Project Editor: Bryan England text or product, submit all requests online at
Website Project Manager: Ed Stubenrauch www.cengage.com/permissions
Manufacturing Buyer: Kevin Kluck Further permissions questions can be emailed to
permissionrequest@cengage.com
Production Service: Lachina Publishing Services
Sr. Art Director: Tippy McIntosh
Internal Designer: Nick & Diane Gliebe, Design Matters ExamView® and ExamView Pro® are registered trademarks of
Cover Designer: Nick & Diane Gliebe, Design Matters FSCreations, Inc. Windows is a registered trademark of the
Cover Images: Getty Images, Inc. Microsoft Corporation used herein under license. Macintosh
and Power Macintosh are registered trademarks of Apple
Photo Researcher: Darren Wright
Computer, Inc. used herein under license.
© 2008 Cengage Learning. All Rights Reserved.
ISBN-13: 978-0-538-44705-8
ISBN-10: 0-538-44705-2
South-Western Cengage Learning
5191 Natorp Boulevard
Mason, OH 45040
Cengage Learning products are represented in Canada
by Nelson Education, Ltd.
For your course and learning solutions, visit
school.cengage.com
Printed in the United States of America
1 2 3 4 5 6 7 11 10 09 08 07
Century 21
VVÕÌ}
Give students real-life experience with
Century 21 Accounting simulations and
working papers!
SIMULATION 1: RICO SANCHEZ, DJ —
a service business organized as a proprietorship
may be completed after Chapter 8
manual simulation: 0-538-44717-6
automated simulation: 0-538-44736-2
SIMULATION 2: UNIQUE GLOBAL IMPORTS —
a merchandising business organized as a
corporation may be completed after Chapter 16
manual simulation: 0-538-44739-7
automated simulation: 0-538-44740-0
SIMULATION 3: ELECTRO, INC. —
a merchandising business organized as a
corporation may be completed after Chapter 22
manual simulation: 0-538-44743-5
automated simulation: 0-538-44763-X
MULTICOLUMN JOURNAL WORKING PAPERS —
Student Edition Working Papers
Ch. 1–16: 0-538-44708-7
Teacher’s Edition Working Papers
Ch. 1–16: 0-538-44712-5
Student Edition Working Papers
Ch. 17–24: 0-538-44710-9
Teacher’s Edition Working Papers
Ch. 17–24: 0-538-44713-3
Join us on the Internet at www.C21accounting.com iii
How to Use This Book
PART OPENERS focus on
a particular business that
you’ll learn about:
PART
1
Chapter 1
Accounting for a Service
Business Organized
as a Proprietorship
Starting a Proprietorship: Changes That
Affect the Accounting Equation
GENERAL LEDGER
Balance Sheet Accounts
100 ASSETS
110
120
130
140
150
Cash
Petty Cash
Accounts Receivable—Oakdale
School
Accounts Receivable—Campus
Internet Cafe
Supplies
TECHKNOW CONSULTING CHART OF ACCOUNTS
300 OWNER’S EQUITY
310
320
330
Kim Park, Capital
Kim Park, Drawing
Income Summary
Income Statement Accounts
400 REVENUE
410 Sales
500 EXPENSES
510
520
Advertising Expense
Insurance Expense
The chart of accounts for TechKnow
Consulting is illustrated for ready
reference as you study the accounting
cycle for a proprietorship in this textbook.
160 Prepaid Insurance 530 Miscellaneous Expense
Chapter 2 Analyzing Transactions into Debit 200 LIABILITIES 540 Rent Expense
and Credit Parts 210 Accounts Payable—Supply Depot 550 Supplies Expense
• A listing of the chapters
220 Accounts Payable—Thomas Supply 560 Utilities Expense
Chapter 3 Journalizing Transactions THE BUSINESS— Company
TECHKNOW CONSULTING
Chapter 4 Posting to a General Ledger
covered in each Part helps
TechKnow Consulting is the business that will
Chapter 5 Cash Control Systems be used in the chapters in Part 1 to illustrate
the accounting concepts and procedures for
Chapter 6 Work Sheet for a Service Business a service business organized as a proprietor-
you focus on what you’ll be Chapter 7
Chapter 8
Financial Statements for a Proprietorship
Recording Adjusting and Closing Entries
ship. TechKnow rents the office space in which
the business is located as well as the equip-
ment used. The service provided by the busi-
ness involves setting up and troubleshooting
learning. for a Service Business
network problems for a variety of clients.
• “The Business” introduces
you to the business you’ll
PHOTOS: STOCKBYTE, BLEND IMAGES, DIGITAL VISION (ALL GETTY IMAGES)
be studying throughout the
PHOTOS: DIGITAL VISION, REDCHOPSTICKS (ALL GETTY IMAGES)
C H A P T E R 1 C H A P T E R 2 C H A P T E R 3 C H A P T E R 4
Part.
• The Chart of Accounts used
in the entire Part is provided C H A P T E R 5 C H A P T E R 6 C H A P T E R 7 C H A P T E R 8
for easy reference as you 3
work through the chapters.
CHAPTER OPENERS introduce the
IMAGES
C H A
GETTY
P T E
subject matter you’ll investigate: R 3
VISION/
Journa
li
DIGITAL
Transa zing
ctions
• Objectives listed at the beginning of each
After stu O B J
chapter highlight lesson concepts and preview 1. Defin
dying Ch
e ac
apter 3,
transac counting terms
tions.
you will
related
be able
to:
E C T
I V E
S
2. Identi to journa 4. Reco
what you will learn. 3. Reco
fy ac
related counting conc
to journa
rd tra
liz
epts an
ing trans d pra
actions ctices
lizing
5. Reco
rd tra
and supp nsactions to
bu
journal. lies on accoun y insurance for
t in a fiv
e-column cash
a five-colu nsactions to . rd tra
mn journa set up a bu and rec nsactions tha
• The Key Terms list displays all the key words l. siness in
6. Prove
eiv
and rule
t
journal. ing cash on ac affect owner’s
count in eq
a five-coluuity
mn
cash. a five-colu
introduced in the chapter. You can also find • journa
• journa
• specia
l
lizing
K E Y
• double-
T E R
M S
mn journa
l and pro
ve
l am entry acc
these terms and their definitions in the • general ount column
• entry
amount
column
• source
• check
• invoic
e
ou
documen nting
t • receip
• memo
t
randum
LD
• sales inv • provin
g cash WOR
REAL
Glossary at the back of the text. ACCO
oice
UN TING
IN TH
E
• Accounting in the Real World features a 54
Traveloc
ity
velocity ww
Point You
(how
Brotwse
rou
)
w.C e ab
ce—Tra are unsur21accous?
r
tter Pla on but ation
ntinTh at’s
g.co
to a Be a vacati
m
Travel u need on reserv
photo and description of a real company with Taking mes fee
l that yo und tra
gro
nsportati
can als
velocity
o help
with
IMAGES
someti tel, and
Do you line, ho help. Tra
nate air ty can a
to coordi Traveloci n’t have
you do
GETTY
ny like s.
a compa vel guide on, and
questions linked to the chapter’s content. where
rail travel
, an d mini tra
inexp en sive vacati
ocity we
b site, yo
u can
VISION/
al
cruises, take an the Travel s, and tot RNET
you wa
nt to
nd. By sea
rch ing
tels, ren
tal car
and do INTE ITY
Maybe on in mi ises, ho at to see V
DIGITAL
destinati als” in air
fares, cru
stions ab
out wh ACTI
specific “top de d sugge
• Internet Research Activity sends you to quickly
vacation
find the
package
destinati
s.
on.
Yo u can even fin
Want to
travel thr
will help
oughou
you arr
t Eu rop
ange rai
e? Trav-
l travel
for a pla
ce
AICPA
Go to
the ho
mepage
for the
of Certif
ied
at your elocity arrange Institute
Europe,
the Internet to locate information to answer
re. CPA)
across get the American nts (AI
lp you Accounta
and he best. rch the
to stay, at its Public Sea
l service needs pa.org).
That’s ful s act ivit y (www.aic on ab ou t the
All of thi in the informati
questions related to the chapter’s subject to be
accounti
record
ng rec
ty.
ed
ords of
site for
AICPA Mi
ssion Sta
tement.
Traveloci tions
Instruc
matter. 1. Summ
arize the
statemen
mission
t and the
PA.
objec-
the AIC
tives of
sea rch by
d the List
2. Expan pages.
at other
looking resource
s
ditional
three ad PA.
by the AIC
provided
ELOCITY
RE/TRAV SWI
©PR NEW
ervation
ke a res
you ma
Th inking dit when
Critical ocity cre e
uld Travel bited? sive airlin
at acc ount wo nt wo uld be de t less expen
1. Wh accou ge
m? What able to
with the might be
velocity t?
you think Tra ua l, could ge
2. Why
do individ
u, as an
than yo
tickets
locity.com
www.trave
Source:
55
iv
L E S S O N Journalizing Buying
Insurance, Buying on Account,
3-2 and Paying on Account
PA I D C A S H FO R I N S U R A N C E
LESSON OPENERS focus on one or two topics.
2 Debit
JOURNAL
3 Credit
PAGE 1
• Most Illustrations are placed above the text that
discusses them. You can quickly find the illustrations
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE NO. REF. CREDIT
DEBIT CREDIT DEBIT CREDIT
3 4 Prepaid Insurance
1 Date
C2 1 2 0 0 00
4 Source Document
1 2 0 0 00 3
when you’re reviewing or working problems.
August 4. Paid cash for insurance,
The source document for this transaction is Check No. 2.
[CONCEPT: Objective Evidence] The analysis of this
• Steps and callouts make it easy to understand and
$1,200.00. Check No. 2. transaction is shown in the T accounts.
The asset account, Prepaid Insurance, increases by a
debit, $1,200.00. The asset account, Cash, decreases by a
apply the procedures you learn. Clear instructions are
credit, $1,200.00.
Prepaid Insurance
1,200.00 directly linked to the part of the illustration where the
Cash
1,200.00 work is recorded.
S T E P S JOURNALIZING CASH PAID FOR INSURANCE
1 Date. Write the date, 4, in the Date column.
L E S S O N
2 Debit. There is no special amount column with the title of the account
debited, Prepaid Insurance, in its heading. Therefore, record the debit
amount, $1,200.00, in the General Debit column. To indicate what 3-4 Proving and Ru
account is debited for this amount, write the title of the account,
R E M E M B E R ling a Journal
Prepaid Insurance, in the Account Title column. All amounts recorded in the
General Debit or General Credit
3 Credit. The journal has a special amount column for credits to Cash. amount columns must have
Write the credit amount, $1,200.00, in the Cash Credit column. The title an account title written in
of the account is in the column heading. Therefore, do not write the the Account Title column. PROVING A
account title in the Account Title column. JOURNAL
PAG E
4 Source document. Write the source document number, C2, in the Doc.
No. column.
Add each
1 amount colum Add debit totals
n 2 and credit totals
Journalizing Buying Insurance, Buying on Account, and Paying on Account Lesson 3-2 63 Debit
Column Column Totals Credit
General Column Totals
$ 3,543.00
Sales $ 5,750.00
Cash 1,960.00
6,710.00
Totals 2,543.00
$10,253.00
3 $10,253.00
Totals equal
After TechKnow
Cons
journal page, colum ulting uses all but the last line
ns are proved and on a To prove a journ
are carried forw ruled before total al
ard to the next
page. s that the total debit page, TechKnow Consulting
s on the page equa verifies
Three steps are l the total credi
followed in provi ts.
ng a journal page
.
S T E P S PRO VIN G A
JOU RNA L PAG
E PHOT ODISC/ G ET
TY IMA
GES
1 Add each of the
amount colum
ns.
2 Add the debit
column totals,
credit column and then add
totals. the
3 Verify that
the total debit
are equal. Becau s and total credi
se the total debit ts
the total credi s equal
ts, page 1 of the
proved. journal is
If the total debit
s do not equal
the total credi
ts, the errors must
found and corre be
cted
more work is comp before any
leted.
Provi ng and
Rulin g a Journ
al
Lesso n 3-4
73
END-OF-LESSON REVIEW PAGES help you End of Lesson
TERMS REVIEW
journal
fully understand all concepts and procedures REVIEW journalizing
special amount column
general amount column
before moving on to the next lesson: entry
double-entry accounting
source document
check
AUDIT YOUR UNDERSTANDING
• Terms Review lists all the new words learned in 1. In what order are transactions recorded in a journal?
invoice
sales invoice
2. Why are source documents important? receipt
the lesson. 3. List the four parts of a journal entry. memorandum
WORK TOGETHER 31
• Audit Your Understanding asks two or more Journalizing entries in a five-column journal
questions about the lesson material. You can check A journal is given in the Working Papers. Your instructor will guide you through the following example.
Norm Derner owns Derner Copy Center, which uses the following accounts.
Cash Accts. Pay.—Palm Supply Miscellaneous Expense
your answers in the Appendix. Accts. Rec.—L. Rohe
Supplies
Norm Derner, Capital
Norm Derner, Drawing
Rent Expense
Utilities Expense
Prepaid Insurance Sales
• Work Together gives you guided practice through Transactions:
Apr. 1. Received cash from owner as an investment, $1,500.00. R1.
2. Paid cash for supplies, $375.00. C1.
hands-on application of the lesson’s procedures and 1. Journalize each transaction completed during April of the current year. Use page 1 of the journal. Source docu-
ments are abbreviated as follows: check, C; receipt, R. Save your work to complete Work Together 3-2.
concepts. ON YOUR OWN 31
Journalizing entries in a five-column journal
• On Your Own challenges you to complete problems A journal is given in the Working Papers. Work this problem independently.
Lou James owns Lou’s Service Center, which uses the following accounts.
by yourself. Cash
Accts. Rec.—C. Lord
Supplies
Accts. Pay.—OK Supplies
Lou James, Capital
Lou James, Drawing
Advertising Expense
Miscellaneous Expense
Rent Expense
Prepaid Insurance Sales
Transactions:
June 2. Received cash from owner as an investment, $3,000.00. R1.
3. Paid cash for supplies, $950.00. C1.
1. Journalize each transaction completed during June of the current year. Use page 1 of the journal. Source docu-
ments are abbreviated as follows: check, C; receipt, R. Save your work to complete On Your Own 3-2.
62 Chapter 3 Journalizing Transactions
v
L E S S O N
Journals, Sour
ce Documents
and Recordin
3-1 g Entries in a ,
Journal
G
OUNTIN
S IN ACC
CAREER
s,
Cowan
R it a J. l A u d it o r JOURNALS
AND JOUR
a NALIZING
In t e r n and
As described in
Chapter 2, tran
sactions are ana
all laws debit and credit lyzed into
g with part
complyin e strateg
ic form for recordin s before information is recorded day. To keep from
getting overload
oration, corporat g transactions in
chronological ord A
. record transactions ed, businesses usu
ts of the corp plish ing the en t.” called a journa
l. Recording tran in their journals ally
as se m em er is
em pl oy - io ns , and acco seni or man
ag
fo r m at h- called journalizin sactions in a jour every day.
ted regulat tablished
by a love g. nal is F Y I
ly respec n, es as es veloped and Transactions cou
As a high rporatio objectiv Rita de critical ld be recorded in
dEx Co school, a very tion. However, the accounting
ee at Fe ns is a Man- W hi le in high g. “I became zin g infor- most companies equa- F O R YO U R
I N F O R M AT
wa countin analy manent record wish to create a ION
Rita J. Co rnal and ac lled at nts’ dire
c- more per-
the Inte ematics and exce her pare
by recording tran F Y I
ager in thinker s.” With ation Each business uses sactions in a jour
ent. iented nal.
Departm detail-or problem her educ needs of that bus the kind of jour The Small Business
Audit
r te nu re an d solving she co ntinued co un ting. iness. The natu
nal that best fits
the (SBA) has prog
Administration
he matio n ort, in ac number of tran re ram
During has g supp degree al sactions to be reco of a business and the management and s that offer free
x, Rita d stron chelor’s d Intern accounting advi
at FedE tion an th a ba r Certifie of journal to be rded determine to small business ce
rious po
si- uated wi rned he ms Audi
tor used. the kind owners. The SBA
held va and grad sfully ea ion Syste The word jour spon sors
an cia l, n, sh e succes fo rm at d in th e nal comes from various workshop
publishes a varie s and
fin In additio d In g certifie meaning daily. the Latin diur
tions in d Certifie ns. “Bein Most businesses nali s,
ty of booklets for
nal, inte
r- (CIA) an signatio l to your conduct transact sma ll business own
operatio Auditor is critica ions every ers. Visit
an d in- pr of es sional de yo u work at e that their Web site at
l, (CISA ) wh ich on str
nationa ms ting in ns dem te www.sba.gov.
n syste accoun rtificatio mmunica
formatio area of ess. Ce n and co
esently
she nal succ ofessio
professio your pr ld.”
audit. Pr r th e m m itted to rt in your fie tiv e in
fo co pe ac
is respon
sible you are u are an
ex come
rmation rs that yo u to be nities fo
r
l, info to othe able yo opportu
financia also en ational
te rn at ion- rtific ations e ed uc te of Inter-
s, and in Ce
at prov
id
th e Institu l CHARAC
system dE x tio ns th
membe
r of ntro
es for Fe organiza Rita is a s Audit
and Co TER COU
t activiti embers. System NTS
al audi ns. their m rmation
de operatio si- rs and Info un cil, R e c o g ni z i n g
Wor ld wi
conduc
ts bu
nal Au di to
s Diversi
ty Co Ethical Di
Her au
dit team financia
l and
Associa
tion. e FedEx
Service
m ever
y back- and Actions lemmas
tegrated ws, ber of th uals fro Ulti- How often hav
views, in tity revie As a mem at individ FedEx. e you said som
ocess re ional en sure th excel at ething
ness pr en
NS
rn at a to to ng
ws, in te has be en
Rita wo
rk s rtuni ty and setti you later regrette one else. If you
COWA
e oppo d? Chances are have any doubts
ion syste
m revie dits. Rita have th
you do you that your action
ndor au tices as for what ess.” spoke before late your morals,
informat , an d ve st pr ac gr ou nd ss io n of su cc you thought abo stop to evaluate will vio-
inations oting be ing a pa ur level
RITA J.
am om t. “It’s , “h av e yo how your wor ut ethical model. the decision, usin
ex and pr en mately rm in g the
fraud loping t Departm will dete ds might affe
in deve al Audi oyees an
d ndards ct
TESY OF
others. Had you The second step
leader e Intern e empl high sta taken the time of the ethical
rt of th that th the model is to iden
gral pa ensure arding to think how you action taken or
an inte ility to ly safegu r words would the proposed tify the
COUR
on sib fe ct ive hurt someone possible action action. Write
my resp x are ef else, you might you think of, even down every
of FedE
ement have said som outrageous at if the idea mig
ht seem
manag ething different first. Seek the
advice of othe
or simply kept have encounte rs who may
ch- quiet. red similar dile
ation te for their ethical mm as or whom you adm
s, inform The first step
of the ethical behavior. Man ire
busines neficial
. y companies assi
rity with es is be model is to reco tor to new emp gn a men-
CF E, et c). Familia an d procedur gnize you are loyees to enco
urage them to
CISA, ts facing an ethi
leg al concep y Ac t of 2002 cal dilemma. seek advice.
lead to d xle Few
nology
, an anes-O enta- business dec Instructions
up. Can The Sarb
ES
00 and tlook: docum isions will requ
d nd the
/GETTY IMAG
ivate an you to act imm ire In private, writ
–$130,0 firms, pr tional Ou to expa ms. Inte
rnal e down the nam
$30,000 unting ch as Occupa orations g syste
ediately. Take
wha es of at least five
Range: blic acco cies, su blic corp countin pliance
ever time is t- from whom you individuals
Salary s at pu t ag en
requ ire s pu eir ac ’ co m required to dete would feel com
-level care
er
d go vernmen te sti ng of th co rp orations di tors whether your
actions could
rmine ethical dilemm fortable seeking
advice on
OALTO
high ions, an d rt of au as.
corporat Auditor). tion an tegral pa d for in
ternal harm some-
public ice (IRS ance, are an in deman
nue Serv ting, fin auditors sult, the
PHOTO: PHOT
rnal Reve in accoun . As a re
the Inte gr ee n, pl us
with th
is law co m e.
: Bachelo
r’s de l positio for year
s to 56 Cha pter 3
cations try-leve level strong
Qualifi s for en r senior will be
system rience fo
rmation ting expe (CPA, CI
A,
and info ye ar s of audi ns preferred Jou rnal izin g
y five rtificat io Tran sact ions
normall sional Ce 43
e. Profes Le ss on
2- 3
or abov
ts
Ac co un
Eq ui ty
fe ct Ow ne r’s
io ns Af
an sa ct
Ho w Tr
An al yz in g
SPECIAL FEATURES provide
L E S S O N
Journalizing Purchases
information about real-life issues:
9-1 Using a Purchases Journal
• Careers in Accounting introduces you
to actual people working in accounting
MERCHANDISING BUSINESSES
or in positions where accounting
TechKnow Consulting, the business described in Part 1, is a
service business; it sells services for a fee. However, many other knowledge is useful. This feature includes
businesses purchase goods to sell. Goods that a business pur-
chases to sell are called merchandise. A business that purchases
and sells goods is called a merchandising business. A merchan-
entry-level job requirements, career
dising business that sells to those who use or consume the goods
is called a retail merchandising business. A business that buys tracks, and projected trends for the
and resells merchandise to retail merchandising businesses
BLEND IMAGES/GETTY IMAGES
is called a wholesale merchandising business. Ser-
vice and merchandising businesses use many of
future.
the same accounts. A merchandising business
has additional accounts on the balance sheet
and income statement to account for the
• Character Counts helps you understand
purchase and sale of merchandise.
complicated issues in the business world,
such as confidentiality and integrity.
BUSINESS STRUCTURES
For mi n g a C or po r a t i o n • Business Structures provides
Many businesses need amounts of capi- tal accounts. Proprietorships have a single capital and
information on characteristics of
tal that cannot be easily provided by a
proprietorship. These businesses choose to
drawing account for the owner. A corporation has sepa-
rate capital accounts for the stock issued and for the earn- proprietorships, corporations, and
organize using another form of business. An ings kept in the business, which will be explained in more
organization with the legal rights of a person and
which many persons may own is called a corporation.
detail in Chapter 16. As in proprietorships, information in a
corporation’s accounting system is kept separate from the
partnerships.
A corporation is formed by receiving approval from a state personal records of its owners. [CONCEPT: Business Entity]
or federal agency. Each unit of ownership in a corporation Periodic financial statements must be sent to the stock-
is called a share of stock. Total shares of ownership in a holders of the corporation to report the financial activities
corporation are called capital stock. An owner of one or of the business.
more shares of a corporation is called a stockholder.
A corporation is a business organization that has the Critical Thinking
legal rights of a person. A corporation can own property, 1. The names of many corporations include the words
PHOTO: PHOTODISC/GETTY IMAGES
incur liabilities, and enter into contracts in its own name. Corporation, Incorporated, Corp., or Inc. in their names.
A corporation may also sell ownership in itself. A person Based on their names, identify several corporations in
becomes an owner of a corporation by purchasing shares your area.
of stock.
2. Why do you think many very large companies are
The principal difference between the accounting
organized as corporations?
records of proprietorships and corporations is in the capi-
234 Chapter 9 Journalizing Purchases and Cash Payments
vi
K SHEET
MNS OF A WOR
ME NTS COLU
HE ADJUST
PROVING T
ulting
TechKnow Cons
Work Sheet
d August 31, 20-- 4
For Month Ende
3
2
1 S
ADJUSTMENT
CE
TRIAL BALAN CREDIT
DEBIT
CREDIT
DEBIT
ACCOUNT TITLE
(a) 7 1 5 00
1 0 2 5 00 (b) 1 0 0 00
5 Supplies 1 2 0 0 00
6 Prepaid Insur
ance 1 Single Rule CALC
(b) 1 0 0 00 U L AT
se ACCO ING C
14 Insurance Expen 2 8 00 To enco UNT W ASH R
Expense urage ea ITH S EC
15 Miscellaneous
Rent Expense
3 0 0 00 (a) 7 1 5 00 deductio
n on th
rly paym
ent for ALES EIPTS ON
16
2 Totals deductio e invoic a sale on DISCO
Supplies Expen
se
1 1 0 00 8 1 5 00 n e amount UNT
8 1 5 00 encourag that a vendor account,
17
Utilities Expen
se
8 8 1 5 00 8 8 1 5 00 m ay a
e allo be amount
A cash di prompt paymen ws on the invo allowed. A
18
3 Double Rule owed w
19
the two ice amou
ling and ruling sales disc
scount on t is know is re duced 2% ith in 10 da
proved by tota sales is ca n as a ca nt
sh discou to ys, the
two columns is ount is
ta lled a sa days. . Other
wise, th sales
in a work sheet’s
Adjust- invoice
amount ken, a customer les discount. W nt. e net am invoice amou
ents are recorded its for the columns. To enco pr ev iously re pa ys he n a
O n O ctober ount is nt
After all adjustm debits and cred SH EE T ur ag co rd
less cash on 30 ,
due in 30
the equality of OF A WO RK credit te e prompt ed in the sa th an the ac co unt to H obby Sh
ments columns, NT S CO LU MN S rms of
2/10, n/ pa ym ent, les account. N ov ember 7, C um berland ac k sold m
E AD JU ST ME 30. Whe Hobby Shac on acco Hobby Sh C en ter for erch andise
PR OV ING TH l Balance columns
. n a custo k gi
mer pays ves
un ack $1,2
S T E P S le line for the Tria ment is t within the di received paymen 00.00. On
e line as the sing for the re scou
received ceived within th nt period. Be for this sale
t
mns on the sam its equal credits
ss the two Adjustments colu ls are the same, then deb w the sing le is reduce e discou cause th
e
line acro two column tota mn’s total belo d by the nt perio pay-
1 Rule a single it columns. If the Write each colu ected amount d,
stm ents Debit and Cred colu mns are in balance. rech ecke d and errors corr of the sa the amount
Adju ents mns are les discou
2 Add both the , and the wor k sheet’s Adjustm sam e, the Adjustments colu Sales In nt.
mns the
these two colu mn totals are not voice Am
Adjustments colu fied as correct. $ 1,200.00 ount
line. If the two have been veri
k sheet is com
pleted. that the totals Sales D
before the wor ble lines mean ⫻ iscount
stments columns. The dou Rate
lines across both
Adju 2%
3 Rule double ⫽
Sales D
iscount
$ 24.00
TIVE
PERSPEC
GLOBAL
l We i gh t s
In t e r n a t i o n a u r e s FINA
NCIA
a n d Me a s s, the U.S. has
recog- L LIT
ERAC
rnational busines the metric Y
t To conduct inte omary units to Buying C r e d it
ary system of measuremen d the nee d to convert cust inely pack aged goods Cards
The prim nize are rout with a
es is the customa
ry ple, beverages business
advant
age of credit ca
in the United Stat - system. For exam U.S. is a global sales or rd is a
the units of mea Although the sity such to gr ea t way to
system. Among em in liter containers. to mee t the needs of the rest as an ap
pl
purcha
se an ta ke
customary syst to adjust a price— iance. unplan greatly
surement in the The leader, it has had the inte
rest that
Howeve
r, this co
ned ne
ces- betwee
, and quarts. on the nvenien Make su n credit
are inches, feet few of the world. accoun
t.
is applied
to any un ce has re you cards.
is among the Interest the term underst
United States that do rates an paid ba
lan ce s of su and
l countries ng it is impo d credit ch rewa
major industria Critical Thinki and mea- terms va program rd
TY IMAGES
rtant to
ric system excl
u- List the weights investiga ry from s.
not use the met food packages. a card. te and co ca rd to ca Credit
the units of mea
- 1. Look at five Find ou
t how th mpare be rd, so cards ca
sively. Among cated. the inte e intere fore choo wonder n be a
are sure s indi to rest sta ful co
KBYTE/GET
metric syst em osal st is calcu sing
surement in the against a prop interest rts on nvenien
ts both for and to the metric starts on a purcha lated an as long ce
ers, and liters.
The 2. List argumen and measures the day se. For d when as you
centimeters, met a decimal vert all U.S. weights
doesn’t
start un of purc so me com
pa
stand
th
under-
base d on con ha se nies e ru
PHOTO: STOC
is til 20 to 25 . Somet , les of
metric system e U.S. system.
cycle. If
you pay days af imes in card yo the
currency. Som ter the terest u choose
system—like U.S. the metric
est will
be char
your bi
ll in full end of
a billing
.
e converted to ged. If by the
industries hav surements in calculat
ed base you are
charged
due da
te, no in Activiti
spec ify mea d on th ter- es
system. Others systems.
your ac
count. e averag interest,
it is usually 1. Using th
ry and metric e daily e Intern
unpaid
C
both customa Some cr
TODIS
ines s edit card balance resource et or ot
a Serv ice Bus compani of s, compa her
Wor k She et for card by
offering es entic re the in
S/PHO
very low e you to est rate ter-
only fo sw s on tw
r a spec introduct itch to th either ca o credit
cards. If
IMAGE
period ific perio ory inte eir rd offers an
Cha pter 6 expires, d of tim rest rate
160 the inte e. Once s—but find ou introdu
the intro t the te ctory ra
GETTY
Other co rest rate ductory rm s of te,
mpanies increase interest the intro
as mile offer ca s. rate afte ductory
s or po sh back r the in rate an
PHOTO:
ints that or othe Present troduct d the
airline tic can be r reward your fin ory perio
kets or us s 2. dings in d is over
other ite ed for such Using th written .
ms. Ag the purc e Intern form.
ain, thes hase of th e et or ot
e progra interest is ca he r re sources,
ms vary Summar lculated find ou
Jo ur na ize your for two t how
liz in g Ca finding di fferent cred
sh Re ce s in a wr it cards.
ip ts Us itten re
in ga Ca sh port.
Re ce ip
ts Jo ur
na l
Le ss on
10 -2
28 1
OPE NING AN ACCOUNT IN A GE NE R AL LE DGE R
SPECIAL FEATURES introduce key 1 Account Title 2 Account Number
concepts in realistic settings: ACCOUNT Cash ACCOUNT NO. 110
POST. BALANCE
• Global Perspective will expose you to
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
some of the ways in which accounting
and business differ in other countries.
• Financial Literacy teaches you about Writing an account title and number on the heading of an
account is called opening an account. A general ledger
Cash, account number 110, is the first account on Tech-
Know Consulting’s chart of accounts. The cash account is
managing your personal finances. account is opened for each account listed on a chart of
accounts. Accounts are opened and arranged in a general
opened using the steps shown below. The same procedure
is used to open all accounts listed on TechKnow Consult-
ledger in the same order as on the chart of accounts. ing’s chart of accounts.
• Cultural Diversity explains how different
S T E P S OPENING AN ACCOUNT IN A GENERAL LEDGER
cultures have contributed to the field of
1 Write the account title, Cash, after the word Account in the heading.
accounting. 2 Write the account number, 110, after the words Account No. in the heading.
C U LT U R A L D I V E R S I T Y
A c c ou nt i ng i n An c i e nt
C i vi l i z a t i o n s
In the ancient civilizations of Asia Minor The Greeks invented coined money around 630 B.C.,
and northern Africa, most citizens were which facilitated assigning values to transactions.
illiterate. The scribe, who could read The Babylonians in Asia Minor used an early form of
and write, became a very important banking. They transferred funds with a system resembling
person in the society. Of ancient our modern-day checking accounts, one of the first uses of
Hebrew origin, the scribe has been business documents.
called the forerunner of today’s These early practices provided the foundation for
accountant. today’s financial system and recordkeeping methods.
Public scribes often recorded
transactions as citizens arrived to Critical Thinking
PHOTO: PHOTODISC/GETTY IMAGES
do business. Most scribes recorded 1. Estimate how many transactions might occur in a
transactions on moist clay tablets single day in a modern grocery store with which you
that were then dried in the sun. There- are familiar.
fore, permanent records of transactions
2. List the number of different methods of payments that
were not possible until scribes could write
are accepted by modern grocery stores.
them down on clay tablets.
94 Chapter 4 Posting to a General Ledger
vii
SUMMARY
After completing this chapter, you can: 3. Journalize sales on account using a sales
journal.
1. Define accounting terms related to sales and
cash receipts for a merchandising business. 4. Journalize cash receipts using a cash receipts
journal.
2. Identify accounting concepts and practices
END-OF-CHAPTER PAGES give related to sales and cash receipts for a mer-
chandising business.
5. Journalize sales returns and allowances using
a general journal.
you opportunities to check your
knowledge of the chapter content:
EXPLORE ACCOUNTING
• Chapter Summary restates the chapter Jo u r n a l i z i n g S a l e s D i s c o u n t s
objectives for your reference. Most sales of a merchandising business are able is $5.88—the original $6.00 sales tax less a
to individuals for cash or credit card. Indi- 2% discount of $0.12. The end result is that a
• Explore Accounting includes vidual customers are expected to pay the
full amount of the invoice at the time of
$98.00 sale was made on which $5.88 sales
tax ($98.00 ⫻ 6%) was collected.
the sale. In contrast, sales on account to It is critically important for accounting
opportunities for higher-level learning. business customers may involve a cash
discount, such as 2/10, n/30. As discussed
employees to be familiar with sales tax
laws in the states in which their companies
in Chapter 9, businesses often receive cash do business. Each state regulates how sales
discounts to encourage early payment for a sale taxes should be paid. In some states, state regu-
on account. lations require that sales taxes be paid only on actual
Sales on account that involve both sales taxes and a sales realized—$5.88 for this transaction. Merchandising
cash discount present an interesting accounting prob- businesses in these states might modify the cash receipts
lem. Assume Country Crafters purchases $100.00 of mer- journal to include a Sales Tax Payable Debit column.
chandise, plus $6.00 sales tax, for a total sale of $106.00, In some states, sales taxes must be paid on the original
with 2/10, n/30 payment terms. Nine days later, Country invoice amount of sale—$6.00 for this transaction. In these
Crafters pays $103.88 in full payment of the invoice. How states, a sales discount would not result in a reduction in
should the cash receipt be journalized? the sales tax liability. The following journal entry would be
Because the payment is received within the discount recorded:
period, the sales amount is reduced by the amount of the
PHOTO: GETTY IMAGES/PHOTOGRAPHER’S CHOICE
Cash 103.88
sales discount, $2.12. The amount of sales tax should also
Sales Discount 2.12
be reduced because the amount of the sale is reduced.
Accounts Receivable 106.00
Thus, the following journal entry should be recorded:
Instructions: With your instructor’s permission, contact
Cash 103.88
several local businesses to determine how they account
Sales Tax Payable .12
for cash discounts on sales on account. Specifically, ask the
Sales Discount 2.00
manager (1) does the business offer cash discounts and
Accounts Receivable 106.00
(2) how do sales returns impact the amount of sales tax
The net sales amount is $98.00—the original $100.00 paid to the state.
sales less a 2% discount of $2.00. The net sales tax pay-
288 Chapter 10 Journalizing Sales and Cash Receipts Using Special Journals
M
PROBLE
ATION • Exercises contain at least one Application
APPLIC ork shee
t
63 etin gaw
Compl m 6-2.
Use the
work sh
t from Ap
ee
plicatio
n Proble
Sheet or
Income
Statem
ent colum
lumns.
ns.
Total ea
ch colum
n.
n. Calcu
late
Problem for each lesson, plus one Mastery
Balance Sheet co le colum
Instruc
tio
1. Exten
ns :
d the up
-to-date
ba lan ces to the
ome Sta
t and Balance e Account Tit
temen amount in th
ss the Inc t loss. Label
the lumns.
Problem and one Challenge Problem to
line acro ne Sheet co
a single net income or Balance
2. Rule
and rec
ord the
and rule
th e Inc om e Statem
ent and
test your understanding of the entire chapter.
3. Total
M
Many of these problems can also be worked
PROBLE record
s
rk shee
t and
ATION unting n. The wo one or more
using accounting software: Automated
APPLIC g errors
in acco
for his bu
EverClea
siness, that he has ma
de
64 rrectin
and co work sh
s
eet
tkins be
lieve
Finding monthly Papers. Mr. Wa y the work sh
eet.
tki ns ha s comp
are giv
Ervin Wa ger accounts rk sheet. He as
e April
leted th in the Working help him verif
en ks yo u to
s you fin
d.
Accounting, Peachtree®, QuickBooks®, and
general
led
ng the
wo the error
a list of
errors in
prepari
tio ns : d the general
ledger
accoun
r acco
ts. Make
unts.
Microsoft® Excel!
Instruc eet an ledge
work sh e general
ine the find in th
1. Exam ors you
ct any err rk shee
t.
2. Corre cted wo
Pre pa re a corre
3.
The
BLEM lances.
RY PRO ts and ba
MASTE k shee t ledger
general Papers.
accoun
65 etin g a wor lowing
s the fol in the Working
Compl bb les ha
nita Bu rk sheet is giv
en
year, Bo wo
e current cal period. A t Balan
ces
30 of th fis Accoun
On April uses a monthly Credit
s
busines Debit
t Tit les ,82 9.0 0
Accoun $2
150.00
511.00
Cash Corbett 855.00
Petty Ca
sh Bernard
ivable— 1,100.00 $ 500.0
0
ts Rece
Accoun 4,500.00
pp lie s s
Su ce lie
pa id Insuran Sp ooner Supp
Pre —
ts Payable pital 440.00
Accoun Ca 2,400.00
tierrez,
Paulo Gu rrez, Drawing
tie
Paulo Gu mmary 450.00
e Su
Incom
Sales pense 190.00
sing Ex
Adverti nse 375.00
ce Expe
Insuran ous Expense
ne
Miscella e 500.00 17 3
pens Ch ap te
r6
Rent Ex ns e
s Expe
Supplie pense
Ex
Utilities
s
rv ice Bu sin es
ee t fo r a Se
Wo rk Sh
viii
ION
I C AT s for
MUN ate need
COM ic chan
ges cre
IED econom
APPL wo rld. So cial and
s th at design
ess s. sinesse her
our busin mer demand rvice bu ts. Anot
busines
ses are
t growing
the fastes businesses
of servi
ce
part of
to satis
fy custo
Wide We
the creati
on of se d private clien long lines for
s an s in
b led to ks for busines ands or stand eir personal
d lin err th
• Enrichment materials help you take
Service different kinds of th e World animation, an siness that runs take care of all
new an
d
ple, the
popular
ity
graphic
s,
rvices bu
growing ses create text, is a personal se le do not have
es
For exam s. These busin service busin
ess peop
sier, some need.
the tim
e to
e-page
report on
a new or
unusua
l
a step further into understanding
ge
Web pa of a new type
of r and bu this ite a on
me busie peared to fill rces, wr
ex am ple
clients.
les be co
As lifesty sinesses have
. Service
bu
y, onlin
ap
r informa
e, or othe d in working
ste
tion res ou
for or ow
nin g.
accounting. Applied Communication
errands ing librar would be intere
tions: Us KING
Instruc siness that yo
service bu
u
IT ICAL
THIN offers exercises for strengthening your
R CR
S FO -
CASE
epaid ins
urance
d of the
June fis
at the en 30? Explain yo
s as of Ju
ne
ur
communication skills—a must for
g en try for pr kken’s busines
Case 1 rnalize
and po
got to jou this omission
st th e adjus
have on
tin
the rec or ds of Ms. Ba
when
penses for his
future employment! Cases for Critical
kken for will ce as ex es
Gretel Ba What effect d insuran d closing entri
cal perio
answer.
d.
that he
so small Mr. Burgos do
jus t rec
pplies an
ords su ord adjusting
es not recer.
an
Thinking asks you to consider questions
siness is d, your an
sw
Case 2
Vincent
for th em
states th
at his bu a fiscal perio ures? Explain
th
d of
e Burgos . Thus, at the en counting proc
his ac
ed
NCY
based on accounting scenarios. SCANS
PETE
wi
he pays Do you agree
COM
busines
s.
S W O RKPL
ACE
ess of th
e whole
m-
Workplace Competency helps you learn
SCAN utes to
the succ e study of a co
ein g thing
s in th e mind’s
liz
eye
er y pa
mpany
r.
e how ev ecutive office rt of the cycle
contrib ve finished th whole cycle.
ha
rt of a co Now that you ntributes to th
co
Ex
e
plain ho
w or
err s would about skills you’ll need in the business
Se vis ua ex es.
g Skill: yees ca
n
the chief and how each
pa do
Thinkin
t: Effectiv
e emplo ce workers to
Concep from mainten u should bette
y,
an
yo
r underst
e of the
work ea
ch of th
e follow
ing em
ployees
world.
compan unting cycle, portanc d.
ple te ac co e th e im e fis cal perio
scrib any. of th
tion: De e comp statemen
t. the end
Applica reporting of th hand at
e the bank of supp
lies on
affect th onciles
ye e who rec s th e amount
a. Emplo o deter
mine es. tries.
yee wh rnal entri ting en
b. Emplo the jou e adjus
o posts ords th
yee wh and rec
c. Emplo lculates entries.
plo ye e who ca th e closing
d. Em ds
o recor
yee wh
e. Emplo
s
rv ice Bu sin es
fo r a Se
En tri es
Cl os in g
sti ng an d
g Ad ju
Re co rd in
Veronic UDIT A
Ch ap te
r8 a ING
22 4 ledgers. Harper has jus FOR
Accord t
ing to th completed po ERRO
Instruc
tions: Th e comp sting sa RS
the am
ounts are ree accounts rec
an y’s internal les and cash rec
amount co ntrol proced eipts transac
s are rec correct. From yo eivable ledger ures, yo tio
the acco
unts.
orded in ur
rect colum
acco
the incor knowledge of unts are show
the
u are as ns to the gene
n be
n. List an sales and cash low. Assume
receipts
signed
the task ral and subsidi
that the
of chec
king he
ary
• Using Source Documents,
y incorrec posti r work.
jou
CUSTO
MER
Gerald
Adam
s
t amou
nts and rnals, determi ng references
ca lculate ne
new en whether any of d
din g balan
an
th
Graphing Workshop, and
DATE ces for e
Ju20--
ly
16
1 Bala
nce
ITEM
POST.
REF.
DEBIT
CUSTO
MER NO
. 110
Auditing for Errors provide
⻫
you with specific situations
CREDIT
25 DEBIT
S7 BALAN
5 5 4 53 CE
CR12 6 2 4 25
CUSTO 6 2 4 25
1178
in which you can analyze
MER
Betty Da 78
igre
1803
DATE 03
Ju20--
ly ITEM
1 Bala
24
nce POST.
REF.
⻫
DEBIT
CREDIT
CUSTO
MER NO
.
DEBIT
120
and investigate accounting
S7 BALAN
tools. Analyzing Best Buy’s
CUSTO CE
MER
Jackso 2 3 0 24 2315
n Mill 48
er 2085
DATE 24
Ju20--
ly
5
1 Bala
nce
ITEM
POST.
REF.
⻫
DEBIT
CREDIT
CUSTO
MER NO
. 130 Financial Statements
22
allows you to examine a real
DEBIT
CR7 BALAN
1758 CE
S7 95 2946
22
2946 4705
22 17
ANA
LY Z I
NG B
E
1758
95
business’s annual report
Graphic ST B
UY’S
fiscal ye
s
in comm are an effectiv
unicatin e meth
ar as we g the amount of communica
od
FINA
NCIA
L ST
and financial documents
Instruc ll as the overa s presen ting fin AT E M
ll trend ted in an incom ancial informa
1. Prepa
page B-
tions
re a sprea
ds
6 in Ap heet containing
in sales
. e statem tio
ent. The n. A stacked ba
chart sh
ows the
r chart
is es
ENTS
and put your knowledge
column, pendix relative pecially usefu
Cost of
Selling,
beginnin
goods so
ld
B.
g in the
If sprea
second
se
dsheet
lec
row, en
ted informa
software tion from Be
is
ter the not available,
st Buy’s
Co
am ounts for
each
l
to work.
general following use a sh nsolidated Sta
Operatin , an d admi heading ee t of pape tem ents of
g incom nistrativ s: r with 4 Ea
2. Acro e e expens columns rnings on
ss the fir es . In the
3. Prepa st row, first
re a sta beginnin
cked co g in the
4. What lum second
amount n (bar) column,
is repres graph of enter th
ented by the data. e years
each ye 2005 to
ar’s bar? 2007.
Po sti ng
to Ge ne
ra l an d Su
bs id iar
y Le dg
er s
Ch ap te
r 11
33 5
( Go Beyond the Book
For more information go to
www.C21accounting.com
) www.C21accounting.com offers a variety of
resources and activities for you to explore.
As you use this textbook, watch for the web
site icons that will lead you to your online
accounting connection!
ix
TECHNOLOGY APPLICATIONS extend and enrich your learning:
• Instructions for completing Century 21
Accounting problems using Peachtree,
Quickbooks, and Microsoft Excel are
provided in each chapter.
Accounting 8COLUMN WORK SHEET AND INSERTING
SOFTWARE
AND DELETING ROWS
Imagine that you are preparing a paper work sheet and have completed entering all the account titles and trial
balance amounts. Calculating the total for each column, you discover that you have missed entering the Petty Cash
account. What would you do to correct this mistake?
Whether using a paper work sheet or an electronic spreadsheet template, the process of entering accounts and
amounts may seem to be the same. However, the electronic spreadsheet has two important advantages. First, addi-
tional rows can easily be inserted to correct a mistake as described above. Second, column totals calculated using
SUM functions eliminate the time and potential errors inherent with calculating these values with a calculator.
TRIAL BALANCE AND ADJUSTING ENTRIES Inserting rows does not require that you modify a SUM function. The function easily adapts to new rows being
entered on a work sheet. A SUM function such as =SUM(B10:B24) will automatically change to =SUM(B10:B25)
Computer accounting systems do not use work sheets to plan adjustments. At any time, a trial balance can be when a row is inserted between rows 10 and 24. In the same manner, SUM functions will adjust when unused rows
printed that reports all general ledger account balances in debit and credit columns, just like the first two columns are deleted.
of the work sheet. Rather than being recorded in the adjustment columns of a work sheet, adjustments are entered
individually using the general journal and posted to the general ledger. EXCEL APPLICATION PROBLEM 61
A second trial balance should be printed to report the adjusted account balances. It is important that you review 1. Open the F06-1 Excel data file.
every report printed by a computer. Don’t assume that anything produced by a computer is accurate. After record- 2. Follow the step-by-step instructions in the Instructions work sheet to make changes to an 8-column work sheet
ing adjustments, you should pay special attention to every account that required adjustment. Is the new Supplies using an Excel spreadsheet.
account balance correct? Does the Insurance Expense account now have a balance?
This template can also be used to complete Application Problems 6-2 and 6-3.
PEACHTREE MASTERY PROBLEM 65
EXCEL MASTERY PROBLEM 65
1. Open (Restore) file 06-5MP.ptb.
1. Open the F06-5 Excel data file.
2. Journalize and post the adjusting entries.
2. Follow the step-by-step instructions in the Instructions work sheet to make changes to an 8-column work sheet
3. Print trial balances before and after adjustments. Note: Although the instructions direct you to prepare a manual using an Excel spreadsheet.
8-column work sheet, it is not necessary to do this for this problem.
TRIAL BALANCE AND ADJUSTING ENTRIES
TRIAL BALANCE AND ADJUSTING ENTRIES
In automated accounting, the emphasis is on the analysis of the source documents and the preparation of timely
The work sheet was introduced in this chapter. The work sheet is used only in a manual accounting and accurate journal entries and adjusting entries. These are the parts of the accounting cycle that require account-
system. Computerized accounting systems do not produce a work sheet. Instead, a trial balance is printed to make ing personnel to apply the matching concept to ensure that revenues and expenses are recorded in the proper peri-
sure that the debit account balances equal the credit account balances. The trial balance is used to plan the neces- ods. The automated accounting system is programmed to post journal entries and to prepare trial balances, closing
sary adjustments. The adjusting entries are then entered into the system using general journal entries. entries, and financial statements as needed. The accounting staff is freed from the more repetitive tasks associated
Once the adjusting entries have been made, another trial balance should be prepared. Although computer with the accounting cycle and can concentrate on the analysis functions.
systems are very accurate, the new balances should be examined to determine if the correct adjusting entries were Work sheets are not used in Automated Accounting. However, it is still necessary to plan and journalize adjusting
made. This can be done by checking to make sure the new balances in supplies and prepaid insurance reflect the entries at the end of the fiscal period.
amount of supplies on hand and the unexpired insurance. A trial balance is printed or displayed to show the current account balances. Adjustments are then planned and
journalized and posted to bring general ledger accounts up to date.
QUICKBOOKS MASTERY PROBLEM 65
1. Open the Bonita Bubbles file. AUTOMATED ACCOUNTING APPLICATION PROBLEM 62
2. Journalize the adjusting entries for April 30 using the general journal in your QuickBooks software to record the Open file F06-2.AA8. Display the problem instructions and complete the problem.
transactions.
AUTOMATED ACCOUNTING MASTERY PROBLEM 65
3. Print a trial balance. NOTE: Although the instructions direct you to generate a balance sheet and profit and loss
Open file F06-5.AA8. Display the problem instructions and complete the problem.
statement, it is not necessary to do this right now. You will do this in a later problem. However, you should gener-
ate a trial balance after the adjusting entries are recorded in order to check the accuracy of the adjusting process.
176 Chapter 6 Work Sheet for a Service Business Work Sheet for a Service Business Chapter 6 177
• Online learning is available at
www.C21accounting.com.
This dynamic web site extends
your learning experience with
interactive review, study tools,
and engaging activities.
x
CONTENTS
PART 1
Accounting for a Service Business Organized as a Proprietorship
CHAPTER 1 4-2 Posting Separate Amounts from a Journal
Starting a Proprietorship: Changes That Affect to a General Ledger ............................................................ 96
the Accounting Equation .............................................. 4 4-3 Posting Column Totals from a Journal to a
General Ledger................................................................... 100
Accounting in the Real World: Gold’s Gym .............................. 5 4-4 Completed Accounting Forms and Making
1-1 The Accounting Equation................................................... 6 Correcting Entries ............................................................. 105
1-2 How Business Activities Change the Accounting End of Chapter Problems.......................................................... 111
Equation ................................................................................. 10
1-3 How Transactions Change Owner’s Equity in an CHAPTER 5
Accounting Equation ......................................................... 14 Cash Control Systems ................................................ 116
End of Chapter Problems............................................................ 19
Accounting in the Real World: Hard Rock Cafe .................. 117
CHAPTER 2 5-1 Checking Accounts ........................................................... 118
Analyzing Transactions into Debit and 5-2 Bank Reconciliation .......................................................... 124
Credit Parts .................................................................. 26 5-3 Dishonored Checks and Electronic Banking ........... 129
5-4 Petty Cash ............................................................................ 134
Accounting in the Real World: American Automobile End of Chapter Problems.......................................................... 140
Association (AAA) .......................................................................... 27
2-1 Using T Accounts ................................................................. 28 REINFORCEMENT ACTIVITY 1PART A
2-2 Analyzing How Transactions Affect Accounts .......... 32 An Accounting Cycle for a Proprietorship:
2-3 Analyzing How Transactions Affect Owner’s Journalizing and Posting Transactions .................... 147
Equity Accounts ................................................................... 38
End of Chapter Problems............................................................ 46
CHAPTER 6
CHAPTER 3 Work Sheet for a Service Business ........................... 150
Journalizing Transactions ........................................... 54
Accounting in the Real World: The AICPA ............................ 151
Accounting in the Real World: Travelocity ............................ 55 6-1 Creating a Work Sheet ..................................................... 152
3-1 Journals, Source Documents, and Recording 6-2 Planning Adjusting Entries on a Work Sheet ........... 157
Entries in a Journal.............................................................. 56 6-3 Extending Financial Statement Information
3-2 Journalizing Buying Insurance, Buying on on a Work Sheet ................................................................. 162
Account, and Paying on Account .................................. 63 6-4 Finding and Correcting Errors on the
3-3 Journalizing Transactions That Affect Owner’s Work Sheet .......................................................................... 167
Equity and Receiving Cash on Account ...................... 67 End of Chapter Problems.......................................................... 172
3-4 Proving and Ruling a Journal .......................................... 73
End of Chapter Problems............................................................ 80 CHAPTER 7
Financial Statements for a Proprietorship .............. 178
CHAPTER 4
Posting to a General Ledger ....................................... 88 Accounting in the Real World:
American Eagle Outfitters .........................................................179
Accounting in the Real World: AMAZON.COM ..................... 89 7-1 Preparing an Income Statement.................................. 180
4-1 Preparing a Chart of Accounts........................................ 90 7-2 Balance Sheet Information on a Work Sheet ........... 187
Contents xi
End of Chapter Problems.......................................................... 194 8-1 Recording Adjusting Entries.......................................... 202
8-2 Recording Closing Entries .............................................. 206
CHAPTER 8 8-3 Preparing a Post-Closing Trial Balance ...................... 213
Recording Adjusting and Closing Entries for a End of Chapter Problems.......................................................... 221
Service Business ........................................................ 200
REINFORCEMENT ACTIVITY 1PART B
Accounting in the Real World: The Walt Disney An Accounting Cycle for a Proprietorship:
Company ......................................................................................... 201 End-of-Fiscal-Period Work ........................................ 228
PART 2
Accounting for a Merchandising Business Organized as a Corporation
CHAPTER 9 11-5 Correcting Errors in Subsidiary Ledger
Journalizing Purchases and Cash Payments ........... 232 Accounts ............................................................................... 327
End of Chapter Problems.......................................................... 331
Accounting in the Real World: OfficeMax ........................... 233
9-1 Journalizing Purchases Using a Purchases CHAPTER 12
Journal................................................................................... 234 Preparing Payroll Records ........................................ 338
9-2 Journalizing Cash Payments Using a Cash
Payments Journal .............................................................. 242 Accounting in the Real World: The Green Bay Packers .... 339
9-3 Performing Additional Cash Payments Journal 12-1 Preparing Payroll Time Cards ........................................ 340
Operations ........................................................................... 248
12-2 Determining Payroll Tax Withholding ........................ 345
9-4 Journalizing Other Transactions Using a
12-3 Preparing Payroll Records .............................................. 351
General Journal .................................................................. 254
12-4 Preparing Payroll Checks ................................................ 356
End of Chapter Problems.......................................................... 260
End of Chapter Problems.......................................................... 360
CHAPTER 10
Journalizing Sales and Cash Receipts Using CHAPTER 13
Special Journals ......................................................... 268 Payroll Accounting, Taxes, and Reports ................... 366
Accounting in the Real World: Best Buy ............................... 269 Accounting in the Real World: Intel ....................................... 367
10-1 Journalizing Sales on Account Using a 13-1 Recording a Payroll ........................................................... 368
Sales Journal ....................................................................... 270 13-2 Recording Employer Payroll Taxes .............................. 373
10-2 Journalizing Cash Receipts Using a Cash 13-3 Reporting Withholding and Payroll Taxes ................ 378
Receipts Journal................................................................. 276 13-4 Paying Withholding and Payroll Taxes ....................... 383
10-3 Recording Transactions Using a General End of Chapter Problems.......................................................... 391
Journal................................................................................... 285
End of Chapter Problems.......................................................... 289
REINFORCEMENT ACTIVITY 2PART A
An Accounting Cycle for a Corporation:
CHAPTER 11 Journalizing and Posting Transactions .................... 398
Posting to General and Subsidiary Ledgers ............ 296
Accounting in the Real World: palmONE, INC. ................... 297 CHAPTER 14
11-1 Posting to an Accounts Payable Ledger.................... 298 Distributing Dividends and Preparing a Work
11-2 Posting to an Accounts Receivable Ledger.............. 307 Sheet for a Merchandising Business ........................ 402
11-3 Posting from Journals to a General Ledger ............. 315
11-4 Posting Special Journal Totals to a General Accounting in the Real World: Lowe’s ................................... 403
Ledger ................................................................................... 320 14-1 Distributing Corporate Earnings to
Stockholders ....................................................................... 404
xii Contents
14-2 Beginning an 8-Column Work Sheet for a 15-4 Preparing a Balance Sheet ............................................. 464
Merchandising Business ................................................. 409 End of Chapter Problems.......................................................... 473
14-3 Planning and Recording a Merchandise
Inventory Adjustment ..................................................... 415
CHAPTER 16
14-4 Planning and Recording an Allowance for Recording Adjusting and Closing Entries
Uncollectible Accounts Adjustment .......................... 419 for a Corporation ....................................................... 478
14-5 Planning and Recording Depreciation
Adjustments ........................................................................ 423
Accounting in the Real World: Apple .................................... 479
14-6 Calculating Federal Income Tax and Completing a
Work Sheet .......................................................................... 427 16-1 Recording Adjusting Entries.......................................... 480
End of Chapter Problems.......................................................... 438 16-2 Recording Closing Entries for Income
Statement Accounts ......................................................... 487
16-3 Preparing a Post-Closing Trial Balance ...................... 494
CHAPTER 15
End of Chapter Problems.......................................................... 500
Financial Statements for a Corporation ................... 444
Accounting in the Real World: Gap, Inc................................ 445 REINFORCEMENT ACTIVITY 2PART B
An Accounting Cycle for a Corporation: End-of-Fiscal
15-1 Preparing an Income Statement.................................. 446
Period Work ................................................................ 508
15-2 Analyzing an Income Statement ................................. 455
15-3 Preparing a Statement of Stockholders’ Equity ...... 461
PART 3
Accounting for a Merchandising Business Organized as a Corporation—
Adjustments and Valuation
CHAPTER 17 CHAPTER 19
Accounting for Uncollectible Accounts Accounting for Inventory .......................................... 562
Receivable .................................................................. 512
Accounting in the Real World: Fender Guitars ................... 563
Accounting in the Real World: 19-1 Determining the Quantity of Merchandise
Performance Food Group ........................................................... 513 Inventory .............................................................................. 564
17-1 Uncollectible Accounts ................................................... 514 19-2 Determining the Cost of Merchandise
17-2 Writing Off and Collecting Uncollectible Inventory .............................................................................. 569
Accounts Receivable ........................................................ 519 19-3 Estimating Inventory........................................................ 574
End of Chapter Problems.......................................................... 526 End of Chapter Problems.......................................................... 578
CHAPTER 18 CHAPTER 20
Accounting for Plant Assets and Depreciation ....... 532 Accounting for Notes and Interest ........................... 586
Accounting in the Real World: Carnival Cruise Lines ........ 533 Accounting in the Real World: Bank of America ................ 587
18-1 Buying Plant Assets and Paying Property Tax ......... 534 20-1 Promissory Notes .............................................................. 588
18-2 Calculating Depreciation Expense .............................. 538 20-2 Notes Payable ..................................................................... 593
18-3 Journalizing Depreciation Expense ............................ 542 20-3 Notes Receivable ............................................................... 598
18-4 Disposing of Plant Assets ............................................... 546 End of Chapter Problems.......................................................... 604
18-5 Declining-Balance Method of Depreciation ............ 551
End of Chapter Problems.......................................................... 556 REINFORCEMENT ACTIVITY 3PART A
An Accounting Cycle for a Corporation:
Journalizing and Posting Transactions .................... 610
Contents xiii
CHAPTER 21 22-2 Preparing an Income Statement.................................. 645
Accounting for Accrued Revenue and Expenses ..... 614 22-3 Preparing a Statement of Stockholders’ Equity
and Balance Sheet ............................................................ 649
Accounting in the Real World: USA Today ........................... 615 22-4 Adjusting, Closing, and Reversing Entries for a
21-1 Accrued Revenue .............................................................. 616 Corporation ......................................................................... 654
21-2 Accrued Expenses ............................................................. 622 End of Chapter Problems.......................................................... 662
End of Chapter Problems.......................................................... 629
REINFORCEMENT ACTIVITY 3PART B
An Accounting Cycle for a Corporation:
CHAPTER 22
End-of-Fiscal-Period Work ........................................ 668
End-of-Fiscal-Period Work for a Corporation .......... 634
Accounting in the Real World: Chico’s .................................. 635
22-1 Preparing a Work Sheet for a Corporation ............... 636
PART 4
Additional Accounting Procedures
CHAPTER 23 CHAPTER 24
Accounting for Partnerships ..................................... 672 Recording International and Internet Sales ............ 700
Accounting in the Real World: Cold Stone Creamery® ..... 673 Accounting in the Real World: Honeywell ........................... 701
23-1 Forming a Partnership ..................................................... 674 24-1 Recording International Sales....................................... 702
23-2 Distribution of Net Income and Owners’ Equity 24-2 Recording Internet Sales ................................................ 710
Statements .......................................................................... 680 End of Chapter Problems.......................................................... 714
23-3 Dissolving a Partnership ................................................. 686
End of Chapter Problems.......................................................... 692
APPENDIX A: STATEMENT OF CASH FLOWS ...........A1 APPENDIX E: ANSWERS TO AUDIT YOUR
UNDERSTANDING ...................................................... E1
APPENDIX B: BEST BUY’S FISCAL 2007 ANNUAL
REPORT SELECTED PAGES ...................................... B1 GLOSSARY...................................................................G1
APPENDIX C: USING A CALCULATOR AND INDEX ........................................................................... I1
COMPUTER KEYPAD .................................................. C1
APPENDIX D: RECYCLING PROBLEMS .....................D1
xiv Contents
ADDITIONAL FEATURES IN THIS BOOK
FEATURES IN EVERY CHAPTER LESSON REVIEW AND PRACTICE
ACCOUNTING IN THE REAL WORLD TERMS REVIEW
5, 27, 55, 89, 117, 151, 179, 201, 233, 269, 297, 339, 367, 9, 13, 17, 31, 37, 62, 78, 95, 99, 109, 123, 128, 133, 138, 155,
403, 445, 479, 513, 533, 563, 587, 615, 635, 673, 701 161, 166, 186, 205, 212, 219, 241, 247, 253, 258, 275, 284,
287, 306, 314, 344, 350, 355, 377, 389, 408, 418, 422, 426,
ACCOUNTING SOFTWARE 454, 460, 463, 471, 524, 537, 545, 550, 554, 568, 573, 576,
25, 52, 86, 114, 145, 176, 198, 226, 266, 294, 336, 364, 396, 592, 597, 602, 621, 627, 653, 679, 685, 690, 709
442, 476, 506, 530, 560, 584, 608, 632, 666, 698, 717
AUDIT YOUR UNDERSTANDING
BUSINESS STRUCTURES 9, 13, 17, 31, 37, 44, 62, 66, 72, 78, 95, 99, 104, 109, 123,
7, 234, 271, 345, 470, 515, 553, 626, 688 128, 133, 138, 155, 161, 166, 170, 186, 192, 205, 212, 219,
241, 247, 253, 258, 275, 284, 287, 306, 314, 319, 326, 329,
CAREERS IN ACCOUNTING 344, 350, 355, 358, 372, 377, 382, 389, 408, 414, 418, 422,
43, 137, 191, 218, 388, 431, 447, 601 426, 436, 454, 460, 463, 471, 486, 493, 498, 518, 524, 537,
541, 545, 550, 554, 568, 573, 576, 592, 597, 602, 621, 627,
CULTURAL DIVERSITY 644, 648, 653, 660, 679, 685, 690, 709, 712
94, 323, 540, 596, 681
WORK TOGETHER
EXPLORE ACCOUNTING 9, 13, 17, 31, 37, 44, 62, 66, 72, 78, 95, 99, 104, 109, 123,
18, 45, 79, 110, 139, 171, 193, 220, 259, 288, 330, 359, 390, 128, 133, 138, 155, 161, 166, 170, 186, 192, 205, 212, 219,
437, 472, 499, 525, 555, 577, 603, 628, 661, 691, 713 241, 247, 253, 258, 275, 284, 287, 306, 314, 319, 326, 329,
344, 350, 355, 358, 372, 377, 382, 389, 408, 414, 418, 422,
GLOBAL PERSPECTIVE 426, 436, 454, 460, 463, 471, 486, 493, 498, 518, 524, 537,
160, 251, 305, 646, 705 541, 545, 550, 554, 568, 573, 576, 592, 597, 602, 621, 627,
644, 648, 653, 660, 679, 685, 690, 709, 712
INTERNET ACTIVITY
5, 27, 55, 89, 117, 151, 179, 201, 233, 269, 297, 339, 367, ON YOUR OWN
403, 445, 479, 513, 533, 563, 587, 615, 635, 673, 701 9, 13, 17, 31, 37, 44, 62, 66, 72, 78, 95, 99,104, 109, 123, 128,
133, 138, 156, 161, 166, 170, 186, 192, 205, 212, 219, 241,
CHARACTER COUNTS 247, 253, 258, 275, 284, 287, 306, 314, 319, 326, 329, 344,
8, 28, 56, 90, 118, 153, 181, 203, 235, 270, 298, 340, 368, 350, 355, 358, 372, 377, 382, 389, 408, 414, 418, 422, 426,
404, 446, 481, 514, 534, 564, 588, 616, 636, 674, 702 436, 454, 460, 463, 471, 486, 493, 498, 518, 524, 537, 541,
545, 550, 554, 568, 573, 576, 592, 597, 602, 621, 627, 644,
SMALL BUSINESS SPOTLIGHT 648, 653, 660, 679, 685, 690, 709, 712
71, 127, 318, 409, 490, 564
FINANCIAL LITERACY
30, 135, 281, 313, 369, 420, 575
Contents xv
CHAPTER REVIEW AND PRACTICE
CHAPTER SUMMARY CASES FOR CRITICAL THINKING
18, 45, 79, 110, 139, 171, 193, 220, 259, 288, 330, 359, 390, 23, 50, 84, 113, 143, 175, 197, 224, 264, 292, 334, 363, 395,
437, 472, 499, 525, 555, 577, 603, 628, 661, 691, 713 441, 475, 504, 528, 559, 581, 607, 631, 665, 696, 716
APPLICATION PROBLEMS SCANS WORKPLACE COMPETENCY
19, 20, 46, 47, 80, 81, 111, 140, 141, 172, 173, 194, 221, 222, 23, 50, 85, 143, 224, 264, 292, 505, 581, 696
260, 261, 262, 289, 290, 331, 332, 360, 361, 391, 392, 438,
439, 473, 474, 500, 526, 556, 557, 578, 604, 605, 629, 662, GRAPHING WORKSHOP
663, 692, 693, 714 23, 144, 197, 363, 475, 529, 582, 607, 665, 716
MASTERY PROBLEMS AUDITING FOR ERRORS
21, 48, 82, 112, 141, 173, 195, 222, 262, 290, 333, 361, 393, 51, 175, 225, 335, 395, 441, 505, 559, 697
439, 474, 501, 527, 557, 579, 606, 630, 663, 694, 715
USING SOURCE DOCUMENTS
CHALLENGE PROBLEMS 85, 113, 265, 293
22, 49, 83, 113, 142, 174, 196, 223, 263, 291, 333, 362, 393,
440, 474, 504, 528, 558, 580, 606, 630, 664, 695, 715 ANALYZING BEST BUY’S FINANCIAL STATEMENTS
23, 51, 85, 113, 144, 175, 197, 225, 265, 293, 335, 363, 395,
APPLIED COMMUNICATION 441, 475, 505, 529, 559, 583, 607, 631, 665, 697, 716
22, 50, 84, 113, 143, 175, 197, 224, 264, 292, 334, 363, 395,
440, 475, 504, 528, 558, 581, 607, 631, 665, 696, 716
xvi Contents
Reviewers
Jon Abel, Salem, OR *Sandy Giuliani, Grafton, WI *James O’Connell, Pittsburgh, PA
*Marilyn Achelpohl, Orion, IL Kathy Goos, Moreno Valley, CA Carol Pearsall, Houston TX
Abe Aleman, Levelland, TX Bonnie Graman, Hamilton, OH Beverly Pettit, Willow Springs, MO
*Cindy Anderson, Wyndmere, ND Madge Gregg, Hoover, AL *Dick Pettit, Ovilla, TX
Kathy Andreason, Salt Lake City, UT Tracy Gutierrez, Garden Grove, CA *Matt Pohlman, Latimer, IA
Cynthia S. Aycock, Eagle Lake, FL Stan Harder, Factoryville, PA Katherine Prange, Breese, IL
*Carolyn Balis, Northfield, OH Kathy Harenka, Mukwonago, WI Eleanor Rankin, Rio Rico, AZ
*Betty A. Banks-Burke, Hudson, OH Liz Hargis, Cincinnati, OH *Howard W. Rankin, MBA,
Tiffannie Barden, Phoenix, AZ *Jean Harms, Port Orange, FL Monticello, KY
Jim Bauer, Cincinnati, OH Cindy Hiester, Astoria, OR Suzanne Rechenberg, Cincinnati, OH
Reta Bell, Garden City, TX Beth Hubbard, Virginia Beach, VA Dr. Andrea B. Reiter, Dingman’s
Rose Berta, Redwood City, CA Lisa Huddlestun, Kansas, IL Falls, PA
Anne Berten, Portland, OR Steve Ingmire, Indianapolis, IN Nicole Reitz-Larson, Salt Lake
Chad E. Bobb, Indianapolis, IN Gladys Jackson, Woodbridge, NJ City, UT
*Debra L. Bushey, Derry, PA Beverly Kaesar, Neenah, WI Dr. Harriet D. Rogers, Whitewater, WI
*Monica Caillouet, Gonzales, LA Sheryl Kirby, Philadelphia, PA Tim Rohlinger, Kewaskum, WI
Ellen Clizbe, Moreno Valley, CA *Trish Klinger, Steelton, PA George Roth, Prairie du Sac, WI
Tony Composto, Brooklyn, NY *Jane Knaub, York, PA Joyce Rowe, Lubbock, TX
Becky Cornacchia, Naples, FL *Alvin Kroon, Mukilteo, WA Sam Sanchez, Laredo, TX
Alicia E. Censi Corso, Los Angeles, CA Jim Littenhoff, Cincinnati, OH *Rob Schumacher, Middletown, DE
David Damme, Eureka, CA Darlene Londo, Appleton, WI Peggy J. Scott, Chesapeke, VA
*Debbie Darnell, Huntington, IN Fran Loos, Salt Lake City, UT *Mark Sears, Winter Garden, FL
Donna Davis, Charlotte, NC Ann M. Ludlow, St. Louis, MO Christopher G. Shaffer,
Paula Davis, Atlanta, GA *Dennis Macy, Elkton, MD Cincinnati, OH
Sylvia Davis, Lakewood, CA Frances Mallard, Brentwood, TN Janet Shaw, Bailey, NC
Dana Dingell, Vienna, VA Diane Malley, Londonderry, NH Mary Ann Shea, Amherst, MA
Kathy Dixon, Richmond, VA H. Jean Malonson, Hayward, CA Jenny V. Shippy, Naples, FL
*Daniel Doseck, Albany, OH Lee C. Marcroux, Hartford, CT *Alice Sineath, Advance, NC
Keith Downs, Dallastown, PA Chris Marshall, Denver, CO Sherri Small, Las Vegas, NV
Dr. Judith A. Drager-McCoy, Lititz, PA *Claire Martin, Onida, SD H. Leland Smith, Racine, WI
Ann Droptini, Gladewater, TX Libby Martin, Chattanooga, TN Tommie Stanaland, Perry, FL
Kathy Dunaway, Erlanger, KY Sally M. Graham Martin, Dottie Starkey, Milford, DE
Jean Eckert, Wexford, PA Nokesville, VA Laurel Stein, Wall, NJ
Julie Eckhart, Salem, WI Marge Marvell, Madison, IN Jeynelle Strickland, Savanah, GA
*Fahryka Elliott, Richmond, VA Barb Mason, Paris, MO *Diane Tanner, Jacksonville, FL
Carrie English, Woodbridge, VA *Ronda Matthews, Gonzales, LA Susan Thie, Hamilton, OH
Barbara Erwin, Orlando, FL Susan McClements, Nappanee, IN Claire Thoke, Glendale, CA
*Jennie Ewert, Beaverton, MI Robin McCluggage, Cincinnati, OH John Tingley, Bradley, IL
K. Skip Fabritius, Olympia, WA Kelvin Meeks, Memphis, TN Linda Underwood, Gilcrest, CO
*Erika Ferranti, Stoneham, MA *Jane Melroy, Pratt, KS *Eileen Wascisin, Bellingham, WA
Debbie Fischer, St. Petersburg, FL Lori Meseke, CPA, Vandalia, IL Jennifer Wegner, Mishicot, WI
Matt Flanagan, Longmeadow, MA *Theresa Molitaris, Bridgeville, PA Linda White, Fayetteville, PA
Kathryn Focht, West Lawn, PA *John Mondshein, Allentown, PA Parnell Wiggins, Memphis, TN
Kathleen Ford, Rochester, MI Susan Moore, Meriden, CT Lonnie Wilson, Evansville, IN
Lance B. Garvin, Indianapolis, IN Heather Moraru, Suwanee, GA Vicki Winchester, Highland, KS
*Debbie Gentene, Mason, OH Jennifer Mundy, O’Fallon, IL Vickie Wolfe, Glenns Ferry, ID
Wendy Gentry, Garden Grove, CA Jospeh Nero, Red Hook, NY Kathy Woodard, Coventry, RI
*Donna Gernert, Palm Coast, FL Barb Nichols, Evansville, IN
Andy Gilley, Hendersonville, TN *Julie Nguyen, West Chester, OH * content verifier
PART
1
Chapter 1
Accounting for a Service
Business Organized
as a Proprietorship
Starting a Proprietorship: Changes That
Affect the Accounting Equation
Chapter 2 Analyzing Transactions into Debit
and Credit Parts
Chapter 3 Journalizing Transactions THE BUSINESS—
TECHKNOW CONSULTING
Chapter 4 Posting to a General Ledger
TechKnow Consulting is the business that will
Chapter 5 Cash Control Systems be used in the chapters in Part 1 to illustrate
the accounting concepts and procedures for
Chapter 6 Work Sheet for a Service Business a service business organized as a proprietor-
ship. TechKnow rents the office space in which
Chapter 7 Financial Statements for a Proprietorship the business is located as well as the equip-
ment used. The service provided by the busi-
Chapter 8 Recording Adjusting and Closing Entries
for a Service Business ness involves setting up and troubleshooting
network problems for a variety of clients.
PHOTOS: STOCKBYTE, BLEND IMAGES, DIGITAL VISION (ALL GETTY IMAGES)
C H A P T E R 1 C H A P T E R 2
C H A P T E R 5 C H A P T E R 6
TECHKNOW CONSULTING CHART OF ACCOUNTS
GENERAL LEDGER 300 OWNER’S EQUITY The chart of accounts for TechKnow
Balance Sheet Accounts 310 Kim Park, Capital Consulting is illustrated for ready
100 ASSETS 320 Kim Park, Drawing reference as you study the accounting
110 Cash 330 Income Summary cycle for a proprietorship in this textbook.
120 Petty Cash Income Statement Accounts
130 Accounts Receivable—Oakdale 400 REVENUE
School 410 Sales
140 Accounts Receivable—Campus 500 EXPENSES
Internet Cafe 510 Advertising Expense
150 Supplies 520 Insurance Expense
160 Prepaid Insurance 530 Miscellaneous Expense
200 LIABILITIES 540 Rent Expense
210 Accounts Payable—Supply Depot 550 Supplies Expense
220 Accounts Payable—Thomas Supply 560 Utilities Expense
Company
C H A P T E R 3 C H A P T E R 4 PHOTOS: DIGITAL VISION, REDCHOPSTICKS (ALL GETTY IMAGES)
C H A P T E R 7 C H A P T E R 8
3
STOCKBYTE/GETTY IMAGES
C H A P T E R 1 Starting a Proprietorship:
Changes That Affect the
Accounting Equation
O B J E C T I V E S
After studying Chapter 1, you will be able to: 3. Classify accounts as assets, liabilities, or owner’s
equity and demonstrate their relationships in the
1. Define accounting terms related to starting a ser-
accounting equation.
vice business organized as a proprietorship and
to changes that affect the accounting equation. 4. Analyze how transactions affect accounts in an
accounting equation.
2. Identify accounting concepts and practices
related to starting a service business organized
as a proprietorship and to changes that affect
the accounting equation.
K E Y T E R M S
• accounting • liability • account title
• accounting system • owner’s equity • account balance
• accounting records • accounting equation • capital
• financial statements • ethics • revenue
• service business • business ethics • sale on account
• proprietorship • transaction • expense
• asset
• equities
• account • withdrawals
( Point Your Browser
www.C21accounting.com
)
4
ACCOUNTING IN THE REAL WORLD
Gold’s Gym
Gold’s Gym and the Importance of Location
Are you ready for a good workout? With so many labor-saving devices avail-
able today, many people look to fitness facilities for their daily physical
exercise. For a fee, a member can make use of a variety of cardiovascular
machines, weightlifting/resistance equipment, free weights, and indoor
tracks. Many facilities offer classes and personal trainers. You can even shop
for specialty food and workout clothing.
DIGITAL VISION/GETTY IMAGES
Gold’s Gym is a franchise operation, meaning that individuals or groups
buy the right to open and operate a Gold’s Gym. The first Gold’s Gym opened
in 1965 in Venice, California. Since then, more than INTERNET
650 Gold’s Gyms have opened in the United ACTIVITY
States and in 23 countries around the
world. Small Business
When considering the pos- Administration
sibility of opening a new Go to the homepage for the
Gold’s Gym, there are many Small Business Administration,
decisions that have to be a government organization
made. These decisions designed to help small busi-
include where to locate nesses in the United States.
the gym, how big the Search the site for advice
facility should be, what about starting a business. Use
equipment to include, the link www.sba.gov, or do a
and how to let people search for the Small Business
know about the new Administration if the link is no
©GOLD’S GYM INTERNATIONAL
facility. longer accurate.
Instructions
1. List at least five aids
that the Small Business
Administration site pro-
vides to help a person
start a business.
Critical Thinking
2. Briefly explain which aid
1. Why is the location of a business important to the success of that
you feel is most helpful.
business?
2. What things would you consider when deciding where to locate
a business such as Gold’s Gym?
Source: www.goldsgym.com
5
L E S S O N
The Accounting Equation
1-1
W H AT I S A C C O U N T I N G ?
Planning, recording, analyzing, and interpreting finan- ing loans to a business are also interested in a business’s
cial information is called accounting. A planned process financial activities. Financial reports that summarize the
for providing financial information that will be useful to financial condition and operations of a business are called
management is called an accounting system. Organized financial statements. Business owners and managers also
summaries of a business’s financial activities are called use financial statements to make business decisions.
accounting records. Inaccurate accounting records often contribute to
Accounting is the language of business. Many individ- business failure and bankruptcy. Failure to understand
uals in a business complete accounting forms and prepare accounting information can result in poor business deci-
accounting reports. Owners, managers, and accounting sions for both businesses and nonprofit organizations.
personnel use their knowledge of accounting to under- Understanding accounting helps managers and owners
stand the information provided in the accounting reports. make better business decisions.
Regardless of their responsibilities within an organization, In addition, nearly everyone in the United States earns
individuals can perform their jobs more efficiently if they money and must submit income tax reports to the federal
know the language of business—accounting. and state governments. Everyone must plan ways to keep
Suppliers that are considering extending credit to a spending within available income in both their personal
business and institutions that are considering extend- and business lives.
T H E B U S I N E S S T E C H K N O W C O N S U LT I N G
A business that performs an activity for a fee is called a must be careful to keep these accounting records separate
service business. Kim Park decided to start her own busi- from her own personal financial records. For example,
ness, helping set up and troubleshoot computer networks. Kim owns a house and a personal car. TechKnow Con-
A business owned by one person is called a proprietorship. sulting’s financial records must not include information
A proprietorship is also referred to as a sole proprietorship. about Kim’s house, car, or other personal belongings. Kim
Kim named her new proprietorship “TechKnow Consult- must use one checking account for her personal expenses
ing.” TechKnow Consulting will rent office space and the and another checking account for TechKnow Consulting.
equipment needed to troubleshoot network problems. The accounting concept Business Entity is applied when a
Since TechKnow Consulting is a new business, Kim business’s financial information is recorded and reported
must design the accounting system that will be used to separately from the owner’s personal financial informa-
keep TechKnow Consulting’s accounting records. Kim tion. [CONCEPT: Business Entity]
6 Chapter 1 Starting a Proprietorship: Changes That Affect the Accounting Equation
Accounting concepts are described throughout this textbook
when an application of a concept first occurs. When addi-
tional applications occur, a concept reference, such as [CON-
CEPT: Business Entity], indicates an application of a specific
accounting concept. A brief description of each accounting
concept used in this text is also provided on the Century 21
Accounting web site at www.C21accounting.com.
After completing a computer networking program at
a local community college, Kim decided to start her own
business so she would have more control over her daily
schedule. After only two months, she has made all the
arrangements and is ready to begin.
Kim enjoys both helping schools, businesses, and indi-
PHOTODISC/GETTY IMAGES
viduals set up a computer network and troubleshooting
a network that is not working properly. She also enjoys
being her own boss. She gets satisfaction from keeping
her own accounting records and seeing that she is making
money every month.
BUSINESS STRUCTURES
For mi n g a n d D i s s o l v i n g
a Proprietorship
A proprietorship is a business owned and controlled by the owner decide to dissolve
one person. The advantages of a proprietorship include: the proprietorship, he or
• Ease of formation. she merely needs to
stop doing business.
• Total control by the owner.
Noncash assets
• Profits that are not shared.
can be sold, with
However, there are some disadvantages of organizing a the cash used
proprietorship: to pay any
• Limited resources. The owner is the only person who outstanding
can invest cash and other assets in the business. liabilities.
• Unlimited liability. The owner is totally responsible for
the liabilities of the business. Personal assets, such as Critical
a car, can be claimed by creditors to pay the business’s Thinking
liabilities. 1. Why do you
• Limited expertise. Limited time, energy, and experience think more busi-
can be put into the business by the owner. nesses are organized
as proprietorships than
• Limited life. A proprietorship must be dissolved when
any other form of business
PHOTO: PHOTODISC/GETTY IMAGES
the owner dies or decides to stop doing business.
organization?
• Obligation to follow the laws of both the federal govern-
2. What kinds of people do you think would
ment and the state and city in which the business is
be most successful as owners of a proprietorship?
formed. Most cities and states have few, if any, legal
procedures to follow. Once any legal requirements are
met, the proprietorship can begin business. Should
The Accounting Equation Lesson 1-1 7
T H E A C C O U N T I N G E Q U AT I O N
Assets Liabilities Owner’s Equity
Left side amount Right side amounts
$0 $0 $0
TechKnow Consulting will own items such as cash and owner. Kim will own TechKnow Consulting and invest in
supplies that will be used to conduct daily operations. the assets of the business. Therefore, she will have a right
Anything of value that is owned is called an asset. Assets to decide how the assets will be used. The amount remain-
have value because they can be used either to acquire other ing after the value of all liabilities is subtracted from the
assets or to operate a business. For example, TechKnow value of all assets is called owner’s equity.
Consulting will use cash to buy supplies for the business. The relationship among assets, liabilities, and owner’s
TechKnow Consulting will then use the asset—supplies— equity can be written as an equation. An equation show-
in the operation of the computer consulting business. ing the relationship among assets, liabilities, and owner’s
Financial rights to the assets of a business are called equity is called the accounting equation. The accounting
equities. A business has two types of equities: (1) Equity equation is most often stated as:
of those to whom money is owed. For example, TechKnow
Assets Liabilities Owner’s Equity
Consulting may buy some supplies and agree to pay for
the supplies at a later date. The business from whom sup- The accounting equation must be in balance. The total of
plies are bought will have a right to some of TechKnow’s the amounts on the left side must always equal the total of
assets until TechKnow pays for the supplies. An amount the amounts on the right side. Before a business starts, its
owed by a business is called a liability. (2) Equity of the accounting equation would show all zeros.
CHARACTER COUNTS
A c c o u nt i n g S c a n d a l s R oc k
t h e Fi n a n c i a l Wor l d
Entering the 21st century, Enron, World- The principles of right and wrong that guide an individ-
Com, and Andersen were three of the ual in making decisions are called ethics. The use of ethics
most celebrated names in corpo- in making business decisions is called business ethics.
rate America. But the actions of Making ethical business decisions is a skill you can learn.
a few individuals forced finan- Each chapter of this textbook contains a feature on busi-
cial mammoths Enron and ness ethics. In Part 1, you will explore a model that guides
WorldCom into bankruptcy. your evaluation of business decisions. In later chapters,
Andersen, once one of the you will apply that model to make ethical business deci-
prestigious “Big 5” account- sions. You will also be exposed to sources that will enable
ing firms, was forced out of you to continue learning about business ethics long after
business. These accounting you have completed this accounting course.
PHOTO: BLEND IMAGES/GETTY IMAGES
scandals caused hundreds of
thousands of employees to lose Instructions
their jobs and millions of individu- Obtain an article that describes an accounting scandal
als to lose billions of dollars in invest- such as Enron, WorldCom, Adelphia, Healthcorp South, or
ment and retirement accounts. The Parmalat. Write a one-paragraph summary that describes
scandals rocked the public’s confidence in what happened and the individuals involved.
the accounting profession and the stock markets.
8 Chapter 1 Starting a Proprietorship: Changes That Affect the Accounting Equation
TERMS REVIEW
End of Lesson
accounting
accounting system
accounting records
financial statements
REVIEW
service business
proprietorship
asset
equities
AUDIT YOUR UNDERSTANDING
liability
owner’s equity
1. What is accounting?
accounting equation 2. Give two examples of service businesses.
ethics 3. What is a proprietorship?
business ethics 4. State the accounting equation.
WORK TOGETHER 11
Completing the accounting equation
Write the answers to the following problem in the Working Papers. Your instructor will guide you through the
following example.
1. For each line, fill in the missing amount to complete the accounting equation.
Assets Liabilities Owner’s Equity
? 3,000 8,000
10,000 ? 6,000
63,000 35,000 ?
ON YOUR OWN 11
Completing the accounting equation
Write the answers to the following problem in the Working Papers. Work this problem independently.
1. For each line, fill in the missing amount to complete the accounting equation.
Assets Liabilities Owner’s Equity
30,000 ? 13,000
? 60,000 20,000
51,000 25,000 ?
The Accounting Equation Lesson 1-1 9
L E S S O N How Business Activities
Change the Accounting
1-2 Equation
RECEIVING CASH
Assets ⴝ Liabilities ⴙ Owner’s Equity
Kim Park,
Cash Capital
Beginning Balances $0 $0 $0
Received cash from owner
as an investment 5,000 5,000
New Balances $5,000 $0 $5,000
Business activities change the amounts in the accounting A record summarizing all the information pertain-
equation. A business activity that changes assets, liabilities, ing to a single item in the accounting equation is called
or owner’s equity is called a transaction. For example, a an account. The name given to an account is called an
business that pays cash for supplies is engaging in a trans- account title. Each part of the accounting equation con-
action. After each transaction, the accounting equation sists of one or more accounts.
must remain in balance. In the accounting equation shown above, the asset
The accounting concept Unit of Measurement is applied account, Cash, is increased by $5,000.00, the amount
when business transactions are stated in numbers that of cash received by the business. This increase is on the
have common values—that is, using a common unit of left side of the accounting equation. The amount in an
measurement. [CONCEPT: Unit of Measurement] For account is called the account balance. Before the owner’s
example, in the United States, business transactions are investment, the account balance of Cash was zero. After
recorded in dollars. The unit of measurement concept is the owner’s investment, the account balance of Cash is
followed so that the financial reports of businesses can be $5,000.00.
clearly stated and understood in numbers that have com- The account used to summarize the owner’s equity in a
parable values. business is called capital. The capital account is an owner’s
equity account. In the accounting equation shown above,
Received Cash Investment from Owner
the owner’s equity account, Kim Park, Capital, is increased
Ms. Park uses $5,000.00 of her own money to invest in
by $5,000.00. This increase is on the right side of the
TechKnow Consulting. TechKnow Consulting should
accounting equation. Before the owner’s investment, the
be concerned only with the effect of this transaction on
account balance of Kim Park, Capital was zero. After the
TechKnow Consulting’s records. The business should not
owner’s investment, the account balance of Kim Park, Capi-
be concerned about Ms. Park’s personal records. [CON-
tal is $5,000.00.
CEPT: Business Entity]
The accounting equation has changed as a result of the
receipt of cash. However, both sides of the equation are
changed by the same amount. The $5,000.00 increase on
Transaction 1 August 1. Received cash from
the left side of the equation equals the $5,000.00 increase
owner as an investment, $5,000.00. on the right side of the equation. Therefore, the account-
ing equation is still in balance.
10 Chapter 1 Starting a Proprietorship: Changes That Affect the Accounting Equation
P AY I N G C A S H
Assets ⴝ Liabilities ⴙ Owner’s Equity
Prepaid Kim Park,
Cash Supplies Insurance Capital
Balances $5,000 $0 $0 $0 $5,000
Paid cash for supplies 275 275
Balances $4,725 $275 $0 $0 $5,000
Paid cash for insurance 1,200 1,200
New Balances $3,525 $275 $1,200 $0 $5,000
TechKnow Consulting pays cash for supplies and insurance. Paid Cash for Insurance
Insurance premiums must be paid in advance. For exam-
Paid Cash for Supplies
ple, TechKnow Consulting pays a $1,200.00 insurance
TechKnow Consulting needs supplies to operate the busi-
premium for future insurance coverage.
ness. Kim Park uses some of TechKnow Consulting’s cash
to buy supplies.
Transaction 3 August 4. Paid cash
Transaction 2 August 3. Paid for insurance, $1,200.00.
cash for supplies, $275.00.
In return for this payment, TechKnow Consulting is
entitled to insurance coverage for the length of the policy.
In this transaction, two asset accounts are changed. One
The insurance coverage is something of value owned by
asset, cash, has been exchanged for another asset, supplies.
TechKnow Consulting. Therefore, the insurance cover-
The asset account, Cash, is decreased by $275.00, the
age is an asset. Because insurance premiums are paid in
amount of cash paid out. This decrease is on the left side
advance, or prepaid, the premiums are recorded in an
of the accounting equation. The asset account, Supplies,
asset account titled Prepaid Insurance.
is increased by $275.00, the amount of supplies bought.
In this transaction, two assets are changed. One asset,
This increase is also on the left side of the accounting
cash, has been exchanged for another asset, prepaid insur-
equation.
ance. The asset account, Cash, is decreased by $1,200.00,
For this transaction, two assets are changed. There-
the amount of cash paid out. The asset account, Prepaid
fore, the two changes are both on the left side of the
Insurance, is increased by $1,200.00, the amount of insur-
accounting equation. When changes are made on only
ance bought.
one side of the accounting equation, the equation must
After this transaction, the new account balance of Cash
still be in balance. Therefore, if one account is increased,
is $3,525.00. The new account balance of Prepaid Insur-
another account on the same side of the equation must be
ance is $1,200.00. The sum of the amounts on the left
decreased. After this transaction, the new account balance
side is $5,000.00 (Cash, $3,525.00 Supplies, $275.00
of Cash is $4,725.00. The new account balance of Sup-
Prepaid Insurance, $1,200.00). The amount on the
plies is $275.00. The sum of the amounts on the left side
right side is also $5,000.00. Therefore, the accounting
is $5,000.00 (Cash, $4,725.00 + Supplies, $275.00). The
equation is still in balance.
amount on the right side is also $5,000.00. Therefore, the
accounting equation is still in balance.
How Business Activities Change the Accounting Equation Lesson 1-2 11
TR ANSAC TIONS ON ACCOUNT
Assets ⴝ Liabilities ⴙ Owner’s Equity
Accts. Pay.—
Prepaid Supply Kim Park,
Cash Supplies Insurance Depot Capital
Balances $3,525 $275 $1,200 $0 $5,000
Bought supplies on account 500 500
New Balances $3,525 $775 $1,200 $500 $5,000
Paid cash on account 300 300
New Balances $3,225 $775 $1,200 $200 $5,000
Bought Supplies on Account Paid Cash on Account
TechKnow Consulting needs to buy additional supplies. Since TechKnow Consulting is a new business, Supply
The supplies are obtained from Supply Depot, and Tech- Depot has not done business with TechKnow Consult-
Know arranges to pay for them at the end of the month. ing before. Supply Depot allows TechKnow Consulting to
It is a common business practice to buy items and pay for buy supplies on account but requires TechKnow Consult-
them at a future date. Another way to state this activity is ing to send a check for $300.00 immediately. TechKnow
to say that these items are bought on account. Consulting will pay the remaining portion of this liability
at a later date.
Transaction 4 August 7. Bought supplies on
account from Supply Depot, $500.00. Transaction 5 August 11. Paid cash on
account to Supply Depot, $300.00.
In this transaction, one asset and one liability are
changed. The asset account, Supplies, is increased by In this transaction, one asset and one liability are
$500.00, the amount of supplies bought. Supply Depot changed. The asset account, Cash, is decreased by $300.00,
will have a claim against some of TechKnow Consulting’s the amount of cash paid out. After this payment, Tech-
assets until TechKnow Consulting pays for the supplies Know Consulting owes less money to Supply Depot.
bought. Therefore, Accounts Payable—Supply Depot is Therefore, the liability account, Accounts Payable—Sup-
a liability account. The liability account, Accounts Pay- ply Depot, is decreased by $300.00, the amount paid on
able—Supply Depot, is increased by $500.00, the amount account.
owed for the supplies. After this transaction, the new account balance of Cash
After this transaction, the new account balance of Sup- is $3,225.00. The new account balance of Accounts Pay-
plies is $775.00. The new account balance of Accounts able—Supply Depot is $200.00. The sum of the amounts
Payable—Supply Depot is $500.00. The sum of on the left side is $5,200.00 (Cash, $3,225.00
the amounts on the left side is $5,500.00 Supplies, $775.00 Prepaid Insurance,
(Cash, $3,525.00 Supplies, $775.00 $1,200.00). The sum of the amounts
Prepaid Insurance, $1,200.00). The sum on the right side is also $5,200.00
of the amounts on the right side is also (Accounts Payable—Supply Depot,
$5,500.00 (Accounts Payable—Supply R E M E M B E R $200.00 Kim Park, Capital,
Depot, $500.00 Kim Park, Capital, $5,000.00). Therefore, the account-
The left side of the accounting
$5,000.00). Therefore, the accounting equation (assets) must always
ing equation is still in balance.
equation is still in balance. equal the right side (liabilities
plus owner’s equity).
12 Chapter 1 Starting a Proprietorship: Changes That Affect the Accounting Equation
End of Lesson
TERMS REVIEW
REVIEW
transaction AUDIT YOUR UNDERSTANDING
account
1. What must be done if a transaction increases the left side of the
account title accounting equation?
account balance 2. How can a transaction affect only one side of the accounting equation?
capital 3. To what does the phrase on account refer?
WORK TOGETHER 12
Determining how transactions change an accounting equation
Write the answers to the following problem in the Working Papers. Your instructor will guide you through the
following example.
Trans.
Assets ⴝ Liabilities ⴙ Owner’s Equity
No.
1.
1. For each transaction, place a plus () in the appropriate column if the classification is increased. Place a minus
() in the appropriate column if the classification is decreased.
Transactions:
1. Bought supplies on account. 3. Paid cash for insurance.
2. Received cash from owner as an investment. 4. Paid cash on account.
ON YOUR OWN 12
Determining how transactions change an accounting equation
Write the answers to the following problem in the Working Papers. Work this problem independently.
Trans.
Assets ⴝ Liabilities ⴙ Owner’s Equity
No.
1.
1. For each transaction, place a plus () in the appropriate column if the classification is increased. Place a minus
() in the appropriate column if the classification is decreased.
Transactions:
1. Received cash from owner as an investment. 4. Paid cash for insurance.
2. Bought supplies on account. 5. Paid cash on account.
3. Paid cash for supplies.
How Business Activities Change the Accounting Equation Lesson 1-2 13
L E S S O N How Transactions Change
Owner’s Equity in an
1-3 Accounting Equation
REVE NUE TR ANSACTIONS
Assets ⴝ Liabilities ⴙ Owner’s Equity
Accts. Rec.— Accts. Pay.—
Oakdale Prepaid Supply Kim Park,
Cash School Supplies Insurance Depot Capital
Balances $3,225 $0 $775 $1,200 $200 $5,000
Received cash from sales 295 295 (revenue)
New Balances $3,520 $0 $775 $1,200 $200 $5,295
Sold services on account 350 350 (revenue)
New Balances $3,520 $350 $775 $1,200 $200 $5,645
Total of left side: Total of right side:
$3,520 $350 $775 $1,200 $5,845 $200 $5,645 $5,845
Received Cash from Sales Sold Services on Account
A transaction for the sale of goods or services results in an A sale for which cash will be received at a later date is
increase in owner’s equity. An increase in owner’s equity called a sale on account, or a charge sale. TechKnow Con-
resulting from the operation of a business is called revenue. sulting contracts with a school and an Internet cafe to
When cash is received from a sale, the total amount of provide consulting services for payment at a later date. All
both assets and owner’s equity is increased. other customers must pay cash at the time of the service.
Regardless of when payment is made, the revenue should
be recorded at the time of a sale. The accounting concept
Transaction 6 August 12. Received Realization of Revenue is applied when revenue is recorded
cash from sales, $295.00. at the time goods or services are sold. [CONCEPT: Real-
ization of Revenue]
When TechKnow Consulting receives cash for services
performed, the asset account, Cash, is increased by the Transaction 7 August 12. Sold services on
amount of cash received, $295.00. This increase is on the account to Oakdale School, $350.00.
left side of the equation. The owner’s equity account, Kim
Park, Capital, is also increased by $295.00. This increase is
on the right side of the equation. After this transaction is When TechKnow Consulting sells services on account,
recorded, the equation is still in balance. the asset account, Accounts Receivable—Oakdale School,
In this chapter, three different kinds of transactions that is increased by $350.00, the amount of cash that will be
affect owner’s equity are described. Therefore, a descrip- received.
tion of the transaction is shown in parentheses to the right This increase is on the left side of the equation. The
of the amount in the accounting equation. owner’s equity account, Kim Park, Capital, is also increased
by $350.00 on the right side of the equation. The equa-
tion is still in balance.
14 Chapter 1 Starting a Proprietorship: Changes That Affect the Accounting Equation
EXPE NSE TR ANSACTIONS
Assets ⴝ Liabilities ⴙ Owner’s Equity
Accts. Rec.— Accts. Pay.—
Oakdale Prepaid Supply Kim Park,
Cash School Supplies Insurance Depot Capital
Balances $3,520 $350 $775 $1,200 $200 $5,645
Paid cash for rent 300 300 (expense)
New Balances $3,220 $350 $775 $1,200 $200 $5,345
Paid cash for telephone bill 40 40 (expense)
New Balances $3,180 $350 $775 $1,200 $200 $5,305
Total of left side: Total of right side:
$3,180 $350 $775 $1,200 $5,505 $200 $5,305 $5,505
A transaction to pay for goods or services needed to oper- Paid Cash for Telephone Bill
ate a business results in a decrease in owner’s equity. A
decrease in owner’s equity resulting from the operation
of a business is called an expense. When cash is paid for Transaction 9 August 12. Paid cash
expenses, the business has less cash. Therefore, the asset for telephone bill, $40.00.
account, Cash, is decreased. The owner’s equity account,
Kim Park, Capital, is also decreased by the same amount.
The asset account, Cash, is decreased by $40.00, the
Paid Cash for Rent
amount of cash paid out. This decrease is on the left side
of the equation. The owner’s equity account, Kim Park,
Capital, is also decreased by $40.00. This decrease is on
Transaction 8 August 12. Paid
the right side of the equation. After this transaction is
cash for rent, $300.00. recorded, the equation is still in balance.
Other expense transactions might be for advertising,
equipment rental or repairs, charitable contributions, and
The asset account, Cash, is decreased by $300.00, the
other miscellaneous items. All expense transactions affect
amount of cash paid out. This decrease is on the left side
the accounting equation in the same way as in Transac-
of the equation. The owner’s equity account, Kim Park,
tions 8 and 9.
Capital, is also decreased by $300.00. This decrease is on
PH O
the right side of the equation. After this transaction is TO D
IS C
/GE
TTY
recorded, the equation is still in balance. I MA
GE
S
How Transactions Change Owner’s Equity in an Accounting Equation Lesson 1-3 15
OTHE R CASH TR ANSAC TIONS
Assets ⴝ Liabilities ⴙ Owner’s Equity
Accts. Rec.— Accts. Pay.—
Oakdale Prepaid Supply Kim Park,
Cash School Supplies Insurance Depot Capital
Balances $3,180 $350 $775 $1,200 $200 $5,305
Received cash on account 200 200
New Balances $3,380 $150 $775 $1,200 $200 $5,305
Paid cash to owner
for personal use 125 125 (withdrawal)
New Balances $3,255 $150 $775 $1,200 $200 $5,180
Total of left side: Total of right side:
$3,255 $150 $775 $1,200 $5,380 $200 $5,180 $5,380
Received Cash on Account The asset account, Cash, is decreased by $125.00. This
When a business receives cash from a customer for a prior decrease is on the left side of the accounting equation. The
sale, the transaction increases the cash account balance owner’s equity account, Kim Park, Capital, is also decreased
and decreases the accounts receivable balance. by $125.00. This decrease is on the right side of the equa-
tion. After this transaction is recorded, the equation is still
in balance.
Transaction 10 August 18. Received cash on
A decrease in owner’s equity because of a withdrawal is not
account from Oakdale School, $200.00. a result of the normal operations of a business. Therefore, a
withdrawal is not considered an expense.
The asset account, Cash, is increased by $200.00.
Summary of Changes in Owner’s Equity
This increase is on the left side of the equation. The
Immediately after recording the beginning investment
asset account, Accounts Receivable—Oakdale School, is
used to start TechKnow Consulting, the total owner’s
decreased by $200.00. This decrease is also on the left
equity was $5,000.00, which represented the investment
side of the equation. After this transaction is recorded, the
by the owner, Kim Park. Since that initial investment, five
equation is still in balance.
additional transactions that changed owner’s equity were
Paid Cash to Owner for Personal Use recorded in the accounting equation.
Assets taken out of a business for the owner’s personal use These transactions increased owner’s equity by
are called withdrawals. A withdrawal decreases owner’s $180.00, from $5,000.00 to $5,180.00. Transaction 10,
equity. Although an owner may withdraw any kind of cash received on account, is not listed because it affects
asset, usually an owner withdraws cash. The withdrawal two accounts that are both on the left side of the account-
decreases the account balance of the withdrawn asset, ing equation.
such as Cash.
Transaction Kind of Change in
Transaction 11 August 18. Paid cash to Number Transaction Owner’s Equity
owner for personal use, $125.00. 6 Revenue (cash) 295.00
7 Revenue (on account) 350.00
8 Expense (rent) 300.00
9 Expense (telephone) 40.00
11 Withdrawal 125.00
Net change in owner’s equity 180.00
16 Chapter 1 Starting a Proprietorship: Changes That Affect the Accounting Equation
End of Lesson
TERMS REVIEW
REVIEW
AUDIT YOUR UNDERSTANDING
revenue
sale on account 1. How is owner’s equity affected when cash is received from sales?
expense 2. How is owner’s equity affected when services are sold on account?
withdrawals 3. How is owner’s equity affected when cash is paid for expenses?
WORK TOGETHER 13
Determining how transactions change an accounting equation
Write the answers to the following problem in the Working Papers. Your instructor will guide you through the
following example.
1. Place a plus () in the appropriate column if the account is increased. Place a minus () in the appropriate
column if the account is decreased.
Assets ⴝ Liabilities ⴙ Owner’s Equity
Trans. Accts. Rec.— Prepaid ⴝ Accts. Pay.— ⴙ Susan Sanders,
Cash ⴙ Bowman Co. ⴙ Supplies ⴙ
No. Insurance Maxwell Co. Capital
1.
Transactions:
1. Received cash from sales. 4. Received cash on account from Bowman Company.
2. Sold services on account to Bowman Company. 5. Paid cash to owner for personal use.
3. Paid cash for telephone bill.
ON YOUR OWN 13
Determining how transactions change an accounting equation
Write the answers to the following problem in the Working Papers. Work this problem independently.
1. Place a plus () in the appropriate column if the account is increased. Place a minus () in the appropriate
column if the account is decreased.
Assets ⴝ Liabilities ⴙ Owner’s Equity
Trans. Accts. Rec.— Prepaid ⴝ Accts. Pay.— ⴙ Vincent Orr,
Cash ⴙ Navarro Co. ⴙ Supplies ⴙ
No. Insurance Barrett Co. Capital
1.
Transactions:
1. Sold services on account to Navarro Company. 4. Paid cash to owner for personal use.
2. Received cash from sales. 5. Paid cash for rent.
3. Received cash on account from Navarro Company.
How Transactions Change Owner’s Equity in an Accounting Equation Lesson 1-3 17
SUMMARY
After completing this chapter, you can: 3. Classify accounts as assets, liabilities, or owner’s
equity and demonstrate their relationships in
1. Define accounting terms related to starting
the accounting equation.
a service business organized as a proprietor-
ship and to changes that affect the accounting 4. Analyze how transactions affect accounts in an
equation. accounting equation.
2. Identify accounting concepts and practices
related to starting a service business organized
as a proprietorship and to changes that affect
the accounting equation.
EXPLORE ACCOUNTING
W ha t Is G A A P ?
The standards and rules that accountants fol- ments were allowed to follow any measure-
low while recording and reporting finan- ment, recording, and reporting rules, the
cial activities are commonly referred to as users of the statements would have no way
generally accepted accounting principles, to determine if the financial statements
or GAAP. These rules have not been devel- present fairly the financial position of the
oped by any one group of rule makers but business.
have instead evolved over time and from By requiring the financial statement
many sources. preparers to consistently follow certain stan-
By law, the Securities and Exchange Com- dards and rules—such as GAAP—the users are
mission (SEC) has the authority to establish GAAP. able to compare the financial statements of several
The SEC, however, has allowed a series of private organi- companies and to track the results of one company over
zations to determine GAAP. Currently, the organization several time periods.
that has the authority to set accounting standards is the
Financial Accounting Standards Board (FASB), which was Discussion: Why would a group of people disagree
established in 1973. with a proposed accounting standard?
The standard-setting process includes getting input
and feedback from many sources. FASB listens to this feed- Research: Using your local library or the Internet, find
back and considers all sides of each issue. additional information about the FASB. Write a one-page
report on your findings.
PHOTO: PHOTOGRAPHER’S CHOICE/GETTY IMAGES
Why Is GAAP Necessary?
Users of financial statements rely on the information those
statements contain. If the preparers of financial state-
18 Chapter 1 Starting a Proprietorship: Changes That Affect the Accounting Equation
11 APPLICATION PROBLEM
Completing the accounting equation
Instructions:
For each line, fill in the missing amount to complete the accounting equation. Use the form in your Working
Papers to complete this problem.
Assets Liabilities Owner’s Equity
95,000 51,000 ?
? 44,000 20,000
4,000 ? 2,500
138,000 70,000 ?
19,000 ? 11,000
? 4,000 12,000
35,000 13,000 ?
? 120,000 49,000
8,000 ? 3,200
86,000 48,000 ?
12,000 ? 7,000
? 8,000 22,000
47,000 24,000 ?
? 29,000 13,000
57,000 ? 36,000
125,000 69,000 ?
11,000 ? 6,000
? 2,000 3,300
12 APPLICATION PROBLEM
Determining how transactions change an accounting equation
Calvin Parish is starting Parish Repair Shop, a small service business. Parish Repair Shop uses the accounts
shown in the following accounting equation. Use the form in your Working Papers to complete this problem.
Assets ⴝ Liabilities ⴙ Owner’s Equity
Trans. Accts. Pay.— Accts. Pay.—
Prepaid Calvin Parish,
No. Cash ⴙ Supplies ⴙ ⴝ Five Star ⴙ Riverland ⴙ
Insurance Capital
Supply Company
Beg. Bal. 0 0 0 0 0 0
1. 3,000 3,000
New Bal. 3,000 0 0 0 0 3,000
2.
( Go Beyond the Book
)
For more information go to
www.C21accounting.com
Starting a Proprietorship: Changes That Affect the Accounting Equation Chapter 1 19
Transactions:
1. Received cash from owner as an investment, $3,000.00.
2. Paid cash for insurance, $1,600.00.
3. Bought supplies on account from Five Star Supply, $700.00.
4. Bought supplies on account from Riverland Company, $300.00.
5. Paid cash on account to Five Star Supply, $700.00.
6. Paid cash on account to Riverland Company, $200.00.
7. Paid cash for supplies, $100.00.
8. Received cash from owner as an investment, $1,500.00.
Instructions:
For each transaction, complete the following. Transaction 1 is given as an example.
a. Analyze the transaction to determine which accounts in the accounting equation are affected.
b. Write the amount in the appropriate columns using a plus () if the account increases or a minus ()
if the account decreases.
c. Calculate the new balance for each account in the accounting equation.
d. Before going on to the next transaction, determine that the accounting equation is still in balance.
13 APPLICATION PROBLEM
Determining how revenue, expense, and withdrawal transactions change
an accounting equation
Peter Smith operates a service business called Peter’s Service Company. Peter’s Service Company uses the
accounts shown in the following accounting equation. Use the form in your Working Papers to complete this
problem.
Assets ⴝ Liabilities ⴙ Owner’s Equity
Trans.
No. Accts. Rec.— Prepaid Accts. Pay.— Peter Smith,
Cash ⴙ ⴙ Supplies ⴙ ⴝ ⴙ
Lisa Lee Insurance Kline Co. Capital
Beg. Bal. 625 0 375 300 200 1,100
1. 300 300 (expense)
New Bal. 325 0 375 300 200 800
2.
Transactions:
1. Paid cash for rent, $300.00.
2. Paid cash to owner for personal use, $150.00.
3. Received cash from sales, $800.00.
4. Paid cash for equipment repairs, $100.00.
5. Sold services on account to Lisa Lee, $400.00.
6. Received cash from sales, $650.00.
7. Paid cash for charitable contributions, $35.00.
8. Received cash on account from Lisa Lee, $300.00.
20 Chapter 1 Starting a Proprietorship: Changes That Affect the Accounting Equation
Instructions:
For each transaction, complete the following. Transaction 1 is given as an example.
a. Analyze the transaction to determine which accounts in the accounting equation are affected.
b. Write the amount in the appropriate columns, using a plus () if the account increases or a minus ()
if the account decreases.
c. For transactions that change owner’s equity, write in parentheses a description of the transaction to the
right of the amount.
d. Calculate the new balance for each account in the accounting equation.
e. Before going on to the next transaction, determine that the accounting equation is still in balance.
14 MASTERY PROBLEM
Determining how transactions change an accounting equation
Marion Cassidy operates a service business called Cassidy Company. Cassidy Company uses the accounts
shown in the following accounting equation. Use the form in your Working Papers to complete this problem.
Assets ⴝ Liabilities ⴙ Owner’s Equity
Trans. Accts. Rec.— Prepaid Accts. Pay.— Marion Cassidy,
No. Cash ⴙ Ana ⴙ Supplies ⴙ Insurance ⴝ ⴙ
Delta Co. Capital
Santiago
Beg. Bal. 2,300 0 200 100 1,800 800
1. 400 400 (expense)
New Bal. 1,900 0 200 100 1,800 400
2.
Transactions:
1. Paid cash for rent, $400.00.
2. Received cash from owner as an investment, $500.00.
3. Paid cash for telephone bill, $50.00.
4. Received cash from sales, $1,025.00.
5. Bought supplies on account from Delta Company, $450.00.
6. Sold services on account to Ana Santiago, $730.00.
7. Paid cash for advertising, $660.00.
8. Paid cash for supplies, $150.00.
9. Received cash on account from Ana Santiago, $400.00.
10. Paid cash on account to Delta Company, $1,500.00.
11. Paid cash for one month of insurance, $100.00.
12. Received cash from sales, $1,230.00.
13. Paid cash to owner for personal use, $1,200.00.
Instructions:
For each transaction, complete the following. Transaction 1 is given as an example.
a. Analyze the transaction to determine which accounts in the accounting equation are affected.
b. Write the amount in the appropriate columns, using a plus () if the account increases or a minus ()
if the account decreases.
c. For transactions that change owner’s equity, write in parentheses a description of the transaction to the
right of the amount.
d. Calculate the new balance for each account in the accounting equation.
e. Before going on to the next transaction, determine that the accounting equation is still in balance.
Starting a Proprietorship: Changes That Affect the Accounting Equation Chapter 1 21
15 CHALLENGE PROBLEM
Determining how transactions change an accounting equation
Zachary Martin owns Zachary’s Repair Shop. On February 1, Zachary’s Repair Shop’s accounting equation
indicated the following account balances. Use the form in your Working Papers to complete this problem.
Assets ⴝ Liabilities ⴙ Owner’s Equity
Accts. Rec.— Prepaid
Trans. Accts. Pay.— Zachary Martin,
Cash ⴙ Mary Lou ⴙ Supplies ⴙ Insurance ⴝ ⴙ
No. Kollasch Co. Capital
Pier
Beg. Bal. 8,552 1,748 1,485 615 3,145 9,255
1.
Transactions:
1. Took $400.00 of supplies for personal use.
2. Had equipment repaired at Kollasch Company and agreed to pay Kollasch Company at a later date,
$250.00.
3. Mr. Martin had some personal property, which he sold for $500.00 cash.
4. Paid Kollasch Company $120.00 on account.
Instructions:
1. For each transaction, complete the following.
a. Analyze the transaction to determine which accounts in the accounting equation are affected.
b. Write the amount in the appropriate columns, using a plus () if the account increases or a minus ()
if the account decreases.
c. For transactions that change owner’s equity, write in parentheses a description of the transaction to the
right of the amount.
d. Calculate the new balance for each account in the accounting equation.
e. Before going on to the next transaction, determine that the accounting equation is still in balance.
2. Answer the following questions.
a. Why can the owner of a business withdraw assets from that business for personal use?
b. Why would the owner withdraw assets other than cash?
A P P L I E D CO M M U N I C AT I O N
A resume provides a statement of your education, experience, and qualifications for a prospective employer. Your
resume should be accurate, honest, and perfect in every respect. It should include all work experience along with
the companies and dates of employment. Education, activities, and interests are all important items that should be
covered.
Instructions:
Research how to prepare an appropriate resume using the library or the Internet. Then prepare a resume that you
could send to a prospective employer.
22 Chapter 1 Starting a Proprietorship: Changes That Affect the Accounting Equation
CASES FOR CRITICAL THINKING
Case 1
Akira Shinoda starts a new business. Mr. Shinoda uses his personal car in the business with the expectation that later
the business can buy a car. All expenses for operating the car, including license plates, gasoline, oil, tune-ups, and
new tires, are paid for out of business funds. Is this an acceptable procedure? Explain.
Case 2
At the end of the first day of business, Quick Clean Laundry has the assets and liabilities shown below.
The owner, Anh Vu, wants to know the amount of her equity in Quick Clean Laundry. Determine this amount and
explain what this amount represents.
Assets Liabilities
Cash $3,500.00 A/P—Smith Office Supplies $ 750.00
Supplies 950.00 A/P—Super Supplies Company 1,500.00
Prepaid Insurance 1,200.00
GRAPHING WORKSHOP
The assets, liabilities, and owner’s equity for three Assets Equity Liabilities
different companies are given in the graph at right. 12000
Analyze the graph to answer the following 10000
questions. 8000
1. Which category is largest? 6000
2. Why will assets always be 50% of the total? 4000
2000
0
Arrow Co. Dexter Co. Grand Co.
A N A LY Z I N G B E S T B U Y ’S F I N A N C I A L S TAT E M E N T S
Selected published financial information for Best Buy Co., Inc., is reproduced in Appendix B. Look at pages B-5
through B-8, where you will find Best Buy’s financial statements. Under the heading on each page, you will see the
phrase “$ in millions.” This means that all dollar amounts are rounded to the nearest million. Therefore, an amount
such as $174 actually means $174,000,000. Another way to think of this is that you can calculate the actual amount
by multiplying the rounded amount by 1,000,000 ($174 1,000,000 $174,000,000).
Not all companies round the amounts in their financial statements to the nearest million. Many companies round to
the nearest thousand.
Instructions
1. List the actual amount of Accounts Payable and Revenue for Best Buy for 2007.
2. The financial statements for Barnes & Noble include the phrase “thousands of dollars.” In 2005, the financial state-
ments included Accounts Payable, $828,852, and Sales, $5,103,004. List the actual amount of Accounts Payable
and Sales.
Starting a Proprietorship: Changes That Affect the Accounting Equation Chapter 1 23
Accounting
SOFTWARE
ACCO U N T I N G S O F T WA R E
As you begin your journey into the exciting world of accounting, it is important that you also experience how
today’s businesses use personal computers to record their transactions and prepare financial statements. How are
transactions entered onto computer screens? How does the computer keep track of the total of the Cash account?
How is the information that is collected reported on financial statements?
At the end of every chapter, this feature will introduce you to Peachtree, one of the most widely recognized
brands of computer accounting systems. Your teacher may also have you complete selected end-of-chapter prob-
lems using Peachtree. You will discover that the knowledge of accounting you learn in this textbook will enable you
to understand how Peachtree operates and provides management with the information it needs to make good
business decisions.
The Peachtree brand was first introduced in 1976, a time when personal computers were just beginning to
become available to individuals and businesses. Since then, Peachtree Software has merged with many other soft-
ware companies to form Sage Software. With millions of customers in the United States and Canada, Sage Software
provides a wide variety of accounting and management software to small and medium-sized businesses.
PEACHTREE ACTIVITY*
1. Access the Sage Software web site at www.sagesoftware.com.
2. Identify the most current versions of Peachtree that are available.
3. Identify what version of Peachtree is available at your school.
ACCO U N T I N G S O F T WA R E
During your study of accounting, your instructor may introduce you to an accounting software program
called QuickBooks. Accounting software programs are more efficient and can be much more accurate than com-
pleting tasks manually. Many companies require new employees to have some knowledge of accounting software
programs. Therefore, learning how to use QuickBooks can make you more employable.
QuickBooks accounting software was developed by the Intuit Company, which was founded in 1983. The soft-
ware is available in many versions. The version used by a company depends on the tasks that the company wishes
to complete electronically. However, all versions of QuickBooks have general items in common. During your study
of accounting, you will learn how to manually complete an accounting task. You may then be asked to complete the
same task using QuickBooks. It is important to understand the manual tasks before using accounting software so
that you can understand what the software is doing. An understanding of accounting also allows you to review the
information that is produced electronically and check it for accuracy.
QUICKBOOKS ACTIVITY*
1. Access the Intuit web site at www.quickbooks.intuit.com.
2. Identify the most current versions of QuickBooks that are available.
3. Identify what version of QuickBooks is available at your school.
24 Chapter 1 Starting a Proprietorship: Changes That Affect the Accounting Equation
ACCO U N T I N G S O F T WA R E
Electronic spreadsheets are one of the most popular software programs used by accountants. The reason is
simple—the row and column structure of an electronic spreadsheet resembles the journal paper used by accoun-
tants for decades, some say even centuries.
It is not surprising, then, that publications read by accountants frequently contain articles about electronic
spreadsheets. The Journal of Accountancy, published by the American Institute of Certified Public Accountants,
is sent to over 300,000 accountants. The Journal regularly publishes articles that provide detailed instructions for
using electronic spreadsheet features. More importantly, the articles provide examples of accounting applications
of the features.
As you study accounting in this course, you will have the opportunity to complete several problems on an elec-
tronic spreadsheet. Along the way, you will learn a variety of helpful features. In some cases, you will be able to try
out these features in your exercises.
EXCEL ACTIVITY*
1. Identify what electronic spreadsheet version is available at your school.
2. Access the Journal of Accountancy online at www.aicpa.org/pubs/jofa/joahome.htm. Perform a search for the
name of your electronic spreadsheet.
3. Select one of the articles in the search results. Write a short summary of the feature described in the article.
ACCO U N T I N G S O F T WA R E
Automated Accounting was developed by Warren Allen and Dale Klooster in the late 1970s for use in their account-
ing classrooms. They were pioneers in the use of computer technology in the classroom. The software includes a
complete accounting system, with modules for specialized activities such as bank statement reconciliation, plant
assets, inventory, and payroll. The software was so comprehensive and easy to use that some small businesses also
used the software for their business needs. South-Western acquired the software in the early 1980s as a companion
to its Century 21 Accounting textbooks. Automated Accounting has been revised and updated continuously since
then.
AUTOMATED ACCOUNTING ACTIVITY*
1. Consider the problems you have worked in Chapter 1. If you used a computerized accounting system to work
the problems, what kinds of errors would the computerized accounting system prevent?
2. For the problems in Chapter 1, what kinds of errors would not be prevented by using a computerized accounting
system?
* C O M P U T E R S A F E T Y A N D H E A LT H B A S I C S
There are some basic safety and health precautions for using computer equipment.
Read the safety and health tips on the Century 21 Accounting web site.
Starting a Proprietorship: Changes That Affect the Accounting Equation Chapter 1 25
BLEND IMAGES/GETTY IMAGES
C H A P T E R 2 Analyzing Transactions
into Debit and
Credit Parts
O B J E C T I V E S
After studying Chapter 2, you will be able to: 4. Analyze how transactions to set up a business
affect accounts.
1. Define accounting terms related to analyzing
transactions into debit and credit parts. 5. Analyze how transactions affect owner’s equity
accounts.
2. Identify accounting practices related to analyz-
ing transactions into debit and credit parts.
3. Use T accounts to analyze transactions showing
which accounts are debited or credited for each
transaction.
K E Y T E R M S
• T account • credit • chart of accounts
• debit • normal balance
( Point Your Browser
www.C21accounting.com
)
26
ACCOUNTING IN THE REAL WORLD
American Automobile Association (AAA)
Traveling with the American Automobile Association (AAA)
Picture yourself driving on a dark, deserted road. Suddenly your car stalls.
You pull over to the side of the road. What do you do next? If you are a mem-
ber of the American Automobile Association (AAA), you can pick up your cell
phone and call for emergency roadside assistance.
Many people realize the benefits of a membership with the AAA. How-
ever, not many people know that the AAA was instrumental in starting the
DIGITAL VISION/GETTY IMAGES
nationwide School Safety Patrol program back in 1920. In 1930, the AAA pio-
neered the driver education program still in existence in many high schools.
As early as 1916, the AAA was fighting for federal INTERNET
dollars to be used to construct a national ACTIVITY
highway system.
The AAA sells memberships Company Headquarters
to individuals and families. In Go to the homepage of a com-
exchange for the membership pany of your choice.
fee, the AAA provides an
array of benefits including Instructions
emergency roadside as- Search the site to find when
sistance, travel services, the company was started and
insurance services, driv- where its headquarters (or
©AAA, WWW.AAANEWSROOM.NET, ABOUT AAA, 2004
er protection services, home office) is located. This
and even emergency information is typically found
check cashing services. under one of the following
headings: “About Us,” “Investor
Relations,” “History,” or “Con-
tact Us.”
Critical Thinking
1. What asset and liability accounts might the AAA use to record its
transactions?
2. List at least two transactions that the AAA might record.
Source: www.aaa.com
27
L E S S O N
Using T Accounts
2-1
A N A LY Z I N G T H E A C C O U N T I N G E Q U AT I O N
Even though the effects of transactions can be recorded equation cumbersome to use as a major financial record.
in an accounting equation, the procedure is not practical Therefore, a separate record is commonly used for each
in an actual accounting system. The number of accounts account. The accounting equation can be represented as a
used by most businesses would make the accounting T, as shown below.
Assets ⫽ Liabilities ⫹ Owner’s Equity
Left side Right side
The values of all things owned (assets) are on the left side always equal the total of amounts on the right side. There-
of the accounting equation. The values of all equities or fore, the total of all assets on the left side of the accounting
claims against the assets (liabilities and owner’s equity) are equation must always equal the total of all liabilities and
on the right side of the accounting equation. The total of owner’s equity on the right side.
amounts on the left side of the accounting equation must
CHARACTER COUNTS
Et hi c s Ve r s u s Mora l i t y
Ethics and morality—these words The following ethical model will be used in this
are often used to refer to an individu- textbook:
al’s ability to “do what is right.” These 1. Recognize you are facing an ethical dilemma.
synonymous English words were 2. Identify the action taken or the proposed action.
derived from different languages. 3. Analyze the action.
“Ethics” is derived from Greek, and a. Is the action illegal?
“morality” is derived from Latin. Over b. Does the action violate company or professional
time, our society has given a slightly standards?
different meaning to each word. c. Who is affected, and how, by the action?
Over 100 years ago, C. C. Everett wrote, 4. Determine if the action is ethical.
“Ethics is the science of morality.” Morality is the
standard of conduct that is acceptable in a society. Instructions
Ethics is an organized method that relies on our morality Prepare a short report that contrasts the ethical model
PHOTO: ASIAPIX/GETTY IMAGES
to make moral decisions. Science students learn the scien- with the scientific method. How are the models similar?
tific method—a model that guides how a proper experi- How are they different?
ment should be conducted. In the same manner, many
ethical models have been proposed to guide individuals
in applying their morality to business decisions.
28 Chapter 2 Analyzing Transactions into Debit and Credit Parts
ACCOUNTS
Assets ⫽ Liabilities ⫹ Owner’s Equity
Left side Right side
T Account
Left side Right side
DEBIT SIDE CREDIT SIDE
A record summarizing all the information pertaining to There are special names for amounts recorded on the
a single item in the accounting equation is known as an left and right sides of a T account. An amount recorded
account. Transactions change the balances of accounts in on the left side is called a debit. An amount recorded
the accounting equation. Accounting transactions must be on the right side is called a credit. The words debit and
analyzed to determine how account balances are changed. credit come from the Latin and Italian words debere and
An accounting device used to analyze transactions is called credere. Common abbreviations are dr. for debit and cr. for
a T account. credit.
ACCOUNT BAL ANCES
Assets ⫽ Liabilities ⫹ Owner’s Equity
Any Asset Any Liability
Debit Credit Debit Credit
NORMAL BALANCE NORMAL BALANCE
Owner's Capital Account
Debit Credit
NORMAL BALANCE
The side of the account that is increased is called the side of the accounting equation and have normal credit
normal balance. The process of increasing or decreasing balances (right side). The owner’s capital account is on the
account balances is discussed on the next page. Assets are right side of the accounting equation and has a normal
on the left side of the accounting equation and have nor- credit balance (right side).
mal debit balances (left side). Liabilities are on the right
Using T Accounts Lesson 2-1 29
INCREASES AND DECREASES IN ACCOUNTS
Assets ⫽ Liabilities ⫹ Owner’s Equity
Any Asset Any Liability
Debit Credit Debit Credit
NORMAL BALANCE NORMAL BALANCE
Decrease
Decrease
Increase
Increase
Owner’s Capital Account
Debit Credit
NORMAL BALANCE
Decrease
Increase
The sides of a T account are used to show increases and Asset accounts have normal debit balances; therefore,
decreases in account balances. asset accounts increase on the debit side and decrease on
Two basic accounting rules regulate increases and the credit side. Liability accounts have normal credit bal-
decreases of account balances. ances; therefore, liability accounts increase on the credit
side and decrease on the debit side. The owner’s capital
1. Account balances increase on the normal balance side
account has a normal credit balance; therefore, the capital
of an account.
account increases on the credit side and decreases on the
2. Account balances decrease on the side opposite the
debit side.
normal balance side of an account.
FINANCIAL LITERACY
Fi r s t D a y a t Wor k
It is your first day at a new job. You feel you a retirement plan such as a 401(k), but you need to decide
are totally prepared. But when you arrive, how much you can afford to contribute into the plan.
you are directed to the Human Resources There may also be numerous forms to complete. For
Department, where you are asked many tax purposes, you need to know how many dependents
questions for which you do not know the you claim. You may need to fill out medical information,
answer. Which health plan do you want? provide picture identification and a social security num-
How many dependents will you claim? ber, and compile a list of emergency contacts and phone
Do you want to participate in the 401(k) numbers.
plan? Do you want to buy additional life
Activities
and/or disability insurance? These are just a
few of the questions you could be asked as you 1. Set up an appointment with someone in the Human
begin a new job. Resources Department at a local company. Ask what
PHOTO: PHOTODISC/GETTY IMAGES
Many companies offer some form of health insurance. decisions must be made by a new employee. Summa-
You may need to decide your level of coverage and who rize your findings in a written report.
is to be covered by the insurance. Life insurance and dis- 2. Give a list of typical benefits to 10 people. Have each
ability insurance are sometimes provided by an employer, person identify the three benefits most important to
but additional levels of coverage may be available for pur- him/her. Summarize your findings in a chart or table.
chase. Your employer may match your contributions into
30 Chapter 2 Analyzing Transactions into Debit and Credit Parts
End of Lesson
TERMS REVIEW
REVIEW
AUDIT YOUR UNDERSTANDING
T account
debit
1. Draw the accounting equation on a T account.
credit
2. What are the two accounting rules that regulate increases and decreases
normal balance of account balances?
WORK TOGETHER 21
Determining the normal balance and increase and decrease sides for accounts
Write the answers to the following problems in the Working Papers. Your instructor will guide you through the
following examples.
Cash Accounts Payable—Miller Supplies
Accounts Receivable—Christine Kelly Accounts Payable—Wayne Office Supplies
Supplies Jeff Dixon, Capital
Prepaid Insurance
For each of the accounts, complete the following:
1. Prepare a T account.
2. Label the debit and credit sides.
3. Label each side of the T account using the following labels:
a. Normal Balance
b. Increase
c. Decrease
ON YOUR OWN 21
Determining the normal balance and increase and decrease sides for accounts
Write the answers to the following problems in the Working Papers. Work this problem independently.
Cash Prepaid Insurance
Accounts Receivable—Lee McCann Accounts Payable—Topline Supplies
Accounts Receivable—Sonya Lopez Vickie Monson, Capital
Supplies
For each of the accounts, complete the following:
1. Prepare a T account.
2. Label the debit and credit sides.
3. Label each side of the T account using the following labels:
a. Normal Balance
b. Increase
c. Decrease
Using T Accounts Lesson 2-1 31
L E S S O N
Analyzing How Transactions
2-2 Affect Accounts
RECEIVED CASH FROM OWNER AS AN INVESTMENT
1 Cash and Kim Park,
Capital are affected. 2 Kim Park,
Capital is
Assets ⫽ Liabilities ⫹ Owner’s Equity
an owner‘s
2 equity account.
Cash is Cash Kim Park, Capital
an asset Debit Credit Debit Credit
account. Normal Balance Normal Balance
5,000.00 5,000.00 4 Kim Park,
4
Cash is Capital is
Decrease
debited. Decrease credited.
Increase
Increase
3 Assets are 3 Owner‘s Equity
increased. is increased.
the balances of at least two accounts. A list of accounts
August 1. Received cash from owner used by a business is called a chart of accounts. The chart
as an investment, $5,000.00. of accounts for TechKnow Consulting is found on page 3.
When accounts are analyzed, debits must equal cred-
its for each transaction. In addition, after a transaction is
The effect of this transaction is shown in the illustra- recorded, total debits must equal total credits.
tion. Before a transaction is recorded in the records of a The same four questions are used every time a transac-
business, the information is analyzed to determine which tion is analyzed into its debit and credit parts.
accounts are changed and how. Each transaction changes
QUESTIONS FOR ANALYZING A TRANSACTION
S T E P S
INTO ITS DEBIT AND CREDIT PARTS
1 Which accounts are affected?
Cash and Kim Park, Capital
2 How is each account classified?
Cash is an asset account. Kim Park, Capital is an owner’s equity account.
3 How is each classification changed?
Assets increase. Owner’s equity increases.
4 How is each amount entered in the accounts?
Assets increase on the debit side. Therefore, debit the asset account, Cash. Owner’s equity accounts increase
on the credit side. Therefore, credit the owner’s equity account, Kim Park, Capital.
32 Chapter 2 Analyzing Transactions into Debit and Credit Parts
PA I D C A S H FO R S U P P L I E S
2 Supplies and Cash are assets. 1 Supplies and Cash are affected.
Assets ⫽ Liabilities ⫹ Owner’s Equity
Supplies Cash
Debit Credit Debit Credit
Normal Balance Normal Balance
275.00 Decrease 275.00 4 Cash is credited.
Decrease
Increase
Increase
4
Supplies is 3 Assets (Supplies) 3 Assets (Cash)
debited. are increased. are decreased.
The two changes are both on the left side of the
accounting equation. When changes are made on only
August 3. Paid cash for supplies, $275.00. one side of the accounting equation, the equation must
still be in balance. Therefore, if one account is increased,
another account on the same side of the equation must be
The effect of this transaction on the accounting equa- decreased.
tion is shown in the illustration. In this transaction, two As you have seen, transactions must be carefully ana-
asset accounts are changed. One asset, cash, has been lyzed. A transaction may affect accounts from both sides
exchanged for another asset, supplies. The asset account, of the accounting equation. Or, a transaction may affect
Cash, decreases by $275.00, the amount of cash paid out. accounts that are on the same side of the accounting
This decrease is on the left side of the accounting equa- equation, as is true in this example. A common error is
tion. The asset account, Supplies, increases by $275.00, to assume that every transaction must affect accounts on
the amount of supplies bought. This increase is also on both sides of the accounting equation.
the left side of the accounting equation.
QUESTIONS FOR ANALYZING A TRANSACTION
S T E P S
INTO ITS DEBIT AND CREDIT PARTS
1 Which accounts are affected?
Supplies and Cash
2 How is each account classified?
Supplies is an asset account. Cash is an asset account.
3 How is each classification changed?
One asset (Supplies) increases and another asset (Cash) decreases.
4 How is each amount entered in the accounts?
Assets increase on the debit side. Therefore, debit the asset account, Supplies. Assets decrease
on the credit side. Therefore, credit the asset account, Cash.
Analyzing How Transactions Affect Accounts Lesson 2-2 33
PA I D C A S H FO R I N S U R A N C E
2 Prepaid Insurance and 1 Prepaid Insurance and Cash are affected.
Cash are assets.
Assets ⫽ Liabilities ⫹ Owner’s Equity
Prepaid Insurance Cash
Debit Credit Debit Credit
Normal Balance Normal Balance
1,200.00 Decrease 1,200.00 4 Cash is credited.
Decrease
Increase
Increase
4
Prepaid
Insurance 3 Assets (Prepaid Insurance) 3 Assets (Cash)
is debited. are increased. are decreased.
August 4. Paid cash for insurance, $1,200.00. F O R YO U R I N F O R M AT I O N
F Y I
T accounts get their name
Paying cash for insurance is very similar to paying from the arrangement of the
cash for supplies. One asset is increased and one asset is lines making up the account.
The horizontal line on top
decreased. of the centered vertical line F O R YO U R I N F O R M AT I O N
The effect of this transaction on the accounting equa- looks like a capital “T.” F Y I
tion is shown in the illustration. In this transaction, two
assets are changed. One asset, cash, has been exchanged for Paying cash for insurance
and buying supplies for cash
another asset, prepaid insurance. The asset account, Cash, are examples of transactions
decreases by $1,200.00, the amount of cash paid out. This that affect only one side of
decrease is on the left side of the accounting equation. The the accounting equation. All
asset account, Prepaid Insurance, increases by $1,200.00, the accounts involved in these
transactions are assets.
the amount of insurance bought. This increase is also on
the left side of the accounting equation.
QUESTIONS FOR ANALYZING A TRANSACTION
S T E P S
INTO ITS DEBIT AND CREDIT PARTS
1 Which accounts are affected?
Prepaid Insurance and Cash
2 How is each account classified?
Prepaid Insurance is an asset account. Cash is an asset account.
3 How is each classification changed?
One asset (Prepaid Insurance) increases and another asset (Cash) decreases.
4 How is each amount entered in the accounts?
Assets increase on the debit side. Therefore, debit the asset account, Prepaid Insurance.
Assets decrease on the credit side. Therefore, credit the asset account, Cash.
34 Chapter 2 Analyzing Transactions into Debit and Credit Parts
BOUGHT SUPPLIES ON ACCOUNT
1 Supplies and Accts. Pay.—Supply Depot are affected.
Assets ⫽ Liabilities ⫹ Owner’s Equity
2 Supplies 2 Accts. Pay.—
is an asset. Supplies Accts. Pay.— Supply Depot Supply Depot
Debit Credit Debit Credit is a liability.
Normal Balance Normal Balance
500.00 500.00 4 Accts. Pay.—
Supply Depot
Decrease
Decrease
is credited.
Increase
Increase
4
Supplies 3 Assets 3 Liabilities
is debited. are increased. are increased.
bought. This increase is on the left side of the accounting
August 7. Bought supplies on account equation. Supply Depot will have a claim against some
from Supply Depot, $500.00. of TechKnow Consulting’s assets until TechKnow Con-
sulting pays for the supplies bought. Therefore, Accounts
Payable—Supply Depot is a liability account. The liability
The effect of this transaction on the accounting equa- account, Accounts Payable—Supply Depot, increases by
tion is shown in the illustration. In this transaction, one $500.00, the amount owed for the supplies. This increase
asset and one liability are changed. The asset account, is on the right side of the accounting equation.
Supplies, increases by $500.00, the amount of supplies
QUESTIONS FOR ANALYZING A TRANSACTION
S T E P S
INTO ITS DEBIT AND CREDIT PARTS
P H O T OD I S C / G E T T Y I M A G E S
1 Which accounts are affected?
Supplies and Accounts Payable—Supply Depot
2 How is each account classified?
Supplies is an asset account. Accounts Payable—
Supply Depot is a liability account.
3 How is each classification changed?
Assets increase. Liabilities increase.
4 How is each amount entered in the
accounts?
Assets increase on the debit side.
Therefore, debit the asset account,
Supplies. Liabilities increase on the
credit side. Therefore, credit the
liability account, Accounts
Payable—Supply Depot.
Analyzing How Transactions Affect Accounts Lesson 2-2 35
PA I D C A S H O N ACCO U N T
1 Accts. Pay.—Supply Depot and Cash are affected.
Assets ⫽ Liabilities ⫹ Owner’s Equity
2 Cash is 2 Accts. Pay.—
an asset. Cash Accts. Pay.— Supply Depot Supply Depot
Debit Credit Debit Credit is a liability.
Normal Balance Normal Balance
4 300.00 300.00 4 Accts. Pay.—
Cash is Supply Depot
Decrease
Decrease
credited. is debited.
Increase
Increase
3 Assets are decreased. 3 Liabilities are decreased.
Cash, is decreased by $300.00, the amount of cash paid
August 11. Paid cash on account out. This decrease is on the left side of the accounting
to Supply Depot, $300.00. equation. After this payment, TechKnow Consulting
owes less money to Supply Depot. Therefore, the liability
account, Accounts Payable—Supply Depot, is decreased
The effect of this transaction on the accounting equa- by $300.00, the amount paid on account. The decrease is
tion is shown in the illustration. In this transaction, one on the right side of the accounting equation.
asset and one liability are changed. The asset account,
QUESTIONS FOR ANALYZING A TRANSACTION
S T E P S
INTO ITS DEBIT AND CREDIT PARTS
1 Which accounts are affected?
Accounts Payable—Supply Depot and Cash
2 How is each account classified?
Accounts Payable—Supply Depot is a liability account. Cash is an asset account.
3 How is each classification changed?
Liabilities decrease. Assets decrease.
4 How is each amount entered in the accounts?
Liabilities decrease on the debit side. Therefore, debit the liability
account, Accounts Payable—Supply Depot. Assets decrease on the R E M E M B E R
credit side. Therefore, credit the asset account, Cash.
When you decrease an account
balance, record the decrease on
the side opposite the normal
balance side of the account.
The side opposite the normal
balance side can be on the
left or the right, depending
on the type of account.
36 Chapter 2 Analyzing Transactions into Debit and Credit Parts
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
TERM REVIEW
1. State the four questions used to analyze a transaction.
chart of accounts 2. What two accounts are affected when a business pays cash for supplies?
WORK TOGETHER 22
Analyzing transactions into debit and credit parts
T accounts are given in the Working Papers. Your instructor will guide you through the following examples. Kathy
Bergum owns Bergum Services. Bergum Services uses the following accounts. Some of the accounts will be
explained in Lesson 2-3.
Cash Accts. Pay.—Bales Supplies Sales
Accts. Rec.—Sam Erickson Kathy Bergum, Capital Advertising Expense
Supplies Kathy Bergum, Drawing Rent Expense
Prepaid Insurance
Transactions:
Apr. 1. Received cash from owner as an investment, $5,000.00.
2. Paid cash for supplies, $50.00.
5. Paid cash for insurance, $75.00.
6. Bought supplies on account from Bales Supplies, $100.00.
9. Paid cash on account to Bales Supplies, $50.00.
1. Prepare two T accounts for each transaction. On each T account, write the account title of one of the accounts
affected by the transaction.
2. Write the debit or credit amount in each T account to show the transaction’s effect.
ON YOUR OWN 22
Analyzing transactions into debit and credit parts
T accounts are given in the Working Papers. Work this problem independently. Derrick Hoffman owns Hoffman
Accounting Service. Hoffman Accounting Service uses the following accounts. Some of the accounts will be
explained in Lesson 2-3.
Cash Accts. Pay.—Nash Supply Sales
Accts. Rec.—Jon Roe Derrick Hoffman, Capital Miscellaneous Expense
Supplies Derrick Hoffman, Drawing Utilities Expense
Prepaid Insurance
Transactions:
Sept. 1. Received cash from owner as an investment, $2,000.00.
4. Paid cash for insurance, $300.00.
5. Paid cash for supplies, $100.00.
6. Bought supplies on account from Nash Supply, $230.00.
11. Paid cash on account to Nash Supply, $115.00.
1. Prepare two T accounts for each transaction. On each T account, write the account title of one of the accounts
affected by the transaction.
2. Write the debit or credit amount in each T account to show the transaction’s effect.
Analyzing How Transactions Affect Accounts Lesson 2-2 37
L E S S O N Analyzing How Transactions
Affect Owner’s Equity
2-3 Accounts
RECEIVED CASH FROM SALES
1 Cash and Sales are affected.
2 Sales is a
Assets ⫽ Liabilities ⫹ Owner’s Equity revenue account
2 that affects
Cash is owner‘s equity.
Cash Sales
an asset.
Debit Credit Debit Credit
Normal Balance Normal Balance
295.00 295.00 4 Sales is
4 credited.
Decrease
Cash is Decrease
Increase
Increase
debited.
3 Owner‘s equity
3 Assets are increased. is increased.
number of entries and to summarize revenue information
separately from the other records, TechKnow Consulting
August 12. Received cash from sales, $295.00. uses a separate revenue account titled Sales.
The owner’s capital account has a normal credit bal-
ance. Increases in the owner’s capital account are shown as
Revenue increases owner’s equity. The increases from credits. Because revenue increases owner’s equity, increases
revenue could be recorded directly in the owner’s capital in revenue are also recorded as credits. Therefore, a rev-
account. However, to avoid a capital account with a large enue account has a normal credit balance.
F Y I
QUESTIONS FOR ANALYZING A TRANSACTION
S T E P S
INTO ITS DEBIT AND CREDIT PARTS
1 Which accounts are affected?
Cash and Sales
F O R YO U R I N F O R M AT I O N
2 How is each account classified?
Cash is an asset account. Sales is a revenue account that affects F Y I
owner’s equity. The Small Business Administration
(SBA) offers two major types of
3 How is each classification changed? loans to small businesses. One type
Assets increase. Owner’s equity increases. of loan is made by private lending
institutions. Another type of loan
4 How is each amount entered in the accounts? is made directly by the SBA.
Assets increase on the debit side. Therefore, debit the asset account,
Cash. Owner’s equity accounts increase on the credit side. Revenue
increases owner’s equity. Therefore, credit the revenue account, Sales.
38 Chapter 2 Analyzing Transactions into Debit and Credit Parts
SOLD SE RVICES ON ACCOUNT
1 Accts. Rec.— Oakdale School
and Sales are affected. 2 Sales is a
Assets ⫽ Liabilities ⫹ Owner‘s Equity revenue account
2 that affects
Accts. Rec.— owner's equity.
Accts. Rec.—Oakdale School Sales
Oakdale
Debit Credit Debit Credit
School
Normal Balance Normal Balance
is an asset. 350.00 350.00 4 Sales is
credited.
Decrease
Decrease
4
Accts. Rec.—
Increase
Increase
Oakdale
School
is debited.
3 Assets are increased. 3 Owner‘s equity
is increased.
that cash is not received at this time; therefore, the cash
August 12. Sold services on account account is not affected by the transaction. Instead, this
to Oakdale School, $350.00. transaction increases an accounts receivable account. The
same four questions are used to analyze this transaction
into its debit and credit parts.
The analysis for selling services on account is similar
to that for selling services for cash. The only difference is
QUESTIONS FOR ANALYZING A TRANSACTION
S T E P S
INTO ITS DEBIT AND CREDIT PARTS
1 Which accounts are affected?
Accounts Receivable—Oakdale School and Sales
2 How is each account classified?
Accounts Receivable—Oakdale School is an asset account. Sales is a revenue
account that affects owner’s equity.
3 How is each classification changed?
Assets increase. Owner’s equity increases.
4 How is each amount entered in the accounts?
Assets increase on the debit side. Therefore, debit the asset account,
R E M E M B E R
Accounts Receivable—Oakdale School. Owner’s equity accounts
increase on the credit side. Revenue increases owner’s equity. Owner’s equity is recorded on
Therefore, credit the revenue account, Sales. the right side of the accounting
equation. The right side of a
T account is the credit side.
Therefore, owner’s equity has
a normal credit balance.
Analyzing How Transactions Affect Owner’s Equity Accounts Lesson 2-3 39
PA I D C A S H FO R A N E X P E N S E
2 Cash is an asset. 1 Rent Expense and Cash are affected.
Assets ⫽ Liabilities ⫹ Owner’s Equity
Cash Owner‘s Equity
Debit Credit Debit Credit
Normal Balance 300.00 Normal Balance
Decrease
Decrease
Increase
Increase
4 Cash is 3 Assets Rent Expense 2
credited. are Debit Credit Rent Expense is an
decreased. Normal Balance expense account
300.00
that affects owner‘s
Decrease
equity.
Increase
4 Rent Expense 3 Owner‘s equity is decreased;
is debited. expenses are increased.
The titles of TechKnow Consulting’s expense accounts
are shown on its chart of accounts. The expense account
August 12. Paid cash for rent, $300.00. Rent Expense is used to record all payments for rent.
The owner’s capital account has a normal credit bal-
ance. Decreases in the owner’s capital account are shown
Expenses decrease owner’s equity. The decreases from as debits. Therefore, an expense account has a normal
expenses could be recorded directly in the owner’s capital debit balance. Because expenses decrease owner’s equity,
account. However, to avoid a capital account with a large increases in expenses are recorded as debits.
number of entries and to summarize expense information All expense transactions are recorded in a similar
separately from the other records, TechKnow Consulting manner.
uses separate expense accounts.
QUESTIONS FOR ANALYZING A TRANSACTION
S T E P S
INTO ITS DEBIT AND CREDIT PARTS
1 Which accounts are affected?
Rent Expense and Cash
2 How is each account classified?
Rent Expense is an expense account that affects owner’s equity. Cash is an asset account.
3 How is each classification changed?
Owner’s equity decreases from an increase in expenses. Assets decrease.
4 How is each amount entered in the accounts?
Owner’s equity accounts decrease on the debit side. An increase in expenses decreases owner’s equity. Expense
accounts have normal debit balances. Therefore, debit the expense account, Rent Expense. Assets decrease on the
credit side. Therefore, credit the asset account, Cash.
40 Chapter 2 Analyzing Transactions into Debit and Credit Parts
RECE IVED CASH ON ACCOUNT
2 Cash and Accts. Rec.— 1 Cash and Accts. Rec.— Oakdale School are affected.
Oakdale School are assets.
Assets ⫽ Liabilities ⫹ Owner’s Equity
Cash Accts. Rec.— Oakdale School
Debit Credit Debit Credit
Normal Balance Normal Balance
200.00 200.00 4 Accts. Rec.—
Oakdale School
Decrease
Decrease
is credited.
Increase
Increase
4 3 Assets (Accts. Rec.—
Cash is Oakdale School)
debited. 3 Assets (Cash) are increased. are decreased.
August 18. Received cash on account
from Oakdale School, $200.00.
QUESTIONS FOR ANALYZING A TRANSACTION
S T E P S
INTO ITS DEBIT AND CREDIT PARTS
1 Which accounts are affected? P HO T O DI S C / G E T
TY IMA
Cash and Accounts Receivable—Oakdale School GE S
2 How is each account classified?
Cash is an asset account. Accounts Receivable—Oakdale
School is an asset account.
3 How is each classification changed?
One asset (Cash) increases and another asset
(Accounts Receivable—Oakdale School)
decreases.
4 How is each amount entered in the
accounts?
Assets increase on the debit side.
Therefore, debit the asset account,
Cash. Assets decrease on the
credit side. Therefore, credit the
asset account, Accounts
Receivable—Oakdale School.
Analyzing How Transactions Affect Owner’s Equity Accounts Lesson 2-3 41
PA I D C A S H TO OW N E R FO R P E R S O N A L U S E
2 Cash is an asset. 1 Kim Park, Drawing and Cash are affected.
Assets ⫽ Liabilities ⫹ Owner’s Equity
Cash Owner‘s Equity
Debit Credit Debit Credit
Normal Balance 125.00 Normal Balance
Decrease
Decrease
Increase
Increase
4 Cash is 3 Assets Kim Park, Drawing 2 Kim Park, Drawing
credited. are Debit Credit is an owner‘s equity
decreased. Normal Balance account.
125.00
Decrease
Increase
4 Kim Park,
3 Owner‘s equity is decreased;
Drawing is debited.
withdrawals are increased.
August 18. Paid cash to owner for
F O R YO U R I N F O R M AT I O N
personal use, $125.00.
F Y I
When drawing T accounts to
Withdrawals decrease owner’s equity. Withdrawals analyze transactions, stack the
could be recorded directly in the owner’s capital account. accounts instead of writing
them horizontally. Stacking the
However, to avoid a capital account with a large number accounts will make it easier to
of entries and to summarize withdrawal information sepa- recognize debits and credits.
rately from the other records, TechKnow Consulting uses
a separate withdrawal account titled Kim Park, Drawing.
QUESTIONS FOR ANALYZING A TRANSACTION
S T E P S
INTO ITS DEBIT AND CREDIT PARTS
1 Which accounts are affected?
Kim Park, Drawing and Cash
2 How is each account classified?
Kim Park, Drawing is an owner’s equity account. Cash is an asset account.
3 How is each classification changed?
Owner’s equity decreases from an increase in withdrawals. Assets decrease.
4 How is each amount entered in the accounts?
Owner’s equity accounts decrease on the debit side. An increase in withdrawals decreases owner’s equity.
Withdrawal accounts have normal debit balances. Therefore, debit the owner’s equity account, Kim Park,
Drawing. Assets decrease on the credit side. Therefore, credit the asset account, Cash.
CAREERS IN ACCOUNTING
42 Chapter 2 Analyzing Transactions into Debit and Credit Parts
CAREERS IN ACCOUNTING
R i t a J . C o wa n s ,
Int e r n a l Au d i t or
As a highly respected employ- assets of the corporation, complying with all laws and
ee at FedEx Corporation, regulations, and accomplishing the corporate strategic
Rita J. Cowans is a Man- objectives as established by senior management.”
ager in the Internal While in high school, Rita developed a love for math-
Audit Department. ematics and accounting. “I became a very critical and
During her tenure detail-oriented thinker and excelled at analyzing infor-
at FedEx, Rita has mation and solving problems.” With her parents’ direc-
held various posi- tion and strong support, she continued her education
tions in financial, and graduated with a bachelor’s degree in accounting.
operational, inter- In addition, she successfully earned her Certified Internal
national, and in- Auditor (CIA) and Certified Information Systems Auditor
formation systems (CISA) professional designations. “Being certified in the
audit. Presently she area of accounting in which you work is critical to your
is responsible for the professional success. Certifications demonstrate that
financial, information you are committed to your profession and communicate
systems, and internation- to others that you are an expert in your field.”
al audit activities for FedEx Certifications also enable you to become active in
Worldwide operations. organizations that provide educational opportunities for
COURTESY OF RITA J. COWANS
Her audit team conducts busi- their members. Rita is a member of the Institute of Inter-
ness process reviews, integrated financial and nal Auditors and Information Systems Audit and Control
information system reviews, international entity reviews, Association.
fraud examinations, and vendor audits. Rita has been a As a member of the FedEx Services Diversity Council,
leader in developing and promoting best practices as Rita works to ensure that individuals from every back-
an integral part of the Internal Audit Department. “It’s ground have the opportunity to excel at FedEx. Ulti-
my responsibility to ensure that the employees and mately, “having a passion for what you do and setting
management of FedEx are effectively safeguarding the high standards will determine your level of success.”
Salary Range: $30,000–$130,000 and up. Can lead to CISA, CFE, etc). Familiarity with business, information tech-
high-level careers at public accounting firms, private and nology, and legal concepts and procedures is beneficial.
public corporations, and government agencies, such as
Occupational Outlook: The Sarbanes-Oxley Act of 2002
the Internal Revenue Service (IRS Auditor).
requires public corporations to expand the documenta-
Qualifications: Bachelor’s degree in accounting, finance, tion and testing of their accounting systems. Internal
and information systems for entry-level position, plus auditors are an integral part of corporations’ compliance
normally five years of auditing experience for senior level with this law. As a result, the demand for internal auditors
or above. Professional Certifications preferred (CPA, CIA, will be strong for years to come.
Analyzing How Transactions Affect Owner’s Equity Accounts Lesson 2-3 43
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. What two accounts are affected when a business receives cash from
sales?
2. What two accounts are affected when services are sold on account?
3. What two accounts are affected when a business pays cash to the owner
for personal use?
4. Are revenue accounts increased on the debit side or credit side?
Explain why.
5. Are expense accounts increased on the debit side or credit side?
Explain why.
WORK TOGETHER 23
Analyzing revenue, expense, and withdrawal transactions into debit and credit parts
T accounts are given in the Working Papers. Your instructor will guide you through the following examples.
Use the chart of accounts for Bergum Services in Work Together 2-2.
Transactions:
Apr. 10. Received cash from sales, $600.00.
11. Sold services on account to Sam Erickson, $850.00.
14. Paid cash for rent, $250.00.
18. Received cash on account from Sam Erickson, $425.00.
20. Paid cash to owner for personal use, $300.00.
1. Prepare two T accounts for each transaction. In each T account, write the account title of one of the accounts
affected by the transaction.
2. Write the debit or credit amount in each T account to show the transaction’s effect.
ON YOUR OWN 23
Analyzing revenue, expense, and withdrawal transactions into debit and credit parts
T accounts are given in the Working Papers. Work this problem independently.
Use the chart of accounts for Hoffman Accounting Service in On Your Own 2-2.
Transactions:
Sept. 13. Received cash from sales, $1,500.00.
15. Sold services on account to Jon Roe, $500.00.
16. Paid cash for utilities, $450.00.
18. Received cash on account from Jon Roe, $250.00.
21. Paid cash to owner for personal use, $700.00.
1. Prepare two T accounts for each transaction. On each T account, write the account title of one of the accounts
affected by the transaction.
2. Write the debit or credit amount in each T account to show the transaction’s effect.
44 Chapter 2 Analyzing Transactions into Debit and Credit Parts
SUMMARY
After completing this chapter, you can: 4. Analyze how transactions to set up a business
affect accounts.
1. Define accounting terms related to analyzing
transactions into debit and credit parts. 5. Analyze how transactions affect owner’s equity
accounts.
2. Identify accounting practices related to analyz-
ing transactions into debit and credit parts.
3. Use T accounts to analyze transactions, show-
ing which accounts are debited or credited for
each transaction.
EXPLORE ACCOUNTING
O w n e r Wi t h d ra wa l s
Employee salaries are considered an expense of $2,500.00 and expenses of $1,100.00, its
that reduces the net income of a company. income is $1,400.00 ($2,500.00 ⫺ $1,100.00).
When the owner withdraws cash from the Wang Accounting Services will have
company, this withdrawal is not consid- income of $1,400.00 regardless of whether
ered an expense. The income of a business the owner withdraws $100.00 or $1,000.00
is calculated by subtracting total expenses from the business during that period.
from total revenue. Since withdrawals are
not considered to be an expense, they do not
affect the business’s income.
A business owned by one person is called a proprietor-
Discussion
ship. The Internal Revenue Service does not require the 1. Hector Moya owns ESW Party Service. He is consider-
proprietorship, itself, to pay taxes. However, the owner of ing giving his employees a raise that would increase
the proprietorship must include the net income of the pro- total salaries by $15,000.00 per year. What effect would
prietorship in his or her own taxable income. this raise have on Mr. Moya’s income tax?
Because the income of a proprietorship is not affected 2. Mr. Moya is also considering withdrawing $5,000.00
by owner withdrawals, the income tax paid by the owner is from ESW Party Service for his personal use. What
not affected by how much cash the owner withdraws from effect would this withdrawal have on the income tax
the business. If Wang Accounting Services has revenues Mr. Moya must pay this year?
PHOTO: PHOTOGRAPHER’S CHOICE/GETTY IMAGES
Analyzing Transactions into Debit and Credit Parts Chapter 2 45
21 APPLICATION PROBLEM
Determining the normal balance and increase and decrease sides for accounts
Write the answers for the following problem in the Working Papers.
Cash Prepaid Insurance
Accounts Receivable—Jens Olefson Accounts Payable—United Company
Accounts Receivable—Toni Nolan Juan Reo, Capital
Supplies
1 2 3 4 5 6 7 8
Account’s
Account Normal Increase Decrease
Account Classification Balance Side Side
Debit Credit Debit Credit Debit Credit
Cash Asset ⻫ ⻫ ⻫
Instructions:
Do the following for each account. The cash account is given as an example.
1. Write the account title in Column 1.
2. Write the account classification in Column 2.
3. Place a check mark in either Column 3 or 4 to indicate the normal balance of the account.
4. Place a check mark in either Column 5 or 6 to indicate the increase side of the account.
5. Place a check mark in either Column 7 or 8 to indicate the decrease side of the account.
22 APPLICATION PROBLEM
Analyzing transactions into debit and credit parts
Hal Rosen owns Hal’s Marketing Services, which uses the following accounts.
Cash Hal Rosen, Capital
Supplies Hal Rosen, Drawing
Prepaid Insurance Sales
Accounts Receivable—Dominik Field Advertising Expense
Accounts Payable—All Star Company Rent Expense
Transactions:
Mar. 1. Received cash from owner as an investment, $1,000.00.
1. Paid cash for insurance, $400.00.
3. Bought supplies on account from All Star Company, $600.00.
5. Paid cash for supplies, $100.00.
8. Paid cash on account to All Star Company, $400.00.
( Go Beyond the Book
)
For more information go to
www.C21accounting.com
46 Chapter 2 Analyzing Transactions into Debit and Credit Parts
Instructions:
1. Prepare two T accounts for each transaction. On each T account, write the account title of one of the
accounts affected by the transaction. Use the forms in your Working Papers.
2. Write the debit or credit amount in each T account to show how the transaction affected that account.
T accounts for the first transaction are given as an example.
March 1. Cash
1,000.00
Hal Rosen, Capital
1,000.00
23 APPLICATION PROBLEM
Analyzing revenue, expense, and withdrawal transactions into debit and credit parts
Use the chart of accounts for Hal’s Marketing Services given in Application Problem 2-2.
Transactions:
Mar. 11. Received cash from sales, $2,200.00.
12. Paid cash for advertising, $150.00.
14. Sold services on account to Dominik Field, $1,700.00.
18. Paid cash to owner for personal use, $500.00.
19. Received cash on account from Dominik Field, $1,000.00.
Instructions:
1. Prepare two T accounts for each transaction. On each T account, write the account title of one of the
accounts affected by the transaction. Use the forms in your Working Papers.
2. Write the debit or credit amount in each T account to show how the transaction affected that account.
24 APPLICATION PROBLEM
Analyzing revenue, expense, and withdrawal transactions into debit and credit parts
Use the chart of accounts for Hal’s Marketing Services given in Application Problem 2-2.
Transactions:
Mar. 25. Sold services for cash, $1,100.00.
26. Performed $500.00 of services for Dominik Field on account.
27. Ran an ad in the local newspaper. Paid $125.00 cash.
28. Hal Rosen withdrew $450.00 for his personal use.
29. Received a $250.00 check from Dominik Field on account.
Instructions:
1. Prepare two T accounts for each transaction. On each T account, write the account title of one of the
accounts affected by the transaction. Use the forms in your Working Papers.
2. Write the debit or credit amount in each T account to show how the transaction affected that account.
Analyzing Transactions into Debit and Credit Parts Chapter 2 47
25 MASTERY PROBLEM
Analyzing transactions into debit and credit parts
Vickie Lands owns a business called LandScape. LandScape uses the following accounts.
Cash Vickie Lands, Drawing
Accounts Receivable—Alston Goff Sales
Accounts Receivable—Josie Leveson Advertising Expense
Supplies Miscellaneous Expense
Prepaid Insurance Rent Expense
Accounts Payable—North End Supplies Repair Expense
Accounts Payable—Bethany Supplies Utilities Expense
Vickie Lands, Capital
Instructions:
1. Prepare a T account for each account. Use the forms in your Working Papers.
2. Analyze each transaction into its debit and credit parts. Write the debit and credit amounts in the proper
T accounts to show how each transaction changes account balances. Write the date of the transaction in
parentheses before each amount.
Transactions:
June 1. Received cash from owner as an investment, $2,700.00.
2. Paid cash for rent, $500.00.
4. Paid cash for supplies, $300.00.
4. Received cash from sales, $850.00.
5. Paid cash for insurance, $275.00.
8. Sold services on account to Alston Goff, $700.00.
9. Bought supplies on account from Bethany Supplies, $200.00.
10. Paid cash for repairs, $75.00.
11. Received cash from owner as an investment, $1,900.00.
11. Received cash from sales, $900.00.
12. Bought supplies on account from North End Supplies, $130.00.
13. Received cash on account from Alston Goff, $500.00.
15. Paid cash for miscellaneous expense, $25.00.
16. Paid cash on account to Bethany Supplies, $50.00.
22. Paid cash for electric bill (utilities expense), $55.00.
23. Paid cash for advertising, $95.00.
25. Sold services on account to Josie Leveson, $450.00.
26. Paid cash to owner for personal use, $400.00.
30. Received cash on account from Josie Leveson, $200.00.
48 Chapter 2 Analyzing Transactions into Debit and Credit Parts
26 CHALLENGE PROBLEM
Analyzing transactions recorded in T accounts
Adriana Janek owns a business for which the following T accounts show the current financial situation. Write
the answers for the following problem in the Working Papers.
Cash Sales
(1) 6,000.00 (2) 100.00 (5) 700.00
(5) 700.00 (3) 65.00 (8) 400.00
(8) 400.00 (6) 75.00 (9) 900.00
(9) 900.00 (7) 900.00 (13) 225.00
(10) 600.00
(11) 550.00
(12) 500.00
Accts. Rec.—Ralph Dahl Advertising Expense
(13) 225.00 (6) 75.00
Supplies Miscellaneous Expense
(4) 1,100.00 (3) 65.00
(10) 600.00
Accts. Pay.—Tri City Supplies Rent Expense
(11) 550.00 (4) 1,100.00 (7) 900.00
Adriana Janek, Capital Utilities Expense
(1) 6,000.00 (2) 100.00
Adriana Janek, Drawing
(12) 500.00
1 2 3 4 5 6
Entered in Description
Trans. Accounts Account Account as a of
No. Affected Classification
Debit Credit Transaction
1. Cash Asset ⻫ Received cash
Adriana Janek, Capital Owner’s Equity ⻫ from owner as an
investment
Instructions:
1. Analyze each numbered transaction in the T accounts. Write the titles of accounts affected in Column 2.
For each account, write the classification of the account in Column 3.
2. For each account, place a check mark in either Column 4 or 5 to indicate if the account is affected by
a debit or a credit.
3. For each transaction, write a brief statement in Column 6 describing the transaction. Information for
Transaction 1 is given as an example.
Analyzing Transactions into Debit and Credit Parts Chapter 2 49
A P P L I E D CO M M U N I C AT I O N
An entrepreneur is a person who attempts to earn a profit by taking the risk of operating a business. You have
expressed an interest in starting your own business after graduation. Your family has agreed to help finance your
new business if you can convince them that you would be successful.
Instructions: Develop a formal plan outlining the details of the business you would operate. Describe the type of
business, the equipment or resources needed, and financial information, such as start-up costs and expenses. Write
clear and persuasive sentences.
CASES FOR CRITICAL THINKING
Case 1
Aruna Patel records all cash receipts as revenue and all cash payments as expenses. Is Ms. Patel recording her cash
receipts and cash payments correctly? Explain your answer.
Case 2
Thomas Bueler records all investments, revenue, expenses, and withdrawals in his capital account. At the end of each
month, Mr. Bueler sorts the information to prepare a summary of what has caused the changes in his capital account
balance. To help Mr. Bueler prepare this summary in the future, what changes would you suggest he make in his
records?
SCANS WORKPLACE COMPETENCY
Resource Competency: Ranking Activities
Concept: Employers need workers who can identify tasks to be completed and prioritize them so that time is spent
on tasks that are the most productive. It is human nature to do the tasks that are enjoyable or easy to complete first;
however, these tasks are not necessarily the ones that contribute most to the success of a business.
Application: Use the planning sheet on the website (www.C21accounting.com) or create your own form for priori-
tizing tasks. The form should have four narrow columns labeled A, B, C, and ✓ and a wider column for tasks that need
to be completed. List all the tasks or activities you need to do tomorrow or this week in the wide column. Then place
a check mark in one of the three columns for each item on the list to show whether it is of the highest priority (A),
medium priority (B), or low priority (C). Place a check mark in the column labeled ✓ as each task is completed.
50 Chapter 2 Analyzing Transactions into Debit and Credit Parts
AUDITING FOR ERRORS
The bookkeeper for Lyons Company used T accounts to analyze three transactions as follows.
Transaction 1:
Cash Ruth Lyons, Capital
200.00 200.00
Transaction 2:
Accounts Payable Supplies
500.00 500.00
Transaction 3:
Accounts Receivable Sales
100.00 100.00
Review the three sets of T accounts and answer the following questions.
1. Which T account analysis is incorrect? How did you determine it was incorrect?
2. What information would you need to determine the correct T account analysis for this transaction?
A N A LY Z I N G B E S T B U Y ’S F I N A N C I A L S TAT E M E N T S
The Best Buy financial statement on Appendix B page B-5 lists the assets, liabilities, and shareholder’s equity of Best
Buy. Shareholder’s equity for a corporation is the same as capital for a proprietorship.
Instructions: Find the total assets, total liabilities, and total equity for Best Buy for 2006 and 2007. Put your answer in
the form of an accounting equation. You will have to add the total current liabilities, long-term liabilities, and long-
term debt to find the total liabilities. Minority interest, which is a special type of account, should be added to total
liabilities and total equity in the accounting equation.
PH O
TO D
IS C
/GE
TTY
I MA
GE
S
Analyzing Transactions into Debit and Credit Parts Chapter 2 51
Accounting
SOFTWARE
O P E N I N G S O F T WA R E A N D P R O B L E M F I L E S
Your first opportunity to enter transactions in Peachtree will be in Chapter 4. The first step in using Peachtree is to
learn how to open the software and then open a problem data file. Problem data files have the chart of accounts
and beginning account balances already set up. Therefore, once the data file is open, you are ready to begin enter-
ing transactions to solve a problem.
Each problem you will complete has an individual problem or data file. Detailed instructions for opening files
and completing problems are provided on the Century 21 Accounting web site (www.C21accounting.com).
Peachtree uses unique terminology for opening data files. Rather than opening a file, the software will restore a
file. The procedures for opening a problem data file depend on how your software is installed.
PEACHTREE ACTIVITY
1. Locate and open your Peachtree software. Depending on how the software was installed, you may be able to
open Peachtree from your Start menu or you may have a Peachtree icon on your desktop.
2. Open the data file for Mastery Problem 4-5 (filename: 04-5MP.ptb).
3. Close the data file and exit the software.
O P E N I N G S O F T WA R E A N D P R O B L E M F I L E S
Your first opportunity to enter transactions in QuickBooks will be in Chapter 4. Learning some basic
skills for using the software now will prepare you to complete these problems accurately and efficiently. Detailed
instructions for opening files and completing problems are provided on the Century 21 Accounting web site
(www.C21accounting.com).
Each problem you will complete has an individual problem or data file. The file is already set up for QuickBooks
and includes company information and the chart of accounts and beginning balances at the point the problem
begins.
QUICKBOOKS ACTIVITY
1. Locate and open your QuickBooks software. Depending on how the software was installed, you may be able to
open QuickBooks from your Start menu or you may have a QuickBooks icon on your desktop.
2. Open the data file for Mastery Problem 4-5. QuickBooks uses the company name as the filename, so look for the
file named O’Kalla Lawn and Garden.qbw.
3. Close the data file and exit the software.
52 Chapter 2 Analyzing Transactions into Debit and Credit Parts
O P E N I N G S O F T WA R E A N D P R O B L E M F I L E S
The birth of the electronic spreadsheet can be traced back to Dan Bricklin, a student at Harvard Business School,
who was preparing a written worksheet analysis for a case study. Knowing that there must be a better alternative,
Bricklin began programming an electronic version. His goal was to create a program in which the user could visual-
ize the worksheet as it was created.
By 1979, Bricklin was marketing his program under the name VisiCalc, short for visible calculator. The program
was an instant success and is credited with providing businesses a reason to finally purchase their first personal
computer, an expensive purchase at that time.
This program had a dramatic impact in business. No longer were individuals required to create worksheets by
hand, calculating each value with adding machines. Most important, if any number on the worksheet changed,
other numbers calculated with formulas automatically changed. This power instantly transformed how businesses
created budgets, analyzed financial statements, and performed “what if” analyses.
EXCEL ACTIVITY
1. Locate and open your Excel software. Depending on how the software was installed, you may be able to open
Excel from your Start menu or you may have an Excel icon on your desktop.
2. Open the data file for Application Problem 5-2 (filename: F05-2.xls). Your instructor may have already copied
the data files to your computer. They may also be downloaded from the Century 21 Accounting web site (www.
C21accounting.com).
3. Close the data file and exit the software.
O P E N I N G S O F T WA R E A N D P R O B L E M F I L E S
Using computer software to process accounting data can be an efficient and effective way to control the financial
information of a business. In order to use the software, it is important to have a general understanding of computer
and software terminology. Keyboarding skills are also essential for entering data. The more skilled you are and the
greater your understanding, the better able you will be to accurately process financial information.
Automated Accounting software is used to teach students about computerized accounting principles. Account-
ing software is a set of instructions that operate the computer and enable the user to enter financial information
and create reports, spreadsheets, graphs, and documents. Specifically, Automated Accounting can process trans-
actions for:
• The purchase of assets, supplies, services, and the related payments.
• Investments in the business.
• Sales, cash receipts, and noncash transactions.
There are many other types of transactions that can be entered into an automated accounting system. Many of the
various types of transactions will be studied in this course.
AUTOMATED ACCOUNTING ACTIVITY
1. Locate and open your Automated Accounting software. Depending on how the software was installed, you may
be able to open Automated Accounting from your Start menu or you may have an Automated Accounting icon
on your desktop. They may also be downloaded from the Century 21 Accounting web site (www.C21accounting.
com).
2. Open the data file for Application Problem 3-5 (filename: F03-5.AA8). To open the data file, click the Open button
on the toolbar. Then look in the C21 1st Year folder and double-click the appropriate filename.
3. Close the data file and exit the software.
Analyzing Transactions into Debit and Credit Parts Chapter 2 53
DIGITAL VISION/GETTY IMAGES
C H A P T E R 3 Journalizing
Transactions
O B J E C T I V E S
After studying Chapter 3, you will be able to: 4. Record transactions to buy insurance for cash
and supplies on account in a five-column
1. Define accounting terms related to journalizing
journal.
transactions.
5. Record transactions that affect owner’s equity
2. Identify accounting concepts and practices
and receiving cash on account in a five-column
related to journalizing transactions.
journal.
3. Record transactions to set up a business in
6. Prove and rule a five-column journal and prove
a five-column journal.
cash.
K E Y T E R M S
• journal • double-entry accounting • receipt
• journalizing • source document • memorandum
• special amount column • check • proving cash
• general amount column • invoice
• entry • sales invoice
( Point Your Browser
www.C21accounting.com
)
54
ACCOUNTING IN THE REAL WORLD
Travelocity
Taking Travel to a Better Place—Travelocity
Do you sometimes feel that you need a vacation but are unsure about how
to coordinate airline, hotel, and ground transportation reservations? That’s
where a company like Travelocity can help. Travelocity can also help with
cruises, rail travel, and mini travel guides.
Maybe you want to take an inexpensive vacation, and you don’t have a
specific destination in mind. By searching the Travelocity web site, you can
DIGITAL VISION/GETTY IMAGES
quickly find the “top deals” in airfares, cruises, hotels, rental cars, and total
vacation packages. You can even find suggestions about what to see and do
at your destination. INTERNET
Want to travel throughout Europe? Trav- ACTIVITY
elocity will help you arrange rail travel
across Europe, arrange for a place AICPA
to stay, and help you get there. Go to the homepage for the
That’s full service at its best. American Institute of Certified
All of this activity needs Public Accountants (AICPA)
to be recorded in the (www.aicpa.org). Search the
accounting records of site for information about the
Travelocity. AICPA Mission Statement.
Instructions
1. Summarize the mission
statement and the objec-
tives of the AICPA.
©PR NEWSWIRE/TRAVELOCITY
2. Expand the search by
looking at other pages. List
three additional resources
provided by the AICPA.
Critical Thinking
1. What account would Travelocity credit when you make a reservation
with them? What account would be debited?
2. Why do you think Travelocity might be able to get less expensive airline
tickets than you, as an individual, could get?
Source: www.travelocity.com
55
L E S S O N Journals, Source Documents,
and Recording Entries in a
3-1 Journal
JOURNALS AND JOURNALIZING
As described in Chapter 2, transactions are analyzed into day. To keep from getting overloaded, businesses usually
debit and credit parts before information is recorded. A record transactions in their journals every day.
form for recording transactions in chronological order is F Y I
called a journal. Recording transactions in a journal is
called journalizing. F O R YO U R I N F O R M AT I O N
Transactions could be recorded in the accounting equa- F Y I
tion. However, most companies wish to create a more per-
The Small Business Administration
manent record by recording transactions in a journal. (SBA) has programs that offer free
Each business uses the kind of journal that best fits the management and accounting advice
needs of that business. The nature of a business and the to small business owners. The SBA
number of transactions to be recorded determine the kind sponsors various workshops and
publishes a variety of booklets for
of journal to be used. small business owners. Visit
The word journal comes from the Latin diurnalis, their Web site at
meaning daily. Most businesses conduct transactions every www.sba.gov.
CHARACTER COUNTS
R e c o g ni z i n g E t h i c a l D i l e m m a s
and Actions
How often have you said something one else. If you have any doubts that your action will vio-
you later regretted? Chances are you late your morals, stop to evaluate the decision, using the
spoke before you thought about ethical model.
how your words might affect The second step of the ethical model is to identify the
others. Had you taken the time action taken or the proposed action. Write down every
to think how your words would possible action you think of, even if the idea might seem
hurt someone else, you might outrageous at first. Seek the advice of others who may
have said something different have encountered similar dilemmas or whom you admire
or simply kept quiet. for their ethical behavior. Many companies assign a men-
The first step of the ethical tor to new employees to encourage them to seek advice.
PHOTO: PHOTOALTO/GETTY IMAGES
model is to recognize you are
facing an ethical dilemma. Few Instructions
business decisions will require In private, write down the names of at least five individuals
you to act immediately. Take what- from whom you would feel comfortable seeking advice on
ever time is required to determine ethical dilemmas.
whether your actions could harm some-
56 Chapter 3 Journalizing Transactions
A FIVE COLUMN JOURNAL
JOURNAL PAGE
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
1 1
2 2
3 3
Using a Journal Double-Entry Accounting
TechKnow Consulting uses a multicolumn journal that Information for each transaction recorded in a journal is
has five amount columns: General Debit, General Credit, called an entry. The recording of debit and credit parts of a
Sales Credit, Cash Debit, and Cash Credit. A journal transaction is called double-entry accounting. In double-
amount column headed with an account title is called entry accounting, each transaction affects at least two
a special amount column. These columns are used for accounts. Both the debit and the credit parts are recorded,
transactions that occur frequently. For example, most reflecting the dual effect of each transaction on the busi-
of TechKnow Consulting’s transactions involve receipt ness’s records. Double-entry accounting assures that deb-
or payment of cash. A large number of the transactions its equal credits.
involve receiving cash from sales. Therefore, TechKnow
Source Documents
Consulting uses three special amount columns in its jour-
A business paper from which information is obtained for
nal: Sales Credit, Cash Debit, and Cash Credit. Using
a journal entry is called a source document. Each trans-
special amount columns eliminates writing an account
action is described by a source document that proves that
title in the Account Title column and saves time.
the transaction did occur. For example, TechKnow Con-
A journal amount column that is not headed with an
sulting prepares a check stub for each cash payment made.
account title is called a general amount column. In Tech-
The check stub describes information about the cash pay-
Know Consulting’s journal, the General Debit and Gen-
ment transaction for which the check is prepared. The
eral Credit columns are general amount columns.
accounting concept Objective Evidence is applied when a
Accuracy source document is prepared for each transaction. [CON-
Information recorded in a journal includes the debit and CEPT: Objective Evidence]
credit parts of each transaction recorded in one place. The A transaction should be journalized only if it actually
information can be verified by comparing the data in the occurs. The amounts recorded must be accurate and true.
journal with the transaction data. Nearly all transactions result in the preparation of a source
document. TechKnow Consulting uses five source docu-
Chronological Record
ments: checks, sales invoices, receipts, calculator tapes,
Transactions are recorded in a journal in order by date. All
and memorandums.
information about a transaction is recorded in one place,
making the information for a specific transaction easy to
locate.
Journals, Source Documents, and Recording Entries in a Journal Lesson 3-1 57
CHECKS
NO. 1 $ 275.00
Date August 3, 20 -- NO. 1 24-317
To Port City Supply 1230
7549 Broadway August 3, 20--
For Supplies Portland, OR 97202-2531
0 00
Port City Supply
PAY TO THE
ORDER OF $ 275.00
Two hundred seventy-five no100
BAL. BRO’T. FOR’D. . . . . . . . . . . .
AMT. DEPOSITED . . . 8 1 -- 5,000 00 DOLLARS
SUBTOTAL. . . . . . . . . . . . . . . . . . . 5,000 00
Date
For Classroom Use Only
OTHER:
pacific national bank
Portland, OR
FOR Supplies Kim Park
SUBTOTAL. . . . . . . . . . . . . . . . . . . 5,000 00
AMT. THIS CHECK . . . . . . . . . . . . 275 00 123003175 43452119
BAL. CAR’D. FOR’D. . . . . . . . . . . . 4,725 00
A business form ordering a bank to pay cash from a bank Consulting’s record of information on a check is the check
account is called a check. The source document for cash stub prepared at the same time as the check.
payments is a check. TechKnow Consulting makes all cash Procedures for preparing checks and check stubs are
payments by check. The checks are prenumbered to help described in Chapter 5.
TechKnow Consulting account for all checks. TechKnow
SALES INVOICES
Sold to: Oakdale School No. 1
5211 SE Oak Street Date 8/12/--
7549 Broadway Portland, OR 97208-5392 Terms 30 days
Portland, OR 97202-2531
Description Amount
Computer Network Setup $350.00
Total $350.00
When services are sold on account, the seller prepares a A sales invoice is prepared in duplicate. The original is
form showing information about the sale. A form describ- given to the customer. The copy is used as the source doc-
ing the goods or services sold, the quantity, and the price ument for the sale on account transaction. [CONCEPT:
is called an invoice. An invoice used as a source document Objective Evidence] Sales invoices are prenumbered in
for recording a sale on account is called a sales invoice. A sequence to help account for all sales invoices.
sales invoice is also referred to as a sales ticket or a sales slip.
58 Chapter 3 Journalizing Transactions
OTHER SOURCE DOCUMENTS
No. 1 Receipt No. 1
Date August 1, 20 -- August 1, 20 --
Rec’d
From Kim Park from Kim Park
For Investment For Investment
Five thousand and no/100 Dollars
$ 5,000 00 Amount $ 5,000 00
Kim Park
7549 Broadway Received By
Portland, OR 97202-2531
Receipts a receipt. The receipts are prenumbered to help account
A business form giving written acknowledgement for cash for all of the receipts. A receipt is the source document for
received is called a receipt. When cash is received from cash received from transactions other than sales. [CON-
sources other than sales, TechKnow Consulting prepares CEPT: Objective Evidence]
No. 1
MEMORANDUM 7549 Broadway
Portland, OR 97202-2531
Bought supplies on account from
Supply Depot, $500.00
Signed: Kim Park Date: August 7, 20--
Memorandums total the amount of cash received from sales for that day.
A form on which a brief message is written describing By totaling all the individual sales, a single source docu-
a transaction is called a memorandum. When no other ment is produced for the total sales of the day. Thus, time
source document is prepared for a transaction, or when and space are saved by recording only one entry for all of a
an additional explanation is needed about a transaction, day’s sales. The calculator tape is the source document for
TechKnow Consulting prepares a memorandum. [CON- daily sales. [CONCEPT: Objective Evidence] A calcula-
CEPT: Objective Evidence] TechKnow Consulting’s tor tape used as a source document is shown here.
memorandums are prenumbered to help account for all TechKnow Consulting dates and numbers each calcu-
memorandums. A brief note is written on the memoran- lator tape. For example, in
dum to describe the transaction. the illustration, the number
0.00 *
T12 indicates that the tape -
Calculator Tapes is for the twelfth day of the
. 1 2 , 20-150.00 ⫹
TechKnow Consulting collects cash at the time services month. Aug 35.00 ⫹
. 110 00 ⫹
are rendered to customers. At the end of each day, Tech- T12 295.00 *
Know Consulting uses a printing electronic calculator to
Journals, Source Documents, and Recording Entries in a Journal Lesson 3-1 59
RECEIVED CASH FROM OWNER AS AN INVESTMENT
1 Date 4 Source Document 2 Debit
JOURNAL PAGE 1
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
20--
1 Aug. 1 Kim Park, Capital R1 5 0 0 0 00 5 0 0 0 00 1
3
Credit
Information for each transaction recorded in a journal The source document for this transaction is Receipt
is known as an entry. An entry consists of four parts: No. 1. [CONCEPT: Objective Evidence] The analysis of
(1) date, (2) debit, (3) credit, and (4) source document. this transaction is shown in the T accounts.
Before a transaction is recorded in a journal, the transac- The asset account, Cash, increases by a debit, $5,000.00.
tion is analyzed into its debit and credit parts. The owner’s capital account, Kim Park, Capital, increases
by a credit, $5,000.00.
August 1. Received cash from owner as an
investment, $5,000.00. Receipt No. 1.
F O R YO U R I N F O R M AT I O N
F Y I
Cash
Dollars and cents signs and decimal
5,000.00 points are not used when writing
amounts on ruled accounting
Kim Park, Capital paper. Sometimes a color tint or a
heavy vertical rule is used on printed
5,000.00 accounting paper to separate the
dollars and cents columns.
JOURNALIZING CASH RECEIVED FROM OWNER
S T E P S
AS AN INVESTMENT
1 Date. Write the date, 20--, Aug. 1, in the Date column. This entry is the first one on this journal page. Therefore, write
both the year and the month for this entry. Do not write either the year or the month again on the same page.
2 Debit. The journal has a special amount column for debits to Cash. Write the debit amount, $5,000.00, in the Cash
Debit column. The title of the account is in the column heading. Therefore, you do not need to write the account
title in the Account Title column.
3 Credit. There is no special amount column with the title of the account credited, Kim Park, Capital, in its heading.
Therefore, record the credit amount, $5,000.00, in the General Credit column. To indicate what account is credited
for this amount, write the title of the account, Kim Park, Capital, in the Account Title column. (All amounts recorded
in the General Debit or General Credit amount columns must have an account title written in the Account Title
column.)
4 Source document. Write the source document number, R1, in the Doc. No. column. The source document number,
R1, indicates that this is Receipt No. 1. (The source document number is a cross reference from the journal to the
source document. Receipt No. 1 is filed in case more details about this transaction are needed.)
60 Chapter 3 Journalizing Transactions
PA I D C A S H FO R S U P P L I E S
2 Debit 3 Credit
JOURNAL PAGE 1
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
2 3 Supplies C1 2 7 5 00 2 7 5 00 2
1 Date 4 Source Document
The asset account, Supplies, increases by a debit,
August 3. Paid cash for supplies, $275.00. The asset account, Cash, decreases by a credit,
$275.00. Check No. 1. $275.00.
Supplies
275.00
F O R YO U R I N F O R M AT I O N
Cash F Y I
275.00
Drawing T accounts for
analyzing transactions will
make journalizing easier.
The source document for this transaction is Check No. 1.
[CONCEPT: Objective Evidence] The analysis of this
transaction is shown in the T accounts.
S T E P S JOURNALIZING CASH PAID FOR SUPPLIES
1 Date. Write the date, 3, in the Date column. This is not the first entry on the journal page. Therefore, do not
write the year and month for this entry.
2 Debit. There is no special amount column with the title of the account debited, Supplies, in its heading.
Therefore, record the debit amount, $275.00, in the General Debit column. In order to indicate what
account is debited for this amount, write the title of the account, Supplies, in the
Account Title column.
3 Credit. The journal has a special amount column for credits to Cash. Write
the credit amount, $275.00, in the Cash Credit column. The title of the R E M E M B E R
account is in the column heading. Therefore, do not write the account
title in the Account Title column. When an account such as
Cash is used frequently, it can
4 Source document. Write the source document number, C1, in the Doc. be time-consuming to write
the account title over and
No. column. The source document number, C1, indicates that this is
over. Using a special amount
Check No. 1. column for a frequently-
used account saves time.
Journals, Source Documents, and Recording Entries in a Journal Lesson 3-1 61
TERMS REVIEW
End of Lesson
journal
REVIEW journalizing
special amount column
general amount column
entry
double-entry accounting
source document
check
AUDIT YOUR UNDERSTANDING
invoice
1. In what order are transactions recorded in a journal? sales invoice
2. Why are source documents important? receipt
3. List the four parts of a journal entry. memorandum
WORK TOGETHER 31
Journalizing entries in a five-column journal
A journal is given in the Working Papers. Your instructor will guide you through the following example.
Norm Derner owns Derner Copy Center, which uses the following accounts.
Cash Accts. Pay.—Palm Supply Miscellaneous Expense
Accts. Rec.—L. Rohe Norm Derner, Capital Rent Expense
Supplies Norm Derner, Drawing Utilities Expense
Prepaid Insurance Sales
Transactions:
Apr. 1. Received cash from owner as an investment, $1,500.00. R1.
2. Paid cash for supplies, $375.00. C1.
1. Journalize each transaction completed during April of the current year. Use page 1 of the journal. Source docu-
ments are abbreviated as follows: check, C; receipt, R. Save your work to complete Work Together 3-2.
ON YOUR OWN 31
Journalizing entries in a five-column journal
A journal is given in the Working Papers. Work this problem independently.
Lou James owns Lou’s Service Center, which uses the following accounts.
Cash Accts. Pay.—OK Supplies Advertising Expense
Accts. Rec.—C. Lord Lou James, Capital Miscellaneous Expense
Supplies Lou James, Drawing Rent Expense
Prepaid Insurance Sales
Transactions:
June 2. Received cash from owner as an investment, $3,000.00. R1.
3. Paid cash for supplies, $950.00. C1.
1. Journalize each transaction completed during June of the current year. Use page 1 of the journal. Source docu-
ments are abbreviated as follows: check, C; receipt, R. Save your work to complete On Your Own 3-2.
62 Chapter 3 Journalizing Transactions
L E S S O N Journalizing Buying
Insurance, Buying on Account,
3-2 and Paying on Account
PA I D C A S H FO R I N S U R A N C E
2 Debit 3 Credit
JOURNAL PAGE 1
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
3 4 Prepaid Insurance C2 1 2 0 0 00 1 2 0 0 00 3
1 Date 4 Source Document
The source document for this transaction is Check No. 2.
August 4. Paid cash for insurance, [CONCEPT: Objective Evidence] The analysis of this
$1,200.00. Check No. 2. transaction is shown in the T accounts.
The asset account, Prepaid Insurance, increases by a
debit, $1,200.00. The asset account, Cash, decreases by a
Prepaid Insurance credit, $1,200.00.
1,200.00
Cash
1,200.00
S T E P S JOURNALIZING CASH PAID FOR INSURANCE
1 Date. Write the date, 4, in the Date column.
2 Debit. There is no special amount column with the title of the account
debited, Prepaid Insurance, in its heading. Therefore, record the debit
amount, $1,200.00, in the General Debit column. To indicate what
account is debited for this amount, write the title of the account, R E M E M B E R
Prepaid Insurance, in the Account Title column. All amounts recorded in the
General Debit or General Credit
3 Credit. The journal has a special amount column for credits to Cash. amount columns must have
Write the credit amount, $1,200.00, in the Cash Credit column. The title an account title written in
of the account is in the column heading. Therefore, do not write the the Account Title column.
account title in the Account Title column.
4 Source document. Write the source document number, C2, in the Doc.
No. column.
Journalizing Buying Insurance, Buying on Account, and Paying on Account Lesson 3-2 63
BOUGHT SUPPLIES ON ACCOUNT
2 Debit 3 Credit
JOURNAL PAGE 1
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
4 7 Supplies M1 5 0 0 00 4
5 Accounts Payable—Supply Depot 5 0 0 00 5
1 Date 4 Source Document
TechKnow Consulting ordered these supplies by tele-
August 7. Bought supplies on account from phone. TechKnow Consulting wishes to record this
Supply Depot, $500.00. Memorandum No. 1. transaction immediately. Therefore, a memorandum is
prepared that shows supplies bought on account.
The source document for this transaction is Memoran-
Supplies dum No. 1. [CONCEPT: Objective Evidence] The analy-
sis of this transaction is shown in the T accounts.
500.00
The asset account, Supplies, increases by a debit,
$500.00. The liability account, Accounts Payable—Supply
Accts. Pay.—Supply Depot
Depot, increases by a credit, $500.00.
500.00
S T E P S JOURNALIZING SUPPLIES BOUGHT ON ACCOUNT
1 Date. Write the date, 7, in the Date column.
2 Debit. There is no special amount column with the title of the account debited, Supplies, in its heading. Therefore,
record the debit amount, $500.00, in the General Debit column. In order to indicate what account is to be debited
for this amount, write the title of the account, Supplies, in the Account Title column.
3 Credit. There is no special amount column with the title of the account credited, Accounts Payable—Supply Depot, in
its heading. Therefore, record the credit amount, $500.00, on the next line in the General Credit column. To indicate
what account is credited for this amount, write the title of the account, Accounts Payable—Supply Depot, in the
Account Title column on the same line as the credit amount.
This entry requires two lines in the journal because account titles for both the debit and credit amounts must be
written in the Account Title column.
4 Source document. Write the source document number, M1, in the Doc. No. column on the first line of the entry.
64 Chapter 3 Journalizing Transactions
PA I D C A S H O N ACCO U N T
2 Debit
JOURNAL PAGE 1
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
6 11 Accounts Payable—Supply Depot C3 3 0 0 00 3 0 0 00 6
1 Date 4 Source Document 3 Credit
The source document for this transaction is Check No. 3.
August 11. Paid cash on account to [CONCEPT: Objective Evidence] The analysis of this
Supply Depot, $300.00. Check No. 3. transaction is shown in the T accounts.
The liability account, Accounts Payable—Supply
Depot, decreases by a debit, $300.00. The asset account,
Accts. Pay.—Supply Depot Cash, decreases by a credit, $300.00.
300.00
Cash
300.00
GE S
TTY IMA
C/ G E
T O D IS
PH O
JOURNALIZING
S T E P S CASH PAID ON
ACCOUNT
1 Date. Write the date, 11, in the Date column.
2 Debit. There is no special amount column with
the title of the account debited, Accounts Pay-
able—Supply Depot, in its heading. Therefore,
record the debit amount, $300.00, in the General
Debit column. In order to indicate what account
is debited for this amount, write the title of the
account, Accounts Payable—Supply Depot, in the
Account Title column.
3 Credit. The journal has a special amount column
for credits to Cash. Write the credit amount,
$300.00, in the Cash Credit column. The title of
the account is in the column heading. Therefore,
do not write the account title in the Account
Title column.
4 Source document. Write the source document
number, C3, in the Doc. No. column.
Journalizing Buying Insurance, Buying on Account, and Paying on Account Lesson 3-2 65
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. Which journal columns are used to record paying cash for insurance?
2. Which journal columns are used to record buying supplies on account?
3. Which journal columns are used to record paying cash on account?
WORK TOGETHER 32
Journalizing entries in a five-column journal
Use the journal that you started for Work Together 3-1. Your instructor will guide you through the following example.
Norm Derner owns Derner Copy Center, which uses the following accounts.
Cash Accts. Pay.—Palm Supply Miscellaneous Expense
Accts. Rec.—L. Rohe Norm Derner, Capital Rent Expense
Supplies Norm Derner, Drawing Utilities Expense
Prepaid Insurance Sales
Transactions:
Apr. 5. Bought supplies on account from Palm Supply, $500.00. M1.
7. Paid cash for insurance, $300.00. C2.
9. Paid cash on account to Palm Supply, $250.00. C3.
1. Journalize the transactions continuing on the next blank line of page 1 of the journal. Source documents are
abbreviated as follows: check, C; memorandum, M. Save your work to complete Work Together 3-3.
ON YOUR OWN 32
Journalizing entries in a five-column journal
Use the chart of accounts below and the journal that you started for On Your Own 3-1. Work this problem
independently.
Lou James owns Lou’s Service Center, which uses the following accounts.
Cash Accts. Pay.—OK Supplies Advertising Expense
Accts. Rec.—C. Lord Lou James, Capital Miscellaneous Expense
Supplies Lou James, Drawing Rent Expense
Prepaid Insurance Sales
Transactions:
June 5. Paid cash for insurance, $400.00. C2.
9. Bought supplies on account from OK Supplies, $300.00. M1.
10. Paid cash on account to OK Supplies, $300.00. C3.
1. Journalize the transactions continuing on the next blank line of page 1 of the journal. Source documents are
abbreviated as follows: check, C; memorandum, M. Save your work to complete On Your Own 3-3.
66 Chapter 3 Journalizing Transactions
L E S S O N Journalizing Transactions That
Affect Owner’s Equity and
3-3 Receiving Cash on Account
RECEIVED CASH FROM SALES
3 Credit
JOURNAL PAGE 1
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
7 12 T12 2 9 5 00 2 9 5 00 7
1 Date 4 Source Document 2 Debit
The source document for this transaction is Calcula-
August 12. Received cash from tor Tape No. 12. [CONCEPT: Objective Evidence] The
sales, $295.00. Tape No. 12. analysis of this transaction is shown in the T accounts.
The asset account, Cash, is increased by a debit,
$295.00. The revenue account, Sales, is increased by a
Cash credit, $295.00.
The reason that Sales increases by a credit is discussed
295.00
in the previous chapter. The owner’s capital account has
Sales
a normal credit balance. Increases in the owner’s capital
account are shown as credits. Because revenue increases
295.00 owner’s equity, increases in revenue are recorded as cred-
its. A revenue account, therefore, has a normal credit
balance.
S T E P S JOURNALIZING CASH RECEIVED FROM SALES
1 Date. Write the date, 12, in the Date column.
2 Debit. The journal has a special amount column for debits to Cash. Write the debit amount, $295.00, in the
Cash Debit column. The title of the account is in the column heading. Therefore, do not write the account title
in the Account Title column.
3 Credit. The journal also has a special amount column for credits to Sales. Write the credit amount, $295.00, in
the Sales Credit column. The title of the account is in the column heading. Therefore, do not write the account
title in the Account title column.
Because both amounts for this entry are recorded in special amount columns, no account titles are writ-
ten in the Account Title column. Therefore, place a check mark in the Account Title column to show that no
account titles need to be written for this transaction. A check mark is also placed in the Post. Ref. column.
The use of the Post. Ref. column is described in Chapter 4.
4 Source document. Write the source document number, T12, in the Doc. No. column.
Journalizing Transactions That Affect Owner’s Equity and Receiving Cash on Account Lesson 3-3 67
SOLD SE RVICES ON ACCOUNT
2 Debit
JOURNAL PAGE 1
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
8 12 Accounts Receivable—Oakdale School S1 3 5 0 00 3 5 0 00 8
1 Date 4 Source Document 3 Credit
The source document for this transaction is Sales
August 12. Sold services on account to Oakdale Invoice No. 1. [CONCEPT: Objective Evidence] The
School, $350.00. Sales Invoice No. 1. analysis of this transaction is shown in the T accounts.
The asset account, Accounts Receivable—Oakdale
School, increases by a debit, $350.00. The revenue
Accts. Rec.—Oakdale School account, Sales, increases by a credit, $350.00.
350.00
Sales
350.00
S T E P S JOURNALIZING SERVICES SOLD ON ACCOUNT
ES
1 Date. Write the date, 12, in the Date column. E T T Y I M AG
IS C / G
T OD
PHO
2 Debit. There is no special amount column with the title of the account
debited, Accounts Receivable—Oakdale School, in its heading. Therefore,
record the debit amount, $350.00, in the General Debit column. To
indicate what account is debited for this amount, write the title
of the account, Accounts Receivable—Oakdale School, in the
Account Title column.
3 Credit. The journal has a special amount column
for credits to Sales. Write the
credit amount, $350.00, in the
Sales Credit column. The
title of the account is in F O R YO U R I N F O R M AT I O N
the column heading.
F Y I
Therefore, do not
write the account Accounting is not just for accountants.
title in the Account For example, a performing artist earns
Title column. revenue from providing a service.
Financial decisions must be made such
4 Source document. as the cost of doing a performance,
Write the source the percentage of revenue paid to
a manager, travel expenses, and
document number,
the cost of rehearsal space.
S1, in the Doc. No.
column.
68 Chapter 3 Journalizing Transactions
PA I D C A S H FO R A N E X P E N S E
2 Debit
JOURNAL PAGE 1
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
9 12 Rent Expense C4 3 0 0 00 3 0 0 00 9
10 12 Utilities Expense C5 4 0 00 4 0 00 10
1 Date 4 Source Document 3 Credit
The expense account, Rent Expense, increases by a
August 12. Paid cash for rent, debit, $300.00. The asset account, Cash, decreases by a
$300.00. Check No. 4. credit, $300.00.
The reason that Rent Expense is increased by a debit
is discussed in the previous chapter. The owner’s capital
Rent Expense account has a normal credit balance. Decreases in the
owner’s capital account are shown as debits.
300.00
Because expenses decrease owner’s equity, increases
Cash in expenses are recorded as debits. An expense account,
therefore, has a normal debit balance.
300.00 Whenever cash is paid for an expense, the journal
entry is similar to the entry discussed above. Therefore,
the journal entry to record paying cash for utilities is also
illustrated.
The source document for this transaction is Check No.
4. [CONCEPT: Objective Evidence] The analysis of this
transaction is shown in the T accounts.
S T E P S JOURNALIZING CASH PAID FOR AN EXPENSE
1 Date. Write the date, 12, in the Date column.
2 Debit. There is no special amount column with the title of the account debited, Rent
Expense, in its heading. Therefore, write the debit amount, $300.00, in the General
Debit column. To indicate what account is to be debited for this amount, write
the title of the account, Rent Expense, in the Account Title column.
3 Credit. The journal has a special amount column for credits to Cash. F O R YO U R I N F O R M AT I O N
Write the credit amount, $300.00, in the Cash Credit column. The title
of the account is in the column heading. Therefore, do not write the F Y I
account title in the Account Title column. Source documents can be
critically important in tracking
4 Source document. Write the source document number, C4, in the down errors. Businesses file
Doc. No. column. their source documents so
they can be referred to if it is
necessary to verify information
entered into their journals.
Journalizing Transactions That Affect Owner’s Equity and Receiving Cash on Account Lesson 3-3 69
RECE IVED CASH ON ACCOUNT
3 Credit
JOURNAL PAGE 1
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
11 18 Accounts Receivable—Oakdale School R2 2 0 0 00 2 0 0 00 11
1 Date 4 Source Document 2 Debit
The source document for this transaction is Receipt
August 18. Received cash on account from No. 2. [CONCEPT: Objective Evidence] The analysis of
Oakdale School, $200.00. Receipt No. 2. this transaction is shown in the T accounts.
The asset account, Cash, increases by a debit, $200.00.
The asset account, Accounts Receivable—Oakdale School,
Cash decreases by a credit, $200.00.
200.00
Accts. Rec.—Oakdale School
200.00
S T E P S JOURNALIZING CASH RECEIVED ON ACCOUNT
1 Date. Write the date, 18 , in the Date column.
2 Debit. The journal has a special amount column for debits to Cash. Write the debit amount, $200.00, in the Cash
Debit column. The title of the account is in the column heading. Therefore, do not write the account title in the
Account Title column.
3 Credit. There is no special amount column with the title of the account credited, Accounts Receivable—Oakdale
School, in its heading. Therefore, record the credit amount, $200.00, in the General
Credit column. To indicate what account is to be credited for this amount, write
the title of the account, Accounts Receivable—Oakdale School, in the Account
Title column.
4 Source document. Write the source document number, R2, in the
Doc. No. column. R E M E M B E R
If you misspell words in your
written communications, people
may mistrust the quality of your
accounting skills. Note that in the
word receipt, the “e” comes before
the “i” and there is a silent “p”
before the “t” at the end of
the word.
70 Chapter 3 Journalizing Transactions
PA I D C A S H TO OW N E R FO R P E R S O N A L U S E
2 Debit
JOURNAL PAGE 1
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
12 18 Kim Park, Drawing C6 1 2 5 00 1 2 5 00 12
1 Date 4 Source Document 3 Credit
The source document for this transaction is Check No. 6.
August 18. Paid cash to owner for [CONCEPT: Objective Evidence] The analysis of this
personal use, $125.00. Check No. 6. transaction is shown in the T accounts.
The reason that Kim Park, Drawing increased by a debit
is discussed in the previous chapter. Decreases in the
Kim Park, Drawing owner’s capital account are shown as debits. Because with-
drawals decrease owner’s equity, increases in withdrawals
125.00
are recorded as debits. A withdrawal account, therefore,
Cash
has a normal debit balance.
125.00
S T E P S JOURNALIZING CASH PAID TO OWNER FOR PERSONAL USE
1 Date. Write the date, 18, in the Date column.
2 Debit. There is no special amount column with the title of the account debited, Kim Park, Drawing, in its
heading. Therefore, record the debit amount, $125.00, in the General Debit column. To indicate what account
is debited for this amount, write the title of the account, Kim Park, Drawing, in the Account
Title column.
3 Credit. The journal has a special amount column for credits to Cash. Write the
credit amount, $125.00, in the Cash Credit column. The title of the account SMALL BUSINESS
is in the column heading. Therefore, do not write the account title in the
Account Title column. S P O T L I G H T
Successful small business owners
4 Source document. Write the source document number, C6, in the Doc. typically have the following
No. column. characteristics: confidence to make
decisions, determination to keep
trying during hard times for the
business, willingness to take
risks, creativity to surpass
the competition, and an
inner need to achieve.
Journalizing Transactions That Affect Owner’s Equity and Receiving Cash on Account Lesson 3-3 71
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. Which journal columns are used to record receiving cash from sales?
2. Which journal columns are used to record sales on account?
3. Which journal columns are used to record paying cash for an expense?
4. Which journal columns are used to record receiving cash on account?
5. Which journal columns are used to record paying cash to the owner for
personal use?
WORK TOGETHER 33
Journalizing transactions that affect owner’s equity in a five-column journal
Use the chart of accounts and journal from Work Together 3-2. Your instructor will guide you through the following
example.
Transactions:
Apr. 12. Paid cash for rent, $1,000.00. C4.
13. Received cash from sales, $2,500.00. T13.
14. Sold services on account to L. Rohe, $510.00. S1.
19. Paid cash for electric bill, $148.00. C5.
20. Received cash on account from L. Rohe, $255.00. R2.
21. Paid cash to owner for personal use, $1,000.00. C6.
1. Journalize the transactions continuing on the next blank line of page 1 of the journal. Source documents are
abbreviated as follows: check, C; receipt, R; sales invoice, S; calculator tape, T. Save your work to complete
Work Together 3-4.
ON YOUR OWN 33
Journalizing transactions that affect owner’s equity in a five-column journal
Use the chart of accounts and journal from On Your Own 3-2. Work this problem independently.
Transactions:
June 11. Paid cash for rent, $525.00. C4.
12. Sold services on account to C. Lord, $700.00. S1.
16. Received cash from sales, $2,300.00. T16.
17. Paid cash for postage (Miscellaneous Expense), $37.00. C5.
19. Received cash on account from C. Lord, $350.00. R2.
20. Paid cash to owner for personal use, $850.00. C6.
1. Journalize the transactions continuing on the next blank line of page 1 of the journal. Source documents are
abbreviated as follows: check, C; receipt, R; sales invoice, S; calculator tape, T. Save your work to complete
On Your Own 3-4.
72 Chapter 3 Journalizing Transactions
L E S S O N
Proving and Ruling a Journal
3-4
P R OV I N G A J O U R N A L PAG E
Add each Add debit totals
1 amount column 2 and credit totals
Debit Credit
Column Column Totals Column Totals
General $ 3,543.00 $ 5,750.00
Sales 1,960.00
Cash 6,710.00 2,543.00
Totals $10,253.00 3 $10,253.00
Totals equal
After TechKnow Consulting uses all but the last line on a To prove a journal page, TechKnow Consulting verifies
journal page, columns are proved and ruled before totals that the total debits on the page equal the total credits.
are carried forward to the next page. Three steps are followed in proving a journal page.
PHOTODISC/GETTY IMAG ES
PROVING A
S T E P S
JOURNAL PAGE
1 Add each of the amount columns.
2 Add the debit column totals, and then add the
credit column totals.
3 Verify that the total debits and total credits
are equal. Because the total debits equal
the total credits, page 1 of the journal is
proved.
If the total debits do not equal
the total credits, the errors must be
found and corrected before any
more work is completed.
Proving and Ruling a Journal Lesson 3-4 73
R U L I N G A J O U R N A L PAG E
JOURNAL PAGE 1
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
20--
1 Aug. 1 Kim Park, Capital R1 5 0 0 0 00 5 0 0 0 00 1
2 3 Supplies C1 2 7 5 00 2 7 5 00 2
3 4 Prepaid Insurance C2 1 2 0 0 00 1 2 0 0 00 3
23 20 Supplies M2 5 0 00 23
24 Accts. Pay.—Thomas Supply Co. 5 0 00 24
25 20 Carried Forward 3 5 4 3 00 5 7 5 0 00 1 9 6 0 00 6 7 1 0 00 2 5 4 3 00 25
2 Date 3 Carried 1 Single Rule 4 5 Double
Forward Column Totals Rule
After a journal page is proved, it is ruled. Five steps are
followed in ruling a journal page.
S T E P S RULING A JOURNAL PAGE
1 Rule a single line across all amount columns directly below the last entry to indicate that columns are to be totaled.
2 On the next line, write the date, 20, in the Date column.
AG ES
ETTY IM
I S C /G
TOD
3 Write Carried Forward in the Account Title column. Place a check mark PHO
in the Post. Ref. column. The use of the Post. Ref. column is described
in Chapter 4.
4 Write each column total below the single line.
5 Rule double lines below the column totals across all
amount columns. A double rule in a journal indicates
that the amounts are totals and that the sum of the
debit totals equals the sum of the credit totals.
F O R YO U R I N F O R M AT I O N
F Y I
Account titles in accounting records
should always be written so that
there is no question about the
meaning. The usual practice is to
write the full account title. If a title is
long, however, and the space is
short, an account title may
sometimes have to be
abbreviated.
74 Chapter 3 Journalizing Transactions
S TA R T I N G A N E W J O U R N A L P A G E
1 Page
JOURNAL PAGE 2
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
20--
1 Aug. 20 Brought Forward 3 5 4 3 00 5 7 5 0 00 1 9 6 0 00 6 7 1 0 00 2 5 4 3 00 1
2 2
2 Date 3 Brought Forward 4
Column Totals
The column totals from the previous page are carried for-
ward to a new page. The totals are recorded on the first
line of the new page, using the following four steps.
S T E P S STARTING A NEW JOURNAL PAGE
1 Write the page number, 2, at the top of the journal.
2 Write the date, 20--, Aug. 20, in the Date column. Because this is the first time that a date is written on page 2,
the year, month, and day are all written in the Date column.
3 Write Brought Forward in the Account Title column. A check mark is also placed in the Post. Ref. column.
4 Record the column totals brought forward from the previous page.
P R O V I N G A N D R U L I N G A J O U R N A L AT T H E E N D O F A M O N T H
JOURNAL PAGE 2
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
20-
1 Aug. 20 Brought Forward 3 5 4 3 00 5 7 5 0 00 1 9 6 0 00 6 7 1 0 00 2 5 4 3 00 1
2 21 T21 2 2 5 00 2 2 5 00 2
3 24 T24 3 0 0 00 3 0 0 00 3
13 31 T31 1 9 0 00 1 9 0 00 13
14 31 Miscellaneous Expense M3 8 00 8 00 14
15 31 Totals 4 3 5 1 00 5 7 5 0 00 3 5 6 5 00 8 3 1 5 00 3 3 5 1 00 15
16 16
2 Date 3 Totals 1 Single Rule 4 5 Double
Column Totals Rule
TechKnow Consulting always proves and rules a journal and the journal is ruled. The proof of page 2 of TechKnow
at the end of each month, even if the last page for the Consulting’s journal is completed as shown on the next
month is not full. page. Proving cash is also discussed on the next page.
The last page of a journal for a month is proved using
the same steps previously described. Then, cash is proved
Proving and Ruling a Journal Lesson 3-4 75
Page 2 of TechKnow Consulting’s journal is proved Proving Cash
because the total debits are equal to the total credits, Determining that the amount of cash agrees with the
$12,666.00. accounting records is called proving cash. Cash can be
proved at any time TechKnow Consulting wishes to verify
the accuracy of the cash records. However, TechKnow
Debit Credit Consulting always proves cash at the end of a month
Column Column Totals Column Totals when the journal is proved. TechKnow Consulting uses
General $ 4,351.00 $ 5,750.00 two steps to prove cash.
Sales 3,565.00
Cash 8,315.00 3,351.00
Totals $12,666.00 $12,666.00
1. Calculate the cash balance.
Cash on hand at the beginning of the month. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.00
TechKnow Consulting began the month with no cash balance. Ms. Park invested the initial
cash on August 1.
Plus total cash received during the month. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ⫹8,315.00
This amount is the total of the journal’s Cash Debit column.
Equals total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,315.00
Less total cash paid during the month . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ⫺3,351.00
This amount is the total of the journal’s Cash Credit column.
Equals cash balance at the end of the month . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,964.00
2. Verify that the cash balance equals the checkbook balance on the next unused check stub in the
checkbook. Because the cash balance calculated using the journal and the checkbook balance are the
same, $4,964.00, cash is proved.
Checkbook balance on the next unused check stub . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,964.00
The double rules in the calculations above indicate that the amounts are totals and the work is proved.
Ruling a Journal at the End of a Month TechKnow Consulting uses five steps in ruling a jour-
A journal is ruled at the end of each month even if the last nal at the end of each month.
journal page is not full. The procedures for ruling a jour-
nal at the end of a month are similar to those for ruling a
journal page to carry the totals forward.
RULING A JOURNAL AT THE END OF A MONTH THESE STEPS
S T E P S
ARE ILLUSTRATED ON THE PREVIOUS PAGE
1 Rule a single line across all amount columns directly below the last entry to indicate that the columns
are to be added.
2 On the next line, write the date, 31, in the Date column.
3 Write the word Totals in the Account Title column.
A check mark is not placed in the Post. Ref. column for this line. More information about the Totals line
will be provided in Chapter 4.
4 Write each column total below the single line.
5 Rule double lines below the column totals across all amount columns. The double lines mean that the
amounts are totals and that the debit totals equal the credit totals.
76 Chapter 3 Journalizing Transactions
S TA N D A R D A C C O U N T I N G P R A C T I C E S
JOURNAL PAGE 2
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
3 5 0 00
17 28 4 T28 3 5 0 00 3 5 0 0 00 1 17
18 2 29 Rent Expense C22 5 5 00 5 00 18
19 29 Repair Expense C22 5 0 00 5 0 00 19
Supplies
20 3 29 Miscellaneous Expense C23 1 0 0 00 7 1 0 0 00 20
21 30 Kim Park, Drawing C24 5 0 0 00 6 5 0 0 00 21
22 30 Totals 8 7 5 0 00 9 2 0 0 00 4 0 0 0 00 12 3 0 0 00 7 8 5 0 00 22
23
8 23
9 1 2 3 4 5 6 7 8 9 11
In completing accounting work, TechKnow Consulting fol- 5. Dollars and cents signs and decimal points are not
lows standard accounting practices. These practices include used when writing amounts on ruled accounting
procedures for error corrections, abbreviating words, writ- paper. Sometimes a color tint or a heavy vertical rule
ing dollar and cents signs, and ruling columns. is used on printed accounting paper to separate the
dollars and cents columns.
1. Errors are corrected in a way that does not cause
6. Two zeros are written in the cents column when an
doubts about what the correct information is. If an
amount is in even dollars, such as $500.00. If the
error is recorded, cancel the error by neatly drawing a
cents column is left blank, doubts may arise later
line through the incorrect item. Write the correct item
about the correct amount.
immediately above the canceled item.
7. A single line is ruled across amount columns to indi-
2. Sometimes an entire entry is incorrect and is discov-
cate a calculation such as addition.
ered before the next entry is journalized. Draw neat
8. A double line is ruled across amount columns to
lines through all parts of the incorrect entry. Journal-
indicate that the amounts are totals. In a journal the
ize the entry correctly on the next blank line.
double rules also indicate that the debit totals equal
3. Sometimes several correct entries are recorded after
the credit totals.
an incorrect entry is made. The next blank lines are
9. Neatness is very important in accounting records so
several entries later. Draw neat lines through all incor-
that there is never any doubt about what information
rect parts of the entry. Record the correct items on the
has been recorded. A ruler is used to make single and
same lines as the incorrect items, directly above the
double lines.
canceled parts.
4. Words in accounting records are written in full when
space permits. Words may be abbreviated only when
space is limited. All items are written legibly.
Proving and Ruling a Journal Lesson 3-4 77
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. List the three steps for proving a journal. TERM REVIEW
2. State the formula for proving cash.
3. List the five steps to rule a journal at the end of a month. proving cash
WORK TOGETHER 34
Proving and ruling a journal
Use the journal from Work Together 3-3. Your instructor will guide you through the following examples.
Transactions:
Apr. 23. Sold services on account to L. Rohe, $375.00. S2.
27. Paid cash to owner for personal use, $500.00. C7.
29. Received cash on account from L. Rohe, $300.00. R3.
30. Received cash from sales, $544.00. T30.
1. Journalize the transactions for April 23 and 27. Source documents are abbreviated as follows: check, C; receipt, R;
sales invoice, S; calculator tape, T.
2. Prove and rule page 1 of the journal. Carry the column totals forward to page 2 of the journal.
3. Use page 2 of the journal to journalize the rest of the transactions for April.
4. Prove page 2 of the journal.
5. Prove cash. The beginning cash balance on April 1 is zero. The balance on the next unused check stub
is $1,526.00.
6. Rule page 2 of the journal.
ON YOUR OWN 34
Proving and ruling a journal
Use the journal from On Your Own 3-3. Work this problem independently.
Transactions:
June 23. Sold services on account to C. Lord, $400.00. S2.
26. Paid cash for delivery charges (Miscellaneous Expense), $23.00. C7.
27. Received cash on account from C. Lord, $200.00. R3.
30. Received cash from sales, $422.00. T30.
1. Journalize the transactions for June 23 and 26. Source documents are abbreviated as follows: check, C;
memorandum, M; receipt, R; sales invoice, S; calculator tape, T.
2. Prove and rule page 1 of the journal. Carry the column totals forward to page 2 of the journal.
3. Use page 2 of the journal to journalize the rest of the transactions for June.
4. Prove page 2 of the journal.
5. Prove cash. The beginning cash balance on June 1 is zero. The balance on the next unused check stub
is $3,187.00.
6. Rule page 2 of the journal.
78 Chapter 3 Journalizing Transactions
SUMMARY
After completing this chapter, you can: 4. Record transactions to buy insurance for cash
and supplies on account in a five-column
1. Define accounting terms related to journalizing
journal.
transactions.
5. Record transactions that affect owner’s equity
2. Identify accounting concepts and practices
and receiving cash on account in a five-column
related to journalizing transactions.
journal.
3. Record transactions to set up a business in a
6. Prove and rule a five-column journal and prove
five-column journal.
cash.
EXPLORE ACCOUNTING
P r e nu mbe r e d D oc u m e n t s
As one way to control the operations of the Another way a business tries to control
business, a company often will use prenum- operations is through the use of batch
bered documents. Such a document is one totals. When many (sometimes hundreds)
that has the form number printed on it in of documents are being recorded, the total
advance. The most common example in amount can be used to help ensure that all
everyday life is the personal check. documents are recorded.
Businesses use several prenumbered For example, when sales invoices are
documents. Examples include business checks, recorded, the total of all the invoices is calcu-
sales invoices, receipts, and memorandums. lated prior to the invoices being recorded. Once all
The use of prenumbered documents allows a simple invoices are recorded, another total can be calculated. If
way to ensure that all documents are recorded. For exam- the two totals are equal, it is assumed that all invoices have
ple, when a business records the checks written during a been recorded. If the totals do not equal, it may indicate
period of time, all check numbers should be accounted for that a document was skipped.
in numeric order. The person recording the checks must
watch to see that no numbers are skipped. In this way, the Research: With your instructor’s permission, contact
business is more confident that all checks are recorded. a local business and ask what prenumbered documents
By using several types of prenumbered documents, the are used there. Determine how the business uses the
business helps ensure that all transactions are properly documents to ensure that all documents are recorded
recorded. properly.
PHOTO: PHOTOGRAPHER’S CHOICE/GETTY IMAGES
Journalizing Transactions Chapter 3 79
31 APPLICATION PROBLEM
Journalizing transactions in a five-column journal
Dennis Gilbert owns a service business called D & G Company, which uses the following accounts.
Cash Accts. Pay.—Scott Supplies Miscellaneous Expense
Accts. Rec.—Covey Company Dennis Gilbert, Capital Rent Expense
Supplies Dennis Gilbert, Drawing Utilities Expense
Prepaid Insurance Sales
Transactions:
Feb. 1. Received cash from owner as an investment, $10,000.00. R1.
4. Paid cash for supplies, $3,000.00. C1.
5. Paid cash for supplies, $250.00. C2.
Instructions:
Journalize the transactions completed during February of the current year. Use page 1 of the journal given
in the Working Papers. Source documents are abbreviated as follows: check, C; receipt, R.
Save your work to complete Application Problem 3-2.
32 APPLICATION PROBLEM
Journalizing buying insurance, buying on account, and paying on account
in a five-column journal
Use the chart of accounts and journal from Application Problem 3-1.
Transactions:
Feb. 6. Paid cash for insurance, $600.00. C3.
7. Bought supplies on account from Scott Supplies, $2,000.00. M1.
8. Paid cash on account to Scott Supplies, $1,000.00. C4.
12. Paid cash on account to Scott Supplies, $1,000.00. C5.
Instructions:
Journalize the transactions. Source documents are abbreviated as follows: check, C; memorandum, M.
Save your work to complete Application Problem 3-3.
( Go Beyond the Book
)
For more information go to
www.C21accounting.com
80 Chapter 3 Journalizing Transactions
33 APPLICATION PROBLEM
Journalizing transactions that affect owner’s equity and receiving cash on account
in a five-column journal
Use the chart of accounts given in Application Problem 3-1 and the journal from Application Problem 3-2.
Transactions:
Feb. 12. Paid cash for rent, $800.00. C6.
13. Received cash from sales, $500.00. T13.
14. Sold services on account to Covey Company, $450.00. S1.
15. Paid cash for telephone bill, $380.00. C7.
15. Paid cash to owner for personal use, $2,800.00. C8.
18. Received cash from sales, $278.00. T18.
19. Paid cash for postage (Miscellaneous Expense), $64.00. C9.
21. Received cash on account from Covey Company, $250.00. R2.
22. Received cash from sales, $700.00. T22.
22. Paid cash for heating bill, $329.00. C10.
25. Bought supplies on account from Scott Supplies, $340.00. M2.
Instructions:
Journalize the transactions. Source documents are abbreviated as follows: check, C; memorandum, M;
receipt, R; sales invoice, S; calculator tape, T. Save your work to complete Application Problem 3-4.
34 APPLICATION PROBLEM
Proving and ruling a journal
Use the chart of accounts given in Application Problem 3-1 and the journal from Application Problem 3-3.
Transactions:
Feb. 25. Received cash on account from Covey Company, $200.00. R3.
25. Paid cash for a delivery (Miscellaneous Expense), $25.00. C11.
26. Sold services on account to Covey Company, $800.00. S2.
26. Paid cash for supplies, $44.00. C12.
27. Paid cash for rent, $200.00. C13.
27. Paid cash for postage (Miscellaneous Expense), $37.00. C14.
28. Received cash from sales, $1,365.00. T28.
28. Paid cash to owner for personal use, $800.00. C15.
Instructions:
1. Journalize the transactions for February 25 and 26. Source documents are abbreviated as follows: check, C;
receipt, R; sales invoice, S; calculator tape, T.
2. Prove and rule page 1 of the journal. Carry the column totals forward to page 2 of the journal.
3. Use page 2 of the journal to journalize the transactions for February 27 and 28.
4. Prove page 2 of the journal.
5. Prove cash. The beginning cash balance on February 1 is zero. The balance on the next unused check stub
is $1,964.00.
6. Rule page 2 of the journal.
Journalizing Transactions Chapter 3 81
35 APPLICATION PROBLEM
Journalizing transactions and proving and ruling a five-column journal
Hans Schultz owns a service business called YardCare, which uses the following accounts.
Cash Accts. Pay.—Midwest Supplies Advertising Expense
Accts. Rec.—Frank Morris Hans Schultz, Capital Utilities Expense
Supplies Hans Schultz, Drawing
Prepaid Insurance Sales
Transactions:
Apr. 1. Hans Schultz invested $2,500.00 of his own money in the business. Receipt No. 1.
3. Used business cash to purchase supplies costing $105.00. Wrote Check No. 1.
4. Wrote Check No. 2 for insurance, $240.00.
5. Purchased supplies for $75.00 over the phone from Midwest Supplies, promising to send the
check next week. Memo. No. 1.
11. Sent Check No. 3 to Midwest Supplies, $75.00.
12. Sent a check for the electricity bill, $65.00. Check No. 4.
15. Wrote a $700.00 check to Mr. Schultz for personal use. Used Check No. 5.
16. Sold services for $358.00 to Frank Morris, who agreed to pay for them within 10 days. Sales
Invoice No. 1.
17. Recorded cash sales of $1,287.00.
18. Paid $90.00 for advertising. Wrote Check No. 6.
25. Received $358.00 from Frank Morris for the services performed last week. Wrote Receipt No. 2.
Instructions:
1. Journalize the transactions completed during April of the current year. Use page 1 of the journal given in
the Working Papers. Remember to record appropriate source document numbers.
2. Prove and rule the journal.
3. Prove cash. The beginning cash balance on April 1 is zero. The balance on the next unused check stub is
$2,870.00.
36 MASTERY PROBLEM
Journalizing transactions and proving and ruling a five-column journal
Jane Fernandez owns a service business called Jane’s Car Wash, which uses the following accounts.
Cash Accts. Pay.—Pine Supplies Miscellaneous Expense
Accts. Rec.—Tony’s Limos Jane Fernandez, Capital Rent Expense
Supplies Jane Fernandez, Drawing Repair Expense
Prepaid Insurance Sales Utilities Expense
Accts. Pay.—Atkin Supplies Advertising Expense
Transactions:
June 1. Received cash from owner as an investment, $16,000.00. R1.
2. Paid cash for supplies, $300.00. C1.
3. Paid cash for rent, $900.00. C2.
4. Bought supplies on account from Atkin Supplies, $1,700.00. M1.
5. Paid cash for electric bill, $146.00. C3.
8. Paid cash on account to Atkin Supplies, $1,000.00. C4.
8. Received cash from sales, $980.00. T8.
8. Sold services on account to Tony’s Limos, $450.00. S1.
82 Chapter 3 Journalizing Transactions
9. Paid cash for insurance, $1,200.00. C5.
10. Paid cash for repairs, $388.00. C6.
10. Received cash from sales, $476.00. T10.
11. Paid cash for miscellaneous expense, $15.00. C7.
11. Received cash from sales, $630.00. T11.
12. Received cash from sales, $900.00. T12.
15. Paid cash to owner for personal use, $400.00. C8.
15. Received cash from sales, $850.00. T15.
16. Paid cash for supplies, $1,100.00. C9.
17. Received cash on account from Tony’s Limos, $225.00. R2.
17. Bought supplies on account from Pine Supplies, $600.00. M2.
17. Received cash from sales, $500.00. T17.
18. Received cash from sales, $800.00. T18.
19. Received cash from sales, $650.00. T19.
22. Bought supplies on account from Pine Supplies, $60.00. M3.
22. Received cash from sales, $610.00. T22.
23. Paid cash for telephone bill, $85.00. C10.
23. Sold services on account to Tony’s Limos, $582.00. S2.
24. Paid cash for advertising, $125.00. C11.
24. Received cash from sales, $300.00. T24.
25. Received cash from sales, $770.00. T25.
26. Paid cash for supplies, $90.00. C12.
26. Received cash from sales, $300.00. T26.
29. Received cash on account from Tony’s Limos, $350.00. R3.
30. Paid cash to owner for personal use, $450.00. C13.
30. Received cash from sales, $500.00. T30.
Instructions:
1. The journals for Jane’s Car Wash are given in the Working Papers. Use page 1 of the journal to journalize
the transactions for June 1 through June 19. Source documents are abbreviated as follows: check, C;
memorandum, M; receipt, R; sales invoice, S; calculator tape, T.
