UNIT 1 THE ACCOUNTING EQUATION

I. ASSETS LIABILITIES = OWNER'SEQUITY

ITEMS OF VALUE WHAT IS OWED NET WORTH

II.
ACCOUNT- a storagearea for financialinformation. DEBIT- left side of an account.
T ACCOUNT- a simplifiedaccount.
III. BALANCE SHEET ACCOUNTS
ASSETS are items of value.
LIABILITIES are amounts owed.
OWNER'S EQUITY is the net worth of a business.
DEFINITIONS
CREDIT- right side of an account.
CAPITAL is the Owner's Equity account for
sole proprietorships and partnerships.
COMMON STOCK is the primary account for
tracking the invested equity of a corporation.
RETAINED EARNINGS is the account used to store
income earned but not distributed by a corporation.

IV. DEBITS AND CREDITS

Please relate the definitions in Part III to the schematic below. Note the
accounting equation has been rewritten to better explain debits and credits.

ASSETS = LIABILITIES + OWNER'S EQUITY

DR. CR. DR. CR. DR. CR.
+ I
- - I
+ - I
+
The DOUBLE ENTRY system of debits and credits rewriting the accounting equation it should be noted that
facilitates the increasing and decreasing of the amounts Assets are on the opposite side of the equation from
stored in the Balance Sheet Accounts. The above Liabilities and Owner's Equity and are therefore treated
schematic summarizes part of the system. After in an opposite manner by the system.

NOTE: The following example will show only the current transaction information in each T account.
v. ANALYZINGTRANSACTIONS-
Assets = Liabilities +
SAMPLE
Owner IS Equity
PROBLEM

1. Darin Jones, a sophomore at State University, started the

Quick Clean Laundry Service with a $100 cash investment.
Cash Capital. Darin Jones
100 I I 100

2. On Sept. 1, paid $50 for 5 ncnths of ads in the school newspaper.

. ~id Advertising
50 I
Cash
I 50 Our 28 Free Internet Libraries
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3. On Sept. 1, purchased Laundry Supplies for $25 cash.
Laundzy Sqp,plies materials for students,
25 I teachers, and professional.
Cash
I 25

4. On Sept. 1, purchased $48 of Laundry Equipment paying $8 down.

LaundIy Eq!.l:i,pment Accounts Payable
48 I I 40
Cash
I 8

5. Darin made an additional investment of $50.

Cash Capital. Darin Jones
50 I I 50

6. Paid one-fourth the CllroUIltowed on the Laundry Equipment.

Cash Accounts Payable
I 10 10 I

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 VI. TEMPORARY OWNER'S EQUITY STORAGE ACCOUNTS
WITHDRAWALS is a storage account used to record periodic decreases
in Owner's Equity by sole proprietors and partners.

EXPENSES represent a decrease in Owner's Equity
caused by a decrease in Assets (usually Cash) or an
increase in Liabilities (Salaries Payable, Accounts
Payable, etc.) resulting from normal business activity.
Examples include Salaries, Advertising, and Interest.
REVENUE represents an increase in Owner's Equity
caused by an increase in Assets (usually Cash or
Accounts Receivable) resulting from normal business
activity. Examples include Sales, Interest Income, and
Rent Revenue.

VII. DEBITS AND CREDITS

Please relate the definitions in Part VI to the expanded schematic below.

ASSETS = LIABILITIES + OWNER'S EOUITY

DR. CR. DR. CR.
+ - DR. C~.
I

+
I I

WITHDRAWALS
CR.
-
Free Business Books has useful R.I EXPENSES REVENUE
materials covering many business CR.
subjects. - - +
R.I DR. ICR.

Expense, Revenue, and Withdrawals are temporary
storage accounts used to track changes in Owner's
Equity and their positive or normal balance is consistent
with the eventual change to be made in Owner's Equity.
That is, expenses and withdrawals are debits because
they will eventually lower Owner's Equity, and
Revenue is a credit because it will eventually increase
Owner's Equity. Revenue, Expense, and Withdrawals
may also be thought of as changes in Assets and/or
Liabilities which cause Owner's Equity to change. The
logic of this system will become more apparent as you
become more familiar with Part One of Quick Notes.

VIII. ANALYZING TRANSACTIONS - SAMPLE PROBLEM

Assets = Liabilities + OWner's Equity

7. Darin withdrew $20 for personal use.

cash Withdrawals. Darin Jones
20
I 20 I

8. Cash collected for Laundry services performed during the month

amounted to $140. $10 was also due for services rendered.

~ Laundrv Revenue
140 I I 150

Accounts
Receivable Excel Internet Library has learning
10 I materials classified by user type.
9. Paid $75 for the use of washers and dryers for September.
Cash Washer/Drver Exoense
75
I 75 I

10. Received $5 on account.

Cash Business Book Mall has material
5 I to enhance your career.
Accounts Receivable
I 5

11. On Sept. 26, two students paid $10 for next week's Laundry Service.
Cash Unearned Laundrv Revenue
20 I 20 I

12. Paid monthly phone bill of $10.

Cash TeleDhone Exoense
10
I 10 I

3
 UNIT 2 RECORDING TRANSACTIONS
ASSETS = LIABILITIES + OWNER'SEOUITY
DR. CR. DR. CR.
+ - DR. . - +
' I I

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WITHDRAWAT ,R . REVENUE
EXPENSES
copies of Quick Notes Accounting, Economics, + -
Statistics, and Excel Statistics Lab Manual. DR. I CR. + - - +
DR. I CR. DR. CR.
I

