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Chapter 3: The Accounting Information System. Expanded rules for debits and credits based on financial statement relationships: Assets = Liabilities + Stockholders’ Equity Retained Common Earnings Stock

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effect of debits and credits
Expanded rules for debits and credits based on financial statement relationships:

Assets = Liabilities + Stockholders’ Equity

Retained Common

Earnings Stock

Net Income Dividends

Revenues Expenses

Effect of Debits and Credits

DR

CR

CR

CR

CR

DR

CR

DR

the format of a journal entry
To initially record transactions, we use a journal entry to represent the debits and credits.

For example, if investors contribute $20,000 into the company, and receive common stock, the transaction is recorded as follows:

Debit Credit

Cash 20,000

Common Stock 20,000

This transaction INCREASES cash with a DEBIT, and INCREASES common stock with a CREDIT. Note that the debit is to the left and the credit is to the right. First we list the account (left hand entry on top), then the amount.

The Format of a Journal Entry
additional entries
Purchase $20,000 of equipment with the payment of $8,000 cash, and finance the balance with a Notes Payable:

Equip. 20,000

Cash 8,000

Notes Pay. 12,000

Additional Entries
additional entries1
Perform services for customer on account, and bill the customer $5,000:

A/Rec. 5,000

Service Revenue 5,000

Collect $4,000 on accounts receivable:

Cash 4,000

A/Rec. 4,000

Pay current month’s rent of $1,000:

Rent Expense 1,000

Cash 1,000

Additional Entries
back to class problem posting to g l now post transactions for cash to t account
Back to Class Problem: Posting to G/LNow post transactions (for Cash) to “T” account:

Cash

20,000

8,000

4,000

1,000

Bal. 15,000

1 accrual of expenses example 1
Raider Company borrowed $10,000 on October 1, 2012. The note included a 5 percent annual interest rate, payable each September 30, starting Sept. 30, 2013. How much interest must Raider accrue at Dec. 31, 2012 before financial statements are prepared?

Calc: Principal x rate x time

P x R x T

AJE:

1. Accrual of Expenses - Example 1

10,000 x .05 x 3/12 of a year = $125

Interest Expense 125

Interest Payable 125

3 prepaid expenses example 3
Raider Company purchased a 1-year insurance policy on April 1, 2012 at a cost of $2,400

General JEat time of purchase (to asset):

Prepaid Insurance 2,400

Cash 2,400

Calculation for AJE at December 31 to recognize the portion that has been used up:

3.Prepaid Expenses - Example 3

2,400 /12 = 200 per month x 9 months= $1,800

AJE: Insurance Expense 1,800

Prepaid Insurance 1,800

3 prepaid expenses example 4
Raider Company purchased a 1-year insurance policy on April 1, 2012 at a cost of $2,400

General JEat time of purchase (to expense):

Insurance Expense 2,400

Cash 2,400

Calculation for AJE at December 31 to create asset for the portion that was not used up:

3.Prepaid Expenses – Example 4

2,400 /12 = 200 per month x 3 months= $600

AJE: Prepaid Insurance 600

Insurance Expense 600

4 unearned revenues example 5
Raider Company received $6,000 on November 30, 2012 for subscriptions to be delivered over the next 12 months, starting in December of 2012.

General JE at time cash received (credit to liability):

Cash 6,000

Unearned Revenues 6,000

AJEat end of the period (for portion earned):

4.Unearned Revenues – Example 5

6,000 / 12 = 500 per month, so 1 month earned.

Unearned Revenues 500

Subscription Revenues 500

4 unearned revenues example 6
Raider Company received $6,000 on November 30, 2012 for subscriptions to be delivered over the next 12 months, starting in December of 2012.

General JE at time cash received (credit to revenue):

Cash 6,000

Subscription Revenues 6,000

AJEat end of the period (for portion earned):

4.Unearned Revenues – Example 6

6,000 / 12 = 500 per month, so 1 month earned.

Subscription Revenues 5,500

Unearned Revenues 5,500

5 depreciation exp example 7
Raider Company purchased equipment in 2010 at a cost of $30,000. The equipment has a useful life of 10 years and no salvage value.

Calculation for AJE at December 31, 2012 for the current year’s depreciation.

5. Depreciation Exp. – Example 7

30,000/10 = 3,000 per year

AJE: Depr. Exp. 3,000

A/D 3,000

exercise 3 16 closing jes
Close revenues and expenses to Retained Earn.:

Sales Revenue 410,000

Sales Discounts 15,000

Sales Returns & Allowances 12,000

COGS 225,700

Selling Expenses 16,000*

Administrative Expenses 38,000*

Income Tax Expense 30,000

Close dividends to Retained Earnings:

Dividends 18,000

Ending RE?

*Note: close individual account titles.

Exercise 3-16 Closing JEs

Retained Earnings 73,300

Retained Earnings 18,000

45,000 + 73,300 – 18,000 = 100,300

exercise 3 1
4/2 Cash 32,000

Equipment 14,000

Capital 46,000

4/2 No JE

4/3 Supplies 700

A/Pay 700

4/7 Rent Expense 600

Cash 600

4/11 A/Rec 1,100

Service Revenue 1,100

4/12 Cash 3,200

Unearned Revenue 3,200

Exercise 3-1
exercise 3 11
4/17 Cash 2,300

Service Rev. 2,300

4/21 Insurance Exp. 110

Cash 110

4/30 Salaries Exp. 1,160

Cash 1,160

4/30 Supplies Exp. 120

Supplies 120

4/30 Computer 6,100

Capital 6,100

Back to Power Points.

Exercise 3-1
exercise 3 5 ajes for 3 months
1.Depr. Exp. 750

Accum. Depr. 750

2.Unearned Rent Rev. 3,100 (1/3 x 9,300)

Rent Rev. 3,100

3.Interest Exp. 500

Interest Pay. 500

4.Supplies Exp. 1,950 (2800-850)

Supplies 1,950

5.Insurance Exp. 900

Prepaid Ins. 900

Exercise 3-5 (AJEs for 3 months)
exercise 3 6 ajes only
1. A/R 750

Service Rev. 750

2.Utility Exp. 520

A/P 520

3. Depr. Exp. 400

A/D 400

Int. Exp. 500

Int. Pay. 500

4. Ins. Exp. 1,000

Prepaid Ins. 1,000

5. Supplies Exp. 1,100

Supplies 1,100

Exercise 3-6 (AJEs only)