Concept explainers
On November 1, 2016, Patty Cosgrove established an interior decorating business, Classic Designs. During the month, Patty completed the following transactions related to the business:
Nov. 1. | Patty transferred cash from a personal bank account to an account to be used for the business in exchange for common stock, $27,750. |
1. | Paid rent for period of November 1 to end of month, $4,000. |
6. | Purchased office equipment on account, $12,880. |
8. | Purchased a truck for $32,500 paying $6,500 cash and giving a note payable for the remainder. |
10. | Purchased supplies for cash, $1,860. |
12. | Received cash for job completed, $7,500. |
Nov. 15. | Paid annual premiums on property and casualty insurance, $2,400. |
23. | Recorded jobs completed on account and sent invoices to customers, 512,440. |
24. | Received an invoice for truck expenses, to be paid in November, $1,100. |
Enter the following transactions on Page 2 of the two column journal: | |
29. | Paid utilities expense, $3,660. |
29. | Paid miscellaneous expenses, $1,700. |
30. | Received cash from customers on account, $8,000. |
30. | Paid wages of employees, $4,750. |
30. | Paid creditor a portion of the amount owed for equipment purchased on November 6, $6,220. |
30. | Paid dividends, $2,000. |
Instructions
- 1. Journalize each transaction in a two-column journal beginning on Page 1, referring to the following chart of accounts in selecting the accounts to be debited and credited. (Do not insert the account numbers in the journal at this time.) Explanations may be omitted.
11 | Cash | 31 | Common Stock |
12 | Accounts Receivable | 33 | Dividends |
13 | Supplies | 41 | Fees Earned |
14 | Prepaid Insurance | 51 | Wages Expense |
15 | Equipment | 53 | Rent Expense |
18 | Truck | 54 | Utilities Expense |
21 | Notes Payable | 55 | Truck Expense |
22 | Accounts Payable | 59 | Miscellaneous Expense |
- 2. Post the journal to a ledger of four-column accounts, inserting appropriate posting references as each item is posted. Extend the balances to the appropriate balance columns after each transaction is posted.
- 3. Prepare an unadjusted trial balance for Classic Designs as of November 30, 2016.
- 4. Determine the excess of revenues over expenses for November.
- 5. Can you think of any reason why the amount determined in (4) might not be the net income for November?
1.
Journal:
Journal is the book of original entry. Journal consists of the day today financial transactions in a chronological order. The journal has two aspects; they are debit aspect and the credit aspect.
Rules of debit and credit:
“An increase in an asset account, an increase in an expense account, a decrease in liability account, and a decrease in a revenue account should be debited.
Similarly, an increase in liability account, an increase in a revenue account and a decrease in an asset account, a decrease in an expenses account should be credited”.
T-account:
An account is referred to as a T-account, because the alignment of the components of the account resembles the capital letter ‘T’. An account consists of the three main components which are as follows:
- The title of the account
- The left or debit side
- The right or credit side
Unadjusted trial balance:
The unadjusted trial balance is the summary of all the ledger accounts that appears on the ledger accounts before making adjusting journal entries.
To journalize: The transactions in a two column journal beginning on Page 1.
Explanation of Solution
Journalize each transaction in a two column journal beginning on Page 1.
