1.

Income Statement

• What it is: An income statement (or profit and loss statement) summarizes a company’s revenues
and expenses during a specific period, typically a month, quarter, or year. It provides a clear picture
of how much money a company earned and spent, ultimately showing whether the business is
profitable.
• Why we use it: Investors and management use the income statement to evaluate the company’s
performance, profitability, and potential for future growth. It helps in making informed decisions
regarding investments, budgeting, and operations.
• Example: Imagine you own a bakery. For the month of October, your bakery made Rs. 50,000 in
sales from various baked goods. Your expenses include:
o Rent: Rs. 10,000
o Ingredients: Rs. 15,000
o Salaries: Rs. 12,000
o Utilities: Rs. 3,000
o Total Expenses: Rs. 40,000
o Net Profit: Rs. 50,000 (Revenues) - Rs. 40,000 (Expenses) = Rs. 10,000

2. Balance Sheet

• What it is: A balance sheet provides a snapshot of a company's financial position at a specific point
in time. It lists the company’s assets, liabilities, and equity, reflecting the accounting equation:
Assets = Liabilities + Owner’s Equity.
• Why we use it: It helps stakeholders assess the financial health of the business. Investors and
creditors use it to understand what the company owns and owes, helping them make informed
decisions regarding lending and investment.
• Example: If your bakery has:
o Assets:
▪ Cash: Rs. 20,000
▪ Equipment: Rs. 30,000
▪ Inventory: Rs. 10,000
▪ Total Assets: Rs. 60,000
o Liabilities:
▪ Loan: Rs. 15,000
▪ Accounts Payable: Rs. 5,000
▪ Total Liabilities: Rs. 20,000
o Equity: Rs. 60,000 (Assets) - Rs. 20,000 (Liabilities) = Rs. 40,000

3. Cash Flow Statement

• What it is: A cash flow statement outlines the inflows and outflows of cash in a business over a
specific period. It categorizes cash flows into three sections: operating, investing, and financing
activities.
• Why we use it: This statement helps assess the liquidity of the business, indicating whether it has
enough cash to cover its short-term obligations and fund its operations.
• Example: For your bakery in October:
o Cash Inflows (Receipts from Sales): Rs. 50,000
o Cash Outflows:
▪ Rent: Rs. 10,000
▪ Inventory Purchases: Rs. 15,000
▪ Salaries: Rs. 12,000
▪ Utilities: Rs. 3,000
o Net Cash Flow: Rs. 50,000 - Rs. 40,000 = Rs. 10,000 cash left at the end of the month.

4. Financial Accounting
 • What it is: Financial accounting is the branch of accounting focused on reporting an organization’s
financial performance and position through the preparation of financial statements. These statements
are prepared according to standardized guidelines (such as GAAP or IFRS).
• Why we use it: It provides transparency to external stakeholders (investors, creditors, regulators)
regarding the company’s financial health, enabling them to make informed decisions.
• Example: At the end of the financial year, your bakery prepares financial statements including the
income statement, balance sheet, and cash flow statement, which are then audited and made available
to potential investors and banks seeking to provide funding.

5. Nature of Transaction

• What it is: The nature of a transaction describes the type of financial activity being recorded. This
can include sales (income), expenses, asset purchases, or liabilities incurred.
• Why we use it: Understanding the nature of transactions helps in proper classification and recording
in the accounting system, ensuring accurate financial reporting.
• Example: If you buy Rs. 10,000 worth of ingredients on credit, this is an increase in assets
(inventory) and a liability (accounts payable). It is crucial to recognize both aspects to keep the
accounting equation balanced.

6. Capital

• What it is: Capital represents the financial resources or funds that owners invest in the business to
start and operate it. This can include cash, property, or equipment.
• Why we use it: Capital is essential for funding operations, investing in assets, and covering initial
expenses. It serves as the foundation for business growth.
• Example: You start your bakery with Rs. 100,000 of your savings. This Rs. 100,000 is recorded as
capital in the equity section of the balance sheet, representing your ownership stake in the business.

