Example for journal

>> Friday, November 20, 2009

Another example .... without cash. April 20, the company opens a charge account at Office Emporium. They buy a $1000 computer, and say "charge it!"

1) Is Cash used in this transaction? No. [We will use the substitution method]
2) If Cash were used...Would it be received or paid? Paid. [Decrease = Credit Column]
--- enter the "cash" portion of the journal entry.
Pencil "cash" in lightly, you will replace it later with the correct account title.
3) Enter the balancing dollar amount in the opposite column.

Date
Account
Debit
Credit
Apr-20
$1000


cash
$1000




Notice that I have roughed in the structure of the journal entry, but the actual accounts have not been entered yet.

4) Refer to the information given, check the Chart of Accounts, tighten your thinking bolts and select the correct account for the second part. This is an example of buying equipment, in this case we will use the account Office Equipment.

5) Refer to the Chart of Accounts and replace "cash" with the appropriate account, which will usually end with "Payable" or "Receivable" such as Accounts Payable, Interest Receivable, etc.

In this case we will use Accounts Payable, one of the most frequently used accounts. Accounts Payable is used to refer to most of the common, day-to-day debts and current liabilities that a company incurs. It is short-term debt, meant to be paid soon, like the phone bill, utility bill, etc.

Date
Account
Debit
Credit
Apr-20 Office Equipment
$1000


Accounts Payable
$1000




These are all examples of simple journal entries. There is one debit and one credit. Some transactions might involve more then two accounts, and we would use three or more lines to write those entries. These are called compound journal entries (or complex journal entries). There is no limit to the number of debit or credit accounts that can be included in a journal entry. All necessary accounts will be used. The journal entry will balance, regardless of the number of accounts used.

Let's try an example of a compound journal entry. June 5, the company buys building and land for $100,000. They make a down payment of $20,000 and sign a mortgage note with their bank for the balance. An appraisal shows the land alone has a value of $10,000.

1) Is Cash used in this transaction? Yes & No. [We will use the substitution method along with Cash]
2) If Cash were used...Would it be received or paid? Paid. [Decrease = Credit Column]
--- enter the Cash portion of the journal entry. We will use Notes Payable to enter the $80,000 we borrowed from the bank, on its own line, but on the same side as Cash - the Credit side in this case.

Date
Account
Debit
Credit
June-5








Notes Payable
$80,000

Cash
$20,000

3) Enter the balancing dollar amount in the opposite column.
4) Refer to the information given, check the Chart of Accounts, tighten your thinking bolts and select the correct account for the second part. I left 2 blank lines above, because I knew we had both land and a building, which must be entered separately.

Date
Account
Debit
Credit
June-5
Land
$10,000


Building
$90,000


Notes Payable
$80,000

Cash
$20,000


--------
--------

Total
$100,000
$100,000

In this example I have totaled the columns to show that the journal entry is in balance. In real accounting systems a total is only drawn at the bottom of the page, not after each journal entry.

Here's another example of a compound journal entry. This one also shows how to record the issue of common stock, a very important journal entry to know. On May 1, Bill, Bob and Quinn create a new corporation, BBQ, Inc. They raise capital in the company by selling 10,000 shares of Common Stock for $5 per share. The common stock has a Par value of $1 per share.

1) Is Cash used in this transaction? Yes. The organizers are raising initial capital to start a new company. If the stock were sold on a stock exchange this would be referred to as an IPO (Initial Public Offering).
2) If Cash were used...Would it be received or paid? Received. [Increase = Debit Column]
--- enter the Cash portion of the journal entry. They sold 10,000 shares of stock at $5 per share, so they have raised 10,000 x $5 = $50,000.

Date
Account
Debit
Credit
May-1
Cash
$50,000





3) Enter the balancing dollar amount in the opposite column.
4) Refer to the information given, check the Chart of Accounts, tighten your thinking bolts and select the correct account for the second part.
Common stock is recorded as a credit to the Common Stock account. It is recorded at Par value, in this case $1 per share. So 10,000 x $1 = $10,000.

Date
Account
Debit
Credit
May-1
Cash
$50,000


Common Stock
$10,000




The journal entry is out of balance and we need to finish it up. Any excess raised by the sale of stock is credited to the Additional Paid-In Capital account.

Date
Account
Debit
Credit
May-1
Cash
$50,000


Common Stock
$10,000

Additional Paid-In Capital
$40,000

This is a good example of an important journal entry every accountant and bookkeeper should know. We don't use it very often, but it's important to know how to make this type of journal entry.