I. JOURNALENTRIES
In the preceding learning unit, transactions were recorded in T accounts because students find it easier to analyze trans-
actions with T accounts. This learning unit makes the transition from T accounts to Journal Entries, the first step of
the accounting process.
ANALYZING TRANSACI'IONS JOURNALIZING TRANSACTIONS
DR. CR.
Assets Liabilities + Owner IS Equity Account Debited XXX
Account Credited XXX
1. Darin Jones, a sophomore at State University, started the
Quick Clean Laundry Service with a $100 cash investment.
Cash Capital. Darin Jones Cash 100
100 I I 100 Capital,Darin Jones 100

2. On Sept. 1, paid $50 for 5 months of ads in the school newspaper.

Pr~id Advertising Prepaid Advertising 50
50 I
Cash 50
~
I 50

3. On Sept. 1, purchased Laundry Supplies for $25 cash.

Laundry S~plies Laundry Supplies 25
25 I
Cash 25
Cash
I 25
4. On Sept. 1, purchased $48 of Laundry Equipment paying $8 down.
LaundryEquipment 48
Laundry Eq\l:i.pment Accounts Payable
48 40 Cash 8
I

Cash
I

Accounts Payable 40
I 8
5. Darin made an additional investment of $50.
~ Capital. Darin Jones Cash 50
50 I
[ 50 Capital,Darin Jones 50

6. Paid one-fourth the amount owed on the Laundry Equipment.

Cash Accounts Payable Accounts Payable 10
10
I 10 I
Cash 10
7. Darin withdrew$20 for personaluse.
Cash Withdrawals.Darin Jones Withdrawals,Darin Jones 20
20
I 20 I
Cash 20
8. Cash collected for Laundry Services performed during the month
amounted to $140. $10 was also due for services rendered.

~ Laundry Revenue Cash 140

140 I I 150 Accounts Receivable 10
Laundry Revenue 150
Accounts
Receivable
10 I

9. Paid $75 for the use of washers and dryers for September.
Cash Washer/DJ:yer~e Washer/Dryer Expense 75
I 75 75 I
Cash 75
10. Received $5 on account.
Cash Cash 5
5 I
AccountsReceivable 5
Accounts Receivable
I 5

11. On Sept. 26, two students paid $10 for next week I s Laundry Service.
Cash Unearned LaundryRevenue Cash 20
20 I I 20 UnearnedLaundry
Revenue 20
12. Paid monthly phone bill of $10.
Cash Telephone~se Telephone Expense 10
10 I
10 I
Cash 10
8
 II. GENERAL LEDGER
Accounts Payable Capital. Darin Jones
(1) 100 (2) 50 (6) 10 I (4) 40 (1) 100
(5) 50 (3) 25 1 (5) 50
(8) 140 (4) 8
(10) 5 (6) 10 Unearned LaunCb:y Revenues
(11) -2Q (7) 20 I (11) 20 Business Software Library
315 (9) 75
- (12) JQ Withdrawals, has free accounting, math
Bal. 117 198 Darin Jones
(7) 201
and statistics software.
Accounts Receivable
(8) 10 I (10) 5

Pre~aid Advertising Washer Dryer Laundry

(2) 50 I ~se Revenue

LaunCb:y Sup.plies
(9) 7S1 1(8) 150
(3) 25 ! Tele~hone ~nse
(12) 10 I
LaunCb:y E~ipment
(4)8 !
III. TRIAL BALANCE
Quick Clean Laundry Service
Our Free Business Textbooks Trial Balance
September 30, 1991
Library covers many subjects.
Cash $117
Accounts Receivable 5
Prepaid Advertising 50
Software Tutorial Internet Library Laundry Supplies 2S
Laundry Equipment 48
has material to help with many Accounts Payable $ 30
Unearned Laundry Revenue 20
popular software programs. Capital, Darin Jones 150
Withdrawals, Darin Jones 20
Laundry Revenue 150
Washer/Dryer Expense 7S
Telephone Expense -ll.
$350 $350

Note: Transaction No.1 has been formally journalized and posted below.
PR stands for Post Reference. The relevant account number or General
Journal page number is placed in the PR column at the time of posting.

IV. GENERAL JOURNAL Page

DATE ACCOUNTTITLE AND EXPLANATION PR DEBIT CREDIT
I II

Sept. 1 Cash 1 100 00

Capital, Darin Jones 100 100 00

To record cash investment.

v. GENERAL LEDGER
CASH ACCOUNT
NO.1
DATE EXPLANATION PR
I DEBIT
II
CREDIT
I
BALANCE

Sept. 1 1 100 00 100 00

l");l\.RTN r(')N'R NO lO(

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Sept. 1 1 100 00 100 00

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9
 UNIT 3 CASH VERSUS ACCRUAL ACCOUNTING
I. Introduction

A. The income statement measures business activity.

B. This activity affects the financial condition of a business as pictured by the balance sheet.

C. Procedural choices exist when measuring business activity.

1. For example, there are a number of inventory methods to choose from when valuing inventory.
Each results in a different value for ending inventory, a different cost of goods sold, a different
gross profit, and a different measure of income. All for the same business activity.
2. Different possible measures of business activity lead to different possible financial pictures for
the same company.
3. Understanding these procedural choices and their effect on the financial picture of a company
are an important aspect of accounting.