2. Prove and rule page 1 of the journal. Carry the column totals forward to page 2 of the journal.
3. Use page 2 of the journal to journalize the transactions for the remainder of June.
4. Prove page 2 of the journal.
5. Prove cash. The beginning cash balance on June 1 is zero. The balance on the next unused check stub
is $18,642.00.
6. Rule page 2 of the journal.
37 CHALLENGE PROBLEM
Journalizing transactions using a variation of the five-column journal
Tony Wirth owns a service business called Wirth’s Tailors, which uses the following accounts.
Cash Accts. Pay.—Marker Supplies Rent Expense
Accts. Rec.—Amy’s Uniforms Tony Wirth, Capital Utilities Expense
Supplies Tony Wirth, Drawing
Prepaid Insurance Sales
Transactions:
June 1. Received cash from owner as an investment, $17,000.00. R1.
2. Paid cash for insurance, $3,000.00. C1.
3. Bought supplies on account from Marker Supplies, $2,500.00. M1.
4. Paid cash for supplies, $1,400.00. C2.
Journalizing Transactions Chapter 3 83
8. Paid cash on account to Marker Supplies, $1,300.00. C3.
9. Paid cash for rent, $800.00. C4.
12. Received cash from sales, $550.00. T12.
15. Sold services on account to Amy’s Uniforms, $300.00. S1.
16. Paid cash for telephone bill, $70.00. C5.
22. Received cash on account from Amy’s Uniforms, $300.00. R2.
25. Paid cash to owner for personal use, $900.00. C6.
Instructions:
The journal for Wirth’s Tailors is given in the Working Papers. Wirth’s Tailors uses a journal with a column
arrangement slightly different from the journal used in this chapter, as shown below.
JOURNAL PAGE 1
1 2 3 4 5
CASH DOC. POST. GENERAL SALES
DATE ACCOUNT TITLE NO. REF. CREDIT
DEBIT CREDIT DEBIT CREDIT
1. Use page 1 of the journal to journalize the transactions. Source documents are abbreviated as follows:
check, C; memorandum, M; receipt, R; sales invoice, S; calculator tape, T.
2. Prove and rule the journal.
3. Prove cash. The beginning cash balance on June 1 is zero. The balance on the next unused check stub
is $10,380.00.
A P P L I E D CO M M U N I C AT I O N
Careful research about careers will help prepare you for making career choices. There are several U.S. government
publications that provide detailed descriptions of many job titles. Two that are available in most public libraries are
the Dictionary of Occupational Titles (DOT) and the Occupational Outlook Handbook.
Instructions: Go to the library and, using one of the two publications listed or any other appropriate resource,
find the description for any accounting-related job. Record information you find, such as qualifications needed, job
outlook, and earnings. Write one paragraph describing the pros and cons of working in such a job. Be sure to write a
topic sentence and a conclusion.
CASES FOR CRITICAL THINKING
Case 1
During the summer, Willard Kelly does a variety of small jobs for many different people in the community to earn
money. Mr. Kelly keeps all his money in a single checking account. He writes checks to pay for personal items and for
business expenses. These payments include personal clothing, school supplies, gasoline for his car, and recreation.
Mr. Kelly uses his check stubs as his accounting records. Are Mr. Kelly’s accounting procedures and records correct?
Explain your answer.
Case 2
In her business, Monica Zapata uses a journal with the following columns: Date, Account Title, Check No., Cash Debit,
and Cash Credit. Ms. Zapata’s husband, Rodrigo, suggests that she needs three additional amount columns: Gen-
eral Debit, General Credit, and Sales Credit. Ms. Zapata states that all her business transactions are for cash, and she
never buys on account. Therefore, she doesn’t see the need for more than the Cash Debit and Cash Credit special
amount columns. Who is correct, Ms. or Mr. Zapata? Explain your answer.
84 Chapter 3 Journalizing Transactions
SCANS WORKPLACE COMPETENCY
Basic Skill: Writing
Concept: Employers frequently cite the ability to communicate as one of the most important skills they require in
employees. When communicating thoughts, ideas, and information, it is important to be clear and concise so that
the intended receiver of the communication understands the message.
Application: Proprietorships are the most common form of business organization in the United States with over
17 million proprietorships filing tax returns. Review the advantages and disadvantages of proprietorships in Chap-
ter 1 and write a paragraph describing why you think proprietorships are the most common form of business
organization.
USING SOURCE DOCUMENTS
Journalizing transactions and proving and ruling a journal
Cy Sawyer owns a service business called Cy’s Repair Service, which uses the following accounts.
Cash Accts. Pay.—Atlas Supplies Miscellaneous Expense
Accts. Rec.—J. Hutton Cy Sawyer, Capital Rent Expense
Supplies Cy Sawyer, Drawing Utilities Expense
Prepaid Insurance Sales
Source documents related to the transactions for Cy’s Repair Service for May are provided in the Working Papers.
Instructions
1. The journal for Cy’s Repair Service is given in the Working Papers. Use page 1 of the journal to journalize the
transactions for May. Source documents are abbreviated as follows: check, C; memorandum, M; receipt, R;
sales invoice, S; calculator tape, T.
2. Prove the journal.
3. Prove cash. The beginning cash balance on May 1 is zero. The balance on the next unused check stub is $5,223.00.
4. Rule the journal.
A N A LY Z I N G B E S T B U Y ’S F I N A N C I A L S TAT E M E N T S
To calculate what percentage one amount is of another amount, you divide the smaller amount by the total that
contains the amount. Using Best Buy as an example, Cash for 2007 ⫽ $1,205,000,000. Total assets for 2007 ⫽
$13,570,000,000. To calculate what percentage cash is of total assets, use the following formula: Cash, 1,205,000,000
⫼ total assets, 13,570,000,000. The answer is .0888 or 8.88%.
Instructions
1. Use the information on page B-5 in Appendix B. Find the amount of Receivables and Total Assets for Best Buy
for 2006 and 2007. Calculate what percentage Receivables are of Total Assets for 2006 and 2007.
2. Did the percentage increase or decrease over this period of time?
3. If this percentage would increase rapidly, what could be happening?
Journalizing Transactions Chapter 3 85
Accounting
SOFTWARE
T O O L B A R , M E N U S , H E L P, A N D
PROBLEM INSTRUCTIONS
Modern software usually has several features in common. These include a toolbar, menus, and a Help function.
A toolbar is a set of icons or buttons that perform a single function, such as Open, Save, or Print. The kinds and
number of toolbar buttons vary with the software. In addition to the toolbar buttons, there are menus that perform
more detailed functions. Each menu item usually includes several options that display when the menu item
is clicked. Different kinds of software have different kinds of menu options.
The Help menu provides information about how to perform different kinds of functions using the software.
Experienced users of a particular kind of software rarely use the Help function. However, it can be very useful when
you are starting out and need to look up how to do a particular task. There are often several different kinds of help
available on the Help menu.
PEACHTREE ACTIVITY
1. Open (Restore) the data file for Mastery Problem 4-5 (filename: 04-5MP.ptb).
2. Click the Help menu. Note that several options are available. Click the different options to see what is available.
Then, click Contents and Index and search for help on adding an account (“add account”). Write a brief descrip-
tion of the procedure.
3. Close the data file and exit the software.
T O O L B A R , M E N U S , H E L P, A N D
PROBLEM INSTRUCTIONS
QuickBooks has toolbar, menu, and Help functions. A toolbar is a set of icons or buttons that perform a single
function, such as Open, Save, or Print. The kinds and number of toolbar buttons vary with the software. In addition
to the toolbar buttons, there are menus that perform more detailed functions. Each menu item usually includes
several options that display when the menu item is clicked. Different kinds of software have different kinds of menu
options.
The Help menu provides information about how to perform different kinds of functions using the software.
Experienced users of a particular kind of software rarely use the Help function. However, it can be very useful when
you are starting out and need to look up how to do a particular task. There are often several different kinds of help
available on the Help menu.
QUICKBOOKS ACTIVITY
1. Open Mastery Problem 4-5 (filename: O’Kalla Lawn and Garden.qbw).
2. Click the Help menu. Note that several options are available. Click the different options to see what is available.
Then, search for help on adding an account (“add account”). Write a brief description of the procedure.
3. Close the data file and exit the software.
86 Chapter 3 Journalizing Transactions
BASIC SPREADSHEET TERMINOLOGY
A file containing an electronic spreadsheet is referred to as a workbook. A workbook can contain one or more work
sheets, each containing the row and column cell structure in which text, numbers, and formulas are entered. A
schedule or form created on a work sheet ready for data to be entered is referred to as a template or data file.
The Excel problem template files have at least two work sheets. One of the work sheets is labeled Instructions.
The Instructions work sheet details the specific instructions for that problem. It is accessed by simply clicking the
Instructions tab.
EXCEL ACTIVITY
1. Open the data file for Application Problem 5-2 (filename: F05-2.xls).
2. Click the Instructions tab and read the instructions for this problem. You will not complete this problem until
Chapter 5.
3. Close the data file and exit the software.
H E L P, P R O B L E M I N S T R U C T I O N S ,
AND JOURNAL ENTRIES
The Automated Accounting software has a Help menu with features similar to all other software. The software also
has a function that displays instructions for specific problems. Click the Browser toolbar button. This opens the
default browser and displays the specific step-by-step instructions for a problem. The instructions may be displayed
at any time they are needed. However, it is usually easier to simply minimize the browser with the instructions dis-
played and then maximize the browser when an instruction is needed.
Just as in manual accounting, transactions are recorded in a journal. A 2-column general journal is used for all
problems in Part 1. The journal is accessed by clicking the Journal toolbar button and the General Journal tab. You
may move to the next entry field with the Tab key or position with the mouse.
Date: Key the date or increase or decrease it with the ⫹ or ⫺ keys.
Refer.: The source document number and identifying letter abbreviation are keyed in the Refer. column.
Account: You may key the account number, select the account by clicking the chart of accounts button, or key part
of the account title.
Debit: Key the debit amount in the debit column. Use the Tab key to advance to the next line for an additional
account title.
Credit: Key the credit amount in the credit column.
Post: After all parts of a transaction are entered, click the Post button or press Enter in the last field of the entry. This
prepares the software for a new transaction.
AUTOMATED ACCOUNTING ACTIVITY
1. Open your Automated Accounting software.
2. Open the data file for Application Problem 3-5 (filename: F03-5.AA8).
3. Click the Help button, then click Help Contents and Index.
4. Search for Help on adding a new account.
5. Keep the data file open to complete Application Problem 3-5.
AUTOMATED ACCOUNTING APPLICATION PROBLEM 35
Open file F03-5.AA8 if it is not already open. Display the problem instructions and complete the problem.
AUTOMATED ACCOUNTING MASTERY PROBLEM 36
Open file F03-6.AA8. Display the problem instructions and complete the problem.
Journalizing Transactions Chapter 3 87
REDCHOPSTICKS/GETTY IMAGES
C H A P T E R 4 Posting to a
General Ledger
O B J E C T I V E S
After studying Chapter 4, you will be able to: 4. Post separate amounts from a journal to a
general ledger.
1. Define accounting terms related to posting from
a journal to a general ledger. 5. Post column totals from a journal to a general
ledger.
2. Identify accounting concepts and practices
related to posting from a journal to a general 6. Analyze and journalize correcting entries.
ledger.
3. Prepare a chart of accounts for a service business
organized as a proprietorship.
K E Y T E R M S
• ledger • file maintenance • posting
• general ledger • opening an account • correcting entry
• account number
( Point Your Browser
www.C21accounting.com
)
88
ACCOUNTING IN THE REAL WORLD
AMAZON.COM
Record Sales Volume at Amazon.com
Have you ever realized the day before a special occasion that you forgot to
purchase a gift for someone? Have you ever thought of going online, pur-
chasing a gift, and getting it delivered the very next day?
On December 24 of a recent year, more than 70,000 gift certificates were
ordered on Amazon.com. These certificates were delivered, via e-mail, on
December 25. Recently Amazon.com, headquartered in Seattle, experienced
DIGITAL VISION/GETTY IMAGES
its busiest holiday season and set a single-day record for items ordered—
averaging 24 items per second!
In a letter to stockholders, Jeffrey P. Bezos, the INTERNET
founder and CEO of Amazon.com, explained ACTIVITY
about a Customer Review feature that
had been established. This feature Securities and Exchange
allows customers to rate both Commission
products and vendors. Mr. Go to the homepage for the
Bezos noted that “negative Securities and Exchange Com-
reviews cost us some sales mission (SEC) at www.sec.gov.
in the short run.” Also, an The SEC was created through
Instant Order Update two Acts of Congress. Search
feature reminds cus- the site to find out more about
tomers that they have these two Acts. This informa-
already ordered an item tion is usually found under the
if they order the same headings such as “About the
item again. Mr. Bezos SEC” and/or “What We Do.”
stated that this feature
©AP PHOTO/SCOTT SADY
“slightly reduced sales.” Instructions
1. List the names of the two
Acts of Congress that
created the SEC.
2. Briefly summarize the pur-
poses of these two Acts.
Critical Thinking
1. If the Customer Review feature and the Instant Order Update feature
both reduce sales, why would Amazon.com continue to make these
features available to its customers?
2. What problems might occur when Amazon.com receives orders at the
rate of 24 items per second?
Source: www.amazon.com and Letter to Shareholders in 2003 Annual Report
89
L E S S O N
Preparing a Chart
4-1 of Accounts
ACCOUNT FORM
TechKnow Consulting records transactions in a journal, as If only a journal is used, a business must search through
described in Chapter 3. A journal is a permanent record of all journal pages to find items affecting a single account
the debit and credit parts of each transaction with transac- balance. For this reason, a form is used to summarize in
tions recorded in chronological order. However, a journal one place all the changes to a single account. A separate
does not show, in one place, all the changes in a single form is used for each account.
account.
CHARACTER COUNTS
A r e Yo u r A c t i o n s L e ga l ?
“A man should be upright, not Whether an action is legal is not always so obvious. Did
be kept upright.” This famous you know:
statement by Marcus Aure-
• It may be illegal to sell certain items, such as comput-
lius suggests that, in a
ers and oil, to countries that violate global norms of
perfect world, everyone
conduct.
would always do the
right thing. In the real • An interviewer may not ask a prospective employee if
world, however, gov- he or she has children.
ernments have been • Companies with more than $10 million in assets hav-
forced to create com- ing more than 500 owners must file annual and other
plex systems of laws periodic reports with the government.
to force individuals to
No one can be expected to know every law that might
adhere to the social norm
affect the operation of a business. To assist its managers,
of right and wrong. We rely
businesses hire lawyers to provide their managers with
on these laws for our protec-
legal advice. Most large businesses have their own legal
tion as well as the orderly opera-
departments staffed with lawyers. Smaller businesses typi-
tion of our society. For example, think
cally pay a retainer fee to an independent lawyer to provide
about the chaos that might result if individ-
legal advice when needed. All businesses should provide
uals could choose which side of the road to drive on!
their managers with regular training on legal issues. Man-
Many laws are common knowledge for individuals
agers should be encouraged to consult the lawyers if there
PHOTO: DIGITAL VISION/GETTY IMAGES
working in business:
is any question whether an action might be illegal.
• Employers may not discriminate on the basis of
national origin. Instructions
• Customers may not be charged different prices for the Use an Internet or library source to prepare a list of ques-
same item. tions that are illegal for an employer to ask during a job
interview.
• Taxes must be paid to the government.
90 Chapter 4 Posting to a General Ledger
R E L AT I O N S H I P O F A T A C C O U N T T O A N A C C O U N T F O R M
Information needed to trace T Account
entry back to journal page Debit side Credit side
ACCOUNT
POST.
DATE ITEM DEBIT CREDIT
REF.
An account form is based on and includes the debit and shown. If this form is used, an up-to-date balance must be
credit sides of a T account. In addition to debit and credit calculated each time the account is examined. When an
columns, space is provided in the account form for record- account has a large number of entries, the balance is dif-
ing the transaction date and journal page number. This ficult and time consuming to calculate. Therefore, a more
information can be used to trace a specific entry back to commonly used account form has Debit and Credit Bal-
where a transaction is recorded in a journal. ance columns, as shown below.
The major disadvantage of the account form illustrated
above is that no current, up-to-date account balance is
ACCOUNT ACCOUNT NO.
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
Balance columns
T T Y I M AG ES
S C/GE
T OD I
PHO
Because the form has columns for the debit and credit
balance, it is often referred to as the balance-ruled account
form.
The account balance is calculated and recorded as each
entry is recorded in the account. Recording information in
an account is described later in this chapter. The T account
is a useful device for analyzing transactions into debit and
credit parts. However, the balance-ruled account form is
more useful than the T account as a permanent record of
changes to account balances. TechKnow Consulting uses
the balance-ruled account form.
Preparing a Chart of Accounts Lesson 4-1 91
CHART OF ACCOUNTS
CHART OF ACCOUNTS
Balance Sheet Accounts Income Statement Accounts
(100) ASSETS (400) REVENUE
110 Cash 410 Sales
120 Petty Cash
(500) EXPENSES
130 Accounts Receivable—Oakdale School
510 Advertising Expense
140 Accounts Receivable—Campus Internet Cafe
520 Insurance Expense
150 Supplies
530 Miscellaneous Expense
160 Prepaid Insurance
540 Rent Expense
(200) LIABILITIES 550 Supplies Expense
210 Accounts Payable—Supply Depot 560 Utilities Expense
220 Accounts Payable—Thomas Supply Co.
(300) OWNER’S EQUITY
310 Kim Park, Capital
320 Kim Park, Drawing
330 Income Summary
A group of accounts is called a ledger. A ledger that TechKnow Consulting’s chart of accounts is shown above.
contains all accounts needed to prepare financial state- For ease of use while studying the chapters in Part 1,
ments is called a general ledger. The name given to an TechKnow Consulting’s chart of accounts is also shown
account is known as an account title. The number assigned on page 3.
to an account is called an account number. Accounts in a general ledger are arranged in the same
order as they appear on financial statements. TechKnow
Preparing a Chart of Accounts Consulting’s chart of accounts shows five general ledger
A list of account titles and numbers showing the location divisions: (1) Assets, (2) Liabilities, (3) Owner’s Equity,
of each account in a ledger is known as a chart of accounts. (4) Revenue, and (5) Expenses.
ACCOUNT NUMBE RS
1 5 0 Supplies
General ledger division Location within general ledger division
TechKnow Consulting assigns a three-digit account num- The second two digits indicate the location of each
ber to each account. For example, Supplies is assigned the account within a general ledger division. The 50 in the
number 150, as shown. account number for Supplies indicates that the account is
The first digit of each account number shows the gen- located between account number 140 and account num-
eral ledger division in which the account is located. For ber 160.
example, the asset division accounts are numbered in
the 100s. Therefore, the number for the asset account,
Supplies, begins with a 1.
92 Chapter 4 Posting to a General Ledger
Assigning Account Numbers account, Water Expense, to show more detail about one
TechKnow Consulting initially assigns account numbers of the utility expenses. The expense accounts are arranged
by 10s so that new accounts can be added easily. Nine in alphabetic order. Therefore, the new account would be
numbers are unused between each account on TechKnow added at the end of the expense section of the chart of
Consulting’s chart of accounts. For example, numbers accounts. The last used expense account number is 560, as
111 to 119 are unused between accounts numbered 110 shown on the chart of accounts. The next number in the
and 120. New numbers can be assigned between exist- sequence of 10s is 570, which is assigned as the number of
ing account numbers without renumbering all existing the new account.
accounts. The procedure for arranging accounts in a
general ledger, assigning account numbers, and keeping 550 Supplies Expense (Existing account)
records current is called file maintenance. 560 Utilities Expense (Existing account)
Unused account numbers are assigned to new accounts. 570 Water Expense (New Account)
TechKnow Consulting records payments for gasoline in
Miscellaneous Expense. If Ms. Park found that the amount
paid each month for gasoline had become a major expense, TechKnow Consulting has relatively few accounts in its
she might decide to use a separate account. The account general ledger and does not anticipate adding many new
might be titled Gasoline Expense. TechKnow Consulting accounts in the future. Therefore, a three-digit account
arranges expense accounts in alphabetic order in its gen- number adequately provides for the few account numbers
eral ledger. Therefore, the new account would be inserted that might be added. However, as the number of general
between Advertising Expense and Insurance Expense. ledger accounts increases, a business may change to four
or more digits.
Charts of accounts with more than three digits are
510 Advertising Expense (Existing account) described in later chapters.
Gasoline Expense (New Account)
520 Insurance Expense (Existing account)
The number selected for the new account should leave
some unused numbers on either side of it for other accounts
D I S C/ G ETT Y I M A GE S
that might need to be added. The middle, unused account P HOT O
number between existing numbers 510 and 520 is 515.
Therefore, 515 is assigned as the account number for the
new account.
510 Advertising Expense (Existing account)
515 Gasoline Expense (New Account)
520 Insurance Expense (Existing account)
When an account is no longer needed, it is removed
from the general ledger and the chart of accounts. For
example, if TechKnow Consulting were to buy its
own equipment and building, there would be no
need for the rent expense account. The account
numbered 540 would be removed, and that num-
ber would become unused and available to assign
to another account if the need should arise.
When a new account is added at the end of a
ledger division, the next number in a sequence
of 10s is used. For example, suppose TechKnow
Consulting needs to add another expense
Preparing a Chart of Accounts Lesson 4-1 93
OPE NING AN ACCOUNT IN A GE NE R AL LE DGE R
1 Account Title 2 Account Number
ACCOUNT Cash ACCOUNT NO. 110
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
Writing an account title and number on the heading of an Cash, account number 110, is the first account on Tech-
account is called opening an account. A general ledger Know Consulting’s chart of accounts. The cash account is
account is opened for each account listed on a chart of opened using the steps shown below. The same procedure
accounts. Accounts are opened and arranged in a general is used to open all accounts listed on TechKnow Consult-
ledger in the same order as on the chart of accounts. ing’s chart of accounts.
S T E P S OPENING AN ACCOUNT IN A GENERAL LEDGER
1 Write the account title, Cash, after the word Account in the heading.
2 Write the account number, 110, after the words Account No. in the heading.
C U LT U R A L D I V E R S I T Y
A c c ou nt i ng i n An c i e nt
C i vi l i z a t i o n s
In the ancient civilizations of Asia Minor The Greeks invented coined money around 630 B.C.,
and northern Africa, most citizens were which facilitated assigning values to transactions.
illiterate. The scribe, who could read The Babylonians in Asia Minor used an early form of
and write, became a very important banking. They transferred funds with a system resembling
person in the society. Of ancient our modern-day checking accounts, one of the first uses of
Hebrew origin, the scribe has been business documents.
called the forerunner of today’s These early practices provided the foundation for
accountant. today’s financial system and recordkeeping methods.
Public scribes often recorded
transactions as citizens arrived to Critical Thinking
PHOTO: PHOTODISC/GETTY IMAGES
do business. Most scribes recorded 1. Estimate how many transactions might occur in a
transactions on moist clay tablets single day in a modern grocery store with which you
that were then dried in the sun. There- are familiar.
fore, permanent records of transactions
2. List the number of different methods of payments that
were not possible until scribes could write
are accepted by modern grocery stores.
them down on clay tablets.
94 Chapter 4 Posting to a General Ledger
End of Lesson
TERMS REVIEW
ledger
REVIEW
general ledger
AUDIT YOUR UNDERSTANDING
account number
file maintenance 1. Describe the two parts of an account number.
opening an account 2. List the two steps for opening an account.
WORK TOGETHER 41
Preparing a chart of accounts and opening an account
Forms are given in the Working Papers. Your instructor will guide you through the following examples.
Clara Ross owns a service business called Ross Company, which uses these accounts.
Accts. Pay.—Sherer Supplies Miscellaneous Expense Cash Automobile Expense
Accts. Rec.—Tyler Link Insurance Expense Sales Clara Ross, Capital
Accts. Pay.—Mid City Supplies Prepaid Insurance Supplies Rent Expense
Accts. Rec.—Megan Alvarez Clara Ross, Drawing Supplies Expense
1. Prepare a chart of accounts. Arrange expense accounts in alphabetical order. Use 3-digit account numbers and
number the accounts within a division by 10s.
2. Two new accounts, Postage Expense and Utilities Expense, are to be added to the chart of accounts prepared in
Instruction 1. Assign account numbers to the two new accounts.
3. Using the account form in the Working Papers, open Cash.
ON YOUR OWN 41
Preparing a chart of accounts and opening an account
Forms are given in the Working Papers. Work this problem independently.
Eric Roen owns a service business called Roen’s Hair Care, which uses these accounts.
Accts. Pay.—Milton Company Supplies Expense Cash Delivery Expense
Accts. Rec.—Superior Supplies Insurance Expense Sales Accts. Pay.—North Star
Prepaid Insurance Telephone Expense Supplies Accts. Rec.—M. Faller
Eric Roen, Drawing Eric Roen, Capital
1. Prepare a chart of accounts. Arrange expense accounts in alphabetical order. Use 3-digit account numbers and
number the accounts within a division by 10s.
2. Two new accounts, Gasoline Expense and Water Expense, are to be added to the chart of accounts prepared in
Instruction 1. Assign account numbers to the two new accounts.
3. Using the account form in the Working Papers, open Delivery Expense.
Preparing a Chart of Accounts Lesson 4-1 95
L E S S O N Posting Separate Amounts
from a Journal to a
4-2 General Ledger
POSTING AN AMOUNT FROM A GENERAL DEBIT COLUMN
JOURNAL PAGE 1
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
2 3 Supplies C1 150 2 7 5 00 2 7 5 00 2
3 3
1 Date 5 Account Number
Debit Amount 3
ACCOUNT Supplies ACCOUNT NO. 150
Journal Page Number 2
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 3 1 2 7 5 00 4 2 7 5 00
Account Balance
Transferring information from a journal entry to a led- POSTING AN
ger account is called posting. Posting sorts journal entries AMOUNT FROM
so that all debits and credits affecting each account are S T E P S
A GENERAL
brought together. For example, all changes to Cash are DEBIT COLUMN
brought together in the cash account.
Amounts in journal entries are recorded in either gen- 1 Write the date, 20--, Aug. 3, in the Date column
eral amount columns or special amount columns. There of the account Supplies.
are two rules for posting amounts from a journal: (1) Sep-
arate amounts in a journal’s general amount columns are 2 Write the journal page number, 1, in the Post.
posted individually to the account written in the Account Ref. column of the account. Post. Ref. is an
Title column. (2) Separate amounts in a journal’s special abbreviation for Posting Reference.
amount columns are not posted individually. Instead, the 3 Write the debit amount, $275.00, in the Debit
special amount column totals are posted to the account amount column.
named in the heading of the special amount column.
4 Write the new account balance, $275.00, in the
Posting a Separate Amount Balance Debit column. Because this entry is
from a General Debit Column the first in the Supplies account, the previous
For most journal entries, at least one separate amount is balance is zero.
posted individually to a general ledger account. When an
entry in a journal includes an amount in a general amount
column, the amount is posted individually. Previous Debit Column New Debit
ⴙ ⴝ
Each separate amount in the General Debit and Gen- Balance Amount Balance
eral Credit columns of a journal is posted to the account $0.00 ⫹ $275.00 ⫽ $275.00
written in the Account Title column.
5 Return to the journal and write the account
number, 150, in the Post. Ref. column of the
journal.
96 Chapter 4 Posting to a General Ledger
POSTING A SECOND AMOUNT TO AN ACCOUNT
JOURNAL PAGE 1
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
2 3 Supplies C1 150 2 7 5 00 2 7 5 00 2
4 7 Supplies M1 150 5 0 0 00 4
5 Accts. Pay.—Supply Depot 5 0 0 00 5
6 6
7 7
1 Date Debit Amount 3 5 Account Number
ACCOUNT Supplies ACCOUNT NO. 150
BALANCE
Journal Page Number 2
DATE ITEM POST. DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 3 1 2 7 5 00 2 7 5 00
7 1 5 0 0 00 4 7 7 5 00
Account Balance
The numbers in the Post. Ref. columns of the general led- column of the journal indicates that posting for that line
ger account and the journal serve three purposes: (1) An still needs to be completed. Therefore, the posting refer-
entry in an account can be traced to its source in a journal. ence is always recorded in the journal as the last step in the
(2) An entry in a journal can be traced to where it was posting procedure.
posted in an account. (3) If posting is interrupted, the The same five steps are followed when a second amount
accounting personnel can easily see which entries in the is posted to an account.
journal still need to be posted. A blank in the Post. Ref.
S T E P S POSTING A SECOND AMOUNT TO AN ACCOUNT
1 Write the date, 7, in the Date column of the account. The month and year are written only once on a page
of a ledger account, unless the month or year changes.
2 Write the journal page number, 1, in the Post. Previous Debit Debit Column New Debit
Ref. column of the account. ⴙ ⴝ
Balance Amount Balance
3 Write the debit amount, $500.00, in the Debit $275.00 ⫹ $500.00 ⫽ $775.00
amount column.
4 Write the new account balance, $775.00, in the Balance Debit column.
5 Return to the journal and write the account number, 150, in the Post. Ref.
column of the journal. R E M E M B E R
Each separate amount in the
General Debit and Credit columns
of a journal is posted individually.
Therefore, the totals of these
columns are not posted.
Posting Separate Amounts from a Journal to a General Ledger Lesson 4-2 97
POSTING AN AMOUNT FROM A GENERAL CREDIT COLUMN
JOURNAL PAGE 1
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
20--
1 Aug. 1 Kim Park, Capital R1 310 5 0 0 0 00 5 0 0 0 00 1
2 2
3 3
1 Date Account Number 5 3 Credit Amount
ACCOUNT Kim Park, Capital ACCOUNT NO. 310
BALANCE
Journal Page Number 2
POST.
DATE ITEM REF. DEBIT CREDIT
DEBIT CREDIT
20--
Aug. 1 1 5 0 0 0 00 4 5 0 0 0 00
Account Balance
An amount in the General Credit column is posted sepa-
rately. Five steps are followed when posting an amount
from the General Credit column.
S T E P S POSTING AN AMOUNT FROM A GENERAL CREDIT COLUMN
1 Write the date, 20--, Aug. 1, in the Date column of the account.
2 Write the journal page number, 1, in the Post. Ref. column of the account.
3 Write the credit amount, $5,000.00, in the
Credit amount column. Previous Credit Column New Credit
ⴙ ⴝ
Balance Amount Balance
4 Write the new account balance, $5,000.00, $0.00 ⫹ $5,000.00 ⫽ $5,000.00
in the Balance Credit column.
5 Return to the journal and write the account number, 310, in the Post. Ref. column of the journal.
P H O T O D I S C/ G E T T Y I M A G
E S
98 Chapter 4 Posting to a General Ledger
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. List the five steps of posting from the general columns of a journal to
TERM REVIEW the general ledger.
2. Are the totals of the General Debit and General Credit columns posted?
posting Why or why not?
WORK TOGETHER 42
Posting separate amounts to a general ledger
A completed journal and general ledger accounts are given in the Working Papers. Your instructor will guide you
through the following example.
Leonard Witkowski owns a service business that uses the following accounts.
Assets Owner’s Equity
110 Cash 310 Leonard Witkowski, Capital
120 Accounts Receivable—Danielle Braastad 320 Leonard Witkowski, Drawing
130 Supplies Revenue
140 Prepaid Insurance 410 Sales
Liabilities Expenses
210 Accounts Payable—Joshua’s Supplies 510 Rent Expense
1. Post the separate amounts (on each line of the journal) that need to be posted individually. Save your work to
complete Work Together 4-3.
ON YOUR OWN 42
Posting separate amounts to a general ledger
A completed journal and general ledger accounts are given in the Working Papers. Work this problem independently.
Heather Hasley owns a service business, which uses the following accounts.
Assets Owner’s Equity
110 Cash 310 Heather Hasley, Capital
120 Accounts Receivable—Ken Garlie 320 Heather Hasley, Drawing
130 Supplies Revenue
140 Prepaid Insurance 410 Sales
Liabilities Expenses
210 Accounts Payable—Bodden Company 510 Advertising Expense
1. Post the separate amounts (on each line of the journal) that need to be posted individually. Save your work to
complete On Your Own 4-3.
Posting Separate Amounts from a Journal to a General Ledger Lesson 4-2 99
L E S S O N Posting Column Totals
from a Journal to a
4-3 General Ledger
C H E C K M A R K S S H O W T H AT A M O U N T S A R E N O T P O S T E D
JOURNAL PAGE 2
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
20--
1 Aug. 20 Brought Forward ⻫ 3 5 4 3 00 5 7 5 0 00 1 9 6 0 00 6 7 1 0 00 2 5 4 3 00 1
13 31 ⻫ T31 ⻫ 1 9 0 00 1 9 0 00 13
14 31 Miscellaneous Expense M3 8 00 8 00 14
15 31 Totals 4 3 5 1 00 5 7 5 0 00 3 5 6 5 00 8 3 1 5 00 3 3 5 1 00 15
16 16
(⻫) (⻫)
17 17
Check mark indicates that
amounts ARE NOT posted
individually. Check marks indicate that
general amount column totals
ARE NOT posted.
Journal Entries That Are Not indicates that no separate amounts are posted individually
Posted Individually from this line. Instead, the totals of the special amount
Several lines in TechKnow Consulting’s journal contain columns are posted.
amounts that are not to be posted individually. These
Totals of General Debit and General
include forwarding totals and amounts recorded in special
Credit Amount Columns
amount columns. The totals brought forward from page 1
The General Debit and General Credit columns are not
are shown on line 1 of the journal. None of these separate
special amount columns because the column headings
total amounts on line 1 are posted individually to gen-
do not contain the name of an account. All of the sepa-
eral ledger accounts. To assure that no postings are over-
rate amounts in the General Debit and General Credit
looked, no blank posting reference spaces should be left
amount columns are posted individually.
in the Post. Ref. column of the journal. Therefore, when
Therefore, the column totals are not posted. A check
the totals were forwarded to page 2 of the journal, a check
mark in parentheses is placed below each general amount
mark was placed in the Post. Ref. column of line 1 to show
column total as shown. The check mark indicates that the
that no separate amounts are posted individually.
total of the General Debit column is not posted.
Separate amounts in the special amount columns—
A check mark in the Post. Ref. column indicates that
Sales Credit, Cash Debit, and Cash Credit—are not
no amounts on that line are posted individually. On the
posted individually. For example, on line 13 of the jour-
totals line, the amounts in the special amount columns are
nal, two separate $190.00 amounts are recorded in two
posted. Therefore, a check mark is not placed in the Post.
special amount columns, Sales Credit and Cash Debit.
Ref. column for the totals line.
A check mark was placed in the Post. Ref. column on
line 13 when the entry was journalized. The check mark
100 Chapter 4 Posting to a General Ledger
P O S T I N G T H E T O TA L O F T H E S A L E S C R E D I T C O L U M N
JOURNAL PAGE 2
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
15 31 Totals 4 3 5 1 00 5 7 5 0 00 3 5 6 5 00 8 3 1 5 00 3 3 5 1 00 15
16 (⻫) (⻫) (410) 16
17 17
18 18
1 Date Column Total 3 5 Account Number
ACCOUNT Sales ACCOUNT NO. 410
BALANCE
Journal Page Number 2
DATE ITEM POST. DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 31 2 3 5 6 5 00 4 3 5 6 5 00
Account Balance
Separate amounts in special amount columns are not are debits or credits to the same account. Therefore, an
posted individually. The separate amounts are part of the advantage of a special amount column is that only the
special amount column totals. Only the totals of special column total needs to be posted. For example, 16 sepa-
amount columns are posted. rate sales transactions are recorded in the Sales Credit col-
TechKnow Consulting’s journal has three special umn of TechKnow Consulting’s August journal. Instead
amount columns for which only totals are posted: Sales of making 16 separate credit postings to Sales, only the
Credit, Cash Debit, and Cash Credit. column total is posted. As a result, only one posting is
The Sales Credit column of a journal is a special amount needed, which saves 15 postings. The smaller number of
column with the account title Sales in the heading. Each postings means 15 fewer opportunities to make a post-
separate amount in a special amount column could be ing error. Posting special amount column totals saves time
posted individually. However, all of the separate amounts and results in greater accuracy.
S T E P S POSTING THE TOTAL OF THE SALES CREDIT COLUMN
1 Write the date, 20--, Aug. 31, in the Date column of the account Sales.
2 Write the journal page number, 2, in the Post. Ref. column of the account.
3 Write the column total, $3,565.00, in the Credit
amount column. Previous Credit Column New Credit
ⴙ ⴝ
Balance Amount Balance
4 Write the new account balance, $3,565.00, in $0.00 ⫹ $3,565.00 ⫽ $3,565.00
the Balance Credit column.
5 Return to the journal and write the account number in parentheses, (410), below the Sales Credit column total.
Posting Column Totals from a Journal to a General Ledger Lesson 4-3 101
P O S T I N G T H E T O TA L O F T H E C A S H D E B I T C O L U M N
JOURNAL PAGE 2
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
15 31 Totals 4 3 5 1 00 5 7 5 0 00 3 5 6 5 00 8 3 1 5 00 3 3 5 1 00 15
16 (⻫) (⻫) (410) (110) 16
17 17
18 18
1 Date Column Total 3 5 Account Number
ACCOUNT Cash ACCOUNT NO. 110
Journal Page Number 2
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 31 2 8 3 1 5 00 4 8 3 1 5 00
Account Balance
The Cash Debit column of a journal is a special amount The Cash Debit column is posted using the following
column with the account title Cash in the heading. steps.
S T E P S POSTING THE TOTAL OF THE CASH DEBIT COLUMN
1 Write the date, 20--, Aug. 31, in the Date column of the account Cash.
2 Write the journal page number, 2, in the Post. Ref. column of the account.
3 Write the column total, $8,315.00, in the Debit
amount column. Previous Debit Column New Debit
ⴙ ⴝ
Balance Amount Balance
4 Write the new account balance, $8,315.00, in $0.00 ⫹ $8,315.00 ⫽ $8,315.00
the Balance Debit column.
5 Return to the journal and write the account number in parentheses, (110), below the Cash Debit column total.
R E M E M B E R
Errors are corrected in a way that
does not cause doubts about
what the correct information is.
If an error is recorded, cancel the
error by neatly drawing a line
through the incorrect item. Write
the correct items immediately
above the canceled item.
102 Chapter 4 Posting to a General Ledger
P O S T I N G T H E T O TA L O F T H E C A S H C R E D I T C O L U M N
Column Total 3
JOURNAL PAGE 2
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
15 31 Totals 4 3 5 1 00 5 7 5 0 00 3 5 6 5 00 8 3 1 5 00 3 3 5 1 00 15
16 (⻫) (⻫) (410) (110) (110) 16
17 17
18 18
1 Date 5 Account Number
ACCOUNT Cash ACCOUNT NO. 110
Journal Page Number 2
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 31 2 8 3 1 5 00 8 3 1 5 00
31 2 3 3 5 1 00 4 9 6 4 00
4 Account Balance
The Cash Credit column of a journal is a special amount
column with the account title Cash in the heading. The
Cash Credit column is posted using the following steps.
S T E P S POSTING THE TOTAL OF THE CASH CREDIT COLUMN
1 Write the date, 31, in the Date column of the account Cash.
2 Write the journal page number, 2, in the Post. Ref. column of the account.
3 Write the column total, $3,351.00, in the
credit amount column. Previous Debit Credit Column New Debit
ⴚ ⴝ
Balance Amount Balance
4 Write the new account balance, $4,964.00, $8,315.00 ⫺ $3,351.00 ⫽ $4,964.00
in the Balance Debit column.
5 Return to the journal and write the account number in parentheses, (110), below the Cash Credit column total.
R E M E M B E R
Whenever the debits in an
account exceed the credits,
the account balance is a debit.
Whenever the credits in an
account exceed the debits, the
account balance is a credit.
Posting Column Totals from a Journal to a General Ledger Lesson 4-3 103
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. Which column totals of a journal are posted?
2. Under what conditions will an account balance be a debit?
3. Under what conditions will an account balance be a credit?
WORK TOGETHER 43
Posting column totals to a general ledger
Use the journal and general ledger accounts from Work Together 4-2. Your instructor will guide you through
the following example.
Leonard Witkowski owns a service business that uses the following accounts.
Assets Owner’s Equity
110 Cash 310 Leonard Witkowski, Capital
120 Accounts Receivable—Danielle Braastad 320 Leonard Witkowski, Drawing
130 Supplies Revenue
140 Prepaid Insurance 410 Sales
Liabilities Expenses
210 Accounts Payable—Joshua’s Supplies 510 Rent Expense
1. Post the journal’s special amount column totals.
ON YOUR OWN 43
Posting column totals to a general ledger
Use the journal and general ledger accounts from On Your Own 4-2. Work this problem independently.
Heather Hasley owns a service business that uses the following accounts.
Assets Owner’s Equity
110 Cash 310 Heather Hasley, Capital
120 Accounts Receivable—Ken Garlie 320 Heather Hasley, Drawing
130 Supplies Revenue
140 Prepaid Insurance 410 Sales
Liabilities Expenses
210 Accounts Payable—Bodden Company 510 Advertising Expense
1. Post the journal’s special amount column totals.
104 Chapter 4 Posting to a General Ledger
L E S S O N Completed Accounting
Forms and Making
4-4 Correcting Entries
J O U R N A L PAG E W I T H P O S T I N G CO M P L E T E D
JOURNAL PAGE 2
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
20--
1 Aug. 20 Brought Forward ⻫ 3 5 4 3 00 5 7 5 0 00 1 9 6 0 00 6 7 1 0 00 2 5 4 3 00 1
2 21 ⻫ T21 ⻫ 2 2 5 00 2 2 5 00 2
3 24 ⻫ T24 ⻫ 2 0 5 00 2 0 5 00 3
4 25 ⻫ T25 ⻫ 2 7 5 00 2 7 5 00 4
5 26 ⻫ T26 ⻫ 2 9 0 00 2 9 0 00 5
6 27 Utilities Expense C10 560 7 0 00 7 0 00 6
7 27 ⻫ T27 ⻫ 2 0 5 00 2 0 5 00 7
8 28 Supplies C11 150 2 0 0 00 2 0 0 00 8
9 28 ⻫ T28 ⻫ 2 1 5 00 2 1 5 00 9
10 31 Miscellaneous Expense C12 530 2 0 00 3 0 00 10
11 Advertising Expense 510 1 0 00 11
12 31 Kim Park, Drawing C13 320 5 0 0 00 5 0 0 00 12
13 31 ⻫ T31 ⻫ 1 9 0 00 1 9 0 00 13
14 31 Miscellaneous Expense M3 530 8 00 8 00 14
15 31 Totals 4 3 5 1 00 5 7 5 0 00 3 5 6 5 00 8 3 1 5 00 3 3 5 1 00 15
16 (⻫) (⻫) (410) (110) (110) 16
17 17
Page 2 of TechKnow Consulting’s August journal is shown completely filled in with either an account number or a
after all posting has been completed. With the exception check mark.
of the Totals line, notice that the Post. Ref. Column is
GENERAL LEDGER WITH POSTING COMPLETED
After all posting from the
ACCOUNT Cash ACCOUNT NO. 110 August journal is com-
POST. BALANCE pleted, TechKnow Consult-
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT ing’s general ledger is shown
20--
Aug. 31 2 8 3 1 5 00 8 3 1 5 00 here and on the next several
31 2 3 3 5 1 00 4 9 6 4 00 pages.
The use of the accounts
Income Summary, Insur-
ACCOUNT Petty Cash ACCOUNT NO. 120
ance Expense, and Supplies
POST. BALANCE Expense is described in
DATE ITEM DEBIT CREDIT
20--
REF. DEBIT CREDIT Chapter 6.
Aug. 19 1 1 0 0 00 1 0 0 00
Completed Accounting Forms and Making Correcting Entries Lesson 4-4 105
ACCOUNT Accounts Receivable—Oakdale School ACCOUNT NO. 130
BALANCE
DATE ITEM POST. DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 12 1 3 5 0 00 3 5 0 00
18 1 2 0 0 00 1 5 0 00
ACCOUNT Accounts Receivable—Campus Internet Cafe ACCOUNT NO. 140
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 13 1 1 0 0 00 1 0 0 00
ACCOUNT Supplies ACCOUNT NO. 150
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 3 1 2 7 5 00 2 7 5 00
7 1 5 0 0 00 7 7 5 00
20 1 5 0 00 8 2 5 00
28 2 2 0 0 00 1 0 2 5 00
ACCOUNT Prepaid Insurance ACCOUNT NO. 160
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 4 1 1 2 0 0 00 1 2 0 0 00
ACCOUNT Accounts Payable—Supply Depot ACCOUNT NO. 210
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 7 1 5 0 0 00 5 0 0 00
11 1 3 0 0 00 2 0 0 00
ACCOUNT Accounts Payable—Thomas Supply Co. ACCOUNT NO. 220
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 20 1 5 0 00 5 0 00
ACCOUNT Kim Park, Capital ACCOUNT NO. 310
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 1 1 5 0 0 0 00 5 0 0 0 00
ACCOUNT Kim Park, Drawing ACCOUNT NO. 320
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 18 1 1 2 5 00 1 2 5 00
31 2 5 0 0 00 6 2 5 00
A General Ledger after Posting Has Been Completed (continued)
106 Chapter 4 Posting to a General Ledger
ACCOUNT Income Summary ACCOUNT NO. 330
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
ACCOUNT Sales ACCOUNT NO. 410
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 31 2 3 5 6 5 00 3 5 6 5 00
ACCOUNT Advertising Expense ACCOUNT NO. 510
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 14 1 7 8 00 7 8 00
18 1 1 2 5 00 2 0 3 00
31 2 1 0 00 2 1 3 00
ACCOUNT Insurance Expense ACCOUNT NO. 520
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
ACCOUNT Miscellaneous Expense ACCOUNT NO. 530
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 31 2 2 0 00 2 0 00
31 2 8 00 2 8 00
ACCOUNT Rent Expense ACCOUNT NO. 540
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 12 1 3 0 0 00 3 0 0 00
ACCOUNT Supplies Expense ACCOUNT NO. 550
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
ACCOUNT Utilities Expense ACCOUNT NO. 560
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 12 1 4 0 00 4 0 00
27 2 7 0 00 1 1 0 00
A General Ledger after Posting Has Been Completed (concluded)
Completed Accounting Forms and Making Correcting Entries Lesson 4-4 107
MEMOR ANDUM FOR A CORRECTING ENTRY
No. 15
MEMORANDUM
A cash payment of $140.00 for advertising,
October 30, 20--, was debited in error to
Miscellaneous Expense.
Signed: Kim Park Date: November 13, 20--
Errors discovered before entries are posted may be cor- If an accounting error is discovered, a memorandum
rected by ruling through the item, as described in Chapter is prepared as the source document describing the correc-
3. However, a transaction may have been improperly jour- tion to be made.
nalized and posted to the ledger. In such a case, the incor-
rect journal entry should be corrected with an additional
journal entry, called a correcting entry.
JOURNAL ENTRY TO RECORD A CORRECTING ENTRY
1 Date 2 Debit
JOURNAL PAGE 7
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE NO. REF. CREDIT
DEBIT CREDIT DEBIT CREDIT
22 13 Advertising Expense M15 1 4 0 00 22
23 Miscellaneous Expense 1 4 0 00 23
24 24
Credit 4 Source Document
3
To correct the error, an entry is made to add $140.00
November 13. Discovered that a payment to the advertising expense account. The entry must also
of cash for advertising in October was deduct $140.00 from the miscellaneous expense account.
journalized and posted in error as a debit to Because the advertising expense account has a normal
Miscellaneous Expense instead of Advertising debit balance, Advertising Expense is debited for $140.00
Expense, $140.00. Memorandum No. 15. to show the increase in this expense account. The miscel-
laneous expense account also has a normal debit balance.
Therefore, Miscellaneous Expense is credited for $140.00
Advertising Expense
to show the decrease in this expense account.
140.00
Miscellaneous Expense
140.00
108 Chapter 4 Posting to a General Ledger
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. What is a correcting entry?
2. When is a correcting entry necessary?
3. When an amount is journalized and posted as a debit to an incorrect
expense account, why is the amount of the correcting entry debited to
the correct expense account?
TERM REVIEW
4. When an amount is journalized and posted as a debit to an incorrect
expense account, why is the amount of the correcting entry credited to
correcting entry the incorrect expense account?
WORK TOGETHER 44
Journalizing correcting entries
A journal is given in the Working Papers. Your instructor will guide you through the following example.
Transactions:
Nov. 1. Discovered that a transaction for supplies bought last month was journalized and posted in error
as a debit to Prepaid Insurance instead of Supplies, $60.00. M15.
1. Discovered that a transaction for rent expense for last month was journalized and posted in error
as a debit to Repair Expense instead of Rent Expense, $550.00. M16.
1. Journalize each correcting entry discovered during November of the current year. Use page 21 of the journal.
ON YOUR OWN 44
Journalizing correcting entries
A journal is given in the Working Papers. Work this problem independently.
Transactions:
June 1. Discovered that a transaction for supplies bought last month was journalized and posted in error
as a debit to Prepaid Insurance instead of Supplies, $150.00. M23.
1. Discovered that a transaction for utilities expense for last month was journalized and posted in error
as a debit to Miscellaneous Expense instead of Utilities Expense, $850.00. M24.
1. Journalize each correcting entry discovered during June of the current year. Use page 11 of the journal.
Completed Accounting Forms and Making Correcting Entries Lesson 4-4 109
SUMMARY
After completing this chapter, you can: 4. Post separate amounts from a journal to a
general ledger.
1. Define accounting terms related to posting
from a journal to a general ledger. 5. Post column totals from a journal to a general
ledger.
2. Identify accounting concepts and practices
related to posting from a journal to a general 6. Analyze and journalize correcting entries.
ledger.
3. Prepare a chart of accounts for a service busi-
ness organized as a proprietorship.
EXPLORE ACCOUNTING
C ha r t o f A c c o u nt s
Each company designs its chart of accounts to separate out the accounts for each company,
meet the needs of that company. TechKnow they may choose to set up the account num-
Consulting, the company described in this bers in an xx-yyy-zzzz format. The first two
section of the textbook, has a relatively digits (xx) would be a unique number for
simple chart of accounts, with a small each company, the second set of numbers
number of accounts. Therefore, TechKnow (yyy) refers to a department number, and
Consulting can use a three-digit account the third set of numbers (zzzz) is a unique
number for each account. A company with account.
more accounts may need to use a four- or five- Another example would be a company that
digit account number for each account. The num- manufactures goods for its customers. Such a com-
bering system used by the company should ensure that pany may want to include the job order number in each
each account can be assigned a unique number. account number, so that it can easily trace the cost of each
When setting up a chart of accounts, a company does job.
not have to use a straight series of numbers. If a company As you can see, there is an infinite number of possible
has several departments, it may choose to use account systems that can be followed when assigning account
numbers such as 12-150. The first two digits (12) can be numbers. A company should consider future growth
used to designate a specific department. The last three when first setting up a system so that it can avoid having
digits (150) identify a unique account within that depart- to renumber accounts at a later date.
ment. If this company has many departments or many
PHOTO: PHOTOGRAPHER’S CHOICE/GETTY IMAGES
accounts within each department, it may have to increase Group Activity: Develop a chart of accounts for an
the number of digits in the account, such as 123-4567. imaginary business. Write a detailed description of the
A large corporation made up of smaller companies may company and a rationale for the account numbering sys-
have one chart of accounts for the entire corporation. If tem you have developed.
the managers of the corporation also want to be able to
110 Chapter 4 Posting to a General Ledger
41 APPLICATION PROBLEM
Preparing a chart of accounts and opening an account
Lillian Deters owns a service business called Deters Duplicating, which uses the following accounts.
Accounts Receivable—Teegan Walters Lillian Deters, Capital Postage Expense Supplies
Accounts Receivable—Austin Kirnyczuk Lillian Deters, Drawing Charitable Expense Sales
Accounts Payable—Dakota Company Prepaid Insurance Rent Expense Cash
Accounts Payable—Falls Supply Advertising Expense
Instructions:
1. Prepare a chart of accounts similar to the one described in this chapter. Arrange expense accounts in
alphabetical order. Use 3-digit account numbers and number the accounts within a division by 10s.
2. Two new accounts, Delivery Expense and Telephone Expense, are to be added to the chart of accounts
prepared in Instruction 1. Assign account numbers to the two new accounts.
3. Using the forms in the Working Papers, open the Prepaid Insurance and the Postage Expense accounts.
42 APPLICATION PROBLEM
Posting separate amounts to a general ledger
A completed journal and general ledger accounts are given in the Working Papers.
Alto Komoko owns a service business that uses the accounts given in the Working Papers.
Instructions:
Post the separate amounts (on each line of the journal) that need to be posted individually. Save your work
to complete Application Problem 4-3.
43 APPLICATION PROBLEM
Posting column totals to a general ledger
Use the journal and general ledger from Application Problem 4-2.
Instructions:
Post the journal’s special amount column totals.
( Go Beyond the Book
)
For more information go to
www.C21accounting.com
Posting to a General Ledger Chapter 4 111
44 APPLICATION PROBLEM
Journalizing correcting entries
The following errors were discovered after the incorrect entries were already journalized and posted.
Transactions:
Apr. 1. Discovered that a transaction for utilities expense was journalized and posted in error as a debit
to Repairs Expense instead of Utilities Expense, $265.00. M66.
5. Discovered that a cash investment by Manuel Ricardo, owner, was journalized and posted in error
as a credit to Sales instead of Manuel Ricardo, Capital, $600.00. M67.
Instructions:
Journalize each correcting entry discovered during April of the current year. Use page 7 of the journal given
in the Working Papers.
45 MASTERY PROBLEM
Journalizing transactions and posting to a general ledger
Patrick O’Kalla owns a service business called O’Kalla Law n and Garden. O’Kalla Lawn and Garden’s general
ledger accounts are given in the Working Papers.
Transactions:
Nov. 1. Received cash from owner as an investment, $5,500.00. R1.
3. Paid cash for supplies, $400.00. C1.
5. Received cash from sales, $900.00. T5.
6. Sold services on account to Merilda Domingo, $280.00. S1.
9. Paid cash for rent, $600.00. C2.
11. Paid cash for miscellaneous expense, $50.00. C3.
13. Bought supplies on account from Park Supplies, $240.00. M1.
13. Received cash from sales, $430.00. T13.
16. Paid cash for advertising, $143.00. C4.
18. Paid cash on account to Park Supplies, $140.00. C5.
20. Paid cash for electric bill, $230.00. C6.
20. Received cash on account from Merilda Domingo, $150.00. R2.
25. Paid cash for supplies, $150.00. C7.
27. Paid cash for supplies, $80.00. C8.
27. Received cash from sales, $2,100.00. T27.
30. Paid cash to owner for personal use, $500.00. C9.
30. Received cash from sales, $110.00. T30.
Instructions:
1. Open an account for Utilities Expense. Use the 3-digit numbering system described in the chapter.
2. Journalize the transactions completed during November of the current year. Use page 1 of a journal.
Source documents are abbreviated as follows: check, C; memorandum, M; receipt, R; sales invoice, S;
calculator tape, T.
3. Prove the journal.
4. Prove cash. The beginning cash balance on November 1 is zero. The balance on the next unused check
stub is $6,897.00.
5. Rule the journal.
6. Post from the journal to the general ledger.
112 Chapter 4 Posting to a General Ledger
46 CHALLENGE PROBLEM
Posting using a variation of the five-column journal
Frances Fessler owns a service business called HouseCare. HouseCare uses a five-column journal that is
different from the journal used in this chapter. HouseCare’s March journal and general ledger accounts
(before posting) are given in the Working Papers.
Instructions:
1. Post the separate amounts (on each line of the journal) that need to be posted individually.
2. Post the journal’s special amount column totals.
A P P L I E D CO M M U N I C AT I O N
Instructions: Write a memorandum responding to the following scenario: Kim Park is at the bank, applying for a
business loan. Ms. Park has just called you and asked that you fax or email her with the following information: Tech-
Know Consulting’s asset, liability, owner’s equity, sales, and expense accounts, and their current balances. In your
memorandum, include an introductory sentence or paragraph and end with a concluding statement.
CASE FOR CRITICAL THINKING
Trent Marvets does the accounting work for his business. When posting, he first transfers all of the information to the
general ledger accounts. Then he returns to the journal and, all at one time, writes the account numbers in the Post.
Ref. column of the journal. Eiko Harada also does the accounting work for her business. When posting, she writes all
the account numbers in the Post. Ref. column of the journal before she transfers any information to the accounts. Is
Mr. Marvets or Ms. Harada following the correct procedure? Explain your answer.
USING SOURCE DOCUMENTS
Journalizing transactions and posting to a general ledger
1. The journal for Darcia’s School of Dance is given in the Working Papers. Use page 1 of the journal to journalize the
transactions for July.
2. Prove the journal.
3. Prove cash. The beginning cash balance on July 1 is zero. The balance on the next unused check stub is $6,576.00.
4. Rule the journal.
5. Post from the journal to the general ledger.
A N A LY Z I N G B E S T B U Y ’S F I N A N C I A L S TAT E M E N T S
In order to move into smaller markets, Best Buy has intentionally planned smaller stores, with 20,000 to 30,000
square feet as compared to the standard Best Buy showroom, which is 45,000 square feet. In order to calculate the
average total retail square footage per U.S. Best Buy store, divide the total retail square footage by the number of
stores. You will find this data in the 5-Year Financial Highlights on Appendix page B-2.
Instructions
1. Calculate the average total retail square footage per store for U.S. Best Buy stores for 2003 through 2007.
2. Is Best Buy succeeding on the goal of smaller stores?
Posting to a General Ledger Chapter 4 113
Accounting
SOFTWARE
CHART OF ACCOUNTS MAINTENANCE;
JOURNALIZING TRANSACTIONS
In this chapter, you learned how to add a new account to a general ledger. The process of creating a new account
in Peachtree is almost identical.
1. Select Maintain, Chart of Accounts from the menu bar.
2. Key the account number in the Account ID field, and press Enter.
3. Key the account title in the Description field, and press Enter.
4. Select Expenses in the Account Type field.
5. Click Save, and then click Close.
Transactions can now be posted to the new account through Peachtree’s general journal. The new account will
appear in the account list. When the transaction is saved, Peachtree automatically posts the transaction to the gen-
eral ledger.
PEACHTREE MASTERY PROBLEM 45
1. Open (Restore) file 04-5MP.ptb.
2. Before you start journalizing, add Account No. 540, Utilities Expense, to O’Kalla Lawn and Garden’s Chart of
Accounts. Journalize and post the November transactions using General Journal Entry from the menu bar and
selecting Tasks.
3. From the menu bar, select Reports and then General Ledger to print the general journal.
4. Print the general ledger from the Select a Report window.
CHART OF ACCOUNTS MAINTENANCE;
JOURNALIZING TRANSACTIONS
In this chapter, you learned how to add a new account to a general ledger. The process of creating a new account
in QuickBooks is almost identical.
1. Click on the Account drop-down box.
2. Click on New to bring up the Add New Account dialog box.
3. Select an account type and click on Continue.
4. Enter the account number, name, and any other appropriate information.
5. Click on Save and Close.
Posting Amounts to the General Ledger
When you make journal entries, QuickBooks automatically posts the entries to the ledger accounts when you select
Save and New or Save and Close.
QUICKBOOKS MASTERY PROBLEM 45
1. Open the O’Kalla Lawn and Garden file if it is not already open.
2. Choose Make General Journal Entries from the Company menu, and enter the transactions.
3. Print the General Journal report from the Accountant & Taxes option from the Reports drop-down menu; choose
Journal and date the report November 30.
4. Choose Company & Financial from the Reports drop-down menu; select Balance Sheet Standard, and print a
report dated November 30.
114 Chapter 4 Posting to a General Ledger
BASIC SPREADSHEET SKILLS
A basic knowledge of electronic spreadsheets is required to complete the exercises in this textbook. For purposes
of the exercises in this textbook, you need to be able to:
Open a workbook. Save the workbook.
Enter numbers and text in a template. Print a work sheet.
Enter a formula. Switch between work sheets.
Enter a SUM function.
Each template contains an Instructions work sheet that contains the exercise number and title followed by a
detailed list of instructions. A second work sheet contains a template that you will complete by entering numbers
and text. Whenever a cell contains [F], that means that you are to create a formula in that cell.
EXCEL ACTIVITY
1. Access the spreadsheet files as instructed by your teacher.
2. Open several of these files to get acquainted with the style of the workbooks and the types of tasks that you will
be performing.
CHART OF ACCOUNTS MAINTENANCE;
JOURNALIZING TRANSACTIONS
Chart of Accounts Maintenance
Accounts can be added, deleted, or changed. The Account Maintenance window will appear when you choose the
Maintain Accounts menu item from the Data drop-down list or click on the Accts. toolbar button.
Adding a New Account
1. Enter the account number in the Account column at the end of the list, then press the Tab key.
2. Enter the title for the new account.
3. For a departmentalized business, enter the department number.
4. Click the Add Account button.
5. Click the Close button to exit the Accounts window.
Changing an Account Title
1. Select the account that you wish to change.
2. Enter the correct account title or department number.
3. Click the Change button when the account title has been changed.
The account number cannot be changed. If an account number needs to be changed because of an incorrect
account number, the account must be deleted, then added as a new account number.
Deleting an Account
1. Select the account that you wish to delete.
2. Click the Delete button. General ledger accounts cannot be deleted unless the account has a zero balance.
3. Click the OK button.
Posting Amounts to the General Ledger
In automated accounting, journal entries are automatically posted by clicking the Post button or pressing the Enter
key after a transaction is entered in a journal.
AUTOMATED ACCOUNTING APPLICATION PROBLEM 41
Open file F04-1.AA8. Display the problem instructions and complete the problem.
AUTOMATED ACCOUNTING MASTERY PROBLEM 45
Open file F04-5.AA8. Display the problem instructions and complete the problem.
Posting to a General Ledger Chapter 4 115
DIGITAL VISION/GETTY IMAGES
C H A P T E R 5 Cash Control
Systems
O B J E C T I V E S
After studying Chapter 5, you will be able to: 4. Reconcile a bank statement.
1. Define accounting terms related to using a 5. Journalize dishonored checks and electronic
checking account and a petty cash fund. banking transactions.
2. Identify accounting concepts and practices 6. Establish and replenish a petty cash fund.
related to using a checking account.
3. Prepare business papers related to using a
checking account.
K E Y T E R M S
• code of conduct • restrictive endorsement • debit card
• checking account • postdated check • petty cash
• endorsement • bank statement • petty cash slip
• blank endorsement • dishonored check
• special endorsement • electronic funds transfer
( Point Your Browser
www.C21accounting.com
)
116
ACCOUNTING IN THE REAL WORLD
Hard Rock Cafe
Hard Rock Really Rocks
“Hard Rock isn’t just a name; it’s a culture.” These words are used on the
Hard Rock website to describe the company. The culture that is Hard Rock
is summed up in its mission, which is “to spread the spirit of rock ‘n roll by
creating authentic experiences that rock.“ As anyone who has visited a Hard
Rock Cafe can tell you, it is all about rock and roll.
Each of the 121 Hard Rock Cafes, located in over 40 countries, features
DIGITAL VISION/GETTY IMAGES
rock and roll memorabilia—over 60,000 pieces in total, as well as classic
American food and good music. And, if your dining experience was a pleas-
ant one, you can take a piece of it home with you INTERNET
by shopping at the on-site stores for articles ACTIVITY
that range from collector pins to one-
of-a-kind guitars. Interest Rates
The Hard Rock culture is also Banks offer many services,
evident in its mottos: “Love including savings accounts
All—Serve All”; “All Is One”; and loans. If you have a sav-
“Save the Planet”; and ings account with a bank, the
“Take Time to Be Kind.” bank pays you interest on the
Hard Rock lives out these money in the account. If you
mottos by contribut- take out a loan, you pay inter-
ing to many charitable est to the bank on the money
organizations designed you owe.
to make the earth a Go to the homepage for a
safer, healthier, and bet- bank of your choice.
ter place to live.
Instructions
RISER/GETTY IMAGES
1. Find the range of interest
the bank offers for its sav-
ings accounts.
2. Find the range of interest
charged by the bank on an
auto loan.
Critical Thinking
3. Compare the two rates.
1. At Hard Rock Cafe, customers use cash or credit cards to make pur-
Why does the bank charge
chases. What control problems may occur when employees accept cash
more interest on loans
for a sale?
than it pays on savings
2. What can Hard Rock do, in its own cafes, to help support its “Save the
accounts?
Planet” motto?
Source: www.hardrock.com
117
L E S S O N
Checking Accounts
5-1
HOW BUSINESSES USE CASH
In accounting, money is usually referred to as cash. Most As a safety measure, TechKnow Consulting keeps most
businesses make major cash payments by check. However, of its cash in a bank. Because all cash receipts are placed
small cash payments for items such as postage and some in a bank, TechKnow Consulting has written evidence to
supplies may be made from a cash fund kept at the place support its accounting records. TechKnow Consulting
of business. can compare its record of checks written with the bank’s
Because cash transactions occur more frequently than record of checks paid. Greater control of TechKnow Con-
other types of transactions, more chances occur to make sulting’s cash and greater accuracy of its cash records result
recording errors affecting cash. Cash can be transferred from these procedures.
from one person to another without any question about
ownership. Also, cash may be lost as it is moved from one
place to another.
CHARACTER COUNTS
B u s i n e s s C od e s o f C o n d u c t
A statement that guides the ethi- The code of conduct contains sections that focus on
cal behavior of a company and its Merck’s relationship with customers, employees, share-
employees is called a code of holders, suppliers, and communities/society. Each section
conduct. Merck & Co., Inc., a lead- contains specific guidance on Merck policies. Common
ing pharmaceutical company, questions and answers are provided to expand on these
makes its code of conduct policies. Throughout the document, individuals are encour-
available to its employees, aged to seek the guidance of upper-level managers, the
consultants, and the public. Legal Department, and the Office of Ethics if they are unsure
The document, titled “Our Val- whether their actions comply with the code of conduct. PHOTO: PHOTOGRAPHER’S CHOICE RF/GETTY IMAGES
ues and Standards,” begins by
stating: Instructions
At Merck, our values and stan- Obtain access to Merck’s code of conduct at www.merck.
dards have always formed the basis com. Assuming you are a Merck employee, may you:
of our success. They inspire trust and 1. Give a physician a gift consisting of a medical textbook?
confidence on the part of the medical
2. Use your cellular phone to discuss new research meth-
community, government officials, regula-
ods with another Merck employee?
tory agencies, financial markets, our customers
3. Accept a supplier’s invitation to attend the Super Bowl?
and patients—all who are essential to our success.
118 Chapter 5 Cash Control Systems
DEPOSITING CASH
AUG 1 20-- D5000.00 RDS
Date August 1, 20 --
Currency
pacific national bank
Portland, OR 97203 Coin
Checks
For deposit to the account of 24-317
1230 24-108 5,000 00
TECHKNOW CONSULTING
7549 Broadway
Portland, OR 97202-2531
TOTAL 5,000 00
123003175 43452119 CUSTOMER RECEIPT
A business form ordering a bank to pay cash from a Checks are listed on a deposit slip according to the
bank account is known as a check. A bank account from bank routing number on each check. For example, the
which payments can be ordered by a depositor is called a routing number 24-108 identifies the bank on which the
checking account. $5,000.00 check is written.
When a checking account is opened, the bank cus- When a deposit is made, a bank gives the depositor a
tomer must provide a signature on a signature card for receipt. Many banks use a copy of the deposit slip with a
the bank records. If several persons are authorized to sign printed or stamped verification as the receipt. The printed
checks, each person’s signature must be on the signature verification, Aug 1, 20-- D5000.00 RDS, is printed along
card. the top left edge of the deposit slip. This printed verifica-
A bank customer prepares a deposit slip each time tion means that a total of $5,000.00 was deposited on
cash or checks are placed in a bank account. Deposit slips August 1. The initials RDS next to the amount are those
may differ slightly from one bank to another. Each bank of the bank employee who accepted the deposit.
designs its own deposit slips to fit the bank’s recording
machines. However, all deposit slips contain the same
basic information.
DEPOSIT RECORDED ON A CHECK STUB
NO. 1 $ After the deposit is recorded on the check stub, a checkbook subtotal is calcu-
Date 20 lated. The balance brought forward on Check Stub No. 1 is zero. The previous
To
balance, $0.00, plus the deposit, $5,000.00, equals the subtotal, $5,000.00.
For Cash receipts are journalized at the time cash is received. Later, the cash
receipts are deposited in the checking account. Therefore, no journal entry is
BAL. BRO’T. FOR’D. . . . . . . . . . . . 0 00 needed for deposits because the cash receipts have already been journalized.
AMT. DEPOSITED . . . 8 1 -- 5,000 00
SUBTOTAL. . . . . . . . . . . . . . . . . . . 5,000 00
Date
OTHER:
SUBTOTAL: . . . . . . . . . . . . . . . . . .
AMT. THIS CHECK . . . . . . . . . . . .
BAL. CAR’D. FOR’D. . . . . . . . . . . .
Checking Accounts Lesson 5-1 119
B L A N K E N D O R S E M E N T, S P E C I A L E N D O R S E M E N T,
AND RESTRICTIVE ENDORSEMENT
Blank Endorsement Special Endorsement Restrictive Endorsement
Endorse here Endorse here Endorse here
X Kim Park X Pay to the order of X For deposit only to
Eleanor Johnson the account of
Kim Park TECHKNOW CONSULTING
Kim Park
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 Reserved for Financial Institution Use Reserved for Financial Institution Use
Ownership of a check can be transferred. The name of the Special Endorsement
first owner is stated on a check following the words Pay An endorsement indicating a new owner of a check is
to the order of. Therefore, the person to whom payment called a special endorsement. Special endorsements are
is to be made must indicate that ownership of the check sometimes known as endorsements in full.
is being transferred. One person transfers ownership to Special endorsements include the words Pay to the order
another person by signing on the back of a check. A signa- of and the name of the new check owner. Only the per-
ture or stamp on the back of a check transferring owner- son or business named in a special endorsement can cash,
ship is called an endorsement. Federal regulations require deposit, or further transfer ownership of the check.
that an endorsement be confined to a limited amount of
Restrictive Endorsement
space that is indicated on the back of a check.
An endorsement restricting further transfer of a check’s
An endorsement should be signed exactly as the per-
ownership is called a restrictive endorsement. A restric-
son’s name appears on the front of the check. For example,
tive endorsement limits use of the check to whatever pur-
a check made payable to K. A. Park is endorsed on the
pose is stated in the endorsement.
back as K. A. Park. Immediately below that endorsement,
Many businesses have a stamp prepared with a restric-
Ms. Park would write her official signature, Kim Park.
tive endorsement. When a check is received, it is imme-
Ownership of a check might be transferred several
diately stamped with the restrictive endorsement. This
times, resulting in several endorsements. Each endorser
prevents unauthorized persons from cashing the check if
guarantees payment of the check. If a bank does not
it is lost or stolen.
receive payment from the person who signed the check,
each endorser is individually liable for payment.
Three types of endorsements are commonly used, each
having a specific use in transferring ownership.
Blank Endorsement F O R YO U R I N F O R M AT I O N
An endorsement consisting only of the endorser’s signa-
F Y I
ture is called a blank endorsement. A blank endorsement
indicates that the subsequent owner is whoever has the The Federal Deposit Insurance
check. Corporation (FDIC) protects
depositors from banks that fail.
If a check with a blank endorsement is lost or stolen, Bank deposits are generally covered
the check can be cashed by anyone who has possession of up to $100,000 per depositor.
it. Ownership may be transferred without further endorse-
ment. A blank endorsement should be used only when a
person is at the bank ready to cash or deposit a check.
120 Chapter 5 Cash Control Systems
COMPLETED CHECK STUB AND CHECK
1 NO. 1 $ 275.00
Date August 3, 20 -- NO. 1 24-317 7
2 To Port City Supply Co. 1230
August 3, 20-- 8
3 For Supplies
0 00
Port City Supply Co.
PAY TO THE
ORDER OF $ 275.00 9
4
Two hundred seventy-five and no100
BAL. BRO’T. FOR’D. . . . . . . . . . . .
AMT. DEPOSITED . . . 8 1 -- 5,000 00 DOLLARS 10
SUBTOTAL. . . . . . . . . . . . . . . . . . . 5,000 00
Date
For Classroom Use Only
OTHER:
11
FOR Supplies Kim Park
5 SUBTOTAL: . . . . . . . . . . . . . . . . . . 5,000 00
AMT. THIS CHECK . . . . . . . . . . . . 275 00 123003175 43452119 12
6 BAL. CAR’D. FOR’D. . . . . . . . . . . . 4,725 00
TechKnow Consulting uses printed checks with check A check stub is a business’s record of each check written
stubs attached. Consecutive numbers are preprinted on for a cash payment transaction. [CONCEPT: Objective
TechKnow Consulting’s checks. Consecutive numbers Evidence] To avoid forgetting to prepare a check stub, the
on checks provide an easy way of identifying each check. check stub is prepared before the check is written.
Also, the numbers help keep track of all checks to assure After the check stub is completed, the check is
that none are lost or misplaced. written.
S T E P S PREPARING CHECK STUBS AND CHECKS
1 Write the amount of the check, $275.00, in the space after the dollar sign at the top of the stub.
2 Write the date of the check, August 3, 20--, on the Date line at the top of the stub.
3 Write to whom the check is to be paid, Port City Supply Co., on the To line at the top of the stub.
4 Record the purpose of the check, Supplies, on the For line.
5 Write the amount of the check, $275.00, in the
amount column at the bottom of the stub on
the line with the words “Amt. This Check.”
Subtotal ⴚ Amount of ⴝ New
6 Calculate the new checking account balance, This Check Balance
$4,725.00, and record the new balance in the $5,000.00 ⴚ $275.00 $4,725.00
amount column on the last line of the stub. The
new balance is calculated as shown.
PREPARING CHECKS
7 Write the date, August 3, 20--, in the space provided. The date should be the month, day, and year on which the
check is issued. A check with a future date on it is called a postdated check. Most banks will not accept postdated
checks because money cannot be withdrawn from a depositor’s account until the date on the check.
8 Write to whom the check is to be paid, Port City Supply Co., following the words “Pay to the order of.” If the person to
whom a check is to be paid is a business, use the business’s name rather than the owner’s name. [CONCEPT: Busi-
ness Entity] If the person to whom the check is to be paid is an individual, use that person’s name.
9 Write the amount in figures, $275.00, following the dollar sign. Write the figures close to the printed dollar sign. This
practice prevents anyone from writing another digit in front of the amount to change the amount of the check.
10 Write the amount in words, Two hundred seventy-five and no/100, on the line with the word “Dollars.” This written
amount verifies the amount written in figures after the dollar sign. Begin the words at the extreme left. Draw a line
through the unused space up to the word “Dollars.” This line prevents anyone from writing in additional words to
change the amount. If the amounts in words and in figures are not the same, a bank may pay only the amount in
words. Often, when the amounts do not agree, a bank will refuse to pay the check. (continued on next page)
Checking Accounts Lesson 5-1 121
11 Write the purpose of the check, Supplies, on the line labeled “For.” (On some checks this space is labeled
“Memo.”) Some checks do not have a line for writing the purpose of the check.
12 Sign the check. A check should not be signed until each item on the check and its stub has been verified
for accuracy.
RECORDING A VOIDE D CHECK
JOURNAL PAGE 1
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
20 15 VOID C20 ⻫ 20
21 21
Date 1 2 VOID Source 3 4 Check Mark Dash in 5
Document Credit Column
Banks usually refuse to accept altered checks. If any kind When TechKnow Consulting records a check in
of error is made in preparing a check, a new check should its journal, the check number is placed in the journal’s
be prepared. Because checks are prenumbered, all checks Doc. No. column. If a check number is missing from the
not used should be retained for the records. This practice Doc. No. column, there is a question whether all checks
helps account for all checks and assures that no checks have been journalized. To assure that all check numbers
have been lost or stolen. are listed in the journal, TechKnow Consulting records
A check that contains errors must be marked so that voided checks in the journal.
others will know that it is not to be used. The word VOID
is written in large letters across both the check and its
stub.
S T E P S RECORDING A VOIDED CHECK IN THE JOURNAL
1 Record the date, 15, in the Date column.
2 Write the word VOID in the Account Title column.
3 Write the check number, C20, in the Doc. No. column.
4 Place a check mark in the Post. Ref. column. R E M E M B E R
5 Place a dash in the Cash Credit column. Always complete the check
stub before writing the check.
Otherwise you may forget
to record the amount of the
check on the check stub.
122 Chapter 5 Cash Control Systems
End of Lesson
REVIEW
TERMS REVIEW
code of conduct
checking account
endorsement
AUDIT YOUR UNDERSTANDING
blank endorsement
special endorsement 1. List the three types of endorsements.
restrictive endorsement 2. List the steps for preparing a check stub.
postdated check 3. List the steps for preparing a check.
WORK TOGETHER 51
Endorsing and writing checks
Write the answers to the following problems in the Working Papers. Your instructor will guide you through the
following examples. You are authorized to sign checks for Balsam Lake Accounting.
1. For each of these situations, prepare the appropriate endorsement.
a. Write a blank endorsement.
b. Write a special endorsement to transfer a check to Kelsey Sather.
c. Write a restrictive endorsement to deposit a check in the account of Balsam Lake Accounting.
2. Record the balance brought forward on Check Stub No. 78, $1,805.75.
3. Record a deposit of $489.00 made on October 30 of the current year on Check Stub No. 78.
4. Prepare check stubs and write the following checks. Use October 30 of the current year as the date.
a. Check No. 78 to Corner Garage for repairs, $162.00.
b. Check No. 79 to St. Croix Supply for supplies, $92.00.
ON YOUR OWN 51
Endorsing and writing checks
Write the answers to the following problems in the Working Papers. Work these problems independently. You are
authorized to sign checks for Centuria Hair Care.
1. For each of these situations, prepare the appropriate endorsement.
a. Write a special endorsement to transfer a check to Kenneth Burleson.
b. Write a restrictive endorsement to deposit a check in the account of Centuria Hair Care.
2. Record the balance brought forward on Check Stub No. 345, $2,106.53.
3. Record a deposit of $456.25 made on May 31 of the current year on Check Stub No. 345.
4. Prepare check stubs and write the following checks. Use May 31 of the current year as the date.
a. Check No. 345 to Uniforms Plus for uniform rental, $355.00.
b. Check No. 346 to HairWorld for supplies, $412.00.
Checking Accounts Lesson 5-1 123
L E S S O N
Bank Reconciliation
5-2
B A N K S TAT E M E N T
Portland, OR 97203
STATEMENT OF ACCOUNT FOR ACCOUNT NUMBER
TECHKNOW CONSULTING 43-452-119
7549 Broadway STATEMENT DATE
Portland, OR 97202-2531 August 30, 20--
BALANCE NO. AMOUNT NO. AMOUNT SERVICE STATEMENT
FROM PREVIOUS OF OF OF OF CHARGES BALANCE
STATEMENT CHECKS CHECKS DEPOSITS DEPOSITS
0.00 11 2,813.00 14 8,125.00 8.00 5,304.00
DATE CHECK AMOUNT CHECK AMOUNT DEPOSIT BALANCE
08/01/-- 0.00
08/01/-- 5,000.00 5,000.00
08/04/-- 1 275.00 4,725.00
08/07/-- 2 1,200.00 3,525.00
08/12/-- 495.00 4,020.00
08/13/-- 4 300.00 6 125.00 3,595.00
08/14/-- 3 300.00 3,295.00
08/15/-- 250.00 3,545.00
08/16/-- 195.00 3,740.00
08/17/-- 5 40.00 175.00 3,875.00
08/18/-- 7 78.00 205.00 4,002.00
08/19/-- 8 100.00 180.00 4,082.00
08/20/-- 9 125.00 210.00 4,167.00
08/21/-- 225.00 4,392.00
08/24/-- 205.00 4,597.00
08/25/-- 275.00 4,872.00
08/26/-- 290.00 5,162.00
08/27/-- 205.00 5,367.00
08/28/-- 215.00 5,582.00
08/29/-- 10 70.00 5,512.00
08/30/-- 11 200.00 5,312.00
SC 8.00 5,304.00
PLEASE EXAMINE AT ONCE - IF NO ERRORS ARE REPORTED WITHIN 10 DAYS THE ACCOUNT WILL BE CONSIDERED CORRECT. REFER ANY
DISCREPANCY TO OUR ACCOUNTING DEPARTMENT IMMEDIATELY.
A report of deposits, withdrawals, and bank balances sent errors are discovered, the bank should be notified at once.
to a depositor by a bank is called a bank statement. However, a bank’s records and a depositor’s records may
When a bank receives checks, the amount of each differ for several reasons:
check is deducted from the depositor’s account. The bank
1. A service charge may not have been recorded in the
stamps the checks to indicate that the checks are canceled
depositor’s business records.
and are not to be transferred further. Canceled checks may
2. Outstanding deposits may be recorded in the deposi-
be returned to a depositor with a bank statement or may
tor’s records but not on a bank statement.
be kept on record by the bank. Account service charges are
3. Outstanding checks may be recorded in the deposi-
also listed on a bank statement.
tor’s records but not on a bank statement.
Although banks seldom make mistakes, occasionally a
4. A depositor may have made math or recording errors.
check or deposit might be recorded in a wrong account. If
124 Chapter 5 Cash Control Systems
B A N K S TAT E M E N T R E C O N C I L I AT I O N
2 Check Stub 1 Date
Balance
RECONCILIATION OF BANK STATEMENT August 31, 20--
(Date)
Balance on Check Stub No. 14 $ 4,972 00 Balance on Bank Statement $ 5,304 00 5 Bank Statement
DEDUCT BANK CHARGES: ADD OUTSTANDING DEPOSITS:
Balance
Description Amount Date Amount
3 Service Charge $ 8 00 8/31/-- $ 190 00 6 Outstanding
Service Deposits
Total outstanding deposits 190 00
Charge
Total bank charges 8 00 SUBTOTAL $ 5,494 00 7 Subtotal
Ck. Ck.
No. Amount No. Amount
12 30 00 8 Outstanding
13 500 00
Checks
Total outstanding checks 530 00
Adjusted Check Stub Balance $ 4,964 00 Adjusted Bank Balance $ 4,964 00 9 Adjusted Bank
Balance
Adjusted Check 4 10 Compare Adjusted
Stub Balance Balances
A bank statement is reconciled by verifying that informa- indicates an outstanding check. Outstanding checks are
tion on a bank statement and a checkbook are in agree- those checks issued by a depositor but not yet reported on
ment. Reconciling immediately is an important aspect of a bank statement. Outstanding deposits are those deposits
cash control. made at a bank but not yet shown on a bank statement.
TechKnow Consulting’s canceled checks are kept on TechKnow Consulting receives a bank statement dated
record at the bank. The bank statement is used to deter- August 30 on August 31. TechKnow Consulting uses
mine the canceled checks. For each canceled check listed a reconciliation form printed on the back of the bank
on the bank statement, a check mark is placed on the cor- statement.
responding check stub. A check stub with no check mark
S T E P S RECONCILING A BANK STATEMENT
1 Write the date on which the reconciliation is prepared, August 31, 20--.
2 In the left amount column, list the balance brought forward on Check Stub No. 14, the next unused check
stub, $4,972.00.
3 In the space for bank charges, list any charges. The only such charge for TechKnow Consulting is the bank
service charge, $8.00. The bank service charge is labeled “SC” on the bank statement.
4 Write the adjusted check stub balance, $4,964.00, in the space provided at the bottom of the left amount
column. The balance on the check stub, $4,972.00, minus the bank’s service charge, $8.00, equals the adjusted
check stub balance, $4,964.00.
5 Write the ending balance shown on the bank statement, $5,304.00, in the right amount column. (continued on
next page)
Bank Reconciliation Lesson 5-2 125
6 Write the date, 8/31/--, and the amount, $190.00, of any outstanding deposits in the space provided. Add the
outstanding deposits. Write the total outstanding deposits, $190.00, in the right amount column.
7 Add the ending bank statement balance to the total outstanding deposits. Write the total, $5,494.00, in the
space for the Subtotal.
8 List the outstanding checks, Nos. 12 and 13, and their amounts, $30.00 and $500.00, in the space provided.
Add the amounts of the outstanding checks, and write the total, $530.00, in the right amount column.
9 Calculate the adjusted bank balance, and write the amount, $4,964.00, in the space provided at the bottom
of the right amount column. The subtotal, $5,494.00, minus the total outstanding checks, $530.00, equals the
adjusted bank balance, $4,964.00.
10 Compare adjusted balances. The adjusted balances must be the same. The adjusted check stub balance is the
same as the adjusted bank balance. Because the two amounts are the same, the bank statement is reconciled.
The completed reconciliation form is filed for future reference. If the two adjusted balances are not the same,
the error must be found and corrected before any more work is done.
RECORDING A BANK SERVICE CHARGE ON A CHECK STUB
NO. 14 $
Date 20
To
For
BAL. BRO’T. FOR’D. . . . . . . . . . . . 4,782 00
AMT. DEPOSITED . . . 8 31 -- 190 00 2 Amount
Date
SUBTOTAL. . . . . . . . . . . . . . . . . . . 4,972 00
OTHER:
1 Service Charge 8.00
Label 8 00
SUBTOTAL: . . . . . . . . . . . . . . . . . . 4,964 00
AMT. THIS CHECK . . . . . . . . . . . .
BAL. CAR’D. FOR’D. . . . . . . . . . . .
3 New Subtotal
The bank deducts the service charge from TechKnow TechKnow Consulting’s accounting records as a cash pay-
Consulting’s checking account each month. Although ment. TechKnow Consulting makes a record of a bank
TechKnow Consulting did not write a check for the bank service charge on a check stub.
service charge, this cash payment must be recorded in
S T E P S RECORDING A BANK SERVICE CHARGE ON A CHECK STUB
1 Write Service Charge $8.00 on the check stub under the heading “Other.”
2 Write the amount of the service charge, $8.00, in the amount column.
3 Calculate and record the new subtotal, $4,964.00, on the Subtotal line. A new Balance Carried Forward
is not calculated until after Check No. 14 is written.
126 Chapter 5 Cash Control Systems
JOURNALIZING A BANK SERVICE CHARGE
Source Document
4
JOURNAL PAGE 2
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
14 31 Miscellaneous Expense M3 8 00 8 00 14
1 Date 2 Debit Credit 3
Because the bank service charge is a cash payment for A memorandum is the source document for a bank
which no check is written, TechKnow Consulting pre- service charge transaction. [CONCEPT: Objective Evi-
pares a memorandum as the source document. TechKnow dence] The analysis of this transaction is shown in the T
Consulting’s bank service charges are relatively small and accounts.
occur only once a month. Therefore, a separate ledger The expense account, Miscellaneous Expense, is debited
account for the expense is not used. Instead, TechKnow for $8.00 to show the decrease in owner’s equity. The asset
Consulting records the bank service charge as a miscel- account, Cash, is credited for $8.00 to show the decrease
laneous expense. in assets.
August 31. Received bank statement showing JOURNALIZING
August bank service charge, $8.00. S T E P S A BANK SERVICE
Memorandum No. 3. CHARGE
1 Date. Write the date, 31, in the Date column.
Miscellaneous Expense
2 Debit. Write the title of the account to be deb-
8.00 ited, Miscellaneous Expense, in the Account Title
column. Record the amount debited, $8.00, in
Cash the General Debit column.
8.00
3 Credit. Record the amount credited, $8.00, in
the Cash Credit column.
4 Source document. Write the source document
ST O C
KBY
TE/
GET number, M3, in the Doc. No. column.
TY
I MA
GE
S
SMALL BUSINESS
S P O T L I G H T
Three factors generally
motivate people to start a new
business: the desire to control
their own destinies, the desire
to work more closely with
customers, and the desire to
achieve substantial profits.
Bank Reconciliation Lesson 5-2 127
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. List four reasons why a depositor’s records and a bank’s records may
differ. TERM REVIEW
2. If a check mark is placed on the check stub of each canceled check, what
does a check stub with no check mark indicate? bank statement
WORK TOGETHER 52
Reconciling a bank statement and recording a bank service charge
Forms are given in the Working Papers. Your instructor will guide you through the following examples.
On July 29 of the current year, DeepClean received a bank statement dated July 28. The following information is
obtained from the bank statement and from the records of the business.
Bank statement balance $1,528.00 Outstanding checks:
Bank service charge 2.00 No. 103 $ 70.00
Outstanding deposit, July 28 150.00 No. 105 35.00
Checkbook balance on Check Stub No. 106 1,575.00
1. Prepare a bank statement reconciliation. Use July 29 of the current year as the date.
2. Record the service charge on check stub No. 106.
3. Record the service charge on journal page 14. Use Memorandum No. 44 as the source document.
ON YOUR OWN 52
Reconciling a bank statement and recording a bank service charge
Forms are given in the Working Papers. Work these problems independently.
On April 30 of the current year, Able Service Co. received a bank statement dated April 29. The following information
is obtained from the bank statement and from the records of the business.
Bank statement balance $3,184.00 Outstanding checks:
Bank service charge 15.00 No. 115 $ 70.00
Outstanding deposits: No. 117 313.00
April 29 360.00 No. 118 80.00
April 30 510.00
Checkbook balance on Check Stub No. 119 3,606.00
1. Prepare a bank statement reconciliation. Use April 30 of the current year as the date.
2. Record the service charge on check stub No. 119.
3. Record the service charge on journal page 8. Use Memorandum No. 84 as the source document.
128 Chapter 5 Cash Control Systems
L E S S O N
Dishonored Checks and
5-3 Electronic Banking
RECORDING A DISHONORED CHECK ON A CHECK STUB
NO. 41 $
Date 20
To
For
BAL. BRO’T. FOR’D. . . . . . . . . . . . 6,128 00
AMT. DEPOSITED . . . 2 Amount
Date
SUBTOTAL. . . . . . . . . . . . . . . . . . . 6,128 00
OTHER:
1 Dis. Check 105.00
Label 105 00
SUBTOTAL: . . . . . . . . . . . . . . . . . . 6,023 00
AMT. THIS CHECK . . . . . . . . . . . .
BAL. CAR’D. FOR’D. . . . . . . . . . . .
3 New Subtotal
A check that a bank refuses to pay is called a dishonored cannot be recovered and becomes an expense to the
check. Banks dishonor a check when the account of the business.
person who wrote the check has insufficient funds to pay Most banks charge a fee for handling dishonored checks
the check. Banks may also dishonor a check for other rea- that have been previously accepted for deposit. This fee is
sons: (1) The check appears to be altered. (2) The signature an expense of the business receiving a dishonored check.
of the person who signed the check does not match the TechKnow Consulting’s bank charges a $35.00 fee for han-
one on the signature card at the bank. (3) The amounts dling dishonored checks. TechKnow Consulting attempts
written in figures and in words do not agree. (4) The to collect the $35.00 fee in addition to the amount of the
check is postdated. (5) The person who wrote the check dishonored check from the person or business that wrote
has stopped payment on the check. the check.
Issuing a check on an account with insufficient funds When TechKnow Consulting receives a check, it
is illegal. Altering or forging a check is also illegal. A dis- records the check as a debit to Cash and deposits the
honored check may affect the credit rating of the person check in the bank. When a check is dishonored, the bank
or business that issued the check. deducts the amount of the check plus the fee, $35.00,
Sometimes money for a dishonored check can be col- from TechKnow Consulting’s checking account. There-
lected directly from the person or business that wrote the fore, TechKnow Consulting records a dishonored check
check. Often, however, the value of a dishonored check as a cash payment transaction.
S T E P S RECORDING A DISHONORED CHECK ON A CHECK STUB
1 Write Dishonored check $105.00 on the line under the heading “Other.” The amount is the amount of the
dishonored check, $70.00, plus the service fee of $35.00.
2 Write the total of the dishonored check, $105.00, in the amount column.
3 Calculate and record the new subtotal, $6,023.00, on the Subtotal line. A new Balance Carried Forward is not
calculated until after Check No. 41 is written.
Dishonored Checks and Electronic Banking Lesson 5-3 129
JOURNALIZING A DISHONORED CHECK
Source Document
4
JOURNAL PAGE 8
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
19 29 Accts. Rec.—Campus Internet Cafe M55 1 0 5 00 1 0 5 00 19
1 Date Debit 2 Credit 3
During August, TechKnow Consulting received no checks TechKnow Consulting receives a notice of the dishon-
that were subsequently dishonored. However, in Novem- ored check and the fee from the bank. TechKnow attaches
ber TechKnow Consulting did receive a check from Cam- the notice to a memorandum, which is used as the source
pus Internet Cafe that was eventually dishonored. document. [CONCEPT: Objective Evidence] The analy-
sis of this transaction is shown in the T accounts.
All checks received are deposited in TechKnow Con-
November 29. Received notice from the sulting’s checking account. The entry for each cash
bank of a dishonored check from Campus receipts transaction includes a debit to Cash. If a check
Internet Cafe, $70.00, plus $35.00 fee; is subsequently returned as dishonored, the previous cash
total, $105.00. Memorandum No. 55. debit for the amount of the check must be offset by a cash
credit. The asset account, Cash, is credited for $105.00 to
show the decrease in assets.
Accounts Receivable—Campus Internet Cafe When TechKnow Consulting originally received the
check from Campus Internet Cafe, Accounts Receiv-
105.00 able—Campus Internet Cafe was credited to reduce the
balance of the account. When TechKnow Consulting
Cash
finds out that the check was not accepted by the bank,
105.00 the account, Accounts Receivable—Campus Internet Cafe,
must be increased to show that this amount, plus the bank
charge, is still owed to TechKnow Consulting. The asset
account, Accounts Receivable—Campus Internet Cafe, is
debited for $105.00 to show the increase in assets.
S T E P S JOURNALIZING A DISHONORED CHECK
1 Date. Write the date, 29, in the Date column.
2 Debit. Write the title of the account to be debited, Accounts Receivable—
Campus Internet Cafe, in the Account Title column. Record the amount
debited, $105.00, in the General Debit column.
3 Credit. Write the amount credited, $105.00, in the Cash Credit column. R E M E M B E R
Checking accounts and records
4 Source document. Write the source document number, M55, in the should be maintained in such a
Doc. No. column. way that all checks will be honored
when presented to the bank.
130 Chapter 5 Cash Control Systems
JOURNALIZING AN ELECTRONIC FUNDS TRANSFER
Source Document
4
JOURNAL PAGE 17
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
7 2 Accts. Pay.—Kelson Enterprises M10 3 5 0 00 3 5 0 00 7
8 8
9 9
1 Date Debit 2 Credit 3
A computerized cash payments system that transfers The source document for this transaction is Memo-
funds without the use of checks, currency, or other paper randum No. 10. [CONCEPT: Objective Evidence] The
documents is called electronic funds transfer. Many analysis of this transaction is shown in the T accounts.
businesses use electronic funds transfer (EFT) to pay ven- The liability account, Accounts Payable—Kelson Enter-
dors. To use EFT, a business makes arrangements with its prises, is decreased by a debit, $350.00. The asset account,
bank to process EFT transactions. Arrangements are also Cash, is decreased by a credit, $350.00.
made with vendors to accept EFT payments on account. A cash payment made by EFT is recorded on the check
Then a transfer of funds from the business’s account to stub as “Other.” This procedure keeps the checkbook in
the vendor’s account can be completed via the Internet or balance during the time lag from when the EFT is made
a telephone call. until receipt of the bank statement. The EFT payments
To control cash payments through EFT, the person are verified as part of the regular bank statement reconcili-
responsible for requesting transfers should be given a pass- ation process. EFT payments are identified in the Check
word. The bank should not accept EFT requests from any column of the bank statement by the notation “EFT,”
person unable to provide an established password. rather than by a check number.
Superior Cleaning Service uses electronic funds trans-
fer to make payments on account to vendors. The journal
entry for making payments on account through EFT is JOURNALIZING
the same as when a check is written. The only change is S T E P S AN ELECTRONIC
the source document used for the transaction. Superior FUNDS TRANSFER
Cleaning Service uses a memorandum as the source docu-
ment for an EFT. A note is written on the memorandum 1 Date. Write the date, 2, in the Date column.
to describe the transaction.
2 Debit. Write the title of the account to be
debited, Accounts Payable—Kelson Enterprises,
September 2. Paid cash on account in the Account Title column. Record the amount
to Kelson Enterprises, $350.00, using debited, $350.00, in the General Debit column.
EFT. Memorandum No. 10. 3 Credit. Record the amount credited, $350.00, in
the Cash Credit column.
Accounts Payable—Kelson Enterprises 4 Source document. Write the source document
number, M10, in the Doc. No. column.
350.00
Cash
350.00
Dishonored Checks and Electronic Banking Lesson 5-3 131
JOURNALIZING A DEBIT CARD TR ANSACTION
Source Document
4
JOURNAL PAGE 17
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
12 5 Supplies M12 2 4 00 2 4 00 12
13 13
14 14
1 Date Debit 2 Credit 3
A bank card that automatically deducts the amount of a The source document for this transaction is Memo-
purchase from the checking account of the cardholder is randum No. 12. [CONCEPT: Objective Evidence] The
called a debit card. There is one major difference between analysis of this transaction is shown in the T accounts.
a debit card and a credit card. When a purchase is made The asset account, Supplies, is increased by a debit,
with a debit card, the amount of the purchase is auto- $24.00. The asset account, Cash, is decreased by a credit,
matically deducted from the checking account of the $24.00.
cardholder. A debit card eliminates the need to write a A cash payment made with a debit card is recorded
check for the purchase. However, the effect is the same. on the check stub as “Other.” This procedure keeps the
The checking account balance is reduced by the amount checkbook in balance during the time lag from when the
of the purchase. A debit card also eliminates the need to debit card payment is made until receipt of the bank state-
carry a checkbook. ment. The debit card payments are verified as part of the
When using a debit card, it is important to remem- regular bank statement reconciliation process. Debit card
ber to record all purchases to avoid errors in the checking payments are identified as a Purchase on the bank state-
account. ment, with the date, time, location, and the amount of
Superior Cleaning Service uses a debit card to make the debit card transaction stated.
some purchases. Recording a cash payment made by a
debit card is similar to recording a cash payment made by
electronic funds transfer. JOURNALIZING
Superior Cleaning Service uses a memorandum as the S T E P S A DEBIT CARD
source document for a debit card purchase. A note is writ- PURCHASE
ten on the memorandum to describe the transaction.
1 Date. Write the date, 5, in the Date column.
September 5. Purchased supplies, $24.00, 2 Debit. Write the title of the account to be
debited, Supplies, in the Account Title column.
using debit card. Memorandum No. 12.
Record the amount debited, $24.00, in the
General Debit column.
Supplies 3 Credit. Record the amount credited, $24.00, in
the Cash Credit column.
24.00
4 Source document. Write the source document
Cash number, M12, in the Doc. No. column.
24.00
132 Chapter 5 Cash Control Systems
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
TERMS REVIEW
1. List six reasons why a bank may dishonor a check.
dishonored check 2. What account is credited when electronic funds transfer is used to pay
cash on account?
electronic funds transfer
3. What account is credited when a debit card is used to purchase
debit card supplies?
WORK TOGETHER 53
Recording dishonored checks, electronic funds transfers, and debit card purchases
Write the answers to this problem in the Working Papers. Your instructor will guide you through the following
example.
1. Enter the following transactions on page 6 of a journal.
Transactions:
March 15. Received notice from the bank of a dishonored check from Christopher Ikola, $63.00, plus $10.00 fee;
total, $73.00. Memorandum No. 121.
16. Paid cash on account to Spinoza Enterprises, $135.00, using EFT. Memorandum No. 122.
17. Purchased supplies, $31.00, using a debit card. Memorandum No. 123.
ON YOUR OWN 53
Recording dishonored checks, electronic funds transfers, and debit card purchases
Write the answers to this problem in the Working Papers. Work this problem independently.
1. Enter the following transactions on page 12 of a journal.
Transactions:
June 12. Received notice from the bank of a dishonored check from Thomas Hofski, $65.00, plus $30.00 fee; total,
$95.00. Memorandum No. 54.
13. Paid cash on account to Alfonso Company, $243.00, using EFT. Memorandum No. 55.
14. Purchased supplies, $65.00, using a debit card. Memorandum No. 56.
Dishonored Checks and Electronic Banking Lesson 5-3 133
L E S S O N
Petty Cash
5-4
E S TA B L I S H I N G A P E T T Y C A S H F U N D
Source Document
4
JOURNAL PAGE 1
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
17 19 Petty Cash C8 1 0 0 00 1 0 0 00 17
18 18
1 Date Debit 2 Credit 3
An amount of cash kept on hand and used for making
small payments is called petty cash. A business usually
Petty Cash
has some small payments for which writing a check is not
time or cost effective. Therefore, a business may maintain 100.00
a separate cash fund for making small cash payments. The
Cash
actual dollar amount considered to be a small payment
differs from one business to another. Ms. Park has set 100.00
$20.00 as the maximum amount to be paid at any one
time from the petty cash fund.
The petty cash account is an asset with a normal debit
balance. The balance of the petty cash account increases The source document for this transaction is Check
on the debit side and decreases on the credit side. No. 8. [CONCEPT: Objective Evidence] The analysis is
shown in the T accounts. Petty Cash is debited for $100.00
Petty Cash to show the increase in this asset account balance. Cash is
credited for $100.00 to show the decrease in this asset
Debit Credit account balance.
NORMAL BALANCE
Ms. Park cashed the check and placed the $100.00 in a
Decrease
locked petty cash box at her place of business. Only she is
Increase
authorized to make payments from the petty cash fund.
ESTABLISHING
S T E P S A PETTY CASH
On August 19, Ms. Park decided that TechKnow Con- FUND
sulting needed a petty cash fund of $100.00. This amount
should provide for small cash payments during a month. 1 Date. Write the date, 19, in the Date column.
2 Debit. Write the title of the account to be debited, Petty
Cash, in the Account Title column. Record the amount
August 19. Paid cash to establish a petty debited, $100.00, in the General Debit column.
cash fund, $100.00. Check No. 8.
3 Credit. Record the amount credited, $100.00, in the
Cash Credit column.
4 Source document. Write the source document number,
C8, in the Doc. No. column.
134 Chapter 5 Cash Control Systems
M A K I N G P AY M E N T S F R O M A P E T T Y C A S H
FUND WITH A PETTY CASH SLIP
PETTY CASH SLIP No. 1
Date: August 19, 20--
Paid to: Tribune
For: Newspaper Ad $ 10.00
Account: Advertising Expense
Approved: Kim Park
Each time a small payment is made from the petty cash (5) amount paid; (6) account in which amount is to be
fund, Ms. Park prepares a form showing the purpose and recorded; and (7) signature of person approving the petty
amount of the payment. A form showing proof of a petty cash payment.
cash payment is called a petty cash slip. The petty cash slips are kept in the petty cash box until
A petty cash slip shows the following information: the fund is replenished. No entries are made in the journal
(1) petty cash slip number; (2) date of petty cash pay- for the individual petty cash payments.
ment; (3) to whom paid; (4) reason for the payment;
FINANCIAL LITERACY
Ma n a g i ng a C h e c k i ng Ac c ou nt
The privilege of having a checking account brings with it mation, electronic transfers between accounts, and free
the responsibility of managing that account. The cost of blank checks. Costs include monthly service fees, per-
inefficient management can be high—especially if you check charges, per-item charge on deposits, and overdraft
write a “bad” check. A “bad” check, or insufficient-funds charges.
check, means that you don’t have enough money in your
account to cover the amount of the check written. If this
Activities
happens, you may have to pay two fines, one to your bank
and one to the company to whom you gave the bad check. 1. Investigate the costs and fea-
These two fines could easily total over $100. tures of checking accounts
Managing a checking account is not difficult, but it from three different
involves recording all written checks, electronic funds banks. Present your
transfers, and automatic payments; making regular findings to five people
deposits; recording all deposits, including electronic funds and ask each person
received; and reconciling your account each month. which account would
Properly managing your checking account also means be best for his or her
physically safeguarding your blank checks, your check needs. Summarize
registers, and monies waiting to be deposited. In addition, your findings in a writ-
PHOTO: PHOTODISC/GETTY IMAGES
it requires safeguarding any account numbers and pass- ten report.
words used to log in to Internet banking sites. 2. Visit a local bank and
Finally, efficiently managing a checking account means inquire about opening
monitoring the costs and benefits of your account. Fea- a checking account. Write
tures of some accounts include interest on the balance, a report outlining the steps
free electronic bill pay, Internet access to account infor- involved.
Petty Cash Lesson 5-4 135
REPLENISHING PETTY CASH
Source Document 4
JOURNAL PAGE 2
1 2 3 4 5
DOC. POST. GENERAL SALES CASH
DATE ACCOUNT TITLE CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
10 31 Miscellaneous Expense C12 2 0 00 3 0 00 10
11 Advertising Expense 1 0 00 11
1 Date Debit 2 Credit 3
As petty cash is paid out, the amount in the petty cash box
decreases. Eventually, the petty cash fund must be replen- August 31. Paid cash to replenish the petty
ished and the petty cash payments recorded. TechKnow cash fund, $30.00: miscellaneous expense,
Consulting replenishes its petty cash fund whenever the $20.00; advertising, $10.00. Check No. 12.
amount on hand is reduced to $25.00. Also, the petty
cash fund is always replenished at the end of each month
so that all of the expenses are recorded in the month they Unless the petty cash fund is permanently increased or
are incurred. decreased, the balance of the account is always the original
Before petty cash is replenished, a proof of the fund amount of the fund. The check issued to replenish petty
must be completed. cash is a credit to Cash and does not affect Petty Cash.
When the check is cashed, the money is placed in the
petty cash box. The amount in the petty cash box changes,
Petty cash remaining in the petty cash fund $ 70.00 as shown below.
Plus total of petty cash slips 30.00
Equals petty cash fund $100.00
Amount in petty cash box before fund
is replenished $ 70.00
The last line of the proof must show the same total as Amount from check issued to replenish
the original balance of the petty cash fund, $100.00. If petty cash 30.00
petty cash does not prove, the errors must be found and Amount in petty cash box after fund
corrected before any more work is done. is replenished $100.00
The proof shows that a total of $30.00 has been paid out
of petty cash. An inspection of the petty cash slips shows
that $20.00 has been paid for miscellaneous expenses The total amount in the petty cash box, $100.00, is
and $10.00 has been paid for advertising. Therefore, an again the same as the balance of the petty cash account.
additional $30.00 must be placed in the fund. TechKnow
Consulting will write a check to replenish the fund.
S T E P S JOURNALIZING THE ENTRY TO REPLENISH PETTY CASH
1 Date. Write the date, 31, in the Date column.
2 Debit. Write the title of the first account to be debited, Miscellaneous Expense, in the Account Title column. Write
the amount to be debited to Miscellaneous Expense, $20.00, in the General Debit column on the same line as
the account title. Write the title of the second account to be debited, Advertising Expense, on the next line in the
Account Title column. Record the amount to be debited to Advertising Expense, $10.00, in the General Debit
column on the same line as the account title.
3 Credit. Record the amount to be credited, $30.00, in the Cash Credit column on the first line of this entry.
4 Source document. Write the source document number, C12, in the Doc. No. column on the first line of the entry.
136 Chapter 5 Cash Control Systems
CAREERS IN ACCOUNTING
Ti m D u Fr e n e ,
S ol e P r o pr i e t or
The average person will make at began working his way into management. Once again,
least three career changes accounting was an important aspect of his work respon-
over the course of his or sibilities. As a project superintendent, he oversaw the
her working life. Tim construction of various industrial projects throughout
DuFrene fits that aver- the United States. Important accounting aspects of that
age precisely. He has job included bidding for projects, assessing estimated
found that account- costs, and setting project budgets.
ing is a transferable After 25 years in his second career of industrial con-
skill that has served struction, Tim became tired of the extensive travel associ-
him well throughout ated with his job and decided to pursue a lifelong dream
his multiple careers. of owning his own business—career #3. In 2001, he
When Tim took launched Han-D-Man, a home maintenance and repair
accounting courses in business that he runs from his home office. As a sole pro-
high school and college, prietor, he found his accounting skills to be especially
he saw himself preparing important in setting up his business and tracking bill-
for a career in banking. His ing and income, managing expenses, and satisfying tax
first full-time job was, in fact, requirements. Tim says, “Owning my own business has
in a bank. Working first as a teller, allowed me to interact with many people and improve
COURTESY OF TIM DUFRENE
he used his accounting skills to balance their quality of life through providing them with more
cash and reconcile accounts. Advancing to the pleasant, functional surroundings. I enjoy having more
position of loan officer, Tim relied on his accounting freedom now to pursue my hobbies, travel, and spend
knowledge to review business plans of loan applicants. more time with my wife and children. My knowledge
After a few years in banking, Tim was drawn into of accounting enabled me to change careers and be
his second professional field—industrial construction. successful.”
After several years of learning and applying a craft, Tim
Salary Range: Self-employed individuals in a service Qualifications: Self-employed individuals need three
industry set their desired hourly rate based on their types of skills: (1) communication skills to interact with
expertise and geographic area. The time required to bid clients, (2) organizational skills to schedule jobs and
jobs, collect fees, and travel between jobs means that a manage the business, and (3) a specific skill to sell in the
service provider does not bill all of his or her work time. marketplace.
Thus, a service provider may bill about 1,600 hours during
Occupational Outlook: In a career such as Tim’s, the sus-
a year. Hourly billing rates between $25.00 and $50.00 per
tained growth of the housing market will cause individual
hour and a 1,600-hour work year yield an annual salary of
homeowners to need more home repairs.
$40,000 to $80,000, less expenses.
Petty Cash Lesson 5-4 137
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
TERMS REVIEW
1. Why do businesses use petty cash funds?
petty cash
2. Why is Cash and not Petty Cash credited when a petty cash fund is
replenished? petty cash slip
WORK TOGETHER 54
Establishing and replenishing a petty cash fund
Write the answers to this problem in the Working Papers. Your instructor will guide you through the following
example.
1. Journalize the following transactions completed during July of the current year. Use page 13 of a journal. The
abbreviation for check is C.
Transactions:
July 3. Paid cash to establish a petty cash fund, $250.00. C57.
31. Paid cash to replenish the petty cash fund, $78.00: supplies, $25.00; miscellaneous expense, $8.00;
repairs, $45.00. C97.
ON YOUR OWN 54
Establishing and replenishing a petty cash fund
Write the answers to this problem in the Working Papers. Work this problem independently.
1. Journalize the following transactions completed during August of the current year. Use page 15 of a journal. The
abbreviation for check is C.
Transactions:
Aug. 1. Paid cash to establish a petty cash fund, $200.00. C114.
31. Paid cash to replenish the petty cash fund, $145.00: supplies, $72.00; advertising, $40.00; miscellaneous
expense, $33.00. C157.
138 Chapter 5 Cash Control Systems
SUMMARY
After completing this chapter, you can: 4. Reconcile a bank statement.
1. Define accounting terms related to using a 5. Journalize dishonored checks and electronic
checking account and a petty cash fund. banking transactions.
2. Identify accounting concepts and practices 6. Establish and replenish a petty cash fund.
related to using a checking account.
3. Prepare business papers related to using a
checking account.
EXPLORE ACCOUNTING
C a s h C o nt r ol s
Cash transactions occur more frequently than One of the best ways to safeguard assets is to
other types of transactions. Because cash separate duties so that one employee does
is easily transferred from one person to not have total control of an entire set of pro-
another, a business must try to safeguard cesses. For example, one employee could
its cash to protect it and other assets from receive and record the receipt of cash on
errors. account; a second employee could make
An unintentional error occurs when and record deposits; and a third employee
someone mistakenly records an incorrect could reconcile the bank statement. By sepa-
amount or forgets to record a transaction. An rating the duties, it is less likely that errors will
intentional error occurs when someone intention- be made.
ally records an incorrect amount or does not record a A company that does not have enough employees to
transaction in order to cover up fraud or theft. Good cash institute the separation of duties concept may hire a cer-
control procedures should guard against both types of tified public accountant (CPA) to perform some of these
errors. duties on a regular basis.
One common method of controlling cash is to insist
that all cash payments over a certain amount be paid by Research Assignment: Talk to a businessperson to
check. In addition, checks should be prenumbered so that determine what kinds of controls are in place in his or her
it is easy to account for each check. The document number business to safeguard cash. Schools, hospitals, charitable
PHOTOS: PHOTOGRAPHER’S CHOICE/GETTY IMAGES
column of a journal can be used to ensure that all checks organizations, and government offices as well as retail,
issued are recorded in the journal. Other cash controls are wholesale, and service businesses should have established
to have one person responsible for authorizing all checks, controls that are being followed. Summarize and present
and requiring a source document in support of each cash your findings to your class.
payment.
Cash Control Systems Chapter 5 139
51 APPLICATION PROBLEM
Endorsing and writing checks
You are authorized to sign checks for Accounting Tutors. Forms are given in the Working Papers.
Instructions:
1. For each of the following situations, prepare the appropriate endorsement.
a. Write a blank endorsement.
b. Write a special endorsement to transfer a check to Vu Kim.
c. Write a restrictive endorsement to deposit a check in the account of Accounting Tutors.
2. Record the balance brought forward on Check Stub No. 390, $6,711.62.
3. Record a deposit of $1,244.25 made on September 30 of the current year on Check Stub No. 390.
4. Prepare check stubs and write the following checks. Use September 30 of the current year as the date.
a. Check No. 390 to Williamson Street Supplies for supplies, $945.00.
b. Check No. 391 to Spring Park Tribune for advertising, $112.00.
c. Check No. 392 to Bryce Wilton for rent, $250.00.
52 APPLICATION PROBLEM
Reconciling a bank statement and recording a bank service charge
Forms are given in the Working Papers. On May 31 of the current year, Parties Plus received a bank statement
dated May 30. The following information is obtained from the bank statement and from the records of the
business.
Bank statement balance $1,927.00
Bank service charge 20.00
Outstanding deposit, May 30 756.25
Outstanding checks:
No. 310 421.76
No. 311 150.50
Checkbook balance on Check Stub No. 312 2,130.99
Instructions:
1. Prepare a bank statement reconciliation. Use May 31 of the current year as the date.
2. Record the service charge on check stub No. 312.
3. Record the service charge on journal page 10. Use Memorandum No. 58 as the source document.
( Go Beyond the Book
)
For more information go to
www.C21accounting.com
140 Chapter 5 Cash Control Systems
53 APPLICATION PROBLEM
Recording dishonored checks, electronic funds transfers, and debit card purchases
Enter the following transactions on page 8 of the journal given in the Working Papers.
Transactions:
Jan. 25. Received notice from the bank of a dishonored check from Ralston Eubanks, $125.00, plus $30.00
fee; total, $155.00. Memorandum No. 333.
26. Paid cash on account to Reed Rosman, $289.00, using EFT. Memorandum No. 334.
27. Purchased supplies, $54.00, using a debit card. Memorandum No. 335.
54 APPLICATION PROBLEM
Establishing and replenishing a petty cash fund
Journalize the following transactions completed during November of the current year. Use page 22 of the
journal given in the Working Papers. The abbreviation for check is C.
Transactions:
Nov. 5. Paid cash to establish a petty cash fund, $300.00. C527.
30. Paid cash to replenish the petty cash fund, $165.00: supplies, $57.00; miscellaneous expense,
$58.00; repairs, $40.00; postage (Postage Expense), $10.00. C555.
55 MASTERY PROBLEM
Reconciling a bank statement; journalizing a bank service charge, a dishonored check,
and petty cash transactions
James Astrup owns a business called LawnMow. Selected general ledger accounts are given below.
110 Cash 140 Prepaid Insurance 535 Repair Expense
115 Petty Cash 320 James Astrup, Drawing 540 Supplies Expense
120 Accts. Rec.—Bruce Kassola 520 Miscellaneous Expense 550 Utilities Expense
130 Supplies 530 Rent Expense
Instructions:
1. Journalize the following transactions completed during August of the current year. Use page 20 of the
journal given in the Working Papers. Source documents are abbreviated as follows: check, C; memorandum,
M; calculator tape, T.
Transactions:
Aug. 21. Paid cash to establish a petty cash fund, $300.00. C110.
24. Paid cash for repairs, $165.00. C111.
26. Paid cash for supplies, $60.00. C112.
27. Received notice from the bank of a dishonored check from Bruce Kassola, $140.00, plus $35.00
fee; total, $175.00. M33.
28. Paid cash for miscellaneous expense, $31.00. C113.
31. Paid cash to owner for personal use, $400.00. C114.
31. Paid cash to replenish the petty cash fund, $255.00: supplies, $125.00; miscellaneous expense,
$130.00. C115.
31. Received cash from sales, $350.00. T31.
Cash Control Systems Chapter 5 141
2. On August 31 of the current year, LawnMow received a bank statement dated August 30. Prepare a bank
statement reconciliation. Use August 31 of the current year as the date. The following information is
obtained from the August 30 bank statement and from the records of the business.
Bank statement balance $2,721.00
Bank service charge 15.00
Outstanding deposit, August 31 350.00
Outstanding checks, Nos. 114 and 115
Checkbook balance on Check Stub No. 116 2,431.00
3. Continue using the journal and journalize the following transaction:
Transaction:
Aug. 31. Received bank statement showing August bank service charge, $15.00. M34.
56 CHALLENGE PROBLEM
Reconciling a bank statement and recording a bank service charge
Use the bank statement, canceled checks, and check stubs for GolfPro given in the Working Papers.
Instructions:
1. Compare the canceled checks with the check stubs. For each canceled check, place a check mark next to
the appropriate check stub number. For each deposit shown on the bank statement, place a check mark
next to the deposit amount on the appropriate check stub.
2. Prepare a bank statement reconciliation. Use August 29 of the current year as the date.
3. Record the following transactions on page 8 of a journal. The abbreviation for memorandum is M.
Transactions:
Sept. 1. Received bank statement showing August bank service charge, $5.00. M25.
1. Received notice from the bank of a dishonored check from Sheldon Martindale, $170.00, plus
$5.00 fee; total, $175.00. M26.
4. Record the bank service charge and dishonored check on Check Stub No. 165.
142 Chapter 5 Cash Control Systems
A P P L I E D CO M M U N I C AT I O N
All businesses are affected to some degree by issues and events that occur in the areas in which the businesses are
located. For example, a city may gain an industry that will employ many people for a long time. Or, a town might
build new roads or schools.
Instructions: Collect three to five newspaper or magazine articles about issues in your area that you think will affect
local businesses. For each article, prepare a written list of consequences that a business might encounter.
CASES FOR CRITICAL THINKING
Case 1
Iris Velez and Suzanne Merker have personal checking accounts for which they receive a bank statement every
month. Ms. Merker does not prepare a reconciliation; instead she records the balance on the bank statement as her
new checkbook balance. Ms. Velez prepares a bank statement reconciliation for each bank statement received. Is
Ms. Velez or Ms. Merker following the better procedure? Explain.
Case 2
Dorset Company decides to establish a petty cash fund. The owner, Edna Dorset, wants to establish a $100.00 petty
cash fund and limit payments to $20.00 or less. The manager, Roy Evans, suggests a petty cash fund of $3,000.00
limited to payments of $50.00 or less. Mr. Evans claims this limit will help him avoid writing so many checks. Do you
agree with Ms. Dorset or Mr. Evans? Explain.
SCANS WORKPLACE COMPETENCY
Personal Qualities: Responsibility
Concept: Employers seek individuals who exert a high level of effort and persevere toward goal attainment.
Application: Make a list of your responsibilities in this accounting course; then assess whether you meet these
responsibilities with a low, medium, or high level of effort. Make a plan for how you can improve your performance
on those responsibilities that you are not already fulfilling at a high level of effort.
Cash Control Systems Chapter 5 143
GRAPHING WORKSHOP
A bar chart of the assets, liabilities, and owner’s equity Assets Equity Liabilities
of Moua Company is shown here. Analyze the chart to 25000
answer the following questions.
20000
1. What was the amount of total assets in May?
2. In what month were liabilities the lowest? 15000
10000
5000
0
Jan Feb Mar Apr May June
A N A LY Z I N G B E S T B U Y ’S F I N A N C I A L S TAT E M E N T S
On a financial statement, the term “Cash and cash equivalents” includes more than just cash on hand. Checking
accounts, savings accounts, and even some very short-term investments are also included in this total. Best Buy’s
financial statement on Appendix B page B-5 shows the total “Cash and cash equivalents” for Best Buy for each year.
Published financial statements include notes that explain some of the titles and amounts used in the statements.
Note 1 for Best Buy’s financial statements begins on page B-9. Read the second page of Note 1.
Instructions: List the amount of Best Buy’s cash and cash equivalents for 2006 and 2007. Look at Note 1 and list
what Best Buy considers to be “cash and cash equivalents.”
P H O T O D I S C/ GE T T Y I M A G
E S
144 Chapter 5 Cash Control Systems
Accounting
SOFTWARE
B A N K S TAT E M E N T R E C O N C I L I AT I O N ;
JOURNALIZING TRANSACTIONS
Preparing a bank reconciliation is an easy task with accounting software. Peachtree presents a list of all the checks
and deposits so that a simple click identifies whether each transaction has cleared. Peachtree performs all calcula-
tions and clearly indicates any difference between the book and bank balances. Knowing that bank service charges
must be journalized, Peachtree automatically generates the journal entry when the bank reconciliation is processed.
You are only required to enter is the amount of the bank charge and the number of the general ledger account to
be debited.
PEACHTREE MASTERY PROBLEM 55
1. Open (Restore) file 05-5MP.ptb.
2. Journalize and post the August cash transactions, including the journal entry for a dishonored check. Remember
to save after each transaction.
3. From the menu bar, select Tasks, then Account Reconciliation to reconcile the bank statement; print a report.
PEACHTREE CHALLENGE PROBLEM 56
1. Open (Restore) file 05-6CP.ptb.
2. To complete account reconciliation, use the bank statement, canceled checks, check stubs, and transactions for
Golf Pro. Journalize cash transactions and a dishonored check transaction.
3. Reconcile the bank statement and print a report.
B A N K S TAT E M E N T R E C O N C I L I AT I O N ;
JOURNALIZING TRANSACTIONS
QuickBooks can be used to prepare the monthly bank reconciliation. The bank statement can be reconciled to the
checkbook balance in the following steps:
1. Choose Reconcile from the Banking menu. When the Begin Reconciliation dialog box appears, make sure Cash
shows in the Account field, and enter the correct ending date.
2. Key in the required data in the Begin Reconciliation dialog box. Click Continue.
3. The Reconcile – Cash dialog box will display. Click in the blank field next to the Date field for all checks and
deposits that have already cleared through the bank and appear on the bank statement. Verify that the amount
next to Difference is 0.00. Make any necessary corrections. Click Reconcile Now.
4. The Select Reconciliation Report dialog box will appear.
Choose which reports you want displayed. Click Display. The reports will display.
QUICKBOOKS MASTERY PROBLEM 55
1. Open the LawnMow file.
2. Journalize the transactions completed during August.
3. Choose Reconcile from the Banking menu to reconcile the bank statement.
4. From the Reconcile – Cash dialog box, click the Reconcile Now button to view the Reconciliation Summary
report. Print this report.
QUICKBOOKS CHALLENGE PROBLEM 56
1. Open the GolfPro file.
2. Prepare a bank reconciliation for GolfPro.
3. Print the Reconciliation Summary and Reconciliation Detail reports.
4. Journalize the transaction for the dishonored check.
5. Print a Journal report for GolfPro for August 28 through September 30.
Cash Control Systems Chapter 5 145
B A N K S TAT E M E N T R E C O N C I L I AT I O N
A bank reconciliation is a relatively easy procedure, yet it is a powerful tool to identify errors in the accounting
records. A bank reconciliation provides proof that cash disbursements and receipts have been recorded the same
way in the accounting records of both the business and the bank.
The spreadsheet template for Chapter 5 presents a replica of the bank reconciliation shown in this chapter. You
will enter the description and amount of any bank charges identified on the bank statement. These are the items that
will require a journal entry to record in the accounting records. On the opposite side of the template, you will enter
the date and amount of all outstanding deposits, and the check number and amount of all outstanding checks.
By creating formulas to calculate the adjusted balances, you will be able to use the template for other reconcilia-
tions. Because the number of outstanding deposits and checks may differ from month to month, it may be neces-
sary to add additional rows to the template. Thus, you should use the SUM function to calculate the total of bank
charges, outstanding deposits, and outstanding checks.
EXCEL APPLICATION PROBLEM 52
1. Open the F05-2 Excel data file.
2. Follow the step-by-step instructions in the Instructions work sheet to reconcile a bank statement using an Excel
spreadsheet.
B A N K S TAT E M E N T R E C O N C I L I AT I O N ;
JOURNALIZING TRANSACTIONS
The automated accounting system may be used to prepare the monthly bank reconciliation. Information main-
tained by the software, such as the checkbook balance and checks that were written during the period, will be auto-
matically provided to make the reconciliation process simpler and more accurate.
While the Automated Accounting Help system contains detailed instructions, the bank statement can be recon-
ciled to the checkbook balance in the following steps:
1. Choose the Other Activities menu item from the Data menu, or click on the Other toolbar button.
2. When the Reconciliation window appears, click on the Clear button to erase any previous data.
3. Enter the bank credits, bank charges, bank statement balance, and outstanding deposit amounts.
4. Checks written during the period are displayed in the Checks from the Journals list box. Select the outstanding
checks by pointing and double-clicking. Each selected check will appear in the Outstanding Checks list, and the
Adjusted Bank Balance will automatically be updated.
5. Click the Report command button in the Reconciliation window to see the completed reconciliation.
6. Click the Close command button to dismiss the report window.
7. When the Bank Reconciliation reappears, click the OK command button to record your data and end the Bank
Reconciliation process.
AUTOMATED ACCOUNTING APPLICATION PROBLEM 52
Open file F05-2.AA8. Display the problem instructions and complete the problem.
AUTOMATED ACCOUNTING MASTERY PROBLEM 55
Open file F05-5.AA8. Display the problem instructions and complete the problem.
146 Chapter 5 Cash Control Systems
REINFORCEMENT
Activity 1—Part A
An Accounting Cycle for a Proprietorship:
Journalizing and Posting Transactions
Reinforcement activities strengthen the learning of accounting concepts and procedures. Reinforcement Activity 1 is a single
problem divided into two parts. Part A includes learning from Chapters 1 through 5. Part B includes learning from Chapters 6
through 8. An accounting cycle is completed in Parts A and B for a single business—Extreme Adventures.
EXTREME ADVENTURES
In May of the current year, Brian Dawson starts a service business called Extreme Adventures. The business provides ad-
venture trips throughout the world, such as trekking in the Himalayas and helo skiing in Colorado. The business rents the
facilities in which it operates, pays the utilities, and is responsible for maintenance. Extreme Adventures charges clients for
each trip. Most of Extreme Adventures’ sales are for cash. However, two private schools use Extreme Adventures for some
physical education classes. These schools have an account with Extreme Adventures.
CHART OF ACCOUNTS
Extreme Adventures uses the following chart of accounts.
CHART OF ACCOUNTS
B A L A N C E S H E E T ACCO U N T S I N CO M E S TAT E M E N T ACCO U N T S
100 ASSETS 400 REVENUE
110 Cash 410 Sales
120 Petty Cash 500 EXPENSES
130 Accts. Rec.—Matterhorn University 510 Advertising Expense
140 Accts. Rec.—Midwest College 520 Insurance Expense
150 Supplies 530 Miscellaneous Expense
160 Prepaid Insurance 540 Rent Expense
200 LIABILITIES 550 Repair Expense
210 Accts. Pay.—Dunn Supplies 560 Supplies Expense
220 Accts. Pay.—Greenway Supplies 570 Utilities Expense
300 OWNER’S EQUITY
310 Brian Dawson, Capital
320 Brian Dawson, Drawing
330 Income Summary
An Accounting Cycle for a Proprietorship: Journalizing and Posting Transactions Reinforcement Activity 1—Part A 147
RECORDING TR ANSACTIONS
Instructions:
1. Journalize the following transactions completed during May of the current year. Use page 1 of the journal given in the
Working Papers. Source documents are abbreviated as follows: check stub, C; memorandum, M; receipt, R; sales invoice,
S; calculator tape, T.
May 1. Received cash from owner as an investment, $15,000.00. R1.
1. Paid cash for rent, $1,800.00. C1.
2. Paid cash for electric bill, $105.00. C2.
4. Paid cash for supplies, $450.00. C3.
4. Paid cash for insurance, $1,200.00. C4.
7. Bought supplies on account from Dunn Supplies, $900.00. M1.
11. Paid cash to establish a petty cash fund, $250.00. C5.
12. Received cash from sales, $475.00. T12.
13. Paid cash for repairs, $250.00. C6.
13. Paid cash for miscellaneous expense, $40.00. C7.
13. Received cash from sales, $235.00. T13.
13. Sold services on account to Midwest College, $225.00. S1.
14. Paid cash for advertising, $300.00. C8.
15. Paid cash to owner for personal use, $200.00. C9.
15. Paid cash on account to Dunn Supplies, $500.00. C10.
15. Received cash from sales, $305.00. T15.
15. Sold services on account to Matterhorn University, $425.00. S2.
18. Paid cash for miscellaneous expense, $95.00. C11.
18. Received cash on account from Midwest College, $125.00. R2.
19. Received cash from sales, $480.00. T19.
20. Paid cash for repairs, $160.00. C12.
20. Bought supplies on account from Greenway Supplies, $120.00. M2.
2. Prove and rule page 1 of the journal. Carry the column totals forward to page 2 of the journal.
3. Post the separate amounts on each line of page 1 of the journal that need to be posted individually.
4. Use page 2 of the journal. Journalize the following transactions.
May 21. Paid cash for water bill, $265.00. C13.
21. Received cash from sales, $620.00. T21.
25. Paid cash for supplies, $25.00. C14.
25. Received cash from sales, $605.00. T25.
26. Paid cash for miscellaneous expense, $37.00. C15.
26. Received cash on account from Matterhorn University, $250.00. R3.
27. Received cash from sales, $715.00. T27.
28. Paid cash for telephone bill, $245.00. C16.
28. Received cash from sales, $650.00. T28.
5. Extreme Adventures received a bank statement dated May 27. The following information is obtained from the bank
statement and from the records of the business. Prepare a bank statement reconciliation. Use May 29 as the date.
Bank statement balance $13,180.00
Bank service charge 15.00
Outstanding deposit, May 28 650.00
Outstanding checks:
No. 14 25.00
No. 15 37.00
No. 16 245.00
Checkbook balance on Check Stub No. 17 $13,538.00
148 Reinforcement Activity 1—Part A An Accounting Cycle for a Proprietorship: Journalizing and Posting Transactions
6. Continue using page 2 of the journal, and journalize the following transactions.
May 29. Received bank statement showing May bank service charge, $15.00. M3.
29. Paid cash for supplies, $30.00. C17.
29. Received cash from sales, $695.00. T29.
31. Paid cash to replenish the petty cash fund, $165.00: miscellaneous expense, $120.00; repairs, $45.00. C18.
31. Paid cash to owner for personal use, $1,000.00. C19.
31. Received cash from sales, $660.00. T31.
7. Prove page 2 of the journal.
8. Prove cash. The beginning cash balance on May 1 is zero. The balance on the next unused check stub is $13,683.00.
9. Rule page 2 of the journal.
10. Post the separate amounts on each line of page 2 of the journal that need to be posted individually.
11. Post the column totals on page 2 of the journal.
The general ledger prepared in Reinforcement Activity 1—Part A is needed to complete Reinforcement
Activity 1—Part B.
P U RE
S TO
C K/
G ET
TY
IMA
GE
S
An Accounting Cycle for a Proprietorship: Journalizing and Posting Transactions Reinforcement Activity 1—Part A 149
DIGITAL VISION/GETTY IMAGES
C H A P T E R 6 Work Sheet for a
Service Business
O B J E C T I V E S
After studying Chapter 6, you will be able to: 4. Plan adjustments for supplies and prepaid
insurance.
1. Define accounting terms related to a work
sheet for a service business organized as a 5. Complete a work sheet for a service business
proprietorship. organized as a proprietorship.
2. Identify accounting concepts and practices 6. Identify selected procedures for finding and
related to a work sheet for a service business correcting errors in accounting records.
organized as a proprietorship.
3. Prepare a heading and a trial balance on a
work sheet.
K E Y T E R M S
• fiscal period • adjustments • net income
• work sheet • balance sheet • net loss
• trial balance • income statement
( Point Your Browser
www.C21accounting.com
)
150
ACCOUNTING IN THE REAL WORLD
The AICPA
Professionalism and the AICPA
The American Institute of Certified Public Accountants (AICPA) is America’s
leading professional CPA organization, with more than 340,000 members
who work for public accounting firms, multinational corporations, small
businesses, not-for-profit organizations, governmental agencies, and edu-
cational institutions.
Certified Public Accountants—CPAs—who work for public account-
DIGITAL VISION/GETTY IMAGES
ing firms provide many services to their clients, such as auditing financial
statements, forensic accounting (sometimes called fraud auditing), consult-
ing services, information technology services, evaluating operating perfor- INTERNET
mance, international accounting, and tax and financial planning services. ACTIVITY
CPAs who are employed
by corporations and busi- AICPA Career Resources
nesses often work in finance Go to the homepage for the
and accounting departments American Institute of Certified
as financial analysts and have Public Accountants (AICPA)
the opportunity to rise up the (www.aicpa.org). Search the
ranks to positions such as controller and Chief Financial Officer (CFO), and site for information about
even Chief Executive Officer (CEO). Others work in the areas of international career resources for students.
finance, treasury, or internal auditing.
To find out more about CPA career opportunities, salary information, and Instructions
the accounting profession, visit www.StartHereGoPlaces.com or www.aicpa
1. List two resources provided
.org, or e-mail the AICPA at educat@aicpa.org. In addition, each state has a
by the AICPA designed to
CPA society or association that can provide you with more information. You
help students with career
can contact a state CPA society or association through the “CPA links” section
choices in the field of
of the AICPA web site.
accounting.
2. Pick one of these two
Critical Thinking
resources and examine it in
1. If you were going to hire an accountant, why might you choose to hire a
more detail. List two inter-
CPA?
esting pieces of informa-
2. If you were a CPA, why might you choose to join a professional associa- tion you learned from this
tion like the AICPA? resource.
Source: www.aicpa.org
151
L E S S O N
Creating a Work Sheet
6-1
CONSISTENT REPORTING
General ledger accounts contain information needed by deliveries made. The next year, the same business reports
managers and owners. Before the information can be used, the amount of revenue received for the deliveries made.
however, it must be analyzed, summarized, and reported The information for the two years cannot be compared
in a meaningful way. The accounting concept Consistent because the business has not been consistent in reporting
Reporting is applied when the same accounting procedures information about deliveries.
are followed in the same way in each accounting period.
[CONCEPT: Consistent Reporting] For example, in A summary of preparing a work sheet is shown on the
one year a delivery business might report the number of Work Sheet Overlay within this chapter.
FISCAL PERIODS
The length of time for which a business summarizes and In this way, the end-of-year accounting work comes at a
reports financial information is called a fiscal period (also time when other business activities are the lightest.
known as an accounting period). Businesses usually select Financial information may be analyzed, summarized,
a period of time for which to summarize and report finan- and reported on any date a business needs the informa-
cial information. The accounting concept Accounting tion. However, financial information is always summa-
Period Cycle is applied when changes in financial informa- rized and reported at the end of a fiscal period.
tion are reported for a specific period of time in the form
of financial statements. [CONCEPT: Accounting Period
Y IMAGES
Cycle] Each business chooses a fiscal period length that /GETT
TO DI S C
PH O
meets its needs. Because federal and state tax reports are
based on one year, most businesses use a one-year fiscal
period. However, because TechKnow Consulting is a new
business, Ms. Park wishes to have financial information
reported frequently to help her make decisions. For this
reason, TechKnow Consulting uses a one-month fiscal
period.
A fiscal period can begin on any date. However, most
businesses begin their fiscal periods on the first day of a
month. TechKnow Consulting started business on August
1. Therefore, TechKnow Consulting’s monthly fiscal
period is for the period from August 1 through August
31, inclusive. Businesses often choose a one-year fiscal
period that ends during a period of low business activity.
152 Chapter 6 Work Sheet for a Service Business
WORK SHEET
A columnar accounting form used to summarize the gen- to the financial statements to be prepared; and (4) to cal-
eral ledger information needed to prepare financial state- culate the amount of net income or net loss for a fiscal
ments is called a work sheet. period.
Accountants use a work sheet for four reasons: (1) to Journals and ledgers are permanent records of a busi-
summarize general ledger account balances to prove that ness and are usually prepared in ink or printed by a com-
debits equal credits; (2) to plan needed changes to gen- puter. However, a work sheet is a planning tool and is not
eral ledger accounts to bring account balances up to date; considered a permanent accounting record. Therefore, a
(3) to separate general ledger account balances according work sheet is prepared in pencil.
P R E PA R I N G T H E H E A D I N G O F A WO R K S H E E T
Name of Company 1 The heading on a work sheet consists of three lines and
contains the name of the business, the name of the report,
and the date of the report.
TechKnow Consulting
2 Name The date on TechKnow Consulting’s work sheet indi-
Work Sheet
of cates that the work sheet covers the 31 days from August
For Month Ended August 31, 20-- Report 1 through and including August 31. If a work sheet were
for a calendar year fiscal period, it might have a date stated
Date of Report 3 as For Year Ended December 31, 20--.
CHARACTER COUNTS
P r ofe s s i on a l C od e s of C o n d u c t
Most professional organizations have a code of profes- Instructions
sional conduct to guide the actions of their members. One Access the AICPA’s
of the best-known codes of professional conduct is that Code of Professional
of the American Institute of Certified Public Accountants Conduct at www.
(AICPA). A national organization of over 340,000 certified aicpa.org. Citing the
public accountants, the AICPA seeks to help its members exact source of each
provide professional services that benefit their employees, answer, determine
clients, and society. An important component of this mis- whether a member
sion is the AICPA Code of Professional Conduct. of the AICPA may:
The Code contains Rules of Conduct that its members 1. Accept a gift from
must follow in their performance of professional services. a client. (Hint: Search
The Rules address the topics of independence, integrity, Independence Ethics
objectivity, client relations, and colleague relations. Some Rulings)
Rules have Interpretations that provide further insight into
2. Charge a client a fee based
the Rules. The Code is also supported by Ethics Rulings, a
on the net income reported on the
series of questions and answers that the AICPA elects to
audited income statement. (Hint: Search Con-
share with its members.
tingent Fees)
AICPA members who fail to adhere to the Code can
PHOTO: AMANA IMAGES
be disciplined or expelled from the membership. Losing 3. Advertise professional services in television commer-
membership in the AICPA can result in serious conse- cials. (Hint: Search Other Professional Responsibilities
quences for a certified public accountant working in the and Practices, Advertising Interpretations)
profession.
Creating a Work Sheet Lesson 6-1 153
P R E PA R I N G A T R I A L BA L A N C E O N A WO R K S H E E T
TechKnow Consulting 2 Account Balances
Work Sheet
For Month Ended August 31, 20--
1 2
TRIAL BALANCE
ACCOUNT TITLE
DEBIT CREDIT
1 Cash 4 9 6 4 00
2 Petty Cash 1 0 0 00
3 Accts. Rec.—Oakdale School 1 5 0 00
4 Accts. Rec.—Campus Internet Cafe 1 0 0 00
5 Supplies 1 0 2 5 00
6 Prepaid Insurance 1 2 0 0 00
7 Accts. Pay.—Supply Depot 2 0 0 00
8 Accts. Pay.—Thomas Supply Co. 5 0 00
9 Kim Park, Capital 5 0 0 0 00
Account 1 10 Kim Park, Drawing 6 2 5 00
Titles 11 Income Summary
12 Sales 3 5 6 5 00
13 Advertising Expense 2 1 3 00
14 Insurance Expense
15 Miscellaneous Expense 2 8 00
Rent Expense 3 0 0 00
3 Single
16
17 Supplies Expense Rule
18 Utilities Expense 1 1 0 00
19
Add Totals 4 8 8 1 5 00 8 8 1 5 00
20
6 Double
5 Rule
Write Totals
The total of all debit account balances must equal the trial balance in the same order as they are listed on the
total of all credit account balances. A proof of the equal- chart of accounts. All the account titles are listed, even if
ity of debits and credits in a general ledger is called a trial some accounts do not have balances.
balance.
Information for the trial balance is taken from the gen-
eral ledger. General ledger account titles are listed on a
S T E P S PREPARING A TRIAL BALANCE ON A WORK SHEET
1 Write the general ledger account titles in the work sheet’s Account Title column.
2 Write the general ledger debit account balances in the Trial Balance Debit column. Write the general ledger credit
account balances in the Trial Balance Credit column. If an account does not have a balance, the space in the Trial Bal-
ance columns is left blank.
3 Rule a single line across the two Trial Balance columns below the last line on which an account title is written. This
single line shows that each column is to be added.
4 Add both the Trial Balance Debit and Credit columns. If the two column totals are the same, then debits equal
credits in the general ledger accounts. If the two column totals are not the same, recheck the Trial Balance columns
to find the error. Other parts of a work sheet are not completed until the Trial Balance columns are proved. Sugges-
tions for locating errors are described later in this chapter.
5 Write each column’s total below the single line.
6 Rule double lines across both Trial Balance columns. The double lines mean that the Trial Balance column totals
have been verified as correct.
154 Chapter 6 Work Sheet for a Service Business
End of Lesson
REVIEW
TERMS REVIEW
AUDIT YOUR UNDERSTANDING
fiscal period
1. What is written on the three-line heading on a work sheet?
work sheet
2. What general ledger accounts are listed in the Trial Balance columns
trial balance of a work sheet?
WORK TOGETHER 61
Recording the trial balance on a work sheet
Use the work sheet given in the Working Papers. Your instructor will guide you through the following example.
On February 28 of the current year, Golden Tan has the following general ledger accounts and balances. The
business uses a monthly fiscal period.
Account Titles Account Balances
Debit Credit
Cash $9,800.00
Petty Cash 150.00
Accounts Receivable—Ruby Prince 2,795.00
Supplies 456.00
Prepaid Insurance 750.00
Accounts Payable—Richard Navarro $ 555.00
Gary Baldwin, Capital 14,885.00
Gary Baldwin, Drawing 3,400.00
Income Summary
Sales 4,320.00
Advertising Expense 931.00
Insurance Expense
Miscellaneous Expense 378.00
Supplies Expense
Utilities Expense 1,100.00
1. Prepare the heading and trial balance on a work sheet. Total and rule the Trial Balance columns. Save your work to
complete Work Together 6-2.
Creating a Work Sheet Lesson 6-1 155
ON YOUR OWN 61
Recording the trial balance on a work sheet
Use the work sheet given in the Working Papers. Work this problem independently.
On December 31 of the current year, Copa’s Copies has the following general ledger accounts and balances. The
business uses a monthly fiscal period.
Account Titles Account Balances
Debit Credit
Cash $6,800.00
Petty Cash 75.00
Accounts Receivable—Burt Strog 1,498.00
Supplies 238.00
Prepaid Insurance 325.00
Accounts Payable—Janet Dao $ 298.00
Jabbo West, Capital 7,443.00
Jabbo West, Drawing 1,700.00
Income Summary
Sales 4,140.00
Advertising Expense 456.00
Insurance Expense
Miscellaneous Expense 189.00
Supplies Expense
Utilities Expense 600.00
1. Prepare the heading and trial balance on a work sheet. Total and rule the Trial Balance columns. Save your work to
complete On Your Own 6-2.
156 Chapter 6 Work Sheet for a Service Business
L E S S O N
Planning Adjusting Entries
6-2 on a Work Sheet
PLANNING ADJUSTMENTS ON A WORK SHEET
Sometimes a business will pay cash for an expense in one account, Prepaid Insurance. Recording each day’s amount
fiscal period, but the expense is not used until a later of insurance used during August is impractical. Therefore,
period. The expense should be reported in the same fiscal at the end of a fiscal period, the amount of the insurance
period that it is used to produce revenue. The account- coverage used must be deducted from the asset account,
ing concept Matching Expenses with Revenue is applied Prepaid Insurance, and recorded in the expense account,
when revenue from business activities and expenses asso- Insurance Expense.
ciated with earning that revenue are recorded in the same Changes recorded on a work sheet to update general
accounting period. For example, TechKnow Consulting ledger accounts at the end of a fiscal period are called
buys supplies in quantity in August, but some of the sup- adjustments. The assets of a business, such as supplies and
plies are not used until September. Only the value of the prepaid insurance, are used to earn revenue. The portions
supplies used in August should be reported as expenses of the assets consumed in order to earn revenue become
in August. In this way, August revenue and the supplies expenses of the business. The portions consumed are no
expense associated with earning the August revenue are longer assets but are now expenses. Therefore, adjustments
recorded in the same accounting period. [CONCEPT: must be made to both the asset and expense accounts for
Matching Expenses with Revenue] supplies and insurance. After the adjustments are made,
In order to give accurate information on financial state- the expenses incurred to earn revenue are reported in the
ments, some general ledger accounts must be brought up same fiscal period as the revenue is earned and reported.
to date at the end of a fiscal period. For example, Tech- [CONCEPT: Matching Expenses with Revenue]
Know Consulting debits an asset account, Supplies, each A work sheet is used to plan adjustments. Changes are
time supplies are bought. Supplies on hand are items of not made in general ledger accounts until adjustments
value owned by a business until the supplies are used. are journalized and posted. The accuracy of the planning
The value of supplies that are used becomes an expense for adjustments is checked on a work sheet before adjust-
to the business. However, recording an expense each time ments are actually journalized.
an individual supply, such as a pencil, is used would be Procedures for journalizing TechKnow Consulting’s
impractical. Therefore, on August 31 the balance of the adjustments are described in Chapter 8.
asset account, Supplies, is the value of all supplies bought
rather than the value of only the supplies that have not yet
been used. The amount of supplies that have been used
must be deducted from the asset account, Supplies, and
recorded in the expense account, Supplies Expense.
Likewise, the amount of insurance that has been used
during the fiscal period is also an expense of the business. R E M E M B E R
When the insurance premium for a year of insurance The ending balance of the
coverage is paid, the entire amount is debited to an asset asset account, Supplies, should
represent the amount of supplies
remaining on hand at the end
of the fiscal period. The amount
of supplies used during the
period should be recorded in
the expense account,
Supplies Expense.
Planning Adjusting Entries on a Work Sheet Lesson 6-2 157
SUPPLIES ADJUSTMENT ON A WORK SHEET
Credit 2
1 2 3 4
TRIAL BALANCE ADJUSTMENTS
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT
(a)
5 Supplies 1 0 2 5 00 7 1 5 00
(a)
17 Supplies Expense 7 1 5 00
18
Label 3
Debit 1
On August 31, before adjustments, the balance of Supplies 3. What must be done to correct the account balance?
is $1,025.00, and the balance of Supplies Expense is zero, Decrease $715.00
as shown in the T accounts. 4. What adjustment is made?
Debit Supplies Expense, $715.00
Credit Supplies, $715.00
BEFORE ADJUSTMENT The expense account, Supplies Expense, is increased
Supplies Expense
by a debit, $715.00, the value of supplies used. The bal-
ance of Supplies Expense, $715.00, is the value of supplies
used during the fiscal period from August 1 to August 31.
Supplies [CONCEPT: Matching Expenses with Revenue]
Aug. 31 Bal. 1,025.00
AFTER ADJUSTMENT
Supplies Expense
On August 31, Ms. Park counted the supplies on hand
and found that the value of supplies still unused on that Adj. (a) 715.00
date was $310.00. The value of the supplies used is calcu-
lated as follows. Supplies
Aug. 31 Bal. 1,025.00 Adj. (a) 715.00
(New Bal. 310.00)
Supplies Account Supplies on Supplies
Balance, Hand, Used During
ⴚ ⴝ
August 31 August 31 August
$1,025.00 ⫺ $310.00 ⫽ $715.00 The asset account, Supplies, is decreased by a credit,
$715.00, the value of supplies used. The debit balance,
$1,025.00, less the credit adjustment, $715.00, equals the
Four questions are asked in analyzing the adjustment new balance, $310.00. The new balance of Supplies is the
for the asset account, Supplies. same as the value of supplies on hand on August 31.
1. What is the balance of Supplies? $1,025.00
2. What should the balance be for this account?
$310.00
S T E P S RECORDING THE SUPPLIES ADJUSTMENT ON A WORK SHEET
1 Write the debit amount, $715.00, in the work sheet’s Adjustments Debit column on the line with the account title
Supplies Expense.
2 Write the credit amount, $715.00, in the Adjustments Credit column on the line with the account title Supplies.
3 Label the two parts of this adjustment with a small letter a in parentheses, (a). The letter a identifies the debit and
credit amounts as part of the same adjustment.
158 Chapter 6 Work Sheet for a Service Business
P R E PA I D I N S U R A N C E A D J U S TM E N T O N A WO R K S H E E T
Credit 2
1 2 3 4
TRIAL BALANCE ADJUSTMENTS
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT
4 9 6 4 00
(b)
6 Prepaid Insurance 1 2 0 0 00 1 0 0 00
(b)
14 Insurance Expense 1 0 0 00
Label 3 Debit 1
On August 31, before adjustments, the balance of Pre- 2. What should the balance be for this account?
paid Insurance is $1,200.00 and the balance of Insurance $1,100.00
Expense is zero. 3. What must be done to correct the account balance?
Decrease $100.00
4. What adjustment is made?
BEFORE ADJUSTMENT Debit Insurance Expense, $100.00
Insurance Expense Credit Prepaid Insurance, $100.00
The expense account, Insurance Expense, is increased by
a debit, $100.00, the value of insurance used. The balance
Prepaid Insurance
of Insurance Expense, $100.00, is the value of insurance
Aug. 31 Bal. 1,200.00 coverage used from August 1 to August 31. [CONCEPT:
Matching Expenses with Revenue]
On August 31, Ms. Park checked the insurance records AFTER ADJUSTMENT
and found that the value of insurance coverage remaining Insurance Expense
was $1,100.00. The value of the insurance coverage used Adj. (b) 100.00
during the fiscal period is calculated as follows.
Prepaid Insurance
Prepaid Insurance Coverage Insurance Aug. 31 Bal. 1,200.00 Adj. (b) 100.00
Insurance Remaining Coverage (New Bal. 1,100.00)
Balance, ⴚ Unused, ⴝ Used During
August 31 August 31 August
$1,200.00 ⫺ $1,100.00 ⫽ $100.00 The asset account, Prepaid Insurance, is decreased by
a credit, $100.00, the value of insurance used. The debit
Four questions are asked in analyzing the adjustment balance, $1,200.00, less the credit adjustment, $100.00,
for the asset account, Prepaid Insurance. equals the new balance, $1,100.00. The new balance of
Prepaid Insurance is the same as the amount of insurance
1. What is the balance of Prepaid Insurance? $1,200.00 coverage unused on August 31.
RECORDING THE PREPAID INSURANCE ADJUSTMENT
S T E P S
ON A WORK SHEET
1 Write the debit amount, $100.00, in the work sheet’s Adjustments Debit column on the line with the account title
Insurance Expense.
2 Write the credit amount, $100.00, in the Adjustments Credit column on the line with the account title Prepaid
Insurance.
3 Label the two parts of this adjustment with a small letter b in parentheses, (b). The letter b identifies the debit and
credit amounts as part of the same adjustment.
Planning Adjusting Entries on a Work Sheet Lesson 6-2 159
PROVING THE ADJUSTMENTS COLUMNS OF A WORK SHEET
TechKnow Consulting
Work Sheet
For Month Ended August 31, 20--
1 2 3 4
TRIAL BALANCE ADJUSTMENTS
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT
(a)
5 Supplies 1 0 2 5 00 7 1 5 00
(b)
6 Prepaid Insurance 1 2 0 0 00 1 0 0 00
(b)
14 Insurance Expense 1 0 0 00 1 Single Rule
15 Miscellaneous Expense 2 8 00
16 Rent Expense 3 0 0 00
(a)
17 Supplies Expense 7 1 5 00
18 Utilities Expense 1 1 0 00
19 8 8 1 5 00 8 8 1 5 00 8 1 5 00 8 1 5 00 2 Totals
3 Double Rule
After all adjustments are recorded in a work sheet’s Adjust- two columns is proved by totaling and ruling the two
ments columns, the equality of debits and credits for the columns.
S T E P S PROVING THE ADJUSTMENTS COLUMNS OF A WORK SHEET
1 Rule a single line across the two Adjustments columns on the same line as the single line for the Trial Balance columns.
2 Add both the Adjustments Debit and Credit columns. If the two column totals are the same, then debits equal credits for
these two columns, and the work sheet’s Adjustments columns are in balance. Write each column’s total below the single
line. If the two Adjustments column totals are not the same, the Adjustments columns are rechecked and errors corrected
before the work sheet is completed.
3 Rule double lines across both Adjustments columns. The double lines mean that the totals have been verified as correct.
GLOBAL PERSPECTIVE
Int e r n a t i o n a l We i ght s
a n d Me a s u r e s
The primary system of measurement To conduct international business, the U.S. has recog-
in the United States is the customary nized the need to convert customary units to the metric
system. Among the units of mea- system. For example, beverages are routinely packaged
surement in the customary system in liter containers. Although the U.S. is a global business
are inches, feet, and quarts. The leader, it has had to adjust to meet the needs of the rest
United States is among the few of the world.
major industrial countries that do
not use the metric system exclu- Critical Thinking
sively. Among the units of mea- 1. Look at five food packages. List the weights and mea-
PHOTO: STOCKBYTE/GETTY IMAGES
surement in the metric system are sures indicated.
centimeters, meters, and liters. The
2. List arguments both for and against a proposal to
metric system is based on a decimal
convert all U.S. weights and measures to the metric
system—like U.S. currency. Some U.S.
system.
industries have converted to the metric
system. Others specify measurements in
both customary and metric systems.
160 Chapter 6 Work Sheet for a Service Business
S U M M A R Y O F P R E P A R AT I O N O F A W O R K
SHEET FOR A SERVICE BUSINESS
The following overlay summarizes the preparation of a work sheet. Follow the directions below in using the overlay.
1. Before using the overlay, be sure the pages and transparent overlays are arranged correctly. The correct arrangement
is shown below.
B C
2. Place your book in a horizontal position. Study the steps on page C in preparing the work sheet. You will be able to
read the text through the transparent overlays. When directed, carefully lift the transparent overlays and lay them over
the work sheet as shown below.
C B
A
B
P R E PA R I N G A WO R K S H E E T
To correctly use the insert, read the steps on page C. Apply the transparent overlays when directed to do so in the steps.
TechKnow Consulting
Work Sheet 1
For Month Ended August 31, 20--
1 2 3 4 5 6 7 8
2 TRIAL BALANCE ADJUSTMENTS INCOME STATEMENT BALANCE SHEET
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
1 Cash 4 9 6 4 00 1
2 Petty Cash 1 0 0 00 2
3 Accts. Rec.—Oakdale School 1 5 0 00 3
4 Accts. Rec.—Campus Internet Cafe 1 0 0 00 4
5 Supplies 1 0 2 5 00 5
6 Prepaid Insurance 1 2 0 0 00 6
7 Accts. Pay.—Supply Depot 2 0 0 00 7
8 Accts. Pay.—Thomas Supply Co. 5 0 00 8
9 Kim Park, Capital 5 0 0 0 00 9
10 Kim Park, Drawing 6 2 5 00 10
11 Income Summary 11
12 Sales 3 5 6 5 00 12
13 Advertising Expense 2 1 3 00 13
14 Insurance Expense 14
15 Miscellaneous Expense 2 8 00 15
16 Rent Expense 3 0 0 00 16
17 Supplies Expense 17
18 Utilities Expense 1 1 0 00 18
19 8 8 1 5 00 8 8 1 5 00 19
20 20
21 21
(a)
7 1 5 00
(b)
1 0 0 00
4 3
(b)
1 0 0 00
(a)
5 7 1 5 00
8 1 5 00 8 1 5 00
4 9 6 4 00
1 0 0 00
1 5 0 00
1 0 0 00
3 1 0 00
6
1 1 0 0 00
2 0 0 00
5 0 00
5 0 0 0 00
6 2 5 00
3 5 6 5 00
2 1 3 00
1 0 0 00
2 8 00 7
3 0 0 00
7 1 5 00
1 1 0 00
1 4 6 6 00 3 5 6 5 00 7 3 4 9 00 5 2 5 0 00
Net Income 8 2 0 9 9 00 2 0 9 9 00
9 3 5 6 5 00 3 5 6 5 00 7 3 4 9 00 7 3 4 9 00
P R E PA R I N G A WO R K S H E E T
1. Write the heading. • Extend the up-to-date liability account balances to the Balance Sheet
2. Record the trial balance. Credit column.
• Write the general ledger account titles in the Account Title column. • Extend the owner’s capital and drawing account balances to the Balance
• Write the account balances in either the Trial Balance Debit or Credit Sheet columns.
column. 7. Extend all income statement account balances.
• Rule a single line across the Trial Balance columns. • Extend the up-to-date revenue account balance to the Income Statement
• Add the Trial Balance columns and compare the totals. Credit column.
• Rule double lines across both Trial Balance columns. • Extend the up-to-date expense account balances to the Income Statement
• Carefully apply the first overlay. Debit column.
3. Record the supplies adjustment. • Carefully apply the third overlay.
• Write the debit amount in the Adjustments Debit column on the line 8. Calculate and record the net income (or net loss).
with the account title Supplies Expense. • Rule a single line across the Income Statement and Balance Sheet
• Write the credit amount in the Adjustments Credit column on the line columns.
with the account title Supplies. • Add the columns and write the totals below the single line.
• Label this adjustment (a). • Calculate the net income or net loss amount.
4. Record the prepaid insurance adjustment. • Write the amount of net income (or net loss) below the smaller of the two
• Write the debit amount in the Adjustments Debit column on the line Income Statement column totals. Write the words Net Income or Net Loss
with the account title Insurance Expense. in the Account Title column.
• Write the credit amount in the Adjustments Credit column on the line • Extend the amount of net income (or net loss) to the Balance Sheet
with the account title Prepaid Insurance. columns. Write the amount under the smaller of the two column totals.
• Label this adjustment (b). Write the amount on the same line as the words Net Income (or Net Loss).
5. Prove the Adjustments columns. 9. Total and rule the Income Statement and Balance Sheet columns.
• Rule a single line across the Adjustments columns. • Rule a single line across the Income Statement and Balance Sheet
• Add the Adjustments columns and compare the totals to ensure that they columns immediately below the net income (or net loss) amounts.
are equal. • Add the net income (or net loss) to the previous column totals. Compare
• Write the proving totals below the single line. the column totals to ensure that totals for each pair of columns are in
• Rule double lines across both Adjustments columns. balance.
• Carefully apply the second overlay. • Write the proving totals for each column below the single line.
6. Extend all balance sheet account balances. • Rule double lines across the Income Statement and Balance Sheet
• Extend the up-to-date asset account balances to the Balance Sheet Debit columns immediately below the proving totals.
column.
C
CHARACTER COUNTS
Ma l pra c t i c e Li a bi l it y
of A c c ou nt a nt s
Accountants are subject to the legal ers, then Best & Farrish should not be held liable for
consequences of malpractice. They American Bank’s loss.
can be held financially liable for 3. Level of negligence. Accountants who fail to exhibit a
misconduct or improper practice reasonable level of care are guilty of ordinary negli-
in their profession. gence. Gross negligence occurs when an accountant’s
Most lawsuits against pub- actions represent a flagrant violation of professional
lic accountants involve audits standards.
of financial statements. Con- Professional standards recognize that accountants
sider the following example. are not able to detect all frauds. Whether Best & Farrish
Best & Farrish, CPAs, audited was negligent in not detecting the president’s fraud
the financial statements of would depend on the facts of the case.
Richmond, Inc. Relying on
4. Accountant-third party relationship. Accountants
these statements, American Bank
have a contract with their clients; a client can sue the
loaned $1,000,000 to Richmond.
accountant for breach of contract. However, third
Unknown to the accountants, how-
parties do not have a contract with the accountant.
ever, Richmond’s president was involved
Whether a third party can sue the accountant depends
in a scheme to steal cash. Richmond expe-
on whether the accountant specifically knew the third
rienced financial difficulties and was unable to
party intended to use the financial statements.
repay the loan to American Bank. The bank sued Best &
If Best & Farrish knew American Bank would use
Farrish for $1,000,000, claiming it was negligent for not
the audited financial statements to grant a loan, then
detecting the president’s fraud.
American Bank could sue Best & Farrish for ordinary
Should Best & Farrish be required to pay $1,000,000 to
negligence. However, if Best & Farrish did not know
American Bank? Over many years, the courts have estab-
Richmond even intended to obtain a bank loan, then
lished four guidelines for determining whether accoun-
gross negligence or fraud would need to be proven for
tants are liable for the financial losses of third parties.
American Bank to win its case.
1. Financial loss. Did the third party incur a financial
Accountants must take great care in performing their
loss? Answering this question is typically an easy task.
professional services. Accountants who can prove the audit
American Bank lost $1,000,000 when Richmond did
was performed in accordance with professional account-
not repay its loan.
ing standards will prevail against negligence lawsuits.
PHOTO: TETRA IMAGES/GETTY IMAGES
2. Reliance on financial statements. Did the third party
actually rely on the financial statements for making Instructions
its decision? Accountants should not be held liable Using your local library or online resources, locate an
unless the third party used the financial statements article describing a malpractice lawsuit against a public
in making its decision. If American Bank received a accounting firm. What were the main facts of this case?
copy of the financial statements but relied solely on What is your opinion of the firm’s liability?
other information obtained from Richmond’s manag-
gil47052_c06_acetate.indd D 11/8/07 6:43:32 PM
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. Explain how the concept of Matching Expenses with Revenue relates
TERM REVIEW to adjustments.
2. List the four questions asked in analyzing an adjustment on a work
adjustments sheet.
WORK TOGETHER 62
Planning adjustments on a work sheet
Use the work sheet from Work Together 6-1. Your instructor will guide you through the following examples.
1. Analyze the following adjustment information into debit and credit parts. Record the adjustments on the work
sheet.
Adjustment Information, February 28
Supplies on hand $325.00
Value of prepaid insurance 500.00
2. Total and rule the Adjustments columns. Save your work sheet to complete Work Together 6-3.
ON YOUR OWN 62
Planning adjustments on a work sheet
Use the work sheet from On Your Own 6-1. Work this problem independently.
1. Analyze the following adjustment information into debit and credit parts. Record the adjustments on the work
sheet.
Adjustment Information, December 31
Supplies on hand $120.00
Value of prepaid insurance 225.00
2. Total and rule the Adjustments columns. Save your work sheet to complete On Your Own 6-3.
Planning Adjusting Entries on a Work Sheet Lesson 6-2 161
L E S S O N Extending Financial
Statement Information
6-3 on a Work Sheet
EX TE NDING BAL ANCE SHE ET ACCOUNT
BALANCES ON A WORK SHEET
TechKnow Consulting
1
Work Sheet
For Month Ended August 31, 20--
1 2 3 4 5 6 7 8
TRIAL BALANCE ADJUSTMENTS INCOME STATEMENT BALANCE SHEET
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
1 Cash 4 9 6 4 00 4 9 6 4 00 1
2 Petty Cash 1 0 0 00 1 0 0 00 2
3 Accts. Rec.—Oakdale School 1 5 0 00 1 5 0 00 3
4 Accts. Rec.—Campus Internet Cafe 1 0 0 00 1 0 0 00 4
(a)
5 Supplies 1 0 2 5 00 7 1 5 00 3 1 0 00 5
(b)
6 Prepaid Insurance 1 2 0 0 00 1 0 0 00 1 1 0 0 00 6
7 Accts. Pay.—Supply Depot 2 0 0 00 2 0 0 00 7
8 Accts. Pay.—Thomas Supply Co. 5 0 00 5 0 00 8
9 Kim Park, Capital 5 0 0 0 00 5 0 0 0 00 9
10 Kim Park, Drawing 6 2 5 00 6 2 5 00 10
Debit Balances 2 Credit Balances 3
with Adjustments without Adjustments
At the end of each fiscal period, TechKnow Consulting A financial statement that reports assets, liabilities,
prepares two financial statements from information on a and owner’s equity on a specific date is called a balance
work sheet. [CONCEPT: Accounting Period Cycle] The sheet. The balance sheet accounts are the asset, liability,
up-to-date account balances on a work sheet are extended and owner’s equity accounts. Up-to-date balance sheet
to columns for the two financial statements. account balances are extended to the Balance Sheet Debit
and Credit columns of the work sheet.
EXTENDING BALANCE SHEET ACCOUNT BALANCES
S T E P S
ON A WORK SHEET
1 Extend the balance of Cash, $4,964.00, to the Balance Sheet Debit column. The balance of Cash in the Trial Balance
Debit column is up-to-date because no adjustment affects this account. Extend to the Balance Sheet Debit column
the balances of all accounts with debit balances that are not affected by adjustments.
2 Calculate the up-to-date adjusted balance of Supplies. The balance of Supplies in the Trial Balance Debit column is
not up-to-date because it is affected by an adjustment. The debit balance, $1,025.00, minus the credit adjustment,
$715.00, equals the up-to-date adjusted balance, $310.00. Extend the up-to-date balance, $310.00, to the Balance
Sheet Debit column. Using the same procedure, calculate and extend the up-to-date adjusted balance of the other
asset account affected by an adjustment, Prepaid Insurance.
3 Extend the up-to-date balance of Accounts Payable—Supply Depot, $200.00, to the Balance Sheet Credit column. The
balance of Accounts Payable—Supply Depot in the Trial Balance Credit column is up-to-date because no adjustment
affects this account. Extend to the Balance Sheet Credit column the balances of all accounts with credit balances
that are not affected by adjustments.
162 Chapter 6 Work Sheet for a Service Business
E X T E N D I N G I N C O M E S TAT E M E N T A C C O U N T
BALANCES ON A WORK SHEET
Expense Balances without Adjustments 2 1 Sales Balance
TechKnow Consulting
Work Sheet
For Month Ended August 31, 20--
1 2 3 4 5 6 7 8
TRIAL BALANCE ADJUSTMENTS INCOME STATEMENT BALANCE SHEET
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
11 Income Summary 11
12 Sales 3 5 6 5 00 3 5 6 5 00 12
13 Advertising Expense 2 1 3 00 2 1 3 00 13
(b)
14 Insurance Expense 1 0 0 00 1 0 0 00 14
15 Miscellaneous Expense 2 8 00 2 8 00 15
16 Rent Expense 3 0 0 00 3 0 0 00 16
(a)
17 Supplies Expense 7 1 5 00 7 1 5 00 17
18 Utilities Expense 1 1 0 00 1 1 0 00 18
19 8 8 1 5 00 8 8 1 5 00 8 1 5 00 8 1 5 00 19
20 20
Expense Balances with Adjustments 3
A financial statement showing the revenue
and expenses for a fiscal period is called an
income statement. TechKnow Consulting’s F O R YO U R I N F O R M AT I O N F O R YO U R I N F O R M AT I O N
income statement accounts are the revenue F Y I F Y I
and expense accounts. Up-to-date income
Use a ruler when extending A work sheet is prepared in manual
statement account balances are extended accounting to adjust the accounts
amounts on a work sheet to keep
to the Income Statement Debit and Credit track of the line you are on. and sort amounts needed to prepare
columns of the work sheet. financial statements. However, in
automated accounting, adjustments
are prepared from the trial balance,
and the software automatically
generates the financial statements
with no need for a work sheet.
EXTENDING INCOME STATEMENT ACCOUNT BALANCES
S T E P S
ON A WORK SHEET
1 Extend the balance of Sales, $3,565.00, to the Income Statement Credit column. The balance of Sales in the Trial
Balance Credit column is up-to-date because no adjustment affects this account.
2 Extend the balance of Advertising Expense, $213.00, to the Income Statement Debit column. The balance of Advertis-
ing Expense is up-to-date because no adjustment affects this account. Extend the balances of all expense accounts
not affected by adjustments to the Income Statement Debit column.
3 Calculate the up-to-date adjusted balance of Insurance Expense. The balance of Insurance Expense in the Trial Balance
Debit column is zero. This zero balance is not up-to-date because this account is affected by an adjustment. The
debit balance, $0.00, plus the debit adjustment, $100.00, equals the adjusted balance, $100.00. Extend the up-to-
date adjusted debit balance, $100.00, to the Income Statement Debit column. Using the same procedure, calculate
and extend the up-to-date adjusted balance of each expense account affected by an adjustment.
Extending Financial Statement Information on a Work Sheet Lesson 6-3 163
R E C O R D I N G N E T I N C O M E , A N D T O TA L I N G
AND RULING A WORK SHEET
TechKnow Consulting
Work Sheet
For Month Ended August 31, 20--
1 2 3 4 5 6 7 8
TRIAL BALANCE ADJUSTMENTS INCOME STATEMENT BALANCE SHEET
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
1 Cash 4 9 6 4 00 4 9 6 4 00 1
2 Petty Cash 1 0 0 00 1 0 0 00 2
3 Accts. Rec.—Oakdale School 1 5 0 00 1 5 0 00 3
4 Accts. Rec.—Campus Internet Cafe 1 0 0 00 1 0 0 00 4
(a)
5 Supplies 1 0 2 5 00 7 1 5 00 3 1 0 00 5
(b)
6 Prepaid Insurance 1 2 0 0 00 1 0 0 00 1 1 0 0 00 6
7 Accts. Pay.—Supply Depot 2 0 0 00 2 0 0 00 7
8 Accts. Pay.—Thomas Supply Co. 5 0 00 5 0 00 8
9 Kim Park, Capital 5 0 0 0 00 5 0 0 0 00 9
10 Kim Park, Drawing 6 2 5 00 6 2 5 00 10
11 Income Summary 11
12 Sales 3 5 6 5 00 3 5 6 5 00 12
13 Advertising Expense 2 1 3 00 2 1 3 00 13
(b) Single
14 Insurance Expense 1 0 0 00 1 0 0 00 14
Rule
15 Miscellaneous Expense 2 8 00 2 8 00 15
1
16 Rent Expense 3 0 0 00 3 0 0 00 Extend Net Income 16
(a)
17 Supplies Expense 7 1 5 00 7 1 5 00 4
17
18 Utilities Expense 1 1 0 00 1 1 0 00 18 Totals
19 8 8 1 5 00 8 8 1 5 00 8 1 5 00 8 1 5 00 1 4 6 6 00 3 5 6 5 00 7 3 4 9 00 5 2 5 0 00 19 2
20 Net Income 2 0 9 9 00 2 0 9 9 00 20
5
21 3 5 6 5 00 3 5 6 5 00 7 3 4 9 00 7 3 4 9 00 21
Single
3 Net Income Rule
Totals 6 Double Rule 7
The difference between total revenue and total expenses and the work sheet must be totaled and ruled. A summary
when total revenue is greater is called net income. Before of preparing a work sheet is shown on the Work Sheet
the work sheet is complete, net income must be calculated Overlay.
CALCULATING AND RECORDING NET INCOME ON A WORK
S T E P S
SHEET; TOTALING AND RULING A WORK SHEET
1 Rule a single line across the four income statement and balance sheet columns.
2 Add both the Income Statement and Balance Sheet columns. Write the totals below the single line.
3 Calculate the net income. The Income Statement Credit column total, $3,565.00, minus the Income Statement
Debit column total, $1,466.00, equals net income, $2,099.00. Write the amount of net income, $2,099.00, below the
Income Statement Debit column total. Write the words Net Income on the same line in the Account Title column.
4 Extend the amount of net income, $2,099.00, to the Balance Sheet Credit column. Since the owner’s equity account,
Kim Park, Capital, increases by a credit, extend the net income amount to the Balance Sheet Credit column.
5 Rule a single line across the four Income Statement and Balance Sheet columns just below the net income amounts.
6 Add the subtotal and net income amount for each column to get proving totals for the Income Statement and Bal-
ance Sheet columns. Write the totals below the single line. Check the equality for each pair of columns.
7 Rule double lines across the Income Statement and Balance Sheet columns.
164 Chapter 6 Work Sheet for a Service Business
C A L C U L AT I N G A N D R E C O R D I N G A N E T L O S S
ON A WORK SHEET
5 6 7 8
ACCOUNT TITLE
INCOME STATEMENT BALANCE SHEET
1
Single
DEBIT CREDIT DEBIT CREDIT
Rule
19 Net Loss 2 2 0 0 00 1 8 0 0 00 5 1 0 0 00 5 5 0 0 00 19
2
20 Net Loss 3 4 0 0 00 4 0 0 00 20
Totals
21 2 2 0 0 00 2 2 0 0 00 5 5 0 0 00 5 5 0 0 00 21
22 22
4 Extend
Net Loss
TechKnow Consulting’s completed work sheet shows a total expenses when total expenses are greater is called a
net income. However, a business might have a net loss net loss.
to report. The difference between total revenue and
CALCULATING AND RECORDING A NET LOSS
S T E P S
ON A WORK SHEET
1 Rule a single line across the four Income Statement and Balance Sheet columns.
2 Add both the Income Statement and Balance Sheet columns. Write the totals below
the single line. E T TY
I MAGES
DI SC/ G
OT O
PH
3 Calculate the net loss. The Income Statement Debit column total, $2,200.00,
minus the Income Statement Credit column total, $1,800.00, equals net loss,
$400.00. The Income Statement Debit column total (expenses) is greater
than the Income Statement Credit column total (revenue). Therefore,
because expenses exceed revenue, there is a net loss. Write the
amount of net loss, $400.00, below the Income Statement Credit
column total. Write the words Net Loss on the same line in the
Account Title column.
4 Extend the amount of net loss, $400.00, to the Balance
Sheet Debit column on the same line as the words Net
Loss. The owner’s equity account, Kim Park, Capital, is
decreased by a debit. Therefore, a net loss is extended
to the Balance Sheet Debit column.
Extending Financial Statement Information on a Work Sheet Lesson 6-3 165
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. Which accounts are extended into the Balance Sheet columns of the
work sheet? TERMS REVIEW
2. Which accounts are extended into the Income Statement columns
of the work sheet? balance sheet
3. In which Balance Sheet column do you record net income on the income statement
work sheet?
net income
4. In which Balance Sheet column do you record net loss on the work
sheet? net loss
WORK TOGETHER 63
Completing a work sheet
Use the work sheet from Work Together 6-2. Your instructor will guide you through the following examples.
1. Extend the up-to-date balances to the Balance Sheet and Income Statement columns.
2. Rule a single line across the Income Statement and Balance Sheet columns. Total each column. Calculate
and record the net income or net loss. Label the amount in the Account Title column.
3. Total and rule the Income Statement and Balance Sheet columns.
ON YOUR OWN 63
Completing a work sheet
Use the work sheet from On Your Own 6-2. Work this problem independently.
1. Extend the up-to-date balances to the Balance Sheet or Income Statement columns.
2. Rule a single line across the Income Statement and Balance Sheet columns. Total each column. Calculate
and record the net income or net loss. Label the amount in the Account Title column.
3. Total and rule the Income Statement and Balance Sheet columns.
166 Chapter 6 Work Sheet for a Service Business
L E S S O N
Finding and Correcting
6-4 Errors on the Work Sheet
CORRECTING ACCOUNTING E RRORS ON THE WORK SHE ET
Some errors in accounting records are not discovered incorrectly. In addition, errors may be made in extend-
until a work sheet is prepared. For example, a debit to ing amounts to the Income Statement and Balance Sheet
supplies may not have been posted from a journal to the columns.
general ledger supplies account. The omission may not Any errors found on a work sheet should be corrected
be discovered until the work sheet’s trial balance does not before any further work is completed. If an incorrect
balance. Also, information may be transferred incorrectly amount is found on a work sheet, erase the error and
from general ledger accounts to the work sheet’s trial bal- replace it with the correct amount. If an amount is writ-
ance. Additional errors may be made, such as recording ten in an incorrect column, erase the amount and record
adjustment information incorrectly or adding columns it in the correct column.
C H E C K I N G F O R T Y P I C A L C A L C U L AT I O N E R R O R S
When two column totals are not in balance, subtract the 3. The difference can be divided
smaller total from the larger total to find the difference. evenly by 9. For example, the differ-
Check the difference between the two amounts against ence between two columns is $45.00,
the following guides. which can be divided by 9 with no
remainder. When the difference can
1. The difference is 1, such as $.01, $.10, $1.00, or
be divided equally by 9, look for
$10.00. For example, if the totals of the two columns
transposed numbers such as 54 writ-
are Debit, $14,657.00, and Credit, $14,658.00, the
ten as 45 or 19 written as 91. Also,
difference between the two columns is $1.00. The
check for a “slide.” A “slide” occurs when numbers are
error is most likely in addition. Add the columns
moved to the right or left in an amount column. For
again.
example, $12.00 is recorded as $120.00 or $350.00 is
2. The difference can be divided evenly by 2. For
recorded as $35.00.
example, the difference between two column totals is
4. The difference is an omitted amount. Look for an
$48.00, which can be divided by 2 with no remainder.
amount equal to the difference. If the difference is
Look for a $24.00 amount in the Trial Balance col-
$50.00, look for an account balance of $50.00 that
umns of the work sheet. If the amount is found, check
has not been extended. Look for any $50.00 amount
to make sure it has been recorded in the correct Debit
on the work sheet and determine if it has been han-
or Credit column. A $24.00 debit amount recorded
dled correctly. Look in the accounts and journals for
in a credit column results in a difference between
a $50.00 amount, and check if that amount has been
column totals of $48.00. If the error is not found on
handled correctly. Failure to record a $50.00 account
the work sheet, check the general ledger accounts and
balance will make a work sheet’s column totals differ
journal entries. An entry for $24.00 may have been
by $50.00.
recorded in an incorrect column in the journal or in
an account.
Finding and Correcting Errors on the Work Sheet Lesson 6-4 167
CHECKING FOR ERRORS IN THE WORK SHEET
Check for Errors in the Trial Balance Column Check for Errors in the Income Statement
1. Have all general ledger account balances been copied and Balance Sheet Columns
in the trial balance column correctly? 1. Has each amount been copied correctly when
2. Have all general ledger account balances been extended to the Income Statement or Balance Sheet
recorded in the correct Trial Balance column? column?
2. Has each account balance been extended to the cor-
Check for Errors in the Adjustments Columns
rect Income Statement or Balance Sheet column?
1. Do the debits equal the credits for each adjustment?
3. Has the net income or net loss been calculated
Use the small letters that label each part of an adjust-
correctly?
ment to help check accuracy and equality of debits
4. Has the net income or net loss been recorded in the
and credits.
correct Income Statement or Balance Sheet column?
2. Is the amount for each adjustment correct?
For all three of these cases, correct any errors found and
add the columns again.
CORRECTING AN E RROR IN POSTING TO THE WRONG ACCOUNT
ACCOUNT Supplies ACCOUNT NO. 130
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Feb. 1 1 4 0 0 00 4 0 0 00
25 2 9 0 00 4 9 0 00
Correct 2 12 1 5 0 00 5 4 0 00
Entry
ACCOUNT Prepaid Insurance ACCOUNT NO. 140
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Feb. 9 1 6 0 0 00 6 0 0 00
Incorrect 1 12 1 5 0 00 6 5 0 00
Entry
If a pair of work sheet columns does not balance and an
CORRECTING
error cannot be found on the work sheet, look for an
error in posting from the journal to the general ledger
AN ERROR IN
S T E P S
accounts. POSTING TO THE
As each item in an account or a journal entry is verified, WRONG ACCOUNT
a check mark should be placed next to it. The check mark
indicates that the item has been checked for accuracy. 1 Draw a line through the entire incorrect entry.
Recalculate the account balance and correct the
1. Have all amounts that need to be posted actually been work sheet.
posted from the journal? To correct, complete the
posting to the correct account. When posting is cor- 2 Record the posting in the correct account. Recal-
rected, recalculate the account balance and correct it culate the account balance, and correct the work
on the work sheet. sheet.
2. Have all amounts been posted to the correct accounts?
To correct, follow these steps.
168 Chapter 6 Work Sheet for a Service Business
CORRECTING AN INCORRECT AMOUNT AND AN
AMOUNT POSTED TO THE WRONG COLUMN
Incorrect Amount 1 2 Correct Amount 3 Correct Balance
ACCOUNT Utilities Expense ACCOUNT NO. 550
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20-- 7 0 00 7 0 00
Sept. 8 1 7 0 0 00 7 0 0 00
9 7 00
17 1 2 7 00 2 7 00 6 7 3 00
Correct Entry 5 4 6 Correct Balance
Incorrect Entry
Errors can be made in writing amounts in general led- about whether important financial information has been
ger accounts. Errors in permanent records should never altered.
be erased. Erasures in permanent records raise questions
S T E P S CORRECTING AN INCORRECT AMOUNT
1 Draw a line through the incorrect amount.
2 Write the correct amount just above the correction in the same space.
3 Recalculate the account balance, and correct the account balance on the work sheet.
CORRECTING AN AMOUNT POSTED TO THE WRONG COLUMN
4 Draw a line through the incorrect item in the account.
5 Record the posting in the correct amount column.
6 Recalculate the account balance, and correct the work sheet.
CHECKING FOR ERRORS IN JOURNAL ENTRIES
1. Do debits equal credits in each journal entry? 5. Does the sum of debit column totals equal the sum of
2. Is each journal entry amount recorded in the correct credit column totals in the journal?
journal column? 6. Have all transactions been recorded?
3. Is information in the Account Title column correct
Some suggestions for correcting errors in journal entries
for each journal entry?
are described in Chapter 3.
4. Are all of the journal amount column totals correct?
PREVENTING ERRORS
The best way to prevent errors is to work carefully. Check umns. When possible, use a calculator. When an error is
the work at each step in an accounting procedure. Most discovered, do no more work until the cause of the error
errors occur in doing arithmetic, especially in adding col- is found and corrections are made.
Finding and Correcting Errors on the Work Sheet Lesson 6-4 169
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. What is the first step in checking for arithmetic errors when two column
totals are not in balance?
2. What is one way to check for an error caused by transposed numbers?
3. What term is used to describe an error that occurs when numbers are
moved to the right or left in an amount column?
WORK TOGETHER 64
Finding and correcting errors in accounting records
Paul Coty has completed the September monthly work sheet for his business, LeafyLift. The work sheet and general
ledger accounts are given in the Working Papers. Mr. Coty believes that he has made one or more errors in preparing
the work sheet. He asks you to help him verify the work sheet. Your instructor will guide you through the following
examples.
1. Examine the work sheet and the general ledger accounts. Make a list of the errors you find.
2. Correct any errors you find in the general ledger accounts.
3. Prepare a corrected work sheet.
ON YOUR OWN 64
Finding and correcting errors in accounting records
Nadine Fritz has completed the November monthly work sheet for her business, Your Personal Trainer. The work
sheet and general ledger accounts are given in the Working Papers. Ms. Fritz believes that she has made one or more
errors in preparing the work sheet. She asks you to help her verify the work sheet. Work this problem independently.
1. Examine the work sheet and the general ledger accounts. Make a list of the errors you find.
2. Correct any errors you find in the general ledger accounts.
3. Prepare a corrected work sheet.
170 Chapter 6 Work Sheet for a Service Business
SUMMARY
After completing this chapter, you can: 4. Plan adjustments for supplies and prepaid
insurance.
1. Define accounting terms related to a work
sheet for a service business organized as a 5. Complete a work sheet for a service business
proprietorship. organized as a proprietorship.
2. Identify accounting concepts and practices 6. Identify selected procedures for finding and
related to a work sheet for a service business correcting errors in accounting records.
organized as a proprietorship.
3. Prepare a heading and a trial balance on a
work sheet.
EXPLORE ACCOUNTING
Fi s c a l Pe r i od s
A fiscal period is the length of time for which Fiscal Year No. of
a business summarizes and reports financial End Companies
information. Since many companies are January 32
required to publish yearly annual reports, February 10
these companies choose a year for the fis- March 16
cal period. In such a case, a company will April 8
prepare financial statements every year. May 18
A fiscal year can be any consecutive 12- June 48
month period. The Internal Revenue Service July 8
(IRS) requires many companies to report taxable August 15
income for the fiscal year January 1 through December 31. September 38
A fiscal year beginning January 1 can also be called a cal- October 19
endar year. Because they use a calendar year for reporting November 15
taxable income, many companies choose to use the calen- December 373
dar year for issuing financial statements also.
However, there is no requirement to begin a fiscal year Activity: Assume you work for a company that makes
on January 1. Companies often choose a fiscal year that snowmobiles. You must determine what fiscal year should
ends during a period of low business activity. Twelve con- be used. Make a written recommendation to the owner.
secutive months which end when business activities have Explain why your recommendation is preferable.
PHOTO: PHOTOGRAPHER’S CHOICE/GETTY IMAGES
reached the lowest point in their annual cycle are called a
natural business year.
The following survey conducted on 600 businesses
shows the number of companies that chose a fiscal year Source: Accounting Trends and Techniques, 2002, published by the
ending at the end of a specific month. American Institute of Certified Public Accountants.
Work Sheet for a Service Business Chapter 6 171
61 APPLICATION PROBLEM
Recording the trial balance on a work sheet
Use the work sheet given in the Working Papers. On June 30 of the current year, Roseville Rental has the fol-
lowing general ledger accounts and balances. The business uses a monthly fiscal period.
Account Titles Account Balances
Debit Credit
Cash $11,620.00
Petty Cash 100.00
Accounts Receivable—Leslie Naples 855.00
Supplies 690.00
Prepaid Insurance 900.00
Accounts Payable—Russell Goodland $ 355.00
Sunthi Ling, Capital 12,926.00
Sunthi Ling, Drawing 500.00
Income Summary
Sales 2,270.00
Advertising Expense 340.00
Insurance Expense
Miscellaneous Expense 184.00
Supplies Expense
Utilities Expense 362.00
Instructions:
Prepare the heading and trial balance on a work sheet. Total and rule the Trial Balance columns. Save your
work to complete Application Problem 6-2.
62 APPLICATION PROBLEM
Planning adjustments on a work sheet
Use the work sheet from Application Problem 6-1.
Instructions:
1. Analyze the following adjustment information into debit and credit parts. Record the adjustments on the
work sheet.
Adjustment Information, June 30
Supplies on hand $250.00
Value of prepaid insurance 750.00
2. Total and rule the Adjustments columns. Save your work to complete Application Problem 6-3.
( Go Beyond the Book
)
For more information go to
www.C21accounting.com
172 Chapter 6 Work Sheet for a Service Business
63 APPLICATION PROBLEM
Completing a work sheet
Use the work sheet from Application Problem 6-2.
Instructions:
1. Extend the up-to-date balances to the Balance Sheet or Income Statement columns.
2. Rule a single line across the Income Statement and Balance Sheet columns. Total each column. Calculate
and record the net income or net loss. Label the amount in the Account Title column.
3. Total and rule the Income Statement and Balance Sheet columns.
64 APPLICATION PROBLEM
Finding and correcting errors in accounting records
Ervin Watkins has completed the April monthly work sheet for his business, EverClean. The work sheet and
general ledger accounts are given in the Working Papers. Mr. Watkins believes that he has made one or more
errors in preparing the work sheet. He asks you to help him verify the work sheet.
Instructions:
1. Examine the work sheet and the general ledger accounts. Make a list of the errors you find.
2. Correct any errors you find in the general ledger accounts.
3. Prepare a corrected work sheet.
65 MASTERY PROBLEM
Completing a work sheet
On April 30 of the current year, Bonita Bubbles has the following general ledger accounts and balances. The
business uses a monthly fiscal period. A work sheet is given in the Working Papers.
Account Titles Account Balances
Debit Credit
Cash $2,829.00
Petty Cash 150.00
Accounts Receivable—Bernard Corbett 511.00
Supplies 855.00
Prepaid Insurance 1,100.00
Accounts Payable—Spooner Supplies $ 500.00
Paulo Gutierrez, Capital 4,500.00
Paulo Gutierrez, Drawing 440.00
Income Summary
Sales 2,400.00
Advertising Expense 450.00
Insurance Expense
Miscellaneous Expense 190.00
Rent Expense 375.00
Supplies Expense
Utilities Expense 500.00
Work Sheet for a Service Business Chapter 6 173
Instructions:
1. Prepare the heading and trial balance on a work sheet. Total and rule the Trial Balance columns.
2. Analyze the following adjustment information into debit and credit parts. Record the adjustments on the
work sheet.
Adjustment Information, April 30
Supplies inventory $220.00
Value of prepaid insurance 800.00
3. Total and rule the Adjustments columns.
4. Extend the up-to-date balances to the Balance Sheet or Income Statement columns.
5. Rule a single line across the Income Statement and Balance Sheet columns. Total each column. Calculate
and record the net income or net loss. Label the amount in the Account Title column.
6. Total and rule the Income Statement and Balance Sheet columns.
66 CHALLENGE PROBLEM
Completing a work sheet
LawnPro Company had a small fire in its office. The fire destroyed some of the accounting records. On Novem-
ber 30 of the current year, the end of a monthly fiscal period, the following information was constructed from
the remaining records and other sources. A work sheet is given in the Working Papers.
Remains of the general ledger:
Account Titles Account Balances
Accounts Receivable—C. Gabriel $ 825.00
Supplies 700.00
Don Arnodt, Drawing 300.00
Sales 3,800.00
Advertising Expense 200.00
Rent Expense 600.00
Utilities Expense 390.00
Information from the business’s checkbook:
Cash balance on last unused check stub $3,119.00
Total payments for miscellaneous expense 50.00
Total payments for insurance 400.00
Information obtained through inquiries to
other businesses:
Owed to St. Croix Supplies $1,500.00
Value of prepaid insurance, November 30 250.00
Information obtained by counting supplies
on hand after the fire:
Supplies on hand $ 200.00
Instructions:
1. From the information given, prepare a heading and reconstruct a trial balance on a work sheet. The
owner’s capital account balance is the difference between the total of all debit account balances minus
the total of all credit account balances.
2. Complete the work sheet.
174 Chapter 6 Work Sheet for a Service Business
A P P L I E D CO M M U N I C AT I O N
Accounting information is used by managers to make business decisions. But exactly what kind of decisions
does the owner of a local business make? How does accounting information enable the manager to make better
decisions?
Instructions: Identify a local business of personal interest to you. Write five questions you would ask the manager
to learn how that person uses accounting information to make decisions. Interview the manager and write a one- or
two-page summary of the interview.
CASE FOR CRITICAL THINKING
When posting amounts from a journal to general ledger accounts, a $10.00 debit to Supplies is mistakenly posted as
a credit to Utilities Expense. Will this error be discovered when the work sheet is prepared? Explain.
AUDITING FOR ERRORS
The trial balance for Enfield Company is given below.
Account Titles Account Balances
Debit Credit
Cash $ 4,391.00
Petty Cash 300.00
Accounts Receivable—Harned Co. $2,950.00
Supplies 327.00
Accounts Payable—Esby Inc. 1,250.00
Ervin Enfield, Capital 6,500.00
Ervin Enfield, Drawing 600.00
Income Summary
Sales 2,500.00
Advertising Expense 1,432.00
Supplies Expense
Rent Expense 250.00
Totals 16,300.00 4,200.00
The debit column does not equal the credit column. The new bookkeeper knows that the amounts are correct but is
not sure if the amounts are in the correct columns.
Instructions
1. Using what you know about the normal balance side of each account, find which amount(s) are in the wrong
column.
2. On a separate piece of paper, copy the balances, putting them in the correct columns.
3. Total the columns to prove that debits now equal credits.
A N A LY Z I N G B E S T B U Y ’S F I N A N C I A L S TAT E M E N T S
The length of time for which a business summarizes and reports financial information is known as a fiscal period.
Annual statements use a fiscal period equal to one year. However, the fiscal year does not necessarily begin on Janu-
ary 1 and end on December 31 (a calendar year). A company’s fiscal year can begin on any date. Most companies
choose a fiscal year that ends during a period of low business activity, often after a period of high activity, when
inventories are low. Look at the second page of Note 1 to Best Buy’s financial statements on Appendix B page B10.
Instructions
1. When does Best Buy’s fiscal year end?
2. Why do you think Best Buy’s management feels that this is a good time for a fiscal year end?
Work Sheet for a Service Business Chapter 6 175
Accounting
SOFTWARE
TRIAL BALANCE AND ADJUSTING ENTRIES
Computer accounting systems do not use work sheets to plan adjustments. At any time, a trial balance can be
printed that reports all general ledger account balances in debit and credit columns, just like the first two columns
of the work sheet. Rather than being recorded in the adjustment columns of a work sheet, adjustments are entered
individually using the general journal and posted to the general ledger.
A second trial balance should be printed to report the adjusted account balances. It is important that you review
every report printed by a computer. Don’t assume that anything produced by a computer is accurate. After record-
ing adjustments, you should pay special attention to every account that required adjustment. Is the new Supplies
account balance correct? Does the Insurance Expense account now have a balance?
PEACHTREE MASTERY PROBLEM 65
1. Open (Restore) file 06-5MP.ptb.
2. Journalize and post the adjusting entries.
3. Print trial balances before and after adjustments. Note: Although the instructions direct you to prepare a manual
8-column work sheet, it is not necessary to do this for this problem.
TRIAL BALANCE AND ADJUSTING ENTRIES
The work sheet was introduced in this chapter. The work sheet is used only in a manual accounting
system. Computerized accounting systems do not produce a work sheet. Instead, a trial balance is printed to make
sure that the debit account balances equal the credit account balances. The trial balance is used to plan the neces-
sary adjustments. The adjusting entries are then entered into the system using general journal entries.
Once the adjusting entries have been made, another trial balance should be prepared. Although computer
systems are very accurate, the new balances should be examined to determine if the correct adjusting entries were
made. This can be done by checking to make sure the new balances in supplies and prepaid insurance reflect the
amount of supplies on hand and the unexpired insurance.
QUICKBOOKS MASTERY PROBLEM 65
1. Open the Bonita Bubbles file.
2. Journalize the adjusting entries for April 30 using the general journal in your QuickBooks software to record the
transactions.
3. Print a trial balance. NOTE: Although the instructions direct you to generate a balance sheet and profit and loss
statement, it is not necessary to do this right now. You will do this in a later problem. However, you should gener-
ate a trial balance after the adjusting entries are recorded in order to check the accuracy of the adjusting process.
176 Chapter 6 Work Sheet for a Service Business
8COLUMN WORK SHEET AND INSERTING
AND DELETING ROWS
Imagine that you are preparing a paper work sheet and have completed entering all the account titles and trial
balance amounts. Calculating the total for each column, you discover that you have missed entering the Petty Cash
account. What would you do to correct this mistake?
Whether using a paper work sheet or an electronic spreadsheet template, the process of entering accounts and
amounts may seem to be the same. However, the electronic spreadsheet has two important advantages. First, addi-
tional rows can easily be inserted to correct a mistake as described above. Second, column totals calculated using
SUM functions eliminate the time and potential errors inherent with calculating these values with a calculator.
Inserting rows does not require that you modify a SUM function. The function easily adapts to new rows being
entered on a work sheet. A SUM function such as =SUM(B10:B24) will automatically change to =SUM(B10:B25)
when a row is inserted between rows 10 and 24. In the same manner, SUM functions will adjust when unused rows
are deleted.
EXCEL APPLICATION PROBLEM 61
1. Open the F06-1 Excel data file.
2. Follow the step-by-step instructions in the Instructions work sheet to make changes to an 8-column work sheet
using an Excel spreadsheet.
This template can also be used to complete Application Problems 6-2 and 6-3.
EXCEL MASTERY PROBLEM 65
1. Open the F06-5 Excel data file.
2. Follow the step-by-step instructions in the Instructions work sheet to make changes to an 8-column work sheet
using an Excel spreadsheet.
TRIAL BALANCE AND ADJUSTING ENTRIES
In automated accounting, the emphasis is on the analysis of the source documents and the preparation of timely
and accurate journal entries and adjusting entries. These are the parts of the accounting cycle that require account-
ing personnel to apply the matching concept to ensure that revenues and expenses are recorded in the proper peri-
ods. The automated accounting system is programmed to post journal entries and to prepare trial balances, closing
entries, and financial statements as needed. The accounting staff is freed from the more repetitive tasks associated
with the accounting cycle and can concentrate on the analysis functions.
Work sheets are not used in Automated Accounting. However, it is still necessary to plan and journalize adjusting
entries at the end of the fiscal period.
A trial balance is printed or displayed to show the current account balances. Adjustments are then planned and
journalized and posted to bring general ledger accounts up to date.
AUTOMATED ACCOUNTING APPLICATION PROBLEM 62
Open file F06-2.AA8. Display the problem instructions and complete the problem.
AUTOMATED ACCOUNTING MASTERY PROBLEM 65
Open file F06-5.AA8. Display the problem instructions and complete the problem.
Work Sheet for a Service Business Chapter 6 177
DIGITAL VISION/GETTY IMAGES
C H A P T E R 7 Financial Statements
for a Proprietorship
O B J E C T I V E S
After studying Chapter 7, you will be able to: 3. Prepare an income statement for a service
business organized as a proprietorship and
1. Define accounting terms related to financial
analyze an income statement using component
statements for a service business organized as a
percentages.
proprietorship.
4. Prepare a balance sheet for a service business
2. Identify accounting concepts and practices
organized as a proprietorship.
related to preparation of financial statements for
a service business organized as a proprietorship.
K E Y T E R M S
• stakeholders • component percentage
( Point Your Browser
www.C21accounting.com
)
178
ACCOUNTING IN THE REAL WORLD
American Eagle Outfitters
King of Jeans
If you have bought a pair of jeans at American Eagle (AE), you’re not alone.
American Eagle sells the most jeans of any U.S. specialty store brand. In
2006, the company sold over 6.5 million pairs of jeans. And, American Eagle
doesn’t sell only jeans. An AE T-shirt is sold every 10 seconds.
American Eagle describes the style of its brand as “laidback, current cloth-
ing” and targets 15-to-25-year-olds. It strives for high-quality merchandise
DIGITAL VISION/GETTY IMAGES
while offering it at affordable prices. Their strategy seems to be working.
Sales have increased from $1.39 billion in 2003 to $2.29 billion for the year
ending February, 2007. These sales are from 911 INTERNET
stores in the U.S., Puerto Rico, and Canada ACTIVITY
as well as through ae.com.
In 2006, AE launched its new Financial Statement
lifestyle brand under the name Analysis
of Martin + OSA. This brand Choose two companies in
is described as being able the same industry. Go to the
to go from the workplace homepage for each company.
to leisure activities and Search each site for its most
is targeted at 25-to-40- current financial statements.
year-olds. American
Eagle hopes that this Instructions
new brand will boost
1. List the “Total Revenue,”
sales even more in the
“Total Expenses,” and “Net
future.
Income” or “Net Loss” for
©TIM BOYLE/GETTY IMAGES
each company.
2. For each company,
calculate and record the
component percentages
for total expenses and net
income by dividing each
item by the amount of net
Critical Thinking sales. Round percentage
1. What account titles might you find on a balance sheet for American calculations to the nearest
Eagle? 0.1%.
2. Why would American Eagle start a new brand of sportswear focused on 3. Compare the component
the 25-to-40-year-old market? percentages for net
income for each company.
Source: www.ae.com Which company has
the better component
percentage?
179
L E S S O N
Preparing an Income
7-1 Statement
R E P O R T I N G F I N A N C I A L I N F O R M AT I O N
The financial information needed by managers and TechKnow Consulting prepares two financial state-
owners to make good business decisions can be found in ments: an income statement and a balance sheet. Tech-
the general ledger accounts. However, the information in Know Consulting always prepares financial statements
the general ledger is very detailed. Therefore, to make this at the end of each monthly fiscal period. [CONCEPT:
general ledger information more usable, the information Accounting Period Cycle]
is summarized, organized, and reported to the owners and When a business is started, it is expected that the busi-
managers. ness will continue to operate indefinitely. For example,
Also, all financial information must be reported if good Kim Park assumes that she will own and operate Tech-
business decisions are to be made. A financial statement Know Consulting for many years. When she retires, she
with incomplete information is similar to a book with miss- expects to sell TechKnow Consulting to someone else,
ing pages. The complete story is not told. If a business has who will continue its operation. The accounting concept
both rent and utilities expenses but reports only the rent Going Concern is applied when financial statements are
expense, managers will have incomplete information on prepared with the expectation that a business will remain
which to base decisions. The accounting concept Adequate in operation indefinitely. [CONCEPT: Going Concern]
Disclosure is applied when financial statements contain all
information necessary to understand a business’s financial
condition. [CONCEPT: Adequate Disclosure]
ES
Y I MAG
G E TT
D I SC/
PH OTO
180 Chapter 7 Financial Statements for a Proprietorship
CHARACTER COUNTS
Id e nt i f y i ng S t a k e h ol d e r s
Many states now require motorcyclists to wear helmets— from this analysis. State legis-
a law unpopular with individuals who believe they should lators who have voted for
have the freedom of choice. Most people recognize that helmet laws believed that
wearing a helmet provides the rider with extra protection benefits to the motor-
in a crash. But why not allow a rider to accept the extra risk cyclist failed to offset
of riding without a helmet? the negative impact
A well-known ethical model, the utilitarian theory, on so many stake-
states that an ethical action is one that provides the great- holders. Individuals
est balance of good over harm. Any persons or groups who opposed hel-
who will be affected by an action are called stakeholders. met laws believe
The impact of the action on all stakeholders should be the benefits to the
analyzed. Major stakeholders include owners, employees, individual offset the
customers, local communities, and society. Not every type negative impact on
of stakeholder will apply in each decision. However, the list all other stakeholders.
of stakeholders provides a useful guide for individuals to
search beyond themselves for the impact of their actions. Instructions
Examine the table below, which analyzes the impact on Most colleges and universi-
stakeholders involved in a motorcyclist’s decision to ride ties have minimum academic
without a helmet. standards for admission. Create a table
This analysis clearly demonstrates how a seemingly that analyzes the positive and negative impact of
personal decision—wearing a helmet—can affect many admission standards. Are admission standards ethical?
people. Individuals must make their own conclusions
Impact on Stakeholders of a Motorcyclist’s Decision to Ride Without a Helmet
Stakeholders Negative Impact Positive Impact
Motorcyclist • Likely to have to pay higher insurance premiums. • Enjoys the freedom of riding
• May incur more serious injuries or death. without the confinement of a
helmet.
Automobile • May suffer higher mental anguish if motorcyclist incurs • May drive more cautiously when
drivers more serious injuries. near motorcyclists without helmets.
Relatives • Personal lives and careers may be negatively affected if
accident disables motorcyclist.
Emergency • Risks to emergency personnel are greater because they are
personnel more aggressive when responding to serious accidents.
Insurance • Higher medical bills resulting from more serious injuries will
companies hopefully be offset by charging higher insurance premiums.
State • May be subject to lawsuits by individuals who believe state
PHOTO: PHOTOALTO/GETTY IMAGES
was negligent in not passing a helmet law.
• More serious accidents require more emergency personnel
and equipment, thus spending limited resources.
Society • Government programs will pay for medical bills and
disability payments not provided by the motorcyclist’s
insurance.
Preparing an Income Statement Lesson 7-1 181
I N C O M E S TAT E M E N T I N F O R M AT I O N O N A W O R K S H E E T
5 6 7 8
INCOME STATEMENT BALANCE SHEET
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT
12 Sales 3 5 6 5 00 12
13 Advertising Expense 2 1 3 00 13
14 Insurance Expense 1 0 0 00 14
15 Miscellaneous Expense 2 8 00 15
16 Rent Expense 3 0 0 00 16
17 Supplies Expense 7 1 5 00 17
18 Utilities Expense 1 1 0 00 18
19 1 4 6 6 00 3 5 6 5 00 19
20 Net Income 2 0 9 9 00 20
21 3 5 6 5 00 3 5 6 5 00 21
22 22
An income statement reports financial information over Information needed to prepare TechKnow Consulting’s
a specific period of time, indicating the financial prog- income statement is obtained from two places on the work
ress of a business in earning a net income or a net loss. sheet. Account titles are obtained from the work sheet’s
Expenses are the amounts a business pays to operate the Account Title column. Account balances are obtained
business and earn the revenue. The revenue earned and from the work sheet’s Income Statement columns. The
the expenses incurred to earn that revenue are reported in income statement for a service business has four sections:
the same fiscal period. [CONCEPT: Matching Expenses (1) heading, (2) revenue, (3) expenses, and (4) net income
with Revenue] or net loss.
H E A D I N G O F A N I N C O M E S TAT E M E N T
1. Name of
PREPARING
Company
S T E P S THE HEADING
TechKnow Consulting
1
OF AN INCOME
Income Statement 2 2. Name of
STATEMENT
For Month Ended August 31, 20-- Report
3
3. Date of 1 Center the name of the company, TechKnow
Report Consulting, on the first line.
2 Center the name of the report, Income State-
The income statement’s date shows that this income state- ment, on the second line.
ment reports information for the one-month period from
3 Center the date of the report, For Month Ended
August 1 through August 31.
August 31, 20--, on the third line.
182 Chapter 7 Financial Statements for a Proprietorship
REVENUE, EXPENSES, AND NET INCOME
S E C T I O N S O F A N I N C O M E S TAT E M E N T
1. Revenue 2. Account Title 7. Single Line
% OF 3. Revenue
1 SALES
Amount
4. Expenses Revenue:
Sales 2 3 5 6 5 00 3
4 Expenses:
Advertising Expense 2 1 3 00
5. Account Titles Insurance Expense 1 0 0 00
5 Miscellaneous Expense 2 8 00 6 6. Expense
Rent Expense 3 0 0 00
Amounts
Supplies Expense 7 1 5 00 9. Total of
8. Total Expenses
Utilities Expense 1 1 0 00 9 Expenses
7
8 Total Expenses 1 4 6 6 00
11 11. Single
Net Income 2 0 9 9 00
12 14 10 13 Line
12. Net Income 13. Record Net Income
14. Double Lines 10. Calculate Net Income
PREPARING THE REVENUE, EXPENSES, AND NET INCOME
S T E P S
SECTIONS OF AN INCOME STATEMENT
1 Write the name of the first section, Revenue:, at the extreme left of the wide column on the first line.
2 Write the title of the revenue account, Sales, on the next line, indented about one centimeter.
3 Record the balance of the account, $3,565.00, on the same line in the second amount column.
4 Write the name of the second section, Expenses:, on the next line at the extreme left of the wide column.
5 Write the title of each expense account in the wide column, indented about one centimeter.
6 Record the balance of each expense account in the first amount column on the same line as the account title.
7 Rule a single line across the first amount column under the last expense account balance to indicate addition.
8 Write the words Total Expenses on the next blank line in the wide column, indented about one centimeter.
9 Record the amount of total expenses, $1,466.00, on the same line in the second amount column.
10 Calculate and verify the amount of net income.
a. Calculate net income from information on
the income statement, as shown. Total Total Net
ⴚ ⴝ
b. Compare the amount of net income, Revenue Expenses Income
$2,099.00, with the net income on the work $3,565.00 ⫺ $1,466.00 ⫽ $2,099.00
sheet. If the two amounts are not the same,
an error has been made.
11 Rule a single line across the second amount column just below the amount of total expenses.
12 Write the words Net Income on the next line at the extreme left of the wide column.
13 On the same line, record the amount of net income, $2,099.00, in the second amount column.
14 Rule double lines across both amount columns below the amount of net income to show that the amount has been
verified as correct.
Preparing an Income Statement Lesson 7-1 183
C O M P O N E N T P E R C E N TA G E A N A LY S I S
O F A N I N C O M E S TAT E M E N T
TechKnow Consulting
Income Statement
For Month Ended August 31, 20--
% OF
SALES
Revenue:
Sales 3 5 6 5 00 100.0
Expenses:
Advertising Expense 2 1 3 00
Insurance Expense 1 0 0 00
Miscellaneous Expense 2 8 00
Rent Expense 3 0 0 00
Supplies Expense 7 1 5 00
Utilities Expense 1 1 0 00
Total Expenses 1 4 6 6 00 41.1
Net Income 2 0 9 9 00 58.9
For a service business, the revenue reported on an income Total Expenses Component Percentage
statement is compared to two components: (1) total The total expenses component percentage, based on infor-
expenses and (2) net income. To make decisions about mation from the August income statement, is calculated
future operations, a manager analyzes relationships as shown. For businesses similar to TechKnow Consult-
between these two income statement components and the ing, an acceptable total expenses component percentage is
total sales. The percentage relationship between one finan- not more than 55.0%. Therefore, TechKnow Consulting’s
cial statement item and the total that includes that item percentage, 41.1%, is less than 55.0% and is acceptable.
is called a component percentage. On an income state-
ment, component percentages are calculated by dividing
the amount of each component by the total amount of Total Total Total Expenses
ⴜ ⴝ
sales. TechKnow Consulting calculates a component per- Expenses Sales Component Percentage
centage for total expenses and net income. The relation- $1,466.00 ⫼ $3,565.00 ⫽ 41.1%
ship between each component and total sales is shown in
a separate column on the income statement at the right of
the amount columns. Net Income Component Percentage
The net income component percentage, based on infor-
Acceptable Component Percentages mation from the August income statement, is calculated
For a component percentage to be useful, Ms. Park needs as shown. For businesses similar to TechKnow Consulting,
to know what component percentages are acceptable an acceptable net income component percentage is not
for businesses similar to TechKnow Consulting. Vari- less than 45.0%. Therefore TechKnow Consulting’s per-
ous industry organizations publish average percentages centage, 58.9%, is greater than 45.0% and is acceptable.
for similar businesses. In the future, Ms. Park could also
compare TechKnow Consulting’s component percentages
from one fiscal period with the percentages of previous Net Total Net Income
fiscal periods. ⴜ ⴝ
Income Sales Component Percentage
$2,099.00 ⫼ $3,565.00 ⫽ 58.9%
184 Chapter 7 Financial Statements for a Proprietorship
I N C O M E S TAT E M E N T W I T H T W O S O U R C E S
OF REVENUE AND A NET LOSS
5. Total Revenue
HighNote
Income Statement
For Month Ended August 31, 20--
1. Revenue 3. Revenue
% OF Amounts
SALES
1 Revenue:
Sales—Lessons 2 3 6 0 00
2 3
Sales—Repairs 1 2 5 0 00 4 4. Total of
2. Account Total Revenue 5 3 6 1 0 00 100.0 Revenue
Titles Expenses:
Advertising Expense 1 1 0 0 00
Insurance Expense 3 4 1 00
Rent Expense 1 4 5 0 00
Supplies Expense 1 5 7 5 00
Total Expenses 4 4 6 6 00 123.7
6 Net Loss (8 5 6 00) (23.7)
7
6. Net Loss 7. Record Net Loss
TechKnow Consulting receives revenue from only one When an income statement is prepared for HighNote,
source, the sale of services for setting up and troubleshoot- both revenue accounts are listed. The revenue section of
ing computer networks. HighNote receives revenue from HighNote differs from the income statement prepared by
two sources, the sale of services for music lessons and the TechKnow Consulting.
sale of services to repair musical instruments. The busi- If total expenses exceed total revenue, a net loss is
ness’s owner wants to know how much revenue is earned reported on an income statement. HighNote reported a
from each source. Therefore, the business uses two rev- net loss on its August income statement.
enue accounts: Sales—Lessons and Sales—Repairs.
PREPARING THE REVENUE SECTION OF AN INCOME
S T E P S
STATEMENT WITH TWO SOURCES OF REVENUE
1 Write the section heading, Revenue:, at the left of the wide column.
2 Write the titles of both revenue accounts in the wide column, indented about one centimeter.
3 Record the balance of each account in the first amount column on the same line as the account title.
4 Total the two revenue account balances. Write the total amount on the next line in the second amount column.
5 Write the words Total Revenue in the wide column, indented about one centimeter on the same line as the total
revenue amount.
PREPARING THE NET LOSS SECTION OF AN INCOME STATEMENT
6 Write the words Net Loss at the extreme left of the wide column.
7 Subtract the total expenses from the revenue to calculate the net loss. Record the amount of net loss in the
second amount column in parentheses. An amount written in parentheses on a financial statement indicates
a negative amount.
Preparing an Income Statement Lesson 7-1 185
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. List the four sections of an income statement. TERMS REVIEW
2. What is the formula for calculating the total expenses component
percentage?
stakeholders
3. What is the formula for calculating the net income component
percentage? component percentage
WORK TOGETHER 71
Preparing an income statement
A partial work sheet of Darlene’s Delivery Service for the month ended July 31 of the current year is given in the
Working Papers. Also given is a blank form for completing an income statement. Your instructor will guide you
through the following example.
1. Prepare an income statement for the month ended July 31 of the current year. Calculate and record the compo-
nent percentages for total expenses and net income. Round percentage calculations to the nearest 0.1%.
ON YOUR OWN 71
Preparing an income statement
A partial work sheet of Cuts by Kelley for the month ended February 28 of the current year is given in the Working
Papers. Also given is a blank form for completing an income statement. Work this problem independently.
1. Prepare an income statement for the month ended February 28 of the current year. Calculate and record the
component percentages for total expenses and net income. Round percentage calculations to the nearest 0.1%.
186 Chapter 7 Financial Statements for a Proprietorship
L E S S O N
Balance Sheet Information
7-2 on a Work Sheet
BALANCE SHEET
7 8
BALANCE SHEET
ACCOUNT TITLE
DEBIT CREDIT
1 Cash 4 9 6 4 00 1
2 Petty Cash 1 0 0 00 2
3 Accounts Receivable—Oakdale School 1 5 0 00 3
4 Accounts Receivable—Campus Internet Cafe 1 0 0 00 4
5 Supplies 3 1 0 00 5
6 Prepaid Insurance 1 1 0 0 00 6
7 Accounts Payable—Supply Depot 2 0 0 00 7
8 Accounts Payable—Thomas Supply Co. 5 0 00 8
9 Kim Park, Capital 5 0 0 0 00 9
10 Kim Park, Drawing 6 2 5 00 10
19 7 3 4 9 00 5 2 5 0 00 19
20 Net Income 2 0 9 9 00 20
21 7 3 4 9 00 7 3 4 9 00 21
A balance sheet reports financial information on a spe- use if reported in an organized manner such as on a bal-
cific date, indicating the financial condition of a business. ance sheet.
The financial condition of a business refers to its finan- Information needed to prepare TechKnow Consulting’s
cial strength. If a business has adequate available assets balance sheet is obtained from two places on the work
and few liabilities, that business is financially strong. If sheet. Account titles are obtained from the work sheet’s
the business’s financial condition is not strong, adverse Account Title column. Account balances are obtained
changes in the economy might cause the business to fail. from the work sheet’s Balance Sheet columns.
Information about assets, liabilities, and owner’s equity A balance sheet has four sections: (1) heading, (2) assets,
might be obtained from the general ledger accounts or (3) liabilities, and (4) owner’s equity.
from a work sheet. However, the information is easier to
HEADING OF A BALANCE SHEET
1. Name of
PREPARING THE
Company
1
S T E P S HEADING OF A
TechKnow Consulting BALANCE SHEET
Balance Sheet 2 2. Name of
August 31, 20-- 3 Report 1 Center the name of the company, TechKnow
Consulting, on the first line.
3. Date of
2 Center the name of the report, Balance Sheet,
Report
on the second line.
3 Center the date of the report, August 31, 20--,
on the third line.
Balance Sheet Information on a Work Sheet Lesson 7-2 187
ASSETS AND LIABILITIES SECTIONS OF A BALANCE SHEET
1. Assets 4. Liabilities 5. Account Titles 6. Liability Amounts
1 Assets 4 Liabilities
5
2. Account Cash 4 9 6 4 00 Accts. Pay.—Supply Depot 2 0 0 00 6
Titles Petty Cash 1 0 0 00 Accts. Pay.—Thomas Supply Co. 5 0 00 7. Single
7 Line
Accts. Rec.—Oakdale School 3 1 5 0 00 Total Liabilities 9 2 5 0 00
2
Accts. Rec.—Campus Internet Cafe 1 0 0 00 8
Supplies 3 1 0 00
Prepaid Insurance 1 1 0 0 00
3. Asset Amounts 8. Total Liabilities 9. Total of Liabilities
A balance sheet reports information about the elements of er’s equity are on the RIGHT side of the accounting equa-
the accounting equation. tion and on the RIGHT side of TechKnow Consulting’s
balance sheet.
Assets ⫽ Liabilities ⫹ Owner’s Equity
The information needed to prepare the assets section
The assets are on the LEFT side of the accounting is obtained from the work sheet’s Account Title column
equation and on the LEFT side of TechKnow Consult- and the Balance Sheet Debit column. The information
ing’s balance sheet. needed to prepare the liabilities section is obtained from
Two kinds of equities are reported on a balance sheet: the work sheet’s Account Title column and the Balance
(1) liabilities and (2) owner’s equity. Liabilities and own- Sheet Credit column.
PREPARING THE ASSETS AND LIABILITIES SECTIONS
S T E P S
OF A BALANCE SHEET
I MA G E S
C / G ETTY
TO D I S
1 PHO
Write the title of the first section, Assets, in the middle of the left wide column.
2 Write the titles of all asset accounts under the heading.
3 Record the balance of each asset account in the left amount
column on the same line as the account title.
4 Write the title of the next section, Liabilities, in the
middle of the right wide column.
5 Write the titles of all liability accounts under the
heading.
6 Record the balance of each liability account in
the right amount column on the same line as
the account title.
7 Rule a single line across the right amount
column under the last amount, to indicate
addition.
8 Write the words Total Liabilities in the
right wide column on the next blank line.
9 Record the total of all liabilities, $250.00,
in the right amount column.
188 Chapter 7 Financial Statements for a Proprietorship
OWNER’S EQUITY SECTION OF A BALANCE SHEET
TechKnow Consulting 1. Owner‘s Equity
7. Total Liab. and Balance Sheet
Owner's Eq. August 31, 20-- 2. Account Title
Assets Liabilities
Cash 4 9 6 4 00 Accts. Pay.—Supply Depot 2 0 0 00
Petty Cash 1 0 0 00 Accts. Pay—Thomas Supply Co. 5 0 00
Accts. Rec.—Oakdale School 1 5 0 00 Total Liabilities 2 5 0 00
Accts. Rec.—Campus Internet Cafe 1 0 0 00 Owner’s Equity 1 3. Capital Amount
Supplies 3 1 0 00 Kim Park, Capital 2 6 4 7 4 00 3
Prepaid Insurance 4 1 1 0 0 00
4
5 6 4. Single Line
Total Assets 6 7 2 4 00 Total Liab. and Owner’s Eq. 8 6 7 2 4 00
9
9 10 7 10
4. Single Line
5. Total Assets 8. Total of Liabilities
6. Total of Assets and Owner's Equity
9. Compare Totals 10. Double Lines
Only the amount of current capital is reported on Tech- Balance Sheet columns. The amount of current capital is
Know Consulting’s balance sheet. The amounts needed to calculated as shown.
calculate the current capital are found in the work sheet’s
Capital Account Net Drawing Account Current
ⴙ ⴚ ⴝ
Balance Income Balance Capital
$5,000.00 ⫹ $2,099.00 ⫺ $625.00 ⫽ $6,474.00
When a business has a net loss, current capital is cal- balance sheet in the same way as when the business has a
culated as shown. The current capital is reported on the net income.
Capital Account Net Drawing Account Current
ⴚ ⴚ ⴝ
Balance Loss Balance Capital
$12,000.00 ⫺ $200.00 ⫺ $500.00 ⫽ $11,300.00
PREPARING THE OWNER’S EQUITY SECTION
S T E P S
OF A BALANCE SHEET
1 Write the title of the section, Owner’s Equity, in the middle of the right wide column on the next line below
“Total Liabilities.”
2 Write the title of the owner’s capital account, Kim Park, Capital, on the next line.
3 Record the current amount of owner’s equity, $6,474.00, in the right amount column.
4 Rule a single line under the last amount in the longer left amount column. Rule a single line in the right amount
column on the same line.
5 Write the words Total Assets on the next line, in the left wide column.
6 Record the amount of total assets, $6,724.00, in the left amount column.
7 Write the words Total Liab. and Owner’s Eq. in the right wide column on the same line as Total Assets.
8 Record the amount of total liabilities and owner’s equity, $6,724.00, in the right amount column.
9 Compare the totals of the two amount columns. The totals are the same, so the balance sheet is in balance.
10 Rule double lines across both the left and right amount columns just below the column totals to show that the
totals have been verified as correct.
Balance Sheet Information on a Work Sheet Lesson 7-2 189
O W N E R ’ S E Q U I T Y R E P O R T E D I N D E TA I L
ON A BALANCE SHEET
3. Net Income 1. Beginning 2. Beginning Capital Amount
Capital
Total Liabilities 2 5 0 00 6. Difference
1 Owner’s Equity 2
Kim Park, Capital, August 1 5,000.00 8. Current
3 Net Income 2,099.00 Capital Amount
6
Less Kim Park, Drawing 4 625.00 1,474.00
7 Kim Park, Capital, August 31 5 6 4 7 4 00 8
Total Liabilities and Owner’s Equity 6 7 2 4 00
9
7. Ending 9. Total Liabilities and 4. Drawing 5. Single Line
Capital Owner’s Equity
TechKnow Consulting’s balance sheet reports the current tion. However, some businesses prefer to report the details
capital on August 31 but does not show how this amount about how owner’s equity is calculated.
was calculated. TechKnow Consulting is a small business If TechKnow Consulting were to report details about
with relatively few changes in owner’s equity to report. owner’s equity, the owner’s equity section of the balance
Therefore, Kim Park decided that the business does not sheet would be prepared as shown in the illustration.
need to report all the details in the owner’s equity sec-
PREPARING THE OWNER’S EQUITY SECTION REPORTED
S T E P S
IN DETAIL ON A BALANCE SHEET
1 Write the words Kim Park, Capital, August 1 on the first line under the words “Owner’s Equity.”
2 Record the owner’s capital account balance on August 1, $5,000.00, in the wide column.
3 Write the words Net Income on the next line. Record the net income, $2,099.00, in the wide column to the left
of the capital account balance.
4 Write the words Less Kim Park, Drawing on the next line. Record the balance of the drawing account, $625.00,
in the wide column.
5 Rule a single line under the amount.
6 Subtract the balance of the drawing account from the net income.
Record the difference, $1,474.00, in the wide column to the right of
the drawing account balance. R E M E M B E R
7 Write the words Kim Park, Capital, August 31 on the next line. Capital is not copied from the
work sheet to the balance
8 Add the August 1 capital amount, $5,000.00, and the difference sheet. Capital is calculated
between the net income and the drawing account, $1,474.00. using beginning capital,
Record the sum, $6,474.00, in the right amount column. plus net income or minus
net loss, minus drawing.
9 Write the words Total Liabilities and Owner’s Equity on the next line.
Record the amount of total liabilities and owner’s equity, $6,724.00,
in the right amount column.
190 Chapter 7 Financial Statements for a Proprietorship
CAREERS IN ACCOUNTING
E r i c Fe n g ,
E n t r e pr e n e u r /Fr a n c h i s e e
Entrepreneurial spirit is the foun- researching numerous opportunities, they decided to
dation of our economy. From pursue the purchase of an Arby’s franchise. “We did not
Henry Ford to Sam Walton have any experience managing a company, much less a
to Bill Gates, individuals restaurant business, nor did we have any significant cap-
have dreamed of con- ital to invest in the business. What we did have, however,
trolling their destiny was our knowledge of accounting.”
by starting their own The Fengs prepared an extensive business plan that
business. These entre- outlined in detail the amount of capital that would be
preneurs identified a required. The business plan included budgets of sales,
need in the market- expenses, and net income under several different sets
place and developed of assumptions. They then submitted the business plan
a product to fill that to the commercial loan officers of several local banks.
need. Through vision “The loan officers at the National Bank of Commerce
and determination, they were confident enough in our business plan to provide
created three of the best- us the financing we needed to make our dream come
known corporations in the true. The reason, we were told later, was that we had a
world. well-thought-out business plan that made good busi-
Eric Feng is an example of how ness sense. All business ventures involve risk. Thanks to
COURTESY OF ERIC FENG
an entrepreneurial spirit can launch a the accounting and computer backgrounds we had, we
successful business. He says, “I wanted to be my were able to evaluate the business venture in financial
own boss—a dream for many people—and we were no accounting terms and demonstrate to the bank that it
exception.” Eric and his wife, Candy, came to the United was a risk worth taking.”
States as foreign students to pursue advanced college Like many entrepreneurs, the Fengs have expanded
degrees. Eric finished a master’s degree in computer sci- their operations beyond their initial restaurant. Now the
ence, and Candy earned a degree in accounting. After owners of three Arby’s units, Eric and Candy credit their
several years of working for the local university, they success to their knowledge of accounting. “Business suc-
decided it was time to turn their dream into reality. cess is not a matter of luck. We owe what we have today
“We took our first step when we decided to purchase to our knowledge of accounting and our insistence on
a franchise for a quick-serve restaurant,” Eric recalls. After quality in all we do.”
Salary Range: Virtually unlimited, although the net specific levels of financial net worth, access to operating
income from a single unit of a franchise is limited by capital, and personal experience in the industry.
its physical size and location. However, like the Fengs,
Occupational Outlook: On its web site (www.
an entrepreneur can acquire many units of the same
franchise.org), the International Franchise Association lists
franchise.
over 800 corporations that offer franchises. Each of these
Qualifications: Franchisors provide potential franchi- franchisors is actively seeking entrepreneurs to expand
sees with information on qualifications, which may include the number of company units in operation.
Balance Sheet Information on a Work Sheet Lesson 7-2 191
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. List the four sections on a balance sheet.