A word about issuing stock.
Each state has slightly different laws regarding corporations. Most states permit Par value stock, and some have a Legal Capital rule, forcing corporations to maintain tangible capital equal to the Legal Capital. This is in place to protect stockholders. Some states permit No-Par stock.

States also allow Preferred stock, which pays a fixed dividend, similar to an interest-bearing investment. Preferred stock usually has a Par value, and is recorded as in the example above, except the Preferred Stock account is used. Some company's maintain a separate account Additional Paid-In Capital on Preferred Stock, but Additional Paid-In Capital usually reverts to the Common stockholders, regardless of it's source.

Posting to the Ledger
Journal entries must be posted to the Ledger accounts on a regular basis. In many computer based systems this is done automatically, when journal entries are made. In a manual system, and some computer systems, the journal entries are posted on a daily, weekly or monthly basis, called "batch posting."

When you Post, you simply take each line from the journal entries, and transfer the amounts to the corresponding Ledger accounts. You have to be very careful to post all journal entries, get the dollar amounts right, and enter them in the correct column of the correct account. Needless to say, in a manual system errors do get made.

Posting is actually a routine and mechanical procedure.

Using T-Accounts
You will see many examples of T-Accounts in your textbook. A T-Account is just a simple way to represent a Ledger account. It's handy for accounting students, because you can make quite a few T-Accounts on one page, and post journal entries quickly. This makes it easier to do homework assignments or analyze transactions.

Most of your homework assignments will only use a few accounts, and there will only be one or two entries to each account. You can make 3 T-Accounts across a page, and several rows down the page. The Cash account should be larger than the rest, since it will have quite a few entries in most assignments.

When you post to T-Accounts, make a large T and write the name of the account above it. Write the Debit entries on the left half of the T, and Credit entries on the right side of the T. I usually draw a line underneath the entries, net all the entries together, and put the balance on the correct side of the T below the line.

The Income Statement
Relates to a period of time.
Revenue - the price of your goods and services
Expenses - costs incurred in earning revenue

Net Income - the excess of Revenue over Expenses, on the Income Statement
Net Loss - the excess of Expenses over Revenue, on the Income Statement

Net Income is synonymous with Net Profit.

Debit and Credit Rules
Revenues = Credit Entry
Expenses = Debit Entry

All revenue and expense entries follow these simple rules. The opposite side entry is usually made only to correct an error in an earlier journal entry. This is true of all income statement accounts.

Many balance sheet accounts tend to increase and decrease on a regular basis. Cash, Inventory, Accounts Receivable, Supplies, Accounts Payable all change on a frequent basis. Income statement accounts only increase, and do so according the the rules above. It is really easy to remember this simple rule.

..... Revenue .....
Example February 3, the company makes a credit sale of $250.

Date
Account
Debit
Credit
Feb-3 Accounts Receivable
$250


Sales Revenue
$250




Example February 5, the company makes a cash sale of $250.

Date
Account
Debit
Credit
Feb-5 Cash
$250


Sales Revenue
$250




These two entries are almost identical. Notice that Sales Revenue is on the Credit side in both entries. Remember this and it will make all your journal entries easier. When you record a revenue you will put it on the Credit side.

..... Expenses .....
Example February 1, the company pays rent, $500.

Date
Account
Debit
Credit
Feb-1 Rent Expense
$500


Cash
$500




Example February 5, the company has an service company clean their office every week. The fee is $100 each week, and the bill is paid at the end of the month. This is the first time the office has been cleaned this month.

Date
Account
Debit
Credit
Feb-5 Office Expense
$100


Accounts Payable
$100




These are both examples of an Expense entry. The expense part is always in the Debit column. You will list it first, and then either Cash or Accounts Payable. An entry to record Payroll Expense would credit Wages Payable. An entry to record Interest Expense would credit Interest Payable. These are special payable accounts. Most common business expenses will credit Accounts Payable or occasionally Cash.

When to record Revenue
Realization Principle - at the time goods are sold or services are rendered.

When to record Expenses
Matching Principle - offsetting expenses against revenues in the appropriate time period. For instance, the bill for June's long distance phone calls is paid in July. The long distance expense should show up on the June income statement.

0 comments:

About This Blog

Lorem Ipsum

  © Free Blogger Templates Digi-digi by Ourblogtemplates.com 2008

Back to TOP