II. Recognizing Revenue and Expenses

A. In accounting, recognition is when a financial activity is recorded and becomes part

of the financial statements.

B. Recognizing revenue and expenses determines their distribution to particular accounting

periods. Profit is thus being allocated among periods.
1. How do you account for goods sold for $25,000 in December 1996, which were paid for
in March 1997, if the accounting period ends on December 31, 1996? The goods were
gone when the 1996 balance sheet was made, but the money did not come in until 1997.
2. How do you account for a $7,000 computer paid for in November that will last three years?

III. Cash Basis Accounting

A. Cash basis accounting records revenue and expenses when cash enters and leaves the business.

B. Advantages of cash basis accounting

1. It is easy to do.
2. It is objective, with few choices to make. Cash either comes in or goes out, period!

C. Disadvantages of cash basis accounting

1. No attempt is made to match an expense with the revenue it generates.
This means that the income statement and balance sheet may not be good
pictures of recent business activity and present business conditions.
2. For example, the cash purchase of an expensive computer will all be
charged in the year of purchase, even though it will last a number of years.
This means that income in the year of purchase would be understated and
income would be overstated in the following years.
3. When business activity involves inventory assets, cash basis accounting is not.
allowed for income tax purposes by the Internal Revenue Service.
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IV. Accrual Basis Accounting

A. Accrual basis accounting records the financial effects of a business activity in the period the effect occurs.
1. Revenue is recognized (recorded) when earned (the goods were legally transferred or the service performed).
a. Cash may come in before revenue is earned, as with a subscription magazine.
b. Cash may come in when revenue is earned, as with the sale of a Domino's pizza.
c. Cash may come in after revenue is earned, as with the acceptance of a credit
card for the sale of a television.
d. In all cases revenue is earned when the item changes legal ownership.
2. Expenses are recognized when their benefit is received.
a. Cash may go out before the benefit, as with the payment of next year's annual property taxes in September.
b. Cash may go out when the benefit is received, as with the payment of a bridge toll.
c. Cash may go out after the benefit is received, as with the payment of this period's payroll in the next period.
d. In all cases the expense is recorded when the benefit is received.
3. Accrual accounting is based on matching an expense with the revenue it helps generate (matching principle).
4. When an accounting activity spans more than one accounting period, an adjustment is needed at the end of
the first period to assure that the revenue is recorded when earned and the expenses are recognized with their
benefit.

B. Accruals and deferrals

1. Accruals and deferrals are required to conform with the matching principle.
2. Accruals are needed when something has affected the income statement and is unrecorded.
a. Accrued revenues have been earned but not recorded. Example: Construction work has
been done but not received. It must be recorded with the amount to be received reported as
construction revenue on the income statement and accounts receivable on the balance sheet.
b. Accrued expenses have been incurred but not recorded. Example: Salaries are earned by
employees but not paid. They must be recorded with the a~ount to be paid reported as
salaries expense on the income statement and salaries payable on the balance sheet.
3. Deferrals refer to situations where cash is received or
paid and the income statement has not been affected.
a. Deferred revenue has been received in advance.
Example: Revenue from a two-year magazine subscription is received in October
and the first magazine won't be sent until next year. This deferred revenue is
reported as the liability unearned subscription revenue on the balance sheet.
b. Deferred expenses have been paid in advance. Example: Liability insurance for one
year is paid in March and coverage begins in April. This deferred expense is reported
as the asset prepaid insurance on the balance sheet.

C. The advantages and disadvantages of accrual basis accounting

1. Accrual accounting measures current income more accurately than the cash method.
a. This means that the balance sheet is a more accurate estimate of financial position (value).
b. Accurate, current information makes it easier to predict future income and financial position.
2. Accrual accounting is difficult to understand.
a. Confusion exists because net income does not equal the period's change in cash.
b. The cash balance of a company with high income may even decrease during the year.
c. For example, a rapidly growing, profitable retailer may face a shortage of cash for
many reasons.
1) Rapid growth often requires large inventories. New retailers often find
that suppliers will not grant credit. This combination increases cash outflows.
2) Gaining market share may require a retailer to grant easy credit terms.
This decreases cash inflows.
3) As a result, a very successful business may not have adequate cash.

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 UNIT 4 ADJUSTMENTS, WORKSHEET, AND STATEMENTS

Adjusting Entries are needed because it is uneconomical to make changes daily to some accounts, and for others,
vital information is not known until the end of the account period. When analyzing these September 30
Adjusting Entries, consider the relevant account balances listed in the Trial Balance, the change described in the
transaction descriptions, and the relevant Journal Entries on page 8.

I. DEBITS AND CREDITS II. TRIAL BALANCE

Quick Clean Laundry Se:z:vice

Trial Balance
~ LIABILITIES + OWNER'S EOUITY September 30, 1991
DR. CR.. DR. CR..
~R.I CR.. - I + - I
+ Cash $117
Accounts Receivable 5
Prepaid Advertising 50
WITHDRAWAlS EXPENSES REVENUE Laundry Supplies 25
DR. CR.. Laundry Equipment 48
~R'I~' ~R'I CR.. - I + Accounts Payable $ 30
Unearned Laundry Revenue 20
Capital, Darin Jones 150
Business Book Mall has material Withdrawals, Darin Jones 20
Laundry Revenue 150
to enhance your career. Washer7DI:yer Expense 75
Telephone Expense
$350 $350

III. ADJUSTING JOURNAL ENTRIES

Sample Problem Adjustments - Wednesday, September 30, 1991
ANALYZING TRANSACTIONS JOURNALIZING TRANSACTIONS
Assets Liabilities + Owner IS Equity

a. One month of scheduled advertising appeared

in the school newspaper. See transaction 2 page 8. DR. CR..