2. What is the formula for calculating current capital?
WORK TOGETHER 72
Preparing a balance sheet
A partial work sheet of Ken’s Carpet Cleaning for the month ended April 30 of the current year is given in the Working
Papers. Also given is a blank form for completing a balance sheet. Your instructor will guide you through the follow-
ing example.
1. Prepare a balance sheet for April 30 of the current year.
ON YOUR OWN 72
Preparing a balance sheet
A partial work sheet of Anne’s Alterations for the month ended October 31 of the current year is given in the Working
Papers. Also given is a blank form for completing a balance sheet. Work this problem independently.
1. Prepare a balance sheet for October 31 of the current year.
192 Chapter 7 Financial Statements for a Proprietorship
SUMMARY
After completing this chapter, you can: 3. Prepare an income statement for a service busi-
ness organized as a proprietorship and ana-
1. Define accounting terms related to financial
lyze an income statement using component
statements for a service business organized as
percentages.
a proprietorship.
4. Prepare a balance sheet for a service business
2. Identify accounting concepts and practices
organized as a proprietorship.
related to preparation of financial state-
ments for a service business organized as a
proprietorship.
EXPLORE ACCOUNTING
C o m pa ra t i ve a n d Int e r i m
Fi n a n c i a l S t a t e m e nt s
A corporation that trades its stock on a U.S. stock ending cash balance from the previous year to
exchange must submit an annual report to determine if the amount of cash on hand is
the Securities and Exchange Commission increasing or decreasing.
(SEC). The SEC has specific requirements as Businesses that are required to sub-
to what must be included in the financial mit an annual report to the SEC must also
statements. submit a quarterly report. This report is
One requirement is that the financial not as detailed as the annual report, but it
statements included in the annual report must include the financial statements for the
must show amounts for more than one year. The quarter. Financial statements providing information
balance sheet must show ending balances for the current for a time period shorter than the fiscal year are called
and the previous year. The income statement and state- interim financial statements. Users of financial information
ment of stockholder’s equity must show amounts for the are able to evaluate the progress of the firm every three
current year and the two previous years. Financial state- months rather than waiting an entire year. The importance
ments providing information for multiple fiscal periods are of interim financial statements can be verified by the fact
called comparative financial statements. that the results reported in these statements are often
These statements make it possible for a user to com- summarized and reported in financial news sources, such
pare performance from year to year. For example, the as The Wall Street Journal and CNBC.
net income for the current year can be compared to the
net income for the two previous years. In this way, the Activity: Contact a corporation near you. Ask if the busi-
PHOTO: PHOTOGRAPHER’S CHOICE/GETTY IMAGES
user can determine if there is a positive or negative trend ness prepares interim financial statements and, if it does,
occurring in net income. On the balance sheet, the ending find out how often these statements are prepared.
cash balance for the current year can be compared to the
Financial Statements for a Proprietorship Chapter 7 193
71 APPLICATION PROBLEM
Preparing an income statement
A form is given in the Working Papers. The following information is obtained from the work sheet of Len’s
Laundry for the month ended August 31 of the current year.
5 6 7 8
INCOME STATEMENT BALANCE SHEET
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT
11 Sales 6 2 3 3 00 11
12 Advertising Expense 8 0 0 00 12
13 Insurance Expense 2 0 0 00 13
14 Miscellaneous Expense 3 1 5 00 14
15 Supplies Expense 4 5 0 00 15
16 Utilities Expense 1 4 9 5 00 16
17 3 2 6 0 00 6 2 3 3 00 10 4 3 6 00 7 4 6 3 00 17
18 Net Income 2 9 7 3 00 2 9 7 3 00 18
19 6 2 3 3 00 6 2 3 3 00 10 4 3 6 00 10 4 3 6 00 19
20 20
21 21
Instructions:
1. Prepare an income statement for the month ended August 31 of the current year.
2. Calculate and record the component percentages for total expenses and net income. Round percentage
calculations to the nearest 0.1%.
72 APPLICATION PROBLEM
Preparing a balance sheet
A form is given in the Working Papers. The following information is obtained from the work sheet of Len’s
Laundry for the month ended August 31 of the current year.
7 8
BALANCE SHEET
ACCOUNT TITLE
DEBIT CREDIT
1 Cash 7 6 0 7 00 1
2 Accts. Rec.—Natasha Goodlad 7 0 0 00 2
3 Accts. Rec.—R. Henry 4 9 8 00 3
4 Supplies 4 3 1 00 4
5 Prepaid Insurance 2 0 0 00 5
6 Accts. Pay.—Tri-County Supplies 3 8 1 00 6
7 Accts. Pay.—West End Supply Co. 5 5 5 00 7
8 Leonard Long, Capital 6 5 2 7 00 8
9 Leonard Long, Drawing 1 0 0 0 00 9
10 Income Summary 10
17 10 4 3 6 00 7 4 6 3 00 17
18 Net Income 2 9 7 3 00 18
19 10 4 3 6 00 10 4 3 6 00 19
20 20
194 Chapter 7 Financial Statements for a Proprietorship
Instructions:
Prepare a balance sheet for August 31 of the current year.
73 MASTERY PROBLEM
Preparing financial statements with a net loss
Forms are given in the Working Papers. The following information is obtained from the work sheet of Rolstad
Repair Service for the month ended September 30 of the current year.
5 6 7 8
INCOME STATEMENT BALANCE SHEET
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT
1 Cash 6 9 5 8 00 1
2 Petty Cash 1 5 0 00 2
3 Accts. Rec.—M. Hollerud 1 9 7 00 3
4 Supplies 7 8 0 00 4
5 Prepaid Insurance 8 0 0 00 5
6 Accts. Pay.—Tampa Supply 6 1 2 00 6
7 Ron Rolstad, Capital 9 3 3 7 00 7
8 Ron Rolstad, Drawing 6 0 0 00 8
9 Income Summary 9
10 Sales 3 2 6 9 00 10
11 Advertising Expense 4 5 0 00 11
12 Insurance Expense 1 5 7 00 12
13 Miscellaneous Expense 8 5 00 13
14 Supplies Expense 1 4 0 0 00 14
15 Utilities Expense 1 6 4 1 00 15
16 3 7 3 3 00 3 2 6 9 00 9 4 8 5 00 9 9 4 9 00 16
17 Net Loss 4 6 4 00 4 6 4 00 17
18 3 7 3 3 00 3 7 3 3 00 9 9 4 9 00 9 9 4 9 00 18
19 19
20 20
Instructions:
1. Prepare an income statement for the month ended September 30 of the current year.
2. Calculate and record the component percentages for total expenses and net loss. Place the percentage for
net loss in parentheses to show that it is for a net loss. Round percentage calculations to the nearest 0.1%.
3. Prepare a balance sheet for September 30 of the current year.
( Go Beyond the Book
For more information go to
www.C21accounting.com
)
Financial Statements for a Proprietorship Chapter 7 195
74 CHALLENGE PROBLEM
Preparing financial statements with two sources of revenue and a net loss
Forms are given in the Working Papers. The information below is obtained from the work sheet of LawnMow
for the month ended October 31 of the current year.
5 6 7 8
INCOME STATEMENT BALANCE SHEET
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT
1 Cash 1 8 9 8 00 1
2 Accts. Rec.—Sandra Rohe 9 5 00 2
3 Supplies 6 5 0 00 3
4 Prepaid Insurance 1 2 0 0 00 4
5 Accts. Pay.—Corner Garage 5 8 00 5
6 Accts. Pay.—Broadway Gas 1 1 0 00 6
7 Accts. Pay.—Esko Repair 2 1 5 00 7
8 Ryo Morrison, Capital 4 0 0 0 00 8
9 Ryo Morrison, Drawing 1 0 0 00 9
10 Income Summary 10
11 Sales—Lawn Care 4 9 0 0 00 11
12 Sales—Shrub Care 2 5 0 0 00 12
13 Advertising Expense 3 9 0 00 13
14 Insurance Expense 4 0 0 00 14
15 Miscellaneous Expense 5 5 0 00 15
16 Rent Expense 3 3 0 0 00 16
17 Supplies Expense 3 2 0 0 00 17
18 7 8 4 0 00 7 4 0 0 00 3 9 4 3 00 4 3 8 3 00 18
19 Net Loss 4 4 0 00 4 4 0 00 19
20 7 8 4 0 00 7 8 4 0 00 4 3 8 3 00 4 3 8 3 00 20
21 21
Instructions:
1. Prepare an income statement for the month ended October 31 of the current year.
2. Calculate and record the component percentages for total expenses and net loss. Place the percentage for
net loss in parentheses to show that it is for a net loss. Round percentage calculations to the nearest 0.1%.
3. Prepare a balance sheet for October 31 of the current year.
196 Chapter 7 Financial Statements for a Proprietorship
A P P L I E D CO M M U N I C AT I O N
Assume that you are the owner of a proprietorship, and you have just hired a new assistant. In the past, your assis-
tants have had difficulty understanding the importance of financial statements to your business.
Instructions: Write down what you would say to your assistant about the importance of income statements and
balance sheets in making financial decisions. Your statements should be no longer than one or two paragraphs.
CASE FOR CRITICAL THINKING
Romelle Woods and Ahti Indihar each own small businesses. Ms. Woods prepares an income statement and balance
sheet at the end of each day for her business, in order to make business decisions. Mr. Indihar prepares an income
statement and balance sheet for his business only at the end of each one-year fiscal period, when preparing tax
reports. Which owner is using the better procedure? Explain your answer.
GRAPHING WORKSHOP
The net income figures for three companies for three years are given below.
2005 2006 2007
Atlas Company 15,000 17,000 14,000
Mertzel Company 13,000 15,000 17,000
Tampeau Company 16,000 14,000 13,000
Develop a graph that will best illustrate the difference in the net income for each company each year. Decide for
yourself which type of graph to use.
A N A LY Z I N G B E S T B U Y ’S F I N A N C I A L S TAT E M E N T S
Best Buy’s financial reports include a consolidated statement of earnings, which is shown in Appendix B page B-6.
This statement reports revenue, expenses, and operating income similar to an income statement for a proprietor-
ship. Best Buy’s statement of earnings is more complex than the income statement described in this chapter. Besides
reporting net income (called net earnings), it also reports “Earnings from continuing operations.” The difference
between these two amounts is caused by discontinuing or selling a portion of the company or because of changes
in accounting procedures.
Instructions
1. What are Best Buy’s net earnings for each of the three years?
2. What are Best Buy’s earnings from continuing operations for each of the three years?
3. Note 2 to the financial statements is on page B-20. Note 2 tells about discontinuing or selling a portion of the
company. Read Note 2. What portion of the company was sold that caused the difference between net earnings
and earnings from continuing operations in 2004?
Financial Statements for a Proprietorship Chapter 7 197
Accounting
SOFTWARE
G E N E R AT I N G F I N A N C I A L S TAT E M E N T S
As an elementary student, you learned to add, subtract, multiply, and divide—the basic functions of math. In junior
high and high school, you learned algebra and geometry—more complex and sophisticated levels of math.
Throughout this chapter, you have been learning the basic functions of accounting. When you use Peachtree
to print an income statement and balance sheet, you will note some terms and headings that you have not yet
learned, such as Cost of Goods Sold, Gross Profit, Current Assets, and Long-term Liabilities. Peachtree was devel-
oped assuming that you, the user, possess a more complete knowledge of accounting. Be patient; you will learn
about these terms as you continue your accounting education.
PEACHTREE MASTERY PROBLEM 73
1. Open (Restore) file 07-3MP.ptb.
2. Print an income statement and balance sheet.
PEACHTREE CHALLENGE PROBLEM 74
1. Open (Restore) file 07-4CP.ptb.
2. Print an income statement and balance sheet.
G E N E R AT I N G F I N A N C I A L S TAT E M E N T S
Accounting terms vary from company to company. This chapter discussed the income statement,
which shows net income or net loss. Another name for this statement is profit and loss statement. QuickBooks uses
the title Profit & Loss to identify a statement that shows net income or net loss.
Financial statements also vary in format. The financial statements printed in QuickBooks may contain terms,
such as current assets or current liabilities, that have not been covered in this course. These terms will be defined in
a later chapter. Regardless of the terms used, the financial statements still provide the same basic information and
can still be analyzed in the same way.
QUICKBOOKS MASTERY PROBLEM 73
Note: For all printouts, add a custom footer that includes your name and the problem number; print in portrait
orientation
1. Open the Rolstad Repair Service file.
2. Print a profit and loss statement for the month ended September 30. Use the Reports menu and choose
Company & Financial.
3. Modify the report to include component percentages for expenses and net loss as a percentage of sales.
4. Print a standard balance sheet as of September 30.
QUICKBOOKS CHALLENGE PROBLEM 74
1. Open the LawnMow file.
2. Print a profit and loss report for October 1 through October 31, including component percentages.
3. Generate a balance sheet for October 31.
198 Chapter 7 Financial Statements for a Proprietorship
G E N E R AT I N G F I N A N C I A L S TAT E M E N T S
Data and information are often considered synonymous terms. Accountants use the term data to refer to unor-
ganized facts. In contrast, information is data that has been organized and is presented in a manner that can be
understood by the reader.
An income statement organizes the current balances of revenue and expense accounts to inform the reader how
effectively the business has operated during a fiscal period. For a business that has incurred a net loss, accountants
have commonly reported negative amounts by using a hyphen in front of the number or by surrounding the num-
ber with parentheses.
Today’s electronic spreadsheets provide accountants with an additional method of alerting the reader to a net
loss. Negative values can also be displayed in red font. You have probably heard someone say “in the red” when
referring to a business that is losing money. By allowing negative numbers to appear in red, the electronic spread-
sheet uses this traditional association to further communicate that the business has incurred a net loss.
EXCEL MASTERY PROBLEM 73
1. Open the F07-3 Excel data file.
2. Follow the step-by-step instructions in the Instructions work sheet to change the cell format of the net loss
amount.
G E N E R AT I N G F I N A N C I A L S TAT E M E N T S
One of the advantages of using accounting software is that once transaction data are entered, the software
prepares financial statements automatically.
To display financial statements:
1. Click the Reports toolbar button, or choose the Report Selection menu item from the Report menu.
2. When the Report Selection dialog appears, choose the Financial Statements option from the Select a Report
Group list.
3. Choose the financial statement report you would like to display from the Choose a Report to Display list.
4. Click the OK button.
The up-to-date account balances stored by the software are used to calculate and display the current financial
statements. A component percentage is included for each dollar amount. Component percentages calculated on
the income statement show the relationship of items to total sales.
The balance sheet reports information about assets, liabilities, and owner’s equity on a specific date. Additional
information about owner’s equity can be obtained by selecting the Statement of Owner’s Equity. This statement
shows changes to the capital account during the period.
When a report is displayed in Automated Accounting, it can also be copied in word processor or spreadsheet
format by pressing the Copy button at the bottom of the report window. The report can then be pasted into a word
processing document or spreadsheet for additional processing or distribution. For example, if an income statement
were pasted into a spreadsheet, amounts could be changed to perform “what-if” analysis, such as “What if sales
increased by 25%: what would the effect on net income be?”
AUTOMATED ACCOUNTING APPLICATION PROBLEMS 71 AND 72
Open file F07-1.AA8. Display the problem instructions and complete the problems.
AUTOMATED ACCOUNTING CHALLENGE PROBLEM 74
Open file F07-4.AA8. Display the problem instructions and complete the problem.
Financial Statements for a Proprietorship Chapter 7 199
DIGITAL VISION/GETTY IMAGES
C H A P T E R 8 Recording Adjusting
and Closing Entries
for a Service Business
O B J E C T I V E S
After studying Chapter 8, you will be able to: 3. Record adjusting entries for a service business
organized as a proprietorship.
1. Define accounting terms related to adjusting
and closing entries for a service business orga- 4. Record closing entries for a service business orga-
nized as a proprietorship. nized as a proprietorship.
2. Identify accounting concepts and practices 5. Prepare a post-closing trial balance for a service
related to adjusting and closing entries for a business organized as a proprietorship.
service business organized as a proprietorship.
K E Y T E R M S
• adjusting entries • temporary accounts • post-closing trial balance
• permanent accounts • closing entries • accounting cycle
( Point Your Browser
www.C21accounting.com
)
200
ACCOUNTING IN THE REAL WORLD
The Walt Disney Company
Conservation Is Good Business at The Walt Disney Company
Say the word “Disney” and you may think of any one of hundreds of movies
produced by Walt Disney Studios. You may think of a wild, exciting ride in
one of the Disney theme parks around the world. You may even think of a
fun-filled resort area within Walt Disney World in Orlando.
How many of you, however, would think of the environment when
you hear the word “Disney”? In 1990, The Walt Disney Company introduced
DIGITAL VISION/GETTY IMAGES
an initiative called “Environmentality.” Disney Online describes Environmen-
tality as “a fundamental ethic that blends business growth with the conserva-
tion of natural resources. Attention to the environment INTERNET
drives new business initiatives, demonstrating ACTIVITY
how environmental stewardship goes
hand-in-hand with bottom-line cost Closing Entries
savings.” Environmentality goes Go to the homepage for a
beyond just complying with company or corporation of
laws. It includes “purchasing your choice. Search the site for
recycled products, waste the most recent annual report.
minimization, resource con- Go to the income statement.
servation, research and
development, community Instructions
involvement, and educa-
1. Looking at the categories
tion” to make the program
of revenues on the
successful.
income statement, list
©GREG E. MATHIESON/MAI/LANDOV
A 2003 report designed
the accounts that may be
to highlight environmental
included in the company’s
accomplishments describes
entry to close the revenue
many examples of waste reduc-
accounts.
tions and resource conservation.
2. Looking at the categories
One example is a water-monitoring
of expenses on the
program in Disney’s Animal Kingdom.
income statement, list
The monitoring results identified areas
the accounts that may be
where water usage could be reduced, saving an
included in the company’s
estimated 145,000,000 gallons of water each year.
entry to close the expense
accounts.
Critical Thinking
1. List at least two reasons why The Walt Disney Company would be inter-
ested in such environmental measures.
2. If The Walt Disney Company purchased equipment to help measure
water usage, would that equipment be classified as an asset, liability, or
owner’s equity on the balance sheet? Why?
Source: disney.go.com
201
L E S S O N
Recording Adjusting Entries
8-1
ADJUSTING ENTRIES
TechKnow Consulting prepares a work sheet at the end of must be journalized so they can be posted to the general
each fiscal period to summarize the general ledger infor- ledger accounts. Journal entries recorded to update gen-
mation needed to prepare financial statements. [CON- eral ledger accounts at the end of a fiscal period are called
CEPT: Accounting Period Cycle] Financial statements are adjusting entries.
prepared from information on the work sheet. [CON- Adjusting entries are recorded on the next journal page
CEPT: Adequate Disclosure] following the page on which the last daily transactions for
TechKnow Consulting’s adjustments are analyzed and the month are recorded.
planned on a work sheet. However, these adjustments
ADJUSTING ENTRY FOR SUPPLIES
3 4
ADJUSTMENTS
ACCOUNT TITLE
DEBIT CREDIT
(a)
5 Supplies 7 1 5 00
(a)
17 Supplies Expense 7 1 5 00
3. Debit
JOURNAL PAGE 3
1. Heading 1 2
DOC. POST. GENERAL
DATE ACCOUNT TITLE
2. Date
NO. REF. DEBIT CREDIT
1 1 Adjusting Entries
22 Aug.
20--
31 Supplies Expense 3 3 7 1 5 00
3 Supplies 4 4 7 1 5 00
4. Credit
The information needed to journalize the adjusting entry Supplies has a new balance of $310.00, which is the cost
for Supplies is obtained from lines 5 and 17 of the work of the supplies on hand at the end of the fiscal period.
sheet, as shown in the illustration. The entry must be
recorded in a journal and posted to the general ledger
accounts affected by the entry. Supplies Expense
The effect of posting the adjusting entry for supplies to Adj. (a) 715.00
the general ledger accounts is shown in the T accounts.
Supplies Expense has an up-to-date balance of $715.00, Supplies
which is the value of the supplies used during the fiscal
Bal. 1,025.00 Adj. (a) 715.00
period. [CONCEPT: Matching Expenses with Revenue] (New Bal. 310.00)
202 Chapter 8 Recording Adjusting and Closing Entries for a Service Business
S T E P S ADJUSTING ENTRY FOR SUPPLIES
1 Write the heading, Adjusting Entries, in the middle of the Account Title column of the journal. Because no
source document is prepared for adjusting entries, the entries are identified with a heading in the journal. The
heading is written only once for all adjusting entries.
2 Write the date, 20--, Aug. 31, in the Date column.
3 Write the title of the account debited, Supplies Expense, in the Account Title column. Record the debit amount,
$715.00, in the General Debit column on the same line as the account title.
4 Write the title of the account credited, Supplies, on the next line in the Account Title column. Record the credit
amount, $715.00, in the General Credit column on the same line as the account title.
CHARACTER COUNTS
C a n I S a y T h i s o n My R e s u m e ?
Kendra Wheeler applied for a payroll clerk job with Hamp- a. Is the action illegal?
ton Group. She slightly exaggerated her work experience No. Overstating
on her resume. She felt uncomfortable with this decision, qualifications is
but she was desperate to get a job. not illegal, but
Based on the resume, Kendra was hired. After one the employer
year, she received above-average ratings during her annual could ter-
review. Then, her boss met Kendra’s former supervisor and minate her
learned the truth. employment.
Was Kendra’s action unethical? Let’s apply the ethical b. Does the
model to this situation. action violate
1. Recognize you are facing an ethical dilemma. Kendra company or
should have realized that her uncomfortable feelings professional
were a sign that her actions might not be ethical. standards? No.
Kendra was neither
2. Identify the action taken or the proposed action. Kendra
an employee of the
could have stated her qualifications honestly. How-
company nor a member
ever, she elected to exaggerate her work experience.
of any profession at the
That action will be evaluated in the following steps.
time she was hired.
3. Analyze the action. c. Who is affected, and how, by the action?
Impact on Stakeholders of Exaggerating Work Experience on a Resume
Stakeholders Negative Positive
Kendra • She might be terminated. • She obtained
• If retained, she could have difficulty being promoted. employment.
Other applicants • More highly qualified applicants lost an employment opportunity.
PHOTO: CREATAS IMAGES/JUPITER IMAGES
Hampton Group • The company lost the opportunity of receiving the benefits of a
more qualified employee.
• If Kendra is terminated, the company must train another employee.
• If Kendra is retained, managers may hesitate to give Kendra
responsibilities necessary for the efficient operation of the company.
4. Determine if the action is ethical. Kendra’s action was not outweigh the negative impact on other applicants
not ethical. Exaggerating her resume provided her and the Hampton Group. In fact, Kendra’s action could
with a short-term benefit. However, this benefit does possibly cause her more harm in the long run.
Recording Adjusting Entries Lesson 8-1 203
A D J U S T I N G E N T RY FO R P R E PA I D I N S U R A N C E
3 4
ADJUSTMENTS
ACCOUNT TITLE
DEBIT CREDIT
(b)
6 Prepaid Insurance 1 0 0 00
(b)
14 Insurance Expense 1 0 0 00
JOURNAL PAGE 3
1 2
DOC. POST. GENERAL
DATE ACCOUNT TITLE NO. REF. DEBIT CREDIT
1
20--
Adjusting Entries 2. Debit
1. Date 2 Aug. 31 Supplies Expense 7 1 5 00
3 Supplies 7 1 5 00
4 1 31 Insurance Expense 2 2 1 0 0 00
5 Prepaid Insurance 3 3 1 0 0 00
3. Credit
The information needed to journalize the adjusting entry
for Prepaid Insurance is obtained from lines 6 and 14 of Insurance Expense
the work sheet. The entry must be recorded in a journal Adj. (b) 100.00
and posted to the general ledger accounts affected by the
entry. Prepaid Insurance
The effect of posting the adjusting entry for Prepaid
Bal. 1,200.00 Adj. (b) 100.00
Insurance to the general ledger accounts is shown in the T (New Bal. 1,100.00)
accounts.
P H OT OD I S C / G E T T Y I M A G
ES
ADJUSTING ENTRY
S T E P S FOR PREPAID
INSURANCE
1 Write the date, 31, in the Date column.
2 Write the title of the account debited, Insur-
ance Expense, in the Account Title column.
Record the debit amount, $100.00, in
the General Debit column on the same
line as the account title.
3 Write the title of the account
credited, Prepaid Insurance, on the
next line in the Account Title col-
umn. Record the credit amount,
$100.00, in the General Credit
column on the same line as the
account title.
204 Chapter 8 Recording Adjusting and Closing Entries for a Service Business
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. Why are adjusting entries journalized?
TERM REVIEW 2. Where is the information obtained to journalize adjusting entries?
3. What accounts are increased from zero balances after adjusting entries
adjusting entries for supplies and prepaid insurance are journalized and posted?
WORK TOGETHER 81
Journalizing and posting adjusting entries
A partial work sheet of Darlene’s Delivery Service for the month ended July 31 of the current year is given in the
Working Papers. Also given are a journal and general ledger accounts. The general ledger accounts do not show all
details for the fiscal period. The balance shown in each account is the account’s balance before adjusting entries are
posted. Your instructor will guide you through the following example.
1. Use page 4 of a journal. Journalize and post the adjusting entries. Save your work to complete Work Together 8-2.
ON YOUR OWN 81
Journalizing and posting adjusting entries
A partial work sheet of Cuts by Kelley for the month ended February 28 of the current year is given in the Working
Papers. Also given are a journal and general ledger accounts. The general ledger accounts do not show all details for
the fiscal period. The balance shown in each account is the account’s balance before adjusting entries are posted.
Work this problem independently.
1. Use page 8 of a journal. Journalize and post the adjusting entries. Save your work to complete On Your Own 8-2.
Recording Adjusting Entries Lesson 8-1 205
L E S S O N
Recording Closing Entries
8-2
NE E D FOR PE RMANE NT AND TEMPOR ARY ACCOUNTS
Accounts used to accumulate information from one fiscal temporary accounts. Temporary accounts are also referred
period to the next are called permanent accounts. Perma- to as nominal accounts. Temporary accounts include the
nent accounts are also referred to as real accounts. Perma- revenue, expense, and owner’s drawing accounts plus the
nent accounts include the asset and liability accounts and income summary account. Temporary accounts show
the owner’s capital account. The ending account balances changes in the owner’s capital for a single fiscal period.
of permanent accounts for one fiscal period are the begin- Therefore, at the end of a fiscal period, the balances of
ning account balances for the next fiscal period. temporary accounts are summarized and transferred to the
Accounts used to accumulate information until it owner’s capital account. The temporary accounts begin a
is transferred to the owner’s capital account are called new fiscal period with zero balances.
NE E D FOR CLOSING TEMPOR ARY ACCOUNTS
Journal entries used to prepare temporary accounts for temporary accounts for recording information about the
a new fiscal period are called closing entries. The tem- next fiscal period. Otherwise, the amounts for the next
porary account balances must be reduced fiscal period would be added to amounts for previous fis-
to zero at the end of each fis- cal periods. [CONCEPT: Matching Expenses with Rev-
P H O T O D I S C / GE T T Y I M A G
cal period. This proce- enue] The net income for the next fiscal period would be
ES
dure prepares the difficult to calculate because amounts from several fiscal
periods remain in the accounts. Therefore, the tempo-
rary accounts must start each new fiscal period with zero
balances.
To close a temporary account, an amount equal to its
balance is recorded in the account on the side opposite to
its balance. For example, if an account has a credit balance
of $3,565.00, a debit of $3,565.00 is recorded to close the
account.
206 Chapter 8 Recording Adjusting and Closing Entries for a Service Business
NE E D FOR THE INCOME SUMMARY ACCOUNT
Whenever a temporary account is closed, the closing this account is determined by the amounts posted to the
entry must have equal debits and credits. If an account account at the end of a fiscal period. When revenue is
is debited for $3,000.00 to close the account, some other greater than total expenses, resulting in a net income, the
account must be credited for the same amount. A tempo- income summary account has a credit balance, as shown
rary account titled Income Summary is used to summarize in the T account.
the closing entries for the revenue and expense accounts.
The income summary account is unique because
it does not have a normal balance side. The balance of
Income Summary
Debit Credit
Total expenses Revenue (greater than expenses)
(Credit balance is the net income.)
When total expenses are greater than revenue, resulting
in a net loss, the income summary account has a debit
balance, as shown in the T account.
Income Summary
Debit Credit
Total expenses (greater than revenue) Revenue
(Debit balance is the net loss.)
Thus, whether the balance of the income summary accounts with debit balances; (3) an entry to record net
account is a credit or a debit depends upon whether the income or net loss and close Income Summary; and (4) an
business earns a net income or incurs a net loss. Because entry to close the owner’s drawing account.
Income Summary is a temporary account, the account Information needed to record the four closing entries
is also closed at the end of a fiscal period when the net is found in the Income Statement and Balance Sheet col-
income or net loss is recorded. umns of the work sheet.
TechKnow Consulting records four closing entries:
(1) an entry to close income statement accounts with
credit balances; (2) an entry to close income statement
F O R YO U R I N F O R M AT I O N
F Y I
Most small businesses use the
calendar year as their fiscal year
because it matches the way in
R E M E M B E R which the owners have to file their
personal income tax returns.
TechKnow Consulting makes four
closing entries: (1) Close income
statement accounts with credit
balances. (2) Close income statement
accounts with debit balances.
(3) Record net income or loss in
the owner’s capital account and
close Income Summary.
(4) Close the owner’s
drawing account.
Recording Closing Entries Lesson 8-2 207
C L O S I N G E N T R Y F O R A N I N C O M E S TAT E M E N T
ACCOUNT WITH A CRE DIT BAL ANCE
5 6
INCOME STATEMENT
ACCOUNT TITLE
DEBIT CREDIT
12 Sales 3 5 6 5 00 (Debit to close)
JOURNAL 3. Debit PAGE 3
1 2
GENERAL
1. Heading DATE ACCOUNT TITLE DOC. POST.
NO. REF. DEBIT CREDIT
2. Date 6 1 Closing Entries
7 2 31 Sales 3 3 3 5 6 5 00
8 Income Summary 4 3 5 6 5 00
9 4
10
4. Credit
TechKnow Consulting has one income statement account The balance of Sales is now zero, and the account is
with a credit balance, Sales. This credit balance must be ready for the next fiscal period. The credit balance of Sales
reduced to zero to prepare the account for the next fis- is transferred to Income Summary.
cal period. To reduce the balance to zero, Sales is debited F Y I
for the amount of the balance. Because debits must equal
credits for each journal entry, some other account must be
credited. The account used for the credit part of this clos- F O R YO U R I N F O R M AT I O N
ing entry is Income Summary. F Y I
The effect of this closing entry on the general ledger
The reasons for recording closing
accounts is shown in the T accounts. entries can be compared to a trip
odometer. Closing entries are
recorded to prepare the temporary
Sales accounts for the next fiscal period
by reducing their balances to zero.
Closing 3,565.00 Bal. 3,565.00 Likewise, a trip odometer must be
(New Bal. zero) reset to zero to begin recording
the miles for the next trip.
Income Summary
Closing (revenue) 3,565.00
CLOSING ENTRY FOR AN INCOME STATEMENT
S T E P S
ACCOUNT WITH A CREDIT BALANCE
1 Write the heading, Closing Entries, in the middle of the Account Title column of the journal. For TechKnow Consult-
ing, this heading is placed in the journal on the first blank line after the last adjusting entry.
2 Write the date, 31, on the next line in the Date column.
3 Write the title of the account debited, Sales, in the Account Title column. Record the debit amount, $3,565.00, in the
General Debit column on the same line as the account title.
4 Write the title of the account credited, Income Summary, on the next line in the Account Title column. Record the
credit amount, $3,565.00, in the General Credit column on the same line as the account title.
208 Chapter 8 Recording Adjusting and Closing Entries for a Service Business
C L O S I N G E N T R Y F O R I N C O M E S TAT E M E N T
ACCOUNTS WITH DE BIT BAL ANCES
5 6
INCOME STATEMENT
ACCOUNT TITLE
DEBIT CREDIT
13 Advertising Expense 2 1 3 00
14 Insurance Expense 1 0 0 00
15 Miscellaneous Expense 2 8 00
16 Rent Expense 3 0 0 00 (Credit to close)
17 Supplies Expense 7 1 5 00
18 Utilities Expense 1 1 0 00
JOURNAL 2. Income Summary PAGE 3
1 2 4. Debit
DATE ACCOUNT TITLE DOC. POST. GENERAL Amount
1. Date NO. REF. DEBIT CREDIT
9 1 31 Income Summary 2 1 4 6 6 00 4
10 Advertising Expense 2 1 3 00
11 Insurance Expense 1 0 0 00
12 Miscellaneous Expense 3 3 2 8 00
13 Rent Expense 3 0 0 00
14 Supplies Expense 7 1 5 00
15 Utilities Expense 1 1 0 00
3. Credit
TechKnow Consulting has six income statement accounts Summary is not entered in the amount column until all
with debit balances. The six expense accounts have nor- expenses have been journalized and the total amount
mal debit balances at the end of a fiscal period. The bal- calculated.
ances of the expense accounts must be reduced to zero The effect of this closing entry on the general ledger
to prepare the accounts for the next fiscal period. Each accounts is shown in the T accounts. The balance of each
expense account is credited for an amount equal to its bal- expense account is returned to zero, and the accounts are
ance. Income Summary is debited for the total of all the ready for the next fiscal period. The balance of Income Sum-
expense account balances. The amount debited to Income mary is the net income for the fiscal period, $2,099.00.
Income Summary
Closing (expenses) 1,466.00 Closing (revenue) 3,565.00
(New Bal. 2,099.00)
Advertising Expense Rent Expense
Bal. 213.00 Closing 213.00 Bal. 300.00 Closing 300.00
(New Bal. zero) (New Bal. zero)
Insurance Expense Supplies Expense
Bal. 100.00 Closing 100.00 Bal. 715.00 Closing 715.00
(New Bal. zero) (New Bal. zero)
Miscellaneous Expense Utilities Expense
Bal. 28.00 Closing 28.00 Bal. 110.00 Closing 110.00
(New Bal. zero) (New Bal. zero)
Recording Closing Entries Lesson 8-2 209
CLOSING ENTRY TO RECORD NET INCOME OR LOSS
AND CLOSE THE INCOME SUMMARY ACCOUNT
5 6
INCOME STATEMENT
ACCOUNT TITLE
DEBIT CREDIT
19 1 4 6 6 00 3 5 6 5 00
(Capital: credit to
20 Net Income 2 0 9 9 00
record net income)
21 3 5 6 5 00 3 5 6 5 00
22
JOURNAL 2. Debit PAGE 3 (Income Summary:
1 2 debit to close)
1. Date DATE ACCOUNT TITLE DOC. POST. GENERAL
NO. REF. DEBIT CREDIT
16 1 31 Income Summary 2 2 2 0 9 9 00
17 Kim Park, Capital 3 3 2 0 9 9 00
18
3. Credit
TechKnow Consulting’s net income appears on line 20
of the work sheet. The amount of net income increases Income Summary
the owner’s capital and, therefore, must be credited to the Closing (expenses) 1,466.00 Closing (revenue) 3,565.00
owner’s capital account. The balance of the temporary Closing 2,099.00 (New Bal. zero)
account, Income Summary, must be reduced to zero to
prepare the account for the next fiscal period. Kim Park, Capital
The effect of this closing entry on the general ledger
Bal. 5,000.00
accounts is shown in the T accounts. The debit to the Closing (net inc.) 2,099.00
income summary account, $2,099.00, reduces the account (New Bal. 7,099.00)
balance to zero and prepares the account for the next fiscal
period. The credit, $2,099.00, increases the balance of the
owner’s capital account, Kim Park, Capital.
If a business incurs a net loss, the closing entry is a
debit to the owner’s capital account and a credit to the
income summary account.
CLOSING ENTRY TO RECORD NET INCOME OR LOSS
S T E P S
AND CLOSE THE INCOME SUMMARY ACCOUNT
1 Write the date, 31, on the next line in the Date column.
2 Write the title of the account debited, Income Summary, in the Account
Title column. Record the debit amount, $2,099.00, in the General Debit
R E M E M B E R
column on the same line as the account title.
Amounts for closing entries
3 Write the title of the account credited, Kim Park, Capital, on the next are taken from the Income
line in the Account Title column. Record the credit amount, $2,099.00, Statement and Balance Sheet
in the General Credit column on the same line as the account title. columns of the work sheet.
210 Chapter 8 Recording Adjusting and Closing Entries for a Service Business
CLOS I NG E NTRY FO R TH E OWN E R ’S D R AWI NG ACCOU NT
7 8
BALANCE SHEET
ACCOUNT TITLE
DEBIT CREDIT
9 Kim Park, Capital 5 0 0 0 00 9
10 Kim Park, Drawing 6 2 5 00 10 (Credit to close)
JOURNAL 2. Debit PAGE 3
1 2
DOC. POST. GENERAL
1. Date
DATE ACCOUNT TITLE NO. REF. DEBIT CREDIT
18 1 31 Kim Park, Capital 2 2 6 2 5 00
19 Kim Park, Drawing 3 3 6 2 5 00
20
21
22
3. Credit
23
Withdrawals are assets that the owner takes out of a busi- ance, $6,474.00, is verified by comparing the balance to
ness and which decrease the amount of the owner’s equity. the amount of capital shown on the balance sheet pre-
The drawing account is a temporary account that accu- pared at the end of the fiscal period. The capital account
mulates information separately for each fiscal period. balance shown on TechKnow Consulting’s balance sheet
Therefore, the drawing account balance is reduced to zero in Chapter 7 is $6,474.00. The two amounts are the same,
at the end of one fiscal period to prepare the account for and the capital account balance is verified.
the next fiscal period.
The drawing account is neither a revenue nor an
expense account. Therefore, the drawing account is not Kim Park, Capital
closed through Income Summary. The drawing account Closing (drawing) 625.00 Bal. 5,000.00
balance is closed directly to the owner’s capital account. Net Income 2,099.00
The effect of the entry to close the drawing account is (New Bal. 6,474.00)
shown in the T accounts.
The drawing account has a zero balance and is ready Kim Park, Drawing
for the next fiscal period. The capital account’s new bal- Bal. 625.00 Closing 625.00
(New Bal. zero)
S T E P S CLOSING ENTRY FOR THE OWNER’S DRAWING ACCOUNT
1 Write the date, 31, in the Date column.
2 Write the title of the account debited, Kim Park, Capital, in the Account Title column. Record the debit amount,
$625.00, in the General Debit column on the same line as the account title.
3 Write the title of the account credited, Kim Park, Drawing, in the Account Title column. Record the credit amount,
$625.00, in the General Credit column on the same line as the account title.
Recording Closing Entries Lesson 8-2 211
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
TERMS REVIEW
1. What do the ending balances of permanent accounts for one fiscal
period represent at the beginning of the next fiscal period? permanent accounts
2. What do the balances of temporary accounts show? temporary accounts
3. List the four closing entries. closing entries
WORK TOGETHER 82
Journalizing and posting closing entries
Use the journal and general ledger accounts from Work Together 8-1. A partial work sheet for the month ended July
31 of the current year is given in the Working Papers. Your instructor will guide you through the following example.
1. Continue on the same journal page. Journalize and post the closing entries. Save your work to complete Work
Together 8-3.
ON YOUR OWN 82
Journalizing and posting closing entries
Use the journal and general ledger accounts from On Your Own 8-1. A partial work sheet for the month ended
February 28 of the current year is given in the Working Papers. Work this problem independently.
1. Continue on the same journal page. Journalize and post the closing entries. Save your work to complete
On Your Own 8-3.
212 Chapter 8 Recording Adjusting and Closing Entries for a Service Business
L E S S O N
Preparing a Post-Closing
8-3 Trial Balance
GE NE R AL LE DGE R ACCOUNTS AFTE R ADJUSTING
AND CLOSING ENTRIES ARE POSTED
ACCOUNT Cash ACCOUNT NO. 110
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 31 2 8 3 1 5 00 8 3 1 5 00
31 2 3 3 5 1 00 4 9 6 4 00
ACCOUNT Petty Cash ACCOUNT NO. 120
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 19 1 1 0 0 00 1 0 0 00
ACCOUNT Accounts Receivable—Oakdale School ACCOUNT NO. 130
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 12 1 3 5 0 00 3 5 0 00
18 1 2 0 0 00 1 5 0 00
ACCOUNT Accounts Receivable—Campus Internet Cafe ACCOUNT NO. 140
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 13 1 1 0 0 00 1 0 0 00
ACCOUNT Supplies ACCOUNT NO. 150
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 3 1 2 7 5 00 2 7 5 00
7 1 5 0 0 00 7 7 5 00
20 1 5 0 00 8 2 5 00
28 2 2 0 0 00 1 0 2 5 00
31 3 7 1 5 00 3 1 0 00
TechKnow Consulting’s general ledger, after the adjusting lines are drawn in both the Balance Debit and Balance
and closing entries are posted, is shown here and on the Credit columns. The lines assure a reader that a balance
next several pages. When an account has a zero balance, has not been omitted.
Preparing a Post-Closing Trial Balance Lesson 8-3 213
ACCOUNT Prepaid Insurance ACCOUNT NO. 160
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 4 1 1 2 0 0 00 1 2 0 0 00
31 3 1 0 0 00 1 1 0 0 00
ACCOUNT Accounts Payable—Supply Depot ACCOUNT NO. 210
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 7 1 5 0 0 00 5 0 0 00
11 1 3 0 0 00 2 0 0 00
ACCOUNT Accounts Payable—Thomas Supply Co. ACCOUNT NO. 220
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 20 1 5 0 00 5 0 00
ACCOUNT Kim Park, Capital ACCOUNT NO. 310
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 1 1 5 0 0 0 00 5 0 0 0 00
31 3 2 0 9 9 00 7 0 9 9 00
31 3 6 2 5 00 6 4 7 4 00
ACCOUNT Kim Park, Drawing ACCOUNT NO. 320
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 18 1 1 2 5 00 1 2 5 00
31 2 5 0 0 00 6 2 5 00
31 3 6 2 5 00 ——— ———
ACCOUNT Income Summary ACCOUNT NO. 330
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 31 3 3 5 6 5 00 3 5 6 5 00
31 3 1 4 6 6 00 2 0 9 9 00
31 3 2 0 9 9 00 ——— ———
ACCOUNT Sales ACCOUNT NO. 410
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 31 2 3 5 6 5 00 3 5 6 5 00
31 3 3 5 6 5 00 ——— ———
A General Ledger after Adjusting and Closing Entries Are Posted (continued)
214 Chapter 8 Recording Adjusting and Closing Entries for a Service Business
ACCOUNT Advertising Expense ACCOUNT NO. 510
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 14 1 7 8 00 7 8 00
18 1 1 2 5 00 2 0 3 00
31 2 1 0 00 2 1 3 00
31 3 2 1 3 00 ———— ————
ACCOUNT Insurance Expense ACCOUNT NO. 520
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 31 3 1 0 0 00 1 0 0 00
31 3 1 0 0 00 ———— ————
ACCOUNT Miscellaneous Expense ACCOUNT NO. 530
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 31 2 2 0 00 2 0 00
31 2 8 00 2 8 00
31 3 2 8 00 ———— ————
ACCOUNT Rent Expense ACCOUNT NO. 540
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 12 1 3 0 0 00 3 0 0 00
31 3 3 0 0 00 ———— ————
ACCOUNT Supplies Expense ACCOUNT NO. 550
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 31 3 7 1 5 00 7 1 5 00
31 3 7 1 5 00 ———— ————
ACCOUNT Utilities Expense ACCOUNT NO. 560
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Aug. 12 1 4 0 00 4 0 00
27 2 7 0 00 1 1 0 00
31 3 1 1 0 00 ———— ————
A General Ledger after Adjusting and Closing Entries Are Posted (concluded)
Preparing a Post-Closing Trial Balance Lesson 8-3 215
P O S T C L O S I N G T R I A L B A L A N C E
2. Account Titles
TechKnow Consulting
Post-Closing Trial Balance 1 1. Heading
August 31, 20--
ACCOUNT TITLE DEBIT CREDIT
Cash 4 9 6 4 00
Petty Cash 1 0 0 00
Accounts Receivable—Oakdale School 1 5 0 00 3. Account
Accounts Receivable—Campus Internet Cafe 1 0 0 00 Balances
2 Supplies 3 1 0 00 3
Prepaid Insurance 1 1 0 0 00
Accounts Payable—Supply Depot 2 0 0 00
Accounts Payable—Thomas Supply Co. 5 0 00 4. Single
Kim Park, Capital 6 4 7 4 00 Rule
Totals 6 6 7 2 4 00 6 7 2 4 00 4
8
5 7
6. Totals 8. Double Rule 5. Compare 7. Record
Totals Totals
After the closing entries are posted, TechKnow Consult- temporary accounts (income summary, revenue, expense,
ing verifies that debits equal credits in the general led- and drawing) are closed and have zero balances, they do
ger accounts by preparing a trial balance. A trial balance not appear on a post-closing trial balance.
prepared after the closing entries are posted is called a The total of all debits must equal the total of all credits
post-closing trial balance. in a general ledger. The totals of both columns on Tech-
Only general ledger accounts with balances are included Know Consulting’s post-closing trial balance are the same,
on a post-closing trial balance. The permanent accounts $6,724.00. TechKnow Consulting’s post-closing trial bal-
(assets, liabilities, and owner’s capital) have balances and ance shows that the general ledger account balances are in
do appear on a post-closing trial balance. Because the balance and ready for the new fiscal period.
S T E P S PREPARING A POSTCLOSING TRIAL BALANCE
1 Write the heading on three lines.
2 Write the titles of all general ledger accounts with balances in the Account Title column.
3 On the same line with each account title, write each account’s balance in either the Debit or Credit column.
4 Rule a single line across both amount columns below the last amount, and add each amount column.
5 Compare the two column totals. The two column totals must be the same. If the two column totals are not the
same, the errors must be found and corrected before any more work is completed.
6 Write the word Totals on the line below the last account title.
7 Write the column totals, $6,724.00, below the single line.
8 Rule double lines across both amount columns to show that the totals have been verified as correct.
216 Chapter 8 Recording Adjusting and Closing Entries for a Service Business
ACC O U N T I N G C YC L E F O R A S E R V I C E B U S I N E S S
1 Analyze Transactions
2 Journalize
POST-CLOSING
TRIAL BALANCE JOURNAL
Prepare 8
Post-Closing
Trial Balance
GENERAL LEDGER
Post 3
GENERAL LEDGER
7 Post Adjusting
and Closing Entries
Prepare 4
GENERAL JOURNAL
Work Sheet WORK SHEET
Journalize 6
Adjusting
INCOME BALANCE
and STATEMENT SHEET
5 Prepare
Closing Financial
Entries Statements
Chapters 1 through 8 describe TechKnow Consulting’s
STEPS IN AN
accounting activities for a one-month fiscal period. The
S T E P S ACCOUNTING
series of accounting activities included in recording finan-
cial information for a fiscal period is called an accounting CYCLE
cycle. [CONCEPT: Accounting Period Cycle]
1 Source documents are checked for accuracy, and trans-
For the next fiscal period, the cycle begins again at
actions are analyzed into debit and credit parts.
Step 1.
F Y I 2 Transactions, from information on source documents,
are recorded in a journal.
3 Journal entries are posted to the general ledger.
4 A work sheet, including a trial balance, is prepared from
R E M E M B E R the general ledger.
The word post means after. The 5 Financial statements are prepared from the work sheet.
Post-Closing Trial Balance is
6 Adjusting and closing entries are journalized from the
prepared after closing entries.
work sheet.
7 Adjusting and closing entries are posted to the general
ledger.
8 A post-closing trial balance of the general ledger is
prepared.
Preparing a Post-Closing Trial Balance Lesson 8-3 217
CAREERS IN ACCOUNTING
A n n a Mc Ne e s e P r i c e ,
Fu t u r e C e r t i f i e d Fi n a n c i a l P l a n n e r
When Anna McNeese Price started Com/Enron scandals, any degree that could guarantee
college, entering the field of job placement was attractive.”
accounting wasn’t part of But her desire to affect lives personally didn’t seem to
her career plan. Through mix with the large corporate jobs that recruiters from the
high school she worked “Big Four” firms were offering. So when one of her pro-
at a mental health facil- fessors told her about a part-time job working for Ernie
ity and enjoyed the George, a certified financial planner, Anna saw an oppor-
personal contact she tunity to experience a different type of career.
had with the clients By working closely with Mr. George and his assistant,
in the physical ther- Anna has been able to use her accounting background
apy department. But to better understand the stock market and what it takes
an interest in business to advise people on how to invest their money. She has
(and a sudden lack of found that as a certified financial planner, Mr. George has
interest in biology) led a close personal relationship with his clients and is able
her to change majors as a to make the impact that she dreamed of in her early col-
college sophomore. lege career.
After considering the differ- “I will finish my bachelor’s of accountancy next year
ent business degrees offered, she and immediately enroll in the Master of Taxation pro-
COURTESY OF ANNA MCNEESE PRICE
decided to go into accounting. Anna gram,” Anna explains. “Within five years of graduation, I
recalls, “I knew I was interested in business, and hope to have obtained my certified public accountant
I thought accounting would be the most challenging. I (CPA) and certified financial planner (CFP) certifications
also heard about the great job market, and since I was and go into private practice as a certified financial plan-
going through school during the height of the World- ner with professional tax expertise.”
Salary Range: Median annual earnings of personal must have good communication skills. Because many
financial advisors were $62,700 in 2004, according to the financial planners are self-employed, they must also pos-
Occupational Outlook Handbook. Over 25% of financial sess the skills necessary to manage a business.
planners earn more than $100,000. (Source: Bureau of
Labor Statistics, U.S. Department of Labor, Occupational Occupational Outlook: More and more people are
Outlook Handbook, 2006–07 Edition; Financial Analysts choosing alternative ways to plan for retirement. The
and Personal Financial Advisors, on the Internet at www. complexity of the stock market and the tax laws (which
bls.gov/oco/ocos259.htm [visited January 15, 2007].) can limit how much you can save) have increased the
need for professionals who can give sound advice to
Qualifications: A college degree is required, and pro- individuals interested in investing.
fessional certification is recommended. Financial planners
218 Chapter 8 Recording Adjusting and Closing Entries for a Service Business
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
TERMS REVIEW 1. Why are lines drawn in both the Balance Debit and Balance Credit
columns when an account has a zero balance?
post-closing trial balance 2. Which accounts go on the post-closing trial balance?
accounting cycle 3. Why are temporary accounts omitted from a post-closing trial balance?
WORK TOGETHER 83
Preparing a post-closing trial balance
Use the general ledger accounts from Work Together 8-2. Your instructor will guide you through the following
example. A form to complete a post-closing trial balance is given in the Working Papers.
1. Prepare a post-closing trial balance for Darlene’s Delivery Service on July 31 of the current year.
ON YOUR OWN 83
Preparing a post-closing trial balance
Use the general ledger accounts from On Your Own 8-2. Work this problem independently. A form to complete
a post-closing trial balance is given in the Working Papers.
1. Prepare a post-closing trial balance for Cuts by Kelley on February 28 of the current year.
Preparing a Post-Closing Trial Balance Lesson 8-3 219
SUMMARY
After completing this chapter, you can: 3. Record adjusting entries for a service business
organized as a proprietorship.
1. Define accounting terms related to adjusting
and closing entries for a service business 4. Record closing entries for a service business
organized as a proprietorship. organized as a proprietorship.
2. Identify accounting concepts and practices 5. Prepare a post-closing trial balance for a ser-
related to adjusting and closing entries for a vice business organized as a proprietorship.
service business organized as a proprietorship.
EXPLORE ACCOUNTING
P u bl i c A c c o u nt i ng Fi r m s
One type of business that helps other busi- tax preparation, tax advice, payroll services,
nesses with accounting issues is known as a bookkeeping services, financial statement
public accounting firm. preparation, and consulting services. These
The independent reviewing and issuing other services often make up a higher per-
of an opinion on the reliability of account- centage of business for the accounting
ing records is known as auditing. firm than performing audits.
When performing an audit for a client, Many accounting firms report that they
the accounting firm looks closely at the cli- are getting more requests for consulting ser-
ent’s financial statements and the way the client vices than for other services they can provide.
records transactions. The auditor’s job is to deter- In many cases, consulting is also the area that pro-
mine if the financial statements fairly present the financial duces the largest profit margin for the public accounting
position of the client. The auditor issues an opinion, which firm. Therefore, some firms are actively advertising their
is a statement as to whether the financial statements fol- ability to provide management consulting services for
low standard accounting rules (GAAP). (GAAP stands for clients.
Generally Accepted Accounting Principles.) This “opinion”
is used by bankers deciding to lend money to the com- Activity: Contact a public accounting firm in your area.
pany. It is also used by investors when making investment Research what services the firm provides and which ser-
decisions. vice area (if any) is growing. Present your findings to your
Auditing, however, is just one of many services pro- class.
PHOTO: PHOTOGRAPHER’S CHOICE/GETTY IMAGES
vided by public accounting firms. Other services include
220 Chapter 8 Recording Adjusting and Closing Entries for a Service Business
81 APPLICATION PROBLEM
Journalizing and posting adjusting entries
A journal and general ledger accounts for Len’s Laundry are given in the Working Papers. A partial work sheet
for the month ended April 30 of the current year is shown below.
3 4
ADJUSTMENTS
ACCOUNT TITLE
DEBIT CREDIT
4 Supplies (a) 4 5 0 00
5 Prepaid Insurance (b) 2 0 0 00
(b)
13 Insurance Expense 2 0 0 00
14 Miscellaneous Expense
(a)
15 Supplies Expense 4 5 0 00
Use page 12 of a journal. Journalize and post the adjusting entries. Save your work to complete Application
Problem 8-2.
82 APPLICATION PROBLEM
Journalizing and posting closing entries
Use the journal and general ledger accounts for Len’s Laundry from Application Problem 8-1. A partial work
sheet for the month ended April 30 of the current year is shown below.
5 6 7 8
INCOME STATEMENT BALANCE SHEET
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT
1 Cash 7 6 0 7 00 1
2 Accounts Receivable—Natasha Goodlad 7 0 0 00 2
3 Accounts Receivable—R. Henry 4 9 8 00 3
4 Supplies 4 3 1 00 4
5 Prepaid Insurance 2 0 0 00 5
6 Accounts Payable—Tri-County Supplies 3 8 1 00 6
7 Accounts Payable—West End Supply Co. 5 5 5 00 7
8 Leonard Long, Capital 6 5 2 7 00 8
9 Leonard Long, Drawing 1 0 0 0 00 9
10 Income Summary 10
11 Sales 6 2 3 3 00 11
12 Advertising Expense 8 0 0 00 12
13 Insurance Expense 2 0 0 00 13
14 Miscellaneous Expense 3 1 5 00 14
15 Supplies Expense 4 5 0 00 15
16 Utilities Expense 1 4 9 5 00 16
17 3 2 6 0 00 6 2 3 3 00 10 4 3 6 00 7 4 6 3 00 17
18 Net Income 2 9 7 3 00 2 9 7 3 00 18
19 6 2 3 3 00 6 2 3 3 00 10 4 3 6 00 10 4 3 6 00 19
20 20
Continue on the same journal page. Journalize and post the closing entries. Save your work to complete
Application Problem 8-3.
Recording Adjusting and Closing Entries for a Service Business Chapter 8 221
83 APPLICATION PROBLEM
Preparing a post-closing trial balance
Use the general ledger accounts for Len’s Laundry from Application Problem 8-2. A form to complete a post-
closing trial balance is given in the Working Papers.
Prepare a post-closing trial balance for Len’s Laundry on April 30 of the current year.
84 MASTERY PROBLEM
Journalizing and posting adjusting and closing entries with a net loss; preparing
a post-closing trial balance
Rolstad Repair Service’s partial work sheet for the month ended October 31 of the current year is given below.
The general ledger accounts are given in the Working Papers. The general ledger accounts do not show all
details for the fiscal period. The Balance shown in each account is the account’s balance before adjusting and
closing entries are posted.
3 4 5 6 7 8
ADJUSTMENTS INCOME STATEMENT BALANCE SHEET
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
1 Cash 6 9 5 8 00 1
2 Petty Cash 1 5 0 00 2
3 Accts. Rec.—M. Hollerud 1 9 7 00 3
(a)
4 Supplies 1 4 0 0 00 7 8 0 00 4
(b)
5 Prepaid Insurance 1 5 7 00 8 0 0 00 5
6 Accts. Pay.—Tampa Supply 6 1 2 00 6
7 Ron Rolstad, Capital 9 3 3 7 00 7
8 Ron Rolstad, Drawing 6 0 0 00 8
9 Income Summary 9
10 Sales 3 2 6 9 00 10
11 Advertising Expense 4 5 0 00 11
12 Insurance Expense (b) 1 5 7 00 1 5 7 00 12
13 Miscellaneous Expense 8 5 00 13
14 Supplies Expense (a) 1 4 0 0 00 1 4 0 0 00 14
15 Utilities Expense 1 6 4 1 00 15
16 1 5 5 7 00 1 5 5 7 00 3 7 3 3 00 3 2 6 9 00 9 4 8 5 00 9 9 4 9 00 16
17 Net Loss 4 6 4 00 4 6 4 00 17
18 3 7 3 3 00 3 7 3 3 00 9 9 4 9 00 9 9 4 9 00 18
19 19
Instructions:
1. Use page 20 of a journal. Journalize and post the adjusting entries.
2. Continue to use page 20 of the journal. Journalize and post the closing entries.
3. Prepare a post-closing trial balance.
( Go Beyond the Book
For more information go to
www.C21accounting.com
)
222 Chapter 8 Recording Adjusting and Closing Entries for a Service Business
85 CHALLENGE PROBLEM
Journalizing and posting adjusting and closing entries with two revenue accounts
and a net loss; preparing a post-closing trial balance
LawnMow’s partial work sheet for the month ended September 30 of the current year is given below. The
general ledger accounts are given in the Working Papers. The general ledger accounts do not show all details
for the fiscal period. The Balance shown in each account is the account’s balance before adjusting and closing
entries are posted.
3 4 5 6 7 8
ADJUSTMENTS INCOME STATEMENT BALANCE SHEET
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
1 Cash 1 8 9 8 00 1
2 Accts. Rec.—Sandra Rohe 9 5 00 2
3 Supplies (a) 3 2 0 0 00 6 5 0 00 3
4 Prepaid Insurance (b) 4 0 0 00 1 2 0 0 00 4
5 Accts. Pay.—Corner Garage 5 8 00 5
6 Accts. Pay.—Broadway Gas 1 1 0 00 6
7 Accts. Pay.—Esko Repair 2 1 5 00 7
8 Ryo Morrison, Capital 4 0 0 0 00 8
9 Ryo Morrison, Drawing 1 0 0 00 9
10 Income Summary 10
11 Sales—Lawn Care 4 9 0 0 00 11
12 Sales—Shrub Care 2 5 0 0 00 12
13 Advertising Expense 3 9 0 00 13
(b)
14 Insurance Expense 4 0 0 00 4 0 0 00 14
15 Miscellaneous Expense 5 5 0 00 15
16 Rent Expense 3 3 0 0 00 16
(a)
17 Supplies Expense 3 2 0 0 00 3 2 0 0 00 17
18 3 6 0 0 00 3 6 0 0 00 7 8 4 0 00 7 4 0 0 00 3 9 4 3 00 4 3 8 3 00 18
19 Net Loss 4 4 0 00 4 4 0 00 19
20 7 8 4 0 00 7 8 4 0 00 4 3 8 3 00 4 3 8 3 00 20
21 21
Instructions:
1. Use page 18 of a journal. Journalize and post the adjusting entries.
2. Continue to use page 18 of the journal. Journalize and post the closing entries.
3. Prepare a post-closing trial balance.
4. Ryo Morrison, owner of LawnMow, is disappointed that his business incurred a net loss for September of
the current year. Mr. Morrison would have preferred not to have to reduce his capital by $440.00. He knows
that you are studying accounting, so Mr. Morrison asks you to analyze his work sheet for September. Based
on your analysis of the work sheet, what would you suggest might have caused the net loss for LawnMow?
What steps would you suggest so that Mr. Morrison can avoid a net loss in future months?
Recording Adjusting and Closing Entries for a Service Business Chapter 8 223
A P P L I E D CO M M U N I C AT I O N
Service businesses are the fastest growing part of our business world. Social and economic changes create needs for
new and different kinds of service businesses to satisfy customer demands.
For example, the growing popularity of the World Wide Web led to the creation of service businesses that design
Web pages. These businesses create text, graphics, animation, and links for business and private clients. Another
example of a new type of service business is a personal services business that runs errands or stands in long lines for
clients. As lifestyles become busier and busier, some people do not have the time to take care of all their personal
errands. Service businesses have appeared to fill this need.
Instructions: Using library, online, or other information resources, write a one-page report on a new or unusual
service business that you would be interested in working for or owning.
CASES FOR CRITICAL THINKING
Case 1
Gretel Bakken forgot to journalize and post the adjusting entry for prepaid insurance at the end of the June fis-
cal period. What effect will this omission have on the records of Ms. Bakken’s business as of June 30? Explain your
answer.
Case 2
Vincente Burgos states that his business is so small that he just records supplies and insurance as expenses when
he pays for them. Thus, at the end of a fiscal period, Mr. Burgos does not record adjusting and closing entries for his
business. Do you agree with his accounting procedures? Explain your answer.
SCANS WORKPLACE COMPETENCY
Thinking Skill: Seeing things in the mind’s eye
Concept: Effective employees can visualize how every part of a company contributes to the success of the whole
company, from maintenance workers to the chief executive officer. Now that you have finished the study of a com-
plete accounting cycle, you should better understand how each part of the cycle contributes to the whole cycle.
Application: Describe the importance of the work each of the following employees does. Explain how errors would
affect the reporting of the company.
a. Employee who reconciles the bank statement.
b. Employee who determines the amount of supplies on hand at the end of the fiscal period.
c. Employee who posts the journal entries.
d. Employee who calculates and records the adjusting entries.
e. Employee who records the closing entries.
224 Chapter 8 Recording Adjusting and Closing Entries for a Service Business
AUDITING FOR ERRORS
The closing entries for Greenlund Enterprises are given below. Assuming all account balances are correct, review the
entries. List any errors you find.
General
Date Account Title Doc No. Post Ref. Debit Credit
20--
May 31 Income Summary 32,000
Sales 32,000
31 Income Summary 6,200
Insurance Expense 900
Rent Expense 2,500
Supplies Expense 1,200
Utilities Expense 3,400
31 Lionel Greenlund, Capital 38,200
Income Summary 38,200
31 Lionel Greenlund, Capital 4,500
Lionel Greenlund, Drawing 4,500
A N A LY Z I N G B E S T B U Y ’S F I N A N C I A L S TAT E M E N T S
Refer to Best Buy’s consolidated statements of earnings on Appendix B page B-6. To calculate what percentage an
item increased or decreased from one year to another, calculate the difference between the two amounts and divide
this difference by the amount for the earlier year. For example, the percentage of increase in revenue from 2005 to
2006 would be calculated as follows: ($30,848,000,000 ⫺ $27,433,000,000) ⫼ $27,433,000,000 ⫽ 12.45%.
Instructions
1. What is Best Buy’s revenue (sales) for each of the three years? Is this a favorable or unfavorable trend?
2. Calculate the percentage of increase in revenue from 2006 to 2007.
3. How does the increase from 2006 to 2007 compare to the increase from 2005 to 2006?
Recording Adjusting and Closing Entries for a Service Business Chapter 8 225
Accounting
SOFTWARE
CLOSING ENTRIES; POSTCLOSING
TRIAL BALANCE
Accounting software does not require that you journalize closing entries. Rather, you can use a wizard to assist you
in closing the accounts. A wizard is a series of windows that collect the information necessary to perform a specific
task. Based on the information you enter, the wizard performs the selected functions automatically.
A wizard is especially useful for functions that are very complicated or rarely performed. In the case of closing
entries, computerized accounting systems are only closed at the end of a fiscal year. Because you only perform this
process once a year, it is helpful to have a wizard to assist you.
Once Peachtree closes an account, you no longer have the ability to examine or modify journal entries made in
that fiscal year. For this reason, Peachtree allows you to have two fiscal years open at one time. This strategy pro-
vides you with ample opportunity to ensure that your journal entries from the past fiscal year are correct while you
continue to record transactions for the current fiscal year.
PEACHTREE MASTERY PROBLEM 84
1. Open (Restore) file 08-4MP.ptb.
2. Journalize and post the adjusting and closing entries in Peachtree’s general journal. Use the closing entries
wizard to record the closing entries.
3. Print the October 31 general ledger.
4. Print a post-closing trial balance.
PEACHTREE CHALLENGE PROBLEM 85
1. Open (Restore) file 08-5CP.ptb.
2. Journalize and post the adjusting and closing entries in Peachtree’s general journal. Use the closing entries
wizard to record the closing entries.
3. Print the September 30 general ledger.
4. Print a post-closing trial balance.
CLOSING ENTRIES; POSTCLOSING
TRIAL BALANCE
QuickBooks automatically closes all revenue and expense accounts into a summary account. However,
the user must make entries to close this summary account into the capital account and to close the drawing
account into the capital account.
Similar to manual accounting, it is a good idea to run a trial balance after the closing entries have been made
and posted. Although computer systems are very accurate, the new balances should be examined to determine if
the correct closing entries were made. The capital account should show the new ending balance, and all revenue
and expense accounts should have a zero balance.
QUICKBOOKS MASTERY PROBLEM 84
1. Open the Rolstad Repair Service file and record the adjusting entries dated October 31.
2. Print a Profit & Loss report for October 1-31.
3. Print a Balance Sheet report and a Trial Balance report for the month ending October 31. Use the Accountant &
Taxes Reports menu to print the Trial Balance report.
4. Using the information in the Trial Balance and the Profit & Loss reports, record the closing entries.
5. Print a Journal report containing both the adjusting and closing entries. Use October 31 for the date.
6. Print a post-closing trial balance from the Accountant & Taxes Reports menu.
226 Chapter 8 Recording Adjusting and Closing Entries for a Service Business
QUICKBOOKS CHALLENGE PROBLEM 85
1. Open the LawnMow file and record the September 30 adjusting entries.
2. Print a Profit & Loss report for September 1-30.
3. Print a Balance Sheet report and Trial Balance report for the month ending September 30. Use the Accountant &
Taxes Reports menu to print the Trial Balance report.
4. Using the information in the Trial Balance and the Profit & Loss reports, record the closing entries.
5. View and print a Journal report containing both the adjusting and closing entries, using September 30 for the
To and From dates.
6. Print a post-closing trial balance from the Account & Taxes Reports menu.
7. Record the closing entries and print a post-closing trial balance.
CHARTS AND GRAPHS
A post-closing trial balance verifies that debits equal credits after posting adjustments and closing the accounts.
The schedule reports the account balances of all permanent accounts at the beginning of the next fiscal period.
What if a manager asked you to provide a report of assets at the beginning of a fiscal period? Before preparing
the answer, you should determine how the manager intends to use the information. Does the manager need to
know the exact amount of every asset account? If so, a schedule of the asset accounts from the post-closing trial
balance would provide the manager with the requested information.
However, the manager may not need to know the exact dollar amount of each asset. Instead, the manager may
need only a general perception of the relative amount of each asset owned by the business. In this case, creating a
chart of the data will provide the manager with better information than a detailed schedule of accounts.
EXCEL MASTERY PROBLEM 8-4
1. Complete Mastery Problem 8-4 using your Working Papers or accounting software. Prepare a post-closing trial
balance.
2. In a new spreadsheet, list the asset accounts in one column and their balances in the next column.
3. Experiment with creating different types of charts of these accounts and balances (pie chart, bar chart, or line
chart, for example).
CLOSING ENTRIES; POSTCLOSING
TRIAL BALANCE
In an automated accounting system, closing entries are generated and posted by the software. The software auto-
matically closes net income to the owner’s capital account after closing the revenue and expense accounts. The
drawing account is closed as well.
To perform a period-end closing:
1. Choose Generate Closing Journal Entries from the Options menu.
2. Click Yes to generate the closing entries.
3. The general journal will appear, containing the journal entries.
4. Click the Post button.
In Automated Accounting, once closing entries are posted, the journal entries of the period cannot be accessed
to make corrections if errors are found later. Therefore, it is always a good practice to save your file before closing
entries are generated; the letters BC (for Before Closing) can be added to the filename. After the closing entries
are generated, add the letters AC (for After Closing) to the filename and save the file again. When this procedure is
followed, if it is necessary to correct a journal entry, the file with BC in its name can be opened and corrected, and
closing entries can be generated again.
AUTOMATED ACCOUNTING MASTERY PROBLEM 84
Open file F08-4.AA8. Display the problem instructions and complete the problem.
AUTOMATED ACCOUNTING CHALLENGE PROBLEM 85
Open file F08-5.AA8. Display the problem instructions and complete the problem.
Recording Adjusting and Closing Entries for a Service Business Chapter 8 227
REINFORCEMENT
Activity 1—Part B
An Accounting Cycle for a Proprietorship:
End-of-Fiscal-Period Work
The general ledger prepared in Reinforcement Activity 1—Part A is needed to complete Reinforcement Activity 1—Part B.
Reinforcement Activity 1—Part B includes end-of-fiscal-period activities studied in Chapters 6 through 8.
WORK SHEET ADJUSTING ENTRIES
INSTRUCTIONS: INSTRUCTIONS:
12. Prepare a trial balance on the work sheet given in the 19. Use page 3 of the journal. Journalize and post the
Working Papers. Use a one-month fiscal period ended adjusting entries.
May 31 of the current year.
13. Analyze the following adjustment information into C LO S I N G E N T R I E S
debit and credit parts. Record the adjustments on the
work sheet. INSTRUCTIONS:
Adjustment Information, May 31 20. Continue using page 3 of the journal. Journalize and
Supplies on hand $ 625.00 post the closing entries.
Value of prepaid insurance 1,100.00
14. Total and rule the Adjustments columns. P O S T- C L O S I N G T R I A L B A L A N C E
15. Extend the up-to-date account balances to the
Balance Sheet and Income Statement columns. INSTRUCTIONS:
16. Complete the work sheet. 21. Prepare a post-closing trial balance.
F I N A N C I A L S TAT E M E N T S
INSTRUCTIONS:
17. Prepare an income statement. Figure and record the
component percentages for sales, total expenses, and
net income. Round percentage calculations to the
nearest 0.1%.
18. Prepare a balance sheet.
228 Reinforcement Activity 1—Part B An Accounting Cycle for a Proprietorship: End-of-Fiscal-Period Work
This simulation covers the transactions completed by Rico Sanchez, Disc
Jockey, a service business organized as a proprietorship. On September 1
of the current year, Rico Sanchez, Disc Jockey, begins business. The owner,
Rico Sanchez, performs as a disc jockey at clubs and private parties. He
also specializes in karaoke when requested.
The activities included in the accounting cycle for Rico Sanchez, Disc
Jockey, are listed below. The company uses a 5-column journal and a gen-
eral ledger similar to those described for TechKnow in Cycle 1.
This simulation is available in manual and in automated versions, for
use with Automated Accounting software.
The following activities are included in this simulation:
1 Journalizing transactions in 5 Preparing a trial balance on 9 Journalizing and posting
a 5-column journal. a work sheet. adjusting entries.
2 Preparing a bank statement 6 Recording adjustments on 10 Journalizing and posting
reconciliation and recording a work sheet. closing entries.
a bank service charge.
7 Completing a work sheet. 11 Preparing a post-closing
3 Proving cash. trial balance.
8 Preparing financial statements
4 Posting from a journal to (income statement and 12 Completing Think Like an
a general ledger. balance sheet). Accountant Financial Analysis
activity.
An Accounting Cycle for a Proprietorship: End-of-Fiscal-Period Work Reinforcement Activity 1—Part B 229
PART
2
Chapter 9
Chapter 10
Accounting for a
Merchandising Business
Organized as a Corporation
Journalizing Purchases and Cash Payments
Journalizing Sales and Cash Receipts Using
Special Journals
Chapter 11 Posting to General and Subsidiary Ledgers
THE BUSINESS—
Chapter 12 Preparing Payroll Records HOBBY SHACK, INC.
Chapter 13 Payroll Accounting, Taxes, and Reports Hobby Shack, Inc., the business described
in Part 2, is a retail merchandising business
Chapter 14 Distributing Dividends and Preparing a organized as a corporation. The business pur-
Work Sheet for a Merchandising Business chases and sells a wide variety of craft and
hobby items such as silk flowers, ceramics,
Chapter 15 Financial Statements for a Corporation paints, and jewelry. Hobby Shack purchases
its merchandise directly from businesses that
Chapter 16 Recording Adjusting and Closing Entries
for a Corporation manufacture the items. Hobby Shack rents
the building in which the business is located.
PHOTOS: DIGITAL VISION, STOCKBYTE, PHOTODISC, TETRA IMAGES (ALL GETTY IMAGES)
C H A P T E R 9 C H A P T E R 1 0
C H A P T E R 1 3 C H A P T E R 1 4
HOBBY SHACK, INC., CHART OF ACCOUNTS
GENERAL LEDGER 2155 Unemployment Tax Payable—State 6135 Miscellaneous Expense
Balance Sheet Accounts 2160 Health Insurance Premiums 6140 Payroll Taxes Expense
1000 ASSETS Payable 6145 Rent Expense
1100 Current Assets 2165 U.S. Savings Bonds Payable 6150 Salary Expense
1110 Cash 2170 United Way Donations Payable 6155 Supplies Expense—Office
1120 Petty Cash 2180 Dividends Payable 6160 Supplies Expense—Store
1130 Accounts Receivable 3000 STOCKHOLDERS’ EQUITY 6165 Uncollectible Accounts Expense
1135 Allowance for Uncollectible 3110 Capital Stock 6170 Utilities Expense
Accounts 3120 Retained Earnings 6200 Income Tax Expense
1140 Merchandise Inventory 3130 Dividends 6205 Federal Income Tax Expense
1145 Supplies—Office 3140 Income Summary
S U B S I D I A RY L E D G E R S
1150 Supplies—Store Income Statement Accounts
1160 Prepaid Insurance 4000 OPERATING REVENUE Accounts Receivable Ledger
1200 Plant Assets 4110 Sales 110 Country Crafters
1205 Office Equipment 4120 Sales Discount 120 Cumberland Center
1210 Accumulated Depreciation— 4130 Sales Returns and Allowances 130 Fairview Church
Office Equipment 5000 COST OF MERCHANDISE 140 Playtime Childcare
1215 Store Equipment 5110 Purchases 150 Village Crafts
1220 Accumulated Depreciation— 5120 Purchases Discount 160 Washington Schools
Store Equipment 5130 Purchases Returns and Allowances Accounts Payable Ledger
2000 LIABILITIES 6000 OPERATING EXPENSES 210 American Paint
2100 Current Liabilities 6105 Advertising Expense 220 Ceramic Supply
2110 Accounts Payable 6110 Cash Short and Over 230 Crown Distributing
2120 Federal Income Tax Payable 6115 Credit Card Fee Expense 240 Floral Designs
2130 Employee Income Tax Payable 6120 Depreciation Expense—Office 250 Gulf Craft Supply
2135 Social Security Tax Payable Equipment 260 Synthetic Arts
2140 Medicare Tax Payable 6125 Depreciation Expense—Store
2145 Sales Tax Payable Equipment The charts of accounts for Hobby Shack,
2150 Unemployment Tax Payable— 6130 Insurance Expense Inc., are illustrated here for ready reference
Federal as you study Part 2 of this textbook.
C H A P T E R 1 1 C H A P T E R 1 2 PHOTOS: DIGITAL VISION, DIGITAL VISION, PHOTOGRAPHER'S CHOICE RF, STOCKBYTE (ALL GETTY IMAGES)
C H A P T E R 1 5 C H A P T E R 1 6
231
DIGITAL VISION/GETTY IMAGES
C H A P T E R 9 Journalizing Purchases
and Cash Payments
O B J E C T I V E S
After studying Chapter 9, you will be able to: 4. Journalize cash payments and cash discounts
using a cash payments journal.
1. Define accounting terms related to purchases
and cash payments for a merchandising 5. Prepare a petty cash report and journalize the
business. reimbursement of the petty cash fund.
2. Identify accounting concepts and practices 6. Total, prove, and rule a cash payments journal
related to purchases and cash payments for a and start a new cash payments journal page.
merchandising business.
7. Journalize purchases returns and allowances
3. Journalize purchases of merchandise using a and other transactions using a general journal.
purchases journal.
K E Y T E R M S
• merchandise • cost of merchandise • purchases discount
• merchandising business • markup • general amount column
• retail merchandising • vendor • list price
business • purchase on account • trade discount
• wholesale merchandising • purchases journal • contra account
business • special amount column • cash short
• corporation • purchase invoice • cash over
• share of stock
• capital stock
• stockholder
• special journal
•
•
•
terms of sale
cash payments journal
cash discount
•
•
•
purchases return
purchases allowance
debit memorandum
( Point Your Browser
www.C21accounting.com
)
232
ACCOUNTING IN THE REAL WORLD
OfficeMax
Purchasing Synergies Benefit OfficeMax
and Boise Office Solutions
Like the trees it manages, Boise Cascade Corporation has grown and evolved
from its roots as a wood products company in Boise, Idaho. Building on its
strength as a manufacturer of wood building products and paper, Boise
established Boise Office Solutions to provide office supplies and furniture
directly to businesses, government offices, and educational institutions.
DIGITAL VISION/GETTY IMAGES
In its 2002 annual report, Boise stated, “Boise Office Solutions’ primary
goal is profitable growth. This means winning new customers, selling more
products to existing customers, and controlling oper- INTERNET
ating costs.” ACTIVITY
Boise took a bold step to achieve
that goal through the 2003 acqui- C Corporations,
sition of OfficeMax, an office S Corporations,
products company with nearly and LLCs
1,000 retail outlets. The acqui- There are several factors to
sition more than doubled consider when organizing a
sales in Boise’s office prod- corporation. One of these is
ucts distribution business. to determine what type of
The company expects corporation you want to orga-
to use its combined pur- nize. Search the Internet for an
chasing power to lower explanation of each of the fol-
the cost of the office lowing types of corporations:
products purchased from C Corporation, S Corporation,
©BLOOMBERG NEWS/LANDOV
other manufacturers and to and a Limited Liability Com-
eliminate duplicate distribu- pany (LLC).
tion facilities and marketing
efforts. Boise expects the com- Instructions
bined companies to achieve syn-
1. List the benefits and
ergy benefits of $160 million a year.
disadvantages of a
C Corporation.
Critical Thinking
2. List the benefits and
1. How can purchasing more units of an item enable a company to
disadvantages of an
purchase that item at a reduced cost?
S Corporation.
2. Can you think of any two other companies that could reduce their
3. List the benefits and
operating costs by combining their businesses?
disadvantages of a Limited
Source: www.bc.com
Liability Company.
233
L E S S O N
Journalizing Purchases
9-1 Using a Purchases Journal
MERCHANDISING BUSINESSES
TechKnow Consulting, the business described in Part 1, is a
service business; it sells services for a fee. However, many other
businesses purchase goods to sell. Goods that a business pur-
chases to sell are called merchandise. A business that purchases
and sells goods is called a merchandising business. A merchan-
dising business that sells to those who use or consume the goods
is called a retail merchandising business. A business that buys
and resells merchandise to retail merchandising businesses
BLEND IMAGES/GETTY IMAGES
is called a wholesale merchandising business. Ser-
vice and merchandising businesses use many of
the same accounts. A merchandising business
has additional accounts on the balance sheet
and income statement to account for the
purchase and sale of merchandise.
BUSINESS STRUCTURES
For mi n g a C or po r a t i o n
Many businesses need amounts of capi- capital accounts. Proprietorships have a single capital and
tal that cannot be easily provided by a drawing account for the owner. A corporation has sepa-
proprietorship. These businesses choose to rate capital accounts for the stock issued and for the earn-
organize using another form of business. An ings kept in the business, which will be explained in more
organization with the legal rights of a person and detail in Chapter 16. As in proprietorships, information in a
which many persons may own is called a corporation. corporation’s accounting system is kept separate from the
A corporation is formed by receiving approval from a state personal records of its owners. [CONCEPT: Business Entity]
or federal agency. Each unit of ownership in a corporation Periodic financial statements must be sent to the stock-
is called a share of stock. Total shares of ownership in a holders of the corporation to report the financial activities
corporation are called capital stock. An owner of one or of the business.
more shares of a corporation is called a stockholder.
A corporation is a business organization that has the Critical Thinking
legal rights of a person. A corporation can own property, 1. The names of many corporations include the words
PHOTO: PHOTODISC/GETTY IMAGES
incur liabilities, and enter into contracts in its own name. Corporation, Incorporated, Corp., or Inc. in their names.
A corporation may also sell ownership in itself. A person Based on their names, identify several corporations in
becomes an owner of a corporation by purchasing shares your area.
of stock.
2. Why do you think many very large companies are
The principal difference between the accounting
organized as corporations?
records of proprietorships and corporations is in the
234 Chapter 9 Journalizing Purchases and Cash Payments
THE BUSINESS HOBBY SHACK , INC .
Janice Kellogg decided to quit her full-time job and turn implement her plan. But with the help of a small group
her ceramic hobby into a retail hobby business. She devel- of investors, Janice formed a corporation called Hobby
oped a plan to rent space in a shopping center and oper- Shack, Inc. Each stockholder received a number of shares
ate Hobby Shack six days a week. Hobby Shack would of stock based on the amount invested.
sell a wide variety of art and hobby supplies to individ- Unlike a proprietorship, a corporation exists indepen-
uals, schools, and businesses. Janice planned to expand dent of its owners. Janice expects the Hobby Shack to
the merchandise she offers, rent store and office equip- continue beyond her lifetime and plans to give her shares
ment, and employ other individuals to work in the store. of stock to her children. [CONCEPT: Going Concern]
However, Janice did not personally have the capital to
USING SPECIAL JOURNALS
A business with a limited number of daily transactions 2. Cash payments journal—for all cash payments
may record all entries in one journal. A business with many 3. Sales journal—for all sales of merchandise on account
daily transactions may choose to use a separate journal for 4. Cash receipts journal—for all cash receipts
each kind of transaction. A journal used to record only 5. General journal—for all other transactions
one kind of transaction is called a special journal. Hobby
Recording transactions in a sales journal and a cash
Shack uses five journals to record daily transactions:
receipts journal is described in Chapter 10.
1. Purchases journal—for all purchases of merchandise
on account
CHARACTER COUNTS
Wa l k i n g o n E t h i c a l Ic e
Lockheed Martin is an international corporation engaged “Shred that document.”
in the production of advanced technology systems. The “We can hide it.”
company’s largest customers are the U.S. Department of “No one will get hurt.”
Defense and other U.S. federal government agencies. “What’s in it for me?”
Lockheed Martin is working to be a leader in ethical “This will destroy the
conduct. In its code of conduct, “Setting the Standard,” the competition.”
company provides its employees with detailed guidance “We didn’t have
on making ethical decisions. One method of assisting its this conversation.”
employees to make ethical decisions is to provide a list of
statements that are warning signs of unethical behavior, Instructions
such as the following: Think of state-
ments you hear
PHOTO: DIGITAL VISION/GETTY IMAGES
“Well, maybe just this once.”
that are warning
“No one will ever know.”
signs of unethical
“It doesn’t matter how it gets done as long as it gets
behavior.
done.”
“It sounds too good to be true.” Source: www.lockheedmartin.com
“Everyone does it.”
Journalizing Purchases Using a Purchases Journal Lesson 9-1 235
PURCHASING MERCHANDISE
The price a business pays for goods it purchases to sell The account used for recording the cost of merchan-
is called cost of merchandise. The selling price of mer- dise is titled Purchases. Purchases is classified as a cost
chandise must be greater than the cost of merchandise account because it is in the cost of merchandise division in
for a business to make a profit. The amount added to the the chart of accounts. Purchases is a temporary account.
cost of merchandise to establish the selling price is called Because the cost of merchandise reduces capital when
markup. Revenue earned from the sale of merchandise the merchandise is purchased, Purchases has a normal
includes both the cost of merchandise and markup. Only debit balance. Therefore, the purchases account increases
the markup increases capital. Accounts for the cost of by a debit and decreases by a credit, as shown in the T
merchandise are kept in a separate division of the gen- account.
eral ledger. The cost of merchandise division is shown in
Hobby Shack’s chart of accounts on page 231.
In addition to purchasing merchandise to sell, a mer- Purchases
chandising business also buys supplies and other assets for Debit Credit
use in the business. A business from which merchandise is
Decrease
purchased or supplies or other assets are bought is called a
Increase
vendor.
PURCHASES ON ACCOUNT
The cost account, Purchases, is used only to record the cost A liability account that summarizes the amounts owed
of merchandise purchased. No other items bought, such as to all vendors is titled Accounts Payable. Hobby Shack
supplies, are recorded in the purchases account. These items uses an accounts payable account. The liability account,
are recorded in other accounts, such as Supplies. Merchan- Accounts Payable, has a normal credit balance. Therefore,
dise and other items bought are recorded and reported at the accounts payable account increases by a credit and
the price agreed upon at the time the transactions occur. decreases by a debit, as shown in the T account.
The accounting concept Historical Cost is applied when the
actual amount paid for merchandise or other items bought
is recorded. [CONCEPT: Historical Cost] Accounts Payable
A transaction in which the merchandise purchased is Debit Credit
to be paid for later is called a purchase on account. Some
Decrease
businesses that purchase on account from only a few
Increase
vendors keep a separate general ledger account for each
vendor. Businesses that purchase on account from many
vendors will have many accounts for vendors. To avoid a
bulky general ledger, the total amount owed to all ven-
dors can be summarized in a single general ledger account.
236 Chapter 9 Journalizing Purchases and Cash Payments
PURCHASES JOURNAL
PURCHASES JOURNAL PAGE
DATE ACCOUNT CREDITED PURCH. POST. PURCHASES DR.
NO. REF. ACCTS. PAY. CR.
1 1
2 2
A special journal used to record only purchases of mer- transactions involve a debit to Purchases and a credit
chandise on account is called a purchases journal. A to Accounts Payable. Therefore, Hobby Shack’s special
purchase on account transaction is recorded on only one amount column in the purchases journal includes those
line of Hobby Shack’s purchases journal. The amount accounts in the heading.
column has two account titles in its heading: Purchases Using special amount columns eliminates writing gen-
Dr. and Accts. Pay. Cr. A journal amount column headed eral ledger account titles in the Account Title column.
with an account title is called a special amount column. Recording entries in a journal with special amount col-
Special amount columns are used for frequently occurring umns saves time.
transactions. All of Hobby Shack’s purchase on account
PU R
EST
O CK
/GE
TTY
I MA
GE
S
R E M E M B E R
All purchase on account
transactions are recorded in
the purchases journal. If a
purchase is made for cash, the
transaction is NOT recorded
in the purchases journal.
Journalizing Purchases Using a Purchases Journal Lesson 9-1 237
PURCHASE INVOICE
Stamp date received and
1 purchase invoice number.
4
TO: Hobby Shack DATE: 10/26/-- 4 Review vendor’s
1420 College Plaza
Atlanta, GA 30337-1726
INV. NO.: 2389 terms of sale.
TERMS: 30 days
ACCT. NO.: 230
QUANTITY CAT. NO. DESCRIPTION UNIT PRICE TOTAL
2 Place a check mark
10 4422 28 canvas 53.00 530.00 by each amount.
12 4424 40 canvas 62.00 744.00
15 6620 2 4 frame kit 36.00 540.00
15 7715 1 2 frame kit 15.00 225.00
2,039.00
Total PSD
Initials of person who checked invoice. 3
When a vendor sells merchandise to a buyer, the ven- A purchase invoice lists the quantity, the description,
dor prepares a form showing what has been sold. A form the price of each item, and the total amount of the invoice.
describing the goods sold, the quantity, and the price is A purchase invoice provides the information needed for
known as an invoice. An invoice used as a source docu- recording a purchase on account.
ment for recording a purchase on account transaction Hobby Shack takes the following actions when a pur-
is called a purchase invoice. [CONCEPT: Objective chase invoice is received.
Evidence]
S T E P S RECEIVING A PURCHASE INVOICE
1 Stamp the date received, 11/02/--, and Hobby Shack’s purchase invoice number, P83, in the upper right corner.
This date should not be confused with the vendor’s date on the invoice, 10/26. Hobby Shack assigns numbers in
sequence to easily identify all purchase invoices. The number stamped on the invoice, P83, is the number assigned
by Hobby Shack to this purchase invoice. This number should not be confused with the invoice number, 2389,
assigned by the vendor. Each vendor uses a different numbering system. Therefore, vendor invoice numbers could
not be recorded in sequence, which would make it impossible to detect a missing invoice.
2 Place a check mark by each of the amounts in the Total column to show that the items have been received and that
amounts have been checked and are correct.
3 The person who checked the invoice should initial below the total amount in the Total column.
4 Review the vendor’s terms. An agreement between a buyer and a seller about payment for merchandise is called
the terms of sale. The terms of sale on the invoice are 30 days. These terms mean that payment is due within
30 days from the vendor’s date of the invoice. The invoice is dated October 26. Therefore, payment must be made
by November 25.
238 Chapter 9 Journalizing Purchases and Cash Payments
PURCHASING ME RCHANDISE ON ACCOUNT
3 Purchase Invoice
1 Date 2 Vendor Name Number 4 Amount
PURCHASES JOURNAL PAGE 11
DATE ACCOUNT CREDITED PURCH. POST. PURCHASES DR.
NO. REF. ACCTS. PAY. CR.
20--
1 Nov. 2 Crown Distributing 83 2 0 3 9 00 1
2 2
A purchase on account transaction increases the amount
November 2. Purchased merchandise owed to a vendor. This transaction increases the pur-
on account from Crown Distributing, chases account balance and increases the accounts pay-
$2,039.00. Purchase Invoice No. 83. able account balance. Because the purchases account has a
normal debit balance, Purchases is debited for $2,039.00
to show the increase in this cost account. The accounts
Purchases payable account has a normal credit balance. Therefore,
Accounts Payable is credited for $2,039.00 to show the
2,039.00
increase in this liability account.
Accounts Payable
2,039.00
S T E P S JOURNALIZING A PURCHASE OF MERCHANDISE ON ACCOUNT
1 Write the date, 20--, Nov. 2, in the Date column.
2 Write the vendor name, Crown Distributing, in the Account Credited column.
3 Write the purchase invoice number, 83, in the Purch. No. column.
4 Write the amount of the invoice, $2,039.00, in the special amount column. This single amount is both a debit
to Purchases and a credit to Accounts Payable. Therefore, it is not necessary to write the title of either general
ledger account.
The way Hobby Shack keeps a record of the amount
owed to each vendor is described in Chapter 11.
F O R YO U R I N F O R M AT I O N
F Y I
Gross Domestic Product (GDP)
is the total dollar value of
all final goods and services
produced by resources located
in the United States (regardless
of who owns the resources)
during one year’s time.
Journalizing Purchases Using a Purchases Journal Lesson 9-1 239
T O TA L I N G A N D R U L I N G A P U R C H A S E S J O U R N A L
PURCHASES JOURNAL PAGE 11
DATE ACCOUNT CREDITED PURCH. POST. PURCHASES DR.
NO. REF. ACCTS. PAY. CR.
20--
1 Nov. 2 Crown Distributing 83 2 0 3 9 00 1
2 5 Ceramic Supply 84 4 1 4 7 20 2
3 5 Synthetic Arts 85 3 8 1 6 00 3
4 13 American Paint 86 3 7 6 8 00 4
5 20 American Paint 87 3 3 7 7 88 5
1
6 30 Total 17 1 4 8 08 6
5 5. Write total
7 3 4 6 7
amount below
2 single line.
1. Rule single line
2. Write 3. Write word across amount 4. Add the 6. Rule double
the date. Total. column. amount lines across
column. amount column.
Hobby Shack always rules its purchases journal at the end Hobby Shack uses the following six steps in ruling its
of each month, even if the page for the month is not full. purchases journal at the end of each month.
S T E P S TOTALING AND RULING A PURCHASES JOURNAL
1 Rule a single line across the amount column under the last entry.
2 Write the date, 30, in the Date column.
3 Write the word Total in the Account Credited column.
P H OT OD I S C / G E T T Y I M A G
ES
4 Add the amount column. Verify the total by re-adding the column in
reverse order.
5 Write the total, $17,148.08, directly below the single line
in the amount column.
6 Rule double lines across the amount column
directly below the total amount to show
that the total has been verified as correct.
Posting from a purchases journal is described
in Chapter 11.
240 Chapter 9 Journalizing Purchases and Cash Payments
TERMS REVIEW
End of Lesson
merchandise
merchandising business
retail merchandising
business
REVIEW
wholesale merchandising
business
corporation
share of stock
capital stock
stockholder
special journal
cost of merchandise
markup
vendor AUDIT YOUR UNDERSTANDING
purchase on account
1. What kinds of transactions are recorded in a purchases journal?
purchases journal
2. For what are special amount columns in a journal used?
special amount column
3. Why are there two account titles in the amount column of the purchases
purchase invoice journal?
terms of sale 4. What is the advantage of having special amount columns in a journal?
WORK TOGETHER 91
Journalizing purchases using a purchases journal
The purchases journal for Lambert Hardware is given in the Working Papers. Your instructor will guide you through
the following examples.
1. Using the current year, journalize these transactions on page 10 of the purchases journal. Purchase invoices are
abbreviated as P.
Transactions:
Oct. 2. Purchased merchandise on account from American Tools, $1,230.00. P116.
7. Purchased merchandise on account from Harris Manufacturing, Inc., $480.00. P117.
11. Purchased merchandise on account from Keasler Supply, $780.00. P118.
2. Total and rule the purchases journal.
ON YOUR OWN 91
Journalizing purchases using a purchases journal
The purchases journal for Classic Gifts, Inc., is given in the Working Papers. Work this problem independently.
1. Using the current year, journalize these transactions on page 11 of the purchases journal. Purchase invoices are
abbreviated as P.
Transactions:
Nov. 4. Purchased merchandise on account from Ulman Supply, Inc., $670.00. P149.
9. Purchased merchandise on account from Else Silver Co., $2,345.00. P150.
18. Purchased merchandise on account from Pratt Paints, $1,150.00. P151.
2. Total and rule the purchases journal.
Journalizing Purchases Using a Purchases Journal Lesson 9-1 241
L E S S O N Journalizing Cash
Payments Using a
9-2 Cash Payments Journal
C A S H P AY M E N T S J O U R N A L
CASH PAYMENTS JOURNAL PAGE
1 2 3 4 5
CK. POST. GENERAL ACCOUNTS PURCHASES CASH
DATE ACCOUNT TITLE NO. REF. PAYABLE DISCOUNT
DEBIT CREDIT CREDIT
DEBIT CREDIT
1 1
A special journal used to record only cash payment trans- the customer pays less than the invoice amount previously
actions is called a cash payments journal. Only those recorded in the purchases account. Taking purchases dis-
columns needed to record cash payment transactions counts reduces the customer’s cost of merchandise pur-
are included in Hobby Shack’s cash payments journal. A chased. Because it often takes purchase discounts, Hobby
cash payments journal may be designed to accommodate Shack uses a cash payments journal with a Purchases Dis-
a business’s frequent cash payment transactions. Since count Credit column.
all cash payment transactions affect the cash account, a A journal amount column that is not headed with an
special amount column is provided for this general ledger account title is called a general amount column. Hobby
account. In addition, Hobby Shack has many cash pay- Shack’s cash payments journal has General Debit and
ment transactions affecting the accounts payable account. General Credit columns for cash payment transactions
Therefore, a special amount column is provided in the that do not occur often, such as monthly rent.
cash payments journal for this general ledger account. All cash payments made by Hobby Shack are recorded
Normally, the total amount shown on a purchase in a cash payments journal. The source document for
invoice is the amount that a customer is expected to pay. most cash payments is the check issued. A few payments,
To encourage early payment, however, a vendor may such as bank service charges, are made as direct withdraw-
allow a deduction from the invoice amount. A deduction als from the company’s bank account. For payments not
that a vendor allows on the invoice amount to encour- using a check, the source document is a memorandum.
age prompt payment is called a cash discount. A cash Most of Hobby Shack’s cash payments are to vendors and
discount on purchases taken by a customer is called a for expenses that are paid by check.
purchases discount. When a purchases discount is taken,
R E M E M B E R
Only cash payment
transactions are recorded in
the cash payments journal.
242 Chapter 9 Journalizing Purchases and Cash Payments
C A S H P AY M E N T O F A N E X P E N S E
1. Date 2. Account Title 3. Check 4. Debit 5. Credit
Number
CASH PAYMENTS JOURNAL PAGE 21
1 2 3 4 5
CK. POST. 4 GENERAL ACCOUNTS PUCHASES CASH
1 DATE 2 ACCOUNT TITLE NO. REF. DEBIT CREDIT
PAYABLE
DEBIT
DISCOUNT
CREDIT
5 CREDIT
1
20--
Nov. 2 Advertising Expense 3 292 1 5 0 00 1 5 0 00 1
2 5 Supplies—Office 293 9 4 00 9 4 00 2
3 3
JOURNALIZING
November 2. Paid cash for advertising,
S T E P S A CASH PAYMENT
$150.00. Check No. 292.
OF AN EXPENSE
Advertising Expense 1 Write the date, 20--, Nov. 2, in the Date column.
150.00 2 Write the account title, Advertising Expense, in
the Account Title column.
Cash
150.00 3 Write the check number, 292, in the Ck. No.
column.
4 Write the debit amount to Advertising Expense,
Hobby Shack usually pays for an expense at the time the $150.00, in the General Debit column.
transaction occurs.
This cash payment increases the advertising expense 5 Write the credit amount, $150.00, in the Cash
account balance and decreases the cash account balance. Credit column.
The expense account Advertising Expense has a normal
debit balance and increases by a debit of $150.00. The
asset account Cash also has a normal debit balance and
decreases by a credit of $150.00.
BUYING SUPPLIES FOR CASH
Hobby Shack buys supplies for use in the business. Sup-
November 5. Paid cash for office plies are not recorded in the purchases account because
supplies, $94.00. Check No. 293. supplies are not intended for sale. Cash register tapes and
price tags are examples of supplies used in a business.
This transaction increases the office supplies account
Supplies—Office balance and decreases the cash account balance. The steps
for journalizing buying supplies for cash are similar to
94.00
journalizing paying cash for an expense.
Cash
94.00
Journalizing Cash Payments Using a Cash Payments Journal Lesson 9-2 243
C A S H P AY M E N T S F O R P U R C H A S E S
CASH PAYMENTS JOURNAL PAGE 21
1 2 3 4 5
CK. POST. GENERAL ACCOUNTS PURCHASES CASH
DATE ACCOUNT TITLE NO. REF. PAYABLE DISCOUNT
DEBIT CREDIT CREDIT
DEBIT CREDIT
10 7 Purchases 301 6 0 0 00 4 5 6 0 0 00 10
1 2 3
1. Date 2. Account Title 3. Check Number 4. Debit 5. Credit
Businesses usually purchase merchandise on account. Cash Purchases
However, vendors may not extend credit to all of their Hobby Shack pays cash for 10 ceramic molds with an
customers. Thus, these businesses must pay the vendor invoice amount of $600.00, the list price less a trade dis-
with a check before the merchandise is either shipped or count. Because the transaction involves a cash payment, it
delivered. is recorded in the cash payments journal. Only purchases
on account are recorded in the purchases journal.
Trade Discount
Most manufacturers and wholesalers print catalogs and
maintain Internet sites that describe their products. Gen-
November 7. Purchased merchandise
erally, the prices listed are the manufacturers’ suggested
retail prices. The retail price listed in a catalog or on an for cash, $600.00. Check No. 301.
Internet site is called a list price. When a merchandising
business purchases a number of products from a manu-
facturer, the price frequently is quoted as “list price less Purchases
trade discount.” A reduction in the list price granted to 600.00
customers is called a trade discount. Trade discounts are
also used to quote different prices for different quantities Cash
purchased without changing catalog or list prices. 600.00
When a trade discount is granted, the seller’s invoice
shows the actual amount charged. This amount after the
trade discount has been deducted from the list price is
referred to as the invoice amount. Only the invoice amount The list price for the 10 ceramic molds is $1,500.00.
is used in a journal entry. [CONCEPT: Historical Cost] The invoice price is the list price, less a 60% trade dis-
No journal entry is made to show the amount of a trade count. The total invoice amount is calculated in two steps,
discount. as follows.
STEP 1:
Total
List Price ⴛ Trade Discount Rate ⴝ Trade Discount
$1,500.00 60% $900.00
STEP 2:
Total
List Price ⴚ Trade Discount ⴝ Invoice Amount
$1,500.00 $900.00 $600.00
244 Chapter 9 Journalizing Purchases and Cash Payments
C A S H P AY M E N T S O N A C C O U N T W I T H P U R C H A S E S D I S C O U N T S
6. Purchase Invoice
Amount Less the
2. Vendor Name Purchases Discount
CASH PAYMENTS JOURNAL PAGE 21
1 2 3 4 5
CK. POST. GENERAL ACCOUNTS PURCHASES CASH
DATE ACCOUNT TITLE NO. REF. PAYABLE DISCOUNT
DEBIT CREDIT CREDIT
DEBIT CREDIT
2
11 1 8 Gulf Craft Supply 302 4 9 8 00 9 96 4 8 8 04 11
12 3 4 5 6 12
13 13
1. Date 3. Check Number 4. Purchase Invoice 5. Purchases Discount
Amount
A cash discount is stated as a percentage deducted from
the invoice amount. For example, 2/10, n/30 is a com- November 8. Paid cash on account to Gulf Craft
mon term of sale, which is read two ten, net thirty. Two ten Supply, $488.04, covering Purchase Invoice No. 82
means that 2% of the invoice amount may be deducted if for $498.00, less 2% discount, $9.96. Check No. 302.
the invoice is paid within 10 days of the invoice date. Net
thirty means that the total invoice amount must be paid
within 30 days. Accounts Payable
Purchases discounts are recorded in a general led-
498.00
ger account titled Purchases Discount. An account that
reduces a related account on a financial statement is called Purchases Discount
a contra account. Purchases Discount is a contra account
to Purchases and is included in the cost of merchandise 9.96
division of the general ledger. On an income statement, Cash
Purchases Discount is deducted from the balance of its
488.04
related account, Purchases.
Since contra accounts are deductions from their related
accounts, contra account normal balances are opposite
the normal balances of their related accounts. The normal
The way Hobby Shack keeps a record of the amount
balance for Purchases is a debit. Therefore, the normal
paid to each vendor is described in Chapter 11.
balance for Purchases Discount, a contra account to Pur-
The steps, numbered above, are described on the top of
chases, is a credit. Trade discounts are not recorded; how-
page 246.
ever, cash discounts are recorded as purchases discounts
because they decrease the recorded invoice amount.
STEP 1:
Purchase Invoice Purchases Discount Purchases
ⴛ ⴝ
Amount Rate Discount
$498.00 2% $9.96
STEP 2:
Purchase Invoice Purchases Cash Amount
ⴚ ⴝ
Amount Discount After Discount
$498.00 $9.96 $488.04
Journalizing Cash Payments Using a Cash Payments Journal Lesson 9-2 245
JOURNALIZING A CASH PAYMENT ON ACCOUNT
S T E P S
WITH PURCHASES DISCOUNT
1 Write the date, 8, in the Date column.
2 Write the account title of the vendor, Gulf Craft Supply, in the Account Title column.
3 Write the check number, 302, in the Ck. No. column.
4 Write the debit amount to Accounts Payable, $498.00, in the Accounts Payable Debit column.
5 Write the credit amount, $9.96, in the Purchases Discount Credit column.
6 Write the credit amount, $488.04, in the Cash Credit column.
C A S H P AY M E N T S O N A C C O U N T W I T H O U T P U R C H A S E S D I S C O U N T S
CASH PAYMENTS JOURNAL PAGE 21
1 2 3 4 5
CK. POST. GENERAL ACCOUNTS PURCHASES CASH
DATE ACCOUNT TITLE NO. REF. PAYABLE DISCOUNT
DEBIT CREDIT CREDIT
DEBIT CREDIT
12 13 American Paint 303 2 6 5 0 00 2 6 5 0 00 12
13
1 2 3 4 5 13
1. Date 2. Vendor Name 3. Check Number 4. Total Purchase 5. Total Purchase
Invoice Amount Invoice Amount
Some vendors do not offer purchases discounts. Some- amount of the purchase invoice, $2,650.00, within 30
times a business does not have the cash available to take days of the invoice date, October 25.
advantage of a purchases discount. In both cases, the full
purchase invoice amount is paid.
Hobby Shack purchased merchandise on account from November 13. Paid cash on account to
American Paint on October 25. American Paint’s credit American Paint, $2,650.00, covering
terms are n/30. Therefore, Hobby Shack will pay the full Purchase Invoice No. 77. Check No. 303.
S T E P S JOURNALIZING A CASH PAYMENT OF AN EXPENSE
1 Write the date, 13, in the Date column.
2 Write the vendor account title, American Paint, in the Account Title column.
3 Write the check number, 303, in the Ck. No. column.
4 Write the debit amount to Accounts Payable, $2,650.00, in the Accounts Payable Debit column.
5 Write the credit amount, $2,650.00, in the Cash Credit column.
246 Chapter 9 Journalizing Purchases and Cash Payments
End of Lesson
TERMS REVIEW
REVIEW
cash payments journal AUDIT YOUR UNDERSTANDING
cash discount
purchases discount 1. Why would a vendor offer a cash discount to a customer?
general amount column 2. What is recorded in the general amount columns of the cash payments
journal?
list price
3. What is the difference between purchasing merchandise and buying
trade discount supplies?
contra account 4. What is meant by terms of sale 2/10, n/30?
WORK TOGETHER 92
Journalizing cash payments using a cash payments journal
The cash payments journal for Franklin Lumber is given in the Working Papers. Your instructor will guide you through
the following example.
1. Using the current year, journalize these transactions on page 10 of a cash payments journal. The checks used as
source documents are abbreviated as C.
Transactions:
Oct. 1. Paid cash for telephone bill, $85.00. C321.
7. Paid cash for office supplies, $52.00. C322.
11. Paid cash to GMT Hardware for merchandise with a list price of $800.00, less a 60% trade discount.
C323.
17. Paid cash on account to West Supply covering Purchase Invoice No. 199 for $3,420.00, less 2% discount.
C324.
19. Paid cash on account to Quill Forest Products covering Purchase Invoice No. 182 for $4,380.00. No cash
discount was offered. C325.
ON YOUR OWN 92
Journalizing cash payments using a cash payments journal
The cash payments journal for Rapid Auto Supply is given in the Working Papers. Work this problem independently.
1. Using the current year, journalize these transactions on page 11 of the cash payments journal. The checks used as
source documents are abbreviated as C.
Transactions:
Nov. 2. Paid cash for the electric bill, $248.00. C432.
6. Paid cash for office supplies, $142.00. C433.
9. Paid cash to Zebra Metals for merchandise with a list price of $3,400.00, less a 40% trade discount. C434.
12. Paid cash on account to Racing Images covering Purchase Invoice No. 543 for $4,230.00, less 2%
discount. C435.
14. Paid cash on account to SPL Renovations covering Purchase Invoice No. 182 for $2,573.00. No cash
discount was offered. C436.
Journalizing Cash Payments Using a Cash Payments Journal Lesson 9-2 247
L E S S O N
Performing Additional Cash
9-3 Payments Journal Operations
PETTY CASH REPORT
PETTY CASH REPORT
1. Date and Custodian Name
1 1
Date: October 31, 20-- Custodian: Janice Morgan
Replenish
Explanation Reconciliation Amount
Fund total 250.00 2 2. Fund Total
Payments:
Supplies 45.34
Advertising 25.00 3 3. Payments by General
Miscellaneous 144.22 Ledger Account
4 214.56 4. Total Payments
Less: Total payments 4 214.56
Equals: Recorded amount on hand 5 35.44
Less: Actual amount on hand 6 33.85
Equals: Cash short (over) 7 1.59 1.59
Amount to replenish 216.15 8
5. Recorded Amount 6. Actual Cash 7. Subtract the actual cash on 8. Amount
on Hand on Hand hand from the recorded amount to Replenish
on hand.
A petty cash fund enables a business to pay cash for that should be on hand. A petty cash on hand amount
small expenses without writing a check, as described in that is less than a recorded amount is called cash short. A
Chapter 5. petty cash on hand amount that is more than a recorded
Errors may be made when making payments from a amount is called cash over.
petty cash fund. These errors cause a difference between The custodian prepares a petty cash report when the
actual cash on hand and the record of the amount of cash petty cash fund is to be replenished.
S T E P S PREPARING A PETTY CASH REPORT
1 Write the date, October 31, 20--, and custodian name, Janice Morgan, in the report heading.
2 Write the fund total, $250.00, from the general ledger account.
3 Summarize petty cash payments by totals for each general ledger account.
4 Calculate and write the total payments, $214.56, in the Reconciliation and Replenish Amount columns.
5 Calculate and write the recorded amount on hand, $35.44 ($250.00 $214.56).
6 Write the actual amount of cash on hand, $33.85, in the Reconciliation column.
7 Subtract the actual amount on hand, $33.85, from the recorded amount on hand, $35.44, and write the amount,
$1.59, in the Reconciliation and Replenish Amount columns. Note that petty cash is short by $1.59. The actual
amount of petty cash on hand is $1.59 less than the recorded amount.
8 Write the total of the replenish amount, $216.15.
248 Chapter 9 Journalizing Purchases and Cash Payments
REPLENISHING A PETTY CASH FUND
PETTY CASH REPORT
Date: November 18, 20-- Custodian: Janice Morgan
Replenish
Explanation Reconciliation Amount
Fund total 250.00
Payments:
Supplies—Office 32.33
Advertising 50.00
Miscellaneous 128.50
Less: Total payments 210.83 210.83
Equals: Recorded amount on hand 39.17
Less: Actual amount on hand 41.34
Equals: Cash short (over) (2.17) (2.17)
Amount to replenish 208.66
6. Total Cash Payment
4. Expense Amounts 4 6
CASH PAYMENTS JOURNAL PAGE 21
1 2 3 4 5
DATE ACCOUNT TITLE CK. POST. GENERAL 5 ACCOUNTS
PAYABLE
PURCHASES
DISCOUNT
CASH
NO. REF. DEBIT CREDIT CREDIT
DEBIT CREDIT
19 1 18 Supplies—Office 310 3 2 33 2 0 8 66 19
20 Advertising Expense 5 0 00 20
21 Miscellaneous Expense 3 1 2 8 50 21
22 2 Cash Short and Over 2 17 22
1. Date 2. Account Titles 3. Check Number 5. Cash Short as a Debit,
Cash Over as a Credit
Petty cash short and petty cash over are recorded in an
account titled Cash Short and Over. The account is a tem- Cash Short and Over
porary account. At the end of the fiscal year, the cash short Debit Credit
and over account is closed to Income Summary.
The balance of Cash Short and Over can be either a Cash short Cash over
debit or credit. However, the balance is usually a debit
because the petty cash fund is more likely to be short November 18. Paid cash to replenish the
than over. A cash shortage adds to the cost of operating petty cash fund, $208.66: office supplies,
a business. Thus, the account is classified as an operating
$32.33; advertising, $50.00; miscellaneous,
expense. Note that in Step 5, the amount of petty cash
$128.50; cash over, $2.17. Check No. 310.
over is recorded in the General Credit column. If petty
cash were short, the amount would be recorded in the
General Debit column.
The petty cash fund is replenished for the amount paid
out, $210.83, less cash over, $2.17. This total amount,
$208.66, restores the fund’s cash balance to its original
amount, $250.00 ($210.83 $2.17 $41.34 cash on
hand).
Performing Additional Cash Payments Journal Operations Lesson 9-3 249
T O TA L I N G , P R O V I N G , A N D R U L I N G A C A S H P AY M E N T S
J O U R N A L P A G E T O C A R R Y T O TA L S F O R W A R D
1. Rule a single line across
all amount columns.
CASH PAYMENTS JOURNAL PAGE 21
1 2 3 4 5
CK. POST. GENERAL ACCOUNTS PURCHASES CASH
DATE ACCOUNT TITLE NO. REF. PAYABLE DISCOUNT
DEBIT CREDIT CREDIT
DEBIT CREDIT
24 20 Ceramic Supply 312 1 5 8 0 8 00 5 8 0 8 00 24
25 20 Carried Forward 13 2 8 1 80 6 9 5 38 12 2 4 0 00 8 2 52 24 7 4 3 90 25
2 3 4 5 6
2. Write the 3. Write Carried 4. Place a check 5. Write each 6. Rule double line below
date. Forward in Account mark in Post. column total. column totals.
Title column. Ref. column.
A journal is proved and ruled whenever a journal page is If the total debits do not equal the total credits, the
filled and always at the end of a month. errors must be found and corrected before any more work
After all November 20 entries are recorded, page 21 of is completed.
Hobby Shack’s cash payments journal is filled. Column After a journal page has been totaled and proved, the
totals of page 21 are totaled and proved before being for- journal is ruled in preparation for forwarding to the next
warded to page 22. The proof that Hobby Shack’s debit page.
totals equal the credit totals on page 21 of the journal is
shown.
Debit Credit
Column Title Column Totals Column Totals
General Debit $13,281.80
General Credit $ 695.38
Accounts Payable Debit 12,240.00
Purchases Discount Credit 82.52
Cash Credit 24,743.90
Totals $25,521.80 $25,521.80
S T E P S STEPS FOR RULING A CASH PAYMENTS JOURNAL
1 Rule a single line across all amount columns directly below the last entry to indicate that all the columns
are to be added.
2 On the next line, write the date, 20, in the Date column.
3 Write the words Carried Forward in the Account Title column.
4 Place a check mark in the Post. Ref. column to show that nothing on this line needs to be posted.
5 Write each column total below the single line.
6 Rule double lines below the column totals across all amount columns to show that the totals have been
verified as correct.
250 Chapter 9 Journalizing Purchases and Cash Payments
S TA R T I N G A N E W C A S H P AY M E N T S J O U R N A L P A G E
2. Write the 3. Write Brought Forward in Account 1. Write the journal
date. Title column. page number.
CASH PAYMENTS JOURNAL PAGE 22 1
1 2 3 4 5
CK. POST. GENERAL ACCOUNTS PURCHASES CASH
DATE ACCOUNT TITLE PAYABLE DISCOUNT
2 3 NO. REF. DEBIT CREDIT DEBIT CREDIT
CREDIT
20--
1 Nov. 20 Brought Forward 13 2 8 1 80 6 9 5 38 12 2 4 0 00 8 2 52 24 7 4 3 90 1
4 5
4. Place a check mark 5. Record column totals brought
in Post. Ref. column. forward from previous page.
The totals from the previous journal page are carried for- The totals are recorded on the first line of the
ward to the next journal page. new page.
S T E P S STEPS FOR FORWARDING TOTALS TO A NEW JOURNAL PAGE
1 Write the journal page number, 22, at the top of 4 Place a check mark in the Post. Ref. column to show that
the journal. nothing on this line needs to be posted.
2 Write the date, 20--, Nov. 20, in the Date column. 5 Record the column totals brought forward from page 21
of the journal.
3 Write the words Brought Forward in the Account
Title column.
GLOBAL PERSPECTIVE
A c c o u nt a n c y i n A f r i c a
The accounting profession in Africa has been influenced In the expanding economies
by the European colonial powers that formerly governed of many developing African
there. Most African nations gained independence in the countries, the belief is that it
mid-twentieth century. is important to have well-
In Nigeria, Kenya, Ghana, and Zimbabwe (formerly qualified and experienced
under British rule), accounting is seen as a tool for finan-
accountants and a sound
cial management and is oriented toward the needs of the
accounting framework to
enterprise. Tax authorities are concerned with account
sustain economic growth.
items that can be valued in different ways, such as fixed
assets, inventories, and depreciation. Critical Thinking
In Togo, Rwanda, and Gambia (formerly ruled by
1. What should an inves-
France), accountancy is regulated by charts of accounts
tor consider when
that standardize financial transactions and annual finan-
PHOTO: STOCKBYTE/GETTY IMAGES
comparing financial
cial statements.
statements of companies in
In Angola, Cape Verde, and São Tomé and Principe (for-
Kenya and Gambia?
merly ruled by Portugal), the accounting system also is
based on charts of accounts that provide rules and regula- 2. What would be the advantages of
tions for companies. There are no professional accounting having a professional accounting organization
organizations in many African countries. in a country that does not currently have one?
Performing Additional Cash Payments Journal Operations Lesson 9-3 251
T O TA L I N G , P R O V I N G , A N D R U L I N G A C A S H P AY M E N T S
J O U R N A L AT T H E E N D O F A M O N T H
1. Rule a single line across
all amount columns.
CASH PAYMENTS JOURNAL PAGE 22
1 2 3 4 5
CK. POST. GENERAL ACCOUNTS PURCHASES CASH
DATE ACCOUNT TITLE PAYABLE DISCOUNT
NO. REF. DEBIT CREDIT CREDIT
DEBIT CREDIT
20--
1 Nov. 20 Brought Forward ⻫ 13 2 8 1 80 6 9 5 38 12 2 4 0 00 8 2 52 24 7 4 3 90 1
8 29 Advertising Expense 319 1 5 0 0 00 1 5 0 0 00 8
9 30 Floral Designs 320 1 6 5 0 00 3 3 00 1 6 1 7 00 9
10 30 Rent Expense 321 6 0 0 00 6 0 0 00 10
11 30 Totals 1 16 4 6 2 99 1 3 9 0 75 17 9 8 4 00 1 5 4 84 32 9 0 1 40 11
2 3 4 5
2. Write the 3. Write Totals in Account 4. Write each column total. 5. Rule double line across
date. Title column. all amount columns.
Equality of debits and credits in a journal is proved at the
end of each month. Proof for Hobby Shack’s cash pay-
ments journal for November is shown.
Debit Credit
Column Title Column Totals Column Totals
General Debit $16,462.99
General Credit $ 1,390.75
Accounts Payable Debit 17,984.00
Purchases Discount Credit 154.84
Cash Credit 32,901.40
Totals $34,446.99 $34,446.99
The two totals, $34,446.99, are equal. Equality of deb- After a cash payments journal has been totaled and
its and credits in Hobby Shack’s cash payments journal for proved at the end of the month, the journal is ruled.
November is proved.
S T E P S STEPS FOR RULING A CASH PAYMENTS JOURNAL
AT THE END OF THE MONTH
1 Rule a single line across all amount columns directly below the last entry to indicate that all the columns
are to be added.
2 On the next line write the date, 30, in the date column.
3 Write the word Totals in the Account Title column.
4 Write each column total below the single line.
5 Rule double lines across all amount columns to show that the totals have been verified as correct.
Posting from a cash payments journal is described in Chapter 11.
252 Chapter 9 Journalizing Purchases and Cash Payments
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. When journalizing a cash payment to replenish petty cash, what is
TERMS REVIEW
entered in the Account Title column of the cash payments journal?
2. What is the usual balance of the account Cash Short and Over?
cash short
3. List the five steps for ruling a cash payments journal at the end of the
cash over month.
WORK TOGETHER 93
Performing other cash payments journal operations
The cash payments journals and petty cash report for Keller Lighting are given in the Working Papers. Your instructor
will guide you through the following examples. The abbreviation for a check is C.
1. Rule page 5 of the cash payments journal using March 27 of the current year.
2. Begin page 6 of a cash payments journal.
3. Kevin Tomlinson is the custodian of a $200.00 petty cash account. On March 31, he had receipts for the following
total payments: supplies—office, $45.23; supplies—store, $66.18; and miscellaneous, $49.25. A cash count shows
$40.59 in the petty cash box. Prepare the petty cash report.
4. Record the replenishment of the fund on March 31. C536.
5. Total, prove, and rule the cash payments journal.
ON YOUR OWN 93
Performing other cash payments journal operations
The cash payments journals and petty cash report for Magic Music are given in the Working Papers. Work this
problem independently. The abbreviation for a check is C.
1. Rule page 11 of the cash payments journal using June 28 of the current year.
2. Begin page 12 of a cash payments journal.
3. Jerri Harris is the custodian of a $250.00 petty cash account. On June 30, she had receipts for the following total
payments: supplies—office, $56.21; supplies—store, $48.27; repairs, $82.25; and miscellaneous, $36.17. A cash
count shows $26.48 in the petty cash box. Prepare the petty cash report.
4. Record the replenishment of the fund on June 30. C627.
5. Total, prove, and rule the cash payments journal.
Performing Additional Cash Payments Journal Operations Lesson 9-3 253
L E S S O N Journalizing Other
Transactions Using
9-4 a General Journal
GENERAL JOURNAL
Not all transactions can be recorded in special journals.
Those transactions that cannot be recorded in a special
journal are recorded in a general journal. For example, R E M E M B E R
when Hobby Shack buys supplies on account, the trans-
If a transaction cannot be
action cannot be recorded in any of the special journals.
recorded in one of the special
Because the transaction is not a cash payment, it cannot journals, it must be recorded
be recorded in the cash payments journal. Since the trans- in the general journal.
action is not a purchase of merchandise on account, it
cannot be recorded in the purchases journal.
MEMOR ANDUM FOR BUYING SUPPLIES ON ACCOUNT
When Hobby Shack buys store supplies on account, an
invoice is received from the vendor. This invoice is simi-
lar to the purchase invoice received when merchandise is
purchased. To assure that no mistake is made, a memoran-
dum is attached to the invoice, noting that the invoice is
for store supplies and not for purchases.
F O R YO U R I N F O R M AT I O N
F Y I
HOBBY SHACK, INC. MEMORANDUM
Office supplies purchased by an
NO. 52
office supplies company to sell to its
customers should be recorded as a DATE November 6, 20--
I M A G E M O RE/ GE T T Y I M A
merchandise purchase. However,
G ES
office supplies bought by the
company for use by employees
Attached invoice is for store
in its store or office should be supplies bought on account.
recorded as store supplies
or office supplies.
254 Chapter 9 Journalizing Purchases and Cash Payments
BUYING SUPPLIES ON ACCOUNT
1. Write the 2. Write the 3. Write the memorandum 4. Write the
date. account title. number. debit amount.
GENERAL JOURNAL PAGE 11
1 4
DOC. POST.
DATE
2 ACCOUNT TITLE
NO. REF.
DEBIT CREDIT
20--
1 Nov. 6 Supplies—Store 3 M52 2 1 0 00 1
2 Accts. Pay./Gulf Craft Supply 2 1 0 00 2
3 5 6 7 3
4 4
5 5
6 6
5. Write the account title 6. Place diagonal 7. Write the
and vendor name in the line in Post. credit amount.
Account Title column. Ref. column.
Hobby Shack usually buys supplies for cash. Occasionally,
November 6. Bought store supplies on account from however, Hobby Shack buys some supplies on account.
Gulf Craft Supply, $210.00. Memorandum No. 52. This transaction increases the store supplies account
balance and increases the accounts payable account bal-
ance. The asset account Supplies—Store has a normal
Supplies—Store
debit balance and increases by a $210.00 debit. The liabil-
210.00 ity account Accounts Payable has a normal credit balance
and increases by a $210.00 credit.
Accounts Payable The equality of debits and credits for each general jour-
210.00 nal entry is checked after each entry is recorded. For this
entry, the amount of the debit entry, $210.00, is the same
as the amount of the credit entry, $210.00. Therefore,
debits equal credits for this entry.
S T E P S JOURNALIZING BUYING SUPPLIES ON ACCOUNT
1 Write the date, 20--, Nov. 6, in the Date column.
2 Write the account title, Supplies—Store, in the Account Title column.
3 Write the memorandum number, M52, in the Doc. No. column.
4 Write the debit amount to Supplies—Store, $210.00, in the Debit column on the same line as the account title.
5 On the next line indented about one centimeter, write the account title and vendor name, Accts. Pay./Gulf Craft
Supply, in the Account title column. Place a diagonal line between the two account titles.
6 Place a diagonal line in the Post. Ref. column on the same line to show that the single credit amount is posted
to two accounts. Posting of a single amount in the general journal to two accounts is described in Chapter 11.
7 Write the credit amount to Accts. Pay./Gulf Craft Supply, $210.00, in the Credit column on the same line as the
account titles.
Journalizing Other Transactions Using a General Journal Lesson 9-4 255
DEBIT MEMORANDUM FOR PURCHASES
R ETU R N S AN D ALLOWANCE S
DEBIT MEMORANDUM NO. 78
DATE
November 8, 20--
HOBBY SHACK, INC. TO
Crown Distributing
1420 College Plaza 162 Webster Road
Atlanta, GA 30337-1726 Miami, FL 33127-6214
ACCOUNT NO.
We have this day debited
your account as follows: 230
Quantity Units Description Price Total
6 ea. 36 canvas, medium grade, your invoice
number 16724, are being returned.
Merchandise sustained water damage
in transit. 42.00 252.00
If the above is incorrect, please return stating difference.
A customer may not want to keep merchandise that is returns and allowances. However, the customer may wait
inferior in quality or is damaged when received. A cus- for written confirmation from the vendor and use that
tomer may be allowed to return part or all of the mer- confirmation as the source document. Hobby Shack
chandise purchased. Credit allowed for the purchase price issues a debit memorandum for each purchases return or
of returned merchandise, resulting in a decrease in the cus- allowance. This debit memorandum is used as the source
tomer’s accounts payable, is called a purchases return. document for purchases returns and allowances transac-
When merchandise is damaged but still usable or is of a tions. [CONCEPT: Objective Evidence] The transaction
different quality than that ordered, the vendor may let the can be recorded immediately without waiting for written
customer keep the merchandise at a reduced price. Credit confirmation from the vendor. The original of the debit
allowed for part of the purchase price of merchandise that memorandum is sent to the vendor. A copy is kept by
is not returned, resulting in a decrease in the customer’s Hobby Shack.
accounts payable, is called a purchases allowance. Some businesses credit the purchases account for the
A purchases return or allowance should be confirmed amount of a purchases return or allowance. However, bet-
in writing. A form prepared by the customer showing the ter information is provided if these amounts are credited
price deduction taken by the customer for returns and to a separate account titled Purchases Returns and Allow-
allowances is called a debit memorandum. The form is ances. A business can track the amount of purchases
called a debit memorandum because the customer records returns and allowances in a fiscal period if a separate
the amount as a debit (deduction) to the vendor account account is used for recording them. The account enables
to show the decrease in the amount owed. a business to evaluate the effectiveness of its merchandise
The customer may use a copy of the debit memoran- purchasing activities.
dum as the source document for journalizing purchases
256 Chapter 9 Journalizing Purchases and Cash Payments
JOU R NALI Z I NG PU RCHASE S R ETU R NS AN D ALLOWANCE S
2. Write the account title
and vendor name in 3. Place a diagonal line
the Account Title column. in the Post. Ref. column.
GENERAL JOURNAL PAGE 11
1. Write the date.
DOC. POST.
1
DATE
2
ACCOUNT TITLE
NO. REF. 3 DEBIT CREDIT
30 28 Accounts Pay./Crown Distributing DM78 2 5 2 00 30
31 Purchases Returns and Allow. 4 5 2 5 2 00 31
32
6 7 32
6. Write the 4. Write the debit 5. Write the 7. Write the
account title. memorandum debit amount. credit amount.
number.
Purchases returns and allowances decrease the amount of
purchases. Therefore, Purchases Returns and Allowances is Accounts Payable
a contra account to Purchases. Thus, the normal account
252.00
balance of Purchases Returns and Allowances is a credit,
the opposite of the normal account balance of Purchases, Purchases Returns and Allowances
a debit.
252.00
The account is in the cost of merchandise division of
Hobby Shack’s chart of accounts.
November 28. Returned merchandise to Crown
Distributing, $252.00, covering Purchase
Invoice No. 80. Debit Memorandum No. 78.
S T E P S JOURNALIZING PURCHASES RETURNS AND ALLOWANCES
1 Write the date, 28, in the Date column.
2 Write the account title and vendor name, Accounts Pay./Crown
Distributing, in the Account Title column. A diagonal line is placed
between the two accounts. F O R YO U R I N F O R M AT I O N
F Y I
3 Place a diagonal line in the Post. Ref. column to show that the
single debit amount is posted to two accounts. Using the debit memorandum
as a source document is a
4 Write the debit memorandum number, DM78, in the Doc. No. proper accounting procedure
column. only if the business is confident
that the vendor will honor
5 Write the amount, $252.00, in the Debit column of the first line. the request for the purchases
return or allowance.
6 On the next line indented about 1 centimeter, write Purchases
Returns and Allow. in the Account Title column.
7 Write the amount, $252.00, in the Credit column of the second line.
Journalizing Other Transactions Using a General Journal Lesson 9-4 257
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. What journal is used to record transactions that cannot be recorded in
special journals?
2. Why is a memorandum used as the source document when supplies are
bought on account?
3. Why are two account titles written for the credit amount when supplies
are bought on account?
4. When is the equality of debits and credits proved for a general journal?
5. If purchases returns and allowances are a decrease in purchases, why TERMS REVIEW
are returns and allowances credited to a separate account?
6. What is a primary difference between a purchases return and a pur- purchases return
chases allowance?
purchases allowance
7. When is a debit memorandum a proper source document for a pur-
chases return or allowance? debit memorandum
WORK TOGETHER 94
Journalizing other transactions using a general journal
A general journal for Rood Electric is given in the Working Papers. Your instructor will guide you through the follow-
ing example.
1. Using the current year, journalize the following transactions on page 8 of the general journal. Source documents
are abbreviated as follows: memorandum, M; debit memorandum, DM. Save your work to complete On Your Own
9-4.
Transactions:
Oct. 5. Bought store supplies on account from Designer Supplies, $180.00. M35.
7. Returned merchandise to Hendrix Products, $540.00. DM65.
ON YOUR OWN 94
Journalizing other transactions using a general journal
Use the general journal that you started for Work Together 9-4. Work this problem independently.
1. Using the current year, journalize the following transactions, continuing on the next blank line of page 8 of the
general journal. Source documents are abbreviated as follows: memorandum, M; debit memorandum, DM.
Transactions:
Oct. 11. Bought office supplies on account from Office Express, $240.00. M36.
14. Returned merchandise to Fretz Industries, $1,239.00. DM66.
258 Chapter 9 Journalizing Purchases and Cash Payments
SUMMARY
After completing this chapter, you can: 4. Journalize cash payments and cash discounts
using a cash payments journal.
1. Define accounting terms related to purchases
and cash payments for a merchandising 5. Prepare a petty cash report and journalize the
business. reimbursement of the petty cash fund.
2. Identify accounting concepts and practices 6. Total, prove, and rule a cash payments journal
related to purchases and cash payments for a and start a new cash payments journal page.
merchandising business.
7. Journalize purchases returns and allowances
3. Journalize purchases of merchandise using a and other transactions using a general journal.
purchases journal.
EXPLORE ACCOUNTING
C a n A c c o u nt i ng C ha nge
t h e C ou r s e o f Hi s t o r y ?
According to accounting historians, the start Act of 1720 eliminated limited liability, effec-
of the Industrial Revolution was delayed by tively restricting the formation of corpora-
nearly a century by restrictions on the use tions. Only a limited number of businesses,
of the corporate form of organization. granted special charters by the British Par-
Events in Britain had a profound impact on liament, were able to form as corporations
the development of global commerce. during the remainder of the century.
The scientific knowledge that was During the early nineteenth century, a
required to spur the Industrial Revolution series of court cases and law changes gradu-
began to emerge in the eighteenth century. The ally loosened the rules governing the granting
massive financial resources necessary to develop of limited liability. Finally, the 1862 Companies Act
new industries could not be generated using partnerships, completely removed all restrictions, permitting the cor-
the traditional form of business organization. The British porate form of organization used today. Accounting his-
Parliament developed laws permitting the corporate form torians believe that the spread of the Industrial Revolution
of organization, including limited liability for stockhold- was helped by the growing acceptance of the corporate
ers, as a means to enable these new industries to generate form of organization.
financial resources.
The financial collapse of one corporation caused Par- Instructions: Research the start and growth of a major
liament to reverse the corporation laws. Financial losses, corporation in your state or region. Prepare a short report
mismanagement, and improper accounting caused the that discusses how the company generated the capital
PHOTO: PHOTOGRAPHER’S CHOICE/GETTY IMAGES
financial collapse of the South Sea Company. The ensuing required to begin and expand the business. Would the
personal financial losses of investors generated a public company have been successful had it not been able to
outcry against the corporation laws. The South Sea Bubble form as a corporation?
Journalizing Purchases and Cash Payments Chapter 9 259
91 APPLICATION PROBLEM
Journalizing purchases using a purchases journal
Eupora Electric is a small appliance store.
Instructions:
1. Journalize the following transactions completed during September of the current year. Use page 9 of the
purchases journal given in the Working Papers. The purchase invoices used as source documents are abbre-
viated as P.
Transactions:
Sept. 2. Purchased merchandise on account from Woodland Appliances, $2,600.00. P54.
6. Purchased merchandise on account from Quality Wholesalers, $1,460.00. P55.
12. Purchased merchandise on account from East Gate Appliances, $1,850.00. P56.
18. Purchased merchandise on account from Winston, Inc., $2,300.00. P57.
26. Purchased merchandise on account from Woodland Appliances, $3,800.00. P58.
2. Total and rule the purchases journal at the end of the month.
92 APPLICATION PROBLEM
Journalizing cash payments using a cash payments journal
Second Base is a sports equipment store that sells discontinued and damaged items.
Instructions:
Journalize the following transactions completed during November of the current year. Use page 22 of the
cash payments journal given in the Working Papers. Source documents are abbreviated as follows: check, C;
purchase invoice, P. Save your work to complete Application Problem 9-4.
Transactions:
Nov. 1. Paid cash for telephone bill, $96.00. C241.
4. Paid cash on account to The Pro Shop, $1,250.00, covering P367, less 2% discount. C242.
6. Paid cash for advertising, $75.00. C243.
9. Paid cash on account to Athletic Center, $925.00, covering P362. No cash discount was offered.
C244.
11. Paid cash for office supplies, $50.00. C245.
13. Paid cash to Tennis City for merchandise with a list price of $1,850.00, less a 50% trade discount.
C246.
18. Paid cash for store supplies, $125.00. C247.
21. Purchased merchandise for cash from Trevor Industries, $250.00. C248.
23. Purchased merchandise for cash from Paris Mfg. Co., $750.00, less a 60% trade discount. C249.
25. Paid cash on account to Best Clothing, $925.00, covering P363. No cash discount was offered.
C250.
27. Paid cash on account to Trophy Sports, $2,100.00, covering P373, less 2% discount. C251.
( Go Beyond the Book
)
For more information go to
www.C21accounting.com
260 Chapter 9 Journalizing Purchases and Cash Payments
93 APPLICATION PROBLEM
Preparing a petty cash report
Kevin Tomlinson is the custodian of a $200.00 petty cash fund. On January 31 he had receipts for the follow-
ing payments.
Payee Description Amount
City Office Supply Computer disks $ 5.95
KEWQ Radio Voice fee for radio advertisement 50.00
Rocket Computers Fix laser printer 45.95
Hooksville PTA Advertisement in monthly newsletter 10.00
John Simmons Pick up recyclable materials 8.00
Myers Hardware Nails to repair outdoor sign 2.50
Books and More Mouse pad 6.15
Instructions:
1. Classify each expense into one of the general ledger accounts used by Hobby Shack in this chapter.
2. Calculate the total of expenses by account.
3. Prepare the petty cash report given in the Working Papers. A cash count shows $70.67 in the petty
cash box.
94 APPLICATION PROBLEM
Performing additional cash payments journal operations
Second Base is a sports equipment store that sells discontinued and damaged items. The cash payments
journal used in Application Problem 9-2 is needed to complete this problem.
Instructions:
1. Total the amount columns of cash payments journal page 22 from Application Problem 9-2. Prove the
equality of debits and credits.
2. Rule the cash payments journal.
3. Begin page 23 of a cash payments journal.
4. Wendy Morris is the custodian of a $250.00 petty cash account. On November 30, she had receipts for the
following total payments: supplies—office, $45.31; supplies—store, $54.62; repairs, $75.82; and miscella-
neous, $41.67. A cash count shows $31.05 in the petty cash box. Prepare the petty cash report.
5. Record the replenishment of the fund on November 30. C252.
6. Total the amount columns of the cash payments journal. Prove the equality of debits and credits.
7. Rule the cash payments journal.
Journalizing Purchases and Cash Payments Chapter 9 261
95 APPLICATION PROBLEM
Journalizing other transactions using a general journal
Jenny’s Designs is a bridal shop.
Instructions:
Journalize the following transactions completed during October of the current year. Use page 10 of the
general journal given in the Working Papers. Source documents are abbreviated as follows: memorandum, M;
debit memorandum, DM.
Transactions:
Oct. 5. Bought store supplies on account from Displays Warehouse, $275.00. M39.
9. Returned merchandise to Hendrix Products, $640.00. DM25.
13. Bought office supplies on account from Office Express, $215.00. M40.
18. Returned merchandise to T-J Designs, $390.00. DM26.
25. Bought store supplies on account from Classic Fixtures, $180.00. M41.
96 MASTERY PROBLEM
Journalizing purchases, cash payments, and other transactions
Mercury Computers sells computer parts and accessories.
Instructions:
1. Using the journals given in the Working Papers, journalize the following transactions completed during July
of the current year. Use page 7 of a purchases journal, page 13 of a cash payments journal, and page 11
of a general journal. Source documents are abbreviated as follows: check, C; memorandum, M; purchase
invoice, P; debit memorandum, DM.
Transactions:
Jul. 2. Purchased merchandise on account from Woodland Computers, $2,600.00. P354.
4. Paid cash on account to Pacific Industries, $1,400.00, covering P367, less 2% discount. C242.
6. Purchased merchandise on account from NewWave Electronics, $2,560.00. P355.
8. Paid cash to WCKF Radio for advertising, $750.00. C243.
8. Bought store supplies on account from Willcut & Bishop, $125.00. M39.
9. Paid cash on account to American Semiconductor, $2,690.00, covering P352. No cash discount
was offered. C244.
10. Paid cash to Southern Bell for telephone bill, $136.00. C245.
11. Paid cash on account to Woodland Computers, $2,600.00, covering P354, less 2% discount. C246.
12. Returned merchandise to NewWave Electronics, $1,640.00. DM25.
12. Purchased merchandise on account from Helms Supply, $550.00. P356.
13. Paid cash to Edmondson Supply for office supplies, $126.00. C247.
14. Paid cash to Deanes Electronics for merchandise with a list price of $3,480.00, less a 60% trade
discount. C248.
15. Bought office supplies on account from Office Express, $106.00. M40.
15. Purchased merchandise on account from Keel, Inc., $3,480.00. P357.
16. Paid cash on account to Farris Cable, $329.00, covering P353. No cash discount was offered. C249.
18. Purchased merchandise for cash from Columbus Industries, $429.00. C250.
20. Purchased merchandise for cash from Mena Mfg. Co., $260.00, less a 40% trade discount. C251.
22. Paid cash on account to Keel, Inc., $3,480.00, covering P357, less 2% discount. C252.
24. Paid cash to Williams Stores for store supplies, $94.00. C253.
25. Paid cash on account to NewWave Electronics, $920.00, covering P355 less DM25. C254.
27. Purchased merchandise on account from Woodland Computers, $3,200.00. P358.
30. Returned merchandise to Woodland Computers, $120.00. DM26.
262 Chapter 9 Journalizing Purchases and Cash Payments
2. Total the amount columns of cash payments journal page 13. Prove the equality of debits and credits and
rule the cash payments journal to carry the totals forward.
3. Record the totals brought forward from cash payments journal page 13 to line 1 of page 14 of the cash
payments journal.
4. Journalize the following transactions.
Transactions:
Jul. 31. Paid cash on account to Helms Supply, $550.00, covering P356. No discount was offered. C255.
31. Paid cash to reimburse the petty cash fund, $181.75: supplies—office, $23.45; supplies—store,
$84.32; miscellaneous, $74.34; and cash over, $0.36. C256.
5. Total and rule page 7 of the purchases journal.
6. Total the amount columns of cash payments journal page 14. Prove the equality of debits and credits of
cash payments journal page 14.
7. Rule page 14 of the cash payments journal.
97 CHALLENGE PROBLEM
Journalizing purchases, cash payments, and other transactions
Fitness Connection is an exercise equipment store.
Instructions:
1. Using the journals given in the Working Papers, journalize the following transactions completed during
November of the current year. Use page 12 of a purchases journal, page 26 of a cash payments journal, and
page 11 of a general journal. Record the appropriate source documents in the journals.
Transactions:
Nov. 1. Wrote Check No. 363 for the monthly rent of $1,300.00.
2. Bought $120.00 worth of store supplies on account from Meda Store Supplies, recorded on
Memo 43, with 2/10, n/30 payment terms.
3. Received an invoice, stamped Purchase Invoice 84, for merchandise on account from Central
Fitness for $2,150.00, less a 60% trade discount.
4. Paid $150.00 to Pitman Industries with Check No. 364 for merchandise.
6. Wrote Check No. 365 for $1,020.00 to Pacer Equipment for Purchase Invoice 82’s payment on
account.
8. Returned $260.00 of the merchandise purchased on Purchase Invoice 84 to Central Fitness,
recorded on Debit Memorandum 54.
9. Purchased $2,900.00 of merchandise on account from Trackmaster on Purchase Invoice 85, with
2/10, n/30 payment terms.
10. Paid $52.00 to myOffice for office supplies with Check No. 366.
11. Paid the balance of Purchase Invoice 84 less Debit Memorandum 54, to Central Fitness with
Check No. 367, taking advantage of the 2/10, n/30 payment terms.
12. Wrote Check No. 368 for $290.00 to pay the monthly insurance premium.
16. Paid Trackmaster the amount owed on Purchase Invoice 85, writing Check No. 369.
29. Paid Meda Store Supplies for the Nov. 2 purchase of store supplies with Check No. 370.
30. Replenished the petty cash fund by writing Check No. 371 to the custodian for $207.00. Receipts
were submitted for the following: office supplies, $48.00; store supplies, $24.00; advertising,
$68.00; and miscellaneous, $66.00.
2. Evaluate and then write a response to the following questions.
a. The cash payments journal used in this problem has only three special amount columns. Under what
circumstances would you recommend that additional special amount columns be added to a cash pay-
ments journal?
b. When insurance premiums are paid, should the debit entry be to the asset account, Prepaid Insurance,
or to the expense account, Insurance Expense? Are there circumstances where either entry could be
correct? Explain.
Journalizing Purchases and Cash Payments Chapter 9 263
A P P L I E D CO M M U N I C AT I O N
When you purchase merchandise for your business, you are considered a customer. Sometimes a customer might
have a problem or complaint about the product. There are several ways to go about resolving the problem. One sug-
gestion is to write to the person or company selling the product.
Instructions: Assume that you bought stereo speakers using the Internet site of a consumer electronics company.
Unfortunately, the speakers make a strange static noise. Write a persuasive e-mail message to the company request-
ing a refund or a new set of speakers. Identify (1) information related to the purchase, such as invoice number and
date, (2) the problem with the speakers, and (3) a request for a refund or a new set of speakers.
CASES FOR CRITICAL THINKING
Case 1
Trent Mercer owns and operates a music store in a mature shopping mall. When the largest store in the mall (often
referred to as the anchor) moved two years ago, the traffic in the shopping center dramatically decreased. Mr. Mercer
has an opportunity to move the business to a popular new shopping mall. Additional capital, however, is required
to move and operate the business in a new location. The local bank has agreed to lend the money needed. His CPA
has suggested that he consider forming a corporation and raise the necessary capital by selling capital stock to a
small group of local investors. Should Mr. Mercer (1) borrow the money from the bank or (2) raise capital by creating
a corporation? Explain your answer.
Case 2
Sophia Perez is a high school student who works part time in a local sports equipment store. As part of her duties,
she records daily transactions in a journal. One day she asks the owner, “You use the purchase invoice as your source
document for recording purchases of merchandise on account. You use a memorandum as your source document
for recording the entry when supplies are bought on account. Why don’t you use the invoice for both entries?” How
would you respond to this question?
SCANS WORKPLACE COMPETENCY
Thinking Skill: Creative Thinking
Concept: Every business encounters problems that require new solutions. Methods of cutting costs, new promo-
tions to increase sales, and changes in merchandising and product mix all require creative solutions. Employees who
can “think outside the box” and generate new creative ideas are important resources to any company.
Application: Choose a retail merchandising business with which you are familiar. Study as much of the business as is
visible to you. Generate new ideas that you think could increase sales for the company.
264 Chapter 9 Journalizing Purchases and Cash Payments
USING SOURCE DOCUMENTS
Journalizing purchases, cash payments, and other transactions from source documents
Messler Sailing sells sailboats, parts, and accessories. Source documents related to the purchases and cash payments
of Messler Sailing for October are provided in the Working Papers.
Instructions
1. Using journals given in the Working Papers, journalize the transactions for October of the current year. Use page
10 of a purchases journal, page 15 of a cash payments journal, and page 14 of a general journal. Source docu-
ments are abbreviated as follows: check, C; memorandum, M; purchase invoice, P; debit memorandum, DM.
2. Total and rule the purchases journal.
3. Total the amount columns of cash payments journal page 15. Prove the equality of debits and credits and rule the
cash payments journal.
A N A LY Z I N G B E S T B U Y ’S F I N A N C I A L S TAT E M E N T S
Best Buy has two types of stock—preferred and common. The company’s Board of Directors must first authorize the
issuance of each stock. The company then sells (issues) its stock on stock exchanges and can distribute shares to
employees. On occasion, the company may repurchase shares, reducing the number of shares outstanding.
Instructions
1. Using page B-5 in Appendix B in this text, refer to Best Buy’s balance sheet to determine the number of shares of
preferred stock authorized, issued, and outstanding.
2. Identify the number of shares of common stock authorized, issued, and outstanding for 2007.
Journalizing Purchases and Cash Payments Chapter 9 265
Accounting
SOFTWARE
P U R C H A S E S A N D C A S H P AY M E N T S
Special journals eliminate the need for you to write most debit and credit account titles. Peachtree uses a different
method to increase your efficiency when entering similar transactions, such as cash payments. Rather than using a
cash payments journal, Peachtree has a unique input screen to record cash payments.
Cash payments should be made only to vendors that have been set up in Peachtree. When you are setting up a
vendor, Peachtree requires that you enter the general ledger account to be debited when a payment is made to the
vendor. For example, when “Castle Advertising” is set up, you would identify that cash payments should be debited
to Advertising Expense. Thus, when entering a cash payment to Castle Advertising, Peachtree accesses the vendor’s
information and debits Advertising Expense. Peachtree also knows that cash payments require a credit to Cash. A
window that displays the journal entry can be viewed before posting the transaction.
PEACHTREE MASTERY PROBLEM 9-6
1. Open (Restore) file 09-6MP.ptb.
2. Record purchases and cash payments. Use the July transactions to journalize and post to the purchase journal
and cash disbursements journal in Peachtree.
3. Print the cash disbursements journal from the Reports menu (select Accounts Payable, Cash Disbursements
Journal).
4. Print the purchases journal from the Report List.
PEACHTREE CHALLENGE PROBLEM 9-7
1. Open (Restore) file 09-7CP.ptb.
2. Journalize and post the November transactions in Peachtree’s Purchase Journal and Cash Disbursements Journal.
3. Print the purchase journal.
4. Print the cash disbursements journal.
P U R C H A S E S A N D C A S H P AY M E N T S
QuickBooks does not use special journals. Instead, QuickBooks uses special screens designed to help
make specific entries. These screens include one for entering bills, which is used to enter purchases on account, and
one for paying bills, which is used to enter payments on account.
When you enter a purchase on account in QuickBooks, a vendor must be identified. That vendor must have
already been entered into the company file. The software will credit both Accounts Payable and the specific vendor
account. At the same time, an account to debit must be identified. For example, if buying supplies on account, the
account—Supplies—would be identified in the entry and automatically debited. When a payment on account is
entered, the software will automatically debit both Accounts Payable and the vendor, and credit Cash.
QUICKBOOKS MASTERY PROBLEM 9-6
1. Open the Mercury Computers file.
2. Journalize purchases, cash payments, and other transactions completed in July, using QuickBooks. Enter the Bills
and Pay Bills windows for purchases and payments on account.
3. Print a Journal report using July 1 and July 31 as the dates.
4. Choose Vendors & Payables from the Reports menu, and print an Unpaid Bills Detail Report for July 31.
QUICKBOOKS CHALLENGE PROBLEM 9-7
1. Open the Fitness Connection file.
2. Journalize purchases, cash payments, and other transactions completed during November.
3. Print a Journal report, using November 1 and 30 for the dates.
4. Print an Unpaid Bills Detail report for November 30.
266 Chapter 9 Journalizing Purchases and Cash Payments
D I S P L AY I N G C A L C U L A T E D A M O U N T S
When you think about a worksheet formula, it’s natural to expect that the formula will perform a mathematical
calculation using two or more numbers. However, a formula does not necessarily have to add, subtract, multiply, or
divide.
When creating a petty cash report on an Excel worksheet, you will need to display a calculated amount in more
than one cell. This task is accomplished with a single-cell formula or cell reference.
Assume the total amount of payments made out of the petty cash fund is calculated in cell D15. To complete the
form, you want to display this amount in cell F15 to show how the amount to be replenished is calculated. The solu-
tion is to enter the formula +D15 in cell F15. The formula simply shows the same amount calculated in cell D15.
EXCEL APPLICATION PROBLEM 9-3
Open the F09-3 Excel data file. Follow the step-by-step instructions in the Instructions worksheet.
Note: This spreadsheet template may also be used to complete Instruction 4 of Application Problem 9-4.
P U R C H A S E S A N D C A S H P AY M E N T S
A merchandising business has many frequently occurring transactions that would require many entries in the
general journal. Therefore, special journals are used to simplify the recording of these repetitive transactions. All
transactions involving the payment of cash are recorded in the cash payments journal. All purchases of merchan-
dise on account are recorded in the purchases journal.
Entering Purchases on Account in the Purchases Journal
1. Enter the transaction date and press Tab.
2. Enter the invoice number in the Refer. column and press Tab.
3. Enter the amount of the invoice in the Purchases Debit column and press Tab. The Accounts Payable credit
amount is calculated and displayed automatically.
4. Choose a vendor name from the drop-down list.
5. Click the Post button.
Entering Cash Payments in the Cash Payments Journal
1. Enter the transaction date and press Tab. (Remember that the date can be increased and decreased by the and
keys.)
2. Enter the check number in the Refer. column and press Tab.
3. For general debit or credit amounts, enter the account number and amount to debit or credit in the Debit or
Credit columns. Enter other amounts in the special columns.
4. If making a payment on account, enter the Accounts Payable debit amount and choose the vendor from the
drop-down vendor list. The Cash credit is automatically calculated and displayed by the computer.
5. If the transaction is correct, click the Post button.
AUTOMATED ACCOUNTING APPLICATION PROBLEM 9-2
Open file F09-2.AA8. Display the problem instructions and complete the problem.
AUTOMATED ACCOUNTING MASTERY PROBLEM 9-6
Open file F09-6.AA8. Display the problem instructions and complete the problem.
Journalizing Purchases and Cash Payments Chapter 9 267
STOCKBYTE/GETTY IMAGES
C H A P T E R 1 0 Journalizing Sales and
Cash Receipts Using
Special Journals
O B J E C T I V E S
After studying Chapter 10, you will be able to: 3. Journalize sales on account using a sales journal.
1. Define accounting terms related to sales and 4. Journalize cash receipts using a cash receipts
cash receipts for a merchandising business. journal.
2. Identify accounting concepts and practices 5. Record sales returns and allowances using a
related to sales and cash receipts for a merchan- general journal.
dising business.
K E Y T E R M S
• customer • batch report
• sales tax • batching out
• sales journal • cash receipts journal
• cash sale • sales discount
• credit card sale • sales return
• point-of-sale (POS) • sales allowance
terminal
• terminal summary
• credit memorandum
( Point Your Browser
www.C21accounting.com
)
268
ACCOUNTING IN THE REAL WORLD
Best Buy
Best Buy—Increasing Sales Results
A sluggish economy had caused consumer spending to drop, especially in
the sales of desktop computers and CDs. Growth in comparable store sales—
the sales at stores open for more than a year—were disappointing. This was
not the ideal time to assume leadership of a leading specialty retailer of con-
sumer electronics, personal computers, entertainment software, and appli-
ances. But that is exactly what faced Bradbury H. Anderson as he became
DIGITAL VISION/GETTY IMAGES
the new chief executive officer of Best Buy.
So how did Best Buy overcome this challenge? It went digital. Recog-
nizing changes in consumer preferences, Best Buy INTERNET
increased its assortment of digital cameras ACTIVITY
and digital, LCD, and projection TVs.
Mr. Anderson and his new man- State Sales Tax Rates
agement team undertook other Go to the homepage for the
strategic plans to reduce Federation of Tax Administra-
product costs and store tors (www.taxadmin.org) or
expenses. These changes search the Internet for state
enabled Best Buy to sales tax rates. Look for a chart
achieve a 2.5% increase or table that compares the
in comparable store sales tax rate for each state.
sales, a 13% increase
©DANIEL ACKER/BLOOMBERG NEWS/LANDOV
in total revenue, and Instructions
an 8% increase in net
1. Make a chart comparing
income.
the sales tax rate for your
state with the sales tax rate
for 10 other states.
2. Highlight the highest and
lowest rates.
Critical Thinking
1. How can a company have a 13% increase in total revenue with just a
2.5% increase in comparable store sales?
2. For any local company, such as a fast-food restaurant, suggest changes
in the products they offer that you believe could increase sales.
Source: www.bestbuy.com
269
L E S S O N
Journalizing Sales on Account
10-1 Using a Sales Journal
S A L E S TA X
Purchases and sales of merchandise are the two major amount of (1) total sales and (2) total sales tax collected.
activities of a merchandising business. A person or busi- The amount of sales tax collected is a business liability
ness to whom merchandise or services are sold is called a until paid to the government agency. Therefore, the sales
customer. Hobby Shack sells merchandise to a variety of tax amount is recorded in a separate liability account titled
customers, including individuals, schools, and churches. Sales Tax Payable, which has a normal credit balance.
Hobby Shack uses the special journals described in this
chapter to record transactions related to sales.
Laws of most states and some cities require that a tax Sales Tax Payable
be collected from customers for each sale made. A tax on a
Debit Credit
sale of merchandise or services is called a sales tax. Sales tax
Decrease
rates are usually stated as a percentage of sales. Regardless
Increase
of the tax rates used, accounting procedures are the same.
Businesses must file reports with the proper govern-
ment unit and pay the amount of sales tax collected. Every
business collecting a sales tax needs accurate records of the
CHARACTER COUNTS
Int e g r i t y — D oi n g W ha t’s R i g h t
What does the word integ- rity is ultimately the most critical component to long-term
rity mean to you? The word business success. A business that fails to act with integrity
is derived from a Latin word will soon find it difficult to hire employees, deal with sup-
meaning “wholeness,” “com- pliers, and enjoy repeat customers.
pleteness,” and “purity.” Many The American Institute of Certified Public Accountants
companies include an inter- recognizes that integrity is critical for maintaining public
pretation of integrity in their confidence in its members’ professional services. “Integrity
code of conduct. is an element of character fundamental to professional
“We always try to do the right recognition. It is the quality from which the public trust
thing.” —Procter & Gamble derives and the benchmark against which a member must
“To say what we mean, to ultimately test all decisions.”
deliver what we promise, to fulfill our
commitments, and to stand for what is Instructions
PHOTO: ASIAPIX/GETTY IMAGES
right.” —Lockheed Martin In private, write down five qualities that you believe people
“We do the right thing without compromise. of high integrity possess. Using a typical grading sched-
We avoid even the appearance of impropriety.” —Intel ule (A+, A, A–, etc.), identify how you believe your friends,
Companies with integrity have an absolute commit- teachers, and others would rate your integrity. Do you
ment to do what is right in all business activities. Integ- have integrity as defined by the three companies above?
270 Chapter 10 Journalizing Sales and Cash Receipts Using Special Journals
SALES OF ME RCHANDISE ON ACCOUNT
A sale of merchandise may be (1) on account or (2) for account titled Accounts Receivable. Accounts Receivable is
cash. A sale of merchandise increases the revenue of a an asset account with a normal debit balance. Therefore,
business. Regardless of when payment is made, the rev- the accounts receivable account is increased by a debit and
enue should be recorded at the time of a sale, not on the decreased by a credit.
date cash is received. For example, on June 15 Hobby
Shack sells merchandise on account to a customer. The
customer pays Hobby Shack for the merchandise on July Accounts Receivable
12. Hobby Shack records the revenue on June 15, the date
Debit Credit
of the sale. The accounting concept Realization of Revenue
Decrease
is applied when revenue is recorded at the time goods or
Increase
services are sold. [CONCEPT: Realization of Revenue]
A sale for which cash will be received at a later date
is known as a sale on account. A sale on account is also
referred to as a charge sale. Hobby Shack summarizes the
total due from all charge customers in a general ledger
BUSINESS STRUCTURES
A d va nt a ge s a n d D i s a d va nt a ge s
o f a C or po r a t i o n
Organizing a corporation is as simple as filing an appli- corporation can be taxed
cation with the appropriate state agency. The approved twice, a concept known as
application establishes the corporation as a legal entity, double taxation.
giving the corporation many of the same legal rights and
Proper planning can
risks as individuals, including owning assets, borrowing
offer stockholders the
money, paying taxes, and being sued.
advantage of limited lia-
The corporate form of business organization has sev-
bility while avoiding the
eral advantages over a sole proprietorship:
disadvantage of double
• Limited liability. The liability of stockholders is limited taxation. Thus, although
to their investment in the corporation. the organization appli-
• Supply of capital. Individuals are more willing to invest cation can be prepared
in a corporation because their personal assets are without the help of an
protected by limited liability. attorney or accountant, con-
sulting with these profession-
However, there are also some disadvantages to a
als is recommended.
corporation:
Critical Thinking
• Shared decision making. Significant business decisions
must be approved by a vote of the stockholders. 1. Think of two businesses you might be inter-
• Shared profits. The earnings of the corporation are ested in starting. Describe whether the proprietorship
PHOTO: PHOTODISC/GETTY IMAGES
divided among the stockholders. or corporation form of organization would be better
• Taxation. The earnings of a corporation may be subject suited for this business.
to federal and state income taxes. When the earnings 2. Often a person who has started a proprietorship and
of the corporation are distributed to the stockholders, run it successfully for many years sells the business to
individual stockholders may also have to pay income a corporation. Why would a corporation be interested
taxes on the distributions. Thus, the earnings of a in buying such a business?
Journalizing Sales on Account Using a Sales Journal Lesson 10-1 271
SALES JOURNAL
SALES JOURNAL PAGE
1 2 3
SALE POST. ACCOUNTS SALES SALES TAX
DATE ACCOUNT DEBITED NO. REF. RECEIVABLE PAYABLE
CREDIT
DEBIT CREDIT
1 1
2 2
Hobby Shack uses a special journal to record only sales Payable Credit. With these special amount columns, each
of merchandise on account transactions. A special journal sale on account transaction can be recorded on one line of
used to record only sales of merchandise on account is the sales journal.
called a sales journal.
The special amount columns in this sales journal are
Accounts Receivable Debit, Sales Credit, and Sales Tax
SALES INVOICE
HOBBY SHACK, INC. Sold to: Village Crafts No. 76
1420 College Plaza 120 Mountain Road 11/3/--
Date
Atlanta, GA 30337-1726
Marietta, GA 30060-1320 Terms 30 days
Cust. No. 150
Stock No. Description Quantity Unit Price Amount
4422 Deer and fawn bisque 25 12.00 300.00
7710 Lighthouse, 6" -- bisque 30 8.00 240.00
Subtotal 540.00
Customer’s Signature Salesclerk Sales Tax 32.40
Max Schindler S.A. Total 572.40
When merchandise is sold on account, the seller prepares customer. The second copy goes to Hobby Shack’s ship-
a form showing what has been sold. A form describing ping department. The third copy is used as the source
the goods or services sold, the quantity, and the price is document for the sale on account transaction. [CON-
known as an invoice. An invoice used as a source docu- CEPT: Objective Evidence] Sales invoices are numbered
ment for recording a sale on account is known as a sales in sequence. Number 76 is the number of the sales invoice
invoice. [CONCEPT: Objective Evidence] A sales invoice issued to Village Crafts.
is also referred to as a sales ticket or a sales slip. Hobby Shack operates in a state with a 6% sales tax
The seller considers an invoice for a sale on account to rate. The total amount of the sale of merchandise in the
be a sales invoice. The same invoice is considered by the invoice above is calculated as follows.
customer to be a purchase invoice.
In the case of Hobby Shack, three copies of a sales
invoice are prepared. The original copy is given to the
Price of Goods Sales Tax Rate Sales Tax
$540.00 6% $32.40
Price of Goods Sales Tax Total Amount
$540.00 $32.40 $572.40
272 Chapter 10 Journalizing Sales and Cash Receipts Using Special Journals
SALE ON ACCOUNT
1. Date 2. Customer Name 3. Sales Invoice Number 6. Sales Tax
SALES JOURNAL PAGE 11
1 2 3
2 ACCOUNTS SALES TAX
SALE POST. SALES
DATE ACCOUNT DEBITED NO. REF. RECEIVABLE PAYABLE
CREDIT
20--
DEBIT CREDIT 6
1 1 Nov. 3 Village Crafts 76 3 5 7 2 40 5 4 0 00 3 2 40 1
2 4 5 2
4. Total Amount 5. Sales
Owed by Customer
Hobby Shack sells on account only to businesses. Other A sale on account transaction increases the amount
customers must either pay cash or use a credit card. to be collected later from a customer. Payment for this
sale will be received at a later date. However, the sale is
recorded at the time the sale is made because the sale has
November 3. Sold merchandise on account taken place and payment is due to Hobby Shack. [CON-
to Village Crafts, $540.00, plus sales tax, CEPT: Realization of Revenue]
$32.40; total, $572.40. Sales Invoice No. 76. Because Accounts Receivable has a normal debit bal-
ance, Accounts Receivable is debited for the total sales
and sales tax, $572.40, to show the increase in this asset
Accounts Receivable account. Sales has a normal credit balance. Therefore,
Sales is credited for the price of the goods, $540.00, to
572.40
show the increase in this revenue account. The sales tax
Sales
payable account also has a normal credit balance. There-
fore, Sales Tax Payable is credited for the amount of sales
540.00 tax, $32.40, to show the increase in this liability account.
Sales Tax Payable
32.40
S T E P S JOURNALIZING A SALE ON ACCOUNT
1 Write the date, 20--, Nov. 3, in the Date column.
2 Write the customer name, Village Crafts, in the Account Debited column. The debit and credit amounts
are recorded in special amount columns. Therefore, writing the titles of the general ledger accounts in the
Account Debited column is not necessary. However, the name of the customer is written in the Account
Debited column to show from whom the amount is due. Hobby Shack’s procedures for keeping records of
the amounts to be collected from each customer are described in Chapter 11.
3 Write the sales invoice number, 76, in the Sale No. column.
4 Write the total amount owed by the customer, $572.40, in the Accounts Receivable Debit column.
5 Write the sales amount, $540.00, in the Sales Credit column.
6 Write the sales tax amount, $32.40, in the Sales Tax Payable Credit column.
Some states exempt schools and other organizations from paying sales tax. A sale to a tax-exempt organi-
zation would be recorded using the same amount in the Sales Credit and Accounts Receivable Debit columns.
No amount would be entered in the Sales Tax Payable Credit column.
Journalizing Sales on Account Using a Sales Journal Lesson 10-1 273
T O TA L I N G , P R O V I N G , A N D R U L I N G A S A L E S J O U R N A L
SALES JOURNAL PAGE 11
1 2 3
SALE POST. ACCOUNTS SALES SALES TAX
DATE ACCOUNT DEBITED RECEIVABLE PAYABLE
NO. REF. CREDIT
DEBIT CREDIT
20--
1 Nov. 3 Village Crafts 76 5 7 2 40 5 4 0 00 3 2 40 1
2 5 Fairview Church 77 1 9 0 8 00 1 9 0 8 00 2
3 9 Washington Schools 78 5 7 2 00 5 7 2 00 3
4 11 Country Crafters 79 7 6 8 50 7 2 5 00 4 3 50 4
5 16 Playtime Childcare 80 1 7 5 2 18 1 6 5 3 00 9 9 18 5
6 19 Village Crafts 81 2 5 4 9 30 2 4 0 5 00 1 4 4 30 6
7 24 Cumberland Center 82 1 5 8 00 1 5 8 00 7
8 24 Washington Schools 83 3 3 4 00 3 3 4 00 8
9 29 Country Crafters 84 4 5 3 68 4 2 8 00 2 5 68 9
10 30 Totals 9 0 6 8 06 8 7 2 3 00 3 4 5 06 10
At the end of each month, Hobby Shack totals, proves, The proof for Hobby Shack’s sales journal is calculated
and rules its sales journal. The procedures for proving as follows.
and ruling a sales journal are the same as the procedures
described for Hobby Shack’s cash payments journal in
Chapter 9.
Col. Debit Credit
No. Column Title Totals Totals
1 Accounts Receivable Debit $9,068.06
2 Sales Credit $8,723.00
3 Sales Tax Payable Credit 345.06
Totals $9,068.06 $9,068.06
The two totals, $9,068.06, are equal. Equality of debits P H OT OD I S C / G E T T Y I M A G
ES
and credits in Hobby Shack’s sales journal for November
is proved.
Posting from a sales journal is described in Chapter 11.
F Y I
F O R YO U R I N F O R M AT I O N
F Y I
Many states exempt food and
drug sales for all customers.
some states even exempt
clothing sales from sales tax.
274 Chapter 10 Journalizing Sales and Cash Receipts Using Special Journals
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
TERMS REVIEW
1. How does a merchandising business differ from a service business?
2. How are sales tax rates usually stated?
customer
3. Why is sales tax collected considered a liability?
sales tax
4. What is the title of the general ledger account used to summarize
sales journal the total amount due from all charge customers?
WORK TOGETHER 101
Journalizing sales on account; proving and ruling a sales journal
The sales journal for Distinctive Appliances is given in the Working Papers. Your instructor will guide you through
the following examples.
1. Using the current year, journalize the following transactions on page 9 of the sales journal. The sales invoice
source document is abbreviated as S.
Transactions:
Sept. 1. Sold merchandise on account to Adrian Makowski, $800.00, plus sales tax, $48.00; total, $848.00. S104.
11. Sold merchandise on account to Columbus City Schools, $875.00. Columbus City Schools is exempt
from sales taxes. S105.
28. Sold merchandise on account to Swiss Delight, $1,460.00, plus sales tax, $87.60; total, $1,547.60. S106.
2. Total, prove, and rule the sales journal.
ON YOUR OWN 101
Journalizing sales on account; proving and ruling a sales journal
The sales journal for Parris Supplies is given in the Working Papers. Work this problem independently.
1. Using the current year, journalize the following transactions on page 6 of the sales journal. The sales invoice
source document is abbreviated as S.
Transactions:
Jun. 5. Sold merchandise on account to Peter Gallaher, $650.00, plus sales tax, $39.00; total, $689.00. S410.
12. Sold merchandise on account to Spann Auto Supply, $590.00, plus sales tax, $35.40; total, $625.40.
S411.
24. Sold merchandise on account to Fleming College, $545.00. Fleming College is exempt from sales taxes.
S412.
2. Total, prove, and rule the sales journal.
Journalizing Sales on Account Using a Sales Journal Lesson 10-1 275
L E S S O N
Journalizing Cash Receipts
10-2 Using a Cash Receipts Journal
PROCESSING SALES TR ANSAC TIONS
Hobby Shack sells most of its merchandise for cash. A The POS terminal matches the number represented by
sale in which cash is received for the total amount of the the UPC symbol with the merchandise number to obtain
sale at the time of the transaction is called a cash sale. the description and price of the merchandise. When all
Hobby Shack also sells merchandise to customers who the merchandise has been scanned, the sales clerk enters
have a bank-approved credit card. A sale in which a credit the customer’s method of payment. For a cash sale, the
card is used for the total amount of the sale at the time of sales clerk enters the cash tendered by the customer and
the transaction is called a credit card sale. Major bank- the POS terminal computes the amount of change. For
approved credit cards include VISA, MasterCard, and a credit card sale, the customer swipes the credit card in
Discover Card. A customer who uses a credit card prom- the card scanner. The POS system produces a receipt that
ises to pay the amount due for the credit card transaction contains detailed information about the sale. A customer
to the bank issuing the credit card. receipt from a POS terminal is shown on the next page.
Some small businesses continue to use the traditional Periodically, Hobby Shack instructs the point-of-sale
cash register to process sales transactions. After enter- terminal to print a report of all cash and credit card sales.
ing the price marked on each item sold, the sales clerk The report that summarizes the cash and credit card sales
pushes a button instructing the cash register to total the of a point-of-sale terminal is called a terminal summary.
sale, including any sales tax, and produce a cash register Hobby Shack uses the terminal summary as the source
receipt for the customer. A typical cash register receipt is document for recording sales in its journals. [CONCEPT:
shown on the next page. At the end of every day, the cash Objective Evidence] A terminal summary is shown on the
register prints a summary of the sales recorded. The sum- next page.
mary is adequate for journalizing the sales transaction, At any time, the POS system can produce a variety of
but it is unable to provide the business with information informational reports to help management make deci-
about what merchandise was sold, when it was sold, and sions. For example:
to which customers.
1. A report of sales by sales clerk would assist manage-
Hobby Shack installed a modern version of a cash reg-
ment to analyze a sales clerk’s efficiency.
ister. A computer used to collect, store, and report all the
2. A report of sales by time of day would assist manage-
information of a sales transaction is called a point-of-sale
ment in scheduling sales clerks to match busy periods.
(POS) terminal. Before any sale is entered, the number,
3. A report of merchandise having a quantity on hand
description, price, and quantity on hand of each item of
below a predetermined reorder point alerts manage-
merchandise are stored in the POS terminal. When pro-
ment to purchase additional merchandise.
cessing a sale, the sales clerk uses a scanning device to scan
the universal product code (UPC) symbol on the item.
UPC (Universal Product
Code) symbol on
merchandise is scanned
to enter data into a
point-of-sale (POS)
terminal
276 Chapter 10 Journalizing Sales and Cash Receipts Using Special Journals
Antique Shop Hobby Shack, Inc.
123 Eagle Street 1420 College Plaza
Hanson, Iowa Atlanta, Georgia
13.23 latex paint, blue 1 oz.
2.45 5 @ $1.45 7.25
2.45 paint brush, 3/4 glaze
10.34 3 @ $3.25 9.75
Subtotal 28.47 Subtotal 1 17.00
Tax 1.71 Tax 1.02
Total 30.18 TOTAL 18.02
VISA RECEIPT
Jan Windham XXXXXXXXX1122
Exp 02/-- Ref3534423
Cash register receipt from a 04/01/--
traditional cash register Register #: 002 Cashier #: 010
Thanks, Come Again
Point-of-sale (POS) terminal receipt
TERMINAL
SUMMARY
Hobby Shack, Inc.
Code: 34
Date: 11/27/-- BATCH REPORT
Time: 18:24 MERCHANT 02938493 234
TERMINAL 923874
Visa 034 DATE 04/03/--TIME 18:45
Sales 295.38 BATCH 45
Sales Tax 17.72 VISA
Total 313.10 COUNT = 007
SALES = $ 325.23
MasterCard 042 RETURNS = $ 12.13
NET = $ 313.10
Sales 107.21
Sales Tax 6.43 MASTERCARD
Total 113.64 COUNT = 003
SALES = $ 145.86
Cash 152 RETURNS = $ 32.22
NET = $ 113.64
Sales 5,057.41
Sales Tax 303.45
TOTALS
Total 5,360.86 COUNT = 010
SALES = $ 471.09
Totals RETURNS = $ 44.35
Sales 5,460.00 NET = $ 426.74
Sales Tax 327.60
CONTROL NUMBER: 0938904235343
Total 5,787.60
Terminal summary printed by POS Batch Report for credit card sales
terminal, used as source document for printed by POS terminal (as discussed
journalizing cash and credit card sales on page 278)
Journalizing Cash Receipts Using a Cash Receipts Journal Lesson 10-2 277
PROCESSING CREDIT CARDS
Sales information for credit card sales is stored in the POS the information to the nearest Federal Reserve Bank. The
terminal. When Hobby Shack produces the terminal sum- funds are transferred among the banks issuing the credit
mary, it also instructs the point-of-sale terminal to print a cards, similar to the way checks are transferred between
report of credit card sales. A report of credit card sales pro- banks.
duced by a point-of-sale terminal is called a batch report. For example, suppose a customer having a VISA card
A batch report can be detailed, showing each credit card issued by Capital National Bank buys $500.00 worth of
sale, or it can provide a summary of the number and total merchandise from Hobby Shack. When Hobby Shack
of sales by credit card type. The process of preparing a batches out, an electronic message is sent to First Ameri-
batch report of credit card sales from a point-of-sale ter- can with the credit card number and amount of the sale.
minal is called batching out. A batch report for credit When the Federal Reserve Bank receives the information,
card sales is shown on the previous page. $500.00 is transferred from Capital National’s account
Hobby Shack has contracted with its bank, First Amer- to First American’s account. First American then credits
ican, to process its credit card sales. When Hobby Shack Hobby Shack’s account for the sale. The cash is deposited
batches out, the POS terminal electronically transmits a in Hobby Shack’s account 2–3 business days after the sale.
summary batch report to First American. The bank com- However, Hobby Shack records the transaction on the
bines the batch reports for all of its customers and submits date it occurs.
CASH RECEIPTS JOURNAL
CASH RECEIPTS JOURNAL PAGE
1 2 3 4 5 6 7
GENERAL ACCOUNTS SALES TAX SALES
DOC. POST. SALES DISCOUNT CASH
DATE ACCOUNT TITLE NO. REF. RECEIVABLE CREDIT PAYABLE DEBIT
DEBIT CREDIT CREDIT CREDIT DEBIT
1 1
2 2
3 3
Hobby Shack, Inc., has many transactions involving the To encourage early payment, Hobby Shack allows cus-
receipt of cash. Because of the number of transactions, tomers who purchase merchandise on account to take a
Hobby Shack uses a special journal for recording only deduction from the invoice amount. A cash discount on
cash receipts. A special journal used to record only cash sales taken by a customer is called a sales discount. When
receipt transactions is called a cash receipts journal. a sales discount is taken, the customer pays less than the
Only those columns needed to record cash receipt invoice amount previously recorded in the sales account.
transactions are included in Hobby Shack’s cash receipts Sales discounts reduce the amount of cash Hobby Shack
journal. Since all cash receipt transactions affect the cash receives on sales on account. Because customers often take
account, a special column is provided for this general ledger these discounts, Hobby Shack’s cash receipts journal has
account. In addition, Hobby Shack has many cash receipt a special column titled Sales Discount Debit. Because of
transactions affecting the accounts receivable account, the these special columns, most of Hobby Shack’s cash receipt
sales account, and the sales tax payable account. There- transactions can be recorded on one line in the cash
fore, special columns are provided in Hobby Shack’s cash receipts journal. Cash receipts that do not occur often are
receipts journal for these general ledger accounts. recorded in the General columns.
278 Chapter 10 Journalizing Sales and Cash Receipts Using Special Journals
CASH AND CREDIT CARD SALES
1. Date 2. Check Mark 3. Terminal Summary Number
CASH RECEIPTS JOURNAL PAGE 11
1 2 3 4 5 6 7
GENERAL ACCOUNTS SALES TAX SALES
1 DATE 2 ACCOUNT TITLE
DOC. POST.
NO. REF. RECEIVABLE
SALES
CREDIT PAYABLE DISCOUNT CASH
DEBIT
DEBIT CREDIT CREDIT CREDIT DEBIT
1
Nov. 4 ⻫
20--
3 TS34 ⻫ 4 5 4 6 0 00 3 2 7 60 5 7 8 7 60 1
2
5 6 7 2
3 3
4. Check Mark 5. Sales 6. Sales Tax 7. Cash
Hobby Shack’s POS terminal combines cash and credit Because the asset account, Cash, has a normal debit
card sales in the terminal summary. The total of the termi- balance, Cash is debited for the total sales and sales tax,
nal summary is recorded as a single cash sales transaction. $5,787.60, to show the increase in this asset account. The
sales account has a normal credit balance. Therefore, Sales
is credited for the total price of all goods sold, $5,460.00,
November 4. Recorded cash and credit card to show the increase in this revenue account. The sales tax
sales, $5,460.00, plus sales tax, $327.60; payable account also has a normal credit balance. There-
total, $5,787.60. Terminal Summary 34. fore, Sales Tax Payable is credited for the total sales tax,
$327.60, to show the increase in this liability account.
Cash
JOURNALIZING
5,787.60
S T E P S CASH AND CREDIT
Sales
CARD SALES
5,460.00
1 Write the date, 20--, Nov. 4, in the Date column.
Sales Tax Payable 2 Place a check mark in the Account Title col-
327.60 umn to show that no account title needs to be
written. The debit and credit amounts will be
recorded in special amount columns.
3 Write the terminal summary document number,
At the end of each week, Hobby Shack batches out and TS34, in the Doc. No. column.
prints a terminal summary. The POS terminal assigns the
summary a sequential number. The terminal summary is 4 Place a check mark in the Post. Ref. column to
used by Hobby Shack as the source document for weekly show that amounts on this line are not to be
cash and credit card sales transactions. [CONCEPT: posted individually.
Objective Evidence] Sales are also totaled at the end of
5 Write the sales amount, $5,460.00, in the Sales
each month so Hobby Shack can analyze monthly sales. Credit column.
Management is responsible for determining how often
the business should batch out, deposit cash, and record 6 Write the sales tax amount, $327.60, in the Sales
sales in the sales journal. Most businesses perform these Tax Payable Credit column.
tasks at the end of every business day. (The weekly pro-
7 Write the cash amount, $5,787.60, in the Cash
cessing demonstrated in this textbook was selected to sim-
Debit column.
plify the textbook illustrations and problems.)
Journalizing Cash Receipts Using a Cash Receipts Journal Lesson 10-2 279
CASH RECE IPTS ON ACCOUNT
1. Date 2. Customer’s Name 3. Receipt Number
CASH RECEIPTS JOURNAL PAGE 11
1 2 3 4 5 6 7
GENERAL ACCOUNTS SALES TAX SALES
DOC. POST. SALES DISCOUNT CASH
DATE ACCOUNT TITLE NO. REF. RECEIVABLE CREDIT PAYABLE DEBIT
DEBIT CREDIT CREDIT CREDIT DEBIT
2 3
2 1 6 Country Crafters R90 2 1 6 2 40 2 1 6 2 40 2
3 4 5 3
4 4
5 5
4. Credit 5. Debit
When cash is received on account from a customer, Hobby Shack’s procedures for keeping records of the
Hobby Shack prepares a receipt. The receipts are prenum- amounts received from customers are described in Chapter
bered so that all receipts can be accounted for. Receipts 11. Posting procedures are also described in Chapter 11.
are prepared in duplicate. The original receipt is given to
the customer. The copy of the receipt is used as the source
document for the cash receipt on account transaction.
Cash
[CONCEPT: Objective Evidence]
2,162.40
November 6. Received cash on account Accounts Receivable
from Country Crafters, $2,162.40, 2,162.40
covering S69. Receipt No. 90.
A cash receipt on account transaction decreases future
amounts to be collected from a customer. This transac-
tion increases the cash account balance and decreases the F O R YO U R I N F O R M AT I O N
accounts receivable account balance. Because the cash F Y I
account has a normal debit balance, Cash is debited for the All cash receipts are recorded in a
amount of cash received, $2,162.40, to show the increase cash receipts journal. Most cash
in this asset account. The accounts receivable account also receipts are for (1) cash received
has a normal debit balance. Therefore, Accounts Receiv- from customers on account and
able is credited for $2,162.40 to show the decrease in this (2) cash and credit card sales.
asset account.
S T E P S JOURNALIZING CASH RECEIPTS ON ACCOUNT
1 Write the date, 6, in the Date column.
2 Write only the customer’s name, Country Crafters, in the Account Title column. The debit and credit amounts are
entered in special amount columns. Therefore, the titles of the two general ledger accounts do not need to be
written in the Account Title column.
3 Write the receipt number, R90, in the Doc. No. column.
4 Write the credit amount, $2,162.40, in the Accounts Receivable Credit column.
5 Write the debit amount, $2,162.40, in the Cash Debit column.
280 Chapter 10 Journalizing Sales and Cash Receipts Using Special Journals
C A L C U L AT I N G C A S H R E C E I P T S O N
ACCOUNT WITH SALES DISCOUNT
To encourage early payment for a sale on account, a amount owed within 10 days, the sales invoice amount
deduction on the invoice amount may be allowed. A is reduced 2%. Otherwise, the net amount is due in 30
deduction that a vendor allows on the invoice amount to days.
encourage prompt payment is known as a cash discount. On October 30, Hobby Shack sold merchandise
A cash discount on sales is called a sales discount. When a on account to Cumberland Center for $1,200.00. On
sales discount is taken, a customer pays less cash than the November 7, Hobby Shack received payment for this sale
invoice amount previously recorded in the sales account. on account within the discount period. Because the pay-
To encourage prompt payment, Hobby Shack gives ment is received within the discount period, the amount
credit terms of 2/10, n/30. When a customer pays the received is reduced by the amount of the sales discount.
Sales Invoice Amount Sales Discount Rate Sales Discount
$ 1,200.00 2% $ 24.00
FINANCIAL LITERACY
Credit Cards
Buying goods with a credit card is a great way to take greatly between credit cards.
advantage of sales or to purchase an unplanned neces- Make sure you understand
sity such as an appliance. However, this convenience has the terms of such reward
a price—the interest that is applied to any unpaid balance programs.
on the account. Credit cards can be a
Interest rates and credit terms vary from card to card, so wonderful convenience
it is important to investigate and compare before choosing as long as you under-
a card. Find out how the interest is calculated and when stand the rules of the
the interest starts on a purchase. For some companies, card you choose.
interest starts on the day of purchase. Sometimes interest
doesn’t start until 20 to 25 days after the end of a billing Activities
cycle. If you pay your bill in full by the due date, no inter- 1. Using the Internet or other
est will be charged. If you are charged interest, it is usually resources, compare the inter-
calculated based on the average daily unpaid balance of est rates on two credit cards. If
your account. either card offers an introductory rate,
Some credit card companies entice you to switch to their find out the terms of the introductory rate and the
PHOTO: PHOTODISC/GETTY IMAGES
card by offering very low introductory interest rates—but interest rate after the introductory period is over.
only for a specific period of time. Once the introductory Present your findings in written form.
period expires, the interest rate increases.
2. Using the Internet or other resources, find out how
Other companies offer cash back or other rewards such
the interest is calculated for two different credit cards.
as miles or points that can be used for the purchase of
Summarize your findings in a written report.
airline tickets or other items. Again, these programs vary
Journalizing Cash Receipts Using a Cash Receipts Journal Lesson 10-2 281
JOURNALIZING CASH RECEIPTS ON
ACCOUNT WITH SALES DISCOUNTS
1. Date
CASH RECEIPTS JOURNAL PAGE 11
1 2 3 4 5 6 7
GENERAL ACCOUNTS SALES TAX SALES
DOC. POST. SALES DISCOUNT CASH
DATE ACCOUNT TITLE NO. REF. RECEIVABLE CREDIT PAYABLE DEBIT
DEBIT CREDIT CREDIT CREDIT DEBIT
3 1 7 Cumberland Center R91 1 2 0 0 00 2 4 00 1 1 7 6 00 3
4 2 3 4 5 6 4
5 5
2. Customer’s 3. Receipt Number 4. Original Sales 5. Sales 6. Cash
Name Invoice Amount Discount Received
Sales discounts are recorded in a general ledger account
titled Sales Discount. Since sales discounts decrease sales, Cash
the account Sales Discount is a contra account to Sales. Nov. 7 1,176.00
A business could debit Sales for the amount of the sales
discount. However, better information is provided if these Accounts Receivable
amounts are debited to Sales Discount. A separate account Nov. 7 1,200.00
provides business managers with more information to
evaluate whether a sales discount is a cost-effective method Sales Discount
of encouraging early payments of sales on account. Nov. 7 24.00
November 7. Received cash on account from
Cumberland Center, $1,176.00, covering If a customer does not pay the amount owed within the
Sales Invoice No. 74 for $1,200.00, less sales discount period, the full invoice amount is due. If
2% discount, $24.00. Receipt No. 91. Cumberland Center had not taken the sales discount, the
journal entry would be a debit to Cash, $1,200.00, and a
credit to Accounts Receivable, $1,200.00.
JOURNALIZING CASH RECEIPTS ON ACCOUNT
S T E P S
WITH SALES DISCOUNTS
1 Write the date, 7, in the Date column.
2 Write the customer’s name, Cumberland Center, in the Account Title column.
3 Write the receipt number, R91, in the Doc. No. column.
4 Write the original invoice amount, $1,200.00, in the Accounts Receivable Credit column.
5 Write the amount of sales discount, $24.00, in the Sales Discount Debit column.
6 Write the debit to Cash, $1,176.00, in the Cash Debit column.
282 Chapter 10 Journalizing Sales and Cash Receipts Using Special Journals
T O TA L I N G , P R O V I N G , A N D R U L I N G
A CASH RECEIPTS JOURNAL
CASH RECEIPTS JOURNAL PAGE 11
1 2 3 4 5 6 7
GENERAL ACCOUNTS SALES SALES
DOC. POST. SALES DISCOUNT CASH
DATE ACCOUNT TITLE NO. REF. RECEIVABLE CREDIT TAX PayABLE DEBIT
DEBIT CREDIT CREDIT CREDIT DEBIT
22 30 ⻫ T38 ⻫ 13 8 0 00 8280 1 4 6 2 80 22
23 30 Totals 9 5 4 0 00 275 3 2 50 164880 5 2 50 38 6 6 8 80 23
24 24
The procedures for totaling, proving, and ruling a cash The proof for Hobby Shack’s cash receipts journal for
receipts journal are the same as the procedures described November is calculated as shown below. The two totals,
for Hobby Shack’s cash payments journal in Chapter 9. $38,721.30, are equal. Equality of debits and credits is
The use of the General Debit and General Credit col- proved.
umns is described in Part 3.
Col. Debit Credit
No. Column Title Totals Totals
1 General Debit —
2 General Credit —
3 Accounts Receivable Credit $ 9,540.00
4 Sales Credit 27,532.50
5 Sales Tax Payable Credit 1,648.80
6 Sales Discount Debit $ 52.50
7 Cash Debit 38,668.80
Totals $38,721.30 $38,721.30
P R O V I N G C A S H AT T H E E N D O F A M O N T H
After the cash receipts journal is proved at the end of each The balance on the next unused check stub is
month, cash is proved. Hobby Shack’s cash proof at the $23,414.84. Since the balance on the next unused check
end of November is calculated as shown. stub is the same as the cash proof, cash is proved.
Cash on hand at the beginning of the month . . . . . . . . . . . . $17,647.44
(Nov. 1 balance of general ledger cash account)
Plus total cash received during the month . . . . . . . . . . . . 38,668.80
(Cash Debit column total, cash receipts journal)
Equals total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $56,316.24
Less total cash paid during the month . . . . . . . . . . . . . . . . 32,901.40
(Cash Credit column total, cash payments journal, Chapter 9)
Equals cash balance on hand at end of the month . . . . . . . . . . $23,414.84
Checkbook balance on the next unused check stub . . . . . . . . . $23,414.84
Journalizing Cash Receipts Using a Cash Receipts Journal Lesson 10-2 283
End of Lesson TERMS REVIEW
REVIEW cash sale
credit card sale
point-of-sale (POS)
terminal
AUDIT YOUR UNDERSTANDING terminal summary
batch report
1. What is the difference in the receipt received by a customer from a cash
register versus a point-of-sale terminal? batching out
2. What are the two types of batch reports? cash receipts journal
3. Who transfers funds between banks involved in the credit card sales? sales discount
WORK TOGETHER 102
Journalizing cash receipts; proving and ruling a cash receipts journal
Cash receipts journal page 16 for Graphics Co. is given in the Working Papers. Your instructor will guide you through
the following examples.
1. Using the current year, journalize the following transactions beginning on line 1. Source documents are abbrevi-
ated as follows: receipt, R; terminal summary, TS.
Transactions:
Oct. 4. Received cash on account from Oakley Company, $371.00, covering S96. R144.
13. Recorded cash and credit card sales, $8,361.60, plus sales tax, $501.70; total, $8,863.30. TS43.
30. Received cash on account from Sierra Supply, covering S97 for $5,989.00, less 2% discount. R145.
2. For the end of the month, total and prove cash receipts journal page 16.
3. Prove cash. The October 1 cash account balance in the general ledger was $11,764.96. The October 31 cash credit
total in the cash payments journal is $8,779.53. On October 31, the balance on the next unused check stub was
$18,088.95.
4. Rule page 16 of the cash receipts journal.
ON YOUR OWN 102
Journalizing cash receipts; proving and ruling a cash receipts journal
Cash receipts journal page 17 for Holloman Auto Parts is given in the Working Papers. Work this problem
independently.
1. Using the current year, journalize the following transactions beginning on line 1. Source documents are abbrevi-
ated as follows: receipt, R; terminal summary, TS.
Transactions:
Nov. 2. Received cash on account from Wakeman Auto, $425.00, covering S298. R312.
13. Recorded cash and credit card sales, $3,254.30, plus sales tax, $189.55; total, $3,443.85. TS48.
27. Received cash on account from Cooley Used Cars, covering S295 for $1,459.00, less 2% discount. R313.
2. For the end of the month, total and prove cash receipts journal page 17.
3. Prove cash. The November 1 cash account balance in the general ledger was $2,848.10. The November 30 cash
credit total in the cash payments journal is $4,284.25. On November 30, the balance on the next unused check
stub was $3,862.52.
4. Rule page 17 of the cash receipts journal.
284 Chapter 10 Journalizing Sales and Cash Receipts Using Special Journals
L E S S O N
Recording Transactions
10-3 Using a General Journal
CREDIT MEMORANDUM FOR SALES
R ETU R N S AN D ALLOWANCE S
CREDIT MEMORANDUM NO. 41
DATE
March 11, 20--
TO
Hobby Shack, Inc.
1420 College Plaza Village Crafts
Atlanta, GA 30337-1726 120 Mountain Road
Marietta, GA 30060-1320
ACCOUNT NO.
We have this day credited
your account as follows: 150
Item No. Quantity Units Description Price Total
17126 3 ea. 18 24 Wood Frame 19.50 58.50
Sales tax 3.51
Total 62.01
If the above is incorrect, please return stating difference.
In Chapter 9, purchases-related transactions other than pared by the vendor showing the amount deducted for
purchases and cash payments were recorded in a general returns and allowances is called a credit memorandum.
journal. Hobby Shack has a sales-related transaction that The original of a credit memorandum is given to the
is recorded in a general journal rather than either the sales customer. The copy is used as the source document for
or the cash receipts journals. recording the sales returns and allowances transaction.
[CONCEPT: Objective Evidence]
Sales Returns and Allowances
Sales returns and sales allowances decrease the amount
Most merchandising businesses expect to have some mer-
of sales. Therefore, the account Sales Returns and Allow-
chandise returned. A customer may have received the
ances is a contra account to the revenue account Sales.
wrong item or damaged goods. A customer may return
Thus, the normal account balance of Sales Returns and
merchandise for a credit on account or a cash refund.
Allowances is a debit, the opposite of the normal balance
Credit allowed a customer for the sales price of returned
of Sales, a credit.
merchandise, resulting in a decrease in the vendor’s
A business could debit the sales account for the amount
accounts receivable, is called a sales return.
of a return or allowance. However, better information is
Credit may be granted to a customer without requir-
provided if these amounts are debited to Sales Returns and
ing the return of merchandise. Credit also may be given
Allowances. This contra account enables management to
because of a shortage in a shipment. Credit allowed a cus-
quickly identify if the amount of sales returns and allow-
tomer for part of the sales price of merchandise that is not
ances compared to sales is greater than expected.
returned, resulting in a decrease in the vendor’s accounts
receivable, is called a sales allowance.
A vendor usually informs a customer in writing when
a sales return or a sales allowance is granted. A form pre-
Recording Transactions Using a General Journal Lesson 10-3 285
JOU R NALI Z I NG SALE S R ETU R NS AN D ALLOWANCE S
2. First Debit 3. Credit 4. Sales Return
Account Title Memorandum Amount
Number
GENERAL JOURNAL PAGE 3
1. Date DATE ACCOUNT TITLE DOC. POST.
NO. REF.
DEBIT CREDIT
2
12 1 11 Sales Returns and Allowances CM41 3 5 8 50 4 12 6. Sales Tax
13
5 Sales Tax Payable 3 51 6 13 Amount
14 Accounts Receivable/Village Crafts 6 2 01 14
8 9
15 7 15
16 16
17 17
5. Second Debit 7. Credit Account 8. Diagonal Line 9. Total Amount
Account Title Titles of Return
On March 8, Hobby Shack sold merchandise on account
to Village Crafts for $503.50 ($475.00 sales plus $28.50
Sales Returns and Allowances
sales tax). Later, Village Crafts returned part of the mer-
chandise. The sales return reduces the amount owed by Mar. 11 58.50
Village Crafts by $62.01.
Sales Tax Payable
Mar. 11 3.51 Mar. 8 28.50
March 11. Granted credit to Village Crafts
for merchandise returned, $58.50, plus Accounts Receivable
sales tax, $3.51, from S160; total, $62.01. Mar. 8 503.50 Mar. 11 62.01
Credit Memorandum No. 41.
S T E P S JOURNALIZING SALES RETURNS AND ALLOWANCES
1 Write the date, 11, in the Date column.
2 Write Sales Returns and Allowances in the Account Title column.
3 Write CM and the credit memorandum number, 41, in the Doc. No. column.
4 Write the amount of the sales return, $58.50, in the Debit column.
5 Write Sales Tax Payable on the next line in the Account Title column.
6 Write the sales tax amount, $3.51, in the Debit column.
7 On the next line, indented about 1 centimeter, write the accounts to be credited, Accounts Receivable/Village Crafts,
in the Account Title column. Hobby Shack’s procedures for keeping records of the amounts to be collected from
each customer are described in Chapter 11.
8 Draw a diagonal line in the Post. Ref. column.
9 Write the total accounts receivable amount, $62.01, in the Credit column.
286 Chapter 10 Journalizing Sales and Cash Receipts Using Special Journals
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
TERMS REVIEW 1. What is the difference between a sales return and a sales allowance?
2. What is the source document for journalizing sales returns and
allowances?
sales return
3. What general ledger accounts are affected, and how, by a sales returns
sales allowance and allowances transaction?
credit memorandum 4. Why are sales returns and allowances not debited to the Sales account?
WORK TOGETHER 103
Journalizing sales returns and allowances using a general journal
The general journal for Cline Interiors is given in the Working Papers. Your instructor will guide you through the
following examples.
1. Using the current year, journalize the following transactions on page 6 of a general journal. Source documents
are abbreviated as: credit memorandum, CM; sales invoice, S.
Transactions:
June 3. Granted credit to Wilbanks and Associates for merchandise returned, $457.00, plus sales tax, $36.56,
from S356; total, $493.56. CM41.
6. Granted credit to Westfall High School for damaged merchandise, $67.00 (no sales tax), from S345.
CM42.
ON YOUR OWN 103
Journalizing sales returns and allowances using a general journal
The general journal for City Lighting is given in the Working Papers. Work this problem independently.
1. Using the current year, journalize the following transactions on page 7 of a general journal. Source documents
are abbreviated as: credit memorandum, CM; sales invoice, S.
Transactions:
July 3. Granted credit to Carver High School for damaged merchandise, $46.00 (no sales tax), from S642. CM86.
4. Granted credit to Karen’s Fine Gifts for merchandise returned, $425.00, plus sales tax, $25.50, from S623;
total, $450.50. CM87.
Recording Transactions Using a General Journal Lesson 10-3 287
SUMMARY
After completing this chapter, you can: 3. Journalize sales on account using a sales
journal.
1. Define accounting terms related to sales and
cash receipts for a merchandising business. 4. Journalize cash receipts using a cash receipts
journal.
2. Identify accounting concepts and practices
related to sales and cash receipts for a mer- 5. Journalize sales returns and allowances using
chandising business. a general journal.
EXPLORE ACCOUNTING
Jou r n a l i z i ng S a l e s D i s c ou nt s
Most sales of a merchandising business are able is $5.88—the original $6.00 sales tax less a
to individuals for cash or credit card. Indi- 2% discount of $0.12. The end result is that a
vidual customers are expected to pay the $98.00 sale was made on which $5.88 sales
full amount of the invoice at the time of tax ($98.00 6%) was collected.
the sale. In contrast, sales on account to It is critically important for accounting
business customers may involve a cash employees to be familiar with sales tax
discount, such as 2/10, n/30. As discussed laws in the states in which their companies
in Chapter 9, businesses often receive cash do business. Each state regulates how sales
discounts to encourage early payment for a sale taxes should be paid. In some states, state regu-
on account. lations require that sales taxes be paid only on actual
Sales on account that involve both sales taxes and a sales realized—$5.88 for this transaction. Merchandising
cash discount present an interesting accounting prob- businesses in these states might modify the cash receipts
lem. Assume Country Crafters purchases $100.00 of mer- journal to include a Sales Tax Payable Debit column.
chandise, plus $6.00 sales tax, for a total sale of $106.00, In some states, sales taxes must be paid on the original
with 2/10, n/30 payment terms. Nine days later, Country invoice amount of sale—$6.00 for this transaction. In these
Crafters pays $103.88 in full payment of the invoice. How states, a sales discount would not result in a reduction in
should the cash receipt be journalized? the sales tax liability. The following journal entry would be
Because the payment is received within the discount recorded:
period, the sales amount is reduced by the amount of the PHOTO: PHOTOGRAPHER’S CHOICE/GETTY IMAGES
Cash 103.88
sales discount, $2.12. The amount of sales tax should also
Sales Discount 2.12
be reduced because the amount of the sale is reduced.
Accounts Receivable 106.00
Thus, the following journal entry should be recorded:
Instructions: With your instructor’s permission, contact
Cash 103.88
several local businesses to determine how they account
Sales Tax Payable .12
for cash discounts on sales on account. Specifically, ask the
Sales Discount 2.00
manager (1) does the business offer cash discounts and
Accounts Receivable 106.00
(2) how do sales returns impact the amount of sales tax
The net sales amount is $98.00—the original $100.00 paid to the state.
sales less a 2% discount of $2.00. The net sales tax pay-
288 Chapter 10 Journalizing Sales and Cash Receipts Using Special Journals
101 APPLICATION PROBLEM
Journalizing sales on account; proving and ruling a sales journal
Audio Engineering is an electronics store specializing in sound systems.
Instructions:
1. Journalize the following transactions completed during September of the current year on page 10 of the
sales journal given in the Working Papers. The sales invoice source document is abbreviated as S.
Transactions:
Sep. 2. Sold merchandise on account to Ketchum Clothing, $457.50, plus sales tax, $27.45; total, $484.95.
S134.
5. Sold merchandise on account to Norton Industries, $345.00, plus sales tax, $20.70; total, $365.70.
S135.
10. Sold merchandise on account to Jackson City Schools, $426.00. Jackson City Schools is exempt
from paying sales tax. S136.
17. Sold merchandise on account to Riley & Slay, CPAs, $522.00, plus sales tax, $31.32; total, $553.32.
S137.
23. Sold merchandise on account to Meadowbrook Church, $453.00. Meadowbrook Church is
exempt from paying sales tax. S138.
30. Sold merchandise on account to Tang Construction, $512.00, plus sales tax, $30.72; total, $542.72.
S139.
2. Total, prove, and rule page 10 of the sales journal.
102 APPLICATION PROBLEM
Journalizing cash receipts; proving and ruling a cash receipts journal
In Focus is a camera and film shop.
Instructions:
1. Journalize the following transactions completed during August of the current year on page 15 of the cash
receipts journal given in the Working Papers. Source documents are abbreviated as follows: receipt, R;
terminal summary, TS.
Transactions:
Aug. 1. Received cash on account from Reader Advertising, $345.60, covering S357. R288.
3. Recorded cash and credit card sales, $2,534.00, plus sales tax, $145.54; total, $2,679.54. TS28.
8. Received cash on account from WXGS Television, $312.60, covering S358. R289.
10. Recorded cash and credit card sales, $2,650.00, plus sales tax, $140.80; total, $2,790.80. TS29.
15. Received cash on account from Lambert News, covering S360 for $204.30, less 2% discount.
R290.
17. Recorded cash and credit card sales, $2,372.00, plus sales tax, $132.43; total, $2,504.43. TS30.
24. Received cash on account from Kelly Modeling Agency, $236.96, covering S359. R291.
24. Recorded cash and credit card sales, $3,180.00, plus sales tax, $170.80; total, $3,350.80. TS31.
30. Received cash on account from JGN Industries, covering S361 for $201.40, less 2% discount.
R292.
31. Recorded cash and credit card sales, $2,100.00, plus sales tax, $104.25; total, $2,204.25. TS32.
2. Total and prove the equality of debits and credits for cash receipts journal page 15.
( Go Beyond the Book
)
For more information go to
www.C21accounting.com
Journalizing Sales and Cash Receipts Using Special Journals Chapter 10 289
3. Prove cash. The August 1 cash account balance in the general ledger was $2,548.25. The August 31 cash
credit total in the cash payments journal was $15,485.25. On August 31, the balance on the next unused
check stub was $1,885.56.
4. Rule page 15 of the cash receipts journal.
103 APPLICATION PROBLEM
Journalizing sales returns and allowances using a general journal
VanHorn Designs sells custom logo products.
Instructions:
1. Journalize the following transactions affecting sales completed during July of the current year. Use page
14 of the general journal given in the Working Papers. Source documents are abbreviated as follows: credit
memorandum, CM; receipt, R; sales invoice, S.
Transactions:
July 2. Granted credit to Tahai Industries for merchandise returned, $253.00, plus sales tax, $15.18, from
S456; total, $268.18. CM61.
4. Granted credit to Allergy Associates for damaged merchandise, $235.00, plus sales tax, $14.10,
from S455; total, $249.10. CM62.
12. Granted credit to Jefferson School for damaged merchandise, $134.25, from S458. CM63.
104 MASTERY PROBLEM
Journalizing sales and cash receipts transactions; proving and ruling journals
Aqua Center installs and maintains swimming pools and spas.
Use page 19 of a sales journal, page 20 of a cash receipts journal, and page 14 of a general journal. Balances
brought forward are provided on line 1 of each journal in the Working Papers.
Instructions:
1. Journalize the following transactions completed during the remainder of October in the appropriate
journal. The sales tax rate is 4%. Source documents are abbreviated as follows: receipt, R; sales invoice, S;
terminal summary, TS.
Transactions:
Oct. 26. Received cash on account from Slumber Inns, covering S435 for $1,356.00, less a 2% discount.
R293.
27. Sold merchandise on account to County Hospital, $489.50, plus sales tax, $19.58; total, $509.08.
S443.
28. Recorded cash and credit card sales, $4,315.00, plus sales tax, $126.60; total, $4,441.60. TS44.
29. Received cash on account from Summit Lodge, $467.24, covering S438. R294.
29. Granted credit to Slumber Inns for merchandise returned, $124.00, plus sales tax, $4.96, from
S293; total, $128.96. CM54.
30. Sold merchandise on account to Southeastern University, $3,643.50. Southeastern University is
exempt from sales tax. S444.
31. Recorded cash and credit card sales, $1,232.00, plus sales tax, $42.22; total, $1,274.22. TS45.
2. Total and prove the equality of debits and credits for the sales journal.
3. Rule the sales journal.
4. Total and prove the equality of debits and credits for the cash receipts journal.
5. Prove cash. The October 1 cash account balance in the general ledger was $4,483.25. The October 31 cash
credit total in the cash payments journal was $39,315.22. On October 31, the balance on the next unused
check stub was $8,918.50.
6. Rule the cash receipts journal.
290 Chapter 10 Journalizing Sales and Cash Receipts Using Special Journals
105 CHALLENGE PROBLEM
Journalizing transactions; proving and ruling special journals
Zone 6 is a lawn and garden store.
Instructions:
1. Journalize in the appropriate journal the following transactions completed during May of the current year.
Use page 5 of a purchases and sales journal, page 8 of a cash payments journal, page 9 of a cash receipts
journal, and page 7 of a general journal given in the Working Papers. The sales tax rate is 8%. Calculate and
add the appropriate sales tax amount to each sale. Source documents are abbreviated as follows: check, C;
credit memorandum, CM; purchase invoice, P; receipt, R; sales invoice, S; terminal summary, TS.
Transactions:
May 1. Paid cash for rent, $1,400.00. C344.
3. Paid cash for electric bill, $186.00. C345.
3. Granted credit to Slippery Rock Inn for merchandise returned, $235.00, plus sales tax, $18.80,
from S493; total, $253.80. CM67.
3. Purchased merchandise on account from Angelo Lawn Supplies, $1,340.00. P91.
4. Bought $120.00 worth of store supplies on account from Mosby Store Supplies, recorded on
Memo 43, with 2/10, n/30 payment terms.
4. Paid cash on account to Northeast Nurseries, $7,632.00, covering P87. C346.
4. Sold merchandise on account to First National Bank, $546.00, plus sales tax. S567.
5. Bought office supplies for cash, $35.45. C347.
5. Paid cash for some merchandise, $89.40. C348.
6. Recorded cash and credit card sales, $3,235.00, plus sales tax of $239.40. TS23.
7. Received an invoice, stamped Purchase Invoice 92, for merchandise on account from Forde
Collectibles for $3,250.00, less a 60% trade discount.
7. Houston Landscaping paid its $545.65 balance, less 2% discount. R490.
8. Bought office supplies on account from Office Mart, $81.60. M44.
10. Returned $260.00 of the merchandise purchased on Purchase Invoice 92 to Forde Collectibles,
recorded on Debit Memorandum 23.
11. Paid the remaining balance of Purchase Invoice 92, less Debit Memorandum 23, to Forde
Collectibles with Check No. 349, taking advantage of the 2/10, n/30 payment terms.
13. Cash and credit card sales for the week were $3,216.00, plus sales tax of $206.70. TS24.
14. Jackson Public Schools bought merchandise on account for $450.00. S568.
16. Purchased $2,900.00 of merchandise on account from Tom’s Sod Farm on Purchase Invoice 93,
with 2/10, n/30 payment terms.
17. Paid cash on account to Office Mart, $81.60, covering M44. C350.
20. Cash and credit card sales for the week were $2,554.00, plus sales tax, $184.23. TS25.
22. First National Bank paid $589.68 cash on its account, covering S567. R491.
23. SDR Investment Trust bought merchandise on account for $1,456.00, plus sales tax. S569.
23. Purchased merchandise on account from LawnScapes, Inc., $4,488.00. P94.
25. Paid $102.00 cash for advertising. C351.
27. Cash and credit card sales for the week were $2,742.00, plus sales tax, $184.25. TS26.
29. Slippery Rock Inn paid $2,345.64 on its account, covering S493. R492.
29. Granted credit to SDR Investment Trust for damaged merchandise, $45.00, plus sales tax, from
S455. CM68.
31. Paid cash to replenish the petty cash fund, $361.60: office supplies, $74.40; store supplies, $85.00;
advertising, $105.00; miscellaneous, $96.00. C352.
31. Recorded cash and credit card sales, $768.00, plus sales tax, $49.45. TS27.
2. Total the purchases, cash payments, sales, and cash receipts journals.
3. Prove the equality of debits and credits for the cash payments, sales, and cash receipts journals.
4. Prove cash. The May 1 cash account balance in the general ledger was $2,464.60. On May 31, the balance
on the next unused check stub was $8,406.44.
5. Rule the purchases, cash payments, sales, and cash receipts journals.
Journalizing Sales and Cash Receipts Using Special Journals Chapter 10 291
A P P L I E D CO M M U N I C AT I O N
The tendency for prices to increase over time is referred to as inflation. Increasing prices reduce what an individual or
company can purchase with the same amount of money.
Instructions: The following table represents the prices for selected consumer goods in 1990. Copy the table and
add a column for the current year and a column for the percent of change. Use the newspaper and identify current
prices for the products listed. Determine the percentage change in the price of each item. If an item decreased in
price, can you explain the reason for the decrease?
Comparison of Prices for Selected Consumer Items
Item 1990 Price
19-inch color television $149.00
Cassette tape 13.50
Milk (gallon) 1.99
Ground beef (pound) 1.69
Eggs, medium (dozen) .99
Raisin bran 1.99
Film, 24 exposures 3.88
Theater ticket 6.50
Motor oil (quart) .84
Refrigerator (19.1 cu. ft.) 790.00
CASE FOR CRITICAL THINKING
Roshonda Compton, an accountant for an office supplies store, has noted a major increase in overdue amounts
from charge customers. All invoice amounts from sales on account are due within 30 days. The amounts due have
reduced the amount of cash available for the day-to-day operation of the business. Ms. Compton recommends that
the business (1) stop all sales on account and (2) begin accepting bank credit cards. The owner is reluctant to accept
the recommendations because the business might lose some reliable customers who do not have credit cards. Also,
the business will have increased expenses because of the credit card fee. How would you respond to Ms. Compton’s
recommendations? What alternatives might the owner consider?
SCANS WORKPLACE COMPETENCY
Basic Skill: Reading
Concept: Employers need employees at all levels who can read well. Reading includes locating, understanding, and
interpreting written information. The written information may be in documents such as manuals, graphs, schedules,
or even in software “Help” windows.
Application: Open a software application with which you are familiar, such as word processing, spreadsheet, or
accounting software. Using either printed documentation or the Help function of the software, locate a software
feature with which you are not familiar. Read the document and create a file in which you can practice applying this
previously unknown feature. Write a statement about situations in which this new feature could save time.
292 Chapter 10 Journalizing Sales and Cash Receipts Using Special Journals
USING SOURCE DOCUMENTS
Journalizing sales and cash receipts transactions; proving and ruling journals
Golfer’s Paradise sells golf and other recreational equipment. Source documents related to the sales and cash
receipts are provided in the Working Papers.
Sales journal page 18, cash receipts journal page 24, and general journal page 15 for Golfer’s Paradise are given in
the Working Papers. Balances brought forward are provided on line 1 of each journal.
Instructions
1. Journalize the transactions shown in the source documents in the appropriate journal. The sales tax rate is 8%.
2. Total and prove the equality of debits and credits for the sales journal.
3. Rule the sales journal.
4. Total and prove the equality of debits and credits for the cash receipts journal.
5. Prove cash. The November 1 cash account balance in the general ledger was $2,551.18. The November 30 cash
credit total in the cash payments journal was $49,158.84. On November 30, the balance on the next unused check
stub was $5,106.41.
6. Rule the cash receipts journal.
A N A LY Z I N G B E S T B U Y ’S F I N A N C I A L S TAT E M E N T S
Comparable store sales—the sales at stores open for more than a year—is one of the best measures of financial
success for a retail business. An increase in comparable store sales can be achieved by a combination of raising unit
sales prices and selling more units. Regardless of the reason, an increase in comparable store sales demonstrates
that the company’s products are in demand.
Instructions
1. Use Best Buy’s 5-Year Financial Highlights on page B-2 in Appendix B to identify the comparable store sales
change for 2005–2007.
2. Use the 5-Year Financial Highlights to identify the types and number of stores open at the end of 2006 and 2007.
Journalizing Sales and Cash Receipts Using Special Journals Chapter 10 293
Accounting
SOFTWARE
SALES AND CASH RECEIPTS
Accounting software enables you to create a sales invoice by entering sales information directly into the computer.
Peachtree provides you with a computer screen that closely resembles a paper sales invoice. Peachtree enhances
the process by assigning a document number, automatically entering a transaction date, providing you with a list
of customers and inventory items, and calculating the total sale. These features increase the efficiency of creating a
sales invoice and reduce the number of errors.
PEACHTREE MASTERY PROBLEM 10-4
1. Open (Restore) file 10-4MP.ptb.
2. Use the Receipts task to journalize and record cash receipts transactions. (Peachtree will automatically debit
Cash; the offsetting credit goes to Sales or the account you specify.)
3. Use the Sales/Invoicing task to record a credit sale. (Peachtree automatically debits the customer’s account and
Accounts Receivable; the credit side defaults to Sales.)
4. Use the Credit Memos task to record sales returns. This transaction will post to the Sales Journal.
5. Print the sales journal from the Reports, Accounts Receivable Report List.
6. Print the cash receipts journal from the Report List.
PEACHTREE CHALLENGE PROBLEM 10-5
1. Open (Restore) file 10-5CP.ptb.
2. Record sales and cash receipts. The sales tax rate is 8%.
3. Print the purchase journal, cash disbursements journal, sales journal, and cash receipts journal.
SALES AND CASH RECEIPTS
New screens will be used to record receiving cash on account, selling merchandise on account,
recording cash and credit card sales, granting credit for sales returns, and making cash payments. By filling in all the
data required on these screens, the report generated will have much more information than can be provided by
special journals. QuickBooks also provides many shortcuts to make entering the data more efficient and accurate.
Dropdown lists are available for account titles and customer and vendor names. The software program automati-
cally fills in much of the data on many screens.
QUICKBOOKS MASTERY PROBLEM 10-4
1. Open the Aqua Center file.
2. Use the Receive Payment option from the Customers menu to record payments on account.
3. Use the Create Invoices option from the Customers menu to record sales on account.
4. Use the Enter Sales Receipts window to record cash and credit card sales.
5. Record customer returns in the Create Credit Memos/Refunds feature.
6. Print a Journal report.
QUICKBOOKS CHALLENGE PROBLEM 10-5
1. Open the Zone file.
2. Use the Enter Bills and Pay Bills features to record purchases, payments, and vendor returns on account.
3. Use the Receive Payments and Create Invoices features to record cash receipts and sales on account.
4. Use the Create Credit Memos/Returns feature to record customer returns.
5. Use the Write Checks feature to record cash payments.
6. Use the Enter Sales Receipts feature to record cash and credit card sales.
7. Print a Journal report, a Customer Balance Summary report, a Vendor Balance Summary report, and a Trial
Balance report.
294 Chapter 10 Journalizing Sales and Cash Receipts Using Special Journals
S O R T I N G A N D F I LT E R I N G D A T A
Effective managers use sales information to understand sales trends and target potential customers. In other words,
sales information should be used to help increase sales. The sales journal reports sales for a period of time. Knowing
the customers involved in the largest sales can provide managers with ideas to increase sales to other customers.
Managers can learn how these sales were made and apply that knowledge when making sales to other customers.
Electronic spreadsheets have the ability to sort and filter data. Data can be sorted in ascending or descend-
ing order by numbers or text. Filters display the information that meets certain criteria, such as amounts that are
greater than 10,000.
OPTIONAL SPREADSHEET ACTIVITY
Open the file F10-OPT. Complete the instructions provided to sort and filter the sales data.
SALES AND CASH RECEIPTS
To record transactions in the sales journal
1. Enter the transaction date.
2. Enter the invoice number in the Refer. column.
3. Enter the amount of the invoice in the Sales Credit column. The Accounts Receivable debit amount is calculated
and displayed automatically.
4. If the transaction involves sales tax, enter the amount in the Sales Tax Credit column.
5. Choose a customer name from the Customer drop-down list.
6. Click the Post button.
The cash receipts journal is used to enter all cash receipt transactions. The debit to cash is automatically calcu-
lated and displayed by the computer. There are two types of cash receipts:
• Cash and credit card sales are cash receipts that do not affect Accounts Receivable.
• Receipts on account are cash receipts that do affect Accounts Receivable.
To record transactions in the cash receipts journal
1. Enter the transaction date.
2. Enter the transaction reference.
3. If recording a cash or credit card sale, enter the sales amount of the merchandise sold. Enter the amount of sales
tax in the Sales Tax Payable Credit column. The debit to Cash is automatically calculated and displayed.
4. If recording a receipt on account, enter the amount in the A.R. Credit column. Choose the customer from the
Customer drop-down list.
5. Click the Post button.
AUTOMATED ACCOUNTING APPLICATION PROBLEM 10-2
Open file F10-2.AA8. Display the problem instructions and complete the problem.
AUTOMATED ACCOUNTING MASTERY PROBLEM 10-4
Open file F10-4.AA8. Display the problem instructions and complete the problem.
Journalizing Sales and Cash Receipts Using Special Journals Chapter 10 295
DIGITAL VISION/GETTY IMAGES
C H A P T E R 1 1 Posting to General and
Subsidiary Ledgers
O B J E C T I V E S
After studying Chapter 11, you will be able to: 5. Post separate items from a cash payments and
general journal to a general ledger.
1. Define accounting terms related to posting to
ledgers. 6. Post special journal column totals to a general
ledger.
2. Identify accounting practices related to posting
to ledgers. 7. Journalize and post correcting entries affecting
customer accounts.
3. Post separate items from a purchases, cash
payments, and general journal to an accounts
payable ledger.
4. Post separate items from a sales, cash receipts,
and general journal to an accounts receivable
ledger.
K E Y T E R M S
• subsidiary ledger • controlling account • schedule of accounts
• accounts payable ledger • schedule of accounts receivable
payable
( )
• accounts receivable Point Your Browser
ledger www.C21accounting.com
296
ACCOUNTING IN THE REAL WORLD
eBay, Inc.
eBay Conquers the Online Marketplace
Cleaning out your closet and finding things you don’t need? Don’t trash it,
eBay it!
From its beginning in 1995, eBay has become an integral part of today’s
society, boasting 222 million registered users as of December 31, 2006. Inno-
vative thinking has fueled eBay’s dynamic growth of its online marketplace,
where individuals and businesses bought and sold a staggering $52 billion
DIGITAL VISION/GETTY IMAGES
worth of goods during 2006.
eBay is more than just an online marketplace. The company has been
quick to identify and purchase companies that have INTERNET
developed services that take advantage of ACTIVITY
the Internet. PayPal, purchased in 2002,
provides a platform for the online AICPA—Student
payment of eBay transactions. Resources
Purchased in 2005, Skype pro- Go to the homepage for the
vides voice and video com- American Institute of Certified
munications. Shopping.com Public Accountants (AICPA)
provides comparison shop- (www.aicpa.org).
ping for new products, and
Rent.com lists apartments Instructions
from more than 20,000
1. Search for "Accounting Fun
properties.
Facts." Find and list three of
With every change in
the fun facts given.
its business, eBay must
2. Click on the "About the
change its accounting sys-
AICPA" link. Under the
tem. New accounts and dif-
GETTY IMAGES NEWS
“Frequently Asked Ques-
ferent methods for combining
tions (FAQ)” link, read
those accounts are required to
through the questions and
create financial statements.
answers. List one question
and summarize the answer
to the question.
Critical Thinking
1. Many businesses begin as a sole proprietorship and later transform into
a corporation. What changes might occur in the chart of accounts when
a business changes from being a sole proprietorship to a corporation?
2. Identify another business that has experienced changes in its corporate
structure. What motivated the change(s)?
Source: http://pages.ebay.com/aboutebay/thecompany/companyoverview.html
297
L E S S O N
Posting to an Accounts
11-1 Payable Ledger
LE DG E RS AND CONTROLLING ACCOUNTS
A business’s size, number of transactions, and type of Each separate ledger is summarized in a single general
transactions determine the number of ledgers used in an ledger account. A ledger that is summarized in a single
accounting system. general ledger account is called a subsidiary ledger. A
subsidiary ledger containing only accounts for vendors
General Ledger
from whom merchandise or other items are purchased on
Hobby Shack’s general ledger chart of accounts is on page
account is called an accounts payable ledger. A subsid-
231. However, because of the business’s size and the num-
iary ledger containing only accounts for charge customers
ber and type of transactions, Hobby Shack also uses addi-
is called an accounts receivable ledger. Total amounts are
tional ledgers in its accounting system.
summarized in single general ledger accounts: Accounts
Subsidiary Ledgers Payable for vendors and Accounts Receivable for charge
A business needs to know the amount owed each vendor customers. An account in a general ledger that summa-
as well as the amount to be collected from each charge rizes all accounts in a subsidiary ledger is called a control-
customer. Therefore, a separate account is needed for each ling account. The balance of a controlling account equals
vendor and each customer. Hobby Shack keeps a separate the total of all account balances in its related subsidiary
ledger for vendors and a separate ledger for customers. ledger.
CHARACTER COUNTS
W h o s e C o m p u t e r I s It R e a l l y ?
John Melton is an accounting In accordance with company policy, John began his
manager at Stegall Indus- planning by examining the company’s code of conduct.
tries. John frequently walks Two statements appear relevant: “Employees should be
through his department to treated with mutual respect, free from the threat of harass-
make himself readily avail- ment and discrimination.”
able for his employees to “Employees may occasionally use company computer
ask questions and provide systems, such as Internet and e-mail, for personal use. Such
feedback. With increas- use should be on a limited basis and should not result in a
ing frequency, John has measurable cost to the Company.”
observed that his employ-
ees have Internet auction Instructions
PHOTO: DIGITAL VISION/GETTY IMAGES
sites open while they are Use the ethical model to evaluate John’s proposed action
working on their computers. to monitor his employees’ Internet usage. Do you have any
Concerned that productivity in his recommendations for John?
department is suffering, he is consid-
ering installing some sort of monitoring
system to gather evidence of the employees’
computer usage.
298 Chapter 11 Posting to General and Subsidiary Ledgers
A C C O U N T S P AYA B L E L E D G E R A N D G E N E R A L
LE DG E R CONTROLLING ACCOUNT
260 SUBSIDIARY LEDGER
tic
Synthe one page for each vendor
Art s 0
3,816.0
250
ft
Gulf Cra
Supply 900.00
240
Floral
e s ig n s
D 996.00
230
Crown ting
u
Distrib 1,787.0
0
220
ic
Ceram
Supply 4,147.2
0 GENERAL LEDGER
210 one controlling account
an
Americ
Paint 7,145.8
8 7,145.88 ⫹ unts Payable 2110
4,147.20 Acco
1.787.00
996.00
900.00 18,792.08
3,816.00
18,792.08 T
UNTS
ACCO BLE
PAYA
ER
LEDG
ities
Liabil
Hobby Shack assigns a vendor number to each account in When the balance of a vendor account in an accounts
the accounts payable ledger. A three-digit number is used. payable ledger is changed, the balance of the controlling
The first digit identifies the division in which the con- account, Accounts Payable, is also changed. The total of
trolling account appears in the general ledger. The second all vendor account balances in the accounts payable ledger
two digits show each account’s location within a subsid- equals the balance of the controlling account, Accounts
iary ledger. Accounts are assigned by 10s, beginning with Payable.
the second digit. Accounts in the subsidiary ledgers can be
located by either number or name.
The vendor number for American Paint is 210. The
first digit, 2, shows that the controlling account is a lia- S T O C K B Y T E / GE T T Y I MA G E S
bility, Accounts Payable. The second and third digits, 10,
show the vendor number assigned to American Paint.
The procedure for adding new accounts to subsidiary
ledgers is the same as described for TechKnow Consult-
ing’s general ledger in Chapter 4. Accounts are arranged
in alphabetical order within the subsidiary ledgers. New
accounts are assigned an unused middle
number. If the proper alphabeti-
cal order places a new account as
the last account, the next num-
ber in the sequence of 10s is
assigned. Hobby Shack’s chart
R E M E M B E R
of accounts for the subsidiary
ledgers is on page 231. The total amount owed to
all vendors is summarized
in a single general ledger
account, Accounts Payable.
Posting to an Accounts Payable Ledger Lesson 11-1 299
A C C O U N T S P AYA B L E L E D G E R F O R M S
1. Vendor Name 1 2. Vendor Number 2
VENDOR Ceramic Supply VENDOR NO. 220
DATE ITEM POST. DEBIT CREDIT CREDIT
REF. BALANCE
20--
3. Date 3 Nov. 1 Balance ⻫ 5 8 0 8 00
4 5 6
4. Word Balance 5. Check Mark 6. Account Balance
Hobby Shack uses a 3-column accounts payable subsid- Some businesses record both the vendor name and vendor
iary account form. Information to be recorded in the address on the ledger form. However, the address infor-
accounts payable ledger includes the date, posting refer- mation is usually kept in a separate name and address
ence, debit or credit amount, and new account balance. file. This practice eliminates having to record the vendor
Accounts payable are liabilities and have normal credit address on the ledger form each time a new ledger page is
balances. Therefore, a Debit Balance column is usually opened or the address changes.
not included in the accounts payable ledger accounts. The number of entries that may be recorded on each
Each new account is opened by: account form depends on the number of lines provided.
When all lines have been used, a new page is prepared.
1. Writing the vendor name on the heading of the ledger
The vendor name, vendor number, and account balance
account.
are recorded on the new page.
2. Writing the vendor number on the heading of the
On November 1, Hobby Shack prepared a new page
ledger account.
for Ceramic Supply in the accounts payable ledger because
The vendor name is obtained from the first purchase the existing page was full. On that day, the account bal-
invoice received. The vendor number is assigned using ance was $5,808.00.
the three-digit numbering system previously described.
S T E P S STARTING A NEW PAGE IN THE ACCOUNTS PAYABLE LEDGER
1 Write the vendor name, Ceramic Supply, on the Vendor line.
2 Write the vendor number, 220, on the Vendor No. line.
3 Write the date, 20--, Nov. 1, in the Date column.
4 Write the word Balance in the Item column.
5 Place a check mark in the Post. Ref. column to show that the amount
has been carried forward from a previous page rather than posted
from a journal.
6 Write the balance, $5,808.00, in the Credit Balance column.
R E M E M B E R
A new vendor account is opened
by writing the vendor name and
vendor number on the heading
of the ledger account and placing
it in alphabetical order.
300 Chapter 11 Posting to General and Subsidiary Ledgers
POSTING FROM A PURCHASES JOURNAL TO
A N A C C O U N T S P AYA B L E L E D G E R
PURCHASES JOURNAL PAGE 11
DATE ACCOUNT CREDITED PURCH. POST. PURCHASES DR.
