Analyzes of a Business Transaction

Analyzes of Business Transactions for a Corporation Co rporation Basic Everyday Journal Entries These are some of the issues to consider when wh en determining where or not a transaction t ransaction has occurred and if it can be recorded in the books of the company. Did assets exchange hands? Was there a purchase price? Were sales or services provided to a customer? What is the source document that confirms a transaction occurred? I.e. Invoice, check, signed notes, sales slips, etc. What accounts within the company were affected a ffected by this transaction? Asset accounts: Cash, Accounts Receivable, Supplies, Prepaid Expenses, o or Property, Plant and Equipment. Liability accounts: Accounts Payable, Notes Payable, Unearned Sale o Revenues, Other payable accounts such as Salaries Payable Stockholders’ Equity accounts: Common Stock, Retained Earnings, o Dividends, Revenues, and Expenses Determine where the accounts were increased or decreased and by how much. o Assets are increased on the debit side and an d decreased on the credit side Contra asset accounts: Allowance for Doubtful accounts and Accumulated o Depreciation are increased on the credit side and decreased on the debit side Liabilities are increased on the credit side and decreased d ecreased on the debit side o Stockholders’ Equity accounts: Common Stock, Retained Earnings or o Revenues are increased on the credit side and decreased on the debit side o Stockholders’ Equity accounts: Dividends, Expenses or Treasury stock are increased on the debit side and decreased on the credit side Create a journal entry that includes at least one debit and one credit that equal the same amount in both columns of a journal. o Debits are always recorded first when a journal entry is recorded in the general journal. Credits are then recorded second and indented when a journal entry is o recorded in the general journal. A short concise description can be placed on the next line if so desired. o

1

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The Following are selected journal entries from Steele Furniture Store out of their general  journals.

Example 1: Issuance of stock to investors (owners) On January 1, Jon invested $500,000 in his new furniture store. Did assets exchange hands? Yes, Cash for a share of ownership in his new company Was there a purchase price? Yes, $500,000 Were sales or services provided to a customer? No What is the source document that confirms a transaction occurred? Stock  certificate issued by the company in return for a check from Jon. What accounts within the company compan y were affected by this transaction? Cash and Common Stock  Determine where the accounts were increased or decreased and by how much. Cash, a asset account increased by $500,000 and Common stock, a stockholders’ equity account was increased by $500,000 Create a journal entry that includes at least one debit and one credit that equal the same amount in both columns of a journal. o Debits are always recorded first when a journal entry is recorded in the general journal. Credits are then recorded second and indented when a journal entry o is recorded in the general journal. o A short concise description can be placed on the next line if so desired. Date 5/3

Account Titles Cash Common Stock Issuances of stock to owner

Dr 500,000

Cr 500,000

In this case the owner invested $500,000 cash into his own company and received common stock in return for the cash.

Example 2: Payment of a dividend to the company’s owners also known as stockholders On September 5, Steele Furniture Store declared and paid a dividend of $100 to stockholders’ of record Did assets exchange hands? Yes, Steele S teele Furniture Store paid investors cash.

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What accounts within the company were affected a ffected by this transaction? Cash, an asset account and Dividends, a contra equity account Determine where the accounts were increased or decreased and by how much. Cash, an asset account, decreased by $100 and Dividends, a stockholders’ equity account which is a recording keeping account, increased by $100. Create a journal entry that includes at least one debit and one credit that equal eq ual the same amount in both columns of a journal. o Debits are always recorded first when a journal entry en try is recorded in the general journal. Credits are then recorded second and indented when a journal entry is o recorded in the general journal. o A short concise description can be placed on the next line if so desired. Date 9/5

Account Titles Dividends Cash

Dr

Cr 100 100

Payment of dividends

In this case the company gave back money to the investors as a return on investments which does not decrease the amount of stock owned by the investors. It will reduce the retained earnings for the company.