Prepaid Advertising Advertising Expense a. Advertising Expense 10

I 10 10 I Prepaid Advertising 10
To record advertising
b. A count of Laundry SUpplies revealed $5 worth on hand. expired.
Laundry Sqpplies Laun~ b. Laundry Supply Expense 20
I 20 20 ~ly Expense Laundry Supplies 20
To record Laundry Supplies
used.
c. Depreciation was taken on $48 of equipment with a useful
life of 4 years.
AcCt.U1lUlated Depreciation, Depreciation Expense, c. Depreciation Expense,
Laundty ~ipment Laundry Eq\l:i,pment Laundry Equipment 1
I 1 1 I Accumulated Depreciation,
Laundry Equipment 1
Note: Depreciation is accumulated and subtracted September's Depreciation
from the relevant asset on the Balance Sheet. recorded.

d. On Friday, October 2nd, Darin would pay his first enployee,

who worked Monday, Wednesday and Friday, $15 for the week.
Salaries Payable Salaries Expense d. SalariesExpense 10
I 10 10 I Salaries Payable 10
To record salaries earned
e. Laundry Se:z:vices for one of the two students who had paid but not paid.
in advance had been performed as of 9/30/91.
Unearned Laundry Revenue Laundty Revenue e. Unearned Laundry Revenue 10
10 I I 10 Laundry Revenue 10
To record Laundry Fees
earned.
f. On Tuesday, September 29, services had been finished
for 3 studentswho promised to pay $10 each on 10/5.
Accounts Receivable f. Accounts Receivable 30
30 I 30
Laun&:y Revenue Laundry Revenue 30
To record Laundry Fees
earned.
18
 IV. WORKSHEET

A worksheet begins with a Trial Balance. Adjustments based upon data accumulated during the period are made.
Horizontal extensions, with like balances being added and unlike balances being subtracted, result in an Adjusted
Trial Balance. Each account is then extended to the proper (similar) column of the Income Statement or Balance
Sheet. Income is then added to both the Income Statement and Balance Sheet to prove the Worksheet.
r 1
I Adjusted Income Balance'
I Trip.l Balance Adjustments Trial Balance Statement Sheet I
ICash 117 117 117 I
IAccounts Receivable 5 (f) 30 35 35 I
Prepaid Advertising 50 (a) 10 40 40 I
1
Launfuy SttPplies 2..5. M..2..Q 5 5 I
I Laundry Equipment 48 48 48 I
IAccounts Payable 30 30 30 I
1Unearned Laundry Revenue 20 (e) 10 10 10 I
Capital. Darin Jones J.5.Q. 150 .liLl
- Darin Jones
I
IWithdrawals 20 20 20 1

Laundry Revenue 150 (e) 10 190 190 1

1
I (f) 30 I
1Washer/Dryer Expense 75 75 75 I
lQ .lQ 12 I
[TelePhone ~e 350 350 I
IAdvertising Expense (a) 10 10 10 I
Laundry Supplies Expense (b) 20 20 20 I
I
Depreciation Expense, I
I
I LaundJ:y Equ:i,pment i.cl 1 .....l .1 II
IAccumulated Depreciation, I
I Laundry Equipment (c) 1 1 1 ,

Salaries Expense (d) 10 10 10 I

I
ISalaries Payable - .Ml l.Q. JQ -- JQ I
I Bl__Rl 391 391 126 190 265 201 I
--H - --H 1
I 190 190... 265 26.5 II
l

Note: Income represents the net changes in assets and liabilities occurring during the period. Because Revenue
(asset increases) were greater than expenses (asset decreases or liability increases), the debit column of the Balance
Sheet is higher than the credit column by an amount equal to net income. This occurred because equity changes
have been temporarily stored in Income Statement accounts. The Closing Process, explained in the next unit, will
formally increase Owner's Equity by the proper amount. .

V. ACCOUNTING STATEMENTS
r 1
I Quick Clean Laundry Service I
1 Balance Sheet I
I I r j September 30, 1991 I
I Note: SectionV hasbeen I I Quick Clean Laundry Service I I
'arranged to show how Balance 1 I Adjusted Trial Balance I ASSETS I
'Sheet accounts come from the I , September 30, 1991 , Current Assets: I
Itop of the Trial Balance, and I Cash $117 1
1
I IncomeStatementaccounts 1 I Cash $117 Accounts Receivable 35 1