NO. REF. ACCTS. PAY. CR.
20--
1 Nov. 2 Crown Distributing 83 230 2 0 3 9 00 1
2 2. Journal Page 2 2
3 Number 3
1. Date 1 3. Credit 3 5 5. Vendor
Number
VENDOR Crown Distributing VENDOR NO. 230
DATE ITEM POST. DEBIT CREDIT CREDIT
REF. BALANCE
20--
Nov. 2 P11 2 0 3 9 00 2 0 3 9 00
4. Account Balance
Each entry in the purchases journal affects the account ledger. Hobby Shack posts frequently to the accounts pay-
of the vendor named in the Account Credited column. able ledger. Posting frequently keeps each vendor account
The amount on each line of a purchases journal is posted balance up to date.
as a credit to a vendor account in the accounts payable
POSTING FROM A PURCHASES JOURNAL
S T E P S
TO AN ACCOUNTS PAYABLE LEDGER
1 Write the date, 20--, Nov. 2, in the Date column of the vendor account.
2 Write the journal page number, P11, in the Post. Ref. column of the account. When several journals are used,
an abbreviation is used to show the journal from which the posting is made. P is the abbreviation used for
the purchases journal. The abbreviation P11 means page 11 of the purchases journal.
3 Write the credit amount, $2,039.00, in the Credit column of the account for Crown Distributing.
4 Add the amount in the Credit column to the previous balance in the Credit
Balance column. (Crown Distributing has no previous balance; therefore,
$0 ⫹ $2,039.00 ⫽ $2,039.00.) Write the new account balance, $2,039.00,
in the Credit Balance column.
5 Write the vendor number, 230, in the Post. Ref. column of the
journal. The vendor number shows that the posting for this entry
is complete. F O R YO U R I N F O R M AT I O N
F Y I
An error in posting may
cause a business to overpay
or underpay its vendors.
Posting to an Accounts Payable Ledger Lesson 11-1 301
P O S T I N G F R O M A C A S H P AY M E N T S J O U R N A L
T O A N A C C O U N T S P AYA B L E L E D G E R
1. Date 5. Vendor Number
CASH PAYMENTS JOURNAL PAGE 21
1 2 3 4 5
CK. POST. GENERAL ACCOUNTS PURCHASES CASH
DATE ACCOUNT TITLE NO. REF. PAYABLE DISCOUNT
DEBIT CREDIT CREDIT
DEBIT CREDIT
5 7 Synthetic Arts 294 260 1 0 5 0 00 1 0 5 0 00 5
5
1
Synthetic Arts
2 260
VENDOR 3 VENDOR NO.
DATE ITEM POST.
REF.
DEBIT CREDIT CREDIT
BALANCE 3. Debit
20--
Oct. 7 P10 1 0 5 0 00 1 0 5 0 00
Nov. 5 P11 3 8 1 6 00 4 8 6 6 00
7 CP21 1 0 5 0 00 4 3 8 1 6 00
2. Journal Page Number 4. Account Balance
Each entry in the Accounts Payable Debit column of a are posted frequently to the proper vendor account in the
cash payments journal affects a vendor account. Indi- accounts payable ledger. Posting frequently keeps each
vidual amounts in the Accounts Payable Debit column vendor account balance up to date.
POSTING FROM A
DIGITAL VISIO
N/G
CASH PAYMENTS
ET T Y
IM A G
ES S T E P S JOURNAL TO
AN ACCOUNTS
PAYABLE LEDGER
1 Write the date, 7, in the Date column of the
vendor account.
2 Write the journal page number, CP21, in the
Post. Ref. column of the account. The abbrevia-
tion CP21 means page 21 of the cash payments
journal.
3 Write the debit amount, $1,050.00, in the Debit
column of the vendor account.
4 Subtract the amount in the Debit column from
the previous balance in the Credit Balance col-
umn ($4,866.00 ⫺ $1,050.00 ⫽ $3,816.00). Write
the new balance, $3,816.00, in the Credit Balance
column.
5 Write the vendor number, 260, in the Post. Ref.
column of the cash payments journal.
302 Chapter 11 Posting to General and Subsidiary Ledgers
POSTING CREDIT AND DEBIT ENTRIES FROM A GENERAL
J O U R N A L T O A N A C C O U N T S P AYA B L E L E D G E R
GENERAL JOURNAL PAGE 11 2. Journal Page
Number
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
20--
1 Nov. 6 Supplies—Store M52 2 1 0 00 1
2 Accts. Pay./Gulf Craft Supply 250 2 1 0 00 2
3 3
1. Date 1 3 3. Credit
30 28 Accts. Pay./Crown Distributing DM8 230 2 5 2 00 30
31 Purchases Returns and Allow. 5 2 5 2 00 31
2
VENDOR Gulf Craft Supply VENDOR NO. 250 5. Vendor
Number
DATE ITEM POST. DEBIT CREDIT CREDIT
REF. BALANCE
20--
Oct. 12 P10 4 9 8 00 4 9 8 00
Nov. 6 G11 2 1 0 00 7 0 8 00
4
VENDOR Crown Distributing 4. Account Balance VENDOR NO. 230 5
DATE ITEM POST. DEBIT CREDIT CREDIT
REF. BALANCE
20--
Nov. 2 P11 2 0 3 9 00 2 0 3 9 00
28 G11 2 5 2 00 1 7 8 7 00
1 2 3 4
Entries in a general journal may affect account balances in from a general journal to a general ledger is described on
a general ledger and an accounts payable ledger. Posting pages 317–318.
POSTING DEBIT AND CREDIT ENTRIES FROM A GENERAL
S T E P S
JOURNAL TO AN ACCOUNTS PAYABLE LEDGER
POSTING A CREDIT ENTRY FOR SUPPLIES BOUGHT ON ACCOUNT
1 Write the date, Nov. 6, in the Date column of the vendor account.
2 Write the general journal page number, G11, in the Post. Ref. column of the account. The abbreviation G11 means
page 11 of the general journal.
3 Write the amount, $210.00, in the Credit column of the vendor account.
4 Add the amount in the Credit column to the previous balance in the Credit Balance column ($498.00 ⫹ $210.00 ⫽
$708.00). Write the new balance, $708.00, in the Credit Balance column.
5 Write the vendor number, 250, to the right of the diagonal line in the Post. Ref. column of the general journal.
POSTING A DEBIT ENTRY FOR A PURCHASES RETURN OR ALLOWANCE
1 Write the date, 28, in the Date column of the vendor account.
2 Write the general journal page number, G11, in the Post. Ref. column of the account.
3 Write the amount, $252.00, in the Debit column of the vendor account.
4 Subtract the amount in the Debit column from the previous balance in the Credit Balance column
($2,039.00 ⫺ $252.00 ⫽ $1,787.00). Write the new balance, $1,787.00, in the Credit Balance column.
5 Write the vendor number, 230, to the right of the diagonal line in the Post. Ref. column of the general journal.
Posting to an Accounts Payable Ledger Lesson 11-1 303
C O M P L E T E D A C C O U N T S P AYA B L E L E D G E R
VENDOR American Paint VENDOR NO. 210
DATE ITEM POST. DEBIT CREDIT CREDIT
REF. BALANCE
20--
Nov. 1 Balance ⻫ 2 6 5 0 00
13 P11 3 7 6 8 00 6 4 1 8 00
13 CP21 2 6 5 0 00 3 7 6 8 00
20 P11 3 3 7 7 88 7 1 4 5 88
VENDOR Ceramic Supply VENDOR NO. 220
DATE ITEM POST. DEBIT CREDIT CREDIT
REF. BALANCE
20--
Nov. 1 Balance ⻫ 5 8 0 8 00
5 P11 4 1 4 7 20 9 9 5 5 20
20 CP21 5 8 0 8 00 4 1 4 7 20
VENDOR Crown Distributing VENDOR NO. 230
DATE ITEM POST. DEBIT CREDIT CREDIT
REF. BALANCE
20--
Nov. 2 P11 2 0 3 9 00 2 0 3 9 00
28 G11 2 5 2 00 1 7 8 7 00
VENDOR Floral Designs VENDOR NO. 240
DATE ITEM POST. DEBIT CREDIT CREDIT
REF. BALANCE
20--
Nov. 1 Balance ⻫ 7 4 4 00
23 CP22 7 4 4 00
24 G11 1 6 5 0 00 1 6 5 0 00
26 G11 9 9 6 00 2 6 4 6 00
30 CP22 1 6 5 0 00 9 9 6 00
VENDOR Gulf Craft Supply VENDOR NO. 250
DATE ITEM POST. DEBIT CREDIT CREDIT
REF. BALANCE
20--
Nov. 1 Balance ⻫ 4 9 8 00
6 G11 2 1 0 00 7 0 8 00
8 CP21 4 9 8 00 2 1 0 00
23 G11 6 9 0 00 9 0 0 00
VENDOR Synthetic Arts VENDOR NO. 260
DATE ITEM POST. DEBIT CREDIT CREDIT
REF. BALANCE
1 Balance
20--
Nov. Balance ⻫ 1 0 5 0 00
5 P11 3 8 1 6 00 4 8 6 6 00
7 CP21 1 0 5 0 00 3 8 1 6 00
Hobby Shack’s accounts payable ledger has been posted for the month of November.
304 Chapter 11 Posting to General and Subsidiary Ledgers
P R O V I N G T H E A C C O U N T S P AYA B L E L E D G E R
Hobby Shack, Inc.
Schedule of Accounts Payable
November 30, 20--
American Paint 7 1 4 5 88
Ceramic Supply 4 1 4 7 20
Crown Distributing 1 7 8 7 00
Floral Designs 9 9 6 00
Gulf Craft Supply 9 0 0 00
Synthetic Arts 3 8 1 6 00
Total Accounts Payable 18 7 9 2 08
A controlling account balance in a general ledger must payable. A schedule of accounts payable is prepared after
equal the sum of all account balances in a subsidiary led- all entries in a journal are posted. The balance of Accounts
ger. Hobby Shack proves subsidiary ledgers at the end of Payable in the general ledger is $18,792.08. The total of
each month. the schedule of accounts payable is $18,792.08. Because
A listing of vendor accounts, account balances, and total the two amounts are the same, the accounts payable led-
amount due all vendors is called a schedule of accounts ger is proved.
GLOBAL PERSPECTIVE
T h e Int e r n a t i o n a l B u s i n e s s D a y
American business offices normally operate Monday Critical Thinking
through Friday, eight hours a day, with a 30- to 60-minute 1. What are some ways you
lunch break. This is not necessarily true in other countries, could reference time
however. In the People’s Republic of China, for example, zones if you had to
employees usually work Monday through Saturday, eight make frequent inter-
hours a day, with lunch from 1:00 p.m. to 2:00 p.m. national phone calls?
When doing business internationally, both time zone
2. If you work for
differences and cultural factors affecting the business day
a company with
must be taken into consideration. For example, in Spain,
offices and custom-
many businesses close at 2:00 p.m. so that employees may
ers all over the world,
eat lunch with their families. The office reopens at 5:00
how could that affect
p.m. and stays open until about 8:00 p.m. Spain is in a time
the way you schedule
zone that is five hours ahead of Eastern Standard Time
PHOTO: STOCKBYTE/GETTY IMAGES
projects?
(EST), the time zone along the eastern coast of the United
States. If doing business with a company in Spain, it would
not be a good idea to try to call at 9:00 a.m. EST because
the business might just be closing for lunch. A better time
to call Spain from the EST time zone would be between
noon and 3:00 p.m.
Posting to an Accounts Payable Ledger Lesson 11-1 305
End of Lesson
REVIEW TERMS REVIEW
subsidiary ledger
AUDIT YOUR UNDERSTANDING accounts payable ledger
accounts receivable
ledger
1. What is the relationship between a controlling account and a subsidiary
ledger? controlling account
2. In which column of the cash payments journal are the amounts that are schedule of accounts
posted individually to the accounts payable ledger? payable
WORK TOGETHER 111
Posting to an accounts payable ledger
Partial purchases, cash payments, and general journals for Graphics, Inc., are given in the Working Papers. Also given
in the Working Papers are accounts payable ledger account forms for selected accounts and a blank form for a sched-
ule of accounts payable. Your instructor will guide you through the following examples.
1. Start a new page for an accounts payable ledger account for Regal Designs. The account number is 240 and the
balance on October 1 of the current year is $877.00.
2. Post the Accounts Payable Credit entry on line 7 of the purchases journal to the accounts payable account for
Regal Designs.
3. Post the Accounts Payable Debit entry on line 15 of the cash payments journal to the accounts payable account
for Electro-Graphics Supply.
4. Post the credit entry on line 5 of the general journal to the accounts payable account for Electro-Graphics Supply.
Post the debit entry on line 6 of the general journal to the accounts payable account for Art and Things.
5. Prepare a schedule of accounts payable for Graphics, Inc., on October 31 of the current year for these selected
accounts. Accounts Payable balance in the general ledger on October 31 is $6,558.20. Save your work to complete
Work Together 11-2, 11-3, and 11-4.
ON YOUR OWN 111
Posting to an accounts payable ledger
Partial purchases, cash payments, and general journals for Amatera, Inc., are given in the Working Papers. Also given
in the Working Papers are accounts payable ledger account forms for selected accounts and a blank form for a sched-
ule of accounts payable. Work this problem independently.
1. Start a new page for an accounts payable ledger account for Swann Industries. The account number is 240 and
the balance on September 1 of the current year is $1,248.00.
2. Post the Accounts Payable Credit entry on line 11 of the purchases journal to the accounts payable account for
Swann Industries.
3. Post the Accounts Payable Debit entry on line 19 of the cash payments journal to the accounts payable account
for Miller Supply.
4. Post the credit entry on line 5 of the general journal to the accounts payable account for Miller Supply. Post the
debit entry on line 6 of the general journal to the accounts payable account for Franklin Mfg. Corp.
5. Prepare a schedule of accounts payable for Amatera, Inc., on September 30 of the current year for these selected
accounts. Accounts Payable balance in the general ledger on September 30 is $9,142.25. Save your work to com-
plete On Your Own 11-2, 11-3, and 11-4.
306 Chapter 11 Posting to General and Subsidiary Ledgers
L E S S O N
Posting to an Accounts
11-2 Receivable Ledger
ACCO U N T S R E C E I VA B L E L E D G E R A N D G E N E R A L
LE DG E R CONTROLLING ACCOUNT
60 SUBSIDIARY LEDGER
gton 1
Washin one page for each customer
c h o o ls 0
S 906.0
150
Village
Crafts 3,059.6
9
140
la y ti m e
P re
a
Childc 1,752.18
130
w
Fairvie
Church 1,908.0
0
120
b e rl and
Cum
Center 158.00
GENERAL LEDGER
110 one controlling account
y
Countr
Crafters 1,222.1
8
unts Receivable 1130
A c co
1,222.18 ⫹
158.00
1,908.00 9,006.05
1,752.18
3,059.69
906.00
UNTS 9,006.05 T
ACCO ABLE
C E IV
RE ER
LEDG
s
Asset
T T Y I M AG ES
S C/GE
TOD I
Hobby Shack assigns a customer number to each account PHO
in the accounts receivable ledger. A three-digit number is
used.
The customer number for Country Crafters is 110.
The first digit, 1, shows that the controlling account is
an asset, Accounts Receivable. The second and third dig-
its, 10, show the customer number assigned to Country
Crafters.
When the balance of a customer account in an accounts
receivable ledger is changed, the balance of
the controlling account, Accounts Receiv-
able, is also changed. The total of all
customer account balances in the
accounts receivable ledger equals
the balance of the controlling R E M E M B E R
account, Accounts Receivable.
The total amount to be
collected from all charge
customers is summarized in a
single general ledger account,
Accounts Receivable.
Posting to an Accounts Receivable Ledger Lesson 11-2 307
ACCO U N T S R E C E I VA B L E L E D G E R FO R M S
1. Customer Name 1 2. Customer Number 2
CUSTOMER Cumberland Center CUSTOMER NO. 120
DATE ITEM POST. DEBIT CREDIT DEBIT
REF. BALANCE
Hobby Shack uses a 3-column accounts receivable subsid- 2. Writing the customer number on the heading of the
iary account form. The accounts receivable account form ledger account.
is similar to the one used for the accounts payable led-
The customer name is obtained from the first sales
ger. Accounts receivable are assets, and assets have normal
invoice prepared for a customer. The customer number
debit balances. Therefore, the form used in the accounts
is assigned using the three-digit numbering system previ-
receivable ledger has a Debit Balance column instead of a
ously described.
Credit Balance column.
Some businesses record both the customer name
Procedures for opening customer accounts are simi-
and customer address on the ledger form. However, the
lar to those used for opening vendor accounts. Each new
address information is usually kept in a separate name and
account is opened by:
address file. This practice eliminates having to record the
1. Writing the customer name on the heading of the customer address on the ledger form each time a new led-
ledger account. ger page is started or the address changes.
G ES
IM A
E T TY F O R YO U R I N F O R M AT I O N
IO N /G
L V IS
G ITA F Y I
DI
When an account that is no
longer used is removed from the
accounts receivable ledger, that
customer number is available for
assignment to a new customer.
308 Chapter 11 Posting to General and Subsidiary Ledgers
POSTING FROM A SALES JOURNAL TO
A N ACCO U N T S R E C E I VA B L E L E D G E R
2. Journal Page
Number SALES JOURNAL PAGE 11
1 2 3
SALE POST. ACCOUNTS SALES SALES TAX
DATE ACCOUNT DEBITED RECEIVABLE PAYABLE
NO. REF. CREDIT
DEBIT CREDIT
20--
1 Nov. 3 Village Crafts 76 150 5 7 2 40 5 4 0 00 3 2 40 1
2 2
3 3
1. Date 1 2 3 5 5. Customer Number
CUSTOMER Village Crafts CUSTOMER NO. 150
DATE ITEM POST. DEBIT CREDIT DEBIT
REF. BALANCE
20--
Nov. 1 Balance ⻫ 3 1 8 00
3 S11 5 7 2 40 4 8 9 0 40
3. Debit 4. Account Balance
Each amount in a sales journal’s Accounts Receivable The controlling account in the general ledger, Accounts
Debit column is posted to the accounts receivable ledger. Receivable, is also increased by this entry. At the end of
Each amount is posted as a debit to the customer account the month, the journal’s Accounts Receivable Debit col-
listed in the Account Debited column. Hobby Shack posts umn total is posted to the controlling account, Accounts
frequently to the accounts receivable ledger so that each Receivable.
customer account will show an up-to-date balance.
POSTING FROM A SALES JOURNAL TO AN
S T E P S
ACCOUNTS RECEIVABLE LEDGER
1 Write the date, 3, in the Date column of the account.
2 Write the sales journal page number, S11, in the Post. Ref. column of the account. S is the abbreviation
used for the sales journal.
3 Write the debit amount, $572.40, in the Debit column of the customer account.
4 Add the amount in the Debit column to the previous balance in the
Debit Balance column ($318.00 ⫹ $572.40 ⫽ $890.40). Write the new
account balance, $890.40, in the Debit Balance column.
F O R YO U R I N F O R M AT I O N
5 Write the customer number, 150, in the Post. Ref. column of the
sales journal. The customer number shows that the posting for this F Y I
entry is complete. Individual amounts in the
Accounts Receivable Debit
column are posted frequently
to customer accounts in the
accounts receivable ledger.
Posting to an Accounts Receivable Ledger Lesson 11-2 309
POSTING FROM A CASH RECEIPTS JOURNAL
T O A N ACCO U N T S R E C E I VA B L E L E D G E R
1. Date 2. Journal Page
Number
CASH RECEIPTS JOURNAL PAGE 11
1 2 3 4 5 6 7
DOC. POST. GENERAL ACCOUNTS SALES SALES TAX SALES CASH
DATE ACCOUNT TITLE NO. REF. RECEIVABLE CREDIT PAYABLE DISCOUNT DEBIT
DEBIT CREDIT CREDIT CREDIT DEBIT
5 15 Fairview Church R93 130 3 8 1 60 3 8 1 60 5
6 6
7
3 7
5
1 2
3. Credit
CUSTOMER Fairview Church CUSTOMER NO. 130
DATE ITEM POST. DEBIT CREDIT DEBIT
20--
REF. BALANCE
5. Customer Number
Nov. 1 Balance ⻫ 3 8 1 60
5 S11 1 9 0 8 00 2 2 8 9 60
15 CR11 3 8 1 60 1 9 0 8 00
4
4. Account Balance
Each entry in the Accounts Receivable Credit column accounts receivable ledger. Hobby Shack posts frequently
affects the customer named in the Account Title column. to the accounts receivable ledger so that each customer
Each amount listed in the Accounts Receivable Credit account will show an up-to-date balance.
column is posted to the proper customer account in the
POSTING FROM A CASH RECEIPTS JOURNAL
S T E P S
TO AN ACCOUNTS RECEIVABLE LEDGER
1 Write the date, 15, in the Date column of the account. A GES
ETTY IM
T E /G
C KBY
S TO
2 Write the cash receipts journal page number, CR11, in the Post. Ref. column
of the account. CR is the abbreviation for the cash receipts journal.
3 Write the credit amount, $381.60, in the Credit column of the customer
account.
4 Subtract the amount in the Credit column from the previous
balance in the Debit Balance column ($2,289.60 ⫺ $381.60 ⫽
$1,908.00). Write the new balance, $1,908.00, in the Debit
Balance column.
5 Write the customer number, 130, in the Post. Ref.
column of the cash receipts journal.
310 Chapter 11 Posting to General and Subsidiary Ledgers
POSTING A CREDIT ENTRY FROM A GENER AL JOURNAL
T O A N ACCO U N T S R E C E I VA B L E L E D G E R
GENERAL JOURNAL PAGE 11 2. Journal Page
Number
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
12 11 Sales Returns and Allowances CM41 5 8 50 12
13 Sales Tax Payable 3 51 13
14 Accounts Rec./Village Crafts 150 6 2 01 14
3. Credit
1. Date 2 5
1 3
CUSTOMER Village Crafts CUSTOMER NO. 150 5. Customer
Number
DATE ITEM POST. DEBIT CREDIT DEBIT
REF. BALANCE
20--
Nov. 1 ⻫ 3 1 8 00
3 S11 5 7 2 40 8 9 0 40
11 S11 2 5 4 9 30 3 4 3 9 70
11 G11 6 2 01 3 3 7 7 69
4
4. Account Balance
Entries in a general journal may affect account balances in from a general journal to a general ledger is described on
a general ledger and an accounts receivable ledger. Posting pages 317–318.
POSTING A CREDIT ENTRY FOR SALES RETURNS
S T E P S AND ALLOWANCES FROM A GENERAL JOURNAL
TO AN ACCOUNTS RECEIVABLE LEDGER
1 Write the date, Nov. 11, in the Date column of the customer account. AM P U
BLI S H I N G / G E T T Y I MA G E S
IN G R
2 Write the general journal page number, G11, in the Post. Ref. column
of the account. The abbreviation G11 means page 11 of the gen-
eral journal.
3 Write the amount, $62.01, in the Credit column of the
customer account.
4 Subtract the amount in the Credit column from
the previous balance in the Debit Balance col-
umn ($3,439.70 ⫺ $62.01 ⫽ $3,377.69). Write
the new balance, $3,377.69, in the Debit
Balance column.
5 Write the customer number, 150, to the
right of the diagonal line in the Post.
Ref. column of the general journal.
Posting to an Accounts Receivable Ledger Lesson 11-2 311
CO M P L E T E D ACCO U N T S R E C E I VA B L E L E D G E R
CUSTOMER Country Crafters CUSTOMER NO. 110
DATE ITEM POST. DEBIT CREDIT DEBIT
REF. BALANCE
20--
Nov. 1 Balance ⻫ 2 1 6 2 40
6 CR11 2 1 6 2 40 __________
11 S11 7 6 8 50 7 6 8 50
29 S11 4 5 3 68 1 2 2 2 18
CUSTOMER Cumberland Center CUSTOMER NO. 120
DATE ITEM POST. DEBIT CREDIT DEBIT
REF. BALANCE
20--
Nov. 1 Balance ⻫ 4 1 8 9 20
7 CR11 1 2 0 0 00 2 9 8 9 20
24 S11 1 5 8 00 3 1 4 7 20
25 CR11 2 9 8 9 20 1 5 8 00
CUSTOMER Fairview Church CUSTOMER NO. 130
DATE ITEM POST. DEBIT CREDIT DEBIT
REF. BALANCE
20--
Nov. 1 Balance ⻫ 3 8 1 60
5 S11 1 9 0 8 00 2 2 8 9 60
15 CR11 3 8 1 60 1 9 0 8 00
CUSTOMER Playtime Childcare CUSTOMER NO. 140
DATE ITEM POST. DEBIT CREDIT DEBIT
REF. BALANCE
20--
Nov. 1 Balance ⻫ 1 1 4 4 80
16 S11 1 7 5 2 18 2 8 9 6 98
18 CR11 1 1 4 4 80 1 7 5 2 18
CUSTOMER Village Crafts CUSTOMER NO. 150
DATE ITEM POST. DEBIT CREDIT DEBIT
REF. BALANCE
20--
Nov. 1 Balance ⻫ 3 1 8 00
3 S11 5 7 2 40 8 9 0 40
11 S11 2 5 4 9 30 3 4 3 9 70
11 G11 6 2 01 3 3 7 7 69
19 CR11 3 1 8 00 3 0 5 9 69
CUSTOMER Washington Schools CUSTOMER NO. 160
DATE ITEM POST. DEBIT CREDIT DEBIT
REF. BALANCE
20--
Nov. 1 Balance ⻫ 2 5 4 4 00
9 S11 5 7 2 00 3 1 1 6 00
12 CR11 2 5 4 4 00 5 7 2 00
24 S11 3 3 4 00 9 0 6 00
Hobby Shack’s accounts receivable ledger has been posted for the month of November.
312 Chapter 11 Posting to General and Subsidiary Ledgers
P R OV I N G T H E ACCO U N T S R E C E I VA B L E L E D G E R
Hobby Shack, Inc.
Schedule of Accounts Receivable
November 30, 20--
Country Crafters 1 2 2 2 18
Cumberland Center 1 5 8 00
Fairview Church 1 9 0 8 00
Playtime Childcare 1 7 5 2 18
Village Crafts 3 0 5 9 69
Washington Schools 9 0 6 00
Total Accounts Receivable 9 0 0 6 05
A listing of customer accounts, account balances, and balance of Accounts Receivable in the general ledger is
total amount due from all customers is called a schedule $9,006.05. The total of the schedule of accounts receiv-
of accounts receivable. A schedule of accounts receivable able is $9,006.05. Because the two amounts are the same,
is prepared after all entries in a journal are posted. The the accounts receivable ledger is proved.
FINANCIAL LITERACY
A c c o u nt R e c o n c i l i a t i o n s
“I don’t ever reconcile my accounts. I just trust the bank.” This will make it easier to understand the
Many people feel this way about reconciling checking corrections if you need to refer to them
accounts. Yet mistakes can be made—even by the bank. in the future.
Savings accounts as well as checking accounts should
be reconciled regularly. Internet account access makes it Activities
possible to reconcile your accounts frequently. This can 1. Survey 10 people to
uncover errors more quickly—therefore preventing over- determine if they regu-
draft charges that otherwise may be applied. larly perform an account
Many banks include a reconciliation form on the back reconciliation. If so, ask
of the monthly statements sent to each account owner. them how often they
The forms give directions for completing the reconcilia- find an error that they
tion. The steps are: (1) Go through the statement, marking made and how often
deposits and checks that have cleared the bank and record- they find an error made
ing any charges and/or automatic withdrawals/deposits by their bank. Report your
that are listed on the statement. (2) List the account bal- findings to your class in a
ance as printed on the bank statement. (3) Add any depos-
PHOTO: PHOTODISC/GETTY IMAGES
presentation.
its made that have not cleared the bank. (4) Subtract any
2. Interview a bank employee who
checks that have been written but have not cleared the
helps clients with bank reconciliations.
bank. (5) Verify that the new subtotal equals the balance
Ask him or her what are the most common errors
as recorded in your records.
made by the account owner and by the bank. Summa-
If you find errors in your records, make the necessary
rize your findings in a written report.
corrections and clearly note the reason for the correction.
Posting to an Accounts Receivable Ledger Lesson 11-2 313
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. To which accounts are the separate amounts in the sales journal posted
individually? TERM REVIEW
2. In which column of the cash receipts journal are the amounts that are
posted individually to the accounts receivable ledger? schedule of accounts
3. What accounts are listed on a schedule of accounts receivable? receivable
WORK TOGETHER 112
Posting to an accounts receivable ledger
Partial sales and cash receipts journals for Graphics, Inc. are given in the Working Papers. Also given in the Working
Papers are one blank accounts receivable ledger account form and a blank form for preparation of a schedule of
accounts receivable. You will also need the general journal from Work Together 11-1. Your instructor will guide you
through the following examples.
1. Start a new page for an accounts receivable ledger account for Brandee Sparks. The account number is 140, and
the balance for October 1 of the current year is $212.00.
2. Post the Accounts Receivable Debit entry on line 5 of the sales journal to the accounts receivable account for
Brandee Sparks.
3. Post the Accounts Receivable Credit entry on line 9 of the cash receipts journal to the accounts receivable
account for Alfredo Lopez.
4. Post the credit entry on line 3 of the general journal to the accounts receivable account for David Bishop.
5. Prepare a schedule of accounts receivable for Graphics, Inc., on October 31 of the current year. Accounts Receiv-
able balance in the general ledger on October 31 is $2,530.22. Save your work to complete Work Together 11-4.
ON YOUR OWN 112
Posting to an accounts receivable ledger
Partial sales and cash receipts journals for Amatera, Inc. are given in the Working Papers. Also given in the
Working Papers are one blank accounts receivable ledger account form and a blank form for preparation of
a schedule of accounts receivable. You will also need the general journal from On Your Own 11-1. Work this
problem independently.
1. Start a new page for an accounts receivable ledger account for Davis Sullivan. The account number is 140,
and the balance for September 1 of the current year is $564.00.
2. Post the Accounts Receivable Debit entry on line 8 of the sales journal to the accounts receivable account for
Davis Sullivan.
3. Post the Accounts Receivable Credit entry on line 21 of the cash receipts journal to the accounts receivable
account for Harris Evans.
4. Post the credit entry on line 3 of the general journal to the accounts receivable account for Mary Burgin.
5. Prepare a schedule of accounts receivable for Amatera, Inc., on September 30 of the current year. Accounts
Receivable balance in the general ledger on September 30 is $5,986.80. Save your work to complete On Your
Own 11-4.
314 Chapter 11 Posting to General and Subsidiary Ledgers
L E S S O N
Posting from Journals
11-3 to a General Ledger
S TA R T I N G A N E W P A G E F O R A N A C C O U N T
IN A GENERAL LEDGER
1. Account Title 1 2. Account Number 2
ACCOUNT Cash ACCOUNT NO. 1110
3. Date DATE ITEM POST. DEBIT CREDIT
BALANCE
REF. DEBIT CREDIT
20--
3 Nov. 1 Balance ⻫ 17 6 4 7 44
4 5 6
4. Word Balance 5. Check Mark 6. Balance
The number of entries that may be recorded on each On November 1, Hobby Shack prepared a new page for
general ledger account form depends on the number of Cash in the general ledger because the existing page was
lines provided. When all lines have been used, a new page full. On that day, the account balance was $17,647.44.
is prepared. The account name, account number, and
account balance are recorded on the new page. I M AG ES
F / GET TY
HO ICE R
ER ’S C
R A PH
OG
OT
PH
STARTING A
NEW PAGE FOR A
S T E P S
GENERAL LEDGER
ACCOUNT
1 Write the account title, Cash, at the top of the
page.
2 Write the account number, 1110, at the top of
the page.
3 Write the date, 20--, Nov. 1, in the Date column.
4 Write the word Balance in the Item column.
5 Place a check mark in the Post. Ref. column
to show that the amount has been carried
forward from a previous page rather than
posted from a journal.
6 Write the balance, $17,647.44, in the
Balance Debit column.
Posting from Journals to a General Ledger Lesson 11-3 315
POSTING FROM THE GENERAL AMOUNT COLUMNS OF
A C A S H P AY M E N T S J O U R N A L T O A G E N E R A L L E D G E R
2. Journal Page Number
CASH PAYMENTS JOURNAL PAGE 21
1 2 3 4 5
CK. POST. GENERAL ACCOUNTS PURCHASES CASH
DATE ACCOUNT TITLE NO. REF. PAYABLE DISCOUNT
DEBIT CREDIT CREDIT
DEBIT CREDIT
1
20--
10 Nov. 7 Purchases 301 5110 6 0 0 00 6 0 0 00 10
11 11
12 12
13 13
1. Date 1 2 3. Debit 3 5 5. Account Number
ACCOUNT Purchases ACCOUNT NO. 5110
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Nov. 1 Balance ⻫ 154 8 4 0 92
7 CP21 6 0 0 00 4 1554 4 0 92
4. Account Balance
Amounts in cash payments journal entries are recorded account written in the Account Title column. However,
in either general amount columns or special amount col- only the monthly total of each special amount column is
umns. Each amount in the General columns of a cash pay- posted to a general ledger account.
ments journal is posted individually to the general ledger
POSTING FROM THE GENERAL AMOUNT COLUMNS OF
S T E P S
A CASH PAYMENTS JOURNAL TO A GENERAL LEDGER
1 Write the date, 7, in the Date column of the account.
2 Write the journal page number, CP21, in the Post. Ref. column of the account.
The abbreviation CP21 means page 21 of the cash payments journal.
3 Write the debit amount, $600.00, in the account’s Debit column. (A credit
amount would be written in the Credit column.)
4 Add the amount in the Debit column to the previous balance in the
Balance Debit column ($600.00 ⫹ $154,840.92 ⫽ $155,440.92). Write
the new account balance, $155,440.92, in the Balance Debit column
R E M E M B E R
of the account.
Separate amounts listed in special
5 Write the general ledger account number, 5110, in the Post. Ref. amount columns of a special
column of the cash payments journal. journal are not posted individually
to the general ledger—only
the totals are posted.
316 Chapter 11 Posting to General and Subsidiary Ledgers
POSTING A DEBIT ENTRY FROM A GENER AL
JOURNAL TO A GENERAL LEDGER
2. Journal Page Number
GENERAL JOURNAL PAGE 11
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
20--
1 Nov. 6 Supplies—Store M52 1150 2 1 0 00 1
2 Accts. Pay./Gulf Craft Supply 250 2 1 0 00 2
3 3
4 4
1. Date 1 2 3. Debit 3 5 5. Account Number
ACCOUNT Supplies—Store ACCOUNT NO. 1150
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Nov. 1 Balance ⻫ 5 9 2 8 00
6 G11 2 1 0 00 4 6 1 3 8 00
4. Account Balance
POSTING A DEBIT AMOUNT FROM A GENERAL JOURNAL
S T E P S
TO A GENERAL LEDGER
1 Write the date, 6, in the Date column of the account.
2 Write the general journal page number, G11, in the Post. Ref. column of the account. The abbreviation G11
means page 11 of the general journal.
3 Write the amount, $210.00, in the Debit column of the account. ES
AG
Y IM
TT
4 Calculate and write the new account balance, $6,138.00, in the Balance Debit column GE
N/
S IO
VI
of the account. TA
L
GI
DI
5 Write the general ledger account number, 1150, in the Post. Ref. column of the
general journal.
F O R YO U R I N F O R M AT I O N
F Y I
Accuracy is very important in
accounting. Following the proper
sequence of steps for posting
increases the accuracy of the task.
Posting from Journals to a General Ledger Lesson 11-3 317
POSTING A CREDIT ENTRY FROM A
GENERAL JOURNAL TO A GENERAL LEDGER
2. Journal Page Number
GENERAL JOURNAL PAGE 11
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
20--
1 Nov. 6 Supplies—Store M52 1150 2 1 0 00 1
2110
2 Accts. Pay./Gulf Craft Supply 250 2 1 0 00 2
3 3
4 4
5 3
1. Date 1 2 5. Account Number 3. Credit
ACCOUNT Accounts Payable ACCOUNT NO. 2110
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Nov. 1 Balance ⻫ 129 8 4 00
6 G11 2 1 0 00 4 131 9 4 00
4. Account Balance
Transactions recorded in a general journal can affect both The diagonal line in the Post. Ref. column allows the
subsidiary ledger and general ledger accounts. Buying posting reference of both the general ledger and subsidiary
supplies on account, for example, results in a credit to ledger account to be recorded.
Accounts Payable. The purchase should also be recorded
as a credit in the subsidiary ledger account of the vendor,
Gulf Craft Supply.
POSTING A CREDIT AMOUNT FROM A GENERAL JOURNAL
S T E P S
TO A GENERAL LEDGER
1 Write the date, 6, in the Date column of the account.
2 Write the general journal page number, G11, in the Post. Ref. column
of the account.
3 Write the amount, $210.00, in the Credit column of the account.
4 Calculate and write the new account balance, $13,194.00, in the SMALL BUSINESS
Balance Credit column of the account.
S P O T L I G H T
5 Write the general ledger account number, 2110, to the left of the
diagonal line in the Post. Ref. column of the general journal. The The major ways of starting a
vendor account number, 250, written to the right of the diagonal new small business are:
line, was described on page 303. 1. Buy an existing business.
2. Buy a franchise.
3. Start a business from
scratch.
318 Chapter 11 Posting to General and Subsidiary Ledgers
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. Which amounts in a general journal are posted individually?
2. List the five steps for posting to a general ledger account.
WORK TOGETHER 113
Posting to a general ledger
Use the partial cash payments and general journals from Work Together 11-1. General ledger account forms are
given in the Working Papers. Your instructor will guide you through the following examples.
1. Start a new page for a general ledger account for Supplies—Office. The account number is 1145, and the balance
for October 1 of the current year is $3,824.00.
2. Post the October 19 General Debit entry of the cash payments journal to the appropriate general ledger account.
3. Post the October 12 general journal entry to the appropriate general ledger accounts.
4. Post the October 26 general journal entry to the appropriate general ledger accounts.
5. Post the October 28 general journal entry to the appropriate general ledger accounts. Save the general ledger
accounts to complete Work Together 11-4.
ON YOUR OWN 113
Posting to a general ledger
Use the partial cash payments and general journals from On Your Own 11-1. General ledger account forms are given
in the Working Papers. Work this problem independently.
1. Start a new page for a general ledger account for Supplies—Store. The account number is 1150, and the balance
for September 1 of the current year is $3,158.00.
2. Post the September 21 General Debit entry of the cash payments journal to the appropriate general ledger
account.
3. Post the September 15 general journal entry to the appropriate general ledger accounts.
4. Post the September 27 general journal entry to the appropriate general ledger accounts.
5. Post the September 29 general journal entry to the appropriate general ledger accounts. Save the general ledger
accounts to complete On Your Own 11-4.
Posting from Journals to a General Ledger Lesson 11-3 319
L E S S O N
Posting Special Journal Totals
11-4 to a General Ledger
P O S T I N G T O TA L S O F A S A L E S J O U R N A L
TO A GENERAL LEDGER
2. Journal Page SALES JOURNAL PAGE 11
Number 1 2 3
SALE POST. ACCOUNTS SALES SALES TAX
DATE ACCOUNT DEBITED RECEIVABLE PAYABLE
NO. REF. CREDIT
DEBIT CREDIT
9 29 Country Crafters 84 110 4 5 3 68 4 2 8 00 2 5 68 9
10 30 Totals 9 0 6 8 06 8 7 2 3 00 3 4 5 06 10
11 (1130) (4110) (2145) 11
1. Date 1 2 3 5 5 5 5. Account
Number
ACCOUNT Accounts Receivable ACCOUNT NO. 1130
3. Column Total
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Nov. 1 Balance ⻫ 10 7 5 0 00
30 S11 9 0 6 8 06 4 19 8 1 8 06
4. Account
Sales 4110
ACCOUNT ACCOUNT NO.
Balance
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Nov. 1 Balance ⻫ 3 351 6 6 3 70
1 30 2 S11 8 7 2 3 00 360 3 8 6 70
4
ACCOUNT Sales Tax Payable ACCOUNT NO. 2145
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Nov. 1 Balance ⻫ 1 7 2 6 10
15 CP21 1 7 2 6 10 3 ——— ———
1 30 2 S11 3 4 5 06 3 4 5 06
4
POSTING EACH SPECIAL AMOUNT COLUMN
S T E P S
TOTAL OF A SALES JOURNAL
1 Write the date, 30, in the Date columns of the accounts.
2 Write the sales journal page number, S11, in the Post. Ref. columns of the accounts.
3 For each column and account, write the column total in the Debit or Credit column of the account.
4 For each account, calculate and write the new account balance in the Balance Debit or Credit column.
5 In the sales journal, write the general ledger account number in parentheses below each column total.
320 Chapter 11 Posting to General and Subsidiary Ledgers
P O S T I N G T H E T O TA L O F A P U R C H A S E S
JOURNAL TO A GENERAL LEDGER
2. Journal Page Number
PURCHASES JOURNAL PAGE 11
DATE ACCOUNT CREDITED PURCH. POST. PURCHASES DR.
NO. REF. ACCTS. PAY. CR.
5 20 American Paint 87 210 3 3 7 7 88 5
6 30 Total 17 1 4 8 08 6
7 (5110)(2110) 7
8 8
9 9
10 10
11 11
1. Date 1 2 3 5 5. Account Number
ACCOUNT Purchases ACCOUNT NO. 5110
3. Column Total
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
7 CP21 6 0 0 00 155 4 4 0 92
12 G11 3 0 0 00 155 7 4 0 92
30 P11 17 1 4 8 08 172 8 8 9 00
4 4. Account
5 Balance
ACCOUNT Accounts Payable ACCOUNT NO. 2110
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
28 G11 2 5 2 00 19 6 2 8 00
1 30 2 P11 3 17 1 4 8 08 36 7 7 6 08
4
A purchases journal is totaled and ruled at the end of each the purchases journal is then posted to two general ledger
month as described in Chapter 9. The total amount of accounts, Purchases and Accounts Payable.
POSTING THE TOTAL OF A PURCHASES JOURNAL
S T E P S
TO THE TWO GENERAL LEDGER ACCOUNTS
1 Write the date, 30, in the Date columns of the accounts.
2 Write the purchases journal page number, P11, in the Post. Ref. columns of the accounts. The abbreviation P11
means page 11 of the purchases journal.
3 For each account, write the purchases journal column total, $17,148.08, in the Debit or Credit column.
4 For each account, calculate and write the new account balance in the Balance Debit or Credit column.
5 Return to the purchases journal and write the purchases general ledger account number, (5110), and the accounts
payable general ledger account number, (2110), in parentheses below the column total.
Posting Special Journal Totals to a General Ledger Lesson 11-4 321
P O S T I N G S P E C I A L A M O U N T C O L U M N T O TA L S O F A
CASH RECEIPTS JOURNAL TO A GENERAL LEDGER
2. Journal Page Number
CASH RECEIPTS JOURNAL PAGE 11
1 2 3 4 5 6 7
DOC. POST. GENERAL ACCOUNTS SALES SALES TAX SALES CASH
DATE ACCOUNT TITLE RECEIVABLE PAYABLE DISCOUNT
NO. REF. DEBIT CREDIT CREDIT DEBIT
CREDIT CREDIT DEBIT
22 30 ⻫ TS38 ⻫ 1 3 8 0 00 8 2 80 1 4 6 2 80 22
23 30 Totals 9 5 4 0 00 275 3 2 50 1 6 4 8 80 5 2 50 38 6 6 8 80 23
24 (1130) (4110) (2145) (4120) (1110) 24
25 5 5 5 5 25
1. Date 1 2 5 5. Account Number
ACCOUNT Accounts Receivable ACCOUNT NO. 1130
POST. BALANCE
DATE ITEM REF. DEBIT CREDIT
DEBIT CREDIT 3. Column Total
20--
Nov. 1 Balance ⻫ 10 7 4 0 00
30 S11 9 0 6 8 06 19 8 0 8 06
30 CR11 9 5 4 0 00 10 2 6 8 06
4
ACCOUNT Sales ACCOUNT NO. 4110
4. Account Balance
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Nov. 1 Balance ⻫ 351 6 6 3 70
30 S11 8 7 2 3 00 360 3 8 6 70
1 30 2 CR11 3 27 5 3 2 50 4 387 9 1 9 20
ACCOUNT Sales Tax Payable ACCOUNT NO. 2145
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Nov. 1 Balance ⻫ 1 7 2 6 10
15 CP21 1 7 2 6 10 ——— ———
30 S11 3 4 5 06 3 4 5 06
1 30 2 CR11 3 1 6 4 8 80 4 1 9 9 3 86
ACCOUNT Sales Discount ACCOUNT NO. 4120
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Nov. 1 Balance ⻫ 1 6 8 69
1 30 2 CR11 5 2 50 3 2 2 1 19 4
ACCOUNT Cash ACCOUNT NO. 1110
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Nov. 1 Balance ⻫ 17 6 4 7 44
1 30 2 CR11 38 6 6 8 80 3 56 3 1 6 24 4
322 Chapter 11 Posting to General and Subsidiary Ledgers
At the end of each month, equality of debits and credits receipts journal is ruled as described in Chapter 10. The
is proved for a cash receipts journal. Cash is then proved total of each special amount column is then posted to the
as described in Chapter 10. After cash is proved, the cash corresponding general ledger account.
POSTING EACH SPECIAL AMOUNT COLUMN TOTAL
S T E P S
OF A CASH RECEIPTS JOURNAL
1 Write the date, 30, in the Date columns of the accounts.
2 Write the cash receipts journal page number, CR11, in the Post. Ref. columns of the accounts. The abbreviation CR11
means page 11 of the cash receipts journal.
3 For each special amount column and account, write the special amount column total in the Debit or Credit column
of the account.
4 For each account, calculate and write the new account balance in the Balance Debit or Credit column.
5 Return to the cash receipts journal and write the general ledger account number in parentheses below each special
amount column total.
C U LT U R A L D I V E R S I T Y
Ti m e l e s s Tool s
Throughout history, people of different cultures and civi- when necessary. Incan record-
lizations have devised tools for counting, calculating, and keepers used small ropes of
recordkeeping. different colors and sizes
The Jibaro Indians living in the Amazon rain forest in and knotted and joined
South America use the most basic counting tools of all— them in different ways to
their fingers. Jibaros use phrases to express the numbers help remember financial
five and ten that translate to “I have finished one hand” data. These ropes, called
and “I have finished both hands.” quipu, were one of the
A more complex device of ancient origin is the abacus. earliest means of record-
The abacus is a calculating device that developed in sev- ing transactions.
eral different cultures. The Babylonians in Asia Minor had Accounting tools have
an early form of abacus, as did the Egyptians in northern changed over the course of
Africa. The first abacus was known in China as early as history. They will continue to
the 6th century B.C. This abacus was a flat piece of wood evolve with future advances in
divided into squares. Its use spread to the rest of the Asian technology.
world.
The abacus may be used to add, subtract, multiply, and Critical Thinking
PHOTO:PHOTODISC/GETTY IMAGES
divide. Twelfth-century Chinese mathematicians used the 1. What tools do most accounting workers today use for
abacus to solve algebraic equations. Today some highly calculations?
skilled people, particularly of Asian descent, still use the
2. Discuss whether the use of modern calculating tools
abacus for calculations.
results in the creation of more complex accounting
Recordkeepers in the Incan civilization (in present-day
transactions.
Peru) memorized business transactions and recited them
Posting Special Journal Totals to a General Ledger Lesson 11-4 323
P O S T I N G S P E C I A L A M O U N T C O L U M N T O TA L S O F A
C A S H P AY M E N T S J O U R N A L T O A G E N E R A L L E D G E R
2. Journal Page Number
CASH PAYMENTS JOURNAL PAGE 22
1 2 3 4 5
CK. POST. GENERAL ACCOUNTS PURCHASES CASH
DATE ACCOUNT TITLE PAYABLE DISCOUNT
NO. REF. DEBIT CREDIT CREDIT
DEBIT CREDIT
20-
1 Nov. 20 Brought Forward ⻫ 13 2 8 1 80 6 9 5 38 12 2 4 0 00 8 2 52 24 7 4 3 90 1
8 29 Advertising Expense 319 1 5 0 0 00 1 5 0 0 00 8
9 30 Floral Designs 320 1 6 5 0 00 3 3 00 1 6 1 7 00 9
10 30 Rent Expense 321 6 0 0 00 6 0 0 00 10
11 30 Totals 16 4 6 2 99 1 3 9 0 75 17 9 8 4 00 1 5 4 84 32 9 0 1 40 11
12 (⻫) (⻫) (2110) (5120) (1110) 12
13 5 5 13
1. Date 2 2 3 5
5. Account Number
ACCOUNT Accounts Payable ACCOUNT NO. 2110
3. Column Total
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
30 P11 17 1 4 8 08 36 7 7 6 08
30 CP22 17 9 8 4 00 4 18 7 9 2 08
4. Account Balance
ACCOUNT Purchases Discount ACCOUNT NO. 5120
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
Oct. 31 CP11 1 2 5 25 1 0 7 5 25
Nov. 30 1 2 CP22 1 5 4 84 3 1 2 3 0 09 4
ACCOUNT Cash ACCOUNT NO. 1110
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20-
Nov. 1 Balance ⻫ 17 6 4 7 44
30 CR11 38 6 6 8 80 56 3 1 6 24
1 30 2 CP22 3 32 9 0 1 40 23 4 1 4 84 4
The cash payments journal is totaled and ruled at the end The totals of the General amount columns are not
of each month as described in Chapter 9. The total of each posted. Each amount in these columns was posted indi-
special column is then posted to a general ledger account. vidually to a general ledger account. To indicate that these
The total of each special amount column is posted to the totals are not to be posted, a check mark is placed in
account named in the journal’s column headings. parentheses below each column total.
324 Chapter 11 Posting to General and Subsidiary Ledgers
POSTING THE TOTALS OF EACH SPECIAL AMOUNT
S T E P S
COLUMN TO THE GENERAL LEDGER ACCOUNT
1 Write the date, 30, in the Date columns of the accounts.
2 Write the cash payments journal page number, CP22, in the Post. Ref. columns of the accounts.
3 For each special amount column and account, write the special amount column total in the Debit or Credit column
of the account.
4 For each account, calculate and write the new account balance in the Balance Debit or Credit column.
5 Return to the cash payments journal and write the general ledger account number in parentheses below each
special amount column total.
ORDER OF POSTING FROM SPECIAL JOURNALS
Items affecting customer or vendor accounts are posted The journals should be posted in the following order:
periodically during the month. Hobby Shack posts fre-
1. Sales journal.
quently so that the balances of the subsidiary ledger
2. Purchases journal.
accounts will be up to date. Since general ledger account
3. General journal.
balances are needed only when financial statements are
4. Cash receipts journal.
prepared, the general ledger accounts are posted less often
5. Cash payments journal.
during the month. All items, including the totals of spe-
cial columns, must be posted before a trial balance is pre-
pared. Hobby Shack posts special amount column totals DIGITAL V
I S IO N
/G E T
TY I
monthly. MA
G ES
F O R YO U R I N F O R M AT I O N
F Y I
It is important to post the journals
in the proper sequence. However,
sometimes the entries will be out of
chronological order. For example,
if subsidiary accounts are posted
for the week ended June 24, it is
possible for a June 23 entry from
the sales journal to appear
before a June 20 entry from
the cash receipts journal.
Posting Special Journal Totals to a General Ledger Lesson 11-4 325
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. For which columns of a special journal are the column totals posted to
the general ledger?
2. In what order should special journals be posted to the general ledger?
WORK TOGETHER 114
Posting special journal totals to a general ledger
Use the journals that were used for Work Together 11-1 and 11-2. General ledger accounts are given in the Working
Papers. Your instructor will guide you through the following examples.
1. Post the October 31 column totals of the sales journal.
2. Post the October 31 column total of the purchases journal.
3. Post the October 31 column totals of the cash receipts journal.
4. Post the October 31 column totals of the cash payments journal.
ON YOUR OWN 114
Posting special journal totals to a general ledger
Use the journals that were used for On Your Own 11-1 and 11-2. General ledger accounts are given in the Working
Papers. Work this problem independently.
1. Post the September 30 column totals of the sales journal.
2. Post the September 30 column total of the purchases journal.
3. Post the September 30 column totals of the cash receipts journal.
4. Post the September 30 column totals of the cash payments journal.
326 Chapter 11 Posting to General and Subsidiary Ledgers
L E S S O N
Correcting Errors in
11-5 Subsidiary Ledger Accounts
JOURNALIZING CORRECTING ENTRIES
AFFEC TING CUSTOME R ACCOUNTS
2. Correct Customer Name 4. Debit
GENERAL JOURNAL PAGE 12
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
1. Date
2
15 1 10 Cumberland Center M56 4 1 2 00 4 15
16 Country Crafters 3 4 1 2 00 16
5
17 6 17
18 18
5. Incorrectly Charged 3. Memorandum 6. Credit
Customer Name Number
Errors may be made in recording amounts in subsidiary
ledgers that do not affect the general ledger controlling ACCOUNTS RECEIVABLE LEDGER
account. For example, a sale on account may be recorded Cumberland Center
to the wrong customer in the sales journal. The column Dec. 10 412.00
total posted from the sales journal to the general ledger is
correct. The accounts receivable account shows the cor- Country Crafters
rect balance. However, two of the customer accounts in Dec. 3 412.00 Dec. 10 412.00
the accounts receivable ledger show incorrect balances.
December 10. Discovered that a sale on account JOURNALIZING
to Cumberland Center on December 3 was CORRECTING
incorrectly charged to the account of Country S T E P S ENTRIES AFFECTING
Crafters, $412.00. Memorandum No. 56. CUSTOMER
ACCOUNTS
The correcting entry recorded in the general journal
1 Write the date, 10, in the Date column of a gen-
involves only subsidiary ledger accounts. Cumberland eral journal.
Center’s account is debited for $412.00 to record the
charge sale in the correct account. Country Crafters’ 2 Write the name of the correct customer, Cumber-
account is credited for $412.00 to cancel the incorrect land Center, in the Account Title column.
entry. 3 Write the memorandum number, M56, in the
Doc. No. column.
4 Write the amount, $412.00, in the Debit column.
5 Indent and write the name of the incorrectly
charged customer, Country Crafters, on the next
line in the Account Title column.
6 Write the amount, $412.00, in the Credit column.
Correcting Errors in Subsidiary Ledger Accounts Lesson 11-5 327
POSTING CORRECTING ENTRIES AFFECTING
CUSTOME R ACCOUNTS
2. Journal Page Number
GENERAL JOURNAL PAGE 12
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
15 10 Cumberland Center M56 120 4 1 2 00 15
16 Country Crafters 110 4 1 2 00 16
17 17
18 18
1. Date 1 2 5. Account Number 5 3 3. Debit or Credit
Amounts
CUSTOMER Country Crafters CUSTOMER NO. 110
POST. DEBIT
DATE ITEM DEBIT CREDIT
REF. BALANCE
20--
Dec. 1 Balance ⻫ 1 2 2 2 18
3 S12 4 1 2 00 1 6 3 4 18
10 G12 4 1 2 00 1 2 2 2 18
4
CUSTOMER Cumberland Center CUSTOMER NO. 120 5
POST. DEBIT
4. Account
DATE ITEM DEBIT CREDIT
REF. BALANCE Balance
20--
Dec. 1 Balance ⻫ 1 5 8 00
10 G12 4 1 2 00 5 7 0 00
1 2 3 4
With one exception, the steps for posting a journal entry account. Because the transaction does not affect a general
to correct customer accounts are the same as posting other ledger account, only a reference to the subsidiary ledger
transactions to subsidiary ledgers. However, a diagonal account is entered in the Post. Ref. column of the general
line is not needed in the Post. Ref. column to separate journal.
the references to the general ledger and subsidiary ledger
POSTING CORRECTING ENTRIES AFFECTING
S T E P S
CUSTOMER ACCOUNTS
1 Write the date, 10, in the Date column of each customer account.
F O R YO U R I N F O R M AT I O N
2 Write the general journal page number, G12, in the Post. Ref. column F Y I
of the account.
Recording a correcting entry establishes
3 Write the amount, $412.00, in the appropriate Debit or Credit what accountants refer to as an audit
trail. The original (incorrect) entry is
column of each customer account.
retained in the accounting records. The
reason for the correcting entry and the
4 For each account, calculate and write the new account balance in
name of the employee who authorized
the Debit Balance column. the correction are recorded on the memo
supporting the correcting entry. Thus,
5 Write the appropriate customer numbers in the Post. Ref. column accountants can follow the history
of the general journal. of the transactions to ensure that the
net effect of the transactions
is accurate.
328 Chapter 11 Posting to General and Subsidiary Ledgers
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. What is the source document for a correcting entry affecting customer
accounts?
2. How does a correcting entry affecting customer accounts impact the
general ledger accounts?
3. How does posting a correcting entry affecting customer accounts differ
from recording other general journal entries that impact subsidiary
ledger accounts?
WORK TOGETHER 115
Journalizing and posting correcting entries affecting customer accounts
The general journal and accounts receivable ledger accounts for Cline Interiors are given in the Working Papers.
Your instructor will guide you through the following examples.
1. Using the current year, journalize the following transaction on page 6 of a general journal. The memorandum
source document is abbreviated as M.
Transaction:
June 3. Discovered that a sale on account to Howell Clinic on May 25, S346, was incorrectly charged to the
account of Howsley Dance Studio, $414.99. M57.
2. Post the items to the accounts receivable ledger.
ON YOUR OWN 115
Journalizing and posting correcting entries affecting customer accounts
The general journal and accounts receivable ledger accounts for Gentry, Inc., are given in the Working Papers. Work
this problem independently.
1. Using the current year, journalize the following transaction on page 7 of a general journal. The memorandum
source document is abbreviated as M.
Transaction:
July 4. Discovered that a sale on account to Kellogg Co., on June 28, S143, was incorrectly charged to the
account of Keller Corp., $715.98. M76.
2. Post the items to the accounts receivable ledger.
Correcting Errors in Subsidiary Ledger Accounts Lesson 11-5 329
SUMMARY
After completing this chapter, you can: 4. Post separate items from a sales, cash receipts,
and general journal to an accounts receivable
1. Define accounting terms related to posting to
ledger.
ledgers.
5. Post separate items from a cash payments and
2. Identify accounting practices related to posting
general journal to a general ledger.
to ledgers.
6. Post special journal column totals to a general
3. Post separate items from a purchases, cash
ledger.
payments, and general journal to an accounts
payable ledger. 7. Journalize and post correcting entries affecting
customer accounts.
EXPLORE ACCOUNTING
C a t e gor i e s of Int e r n a l C o nt r ol
Posting transactions from a journal to both the Businesses with an adequate number of
general ledger and subsidiary ledgers pre- employees should split duties among several
sents opportunities for errors. Hobby Shack employees to reduce the chances of error.
can fail to record a sales transaction to a This segregation of duties enables one
customer’s account. If the customer does employee to check the work of another.
not pay the amount owed, Hobby Shack For example, one employee should post
may never collect the accounts receivable. transactions to the general ledger while
To avoid errors and their resulting losses, another employee should post transactions
businesses should institute effective internal to the subsidiary ledger.
controls.
Internal controls may be categorized in three phases: Discussion
(1) preventive, (2) detective, and (3) corrective. A preven- 1. Describe internal control procedures that you have
tive control prevents the individual from making the error. observed either as an employee or as a customer.
Establishing and following consistent procedures for post- Identify each procedure as (1) preventive, (2) detective,
ing transactions is a preventive control. A detective con- or (3) corrective.
trol detects or finds the error. Preparing a trial balance is
2. Discuss whether a policeman monitoring a highway
a detective control. A corrective control restores the busi-
with radar is a preventive or detective control of the
ness back to normal if an error occurs. Insurance, such as a
speed limit.
fidelity bond on a cashier, is a corrective control.
PHOTO: PHOTOGRAPHER’S CHOICE/GETTY IMAGES
330 Chapter 11 Posting to General and Subsidiary Ledgers
111 APPLICATION PROBLEM
Posting to an accounts payable ledger
Selected entries from the purchases, cash payments, and general journals for Healthy Nutrition, a health food
store, are given in the Working Papers.
Instructions:
1. Start new pages for the following vendor accounts in the accounts payable ledger. Record the balances
as of October 1 of the current year.
Vendor No. Vendor Name Account Balance
210 Cornucopia, Inc. $3,090.00
220 Healthy Foods 5,064.00
230 Nutrition Center —
240 Office Center —
250 Sports Nutrition 4,512.00
2. Post the separate items recorded in the purchases, cash payments, and general journals to the appropriate
accounts payable ledger accounts. Post in chronological order by date.
3. Prepare a schedule of accounts payable. Compare the total of the schedule with the balance of the control-
ling account, Accounts Payable, $13,352.00. If the totals are not the same, find and correct the errors.
112 APPLICATION PROBLEM
Posting to an accounts receivable ledger
Selected entries from the sales, cash receipts, and general journals for Healthy Nutrition are given in the Work-
ing Papers.
Instructions:
1. Start new pages for the following customer accounts in the accounts receivable ledger. Record the
balances as of October 1 of the current year.
Customer No. Customer Name Account Balance
110 Children’s Center $4,416.00
120 Eastman Sports Arena 2,220.00
130 Maple Tree Club 3,528.00
140 Southwest Community Club —
2. Post the separate items recorded in the sales, cash receipts, and general journals to the appropriate
accounts receivable ledger accounts. Post in chronological order by date.
3. Prepare a schedule of accounts receivable. Compare the total of the schedule with the balance of the con-
trolling account, Accounts Receivable, $8,293.44. If the totals are not the same, find and correct the errors.
( Go Beyond the Book
)
For more information go to
www.C21accounting.com
Posting to General and Subsidiary Ledgers Chapter 11 331
113 APPLICATION PROBLEM
Posting to a general ledger
Selected entries from the cash payments and general journals for Hartley Corporation are given in the Work-
ing Papers.
Instructions:
1. Start new pages for the following accounts in the general ledger. Record the balances as of November 1 of
the current year.
General Ledger
Account No. Account Title Balance
1110 Cash $ 21,960.00
1130 Accounts Receivable 8,420.64
1150 Supplies—Office 4,416.00
1170 Prepaid Insurance 1,870.00
2110 Accounts Payable 15,396.00
2120 Sales Tax Payable 1,615.20
4110 Sales 206,904.00
4120 Sales Discount 2,051.23
5110 Purchases 115,800.00
5120 Purchases Discount 1,845.22
6160 Rent Expense 12,000.00
2. Post the separate general ledger items recorded in the cash payments and general journals. Save your
work to complete Application Problem 11-4.
114 APPLICATION PROBLEM
Posting special journal column totals to a general ledger
The sales, purchases, and cash receipts journals for Hartley Corporation are given in the Working Papers.
Use the general ledger accounts and cash payments journal from Application Problem 11-3.
Instructions:
Post the totals of the special columns of the sales, purchases, cash receipts, and cash payments journals.
115 APPLICATION PROBLEM
Journalizing and posting correcting entries affecting customer accounts
The general journal and accounts receivable ledger accounts for Placid Marina are given in the Working
Papers.
Instructions:
1. Using the current year, journalize the following transactions on page 6 of a general journal. Source
documents are abbreviated as: sales invoices, S; memorandum, M.
332 Chapter 11 Posting to General and Subsidiary Ledgers
Transactions:
July 14. Discovered that a sale on account to Mark Ford on July 5, S534, was incorrectly charged to the
account of Andrew Forde, $253.32. M37.
15. Discovered that a sale on account to Sandy Patterson on July 8, S567, was incorrectly charged to
the account of Daniel Patrick, $384.50. M38.
2. Post the items to the accounts receivable ledger.
116 MASTERY PROBLEM
Posting to general and subsidiary ledgers
The journals, subsidiary ledgers, and selected general ledger accounts for Auto Restoration, Inc., are given
in the Working Papers.
Instructions:
1. Post the separate items in the following journals to the general and subsidiary ledgers. Use the current
year. Note that some postings will be out of order by date because posting of individual amounts is not
being done weekly.
a. Sales journal to the accounts receivable ledger.
b. Purchases journal to the accounts payable ledger.
c. General journal to the accounts payable, accounts receivable, and general ledger.
d. Cash receipts journal to the accounts receivable ledger.
e. Cash payments journal to the accounts payable and general ledgers.
2. Post the totals of the special amount columns of the sales, purchases, cash receipts, and cash payments
journals.
3. Prepare a schedule of accounts payable and a schedule of accounts receivable. Compare the totals of the
schedules with the balances of the controlling accounts, Accounts Payable and Accounts Receivable, in the
general ledger. If the totals are not the same, find and correct the errors.
117 CHALLENGE PROBLEM
Journalizing and posting business transactions
The general, accounts payable, and accounts receivable ledgers for Custom Golf Land are given in the
Working Papers.
Instructions:
1. Journalize the following transactions completed during October of the current year. Use page 11 of a sales
journal, purchases journal, general journal, and cash receipts journal. Use page 21 of a cash payments
journal. Add an 8% sales tax to all sales transactions. Source documents are abbreviated as follows: check,
C; memorandum, M; purchase invoice, P; receipt, R; sales invoice, S; terminal summary, TS.
Transactions:
Oct. 2. Wrote a check for rent, $1,150.00. C265.
3. Received an invoice from Vista Golf Co. for merchandise purchased on account, $1,950.00. P71.
4. Paid for merchandise, $142.80. C266.
6. A check was received in payment on account from Viola Davis, $829.44, covering S45. R43.
7. Eagle Golf Equipment was paid on account, $2,358.00, covering P67. C267.
7. Cash and credit card sales, $5,676.00. TS31.
Posting. Post the items that are to be posted individually.
11. Merchandise was sold on account to Doris McCarley, $306.00. S49.
Posting to General and Subsidiary Ledgers Chapter 11 333
13. Store supplies were bought on account from Golf Source, $258.00. M34.
14. Cash and credit card sales, $5,808.00. TS32.
Posting. Post the items that are to be posted individually.
17. Wrote a check for electric bill, $220.20. C268.
20. Wrote a check to Vista Golf Co. on account, $3,216.00, less 2% discount, covering P68. C269.
21. Recorded cash and credit card sales, $5,376.00. TS33.
Posting. Post the items that are to be posted individually.
23. Design Golf was paid on account, $2,916.00, covering P69. C270.
24. Barry Fuller bought merchandise on account, $1,315.00. S50.
24. Received payment on account from Leona Silva, $285.12, covering S46. R44.
25. Merchandise was purchased on account from Pro Golf Supply, $1,542.00. P72.
27. A check was received in payment on account from David Bench, $972.00, covering S47. R45.
28. Received an invoice from Design Golf for merchandise purchased on account, $2,790.00. P73.
28. Merchandise was sold on account to Leona Silva, $1,314.00. S51.
28. Recorded cash and credit card sales, $5,556.00. TS34.
Posting. Post the items that are to be posted individually.
30. Discovered that a sale on account to David Bench on October 28, S51, was incorrectly charged
to the account of Leona Silva, $1,419.12. M35.
30. Replenish the petty cash fund, $251.00: office supplies, $40.00; store supplies, $51.00; advertis-
ing, $62.00; miscellaneous, $98.00. C271.
31. Recorded cash and credit card sales, $1,680.00. TS35.
Posting. Post the items that are to be posted individually.
2. Prove and rule the sales journal. Post the totals of the special columns.
3. Total and rule the purchases journal. Post the total.
4. Prove the equality of debits and credits for the cash receipts and cash payments journals.
5. Prove cash. The balance on the next unused check stub is $38,140.56.
6. Rule the cash receipts journal. Post the totals of the special columns.
7. Rule the cash payments journal. Post the totals of the special columns.
8. Prepare a schedule of accounts payable and a schedule of accounts receivable. Prove the accuracy of the
subsidiary ledgers by comparing the schedule totals with the balances of the controlling accounts in the
general ledger. If the totals are not the same, find and correct the errors.
9. In states that have sales taxes, businesses are required to collect taxes on their sales and submit the taxes
to the state. This additional activity requires considerable extra effort: keeping a separate record of the
taxes collected at the time of sale, maintaining a separate account for the sales taxes collected, Sales Taxes
Payable, and recording the collection and payment of the sales taxes in the account. These additional
activities place an additional administrative burden on businesses, especially small businesses with few
employees.
Can you think of a procedure that would not require the separate record for collecting and accounting
for sales taxes, yet comply with a state’s requirement to collect and submit sales taxes based on sale of
merchandise sold? Write a brief response providing an alternative approach to collecting and paying
sales taxes.
A P P L I E D CO M M U N I C AT I O N
Instructions: Write a letter to the Cute and Cuddly Corporation explaining that you are returning an order of stuffed
toys because of poor workmanship. You would like to receive a refund for the full amount of the order, $350.25.
Explain that you are providing a copy of the invoice, and ask for written confirmation of the processing of the refund.
Include information that will allow the Cute and Cuddly Corp. to comply with your request.
CASE FOR CRITICAL THINKING
Larry Hayes observes his accountant at work and says, “You post each individual accounts receivable entry in the
journal. Then you post the totals of the Accounts Receivable columns. You are posting these entries twice, which will
make the records wrong.” The accountant does not agree that the posting procedure is incorrect. Is Mr. Hayes or his
accountant correct? Why?
334 Chapter 11 Posting to General and Subsidiary Ledgers
AUDITING FOR ERRORS
Veronica Harper has just completed posting sales and cash receipts transactions to the general and subsidiary
ledgers. According to the company’s internal control procedures, you are assigned the task of checking her work.
Instructions: Three accounts receivable ledger accounts are shown below. Assume that the posting references and
the amounts are correct. From your knowledge of the sales and cash receipts journals, determine whether any of the
amounts are recorded in the incorrect column. List any incorrect amounts and calculate new ending balances for
the accounts.
CUSTOMER Gerald Adams CUSTOMER NO. 110
DATE ITEM POST. DEBIT CREDIT DEBIT
REF. BALANCE
20--
July 1 Balance ⻫ 6 2 4 25
16 S7 5 5 4 53 1 1 7 8 78
25 CR12 6 2 4 25 1 8 0 3 03
CUSTOMER Betty Daigre CUSTOMER NO. 120
DATE ITEM POST. DEBIT CREDIT DEBIT
REF. BALANCE
20--
July 1 Balance ⻫ 2 3 1 5 48
24 S7 2 3 0 24 2 0 8 5 24
CUSTOMER Jackson Miller CUSTOMER NO. 130
DATE ITEM POST. DEBIT CREDIT DEBIT
REF. BALANCE
20--
July 1 Balance ⻫ 2 9 4 6 22
5 CR7 1 7 5 8 95 4 7 0 5 17
22 S7 2 9 4 6 22 1 7 5 8 95
A N A LY Z I N G B E S T B U Y ’S F I N A N C I A L S TAT E M E N T S
Graphics are an effective method of communicating financial information. A stacked bar chart is especially useful
in communicating the amounts presented in an income statement. The chart shows the relative amounts for each
fiscal year as well as the overall trend in sales.
Instructions
1. Prepare a spreadsheet containing selected information from Best Buy’s Consolidated Statements of Earnings on
page B-6 in Appendix B. If spreadsheet software is not available, use a sheet of paper with 4 columns. In the first
column, beginning in the second row, enter the following headings:
Cost of goods sold
Selling, general, and administrative expenses
Operating income
2. Across the first row, beginning in the second column, enter the years 2007 to 2005.
3. Prepare a stacked column (bar) graph of the data.
4. What amount is represented by each year’s bar?
Posting to General and Subsidiary Ledgers Chapter 11 335
Accounting
SOFTWARE
CHECKING ACCURACY IN JOURNAL ENTRIES
There are many opportunities to make errors when entering and posting transactions in a manual accounting sys-
tem. Many of these errors will never occur when using a computerized accounting system. For instance, by using a
computerized system, you can be assured that a sale to a customer will be posted to that customer’s account.
Peachtree has additional controls to help identify input errors. For example, Peachtree will not allow you to enter
a sale on account to a customer that does not exist in the system. The program will not allow you to enter a transac-
tion where the debit and credit amounts are not equal. A transaction date of February 30 will not be accepted.
But no accounting software can prevent you from entering the wrong customer, purchasing the wrong part, or
writing a check for the wrong amount. Peachtree provides a variety of reports to help you review your transactions
and identify any errors. Transaction journals and trial balances of accounts receivable and accounts payable should
be reviewed carefully to help detect any errors.
PEACHTREE MASTERY PROBLEM 11-6
1. Open (Restore) file 11-6MP.ptb.
2. Print the purchase journal, cash disbursements journal, sales journal, cash receipts journal, general ledger,
vendor ledgers (accounts payable ledger), and customer ledgers (accounts receivable ledger).
PEACHTREE CHALLENGE PROBLEM 11-7
1. Open (Restore) file 11-7CP.ptb.
2. Journalize and post the transactions completed during October. Add an 8% sales tax to all sales transactions.
3. Print the sales journal, cash receipts journal, purchase journal and cash disbursements journal.
4. Print the vendor ledgers, customer ledgers, and the general ledger.
5. Prove the accuracy of the subsidiary ledgers by comparing the totals with the balances of the controlling
accounts in the general ledger.
CHECKING ACCURACY IN JOURNAL ENTRIES
Accounting software packages can quickly print out volumes of journals, reports, and financial
statements. The old adage “garbage in, garbage out” is especially pertinent when using an automated accounting
system. The journals, reports, and financial statements are only as good as the data entered into the system.
Most accounting software programs have a variety of safeguards, or controls, to help limit the number and kinds
of errors that can be entered. For example, QuickBooks will not allow a journal transaction to be saved if the debits
do not equal the credits. Instead, an error message will be displayed, and a correction must be made. Other controls
may include requiring a customer name whenever accounts receivable is used in a transaction or using dropdown
lists to avoid typing errors.
However, no software program can eliminate all entry errors. Dropdown boxes don’t prevent the user from
selecting the wrong account. Making sure debits and credits are equal doesn’t help if both amounts are incorrect.
Therefore, journals, reports, and financial statements must be reviewed carefully to determine accuracy.
QUICKBOOKS MASTERY PROBLEM 11-6
1. Open the Auto Restoration Inc. file.
2. Print a Customer Balance Summary report, a Vendor Balance report, and a Trial Balance report using October 1
and October 31 for the From and To dates.
336 Chapter 11 Posting to General and Subsidiary Ledgers
QUICKBOOKS CHALLENGE PROBLEM 11-7
1. Open the Custom Golf Land file.
2. Journalize the transactions completed during October. Use the Receive Payments and Create Invoices features
for cash receipts and sales on account.
3. Use Enter Bills and Pay Bills for purchases and payments on account. Manually enter the amount of the purchase
discount for the October 20 transaction.
4. Use the Write Checks feature on all other cash payments.
5. Use the Enter Sales Receipts option to record cash and credit card sales. Use the Make General Journal Entries
window for all other transactions.
6. Use 8% sales tax rate for all sales transactions.
7. Print a Journal report, a Customer Balance Summary report, a Vendor Balance Summary report, and a Trial
Balance report.
DOWNLOADING FILES INTO A SPREADSHEET
Today’s computer accounting systems provide a wide variety of reports of accounts receivable and accounts pay-
able transactions. Yet even the most sophisticated system may not be able to predict every information need of a
business. For this reason, accounting systems enable you to download information using a file format that is recog-
nized by other software, including electronic spreadsheets.
Files are often downloaded as comma or tab delimited files. A comma or tab is used to separate each piece of
data in the file. An electronic spreadsheet uses the comma or tab to identify and place the data into the columns
and rows of the spreadsheet. Once the data are imported, any of the tools of an electronic spreadsheet can used to
analyze and report the data.
OPTIONAL SPREADSHEET ACTIVITY
Open the file F11-OPT. Complete the instructions provided to import a comma delimited file.
CORRECTING ERRORS IN JOURNAL ENTRIES
In manual accounting, errors can be made even though care is taken in recording transactions. Likewise, in auto-
mated accounting, an incorrect entry can be journalized and posted. Account numbers or dollar amounts can be
transposed, or the wrong customer, vendor, or general ledger account selected. If an error has been made, it is
necessary to locate and correct the inaccurate journal entry.
Finding a Journal Entry
1. Click the desired journal tab: General, Purchases, Sales, Cash Payments, or Cash Receipts.
2. Choose Find from the Edit menu bar.
3. Enter the date, reference, name, or amount you want to find in the Find What text box. Click OK.
4. If a matching transaction is found, it will be highlighted in the journal.
Changing or Deleting Journal Transactions
1. Select (highlight) the specific transaction text box that you wish to change or delete.
2. To change the transaction, enter the correction and click the Post command button. To delete the entire
transaction, choose the Delete command button.
AUTOMATED ACCOUNTING APPLICATION PROBLEM 11-5
Open file F11-5.AA8. Display the problem instructions and complete the problem.
AUTOMATED ACCOUNTING CHALLENGE PROBLEM 11-7
Open file F11-7.AA8. Display the problem instructions and complete the problem.
Posting to General and Subsidiary Ledgers Chapter 11 337
DIGITAL VISION/GETTY IMAGES
C H A P T E R 1 2 Preparing Payroll
Records
O B J E C T I V E S
After studying Chapter 12, you will be able to: 4. Calculate payroll taxes.
1. Define accounting terms related to payroll 5. Complete a payroll register and an employee
records. earnings record.
2. Identify accounting practices related to payroll 6. Prepare payroll checks.
records.
3. Complete a payroll time card.
K E Y T E R M S
• salary • withholding allowance • payroll register
• pay period • social security tax • net pay
• payroll • Medicare tax • employee earnings
• total earnings • tax base record
• payroll taxes
( Point Your Browser
www.C21accounting.com
)
338
ACCOUNTING IN THE REAL WORLD
The Green Bay Packers
The Payroll Playbook of the Green Bay Packers
The Green Bay Packers have one of the richest and most enduring traditions
of any professional franchise in any sport. Who hasn’t watched the Packer
faithful cheer their team to victory in snow-covered Lambeau Field? Twelve
championships and three Super Bowls have been won under the leadership
of legendary coaches like Vince Lombardi.
But did you know that the Green Bay Packers has been a publicly owned,
DIGITAL VISION/GETTY IMAGES
nonprofit corporation since 1923? And, like every other corporation, the
Green Bay Packers must pay its employees, withhold payroll taxes and
benefits, and submit employee reports to the INTERNET
government. ACTIVITY
The Packers employ a diverse group
of talented individuals, including Child Labor Laws
players, coaches, trainers, and Go to the web site for the
scouts. However, many of its Department of Labor, Youth
employees work off the Rules (www.youthrules.dol.
field. From purchasing gov). Search the site for infor-
materials for the conces- mation about child labor laws.
sion stands to planning
advertising campaigns, Instructions
individuals with a wide
1. Make a chart showing
variety of talents are
which jobs youth can do at
required for the Packers
age 13 or younger, age 14,
to continue as a viable
age 16, and age 18.
corporation.
©STEVE APPS/SEPA/LANDOV
2. Make a chart showing
what hours youth can work
at age 14–15 and age 16.
Critical Thinking
1. Identify at least 10 off-field jobs that might be available with the Green
Bay Packers.
2. How might payment of wages be different among the various types of
employees?
Source: www.packers.com
339
L E S S O N
Preparing Payroll
12-1 Time Cards
P AY I N G E M P L O Y E E S
Hobby Shack employs several people to work in the busi- roll transactions in a journal. The business also uses these
ness. These employees record the time they work for records to inform employees of their annual earnings and
Hobby Shack each day. Periodically, Hobby Shack pays to prepare payroll reports for the government.
its employees for the number of hours each employee has
worked. The money paid for employee services is called a
salary. The period covered by a salary payment is called a F O R YO U R I N F O R M AT I O N
pay period. A business may decide to pay employee sala- F Y I
ries every week, every two weeks, twice a month, or once
a month. Hobby Shack uses a semimonthly pay period. Salaries are usually stated as a fixed
amount on a weekly, biweekly,
Employees are paid twice a month, on the 15th and last semimonthly, or monthly basis.
day of each month. Salaried workers do not normally
The total amount earned by all employees for a pay receive overtime pay. Money
period is called a payroll. The payroll is reduced by state paid to employees on an hourly,
daily, or even weekly basis is often
and federal taxes and other deductions, such as health
referred to as wages. In practice,
insurance, to determine the amount paid to all employ- the terms wages and salary are
ees. Special payroll records support the recording of pay- often used interchangeably.
CHARACTER COUNTS
Is It D i s c r i mi n a t i on
or Poor Ju d g me nt ?
Your group at CyberMarket has meeting, committee members gave the following reasons
an opening for a research for wanting to eliminate two candidates.
analyst. You are on the Candidate A: “She graduated from college before
search committee to pick I was born. She can’t possibly know anything about our
candidates to be inter- business.” PHOTO: PHOTOGRAPHER’S CHOICE RF/GETTY IMAGES
viewed. Your company Candidate B: “The ad said two to five years of experi-
has a code of conduct ence, but we really need someone with more than two
that states the com- years of experience.”
pany will not discrimi-
nate on the basis of Instructions
“race, color, religion, Use the ethical model to help evaluate hiring decisions
national origin, sex, sex- based on each of the statements above. Use online
ual orientation or group sources, as appropriate, to determine whether any actions
affiliation, age, disability, are illegal.
or veteran status.” In a recent
340 Chapter 12 Preparing Payroll Records
A N A LY Z I N G A P AY R O L L T I M E C A R D
EMPLOYEE NO. 3
NAME Rick E. Selby
PAY PERIOD ENDED December 15, 20--
MORNING AFTERNOON OVERTIME HOURS
1 IN OUT IN OUT IN OUT REG OT
758 1202 1259 506
A payroll system must include an accurate record of the employee number are the employee name and the ending
time each employee has worked. Several methods are used date of the pay period.
for keeping time records. One of the more frequently used Hobby Shack’s time cards have three sections (Morn-
methods is a time card. Time cards are used as the basic ing, Afternoon, and Overtime) with In and Out columns
source of information to prepare a payroll. under each section. When Mr. Selby reported for work on
Some time cards require employees to record only the December 1, he inserted the card in the time clock. The
total hours worked each day. Employees who record the clock recorded his time of arrival, 7:58, on the first line of
total hours worked each day usually complete time cards the time card. The other entries on this line indicate that
by hand. he left for lunch at 12:02. He returned at 12:59 and left
A business may use a time card that requires employees for the day at 5:06.
to record their arrival and departure times. Hobby Shack Hobby Shack calculates overtime pay for each employee
uses a time clock to record the daily arrival and departure who works more than 8 hours in one day. No employee
times of its employees. works more than 5 days in any one week.
The time card shown here is for Rick E. Selby. Mr. Sel-
by’s employee number is at the top of the card. Below the
D I GI T
AL V
I S IO
N/ G
ETT
Y IM
AG
ES
F O R YO U R I N F O R M AT I O N
F Y I
Larger companies can afford more
expensive systems to record employee
arrival and departure times. A popular
system requires employees to scan
a personal identification card
through a card scanner. At the end
of the pay period, the system
prints a report similar to
the time card.
Preparing Payroll Time Cards Lesson 12-1 341
C A L C U L AT I N G E M P L O Y E E H O U R S W O R K E D
EMPLOYEE NO. 3
NAME Rick E. Selby
PAY PERIOD ENDED December 15, 20-- 1 Calculate regular
MORNING AFTERNOON OVERTIME HOURS hours.
IN OUT IN OUT IN OUT REG OT
1
758 1202 1259 506
8 1
2
759 1200 1257 501
8 2 /2 2 Calculate overtime
3
755 1201 1256 502 701 933
8
4
756 1202 hours.
8
14
754 1204 1259 501
15
755 1200 1258 501 628 831 8 2
HOURS RATE AMOUNT
Add Hours 4
REGULAR 88
OVERTIME 4 1/2 3 Add Hours Reg and Hours OT
column. TOTAL HOURS 92 1/2 TOTAL
EARNINGS
columns and enter totals.
The first task in preparing a payroll is to calculate the culating hours worked, Hobby Shack rounds arrival and
number of hours worked by each employee. When cal- departure times to the nearest quarter hour.
S T E P S CALCULATING EMPLOYEE HOURS WORKED
1 Calculate the number of regular hours for each day and enter the amounts in the Hours Reg column. Mr. Selby
works 8 hours during a normal day. The hours worked on December 3, the third line of the time card, are calcu-
lated using the arrival
and departure times
imprinted on the time Departure Arrival Hours
ⴚ ⴝ
card. Time Time Worked
The hours worked Morning:
in the morning and Time card 12:01 7:55
afternoon are calculated Nearest quarter hour 12:00 ⫺ 8:00 ⫽ 4:00
separately. The morning
departure time of 12:01 Afternoon:
is rounded to the nearest Time card 5:02 12:56
quarter hour, 12:00. The Nearest quarter hour 5:00 ⫺ 1:00 ⫽ 4:00
rounded arrival time, Total regular hours worked on December 3 8:00
8:00, subtracted from the
departure time, 12:00,
equals the morning hours worked. Hours worked of 4:00 means that Mr. Selby worked 4 hours and no (00) minutes.
The total regular hours worked, 8, is recorded in the Hours Reg column.
2 Calculate the number
of overtime hours for Departure Arrival Hours
ⴚ ⴝ
each day and enter the Time Time Worked
amounts in the Hours OT Time card 9:33 7:01
column. Overtime hours
Nearest quarter hour 9:30 ⫺ 7:00 ⫽ 2:30
for December 3 are cal-
culated using the same
procedure as for regular hours.
The hours worked of 2:30 means that Mr. Selby worked 2 hours and 30 minutes (1⁄2 hour) of overtime.
3 Add the hours worked in the Hours Reg and Hours OT columns and enter the totals in the spaces provided at the
bottom of the time card. Mr. Selby worked 88 regular hours (8 hours ⫻ 11 days) and 41⁄2 overtime hours during the
semimonthly pay period.
4 Add the Hours column to calculate the total hours. Enter the total in the Hours column at the bottom of the time
card. Mr. Selby worked 88 regular hours and 41⁄2 overtime hours for a total of 921⁄2 hours.
342 Chapter 12 Preparing Payroll Records
C A L C U L AT I N G E M P L O Y E E T O TA L E A R N I N G S
EMPLOYEE NO. 3
NAME Rick E. Selby
PAY PERIOD ENDED December 15, 20--
MORNING AFTERNOON OVERTIME HOURS
IN OUT IN OUT IN OUT REG OT
1
758 1202 1259 506
8 1
2
759 1200 1257 501
8 2 /2
3
755 1201 1256 502 701 933
4
756 1202
8
14
754 1204 1259 501
Regular Time 1 8 2
15
755 1200 1258 501 628 831
Rate HOURS RATE AMOUNT
REGULAR 88 12.00 1,056.00 2 Regular Earnings Amount
Overtime Rate 3 OVERTIME 4 1/2 18.00 81.00
TOTAL HOURS 92 1/2 1,137.00
TOTAL
EARNINGS
5 Total Earnings Amount
4 Overtime Earnings Amount
Once the total regular and overtime hours are determined, Hobby Shack owes Mr. Selby $1,137.00 for his work
employee earnings can be calculated. The total pay due for during the pay period ending December 15. However,
a pay period before deductions is called total earnings. taxes and other deductions must be subtracted from total
Total earnings are sometimes referred to as gross pay or earnings to determine the actual amount Hobby Shack
gross earnings. will pay Mr. Selby.
S T E P S CALCULATING AN EMPLOYEE’S TOTAL EARNINGS
1 Enter the rate for regular time in the Rate column. Mr. Selby’s regular hourly rate is $12.00.
2 Calculate the regular earnings by multiplying regular hours times the regular rate. Enter the amount of regu-
lar earnings, $1,056.00, in the Regular Amount space.
3 Enter the rate for overtime, $18.00, in the Rate column. Mr. Selby is paid 11⁄2 times his regular rate for overtime
work.
4 Calculate the overtime earnings by multiplying overtime hours times the overtime rate. Enter the amount of
overtime earnings, $81.00, in the Overtime Amount space.
5 Add the Amount column to calculate the total earnings. Enter the amount of total earnings, $1,137.00, in the
Total Earnings space.
Regular Regular Regular
ⴛ ⴝ
Hours Rate Earnings
88 ⫻ $12.00 ⫽ $1,056.00
Regular Overtime
ⴛ 11 / 2 ⴝ
Rate Rate
$12.00 ⫻ 11/2 ⫽ $18.00
Overtime Overtime Overtime
ⴛ ⴝ
Hours Rate Earnings
41/2 ⫻ $18.00 ⫽ $81.00
Preparing Payroll Time Cards Lesson 12-1 343
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
TERMS REVIEW
1. What is a payroll?
2. How many hours were worked by a Hobby Shack employee who arrived salary
at 8:29 and departed at 12:02?
pay period
3. How does Hobby Shack calculate overtime earnings?
payroll
4. What are the total earnings of a Hobby Shack employee who worked
44 hours in a week and earns $11.00 per hour? total earnings
WORK TOGETHER 121
Calculating total earnings
Information taken from employee time cards is provided in the Working Papers. Your instructor will guide you
through the following example.
1. For each employee, calculate the amount of regular, overtime, and total earnings. Overtime hours are paid at
11⁄2 times the regular rate.
ON YOUR OWN 121
Calculating total earnings
Information taken from employee time cards is provided in the Working Papers. Work this problem independently.
1. For each employee, calculate the amount of regular, overtime, and total earnings. Overtime hours are paid at
11⁄2 times the regular rate.
344 Chapter 12 Preparing Payroll Records
L E S S O N
Determining Payroll
12-2 Tax Withholding
P AY R O L L TA X E S
Taxes based on the payroll of a business are called payroll Employee Income Tax
taxes. A business is required by law to withhold certain A business must withhold federal income taxes from
payroll taxes from employee salaries. All payroll taxes are employee total earnings. Federal income taxes withheld
based on employee total earnings. Therefore, accurate must be forwarded periodically to the federal government.
and detailed payroll records must be maintained. Errors Federal income tax is withheld from employee earnings in
in payroll records could cause incorrect payroll tax pay- all 50 states. Employers in many states also are required
ments. Federal and state governments may charge a busi- to withhold state, city, or county income taxes from
ness a penalty for failure to pay correct payroll taxes when employee earnings.
they are due. Payroll taxes withheld represent a liability for
the employer until payment is made to the government.
BUSINESS STRUCTURES
S e l e c t i n g a C or po r a t e For m
There are several forms of corporations, each designed to C corporations. Unlike with C
meet the specific needs of its stockholders. The appropri- Corporations, distributions
ate form is generally dependent on the size of the business of earnings are not taxed
and may be changed as the business grows. to the stockholders,
1. General Corporations. Corporations that have more thus eliminating the
than 30 stockholders or offer to sell stock to the public “double taxation” of
must organize as a general or “C” corporation. These corporate earnings
corporations must have a board of directors, conduct and distributions.
annual stockholders meetings, and publish financial Having 75 or fewer
reports with certain government agencies, such as stockholders is the
the Securities and Exchange Commission. Large, primary require-
well-known companies, such as Wal-Mart and General ment for electing S
Motors, are C Corporations. corporation status.
2. Close Corporations. In some states, corporations having
fewer than 30 stockholders may elect to be a close Critical Thinking
corporation. This form of corporation reduces the gov- 1. You plan to expand your
ernance requirements of a C Corporation. For example, small proprietorship with an
PHOTO: PHOTODISC/GETTY IMAGES
a board of directors or annual stockholder meetings investment from several family
may not be required. Less than half of the states recog- members who will be stockholders.
nize this form of corporation. Which form of corporation would you
3. Subchapter S Corporation. Named for the related sec- probably use?
tion of the Internal Revenue Code, the Subchapter S 2. Considering your answer to question 1, what is the
or “S” Corporation is a special tax status available to advantage to you? To your investors?
Determining Payroll Tax Witholding Lesson 12-2 345
E M P L O Y E E ’ S W I T H H O L D I N G A L L O W A N C E C E R T I F I C AT E
3. Marital 2. Social Security
Status Number
Form W-4 Employee’s Withholding Allowance Certificate OMB No. 1545-0010
Department of the Treasury
Internal Revenue Service For Privacy Act and Paperwork Reduction Act Notice, see page 2.
2 20
1 Type or print your first name and middle initial Last name 2 Your social security number
Rick E. Selby 3 450 70 6432 4. Withholding
1. Name and 1 Home address (number and street or rural route)
3 Single x Married Married, but withhold at higher Single rate. Allowances
Address 1625 Northland Drive Note: If married, but legally separated, or spouse is a nonresident alien, check the “Single” box.
City or town, state, and ZIP code 4 If your last name differs from that shown on your social security
Clarkdale, GA 30020-6523 card, check here. You must call 1-800-772-1213 for a new card.
5 Total number of allowances you are claiming (from line H above or from the applicable worksheet on page 2) 5 4 4
6 Additional amount, if any, you want withheld from each paycheck 6 $ -0-
7 I claim exemption from withholding for 20--, and I certify that I meet both 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
This year I expect a refund of all Federal income tax withheld because I expect to have no tax liability.
If you meet both conditions, write “Exempt” here 7
Under penalties of perjury, I certify that I am entitled to the number of withholding allowances claimed on this certificate, or I am entitled to claim exempt status.
Employee’s signature
(Form is not valid
unless you sign it.)
8
Rick E. Selby 5
Employer’s name and address (Employer: Complete lines 8 and 10 only if sending to the IRS.)
Date
9
Feb. 15 , 20 --
Office code 10 Employer identification number
(optional)
5. Signature and Date
The information used to determine the amount of income Most employees are required to have federal income
tax withheld is identified on Form W-4, Employee’s taxes withheld from their salaries. An exemption from
Withholding Allowance Certificate. A deduction from withholding is available for certain low-income and part-
total earnings for each person legally supported by a tax- time employees. The employee must meet the require-
payer, including the employee, is called a withholding ments listed in item 7 of the Form W-4. However,
allowance. Employers are required to have a current Form individuals cannot claim exemption from withholding if
W-4 on file for all employees. The amount of income tax (1) their income exceeds $750 and includes more than
withheld is based on employee marital status and number $250 of unearned income such as interest and dividends
of withholding allowances. A married employee will have and (2) another person can claim them as a dependent on
less income tax withheld than a single employee with the their tax return.
same total earnings. The larger the number of withhold-
ing allowances claimed, the smaller the amount of income F O R YO U R I N F O R M AT I O N
tax withheld.
F Y I
Each employee must have a social
PREPARING AN security number. Current law ensures
that most infants who are at least
EMPLOYEE’S one year old by the end of a tax year
S T E P S WITHHOLDING will have a social security number.
ALLOWANCE Therefore, most employees will have
received their social security number
CERTIFICATE as a child. Employees without social
security numbers can apply for
1 Write the employee’s name and address. a number at the nearest Social
Security office.
F O R YO U R I N F O R M AT I O N
2 Write the employee’s social security number.
F Y I
3 Check the appropriate marital status block.
Employees are responsible
Mr. Selby checked the married box for item 3.
for contacting their employer
when the number of their
4 Write the total number of withholding allow-
dependents changes. A new
ances claimed. Mr. Selby claimed four withhold- W-4 form should be completed
ing allowances, one each for himself, his wife, and a copy of the form sent to
and his two children. the Internal Revenue Service.
5 The employee signs and dates the form.
346 Chapter 12 Preparing Payroll Records
E M P L O Y E E ’ S I N C O M E TA X W I T H H O L D I N G
SINGLE PERSONS
The amount of federal income tax withheld from each Tables are prepared for various payroll periods—
employee’s total earnings is determined from withhold- monthly, semimonthly, biweekly, weekly, and daily. Single
ing tables prepared by the Internal Revenue Service. These persons are taxed at different levels of income than mar-
withholding tables are revised each year and are available ried persons. Therefore, one table is available for single
from the Internal Revenue Service in Publication 15 (Cir- persons and another table is available for married persons
cular E), Employer’s Tax Guide. The withholding tables for each pay period.
shown in this chapter are those available when this text- Hobby Shack’s pay period is semimonthly, so Hobby
book was prepared. Shack uses the semimonthly withholding tables.
Determining Payroll Tax Witholding Lesson 12-2 347
E M P L O Y E E ’ S I N C O M E TA X W I T H H O L D I N G
MARRIED PERSONS
1 Select the appropriate table.
2 Locate employee's total earnings. 3 Intersection of wages and number of withholding
allowances column.
S T E P S DETERMINING AN EMPLOYEE’S INCOME TAX WITHHOLDING
1 Select the appropriate table. Married Persons—Semimonthly Payroll Period is selected to determine income tax
withholding for employee Rick E. Selby.
2 Locate the employee’s total earnings between the appropriate lines of the At Least and But Less Than columns. Mr.
Selby’s total earnings for the pay period ended December 15, 20--, are $1,137.00. Locate the line At Least $1,120.00
But Less Than $1,140.00.
3 Follow the selected wages line across to the column headed by the employee’s number of withholding allow-
ances. The amount listed at the intersection of the wages line and number of withholding allowances column is the
employee’s amount of income tax withholding. Mr. Selby’s federal income tax withholding, with total earnings of
$1,137.00 and withholding allowances of four, is $28.00 for the semimonthly pay period ended December 15, 20--.
348 Chapter 12 Preparing Payroll Records
E M P L O Y E E S O C I A L S E C U R I T Y A N D M E D I C A R E TA X
The Federal Insurance Contributions Act (FICA) pro- Mr. Selby’s social security tax deduction for the semi-
vides for a federal system of old-age, survivors, disability, monthly pay period ended December 15, 20--, is calcu-
and hospital insurance. A federal tax paid for old-age, sur- lated as shown.
vivors, and disability insurance is called social security
tax. A federal tax paid for hospital insurance is called
Total Social Security Social Security
Medicare tax. Each of these taxes is accounted for and ⴛ ⴝ
Earnings Tax Rate Tax Deduction
reported separately.
$1,137.00 ⫻ 6.2% ⫽ $70.49
Social security and Medicare taxes are paid by both
employees and employer. Employers are required to with-
hold and deposit the employees’ part of the taxes and pay Medicare does not have a tax base. Therefore, Medicare
a matching amount of these taxes. tax is calculated on total employee earnings. The Medi-
Social security tax is calculated on employee earnings care tax rate used in this text is 1.45% of total employee
up to a maximum paid in a calendar year. The maximum earnings.
amount of earnings on which a tax is calculated is called Rick E. Selby’s Medicare tax deduction for the semi-
a tax base. Congress sets the tax base and the tax rates for monthly pay period ended December 15, 20--, is calcu-
social security tax. An act of Congress can change the tax lated as shown.
base and tax rate at any time. The social security tax rate
and base used in this text are 6.2% of earnings up to a
Total Medicare Medicare
maximum of $87,000.00 in each calendar year. ⴛ ⴝ
Earnings Tax Rate Tax Deduction
Between January 1 and December 15, Mr. Selby’s earn- $1,137.00 ⫻ 1.45% ⫽ $16.49
ings are less than the social security tax base. Therefore,
I MAG ES
GETTY
DA J /
F O R YO U R I N F O R M AT I O N
F Y I
Accounting procedures are the
same regardless of changes
in the tax base and tax rate.
The social security tax rate
and the tax base shown above
are assumed for all payroll
calculations in this textbook.
R E M E M B E R
When an employee’s earnings
exceed the tax base, no more
social security tax is deducted.
Determining Payroll Tax Witholding Lesson 12-2 349
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING TERMS REVIEW
1. Where does an employer get the information used to determine the payroll taxes
amount of federal income tax to withhold from employees’ earnings? withholding allowance
2. Employee federal income tax withholdings are based on what two social security tax
factors?
3. Does the employer or employee pay social security tax and Medicare Medicare tax
tax? tax base
WORK TOGETHER 122
Determining payroll tax withholding
Information taken from a semimonthly payroll is given in the Working Papers. Your instructor will guide you through
the following examples.
1. For each employee, determine the federal income tax that must be withheld. Use the tax withholding tables in
this lesson.
2. Calculate the amount of social security tax and Medicare tax that must be withheld for each employee. Use a
social security tax rate of 6.2% and a Medicare tax rate of 1.45%. None of the employees has accumulated earn-
ings greater than the tax base.
ON YOUR OWN 122
Determining payroll tax withholding
Information taken from a semimonthly payroll is given in the Working Papers. Work this problem independently.
1. For each employee, determine the federal income tax that must be withheld. Use the tax withholding tables in
this lesson.
2. Calculate the amount of social security tax and Medicare tax that must be withheld for each employee. Use a
social security tax rate of 6.2% and a Medicare tax rate of 1.45%. None of the employees has accumulated earn-
ings greater than the tax base.
350 Chapter 12 Preparing Payroll Records
L E S S O N
Preparing Payroll Records
12-3
P AY R O L L R E G I S T E R
3. Employee 6. Social 8. Health 2. Payment
Personal Security Insurance Date
Data Tax
5. Federal 7. Medicare 9. Other
1. Pay Period 4. Earnings Income Tax Deductions
Date Tax
2
1
SEMIMONTHLY PERIOD ENDED December 15, 20-- PAYROLL REGISTER DATE OF PAYMENT December 15, 20--
1 2 3 4 5 6 7 8 9 10
ALLOWANCES
EMPL. NO.
MARITAL
EARNINGS DEDUCTIONS
STATUS
NO. OF
CHECK
EMPLOYEE’S NAME NET PAY NO.
FEDERAL SOC. SEC. MEDICARE HEALTH OTHER TOTAL
REGULAR OVERTIME TOTAL
INCOME TAX TAX TAX INSURANCE
1 2 Aranda, Susan A. M 2 9 6 8 00 9 6 8 00 3 8 00 6 0 02 1 4 04 4 5 00 B 1 0 00 1 6 7 06 8 0 0 94 482 1
2 5 Drew, Paul S. S 1 5 5 0 00 5 5 0 00 3 2 00 3 4 10 7 98 3 8 00 1 1 2 08 4 3 7 92 483 2
3 1 Kellogg, Janice P. M 1 1 7 6 0 00 1 5 0 00 1 9 1 0 00 1 8 7 00 1 1 8 42 2 7 70 3 8 00 uw 2 0 00 3 9 1 12 1 5 1 8 88 484 3
3 4 5 6 7 8 9
4 6 Mendel, Ann M. S 1 2 4 0 00 2 4 0 00 1 4 88 3 48 1 8 36 2 2 1 64 485 4
B 1 0 00
5 3 Selby, Rick E. M 4 1 0 5 6 00 8 1 00 1 1 3 7 00 2 8 00 7 0 49 1 6 49 6 0 00 uw 1 0 00 1 9 4 98 9 4 2 02 486 5
B 1 5 00
6 4 Young, Justin L. S 1 9 0 6 40 9 0 6 40 8 6 00 5 6 20 1 3 14 3 8 00 uw 1 0 00 2 1 8 34 6 8 8 06 487 6
B 3 5 00
7 Totals 5 4 8 0 40 2 3 1 00 5 7 1 1 40 3 7 1 00 3 5 4 11 8 2 83 2 1 9 00 uw 4 0 00 1 1 0 1 94 4 6 0 9 46 13 7
8
12 10 11 8
9 9
12. Total, Prove, 11. Net
and Rule Pay
10. Total 13. Check
Deductions Number
A business form used to record payroll information is ings, payroll withholdings, and net pay of all employees.
called a payroll register. A payroll register summarizes Hobby Shack prepares a separate payroll register for each
the payroll for one pay period and shows total earn- semimonthly payroll.
S T E P S PREPARING A PAYROLL REGISTER
1 Enter the last date of the semimonthly payroll period, December 15, 20--, at the top of the payroll register.
2 Enter the date of payment, December 15, 20--, also at the top of the payroll register.
3 For each employee, enter employee number, name, marital status, and number of allowances. This information
is taken from personnel records. Entries for Rick E. Selby are on line 5 of the register.
4 Enter regular earnings, overtime earnings, and total earnings for each employee in columns 1, 2, and 3 of the
payroll register. This information is taken from each employee’s time card.
Preparing Payroll Records Lesson 12-3 351
5 Enter in column 4 the federal income tax withheld from each employee. Mr. Selby’s federal tax withholding is
$28.00.
6 Enter in column 5 of the payroll register the social security tax withheld from each employee. Mr. Selby’s social secu-
rity tax deduction, $70.49, is recorded in column 5 of the payroll register. Mr. Selby’s total earnings for the year have
not exceeded the social security tax base, so his total earnings for the pay period are taxed.
7 Enter in column 6 the Medicare tax withheld from each employee. Mr. Selby’s Medicare tax deduction is $16.49.
8 Enter in column 7 the health insurance premium deductions. Full-time employees of Hobby Shack participate in
a group health insurance plan to take advantage of lower group rates. Mr. Selby’s semimonthly health insurance
premium is $60.00. Premiums are set by the insurance company and are usually based on the employee marital
status and whether coverage is for an individual or a family. Some health insurance premiums may be based on the
number of individuals covered.
9 Enter in column 8 all other employee payroll deductions. The Other column is used to record voluntary deductions
requested by an employee. Entries are identified by code letters. Hobby Shack uses the letter B to identify amounts
withheld for buying U.S. Savings Bonds. UW is used to identify amounts withheld for employee contributions to
United Way. Mr. Selby has authorized Hobby Shack to withhold $10.00 each pay period to buy U.S. Savings Bonds for
him. Mr. Selby has also authorized that $10.00 be withheld as a contribution to the United Way.
10 After all deductions are entered in the payroll register, add all the deduction amounts for each employee and enter
the totals in column 9. Mr. Selby’s total deductions, $194.98, are calculated as shown.
Federal Social Security Medicare Health Total
ⴙ ⴙ ⴙ ⴙ Other ⴝ
Income Tax Tax Tax Insurance Deductions
$28.00 ⫹ $70.49 ⫹ $16.49 ⫹ $60.00 ⫹ $20.00 ⫽ $194.98
11 Determine the net pay for each employee. The total earnings paid to an employee after payroll taxes and other
deductions is called net pay. Subtract the total deductions, column 9, from total earnings, column 3, to determine
net pay. Enter net pay in column 10. Mr. Selby’s net pay, $942.02, is calculated as shown.
Total Total
ⴚ ⴝ Net Pay
Earnings Deductions
$1,137.00 ⫺ $194.98 ⫽ $942.02
12 Total, prove, and rule the payroll register. Total each amount column. Subtract the Total Deductions column from
the Total Earnings column. The result should equal the total of the Net Pay column. If the totals do not agree, the
errors must be found and corrected. Proving the accuracy of Hobby Shack’s payroll register for the pay period
ended December 15, 20--, is shown.
Total Total
ⴚ ⴝ Net Pay
Earnings Deductions
$5,711.40 ⫺ $1,101.94 ⫽ $4,609.46
The net pay, $4,609.46, is the same as the total of the Net Pay column. The payroll register is proved. After the
payroll register is proved, rule double lines below all amount column totals to show the totals have been verified
as correct.
13 Payroll checks are written after payroll calculations are verified and a manager approves the payroll. Write the
payroll check numbers in the Check No. column.
352 Chapter 12 Preparing Payroll Records
E M P LOY E E E A R N I N G S R E CO R D S
SEMIMONTHLY PERIOD ENDED December 15, 20-- PAYROLL REGISTER DATE OF PAYMENT December 15, 20--
1 2 3 4 5 6 7 8 9 10
ALLOWANCES
EMPL. NO.
MARITAL
EARNINGS DEDUCTIONS
STATUS
NO. OF
CHECK
EMPLOYEE’S NAME NET PAY NO.
FEDERAL SOC. SEC. MEDICARE HEALTH OTHER TOTAL
REGULAR OVERTIME TOTAL
INCOME TAX TAX TAX INSURANCE
B 1 0 00
5 3 Selby, Rick E. M 4 1 0 5 6 00 8 1 00 1 1 3 7 00 2 8 00 7 0 49 1 6 49 6 0 00 uw 1 0 00 1 9 4 98 9 4 2 02 486 5
2. Employee
Personal 4 4. Pay Period 5 5. Earnings, Deductions,
Data Net Pay
1. Last Day
December 31, 20-- 1 of Quarter
EARNINGS RECORD FOR QUARTER ENDED
EMPLOYEE NO.
3 Selby Rick E. MARITAL STATUS M WITHHOLDING
ALLOWANCES
4
LAST NAME FIRST MIDDLE
2 INITIAL 3. Beginning Accumulated
Earnings
RATE OF PAY $12.00 PER HR. SOCIAL SECURITY NO. 450-70-6432 POSITION Sales Clerk
1 2 3 4 5 6 7 8 9 10 11
PAY PERIOD EARNINGS DEDUCTIONS ACCUMULATED
EARNINGS
3
NET PAY
FEDERAL SOC. SEC. MEDICARE HEALTH
NO. ENDED REGULAR OVERTIME TOTAL
INCOME TAX TAX TAX INSURANCE
OTHER TOTAL
18 4 3 2 00
B 1 0 00
1 10/15 9 6 0 00 9 0 00 1 0 5 0 00 2 0 00 6 5 10 1 5 23 6 0 00 uw 1 0 00 1 8 0 33 8 6 9 67 19 4 8 2 00
B 1 0 00
2 10/31 1 1 5 2 00 1 1 5 2 00 3 0 00 7 1 42 1 6 70 6 0 00 uw 1 0 00 1 9 8 12 9 5 3 88 20 6 3 4 00
B 1 0 00
3 11/15 1 0 5 6 00 1 0 5 6 00 2 0 00 6 5 47 1 5 31 6 0 00 uw 1 0 00 1 8 0 78 8 7 5 22 21 6 9 0 00
B 1 0 00
4 11/30 1 0 5 6 00 1 0 5 6 00 2 0 00 6 5 47 1 5 31 6 0 00 uw 1 0 00 1 8 0 78 8 7 5 22 22 7 4 6 00
B 1 0 00
5 12/15 1 0 5 6 00 8 1 00 1 1 3 7 00 2 8 00 7 0 49 1 6 49 6 0 00 uw 1 0 00 1 9 4 98 9 4 2 02 23 8 8 3 00
B 1 0 00 6
6 12/31 9 6 0 00 9 6 0 00 1 2 00 5 9 52 1 3 92 6 0 00 uw 1 0 00 1 6 5 44 7 9 4 56 24 8 4 3 00
7
QUARTERLY
TOTALS 6 2 4 0 00 1 7 1 00 6 4 1 1 00 1 3 0 00 3 9 7 47 9 2 96 3 6 0 00
B
uw
6 0 00
6 0 00 1 1 0 0 43 5 3 1 0 57 7
OTHER DEDUCTIONS: B—U.S. SAVINGS BONDS; UW—UNITED WAY
7. Total and 6. Updated Accumulated
Prove Earnings
A business must send a quarterly report to federal and
state governments showing employee taxable earnings and F O R YO U R I N F O R M AT I O N
taxes withheld from employee earnings. Detailed infor- F Y I
mation about each employee’s earnings is summarized in
The federal income tax withholding tables
a single record for each employee. A business form used to on pages 347–348 contain a column for
record details affecting payments made to an employee is 0 dependents. How can an employee
called an employee earnings record. An employee’s earn- have 0 dependents if the employee is a
ings and deductions for each pay period are summarized dependent? Some employees claim fewer
dependents than they are allowed—even
on one line of the employee earnings record. A new earn- as low as zero—to increase the amount
ings record is prepared for each employee each quarter. of tax withheld. An employee who has
Rick E. Selby’s earnings record for the fourth quarter is other taxable income, such as interest and
shown. dividends, can use payroll withholding
to pay the additional income taxes owed
The steps for completing the employee earnings record on this income. As a result, the employee
are on the next page. avoids having a large income
tax payment when the tax
return is filed.
Preparing Payroll Records Lesson 12-3 353
S T E P S PREPARING AN EMPLOYEE EARNINGS RECORD
1 Enter the last day of the yearly quarter, December 31, 20--, at the top of the earnings record.
2 Enter the employee’s number, name, marital status, withholding allowances, hourly rate, social security number,
and position in the provided space. This information is taken from the employee’s personnel records.
3 Enter the fiscal year’s accumulated earnings for the beginning of the current quarter. This information is taken from
the ending accumulated earnings for the previous quarter. Mr. Selby’s accumulated earnings for the first three
quarters ended September 30 are $18,432.00. The Accumulated Earnings column of the employee earnings record
shows the accumulated earnings since the beginning of the fiscal year.
4 Enter the ending date of the pay period being recorded, 12/15.
5 Enter the earnings, deductions, and net pay in the columns of the employee earnings record. This information is
taken from the current pay period’s payroll register.
6 Add the current pay period’s total earnings to the previous period’s accumulated earnings. Mr. Selby’s accumulated
earnings as of December 15 are calculated as shown.
Accumulated Total Earnings Accumulated
Earnings for Pay Period Earnings
ⴙ ⴝ
as of Ended as of
December 1 December 15 December 15
$22,746.00 ⫹ $1,137.00 ⫽ $23,883.00
The Accumulated Earnings column shows the total earnings for Mr. Selby since the first of the year. The amounts
in the Accumulated Earnings column supply an up-to-date reference for an employee’s year-to-date earnings. When
employee earnings reach the tax base, certain payroll taxes do not apply. For example, social security taxes are paid
only on the first $87,000 of earnings.
7 At the end of each quarter, total and prove the earnings record for each employee. Calculate quarterly totals for
each amount column. Subtract the Total Deductions column from the Total Earnings column. The result should
equal the total of the Net Pay column. If the totals do not agree, the errors must be found and corrected. Proving
the accuracy of Mr. Selby’s fourth quarterly totals is shown.
Total Total
ⴚ ⴝ Net Pay
Earnings Deductions
$6,411.00 ⫺ $1,100.43 ⫽ $5,310.57
The net pay, $5,310.57, is compared to the total of the Net Pay column.
The earnings record is proved because these amounts are equal. These
totals are needed to prepare required government reports.
R E M E M B E R
Total earnings, not net pay, are
added to the previous accumulated
earnings amount on the earnings
record. Total earnings is the amount
compared to the tax base to
determine whether social security
taxes should be withheld.
354 Chapter 12 Preparing Payroll Records
End of Lesson
REVIEW
TERMS REVIEW
AUDIT YOUR UNDERSTANDING
payroll register
net pay 1. What does the payroll register summarize?
employee earnings 2. How is net pay calculated?
record 3. Why do companies complete employee earnings records?
WORK TOGETHER 123
Preparing payroll records
Selected payroll data for Antique Shop are provided in a payroll register in the Working Papers. Your instructor will
guide you through the following examples.
1. Complete the payroll register entries for Judy Hensley and Mike McCune for the semimonthly pay period ended
July 15, 20--. Use the tax withholding tables shown in Lesson 12-2. Use tax rates of 6.2% for social security tax
and 1.45% for Medicare tax. Neither employee has reached the tax base. For each employee, withhold $60.00 for
health insurance and $15.00 for U.S. Savings bonds, per pay period.
2. Total all the amount columns of the payroll register. Prove the payroll register.
3. Prepare a quarterly earnings record for Ms. Hensley for the quarter ended September 30, 20--, and enter the
July 15 payroll information. Ms. Hensley’s employee number is 5; rate of pay is $13.00; social security number
is 543-69-0123; position is sales clerk. Accumulated earnings at the end of the second quarter are $13,520.00.
Save your work to complete Work Together 12-4.
ON YOUR OWN 123
Preparing payroll records
Selected payroll data for Prosser Company are provided in a payroll register in the Working Papers. Work this problem
independently.
1. Complete the payroll register entries for Allen P. Best and Tammy S. Edwards for the semimonthly pay period
ended July 15, 20--. Use the tax withholding tables shown in Lesson 12-2. Use tax rates of 6.2% for social security
tax and 1.45% for Medicare tax. For each employee, withhold $60.00 for health insurance and $10.00 for U.S.
Savings Bonds per pay period. For Ms. Edwards, also withhold $20.00 for United Way per pay period.
2. Total all the amount columns of the payroll register. Prove the payroll register.
3. Prepare a quarterly earnings record for Mr. Best for the quarter ended September 30, 20--, and enter the July 15
payroll information. Mr. Best’s employee number is 4; rate of pay is $12.25; social security number is 301-69-1427;
position is sales clerk. Accumulated earnings at the end of the second quarter are $28,692.00. Save your work to
complete On Your Own 12-4.
Preparing Payroll Records Lesson 12-3 355
L E S S O N
Preparing Payroll Checks
12-4
P AY R O L L B A N K A C C O U N T
1. Prepare the 2. Prepare the
check stub. check.
GENERAL
No. 312 1 ACCOUNT
No. 312 2 66-311
Date12/15 20 -- $ 4,609.46 610
To Payroll Account Hobby Shack December 15, --
20
006863274
For Payroll for December 1-15 Pay to the
order of Payroll Account 006863274 $4,609.46
46
Bal. Bro’t For’d 31,652 50 Four thousand six hundred nine and 100 Dollars
Amt. Deposited FOR CLASSROOM USE ONLY
Total 31,652 50 FIRST SECURITY BANK
Amt. This Check 4,609 46 Atlanta, GA 30306-2116
Janice Kellogg
Bal. Car’d For’d 27,043 04 061003114 006863272
Hobby Shack pays its employees with checks written on a unauthorized payroll checks are prepared, the amount in
special payroll checking account. A check for the total net the special payroll account would be insufficient to cover
pay is written on Hobby Shack’s general checking account. all the checks. Thus, the bank and Hobby Shack would
The check is deposited in the payroll checking account. be alerted quickly to an unauthorized payroll check. Also,
A separate checking account for payroll checks helps to since payroll checks are drawn on the separate account,
protect and control payroll payments. The exact amount any balance in this account will correspond to the sum of
needed to pay the payroll is deposited in the special pay- outstanding payroll checks.
roll checking account. If amounts on checks are altered or
S T E P S PREPARING A CHECK FOR TOTAL NET PAY
1 Prepare the check stub. The date of the check is 12/15. The amount, $4,609.46, is
the total of the Net Pay column of the payroll register. The check is payable to
Payroll Account 006863274, Hobby Shack’s special payroll checking account.
The payment is for the payroll period from December 1 to 15. Calculate
and record the new general checking account balance.
2 Prepare the check from the information on the check stub. Hobby R E M E M B E R
Shack’s check is drawn on the company’s general account and is
signed by Janice Kellogg. Using a separate checking
account for payroll checks
provides internal control and
helps to prevent fraud.
356 Chapter 12 Preparing Payroll Records
E M P L O Y E E ’ S P AY R O L L C H E C K
1. Enter on check stub information 2. Prepare employee’s payroll check
from payroll register. for net amount of earnings.
1 Check No. 486 PAYROLL 2 66-311
ACCOUNT
PERIOD
ENDING 12 15 20-- December 15, 20 --
610
No. 486
EARNINGS $ 1,137 00
REG. $ 1,056.00 Pay to the
O.T. $ 81.00 order of Rick E. Selby $ 942.02
DEDUCTIONS $ 194 98 02
INC. TAX $ 28.00 Nine hundred forty -two and 100 Dollars
70.49 FOR CLASSROOM USE ONLY
SOC. SEC. TAX $
MED. TAX $ 16.49 FIRST SECURITY BANK
HEALTH INS. $ 60.00
B 10.00
Atlanta, GA 30306-2116
OTHER $ UW 10.00 Janice Kellogg
NET PAY $ 942 02 061003114 006863274
The information used to prepare payroll checks is taken amounts deducted. Employees keep the stubs for a record
from a payroll register. A special payroll check form is of deductions and cash received.
used that has a detachable stub for recording earnings and
S T E P S PREPARING AN EMPLOYEE’S PAYROLL CHECK
1 Prepare the check stub of each employee’s payroll check. Enter information from the payroll register.
2 Prepare each employee’s payroll check payable for the amount of net pay for the pay period. Rick E. Selby’s
net pay for the pay period ended December 15, 20--, is $942.02.
ELECTRONIC FUNDS TRANSFER
P H O T O DI S C/ GE T T Y I M A G E S
A computerized cash payments system that transfers
funds without the use of checks, currency, or other paper
documents is known as electronic funds transfer (EFT).
Some businesses deposit employee net pay directly to each
employee bank account by using EFT. When EFT is used,
the bank’s computer deducts the amount of net pay from
the business’s bank account and adds the amount to
each employee bank account. The payroll must still
be calculated, but individual checks are not written
and do not have to be distributed. Under this sys-
tem, each employee receives a statement of earn-
ings and deductions similar to the detachable
stub on a payroll check.
Preparing Payroll Checks Lesson 12-4 357
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. Why does Hobby Shack have a separate checking account for payroll
checks?
2. What is the source of the information that is recorded on each
employee’s payroll check stub?
3. How do payroll procedures differ for employees who request that
their pay be deposited through electronic funds transfer?
WORK TOGETHER 124
Preparing payroll checks
Use the payroll register from Work Together 12-3. In the Working Papers are three blank checks: one General Account
check and two Payroll Account checks. Your instructor will guide you through the following examples.
1. Prepare Antique Shop’s General Account check for the pay period ended July 15, 20--. The payment date is July
15. Balance brought forward from the previous check is $16,542.00. The Payroll Account number is 0639583. Sign
your name as the manager of Antique Shop.
2. For the pay period ended July 15, 20--, prepare payroll checks for Judy Hensley and Mike McCune. The payment
date is July 15. Sign your name as the manager of Antique Shop. Record the two payroll check numbers in the
payroll register.
ON YOUR OWN 124
Preparing payroll checks
Use the payroll register from On Your Own 12-3. In the Working Papers are three blank checks: one General Account
check and two Payroll Account checks. Work this problem independently.
1. Prepare Prosser Company’s General Account check for the pay period ended July 15, 20--. The payment date is
July 15. Balance carried forward from the previous check is $12,421.90. The Payroll Account number is 146-7219-6.
Sign your name as the manager of Prosser Company.
2. For the pay period ended July 15, 20--, prepare payroll checks for Allen P. Best and Tammy S. Edwards. The pay-
ment date is July 15. Sign your name as the manager of Prosser Company. Record the two payroll checks in the
payroll register.
358 Chapter 12 Preparing Payroll Records
SUMMARY
After completing this chapter, you can: 4. Calculate payroll taxes.
1. Define accounting terms related to payroll 5. Complete a payroll register and an employee
records. earnings record.
2. Identify accounting practices related to payroll 6. Prepare payroll checks.
records.
3. Complete a payroll time card.
( Go Beyond the Book
)
For more information go to
www.C21accounting.com
EXPLORE ACCOUNTING
E m pl o y e e v s . In d e p e n d e nt
C o nt ra c t or
A business sometimes contracts with individuals individual who performs services subject to the
to perform specified services for the business. will and control of an employer both as to
Determining whether such an individual is what shall be done and how it shall be done
an employee or a self-employed indepen- is considered an employee for withholding
dent contractor is an important issue. purposes. The major determining factor is
If the person is found to be an employee, whether the employer has the legal right
the employer must withhold and submit to control both the method and result of
employee income tax, social security tax, the services. If the business has the right to
and Medicare tax to the Internal Revenue Ser- control only the result of the service performed
vice (IRS). The employer must pay an equal amount and not the means and methods of accomplishing
of social security and Medicare tax. Also, the employer will the result, the individual is probably a self-employed inde-
pay unemployment taxes (discussed in Chapter 13) and be pendent contractor.
subject to various employer reporting requirements.
A person who is found to be a self-employed indepen- Research: Review federal tax publications or inter-
dent contractor must pay an amount of social security and view local businesses on the issues below. Then prepare
Medicare tax that is equivalent to both the employer and a written or oral report to present to your class. (1) Why
employee taxes. is it important to determine an individual’s status? What
If an employer incorrectly treats an employee as a self- is at stake for the individual, the employer, and the IRS?
employed independent contractor, the penalties can be (2) What are the advantages and disadvantages of deter-
PHOTO: PHOTOGRAPHER’S CHOICE/GETTY IMAGES
severe. Therefore, it is important to a business to make mining an individual to be an employee or independent
an accurate determination of the status of all individuals contractor—to the individual? to the employer? to the
performing work for the business. The IRS has provided IRS?
guidelines to help businesses make the distinction. Every
Preparing Payroll Records Chapter 12 359
121 APPLICATION PROBLEM
Preparing payroll time cards
Employee time cards are given in the Working Papers.
Instructions:
1. Calculate the regular, overtime, and total hours worked by each employee. Any hours over the regular
8-hour day are considered overtime. Record the hours on the time cards.
2. Determine the regular, overtime, and total earnings for each employee. The overtime rate is 11⁄2 times the
regular rate. Complete the time cards.
122 APPLICATION PROBLEM
Determining payroll tax withholding
Information taken from the semimonthly payroll register is given in the Working Papers.
Instructions:
1. Determine the federal income tax that must be withheld for each of the eight employees. Use the tax
withholding tables shown in Lesson 12-2.
2. Calculate the amount of social security tax and Medicare tax that must be withheld for each employee
using 6.2% and 1.45% tax rates, respectively. None of the eight employees has accumulated earnings
greater than the tax base.
123 APPLICATION PROBLEM
Preparing a payroll register
The information for the semimonthly pay period October 1–15 of the current year is given in the Working
Papers.
Instructions:
Complete a payroll register for Perez Company. The date of payment is October 15. Use the tax withholding
tables shown in Lesson 12-2 for the income tax withholding for each employee. Calculate social security and
Medicare taxes withholding using 6.2% and 1.45% tax rates, respectively. None of the employees has accumu-
lated earnings greater than the social security tax base.
124 APPLICATION PROBLEM
Preparing an employee earnings record
Grady R. Hurley’s earnings for the six semimonthly pay periods in July, August, and September of the current
year are given in the Working Papers. Deductions and net pay have been completed for July and August.
The following additional data about Grady R. Hurley are needed to complete the employee earnings
record.
1. Employee number: 28 8. Deductions from total earnings:
2. Marital status: married a. Health insurance: $60.00 each semimonthly pay period
3. Withholding allowances: 2 b. U.S. Savings Bonds: $20.00 each semimonthly pay period
4. Rate of pay: regular, $15.00 c. Federal income tax: determined each pay period by
5. Social security number: 462-81-5823 using the withholding tables in Lesson 12-2
6. Position: service manager d. Social security taxes: 6.2% of total earnings each pay
7. Accumulated earnings for the end of period
second quarter: $15,750.00 e. Medicare taxes: 1.45% of total earnings each pay period
360 Chapter 12 Preparing Payroll Records
Instructions:
1. Calculate and record the accumulated earnings for the July and August pay periods.
2. Complete the earnings record for the pay periods ended September 15 and September 30.
3. Total all amount columns on the earnings record.
4. Verify the accuracy of the completed employee earnings record. The Quarter Total for Regular and Over-
time Earnings should equal the Quarter Total for Net Pay plus Total Deductions. The Quarter Total for
Total Earnings should equal the end-of-quarter Accumulated Earnings minus the beginning-of-quarter
Accumulated Earnings.
125 APPLICATION PROBLEM
Preparing payroll checks
Royal Appliances’ net payroll for the semimonthly pay period ended May 15, 20--, is $7,498.80. Payroll checks
are prepared May 15, 20--. Blank checks are provided in the Working Papers.
Instructions:
1. Prepare a General Account check for the total amount of the net pay. Make the check payable to Payroll
Account 018-65-4237, and sign your name as manager of Royal Appliances. The beginning check stub
balance is $10,138.95.
2. Prepare payroll checks for two employees of Royal Appliances. Payroll information for the two employees
is as follows. Sign your name as a manager of Royal Appliances.
a. Wanda M. Curtis b. Kevin R. Hayes
Check No. 823 Check No. 827
Regular Earnings $740.00 Regular Earnings $920.00
Overtime Earnings 40.00 Overtime Earnings 30.00
Deductions: Deductions:
Federal Income Tax $ 33.00 Federal Income Tax $ 23.00
Social Security Tax 48.36 Social Security Tax 58.90
Medicare Tax 11.31 Medicare Tax 13.78
Health Insurance 35.00 Health Insurance 60.00
Savings Bond 20.00
126 MASTERY PROBLEM
Preparing a semimonthly payroll
The following information for Arrow Company is for the semimonthly pay period August 16–31 of the current
year. Forms are given in the Working Papers.
ALLOWANCES
EMPL. NO.
MARITAL
EARNINGS DEDUCTIONS
STATUS
NO. OF
EMPLOYEE’S NAME
REGULAR OVERTIME HEALTH SAVINGS
INSURANCE BONDS
5 Acron, Peter C. M 3 1 1 2 6 40 1 1 5 20 6 0 00 1 0 00
7 Barenis, Mary P. S 1 1 1 5 5 00 2 5 00
6 Epps, John P. M 2 7 9 2 00 4 0 00 1 0 00
1 Goforth, Alice A. S 2 1 1 3 5 20 7 7 40 4 0 00
8 Hiett, Franklin B. M 3 1 1 8 8 00 6 0 00 1 0 00
9 Land, Keith S 1 9 5 4 60 2 5 00 1 0 00
2 Malone, Lillie L. S 1 1 0 8 3 60 2 5 00
4 Rivers, Linda K. M 2 1 0 9 1 20 9 3 00 4 0 00
10 Sowell, Jacob S. M 2 1 1 6 1 60 4 0 00 1 0 00
3 Vole, Ryan V. M 5 1 0 7 5 00 8 0 00 1 0 00
Preparing Payroll Records Chapter 12 361
Instructions:
1. Prepare a payroll register. The date of payment is August 31. Use the income tax withholding tables shown
in Lesson 12-2 to find the income tax withholding for each employee. Calculate social security and Medi-
care tax withholdings using 6.2% and 1.45% tax rates, respectively. None of the employees has accumu-
lated earnings greater than the social security tax base.
2. Prepare a check for the total amount of the net pay. Make the check payable to Payroll Account 59-721-65,
and sign your name as the manager of Arrow Company. The beginning check stub balance is $16,216.90.
3. Prepare payroll checks for Peter C. Acron, Check No. 1692, and Franklin B. Hiett, Check No. 1696. Sign your
name as the manager of Arrow Company. Record the two payroll check numbers in the payroll register.
127 CHALLENGE PROBLEM
Calculating piecework wages
Production workers in factories are frequently paid on the basis of the number of units they produce. This
payroll method is referred to as the piecework incentive wage plan. Most piecework incentive wage plans
include a guaranteed hourly rate to employees regardless of the number of units they produce. This guaran-
teed hourly rate is referred to as the base rate.
Time and motion study engineers usually determine the standard time required for producing a single
unit. Assume, for example, that time studies determine that one-third of an hour is the standard time required
to produce a unit. Then the standard rate for an 8-hour day would be 24 units (8 hours divided by 1⁄3 hour ⫽
24 units per day). If a worker’s daily base pay is $96.00, the incentive rate per unit is $4.00 ($96.00 divided by
24 units ⫻ $4.00 per unit). Therefore, the worker who produces 24 or fewer units per day is paid the base pay,
$96.00. However, each worker is paid an additional $4.00 for each unit over 24 produced each day.
Draker Furniture Company has eight employees in production departments that are paid on a piecework
incentive wage plan. The following standard and incentive wage rates are listed by department.
Standard Production Incentive Rate
Department per Employee per Unit
Cutting 32 units per day $3.50
Assembly 20 units per day $5.75
Finishing 45 units per day $2.00
A payroll register is given in the Working Papers. Each employee worked eight hours a day during the semi-
monthly pay period, May 1–15. Payroll records for May 1–15 are summarized in the following table.
Employee Units Produced per Day
No. of Guaranteed
Marital
Allow- Daily Pay Period May 1–15
No. Name Status
ances Rate
2 3 4 5 6 9 10 11 12 13
Cutting Department
C3 Bell, Julie M. M 4 $112.00 33 30 28 32 32 32 32 33 35 33
C6 Hairston, Gary P. M 2 $112.00 29 35 29 32 31 33 32 33 30 30
C9 Reeves, John M. S 1 $112.00 31 30 35 34 34 31 35 28 31 32
Assembly Department
A2 Bullock, Amy C. S 2 $115.00 22 20 20 20 22 22 22 22 23 20
A6 Green, Steven P. S 1 $115.00 20 23 23 20 22 21 20 20 20 20
A9 Prine, Jacob R. M 4 $115.00 23 22 21 22 22 21 22 22 20 23
Finishing Department
F5 Gerez, Dave A. M 2 $90.00 39 47 38 47 43 41 40 41 39 46
F2 Kyle, Ryan G. S 1 $90.00 41 43 47 38 42 39 43 39 43 39
Instructions:
Prepare a payroll register. The earnings column Incentive is used instead of Overtime. The date of payment is
May 15. Use the income tax withholding tables shown in Lesson 12-2. Calculate the employee social secu-
rity and Medicare tax withholdings using 6.2% and 1.45% tax rates, respectively. None of the employees has
health insurance or other deductions. None of the employees has accumulated earnings greater than the
social security tax base.
362 Chapter 12 Preparing Payroll Records
A P P L I E D CO M M U N I C AT I O N
The employees of Kaden Company currently use time cards and a time clock to record their arrival and departure
times. Management plans to replace the time clock with a device that reads a magnetic strip on the back of each
employee’s name badge. The badge is scanned by a reader in the same manner that credit cards are scanned.
Because the badge reader is connected to a computer, the information is recorded directly to a computer file. Thus,
the new system will enable management to make daily analyses of employee hours and productivity. This informa-
tion should allow managers to make more timely decisions and increase profits.
Instructions: Assume you work in the payroll department for Kaden Company. Write a memo to the employees
informing them of the new system. Because some employees may not be happy with this new system, be sure to
include reasons why the policy is being implemented.
CASE FOR CRITICAL THINKING
Vadillo Lumber currently requires each employee to inform the accounting clerk of the total hours worked each day
during the pay period. The total number of hours worked by all employees has been steadily increasing during the
prior pay periods. The new store manager has suggested that a time clock be installed to record arrival and depar-
ture times. The accounting clerk believes the current system is satisfactory. Do you agree with the new manager or
the accounting clerk? Explain your response.
GRAPHING WORKSHOP
Distribution of Gross Wages Payroll Distribution
The chart depicts data from the payroll register of
Alectra Corporation. Analyze the graph to answer 6.3% 6.2%
the following questions. 1.5%
4.3%
1. What was the largest payroll deduction? 0.9%
2. What percent of employees’ wages are withheld Federal Income Tax
for taxes? Social Security Tax
3. What amount is represented by the entire pie Medicare Tax
graph?
80.8% Health Insurance
Other Deductions
Net Pay
A N A LY Z I N G B E S T B U Y ’S F I N A N C I A L S TAT E M E N T S
Annual reports contain a report by management designed to inform potential investors and business partners about
how the financial statements were prepared. The report describes, in detail, accounting and management policies
that are followed to ensure that the amounts on the financial statements can be relied upon for making business
decisions.
Instructions: Use Management’s Report on the Financial Statements and Management’s Report on Internal Control
over Financial Reporting on page B-4 in Appendix B to answer the following questions.
1. Who is responsible for the preparation of Best Buy’s financial statements?
2. What is the system of internal control designed to do?
3. Can internal controls prevent or detect all misstatements?
Preparing Payroll Records Chapter 12 363
Accounting
SOFTWARE
R E C O R D I N G P AY R O L L
Review the payroll calculations for: (1) gross wages, (2) federal income tax withholding, (3) FICA taxes, considering
whether the employee has reached the tax base, (4) Medicare taxes, and (5) net wages. Peachtree can perform all
the calculations required to prepare payroll checks.
Before preparing payroll checks, an employee’s personal record must be up to date. The personal record contains
the employee’s regular and overtime wage rates, filing status (single or married), withholding allowances, and any
optional deductions. When the number of hours worked is entered, Peachtree calculates all required amounts and
prints the payroll check. The journal entry is automatically recorded when the payroll check is printed. Peachtree
records each payroll check as a separate journal entry.
PEACHTREE APPLICATION PROBLEM 12-5
1. Open (Restore) file 12-5AP.ptb.
2. Use Peachtree’s Payments task to journalize the May 15 transactions to establish the payroll account for the
amount of the net payroll; post the Payments entry.
3. Record the May 15 paychecks for the two employees. Post the Payments entries.
PEACHTREE MASTERY PROBLEM 12-6
1. Open (Restore) file 12-6MP.ptb.
2. Prepare a payroll register.
3. Record the check for the net payroll for the pay period August 16-31.
4. Journalize and post payroll checks for the two employees.
5. Print the cash disbursements journal.
R E C O R D I N G P AY R O L L
The benefit of an automated payroll package is that it usually calculates all the deductions and the net pay
for each employee. In QuickBooks, the payroll function is a special package to which a company can subscribe.
A company that does not subscribe to the payroll function will still use QuickBooks for payroll but will have to
calculate the deductions and net pay manually. The payroll check will be entered into QuickBooks similar to other
checks, which will automatically make a journal entry for the check. Since each employee will receive a separate
check, a separate entry will be made for each employee. This is different from the method illustrated in this chapter,
where the payroll register totals are used to journalize the payroll.
QUICKBOOKS APPLICATION PROBLEM 12-5
1. Open the Royal Appliances file if it is not already open.
2. Record the deposit in the Payroll account using the Make Deposits feature.
3. Write the payroll checks using the Write Checks feature for the two employees.
4. Print a Journal report for May 1 through May 15.
QUICKBOOKS MASTERY PROBLEM 12-6
1. Open the Arrow Company file.
2. Record the payroll deposit.
3. Write the payroll checks for the two employees.
4. Print a Journal report for August 16 through August 31.
364 Chapter 12 Preparing Payroll Records
USING THE ROUND FUNCTION
Can 4.00 ⫹ 3.00 equal 6.99? It can on an electronic spreadsheet! Users of such spreadsheets typically apply cell
formatting to display dollar amounts to two-decimal-place accuracy. If they do not account for rounding, this kind
of error can occur.
Shown below are two employees’ FICA tax calculations. Each actual number in the first column is rounded to dis-
play to the nearest cent when it is displayed in the second column. This is done by using the ROUND function. The
function ⫽ROUND(Cell, Number of places) rounds the contents of the Cell to a specified Number of decimals. Thus,
the function doesn’t just display a number to a specified decimal-place accuracy, it actually rounds the number.
To get a correct total of the individual rounded amounts in Cell C5, simply add the rounded amounts in cells C3
and C4. You may use ⫹C3⫹C4 or SUM(C3:C4), but do not round the total.
A B C D
1 Actual Formatted (to two =ROUND (to two
2 Number decimal places) decimal places)
3 Sanders, Jim 3.996 $4.00 4.00
4 Keller, Danielle 2.997 $3.00 3.00
5 Totals 6.993 $6.99 7.00
EXCEL APPLICATION PROBLEM 12-3
Open the F12-3 Excel data file. Follow the step-by-step instructions in the Instructions worksheet.
EXCEL APPLICATION PROBLEM 12-4
Open the F12-4 Excel data file. Follow the step-by-step instructions in the Instructions worksheet.
R E C O R D I N G P AY R O L L
In an automated payroll system, the computer is used to maintain the employee database, to record payroll trans-
actions at the end of each pay period, to calculate withholding taxes, and to create all the related journal entries.
The employee database identifies each employee by employee number. Other data required for each employee
includes the employee’s name, social security number, marital status, number of withholding allowances, pay rate,
and voluntary deductions. Employee accounts may be added, changed, or deleted from the accounting system.
Entering Payroll Transactions
1. Click the Other toolbar button.
2. Click the Payroll tab.
3. Enter the date of the check.
4. Select the employee from the employee drop-down list.
5. Verify that the check number displayed is correct, or key the correct number.
6. For salaried employees, the salary amount will be automatically displayed. For hourly employees, enter the
regular and overtime hours worked during the current payroll period.
7. Click the Calculate Taxes button to direct the software to calculate the employee taxes.
8. Enter the employee’s voluntary deductions.
9. Click OK to generate and display the payroll check.
10. Click the Close button to dismiss the check and continue, or click Print to print the check.
AUTOMATED ACCOUNTING MASTERY PROBLEM 12-6
Open file F12-6.AA8. Display the problem instructions and complete the problem.
Preparing Payroll Records Chapter 12 365
PHOTODISC/GETTY IMAGES
C H A P T E R 1 3 Payroll Accounting,
Taxes, and Reports
O B J E C T I V E S
After studying Chapter 13, you will be able to: 4. Record employer payroll taxes.
1. Define accounting terms related to payroll 5. Prepare selected payroll tax reports.
accounting, taxes, and reports.
6. Pay and record withholding and payroll taxes.
2. Identify accounting concepts and practices
related to payroll accounting, taxes, and reports.
3. Analyze payroll transactions and record a
payroll.
K E Y T E R M S
• federal unemployment • state unemployment tax • lookback period
tax
( Point Your Browser
www.C21accounting.com
)
366
ACCOUNTING IN THE REAL WORLD
Employee Benefits at Google
Innovative thinking comes from creative minds. Technology companies
must continually develop new products and applications for those prod-
ucts in order to stay competitive in today’s rapidly changing marketplace. To
maintain a creative workforce, companies must create a comfortable work
environment that encourages and rewards creativity.
Google offers many innovative benefits designed to make its employees’
DIGITAL VISION/GETTY IMAGES
lives healthier, less complicated, and simply more fun. Beyond traditional
medical, vacation, and retirement benefits, employees at Google’s Moun-
tain View, California headquarters can ride to work in a INTERNET
shuttle that serves the San Francisco area. Once ACTIVITY
at work, employees can:
• Drop their children off at the IRS Forms Online
Kinderplex, Google’s own child (NOTE: You will need to have
care center. Adobe Acrobat Reader on your
• Eat a free lunch or dinner computer to complete this
cooked by gourmet chefs. activity.)
The Internal Revenue Ser-
• Visit a doctor or receive
vice (IRS) makes some tax
a massage.
forms available online. Go
• Have their laundry dry to the homepage for the IRS
cleaned. (www.irs.gov). Click on “Forms
• Exercise in the gym. and Publications.” A W-4 Form
©JUSTIN SULLIVAN/GETTY IMAGES
Google is family friendly. is the form you fill out for your
New mothers receive 12 employer when you are hired.
weeks of paid (75%) mater- A 1040EZ Form is the form you
nity leave. Fathers also receive use to file your income tax
between 2 and 6 weeks of par- return each year.
ental leave. New parents are reim-
bursed for up to $500 for take-out meals Instructions
during the first four weeks the new baby is 1. Search the site for a W-4
home. Google also provides financial assistance to Form. Print out the form.
pay the legal and other fees in the adoption of a child. 2. Search the site for a
From ski trips to parking-lot roller hockey, Google makes working fun. 1040EZ Form. Print out
the form.
Critical Thinking
3. List one additional form
1. Google has offices all over the world. Identify three services you would that is available on the
suggest any company offer that would uniquely serve employees living IRS site.
in your city or state.
2. Why do you think Google employees are offered financial planning
classes?
Source: www.google.com
367
L E S S O N
Recording a Payroll
13-1
D I F F E R E N T F O R M S O F P AY R O L L I N F O R M AT I O N
Payroll information for each pay period is recorded in a
payroll register. Each pay period the payroll information
for each employee is also recorded on each employee earn-
ings record. Separate payroll accounts for each employee
are not kept in the general ledger. Instead, accounts are
kept in the general ledger to summarize total earnings and
deductions for all employees.
The payroll register and employee earnings records
provide all the payroll information needed to prepare
payroll and payroll tax reports. Journal entries are made
to record the payment of the payroll and the employer
payroll taxes. In addition, various quarterly and annual
IMAGE SOURCE/GETTY IMAGES
payroll tax reports are required to report the payment of
payroll taxes.
CHARACTER COUNTS
IMAGE SOURCE
Yo u r C a l l M a y B e R e c o r d e d
Janice Whitehead has just been “Company telephones are to be used exclusively for
fired for violating her employ- company business. Employees needing to make personal
er’s code of conduct. Over the phone calls should use their personal cellular phones.”
last few months, Janice has During an ethics training program, employees were
been using her office phone informed that the company uses a pen register. The device
to call former classmates to creates a list of all outgoing calls and the length of each
inform them of an upcoming call. Janice signed a statement that she understood the
PHOTO: DIGITAL VISION/GETTY IMAGES
class reunion. She believes her company has a “no tolerance” approach toward topics dis-
firing is unethical and is con- cussed in the training program.
sidering legal action against the
company. Instructions
Cobb Manufacturing has the Was it ethical for Cobb Manufacturing to fire Janice for
following statement in its code of making personal phone calls?
conduct:
368 Chapter 13 Payroll Accounting, Taxes, and Reports
P AY R O L L R E G I S T E R
SEMIMONTHLY PERIOD ENDED December 15, 20-- PAYROLL REGISTER DATE OF PAYMENT December 15, 20--
1 2 3 4 5 6 7 8 9 10
ALLOWANCES
EMPL. NO.
MARITAL
EARNINGS DEDUCTIONS
STATUS
NO. OF
CHECK
EMPLOYEE’S NAME NET PAY
FEDERAL SOC. SEC. MEDICARE HEALTH OTHER TOTAL NO.
REGULAR OVERTIME TOTAL
INCOME TAX TAX TAX INSURANCE
1 2 Aranda, Susan A. M 2 9 6 8 00 9 6 8 00 3 8 00 6 0 02 1 4 04 4 5 00 B 1 0 00 1 6 7 06 8 0 0 94 482 1
2 5 Drew, Paul S. S 1 5 5 0 00 5 5 0 00 3 2 00 3 4 10 7 98 3 8 00 1 1 2 08 4 3 7 92 483 2
3 1 Kellogg, Janice P. M 1 1 7 6 0 00 1 5 0 00 1 9 1 0 00 1 8 7 00 1 1 8 42 2 7 70 3 8 00 uw 2 0 00 3 9 1 12 1 5 1 8 88 484 3
4 6 Mendel, Ann M. S 1 2 4 0 00 2 4 0 00 1 4 88 3 48 1 8 36 2 2 1 64 485 4
B 1 0 00
5 3 Selby, Rick E. M 4 1 0 5 6 00 8 1 00 1 1 3 7 00 2 8 00 7 0 49 1 6 49 6 0 00 uw 1 0 00 1 9 4 98 9 4 2 02 486 5
B 1 5 00
6 4 Young, Justin L. S 1 9 0 6 40 9 0 6 40 8 6 00 5 6 20 1 3 14 3 8 00 uw 1 0 00 2 1 8 34 6 8 8 06 487 6
B 3 5 00
7 Totals 5 4 8 0 40 2 3 1 00 5 7 1 1 40 3 7 1 00 3 5 4 11 8 2 83 2 1 9 00 uw 4 0 00 1 1 0 1 94 4 6 0 9 46 7
8 8
9 9
Similar to a special journal, the column totals of a payroll each deduction column, and the Net Pay column. The
register provide the debit and credit amounts needed to totals of the Earnings Regular, Earnings Overtime, and
journalize a payroll. Deductions Total columns are not used to journalize the
As you will learn in this chapter, the payroll journal payroll.
entry is based on the totals of the Earnings Total column,
FINANCIAL LITERACY
Ta x e s
An old saying goes, “Only two things are certain in life— Activities
death and taxes!” Depending on where you live, you may 1. Using tables provided
encounter a few or many different taxes. In the United by the Internal Rev-
States, there is a federal tax on the income you earn. Some enue Service for
states also impose a tax on personal income. Many states the most current
and some cities have a sales tax, but the list of taxable year (which can
items varies greatly. Some states and cities charge a sales be found on the
tax on nearly everything, while others may exclude spe- Internet), deter-
cific items such as food, clothing, medical items, etc. If you mine how much
own property, you may have to pay a state property tax federal income
and/or a city property tax. tax would be
The major purpose of most taxes is to provide funds due from a
for services supplied by the government such as schools, single taxpayer
roadways, emergency services, water and sewer systems, with no additional
public transportation systems, and public parks. deductions, who
PHOTO: PHOTODISC/GETTY IMAGES
However, some taxes are designed to encourage us to earned $26,000.
behave in certain ways. If the United States government
2. Write a report on your
wants us to save more money, it can make certain pay-
state’s sales tax, including the
ments to savings and investment accounts tax deductible,
amount of the tax and what items are subject
which means those amounts are not subject to tax. If the
to this tax. If your state does not have a sales tax, pick
government wants to encourage home ownership, it can
a neighboring state that has a sales tax.
make interest on home mortgages tax deductible.
Recording a Payroll Lesson 13-1 369
A N A LY Z I N G P AY M E N T O F A P AY R O L L
Employee Income Tax Payable
Dec. 15 371.00
Social Security Tax Payable
Dec. 15 354.11
Medicare Tax Payable
Dec. 15 82.83
Salary Expense Health Insurance Premiums Payable
⫽
Dec. 15 5,711.40 Dec. 15 219.00
U.S. Savings Bonds Payable
Dec. 15 35.00
United Way Donations Payable
Dec. 15 40.00
Cash
Dec. 15 4,609.46
Data about Hobby Shack’s semimonthly pay period ended amount is a liability of the business until the premiums
December 15, obtained from the payroll register, are sum- are paid to the insurance company. Health Insurance
marized in the T accounts. Premiums Payable is credited for $219.00 to record this
The Total Earnings column total, $5,711.40, is the sal- liability.
ary expense for the period. Salary Expense is debited for Two types of Other deductions are recorded in Hobby
this amount. Shack’s payroll register. The $35.00 Other column total
The Federal Income Tax column total, $371.00, is identified with the letter B is withheld to buy savings
the amount withheld from employee salaries for federal bonds for employees. The $40.00 total identified with the
income tax. The amount withheld is a liability of the busi- letters UW is withheld for employee United Way pledges.
ness until the taxes are sent to the federal government. Until these amounts have been paid by the employer, they
Employee Income Tax Payable is credited for $371.00 to are liabilities of the business. U.S. Savings Bonds Payable
record this liability. is credited for $35.00. United Way Donations Payable is
The Social Security Tax column total, $354.11, is the credited for $40.00.
amount withheld for social security tax. The amount is a The Net Pay column total, $4,609.46, is the net amount
liability of the business until the tax is paid to the govern- paid to employees. Cash is credited for $4,609.46. A check
ment. Social Security Tax Payable is credited for $354.11. for the total net pay amount, $4,609.46, is written on
The Medicare Tax column total, $82.83, is the amount Hobby Shack’s general checking account and is deposited
withheld for Medicare tax. The amount is a liability of the in a special payroll checking account. Individual payroll
business until the tax is paid to the government. Medicare checks are then written on the special payroll checking
Tax Payable is credited for $82.83. account.
The Health Insurance column total, $219.00, is the
amount withheld for health insurance premiums. The
370 Chapter 13 Payroll Accounting, Taxes, and Reports
J O U R N A L I Z I N G P AY M E N T O F A P AY R O L L
5. Amount Paid
1. Date 2. Account Debited 3. Check Number 4. Amount Debited to Employees
CASH PAYMENTS JOURNAL PAGE 23
1 2 3 4 5
CK. POST. GENERAL ACCOUNTS PURCHASES CASH
DATE ACCOUNT TITLE PAYABLE DISCOUNT CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
2 4 5
14 1 15 Salary Expense 3 335 5 7 1 1 40 4 6 0 9 46 14
15 Employee Income Tax Payable 3 7 1 00 15
16 Social Security Tax Payable 3 5 4 11 16
17 Medicare Tax Payable 7 8 2 83 17
18 Health Insurance Premiums Payable 2 1 9 00 18
19 U.S. Savings Bonds Payable 3 5 00 19
20 United Way Donations Payable 4 0 00 20
21 21
6
22 22
6. Accounts Credited 7. Amounts Credited
Hobby Shack journalized the company’s payroll for the Amounts recorded in the General columns of a cash
semimonthly period ended December 15, 20--. payments journal are posted individually to general led-
ger accounts. The credit to Cash, $4,609.46, is not posted
separately to the cash account. The amount is included in
December 15. Paid cash for semimonthly payroll, the journal’s Cash Credit column total that is posted at
$4,609.46 (total payroll, $5,711.40, less deductions: the end of the month. The same procedures are followed
employee income tax, $371.00; social security tax, to post this journal entry to the appropriate accounts as
$354.11; Medicare tax, $82.83; health insurance were described in Chapter 11.
premiums, $219.00; U.S. Savings Bonds, $35.00;
United Way donations, $40.00). Check No. 335.
S T E P S JOURNALIZING PAYMENT OF A PAYROLL
1 Write the date, 15, in the Date column.
2 Write the title of the account debited, Salary Expense, in the Account Title column.
3 Write the check number, 335, in the Ck. No. column.
4 Write the amount debited to Salary Expense, $5,711.40, in the General Debit column.
5 On the same line, write the total amount paid to employees, $4,609.46, in the
Cash Credit column.
6 On the next six lines, write the titles of the accounts credited, Employee R E M E M B E R
Income Tax Payable, Social Security Tax Payable, Medicare Tax Payable, Health Total Earnings is the debit
Insurance Premiums Payable, U.S. Savings Bonds Payable, and United Way amount for Salary Expense. Net
Donations Payable, in the Account Title column. Pay is the credit amount for cash.
7 On the same six lines, write the amounts credited to the corresponding
liability accounts, $371.00, $354.11, $82.83, $219.00, $35.00, and $40.00, in the
General Credit column.
Recording a Payroll Lesson 13-1 371
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. What account title is used to journalize the Total Earnings column of the
payroll register?
2. What account title is used to journalize the Federal Income Tax column
of the payroll register?
3. What account title is used to journalize the Social Security Tax column of
the payroll register?
4. What account title is used to journalize the Medicare Tax column of the
payroll register?
WORK TOGETHER 131
Recording a payroll
Metro Company’s payroll register has the following totals for the semimonthly pay period, July 1–15 of the current
year. T accounts and a cash payments journal page are provided in the Working Papers. Your instructor will guide you
through the following examples.
Total Federal Income Social Security Medicare
Earnings Tax Withheld Tax Withheld Withheld
$12,600.00 $1,186.00 $781.20 $182.70
1. Use the T accounts provided to analyze Metro’s July 1–15 payroll.
2. Journalize the payment of Metro’s July 1–15 payroll on page 15 of the cash payments journal. The payroll was
paid by Check No. 455 on July 15 of the current year.
ON YOUR OWN 131
Recording a payroll
Butler Company’s payroll register has the following totals for the semimonthly pay period, August 16–31 of the
current year. T accounts and a cash payments journal page are provided in the Working Papers. Work this problem
independently.
Total Federal Income Social Security Medicare
Earnings Tax Withheld Tax Withheld Withheld
$14,260.00 $1,562.00 $884.12 $206.77
1. Use the T accounts provided to analyze Butler’s August 16–31 payroll.
2. Journalize the payment of Butler’s August 16–31 payroll on page 16 of a cash payments journal. The payroll was
paid by Check No. 628 on August 31 of the current year.
372 Chapter 13 Payroll Accounting, Taxes, and Reports
L E S S O N
Recording Employer
13-2 Payroll Taxes
C A L C U L AT I N G E M P L O Y E R P AY R O L L TA X E S
Employers must pay to the government the taxes withheld and $82.83 in Medicare tax from employee wages for
from employee earnings. Hobby Shack has withheld fed- the pay period ended December 15. Hobby Shack owes
eral income tax, social security tax, and Medicare tax from the same amount of social security and Medicare taxes as
employee salaries. The amounts withheld are liabilities to the amount withheld from employees. Therefore, Hobby
the business until they are actually paid to the govern- Shack’s social security and Medicare taxes for the pay
ment. In addition, employers must pay several of their period ended December 15 are also $354.11 and $82.83
own payroll taxes. Employer payroll taxes are business respectively.
expenses. Congress sets the social security and Medicare tax rates
Most employers must pay four separate payroll taxes. for employees and employers. Periodically, Congress may
These taxes are (1) social security tax, (2) Medicare tax, change the tax rates and tax base. The social security tax
(3) federal unemployment tax, and (4) state unemploy- rate and base used in this text are 6.2% of earnings up to a
ment tax. Employer payroll taxes expense is based on a maximum of $87,000.00 in each calendar year. Medicare
percentage of employee earnings. does not have a tax base. Therefore, Medicare tax is cal-
culated on total employee earnings. The Medicare tax rate
Employer Social Security and Medicare Taxes
used in this text is 1.45% of total employee earnings.
The social security and Medicare taxes are the only pay-
roll taxes paid by both the employees and the employer.
Hobby Shack withheld $354.11 in social security tax R E DC
HOP
S T IC
KS /
G ET
TY
IMA
GE
S
R E M E M B E R
Employers must pay four taxes
on employee earnings—social
security tax, Medicare tax,
federal unemployment tax, and
state unemployment tax.
Recording Employer Payroll Taxes Lesson 13-2 373
U N E M P L O Y M E N T TA X A B L E E A R N I N G S
HOBBY SHACK
Taxable Earnings
for December 15, 20--, Pay Period
Accumulated Total
Unemployment
Earnings Earnings for
Taxable
as of Dec. 15, 20--
Earnings
Nov. 30, 20-- Pay Period
Aranda, Susan A. . . . . . . $21,115.00 $ 968.00 —
Drew, Paul S. . . . . . . . . . 5,595.25 550.00 $550.00 2 2. Enter unemployment
Kellogg, Janice P. . . . . . . . 39,840.00 1,910.00 — taxable earnings.
Mendel, Ann M. . . . . . . . 1 2,030.00 1 240.00 240.00
Selby, Rick E. ........ 22,746.00 1,137.00 —
Young, Justin L. . . . . . . . 19,816.00 906.40 —
3 $790.00
1. Enter accumulated earnings 3. Total the unemployment
and total earnings for taxable earnings column.
each employee.
Federal unemployment insurance laws require that employ- ployment tax is applied to the first $7,000.00 earned
ers pay taxes for unemployment compensation. These tax by each employee for each calendar year. The amount
funds are used to pay workers’ benefits for limited periods of unemployment taxable earnings for Hobby Shack’s
of unemployment and to administer the unemployment pay period ended December 15, 20--, is shown in the
compensation program. illustration.
The total earnings subject to unemployment tax is
referred to as unemployment taxable earnings. The unem-
S T E P S CALCULATING UNEMPLOYMENT TAXABLE EARNINGS
1 For each employee, enter accumulated earnings as of November 30 and total earnings for the December 15 pay
period. These amounts are taken from each employee earnings record. Rick E. Selby’s accumulated earnings as
of November 30, $22,746.00, are recorded in the first column. His total earnings for the December 15 pay period,
$1,137.00, are recorded in the second column.
2 Enter unemployment taxable earnings for the pay period in the Unemployment Taxable Earnings column for
employees whose accumulated earnings are less than $7,000.00. The November 30 accumulated earnings for Paul
S. Drew, $5,595.25, plus the December 15 earnings, $550.00, equal $6,145.25 and are less than $7,000.00. Therefore,
his total earnings for the December 15 pay period, $550.00, are subject to unemployment tax and are recorded
in the Unemployment Taxable Earnings column. Since the accumulated earnings for Mr. Selby are greater than
$7,000.00, none of his current earnings are subject to unemployment tax. Thus, the amount of unemployment
taxable earnings recorded in the third column is zero, which is represented by a dash.
3 Total the Unemployment Taxable Earnings column. This total amount, $790.00, is used to calculate the unemploy-
ment tax.
374 Chapter 13 Payroll Accounting, Taxes, and Reports
U N E M P L O Y M E N T TA X E S
Hobby Shack pays two unemployment taxes, federal funds. This deduction cannot be more than 5.4% of tax-
unemployment tax and state unemployment tax. able earnings. The effective federal unemployment tax rate
in most states is, therefore, 0.8% on the first $7,000.00
Federal Unemployment Tax
earned by each employee. (Federal, 6.2% ⫺ deductible
A federal tax used for state and federal administrative
for state, 5.4% ⫽ 0.8%.) All of the unemployment tax on
expenses of the unemployment program is called federal
the first $7,000.00 of salary is paid by the employer.
unemployment tax. The federal unemployment tax is
Hobby Shack’s federal unemployment tax for the pay
6.2% of the first $7,000.00 earned by each employee. An
period ended December 15, 20--, is calculated as shown.
employer generally can deduct from federal unemploy-
ment payments the amounts paid to state unemployment
Unemployment Federal Federal
Taxable ⴛ Unemployment ⴝ Unemployment
Earnings Tax Rate Tax
$790.00 ⫻ 0.8% ⫽ $6.32
State Unemployment Tax Many states require that employers pay unemploy-
A state tax used to pay benefits to unemployed workers is ment tax of 5.4% on the first $7,000.00 earned by each
called state unemployment tax. The Social Security Act employee. The unemployment taxable earnings used to
specifies certain standards for unemployment compensa- calculate the federal unemployment tax are also used to
tion laws. Therefore, a high degree of uniformity exists in calculate the state unemployment tax. Hobby Shack’s
state unemployment laws. However, details of state unem- state unemployment tax for the pay period ended Decem-
ployment laws do differ. Because of these differences, ber 15, 20--, is calculated as shown.
employers must know the requirements of the states in
which they operate.
Unemployment State State
Taxable ⴛ Unemployment ⴝ Unemployment
Earnings Tax Rate Tax
$790.00 ⫻ 5.4% ⫽ $42.66
D I GI T
AL V
I S IO
N/ G
ETT
Y IM
AG
ES
Recording Employer Payroll Taxes Lesson 13-2 375
J O U R N A L I Z I N G E M P L O Y E R P AY R O L L TA X E S
1. Date 2. Account Debited 3. Memorandum Number 4. Amount Debited
GENERAL JOURNAL PAGE 13
DOC. POST.
DATE ACCOUNT TITLE NO. REF. DEBIT CREDIT
2 4
9 1 15 Payroll Taxes Expense 3 M63 4 8 5 92 9
10 Social Security Tax Payable 3 5 4 11 10
11 Medicare Tax Payable 8 2 83 11
12 Unemployment Tax Payable—Federal 5 6 6 32 12
13 Unemployment Tax Payable—State 4 2 66 13
14 14
15 15
5. Accounts Credited 6. Amounts Credited
Employer payroll taxes are paid to the government at a
later date. However, the liability is incurred when salaries Payroll Taxes Expense
are paid. Therefore, the transaction to record employer 485.92
payroll taxes expense is journalized on the same date the
payroll is journalized. The salary expense and the employer Social Security Tax Payable
payroll taxes expense are, therefore, both recorded in the 354.11
same accounting period.
Medicare Tax Payable
82.83
December 15. Recorded employer payroll
taxes expense, $485.92, for the semimonthly Unemployment Tax Payable—Federal
pay period ended December 15. Taxes owed 6.32
are: social security tax, $354.11; Medicare tax,
$82.83; federal unemployment tax, $6.32; state Unemployment Tax Payable—State
unemployment tax, $42.66. Memorandum No. 63. 42.66
Payroll Taxes Expense is debited for $485.92 to show Amounts recorded in the general journal are posted
the increase in the balance of this expense account. Four individually to general ledger accounts. The same proce-
liability accounts are credited to show the increase in pay- dures are followed to post this journal entry to the appro-
roll tax liabilities. priate accounts as were described in Chapter 11.
S T E P S JOURNALIZING EMPLOYER PAYROLL TAXES
1 Write the date, 15, in the Date column.
2 Write the title of the expense account debited, Payroll Taxes Expense, in the Account Title column.
3 Write the memorandum number, M63, in the Doc. No. column.
4 Write the debit amount, $485.92, in the Debit column.
5 Write the titles of the liability accounts credited, Social Security Tax Payable, Medicare Tax Payable, Unemployment
Tax Payable—Federal, and Unemployment Tax Payable—State, on the next four lines of the Account Title column,
indented about 1 centimeter.
6 Write the credit amounts, $354.11, $82.83, $6.32, and $42.66, respectively, in the Credit column.
376 Chapter 13 Payroll Accounting, Taxes, and Reports
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
TERMS REVIEW 1. What is the tax rate Hobby Shack must pay on employees for each of the
following taxes: social security, Medicare, federal unemployment, and
state unemployment?
federal unemployment tax
2. What is the amount of each employee’s earnings that is subject to fed-
state unemployment tax eral and state unemployment taxes at Hobby Shack?
WORK TOGETHER 132
Recording employer payroll taxes
Payroll information taken from employee earnings records is given below. A form and general journal page are
provided in the Working Papers. Your instructor will guide you through the following examples.
Accumulated Total Earnings for
Employee Name Earnings, April 30 May 1–15 Pay Period
Beltran, Tamela C. $5,100.00 $637.50
Cintron, Irma V. 7,350.00 920.00
1. Calculate the amount of earnings subject to unemployment taxes. Unemployment taxes are owed on the first
$7,000.00 of earnings for each employee.
2. Calculate the amount of employer payroll taxes owed for the May 1–15 pay period. Use the employer payroll tax
rates shown in this chapter.
3. Journalize the employer’s payroll taxes for the May 1–15 pay period on May 15 of the current year. Use general
journal page 10 and Memorandum No. 46.
ON YOUR OWN 132
Recording employer payroll taxes
Payroll information taken from employee earnings records is given below. A form and general journal page are
provided in the Working Papers. Work this problem independently.
Accumulated Total Earnings for
Employee Name Earnings, May 31 June 1–15 Pay Period
Caldwell, Sarah H. $6,020.00 $ 580.00
Easley, Benjamin P. 5,450.00 620.00
Franks, John J. 8,420.00 1,000.00
1. Calculate the amount of earnings subject to unemployment taxes. Unemployment taxes are owed on the first
$7,000.00 of earnings for each employee.
2. Calculate the amount of employer payroll taxes owed for the June 1–15 pay period. Use the employer payroll tax
rates shown in this chapter.
3. Journalize the employer’s payroll taxes for the June 1–15 pay period on June 15 of the current year. Use general
journal page 12 and Memorandum No. 83.
Recording Employer Payroll Taxes Lesson 13-2 377
L E S S O N
Reporting Withholding
13-3 and Payroll Taxes
E M PLOY E R AN N UAL R E P O R T TO
E M P L O Y E E S O F TA X E S W I T H H E L D
31-0429632 24,843.00 648.00
24,843.00 1,540.27
Hobby Shack, Inc.
1420 College Plaza 24,843.00 360.22
Atlanta, GA 30337-1726
450-70-6432
Rick E. Selby
1625 Northland Drive
Clarkdale, GA 30020-6523
Each employer who withholds income tax, social secu- ends employment before December 31, Form W-2 must be
rity tax, and Medicare tax from employee earnings must furnished within 30 days of the last date of employment.
furnish each employee with an annual report of these Four copies (A to D) of Form W-2 are prepared for each
withholdings. The report shows total year’s earnings and employee. Copies B and C are given to the employee. The
the amounts withheld for taxes for an employee. These employee attaches Copy B to a personal federal income
amounts are obtained from the employee earnings records. tax return and keeps Copy C for a personal record. The
The report is prepared on the Internal Revenue Service employer sends Copy A to the Social Security Administra-
Form W-2, Wage and Tax Statement. The Form W-2 pre- tion and keeps Copy D for the business’s records.
pared by Hobby Shack for Rick E. Selby is shown. Businesses in states with state income tax must prepare
Employers are required to furnish Form W-2 to each additional copies of Form W-2. The employee attaches the
employee by January 31 of the next year. If an employee additional copy to the personal state income tax return.
378 Chapter 13 Payroll Accounting, Taxes, and Reports
E M P L O Y E R ’ S Q U A R T E R LY F E D E R A L TA X R E T U R N
1. Heading
Hobby Shack, Inc. December 31, 20--
1 31-0429632
1420 College Plaza Atlanta GA
30337-1726
2. Number of
Employees
3. Total
Quarterly
6 2
32,98000 3 Earnings
2,16800 4 4. Income
- 0-
2,16800 Tax Withheld
32,98000 4,08952
-0- - 0-
32,98000 95642 5 5. Employee and
6 Employer
5,04594
Social Security
- 0- and Medicare Taxes
5,04594
7,21394 7
- 0- 6. Total Social Security
7,21394 plus Medicare Taxes
7,21394
- 0-
7. Total Taxes
2,271.44 2,394.70 2,547.80 7,213.94 9 9. Total Taxes
8 8 8
Janice Kellogg,
Janice Kellogg Manager 1/24/--
8. Total Taxes for Each Month
Reporting Withholding and Payroll Taxes Lesson 13-3 379
P R E P A R I N G E M P L O Y E R ’ S Q U A R T E R LY
F E D E R A L TA X R E T U R N
Each employer is required by law to periodically report submitted every three months on Form 941, Employer’s
the payroll taxes withheld from employee salaries and the Quarterly Federal Tax Return. Form 941 is filed before
employer payroll taxes due the government. Some reports the last day of the month following the end of a calendar
are submitted quarterly and others, annually. quarter. Hobby Shack’s Form 941 for the quarter ended
Each employer must file a quarterly federal tax return December 31 is shown on the previous page. The infor-
showing the federal income tax, social security tax, and mation needed to prepare Form 941 is obtained from
Medicare tax due the government. This information is employee earnings records.
PREPARING AN EMPLOYER’S QUARTERLY
S T E P S
FEDERAL TAX RETURN
1 Enter the company name, address, employer identification number, and the date the quarter ended in the
heading section of Form 941.
2 Enter the number of employees, 6, on line 1.
3 Enter total quarterly earnings, $32,980.00, on line 2. This amount is the sum of the fourth quarter total earn-
ings of all employees. Total earnings, $32,980.00, is also recorded on lines 6a and 7a.
4 Enter the income tax withheld, $2,168.00, on line 3. The amount is the total of the fourth quarter federal
income tax withheld from all employees. The same amount is entered on line 5.
5 Enter the quarterly employee and employer social security taxes, $4,089.52, and Medicare taxes, $956.42, on
lines 6b and 7b, respectively. The taxes due are calculated as shown.
Total
Earnings ⴛ Tax Rate ⴝ Tax
Social Security $32,980.00 ⫻ 12.4% ⫽ $4,089.52
Medicare $32,980.00 ⫻ 2.9% ⫽ $ 956.42
The 12.4% tax rate is the sum of the employee 6.2% and the employer 6.2% social security tax rates. The
2.9% tax rate is the sum of the employee 1.45% and the employer 1.45% Medicare tax rates.
6 Enter the total social security tax plus Medicare tax, $5,045.94 ($4,089.52 ⫹ $956.42 ⫽ $5,045.94), on line 8.
Since Hobby Shack has no adjustment to its taxes, the total is also entered on line 10.
7 Enter the total taxes, $7,213.94, on lines 11 and 13. Hobby Shack is required to pay the federal government
the sum of the federal income tax withheld and the employee and employer’s shares of the social security tax
and Medicare tax.
8 Enter on lines 17a, 17b, and 17c the total amounts of employee income tax withheld and employee and
employer social security and Medicare taxes for each month of the quarter. For the month of December, the
amount of taxes owed is calculated as shown and recorded on line 17c.
Employee Social Employer Social
Federal Income Security and Security and Federal Tax
ⴙ ⴙ ⴝ
Tax Withheld Medicare Tax Medicare Tax Liability
Dec. 1–15 $371.00 ⫹ $436.94 ⫹ $436.94 ⫽ $1,244.88
Dec. 16–31 $386.00 ⫹ $458.46 ⫹ $458.46 ⫽ $1,302.92
Totals $757.00 ⫹ $895.40 ⫹ $895.40 ⫽ $2,547.80
9 Enter the total quarterly withholding and payroll taxes, $7,213.94, on line 17d. This total is the sum of the
three monthly totals reported on line 17 ($2,271.44 ⫹ $2,394.70 ⫹ $2,547.80 ⫽ $7,213.94).
380 Chapter 13 Payroll Accounting, Taxes, and Reports
E M P L O Y E R A N N U A L R E P O R T I N G O F P AY R O L L TA X E S
X 104,525.00 6,790.00
104,525.00 6,480.55
104,525.00 1,515.61
31-0429632
Hobby Shack, Inc.
1420 College Plaza
Atlanta, GA 30337-1726
Janice Kellogg 404 555-9368
jkellogg@hobbyshack.com
Janice Kellogg Manager 2/27/--
T Y I MA G E S
E R F / GET
CHOIC
PH E R ’S
Form W-3, Transmittal of Wage and Tax Statements, is O TO
GR A
PH
sent to the Social Security Administration by February 28
each year. Form W-3 reports the previous year’s earnings
and payroll taxes withheld for all employees. Attached
to Form W-3 is Copy A of each employee Form W-2.
Employers with more than 250 employees must send the
information to the Internal Revenue Service in computer
files rather than the actual Forms W-2 and W-3.
At the end of a calendar year, employers must also
report to the federal and state governments a summary of
all earnings paid to employees during the twelve months.
Reporting Withholding and Payroll Taxes Lesson 13-3 381
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. When must employers furnish a W-2 statement to their employees?
2. What taxes are included in the quarterly federal tax return filed by the
employer?
WORK TOGETHER 133
Reporting withholding and payroll taxes
A Form 941, Employer’s Quarterly Federal Tax Return, is given in the Working Papers. Your instructor will guide you
through the following example. The following data is for Audio Solutions.
Date Total Federal Income Employee Social Security Employee Medicare
Paid Earnings Tax Withheld Tax Withheld Tax Withheld
Jan. 31 $10,440.00 $731.00 $647.28 $151.38
Feb. 28 10,960.00 767.00 679.52 158.92
Mar. 31 12,400.00 868.00 768.80 179.80
a. Company address: 625 Sandpiper Street, Ormond Beach, Florida 32074-4060
b. Employer identification number: 70-7818356
c. Number of employees: 6
1. Prepare a Form 941 for Audio Solutions for the first quarter of the current year. Use the preparation date of
April 24. Sign your name as the manager of the company.
ON YOUR OWN 133
Reporting withholding and payroll taxes
A Form 941, Employer’s Quarterly Federal Tax Return, is given in the Working Papers. Work this problem indepen-
dently. The following data is for Audio Solutions. The company address, employer identification number, and
number of employees are the same as in Work Together 13-3.
Date Total Federal Income Employee Social Security Employee Medicare
Paid Earnings Tax Withheld Tax Withheld Tax Withheld
Apr. 30 $11,760.00 $823.00 $729.12 $170.52
May 31 11,820.00 827.00 732.84 171.39
June 30 10,900.00 763.00 675.80 158.05
1. Prepare a Form 941 for Audio Solutions for the second quarter of the current year. Use the preparation date of
July 22. Sign your name as the manager of the company.
382 Chapter 13 Payroll Accounting, Taxes, and Reports
L E S S O N
Paying Withholding and
13-4 Payroll Taxes
P AY I N G T H E L I A B I L I T Y F O R E M P L O Y E E I N C O M E
TA X , S O C I A L S E C U R I T Y TA X , A N D M E D I C A R E TA X
Employers must pay to the federal, state, and local gov- and (2) the amount of payroll taxes owed during a prior
ernments all payroll taxes withheld from employee earn- 12-month period. The 12-month period that ends on
ings as well as the employer payroll taxes. The payment June 30th of the prior year is called the lookback period.
of payroll taxes with the government is referred to as a The Internal Revenue Service provides businesses with the
deposit. Two amounts determine how often deposits are following flowchart to assist them in determining when to
made to the federal government: (1) the amount of pay- make tax deposits.
roll taxes collected during the current deposit period
When to Deposit Form 941 Employment Taxes
Will total taxes for the quarter Deposit taxes by the end of the month after
be less than $2,500? YES the end of the quarter, or mail taxes with
If, unsure, answer NO. Form 941.
NO
Is your accumulated liability for the deposit
period $100,000 or more? YES Deposit taxes by the next banking day.
NO
Did you fall under the $100,000 rule at any
time during this year or YES You are a Semiweekly Schedule Depositor.
last year?
Deposit taxes from paydays paid on:
NO • Wednesday, Thursday, and Friday
by the following Wednesday.
• Saturday, Sunday, Monday,
Are the total taxes and Tuesday by the following Friday.
for the Lookback Period YES
more than $50,000?
NO
You are a
Monthly Schedule Depositor.
Deposit taxes for the month
by the 15th of the
following month.
Paying Withholding and Payroll Taxes Lesson 13-4 383
FO R M 810 9, F E D E R AL D E P O S IT CO U P O N
AMOUNT OF DEPOST (Do NOT type: please print.)
DOLLARS CENTS
-- 2 5 47 8 0
BANK NAME/
31 0 4 29 6 3 2
DATE STAMP Hobby Shack, Inc.
IRS USE
1420 College Plaza ONLY
Atlanta
GA 30337-1726
FOR BANK USE IN MICR ENCODING
404 555-9368
New employers are monthly schedule depositors for the Deposits can also be made using the Electronic Federal
first calendar year of business. The Internal Revenue Ser- Tax Payment System (EFTPS). Using either a personal
vice issues a monthly Form 8109 coupon book to new computer or telephone, the business can have the deposit
employers. After a lookback period is established, the transferred directly from its bank account to the govern-
business must evaluate whether a change in its deposit ment. Although any business can enroll in the EFTPS,
period is required. businesses having deposits of more than $200,000 during
Hobby Shack is classified as a monthly depositor. So, the the past calendar year must use the EFTPS.
payroll taxes are deposited with a local authorized finan- Tax rules change periodically. Always check the most
cial institution by the 15th day of the following month, current tax information before calculating any tax amount
accompanied by Form 8109. In December, Hobby Shack and the tax deposit requirements.
withheld $757.00 from employee salaries for federal
income taxes and $895.40 for social security and Medi-
care taxes. Hobby Shack must also pay the employer share
of the payroll taxes. The federal tax payment, $2,547.80,
is sent January 15 to an authorized bank with Form 8109 F O R YO U R I N F O R M AT I O N
as shown. F Y I
The type of tax—federal income, social security, and
Medicare—is identified by marking the 941 circle. These Some federal tax forms can be
printed from copies available
taxes are reported to the government using Form 941.
on the Internet. Other tax
The calendar quarter is identified on the right side of the forms, such as the W-2, W-3,
form. and 8109, are designed to be
machine readable and must
be obtained directly from the
Internal Revenue Service.
R E M E M B E R
Social security tax and Medicare
tax are the only payroll taxes
paid by both the employer
and employee. A business
pays the same amount
of social security tax and
Medicare tax as the amount
withheld from employees.
384 Chapter 13 Payroll Accounting, Taxes, and Reports
J O U R N A L I Z I N G P AY M E N T O F L I A B I L I T Y F O R E M P L O Y E E
I N C O M E TA X , S O C I A L S E C U R I T Y TA X , A N D M E D I C A R E TA X
1. Date 4. Debit Amount
CASH PAYMENTS JOURNAL PAGE 25
1 2 3 4 5
CK. POST. GENERAL ACCOUNTS PURCHASES CASH
DATE ACCOUNT TITLE PAYABLE DISCOUNT CREDIT
NO. REF. DEBIT CREDIT DEBIT CREDIT
1 4
12 15 Employee Income Tax Payable 347 7 5 7 00 2 5 4 7 80 12
13 Social Security Tax Payable 3 1 4 5 1 38 5 13
14 Medicare Tax Payable 3 3 9 42 14
15
2 15
16 16
2. Accounts Debited 3. Check Number 5. Credit Amount
JOURNALIZING
January 15. Paid cash for liability for
A PAYMENT
employee income tax, $757.00; social
OF LIABILITY
security tax, $1,451.38; and Medicare tax,
FOR EMPLOYEE
$339.42; total, $2,547.80. Check No. 347. S T E P S
INCOME TAX,
SOCIAL SECURITY
Employee Income Tax Payable
TAX, AND
MEDICARE TAX
757.00 Jan.15 Bal. 757.00
Social Security Tax Payable 1 Write the date, 15, in the Date column.
1,451.38 Jan.15 Bal. 1,451.38 2 Write the titles of the three accounts debited, Employee
Income Tax Payable, Social Security Tax Payable, and
Medicare Tax Payable Medicare Tax Payable, in the Account Title column.
339.42 Jan.15 Bal. 339.42 3 Write the check number, 347, in the Ck. No. column.
Cash 4 Write the three debit amounts, $757.00, $1,451.38, and
2,547.80 $339.42, in the General Debit column.
5 Write the amount of the credit to Cash, $2,547.80, in the
Cash Credit column.
The balances of the liability accounts are reduced by
this transaction. Therefore, Employee Income Tax Payable
is debited for $757.00. Social Security Tax Payable is deb-
ited for $1,451.38. Medicare Tax Payable is debited for
$339.42. The balance of Cash is decreased by a credit for F O R YO U R I N F O R M AT I O N
the total payment, $2,547.80. F Y I
Semimonthly pay periods are
paid twice a month. Biweekly pay
periods are paid every two weeks.
Paying Withholding and Payroll Taxes Lesson 13-4 385
P AY I N G T H E L I A B I L I T Y F O R F E D E R A L
U N E M P L O Y M E N T TA X
AMOUNT OF DEPOST (Do NOT type: please print.)
DOLLARS CENTS
-- 3460
BANK NAME/
31 0429 6 32
DATE STAMP Hobby Shack, Inc.
IRS USE
ONLY
1420 College Plaza
Atlanta
GA 30337-1726
FOR BANK USE IN MICR ENCODING
404 555-9368
Federal unemployment insurance is paid by the end of The total of federal unemployment taxes paid during
the month following each quarter if the liability amount a calendar year is reported on Form 940. Hobby Shack’s
is more than $100. However, all unemployment tax lia- federal unemployment tax liability at the end of Decem-
bilities outstanding at the end of a calendar year should ber 31 is $34.60. Hobby Shack’s Form 8109 for the fourth
be paid. Federal unemployment tax is paid to the federal quarter is shown. The type of tax, federal unemployment
government by making a tax deposit with an authorized tax, is identified by marking the 940 circle since this tax is
bank. The deposit for federal unemployment tax is similar reported to the government using Form 940. The calen-
to the deposit required for income tax, social security tax, dar quarter is identified on the right side of the form.
and Medicare tax. Form 8109, Federal Tax Deposit Cou-
pon accompanies the unemployment tax deposit.
IM A G E S
ETTY
ON/ G
AL V IS I
D IGIT
386 Chapter 13 Payroll Accounting, Taxes, and Reports
J O U R N A L I Z I N G P AY M E N T O F L I A B I L I T Y
F O R F E D E R A L U N E M P L O Y M E N T TA X
1. Date 2. Account Debited 4. Debit Amount
CASH PAYMENTS JOURNAL PAGE 26
1 2 3 4 5
CK. POST. GENERAL ACCOUNTS PURCHASES CASH
DATE ACCOUNT TITLE NO. REF. PAYABLE DISCOUNT CREDIT
DEBIT CREDIT DEBIT CREDIT
2 4
10 1 31 Unemployment Tax Payable—Federal 367 3 4 60 5 3 4 60 10
11 3 11
3. Check Number 5. Credit Amount
The balance of the liability account is reduced by this
January 31. Paid cash for federal transaction. Therefore, Unemployment Tax Payable—
unemployment tax liability for quarter ended Federal is debited for $34.60. The balance of the asset
December 31, $34.60. Check No. 367. account, Cash, is decreased by a credit for the payment,
$34.60.
Unemployment Tax Payable—Federal
34.60 Jan. 31 Bal. 34.60
Cash
34.60
JOURNALIZING A PAYMENT OF LIABILITY FOR FEDERAL
S T E P S
UNEMPLOYMENT TAX
1 Write the date, 31, in the Date column.
2 Write the title of the account debited, Unemployment Tax Payable—Federal, in the Account Title column.
3 Write the check number, 367, in the Ck. No. column.
4 Write the debit amount, $34.60, in the General Debit column.
5 Write the amount of the credit to Cash, $34.60, in the Cash Credit column.
J O U R N A L I Z I N G P AY M E N T O F L I A B I L I T Y
F O R S TAT E U N E M P L O Y M E N T TA X
1. Date 2. Account Debited 4. Debit Amount
CASH PAYMENTS JOURNAL PAGE 26
1 2 3 4 5
CK. POST. GENERAL ACCOUNTS PURCHASES CASH
DATE ACCOUNT TITLE NO. REF. PAYABLE DISCOUNT CREDIT
DEBIT CREDIT DEBIT CREDIT
2 4
11 1 31 Unemployment Tax Payable—State 368 2 3 3 55 5 2 3 3 55 11
12 3 12
3. Check Number 5. Credit Amount
The same steps are followed as for federal unemploy-
ment tax. State requirements for reporting and paying January 31. Paid cash for state unemployment
state unemployment taxes vary. In general, employers are tax liability for quarter ended December 31,
required to pay the state unemployment tax during the $233.55. Check No. 368.
month following each calendar quarter.
Paying Withholding and Payroll Taxes Lesson 13-4 387
CAREERS IN ACCOUNTING
Wa l l y Wood , Ma n a g i ng Pa r t ne r
of A c c o u nt i ng Fi r m
Stop a farmer as he harvests his Soon after graduating from college and passing the
crop. Ask him how he decided CPA examination, Wally became a partner in the firm,
to become a farmer and you now called Wood and Wood, Ltd. Within three years,
are likely to hear, “I was before the age of 30, Wally became managing partner
born to be a farmer. My of the firm. As the managing partner, Wally is ultimately
grandfather started this responsible for the quality of all services provided by the
farm. My father worked firm. A managing partner also markets the firm’s services
this farm. I’ve never to obtain new clients. Like the owner of any small busi-
thought of doing any- ness, the managing partner manages the firm’s employ-
thing else.” ees, technology, equipment, and accounting records.
Likewise, Wally Wood The firm recently expanded by buying another CPA
was born into the account- firm, becoming Wood, Wood and Taylor, Ltd. Wally notes,
ing profession. Wally began “As a small firm, we are uniquely positioned to provide
working part-time for his personalized tax, audit, and consulting services to our
father, K. Dale Wood, CPA, in clients, including individuals, small businesses, and gov-
1973 at the age of 16. He started his ernment agencies. We also perform peer reviews for
accounting career doing write-up work other accounting firms, evaluating their work to ensure
COURTESY OF WALLY WOOD
for clients, recording their accounting transac- that proper accounting and auditing standards are being
tions in accounting records, and preparing their financial applied.”
statements. He also began preparing short tax returns. As managing partner of an accounting firm, Wally
After graduating from high school, he became a full- recognizes his obligation to be involved in the growth
time employee of his father’s accounting firm while major- and governance of his profession. As a member of sev-
ing in accounting at the local university. “After about two eral committees of his state society of certified public
years, due to circumstances beyond our control, I became accountants, he is working to ensure that accountants
the in-charge on several tax and small write-up clients. By provide quality services to their clients.
the time I graduated from college, I was responsible for
the majority of the tax and write-up clients.”
Salary Range: According to the 2005 salary survey obtain several years’ experience in another accounting
conducted by financial recruiting company Robert Half firm.
International, directors (partners) of small public account-
Occupational Outlook: The Sarbanes-Oxley Act of
ing firms earned between $69,000 and $87,750 a year.
2002 has dramatically increased the demand for accoun-
Graduate degrees and professional certifications can
tants who can establish, document, and evaluate the
increase these salaries by up to 10 percent.
internal accounting controls required to prepare accu-
Qualifications: Starting your own accounting firm rate financial statements. Clients continue to need tax
requires a combination of expertise and experience. After planning and other consulting services.
earning a Certified Public Accountant license, you should
388 Chapter 13 Payroll Accounting, Taxes, and Reports
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
TERM REVIEW 1. For a monthly schedule depositor, when are payroll taxes paid to the
federal government?
lookback period 2. What are two different uses for Form 8109?
WORK TOGETHER 134
Paying withholding and payroll taxes
A cash payments journal page is given in the Working Papers. Your instructor will guide you through the following
examples. The following payroll data is for Digital Supplies for the monthly pay period ended March 31 of the current
year.
Date Federal Income Employee Social Security Employee Medicare
Paid Tax Withheld Tax Withheld Tax Withheld
Mar. 31 $1,386.00 $1,322.05 $309.25
Credit balances on March 31 for the unemployment tax accounts for the first quarter are as follows: Unemployment
Tax Payable—Federal, $511.75; Unemployment Tax Payable—State, $3,454.34. Digital Supplies pays both unemploy-
ment taxes each quarter.
1. Prepare a journal entry for payment of the withheld taxes. Digital Supplies is a monthly schedule depositor.
Journalize Check No. 383 on cash payments journal page 14 using the date the taxes are due to the federal
government.
2. Prepare journal entries for payment of the federal and state unemployment taxes liability. Assume both checks
were prepared on the due date for the federal tax deposit. Check Nos. 401 and 402.
ON YOUR OWN 134
Paying withholding and payroll taxes
A cash payments journal page is given in the Working Papers. Work this problem independently. The following
payroll data is for River Hardware for the monthly pay period ended June 30 of the current year.
Date Federal Income Employee Social Security Employee Medicare
Paid Tax Withheld Tax Withheld Tax Withheld
June 30 $1,052.00 $1,004.40 $234.95
Credit balances on June 30 for the unemployment tax accounts for the second quarter are as follows: Unemploy-
ment Tax Payable—Federal, $274.80; Unemployment Tax Payable—State, $1,922.40. River Hardware pays both
unemployment taxes each quarter, regardless of the amount owed.
1. Prepare a journal entry for payment of the withheld taxes. River Hardware is a monthly schedule depositor.
Journalize Check No. 678 on cash payments journal page 19 using the date the taxes are due to the federal
government.
2. Prepare journal entries for payment of the federal and state unemployment taxes liability. Assume both checks
were prepared on the due date for the federal tax deposit. Check Nos. 711 and 712.
Paying Withholding and Payroll Taxes Lesson 13-4 389
SUMMARY
After completing this chapter, you can: 3. Analyze payroll transactions and record a
payroll.
1. Define accounting terms related to payroll
accounting, taxes, and reports. 4. Record employer payroll taxes.
2. Identify accounting concepts and practices 5. Prepare selected payroll tax reports.
related to payroll accounting, taxes, and
6. Pay and record withholding and payroll taxes.
reports.
EXPLORE ACCOUNTING
Ne t In c o m e v s . Ta x a bl e In c o m e
Financial statements should provide important age businesses to replace equipment more
information that is accurate, reliable, compa- rapidly, IRS Regulations may permit the cost
rable, and consistent. Over the years, a set of equipment to be allocated more rap-
of principles and concepts for maintain- idly. Thus, in a certain year the expense
ing accounting records and preparing for allocating cost would be greater for
financial statements has been developed. tax purposes than for financial reporting
These guidelines are known as Generally purposes. These types of differences create
Accepted Accounting Principles (GAAP). different amounts reported as net income for
Most businesses use GAAP in preparing their financial reporting purposes and for tax report-
financial statements and determining their net ing purposes.
income. Thus, most businesses follow GAAP in preparing their
The Internal Revenue Service (IRS) is responsible for col- financial statements but must follow IRS Regulations in
lecting money to operate the federal government. Federal preparing their tax returns. As a result, net income on
income taxes are calculated as a percentage of business or financial statements generally differs from taxable income
individual income. To accomplish its task, the IRS prepares reported on tax returns.
Internal Revenue Service Regulations.
The objectives of the accounting profession and busi- Research: Examine several company annual reports.
ness community, however, are not necessarily the same as Study the financial statements and the notes connected
those of the federal government and the IRS. For exam- with those statements. Is there any information indicating
PHOTO: PHOTOGRAPHER’S CHOICE/GETTY IMAGES
ple, a GAAP concept, Matching Expenses with Revenue, a difference between net income reported on the financial
requires that the cost of business equipment be allocated statements and taxable income for tax purposes? What are
over the usable life of the equipment. However, to encour- they, if any?
390 Chapter 13 Payroll Accounting, Taxes, and Reports
131 APPLICATION PROBLEM
Recording a payroll
Dana’s payroll register has the following totals for two semimonthly pay periods, July 1–15 and July 16–31 of
the current year.
Deductions
Total Federal Social Net
Period Medicare
Earnings Income Security Other Total Pay
Tax
Tax Tax
July 1–15 . . . . . . . . . . . . $6,970.00 $685.00 $432.14 $101.07 B $180.00 $1,398.21 $5,571.79
July 16–31 . . . . . . . . . . . 6,040.00 572.00 374.48 87.58 B 150.00 1,184.06 4,855.94
Other Deductions: B—U.S. Savings Bonds
Instructions:
Journalize payment of the two payrolls on page 15 of the cash payments journal given in the Working Papers.
The first payroll was paid by Check No. 547 on July 15 of the current year. The second payroll was paid by
Check No. 568 on July 31 of the current year.
132 APPLICATION PROBLEM
Recording employer payroll taxes
Use Malone’s selected payroll information for the two semimonthly pay periods, April 1–15 and April 16–30 of
the current year. Forms and a general journal are given in the Working Papers.
Accumulated Total Earnings Total Earnings
Earnings, for April 1–15 for April 16–30
Employee Name March 31 Pay Period Pay Period
Bolser, Frank T. $4,860.00 $ 810.00 $ 795.00
Denham, Beth R. 5,670.00 945.00 980.00
Harjo, Teresa S. 7,500.00 1,250.00 1,250.00
Knutzen, John L. 3,720.00 620.00 635.00
Prescott, Laura F. 4,560.00 760.00 740.00
Schmidt, Ian T. 6,900.00 1,150.00 1,125.00
Employer payroll tax rates are as follows: social security, 6.2%; Medicare, 1.45%; federal unemployment,
0.8%; state unemployment, 5.4%. Unemployment taxes are owed on the first $7,000.00 of earnings for each
employee.
Instructions:
1. Calculate the amount of earnings subject to unemployment taxes for the April 1–15 pay period. Note that
Ian T. Schmidt has accumulated earnings on March 31 of $6,900.00. Therefore, only $100.00 ($7,000.00
– $6,900.00) of his April 1–15 earnings is subject to unemployment tax.
2. Calculate the employer payroll tax amounts for the April 1–15 pay period.
( Go Beyond the Book
)
For more information go to
www.C21accounting.com
Payroll Accounting, Taxes, and Reports Chapter 13 391
3. Journalize the employer payroll taxes on page 16 of a general journal. Use the date of April 15 of the
current year. The source document is Memorandum No. 69.
4. Calculate the employer payroll taxes for the April 16–30 pay period. Calculate April 15 accumulated
earnings by adding total earnings for the April 1–15 pay period to the March 31 accumulated earnings.
Note that only part of Beth R. Denham’s earnings for April 16–30 are subject to unemployment tax.
5. Journalize the employer payroll taxes on page 16 of a general journal. Use the date of April 30 of the
current year. The source document is Memorandum No. 76.
133 APPLICATION PROBLEM
Reporting withholding and payroll taxes
The following payroll data is for Eagle Toys for the second quarter of the current year.
Date Total Federal Income Employee Social Security Employee Medicare
Paid Earnings Tax Withheld Tax Withheld Tax Withheld
Apr. 30 $ 9,166.00 $654.00 $568.29 $132.91
May 31 10,382.00 687.00 643.68 150.54
June 30 9,872.00 718.00 612.06 143.14
Additional data:
1. Company address: 784 McDonald Street, Mesa, AZ 85201-5874
2. Employer identification number: 80-7818356
3. Number of employees: 5
4. Federal tax payments have been made on May 15, June 15, and July 15.
Instructions:
Prepare the Form 941, Employer’s Quarterly Federal Tax Return, given in the Working Papers. Use the date July
21. Sign your name as the manager of the company. Amounts on lines 13 and 17d may not equal, due
to rounding.
134 APPLICATION PROBLEM
Paying withholding and payroll taxes
The following payroll data is for Zimmerman Company for the first quarter of the current year.
Total Federal Income
Period Earnings Tax Withheld
March $17,560.00 $1,548.00
First Quarter $52,210.00 —
In addition, total earnings are subject to 6.2% employee and 6.2% employer social security tax, plus 1.45%
employee and 1.45% employer Medicare tax. The federal unemployment tax rate is 0.8% and the state
unemployment tax rate is 5.4% of total earnings. No total earnings have exceeded the tax base for calculating
unemployment taxes.
Instructions:
1. Calculate the appropriate liability amount of social security and Medicare taxes for March. Journalize the
payment of the withheld taxes on page 8 of the cash payments journal given in the Working Papers. The
taxes were paid by Check No. 813 on April 15 of the current year.
392 Chapter 13 Payroll Accounting, Taxes, and Reports
2. Calculate the appropriate federal unemployment tax liability for the first quarter. Journalize payment of
this liability in the cash payments journal. The tax was paid by Check No. 830 on April 30 of the current
year.
3. Calculate the appropriate state unemployment tax liability for the first quarter. Journalize payment of this
liability in the cash payments journal. The tax was paid by Check No. 831 on April 30 of the current year.
135 MASTERY PROBLEM
Journalizing payroll transactions
Keller Systems, Inc., completed payroll transactions during the period May 1 to June 15 of the current year.
Payroll tax rates are as follows: social security, 6.2%; Medicare, 1.45%; federal unemployment, 0.8%; state
unemployment, 5.4%. The company buys savings bonds for employees as accumulated withholdings reach
the necessary amount to purchase a bond. No total earnings have exceeded the tax base for calculating
unemployment taxes. Keller Systems is a monthly schedule depositor for payroll taxes.
Instructions:
1. Journalize the following transactions on page 14 of the cash payments journal and page 10 of the general
journal given in the Working Papers. Source documents are abbreviated as follows: check, C, and memoran-
dum, M.
Transactions:
May 15. Paid cash for April’s payroll tax liability. Withheld taxes from April payrolls: employee income tax,
$532.00; social security tax, $634.88; and Medicare tax, $148.48. C421.
15. Paid cash for semimonthly payroll. Total earnings, $5,250.00; withholdings: employee income
tax, $273.00; U.S. Savings Bonds, $60.00 (calculate the social security and Medicare deductions).
C422.
15. Recorded employer payroll taxes expense for the May 15 payroll. M42.
15. Paid cash for U.S. Savings Bonds for employees, $300.00. C423.
31. Paid cash for semimonthly payroll. Gross wages, $5,310.00; withholdings: employee income tax,
$276.00; U.S. Savings Bonds, $60.00. C461.
31. Recorded employer payroll taxes expense for the May 31 payroll. M46.
31. Paid cash for federal unemployment tax liability for quarter ended March 31, $245.76. C462.
31. Paid cash for state unemployment tax liability for quarter ended March 31, $1,658.88. C463.
June 15. Paid cash for the May liability for employee income tax, social security tax, and Medicare tax,
C487. (Calculate the social security and Medicare tax liabilities by multiplying total earnings for
the period by 12.4% for social security tax and 2.9% for Medicare tax.)
15. Paid cash for semimonthly payroll. Gross wages, $5,280.00; withholdings: employee income tax,
$274.00; U.S. Savings Bonds, $75.00. C488.
15. Recorded employer payroll taxes expense. M53.
2. Prove and rule the cash payments journal.
136 CHALLENGE PROBLEM
Journalizing and posting payroll transactions
Golf Design, Inc., completed payroll transactions during the period January 1 to April 30 of the current year.
Payroll tax rates are as follows: social security, 6.2%; Medicare, 1.45%; federal unemployment, 0.8%; and state
unemployment, 5.4%. The company buys savings bonds for employees as the accumulated withholdings
reach the necessary amount to purchase a bond. No total earnings have exceeded the tax base for calculating
unemployment taxes.
The balances in the general ledger as of January 1 of the current year are recorded in the Working Papers.
Payroll Accounting, Taxes, and Reports Chapter 13 393
Chart of Accounts
Account
Number Account Title
2120 Employee Income Tax Payable
2130 Social Security Tax Payable
2140 Medicare Tax Payable
2150 Unemployment Tax Payable—Federal
2160 Unemployment Tax Payable—State
2180 U.S. Savings Bonds Payable
6150 Payroll Taxes Expense
6170 Salary Expense
Instructions:
1. Journalize the following transactions on page 1 of the cash payments journal and the general journal
given in the Working Papers. Payroll withholdings for employee income tax and U.S. Savings Bonds are
provided. Calculate other payroll withholdings using the tax rates provided. Source documents are abbre-
viated as follows: check, C, and memorandum, M.
Transactions:
Jan. 2. Wrote a check for 15 U.S. Savings Bonds at $25.00 each for employees. C195.
15. Paid the December liability for employee income tax, social security tax, and Medicare tax. C204.
31. Wrote a check for federal unemployment tax liability for quarter ended December 31. C210.
31. Wrote a check for state unemployment tax liability for quarter ended December 31. C211.
31. Paid January payroll (total payroll, $12,200.00, less deductions: employee income tax, $805.00;
U.S. Savings Bonds, $125.00). C216.
31. Recorded employer payroll taxes expense. M98.
Posting. Post the items that are to be posted individually.
Feb. 15. Wrote a check for January liability for employee income tax and for social security tax and Medi-
care tax. C222.
28. Paid February payroll (total payroll, $12,360.00, less deductions: employee income tax, $816.00;
U.S. Savings Bonds, $125.00). C232.
28. Recorded employer payroll taxes expense. M107.
Posting. Post the items that are to be posted individually.
2. Prove and rule cash payments journal page 1. Carry the column totals forward to page 2 of the cash pay-
ments journal.
3. Journalize the following transactions on page 2 of the cash payments journal and continuing on page 1 of
the general journal.
Transactions:
Mar. 15. Wrote a check for February liability for employee income tax, social security tax, and Medicare
tax. C237.
31. Paid March payroll (total payroll, $11,860.00, less deductions: employee income tax, $783.00; U.S.
Savings Bonds, $125.00). C258.
31. Recorded employer payroll taxes expense. M116.
Posting. Post the items that are to be posted individually.
Apr. 1. Paid cash for 15 U.S. Savings Bonds at $25.00 each for employees. C259.
15. Wrote a check for March liability for employee income tax, social security tax, and Medicare tax.
C270.
30. Wrote a check for federal unemployment tax liability for quarter ended March 31. C276.
30. Wrote a check for state unemployment tax liability for quarter ended March 31. C277.
Posting. Post the items that are to be posted individually.
4. Prove and rule cash payments journal page 2.
394 Chapter 13 Payroll Accounting, Taxes, and Reports
A P P L I E D CO M M U N I C AT I O N
One of the unwritten rules of business is that payroll information is private and confidential. People usually do not
want their co-workers to know how much they are paid. This common business practice presents a challenge for
employees responsible for payroll accounting. Payroll workers handle many different types of data. The payroll
department records personal information about employees, such as addresses and social security numbers, and
verifies and totals time cards. In addition, each pay period, payroll accountants calculate each employee’s earnings,
deductions, and net pay. It is important for payroll employees to be trustworthy and able to maintain confidentiality.
Instructions: In the form of a memorandum, write a statement of a company’s policy regarding the confidentiality
of payroll information. The memorandum should be addressed to the employees of the payroll department.
CASE FOR CRITICAL THINKING
Wyatt Company has decided to hire a sales representative. The business can afford to pay the representative a salary
of only $30,000.00. The accounting assistant informs the manager that hiring the representative will cost the busi-
ness more than the $30,000.00 salary. Do you agree with the accounting assistant? Explain your response.
AUDITING FOR ERRORS
In June, the liability for federal and state unemployment tax for Excelsior Corporation is recorded at about the same
amount as for previous months. Jackie Blette suggests that it usually begins to decrease in June, except when many
new graduates are hired that month. You have been asked to investigate the payroll data to discover whether there
is a problem.
Instructions
1. Why would the liability for unemployment tax begin to decline in June?
2. If there is an error in the unemployment liability amounts, what is the likely cause?
3. Examine the information below and on a separate sheet of paper write the correct amounts for the unemploy-
ment tax liabilities.
Accumulated June Federal State
Earnings Total Unemployment Unemployment
Jan.–May Earnings Tax Tax
$4,260.00 $ 810.00 $ 6.48 $43.74
5,200.00 1,100.00 8.80 59.40
6,450.00 1,250.00 10.00 67.50
6,800.00 1,350.00 10.80 72.90
3,600.00 1,200.00 9.60 64.80
A N A LY Z I N G B E S T B U Y ’S F I N A N C I A L S TAT E M E N T S
Best Buy plans for current-year claims against it as well as any claims that might occur in the future. Best Buy esti-
mates an amount for claims it expects to pay in the future that relate to activities of the current fiscal year.
Instructions: Use the Insurance section in Note 1 of Best Buy’s financial statements in Appendix B, page B-14 , to
answer the following questions.
1. How does Best Buy insure against losses?
2. For what types of losses does Best Buy self-insure?
3. Does Best Buy purchase insurance?
4. How does Best Buy estimate its claims?
5. How are accrued claims reported on the March 3, 2007 financial statements?
Payroll Accounting, Taxes, and Reports Chapter 13 395
Accounting
SOFTWARE
R E C O R D I N G P AY R O L L T A X E S
The government does not send an invoice for the amount of payroll taxes due. Businesses must keep accurate
records of the payroll taxes withheld and employer payroll taxes to ensure the correct amount is paid. The payroll
tax liability accounts provide a record of all payroll taxes due. The balance in the account is the amount that should
be paid to the government.
Peachtree provides two methods to obtain the outstanding balances of general ledger accounts. A report of
general ledger accounts presents each transaction and the ending balance of every account. Another window
reports only the monthly total debits and credits and balance for a single account.
PEACHTREE MASTERY PROBLEM 13-5
1. Open (Restore) file 13-5MP.ptb.
2. Journalize and post the May 15 and May 31 transactions in the cash disbursements journal. Use the general
journal to record the employer payroll taxes expense for May 15 and May 31.
3. Before you journalize and post the June 15 transactions, remember to change the accounting periods (Tasks,
System, Change Accounting Period).
4. Journalize and post the June 15 transactions. Use the general journal for the payroll tax expense transactions.
5. Print the May 15 through June 15 cash disbursements journal.
PEACHTREE CHALLENGE PROBLEM 13-6
1. Open (Restore) file 13-6CP.ptb.
2. Journalize and post the payroll transactions. Use the general journal to record the employer payroll taxes
expense.
3. Print the January through April cash disbursements journal.
4. Print the January 2 through March general journal.
5. Print the January through April general ledger.
R E C O R D I N G P AY R O L L T A X E S
When paying payroll taxes and other payroll liabilities in this chapter, the amounts were clearly stated
in the transaction. In a company, there are no bills received stating payroll liability amounts and due date. The
payroll employee must determine how much needs to be paid for each liability and when the amount is due.
The electronic records contain all the data needed to determine the correct amounts, but they must be accessed in
order to be of help. QuickBooks has several ways to determine the balance of various accounts.
A trial balance can be run to show the balance in each account. In most cases, the balance of the account is the
amount that is due the government for the payroll tax liability. To get more detail, a general ledger can be printed
or displayed. The general ledger can be displayed in two forms—one showing only the account balances and one
showing all the entries in each account along with the account balance.
QUICKBOOKS MASTERY PROBLEM 13-5
1. Open the Keller Systems Inc file.
2. Journalize the transactions completed during May 15 through June 15. Use the Write Checks option for all cash
payments. Use the Make General Journal Entries window for all other transactions.
3. Print a Journal report. Use May 15 and June 15 for the dates.
QUICKBOOKS CHALLENGE PROBLEM 13-6
1. Open the Golf Design Inc file.
2. Journalize the transactions completed during January through April.
3. Print a Journal report. Use January 1 and April 30 for the dates.
396 Chapter 13 Payroll Accounting, Taxes, and Reports
C A L C U L AT I N G U N E M P L O Y M E N T TA X
Determining the amount of unemployment taxable earnings can be difficult. The calculation is especially difficult in
the pay period in which an employee’s accumulated earnings reach $7,000. Mistakes can easily be made calculating
these amounts. The solution is to create a template on an electronic spreadsheet.
A formula using a combination of IF and MIN functions is required to calculate unemployment taxable earn-
ings. An IF function compares two numbers and enters one of two values in the cell. The syntax of the IF function is
=IF(logical_test, true_value, false_value). A MIN function calculates the minimum of two or more values. The syntax
of the MIN function is =MIN(value1, value2, …)
Suppose an employee’s accumulated earnings are $6,200 (cell C8) and earnings for the pay period are $500 (cell
D8). The function to calculate the unemployment taxable earnings would be
=IF(C8>7000,0,MIN(D8,7000-C8))
The logical_test is false; C8 is not greater than $7,000. Therefore, the MIN function then calculates the lesser of
(1) $500 in D8 or (2) $800, the difference between $7,000 and the accumulated earnings, $6,200. As you can see,
using IF functions can be complex and will require you to have a full understanding how unemployment taxes are
calculated.
OPTIONAL SPREADSHEET ACTIVITY
Open the file F13-OPT. Follow the step-by-step instructions in the Instructions worksheet to use the IF and MIN
functions to calculate unemployment taxable earnings.
R E C O R D I N G P AY R O L L T A X E S
In an automated payroll system, the computer is used to maintain the employee database, to record payroll transac-
tions at the end of each pay period, and to display and print various payroll reports.
Generating Payroll Journal Entries
Automated Accounting can generate the current payroll journal entry.
1. Choose the Current Payroll Journal Entry menu item from the Options menu. Note that you must first have a
payroll entered into the system before payroll journal entries can be generated.
2. When the confirmation dialog box appears, click Yes.
3. Click the Post button.
Generating the Employer’s Payroll Taxes Journal Entries
Automated Accounting can also generate the current payroll taxes journal entry.
1. Choose the Employer’s Payroll Taxes menu item from the Options menu.
2. When the confirmation dialog box appears, click Yes.
3. Click the Post button.
AUTOMATED ACCOUNTING MASTERY PROBLEM 13-5
Open file F13-5.AA8. Display the problem instructions and complete the problem.
Payroll Accounting, Taxes, and Reports Chapter 13 397
REINFORCEMENT
Activity 2—Part A
An Accounting Cycle for a Corporation:
Journalizing and Posting Transactions
Reinforcement Activity 2 reinforces learning from Part 2, Chapters 9 through 16. Activities cover a complete accounting cycle for
a merchandising business organized as a corporation. Reinforcement Activity 2 is a single problem divided into two parts. Part A
includes learning from Chapters 9 through 13. Part B includes learning from Chapters 14 through 16.
The accounting work of a single merchandising business for the last month of a yearly fiscal period is used in this reinforce-
ment activity. The records kept and reports prepared, however, illustrate the application of accounting concepts for all merchan-
dising businesses.
MEDICAL SERVICES JOURNALS AND LEDGERS
COMPANY MSC
The journals and ledgers used by MSC are listed below.
Medical Services Company (MSC), a merchandising busi- Models of the journals and ledgers are shown in the text-
ness, is organized as a corporation. The business sells a book chapters indicated.
complete line of medical accessories, from crutches to lift
chairs. MSC is located in a medical office plaza adjacent to Journals and Ledgers Chapter
the hospital and is open for business Monday through Sat- Purchases journal 9
urday. A monthly rent is paid for the building. MSC accepts Cash payments journal 9
credit cards from customers.
General journal 9
Sales journal 10
CHART OF ACCOUNTS Cash receipts journal 10
Accounts payable ledger 11
MSC uses the chart of accounts shown on the next page.
Accounts receivable ledger 11
General ledger 11
398 Reinforcement Activity 2—Part A An Accounting Cycle for a Corporation: Journalizing and Posting Transactions
CHART OF ACCOUNTS
GENERAL LEDGER
Balance Sheet Accounts Income Statement Accounts
(1000) ASSETS (4000) OPERATING REVENUE
1100 Current Assets 4110 Sales
1110 Cash 4120 Sales Discount
1120 Petty Cash 4130 Sales Returns and Allowances
1130 Accounts Receivable (5000) COST OF MERCHANDISE
1135 Allowance for Uncollectible Accounts 5110 Purchases
1140 Merchandise Inventory 5120 Purchases Discount
1145 Supplies—Office 5130 Purchases Returns and Allowances
1150 Supplies—Store (6000) OPERATING EXPENSES
1160 Prepaid Insurance 6110 Advertising Expense
1200 Plant Assets 6115 Cash Short and Over
1210 Office Equipment 6120 Credit Card Fee Expense
1220 Accumulated Depreciation—Office Equipment 6125 Depreciation Expense—Office Equipment
1230 Store Equipment 6130 Depreciation Expense—Store Equipment
1240 Accumulated Depreciation—Store Equipment 6135 Insurance Expense
(2000) LIABILITIES 6140 Miscellaneous Expense
2100 Current Liabilities 6150 Payroll Taxes Expense
2110 Accounts Payable 6160 Rent Expense
2115 Federal Income Tax Payable 6165 Repairs Expense
2120 Employee Income Tax Payable 6170 Salary Expense
2130 Social Security Tax Payable 6175 Supplies Expense—Office
2135 Medicare Tax Payable 6180 Supplies Expense—Store
2140 Sales Tax Payable 6185 Uncollectible Accounts Expense
2150 Unemployment Tax Payable—Federal 6190 Utilities Expense
2160 Unemployment Tax Payable—State (7000) INCOME TAX EXPENSE
2170 Health Insurance Premiums Payable 7105 Federal Income Tax Expense
2180 U.S. Savings Bonds Payable
2190 United Way Donations Payable
2195 Dividends Payable
(3000) OWNERS’ EQUITY
3110 Capital Stock
3120 Retained Earnings
3130 Dividends
3140 Income Summary
SUBSIDIARY LEDGERS
Accounts Receivable Ledger Accounts Payable Ledger
110 Bratton Clinic 210 Armstrong Medical
120 Clegg Medical Center 220 Cross Office Supply
130 Glenmore School 230 Evans Supply
140 Jamacus Clinic 240 Ogden Instruments
150 Odom Daycare 250 Spencer Industries
160 Treet Retirement Home 260 Ziegler, Inc.
An Accounting Cycle for a Corporation: Journalizing and Posting Transactions Reinforcement Activity 2—Part A 399
RECORDING TRANSACTIONS
The December 1 account balances for the general and subsidiary ledgers are given in the Working Papers.
Instructions:
1. Journalize the following transactions completed during December of the current year. Use page 12 of a sales journal,
page 12 of a purchases journal, page 12 of a general journal, page 12 of a cash receipts journal, and page 23 of a cash
payments journal. MSC offers sales terms of 2/10, n/30. The sales tax rate is 6%. Source documents are abbreviated as
follows: check, C; memorandum, M; purchase invoice, P; receipt, R; sales invoice, S; terminal summary, TS; debit memo-
randum, DM; credit memorandum, CM.
Dec. 1. Paid cash for rent, $1,200.00. C372.
2. Paid cash for electric bill, $346.20. C373.
2. Received cash on account from Clegg Medical Center, covering S64 for $413.40, less 2% sales discount. R92.
3. Paid cash for miscellaneous expense, $72.00. C374.
3. Paid cash on account to Spencer Industries, covering P73 for $580.00, less 2% discount. C375.
4. Sold merchandise on account to Bratton Clinic, $450.00, plus sales tax, $27.00; total, $477.00. S67.
5. Recorded cash and credit card sales, $5,796.00, plus sales tax, $347.76; total, $6,143.76. TS45.
Posting. Post the items that are to be posted individually. Post the journals in this order: sales journal, pur-
chases journal, general journal, cash receipts journal, and cash payments journal.
7. Sold merchandise on account to Glenmore School, $462.00. Glenmore School is exempt from sales tax. S68.
7. Received cash on account from Treet Retirement Home, $432.48, covering S65. R93.
8. Bought office supplies on account from Cross Office Supply, $351.60. M43.
9. Purchased merchandise on account from Ogden Instruments, $2,250, less a 40% trade discount. P77.
9. Bought store supplies on account from Ziegler, Inc., $330.00. M44.
10. Paid cash for office supplies, $174.00. C376.
11. Paid cash on account to Evans Supply, $1,170.00, covering P74. C377.
11. Purchased merchandise on account from Spencer Industries, $1,032.00. P78.
12. Paid cash for store supplies, $264.00. C378.
12. Recorded cash and credit card sales, $7,125.00, plus sales tax, $427.50; total, $7,552.50. TS46.
Posting. Post the items that are to be posted individually.
14. Purchased merchandise on account from Evans Supply, $3,276.00. P79.
14. Sold merchandise on account to Odom Daycare, $170.00, plus sales tax, $10.20; total, $180.20. S69.
14. Paid cash for advertising, $415.00. C379.
15. Returned $226.00 of merchandise to Evans Supply from P79, $226.00. DM4.
15. Paid cash on account to Armstrong Medical, $1,272.00, covering P75. C380.
15. Received cash on account from Jamacus Clinic, $821.50, covering S66. R94.
15. Sold merchandise on account to Clegg Medical Center, $490.00, plus sales tax, $29.40; total, $519.40. S70.
15. Paid cash for liability for employee income tax, $342.00, social security tax, $767.00, and Medicare tax,
$179.38; total, $1,288.38. C381.
15. Paid cash for semimonthly payroll, $2,313.85 (total payroll, $2,930.00, less deductions: employee income
tax, $162.00; social security tax, $181.66; Medicare tax, $42.49; health insurance, $170.00; U.S. Savings Bonds,
$30.00; United Way donations, $30.00). C382.
15. Recorded employer payroll taxes, $248.95, for the semimonthly pay period ended December 15. Taxes owed
are: social security tax, $181.66; Medicare tax, $42.49; federal unemployment tax, $3.20; and state unemploy-
ment tax, $21.60. M45.
19. Recorded cash and credit card sales, $6,925.00, plus sales tax, $415.50; total, $7,340.50. TS47.
Posting. Post the items that are to be posted individually.
23. Paid cash on account to Ogden Instruments, $2,200.00, covering P76. C383.
24. Received cash on account from Odom Daycare, covering S69 for $180.20, less 2% discount. R95.
24. Granted credit to Clegg Medical Center for merchandise returned, $120.00, plus sales tax, $7.20, from S70;
total, $127.20. CM5.
26. Recorded cash and credit card sales, $6,980.00, plus sales tax, $418.80; total, $7,398.80. TS48.
Posting. Post the items that are to be posted individually.
400 Reinforcement Activity 2—Part A An Accounting Cycle for a Corporation: Journalizing and Posting Transactions
MSC’s bank charges a fee for handling the collection of credit card sales deposited during the month. The credit card fee is
deducted from MSC’s bank account. The amount is then shown on the bank statement. The credit card fee is recorded in
the cash payments journal as a reduction in cash.
Dec. 28. Recorded credit card fee expense, $342.00. M46. (Debit Credit Card Fee Expense; credit Cash.)
2. Prove and rule page 23 of the cash payments journal.
3. Carry the column totals forward to page 24 of the cash payments journal.
4. Journalize the following transactions.
Dec. 30. Purchased merchandise on account from Armstrong Medical, $1,940.00. P80.
31. Paid cash to replenish the petty cash fund, $145.20: office supplies, $35.00; store supplies, $19.00; advertising,
$64.00; miscellaneous, $26.00; cash short, $1.20. C384.
31. Paid cash for semimonthly payroll, $2,462.32 (total payroll, $3,120.00, less deductions: employee income
tax, $189.00; social security tax, $193.44; Medicare tax, $45.24; health insurance, $170.00; U.S. Savings Bonds,
$30.00; United Way donations, $30.00). C385.
31. Recorded employer payroll taxes, $263.48, for the semimonthly pay period ended December 31. Taxes owed
are: social security tax, $193.44: Medicare tax, $45.24; federal unemployment tax, $3.20; and state unemploy-
ment tax, $21.60. M47.
31. Recorded cash and credit card sales, $3,890.00, plus sales tax, $233.40; total, $4,123.40. TS49.
Posting. Post the items that are to be posted individually.
5. Prove and rule the sales journal. Post the totals of the special columns.
6. Total and rule the purchases journal. Post the total.
7. Prove the equality of debits and credits for the cash receipts and cash payments journals.
8. Prove cash. The balance on the next unused check stub is $40,126.14.
9. Rule the cash receipts journal. Post the totals of the special columns.
10. Rule the cash payments journal. Post the totals of the special columns.
11. Prepare a schedule of accounts receivable and a schedule of accounts payable. Prove the accuracy of the subsidiary
ledgers by comparing the schedule totals with the balances of the controlling accounts in the general ledger. If the
totals are not the same, find and correct the errors.
The ledgers used in Reinforcement Activity 2—Part A are needed to complete Reinforcement Activity 2—Part B.
An Accounting Cycle for a Corporation: Journalizing and Posting Transactions Reinforcement Activity 2—Part A 401
TETRA IMAGES/GETTY IMAGES
C H A P T E R 1 4 Distributing Dividends
and Preparing a
Work Sheet for a
Merchandising Business
O B J E C T I V E S
After studying Chapter 14, you will be able to: 4. Begin a work sheet for a merchandising business.
1. Define accounting terms related to distribut- 5. Plan work sheet adjustments for merchandise
ing dividends and preparing a work sheet for a inventory, supplies, prepaid expenses, uncollect-
merchandising business. ible accounts, and depreciation.
2. Identify accounting concepts and practices 6. Calculate federal income tax and plan the work
related to distributing dividends and preparing a sheet adjustment for federal income tax.
work sheet for a merchandising business.
7. Complete a work sheet for a merchandising
3. Journalize the declaration and payment of a business.
dividend.
K E Y T E R M S
• retained earnings • allowance method of • depreciation expense
• dividends recording losses from • estimated salvage value
• board of directors uncollectible accounts • straight-line method of
• book value
( )
• declaring a dividend depreciation Point Your Browser
• merchandise inventory • book value of accounts • accumulated www.C21accounting.com
receivable depreciation
• uncollectible accounts
• current assets • book value of a plant
• plant assets asset
402
ACCOUNTING IN THE REAL WORLD
Lowe’s
Lowe’s—the Good Neighbor
Welcome to the neighborhood! That’s the reaction Lowe’s wants when
it opens a store in your neighborhood. Lowe’s is working to make home
improvement more convenient for its customers. By providing the right
products at the right price, whether in local stores or at Lowes.com, the com-
pany seeks to make it easy for its customers to improve the quality and value
of their homes.
DIGITAL VISION/GETTY IMAGES
Lowe’s is also investing in its community. The company provides relief
supplies to victims of natural disasters, financial support for Habitat for
Humanity, and educational grants to K-12 public INTERNET
education systems. ACTIVITY
Community involvement is impor-
tant to the employees at Lowe’s. Finding Stock Prices
The company encourages vol- Many company web sites give
unteerism through Lowe’s a history of the stock prices
Heroes, a program focused for the company’s stock. Go to
on home safety. Looking the homepage for a company
out for your neighbor— of your choice. Look under a
that’s what being a good heading such as “About Us”
neighbor is all about. or “Investor Relations” to find
©EMILE WAMSTEKER/BLOOMBERG NEWS/LANDOV
information about the price of
the company’s stock.
Instructions
1. Find the closing stock price
from the previous day’s
trading.
2. Find the highest price for
which the stock sold on
the previous day.
3. Find the lowest price for
Critical Thinking which the stock sold on
the previous day.
1. Beyond having quality products at a fair price, how do Lowe’s and
other home improvement companies assist customers to improve
their homes?
2. How should Lowe’s account for a donation of lumber to a Habitat for
Humanity house?
Source: www.lowes.com
403
L E S S O N
Distributing Corporate
14-1 Earnings to Stockholders
F I N A N C I A L I N F O R M AT I O N
Management decisions about future business operations
are often based on financial information. This informa-
tion shows whether a profit is being made or a loss is being
incurred. Profit or loss information helps an owner or
manager determine future changes. Financial information
is also needed to prepare required tax reports.
Hobby Shack uses a fiscal year that begins on January 1
and ends on December 31. Therefore, Hobby Shack sum-
marizes its financial information on December 31 of each
year.
DIGITAL VISION/GETTY IMAGES
CHARACTER COUNTS
He’s G u i l t y !
A company that believes one of how to serve as an expert witness. The Code states that
its employees is stealing may the CFE should obtain evidence that provides a reason-
obtain the services of a Cer- able basis for his or her opinion. However, the CFE should
tified Fraud Examiner (CFE). never express an opinion on the guilt or innocence of any
The CFE is trained to examine person.
accounting records and obtain
PHOTO: STOCKBYTE/GETTY IMAGES
other evidence related to the Instructions
alleged theft. CFEs often serve Access the ACFE Code of Professional Ethics of the Associa-
as expert witnesses in court. The tion of Certified Fraud Examiners at www.cfenet.com. Cit-
Code of Professional Ethics of the ing the section, what other advice does the Code provide
Association of Certified Fraud Examin- a CFE when serving as an expert witness?
ers provides its members with guidance on
404 Chapter 14 Distributing Dividends and Preparing a Work Sheet for a Merchandising Business
STOCKHOLDE RS’ EQUIT Y ACCOUNTS
U S E D B Y A C O R P O R AT I O N
(3000) STOCKHOLDERS’ EQUITY
3110 Capital Stock
3120 Retained Earnings
3130 Dividends
3140 Income Summary
A corporation’s ownership is divided into units. Each retained by a corporation for business expansion. An
unit of ownership in a corporation is known as a share of amount earned by a corporation and not yet distributed
stock. An owner of one or more shares of a corporation is to stockholders is called retained earnings. Retained Earn-
known as a stockholder. Each stockholder is an owner of a ings is the title of the account used to record a corpora-
corporation. tion’s earnings.
Owners’ equity accounts for a corporation normally Some income may be given to stockholders as a return
are listed under a major chart of accounts division titled on their investments. A third stockholders’ equity account
Stockholders’ Equity. is used to record the distribution of a corporation’s earn-
Most corporations have many stockholders. It is not ings to stockholders. Earnings distributed to stockholders
practical to have a separate owner’s equity account for each are called dividends. A corporation’s dividend account is
stockholder. Instead, a single owners’ equity account, titled a temporary account similar to a proprietorship’s draw-
Capital Stock, is used for the investment of all owners. ing account. Each time a dividend is declared, an account
A second stockholders’ equity account is used to record titled Dividends is debited. At the end of each fiscal period,
a corporation’s earnings. Net income increases a corpo- the balance in the dividends account is closed to Retained
ration’s total stockholders’ equity. Some income may be Earnings.
P HO T OG R
APHER
’S C H
O I CE
RF /
GE
TTY
IM
AG
ES
R E M E M B E R
Dividends is a temporary
account that is closed to
Retained Earnings at the
end of the fiscal period.
Distributing Corporate Earnings to Stockholders Lesson 14-1 405
DECLARING A DIVIDEND
2. Account Debited 3. Memorandum Number 4. Amount Debited
GENERAL JOURNAL PAGE 14
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
2 NO. REF.
20--
1 Dec. 15 Dividends 3 M79 4 50 0 0 00 1
2 1 Dividends Payable 6 50 0 0 00 2
5
1. Date 5. Account Credited 6. Amount Credited
A group of persons elected by the stockholders to manage
a corporation is called a board of directors. Dividends December 15. Hobby Shack’s board of directors
can be distributed to stockholders only by formal action declared a quarterly dividend of $2.00 per
of a corporation’s board of directors. [CONCEPT: Busi- share; capital stock issued is 2,500 shares;
ness Entity] total dividend, $5,000.00. Date of payment
Action by a board of directors to distribute corporate is January 15. Memorandum No. 79.
earnings to stockholders is called declaring a dividend.