Example 3: Purchase of a long term asset. I.e. Equipment, furniture, or fixtures for cash payment On June 5, Jon purchased a copy machine for $2,500 cash. Did assets exchange hands? Yes Was there a purchase price? Yes, $2,500 Were sales or services provided to a customer? No What is the source document that confirms a transaction occurred? Invoice or sales slip from the company which sold the machine to Steele Furniture Store. What accounts within the company compan y were affected by this transaction? Equipment and Cash Determine where the accounts were increased or decreased and by how much. Equipment, an asset account, increased by $2,500 and Cash, an asset account, decreased by $2,500. Create a journal entry that includes at least one debit and one credit that equal the same amount in both columns of a journal. o Debits are always recorded first when a journal entry is recorded in the general journal.

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Date 9/5

Account Titles Equipment Cash

Dr 2,500

Cr 2,500

Purchased a copy machine

In this transaction one asset is exchanged for another so one increases while the other decreases.

Example 4: Purchase of a long term asset. I.e. Equipment, furniture, or fixtures for cash down payment and the balance on credit. On August 1, Jon Doe purchases a company car for $20,000 with a down payment of  $5,000 and he signs a notes payable for the remaining sum. Did assets exchange hands? Yes, Jon received a company car in exchange for cash of $5,000 and a written promise to pay the remainder of $15,000 at a future date in time. Was there a purchase price? Yes, $20,000 Were sales or services provided to a customer? No What is the source document that confirms a transaction occurred? They are the signed note and a cashers check for the $5,000 down payment. What accounts within the company were affected by this transaction? Cash, Company vehicles, and Notes Payable Determine where the accounts were increased or decreased and by how much. Cash, an asset account, was reduced by $5,000, Company vehicle, an asset account, was increased by $20,000 and Notes Payable, a liability account, and was increased by $15,000. Create a journal entry that includes at least one debit and one credit that equal eq ual the same amount in both columns of a journal. Debits are always recorded first when a journal entry is recorded in the o general journal. Credits are then recorded second and indented when a journal entry is o recorded in the general journal. o A short concise description can be placed on the next line if so desired. Date 8/1

Account Titles Company vehicle Cash Notes Payable Purchased vehicle for company use

Dr 20,000

Cr 5,000 15,000

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The car is considered an asset to the company so that account is debited for the total value of the vehicle. Cash is reduced by the amount of the down payment so that account is credited. And Notes payable pa yable is a liability to the company which is increased so that account is also credited. This type of journal entry is called a compound journal entry because more than two accounts are used to record the transaction.

Example 5: Advance payment from a customer cu stomer for payment of services or sales to be performed at a future date. On May 10, Jon receives a $10,000 cash advance payment for a custom made dinner table and chairs that will be delivered one on e it is finished. Did assets exchange hands? Yes, the company receives a cash advance payment in return for a promise for future service. Was there a purchase price? Yes, $10,000 Were sales or services provided to a customer? No, in the event of o f an advance payment servers will not be performed at the time the money is received. What is the source document that confirms a transaction occurred? Check  from the customer What accounts within the company compan y were affected by this transaction? Cash and Unearned Sales Revenue Determine where the accounts were increased or decreased and by how much. Cash, an asset account was increased by $10,000 and Unearned Sales Revenue, a liability account, increased by $10,000. Create a journal entry that includes at least one debit and one credit that equal the same amount in both columns of a journal. o Debits are always recorded first when a journal entry is recorded in the general journal. Credits are then recorded second and indented when a journal entry o is recorded in the general journal. A short concise description can be placed on the next line if so o desired. Date 5/10

Account Titles Cash Unearned Sales Revenue Advance payment for Custom Dining Room Set

Dr 10,000

Cr 10,000

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Example 6: Providing the services or sales that the company is in the business to perform for cash. On May 3, Jon sold Mr. Jones, a customer, a bookcase for $2,000 cash and delivered it on the same day. Did assets exchange hands? Yes, a bookcase was delivered to Mr. Jones for cash payment of $2,000. Was there a purchase price? Yes, $2,000 Were sales or services provided to a customer? Yes, sales What is the source document that confirms a transaction occurred? Sales slip from Steele Furniture Store. What accounts within the company were affected by this transaction? Cash and Sales Revenues Determine where the accounts were increased or decreased and by how much. Cash, an asset account, was increased by $2,000 and Sales Revenues, a Stockholder’s Equity account, was also increased by $2,000. Create a journal entry that includes at least one debit and one credit that equal the same amount in both columns of a journal. Debits are always recorded first when a journal entry is recorded in the o general journal. o Credits are then recorded second and indented when a journal entry is recorded in the general journal. A short concise description can be placed on the next line if so desired. o Date 5/3

Account Titles Cash Sales Revenues Sold bookcase to Mr. Jones

Dr 2,000

Cr 2,000

The bookcase is considered inventory inventor y for the company so the sale of it is considered revenue by the company. compan y. In this case cash was received at the time of the sale. If the customer had been billed for the bookcase you would have debited Accounts Receivable instead of cash.