Icome from the bottomof the I IAccounts Receivable 35 I

PrepaidAdvertising 40 I

I
Trial Balance. I
I
I Prepaid Advertising 40 I Laundry Supplies 5 I

ILaundry Supplies 5 , Plant and Equipment: I

Laundry Equipment 48 , Laundry Equipment $48 I

r AccurmJlated Depreciation, , Less AccurmJlated -1. ,

I j Laundry Equipment $ 11 Depreciation ---fl I

1 Quick Clean LaundryService IAccounts Payable 301 Total Assets $244 1

Income Statement ISalaries Payable 10 -I

[
I

For the Month Ended Sept. 30, 1991 Unearned Laundry Revenue 10 LIABILITIES 1
1
Capital, Darin Jones 1501 CUrrent Liabilities: I
1
I
Revenue: IWithdrawals, Darin Jones 20 Accounts Payable $ 30 I

I Laundry Revenue $190 ILaundry Revenue 190 I Salaries Payable 10 I

I Advertising Expense 10 Unearned Laundry Revenue ~,

I
I Operating Expenses: Salaries Expense 10 I Total CUrrent Liabilities $ 50 ,
Advertising $10 I Washer/Dryer Expense 75 I

Salaries 10 ITelephone Expense 10 OWNER I S EQUITY I

I
Washer/Dryer 75 ILaundry Supply Expense 20 I

Telephone 10 Depreciation Expense, Capital Sept. 1 $150 I

I Laundry Supplies 20 I
Laundry Equipment ~ J Net Income $64 I
I Depreciation, I Withdrawals -2.Q...M I
Laundry Equipment --1. $391 $3911 Capital Sept. 30 ~I
~I
I

Total Operating Expenses Total Liabilities+ I

I
Net Income $ 64 ! Owner I s Equity $244 1

Note: Now that the concept of normal balances has been fIrmly established; that is assets and expenses have debit
balances and revenues, liabilities, equity, and contra assets (accumulated depreciation) have credit balances, it will
no longer be necessary to restrict statement presentations to two columns with debit balances always to the left of
credit balances. The above statements have been so constructed.
19
 UNIT 5 COMPLETING THE ACCOUNTING CYCLE
Free Quick Notes books
Free Business Textbooks
provide help for accounting,
Library covers many subjects. I. ACCOUNTING STATEMENTS economics, statistics, and
basic mathematics.
Quick Clean Laundry Service
Balance Sheet
September 30, 1991 Now that Financial Statements have been made, amounts
temporarily stored in expense, revenue, and the withdrawals
ASSETS accounts may be moved to the equity account. A new account
Current Assets: entitled Income Summary will be used to calculate income
Cash $117 which will then be moved to Owner's Equity.
Accounts Receivable 35
Prepaid Advertising 40
Laundry Supplies 5
Plant and Equipment:
Laundry Equipment $48
Less Accumulated ---1.
Depreciation -fl
Total Assets $244 Quick Clean Laundry Service
Income Statement
LIABILITIES For the Month Ended Sept. 30, 1991
Current Liabilities:
Accounts Payable $ 30 Revenue:
Salaries Payable 10 Laundry Revenue $190
Unearned Laundry Revenue ---1..Q.
Total Current Liabilities $ 50 Operating Expenses:
Washer/Dryer Expense $75
OWNER'S EQUITY Telephone Expense 10
Advertising Expense 10
Capital Sept.1 $150 Laundry Supply Expense 20
Income $64 Depreciation Expense 1
Withdrawals -2.Q. ~ SalariesExpense 1.Q.
Capital Sept. 30 ~ Total Operating Expenses ~
Total Liabilities + Net Income $ 64
Owner's Equity $244

II. CLOSING PROCESS LOGIC III. CLOSING JOURNAL ENTRIES

DR. CR.
Step 1 Reduce Expenses to zero Sept. 30 Income Summary 126
Step 2 Reduce Revenues to zero Washer/Dryer Expense 75
Step 3 Reduce Income Summary to zero Telephone Expense 10
Step 4 Reduce Withdrawals to zero Advertising Expense 10
Laundry Supply Expense 20
Owner 1 s Equity Depreciation Expense 1
(4) 20 Bal. 150 Salaries Expense 10
I
(3) 64
Sept. 30 Laundry Revenue 190
Income Summary 190
Withdrawals
Income Summary Sept. 30 Income Summary 64
Bal. 20 I (4) 20
Capital, Darin Jones 64
(1)126
(3) 64
I (2) 190

~es Revenue Sept. 30 Capital,Darin Jones 20

20
Bal. 126 I (1) 126 (2)190 IBal. 190 Withdrawals, Darin Jones

IV. POST-CLOSING TRIAL BALANCE

Quick Clean Laundry Service
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Post-Closing Trial Balance have academic and career
September30, 1991
materials for students,
Cash $117 teachers, and professional.
Accounts Receivable 35
Prepaid Advertising 40
Laundry Supplies 5 Note: The closing of all ex-
Laundry Equipment 48 pense and revenue accounts
Accumulated Depreciation, results in a Post-Closing
Laundry Equipment $ 1 Trial Balance consisting of
Accounts Payable 30 only Balance Sheet accounts.
Salaries Payable 10
Unearned Laundry Revenue 10
Capital, Darin Jones ~ Business Software Library
$245 $245
has free accounting, math
24
and statistics software.
 v. REVERSmG ENTRIES
Adjusting entries sometimes require a unique nonroutine entry early in the next cycle to complete a particular
transaction. The September 30th payroll adjustment of $10 to Salaries Expense and Salaries Payable associated
with the $15 weekly payroll is an example. A unique entry must be made on the October 2nd payday to complete
the payroll. Reversing the September 30 adjustment on October 1 will allow the regular payroll entry on October 2
to complete the payroll. Regardless of the alternative chosen, $10 is charged to Salaries Expense in September,
$5 in October, and the salary liability has been brought to zero.
Paying Salaries- No Reversing
Entry Paying SalarJ.es - ReversingEntry
DR. CR.
DR. CR.
Sept. 30 SalariesExpense 10 Sept. 30 Salaries Expense 10
Salaries Payable 10 Salaries Payable 10
Oct. 2 SalariesExpense 5 Oct. 1 Salaries Payable 10
SalariesPayable 10 Salaries Expense 10
Cash 15 Oct. 2 Salaries Expense 15
Cash 15