Journal Page 1 | |||||
Date | Description | Post. Ref | Debit ($) | Credit ($) | |
2016 | Cash | 11 | 27,750 | ||
November | 1 | Common stock | 31 | 27,750 | |
(To record the transfer of cash from personal bank account to business account in exchange for common stock) | |||||
1 | Rent expense | 53 | 4,000 | ||
Cash | 11 | 4,000 | |||
(To record the payment of rent for the month of June) | |||||
6 | Equipment | 16 | 12,880 | ||
Accounts payable | 22 | 12,880 | |||
(To record the purchase of equipment on account) | |||||
8 | Truck | 18 | 32,500 | ||
Cash | 11 | 6,500 | |||
Notes payable | 21 | 26,000 | |||
(To record the purchase of truck by cash and on account) | |||||
10 | Supplies | 13 | 1,860 | ||
Cash | 11 | 1,860 | |||
(To record the purchase of supplies) | |||||
12 | Cash | 11 | 7,500 | ||
Fees earned | 41 | 7,500 | |||
(To record the receipt of cash for the completed job) | |||||
15 | Prepaid insurance | 14 | 2,400 | ||
Cash | 11 | 2,400 | |||
(To record the payment made for insurance premiums) | |||||
23 | Accounts receivable | 12 | 12,440 | ||
Fees earned | 41 | 12,440 | |||
(To record the invoices sent to customers for the jobs completed) | |||||
24 | Truck expense | 55 | 1,100 | ||
Accounts payable | 22 | 1,100 | |||
(To record the receipt of invoices for van expenses) |
Table (1)
Journal Page 2 | |||||
Date | Description | Post. Ref | Debit ($) | Credit ($) | |
2016 | 29 | Utilities expense | 54 | 3,660 | |
November | Cash | 11 | 3,660 | ||
(To record the payment of utilities expense) | |||||
29 | Miscellaneous expense | 59 | 1,700 | ||
Cash | 11 | 1,700 | |||
(To record the payment of miscellaneous expense) | |||||
30 | Cash | 11 | 8,000 | ||
Accounts receivable | 12 | 8,000 | |||
(To record the receipt of cash from customers on account) | |||||
30 | Wages expense | 51 | 4,750 | ||
Cash | 11 | 4,750 | |||
(To record the payment of wages expense) | |||||
30 | Accounts payable | 22 | 6,220 | ||
Cash | 11 | 6,220 | |||
(To record the payment made to creditor on account) | |||||
30 | Dividends | 33 | 2,000 | ||
Cash | 11 | 2,000 | |||
(To record the withdrawal of cash for personal use) |
Table (2)
2.
To post: The journal to a ledger of four-column accounts with appropriate post references, and the balances after each transaction is posted.
Explanation of Solution
General Ledger
Account: Cash Account no. 11 | |||||||
Date | Item | Post. Ref |
Debit ($) |
Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
2016 | |||||||
November | 1 | 1 | 27,750 | 27,750 | |||
1 | 1 | 4,000 | 23,750 | ||||
8 | 1 | 6,500 | 17,250 | ||||
10 | 1 | 1,860 | 15,390 | ||||
12 | 1 | 7,500 | 22,890 | ||||
15 | 1 | 2,400 | 20,490 | ||||
29 | 2 | 3,660 | 16,830 | ||||
29 | 2 | 1,700 | 15,130 | ||||
30 | 2 | 8,000 | 23,130 | ||||
30 | 2 | 4,750 | 18,380 | ||||
30 | 2 | 6,220 | 12,160 | ||||
30 | 2 | 2,000 | 10,160 |
Table (3)
Account: Accounts Receivable Account no. 12 | |||||||
Date | Item | Post. Ref |
Debit ($) |
Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
2016 | |||||||
November | 23 | 1 | 12,440 | 12,440 | |||
30 | 2 | 8,000 | 4,440 |
Table (4)
Account: Supplies Account no. 13 | |||||||
Date | Item | Post. Ref |
Debit ($) |
Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
2016 | |||||||
November | 10 | 1 | 1,860 | 1,860 |
Table (5)
Account: Prepaid Insurance Account no. 14 | |||||||
Date | Item | Post. Ref |
Debit ($) |
Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
2016 | |||||||
November | 15 | 1 | 2,400 | 2,400 |
Table (6)
Account: Equipment Account no. 16 | |||||||
Date | Item | Post. Ref |
Debit ($) |
Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
2016 | |||||||
November | 6 | 1 | 12,880 | 12,880 |
Table (7)
Account: Truck Account no. 18 | |||||||
Date | Item | Post. Ref |
Debit ($) |
Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
2016 | |||||||
November | 8 | 1 | 32,500 | 32,500 |