Example 7: Providing the services or sales that eh company is in the business to perform on credit. Customer will pay at a later date in time. On June 6, Jon made and delivered six custom bedroom suits for a local bed and breakfast at a cost of $60,000. When he delivered the suits he gave the management an invoice for the items that had terms of n/30.

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What is the source document that confirms a transaction occurred? Invoice from Steele Furniture Store. What accounts within the company compan y were affected by this transaction? Accounts Receivable and Sales Revenues Determine where the accounts were increased or decreased and by how much. Accounts Receivable, an asset account, increased by $60,000 and Sales Revenue, a Stockholders’ Equity account, increased by $60,000. Create a journal entry that includes at least one debit and one credit that equal the same amount in both columns of a journal. Debits are always recorded first when a journal entry is recorded in o the general journal. o Credits are then recorded second and indented when a journal entry is recorded in the general journal. A short concise description can be placed on the next line if so o desired. Date 6/6

Account Titles Accounts Receivable Sales Revenues Sold six bedroom suits

Dr 60,000

Cr 60,000

Example 8: Payment of cash on account for items purchases earlier on credit. On July 1, Jon paid $10,000 cash on account for the past month. Did assets exchange hands? Yes, Jon is paying off his accounts payable for items charge on credit during the recent past. Was there a purchase price? Yes, the balance in the accounts payable account. Were sales or services provided to a customer? No What is the source document that confirms a transaction occurred? Company check from Steele Furniture Store.

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Date 7/1

Account Titles Accounts Payable Cash

Dr 10,000

Cr 10,000

Sold six bedroom suits

Example 9: On October 10 Received $60,000 cash on account from customers who owes money to the company for services or sales. Did assets exchange hands? Yes, Steele Furniture Store received cash to pay off  o ff  customer’s credit account. Was there a purchase price? Yes, at the time of the sale the customer was given a  price for the goods sold and this amount was record in Steele Furniture Store’s Accounts Receivable account. Were sales or services provided to a customer? No What is the source document that confirms a transaction occurred? Customer’s Check and the record of o f deposit for Steele Furniture Store. What accounts within the company were affected a ffected by this transaction? Cash and Accounts Receivable Determine where the accounts were increased or decreased and by how much. Cash, an asset account, increased by $60,000 and Accounts Receivable, an asset account decreased by $60,000. Create a journal entry that includes at least one debit and one credit that equal eq ual the same amount in both columns of a journal. Debits are always recorded first when a journal entry en try is recorded in the o general journal. o Credits are then recorded second and indented when a journal entry is recorded in the general journal. A short concise description can be placed on the next line if so desired. o Date 10/10

Account Titles Cash

Dr 60,000

Cr

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What is the source document that confirms a transaction occurred? Monthly bills What accounts within the company were affected a ffected by this transaction? Cash, Telephone Expense, and Utilities Expense Determine where the accounts were increased or decreased and by how much. Cash, an asset decreased by $495, Telephone Expense, a stockholders’ equity account, increased by $145, and Utilities Expense, a stockholders’ equity account increased by $350. Create a journal entry that includes at least one debit and one credit that equal the same amount in both columns of a journal. Debits are always recorded first when a journal entry is recorded in the o general journal. o Credits are then recorded second and indented when a journal entry is recorded in the general journal. A short concise description can be placed on the next line if so desired. o Date 10/28

Account Titles Telephone Expense Utilities Expense Cash Paid monthly bills

Dr

Cr 145 350 495

Monthly bills that are paid during the course of o f the month are recorded as expenses.