VI. CORRECTING ENTRIES

Erasing is never allowed. A line may be drawn through journal entry errors discovered before
posting. After posting, errors must be corrected with journal entries. If a $5 purchase of Laundry
Supplies had been posted to Laundry Equipment, the following Correcting Entry would be necessary:
DR. CR.
Oct. 5 Laundry Supplies 5
Laundry Equipment 5

VII. THE THIRTEEN ACCOUNTING STEPS

1. Journal Entries 4. Adjusting Entries 9. Closing Entries 12. Reversing
2. Post to Ledger 5. Post to Ledger 7. Income Statement 10. Post to Ledger Entries
3. Trial Balance 6. Adjusted Trial 8. Balance Sheet 11. Post-Closing Trial 13. Correcting
Balance Balance Entries

VIII. OWNER I S EQUITY VS. STOCKHOLDERS I EQUITY

Sole proprietorships and partnerships account for Owner's Equity in essentially the same manner, only the number
of capital and withdrawal accounts differ. Corporations, on the other hand, replace the capital account with contributed
capital (stock) accounts, use dividends to distribute equity to owners, and accumulated undistributed profits in the
Retained Earnings account. September's equity transactions for Quick Clean contrasting a sole proprietorship with
a corporation appear below. Also contrasted are the equity sections of the Balance Sheet.
STARTING A BUSINESS
DR. CR. DR. CR.
Cash 150 Cash 150
150 Comnon Stock 150
Capital,Darin Jones
Issued 150 shares of
$1 par Common Stock.
RECORDING EARNINGS

Income SUI!UTlary 64 Income SUI!UTlary 64

64 Retained Earnings 64
Capital, Darin Jones
DISTlUBUTING EARNINGS

Withdrawals,Darin Jones 20 Retained Earnings 20

Cash 20 Dividend Payable 20
Declared a 13 1/3<::per
20 share stock dividend.
Capital,Darin Jones 20
Withdrawals,Darin Jones 20 Dividend Payable
Cash 20

EQUITY SECTION OF BALANCE SHEET

OWner's Equity Stockholders

I Equity

Darin Jones, Capital,September1, 1992 $150 Comnon Stock, $1 par 150 shares
Net Income $ 64 authorized and outstanding $150
Withdrawals 2Q. --M Retained Earnings -H
Total Stockholders' Equity S194
Capital,September30 S194

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 UNIT 6 MERCHANDISING
A merchandising company is a Retailer. Retailers buy
merchandise from manufacturers and/or wholesalers,
mark the merchandise up enough to cover operating
expenses and make a profit. Merchandise bought for
re-sale is charged to Purchases. Cost of merchandise
sold is calculated by subtracting Ending Inventory from
Beginning Inventory plus Net Purchases (including
transportation costs). Sales Discounts and Purchase
Discounts are given to those who pay early. An
example of discount terms would be 2/10,n30 which
means 2% is taken off if paid within 10 days, otherwise
pay within 30 days. Unsatisfactory goods are accounted
for by charging Sales Returns and Allowance or
Purchase Returns and Allowance.

I. LOGIC OF MERCHANDISING DEBITS AND CREDITS

Debits Credits Note: Sales and Purchases
are opposites and therefore
< > have opposite nonnal balances.
I Purchases Sales I
Their return and discount
I
accounts also have opposite
Sales Returns < > Purchase Returns balances.
Sales Discounts Purchase Discounts

DARIN'S MUSIC EMPORIUM

Darin Jones graduated in December of 1994, and after a brief vacation, took the accumulation from his Laundry business
and invested $10,000 in Darin's Music Emporium, a retailer of computerized musical instruments. Sample Journal
Entries and 1995 statements along with Closing Entries appear below. Please read transaction descriptions first.
II. JOURNAL ENTRIES
Jan. 3 Purchases 4000 Note: Related
Accounts Payable 4000 transactions have
READ FIRST--> Merchandisepurchased for $4,000 on credit been boxed.
from L. Co. invoice dated 1/1, terms 2/10,n30.
Jan. 7 Accounts Payable 500
Purchase Returns and Allowances 500
Returned $500 of merchandise purchased 1/1. Free Business Textbooks
Jan. 11 Accounts Payable 3500 Library covers many subjects.
Purchase Discount 70
Cash 3430
Paid L. Co. for purchase of 1/1 less return
and discount. Business Software Library
Jan. 12 Cash 2000
has free accounting, math
Sales 2000 and statistics software.
Recorded Cash Sales of $2,000.
Jan. 14 Accounts Receivable 5000
Sales 5000 28 Free Internet Libraries
Recorded credit sale of $5,000 to M. Co.
terms 2/10,n30. have academic and career
Jan. 18 Sales Returns and Allowances 100
materials for students,
Accounts Receivable 100 teachers, and professional.
M. Co. returned $100 of merchandise purchased 1/14.
Jan. 24 Cash 4802
Sales Discount 98
Accounts Receivable 4900
Receivedpayment from M. Co. less return, Note: The net method of
less discount. recording purchases
assumes the Purchase
Feb. 2 Purchases 3960 Discount will be taken.
Accounts Payable 3960 If it is not taken, a
Merchandise purchased fromZ Co. with a value Purchase Discount Lost
of $4,000, terms 1/10,n30 Net Method.- is recorded. Purchase
Discounts Lost are not
Feb. 28 Accounts Payable 3960 considered an operating
Purchase Discount Lost 40 expense and are reported
Cash 4000 after operating income
Paid Z Co. for purchase of 2/2 plus discount lost. in an Income Statement
section entitled Other
Feb. 28 Transportation-In 50 Revenue and Expenses.
Cash 50
Paid Transportation charges of $50 for
merchandise purchased 2/2.
30
 III. LOGIC OF INCOME STATEMENT