Dividends normally are declared on one date and paid
on a later date. If a board of directors declares a dividend, Dividends
the corporation is then obligated to pay the dividend. The
3/15 Decl. 5,000.00
dividend is a liability that must be recorded in the corpo- 6/15 Decl. 5,000.00
ration’s accounts. 9/15 Decl. 5,000.00
Hobby Shack declares dividends each March 15, June 12/15 Decl. 5,000.00
15, September 15, and December 15. The dividends are
then paid on the 15th of the following month. Dividends Payable
The stockholders’ equity account, Dividends, has a nor- 4/15 Paid 5,000.00 3/15 Decl. 5,000.00
mal debit balance and is increased by a $5,000.00 debit. 7/15 Paid 5,000.00 6/15 Decl. 5,000.00
Dividends Payable is credited for $5,000.00 to show the 10/15 Paid 5,000.00 9/15 Decl. 5,000.00
increase in this liability account. 12/15 Decl. 5,000.00
Number of Shares Quarterly Dividend Total Quarterly
Outstanding per Share Dividend
2,500 $2.00 $5,000.00
S T E P S JOURNALIZING DECLARING A DIVIDEND
1 Write the date, 20--, Dec. 15, in the Date column.
2 Write the title of the account debited, Dividends, in the Account Title column.
3 Write the memorandum number, M79, in the Doc. No. column.
4 Write the debit amount, $5,000.00, in the Debit column.
5 Write the title of the account credited, Dividends Payable, on the next line of the Account Title column,
indented about 1 centimeter.
6 Write the credit amount, $5,000.00, in the Credit column.
406 Chapter 14 Distributing Dividends and Preparing a Work Sheet for a Merchandising Business
P AY I N G A D I V I D E N D
2. Account Title 5. Credit Cash
CASH PAYMENTS JOURNAL PAGE 25
1 2 3 4 5
CK. POST. GENERAL ACCOUNTS PURCHASES CASH
DATE
2 ACCOUNT TITLE NO. REF. DEBIT CREDIT
PAYABLE
DEBIT
DISCOUNT
CREDIT
CREDIT
20--
1 Jan. 15 Dividends Payable 379 5 0 0 0 00 4 5 5 0 0 0 00 1
2
1 3 2
1. Date 3. Check Number 4. Debit Dividends Payable
Hobby Shack issues one check for the amount of the
total dividend to be paid. This check is deposited in a Dividends Payable
special dividend checking account. A separate check for
4/15 Paid 5,000.00 3/15 Decl. 5,000.00
each stockholder is drawn on this special account. The
7/15 Paid 5,000.00 6/15 Decl. 5,000.00
special account avoids a large number of cash payments 10/15 Paid 5,000.00 9/15 Decl. 5,000.00
journal entries and also reserves cash specifically for pay- 1/15 Paid 5,000.00 12/15 Decl. 5,000.00
ing dividends.
A check is often made payable to an agent, such as a Cash
bank. The agent then handles the details of sending divi- 1/15 Paid 5,000.00
dend checks to individual stockholders.
January 15. Paid cash for quarterly dividend When this entry is posted, the dividends payable
declared December 15, $5,000.00. Check No. 379. account has a zero balance.
S T E P S JOURNALIZING THE PAYMENT OF DIVIDENDS
1 Write the date, 20--, Jan. 15, in the Date column.
2 Write the account title, Dividends Payable, in the Account Title column.
3 Write the check number, 379, in the Ck. No. column.
F O R YO U R I N F O R M AT I O N
4 Write the debit amount, $5,000.00, in the General Debit column.
F Y I
5 Write the credit amount, $5,000.00, in the Cash Credit column.
Dividends are declared on one
date and paid on a later date. Only
stockholders owning the stock
on the date of record specified by
the board of directors receive the
dividend. Stockholders owning the
stock on the date of record receive
the entire dividend, regardless of how
long they have owned the stock.
Distributing Corporate Earnings to Stockholders Lesson 14-1 407
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. Under what major chart of accounts division are the owners’ equity
accounts for a corporation normally listed? TERMS REVIEW
2. How many accounts are kept for the investment of all owners of a
corporation? retained earnings
3. What account does a corporation use to record earnings not yet distrib- dividends
uted to stockholders?
board of directors
4. What action is required before a corporation can distribute income to its
stockholders? declaring a dividend
WORK TOGETHER 141
Journalizing dividends
Journals are given in the Working Papers. Your instructor will guide you through the following examples.
Coastal Aquatics completed the following transactions during December of the current year and January of the next
year.
Transactions:
Dec. 15. The board of directors declared a dividend of $3.00 per share; capital stock issued is 1,750 shares. M162.
Jan. 15. Paid cash for dividend declared December 15. C687.
1. Use page 14 of a general journal. Journalize the dividend declared on December 15.
2. Use page 21 of a cash payments journal. Journalize payment of the dividend on January 15.
ON YOUR OWN 141
Journalizing dividends
Journals are given in the Working Papers. Work this problem independently.
Sonoma Treasures completed the following transactions during December of the current year and January of the
next year.
Transactions:
Dec. 15. The board of directors declared a dividend of $1.00 per share; capital stock issued is 21,000 shares.
M321.
Jan. 15. Paid cash for dividend declared December 15. C721.
1. Use page 22 of a general journal. Journalize the dividend declared on December 15.
2. Use page 24 of a cash payments journal. Journalize payment of the dividend.
408 Chapter 14 Distributing Dividends and Preparing a Work Sheet for a Merchandising Business
L E S S O N Beginning an 8-Column
Work Sheet for a
14-2 Merchandising Business
A columnar accounting form on which the financial essary to prepare financial statements. The steps used to
information needed to prepare financial statements is prepare a work sheet are similar for proprietorships and
summarized is known as a work sheet. A work sheet is used corporations.
to plan adjustments and summarize the information nec-
ENTERING A TRIAL BALANCE ON A WORK SHEET
To prepare a work sheet, a trial balance is first entered in a service business, a merchandising business will have
the Trial Balance columns. All general ledger accounts and an account for merchandise inventory. A corporation’s
balances are listed in the same order as they appear in the accounts are similar to those of a proprietorship except for
general ledger. Trial Balance columns are totaled to prove the capital stock, retained earnings, dividends, and federal
equality of debits and credits. income tax accounts.
The worksheet for Hobby Shack is different from the
work sheet completed for TechKnow in Chapter 6. Unlike
PLANNING ADJUSTMENTS ON A WORK SHEET
Some general ledger accounts need to be brought up to The adjustment for merchandise inventory is unique
date before financial statements are prepared. Accounts to a merchandising business. Adjustments for uncollect-
are brought up to date by planning and entering adjust- ible accounts expense and depreciation expense could also
ments on a work sheet. Adjustments are planned in the be made by a service business. The adjustment for federal
Adjustments columns of a work sheet. Adjustments income tax is unique to corporations. This adjustment is
recorded on a work sheet are for planning purposes only. not made for a proprietorship because taxes are paid by
The general ledger account balances are not changed until the owner, not the business.
entries are journalized and posted. Journal entries made
to bring general ledger accounts up to date are known as
adjusting entries.
Hobby Shack’s adjustments for supplies and prepaid SMALL BUSINESS
insurance are the same as those for TechKnow described
S P O T L I G H T
in Chapter 6. Hobby Shack also makes adjustments to
these accounts: (1) Merchandise Inventory, (2) Uncollect- Small businesses represent
ible Accounts Expense, (3) Depreciation Expense, and approximately 99 percent of
(4) Federal Income Tax Expense. employers, employ nearly 50 percent
of non-government employees,
and are responsible for about
two-thirds to three-quarters of
net new jobs, according to the
Office of Advocacy of the U.S.
Small Business Administration.
Beginning an 8-Column Work Sheet for a Merchandising Business Lesson 14-2 409
RECORDING A TRIAL BALANCE ON A WORK SHEET
ACCOUNT Cash 1. Account Titles ACCOUNT NO. 1110
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Dec. 1 Balance ⻫ 2 8 2 6 0 00
31 CR12 37 1 8 0 80 6 5 4 4 0 80
31 CP24 36 3 6 0 52 2 9 0 8 0 28
2. Account Balances
Hobby Shack, Inc.
Work Sheet
For Year Ended December 31, 20--
1 2
TRIAL BALANCE
1 ACCOUNT TITLE DEBIT CREDIT
1 Cash 29 0 8 0 28 2
2 Petty Cash 3 0 0 00
3 Accounts Receivable 14 6 9 8 40
4 Allow. for Uncoll. Accts. 1 2 7 52
5 Merchandise Inventory 140 4 8 0 00
6 Supplies—Office 3 4 8 0 00
7 Supplies—Store 3 9 4 4 00
8 Prepaid Insurance 5 8 0 0 00
9 Office Equipment 35 8 6 4 50
10 Acc. Depr.—Office Equipment 6 4 9 7 00
11 Store Equipment 40 8 4 9 50
12 Acc. Depr.—Store Equipment 5 0 6 9 00
13 Accounts Payable 11 5 8 3 03
14 Federal Income Tax Payable
40 Insurance Expense
41 Miscellaneous Expense 2 5 6 4 90
42 Payroll Taxes Expense 9 1 0 5 00
43 Rent Expense 18 0 0 0 00
44 Salary Expense 104 5 2 5 00
45 Supplies Expense—Office
46 Supplies Expense—Store
47 Uncollectible Accounts Expense
48 Utilities Expense 3 8 2 0 00
49 Federal Income Tax Expense 18 0 0 0 00
50 670 8 6 1 59 670 8 6 1 59 3 3. Total, prove and rule
the debit and credit columns.
S T E P S RECORDING A TRIAL BALANCE ON A WORK SHEET
1 Write the title of each general ledger account in the work sheet’s Account Title column in the same order they
appear in the general ledger. All accounts are listed regardless of whether there is a balance or not. Listing all
accounts reduces the possibility of overlooking an account that needs to be brought up to date.
2 Write the balance of each account in the appropriate work sheet’s Trial Balance Debit or Credit column. The
amounts are taken from the general ledger accounts.
3 Total, prove, and rule the Trial Balance Debit and Credit columns of the work sheet.
410 Chapter 14 Distributing Dividends and Preparing a Work Sheet for a Merchandising Business
A N A LY Z I N G A N D R E C O R D I N G S U P P L I E S A D J U S T M E N T S
The balance of Supplies—Office in the trial balance,
$3,480.00, is the cost of office supplies on hand at the Supplies Expense—Office
beginning of the year plus the office supplies purchased
during the year. The supplies on hand on December 31 Adj. (a) 2,730.00
are counted and determined to be $750.00. The differ-
ence is the value of office supplies used during the year, Supplies—Office
which is an expense. Dec. 31 Bal. 3,480.00 Adj. (a) 2,730.00
Likewise, the balance of Supplies—Store in the trial (Adj. Bal. 750.00)
balance, $3,944.00, is the cost of store supplies on hand at
the beginning of the year plus the store supplies purchased
during the year. The value of store supplies on hand on
December 31 is determined to be $1,034.00. Supplies Expense—Store
Analyzing Supplies Adjustments Adj. (b) 2,910.00
Four questions are asked to analyze the adjustments for
the supplies accounts.
1. What is the balance of the Supplies accounts?
Supplies—Office, $3,480.00 Supplies—Store
Supplies—Store, $3,944.00
Dec. 31 Bal. 3,944.00 Adj. (b) 2,910.00
2. What should the balance be for these accounts? (Adj Bal. 1,034.00)
Supplies—Office, $750.00
Supplies—Store, $1,034.00
3. What must be done to correct the account
balances?
Decrease Supplies—Office, $2,730.00 ($3,480.00
750.00) HOLA
I MA G ES/ G E
T T Y I MA G E S
Decrease Supplies—Store, $2,910.00 ($3,944.00
1,034.00)
4. What adjustment is made?
Debit:
Supplies Expense—Office, $2,730.00
Supplies Expense—Store, $2,910.00
Credit:
Supplies—Office, $2,730.00
Supplies—Store, $2,910.00
The supplies adjustments are shown in the T accounts.
The December 31 balance shown in faded type is the bal-
ance before the adjustments.
Beginning an 8-Column Work Sheet for a Merchandising Business Lesson 14-2 411
RECORDING SUPPLIES ADJUSTMENTS ON A WORK SHEET
3. Labels 2. Credits
1 2 3 4
TRIAL BALANCE ADJUSTMENTS
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT
6 Supplies—Office 34 8 0 00 (a) 2 7 3 0 00
7 Supplies—Store 39 4 4 00 3 (b) 2 9 1 0 00 2
45 Supplies Expense—Office 3 (a)
2 7 3 0 00 1
(b)
46 Supplies Expense—Store 2 9 1 0 00
1. Debits
S T E P S RECORDING WORK SHEET ADJUSTMENTS FOR SUPPLIES
1 Write the debit amounts in the Adjustments Debit column on the lines with the appropriate account titles:
$2,730.00 with Supplies Expense—Office and $2,910.00 with Supplies Expense—Store.
2 Write the credit amounts in the Adjustments Credit column on the lines with the appropriate account titles:
$2,730.00 with Supplies—Office and $2,910.00 with Supplies—Store.
3 Label the two parts of the Supplies—Office adjustment with a small letter a in parentheses, (a). Label the two
parts of the Supplies—Store adjustment with a small letter b in parentheses, (b).
V I S I ON / G E T T Y I M A G E S
DIGITAL
412 Chapter 14 Distributing Dividends and Preparing a Work Sheet for a Merchandising Business
A N A LY Z I N G A N D R E C O R D I N G A P R E P A I D
INSURANCE ADJUSTMENT
Insurance premiums are debited to a prepaid insurance 3. What must be done to correct the account balance?
account when paid. During the year, Hobby Shack paid Decrease $3,170.00 ($5,800.00 $2,630.00)
$5,800.00 of insurance premiums. 4. What adjustment is made?
Debit Insurance Expense, $3,170.00
Analyzing a Prepaid Insurance Adjustment
Credit Prepaid Insurance, $3,170.00
Hobby Shack determined that the value of prepaid insur-
ance on December 31 is $2,630.00. Therefore, the value
of insurance used during the year is $3,170.00 ($5,800.00
$2,630.00). This difference is the amount of insurance Insurance Expense
expense for the year. Prepaid Insurance is credited and Adj. (c) 3,170.00
Insurance Expense is debited at the end of the fiscal period
for the value of insurance used.
Prepaid Insurance
The prepaid insurance adjustment is shown in the T
accounts. The December 31 balance shown in faded type Dec. 31 Bal. 5,800.00 Adj. (c) 3,170.00
is the balance before the adjustment. (New Bal. 2,630.00)
1. What is the balance of Prepaid Insurance?
$5,800.00
2. What should the balance be for this account?
$2,630.00
Recording a Prepaid Insurance Adjustment
1. Credit
1 2 3 4
TRIAL BALANCE ADJUSTMENTS
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT
3 (c)
8 Prepaid Insurance 5 8 0 0 00 3 1 7 0 00 1
40 Insurance Expense 3 (c)
3 1 7 0 00
2
3. Labels 2. Debit
RECORDING WORK SHEET ADJUSTMENTS
S T E P S
FOR PREPAID INSURANCE
1 Enter the amount of insurance used, $3,170.00, in the Adjustments Credit column on the Prepaid Insurance line of
the work sheet.
2 Enter the same amount, $3,170.00, in the Adjustments Debit column on the Insurance Expense line of the work
sheet.
3 Label the two parts of the adjustment with a small letter c in parentheses, (c).
Beginning an 8-Column Work Sheet for a Merchandising Business Lesson 14-2 413
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. What accounts are used for the adjustment to office supplies?
2. What accounts are used for the adjustment to prepaid insurance?
WORK TOGETHER 142
Beginning an 8-column work sheet for a merchandising business
A partially completed work sheet for Coastal Aquatics is given in the Working Papers. Four general ledger accounts
are shown below. Your instructor will guide you through the following examples.
1. Enter the accounts and account balances on the following lines.
Line Account Account Balance
3 Accounts Receivable $ 15,485.25
13 Accounts Payable 18,482.28
29 Sales 845,828.09
32 Purchases 389,184.01
2. Total, prove, and rule the trial balance.
3. From a physical count of the following, December 31 balances are determined to be:
Supplies—Office $657.15
Supplies—Store 633.11
Prepaid Insurance 800.00
Analyze adjustments that need to be made for the accounts above and enter the adjustments on the work sheet.
Label the adjustments (a)–(c). Save your work to complete Work Together 14-3.
ON YOUR OWN 142
Beginning an 8-column work sheet for a merchandising business
A partially completed work sheet for Sonoma Treasures is given in the Working Papers. Four general ledger accounts
are shown below. Work this problem independently.
1. Enter the accounts and account balances on the following lines.
Line Account Account Balance
8 Prepaid Insurance $ 12,000.00
25 Capital Stock 210,000.00
30 Sales Discount 715.25
43 Rent Expense 30,000.00
2. Total, prove, and rule the trial balance.
3. From a physical count of the following, December 31 balances are determined to be:
Supplies—Office $ 633.61
Supplies—Store 983.36
Prepaid Insurance 3,000.00
Analyze adjustments that need to be made for the accounts above and enter the adjustments on the work sheet.
Label the adjustments (a)–(c). Save your work to complete On Your Own 14-3.
414 Chapter 14 Distributing Dividends and Preparing a Work Sheet for a Merchandising Business
L E S S O N Planning and Recording
a Merchandise Inventory
14-3 Adjustment
MERCHANDISE INVENTORY
In addition to supplies and prepaid insurance, Hobby The balance of the merchandise inventory account
Shack needs to adjust the merchandise inventory account. on December 31, the end of the fiscal year, is the same
Planning the adjustment is similar to the adjustment for amount, $140,480.00. The January 1 and December 31
supplies. However, the adjusting entry includes a new balances are the same because no entries have been made
account. in the account during the fiscal year. The changes in inven-
The amount of goods on hand for sale to custom- tory resulting from purchases and sales transactions have
ers is called merchandise inventory. The general ledger not been recorded in the merchandise inventory account.
account in which merchandise inventory is recorded is During a fiscal period, the amount of merchandise on
titled Merchandise Inventory. Merchandise Inventory is an hand increases each time merchandise is purchased. How-
asset account with a normal debit balance. ever, all purchases are recorded in the purchases account.
The amount of merchandise on hand decreases each time
Merchandise Inventory merchandise is sold. However, all sales are recorded in the
Debit Credit sales account. This procedure makes it easier to determine
the total purchases and sales during a fiscal period. The
Decrease
merchandise inventory account balance, therefore, must
Increase
be adjusted to reflect the changes resulting from purchases
and sales during a fiscal period.
S T O C K B Y T E / GE T T Y I MA G E S
Hobby Shack’s merchandise inventory account on Jan-
uary 1, the beginning of the fiscal year, has a debit balance
of $140,480.00.
Merchandise Inventory
Jan. 1 Bal. 140,480.00
Planning and Recording a Merchandise Inventory Adjustment Lesson 14-3 415
A N A LY Z I N G A N D R E C O R D I N G A M E R C H A N D I S E
INVENTORY ADJUSTMENT
3. Label
1 2 3 4
TRIAL BALANCE ADJUSTMENTS
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT
(d)
5 Merchandise Inventory 140 4 8 0 00 3 15 8 4 0 00
2
Income Summary (d)
28 1 15 8 4 0 00
1. Debit 2. Credit
The two accounts used to adjust the merchandise inven- 2. What should the balance be for this account?
tory are Merchandise Inventory and Income Summary. $124,640.00
Before the adjustment, the merchandise inventory 3. What must be done to correct the account balance?
account has a January 1 debit balance of $140,480.00. The Decrease $15,840.00
merchandise inventory account balance, however, is not 4. What adjustment is made?
up-to-date. The actual count of merchandise on Decem- Debit Income Summary, $15,840.00
ber 31 shows that the inventory is valued at $124,640.00. Credit Merchandise Inventory, $15,840.00
Therefore, the merchandise inventory account balance
must be adjusted to show the current value of merchan-
dise on hand. Merchandise Inventory
Most accounts needing adjustment at the end of a fis- Jan. 1 Bal. 140,480.00 Adj. (d) 15,840.00
cal period have a related temporary account. For example, (New Bal. 124,640.00)
when the account Prepaid Insurance is adjusted, Insur-
ance Expense is the related expense account, a temporary Income Summary
account. Merchandise Inventory, however, does not have Adj. (d) 15,840.00
a related expense account. Therefore, Income Summary,
a temporary account, is used to adjust the merchandise
inventory account at the end of a fiscal period.
Income Summary is debited and Merchandise Inven-
Four questions are asked in analyzing the adjustment
tory is credited for $15,840.00. The beginning debit bal-
for merchandise inventory.
ance of Merchandise Inventory, $140,480.00, minus the
1. What is the balance of Merchandise Inventory? adjustment credit amount, $15,840.00, equals the ending
$140,480.00 debit balance of Merchandise Inventory, $124,640.00.
RECORDING A WORK SHEET ADJUSTMENT
S T E P S
FOR MERCHANDISE INVENTORY
1 Write the debit amount, $15,840.00, in the Adjustments Debit column on the line with the account title
Income Summary.
2 Write the credit amount, $15,840.00, in the Adjustments Credit column on the line with the account title
Merchandise Inventory.
3 Label the two parts of this adjustment with a small letter d in parentheses, (d).
416 Chapter 14 Distributing Dividends and Preparing a Work Sheet for a Merchandising Business
A N A LY Z I N G A N A D J U S T M E N T W H E N E N D I N G M E R C H A N D I S E
I N V E N T O R Y I S G R E AT E R T H A N B E G I N N I N G M E R C H A N D I S E I N V E N T O R Y
If the amount of merchandise inventory on hand is The merchandise inventory adjustment is shown in the
greater than the January 1 balance of Merchandise Inven- T accounts.
tory, opposite entries would be made—debit Merchandise
Inventory and credit Income Summary. For example, Ven-
able Company’s merchandise inventory account on Janu- Merchandise Inventory
ary 1 has a debit balance of $294,700.00. The count of
merchandise on December 31 shows that the inventory Jan. 1 Bal. 294,700.00
Adj. (d) 4,200.00
is valued at $298,900.00. The merchandise on hand is (New Bal. 298,900.00)
$4,200.00 greater than the January 1 balance of Merchan-
dise Inventory. Income Summary
Four questions are asked in analyzing the adjustment Adj. (d) 4,200.00
for merchandise inventory.
1. What is the balance of Merchandise Inventory?
$294,700.00
Merchandise Inventory is debited and Income Summary
2. What should the balance be for this account?
is credited for $4,200.00. The beginning debit balance of
$298,900.00
Merchandise Inventory, $294,700.00, plus the adjustment
3. What must be done to correct the account balance?
debit amount, $4,200.00, equals the ending debit balance
Increase $4,200.00
of Merchandise Inventory, $298,900.00.
4. What adjustment is made?
Debit Merchandise Inventory, $4,200.00
Credit Income Summary, $4,200.00
D IG I T
AL V
IS IO
N /GE
TTY
I MA
GE
S
R E M E M B E R
When an account that requires
adjusting does not have a
related expense account,
the temporary account
Income Summary is used.
Planning and Recording a Merchandise Inventory Adjustment Lesson 14-3 417
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. In what order should general ledger accounts be listed on a work sheet?
2. What accounts are used for the adjustment for merchandise inventory?
3. What adjusting entry is entered on a work sheet when the ending TERM REVIEW
merchandise inventory is less than the beginning value?
4. When is the temporary account Income Summary used? merchandise inventory
WORK TOGETHER 143
Analyzing and recording an adjustment for merchandise inventory
Use the work sheet from Work Together 14-2. Your instructor will guide you through the following example.
1. From a physical count of merchandise inventory, the December 31 balance is determined to be $234,904.20.
Analyze the merchandise inventory adjustment and enter the adjustment on the work sheet. Label the adjust-
ment (d). Save your work to complete Work Together 14-4.
ON YOUR OWN 143
Analyzing and recording an adjustment for merchandise inventory
Use the work sheet from On Your Own 14-2. Work this problem independently.
1. From a physical count of merchandise inventory, the December 31 balance is determined to be $261,089.97.
Analyze the merchandise inventory adjustment and enter the adjustment on the work sheet. Label the adjust-
ment (d). Save your work to complete On Your Own 14-4.
418 Chapter 14 Distributing Dividends and Preparing a Work Sheet for a Merchandising Business
L E S S O N Planning and Recording an
Allowance for Uncollectible
14-4 Accounts Adjustment
ALLOWANCE M ETH O D O F R ECO R D I NG
LOSSES FROM UNCOLLEC TIBLE ACCOUNTS
Uncollectible Accounts Expense Accounts Receivable Allowance for Uncollectible Accounts
Debit Credit Debit Credit Debit Credit
Decrease
Decrease
Decrease
Increase
Increase
Increase
With each sale on account, a business takes a risk that To record estimated uncollectible accounts, an adjust-
customers will not pay their accounts. Accounts receiv- ing entry is made affecting two accounts. The estimated
able that cannot be collected are called uncollectible amount of uncollectible accounts is debited to Uncollect-
accounts. This risk is a cost of doing business that should ible Accounts Expense and credited to an account titled
be recorded as an expense in the same accounting period Allowance for Uncollectible Accounts.
that the revenue is earned. Accurate financial reporting An account that reduces a related account is known
requires that expenses be recorded in the fiscal period in as a contra account. Allowance for Uncollectible Accounts
which the expenses contribute to earning revenue. [CON- is a contra account to its related asset account, Accounts
CEPT: Matching Expenses with Revenue] Receivable.
At the end of a fiscal year, a business does not know Crediting the estimated value of uncollectible accounts
which customer accounts will become uncollectible. If to a contra account is called the allowance method of
a business knew exactly which accounts would become recording losses from uncollectible accounts. The dif-
uncollectible, it could credit Accounts Receivable and each ference between an asset’s account balance and its related
customer account for the uncollectible amounts and debit contra account balance is called book value. The differ-
Uncollectible Accounts Expense for the same amounts. ence between the balance of Accounts Receivable and its
To solve this accounting problem, a business can cal- contra account, Allowance for Uncollectible Accounts, is
culate and record an estimated amount of uncollectible called the book value of accounts receivable. The book
accounts expense. Estimating uncollectible accounts value of accounts receivable, which is reported on the bal-
expense at the end of a fiscal period accomplishes two ance sheet, represents the total amount of accounts receiv-
objectives: able the business expects to collect in the future.
A contra account is usually assigned the next number of
1. It reports a balance sheet amount for Accounts Receiv-
the account number sequence after its related account in
able that reflects the amount the business expects to
the chart of accounts. Hobby Shack’s Accounts Receivable
collect in the future.
account is numbered 1130 and the Allowance for Uncol-
2. It recognizes the expense of uncollectible accounts
lectible Accounts contra account is numbered 1135.
in the same period in which the related revenue is
recorded.
Planning and Recording an Allowance for Uncollectible Accounts Adjustment Lesson 14-4 419
E S T I M AT I N G U N C O L L E C T I B L E A C C O U N T S E X P E N S E
Total Sales Estimated
on Account Percentage Uncollectible
Accounts Expense
$124,500.00 1% $1,245.00
Many businesses use a percentage of total sales on account account. The company’s total sales on account for the
to estimate uncollectible accounts expense. Each sale on year is $124,500.00. Thus, Hobby Shack estimates that
account represents a risk of loss from an uncollectible $1,245.00 of the current fiscal year’s sales on account will
account. Therefore, if the estimated percentage of loss is eventually be uncollectible.
accurate, the amount of uncollectible accounts expense will F Y I
be accurate regardless of when the actual losses occur.
Since a sale on account creates a risk of loss, estimat-
F O R YO U R I N F O R M AT I O N
ing the percentage of uncollectible accounts expense for
the same period matches sales revenue with the related F Y I
uncollectible accounts expense. [CONCEPT: Matching Allowance for Bad Debts and
Expenses with Revenue] Allowance for Doubtful Accounts
Hobby Shack estimates uncollectible accounts expense are account titles sometimes
used instead of Allowance for
by calculating a percentage of total sales on account. A
Uncollectible Accounts.
review of Hobby Shack’s previous experience in col-
lecting sales on account shows that actual uncollectible
accounts expense has been about 1% of total sales on
FINANCIAL LITERACY
Pe r s o n a l B u d ge t s
Mention the word “budget” to most peo- fund your spring-break trip—but only because you deter-
ple and many negative thoughts come to mined the trip was more important. You are in control, and
mind. However, a budget does not have your budget can change as your goals change.
to be restrictive or inflexible. In fact, a Think of a budget as a flexible spending plan that helps
budget may give you more freedom. you achieve your goals, and you will be more likely to fol-
A budget is merely a plan that helps low your budget and actually be able to take that trip!
you achieve your goals. When getting
ready to prepare a budget, you not only Activities
need to gather income and expense data, 1. One way to gather expense data for your budget is to
but you also need to determine and prioritize write down all of your expenses for a period of time.
your goals. For example, suppose you want to Do this for one week. Try to pick a typical week, and
take a trip during spring break, but you also like to remember to include all expenses. Then categorize
PHOTO: PHOTODISC/GETTY IMAGES
have all the latest clothing styles. If you can’t do both, what you’ve spent into “needs” and “wants.”
which is more important to you? No one can answer this
2. Survey five adults. Ask each one if he or she has a bud-
question for you. Financial goals are very personal.
get. If that person has a budget, ask if he or she follows
One of the major benefits of a budget is that any “left-
it. What does he or she feel are the advantages and
over” money you have is used to fund your goals in their
disadvantages of having a budget? Summarize your
order of priority. This may mean that instead of spending
findings in a written report.
money on the latest fashions, you may choose to save it to
420 Chapter 14 Distributing Dividends and Preparing a Work Sheet for a Merchandising Business
A N A LY Z I N G A N D R E C O R D I N G A N A D J U S T M E N T
FOR UNCOLLEC TIBLE ACCOUNTS EXPE NSE
3. Label
1 2 3 4
TRIAL BALANCE ADJUSTMENTS
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT
3 Accounts Receivable 14 6 9 8 40 3
4 Allowance for Uncollectible Accounts 1 2 7 52 (e) 1 2 4 5 00
1
(e)
47 Uncollectible Accounts Expense 2 1 2 4 5 00
2. Debit 1. Credit
The percentage of total sales on account method of esti- This new balance of the allowance account, $1,372.52,
mating uncollectible accounts expense assumes that is the estimated amount of accounts receivable that will
a portion of every sale on account dollar will become eventually become uncollectible. This amount, subtracted
uncollectible. Hobby Shack has estimated that 1% of its from the accounts receivable account balance, $14,698.40,
$124,500.00 sales on account, or $1,245.00, will eventu- is the book value of accounts receivable. Notice in the
ally become uncollectible. T accounts that Accounts Receivable is not affected by
At the end of a fiscal period, an adjustment for uncol- this adjustment. Also notice that Uncollectible Accounts
lectible accounts expense is planned on a work sheet. Expense did not have a balance before the adjustment.
The Allowance for Uncollectible Accounts balance in
the Trial Balance Credit column, $127.52, is the allow-
ance estimate from the previous fiscal period that has not Balance of Book Value of
yet been identified as uncollectible. Accounts Allowance for Accounts
When the allowance account has a previous credit bal- Receivable Uncollectible Receivable
ance, the amount of the adjustment is added to the previ- Accounts
ous balance. $14,698.40 $1,372.52 $13,325.88
Accounts Receivable Hobby Shack estimates that it will collect $13,325.88
Dec. 31 Bal. 14,698.40 from its outstanding accounts receivable.
Uncollectible Accounts Expense RECORDING A
Adj. (e) 1,245.00 WORK SHEET
S T E P S ADJUSTMENT FOR
Allowance for Uncollectible Accounts UNCOLLECTIBLE
Bal. 127.52 ACCOUNTS
Adj. (e) 1,245.00
(New Bal. 1,372.52) 1 Enter the estimated uncollectible amount,
$1,245.00, in the Adjustments Credit column on
the Allowance for Uncollectible Accounts line of
the work sheet.
2 Enter the same amount, $1,245.00, in the
Adjustments Debit column on the Uncollectible
Accounts Expense line of the work sheet.
3 Label the two parts of this adjustment with a
small letter e in parentheses, (e).
Planning and Recording an Allowance for Uncollectible Accounts Adjustment Lesson 14-4 421
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
TERMS REVIEW
1. Why is an uncollectible account recorded as an expense rather than a
reduction in revenue? uncollectible accounts
2. When do businesses normally estimate the amount of their uncollect- allowance method of
ible accounts expense? recording losses from
3. What two objectives will be accomplished by recording an estimated uncollectible accounts
amount of uncollectible accounts expense? book value
4. Why is Allowance for Uncollectible Accounts called a contra account? book value of accounts
5. How is the book value of accounts receivable calculated? receivable
WORK TOGETHER 144
Analyzing and recording an adjustment for uncollectible accounts expense
Use the work sheet from Work Together 14-3. Your instructor will guide you through the following example.
1. Coastal Aquatics estimates uncollectible accounts expense as 0.5% of its total sales on account. During the
current year, Coastal Aquatics had sales on account of $424,000.00. Record the uncollectible accounts expense
adjustment on the work sheet. Label the adjustment (e). Save your work to complete Work Together 14-5.
ON YOUR OWN 144
Analyzing and recording an adjustment for uncollectible accounts expense
Use the work sheet from On Your Own 14-3. Work this problem independently.
1. Sonoma Treasures estimates uncollectible accounts expense as 0.4% of its total sales on account. During the
current year, Sonoma Treasures had sales on account of $462,500.00. Record the uncollectible accounts expense
adjustment on the work sheet. Label the adjustment (e). Save your work to complete On Your Own 14-5.
422 Chapter 14 Distributing Dividends and Preparing a Work Sheet for a Merchandising Business
L E S S O N
Planning and Recording
14-5 Depreciation Adjustments
C AT E G O R I E S O F A S S E T S
Most businesses use two broad categories of assets in Three factors are considered in calculating the annual
their operations. Cash and other assets expected to be amount of depreciation expense for a plant asset.
exchanged for cash or consumed within a year are called
1. Original Cost. The original cost of a plant asset
current assets. Assets that will be used for a number of
includes all costs paid to make the asset usable to a
years in the operation of a business are called plant assets.
business. These costs include the price of the asset,
Some of Hobby Shack’s plant assets are computers, cash
delivery costs, and any necessary installation costs.
registers, sales display cases, and furniture.
2. Estimated Salvage Value. Generally, a business removes
Businesses may have three major types of plant assets—
a plant asset from use and disposes of it when the
equipment, buildings, and land. Hobby Shack records its
asset is no longer usable. The amount that will be
equipment in two different equipment accounts—Office
received for an asset at the time of its disposal is not
Equipment and Store Equipment. Because it rents the
known when the asset is bought. Thus, the amount
building and the land where the business is located, Hobby
that may be received at disposal must be estimated.
Shack does not need plant asset accounts for buildings
The amount an owner expects to receive when a plant
and land. [CONCEPT: Adequate Disclosure]
asset is removed from use is called estimated salvage
Depreciating Plant Assets value. Estimated salvage value may also be referred to
A business buys plant assets to use in earning revenue. as residual value or scrap value.
Hobby Shack bought a new lighted display case. Hobby 3. Estimated Useful Life. The total amount of deprecia-
Shack knows that the display case will be useful only for tion expense is distributed over the estimated useful
a limited period of time. After several years, most display life of a plant asset. When a plant asset is bought, the
cases become worn from use and no longer attractively exact length of useful life is not known. Therefore,
display the products. Hobby Shack will replace worn dis- the number of years of useful life must be estimated.
play cases with newer models. Thus, each display case has Two factors affect the useful life of a plant asset:
a limited useful life to the business. (1) physical depreciation and (2) functional deprecia-
In order to match revenue with the expenses used tion. Physical depreciation is caused by wear from use
to earn the revenue, the cost of a plant asset should be and deterioration from aging and weathering. Func-
expensed over the plant asset’s useful life. A portion of a tional depreciation occurs when a plant asset becomes
plant asset’s cost is transferred to an expense account in inadequate or obsolete. An asset is inadequate when
each fiscal period that a plant asset is used to earn rev- it can no longer satisfactorily perform the needed
enue. [CONCEPT: Matching Expenses with Revenue] service. An asset is obsolete when a newer asset can
The portion of a plant asset’s cost that is transferred to an operate more efficiently or produce better service.
expense account in each fiscal period during a plant asset’s
useful life is called depreciation expense.
Planning and Recording Depreciation Adjustments Lesson 14-5 423
C A L C U L AT I N G D E P R E C I AT I O N E X P E N S E
A N D B O O K VA LU E
Straight-Line Depreciation On January 2, 20X1, Hobby Shack bought a lighted
Charging an equal amount of depreciation expense for a display case for $1,250.00, with an estimated salvage
plant asset in each year of useful life is called the straight- value of $250.00 and an estimated useful life of 5 years.
line method of depreciation. Using the straight-line method of depreciation, the annual
Hobby Shack summarizes the depreciation expense for depreciation expense, $200.00, is the same for each year
each plant asset to calculate the total depreciation expense in which the asset is used.
recorded on the work sheet.
Original Estimated Estimated Total
Cost Salvage Value Depreciation Expense
$1,250.00 $250.00 1 $1,000.00
Estimated Total Years of Estimated Annual
Depreciation Expense Useful Life Depreciation Expense
$1,000.00 5 2 $200.00
S T E P S CALCULATING ANNUAL DEPRECIATION EXPENSE
1 Subtract the asset’s estimated salvage value from the asset’s original cost. This difference is the estimated total
depreciation expense for the asset’s entire useful life.
2 Divide the estimated total depreciation expense by the years of estimated useful life. The result is the annual
depreciation expense.
Calculating Accumulated Depreciation First, the depreciation expense that has accumulated
The total amount of depreciation expense that has been over all prior years is determined. Second, the deprecia-
recorded since the purchase of a plant asset is called tion expense for the current year is calculated. Third, the
accumulated depreciation. The amount accumulates prior accumulated depreciation and the current deprecia-
each year of the plant asset’s useful life. tion expense are added.
20X2 Accumulated 20X3 Accumulated
Depreciation 20X3 Depreciation Expense Depreciation
$400.00 $200.00 $600.00
Calculating Book Value book value is calculated by subtracting the accumulated
The original cost of a plant asset minus accumulated depreciation from the original cost of the asset.
depreciation is called the book value of a plant asset. The
Original Cost Accumulated Depreciation Ending Book Value
$1,250.00 $600.00 $650.00
Procedures for recording the accumulated depreciation
and book value of individual assets are presented in Chap-
ter 18.
424 Chapter 14 Distributing Dividends and Preparing a Work Sheet for a Merchandising Business
A N A LY Z I N G A N D R E C O R D I N G A D J U S T M E N T S
F O R D E P R E C I AT I O N E X P E N S E
3. Labels
1 2 3 4
TRIAL BALANCE ADJUSTMENTS
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT
2. Credits
9 Office Equipment 358 6 4 50
Acc. Depr.—Office Equipment 6 4 9 7 00 (f)
10 6 5 4 0 00
11 Store Equipment 408 4 9 50 3 2
Acc. Depr.—Store Equipment 5 0 6 9 00 (g)
12 5 2 5 0 00
Depr. Exp.—Office Equipment (f)
38 3 6 5 4 0 00
Depr. Exp.—Store Equipment (g)
39 5 2 5 0 00
1
1. Debits
At the end of the fiscal year, Hobby Shack calculates the
depreciation expense for each plant asset. Hobby Shack Store Equipment
determined that total depreciation expense is $6,540.00
Dec. 31 Bal. 40,849.50
for office equipment and $5,250.00 for store equipment.
Adjustments are planned in the Adjustments columns of
the work sheet. Accumulated Depreciation—Store Equipment
Jan. 1 Bal. 5,069.00
Dec. 31 Adj. (g) 5,250.00
Accumulated Depreciation ) (Dec. 31 Bal. 10,319.00)
Debit Credit
Decrease
Depreciation Expense—Store Equipment
Increase
Dec. 31 Adj. (g) 5,250.00
At any time, the book value of plant assets can be cal-
It is important to retain original cost information for culated by subtracting Accumulated Depreciation from its
plant assets. Therefore, rather than credit the plant asset related plant asset account.
account, depreciation is recorded in the contra asset
account Accumulated Depreciation.
RECORDING
S T E P S WORK SHEET
Office Equipment ADJUSTMENTS FOR
Dec. 31 Bal. 35,864.50 DEPRECIATION
1 Write the debit amounts in the Adjustments Debit
Accumulated Depreciation—Office Equipment column on the lines with the appropriate account titles:
$6,540.00 with Depreciation Expense—Office Equipment
Jan. 1 Bal. 6,497.00 and $5,250.00 with Depreciation Expense—Store
Dec. 31 Adj. (f) 6,540.00 Equipment.
(Dec. 31 Bal. 13,037.00)
2 Write the credit amounts in the Adjustments Credit
column on the lines with the appropriate account
Depreciation Expense—Office Equipment titles: $6,540.00 with Accumulated Depreciation—
Dec. 31 Adj. (f) 6,540.00 Office Equipment and $5,250.00 with Accumulated
Depreciation—Store Equipment.
3 Label the two parts of the Office Equipment adjustment
with a small letter f in parentheses, (f). Label the two
parts of the Store Equipment adjustment with a small
letter g in parentheses, (g).
Planning and Recording Depreciation Adjustments Lesson 14-5 425
TERMS REVIEW
End of Lesson
REVIEW
current assets
plant assets
depreciation expense
estimated salvage value
straight-line method of
AUDIT YOUR UNDERSTANDING depreciation
accumulated
1. What are the two categories of assets? depreciation
2. What three factors are used to calculate a plant asset’s annual deprecia- book value of a plant
tion expense? asset
WORK TOGETHER 145
Planning and recording adjustments for depreciation
Use the work sheet from Work Together 14-4. Your instructor will guide you through the following example.
1. Calculate depreciation expense for a computer printer costing $1,600.00; estimated salvage value, $100.00, useful
life, 5 years.
2. Calculate the book value of the computer printer at the end of its second year of service.
3. On December 31, Coastal Aquatics determined the total depreciation expense: office equipment, $6,120.00; store
equipment, $5,060.00. Plan the work sheet adjustments and label the adjustments (f) and (g). Save your work to
complete Work Together 14-6.
ON YOUR OWN 145
Planning and recording adjustments for depreciation
Use the work sheet from On Your Own 14-4. Work this problem independently.
1. Calculate depreciation expense for a display rack costing $2,350.00; estimated salvage value, $600.00, useful life,
7 years.
2. Calculate the book value of the display rack at the end of its third year of service.
3. On December 31, Sonoma Treasures determined the total depreciation expense: office equipment, $5,184.00;
store equipment, $6,480.00. Plan the work sheet adjustments and label the adjustments (f) and (g). Save your
work to complete On Your Own 14-6.
426 Chapter 14 Distributing Dividends and Preparing a Work Sheet for a Merchandising Business
L E S S O N Calculating Federal
Income Tax and Completing
14-6 a Work Sheet
F E D E R A L I N C O M E TA X E X P E N S E A D J U S T M E N T
Corporations anticipating annual federal income taxes of Tax Expense in Hobby Shack’s chart of accounts. Federal
$500.00 or more are required to pay their estimated taxes Income Tax Payable, a liability account, appears under the
each quarter. Estimated income tax is paid in quarterly heading Current Liabilities.
installments in April, June, September, and December. In order to make adjustments to federal income tax,
However, the actual federal income tax owed is calculated you must first determine the net income before federal
at the end of a fiscal year. Based on the actual income tax income tax expense. To calculate, follow these steps:
owed for a year, a corporation must file an annual return.
1. Complete all other adjustments on a work sheet.
Any additional tax owed that was not paid in quarterly
2. Extend all amounts except Federal Income Tax Expense
installments must be paid when the final return is filed.
to the Income Statement or Balance Sheet columns.
Early in the current year, Hobby Shack estimated
3. On a separate sheet of paper, total the work sheet’s
$18,000.00 federal income tax for the year. Hobby Shack
Income Statement columns.
paid $4,500.00 in each quarterly installment for a total of
4. Calculate the difference between the Income State-
$18,000.00. Each tax payment is recorded as a debit to
ment Debit column total and the Income Statement
Federal Income Tax Expense and a credit to Cash.
Credit column total. This difference between the
Federal income tax is an expense of a corporation. How-
totals of these two income statement columns is the
ever, the amount of tax depends on net income before the
net income before federal income tax expense.
tax is recorded.
Federal Income Tax Expense is an expense account.
The account appears under a major division titled Income
Total of Income Statement Credit column . . . . . . . . . . . . . . . . $ 500,253.10
Less total of Income Statement Debit column
before federal income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396,049.91
Equals Net Income before Federal Income Tax . . . . . . . . . . . . . $ 104,203.19
PH O
TO A
LTO
/ G ET
TY
IMA
GE
S
Calculating Federal Income Tax and Completing a Work Sheet Lesson 14-6 427
C A L C U L AT I N G F E D E R A L I N C O M E TA X
15% of net income before taxes, zero to $50,000.00 (15% tax on the first $50,000.00 of net income)
Plus 25% of net income before taxes, $50,000.00 to $75,000.00 (25% tax on the next $25,000.00 of net income)
Plus 34% of net income before taxes, $75,000.00 to $100,000.00 (34% tax on the next $25,000.00 of net income)
Plus 39% of net income before taxes, $100,000.00 to $335,000.00 (39% tax on the next $225,000.00 of net income)
Plus 34% of net income before taxes over $335,000.00 (34% tax on net income above $335,000.00)
1
First Net Income Amount First Tax Rate Federal Income Tax on First $50,000.00 of Net Income
$50,000.00 15% $7,500.00
2
Second Net Income Amount Second Tax Rate Federal Income Tax on Next $25,000.00 of Net Income
$25,000.00 25% $6,250.00
3
Third Net Income Amount Third Tax Rate Federal Income Tax on Next $25,000.00 of Net Income
$25,000.00 34% $8,500.00
4
Total Net Income Lowest Dollar Amount Amount of Net Income to Which Fourth Tax Rate Is Applied
of Fourth Tax Range
$104,203.19 $100,000.00 $4,203.19
5
Fourth Net Income Amount Fourth Tax Rate Federal Income Tax on Next $140,914.00 of Net Income
$4,203.19 39% $1,639.24
6
First Federal Tax Second Federal Tax Third Federal Tax Fourth Federal Tax Total Federal Tax
Amount Amount Amount Amount Amount
$7,500.00 $6,250.00 $8,500.00 $1,639.24 $23,889.24
The amount of federal income tax expense a corporation net income before federal income tax is $104,203.19.
must pay is calculated using a tax rate table furnished by Corporation tax rates in effect when this text was written
the Internal Revenue Service. Different tax percentages are are used to calculate Hobby Shack’s federal income tax
applied to different portions of the net income to deter- expense.
mine the total federal income tax owed. Hobby Shack’s
S T E P S CALCULATING FEDERAL INCOME TAX
1 Multiply $50,000.00 by a tax rate of 15% to calculate the first federal income tax amount. This is the tax Hobby Shack
must pay on its first $50,000.00 of net income.
2 Multiply $25,000.00 by a tax rate of 25% to calculate the second federal income tax amount. This is the tax Hobby
Shack must pay on the next $25,000.00 of net income.
3 Multiply $25,000.00 by a tax rate of 34% to calculate the third federal income tax amount. This is the tax Hobby
Shack must pay on the next $25,000.00 of net income.
4 The tax rate of 39% applies to all net income that falls in the range of $100,000.00 to $335,000.00. Hobby Shack’s net
income is $104,203.19. When the net income does not equal or exceed the highest dollar amount given in a range,
the amount of net income to which the tax rate is applied is determined by subtracting the lowest dollar amount in
the range from the total net income. ($104,203.19 $100,000.00 $4,203.19)
5 Multiply $4,203.19 by a tax rate of 39% to calculate the fourth federal income tax amount, $1,639.24. This is the tax
Hobby Shack must pay on the remainder of its net income.
6 Add the four tax amounts together to determine Hobby Shack’s federal income tax expense for the fiscal year.
428 Chapter 14 Distributing Dividends and Preparing a Work Sheet for a Merchandising Business
R E C O R D I N G T H E F E D E R A L I N C O M E TA X A D J U S T M E N T
1 2 3 4 5 6 7 8
TRIAL BALANCE ADJUSTMENTS INCOME STATEMENT BALANCE SHEET
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
9 Office Equipment 35 8 6 4 50 35 8 6 4 50 9
(f)
10 Acc. Depr.—Office Equipment 6 4 9 7 00 6 5 4 0 00 13 0 3 7 00 10
11 Store Equipment 40 8 4 9 50 40 8 4 9 50 11
(g)
12 Acc. Depr.—Store Equipment 5 0 6 9 00 5 2 5 0 00 10 3 1 9 00 12
13 Accounts Payable 11 5 8 3 03 11 5 8 3 03 13
(h)
14 Federal Income Tax Payable 1 5 8 8 9 24 3 5 8 8 9 24 14
(b)
46 Supplies Expense—Store 2 9 1 0 00 2 9 1 0 00 46
(e)
47 Uncollectible Accounts Expense 1 2 4 5 00 1 2 4 5 00 47
48 Utilities Expense 3 8 2 0 00 3 8 2 0 00 48
49 Federal Income Tax Expense 18 0 0 0 00 1 (h) 5 8 8 9 24 3 23 8 8 9 24 49
50 670 8 6 1 59 670 8 6 1 59 43 5 7 4 24 43 5 7 4 24 50
51 2 51
1. Calculate and enter the 2. Total and rule the 3. Extend the account balances.
federal income tax adjustment. adjustment columns.
RECORDING A WORK SHEET ADJUSTMENT FOR FEDERAL
S T E P S
INCOME TAX EXPENSE
1 Calculate the amount of the federal income tax expense adjustment. The adjustment is the difference between the
federal income tax for the year and the taxes paid during the year.
Federal Income Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23,889.24
Less Total of Quarterly Installments . . . . . . . . . . . . . . . . . . . . . . 18,000.00
Equals Federal Income Tax Adjustment . . . . . . . . . . . . . . . . . . . $ 5,889.24
Enter the federal income tax expense adjustment, $5,889.24, in the Adjustments Credit column on the Federal
Income Tax Payable line of the work sheet. Enter the same amount in the Adjustments Debit column of the Federal
Income Tax Expense line of the work sheet. Label both parts of the adjustment (h).
2 Total and rule the Adjustments columns.
3 Extend the Federal Income Tax Expense account balance, $23,889.24, to the Income Statement Debit column. Extend
the amount for Federal Income Tax Payable, $5,889.24, to the Balance Sheet Credit column.
Federal Income Tax Expense
4/15 4,500.00
6/15 4,500.00
9/15 4,500.00
12/15 4,500.00
(12/15 Bal. 18,000.00)
12/31 Adj. (h) 5,889.24
(New Bal. 23,889.24)
Federal Income Tax Payable
12/31 Adj. (h) 5,889.24
Calculating Federal Income Tax and Completing a Work Sheet Lesson 14-6 429
COMPLETING A WORK SHEET
1. Total the income statement and
balance sheet columns.
1 2 3 4 5 6 7 8
TRIAL BALANCE ADJUSTMENTS INCOME STATEMENT BALANCE SHEET
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
48 Utilities Expense 3 8 2 0 00 3 8 2 0 00 48
(h)
49 Federal Income Tax Expense 18 0 0 0 00 5 8 8 9 24 23 8 8 9 24 1 1 49
50 670 8 6 1 59 670 8 6 1 59 43 5 7 4 2 4 43 5 7 4 24 419 9 3 9 15 500 2 5 3 10 269 8 4 6 68 189 5 3 2 73 50
51 Net Income after Federal Income Tax 2 80 3 1 3 95 3 80 3 1 3 95 51
52 4 500 2 5 3 10 500 2 5 3 10 269 8 4 6 68 269 8 4 6 68 52
5
2. Calculate and enter 4. Calculate the 5. Draw double 3. Extend the net
the net income after column totals. lines. income amount.
federal income tax.
After the adjustment for federal income tax expense has to adjust Merchandise Inventory. The merchandise inven-
been recorded, the work sheet is ready to be completed. tory adjustment reflects the increases and decreases in the
Income Statement column totals are used to calculate net amount of goods on hand resulting from purchases and
income after federal income tax. sales. Therefore, the amount recorded in Income Sum-
Hobby Shack follows the same procedures for complet- mary is extended to the work sheet’s Income Statement
ing a work sheet as described for TechKnow in Chapter 6, Debit or Credit column. An Income Summary debit
with the exception of the Income Summary account. Tech- amount is extended to the Income Statement Debit col-
Know sells a service, not merchandise. Therefore, Tech- umn. An Income Summary credit amount is extended to
Know has no amount recorded in the Income Summary the Income Statement Credit column.
account, a related account used to adjust Merchandise Hobby Shack’s completed work sheet for the year ended
Inventory. Hobby Shack sells merchandise. Therefore, the December 31, 20--, is shown on pages 432–433.
Income Summary account is used as the related account
S T E P S COMPLETING A WORK SHEET
1 Total the Income Statement and Balance Sheet columns.
2 Write the words Net Income after Federal Income Tax on line 51 of the work sheet. Calculate and enter the net income
after federal income tax, $80,313.95, in the Income Statement Debit column on this new line of the work sheet.
Total of Income Statement Credit column . . . . . . . . . . . . . . . . $500,253.10
Less Total of Income Statement Debit column . . . . . . . . . . . . . 419,939.15
Equals Net Income after Federal Income Tax . . . . . . . . . . . . . . $ 80,313.95
3 Extend the net income after federal income tax amount, $80,313.95, to the Balance Sheet Credit column.
4 Total the four Income Statement and Balance Sheet columns. Determine that the totals of each pair of columns are
in balance.
5 Rule double lines across the Income Statement and Balance Sheet columns to show that the totals have been
verified as correct.
430 Chapter 14 Distributing Dividends and Preparing a Work Sheet for a Merchandising Business
CAREERS IN ACCOUNTING
E v e r l y n Joh n s o n ,
Small Business Owner
By the age of 18, you will have responsible for gathering and communicating current
gained experiences that will knowledge and research with other county agents.
change your life in ways Most people plan to relax in their retirement. But not
you might never imag- Dr. Johnson. She says, “I constantly heard people say
ine. These experiences that they wish they knew how to sew. I saw a niche that
may come from an needed filling and decided I was the person to fulfill it.”
extracurricular activ- So after just three years of retirement, Everlyn decided to
ity, a part-time job, open a fabric store.
or a hobby, and they One of her first tasks to prepare for the store opening
may influence the was to enroll in an income tax course at the local univer-
direction of your sity. She recalls, “I felt the tax course would help me do
career or retirement. a better job of keeping the records of the business and
For Everlyn John- would ensure that I planned the business to take advan-
son, the youthful expe- tage of tax laws.” Then she started doing her homework,
rience that would affect meeting with a variety of small business owners to learn
her life was learning to the rewards and pitfalls of small business ownership.
sew. Her mother taught her Everlyn visited fabric stores outside her market area.
the basics when Everlyn was 11. “The owners of many stores painted less than a rosy pic-
COURTESY OF EVERLYN JOHNSON
Advancing from quilts to doll clothes ture of the prospect of opening a store,” she remarks. “I
to her prom dress, Everlyn learned that human felt they were missing something—that main ingredient
sciences (formerly home economics) would lead her to that would make the store successful. Then I visited two
a fulfilling career. Earning bachelor’s, master’s, and doc- stores that were constantly conducting sewing classes. It
toral degrees in the area, Dr. Johnson worked with her was clear to see that these classes were the key to the
state’s cooperative extension service for over 27 years. success of the stores. Perfect!” Having spent most of her
In her role as a county agent, she was responsible for career teaching classes, Everlyn now plans sewing classes,
educating the public on home living skills—including teaching some herself, to serve her customers and to pro-
sewing. Later she advanced to a position where she was mote the sale of fabric and accessories in her store.
Salary: Approximately $70,000, depending on Occupational Outlook: The budgetary constraints
experience. of county, state, and federal governments have reduced
the financial resources devoted to cooperative education.
Qualifications: A master’s degree requires one year
Thus, the opportunities for individuals in this career have
of university courses beyond the bachelor’s degree. Most
been declining. However, in Dr. Johnson’s situation, she
doctoral programs require another four years of univer-
was able to use her background to move into a successful
sity study and research.
business venture.
Calculating Federal Income Tax and Completing a Work Sheet Lesson 14-6 431
432
A COMPLETED 8 COLUMN WORK SHEET
Chapter 14
Hobby Shack, Inc.
Work Sheet
For Year Ended December 31, 20--
1 2 3 4 5 6 7 8
TRIAL BALANCE ADJUSTMENTS INCOME STATEMENT BALANCE SHEET
ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
1 Cash 29 0 8 0 28 2 9 0 8 0 28 1
2 Petty Cash 3 0 0 00 3 0 0 00 2
3 Accounts Receivable 14 6 9 8 40 14 6 9 8 40 3
4 Allow. for Uncoll. Accts. 1 2 7 52 (e) 1 2 4 5 00 1 3 7 2 52 4
5 Merchandise Inventory 140 4 8 0 00 (d)15 8 4 0 00 124 6 4 0 00 5
6 Supplies—Office 3 4 8 0 00 (a) 2 7 3 0 00 7 5 0 00 6
Distributing Dividends and Preparing a Work Sheet for a Merchandising Business
7 Supplies—Store 3 9 4 4 00 (b) 2 9 1 0 00 1 0 3 4 00 7
8 Prepaid Insurance 5 8 0 0 00 (c) 3 1 7 0 00 2 6 3 0 00 8
9 Office Equipment 35 8 6 4 50 35 8 6 4 50 9
10 Acc. Depr.—Office Equipment 6 4 9 7 00 (f) 6 5 4 0 00 13 0 3 7 00 10
11 Store Equipment 40 8 4 9 50 40 8 4 9 50 11
12 Acc. Depr.—Store Equipment 5 0 6 9 00 (g) 5 2 5 0 00 10 3 1 9 00 12
13 Accounts Payable 11 5 8 3 03 11 5 8 3 03 13
14 Federal Income Tax Payable (h) 5 8 8 9 24 5 8 8 9 24 14
15 Employee Income Tax Payable 7 5 7 00 7 5 7 00 15
16 Social Security Tax Payable 1 4 5 1 38 1 4 5 1 38 16
17 Medicare Tax Payable 3 9 9 42 3 9 9 42 17
18 Sales Tax Payable 2 5 5 6 70 2 5 5 6 70 18
19 Unemployment Tax Payable—Federal 3 4 60 3 4 60 19
20 Unemployment Tax Payable—State 2 3 3 55 2 3 3 55 20
21 Health Insurance Premiums Payable 1 0 0 8 00 1 0 0 8 00 21
22 U.S. Savings Bonds Payable 6 0 00 6 0 00 22
23 United Way Donations Payable 7 0 00 7 0 00 23
24 Dividends Payable 5 0 0 0 00 5 0 0 0 00 24
25 Capital Stock 125 0 0 0 00 125 0 0 0 00 25
26 Retained Earnings 10 7 6 1 29 10 7 6 1 29 26
27 Dividends 20 0 0 0 00 20 0 0 0 00 27
(d)
28 Income Summary 15 8 4 0 00 15 8 4 0 00 28
y
Calculating Federal Income Tax and Completing a Work Sheet
29 Sales 495 1 2 0 00 495 1 2 0 00 29
30 Sales Discount 2 5 8 48 2 5 8 48 30
31 Sales Returns and Allowances 3 1 2 7 28 3 1 2 7 28 31
32 Purchases 209 9 6 0 00 209 9 6 0 00 32
33 Purchases Discount 1 6 4 8 15 1 6 4 8 15 33
34 Purch. Returns and Allowances 3 4 8 4 95 3 4 8 4 95 34
35 Advertising Expense 3 6 0 0 00 3 6 0 0 00 35
36 Cash Short and Over 1 9 25 1 9 25 36
37 Credit Card Fee Expense 3 3 8 5 00 3 3 8 5 00 37
38 Depr. Exp.—Office Equipment (f) 6 5 4 0 00 6 5 4 0 00 38
39 Depr. Exp.—Store Equipment (g) 5 2 5 0 00 5 2 5 0 00 39
40 Insurance Expense (c) 3 1 7 0 00 3 1 7 0 00 40
41 Miscellaneous Expense 2 5 6 4 90 2 5 6 4 90 41
42 Payroll Taxes Expense 9 1 0 5 00 9 1 0 5 00 42
43 Rent Expense 18 0 0 0 00 18 0 0 0 00 43
44 Salary Expense 104 5 2 5 00 104 5 2 5 00 44
45 Supplies Expense—Office (a) 2 7 3 0 00 2 7 3 0 00 45
46 Supplies Expense—Store (b) 2 9 1 0 00 2 9 1 0 00 46
47 Uncollectible Accounts Expense (e) 1 2 4 5 00 1 2 4 5 00 47
48 Utilities Expense 3 8 2 0 00 3 8 2 0 00 48
49 Federal Income Tax Expense 18 0 0 0 00 (h)5 8 8 9 24 23 8 8 9 24 49
50 670 8 6 1 59 670 8 6 1 59 43 5 7 4 24 43 5 7 4 24 419 9 3 9 15 500 2 5 3 10 269 8 4 6 68 189 5 3 2 73 50
51 Net Income after Federal Income Tax 80 3 1 3 95 80 3 1 3 95 51
52 500 2 5 3 10 500 2 5 3 10 269 8 4 6 68 269 8 4 6 68 52
Lesson 14-6
433
A 10 CO LU M N WO R K S H E E T L E F T PAG E
1. Trial balance 2. Adjustments 3. Extend Adjusted
Balances
Hobby Shack, Inc.
Work Sheet
For Year Ended December 31, 20-- 3
1 2 3 4 5 6
ACCOUNT TITLE
TRIAL BALANCE ADJUSTMENTS 2 ADJUSTED TRIAL BALANCE
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
1 Cash 1 29 0 8 0 28 29 0 8 0 28
2 Petty Cash 3 0 0 00 3 0 0 00
3 Accounts Receivable 14 6 9 8 40 14 6 9 8 40
Allow. for Uncoll. Accts. (e)
4 1 2 7 52 1 2 4 5 00 1 3 7 2 52
Merchandise Inventory (d)
5 140 4 8 0 00 15 8 4 0 00 124 6 4 0 00
Supplies—Office (a)
6 3 4 8 0 00 2 7 3 0 00 7 5 0 00
Supplies—Store (b)
7 3 9 4 4 00 2 9 1 0 00 1 0 3 4 00
Prepaid Insurance (c)
8 5 8 0 0 00 3 1 7 0 00 2 6 3 0 00
9 Office Equipment 35 8 6 4 50 35 8 6 4 50
Acc. Depr.—Office Equipment (f)
10 6 4 9 7 00 6 5 4 0 00 13 0 3 7 00
11 Store Equipment 40 8 4 9 50 40 8 4 9 50
Acc. Depr.—Store Equipment (g)
12 5 0 6 9 00 5 2 5 0 00 10 3 1 9 00
13 Accounts Payable 11 5 8 3 03 11 5 8 3 03
Federal Income Tax Payable (h)
14 5 8 8 9 24 5 8 8 9 24
24 Dividends Payable 5 0 0 0 00 5 0 0 0 00
25 Capital Stock 125 0 0 0 00 125 0 0 0 00
26 Retained Earnings 10 7 6 1 29 10 7 6 1 29
27 Dividends 20 0 0 0 00 20 0 0 0 00
Income Summary (d)15 8 4 0 00
28 15 8 4 0 00
29 Sales 495 1 2 0 00 495 1 2 0 00
30 Sales Discount 2 5 8 48 2 5 8 48
31 Sales Returns and Allowances 3 1 2 7 28 3 1 2 7 28
32 Purchases 209 9 6 0 00 209 9 6 0 00
33 Purchases Discount 1 6 4 8 15 1 6 4 8 15
34 Purch. Returns and Allowances 3 4 8 4 95 3 4 8 4 95
35 Advertising Expense 3 6 0 0 00 3 6 0 0 00
36 Cash Short and Over 1 9 25 1 9 25
37 Credit Card Fee Expense 3 3 8 5 00 3 3 8 5 00
Depr. Exp.—Office Equipment (f) 6 5 4 0 00
38 6 5 4 0 00
Depr. Exp.—Store Equipment (g)
39 5 2 5 0 00 5 2 5 0 00
Insurance Expense (c)
40 3 1 7 0 00 3 1 7 0 00
41 Miscellaneous Expense 2 5 6 4 90 2 5 6 4 90
42 Payroll Taxes Expense 9 1 0 5 00 9 1 0 5 00
43 Rent Expense 18 0 0 0 00 18 0 0 0 00
44 Salary Expense 104 5 2 5 00 104 5 2 5 00
Supplies Expense—Office (a) 2 7 3 0 00
45 2 7 3 0 00
Supplies Expense—Store (b) 2 9 1 0 00
46 2 9 1 0 00
Uncollectible Accounts Expense (e)
47 1 2 4 5 00 1 2 4 5 00
48 Utilities Expense 3 8 2 0 00 3 8 2 0 00
Federal Income Tax Expense 18 0 0 0 00 (h)5 8 8 9 24
49 23 8 8 9 24
50 670 8 6 1 59 6708 6 1 59 43 5 7 4 24 43 5 7 4 24 689 7 8 5 83 689 7 8 5 83
51 Net Income after Federal Income Tax 4
52
4. Total, prove, and rule
434 Chapter 14 Distributing Dividends and Preparing a Work Sheet for a Merchandising Business
A 10 CO LU M N WO R K S H E E T R I G H T PAG E
5. Extend Balances Some large businesses with many accounts to be adjusted
at the end of a fiscal period may use a 10-column work
sheet. A 10-column work sheet includes an additional pair
of amount columns titled Adjusted Trial Balance.
7 8 9 10
Any business with adjustments to make at the end of a
INCOME STATEMENT 5 BALANCE SHEET fiscal period could use either an 8-column or a 10-column
DEBIT CREDIT DEBIT CREDIT
29 0 8 0 28 1
work sheet. However, completing two extra amount col-
3 0 0 00 2 umns when most of the account balances are not adjusted
14 6 9 8 40 3 requires extra time and work. Account balances not
1 3 7 2 52 4 adjusted must be extended from the Trial Balance columns
124 6 4 0 00 5 to the Adjusted Trial Balance columns; whereas, with an
7 5 0 00 6 8-column work sheet, account balances not adjusted are
1 0 3 4 00 7 extended directly to the Balance Sheet or Income State-
2 6 3 0 00 8 ment columns.
35 8 6 4 50 9
13 0 3 7 00 10
40 8 4 9 50 11 COMPLETING
10 3 1 9 00 12 S T E P S A 10COLUMN
11 5 8 3 03 13
WORK SHEET
5 8 8 9 24 14
1 Record the trial balance on the work sheet.
5 0 0 0 00 24
125 0 0 0 00 25 2 Plan the adjustments on the work sheet.
10 7 6 1 29 26
20 0 0 0 00 27 3 Extend the balances in the Trial Balance Debit
15 8 4 0 00 28 and Credit columns to the Adjusted Trial Balance
495 1 2 0 00 29 Debit and Credit columns. Calculate up-to-date
2 5 8 48 30 adjusted balances for all accounts affected by
3 1 2 7 28 31 adjustments.
209 9 6 0 00 32
4 Total, prove, and rule the Adjusted Trial Balance
1 6 4 8 15 33
Debit and Credit columns.
3 4 8 4 95 34
3 6 0 0 00 35 5 Extend the amounts in the Adjusted Trial Bal-
1 9 25 36 ance Debit and Credit columns to the appro-
3 3 8 5 00 37 priate Income Statement and Balance Sheet
6 5 4 0 00 38 columns.
5 2 5 0 00 39
6 Calculate net income and total, prove, and rule
3 1 7 0 00 40
the Income Statement and Balance Sheet col-
2 5 6 4 90 41
umns in the same way as on an 8-column work
9 1 0 5 00 42
sheet.
18 0 0 0 00 43
104 5 2 5 00 44
2 7 3 0 00 45
2 9 1 0 00 46
1 2 4 5 00 47
R E M E M B E R
3 8 2 0 00 48
23 8 8 9 24 49 A 10-column work sheet is often
419 9 3 9 15 500 2 5 3 10 269 8 4 6 68 189 5 3 2 73 50 used by large merchandising
80 3 1 3 95 80 3 1 3 95 51 companies with many
accounts to be adjusted.
500 2 5 3 10 500 2 5 3 10 269 8 4 6 68 269 8 4 6 68 52
6 6. Calculate net income;
total, prove, and rule
Calculating Federal Income Tax and Completing a Work Sheet Lesson 14-6 435
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. In what column is the Income Summary amount extended?
2. To which Balance Sheet column is a net loss amount extended?
3. What extra step is required when a 10-column work sheet is prepared
instead of an 8-column work sheet?
WORK TOGETHER 146
Completing an 8-column work sheet for a merchandising business organized as a corporation
Use the work sheet from Work Together 14-5. Your instructor will guide you through the following examples.
1. Extend all amounts except Federal Income Tax Expense to the appropriate Income Statement or Balance Sheet
columns. Do not total the columns.
2. On the form provided in the Working Papers, total the work sheet’s Income Statement columns. Calculate the
difference between the debit and credit totals. This difference becomes the net income before federal income tax
expense.
3. Using the tax table shown in this chapter, calculate federal income tax expense and record the income tax adjust-
ment on the work sheet. Label the adjustment (h).
4. Complete the work sheet.
ON YOUR OWN 146
Completing an 8-column work sheet for a merchandising business organized as a corporation
Use the work sheet from On Your Own 14-5. Work this problem independently.
1. Extend all amounts except Federal Income Tax Expense to the appropriate Income Statement or Balance Sheet
columns. Do not total the columns.
2. On the form provided in the Working Papers, total the work sheet’s Income Statement columns. Calculate the
difference between the debit and credit totals.
3. Using the tax table shown in this chapter, calculate federal income tax expense and record the income tax
adjustment on the work sheet. Label the adjustment (h).
4. Complete the work sheet.
436 Chapter 14 Distributing Dividends and Preparing a Work Sheet for a Merchandising Business
SUMMARY
After completing this chapter, you can: 4. Begin a work sheet for a merchandising
business.
1. Define accounting terms related to distribut-
ing dividends and preparing a work sheet for a 5. Plan work sheet adjustments for merchandise
merchandising business. inventory, supplies, prepaid expenses, uncol-
lectible accounts, and depreciation.
2. Identify accounting concepts and practices
related to distributing dividends and preparing 6. Calculate federal income tax and plan the work
a work sheet for a merchandising business. sheet adjustment for federal income tax.
3. Journalize the declaration and payment of a 7. Complete a work sheet for a merchandising
dividend. business.
( Go Beyond the Book
)
For more information go to
www.C21accounting.com
EXPLORE ACCOUNTING
A c c o u nt i n g S y s t e m s D e s i g n
An important role of accountants is to prepare A small business owned and operated by
financial statements for businesses. In addi- one person may not need detailed informa-
tion, many accountants design accounting tion. However, as a business grows in size
systems used to prepare the various finan- and complexity, more detailed information
cial reports important to successful busi- is required. Large international businesses
ness operations. need very complex accounting systems
An accounting system should be with thousands of accounts to furnish man-
designed to meet the needs of the business agement with the information needed to
it serves. Factors to consider are size of the com- make decisions and the data for various reports
pany, number of facility locations, geographic area required by governments and other agencies. As
of operations (local, statewide, national, international), businesses grow, accountants constantly look for ways to
number of employees, and type of organization (service, provide better information. Thus, accountants play a key
merchandising, manufacturing). Also to be considered are role in the successful growth of a business.
the intended uses of the information: traditional financial
Activity: Assume Hobby Shack has made the decision
statements (income statement, balance sheet, cash flow
to change from a merchandising business to a manufac-
statement), income tax information, management deci-
turing business. It will create its own ceramic molds that
sion information, management control information, and
will enable it to produce its own line of ceramic images. As
PHOTO: PHOTOGRAPHER’S CHOICE/GETTY IMAGES
product pricing information.
the accountant, how would you recommend the chart of
An accounting system is built around a chart of accounts,
accounts be modified to meet the changing needs of the
which provides the organizational system around which
company?
information will be collected, filed, and made available for
various types of financial reports.
Distributing Dividends and Preparing a Work Sheet for a Merchandising Business Chapter 14 437
141 APPLICATION PROBLEM
Journalizing dividends
Drake Corporation completed the following transactions during December of the current year and January of
the next year.
Instructions:
1. Use page 17 of a general journal. Journalize the dividend declared on December 15.
2. Use page 28 of a cash payments journal. Journalize payment of the dividend on January 15.
Transactions:
Dec. 15. The board of directors declared a dividend of $1.50 per share; capital stock issued is 2,100 shares.
M258.
Jan. 15. Paid cash for dividend declared December 15. C721.
142 APPLICATION PROBLEM
Beginning an 8-column work sheet for a merchandising business
A partially completed work sheet for Branson Amusement Company is given in the Working Papers. Four
general ledger accounts are shown below.
Instructions:
1. Enter the accounts and account balances on the following lines.
Line Account Account Balance
6 Supplies—Office $ 5,210.98
13 Accounts Payable 17,558.16
33 Purchases Discount 5,155.28
44 Salary Expense 193,971.80
2. Total, prove, and rule the trial balance.
3. From a physical count of the following, December 31 balances are determined to be:
Supplies—Office $489.73
Supplies—Store 701.19
Prepaid Insurance 500.00
Analyze the supplies and prepaid insurance adjustments and enter the adjustments on the work sheet. Label
the adjustments (a)–(c). Save your work to complete Application Problem 14-3.
143 APPLICATION PROBLEM
Analyzing and recording a merchandise inventory adjustment on a work sheet
Use the work sheet prepared in Application Problem 14-2.
Instructions:
1. From a physical count of merchandise inventory, the December 31 balance is determined to be
$226,766.38. Analyze the merchandise inventory adjustment and enter the adjustment on the work sheet.
Label the adjustment (d). Save your work to complete Application Problem 14-4.
438 Chapter 14 Distributing Dividends and Preparing a Work Sheet for a Merchandising Business
144 APPLICATION PROBLEM
Analyzing and recording an allowance for uncollectible accounts adjustment
on a work sheet
Use the work sheet prepared in Application Problem 14-3.
Instructions:
1. Branson Amusement Company estimates uncollectible accounts expense as 0.8% of its total sales on
account. During the current year, Branson had credit sales of $248,500.00. As of December 31, record the
uncollectible accounts expense adjustment on the work sheet and label the adjustment (e). Save your
work to complete Application Problem 14-5.
145 APPLICATION PROBLEM
Planning and recording adjustments for depreciation
Use the work sheet prepared in Application Problem 14-4.
Instructions:
1. Wave Dive Company tests scuba equipment. Calculate depreciation expense for scuba testing equipment
costing $10,540.00; estimated salvage value, $2,500.00; useful life, 3 years.
2. Calculate the book value of the scuba testing equipment at the end of its second year of service.
3. On December 31, Branson Amusement Company determined total depreciation expense: office equip-
ment, $5,850.00; store equipment, $5,250.00. Plan the work sheet adjustments and label the adjustments
(f) and (g). Save your work to complete Application Problem 14-6.
146 APPLICATION PROBLEM
Calculating federal income tax and completing an 8-column work sheet for a
merchandising business
Use the work sheet prepared in Application Problem 14-5.
Instructions:
1. Extend all amounts except Federal Income Tax Expense to the appropriate Income Statement or Balance
Sheet columns. Do not total the columns.
2. On the form provided in the Working Papers, calculate the net income before federal income tax expense.
3. Using the tax table shown in this chapter, calculate federal income tax expense and record the income tax
adjustment on the work sheet. Label the adjustment (h).
4. Finish the work sheet.
147 MASTERY PROBLEM
Preparing an 8-column work sheet for a merchandising business
The trial balance for Carol’s Closet as of December 31 of the current year is recorded on a work sheet in the
Working Papers.
Distributing Dividends and Preparing a Work Sheet for a Merchandising Business Chapter 14 439
Instructions:
1. Analyze the following adjustment information collected on December 31 and record the adjustments on
the work sheet. Label each adjustment using labels (a) through (g).
a. Office supplies inventory $ 1,407.00
b. Store supplies inventory 570.11
c. Merchandise inventory 238,830.61
d. Uncollectible accounts are 1.2% of credit sales of: 458,200.00
e. Value of prepaid insurance 2,000.00
f. Estimate of office equipment depreciation 5,216.00
g. Estimate of store equipment depreciation 4,820.00
2. Using the tax table shown in this chapter, calculate federal income tax expense and record the income tax
adjustment on the work sheet. Label the adjustment (h).
3. Complete the work sheet.
148 CHALLENGE PROBLEM
Preparing a 10-column work sheet for a merchandising business
Hillside Ski Shop’s trial balance as of December 31 of the current year is recorded on a work sheet in the
Working Papers.
Instructions:
1. Analyze the following adjustment information collected on December 31 and record the adjustments on
the work sheet. Label each adjustment using labels (a) through (g).
a. Office supplies inventory $ 343.42
b. Store supplies inventory 309.41
c. Merchandise inventory 167,000.46
d. Uncollectible accounts are 1.0% of credit sales of: 158,900.00
e. Value of prepaid insurance 3,000.00
f. Estimate of office equipment depreciation 3,890.00
g. Estimate of store equipment depreciation 3,460.00
2. Using the tax table shown in this chapter, calculate federal income tax expense and record the income tax
adjustment on the work sheet. Label the adjustment (h).
3. Complete the work sheet.
A P P L I E D CO M M U N I C AT I O N
Sometimes a credit customer does not pay off the amount due on an account receivable by the deadline specified in
the terms of the sale on account. In this situation, a business wants to (1) receive the amount owed and (2) preserve
a long-term relationship so there can be repeated sales to that customer.
Instructions: Write a first-notice letter to a customer who has not yet paid an amount due. Balance your business’s
need to receive payment with the desire to keep the customer’s goodwill now and in the future. Use a supportive
opening and closing.
440 Chapter 14 Distributing Dividends and Preparing a Work Sheet for a Merchandising Business
CASE FOR CRITICAL THINKING
After completing a work sheet, Park’s Boutique finds that garment bags worth $600.00 were overlooked in the supplies
inventory. Jerry Park suggests that the oversight does not have any effect on balancing the Income Statement and
Balance Sheet columns of the work sheet. He adds that the oversight will be corrected when the store supplies are
counted at the end of the next fiscal period. The accountant recommends that the work sheet be redone to reflect the
recalculated supplies inventory. Do you agree with Mr. Park or the accountant? Explain your answer.
AUDITING FOR ERRORS
Martin Grotte has just completed the year-end work sheet for Lancing Corporation. Part of the work sheet is shown
below.
Trial Balance Adjustments
Account Title Debit Credit Debit Credit
Accounts Receivable 42,518.25
Allow. for Uncoll. Accts. 251.66 (e) 496.41
Merchandise Inventory 251,486.36 (d) 9,548.25
Supplies—Office 5,141.84 (a) 4,154.22
Supplies—Store 3,148.28 (b) 2,974.22
Prepaid Insurance 6,000.00 (c) 5,000.00
Office Equipment 28,550.00
Acc. Depr.—Office Equipment 12,480.00 (f ) 5,210.00
Store Equipment 58,940.00
Acc. Depr.—Store Equipment 16,420.00 (g) 8,420.00
Federal Income Tax Payable (h) 45,813.38
Sales 992,818.10
Utilities Expense 5,485.22
Federal Income Tax Expense 60,000.00 (h) 45,813.38
Martin used the following information to prepare the work sheet adjustments:
a. Uncollectible accounts are estimated to be 0.5% of gross sales (the amount of sales before discounts and returns
and allowances are subtracted).
b. Office supplies inventory on hand, $987.62.
c. Store supplies inventory on hand, $174.06.
d. Merchandise inventory on hand, $241,938.11.
e. The six-month insurance premium was paid on July 1.
f. Office equipment has a 5-year useful life and a $2,500 salvage value.
g. Store equipment has a 7-year useful life and a $3,500 salvage value.
Instructions
Audit the work sheet to determine if the work sheet adjustments were recorded properly. Prepare a list that
describes any errors you discover and how they should be corrected.
A N A LY Z I N G B E S T B U Y ’S F I N A N C I A L S TAT E M E N T S
Investors use a ratio known as the dividend yield when making investment decisions. The dividend yield is calculated
as follows:
Dividend per Share
Dividend Yield
Market Price per Share
Companies with large dividend yields (greater than 3%) are typically considered to be income stocks, meaning that
investors own the stock primarily to earn the dividend. In contrast, companies with small dividend yields (less than
2%) are often referred to as growth stocks, meaning that investors are counting on the market value of the stock to
increase over time.
Instructions: Use Best Buy’s Statement of Changes in Shareholders' Equity on page B-8 in Appendix B to answer the
following questions.
1. Calculate the 2006 dividend yield for Best Buy, assuming the current market price is $50.00 per share.
2. Would you classify Best Buy as an income or growth stock?
Distributing Dividends and Preparing a Work Sheet for a Merchandising Business Chapter 14 441
Accounting
SOFTWARE
JOURNALIZING ADJUSTING ENTRIES
Peachtree has a working trial balance report that is similar to a work sheet. The report presents each account, the
account balance as of the end of the last fiscal period, and the current balance.
Like the work sheet, the printed working trial balance has blank debit and credit columns where adjustments
can be planned. The completed report provides the support for adjustments of allowance for uncollectible
accounts, inventory, prepaid insurance, and accumulated depreciation accounts. After the adjustments are entered
in Peachtree, an income statement is printed to obtain the required pretax net income amount needed for calculat-
ing federal income taxes.
PEACHTREE APPLICATION PROBLEM 14-1
1. Open (Restore) file 14-1AP.ptb.
2. Journalize and post the dividend declared on December 15 in the general journal.
3. Change the accounting periods from Period 12 to Period 13.
4. Using the Write Checks task, journalize and post the payment of the dividend on January 16.
5. Print the December 15 general journal.
6. Print the January 15 cash disbursements journal.
PEACHTREE MASTERY PROBLEM 14-7
1. Open (Restore) file 14-7MP.ptb.
2. Journalize and post the adjusting entries in the general journal.
3. Display or print Peachtree’s general ledger trial balance to see the account balances.
4. Print the December 31 general journal, the income statement and the balance sheet.
JOURNALIZING ADJUSTING ENTRIES
As discussed in this chapter, many corporations pay cash dividends to their shareholders. The number
of shareholders receiving checks could number in the thousands. Similar to how many companies use a special
payroll account, some companies deposit the total amount of the cash dividend to a special dividend bank account.
The check to each shareholder is written from that special dividend account.
Also covered in this chapter is the calculating and recording of adjusting entries. If a work sheet is not used,
the adjusting entries must be planned using other means. A trial balance can be printed out and used to plan the
adjusting entries. The trial balance, however, will not provide the amount of pretax net income needed to calculate
the federal income tax adjustment. To determine this amount, it is necessary to enter all the other adjusting entries,
print out a profit & loss statement, and use the net income amount on that profit & loss statement to calculate the
adjusting entry for federal income taxes.
QUICKBOOKS APPLICATION PROBLEM 14-1
1. Open the Drake Corporation file.
2. Record the dividend transactions. Use the Write Checks option for all cash payments; use the Make General
Journal Entries window for all other transactions.
3. Print a Journal report, using December 15 and January 15 for the dates. Change column widths as needed to
display all of the data.
QUICKBOOKS MASTERY PROBLEM 14-7
1. Open the Carol’s Closet file.
2. Journalize the adjusting entries, using the Make General Journal Entries window for all transactions.
3. View a Profit & Loss Standard report, using January 1 and December 31 for the dates; close without printing.
4. Print a Journal report for Carol’s Closet, using December 1 and December 31 for the dates.
5. Print a Trial Balance report, using December 31 for the dates.
442 Chapter 14 Distributing Dividends and Preparing a Work Sheet for a Merchandising Business
L O G I C A L R E L AT I O N S H I P S
In Chapter 9, you learned that a formula can consist of a reference to a single cell. A formula can also determine
the logical relationship between two numbers. Some common logical relationships are equal to (), less than, (),
greater than or equal to (), and not equal to ().
Debit and credit columns of a worksheet must be equal. As the numbers get larger, it becomes more likely that
you may miss an error. Examine the following section of a worksheet.
A B C
56 Utilities Expense 4,051.06 0.00
57 Fed. Income Tax Expense 48,000.00 0.00
58 1,058,513.74 1,059,513.74
59 Net Inc. after Fed. Income Tax
60
How long did it take you to detect that the column totals are not equal? Rather than relying on yourself to
determine if the columns are equal, you can enter a formula, such as +B58=C58, to compare the two amounts.
If the amounts are equal, the cells will display TRUE; if the amounts are not equal, FALSE.
EXCEL APPLICATION PROBLEM 14-2
Open the F14-2 Excel data file. Follow the step-by-step instructions in the Instructions worksheet. Use the logical
functions to ensure that each pair of column totals are equal.
EXCEL APPLICATION PROBLEM 14-3
Open the F14-3 Excel data file. Follow the step-by-step instructions in the Instructions worksheet. Use the logical
functions to ensure that each pair of column totals are equal.
C R E AT I N G C H A R T S A N D G R A P H S
Charts and graphs provide a picture of numeric data. To be effective, charts and graphs should be clearly labeled.
They are commonly used to track sales goals, monitor expenses, identify trends, and make forecasts.
Different styles of graphs are used to display different types of financial information. A pie graph is used to illus-
trate parts of a whole, such as cost of goods sold, operating expenses, and net income as percentages of net sales.
Bar graphs are used to show the relative size of related items, such as expenses. Line graphs are used to illustrate
trends, such as net sales or net income over a period of years.
To prepare a graph based on financial data when a data file is open, choose the Graph Selection menu item from
the Reports menu or click the Graphs toolbar button. Then click the type of graph you would like to display.
AUTOMATED ACCOUNTING GRAPHING PROBLEM (OPTIONAL)
1. Open the data file that is your solution to Automated Accounting Problem F11-5. There is no Help file available
for this optional graphing problem.
2. Click the Graphs toolbar button.
3. Click the Income Statement button to display a graph of the income statement.
4. View the other graphs available. Note that some are not very meaningful because this particular problem does
not have a wide range of data available for graphing.
5. Exit Automated Accounting without saving your file.
Distributing Dividends and Preparing a Work Sheet for a Merchandising Business Chapter 14 443
PHOTOGRAPHER’S CHOICE RF/GETTY IMAGES
C H A P T E R 1 5 Financial Statements
for a Corporation
O B J E C T I V E S
After studying Chapter 15, you will be able to: 4. Analyze an income statement using component
percentages and financial ratios.
1. Define accounting terms related to financial
statements for a merchandising business orga- 5. Prepare a statement of stockholders’ equity
nized as a corporation. for a merchandising business organized as a
corporation.
2. Identify accounting concepts and practices
related to financial statements for a merchandis- 6. Prepare a balance sheet for a merchandising
ing business organized as a corporation. business organized as a corporation.
3. Prepare an income statement for a merchandis-
ing business organized as a corporation.
K E Y T E R M S
• net sales • price-earnings ratio • current liabilities
• cost of merchandise sold • statement of • long-term liabilities
• gross profit on sales stockholders’ equity • supporting schedule
• financial ratio • par value
• earnings per share
( Point Your Browser
www.C21accounting.com
)
444
ACCOUNTING IN THE REAL WORLD
Gap, Inc.
The Evolution of Gap, Inc.
Many of today’s most notable companies had very humble beginnings. Gap,
Inc., began in 1969 when Don and Doris Fisher opened a clothing store in
San Francisco. The company grew quickly, becoming a publicly traded com-
pany in just seven years.
The company expanded beyond its Gap store concept in 1983 by pur-
chasing Banana Republic, a small safari and travel clothing company. Gap
DIGITAL VISION/GETTY IMAGES
further extended its penetration into the clothing market by introducing
the Old Navy brand in 1994. The rest, as they say, is history. With over 3,000
stores, Gap, Inc., is now a major force in the apparel INTERNET
industry. ACTIVITY
Each of its clothing brands targets differ-
ent customers. The original Gap brand EDGAR—Part 1
targets style-conscious customers Go to the homepage for the
in the casual specialty market. Securities and Exchange
Banana Republic targets men Commission (SEC) (www.sec.
and women who want more gov). The SEC provides almost
sophisticated seasonal fash- instant access to forms filed
ions, shoes, personal care with the SEC. Investors can
products, intimate apparel, access these forms through a
and gifts for the home. system called EDGAR. Click on
Old Navy is more value “Filings and Forms (EDGAR).”
focused, providing fami- Search the site to find out
lies with great fashions at more about EDGAR.
affordable prices.
Instructions
1. Each letter in “EDGAR” is
©GETTY IMAGES
an abbreviation for a word.
List the word connected
with each letter in EDGAR.
2. Briefly state how EDGAR
helps investors.
Critical Thinking
1. Should a single set of financial statements be prepared for Gap Inc., or
should financial statements be prepared for each brand?
2. How would the chart of accounts differ among the three brands?
Source: www.gapinc.com
445
L E S S O N
Preparing an Income
15-1 Statement
U S E S O F F I N A N C I A L S TAT E M E N T S
Financial statements provide the primary source of infor-
mation needed by owners and managers to make decisions
on the future activity of a business. All financial informa-
tion must be reported in order to make sound business
decisions. The financial statements should provide infor-
mation about a business’s financial condition, changes in
this financial condition, and the progress of operations.
HOLA IMAGES/GETTY IMAGES
[CONCEPT: Adequate Disclosure]
Comparing financial condition and progress for more
than one fiscal period also helps owners and managers
make sound business decisions. Therefore, financial infor-
mation must be reported the same way from one fiscal
period to the next. [CONCEPT: Consistent Reporting]
Hobby Shack prepares three financial statements to
report financial progress and condition. A corporation
prepares an income statement and a balance sheet similar
to those used by a proprietorship. A corporation also pre-
pares a statement of stockholders’ equity.
CHARACTER COUNTS
C a n Yo u S ha r e C l i e n t Na m e s ?
After working six years with The Code of Professional Conduct for the American
a national public accounting Institute of Certified Public Accountants “prohibits a mem-
firm, Raymond Steele decided ber in public practice from disclosing confidential infor-
to venture out on his own. mation without the client’s consent.” Raymond is aware of
Raymond’s new firm, Steele the rule but believes he is not violating this rule.
PHOTO: STOCKBYTE/GETTY IMAGES
Consulting, specializes in help-
ing companies that are facing Instruction
severe financial difficulties. When Access the AICPA Code of Professional Conduct. Deter-
delivering proposals to potential mine if Raymond’s actions violate the confidentiality rule.
clients, Raymond proudly lists the (Hint: Remember that the Code includes rules, interpreta-
names of his current clients. tions, and ethics rulings.)
446 Chapter 15 Financial Statements for a Corporation
CAREERS IN ACCOUNTING
K e n Ha r r i s o n , C o m p u t e r a n d
Inf o r m a t i o n S y s t e m s M a n a g e r
As a high school student, Ken Har- start-up general aviation company. Later, as its general
rison knew he didn’t want to do manager, he was involved in sales, marketing, human
the same thing for his entire resources, finance, and information technology. “As a suc-
career. Ken recalls, “I was cessful entrepreneurial business, our little company soon
the only one in my col- became the target of larger companies in the industry. I
lege freshman orienta- hadn’t studied much about mergers and acquisitions in
tion group who firmly college, but ‘deal making’ soon became a requirement.”
knew their intended The sale of the company to a much larger out-of-state
major. ‘Accounting!’ I corporation, which brought in their own leadership,
proudly responded to resulted in Ken’s position being eliminated.
our group leader.” Ken Another opportunity soon appeared—to go to work
had been advised that for a publicly held client who needed a CPA familiar with
an accounting degree mergers and acquisitions. Seven years later, when Ken’s
was a good background personal desires turned to a more humanitarian calling,
for law school. However, he accepted the CFO position of an international not-
when presented with attrac- for-profit organization working to provide impoverished
tive accounting job offers in people with the skills and means to improve their lives.
the first semester of his senior In that role, he experienced different and interesting
COURTESY OF KEN HARRISON
year, he thought that “perhaps law school challenges, including travel to many developing coun-
could wait!” tries. “Who would have imagined an accounting degree
Ken began his career with PricewaterhouseCoopers. would take me to remote Africa!” he remarks.
During five years in public accounting, he was exposed Ken is now working in state government for another
to numerous accounting issues and became acquainted former colleague. He explains, “Our mission is to help
with the upper-level managers and officers of his clients. improve business processes of the state government by
Networking in his profession and community has installing and supporting an enterprise resource plan-
brought Ken numerous opportunities. At age 28, he was ning (ERP) system.” Ken helps direct 80 individuals who
offered the chief financial officer (CFO) position for a assist the users of the ERP throughout the government.
Salary Range: Earnings for computer and information public accounting experience provide a solid foundation.
systems managers vary by specialty and level of respon- Communication skills and a willingness to work in every
sibility. The median annual salary for these managers was aspect of the organization, from sales to technology, are
$92,570 in 2004 (Bureau of Labor Statistics, Occupational important to take advantage of job opportunities.
Outlook Handbook, 2006-07, at www.bls.gov [visited Janu-
Occupational Outlook: The U.S. Department of
ary 15, 2007]).
Labor expects jobs for computer and information sys-
Qualifications: Ken believes networking is the key to tems managers to increase much faster than the national
opportunity. Developing relationships with colleagues average for all occupations. The continued application of
and individuals in professional and civic organizations technology to business operations will increase the num-
will open doors to opportunities in the most unexpected ber of jobs that use computer technology, thus requiring
places. A Certified Public Accountant (CPA) license and more individuals to manage the technology.
Preparing an Income Statement Lesson 15-1 447
I N C O M E S TAT E M E N T I N F O R M AT I O N O N A W O R K S H E E T
Hobby Shack, Inc.
Work Sheet
For Year Ended December 31, 20--
1 2 3 4 5 6 7 8
TRIAL BALANCE ADJUSTMENTS INCOME STATEMENT BALANCE SHEET
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
(d)
5 Merchandise Inventory 14 0 4 8 0 00 15 8 4 0 00 124 6 4 0 00 5
29 Sales 495 1 2 0 00 495 1 2 0 00 29
30 Sales Discount 2 5 8 48 2 5 8 48 30
31 Sales Returns and Allowances 3 1 2 7 28 3 1 2 7 28 31
32 Purchases 209 9 6 0 00 209 9 6 0 00 32
33 Purchases Discount 1 6 4 8 15 1 6 4 8 15 33
34 Purch. Returns and Allowances 3 4 8 4 95 3 4 8 4 95 34
35 Advertising Expense 3 6 0 0 00 3 6 0 0 00 35
36 Cash Short and Over 1 9 25 1 9 25 36
37 Credit Card Fee Expense 3 3 8 5 00 3 3 8 5 00 37
(f)
38 Depr. Exp.—Office Equipment 6 5 4 0 00 6 5 4 0 00 38
(g)
39 Depr. Exp.—Store Equipment 5 2 5 0 00 5 2 5 0 00 39
(c)
40 Insurance Expense 3 1 7 0 00 3 1 7 0 00 40
41 Miscellaneous Expense 2 5 6 4 90 2 5 6 4 90 41
42 Payroll Taxes Expense 9 1 0 5 00 9 1 0 5 00 42
43 Rent Expense 18 0 0 0 00 18 0 0 0 00 43
44 Salary Expense 104 5 2 5 00 10 4 5 2 5 00 44
(a)
45 Supplies Expense—Office 2 7 3 0 00 2 7 3 0 00 45
Supplies Expense—Store (b)
46 2 9 1 0 00 2 9 1 0 00 46
Uncollectible Accounts Expense (e)
47 1 2 4 5 00 1 2 4 5 00 47
48 Utilities Expense 3 8 2 0 00 3 8 2 0 00 48
Federal Income Tax Expense (h)
49 18 0 0 0 00 5 8 8 9 24 23 8 8 9 24 49
50 670 8 6 1 59 670 8 6 1 59 4 3 5 7 4 24 4 3 5 7 4 24 419 9 3 9 15 500 2 5 3 10 269 8 4 6 68 189 5 3 2 73 50
51 Net Income after Federal Income Tax 80 3 1 3 95 80 3 1 3 95 51
52 500 2 5 3 10 500 2 5 3 10 269 8 4 6 68 269 8 4 6 68 52
An income statement is used to report a business’s financial Information from a completed work sheet is used to
progress. Merchandising businesses report revenue, cost of prepare an income statement. Amounts in all revenue and
merchandise sold, gross profit on sales, expenses, and net expense accounts and Merchandise Inventory are reported
income or loss. Current and previous income statements on an income statement.
can be compared to determine the reasons for increases The income statement of a merchandising business has
or decreases in net income. This comparison is helpful in three main sections: (1) revenue section, (2) cost of mer-
making management decisions about future operations. chandise sold section, and (3) expenses section.
448 Chapter 15 Financial Statements for a Corporation
R E V E N U E S E C T I O N O F A N I N C O M E S TAT E M E N T
FOR A MERCHANDISING BUSINESS
2. Revenue Section 1. Heading 4. Sales Amount
1 Hobby Shack, Inc.
Income Statement
For Year Ended December 31, 20--
%
OF Net
2 SALES
Revenue: 4
3 Sales 495 1 2 0 00
5 Less: Sales Discount 6 2 5 8 48
5. Less Contra Sales Ret. and Allow. 3 1 2 7 28 3 3 8 5 76
Accounts
8 Net Sales 7 491 7 3 4 24 9
3. Title of Revenue 8. Net Sales 6. Contra 7. Contra 9. Net
Account Account Account Sales Amount
Amounts Total
Hobby Shack’s income statement differs from TechKnow’s Sales Returns and Allowances, are reported in the Revenue
income statement shown in Part 1. Hobby Shack has section. Total sales less sales discount and sales returns and
more accounts to report on the income statement. The allowances is called net sales.
account Sales and its contra accounts, Sales Discount and
S T E P S PREPARING THE REVENUE SECTION OF AN INCOME STATEMENT
1 Write the income statement heading on three lines.
2 Write the name of this section, Revenue:, at the extreme left of the wide column on the first line.
3 Write the title of the revenue account, Sales, on the next line, indented about one centimeter.
4 Write the balance of the sales account, $495,120.00, in the third amount column.
5 Write Less: on the next line, indented about one centimeter, followed by Sales Discount and
Sales Returns and Allowances on the next line. IMAGES
ET T Y
SI O N /G
ITA L VI
6 Write the balances of the sales discount account, $258.48, and sales returns and D IG
allowances account, $3,127.28, in the second amount column.
7 Add sales discounts, $258.48, and sales returns and allowances,
$3,127.28, and write the amount, $3,385.76, in the third amount
column.
8 Write Net Sales on the next line, indented about one
centimeter.
9 Subtract the total of the contra accounts, $3,385.76, from
sales, $495,120.00, to calculate net sales, $491,734.24.
Write this amount in the fourth amount column.
Preparing an Income Statement Lesson 15-1 449
COST OF MERCHANDISE SOLD SECTION OF AN INCOME
S TAT E M E N T F O R A M E R C H A N D I S I N G B U S I N E S S
Hobby Shack, Inc.
Income Statement
For Year Ended December 31, 20--
%
OF NET
SALES
Revenue:
Sales 4951 2 0 00
Less: Sales Discount 2 5 8 48
Sales Ret. and Allow. 3 1 2 7 28 33 8 5 76
Net Sales 491 7 3 4 24
1. Cost of 1 Cost of Merchandise Sold:
Merchandise Merchandise Inventory, Jan. 1, 20-- 2 1404 8 0 00
Sold Section Purchases 2099 6 0 00
3. Purchases 3 Less: Purchases Discount 16 4 8 15
Section Purch. Ret. and Allow. 3 4 8 4 95 5 1 3 3 10
Net Purchases 2048 2 6 90
Total Cost of Mdse. Avail. for Sale 4 3453 0 6 90
5. Ending 5 Less Mdse. Inventory, Dec. 31, 20-- 1246 4 0 00
Inventory Cost of Merchandise Sold 6 220 6 6 6 90
6. Cost of Merchandise 4. Total Cost of 2. Beginning Inventory
Sold Merchandise
Available for Sale
The original price of all merchandise sold during a fiscal CEPT: Historical Cost] Cost of merchandise sold is also
period is called the cost of merchandise sold. [CON- known as cost of goods sold or cost of sales.
PREPARING THE COST OF MERCHANDISE SOLD SECTION
S T E P S
OF AN INCOME STATEMENT
1 Write the name of this section, Cost of Merchandise Sold:, at the extreme left of the wide column.
2 Write the beginning inventory found in the Trial Balance Debit column of the work sheet.
a. Indent about one centimeter on the next line and write Merchandise Inventory, Jan. 1, 20--.
b. Write the beginning merchandise inventory balance, $140,480.00, in the third amount column.
3 Prepare the Purchases section.
a. Indent about one centimeter on the next line and write Purchases. Enter the purchases amount, $209,960.00, in
the second amount column.
b. Write Less: on the next line, indented about one centimeter, followed by Purchases Discount and Purchases
Returns and Allowances on the next line. It is permissible to abbreviate long titles when necessary.
c. Write the balances of the purchases discount account, $1,648.15, and purchases returns and allowances account,
$3,484.95, in the first amount column.
d. Add purchases discounts, $1,648.15, and purchases returns and allowances, $3,484.95, and write the amount,
$5,133.10, in the second amount column.
e. Write Net Purchases on the next line, indented about one centimeter.
f. Subtract the total of the contra accounts, $5,133.10, from purchases, $209,960.00, to calculate net purchases,
$204,826.90. Write this amount in the third amount column.
450 Chapter 15 Financial Statements for a Corporation
4 Calculate the total cost of merchandise available for sale.
a. Indent about one centimeter on the next line, and write Total Cost of Merchandise Available for Sale.
b. Add the beginning merchandise inventory balance, $140,480.00, and net purchases, $204,826.90, to calculate
the total cost of merchandise available for sale, $345,306.90. Write this amount in the third amount column.
5 Write the ending inventory found in the Balance Sheet Debit column of the work sheet.
a. Indent about one centimeter on the next line, and write Less Merchandise Inventory, Dec. 31, 20--.
b. Write the ending merchandise inventory balance, $124,640.00, found in the Balance Sheet Debit column of the
work sheet, in the third amount column.
6 Calculate the cost of merchandise sold.
a. Indent about one centimeter on the next line, and write Cost of Merchandise Sold.
b. Subtract the ending merchandise inventory balance, $124,640.00, from the total cost of merchandise available
for sale, $345,306.90, to calculate the cost of merchandise sold, $220,666.90. Write the amount in the fourth
amount column.
Most calculated amounts reported on a financial state- by its physical position on the statement. Each amount is
ment have a related description. Net sales and net purchases immediately to the right of an amount column ruled with
are two examples. However, the totals of the sales contra a single line.
accounts, $3,385.76, and the purchases contra accounts, The single ruled line indicates that the column is being
$5,133.10, are not described. Instead, the reader of the totaled. The amount adjacent to the column is the sum of
financial statement is expected to understand the amount that column.
Hobby Shack, Inc.
Income Statement
For Year Ended December 31, 20--
%
OF NET
SALES
Revenue:
Sales 495 1 2 0 00
Less: Sales Discount 2 5 8 48
Sales Ret. and Allow. 3 1 2 7 28 3 3 8 5 76
Net Sales 491 7 3 4 24
Total of adjacent column
AM
AN
AI
MA
GE
S/ G
ET
TY
IM
AG
ES
Preparing an Income Statement Lesson 15-1 451
C O M P L E T I N G A N I N C O M E S TAT E M E N T F O R
A MERCHANDISING BUSINESS
Hobby Shack, Inc.
Income Statement
For Year Ended December 31, 20--
%
NET OF
SALES
Revenue:
Sales 4951 2 0 00
Less: Sales Discount 2 5 8 48
Sales Ret. and Allow. 3 1 2 7 28 3 3 8 5 76
Net Sales 4917 3 4 24 100.0
Cost of Merchandise Sold:
Merchandise Inventory, Jan. 1, 20-- 1404 8 0 00
Purchases 209 9 6 0 00
Less: Purchases Discount 1 6 4 8 15
Purch. Ret. and Allow. 3 4 8 4 95 5 1 3 3 10
Net Purchases 2048 2 6 90
Total Cost of Mdse. Avail. for Sale 3453 0 6 90
Less Mdse. Inventory, Dec. 31, 20-- 1246 4 0 00
Cost of Merchandise Sold 2206 6 6 90 44.9 7 7. Component
1. Gross Profit 1 Gross Profit on Sales 2710 6 7 34 55.1 Percentage
on Sales Expenses:
Advertising Expense 3 6 0 0 00
Cash Short and Over 19 25
Credit Card Fee Expense 3 3 8 5 00
Depr. Exp.—Office Equipment 6 5 4 0 00
Depr. Exp.—Store Equipment 5 2 5 0 00
Insurance Expense 3 1 7 0 00
Miscellaneous Expense 2 5 6 4 90
Payroll Taxes Expense 9 1 0 5 00
2. Expenses 2 Rent Expense 18 0 0 0 00
Section Salary Expense 1045 2 5 00
Supplies Expense—Office 2 7 3 0 00
Supplies Expense—Store 2 9 1 0 00
Uncollectible Accounts Expense 1 2 4 5 00
Utilities Expense 3 8 2 0 00
Total Expenses 1668 6 4 15 33.9
Net Income before Federal Income Tax 3 1042 0 3 19 21.2
Less Federal Income Tax Expense 4 23 8 8 9 24
Net Income after Federal Income Tax 5 8 0 3 1 3 95
6
6. Double Lines
3. Net Income before 4. Less Federal Income 5. Net Income after
Federal Income Tax Tax Expense Federal Income Tax
The revenue remaining after cost of merchandise sold has to compare its performance to prior fiscal periods. The
been deducted is called gross profit on sales. Management percentage relationship between one financial statement
uses gross profit on sales as a measure for how effectively item and the total that includes that item is known as a
the business is performing in its primary functions of buy- component percentage. Hobby Shack calculates a compo-
ing and selling merchandise. Calculating a ratio between nent percentage for most calculated amounts reported in
gross profit on sales and net sales enables management the fourth column of the income statement.
452 Chapter 15 Financial Statements for a Corporation
S T E P S COMPLETING AN INCOME STATEMENT
1 Calculate the gross profit on sales.
a. Write Gross Profit on Sales on the next line at the extreme left of the wide column.
b. Write the gross profit on sales amount, $271,067.34, in the second amount column. (Total revenue, $491,734.24,
less cost of merchandise sold, $220,666.90, equals gross profit on sales, $271,067.34.)
2 Prepare the expenses section. Use the information from the Income Statement Debit column of the work sheet.
a. Write the name of this section, Expenses:, at the extreme left of the wide column.
b. On the next line, indented about one centimeter, list the expense account titles, one per line, in the order in
which they appear on the work sheet.
c. Write the amount of each expense account balance in the third amount column.
d. Indent about one centimeter, and write Total Expenses on the next line in the wide column below the last
expense account title.
e. Total the individual expense amounts and write the total, $166,864.15, in the fourth amount column on the total
line.
3 Calculate the net income before federal income tax.
a. Write Net Income before Federal Income Tax on the next line at the extreme left of the wide column.
b. Write the amount, $104,203.19, in the fourth amount column. (Gross profit on sales, $271,067.34, less total
expenses, $166,864.15, equals net income before federal income tax, $104,203.19.)
4 Write Less Federal Income Tax Expense on the next line at the extreme left of the wide column. Write the amount,
$23,889.24, on the same line in the fourth amount column.
5 Calculate net income after federal income tax.
a. Write Net Income after Federal Income Tax on the next line at the extreme left of the wide column.
b. Write the amount, $80,313.95, in the fourth amount column. (Net income before federal income tax, $104,203.19,
less federal income tax expense, $23,889.24, equals net income after federal income tax, $80,313.95.)
c. Verify accuracy by comparing the amount of net income after federal income tax calculated on the income state-
ment, $80,313.95, with the amount on the work sheet, $80,313.95. The two amounts must be the same.
6 Rule double lines across the four amount columns to show that the income statement has been verified as correct.
7 Calculate a component percentage for each amount in the fourth amount column through the Net Income before
Federal Income Tax. Divide the amount of each component by the amount of net sales. Round each component
percentage to the nearest 0.1%. Write the component percentage in the % of Net Sales column.
Income Statement Component Amount Net Sales Component
Percentage
Cost of Merchandise Sold $220,666.90 $491,734.24 44.9%
Gross Profit on Sales $271,067.34 $491,734.24 55.1%
Total Expenses $166,864.15 $491,734.24 33.9%
Net Income before Federal Income Tax $104,203.19 $491,734.24 21.2%
Preparing an Income Statement Lesson 15-1 453
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
TERMS REVIEW
1. What is the major difference between the income statement for a mer-
chandising business and a service business?
net sales
2. How is the cost of merchandise sold calculated?
cost of merchandise sold
3. How can the amount of net income calculated on the income statement
be verified? gross profit on sales
WORK TOGETHER 151
Preparing an income statement for a merchandising business
The work sheet for Interstate Tires, Inc., for the year ended December 31 of the current year is given in the Working
Papers. Your instructor will guide you through the following examples.
1. Prepare an income statement.
2. Calculate and record on the income statement the following component percentages: (a) cost of merchandise
sold, (b) gross profit on sales, (c) total expenses, and (d) net income before federal income tax. Round percentage
calculations to the nearest 0.1%. Save your work to complete Work Together 15-2.
ON YOUR OWN 151
Preparing an income statement for a merchandising business
Osborn Corporation’s work sheet for the year ended December 31 of the current year is given in the Working Papers.
Work this problem independently.
1. Prepare an income statement.
2. Calculate and record on the income statement the following component percentages: (a) cost of merchandise
sold, (b) gross profit on sales, (c) total expenses, and (d) net income before federal income tax. Round percentage
calculations to the nearest 0.1%. Save your work to complete On Your Own 15-2.
454 Chapter 15 Financial Statements for a Corporation
L E S S O N
Analyzing an Income
15-2 Statement
U S I N G C O M P O N E N T P E R C E N TA G E S
A percentage relationship between one financial statement about future operations, Hobby Shack analyzes relation-
item and the total that includes that item is known as a ships between these four income statement components
component percentage. For Hobby Shack, a merchandis- and sales. Hobby Shack calculates a component percent-
ing business, every sales dollar reported on the income age for each of the four components. The relationship
statement includes four components: (1) cost of merchan- between each component and sales is shown in a separate
dise sold, (2) gross profit on sales, (3) total expenses, and column on the income statement.
(4) net income before income tax. To help make decisions
Acceptable Component Percentages
Acceptable Hobby Shack
Industry Component
Standards Percentages
Sales 100% 100%
Cost of merchandise sold not more than 46.0% 44.9%
Gross profit on sales not less than 54.0% 55.1%
Total expenses not more than 35.0% 33.9%
Net income before federal income tax not less than 19.0% 21.2%
For a component percentage to be useful, a business
must know acceptable percentages. This information F O R YO U R I N F O R M AT I O N
is determined by making comparisons with prior fiscal
F Y I
periods as well as with industry standards published by
industry organizations. Based on these sources, Hobby Unacceptable component percentages
Shack determines acceptable component percentages for serve as a warning that management
action is necessary. Calculating and
the current fiscal period. Each percentage represents the reporting component percentages is
amount of each sales dollar that is considered acceptable. an example of how accounting
For example, Hobby Shack determines that the cost of information can help management
merchandise sold should be no more than 46.0%, or 46 planning and decision making.
Effective managers rely on
cents, of each sales dollar. the information provided
F Y I from accounting records.
Analyzing an Income Statement Lesson 15-2 455
A N A LY S I S O F C O M P O N E N T P E R C E N TA G E S
Hobby Shack compares four of its component percent- Total Expenses Component Percentage
ages to its acceptable component percentages. The four Total expenses must be less than gross profit on sales
component percentages are for cost of merchandise sold, to provide a desirable net income. Acceptable industry
gross profit on sales, total expenses, and net income before standards show that no more than 35 cents, or 35.0%,
federal income tax. of each sales dollar should be devoted to total expenses.
Hobby Shack’s component percentage for total expenses
Cost of Merchandise Sold Component Percentage
is 33.9%.
The cost of merchandise sold is a major cost and must be
The component percentage for total expenses, 33.9%,
kept as low as possible. Analysis of Hobby Shack’s compo-
is not more than the maximum acceptable percentage,
nent percentages shows that the cost of merchandise sold
35.0%. Therefore, Hobby Shack’s component percentage
is 44.9% of sales.
for total expenses is considered acceptable.
The component percentage for cost of merchandise
sold, 44.9%, is less than the maximum acceptable per- Net Income before Federal Income Tax
centage, 46.0%. Therefore, Hobby Shack’s component Component Percentage
percentage for cost of merchandise sold is considered The component percentage for net income before federal
acceptable. income tax shows the progress being made by a business.
Acceptable industry standards show that at least 19 cents,
Gross Profit on Sales Component Percentage
or 19.0%, of each sales dollar should result in net income.
Gross profit must be large enough to cover total expenses
Hobby Shack’s component percentage for net income is
and the desired amount of net income. Acceptable indus-
21.25%.
try standards show that at least 54 cents, or 54.0%, of each
The component percentage for net income, 21.2%, is
sales dollar should result in gross profit. Hobby Shack’s
not less than the minimum acceptable percentage, 19.0%.
component percentage for gross profit on sales is 55.1%.
Therefore, Hobby Shack’s component percentage for net
The component percentage for gross profit on sales,
income is considered acceptable.
55.1%, is not less than the minimum acceptable percent- R E M E M B E R
age, 54.0%. Therefore, Hobby Shack’s component per-
centage for gross profit on sales is considered acceptable.
R E M E M B E R
The cost of merchandise sold and total expenses
reduce owner’s equity. For this reason, a business
wants actual component percentages of these
financial statement totals to be less than the
acceptable component percentage. A business
wants the gross profit on sales and net income
before federal income tax to be as high as
possible. Thus, a business wants the actual
component percentage for these financial
statement totals to be higher than
the acceptable component
percentages.
456 Chapter 15 Financial Statements for a Corporation
A N A LY Z I N G A N I N C O M E S TAT E M E N T
SHOWING A NET LOSS
Cloth Circuit
Income Statement
For Year Ended December 31, 20--
%
OF NET
SALES
Revenue:
Sales 848 1 8 4 10
Cost of Merchandise Sold 485 7 6 3 95 58.0
Gross Profit on Sales 351 9 5 6 98 42.0
Expenses:
Advertising Expense 32 5 5 0 00
Credit Card Fee Expense 5 1 1 8 20
Utilities Expense 5 1 8 4 00
Total Expenses 393 7 2 6 94 47.0
Net Loss before Federal Income Tax (41 7 6 9 96) (5.0)
Plus Federal Income Tax Benefit 6 2 6 5 49
Net Loss after Federal Income Tax (35 5 0 4 47)
When a business’s total expenses are greater than the gross sales dollar. These component percentages indicate that
profit on sales, the difference is known as a net loss. Cloth management is not effective in controlling its expenses.
Circuit’s total expenses, $393,726.94, less gross profit on To return to profitability, management must take action
sales, $351,956.98, equals net loss before federal income to reduce its expenses. Advertising and salary expense are
taxes, $41,769.96. The net loss before federal income the two largest expenses that management could quickly
taxes, $41,769.96, is written in parentheses in the fourth control. Rent expense, although one of the three largest
amount column on the line with the words Net Loss before expenses, is more difficult to control in the short term
Federal Income Taxes. An amount written in parentheses since most lease agreements are signed for a year or more.
on a financial statement indicates a negative amount.
Cloth Circuit’s managers can compare its component
percentages to acceptable component percentages. The F O R YO U R I N F O R M AT I O N
component percentage for cost of merchandise sold, F Y I
58.0%, is less than Cloth Circuit’s maximum acceptable A corporation having a net loss before
component percentage, 60.0%. The component percent- federal income taxes can file for a tax
age for gross profit on sales, 42.0%, is greater than the refund from the federal government. To
minimum acceptable component percentage, 40.0%. qualify for this benefit, the corporation
must have paid at least an equal amount
These component percentages indicate that management of federal income taxes in the previous
is doing a good job controlling the cost of merchandise three years. Cloth Circuit calculates its
inventory. tax refund using the same tax schedule
The component percentage for total expenses, 47.0%, Hobby Shack used to calculate its federal
income tax expense. Cloth Circuit’s tax
is more than the maximum acceptable component per- benefit, $6,265.49, is shown as a positive
centage, 37.0%. Because a net loss occurred, the compo- amount, thus reducing the amount
nent percentage for net income before federal income tax, of the net loss to $35,504.47.
(5.0%), means that Cloth Circuit lost 5.0 cents on each
Analyzing an Income Statement Lesson 15-2 457
A C T I O N S T O C O R R E C T U N A C C E P TA B L E
C O M P O N E N T P E R C E N TA G E S
The goal of any business is to earn an acceptable net Unacceptable Component Percentage
income. When component percentages are not acceptable, for Total Expenses
regardless of whether a net income or net loss occurred, Each expense account balance must be reviewed to deter-
management action is necessary. mine if major increases have occurred. This review should
include comparisons with prior fiscal periods as well as
Unacceptable Component Percentage
with industry standards. Actions must then be taken
for Gross Profit on Sales
to reduce any expenses for which major increases have
The component percentage for gross profit on sales is
occurred or that are beyond industry standards.
directly related to sales revenue and cost of merchandise
sold. An unacceptable component percentage for gross Unacceptable Component Percentage for
profit on sales requires one of three actions: (1) increase Net Income before Federal Income Tax
sales revenue, (2) decrease cost of merchandise sold, or If the component percentages for cost of merchandise sold,
(3) increase sales revenue and also decrease cost of mer- gross profit on sales, and total expenses are brought within
chandise sold. acceptable ranges, net income before federal income tax
Increasing sales revenue while keeping the cost of mer- will also be acceptable.
chandise sold the same will increase gross profit on sales.
To increase sales revenue, management may consider
increasing the markup on merchandise purchased for sale.
However, a business must be cautious on the amount of
the markup increase. If the increase in markup is too large, F O R YO U R I N F O R M AT I O N
a decrease in sales revenue could occur for two reasons: F Y I
(1) the sales price is beyond what customers are willing to
pay or (2) the sales price is higher than what competing Net income after federal
income tax is typically
businesses charge for the same merchandise. referred to as net income.
Decreasing the cost of merchandise sold while keeping
the sales revenue the same will also increase gross profit on
sales. To decrease cost of merchandise sold, management
should review purchasing practices. For example, would
purchasing merchandise in larger quantities or from other DIGITAL VISION/GETTY IMAGES
vendors result in a lower cost?
Combining a small increase in sales revenue and a small
decrease in the cost of merchandise sold may also result in
an acceptable component percentage for gross profit on
sales.
458 Chapter 15 Financial Statements for a Corporation
F I N A N C I A L R AT I O S
Individual amounts reported on an income statement Price-Earnings Ratio
have little meaning without being compared to another
amount. Suppose a company has net income before fed-
eral income taxes of $1,000,000.00. Is the company suc- Market Price Earnings per Price-Earnings
cessful? Only by calculating the net income before federal per Share Share Ratio
income taxes component percentage could this question $345.00 $32.13 10.7
begin to be answered.
Comparisons between other financial items can also
The relationship between the market value per share
provide valuable information about the financial perfor-
and earnings per share of a stock is called the price-
mance of a business. A comparison between two items
earnings ratio. The ratio is calculated as the market price
of financial information is called a financial ratio. Most
per share divided by the earnings per share as determined
financial ratios include at least one amount reported on
by the stock markets. The ratio is often referred to as the
the financial statements.
P-E ratio.
Earnings per Share The price-earnings ratio provides investors with infor-
mation concerning the price of the stock relative to the
Net Income Number of earnings. Low price-earnings ratios are typically associ-
after Federal Shares Earnings ated with slow growth companies, such as public utilities.
Income Tax Outstanding per Share Companies expected to have dynamic growth in future
$80,313.95 2,500 $32.13 earnings typically have a high price-earnings ratio.
Online sources of financial information highlight the
The amount of net income after federal income tax belong- earnings per share and price-earnings ratio over several
ing to a single share of stock is called earnings per share. years. Investors can analyze the trends in the earnings per
The ratio is calculated by dividing net income after federal share to project future earnings of the company. Then,
income taxes by the number of shares outstanding. using historical price-earnings ratios, investors can predict
Earnings per share is one of the most widely recognized future market prices of the company’s stock.
measures of a corporation’s financial performance. The
financial ratio is often referred to as EPS. Unlike com-
ponent percentages, earnings per share cannot be com-
pared to industry standards. Instead, earnings per share is D IG I T
AL V
IS I O
compared to (1) prior year’s earnings per share or (2) the N /G
ETT
Y IM
AG
market price of the stock. ES
F O R YO U R I N F O R M AT I O N
F Y I
Some financial ratios are unique to
companies in a particular industry.
For example, a critical financial ratio
for the airline industry is revenue per
passenger mile, calculated as sales
divided by total passenger miles.
Managers of airline companies rely
on this ratio to measure how
effectively the airline is
pricing its tickets.
Analyzing an Income Statement Lesson 15-2 459
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
TERMS REVIEW
1. For a merchandising business, every sales dollar includes what four
components? financial ratio
2. How does a company determine acceptable component percentages? earnings per share
3. What is the result if total expenses are greater than gross profit on sales? price-earnings ratio
WORK TOGETHER 152
Analyzing an income statement
Use the income statement for Interstate Tires, Inc., from Work Together 15-1. A form for completing this problem is
given in the Working Papers. Your instructor will guide you through the following examples.
1. Interstate Tires determines that no more than 53 cents, or 53.0%, of each sales dollar should be devoted to cost
of merchandise sold. Compare the actual component percentage for cost of merchandise sold to the acceptable
percentage. Indicate if the actual component percentage is acceptable or unacceptable. If it is unacceptable, sug-
gest an action that corrects it.
2. Acceptable auto parts industry standards show that at least 47 cents, or 47.0%, of each sales dollar should result
in gross profit. For Interstate Tires, compare the actual component percentage for gross profit on sales to the
acceptable percentage. Indicate if the actual component percentage is acceptable or unacceptable. If it is unac-
ceptable, suggest an action that corrects it.
3. Interstate Tires currently has 110,000 of shares outstanding with a market price of $13.75 per share. Calculate the
earnings per share and price-earnings ratio.
ON YOUR OWN 152
Analyzing an income statement
Use the income statement for Osborn Corporation from On Your Own 15-1. A form for completing this problem is
given in the Working Papers. Work this problem independently.
1. Acceptable game industry standards show that no more than 30 cents, or 30.0%, of each sales dollar should
be devoted to total expenses. For Osborn Corporation, compare the actual component percentage for total
expenses to the acceptable percentage. Indicate if the actual component percentage is acceptable or unaccept-
able. If it is unacceptable, suggest an action that corrects it.
2. Acceptable game industry standards show that at least 15 cents, or 15.0%, of each sales dollar should result in net
income before federal income tax. For Osborn Corporation, compare the actual component percentage for net
income before federal income tax to the acceptable percentage. Indicate if the actual component percentage is
acceptable or unacceptable. If it is unacceptable, suggest an action that corrects it.
3. Osborn Corporation currently has 8,000 shares outstanding with a market price of $104.50 per share. Calculate
the earnings per share and price-earnings ratio.
460 Chapter 15 Financial Statements for a Corporation
L E S S O N
Preparing a Statement of
15-3 Stockholders’ Equity
C A P I TA L S T O C K S E C T I O N O F T H E S TAT E M E N T
OF STOCKHOLDERS’ EQUITY
2. Words Capital Stock and Par Value 1. Heading
Hobby Shack, Inc. 1
Statement of Stockholders’ Equity
For Year Ended December 31, 20--
Capital Stock:
2 $50.00 Par Value
3 January 1, 20--, 2,000 Shares Issued 100 0 0 0 00
4 Issued during Current Year, 500 Shares 25 0 0 0 00
Balance, December 31, 20--, 2,500 Shares Issued 5 125 0 0 0 00
3. Stock at Beginning 4. Stock Issued During the Year 5. Total Stock Issued
of Year for the Year
A financial statement that shows changes in a corpora- the general ledger during the fiscal year would be added
tion’s ownership for a fiscal period is called a statement to calculate the amount of stock issued during the fiscal
of stockholders’ equity. A statement of stockholders’ year. Thus, the amounts in the capital stock section of the
equity contains two major sections: (1) capital stock and statement of stockholders’ equity are obtained from the
(2) retained earnings. general ledger account, Capital Stock.
The amount of capital stock issued as of the beginning Each share of stock issued by a corporation has a mone-
of the year is the beginning balance of the capital stock tary value. A value assigned to a share of stock and printed
account. Any additional stock transactions recorded in on the stock certificate is called par value.
PREPARING THE CAPITAL STOCK SECTION OF A
S T E P S
STATEMENT OF STOCKHOLDERS’ EQUITY
1 Write the heading: company name, Hobby Shack, Inc.; statement name, Statement of Stockholders’ Equity; and fiscal
period, For Year Ended December 31, 20--, in the statement heading.
2 Write the heading Capital Stock: and on the next line write the par value of the stock, $50.00 Par Value, indented
about 1 centimeter.
3 Write the number of shares, 2,000, and dollar amount, $100,000.00, of stock issued as of the beginning of the year.
4 Write the number of shares, 500, and dollar amount, $25,000.00, of stock issued during the year.
5 Calculate the total dollar amount of stock issued as of the end of the year, $125,000.00, by adding the dollar amount
of beginning stock, $100,000.00, and the dollar amount of shares issued during the year, $25,000.00.
Preparing a Statement of Stockholders’ Equity Lesson 15-3 461
R E TA I N E D E A R N I N G S S E C T I O N O F T H E
S TAT E M E N T O F S T O C K H O L D E R S ’ E Q U I T Y
3. Net Income after 2. Beginning Balance
Federal Income Tax
Hobby Shack, Inc.
Statement of Stockholders’ Equity
For Year Ended December 31, 20--
Capital Stock:
$50.00 Par Value
January 1, 20--, 2,000 Shares Issued 10 0 0 0 0 00
Issued during Current Year, 500 Shares 25 0 0 0 00
Balance, December 31, 20--, 2,500 Shares Issued 125 0 0 0 00
1 Retained Earnings:
Balance, January 1, 20-- 3 10 7 6 1 29 2
Net Income after Federal Income Tax for 20-- 80 3 1 3 95
Less Dividends Declared during 20-- 4 20 0 0 0 00
Net Increase during 20-- 5 60 3 1 3 95
Balance, December 31, 20-- 6 71 0 7 5 24
Total Stockholders’ Equity, December 31, 20-- 196 0 7 5 24 7
1. Words Retained 4. Dividends 5. Increase in 6. Ending 7. Total
Earnings Declared Retained Balance Stockholders’
Earnings Equity
Net income increases a corporation’s total capital. Some Amounts used to prepare the statement of stockhold-
income may be retained by a corporation for business ers’ equity are obtained from the income statement and
expansion. Some income may be distributed as dividends balance sheet columns of the work sheet shown in Chap-
to provide stockholders with a return on their invest- ter 14.
ments. During the year, Hobby Shack’s board of directors
declared $20,000.00 in dividends.
PREPARING THE RETAINED EARNINGS SECTION OF A
S T E P S
STATEMENT OF STOCKHOLDERS’ EQUITY
1 Write the heading Retained Earnings.
2 Write the beginning balance of Retained Earnings, $10,761.29, from the Balance Sheet Credit column, indented
about 1 centimeter.
3 Write the net income after federal income tax, $80,313.95, from the Income Statement Debit column.
4 Write the amount of dividends, $20,000.00, from the Balance Sheet Debit column.
5 Subtract dividends, $20,000.00, from net income after federal income tax, $80,313.95, to calculate the increase
in retained earnings, $60,313.95.
6 Add the beginning balance of retained earnings, $10,761.29, and the increase in retained earnings, $60,313.95,
to calculate the ending balance of retained earnings, $71,075.24.
7 Add the ending amounts of capital stock, $125,000.00, and retained earnings, $71,075.24, to calculate the total
amount of stockholders’ equity, $196,075.24.
462 Chapter 15 Financial Statements for a Corporation
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. What financial information does a statement of stockholders’ equity
report?
2. What are the two major sections of a statement of stockholders’ equity?
TERMS REVIEW 3. Where is the information found to prepare the capital stock section of a
statement of stockholders’ equity?
statement of 4. Where is the beginning balance of retained earnings found?
stockholders’ equity 5. How does a corporation distribute a portion of income to stockholders?
par value 6. Where is the amount of dividends found?
WORK TOGETHER 153
Preparing a statement of stockholders’ equity
Use the work sheet and income statement for Interstate Tires, Inc., from Work Together 15-2. A form for the state-
ment of stockholders’ equity is given in the Working Papers. Your instructor will guide you through the following
example.
1. Prepare a statement of stockholders’ equity for the current year. As of January 1, Interstate Tires, Inc., had issued
100,000 shares of capital stock with a par value of $1.00 per share. During the fiscal year, the corporation issued
10,000 additional shares of capital stock. Save your work to complete Work Together 15-4.
ON YOUR OWN 153
Preparing a statement of stockholders’ equity
Use the work sheet and income statement for Osborn Corporation from On Your Own 15-2. A form for the statement
of stockholders’ equity is given in the Working Papers. Work this problem independently.
1. Prepare a statement of stockholders’ equity for the current year. As of January 1, Osborn Corporation had issued
7,500 shares of capital stock with a par value of $25.00 per share. During the fiscal year, the corporation issued
500 additional shares of stock. Save your work to complete On Your Own 15-4.
Preparing a Statement of Stockholders’ Equity Lesson 15-3 463
L E S S O N
Preparing a Balance Sheet
15-4
B A L A N C E S H E E T I N F O R M AT I O N O N A W O R K S H E E T
Hobby Shack, Inc.
Work Sheet
For Year Ended December 31, 20--
1 2 3 4 5 6 7 8
TRIAL BALANCE ADJUSTMENTS INCOME STATEMENT BALANCE SHEET
ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
1 Cash 29 0 8 0 28 29 0 8 0 28 1
2 Petty Cash 3 0 0 00 3 0 0 00 2
3 Accounts Receivable 14 6 9 8 40 14 6 9 8 40 3
4 Allow. for Uncoll. Accts. 1 2 7 52 (e) 12 4 5 00 1 3 7 2 52 4
5 Merchandise Inventory 140 4 8 0 00 (d)15 8 4 0 00 124 6 4 0 00 5
6 Supplies—Office 3 4 8 0 00 (a) 2 7 3 0 00 7 5 0 00 6
7 Supplies—Store 3 9 4 4 00 (b) 2 9 1 0 00 1 0 3 4 00 7
8 Prepaid Insurance 5 8 0 0 00 (c) 3 1 7 0 00 2 6 3 0 00 8
9 Office Equipment 35 8 6 4 50 35 8 6 4 50 9
10 Acc. Depr.—Office Equipment 6 4 9 7 00 (f) 6 5 4 0 00 13 0 3 7 00 10
11 Store Equipment 40 8 4 9 50 40 8 4 9 50 11
12 Acc. Depr.—Store Equipment 5 0 6 9 00 (g) 5 2 5 0 00 10 3 1 9 00 12
13 Accounts Payable 11 5 8 3 03 11 5 8 3 03 13
14 Federal Income Tax Payable (h) 5 8 8 9 24 5 8 8 9 24 14
15 Employee Income Tax Payable 7 5 7 00 7 5 7 00 15
16 Social Security Tax Payable 1 4 5 1 38 1 4 5 1 38 16
17 Medicare Tax Payable 3 9 9 42 3 9 9 42 17
18 Sales Tax Payable 2 5 5 6 70 2 5 5 6 70 18
19 Unemployment Tax Payable—Federal 3 4 60 3 4 60 19
20 Unemployment Tax Payable—State 2 3 3 55 2 3 3 55 20
21 Health Insurance Premiums Payable 1 0 0 8 00 1 0 0 8 00 21
22 U.S. Savings Bonds Payable 6 0 00 6 0 00 22
23 United Way Donations Payable 7 0 00 7 0 00 23
24 Dividends Payable 5 0 0 0 00 5 0 0 0 00 24
A corporation’s balance sheet reports assets, liabilities, The information used to prepare a balance sheet is
and stockholders’ equity on a specific date. [CONCEPT: obtained from two sources: (1) the Balance Sheet columns
Accounting Period Cycle] Some management decisions of a work sheet and (2) the owners’ equity statement.
can best be made after owners have analyzed the balance Procedures for preparing Hobby Shack’s balance sheet
sheet. For example, balance sheet information would are similar to those used by TechKnow in Part 1. A balance
enable management to determine whether the corpora- sheet may be prepared in account form or report form. As
tion should incur additional liabilities to acquire addi- described in Chapter 7, TechKnow uses the account form.
tional plant assets. Hobby Shack uses the report form.
464 Chapter 15 Financial Statements for a Corporation
CURRENT ASSETS SECTION OF A BALANCE SHEET
2. Begin Assets Section 1. Heading
Hobby Shack, Inc. 1
Balance Sheet
December 31, 20--
2 Assets
Current Assets:
Cash 29 0 8 0 28
Petty Cash 3 0 0 00
3 Accounts Receivable 14 6 9 8 40
Less Allowance for Uncollectible Accounts 1 3 7 2 52 13 3 2 5 88
Merchandise Inventory 124 6 4 0 00
Supplies—Office 4 7 5 0 00
Supplies—Store 1 0 3 4 00
Prepaid Insurance 2 6 3 0 00
Total Current Assets 5 171 7 6 0 16
3. Book Value of 4. Remaining Current 5. Total Current Assets
Accounts Receivable Asset Accounts
Hobby Shack classifies its assets as current assets and plant balance and its related contra account balance is known as
assets. A business owning both current and plant assets book value. An asset’s book value is reported on a balance
usually lists them under separate headings on a balance sheet by listing three amounts: (1) the balance of the asset
sheet. Some of Hobby Shack’s asset accounts have related account, (2) the balance of the asset’s contra account, and
contra accounts that reduce the related account on the (3) the book value.
balance sheet. The difference between an asset’s account
PREPARING THE CURRENT ASSETS SECTION
S T E P S
OF A BALANCE SHEET
1 Write the balance sheet heading on three lines.
2 Begin preparing the assets section of the balance sheet. Use information from the work sheet.
a. Write the section title, Assets, on the first line in the middle of the wide column.
b. Write the section title, Current Assets:, on the next line at the extreme left of the wide column.
c. Beginning on the next line, indented about one centimeter, write the Cash and Petty Cash account titles
in the order in which they appear on the work sheet.
d. Write the balance of each asset account in the second column.
3 Calculate the book value of accounts receivable.
a. Write Accounts Receivable on the next line, indented about one centimeter.
b. Write the total amount of accounts receivable, $14,698.40, in the first amount column.
c. Write Less Allowance for Uncollectible Accounts on the next line, indented about two centimeters.
d. Write the amount of the allowance for uncollectible accounts, $1,372.52, in the first amount column.
e. Subtract the allowance for uncollectible accounts, $1,372.52, from the total amount of accounts receivable,
$14,698.40, to calculate the book value of accounts receivable, $13,325.88. Write the amount in the second
amount column on the same line.
4 Write the remaining current asset account titles and amounts.
5 Calculate total current assets.
a. Write Total Current Assets on the next line, indented about one centimeter.
b. Add the amounts in the second amount column and write the total, $171,760.16, in the third amount column.
Preparing a Balance Sheet Lesson 15-4 465
PLANT ASSETS SECTION OF A BALANCE SHEET
1. Heading Plant Assets 4. Total Plant Assets
Hobby Shack, Inc.
Balance Sheet
December 31, 20--
Total Current Assets 171 7 6 0 16
Plant Assets: 1
Office Equipment 35 8 6 4 50 2 2. Book Value of
Less Accumulated Depreciation—Office Equipment 13 0 3 7 00 22 8 2 7 50 Office Equipment
Store Equipment 40 8 4 9 50
Less Accumulated Depreciation—Store Equipment 10 3 1 9 00 30 5 3 0 50
Total Plant Assets 3 4 53 3 5 8 00
Total Assets 225 1 1 8 16 5
3. Book Value of 5. Total
Store Equipment Assets
S T E P S PREPARING THE PLANT ASSETS SECTION OF A BALANCE SHEET
1 Write the heading Plant Assets on the next line at the extreme left of the wide column.
2 Calculate the book value of office equipment using information from the work sheet.
a. Write Office Equipment on the next line, indented about one centimeter.
b. Write the total amount of office equipment, $35,864.50, in the first amount column.
c. Write Less Accumulated Depreciation—Office Equipment on the next line, indented about two centimeters.
d. Write the amount of the accumulated depreciation—office equipment, $13,037.00, in the first amount column.
e. Subtract the accumulated depreciation—office equipment, $13,037.00, from the total amount of office equip-
ment, $35,864.50, to calculate the book value of office equipment, $22,827.50. Write the amount in the second
amount column on the same line.
T Y I MA GE S
3 Use the same procedure to calculate the book value of store equipment. T E/GET
C KB Y
STO
4 Calculate total plant assets.
a. Write Total Plant Assets on the next line, indented about one
centimeter.
b. Add the amounts in the second amount column and write the
total, $53,358.00, in the third amount column.
5 Calculate total assets.
a. Write Total Assets on the next line at the extreme left
of the wide column.
b. Add the current and plant asset totals and write
the amount, $225,118.16, on the same line in
the third amount column.
466 Chapter 15 Financial Statements for a Corporation
LIABILITIES SECTION OF A BALANCE SHEET
1. Heading Liabilities
Hobby Shack, Inc.
Balance Sheet
December 31, 20--
Total Assets 225 1 1 8 16
1
Liabilities
Current Liabilities:
Accounts Payable 11 5 8 3 03
Federal Income Tax Payable 5 8 8 9 24
Employee Income Tax Payable 7 5 7 00
Social Security Tax Payable 1 4 5 1 38
Medicare Tax Payable 2 2 3 9 9 42
Sales Tax Payable 2 5 5 6 70
Unemployment Tax Payable—Federal 3 4 60
Unemployment Tax Payable—State 2 3 3 55
Health Insurance Premiums Payable 1 0 0 8 00
U.S. Savings Bonds Payable 6 0 00
United Way Donations Payable 7 0 00
Dividends Payable 5 0 0 0 00
Total Liabilities 29 0 4 2 92 3
2. Account Title and 3. Total
Amount of Each Liabilities
Current Liability
Liabilities are classified according to the length of time Mortgage Payable. On December 31 of the current year,
until they are due. Liabilities due within a short time, usu- Hobby Shack does not have any long-term liabilities.
ally within a year, are called current liabilities. To prepare the liabilities section of the balance sheet,
Liabilities owed for more than a year are called long- use information from the work sheet.
term liabilities. An example of a long-term liability is
S T E P S PREPARING THE LIABILITIES SECTION OF A BALANCE SHEET
1 Write the section title, Liabilities, on the next line in the middle of the wide column.
2 Write the title Current Liabilities: on the next line at the extreme left of the
wide column.
a. Beginning on the next line, indented about one centimeter, write the F O R YO U R I N F O R M AT I O N
liability account titles in the order in which they appear on the work
F Y I
sheet.
b. Write the balance of each liability account in the second amount A company having both current
column. liabilities and long-term liabilities
would include headings and totals
3 Calculate total liabilities. for each category. The process is
a. Write Total Liabilities on the next line below the last liability similar to preparing the assets
section of a balance sheet.
account title at the extreme left of the wide column.
b. Write the total liabilities, $29,042.92, on the same line in the third
amount column.
Preparing a Balance Sheet Lesson 15-4 467
STOCKHOLDERS’ EQUITY SECTION OF A BALANCE SHEET
1. Heading Stockholders’ Equity 2. Capital Stock
Hobby Shack, Inc.
Balance Sheet
December 31, 20--
Total Assets 225 1 1 8 16 6
Total Liabilities 29 0 4 2 92
1 Stockholders’ Equity
Capital Stock 2 125 0 0 0 00
6. Double
Retained Earnings 3 71 0 7 5 24 Rules
Total Stockholders’ Equity 4 196 0 7 5 24
Total Liabilities and Stockholders’ Equity 5 225 1 1 8 16
6
3. Retained 4. Total Stockholders‘ 5. Total Liabilities and
Earnings Equity Stockholders‘ Equity
A major difference between balance sheets of a corpora- The stockholders’ equity section contains the total
tion and a proprietorship is the owners’ equity section. amounts of capital stock and retained earnings. These
The owners’ equity section of Hobby Shack’s balance sheet amounts are calculated and reported on the statement of
is labeled Stockholders’ Equity. Some corporations use the stockholders’ equity.
same label, Owners’ Equity, as proprietorships. Either label Hobby Shack’s completed balance sheet is shown on
is acceptable. the following page.
PREPARING THE STOCKHOLDERS’ EQUITY SECTION
S T E P S
OF A BALANCE SHEET
1 Write the heading Stockholders’ Equity on the next line centered in the wide column.
2 Write the title and amount of Capital Stock, $125,000.00, calculated on the statement of stockholders’ equity.
3 Write the title and amount of Retained Earnings, $71,075.24, calculated on the statement of stockholders’ equity.
4 Add the amount of capital stock, $125,000.00, and retained earnings, $71,075.24, to calculate the total of stockhold-
ers’ equity, $196,075.24.
5 Add the amount of total liabilities, $29,042.92, and total stockholders’ equity,
$196,075.24, to calculate the total of liabilities and stockholders’ equity,
$225,118.16. Verify accuracy by comparing the total amount of assets
and the total amount of liabilities and stockholders’ equity. These two
amounts must be the same. R E M E M B E R
Total assets must equal the total
6 Draw double rules across the three columns at the end of the Assets
of liabilities and stockholders’
section and the Stockholders’ Equity section to show that assets equity. If these totals are not equal,
equal liabilities plus owners’ equity. identify the errors before preparing
adjusting and closing entries.
468 Chapter 15 Financial Statements for a Corporation
COMPLETED BALANCE SHEET
Hobby Shack, Inc.
Balance Sheet
December 31, 20--
Assets
Current Assets:
Cash 29 0 8 0 28
Petty Cash 3 0 0 00
Accounts Receivable 14 6 9 8 40
Less Allowance for Uncollectible Accounts 1 3 7 2 52 13 3 2 5 88
Merchandise Inventory 124 6 4 0 00
Supplies—Office 7 5 0 00
Supplies—Store 1 0 3 4 00
Prepaid Insurance 2 6 3 0 00
Total Current Assets 171 7 6 0 16
Plant Assets:
Office Equipment 35 8 6 4 50
Less Accumulated Depreciation—Office Equipment 13 0 3 7 00 22 8 2 7 50
Store Equipment 40 8 4 9 50
Less Accumulated Depreciation—Store Equipment 10 3 1 9 00 30 5 3 0 50
Total Plant Assets 5 3 3 5 8 00
Total Assets 2 2 5 1 1 8 16
Liabilities
Current Liabilities:
Accounts Payable 11 5 8 3 03
Federal Income Tax Payable 5 8 8 9 24
Employee Income Tax Payable 7 5 7 00
Social Security Tax Payable 1 4 5 1 38
Medicare Tax Payable 3 9 9 42
Sales Tax Payable 2 5 5 6 70
Unemployment Tax Payable—Federal 3 4 60
Unemployment Tax Payable—State 2 3 3 55
Health Insurance Premiums Payable 1 0 0 8 00
U.S. Savings Bonds Payable 6 0 00
United Way Donations Payable 7 0 00
Dividends Payable 5 0 0 0 00
Total Liabilities 2 9 0 4 2 92
Stockholders’ Equity
Capital Stock 125 0 0 0 00
Retained Earnings 710 7 5 24
Total Stockholders’ Equity 1 9 6 0 7 5 24
Total Liabilities and Stockholders’ Equity 2 2 5 1 1 8 16
Preparing a Balance Sheet Lesson 15-4 469
SUPPORTING SCHEDULES FOR A BALANCE SHEET
A report prepared to give details about an item on a prin- each vendor is not shown. When detailed information
cipal financial statement is called a supporting schedule. is needed, a supporting schedule of accounts payable is
A supporting schedule is sometimes referred to as a supple- prepared, showing the balance for each vendor. A bal-
mentary report or an exhibit. ance sheet also shows only the accounts receivable total
Hobby Shack prepares two supporting schedules to amount. When information about the account balance
accompany the balance sheet. The supporting sched- for each customer is needed, a supporting schedule of
ules are a schedule of accounts payable and a schedule accounts receivable is prepared. Hobby Shack’s support-
of accounts receivable. A balance sheet shows only the ing schedules on December 31 are similar to the support-
accounts payable total amount. The account balance for ing schedules for November 30 shown in Chapter 11.
BUSINESS STRUCTURES
W h o O w n s t h e C or po r a t i o n ?
A share of stock is a unit of owner- stock owners will attempt to gain a majority holding of a
ship in a corporation. Stock may be company’s stock in order to take control of the company.
purchased by individuals, invest- Sometimes investors determine which corporation’s
ment companies, pension funds, stock they will purchase based on political or social issues.
institutions, banks, and other com- For example, one investor might buy stocks only of compa-
panies. Publicly traded stocks are nies that have good reputations on environmental issues.
bought and sold on stock exchanges Others might buy stocks only of companies that have good
throughout the world. Ownership of policies regarding racial or gender discrimination.
a corporation’s stock entitles the owner
to distributions of earnings if there are Critical Thinking
dividends declared. Many stock owners, 1. If you were buying stock as an investment for your
however, buy stock with the expectation that retirement years, would you be more concerned with
the stock will increase in value and they can then the future resale value of the stock or its dividends?
PHOTO: PHOTODISC/GETTY IMAGES
sell the stock at a profit. Would the answer be different for 18-year-olds and
Stock ownership also entitles the owner to vote at 60-year-olds?
stockholders’ meetings, where important issues regarding
2. What are some other kinds of social issues that might
the corporation may be decided. The membership of the
be important considerations for some people in pur-
board of directors of the corporation is also determined
chasing corporate stock?
at stockholders’ meetings. Sometimes individuals or other
470 Chapter 15 Financial Statements for a Corporation
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. How does Hobby Shack classify its assets?
2. What three items are listed on the balance sheet for an account having
TERMS REVIEW a related contra asset account?
3. What is an example of a long-term liability?
current liabilities 4. Where are the amounts obtained for the stockholders’ equity section
of the balance sheet?
long-term liabilities
5. What are two supporting schedules that might accompany a balance
supporting schedule sheet?
WORK TOGETHER 154
Preparing a balance sheet for a corporation
Use Interstate Tires’ work sheet and statement of stockholders’ equity from Work Together 15-3. A form for the
balance sheet is given in the Working Papers. Your instructor will guide you through the following examples.
1. Prepare a balance sheet for the current year.
ON YOUR OWN 154
Preparing a balance sheet for a corporation
Use Osborn Corporation’s work sheet and statement of stockholders’ equity from On Your Own 15-3. A form for the
balance sheet is given in the Working Papers. Work this problem independently.
1. Prepare a balance sheet for the current year.
Preparing a Balance Sheet Lesson 15-4 471
SUMMARY
After completing this chapter, you can: 4. Analyze an income statement using compo-
nent percentages and financial ratios.
1. Define accounting terms related to financial
statements for a merchandising business orga- 5. Prepare a statement of stockholders’ equity
nized as a corporation. for a merchandising business organized as a
corporation.
2. Identify accounting concepts and practices
related to financial statements for a merchan- 6. Prepare a balance sheet for a merchandising
dising business organized as a corporation. business organized as a corporation.
3. Prepare an income statement for a merchandis-
ing business organized as a corporation.
EXPLORE ACCOUNTING
A l t e r n a t i ve Fi s c a l Ye a r s
Most small companies use a fiscal year that 15 because of the three holidays of Thanks-
is the same as the calendar year, January giving, Christmas, and Valentine’s Day. The
1 to December 31. However, there may company spends six months—May to
be several reasons why a different fiscal November—preparing for its heavy sales
period would be beneficial. If the cal- period. The company has selected April 1
endar year end comes in the middle of a to March 31 as its fiscal year. By March 31,
high sales period, a fiscal year ending at inventory is low, most accounts receivable
this time can be more difficult. All employ- have been collected, and the company has
ees are extremely busy with sales and shipping. not yet replaced inventory to begin preparing
Because of this activity, accurately identifying sales, for the next season. Thus, this is an ideal time to end
inventory, and accounts receivable is more difficult. If the the fiscal period. Inventory is easier to count, the level of
calendar year end comes just before the high sales period accounts receivable is lower, and more employees are
begins, an analysis of the company’s financial condition available to help with the closing activities.
will not be as favorable. The company may have borrowed
money to buy a high level of inventory, so the company Research: What other types of companies may find it
has higher debt and high inventory levels. Therefore, some beneficial to use a fiscal year different from the calendar
companies choose to use a natural business year as the fis- year? What would be the ideal fiscal period for these com-
cal year, as discussed in Chapter 6. panies? You may wish to find a local business that has a fis-
FanciFoods is a corporation that makes and sells deco- cal period different from the calendar year. If so, determine
PHOTO: PHOTOGRAPHER’S CHOICE/GETTY IMAGES
rative cakes, cookies, and candies. Approximately 90% the reasons for selecting the fiscal period it now uses.
of its sales are made between November 1 and February
472 Chapter 15 Financial Statements for a Corporation
151 APPLICATION PROBLEM
Preparing an income statement for a merchandising business
A work sheet for Historic Doors, Inc., for the year ended December 31 of the current year is given in the
Working Papers.
Instructions:
1. Prepare an income statement.
2. Calculate and record on the income statement the following component percentages: (a) cost of merchan-
dise sold, (b) gross profit on sales, (c) total expenses, and (d) net income before federal income tax. Round
percentage calculations to the nearest 0.1%.
152 APPLICATION PROBLEM
Analyzing component percentages and financial ratios
The income statement for Custom Jewelry, Inc., and a form for completing this problem are given in the Work-
ing Papers. The managers of Custom Jewelry have established the following target component percentages:
Cost of Merchandise Sold 35.0%
Gross Profit on Sales 65.0%
Expenses 40.0%
Net Income before Federal Income Tax 25.0%
Instructions:
1. Compare the actual component percentages to the target percentage. Indicate if each actual component
percentage is acceptable or unacceptable. If a percentage is unacceptable, suggest a possible action to
correct the unacceptable component percentage.
2. Custom Jewelry has 110,000 shares of stock outstanding on December 31. The company’s market price is
$13.75 per share. Calculate the earnings per share and price-earnings ratio.
153 APPLICATION PROBLEM
Preparing a statement of stockholders’ equity
A form for completing this problem is given in the Working Papers.
Instructions:
1. Prepare a statement of stockholders’ equity for Classic Interiors, Inc., for the fiscal year ended on December
31 of the current year. Use the following additional information.
Capital stock outstanding on January 1 50,000 shares
Capital stock issued during the year 10,000 shares
Capital stock par value $5.00
Retained earnings, January 1 $59,485.50
Dividends declared during year $66,000.00
Net income after federal income tax $110,635.34
( Go Beyond the Book
)
For more information go to
www.C21accounting.com
Financial Statements for a Corporation Chapter 15 473
154 APPLICATION PROBLEM
Preparing a balance sheet for a corporation
Henderson Corporation’s partial work sheet for the year ended December 31 of the current year is given in
the Working Papers. A form for completing this problem is also given in the Working Papers. The December 31
balance in retained earnings reported on the statement of stockholders’ equity is $97,294.85.
Instructions:
1. Prepare a balance sheet in report form.
155 MASTERY PROBLEM
Preparing financial statements
The work sheet for Lighting Center, Inc., for the year ended December 31 of the current year and forms for
completing this problem are given in the Working Papers.
Instructions:
1. Prepare an income statement. Calculate and record the following component percentages: (a) cost of mer-
chandise sold, (b) gross profit on sales, (c) total expenses, and (d) net income or loss before federal income
tax. Round percentage calculations to the nearest 0.1%.
2. Prepare a statement of stockholders’ equity. The company had 90,000 shares of $1.00 par value stock out-
standing on January 1. The company issued an additional 10,000 shares during the year.
3. Prepare a balance sheet in report form.
4. Calculate the earnings per share and price-earnings ratio. The current market price of the stock is $28.50.
156 CHALLENGE PROBLEM
Analyzing component percentages and financial ratios
Instructions:
1. Obtain the financial statements of two corporations in similar industries. Calculate the income statement
component percentages, earnings per share, and price-earnings ratio of each corporation. The current
market price of each stock can be obtained from a newspaper or online. Note: Annual reports may be avail-
able in your classroom, school library, or public library. They can also be found online.
2. Contrast the component percentages of the companies. Identify which company you believe is performing
better.
474 Chapter 15 Financial Statements for a Corporation
A P P L I E D CO M M U N I C AT I O N
A long written report should contain numerous headings. A heading enables the reader to focus on the primary idea
of the next section. An outline is a special document that lists only the headings of a report. By reviewing an outline
before and after reading a report, the reader can gain a better understanding of the relationship among the topics
being presented.
Each chapter of this textbook is similar to a long report. Headings are used to separate and emphasize major
concepts.
Instructions: Prepare an outline of this chapter.
CASE FOR CRITICAL THINKING
Christy Burch and Myung Lim, business managers, compared their current income statement with the income state-
ment of a year ago. They noted that sales were 12.0% higher than a year ago. They also noted that the total expenses
were 20.0% higher than a year ago. What type of analysis should be done to determine whether the increase in
expenses is justified?
GRAPHING WORKSHOP
Evaluating Department Sales Collinsville Home Center
Collinsville Home Center made a strategic decision
Appliances Lumber Hardware
5,000
in 2002 to carry a line of home appliances. The fol-
lowing graph depicts sales for the company’s three 4,500
departments for the recent eight-year period. Ana- 4,000
3,500
Sales ($000s)
lyze the graph to answer the following questions.
1. Describe the sales growth in the Appliances 3,000
department. 2,500
2. State the approximate total company sales for 2,000
2007. 1,500
3. Describe the performance of the Lumber 1,000
Department. 500
—
2000 2001 2002 2003 2004 2005 2006 2007
A N A LY Z I N G B E S T B U Y ’S F I N A N C I A L S TAT E M E N T S
Gross profit on sales is the amount of revenue remaining after the cost of merchandise has been deducted. Best
Buy’s gross profit on sales, labeled simply as “gross profit” on its income statement, has increased dramatically over
the past three fiscal periods, a very favorable trend. But sales have also increased, making it difficult to determine
how effectively Best Buy has been controlling its cost of merchandise sold.
The component percentage for gross profit on sales is also referred to as the gross margin or gross profit rate.
Instructions
1. Use Best Buy’s Financial Highlights on page B-2 in Appendix B to identify the gross profit rate for 2005–2007.
2. Is the trend in the gross profit rate favorable or unfavorable?
3. Demonstrate how amounts on Best Buy’s Consolidated Statement of Earnings, on page B-6, were used to calcu-
late the gross profit rate for 2007.
Financial Statements for a Corporation Chapter 15 475
Accounting
SOFTWARE
F I N A N C I A L S TAT E M E N T S
Component percentages are an essential tool for understanding financial statements. Peachtree includes compo-
nent percentages on many, but not all, of its financial statements.
What if a manager requests that you add the component percentages to a report? Peachtree provides you with
an easy method for accomplishing this task. With the report displayed on the screen, you can instruct Peachtree to
export the financial statement to an electronic spreadsheet file.
This feature provides you with two important benefits. First, formulas can be entered to quickly and accurately
calculate the component percentages. Second, the financial statement printed from the electronic spreadsheet will
have a more professional appearance than might have been available otherwise.
PEACHTREE MASTERY PROBLEM 155
1. Open (Restore) file 15-5MP.ptb.
2. Print an income statement. Calculate the component percentages for (a) cost of merchandise sold, (b) gross
profit on sales, (c) total expenses, and (d) net income or loss before federal income tax. Round percentage calcu-
lations to the nearest 0.1%.
3. Print a balance sheet.
4. Substitute Peachtree’s statement of retained earnings for the statement of stockholders’ equity. Peachtree’s
Statement of Retained Earnings does not show the beginning Capital Stock balance of $100,000. Add that bal-
ance to the Ending Retained Earnings Balance so that Peachtree’s statement agrees with the manually-prepared
statement that would have been completed in the Working Papers.
5. As an optional activity, use the Help feature to learn how to export the income statement to an electronic
spreadsheet. Then use formulas to calculate additional component percentages. Format the spreadsheet.
F I N A N C I A L S TAT E M E N T S
QuickBooks is a very useful software program for recording transactions and producing reports and
financial statements. It is not as helpful when it comes to trying to look into the future and answer questions, such
as “How much will the net income be if the revenues increase by 25% and expenses only increase 10%?”
This type of question is better answered by electronic spreadsheet software. Thus, in order to answer the ques-
tion, the current accounting data would have to be exported into the electronic spreadsheet program. QuickBooks
has a function that allows data to be transferred to an electronic spreadsheet program.
In addition to answering “what if” questions such as that above, exporting data into a spreadsheet also makes it
possible to change a report’s appearance or contents without affecting your QuickBooks data.
QUICKBOOKS MASTERY PROBLEM 155
1. Open the Lighting Center Inc. file.
2. Print the Profit & Loss Standard report, using January 1 and December 31 for the dates.
3. Add component percentages calculated as a percentage of income to the report. Change the report subtitle to
“For Year Ended December 31.” Print the report.
4. To create a year-end balance sheet in QuickBooks, it is necessary to make a closing entry to close the equity
account Dividends to retained earnings. Print a Trial Balance report to use as the basis for journalizing the closing
transaction.
5. Use the Make General Journal Entries window to journalize the closing entry, using December 31 for the date.
6. Print a Journal report and a Balance Sheet Standard report, using December 31 for the dates.
7. As an optional activity, use the Help feature to learn how to export the income statement to an electronic
spreadsheet. Then use formulas to calculate additional component percentages. Format the spreadsheet.
476 Chapter 15 Financial Statements for a Corporation
F O R M AT T I N G F I N A N C I A L S TAT E M E N T S
Indenting section and account titles on a financial statement helps the reader identify the major sections of the
statement. For example, having all the expenses indented under the Expense title clearly identifies these accounts
as expenses.
The traditional method for indenting on an electronic spreadsheet was to have a series of thin columns on the
left of the template. Each column allowed for one indentation. Modern electronic spreadsheets have tools that
allow you to increase and decrease the indentation of text within a cell. Using these tools eliminates the need for
many thin columns and allows you to easily change the level of indentation.
EXCEL APPLICATION PROBLEM 151
Open the F15-1 Excel data file. Follow the step-by-step instructions in the Instructions work sheet to calculate com-
ponent percentages and indent text within cells for a better appearance.
EXCEL APPLICATION PROBLEM 153
Open the F15-3 Excel data file. Follow the step-by-step instructions in the Instructions work sheet to complete the
statement of stockholders’ equity.
F I N A N C I A L S TAT E M E N T S
Sometimes it is not enough to simply display or print a financial statement. It might be desirable to paste a copy of
the income statement or balance sheet in a memo or report. There could be an advantage in copying and pasting a
financial statement in a spreadsheet where different assumptions could be tried to see how the business could be
improved. For example, you might change the cost of purchases and see what effect the change has on net income.
Automated Accounting has a Copy function in the report window that allows you to copy the displayed financial
statement in either a word processing or a spreadsheet format. When the report is displayed, click the Copy but-
ton. You then must choose either a word processing or a spreadsheet format. The report is saved on the operating
system’s Clipboard. You can then open an existing word processing document or start a new one, click the Paste
tool on the toolbar or select Edit Paste, and the report is copied into a word processing document.
To make columns align, it is necessary to reformat the entire report in a monotype font, such as Courier New, so
that each character occupies the same amount of space. A similar process is used to copy a report to a spreadsheet.
Optional Automated Accounting Problem
Open file F15-CP.AA8. Display the problem instructions and complete the problem.
Financial Statements for a Corporation Chapter 15 477
STOCKBYTE/GETTY IMAGES
C H A P T E R 1 6 Recording Adjusting
and Closing Entries
for a Corporation
O B J E C T I V E S
After studying Chapter 16, you will be able to: 3. Record closing entries for income statement
accounts.
1. Identify accounting concepts and practices
related to adjusting and closing entries for 4. Record closing entry for dividends.
a merchandising business organized as a
5. Prepare a post-closing trial balance.
corporation.
2. Record adjusting entries.
( Point Your Browser
www.C21accounting.com
)
478
ACCOUNTING IN THE REAL WORLD
Apple
Apple Spreads Its Wings
Recent world history would be incomplete without a reference to three com-
puters—Apple II, Macintosh, and iMac—that pushed computer technology
beyond the standard of their day.
The Apple II was the first personal computer to gain wide distribution and
put the Apple Computer company on the technology map. The Macintosh
introduced the graphical interface and mouse technologies we now take for
DIGITAL VISION/GETTY IMAGES
granted. The iMac merged digital audio and video into traditional computer
technology to enable stunning editing of video and audio files.
Although Apple’s foundation is in computers, the INTERNET
company has spread its wings into related ACTIVITY
technology markets. The widely suc-
cessful iPod is the driving force in EDGAR—Part 2
the popular digital music player Go to the homepage for EDGAR
market. iTunes was the first (www.sec.gov/edgar.shtml).
Internet site to offer legal, Click on “Search for Company
digital copies of music Filings,” and then click on “Lat-
files. Together, iPod and est Filings.”
iTunes have revolution-
ized how people access Instructions
and play music.
1. Look at the most recent
Apple has clearly
filing (top of the list) and
demonstrated that it
©KYODO/LANDOV
record the company name
can be a player in any
and the date and time the
market that requires the
filing was accepted.
innovative application of
2. Click the “Back” button
computer technology.
to return to “Search the
EDGAR Database” page.
Again, click on “Latest
Filings.” Scroll down the
list to find the company
filing you recorded in
Critical Thinking
instruction 1. Count and
1. Identify other companies that have extended their product lines beyond
record the number of
their original market.
additional filings that
2. Identify at least five expenses Apple incurs to support its iTunes are listed.
business.
Source: www.apple.com, www.apple-history.com
479
L E S S O N
Recording Adjusting Entries
16-1
ADJUSTING ENTRIES RECORDED FROM A WORK SHEET
1 2 3 4
TRIAL BALANCE ADJUSTMENTS
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT
1 Cash 29 0 8 0 28 1
3. Identify the
2 Petty Cash 3 0 0 00 2
first adjustment.
3 Accounts Receivable 14 6 9 8 40 3
Allow. for Uncoll. Accts. 1 2 7 52 (e) 1 2 4 5 00
4 4 3
5 Merchandise Inventory 140 4 8 0 00 (d)158 4 0 00 5
6 Supplies—Office 3 4 8 0 00 (a) 2 7 3 0 00 6
7 Supplies—Store 3 9 4 4 00 (b) 2 9 1 0 00 7
8 Prepaid Insurance 5 8 0 0 00 (c) 3 1 7 0 00 8
(d)
28 Income Summary 158 4 0 00 28
(a)
45 Supplies Expense—Office 2 7 3 0 00 45
(b)
46 Supplies Expense—Store 2 9 1 0 00 46
(e)
47 Uncollectible Accounts Expense 1 2 4 5 00 47
48 Utilities Expense 3 8 2 0 00 48
(h)
49 Federal Income Tax Expense 18 0 0 0 00 5 8 8 9 24 49
2. Date 1. Heading 4. Account Debited 5. Debit 7. Credit
GENERAL JOURNAL PAGE 15
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
1 1 Adjusting Entries 1
20--
2 2 Dec. 31 Uncollectible Accounts Expense 4 5 12 4 5 00 2
3 Allowance for Uncoll. Accounts 6 12 4 5 00 73
4 31 Income Summary 15 8 4 0 00 4
5 Merchandise Inventory 15 8 4 0 00 5
6 31 Supplies Expense—Office 2 7 3 0 00 6
7 Supplies—Office 2 7 3 0 00 7
16 31 Federal Income Tax Expense 5 8 8 9 24 16
17 Federal Income Tax Payable 5 8 8 9 24 17
18 18
6. Account Credited
480 Chapter 16 Recording Adjusting and Closing Entries for a Corporation
General ledger account balances are changed only by post- ing Expenses with Revenue] Adjusting entries recorded in
ing journal entries. Two types of journal entries change a work sheet are journalized in a general journal. Hobby
general ledger account balances at the end of a fiscal Shack begins the adjusting entries on a new general jour-
period: (1) Adjusting entries bring general ledger account nal page. The adjusting entries are entered in the Debit
balances up to date. (2) Closing entries prepare temporary and Credit columns of the general journal.
accounts for the next fiscal period. [CONCEPT: Match-
S T E P S RECORDING ADJUSTING ENTRIES IN A GENERAL JOURNAL
1 Write the heading, Adjusting Entries, in the middle of the general journal’s Account Title column. This heading
explains all of the adjusting entries that follow. Therefore, indicating a source document is unnecessary. The first
adjusting entry is recorded on the first two lines below the heading.
2 For the first adjusting entry in the work sheet Adjustments columns, write the date, Dec. 31, 20--, in the Date column.
3 Scan down the Adjustments column of the work sheet to identify the first adjustment, (e), to Allowance for Uncollect-
ible Accounts. Identify the debit and credit parts of this entry.
4 Write the title of the account debited in the Account Title column.
5 Write the debit adjustment amount in the Debit column.
6 Write the title of the account credited in the Account Title column,
R E M E M B E R
indented about 1 centimeter.
Remember to start a
7 Write the credit adjustment amount in the Credit column. new general journal page
for adjusting entries.
8 Continue down the Adjustments columns, repeating Steps 4 through
7 for each of the additional adjustments.
CHARACTER COUNTS
In s i d e r Tra d i ng
Ben Levine works in the research unit of a large chemical Instructions
company. His group has recently discovered a new chemi- Access the Code of Busi-
cal process that will revolutionize how household cleaning ness Conduct of Dow at
products are manufactured. The discovery should have a www.dow.com. Using
significant positive impact on his company’s profitability this code of conduct as
PHOTO: DIGITAL VISION/GETTY IMAGES
and its stock price. a guide, provide Ben
Ben purchases shares of his company every month with guidance on his
through a payroll deduction program. He is consider- proposed stock pur-
ing using a large portion of his savings to buy additional chase. Can Ben continue
shares of the company. Since you are the ethics officer of his monthly purchases?
the company, he has asked your opinion on his proposed
stock purchase.
Recording Adjusting Entries Lesson 16-1 481
ADJ USTI NG E NTRY FO R ALLOWANCE FO R
UNCOLLEC TIBLE ACCOUNTS
GENERAL JOURNAL PAGE 15
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
1 Adjusting Entries 1
20--
2 Dec. 31 Uncollectible Accounts Expense 1 2 4 5 00 2
3 Allowance for Uncoll. Accounts 1 2 4 5 00 3
Hobby Shack estimated that $1,245.00 of the current fis-
cal year’s sales on account will eventually be uncollectible. Allowance for Uncollectible Accounts
The amount is added to the existing balance in Allowance
for Uncollectible Accounts, $127.52. The adjusted balance Bal. 127.52
Adj. (e) 1,245.00
of Allowance for Uncollectible Accounts, $1,372.52, is the (New Bal. 1,372.52)
amount of the current accounts receivable that Hobby
Shack expects to become uncollectible.
The effect of posting the adjusting entry (e) for Uncol- Uncollectible Accounts Expense
lectible Accounts is shown in the T accounts. The debit Adj. (e) 1,245.00
to Uncollectible Accounts Expense recognizes this as an
expense for the fiscal period.
ADJUSTING ENTRY FOR MERCHANDISE INVENTORY
GENERAL JOURNAL PAGE 15
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
1
4 31 Income Summary 15 8 4 0 00 4
5 Merchandise Inventory 15 8 4 0 00 5
The merchandise inventory account has a January 1 debit
balance of $140,480.00. The inventory was counted Merchandise Inventory
at the end of the fiscal period and determined to cost
Bal. 140,480.00 Adj. (d) 15,840.00
$124,640.00. Adjustment (d) for $15,840.00 reduces (New Bal. 124,640.00)
the cost of inventory, $140,480.00, to $124,640.00.
The effect of posting the adjusting entry for merchandise
inventory is shown in the T accounts.
Income Summary
Adj. (d) 15,840.00
482 Chapter 16 Recording Adjusting and Closing Entries for a Corporation
ADJUSTING ENTRY FOR SUPPLIES OFFICE
GENERAL JOURNAL PAGE 15
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
6 31 Supplies Expense—Office 2 7 3 0 00 6
7 Supplies—Office 2 7 3 0 00 7
Hobby Shack counted $750.00 of office supplies on hand
at the end of the fiscal period. The balance of Supplies— Supplies—Office
Office in the trial balance, $3,480.00, is the cost of office
Bal. 3,480.00 Adj. (a) 2,730.00
supplies on hand at the beginning of the year plus the
(New Bal. 750.00)
office supplies purchased during the year. Adjustment (a)
for $2,730.00 reduces the balance in Supplies—Office
from $3,480.00 to $750.00.
The effect of posting the adjusting entry for office sup- Supplies Expense—Office
plies is shown in the T accounts. The debit to Supplies Adj. (a) 2,730.00
Expense—Office recognizes the amount of supplies used
during the period as an expense.
ADJUSTING ENTRY FOR SUPPLIESSTORE
GENERAL JOURNAL PAGE 15
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
8 31 Supplies Expense—Store 2 9 1 0 00 8
9 Supplies—Store 2 9 1 0 00 9
Hobby Shack also counted $1,034.00 of store supplies
on hand at the end of the fiscal period. Adjustment (b) Supplies—Store
for $2,910.00 reduces the balance in Supplies—Store,
Bal. 3,944.00 Adj. (b) 2,910.00
$3,944.00, to the current cost of store supplies on hand,
(New Bal. 1,034.00)
$1,034.00. The effect of posting the adjusting entry for
store supplies inventory is shown in the T accounts. The
debit to Supplies Expense—Store recognizes the amount
of supplies used during the period as an expense. Supplies Expense—Store
Adj. (b) 2,910.00
Recording Adjusting Entries Lesson 16-1 483
A D J U S T I N G E N T RY FO R P R E PA I D I N S U R A N C E
GENERAL JOURNAL PAGE 15
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
10 31 Insurance Expense 3 1 7 0 00 10
11 Prepaid Insurance 3 1 7 0 00 11
During the fiscal period, Hobby Shack paid $5,800.00
for future insurance coverage. At the end of the fiscal Prepaid Insurance
year, Hobby Shack determined that the value of prepaid Bal. 5,800.00 Adj. (c) 3,170.00
insurance on December 31 is $2,630.00. Adjustment (New Bal. 2,630.00)
(c) reduces Prepaid Insurance by $3,170.00, the value of
insurance used during the year.
The effect of posting the adjusting entry for Prepaid
Insurance is shown in the T accounts. The debit to Insur- Insurance Expense
ance Expense recognizes the amount of insurance used Adj. (c) 3,170.00
during the fiscal period as an expense.
A D J U S T I N G E N T R Y F O R D E P R E C I AT I O N
OFFICE EQUIPMENT
GENERAL JOURNAL PAGE 15
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
12 31 Depreciation Exp.—Office Equip. 6 5 4 0 00 12
13 Accum. Depr.—Office Equip. 6 5 4 0 00 13
Hobby Shack estimated its depreciation of office equip-
ment during the fiscal year to be $6,540.00. Adjustment Accum. Depr.—Office Equip.
(f ) increases Accum. Depr.—Office Equip. by $6,540.00, Bal. 6,497.00
resulting in a new balance of $13,037.00. Adj. (f) 6,540.00
The effect of posting the adjusting entry for office (New Bal. 13,037.00)
equipment depreciation is shown in the T accounts. The
debit to Depreciation Exp.—Office Equip. recognizes the
depreciation as an expense for the fiscal period. Depreciation Exp.—Office Equip.
Adj. (f) 6,540.00
484 Chapter 16 Recording Adjusting and Closing Entries for a Corporation
A D J U S T I N G E N T R Y F O R D E P R E C I AT I O N
STORE EQUIPMENT
GENERAL JOURNAL PAGE 15
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
14 31 Depreciation Exp.—Store Equip. 5 2 5 0 00 14
15 Accum. Depr.—Store Equip. 5 2 5 0 00 15
Hobby Shack estimated its depreciation of store equip-
ment during the fiscal year to be $5,250.00. Adjustment Accum. Depr.—Store Equip.
(g) increases Accum. Depr.—Store Equip. by $5,250.00, Bal. 5,069.00
resulting in a new balance of $10,319.00. Adj. (g) 5,250.00
The effect of posting the adjusting entry for store (New Bal. 10,319.00)
equipment depreciation is shown in the T accounts. The
debit to Depreciation Exp.—Store Equip. recognizes the
depreciation as an expense for the fiscal period. Depreciation Exp.—Store Equip.
Adj. (g) 5,250.00
A D J U S T I N G E N T R Y F O R F E D E R A L I N C O M E TA X E S
GENERAL JOURNAL PAGE 15
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
16 31 Federal Income Tax Expense 5 8 8 9 24 16
17 Federal Income Tax Payable 5 8 8 9 24 17
Hobby Shack made four quarterly estimated payments
of $4,500.00. The actual federal income tax expense, Federal Income Tax Payable
$23,889.24, was calculated based on the company’s net
Adj. (h) 5,889.24
income before federal income tax. Hobby Shack must
(New Bal. 5,889.24)
make an extra payment of $5,889.24 to pay its tax liabil-
ity. Adjustment (h) increases Federal Income Tax Expense
by $5,889.24, resulting in a new balance of $23,889.24.
The adjustment also creates the $5,889.24 tax liability. Federal Income Tax Expense
The effect of posting the adjusting entry for federal Bal. 18,000.00
income tax is shown in the T accounts. Adj. (h) 5,889.24
(New Bal. 23,889.24)
Recording Adjusting Entries Lesson 16-1 485
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. When adjusting entries are journalized, why is no source document
recorded?
2. What adjusting entry is recorded for a merchandising business that is
not recorded for a service business?
3. What balance sheet account is increased from a zero balance after
adjusting entries are journalized and posted?
WORK TOGETHER 161
Journalizing adjusting entries
The work sheet for Discount Books, Inc., is given in the Working Papers. Your instructor will guide you through the
following example.
1. Record the appropriate adjusting entries on page 18 of a general journal provided in the Working Papers. Use
December 31 of the current year as the date. Save your work to complete Work Together 16-2.
ON YOUR OWN 161
Journalizing adjusting entries
The work sheet for Sturgis Supply, Inc., is given in the Working Papers. Work this problem independently.
1. Record the appropriate adjusting entries on page 24 of a general journal provided in the Working Papers. Use
December 31 of the current year as the date. Save your work to complete On Your Own 16-2.
486 Chapter 16 Recording Adjusting and Closing Entries for a Corporation
L E S S O N
Recording Closing Entries for
16-2 Income Statement Accounts
Closing entries for a corporation are made from infor- 2. A closing entry for income statement accounts with
mation in a work sheet. Closing entries for revenue and debit balances (cost, contra revenue, and expense
expense accounts are similar to those for proprietorships. accounts)
A corporation’s closing entries to close net income and 3. A closing entry to record net income or net loss in the
temporary equity accounts are also similar to those for a retained earnings account and close the income sum-
proprietorship. However, these closing entries affect differ- mary account
ent accounts. A corporation records four closing entries: 4. A closing entry for the dividends account
1. A closing entry for income statement accounts with
credit balances (revenue and contra cost accounts)
THE INCOME SUMMARY ACCOUNT
At the end of a fiscal period, the temporary accounts are next fiscal period. Temporary accounts, also referred to as
closed to prepare the general ledger for the next fiscal nominal accounts, include the revenue, cost, expense, and
period. [CONCEPT: Matching Expenses with Revenue] dividend accounts.
To close a temporary account, an amount equal to its bal- Another temporary account is used to summarize
ance is recorded on the side opposite the balance. the closing entries for revenue, cost, and expenses. The
Amounts needed for the closing entries are obtained account is titled Income Summary because it is used to
from the Income Statement and Balance Sheet columns summarize information about net income. Income Sum-
of the work sheet and from the statement of stockhold- mary is used only at the end of a fiscal period to help
ers’ equity. Closing entries are recorded in the general prepare other accounts for a new fiscal period.
journal. The income summary account is unique because
Chapter 8 discusses the difference between permanent it does not have a normal balance side. The balance of
accounts and temporary accounts. Permanent accounts, this account is determined by the amounts posted to the
also referred to as real accounts, include the asset and lia- account at the end of a fiscal period. When revenue is
bility accounts as well as the owners’ capital accounts. The greater than total expenses, resulting in a net income, the
ending account balances of permanent accounts for one income summary account has a credit balance, as shown
fiscal period are the beginning account balances for the in the T account.
Income Summary
Debit Credit
Total expenses Revenue (greater than expenses)
(Credit balance is the net income.)
R E M E M B E R
The income summary account is
used only at the end of the fiscal
period to help prepare other
accounts for a new fiscal period.
Recording Closing Entries for Income Statement Accounts Lesson 16-2 487
CLOSING E NTRY FOR ACCOUNTS WITH CRE DIT BAL ANCES
1 2 5 6
TRIAL BALANCE INCOME STATEMENT
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT
29 Sales 495 1 2 0 00 495 1 2 0 00
30 Sales Discount 2 5 8 48 2 5 8 48
31 Sales Returns and Allowances 3 1 2 7 28 3 1 2 7 28
32 Purchases 209 9 6 0 00 209 9 6 0 00
33 Purchases Discount 1 6 4 8 15 1 6 4 8 15
34 Purch. Returns and Allowances 3 4 8 4 95 3 4 8 4 95
3. Debit to
3 3 Close
1. Heading
GENERAL JOURNAL PAGE 16
DOC. POST.
DATE ACCOUNT TITLE NO. REF. DEBIT CREDIT
1 1 Closing Entries 1
2. Date 20--
22 Dec. 31 Sales 495 1 2 0 00 2
3 Purchases Discount 1 6 4 8 15 3
4 Purchases Returns and Allowances 3 4 8 4 95 4
5 Income Summary 4 500 2 5 3 10 5
4. Credit to Income Summary
Hobby Shack’s work sheet has three income statement CLOSING INCOME
accounts with credit balances. One account, Sales, is a
STATEMENT
revenue account. The other two accounts, Purchases Dis- S T E P S
count and Purchases Returns and Allowances, are contra
ACCOUNTS WITH
cost accounts. Each account has a normal credit balance CREDIT BALANCES
that must be reduced to zero to prepare the account for
the next fiscal period. [CONCEPT: Matching Expenses 1 Write the heading, Closing Entries, in the middle
with Revenue] of the general journal’s Account Title column
To reduce each balance to zero, each account is debited on a new page. This heading explains all of the
closing entries that follow. Therefore, indicating
for the amount of the balance. The impact of the closing
a source document is unnecessary. The first clos-
entry on the sales account is shown in the T account.
ing entry is recorded on the first four lines below
the heading.
Sales 2 Write the date, Dec. 31, 20--, in the Date column.
Closing 495,120.00 Bal. 495,120.00
(New Bal. zero) 3 Write the account title of each revenue and
contra cost account in the Account Title column.
Write the balance of each revenue and contra
Income Summary is credited for $500,253.10, the total cost account in the Debit column.
of the three debits in this closing entry.
4 Write the title of the account credited, Income
Summary, in the Account Title column,
indented about 1 centimeter. Write the amount,
Income Summary
$500,253.10, in the Credit column.
Adj. (mdse. inv.) 15,840.00 Closing 500,253.10
(credit accounts)
The balance in Income Summary will be adjusted by
other closing entries.
488 Chapter 16 Recording Adjusting and Closing Entries for a Corporation
C L O S I N G E N T R Y F O R I N C O M E S TAT E M E N T
ACCOUNTS WITH DE BIT BAL ANCES
1 2 5 6
TRIAL BALANCE INCOME STATEMENT
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT
28 Income Summary 15 8 4 0 00
29 Sales 495 1 2 0 00 495 1 2 0 00
30 Sales Discount 2 5 8 48 2 5 8 48
31 Sales Returns and Allowances 3 1 2 7 28 3 1 2 7 28
32 Purchases 209 9 6 0 00 209 9 6 0 00
33 Purchases Discount 1 6 4 8 15 1 6 4 8 15
34 Purch. Returns and Allowances 3 4 8 4 95 3 4 8 4 95
35 Advertising Expense 3 6 0 0 00 3 6 0 0 00
36 Cash Short and Over 1 9 25 1 9 25
37 Credit Card Fee Expense 3 3 8 5 00 3 3 8 5 00
48 Utilities Expense 3 8 2 0 00 3 8 2 0 00
49 Federal Income Tax Expense 18 0 0 0 00 23 8 8 9 24
1. Date 2. Account Debited 4. Debit Amount
GENERAL JOURNAL PAGE 16
DOC. POST.
DATE ACCOUNT TITLE NO. REF. DEBIT CREDIT
1
2 1
6 1 31 Income Summary 4 404 0 9 9 15 6
7 Sales Discount 2 5 8 48 7
8 Sales Returns and Allow. 3 1 2 7 28 8
9 Purchases 209 9 6 0 00 9
10 Advertising Expense 3 6 0 0 00 10 3. Credit
11 Cash Short and Over 1 9 25 11 to Close
3
12 Credit Card Fee Expense 3 3 8 5 00 12 3
13 Depr. Exp.—Office Equipment 6 5 4 0 00 13
14 Depr. Exp.—Store Equipment 5 2 5 0 00 14
23 Utilities Expense 3 8 2 0 00 23
24 Federal Income Tax Expense 23 8 8 9 24 24
Hobby Shack’s work sheet has many income statement next fiscal period. [CONCEPT: Matching Expenses with
accounts with debit balances—contra revenue accounts, Revenue] To reduce the balances to zero, the accounts are
Purchases, and the expense accounts. These debit balances credited for the amount of their balances. Income Sum-
must be reduced to zero to prepare the accounts for the mary is debited for the total amount.
S T E P S CLOSING INCOME STATEMENT ACCOUNTS WITH DEBIT BALANCES
1 Write the date, 31, in the Date column.
2 Write the title of the account debited, Income Summary, in the Account Title column. The debit to Income
Summary is not entered in the amount column until all contra revenue, cost, and expense balances have been
journalized and the total amount calculated.
3 Write the account title of each contra revenue, cost, and expense account in the Account Title column, each
indented about 1 centimeter. Write the balance of each cost and expense account in the Credit column.
4 Add the credit amounts for this entry. Write the total of the credited accounts, $404,099.15, in the Debit
column on the same line as the account title Income Summary.
Recording Closing Entries for Income Statement Accounts Lesson 16-2 489
SUMMARY OF CLOSING ENTRY FOR INCOME
S TAT E M E N T A C C O U N T S W I T H D E B I T B A L A N C E S
The second closing entry reduces the balance of the con- 3. A debit of $404,099.15, the amount of the entry to
tra revenue, Purchases, and expense accounts to a zero close the contra revenue, cost, and expense accounts
balance. The effect of the closing entry on Purchases is
shown in the T account.
Income Summary
Adj. (mdse. inv.) 15,840.00 Closing (credit
Purchases Closing (debit amounts) 500,253.10
accounts) 404,099.15 (New Bal. 80,313.95)
Bal. 209,960.00 Closing 209,960.00
(New Bal. zero)
The credit balance of Income Summary, $80,313.95, is
equal to the net income amount shown on the work sheet.
After recording this closing entry, Income Summary has However, Income Summary is not closed as part of this
three amounts: closing entry. Instead, the account is closed with the third
1. A debit of $15,840.00, the amount of the merchan- closing entry when net income is recorded.
dise inventory adjustment
2. A credit of $500,253.10, the amount of the entry to
close the revenue and contra cost accounts
F O R YO U R I N F O R M AT I O N
F Y I
F S T O P / G E T T Y I MA G E S
A document that outlines
the mission and goals of a
corporation is known as a
strategic plan. The management
of a corporation uses the strategic
plan as a guiding light to
ensure that all business
decisions work toward
achieving its goals.
SMALL BUSINESS
S P O T L I G H T
Buying a franchise is a popular way to
start a small business. Franchises are
particularly appealing to people with
less experience because the failure rate
is much lower than that of other new
businesses. Advantages of purchasing
a franchise include the franchise’s
proven reputation, established
customers, and time-tested business
procedures. Disadvantages include
the franchisee’s sometimes-limited
control over the new business and the
relatively high initial fees attached
to the purchase of a franchise.
490 Chapter 16 Recording Adjusting and Closing Entries for a Corporation
CLOSING ENTRY TO RECORD NET INCOME
1. Date 2. Debit Income Summary 3. Credit Retained Earnings
GENERAL JOURNAL PAGE 16
DOC. POST.
DATE ACCOUNT TITLE NO. REF. DEBIT CREDIT
20--
24 1 31 Income Summary 2 80 3 1 3 95 3 24
25 Retained Earnings 80 3 1 3 95 25
After closing entries for the income statement accounts
are posted, Income Summary has a credit balance of Income Summary
$80,313.95. This credit balance equals the net income Adj. (mdse. inv.) 15,840.00 Closing (credit
calculated on the work sheet. Closing (debit accounts) 500,253.10
A corporation’s net income should be recorded in the accounts) 404,099.15
retained earnings account at the end of the fiscal year. Closing (retained
earnings) 80,313.95 (New Bal. zero)
After the closing entry is posted, Income Summary has a
zero balance. Retained Earnings
The new balance in retained earnings, $91,075.24, does
not yet equal the amount reported on the statement of Bal. 10,761.29
Closing (Income
stockholders’ equity. The fourth closing entry is required Summary) 80,313.95
to adjust Retained Earnings to the correct amount. (New Bal. 91,075.24)
CLOSING ENTRY FOR DIVIDENDS
1. Date 2. Debit Retained Earnings 3. Credit Dividends
GENERAL JOURNAL PAGE 16
DOC. POST.
DATE ACCOUNT TITLE NO. REF. DEBIT CREDIT
20--
26 1 31 Retained Earnings 2 20 0 0 0 00 3 26
27 Dividends 20 0 0 0 00 27
Because dividends decrease the earnings retained by a
corporation, the dividends account is closed to Retained Retained Earnings
Earnings. After the closing entry for the dividends account Bal. 10,761.29
is posted, Dividends has a zero balance. The amount of Closing Closing (Income
the dividends, $20,000.00, has reduced the balance of (dividends) 20,000.00 Summary) 80,313.95
Retained Earnings. The new balance in Retained Earnings, (New Bal. 71,075.24)
$71,075.24, now equals the amount reported on the
statement of stockholders’ equity. Therefore, the retained Dividends
earnings account is now up to date. Bal. 20,000.00 Closing
(dividends) 20,000.00
(New Bal. zero)
Recording Closing Entries for Income Statement Accounts Lesson 16-2 491
COMPLETED CLOSING ENTRIES FOR A
C O R P O R AT I O N R E C O R D E D I N A J O U R N A L
GENERAL JOURNAL PAGE 16
DOC. POST.
DATE ACCOUNT TITLE NO. REF. DEBIT CREDIT
1 Closing Entries 1
20--
2 Dec. 31 Sales 495 1 2 0 00 2
3 Purchases Discount 1 6 4 8 15 3
4 Purchases Ret. and Allow. 3 4 8 4 95 4
5 Income Summary 500 2 5 3 10 5
6 31 Income Summary 404 0 9 9 15 6
7 Sales Discount 2 5 8 48 7
8 Sales Returns and Allow. 3 1 2 7 28 8
9 Purchases 209 9 6 0 00 9
10 Advertising Expense 3 6 0 0 00 10
11 Cash Short and Over 1 9 25 11
12 Credit Card Fee Expense 3 3 8 5 00 12
13 Depr. Exp.—Office Equipment 6 5 4 0 00 13
14 Depr. Exp.—Store Equipment 5 2 5 0 00 14
15 Insurance Expense 3 1 7 0 00 15
16 Miscellaneous Expense 2 5 6 4 90 16
17 Payroll Taxes Expense 9 1 0 5 00 17
18 Rent Expense 18 0 0 0 00 18
19 Salary Expense 104 5 2 5 00 19
20 Supplies Expense—Office 2 7 3 0 00 20
21 Supplies Expense—Store 2 9 1 0 00 21
22 Uncollectible Accounts Expense 1 2 4 5 00 22
23 Utilities Expense 3 8 2 0 00 23
24 Federal Income Tax Expense 23 8 8 9 24 24
25 31 Income Summary 80 3 1 3 95 25
26 Retained Earnings 80 3 1 3 95 26
27 31 Retained Earnings 20 0 0 0 00 27
28 Dividends 20 0 0 0 00 28
Hobby Shack’s general journal appears as shown above,
ES
IM A G
after all closing entries have been recorded. P /G E
TTY
F ST O
The next step would be to post the adjusting and clos-
ing entries to the general ledger.
F O R YO U R I N F O R M AT I O N
F Y I
If a corporation has a net loss,
Income Summary has a debit
balance. Retained Earnings
would then be debited and
Income Summary credited
for the net loss amount.
492 Chapter 16 Recording Adjusting and Closing Entries for a Corporation
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. Where is the information obtained for journalizing closing entries for
revenue, cost, and expenses?
2. What is the name of the temporary account that is used to summarize
the closing entries for revenue, cost, and expenses?
WORK TOGETHER 162
Journalizing closing entries
Use the work sheet of Discount Books, Inc., from Work Together 16-1. A general journal is given in the Working
Papers. Your instructor will guide you through the following example.
1. Record the following closing entries on page 19 of the general journal.
a. Close the income statement accounts with credit balances.
b. Close the income statement accounts with debit balances.
c. Close Income Summary.
d. Close the dividend account.
ON YOUR OWN 162
Journalizing closing entries
Use the work sheet of Sturgis Supply, Inc., from On Your Own 16-1. A general journal is given in the Working Papers.
Work this problem independently.
1. Record the following closing entries on page 25 of the general journal.
a. Close the income statement accounts with credit balances.
b. Close the income statement accounts with debit balances.
c. Close Income Summary.
d. Close the dividend account.
Recording Closing Entries for Income Statement Accounts Lesson 16-2 493
L E S S O N
Preparing a Post-Closing
16-3 Trial Balance
COMPLETED GENERAL LEDGER AFTER ADJUSTING
AND CLOSING ENTRIES ARE POSTED
ACCOUNT Cash ACCOUNT NO. 1110 ACCOUNT Accounts Payable ACCOUNT NO. 2110
POST. BALANCE POST. BALANCE
DATE ITEM DEBIT CREDIT DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT REF. DEBIT CREDIT
20-- 20--
Dec. 31 Balance ⻫ 290 8 0 28 Dec. 31 Balance ⻫ 115 8 3 03
ACCOUNT Petty Cash ACCOUNT NO. 1120 ACCOUNT Federal Income Tax Payable ACCOUNT NO. 2120
POST. BALANCE POST. BALANCE
DATE ITEM DEBIT CREDIT DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT REF. DEBIT CREDIT
20-- 20--
Dec. 31 Balance ⻫ 3 0 0 00 Dec. 31 Balance G15 5 8 8 9 24 5 8 8 9 24
ACCOUNT Accounts Receivable ACCOUNT NO. 1130 ACCOUNT Employee Income Tax Payable ACCOUNT NO. 2130
POST. BALANCE POST. BALANCE
DATE ITEM DEBIT CREDIT DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT REF. DEBIT CREDIT
20-- 20--
Dec. 31 Balance ⻫ 146 9 8 40 Dec. 31 Balance ⻫ 7 5 7 00
ACCOUNT Allow. for Uncoll. Acc. ACCOUNT NO. 1135 ACCOUNT Social Security Tax Payable ACCOUNT NO. 2135
POST. BALANCE POST. BALANCE
DATE ITEM DEBIT CREDIT DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT REF. DEBIT CREDIT
20--
⻫
20--
Dec. 31 Balance 1 2 7 52 Dec. 31 Balance ⻫ 1 4 5 1 38
31 G15 1 2 4 5 00 1 3 7 2 52
ACCOUNT Medicare Tax Payable ACCOUNT NO. 2140
ACCOUNT Merchandise Inventory ACCOUNT NO. 1140
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
POST. BALANCE
20--
⻫
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT Dec. 31 Balance 3 9 9 42
20--
Dec. 31 Balance ⻫ 140 4 8 0 00
ACCOUNT Sales Tax Payable ACCOUNT NO. 2145
31 G15 15 8 4 0 00 124 6 4 0 00
POST. BALANCE
ACCOUNT Supplies—Office ACCOUNT NO. 1145 DATE ITEM
REF.
DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 31 Balance ⻫ 2 5 5 6 70
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
ACCOUNT Unemployment Tax Payable—Federal ACCOUNT NO. 2150
Dec. 31 Balance ⻫ 3 4 8 0 00
BALANCE
31 G15 2 7 3 0 00 7 5 0 00 DATE ITEM POST.
REF.
DEBIT CREDIT
DEBIT CREDIT
20--
ACCOUNT Supplies—Store ACCOUNT NO. 1150 Dec. 31 Balance ⻫ 3 4 60
DATE ITEM POST. DEBIT CREDIT
BALANCE ACCOUNT Unemployment Tax Payable—State ACCOUNT NO. 2155
REF. DEBIT CREDIT
20--
Dec. 31 Balance ⻫ 3 9 4 4 00 DATE ITEM POST. DEBIT CREDIT
BALANCE
REF. DEBIT CREDIT
31 G15 2 9 1 0 00 1 0 3 4 00 20--
Dec. 31 Balance ⻫ 2 3 3 55
ACCOUNT Prepaid Insurance ACCOUNT NO. 1160
ACCOUNT Health Insurance Premiums Payable ACCOUNT NO. 2160
POST. BALANCE
DATE ITEM DEBIT CREDIT POST. BALANCE
REF. DEBIT CREDIT DATE ITEM DEBIT CREDIT
20--
REF. DEBIT CREDIT
Dec. 31 Balance ⻫ 5 8 0 0 00 20--
Dec. 31 Balance ⻫ 1 0 0 8 00
31 G15 3 1 7 0 00 2 6 3 0 00
ACCOUNT U.S. Savings Bonds Payable ACCOUNT NO. 2165
ACCOUNT Office Equipment ACCOUNT NO. 1205
POST. BALANCE
DATE ITEM DEBIT CREDIT
POST. BALANCE REF. DEBIT CREDIT
DATE ITEM DEBIT CREDIT 20--
20--
REF. DEBIT CREDIT
Dec. 31 Balance ⻫ 6 0 00
Dec. 31 Balance ⻫ 3 5 8 6 4 50
ACCOUNT United Way Donations Payable ACCOUNT NO. 2170
ACCOUNT Acc. Depr.— Office Equipment ACCOUNT NO. 1210
POST. BALANCE
DATE ITEM DEBIT CREDIT
BALANCE REF. DEBIT CREDIT
POST.
DATE ITEM DEBIT CREDIT 20--
REF. DEBIT CREDIT Dec. 31 Balance ⻫ 7 0 00
20--
Dec. 31 Balance ⻫ 6 4 9 7 00
ACCOUNT Dividends Payable ACCOUNT NO. 2180
31 G15 6 5 4 0 00 13 0 3 7 00
BALANCE
ACCOUNT Store Equipment ACCOUNT NO. 1215 DATE ITEM POST.
REF.
DEBIT CREDIT
DEBIT CREDIT
20--
POST. BALANCE Dec. 31 Balance ⻫ 5 0 0 0 00
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Dec. 31 Balance ⻫ 4 0 8 4 9 50
ACCOUNT Acc. Depr.— Store Equipment ACCOUNT NO. 1220
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Dec. 31 Balance ⻫ 5 0 6 9 00
31 G15 5 2 5 0 00 10 3 1 9 00
Hobby Shack’s completed general ledger after adjusting Income statement accounts (revenue, cost, and expense
and closing entries are posted is shown above and on the accounts) have zero balances to begin the new fiscal period.
following page. [CONCEPT: Matching Expenses with Revenue]
Balance sheet accounts (asset, liability, and capital
accounts) have up-to-date balances to begin the new fiscal
period.
494 Chapter 16 Recording Adjusting and Closing Entries for a Corporation
COMPLETED GENERAL LEDGER AFTER ADJUSTING
AN D CLOSI NG E NTR I ES AR E POSTE D CONCLUDE D
ACCOUNT Captial Stock ACCOUNT NO. 3110 ACCOUNT Credit Card Fee Expense ACCOUNT NO. 6115
POST. BALANCE POST. BALANCE
DATE ITEM DEBIT CREDIT DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT REF. DEBIT CREDIT
20-- 20--
Dec. 31 Balance ⻫ 125 0 0 0 00 Dec. 31 Balance ⻫ 3 3 8 5 00
31 G16 3 3 8 5 00 ---------------------------- ----------------------------
ACCOUNT Retained Earnings ACCOUNT NO. 3120
POST. BALANCE ACCOUNT Depr. Exp.—Office Equipment ACCOUNT NO. 6120
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20-- BALANCE
⻫
POST.
Dec. 1 Balance 10 7 6 1 29 DATE ITEM
REF.
DEBIT CREDIT
DEBIT CREDIT
20--
31 G16 80 3 1 3 95 91 0 7 5 24 Dec. 31 Balance G15 6 5 4 0 00 6 5 4 0 00
31 G16 2 0 0 0 0 00 71 0 7 5 24 31 G16 6 5 4 0 00 ---------------------------- ----------------------------
ACCOUNT Dividends ACCOUNT NO. 3130 ACCOUNT Depr. Exp.—Store Equipment ACCOUNT NO. 6125
POST. BALANCE BALANCE
DATE ITEM DEBIT CREDIT DATE ITEM POST. DEBIT CREDIT
REF. DEBIT CREDIT REF. DEBIT CREDIT
20--
Dec. 31 Balance ⻫ 20 0 0 0 00 20--
Dec. 31 Balance G15 5 2 5 0 00 5 2 5 0 00
31 G16 20 0 0 0 00 ---------------------------- ---------------------------- 31 G16 5 2 5 0 00 ---------------------------- ----------------------------
ACCOUNT Income Summary ACCOUNT NO. 3140 ACCOUNT Insurance Expense ACCOUNT NO. 6130
POST. BALANCE BALANCE
DATE ITEM DEBIT CREDIT DATE ITEM POST. DEBIT CREDIT
REF. DEBIT CREDIT REF. DEBIT CREDIT
20--
Dec. 31 Balance G15 15 8 4 0 00 15 8 4 0 00 20--
Dec. 31 Balance G15 3 1 7 0 00 3 1 7 0 00
31 G16 500 2 5 3 10 484 4 1 3 10 31 G16 3 1 7 0 00 ---------------------------- ----------------------------
31 G16 404 0 9 9 15 80 3 1 3 95
ACCOUNT Miscellaneous Expense ACCOUNT NO. 6135
31 G16 80 3 1 3 95 ---------------------------- ----------------------------
POST. BALANCE
ACCOUNT Sales ACCOUNT NO. 4110 DATE ITEM
REF.
DEBIT CREDIT
DEBIT CREDIT
20--
POST. BALANCE Dec. 31 Balance ⻫ 2 5 6 4 90
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT 31 G16 2 5 6 4 90 ---------------------------- ----------------------------
20--
Dec. 31 Balance ⻫ 495 1 2 0 00
ACCOUNT Payroll Taxes Expense ACCOUNT NO. 6140
31 G16 495 1 2 0 00 ---------------------------- ----------------------------
POST. BALANCE
ACCOUNT Sales Discount ACCOUNT NO. 4120 DATE ITEM
REF.
DEBIT CREDIT
DEBIT CREDIT
20--
POST. BALANCE Dec. 31 Balance ⻫ 9 1 0 5 00
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT 31 G16 9 1 0 5 00 ---------------------------- ----------------------------
20--
Dec. 31 Balance ⻫ 2 5 8 48
ACCOUNT Rent Expense ACCOUNT NO. 6145
31 G16 2 5 8 48 ---------------------------- ----------------------------
POST. BALANCE
ACCOUNT Sales Returns and Allowances ACCOUNT NO. 4130 DATE ITEM
REF.
DEBIT CREDIT
DEBIT CREDIT
20--
POST. BALANCE Dec. 31 Balance ⻫ 18 0 0 0 00
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT 31 G16 18 0 0 0 00 ---------------------------- ----------------------------
20--
Dec. 31 Balance ⻫ 3 1 2 7 28
ACCOUNT Salary Expense ACCOUNT NO. 6150
31 G16 3 1 2 7 28 ---------------------------- ----------------------------
----------------------------
POST. BALANCE
ACCOUNT Purchases ACCOUNT NO. 5110 DATE ITEM
REF.
DEBIT CREDIT
DEBIT CREDIT
20--
POST. BALANCE Dec. 31 Balance ⻫ 104 5 2 5 00
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT 31 G16 104 5 2 5 00 ---------------------------- ----------------------------
20--
Dec. 31 Balance ⻫ 209 9 6 0 00
ACCOUNT Supplies Expense—Office ACCOUNT NO. 6155
31 G16 209 9 6 0 00 ---------------------------- ----------------------------
POST. BALANCE
ACCOUNT Purchases Discount ACCOUNT NO. 5120 DATE ITEM
REF.
DEBIT CREDIT
DEBIT CREDIT
20--
POST. BALANCE Dec. 31 Balance G15 2 7 3 0 00 2 7 3 0 00
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT 31 G16 2 7 3 0 00 ---------------------------- ----------------------------
20--
Dec. 31 Balance ⻫ 1 6 4 8 15
ACCOUNT Supplies Expense—Store ACCOUNT NO. 6160
31 G16 1 6 4 8 15 ---------------------------- ----------------------------
POST. BALANCE
ACCOUNT Purch. Returns and Allowances ACCOUNT NO. 5130 DATE ITEM
REF.
DEBIT CREDIT
DEBIT CREDIT
20--
POST. BALANCE Dec. 31 Balance G15 2 9 1 0 00 2 9 1 0 00
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT 31 G16 2 9 1 0 00 ---------------------------- ----------------------------
20--
Dec. 31 Balance ⻫ 3 4 8 4 95
ACCOUNT Uncollectible Accounts Expense ACCOUNT NO. 6165
31 G16 3 4 8 4 95 ---------------------------- ----------------------------
POST. BALANCE
ACCOUNT Advertising Expense ACCOUNT NO. 6105 DATE ITEM
REF.
DEBIT CREDIT
DEBIT CREDIT
20--
POST. BALANCE Dec. 31 Balance G15 1 2 4 5 00 1 2 4 5 00
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT 31 G16 1 2 4 5 00 ---------------------------- ----------------------------
20--
Dec. 31 Balance ⻫ 3 6 0 0 00
ACCOUNT Utilities Expense ACCOUNT NO. 6170
31 G16 3 6 0 0 00 ---------------------------- ----------------------------
POST. BALANCE
ACCOUNT Cash Short and Over ACCOUNT NO. 6110 DATE ITEM
REF.
DEBIT CREDIT
DEBIT CREDIT
20--
BALANCE
Dec. 31 Balance ⻫ 3 8 2 0 00
DATE ITEM POST. DEBIT CREDIT
REF. DEBIT CREDIT 31 G16 3 8 2 0 00 ---------------------------- ----------------------------
20--
Dec. 31 Balance ⻫ 1 9 25
ACCOUNT Federal Income Tax Expense ACCOUNT NO. 6205
31 G16 1 9 25 ---------------------------- ----------------------------
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Dec. 31 Balance ⻫ 1 8 0 0 0 00
31 G15 5 8 8 9 24 2 3 8 8 9 24
31 G16 2 3 8 8 9 24 ---------------------------- ----------------------------
Preparing a Post-Closing Trial Balance Lesson 16-3 495
P O S T C L O S I N G T R I A L B A L A N C E
1. Heading 1 Hobby Shack, Inc.
Post-Closing Trial Balance
December 31, 20--
ACCOUNT TITLE DEBIT CREDIT
2. Accounts That 2 Cash 29 0 8 0 28
Have Balances Petty Cash 3 0 0 00 3. Balances of
Accounts Receivable 14 6 9 8 40 Asset Accounts
Allow. for Uncoll. Accts. 1 3 7 2 52
Merchandise Inventory 124 6 4 0 00
Supplies—Office 3 7 5 0 00
Supplies—Store 1 0 3 4 00
Prepaid Insurance 2 6 3 0 00
Office Equipment 35 8 6 4 50
Acc. Depr.—Office Equipment 13 0 3 7 00
Store Equipment 40 8 4 9 50
Acc. Depr.—Store Equipment 10 3 1 9 00
Accounts Payable 11 5 8 3 03
Federal Income Tax Payable 5 8 8 9 24 4 4. Balances of
Employee Income Tax Payable 7 5 7 00 Contra Asset,
Social Security Tax Payable 1 4 5 1 38 Liability and
Medicare Tax Payable 3 9 9 42 Capital Accounts
Sales Tax Payable 2 5 5 6 70
Unemployment Tax Payable—Federal 3 4 60
Unemployment Tax Payable—State 2 3 3 55
Health Insurance Premiums Payable 1 0 0 8 00
U.S. Savings Bonds Payable 6 0 00
United Way Donations Payable 7 0 00
Dividends Payable 5 0 0 0 00
Capital Stock 125 0 0 0 00
5. Word Totals Retained Earnings 71 0 7 5 24
5 Totals 6 249 8 4 6 68 249 8 4 6 68
7 7. Double
Lines
6. Totals
A post-closing trial balance is prepared to prove the equal- balances on the post-closing trial balance agree with the
ity of debits and credits in the general ledger and to pre- balances on the balance sheet shown in Chapter 15.
pare the general ledger for the next fiscal period. Account
S T E P S PREPARING A POSTCLOSING TRIAL BALANCE
1 Write the post-closing trial balance heading on three lines.
2 List all general ledger accounts that have balances in the Account Title column.
3 Write the balance of each asset account in the Debit column. Write the balance
of each contra account in the Credit column.
4 Write the balance of each liability and capital account in the Credit column.
5 Write the word Totals on the next line below the last account title.
6 Total the columns and write the totals, $249,846.68, on the Totals line.
7 Verify equality. Rule double lines below both column totals.
496 Chapter 16 Recording Adjusting and Closing Entries for a Corporation
ACC O U N T I N G C YC L E F O R A M E R C H A N D I S I N G
B U S I N E S S O R G A N I Z E D A S A C O R P O R AT I O N
POST-CLOSING
TRIAL BALANCE
2
9 JOURNALS
ACCOUNTS PAYABLE LEDGER
NTS RECEIVABLE LEDGER
ACCOU
GENERAL LEDGER
3
3
GENERAL LEDGER
8 SCHEDULE OF
ACCOUNTS
PAYABLE
4
SCHEDULE OF
ACCOUNTS
JOURNAL RECEIVABLE
5
7 WORK SHEET
BALANCE
SHEET
STATEMENT OF INCOME
SHOCKHOLDERS’ STATEMENT
EQUITY
Service and merchandising businesses use a similar when subsidiary ledgers are used. Variations also occur in
accounting cycle. The accounting cycles are also similar preparing financial statements.
for a proprietorship and a corporation. Variations occur
S T E P S ACCOUNTING CYCLE FOR A MERCHANDISING BUSINESS
1 Source documents are checked for accuracy, and transactions are analyzed into debit and credit parts.
2 Transactions, from information on source documents, are recorded in journals.
3 Journal entries are posted to the accounts payable ledger, the accounts receivable ledger, and the general ledger.
4 Schedules of accounts payable and accounts receivable are prepared from the subsidiary ledgers.
5 A work sheet, including a trial balance, is prepared from the general ledger.
6 Financial statements are prepared from the work sheet.
7 Adjusting and closing entries are journalized from the work sheet.
8 Adjusting and closing entries are posted to the general ledger.
9 A post-closing trial balance of the general ledger is prepared.
Preparing a Post-Closing Trial Balance Lesson 16-3 497
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. Which accounts are listed on a post-closing trial balance?
2. What is the purpose of preparing a post-closing trial balance?
3. In what order should accounts be listed on a post-closing trial balance?
WORK TOGETHER 163
Preparing a post-closing trial balance
For the current year, the December 31 balances for Visual Art Center’s balance sheet accounts after adjusting and
closing entries have been posted are given below. Your instructor will guide you through the following example.
Account Balance
Cash $ 21,810.20
Petty Cash 350.00
Accounts Receivable 8,398.80
Merchandise Inventory 190,980.00
Supplies—Office 1,314.00
Supplies—Store 2,268.00
Prepaid Insurance 1,980.00
Accounts Payable 11,676.50
Sales Tax Payable 1,584.00
Capital Stock 100,000.00
Retained Earnings 113,840.50
1. Prepare a post-closing trial balance on the form provided in the Working Papers.
ON YOUR OWN 163
Preparing a post-closing trial balance
For the current year, the December 31 balances for Welding Supply’s balance sheet accounts after adjusting and
closing entries have been posted are given below. Work this problem independently.
Account Balance
Cash $ 26,485.00
Petty Cash 500.00
Accounts Receivable 15,487.00
Allow. for Uncoll. Accts. 1,457.00
Merchandise Inventory 134,152.00
Supplies 741.00
Prepaid Insurance 1,000.00
Equipment 25,487.00
Acc. Dep.—Equipment 12,450.00
Accounts Payable 13,154.00
Federal Income Tax Payable 2,489.00
Sales Tax Payable 1,548.00
Dividends Payable 5,000.00
Capital Stock 50,000.00
Retained Earnings 117,754.00
1. Prepare a post-closing trial balance on the form provided in the Working Papers.
498 Chapter 16 Recording Adjusting and Closing Entries for a Corporation
SUMMARY
After completing this chapter, you can: 3. Record closing entries for income statement
accounts.
1. Identify accounting concepts and practices
related to adjusting and closing entries for 4. Record closing entry for dividends.
a merchandising business organized as a
5. Prepare a post-closing trial balance.
corporation.
2. Record adjusting entries.
EXPLORE ACCOUNTING
Fr e i ght C ha r ge s
When a business purchases merchandise from responsible for the freight charges. However,
a vendor, ordinarily a third-party freight the freight company may require payment
company is used to deliver the merchan- in advance. Therefore, the seller pays the
dise from the seller (vendor) to the buyer freight company for the freight charges.
(purchasing business). As part of the terms Four different situations may occur:
of sale, the buyer and seller must agree on 1. FOB shipping point, seller pays freight
who is responsible for the freight charges. company
Those terms will be listed on the seller’s sales
2. FOB shipping point, buyer pays freight
invoice as either FOB shipping point or FOB
company
destination. FOB is an abbreviation for the phrase
3. FOB destination, seller pays freight company
“Free on Board.” FOB shipping point means that the buyer
is responsible for the freight charges. FOB destination 4. FOB destination, buyer pays freight company
means that the seller is responsible for the freight charges.
Shipping point is the location where the freight company Research: Investigate this issue by reviewing collegiate
receives the merchandise from the seller. Destination refers Principles of Accounting or Intermediate Accounting text-
to the receiving point of the buyer. books. Also, you might interview a merchandising busi-
The accounting entries for freight charges can be com- ness manager to determine how the business accounts
plicated when one business is responsible for the freight for freight charges. After completing your research, write
charges according to the terms of sale, but the other busi- a report on the issue of freight charges that would clearly
PHOTO: PHOTOGRAPHER’S CHOICE/GETTY IMAGES
ness pays the freight company. For example, terms of sale explain the correct accounting procedures to a new
may be FOB shipping point, meaning that the buyer is accounting department employee.
Recording Adjusting and Closing Entries for a Corporation Chapter 16 499
161 APPLICATION PROBLEM
Journalizing adjusting entries
A partial work sheet for Cellar Books, Inc., for the year ended December 31 is given in the Working Papers.
Instructions:
1. Record the appropriate adjusting entries on page 22 of the general journal provided in the Working Papers.
Use December 31 of the current year as the date.
162 APPLICATION PROBLEM
Journalizing closing entries
Use the partial work sheet for Cellar Books, Inc., given in Problem 16-1.
Instructions:
Prepare the following closing entries on page 23 of the general journal provided in the Working Papers.
1. Close the income statement accounts with credit balances.
2. Close the income statement accounts with debit balances.
3. Close Income Summary.
4. Close the dividend account.
163 APPLICATION PROBLEM
Preparing a post-closing trial balance
For the current year, the December 31 balances for the balance sheet accounts of Cellar Books, Inc., after
adjusting and closing entries have been posted are given below.
Account Balance Account Balance
Cash $ 16,485.00 Federal Income Tax Payable $ 3,660.23
Petty Cash 400.00 Employee Income Tax Payable 1,248.20
Accounts Receivable 41,483.15 Social Security Tax Payable 903.96
Allow. for Uncoll. Accts. 2,406.15 Medicare Tax Payable 211.41
Merchandise Inventory 246,598.05 Sales Tax Payable 2,458.25
Supplies—Office 329.62 Unemployment Tax Payable—Federal 28.00
Supplies—Store 326.81 Unemployment Tax Payable—State 189.00
Prepaid Insurance 2,000.00 Health Insurance Premiums Payable 400.00
Office Equipment 38,458.25 U.S. Savings Bonds Payable 25.00
Acc. Dep.—Office Equipment 23,960.00 United Way Donations Payable 40.00
Store Equipment 41,478.50 Dividends Payable 3,000.00
Acc. Dep.—Store Equipment 31,100.00 Capital Stock 60,000.00
Accounts Payable 19,948.80 Retained Earnings 237,980.38
Instructions:
1. Prepare a post-closing trial balance on the form provided in the Working Papers.
( Go Beyond the Book
)
For more information go to
www.C21accounting.com
500 Chapter 16 Recording Adjusting and Closing Entries for a Corporation
164 APPLICATION PROBLEM
Journalizing and posting adjusting and closing entries;
preparing a post-closing trial balance
Use the partial work sheet of Wilson Paint, Inc., for the year ended December 31 of the current year, on page
502. The general ledger accounts and their balances as well as forms for completing this problem are in
the Working Papers.
Instructions:
1. Journalize the adjusting entries using page 22 of a general journal.
2. Post the adjusting entries.
3. Journalize the closing entries using page 23 of a general journal.
4. Post the closing entries.
5. Prepare a post-closing trial balance.
165 MASTERY PROBLEM
Journalizing and posting adjusting and closing entries;
preparing a post-closing trial balance
Use the partial work sheet of Northern Lights for the year ended December 31 of the current year, on page
503. The general ledger accounts and their balances as well as forms for completing this problem are in the
Working Papers.
Instructions:
1. Journalize the adjusting entries using page 18 of a general journal.
2. Post the adjusting entries.
3. Journalize the closing entries using page 19 of a general journal.
4. Post the closing entries.
5. Prepare a post-closing trial balance.
Recording Adjusting and Closing Entries for a Corporation Chapter 16 501
Partial Work Sheet for Application Problem 16-4 (Wilson Paint, Inc.)
1 2 3 4 5 6
TRIAL BALANCE ADJUSTMENTS INCOME STATEMENT
ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
1 Cash 15 4 8 2 00
2 Petty Cash 5 0 0 00
3 Accounts Receivable 42 1 5 8 80
4 Allow. for Uncoll. Accts. 6 8 4 20 (e) 3 5 6 0 00
5 Merchandise Inventory 274 5 3 5 33 (d) 1 4 8 3 60
6 Supplies—Office 6 1 5 8 84 (a) 5 8 4 7 10
7 Supplies—Store 5 5 4 8 55 (b) 4 9 1 8 50
8 Prepaid Insurance 8 0 0 0 00 (c) 7 2 0 0 00
9 Office Equipment 22 1 5 8 66
10 Acc. Depr.—Office Equipment 4 8 4 8 00 (f) 3 5 8 0 00
11 Store Equipment 34 1 5 8 11
12 Acc. Depr.—Store Equipment 12 4 8 0 00 (g) 6 1 4 0 00
13 Accounts Payable 15 4 8 7 99
14 Federal Income Tax Payable (h) 1 3 5 6 14
15 Employee Income Tax Payable 1 1 2 5 58
16 Social Security Tax Payable 9 0 3 96
17 Medicare Tax Payable 2 1 1 41
18 Sales Tax Payable 2 3 4 5 99
19 Unemployment Tax Pay.—Federal 2 5 60
20 Unemployment Tax Pay.—State 1 7 2 80
21 Health Insurance Premiums Payable 3 5 0 00
22 U.S. Savings Bonds Payable 5 0 00
23 United Way Donations Payable 6 0 00
24 Dividends Payable 5 0 0 0 00
25 Capital Stock 125 0 0 0 00
26 Retained Earnings 136 8 4 3 68
27 Dividends 20 0 0 0 00
28 Income Summary (d) 1 4 8 3 60 1 4 8 3 60
29 Sales 724 1 8 3 99 724 1 8 3 99
30 Sales Discount 1 6 9 4 48 1 6 9 4 48
31 Sales Returns and Allowances 4 1 8 9 64 4 1 8 9 64
32 Purchases 331 8 0 5 18 331 8 0 5 18
33 Purchases Discount 3 4 1 8 47 3 4 1 8 47
34 Purch. Returns and Allowances 4 6 8 4 69 4 6 8 4 69
35 Advertising Expense 14 5 1 8 00 14 5 1 8 00
36 Cash Short and Over 4 60 4 60
37 Credit Card Fee Expense 12 1 8 0 00 12 1 8 0 00
38 Depr. Exp.—Office Equipment (f) 3 5 8 0 00 3 5 8 0 00
39 Depr. Exp.—Store Equipment (g) 6 1 4 0 00 6 1 4 0 00
40 Insurance Expense (c) 7 2 0 0 00 7 2 0 0 00
41 Miscellaneous Expense 6 4 8 1 00 6 4 8 1 00
42 Payroll Taxes Expense 14 1 8 4 60 14 1 8 4 60
43 Rent Expense 20 1 5 0 00 20 1 5 0 00
44 Salary Expense 168 4 8 3 60 168 4 8 3 60
45 Supplies Expense—Office (a) 5 8 4 7 10 5 8 4 7 10
46 Supplies Expense—Store (b) 4 9 1 8 50 4 9 1 8 50
47 Uncollectible Accounts Expense (e) 3 5 6 0 00 3 5 6 0 00
48 Utilities Expense 5 4 8 4 97 5 4 8 4 97
49 Federal Income Tax Expense 30 0 0 0 00 (h)1 3 5 6 14 313 5 6 14
50 1037 8 7 6 36 1037 8 7 6 36 34 0 8 5 34 34 0 8 5 34 641 7 7 7 81 733 7 7 0 75
51 Net Income after Federal Income Tax 91 9 9 2 94
52 733 7 7 0 75 7337 7 0 75
502 Chapter 16 Recording Adjusting and Closing Entries for a Corporation
Partial Work Sheet for Mastery Problem 16-5 (Northern Lights)
1 2 3 4 5 6
TRIAL BALANCE ADJUSTMENTS INCOME STATEMENT
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
1 Cash 5 1 2 4 12
2 Petty Cash 2 5 0 00
3 Accounts Receivable 14 8 4 3 30
4 Allow. for Uncoll. Accts. 1 2 4 55 (e) 2 1 2 0 00
5 Merchandise Inventory 154 3 1 8 22 (d) 3 4 8 8 14
6 Supplies—Office 3 4 1 5 58 (a) 3 1 4 8 66
7 Supplies—Store 6 1 8 4 56 (b) 5 3 4 8 84
8 Prepaid Insurance 7 0 0 0 00 (c) 6 0 0 0 00
9 Office Equipment 21 4 8 2 66
10 Acc. Depr.—Office Equipment 6 4 8 0 00 (f) 3 5 8 0 00
11 Store Equipment 40 4 8 1 66
12 Acc. Depr.—Store Equipment 18 4 8 0 00 (g) 6 1 4 0 00
13 Accounts Payable 8 4 1 8 36
14 Federal Income Tax Payable (h) 9 6 5 64
15 Employee Income Tax Payable 4 5 8 00
16 Social Security Tax Payable 5 2 8 24
17 Medicare Tax Payable 1 2 3 54
18 Sales Tax Payable 1 4 1 5 30
19 Unemployment Tax Pay.—Federal 4 00
20 Unemployment Tax Pay.—State 2 7 00
21 Health Insurance Premiums Payable 2 5 0 00
22 U.S. Savings Bonds Payable 4 0 00
23 United Way Donations Payable 6 0 00
24 Dividends Payable 4 0 0 0 00
25 Capital Stock 80 0 0 0 00
26 Retained Earnings 89 7 6 1 21
27 Dividends 16 0 0 0 00
28 Income Summary (d) 3 4 8 8 14 3 4 8 8 14
29 Sales 514 8 1 5 35 514 8 1 5 35
30 Sales Discount 2 1 5 4 94 2 1 5 4 94
31 Sales Returns and Allowances 6 1 8 4 74 6 1 8 4 74
32 Purchases 301 5 4 8 60 301 5 4 8 60
33 Purchases Discount 2 1 5 4 65 2 1 5 4 65
34 Purch. Returns and Allowances 2 8 8 9 41 2 8 8 9 41
35 Advertising Expense 2 4 9 1 95 2 4 9 1 95
36 Cash Short and Over 5 25 5 25
37 Credit Card Fee Expense 8 1 5 4 62 8 1 5 4 62
38 Depr. Exp.—Office Equipment (f) 3 5 8 0 00 3 5 8 0 00
39 Depr. Exp.—Store Equipment (g) 6 1 4 0 00 6 1 4 0 00
40 Insurance Expense (c) 6 0 0 0 00 6 0 0 0 00
41 Miscellaneous Expense 4 1 0 00 4 1 0 00
42 Payroll Taxes Expense 14 1 8 4 60 14 1 8 4 60
43 Rent Expense 15 4 0 0 00 15 4 0 0 00
44 Salary Expense 102 2 4 0 30 102 2 4 0 30
45 Supplies Expense—Office (a) 3 1 4 8 66 3 1 4 8 66
46 Supplies Expense—Store (b) 5 3 4 8 84 5 3 4 8 84
47 Uncollectible Accounts Expense (e) 2 1 2 0 00 2 1 2 0 00
48 Utilities Expense 4 1 5 4 51 4 1 5 4 51
49 Federal Income Tax Expense 4 0 0 0 00 (h) 9 6 5 64 4 9 6 5 64
50 730 0 2 9 61 730 0 2 9 61 30 7 9 1 28 30 7 9 1 28 491 7 2 0 79 519 8 5 9 41
51 Net Income after Federal Income Tax 28 1 3 8 62
52 519 8 5 9 41 519 8 5 9 41
Recording Adjusting and Closing Entries for a Corporation Chapter 16 503
166 CHALLENGE PROBLEM
Inventory auditing challenges
For most businesses, merchandise inventory is a major portion of the business’s assets. Therefore, reporting
an accurate amount on the financial statements is important to accurate financial reporting. Whether a mem-
ber of the business’s accounting staff or an outside auditor audits the merchandise inventory of the business,
determining an accurate count of the merchandise inventory is very important. Different types of merchan-
dise present different kinds of challenges for the auditor.
a. Actual count, common costs: A sports store has 50 tennis rackets, all the same model. The rackets should be
counted and multiplied times the cost per racket to determine the inventory value.
b. Actual count, unique costs: An automobile dealer has 60 new automobiles. Since each automobile probably
has a unique and significant cost, the cost of each automobile should be totaled to determine the inven-
tory value.
c. Sampling: A hardware store has many machine bolts. Since the value of each is low and there are many
items, a small quantity may be counted or weighed. Then estimate the total cost based on the sample size
or weight.
d. Measuring/calculating: An oil company stores crude oil in large tanks. The depth of the oil in the tank can
be measured with a measuring rod; then the circumference of the tank can be measured. The total volume
of crude oil can be calculated, then divided by the volume of one barrel of crude oil to determine the total
barrels. This number can then be multiplied by the cost per barrel of crude oil.
Instructions:
How would you determine the value of the following inventory items? Record your answers in the Working
Papers.
1. Grain in a grain elevator
2. Lumber in a lumber yard
3. Diamond rings in a jewelry store
4. Nails in a home improvement store
A P P L I E D CO M M U N I C AT I O N
Public speakers are judged by the ability of the audience to remember important points of their presentation. Effec-
tive public speakers use a variety of techniques to encourage the audience to listen to their message.
Instructions: Contact an instructor in your school or a local businessperson you have heard speak at school or com-
munity functions. Ask the person to describe the techniques used to help the audience listen and remember the
message. Write a short report summarizing these techniques. Be prepared to present your report orally in class.
CASE FOR CRITICAL THINKING
Antwan Jones, a new accounting clerk, has just experienced his first closing of a fiscal period. He questions why the
adjustments on the work sheet have to be recorded in a general journal. Antwan maintains that the adjustments can
simply be posted from the work sheet. As the senior accounting clerk, how would you respond to his statement?
504 Chapter 16 Recording Adjusting and Closing Entries for a Corporation
SCANS WORKPLACE COMPETENCY
Thinking Skills: Knowing how to learn
Concept: One way to learn new concepts is to build on knowledge already acquired. For example, you might learn
how to create your own filing system after using a filing system created by someone else.
Application: Describe how the financial statements and adjusting and closing entries for a corporation differ from
those of a proprietorship. Could a proprietorship prepare a statement of stockholders’ equity?
AUDITING FOR ERRORS
Editing an Accounting Policies Manual
The Sarbanes-Oxley Act requires publicly traded corporations to document and test their accounting systems. The
documentation for Mateen Supply Corporation contains the following section on the preparation of closing entries.
Identify the errors in this section of Mateen’s accounting systems documentation.
Closing Entries
After the worksheet has been completed and verified, journal entries are
recorded to close temporary accounts. Three entries are recorded:
1. Sales and contra purchases accounts are debited for their year-end
balances. The total of the accounts is credited to Income Summary.
