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Analysis of Transaction
Steps Debit or Credit
Increase in Assets (Cash) by $10,000 Debit
1
Increase in Owner's Equity by $10,000 Credit
2
Journal Entry
Debit Credit
Cash 10,000
Owner's Equity 10,000
Analysis of Transaction
Steps Debit or Credit
Increase in Assets (Cash) by $20,000 Debit
1
Increase in Liabilities (Borrowings) by $20,000 Credit
2
Journal Entry
Debit Credit
Cash 20,000
Borrowings
20,000
Analysis of Transaction
Steps Debit or Credit
Increase in Assets (Equipment) by $12,000 Debit
1
Decrease in Assets (Cash) by $12,000 Credit
2
Journal Entry
Debit Credit
Equipment
12,000
Cash
12,000
Analysis of Transaction
Steps Debit or Credit
Increase in Assets (Merchandise) by $6,000 Debit
1
Increase in Liabilities (Accounts Payable) by $6,000 Credit
2
Journal Entry
Debit Credit
Merchandise
6,000
Accounts Payable
6,000
The company sold 500 units of merchandise at the price of $11,000. Customer paid $9,000 in
the time of sale.
Analysis of Transaction
Note: This transaction includes both "REVENUE" and "EXPENSE" components.
Analysis of Transaction
Steps Debit or Credit
Increase in Expenses (Salaries Expense) by $3,500 Debit
1
Decrease in Assets (Cash) by $3,500 Credit
2
Journal Entry
Debit Credit
Salaries Expense
3,500
Cash
3,500
Analysis of Transaction
Steps Debit or Credit
Increase in Expenses (Rent Expense) by $1,500 Debit
1
Decrease in Assets (Cash) by $1,500 Credit
2
Journal Entry
Debit Credit
Rent Expense
1,500
Cash
1,500
Journal Entries
No. Debit C
(1) Cash 10,000
(1) Owner's Equity 10
Owner invested $10,000 in the company.
Merchandise 1,000
Income Statement
For the Period from May 1 to May 31, 20XX
Revenue
Sales $ 11,000
Total Revenue $ 11,000
Expenses
Cost of Goods Sold $ 5,000
Salaries Expense 2,500
Rent Expense 1,500
Total Expenses 9,000
5. Borrowing money
5a. Borrowed $9,000 in cash
5b. Issued a promissory note and received $11,000 in cash
6. Issuance of stock
6a. Issued 500 shares of common stock, at $50 per share
6b. Issued 200 shares of preferred stock, at $80 per share
debit credit
merchandise 2,000
cash 2,000
debit credit
equipment 15,000
cash 15,000
debit credit
borrowings 7,000
cash 7,000
debit credit
cash 3,000
debit credit
cash 3,500
debit credit
cash 6,000
debit credit
cash 6,500
sales 6,500
debit credit
merchandise 5,100
debit credit
cash 8,600
equipment 8,000
debit credit
cash 9,000
borrowings 9,000
debit credit
cash 11,000
debit credit
cash 25,000
debit credit
cash 16,000
Current assets
--> Assets that are expected to be realized
--> within a year or normal operating cycle, whichever is longer
Current liabilities
--> Liabilities that are expected to liquidate
--> within a year or normal operating cycle, whichever is longer
Current Assets
5-02.1: Cash and cash items
5-02.2: Marketable securities
5-02.3: Accounts and notes receivable
5-02.4: Allowances for doubtful accounts and notes receivable
5-02.5: Unearned income
5-02.6: Inventories
5-02.7: Prepaid expenses
5-02.8: Other current assets
5-02.9: Total current assets
Noncurrent assets
5-02.12: Other investments
5-02.13: Property, plant and equipment
5-02.14: Accumulated depreciation
5-02.15: Intangible assets
5-02.16: Amortization of intangible assets
5-02.17: Other assets
5-02.18: Total assets
Current liabilities
5-02.19: Accounts and notes payable
5-02.20: Other current liabilities
5-02.21: Total current liabilities
Noncurrent liabilities
5-02.22: Bonds, mortgages and other long-term debt
5-02.24: Other liabilities
5-02.25: Commitments and contingent liabilities
Stockholders' equity
5-02.27: Redeemable preferred stocks
5-02.28: Non-redeemable preferred stocks
5-02.29: Common stocks
5-02.30: Other stockholders' equity
5-02.31: Noncontrolling interests
5-02.32: Total liabilities and equity
Revenue Accounts 01
Examples and Practice Questions
Revenue
Recognition of revenue
Sales revenue
Services revenue
Interest revenue
Rent revenue
Practice Questions
debit credit
Cash 3,600
debit credit
Cash 2,400
Equity
Components of equity
1. Paid-in capital
--> the amount shareholders contributed to the entity
--> in exchange of the shares of common stock or preferred stock
2. Retained earnings
--> net income is accumulated in retained earnings
--> dividends are paid from retained earnings
Practice Questions
debit credit
Cash 80,000
debit credit
Cash 140,000
Retained earnings
Practice Questions
debit credit
Common stock
Preferred stock
Retained earnings
Accounting Equation 01
Assets = $12,000
Liabilities = $5,000
Equity = $7,000
Assets = Liabilities + Equity
$12,000 = $5,000 + $7,000
Practice Question 1:
Revenue = $16,000
Expenses = $10,000
Net income = Revenue - Expenses = $16,000 - $10,000 = $6,000
Practice Question 2:
Assets = $25,000
Liabilities = $11,000
Beginning Equity = $10,000
Revenue = $36,000
Expenses = $32,000
Assets = Liabilities + Beginning Equity + Revenue - Expenses
$25,000 = $11,000 + $10,000 + $36,000 - $32,000
Practice Question 3:
1. Asset accounts
2. Expense and loss accounts
3. Increases in expense and loss accounts are recorded on the debit side
4. Decreases in expense and loss accounts are recorded on the credit side
Accounts receivable
Notes receivable
Interest receivable
Rent receivable
Inventories
Merchandise
Raw materials
Work-in-process
Finished goods
Supplies
Prepaid expenses
Trading securities
Available-for-sale securities
Held-to-maturity securities
Land
Buildings
Equipment
Machinery
Capitalized leases
Leasehold improvements
Intangible assets
Goodwill
Trademarks
Patents
Salaries expense
Advertising expense
Rent expense
Travel expense
Communication expense
Insurance expense
Supplies expense
Utilities expense
Depreciation expense
Interest expense
Trial Balance
If the journal entries are error-free and were posted properly to the general ledger, the total of all
of the debit balances should equal the total of all of the credit balances. If the debits do not equal
the credits, then an error has occurred somewhere in the process. The total of the accounts on the
debit and credit side is referred to as the trial balance.