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IV. INCOME STATEMENT v. BALANCE SHEET'

Darin's Music Emporium
Darin I s Music Etrporium Balance Sheet
Income Statement December 31, 1995
For the Year Ended December 31, 1995
ASSETS
Sales Revenue: CUrrent Assets:
,/
Gross Sales $98,000 Cash $4,000
Sales Retuxns and Allowances $1,000 Accounts Receivable 1,000
Sales Discounts 2...QQQ .hQ.Q.Q Office Supplies 250
Net Sales $95,000 Merchandise Inventory 21,000
Prepaid Rent
Cost of Goods Sold: Total CUrrent Assets $26,600
Merchandise Inventory,
January 1, 1995 $10,000 Plant and Equipment:
Purchases $38,000 Store Equipment $ 6,000
PurchaseRetuxns Less Accumulated Depreciation ---2.QQ $5,400
and Allowances $1,000 Office Equipment $ 5,000
PurchaseDiscounts~ ...J QQQ. Less Accumulated Depreciation L..QQQ 9.400
Net Purchases $35,000 Total Assets $36.000
Plus Transportation-In ~
Costof GoodsPurchased ~
Goods Availablefor Sale $46,000 LIABILITIES
Merchandise Inventory,
December 31, 1995 CUrrent Liabilities:
Cost of Goods Sold 2L..QQQ 2.5...Q.QQ Accounts Payable S22.000
Gross Profit $70,000 Total Liabilities $22,000
Operating Expenses:
Selling Expenses $22,500 OWNER'S EQUITY
General and Administrative
Expenses 'Z~ Darin Jones Capital,January 1, 1995 $10,000
Total Operating Expenses 3JL..Q.Q.Q Net Income $40,000
Income from Operations $40.000 Withdrawals I

Increase in Capital --L.Q.QQ

Note: Being a Sole Proprietorship, no federal Darin Jones Capital,December 31, 1995 14.000
income tax is owed by the business. Darin will Total Liabilities and Owner's Equity $36.000
file an individual return.

VI. CLOSING ENTRIES

DR. CR. DR. CR.

Dec. 31 Income Summary 82,000 Dec. 31 Ending Inventory 21,000
Beginning Inventory 10,000 Sales 98,000
Sales Retuxns and PurchaseRetuxns and
Allowances 1,000 Allowances 1,000
Sales Discounts 2,000 PurchaseDiscounts 2,000
Purchases 38,000 Income Surrmary 122,000
Transportation-In 1,000 Dec. 31 Income Surrmary 40,000
Selling Expenses 22,500 Capital, Darin Jones 40,000
General and Administrative 7,500 Dec. 31 Capital, Darin Jones 36,000
Expenses Withdrawals, Darin Jones 36,000

Note: When the list price of an item Note: An al ternative method to closing
does not represent its true price and Beginning Inventory with a $10,000 credit
a discount is stated, said discount, and creating the Ending Inventory with a
called a trade discount, is used to $21,000 debit would be to adjust inventory
lower the historical cost of the item. with an $11,000 debit. Either adjusts for
all purchases being treated as an expense.

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31
 UNIT 7 ACCOUNTING SYSTEMS
Accounting Systems are designed to eliminate much of work to be accomplished as receipts are processed and
the duplication involved in a manual accounting system. checks written. Special journals are important because
Using carbonized receipts, special journals as shown they provide the basis for computerized accounting
here, and ledger cards allow for much of the accounting systems.

Special Journal:
Free Business Textbooks Purchases Journal is used for Credit Purchases
Library covers many subjects. Sales Journal is for Credit Sales
Cash Payments Journal is used when Cash is Credited
Cash Receipts Journal is used when Cash is Debited

Note: The following transactions were originally recorded in the General Journal Note: Only credit
on page 30. In this section, when possible, they have been recorded in special purchases are
journals. The abbreviation of the journal used follows each transaction. allowed in the
Purchase Journal.
1/3 Purchased merchandise for $4,000 on credit from L. Company,
invoice dated 1/1, terms 2/10,n30. PJ
1/7 Return $500 of defective merchandise purchased 1/1 from PURCHASES JOURNAL Page 1
L. Company. GJ
1/11 Paid L. Company for purchases of 1/1 less return POST
and discount. CPJ DA'IE ACCOUNT 'IERMS REF. AMOUNT
1/12 Recorded Cash Sales of $2,000. CRJ
1/14 Sold $5,000 of merchandise to M. company termS 1/3 L. Company 2/10,n30 ,/ 4,000
2/10,n30. SJ 2/2 Z. Company 1/10,n30 ./

1/18 M. Company returned $100 of merchandise purchased 7,960

1/14. GJ (51) (31)
1/24 M. Company paid for sale of 1/14 less return and
discount. CRJ

CASH PA"2MENTS JOURNAL Page 1

I'RRTl TS DEBITS

I DATE I EXPLANATIOO
1/11 Paid L. Co.
II 1 3,430
PURCHASE
CASH DISCOUNTS REF.