Table (8)
Account: Notes Payable Account no. 21 | |||||||
Date | Item | Post. Ref |
Debit ($) |
Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
2016 | |||||||
November | 8 | 1 | 26,000 | 26,000 |
Table (9)
Account: Accounts Payable Account no. 22 | |||||||
Date | Item | Post. Ref |
Debit ($) |
Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
2016 | |||||||
November | 6 | 1 | 12,880 | 12,880 | |||
24 | 1 | 1,100 | 13,980 | ||||
30 | 2 | 6,220 | 7,760 |
Table (10)
Account: Common Stock Account no. 31 | |||||||
Date | Item | Post. Ref |
Debit ($) |
Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
2016 | |||||||
November | 1 | 1 | 27,750 | 27,750 |
Table (11)
Account: Dividends Account no. 33 | |||||||
Date | Item | Post. Ref |
Debit ($) |
Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
2016 | |||||||
November | 30 | 2 | 2,000 | 2,000 |
Table (12)
Account: Fees earned Account no. 41 | |||||||
Date | Item | Post. Ref |
Debit ($) |
Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
2016 | |||||||
November | 12 | 1 | 7,500 | 7,500 | |||
23 | 1 | 12,440 | 19,940 |
Table (13)
Account: Wages expense Account no. 51 | |||||||
Date | Item | Post. Ref |
Debit ($) |
Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
2016 | |||||||
November | 30 | 2 | 4,750 | 4,750 |
Table (14)
Account: Rent expense Account no. 53 | |||||||
Date | Item | Post. Ref |
Debit ($) |
Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
2016 | |||||||
November | 1 | 1 | 4,000 | 4,000 |
Table (15)
Account: Utilities expense Account no. 54 | |||||||
Date | Item | Post. Ref |
Debit ($) |
Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
2016 | |||||||
November | 29 | 2 | 3,660 | 3,660 |
Table (16)
Account: Truck expense Account no. 55 | |||||||
Date | Item | Post. Ref |
Debit ($) |
Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
2016 | |||||||
November | 24 | 1 | 1,100 | 1,100 |
Table (17)
Account: Miscellaneous expense Account no. 59 | |||||||
Date | Item | Post. Ref |
Debit ($) |
Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
2016 | |||||||
November | 29 | 2 | 1,700 | 1,700 |
Table (18)
3.
To prepare: An unadjusted trial balance of C Designs as of November 30, 2016.
Explanation of Solution
Prepare an unadjusted trial balance of C Designs as of November 30, 2016 as follows:
C Designs Unadjusted Trial Balance November 30, 2016 |
|||
Particulars | Account No. |
Debit $ | Credit $ |
Cash | 11 | 10,160 | |
Accounts receivable | 12 | 4,440 | |
Supplies | 13 | 1,860 | |
Prepaid insurance | 14 | 2,400 | |
Equipment | 16 | 12,880 | |
Truck | 18 | 32,500 | |
Notes payable | 21 | 26,000 | |
Accounts payable | 22 | 7,760 | |
Common stock | 31 | 27,750 | |
Dividends | 33 | 2,000 | |
Fees earned | 41 | 19,940 | |
Wages expense | 51 | 4,750 | |
Rent expense | 53 | 4,000 | |
Utilities expense | 54 | 3,660 | |
Truck expense | 55 | 1,100 | |
Miscellaneous expense | 59 | 1,700 | |
Total | 81,450 | 81,450 |
Table (19)
The debit column and credit column of the unadjusted trial balance are agreed, both having balance of $81,450.
4.
Explanation of Solution
The excess of revenues over expenses for the month of November is $4,730.
Working note:
Calculate the excess of revenues over expenses.
Hence, the excess of revenues over expenses for the month of November is $4,730.
5.
To discuss: The reason behind the amount determined in (4) might not be the net income for November.
Explanation of Solution
The amount determined in (4) might not be the net income for November, because adjusting entries for supplies used, insurance expired, and depreciation should be passed at the end of the accounting period in order to bring the accounts up to date.
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Chapter 2 Solutions
Financial & Managerial Accounting
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