To calculate the trial balance, first determine the balance of each general ledger account as
shown in the following example:
General Ledger
Bal. 6825
Capital Revenue
Sep 1 7500 1
Sep 1100
7
Expenses
1
Sep 1000
5
1
Sep 275
8
Bal. 1275
Once the account balances are known, the trial balance can be calculated as shown:
Trial Balance
Cash 6825
Capital 7500
Revenue 1100
Expenses 1275
10600 10600
In this example, the debits and credits balance. This result does not guarantee that there are no
errors. For example, the trial balance would not catch the following types of errors:
• Transactions that were not recorded in the journal
• Transactions recorded in the wrong accounts
• Transactions for which the debit and credit were transposed
• Neglecting to post a journal entry to the ledger
If the trial balance is not in balance, then an error has been made somewhere in the accounting
process. The following is listing of common errors that would result in an unbalanced trial
balance; this listing can be used to assist in isolating the cause of the imbalance.
• Summation error for the debits and credits of the trial balance
• Error transferring the ledger account balances to the trial balance columns
○ Error in numeric value
○ Error in transferring a debit or credit to the proper column
○ Omission of an account
• Error in the calculation of a ledger account balance
• Error in posting a journal entry to the ledger
○ Error in numeric value
○ Error in posting a debit or credit to the proper column
• Error in the journal entry
○ Error in a numeric value
○ Omission of part of a compound journal entry
The more often that the trial balance is calculated during the accounting cycle, the easier it is to
isolate any errors; more frequent trial balance calculations narrow the time frame in which an
error might have occurred, resulting in fewer transactions through which to search.
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Chart of Accounts
The chart of accounts is a listing of all the accounts in the general ledger, each account
accompanied by a reference number. To set up a chart of accounts, one first needs to define the
various accounts to be used by the business. Each account should have a number to identify it.
For very small businesses, three digits may suffice for the account number, though more digits
are highly desirable in order to allow for new accounts to be added as the business grows. With
more digits, new accounts can be added while maintaining the logical order. Complex businesses
may have thousands of accounts and require longer account reference numbers. It is worthwhile
to put thought into assigning the account numbers in a logical way, and to follow any specific
industry standards. An example of how the digits might be coded is shown in this list:
Account Numbering
1000 - 1999: asset accounts
2000 - 2999: liability accounts
3000 - 3999: equity accounts
4000 - 4999: revenue accounts
5000 - 5999: cost of goods sold
6000 - 6999: expense accounts
7000 - 7999: other revenue (for example, interest income)
8000 - 8999: other expense (for example, income taxes)
By separating each account by several numbers, many new accounts can be added between any
two while maintaining the logical order.
Defining Accounts
Different types of businesses will have different accounts. For example, to report the cost of
goods sold a manufacturing business will have accounts for its various manufacturing costs
whereas a retailer will have accounts for the purchase of its stock merchandise. Many industry
associations publish recommended charts of accounts for their respective industries in order to
establish a consistent standard of comparison among firms in their industry. Accounting software
packages often come with a selection of predefined account charts for various types of
businesses.
There is a trade-off between simplicity and the ability to make historical comparisons. Initially
keeping the number of accounts to a minimum has the advantage of making the accounting
system simple. Starting with a small number of accounts, as certain accounts acquired significant
balances they would be split into smaller, more specific accounts. However, following this
strategy makes it more difficult to generate consistent historical comparisons. For example, if the
accounting system is set up with a miscellaneous expense account that later is broken into more
detailed accounts, it then would be difficult to compare those detailed expenses with past
expenses of the same type. In this respect, there is an advantage in organizing the chart of
accounts with a higher initial level of detail.
Some accounts must be included due to tax reporting requirements. For example, in the U.S. the
IRS requires that travel, entertainment, advertising, and several other expenses be tracked in
individual accounts. One should check the appropriate tax regulations and generate a complete
list of such required accounts.
Other accounts should be set up according to vendor. If the business has more than one checking
account, for example, the chart of accounts might include an account for each of them.
Account Order
Balance sheet accounts tend to follow a standard that lists the most liquid assets first. Revenue
and expense accounts tend to follow the standard of first listing the items most closely related to
the operations of the business. For example, sales would be listed before non-operating income.
In some cases, part or all of the expense accounts simply are listed in alphabetical order.
Sample Chart of Accounts
The following is an example of some of the accounts that might be included in a chart of
accounts.
Sample Chart of Accounts
Asset Accounts
Current Assets
1900 Deposits
1910 Organization Costs
1915 Accumulated Amortization, Organization Costs
1920 Notes Receivable, Non-current
1990 Other Non-current Assets
Liability Accounts
Current Liabilities