2. Purchasing and expense accounts are credited for their year-balances.
The total of the accounts is debited to Income Summary.
3. If the company had a net income, record a debit to Income Summary
for the difference of the closing entries recorded in steps 1 and 2.
If the company had a net loss, record a credit to Income Summary for
this difference. In either case, record the same amount to Retained
Earnings to balance the entry.
A N A LY Z I N G B E S T B U Y ’S F I N A N C I A L S TAT E M E N T S
Generally accepted accounting principles require several forms of earnings per share to be reported. Earnings per
share from the normal operations of the business is presented first. The effect on earnings per share from unusual,
nonrecurring events is added or deducted. The net of these items is the earnings per share that is typically reported
in the financial news.
Instructions: Use Best Buy’s Consolidated Statements of Earnings on page B-6 in Appendix B to answer the follow-
ing questions.
1. What is the label given to the net earnings per share amount, and what are its components?
2. What earnings per share amount would be reported in the financial news for the most recent fiscal year?
Recording Adjusting and Closing Entries for a Corporation Chapter 16 505
Accounting
SOFTWARE
G R O U P I N G F I N A N C I A L S TAT E M E N T R E P O R T S
Peachtree has a feature that allows you to create and print a group of reports. Creating a group is as easy as select-
ing each report and giving the group a name. The group appears in the report menu along with the other reports
you have become accustomed to printing.
PEACHTREE APPLICATION PROBLEM 164
1. Open (Restore) file 16-4AP.ptb.
2. Journalize and post the adjusting entries.
3. Print the income statement, and compare the amounts with the work sheet.
4. Journalize and post the closing entries.
5. Print the December 31 general journal, the general ledger, and the post-closing trial balance.
PEACHTREE MASTERY PROBLEM 165
1. Open (Restore) file 16-5MP.ptb.
2. Journalize and post the adjusting entries.
3. Print the income statement, and compare the amounts with the work sheet.
4. Journalize and post the closing entries.
5. Print the general ledger and post-closing trial balance.
G R O U P I N G F I N A N C I A L S TAT E M E N T R E P O R T S
One way QuickBooks supports efficiency is by allowing common tasks to be completed quickly.
QuickBooks can be programmed to memorize the format of any financial statement and also to group financial
statements together. When it is time to prepare financial statements, the user can print the entire group with a
minimum of commands.
QUICKBOOKS APPLICATION PROBLEM 164
1. Open the Wilson Paint Inc. file.
2. Journalize the adjusting entries using the Make General Journal Entries window.
3. Print a Profit & Loss Standard report using January 1 and December 31 for the dates.
4. To create a year-end balance sheet in QuickBooks, it is necessary to make a closing entry to close the equity
account Dividends to Retained Earnings. Print a Trial Balance report to use for the closing transaction.
5. Use the General Journal Entries window to journalize the closing entry dated December 31.
6. Print a Journal report, a Balance Sheet Standard report, and a Trial Balance report.
7. As an optional activity, group the financial statement reports and print them. Then, record the closing entries
and print a post-closing trial balance.
QUICKBOOKS MASTERY PROBLEM 165
1. Open the Northern Lights file.
2. Journalize the adjusting entries using the Make General Journal Entries window.
3. Print a Profit & Loss Standard report using January 1 and December 31 for the dates.
4. Journalize the closing entry for Dividends using the Make General Journal Entries window.
5. Print a Journal report, a Balance Sheet Standards report, and a Trial Balance report. The trial balance will show
only balance sheet accounts so you will need to edit the Report Title field to read “Post-Closing Trial Balance.”
Edit the Subtitle field to read “As of December 31.”
506 Chapter 16 Recording Adjusting and Closing Entries for a Corporation
F O R M AT T I N G G R I D L I N E S O N R E P O R T S
What do a football field and journal paper have in common? Each has many lines to help provide structure to its
activity. Lines on the football field guide players where to run and mark the end zones. Journal paper lines guide
accountants where to write account information and related amounts. These lines also help readers accurately
locate information on a journal.
Spreadsheets also display row and column lines, called gridlines, to provide you with this structure as you enter
text and numbers in a template. Unfortunately, these lines do not automatically appear on printed output.
Lines can be added to an electronic spreadsheet using two methods. A single command will print all gridlines.
This quick solution may be overwhelming as the lines surrounding every cell will be printed. In contrast, the Borders
tool allows you to insert a variety of line styles exactly where you want them–you decide what lines will provide
readers with the structure they need.
EXCEL APPLICATION PROBLEM 163
Open the F16-3 Excel data file. Follow the step-by-step instructions in the Instructions work sheet. Use the Borders
tool to insert horizontal and vertical lines to provide structure to the trial balance.
ADJUSTING ENTRIES, CLOSING ENTRIES,
AND POSTCLOSING TRIAL BALANCE
Adjusting Entries
At the end of a fiscal period, many accounts need to be adjusted to recognize changes and expenses of the fiscal
period. Adjusting entries are recorded in the general journal. The reference used for adjusting entries is Adj.Ent.
After all adjusting entries have been entered and posted, the file should be saved with the letters BC in the filename.
BC stands for Before Closing. Once closing entries are posted, it is very difficult to correct any errors that may have
been made during the fiscal period. Therefore, having a file saved before the closing entries ensures that a before-
closing file exists if corrections are necessary.
Closing Entries
In an automated accounting system, closing entries are generated and posted by the software. Automated Account-
ing automatically prepares all closing entries with the Generate Closing Journal Entries option from the Options
menu. Once generated, the journal entries should be examined for accuracy and then posted.
Post-Closing Trial Balance
After closing entries are journalized and posted, a general ledger trial balance report is selected from the Reports
menu. Because the closing entries have been posted, this trial balance is a post-closing trial balance.
AUTOMATED ACCOUNTING APPLICATION PROBLEM 164
Open file F16-4.AA8. Display the problem instructions and complete the problem.
AUTOMATED ACCOUNTING MASTERY PROBLEM 165
Open file F16-5.AA8. Display the problem instructions and complete the problem.
Recording Adjusting and Closing Entries for a Corporation Chapter 16 507
REINFORCEMENT
Activity 2—Part B
An Accounting Cycle for a Corporation:
End-of-Fiscal-Period Work
The ledgers used in Reinforcement Activity 2—Part A are needed to complete Reinforcement Activity 2—Part B.
Reinforcement Activity 2—Part B includes those accounting activities needed to complete the accounting cycle of Medical
Services Company (MSC).
END-OF-FISCAL-PERIOD WORK
INSTRUCTIONS: 15. Prepare an income statement. Figure and record
the following component percentages of net sales:
12. Prepare a trial balance on a work sheet. Use Decem-
(a) cost of merchandise sold, (b) gross profit on sales,
ber 31 of the current year as the date.
(c) total expenses, and (d) net income or loss before
13. Complete the work sheet using the following adjust- federal income tax. Round percentage calculations
ment information: to the nearest 0.1%.
a. Office supplies inventory $ 476.60 16. Prepare a statement of stockholders’ equity. The
b. Store supplies inventory 817.00 company had 9,500 shares of $1.00 par value stock
c. Merchandise inventory 33,278.01 outstanding on January 1. The company issued an
additional 500 shares during the year.
d. Uncollectible accounts are 2.0%
of credit sales of $65,000.00 17. Prepare a balance sheet in report form.
e. Value of prepaid insurance $ 500.00 18. Calculate the earnings per share and price-earnings
ratio. The current market price of the stock is $87.50.
f. Estimate of office equipment
depreciation 3,520.00 19. Use page 13 of a general journal. Journalize and post
the adjusting entries.
g. Estimate of store equipment
depreciation 2,240.00 20. Use page 14 of a general journal. Journalize and post
the closing entries.
14. Using the tax table shown in Chapter 14, calculate
federal income tax expense and record the income 21. Prepare a post-closing trial balance.
tax adjustment on the work sheet.
508 Reinforcement Activity 2—Part B An Accounting Cycle for a Corporation: End-of-Fiscal-Period Work
This simulation covers the realistic transactions completed by Unique
Global Imports. The business sells imported goods, including fabrics,
clothing, furniture, and decorative accessories.
Transactions are recorded in special journals similar to the ones used
by Hobby Shack, Inc., in this accounting cycle. The activities included in
the accounting cycle for Unique Global Imports are listed below.
This real-life business simulation comes with source documents. It
is available in manual and automated versions. The automated version is
used with Automated Accounting software.
The following activities are included in the Unique Global Imports simulation:
1 Recording transactions in 5 Preparing schedules of 10 Journalizing and posting
special journals from source accounts receivable and closing entries.
documents. accounts payable from
subsidiary ledgers. 11 Preparing a post-closing
2 Posting items to be posted trial balance.
individually to a general 6 Preparing a trial balance on
ledger and subsidiary ledgers. a work sheet. 12 Preparing a post-closing
trial balance.
3 Recording a payroll in a 7 Planning adjustments and
payroll register. Updating the completing a work sheet. 13 Completing Think Like
employee earnings records. an Accountant Financial
Recording payroll journal 8 Preparing financial statements. Analysis.
entries.
9 Journalizing and posting
4 Posting column totals to a adjusting entries.
general ledger.
An Accounting Cycle for a Corporation: End-of-Fiscal-Period Work Reinforcement Activity 2—Part B 509
PART
3 Accounting for a
Merchandising Business
Organized as a Corporation—
Adjustments and Valuation
Chapter 17 Accounting for Uncollectible
Accounts Receivable
THE BUSINESS—
Chapter 18 Accounting for Plant Assets and
Depreciation RESTAURANT SUPPLY CO.
Chapter 19 Accounting for Inventory Restaurant Supply Co., the business described
in Part 3, is a retail merchandising business
Chapter 20 Accounting for Notes and Interest organized as a corporation. The business
purchases and sells a wide variety of cooking
Chapter 21 Accounting for Accrued Revenue and restaurant supplies and equipment. Res-
and Expenses taurant Supply purchases its merchandise
directly from the manufacturers and distrib-
Chapter 22 End-of-Fiscal-Period Work for
a Corporation utors. Restaurant Supply rents the building
in which the business is located.
PHOTOS: IMAGEMORE, PHOTODISC, STOCKBYTE (ALL GETTY IMAGES)
C H A P T E R 1 7 C H A P T E R 1 8 C H A P T E R 1 9
RESTAURANT SUPPLY CO. CHART OF ACCOUNTS
GENERAL LEDGER 2135 Medicare Tax Payable 6125 Depreciation Expense—
Balance Sheet Accounts 2140 Sales Tax Payable Store Equipment
1000 ASSETS 2145 Unemployment Tax Payable— 6130 Insurance Expense
1100 Current Assets Federal 6135 Miscellaneous Expense
1105 Cash 2150 Unemployment Tax Payable— 6140 Payroll Taxes Expense
1110 Petty Cash State 6145 Rent Expense
1115 Notes Receivable 2155 Health Insurance Premiums 6150 Repair Expense
1120 Interest Receivable Payable 6155 Salary Expense
1125 Accounts Receivable 2160 Dividends Payable 6160 Supplies Expense
1130 Allowance for Uncollectible 3000 STOCKHOLDERS’ EQUITY 6165 Uncollectible Accounts Expense
Accounts 3105 Capital Stock 6170 Utilities Expense
1135 Merchandise Inventory 3110 Retained Earnings 7000 OTHER REVENUE
1140 Supplies 3115 Dividends 7105 Gain on Plant Assets
1145 Prepaid Insurance 3120 Income Summary 7110 Interest Income
1200 Plant Assets Income Statement Accounts 8000 OTHER EXPENSES
1205 Office Equipment 4000 OPERATING REVENUE 8105 Interest Expense
1210 Accumulated Depreciation— 4105 Sales 8110 Loss on Plant Assets
Office Equipment 4110 Sales Discount 9000 INCOME TAX EXPENSE
1215 Store Equipment 4115 Sales Returns and Allowances 9105 Federal Income Tax Expense
1220 Accumulated Depreciation— 5000 COST OF MERCHANDISE
Store Equipment 5105 Purchases The chart of accounts for Restaurant
2000 LIABILITIES 5110 Purchases Discount Supply Co. is illustrated here for ready
2100 Current Liabilities 5115 Purchases Returns and Allowances reference as you study Part 3 of this
2105 Notes Payable 6000 OPERATING EXPENSES textbook.
2110 Interest Payable 6105 Advertising Expense
2115 Accounts Payable 6110 Cash Short and Over
2120 Employee Income Tax Payable 6115 Credit Card Fee Expense
2125 Federal Income Tax Payable 6120 Depreciation Expense—Office
2130 Social Security Tax Payable Equipment
PHOTOS: PHOTODISC, STOCKBYTE, TETRA IMAGES (ALL GETTY IMAGES)
C H A P T E R 2 0 C H A P T E R 2 1 C H A P T E R 2 2
511
IMAGEMORE/GETTY IMAGES
C H A P T E R 1 7 Accounting for
Uncollectible Accounts
Receivable
O B J E C T I V E S
After studying Chapter 17, you will be able to: 3. Calculate, journalize, and post estimated
uncollectible accounts expense.
1. Define accounting terms related to uncollectible
accounts. 4. Journalize and post entries related to writing off
and collecting uncollectible accounts receivable.
2. Identify accounting concepts and practices
related to uncollectible accounts.
K E Y T E R M S
• writing off an account
( Point Your Browser
www.C21accounting.com
)
512
ACCOUNTING IN THE REAL WORLD
Performance Food Group
Dining Out with Performance Food Group
You can’t drive down the road and find a restaurant by its name. But chances
are you have eaten recently at a restaurant that purchased its food from Per-
formance Food Group (PFG). The company is one of the leading food dis-
tributors in the United States.
PFG purchases food products from manufacturers and produces its own
line of ready-to-eat products. The company delivers these products to more
DIGITAL VISION/GETTY IMAGES
than 47,000 customers that include restaurants, schools, cafeterias, health-
care facilities, and grocery stores. To provide superior service, PFG sells to
some customers on account. INTERNET
Unfortunately, the food service busi- ACTIVITY
ness can be challenging, even for
entrepreneurs with experience in EDGAR—Part 3
the industry. As a result, some Go to the homepage for
of PFG’s customers cannot EDGAR (www.sec.gov/edgar/
pay their accounts. PFG is searchedgar/webusers.htm).
unable to collect approxi- Click on “Companies & Other
mately 0.1% of its sales, Filers.” Search the EDGAR data-
or approximately $5.5 base for the most recent 10K
million per year. report from Dell, Inc. (Enter
“Dell Inc” for company name,
©COURTESY OF PERFORMANCE FOOD GROUP
click on “Find Companies,” and
then scroll down and click on
“10-K” in the first column.) The
10-K form is very similar to and
contains much of the same
information as the annual
report.
Instructions
1. Find the balance sheet and
Critical Thinking record the net amount of
Accounts Receivable.
1. Using the information provided, estimate PFG’s annual sales.
2. Find the “Notes” to the
2. What account is used to record the period estimate of future uncollect-
financial statements and
ible accounts? What is the classification of this account?
record the amount of
Source: www.pfgc.com “gross accounts receiv-
able” and the amount of
“allowance for doubtful
accounts.”
513
L E S S O N
Uncollectible Accounts
17-1
A business sells on account to encourage sales. Customers A credit customer’s financial condition may decline
can buy merchandise even though they will not have the over time. Business customers may experience increased
cash needed to pay the account until days or months later. competition or a catastrophic event, such as a weather
A business that sells on account expects full payment disaster. Individual customers may lose their employment.
within the terms of sale. Before selling to a customer on Regardless of the reason, creditworthy customers may later
account, management should perform a thorough credit be unable to pay their accounts. Accounts receivable that
check on a customer. cannot be collected are known as uncollectible accounts.
T H E B U S I N E S S R E S TA U R A N T S U P P LY C O .
Miguel Lopez, Keisha Tomkins, and Joseph Weisbaum The chart of accounts on page 511 is similar to that of
worked as chefs at restaurants in a trendy part of the city. the corporation in Part 2. However, Restaurant Supply
They all had dreams of owning their own businesses, but has two new sections in the chart of accounts: Other Rev-
they tired of the long hours involved in restaurant opera- enue and Other Expenses. The accounts in these sections
tions. Since they had experience using cooking tools and are income statement accounts that are used for interest
equipment, they explored the restaurant supply business they pay on loans or earn on extended credit terms for
and decided to form a corporation to sell to restaurants. customers. They also have accounts for recording gains
Because of widespread consumer interest in cooking, they and losses on plant assets they sell, trade, or discard.
also make cash and credit card sales to individual cus-
tomers. They sell on account to restaurants and catering
operations.
CHARACTER COUNTS
Li fe l o n g L e a r n i n g
When you are ill, you expect your doc- organizations require their members to complete a speci-
tor to know the latest methods and fied number of continuing education credits annually. For
medicines to restore your health. example, most certified public accountants must com-
Businesses should expect noth- plete 40 hours of continuing education every year. This
ing less from their accountants. education may be in the form of self-study courses, col-
Therefore, accountants must con- lege courses, seminars, or conferences.
stantly improve their knowledge
PHOTO: DIGITAL VISION/GETTY IMAGES
and skills to provide their clients, Instructions
employees, and the public with Access the code of conduct from the American Institute
the highest level of professional of Certified Public Accountants (AICPA), the Institute
service. of Internal Auditors (IIA), the Institute of Management
The code of conduct for every Accountants (IMA), and the Association of Certified Fraud
major accounting organization includes Examiners (ACFE). Identify what each code states about
some reference to lifelong learning. Many lifelong learning.
514 Chapter 17 Accounting for Uncollectible Accounts Receivable
E S T I M AT I N G A N D R E C O R D I N G
UNCOLLEC TIBLE ACCOUNTS EXPE NSE
Allowing customers to buy now and pay later is an effec- the year is $1,287,330.00. Thus, Restaurant Supply esti-
tive method for increasing sales. Unfortunately, some cus- mates that $12,873.30 of the current fiscal period’s sales
tomers may later become unable or unwilling to pay their on account will eventually be uncollectible.
account. These uncollectible accounts must be recorded
as an expense.
The allowance method of recording losses from uncol- Estimated
Total Sales
lectible accounts attempts to match the expense of uncol- ⴛ Percentage ⴝ Uncollectible
on Account Accounts Expense
lectible accounts in the same fiscal year the related sales
are recorded. At the end of the fiscal year, the business $1,287,330.00 ⫻ 1.0% ⫽ $12,873.30
does not know which specific accounts will become
uncollectible. Therefore, an estimate of the uncollectible
accounts is recorded to the contra asset account Allow-
ance for Uncollectible Accounts and the expense account F O R YO U R I N F O R M AT I O N
Uncollectible Accounts Expense. [CONCEPT: Matching
F Y I
Expenses with Revenue]
Restaurant Supply estimates uncollectible accounts A credit check might involve an
expense by calculating a percentage of total sales on analysis of the customer’s financial
statements, a review of reports
account. A review of Restaurant Supply’s previous experi-
from national credit agencies, and
ence in collecting sales on account shows that actual uncol- interviews with other businesses that
lectible accounts expense has been about 1.0% of total sell to the customer on account.
sales on account. The company’s total sales on account for
BUSINESS STRUCTURES
D i s s o l v i n g a C or po r a t i o n
Because the corporation is the most complex form of busi- ceeds are used to pay creditors. The pro-
ness, dissolution involves many legal procedures. Thus, cedure for selling noncash assets is
the board of directors should seek the legal advice of an similar to that for proprietorships.
attorney. However, because a corpora-
In some states, the Secretary of State may take action tion’s earnings are taxable,
to dissolve a corporation if one or more of the three fol- the gains and losses on the
lowing conditions exists: (1) The corporation is 60 days late sales of noncash assets
in paying franchise taxes. (2) The corporation does not file are subject to taxation.
its annual report within 60 days of the due date. (3) The Therefore, additional tax
corporation does not have a registered agent or office for reports for the corpora-
60 days or more. tion must be filed.
PHOTO: PHOTODISC/GETTY IMAGES
Judicial proceedings may be brought against a corpora-
tion if the corporation acts beyond the powers it has been Critical Thinking
granted or engages in illegal activity. These proceedings What do you think are some
may force the corporation to give up its charter. circumstances that might
Once a corporation is dissolved, the liquidation process lead a corporation to dissolve
can begin. Noncash assets usually are sold, and the pro- voluntarily?
Uncollectible Accounts Lesson 17-1 515
A N A LY Z I N G A N D J O U R N A L I Z I N G A N A D J U S T M E N T
FOR UNCOLLEC TIBLE ACCOUNTS EXPE NSE
2. Enter and label 1. Enter and label
debit amount. credit amount.
1 2 3 4
TRIAL BALANCE ADJUSTMENTS
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT
(b)
6 Allowance for Uncollectible Accounts 2 8 0 00 12 8 7 3 30 1
(b)
48 Uncollectible Accounts Expense 2 12 8 7 3 30
3. Record
adjusting
entry.
3 3
GENERAL JOURNAL PAGE 15
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
1 Adjusting Entries 1
4 31 Uncollectible Accounts Expense 12 8 7 3 30 4
5 Allow. for Uncollectible Accts. 12 8 7 3 30 5
The percentage of total sales on account method of esti- ous balance. This new balance of the allowance account
mating uncollectible accounts expense assumes that is the estimated amount of accounts receivable that will
a portion of every sale on account dollar will become eventually become uncollectible.
uncollectible. Restaurant Supply has estimated that 1%
of its $1,287,330.00 sales on account, or $12,873.30, will
eventually become uncollectible.
Uncollectible Accounts Expense
At the end of a fiscal period, an adjustment for uncol-
lectible accounts expense is planned on a work sheet. The Dec. 31 Adj. 12,873.30
Allowance for Uncollectible Accounts balance in the Trial
Allowance for Uncollectible Accounts
Balance Credit column, $280.00, is the allowance esti-
mate from the previous fiscal period that has not yet been Bal. 280.00
identified as uncollectible. Dec. 31 Adj. 12,873.30
(New Bal. 13,153.30)
When the allowance account has a previous credit bal-
ance, the amount of the adjustment is added to the previ-
ANALYZING AND JOURNALIZING AN ADJUSTMENT
S T E P S
FOR UNCOLLECTIBLE ACCOUNTS EXPENSE
1 Enter the estimated uncollectible amount, $12,873.30, in the Adjustments Credit column on the Allowance for
Uncollectible Accounts line of the work sheet. Label the adjustment (b) with a small letter in parentheses.
2 Enter the same amount, $12,873.30, in the Adjustments Debit column on the Uncollectible Accounts Expense line
of the work sheet. Label the adjustment using the same letter, (b).
3 Use the debit and credit amounts on the work sheet to record an adjusting entry in a general journal.
516 Chapter 17 Accounting for Uncollectible Accounts Receivable
POSTING AN ADJUSTING ENTRY FOR
UNCOLLEC TIBLE ACCOUNTS EXPE NSE
GENERAL JOURNAL PAGE 15
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
1 Adjusting Entries 1
4 31 Uncollectible Accounts Expense 6165 12 8 7 3 30 4
5 Allow. for Uncollectible Accts. 1130 12 8 7 3 30 5
ACCOUNT Accounts Receivable ACCOUNT NO. 1125
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
Dec. 31 S49 84 4 5 1 25 142 6 2 4 50
31 CR54 64 2 8 4 20 78 3 4 0 30
2. Credit
1. Debit 1
2
ACCOUNT Allowance for Uncollectible Accounts ACCOUNT NO. 1130
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
Dec. 22 G14 8 1 0 00 2 8 0 00
31 G15 12 8 7 3 30 13 1 5 3 30
ACCOUNT Uncollectible Accounts Expense ACCOUNT NO. 6165
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Dec. 31 G15 12 8 7 3 30 12 8 7 3 30
The adjustment for uncollectible accounts expense planned The adjusting entry does not affect the balance of
on the work sheet is recorded as an adjusting entry in the Accounts Receivable. Accounts Receivable has a debit bal-
general journal. The adjusting entry is then posted to the ance of $78,340.30 before and after the adjusting entry is
general ledger. posted. The book value of accounts receivable on Decem-
The adjusting entry affects two of the three accounts ber 31, $65,187.00, is an estimate of the amount of the
related to accounts receivable. After the adjustment, December 31 balance of accounts receivable Restaurant
Allowance for Uncollectible Accounts has a credit bal- Supply expects to collect during the next fiscal year.
ance of $13,153.30. The balance of this contra account
is an estimate of outstanding accounts receivable that will
become uncollectible during the next fiscal period. Balance of
Book Value of
The debit balance of Uncollectible Accounts Expense, Allowance for
Accounts Accounts
$12,873.30, is the estimated uncollectible accounts result- ⴚ Uncollectible ⴝ
Receivable Receivable
ing from sales on account during the current fiscal year. Accounts
$78,340.30 ⫺ $13,153.30 ⫽ $65,187.00
Uncollectible Accounts Lesson 17-1 517
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. How are uncollectible accounts recorded?
2. Explain why an adjustment for uncollectible accounts is an application
of the Matching Expenses with Revenue concept.
3. How is the account Accounts Receivable affected by the estimate of
uncollectible accounts?
WORK TOGETHER 171
Estimating and journalizing entries for uncollectible accounts expense
A general journal, work sheet, and selected general ledger accounts for Velson Company are given in the Working
Papers. Your instructor will guide you through the following examples.
1. Velson Company estimates uncollectible accounts expense as 0.3% of its total sales on account. During the
current year, Velson had credit sales of $2,152,000.00. The balance in Allowance for Uncollectible Accounts before
adjustment is an $853.00 credit. Record the December 31 uncollectible accounts expense adjustment on a work
sheet. Label the adjustment (e).
2. Journalize the adjusting entry on page 13 of a general journal.
3. Post the adjusting entry to the general ledger.
ON YOUR OWN 171
Estimating and journalizing entries for uncollectible accounts expense
A general journal, work sheet, and selected general ledger accounts for McCaffery Industries are given in the
Working Papers. Work this problem independently.
1. McCaffery Industries estimates uncollectible accounts expense as 0.4% of its total sales on account. During the
current year, McCaffery had credit sales of $1,548,050.00. The balance in Allowance for Uncollectible Accounts
before adjustment is a $216.00 credit. Record the December 31 uncollectible accounts expense adjustment on
a work sheet. Label the adjustment (e).
2. Journalize the adjusting entry on page 26 of a general journal.
3. Post the adjusting entry to the general ledger.
518 Chapter 17 Accounting for Uncollectible Accounts Receivable
L E S S O N Writing Off and Collecting
Uncollectible Accounts
17-2 Receivable
JOURNALIZING WRITING OFF AN
U N CO L L E C T I B L E ACCO U N T R E C E I VA B L E
1. Debit
GENERAL JOURNAL PAGE 18
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
8 4 Allow. for Uncollectible Accts. M3 1 1 6 2 1 00 8
9 Accts. Rec./Metro Food Court 1 6 2 1 00 9
10 10
2 2
2. Credit and Customer‘s Name
When a customer account is determined to be uncollect- is true because the same amount is deducted from both
ible, a journal entry is made to cancel the uncollectible the accounts receivable and the allowance accounts.
account. This entry cancels the uncollectible amount from
the general ledger account Accounts Receivable as well as
the customer account in the accounts receivable subsid- GENERAL LEDGER
iary ledger. Canceling the balance of a customer account Allowance for Uncollectible Accounts
because the customer does not pay is called writing off
Jan. 4 1,621.00 Bal. 13,153.30
an account. (New Bal. 11,532.30)
After months of unsuccessful collection efforts, Restau-
rant Supply decides that the past-due account of Metro Accounts Receivable
Food Court is uncollectible.
Bal. 78,340.30 Jan. 4 1,621.00
(New Bal. 76,719.30)
January 4. Wrote off Metro Food Court’s ACCOUNTS RECEIVABLE LEDGER
past-due account as uncollectible, Metro Food Court
$1,621.00. Memorandum No. 3. Bal. 1,621.00 Jan. 4 1,621.00
(New Bal. zero)
Because the account of Metro Food Court has been
determined to be uncollectible, the $1,621.00 is now an
actual uncollectible amount. Therefore, the amount of
the uncollectible account is deducted from the allowance Before After
account. Account Account
Accounts Receivable is credited to reduce the balance Written Off Written Off
due from customers. Metro Food Court’s account is also Accounts Receivable $ 78,340.30 $76,719.30
credited to cancel the debit balance of the account. Metro Allowance for
Food Court’s account is written off. Uncollectible Accounts –13,153.30 –11,532.30
The book value of accounts receivable is the same both Book Value $ 65,187.00 $ 65,187.00
before and after writing off an uncollectible account. This
Writing Off and Collecting Uncollectible Accounts Receivable Lesson 17-2 519
POSTING AN ENTRY TO WRITE OFF AN
U N CO L L E C T I B L E ACCO U N T R E C E I VA B L E
GENERAL JOURNAL PAGE 18
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
8 4 Allow. for Uncollectible Accts. M3 1130 1 6 2 1 00 8
1125
9 Accts. Rec./Metro Food Court 180 1 6 2 1 00 9
10 10
ACCOUNT Accounts Receivable ACCOUNT NO. 1125
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
31 CR62 64 2 8 4 20 78 3 4 0 30
20X2
Jan. 4 G18 2 1 6 2 1 00 76 7 1 9 30
2. Post credit
amount to
general ACCOUNT Allowance for Uncollectible Accounts ACCOUNT NO. 1130
ledger.
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
31 G15 12 8 7 3 30 13 1 5 3 30
20X2
Jan. 4 G18 1 6 2 1 00 11 5 3 2 30
1
1. Post debit
amount to
general ledger. CUSTOMER Metro Food Court CUSTOMER NO. 180
DATE ITEM POST. DEBIT CREDIT DEBIT
REF. BALANCE
20X1
May 21 S13 1 6 2 1 00 1 6 2 1 00
20X2 3. Post credit
Jan. 4 Written off G18 1 6 2 1 00 ———
amount to
4. Write Written off in 4 3 customer
the customer account. account.
The journal entry to write off an uncollectible account customer account. The words Written off are written in
affects the two general ledger accounts Accounts Receiv- the Item column of the customer account to show the full
able and Allowance for Uncollectible Accounts, and the credit history for the customer.
POSTING AN ENTRY TO WRITE OFF AN UNCOLLECTIBLE
S T E P S
ACCOUNT RECEIVABLE
1 Post the debit, $1,621.00, to Allowance for Uncollectible Accounts in the general ledger.
2 Post the credit, $1,621.00, to Accounts Receivable in the general ledger.
3 Post the credit, $1,621.00, to the customer account, Metro Food Court, in the accounts receivable ledger.
4 Write the words Written off in the Item column of the customer account.
520 Chapter 17 Accounting for Uncollectible Accounts Receivable
R E O P E N I N G A N A C C O U N T P R E V I O U S LY W R I T T E N O F F
1. Debit and Customer‘s Name
GENERAL JOURNAL PAGE 18
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
1 1
16 30 Accts. Receivable/Metro Food Court M5 1 6 2 1 00 16
17 Allow. for Uncollectible Accts. 1 6 2 1 00 17
18 2 18
2. Credit
19 19
20 20
21 21
22 22
A business writes off a specific account receivable after Several accounts must be changed to show that Metro
determining that the account probably will not be col- Food Court did pay its account. The accounts also should
lected. Occasionally, after an account has been written be changed to show a complete credit history of Metro
off, the customer pays the delinquent account. Several Food Court’s dealings with Restaurant Supply Co.
accounts must be changed to recognize payment of a writ- Two journal entries are recorded for the collection of a
ten-off account receivable. written-off account receivable: (1) a general journal entry
to reopen the customer account and (2) a cash receipts
journal entry to record the cash received on account.
January 30. Received cash in full payment To show an accurate credit history, Metro Food Court’s
of Metro Food Court’s account, previously account is reopened. Accounts Receivable is debited for
written off as uncollectible, $1,621.00. $1,621.00 to replace the amount previously written off
Memorandum No. 5 and Receipt No. 12. in the general ledger account. Allowance for Uncollectible
Accounts is credited for $1,621.00 to replace the amount
that was removed when Metro Food Court’s account was
previously written off. Also, Metro Food Court’s account
in the accounts receivable ledger is debited for $1,621.00.
GENERAL LEDGER
Accounts Receivable
This entry to reopen the account is the exact reverse of the
entry to write off Metro Food Court’s account.
Bal. 78,340.30 Jan. 4 1,621.00
Jan. 30 1,621.00
(New Bal. 78,340.30)
REOPENING
Allowance for Uncollectible Accounts AN ACCOUNT
S T E P S
Jan. 4 1,621.00 Bal. 13,153.30 PREVIOUSLY
Jan. 30 1,621.00 WRITTEN OFF
(New Bal. 13,153.30)
ACCOUNTS RECEIVABLE LEDGER 1 Enter a debit, $1,621.00, to Accounts Receivable.
Metro Food Court Place a diagonal line after the account title and
Bal. 1,621.00 Jan. 4 1,621.00 enter the customer’s name, Metro Food Court.
Jan. 30 1,621.00 Place a diagonal line in the Post. Ref. column.
(New Bal. 1,621.00)
2 Enter a credit, $1,621.00, to Allowance for Uncol-
lectible Accounts.
Writing Off and Collecting Uncollectible Accounts Receivable Lesson 17-2 521
RECORDING CASH RECEIVED FOR AN
A C C O U N T P R E V I O U S LY W R I T T E N O F F
CASH RECEIPTS JOURNAL PAGE 54
1 2 3 4 5 6 7
DOC. POST. GENERAL ACCOUNTS SALES SALES TAX SALES CASH
DATE ACCOUNT TITLE RECEIVABLE PAYABLE DISCOUNT
NO. REF. DEBIT CREDIT CREDIT DEBIT
CREDIT CREDIT DEBIT
21 30 Metro Food Court R12 1 6 2 1 00 1 6 2 1 00 21
22 22
After the entry to reopen Metro Food Court’s account is
recorded, an entry is made to record the cash received on GENERAL LEDGER
Metro Food Court’s account. Cash
Jan. 30 1,621.00
January 30. Received cash in full payment
of Metro Food Court’s account, previously Accounts Receivable
written off as uncollectible, $1,621.00. Bal. 78,340.30 Jan. 4 1,621.00
Memorandum No. 5 and Receipt No. 12. Jan. 30 1,621.00 Jan. 30 1,621.00
ACCOUNTS RECEIVABLE LEDGER
The entry in the cash receipts journal is the same as for Metro Food Court
any other collection of accounts receivable. Bal. 1,621.00 Jan. 4 1,621.00
Jan. 30 1,621.00 Jan. 30 1,621.00
(New Bal. zero)
S T O C K B Y T E/ G ET TY I M A G E S
522 Chapter 17 Accounting for Uncollectible Accounts Receivable
POSTING ENTRIES FOR COLLECTING A
W R I T T E N O F F ACCO U N T R E C E I VA B L E
GENERAL JOURNAL PAGE 18
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
16 30 Accts. Receivable/Metro Food Crt. M5 1125180 1 6 2 1 00 16
17 Allow. for Uncollectible Accts. 1130 1 6 2 1 00 17
ACCOUNT Accounts Receivable ACCOUNT NO. 1125
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
31 CR54 64 2 8 4 20 78 3 4 0 30
20X2
Jan. 4 G18 1 6 2 1 00 76 7 1 9 30
30 G18 1 6 2 1 00 78 3 4 0 30
1. Post 1 2. Post
general general
journal ACCOUNT Allowance for Uncollectible Accounts ACCOUNT NO. 1130 journal
entry to entry to
general customer
POST. BALANCE
DATE ITEM REF. DEBIT CREDIT
DEBIT CREDIT
ledger. account.
31 G15 12 8 7 3 30 13 1 5 3 30
20X2
Jan. 4 G18 1 6 2 1 00 11 5 3 2 30
30 G18 1 1 6 2 1 00 13 1 5 3 30
3. Write
Reopen
account in CUSTOMER Metro Food Court CUSTOMER NO. 180
customer DATE ITEM POST. DEBIT CREDIT DEBIT
account. 20X1
REF. BALANCE
May 21 S13 1 6 2 1 00 1 6 2 1 00
20X2
Jan. 4 Written off G18 2 1 6 2 1 00 ———
30 Reopen account 3 G18 1 6 2 1 00 1 6 2 1 00
4. Post cash 30 CR54 4 1 6 2 1 00 ———
receipts
journal entry
to customer account.
CASH RECEIPTS JOURNAL PAGE 54
1 2 3 4 5 6 7
DOC. POST. GENERAL ACCOUNTS SALES SALES TAX SALES CASH
DATE ACCOUNT TITLE NO. REF. RECEIVABLE CREDIT PAYABLE DISCOUNT DEBIT
DEBIT CREDIT CREDIT CREDIT DEBIT
21 30 Metro Food Court R12 1 6 2 1 00 1 6 2 1 00 21
22 22
POSTING ENTRIES FOR COLLECTING A WRITTENOFF
S T E P S
ACCOUNT RECEIVABLE
1 Post the general journal entry to the general ledger.
2 Post the debit portion of the general journal entry to the customer account.
3 Write the words Reopen account in the Item column of the customer account.
4 Post the cash receipts journal entry to the customer account.
Writing Off and Collecting Uncollectible Accounts Receivable Lesson 17-2 523
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. Why is Allowance for Uncollectible Accounts debited when a customer
account is written off?
2. Does the book value of accounts receivable differ before and after
writing off an account? Explain. TERM REVIEW
3. Why is a customer account reopened when the account is paid after
being previously written off? writing off an account
WORK TOGETHER 172
Recording entries related to uncollectible accounts receivable
The journals and selected ledger accounts for Cross Company are given in the Working Papers. Your instructor will
guide you through the following examples.
1. Journalize the following transactions completed during November of the current year. Use page 15 of a general
journal and page 24 of a cash receipts journal.
Transactions:
Nov. 2. Wrote off Davidson Corp.’s past-due account as uncollectible, $849.00. M245.
3. Wrote off JGF Industries’ past-due account as uncollectible, $2,488.00. M247.
4. Wrote off Sansing Co.’s past-due account as uncollectible, $609.00. M251.
14. Received cash in full payment of Lynchburg Co.’s account, previously written off as uncollectible,
$1,548.00. M258 and R415.
29. Received cash in full payment of JGF Industries’ account, previously written off as uncollectible,
$2,488.00. M261 and R429.
2. Post each entry to the customer accounts in the accounts receivable ledger.
3. Post general journal entries to the general ledger.
ON YOUR OWN 172
Recording entries related to uncollectible accounts receivable
The journals and selected ledger accounts for Potera Company are given in the Working Papers. Work this problem
independently.
1. Journalize the following transactions completed during October of the current year. Use page 11 of a general
journal and page 15 of a cash receipts journal.
Transactions:
Oct. 5. Wrote off Angela White’s past-due account as uncollectible, $159.00. M45.
8. Wrote off Peter Ewing’s past-due account as uncollectible, $612.00. M47.
12. Received cash in full payment of Mike Novak’s account, previously written off as uncollectible, $853.00.
M51 and R313.
16. Wrote off Tim Haley’s past-due account as uncollectible, $238.00. M58.
23. Received cash in full payment of Peter Ewing’s account, previously written off as uncollectible, $612.00.
M61 and R345.
2. Post each entry to the customer accounts in the accounts receivable ledger.
3. Post general journal entries to the general ledger.
524 Chapter 17 Accounting for Uncollectible Accounts Receivable
SUMMARY
After completing this chapter, you can: 3. Calculate, journalize, and post estimated
uncollectible accounts expense.
1. Define accounting terms related to uncollect-
ible accounts. 4. Journalize and post entries related to writing
off and collecting uncollectible accounts
2. Identify accounting concepts and practices
receivable.
related to uncollectible accounts.
EXPLORE ACCOUNTING
A c c o u nt i ng E s t i m a t e s Us e
Int e r e s t i ng A s s u m pt i o n s
Accountants use many accounting estimates to during her retirement are currently estimated
adjust the historical cost of certain transac- to be $30,000. Rather than expense the
tions to better reflect the company’s finan- $30,000 when the bills are paid during
cial condition. Carmen’s retirement, the new accounting
One of the most interesting account- rule requires that the $30,000 be expensed
ing estimates concerns a payroll-related over Carmen’s 30 years of service. There-
expense known as post-retirement ben- fore, $1,000 will be expensed each year.
efits other than pensions. Some companies To estimate the projected benefit, assump-
offer their employees free services, such as tions must be made regarding the following
health care, during their retirement. For many years, items: (1) percentage annual growth rate in health
companies have expensed these costs when the services care costs, (2) life expectancy, (3) retirement age, (4) num-
were actually provided and paid for in cash. Accounting ber of children, and (5) interest costs. Management’s
rules recently changed to require that these costs be rec- assumptions can dramatically affect accounting estimates.
ognized as an expense over the employee’s years of work. Companies that prepare public financial statements have
The promise of free health care during retirement is part of independent auditors examine the assumptions used
the total benefits that the company provides an employee to compute accounting estimates to assure that these
in exchange for the employee’s services. assumptions are reasonable.
For example, Watanabe Industries has promised free
health care to its retired employees and their family mem- Research: Research the annual growth rate of health
PHOTO: PHOTOGRAPHER’S CHOICE/GETTY IMAGES
bers under 21 years of age. Carmen Suarez is expected care costs. Do you believe this growth rate will continue?
to work for Watanabe Industries for 30 years. Health care Identify factors that might cause further increases or
costs for Carmen, her husband, and any future children decreases in growth rate.
Accounting for Uncollectible Accounts Receivable Chapter 17 525
171 APPLICATION PROBLEM
Estimating and journalizing entries for uncollectible accounts expense
A general journal, partial work sheet, and selected general ledger accounts for Kellogg, Inc., are given in the
Working Papers.
Instructions:
1. Kellogg, Inc., estimates uncollectible accounts expense as 1.0% of its total sales on account. During
the current year, Kellogg had credit sales of $3,426,000.00. The balance in Allowance for Uncollectible
Accounts before adjustment is a $534.00 credit. Record the uncollectible accounts expense adjustment
on a work sheet. Label the adjustment (e).
2. Journalize the adjusting entry on page 25 of a general journal.
3. Post the adjusting entry to the general ledger.
172 APPLICATION PROBLEM
Recording entries related to uncollectible accounts receivable
The journals and selected ledger accounts for Waldron Company are given in the Working Papers.
Instructions:
1. The following transactions related to accounts receivable occurred during September of the current year.
Journalize the transactions using page 14 of a general journal and page 19 of a cash receipts journal.
Transactions:
Sept. 5. Wrote off Jackson Company’s past-due account as uncollectible, $124.00. M234.
7. Received cash in full payment of Davis Industries’ account, previously written off as uncollectible,
$185.00. M235 and R339.
14. Wrote off Lancing, Inc.’s past-due account as uncollectible, $215.00. M238.
19. Wrote off Sanders Mfg.’s past-due account as uncollectible, $842.00. M243.
27. Received cash in full payment of Jackson Company’s account, previously written off as uncollect-
ible, $124.00. M251 and R362.
2. Post each entry to the customer accounts in the accounts receivable ledger.
3. Post each entry in the general journal to the general ledger.
P U RE S T O CK / G E T T Y I M A G E
S
( Go Beyond the Book
)
For more information go to
www.C21accounting.com
526 Chapter 17 Accounting for Uncollectible Accounts Receivable
173 APPLICATION PROBLEM
Recording entries related to uncollectible accounts receivable
The journals and selected ledger accounts for Weatherly Co. are given in the Working Papers.
Instructions:
1. The following transactions related to accounts receivable occurred during February of the current year.
Journalize the transactions using page 4 of a general journal and page 2 of a cash receipts journal.
Transactions:
Feb. 3. Received a $1,458.00 check from Bearden Co. in full payment of its account. The account was
written off in the previous month based on a newspaper story that indicated the company was
about to close. M24 and R134.
7. Monique Pearce, controller of Hampton Industries, just called, stating that the company had seri-
ous cash flow problems and would not be able to pay its $2,584.00 account balance. M25.
10. Received a letter from Rankin Co.’s legal counsel, stating that the company was in the process
of filing bankruptcy. The letter gave little hope that Weatherly would collect Rankin’s $948.00
account. M28.
12. Received a check from Camden Enterprises in full payment of its $1,784.00 account. The account
was written off in January after months of efforts to collect the account. M31 and R142.
21. A letter from Wilmont Co.’s receiving department supervisor, Daymon Lewis, stated that Wilmont
refuses to pay for a prior year shipment of product for $548.00. The supervisor contends that the
products were spoiled on arrival and were discarded. M34.
27. Received a letter and check in the mail from Monique Pearce of Hampton Industries. Two weeks
ago the company was purchased by another company and therefore has access to cash to pay its
debt. M35 and R159.
2. Post each entry to the customer accounts in the accounts receivable ledger.
3. Post each entry in the general journal to the general ledger.
174 MASTERY PROBLEM
Recording entries for uncollectible accounts
Selected accounts receivable and general ledger accounts for Sing Industries are given in the Working Papers.
The following transactions relating to uncollectible accounts receivable occurred during the final quarter of
the current fiscal year.
Instructions:
1. Journalize the following transactions completed during October using page 20 of a general journal. Post
the transactions to the customer accounts and general ledger accounts.
Transactions:
Oct. 8. Wrote off Keller Corporation’s past-due account as uncollectible, $648.25. M243.
19. Wrote off Gason Company’s past-due account as uncollectible, $948.00. M252.
2. Journalize the following transactions completed during November using page 22 of a general journal and
page 24 of a cash receipts journal. Prove the cash receipts journal. Post the transactions and the total of the
Accounts Receivable Credit column to the customer accounts and general ledger accounts.
Transactions:
Nov. 9. Wrote off Baker Co.’s past-due account as uncollectible, $815.00. M267.
18. Received cash in full payment of Keller Corporation’s account, previously written off as uncollect-
ible, $648.25. M274 and R453.
23. Received cash in full payment of Pearson Industries’ account, previously written off as uncollect-
ible, $251.80. M281 and R476.
Accounting for Uncollectible Accounts Receivable Chapter 17 527
3. Journalize the following transactions for December. Use page 24 of a general journal and page 26 of a cash
receipts journal. Prove the cash receipts journal. Post the transactions and the total of the Accounts Receiv-
able Credit column to the customer accounts and general ledger accounts.
Transactions:
Dec. 4. Wrote off Franklin, Inc.’s past-due account as uncollectible, $1,458.00. M291.
10. Received cash in full payment of Baker Corp.’s account, previously written off as uncollectible,
$815.00. M293 and R489.
29. Received cash in full payment of Gason Company’s account, previously written off as uncollect-
ible, $948.00. M297 and R502.
4. Journalize the December 31 adjusting entry for estimated uncollectible accounts expense for the year. Use
page 26 of the general journal. Uncollectible accounts expense is estimated as 0.5% of total sales on account.
Total sales on account for the year were $1,654,800.00. Post the transaction to the general ledger accounts.
175 CHALLENGE PROBLEM
Recording entries for uncollectible accounts
Information from the accounting records of Rosedale Company concerning uncollectible accounts during the
past five years follows (presented in thousands of dollars).
20X1 20X2 20X3 20X4 20X5
Sales on account $575 $700 $850 $1,050 $1,200
Ending Accounts Receivable 50 60 80 90 100
Uncollectible Accounts Expense 8 8 15 15 15
Ending Allowance for Uncollectible Accounts 5 1 4 3 1
Accounts written off 10 13 14 18 19
Accounts collected after being written off 1 1 2 2 2
Yu-lan Cheng, the controller of the company, has asked you to evaluate the prior annual adjustments to
Allowance for Uncollectible Accounts. If the company expects to have sales of $1,400,000.00 next year, what
amount would you suggest be expensed to Uncollectible Accounts Expense? Support your answer.
A P P L I E D CO M M U N I C AT I O N
For many years, the accounting staff at St. Charles Furniture has written off uncollectible accounts receivable by
debiting Uncollectible Accounts Expense and crediting Accounts Receivable. Despite relatively constant sales and
collections on account, the annual amount of Uncollectible Accounts Expense has fluctuated between $5,000.00
and $90,000.00 during the past six years. Management admits that the amount of accounts written off depends
largely on the time the managers have devoted to evaluating accounts receivable for possible collection problems.
Instructions: Prepare a memorandum to Tomas Gonzalez, president of St. Charles Furniture, explaining the
correct way to account for uncollectible accounts receivable. The memorandum should persuade him to implement
a change from the current accounting procedure.
CASE FOR CRITICAL THINKING
Some businesses have a policy of accepting only cash sales. Depending on economic conditions or the time of year,
many potential customers may not be able to pay with currency, check, or debit card. Businesses with cash-only
policies will lose those potential sales. As has been discussed in previous chapters, other businesses encourage more
sales by selling on account to customers with approved credit. The key decision is defining what is approved credit.
Employees responsible for meeting the sales goals of a business might choose one set of standards for approving
credit. Employees responsible for maintaining merchandise inventory and filling orders might choose a different set
of standards for approving credit. What role, if any, do you believe that accounting employees should play in setting
a company’s standards for approving credit? What contributions can accounting employees make to discussions
about credit standards?
528 Chapter 17 Accounting for Uncollectible Accounts Receivable
GRAPHING WORKSHOP
Predicting Uncollectible Accounts Historical Trend of Uncollectible Accounts
2.00%
Each year Hitesh Nizami, the controller for South-
Uncollectible Accounts
ern Electronics, evaluates the percentage to be 1.75%
Percent of Actual
used to estimate uncollectible accounts expense. 1.50%
The company adopted a more liberal credit policy, 1.25%
resulting in a significant but acceptable increase in
1.00%
the accounts that were actually written off.
0.75%
1. In what year did the company implement its new
credit policy? 0.50%
2. What percentage would you recommend Hitesh 0.25%
use to calculate the 2005 adjustment for allow- 0.00%
ance for uncollectible accounts? Justify your 1990 1995 2000 2005
answer. Fiscal Year
A N A LY Z I N G B E S T B U Y ’S F I N A N C I A L S TAT E M E N T S
A standard set of financial ratios has been developed to help individuals understand financial statements. Not every
ratio, however, can be applied to every company. Best Buy customers must pay for their purchases with cash or a
credit card. Thus, Best Buy does not have any trade accounts receivable. The small amount of accounts receivable
reported on Best Buy’s Consolidated Balance Sheets results from miscellaneous transactions.
For companies that do have trade accounts receivable, the accounts receivable turnover ratio measures how quickly
a company is collecting its trade accounts receivable (A/R). The ratio is calculated as shown below:
Sales
Accounts Receivable Turnover ⫽
(Beginning balance of A/R ⫹ Ending balance of A/R) ⫼ 2
Dividing the sum of the beginning and ending accounts receivable by 2 approximates the average accounts receiv-
able for the fiscal year.
The accounts receivable turnover for Hershey Foods Corporation, based on its 2006 fiscal year financial statements,
is calculated below (www.hersheys.com):
$4,944,230,000
A/R Turnover ⫽ ⫽ 9.60 times
($507,119,000 ⫹ $522,673,000) ⫼ 2
Dividing 365 by the turnover ratio yields a financial ratio known as the number of days’ sales in receivables. Hershey
Foods’ number of days’ sales in receivables is 38.0 days. Thus, the average account is collected in approximately 38
days.
Instructions
1. What is the amount of accounts receivable for Best Buy reported on its fiscal year 2006 and 2007 financial state-
ments on Appendix B page B-5?
2. Calculate the accounts receivable turnover and number of days’ sales in receivables for the Procter & Gamble
Company. The company reported $4,185 and $5,725 million of accounts receivable on June 30, 2005 and 2006,
respectively, and sales of $68,222 million for fiscal year 2006. (www.pg.com)
Accounting for Uncollectible Accounts Receivable Chapter 17 529
Accounting
SOFTWARE
U N CO L L E C T I B L E ACCO U N TS R E C E I VA B L E
Any transaction with a customer, whether it’s a sale or cash receipt, results in transactions
being posted to both the general ledger and the accounts receivable ledger. Writing off a customer’s account is no
different. Not only is the transaction posted to the general ledger, but the outstanding invoice in the customer’s
account must also be written off as uncollectible.
How does a business determine if an account is uncollectible? The process often begins with preparing an aging
of accounts receivable report, which is a list of outstanding invoices. This report classifies outstanding invoices by
the time each is overdue, such as 1 to 30 days overdue, 30 to 60 days overdue, 60 to 90 days overdue, and over 90
days overdue.
PEACHTREE APPLICATION PROBLEM 17-2
1. Open (Restore) file 17-2AP.ptb.
2. Use the Receipts task to write off the customer accounts.
3. To record payment of previously written-off amounts, go to the menu and select Tasks, Sales Invoicing, and
the appropriate account. Remember to post when you have completed the transaction. Complete all the
transactions.
4. Print the sales journal, cash receipts journal, and the customer ledger.
5. Print the accounts receivable and allowance for uncollectible accounts from the general ledger.
PEACHTREE APPLICATION PROBLEM 17-3
1. Open (Restore) file 17-3AP.ptb.
2. Journalize the entries related to accounts receivable using the sales journal and cash receipts journal.
3. Print the sales journal, cash receipts journal, and customer ledger.
4. Print the accounts receivable and allowance for uncollectible accounts in the general ledger.
U N CO L L E C T I B L E ACCO U N TS R E C E I VA B L E
There are no special systems in QuickBooks software for handling the recording of uncollectible accounts.
The transactions for recording uncollectible accounts are recorded in journals just as in a manual accounting system.
QuickBooks does, however, have some additional features that make the tracking of uncollectible accounts more
efficient. One of these features is the ability to print out a report that lists the accounts receivables according to how
old they are. This report is sometimes called an Aging Schedule of Accounts Receivable. This schedule can usually be
set up to list if an account is current, 1 to 30 days overdue, 30 to 60 days overdue, 60 to 90 days overdue, 90 to 120
days overdue, and over 120 days overdue.
QUICKBOOKS APPLICATION PROBLEM 17-2
1. Open the Waldron Company file.
2. Journalize the transactions; use the Create Credit Memos/Refunds window to write off customer invoices.
3. Use the Make General Journal Entries window to record the reinstatement of previously written-off invoices and
receipts from customers in payment.
4. Print a Journal report using September 1 and September 30 as the dates.
5. Print a Customer Balance Detail report using January 1 and September 30 for the dates.
530 Chapter 17 Accounting for Uncollectible Accounts Receivable
QUICKBOOKS APPLICATION PROBLEM 17-3
1. Open the Weatherly Company file.
2. Journalize the transactions related to accounts receivable; use the Create Credit Memos/Refunds window to
write off customer invoices.
3. Use the Make General Journal Entries window to record the reinstatement of previously written-off invoices and
to record receipts from customers in payment of the invoices.
4. Print a Journal report using February 1 and February 28 as the dates.
5. Print a Customer Balance Detail report.
F O R M A T T I N G T H E D I S P L AY O F R A T I O S
The relationship of two amounts can provide managers with useful information for making business decisions. For
example, the ratio of accounts written off to sales on account provides important information about the actual rate
of uncollectible accounts receivable.
Most accountants believe that only the first three digits of a ratio are meaningful for making business decisions.
Suppose you learned that your credit manager had been able to reduce the ratio of accounts written off to sales on
account to 1.23%. Would you think differently about the credit manager’s performance if you knew that the ratio
was actually 1.234567%?
Electronic spreadsheets make it easy for you to modify the format of a cell to display any number of decimal
places. Displaying amounts with proper formatting makes printed schedules more useful.
EXCEL CHALLENGE PROBLEM 17-5
Open the F17-5OPT Excel data file. Follow the step-by-step instructions in the Instructions worksheet. Use the
Format Cells feature to display ratios with the proper number of decimal places.
U N CO L L E C T I B L E ACCO U N TS R E C E I VA B L E
There are no special systems in the Automated Accounting software for handling the recording of uncollectible
accounts. Instead, transactions for uncollectible accounts are recorded in journals, just as in a manual accounting
system. There are four kinds of entries described in this chapter that can be recorded using the Automated Account-
ing software:
1. Adjusting Entry for Uncollectible Accounts: This entry is recorded in the general journal with a debit to Uncollect-
ible Accounts Expense and a credit to Allowance for Uncollectible Accounts.
2. Writing Off an Account Receivable: This entry is also recorded in the general journal. The entry includes a debit to
Allowance for Uncollectible Accounts and a credit to Accounts Receivable and the customer’s account. When
the general ledger account number for Accounts Receivable is keyed in the Account Title field, a drop-down list
for selecting the individual customer’s account will appear. A separate entry for the Customer account is not
recorded.
3. Collecting a Previously Written-Off Account Receivable: This transaction requires two entries: (a) an entry in the
general journal to re-open the account and (b) an entry in the cash receipts journal to record the receipt of cash.
AUTOMATED ACCOUNTING APPLICATION PROBLEM 17-2
Open file F17-2.AA8. Display the problem instructions and complete the problem.
AUTOMATED ACCOUNTING MASTERY PROBLEM 17-4
Open file F17-4.AA8. Display the problem instructions and complete the problem.
Accounting for Uncollectible Accounts Receivable Chapter 17 531
PHOTODISC/GETTY IMAGES
C H A P T E R 1 8 Accounting for Plant
Assets and Depreciation
O B J E C T I V E S
After studying Chapter 18, you will be able to: 4. Calculate depreciation expense and book value
using the straight-line method of depreciation.
1. Define accounting terms related to plant assets,
depreciation, and property tax expense. 5. Prepare plant asset records and journalize
annual depreciation expense.
2. Identify accounting concepts and practices
related to accounting for plant assets, deprecia- 6. Record entries related to disposing of plant
tion, and property tax expense. assets.
3. Record the buying of a plant asset and the 7. Calculate depreciation expense using the double
paying of property tax. declining-balance method of depreciation.
K E Y T E R M S
• real property • plant asset record • declining-balance
• personal property • gain on plant assets method of depreciation
• assessed value • loss on plant assets
( Point Your Browser
www.C21accounting.com
)
532
ACCOUNTING IN THE REAL WORLD
Carnival Cruise Lines
Carnival Invests in Fun
Few companies invest more in equipment than Carnival Cruise Lines, the
most popular cruise line in the world. Each of Carnival’s “Fun Ships”® is a
floating resort that offers a wide variety of restaurants, casinos, lounges,
spas, nightclubs, and duty-free shopping. Ports of call allow passengers the
opportunity to explore port cities in the Caribbean, Alaska, Mexico, and Can-
ada, just to name a few.
DIGITAL VISION/GETTY IMAGES
To serve the increasing demand for cruises, Carnival is constantly expand-
ing its fleet of ships. At up to $500 million per ship, the cost of the cruise
ships is one of Carnival’s most significant expenses. INTERNET
Carnival estimates that its ships will sail for ACTIVITY
30 years before they are retired. Follow-
ing generally accepted accounting Notes to the Financial
principles, Carnival depreciates Statements—
the cost of each ship over its Depreciation Methods
30-year estimated useful Go to the homepage for
life. Thus, a portion of a Carnival Cruise Lines (www.
ship’s cost is recorded as carnival.com) and Royal Carib-
an expense each time bean Cruise Lines (www.royal
Carnival sets sail for a caribbean.com). Search for the
new destination. latest annual report for each
company. The annual report
is usually found under the
heading “About Us” or “Inves-
©ANDY NEWMAN/EPA/LANDOV
tor Relations.” In the annual
report, usually after the finan-
cial statements, you will find
the notes to the financial
statements. Using these notes
(probably Note #1 or #2), look
for the information about
depreciating their ships.
Critical Thinking
1. A properly maintained ship can easily last more than 30 years. Why
Instructions
do you think Carnival estimates that its ships will be used for only
1. For each company, state
30 years? (Hint: What is the estimated life of your car?)
the method of deprecia-
2. Suppose Carnival installs a teen club in a ship that was added to
tion used to depreciate the
the fleet 10 years ago. How should the cost of this enhancement
ships.
be accounted for?
2. For each company, state
Source: www.carnival.com the number of years used
in estimating the “useful
life” of the ships.
533
L E S S O N
Buying Plant Assets and
18-1 Paying Property Tax
Assets that will be used for a number of years in the opera- have a related accumulated depreciation account—a con-
tion of a business are known as plant assets. A business may tra asset account—to accumulate the annual depreciation
have several types of plant assets, including equipment, expense of the plant assets in the account.
buildings, and land. Businesses often subdivide plant
assets into more focused categories and create an account
for each category. For example, a company may divide its
equipment into office, store, warehouse, and transporta-
tion equipment.
Restaurant Supply Co. owns its equipment but rents
the building and the land where the business is located.
Therefore, Restaurant Supply has only accounts for equip-
ment. To provide more detailed financial information,
Restaurant Supply records its equipment in two different
equipment accounts—Office Equipment and Store Equip-
IMAGE SOURCE/GETTY IMAGES
ment. [CONCEPT: Adequate Disclosure]
Most plant assets are useful for only a limited period of
time. Over time, most equipment wears out and can no
longer perform its functions. Other equipment, such as
computers, becomes technologically outdated. Regardless
of the reason, the cost of a plant asset should be depreci-
ated over its useful life. Each plant asset account should
CHARACTER COUNTS
K e e pi n g Yo u r E m pl o y e e s B u s y
Gabriel Peña is a reception- assign him additional work because she doesn’t have the
ist for Traylor Technologies. time to provide more training or supervision. Therefore, to
After the company installed fill the time, Gabriel plays computer games.
voice mail, Gabriel’s workload
PHOTO: BLEND IMAGES/GETTY IMAGES
became lighter, so his super- Instructions
visor, Amy Sanchez, assigned Do an Internet search using “Hilton Hotels” and “Code of
Gabriel additional responsibili- Conduct.” Read the Hilton Code of Conduct. Then, use the
ties, including some accounting ethical model to determine if Amy’s supervision of Gabriel
tasks. Even with these assignments, represents ethical behavior.
Gabriel is not always busy. Amy does not
534 Chapter 18 Accounting for Plant Assets and Depreciation
RECORDING THE BUYING OF A PLANT ASSET
CASH PAYMENTS JOURNAL PAGE 1
1 2 3 4 5
CK. POST. GENERAL ACCOUNTS PURCHASES CASH
DATE ACCOUNT TITLE NO. REF. PAYABLE DISCOUNT
DEBIT CREDIT CREDIT
DEBIT CREDIT
4 3 Store Equipment 4 1215 3 2 5 0 00 3 2 5 0 00 4
5 1 2 3 5
1. Account Title 2. Cost of the 3. Cash Paid
Plant Asset
4 4. Post
ACCOUNT Store Equipment ACCOUNT NO. 1215
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20X1
Jan. 1 Balance ⻫ 36 4 6 0 00
3 CP1 3 2 5 0 00 39 7 1 0 00
Procedures for recording the buying of a plant asset are
similar to procedures for recording the buying of current January 3, 20X1. Paid cash for a display
assets such as supplies. The amount paid for a plant asset case, $3,250.00. Check No. 4.
is debited to a plant asset account with a title such as Store
Equipment. [CONCEPT: Historical Cost]
The entry in the General Debit column of the cash
payments journal is posted individually to the account
Store Equipment named in the Account Title column.
Debit Credit F Y I
Decrease
Store Equipment
Increase
3,250.00
Cash
3,250.00
F O R YO U R I N F O R M AT I O N
JOURNALIZING AND POSTING THE
S T E P S F Y I
BUYING OF A PLANT ASSET
Because of its permanent nature,
land is generally not subject to
1 Write the plant asset account, Store Equipment, in the Account Title depreciation. Buildings, after years
column of the cash payments journal. of use, eventually become unusable.
A building may be torn down and
2 Enter the cost of the plant asset, $3,250.00, in the General Debit column. a new building constructed on the
same land. However, since land
3 Enter the same amount, $3,250.00, in the Cash Credit column. can be used indefinitely, it is
considered permanent and
4 Post the entry in the general debit column to the general ledger. is not depreciated.
Buying Plant Assets and Paying Property Tax Lesson 18-1 535
C A L C U L AT I N G A N D P AY I N G P R O P E R T Y TA X
CASH PAYMENTS JOURNAL PAGE 3
1 2 3 4 5
CK. POST. GENERAL ACCOUNTS PURCHASES CASH
DATE ACCOUNT TITLE NO. REF. PAYABLE DISCOUNT
DEBIT CREDIT CREDIT
DEBIT CREDIT
20--
1 Feb. 1 Property Tax Expense 69 7 2 0 00 7 2 0 00 1
2 2
For tax purposes, state and federal governments define two Classic Parts, Inc., owns real property that has been
kinds of property—real and personal. Land and anything assessed for a total of $60,000.00. The city tax rate is
attached to the land is called real property. Real prop- 1.2%.
erty is sometimes referred to as real estate. All property not
classified as real property is called personal property. For
tax purposes, these definitions apply whether the property Assessed Annual
is owned by a business or an individual. Value ⴛ Tax Rate ⴝ Property Tax
The value of an asset determined by tax authorities $60,000.00 1.2% $720.00
for the purpose of calculating taxes is called the assessed
value. Assessed value is usually based on the judgment of
persons referred to as assessors. Assessors are elected by
citizens or are specially trained employees of a governmen- February 1. Classic Parts, Inc., paid cash for
tal unit. property tax, $720.00. Check No. 69.
Most governmental units with taxing power have a tax
based on the value of real property. The real property tax
is used on buildings and land. Some governmental units Payment of property taxes is necessary if a firm is to
also tax personal property such as cars, boats, trailers, and continue in business. Therefore, Classic Parts, Inc., classi-
airplanes. fies property tax as an operating expense.
A governmental taxing unit determines a tax rate to
use in calculating taxes. The tax rate is multiplied by an
asset’s assessed value, not the value recorded on a business’s Property Tax Expense
records. 720.00
Cash
720.00
/ GE T T Y I M AG ES
VISION
ITAL
DIG
F O R YO U R I N F O R M AT I O N
F Y I
The assessed value of an asset may
not be the same as the value on the
business’s or individual’s records.
The assessed value is assigned to an
asset for tax purposes only. Often
the assessed value is only a part
of the true value of the asset.
536 Chapter 18 Accounting for Plant Assets and Depreciation
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
TERMS REVIEW
1. What accounts are affected, and how, when cash is paid for office
real property equipment?
personal property 2. What items are included in real property?
assessed value 3. Who determines the assessed value of plant assets?
WORK TOGETHER 181
Journalizing buying plant assets and paying property tax
The cash payments journal and selected general ledger accounts for Singh Paint Store are given in the Working
Papers. Your instructor will guide you through the following examples.
1. Journalize the following transactions completed during the current year. Use page 1 of a cash payments journal.
The abbreviation for a check is C.
Transactions:
Jan. 3. Paid cash for a paint mixer, $500.00. C142.
5. Paid cash for an office chair, $400.00. C145.
Feb. 26. Paid property taxes on real property with an assessed value of $80,000.00. The tax rate in the city where
the property is located is 3.0% of assessed value. C182.
July 2. Paid cash for a filing cabinet, $260.00. C216.
2. Post the general columns of the cash payments journal.
ON YOUR OWN 181
Journalizing buying plant assets and paying property tax
The cash payments journal and selected general ledger accounts for Herrera Tile Center are given in the Working
Papers. Work this problem independently.
1. Journalize the following transactions completed during the current year. Use page 1 of a cash payments journal.
The abbreviation for a check is C.
Transactions:
Jan. 2. Paid cash for a computer printer, $1,800.00. C215.
5. Paid cash for a tile cutter, $520.00. C216.
Feb. 24. Paid property taxes on real property with an assessed value of $72,000.00. The tax rate in the city where
the property is located is 2.5% of assessed value. C232.
Mar. 13. Paid cash for a dolly, $325.00. C283.
2. Post the general columns of the cash payments journal.
Buying Plant Assets and Paying Property Tax Lesson 18-1 537
L E S S O N
Calculating Depreciation
18-2 Expense
S T R A I G H T L I N E D E P R E C I AT I O N
Original Estimated Estimated Total
Cost ⴚ Salvage Value ⴝ Depreciation Expense
$3,250.00 $250.00 1 $3,000.00
Estimated Total Years of Estimated Annual
Depreciation Expense ⴜ Useful Life ⴝ Depreciation Expense
$3,000.00 5 2 $600.00
Plant assets are expected to be used in the business for The straight-line method of depreciation charges an
many years. Generally accepted accounting principles equal amount of depreciation expense in each full year in
require that the cost of a plant asset be expensed over the which the asset is used.
plant asset’s useful life. [CONCEPT: Matching Expenses On January 3, 20X1, Restaurant Supply bought a lighted
with Revenues] The annual expense is recorded in Depre- display case for $3,250.00 with an estimated salvage value
ciation Expense and the contra asset account Accumulated of $250.00 and an estimated useful life of 5 years.
Depreciation.
Several methods for calculating depreciation expense
are available. The easiest and most widely used method F O R YO U R I N F O R M AT I O N
is known as the straight-line method of depreciation. The F Y I
method requires the business to know the cost of the plant
asset and to estimate two amounts: The estimated useful life should be
based on prior experience with similar
1. The amount the business expects to receive when a assets and on available guidelines.
Trade associations frequently publish
plant asset is removed from use, known as the esti- guidelines for specialized plant assets.
mated salvage value. The Internal Revenue Service
2. The number of years a plant asset is expected to be also publishes depreciation
used, known as the estimated useful life. guidelines for plant assets.
S T E P S CALCULATING ANNUAL DEPRECIATION EXPENSE
1 Subtract the asset’s estimated salvage value from the asset’s original cost. This difference is the estimated total
depreciation expense for the asset’s entire useful life.
2 Divide the estimated total depreciation expense by the years of estimated useful life. The result is the annual
depreciation expense.
538 Chapter 18 Accounting for Plant Assets and Depreciation
C A L C U L AT I N G D E P R E C I AT I O N E X P E N S E F O R P A R T O F A Y E A R
Annual Months in Monthly
Depreciation Expense ⴜ a Year ⴝ Depreciation Expense
$600.00 12 1 $50.00
Monthly Number of Months Partial Year‘s
Depreciation Expense ⴛ Asset Is Used ⴝ Depreciation Expense
$50.00 5 2 $250.00
A month is the smallest unit of time used to calculate Restaurant Supply bought a point-of-sale terminal on
depreciation. A plant asset may be placed in service at a August 2, 20X1. The annual straight-line depreciation
date other than the first day of a fiscal period. In such cases, expense is $600.00. The depreciation expense is $250.00
a business may elect to calculate depreciation expense to for the remaining 5 months of the year in which Restau-
the nearest first of a month. A partial year’s depreciation rant Supply used the computer.
may also be recorded in the year the plant asset is sold or
disposed of.
S T E P S CALCULATING PARTIAL YEAR’S DEPRECIATION EXPENSE
1 Divide the annual depreciation expense by 12, the number of months in a year. The result is the monthly
depreciation expense.
2 Multiply the monthly depreciation expense by the number of months the plant asset is used in a year.
The result is the partial year’s depreciation expense.
The five years’ depreciation expense is illustrated below. would be closer to September 1 than August 1. In the next
In the first year, a partial year’s depreciation is recorded: four years, a full year’s depreciation, $600.00, would be
August 1, 20X1 to December 31, 20X1—five months. If expensed each year. In 20X6, the original five-year useful
the asset had been purchased August 16 or later, only four life ends July 31, so seven months’ depreciation would be
months’ depreciation would be expensed because the date recorded.
Point-of-sale terminal: $3,300.00
Estimated salvage value: $300.00
Useful life: 5 years
Annual depreciation: ($3,300.00 300.00) 5 $600.00 per year
Monthly depreciation: $600.00 12 $50 per month
20X1 20X1 20X2 20X3 20X4 20X5 20X6
to to to to to to
Aug. 3 Dec. 31 Dec. 31 Dec. 31 Dec. 31 Dec. 31 July 31
5 months 1 year 1 year 1 year 1 year 7 months
$50 5 $600 $600 $600 $600 $50 7
$250 $350
Plant assets may continue to be used after their esti-
mated useful lives have ended; however, no additional
depreciation is recorded.
Calculating Depreciation Expense Lesson 18-2 539
C A L C U L AT I N G A C C U M U L AT E D
D E P R E C I AT I O N A N D B O O K V A L U E
Calculating Accumulated Depreciation lated depreciation account. The accumulated depreciation
Depreciation is not recorded as a reduction of the plant for a plant asset is calculated by adding the depreciation
asset account. Instead, the depreciation expense for each expense for the current year to the prior year’s accumu-
year of a plant asset's useful life is recorded in an accumu- lated depreciation.
20X2 Accumulated 20X3 20X3 Accumulated
Depreciation ⴙ Depreciation Expense ⴝ Depreciation
$1,200.00 $600.00 $1,800.00
Calculating Book Value lated depreciation from the original cost of the plant asset.
The original cost of a plant asset minus accumulated The ending book value is the beginning book value for
depreciation is known as the book value of a plant asset. the next year.
The book value is calculated by subtracting the accumu-
Original Cost ⴚ Accumulated Depreciation ⴝ Ending Book Value
$3,250.00 $1,800.00 $1,450.00
The book value can also be calculated by subtracting value. Either method of calculating a book value is accept-
the year’s depreciation from that year’s beginning book able because both methods calculate the same amount.
C U LT U R A L D I V E R S I T Y
Va l u i n g D i v e r s i t y i n
t h e Wor k pl a c e
Employees in the U.S. have diverse Enlightened companies will encourage “valuing diver-
cultural backgrounds. This diversity sity” in the workplace. This means valuing the cultural
reflects the cultural differences in backgrounds of each individual. It means respecting each
society. All employees bring their person for what he or she can contribute to the goals of
cultural backgrounds and values the organization.
with them to the workplace.
Cultural differences do not exist Critical Thinking
PHOTO: DIGITAL VISION/GETTY IMAGES
only between people from different 1. What would be the result if culturally different employ-
countries. They may arise with anyone ees could not work together?
in the workplace perceived to be differ-
2. What do you think should be the consequence for an
ent from the norm. Consider the differ-
employee who cannot work with other employees of
ences in employees who are younger or older
different cultural backgrounds?
than average, who are physically challenged, or
who speak English as a second language.
540 Chapter 18 Accounting for Plant Assets and Depreciation
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. Which accounting concept is being applied when depreciation expense
is recorded for plant assets?
2. What three amounts are used to calculate a plant asset’s annual depre-
ciation expense using the straight-line method of depreciation?
WORK TOGETHER 182
Calculating depreciation
Depreciation tables for Fairbrother, Inc., are given in the Working Papers. Your instructor will guide you through the
following example.
1. Fairbrother, Inc., bought the following assets during 20X1. Complete a depreciation table for each asset using the
straight-line depreciation method. If the asset was not bought at the beginning of 20X1, calculate the deprecia-
tion expense for the part of 20X1 in which the company owned the asset. Save your work to complete Work
Together 18-3.
Transactions:
Jan. 3. Bought a computer monitor costing $560.00; estimated salvage value, $60.00; estimated useful life,
5 years.
Oct. 19. Bought a notebook computer, $2,750.00; estimated salvage value, $350.00; estimated useful life,
4 years.
ON YOUR OWN 182
Calculating depreciation
Depreciation tables for Wrench Co. are given in the Working Papers. Work this problem independently.
1. Wrench Co. bought the following assets during 20X1. Complete a depreciation table for each asset using the
straight-line depreciation method. If the asset was not bought at the beginning of 20X1, calculate the deprecia-
tion expense for the part of 20X1 in which the company owned the asset. Save your work to complete On Your
Own 18-3.
Transactions:
Jan. 6. Bought a sound system costing $5,600.00; estimated salvage value, $400.00; estimated useful life,
8 years.
May 22. Bought a shredder, $1,250.00; estimated salvage value, $50.00; estimated useful life, 5 years.
Calculating Depreciation Expense Lesson 18-2 541
L E S S O N
Journalizing Depreciation
18-3 Expense
P R E PA R I N G P L A N T A S S E T R E CO R D S
PLANT ASSET RECORD No. 62 1215
General Ledger Account No.
Description
Display Case General Ledger Account
Store Equipment
Date Serial Original
Bought
January 3, 20X1 Number
D2679-26 Cost
$3,250.00 1
Estimated Estimated Depreciation
Useful Life
5 years Salvage Value
$250.00 Method
Straight-line
Disposed of: Discarded Sold Traded
2
Date Disposal Amount
YEAR ANNUAL DEPRECIATION ACCUMULATED ENDING
EXPENSE DEPRECIATION BOOK VALUE
20X1 $600.00 $ 600.00 $2650.00 3
20X2 600.00 1,200.00 2,050.00
20X3 600.00 1,800.00 1,450.00
20X4 600.00 2,400.00 850.00
20X5 600.00 3,000.00 250.00
Continue record on back of card
A separate record is kept for each plant asset. An account- mulated depreciation is the depreciation expense that
ing form on which a business records information about has accumulated over all prior years added to that year’s
each plant asset is called a plant asset record. annual depreciation expense.
Plant asset records may vary in arrangement for different The ending book value is the original cost less that
businesses, but most records contain similar information. year’s accumulated depreciation.
Restaurant Supply’s plant asset record has three sections.
Section 1 is prepared when a plant asset is bought. Section
2 provides space for recording the disposition of the plant PREPARING A
asset. When the asset is disposed of, this information will S T E P S PLANT ASSET
be filled in. Section 3 provides space for recording annual RECORD
depreciation expense and the changing book value of the
asset each year it is used. 1 Write the information in Section 1 when the
At the end of each fiscal period, Restaurant Supply plant asset is purchased.
brings each plant asset record up to date by recording
three amounts: (1) annual depreciation expense, (2) accu- 2 Do not write in Section 2 until the asset is
mulated depreciation, and (3) ending book value. disposed of.
The amount recorded in the Annual Depreciation 3 Each year the asset is owned, record the year’s
Expense column is the amount calculated for each year. annual depreciation expense in Section 3. Calcu-
These amounts may be different if the asset is bought or late and record accumulated depreciation and
sold at a time other than near the fiscal year beginning or ending book value.
end.
Accumulated depreciation for the first year is the annual
depreciation expense for the first year. In later years, accu-
542 Chapter 18 Accounting for Plant Assets and Depreciation
J O U R N A L I Z I N G A N N U A L D E P R E C I AT I O N E X P E N S E
1 2 3 4
TRIAL BALANCE ADJUSTMENTS
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT
12 Store Equipment 41 5 4 6 35
(g)
13 Accum. Depr.—Store Equipment 16 0 4 9 00 9 2 5 0 00 2
(g)
40 Depr. Exp.—Store Equipment 1 9 2 5 0 00
41
1. Depreciation 2. Accumulated
Expense Debit Depreciation Credit
GENERAL JOURNAL PAGE 15
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
3. Record Adjusting
NO. REF.
Entry
14 31 Depr. Exp.—Store Equipment 9 2 5 0 00 14
15 Accum. Depr.—Store Equipment 9 2 5 0 00 15 3
16 16
At the end of the fiscal year, Restaurant Supply calcu-
lates the depreciation expense for each plant asset. The
Store Equipment
depreciation expense for each asset is recorded on its plant
asset record. Next, the total depreciation expense is calcu- Dec. 31 Bal. 41,546.35
lated for all plant assets recorded in the same plant asset
account.
Depreciation Expense—Store Equipment
Restaurant Supply determined that total depreciation
expense for store equipment is $9,250.00. An adjust- Dec. 31 Adj. 9,250.00
ment is planned in the Adjustments columns of the work
sheet. Using this information, an adjusting entry is then
recorded in a general journal. Accumulated Depreciation—Store Equipment
It is important to retain original cost information for Jan. 1 Bal. 16,049.00
plant assets. Rather than credit the plant asset account, Dec. 31 Adj. 9,250.00
depreciation is recorded to the contra asset account Accu- (Dec. 31 Bal. 25,299.00)
mulated Depreciation.
ANALYZING AND
Accumulated Depreciation JOURNALIZING
Debit Credit S T E P S ANNUAL
Decrease
DEPRECIATION
EXPENSE
Increase
1 Write the total annual depreciation expense, $9,250.00,
in the Adjustments Debit column on the Depreciation
Expense—Store Equipment line of the work sheet. Label
the adjustment (g), with a small letter in parentheses.
At any time, the book value of plant assets can be calcu- 2 Write the same amount, $9,250.00, in the Adjustments
lated by subtracting Accumulated Depreciation from the Credit column on the Accumulated Depreciation—Store
plant asset account. Equipment line of the work sheet. Label the adjustment
using the same letter, (g).
3 Use the debit and credit accounts on the work sheet to
record an adjusting entry in a general journal.
Journalizing Depreciation Expense Lesson 18-3 543
POSTING AN ADJUSTING ENTRY
F O R D E P R E C I AT I O N E X P E N S E
GENERAL JOURNAL PAGE 15
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
14 31 Depr. Exp.—Store Equipment 6125 9 2 5 0 00 14
15 Accum. Depr.—Store Equipment 1220 9 2 5 0 00 15
16 16
17 17
1. Debit Depreciation 1 2
Expense 2. Credit
Accumulated
ACCOUNT Store Equipment ACCOUNT NO. 1215 Depreciation
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Dec. 4 CP24 2 5 0 00 41 5 4 6 35
ACCOUNT Accumulated Depreciation—Store Equipment ACCOUNT NO. 1220
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Jan. 1 Balance ⻫ 16 0 4 9 00
Dec. 31 G15 9 2 5 0 00 25 2 9 9 00
ACCOUNT Depreciation Expense—Store Equipment ACCOUNT NO. 6125
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Dec. 31 G15 9 2 5 0 00 9 2 5 0 00
The adjustment for depreciation expense planned on the tra account Accumulated Depreciation—Store Equipment
work sheet is recorded as an adjusting entry in the general has a credit balance showing the accumulated deprecia-
journal. The adjusting entry is then posted to the general tion recorded to date.
ledger. The debit balance of Depreciation Expense—Store
After posting, Store Equipment has a debit balance Equipment is the portion of the cost of plant assets allo-
showing the original cost of all store equipment. The con- cated to expense during the fiscal period.
POSTING AN ADJUSTING
S T E P S ENTRY FOR DEPRECIATION R E M E M B E R
EXPENSE An adjusting entry is made to record
the depreciation expense for each
1 Post the debit, $9,250.00, to Depreciation Expense—Store category of plant assets. Restaurant
Supply also records an adjusting entry
Equipment.
for Depreciation Expense—Office
2 Equipment and Accumulated
Post the credit, $9,250.00, to Accumulated Depreciation—
Depreciation—Office
Store Equipment. Equipment.
544 Chapter 18 Accounting for Plant Assets and Depreciation
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. What method is used to record accumulated depreciation while also
TERM REVIEW retaining original cost information for plant assets?
2. How does an adjusting entry for depreciation expense change the
plant asset record balance of the asset account?
WORK TOGETHER 183
Journalizing depreciation
Use the depreciation tables from Work Together 18-2. Additional forms are given in the Working Papers. Your instruc-
tor will guide you through the following examples.
1. Complete each plant asset record for the years 20X1 through 20X3. Use the following additional information.
Plant Serial
Description General Ledger Account Date Bought Asset No. No.
Computer Monitor 1215-Store Equipment Jan. 3 241 51-4882
Notebook Computer 1205-Office Equipment Oct. 19 242 GY1281
2. On December 31, Fairbrother, Inc., determined that total depreciation expense for office equipment was
$4,230.00. Plan the work sheet adjustment and label the adjustment (f). Record the adjusting entry on page 20 of
a general journal and post the entry to the general ledger. Save your work to complete Work Together 18-4.
ON YOUR OWN 183
Journalizing depreciation
Use the depreciation tables from On Your Own 18-2. Additional forms are given in the Working Papers. Work this
problem independently.
1. Complete each plant asset record from the years 20X1 through 20X3. Use the following additional information:
Plant Serial
Description General Ledger Account Date Bought Asset No. No.
Sound System 1215-Store Equipment Jan. 6 353 12488BF2
Shredder 1205-Office Equipment May 22 354 34-432-2
2. On December 31, Wrench Co. determined that total depreciation expense for store equipment was $9,880.00.
Plan the work sheet adjustment and label the adjustment (g). Record the adjusting entry on page 18 of a general
journal and post the entry to the general ledger. Save your work to complete On Your Own 18-4.
Journalizing Depreciation Expense Lesson 18-3 545
L E S S O N
Disposing of Plant Assets
18-4
SA L E O F A P L A N T A S S E T FO R B O O K VA LU E
CASH RECEIPTS JOURNAL PAGE 1
1 2 3 4 5 6 7
DOC. POST. GENERAL ACCOUNTS SALES SALES TAX SALES CASH
DATE ACCOUNT TITLE NO. REF. RECEIVABLE PAYABLE DISCOUNT
DEBIT CREDIT CREDIT DEBIT
CREDIT CREDIT DEBIT
8 1 6 Accum. Depr.—Store Equipment R4 3 0 0 0 00 2 5 0 00 8
9 Store Equipment 3 2 5 0 00 9
10 10
1. Remove the original cost of the plant asset and its related
2. Complete Section 2
accumulated depreciation. Record the cash received.
of the plant asset
Disposed of: Discarded Sold ⻫ Traded
2 record.
Date January 6, 20X6 Disposal Amount $250.00
When a plant asset is no longer useful to a business, the Cash received $250.00
asset may be disposed of. The old plant asset may be sold, Less: Book value of
traded for a new asset, or discarded. asset sold:
When a plant asset is disposed of, a journal entry is Cost $3,250.00
recorded that achieves the following: Accum. Depr. 3,000.00 250.00
Gain (loss) on sale of
1. Removes the original cost of the plant asset and its
plant asset $ 0.00
related accumulated depreciation.
2. Recognizes any cash or other asset received for the old
The amount of gain or loss, if any, is calculated by sub-
plant asset.
tracting the book value from the cash received. The dis-
3. Recognizes any gain or loss on the disposal.
play case was sold for its book value. Therefore, no gain or
loss exists.
January 6, 20X6. Received cash from sale of
display case, $250.00: original cost, $3,250.00;
RECORDING SALE
total accumulated depreciation through
S T E P S OF A PLANT ASSET
December 31, 20X5, $3,000.00. Receipt No. 4.
FOR BOOK VALUE
Cash 1 Record an entry in the cash receipts journal to
250.00 remove the original cost, $3,250.00, from Store
Equipment and $3,000.00 from Accumulated
Accumulated Depreciation— Depreciation—Store Equipment. Record the cash
Store Equipment received from the sale, $250.00, as a debit to
Cash.
3,000.00 Bal. 3,000.00
2 Check the type of disposal, Sold, and write the
Store Equipment date, January 6, 20X6, and disposal amount,
$250.00, in Section 2 of the plant asset record.
Bal. 3,250.00 3,250.00
546 Chapter 18 Accounting for Plant Assets and Depreciation
R E C O R D I N G A P L A N T A S S E T ’ S D E P R E C I AT I O N
E X P E N S E FO R A PA R T I A L Y E A R
1. Debit the depreciation
expense account.
GENERAL JOURNAL PAGE 4
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
20X7
1 Apr. 4 Depr. Exp.—Store Equipment M31 1 6 0 00 1
2 Accum. Depr.—Store Equipment 2 6 0 00 2
3. Update Section 3 of the 2. Credit the accumulated
plant asset record. depreciation account.
YEAR ANNUAL DEPRECIATION ACCUMULATED ENDING
EXPENSE DEPRECIATION BOOK VALUE
20X5 240.00 1,200.00 600.00
20X6 240.00 1,440.00 360.00
20X7 3 60.00 1,500.00 300.00
A plant asset may be sold at any time during the asset’s
useful life. When a plant asset is sold, its depreciation April 4, 20X7. Recorded a partial year’s depreciation
from the beginning of the current fiscal year to the date of on a safe to be sold, $60.00. Memorandum No. 31.
disposal must be recorded.
On April 4, 20X7, Restaurant Supply intends to sell a
safe that was bought on January 12, 20X1, for $1,800.00. Depreciation Expense—Store Equipment
Annual depreciation expense for the safe is $240.00. Add. Depr. 60.00
Depreciation recorded through December 31, 20X6, is
$1,440.00. Accumulated Depreciation—
The method to calculate a partial year’s depreciation Store Equipment
is the same as calculating depreciation when an asset is Bal. 1,440.00
purchased during the fiscal year. The monthly deprecia- Add. Depr. 60.00
tion expense is multiplied by the number of months the (New Bal. 1,500.00)
asset is used during the current fiscal year. Depreciation
is calculated for each month prior to the month the plant
asset is sold. Thus, Restaurant Supply will depreciate the The depreciation is also recorded on the plant asset
safe for three months, January through March. record for the safe.
RECORDING A
Annual Monthly S T E P S PARTIAL YEAR’S
Depreciation Months Depreciation DEPRECIATION
Expense ⴜ in a Year ⴝ Expense
$240.00 12 $20.00 1 Record a debit, $60.00, to Depreciation Expense—
Store Equipment in the general journal.
2 Record a credit, $60.00, to Accumulated Deprecia-
Number Partial tion—Store Equipment in the general journal.
Monthly of Months Year‘s
3 Record the depreciation expense in Section 3 of
Depreciation Asset is Depreciation
the plant asset record for the safe. Calculate and
Expense ⴛ Used ⴝ Expense
record accumulated depreciation and ending
$20.00 3 $60.00
book value.
Disposing of Plant Assets Lesson 18-4 547
SA L E O F A P L A N T A S S E T FO R M O R E T H A N B O O K VA LU E
CASH RECEIPTS JOURNAL PAGE 4
1 2 3 4 5 6 7
DOC. POST. GENERAL ACCOUNTS SALES SALES TAX SALES CASH
DATE ACCOUNT TITLE NO. REF. RECEIVABLE PAYABLE DISCOUNT
DEBIT CREDIT CREDIT DEBIT
CREDIT CREDIT DEBIT
20X7
1 Apr. 4 Accum. Depr.—Store Equipment R47 1 5 0 0 00 4 2 5 00 1
2
1 Store Equipment 1 8 0 0 00 2
3 Gain on Plant Assets 1 2 5 00 3
1. Record an entry to remove asset, 2. Complete
record gain, and record cash. Section 2
⻫ of the plant
Disposed of: Discarded Sold Traded
April 4, 20X7 $425.00 2 asset record.
Date Disposal Amount
YEAR ANNUAL DEPRECIATION ACCUMULATED ENDING
EXPENSE DEPRECIATION BOOK VALUE
Revenue that results when a plant asset is sold for more A gain from the sale of plant assets is not an operat-
than book value is called gain on plant assets. Restaurant ing revenue. Therefore, Gain on Plant Assets is listed in
Supply is selling a safe for $425.00. After the partial year’s a classification titled “Other Revenue” in the chart of
depreciation is recorded, a journal entry is made to record accounts.
the sale of the safe.
Cash
April 4, 20X7. Received cash from sale of 425.00
safe, $425.00: original cost, $1,800.00;
accumulated depreciation through April Accumulated Depreciation—
Store Equipment
4, 20X7, $1,500.00. Receipt No. 47.
1,500.00 Bal. 1,500.00
The gain or loss on the sale of a plant asset is the book Store Equipment
value subtracted from cash received. Bal. 1,800.00 1,800.00
Cash received $425.00 Gain on Plant Assets
Less: Book value of 125.00
asset sold:
Cost $1,800.00
Accum. Depr. 1,500.00 300.00
Gain (loss) on sale RECORDING SALE
of plant asset $125.00 OF A PLANT ASSET
S T E P S
FOR MORE THAN
The gain realized on the disposal of a plant asset is BOOK VALUE
credited to a revenue account titled Gain on Plant Assets.
1 Record an entry in the cash receipts journal to
remove the original cost, $1,800.00, from Store
Gain on Plant Assets Equipment and $1,500.00 from Accumulated
Depreciation—Store Equipment. Record the gain
Debit Credit
on the sale, $125.00, as a credit to Gain on Plant
Decrease
Assets. Record the cash received from the sale,
Increase
$425.00, as a debit to Cash.
2 Check the type of disposal, Sold, and write the
date, April 4, 20X7, and disposal amount, $425.00,
in Section 2 of the plant asset record for the safe.
548 Chapter 18 Accounting for Plant Assets and Depreciation
SA L E O F A P L A N T A S S E T FO R L E S S T H A N B O O K VA LU E
DOC. POST. GENERAL ACCOUNTS SALES SALES TAX SALES CASH
DATE ACCOUNT TITLE NO. REF. RECEIVABLE PAYABLE DISCOUNT
DEBIT CREDIT CREDIT DEBIT
CREDIT CREDIT DEBIT
20X7
1 Oct. 6 Accum. Depr.—Office Equipment R281 1 5 0 0 00 1 5 0 00 1
2
1 Loss on Plant Assets 2 5 0 00 2
3 Office Equipment 1 9 0 0 00 3
1. Record an entry to dispose of the asset, record a loss on 2. Complete
plant assets, and record cash. Section 2
Disposed of: Discarded Sold ⻫ Traded
of the plant
2
Date October 6, 20X7 Disposal Amount $150.00 asset record.
The loss that results when a plant asset is sold for less A loss from the sale of plant assets is not an operating
than book value is called loss on plant assets. Restaurant expense. Therefore, Loss on Plant Assets is listed in a classi-
Supply sold a computer after three years of use. After the fication titled “Other Expenses” in the chart of accounts.
partial year’s depreciation is recorded, a journal entry is
made to record the sale of the computer.
Cash
150.00
October 6, 20X7. Received cash from sale of a
computer, $150.00: original cost, $1,900.00; Accumulated Depreciation—
total accumulated depreciation through Office Equipment
October 1, 20X7, $1,500.00. Receipt No. 281. 1,500.00 Bal. 1,500.00
Loss on Plant Assets
The gain or loss on the sale of a plant asset is the book 250.00
value subtracted from cash received.
Office Equipment
Cash received $ 150.00
Bal. 1,900.00 1,900.00
Less: Book value of
asset sold:
Cost $1,900.00
Accum. Depr. 1,500.00 400.00 RECORDING SALE
Gain (loss) on sale of OF A PLANT ASSET
plant asset $(250.00) S T E P S
FOR LESS THAN
BOOK VALUE
The loss realized on the disposal of a plant asset is
debited to an other expense account titled Loss on Plant 1 Record an entry in the cash receipts journal to
Assets. remove the original cost, $1,900.00, from Office
Equipment and $1,500.00 from Accumulated
Depreciation—Office Equipment. Record the loss
Loss on Plant Assets on the sale, $250.00, as a debit to Loss on Plant
Debit Credit Assets. Record the cash received from the sale,
$150.00, as a debit to Cash.
Decrease
2 Check the type of disposal, Sold, and write the
Increase
date, Oct. 6, 20X7, and disposal amount, $150.00,
in Section 2 of the plant asset record for the
computer.
Disposing of Plant Assets Lesson 18-4 549
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. What is recorded on plant asset records for plant assets that have been
disposed of?
2. When an asset is disposed of after the beginning of the fiscal year, what
entry may need to be recorded before an entry is made for the discard-
TERMS REVIEW
ing of a plant asset?
3. What is the formula to calculate the gain or loss on the sale of a plant
asset? gain on plant assets
4. In what account classification is Loss on Plant Assets listed? loss on plant assets
WORK TOGETHER 184
Recording the disposal of plant assets
Use the plant asset records from Work Together 18-3. Your instructor will guide you through the following examples.
1. For each of the following transactions completed in 20X4, journalize an entry for additional depreciation, if
needed. Use page 11 of a general journal given in the Working Papers. Source documents are abbreviated as
follows: memorandum, M; receipt, R.
Transactions:
Jan. 6. Received cash for sale of a computer monitor, plant asset No. 241, $290.00. R4.
Jul. 12. Received cash for sale of a notebook computer, plant asset No. 242, $800.00. M67 and R203.
2. Use page 1 of a cash receipts journal to record the disposal of each plant asset.
3. Make appropriate notations in the plant asset records.
ON YOUR OWN 184
Recording the disposal of plant assets
Use the plant asset records from On Your Own 18-3. Work this problem independently.
1. For each of the following transactions completed in 20X4, journalize an entry for additional depreciation, if
needed. Use page 10 of a general journal given in the Working Papers. Source documents are abbreviated as
follows: memorandum, M; receipt, R.
Transactions:
Jan. 2. Received cash for sale of a sound system, plant asset No. 353, $4,000.00. R11.
Oct. 3. Received cash for sale of a shredder, plant asset No. 354, $325.00. M82 and R255.
2. Use page 8 of a cash receipts journal to record the disposal of each plant asset.
3. Make appropriate notations in the plant asset records.
550 Chapter 18 Accounting for Plant Assets and Depreciation
L E S S O N
Declining-Balance Method
18-5 of Depreciation
C A L C U L AT I N G D E P R E C I AT I O N U S I N G T H E
DOUBLE DECLININGBALANCE METHOD
Original Cost: $25,000.00
Plant Asset: Truck Estimated Salvage Value: $2,500.00
Depreciation Method: Double Declining-Balance Estimated Useful Life: 5 years
Declining- Annual
Year Beginning Book Value Balance Rate 1 Depreciation Ending Book Value
1 $25,000.00 40% 2 $10,000.00 3 $15,000.00
2 4 15,000.00 40% 6,000.00 9,000.00
4. Transfer the book value to the 1. Calculate 2. Determine the annual 3. Determine the
following year. rate. depreciation expense. ending book value.
The straight-line method charges an equal amount of Multiplying the book value by a constant depreciation
depreciation expense each year. However, many plant rate at the end of each fiscal period is called the declining-
assets depreciate more in the early years of useful life than balance method of depreciation.
in later years. For example, a truck’s value will decrease The declining-balance depreciation rate is a multiple
more in the first year than in later years. Therefore, charg- of the straight-line rate. Many businesses use a declin-
ing more depreciation expense in the early years may be ing-balance rate that is two times the straight-line rate.
more accurate than charging the same amount each year. This method of depreciation is referred to as the double
[CONCEPT: Matching Expenses with Revenue] declining-balance method.
CALCULATING DEPRECIATION USING THE DOUBLE
S T E P S
DECLININGBALANCE METHOD
1 Calculate the double declining-balance rate. An example of a plant asset with a five-year life is shown.
Estimated Years of Estimated Straight-line Rate
Depreciation Expense ⴜ Useful Life ⴝ of Depreciation
100% 5 20%
Straight-line Rate Double Declining-
of Depreciation ⴛ 2 ⴝ balance Rate
20% 2 40%
2 Multiply the double declining-balance rate by the beginning book value to determine the annual deprecia-
tion expense for a given year ($25,000.00 40% $10,000.00).
3 Subtract the annual depreciation expense from the beginning book value to determine the ending book
value ($25,000.00 $10,000.00 $15,000.00).
4 Transfer the ending book value to the beginning book value for the following year. Calculating the deprecia-
tion expense in the last year of an asset’s life is described on the next page.
Declining-Balance Method of Depreciation Lesson 18-5 551
C A L C U L AT I N G T H E L A S T Y E A R ’ S D E P R E C I AT I O N E X P E N S E
Original Cost: $25,000.00
Plant Asset: Truck Estimated Salvage Value: $2,500.00
Depreciation Method: Double Declining-Balance Estimated Useful Life: 5 years
Declining- Annual
Year Beginning Book Value Balance Rate Depreciation Ending Book Value
1 $25,000.00 40% $10,000.00 $15,000.00
2 15,000.00 40% 6,000.00 9,000.00
3 9,000.00 40% 3,600.00 5,400.00
4 5,400.00 40% 2,160.00 3,240.00
5 1 3,240.00 —— 2 740.00 3 2,500.00
Total $22,500.00
Depreciation
1. Transfer the book value. 2. Determine the last year's 3. Verify the ending
depreciation. book value.
Although the depreciation rate is the same each year, the When this situation exists, most companies that use
annual depreciation expense declines from one year to the the declining-balance method of depreciation switch to
next. the straight-line method sometime during the life of the
A plant asset is never depreciated below its estimated plant asset. To determine when to switch to the straight-
salvage value. Therefore, in the last year, only enough line method of depreciation, each year a company com-
depreciation expense is recorded to reduce the book value pares the annual depreciation expense calculated using
of the plant asset to its salvage value. the straight-line method to the annual depreciation
Sometimes in the last year of a plant asset’s useful life, expense calculated using the declining-balance method.
the formula for the double declining-balance method of If the annual depreciation expense using the straight-line
depreciation results in an ending book value greater than method is greater than the annual depreciation expense
the estimated salvage value. In other words, the deprecia- using the declining-balance method, the company should
tion formula does not create enough accumulated depreci- use the straight-line method.
ation to reduce the book value down to what is a relatively
small estimated salvage value.
S T E P S CALCULATING THE LAST YEAR’S DEPRECIATION EXPENSE
1 Transfer the ending book value from Year 4 to the beginning book value of Year 5.
2 Subtract the salvage value of the plant asset from the beginning book value
to determine the depreciation expense for the last year of useful life
($3,240.00 $2,500.00 $740.00).
R E M E M B E R
3 Verify that the ending book value is equal to the salvage value.
R E M E M B E R Unlike the straight-line method,
the declining-balance method
does not use the estimated salvage
value to calculate depreciation.
The estimated salvage value
is used only to limit the last
year’s depreciation expense.
552 Chapter 18 Accounting for Plant Assets and Depreciation
C O M P A R I S O N O F T W O M E T H O D S O F D E P R E C I AT I O N
Plant Asset: Computer Original Cost: $4,000.00
Depreciation Method: Comparison of Two Methods Estimated Salvage Value: $500.00
Estimated Useful Life: 5 years
Straight-Line Method Double Declining-Balance Method
Beginning Book Annual Ending Book Beginning Book Annual Ending Book
Year Value Depreciation Value Value Depreciation Value
1 $4,000.00 $700.00 $3,300.00 $4,000.00 $1,600.00 $2,400.00
2 3,300.00 700.00 2,600.00 2,400.00 960.00 1,440.00
3 2,600.00 700.00 1,900.00 1,440.00 576.00 864.00
4 1,900.00 700.00 1,200.00 864.00 345.60 518.40
5 1,200.00 700.00 500.00 518.40 18.40 500.00
Total
Depreci- —— $3,500.00 —— —— $3,500.00 ——
ation
Regardless of the depreciation method used, the total The double declining-balance method is slightly more
depreciation expense over the useful life of a plant asset complicated. This method records a greater depreciation
is the same. The accounts used in the journal entries to expense in the early years than the straight-line method.
record depreciation expense and the sale of plant assets are The declining-balance method is referred to as an accel-
also the same. erated depreciation method. The method accelerates the
Each depreciation method is acceptable according to recording of depreciation in the early years of the asset’s
generally accepted accounting principles. The straight-line useful life.
method is easy to calculate. The same amount of deprecia-
tion expense is recorded for each year of estimated useful
life.
BUSINESS STRUCTURES
P i e r c i n g t h e C or po r a t e Ve i l
A major advantage of a corporation is the limited liability If this type of abuse occurs
for its owners. This protection from liability is sometimes and creditors are not
referred to as a corporate veil, or shield. It protects the per- being paid, the court will
sonal assets of stockholders from creditors’ claims. pierce the corporate veil
To benefit from the corporate veil, however, stockhold- and hold owners active
ers must keep corporate affairs completely separate from in management person-
their personal affairs. If this separation is maintained, only ally liable to creditors.
the corporation’s assets are available for payment of credi-
PHOTO: PHOTODISC/GETTY IMAGES
tors’ claims. If the owners do not maintain this separation Critical Thinking
and, for example, pay personal bills with corporate funds, Why would courts consider
the corporate protection may be lost. paying personal expenses
A court “pierces the corporate veil” when it imposes per- from corporate funds to be a
sonal liability for corporate debts on shareholders active in reason for piercing the corpo-
the management of a corporation. For example, owners rate veil?
might pay themselves excessive salaries or other benefits.
Declining-Balance Method of Depreciation Lesson 18-5 553
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. When calculating depreciation expense using the declining-balance
method, what number stays constant each fiscal period?
2. What is the declining-balance method that uses twice the straight-line
rate? TERM REVIEW
3. What change occurs in the annual depreciation expense calculated
using the declining-balance method? declining-balance
4. An asset is never depreciated below what amount? method of depreciation
WORK TOGETHER 185
Calculating depreciation using the double declining-balance depreciation method
Depreciation tables for Clearwater Clothiers are given in the Working Papers. Your instructor will guide you through
the following example.
1. Complete a depreciation table for each of the following plant assets purchased during the current year. Use the
double declining-balance depreciation method. Round amounts to the nearest cent.
Estimated Estimated
Salvage Useful
Date Description Original Cost Value Life
Jan. 4 Truck $22,000.00 $2,200.00 4 years
Jan. 6 Cash Register $1,200.00 $100.00 5 years
Jan. 7 Clothing Rack $500.00 $50.00 8 years
ON YOUR OWN 185
Calculating depreciation using the double declining-balance depreciation method
Depreciation tables for Teton Skis are given in the Working Papers. Work this problem independently.
1. Complete a depreciation table for each of the following plant assets purchased during the current year. Use the
double declining-balance depreciation method. Round amounts to the nearest cent.
Estimated Estimated
Salvage Useful
Date Description Original Cost Value Life
Jan. 2 Ski Rack $1,200.00 $100.00 5 years
Jan. 4 Delivery Truck $25,000.00 $2,000.00 3 years
Jan. 6 Filing Cabinet $600.00 $50.00 4 years
554 Chapter 18 Accounting for Plant Assets and Depreciation
SUMMARY
After completing this chapter, you can: 5. Prepare plant asset records and journalize
annual depreciation expense.
1. Define accounting terms related to plant assets,
depreciation, and property tax expense. 6. Record entries related to disposing of plant
assets.
2. Identify accounting concepts and practices
related to accounting for plant assets, deprecia- 7. Calculate depreciation expense using
tion, and property tax expense. the double declining-balance method of
depreciation.
3. Record the buying of a plant asset and the pay-
ing of property tax.
4. Calculate depreciation expense and book value
using the straight-line method of depreciation.
EXPLORE ACCOUNTING
A c c o u nt i n g f o r L e a s e s
Leasing has become a popular alternative to Accountants often apply the concept of sub-
purchasing a new car. The customer, called stance over form when accounting for eco-
the lessee, has use of the car during the nomic transactions. Substance refers to the
lease period. At the end of the lease term, underlying nature of the transaction. Form
the car dealer, called the lessor, may give considers only the appearance of the trans-
the lessee the option to purchase the car. action. FASB (Financial Accounting Stan-
The accounting for a lease and the buy- dards Board) Statement No. 13, Accounting
ing of an asset on account are very different. for Leases, provides accountants with guide-
Normally, a leased asset is not recorded on the lines for evaluating lease agreements. If one
balance sheet as a plant asset, and the future lease of four criteria is met, the lease is recorded as if the
payments are not recorded as a liability. Lease payments asset were purchased, referred to as a capital lease.
are charged to Rent Expense when paid. In contrast, an
asset bought on account is recorded on the balance sheet Research: Investigate the terms of leases offered by a
as a plant asset and the total payments are recorded as a local car dealership and an apartment complex. Identify
liability. Each month, Depreciation Expense is charged and factors, such as lease term and maintenance, that differ
the interest expense is recorded on the monthly note pay- between the two leases. Disregarding the rules of FASB
ment. In addition, the liability account is debited; the cash Statement No. 13, would you consider the substance of
and accumulated depreciation accounts are credited. Thus, either lease to be a purchase of the asset?
the decision to lease or buy plant assets can have a dra-
PHOTO: PHOTOGRAPHER’S CHOICE/GETTY IMAGES
matic impact on the financial statements of a company.
Accounting for Plant Assets and Depreciation Chapter 18 555
181 APPLICATION PROBLEM
Journalizing buying plant assets and paying property tax
The cash payments journal and selected general ledger accounts for Umeki Food Source are given in the
Working Papers.
Instructions:
1. Journalize the following transactions completed during the current year. The abbreviation for a check is C.
Transactions:
Jan. 4. Paid cash for office desk, $700.00. C334.
5. Paid cash for a freezer, $4,200.00. C337.
Feb. 24. Paid property taxes on real property with an assessed value of $240,000.00. The tax rate in the
city where the property is located is 1.4% of assessed value. C411.
May 12. Paid cash for shopping carts, $1,250.00. C534.
2. Post the general columns of the cash payments journal.
182 APPLICATION PROBLEM
Calculating straight-line depreciation
Planter Stores depreciates plant assets using the straight-line depreciation method. If the asset was not
bought at the beginning of 20X1, calculate the depreciation expense for the part of 20X1 during which the
company owned the asset.
Instructions:
1. Prepare a depreciation table for each of the following plant assets bought by Planter Stores during 20X1.
Depreciation tables are given in the Working Papers. Save your work to complete Application Problem 18-3.
Transactions:
Jan. 4. Bought a cooler costing $1,400.00; estimated salvage value, $350.00; estimated useful life, 7
years; plant asset No. 311; serial number, 47367BX34.
Mar. 30. Bought an office chair, $500.00; estimated salvage value, $50.00; estimated useful life, 5 years;
plant asset No. 312; serial number, 1727X6B3.
Aug. 2. Bought a sale sign, $350.00; estimated salvage value, $50.00; estimated useful life, 5 years; plant
asset no. 313; serial number, BC762761.
183 APPLICATION PROBLEM
Preparing plant asset records
Instructions:
1. Using the depreciation tables prepared in Application Problem 18-2, prepare a plant asset record for each
plant asset. Plant asset records are given in the Working Papers. Record the depreciation and book values
for 20X1–20X4. Save the plant asset records for use in Application Problem 18-5.
( Go Beyond the Book
)
For more information go to
www.C21accounting.com
556 Chapter 18 Accounting for Plant Assets and Depreciation
184 APPLICATION PROBLEM
Journalizing annual depreciation expense
Instructions:
1. On December 31, Ester Engineering, Inc., determined that total depreciation expense for office equipment
was $4,320.00. Plan the work sheet adjustment and label the adjustment (f). Record the adjusting entry on
page 14 of a general journal and post the transaction to the general ledger. Forms are given in the Working
Papers.
185 APPLICATION PROBLEM
Recording the disposal of plant assets
During 20X5, Planter Stores had the following transactions involving the sale of plant assets. Use the plant
asset records completed in Application Problem 18-3. Journals are given in the Working Papers.
Transactions:
Jan. 6. Received cash for sale of an office chair, plant asset No. 312, $250.00. R4.
Mar. 29. Received cash for sale of a sale sign, plant asset No. 313, $130.00. M3 and R53.
July 8. Received cash for sale of a cooler, plant asset No. 311, $300.00. M34 and R125.
Instructions:
1. For each plant asset disposed of in 20X5, journalize an entry for additional depreciation, if needed. Use
page 3 of a general journal. Source documents are abbreviated as follows: check, C; memorandum, M;
receipt, R.
2. Use page 3 of a cash receipts journal to record the disposal of each plant asset.
3. Make appropriate notations in the plant asset records.
186 APPLICATION PROBLEM
Calculating depreciation using the double declining-balance depreciation method
Instructions:
1. Depreciation tables are given in the Working Papers. Complete a depreciation table for each of the fol-
lowing plant assets purchased during the current year. Use the double declining-balance depreciation
method. Round amounts to the nearest cent.
Estimated Estimated
Date Description Original Cost Salvage Value Useful Life
Jan. 3 Display Case $1,600.00 $200.00 8 years
Jan. 5 Truck $30,000.00 $2,500.00 4 years
Jan. 8 Mixer $2,400.00 $300.00 5 years
187 MASTERY PROBLEM
Recording transactions for plant assets
Hillside Resort records plant assets in two accounts: Room Furnishings, Account No. 1205, and Equipment,
Account No. 1215. Room furnishings are depreciated using the double declining-balance method. Equipment
is depreciated using the straight-line method. Forms are given in the Working Papers.
Accounting for Plant Assets and Depreciation Chapter 18 557
Instructions:
1. Record the following transactions completed during 20X1 on page 1 of a cash payments journal.
Transactions:
Jan. 5. Bought a dining table: cost, $2,200.00; estimated salvage value, $200.00; estimated useful life,
5 years; plant asset No. 892; serial number, 903452. C435.
Feb. 26. Paid property taxes on plant assets assessed at $1,600,000.00. The tax rate is 0.8%. C534.
Apr. 5. Bought an air purifier for the office: cost, $1,300.00; estimated salvage value, $100.00; estimated
useful life, 6 years; plant asset No. 893; serial number, BE35CC. C577.
2. Complete Section 1 of a plant asset record for each new plant asset.
3. Prepare a depreciation table for each new plant asset.
4. Complete Section 3 of the plant asset records for 20X1–20X4.
5. Record the following transactions completed during 20X5. Use page 2 of a cash receipts journal and page
18 of a general journal.
Transactions:
Jan. 6. Received cash for sale of a dining table, plant asset No. 892, $300.00. R4.
Jul. 2. Received cash for sale of an air purifier, plant asset No. 893, $200.00. M31 and R77.
Dec. 31. Recorded the adjusting entry for depreciation expense—room furnishings. Total 20X5 deprecia-
tion expense of room furnishings was $38,520.00.
6. Complete the plant asset records for each plant asset sold during 20X5.
188 CHALLENGE PROBLEM
Calculating a partial year’s depreciation using the double declining-balance method
Yann Landscaping uses the double declining-balance depreciation method for its equipment. Because many
purchases are made during the year, Yann must calculate a partial year’s depreciation in the first year. Yann
uses the same method to calculate a partial year’s depreciation as was described for Restaurant Supply in this
chapter. The annual depreciation expense is divided by 12 to calculate a monthly depreciation. The monthly
depreciation is then multiplied by the number of months the plant asset was owned during the year. For
subsequent years, the annual depreciation is calculated using the normal method—book value multiplied by
the depreciation rate.
Instructions:
1. Depreciation tables are given in the Working Papers. Prepare depreciation tables for the following assets
purchased in 20X1. Round to the nearest cent.
Transactions:
Apr. 2. Bought a lift, $3,600.00; estimated salvage value, $250.00; estimated useful life, 5 years.
July 24. Purchased a lawnmower, $5,400.00; estimated salvage value, $300.00; estimated useful life,
4 years.
A P P L I E D CO M M U N I C AT I O N
Public accountants often work with persons who do not understand the concept of depreciation. Although these
individuals realize that equipment wears out and loses its value over time, they do not understand why depreciation
is shown as an expense on the income statement.
Keyondra Lynch owns a business that manages several apartment buildings. The business had a net loss of
$25,000.00 last year, largely because of $300,000.00 in building depreciation expense. The business also generated
over $200,000.00 in cash. Ms. Lynch is confused by the financial statements and asks, “Did I make any money or not?”
Instructions: Write a letter to Ms. Lynch, explaining the concept of depreciation. Explain how her business can both
“lose money” (incur expenses) yet have a positive cash flow (pay no cash for certain expenses).
558 Chapter 18 Accounting for Plant Assets and Depreciation
CASE FOR CRITICAL THINKING
Miguel Quintanilla, owner of a business, does not record depreciation expense for the business’s plant assets. Mr.
Quintanilla says that he does not make actual cash payments for depreciation. Therefore, he records an expense for
the use of plant assets only when cash is paid for a plant asset. Do you agree with Mr. Quintanilla’s method? Explain.
AUDITING FOR ERRORS
Jaudon Industries recently purchased two new plant assets. Danielle Hess, accounting clerk, has prepared the fol-
lowing depreciation schedule for the assets.
Plant Asset: Copier Machine Original Cost: $6,000.00
Depreciation Method: Straight-line Estimated Salvage Value: $1,000.00
Estimated Useful Life: 5 years
Beginning Book Annual Accumulated Ending Book
Year Value Depreciation Depreciation Value
20X1 $6,000.00 $1,200.00 $1,200.00 $4,800.00
20X2 $4,800.00 $1,200.00 $2,400.00 $3,600.00
20X3 $3,600.00 $1,200.00 $3,600.00 $2,400.00
20X4 $2,400.00 $1,200.00 $4,800.00 $1,200.00
20X5 $1,200.00 $1,200.00 $6,000.00 $0.00
Plant Asset: Computer System Original Cost: $8,000.00
Depreciation Method: Declining-balance Estimated Salvage Value: $1,000.00
Estimated Useful Life: 5 years
Beginning Book Annual Accumulated Ending Book
Year Value Depreciation Depreciation Value
20X1 $8,000.00 $2,800.00 $2,800.00 $5,200.00
20X2 $5,200.00 $2,080.00 $4,880.00 $3,120.00
20X3 $3,120.00 $1,248.00 $6,128.00 $1,872.00
20X4 $1,872.00 $748.80 $6,876.80 $1,123.20
20X5 $1,123.20 $449.28 $7,326.08 $673.92
Instructions: Determine the accuracy of each depreciation schedule. Identify any corrections that Danielle should
make.
A N A LY Z I N G B E S T B U Y ’S F I N A N C I A L S TAT E M E N T S
Merchandising businesses often rent buildings from companies that specialize in building management. Any modifi-
cations made to the building become the property of the building owner at the end of the lease. These fixed assets
are known as leasehold improvements.
Instructions
1. Review Best Buy’s annual report in Appendix B of this text. Referring to Note 1 beginning on page B-9, what
method of depreciation does Best Buy use to depreciate property and equipment?
2. How does Best Buy determine the useful life of leasehold improvements?
Accounting for Plant Assets and Depreciation Chapter 18 559
Accounting
SOFTWARE
P L A N T A S S E T S A N D D E P R E C I AT I O N
In information technology terms, the ability of users to perform a specific task is known as functionality. Most soft-
ware companies offer their product with the basic functionality, such as recording journal entries, sales, and cash
disbursements, that is needed by all businesses. Additional functionality, such as payroll, fixed assets, credit card
processing, and e-commerce, can be purchased separately if needed.
A company with only a few fixed assets may find it easier and more economical to keep their fixed asset records
on an electronic spreadsheet. The amount of depreciation expense to be recorded would be calculated by the
spreadsheet and recorded in the accounting system using a journal entry.
PEACHTREE APPLICATION PROBLEM 18-1
1. Open (Restore) file 18-1AP.ptb.
2. Journalize and post the transactions related to acquiring plant assets and paying property taxes. Use the Write
Checks task; you do not need to change accounting periods.
3. Print the office equipment and store equipment general ledger accounts from Period 1 through Period 5.
4. Print the Property Tax account for February.
PEACHTREE APPLICATION PROBLEM 18-4
1. Open (Restore) file 18-4AP.ptb.
2. Record entries related to depreciation expense. Record and post $4,320 as the adjusting entry in the general
journal for the total depreciation expense for office equipment.
3. Print the December 31 general journal, the general ledger’s Office Equipment and Accumulated Depreciation-
Office Equipment accounts, and the general ledger’s Depreciation Expense—Office Equipment account.
P L A N T A S S E T S A N D D E P R E C I AT I O N
The information about plant assets is used to prepare depreciation schedules and to prepare the
adjusting entries for depreciation. In QuickBooks, when a new plant asset is acquired, a new plant asset record must
be established. The information to be recorded includes the name of the asset, the seller’s name, the date acquired,
the amount, the serial number of the asset (if available), and the title of the account that will be debited. When the
asset is sold or retired, the plant asset record must be updated to show the asset disposal. Information recorded
at this time includes: the date of sale or disposal; the amount of cash received for the asset; and other information
if the asset was traded for a new asset. QuickBooks requires you to calculate the amount of depreciation for each
plant asset and to enter all depreciation entries into the general journal.
QUICKBOOKS APPLICATION PROBLEM 18-1
1. Open the Umeki Food Source file if it is not already open.
2. Use the Write Checks window to record entries, creating an item for each new asset purchased in the Fixed Asset
Item List option. Record all transactions related to acquiring plant assets, preparing fixed plant asset records,
and paying property taxes.
3. Print a Journal report using January 1 and May 31 as the dates.
4. Print a Fixed Asset Listing report.
QUICKBOOKS APPLICATION PROBLEM 18-4
1. Open the Ester Engineering Inc file.
2. Journalize the depreciation expense in the Make General Journal Entries window. Print a Journal report using
December 31 for the dates.
560 Chapter 18 Accounting for Plant Assets and Depreciation
C A L C U L AT I N G D E P R E C I AT I O N E X P E N S E
The many calculations required by a depreciation schedule make this task a perfect application for an electronic
spreadsheet. Armed with your understanding of how depreciation is calculated, you would begin by creating the
formulas for the first year. Those formulas could be copied down the columns to quickly complete the schedule.
You also need a good understanding of how formulas are copied. By default, formula cell references are relative
references, meaning that the column and row of a cell reference change when the formula is copied. In contrast, the
column and row of absolute references do not change when copied.
When creating the formulas for annual depreciation expense using the straight-line method, you will need to
reference the cells containing the original cost, salvage value, and useful life. These cell references are the same
whether calculating depreciation for year 1 or year 5. Therefore, identifying these cells as absolute references will
enable you to copy the year 1 formula for each year on the schedule.
EXCEL APPLICATION PROBLEM 18-2
Open the F18-2 Excel data file. Follow the step-by-step instructions in the Instructions worksheet. Use absolute
references to create the formulas for annual depreciation expense.
EXCEL APPLICATION PROBLEM 18-3
Open the F18-3 Excel data file. Follow the step-by-step instructions in the Instructions worksheet.
EXCEL APPLICATION PROBLEM 18-6
Open the F18-6 Excel data file. Follow the step-by-step instructions in the Instructions worksheet.
P L A N T A S S E T S A N D D E P R E C I AT I O N
In order for the accounting system to prepare depreciation schedules, complete information must be entered for each
plant asset.
1. Click the Accounts toolbar button.
2. Click the Plant Assets tab.
3. To add a new asset:
a. Enter the asset number.
b. Complete the data fields in the text boxes—asset name, date acquired, useful life, original cost, and salvage value.
c. Enter the appropriate accumulated depreciation and depreciation expense account numbers.
d. Select the desired depreciation method from the drop-down list.
e. Click Add Asset.
4. To change or delete data for an existing plant asset:
a. Select the asset by clicking the text box containing the data you wish to change.
b. Enter the correct data and click the Change Asset button, or click the Delete button to remove the asset from the
database.
Generating and Posting Depreciation Adjusting Entries
At the end of the fiscal period (month or year), the computerized accounting system will generate the adjusting entries
from the information in the plant asset records. To generate and post the adjusting entries:
1. Choose Depreciation Adjusting Entries from the Options menu.
2. Click Yes to generate the depreciation adjusting entries.
3. Click the Post button. The general journal will appear, containing the posted journal entry. Verify the accuracy of the
entry and click the Close button.
AUTOMATED ACCOUNTING APPLICATION PROBLEM 18-2
Open file F18-2.AA8. Display the problem instructions and complete the problem.
AUTOMATED ACCOUNTING MASTERY PROBLEM 18-7
Open file F18-7.AA8. Display the problem instructions and complete the problem.
Accounting for Plant Assets and Depreciation Chapter 18 561
STOCKBYTE/GETTY IMAGES
C H A P T E R 1 9 Accounting for
Inventory
O B J E C T I V E S
After studying Chapter 19, you will be able to: 4. Determine the cost of merchandise inventory
using the fifo, lifo, and weighted-average inven-
1. Define accounting terms related to inventory.
tory costing methods.
2. Identify accounting concepts and practices
5. Estimate the cost of merchandise inventory using
related to inventory.
the gross profit method of estimating inventory.
3. Prepare a stock record.
K E Y T E R M S
• periodic inventory • first-in, first-out inventory • weighted-average inven-
• perpetual inventory costing method tory costing method
• inventory record • last-in, first-out inventory • gross profit method of
• stock record costing method estimating inventory
• stock ledger
( Point Your Browser
www.C21accounting.com
)
562
ACCOUNTING IN THE REAL WORLD
Fender Guitars
Fender Guitars Are Everywhere
When you enter a music store searching for that perfect guitar, you expect to
be able to choose from an extensive variety of guitars. You want a style and
color that reflects your personality, an awesome sound, and a great price.
Equally important, you want a brand name that is respected by musicians
worldwide.
Beginning with its legendary Telecaster®, Fender has produced renowned
DIGITAL VISION/GETTY IMAGES
electric guitars for more than 50 years. The company now offers a wide vari-
ety of electric basses and amplifiers.
Have you ever wondered how small music stores can INTERNET
afford to have such an extensive selection of ACTIVITY
guitars and amplifiers? The money required
to maintain this level of inventory is Notes to the Financial
beyond the financial resources of Statements—Inventory
the typical music store. Costing Methods
To solve this problem, Fender Go to the homepage for
has established relationships Wal-Mart (www.walmart.com)
with various floor-planning and Target Corporation (www.
companies that provide rea- target.com). Search for the
sonable financing to Fender latest annual report for each
dealers. The dealers can pur- company. The annual report
chase product beyond their is usually found under the
financial resources, and pay heading “About Us” or “Inves-
for the product as it is sold. tor Relations.” In the annual
The floor-plan methodology report, usually after the finan-
enables Fender’s dealers to cial statements, you will find
©AFP /GETTY IMAGES
provide their customers with a the notes to the financial
full range of product from which statements. Using these notes
to select. In addition, the inventory (probably Note #1 or #2), look
can be very easily replenished. for the information about
inventory.
Critical Thinking
Instructions
1. Manufacturers in other industries, including automobiles, motorcycles,
1. For each company, state
and appliances, often floor-plan inventory for their distributors. What do
which note contains
these industries have in common with musical instruments?
the information about
2. How does the floor-plan method benefit customers who do not live in inventory.
large metropolitan areas?
2. For each company, find
Source: www.fender.com the method(s) used to
calculate the cost of inven-
tory (fifo, lifo, or weighted
average.)
563
L E S S O N
Determining the Quantity
19-1 of Merchandise Inventory
W H Y M E R C H A N D I S E I N V E N T O R Y I S I M P O R TA N T
Merchandise inventory on hand is typically the largest
asset of a merchandising business. Successful businesses
SMALL BUSINESS
must have merchandise available for sale that customers
want. A business therefore needs controls that assist man- S P O T L I G H T
agers in maintaining a merchandise inventory of sufficient
quantity, variety, and price. Every state has a Small Business
Development Center (SBDC) office,
The cost of merchandise inventory is reported on both which provides a wide range of
the balance sheet and the income statement. An accurate consulting services and seminars.
cost of merchandise inventory is required to correctly Funded by state and federal
report current assets and retained earnings on the bal- governments, SBDCs are directed by
the Small Business Administration
ance sheet. The accuracy of the inventory cost will also and state university personnel.
assure that gross profit and net income are reported cor-
rectly on the income statement. [CONCEPT: Adequate
Disclosure]
CHARACTER COUNTS
Hot l i n e s
The accounting scandals of the early communicate possible ethics violations. A phone number
21st century led the U.S. Congress that allows an individual to provide confidential informa-
to pass legislation designed to tion regarding possible ethics violations is called a hotline.
protect investors by improving An effective hotline must ensure an individual that:
the accuracy and reliability of 1. Management takes hotline calls seriously.
financial reporting. The bill,
2. The information provided will be maintained on an
known as the Sarbanes-Oxley
anonymous or confidential basis.
Act of 2002 (SOX), contains a
3. No retaliation or harassment will be tolerated.
section that requires manage-
ment to make a written state-
ment about the effectiveness
Instructions
Dow’s EthicsLine is available to Dow employees to report
of its internal control system.
PHOTO: STOCKBYTE/GETTY IMAGES
possible violations of its Code of Business Conduct (www.
External auditors must test the
dow.com). Describe how EthicsLine is designed to meet
internal control system to ensure
the three criteria presented above.
that management’s conclusions are
appropriate.
In an effective internal control system,
employees and other stakeholders must be able to
564 Chapter 19 Accounting for Inventory
THE MOST EFFICIENT QUANTIT Y OF INVENTORY
To determine the most efficient quantity of inventory, a which increase with the cost of the merchandise
business makes frequent analysis of purchases, sales, and inventory.
inventory records. Many businesses fail because too much 4. Excess inventory may become obsolete and unsalable.
or too little merchandise inventory is kept on hand. A
Merchandise inventory that is smaller than needed
business that stocks merchandise that does not satisfy the
may also decrease the net income of a business for several
demand of its customers is also likely to fail.
reasons.
A merchandise inventory that is larger than needed may
decrease the net income of a business for several reasons. 1. Sales may be lost to competitors if items wanted by
customers are not on hand.
1. Excess inventory requires that a business spend money
2. Sales may be lost to competitors if there is an insuf-
for expensive store and warehouse space.
ficient variety of merchandise to satisfy customers.
2. Excess inventory uses capital that could be invested in
3. When a business frequently orders small quantities
other assets to earn a profit for the business.
of an item, the price paid is often more per unit than
3. Excess inventory requires that a business spend money
when merchandise is ordered in large quantities.
for expenses, such as taxes and insurance premiums,
METHODS USED TO DETERMINE THE QUANTIT Y
OF MERCHANDISE INVENTORY
The quantity of items in inventory at the end of a fiscal Minimum quantity levels must be established with
period must be determined in order to calculate the cost consideration for how long it may take to receive new
of merchandise sold. inventory. Otherwise, merchandise may not be available
Two principal methods are used to determine the quan- when a customer wants to buy it. Those who order new
tity of each item of merchandise on hand. merchandise must also be aware of the ideal quantities to
order to get the best prices and trade discounts.
1. A merchandise inventory determined by counting,
weighing, or measuring items of merchandise on hand E S/ G E
T T Y I MA GE S
M AG
ND I
is called a periodic inventory. A periodic inventory is BL E
also referred to as a physical inventory.
2. A merchandise inventory determined by keeping a
continuous record of increases, decreases, and balance
on hand is called a perpetual inventory. A perpetual
inventory is also referred to as a book inventory.
Because controlling the quantity of merchandise inven-
tory is so important to a business’s success, many methods
of keeping inventory records are used. Today, most com-
panies use computers to keep track of the inventory on
hand.
Keeping track of merchandise inventory also involves
knowing the ideal quantity for each kind of merchandise
in inventory. To ensure having the appropriate quantity,
companies frequently establish an ideal minimum quan-
tity and an ideal reorder quantity. When the minimum
quantity is reached, new merchandise is ordered.
Determining the Quantity of Merchandise Inventory Lesson 19-1 565
INVENTORY RECORD
3. Unit Price and
1. Stock Number and Description Total Cost
INVENTORY RECORD
DATE December 31, 20-- ITEM Skillet
1 2 3 4 5
STOCK NO. OF UNITS UNIT TOTAL
NUMBER 1 DESCRIPTION
ON HAND PRICE 3 COST
GC-65 12" non-stick aluminum 10 29.95 299.50
GC-66G 14" non-stick aluminum 2 12 2@28.95
10@29.95 357.40
GC-66S 12" cast iron 6 49.95 299.70
Total 3,153.30
2. Actual Units
on Hand
Counting, weighing, or measuring merchandise on hand Columns 1–3 are completed when the business is taking
for a periodic inventory is commonly referred to as “tak- an inventory. Columns 4–5 are completed after the tak-
ing an inventory.” Employees count each item of inven- ing of inventory. The methods used to determine the unit
tory and record the quantities on special forms. To assure prices are discussed later in this chapter.
an accurate and complete count, a business will typically F Y I
be closed during the periodic inventory.
Businesses frequently establish their fiscal period to
end when inventory is at a minimum because it takes less F O R YO U R I N F O R M AT I O N
time to count a smaller inventory. For example, a depart- F Y I
ment store may take an inventory at the end of December.
The amount of merchandise on hand is smaller because Taking an inventory is an involved and
expensive task. An efficient inventory
of holiday sales. Few purchases of additional merchandise
count requires extensive management
are made in December after the holiday sales. All of these planning and employee training.
activities make the merchandise inventory smaller at the Some businesses hire independent
end of December. companies that specialize in taking
A form used during a periodic inventory to record inventories to assist in planning
for and counting the inventory.
information about each item of merchandise on hand
is called an inventory record. The inventory record has
space to record the stock number, description, number
of units on hand, unit price, and total cost of each item.
S T E P S PREPARING AN INVENTORY RECORD
1 Write the stock number and description before the periodic inventory begins.
2 Write the actual count in the No. of Units on Hand column.
3 Write the unit price and calculate the total cost after the physical inventory is completed.
These columns are usually completed by the accounting department.
566 Chapter 19 Accounting for Inventory
STOCK RECORD
STOCK RECORD
Description Skillet, 14" cast iron Stock No. GC-66
Reorder 20 Minimum 10 Location Rack C-24
1 2 3 4 5 6 7
INCREASES DECREASES BALANCE
DATE PURCHASE QUANTITY DATE SALES QUANTITY QUANTITY
INVOICE NO. INVOICE NO.
Oct. 10 5 9
Nov. 2 968 20 29
1 Nov. 12 1726 4 25
Nov. 29 1792 2 23
Dec. 6 1841 3 20 3
2
1. Purchase 2. Sales 3. New Balance
Information Information on Hand
Some businesses keep inventory records that show contin- reorder line of the stock record. A stock record shows the
uously the quantity on hand for each kind of merchandise. quantity but usually not the cost of the merchandise.
A form used to show the kind of merchandise, quantity Purchase information is recorded in the Increases col-
received, quantity sold, and balance on hand is called a umns when additional merchandise is received. Sales
stock record. A separate stock record is prepared for each information is recorded in the Decreases columns when
kind of merchandise on hand. A file of stock records for merchandise is sold. The new balance on hand is recorded
all merchandise on hand is called a stock ledger. after each purchase and sale.
A perpetual inventory system provides day-to-day When a perpetual inventory is kept, errors may be
information about the quantity of merchandise on hand. made in recording or calculating amounts. Also, some
The minimum balance allowed before a reorder must be stock records may be incorrect because merchandise is
placed is also shown on each stock record. The minimum taken from stock and not recorded on stock records. A
balance is the quantity that will typically last until the business should take a periodic inventory at least once a
ordered merchandise can be received from the vendors. fiscal period. The perpetual records are corrected to reflect
When the quantity falls below the minimum, additional the actual quantity on hand as determined by the periodic
merchandise is ordered in the quantity shown on the inventory.
PERPETUAL INVENTORY USING A COMPUTER
Many merchandising businesses use a computer to keep perpetual inventory
records. The point-of-sale terminals at the customer check-out counters are
connected to the computer. The terminals read the Universal Product Codes
(UPC) marked on products.
The stock ledger is stored in the computer. When a UPC is read at the
terminal, the product description and the sales price are retrieved from the
stock ledger and displayed on the terminal. The computer reduces the units
on hand to reflect the item sold. The computer may also periodically check
the quantities in the stock ledger and print a list of items that need to be
reordered.
Determining the Quantity of Merchandise Inventory Lesson 19-1 567
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
TERMS REVIEW
1. Why do successful businesses need an effective inventory system?
2. Identify four reasons why a merchandise inventory that is larger than periodic inventory
needed may decrease the net income of a business.
perpetual inventory
3. When are periodic inventories normally taken?
inventory record
4. How do inventory levels affect the period a business selects for its fiscal
year? Why? stock record
5. How is the accuracy of a perpetual inventory checked? stock ledger
WORK TOGETHER 191
Preparing a stock record
A stock record for Sound Station is given in the Working Papers. Your instructor will guide you through the following
example.
1. Enter the following transactions on the stock record of Stock No. W-394, 16-gauge speaker wire. Source documents
are abbreviated as follows: purchase invoice, P; sales invoice, S.
Transactions:
Oct. 3. Sold 250 feet of W-394 speaker wire. S2543.
27. Purchased 750 feet of W-394 speaker wire. P1542.
29. Sold 300 feet of W-394 speaker wire. S2654.
Dec. 4. Sold 170 feet of W-394 speaker wire. S2801.
ON YOUR OWN 191
Preparing a stock record
A stock record for Frames-R-Us is given in the Working Papers. Work this problem independently.
1. Enter the following transactions on the stock record of Stock No. M-253, an 8 10 white metal frame. Source
documents are abbreviated as follows: purchase invoice, P; sales invoice, S.
Transactions:
Nov. 4. Sold 10 M-253 picture frames. S590.
16. Sold 25 M-253 picture frames. S624.
22. Received 50 M-253 picture frames. P223.
Dec. 9. Sold 15 M-253 picture frames. S645.
568 Chapter 19 Accounting for Inventory
L E S S O N
Determining the Cost of
19-2 Merchandise Inventory
F I R S T I N , F I R S T O U T I N V E N T O RY CO S T I N G M E T H O D
3. Units Needed to Equal 4. Unit Price Times
the Total Units on Hand Fifo Units
Units FIFO Units
Purchase Dates Purchased Unit Price Total Cost on Hand FIFO Cost
January 1, beginning inventory 10 $18.80 $188.00
February 16, purchases 6 19.60 117.60
April 17, purchases 14 20.40 285.60 3 4
September 5, purchases 12 21.40 256.80 10 $214.00
November 22, purchases 8 21.50 172.00 2 8 172.00
Totals 50 $1,020.00 1 18 $386.00 5
2. Units from the 1. Total Units 5. Total Fifo
Most Recent Purchase on Hand Cost
After the quantities of merchandise on hand are counted, used to determine the cost of merchandise sold. Using the
purchase invoices are used to find merchandise unit price of merchandise purchased first to calculate the cost
prices. The total costs are then calculated using the quan- of merchandise sold first is called the first-in, first-out
tities and unit prices recorded on the inventory records. inventory costing method. The first-in, first-out method
Most businesses use one of three inventory costing is frequently abbreviated as fifo.
methods: (1) first-in, first-out, (2) last-in, first-out, or On December 31, a periodic inventory of 12-inch alu-
(3) weighted-average. minum skillets, Model No. GS-67, showed 18 units on
Restaurant Supply uses the most recent invoices for hand. Using the fifo method, the 18 units would show a
purchases to determine the unit price of an item in inven- total cost of $386.00.
tory. The earliest invoices for purchases, therefore, are
S T E P S COSTING INVENTORY USING THE FIFO METHOD
1 Enter the total number of units on hand, 18.
2 From the most recent purchase, November 22, enter the number of units purchased, 8. In some cases, the
number of units of the most recent purchase will be greater than or equal to the total number of units on
hand. In such a case, enter the total number of units on hand and do not complete Step 3 below.
3 From the next most recent purchase, September 5, enter the number of units, 10, needed for the fifo units
to equal the total number on hand, 18. Continue with the next invoices as needed.
4 Multiply the unit price of each appropriate purchase by the fifo units on hand to determine the fifo cost.
5 Add the individual fifo costs to determine the fifo cost of the total number of units in ending inventory.
Determining the Cost of Merchandise Inventory Lesson 19-2 569
L A S T I N , F I R S T O U T I N V E N T O RY CO S T I N G M E T H O D
3. Units from the 2. Beginning
Earliest Purchase Inventory Units
Units LIFO Units
Purchase Dates Purchased Unit Price Total Cost on Hand LIFO Cost
January 1, beginning inventory 10 $18.80 $188.00 2 10 $188.00 5. Unit Price
February 16, purchases 6 19.60 117.60 3 6 117.60 5 Times Lifo
April 17, purchases 14 20.40 285.60 4 2 40.80 Units
September 5, purchases 12 21.40 256.80
November 22, purchases 8 21.50 172.00 4. Units Needed
to Equal the
Totals 50 $1,020.00 1 18 $346.40 6 Total Units
on Hand
1. Total Units 6. Total Lifo
on Hand Cost
Using the price of merchandise purchased last to calcu- The earliest prices for the 18 skillets would consist of
late the cost of merchandise sold first is called the last-in, the 10 units in the January 1 beginning inventory. The
first-out inventory costing method. The last-in, first- next earliest purchase, February 16, of 6 units is then used
out method is frequently abbreviated as lifo. This method to cost 6 units in ending inventory. The remaining 2 units
is based on the idea that the most recent costs of merchan- in ending inventory are costed using the next earliest pur-
dise should be charged against current revenue. [CON- chase, April 17. On the inventory record, the 18 units
CEPT: Matching Expenses with Revenue] would show a total cost of $346.40.
Using the lifo method, each item on the inventory
records is recorded at the earliest prices paid for the
merchandise.
S T E P S COSTING INVENTORY USING THE LIFO METHOD
1 Enter the total number of units on hand, 18.
2 Enter the number of units in beginning inventory, 10. In some cases, the number of units of beginning inventory
will be greater than or equal to the total number of units on hand. In such a case, enter the total number of units
on hand and do not complete Steps 3 and 4 below.
3 From the earliest purchase, February 16, enter the number of units purchased, 6.
4 From the next earliest purchase, April 17, enter the number of units, 2, needed
for the lifo units to equal the total number of units on hand, 18.
5 Multiply the unit price of the beginning inventory by the lifo units on
R E M E M B E R
hand to determine the lifo cost for beginning inventory. Repeat this
process for each appropriate purchase. In the lifo method, the latest
purchases are assumed to be
6 Add the lifo cost for the beginning inventory and each appropriate sold first (first-out). Therefore,
purchase to determine the lifo cost of the total number of units in ending inventory consists of the
ending inventory. units purchased the earliest,
and the earliest purchase
invoice costs are used to value
the ending inventory.
570 Chapter 19 Accounting for Inventory
W E I G H T E D AV E R AG E I N V E N T O RY C O S T I N G M E T H O D
Purchases Total
Date Units Unit Price Cost
January 1, beginning inventory 10 $18.80 $188.00
February 16, purchases 6 19.60 117.60
April 17, purchases 14 20.40 285.60
September 5, purchases 12 21.40 256.80
November 22, purchases 8 21.50 172.00
Totals 50 $1,020.00 1 1. Total Cost of
Inventory Available
Total of Beginning Weighted-Average
ⴜ Total Units ⴝ 2 2. Weighted-Average
Inventory and Purchases Price per Unit Price per Unit
$1,020.00 50 $20.40
Units in Weighted-Average Cost of
ⴛ ⴝ 3. Cost of Ending
Ending Inventory Price per Unit Ending Inventory 3
18 $20.40 $367.20 Inventory
Using the average cost of beginning inventory plus mer- is then charged against current revenue. [CONCEPT:
chandise purchased during a fiscal period to calculate the Matching Expenses with Revenue]
cost of merchandise sold is called the weighted-average Using the weighted-average method, the inventory
inventory costing method. The average unit price of the is costed at the average price per unit of the beginning
total inventory available is calculated. This average unit inventory plus the cost of all purchases during the fiscal
price is used to calculate both ending inventory and cost year. On the inventory record, the 18 units would show a
of merchandise sold. The average cost of merchandise total cost of $367.20.
COSTING INVENTORY USING THE WEIGHTEDAVERAGE
S T E P S
METHOD
1 Calculate the total cost of beginning inventory and each purchase, $1,020.00, by multiplying the units
by each unit price.
2 Calculate the weighted-average price per unit, $20.40, by dividing
the total cost, $1,020.00, by the number of units available, 50.
F O R YO U R I N F O R M AT I O N
3 Calculate the cost of ending inventory, $367.20, by multiply- F Y I
ing the weighted-average price per unit, $20.40, by the
units in ending inventory, 18. A business usually determines the order in
F Y I which products are sold, based on the type
of inventory. A grocery store, for example,
must sell its earliest purchases first. A
hardware store, however, could sell its
most recent purchases first. The inventory
costing method used to calculate the cost
of merchandise sold should not, however,
be determined by the order in which items
are sold. A business should choose
the inventory costing method that
provides its managers with the
best accounting information.
Determining the Cost of Merchandise Inventory Lesson 19-2 571
C A L C U L AT I N G T H E C O S T O F M E R C H A N D I S E S O L D
The cost of ending inventory determined using any of the tory costing method the amount determined will be dif-
three inventory costing methods can be used to calculate ferent. Restaurant Supply uses the fifo method. Therefore,
the cost of merchandise sold. The cost of ending inven- the fifo cost of $386.00 is subtracted from the total cost of
tory is subtracted from the total cost of units available for merchandise available for sale, $1,020.00, to calculate the
sale. Although the formula is the same, under each inven- cost of merchandise sold of $634.00.
Cost of Merchandise Fifo Cost of Cost of
ⴚ ⴝ
Available for Sale Ending Inventory Merchandise Sold
$1,020.00 $386.00 $634.00
CO M PA R I S O N O F I N V E N TO RY M E T H O D S
Weighted
Fifo Lifo
Average
Cost of Merchandise Sold:
Merchandise Inventory, Jan. 1 $ 188.00 $ 188.00 $ 188.00
Net Purchases 832.00 832.00 832.00
Merchandise Available for Sale $ 1,020.00 $ 1,020.00 $ 1,020.00
Less Ending Inventory, Dec. 31 386.00 346.40 367.20
Cost of Merchandise Sold $ 634.00 $ 673.60 $ 652.80
In a period of rising prices:
Relative Cost of Ending Inventory highest lowest intermediate
Relative Cost of Merchandise Sold lowest highest intermediate
In a period of rising prices, the fifo method gives the high- All three inventory costing methods are acceptable
est possible ending inventory cost and the lowest cost of accounting practices. A business should select one method
merchandise sold. The lifo method gives the lowest pos- and use that same method continuously for each fiscal
sible ending inventory cost and the highest cost of mer- period. If a business changed inventory costing methods,
chandise sold. The weighted-average method gives ending part of the difference in gross profit and net income would
inventory cost and cost of merchandise sold between fifo be caused by the change in methods. To provide financial
and lifo. As the cost of merchandise sold increases, gross statements that can be analyzed and compared with state-
profit and net income decrease. Thus, net income is high- ments of other fiscal periods, the same inventory costing
est under the fifo method, lowest under the lifo method, method should be used each fiscal period. [CONCEPT:
and intermediate under the weighted-average method. Consistent Reporting]
In a period of declining prices, the results for the fifo
and lifo methods are reversed.
572 Chapter 19 Accounting for Inventory
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
TERMS REVIEW
1. When the fifo method is used, how is the cost of each kind of ending
first-in, first-out inventory merchandise inventory determined?
costing method 2. On what idea is the lifo method based?
last-in, first-out inventory 3. In a period of rising prices, which inventory costing method gives the
costing method highest cost of merchandise sold?
weighted-average 4. Why should a business select one inventory costing method and use
inventory costing method that same method continuously for each fiscal period?
WORK TOGETHER 192
Determining the cost of inventory using the fifo, lifo, and weighted-average inventory costing
methods
Inventory costing information for Riverville Electronics is given in the Working Papers. Your instructor will guide you
through the following example.
1. Calculate the cost of ending inventory using the fifo, lifo, and weighted-average methods. There are 16 units in
ending inventory.
ON YOUR OWN 192
Determining the cost of inventory using the fifo, lifo, and weighted-average inventory costing
methods
Inventory costing information for Venture Plumbing is given in the Working Papers. Work this problem
independently.
1. Calculate the cost of ending inventory using the fifo, lifo, and weighted-average methods. There are 24 units in
ending inventory.
Determining the Cost of Merchandise Inventory Lesson 19-2 573
L E S S O N
Estimating Inventory
19-3
G R O S S P R O F I T M E T H O D O F E S T I M AT I N G I N V E N T O R Y
STEP 1: Beginning inventory, January 1 . . . . . . . . . . . . . . . . . . . . $ 142,536.20
Plus net purchases for January 1 to January 31 . . . . . 42,452.80
Equals cost of merchandise available for sale . . . . . . . . $ 184,989.00
STEP 2: Net sales for January 1 to January 31. . . . . . . . . . . . . . . . $ 99,340.00
Times previous year's gross profit percentage . . . . . . . 40.00%
Equals estimated gross profit on operations . . . . . . . . . $ 39,736.00
STEP 3: Net sales for January 1 to January 31. . . . . . . . . . . . . . . . $ 99,340.00
Less estimated gross profit on operations . . . . . . . . . 39,736.00
Equals estimated cost of merchandise sold . . . . . . . . . . $ 59,604.00
STEP 4: Cost of merchandise available for sale . . . . . . . . . . . . . . $ 184,989.00
Less estimated cost of merchandise sold . . . . . . . . . . 59,604.00
Equals estimated ending merchandise inventory . . . . . $ 125,385.00
Restaurant Supply Co.
Income Statement
For Month Ended January 31, 20--
% of Net
Sales
Operating Revenue:
Net Sales $ 99,340.00 100.0
Cost of Merchandise Sold:
Beginning Inventory, January 1 $142,536.20
Net Purchases 42,452.80
Merchandise Available for Sale $184,989.00
Less Est. Ending Inv., January 31 125,385.00
Cost of Merchandise Sold 59,604.00 60.0
Gross Profit on Operations $ 39,736.00 40.0
Operating Expenses 30,298.70 30.5
Net Income $ 9,437.30 9.5
Estimating inventory by using the previous year’s per- Four values are needed to perform the four-step process.
centage of gross profit on operations is called the gross Actual net sales and net purchases amounts are obtained
profit method of estimating inventory. The gross profit from the general ledger. The beginning inventory amount
method is often used to estimate the cost of the ending is obtained from the prior period’s financial statements.
inventory reported on monthly financial statements. The The gross profit percentage is estimated by management
gross profit method is a less expensive method of calculat- based on the previous year’s actual percentage, adjusted
ing inventory costs than taking a periodic inventory or for any significant changes in economic conditions.
maintaining a perpetual inventory system.
574 Chapter 19 Accounting for Inventory
E S T I M AT I N G I N V E N T O R Y F O R O T H E R M O N T H S
When the gross profit method of estimating inventory is ending balance to calculate the amount of sales for just
used for months other than the first month of the fis- the current month. The same process is used for the pur-
cal period, the process is the same as that just illustrated. chases account. The beginning inventory for the month
Net sales and purchases amounts are obtained from the is the same as the ending inventory from the previous
general ledger. For the sales account, the previous month’s month. Note that both the beginning and ending inven-
ending balance is subtracted from the current month’s tory amounts will be based on estimated amounts.
FINANCIAL LITERACY
S y n o ps i s of Inve s t m e nt s
There is much pressure on individuals to save for retire- to a loan that pays periodic interest. The repayment of the
ment. Where do you start? If you have money available to principal amount occurs at a specified date in the future.
put away for retirement, where should you invest it to get If you want to invest in stocks and bonds but
the best return? There are many investment options avail- don’t want to deal directly with each com-
able to today’s workers. pany, you can invest in a mutual fund,
One kind of fund is called an Individual Retirement which means you buy shares in an
Account (IRA). There are several forms of IRAs. A deduct- entity designed to collect the
ible IRA means that the investor does not have to pay tax investments from many inves-
on the money deposited or on the interest earned on the tors. In turn, these funds are
account until it is withdrawn at retirement. A non-deduct- invested in the stocks and
ible IRA means that the investor does pay tax on the money bonds of many compa-
deposited but does not pay tax on the interest earned on nies by fund managers.
the account until it is withdrawn at retirement. A Roth IRA
is one where the person pays tax on the amount depos- Activities
ited but never has to pay tax on the interest earned on the 1. Contact a financial
account. planner. Ask his or her
A certificate of deposit (CD) is an investment product advice on how much is
offered by banks. Interest is paid on the CD on a specific needed to start invest-
date in the future. The term of the CD can range from 30 ing and what types of
days to more than five years. If you want to share directly investments are appropriate
PHOTO: PHOTODISC/GETTY IMAGES
in the success of a corporation, you may purchase shares for someone your age. Prepare a
of stock in that company. Each share of stock represents an written summary of your findings.
ownership interest. Your investment can reward you either
2. Pick two publicly traded companies in the same indus-
in the form of dividends or by an increase in the value of
try. Track each company’s stock price daily for two
your shares of stock. Another investment is to purchase the
weeks. Summarize your findings in a chart or graph.
bond of a company or government entity, which is similar
Estimating Inventory Lesson 19-3 575
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. When neither a perpetual system is maintained nor a periodic inventory
is taken, how can an ending merchandise inventory be determined that
is accurate enough for a monthly income statement? TERM REVIEW
2. What amounts are needed to estimate ending merchandise inventory?
3. What amount is used for beginning inventory for a month that is not the gross profit method of
first month of a fiscal period? estimating inventory
WORK TOGETHER 193
Estimating ending inventory using the gross profit method
A form for making estimated inventory calculations and a form for completing an income statement are given in
the Working Papers. Your instructor will guide you through the following examples.
1. Use the following information obtained from the records and management of Evans Company to estimate the
cost of the ending inventory on June 30.
Estimated beginning inventory, June 1 $154,800.00
Actual net purchases for June $ 47,800.00
Actual net sales for June $245,000.00
Estimated gross profit percentage 45.0%
Actual operating expenses for June $ 76,930.00
2. Prepare an income statement for the month ended June 30 of the current year.
ON YOUR OWN 193
Estimating ending inventory using the gross profit method
A form for making estimated inventory calculations and a form for completing an income statement are given in
the Working Papers. Work this problem independently.
1. Use the following information obtained from the records and management of Luke Enterprises to estimate the
cost of the ending inventory on April 30.
Estimated beginning inventory, April 1 $24,500.00
Actual net purchases for April $12,100.00
Actual net sales for April $56,000.00
Estimated gross profit percentage 55.0%
Actual operating expenses for April $17,920.00
2. Prepare an income statement for the month ended April 30 of the current year.
576 Chapter 19 Accounting for Inventory
SUMMARY
After completing this chapter, you can: 4. Determine the cost of merchandise inventory
using the fifo, lifo, and weighted-average inven-
1. Define accounting terms related to inventory.
tory costing methods.
2. Identify accounting concepts and practices
5. Estimate the cost of merchandise inventory
related to inventory.
using the gross profit method of estimating
3. Prepare a stock record. inventory.
EXPLORE ACCOUNTING
C os t i n g a C D C a n M a k e
Yo u r He a d S pi n
Determining the cost of an item of inventory, of units sold. The studio artist cost of $30,000
often referred to as costing an item, is a rela- is referred to as a fixed cost because the total
tively easy task for a merchandising busi- studio artist cost is fixed (constant), regard-
ness. However, costing can be a complex less of the number of units sold.
task for the company that manufactures When preparing the first monthly finan-
the item. cial statement after the release of SeaMist’s
Consider the challenge of a music com- CD, Stardust’s accountants must assign
pany costing a music CD. Stardust Music has a labor cost to SeaMist’s CD. What amount
signed a new group, SeaMist, to its first contract. should be used? $1.80? $1.60? Another amount?
Included in the cost of the CD is all the labor required Accountants must make good sales estimates and
to produce the CD. Stardust Music will pay SeaMist $1.50 constantly reevaluate these estimates to calculate the most
for every CD sold. Studio artists, however, were paid a fixed accurate cost information possible. Accountants must con-
fee totaling $30,000. stantly communicate with the sales staff to update sales
If Stardust Music sells 100,000 CDs, its labor cost will projections.
be $180,000, or $1.80 per CD—$150,000 to SeaMist and
$30,000 to the studio artists. If the CD is an unexpected Required: Calculate the total and unit labor costs for
smash hit, selling 300,000 CDs, Stardust’s labor cost will SeaMist’s second CD using the following assumptions:
be $480,000, or $1.60 per CD—$450,000 to SeaMist and (1) SeaMist receives $1.75 per CD. (2) Studio artists cost
$30,000 for the studio artists. $60,000. (3) A famous guest artist used on one track
PHOTO: PHOTOGRAPHER’S CHOICE/GETTY IMAGES
The artist cost, $1.50 per CD, is referred to as a variable receives $30,000 plus $0.10 for every CD sold. Prepare esti-
cost. The total artist cost varies, depending on the number mates for 400,000; 500,000; and 600,000 unit sales.
Accounting for Inventory Chapter 19 577
191 APPLICATION PROBLEM
Preparing a stock record
A stock record for Mountain Pool & Spa is given in the Working Papers.
Instructions:
Enter the following transactions on the stock record of a 450-gallon spa, model no. HT-450. The units cost
$1,299.00 and are sold for $2,599.00. Source documents are abbreviated as follows: purchase invoice, P; sales
invoice, S.
Transactions:
Feb. 4. Sold 1 model no. HT-450 spa to Jan Ellis, n/30. S2433.
28. Sold 2 model no. HT-450 spas to Lake County Hospital, 2/10, n/30. S2478.
Mar. 10. Received 5 units of model no. HT-450 spas from SunSpa Manufacturing, 2/10, n/30. P789.
24. Sold 1 model no. HT-450 spa to John Pierce, n/30. S2502.
192 APPLICATION PROBLEM
Determining the cost of inventory using the fifo, lifo, and weighted-average
inventory costing methods
Forms for costing inventory for Orlando Supply are given in the Working Papers. There are 172 units in ending
inventory.
Purchase Date Quantity Unit Price
January 1, beginning inventory 90 $2.00
March 13, purchases 78 2.10
June 8, purchases 80 2.25
September 16, purchases 84 2.30
December 22, purchases 88 2.40
Instructions:
Calculate the cost of ending inventory using the fifo, lifo, and weighted-average methods.
( Go Beyond the Book
)
For more information go to
www.C21accounting.com
578 Chapter 19 Accounting for Inventory
193 APPLICATION PROBLEM
Estimating ending inventory using the gross profit method
Use the following information obtained from the records and management of Fultz Industries. A form for
making inventory calculations and a form for completing an income statement are given in the Working
Papers.
Instructions:
1. Estimate the cost of the ending inventory on March 31.
Estimated beginning inventory, March 1 $ 98,700.00
Actual net purchases for March $ 45,800.00
Actual net sales for March $186,000.00
Estimated gross profit percentage 58.0%
Actual operating expenses for March $ 80,352.00
2. Prepare an income statement for the month ended March 31 of the current year.
194 MASTERY PROBLEM
Determining the cost of inventory using the fifo, lifo, and weighted-average
inventory costing methods
Fratisi Company began the year with 8 units of its model P-234 electronic switch in beginning inventory. Each
unit sells for $9.95. The following transactions involving model P-234 occurred during the year. Forms are
given in the Working Papers. Source documents are abbreviated as follows: purchase invoice, P; sales invoice, S.
Transactions:
Jan. 6. Purchased 20 units from Master Electronics for $5.12 per unit, 2/10, n/30. P154.
Apr. 5. Sold 22 units to Evan Construction, n/30. S1998.
14. Purchased 20 units from Master Electronics for $5.18 per unit, 2/10, n/30. P223.
Jul. 28. Sold 25 units to Pette Hardware, n/30. S2245.
Aug. 3. Purchased 20 units from Master Electronics for $5.23 per unit, 2/10, n/30. P298.
Dec. 2. Sold 15 units to Century Homebuilders, n/30. S2848.
12. Purchased 20 units from Master Electronics for $5.27 per unit, 2/10, n/30. P332.
Instructions:
1. Enter the transactions on the stock record and determine the number of units in ending inventory.
2. Calculate the cost of ending inventory using the fifo, lifo, and weighted-average methods.
3. Which of the inventory costing methods resulted in the highest cost of merchandise sold? Merchandise
available for sale is the total cost of beginning inventory plus all purchases during the year.
Accounting for Inventory Chapter 19 579
195 CHALLENGE PROBLEM
Determining the cost of merchandise inventory destroyed in a fire
A fire completely destroyed the warehouse of Murphy Electronics Company on the night of May 12 of the cur-
rent year. The accounting records of the company and $1,890.00 of merchandise inventory were salvaged. The
company does not maintain a perpetual inventory system. The insurance company therefore has requested
an estimate of the merchandise inventory destroyed in the fire. Forms are given in the Working Papers. The
following income statement is for the previous fiscal year.
Murphy Electronics Company
Income Statement
For Year Ended April 30, 20--
Operating Revenue:
Net Sales $645,217.90
Cost of Merchandise Sold:
Beginning Inventory, May 1 (prior year) $ 33,298.45
Net Purchases 322,564.03
Merchandise Available for Sale $355,862.48
Less Ending Inv., April 30 34,543.98
Cost of Merchandise Sold 321,318.50
Gross Profit on Operations $323,899.40
Operating Expenses 284,535.22
Net Income $ 39,364.18
The following additional financial information is obtained from the current year’s accounting records.
Net purchases, May 1 to May 12 $ 6,754.03
Net sales, May 1 to May 12 22,432.87
Operating expenses, May 1 to May 12 9,875.40
Instructions:
1. Calculate the prior year’s gross profit on operations as a percentage of net sales. Round the percentage
calculation to the nearest 0.1 percent.
2. Use the percentage calculated in Instruction 1 and the current year’s financial information to calculate an
estimate of the total merchandise inventory as of May 12.
3. To calculate the cost of the inventory destroyed in the fire, subtract the cost of the merchandise inventory
that was not destroyed from the estimate of the total merchandise inventory as of May 12.
4. Prepare an income statement for the period May 1 through May 12.
The insurance company maintains that it is liable for paying only the book value of the inventory destroyed
by fire. Murphy Electronics Company maintains that the insurance company should pay the replacement cost
of the destroyed inventory.
Instructions:
5. What is meant by the book value and the replacement value of the inventory?
6. Murphy Electronics Company uses the fifo inventory costing method. How does using fifo affect the differ-
ence between the book value and the replacement value of the destroyed inventory?
7. What should determine which value the insurance company uses?
580 Chapter 19 Accounting for Inventory
A P P L I E D CO M M U N I C AT I O N
Arrange with your instructor to call the manager of a local merchandising company. Ask the manager questions con-
cerning how the company maintains a count and cost of its merchandise inventory. Suggested questions include:
1. Does the company maintain a perpetual inventory system?
2. How often does the company take an inventory?
3. Who counts the inventory during a periodic inventory?
4. What method is used to cost the ending inventory?
5. If a perpetual inventory is used, how closely do the year-end quantities match the periodic counts?
CASES FOR CRITICAL THINKING
Case 1
Ballston Company uses the fifo method of costing its merchandise inventory. The manager is considering a change
to the lifo method. Costs have increased steadily over the past three years. What effect will the change have on the
following items? (1) The amount of net income on the income statement. (2) The amount of income taxes to be paid.
(3) The quantity of each item of merchandise that must be kept in stock. Why?
Case 2
The Pet Center stocks many kinds of merchandise. The store has always taken a periodic inventory at the end of a
fiscal year. The store has not kept a perpetual inventory because of the cost. However, the manager wants a reason-
ably accurate cost of merchandise inventory at the end of each month. The manager needs the amount to prepare
monthly income statements and to help in making decisions about the business. What would you recommend?
SCANS WORKPLACE COMPETENCY
Personal Quality: Sociability
Concept: Sociability involves understanding, friendliness, adaptability, empathy, and politeness in new and
on-going group settings. It includes asserting oneself in familiar and unfamiliar social situations, relating well
to others, responding appropriately as a situation might require, and taking an interest in what others say and do.
Application: Consider each element in the concept of sociability. Rate yourself on each element. List ways you
could improve. Discuss whether there are workplace situations that require greater or lesser degrees of sociability.
D I GI T
AL V
I S IO
N/ G
ETT
Y IM
AG
ES
Accounting for Inventory Chapter 19 581
GRAPHING WORKSHOP
Employees responsible for purchasing inventory can be tempted to accept bribes from unscrupulous vendors. In
exchange for the bribe, the employee favors the vendor in future purchasing decisions. This fraud is known as a
kickback. Because the bribe is not recorded in the accounting records, it can be difficult to detect.
Marcus Salazar suspects one of his purchasing agents may be involved in a kickback scheme. To gather support for
his suspicion, he has created graphs that depict the quantity and price paid for purchases of each inventory item
from each vendor. An increase in the number of units purchased from a vendor, together with an increase in price,
is a red flag of a kickback, since the vendor must raise the price to pay for the kickback.
The graphs for model AX-43 motors are shown below.
Model AX-43 Purchases by Vendor
16
Quantity (thousands)
14
12
10
8
6
4
2
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Month
Amhurst Industries McGinnis Company Global Manufacturing
Model AX-43 Purchases by Vendor
$57.0
56.00
55.00
Unit Price
54.00
53.00
52.00
51.00
50.00
49.00
48.00
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Month
Amhurst Industries McGinnis Company Global Manufacturing
The first graph shows the monthly purchase quantity (in thousands) for each vendor. The second graph shows the
unit price charged by vendor.
Assist Marcus in interpreting this data by answering the following questions.
1. From which vendor did the number of units purchased tend to increase over time?
2. How did the unit prices change for the vendor with increasing purchases? Support your answer.
3. Could there be a valid explanation why the buyer might purchase more from a vendor despite an increase in the
unit price?
582 Chapter 19 Accounting for Inventory
A N A LY Z I N G B E S T B U Y ’S F I N A N C I A L S TAT E M E N T S
The managers at Best Buy need to constantly monitor the amount of inventory available for sale. Having too little
inventory can cause the company to miss sales if the product is out of stock. Holding too much inventory increases
its operating expenses. A financial ratio that evaluates the amount of inventory available for sale is known as the
inventory turnover ratio. The ratio is calculated as follows:
Cost of Goods Sold
Inventory Turnover
(Beginning Inventory Ending Inventory) 2
Dividing the sum of the beginning and ending inventory by 2 approximates the average inventory for the fiscal year.
The inventory turnover for Wendy’s International, based on its 2006 fiscal year financial statements, is calculated
below:
$1,352,312,000
Inventory Turnover 45
($30,252,000 $29,798,000) 2
Dividing 365 by the turnover ratio yields a financial ratio known as days’ sales in inventory. Wendy’s number of
days’ sales in inventory is 8.1 days. Thus, the average item remains in its inventory for approximately 8 days
(www.wendys.com).
Instructions
1. Using the financial information in Appendix B of this text, calculate Best Buy’s inventory turnover ratio and num-
ber of days’ sales in inventory for 2007.
2. Why would the inventory turnover ratios for Best Buy and Wendy’s differ?
Accounting for Inventory Chapter 19 583
Accounting
SOFTWARE
MERCHANDISE INVENTORY
Generally accepted accounting principles require that a business use a recognized method for determining the cost
of merchandise inventory. The FIFO, LIFO, and weighted-average methods are all recognized methods. Two varia-
tions of each method are also acceptable.
In this chapter, the cost of the units in ending inventory was determined at the end of a fiscal period. This
method of applying FIFO, LIFO, and weighted-average is known as a periodic method—the calculation is made only
at the end of a period. The perpetual method results in the cost of inventory sold being determined every time an
item is sold. Thus, the perpetual variation keeps a continual count of the number and cost of the units in inventory.
Periodic and perpetual methods of FIFO, LIFO, and weighted-average inventories result in different values for
ending inventory and the cost of goods sold. For this reason, generally accepted accounting principles require the
consistent use of an inventory method. Peachtree uses the perpetual FIFO method of costing inventory and pro-
duces an Item Costing report to account for how every purchase and sale affects the value of inventory items.
PEACHTREE MASTERY PROBLEM 19-4
1. Open (Restore) file 19-4MP.ptb.
2. Journalize and post the transactions for the purchase and sale of inventory.
3. Print the purchase journal from January 6 to December 12.
4. Print the sales journal from April 5 to December 2.
5. Print the Item Costing report from January 1 to December 31.
MERCHANDISE INVENTORY
In QuickBooks, an inventory record is created for each item in inventory. The inventory record can
include the item number, description, unit of measure, reorder point, quantity on hand, preferred vendor, cost,
and selling price. When you purchase more of an item or sell it, the inventory record is automatically updated.
As discussed in this chapter, inventory can be accounted for on a periodic or perpetual basis. Also, inventory can
be assigned a value based on a FIFO, LIFO, or weighted-average costing method. QuickBooks uses the perpetual
basis and the weighted-average costing method.
In an automated accounting system, inventory reports can be produced anytime. These reports can be custom-
ized to contain all the information that is needed at the time. If the quantity of an item drops below the reorder
point, QuickBooks will remind the user that it is time to reorder that inventory item.
QUICKBOOKS MASTERY PROBLEM 19-4
1. Open the Fratisi Company file.
2. Record the purchase of inventory by choosing the Enter Bills option from the Vendors menu.
3. Select Create Invoices from the Customers menu to record merchandise sales on account.
4. Choose Inventory from the Reports menu and Select Inventory Valuation Detail. Use January 1 and
December 31 for the dates and print the report.
584 Chapter 19 Accounting for Inventory
C A L C U L AT I N G M E R C H A N D I S E I N V E N T O R Y
“If the number of units in beginning inventory is less than the units on hand, enter the units in beginning inventory.
Otherwise, enter the number of units on hand.” This statement illustrates one of the decisions you must make in
costing merchandise inventory using the LIFO method. Electronic spreadsheets can help you make these decisions.
Through the use of its IF function, the electronic spreadsheet can compare two numbers and enter one of two
values in the cell.
The syntax of the IF function is =IF(logical_test, true_value, false_value). Suppose there are 10 units (cell C17)
in beginning inventory and 18 units (cell F22) on hand. The IF function to calculate the units from the beginning
inventory would be:
=IF(C17< F22, C17, F22)
This function would calculate the value 10—it is true that C17 is less than F22, thus the true_value, 10 in cell C17,
is calculated by the IF function.
Creating IF functions for a LIFO or FIFO template requires a full understanding of the logic of each inventory cost-
ing method. The logical tests for other purchases can become rather complex.
EXCEL APPLICATION PROBLEM 19-2
Open the F19-2 Excel data file. Follow the step-by-step instructions in the Instructions worksheet.
EXCEL APPLICATION PROBLEM 19-3
Open the F19-3 Excel data file. Follow the step-by-step instructions in the Instructions worksheet.
EXCEL MASTERY PROBLEM 19-4
Open the F19-4 Excel data file. Follow the step-by-step instructions in the Instructions worksheet.
A U T O M AT E D M E R C H A N D I S E I N V E N T O R Y
A computerized inventory system provides better access to accurate information about the inventory. Managers
need information about which items are selling, the number of items currently in inventory, and when to reorder an
item.
All inventory transactions are recorded in the Other Activities Inventory window. These transactions include
sales, purchases ordered, purchases received, and sales and purchases returns.
To enter inventory transactions:
1. Click the Other toolbar button.
2. Click the appropriate tab and enter the information about the purchase order, purchase invoice, or sales invoice;
then click OK.
a. Click Purch. Order if you are ordering items.
b. Click Purch. Invoice if you are entering the receipt of merchandise purchased from a purchase invoice.
c. Click Sales Invoice if you are entering the sale of merchandise from a sales invoice.
AUTOMATED ACCOUNTING APPLICATION PROBLEM 19-2
Open file F19-2.AA8. Display the problem instructions and complete the problem.
AUTOMATED ACCOUNTING MASTERY PROBLEM 19-4
Open file F19-4.AA8. Display the problem instructions and complete the problem.
Accounting for Inventory Chapter 19 585
PHOTODISC/GETTY IMAGES
C H A P T E R 2 0 Accounting for Notes
and Interest
O B J E C T I V E S
After studying Chapter 20, you will be able to: 3. Calculate interest and maturity dates for notes.
1. Define accounting terms related to notes and 4. Analyze and record transactions for notes
interest. payable.
2. Identify accounting concepts and practices 5. Analyze and record transactions for notes
related to notes and interest. receivable.
K E Y T E R M S
• number of a note • maturity date of a note • maturity value
• date of a note • maker of a note • current liabilities
• payee of a note • promissory note • interest expense
• time of a note • creditor • notes receivable
• principal of a note • notes payable • interest income
• interest rate of a note • interest • dishonored note
( Point Your Browser
www.C21accounting.com
)
586
ACCOUNTING IN THE REAL WORLD
Bank of America
Achieving Dreams with the Bank of America
Your first home. A new car. Opening your own business. Sending a child to
college.
Many of the dreams we share require that we borrow money. That’s how
Bank of America helps people achieve their dreams. Through a national
network of more than 16,000 ATMs and 5,700 branches, Bank of America is
there to ensure that individuals, companies, and even government agencies
DIGITAL VISION/GETTY IMAGES
have access to financial resources and services.
Bank of America is in the business of loaning money to its customers.
In return, Bank of America expects the borrower to INTERNET
periodically pay interest on the loan until the ACTIVITY
loan matures. Interest income for a bank
is equivalent to inventory sales of a Federal Reserve
retail company. Go to the homepage for the
The timing of when inter- Federal Reserve System (www.
est is earned and recorded federalreserve.gov). The Fed-
in the accounts is a signifi- eral Reserve’s duties fall into
cant issue for any bank. four broad categories.
Interest income is earned
each day a loan is out- Instructions
standing, regardless of
1. List the four broad catego-
when the borrower pays
ries of duties of the Federal
the interest. As a result,
Reserve.
banks must record the
2. The United States is
interest income earned,
©QILAI SHEN/EPA/LANDOV
divided into 12 Federal
but not yet collected, in
Reserve districts. Find
order for its financial state-
the district in which your
ments to be in accordance
school is located. List the
with generally accepted account-
district number and the
ing principles.
headquarter city.
Critical Thinking
1. Banks make loans to individuals, companies, and many other groups,
including cities. Why would a city need to borrow money?
2. If you borrow money, how is the interest rate usually stated?
Source: www.bankofamerica.com
587
L E S S O N
Promissory Notes
20-1
WHEN LENDING AND BORROWING ARE NECESSARY
Cash is the primary medium of exchange for business
transactions. [CONCEPT: Unit of Measurement] Cash
is used to purchase merchandise and to pay salaries and
other expenses. In turn, businesses receive cash when they
sell their products or services and collect payment. The
cash received can be used to purchase more merchandise
and continue to pay salaries and other expenses. Thus, the
RUBBERBALL PRODUCTIONS/GETTY IMAGES
business cycle continues.
Sometimes a business receives more cash from sales than
is needed to pay for purchases and expenses. A business
may deposit the extra cash in a bank for a short period.
At other times, the receipt of cash from sales does not
occur at the same time and in amounts sufficient to pay
for needed purchases and expenses. When this occurs, a
business needs to borrow additional cash or make arrange-
ments with its vendors to delay payment for a period of
time. Generally, when a bank or other business lends
money to another business, the loan agreement is made in
writing.
CHARACTER COUNTS
O n l y Fu l l -Ti m e Wor k e r s
R e c e i ve B e n e f i t s
At the Backyard Gourmet, Public Accountants, has just been hired as the company’s
most employees work less chief financial officer. Having just learned of the company’s
than 30 hours per week. How- hiring practices, she is considering resigning her position.
ever, only employees who
work a minimum of 30 hours Instructions
per week are eligible for the Assume that Backyard Gourmet does not have a code of
company’s health insurance plan. conduct. Use the ethical model to evaluate the company’s
PHOTO: RISER/GETTY IMAGES
Thus, only the company’s manag- hiring practices. Do you have any recommendations for
ers and officers are covered by health Lashonda?
insurance. Lashonda Ethridge, a CPA and
member of the American Institute of Certified
588 Chapter 20 Accounting for Notes and Interest
USES OF PROMISSORY NOTES
3. Payee of a note. The
1. Number of a note. person or business to
The number assigned whom the amount of 2. Date of a note. The
to identify a specific note. a note is payable. day a note is signed.
4. Time of a
PROMISSORY NOTE
note. The
days,
months, or NOTE NO. 2 DATE: May18 20 --
years from
the date of NAME: Restaurant Supply Co.
signing until
a note is For value received, I or We, the signers, promise to pay to the order of Charter State Bank
to be paid. of Atlanta, Georgia, 90 days from date, the principal sum of $ 20,000.00
5. Principal Twenty thousand and xx/100 DOLLARS
of a note.
The original
amount of with interest from date at the rate of 6 % per year, due on August 16, 20-- .
a note;
sometimes Miquel Lopez, President
referred to Restaurant Supply Co.
as face
amount of 8. Maker of a note. The 6. Interest rate of a note. 7. Maturity date of
a note. person or business who The percentage of the a note. The date a
signs a note and thus principal that is paid note is due.
promises to make payment. for use of the money.
A written and signed promise to pay a sum of money at T T Y I MA GE S
S C/GE
TO D I
PHO
a specified time is called a promissory note. A person
or organization to whom a liability is owed is called a
creditor. Promissory notes signed by a business and given
to a creditor are called notes payable. A note payable is
frequently referred to as a note.
Promissory notes are used when money is borrowed for
a period of time from a bank or other lending agency.
Sometimes a business requests a note from a customer
who wants credit beyond the usual time given for sales on
account. Notes have an advantage over oral promises and
accounts receivable or payable. Notes can be useful in a
court of law as written evidence of a debt.
Promissory Notes Lesson 20-1 589
INTEREST ON PROMISSORY NOTES
An amount paid for the use of money for a period of Sometimes partial payments on a note are made each
time is called interest. Banks and other lending institu- month. This arrangement is particularly true when an
tions charge interest on money loaned to their customers. individual buys a car and signs a note for the amount
The interest rate is stated as a percentage of the principal. owed. Each monthly payment includes part of the princi-
Interest at 10% means that 10 cents will be paid for the pal and part of the interest to be paid.
use of each dollar borrowed for a full year. To calculate interest for one year, the principal is mul-
When businesses borrow money from banks, other tiplied by the interest rate. The interest on a $20,000.00,
lending institutions, or other businesses, promissory notes 6% note for one year is $1,200.00.
should be prepared to provide written evidence of the
transaction.
Interest Time in Interest for
Principal ⴛ ⴛ ⴝ
Rate Years One Year
$20,000.00 ⫻ 6% ⫻ 1 ⫽ $1,200.00
The time of a note issued for less than one year is usually stated as a fraction of 360 days. The interest on a
typically stated as a number of days, such as 30 days, 60 $20,000.00, 6% note for 90 days is $300.00.
days, or 90 days. The time used in calculating interest is
Time as
Interest Interest for
Principal ⴛ ⴛ Fraction ⴝ
Rate Fraction of Year
of Year
$20,000.00 ⫻ 6% ⫻ 90
—— ⫽ $300.00
360
The amount that is due on the maturity date of a note cipal of $20,000.00 and interest rate of 6% will have a
is called the maturity value. A 90-day note with a prin- maturity value of $20,300.00.
Maturity
Principal ⴙ Interest ⴝ
Value
$20,000.00 ⫹ $300.00 ⫽ $20,300.00
C E / GE T TY I M AG ES
E S OUR
IMAG
590 Chapter 20 Accounting for Notes and Interest
M AT U R I T Y D AT E O F P R O M I S S O R Y N O T E S
1 Subtract the date of
the note from the
number of days
in the first month.
May 18, 90-Day Note
May 18–May 31 13 days
June 30 days 2 Add 30 days
July 31 days for June.
August 1–August 16 16 days
Total 90 days
4 Add only 16 days
3 Add 31 days in August.
for July.
The time between the date a note is signed and the date The date on which the note is written is not counted, but
a note is due is typically expressed in days. The maturity the maturity date is counted. For example, a 90-day note
date is calculated by counting the exact number of days. dated May 18 is due on August 16.
S T E P S CALCULATING THE MATURITY DATE OF A NOTE
1 Calculate the number of days remaining in May, 13, by subtracting the date of the note, 18, from the number
of days in May, 31.
2 Calculate the number of days remaining in the term of the note, 77, by subtracting the number of days in the
previous month, 13, from the term of the note, 90. Because 77 is greater than the number of days in June, 30,
add all of the days in June.
3 Calculate the number of days remaining in the term of the note, 47, by subtracting the number of days in
the previous months, 43 (13 ⫹ 30), from the term of the note, 90. Because 43 is greater than the
number of days in July, 31, add all of the days in July. TTY IM
AGE S
S /G E
IM AGE
LO W
4 Calculate the number of days remaining in the term of the note, 16, by sub- G
tracting the number of days in the previous months, 74 (13 + 30 + 31), from
the term of the note, 90. Because 16 is less than the number of days in
August, 31, add only 16 days in August.
F O R YO U R I N F O R M AT I O N
F Y I
Agencies of the federal government
generally use a 365-day year when
calculating interest. Consumer
interest is also generally calculated
F O R YO U R I N F O R M AT I O N
on a 365-day year. However, many
F Y I banks use a 360-day year when
calculating interest. Therefore,
An interest rate can be entered on a the interest calculations in this
calculator or electronic spreadsheet textbook use a 360-day year.
by using either the Percent key
(%) or the decimal equivalent of
the interest rate. For example,
12% could be keyed as 0.12.
Promissory Notes Lesson 20-1 591
TERMS REVIEW
End of Lesson
number of a note
REVIEW date of a note
payee of a note
time of a note
principal of a note
interest rate of a note
AUDIT YOUR UNDERSTANDING maturity date of a note
maker of a note
1. What conditions would cause a business to have extra cash to deposit promissory note
in a bank, yet at another time of year need to borrow extra cash from a
creditor
bank?
2. What is the advantage of a promissory note over an account receivable? notes payable
3. What does interest at 10% mean? interest
4. How is interest calculated for a fraction of a year? maturity value
WORK TOGETHER 201
Calculating interest, maturity dates, and maturity values for promissory notes
Write the answers to the following problem in the Working Papers. Your instructor will guide you through the follow-
ing example.
1. For each of the following promissory notes, calculate (a) the interest on the note, (b) the maturity date of the
note, and (c) the maturity value of the note. Save your work to complete Work Together 20-2.
Date Principal Interest Rate Time
March 3 $6,000.00 6% 90 days
March 18 $2,000.00 9% 60 days
ON YOUR OWN 201
Calculating interest, maturity dates, and maturity values for promissory notes
Write the answers to the following problem in the Working Papers. Work this problem independently.
1. For each of the following promissory notes, calculate (a) the interest on the note, (b) the maturity date of the
note, and (c) the maturity value of the note. Save your work to complete On Your Own 20-2.
Date Principal Interest Rate Time
June 8 $20,000.00 8% 180 days
June 12 $10,000.00 6% 90 days
592 Chapter 20 Accounting for Notes and Interest
L E S S O N
Notes Payable
20-2
S I G N I N G A N O T E P AYA B L E
1. Date 2. Account Title
CASH RECEIPTS JOURNAL PAGE 8
1 2 3 4 5 6 7
DOC. POST. GENERAL ACCOUNTS SALES SALES TAX SALES CASH
DATE ACCOUNT TITLE NO. REF. RECEIVABLE PAYABLE DISCOUNT
DEBIT CREDIT CREDIT DEBIT
CREDIT CREDIT DEBIT
2
21 1 18 Notes Payable 3 R345 20 0 0 0 00 20 0 0 0 00 21
22 4 5 22
23 23
24 24
3. Receipt Number 4. Principal Amount 5. Cash Received
Liabilities due within a short time, usually within a year, to show the receipt of the principal amount of the note.
are called current liabilities. Because notes payable gen- [CONCEPT: Objective Evidence]
erally are paid within one year, they are classified as cur-
rent liabilities.
When a business signs a note payable, the principal or Cash
face amount of the note is credited to a liability account May 18 20,000.00
titled Notes Payable.
Notes Payable
May 18 20,000.00
Notes Payable
Debit Credit
Decrease
No entry is made for interest until a later date when the
Increase
interest is paid.
JOURNALIZING
THE RECEIPT OF
S T E P S
CASH FROM A
Restaurant Supply arranges to borrow money from its NOTE PAYABLE
bank. A note payable is signed with the bank as evidence
of the debt. The bank issues a check or deposits the prin- 1 Write the date, 18, in the Date column of the cash
cipal amount of the note in Restaurant Supply’s checking receipts journal.
account. 2 Write the account title, Notes Payable, in the Account
Title column.
May 18. Signed a 90-day, 6% note, 3 Write the receipt number, R345, in the Doc. No. column.
$20,000.00. Receipt No. 345. 4 Write the principal amount, $20,000.00, in the General
Credit column.
The bank retains the original of the note until Restau- 5 Write the same amount, $20,000.00, in the Cash Debit
rant Supply pays the maturity value. A receipt is prepared column.
Notes Payable Lesson 20-2 593
P AY I N G P R I N C I P A L A N D I N T E R E S T O N A N O T E P AYA B L E
1. Date 2. First Account Title 3. Check Number 4. Principal Amount 7. Maturity Value
CASH PAYMENTS JOURNAL PAGE 11
1 2 3 4 5
CK. POST. GENERAL ACCOUNTS PURCHASES CASH
DATE ACCOUNT TITLE NO. REF. PAYABLE DISCOUNT
DEBIT CREDIT CREDIT
DEBIT CREDIT
2 4 7
15 1 16 Notes Payable 3 721 2 0 0 0 0 00 2 0 3 0 0 00 15
16 Interest Expense 5 3 0 0 00 16
5. Second Account Title 6. Interest Amount
When a note payable reaches its maturity date, the maker Restaurant Supply paid the 90-day note payable it had
of the note pays the maturity value to the payee. The signed on May 18.
interest accrued on money borrowed is called interest
expense. The interest accrued on a note payable is debited
to an expense account titled Interest Expense. August 16. Paid cash for the maturity value of the
May 18 note: principal, $20,000.00, plus interest,
$300.00; total, $20,300.00. Check No. 721.
Interest Expense
Debit Credit
Notes Payable
Decrease
Aug. 16 20,000.00 May 18 20,000.00
Increase
Interest Expense
Aug. 16 300.00
Cash
Aug. 16 20,300.00
Interest expense is a financial expense rather than an
expense of the business’s normal operations. Therefore,
Interest Expense is listed in a classification titled Other
Expenses in a chart of accounts.
JOURNALIZING A CASH PAYMENT FOR THE
S T E P S
MATURITY VALUE OF A NOTE PAYABLE
1 Write the date, 16, in the Date column of the cash payments journal.
Y I M A GE S
2 /G E T T
Write the account title, Notes Payable, in the Account Title column. IM A GE S
G LOW
3 Write the check number, 721, in the Ck. No. column.
4 Write the note’s principal amount, $20,000.00, in the General Debit column.
5 Write the account title, Interest Expense, in the Account Title column
on the next line.
6 Write the interest expense amount, $300.00, in the General
Debit column.
7 Write the amount of cash paid, $20,300.00, in the Cash
Credit column on the first line of the entry.
594 Chapter 20 Accounting for Notes and Interest
S I G N I N G A N O T E P AYA B L E F O R A N E X T E N S I O N O F T I M E
1. Debit to Accounts Payable
GENERAL JOURNAL PAGE 6
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
1
5 5 Accounts Payable/Hayport Company M66 4 0 0 0 00 5
6
2 Notes Payable 4 0 0 0 00 6
2. Credit to Notes Payable
A business may ask for an extension of time if it is unable
to pay an account when due. The vendor may ask the
GENERAL LEDGER
business to sign a note payable. The note payable does Accounts Payable
not pay the amount owed to the vendor. However, the
June 5 4,000.00 Bal. 4,000.00
form of the liability is changed from an account payable
to a note payable. When this entry is posted, the balance
Notes Payable
of the accounts payable account for Hayport Company
will be zero. One liability, Accounts Payable, is replaced June 5 4,000.00
by another liability, Notes Payable.
ACCOUNTS PAYABLE LEDGER
Hayport Company
June 5. Restaurant Supply signed a 90-day, 12% note June 5 4,000.00 Bal. 4,000.00
to Hayport Company for an extension of time on its
account payable, $4,000.00. Memorandum No. 66.
JOURNALIZING SIGNING A NOTE PAYABLE
S T E P S
FOR AN EXTENSION OF TIME
1 Record a debit, $4,000.00, to Accounts Payable/Hayport Company
in the general journal. F O R YO U R I N F O R M AT I O N
2 F Y I
Record a credit, $4,000.00, to Notes Payable.
There are advantages to accepting a note
from a customer for an extension of time. In
addition to serving as legal evidence of the
debt, accepting a note may avoid having an
account become uncollectible if additional
time is all the customer needs in order to
R E M E M B E R pay the account eventually. The business
When a note payable is signed for accepting the note will also earn interest on
an extension of time on account, the overdue account, usually at a relatively
both the general ledger account, high interest rate. Also, in some industries,
Accounts Payable, and the subsidiary these notes can be sold for cash if
ledger account are changed to that cash is needed to meet
a note payable. Therefore, both operating expenses.
accounts must be debited to
remove the amount from
the accounts.
Notes Payable Lesson 20-2 595
P AY I N G A N O T E P AYA B L E I S S U E D F O R A N E X T E N S I O N O F T I M E
CASH PAYMENTS JOURNAL PAGE 11
1 2 3 4 5
CK. POST. GENERAL ACCOUNTS PURCHASES CASH
DATE ACCOUNT TITLE PAYABLE DISCOUNT
NO. REF. DEBIT CREDIT CREDIT
DEBIT CREDIT
3 3 Notes Payable 722 4 0 0 0 00 4 1 2 0 00 3
4 Interest Expense 1 2 0 00 4
5 5
6 6
7 7
The entry to record the cash payment at the maturity date
of a note payable is the same regardless of the reason the Notes Payable
note was signed.
Sept. 3 4,000.00 Jan. 5 4,000.00
Interest Expense
September 3. Paid cash for the maturity value
of the note payable to Hayport Company: Sept. 3 120.00
principal, $4,000.00, plus interest, $120.00;
Cash
total, $4,120.00. Check No. 722.
Sept. 3 4,120.00
C U LT U R A L D I V E R S I T Y
A n c i e nt C hi n a
By approximately 1000 C/D/, the Chi- bank. The Office of the Superintendent of Records fur-
nese had developed one of the most nished compilations of receipts and payments. It also
sophisticated accounting systems kept maps and records of production tools used. Many of
in the world. The Chao Dynasty the accounting and record keeping tasks that affect busi-
ruled China from 1122 to 256 nesses and governments today can be traced back to sys-
C/D/ During this time, the dynasty tems established in ancient China.
oversaw territorial expansion and
a Golden Age in literature and phi- Critical Thinking
PHOTO: DIGITAL VISION/GETTY IMAGES
losophy. The famous philosopher 1. Early civilizations did not have currency. How do you
Confucius lived during this dynasty. think people would buy and sell goods and services
Confucius was said to have been a without currency?
government recordkeeper.
2. If you owned a store, what kinds of records would you
During the Chao Dynasty, the Chinese
want to keep about your sales?
used a system of currency and had a central
596 Chapter 20 Accounting for Notes and Interest
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
TERMS REVIEW
1. Why are notes payable generally classified as current liabilities?
current liabilities
2. What accounts are affected, and how, when a business signs a note
interest expense payable for an extension of time on an account payable?
WORK TOGETHER 202
Journalizing notes payable transactions
The journals for Landings, Inc., are provided in the Working Papers. Your instructor will guide you through the follow-
ing examples.
1. Using the current year, journalize the following transactions. Use page 3 of a general journal and page 5 of a cash
receipts journal. Source documents are abbreviated as follows: check, C; receipt, R; memorandum, M.
Transactions:
Mar. 3. Signed a 90-day, 6% note, for $6,000.00 with First National Bank. R279.
18. Signed a 60-day, 9% note with DryCreek Company for an extension of time on this account payable,
$2,000.00. M288.
2. Journalize the following transactions on page 9 of a cash payments journal. Use the maturity dates and maturity
values calculated in Work Together 20-1.
Transactions:
Paid cash for the maturity value of the $2,000.00 note. C255.
Paid cash for the maturity value of the $6,000.00 note. C263.
ON YOUR OWN 202
Journalizing notes payable transactions
The journals for Modisto Corporation are provided in the Working Papers. Work this problem independently.
1. Using the current year, journalize the following transactions. Use page 10 of a general journal and page 20 of a
cash receipts journal. Source documents are abbreviated as follows: check, C; receipt, R; memorandum, M.
Transactions:
June 8. Signed a 180-day, 8% note, for $20,000.00 with First National Bank. R361.
12. Signed a 90-day, 6% note with Best Company for an extension of time on this account payable,
$10,000.00. M165.
2. Journalize the following transactions on page 17 of a cash payments journal. Use the maturity dates and maturity
values calculated in On Your Own 20-1.
Transactions:
Paid cash for the maturity value of the $10,000.00 note. C601.
Paid cash for the maturity value of the $20,000.00 note. C882.
Notes Payable Lesson 20-2 597
L E S S O N
Notes Receivable
20-3
ACC E P T I N G A N OT E R E C E I VA B L E F R O M A C U S TO M E R
1. Debit to Notes
Receivable
GENERAL JOURNAL PAGE 4
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
1
18 14 Notes Receivable NR9 3 0 0 0 00 18
2. Credit to 19 Accounts Receivable/Martin Sterling 3 0 0 0 00 19
Accounts 20 2 20
Receivable
Promissory notes that a business accepts from customers
are called notes receivable. Notes receivable are usually GENERAL LEDGER
paid within one year. Therefore, they are classified as cur- Notes Receivable
rent assets.
Apr. 14 3,000.00
A customer who is unable to pay an account on the due
date may request additional time. The business should Accounts Receivable
require the customer to sign a note. A note does not pay
the amount the customer owes. However, the form of Bal. 3,000.00 Apr. 14 3,000.00
the asset is changed from an account receivable to a note
ACCOUNTS RECEIVABLE LEDGER
receivable. The promissory note is a written confirmation
Martin Sterling
of the amount owed, which provides the business with
evidence of the debt in case legal action is required to Bal. 3,000.00 Apr. 14 3,000.00
collect.
When a customer signs a note, the principal amount
of the note is debited to an asset account titled Notes
Receivable. One asset, Accounts Receivable, is replaced by When this entry is posted, the balance of the accounts
another asset, Notes Receivable. receivable account for Mr. Sterling is zero.
JOURNALIZING
Notes Receivable
ACCEPTING A
Debit Credit NOTE FOR AN
S T E P S
EXTENSION
Decrease
OF TIME ON
Increase
AN ACCOUNT
RECEIVABLE
1 Record a debit to Notes Receivable for the
amount of the note, $3,000.00, in the general
April 14. Accepted a 90-day, 8% note from journal.
Martin Sterling for an extension of time on his 2 Record a credit to Accounts Receivable/Martin
account, $3,000.00. Note Receivable No. 9. Sterling for the same amount, $3,000.00.
598 Chapter 20 Accounting for Notes and Interest
CO L L E C T I N G P R I N C I PA L A N D I N T E R E S T
O N A N OT E R E C E I VA B L E
1. Date 2. First Account Title 4. Principal Amount
CASH RECEIPTS JOURNAL PAGE 16
1 2 3 4 5 6 7
GENERAL ACCOUNTS SALES TAX SALES
DOC. POST. SALES PAYABLE CASH
DATE ACCOUNT TITLE NO. REF. RECEIVABLE DISCOUNT
DEBIT CREDIT CREDIT CREDIT DEBIT
CREDIT DEBIT
2
18 1 13 Notes Receivable 3 R562 3 0 0 0 00 4 3 0 6 0 00 18
19 Interest Income 5 6 0 00 6 7 19
20 20
5. Second 3. Receipt 6. Interest Amount 7. Maturity Value
Account Title Number
When a note receivable reaches its maturity date, the payee
receives the maturity value from the maker. The interest July 13. Received cash for the maturity
earned on money loaned is called interest income. The value of Note Receivable No. 9, a 90-day,
interest earned on a note receivable is credited to a rev- 8% note: principal, $3,000.00, plus interest,
enue account titled Interest Income. $60.00; total, $3,060.00. Receipt No. 562.
Interest Income Cash
Debit Credit July 13 3,060.00
Decrease
Notes Receivable
Increase
Apr. 14 3,000.00 July 13 3,000.00
Interest Income
July 13 60.00
Interest income is investment revenue rather than rev-
enue from normal operations. Therefore, Interest Income
is listed in a classification titled Other Revenue in a chart Interest income is calculated using the same method as
of accounts. that used for notes payable. The principal is multiplied by
Restaurant Supply received cash for the principal and the interest rate and the fraction of the year ($3,000.00 ⫻
interest of the note signed by Mr. Sterling on April 14. 8% ⫻ 90/360) to calculate interest income, $60.00.
After the entry is recorded, the original of Note Receiv-
able No. 9 is marked Paid. The original is given to Mr.
Sterling and a copy is kept by Restaurant Supply.
JOURNALIZING CASH RECEIVED FOR MATURITY
S T E P S
VALUE OF A NOTE RECEIVABLE
1 Write the date, 13, in the Date column of the cash receipts journal.
2 Write the account title, Notes Receivable, in the Account Title column.
3 Write the receipt number, R562, in the Doc. No. column.
4 Write the principal amount, $3,000.00, in the General Credit column.
5 On the next line, write the account title, Interest Income, in the Account Title column.
6 Calculate and write the interest income amount, $60.00, in the General Credit column.
7 Write the maturity value, $3,060.00, in the Cash Debit column on the first line of the entry.
Notes Receivable Lesson 20-3 599
R E CO R D I N G A D I S H O N O R E D N OT E R E C E I VA B L E
1. Debit to Accounts Receivable
GENERAL JOURNAL PAGE 5
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
1
15 6 Accounts Receivable/Jill Davis M92 6 1 2 00 15
16
2 Notes Receivable 6 0 0 00 16
17 Interest Income 1 2 00 17
18 3 18
2. Credit to Notes 3. Credit to
Receivable Interest Income
A note that is not paid when due is called a dishonored in the accounts receivable ledger. One asset, Notes Receiv-
note. The balance of the notes receivable account should able, is replaced by another asset, Accounts Receivable.
show only the total amount of notes that probably will
be collected. The amount of a dishonored note receivable
should be removed from the notes receivable account. GENERAL LEDGER
Accounts Receivable
The amount of the note plus interest income earned on
the note is still owed by the customer. Therefore, the total May 6 612.00
amount owed should be debited to the accounts receivable Notes Receivable
account in the general ledger. The amount owed should
Feb. 5 600.00 May 6 600.00
also be debited to the customer account in the accounts
receivable ledger. This information may be important if Interest Income
the customer requests credit in the future or if collection May 6 12.00
is achieved later.
ACCOUNTS RECEIVABLE LEDGER
Jill Davis
May 6. Jill Davis dishonored Note Receivable May 6 612.00
No. 12, a 90-day, 8% note, maturity value due
today: principal, $600.00; interest, $12.00;
Restaurant Supply does not write off Ms. Davis’s
total, $612.00. Memorandum No. 92.
account when the note is dishonored. The company con-
tinues to try to collect the account.
The interest income on the note has been earned as of Later, Restaurant Supply may decide that the account
the maturity date even though the note has not been paid. cannot be collected. At that time, the balance of the account
Jill Davis owes the principal amount of the note plus the will be written off as an uncollectible account. Allowance
interest earned. Therefore, the maturity value, $612.00, is for Uncollectible Accounts will be debited, and Accounts
debited to Accounts Receivable and to Jill Davis’s account Receivable and Jill Davis’s account will be credited.
S T E P S JOURNALIZING A DISHONORED NOTE RECEIVABLE
1 Record a debit to Accounts Receivable/Jill Davis for the total maturity value of the note, $612.00,
in the general journal.
2 Record a credit to Notes Receivable for the principal amount of the dishonored note, $600.00.
3 Record a credit to Interest Income for the interest earned on the note, $12.00.
600 Chapter 20 Accounting for Notes and Interest
CAREERS IN ACCOUNTING
Mi s s i e T. Ta l bot ,
L a w Fi r m O f f i c e Ma n a ge r
Missie T. Talbot first became interested in tax returns for over six states and many local taxing
accounting when she elected to take authorities, along with monthly, quarterly, and year-end
her first accounting course as a high closings.
school junior. She had always Missie says, “During this time, my husband and I were
enjoyed working with numbers. approached by a corporation in Dallas to open and oper-
During the first account- ate a dry cleaner. After considerable discussion and rely-
ing class, she learned how to ing on my bookkeeping knowledge, we decided to go
write checks properly, open for it.” Organized in 1992 as a sole proprietorship, the
a bank account, and balance business was a grand success because all garments were
a checking account—skills cleaned for the same low price. Within two years, they
she believes every high opened another location in their hometown.
school student should learn. Successful businesses often catch the attention of
Realizing that she enjoyed investors. When Missie and her husband sold their busi-
accounting, Missie elected to ness to investors, she became the office manager and
take a second year of high school paraprofessional for T. E. Lott & Company, PA, a regional
accounting. She recalls, “We were accounting firm. There she prepared the monthly finan-
able to set up our own company, record cial statements, quarterly payroll tax returns, sales tax
all the cash receipts, write checks, and reports, and payroll checks for its clients.
COURTESY OF MISSIE T. TALBOT
perform the accounting procedures involved Missie is now the firm administrator for the law firm
with running a business. I found the task a rewarding of Gholson, Hicks and Nichols, PA. She is responsible for
experience.” the financial management of the firm and supervises its
After graduation, she enrolled in accounting and data 16 staff members. She believes that “without the basics
processing courses in college. Her accounting knowl- of accounting that I received in high school, I know that I
edge enabled her to become a bookkeeper for a forestry would not be here in this law firm today.”
equipment manufacturer. She was later promoted to Missie credits her high school math teacher, Mrs.
office manager while still performing her bookkeep- Mythle Hodges, for encouraging her to stick with math
ing responsibilities. A family move led her to become and accounting. “I do regret never completing my col-
an accounts payable clerk for a contact lens manufac- lege degree—but it’s never too late!”
turer and distributor. In that position, she prepared sales
Salary Range: The median annual earnings of office sup- Qualifications: An office manager must possess a wide
port supervisors and managers were $41,030 in 2004. The variety of skills, including communication, technology,
middle 50 percent earned between $31,860 and $53,110, and organizational skills. Accounting courses in high
according to the Occupational Outlook Handbook. (Bureau school and college are highly desirable.
of Labor Statistics, U.S. Department of Labor, Occupa-
Occupational Outlook: As the economy becomes more
tional Outlook Handbook, 2006–07 Edition, Secretaries
service oriented, more job opportunities will become
and Administrative, on the Internet at www.bls.gov/oco/
available in the offices of small service businesses.
ocos127.htm.)
Notes Receivable Lesson 20-3 601
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. When a business asks a customer to sign a note receivable for an exten-
sion of time on the customer’s account receivable, how do the amount
and form of the business asset change? TERMS REVIEW
2. In which chart of accounts classification is Interest Income listed?
3. What accounts are affected, and how, when a customer dishonors a notes receivable
note receivable?
interest income
4. Why is interest income recorded at the time a note is dishonored even
though cash has not been received? dishonored note
WORK TOGETHER 203
Journalizing notes receivable transactions
The journals for Cruz Corporation are provided in the Working Papers. Your instructor will guide you through the
following example.
1. Using the current year, journalize the following transactions. Use page 2 of a general journal and page 3 of a cash
receipts journal. Source documents are abbreviated as follows: note receivable, NR; receipt, R; memorandum, M.
Transactions:
Feb. 2. Accepted a 90-day, 8% note from Paul Gary for an extension of time on his account, $1,800.00. NR17.
18. Received cash for the maturity value of NR14, a 60-day, 9% note for $500.00. R67.
27. Kirk Adams dishonored NR9, a 90-day, 9% note, for $400.00. M25.
ON YOUR OWN 203
Journalizing notes receivable transactions
The journals for Reality, Inc., are provided in the Working Papers. Work this problem independently.
1. Using the current year, journalize the following transactions. Use page 3 of a general journal and page 5 of a cash
receipts journal. Source documents are abbreviated as follows: note receivable, NR; receipt, R; memorandum, M.
Transactions:
Mar. 4. Accepted a 90-day, 10% note from Kim Pratt for an extension of time on her account, $2,500.00. NR24.
18. Received cash for the maturity value of NR18, a 60-day, 12% note for $1,500.00. R68.
26. T. J. Cross dishonored NR15, a 90-day, 10% note, for $1,800.00. M21.
602 Chapter 20 Accounting for Notes and Interest
SUMMARY
After completing this chapter, you can: 3. Calculate interest and maturity dates for notes.
1. Define accounting terms related to notes and 4. Analyze and record transactions for notes
interest. payable.
2. Identify accounting concepts and practices 5. Analyze and record transactions for notes
related to notes and interest. receivable.
EXPLORE ACCOUNTING
L o w Int e r e s t o r C a s h B a c k ?
“For a limited time, receive 1.9% financing or However, accountants believe that, regard-
$2,000 cash back on your new car!” We often less of which sales incentive is offered, the
hear car dealers offer customers incentives value of the incentive should be deducted
of below-market financing or a cash refund. from the sales price. Accounting rules
Each option provides the customer with a require that the recorded amount of
monetary value. The below-market financ- below-market loans be reduced by the
ing spreads this value—a reduced monthly value of the incentive. This process, known
payment—over a period of time. The cash as imputing interest, adjusts the note receiv-
refund is received when the car is purchased. able to an amount that will yield a market rate
Should the customer’s choice have an impact of interest over the life of the note. Using the imput-
on the way the sales transaction is recorded by the car ing interest rules, the below-market financing provided
dealer? Hammond Motors has two cars with sticker prices Pedro Diaz with a $2,000.00 benefit. Thus, Hammond
of $18,000.00. Pedro Diaz purchased one car, paying Auto must record a $2,000.00 credit to Discount on Notes
$3,000.00 down and financing the remaining $15,000.00 Receivable. The credit to Sales for Pedro’s car, therefore, is
over 4 years at the 1.9% interest rate. Tatsu Hamazaki pur- only $15,000.00.
chased the other car, paying only $1,000.00 down and
using her $2,000.00 cash back option to reduce her 12% Instructions: Identify a below-market financing or cash
note to $15,000.00. Using this information, it appears that refund currently being offered by an auto dealer. If you
Hammond Auto sold Pedro’s car for $18,000.00 and Tatsu’s were purchasing the car, which offer would you accept?
PHOTO: PHOTOGRAPHER’S CHOICE/GETTY IMAGES
car for $16,000.00. It also appears that both customers are Without knowing the accounting rules for imputing inter-
responsible for $15,000.00 notes receivable. est, how could you make an informed decision?
Accounting for Notes and Interest Chapter 20 603
201 APPLICATION PROBLEM
Calculating interest, maturity dates, and maturity values for promissory notes
Information regarding Shinoda, Inc., is provided in the Working Papers.
Instructions:
1. For each of the following promissory notes, calculate (a) the interest on the note, (b) the maturity date of
the note, and (c) the maturity value of the note. Save your work to complete Application Problem 20-2.
Date Principal Interest Rate Time
April 6 $10,000.00 12% 180 days
April 12 $600.00 9% 60 days
April 15 $5,000.00 10% 90 days
April 23 $3,000.00 14% 60 days
202 APPLICATION PROBLEM
Journalizing notes payable transactions
The journals for Webster Company are provided in the Working Papers.
Instructions:
1. Using the current year, journalize each of the following transactions using page 4 of a general journal and
page 6 of a cash receipts journal. Source documents are abbreviated as follows: receipt, R; memorandum, M.
Transactions:
Apr. 6. Signed a 180-day, 12% note for $10,000.00 with First American Bank. R127.
12. Signed a 60-day, 9% note with Milligan Company for an extension of time on this account pay-
able, $600.00. M32.
15. Signed a 90-day, 10% note for $5,000.00 with First National Bank. R142.
23. Signed a 60-day, 14% note with Yeatman Industries for an extension of time on this account pay-
able, $3,000.00. M42.
2. Journalize the following transactions on page 9 of a cash payments journal. Use the maturity dates and
maturity values calculated in Application Problem 20-1. The abbreviation for a check is C.
Transactions:
Paid cash for the maturity value of the $600.00 note dated April 12. C310.
Paid cash for the maturity value of the $3,000.00 note dated April 23. C318.
Paid cash for the maturity value of the $5,000.00 note dated April 15. C456.
Paid cash for the maturity value of the $10,000.00 note dated April 6. C645.
( Go Beyond the Book
)
For more information go to
www.C21accounting.com
604 Chapter 20 Accounting for Notes and Interest
203 APPLICATION PROBLEM
Journalizing notes receivable transactions
The journals for Compression Services are provided in the Working Papers.
Instructions:
1. Using the current year, journalize the following transactions. Use page 14 of a general journal and page 10
of a cash receipts journal. Source documents are abbreviated as follows: notes receivable, NR; receipt, R;
memorandum, M.
Transactions:
Jul. 5. Accepted a 90-day, 12% note from Peter Lamb for an extension of time on his account, $3,000.00.
NR25.
11. Received cash for the maturity value of NR20, a 60-day, 9% note for $800.00. R321.
15. Accepted a 90-day, 10% note from Pam Sellers for an extension of time on her account,
$2,400.00. NR26.
21. Josh Kemp dishonored NR16, a 90-day, 12% note, for $3,500.00. M62.
22. Received cash for the maturity value of NR17, a 90-day, 10% note for $1,000.00. R339.
27. Phil Pellum dishonored NR18, a 90-day, 15% note, for $2,500.00. M63.
204 APPLICATION PROBLEM
Journalizing notes receivable transactions
Savath Rajady, the credit manager of Jenkin Company, encourages customers of past-due accounts to sign
notes receivable. Mr. Rajady informs customers that future sales on account will be accepted only if the cus-
tomers sign a note and subsequently pay the note with interest. Using this strategy, most of Jenkin’s custom-
ers agree to sign notes. Jenkin Company requires all customers to sign 90-day, 18% notes.
Instructions:
1. Journalize the following transactions completed by Jenkin Company during the current year. The journals
are provided in the Working Papers. Use page 18 of a general journal and page 11 of a cash receipts journal.
Source documents are abbreviated as follows: notes receivable, NR; receipt, R; memorandum, M.
Transactions:
Nov. 3. Savath Rajady visited the offices of AutoCare Industries. AutoCare’s president agreed to sign a
note for $3,000.00. NR63.
14. Received a check for $2,090.00 from Teltor Company. The payment covers a $2,000.00 note,
number 52. R245.
28. A $4,000.00, 18%, 90-day note receivable from Sanford Company was due today, but no check
has been received. Savath Rajady attempted to call the company but discovered that its phone
has been disconnected. M69.
Accounting for Notes and Interest Chapter 20 605
205 MASTERY PROBLEM
Journalizing notes payable and notes receivable transactions
The following transactions related to notes payable and notes receivable were completed by Amory
Company during March of the current year. Journals are provided in the Working Papers.
Transactions:
Jul. 2. Signed a 90-day, 10% note for $5,000.00 with Commercial National Bank. R51.
7. Accepted a 90-day, 10% note from Nan Abert for an extension of time on her account, $1,500.00.
NR9.
9. Received cash for the maturity value of NR4, a 60-day, 9% note for $1,600.00. R62.
12. Accepted a 90-day, 10% note from Tom Burns for an extension of time on his account, $400.00.
NR10.
17. Received cash for the maturity value of NR5, a 60-day, 9% note for $800.00. R65.
23. Signed a 180-day, 8% note for $8,000.00 with American National Bank. R74.
24. Gibson Co. dishonored NR2, a 90-day, 12% note, for $3,000.00. M43.
28. Received cash for the maturity value of NR3, a 90-day, 12% note for $4,500.00. R79.
29. Signed a 60-day, 12% note with Daily Supply for an extension of time on this account payable,
$2,500.00. M44.
Instructions:
1. Journalize each transaction, using page 7 of a general journal and page 6 of a cash receipts journal. Source
documents are abbreviated as follows: check, C; receipt, R; memorandum, M; note receivable, NR.
2. Determine the maturity date and maturity value of each note signed by Amory Company.
3. Journalize the following transactions on page 9 of a cash payments journal. Use the maturity dates and
maturity values calculated in previous steps.
Transactions:
Paid cash for the maturity value of the $2,500.00 note dated July 29. C417.
Paid cash for the maturity value of the $5,000.00 note dated July 2. C610.
Paid cash for the maturity value of the $8,000.00 note dated July 23. C821.
206 CHALLENGE PROBLEM
Recording notes receivable stated in months
On June 18, James Whiley signed a $10,000.00 note payable with National Bank of Cressville. At his request,
the bank drafted the note for a 3-month term, payable on September 18, with 15% interest. Mr. Whiley
proudly stated, “Since my company began in 1972, we have never had to borrow money for more than 90
days.” The loan officer, believing that Mr. Whiley did not fully understand the terms of the note, explained that
the company would be responsible for interest for the number of days between June 18 and September 18.
That number, he continued, would be slightly more than 90 days.
Instructions:
1. Use the forms given in the Working Papers. Determine the maturity value of the note on September 18. Use
the actual number of days from June 18 in your calculation.
2. Mr. Whiley expected to pay only 90 days of interest on the note. Determine the maturity value of the note
assuming interest is charged for only 90 days.
3. Assume the bank allows Mr. Whiley to pay only the interest amount calculated in Instruction 2, even
though the money will be borrowed for more than 90 days. Determine the actual interest rate of the note.
4. Should the bank allow Mr. Whiley to pay for only 90 days’ interest?
606 Chapter 20 Accounting for Notes and Interest
A P P L I E D CO M M U N I C AT I O N
As an accountant for Hasler Corporation, you have been asked to assist the president in making a presentation to
the board of directors. The president wants to report the 4-year growth in sales of four major products. The following
table presents product sales (in thousands of dollars) from 20X1 to 20X4.
20X1 20X2 20X3 20X4
Lumber $253 $316 $324 $315
Hardware 166 182 169 175
Carpet 153 176 189 201
Housewares 122 112 114 103
Instructions: Prepare a graph displaying the data presented in the table. Determine what type of graph (pie, line,
bar, stacked-bar) best communicates the sales trend of each product. If available, use the graph or chart feature of a
spreadsheet program to create the graph.
CASE FOR CRITICAL THINKING
TayVon Johnson, a new accounting department employee, questions the practice of recording interest income when
a note is dishonored. Instead, he believes that the interest earned on the note should be recorded only if and when
the account is subsequently paid. Is this alternative method acceptable? Why or why not?
GRAPHING WORKSHOP
Every week Sandie Oswalt, Vice-President, compares CD Comparisons
the certificate of deposit (CD) rates for her bank, 6.0%
Percentage Yield
National Bank, to three local competing banks.
5.0%
Sandie uses the information to decide when and
by how much to raise or lower National Bank’s CD 4.0%
rates. 3.0%
Use the graph to answer the following questions. 2.0%
Support your answers. 1.0%
1. Is the National Bank competitive with short-term
0.0%
(90 day or less) CDs? 30 60 90 180 1 2 4
2. Is the National Bank competitive with long-term day day day day year year year
(1 year or more) CDs? Term of Deposit
3. Which bank has the least variation in its CD National Bank American Bank
rates? Citizens Bank Columbus Bank
A N A LY Z I N G B E S T B U Y ’S F I N A N C I A L S TAT E M E N T S
Just as no two individuals are exactly the same, no two companies are exactly the same. Management decisions,
such as the ownership of property and equipment, the types and amounts of inventory, and customer credit poli-
cies, all cause the economic events of each company to be different.
The summary of these economic events is reflected in financial statements. Financial statements should enable the
reader to learn the important financial information of the company. Thus, just as each company is different, each
company’s financial statements are different.
Many companies have large levels of long-term debt and, as a result, report interest expense on their income state-
ments. Compared with other companies, Best Buy has a relatively low level of long-term debt and incurs a small
amount of interest expense.
Instructions: Refer to Best Buy’s financial statements on pages B-5 and B-7 in Appendix B of this textbook.
1. What are Best Buy’s long-term liabilities and debt as a percent of total liabilities and shareholders’ equity for fiscal
year 2007?
2. What was the amount of cash paid for interest expense in fiscal year 2007 as reported on the Consolidated State-
ments of Cash Flows?
Accounting for Notes and Interest Chapter 20 607
Accounting
SOFTWARE
N O T E S P AYA B L E A N D R E C E I V A B L E
Peachtree keeps records of every purchase on account from each vendor. At any time, a business can see a listing
of the outstanding invoices owed to a vendor. When the business pays the account, the payment is applied against
specific outstanding invoices in the vendor’s account. This method of maintaining an accounts payable ledger is
known as an open item system.
When a business pays an outstanding invoice with a note payable, the outstanding invoice in the vendor’s
account should be marked as paid. Therefore, Peachtree has you record the signing of a note payable using the
same window you would use if the business paid the invoice with a check.
Similarly, the receipt of cash from the signing of a note payable is recorded in a window normally used to
record the receipt of cash from sales or the collection of accounts receivable. Changes in the default general ledger
accounts are necessary to ensure the transaction is journalized properly.
PEACHTREE APPLICATION PROBLEM 20-2
1. Open (Restore) file 20-2AP.ptb.
2. Journalize and post each of the transactions covering the signing of notes payable and the payment of cash for a
notes payable.
3. Print the April 6 to April 15 cash receipts journal.
4. Print the April 12 to April 23 purchase journal.
5. Print the June 11 to October 3 cash disbursements journal.
PEACHTREE MASTERY PROBLEM 20-5
1. Open (Restore) file 20-5MP.ptb.
2. Journalize and post the transactions in the cash disbursements journal related to notes payable and notes
receivable.
3. Print July’s cash receipts journal, sales journal, and purchase journal.
4. Print the cash disbursements journal from September 27 to January 19.
N O T E S P AYA B L E A N D R E C E I V A B L E
Using an accounting software package to record notes payable and notes receivable is very similar to
recording these transactions in a manual accounting system.
The entry to record signing a note payable in exchange for cash or other assets is entered in the Make Deposits
window. The entry to record signing a note payable for an extension of time on an account is entered in the Enter
Bills window. The entry to record the payment of a note payable is entered in the Write Checks window.
Notes receivable are handled in a similar manner. The entry to record accepting a note receivable from a cus-
tomer for an extension of time is entered in the Receive Payments window. The entry to record the receipt of cash
from a note receivable is entered in the Make Deposits window.
While QuickBooks does not calculate maturity dates or maturity values, it does have a calculator feature avail-
able. To open the calculator, click in the amount field and either press = or enter a number followed by ⫹, ⫺, *, /,
or ⫽. A paper tape, much like the paper tape in a calculator, will appear, and your calculations will appear on the
tape. To enter the calculation result in the field, press Enter or Tab, or click anywhere outside the lines of the tape.
QUICKBOOKS APPLICATION PROBLEM 20-2
1. Open the Webster Company file.
2. To record a note payable for cash, use the Make Deposits option from the Banking menu. To record a note pay-
able to extend payment terms, choose the Enter Bills option from the Vendors menu. Record the signing of a
note payable and the payment of cash for a note payable.
3. Print a Journal report using April 1 and October 31 for the dates.
608 Chapter 20 Accounting for Notes and Interest
QUICKBOOKS MASTERY PROBLEM 20-5
1. Open the Amory Company file.
2. Journalize the notes payable and notes receivable transactions for July.
3. Journalize the transactions for later months for notes paid at maturity using the Write Checks window to record
the transactions.
4. Print a Journal report using July 1 and January 31 of the following year for the dates.
C A L C U L AT I N G D AT E S F O R N O T E S
Mitchell Nelson was born on the 33,131st day of the 20th century. Why would Mitchell or anyone else care about
this number? Electronic spreadsheets use sequential numbers, beginning with January 1, 1900, to perform date
calculations. A variety of date and time functions allows you to determine dates, such as the age of a person or the
due date of a note payable.
Open a blank worksheet and enter Mitchell’s birthday of 9/15/1990 in cell A1. The spreadsheet displays the date
but stores the 33,131 in the cell. Let’s assume today's date is January 1, 2009. How old is Mitchell on that date? To
find out, enter 1/01/2009 in cell A2; then enter the following formula in cell A3: =(A2 – A1)/365. Subtracting Mitch-
ell’s birthday from today’s value calculates his age in days; dividing this number by 365 completes the calculation of
his age in years. The age displayed is 18.30959. Mitchell is 18 years old.
When does a 135-day note signed on 6/17/2010 mature? Enter the date in cell B1 and enter the formula
+B1+135 in cell B2. The spreadsheet recognizes you are working with dates and automatically formats the new cell
as a date—10/30/2010. But the number that is stored in the cell is actually 40,481.
Not sure you believe it? Format the four cells using a number or currency format and see it for yourself.
EXCEL APPLICATION PROBLEM 20-1
Open the F20-1 Excel data file. Follow the step-by-step instructions in the Instructions worksheet.
C A L C U L AT I N G N O T E S A N D I N T E R E S T
The Planning Tools in Automated Accounting perform specific types of interest and loan calculations.
The Notes and Interest Planner is used to calculate maturity date, amount of interest, and the maturity value of
the note. A business can use the planner to calculate the total amount to be received or paid (maturity value) of its
notes receivable or notes payable. The planner may also be used to determine the exact due date of a note when
the term is stated as a number of days or months. To use the Notes and Interest Planner:
1. Click the Tools toolbar button.
2. Click the Notes and Interest tab.
3. In the Time Basis box, select the time basis to be used by clicking on the appropriate option button. (This text-
book uses a 360-day year.)
4. Enter the data and press the Tab key to move among the text boxes. The calculated results for Maturity Date of
Note, Amount of Interest, and Maturity Value will appear at the bottom of the Planning dialog box.
5. Click on the Report button to produce a schedule of the results. Once displayed, the report may be printed or
copied to the clipboard for pasting into a spreadsheet or word processor.
6. Click the Close button to exit the report and return to the planner.
7. Click the Close button or press ESC to exit the planner.
AUTOMATED ACCOUNTING APPLICATION PROBLEM 20-1
Open file F20-14.AA8. Display the problem instructions and complete the problem.
AUTOMATED ACCOUNTING MASTERY PROBLEM 20-5
Open file F20-5.AA8. Display the problem instructions and complete the problem.
OPTIONAL ACTIVITY
On your own, explore the other planning tools. For example, you could use the Savings Planner to calculate the
monthly deposit required to save enough to buy a car in the future.
Accounting for Notes and Interest Chapter 20 609
REINFORCEMENT
Activity 3—Part A
An Accounting Cycle for a Corporation:
Journalizing and Posting Transactions
Reinforcement Activity 3 reinforces learning from Parts 2 and 3. Activities cover a complete accounting cycle for a merchandising
business organized as a corporation. Reinforcement Activity 3 is a single problem divided into two parts. Part A includes learning
from Part 2 and Chapters 17 through 20 of Part 3. Part B includes learning from Chapters 21 and 22.
The accounting work of a single merchandising business for the last month of a yearly fiscal period is used in this reinforce-
ment activity. The records kept and reports prepared, however, illustrate the application of accounting concepts for all merchan-
dising businesses.
SPARKLE, INC. JOURNALS AND LEDGERS
Sparkle, Inc., a merchandising business, is organized as a The journals, ledgers, and forms used by Sparkle are listed
corporation. The business sells a complete line of cleaning below. Models of these items are shown in the textbook
and maintenance supplies, mostly to business customers. chapters indicated.
Sparkle is located within an industrial park and is open for
business Monday through Saturday. A monthly rent is paid Journals and Ledgers Chapter
for the building. Sparkle sells to some businesses on ac- Purchases journal 9
count and accepts cash or credit cards from small business
owners. Cash payments journal 9
General journal 9
Sales journal 10
CHART OF ACCOUNTS Cash receipts journal 10
Accounts payable ledger 11
Sparkle uses the chart of accounts shown on the next
page. Accounts receivable ledger 11
General ledger 11
Plant asset record 18
610 Reinforcement Activity 3—Part A An Accounting Cycle for a Corporation: Journalizing and Posting Transactions
CHART OF ACCOUNTS
GENERAL LEDGER
Balance Sheet Accounts Income Statement Accounts
(1000) ASSETS (4000) OPERATING REVENUE
1100 Current Assets 4105 Sales
1105 Cash 4110 Sales Discount
1110 Petty Cash 4115 Sales Returns and Allowances
1115 Notes Receivable (5000) COST OF MERCHANDISE
1120 Interest Receivable 5105 Purchases
1125 Accounts Receivable 5110 Purchases Discount
1130 Allowance for Uncollectible Accounts 5115 Purchases Returns and Allowances
1135 Merchandise Inventory (6000) OPERATING EXPENSES
1140 Supplies 6105 Advertising Expense
1145 Prepaid Insurance 6110 Cash Short and Over
1200 Plant Assets 6115 Credit Card Fee Expense
1205 Office Equipment 6120 Depreciation Expense—Office Equipment
1210 Accumulated Depreciation—Office Equipment 6125 Depreciation Expense—Warehouse Equipment
1215 Warehouse Equipment 6130 Insurance Expense
1220 Accumulated Depreciation—Warehouse 6135 Miscellaneous Expense
Equipment 6140 Payroll Taxes Expense
(2000) LIABILITIES 6145 Rent Expense
2100 Current Liabilities 6150 Repairs Expense
2105 Notes Payable 6155 Salary Expense
2110 Interest Payable 6160 Supplies Expense
2115 Accounts Payable 6165 Uncollectible Accounts Expense
2120 Federal Income Tax Payable 6170 Utilities Expense
2125 Employee Income Tax Payable (7000) OTHER REVENUE
2130 Social Security Tax Payable 7105 Gain on Plant Assets
2135 Medicare Tax Payable 7110 Interest Income
2140 Sales Tax Payable (8000) OTHER EXPENSES
2145 Unemployment Tax Payable—Federal 8105 Interest Expense
2150 Unemployment Tax Payable—State 8110 Loss on Plant Assets
2155 Health Insurance Premiums Payable (9000) INCOME TAX EXPENSE
2160 Dividends Payable 9105 Federal Income Tax Expense
(3000) OWNER’S EQUITY
3105 Capital Stock
3110 Retained Earnings
3115 Dividends
3120 Income Summary
SUBSIDIARY LEDGERS
Accounts Receivable Ledger Accounts Payable Ledger
110 Baker & Associates 210 Buntin Supply Company
120 Felton Industries 220 Draper Company
130 Hilldale School 230 Glenson Company
140 Horton Company 240 Hinsdale Supply Co.
150 Nelson Co. 250 SHF Corp.
160 Ruocco Plastics 260 Walbash Manufacturing
An Accounting Cycle for a Corporation: Journalizing and Posting Transactions Reinforcement Activity 3—Part A 611
RECORDING TRANSACTIONS
The December 1, 20X4, account balances for the general and subsidiary ledgers are given in the Working Papers.
Instructions:
1. Journalize the following transactions completed during December, 20X4. Use page 12 of a sales journal, page 12 of
a purchases journal, page 12 of a general journal, page 12 of a cash receipts journal, and page 23 of a cash payments
journal. Sparkle offers sales terms of 2/10, n/30. The sales tax rate is 6%. Source documents are abbreviated as follows:
check, C; memorandum, M; purchase invoice, P; receipt, R; sales invoice, S; terminal summary, TS; debit memorandum,
DM; credit memorandum, CM; NR, note receivable; NP, note payable.
Dec. 1. Paid cash for rent, $1,750.00. C578.
2. Received cash on account from Ruocco Plastics, covering S637 for $3,250.00. R671.
3. Paid cash on account to Walbash Manufacturing, covering P324 for $620.00, less 2% discount. C579.
3. Paid cash for the maturity value of NP31, a 180-day, 9% note for $10,000.00 to First American Bank. C580.
5. Bought a printer/scanner for the office: cost, $1,200.00; estimated salvage value, $200.00; estimated use-
ful life, 3 years; plant asset No. 998; serial number, MNT-9343. C581. Open a plant asset record for this office
equipment. Sparkle Inc. uses the straight-line method of depreciation. C581.