Example 11: Recording of monthly expenses on account (credit) Bills accrued at month’s end

On October 31, Jon received a bill for rent totaling $1,500 that is due on the first of  each month. Did assets exchange hands? Yes, Steele Furniture Store incurred an expense that will be paid at a later date dat e in time. Was there a purchase price? Yes, the amount record on the bill.

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o

Date 10/31

A short concise description can be placed on the next line if so desired.

Account Titles Rent Expense Accounts Payable

Dr 1,500

Cr 1,500

Monthly rent

Monthly bill that do not come due until the following month are recorded in order to match those expenses with the revenues that were earned in a specific fiscal time period.

Example 12: The purchase and prepayment of an asset with cash before it is used by the company. I.e. Insurance, rent, or supplies. On November 1, Jon purchased a six month insurance policy for the company vehicle for $1,200. Did assets exchange hands? Yes, the insurance policy is considered an asset to the company until it is used up. Was there a purchase price? Yes, the cost of the policy Were sales or services provided to a customer? No What is the source document that confirms a transaction occurred? Insurance policy and Company Check  What accounts within the company were affected a ffected by this transaction? Prepaid Insurance and Cash Determine where the accounts were increased or decreased and by how much. Prepaid Insurance, an asset account, was increased by $1,200 and Cash, an asset account, was decreased by $1,200. Create a journal entry that includes at least one debit and one credit that equal the same amount in both columns of a journal. o Debits are always recorded first when a journal entry is recorded in the general journal. Credits are then recorded second and indented when a journal entry is o

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Example 13: The purchase and prepayment of an asset on credit before it is used by the company. I.e. Insurance, tickets, rent, or supplies. On November 17, Jon purchased airplane tickets valued at $638 for a woodworking conference in Hartford Connecticut for December 16-18. Did assets exchange hands? Yes, an airplane ticket was purchased using credit. Was there a purchase price? Yes Were sales or services provided to a customer? No What is the source document that confirms a transaction occurred? Tickets and Company check  What accounts within the company were affected a ffected by this transaction? Prepaid Travel Expenses and Accounts Payable Determine where the accounts were increased or decreased and by how much. Prepaid Travel Expenses, an asset account, was increased by $638 and Account Payable, a liability account, was increased by $638. Create a journal entry that includes at least one debit and one credit that equal the same amount in both columns of a journal. o Debits are always recorded first when a journal entry is recorded in the general journal. Credits are then recorded second and indented when a journal entry is o recorded in the general journal. o A short concise description can be placed on the next line if so desired. Date 11/17

Account Titles Prepaid Travel Expense Accounts Payable Purchased Plane Tickets for Conference

Dr

Cr 638

Companies often purchase assets before they use them up in the normal course of 

638

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What is the source document that confirms a transaction occurred? Signed Notes Payable and check from bank. What accounts within the company were affected by this transaction? Cash and Notes Payable Determine where the accounts were increased or decreased and by how much. Cash, an asset account, was increased by $10,000 and Notes Payable, a liability account, was increased by $10,000. Create a journal entry that includes at least one debit and one credit that equal eq ual the same amount in both columns of a journal. Debits are always recorded first when a journal entry is recorded in the o general journal. o Credits are then recorded second and indented when a journal entry is recorded in the general journal. A short concise description can be placed on the next line if so desired. o Date 12/1

Account Titles Cash Notes Payable Bank loan for exotic lumber

Dr 10,000

Cr 10,000

Most of the time if an asset such as inventory inven tory is being purchase with credit then the asset will be debited but in this case because the asset has not yet been determined because of 

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o

Date 12/15

A short concise description can be placed on the next line if so desired.

Account Titles Specialty Inventory Account Payable Purchase of tea services for resale

Dr 6,000

Cr 6,000

This asset was purchased by using credit there for not money exchanged hands ha nds at time of  the purchase. Final notes: When determining which account titles to use always look for a trial balance, a chart of accounts, hints for the question being answered or an example in the book that you are using. While most account names will have a root element the actual titles varies from one company to another. Example would be Sale Revenue where different companies could use the title Sales, Furniture Sales, or Furniture Sale Revenue. Try to avoid making up new account titles in the industry unless no other account can be found.