70
POST

./
ACCOUNTS
PAYABLE

3,500
PURCHASES
TRAVEL
EXPENSE
OTHER
DEBITS

Purchase
REF.
POST I
AMOUNT

2/28 Paid Z. Co. 2 4,000 ./ 3,960 Discount

I Lost 70 40
2/28 Paid Trans. - In 3 50 Trans. In 55 50
3/5 Paid Travel 4 --ZQQ 2QQ. I

7,680 70 7,460 200 90

I
(1) (53) I
(31) (68) I

Note: When posting, place the number of the ledger account below the amount posted. A check (./)
should be placed in the Post Reference Column to indicate posting to a Subsidiary Ledger.

GENERAL LEDGER

CASH (1) ACCOUNTS RECEIVABLE (3) PURCHASES f.5.1l

11,000 I 10,900
Bal. 15,122 --1.Q.Q.
22.802 I 7.680 7,960 I

PURCHASE RETURNS (52)

I 500

ACCOUNTS RECEIVABLE
SUBSIDIARY LEDGER
PURCHASE
PIi~ {531
M CO!!1PaIl¥ A CO!!1Pany
6.000 I 6.000

5,000 It~gg I

TRANS~iArCN-TN (0<1
TRAVEL EXPENSES (68)

Free Quick Notes Books provide help for accounting, 200 I

economics, statistics, and basic mathematics. PURCHASE DISCOUNT LOST (70)

40 I
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 2/2 Purchase $4,000of merchandisefrom Z. Company,terms 1/10,n30 Net Method - used.PJ
2/28 Paid Z. Company for purchase of 2/2 plus purchase discount lost. CPJ
2/28 Paid transportation charges of $50 for merchandise purchased 10/2. CPJ
Addi tiona.1 Transactions

3/1 Signed a $10,000 Note Payable with First Bank Corporation, cash deposited today. CRJ
3/2 Sold $6,000 of merchandise to A. Company terms 2/10,n30. SJ
3/5 Paid Travel Expense of $200. CPJ
3/30 A. Company paid today. CRJ
Note: The General Journal is used for

I
Note: Only Credit Sales are entries that do not easily fit into a
allowed in the Sales Journal. special journal. Also included are
Adjusting, Closing, Reversing, and
Correcting Entries.

SALES JOURNAL Page1 GENERAL JOURNAL Page1

INVOICE POST DATE EXPLANATION PR DR CR
DATE ACCOUNT NUMBER REF. AMOUNT

1/14 M. Conpany 1 J' 5,000 1/7 Accounts Payable - L. Co. 31 500

3/2 A. Company 2 J' Purchase Returns 52 500
11,000
(3) (41) 1/18 Sales Returns 42 100
Accounts Receivable - 3 100
M. Co.

CASH RECEIPTS JOURNAL Page 1

1/12
1/24
I EXPLANATION

Weekly Sales
M. Company
I CASH

2,000
4,802
DEBT'i'
SALES
DISCOUNTS

98
POST
REF.

J'
ACCOUNTS
RECEIVABLE

4,900
CASH
('R1<TIIT

SALES

2,000
OTHER I POST
CREDITS REF.
I AMOUNT

3/1 Signed Note 10,000 Notes 32 10,000

3/30 A. Company J' I
I ....hQ.QQ Payable
22,802 98 10,900 2,000 10,000
I
(1) (43) i
(3) (40) I I (32)
i

CASH SALES (40)

I 2,000 Darin I s Music Emporium

Trial Balance
ACCOUNTS PAYABLE (31) CREDIT SALES (41) March 31, 1996
7,460 I 7,960
~
~ 11,000
Cash $ 15,122
Bal. -0- I

Purchases 7,960
Purchase Returns $ 500
NOTES PAYABLE (32) SALES RETURNS Purchase Discounts 70
AND ALLOWANCES (42) Transportation-In 50
TravelExpense 200
I 10,000 Purchase Discount Lost 40
100 I
10,000
Notes Payable
Cash Sales 2,000
f.Ul Credit Sales 11,000
Sales Returns and
ACCOCINTSPAYABLE Allowances 100
SUBSIDIARY LEDGER =~ir Sales Discounts
~5JQ
~
~570
L. CO\1:Pany Z. Corqpany

~
4.000
I 4,000 3.960 I 3.960

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Library covers many subjects.

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Business Software Library has free accounting, Software Tutorial Internet Library has free material
mathematics and statistics software. to help with many popular software programs.
 Free Quick Notes Books provide help for accounting, economics, statistics, and basic mathematics.

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has learning materials
classified by user type.

Free Business Textbooks Library covers many subjects.

Our 28 Free Internet Libraries

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