5. Sold merchandise on account to Horton Company, $500.00, plus sales tax. S657.
6. Recorded cash and credit card sales, $5,430.00, plus sales tax, $325.80; total, $5,755.80. TS49.
6. Bought supplies on account from Draper Company, $362.40. M45.
Posting. Post the items that are to be posted individually. Always post the journals in this order: sales journal,
purchases journal, general journal, cash receipts journal, and cash payments journal.
7. Accepted a 90-day, 10% note from Nelson Co. for an extension of time on its account, $3,600.00. NR34.
8. Purchased merchandise on account from Glenson Company, $4,518.00. P332.
9. Sold merchandise on account to Ruocco Plastics, $480.00, plus sales tax. S658.
9. Wrote off Felton Industries’ past-due account as uncollectible, $2,460.00. M46.
10. Paid cash for supplies, $223.00. C582.
12. Received cash on account from Horton Company, covering S657 for $530.00, less 2% discount. R672.
12. Purchased merchandise on account from Hinsdale Supply Co., $6,812.00. P333.
13. Recorded cash and credit card sales, $5,987.00, plus sales tax, $359.22; total, $6,346.22. TS50.
Posting. Post the items that are to be posted individually.
14. Received cash for sale of a hand truck, plant asset No. 432, $1,400.00. M47 and R673.
14. Returned merchandise purchased from Glenson Company on P332, $198.00. DM34.
15. Paid cash liability for employee income tax, $324.00; social security tax, $742.00; and Medicare tax, $162.35.
C583.
15. Paid cash for semimonthly payroll, $2,256.27 (total payroll, $2,820.00, less deductions: employee income tax,
$158.00; social security tax, $174.84; Medicare tax, $40.89; health insurance, $190.00). C584.
15. Recorded employer payroll taxes, $250.45, for the semimonthly pay period ended December 15. Taxes owed
are: social security tax, $174.84; Medicare tax, $40.89; federal unemployment tax, $4.48; and state unemploy-
ment tax, $30.24. M48.
16. Purchased merchandise on account from Buntin Supply Company, $4,833.00. P334.
17. Paid cash for electric bill, $346.20. C585.
17. Paid cash on account to Glenson Company, covering P332 for $4,518.00, less 2% discount. C586.
18. Received cash in full payment of Baker & Associates’ account, previously written off as uncollectible, $948.00.
M49 and R674.
19. Paid cash for miscellaneous expense, $72.00. C587.
20. Sold merchandise on account to Hilldale School, $1,560.00. Hilldale School is exempt from sales tax. S659.
20. Recorded cash and credit card sales, $3,554.00, plus sales tax, $213.24; total, $3,767.24. TS51.
Posting. Post the items that are to be posted individually.
21. Paid cash for merchandise, $357.00. C588.
22. Granted credit to Ruocco Plastics for merchandise returned, $120.00; plus sales tax, $7.20; $127.20 total.
CM15.
23. Paid cash on account to Hinsdale Supply Co., covering P333 for $6,812.00. C589.
26. Received cash for the maturity value of NR32, a 90-day, 12% note for $5,800.00. R675.
27. Recorded cash and credit card sales, $2,337.00, plus sales tax, $140.22; total, $2,477.22. TS52.
Posting. Post the items that are to be posted individually.
28. Sold merchandise on account to Horton Company, $2,500.00, plus sales tax. S660.
612 Reinforcement Activity 3—Part A An Accounting Cycle for a Corporation: Journalizing and Posting Transactions
28. Purchased merchandise on account from Draper Company, $6,148.00. P335.
28. Signed a 90-day, 10% note, for $6,000.00 with Commercial National Bank. NP33 and R676.
28. Received cash for sale of a computer printer, plant asset No. 667, $150.00. M50 and R677. Update the plant
asset record and record the sale.
29. Paid $500.00 on the outstanding balance of the SHF Corp. account. C590.
30. Ruocco Plastics dishonored NR33, a 60-day, 12% note, for $3,000.00. M51.
30. Recorded credit card fee expense, $418.00. M52.
31. Paid cash to replenish the petty cash fund, $84.96: supplies, $12.50; advertising, $50.00; miscellaneous,
$22.37; cash short, $.09. C591.
31. Paid cash for semimonthly payroll, $2,206.86 (total payroll, $2,760.00, less deductions: employee income tax,
$152.00; social security tax, $171.12; Medicare tax, $40.02; health insurance, $190.00. C592.
31. Recorded employer payroll taxes, $242.14, for the semimonthly pay period ended December 31. Taxes owed
are: social security tax, $171.12: Medicare tax, $40.02; federal unemployment tax, $4.00; and state unemploy-
ment tax, $27.00. M53.
31. Recorded cash and credit card sales, $465.00, plus sales tax, $27.90; total, $492.90. TS53.
Posting. Post the items that are to be posted individually.
2. Prove and rule the sales journal. Post the totals of the special columns.
3. Total and rule the purchases journal. Post the total.
4. Prove the equality of debits and credits for the cash receipts and cash payments journals.
5. Prove cash. The balance on the next unused check stub is $8,100.70.
6. Rule the cash receipts journal. Post the totals of the special columns.
7. Rule the cash payments journal. Post the totals of the special columns.
8. Prepare a schedule of accounts receivable and a schedule of accounts payable. Prove the accuracy of the subsidiary led-
gers by comparing the schedule totals with the balances of the controlling accounts in the general ledger. If the totals
are not the same, find and correct the errors.
The ledgers used in Reinforcement Activity 3—Part A are needed to complete Reinforcement Activity 3—Part B.
An Accounting Cycle for a Corporation: Journalizing and Posting Transactions Reinforcement Activity 3—Part A 613
TETRA IMAGES/GETTY IMAGES
C H A P T E R 2 1 Accounting for Accrued
Revenue and Expenses
O B J E C T I V E S
After studying Chapter 21, you will be able to: 3. Record adjusting, closing, and reversing entries
for accrued revenue.
1. Define accounting terms related to accrued
revenue and accrued expenses. 4. Record adjusting, closing, and reversing entries
for accrued expenses.
2. Identify accounting concepts and practices
related to accrued revenue and accrued
expenses.
K E Y T E R M S
• accrued revenue • accrued interest income • accrued expenses
• intellectual property • reversing entry • accrued interest expense
( Point Your Browser
www.C21accounting.com
)
614
ACCOUNTING IN THE REAL WORLD
USA Today
Deferred Revenue at USA Today
You’ve probably heard someone use the phrase “timing is everything.” This
phrase has a special meaning to the accountants at USA Today, a division of
Gannett Co., Inc.
USA Today collects fees for advertising before the advertisements appear.
Customers pay subscriptions for paper delivery or online editions as much
as a year in advance. Receiving these fees does not, however, mean that
DIGITAL VISION/GETTY IMAGES
USA Today can record the amounts as current revenue. In accordance with
generally accepted accounting principles, advertising fees are recorded as
revenue when the advertising is printed or placed on a INTERNET
web site. In the same manner, subscription fees ACTIVITY
are recorded as revenue when purchased
newspapers are delivered. Mission Statements
When preparing financial state- Go to the homepage for Ben
ments, accountants at USA Today and Jerry’s Ice Cream (www.
must analyze the money col- benandjerrys.com). Search for
lected from advertising and Ben and Jerry’s Mission State-
subscriptions to determine ment.
what amount should be
recorded as revenue. Instructions
1. List Ben and Jerry’s Mission
©JAY CARRIER/BLOOMBERG NEWS/LANDOV
Statement in full.
2. Expand your search by
reading about Ben and
Jerry’s commitment to
the environment. List one
interesting fact that you
find.
Critical Thinking
1. Suppose you purchase a $150.00 annual subscription to USA Today on
November 1. How much should USA Today recognize as revenue on its
December financial statements?
2. Would your answer to question 1 differ if the customer selected online
delivery of USA Today?
Source: http://library.corporate-ir.net/library/84/846/84662/items/233865/06AnnualReport.pdf
615
L E S S O N
Accrued Revenue
21-1
ACCOUNTING FOR INTE REST
AT T H E F I S C A L Y E A R E N D
Generally accepted accounting principles (GAAP) require maturity date. At the end of the fiscal period, adjusting
that revenue and expenses be recorded in the account- entries are recorded for these revenues and expenses.
ing period in which revenue is earned and expenses are Revenue earned in one fiscal period but not received
incurred. [CONCEPT: Matching Expenses with Rev- until a later fiscal period is called accrued revenue. At
enue] Some revenues, however, are earned each day but the end of a fiscal period, accrued revenue is recorded by
are usually recorded only when cash is actually received. an adjusting entry. [CONCEPT: Realization of Revenue]
For example, interest is earned for each day a note receiv- The adjusting entry for accrued revenue increases a rev-
able is held. enue account. The adjusting entry also increases a receiv-
However, the interest may not be received until the able account. The income statement will then report all
maturity date of the note. Likewise, some expenses may revenue earned for the period, even though some of the
be incurred before they are actually paid. A note payable revenue has not yet been received. The balance sheet will
incurs interest expense each day the note is outstanding. report all the assets, including the accrued revenue receiv-
However, the interest generally is not paid until the note’s able. [CONCEPT: Adequate Disclosure]
CHARACTER COUNTS
G u a r d i ng Int e l l e c t u a l P r o pe r t y
Is it ethical to download free music are examples of intellectual property. Regardless of how
from the Internet? This hotly debated individuals attempt to justify downloading free music
issue provides interesting insight from the Internet, there is no escaping the fact that these
into our society and individuals’ downloads are illegal.
ability to make ethical deci- Businesses recognize that the unauthorized copying of
sions. Have you heard people computer software is also illegal. Many companies address
attempt to justify copying this issue in their code of conduct.
music? “It doesn’t cost the art-
ists anything.” “They’re so rich Instructions
PHOTO: BLEND IMAGES/GETTY IMAGES
anyway.” “I can’t afford to pur- Do an Internet search to access “Everyday Values,” the code
chase the music I like.” “If it’s on of conduct for Harley-Davidson, Inc. What guidance does
the Internet, I can download it.” Harley-Davidson provide its employees about copying
Any product that is protected software for both business and personal use?
by patents, trademarks, and copy-
rights is called intellectual property. Source: http://investor.harley-davidson.com/downloads/CG_
Music, videos, and computer software CodeConduct.pdf.
616 Chapter 21 Accounting for Accrued Revenue and Expenses
A N A LY Z I N G A N A D J U S T M E N T F O R
ACCRUED INTE REST INCOME
1. Debit Interest Receivable. 2. Credit Interest Income.
Restaurant Supply Co.
Work Sheet
For Year Ended December 31, 20--
1 2 3 4 5 6 7 8
TRIAL BALANCE ADJUSTMENTS INCOME STATEMENT BALANCE SHEET
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
(a)
4 Interest Receivable 1 2 0 00 2 0 00 4
2
(a)
51 Interest Income 1 3 6 00 2 0 00 1 5 6 00 51
3 3. Record the adjusting entry.
GENERAL JOURNAL PAGE 15
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
1 Adjusting Entries 1
20--
2 Dec. 31 Interest Receivable 2 0 00 2
3 Interest Income 2 0 00 3
At the end of each fiscal period, Restaurant Supply exam- Interest Receivable is debited for $20.00 to show the
ines the notes receivable on hand. The amount of interest interest income that has accrued at the end of the fiscal
income earned but not yet collected is calculated. Inter- period. This revenue will not be collected until the next
est earned but not yet received is called accrued interest fiscal period.
income. On December 31, Restaurant Supply has one The credit of $20.00 is added to the previous balance
note receivable on hand, a 90-day, 6%, $2,000.00 note in Interest Income. The new account balance, $156.00,
dated November 1. An adjusting entry must be made is the total amount of interest income earned during the
to record the amount of interest earned to date on this fiscal period.
note.
The time period from November 1 through December
RECORDING AN
31 is 60 days. Therefore, the interest earned on the note is
calculated for 60/360 of a year. S T E P S ADJUSTMENT
FOR ACCRUED
Time as
INTEREST INCOME
Accrued
Interest
Principal ⴛ ⴛ Fraction ⴝ Interest
Rate 1 Write the accrued interest income amount,
of Year Income
$2,000.00 ⫻ 6% ⫻ 60 $20.00, in the Adjustments Debit column on the
360 ⫽ $20.00
Interest Receivable line of the work sheet. Label
the adjustment with a small letter a in parenthe-
ses, (a).
Interest Receivable
2 Write the same amount, $20.00, in the Adjust-
Dec. 31 Adj. 20.00 ments Credit column on the Interest Income line
of the work sheet. Label the adjustment using
Interest Income the same letter, (a).
Dec. 31 Bal. 136.00
3 Use the debit and credit amounts on the work
Dec. 31 Adj. 20.00
(New Bal. 156.00) sheet to record an adjusting entry in the general
journal.
Accrued Revenue Lesson 21-1 617
POSTING AN ADJUSTING ENTRY FOR
ACCRUED INTE REST INCOME
GENERAL JOURNAL PAGE 15
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
1 Adjusting Entries 1
20--
2 Dec. 31 Interest Receivable 1120 2 0 00 2
3 Interest Income 7110 2 0 00 3
4 4
5 5
1. Post the 1 2 2. Post the
debit. credit.
ACCOUNT Interest Receivable ACCOUNT NO. 1120
POST. BALANCE
DATE ITEM REF. DEBIT CREDIT
DEBIT CREDIT
20--
Dec. 31 G15 2 0 00 2 0 00
ACCOUNT Interest Income ACCOUNT NO. 7110
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
Dec. 29 CR36 1 2 00 1 3 6 00
31 G15 2 0 00 1 5 6 00
The adjustment for accrued interest income planned on POSTING AN
a work sheet is recorded as an adjusting entry in a general
S T E P S ADJUSTING ENTRY
journal. The adjusting entry is then posted to the general
FOR ACCRUED
ledger.
After posting, the interest receivable account has a debit INTEREST INCOME
balance of $20.00 and will appear on the balance sheet as
a current asset. This debit balance is the accrued interest 1 Post the debit, $20.00, to Interest Receivable.
income earned but not yet collected at the end of the year. 2 Post the credit, $20.00, to Interest Income.
The interest income account has a credit balance
of $156.00 and will appear on the income
statement as other revenue. This amount
is the total interest income for the year.
R E M E M B E R
The interest receivable account
appears in the Current Assets section
of the balance sheet. The interest
income account appears in
the Other Revenue section of
the income statement.
618 Chapter 21 Accounting for Accrued Revenue and Expenses
REVE RSING E NTRY FOR ACCRUE D INTE REST INCOME
1. Write the heading. 2. Debit Interest Income.
GENERAL JOURNAL PAGE 17
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
1 1 Reversing Entries 1
20--
2 Jan. 1 Interest Income 2 2 0 00 2
3 Interest Receivable 3 2 0 00 3
4 4
3. Credit Interest Receivable.
On December 31, Interest Income is closed as part of the
regular closing entry for income statement accounts with Interest Income
credit balances. Interest Income is debited for $156.00 to Dec. 31 Closing 156.00 Dec. 31 Bal. 136.00
reduce the account balance to zero. Jan. 1 Rev. 20.00 Dec. 31 Adj. 20.00
Adjusting entries for accrued revenues have an effect on (New Bal. 20.00)
transactions that will be recorded in the following fiscal
period. On the maturity date of the outstanding 90-day Interest Receivable
note receivable, Restaurant Supply will receive interest of Dec. 31 Adj. 20.00 Jan. 1 Rev. 20.00
$30.00. (New Bal. zero)
However, an adjusting entry was made to record the
amount of interest earned last year, $20.00. Thus, $20.00
of the $30.00 total interest income has already been
recorded as revenue. The remaining $10.00 of the $30.00 The reversing entry is the opposite of the adjusting
total interest will be earned during the current fiscal entry. The entry creates a debit balance of $20.00 in Inter-
est Income. A debit balance is the opposite of the nor-
period.
It is inconvenient to determine how much, if any, mal balance of Interest Income. When the full amount of
of cash received from notes receivable relates to inter- interest is received, the $30.00 will be credited to Inter-
est Income, resulting in a $10.00 credit balance ($30.00
est accrued during the prior fiscal period. To avoid this
inconvenience, an entry is made at the beginning of the credit ⫺ $20.00 debit), the amount of interest earned in
new fiscal period to reverse the adjusting entry. An entry the new year.
made at the beginning of one fiscal period to reverse an The reversing entry reduced the balance in Interest
Receivable to zero. When the interest is received, no entry
adjusting entry made in the previous fiscal period is called
a reversing entry. will be made to Interest Receivable. Instead, the total
amount of interest received will be credited to Interest
Income.
REVERSING AN ADJUSTING ENTRY FOR ACCRUED
S T E P S
INTEREST INCOME
1 Write the heading, Reversing Entries, in the middle of the general journal’s Account Title column. This heading
explains all the reversing entries that follow. Therefore, indicating a source document is unnecessary.
2 Record a debit, $20.00, to Interest Income.
3 Record a credit, $20.00, to Interest Receivable.
Accrued Revenue Lesson 21-1 619
CO L L E C T I N G A N OT E R E C E I VA B L E I S S U E D
IN A PREVIOUS FISCAL PERIOD
1. Credit for Principal 3. Debit for Maturity Value
CASH RECEIPTS JOURNAL PAGE 51
1 2 3 4 5 6 7
DOC. POST. GENERAL ACCOUNTS SALES SALES TAX SALES CASH
DATE ACCOUNT TITLE NO. REF. RECEIVABLE PAYABLE DISCOUNT DEBIT
DEBIT CREDIT CREDIT
CREDIT CREDIT DEBIT
22 30 Notes Receivable R9 1115 1 2 0 0 0 00 3 2 0 3 0 00 22
23 Interest Income 7110 3 0 00 2 23
24 24
2. Credit for Total Interest
ACCOUNT Notes Receivable ACCOUNT NO. 1115
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
4 4. Post amounts
Nov. 1 G11 2 0 0 0 00 2 0 0 0 00 in General
20--
Jan. 30 CR51 2 0 0 0 00 ——— ——— columns.
ACCOUNT Interest Income ACCOUNT NO. 7110
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
31 G15 2 0 00 1 5 6 00
31 G16 1 5 6 00 ——— ———
20--
Jan. 1 G17 2 0 00 2 0 00
30 CR51 4 3 0 00 1 0 00
On January 30, Restaurant Supply received the maturity The total interest, $30.00, was earned during two fis-
value of the only note receivable on hand on December cal periods—$20.00 during the previous fiscal period and
31, the end of the previous fiscal year. $10.00 during the current fiscal period. The reversing
entry created a $20.00 debit balance in Interest Income.
After the $30.00 credit is posted, Interest Income has a
January 30. Received cash for the maturity value
credit balance of $10.00, the amount of interest earned
of a 90-day, 6% note: principal, $2,000.00, plus during the current fiscal period.
interest, $30.00; total, $2,030.00. Receipt No. 9.
COLLECTING A
Cash NOTE RECEIVABLE
Jan. 30 Rec’d 2,030.00 S T E P S ISSUED IN A
PREVIOUS FISCAL
Notes Receivable PERIOD
Nov. 1 2,000.00 Jan. 30 Rec’d 2,000.00
1 Record a credit to Notes Receivable in the Gen-
eral Credit column of the cash receipts journal
Interest Income
for the principal of the note, $2,000.00.
Dec. 31 Closing 156.00 Dec. 31 Bal. 136.00
Jan. 1 Rev. 20.00 Dec. 31 Adj. 20.00 2 Record a credit to Interest Income in the General
Jan. 30 Rec’d 30.00 Credit column for the total interest, $30.00.
(New Bal. 10.00) 3 Record a debit in the Cash Debit column for the
maturity value of the note, $2,030.00.
4 Post the amounts in the General columns.
620 Chapter 21 Accounting for Accrued Revenue and Expenses
End of Lesson
REVIEW
TERMS REVIEW
AUDIT YOUR UNDERSTANDING
accrued revenue
intellectual property 1. Which accounting concept is being applied when an adjusting entry is
made at the end of the fiscal period to record accrued revenue?
accrued interest income
2. Why does a business use reversing entries as part of its procedures for
reversing entry accounting for accrued interest income?
WORK TOGETHER 211
Journalizing and posting entries for accrued revenue
The accounting forms for the following problem are in the Working Papers. Your instructor will guide you through
the following examples.
On December 31 of the current year, Marris Corporation has one note receivable outstanding, a 120-day, 12%,
$4,000.00 note dated November 16.
1. Plan the adjustment on a work sheet. Label the adjustment (a).
2. Journalize and post the adjusting entry for accrued interest income on December 31. Use page 14 of a general
journal.
3. Journalize and post the closing entry for interest income using page 14 of a general journal.
4. Journalize and post the January 1 reversing entry for accrued interest income on page 15 of a general journal.
5. Journalize the receipt of cash for the maturity value of the note on March 16, Receipt No. 32. Use page 16 of a
cash receipts journal. Post the amounts in the General columns.
ON YOUR OWN 211
Journalizing and posting entries for accrued revenue
The accounting forms for the following problem are in the Working Papers. Work this problem independently.
On December 31 of the current year, ExMark, Inc., has one note receivable outstanding, a 90-day, 10%, $6,000.00
note dated December 1.
1. Plan the adjustment on a work sheet. Label the adjustment (a).
2. Journalize and post the adjusting entry for accrued interest income on December 31. Use page 14 of a general
journal.
3. Journalize and post the closing entry for interest income using page 14 of a general journal.
4. Journalize and post the January 1 reversing entry for accrued interest income on page 15 of a general journal.
5. Journalize the receipt of cash for the maturity value of the note on March 1, Receipt No. 65. Use page 19 of a cash
receipts journal. Post the amounts in the General columns.
Accrued Revenue Lesson 21-1 621
L E S S O N
Accrued Expenses
21-2
A N A LY Z I N G A N A D J U S T M E N T F O R
ACCRUE D INTE REST EXPE NSE
2. Credit Interest Payable.
Restaurant Supply Co.
Work Sheet
For Year Ended December 31, 20--
1 2 3 4 5 6 7 8
TRIAL BALANCE ADJUSTMENTS INCOME STATEMENT BALANCE SHEET
ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
(h)
15 Interest Payable 4 0 0 00 2 4 0 0 00 15
(h)
52 Interest Expense 6 0 0 00 4 0 0 00 1 0 0 0 00 52
1
1. Debit Interest Expense. 3 3. Record the adjusting entry.
GENERAL JOURNAL PAGE 15
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
1 Adjusting Entries 1
16 31 Interest Expense 4 0 0 00 16
17 Interest Payable 4 0 0 00 17
Expenses incurred in one fiscal period but not paid until a
later fiscal period are called accrued expenses. At the end Interest Expense
of a fiscal period, accrued expense is recorded by an adjust- Dec. 31 Bal. 600.00
ing entry. [CONCEPT: Matching Expenses with Rev- Dec. 31 Adj. 400.00
enue] The adjusting entry increases an expense account. (New Bal. 1,000.00)
The adjusting entry also increases a payable account.
Interest incurred but not yet paid is called accrued Interest Payable
interest expense. On December 31, Restaurant Sup- Dec. 31 Adj. 400.00
ply has one note payable outstanding, a 180-day, 12%,
$10,000.00 note dated September 2. Restaurant Supply
owes $400.00 interest for the 120 days from September 2
through December 31. Interest Expense is debited for $400.00 to show the
increase in the balance of this other expense account.
The new balance of Interest Expense, $1,000.00, is the
Time as Accrued total amount of interest expense incurred during the fiscal
Interest
Principal ⴛ ⴛ Fraction ⴝ Interest period.
Rate
of Year Expense The credit to Interest Payable creates a $400.00 account
$10,000.00 ⫻ 12% ⫻ 120
360 ⫽ $400.00 balance that represents the interest owed on December 31
that will be paid in the next fiscal period.
622 Chapter 21 Accounting for Accrued Revenue and Expenses
POSTING AN ADJUSTING ENTRY FOR
ACCRUE D INTE REST EXPE NSE
GENERAL JOURNAL PAGE 15
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
1 Adjusting Entries 1
16 31 Interest Expense 8105 4 0 0 00 16
17 Interest Payable 2110 4 0 0 00 17
18 18
19 19
20 20
1. Post the 1 2 2 2. Post the
debit. credit.
ACCOUNT Interest Payable ACCOUNT NO. 2110
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Dec . 31 G15 4 0 0 00 4 0 0 00
ACCOUNT Interest Expense ACCOUNT NO. 8105
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
Dec. 21 CP36 7 5 00 6 0 0 00
31 G15 4 0 0 00 1 0 0 0 00
The adjustment for accrued interest expense planned on POSTING AN
a work sheet is recorded as an adjusting entry in a general
ADJUSTING ENTRY
journal. The adjusting entry is then posted to the general S T E P S
ledger. FOR ACCRUED
After posting, the interest payable account has a credit INTEREST EXPENSE
balance of $400.00 and will appear on the December 31
balance sheet as a current liability. This credit bal- 1 Post the debit, $400.00, to Interest Expense.
ance is the accrued interest expense incurred
2 Post the credit, $400.00, to Interest
but not yet paid at the end of the year. R E M E M B E R Payable.
The interest expense account has a
The adjusting entry for accrued
debit balance of $1,000.00 and will
interest expense affects both the
appear on the income statement for income statement and the balance
the year ended December 31 as an sheet. The income statement will
other expense. This amount is the report all expenses for the period even
total interest expense for the year. though some of the expenses have
not yet been paid. The balance sheet
will report all liabilities, including
the accrued expenses payable.
(CONCEPT: Adequate
Disclosure)
Accrued Expenses Lesson 21-2 623
REVE RSING E NTRY FOR ACCRUE D INTE REST EXPE NSE
GENERAL JOURNAL PAGE 17
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
1 Reversing Entries 1
4 1 Interest Payable 1 4 0 0 00 4
5 Interest Expense 2 4 0 0 00 5
6 6
1. Debit Interest Payable. 2. Credit Interest Expense.
On December 31, Interest Expense is closed as part of
the regular closing entries. Interest Expense is credited for Interest Payable
$1,000.00 to reduce the account balance to zero. After Jan. 1 Rev. 400.00 Dec. 31 Adj. 400.00
the closing entry is posted, the interest expense account (New Bal. zero)
is closed.
Adjusting entries for accrued expenses have an effect on Interest Expense
transactions to be recorded in the following fiscal period. Dec. 31 Bal. 600.00 Dec. 31 Closing 1,000.00
For example, on the maturity date of the note payable on Dec. 31 Adj. 400.00 Jan. 1 Rev. 400.00
March 1, Restaurant Supply will pay the note’s maturity (New Bal. 400.00)
value, including interest of $600.00.
The reversing entry is the opposite of the adjusting
Time as Accrued
Interest entry. The entry creates a credit balance of $400.00 in
Principal ⴛ ⴛ Fraction ⴝ Interest
Rate Interest Expense. A credit balance is the opposite of the
of Year Expense
$10,000.00 ⫻ 12% ⫻ 120 ⫽ $400.00 normal balance of the interest expense account. When the
360 full amount of interest is paid, $600.00, this amount will
be debited to Interest Expense. The account will then have
a debit balance of $200.00 ($600.00 debit – $400.00
However, an adjusting entry was made to record the
credit), the amount of interest expense incurred in the
amount of accrued interest expense last year, $400.00.
new year.
Thus, $400.00 of the $600.00 total interest expense was
The reversing entry to Interest Payable reduces that
incurred and recorded in the previous year. The remaining
account to a zero balance. Thus, when the interest is paid,
$200.00 was incurred during the current year.
no debit entry will be required to recognize payment of
Determining how much of the cash paid is for accrued
the balance of Interest Payable. The total amount of inter-
interest expense and how much applies to the current
est paid will be debited to Interest Expense.
year is an inconvenience. To avoid this inconvenience, a
reversing entry is made at the beginning of the new fiscal
period.
REVERSING AN ADJUSTING ENTRY FOR
S T E P S
ACCRUED INTEREST EXPENSE
1 Record a debit, $400.00, to Interest Payable in the general journal.
2 Record a credit, $400.00, to Interest Expense.
624 Chapter 21 Accounting for Accrued Revenue and Expenses
P AY I N G A N O T E P AYA B L E S I G N E D I N
A PREVIOUS FISCAL PERIOD
1. Debit for Principal
CASH PAYMENTS JOURNAL PAGE 55
1 2 3 4 5
CK. POST. GENERAL ACCOUNTS PURCHASES CASH
DATE ACCOUNT TITLE NO. REF. PAYABLE DISCOUNT
DEBIT CREDIT CREDIT
DEBIT CREDIT
21 1 Notes Payable 916 2105 1 0 0 0 0 00 1 1 0 6 0 0 00 21
22 Interest Expense 8105 6 0 0 00 2 3 22
2. Debit for Total Interest 3. Credit for Maturity Value
ACCOUNT Notes Payable ACCOUNT NO. 2105
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
Sept. 2 CR28 1 0 0 0 0 00 10 0 0 0 00
20--
Mar. 1 CP55 10 0 0 0 00 4 ——— ——— 4. Post amounts in
General columns.
ACCOUNT Interest Expense ACCOUNT NO. 8105
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
31 G15 4 0 0 00 1 0 0 0 00
31 G16 1 0 0 0 00 ——— ———
20--
Jan. 1 G17 4 0 0 00 4 0 0 00
Mar. 1 CP55 6 0 0 00 4 2 0 0 00
and $200.00 during the current fiscal period. The revers-
March 1. Paid cash for the maturity value of the ing entry created a $400.00 credit balance in Interest
September 2 note: principal, $10,000.00, plus Expense. After the $600.00 debit is recorded, Interest
interest, $600.00; total, $10,600.00. Check No. 916. Expense has a debit balance of $200.00, the amount of
interest expense incurred during the current fiscal period.
The total interest, $600.00, was incurred during two
PAYING A NOTE
fiscal periods—$400.00 during the previous fiscal period
PAYABLE SIGNED
S T E P S
IN A PREVIOUS
Notes Payable FISCAL PERIOD
Mar. 1 Paid 10,000.00 Sept. 2 10,000.00
1 Record a debit to Notes Payable in the General
Debit column for the principal of the note,
Interest Expense $10,000.00.
Dec. 31 Bal. 600.00 Dec. 31 Closing 1,000.00 2 Record a debit to Interest Expense in the General
Dec. 31 Adj. 400.00 Jan. 1 Rev. 400.00
Debit column for the total interest, $600.00.
Mar. 1 Paid 600.00
(New Bal. 200.00) 3 Record a credit to Cash in the Cash Credit
column for the maturity value of the note,
Cash $10,600.00.
Mar. 1 Paid 10,600.00 4 Post the amounts in the General columns.
Accrued Expenses Lesson 21-2 625
EFFECT OF NOT USING REVERSING ENTRIES
If Restaurant Supply did not use a reversing entry for adjusting entry creates a balance in an asset or liability
accrued interest expense, $400.00 of the interest would account that initially had a zero balance.
be reported twice. The $400.00 amount is recorded once
as an adjusting entry to Interest Expense in the previous
fiscal period. The amount is recorded a second time as
part of the $600.00 debit to Interest Expense in the cur-
rent fiscal period when the note is paid.
The double charge might be avoided if accounting per-
sonnel are careful to divide the interest amount when the
note is paid. The part of the interest chargeable to the
PHOTOGRAPHER’S CHOICE RF/GETTY IMAGES
previous fiscal period, $400.00, would be recorded as a
debit in Interest Payable. The part chargeable to the cur-
rent fiscal period, $200.00, is recorded as a debit in Inter-
est Expense.
Restaurant Supply prefers to use reversing entries.
Restaurant Supply’s accounting personnel do not have to
remember to check an entry each time a note is paid to
determine if interest should be divided. Restaurant
Supply, like other companies that use reversing
entries, records a reversing entry whenever an
BUSINESS STRUCTURES
S e l l i n g a C or po r a t i o n’s S t o c k
Many small corporations are owned by a A corporation’s existing stock is sold by another means.
few individuals, the original investors who Stock that has already been issued and sold may be sold
founded the corporation. Sometimes these cor- again by whoever owns it. This is generally done through
porations require greater investments in order to a stockbroker who buys and sells stock in a stock market.
expand to meet the needs of the marketplace or In the United States, the two national stock exchanges are
to achieve greater success. One way for a corporation the New York Stock Exchange (www.nyse.com) and the
to expand is to make a public offering of its stock. When American Stock Exchange (www.amex.com). There are
a corporation issues new stock and the public buys it, the also regional stock exchanges in several large cities, such
corporation receives the additional investment, minus any as Chicago and Philadelphia. In addition, Nasdaq (www.
commissions, legal fees, and other costs of issuing stock. nasdaq.com) is a network of brokers who trade securities.
New offerings of stock are usually sold by investment
bankers who have expertise in new stock offerings. Critical Thinking
A public corporation which already has stock issued 1. Do you think that issuing new stock is a guaranteed
that is owned by the general public can also issue addi- method of acquiring new funds? Why or why not?
PHOTO: PHOTODISC/GETTY IMAGES
tional shares of stock to the public to attract funds for
2. Select a major corporation and study its stock listings
expansion, new product offerings, research, and many
in the newspaper or on the Internet for several days or
other purposes.
weeks. What trends do you notice?
New stock offerings are sold in what is called primary
markets and usually require the services of an investment
banker.
626 Chapter 21 Accounting for Accrued Revenue and Expenses
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
TERMS REVIEW
1. Why should accrued expenses be recorded by an adjusting entry before
financial statements are prepared at the end of a fiscal period?
accrued expenses
2. What accounts are affected, and how, by the reversing entry for accrued
accrued interest expense interest expense?
WORK TOGETHER 212
Journalizing and posting entries for accrued expenses
The accounting forms for this problem are in the Working Papers. Your instructor will guide you through the follow-
ing examples.
On December 31 of the current year, Powers Corporation has one note payable outstanding, a 90-day, 12%,
$2,000.00 note dated December 1.
1. Plan the adjustment on a work sheet. Label the adjustment (h).
2. Journalize and post the adjusting entry for accrued interest expense on December 31. Use page 14 of a general
journal.
3. Journalize and post the closing entry for interest expense on page 14 of a general journal.
4. Journalize and post the January 1 reversing entry for accrued interest expense on page 15 of a general journal.
5. Journalize the payment of cash for the maturity value of the note on March 1, Check No. 543. Use page 25 of a
cash payments journal. Post the amounts in the General columns.
ON YOUR OWN 212
Journalizing and posting entries for accrued expenses
The accounting forms for this problem are in the Working Papers. Work this problem independently.
On December 31 of the current year, Latham Industries has one note payable outstanding, a 180-day, 9%, $5,000.00
note dated October 17.
1. Plan the adjustment on a work sheet. Label the adjustment (h).
2. Journalize and post the adjusting entry for accrued interest expense on December 31. Use page 14 of a general
journal.
3. Journalize and post the closing entry for interest expense using page 14 of a general journal.
4. Journalize and post the January 1 reversing entry for accrued interest expense on page 15 of a general journal.
5. Journalize the payment of cash for the maturity value of the note on April 15, Check No. 668. Use page 30 of a
cash payments journal. Post the amounts in the General columns.
Accrued Expenses Lesson 21-2 627
SUMMARY
After completing this chapter, you can: 3. Record adjusting, closing, and reversing entries
for accrued revenue.
1. Define accounting terms related to accrued
revenue and accrued expenses. 4. Record adjusting, closing, and reversing entries
for accrued expenses.
2. Identify accounting concepts and practices
related to accrued revenue and accrued
expenses.
( Go Beyond the Book
)
For more information go to
www.C21accounting.com
EXPLORE ACCOUNTING
A n n u a l R e p o r t s—Fi n a n c i a l
Inf o r m a t i o n a n d Mor e
Corporations publish annual reports to commu- statements. Most of the additional items are
nicate the results of operations to interested required by GAAP or the Securities and
parties, such as stockholders, creditors, and Exchange Commission. As a result, these
government agencies. The typical annual items are similar among corporations.
report is a colorful, soft-cover brochure a. Notes to the Financial Statements. The
printed on glossy paper and 40 to 60 pages notes contain additional, detailed
in length. Most companies post a copy of information about items presented on
this report on their web site. The reports are the financial statements. For example,
grouped in two sections: the note related to long-term debt
1. Management’s Analysis and Discussion. This sec- would include the projected loan repayments for the
tion provides management with an opportunity to next five years.
promote the corporation. Through the use of pictures, b. Auditor’s Report. The report of the independent auditor
graphs, and narrative, management can highlight the states that a public accounting firm has tested the
achievements of the past fiscal year and present its financial statements for accuracy and fair presenta-
plans. Some corporations report on how the volunteer tion. The report gives the reader confidence to use the
work of their employees is having a positive impact financial statements to make business decisions.
in their communities. Discussions of environmental
c. Financial Analysis. Summary financial information,
and recycling programs could demonstrate how the
such as total assets, net income, and common financial
PHOTO: PHOTOGRAPHER’S CHOICE/GETTY IMAGES
corporation is socially responsible.
ratios, are presented for several years.
The ultimate objective of any corporation is to
increase the market price of its stock, thereby raising
Instructions: Access an annual report using a library or
stockholders’ investment. By “putting its best foot
the Internet and prepare a detailed outline of its contents.
forward” in this section, management can increase the
Summarize the major topics in management’s analysis and
demand for the corporation’s products and stock, thus
discussion. Did management do a good job of “putting its
increasing the stock’s price.
best foot forward?” Would you recommend that a friend
2. Financial Statements. The financial statements section purchase the corporation’s stock? Support your answers.
contains several items in addition to basic financial
628 Chapter 21 Accounting for Accrued Revenue and Expenses
211 APPLICATION PROBLEM
Journalizing and posting entries for accrued revenue
The accounting forms for this problem are in the Working Papers.
On December 31 of the current year, Velma Parts Company has one note receivable outstanding, a 120-day,
10%, $8,100.00 note dated November 6.
Instructions:
1. Plan the adjustment on a work sheet. Label the adjustment (a).
2. Journalize and post the adjusting entry for accrued interest income on December 31. Use page 14 of a
general journal.
3. Journalize and post the closing entry for interest income using page 14 of a general journal.
4. Journalize and post the January 1 reversing entry for accrued interest income on page 15 of a general
journal.
5. Journalize the receipt of cash for the maturity value of the note on March 6, Receipt No. 457. Use page 8
of a cash receipts journal. Post the amounts in the General columns of the cash receipts journal.
212 APPLICATION PROBLEM
Journalizing and posting entries for accrued expenses
The accounting forms for this problem are in the Working Papers.
On December 31 of the current year, Delmar Plumbing Supply has one note payable outstanding, a 180-day,
10%, $12,000.00 note dated December 1.
Instructions:
1. Plan the adjustment on a work sheet. Label the adjustment (h).
2. Journalize and post the adjusting entry for accrued interest expense on December 31. Use page 14 of a
general journal.
3. Journalize and post the closing entry for interest expense using page 14 of a general journal.
4. Journalize and post the January 1 reversing entry for accrued interest expense on page 15 of a general
journal.
5. Journalize the payment of cash for the maturity value of the note on May 30, Check No. 756. Use page 27
of a cash payments journal. Post the amounts in the General columns of the cash payments journal.
213 APPLICATION PROBLEM
Journalizing and posting entries for accrued expenses
The accounting forms for this problem are in the Working Papers.
On October 14 of the current year, Patti’s Dress Shop signed a $10,000.00 note with National Bank of Colum-
bus. The note term is 180 days at 12% interest.
Instructions:
1. Plan the adjustment on a work sheet for the fiscal year ended December 31. Label the adjustment (h).
2. Journalize and post the transactions to accrue, close, and reverse interest-related accounts at the fiscal
year-end. Use page 16 of a general journal for December 31 transactions and page 17 for the January 1
transactions.
3. Journalize the payment of cash for the maturity value of the note paid on April 12 with Check No. 377.
Use page 23 of a cash payments journal. Post the amounts in the General columns of the cash payments
journal.
Accounting for Accrued Revenue and Expenses Chapter 21 629
214 MASTERY PROBLEM
Journalizing and posting entries for accrued interest revenue and expense
The accounting forms for Youngblood, Inc., are given in the Working Papers. The balances are recorded as of
December 31 of the current year before adjusting entries. Youngblood, Inc., completed the following transac-
tions related to notes receivable and notes payable during the current year and the following year. The first
two transactions have already been journalized and posted. One note receivable and one note payable are
the only notes on hand at the end of the fiscal period. Source documents are abbreviated as follows: receipt,
R; check, C; note receivable, NR.
Transactions:
20X1
Nov. 11. Accepted a 90-day, 12% note from Centre Plaza for an extension of time on their account,
$900.00. NR10.
Dec. 6. Signed a 120-day, 8% note, $7,200.00 with First American Bank. R336.
20X2
Feb. 9. Received cash for the maturity value of NR10. R336.
Apr. 5. Paid cash for the maturity value of the First American Bank note. C612.
Instructions:
1. Plan the adjustments on a work sheet. Label the interest income adjustment (a) and the interest expense
adjustment (h).
2. Journalize and post the adjusting entries for accrued interest income and accrued interest expense on
December 31. Use page 15 of a general journal.
3. Journalize and post the closing entries for interest income and interest expense. Continue to use page 15
of a general journal.
4. Journalize and post the reversing entries for accrued interest income and accrued interest expense. Use
page 16 of a general journal.
5. Journalize the receipt of cash for the maturity value of NR10. Use page 16 of a cash receipts journal. Post
the amounts in the General columns of the cash receipts journal.
6. Journalize the cash payment for the maturity value of the note payable. Use page 28 of a cash payments
journal. Post the amounts in the General columns of the cash payments journal.
215 CHALLENGE PROBLEM
Journalizing and posting entries for accrued interest revenue and expenses
The accounting forms for Blackwell Corporation are given in the Working Papers. The balances are recorded as
of December 31 of the current year before adjusting entries. Blackwell Corporation completed the following
transactions related to notes receivable and notes payable during the current year and the following year. The
first two transactions have already been journalized and posted. These notes are the only notes outstanding
on December 31, 20X1, the fiscal year-end.
Transactions:
20X1
Dec. 8. Margaret Snider signed a 90-day, 18% note for an extension of time on her account, $900.00.
NR56.
15. Signed a 180-day, 12% note with American National Bank, $10,000.00. R416.
20X2
Mar. 8. Margaret Snider dishonored NR56, maturity value due today. M98.
12. Paid off the American National Bank note ahead of the maturity date. American National charges
interest only for the number of days the note is outstanding, with no early payment penalty.
C645.
630 Chapter 21 Accounting for Accrued Revenue and Expenses
Instructions:
1. Plan the adjustments on a work sheet. Label the interest income adjustment (a) and the interest expense
adjustment (h).
2. Journalize and post the transactions to accrue, close, and reverse interest-related accounts at the fis-
cal year-end. Use page 16 of a general journal for December 31 transactions and page 17 for January 1
transactions.
3. Journalize the 20X2 transactions using page 18 of a general journal and page 15 of a cash payments
journal. Post the Credit column of the general journal and the amounts in the General columns of the cash
payments journal.
A P P L I E D CO M M U N I C AT I O N
Employers often screen prospective employees for written communication skills. As an applicant, you may be asked
to write a short essay. Therefore, it is important for you to practice preparing documents that clearly communicate a
message, demonstrate proper usage of grammar rules, and project a professional image.
Instructions: Write a one-page memo to Gerard Spikes, Controller of Jenkins Company, that gives your opinion
on one of the following questions: (1) Why is a basic knowledge of accounting important for all employees of a
company, even for those not directly involved in accounting? (2) Why should the company help its employees to
continue their formal education by paying for one technical or college course each year?
CASE FOR CRITICAL THINKING
At the end of each fiscal period, Kimura Corporation prepares adjusting entries to record accrued interest expense.
However, the company does not record reversing entries for the accrued interest expense. At the end of the current
fiscal year, Kimura had a $3,000.00, 90-day, 10% note payable outstanding, signed November 1. Kimura made the
following journal entries related to the note.
Signed Note Nov. 1 Closing Entry Dec. 31
Cash . . . . . . . . . . . . . . . . . . . $3,000.00 Income Summary . . . . . . 50.00
Notes Payable . . . . . . $3,000.00 Interest Expense . . . . 50.00
Adj. Entry Dec. 31 Paid Note Jan. 30
Interest Expense . . . . . . . 50.00 Notes Payable . . . . . . . . . 3,000.00
Interest Payable . . . . . 50.00 Interest Payable . . . . . . . . 50.00
Interest Expense . . . . . . . 25.00
Cash . . . . . . . . . . . . . . . . . . . 3,075.00
Isabel Lugo, an accounting supervisor, says that generally accepted accounting principles require that reversing
entries be used in conjunction with adjusting entries for accrued expenses. Thus, Ms. Lugo says Kimura must begin
using reversing entries for all accrued expenses. Is she correct? Do the procedures Kimura has been using result in
incorrect financial statements? Explain.
A N A LY Z I N G B E S T B U Y ’S F I N A N C I A L S TAT E M E N T S
Reward Zone, Best Buy’s customer loyalty program, awards discount certificates to members, based on their pur-
chases. The value of the discount certificate must be recorded as an accrued liability until the customer redeems the
certificate. Use the Sales Incentives section in the Notes to Consolidated Financial Statements on page B-16 in Best
Buy’s annual report in Appendix B.
Instructions
1. What account title is used to record discount certificates on the Consolidated Balance Sheets on page B-5?
2. What impact would the recorded debit have on the income statement when a discount certificate is issued?
Accounting for Accrued Revenue and Expenses Chapter 21 631
Accounting
SOFTWARE
ACCRUED REVENUE AND EXPENSES
One of the most valuable assets of any business is its financial information. The actions that ensure that a business
can quickly restore its access to and use its financial data is referred to as a disaster recovery plan. Creating a backup
copy of financial data is one of the most common components of a disaster recovery plan. Peachtree has a menu
option for creating a backup copy. Backup copies should be stored on a removable storage device and, preferably,
stored at a remote location. Of course, after transactions are recorded in the restored backup copy, a new backup
copy needs to be made.
PEACHTREE MASTERY PROBLEM 214
1. Open (Restore) file 21-4MP.ptb.
2. Journalize and post the adjusting entries for accrued interest income and accrued expense on December 31.
3. Journalize and post the closing entries for interest income and interest expense.
4. Journalize the post the reversing entries for accrued interest income and accrued interest expense.
5. Journalize and post the receipt of cash for the maturity value of NR10.
6. Journalize the cash payment for the maturity value of the note payable.
7. Print the December 31 to January 1 general journal, the February 9 cash receipts journal, the April 5 cash
disbursements journal, and the general ledger from December 1 to April 30.
PEACHTREE CHALLENGE PROBLEM 215
1. Open (Restore) file 21-5CP.ptb.
2. Journalize and post the adjusting, closing, and reversing entries for interest-related accounts.
3. Journalize and post the 2006 transactions.
4. Print the general journal, the cash receipts journal, the cash disbursements journal, and the general ledger.
ACCRUED REVENUE AND EXPENSES
When using accounting software, critical financial information about the company is stored in an
electronic file. QuickBooks allows the user to make a backup copy of the company’s data. If there is a problem with
the original file, the backup copy can be used. Any transactions recorded since the last backup was made will be
lost. Therefore, if any entries are recorded, a backup copy should be made at the end of the day.
It is important to store the backup file on something other than the computer on which the original file is stored.
It is also preferable to keep the removable storage device at a remote location.
QUICKBOOKS MASTERY PROBLEM 214
1. Open the Youngblood Inc file if it is not already open.
2. Journalize the reversing entries for accrued interest income and accrued interest expense as of January 1, 20X2.
3. Use the Make Deposits window to record the receipt of payment from Centre Plaza.
4. Print a journal report.
QUICKBOOKS CHALLENGE PROBLEM 215
1. Open the Blackwell Corporation file if it is not already open.
2. Journalize the adjusting entries for accrued interest income and expense as of December 31, 20X1.
3. Journalize the reversing entries for interest income and expense as of January 1, 20X2.
4. Calculate the maturity value of NR56. Record the dishonored note using the Make General Journal Entries
window.
5. Calculate the maturity value of the note from First National Bank as of March 12, 20X2, and record the payment.
6. Print the Journal report using December 31, 20X1 and March 31, 20X2 as the dates.
632 Chapter 21 Accounting for Accrued Revenue and Expenses
R E P O R T I N G F I N A N C I A L I N F O R M AT I O N
Annual reports of many public companies contain summary financial information for 10 years. This information
provides investors with a rich history of the company’s operating results and financial strength.
Absorbing 10 years of financial information can be overwhelming if that information is presented in a table.
Charts provide a better approach of reporting this information. Line graphs are particularly adept at indicating
trends.
Electronic spreadsheets provide a variety of tools to modify the chart’s appearance. From adding titles to chang-
ing the scale of an axis, you can enhance the chart to ensure that the story of the financial information is clearly
communicated.
EXCEL MASTERY PROBLEM 214
Open the F21-4 Excel data file. Follow the step-by-step instructions in the Instructions work sheet.
OPTIONAL SPREADSHEET ACTIVITY
Open the F21-OPT Excel data file. Follow the step-by-step instructions in the Instructions work sheet. This problem
is not related to a specific problem in the textbook; however, it is related to the Explore Accounting feature in this
chapter.
ENTRIES FOR ACCRUED REVENUE
AND EXPENSES
To complete the accounting cycle, adjusting entries are entered and verified for accuracy. The financial statements
are generated and then closing entries are generated and posted by the software. On the first day of the next fiscal
period, some adjusting entries for accrued revenue and expense items affecting the next fiscal period are reversed
by recording reversing entries.
Closing entries are made to close all temporary accounts at the end of the accounting period. Automated
Accounting automatically prepares and posts closing entries.
To generate closing entries:
1. Choose Generate Closing Journal Entries from the Options menu.
2. Click Yes to generate the closing entries.
3. The general journal will appear, containing the journal entries.
4. Check the entries for accuracy, then click the Post button.
5. To display a post-closing trial balance report:
a. Click on the Reports toolbar button, or choose the Reports Selection menu item from the Reports menu.
b. Select the Ledger Reports option button from the Report Selection dialog box.
c. Choose Trial Balance report.
Revenue and expense items that affect two fiscal periods are adjusted at the end of a fiscal period and then
reversed at the beginning of the next fiscal period. Reversing entries are recorded in the general journal the same
way as adjusting entries. Use Rev.Ent. as the reference.
AUTOMATED ACCOUNTING MASTERY PROBLEM 214
Open file F21-4.AA8. Display the problem instructions and complete the problem.
Accounting for Accrued Revenue and Expenses Chapter 21 633
STOCKBYTE/GETTY IMAGES
C H A P T E R 2 2 End-of-Fiscal-Period
Work for a Corporation
O B J E C T I V E S
After studying Chapter 22, you will be able to: 5. Prepare and analyze an income statement
for a merchandising business organized as a
1. Define accounting terms related to financial
corporation.
statements for a merchandising business
organized as a corporation. 6. Prepare a statement of stockholders’ equity
for a merchandising business organized as a
2. Identify accounting concepts and practices
corporation.
related to financial statements and end-of-
fiscal-period entries for a merchandising busi- 7. Prepare and analyze a balance sheet for a mer-
ness organized as a corporation. chandising business organized as a corporation.
3. Plan end-of-fiscal-period adjustments for a mer- 8. Record adjusting, closing, and reversing entries
chandising business organized as a corporation. for a merchandising business organized as a
corporation.
4. Calculate federal income tax, plan an adjust-
ment for federal income tax expense, and
complete a work sheet.
K E Y T E R M S
• long-term liabilities • working capital • current ratio
( Point Your Browser
www.C21accounting.com
)
634
ACCOUNTING IN THE REAL WORLD
Chico’s
Store Efficiency Fuels Chico’s Growth
Chico’s FAS, Inc., is a specialty retailer of private-label, sophisticated, casual-
to-dressy clothing. The company focuses on women who are 35 years old
and up, with moderate to higher incomes. This focus has enabled the com-
pany to achieve dramatic growth since opening its first store in 1983. With
sales of $1,646,482,000 in fiscal year 2006, the company now operates over
920 stores under its Chico’s and White House | Black Market brands.
DIGITAL VISION/GETTY IMAGES
Chico’s sales growth has also been achieved by improving the efficiency
of each store. Similar to other retail businesses, Chico’s tracks the change
in its total sales per store. This financial ratio, often INTERNET
referred to as same-store sales, is calculated ACTIVITY
by dividing the change in sales by the
prior period’s sales. Chico’s achieved Fiscal Year End
same-store sales growth of 2.1% Go to the homepage for Home
in its fiscal year 2006. Depot (www.homedepot.com)
Chico’s takes this analysis and Lowe’s (www.lowes.com).
a step further by measur-
ing its sales per square Instructions
foot. Average net sales
1. List the last day of the fiscal
per selling square foot
period for each company.
grew from below $700 in
2. Are the dates similar for
fiscal year 1999 to over
both companies? Why
©JEFFERY ALLAN SALTER/CORBIS SABA
$950 per square foot in
might these two compa-
fiscal year 2006.
nies have a similar year
end?
Critical Thinking
1. Suggest three steps a clothing retailer can take to increase its sales per
square foot.
2. What measure could Chico’s managers use to evaluate the efficiency of
its store employees?
Source: www.chicos.com
635
L E S S O N
Preparing a Work Sheet
22-1 for a Corporation
P R E P A R I N G F I N A N C I A L S TAT E M E N T S
The preparation of financial statements begins with the prepare the statement of stockholders’ equity. Summary
work sheet. Account titles and balances are entered on amounts on this statement and account balances in the
the work sheet. Any adjustments to account balances are work sheet’s Balance Sheet columns are used to prepare a
entered in the Adjustments columns. Restaurant Supply balance sheet. Restaurant Supply uses ratios to evaluate its
records adjustments affecting several accounts, including financial strength relative to expected measures.
notes receivable, notes payable, allowance for uncollectible In preparation for recording transactions during the
accounts, merchandise inventory, supplies, and deprecia- next period, adjusting entries are journalized to record the
tion. Since Restaurant Supply is a corporation, an adjust- work sheet adjustments in the accounts. After recording
ment is also planned for federal income tax expense. closing and reversing entries, the accounts are ready to
The completed work sheet is used to prepare the finan- record transactions for the next fiscal period. Businesses
cial statements. The income statement is prepared from use work sheets to plan adjustments and provide informa-
amounts in the Income Statement columns of the work tion needed to prepare financial statements. Restaurant
sheet. Restaurant Supply uses ratios to analyze its per- Supply may prepare a work sheet at any time financial
formance relative to industry standards and prior year’s statements are needed. However, Restaurant Supply
performance. always prepares a work sheet and financial statements at
The amount of net income, selected balance sheet the end of a fiscal year. [CONCEPT: Accounting Period
accounts, and other accounting information is used to Cycle]
CHARACTER COUNTS
T h e Ne w s pa p e r Te s t
A code of conduct should pro- The most popular question is: “Would I be comfortable if
vide employees with a guide my actions were reported in the newspaper?” If employ-
for making an ethical deci- ees are uncomfortable with their actions becoming pub-
sion. The ethical model pre- lic knowledge, chances are their actions are unethical.
sented in Chapter 2 provides At the very least, the employees should realize that they
employees with a structured should consult their company’s ethics officer and legal
method of evaluating all the department.
PHOTO: PHOTODISC/GETTY IMAGES
implications of an action. Yet,
even with these aids, employees Instructions
can still find it difficult to make a Use the Internet to access the code of conduct for Lock-
decision. heed Martin, the Coca-Cola Company, and Shell Oil
Some companies provide their Company. Prepare a list of questions that could help you
employees with a simple set of questions. determine if an action is ethical.
636 Chapter 22 End-of-Fiscal-Period Work for a Corporation
USE OF A WORK SHEET
Entering a Trial Balance on a Work Sheet 3. Depreciation Expense—Office Equipment
To prepare a work sheet, a trial balance is first entered 4. Depreciation Expense—Store Equipment
in the Trial Balance columns. All general ledger accounts 5. Interest Expense
are listed in the same order as they appear in the general
Other accounts require the end-of-period balance to
ledger. Trial Balance columns are totaled to prove equality
be estimated. The current balance is typically subtracted
of debits and credits.
from the estimated end-of-period account balance to
Planning Adjustments on a Work Sheet determine the amount of the adjustment. Thus, the work
Some general ledger accounts need to be brought up to sheet adjustment brings the account balance up to date.
date before financial statements are prepared. Accounts These adjustments include:
are brought up to date by planning and entering adjust-
1. Merchandise Inventory
ments on a work sheet. Two methods are used to deter-
2. Supplies
mine the amount of each adjustment.
3. Prepaid Insurance
For some accounts, the calculated estimate of the
4. Federal Income Tax Expense
account is also the amount used in the work sheet adjust-
ment. These adjustments include: Examples of both types of adjustments are shown on
the following page. Adjustments generally are made in the
1. Interest Income
order that accounts are listed on a work sheet.
2. Uncollectible Accounts Expense
DIG
ITA
LV
IS I
ON
/G
ET
TY
IM
AG
ES
Preparing a Work Sheet for a Corporation Lesson 22-1 637
INTEREST INCOME ADJUSTMENT
1. Debit Interest Receivable
TRIAL BALANCE ADJUSTMENTS
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT
4 Interest Receivable 1 (a)
2 0 00
(a)
51 Interest Income 1 3 6 00 2 0 00 2
2. Credit Interest Income
Interest income earned during the current fiscal period of Restaurant Supply’s adjustment for accrued inter-
but not yet received needs to be recorded. Two accounts est income is described in Chapter 21. The estimate of
are used for the adjustment for accrued interest income: accrued interest income is the amount used in the work
Interest Receivable and Interest Income. An analysis sheet adjustment.
PLANNING A WORK SHEET ADJUSTMENT
S T E P S
FOR INTEREST INCOME
1 Enter the accrued interest income amount, $20.00, in the Adjustments Debit column on the Interest Receivable line of
the work sheet. Label the adjustment (a).
2 Enter the same amount, $20.00, in the Adjustments Credit column on the Interest Income line. Label the adjustment (a).
SUPPLIES ADJUSTMENT
1. Credit Supplies
TRIAL BALANCE ADJUSTMENTS
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT
1 (d)
8 Supplies 8 7 4 5 25 7 8 3 7 00
2 (d)
47 Supplies Expense 7 8 3 7 00
2. Debit Supplies Expense
The balance of Supplies in the trial balance, $8,745.25, balance of Supplies needs to be decreased by $7,837.00
is the cost of supplies on hand at the beginning of the ($8,745.25 $908.25), the cost of supplies used dur-
year plus the supplies purchased during the year. The sup- ing the year. Supplies Expense is debited, and Supplies is
plies on hand on December 31 are counted and deter- credited for the amount of the decrease.
mined to be $908.25. To bring the account up to date, the
S T E P S PLANNING A WORK SHEET ADJUSTMENT FOR SUPPLIES
1 Enter the amount of supplies used, $7,837.00, in the adjustments credit column on the Supplies line of the work
sheet. Label the adjustment (d).
2 Enter the same amount, $7,837.00, in the Adjustments Debit column on the Supplies Expense line of the work sheet.
Label the adjustment (d).
638 Chapter 22 End-of-Fiscal-Period Work for a Corporation
F E D E R A L I N C O M E TA X A D J U S T M E N T
2. Credit Federal Income Tax Payable
TRIAL BALANCE ADJUSTMENTS
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT
2 (i)
18 Federal Income Tax Payable 4 5 7 8 18
54 Federal Income Tax Expense 8 0 0 0 0 00 1 (i)
4 5 7 8 18
1. Debit Federal Income Tax Expense
Detailed instructions for preparing the federal income tax tax rate varies, depending on the amount of net income
adjustment were presented in Chapter 14. The first step earned. Restaurant Supply’s net income before income
is to calculate the corporation’s net income before federal tax expense is $259,815.85. The tax rates are given in the
income tax. This procedure can be summarized in four table on the next page.
steps:
1. Complete all adjustments other than federal income
Net Income Tax Federal Income
taxes.
before Taxes Rate Tax Amount
2. Extend all the accounts except Federal Income Tax
$ 50,000.00 15% $ 7,500.00
Expense to the Income Statement or Balance Sheet
Plus 25,000.00 25% 6,250.00
columns. Plus 25,000.00 34% 8,500.00
3. Calculate temporary totals of the Income Statement Plus 159,815.85 39% 62,328.18
accounts in the Income Statement columns.
4. The difference between the two Income Statement $259,815.85 $84,578.18
columns, excluding the estimated federal income
taxes, is the net income or loss before income taxes.
The estimated tax payments already made are sub-
The amount of federal income tax is calculated using tracted from the total federal income tax expense to calcu-
tax rates provided by the Internal Revenue Service. The late the adjustment for federal income tax expense.
Total Federal Estimated Federal Income Accrued Federal
Income Tax Expense Tax Already Paid Income Tax Expense
$84,578.18 $80,000.00 $4,578.18
PLANNING A WORK SHEET ADJUSTMENT
S T E P S ST O C K
B Y T E / GE T T Y I M AG E S
FOR FEDERAL INCOME TAX EXPENSE
1 Enter the federal income tax expense adjustment amount,
$4,578.18, in the Adjustments Debit column on the Federal
Income Tax Expense line of the work sheet. Label the adjust-
ment (i).
2 Enter the same amount, $4,578.18, in the Adjust-
ments Credit column on the Federal Income Tax
Payable line of the work sheet. Label the adjust-
ment (i).
Preparing a Work Sheet for a Corporation Lesson 22-1 639
15% of net income before taxes, zero to $50,000.00 (15% tax on the first $50,000.00 of net income)
Plus 25% of net income before taxes, $50,000.00 to $75,000.00 (25% tax on the next $25,000.00 of net income)
Plus 34% of net income before taxes, $75,000.00 to $100,000.00 (34% tax on the next $25,000.00 of net income)
Plus 39% of net income before taxes, $100,000.00 to $335,000.00 (39% tax on the next $225,000.00 of net income)
Plus 34% of net income before taxes over $335,000.00 (34% tax on net income above $335,000.00)
Step 1:
First Net Income Amount First Tax Rate Federal Income Tax on First $50,000.00 of Net Income
$50,000.00 15% $7,500.00
Step 2:
Second Net Income Amount Second Tax Rate Federal Income Tax on Next $25,000.00 of Net Income
$25,000.00 25% $6,250.00
Step 3:
Third Net Income Amount Third Tax Rate Federal Income Tax on Next $25,000.00 of Net Income
$25,000.00 34% $8,500.00
Step 4:
Total Net Income Lowest Dollar Amount Amount of Net Income to Which Fourth Tax Rate Is Applied
of Fourth Tax Range
$259,815.85 $100,000.00 $159,815.85
Step 5:
Fourth Net Income Amount Fourth Tax Rate Federal Income Tax on Next $159,815.85 of Net Income
$159,815.85 39% $62,328.18
Step 6:
First Federal Tax Second Federal Tax Third Federal Tax Fourth Federal Tax Total Federal Tax
Amount Amount Amount Amount Amount
$7,500.00 $6,250.00 $8,500.00 $62,328.18 $84,578.18
P U R E S T O CK / GE T T Y I M A
GE S
640 Chapter 22 End-of-Fiscal-Period Work for a Corporation
COMPLETING A WORK SHEET
1. Total the income statement
and balance sheet columns.
TRIAL BALANCE ADJUSTMENTS INCOME STATEMENT BALANCE SHEET
ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
14 Notes Payable 10 0 0 0 00 10 0 0 0 00 14
15 Interest Payable (h) 4 0 0 00 4 0 0 00 15
16 Accounts Payable 24 9 5 0 35 24 9 5 0 35 16
17 Employee Income Tax Payable 2 0 4 9 00 2 0 4 9 00 17
18 Federal Income Tax Payable (i) 4 5 7 8 18 4 5 7 8 18 18
52 Interest Expense 6 0 0 00 (h) 4 0 0 00 1 0 0 0 00 52
53 Loss on Plant Assets 1 4 0 0 00 1 4 0 0 00 53
54 Federal Income Tax Expense 80 0 0 0 00 (i) 45 7 8 1 8 84 5 7 8 18 1 1 54
55 2264 5 2 2 37 2264 5 2 2 37 58 1 9 8 48 58 1 9 8 48 1957 0 0 9 33 21322 4 7 00 346 2 7 4 52 171 0 3 6 85 55
56 Net Income after Federal Income Tax 2 175 2 3 7 67 175 2 3 7 67 56 3
57 2 2132 2 4 7 00 2132 2 4 7 00 346 2 7 4 52 346 2 7 4 52 57
5
4
2. Calculate and enter the 5. Draw double lines. 4. Calculate the 3. Extend the net
net income after federal column totals. income amount.
income tax.
After the adjustment for federal income tax expense has income after federal income tax. Restaurant Supply’s com-
been recorded, the work sheet is ready to be completed. pleted work sheet is shown on the following two pages.
Income Statement column totals are used to calculate net
S T E P S COMPLETING A WORK SHEET
1 Total the Income Statement and Balance Sheet columns.
2 Write the words Net Income after Federal Income Tax on line 56 of the work sheet. Calculate and enter the net
income after federal income tax, $175,237.67, in the Income Statement Debit column on this new line of the
work sheet.
Total of Income Statement Credit column . . . . . . . . . . . . . . . . $ 2,132,247.00
Less Total of Income Statement Debit column . . . . . . . . . . . . . 1,957,009.33
Equals Net Income after Federal Income Tax . . . . . . . . . . . . . $ 175,237.67
3 Extend the net income after federal income tax amount, $175,237.67, to the Balance Sheet Credit column.
4 Total the four Income Statement and Balance Sheet columns. Determine that the totals of each pair of
columns are in balance.
5 Rule double lines across the Income Statement and Balance Sheet columns to show that the totals have been
verified as correct.
Preparing a Work Sheet for a Corporation Lesson 22-1 641
642
COMPLETED WORK SHEET
Chapter 22
Restaurant Supply Co.
Work Sheet
For Year Ended December 31, 20--
1 2 3 4 5 6 7 8
TRIAL BALANCE ADJUSTMENTS INCOME STATEMENT BALANCE SHEET
ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
1 Cash 11 2 0 3 10 11 2 0 3 10 1
2 Petty Cash 2 5 0 00 2 5 0 00 2
3 Notes Receivable 2 0 0 0 00 2 0 0 0 00 3
Interest Receivable (a) 2 0 00
4 2 0 00 4
5 Accounts Receivable 78 3 4 0 30 78 3 4 0 30 5
6 Allowance for Uncollectible Accts. 2 8 0 00 (b)12 8 7 3 30 13 1 5 3 30 6
Merchandise Inventory 142 5 3 6 20 (c) 147 8 2 6 20
7 5 2 9 0 00 7
8 Supplies 8 7 4 5 25 (d) 7 8 3 7 00 9 0 8 25 8
9 Prepaid Insurance 13 8 0 0 00 (e)11 6 0 0 00 2 2 0 0 00 9
10 Office Equipment 31 9 8 0 32 31 9 8 0 32 10
11 Accum. Depr.—Office Equipment 18 7 6 0 00 (f) 6 3 5 0 00 25 1 1 0 00 11
12 Store Equipment 41 5 4 6 35 41 5 4 6 35 12
13 Accum. Depr.—Store Equipment 16 0 4 9 00 (g) 9 2 5 0 00 25 2 9 9 00 13
14 Notes Payable 10 0 0 0 00 10 0 0 0 00 14
15 Interest Payable (h) 4 0 0 00 4 0 0 00 15
16 Accounts Payable 24 9 5 0 35 24 9 5 0 35 16
17 Employee Income Tax Payable 2 0 4 9 00 2 0 4 9 00 17
18 Federal Income Tax Payable (i) 4 5 7 8 18 4 5 7 8 18 18
End-of-Fiscal-Period Work for a Corporation
19 Social Security Tax Payable 1 7 6 7 76 1 7 6 7 76 19
20 Medicare Tax Payable 4 2 7 24 4 2 7 24 20
21 Sales Tax Payable 4 9 8 0 00 4 9 8 0 00 21
22 Unemployment Tax Payable—Federal 3 8 00 3 8 00 22
23 Unemployment Tax Payable—State 2 4 4 00 2 4 4 00 23
24 Health Insurance Premiums Payable 5 6 0 00 5 6 0 00 24
25 Dividends Payable 7 5 0 0 00 7 5 0 0 00 25
26 Capital Stock 15 0 0 0 00 15 0 0 0 00 26
27 Retained Earnings 34 9 8 0 02 34 9 8 0 02 27
28 Dividends 30 0 0 0 00 30 0 0 0 00 28
(c)
29 Income Summary 5 2 9 0 00 5 2 9 0 00 29
30 Sales 2109 8 9 4 30 2109 8 9 4 30 30
31 Sales Discount 6 9 5 8 20 6 9 5 8 20 31
Preparing a Work Sheet for a Corporation
32 Sales Returns and Allowances 24 0 5 9 40 24 0 5 9 40 32
33 Purchases 1212 3 2 1 50 1212 3 2 1 50 33
34 Purchases Discount 11 0 9 4 20 11 0 9 4 20 34
35 Purchases Returns and Allowances 5 1 4 2 50 5 1 4 2 50 35
36 Advertising Expense 24 3 2 2 25 24 3 2 2 25 36
37 Cash Short and Over 1 4 23 1 4 23 37
38 Credit Card Fee Expense 15 3 4 2 44 15 3 4 2 44 38
(f)
39 Depr. Expense—Office Equipment 6 3 5 0 00 6 3 5 0 00 39
(g)
40 Depr. Expense—Store Equipment 9 2 5 0 00 9 2 5 0 00 40
(e)
41 Insurance Expense 11 6 0 0 00 11 6 0 0 00 41
42 Miscellaneous Expense 30 0 2 4 43 30 0 2 4 43 42
43 Payroll Taxes Expense 29 3 1 0 05 29 3 1 0 05 43
44 Rent Expense 60 0 0 0 00 60 0 0 0 00 44
45 Repair Expense 4 5 4 3 13 4 5 4 3 13 45
46 Salary Expense 393 8 4 4 28 393 8 4 4 28 46
(d)
47 Supplies Expense 7 8 3 7 00 7 8 3 7 00 47
(b)12 8 7 3 30 12 8 7 3 30
48 Uncollectible Accounts Expense 48
49 Utilities Expense 21 3 8 0 94 21 3 8 0 94 49
50 Gain on Plant Assets 6 7 0 00 6 7 0 00 50
1 3 6 00 (a) 2 0 00
51 Interest Income 1 5 6 00 51
6 0 0 00 (h) 4 0 0 00 1 0 0 0 00
52 Interest Expense 52
53 Loss on Plant Assets 1 4 0 0 00 1 4 0 0 00 53
80 0 0 0 00 (i)4 5 7 8 18 84 5 7 8 18
54 Federal Income Tax Expense 54
55 2264 5 2 2 37 2264 5 2 2 37 58 1 9 8 48 58 1 9 8 48 1957 0 0 9 33 2132 2 4 7 00 346 2 7 4 52 171 0 3 6 85 55
56 Net Income after Federal Income Tax 175 2 3 7 67 175 2 3 7 67 56
57 2132 2 4 7 00 2132 2 4 7 00 346 2 7 4 52 346 2 7 4 52 57
Lesson 22-1
643
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. Describe the two methods used to determine the amount of an adjust-
ment on a work sheet.
2. Summarize the four steps to calculate net income before federal income
taxes.
WORK TOGETHER 221
Preparing a work sheet for a corporation
Webster Corporation’s work sheet is given in the Working Papers. Your instructor will guide you through the follow-
ing example.
1. For the current year ended December 31, record the adjustments on the work sheet using the following informa-
tion. Do not total the Adjustments columns.
Accrued interest income $ 275.00
Uncollectible accounts expense estimated as 1.5% of sales on account.
Sales on account for year, $490,000.00.
Merchandise inventory 90,116.30
Supplies inventory 252.08
Value of prepaid insurance 3,071.60
Annual depreciation expense—office equipment 2,800.00
Annual depreciation expense—store equipment 1,700.60
Accrued interest expense 555.16
2. Using the tax table shown in this chapter, calculate federal income tax expense and record the income tax adjust-
ment on the work sheet. Complete the work sheet. Save your work to complete Work Together 22-2.
ON YOUR OWN 221
Preparing a work sheet for a corporation
Osborn Corporation’s work sheet is given in the Working Papers. Work this problem independently.
1. For the current year ended December 31, record the adjustments on the work sheet using the following informa-
tion. Do not total the Adjustments columns.
Accrued interest income $ 160.00
Uncollectible accounts expense estimated as 0.8% of sales on account.
Sales on account for year, $914,000.00.
Merchandise inventory 197,992.26
Supplies inventory 802.50
Value of prepaid insurance 1,200.00
Annual depreciation expense—office equipment 6,440.00
Annual depreciation expense—store equipment 8,250.00
Accrued interest expense 300.00
2. Using the tax table shown in this chapter, calculate federal income tax expense and record the income tax adjust-
ment on the work sheet. Complete the work sheet. Save your work to complete On Your Own 22-2.
644 Chapter 22 End-of-Fiscal-Period Work for a Corporation
L E S S O N
Preparing an Income
22-2 Statement
I N C O M E S TAT E M E N T
Restaurant Supply Co.
Income Statement
For Year Ended December 31, 20--
% OF
NET
SALES
Operating Revenue:
Sales 2109 8 9 4 30
Less: Sales Discount 6 9 5 8 20
Sales Returns and Allowances 24 0 5 9 40 31 0 1 7 60
Net Sales 2078 8 7 6 70 100.0
Cost of Merchandise Sold:
Merchandise Inventory, Jan. 1, 20-- 142 5 3 6 20
Purchases 1212 3 2 1 50
Less: Purchases Discount 11 0 9 4 20
Purchases Returns and Allow. 5 1 4 2 50 16 2 3 6 70
Net Purchases 1196 0 8 4 80
Total Cost of Mdse. Avail. for Sale 1338 6 2 1 00
Less Mdse. Inventory, Dec. 31, 20-- 147 8 2 6 20
Cost of Merchandise Sold 11907 9 4 80 57.3
Gross Profit on Operations 888 0 8 1 90 42.7
Operating Expenses:
Advertising Expense 24 3 2 2 25
Cash Short and Over 1 4 23
Credit Card Fee Expense 1 5 3 4 2 44
Depr. Expense—Office Equipment 6 3 5 0 00
Depr. Expense—Store Equipment 9 2 5 0 00
Insurance Expense 11 6 0 0 00
Miscellaneous Expense 30 0 2 4 43
Payroll Taxes Expense 29 3 1 0 05
Rent Expense 60 0 0 0 00
Repair Expense 4 5 4 3 13
Salary Expense 393 8 4 4 28
Supplies Expense 7 8 3 7 00
Uncollectible Accounts Expense 12 8 7 3 30
Utilities Expense 21 3 8 0 94
Total Operating Expenses 626 6 9 2 05 30.1
Income from Operations 261 3 8 9 85 12.6
Other Revenue:
Gain on Plant Assets 6 7 0 00
Interest Income 1 5 6 00
Total Other Income 8 2 6 00
Other Expenses:
Interest Expense 1 0 0 0 00
Loss on Plant Assets 1 4 0 0 00
Total Other Expenses 2 4 0 0 00
Net Deduction 1 5 7 4 00 0.1
Net Income before Federal Income Tax 259 8 1 5 85 12.5
Less Federal Income Tax Expense 84 5 7 8 18
Net Income after Federal Income Tax 175 2 3 7 67
Preparing an Income Statement Lesson 22-2 645
U S E S O F A N I N C O M E S TAT E M E N T
An income statement reports the financial progress of a Restaurant Supply’s income statement is very similar to
business during a fiscal period. [CONCEPT: Accounting Hobby Shack’s income statement, shown in Part 2. Both
Period Cycle] Revenue, cost of merchandise sold, gross companies report net sales, net purchases, gross profit on
profit on operations, operating expenses, and net income operations, and income from operations. However, Res-
or net loss are reported on an income statement. [CON- taurant Supply has two additional types of accounts that
CEPT: Adequate Disclosure] To help make decisions are reported on the income statement: (1) gains and losses
about current and future operations, Restaurant Supply from the sale of plant assets and (2) accruals for interest
also analyzes relationships between revenue and expense receivable and payable. These accounts are reported after
items. Based on this analysis, Restaurant Supply reports income from operations.
component percentages for all major income statement
items.
NEW ELEMENTS IN THE INCOME STATEMENT
S T E P S
FOR RESTAURANT SUPPLY
1 Income from operations, $261,389.85, is the income earned only from normal business activities. Restaurant
Supply’s normal business activities are selling kitchen equipment and supplies. Revenue from the sales of plant
assets, $670.00, and interest earned on notes receivable, $156.00, are not normal operating activities. Therefore,
these accounts are reported after income from operations in a section labeled Other Revenue.
2 The interest expense on notes payable, $1,000.00, and the loss from the sales of plant assets, $1,400.00, are not
normal operating activities. Therefore, these accounts are reported after income from operations in a section
labeled Other Expenses.
3 The difference between other revenue and other expenses, $1,574.00, is reported as a net addition or net deduc-
tion. The difference is added to or deducted from income from operations to determine the net income before
federal income tax.
GLOBAL PERSPECTIVE
Int e r n a t i o n a l Q u a l i t y S t a n d a r d s
The quality of products is a major con- ization has been established for many fields, including
cern for industry, especially when information processing and communications, textiles,
trading those products among packaging, energy production, shipbuilding, and bank-
nations. In order for some prod- ing and financial services. Standardization will continue to
ucts to be used in other nations, grow in importance for all sectors of business activity.
they must be standardized. In this
sense, a standard is a technical Critical Thinking
specification or other precise cri- 1. How would your company benefit from international
PHOTO: STOCKBYTE/GETTY IMAGES
teria used consistently in the pro- quality standards if it were buying the same product
duction of a product. from different vendors in different countries?
Companies who intend to sell
2. Could meeting international quality standards give a
their products globally must produce
company a competitive advantage?
them in compliance with the standards
set for the industry. International standard-
646 Chapter 22 End-of-Fiscal-Period Work for a Corporation
A N A LY Z I N G A N I N C O M E S TAT E M E N T
Acceptable Actual
Income Statement Items Component Component
Percentages Percentages
Net sales 100.0% 100.0%
Cost of merchandise sold not more than 58.0% 57.3%
Gross profit on operations not less than 42.0% 42.7%
Total operating expenses not more than 35.0% 30.1%
Income from operations not less than 7.0% 12.6%
Net deduction not more than 0.1% 0.1%
Net income before federal income tax not less than 6.9% 12.5%
For a business to determine whether it is progressing satis- Supply uses net sales as the base for calculating compo-
factorily, results of operations are compared with industry nent percentages.
standards and/or previous fiscal periods. By analyzing rev- The amount of each item on the income statement is
enues, costs, and expenses, management can gain infor- divided by the amount of net sales. Thus, each compo-
mation that it can use to improve future operations. nent percentage shows the percentage that item is of net
The percentage relationship between one financial sales. For example, the cost of merchandise sold compo-
statement item and the total that includes that item is nent percentage indicates that Restaurant Supply spent
known as a component percentage. Restaurant Supply pre- 57.3 cents out of each $1.00 of sales for the merchandise
pares component percentages for six major items on its sold.
income statement, as shown in the illustration. Restaurant
Cost of Net Cost of Merchandise Sold
Merchandise Sold Sales Component Percentage
$1,190,794.80 $2,078,876.70 57.3%
Acceptable Component Percentages
Based on comparisons with industry standards as well as F O R YO U R I N F O R M AT I O N
previous accounting periods, Restaurant Supply has deter-
F Y I
mined acceptable component percentages for each major
item of cost and expense on its income statement. Component percentages are not
If the component percentage of any cost or expense calculated for federal income tax
expense and net income after federal
item for a fiscal period exceeds the acceptable percentage,
income tax. Corporations do not have
that cost or expense is reviewed further to determine the much control over the amount of
reason. After determining the reason why a cost or expense federal income taxes to be paid.
exceeded the acceptable percentage, ways are sought to Thus, the net income before
bring the expense within acceptable limits. federal income tax is the best
measure the corporation has
F Y I
to assess its profitability.
Preparing an Income Statement Lesson 22-2 647
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. Why are other revenue and other expenses reported separately from
sales, cost of merchandise sold, and operating expenses on the income
statement?
2. What information is shown by component percentages on an income
statement?
WORK TOGETHER 222
Preparing an income statement for a corporation
The completed work sheet for Webster Corporation and a blank income statement form are given in the Working
Papers. Your instructor will guide you through the following examples.
1. Prepare an income statement for the current year. Calculate and record the following component percentages:
(a) cost of merchandise sold; (b) gross profit on operations; (c) total operating expenses; (d) income from opera-
tions; (e) net addition or deduction resulting from other revenue and expenses; and (f ) net income before federal
income tax. Round percentage calculations to the nearest 0.1%.
2. The acceptable component percentages are given in the Working Papers. Analyze the income statement by deter-
mining if component percentages are within acceptable levels. If any component percentage is not within an
acceptable level, suggest steps that the company should take. Save your work to complete Work Together 22-3.
ON YOUR OWN 222
Preparing an income statement for a corporation
The completed work sheet you prepared for Osborn Corporation and a blank income statement form are given in
the Working Papers. Work this problem independently.
1. Prepare an income statement for the current year. Calculate and record the following component percentages:
(a) cost of merchandise sold; (b) gross profit on operations; (c) total operating expenses; (d) income from opera-
tions; (e) net addition or deduction resulting from other revenue and expenses; and (f ) net income before federal
income tax. Round percentage calculations to the nearest 0.1%.
2. The acceptable component percentages are given in the Working Papers. Analyze the income statement by
determining if component percentages are within acceptable levels. If any component percentage is not within
an acceptable level, suggest steps that the company should take. Save your work to complete On Your Own 22-3.
648 Chapter 22 End-of-Fiscal-Period Work for a Corporation
L E S S O N Preparing a Statement of
Stockholders’ Equity and
22-3 Balance Sheet
S TAT E M E N T O F S T O C K H O L D E R S ’ E Q U I T Y
1. Write Heading 1 Restaurant Supply Co.
Statement of Stockholders’ Equity
For Year Ended December 31, 20--
2. Prepare Capital 2 Capital Stock
Stock Section $1.00 Per Share
January 1, 20--, 15,000 Shares Issued 15 0 0 0 00
Issued during Current Year, None 0 00
Balance, December 31, 20--, 15,000 Shares Issued 15 0 0 0 00
3. Prepare Retained 3 Retained Earnings:
Earnings Section Balance, January 1, 20-- 34 9 8 0 02
Net Income after Federal Income Tax for 20-- 175 2 3 7 67
Less Dividends Declared during 20-- 30 0 0 0 00
Net Increase during 20-- 145 2 3 7 67
Balance, December 31, 20-- 180 2 1 7 69
Total Stockholders' Equity, December 31, 20-- 195 2 1 7 69
The statement of stockholders’ equity shows changes increases retained earnings. In contrast, dividends reduce
in a corporation’s ownership for a fiscal period. A state- retained earnings. The net difference of these amounts is
ment of stockholders’ equity contains two major sections: added to beginning retained earnings to calculate the bal-
(1) capital stock and (2) retained earnings. ance at the fiscal year end.
The capital stock section reports the amount of capital Detailed instructions for preparing the statement of
stock issued at the start of the year and any shares issued stockholders’ equity were presented in Chapter 15 and are
during the year. Information about the par value and the summarized below.
number of shares is also presented.
The lower section of the statement reports the changes
in retained earnings. Net income after federal income taxes
S T E P S PREPARING A STATEMENT OF STOCKHOLDERS’ EQUITY
1 Write the heading: company name, Restaurant Supply Co.; statement name, Statement of Stockholders’ Equity; and
fiscal period, For Year Ended December 31, 20--, in the statement heading.
2 Use information in the accounting records and account balances on the work sheet to prepare the capital stock
section of the statement.
3 Use account balances on the work sheet and the amount of net income after federal income tax reported on the
income statement to prepare the retained earnings section of the statement.
Preparing a Statement of Stockholders’ Equity and Balance Sheet Lesson 22-3 649
BALANCE SHEET
Restaurant Supply Co.
Balance Sheet
December 31, 20--
Assets
Current Assets:
Cash 11 2 0 3 10
Petty Cash 2 5 0 00
Notes Receivable 2 0 0 0 00
Interest Receivable 2 0 00
Accounts Receivable 78 3 4 0 30
Less Allowance for Uncollectible Accounts 13 1 5 3 30 65 1 8 7 00
Merchandise Inventory 147 8 2 6 20
Supplies 9 0 8 25
Prepaid Insurance 2 2 0 0 00
Total Current Assets 229 5 9 4 55
Plant Assets:
Office Equipment 31 9 8 0 32
Less Accumulated Depreciation—Office Equipment 25 1 1 0 00 6 8 7 0 32
Store Equipment 41 5 4 6 35
Less Accumulated Depreciation—Store Equipment 25 2 9 9 00 16 2 4 7 35
Total Plant Assets 23 1 1 7 67
Total Assets 252 7 1 2 22
Liabilities
Current Liabilities:
Notes Payable 10 0 0 0 00
Interest Payable 4 0 0 00
Accounts Payable 24 9 5 0 35
Employee Income Tax Payable 2 0 4 9 00
Federal Income Tax Payable 4 5 7 8 18
Social Security Tax Payable 1 7 6 7 76
Medicare Tax Payable 4 2 7 24
Sales Tax Payable 4 9 8 0 00
Unemployment Tax Payable—Federal 3 8 00
Unemployment Tax Payable—State 2 4 4 00
Health Insurance Premiums Payable 5 6 0 00
Dividends Payable 7 5 0 0 00
Total Liabilities 57 4 9 4 53
Stockholders’ Equity
Capital Stock 15 0 0 0 00
Retained Earnings 180 2 1 7 69
Total Stockholders’ Equity 195 2 1 7 69
Total Liabilities and Stockholders’ Equity 252 7 1 2 22
650 Chapter 22 End-of-Fiscal-Period Work for a Corporation
P R E PA R I N G A BA L A N C E S H E E T
A corporation’s balance sheet reports assets, liabilities, book value. An asset’s book value is reported on a balance
and stockholders’ equity on a specific date. [CONCEPT: sheet by listing three amounts: (1) the balance of the asset
Accounting Period Cycle] A balance sheet is prepared account, (2) the balance of the asset’s contra account, and
from information found in the Balance Sheet columns (3) book value.
of the work sheet and on the statement of stockholders’
Liabilities
equity.
Liabilities are classified according to the length of time
Detailed procedures for preparing a balance sheet were
until they are due. Liabilities due within a short time, usu-
presented in Chapter 15. These procedures are summa-
ally within a year, are known as current liabilities. All of
rized below by the three primary account classifications.
Restaurant Supply’s liabilities are current liabilities because
Assets they come due within a year.
Restaurant Supply classifies its assets as current assets Liabilities owed for more than a year are called long-
and plant assets. Cash and other assets expected to be term liabilities. An example of a long-term liability
exchanged for cash or consumed within a year are known is Mortgage Payable. On December 31 of the current
as current assets. Assets that will be used for a number of year, Restaurant Supply does not have any long-term
years in the operation of a business are known as plant liabilities.
assets. A business owning both current and plant assets
Stockholders’ Equity
usually lists them under separate headings on a balance
The stockholders’ equity section contains the total
sheet.
amounts of capital stock and retained earnings. These
Some of Restaurant Supply’s asset accounts have related
amounts are calculated and reported on the statement of
contra accounts that reduce the related account on the
stockholders’ equity, as well as on the balance sheet.
balance sheet. The difference between an asset’s account
balance and its related contra account balance is known as
P HO
T OA
LTO
/G ETT
Y IM
AG
ES
F O R YO U R I N F O R M AT I O N
F Y I
A company having both current
liabilities and long-term liabilities
would include headings and totals
for each category. The process
is similar to preparing the asset
section of a balance sheet.
Preparing a Statement of Stockholders’ Equity and Balance Sheet Lesson 22-3 651
A N A LY Z I N G A B A L A N C E S H E E T
To continue operating successfully, a business must have Current Ratio
adequate financial resources to buy additional merchan- Although working capital is a useful measure, working
dise, pay employee salaries, and pay for other operating capital does not permit a business to compare itself to its
expenses. Financial strength analysis measures the level industry or to provide a convenient relative measurement
of financial resources. The balance sheet is the primary from year to year.
source of data to determine the financial strength of a A more useful measure results from comparing the
business. amount of total current assets to total current liabilities.
Restaurant Supply analyzes its financial strength to A comparison between two numbers showing how many
assist the company in planning for future periods and to times one number exceeds the other is known as a ratio. A
ensure that adequate resources are available to operate the ratio that shows the numeric relationship of current assets
business. Creditors and investors also use financial strength to current liabilities is called the current ratio. The current
analysis to determine if the company is a good credit and ratio is a measure of a company’s ability to pay its current
investment risk. Before a creditor sells merchandise to a liabilities when due. Creditors use the ratio to determine
company on account, the creditor must believe that the if merchandise should be sold to a company on account.
company will later pay for the merchandise. A company Restaurant Supply’s current ratio is calculated as shown.
that is considered to be a poor credit risk is usually a bad Restaurant Supply’s current ratio is stated as 4.0 to 1,
investment for an investor. which means that total current assets are 4.0 times total
current liabilities.
Working Capital
Based on previous experience, industry guidelines, and
The amount of total current assets less total current lia-
the need to maintain sufficient merchandise inventory,
bilities is called working capital. The amount is stated
Restaurant Supply considers a current ratio between 3.0
in dollars. Working capital is a measure of the financial
to 1 and 4.5 to 1 to be acceptable. On December 31 of the
resources available for the daily operations of the business.
current year, Restaurant Supply’s current ratio, 4.0 to 1, is
Restaurant Supply’s working capital is calculated as shown
acceptable. This year’s current ratio indicates a favorable
below.
condition of financial strength.
Working capital should not be confused with cash. Res-
taurant Supply does not have $172,100.02 of excess cash.
However, Restaurant Supply does have $172,100.02 of
financial resources that are available for use in daily opera- Total Current Total Current Current
tions at the beginning of the next fiscal year. Assets Liabilities Ratio
$229,594.55 $57,494.53 4.0 to 1
Total Current Total Current Working
Assets Liabilities Capital
$229,594.55 $57,494.53 $172,100.02 DIGITAL VISION/GETTY IMAGES
652 Chapter 22 End-of-Fiscal-Period Work for a Corporation
End of Lesson
REVIEW
TERMS REVIEW AUDIT YOUR UNDERSTANDING
long-term liabilities 1. What is an example of a long-term liability?
working capital 2. What is working capital?
current ratio 3. Why is the current ratio a useful measure of financial strength?
WORK TOGETHER 223
Preparing a statement of stockholders’ equity and balance sheet for a corporation
Use the work sheet and income statement for Webster Corporation from Work Together 22-2. Forms are given in the
Working Papers. Your instructor will guide you through the following example.
1. Prepare a statement of stockholders’ equity for the current year. As of January 1, Webster Corporation had issued
9,000 shares of capital stock with a par value of $10.00 per share. During the fiscal year, the corporation issued
1,000 additional shares of capital stock.
2. Prepare a balance sheet for the current year.
3. Calculate Webster Corporation’s (a) working capital and (b) current ratio.
4. Determine if these items are within acceptable levels. The corporation considers working capital in excess of
$150,000.00 and a current ratio between 2.0 to 1 and 3.0 to 1 to be acceptable indications of financial strength.
Save your work to complete Work Together 22-4.
ON YOUR OWN 223
Preparing a statement of stockholders’ equity and balance sheet for a corporation
Use the work sheet and income statement for Osborn Corporation from On Your Own 22-2. Forms are given in the
Working Papers. Work this problem independently.
1. Prepare a statement of stockholders’ equity for the current year. As of January 1, Osborn Corporation had issued
45,000 shares of capital stock with a par value of $1.00 per share. During the fiscal year, the corporation issued
5,000 additional shares of stock.
2. Prepare a balance sheet for the current year.
3. Calculate Osborn Corporation’s (a) working capital and (b) current ratio.
4. Determine if these items are within acceptable levels. The corporation considers working capital in excess of
$100,000.00 and a current ratio between 5.0 to 1 and 6.0 to 1 to be acceptable indications of financial strength.
Save your work to complete On Your Own 22-4.
Preparing a Statement of Stockholders’ Equity and Balance Sheet Lesson 22-3 653
L E S S O N Adjusting, Closing, and
Reversing Entries for a
22-4 Corporation
ADJUSTING ENTRIES
GENERAL JOURNAL PAGE 15
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
1 Adjusting Entries 1
20--
2 Dec. 31 Interest Receivable 2 0 00 2
3 Interest Income 2 0 00 3
4 31 Uncollectible Accounts Expense 12 8 7 3 30 4
5 Allowance for Uncoll. Accts. 12 8 7 3 30 5
6 31 Merchandise Inventory 5 2 9 0 00 6
7 Income Summary 5 2 9 0 00 7
8 31 Supplies Expense 7 8 3 7 00 8
9 Supplies 7 8 3 7 00 9
10 31 Insurance Expense 11 6 0 0 00 10
11 Prepaid Insurance 11 6 0 0 00 11
12 31 Depreciation Exp.—Office Equip. 6 3 5 0 00 12
13 Accum. Depr.—Office Equip. 6 3 5 0 00 13
14 31 Depreciation Exp.—Store Equip. 9 2 5 0 00 14
15 Accum. Depr.—Store Equip. 9 2 5 0 00 15
16 31 Interest Expense 4 0 0 00 16
17 Interest Payable 4 0 0 00 17
18 31 Federal Income Tax Expense 4 5 7 8 18 18
19 Federal Income Tax Payable 4 5 7 8 18 19
20 20
After financial statements are prepared, adjusting and A corporation’s adjusting entries are made from the
closing entries are journalized and posted. A post-closing Adjustments columns of a work sheet. To assure that each
trial balance is then prepared to prove the equality of deb- work sheet adjustment is journalized, record the entries in
its and credits in the general ledger after adjusting and the order of the letters assigned to each adjustment on the
closing entries have been posted. The steps for preparing work sheet.
a post-closing trial balance are the same as discussed in Restaurant Supply’s work sheet is shown in Lesson
Chapter 16. Finally, reversing entries are journalized and 22-1.
posted.
654 Chapter 22 End-of-Fiscal-Period Work for a Corporation
C L O S I N G E N T R I E S F O R A C O R P O R AT I O N
Closing entries for a corporation are made from informa- 3. Closing entry to record net income or net loss in the
tion in a work sheet. A corporation records four closing retained earnings account and close the income sum-
entries: mary account.
4. Closing entry for the dividends account.
1. Closing entry for income statement accounts with
credit balances (revenue and contra cost accounts).
2. Closing entry for income statement accounts with
debit balances (cost, contra revenue, and expense
accounts).
CLOSING E NTRY FOR ACCOUNTS WITH CRE DIT BAL ANCES
1. Enter the balance of every
Income Statement credit
account in the debit column.
GENERAL JOURNAL PAGE 16
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
1 Closing Entries 1
20--
2 Dec. 31 Sales 21098 9 4 30 2
3 Purchases Discount 1 11 0 9 4 20 3
4 Purchases Returns and Allow. 5 1 4 2 50 4
5 Gain on Plant Assets 6 7 0 00 5
6 Interest Income 1 5 6 00 6
7 Income Summary 21269 5 7 00 7
8 2 8
9 9
2. Enter the total of debit entries
as a credit to Income Summary.
The income statement credit balance accounts consist needed for closing income statement credit balance
of the revenue (Sales, Gain on Plant Assets, and Interest accounts is obtained from the work sheet. Closing entries
Income) and the contra cost accounts (Purchases Discount are recorded on a new page of the general journal.
and Purchases Returns and Allowances). Information
JOURNALIZING A CLOSING ENTRY FOR ACCOUNTS
S T E P S
WITH CREDIT BALANCES
1 Except for Income Summary, enter the balance of every account found in the Income Statement credit
column of the work sheet as a debit entry in a general journal.
2 Enter the total of the debit entries, $2,126,957.00, as a credit to Income Summary.
Adjusting, Closing, and Reversing Entries for a Corporation Lesson 22-4 655
CLOSING E NTRY FOR ACCOUNTS WITH DE BIT BAL ANCES
3. Enter the total as a debit
1. Enter Income Summary. to Income Summary.
GENERAL JOURNAL PAGE 16
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
8 31 Income Summary 1 3 1957 0 0 9 33 8
9 Sales Discount 6 9 5 8 20 9
10 Sales Returns and Allow. 24 0 5 9 40 10
11 Purchases 1212 3 2 1 50 11
12 Advertising Expense 24 3 2 2 25 12
13 Cash Short and Over 1 4 23 13
14 Credit Card Fee Expense 15 3 4 2 44 14
15 Depr. Expense—Office Equipment 6 3 5 0 00 15
16 Depr. Expense—Store Equipment 9 2 5 0 00 16
17 Insurance Expense 2 11 6 0 0 00 17
18 Miscellaneous Expense 30 0 2 4 43 18
19 Payroll Taxes Expense 29 3 1 0 05 19
20 Rent Expense 60 0 0 0 00 20
21 Repair Expense 4 5 4 3 13 21
22 Salary Expense 393 8 4 4 28 22
23 Supplies Expense 7 8 3 7 00 23
24 Uncollectible Accounts Expense 12 8 7 3 30 24
25 Utilities Expense 21 3 8 0 94 25
26 Interest Expense 1 0 0 0 00 26
27 Loss on Plant Assets 1 4 0 0 00 27
28 Federal Income Tax Expense 84 5 7 8 18 28
2. Enter the balance of every
Income Statement debit
account in the credit column.
The income statement debit balance accounts consist of Because Cash Short and Over has a debit balance in
the contra revenue accounts (Sales Discount and Sales this fiscal period, the account balance amount is closed to
Returns and Allowances), the cost (Purchases), and all Income Summary with the debit balance accounts.
expense accounts. Information needed for closing income
statement debit balance accounts is obtained from the
work sheet’s Income Statement Debit column.
JOURNALIZING A CLOSING ENTRY FOR ACCOUNTS
S T E P S
WITH DEBIT BALANCES
1 Enter the account title Income Summary.
2 Enter the balance of every account found in the Income Statement debit column of the work
sheet as a credit entry in a general journal.
3 Enter the total of the credit entries, $1,957,009.33, as a debit to Income Summary.
656 Chapter 22 End-of-Fiscal-Period Work for a Corporation
CLOSING ENTRY TO RECORD NET INCOME
GENERAL JOURNAL PAGE 16
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
29 31 Income Summary 1 175 2 3 7 67 29
30 Retained Earnings 2 175 2 3 7 67 30
1. Debit Income Summary. 2. Credit Retained Earnings.
After closing entries for the income statement accounts of net income. After the closing entry is posted, Income
are posted, Income Summary has a credit balance of Summary has a zero balance.
$175,237.67. This credit balance equals the net income A corporation having a net loss will have a debit bal-
calculated on the work sheet. ance in Income Summary. Retained Earnings would then
As reported on the statement of stockholders’ equity, be debited and Income Summary credited for the net loss
the net income of a corporation increases retained earn- amount. The entry would reduce the balance of Retained
ings. Closing the balance of Income Summary actually Earnings.
increases the Retained Earnings account by the amount
JOURNALIZING A CLOSING ENTRY FOR NET INCOME
S T E P S
TO RETAINED EARNINGS
1 Record a debit to Income Summary for the amount of net income, $175,237.67.
2 Record a credit to Retained Earnings for the same amount, $175,237.67.
CLOSING ENTRY FOR DIVIDENDS
GENERAL JOURNAL PAGE 16
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
31 31 Retained Earnings 1 30 0 0 0 00 31
32 Dividends 2 30 0 0 0 00 32
33 33
1. Debit Retained Earnings. 2. Credit Dividends.
Dividends reduce the earnings retained by a corporation, closing entry reduces the balance in the Retained Earnings
as reported on the Statement of Stockholders’ Equity. The account by the amount of the dividends.
S T E P S JOURNALIZING A CLOSING ENTRY FOR DIVIDENDS
1 Record a debit to Retained Earnings for the amount of dividends, $30,000.00.
2 Record a credit to Dividends for the same amount, $30,000.00.
Adjusting, Closing, and Reversing Entries for a Corporation Lesson 22-4 657
REVERSING ENTRIES
GENERAL JOURNAL PAGE 15
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
1 Adjusting Entries 1
20--
2 Dec. 31 Interest Receivable 2 0 00 2
3 Interest Income 2 0 00 3
16 31 Interest Expense 4 0 0 00 16
17 Interest Payable 4 0 0 00 17
18 31 Federal Income Tax Expense 4 5 7 8 18 18
19 Federal Income Tax Payable 4 5 7 8 18 19
20 20
1. Reverse the entry that created a
1
balance in Interest Receivable.
GENERAL JOURNAL PAGE 17
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
1 Reversing Entries 1
20--
2 Jan. 1 Interest Income 2 0 00 2
3 Interest Receivable 2 0 00 3
4 1 Interest Payable 2 4 0 0 00 4
5 Interest Expense 4 0 0 00 5
6 1 Federal Income Tax Payable 3 4 5 7 8 18 6
7 Federal Income Tax Expense 4 5 7 8 18 7
2. Reverse the entry that created a 3. Reverse the entry that created a balance
balance in Interest Payable. in Federal Income Tax Payable.
If an adjusting entry creates a balance in an asset or lia- 2. The adjusting entry for accrued interest expense cre-
bility account, the adjusting entry should be reversed. A ated a balance in the interest payable account.
review of Restaurant Supply’s adjusting entries shows that 3. The adjusting entry for federal income tax expense
three adjusting entries created a balance in an asset or created a balance in the federal income tax payable
liability account. account.
1. The adjusting entry for accrued interest income cre-
ated a balance in the interest receivable account.
S T E P S JOURNALIZING REVERSING ENTRIES
1 Reverse the entry that created a balance in Interest Receivable.
R E M E M B E R
2 Reverse the entry that created a balance in Interest Payable. A post-closing trial balance is
prepared to prove the equality of
3 Reverse the entry that created a balance in Federal Income Tax Payable. debits and credits in the general
ledger after adjusting and closing
entries have been posted, but
before reversing entries
are posted.
658 Chapter 22 End-of-Fiscal-Period Work for a Corporation
ACC O U N T I N G C YC L E F O R A M E R C H A N D I S I N G
B U S I N E S S O R G A N I Z E D A S A C O R P O R AT I O N
GENERAL LEDGER
GENERAL JOURNAL
1
2
JOURNAL
9
POST-CLOSING
TRIAL BALANCE ACCOUNTS PAYABLE LEDGER
NTS RECEIVABLE LEDGER
ACCOU
3
8
GENERAL LEDGER
GENERAL LEDGER SCHEDULE OF
ACCOUNTS
GENERAL JOURNAL PAYABLE
4
SCHEDULE OF
ACCOUNTS
RECEIVABLE
5
7
WORK SHEET
BALANCE
SHEET
STATEMENT INCOME
OF STATEMENT
STOCKHOLDERS'
EQUITY
The accounting cycles are similar for merchandising busi- Variations occur in preparing financial statements. Varia-
nesses, regardless of how the businesses are organized. tions also occur when reversing entries are recorded.
ACCOUNTING CYCLE FOR A MERCHANDISING BUSINESS
S T E P S
ORGANIZED AS A CORPORATION
1 Source documents are checked for accuracy, and transactions are analyzed into debit and credit parts.
2 Transactions, from information on source documents, are recorded in journals.
3 Journal entries are posted to the accounts payable, accounts receivable, and general ledgers.
4 Schedules of accounts payable and accounts receivable are prepared from the subsidiary ledgers.
5 A work sheet, including a trial balance and an adjustment for federal income tax expense, is prepared
from the general ledger.
6 Financial statements are prepared from the work sheet.
7 Adjusting and closing entries are journalized from the work sheet and posted to the general ledger.
8 A post-closing trial balance of the general ledger is prepared.
9 Reversing entries are journalized and posted to the general ledger.
Adjusting, Closing, and Reversing Entries for a Corporation Lesson 22-4 659
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. What is used to prove the equality of debits and credits in the general
ledger?
2. What are the four closing entries for a corporation?
3. What accounts are closed to Retained Earnings?
WORK TOGETHER 224
Journalizing adjusting, closing, and reversing entries for a corporation
Use the work sheet and financial statements from Work Together 22-3. General journal pages are given in the
Working Papers. Your instructor will guide you through the following examples.
1. For the current year, journalize the adjusting entries using page 15 of a general journal.
2. For the current year, journalize the closing entries using page 16 of a general journal.
3. For the following year, journalize the reversing entries using page 17 of a general journal.
ON YOUR OWN 224
Journalizing adjusting, closing, and reversing entries for a corporation
Use the work sheet and financial statements from On Your Own 22-3. General journal pages are given in the Working
Papers. Work this problem independently.
1. For the current year, journalize the adjusting entries using page 18 of a general journal.
2. For the current year, journalize the closing entries using page 19 of a general journal.
3. For the following year, journalize the reversing entries using page 20 of a general journal.
660 Chapter 22 End-of-Fiscal-Period Work for a Corporation
SUMMARY
After completing this chapter, you can: 5. Prepare and analyze an income statement
for a merchandising business organized as
1. Define accounting terms related to financial
a corporation.
statements for a merchandising business
organized as a corporation. 6. Prepare a statement of stockholders’ equity
for a merchandising business organized as
2. Identify accounting concepts and practices
a corporation.
related to financial statements and end-of-
fiscal-period entries for a merchandising 7. Prepare and analyze a balance sheet for
business organized as a corporation. a merchandising business organized as a
corporation.
3. Plan end-of-fiscal-period adjustments for
a merchandising business organized as a 8. Record adjusting, closing, and reversing entries
corporation. for a merchandising business organized as a
corporation.
4. Calculate federal income tax, plan an adjust-
ment for federal income tax expense, and
complete a work sheet.
EXPLORE ACCOUNTING
Au d i t s Pr ovi d e S t oc k h ol d e r s
with Positive Assurance
Stockholders want assurance that the financial 2. Completeness. All assets and liabilities that
statements of their corporation accurately exist have been reported, and all revenue
present its financial condition and results and expense events have been recorded.
of operations. To provide this assurance, 3. Rights and Obligations. All assets and
corporations hire independent public liabilities are those of the corporation and
accountants to audit the financial state- not of its owners or another corporation.
ments. These accountants, referred to as
4. Valuation or Allocation. Transactions are
auditors, provide a written opinion that
reported using amounts that correctly reflect
informs stockholders whether the financial
the value of the item or event.
statements can be relied upon for making informed
5. Presentation and Disclosure. Accounts are properly
business decisions.
classified, described, and disclosed in conformity with
Auditors examine documents, journals, ledgers, and
generally accepted accounting principles.
other accounting records to collect evidence that sup-
ports five declarations, or assertions, about each amount
in the financial statements. Each assertion addresses a
Instructions: Create a table that shows how the five
financial statement assertions relate to any one particular
unique quality about the amount in the financial state-
PHOTO: PHOTOGRAPHER’S CHOICE/GETTY IMAGES
amount reported on the financial statements.
ments. These assertions are summarized as follows.
1. Existence or Occurrence. All assets and liabilities actually
exist, and all income statement transactions actually
occurred during the period.
End-of-Fiscal-Period Work for a Corporation Chapter 22 661
221 APPLICATION PROBLEM
Preparing a work sheet for a corporation
Donovan Lumber Corporation’s work sheet is given in the Working Papers.
Instructions:
1. For the current year ended December 31, record the adjustments on the work sheet using the following
information. Do not total the Adjustments columns. Save your work to complete Application Problem 22-2.
Adjustment Information, December 31
Accrued interest income $ 315.00
Uncollectible accounts expense estimated as 1.0% of sales on account.
Sales on account for year, $685,000.00.
Merchandise inventory 81,284.50
Supplies inventory 1,847.50
Value of prepaid insurance 4,180.00
Annual depreciation expense—office equipment 3,128.00
Annual depreciation expense—store equipment 3,389.00
Accrued interest expense 300.00
2. Using the tax table shown in this chapter, calculate federal income tax expense and record the income tax
adjustment on the work sheet. Complete the work sheet. Save your work to complete Application Problem
22-2.
222 APPLICATION PROBLEM
Preparing an income statement for a corporation
Use the work sheet from Application Problem 22-1 and the financial analysis form provided in the Working
Papers to complete this problem. Save your work to complete Application Problem 22-3.
Instructions:
1. Prepare an income statement for Donovan Lumber Corporation for the fiscal year ending December 31 of
the current year.
2. Calculate and record the following component percentages: (a) cost of merchandise sold; (b) gross profit
on operations; (c) total operating expenses; (d) income from operations; (e) net addition or deduction from
other revenue and expenses; and (f ) net income before federal income tax. Round percentage calculations
to the nearest 0.1%.
3. Analyze the corporation’s income statement by determining if component percentages are within accept-
able levels. If any component percentage is not within an acceptable level, suggest steps that the com-
pany should take. The corporation considers the following component percentages acceptable.
Cost of merchandise sold Not more than 70.0%
Gross profit on operations Not less than 30.0%
Total operating expenses Not more than 25.0%
Income from operations Not less than 5.0%
Net deduction from other revenue and expenses Not more than 0.1%
Net income before federal income tax Not less than 4.9%
( Go Beyond the Book
)
For more information go to
www.C21accounting.com
662 Chapter 22 End-of-Fiscal-Period Work for a Corporation
223 APPLICATION PROBLEM
Preparing a statement of stockholders’ equity and balance sheet for a corporation
Use the work sheet and income statement from Application Problems 22-1 and 22-2 to complete this prob-
lem. Save your work to complete Application Problem 22-4.
Instructions:
1. Prepare a statement of stockholders’ equity for Donovan Lumber Corporation for the fiscal year ended on
December 31 of the current year. Use the following additional information.
January 1 balance of capital stock account $40,000.00
(8,000 shares issued for $5.00 per share)
Shares issued during the year 2,000 shares
2. Prepare a balance sheet for Donovan Lumber Corporation as of December 31 of the current year.
3. Calculate the corporation’s (a) working capital and (b) current ratio.
4. Determine if these items are within acceptable levels. The corporation considers the following levels
acceptable. Save your work to complete Application Problem 22-4.
Working capital Not less than $100,000.00
Current ratio Between 3.0 to 1 and 3.5 to 1
224 APPLICATION PROBLEM
Journalizing adjusting, closing, and reversing entries for a corporation
Use the work sheet and financial statements from Application Problem 22-3 to complete this problem.
Instructions:
1. For the current year, journalize the adjusting entries using page 15 of a general journal.
2. For the current year, journalize the closing entries using page 16 of a general journal.
3. For the following year, journalize the reversing entries using page 17 of a general journal.
225 MASTERY PROBLEM
Preparing a work sheet, financial statements, and end-of-fiscal-period entries
for a corporation
Accounting forms are given in the Working Papers. Benford Corporation completed the following transactions
during December of the current year and January of the next year.
Instructions:
1. Prepare Benford Corporation’s work sheet for the current year ended December 31. Record the adjust-
ments on the work sheet using the following information.
End-of-Fiscal-Period Work for a Corporation Chapter 22 663
Adjustment Information, December 31
Accrued interest income $ 80.00
Uncollectible accounts expense estimated as 0.6% of sales on account.
Sales on account for year, $945,000.00.
Merchandise inventory 283,028.08
Supplies inventory 998.99
Value of prepaid insurance 2,000.00
Annual depreciation expense—office equipment 5,480.00
Annual depreciation expense—store equipment 5,060.00
Accrued interest expense 312.50
Federal income tax is calculated using the tax table presented in this chapter.
2. Prepare an income statement. Calculate and record the following component percentages: (a) cost of
merchandise sold; (b) gross profit on operations; (c) total operating expenses; (d) income from operations;
(e) net addition or deduction from other revenue and expenses; and (f ) net income before federal income
tax. Round percentage calculations to the nearest 0.1%.
3. Analyze the corporation’s income statement by determining if component percentages are within accept-
able levels. If any component percentage is not within an acceptable level, suggest steps that the com-
pany should take. The corporation considers the following component percentages acceptable.
Cost of merchandise sold Not more than 70.0%
Gross profit on operations Not less than 30.0%
Total operating expenses Not more than 25.0%
Income from operations Not less than 5.0%
Net deduction from other revenue and expenses Not more than 0.1%
Net income before federal income tax Not less than 4.9%
4. Prepare a statement of stockholders’ equity. Use the following additional information.
January 1 balance of capital stock account $140,000.00
(14,000 shares issued for $10.00 per share)
Shares issued during the year 1,000 shares
5. Prepare a balance sheet.
6. Calculate the corporation’s (a) working capital and (b) current ratio. Determine if these items are within
acceptable levels. The corporation considers the following levels acceptable.
Working capital Not less than $150,000.00
Current ratio Between 3.0 to 1 and 4.0 to 1
7. Journalize the adjusting entries using page 15 of a general journal.
8. Journalize the closing entries using page 16 of a general journal.
9. Journalize the reversing entries using page 17 of a general journal.
226 CHALLENGE PROBLEM
Analyzing financial strength
Instructions:
1. Obtain the financial statements of two corporations from two different industries. Calculate the amount of
working capital and the current ratio of each corporation.
2. Discuss the usefulness of each measure of financial strength between the companies in each industry and
among the different industries.
3. The current ratio is often considered to be acceptable within a specified range. Investigate why a current
ratio being too high might be undesirable.
664 Chapter 22 End-of-Fiscal-Period Work for a Corporation
A P P L I E D CO M M U N I C AT I O N
You have learned a wide variety of facts and concepts about accounting for service and merchandising businesses
and for proprietorships, corporations, and the business world. Regardless of your future educational and career
goals, this knowledge will provide you with a sound foundation to become a productive member of society.
Instructions: Prepare an essay to discuss how your knowledge of accounting will be useful to you in the future. How
will accounting help you to complete your education, obtain a job, start a business, make personal investment deci-
sions, and be successful in other facets of your life?
CASE FOR CRITICAL THINKING
The president of Reyes Company asked the accounting department to provide information to help management
improve the company’s net income. Accountant Pemlata Rathi suggests that an income statement showing all the
revenue and expense amounts should provide all the information needed to analyze the company’s results of opera-
tions. Do you agree? If not, what additional information do you recommend?
GRAPHING WORKSHOP
Stock prices are often presented in a high-low-close graph. The vertical line represents the range—the high and low
price—in which the stock traded during the fiscal year. The following graph shows that Burnett Company’s stock
reached a high of $40 per share some time during 20X1. However, during the year the stock fell to as low as $30 per
share. The small tab within each line shows the market price on the last day of the fiscal year—the close price.
Burnett Company Stock Market Price Growth
$60
$50
Market Price
$40
$30
$20
$10
$0
20X1 20X2 20X3 20X4 20X5 20X6
Fiscal Year
In its annual report, the president of Burnett Company made the following statement:
“In 20X2, we implemented a strategic plan to reverse the decline in the market price of the company’s stock.
The installation of a new information system has increased sales and reduced the costs of purchasing materials and
services. As evidenced by the steady increase in the stock price, stockholders who retained their investment in the
company have been rewarded with significant appreciation in the value of their investments.”
Instructions: Evaluate the president’s statement. Does the information in the high-low-close graph support the
president’s analysis?
A N A LY Z I N G B E S T B U Y ’S F I N A N C I A L S TAT E M E N T S
A statement of shareholders’ equity reports changes in each of the capital accounts. The amount of stock issued
and repurchased is reported as changes in the common stock account. The company’s operations for the year are
reflected as changes in the retained earnings account.
Instructions
1. Use Best Buy’s Consolidated Statements of Changes in Shareholders’ Equity on page B-8 in Appendix B of this
textbook to identify the changes in the retained earnings account for fiscal years 2005–2007.
2. Describe the change, if any, in the amount of dividends per share for the fiscal years 2005–2007.
End-of-Fiscal-Period Work for a Corporation Chapter 22 665
Accounting
SOFTWARE
ENDOFFISCALPERIOD WORK
F O R A C O R P O R AT I O N
It is common practice for businesses to set limits on the amount of unpaid sales on account to each customer. Busi-
nesses have learned these credit limits help limit bad debt expenses. A method or process that achieves a desired
result for many businesses is referred to as a best practice. In your accounting education, you have learned many
best practices, such as the use of work sheets, special journals, and sales discounts.
Peachtree uses best practices for maintaining customer information and selling to customers. First, you can
establish default options for all customers, including credit terms, credit limits, shipment methods, and finance
charges. When a new customer is entered into Peachtree, the customer is initially assigned the default options. You
can then change any of the options for that customer. For example, if your business offers most customers 2/10,
n/30 credit terms, these terms would be entered in the default options. If you wanted to offer a particular customer
different terms, those new terms would be entered into that customer’s information.
Peachtree Mastery Problem 22-5
1. Open (Restore) file 22-5MP.ptb.
2. Print a Profit & Loss Standard report using January 1 and December 31 as the dates.
3. View a Trial Balance report for December 31. Use the report to help journalize the closing entry for Dividends.
4. Print a Balance Sheet Standard report dated December 31.
ENDOFFISCALPERIOD WORK
F O R A C O R P O R AT I O N
QuickBooks allows the user to customize lists, forms, and financial statements to meet the needs of each company.
When creating lists, such as customers, vendors, employees, and inventory items, extra fields can be added. For
example, a Sales Region field can be added to the customer list. This field can then be used to sort sales by region
of the country.
Invoices, credit memos, sales receipts, statements, and other forms can be customized in several ways. Columns
can be added, the format can be changed, columns can appear on the form when entering data but be hidden on
the printed form, text can be automatically added to a form, or the style, color, and size of the font can be changed.
Reports can be modified in several ways. An income statement, for example, can be designed to show revenue
month by month or week by week for the entire accounting period. Financial statements can show amounts for the
previous period along with amounts for the current period.
QUICKBOOKS MASTERY PROBLEM 225
1. Open the Benford Corporation file if it is not already open.
2. Journalize and post the adjusting entries.
3. Print an income statement.
4. Print a statement of retained earnings.
5. Print a balance sheet.
6. Journalize and post the closing entries.
7. Print the December 31 to January 1 (of the following year) general journal.
666 Chapter 22 End-of-Fiscal-Period Work for a Corporation
CHARTS AND GRAPHS
Large work sheets can be difficult to print. Using default print settings, the template for this chapter prints, section
by section, over six pages. You would have to tape the pages together to create a document that you could review.
Obviously, such a method of printing a large work sheet is unacceptable in business today.
Electronic spreadsheets provide you with numerous tools to modify how a document is printed. One of the most
powerful tools is called scaling. If you have ever used a copy machine to reduce a document to a certain percentage
of its normal size, you have scaled a document.
The level of scaling can be entered as a percentage, or the electronic spreadsheet can determine the required
scaling for you. By instructing the computer to print the document by a certain number of pages wide and pages
tall, the computer automatically determines the required level of scaling.
EXCEL APPLICATION PROBLEM 221
Open the F22-1 Excel data file. Follow the step-by-step instructions in the Instructions work sheet. Scale the tem-
plate to print one page wide and two pages tall.
EXCEL APPLICATION PROBLEM 223
Open the F22-1 Excel data file. Follow the step-by-step instructions in the Instructions work sheet.
ENDOFFISCALPERIOD WORK
F O R A C O R P O R AT I O N
Adjusting entries must be planned and then entered into the software. The first step is to display or print a trial bal-
ance and use the data on that report to plan the adjusting entries. The adjusting entries are then journalized in the
general journal and posted. The same reference, such as Adj.Ent., should be used for each adjusting entry.
Financial statements are generated by the software by clicking the Reports toolbar button and then selecting
the desired reports. The reports may be displayed, printed, or copied in word processing or spreadsheet format for
pasting into another document or spreadsheet. Financial statements should be generated before closing entries are
recorded and posted.
Closing entries can be generated automatically by the software. Click Options on the menu and select Gener-
ate Closing Entries. The closing entries are then displayed in the general journal and should be checked and then
posted. Note that it is important to save a copy of the file before closing entries (use BC in the filename) so that the
file can be opened in case corrections are needed. Another version of the file should be saved after closing entries
(use AC in the filename).
After closing entries are posted, reversing entries are recorded in the general journal. The same reference, such
as Rev.Ent., should be used for each reversing entry.
AUTOMATING MASTERY PROBLEM 225
Open file F22-5.AA8. Display the problem instructions and complete the problem.
End-of-Fiscal-Period Work for a Corporation Chapter 22 667
REINFORCEMENT
Activity 3—Part B
An Accounting Cycle for a Corporation:
End-of-Fiscal-Period Work
The general ledger used in Reinforcement Activity 3—Part A is needed to complete Reinforcement Activity 3—Part B.
END-OF-FISCAL-PERIOD WORK
INSTRUCTIONS: deduction from other revenue and expenses; and
(f ) net income before federal income tax. Round per-
9. Record the 20X4 depreciation on the plant asset
centage calculations to the nearest 0.1%.
record of plant asset no. 998.
14. Analyze the corporation’s income statement by deter-
10. Prepare a trial balance as of December 31, 20X4, on a
mining if component percentages are within accept-
work sheet.
able levels. If any component percentage is not within
11. Complete the work sheet using the following adjust- an acceptable level, suggest steps that the company
ment information: should take. The corporation considers the following
a. Outstanding notes receivable consist of NR34, a component percentages acceptable:
90-day, 10% note accepted from Nelson Co. on
Cost of merchandise sold: Not more than 62.0%
December 7, 20X4, for an extension of time on its
Income from operations: Not less than 10.0%
account, $3,600.00.
Gross profit on operations: Not less than 38.0%
b. Uncollectible accounts expense is estimated as Net deduction from other revenue and expenses: Not
4.0% of sales on account. Sales on account for the more than 0.5%
year, $90,000. Total operating expenses: Not more than 28.0%
c. Merchandise inventory $80,491.95 Net income before federal income tax: Not less than
d. Supplies inventory $425.05 9.5%
e. Value of prepaid insurance $600.00 15. Calculate the earnings per share and price-earnings
ratio. Current market price is $225.00.
f. Estimate of office equipment
depreciation $6,520.00 16. Prepare a statement of stockholders’ equity. The
company had 3,000 shares of $10.00 par-value stock
g. Estimate of warehouse equipment outstanding on January 1. The company did not issue
depreciation $4,210.00 any additional shares during the year.
h. Outstanding notes payable consist of (1) NP32, a 17. Prepare a balance sheet in report form.
90-day, 12% note for $10,000.00 signed on Novem-
ber 16, 20X4, and (2) NP33, a 90-day, 10% note for 18. Journalize and post the adjusting entries. Use page 13
$6,000.00 signed on December 28, 20X4. of a general journal.
12. Calculate federal income tax expense and record the 19. Journalize and post the closing entries. Use page 14
adjustment on the work sheet. of a general journal.
13. Prepare an income statement. Calculate and record 20. Prepare a post-closing trial balance.
the following component percentages: (a) cost of 21. Journalize and post the reversing entries. Use page 15
merchandise sold; (b) gross profit on operations; (c) of a general journal.
total operating expenses; (d) income from operations;
(e) net addition or
668 Reinforcement Activity 3—Part B An Accounting Cycle for a Corporation: End-of-Fiscal-Period Work
Electro, Inc., is a merchandising business organized as a corporation. The com-
pany specializes in selling electronic items, including computers and audio and
video systems and accessories. This simulation includes the realistic transac-
tions completed by Electro, Inc., in the month of December, including end-of-
fiscal-year activities.
Source documents are provided for transactions that are recorded in
special journals and a general journal, similar to the ones used by Restaurant
Supply Co. in Part 3.
This real-life business simulation is available in manual and automated
versions. The automated version is used with Automated Accounting software.
The following activities are included in the Electro, Inc. simulation:
1 Recording transactions in 4 Preparing schedules of 9 Journalizing and posting
special journals from source accounts receivable and closing entries.
documents. accounts payable from
subsidiary ledgers. 10 Preparing a post-closing trial
2 Posting items to be posted balance.
individually to a general 5 Preparing a trial balance on
ledger and subsidiary ledger. a work sheet. 11 Journalizing and posting
reversing entries.
3 Posting column totals to a 6 Planning adjustments and
general ledger. completing a work sheet. 12 Think Like an Accountant
Financial Analysis Activity
7 Preparing financial statements.
8 Journalizing and posting
adjusting entries.
An Accounting Cycle for a Corporation: End-of-Fiscal-Period Work Reinforcement Activity 3—Part B 669
PART
4 Additional Accounting
Procedures
Chapter 23 Accounting for Partnerships THE BUSINESS—
GIFTPAK COMPANY
Chapter 24 Recording International and Internet Sales
GiftPak Company is the business that will be
used in Chapters 23 and 24 in Part 4 to illus-
trate the chapter concepts. The company is a
partnership that sells gift baskets with both
national and international sales. The com-
pany also sells merchandise on the Internet
through its web site. GiftPak rents the build-
ing that it uses for its operations.
PHOTO: IMAGE SOURCE/GETTY IMAGES
C H A P T E R 2 3
GIFTPAK COMPANY CHART OF ACCOUNTS
GENERAL LEDGER 2000 LIABILITIES 5115 Purchases Returns and
Balance Sheet Accounts 2100 Current Liabilities Allowances
1000 ASSETS 2110 Accounts Payable 5120 Purchases Discount
1100 Current Assets 3000 OWNERS’ EQUITY 6000 OPERATING EXPENSES
1110 Cash 3110 Sawyer Hess, Capital 6110 Advertising Expense
1120 Petty Cash 3120 Sawyer Hess, Drawing 6120 Credit Card Fee Expense
1130 Accounts Receivable 3130 Kendra Sullivan, Capital 6130 Depreciation Expense—
1135 Allowance for Uncollectible 3140 Kendra Sullivan, Drawing Office Equipment
Accounts 3150 Income Summary 6135 Insurance Expense
1137 Time Drafts Receivable Income Statement Accounts 6140 Miscellaneous Expense
1140 Merchandise Inventory 4000 OPERATING REVENUE 6150 Rent Expense
1150 Supplies 4110 Sales 6160 Supplies Expense
1160 Prepaid Insurance 4115 Sales Returns and Allowances 6170 Uncollectible Accounts Expense
1200 Plant Assets 4120 Sales Discount
1210 Office Equipment 5000 COST OF MERCHANDISE The chart of accounts for GiftPak
1215 Accumulated Depreciation— 5110 Purchases Company is illustrated above for ready
Office Equipment reference as you study Part 4 of this
textbook.
PHOTO: STOCKBYTE/GETTY IMAGES
C H A P T E R 2 4
671
IMAGE SOURCE/GETTY IMAGES
C H A P T E R 2 3 Accounting for
Partnerships
O B J E C T I V E S
After studying Chapter 23, you will be able to: 4. Calculate the distribution of partnership
earnings.
1. Define accounting terms related to forming,
dissolving, and distributing the earnings of a 5. Prepare a distribution of net income statement
partnership. for a business organized as a partnership.
2. Identify accounting concepts and practices 6. Prepare an owners’ equity statement for a busi-
related to forming, dissolving, and distributing ness organized as a partnership.
the earnings of a partnership.
3. Journalize entries related to forming, dissolving,
and distributing the earnings of a partnership.
K E Y T E R M S
• partnership • owners’ equity statement • realization
• partner • liquidation of a • limited liability partner-
• partnership agreement partnership ship (LLP)
• distribution of net
income statement
( Point Your Browser
www.C21accounting.com
)
672
ACCOUNTING IN THE REAL WORLD
Cold Stone Creamery®
Today’s Business World—Cold Stone Creamery®
Do you love ice cream? Donald and Susan Sutherland’s passion for ice cream
led them to open Cold Stone Creamery® in Tempe, Arizona, in 1988. The
Sutherlands make their ice cream daily, using only the finest ingredients. But
what makes Cold Stone Creamery® unique is how the ice cream is prepared.
As customers watch, their desired mix-ins are blended with the ice cream on
a frozen granite stone and served in a fresh-baked waffle cone.
DIGITAL VISION/GETTY IMAGES
The success of Cold Stone Creamery® motivated the Sutherlands to
begin franchising their concept in 1995. With nearly 1,400 franchise stores in
operation in 2007 and many more in development, Cold INTERNET
Stone Creamery® was ranked #12 in Entrepre- ACTIVITY
neur Magazine’s 2007 100 Fastest Growing
Franchises (Entrepreneur.com). Partnership Agreements
In exchange for an initial invest- Search the Internet for in-
ment, Cold Store Creamery® formation about partnership
franchisees receive step-by- agreements.
step guidance in choosing a
site, negotiating the lease, Instructions
transforming the store, and,
1. List the purpose of a part-
most important, learning
nership agreement.
how to create the best ice
2. List at least four items that
cream creations at the Cold
should be included in a
Store Creamery® Ice Cream
partnership agreement.
University.
©LON C. DIEHL/PHOTOEDIT
Critical Thinking
1. What other kinds of support and training might be provided to a
franchisee?
2. If you were going to start a business with someone else, how would
you choose your partner?
Source: www.coldstonecreamery.com
673
L E S S O N
Forming a Partnership
23-1
PA R T N E R S H I P S
TechKnow Consulting, the business described in Part 1, ership, reports and financial records of the business are
is a proprietorship, a small business owned by one person. kept separate from the personal records of the partners.
Hobby Shack, Inc., and Restaurant Supply Co., the busi- [CONCEPT: Business Entity]
nesses described in Parts 2 and 3, are organized as corpora- A partnership prepares four financial statements. It
tions. Businesses that require the skills and capital of more prepares an income statement and a balance sheet similar
than one person, but that do not wish to be organized to those used by a proprietorship or corporation. It also
as a corporation, may choose another form of business. prepares two additional financial statements. One state-
A business in which two or more persons combine their ment reports the distribution of net income or net loss for
assets and skills is called a partnership. Each member of a each partner. The other statement reports the changes in
partnership is called a partner. As in other forms of own- owners’ equity for the fiscal period.
T H E B U S I N E S S G I F T PA K CO M PA N Y
Sawyer Hess and Kendra Sullivan own a partnership called The partners do all the work in the company; there are
GiftPak Company. The business purchases gourmet foods no employees. Partners are not employees, and the money
and novelty gifts and packages these items into gift boxes that partners receive from a partnership is not consid-
and baskets. The company accepts orders through its web ered salaries. Therefore, GiftPak Company does not need
site and has customers in other countries. accounts for recording salaries and payroll taxes.
CHARACTER COUNTS
S e t t i n g t h e To n e a t t h e To p
A certain company’s code of The employees at the top of a company—managers,
conduct prohibits employees officers, and directors—must provide leadership in mak-
from accepting gifts, favors, ing ethical decisions. Among the many ways companies
or entertainment that would can “set the tone at the top” is to have a special code of
PHOTO: BLEND IMAGES/GETTY IMAGES
influence their sound business conduct for members of the board of directors.
decisions. Despite the rule, the
company president is known to Instructions
accept lavish gifts from suppliers. Access the Code of Conduct for Kellogg Company Directors
Do you think the employees will be at http://investor.kelloggs.com. Determine whether direc-
motivated to adhere to the code of tors can own stock in companies that do business with
conduct? Kellogg Company.
674 Chapter 23 Accounting for Partnerships
PA R T N E R S H I P AG R E E M E N T S
PARTNERSHIP AGREEMENT
THIS CONTRACT is made and entered into this thirty-first day of December, 20--, by and between Sawyer
Hess and Kendra Sullivan, of Glendive, MT.
WITNESSETH: That the said parties have this date formed a partnership to engage in and conduct a business
under the following stipulations which are a part of this contract. The partnership will begin operation January 1,
20--.
FIRST: The business shall be conducted under the name of GiftPak Company, located initially at 234 North
River Avenue, Glendive, MT 59330.
SECOND: The investment of each partner is: Sawyer Hess: Cash of $15,000. Kendra Sullivan: Cash of
$10,000 and office equipment with a value of $5,000; total investment, $15,000.
THIRD: Both partners are to (a) participate in all general policy-making decisions, (b) devote full time and
attention to the partnership business, and (c) engage in no other business enterprise without the written consent of
the other partner. Mr. Hess is to be general manager of the business’s operations.
FOURTH: Neither partner is to become a surety or bonding agent for anyone without the written consent of
the other partner.
FIFTH: The partners will share equally in all profits and losses of the partnership.
SIXTH: No partner is to withdraw assets without the other partner’s written consent.
SEVENTH: All partnership transactions are to be recorded in accordance with standard and generally
accepted accounting procedures and concepts. The partnership records are to be open at all times for inspection by
either partner.
EIGHTH: In case of either partner’s death or legal disability, the equity of the partners is to be determined as
of the time of the death or disability of the one partner. The continuing partner is to have first option to buy the
deceased/disabled partner’s equity at recorded book value.
NINTH: This partnership agreement is to continue indefinitely unless (a) terminated by death of one partner,
(b) terminated by either partner giving the other partner written notice at least ninety (90) days prior to the
termination date, or (c) terminated by written mutual agreement signed by both partners.
TENTH: At the termination of this partnership agreement, the partnership's assets, after all liabilities are paid,
will be distributed according to the balance in partners’ capital accounts.
IN WITNESS WHEREOF, the parties to this contract have set their hands and seals on the date and year
written.
Signed: Sawyer Hess (Seal) Date December 31, 20--
Signed: Kendra Sullivan (Seal) Date December 31, 20--
A written agreement setting forth the conditions under name of the business and the partners, the investments of
which a partnership is to operate is called a partnership each partner, the duties and responsibilities of each part-
agreement. Legally, a partnership agreement may be either ner, how profits and losses are to be divided, what happens
written or oral. However, a written agreement may limit if a partner dies, how the partnership is to be dissolved,
misunderstandings in the future; therefore, a partnership and the duration of the agreement.
agreement should be in writing. It should include the
Forming a Partnership Lesson 23-1 675
INITIAL INVESTMENTS BY OWNERS
1. Write 2. Write the 3. Write the 4. Write the debit 5. Write the debit
the date. account titles. receipt numbers. and credit amounts. to Cash.
CASH RECEIPTS JOURNAL PAGE 1
1 2 3 4 5 6
1 2 3
DATE ACCOUNT TITLE
DOC. POST. 4 GENERAL 4 ACCOUNTS SALES SALES 5 CASH
NO. REF. RECEIVABLE CREDIT DISCOUNT DEBIT
DEBIT CREDIT CREDIT DEBIT
20--
1 Jan. 1 Sawyer Hess, Capital R1 15 0 0 0 00 15 0 0 0 00 1
2 1 Office Equipment R2 5 0 0 0 00 10 0 0 0 00 2
3 Kendra Sullivan, Capital 15 0 0 0 00 3
4 4
GiftPak’s partnership agreement calls for Sawyer Hess
to contribute cash and for Kendra Sullivan to contrib- January 1. Received cash, $10,000.00, and office
ute cash and office equipment to the new partnership. equipment valued at $5,000.00, from partner, Kendra
A separate journal entry is made for each partner’s initial Sullivan, as an initial investment. Receipt No. 2.
investment.
Cash
January 1. Received cash from partner, Sawyer Hess, 10,000.00
as an initial investment, $15,000.00. Receipt No. 1. Office Equipment
5,000.00
Cash
Kendra Sullivan, Capital
15,000.00
15,000.00
Sawyer Hess, Capital
15,000.00
The asset account, Cash, increases by a debit, $10,000.00.
The asset account, Office Equipment, increases by a debit,
The asset account, Cash, increases by a debit, $5,000.00. The owner’s capital account, Kendra Sullivan,
$15,000.00. The owner’s capital account, Sawyer Hess, Capital, increases by a credit, $15,000.00.
Capital, increases by a credit, $15,000.00.
S T E P S JOURNALIZING RECEIPT OF PARTNERS’ INITIAL INVESTMENTS
1 Write the date, 20--, Jan. 1, in the Date column.
2 Write the account titles in the Account Title column. For Sawyer Hess’s investment, write the account to be credited,
Sawyer Hess, Capital. For Kendra Sullivan’s investment, write the account to be debited, Office Equipment. Also write
the account to be credited, Kendra Sullivan, Capital.
3 Write the receipt numbers, R1 and R2, in the Doc. No. column.
4 Write the amounts in the General Debit and Credit columns. The only credit amount for Sawyer Hess is $15,000 for
the cash investment. For Kendra Sullivan’s investment, the debit amount is $5,000.00 for the office equipment. The
credit amount for Kendra Sullivan is $15,000.00 for the total investment.
5 Write the debits to Cash, $15,000.00 and $10,000.00, in the Cash Debit column.
676 Chapter 23 Accounting for Partnerships
W I T H D R AWA L O F C A S H BY PA R T N E R
CASH PAYMENTS JOURNAL PAGE 1
1 2 3 4 5
CK. POST. GENERAL ACCOUNTS PURCHASES CASH
DATE ACCOUNT TITLE NO. REF. PAYABLE DISCOUNT
DEBIT CREDIT CREDIT
DEBIT CREDIT
13 15 Kendra Sullivan, Drawing 10 5 0 0 00 5 0 0 00 13
14 1 2 3 4 5 14
15 15
1. Write 2. Write the 3. Write the 4. Write the 5. Write the
the date. account debited. check number. debit amount. credit amount.
During a fiscal period, partners may take assets out of
the partnership in anticipation of the net income for Kendra Sullivan, Drawing
the period. As in a proprietorship, assets taken out of a 500.00
business for the personal use of an owner are known as
withdrawals. The two assets generally taken out of a mer- Cash
chandising business are cash and merchandise. The part- 500.00
nership agreement may limit the amount of assets that
may be withdrawn.
Withdrawals reduce the amount of a business’s capital.
The owner’s drawing account, Kendra Sullivan, Draw-
The account titles of the partners’ drawing accounts are
ing, has a normal debit balance because withdrawals
Sawyer Hess, Drawing and Kendra Sullivan, Drawing. Since
decrease owner’s equity. Therefore, increases in withdraw-
capital accounts have credit balances, partners’ drawing
als are recorded by a debit, $500.00. The asset account,
accounts have normal debit balances. Therefore, the draw-
Cash, decreases by a credit, $500.00.
ing accounts increase by a debit and decrease by a credit,
Withdrawals could be recorded as debits directly to
as shown in the T accounts.
the partners’ capital accounts. However, withdrawals
are normally recorded in separate accounts so that the
total amounts are easily determined for each accounting
Partner’s Drawing Account
period.
Debit Credit
Decrease
JOURNALIZING
Increase
WITHDRAWALS
S T E P S
OF CASH BY
PARTNERS
1 Write the date, 15, in the Date column.
January 15. Kendra Sullivan, partner, withdrew
cash for personal use, $500.00. Check No. 10. 2 Write the title of the account debited, Kendra
Sullivan, Drawing, in the Account Title column.
3 Write the check number, 10, in the Ck. No.
column.
4 Write the debit amount, $500.00, in the General
Debit column.
5 Write the credit amount, $500.00, in the Cash
Credit column.
Forming a Partnership Lesson 23-1 677
W I T H D R AWA L O F M E R C H A N D I S E BY PA R T N E R
3. Write the memorandum number.
GENERAL JOURNAL PAGE 1
1. Write
the date. DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
20--
11 Jan. 15 Sawyer Hess, Drawing 2 M1 3 2 0 0 00 1
2 Purchases 4 2 0 0 00 2
6 6. Write the
3 5 3
credit amount.
5. Write the 2. Write the 4. Write the
account title. account title. debit amount.
A partner usually withdraws cash for personal use. How-
ever, a partner may also withdraw merchandise for per- Sawyer Hess, Drawing
sonal use. This merchandise withdrawal increases the 200.00
account balance of Sawyer Hess, Drawing and decreases
the purchases account balance. Purchases
200.00
January 15. Sawyer Hess, partner,
withdrew merchandise for personal use, Sawyer Hess’s drawing account increases by a debit,
$200.00. Memorandum No. 1. $200.00. The cost account, Purchases, decreases by a
credit, $200.00. This transaction is recorded in the gen-
eral journal.
S T E P S JOURNALIZING WITHDRAWALS OF MERCHANDISE BY PARTNERS
1 Write the date, 20--, Jan. 15, in the Date column. S T OC K B Y T E / G E T T Y I M A G
ES
2 Write the account title, Sawyer Hess, Drawing, in the Account
Title column.
3 Write the memorandum number, M1, in the Doc. No.
column.
4 Write the debit amount, $200.00, in the Debit
column on the same line as the account
title.
5 On the next line, indented about one
centimeter, write the account title,
Purchases, in the Account Title
column.
6 Write the credit amount,
$200.00, in the Credit column
on the same line as the
account title.
678 Chapter 23 Accounting for Partnerships
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
TERMS REVIEW 1. What two financial statements prepared by a partnership are similar to
those prepared by a proprietorship?
partnership 2. List at least three items that should be included in a partnership
agreement.
partner 3. What accounts are debited and credited when a partner withdraws cash
partnership agreement from the partnership?
WORK TOGETHER 231
Journalizing partners’ investments and withdrawals
Cash receipts, cash payments, and general journals are given in the Working Papers. Your instructor will guide you
through the following examples.
B and B Diving completed the following transactions during March of the current year.
Transactions:
Mar. 1. Received cash of $22,000.00 and office supplies valued at $3,000.00 from partner, Robert Billings, as an
initial investment. Receipt No. 1.
1. Received cash from partner, Susan Billings, as an initial investment, $25,000.00. Receipt No. 2.
30. Susan Billings, partner, withdrew cash for personal use, $600.00. Check No. 23.
30. Robert Billings, partner, withdrew merchandise for personal use, $600.00. Memorandum No. 4.
1. Use page 1 of a cash receipts journal. Journalize the investments on March 1.
2. Use page 1 of a cash payments journal and page 3 of a general journal. Journalize the withdrawals on March 30.
ON YOUR OWN 231
Journalizing partners’ investments and withdrawals
Cash receipts, cash payments, and general journals are given in the Working Papers. Work this problem
independently.
Northern Lights completed the following transactions during September of the current year.
Transactions:
Sept. 1. Received cash of $45,000.00 and inventory valued at $5,000.00 from partner, Loane Le, as an initial
investment. Receipt No. 1.
1. Received cash from partner, Wheatonia Makebu, as an initial investment, $30,000.00 Receipt No. 2.
30. Loane Le, partner, withdrew cash for personal use, $1,000.00. Check No. 65.
30. Wheatonia Makebu, partner, withdrew merchandise for personal use, $1,500.00. Memorandum No. 6.
1. Use page 1 of a cash receipts journal. Journalize the investments on September 1.
2. Use page 1 of a cash payments journal and page 9 of a general journal. Journalize the withdrawals on
September 30.
Forming a Partnership Lesson 23-1 679
L E S S O N Distribution of Net Income
and Owners’ Equity
23-2 Statements
D I S T R I B U T I O N O F N E T I N C O M E S TAT E M E N T
GiftPak Company
1. Heading 3. First Partner’s
1 Distribution of Net Income Statement
Share of Net
For Month Ended January 31, 20--
2. First Partner’s Income
Name
2 Sawyer Hess
50.0% of Net Income 3 6 7 5 0 25 5. Second Partner’s
4. Second Partner’s
Name 4 Kendra Sullivan Share of Net
50.0% of Net Income 5 6 7 5 0 25 Income
6 Net Income 13 5 0 0 50 7
6. Words
Net Income 8
7. Total
8. Double Lines Net Income
A partnership’s net income or net loss may be divided in distribution to partners is called a distribution of net
any way agreed upon by the partners in their partnership income statement.
agreement. Sawyer Hess and Kendra Sullivan, partners in The income statement for a partnership is prepared in
GiftPak Company, agreed to share net income or net loss the same way as an income statement for a proprietorship,
equally. described in Chapter 7. GiftPak Company’s income state-
A partnership’s distribution of net income or net loss is ment shows a net income of $13,500.50 for the month
usually shown on a separate financial statement. A part- ended January 31. This net income is used to prepare the
nership financial statement showing net income or loss distribution of net income statement.
S T E P S PREPARING A DISTRIBUTION OF NET INCOME STATEMENT
1 Write the heading of the distribution of net income statement on three lines.
2 Write one partner’s name, Sawyer Hess, on the first line at the extreme left.
3 Indent about one centimeter on the next line, and write Sawyer Hess’s share of net income as a percentage, 50.0%
of Net Income. Write Mr. Hess’s share of net income, $6,750.25 (50.0% ⫻ $13,500.50), in the amount column on the
same line.
4 Write the other partner’s name, Kendra Sullivan, on the next line.
5 Indent about one centimeter on the next line, and write Kendra Sullivan’s share of net income as a percentage,
50.0% of Net Income. Write Ms. Sullivan’s share of net income, $6,750.25 (50.0% ⫻ $13,500.50), in the amount column
on the same line.
6 Write Net Income on the next line at the extreme left of the wide column.
7 Add the distribution of net income and write the total amount, $13,500.50, in the amount column. Verify accuracy
by comparing the total amount, $13,500.50, with the net income reported on the income statement, $13,500.50.
The two amounts must be the same.
8 Rule double lines across the amount column to show that the distribution of net income statement has been
verified as correct.
680 Chapter 23 Accounting for Partnerships
D I S T R I B U T I O N O F N E T I N C O M E S TAT E M E N T
WITH UNEQUAL DISTRIBUTION OF EARNINGS
Custom Cabinets
Distribution of Net Income Statement
For Year Ended December 31, 20--
Beth Castillo
60.0% of Net Income 38 5 2 0 00
Jana Kenyon
40.0% of Net Income 25 6 8 0 00
Net Income 64 2 0 0 00
Regardless of how earnings are shared, the steps in prepar- ness than Ms. Kenyon, the partners agree to share net
ing a distribution of net income statement are the same. income or loss unequally. Ms. Castillo gets 60.0% of net
The only difference is the description of how the earnings income or loss. Ms. Kenyon gets 40.0% of net income
are to be shared by the partners. or loss. With a net income of $64,200.00, Ms. Castillo
Beth Castillo and Jana Kenyon are partners in a busi- receives 60.0%, or $38,520.00. Ms. Kenyon receives
ness. Because Ms. Castillo spends more time in the busi- 40.0%, or $25,680.00.
C U LT U R A L D I V E R S I T Y
Business Culture and
A c c o u nt a n c y i n R u s s i a
The changeover of Russia’s economy from socialism to market economies. Regulations
free enterprise has strongly influenced Russian business are being written that include
culture. Employees, who for generations have depended precise definitions for
on the government to fulfill their needs, now have the accounting terms. Regu-
opportunity to get ahead individually. Russian business lations on the qualifica-
culture—the way Russians do business—is changing tions of auditors also are
gradually. An example of this change can be seen in the being developed.
accounting profession.
In the emerging Russian market economy, the person Critical Thinking
performing the role of accountant is called an “econo-
PHOTO: NATIONAL GEOGRAPHIC/GETTY IMAGES
1. What are the advan-
mist.” These employees have a degree in “economics” and tages if the accounting
years of experience. Employees performing the role of standards in Russia are
“bookkeeper” have lower status and lower pay. The chief similar to those in the rest
bookkeeper, however, has a prominent position because of the world?
of his or her responsibility for the accuracy of financial
2. What factors might require that
statements.
some accounting standards differ from
The accounting profession in Russia is devising a regula-
those in other countries?
tory framework based upon similar frameworks in existing
Distribution of Net Income and Owners’ Equity Statements Lesson 23-2 681
P A R T N E R S ’ C A P I TA L A N D D R A W I N G A C C O U N T S
ACCOUNT Sawyer Hess, Capital ACCOUNT NO. 3110
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Jan. 1 CR1 15 0 0 0 00 15 0 0 0 00
ACCOUNT Sawyer Hess, Drawing ACCOUNT NO. 3120
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Jan. 15 G1 2 0 0 00 2 0 0 00
ACCOUNT Kendra Sullivan, Capital ACCOUNT NO. 3130
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Jan. 1 CR1 15 0 0 0 00 15 0 0 0 00
ACCOUNT Kendra Sullivan, Drawing ACCOUNT NO. 3140
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20--
Jan. 15 CP1 5 0 0 00 5 0 0 00
The amount of net income earned is important to busi- ment is obtained from the distribution of net income
ness owners. Owners are also interested in changes that statement, shown on page 680, and the general ledger
occur in owners’ equity during a fiscal period. A finan- capital and drawing accounts shown above. The dis-
cial statement that summarizes the changes in owners’ tribution of net income statement shows each partner’s
equity during a fiscal period is called an owners’ equity share of net income or net loss. Three kinds of informa-
statement. Business owners can review an owners’ equity tion are obtained from each partner’s capital and drawing
statement to determine if owners’ equity is increasing or account:
decreasing and what is causing the change. Three factors
(1) beginning capital amount,
can change owners’ equity: (1) additional investments, (2)
(2) any additional investments made during the fiscal
withdrawals, and (3) net income or net loss.
period, and
An owners’ equity statement shows information about
(3) each partner’s withdrawal of assets during the fiscal
changes in each partner’s capital during a fiscal period.
period.
Information needed to prepare an owners’ equity state-
682 Chapter 23 Accounting for Partnerships
O W N E R S ’ E Q U I T Y S TAT E M E N T
1 GiftPak Company
1. Heading
Owners’ Equity Statement
For Month Ended January 31, 20--
2. First Partner’s
Name 2 Sawyer Hess
Capital, January 1, 20-- 15 0 0 0 00
Share of Net Income 6 7 5 0 25
3. First Partner’s Less Withdrawals 2 0 0 00
Ending Capital Net Increase in Capital 6 5 5 0 25
3 Capital, January 31, 20-- 21 5 5 0 25
4. Second Partner’s
4 Kendra Sullivan
Name
Capital, January 1, 20-- 15 0 0 0 00
Share of Net Income 6 7 5 0 25
Less Withdrawals 5 0 0 00
Net Increase in Capital 6 2 5 0 25 7. Double
5. Second Partner’s Lines
5 Capital, January 31, 20-- 21 2 5 0 25
Ending Capital
Total Owners’ Equity, January 31, 20-- 42 8 0 0 50 7
6
6. Total Owners’
Equity
Neither Sawyer Hess nor Kendra Sullivan invested any Some businesses include the owners’ equity statement
additional capital during the month ended January 31 information as part of the balance sheet. An example of
after the initial investments on January 1. Both partners this method of reporting changes in owner’s equity is
withdrew either cash or merchandise during the month. shown in Chapter 7.
S T E P S PREPARING AN OWNERS’ EQUITY STATEMENT
1 Write the heading of the owners’ equity statement on three lines.
2 Write the name Sawyer Hess on the first line at the extreme left.
3 Calculate the net increase in capital and ending capital amount for Sawyer Hess.
a. Indent about one centimeter on the next line, and write Capital, January 1, 20--. Write the amount
$15,000.00 in the second amount column. (This amount is obtained from the capital account.)
b. Indent about one centimeter on the next line, and write Share of Net Income. Write the amount $6,750.25 in
the first amount column. (This amount is obtained from the distribution of net income statement.)
c. Indent about one centimeter on the next line, and write Less Withdrawals. Write the amount $200.00 in the
first amount column. (This amount is obtained from the drawing account.)
d. Indent about one centimeter on the next line, and write Net Increase in Capital. Write the amount $6,550.25
in the second amount column. ($6,750.25 ⫺ $200.00 ⫽ $6,550.25)
e. Indent about one centimeter on the next line, and write Capital, January 31, 20--. Write the amount
$21,550.25 in the third amount column. ($15,000.00 ⫹ $6,550.25 ⫽ $21,550.25)
4 Write the name Kendra Sullivan on the next line at the extreme left of the wide column.
5 Calculate the net increase in capital and ending capital amount for Kendra Sullivan. Follow Step 3.
6 Write Total Owners’ Equity, January 31, 20-- on the next line at the extreme left of the wide column. Write the
amount $42,800.50 in the third amount column.
7 Rule double lines across the three amount columns to show that the totals have been verified as correct.
Distribution of Net Income and Owners’ Equity Statements Lesson 23-2 683
O W N E R S ’ E Q U I T Y S TAT E M E N T W I T H A N
ADDITIONAL INVESTMENT AND A NET LOSS
Cloth Circuit
Owners’ Equity Statement
For Year Ended December 31, 20--
Mark Gavin
Capital, January 1, 20-- 125 2 0 0 00
Plus Additional Investment 12 0 0 0 00
Total 137 2 0 0 00
Share of Net Loss 2 8 4 0 00
Plus Withdrawals 17 7 6 0 00
Net Decrease in Capital 20 6 0 0 00
Capital, December 31, 20-- 116 6 0 0 00
Judy Oliver
Capital, January 1, 20-- 123 4 0 0 00
Plus Additional Investment 12 0 0 0 00
Total 135 4 0 0 00
Share of Net Loss 2 8 4 0 00
Plus Withdrawals 18 1 2 0 00
Net Decrease in Capital 20 9 6 0 00
Capital, December 31, 20-- 114 4 4 0 00
Total Owners’ Equity, December 31, 20-- 231 0 4 0 00
On December 31, the capital accounts of Mark Gavin and agreed to share net income or net loss equally. The owners’
Judy Oliver showed additional investments of $12,000.00 equity statement above shows the net loss as a deduction
each. Also, the income statement for their company, Cloth from the owners’ capital.
Circuit, showed a net loss of $5,680.00. The partners
BA L A N C E S H E E T FO R A PA R T N E R S H I P
GiftPak Company
Balance Sheet
January 31, 20--
Total Liabilities 10 2 7 6 11
Owners’ Equity
Sawyer Hess, Capital 21 5 5 0 25
Kendra Sullivan, Capital 21 2 5 0 25
Total Owners’ Equity 42 8 0 0 50
Total Liabilities and Owners’ Equity 53 0 7 6 61
The asset and liability sections of a balance sheet for a
partnership are prepared in the same way as the asset and
liability sections of a balance sheet for a proprietorship. F O R YO U R I N F O R M AT I O N
The only section that is different is the equity section. The F Y I
equity section lists the capital account for each partner.
The balances of these two accounts are added together Partnerships must file tax
returns with the IRS to report
and listed as Total Owners’ Equity. Total Liabilities and
how income was divided
Total Owners’ Equity are added together to determine among the partners.
Total Liabilities and Owners’ Equity.
684 Chapter 23 Accounting for Partnerships
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
TERMS REVIEW 1. What information used to prepare an owners’ equity statement is
obtained from the distribution of net income statement?
distribution of net 2. What information used to prepare an owners’ equity statement is
income statement obtained from the partners’ capital and drawing accounts?
owners’ equity statement 3. What is the procedure for calculating an owner’s end-of-year capital?
WORK TOGETHER 232
Preparing distribution of net income and owners’ equity statements
B and B Diving is a partnership owned by Susan and Robert Billings. Information from B and B’s worksheet and
income statement is given below. Forms for completing these problems are given in the Working Papers. Your
instructor will guide you through the following examples.
Net Income for the month ended March 31 $29,600.00
Robert Billings, Capital March 1 balance 25,000.00
Susan Billings, Capital March 1 balance 25,000.00
Robert Billings, Drawing March 31 balance 600.00
Susan Billings, Drawing March 31 balance 600.00
1. Prepare a distribution of net income statement for B and B Diving. Net income or loss is to be shared equally.
2. Using the balances of the general ledger capital and drawing accounts from the work sheet, prepare an owners’
equity statement for B and B Diving. No additional investments were made.
ON YOUR OWN 232
Preparing distribution of net income and owners’ equity statements
Northern Lights is a partnership owned by Loane Le and Wheatonia Makebu. Information from Northern Lights’
worksheet and income statement is given below. Forms for completing these problems are given in the Working
Papers. Work this problem independently.
Net Income for the month ended September 30 $58,800.00
Leone Le, Capital September 1 balance 35,000.00
Wheatonia Makebu, Capital September 1 balance 28,000.00
Leone Le, Drawing September 30 balance 4,500.00
Wheatonia Makebu, Drawing September 30 balance 2,600.00
1. Prepare a distribution of net income statement for Northern Lights. Net income or loss is to be distributed 60% to
Mr. Le and 40% to Ms. Makebu.
2. Using the balances of the general ledger capital and drawing accounts from the work sheet, prepare an owners’
equity statement for Northern Lights. No additional investments were made.
Distribution of Net Income and Owners’ Equity Statements Lesson 23-2 685
L E S S O N
Dissolving a Partnership
23-3
A C C O U N T B A L A N C E S B E F O R E R E A L I Z AT I O N
Cash Accounts Payable
21,000.00 4,000.00
Supplies Adam Walker, Capital
1,500.00 18,000.00
Truck Shirley Jeter, Capital
20,000.00 12,500.00
Accumulated Depreciation—Truck
8,000.00
If a partnership goes out of business, its assets are distrib- ing cash is distributed to the partners according to each
uted to the creditors and partners. The process of paying partner’s total equity.
a partnership’s liabilities and distributing remaining assets On July 31, Adam Walker and Shirley Jeter liquidated
to the partners is called liquidation of a partnership. their partnership. At that time, financial statements were
Cash received from the sale of assets during liquidation prepared and adjusting and closing entries were journal-
of a partnership is called realization. Typically, when a ized and posted. After the end-of-fiscal-period work was
partnership is liquidated, the noncash assets are sold, and completed, the partnership had account balances as shown
the available cash is used to pay the creditors. Any remain- in the T accounts above.
G A I N O N R E A L I Z AT I O N
Value of Asset Book Value of Gain on
ⴚ ⴝ 1. Calculate the
Received Asset Sold Realization
gain.
Cost $20,000.00 1
Accum. Depr. 8,000.00
Cash $13,000.00 ⫺ Book Value $12,000.00 ⫽ $1,000.00 2. Record the
entry.
2
CASH RECEIPTS JOURNAL PAGE 15
1 2 3 4 5 6
DOC. POST. GENERAL ACCOUNTS SALES SALES CASH
DATE ACCOUNT TITLE NO. REF. RECEIVABLE CREDIT DISCOUNT
DEBIT CREDIT DEBIT
CREDIT CREDIT
20--
1 Aug. 1 Accum. Depr.—Truck R316 8 0 0 0 00 13 0 0 0 00 1
2 Truck 20 0 0 0 00 2
3 Loss and Gain on Realization 1 0 0 0 00 3
686 Chapter 23 Accounting for Partnerships
R E C O G N I Z I N G A G A I N O N R E A L I Z AT I O N
Noncash assets might be sold for more than the recorded The partnership’s gain on the sale of the truck is calcu-
book value. When this happens, the amount received in lated as shown.
excess of the book value is recorded as a gain on realiza-
tion. The gain is recorded as a credit in an account titled
Loss and Gain on Realization. RECOGNIZING
S T E P S A GAIN ON
REALIZATION
August 1, 20--. Received cash from sale of
truck, $13,000.00: original cost, $20,000.00; 1 Calculate the gain on the sale of the asset,
total accumulated depreciation recorded $1,000.00 ($13,000.00 cash received ⫺
to date, $8,000.00. Receipt No. 316. $12,000.00 book value of asset).
2 Record the entry in the cash receipts journal,
as shown on the previous page.
L O S S O N R E A L I Z AT I O N
1. Calculate
Value of Asset Book Value of Loss on
ⴚ ⴝ the loss.
Received Asset Sold Realization 1
Cash $1,100.00 ⫺ Supplies $1,500.00 ⫽ $(400.00)
2. Record the
entry.
2
CASH RECEIPTS JOURNAL PAGE 15
1 2 3 4 5 6
DOC. POST. GENERAL ACCOUNTS SALES SALES CASH
DATE ACCOUNT TITLE RECEIVABLE DISCOUNT
NO. REF. DEBIT CREDIT CREDIT DEBIT
CREDIT CREDIT
4 1 Loss and Gain on Realization R317 4 0 0 00 1 1 0 0 00 4
5 Supplies 1 5 0 0 00 5
Sometimes during liquidation, the sale of an asset brings
RECOGNIZING
in less cash than the recorded book value.
S T E P S A LOSS ON
REALIZATION
August 1. Received cash from sale of
supplies, $1,100.00; balance of supplies 1 Calculate the loss on the sale of the asset,
$400.00 ($1,500.00 book value of supplies ⫺
account, $1,500.00. Receipt No. 317.
$1,100.00 cash received).
2 Record the entry in the
The journal entry to record this transaction is shown. cash receipts journal.
F O R YO U R I N F O R M AT I O N
After both liquidation entries have been journalized, the
credit balance of Loss and Gain on Realization, $600.00, is F Y I
the amount received in excess of the value of the truck and A partnership usually tries to
supplies combined. sell the business before it begins
the process of liquidation.
Dissolving a Partnership Lesson 23-3 687
L I Q U I D AT I N G L I A B I L I T I E S
CASH PAYMENTS JOURNAL PAGE 15
1 2 3 4 5
CK. POST. GENERAL ACCOUNTS PURCHASES CASH
DATE ACCOUNT TITLE NO. REF. PAYABLE DISCOUNT CREDIT
DEBIT CREDIT DEBIT CREDIT
⻫
20--
1 Aug. 4 422 4 0 0 0 00 4 0 0 0 00 1
The partnership’s available cash is used to pay creditors.
The entry is recorded in the cash payments journal as August 4, 20--. Paid cash to all creditors for the
shown. amounts owed, $4,000.00. Check No. 422.
A C C O U N T B A L A N C E S A F T E R L I Q U I D AT I O N O F
N O N C A S H A S S E T S A N D P AY M E N T O F L I A B I L I T I E S
Cash Shirley Jeter, Capital
Bal. 31,100.00 Bal. 12,500.00
Adam Walker, Capital Loss and Gain on Realization
Bal. 18,000.00 Bal. 600.00
When this transaction has been journalized and posted,
the partnership has only four general ledger accounts with
balances as shown.
BUSINESS STRUCTURES
Li mi t e d Li a bi l i t y Pa r t n e r s h i ps
A partnership that combines the of the personal assets of the members are subject to the
advantages of the partnership and claims of business creditors.
the corporation, while avoiding their The LLP follows partnership rules for dissolution. If one
disadvantages, is called a limited member drops out, all others must formally agree to con-
liability partnership (LLP). At least tinue the business.
two members, or partners, are neces- Many major accounting firms have changed to the LLP
sary to form an LLP. The primary advan- form of business organization in an effort to limit the costs
PHOTO: PHOTODISC/GETTY IMAGES
tage of the LLP is that it does not pay associated with malpractice liability.
separate income tax. LLP partners allo-
cate profits and losses among themselves, Critical Thinking
according to the partnership agreement. What other professions might organize as LLPs to limit the
All members in the LLP have “limited” liability costs associated with malpractice liability?
for the debts of the business. This means that none
688 Chapter 23 Accounting for Partnerships
DISTRIBUTING LOSS OR GAIN ON
R E A L I Z AT I O N T O P A R T N E R S
Balance of Fixed Share of the
ⴛ ⴝ 1. Calculate each
Loss and Gain Percentage Balance of Loss and
partner’s share
on Realization Gain on Realization 1 of gain or loss.
Walker $600.00 ⫻ 60% ⫽ $360.00
Jeter $600.00 ⫻ 40% ⫽ 240.00
Total $600.00
2. Record entry to
2 distribute gain
or loss.
GENERAL JOURNAL PAGE 8
1 2
DOC. POST.
DATE ACCOUNT TITLE NO. REF. DEBIT CREDIT
20--
1 Aug. 6 Loss and Gain on Realization M412 6 0 0 00 1
2 Adam Walker, Capital 3 6 0 00 2
3 Shirley Jeter, Capital 2 4 0 00 3
When all creditors have been paid, the balance of Loss and
Gain on Realization is distributed to the partners. A credit August 6, 20--. Recorded distribution of gain
balance indicates a gain on realization. A debit balance on realization: to Adam Walker, $360.00; to
indicates a loss. The distribution is based on the method Shirley Jeter, $240.00. Memorandum No. 412.
of distributing net income or net loss as stated in the part-
nership agreement. The percentages for the Walker and
Jeter partnership are Adam Walker, 60%, and Shirley If a loss on realization is distributed to the partners, Loss
Jeter, 40%. The distribution of the balance of Loss and and Gain on Realization is credited to close the account.
Gain on Realization is calculated as shown. Each partner’s capital account is debited for the partner’s
share of the loss on realization.
D I S T R I B U T I N G R E M A I N I N G C A S H TO PA R T N E R S
CASH PAYMENTS JOURNAL PAGE 15
1 2 3 4 5
CK. POST. GENERAL ACCOUNTS PURCHASES CASH
DATE ACCOUNT TITLE NO. REF. PAYABLE DISCOUNT
DEBIT CREDIT CREDIT
DEBIT CREDIT
2 6 Adam Walker, Capital 423 18 3 6 0 00 31 1 0 0 00 2
3 Shirley Jeter, Capital 424 12 7 4 0 00 3
Any remaining cash is distributed to the partners. The cash
is distributed according to each partner’s capital account August 6. Recorded final distribution of remaining
balance, regardless of the method used to distribute net cash to partners: to Adam Walker, $18,360.00; to
income or net loss. Shirley Jeter, $12,740.00. Check Nos. 423 and 424.
After this journal entry is journalized (as shown) and
posted, all of the partnership’s general ledger accounts will
have zero balances. The partnership is liquidated.
Dissolving a Partnership Lesson 23-3 689
End of Lesson
REVIEW TERMS REVIEW
AUDIT YOUR UNDERSTANDING liquidation of a
partnership
1. What is meant by the term “realization”? realization
2. What accounts are debited when distributing remaining cash to part- limited liability
ners during liquidation? partnership (LLP)
WORK TOGETHER 233
Liquidation of a partnership
Jason Edson and Peggy Karam agreed to liquidate their partnership on April 30 of the current year. On that date,
after financial statements were prepared and closing entries were posted, the general ledger accounts had the
balances shown in the Working Papers.
A cash receipts journal, page 6, a cash payments journal, page 8, and a general journal, page 4, are provided in the
Working Papers. Your instructor will guide you through the following examples.
Transactions:
May 1. Received cash from sale of office equipment, $6,000.00. R86.
1. Received cash from sale of supplies, $950.00. R87.
3. Received cash from sale of truck, $7,500.00. R88.
5. Paid cash to all creditors for amounts owed. C116.
6. Distributed loss or gain to Jason Edson, 60%; to Peggy Karam, 40%. M21.
6. Distributed remaining cash to partners. C117 and C118.
1. Journalize the transactions.
ON YOUR OWN 233
Liquidation of a partnership
Daska Madura and Lawrence Neary agreed to liquidate their partnership on May 31 of the current year. On that
date, after financial statements were prepared and closing entries were posted, the general ledger accounts had
the balances shown in the Working Papers.
A cash receipts journal, page 8, a cash payments journal, page 10, and a general journal, page 5, are provided in the
Working Papers. Work this problem independently.
Transactions:
June 1. Received cash from sale of office equipment, $800.00. R96.
1. Received cash from sale of supplies. $1,600.00. R97.
3. Received cash from sale of truck, $5,400.00. R98.
5. Paid cash to all creditors for amounts owed. C125.
6. Distributed loss or gain to Daska Madura, 60%; to Lawrence Neary, 40%. M29.
6. Distributed remaining cash to partners. C126 and C127.
1. Journalize the transactions.
690 Chapter 23 Accounting for Partnerships
SUMMARY
After completing this chapter, you can: 4. Calculate the distribution of partnership
earnings.
1. Define accounting terms related to forming,
dissolving, and distributing the earnings of a 5. Prepare a distribution of net income statement
partnership. for a business organized as a partnership.
2. Identify accounting concepts and practices 6. Prepare an owners’ equity statement for a busi-
related to forming, dissolving, and distributing ness organized as a partnership.
the earnings of a partnership.
3. Journalize entries related to forming, dissolving,
and distributing the earnings of a partnership.
EXPLORE ACCOUNTING
B u s i n e s s For m s
Properly designed business forms can accom- customer’s signature confirms the delivery. If
plish several important purposes for a com- the merchandise is delivered by a freight
pany. Business forms may (1) initiate action, company, the freight company normally
(2) exercise control, (3) provide essential requires a signature to verify delivery.
accounting information, and (4) provide 3. Provide essential accounting informa-
information to multiple users. Consider tion. To account for the merchandise sold,
how a sales invoice accomplishes these the accounting department needs the
purposes. description, unit price, and total amounts
1. Initiate action. The major action initiated in a of merchandise; name, address, and customer
sales invoice is the collection of the amount owed number; and invoice date and terms of sale.
by a customer for merchandise received. Information 4. Provide information to multiple users. Several individu-
needed to accomplish this action is the customer’s als or departments need some or all of the informa-
name and address; stock number, description, quan- tion on a business form. A company may color-code
tity, unit price, and total amounts owed for items multiple copies of its sales invoice. For example, the
purchased; the seller’s name and address; date of the first copy (white) goes to the customer. The second
invoice; and terms of sale, such as 2/10, n/30. copy (yellow) goes to the seller’s shipping department.
2. Exercise control. The seller needs to insure that all mer- The third copy (salmon) goes to the seller’s accounts
chandise shipped is properly invoiced to the customer receivable department. Although different businesses
PHOTO: PHOTOGRAPHER’S CHOICE/GETTY IMAGES
and that the information on the invoice is correct. A may use different colors, the use of color-coding
seller’s invoices should be sequentially numbered to insures that the appropriate copy goes to the correct
insure that all invoices are accounted for. The invoice user.
date and terms permit the seller to file the invoice by
the due date so that the company can follow up if pay- Required: With your instructor’s permission, visit a local
ment is not received. business and request a copy of one of its business forms.
The sales clerk’s initials show who made the sale so Identify the items on the form that achieve important pur-
that person can be consulted if there are any ques- poses for the company.
tions. If the merchandise is delivered in person, the
Accounting for Partnerships Chapter 23 691
231 APPLICATION PROBLEM
Journalizing partners’ investments and withdrawals
Cash receipts, cash payments, and general journals are given in the Working Papers.
Kopy King completed the following transactions during April of the current year.
Transactions:
Apr. 1. Received cash of $2,000.00 and equipment valued at $33,000.00 from partner, Wilhelm Mellberg,
as an investment. Receipt No. 1.
1. Received cash from partner, Julie Jenson, as an initial investment, $30,000.00. Receipt No. 2.
30. Julie Jenson, partner, withdrew cash for personal use, $3,600.00. Check No. 66.
30. Wilhelm Mellberg, partner, withdrew merchandise for personal use, $4,800.00. Memorandum
No. 10.
Instructions:
1. Use page 1 of a cash receipts journal. Journalize the investments on April 1.
2. Use page 5 of a cash payments journal and page 12 of a general journal. Journalize the withdrawals on
April 30.
232 APPLICATION PROBLEM
Preparing distribution of net income and owners’ equity statements (net income)
Janet Kelly and Paul Sharp are partners in a merchandising business, Kelly Appliances. Forms for complet-
ing this problem are given in the Working Papers. The following information was taken from the records on
December 31 of the current year.
Balance of Balance of Distribution
Partner Capital Account Drawing of
January 1 Account Net Income
Kelly $159,000.00 $17,550.00 60.0%
Sharp $142,600.00 $18,800.00 40.0%
Instructions:
1. On December 31, the partnership had a net income of $83,260.00. Prepare a distribution of net income
statement for the partnership.
2. Prepare an owners’ equity statement for Kelly Appliances. No additional investments were made.
( Go Beyond the Book
)
For more information go to
www.C21accounting.com
692 Chapter 23 Accounting for Partnerships
233 APPLICATION PROBLEM
Preparing an owners’ equity statement (net loss)
Judy Fulton and Lee Terry are partners in a merchandising business, Elegant Cosmetics. Forms for complet-
ing this problem are given in the Working Papers. The following information was taken from the records on
December 31 of the current year.
Balance of Balance of Distribution
Partner Capital Account Drawing of
January 1 Account Net Loss
Fulton $124,300.00 $13,950.00 $3,750.00
Terry $118,000.00 $14,900.00 $3,750.00
Instructions:
1. Prepare an owners’ equity statement for Elegant Cosmetics. Additional investments made during the year:
Judy Fulton, $12,000.00; Lee Terry, $10,000.00.
234 APPLICATION PROBLEM
Liquidating a partnership
Donald Winn and Judy Reed agreed to liquidate their partnership on July 30 of the current year. On that date,
after financial statements were prepared and closing entries were posted, the general ledger accounts had
the following balances.
Cash $ 5,000.00
Supplies 500.00
Office Equipment 10,000.00
Accumulated Depreciation—Office Equipment 5,500.00
Truck 17,000.00
Accumulated Depreciation—Truck 12,200.00
Accounts Payable 500.00
Donald Winn, Capital 7,300.00
Judy Reed, Capital 7,000.00
The following transactions occurred during July of the current year.
Transactions:
July 1. Received cash from sale of office equipment, $4,000.00. R114.
1. Received cash from sale of supplies, $200.00. R115.
3. Received cash from sale of truck, $5,000.00. R116.
5. Paid cash to all creditors for amounts owed. C156.
6. Distributed balance of Loss and Gain on Realization to Donald Winn, 65%; to Judy Reed, 35%.
M34.
6. Distributed remaining cash to partners. C157 and C158.
Instructions:
1. Journalize the transactions. Use page 13 of a cash receipts journal, page 13 of a cash payments journal,
and page 7 of a general journal.
Accounting for Partnerships Chapter 23 693
235 MASTERY PROBLEM
Recording partners’ investments and withdrawals, preparing financial statements, and
liquidating a partnership
Darren and Karen Greenlund are partners in a business called GreenGarden. Journals and forms for complet-
ing this problem are given in the Working Papers. GreenGarden completed the following transactions during
July of the current year.
Transactions:
July 15. Received cash from partner, Darren Greenlund, as an investment, $10,000.00. Receipt No. 87.
15. Received cash of $3,000.00 and equipment valued at $8,000.00 from partner, Karen Greenlund,
as an investment. Receipt No. 88.
31. Karen Greenlund, partner, withdrew merchandise for personal use, $1,000.00. Memorandum
No. 61.
31. Darren Greenlund, partner, withdrew cash for personal use, $800.00. Check No. 321.
Instructions:
1. Use page 13 of a cash receipts journal. Journalize the investments on July 15.
2. Use page 19 of a cash payments journal and page 23 of a general journal. Journalize the withdrawals on
July 31.
Information from GreenGarden’s worksheet and income statement for the month ended July 31 is given
below.
Net Income for the month ended July 31 $14,600.00
Darren Greenlund, Capital July 1 balance 32,310.00
Karen Greenlund, Capital July 1 balance 28,880.00
Instructions:
3. Prepare a distribution of net income statement for Green Garden. Net income or loss is to be distributed
equally to the partners.
4. Using the balances of the general ledger capital accounts, prepare an owners’ equity statement for Green-
Garden. The investments made on July 15 are the only additional investments made by the partners this
month. The withdrawals made on July 31 are the only withdrawals made by the partners this month.
The Greenlunds decided to liquidate GreenGarden and retire on July 31. On that date, after financial state-
ments were prepared and closing entries were posted, the general ledger accounts had the following
balances.
Cash $90,490.00
Merchandise Inventory 2,000.00
Equipment 15,000.00
Accumulated Depreciation—Equipment 10,000.00
Accounts Payable 2,500.00
Darren Greenlund, Capital 48,810.00
Karen Greenlund, Capital 46,180.00
The following transactions occurred on July 31 of the current year.
Transactions:
a. Received cash from the sale of merchandise inventory, $1,800.00. R89.
b. Received cash from the sale of equipment, $7,000.00. R90.
c. Paid cash to all creditors for amounts owed. C322.
d. Distributed balance of Loss and Gain on Realization to the partners on an equal basis. M62.
e. Distributed remaining cash to partners. C323 and C324.
Instructions:
5. Journalize the transactions. Continue on the next available line of the journals used in instructions 1 and 2.
694 Chapter 23 Accounting for Partnerships
236 CHALLENGE PROBLEM
Preparing a distribution of net income statement and owners’ equity statement
(unequal distribution of net loss; additional investment)
Kaye Skousen and Timothy Tripp are partners in a merchandising business, Jewelry Joint. Forms for complet-
ing this problem are given in the Working Papers. The following information was taken from the records on
December 31 of the current year.
Balance of Balance of Distribution
Partner Capital Account Drawing of
January 1 Account Net Loss
Skousen $125,294.00 $18,000.00 65.0%
Tripp $101,961.00 $16,300.00 35.0%
Instructions:
1. On December 31, the partnership had a net loss of $32,340.00. Prepare a distribution of net income state-
ment for the partnership.
2. Prepare an owners’ equity statement for Jewelry Joint. Additional investments made during the year: Kaye
Skousen, $11,000.00; Timothy Tripp, $9,500.00.
PH O
TO D
IS C
/GE
TTY
I MA
GE
S
Accounting for Partnerships Chapter 23 695
A P P L I E D CO M M U N I C AT I O N
Since reports are valuable communication tools used to make decisions, they must be clearly written.
Instructions: Research the advantages and disadvantages of three types of business ownership: proprietorship,
partnership, and corporation. Write a clear, concise report on your findings.
CASE FOR CRITICAL THINKING
Rena Jacques and George Nadler are partners in a paint and decorating store. The store operates on a yearly fiscal
period. At the end of each year, an accountant is hired to prepare financial statements. At the end of each month
during the year, Ms. Jacques prepares a work sheet. The work sheet is prepared to determine if the business made or
lost money that month. The accountant suggests that monthly financial statements also be prepared. Ms. Jacques
believes, however, that the monthly work sheet is sufficient to determine how the business is doing. Do you agree
with Ms. Jacques or the accountant? Why?
SCANS WORKPLACE COMPETENCY
Systems Competency: Monitors and Corrects Performance
Concept: A workplace consists of many different systems, from the human resources system to the computer
network to the order fulfillment system. Every employee needs to understand the system in which he or she works.
Managers of a system need to distinguish trends, predict impacts on systems operations, diagnose deviations in
systems’ performance, and correct malfunctions in a system.
Application: Your company has just introduced a new product with predictions that it will be enormously popular
and increase sales 50% after a large advertising campaign. List the systems that could be affected by a sudden large
increase in demand for the company’s products. Suggest ways this increased demand can be handled.
696 Chapter 23 Accounting for Partnerships
AUDITING FOR ERRORS
Wendy Winger and Leo Zenisek are partners in Old World Bakery. The following information was taken from the
records on December 31 of the current year.
Balance of Balance of Distribution
Capital Account Drawing of
Partner January 1 Account Net Income
Winger $15,000.00 $2,300.00 40.0%
Zenisek $12,000.00 $1,100.00 60.0%
On December 31, the partnership had a net income of $14,500.00. No additional investments were made.
The following statements were prepared using the information above. Audit the statements. Prepare a list that
describes any errors you discover and how they should be corrected.
Old World Bakery
Distribution of Net Income Statement
December 31, 20--
Wendy Winger
40.0% of Net Income 7 2 5 0 00
Leo Zenisek
60.0% of Net Income 7 2 5 0 00
Net Income 1 4 5 0 0 00
Old World Bakery
Owners’ Equity Statement
For Year Ended December 31, 20--
Wendy Winger
Capital Balance, January 1, 20-- 51 0 0 0 00
Share of Net Income 7 2 5 0 00
Less Withdrawals 2 3 0 0 00
Increase in Capital 4 9 5 0 00
Capital, December 31, 20-- 46 0 5 0 00
Leo Zenisek
Capital Balance, January 1, 20-- 12 0 0 0 00
Share of Net Income 7 2 5 0 00
Less Withdrawals 1 1 0 0 00
Increase in Capital 8 3 5 0 00
Capital, December 31, 20-- 20 3 5 0 00
Total Owners’ Equity, December 31, 20-- 66 4 0 0 00
A N A LY Z I N G B E S T B U Y ’S F I N A N C I A L S TAT E M E N T S
Look at the equity section of Best Buy’s consolidated balance sheets on Appendix B page B-5 in this textbook.
Instructions: How would this section be different if Best Buy were a partnership owned by two partners instead
of a corporation?
Accounting for Partnerships Chapter 23 697
Accounting
SOFTWARE
MEMORIZED JOURNAL ENTRIES
Peachtree strives to make entering journal entries as efficient as possible. For many transactions, such as a credit
sale, you don’t even have to enter a debit or credit--Peachtree assigns the appropriate account titles based on previ-
ously entered customer default options.
In contrast, some journal entries, such as accruals, must be entered using a general journal. These transactions
require that you identify each debit and credit account. Over time, you might wonder if there is a way that you can
eliminate the need to enter these accounts.
Peachtree’s memorized transaction feature is the solution. Imagine entering the debit and credit accounts (but
no amounts) of a general journal entry you record frequently. You can save this transaction as a memorized transac-
tion. Then, when entering a general journal entry, you can select the appropriate entry from a list of memorized
journal entries. With the accounts titles automatically identified, you only have to enter the amounts to save the
entry.
The more often a journal entry is recorded, the more efficient you will be by creating a memorized journal entry.
Of equal importance, the chance of entering an incorrect account title is reduced because you do not enter this
information each time an entry is recorded.
OPTIONAL PEACHTREE ACTIVITY
Identify five general journal entries that could be entered as memorized journal entries.
MEMORIZED JOURNAL ENTRIES
Much of the work of a computerized accounting system is focused on recording transactions. Some
of these transactions are repeated, possibly several times a day. The QuickBooks “memorize a transaction” function
allows the user to enter a transaction one time and then memorize it for later use.
When a memorized transaction is created, it can be set up to be automatically entered into the system on a set
schedule. The user can also call up a memorized transaction to enter it into the system. A reminder can also be set
up to prompt the user to enter a recurring transaction.
Reminders are another QuickBooks feature designed to increase efficiency and accuracy. QuickBooks can be pro-
grammed to remind the user to send out invoices, pay the payroll, print checks, make deposits, and perform other
functions.
A good example of the use of reminders and memorized transactions could be applied to the adjusting entry for
supplies. The entry could be memorized, with the amounts omitted since the amount will change each period. A
reminder can be set to prompt the user to enter the adjusting entry at the end of each fiscal period. Once reminded,
the user can recall the memorized adjusting entry and insert the amount of supplies used that period.
OPTIONAL QUICKBOOKS ACTIVITY
Identify five general journal entries that could be entered as memorized journal entries.
698 Chapter 23 Accounting for Partnerships
MERGING AND CENTERING TITLES
Throughout this textbook you have used Excel templates in which document titles were centered over several
columns. For example, the corporation’s name and statement title are usually centered over the statement.
The Merge and Center tool allows you to combine a group of adjacent cells into a single cell. Any text to be
displayed in the combined cell should be entered in the upper left cell of the range.
Once the cells are merged, you can do anything you would do to any other cell: change the font size or color,
right or left justify, or add a border. Selecting the Merge and Center tool again returns the cells to their original
condition.
EXCEL APPLICATION PROBLEM 232
Open the F23-2 Excel data file. Follow the step-by-step instructions in the Instructions work sheet. Merge and center
each financial statement heading.
C U S T O M I Z I N G T H E A U T O M AT E D
ACCOUNTING SYSTEM
Many of the functions of the accounting cycle are performed automatically by the Automated Accounting system
after journal entries are recorded and posted. Journal entry, ledger reports, financial statement, payroll, plant asset,
and closing entries are generated automatically. The options that determine the nature of these reports and entries
are determined by the settings in the Company Info. Window, which is accessed from the Custom toolbar button.
Company Name: The name of the company is entered in the Company name text box. The company name is dis-
played and printed as part of the heading for each report.
Problem Name: The problem name entered in this textbox is printed at the top of every report along with the user
name. The problem name also appears in the title bar of the Automated Accounting main window.
Departments: The Departments drop-down list allows you to select from three options: None, 2, or 3 to set the
number of departments in the business. In this course, none of the problems involve a departmentalized business,
so None is selected.
Business Organization: The type of business organization selected determines the format and nature of financial
statements. If Partnership Equal Distribution is selected, the automatic closing entries will distribute net income
equally between the partners’ capital accounts. If Partnership Unequal Distribution is selected, the closing entries to
close Income Summary and distribute net income to the partners’ capital accounts must be journalized and posted.
Features: Turning on the various features enables the use of plant assets, payroll, inventory, and/or budgeting
systems. Employee deductions for the Payroll system can be entered under Voluntary Deductions.
Type of Business: The type of business selected determines the format of the income statement.
Income Statement: The Report by Month and Year option will show both the current month and the current year
on the income statement. There must be enough data available to make this option meaningful. The problems in
this textbook use the Report by Fiscal Period.
Accounting System: The Standard option is selected for all the problems in this textbook. The Voucher option is an
alternative to an accounts payable system.
Computer Checks: If Accounts Payable Checks is turned on, checks will be created each time a cash payment that
involves a vendor is entered. If the Payroll Checks option is turned on, paychecks will be created each time a payroll
transaction is entered for an employee.
AUTOMATED ACCOUNTING APPLICATION PROBLEM 231
Open file F23-1.AA8. Display the problem instructions and complete the problem.
AUTOMATED ACCOUNTING APPLICATION PROBLEM 234
Open file F23-4.AA8. Display the problem instructions and complete the problem.
Accounting for Partnerships Chapter 23 699
STOCKBYTE/GETTY IMAGES
C H A P T E R 2 4 Recording International
and Internet Sales
O B J E C T I V E S
After studying Chapter 24, you will be able to: 3. Record transactions for international sales.
1. Define accounting terms related to international 4. Record transactions for Internet sales.
sales.
2. Identify accounting concepts and practices
related to international and Internet sales.
K E Y T E R M S
• exports • bill of lading • sight draft
• imports • commercial invoice • time draft
• contract of sale • draft • trade acceptance
• letter of credit
( Point Your Browser
www.C21accounting.com
)
700
ACCOUNTING IN THE REAL WORLD
Honeywell
Honeywell Around the World
“You can’t see most of our products, but you can count on them.” This is a
quote from the Honeywell web site. Sometimes the products we don’t think
about or can’t see are some of the most important products for our safety
and comfort.
Honeywell manufactures collision avoidance and traffic control systems
for the aerospace industry. They also make wing-ice and wind-shear sensors
DIGITAL VISION/GETTY IMAGES
and landing systems. Most of us will never see these products, but we rely on
them to help get us safely to our destination. Honeywell also makes controls
to keep airport facilities efficient, safe, and comfort- INTERNET
able. Again, most of us will never see these ACTIVITY
products, but we count on them to keep
us comfortable as we travel. Foreign Exchange Rates
Honeywell has manufacturing There are several Internet sites
facilities and affiliates around designed to help you convert
the world, including the foreign currency. Perform an
Asia Pacific region, Europe, Internet search for the phrase
the Middle East, Africa, “foreign currency.” Find a site
Latin America, Brazil, and that converts currency.
Mexico. It is estimated
that Honeywell employs Instructions
nearly 62,000 people
1. Pick the currency of a
outside North America.
foreign country. List the
exchange rate for that
©BLOOMBERG NEWS/LANDOV
currency.
2. If you gave the exchange
organization 100 U.S. dol-
lars, how much foreign cur-
rency would you receive?
Critical Thinking
1. Name at least two challenges Honeywell faces because of its world-wide
operations.
2. Name at least two benefits Honeywell has because of its world-wide
operations.
Source: www.honeywell.com
701
L E S S O N
Recording International Sales
24-1
I N T E R N AT I O N A L S A L E S
Sales in the international market have become a major their own country. Thus, many companies have entered
source of revenue for both small and large businesses. into the export and import markets to maintain their
Improved technology has helped support international competitiveness and provide the products and services to
trade. It is no longer necessary to talk to your vendor or meet customer demand.
customer via telephone. E-mail, fax, and the Internet have GiftPak Company imports merchandise such as Swiss
made it possible to do business without as much concern chocolate and Chinese tea from a variety of countries.
about time zones and business hours around the world. GiftPak also exports its gift boxes and baskets to custom-
Goods or services shipped out of a seller’s home coun- ers around the world. Selling merchandise to individuals
try to a foreign country are called exports. Goods or ser- or other businesses within one’s own country, generally
vices bought from a foreign country and brought into a referred to as domestic sales, is much simpler than interna-
buyer’s home country are called imports. tional sales.
Businesses may be able to import materials or services
that are not available or are less expensive than within
CHARACTER COUNTS
Become an Ethics Of ficer
While researching the ethics activities lege education, you would need to constantly increase
in this textbook, you have reviewed your knowledge of business ethics and corporate gov-
the codes of conduct for several ernance. One resource of information available to ethics
companies. You have seen refer- officers is the Ethics Resource Center (ERC), a nonprofit
ences to individuals with titles organization devoted to helping individuals and organiza-
such as ethics officer, gover- tions act with integrity. The ERC provides a wide range of
nance manager, or compli- resources to help ethics officers. The ERC is also involved in
ance officer. These individuals ethics education for students.
are charged with ensuring
that the company has an effec- Instructions
PHOTO: PHOTODISC/GETTY IMAGES
tive ethics policy, educating Access the Ethics Resource Center at www.ethics.org. Pre-
employees on the code of con- pare a list of the various resources available to ethics offi-
duct, and resolving ethical issues cers. How does the ERC help provide ethics education to
reported by employees. students?
Have you considered a career in
business ethics? Beyond earning a col-
702 Chapter 24 Recording International and Internet Sales
I N T E R N AT I O N A L S A L E S C O M P A R E D
WITH DOMESTIC SALES
Most domestic sales are sold for cash or on account after settlement of disputes more difficult. Greater distances
reviewing and approving a customer’s credit. Because all and sometimes more complex transportation methods
transactions in the United States are covered by the same increase the time to complete the transaction. Because it
universal commercial laws and the same accounting stan- may be difficult to determine a customer’s financial con-
dards, many transactions are based on trust. A customer dition and to take legal action if a customer does not pay,
with approved credit orders merchandise. The merchan- the risk of uncollected amounts is increased. Unstable
dise is shipped, and an invoice is sent by the vendor. After political conditions in some countries may affect the abil-
receiving the merchandise and invoice, the customer pays ity to receive payments from those countries. Therefore,
the vendor. most businesses dealing in exports and/or imports follow
However, because of the increased complexities of a general process in international trade that ensures that
international sales, several issues must be considered. The the vendor receives payment for merchandise sold and the
lack of uniform commercial laws among countries makes customer receives the merchandise ordered.
P R O C E S S I N G A N I N T E R N AT I O N A L S A L E
A document that details all the terms agreed to by seller Santiago prepared an application with its bank, Banco
and buyer for a sales transaction is called a contract of Nacional de México, to issue a letter of credit. Banco
sale. The contract includes a description and quantity of Nacional de México approved Santiago’s application and
merchandise, price, point of delivery, packing and mark- issued the letter of credit. Banco Nacional de México for-
ing instructions, shipping information, insurance provi- warded the letter of credit to GiftPak’s bank, First Bank in
sions, and method of payment. Glendive.
GiftPak Company, located in Glendive, Montana, con- First Bank delivered the letter of credit to GiftPak.
tracts to sell merchandise to Santiago Company in Mexico GiftPak reviewed the letter of credit to ensure that the
City, Mexico. The contract price is $5,000.00 in U.S. dol- provisions in the letter agreed with the contract of sale.
lars, and merchandise is to be delivered to Mexico City. GiftPak then shipped the merchandise.
The Santiago Company is to pay transportation charges.
A letter issued by a bank guaranteeing that a named
individual or business will be paid a specified amount pro-
vided stated conditions are met is called a letter of credit.
The contract of sale between GiftPak and Santiago speci- PHOT O
DI S C
/G E T
fied a letter of credit as the method of payment. TY I
MA
GE
S
F O R YO U R I N F O R M AT I O N
F Y I
The International Chamber of
Commerce publishes “Incoterms” to
attempt to coordinate international
sales. This set of international
rules interprets common sales terms
used in foreign trade that are
adopted by most international
trade associations.
Recording International Sales Lesson 24-1 703
C O L L E C T I N G P AY M E N T F O R A N
I N T E R N AT I O N A L S A L E
In order for GiftPak to collect payment, three documents First Bank examines the documents submitted by Gift-
specified in the letter of credit must be submitted to First Pak to ensure that all terms of sale are in compliance with
Bank: (1) a bill of lading, (2) a commercial invoice, and the letter of credit. First Bank then forwards the docu-
(3) a draft. ments to Santiago’s bank, Banco Nacional de México.
A receipt signed by the authorized agent of a transpor- Banco Nacional de México examines the documents to
tation company for merchandise received that also serves ensure they are in compliance with the terms and con-
as a contract for the delivery of the merchandise is called ditions of the letter of credit. When Banco Nacional de
a bill of lading. The transportation company sends the México determines that all documents are in compliance,
bill of lading to GiftPak when the merchandise is shipped. it deducts the amount of the sight draft from Santiago’s
GiftPak then prepares the other two documents. A state- account and sends that amount, $5,000.00, to GiftPak’s
ment prepared by the seller of merchandise addressed to bank, First Bank.
the buyer showing a detailed listing and description of Banco Nacional de México then forwards the docu-
merchandise sold, including prices and terms, is called a ments to Santiago Company. By presenting the bill of
commercial invoice. A written, signed, and dated order lading and letter of credit to the transportation company,
from one party ordering another party, usually a bank, Santiago can receive the merchandise.
to pay money to a third party is called a draft. A draft is
sometimes referred to as a bill of exchange. A draft payable
on sight when the holder presents it for payment is called F O R YO U R I N F O R M AT I O N
a sight draft.
F Y I
The United States federal
government does not collect a sales
tax. However, many countries of
the world, including most of the
major industrial powers, do collect
S what is referred to as a value
GE
Y I MA added tax, or VAT. A value
E TT
ES
/G added tax is basically a
G
I MA national sales tax.
D
EN
BL
704 Chapter 24 Recording International and Internet Sales
GLOBAL PERSPECTIVE
For e i g n C u r r e n c y
As our world becomes smaller and global trade increases, To convert an amount in Argentine pesos to U.S. dol-
U.S. businesses become more involved in transactions lars, divide the amount of pesos by the number of pesos
with foreign businesses. These transactions can be stated per dollar as shown.
in terms of U.S. dollars or in the currency of the other coun-
try. If the transaction involves foreign currency, a U.S. busi-
ness must convert the foreign currency into U.S. dollars 350 Argentine pesos ⫼ 2.9568 pesos per U.S. dollar
before the transaction can be recorded. [CONCEPT: Unit of ⫽ $118.37 US
Measurement]
The value of foreign currency may change daily. In the
United States, the exchange rate is the value of foreign cur- Instructions
rency in relation to the U.S. dollar. Banks, online services, 1. Current exchange rates change
and many daily newspapers list current exchange rates. constantly. Do an Internet
The exchange rate is stated in terms of one unit of for- search and report the cur-
eign currency. Using Argentina as an example, assume that rent exchange rate for
one Argentine peso is worth 0.33820 U.S. dollar (or about the Argentine peso.
34 U.S. cents). This rate would be used when exchanging 2. If the exchange rate
Argentine pesos for U.S. dollars. for one Japanese yen
A conversion formula can be used to find out how many is .0085143 U.S. dol-
foreign currency units can be purchased with one U.S. dol- lar, what U.S. dollar
lar. The formula is: amount would be
recorded for a receipt
PHOTO: STOCKBYTE/GETTY IMAGES
of 5,200 Japanese yen?
⫼ exchange rate ⫽ foreign currency per U.S. dollar
3. If the exchange rate
1 dollar ⫼ 0.33820 ⫽ 2.9568 pesos per dollar
for one European euro
is 1.08944 U.S. dollars,what
amount would be recorded for a
receipt of 197 euros?
Recording International Sales Lesson 24-1 705
J O U R N A L I Z I N G A N I N T E R N AT I O N A L S A L E
CASH RECEIPTS JOURNAL PAGE 10
1 2 3 4 5 6
DOC. POST. GENERAL ACCOUNTS SALES SALES CASH
DATE ACCOUNT TITLE NO. REF. RECEIVABLE DISCOUNT
DEBIT CREDIT CREDIT DEBIT
CREDIT DEBIT
Apr. 1 ⻫ 2 ⻫
20--
1 M45 5 0 0 0 00 5 0 0 0 00 1
2
1 3 4 5 6 2
3 3
2. Check Mark
1. Date 3. Memorandum 4. Check 5. Sale Amount 6. Sale Amount
Number Mark Credit Debit
After receiving payment from Banco Nacional de México, Sales taxes are normally paid only on sales to the final
First Bank deposits the payment for the sale in GiftPak’s consumer. GiftPak’s sale is to Santiago Company, a mer-
account and sends GiftPak a deposit slip for the amount chandising company. Therefore, sales tax is not collected.
deposited. After receiving the deposit slip from First Bank, The sales and collection process GiftPak followed
GiftPak prepares a memorandum as a source document assured GiftPak of receiving payment for its sale and San-
for the cash received. The sale is then recorded as a cash tiago Company of receiving the merchandise it ordered.
sale.
April 1. Recorded international cash F O R YO U R I N F O R M AT I O N
sale, $5,000.00. Memorandum 45. F Y I
Visitors to foreign countries with a
Cash value added tax (VAT) typically are
required to pay the VAT. However, if
Apr. 1 5,000.00 items purchased exceed a specified
amount, a refund of a portion
Sales of the VAT can be requested.
Apr. 1 5,000.00
S T E P S RECORDING AN ENTRY FOR AN INTERNATIONAL SALE
P H OT OD I S C / G E T T Y I M A G
1 Write the date, 20--, Apr. 1, in the Date column. ES
2 Place a check mark in the Account Title column to indicate that
no account title needs to be entered.
3 Write the source document number, M45, in the Doc.
No. column.
4 Place a check mark in the Post. Ref. column to
indicate that the amounts on this line are
not posted individually.
5 Write the sale amount, $5,000.00, in
the Sales Credit column.
6 Write the sale amount, $5,000.00,
in the Cash Debit column.
706 Chapter 24 Recording International and Internet Sales
JOURNALIZING TIME DRAFTS
2. Account Debited 4. Sale Amount Debit
GENERAL JOURNAL PAGE 5
DATE ACCOUNT TITLE DOC. POST. DEBIT CREDIT
NO. REF.
2 4
6 1 10 Time Drafts Receivable TD12 6 0 0 0 00 6
7 Sales 3 6 0 0 0 00 7
1. Date 5 6
5. Account Credited 3. Time Draft 6. Sale Amount
Number Credit
GiftPak Company sold $6,000.00 of merchandise to
Simov Co., located in Istanbul, Turkey. The contract of May 10. Received a 60-day time draft
sale with Simov was similar to the contract with Santiago from Simov Co. for an international
Company, with one exception. GiftPak agreed to delay sale, $6,000.00. Time Draft No. 12.
receipt of payment 60 days. A draft that is payable at a
fixed or determinable future time after it is accepted is
called a time draft. Time Drafts Receivable
The sales process with Simov is the same as with San-
May 10 6,000.00
tiago, except GiftPak submits with the documentation a
time draft due 60 days from the date the draft is accepted. Sales
On May 10, all documentation for the Simov sale is veri- May 10 6,000.00
fied to be correct by the seller’s and buyer’s banks, and
GiftPak’s time draft is accepted.
After verifying the documentation, Simov’s bank, Bank
of Istanbul, returns the accepted time draft to GiftPak and
forwards the other documents to Simov Co. Simov can
receive the merchandise by presenting the bill of lading
and letter of credit to the transportation company.
S T E P S JOURNALIZING A TIME DRAFT
1 Write the date, 10, in the Date column.
2 Write Time Drafts Receivable in the Account Title column.
3 Write TD and the time draft number, 12, in the Doc. No. column. F O R YO U R I N F O R M AT I O N
4 Write the sale amount, $6,000.00, in the Debit column. F Y I
The minimum value added tax (VAT)
5 On the next line, indent and write Sales in the Account Title column.
in the European Community is 15%;
however, there is no additional local
6 Write the sale amount, $6,000.00, in the Credit column.
sales tax. The Philippines has a 10%
VAT that applies to the sale, barter,
or exchange of goods, properties,
or services. Thailand applies
a 7% VAT to selected
beverages.
Recording International Sales Lesson 24-1 707
JOURNALIZING CASH RECEIPTS FROM TIME DRAFTS
CASH RECEIPTS JOURNAL PAGE 16
1 2 3 4 5 6
DOC. POST. GENERAL ACCOUNTS SALES SALES CASH
DATE ACCOUNT TITLE NO. REF. RECEIVABLE CREDIT DISCOUNT
DEBIT CREDIT DEBIT
CREDIT DEBIT
9 1 9 Time Drafts Receivable R465 6 0 0 0 00 6 0 0 0 00 9
10 2 3 4 5 10
11 11
1. Date 2. Account 3. Receipt Number 4. Amount Received Credit 5. Amount Received Debit
Title
When Simov’s time draft is due and presented to its bank, The process used by GiftPak Company for interna-
Bank of Istanbul, the bank pays the draft. The payment tional sales relies upon letters of credit from banks to
process is the same as the payment of Santiago Company’s assure receipt of payment for those sales. Occasionally,
sight draft. GiftPak grants an extension of time for payment to long-
time international customers by submitting a time draft.
Trade Acceptances
July 9. Received cash for the value of Time
A form signed by a buyer at the time of a sale of merchan-
Draft No. 12, $6,000.00. Receipt No. 465. dise in which the buyer promises to pay the seller a speci-
fied sum of money, usually at a stated time in the future,
Cash is called a trade acceptance.
A trade acceptance is similar to a draft except a draft is
July 9 6,000.00
generally paid by a bank and a trade acceptance is paid by
Time Drafts Receivable the buyer. A seller generally has much more assurance of
May 10 6,000.00 July 9 6,000.00 receiving payment from a bank than from a buyer. Because
of the many complexities, few businesses use trade accep-
tances in international sales. Some businesses, however,
use trade acceptances for domestic sales to very reliable
customers.
S T E P S JOURNALIZING CASH RECEIVED FROM A TIME DRAFT
1 Write the date, 9, in the Date column.
2 Write Time Drafts Receivable in the account title column.
R E M E M B E R
3 Write the source document number, R465, in the Doc. No. column.
A sight draft and a time draft
4 Write the amount received, $6,000.00, in the General Credit column. are similar. Both methods of
international sales require the buyer’s
5 Write the same amount, $6,000.00, in the Cash Debit column. bank to guarantee the cash payment
R E M E M B E R for the sale. The primary difference
between a sight draft and a time draft
is the timing of the payment. Cash
payment of a time draft is delayed
for a period of time after the delivery
of the goods to the buyer.
708 Chapter 24 Recording International and Internet Sales
End of Lesson
TERMS REVIEW
exports
imports
REVIEW
contract of sale
AUDIT YOUR UNDERSTANDING
letter of credit
bill of lading 1. What are some of the issues that must be considered before making
commercial invoice international sales?
draft 2. What two purposes does a bill of lading serve?
3. How does a sight draft differ from a time draft?
sight draft
4. Why do many companies dealing in international sales rely upon letters
time draft of credit from banks?
trade acceptance 5. How does a trade acceptance differ from a draft?
WORK TOGETHER 241
Journalizing international sales transactions
The cash receipts and general journals for Marlon Exports, Ltd. are given in the Working Papers. Your instructor will
guide you through the following examples.
1. Using the current year, journalize the following international sales on page 9 of a cash receipts journal and page 5
of a general journal. Sales tax is not charged on these sales. Source documents are abbreviated as follows: memo-
randum, M; time draft, TD; receipt, R.
Transactions
May 1. Recorded an international cash sale, $14,000.00. M323.
5. Received a 30-day time draft from Ying Shen for an international sale, $18,000.00. TD32.
9. Received cash for the value of Time Draft No. 10, $21,000.00. R221.
2. Prove and rule the cash receipts journal.
ON YOUR OWN 241
Journalizing international sales transactions
The cash receipts and general journals for Hakim Handicrafts are given in the Working Papers. Work this problem
independently.
1. Using the current year, journalize the following international sales on page 17 of a cash receipts journal and
page 9 of a general journal. Sales tax is not charged on these sales. Source documents are abbreviated as follows:
memorandum, M; time draft, TD; receipt, R.
Transactions
Sep. 3. Recorded an international cash sale, $9,400.00. M256.
5. Received a 45-day time draft from Ledah Patel for an international sale, $7,800.00. TD81.
6. Received cash for the value of Time Draft No. 73, $13,500.00. R211.
2. Prove and rule the cash receipts journal.
Recording International Sales Lesson 24-1 709
L E S S O N
Recording Internet Sales
24-2
INTERNET SALES
More and more companies are turning to the Internet as offer this service or with a company that will offer this
an additional way of selling goods and services. Internet service to businesses for a fee.
shopping provides customers the opportunity to browse GiftPak has prepared a web site that will accept credit
the products offered by a company, compare competitors’ card orders and transmit the sales information for imme-
products, and do so at a time and place convenient to the diate shipping and billing. An order confirmation is also
customer. immediately sent to the buyer, containing information
Selling goods over the Internet, however, also presents about the order and expected shipping date.
some challenges to the seller. The web site developed must Internet sales at GiftPak must be completed with a
be easy to navigate and safe to use. Customers must feel credit card. At the end of each day, GiftPak will be able
that the web site uses up-to-date security procedures to to print out a terminal summary similar to the terminal
protect credit card information as it is being transmitted. summary discussed in Chapter 10. The terminal summary
The selling company must also be able to accept credit is used as the source document for recording online sales.
card sales, which means it must contract with a bank to
F O R YO U R I N F O R M AT I O N
P H O T O G R A PHE R’ S C H O
IC E R F/
GET
TY I F Y I
MA
G ES
Credit card companies are taking
measures to protect online shoppers.
Some companies offer a safe-shopping
option, which allows the credit card
holder to instantly obtain a temporary
credit card account number good
only for one purchase.
F O R YO U R I N F O R M AT I O N
F Y I
Companies such as PayPal offer
services to online customers and
sellers. For customers, these companies
offer sites that use the most modern
methods to safeguard credit card
information as it is transmitted
online. For sellers, these companies
offer the availability of credit card
sales with less cost and
red tape.
710 Chapter 24 Recording International and Internet Sales
JOURNALIZING AN INTERNET SALE
4. Checkmark 5. Credit to Sales
CASH RECEIPTS JOURNAL PAGE 9
4 1 2 3 4 5 6
DOC. POST. GENERAL ACCOUNTS SALES SALES CASH
DATE ACCOUNT TITLE DISCOUNT
NO. REF. DEBIT CREDIT
RECEIVABLE
CREDIT
CREDIT 5 DEBIT
DEBIT
May 1 ⻫ 2 TS45 ⻫
20--
11 8 9 1 00 6 8 9 1 00 1
2 3 2
3 3
1. Date 2. Checkmark 3. Source Document 6. Debit to Cash
The asset account Cash has a normal debit balance and
May 1. Recorded Internet credit card sales, is debited for the amount of the credit card sales, $891.00.
$891.00. Terminal Summary 45. The sales account has a normal credit balance. Therefore,
Sales is credited for the amount of the sales, $891.00.
GiftPak Company processes its credit card sales at the
end of each day. At the same time, the information is elec-
tronically transmitted to First Bank, with whom GiftPak
F O R YO U R I N F O R M AT I O N
has contracted to process its credit card sales. This infor-
mation is transferred to the Federal Reserve Bank and pro- F Y I
cessed in a manner similar to checks. Therefore, GiftPak In order to process bank credit cards
considers these sales to be cash sales. such as Visa and MasterCard, a
business must set up a merchant
account with a bank. The
business pays a fee to the bank
Cash
for processing credit card sales.
May 1 891.00
Sales
May 1 891.00
S T E P S RECORDING AN ENTRY FOR AN INTERNET SALE
I CE R F/ G ETT Y I M AG E S
1 S CHO
Write the date, 20--, May 1, in the Date column. G RAP
H ER ’
O TO
PH
2 Place a check mark in the Account Title column to indicate that
no account title needs to be entered.
3 Write the source document number, TS45, in the Doc. No.
column.
4 Place a check mark in the Post. Ref. column to indi-
cate that the amounts on this line are not posted
individually.
5 Write the sale amount, $891.00, in the Sales
Credit column.
6 Write the sale amount, $891.00, in the
Cash Debit column.
Recording Internet Sales Lesson 24-2 711
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. What are two reasons why a customer might prefer online shopping?
2. Why is a bank credit card sale treated the same as a cash sale?
WORK TOGETHER 242
Journalizing Internet sales transactions
The cash receipts journal for Teddy Bears Galore is given in the Working Papers. Your instructor will guide you
through the following examples.
1. Using the current year, journalize the following Internet sales on page 5 of a cash receipts journal.
Transactions
Mar. 5. Recorded Internet credit card sales, $2,432.00. Terminal Summary 331.
12. Recorded Internet credit card sales, $3,010.00. Terminal Summary 332.
19. Recorded Internet credit card sales, $1,550.00. Terminal Summary 333.
ON YOUR OWN 242
Journalizing Internet sales transactions
The cash receipts journal for Labels World is given in the Working Papers. Work this problem independently.
1. Using the current year, journalize the following Internet sales on page 9 of a cash receipts journal.
Transactions
May 7. Recorded Internet credit card sales, $352.00. Terminal Summary 44.
12. Recorded Internet credit card sales, $187.00. Terminal Summary 45.
20. Recorded Internet credit card sales, $319.00. Terminal Summary 46.
712 Chapter 24 Recording International and Internet Sales
SUMMARY
After completing this chapter, you can: 3. Record transactions for international sales.
1. Define accounting terms related to interna- 4. Record transactions for Internet sales.
tional sales.
2. Identify accounting concepts and practices
related to international and Internet sales.
EXPLORE ACCOUNTING
Ho w C r e d i t C a r d S y s t e m s Wor k
To promote sales, Chimes Music Store accepts ing center notifies each credit card company of
major credit cards, such as Visa, MasterCard, its daily total. The credit card companies then
American Express, and Discover. To process make electronic funds transfers to Chimes
these sales, Chimes Music contracted with Music’s bank account. This process often
a processing center to install and maintain requires several days to complete.
its credit card system. Both the processing center and the
When a customer presents Chimes with credit card companies charge Chimes with
a credit card, the card is scanned and the a fee for processing credit card sales. These
amount of purchase is entered in a credit card charges are accumulated, and a monthly fee is
reader. The reader uses phone lines to contact the charged directly to Chimes Music’s bank account.
processing center. If the processing center determines that
the customer has an adequate amount of unused credit, Research: Credit card processing companies can use dif-
the transaction is approved and a sales receipt is printed. ferent equipment and procedures to process credit card
At the same time, the transaction is added to daily totals sales. Ask a local retailer to describe its credit card pro-
maintained by the processing center. After the customer cessing system. Prepare a report that describes the equip-
signs the credit card receipt, both the customer and busi- ment and procedures used as well as the fees charged.
ness keep a copy. Contrast the system you observed with Chimes Music’s
At the end of the day, Chimes enters a command to system. Which system is better? How could the system you
instruct the system to close its account. The credit card researched be improved?
PHOTO: PHOTOGRAPHER’S CHOICE/GETTY IMAGES
reader prints a summary receipt that lists the total number
and amount of sales by credit card company. The process-
Recording International and Internet Sales Chapter 24 713
241 APPLICATION PROBLEM
Journalizing international sales transactions
The cash receipts and general journals for Parker Exports, Ltd. are given in the Working Papers.
Instructions:
1. Journalize the following international sales completed by Parker Exports, Ltd. during June of the current
year. Use page 10 of a cash receipts journal and page 6 of a general journal. Sales tax is not charged on
these sales. Source documents are abbreviated as follows: memorandum, M; time draft, TD; receipt, R.
Transactions:
June 1. Recorded an international cash sale, $12,000.00. M82.
5. Received a 30-day time draft from Bella Lamas for an international sale, $13,000.00. TD32.
9. Received cash for the value of Time Draft No. 24, $16,000.00. R116.
12. Received a 60-day time draft from Pablo Fuentes for an international sale, $8,000.00. TD33.
19. Received cash for the value of Time Draft No. 21, $22,000.00. R117.
21. Recorded an international cash sale, $17,500.00. M83.
25. Received a 30-day time draft from Rodrigo Soto for an international sale, $24,000.00. TD34.
2. Prove and rule the cash receipts journal.
242 APPLICATION PROBLEM
Journalizing Internet sales transactions
The cash receipts journal for Sports Memorabilia is given in the Working Papers.
Instructions:
1. Journalize the following Internet sales completed by Sports Memorabilia during August of the current
year. Use page 15 of a cash receipts journal. Source documents are abbreviated as follows: Terminal
Summary, TS.
Transactions:
Aug. 6. Recorded Internet credit card sales, $909.00. TS116.
13. Recorded Internet credit card sales, $1,480.00. TS117.
20. Recorded Internet credit card sales, $1,147.00. TS118.
27. Recorded Internet credit card sales, $2,843.00. TS119.
2. Total and rule the cash receipts journal.
( Go Beyond the Book
)
For more information go to
www.C21accounting.com
714 Chapter 24 Recording International and Internet Sales
243 MASTERY PROBLEM
Recording international and Internet sales
Argo Corporation has both international and Internet sales.
Instructions:
1. Journalize the following transactions affecting sales and cash receipts completed during February of the
current year. Use page 2 of a general journal and a cash receipts journal. Source documents are abbrevi-
ated as follows: memorandum, M; receipt, R; time draft, TD; terminal summary, TS.
Transactions:
Feb. 5. Received a 30-day time draft from Akeo Doi for an international sale, $5,000.00. TD10.
8. Recorded Internet credit card sales, $12,300.00. TS23.
12. Recorded an international cash sale, $10,500.00. M8.
14. Received cash for the value of Time Draft No. 4, $23,000.00. R35.
18. Recorded Internet credit card sales, $18,400.00. TS24.
21. Received cash for the value of Time Draft No. 7, $8,000.00. R37.
24. Recorded an international cash sale, $13,500.00. M12.
27. Recorded Internet credit card sales, $9,200.00. TS25.
28. Received a 30-day time draft from Sachi Nozaki for international sale of merchandise, $6,000.00.
TD11.
2. Prove and rule the cash receipts journal.
244 CHALLENGE PROBLEM
Recording international sales and converting foreign currency
International sales can be stated in terms of U.S. dollars or in the foreign currency. The transaction statements
below are stated in terms of the foreign currency of the customer.
Instructions:
1. Journalize the following transactions affecting sales. Use the foreign currency exchange rates given in the
table below to translate the amount of the sales into U.S. dollars. Use page 11 of a cash receipts journal.
Source documents are abbreviated as follows: memorandum, M.
Transactions:
June 1. Recorded international cash sale, 7,026 Chinese yuan. M46.
8. Recorded international cash sale, 13,782 Mexican pesos. M49.
14. Recorded international cash sale, 1,364 New Zealand dollars. M55.
19. Recorded international cash sale, 354 European euros. M57.
28. Recorded international cash sale, 3,174,060 Zimbabwe dollars. M68.
Currency 1 U.S. Dollar Equals…
Chinese Yuan 8.26650 Yuan
European Euro .78796 Euro
Mexican Peso 11.48500 Pesos
New Zealand Dollar 1.43616 New Zealand Dollars
Zimbabwe Dollar 5,290.10 Zimbabwe Dollars
2. Prove and rule the cash receipts journal.
Recording International and Internet Sales Chapter 24 715
A P P L I E D CO M M U N I C AT I O N
Internet sites must be easy to use and provide the customer with the information needed to make buying decisions.
Instructions: Investigate the web sites of two businesses. Write a report stating which site you feel is more customer
friendly. Be sure to support your opinion with facts and examples.
CASE FOR CRITICAL THINKING
Julie Lindstrom is the bookkeeper for a small company that imports handcrafted items from foreign countries. Most
of its suppliers are individuals who sell handmade crafts. All purchases are stated in the currency of the supplier’s
country but paid in U.S. dollars. When Julie pays the suppliers for their goods, she must look up the exchange rate in
effect at the time and convert the foreign currency into U.S. dollars.
Most of the suppliers are not knowledgeable about the current exchange rates. Julie calculates the amount of U.S.
dollars owed to each supplier, but she then rounds down to the lower whole dollar. She reasons that this saves time
for both parties by eliminating “cents” from all transactions. Is this the correct procedure? What would you say to
Julie about her policy?
GRAPHING WORKSHOP
Data regarding unit sales of Import/Export World are given in the table below.
Instructions: For each year, create a pie graph showing the amount of unit sales in each country.
China Italy Bolivia Germany Total Sales
Year 1 10,000 5,000 8,000 15,000 38,000
Year 2 25,000 4,000 10,000 18,000 57,000
A N A LY Z I N G B E S T B U Y ’S F I N A N C I A L S TAT E M E N T S
When a company does business in a foreign country, it often deals in the currency of that country. When financial
statements are prepared, the company must convert these amounts to U.S. dollars. Note 1 to Best Buy’s finan-
cial statements on Appendix pages B-9 through B-20 explains how many different financial statement items are
presented.
Instructions
1. When Best Buy translates foreign currency into U.S. dollars, what rate is used when listing the amounts for assets
and liabilities?
2. When Best Buy translates its results of operations and cash flows into U.S. dollars, what rate is used?
716 Chapter 24 Recording International and Internet Sales
Accounting
SOFTWARE
PEACHTREE REMINDERS AND ALERTS
Today’s computerized accounting systems are designed to do more than organize transactions and prepare finan-
cial statements. These systems also provide features to help you get organized.
Imagine starting your computer each morning and receiving a list of items that require your attention. You might
begin by looking at your “to-do” list, notes you create for yourself to remind you of tasks to be performed. Then,
examine your list of “events,” such as the time and location of a meeting, the deadline for a report, or a desired date
to contact a potential customer. As you enter a new event, Peachtree asks you identify the number of days before
the event will be listed. For example, your event list might include a meeting scheduled for tomorrow while also
listing an important report due in one week.
PEACHTREE MASTERY PROBLEM 243
1. Open (Restore) file 24-3MP.ptb.
2. Journalize the international sales involving a time draft using the Make General Journal Entries window.
3. Use the Enter Sales Receipts window to journalize Internet sales.
4. Use the Enter Sales Receipts window to journalize international sales.
5. Use the Make Deposits window to journalize the receipt of time draft payments.
6. Print a Journal report using February 1 and February 28 for the dates.
Q U I C K B O O K S P O R TA B L E F I L E S
A previous chapter discussed the importance of making a backup copy of accounting data stored
electronically. Backup files contain all of the financial data for the company and can be quite large.
If you need to email or transport the financial data to a different location, it is not reasonable to use the backup
file because of its size. A better solution is provided by QuickBooks. A portable file is a compact version of compa-
ny’s file and is small enough to be sent via email or saved to a portable media device.
If the person receiving the portable file is only looking at the data and will not be changing any data, no special
considerations need to be made. However, if that person will be changing the data, no additional changes should
be made to the main company files. When the portable file with changes is received by the company, it is not pos-
sible to merge the portable file back into the company files. Instead, the new, changed portable file will be used in
place of the old company file.
QUICKBOOKS MASTERY PROBLEM 243
1. Open the Argo Corporation file.
2. Journalize the transactions affecting sales and cash receipts completed during February in the appropriate
journal.
3. Print the general journal and cash receipts journal.
OPTIONAL QUICKBOOKS ACTIVITY
If directed by your instructor, make a portable file from your solution to Mastery Problem 24-3 and email it to your
instructor.
Recording International and Internet Sales Chapter 24 717
F O R M AT S F O R C U R R E N C Y
As a student of accounting, you have become accustomed to writing amounts in dollars and cents. On a spread-
sheet, monetary amounts are almost always presented using a number, currency, or accounting format with two
decimal places.
In today’s global economy, accountants need to create workbooks that can accurately translate U.S. dollars to
any of the world’s many currencies. For example, one U.S. dollar may equal 8.2665 Chinese Yuan or 0.78796 Euro-
pean Euro.
Electronic spreadsheets allow you to display amounts to 30 or more decimal places. Although it is unlikely you
will ever need that level of accuracy, it demonstrates the flexibility of today’s electronic spreadsheets.
EXCEL CHALLENGE PROBLEM 244
Open the F24-4 Excel data file. Follow the step-by-step instructions in the Instructions work sheet. Modify the deci-
mal places of the foreign currency amounts.
A U T O M AT E D A C C O U N T I N G T O O L S
Automated Accounting has several tools available to help perform certain tasks when using the system. You have
already learned about the Planning Tools which perform various savings, loan, and interest calculations. Two other
useful tools are the Calculator and the Find tool.
Calculator
Click the Calc. button on the toolbar to open the on-screen Calculator. A help menu is available for the Calculator
by clicking Help at the top of the calculator. The results of a calculation can be pasted into the text box in which the
cursor is located.
The Find Tool
When a journal is displayed, the Find tool from the Edit menu can be used to locate any previously entered transac-
tion. You may enter the date, reference, amount, or any other data from the transaction in the Find What text box
and click OK. If a matching transaction is found, it will be displayed in the journal where it can be checked, changed,
or deleted. If you select Find Next in the Edit menu, you will locate the next occurrence of the search criteria.
AUTOMATED ACCOUNTING APPLICATION PROBLEM 241
Open file F24-1.AA8. Display the problem instructions and complete the problem.
AUTOMATED ACCOUNTING MASTERY PROBLEM 243
Open file F24-3.AA8. Display the problem instructions and complete the problem.
718 Chapter 24 Recording International and Internet Sales
APPENDIX A
STATEMENT OF CASH FLOWS
C A S H F L O W A N A LY S I S
Financial statements provide managers, investors, and Accrual-based financial statements report useful infor-
other individuals with financial information about the mation. Some individuals, however, may need more infor-
operating efficiency and financial condition of a busi- mation about why cash is received and how cash is spent
ness. The income statement, balance sheet, and statement in a business. The cash receipts and cash payments of a
of stockholders’ equity are prepared using accounting company are called cash flows. A financial statement that
records of a business. On the income statement, rev- reports the cash flows of a business for a fiscal period is
enues are recorded when the revenue is earned, regard- called a statement of cash flows. The statement reports the
less of when the cash is received. Expenses are recorded source of all cash receipts and the reason for all cash pay-
when incurred, regardless of when the cash is paid. The ments during a fiscal period.
accounting method that records revenues when they are The statement of cash flows is divided into three sec-
earned and expenses when they are incurred is called the tions: cash flows from operating activities, cash flows
accrual basis of accounting. from investing activities, and cash flows from financing
activities.
C A S H F L O W S F R O M O P E R AT I N G A C T I V I T I E S
The cash receipts and payments necessary to operate a Cash inflows and outflows from operating activities are
business on a day-to-day basis are called operating activities. listed below.
Operating Activities
Cash Inflows Cash Outflows
Cash sales of merchandise Cash paid for salaries
Cash sales of services Cash paid for merchandise
Cash received on account Cash paid on account
Interest income Cash paid for supplies
Cash paid for utilities
Cash paid for interest
Statement of Cash Flows Appendix A A-1
CASH FLOWS FROM INVESTING ACTIVITIES
Cash receipts and cash payments involving the sale or pur- are called investing activities. Cash inflows and outflows
chase of assets used to earn revenue over a period of time from investing activities are listed below.
Investing Activities
Cash Inflows Cash Outflows
Sale of property/building Purchase of property/building
Sale of investments Cash paid for investment
Sale of machinery/equipment Purchase of machinery/equipment
CASH FLOWS FROM FINANCING AC TIVITIES
Cash receipts and payments involving debt or equity
transactions are called financing activities. Cash inflows
and outflows from financing activities are listed below.
Financing Activities
Cash Inflows Cash Outflows
Issuing stock Payment of cash dividends
Long-term loans Repayment of loan principal
Issuing bonds Retirement of bond principal
P R E P A R I N G T H E O P E R AT I N G A C T I V I T I E S S E C T I O N
O F A S TAT E M E N T O F C A S H F L O W S
The first item listed in the operating activities section is Adjusting Net Income for Changes in
the net income for the period. Since this amount is calcu- Current Assets
lated using the accrual basis of accounting, several adjust- Increases and decreases in current assets affect cash flows
ments must be made to adjust the net income to actual and require adjustments. The balance in accounts receiv-
cash flow from operating activities. able for Sanibel Sports on December 31, 20X1, was
$78,550.00. On December 31, 20X2, the balance was
Adjusting Net Income for Depreciation
$64,270.00. The accounts receivable account balance
Depreciation expense is recorded on the income statement
decreased by $14,280.00 during the year. A decrease in
and reduces net income. However, depreciation expense is
accounts receivable means that the sales amount reported
a non-cash expense, because cash is not paid out for depre-
on the income statement was less than the cash received
ciation. Therefore, even though it is an expense, it is not
on account. The $14,280.00 decrease in accounts receiv-
an outflow of cash. Since it has already been subtracted to
able represents additional cash that has been received and
determine net income, it has to be added back in when
is added to net income to determine cash flow on Sanibel
adjusting net income to cash flow. Sanibel Sports recorded
Sports’ statement of cash flows.
$1,500.00 of depreciation expense for 20X2. The adjust-
The balance in the supplies account for Sanibel Sports
ment to add back in the amount of depreciation expense
on December 31, 20X1, was $6,702.00. On Decem-
is the first adjustment listed on the statement of cash flows
ber 31, 20X2, the balance was $7,377.00. The supplies
for Sanibel Sports on page A-5.
A-2 Appendix A Statement of Cash Flows
account balance increased by $675.00 during the year. is deducted from net income to determine cash flow on
An increase in supplies means that Sanibel Sports bought Sanibel Sports’ statement of cash flows.
more supplies than it used during the period. The amount In a similar manner, all decreases in current assets will
of supplies used is listed on the income statement as an be added to net income as an adjustment. All increases
expense and reduces net income. The $675.00 increase in current assets will be deducted from net income as an
in supplies represents additional cash that was used and adjustment.
Effect of Changes in Current Assets on Cash Flows
Increases in current assets Deducted from net income
Decreases in current assets Added to net income
Adjusting Net Income for Changes in The balance in the salaries payable account for Sani-
Current Liabilities bel Sports on December 31, 20X1, was $12,500.00. On
Increases and decreases in current liabilities also affect cash December 31, 20X2, the balance was $20,900.00. The
flows and require adjustments. The balance in accounts salaries payable account balance increased by $8,400.00
payable for Sanibel Sports on December 31, 20X1, was during the year. An increase in salaries payable means that
$79,290.00. On December 31, 20X2, the balance was not all of the salaries earned during the year were paid. The
$63,400.00. The accounts payable account balance amount of salaries earned is listed on the income state-
decreased by $15,890.00 during the year. A decrease in ment and reduces net income. The $8,400.00 increase
accounts payable means that the cash flow for purchases on in salaries payable represents a cash savings and is added
account was more than the amount of purchases reported to net income to determine cash flow on Sanibel Sports’
on the income statement. The $15,890.00 decrease in statement of cash flows.
accounts payable represents additional cash that has been In a similar manner, all decreases in current liabilities
paid out and is deducted from net income to determine will be deducted from net income as an adjustment. All
cash flow on Sanibel Sports’ statement of cash flows. increases in current liabilities will be added to net income
as an adjustment.
