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Financial and Managerial Accounting

1) NetSolutions incurred various expenses during the month including wages of $2,125, rent of $800, utilities of $450, and miscellaneous expenses of $275 which reduced assets and stockholders' equity. 2) NetSolutions paid $950 to creditors which reduced cash and the accounts payable liability. 3) An inventory count determined $550 of supplies remained at month end, so $800 must have been used as an operating expense.

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71 views1 page

Financial and Managerial Accounting

1) NetSolutions incurred various expenses during the month including wages of $2,125, rent of $800, utilities of $450, and miscellaneous expenses of $275 which reduced assets and stockholders' equity. 2) NetSolutions paid $950 to creditors which reduced cash and the accounts payable liability. 3) An inventory count determined $550 of supplies remained at month end, so $800 must have been used as an operating expense.

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12

Chapter 1 Introduction to Accounting and Business

In such cases, the firm has an account receivable, which is a claim against the
customer. An account receivable is an asset, and the revenue is earned and recorded
as if cash had been received. When customers pay their accounts, Cash increases and
Accounts Receivable decreases.
Nov. 30, 2013 NetSolutions paid the following expenses during the month: wages,
Transaction E
$2,125; rent, $800; utilities, $450; and miscellaneous, $275.
During the month, NetSolutions spent cash or used up other assets in earning revenue.
Assets used in this process of earning revenue are called expenses. Expenses include
supplies used and payments for employee wages, utilities, and other services.
NetSolutions paid the following expenses during the month: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous, $275. Miscellaneous expenses include small amounts
paid for such items as postage, coffee, and newspapers. The effect of expenses is the
opposite of revenues in that expenses reduce assets and stockholders’ equity. Like fees
earned, the expenses are recorded in columns to the right of Capital Stock. However, since
expenses reduce stockholders’ equity, the expenses are entered as negative amounts.
The effect of this transaction is shown below.

Assets 5 Liabilities 1 Stockholders’ Equity


Accounts Capital Fees Wages Rent Utilities Misc.
Cash + Supplies + Land = Payable + Stock + Earned – Exp. – Exp. – Exp. – Exp.
Bal. 12,500 1,350 20,000 1,350 25,000 7,500
e. –3,650 –2,125 –800 –450 –275
Bal. 8,850 1,350 20,000 1,350 25,000 7,500 –2,125 –800 –450 –275

Businesses usually record each revenue and expense transaction as it occurs.


However, to simplify, NetSolutions’ revenues and expenses are summarized for the
month in transactions (d) and (e).

Transaction F Nov. 30, 2013  NetSolutions paid creditors on account, $950.

When you pay your monthly credit card bill, you decrease the cash and decrease
the amount you owe to the credit card company. Likewise, when NetSolutions pays
$950 to creditors during the month, it reduces assets and liabilities, as shown below.

Assets 5 Liabilities 1 Stockholders’ Equity


Accounts Capital Fees Wages Rent Utilities Misc.
Cash + Supplies + Land Payable + Stock + Earned – Exp. – Exp. – Exp. – Exp.
=
Bal. 8,850 1,350 20,000 1,350 25,000 7,500 –2,125 –800 –450 –275
f. –950 −950
Bal. 7,900 1,350 20,000 400 25,000 7,500 –2,125 –800 –450 –275

Paying an amount on account is different from paying an expense. The paying


of an expense reduces stockholders’ equity, as illustrated in transaction (e). Paying
an amount on account reduces the amount owed on a liability.
Transaction G Nov. 30, 2013 Chris Clark determined that the cost of supplies on hand at the end
of the month was $550.
The cost of the supplies on hand (not yet used) at the end of the month is $550.
Thus, $800 ($1,350 – $550) of supplies must have been used during the month. This
decrease in supplies is recorded as an expense, as shown below.

Assets 5 Liabilities 1 Stockholders’ Equity


Accounts Capital Fees Wages Rent Supplies Utilities Misc.
Cash + Supplies + Land Payable + Stock + Earned – Exp. – Exp. – Exp. – Exp. – Exp.
=
Bal. 7,900 1,350 20,000 400 25,000 7,500 –2,125 –800   –450 –275
g. –800 –800
Bal. 7,900 550 20,000 400 25,000 7,500 –2,125 –800 –800 –450 –275

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