Effect of Changes in Current Liabilities on Cash Flows
Increases in current liabilities Added to net income
Decreases in current liabilities Deducted from net income
When all adjustments are recorded, the total adjust- from operating activities, $69,965.00, are calculated and
ment to net income, $7,615.00, is calculated and entered recorded.
on the statement of cash flows. Finally, net cash flows
P R E PA R I N G T H E I N V E S T I N G AC T I V I T I E S S E C T I O N
O F A S TAT E M E N T O F C A S H F L O W S
The second section of the statement of cash flows reports $50,000.00 increase represents the cost of new equipment
the cash effect of investing activities. Cash flows result- purchased for cash. This amount is shown as an outflow
ing from a company’s investing activities are identified by of cash on Sanibel Sports’ statement of cash flows.
analyzing the changes in long-term asset accounts. The balance in the land account for Sanibel Sports
The balance in the equipment account for Sanibel on December 31, 20X1, was $35,500.00. On December
Sports on December 31, 20X1, was $45,000.00. On 31, 20X2, the balance was $25,200.00. The $10,300.00
December 31, 20X2, the balance was $95,000.00. The decrease represents land sold by Sanibel during this period.
Statement of Cash Flows Appendix A A-3
Further investigation reveals that Sanibel sold the land for When the changes in all long-term asset accounts have
$10,300.00 during 20X2. The sale of land is an inflow of been analyzed and cash flows listed, the net cash flows
cash of $10,300.00. This amount is shown as an inflow of from investing activities ($39,700.00), is calculated and
cash on Sanibel Sports’ statement of cash flows. recorded.
P R E PA R I N G T H E F I N A N C I N G AC T I V I T I E S S E C T I O N
O F A S TAT E M E N T O F C A S H F L O W S
The third section of the statement of cash flows reports The change in this account is caused by two items. The
the cash effect of financing activities. Cash flows result- retained earnings account increases by the amount of net
ing from a company’s financial activities are identified by income for a period and decreases by the amount of div-
analyzing the changes in long-term debt and stockholders’ idends paid during a period. The beginning balance of
equity accounts. The balance in the loans payable account $73,670.00, plus the net income of $62,350.00, would
for Sanibel Sports on December 31, 20X1, was zero. On give a balance of $136,020.00. Any difference between
December 31, 20X2, the balance was $12,500.00. The that amount and the actual ending balance in retained
$12,500.00 increase represents the proceeds from a loan earnings is caused by dividends. Therefore, the amount
Sanibel Sports received. This amount is shown as an inflow of dividends declared by Sanibel Sports this period equals
of cash on Sanibel Sports’ statement of cash flows. $8,000.00. Since this was a cash dividend, this amount is
The balance in the retained earnings account for Sani- shown as an outflow of cash on Sanibel Sports’ statement
bel Sports on December 31, 20X1, was $73,670.00. of cash flows.
On December 31, 20X2, the balance was $128,020.00.
Retained Earnings, beginning balance $ 73,670.00
Plus net income 62,350.00
Equals $136,020.00
Minus current balance of Retained Earnings 128,020.00
Equals dividend paid $ 8,000.00
When all the changes in long-term debt and stockholder the net cash flows from financing activities, $4,500.00, is
equity accounts have been analyzed and cash flows listed, calculated and recorded.
A-4 Appendix A Statement of Cash Flows
Sanibel Sports
Statement of Cash Flows
For Year Ended December 31, 20X2
Cash Flows from Operating Activities:
Net Income 62 3 5 0 00
Adjustments to Net Income:
Depreciation Expense 1 5 0 0 00
Changes in current assets and liabilities:
Decrease in accounts receivable 14 2 8 0 00
Increase in supplies (6 7 5 00)
Decrease in accounts payable (15 8 9 0 00)
Increase in salaries payable 8 4 0 0 00
Total adjustments to net income 7 6 1 5 00
Net cash flows from operating activities 69 9 6 5 00
Cash Flows from Investing Activities:
Purchased equipment (50 0 0 0 00)
Sold land 10 3 0 0 00
Net cash flows from investing activities (39 7 0 0 00)
Cash Flows from Financing Activities:
Proceeds from loan payable 12 5 0 0 00
Dividend payment (8 0 0 0 00)
Net cash flows from financing activities 4 5 0 0 00
Net Change in Cash 34 7 6 5 00
Cash Balance, Beginning of Period 62 7 5 0 00
Cash Balance, End of Period 97 5 1 5 00
C O M P L E T I N G T H E S TAT E M E N T O F C A S H F L O W S
The sum of the operating, investing, and financing activi- Sanibel Sports’ increase in cash, $34,765.00, is added to
ties sections of the statement of cash flows are added in the beginning cash balance, $62,750.00, to calculate the
order to calculate the net increase or decrease in cash. If ending cash balance, $97,515.00. The ending cash bal-
all cash transactions have been accounted for, the change ance equals the cash balance reported on Sanibel Sports’
in cash plus the beginning cash balance should equal the balance sheet. Thus, the statement of cash flows has been
ending cash balance reported on the balance sheet. prepared accurately.
Statement of Cash Flows Appendix A A-5
P R AC T I C E P R O B L E M A 1: P R E PA R I N G
A S TAT E M E N T O F C A S H F L O W S
The following information was taken from the financial records of Bonita Body Shop for the year ending
December 31, 20X2:
Net Income $15,495.00
Depreciation Expense 2,300.00
Balance Balance
Account Title Dec. 31, 20X1 Dec. 31, 20X2
Cash $70,700.00 $51,795.00
Accounts Receivable 10,500.00 12,300.00
Prepaid Insurance 7,000.00 6,000.00
Accounts Payable 13,000.00 15,500.00
Interest Payable 1,400.00 0.00
Equipment 18,000.00 22,000.00
Loans Payable 40,000.00 10,000.00
Retained Earnings 42,000.00 54,495.00
Additional information: Equipment was purchased for $4,000.00 cash.
All dividends were paid in cash.
Statement paper is provided in the Working Papers.
Instructions:
1. Complete a statement of cash flows for the year ending December 31, 20X2, for Bonita Body Shop.
P R AC T I C E P R O B L E M A 2 : P R E PA R I N G
A S TAT E M E N T O F C A S H F L O W S
The following information was taken from the financial records of Terrace Yard Care for the year ending
December 31, 20X2:
Net Income $3,500.00
Depreciation Expense 2,000.00
Balance Balance
Account Title Dec. 31, 20X1 Dec. 31, 20X2
Cash $13,300.00 $15,000.00
Accounts Receivable 20,500.00 25,900.00
Supplies 700.00 400.00
Accounts Payable 18,600.00 16,600.00
Salaries Payable 0.00 800.00
Equipment 4,000.00 5,500.00
Land 8,000.00 6,000.00
Loans Payable 0.00 3,000.00
Retained Earnings 11,200.00 13,700.00
Additional information: Equipment was purchased for $1,500.00 cash.
Land was sold for $2,000.00 cash.
All dividends were paid in cash.
Statement paper is provided in the Working Papers.
Instructions:
1. Complete a statement of cash flows for the year ending December 31, 20X2, for Terrace Yard Care.
A-6 Appendix A Statement of Cash Flows
BEST BUY’S FISCAL 2007
APPENDIX B
ANNUAL REPORT (selected pages)
A WORLD OF OPPORTUNITY
Fiscal 2007 Annual Report
Source: © 2007 Best Buy
Item 6. Selected Financial Data.
The following table presents our selected financial data. The table should be read in conjunction with Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and
Supplementary Data, of this Annual Report on Form 10-K. Certain prior-year amounts have been reclassified to conform to
the current-year presentation. In fiscal 2004, we sold our interest in Musicland. All fiscal years presented reflect the
classification of Musicland’s financial results as discontinued operations.
Five-Year Financial Highlights
$ in millions, except per share amounts
Fiscal Year 2007(1) 2006(2) 2005(3) 2004 2003
Consolidated Statements of Earnings Data
Revenue $35,934 $30,848 $27,433 $24,548 $20,943
Operating income 1,999 1,644 1,442 1,304 1,010
Earnings from continuing operations 1,377 1,140 934 800 622
Loss from discontinued operations, net of tax — — — (29) (441)
Gain (loss) on disposal of discontinued operations, net of tax — — 50 (66) —
Cumulative effect of change in accounting principles, net of tax(4) — — — — (82)
Net earnings 1,377 1,140 984 705 99
Per Share Data(5)
Continuing operations $ 2.79 $ 2.27 $ 1.86 $ 1.61 $ 1.27
Discontinued operations — — — (0.06) (0.89)
Gain (loss) on disposal of discontinued operations — — 0.10 (0.13) —
Cumulative effect of accounting changes — — — — (0.16)
Net earnings 2.79 2.27 1.96 1.42 0.20
Cash dividends declared and paid 0.36 0.31 0.28 0.27 —
Common stock price:
High 59.50 56.00 41.47 41.80 35.83
Low 43.51 31.93 29.25 17.03 11.33
Operating Statistics
Comparable store sales gain(6) 5.0% 4.9% 4.3% 7.1% 2.4%
Gross profit rate 24.4% 25.0% 23.7% 23.9% 23.6%
Selling, general and administrative expenses rate 18.8% 19.7% 18.4% 18.6% 18.8%
Operating income rate 5.6% 5.3% 5.3% 5.3% 4.8%
Year-End Data
Current ratio(7)(8) 1.4 1.3 1.4 1.3 1.3
Total assets(7) $13,570 $11,864 $10,294 $ 8,652 $ 7,694
Debt, including current portion(7) 650 596 600 850 834
Total shareholders’ equity 6,201 5,257 4,449 3,422 2,730
Number of stores
Domestic 868 774 694 631 567
International 304 167 144 127 112
Total 1,172 941 838 758 679
Retail square footage (000s)
Domestic 33,959 30,826 28,465 26,640 24,432
International 7,926 3,564 3,139 2,800 2,375
Total 41,885 34,390 31,604 29,440 26,807
(1)
Fiscal 2007 included 53 weeks. All other periods presented included 52 weeks.
(2) In the first quarter of fiscal 2006, we early-adopted the fair value recognition provisions of Statement of Financial
Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment (“123(R)”), requiring us to recognize
expense related to the fair value of our stock-based compensation awards. We elected the modified prospective
transition method as permitted by SFAS No. 123(R) and, accordingly, financial results for years prior to fiscal 2006
have not been restated. Stock-based compensation expense in fiscal 2007 and 2006 was $121 ($82 net of tax) and
$132 ($87 net of tax), respectively. Stock-based compensation expense recognized in our financial results for years
prior to fiscal 2006 was not significant.
Footnotes continue on next page.
B-2 Appendix B Best Buy’s Fiscal 2007 Annual Report (selected pages)
$ in millions, except per share amounts
(footnotes continued)
(3)
During the fourth quarter of fiscal 2005, following a review of our lease accounting practices, we recorded a
cumulative charge of $36 pre-tax ($23 net of tax) to correct our accounting for certain operating lease matters.
Additionally, during the same quarter, we established a sales return liability which reduced gross profit by $15 pre-tax
($10 net of tax). Further, in fiscal 2005 we recognized a $50 tax benefit related to the reversal of valuation allowances
on deferred tax assets as a result of the favorable resolution of outstanding tax matters with the Internal Revenue Service
regarding the disposition of our interest in Musicland. The tax benefit was classified as discontinued operations.
(4)
Effective on March 3, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets. During fiscal 2003, we
completed the required goodwill impairment testing and recognized an after-tax, noncash impairment charge of $40
that was reflected in our fiscal 2003 financial results as a cumulative effect of a change in accounting principle. Also
effective on March 3, 2002, we changed our method of accounting for vendor allowances in accordance with
Emerging Issues Task Force (“EITF”) Issue No. 02-16, Accounting by a Reseller for Cash Consideration Received from a
Vendor. The change resulted in an after-tax, noncash charge of $42 that also was reflected in our fiscal 2003 financial
results as a cumulative effect of a change in accounting principle.
PART II
(5)
Earnings per share is presented on a diluted basis and reflects three-for-two stock splits effected in August 2005 and
May 2002.
(6)
Comprised of revenue at stores and Web sites operating for at least 14 full months, as well as remodeled and expanded
locations. Relocated stores are excluded from the comparable store sales calculation until at least 14 full months after
reopening. Acquired stores are included in the comparable store sales calculation beginning with the first full quarter
following the first anniversary of the date of acquisition. The calculation of the comparable store sales percentage gain
excludes the effect of fluctuations in foreign currency exchange rates. All comparable store sales percentage
calculations reflect an equal number of weeks. The method of calculating comparable store sales varies across the
retail industry. As a result, our method of calculating comparable store sales may not be the same as other retailers’
methods.
During fiscal 2004, we refined our methodology for calculating our comparable store sales percentage gain to reflect
the impact of non-point-of-sale (non-POS) revenue transactions. We refined our comparable store sales calculation in
light of changes in our business. Previously, our comparable store sales calculation was based on store POS revenue.
The comparable store sales percentage gains for fiscal 2007, 2006, 2005 and 2004 have been computed using the
refined methodology. The comparable store sales percentage gain for fiscal 2003 has not been computed using
the refined methodology. Refining the methodology for calculating our comparable store sales percentage gain did not
impact previously reported revenue, net earnings or cash flows.
(7)
Includes both continuing and discontinued operations.
(8)
The current ratio is calculated by dividing total current assets by total current liabilities.
Best Buy’s Fiscal 2007 Annual Report (selected pages) Appendix B B-3
Item 8. Financial Statements and Supplementary Data.
Management’s Report on the Financial Statements
Our management is responsible for the preparation, integrity and objectivity of the accompanying consolidated financial
statements and the related financial information. The financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America and necessarily include certain amounts that are based on
estimates and informed judgments. Our management also prepared the related financial information included in this Annual
Report on Form 10-K and is responsible for its accuracy and consistency with the financial statements.
The consolidated financial statements have been audited by Deloitte & Touche LLP for the years ended March 3, 2007, and
February 25, 2006, and by Ernst & Young LLP for the year ended February 26, 2005, independent registered public
accounting firms who conducted their audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). The independent registered public accounting firms’ responsibility is to express an opinion as to the
fairness with which such financial statements present our financial position, results of operations and cash flows in
accordance with accounting principles generally accepted in the United States.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as
PART II
defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is
designed under the supervision of our principal executive officer and principal financial officer, and effected by our Board of
Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with accounting principles generally
accepted in the United States and include those policies and procedures that:
(1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and the
dispositions of our assets;
(2) Provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally accepted in the United States, and that our receipts and
expenditures are being made only in accordance with authorizations of our management and Board of Directors; and
(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
Under the supervision and with the participation of our management, including our principal executive officer and principal
financial officer, we assessed the effectiveness of our internal control over financial reporting as of March 3, 2007, using the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control —
Integrated Framework. Based on its assessment, management has concluded that our internal control over financial reporting
was effective as of March 3, 2007. During its assessment, management did not identify any material weaknesses in our internal
control over financial reporting. Management has excluded from its assessment the internal control over financial reporting at
Pacific Sales Kitchen and Bath Centers, which was acquired on March 7, 2006, and whose financial statements reflect total
assets and total revenues constituting 3% and 1%, respectively, of the consolidated financial statement amounts as of and for the
year ended March 3, 2007. Management has also excluded from its assessment the internal control over financial reporting at
Jiangsu Five Star Appliance Co., in which a 75% interest was acquired on June 8, 2006, and whose financial statements reflect
total assets and total revenues constituting 5% and 2%, respectively, of the consolidated financial statement amounts as of and
for the year ended March 3, 2007. Deloitte & Touche LLP, the independent registered public accounting firm that audited our
consolidated financial statements for the year ended March 3, 2007, included in Item 8, Financial Statements and
Supplementary Data, of this Annual Report on Form 10-K, has issued an unqualified attestation report on management’s
assessment of internal control over financial reporting.
Bradbury H. Anderson Darren R. Jackson
Vice Chairman and Chief Executive Officer Executive Vice President — Finance
(Principal Executive Officer) and Chief Financial Officer
(Principal Financial Officer)
B-4 Appendix B Best Buy’s Fiscal 2007 Annual Report (selected pages)
Consolidated Balance Sheets
$ in millions, except per share amounts
March 3, February 25,
2007 2006
Assets
Current Assets
Cash and cash equivalents $ 1,205 $ 748
Short-term investments 2,588 3,041
Receivables 548 449
Merchandise inventories 4,028 3,338
Other current assets 712 409
Total current assets 9,081 7,985
Property and Equipment
Land and buildings 705 580
Leasehold improvements 1,540 1,325
PART II
Fixtures and equipment 2,627 2,898
Property under capital lease 32 33
4,904 4,836
Less accumulated depreciation 1,966 2,124
Net property and equipment 2,938 2,712
Goodwill 919 557
Tradenames 81 44
Long-Term Investments 318 218
Other Assets 233 348
Total Assets $ 13,570 $ 11,864
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable $ 3,934 $ 3,234
Unredeemed gift card liabilities 496 469
Accrued compensation and related expenses 332 354
Accrued liabilities 990 878
Accrued income taxes 489 703
Short-term debt 41 —
Current portion of long-term debt 19 418
Total current liabilities 6,301 6,056
Long-Term Liabilities 443 373
Long-Term Debt 590 178
Minority Interests 35 —
Shareholders’ Equity
Preferred stock, $1.00 par value: Authorized — 400,000 shares; Issued and
outstanding — none — —
Common stock, $.10 par value: Authorized — 1 billion shares; Issued and
outstanding — 480,655,000 and 485,098,000 shares, respectively 48 49
Additional paid-in capital 430 643
Retained earnings 5,507 4,304
Accumulated other comprehensive income 216 261
Total shareholders’ equity 6,201 5,257
Total Liabilities and Shareholders’ Equity $ 13,570 $ 11,864
See Notes to Consolidated Financial Statements.
Best Buy’s Fiscal 2007 Annual Report (selected pages) Appendix B B-5
Consolidated Statements of Earnings
$ in millions, except per share amounts
March 3, February 25, February 26,
Fiscal Years Ended 2007 2006 2005
Revenue $35,934 $30,848 $ 27,433
Cost of goods sold 27,165 23,122 20,938
Gross profit 8,769 7,726 6,495
Selling, general and administrative expenses 6,770 6,082 5,053
Operating income 1,999 1,644 1,442
Net interest income 111 77 1
Gain on investments 20 — —
Earnings from continuing operations before income tax expense 2,130 1,721 1,443
Income tax expense 752 581 509
Minority interest in earnings 1 — —
Earnings from continuing operations 1,377 1,140 934
Gain on disposal of discontinued operations (Note 2), net of tax — — 50
Net earnings $ 1,377 $ 1,140 $ 984
Basic earnings per share:
Continuing operations $ 2.86 $ 2.33 $ 1.91
Gain on disposal of discontinued operations — — 0.10
Basic earnings per share $ 2.86 $ 2.33 $ 2.01
Diluted earnings per share:
Continuing operations $ 2.79 $ 2.27 $ 1.86
Gain on disposal of discontinued operations — — 0.10
Diluted earnings per share $ 2.79 $ 2.27 $ 1.96
Basic weighted-average common shares outstanding (in millions) 482.1 490.3 488.9
Diluted weighted-average common shares outstanding (in millions) 496.2 504.8 505.0
See Notes to Consolidated Financial Statements.
B-6 Appendix B Best Buy’s Fiscal 2007 Annual Report (selected pages)
Consolidated Statements of Cash Flows
$ in millions
March 3, February 25, February 26,
Fiscal Years Ended 2007 2006 2005
Operating Activities
Net earnings $ 1,377 $ 1,140 $ 984
Gain from disposal of discontinued operations, net of tax — — (50)
Earnings from continuing operations 1,377 1,140 934
Adjustments to reconcile earnings from continuing operations to total cash
provided by operating activities from continuing operations:
Depreciation 509 456 459
Asset impairment charges 32 4 22
Stock-based compensation 121 132 (1)
Deferred income taxes 82 (151) (28)
Excess tax benefits from stock-based compensation (50) (55) —
Other, net (11) (3) 24
Changes in operating assets and liabilities, net of acquired assets and liabilities:
PART II
Receivables (70) (43) (30)
Merchandise inventories (550) (457) (240)
Other assets (47) (11) (50)
Accounts payable 320 385 347
Other liabilities 185 165 243
Accrued income taxes (136) 178 301
Total cash provided by operating activities from continuing operations 1,762 1,740 1,981
Investing Activities
Additions to property and equipment, net of $75 and $117 non-cash capital
expenditures in fiscal 2006 and 2005, respectively (733) (648) (502)
Purchases of available-for-sale securities (4,541) (4,319) (8,517)
Sales of available-for-sale securities 4,886 4,187 7,730
Acquisitions of businesses, net of cash acquired (421) — —
Proceeds from disposition of investments 24 — —
Change in restricted assets — (20) (140)
Other, net 5 46 7
Total cash used in investing activities from continuing operations (780) (754) (1,422)
Financing Activities
Repurchase of common stock (599) (772) (200)
Issuance of common stock under employee stock purchase plan and for the
exercise of stock options 217 292 256
Dividends paid (174) (151) (137)
Repayments of debt (84) (69) (371)
Proceeds from issuance of debt 96 36 —
Excess tax benefits from stock-based compensation 50 55 —
Other, net (19) (10) (7)
Total cash used in financing activities from continuing operations (513) (619) (459)
Effect of Exchange Rate Changes on Cash (12) 27 9
Increase in Cash and Cash Equivalents 457 394 109
Cash and Cash Equivalents at Beginning of Year 748 354 245
Cash and Cash Equivalents at End of Year $ 1,205 $ 748 $ 354
Supplemental Disclosure of Cash Flow Information
Income taxes paid $ 804 $ 547 $ 241
Interest paid 14 16 35
See Notes to Consolidated Financial Statements.
Best Buy’s Fiscal 2007 Annual Report (selected pages) Appendix B B-7
Consolidated Statements of Changes in Shareholders’ Equity
$ and shares in millions
Accumulated
Additional Other
Common Common Paid-In Retained Comprehensive
Shares Stock Capital Earnings Income Total
Balances at February 28, 2004 487 $ 49 $ 819 $ 2,468 $ 86 $ 3,422
Net earnings — — — 984 — 984
Other comprehensive income, net of tax:
Foreign currency translation adjustments — — — — 59 59
Other — — — — 4 4
Total comprehensive income 1,047
Stock options exercised 10 1 219 — — 220
Tax benefit from stock options exercised and
employee stock purchase plan — — 60 — — 60
Issuance of common stock under employee stock
purchase plan 2 — 36 — — 36
Vesting of restricted stock awards — — 1 — — 1
Common stock dividends, $0.28 per share — — — (137) — (137)
Repurchase of common stock (6) (1) (199) — — (200)
Balances at February 26, 2005 493 49 936 3,315 149 4,449
Net earnings — — — 1,140 — 1,140
Other comprehensive income, net of tax:
Foreign currency translation adjustments — — — — 101 101
Other — — — — 11 11
Total comprehensive income 1,252
Stock options exercised 9 1 256 — — 257
Tax benefit from stock options exercised and
employee stock purchase plan — — 55 — — 55
Issuance of common stock under employee stock
purchase plan 1 — 35 — — 35
Stock-based compensation — — 132 — — 132
Common stock dividends, $0.31 per share — — — (151) — (151)
Repurchase of common stock (18) (1) (771) — — (772)
Balances at February 25, 2006 485 49 643 4,304 261 5,257
Net earnings — — — 1,377 — 1,377
Other comprehensive loss, net of tax:
Foreign currency translation adjustments — — — — (33) (33)
Other — — — — (12) (12)
Total comprehensive income 1,332
Stock options exercised 7 1 167 — — 168
Tax benefit from stock options exercised and
employee stock purchase plan — — 47 — — 47
Issuance of common stock under employee stock
purchase plan 1 — 49 — — 49
Stock-based compensation — — 121 — — 121
Common stock dividends, $0.36 per share — — — (174) — (174)
Repurchase of common stock (12) (2) (597) — — (599)
Balances at March 3, 2007 481 $ 48 $ 430 $ 5,507 $ 216 $ 6,201
See Notes to Consolidated Financial Statements.
B-8 Appendix B Best Buy’s Fiscal 2007 Annual Report (selected pages)
Notes to Consolidated Financial Statements
$ in millions, except per share amounts
1. Summary of Significant Accounting Policies In fiscal 2004, we sold our interest in Musicland Stores
Corporation (“Musicland”). The transaction resulted in the
Description of Business
transfer of all of Musicland’s assets other than a distribution
Best Buy Co., Inc. is a specialty retailer of consumer center in Franklin, Indiana, and selected nonoperating
electronics, home-office products, entertainment software, assets. In fiscal 2005, we reversed previously recorded
appliances and related services, with fiscal 2007 revenue valuation allowances on deferred tax assets related to the
from continuing operations of $35.9 billion. disposition of our interest in Musicland and recognized a
We operate two reportable segments: Domestic and tax benefit. As described in Note 2, Discontinued
International. The Domestic segment is comprised of all Operations, we have classified Musicland’s financial results
U.S. store and online operations of Best Buy, Geek Squad, as discontinued operations for all periods presented. These
Magnolia Audio Video and Pacific Sales Kitchen and Bath Notes to Consolidated Financial Statements, except where
Centers, Inc. (“Pacific Sales”). We acquired Pacific Sales on otherwise indicated, relate to continuing operations only.
PART II
March 7, 2006. U.S. Best Buy stores offer a wide variety of
consumer electronics, home-office products, entertainment
Basis of Presentation
software, appliances and related services through 822 The consolidated financial statements include the accounts
stores at the end of fiscal 2007. Geek Squad provides of Best Buy Co., Inc. and its subsidiaries. Investments in
residential and commercial computer repair, support and unconsolidated entities over which we exercise significant
installation services in all U.S. Best Buy stores and at 12 influence but do not have control are accounted for using
stand-alone stores at the end of fiscal 2007. Magnolia the equity method. Our share of the net earnings or loss
Audio Video stores offer high-end audio and video products was not significant for any period presented. We have
and related services through 20 stores at the end of fiscal eliminated all intercompany accounts and transactions.
2007. Pacific Sales stores offer high-end home-
Effective June 8, 2006, we acquired a 75% interest in Five
improvement products, appliances and related services
Star. Consistent with China’s statutory requirements, Five
through 14 stores at the end of fiscal 2007.
Star’s fiscal year ends on December 31. Therefore, we have
The International segment is comprised of all Canada store elected to consolidate Five Star’s financial results on a two-
and online operations, including Best Buy, Future Shop and month lag. There were no significant intervening events
Geek Squad, as well as all China store and online which would have materially affected our consolidated
operations, including Best Buy, Geek Squad and Jiangsu financial statements had they been recorded during the
Five Star Appliance Co., Ltd. (“Five Star”). We acquired a fiscal year. See Note 3, Acquisitions, for further details
75% interest in Five Star on June 8, 2006. We opened our regarding this transaction.
first China Best Buy store in Shanghai on December 28,
2006. The International segment offers products and Reclassifications
services similar to those offered by the Domestic segment.
To maintain consistency and comparability, certain amounts
However, Canada Best Buy stores do not carry appliances.
from previously reported consolidated financial statements
Further, Five Star stores and our China Best Buy store do
have been reclassified to conform to the current-year
not carry entertainment software. At the end of fiscal 2007,
presentation:
the International segment operated 121 Future Shop stores
and 47 Best Buy stores in Canada, and 135 Five Star stores • We reclassified selected balances from receivables
and one Best Buy store in China. to cash and cash equivalents in our February 25,
2006, consolidated balance sheet.
In support of our retail store operations, we also maintain
Web sites for each of our brands (BestBuy.com, • During the third quarter of fiscal 2007, we made a
BestBuyCanada.ca, BestBuy.com.cn, Five-Star.cn, one-time election to adopt the alternative transition
FutureShop.ca, GeekSquad.com, GeekSquad.ca, method described in Financial Accounting
MagnoliaAV.com and PacificSales.com). Standards Board (“FASB”) Staff Position (“FSP”)
No. FAS 123(R)-3, Transition Election Related to
Best Buy’s Fiscal 2007 Annual Report (selected pages) Appendix B B-9
$ in millions, except per share amounts
Accounting for the Tax Effects of Share-Based This change in accounting principle had no effect on any
Payment Awards. This election resulted in the quarter of fiscal 2007 or 2006 other than those in the table
reclassification of excess tax benefits from operating above.
activities to financing activities, as presented in the
statement of cash flows. See Stock-Based Use of Estimates in the Preparation of Financial
Compensation below, for further details. Statements
These reclassifications had no effect on previously reported The preparation of financial statements in conformity with
operating income, net earnings or shareholders’ equity. accounting principles generally accepted in the United
States (“GAAP”) requires us to make estimates and
Change in Accounting Principle assumptions. These estimates and assumptions affect the
During the fourth quarter of fiscal 2007, we elected to reported amounts in the consolidated balance sheets and
change our accounting principle to recognize the purchase statements of earnings, as well as the disclosure of
and sale of investments in marketable debt and equity contingent liabilities. Future results could be materially
securities on the trade date. Prior to the fourth quarter of affected if actual results differ from these estimates and
fiscal 2007, we recognized these transactions in our assumptions.
consolidated financial statements on the settlement date. We
concluded that use of the trade date was preferable to the Fiscal Year
settlement date as trade date reflects the risks and rewards of
investment ownership on a more timely basis. In addition, this Our fiscal year ends on the Saturday nearest the end of
method more closely aligns with the standard methodology February. Fiscal 2007 included 53 weeks and fiscal 2006
utilized by our new investment custodian to account for and 2005 each included 52 weeks.
investment transactions. In accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 154, Cash and Cash Equivalents
Accounting Changes and Error Corrections, this change in
Cash primarily consists of cash on hand and bank deposits.
accounting principle has been applied retrospectively to our
consolidated financial statements for all prior periods. This Cash equivalents primarily consist of money market
change in accounting principle had no effect on previously accounts and other highly liquid investments with an
reported operating income, net earnings, shareholders’ original maturity of three months or less when purchased.
equity or cash flows. The effect on the consolidated balance We carry these investments at cost, which approximates
sheets for each applicable quarter was as follows in fiscal market value. The amounts of cash equivalents at March 3,
2007 and 2006 (unaudited): 2007, and February 25, 2006, were $695 and $350,
2007 2006 respectively, and the weighted-average interest rates were
3rd 2nd 4th 1st 4.8% and 3.3%, respectively.
Quarter Quarter Quarter Quarter
Cash and cash equivalents Outstanding checks in excess of funds on deposit (“book
As reported $ 1,202 $ 1,104 $ 748 $ 458 overdrafts”) totaled $183 and $230 at March 3, 2007, and
As adjusted 1,208 1,104 748 458 February 25, 2006, respectively, and are reflected as
Short-term investments current liabilities in our consolidated balance sheets.
As reported 1,513 1,564 3,051 2,148
As adjusted 1,802 1,534 3,041 2,101 Merchandise Inventories
Receivables Merchandise inventories are recorded at the lower of
As reported 1,112 483 439 350 average cost or market. In-bound freight-related costs from
As adjusted 1,115 513 449 413 our vendors are included as part of the net cost of
Accrued liabilities merchandise inventories. Also included in the cost of
As reported 1,315 958 878 741 inventory are certain vendor allowances that are not a
As adjusted 1,613 958 878 757 reimbursement of specific, incremental and identifiable
costs to promote a vendor’s products. Other costs
associated with acquiring, storing and transporting
B-10 Appendix B Best Buy’s Fiscal 2007 Annual Report (selected pages)
$ in millions, except per share amounts
merchandise inventories to our retail stores are expensed as removed from the accounts and any resulting gain or loss is
incurred and included in cost of goods sold. reflected in the consolidated statement of earnings.
Our inventory loss reserve represents anticipated physical Repairs and maintenance costs are charged directly to
inventory losses (e.g., theft) that have occurred since the last expense as incurred. Major renewals or replacements that
physical inventory date. Independent physical inventory substantially extend the useful life of an asset are capitalized
counts are taken on a regular basis to ensure that the and depreciated.
inventory reported in our consolidated financial statements
Costs associated with the acquisition or development of
is properly stated. During the interim period between physical
software for internal use are capitalized and amortized over
inventory counts, we reserve for anticipated physical inventory
the expected useful life of the software, from three to seven
losses on a location-by-location basis.
years. A subsequent addition, modification or upgrade to
Our markdown reserve represents the excess of the carrying internal-use software is capitalized only to the extent that it
value, typically average cost, over the amount we expect to enables the software to perform a task it previously did not
PART II
realize from the ultimate sale or other disposal of the inventory. perform. Capitalized software is included in fixtures and
Markdowns establish a new cost basis for our inventory. equipment. Software maintenance and training costs are
Subsequent changes in facts or circumstances do not result expensed in the period incurred.
in the reversal of previously recorded markdowns or an
Property under capital lease is comprised of buildings and
increase in that newly established cost basis.
equipment used in our retail operations and corporate
support functions. The related depreciation for capital lease
Restricted Assets
assets is included in depreciation expense. Accumulated
Restricted cash and investments in debt securities totaled depreciation for property under capital lease was $6 and
$382 and $178, at March 3, 2007, and February 25, $5 at March 3, 2007, and February 25, 2006, respectively.
2006, respectively, and are included in other current assets.
Estimated useful lives by major asset category are as
Such balances are pledged as collateral or restricted to use
follows:
for vendor payables, general liability insurance, workers’
compensation insurance and warranty programs. The Life
increase in restricted cash and investments in debt securities Asset (in years)
compared with February 25, 2006, was due primarily to Buildings 30–40
restricted cash assumed in connection with the acquisition Leasehold improvements 3–25
of Five Star. Five Star’s restricted cash represents bank Fixtures and equipment 3–20
deposits pledged as security for certain vendor payables. Property under capital lease 3–20
Property and Equipment During the fourth quarter of fiscal 2007, we removed from
our fixed asset balances $621 of fully depreciated assets
Property and equipment are recorded at cost. We compute that were no longer in service. This asset adjustment was
depreciation using the straight-line method over the based primarily on an analysis of our fixed asset records
estimated useful lives of the assets. Leasehold improvements and certain other validation procedures and had no net
are depreciated over the shorter of their estimated useful impact to our fiscal 2007 consolidated balance sheet,
lives or the period from the date the assets are placed in statement of earnings or statement of cash flows.
service to the end of the initial lease term. Leasehold
improvements made significantly after the initial lease term Impairment of Long-Lived Assets and Costs
are depreciated over the shorter of their estimated useful Associated With Exit Activities
lives or the remaining lease term, including renewal
periods, if reasonably assured. Accelerated depreciation We account for the impairment or disposal of long-lived
methods are generally used for income tax purposes. assets in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which requires
When property is fully depreciated, retired or otherwise long-lived assets, such as property and equipment, to be
disposed of, the cost and accumulated depreciation are evaluated for impairment whenever events or changes in
Best Buy’s Fiscal 2007 Annual Report (selected pages) Appendix B B-11
$ in millions, except per share amounts
circumstances indicate the carrying value of an asset may For leases that contain predetermined fixed escalations of
not be recoverable. Factors considered important that could the minimum rent, we recognize the related rent expense on
result in an impairment review include, but are not limited a straight-line basis from the date we take possession of the
to, significant underperformance relative to historical or property to the end of the initial lease term. We record any
planned operating results, significant changes in the difference between the straight-line rent amounts and
manner of use of the assets or significant changes in our amounts payable under the leases as part of deferred rent,
business strategies. An impairment loss is recognized when in accrued liabilities or long-term liabilities, as appropriate.
the estimated undiscounted cash flows expected to result
Cash or lease incentives (“tenant allowances”) received
from the use of the asset plus net proceeds expected from
upon entering into certain store leases are recognized on a
disposition of the asset (if any) are less than the carrying
straight-line basis as a reduction to rent from the date we
value of the asset. When an impairment loss is recognized,
take possession of the property through the end of the initial
the carrying amount of the asset is reduced to its estimated
lease term. We record the unamortized portion of tenant
fair value based on quoted market prices or other valuation
allowances as a part of deferred rent, in accrued liabilities
techniques.
or long-term liabilities, as appropriate.
The present value of costs associated with location closings,
At March 3, 2007, and February 25, 2006, deferred rent
primarily future lease costs (net of expected sublease
included in accrued liabilities in our consolidated balance
income), are charged to earnings when a location is
sheets was $18 and $16, respectively, and deferred rent
vacated.
included in long-term liabilities in our consolidated balance
Pre-tax asset impairment charges recorded in selling, sheets was $237 and $211, respectively.
general and administrative expenses (“SG&A”) by segment
Prior to fiscal 2007, we capitalized straight-line rent
were as follows in fiscal 2007, 2006 and 2005:
amounts during the major construction phase of leased
2007 2006 2005 properties. Beginning in the first quarter of fiscal 2007, we
Domestic $26 $ 4 $22 adopted on a prospective basis, FSP No. FAS 13-1,
International 6 — — Accounting for Rental Costs Incurred During a Construction
Total $32 $ 4 $22 Period. FSP No. FAS 13-1 requires companies to expense
rent payments for building or ground leases incurred during
the construction period. The adoption of FSP No. FAS 13-1
The impairment charges in fiscal 2007 and 2006 related to
did not have a significant effect on our operating income or
technology and store assets that were taken out of service
net earnings. Straight-line rent is expensed as incurred
due to changes in our business. The impairment charges in
subsequent to the major construction phase, including the
fiscal 2005 related to technology assets that were taken out
period prior to the store opening.
of service due to changes in our business and charges
associated with the disposal of corporate facilities that had Transaction costs associated with the sale and leaseback of
been vacated. properties and any related gain or loss are recognized on a
straight-line basis over the initial period of the lease
Leases agreements. We do not have any retained or contingent
interests in the properties nor do we provide any guarantees
We conduct the majority of our retail and distribution
in connection with the sale and leaseback of properties,
operations from leased locations. The leases require
other than a corporate-level guarantee of lease payments.
payment of real estate taxes, insurance and common area
maintenance, in addition to rent. The terms of our lease We also lease certain equipment under noncancelable
agreements generally range from 10 to 20 years. Most of operating and capital leases. Assets acquired under capital
the leases contain renewal options and escalation clauses, leases are depreciated over the shorter of the useful life of
and certain store leases require contingent rents based on the asset or the lease term, including renewal periods, if
factors such as specified percentages of revenue or the reasonably assured.
consumer price index. Other leases contain covenants
related to the maintenance of financial ratios.
B-12 Appendix B Best Buy’s Fiscal 2007 Annual Report (selected pages)
$ in millions, except per share amounts
Goodwill and Intangible Assets Tradenames
Goodwill We have an indefinite-lived intangible asset related to our
Pacific Sales tradename which is included in the Domestic
Goodwill is the excess of the purchase price over the fair
segment. We also have indefinite-lived intangible assets
value of identifiable net assets acquired in business
related to our Future Shop and Five Star tradenames which
combinations accounted for under the purchase method.
are included in the International segment.
We do not amortize goodwill but test it for impairment
annually, or when indications of potential impairment exist, We determine fair values utilizing widely accepted valuation
utilizing a fair value approach at the reporting unit level. A techniques, including discounted cash flows and market
reporting unit is the operating segment, or a business unit multiple analyses. During the fourth quarter of fiscal 2007,
one level below that operating segment, for which discrete we completed our annual impairment testing of our
financial information is prepared and regularly reviewed by goodwill and tradenames, using the valuation techniques as
segment management. described above, and determined there was no impairment.
PART II
The changes in the carrying amount of goodwill and tradenames by segment for continuing operations were as follows in
fiscal 2007, 2006 and 2005:
Goodwill Tradenames
Domestic International Total Domestic International Total
Balances at February 28, 2004 $ 3 $ 474 $ 477 $— $ 37 $ 37
Changes in foreign currency exchange rates — 36 36 — 3 3
Balances at February 26, 2005 3 510 513 — 40 40
Changes in foreign currency exchange rates — 40 40 — 4 4
Changes resulting from acquisitions 3 1 4 — — —
Balances at February 25, 2006 6 551 557 — 44 44
Changes resulting from acquisitions 369 27 396 17 21 38
Changes resulting from tax adjustment(1) — (21) (21) — — —
Changes in foreign currency exchange rates — (13) (13) — (1) (1)
Balances at March 3, 2007 $375 $ 544 $ 919 $17 $ 64 $ 81
(1) Adjustment related to the resolution of certain tax matters associated with our acquisition of Future Shop.
Lease Rights Investments
Lease rights represent costs incurred to acquire the lease of Short-term and long-term investments are comprised of
a specific commercial property. Lease rights are recorded at municipal and United States government debt securities as
cost and are amortized to rent expense over the remaining well as auction-rate securities and variable rate-demand
lease term, including renewal periods, if reasonably notes. In accordance with SFAS No. 115, Accounting for
assured. Amortization periods range up to 16 years, Certain Investments in Debt and Equity Securities, and
beginning with the date we take possession of the property. based on our ability to market and sell these instruments,
we classify auction-rate securities, variable-rate demand
The gross cost and accumulated amortization of lease rights
notes and other investments in debt securities as available-
were $32 and $13 at March 3, 2007; and $29 and $10 at
for-sale and carry them at amortized cost, which
February 25, 2006. Lease rights amortization was $4, $3
approximates fair value. Auction-rate securities and
and $4 in fiscal 2007, 2006 and 2005, respectively.
variable-rate demand notes are similar to short-term debt
Current lease rights amortization is expected to be
instruments because their interest rates are reset
approximately $3 for each of the next five fiscal years.
periodically. Investments in these securities can be sold for
cash on the auction date. We classify auction-rate securities
and variable-rate demand notes as short-term or long-term
investments based on the reset dates.
Best Buy’s Fiscal 2007 Annual Report (selected pages) Appendix B B-13
$ in millions, except per share amounts
In accordance with our investment policy, we place our interest, if we exceed certain terms, at rates specified in the
investments with issuers who have high-quality credit and agreements. We impute interest based on our borrowing
limit the amount of investment exposure to any one issuer. rate where there is an average balance outstanding.
We seek to preserve principal and minimize exposure to Imputed interest is not significant. Certain agreements have
interest-rate fluctuations by limiting default risk, market risk
provisions that entitle the lenders to a portion of the cash
and reinvestment risk.
discounts provided by the suppliers.
We also hold investments in marketable equity securities
At March 3, 2007, and February 25, 2006, $39 and $59,
and classify them as available-for-sale. Investments in
respectively, were outstanding and included in accrued
marketable equity securities are included in other assets in
our consolidated balance sheets. Investments in marketable liabilities on our consolidated balance sheets; and $196
equity securities are reported at fair value, based on quoted and $177, respectively, were available for use under these
market prices when available. All unrealized holding gains inventory financing facilities.
or losses are reflected net of tax in accumulated other
Borrowings and payments on our inventory financing
comprehensive income in shareholders’ equity.
facilities were classified as financing activities in our
We review the key characteristics of our debt and consolidated statements of cash flows in other, net.
marketable equity securities portfolio and their classification
in accordance with GAAP on an annual basis, or when Income Taxes
indications of potential impairment exist. If a decline in the
fair value of a security is deemed by management to be We account for income taxes under the liability method.
other than temporary, the cost basis of the investment is Under this method, deferred tax assets and liabilities are
written down to fair value, and the amount of the write- recognized for the estimated future tax consequences
down is included in the determination of net earnings. attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
Insurance respective tax bases, and operating loss and tax credit
We are self-insured for certain losses related to health, carryforwards. Deferred tax assets and liabilities are
workers’ compensation and general liability claims, measured using enacted income tax rates in effect for the
although we obtain third-party insurance coverage to limit year in which those temporary differences are expected to
our exposure to these claims. A portion of these self-insured be recovered or settled. The effect on deferred tax assets
losses is managed through a wholly-owned insurance and liabilities of a change in income tax rates is recognized
captive. We estimate our self-insured liabilities using a in our consolidated statement of earnings in the period that
number of factors including historical claims experience, an includes the enactment date. A valuation allowance is
estimate of incurred but not reported claims, demographic recorded to reduce the carrying amounts of deferred tax
factors, severity factors and valuations provided by assets if it is more likely than not that such assets will not be
independent third-party actuaries. Our self-insurance
realized.
liabilities included in the consolidated balance sheets were
as follows: In determining our provision for income taxes, we use an
annual effective income tax rate based on annual income,
March 3, Feb. 25, permanent differences between book and tax income, and
2007 2006
statutory income tax rates. The effective income tax rate also
Accrued liabilities $51 $83
reflects our assessment of the ultimate outcome of tax
Long-term liabilities 44 —
audits. We adjust our annual effective income tax rate as
Total $95 $83
additional information on outcomes or events becomes
available. Discrete events such as audit settlements or
Inventory Financing
changes in tax laws are recognized in the period in which
We have inventory financing facilities through which certain they occur.
suppliers receive payments from a designated finance
Our income tax returns, like those of most companies, are
company on invoices we owe them. Amounts due under the
periodically audited by domestic and foreign tax authorities.
facilities are collateralized by a security interest in certain
These audits include questions regarding our tax filing
merchandise inventories. The amounts extended bear
positions, including the timing and amount of deductions
B-14 Appendix B Best Buy’s Fiscal 2007 Annual Report (selected pages)
$ in millions, except per share amounts
and the allocation of income among various tax Revenue Recognition
jurisdictions. At any one time, multiple tax years are subject
We recognize revenue when the sales price is fixed or
to audit by the various tax authorities. In evaluating the
determinable, collectibility is reasonably assured and the
exposures associated with our various tax filing positions,
customer takes possession of the merchandise, or in the
we record reserves for probable exposures. A number of
case of services, at the time the service is provided.
years may elapse before a particular matter, for which we
Amounts billed to customers for shipping and handling are
have established a reserve, is audited and fully resolved or
included in revenue. Revenue is reported net of estimated
clarified. We adjust our tax contingencies reserve and
sales returns and excludes sales taxes.
income tax provision in the period in which actual results of
a settlement with tax authorities differs from our established We estimate our sales returns reserve based on historical
reserve, the statute of limitations expires for the relevant return rates. We initially established our sales returns
taxing authority to examine the tax position or when more reserve in the fourth quarter of fiscal 2005. Our sales
information becomes available. We include our tax returns reserve was $104 and $78, at March 3, 2007, and
PART II
contingencies reserve, including accrued penalties and February 25, 2006, respectively.
interest, in accrued income taxes on our consolidated We sell extended service contracts on behalf of an
balance sheets and in income tax expense in our unrelated third party. In jurisdictions where we are not
consolidated statements of earnings. deemed to be the obligor on the contract, commissions are
In July 2006, the FASB issued FASB Interpretation (“FIN”) recognized in revenue at the time of sale. In jurisdictions
No. 48, Accounting for Uncertainty in Income Taxes, an where we are deemed to be the obligor on the contract,
Interpretation of FASB Statement No. 109. In May 2007, the commissions are recognized in revenue ratably over the
FASB issued FSP FIN No. 48-1, Definition of “Settlement” in term of the service contract. Commissions represented
FASB Interpretation No.48. We will adopt FIN No. 48 and FSP 2.2%, 2.5% and 2.6% of revenues in fiscal 2007, 2006
FIN No. 48-1 beginning in the first quarter of fiscal 2008. See and 2005, respectively.
New Accounting Standards below for further details. For revenue transactions that involve multiple deliverables,
we defer the revenue associated with any undelivered
Long-Term Liabilities elements. The amount of revenue deferred in connection
The major components of long-term liabilities at March 3, with the undelivered elements is determined using the
2007, and February 25, 2006, included long-term relative fair value of each element, which is generally based
rent-related liabilities, deferred compensation plan on each element’s relative retail price. See additional
liabilities, self-insurance reserves and advances received information regarding our customer loyalty program in
under vendor alliance programs. Sales Incentives below.
Foreign Currency Gift Cards
Foreign currency denominated assets and liabilities are We sell gift cards to our customers in our retail stores,
translated into U.S. dollars using the exchange rates in through our Web sites, and through selected third parties.
effect at our consolidated balance sheet date. Results of We do not charge administrative fees on unused gift cards
operations and cash flows are translated using the average and our gift cards do not have an expiration date. We
exchange rates throughout the period. The effect of recognize income from gift cards when: (i) the gift card is
exchange rate fluctuations on translation of assets and redeemed by the customer; or (ii) the likelihood of the gift
liabilities is included as a component of shareholders’ card being redeemed by the customer is remote (“gift card
equity in accumulated other comprehensive income. Gains breakage”) and we determine that we do not have a legal
and losses from foreign currency transactions, which are obligation to remit the value of unredeemed gift cards to
included in SG&A, have not been significant. the relevant jurisdictions. We determine our gift card
breakage rate based upon historical redemption patterns.
Based on our historical information, the likelihood of a gift
card remaining unredeemed can be determined 24 months
after the gift card is issued. At that time, we recognize
Best Buy’s Fiscal 2007 Annual Report (selected pages) Appendix B B-15
$ in millions, except per share amounts
breakage income for those cards for which the likelihood of First, we have a customer loyalty card where members earn
redemption is deemed remote and we do not have a legal points for each purchase completed at U.S. Best Buy stores
obligation to remit the value of such unredeemed gift cards or through our BestBuy.com Web site. We account for our
to the relevant jurisdictions. Gift card breakage income is customer loyalty program in accordance with Emerging
included in revenue in our consolidated statements of Issues Task Force (“EITF”) Issue No. 00-22, Accounting for
earnings. “Points” and Certain Other Time-Based or Volume-Based
Sales Incentive Offers, and Offers for Free Products or
We began recognizing gift card breakage income during
Services to Be Delivered in the Future. The retail value of
the third quarter of fiscal 2006. Gift card breakage income
points earned by our customer loyalty members is included
was as follows in fiscal 2007, 2006 and 2005:
in accrued liabilities and recorded as a reduction of
2007(1) 2006(1) 2005 revenue at the time the points are earned, based on the
Gift card breakage income $ 46 $43 $— percentage of points that are projected to be redeemed.
(1)
Prior to October 2006, we charged a loyalty program
Due to the resolution of certain legal matters associated with
gift card liabilities, we recognized $19 and $27 of gift card membership fee which was initially deferred and then
breakage income in fiscal 2007 and 2006, respectively, that recognized in revenue ratably over the membership period.
related to prior fiscal years.
Beginning in October 2006, we no longer charge a
membership fee for our customer loyalty program.
Sales Incentives
Second, we have a co-branded credit card agreement with
We frequently offer sales incentives that entitle our
a third-party bank (the “Bank”) for the issuance of a
customers to receive a reduction in the price of a product or
customer loyalty credit card bearing the Best Buy brand.
service. Sales incentives include discounts, coupons and
Cardholders earn points for qualifying purchases, including
other offers that entitle a customer to receive a reduction in
purchases made at Best Buy. Points earned enable
the price of a product or service by submitting a claim for a
cardholders to receive certificates that may be redeemed on
refund or rebate. For sales incentives issued to a customer
future purchases at U.S. Best Buy stores. The Bank is the
in conjunction with a sale of merchandise or services, for
sole owner of the accounts issued under the program and
which we are the obligor, the reduction in revenue is
absorbs losses associated with non-payment by the
recognized at the time of sale, based on the retail value of
cardholders and fraudulent usage of the accounts. We are
the incentive expected to be redeemed.
responsible for redeeming the points earned by the
Customer Loyalty Program cardholders. The Bank pays fees to us based on the number
We have a customer loyalty program which allows members of credit card accounts activated and card usage, and
to earn points for each qualifying purchase. Points earned reimburses us for certain costs associated with the program.
enable members to receive a certificate that may be In accordance with EITF No. 00-21, Revenue Arrangements
redeemed on future purchases at U.S. Best Buy stores. with Multiple Deliverables, we defer revenue received from
There are two ways that members may participate and earn cardholder account activations and recognize revenue on a
loyalty points. straight-line basis over the remaining term of the
agreement. Card usage fees are recognized in revenue as
actual credit card usage occurs.
B-16 Appendix B Best Buy’s Fiscal 2007 Annual Report (selected pages)
$ in millions, except per share amounts
Cost of Goods Sold and Selling, General and Administrative Expenses
The following table illustrates the primary costs classified in each major expense category:
Cost of Goods Sold SG&A
• Total cost of products sold including: • Payroll and benefit costs for retail and corporate
— Freight expenses associated with moving merchandise employees;
inventories from our vendors to our distribution centers; • Occupancy costs of retail, services and corporate
— Vendor allowances that are not a reimbursement of facilities;
specific, incremental and identifiable costs to promote a • Depreciation related to retail, services and corporate
vendor’s products; and assets;
— Cash discounts on payments to vendors; • Advertising;
• Cost of services provided including; • Vendor allowances that are a reimbursement of
— Payroll and benefits costs for services employees; and specific, incremental and identifiable costs to promote
PART II
— Cost of replacement parts and related freight expenses; a vendor’s products;
• Physical inventory losses; • Charitable contributions;
• Markdowns; • Outside service fees;
• Customer shipping and handling expenses; • Long-lived asset impairment charges; and
• Costs associated with operating our distribution network, • Other administrative costs, such as credit card service
including payroll and benefit costs, occupancy costs, and fees, supplies, and travel and lodging.
depreciation;
• Freight expenses associated with moving merchandise
inventories from our distribution centers to our retail stores;
and
• Promotional financing costs.
Vendor Allowances Advertising Costs
We receive vendor allowances for various programs, Advertising costs, which are included in SG&A, are
primarily volume incentives and reimbursements for specific expensed the first time the advertisement runs. Advertising
costs such as markdowns, margin protection, advertising costs consist primarily of print and television advertisements
and sales incentives. Vendor allowances provided as as well as promotional events. Net advertising expenses
reimbursement of specific, incremental and identifiable were $692, $644 and $597 in fiscal 2007, 2006 and
costs incurred to promote a vendor’s products are included 2005, respectively. Allowances received from vendors for
as an expense reduction when the cost is incurred. All other advertising of $140, $123 and $115, in fiscal 2007, 2006
vendor allowances, including vendor allowances received in and 2005, respectively, were classified as reductions of
excess of our cost to promote a vendor’s product, are
advertising expenses.
initially deferred and recorded as a reduction of
merchandise inventories. The deferred amounts are then
Pre-Opening Costs
included as a reduction of cost of goods sold when the
related product is sold. Non-capital expenditures associated with opening new
stores are expensed as incurred.
Vendor allowances included in revenue for reimbursement
of vendor-provided sales incentives and in SG&A for
reimbursement of specific, incremental and identifiable Stock-Based Compensation
SG&A costs to promote a vendor’s products were as follows SFAS No. 123(R)
in fiscal 2007, 2006 and 2005:
At the beginning of fiscal 2006, we early-adopted the fair
2007 2006 2005 value recognition provisions of SFAS No. 123 (revised
Revenue $ 29 $141 $ 85 2004), Share-Based Payment (123(R)), requiring us to
SG&A $158 $138 $140 recognize expense related to the fair value of our stock-
Best Buy’s Fiscal 2007 Annual Report (selected pages) Appendix B B-17
$ in millions, except per share amounts
based compensation awards. We elected the modified shares expected to ultimately vest and the vesting period.
prospective transition method as permitted by SFAS Outside valuation advisors assisted us in determining the
No. 123(R). Under this transition method, stock-based number of shares ultimately expected to vest. We
compensation expense in fiscal 2007 and 2006 includes: recognized compensation expense for performance-based
(i) compensation expense for all stock-based compensation awards on a straight-line basis over the requisite service
awards granted prior to, but not yet vested as of period (or to an employee’s eligible retirement date, if
February 26, 2005, based on the grant date fair value earlier) based on management’s estimate of the likelihood
estimated in accordance with the original provisions of of achieving company or personal performance goals. If an
SFAS No. 123, Accounting for Stock-Based Compensation; award recipient’s relationship with us is terminated, all
and (ii) compensation expense for all stock-based shares still subject to restrictions are forfeited and returned
compensation awards granted subsequent to February 26, to the plan.
2005, based on the grant-date fair value estimated in
Stock-based compensation income recognized in fiscal
accordance with the provisions of SFAS No. 123(R). We
2005 on a pre-tax basis was $1. The fiscal 2005 income
recognize compensation expense on a straight-line basis
reflects a change in vesting assumptions based on our total
over the requisite service period of the award (or to an
shareholder return relative to the performance of the
employee’s eligible retirement date, if earlier). Total stock-
Standard & Poor’s 500 Index (“S&P 500”) and an increase
based compensation expense included in our consolidated
in our expected forfeiture rate.
statement of earnings in fiscal 2007 and 2006 was $121
($82, net of tax) and $132 ($87, net of tax), respectively. In Transition
accordance with the modified prospective transition method
In November 2005, the FASB issued FSP No. FAS 123(R)-3,
of SFAS No. 123(R), financial results for prior periods have
Transition Election Related to Accounting for Tax Effects of
not been restated.
Share-Based Payment Awards. During the third quarter of
APB Opinion No. 25 fiscal 2007, we elected to adopt the alternative transition
method provided in FSP No. FAS 123(R)-3 to calculate the
Prior to fiscal 2006, we applied Accounting Principles
tax effects of stock-based compensation. The alternative
Board (“APB”) Opinion No. 25, Accounting for Stock Issued
transition method includes simplified methods to determine
to Employees, and related Interpretations in accounting for
the beginning balance of the additional paid-in capital
stock-based compensation awards. Prior to fiscal 2006, no
(“APIC”) pool related to the tax effects of stock-based
stock-based compensation expense was recognized in our
compensation, and to determine the subsequent impact on
consolidated statements of earnings for non-qualified stock
the APIC pool and the statement of cash flows of the tax
options (“stock options”), as the exercise price was equal to
effects of stock-based awards that were fully vested and
the market price of our stock on the date of grant. In
outstanding upon the adoption of SFAS No. 123(R).
addition, we did not recognize any stock-based
compensation expense for our employee stock purchase In accordance with SFAS No. 154, Accounting Changes and
plan (“ESPP”), as it was intended to be a plan that qualifies Error Corrections, this change in accounting principle has been
under Section 423 of the Internal Revenue Code of 1986, applied retrospectively to our fiscal 2006 consolidated statement
as amended. However, we did recognize stock-based of cash flows. The effect on the consolidated statement of cash
compensation expense for share awards. flows was a decrease in operating activities with an offsetting
increase in financing activities of $22 in fiscal 2006. The
We recognized compensation expense for time-based share
adoption of FSP No. FAS 123(R)-3 did not have an impact
awards on a straight-line basis over the vesting period (or to
on our operating income, net earnings or shareholders’
an employee’s eligible retirement date, if earlier) based on
equity.
the fair value of the award on the grant date. We
recognized compensation expense for market-based share
awards based on the current stock price, the number of
B-18 Appendix B Best Buy’s Fiscal 2007 Annual Report (selected pages)
$ in millions, except per share amounts
The table below illustrates the effect on net earnings and earnings per share as if we had applied the fair value recognition
provisions of SFAS No. 123 to stock-based compensation in fiscal 2005:
Net earnings, as reported $ 984
Add: Stock-based compensation income included in reported net earnings, net of tax(1) (1)
(2)
Deduct: Stock-based compensation expense determined under fair value method for all awards, net of tax (60)
Net earnings, pro forma $ 923
Earnings per share:
Basic — as reported $2.01
Basic — pro forma $1.89
Diluted — as reported $1.96
Diluted — pro forma $1.87
PART II
(1)
Amount represents the stock-based compensation costs, net of tax, recognized under APB Opinion No. 25.
(2)
In the fourth quarter of fiscal 2005, we increased our expected participant stock option forfeiture rate as a result of transferring to a
third-party provider certain corporate employees, and the departure of certain senior executives. This higher level of expected stock
option forfeitures reduced our fiscal 2005 pro forma stock-based compensation expense. Fiscal 2005 pro forma stock-based
compensation expense may not be indicative of future stock-based compensation expense.
The weighted-average fair value of stock options granted during fiscal 2005 used in computing pro forma compensation
expense was $14.18 per share. The fair value of each stock option was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions in fiscal 2005:
Risk-free interest rate(1) 3.4%
Expected dividend yield 0.9%
Expected stock price volatility(2) 40%
(3)
Expected life of stock options 5.5 years
(1)
Based on the five-year U.S. Treasury constant maturity interest rate whose term is consistent with the expected life of our stock options.
(2)
We used an outside valuation advisor to assist us in projecting the expected stock price volatility. We considered both historical data
and observable market prices of similar equity instruments.
(3)
We estimated the expected life of stock options based upon historical experience.
New Accounting Standards In May 2007, the FASB issued FSP FIN No. 48-1, Definition
of “Settlement” in FASB Interpretation No. 48. FSP FIN
In July 2006, the FASB issued FIN No. 48, Accounting for
No. 48-1 provides guidance on how a company should
Uncertainty in Income Taxes, an Interpretation of FASB
determine whether a tax position is effectively settled for the
Statement No. 109. FIN No. 48 provides guidance
purpose of recognizing previously unrecognized tax
regarding the recognition, measurement, presentation and
benefits. FSP FIN No. 48-1 is effective upon initial adoption
disclosure in the financial statements of tax positions taken
of FIN No. 48, which we will adopt in the first quarter of
or expected to be taken on a tax return, including the
fiscal 2008, as indicated above.
decision whether to file or not to file in a particular
jurisdiction. FIN No. 48 is effective for fiscal years In September 2006, the U.S. Securities and Exchange
beginning after December 15, 2006. We will adopt FIN Commission (“SEC”) issued Staff Accounting Bulletin
No. 48 beginning in the first quarter of fiscal 2008. The (“SAB”) No. 108, Considering the Effects of Prior Year
cumulative effect of applying the provisions of FIN No. 48 Misstatements when Quantifying Misstatements in Current
upon initial adoption will be reported as an adjustment to Year Financial Statements, which provides interpretive
retained earnings as of the beginning of fiscal 2008. We guidance on the consideration of the effects of prior-year
are evaluating the impact, if any, the adoption of FIN misstatements in quantifying current-year misstatements for
No. 48 will have on our operating income, net earnings or the purpose of a materiality assessment. SAB No. 108 is
retained earnings. effective for fiscal years ending after November 15, 2006.
Best Buy’s Fiscal 2007 Annual Report (selected pages) Appendix B B-19
$ in millions, except per share amounts
We adopted SAB No. 108 in the fourth quarter of fiscal approximately $500 in lease obligations and paid no cash
2007. The cumulative effect of initially applying the consideration, in exchange for all of the capital stock of
provisions of SAB No. 108, may be reported as a Musicland. The transaction also resulted in the transfer of
cumulative adjustment to retained earnings at the beginning all of Musicland’s assets, other than a distribution center in
of the year of adoption. The adoption of SAB No. 108 had Franklin, Indiana, and selected nonoperating assets.
no impact on our net earnings or financial position.
On March 25, 2005, we received notification from the
In September 2006, the FASB issued SFAS No. 157, Fair Internal Revenue Service (“IRS”) of a favorable resolution of
Value Measurements. SFAS No. 157 defines fair value, outstanding tax matters regarding the disposition of our
establishes a framework for measuring fair value in interest in Musicland. Based on the agreement with the IRS,
generally accepted accounting principles and expands we reversed previously recorded valuation allowances on
disclosures about fair value measurements. SFAS No. 157 deferred tax assets related to the disposition of our interest in
applies under other accounting pronouncements that Musicland and recognized a $50 tax benefit in fiscal 2005.
require or permit fair value measurements, the FASB having
In accordance with SFAS No. 144, Musicland’s financial
previously concluded in those accounting pronouncements
results are reported separately as discontinued operations
that fair value is the relevant measurement attribute.
for all periods presented. No assets or liabilities of
Accordingly, SFAS No. 157 does not require any new fair
Musicland were included in our consolidated balance
value measurements. SFAS No. 157 is effective for fiscal
sheets at March 3, 2007, or February 25, 2006.
years beginning after December 15, 2007. We plan to
adopt SFAS No. 157 beginning in the first quarter of fiscal
3. Acquisitions
2009. We are evaluating the impact, if any, the adoption of
SFAS No. 157 will have on our operating income or net Pacific Sales Kitchen and Bath Centers, Inc.
earnings. On March 7, 2006, we acquired all of the common stock
In February 2007, the FASB issued SFAS No. 159, The Fair of Pacific Sales for $411, or $408, net of cash acquired,
Value Option for Financial Assets and Financial Liabilities. including transaction costs. We acquired Pacific Sales, a
SFAS No. 159 permits companies to choose to measure high-end home-improvement and appliance retailer, to
many financial instruments and certain other items at fair enhance our ability to grow with an affluent customer base
value. The objective is to improve financial reporting by and premium brands using a proven and successful
providing companies with the opportunity to mitigate volatility showroom format. Utilizing the existing store format, we
in reported earnings caused by measuring related assets and expect to expand the number of stores in order to capitalize
liabilities differently without having to apply complex hedge on the expanding high-end segment of the U.S. appliance
accounting provisions. SFAS No. 159 is effective for fiscal market. The acquisition was accounted for using the
years beginning after November 15, 2007. Companies are purchase method in accordance with SFAS No. 141,
not allowed to adopt SFAS No. 159 on a retrospective basis Business Combinations. Accordingly, we recorded the net
unless they choose early adoption. We plan to adopt SFAS assets at their estimated fair values, and included operating
No. 159 at the beginning of fiscal 2009. We are evaluating results in our Domestic segment from the date of
the impact, if any, the adoption of SFAS No. 159 will have acquisition. We allocated the purchase price on a
on our operating income or net earnings. preliminary basis using information then available. The
allocation of the purchase price to the assets and liabilities
2. Discontinued Operations acquired was finalized in the fourth quarter of fiscal 2007.
There were no significant adjustments to the preliminary
In fiscal 2004, we sold our interest in Musicland. The buyer
purchase price allocation. All goodwill is deductible for tax
assumed all of Musicland’s liabilities, including
purposes.
B-20 Appendix B Best Buy’s Fiscal 2007 Annual Report (selected pages)
APPENDIX C
USING A CALCULATOR
AND COMPUTER KEYPAD
K I N D S O F C A L C U L AT O R S
Many different models of calculators, both desktop and specific instructions and locations of the operating keys
handheld, are available. All calculators have their own fea- for the calculator being used. A typical keyboard of a
tures and particular placement of operating keys. There- desktop calculator is shown in the illustration.
fore, it is necessary to refer to the operator’s manual for
DISPLAY
OPERATING
SWITCHES
5/4 + 0 2 3 4 F PRINT GT
➞
➞
CA NON-ADD
KEY
ⴚ PAPER ADVANCE
% ➞
CE
/C 7 8 9 M*
KEY
OPERATION ⴜ –D# 4 5 6 N Mⴚ
MEMORY
KEYS KEYS
ⴝ 1 2 3 ⴙ Mⴙ
ⴛ 0 00 ⴢ M
* TOTAL
KEY
NUMBER SUBTOTAL
KEYS DECIMAL OPERATION KEY
POINT KEYS
D E S K T O P C A L C U L AT O R S E T T I N G S
Several operating switches on a desktop calculator must The decimal rounding selector rounds the answers. The
be engaged before the calculator will produce the desired down arrow position will drop any digits beyond the last
results. digit desired. The up arrow position will drop any digits
The decimal selector sets the appropriate decimal places beyond the last digit desired and round the last digit up.
necessary for the numbers that will be entered. For exam- In the 5/4 position, the calculator rounds the last desired
ple, if the decimal selector is set at 2, both the numbers digit up only when the following digit is 5 or greater. If the
entered and the answer will have two decimal places. If following digit is less than 5, the last desired digit remains
the decimal selector is set at F, the calculator automatically unchanged.
sets the decimal places. The F setting allows the answer to The GT or grand total switch in the on position accu-
be unrounded and carried out to the maximum number mulates totals.
of decimal places possible.
Using a Calculator and Computer Keypad Appendix C C-1
KINDS OF COMPUTER KEYBOARDS
The computer has a keypad on the right side of the key- The enhanced keyboards have the arrow keys and the
board, called the numeric keypad. Even though several other directional keys mentioned above to the left of the
styles of keyboards are found, there are two basic lay- numeric keypad. When using the keypad on an enhanced
outs for the numeric keypad. The standard layout and keyboard, Num Lock can remain on.
enhanced layout are shown in the illustration. On the The asterisk (*) performs a different function on the
standard keyboard, the directional arrow keys are found computer than the calculator. The asterisk on the calcu-
on the number keys. To use the numbers, press the key lator is used for the total while the computer uses it for
called Num Lock. (This key is found above the “7” key.) multiplication.
When the Num Lock is turned on, numbers are entered Another difference is the division key. The computer
when the keys on the keypad are pressed. When the Num key is the forward slash key (/). The calculator key uses the
Lock is off, the arrow, Home, Page Up, Page Down, End, division key ().
Insert, and Delete keys can be used.
Num Lock Key
Division Key
Multiplication Key
Num
Lock / * – Insert Home Page
Up
Num
Lock / * –
7 8 9 7 8 9
Page
Delete End
➞
➞
Down
Home Pg Up Home Pg Up
+ +
4 5 6 4 5 6
➞ ➞ ➞ ➞
1 2 3 1 2 3
➞
➞
End Pg Dn End ➞ Pg Dn
0 ⴢ
Enter
➞ ➞ 0 ⴢ
Enter
➞
Ins Del Ins Del
Standard Enhanced
Keyboard Layout Keyboard Layout
TE N KEY TOUCH SYSTE M
Striking the numbers 0 to 9 on a calculator or numeric Place the fingers on the home row keys. Curve the
keypad without looking at the keyboard is called the touch fingers and keep the wrist straight. These keys may feel
system. Using the touch system develops both speed and slightly concaved or the 5 key may have a raised dot. The
accuracy. differences in the home row allow the operator to recog-
The 4, 5, and 6 keys are called the home row. If the nize the home row by touch rather than by sight.
right hand is used for the keyboard, the index finger is Maintain the position of the fingers on the home row.
placed on the 4 key, the middle finger on the 5 key, and The finger used to strike the 4 key will also strike the 7 key
the ring finger on the 6 key. If the left hand is used, the and the 1 key. Stretch the finger up to reach the 7; then
ring finger is placed on the 4 key, the middle finger on the stretch the finger down to reach the 1 key. Visualize the
5 key, and the index finger on the 6 key. position of these keys.
C-2 Appendix C Using a Calculator and Computer Keypad
Again, place the fingers on the home row. Stretch the If the right hand is used, the thumb will be used to
finger that strikes the 5 key up to reach the 8 key, then strike the 0 and 00 keys and the little finger to strike the
down to reach the 2 key. Likewise, stretch the finger that addition key. If the left hand is used, the little finger will
strikes the 6 key up to strike the 9 and down to strike the be used to strike the 0 and 00 keys and the thumb to strike
3 key. This same finger will stretch down again to hit the the addition key.
decimal point.
H A N D H E L D C A L C U L AT O R S
Handheld calculators are slightly different from desktop On a handheld calculator, the numeric keys are usually
calculators, not only in their size and features but also in very close together. In addition, the keys do not respond
their operation. Refer to the operator’s manual for specific to touch as easily as on a desktop calculator. Therefore,
instructions for the calculator being used. the touch system is usually not used on a handheld
calculator.
P E R F O R M I N G M AT H E M AT I C A L O P E R AT I O N S
O N D E S K T O P C A L C U L AT O R S
Mathematical operations can be performed on a calcula- is called the multiplier. The answer to a multiplication
tor both quickly and efficiently. The basic operations of problem is called the product.
addition, subtraction, multiplication, and division are Multiplication is performed by entering the multipli-
used frequently on a calculator. cand and striking the multiplication key (). The mul-
tiplier is then entered, followed by the equals key ().
Addition
The calculator will automatically multiply and give the
Each number to be added is called an addend. The answer
product.
to an addition problem is called the sum.
Addition is performed by entering an addend and Division
striking the addition key (+). All numbers are entered on The number to be divided is called the dividend. The num-
a calculator in the exact order they are given. To enter the ber the dividend will be divided by is called the divisor.
number 4,455.65, strike the 4, 4, 5, 5, decimal, 6, and 5 The answer to a division problem is called the quotient.
keys in that order, and then strike the addition key. Com- Division is performed by entering the dividend and
mas are not entered. Continue in this manner until all striking the division key (). The divisor is then entered,
addends have been entered. To obtain the sum, strike the followed by the equals key (=). The calculator will auto-
total key on the calculator. matically divide and give the quotient.
Subtraction Correcting Errors
The top number or first number of a subtraction problem If an error is made while using a calculator, several meth-
is called the minuend. The number to be subtracted from ods of correction may be used. If an incorrect number
the minuend is called the subtrahend. The answer to a sub- has been entered and the addition key or equals key has
traction problem is called the difference. not yet been struck, strike the clear entry (CE) key one
Subtraction is performed by first entering the minuend time. This key will clear only the last number that was
and striking the addition key (+). The subtrahend is then entered. However, if the clear entry key is depressed more
entered, followed by the minus key (–), followed by the than one time, the entire problem will be cleared on some
total key. calculators. If an incorrect number has been entered and
the addition key has been struck, strike the minus key one
Multiplication
time only. This will automatically subtract the last num-
The number to be multiplied is called the multiplicand.
ber added, thus removing it from the total.
The number of times the multiplicand will be multiplied
Using a Calculator and Computer Keypad Appendix C C-3
P E R F O R M I N G M AT H E M AT I C A L O P E R AT I O N S O N
C O M P U T E R S A N D H A N D H E L D C A L C U L AT O R S
On a computer keypad or a handheld calculator, addition usually entered, followed by the minus () key. Then the
is performed in much the same way as on a desktop cal- subtrahend is entered. Pressing either the key or the
culator. However, after the + key is depressed, the display key will display the difference. Some computer programs
usually shows the accumulated total. Therefore, the total will not calculate the difference until Enter is pressed.
key is not found. Some computer programs will not cal- Multiplication and division are performed the same
culate the total until Enter is pressed. way on a computer keypad and handheld calculator as on
Subtraction is performed differently on many com- a desktop calculator. Keep in mind that computers use the
puter keypads and handheld calculators. The minuend is * for multiplication and / for division.
SAFETY CONCERNS
Whenever electrical equipment such as a calculator or 3. Avoid food and beverages near the equipment where a
computer is being operated in a classroom or office, sev- spill might result in an electrical short.
eral safety rules apply. These rules protect the operator of 4. Do not attempt to remove the cover of a calculator,
the equipment, other persons in the environment, and the computer, or keyboard for any reason while the power
equipment itself. is turned on.
5. Do not attempt to repair equipment while it is
1. Do not unplug equipment by pulling on the electrical
plugged in.
cord. Instead, grasp the plug at the outlet and remove
6. Always turn the power off or unplug equipment when
it.
finished using it.
2. Do not stretch electrical cords across an aisle where
someone might trip over them.
C A L C U L AT I O N D R I L L S
Instructions for Desktop Calculators of decimal places as directed in the instructions for the
Complete each drill using the touch method. Set the deci- computer program. In spreadsheets, for example, use the
mal selector at the setting indicated in each drill. Com- formatting options to set the number of decimal places.
pare the answer on the calculator to the answer in the When the drill indicates “F” for floating, leave the com-
book. If the two are the same, progress to the next prob- puter application in its default format. Compare the
lem. It is not necessary to enter 00 in the cents column answer on the computer monitor to the answer in the
if the decimal selector is set at 0-F. However, digits other book. If the two are the same, progress to the next prob-
than zeros in the cents column must be entered preceded lem. It is not necessary to enter 00 in the cents column.
by a decimal point. However, digits other than zeros in the cents column must
be entered, preceded by a decimal point.
Instructions for Computer Keypads
Complete each drill using the touch method. There is no
decimal selector on computer keypads. Set the number
C-4 Appendix C Using a Calculator and Computer Keypad
DRILL C-1 Performing addition using the home row keys
Decimal Selector—2
4.00 44.00 444.00 4,444.00 44,444.00
5.00 55.00 555.00 5,555.00 55,555.00
6.00 66.00 666.00 6,666.00 66,666.00
5.00 45.00 455.00 4,455.00 44,556.00
4.00 46.00 466.00 4,466.00 44,565.00
5.00 54.00 544.00 5,544.00 55,446.00
6.00 56.00 566.00 5,566.00 55,664.00
5.00 65.00 655.00 6,655.00 66,554.00
4.00 64.00 644.00 6,644.00 66,555.00
5.00 66.00 654.00 6,545.00 65,465.00
49.00 561.00 5,649.00 56,540.00 565,470.00
DRILL C-2 Performing addition using the 0, 1, 4, and 7 keys
Decimal Selector—2
4.00 11.00 444.00 4,440.00 44,000.00
7.00 44.00 777.00 7,770.00 77,000.00
4.00 74.00 111.00 1,110.00 11,000.00
1.00 71.00 741.00 4,400.00 41,000.00
4.00 70.00 740.00 1,100.00 71,000.00
7.00 10.00 101.00 4,007.00 10,000.00
4.00 14.00 140.00 7,001.00 10,100.00
1.00 17.00 701.00 1,007.00 40,100.00
4.00 40.00 700.00 1,004.00 70,100.00
7.00 77.00 407.00 7,700.00 74,100.00
43.00 428.00 4,862.00 39,539.00 448,400.00
DRILL C-3 Performing addition using the 2, 5, and 8 keys
Decimal Selector—2
5.00 58.00 588.00 8,888.00 88,855.00
8.00 52.00 522.00 5,555.00 88,822.00
5.00 85.00 888.00 2,222.00 88,852.00
2.00 52.00 222.00 8,525.00 88,222.00
5.00 25.00 258.00 2,585.00 85,258.00
8.00 58.00 852.00 8,258.00 22,255.00
5.00 82.00 225.00 8,585.00 22,288.00
2.00 28.00 885.00 5,258.00 22,258.00
5.00 88.00 882.00 2,852.00 22,888.00
8.00 22.00 228.00 2,288.00 25,852.00
53.00 550.00 5,550.00 55,016.00 555,550.00
Using a Calculator and Computer Keypad Appendix C C-5
DRILL C-4 Performing addition using the 3, 6, 9, and decimal point keys
Decimal Selector—2
6.00 66.66 666.66 6,666.99 66,699.33
9.00 99.99 999.99 9,999.66 99,966.66
6.00 33.33 333.33 3,333.99 33,366.33
3.00 33.66 666.99 3,366.99 36,963.36
6.36 33.99 999.66 6,699.33 69,636.36
3.36 99.66 333.66 9,966.33 33,333.66
9.36 99.33 696.36 9,636.69 66,666.99
9.63 33.36 369.63 3,696.36 99,999.33
6.33 33.69 336.69 6,963.99 96,369.63
9.93 69.63 963.36 6,699.33 36,963.36
68.97 603.30 6,366.33 67,029.66 639,965.01
DRILL C-5 Performing subtraction using all number keys
Decimal Selector—F
456.73 789.01 741.00 852.55 987.98
123.21 456.00 258.10 369.88 102.55
333.52 333.01 482.90 482.67 885.43
DRILL C-6 Performing multiplication using all number keys
Decimal Selector—F
654.05 975.01 487.10 123.56 803.75
12.66 27.19 30.21 50.09 1.45
8,280.273 26,510.5219 14,715.291 6,189.1204 1,165.4375
DRILL C-7 Performing division using all number keys
Decimal Selector—F
900.56 450.28 2.
500.25 100.05 5.
135.66 6.65 20.4
269.155 105.55 2.550023685*
985.66 22.66 43.49779346*
*Number of decimal places may vary, due to machine capacity.
C-6 Appendix C Using a Calculator and Computer Keypad
APPENDIX D
RECYCLING PROBLEMS
R E C YC L I N G P R O B L E M 11
Determining how transactions change an accounting equation
Brian Frizza is a personal trainer and operates a business called FitnessPro. FitnessPro uses the accounts shown in the following
accounting equation. Use the form given in the Recycling Problem Working Papers to complete this problem.
Assets ⴝ Liabilities ⴙ Owner’s Equity
Trans. Accts. Rec.— Prepaid Accts. Pay.— Brian Frizza,
No. Cash ⴙ Dean Mills ⴙ Supplies ⴙ Insurance ⴝ ⴙ
Topline Capital
Beg. Bal. 2,200 —0— 1,100 200 200 3,300
1. ⫺120 ⫺120 (expense)
New Bal. 2,080 —0— 1,100 200 200 3,180
2.
Transactions:
1. Paid cash for telephone bill, $120.00.
2. Received cash from owner as an investment, $400.00.
3. Paid cash for rent, $600.00.
4. Received cash from sales, $425.00.
5. Bought supplies on account from Topline, $310.00.
6. Sold services on account to Dean Mills, $500.00.
7. Paid cash for supplies, $250.00.
8. Paid cash for advertising, $700.00.
9. Received cash on account from Dean Mills, $400.00.
10. Paid cash on account to Topline, $200.00.
11. Paid cash for insurance, $225.00.
12. Received cash from sales, $675.00.
13. Paid cash to owner for personal use, $1,000.00.
Instructions:
For each transaction, complete the following. Transaction 1 is given as an example.
1. Analyze the transaction to determine which accounts in the accounting equation are affected.
2. Write the amount in the appropriate columns, using a plus (⫹) if the account increases or a minus (⫺) if the account
decreases.
3. For transactions that change owner’s equity, write in parentheses a description of the transaction to the right of the amount.
4. Calculate the new balance for each account in the accounting equation.
5. Before going on to the next transaction, determine that the accounting equation is still in balance.
Recycling Problems Appendix D D-1
R E C YC L I N G P R O B L E M 2 1
Analyzing transactions into debit and credit parts
Luke Harris owns a business called Colato Copies. Colato Copies uses the following accounts.
Cash Luke Harris, Drawing
Accounts Receivable—Flowerama Sales
Accounts Receivable—Seaside Inn Advertising Expense
Supplies Miscellaneous Expense
Prepaid Insurance Rent Expense
Accounts Payable—Pacific Paper Repair Expense
Accounts Payable—Raffi Supplies Utilities Expense
Luke Harris, Capital
Instructions:
Use the forms given in the Recycling Problem Working Papers.
1. Prepare a T account for each account.
2. Analyze each transaction into its debit and credit parts. Write the debit and credit amounts in the proper T accounts to show
how each transaction changes account balances. Write the date of the transaction in parentheses before each amount.
Transactions:
July 1. Received cash from owner as an investment, $4,500.00.
2. Paid cash for rent, $520.00.
4. Paid cash for supplies, $300.00.
4. Received cash from sales, $400.00.
5. Paid cash for insurance, $200.00.
8. Sold services on account to Flowerama, $450.00.
9. Bought supplies on account from Raffi Supplies, $700.00.
10. Paid cash for rent, $120.00.
11. Received cash from owner as an investment, $2,300.00.
11. Received cash from sales, $800.00.
12. Bought supplies on account from Pacific Paper, $300.00.
13. Received cash on account from Flowerama, $250.00.
15. Paid cash for miscellaneous expense, $40.00.
16. Paid cash on account to Raffi Supplies, $350.00.
22. Paid cash for electric bill (utilities expense), $70.00.
23. Paid cash for advertising, $160.00.
25. Sold services on account to Seaside Inn, $640.00.
26. Paid cash to owner for personal use, $1,200.00.
30. Received cash on account from Seaside Inn, $300.00.
R E C YC L I N G P R O B L E M 3 1
Journalizing transactions and proving and ruling a journal
Adeline Stein owns a service business called Stein Express, which uses the following accounts:
Cash Accts. Pay.—Rim Supply Sales Repair Expense
Supplies Accts. Pay.— Parks Co. Advertising Expense Utilities Expense
Prepaid Insurance Adeline Stein, Capital Miscellaneous Expense
Accts. Rec.—M. Bien Adeline Stein, Drawing Rent Expense
D-2 Appendix D Recycling Problems
Transactions:
Aug. 1. Received cash from owner as an investment, $8,750.00. R1.
2. Paid cash for supplies, $500.00. C1.
3. Paid cash for rent, $300.00. C2.
4. Bought supplies on account from Rim Supply, $1,200.00. M1.
5. Paid cash for electric bill, $250.00. C3.
8. Paid cash on account to Rim Supply, $700.00. C4.
8. Received cash from sales, $425.00. T8.
8. Sold services on account to M. Bien, $125.00. S1.
9. Paid cash for insurance, $1,900.00. C5.
10. Paid cash for miscellaneous expense, $27.00. C6.
10. Received cash from sales, $297.00. T10.
11. Paid cash for supplies, $770.00. C7.
11. Received cash from sales, $493.00. T11.
12. Received cash from sales, $294.00. T12.
15. Paid cash to owner for personal use, $125.00. C8.
15. Received cash from sales, $275.00. T15.
16. Paid cash for repairs, $88.00. C9.
17. Received cash on account from M. Bien, $125.00. R2.
17. Bought supplies on account from Parks Co., $345.00. M2.
17. Received cash from sales, $200.00. T17.
18. Received cash from sales, $600.00. T18.
19. Received cash from sales, $175.00. T19.
22. Bought supplies on account from Parks Co., $80.00. M3.
22. Received cash from sales, $450.00. T22.
23. Paid cash for telephone bill, $50.00. C10.
23. Sold services on account to M. Bien, $425.00. S2.
24. Paid cash for advertising, $80.00. C11.
24. Received cash from sales, $250.00. T24.
25. Received cash from sales, $325.00. T25.
26. Paid cash for supplies, $45.00. C12.
26. Received cash from sales, $310.00. T26.
29. Received cash on account from M. Bien, $425.00. R3.
30. Paid cash to owner for personal use, $150.00. C13.
31. Received cash from sales, $450.00. T31.
Instructions:
1. Use page 1 of the journal given in the Recycling Problem Working Papers. Journalize the transactions for August 1 through
August 19 of the current year. Source documents are abbreviated as follows: check, C; memorandum, M; receipt, R; sales
invoice, S; calculator tape, T.
2. Prove and rule page 1 of the journal. Carry the column totals forward to page 2 of the journal.
3. Use page 2 of the journal to journalize the transactions for the remainder of August.
4. Prove page 2 of the journal.
5. Prove cash. The beginning cash balance on August 1 is zero. The balance on the next unused check stub is $8,859.00.
6. Rule page 2 of the journal.
Recycling Problems Appendix D D-3
R E C YC L I N G P R O B L E M 4 1
Journalizing transactions and posting to a general ledger
Janet Porter owns a service business called Porter’s Parties. Porter’s Parties’ general ledger accounts are given in the Recycling
Problem Working Papers.
Transactions:
Aug. 1. Received cash from owner as an investment, $4,500.00. R1.
3. Paid cash for supplies, $300.00. C1.
5. Sold services on account to Nicholas Calendo, $650.00. S1.
6. Received cash from sales, $630.00. T6.
9. Paid cash for electric bill, $130.00. C2.
11. Paid cash for rent, $530.00. C3.
13. Bought supplies on account from Jordan Supplies, $800.00. M1.
13. Received cash from sales, $650.00. T13.
16. Paid cash for miscellaneous expense, $55.00. C4.
18. Paid cash on account to Jordan Supplies, $500.00. C5.
20. Paid cash for supplies, $105.00. C6.
20. Received cash on account from Nicholas Calendo, $350.00. R2.
25. Paid cash for advertising, $250.00. C7.
27. Paid cash for supplies, $75.00. C8.
27. Received cash from sales, $1,200.00. T27.
30. Paid cash to owner for personal use, $800.00. C9.
31. Received cash from sales, $780.00. T31.
Instructions:
1. Open an account for Utilities Expense. Use the 3-digit numbering system described in the chapter.
2. Journalize the transactions completed during August of the current year. Use page 1 of a journal. Source documents are
abbreviated as follows: check, C; memorandum, M; receipt, R; sales invoice, S; calculator tape, T.
3. Prove the journal.
4. Prove cash. The beginning cash balance on August 1 is zero. The balance on the next unused check stub is $5,365.00.
5. Rule the journal.
6. Post from the journal to the general ledger.
R E C YC L I N G P R O B L E M 5 1
Reconciling a bank statement; journalizing a bank service charge, a dishonored check, and petty cash transactions
Tao Vang owns a business called Fast Print. Selected general ledger accounts are given below. Forms are given in the Recycling
Problem Working Papers.
110 Cash 140 Prepaid Insurance 535 Repair Expense
115 Petty Cash 320 Tao Vang, Drawing 540 Supplies Expense
120 Accts. Rec.—Corner Cafe 520 Miscellaneous Expense 550 Utilities Expense
130 Supplies 530 Rent Expense
Instructions:
1. Journalize the following transactions completed during May of the current year. Use page 12 of a journal. Source documents
are abbreviated as follows: check, C; memorandum, M.
D-4 Appendix D Recycling Problems
Transactions:
May 21. Paid cash to establish a petty cash fund, $150.00. C51.
24. Paid cash for supplies, $72.00. C52.
26. Paid cash for repairs, $85.00. C53.
27. Received notice from the bank of a dishonored check from Corner Cafe, $70.00, plus $25.00 fee; total, $95.00. M22.
28. Paid cash for miscellaneous expense, $42.00. C54.
31. Paid cash to owner for personal use, $200.00. C55.
31. Paid cash to replenish the petty cash fund, $105.00: supplies, $85.00; miscellaneous expense, $20.00. C56.
2. On May 31 of the current year, Fast Print received a bank statement dated May 30. Prepare a bank statement reconciliation.
Use May 31 of the current year as the date. The following information is obtained from the May 30 bank statement and from
the records of the business.
Bank statement balance $1,586.00
Bank service charge 25.00
Outstanding deposit, May 31 285.00
Outstanding checks, Nos. 55 and 56
Checkbook balance on Check Stub No. 57 $1,591.00
3. Continue using the journal and journalize the following transaction.
Transaction:
May 31. Received bank statement showing May bank service charge, $25.00. M23.
R E C YC L I N G P R O B L E M 6 1
Completing a work sheet
On February 28 of the current year, Hibbing Hair Care has the following general ledger accounts and balances. The business uses
a monthly fiscal period.
Account Balances
Account Titles Debit Credit
Cash $2,609.00
Petty Cash 300.00
Accounts Receivable—Robert Perpich 581.00
Supplies 895.00
Prepaid Insurance 1,200.00
Accounts Payable—Ely Supplies $ 450.00
Jens Miller-Smith, Capital 4,550.00
Jens Miller-Smith, Drawing 300.00
Income Summary
Sales 3,100.00
Advertising Expense 425.00
Insurance Expense
Miscellaneous Expense 250.00
Rent Expense 1,100.00
Supplies Expense
Utilities Expense 440.00
Instructions:
1. Prepare the heading and trial balance on the work sheet given in the Recycling Problem Working Papers. Total and rule the Trial
Balance columns.
2. Analyze the following adjustment information into debit and credit parts. Record the adjustments on the work sheet.
Adjustment Information, February 28
Supplies inventory $ 450.00
Value of prepaid insurance 1,000.00
Recycling Problems Appendix D D-5
3. Total and rule the Adjustments columns.
4. Extend the up-to-date balances to the Balance Sheet or Income Statement columns.
5. Rule a single line across the Income Statement and Balance Sheet columns. Total each column. Calculate and record the net
income or net loss. Label the amount in the Account Title column.
6. Total and rule the Income Statement and Balance Sheet columns.
R E C YC L I N G P R O B L E M 71
Preparing financial statements
The following information is obtained from the work sheet of SuperClean for the month ended August 31 of the current year.
Forms are given in the Recycling Problem Working Papers.
5 6 7 8
INCOME STATEMENT BALANCE SHEET
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT
1 Cash 5 6 3 2 00 1
2 Accounts Receivable—D. Dawson 1 7 5 00 2
3 Accounts Receivable—K. Keene 3 1 5 00 3
4 Supplies 4 6 7 00 4
5 Prepaid Insurance 9 0 0 00 5
6 Accounts Payable—DV Supply 5 9 3 00 6
7 Accounts Payable—Supply Warehouse 7 0 0 00 7
8 Michelle Delist, Capital 5 0 3 1 00 8
9 Michelle Delist, Drawing 1 5 0 0 00 9
10 Income Summary 10
11 Sales 5 8 8 1 00 11
12 Advertising Expense 6 2 5 00 12
13 Insurance Expense 1 5 0 00 13
14 Miscellaneous Expense 1 4 5 00 14
15 Supplies Expense 9 2 5 00 15
16 Utilities Expense 1 3 7 1 00 16
17 3 2 1 6 00 5 8 8 1 00 8 9 8 9 00 6 3 2 4 00 17
18 Net Income 2 6 6 5 00 2 6 6 5 00 18
19 5 8 8 1 00 5 8 8 1 00 8 9 8 9 00 8 9 8 9 00 19
20 20
Instructions:
1. Prepare an income statement for the month ended August 31 of the current year.
2. Calculate and record the component percentages for total expenses and net income. Round percentage calculations to the
nearest 0.1%.
3. Prepare a balance sheet for August 31 of the current year.
D-6 Appendix D Recycling Problems
R E C YC L I N G P R O B L E M 8 1
Journalizing adjusting and closing entries
The following information is obtained from the partial work sheet of SuperClean for the month ended August 31 of the current
year.
3 4 5 6 7 8
ADJUSTMENTS INCOME STATEMENT BALANCE SHEET
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
1 Cash 5 6 3 2 00 1
2 Accounts Receivable—D. Dawson 1 7 5 00 2
3 Accounts Receivable—K. Keene 3 1 5 00 3
(a)
4 Supplies 9 2 5 00 4 6 7 00 4
(b)
5 Prepaid Insurance 1 5 0 00 9 0 0 00 5
6 Accounts Payable—DV Supply 5 9 3 00 6
7 Accounts Payable—Supply Warehouse 7 0 0 00 7
8 Michelle Delist, Capital 5 0 3 1 00 8
9 Michelle Delist, Drawing 1 5 0 0 00 9
10 Income Summary 10
11 Sales 5 8 8 1 00 11
12 Advertising Expense 6 2 5 00 12
(b)
13 Insurance Expense 1 5 0 00 1 5 0 00 13
14 Miscellaneous Expense 1 4 5 00 14
(a)
15 Supplies Expense 9 2 5 00 9 2 5 00 15
16 Utilities Expense 1 3 7 1 00 16
17 1 0 7 5 00 1 0 7 5 00 3 2 1 6 00 5 8 8 1 00 8 9 8 9 00 6 3 2 4 00 17
18 Net Income 2 6 6 5 00 2 6 6 5 00 18
19 5 8 8 1 00 5 8 8 1 00 8 9 8 9 00 8 9 8 9 00 19
20 20
Instructions:
1. Use page 16 of the journal given in the Recycling Problem Working Papers. Journalize the adjusting entries.
2. Continue to use page 16 of the journal. Journalize the closing entries.
R E C YC L I N G P R O B L E M 9 1
Journalizing purchases, cash payments, and other transactions
Backwoods, Inc., is a sporting goods store organized as a corporation.
Instructions:
1. Using the journals given in the Recycling Problem Working Papers, journalize the following transactions completed during
August of the current year. Use page 9 of a purchases journal, page 15 of a cash payments journal, and page 12 of a general
journal. Source documents are abbreviated as follows: check, C; memorandum, M; purchase invoice, P; debit memorandum,
DM.
Transactions:
Aug. 1. Paid cash to Keller Realty for rent, $1,000.00. C772.
2. Paid cash to LWAP Radio for advertising, $720.00. C773.
3. Bought office supplies on account from Johnson Office Supply, $420.00. M62.
4. Paid cash on account to Arrowhead Supply, $4,210.00, covering P436. No cash discount was offered. C774.
Recycling Problems Appendix D D-7
6. Paid cash to City Utilities for electric bill, $420.00. C775.
7. Paid cash on account to Johnson Office Supply covering M62, less 2% discount. C776.
9. Paid cash to Mark’s Discount Stores for store supplies, $224.00. C777.
9. Purchased merchandise on account from Peterson Sports, $3,560.00. P445.
11. Purchased merchandise for cash from Atlas Sports Co., $3,480.00, less a 60% trade discount. C778.
13. Returned merchandise to Peterson Sports from P445, $233.00. DM19.
13. Purchased merchandise for cash from Duck Crafts, $495.00. C779.
15. Returned merchandise to Evans Sports Corporation from P438, $112.00. DM20.
15. Paid cash on account to Peterson Sports covering P445 after a purchase return, DM19, less 2% discount. C780.
20. Purchased merchandise for cash from Atlas Sports Co., $156.00. C781.
21. Paid cash on account to Evans Sports Corporation, $1,950.00. No cash discount was offered. C782.
22. Purchased merchandise on account from Camo Clothing, $8,100, less a 50% trade discount. P446.
23. Bought store supplies on account from Mancil Marketing, $120.00. M63.
24. Paid cash to Velmar Company for store supplies, $245.00. C783.
29. Purchased merchandise for cash from Paintball Central, $1,154.00. C784.
2. Total the amount columns of cash payments journal page 15. Prove the equality of debits and credits and rule the cash pay-
ments journal to carry the totals forward.
3. Record the totals brought forward from cash payments journal page 15 to line 1 of page 16 of the cash payments journal.
4. Journalize the following transactions.
Transactions:
Aug. 31. Paid cash on account to Camo Clothing covering P446, less 2% cash discount. C785.
31. Paid cash to replenish the petty cash fund, $127.80: supplies—office, $25.66; supplies—store, $48.25; miscella-
neous, $54.33; and cash over, $0.44. C786.
5. Total and rule page 9 of the purchases journal.
6. Total the amount columns of cash payments journal page 16. Prove the equality of debits and credits of cash payments jour-
nal page 16.
7. Rule page 16 of the cash payments journal.
R E C YC L I N G P R O B L E M 10 1
Journalizing sales and cash receipts transactions; proving and ruling journals
Burge Supply sells lumber, brick, and other construction materials.
Sales journal page 22, cash receipts journal page 23, and general journal page 17 are given in the Recycling Problem Working
Papers. Balances brought forward are provided on line 1 of the sales and cash receipts journals.
Instructions:
1. Journalize the following transactions completed during the remainder of November in the appropriate journal. Sales tax rate
is 6%. Source documents are abbreviated as follows: receipt, R; sales invoice, S; terminal summary, TS.
Transactions:
Nov. 25. Received cash on account from Davis Construction, $1,379.84, covering S845 for $1,408.00, less 2% cash discount,
$28.16. R334.
26. Recorded cash and credit card sales, $4,844.00, plus sales tax, $290.64; total, $5,134.64. TS38.
28. Sold merchandise on account to Margaret Sienna, $664.00, plus sales tax, $39.84; total, $703.84. S889.
28. Received cash on account from Ventura Fencing, $2,849.00, covering S861. R335.
29. Granted credit to Davis Construction for merchandise returned, $1,820.00, plus sales tax, $109.20; total, $1,929.20.
CM43.
30. Sold merchandise on account to State University, $2,118.00. State University is exempt from sales tax. S890.
30. Recorded cash and credit card sales, $839.00, plus sales tax, $50.34; total, $889.34. TS39.
D-8 Appendix D Recycling Problems
2. Total and prove the equality of debits and credits for the sales journal.
3. Rule the sales journal.
4. Total and prove the equality of debits and credits for the cash receipts journal.
5. Prove cash. The November 1 cash account balance in the general ledger was $8,483.31. The November 31 cash credit total in
the cash payments journal was $42,194.33. On November 31 the balance on the next unused check stub was $16,626.70.
6. Rule the cash receipts journal.
R E C Y C L I N G P R O B L E M 11 1
Posting to general and subsidiary ledgers
The journals and ledgers for Custom Boots are given in the Recycling Problem Working Papers.
Instructions:
1. Post the separate items in the following journals to the general and subsidiary ledgers. Use the current year.
a. Sales journal.
b. Purchases journal.
c. General journal.
d. Cash receipts journal.
e. Cash payments journal.
2. Prove and rule the sales journal. Post the totals of the special amount columns.
3. Total and rule the purchases journal. Post the total.
4. Prove and rule the cash receipts journal. Post the totals of the special amount columns.
5. Prove and rule the cash payments journal. Post the totals of the special amount columns.
6. Prepare a schedule of accounts payable and a schedule of accounts receivable. Compare the totals of the schedules with the
balances of the controlling accounts, Accounts Payable and Accounts Receivable, in the general ledger. If the totals are not
the same, find and correct the errors.
R E C Y C L I N G P R O B L E M 12 1
Preparing a semimonthly payroll
The following information is for the semimonthly pay period July 16–31 of the current year. Forms are given in the Recycling
Problem Working Papers.
SEMIMONTHLY PERIOD ENDED July 31, 20--
ALLOWANCES
EMPL. NO.
MARITAL
EARNINGS DEDUCTIONS
STATUS
NO. OF
EMPLOYEE’S NAME
REGULAR OVERTIME HEALTH
INSURANCE
1 5 Abrams, Thomas S 1 8 9 2 00 3 5 00
2 6 Carroll, John M 2 8 8 0 00 9 0 00 6 0 00
3 1 Harris, Jonathan S 1 9 2 4 00 3 5 00
4 4 Kennard, Mary S 1 1 0 5 6 00 7 2 00 3 5 00
5 2 Locke, Anna M 2 9 9 4 00 6 0 00
6 7 Rayford, Stan M 2 8 1 2 00 6 0 00
7 3 Suell, Nicole M 3 8 6 0 00 8 0 00
8
10
11
12
Recycling Problems Appendix D D-9
Instructions:
1. Prepare a payroll register. The date of payment is July 31. Use the income tax withholding tables shown in Chapter 12 to find
the income tax withholding for each employee. Calculate social security and Medicare tax withholdings using 6.2% and 1.45%
tax rates, respectively. None of the employee-accumulated earnings has exceeded the social security tax base.
2. Prepare a check for the total amount of the net pay. Make the check payable to Payroll Account 982-561-4732 and sign your
name as the manager of Sanford Company. The beginning check stub balance is $11,530.50.
3. Prepare payroll checks for Thomas Abrams, Check No. 558, and Anna Locke, Check No. 562. Sign your name as the manager of
Sanford Company. Record the two payroll check numbers in the payroll register.
R E C Y C L I N G P R O B L E M 13 1
Journalizing payroll transactions
Wooden Cycles completed payroll transactions during the period January 1 to March 31 of the current year. Payroll tax rates are
as follows: social security, 6.2%; Medicare, 1.45%; federal unemployment, 0.8%; state unemployment, 5.4%. No total earnings
have exceeded the tax base for calculating unemployment taxes. Wooden Cycles is a monthly schedule depositor for payroll
taxes.
Instructions:
1. Journalize the following transactions on page 14 of the cash payments journal and page 10 of the general journal given in the
Recycling Problem Working Papers. Source documents are abbreviated as follows: check, C, and memorandum, M.
Transactions:
Jan. 31. Paid cash for monthly payroll. Gross wages, $5,920.00; withholdings: employee income tax, $360.00; calculate social
security and Medicare taxes. C555.
31. Recorded employer payroll taxes expense for the January payroll. M24.
Feb. 15. Paid cash for the January liability for employee income tax, social security tax, and Medicare tax. C575.
28. Paid cash for monthly payroll. Gross wages, $6,058.00; withholdings: employee income tax, $372.00; calculate social
security and Medicare taxes. C601.
28. Recorded employer payroll taxes expense for the February payroll. M28.
Mar. 15. Paid cash for the February liability for employee income tax, social security tax, and Medicare tax. C624.
31. Paid cash for monthly payroll. Gross wages, $6,120.00; withholdings: employee income tax, $394.00; calculate social
security and Medicare taxes. C658.
31. Recorded employer payroll taxes expense for the March payroll. M35.
Apr. 15. Paid cash for the March liability for employee income tax, social security tax, and Medicare tax. C699.
15. Paid cash for federal unemployment tax liability for quarter ended March 31. C700.
15. Paid cash for state unemployment tax liability for quarter ended March 31. C701.
2. Prove and rule the cash payments journal.
D-10 Appendix D Recycling Problems
R E C Y C L I N G P R O B L E M 14 1
Preparing an 8-column work sheet for a merchandising business
The trial balance for Audio Source, Inc., as of December 31 of the current year is recorded on a work sheet in the Recycling Prob-
lem Working Papers. Audio Source completed the following transactions during December of the current year and January of the
next year.
Transactions:
Dec. 15. The board of directors declared a dividend of $0.375 per share; capital stock issued is 20,000 shares. M114.
Jan. 15. Paid cash for dividend declared December 15. C924.
Instructions:
1. Use page 12 of a general journal. Journalize the dividend declared on December 15.
2. Use page 18 of a cash payments journal. Journalize payment of the dividend on January 15.
3. Analyze the following adjustment information collected on December 31 and record the adjustments on the work sheet.
Label each adjustment using labels (a) through (g).
a. Uncollectible accounts are 0.4% of credit sales of $620,000.00.
b. Merchandise inventory $270,461.36
c. Office supplies inventory 1,081.34
d. Store supplies inventory 1,585.90
e. Value of prepaid insurance 160.00
f. Estimate of office equipment depreciation 6,140.00
g. Estimate of store equipment depreciation 5,520.00
4. Using the federal income tax table shown in Chapter 14, calculate federal income tax expense and record the income tax
adjustment on the work sheet. Label the adjustment (h).
5. Complete the work sheet.
R E C Y C L I N G P R O B L E M 15 1
Preparing financial statements
The completed work sheet for Hawkins Parts, Inc., for the year ended December 31 of the current year and forms for completing
this problem are given in the Recycling Problem Working Papers.
Instructions:
1. Prepare an income statement. Calculate and record the following component percentages: (a) cost of merchandise sold, (b)
gross profit on sales, (c) total expenses, and (d) net income or loss before federal income tax. Round percentage calculations
to the nearest 0.1%.
2. Prepare a statement of stockholders’ equity. The company had 30,000 shares of $1.00 par value stock outstanding on January
1. The company issued an additional 2,000 shares during the year.
3. Prepare a balance sheet in report form.
4. Calculate the earnings per share and price-earnings ratio. The current market price of the stock is $89.00.
Recycling Problems Appendix D D-11
R E C YC L I N G P R O B L E M 16 1
Journalizing and posting adjusting and closing entries; preparing a post-closing trial balance
Use the following partial work sheet of Southern Fixtures, Inc., for the year ended December 31 of the current year. The general
ledger accounts and their balances as well as forms for completing this problem are in the Recycling Problem Working Papers.
Southern Fixtures, Inc.
Work Sheet
For Year Ended December 31, 20--
3 4 5 6
ADJUSTMENTS INCOME STATEMENT
ACCOUNT TITLE
DEBIT CREDIT DEBIT CREDIT
4 Allow. for Uncoll. Accts. (a) 2 2 1 5 00
5 Merchandise Inventory (b) 4 8 1 9 00
6 Supplies—Office (c) 6 1 0 6 00
7 Supplies—Store (d) 3 1 5 4 00
8 Prepaid Insurance (e) 9 6 0 0 00
9 Office Equipment
10 Acc. Depr.—Office Equipment (f) 4 4 2 0 00
11 Store Equipment
12 Acc. Depr.—Store Equipment (g) 4 9 5 0 00
13 Accounts Payable
14 Federal Income Tax Payable (h) 6 4 2 9 62
28 Income Summary (b) 4 8 1 9 00 4 8 1 9 00
38 Depr. Exp.—Office Equipment (f) 4 4 2 0 00 4 4 2 0 00
39 Depr. Exp.—Store Equipment (g) 4 9 5 0 00 4 9 5 0 00
40 Insurance Expense (e) 9 6 0 0 00 9 6 0 0 00
41 Miscellaneous Expense 13 1 8 4 80
42 Payroll Taxes Expense 18 7 8 5 24
43 Rent Expense 12 8 0 0 00
44 Salary Expense 151 5 8 4 73
45 Supplies Expense—Office (c) 6 1 0 6 00 6 1 0 6 00
46 Supplies Expense—Store (d) 3 1 5 4 00 3 1 5 4 00
47 Uncollectible Accounts Expense (a) 2 2 1 5 00 2 2 1 5 00
48 Utilities Expense 3 2 9 4 47
49 Federal Income Tax Expense (h) 64 2 9 62 46 4 2 9 62
50 41 6 9 3 62 41 6 9 3 62 641 8 7 4 48 757 4 4 3 89
51 Net Income after Federal Income Tax 115 5 6 9 41
52 757 4 4 3 89 757 4 4 3 89
Instructions:
1. Journalize the adjusting entries using page 18 of a general journal.
2. Post the adjusting entries.
3. Journalize the closing entries using page 19 of a general journal.
4. Post the closing entries.
5. Prepare a post-closing trial balance.
D-12 Appendix D Recycling Problems
R E C Y C L I N G P R O B L E M 17 1
Recording entries for uncollectible accounts
The accounts receivable and general ledger accounts for Fincher Industries are given in the Recycling Problem Working Papers.
The following transactions relating to uncollectible accounts receivable occurred during the final quarter of the current fiscal
year.
Instructions:
1. Journalize the following transactions completed during October using page 10 of a general journal. Post the transactions to
the customer accounts and general ledger accounts.
Transactions:
Oct. 6. Wrote off Chittenden Corporation’s past-due account as uncollectible, $284.75. M216.
19. Wrote off Foster Corporation’s past-due account as uncollectible, $574.10. M221.
2. Journalize the following transactions completed during November using page 11 of a general journal and page 11 of a cash
receipts journal. Prove the cash receipts journal. Post the transactions to the customer accounts and general ledger accounts.
Transactions:
Nov. 5. Wrote off Agnew Company’s past-due account as uncollectible, $804.24. M236.
12. Received cash in full payment of Chittenden Corporation’s account, previously written off as uncollectible, $284.75.
M241 and R616.
17. Received cash in full payment of Dionne, Inc.’s account, previously written off as uncollectible, $468.30. M243 and
R627.
3. Journalize the following transactions completed during December using page 12 of a general journal and page 12 of a cash
receipts journal. Prove the cash receipts journal. Post the transactions to the customer accounts and general ledger accounts.
Transactions:
Dec. 4. Wrote off Grant Company’s past-due account as uncollectible, $705.18. M257.
10. Received cash in full payment of Agnew Company’s account, previously written off as uncollectible, $804.24. M259
and R702.
21. Received cash in full payment of Foster Corporation’s account, previously written off as uncollectible, $574.10. M265
and R729.
4. Journalize the December 31 adjusting entry for estimated uncollectible accounts expense for the year. Use page 13 of the
general journal. Uncollectible accounts expense is estimated as 1.2% of total sales on account. Total sales on account for the
year were $987,660.00. Post the transaction to the general ledger accounts.
R E C YC L I N G P R O B L E M 18 1
Recording transactions for plant assets
Diamond Clothing records plant assets in two accounts: Store Equipment, Account No. 1215, and Office Equipment, Account No.
1205. Store equipment is depreciated using the straight-line method. Office equipment is depreciated using the double declin-
ing-balance method. Journals and plant asset records are given in the Recycling Problem Working Papers.
Instructions:
1. Record the following transactions completed during 20X1 on page 1 of a cash payments journal.
Transactions:
Jan. 3. Bought a color printer for the office: cost, $900.00; estimated salvage value, $100.00; estimated useful life, 4 years;
plant asset No. 642; serial number, ZE532N34. C168.
Feb. 26. Paid property taxes on plant assets assessed at $620,000.00. The tax rate is 1.4%. C216.
Apr. 3. Purchased a store display: cost, $3,000.00; estimated salvage value, $500.00; estimated useful life, 5 years; plant
asset No. 643; serial number, 754NFE. C275.
Recycling Problems Appendix D D-13
2. Complete Section 1 of a plant asset record for each new plant asset.
3. Prepare a depreciation table for each new plant asset.
4. Complete Section 3 of the plant asset records for 20X1–20X4.
5. Record the following transactions completed during 20X5. Use page 2 of a cash receipts journal and page 2 of a general
journal.
Transactions:
Jan. 3. Received cash for sale of a color printer, plant asset No. 642, $60.00. R7.
June 29. Received cash for sale of a store display, plant asset No. 643, $950.00. M69 and R171.
Dec. 31. Recorded the adjusting entry for depreciation expense—store equipment. Total 20X5 depreciation expense of store
equipment was $17,765.00.
6. Complete the plant asset records for each plant asset sold during 20X5.
R E C YC L I N G P R O B L E M 19 1
Determining the cost of inventory using the fifo, lifo, and weighted-average inventory costing methods
Mayfair Industries made the following purchases of a part during the fiscal year. There are 32 units in ending inventory. Forms for
costing inventory are given in the Recycling Problem Working Papers.
Purchase Date Quantity Unit Price
January 1, beginning inventory 3 $12.30
January 3, purchases 20 13.00
March 29, purchases 20 13.20
August 15, purchases 15 13.25
November 13, purchases 15 13.45
Instructions:
1. Calculate the cost of ending inventory using the fifo, lifo, and weighted-average methods.
2. Which of the inventory costing methods resulted in the highest cost of merchandise sold?
R E C YC L I N G P R O B L E M 2 0 1
Journalizing notes payable and notes receivable transactions
The following transactions related to notes payable and notes receivable were completed by Wolverton Company during April of
the current year. Journals are provided in the Recycling Problem Working Papers.
Transactions:
Apr. 5. Signed a 90-day, 10% note, for $30,000.00 with First National Bank. R34.
9. Accepted a 90-day, 15% note from Phillip Majure for an extension of time on his account, $650.00. NR18.
12. Received cash for the maturity value of a 60-day, 18% note for $900.00. R67.
16. Accepted a 60-day, 14% note from Avery Harris for an extension of time on her account, $2,450.00. NR19.
19. Received cash for the maturity value of a 60-day, 18% note for $500.00. R74.
20. Signed a 90-day, 15% note with Rossman Supply for an extension of time on this account payable, $2,500.00. M49.
22. Patrick Isamen dishonored his 90-day, 15% note, for $3,000.00. M53.
27. Signed a 120-day, 12% note for $20,000.00 with First Commerce Bank. R84.
29. Received cash for the maturity value of a 90-day, 18% note for $1,800.00. R89.
D-14 Appendix D Recycling Problems
Instructions:
1. Journalize each transaction using page 3 of a general journal and page 6 of a cash receipts journal. Source documents are
abbreviated as follows: check, C; receipt, R; memorandum, M; note receivable, NR.
2. Determine the maturity date and maturity value of each note signed by Wolverton Company.
3. Journalize the following transactions on page 10 of a cash payments journal. Use the maturity dates and maturity values
calculated in Instruction 2.
Transactions:
Paid cash for the maturity value of the $30,000.00 note dated April 5. C452.
Paid cash for the maturity value of the $2,500.00 note dated April 20. C489.
Paid cash for the maturity value of the $20,000.00 note dated April 27. C672.
R E C YC L I N G P R O B L E M 211
Journalizing and posting entries for accrued interest revenue and expense
The accounting forms for Farrell Company are given in the Recycling Problem Working Papers. The balances are recorded as of
December 31 of the current year before adjusting entries.
Farrell Company completed the following transactions related to notes receivable and notes payable during the current year
and the following one year. The first two transactions have already been journalized and posted. One note receivable and one
note payable are the only notes on hand at the end of the fiscal period. Source documents are abbreviated as follows: receipt, R;
check, C; note receivable, NR.
Transactions:
20X1
Nov. 9. Accepted a 90-day, 18% note from Kayla Nelson for an extension of time on her account, $800.00. NR18.
Dec. 14. Signed a 120-day, 12% note, $4,800.00 with First National Bank. R364.
20X2
Feb. 7. Received cash for the maturity value of NR18. R132.
Apr. 13. Paid cash for the maturity value of the First National Bank note. C342.
Instructions:
1. Plan the adjustments on a work sheet. Use (a) for accrued interest income and (h) for accrued interest expense.
2. Journalize and post the adjusting entries for accrued interest income and accrued interest expense on December 31. Use
page 15 of a general journal.
3. Journalize and post the closing entries for interest income and interest expense. Continue to use page 15 of a general journal.
4. Journalize and post the reversing entries for accrued interest income and accrued interest expense. Use page 16 of a general
journal.
5. Journalize the receipt of cash for the maturity value of NR18. Use page 13 of a cash receipts journal. Post the amounts in the
General columns of the cash receipts journal.
6. Journalize the cash payment for the maturity value of the note payable. Use page 18 of a cash payments journal. Post the
amounts in the General columns of the cash payments journal.
Recycling Problems Appendix D D-15
R E C YC L I N G P R O B L E M 2 2 1
Preparing financial statements and end-of-fiscal-period entries for a corporation
Accounting forms are given in the Recycling Problem Working Papers. Applewhite Corporation completed the following transac-
tions during December of the current year and January of the next year.
Instructions:
1. Prepare Applewhite Corporation’s work sheet for the current year ended December 31. Record the adjustments on the work
sheet using the following information.
Adjustment Information, December 31
Accrued interest income $ 64.00
Uncollectible accounts expense estimated as 0.6% of sales on account.
Sales on account for year, $554,000.00.
Merchandise inventory $229,406.46
Supplies inventory 573.52
Value of prepaid insurance 1,200.00
Annual depreciation expense—office equipment 4,850.00
Annual depreciation expense—store equipment 3,480.00
Accrued interest expense 250.00
Federal income tax is calculated using the tax table presented in Chapter 22.
2. Prepare an income statement. Calculate and record the following component percentages: (a) cost of merchandise sold; (b)
gross profit on operations; (c) total operating expenses; (d) income from operations; (e) net addition or deduction resulting
from other revenue and expenses; and (f ) net income before federal income tax. Round percentage calculations to the near-
est 0.1%.
3. Analyze the corporation’s income statement by determining if component percentages are within acceptable levels. If any
component percentage is not within an acceptable level, suggest steps that the company should take. The corporation con-
siders the following component percentages acceptable.
Cost of merchandise sold Not more than 68.0%
Gross profit on operations Not less than 32.0%
Total operating expenses Not more than 25.0%
Income from operations Not less than 7.0%
Net deduction from other revenue and expenses Not more than 0.5%
Net income before federal income tax Not less than 6.5%
4. Prepare a statement of stockholders’ equity. Use the following additional information.
January 1 balance of capital stock account $100,000.00
(10,000 shares issued for $10.00 per share)
Shares issued during the year 2,000 shares
5. Prepare a balance sheet.
6. Calculate the corporation’s (a) working capital and (b) current ratio. Determine if these items are within acceptable levels. The
corporation considers the following levels acceptable.
Working capital Not less than $250,000.00
Current ratio Between 4.0 to 1 and 6.0 to 1
7. Journalize the adjusting entries using page 15 of a general journal.
8. Journalize the closing entries using page 16 of a general journal.
9. Journalize the reversing entries using page 17 of a general journal.
D-16 Appendix D Recycling Problems
R E C YC L I N G P R O B L E M 2 3 1
Recording partners’ investments and withdrawals, preparing financial statements, and liquidating a partnership
Ashwin Akabu and Chen Wong are partners in a business called Total Toys. Journals and forms for completing this problem are
given in the Recycling Problem Working Papers.
Total Toys completed the following transactions during June of the current year.
Transactions:
June 15. Received cash from partner, Ashwin Akabu, as an investment, $15,000.00. Receipt No. 128.
15. Received cash of $7,000 and supplies valued at $5,000.00 from partner, Chen Wong, as an investment. Receipt No.
129.
30. Ashwin Akabu, partner, withdrew merchandise for personal use, $900.00. Memorandum No. 74.
30. Chen Wong, partner, withdrew cash for personal use, $1,200. Check No. 141.
Instructions:
1. Use page 11 of a cash receipts journal. Journalize the investments on June 15.
2. Use page 17 of a cash payments journal and page 21 of a general journal. Journalize the withdrawals on June 30.
Information from Total Toys’ worksheet and income statement for the month ended June 30 is given below.
Net Income for the month ended June 30 $ 7,200.00
Ashwin Akabu, Capital June 1 balance 31,770.00
Chen Wong, Capital June 1 balance 25,441.00
Instructions:
3. Prepare a distribution of net income statement for Total Toys. Net income or loss is to be distributed equally to the partners.
4. Using the balances of the general ledger capital accounts, prepare an owners’ equity statement for Total Toys. The investments
made on June 15 are the only additional investments made by the partners this month. The withdrawals made on June 30 are
the only withdrawals made by the partners this month.
Total Toys was liquidated on June 30. On that date, after financial statements were prepared and closing entries were posted, the
general ledger accounts had the following balances.
Cash $87,061.00
Merchandise Inventory 1,000.00
Equipment 7,500.00
Accumulated Depreciation—Equipment 5,000.00
Accounts Payable 1,250.00
Ashwin Akabu, Capital 49,470.00
Chen Wong, Capital 39,841.00
The following transactions occurred on June 30 of the current year.
Transactions:
a. Received cash from the sale of merchandise inventory, $900.00. R130.
b. Received cash from the sale of equipment, $3,500.00. R131.
c. Paid cash to all creditors for amounts owed. C142.
d. Distributed balance of Loss and Gain on Realization to the partners on an equal basis. M75.
e. Distributed remaining cash to partners. C143 and C144.
Instructions:
5. Journalize the transactions. Continue on the next available line of the journals used in instructions 1 and 2.
Recycling Problems Appendix D D-17
R E C YC L I N G P R O B L E M 2 4 1
Recording international and Internet sales
Pacific Trade Inc. sells folk art domestically and internationally. The company has Internet sales as well. Journals and forms for
completing this problem are given in the Recycling Problem Working Papers.
Instructions:
1. Journalize the following transactions affecting sales and cash receipts completed during November of the current year. Use
page 23 of a general journal and a cash receipts journal. Source documents are abbreviated as follows: memorandum, M;
receipt, R; time draft, TD; and terminal summary, TS.
Transactions:
Nov. 4. Received a 30-day time draft from Hong Kong Importers for an international sale, $2,200.00. TD72.
7. Recorded Internet credit card sales, $8,450.00. TS330.
12. Recorded international cash sale, $11,800.00. M65.
14. Recorded Internet credit card sales, $5,670.00. TS331.
15. Received cash for the value of Time Draft No. 68, $3,000.00. R103.
18. Received cash for the value of Time Draft No. 71, $5,900.00. R110.
21. Recorded Internet cash sale, $16,400. TS332.
24. Recorded international cash sale, $7,500.00. M76.
28. Recorded Internet cash sale, $3,300.00. TS333.
30. Received a 30-day time draft from Australian Arts for international sale of merchandise, $16,040.00. TD73.
2. Prove and rule the cash receipts journal.
D-18 Appendix D Recycling Problems
APPENDIX E
ANSWERS TO AUDIT
YOUR UNDERSTANDING
Chapter 1, Page 9 Chapter 3, Page 66
1. Planning, recording, analyzing, and interpreting financial 1. General Debit and Cash Credit.
information. 2. General Debit and General Credit.
2. Answers will vary but should involve businesses that 3. General Debit and Cash Credit.
perform activities for a fee.
3. A business owned by one person. Chapter 3, Page 72
4. Assets = Liabilities + Owner’s Equity. 1. Cash Debit and Sales Credit.
2. General Debit and Sales Credit.
Chapter 1, Page 13
3. General Debit and Cash Credit.
1. The right side must be increased.
4. Cash Debit and General Credit.
2. If one account is increased, another account on the same
5. General Debit and Cash Credit.
side of the equation must be decreased by the same
amount.
3. Buying items or services and paying for them at a future Chapter 3, Page 78
date. 1. (1) Add each of the amount columns. (2) Add the debit
column totals, and then add the credit column totals.
(3) Verify that the total debits and total credits are equal.
Chapter 1, Page 17
2. Cash on hand at the beginning of the month, plus total
1. Increased.
cash received, less total cash paid.
2. Increased
3. (1) Rule a single line across all amount columns directly
3. Decreased. below the last entry to indicate that the columns are to be
added. (2) On the next line, write the date in the Date col-
Chapter 2, Page 31 umn. (3) Write the word Totals in the Account Title column.
1. ASSETS = LIABILITIES + OWNER’S EQUITY (4) Write each column total below the single line. (5) Rule
double lines below the column totals across all amount
2. (1) Account balances increase on the normal balance side columns. The double lines mean that the totals have been
of an account. (2) Account balances decrease on the side verified as correct.
opposite the normal balance side of an account.
Chapter 4, Page 95
Chapter 2, Page 37 1. The first digit indicates in which general ledger division
1. (1) Which accounts are affected? (2) How is each account the account is located. The second and third digits indicate
classified? (3) How is each classification changed? (4) How the location of the account within that division.
is each amount entered in the accounts? 2. (1) Write the account title in the heading. (2) Write the
2. Supplies and Cash. account number in the heading.
Chapter 2, Page 44 Chapter 4, Page 99
1. Cash and Sales. 1. (1) Write the date in the Date column of the account.
(2) Write the journal page number in the Post. Ref.
2. Accounts Receivable and Sales.
column of the account. (3) Write the amount in the Debit
3. Owner’s drawing account and Cash. or Credit column. (4) Calculate and write the new account
4. Credit, because revenue increases owner’s equity. balance in the Balance Debit or Balance Credit column.
5. Debit, because expenses decrease owner’s equity. (5) Write the account number in the Post. Ref. column of
the journal.
Chapter 3, Page 62 2. No. Each separate amount in the General Debit and Gen-
eral Credit columns of a journal is posted to the account
1. By date. written in the Account Title column.
2. Source documents are one way to verify the accuracy of a
specific journal entry.
3. Date, debit, credit, and source document.
Answers to Audit Your Understanding Appendix E E-1
Chapter 4, Page 104 Chapter 6, Page 155
1. Special amount columns. 1. Name of the business, name of report, and date of report.
2. Whenever the debits in an account exceed the credits. 2. All general ledger accounts are listed in the Trial Balance
3. Whenever the credits in an account exceed the debits. columns of a work sheet, even if some accounts do not
have balances.
Chapter 4, Page 109
Chapter 6, Page 161
1. A journal entry made to correct an error in the ledger.
1. An expense should be reported in the same fiscal period
2. When a transaction has been improperly journalized and
that it is used to produce revenue.
posted to the ledger.
2. (1) What is the balance of the account? (2) What should the
3. To show the increase in this expense account.
balance be for this account? (3) What must be done to cor-
4. To show the decrease in this expense account. rect the account balance? (4) What adjustment is made?
Chapter 5, Page 123 Chapter 6, Page 166
1. Blank endorsement, special endorsement, and restrictive 1. Asset, liability, and owner’s equity accounts.
endorsement.
2. Revenue and expense accounts.
2. (1) Write the amount of the check after the dollar sign at
3. Balance Sheet Credit column.
the top of the stub. (2) Write the date of the check on the
Date line. (3) Write to whom the check is to be paid on the 4. Balance Sheet Debit column.
To line. (4) Record the purpose of the check on the For line.
(5) Write the amount of the check after the words Amt. This Chapter 6, Page 170
Check. (6) Calculate the new checking balance and record 1. Subtract the smaller total from the larger total to find the
it in the amount column on the last line of the stub. difference.
3. (1) Write the date. (2) Write to whom the check is to be 2. The difference between two column totals can be divided
paid following the words Pay to the order of. (3) Write the evenly by 9.
amount in figures following the dollar sign. (4) Write
the amount in words on the line with the word Dollars. 3. A slide.
(5) Write the purpose of the check on the line labeled For.
(6) Sign the check. Chapter 7, Page 186
1. Heading, revenue, expenses, and net income or net loss.
Chapter 5, Page 128 2. Total Expenses divided by Total Sales equals Total Expenses
1. (1) A service charge may not have been recorded in the Component Percentage.
depositor’s business records. (2) Outstanding deposits 3. Net Income divided by Total Sales equals Net Income
may be recorded in the depositor’s records but not on a Component Percentage.
bank statement. (3) Outstanding checks may be recorded
in the depositor’s records but not on a bank statement.
Chapter 7, Page 192
(4) A depositor may have made a math or recording error.
1. Heading, assets, liabilities, and owner’s equity.
2. An outstanding check.
2. Capital Account Balance plus Net Income minus Drawing
Account Balance equals Current Capital.
Chapter 5, Page 133
1. (1) The check appears to be altered. (2) The signature on
Chapter 8, Page 205
the check does not match the signature on the signature
card. (3) The amounts written in figures and in words 1. To update general ledger accounts at the end of a fiscal
do not agree. (4) The check is postdated. (5) The person period.
who wrote the check has stopped payment on it. (6) The 2. Adjustments column of the work sheet.
account of the person who wrote the check has insuffi- 3. Supplies Expense and Insurance Expense.
cient funds to pay the check.
2. Cash.
Chapter 8, Page 212
3. Cash.
1. Beginning balances.
2. Changes in the owner’s capital for a single fiscal period.
Chapter 5, Page 137
3. (1) An entry to close income statement accounts with
1. For making small cash payments. credit balances. (2) An entry to close income statement
2. The check issued to replenish petty cash is a credit to Cash accounts with debit balances. (3) An entry to record
and does not affect Petty Cash. net income or net loss and close the income summary
account. (4) An entry to close the owner’s drawing
account.
E-2 Appendix E Answers to Audit Your Understanding
Chapter 8, Page 219 Chapter 10, Page 275
1. To assure a reader that a balance has not been omitted. 1. A merchandising business sells merchandise; a service
2. Only those with balances (permanent accounts). business sells services.
3. Because they are closed and have zero balances. 2. As a percentage of sales.
3. The amount of sales tax collected is a business liability
Chapter 9, Page 241 until paid to the government.
1. Purchases of merchandise on account. 4. Accounts Receivable.
2. Frequently occurring transactions.
Chapter 10, Page 284
3. Because the same two accounts are always affected by
purchase on account transactions. 1. The POS system produces a receipt that contains detailed
information about the sale, including the merchandise’s
4. Time is saved because using special amount columns
description and price. The cash register receipt does not
eliminates writing an account title in the Account Title
include such detailed information.
column.
2. A batch report can be detailed, showing each credit card
sale, or it can provide a summary of the number and total
Chapter 9, Page 247 of sales by credit card type.
1. To encourage early payment. 3. The funds are transferred among the banks issuing the
2. Cash payment transactions that do not occur often. credit cards.
3. A business purchases merchandise to sell but buys sup-
plies for use in the business. Supplies are not intended Chapter 10, Page 287
for sale.
1. A sales return is credit allowed a customer for the sales
4. Two ten means 2% of the invoice amount may be price of returned merchandise; a sales allowance is credit
deducted if the invoice is paid within 10 days of the allowed a customer for part of the sales price of merchan-
invoice date. Net thirty means that the total invoice dise that is not returned.
amount must be paid within 30 days.
2. Credit memorandum.
3. Sales Returns and Allowances and Sales Tax Payable are
Chapter 9, Page 253 debited; Accounts Receivable is credited.
1. The titles of the accounts for which the petty cash fund 4. To provide better information to quickly identify if the
was used. amount of sales returns and allowances is greater than
2. The balance is usually a debit because the petty cash fund expected.
is more likely to be short than over.
3. (1) Rule a single line across all amount columns. Chapter 11, Page 306
(2) Write the date in the Date column. (3) Write Totals
1. A controlling account summarizes all accounts in a sub-
in the Account Title column. (4) Write each column
sidiary ledger. The balance of a controlling account equals
total below the single line. (5) Rule a double line
the total of all account balances in its related subsidiary
across all amount columns.
ledger.
2. Accounts Payable Debit column.
Chapter 9, Page 258
1. General journal.
Chapter 11, Page 314
2. To note that the invoice is for store supplies and not for
1. Customer accounts listed in the Accounts Receivable
purchases, ensuring that no mistake is made.
Debit column.
3. Because the single credit amount is posted to two
2. Accounts Receivable Credit column.
accounts.
3. All customer accounts that have balances.
4. After each general journal entry is recorded.
5. A business can track the amount of purchases returns and
Chapter 11, Page 319
allowances in a fiscal period if a separate account is used.
1. Amounts in the Debit and Credit columns.
6. A purchases return is credit allowed for the purchase price
of returned merchandise. A purchases allowance is credit 2. (1) Write the date in the Date column of the account.
allowed for part of the purchase price of merchandise that (2) Write the journal page number in the Post. Ref. column
is not returned. of the account. (3) Write the amount in the Debit or Credit
column of the account. (4) Calculate and write the new
7. When the customer wants to record the transaction imme-
account balance in the Balance Debit or Balance Credit
diately, without waiting for written confirmation from the
column of the account. (5) Write the general ledger
vendor.
account number in the Post. Ref. column of the journal.
Answers to Audit Your Understanding Appendix E E-3
Chapter 11, Page 326 Chapter 13, Page 382
1. Each special amount column. 1. By January 31.
2. (1) Sales journal, (2) purchases journal, (3) general journal, 2. Federal income tax, social security tax, and Medicare tax.
(4) cash receipts journal, (5) cash payments journal.
Chapter 13, Page 389
Chapter 11, Page 329 1. By the 15th day of the following month.
1. Memorandum. 2. For paying payroll taxes and for paying federal unemploy-
2. It does not affect the general ledger accounts. ment tax.
3. Only a reference to the subsidiary ledger account is
entered in the Post. Ref. column of the general journal. Chapter 14, Page 408
1. Stockholders’ Equity.
Chapter 12, Page 344 2. One account called Capital Stock.
1. The total amount earned by all employees for a pay 3. Retained Earnings.
period.
4. The board of directors declares a dividend.
2. 31⁄2 hours.
3. Overtime hours ⫻ the overtime rate. Chapter 14, Page 414
4. $506 (40 ⫻ $11.00 ⫹ 4 ⫻ $16.50). 1. Supplies—Office and Supplies Expense—Office.
2. Prepaid Insurance and Insurance Expense.
Chapter 12, Page 350
1. Form W-4, Employee’s Withholding Allowance Certificate. Chapter 14, Page 418
2. Employee marital status and number of withholding 1. In the same order they appear in the general ledger.
allowances.
2. Merchandise Inventory and Income Summary.
3. Both the employee and the employer.
3. Debit Income Summary and credit Merchandise Inventory.
4. The Income Summary account is used to adjust the Mer-
Chapter 12, Page 355
chandise Inventory account at the end of a fiscal period.
1. The payroll register summarizes the payroll for one pay
period and shows total earnings, payroll withholdings,
and net pay of all employees. Chapter 14, Page 422
2. By subtracting total deductions from total earnings. 1. The loss is considered a regular expense of doing business.
Revenue was earned when the sale was made. Failing to
3. Because a business must send a quarterly report to federal collect an account does not cancel the sale.
and state governments showing employee taxable earn-
ings and taxes withheld from employee earnings. 2. At the end of the fiscal period.
3. (1) Report a balance sheet amount for Accounts Receiv-
able that reflects the amount the business expects to
Chapter 12, Page 358
collect in the future. (2) Recognize the expense of uncol-
1. To help protect and control payroll payments. lectible accounts in the same period in which the related
2. The payroll register. revenue is recorded.
3. Individual checks are not written and do not have to be 4. It reduces its related asset account, Accounts Receivable.
distributed. 5. The difference between the balance of Accounts Receiv-
able and its contra account, Allowance for Uncollectible
Chapter 13, Page 372 Accounts.
1. Salary Expense.
2. Employee Income Tax Payable. Chapter 14, Page 426
3. Social Security Tax Payable. 1. Current assets and plant assets.
4. Medicare Tax Payable. 2. Original cost; estimated salvage value; estimated useful
life.
Chapter 13, Page 377
Chapter 14, Page 436
1. Social security: 6.2% of earnings up to a maximum of
$87,000.00 in each calendar year; Medicare: 1.45% of total 1. Income Statement Debit or Credit column.
employee earnings; federal unemployment: 0.8% on the 2. Balance Sheet Debit.
first $7,000.00 earned by each employee; state unem- 3. Trial balance amounts after adjustments are extended to
ployment: 5.4% on the first $7,000.00 earned by each the Adjusted Trial Balance columns, and the Adjusted Trial
employee. Balance columns are proved before extending amounts to
2. The first $7,000.00. the Income Statement and Balance Sheet columns.
E-4 Appendix E Answers to Audit Your Understanding
Chapter 15, Page 454 Chapter 17, Page 518
1. The cost of merchandise sold section 1. To the contra asset account Allowance for Uncollectible
2. Beginning merchandise inventory, plus purchases, equals Accounts and the expense account Uncollectible Accounts
total cost of merchandise available for sale, less ending Expense.
merchandise inventory, equals cost of merchandise sold. 2. The allowance method of recording losses from uncollect-
3. By comparing the amount calculated on the income state- ible accounts attempts to match the expense of uncollect-
ment with the amount on the work sheet. ible accounts in the same fiscal year the related sales are
recorded.
Chapter 15, Page 460 3. The account is not affected.
1. (1) Cost of merchandise sold, (2) gross profit on sales,
(3) total expenses, and (4) net income. Chapter 17, Page 524
2. By making comparisons with prior fiscal periods as well 1. The balance of the customer account is an actual uncol-
as with industry standards that are published by industry lectible amount and no longer an estimate of an uncollect-
organizations. ible amount.
3. Net loss. 2. The book value is the same because the same amount is
deducted from the accounts receivable and the allowance
accounts.
Chapter 15, Page 463
3. To show an accurate credit history.
1. The changes in a corporation’s ownership for a fiscal
period.
Chapter 18, Page 537
2. Capital stock and retained earnings.
1. Office Equipment is debited; Cash is credited.
3. In the Capital Stock general ledger account.
2. Land and anything attached to the land.
4. In the Balance Sheet Credit column of a work sheet.
3. Tax authorities referred to as assessors.
5. As a dividend.
6. In the Balance Sheet Debit column of a work sheet.
Chapter 18, Page 541
1. Matching Expenses with Revenues.
Chapter 15, Page 471
2. Original cost; estimated salvage value; estimated useful
1. Current and plant assets.
life.
2. (1) The balance of the asset account, (2) the balance of
the asset’s contra account, and (3) book value.
Chapter 18, Page 545
3. Mortgage payable.
1. Depreciation is credited to the contra asset account,
4. From the statement of stockholders’ equity. Accumulated Depreciation, rather than crediting the asset
5. Schedule of accounts payable and schedule of accounts account.
receivable. 2. The balance of the asset account is not changed.
Chapter 16, Page 486 Chapter 18, Page 550
1. Because the heading Adjusting Entries is recorded in the 1. Disposal date, disposal method, and disposal amount.
Account Title column to explain all of the adjusting entries
2. Partial year’s depreciation.
that follow.
3. Cash received less the book value of the asset sold.
2. Adjusting entry for merchandising inventory.
4. Other Expenses.
3. Federal Income Tax Payable.
Chapter 18, Page 554
Chapter 16, Page 493
1. Depreciation rate.
1. Income Statement and Balance Sheet columns of the work
sheet and the distribution of net income statement. 2. Double declining-balance method.
2. Income Summary. 3. It declines.
4. Its estimated salvage value.
Chapter 16, Page 498
1. General ledger accounts with balances. Chapter 19, Page 568
2. To prove the equality of debits and credits in the general 1. Successful businesses must have merchandise available
ledger. for sale that customers want. A business needs controls
that assist managers in maintaining a merchandise inven-
3. In the same order as they appear in the general ledger.
tory of sufficient quantity, variety, and price.
Answers to Audit Your Understanding Appendix E E-5
2. (1) Excess inventory requires that a business spend money Chapter 20, Page 602
for expensive store and warehouse space. (2) Excess inven- 1. A note receivable does not pay the amount the customer
tory uses capital that could be invested in other assets to owes. Therefore, the amount of the asset does not change
earn a profit for the business. (3) Excess inventory requires at the time the note is signed. The form of the asset does
that a business spend money for expenses, such as taxes change from an account receivable to a note receivable.
and insurance premiums, that increase with the cost of the However, the asset will remain classified as a current asset.
merchandise inventory. (4) Excess inventory may become
obsolete and unsalable. 2. Other Revenue.
3. At the end of a fiscal period. 3. Accounts Receivable and the customer account are each
debited for the principal of the note and the interest.
4. A business frequently establishes its fiscal period to end Notes Receivable is credited for the principal of the note.
when inventory normally is at a minimum because it takes Interest Income is credited for the interest.
less time to count a smaller inventory.
4. Because the interest has been earned.
5. A customary practice is to take a periodic inventory at
least once a fiscal period. The periodic inventory is then
compared with the perpetual inventory records. Chapter 21, Page 621
1. Realization of Revenue.
Chapter 19, Page 573 2. To avoid the inconvenience of determining how much, if
1. The most recent invoices for purchases are used in record- any, of each cash receipt is for interest income earned and
ing prices for each item on the inventory record. accrued during the previous year and how much is earned
in the current year.
2. The most recent costs of merchandise should be charged
against current revenue.
Chapter 21, Page 627
3. Lifo.
1. So that the income statement will report all expenses for
4. Using the same inventory costing method for all fiscal the period even though some of the expenses have not
periods provides financial statements that can be com- yet been paid. Also, so that the balance sheet will report
pared with other fiscal period statements. If a business all liabilities, including the accrued expenses payable.
changes inventory cost methods, part of the difference in
gross profit and net income may be caused by the change 2. Interest Payable is debited; Interest Expense is credited.
in methods.
Chapter 22, Page 644
Chapter 19, Page 576 1. (1) For some accounts, the calculated estimate of the
1. By using the gross profit method of estimating inventory. account is also the amount used in the work sheet adjust-
ment. (2) Other accounts have a current balance when the
2. Actual net sales and net purchases amounts; the begin- work sheet adjustment is planned. The current balance is
ning inventory amount; and the gross profit percentage. typically subtracted from the estimated account balance
3. The beginning inventory for the month is the same as the to determine the amount of the adjustment.
ending inventory from the previous month. 2. (1) Complete all adjustments other than federal income
tax. (2) Extend all the accounts except Federal Income Tax
Chapter 20, Page 592 Expense to the Income Statement or Balance Sheet col-
1. Sometimes a business receives more cash from sales than umns. (3) Calculate temporary totals of the Income State-
is needed to pay for purchases and expenses. When this ment accounts. (4) The difference of the Income Statement
occurs, a business may deposit the extra cash in a bank columns, excluding the estimated federal income taxes, is
or other financial institution for a short period. At other the net income or loss before income taxes.
times, the receipt of cash from sales does not occur at the
same time and in sufficient amounts to pay for needed Chapter 22, Page 648
purchases and expenses. When this occurs, a business 1. Sales, cost of merchandise sold, and operating expenses
needs to borrow additional cash or make arrangements are used to determine income from operations. Other
with its vendors to delay payment for a period of time. revenue and other expenses, such as interest income,
2. A note can be useful in a court of law as written evidence interest expense, and gains or losses on plant assets, are
of a debt. not normal business activities. Therefore, they are not
3. Ten cents will be paid for the use of each dollar borrowed included in calculating income from operations and are
for a full year. reported separately.
4. Multiply the principal times the interest rate times the 2. Each component percentage shows the percentage that
time stated as a fraction of a year. each item is of net sales.
Chapter 20, Page 597 Chapter 22, Page 653
1. Because notes payable generally are paid within one year. 1. Mortgage payable.
2. Accounts Payable and the vendor are debited. Notes Pay- 2. The amount of total current assets less total current
able is credited. liabilities.
E-6 Appendix E Answers to Audit Your Understanding
3. The current ratio permits a business to compare itself to Chapter 23, Page 690
its industry and to provide a convenient relative measure 1. Cash received from the sale of assets during liquidation of
from year to year. a partnership.
2. Each partner’s capital account.
Chapter 22, Page 660
1. Post-closing trial balance. Chapter 24, Page 709
2. (1) Closing entry for income statement accounts with 1. (1) The lack of uniform commercial laws among countries
credit balances (revenue and contra cost accounts). makes settlement of disputes more difficult. (2) Greater
(2) Closing entry for income statement accounts with distances and sometimes more complex transportation
debit balances (cost, contra revenue, and expense methods increase the time to complete the transaction.
accounts). (3) Closing entry to record net income or net (3) Because it may be difficult to determine a customer’s
loss in the retained earnings account and close the income financial condition and to take legal action if a customer
summary account. (4) Closing entry for the dividends does not pay, the risk of uncollected amounts is increased.
account. (4) Unstable political conditions in some countries
3. Income Summary and Dividends. may affect the ability to receive payments from those
countries.
Chapter 23, Page 679 2. The bill of lading serves as a receipt for merchan-
1. Income statement and balance sheet. dise received and as a contract for the delivery of the
merchandise.
2. A partnership agreement should include: the name of
the business and the partners, the investments of each 3. A sight draft is payable when the holder presents it for
partner, the duties and responsibilities of each partner, payment. A time draft is payable at a fixed or determin-
how profits and losses are to be divided, what happens if able future time after it is accepted.
a partner dies, how the partnership is to be dissolved, and 4. To assure receipt of payment for those sales.
the duration of the agreement. 5. A draft is generally paid by a bank and a trade acceptance
3. The partner’s drawing account increases by a debit; Cash is paid by the buyer. A seller generally has much more
decreases by a credit. assurance of receiving payment from a bank than from a
buyer.
Chapter 23, Page 685
1. Each partner’s share of net income or net loss. Chapter 24, Page 712
2. (1) Beginning capital amount, (2) any additional invest- 1. To browse and compare the products offered by compa-
ments made during the fiscal period, and (3) each nies, and to do so at a convenient time and place.
partner’s withdrawal of assets during the fiscal period. 2. Credit card sales information is processed in a manner
3. Compute Ending Capital as follows: (1) Share of Net similar to checks. Therefore, these sales are considered
Income less Withdrawals equals Net Increase in Capital. cash sales.
(2) Beginning Capital plus Net Increase in Capital equals
Ending Capital.
Answers to Audit Your Understanding Appendix E E-7
This page intentionally left blank
A
GLOSSARY
Account a record summarizing all the
information pertaining to a single item in
the accounting equation. (p. 10) Adjustments changes recorded on a
Account balance the amount in an work sheet to update general ledger
account. (p. 10) accounts at the end of a fiscal period.
(p. 157)
Account number the number assigned
to an account. (p. 92) Allowance method of recording losses Book value of accounts receivable
from uncollectible accounts credit- the difference between the balance
Account title the name given to an ing the estimated value of uncollectible of Accounts Receivable and its contra
account. (p. 10) accounts to account, Allowance for Uncollectible
Accounting planning, recording, analyz- a contra account. (p. 419) Accounts. (p. 419)
ing, and interpreting financial informa- Assessed value the value of an asset Business ethics the use of ethics in
tion. (p. 6) determined by tax authorities for the making business decisions. (p. 8)
Accounting cycle the series of account- purpose of calculating taxes. (p. 536)
ing activities included in recording finan- Asset anything of value that is owned.
cial information for a fiscal period. C
(p. 8)
(p. 217)
Accounting equation an equation show- Capital the account used to summarize
ing the relationship among assets, liabili- B the owner’s equity in a business. (p. 10)
ties, and owner’s equity. (p. 8) Capital stock total shares of ownership
Accounting period see fiscal period Bad debts see uncollectible accounts in a corporation. (p. 234)
Accounting records organized summa- Balance sheet a financial statement that Cash discount a deduction from the
ries of a business’s financial activities. reports assets, liabilities, and owner’s invoice amount, allowed by a vendor to
(p. 6) equity on a specific date. (p. 162) encourage early payment. (p. 242)
Accounting system a planned process Bank statement a report of deposits, Cash over a petty cash on hand amount
for providing financial information that withdrawals, and bank balances sent to a that is more than a recorded amount.
will be useful to management. (p. 6) depositor by a bank. (p. 124) (p. 248)
Accounts payable ledger a subsidiary Batch report a report of credit card sales Cash payments journal a special journal
ledger containing only accounts for ven- produced by a point-of-sale terminal. used to record only cash payment trans-
dors from whom items are purchased or (p. 278) actions. (p. 242)
bought on account. (p. 298) Batching out the process of preparing Cash receipts journal a special journal
Accounts receivable ledger a subsid- a batch report of credit card sales from a used to record only cash receipt transac-
iary ledger containing only accounts for point-of-sale terminal. (p. 278) tions. (p. 278)
charge customers. (p. 298) Bill of exchange see draft Cash sale a sale in which cash is received
Accrued expenses expenses incurred in for the total amount of the sale at the
Bill of lading a receipt signed by the
one fiscal period but not paid until a later time of the transaction. (p. 276)
authorized agent of a transportation
fiscal period. (p. 622) company for merchandise received that Cash short a petty cash on hand amount
Accrued interest expense interest also serves as a contract for the delivery that is less than a recorded amount.
incurred but not yet paid. (p. 622) of the merchandise. (p. 704) (p. 248)
Accrued interest income interest earned Blank endorsement an endorsement Charge sale see sale on account
but not yet received. (p. 617) consisting only of the endorser’s signa-
Chart of accounts a list of accounts used
ture. (p. 120)
Accrued revenue revenue earned in one by a business. (p. 32)
fiscal period but not received until a later Board of directors a group of persons
Check a business form ordering a bank to
fiscal period. (p. 616) elected by the stockholders to manage a
pay cash from a bank account. (p. 58)
corporation. (p. 406)
Accumulated depreciation the total Checking account a bank account from
amount of depreciation expense that has Book inventory see perpetual inventory
which payments can be ordered by a
been recorded since the purchase of a Book value the difference between an depositor. (p. 119)
plant asset. (p. 424) asset’s account balance and its related
Closing entries journal entries used to
Adjusting entries journal entries contra account balance. (p. 419)
prepare temporary accounts for a new
recorded to update general ledger Book value of a plant asset the original fiscal period. (p. 206)
accounts at the end of a fiscal period. cost of a plant asset minus accumulated
(p. 202) Code of conduct a statement that guides
depreciation. (p. 424)
the ethical behavior of a company and its
employees. (p. 118)
Glossary G-1
Commercial invoice a statement pre- D Employee earnings record a business
pared by the seller of merchandise form used to record details affecting pay-
addressed to the buyer, showing a ments made to an employee. (p. 353)
detailed listing and description of mer- Date of a note the day a note is signed.
(p. 589) Endorsement a signature or stamp on the
chandise sold, including prices and terms.
back of a check transferring ownership.
(p. 704) Debit an amount recorded on the left (p. 120)
Component percentage the percentage side of a T account. (p. 29)
Endorsement in full see special
relationship between one financial state- Debit card a bank card that automatically endorsement
ment item and the total that includes that deducts the amount of the purchase from
item. (p. 184) the checking account of the cardholder. Entry information for each transaction
(p. 132) recorded in a journal. (p. 57)
Contra account an account that reduces
a related account on a financial state- Debit memorandum a form prepared by Equities financial rights to the assets of
ment. (p. 245) the customer showing the price deduc- a business. (p. 8)
Contract of sale a document that details tion taken by the customer for returns Estimated salvage value the amount an
all the terms agreed to by seller and buyer and allowances. (p. 256) owner expects to receive when a plant
for a sales transaction. (p. 703) Declaring a dividend action by a board asset is removed from use. (p. 423)
Controlling account an account in a of directors to distribute corporate earn- Ethics the principles of right and wrong
general ledger that summarizes all accounts ings to stockholders. (p. 406) that guide an individual in making deci-
in a subsidiary ledger. (p. 298) Declining-balance method of depre- sions. (p. 8)
Corporation an organization with the ciation multiplying the book value by a Exhibit see supporting schedule
legal rights of a person and which may constant depreciation rate at the end of
each fiscal period. (p. 551) Expense a decrease in owner’s equity
be owned by many persons. (p. 234)
resulting from the operation of a busi-
Correcting entry a journal entry made Depreciation expense the portion of ness. (p. 15)
to correct an error in the ledger. (p. 108) a plant asset’s cost that is transferred to
an expense account in each fiscal period Exports goods or services shipped out of
Cost of goods sold see cost of merchan- during a plant asset’s useful life. (p. 423) a seller’s home country to a foreign coun-
dise sold try. (p. 702)
Dishonored check a check that a bank
Cost of merchandise the price a business refuses to pay. (p. 129)
pays for goods it purchases to sell. (p. 236) F
Dishonored note a note that is not paid
Cost of merchandise sold the total origi- when due. (p. 600)
nal price of all merchandise sold during a Face amount see principal of a note
fiscal period. (p. 450) Distribution of net income statement a
partnership financial statement showing Federal unemployment tax a federal tax
Credit an amount recorded on the right net income or loss distribution to part- used for state and federal administrative
side of a T account. (p. 29) ners. (p. 680) expenses of the unemployment program.
Credit card sale a sale in which a credit Dividends earnings distributed to stock- (p. 375)
card is used for the total amount of the holders. (p. 405) Fifo see first-in, first-out inventory costing
sale at the time of the transaction. (p. 276) method
Double-entry accounting the recording
Credit memorandum a form prepared of debit and credit parts of a transaction. File maintenance the procedure for
by the vendor showing the amount (p. 57) arranging accounts in a general ledger,
deducted for returns and allowances. assigning account numbers, and keeping
(p. 285) Doubtful accounts see uncollectible
accounts records current. (p. 93)
Creditor a person or organization to Financial ratio a comparison between
whom a liability is owed. (p. 589) Draft a written, signed, and dated order
from one party ordering another party, two items of financial information. (p. 459)
Current assets cash and other assets usually a bank, to pay money to a third Financial statements financial reports
expected to be exchanged for cash or party. (p. 704) that summarize the financial conditions and
consumed within a year. (p. 423) operations of a business. (p. 6)
Current liabilities liabilities due within a First-in, first-out inventory costing
short time, usually within a year. (p. 467) E
method using the price of merchandise
Current ratio a ratio that shows the purchased first to calculate the cost of
numeric relationship of current assets to Earnings per share the amount of net merchandise sold first. (p. 569)
current liabilities. (p. 652) income after federal income tax belong-
ing to a single share of stock. (p. 459) Fiscal period the length of time for which
Customer a person or business to whom a business summarizes and reports finan-
merchandise or services are sold. (p. 270) Electronic funds transfer a computer- cial information. (p. 152)
ized cash payments system that transfers
funds without the use of checks, currency,
or other paper documents. (p. 131)
G-2 Glossary
G J Maturity value the amount that is due
on the maturity date of a note. (p. 590)
Gain on plant assets revenue that results Journal a form for recording transactions Medicare tax a federal tax paid for hospi-
when a plant asset is sold for more than in chronological order. (p. 56) tal insurance. (p. 349)
book value. (p. 548) Memorandum a form on which a brief
Journalizing recording transactions in a
General amount column a journal journal. (p. 56) message is written describing a transac-
amount column that is not headed with tion. (p. 59)
an account title. (p. 57) Merchandise goods that a merchandis-
L ing business purchases to sell. (p. 234)
General ledger a ledger that contains
all accounts needed to prepare financial Merchandise inventory the amount of
statements. (p. 92) Last-in, first-out inventory costing goods on hand for sale to customers.
method using the price of merchandise (p. 415)
Gross earnings see total earnings purchased last to calculate the cost of
Gross pay see total earnings merchandise sold first. (p. 570) Merchandising business a business that
purchases and sells goods. (p. 234)
Gross profit method of estimating Ledger a group of accounts. (p. 92)
inventory estimating inventory by using Letter of credit a letter issued by a bank
the previous year’s percentage of gross guaranteeing that a named individual or N
profit on operations. (p. 574) business will be paid a specified amount,
Gross profit on sales the revenue provided stated conditions are met. Net income the difference between total
remaining after cost of merchandise sold (p. 703) revenue and total expenses when total
has been deducted. (p. 452) Liability an amount owed by a business. revenue is greater. (p. 164)
(p. 8) Net loss the difference between total
I Lifo see last-in, first-out inventory costing revenue and total expenses when total
method expenses are greater. (p. 165)
Imports goods or services bought from Limited liability partnership (LLP) a Net pay the total earnings paid to an
a foreign country and brought into a partnership that combines the advan- employee after payroll taxes and other
buyer’s home country. (p. 702) tages of the partnership and the corpora- deductions. (p. 352)
tion, while avoiding their disadvantages. Net sales total sales less sales discount
Income statement a financial statement
(p. 688) and sales returns and allowances. (p. 449)
showing the revenue and expenses for a
fiscal period. (p. 163) Liquidation of a partnership the pro- Nominal account see temporary
cess of paying a partnership’s liabilities accounts
Intellectual property any product that
and distributing remaining assets to the
is protected by patents, trademarks, and Normal balance the side of the account
partners. (p. 686)
copyrights. (p. 616) that is increased. (p. 29)
List price the retail price listed in a cata-
Interest an amount paid for the use of Note see notes payable
log or on an Internet site. (p. 244)
money for a period of time. (p. 590)
Long-term liabilities liabilities owed for Notes payable promissory notes signed
Interest expense the interest accrued on by a business and given to a creditor.
more than a year. (p. 467)
money borrowed. (p. 594) (p. 589)
Lookback period the 12-month period
Interest income the interest earned on Notes receivable promissory notes that a
that ends on June 30th of the prior year.
money loaned. (p. 599) business accepts from customers. (p. 598)
(p. 383)
Interest rate of a note the percentage of Number of a note the number assigned to
Loss on plant assets the loss that results
the principal that is paid for use of the identify a specific note. (p. 589)
when a plant asset is sold for less than
money. (p. 589)
book value. (p. 549)
Inventory see merchandise inventory
O
Inventory record a form used during a M
periodic inventory to record information
about each item of merchandise on hand. Opening an account writing an account
(p. 566) Maker of a note the person or business title and number on the heading of an
who signs a note and thus promises to account. (p. 94)
Invoice a form describing the goods or make payment. (p. 589)
services sold, the quantity, and the price. Owner’s equity the amount remaining
(p. 58) Markup the amount added to the cost of after the value of all liabilities is sub-
merchandise to establish the selling price. tracted from the value of all assets. (p. 8)
(p. 236) Owners’ equity statement a financial
Maturity date of a note the date a note statement that summarizes the changes in
is due. (p. 589) owners’ equity during a fiscal period.
(p. 682)
Glossary G-3
P Post-closing trial balance a trial balance Receipt a business form giving written
prepared after the closing entries are acknowledgement for cash received.
posted. (p. 216) (p. 59)
Par value a value assigned to a share of
stock and printed on the stock certificate. Postdated check a check with a future Residual value see estimated salvage
(p. 461) date on it. (p. 121) value
Partner each member of a partnership. Posting transferring information from a Restrictive endorsement an endorse-
(p. 674) journal entry to a ledger account. (p. 96) ment restricting further transfer of a
check’s ownership. (p. 120)
Partnership a business in which two or Price-earnings ratio the relationship
more persons combine their assets and between the market value per share and Retail merchandising business a mer-
skills. (p. 674) earnings per share of a stock. (p. 459) chandising business that sells to those
who use or consume the goods. (p. 234)
Partnership agreement a written agree- Principal of a note the original amount
ment setting forth the conditions under of a note; sometimes referred to as face Retained earnings an amount earned by
which a partnership is to operate. (p. 675) amount of a note. (p. 589) a corporation and not yet distributed to
stockholders. (p. 405)
Pay period the period covered by a salary Promissory note a written and signed
payment. (p. 340) promise to pay a sum of money at a speci- Revenue an increase in owner’s equity
fied time. (p. 589) resulting from the operation of a busi-
Payee of a note the person or business ness. (p. 14)
to whom the amount of a note is payable. Proprietorship a business owned by one
(p. 589) person. (p. 6) Reversing entry an entry made at the
beginning of one fiscal period to reverse
Payroll the total amount earned by all Proving cash determining that the
an adjusting entry made in the previous
employees for a pay period. (p. 340) amount of cash agrees with the account-
fiscal period. (p. 619)
ing records. (p. 76)
Payroll register a business form used to
record payroll information. (p. 351) Purchase invoice an invoice used as a
source document for recording a pur- S
Payroll taxes taxes based on the payroll chase on account transaction. (p. 238)
of a business. (p. 345)
Purchase on account a transaction in Salary the money paid for employee
Periodic inventory a merchandise inven- which the merchandise purchased is to services. (p. 340)
tory determined by counting, weighing, be paid for later. (p. 236)
or measuring items of merchandise on Sale on account a sale for which cash will
hand. (p. 565) Purchases allowance credit allowed for be received at a later date. (p. 14)
part of the purchase price of merchan- Sales allowance credit allowed a cus-
Permanent accounts accounts used to dise that is not returned, resulting in a
accumulate information from one fiscal tomer for part of the sales price of mer-
decrease in the customer’s accounts pay- chandise that is not returned, resulting
period to the next. (p. 206) able. (p. 256) in a decrease in the vendor’s accounts
Perpetual inventory a merchandise Purchases discount a cash discount on receivable. (p. 285)
inventory determined by keeping a con- purchases taken by a customer. (p. 242)
tinuous record of increases, decreases, Sales discount a cash discount on sales.
and balance on hand. (p. 565) Purchases journal a special journal used (p. 278)
to record only purchases of merchandise Sales invoice an invoice used as a
Personal property all property not classi- on account. (p. 237)
fied as real property. (p. 536) source document for recording a sale
Purchases return credit allowed for the on account. (p. 58)
Petty cash an amount of cash kept on purchase price of returned merchandise,
hand and used for making small pay- Sales journal a special journal used to
resulting in a decrease in the customer’s record only sales of merchandise on
ments. (p. 134) accounts payable. (p. 256) account. (p. 272)
Petty cash slip a form showing proof of
a petty cash payment. (p. 135) Sales return credit allowed a customer
R for the sales price of returned merchan-
Physical inventory see periodic inventory dise, resulting in a decrease in the ven-
Plant asset record an accounting form dor’s accounts receivable. (p. 285)
Real accounts see permanent accounts
on which a business records information Sales slip see sales invoice
about each plant asset. (p. 542) Real estate see real property
Sales tax a tax on a sale of merchandise
Plant assets assets that will be used for Real property land and anything
or services. (p. 270)
a number of years in the operation of a attached to the land. (p. 536)
business. (p. 423) Salvage value see estimated salvage
Realization cash received from the sale
value
Point-of-sale (POS) terminal a computer of assets during liquidation of a partner-
used to collect, store, and report all the ship. (p. 686) Schedule of accounts payable a listing of
information of a sales transaction. (p. 276) vendor accounts, account balances, and
total amount due all vendors. (p. 305)
G-4 Glossary
Schedule of accounts receivable a Straight-line method of depreciation Transaction a business activity that
listing of customer accounts, account charging an equal amount of deprecia- changes assets, liabilities, or owner’s
balances, and total amount due from all tion expense for a plant asset in each year equity. (p. 10)
customers. (p. 313) of useful life. (p. 424)
Trial balance a proof of the equality of
Scrap value see estimated salvage value Subsidiary ledger a ledger that is debits and credits in a general ledger.
summarized in a single general ledger (p. 154)
Service business a business that per-
account.
forms an activity for a fee. (p. 6)
(p. 298)
Share of stock each unit of ownership U
Supplementary report see supporting
in a corporation. (p. 234)
schedule
Sight draft a draft payable on sight Uncollectible accounts accounts receiv-
Supporting schedule a report prepared able that cannot be collected. (p. 419)
when the holder presents it for payment.
to give details about an item on a princi-
(p. 704)
pal financial statement. (p. 470)
Social security tax a federal tax paid for V
old-age, survivors, and disability insur-
ance. (p. 349) T
Vendor a business from which merchan-
Sole proprietorship see proprietorship dise is purchased or supplies or other
T account an accounting device used to assets are bought. (p. 236)
Source document a business paper from analyze transactions. (p. 29)
which information is obtained for a jour-
nal entry. (p. 57) Tax base the maximum amount of earn-
ings on which a tax is calculated. (p. 349) W
Special amount column a journal
amount column headed with an account Temporary accounts accounts used to
accumulate information until it is trans- Weighted-average inventory costing
title. (p. 57)
ferred to the owner’s capital account. method using the average cost of begin-
Special endorsement an endorsement (p. 206) ning inventory plus merchandise pur-
indicating a new owner of a check. chased during a fiscal period to calculate
(p. 120) Terminal summary the report that sum- the cost of merchandise sold. (p. 571)
marizes the cash and credit card sales of a
Special journal a journal used to record point-of-sale terminal. (p. 276) Wholesale merchandising business a
only one kind of transaction. (p. 235) business that buys and resells merchan-
Terms of sale an agreement between dise to retail merchandising businesses.
Stakeholders any persons or groups who a buyer and a seller about payment for (p. 234)
will be affected by an action.(p. 181) merchandise. (p. 238)
Withdrawals assets taken out of a busi-
State unemployment tax a state tax Time draft a draft that is payable at a ness for the owner’s personal use. (p. 16)
used to pay benefits to unemployed fixed or determinable future time after it
workers. (p. 375) is accepted. (p. 707) Withholding allowance a deduction
from total earnings for each person
Statement of stockholders’ equity a Time of a note the days, months, or years legally supported by a taxpayer, including
financial statement that shows changes from the date of signing until a note is to the employee. (p. 346)
in a corporation’s ownership for a fiscal be paid. (p. 589)
period. (p. 461) Work sheet a columnar accounting form
Total earnings the total pay due for a pay used to summarize the general ledger
Stock ledger a file of stock records for all period before deductions. (p. 343) information needed to prepare financial
merchandise on hand. (p. 567)
Trade acceptance a form signed by a statements. (p. 153)
Stock record a form used to show the buyer at the time of a sale of merchandise Working capital the amount of total
kind of merchandise, quantity received, in which the buyer promises to pay the current assets less total current liabilities.
quantity sold, and balance on hand. seller a specified sum of money, usually at a (p. 652)
(p. 567) stated time in the future. (p. 708)
Writing off an account canceling the bal-
Stockholder an owner of one or more Trade discount a reduction in the list ance of a customer account because the
shares of a corporation. (p. 234) price granted to customers. (p. 244) customer does not pay. (p. 519)
Glossary G-5
This page intentionally left blank
A
INDEX
Abacus, 323
Accelerated depreciation method, 553
Account(s) Accounting information, use in
analyzing how transactions affect, business decisions, 175
32–37 Accounting period cycle, 152, 162, 180,
Automated Accounting, 115 202, 217, 464, 636, 646, 651
defined, 10, 29 Accounting records
increases and decreases in, 30 accuracy of, 57, 317 Accrued interest expense
nominal, 206, 487 defined, 6 adjusting entry for, 623
opening, 94 Accounting scandals, 8 analyzing an adjustment for, 622
permanent, 206 Accounting systems defined, 622
posting second amount to, 97 in ancient China, 596 posting adjusting entry for, 623
real, 206, 487 defined, 6 reversing entry for, 624
temporary, 206 design of, 437 Accrued interest income
uncollectible (See Uncollectible Accounts payable ledger analyzing an adjustment for, 617
accounts) controlling accounts, 299 defined, 617
Account balance defined, 298 posting an adjusting entry for, 618
after liquidation, 688 example of completed, 304 recording an adjustment for, 617
debit vs. credit, 103 forms, 300 reversing entry for, 619
defined, 10 posting credit and debit entries to, Accrued revenue, 616–621
extending on work sheet, 163 303 accounting software tools, 632, 633
normal balance, 29 posting from cash payments journal defined, 616
before realization, 686 to, 302 Accumulated depreciation, 424, 540
Account forms posting from purchases journal to, Accuracy, importance of, 57, 317
balance-ruled, 91 301 Adequate disclosure, 180, 202, 423, 446,
example of completed, 105–109 posting to, 298–306 534, 616, 623, 646
purpose of, 90 proving, 305 Adjusting entries
relationship to T account, 91 starting new page in, 300 accounting software tools, 176, 442
Account numbers Accounts payable schedule, 305 for accrued interest expense, 623
assigning, 93, 110 Accounts payable subsidiary ledger, for accrued interest income, 618
defined, 92 298 for allowance for uncollectible
three-digit, 92–93 See also Accounts payable ledger accounts, 482
Account titles Accounts receivable for corporation, 654
Automated Accounting, 115 book value of, 419 defined, 202
defined, 10, 92 schedule of, 313 for depreciation expense, 544
writing, 74 uncollectible (See Uncollectible for depreciation of office equipment,
Accountants. See Careers in Accounting accounts receivable) 484
Accounting cycle Accounts receivable ledger for depreciation of store equipment,
for corporation, 398–401, 497, controlling account, 307 485
610–613, 659 defined, 298 for federal income taxes, 485
defined, 217 example of completed, 312 general ledger accounts after posting,
for merchandising business, 497, 659 forms, 308 213–215, 494–495
for proprietorship, 147–149, 228 posting credit entry from general for merchandise inventory, 482
for service business, 217 journal to, 311 for office supplies, 483
Accounting equation, 6–9 posting from cash receipts journal planning on work sheet, 157–161
analyzing, 28 to, 310 posting for uncollectible accounts
business activities and change in, posting from sales journal to, 309 expense, 517
10–13 posting to, 307–314 for prepaid insurance, 204, 484
defined, 8 proving, 313 recorded from work sheet, 480–481
paying cash and, 11 Accounts receivable subsidiary ledger, recording, 202, 480–486
receiving cash and, 10 298 recording in general journal, 481
T accounts and, 28 See also Accounts receivable ledger reversing for accrued interest
transactions and, 12 Accounts receivable turnover, 530 expense, 624
transactions and changes in owner’s Accrued expenses, 622–627 reversing for accrued interest income,
equity, 14–17 accounting software tools, 632, 633 619
Accounting estimates, 525 defined, 622 for service business, 200–227
Index I-1
Adjusting entries (continued) Auditing, 43, 220 current assets section, 465
for store supplies, 483 Auditor’s Report, 628 defined, 162
for supplies, 202–203 Audits, 661 example of, 469, 650
See also Adjustments Automated Accounting extending account balances on work
Adjustments account titles, 115 sheet, 163
for accrued interest expense, 622 accounts, 115 financial information on work sheet,
for accrued interest income, 617 accrued revenue and expenses, 633 187–192, 464
defined, 157 adding new accounts, 115 heading, 187
depreciation (See Depreciation adjusting entries, 177, 507 liabilities section, 188, 467, 651
adjustments) bank statement reconciliation, 146 owner’s equity reported in detail on,
federal income tax expense, 427, 429, Calculator tool, 718 190
639–640 cash payments, 267 owner’s equity section, 189
interest income, 638 changing account titles, 115 for partnership, 684
merchandise inventory, 415–418 chart of accounts, 115 plant assets section, 466
planning on work sheet, 409, 637 charts and graphs, 443 preparing, 464–471, 651
prepaid insurance, 159, 413 closing entries, 227, 507 stockholders’ equity section, 468, 651
supplies (See Supplies adjustment) deleting accounts, 115 supporting schedules for, 470
uncollectible accounts expense, 421, depreciation, 561 Balance sheet columns, errors in, 168
516 end-of-fiscal-period work for corpora- Bank of America, 587
See also Adjusting entries tion, 667 Bank statements
Adjustments columns error correction, 337 defined, 124
errors in, 168 financial statements, 163, 199 reconciliation, 124–128, 145–146, 313
proving work sheet, 160 Find tool, 718 Banking
Africa, accountancy in, 94, 251 general ledger postings, 115 payroll bank account, 356
AICPA (American Institute of Certified Help menu, 87 service charges, 126–127
Public Accountants), 55, 151, introduction to, 25 services, 117
153, 270, 297 inventory transactions, 585 Batch reports, 277, 278
Allowance, purchases. See Purchases journalizing transactions, 115, 146 Batch totals, 79
allowances manual accounting vs. Automated Batching out, 278
Allowance method of recording losses Accounting, 52 Ben and Jerry’s Ice Cream, 615
from uncollectible accounts, Notes and Interest Planner, 609 Best Buy, financial statement analysis
419 opening software, 53 accounts payable and revenues, 23
Amazon.com, 89 payroll, 365 accounts receivable, 530
American Automobile Association payroll taxes, recording, 397 accounts receivable turnover, 530
(AAA), 27 plant assets, 561 average total retail square footage,
American Eagle Outfitters, 179 post-closing trial balance, 227, 507 114
American Institute of Certified Public posting amounts to general ledger, cash and cash equivalents, 144
Accountants (AICPA), 55, 151, 115 common stock, 265
153, 270, 297 problem files, 53 comparable store sales, 293
Andersen, 8 purchases, 267 consolidated statements of earnings,
Annual reports recording bank service charges, 146 198, 225
of corporations, 628 recording journal entries, 87 discount certificates, 631
to employees of taxes withheld, 378 sales and cash receipts, 295 dividend yield, 441
in Excel, 633 trial balance, 177 earnings from continuing operations,
of payroll taxes, 381 uncollectible accounts receivable, 531 198
Apple Computer, 479 earnings per share, 505
Assessed value, 536 equity section of consolidated bal-
Assets B ance sheets, 697
assessed value of, 536 financial statements, 363
on balance sheet, 188 Babylonia, early banking system in, 94 fiscal year, 175
categories of, 423 Bad debt. See Uncollectible accounts graphing data, 336
current, 423, 465, 651 Balance, normal, 29 gross profit, 475
defined, 8 See also Account balance; Trial insurance, 395
plant (See Plant assets) balance interest expense, 608
section on balance sheet, 651 Balance-ruled account form, 91 international sales, 716
Association of Certified Fraud Examin- Balance sheet inventory turnover ratio, 583
ers, 404 analyzing, 652 leasehold improvements, 559
Audit trail, 328 assets section, 188, 651 long-term debt, 608
I-2 Index
net earnings, 198 Careers in accounting posting special amount column totals
percentage increase in revenue, Certified Financial Planner (CFP), 218 to general ledger, 324–325
calculating, 225 Certified Fraud Examiner, 404 posting to accounts payable ledger
percentages, calculating, 85 Certified Public Accountant (CPA), 151 from, 302
preferred stock, 265 computer and information systems purchases, 244
retained earnings account, 665 manager, 447 starting a new page, 251
revenue, calculating, 225 entrepreneur/franchisee, 191 totaling, proving, and ruling, 250
sales results, increasing, 269 internal auditor, 43 totaling, proving, and ruling at end of
statement of changes in shareholders’ law firm office manager, 601 month, 252
equity, 665 managing partner of accounting firm, Cash purchases, 244
total assets, 51 388 Cash receipts
total equity, 51 research about, 84 on account, 16, 41, 70, 280
total liabilities, 51 small business owner, 431 accounting software tools, 294–295
unredeemed discount certificates, sole proprietor, 137 for an account previously written off,
631 Carnival Cruise Line, 533 522
Bill of exchange, 704 Carrying totals forward, 250, 251 calculating cash receipts on account
Bill of lading, 704 Cash with sales discount, 281
Blank endorsement, 120 Best Buy analysis, 144 journalizing cash receipts on account,
Board of directors, 406 business use of, 118 280
Boise Office Solutions, 233 depositing in checking account, 119 journalizing cash receipts on account
Book inventory, 565 paying (See Cash payments) with sales discounts, 282
Book value of accounts receivable, 419 as primary medium of exchange, 588 journalizing from time drafts, 708
Book value of plant assets proving, 76 journalizing using cash receipts jour-
calculating, 424, 540 proving at end of month, 283 nal, 276–284
defined, 651 receiving (See Cash receipts) journalizing using special journals,
sale of plant assets for, 546 withdrawals by partners, 677 268–295
sale of plant assets for less than, 549 Cash back vs. low interest, 603 from owner as investment, 10, 32, 60
sale of plant assets for more than, 548 Cash control systems, 116–146 recording, 50
Borrowing, 588 Cash credit column, 103 from sales, 14, 38, 67
Business activities, and changes in ac- Cash debit column, 102 Cash receipts journal, 276–284
counting equation, 10–13 Cash discount, 242 defined, 278
Business day, 305 Cash over, 248 posting special amount column totals
Business entity, 234, 406, 674 Cash payments to general ledger, 322–325
Business ethics, defined, 8 on account, 12, 36, 65, 245–246 posting to accounts receivable ledger
See also Character/ethical issues on account, with purchases discounts, from, 310
Business forms, 691 245–246 totaling, proving, and ruling, 283
Business plans, 50 on account, without purchases dis- Cash register receipt, 276, 277
Business transactions. See Transactions counts, 246 Cash sale, 276, 279
Business year. See Fiscal year accounting software tools, Cash short, 248
266–267 Certificate of deposit (CD), 575
for expenses, 40, 69, 243, 246 Certified Financial Planner (CFP), 218
C for insurance, 11, 34, 63 Certified Fraud Examiner (CFE), 404
journalizing, 232–267 Certified Public Accountant (CPA), 151
Calculation errors, 167 for maturity value of note payable, CFEs (Certified Fraud Examiners), 404
Calculator tape, 59 594 CFPs (Certified Financial Planners), 218
Calculators, early, 323 to owner for personal use, 16, 42, 71 Character/ethical issues
Calendar year, 207 for purchases, 244 accounting scandals, 8
See also Fiscal year for rent, 15 business ethics, 8
Capital for supplies, 11, 33, 61, 243 client names, disclosing, 446
calculating, 190 for telephone bill, 15 codes of conduct, 118, 153
defined, 10 Cash payments journal, 242–247 defined, 8
partners’ capital account, 682 on account with/without purchases discrimination, 340
working capital, 652 discounts, 245–246 employee benefits, 588
Capital account records, 50 carrying totals forward, 250, 251 employee fraud, 404
Capital stock defined, 242 employee hotlines, 564
defined, 234 expenses, 243 ethics officers, 702
section on statement of stockholders’ posting from general amount col- ethics vs. morality, 28
equity, 461 umns to general ledger, 316 insider trading, 481
Index I-3
Character/ethical issues (continued) for corporation, 492, 655 Comparative financial statements, 193
integrity, 270 defined, 206 Competencies. See Workplace compe-
intellectual property, 616 for dividends, 491, 657 tencies
keeping employees busy, 534 general ledger accounts after posting, Component percentages
legality of actions, 90 213–215 acceptable, 184, 455, 647
lifelong learning, 514 for income statement account with analysis of, 456
monitoring computer usage at work, credit balance, 208, 488 analysis of income statement, 184,
298 for income statement account with 647
newspaper test, 636 debit balance, 209, 489, 490 cost of merchandise sold, 456
recognizing ethical dilemmas and for income summary account, 210, defined, 184
actions, 56 487 gross profit on sales, 456, 458
recording employees’ phone calls, 368 for net income, 210, 491, 657 income statement analysis, 455
resumes, 203 for net loss, 210 net income, 184, 456, 458
setting the tone at the top, 674 for owner’s drawing account, 211 total expenses, 184, 456, 458
stakeholders, identifying, 181 recording, 206–212 unacceptable, 455, 458
Charge sale, 14 recording for income statement Computerized accounting. See Auto-
Chart of accounts accounts, 487–493 mated Accounting; Peachtree;
accounting software tools, 231–232 for service business, 200–227 Quickbooks
Automated Accounting, 115 COA. See Chart of accounts Computers
defined, 32, 92 Codes of conduct, 118, 153, 514 monitoring usage at work, 298
numbering system, 110 Cold Stone Creamery, 673 for perpetual inventory, 567
preparing, 90–95 Collecting Conservation, 201
Check stubs note receivable issued in previous Consistent reporting, 152, 446, 572
deposit recorded on, 119 fiscal period, 620 Consolidated statement of earnings,
example of completed, 121, 122 payment for international sales, 704 198
as objective evidence, 57 posting entries for collecting written- Consumer loans, 603
recording bank service charge on, 126 off account receivable, 523 Continuing education, 514
recording dishonored check on, 129 principal and interest on notes receiv- Contra account, 245, 419
Checking accounts, 118–123 able, 599 Contract of sale, 703
defined, 119 uncollectible accounts receivable, Controlling accounts
depositing cash in, 119 519–524 accounts payable ledger, 299
management of, 135 Column totals accounts receivable ledger, 307
Checks cash credit column, 103 defined, 298
defined, 58 cash debit column, 102 general ledger, 299, 307
dishonored, 129–130 general credit and debit columns, 100 ledgers, 298
endorsement, 120 posting from journal to general led- Controls
example of completed, 121 ger, 100–104 batch totals for, 79
as objective evidence, 58, 121 sales credit column, 101 business forms for, 691
payroll, 356–358 special amount column, 320, 324–325 cash, 139
postdated, 121 Columns prenumbered documents for, 79
preparing, 121–122 adjustments, 160, 168 Corporate earnings, distributing to
recording voided checks, 122 amount posted to wrong, 169 stockholders, 404–408
for total net pay, 356 balance sheet, 168 Corporations
Chico’s FAS, Inc., 635 cash credit, 103 accounting cycle for, 398–401, 497,
Child labor laws, 339 cash debit, 102 610–613, 659
China credit, 101, 103 accounting for, 230–669
accounting in ancient, 596 general amount, 57, 242, 316 adjusting entries, 654
work day in, 305 general credit, 98, 100 advantages and disadvantages of, 271
Chronological record, 57 general debit, 96–97, 100 annual reports, 628
Client names, sharing, 446 income statement, 168 close corporation, 345
Close corporation, 345 proving adjustments, 160 closing entries for, 492, 655
Closing entries sales credit, 101 defined, 234
accounting software tools, 226–227 special amount, 57, 237 dissolution, 515
for accounts with credit balance, 488, trial balance, 168 end-of-fiscal-period work for, 508,
655 Commercial invoice, 704 634–669, 668
for accounts with debit balance, 656 Common stock, 265 financial statements for, 444–477, 636
completed general ledger after post- Communication, misspelled words in, formation, 234, 271
ing, 494–495 70 forms of, 345
I-4 Index
general corporation, 345 Credit columns Declaring a dividend, 406
income statement for, 445–454, cash, 103 Declining-balance method of deprecia-
645–648 sales, 101 tion, 551–554
owner of, 470 Credit entries Deposits
piercing the corporate veil, 553 posting for supplies bought on cash into checking account, 119
selling stock of, 626 account, 303 federal deposit coupon, 384
stockholders’ equity accounts, 405 posting from general journal to recorded on check stub, 119
Subchapter S, 345 accounts payable ledger, 303 Depreciation, accumulated, 424, 540
work sheet for, 636–644 posting from general journal to Depreciation adjustments
Correcting entries accounts receivable ledger, 311 for office equipment, 484
affecting customer accounts, 327, posting from general journal to gen- planning and recording, 423–426
328 eral ledger, 318 posting for depreciation expense, 544
defined, 108 Credit memorandum for store equipment, 485
journal entry for, 108 defined, 285 Depreciation expense
making, 108 as objective evidence, 285 accounting software tools, 560–561
memorandum for, 108 for sales returns and allowances, 285 calculating, 424, 538–540, 560–561
Cost, historical, 236, 244, 450, 535 Creditors, 589 defined, 423
Cost of goods sold. See Cost of merchan- Cultural diversity, valuing in work- journalizing, 542–545
dise sold place, 540 for last year, 552
Cost of merchandise, 236 Current assets, 423, 465, 651 for partial year, 539, 547
Cost of merchandise sold Current liabilities, 467, 593, 651 Depreciation methods
calculating, 572 Current ratio, 652 comparing, 553
component percentage, 456 Customary system of measurement, 160 declining-balance method of,
defined, 450 Customer accounts 551–554
income statement section, correcting entries affecting, 327 double declining-balance method,
450–451 posting correcting entries affecting, 551
Cost of sales. See Cost of merchandise 328 straight-line method, 424, 538
sold Customers Dictionary of Occupational Titles (DOT),
Costing an item, 577 defined, 270 84
Costing inventory methods notes receivable from, 598 Discounts
first-in, first-out, 569 cash, 242
last-in, first-out, 570 purchases, 242, 245–246
weighted-average, 571 D sales, 278, 281, 282, 288
Cowans, Rita J., 43 trade, 244
CPAs (Certified Public Accountants), Date of note, 589 Discrimination, 340
151 Debit Dishonored checks
Creative thinking, 264 account balance as, 103 defined, 129
Credit analyzing transactions, 26–53 journalizing, 130
account balance as, 103 defined, 29 recording on check stub, 129
analyzing transactions, 26–53 on T account, 28–49 Dishonored notes, 600
defined, 29 Debit balance Dissolution, 515
letter of, 703 closing entry for accounts with, 656 Distribution
posting to accounts receivable closing entry for income statement of corporate earnings and dividends,
ledger, 311 account with, 209, 489, 490 404–408
on T account, 28–49 income statement account with, 209, of net income, 680, 681
Credit balance 489 to partnerships, 680–685, 689
closing entry for accounts with, 488, Debit cards, 132 unequal distribution of earnings, 681
655 Debit column, 102 Distribution of net income statement,
closing income statement account Debit entries 680
with, 208, 488 posting for purchases return or allow- Dividend yield, 441
income statement account with, 208, ance, 303 Dividends
488 posting from general journal to gen- closing entry for, 491, 657
Credit cards eral ledger, 317 declaring, 406
financial literacy activities, 291 Debit memorandum defined, 405
processing, 278 defined, 256 distribution of, 404–408
sales, 276, 277, 279 as objective evidence, 256 paying, 407
systems, 713 for purchases returns and allowances, Documents, prenumbered, 79
Credit checks, 515 256 See also Source documents
Index I-5
Dollar signs, writing, 77 total earnings calculation, 343 bank statement reconciliation,
Domestic sales vs. international sales, withholding allowance certificate, 346 145–146
703 End-of-fiscal-period work basic skill practice, 115
DOT (Dictionary of Occupational Titles), accounting software tools, 666, 667 calculated amounts, displaying, 267
84 for corporation, 508, 634–669, 668 charts and graphs, 227, 667
Double declining-balance method of for proprietorship, 228 currency formats, 718
depreciation, 551 Endorsement, 120 data files, 87
Double-entry accounting, 57 Endorsements in full, 120 depreciation expense, 561
Drafts Enron, 8 downloading files into, 337
defined, 704 Entrepreneurs, 50, 191 financial information, 633
sight, 704 Entries financial statements, 199
time, 707, 708 adjusting (See Adjusting entries) gridlines, formatting, 507
Drawing account closing (See Closing entries) inserting/deleting rows, 177
owner’s, 211 correcting, 108, 327–329 Instructions tab, 87
partners’, 682 credit, 303, 311, 318 inventory, calculating, 585
DuFrene, Tim, 137 debit, 303, 317 logical relationships, 443
defined, 57 notes, calculating dates for, 609
errors in, 169 opening software, 53
E not posted individually, 100 problem files, 53
reversing (See Reversing entries) ratios, formatting display of, 531
e-Bay, 297 writing off uncollectible accounts rounding numbers, 365
e-mail, 313 receivable, 520, 523 sorting and filtering data, 295
Earnings Equities, 8 templates, 87
from continuing operations, 198 See also Owner’s equity; Stockholders’ unemployment tax, calculation,
corporate, 404–408 equity 397
price-earnings ratio, 459 Errors work sheet, 8-column, 177
retained, 405, 462, 657 in adjustments columns, 168 workbooks, 87
total, 343, 354 in amounts, 169 Exchange rate, 701, 705
unemployment taxable earnings, 374 in balance sheet columns, 168 Exhibit, 470
unequal distribution of, 681 calculation errors, 167 Expense
Earnings per share, 459, 505 correcting in Automated Accounting, accrued (See Accrued expenses)
Earnings records, employee, 353–354 337 cash payment of, 40, 69, 243, 246
EDGAR, 445, 479, 513 in income statement column, 168 defined, 15
EFT (Electronic funds transfer), 131, 357 in journal entries, 169 depreciation (See Depreciation
EFTPS (Electronic Federal Tax Payment marking corrections, 102 expense)
System), 384 posting to wrong account, 168 interest, 594
Electronic Federal Tax Payment System preventing, 169 journalizing cash payments for, 243,
(EFTPS), 384 in subsidiary ledger accounts, 246
Electronic funds transfer (EFT), 131, 357 327–329 matching with revenue (See Matching
Electronic spreadsheets, 25, 591 tracking, and source documents, 69 expenses with revenue)
See also Excel in trial balance column, 168 section of income statement, 183
Employee benefits, 367, 525, 588 on work sheet, 167–170 total, component percentage, 458
Employee earnings record, 353–354 Estimated salvage value, 423, 538 uncollectible accounts (See Uncollect-
Employee taxes Estimated useful life, 538 ible accounts expense)
annual report of taxes withheld, 378 Estimates Expense transactions, 15
journalizing payment of liability for, accounting, 525 Exports, 702
385 inventory, 574–576 Extension of time
paying liability for, 383 uncollectible accounts expense, 420, paying note payable issued for, 596
See also Federal income tax; Payroll 515 signing note payable for, 595
taxes Estimating inventory, 574–576
Employees gross profit method, 574
annual report of taxes withheld, 378 for other months, 575 F
hours worked calculation, 342 Ethics, defined, 8
independent contractor vs., 359 See also Character/ethical issues FASB (Financial Accounting Standards
keeping busy, 534 Ethics Resource Center, 702 Board), 18
paying, 340 Everett, C. C., 28 FDIC (Federal Deposit Insurance Corpo-
payroll check, 357 Excel ration), 120
salaries, 340 annual reports, 633 Federal deposit coupon, 384
I-6 Index
Federal Deposit Insurance Corporation First-in, first-out (fifo) inventory cost- General ledger
(FDIC), 120 ing method, 569 accounts (See General ledger
Federal income tax Fiscal periods accounts)
adjusting entry for, 485 collecting a note receivable issued in with adjusting and closing entries
adjustment, 639–640 previous fiscal period, 620 posted, 213–215, 494–495
calculating, 428 defined, 152 Automated Accounting, 115
component percentage, 456, 458 paying note payable signed in previ- controlling account, 299, 307
expense adjustment, 427, 429 ous, 625 defined, 92
FICA, 349 See also End-of-fiscal-period work example of completed, 494–495
married persons withholding, 348 Fiscal year opening accounts in, 94
recording adjustment, 429 alternative, 171, 472 posting column totals from journal to,
single persons withholding, 347 calendar year as, 207 100–104
withholding, 345–348, 353 interest at end of, 616 with posting completed, 105–107
work sheet for, 430, 432–435 Fiscal year end, 171 posting credit entries from general
Federal Insurance Contributions Act Five-column journal, 57 journal to, 318
(FICA), 349 FOB (free on board), 499 posting debit entries from general
Federal Reserve System, 587 Foreign currency, 701, 705 journal to, 317
Federal Tax Deposit Coupon, 384 Foreign exchange rates, 701, 705 posting from cash payments journal
Federal unemployment tax Form 941, 383 to, 316, 324–325
defined, 375 Form 8109, 384, 386 posting from cash receipts journal to,
journalizing payment of liability for, 387 Form W-2, 378 322–323
paying liability for, 386 Form W-3, 381 posting from journals to, 315–319
Federation of Tax Administrators, 269 Form W-4, 346 posting separate amounts from jour-
FedEx Corporation, 43 Franchises, 191, 490 nal to, 96–99
Fender Guitars, 563 Freight charges, 499 posting special journal totals to,
Feng, Eric, 191 320–326
FICA (Federal Insurance Contributions posting to, 88–115, 296–337
Act), 349 G posting total of purchases journal to,
FIFO (first-in, first-out inventory cost- 321
ing method), 569 GAAP (generally accepted accounting posting totals of sales journal to, 320
File maintenance, 93 principles), 18, 220, 390 starting new page for account in, 315
Financial Accounting Standards Board Gain on plant assets, 548 General ledger accounts
(FASB), 18 Gain on realization, 686, 687, 689 after adjusting and closing entries
Financial information Gap, Inc., 445 posted, 213–215, 494–495
on balance sheet, 187–192, 464 GDP (Gross Domestic Product), 239 posting total of purchases journal to
reporting, 180 General amount column two general ledger accounts, 321
use of, 404 defined, 57, 242 Generally accepted accounting prin-
Financial literacy posting from cash payments journal ciples (GAAP), 18, 220, 390
account reconciliation, 313 to general ledger, 316 Global issues. See International business
checking account management, 135 General corporation, 345 Going concern, 180, 235
credit cards, 281 General credit column Gold’s Gym, 5
employee benefits, 30 posting amount from, 98 Goods. See Merchandise inventory
personal budgets, 420 totals of, 100 Google, 367
retirement savings, 575 General debit column Graphs/graphing, 227, 336, 443, 667
taxes, 369 posting amount from, 96–97 Greece, accounting in ancient, 94
Financial ratios, 459 posting separate amount from, 96–97 Green Bay Packers, 339
Financial statements totals of, 100 Gross Domestic Product (GDP), 239
accounting software tools, 198–199, General journal Gross margin, 475
506 posting credit entries from, 303 Gross profit method of estimating
in annual report, 628 posting credit entries to accounts inventory, 574
comparative, 193 receivable ledger, 311 Gross profit on sales, 452–453, 456, 458,
for corporation, 444–477, 636 posting credit entries to general 475
defined, 6 ledger from, 318 Gross profit rate, 475
extending information on work sheet, posting debit entries to general led-
162–166 ger from, 317
interim, 193 purpose of, 254 H
for proprietorship, 178–199 recording adjusting entries in, 481
uses of, 446 recording transactions using, 285–287 Hard Rock Cafe, 117
Index I-7
Harrison, Ken, 447 Income summary accounts International Chamber of Commerce,
Headings closing entry for, 210, 487 703
balance sheets, 187 need for, 207 International sales
income statements, 182 Income tax. See Federal income tax collecting payment for, 704
work sheets, 153 Independent contractor, 359 compared with domestic sales, 703
Historical cost, 236, 244, 450, 535 Individual Retirement Accounts (IRAs), imports/exports, 702
History, and accounting, 259 575 journalizing, 706
Honeywell, 701 Industrial Revolution, 259 processing, 703
Hours of work, calculating, 342 Inflation, 292 recording, 702–709
Insider trading, 481 Internet sales
Insurance, prepaid. See Prepaid insur- challenges of, 710
I ance journalizing, 711
Integrity, 270 recording, 710–712
Imports, 702 Intellectual property, 616 Inventory
Imputing interest, 603 Interest accounting for, 562–585
Income accounting for, 586–613 book inventory, 565
accrued interest (See Accrued interest calculating, 591 costing methods, 569–571, 572
income) cash back vs. low interest, 603 estimating, 574–576
interest, 599, 638 collecting on notes receivable, 599 gross profit method of estimating, 574
net (See Net income) defined, 590 most efficient quantity of, 565
taxable, 390 at fiscal year end, 616 periodic, 565
Income statement imputing, 603 perpetual, 565, 567
accounts (See Income statement paying on notes payable, 594 physical, 565
accounts) on promissory notes, 590 turnover ratio, 583
analyzing, 455–460, 647 Interest expense, 594, 608 See also Merchandise inventory
component percentage analysis of, See also Accrued interest expense Inventory costing methods
184, 455, 647 Interest income comparing, 572
for corporation, 445–454, 645–648 accrued (See Accrued interest first-in, first-out, 569
cost of merchandise sold, 450–451 income) last-in, first-out, 570
defined, 163 adjustment, 638 weighted-average, 571
distribution of net income, 680, 681 defined, 599 Inventory record, 566
errors in, 168 Interest rate of note, 589 Inventory turnover ratio, 583
expenses section, 183 Interest rates Investment
extending account balances on work bank web site activity, 117 on owners’ equity statement, 684
sheet, 163 entering on electronic spreadsheet, partners’ initial investments, 676
heading of, 182 591 received cash investment from owner,
information on work sheet, 182, 448 of promissory notes, 589 10, 32, 60
for merchandising business, 452–453 Interim financial statements, 193 Invoice amount, 244
net income section, 183 Internal auditor, 43 Invoices
net loss on, 185, 457 Internal control categories, 330 commercial, 704
preparation of, 180–186 Internal Revenue Service (IRS) defined, 58
for proprietorship, 180–186 Electronic Federal Tax Payment Sys- as objective evidence, 238
revenue section, 183, 449 tems, 384 purchase invoice, 238
with two sources of revenue and net fiscal periods, 171 sales invoices, 58, 272
loss, 185 Form 941, 383 IRA (Individual Retirement Accounts),
uses of, 646 Form 8109, 384, 386 575
Income statement accounts Form W-2, 378 IRS. See Internal Revenue Service (IRS)
closing entry with credit balance, 208, Form W-3, 381
488 Form W-4, 346
closing entry with debit balance, 209, independent contractor rules, 359 J
489, 490 online tax forms, 367
with credit balance, 208, 488 Service Regulations, 390 Johnson, Everlyn, 431
with debit balances, 209, 489 International business Journal(s)
extending balances on work sheet, business day, 305 5-column, 57
163 foreign exchange rates, 701, 705 accuracy in, 57
recording closing entries for, 487–493 quality standards, 646 carrying totals forward on, 250, 251
Income statement column, errors in, weights and measures, 160 cash payment (See Cash payments
168 See also International sales journal)
I-8 Index
cash receipts (See Cash receipts closing entries, for accounts with sales discounts, 288
journal) credit balances, 655 sales on account, 273
checking for errors in, 169 closing entries, for accounts with sales on account, using sales journal,
chronological record, 57 debit balances, 656 270–275
defined, 56 closing entries, for dividends, 657 sales returns and allowances, 286
general (See General journal) closing entries, for net income to sold services on account, 68
not posted individually, 100 retained earnings, 657 standards for, 77
posting column totals to general correcting entries affecting customer time drafts, 707
ledger from, 100–104 accounts, 327 transactions, 54–87, 114–115,
posting separate amounts to general credit card sales, 279 145–149
ledger from, 96–99 debit card transaction, 132 transactions affecting owner’s equity,
posting to general ledger from, declaring a dividend, 406 67–72
315–319 defined, 56 withdrawal of cash by partners, 677
proving, 73, 75–76 depreciation expense, 542–545 withdrawals of merchandise by part-
purchases (See Purchases journal) dishonored checks, 130 ners, 678
purpose of, 56 dishonored notes receivable, 600 writing off uncollectible account
ruling, 75–76 electronic funds transfer, 131 receivable, 519
sales (See Sales journal) employer payroll tax, 376
special (See Special journals) entry to replenish petty cash, 136
Journal entries. See Entries international sales, 706 L
Journal of Accountancy, 25 Internet sales, 711
Journal page note for extension of time on Last-in, first-out (lifo) inventory costing
with posting completed, 105 accounts receivable, 598 method, 570
proving, 73 paid cash for expense, 69 Law. See Legal issues
ruling, 74 paid cash for insurance, 63 Law firm office manager, 601
starting new, 75 paid cash for supplies, 61 Leasehold improvements, 559
Journalizing paid cash on account, 65 Leases, 555
accounting software tools, 114–115, paid cash to owner for personal Ledgers
145–146 expense, 71 accounts payable (See Accounts pay-
adjustment for uncollectible accounts payment of dividends, 407 able ledger)
expense, 516 payment of liability for employee accounts receivable (See Accounts
bank service charge, 127 income tax, 385 receivable ledger)
bought supplies on account, 64 payment of liability for federal unem- controlling accounts and, 298
buying of plant assets, 535 ployment tax, 387 defined, 92
buying supplies on account, 255 payment of liability for Medicare tax, general (See General ledger)
cash payments, 232–267 385 stock, 567
cash payments, for expenses, 40, 69, payment of liability for social security subsidiary, 298
243, 246 tax, 385 Legal issues
cash payments, for maturity value of payment of liability for state unem- consultation with attorneys, 90
note payable, 594 ployment tax, 387 corporation dissolution, 515
cash payments, on account, payment of payroll, 371 corporation formation, 234, 271
242–247 purchase of merchandise on account, and ethics, 90
cash payments, on account with 239 limited liability partnerships, 688
purchases discounts, 246 purchases, 232–267 partnership dissolution, 686–690
cash payments, using cash payments purchases, returns and allowances, piercing the corporate veil, 553
journal, 242–247 257 proprietorship dissolution, 7
cash receipts, from time drafts, 708 purchases, using purchases journal, proprietorship formation, 7
cash receipts, on account, 280 234–241 training, 90
cash receipts, on account with sales receipt of cash from notes payable, Lending, 588
discounts, 282 593 Letters of credit, 703
cash receipts, using cash receipts receipt of partners’ initial investments, Liabilities
journal, 276–284 676 on balance sheet, 188
cash receipts using special journals, received cash from owner as invest- current, 467, 593, 651
268–295 ment, 60 defined, 8
cash received for maturity value of received cash from sales, 67 income tax, 383, 385
note receivable, 599 reversing entries, 658 liquidating, 688
cash received on account, 70 sales and cash receipts using special long-term, 467, 651
cash sales, 279 journals, 268–295 partnerships and, 688
Index I-9
Liabilities (continued) debit card transactions, 132 closing entries for, 210
section on balance sheet, 467, 651 defined, 59 defined, 165
unemployment tax, 386, 387 dishonored checks, 130 income statement showing, 185, 457
LIFO (last-in, first-out inventory costing electronic funds transfers, 131 owners’ equity statement with, 684
method), 570 as objective evidence, 59 Net pay
Limited liability partnerships (LLPs), writing, 113 check for total net pay, 356
688 Merchandise defined, 352
Liquidation of a partnership, 686, 688 cost of, 236 Net sales, 449
List price, 244 cost of merchandise sold, 450–451, Nominal accounts, 206, 487
LLPs (Limited liability partnerships), 456, 572 Normal balance, 29
688 defined, 234 Notes payable, 593–597
Loans, Small Business Administration, purchasing, 236 accounting software tools, 608–609
38 purchasing on account, 239 cash payment for maturity value of,
Lockheed Martin, 235 sales on account, 271 594
Long-term debt, 608 withdrawals by partners, 678 defined, 589
Long-term liabilities, 467, 651 Merchandise inventory issued for extension of time, 596
Lookback period, 383 accounting software tools, 584–585 maturity value of, 594
Loss adjusting entry for, 482 paying principal and interest on, 594
net (See Net loss) adjustment for, 415–418 receipt of cash from, 593
on plant assets, 549 analyzing and recording adjustment signed in previous fiscal period, 625
on realization, 687, 689 for, 416–417 signing, 593
recording from uncollectible defined, 415 signing for extension of time, 595
accounts, 419 determining cost of, 569–573 Notes receivable, 598–602
Low interest vs. cash back, 603 determining quantity of, 564–568 accepting from customers, 598
Lowe’s, 403 importance of, 564 accounting software tools, 608–609
methods to determine quantity of, 565 cash received for maturity value of,
most efficient quantity of, 565 599
M Merchandising business collecting principal and interest on,
accounting cycle for, 497, 659 599
Maker of note, 589 defined, 234 defined, 598
Malpractice liability, 160–D income statement for, 452–453 dishonored, 600
Management’s Analysis and Discus- types of, 234 issued in previous fiscal period, 620
sion, 628 work sheet for, 409–414 Notes to the Financial Statement, 628
Manual accounting vs. Automated Ac- See also specific entries Number of note, 589
counting, 52 Merck & Co., Inc., 118
Markup, 236 Metric system, 160
Matching expenses with revenue, 157, Microsoft Excel. See Excel O
158, 159, 182, 202, 206, 390, 419, Mission statements, 615
420, 423, 481, 487, 488, 489, 494, Morality vs. ethics, 28 Objective evidence
515, 538, 551, 570, 571, 616, 622 calculator tapes, 59
Maturity date of note, 589, 591 cash register receipt, 276, 277
Maturity value N check stub, 57
defined, 590 checks, 58, 121
of notes payable, 594 Net earnings, 198 credit memorandum, 285
of notes receivable, 599 Net income debit memorandum, 256
Measures and weights, 160 closing entries for, 210, 491, 657 defined, 57
Medicare tax component percentage, 184, 456, 458 invoice, 238
employee, 349 defined, 164 memorandum, 59
employer, 373 distribution of, 680, 681 purchase invoice, 238
journalizing payment of liability for, before federal income component receipts, 59, 280, 593
385 percentage, 456 sales invoices, 58, 272
paying liability for, 383 before federal income tax, 458 terminal summary, 276, 279
Memorandum recording on work sheet, 164 Occupational Outlook Handbook, 84
bank service charges, 127 section of income statement, 183 Office equipment, adjusting entry for
for buying supplies on account, 254 taxable income vs., 390 depreciation, 484
for correcting entries, 108 Net loss Office manager, 601
credit, 285 calculating and recording on work Office supplies, 254, 483
debit, 256, 257 sheet, 165 OfficeMax, 233
I-10 Index
On account dissolving, 686–690 opening software, 52
cash payments, 242–247 distributions to, 680–685, 689 payroll, 364
cash payments, with purchases dis- forming, 674–679 payroll taxes, recording, 396
counts, 245–246 initial investments by owners, 676 plant assets, 560
cash payments, without purchases liabilities and, 688 post-closing trial balance, 226
discounts, 246 limited liability partnership, 688 problem files, 52
cash receipts, 280 liquidation of, 686, 688 purchases, 266
cash receipts, with sales discounts, owners’ equity statement for, 682–685 reminders and alerts, 717
281, 282 withdrawal of cash by partner, 677 sales and cash receipts, 294
journalizing sales, 270–275 withdrawal of merchandise by part- toolbar, 86
memorandum for buying supplies, 254 ner, 678 trial balance, 176
paid cash, 12, 36, 65 Pay period, 340 uncollectible accounts receivable, 530
purchases, 236 Payee of note, 589 vendor set up, 266
purchasing merchandise, 239 Paying cash. See Cash payments Percentages, calculating, 85
received cash, 16, 41, 70 Payroll See also Component percentages
sales, 14, 273 accounting software tools, 364–365 Performance Food Group, 513
sales of merchandise, 271 analyzing payment of, 370 Periodic inventory, 565
sold services, 14, 39, 68 defined, 340 Permanent accounts, 206
supplies, 12, 35, 64, 255, 303 different forms of information for, 368 Perpetual inventory, 565, 567
transactions, 12 journalizing payment of, 371 Personal property, 536
Opening an account, 94 recording, 368–372 Petty cash, 134–136
Owner withdrawals, 45 Payroll bank account, 356 defined, 134
Owners, cash paid for personal use, 16, Payroll checks, 356–358 establishing, 134
42, 71 Payroll records, 351–355, 395 journalizing entry to replenish, 136
Owner’s cash investment, 10, 32, 60 Payroll register, 351–352, 369 making payments from, with petty
Owner’s drawing account, 211 Payroll taxes cash slip, 135
Owner’s equity accounting software tools, 396–397 replenishing, 136, 249
accounts, 38–44 calculating, 373 Petty cash report, 248
defined, 8 defined, 345 Petty cash slip, 135
ion on balance sheet, 189 journalizing, 376 Physical inventory, 565
journalizing transactions affecting, Medicare (See Medicare tax) Piercing the corporate veil, 553
67–72 paying, 383–389 Plant asset records, 542
reported in detail on balance sheet, quarterly federal tax return, 379, 380 Plant assets
190 recording, 373–377 accounting for, 532–561
transactions and changes in, 14–17 reporting, 378–382 accounting software tools, 560–561
Owners’ equity statement, 682–685 social security (See Social security tax) book value of, 424, 540
withholding, 345–350 buying, 534–535
Payroll time cards defined, 423, 651
P analyzing, 341 depreciation, 423
preparing, 340–344 depreciation expense for partial year,
P-E ratio, 459 Peachtree 547
Par value, 461 accrued revenue and expenses, 632 disposal of, 546–550
Partners adjusting entries, 176, 442 gain on, 548
capital account, 682 bank statement reconciliation, 145 journalizing and posting the buying
cash withdrawals by, 677 cash payments, 266 of, 535
defined, 674 chart of accounts maintenance, 114 loss on, 549
distributing loss or gain on realization closing entries, 226 property tax, 536
to, 689 depreciation, 560 recording the buying of, 535
distributing remaining cash to, 689 end-of-fiscal-period work for corpora- sale of for book value, 546
drawing account, 682 tion, 666 sale of for less than book value, 549
initial investment, 676 financial statements, 198, 506 sale of for more than book value, 548
merchandise withdrawals by, 678 Help function, 86 section on balance sheet, 466
Partnership agreements, 675 introduction to, 24 Point-of-sale (POS) terminal, 276, 277
Partnerships inventory, 584 Post-closing trial balance
account balances, 686, 688 journal entry accuracy, 336 accounting software tools, 226–227
accounting for, 672–699 journalizing transactions, 114, 145 defined, 216
balance sheet for, 684 menus, 86 example of, 496
defined, 674 notes payable and receivable, 608 preparing, 213–219, 494–498
Index I-11
Post-retirement benefits, 525 second amount to an account, 97 See also Notes payable; Notes
Postdated checks, 121 separate amount from general debit receivable
Posting column, 96–97 Property tax, 536
to accounts payable ledger, 298–306 separate amount from journal to Proprietorship
to accounts receivable ledger, general ledger, 96–99 accounting cycle for, 147–149, 228
307–314 special amount column totals, of advantages and disadvantages of, 7
adjusting entry, for accrued interest cash payments journal to general career of, 137
expense, 623 ledger, 324–325 defined, 6
adjusting entry, for accrued interest special amount column totals, of cash end-of-fiscal-period work, 228
income, 618 receipts journal to general ledger, financial statements for, 178–199
adjusting entry, for depreciation 322–323 forming and dissolving, 7
expense, 544 special amount column totals, of sales income statement for, 180–186
adjusting entry, for uncollectible journal, 320 owner withdrawals and, 45
accounts expense, 517 special journal totals to general led- salary range, 137
amount from general credit column, ger, 320–326 service business organized as, 2–229
98 to subsidiary ledger, 296–337 Proving
amount from general debit column, total of cash credit column, 103 accounts payable ledger, 305
96–97 total of cash debit column, 102 accounts receivable ledger, 313
buying of a plant assets, 535 total of purchases journal to general adjustments columns of work sheet,
from cash payments journal to gen- ledger, 321 160
eral ledger, 316 total of purchases journal to two cash, 76
from cash receipts journal to accounts general ledger accounts, 321 cash at end of month, 283
receivable ledger, 302, 310 total of sales credit column, 101 cash payments journal, 250, 252
column totals from journal to general totals of sales journal to general cash receipts journal, 283
ledger, 100–104 ledger, 320 journal at end of month, 75–76
correcting entries affecting customer to wrong account, 168 journal page, 73
accounts, 328 Preferred stock, 265 sales journal, 274
credit entry, for supplies bought on Prenumbered documents, 79 totals, 250
account, 303 Prepaid insurance Proving cash, 76
credit entry, from general journal to adjustment, 159, 204, 413, 484 Public accounting firms, 220
accounts receivable ledger, 311 analyzing and recording on work Purchase invoice, 238
credit entry, from general journal to sheet, 413 Purchase on account, 236
general ledger, 318 paid cash for, 11, 34, 63 Purchases
credit entry, to accounts payable Price, Anna McNeese, 218 on account, 236, 239
ledger, 303 Price, list, 244 cash payments for, 244
debit entry, for purchases return or Price-earnings ratio, 459 journalizing, 232–267
allowance, 303 Price table, 292 of merchandise, 236
debit entry, from general journal to Primary markets, 626 of merchandise on account, 239
general ledger, 317 Principal Purchases allowances
defined, 96 collecting on notes receivable, debit memorandum for, 256
entry for collecting written-off 599 defined, 256
account receivable, 523 paying on notes payable, 594 journalizing, 257
entry to write off uncollectible of promissory notes, 589 posting debit entry for, 303
account receivable, 520 Principal of note, 589 Purchases discount, 242, 245–246
to general ledger, 88–115, 296–337 Prioritization, 50 Purchases journal, 234–241
general ledger with posting com- Promissory notes, 588–592 defined, 237
pleted, 105–107 date of, 589 posting to accounts payable ledger
journal entries not posted individu- defined, 589 from, 301
ally, 100 interest on, 590 posting total to general ledger, 321
journal page with posting completed, interest rate of, 589 posting total to two general ledger
105 maker of, 589 accounts, 321
from journals to general ledger, maturity date, 589, 591 totaling and ruling, 240
315–319 number of, 589 Purchases returns
from purchases journal to accounts payee of, 589 debit memorandum for, 256
payable ledger, 301 principal of, 589 defined, 256
from sales journal to accounts receiv- time of, 589 journalizing, 257
able ledger, 309 uses of, 589 posting debit entry for, 303
I-12 Index
Q recognizing loss on, 687, 689 gross profit on, 452–453, 456, 458
of revenue, 14, 271, 273, 616 international, 702–709
Quality standards, 646 Receipts of merchandise on account, 271
Quarterly federal tax return, 379, 380 cash (See Cash receipts) net, 449
QuickBooks cash register, 276, 277 of plant asset for book value, 546
accrued revenue and expenses, 632 defined, 59 of plant asset for less than book value,
adjusting entries, 176, 442–443 as objective evidence, 59 549
bank statement reconciliation, Reconciliation, bank, 124–128, 135 of plant asset for more than book
145–146 Records, accounting value, 548
cash payments, 266 accuracy of, 57, 317 received cash from, 14, 38, 67
chart of accounts maintenance, 114 defined, 6 terms of, 238
closing entries, 226 Rent, paid cash for, 15 Sales allowances
depreciation, 560–561 Responsibility, 143 credit memorandum for, 285
end-of-fiscal-period work for corpora- Restrictive endorsement, 120 defined, 285
tion, 666 Resumes, 22, 203 journalizing, 286
financial statements, 198, 506–507 Retail merchandising business, 234 posting credit entry from general
Help function, 86 See also Merchandising business journal to accounts receivable
introduction to, 24 Retained earnings, 405, 462, 657 ledger, 311
inventory, 584–585 Retirement savings, 575 Sales credit column, 101
journal entry accuracy, 336–337 Revenue Sales discount
journalizing transactions, 114, accrued (See Accrued revenue) calculating cash receipts on account
145–146 defined, 14 with, 281
menus, 86 income statement with two sources defined, 278
notes payable and receivable, of, 185 journalizing cash receipts on account
608–609 matching expenses with (See Match- with, 282
opening software, 52 ing expenses with revenue) Sales invoices, 58, 272
payroll, 364–35 realization of, 14, 271, 273, 616 Sales journal
payroll taxes, recording, 396–397 section of income statement, 183, 449 Automated Accounting, 294–295
plant assets, 560–561 transactions, 14 defined, 272
portable files, 717 Reversing entries journalizing sales on account using,
post-closing trial balance, 226 for accrued interest expense, 624 270–275
problem files, 52 for accrued interest income, 619 posting each special amount column
purchases, 266 defined, 619 total of, 320
sales and cash receipts, 294–295 effect of not using, 626 posting to accounts receivable ledger
toolbar, 86 journalizing, 658 from, 309
trial balance, 176 Roth IRAs, 575 posting totals to general ledger,
uncollectible accounts receivable, Ruled accounting paper, writing 320
530–531 amounts on, 60 totaling, proving, and ruling, 274
vendor set up, 266 Ruling Sales on account
cash payments journal, 250, 252 defined, 14
cash receipts journal, 283 journalizing, 270–275
R journal at end of month, 75–76 Sales receipts, 294–295
journal page, 74 Sales return
Ranking activities, 50 purchases journal, 240 credit memorandum for, 285
Ratios sales journal, 274 defined, 285
current, 652 work sheet, 164 journalizing, 286
Excel formatting, 531 Russia, business culture and accoun- posting credit entry from general
financial, 459 tancy in, 681 journal to accounts receivable
inventory turnover ratio, 583 ledger, 311
price-earnings, 459 Sales slip, 58
Reading skills, 292 S Sales tax, 269, 270
Real accounts, 206, 487 Sales ticket, 58
Real estate, 536 Salary, 340 Sales transactions, 276–277
Real property, 536 Sales Salvage value, estimated, 423, 538
Realization on account, 14, 270–275 Sarbanes-Oxley Act, 564
defined, 686 cash, 276, 279 SBA (Small Business Administration),
gain on, 686, 687, 689 credit card, 276, 277, 279 5, 38, 56
Index I-13
SBDC (Small Business Development Special journals recording, 158, 411, 412
Centers), 564 defined, 235 on work sheet, 158, 638
Schedule of accounts payable, 305 journalizing sales and cash receipts Supplies adjustment
Schedule of accounts receivable, 313 using, 268–295 entries for, 202–203
SEC (Securities and Exchange Commis- order of posting from, 325 entry for office supplies, 483
sion), 18, 89, 193, 445 posting totals to general ledger, entry for store supplies, 483
Securities and Exchange Commission 320–326 Supporting schedule, 470
(SEC), 18, 89, 193, 445 Spreadsheets, 25, 591
Service business See also Excel
accounting cycle for, 217 Stakeholders, 181 T
adjusting and closing entries for, Standard accounting practices, 77
200–227 State sales tax rates, 269 T accounts
defined, 6 State unemployment tax accounting equation and, 28
organized as proprietorship, 2–229 defined, 375 analyzing transactions into debit and
work sheet for, 150–177 journalizing payment of liability for, credit parts, 28–49
Service fees, bank, 126–127, 127 387 defined, 29
Services, sold on account, 14, 39, 68 Statement of stockholders’ equity drawing, 42, 61
Share of stock, 234, 405, 470 capital stock section, 461 relationship to account form, 91
See also Stock defined, 461 Talbot, Missie T., 601
Sight draft, 704 preparing, 649 Tax base, 349
Skype, 297 retained earnings section, 462 Tax forms
Small business Stock Form 941, 383
characteristics of owners, 71 capital, 234, 461 Form 8109, 384, 386
franchises, 490 common, 265 Form W-2, 378
motivations of owners, 127 income vs. growth, 441 Form W-3, 381
statistics, 409 preferred, 265 Form W-4, 346
top ways of starting, 318 purchase, 470 online, 384
Small Business Administration (SBA), selling, 626 Taxes
5, 38, 56 Stock ledger, 567 employee (See Employee taxes)
Small Business Development Centers Stock record, 567 income (See Federal income tax)
(SBDC), 564 Stockholders payroll (See Payroll taxes)
Sociability, 581 defined, 234 property, 536
Social security number, 346 distributing dividends to, 404–408 purpose of, 369
Social security tax Stockholders’ equity sales, 269, 270
defined, 349 accounts used by corporations, 405 unemployment (See Unemployment
employer, 373 section of balance sheet, 468, 651 tax)
journalizing payment of liability for, statement of, 461–463, 649 value added, 704, 706, 707
385 Store equipment, adjusting entry for Telephone bill, paid cash for, 15
paying liability for, 383 depreciation, 485 Temporary accounts, 206
Software tools. See Automated Account- Straight-line method of depreciation, Terminal summary, 276, 277
ing; Peachtree; Quickbooks 424, 538 Terms of sale, 238
Sold services on account, 14, 39, 68 Strategic plan, 490 Time cards, preparing, 340–344
Sole proprietorship. See Proprietorship Subchapter S corporation, 345 Time drafts, 707, 708
Source documents Subsidiary ledger Time of note, 589
defined, 57 defined, 298 Total assets, 51
tracking errors and, 69 posting to, 296–337 Total earnings, 343, 354
types of, 57–59 Subsidiary ledger accounts, correcting Total equity, 51
See also Objective evidence errors in, 327–329 Total expenses, 184, 456, 458
Spain, business day, 305 Supplementary report, 470 Total liabilities, 51
Special amount column Supplies Totals
defined, 57, 237 on account, 12, 35, 64, 255, 303 batch totals, 79
posting each column total of sales analyzing and recording on work carrying forward, 250, 251
journal, 320 sheet, 411–412 work sheet, 164
posting totals of cash payments jour- credit entry for supplies bought on See also Column totals
nal to general ledger, 324–325 account, 303 Trade acceptances, 708
posting totals of cash receipts journal memorandum for buying on account, Trade discount, 244
to general ledger, 322–323 254 Transactions
Special endorsement, 120 paid cash for, 11, 33, 61, 243 on account, 12
I-14 Index
accounting equation and, 12 Unemployment tax completing for income tax, 430,
analyzing effects on accounts, 32–37 calculation with Excel, 397 432–435
analyzing effects on owner’s equity federal, 375, 386, 387 for corporation, 636–644
accounts, 38–44 liabilities, 386, 387 creating, 152–156
analyzing into debit and credit parts, state, 375, 387 defined, 153, 409
26–53 Unemployment taxable earnings, 374 8-column, 409–414, 432–433
changes in owner’s equity and, 14–17 Unit of measurement, 10, 160, 588, 705 errors on, 167–170
controls for cash, 139 Universal Product Code (UPC), 276, 567 example of, 642–643
debit card, 132 USA Today, 615 extending balance sheet account, 163
defined, 10 Useful life, estimated, 538 extending financial statement infor-
expense transactions, 15 Utilitarian theory, 181 mation on, 162–166
journalizing, 54–87, 147–149 extending income statement account
journalizing transactions affecting balances on, 163
owner’s equity, 67–72 V federal income tax adjustment,
recording in general journal, 285–287 639–640
revenue transactions, 14 Value heading of, 153
sales transactions, 276–277 assessed, 536 income statement information on,
Travelocity, 55 book (See Book value of plant assets) 182, 448
Trial balance estimated salvage, 423, 538 for merchandising business, 409–414
accounting software tools, 176, 177 maturity value, 590, 594, 599 net income on, 164
defined, 154 par, 461 net loss on, 165
entering on work sheet, 409, 637 Value added tax (VAT), 704, 706, 707 planning adjusting entries on,
errors in column, 168 Vendor 157–161
post-closing, 213–219, 494–498 defined, 236 planning adjustments on, 409, 637
recording on work sheet, 410 starting new page in accounts pay- prepaid insurance adjustment on,
on work sheet, 154 able ledger for, 300 159, 413
Turnover Visualizing, 224 proving adjustments columns, 160
of accounts receivable, 530 Voided checks, 122 ruling, 164
of inventory, 583 for service business, 150–177
supplies adjustments on, 158,
W 411–412, 638
U 10-column, 434–435
Wages, 340 totaling, 164
Uncollectible accounts, 514–518 Walt Disney Company, 201 trial balance on, 154, 409, 410, 637
adjusting entry for allowance for, 482 Weighted-average inventory costing use of, 637
allowance method of recording losses method, 571 Working capital, 652
from, 419 Weights and measures, 160 Workplace competencies
defined, 419 Wholesale merchandising business, creative thinking, 264
Uncollectible accounts expense 234 knowing how to learn, 505
analyzing and journalizing adjust- Withdrawals monitoring and correcting perfor-
ment for, 516 cash withdrawal by partner, 677 mance, 696
analyzing and recording adjustment defined, 16 ranking activities, 50
for, 421 merchandise withdrawal by partner, reading, 292
estimating, 420, 515 678 responsibility, 143
posting adjusting entry for, 517 owner withdrawals, 45 sociability, 581
recording, 515 Withholding visualization, 224
Uncollectible accounts receivable, employee taxes, 347, 348 writing, 85
512–531 federal income tax, 347–348, 353 WorldCom, 8
accounting software tools, 530–531 paying, 383–389 Writing off an account, 519–524
journalizing writing off, 519 payroll taxes, 345–350 Writing skills, 85
posting entries for collecting written- reporting, 378–382
off account receivable, 523 Withholding allowance, 346
posting entries to write off, 520 Wood, Wally, 388 Y
recording cash received for account Work sheets
previously written off, 522 adjusting entries recorded from, Year
reopening account previously written 480–481 calendar, 207
off, 521 balance sheet information on, fiscal (See Fiscal year)
writing off and collecting, 519–524 187–192, 464
Index I-15
You might also like
- (Ebook PDF) Accounting: To Trial Balance 11th Edition Download100% (7)(Ebook PDF) Accounting: To Trial Balance 11th Edition Download44 pages
- Accounting Process - Basic Concepts and Procedures 18th Edition - Zenaida Vera Cruz-Manuel PDF80% (5)Accounting Process - Basic Concepts and Procedures 18th Edition - Zenaida Vera Cruz-Manuel PDF405 pages
- Chapter 3 IAS 16 Property, Plant and EquipmentNo ratings yetChapter 3 IAS 16 Property, Plant and Equipment190 pages
- ACCT 1002 - Introduction To Financial Accounting - COURSE SCHEDULE - Semester 1 2022 - 2023No ratings yetACCT 1002 - Introduction To Financial Accounting - COURSE SCHEDULE - Semester 1 2022 - 20233 pages
- 1 Horngren Harrison Oliver Accounting 9th Edition PrenticeNo ratings yet1 Horngren Harrison Oliver Accounting 9th Edition Prentice5 pages
- South-Western Century 21 Accounting - Multicolumn Journal - Gilbertson, Claudia Bienias Lehman, Mark W South-Western - 2009 - Mason, OH - 9780538447133 - Anna's ArchiveNo ratings yetSouth-Western Century 21 Accounting - Multicolumn Journal - Gilbertson, Claudia Bienias Lehman, Mark W South-Western - 2009 - Mason, OH - 9780538447133 - Anna's Archive290 pages
- DAIF Intergrated Workbook STUDENT 2023-24No ratings yetDAIF Intergrated Workbook STUDENT 2023-24422 pages
- Adjustments and The Ten-Column Work Sheet: What You'll Learn100% (1)Adjustments and The Ten-Column Work Sheet: What You'll Learn34 pages
- Accounting I Syllabus: Instructor's Name and Contact InformationNo ratings yetAccounting I Syllabus: Instructor's Name and Contact Information6 pages
- Diploma in Accountancy Examination June 2019 Q A100% (1)Diploma in Accountancy Examination June 2019 Q A229 pages
- CENTURY 21 ACCOUNTING © Thomson/South-Western Lesson 5-1No ratings yetCENTURY 21 ACCOUNTING © Thomson/South-Western Lesson 5-130 pages
- Database For Financial Accounting Application II - Infrastructure - CodeProjectNo ratings yetDatabase For Financial Accounting Application II - Infrastructure - CodeProject33 pages
- Accounting & Financial Management Mca 405ANo ratings yetAccounting & Financial Management Mca 405A22 pages
- ACCT504 Case Study 1 The Complete Accounting Cycle0% (1)ACCT504 Case Study 1 The Complete Accounting Cycle19 pages
- 1 IAS 1 - Presentation of Financial StatementsNo ratings yet1 IAS 1 - Presentation of Financial Statements27 pages
- Accounting Concepts and Conventions: Unit - INo ratings yetAccounting Concepts and Conventions: Unit - I30 pages
- Microsoft Dynamics NAV 2016 - Product Overview and Capabilities GuideNo ratings yetMicrosoft Dynamics NAV 2016 - Product Overview and Capabilities Guide46 pages
- Your Complete Guide To Canadian Payroll (2022)No ratings yetYour Complete Guide To Canadian Payroll (2022)35 pages
- Financial Management For Non-Governmental Organization: September 2010No ratings yetFinancial Management For Non-Governmental Organization: September 201060 pages
- Financial Management - Pipelines and Burn RatesNo ratings yetFinancial Management - Pipelines and Burn Rates3 pages