7. Sales

• What it is: Sales refer to the revenue generated from selling goods or services. It is the primary
source of income for most businesses.
• Why we use it: Tracking sales is crucial for measuring business performance, setting financial goals,
and forecasting future revenues.
• Example: If you sell 200 cakes at Rs. 500 each in a month, your total sales revenue for that month
would be:
o Sales Revenue = 200 cakes x Rs. 500 = Rs. 100,000.

8. Expenses

• What it is: Expenses are the costs incurred in the process of running a business. This includes
operating costs such as rent, utilities, salaries, and raw materials.
• Why we use it: Tracking expenses is vital for understanding the cost structure of the business and
ensuring profitability.
• Example: If your bakery has the following monthly expenses:
o Rent: Rs. 15,000
o Utilities: Rs. 3,000
o Salaries: Rs. 25,000
o Total Expenses: Rs. 15,000 + Rs. 3,000 + Rs. 25,000 = Rs. 43,000.

9. Profit

• What it is: Profit is the financial gain that remains after all expenses have been subtracted from total
revenue. It is often viewed as the primary measure of a business’s success.
 • Why we use it: Profitability indicates how well the business is performing and is crucial for
sustainability and growth.
• Example: Using the previous example:
o Sales Revenue: Rs. 100,000
o Total Expenses: Rs. 43,000
o Net Profit: Rs. 100,000 - Rs. 43,000 = Rs. 57,000.

10. Concept of Debit & Credit

• What it is: In double-entry accounting, every transaction is recorded in two parts: debits and credits.
A debit increases an asset or expense account or decreases a liability or equity account, while a credit
decreases an asset or expense account or increases a liability or equity account.
• Why we use it: This system ensures the accounting equation stays balanced and provides an
accurate financial picture.
• Example: If you purchase a new oven for Rs. 20,000, you would:
o Debit the "Equipment" account (an asset) by Rs. 20,000, indicating an increase in assets.
o Credit the "Cash" account by Rs. 20,000, indicating a decrease in cash.

11. Accounting Equation

• What it is: The accounting equation is a fundamental principle stating that a company’s total assets
equal the sum of its liabilities and owner’s equity (Assets = Liabilities + Equity). It reflects the
relationship between a company’s resources and its obligations.
• Why we use it: It serves as the foundation of double-entry accounting, ensuring that all financial
statements are balanced and accurate.
• Example: If your bakery has:
o Assets (Cash, Equipment, Inventory): Rs. 100,000
o Liabilities (Loans, Payables): Rs. 40,000
o Owner’s Equity: Rs. 100,000 (Assets) - Rs. 40,000 (Liabilities) = Rs. 60,000.

12. General Journal

• What it is: A general journal is a chronological record of all financial transactions of a business.
Each entry includes the date, accounts affected, amounts, and a brief description.
• Why we use it: It serves as the first point of entry for all transactions before they are posted to
specific accounts in the general ledger, ensuring a complete history of financial activities.
• Example: If you purchase ingredients for Rs. 5,000 on credit, the journal entry would look like:
o Date: October 1
o Debit: Inventory (Ingredients) Rs. 5,000
o Credit: Accounts Payable Rs. 5,000
o Description: Purchased ingredients on credit.

13. General Ledger

• What it is: A general ledger is a comprehensive collection of all accounts used in a company’s
financial accounting. It provides detailed records of all financial transactions categorized by account.
• Why we use it: The general ledger helps in tracking the balance of each account and serves as the
basis for preparing financial statements.
• Example: For your bakery, the "Cash" ledger may include:
o October 1: Rs. 10,000 (Sales)
o October 5: -Rs. 5,000 (Ingredient Purchase)
o Ending Balance: Rs. 5,000.

14. Trial Balance

 • What it is: A trial balance is a summary of all the balances in the general ledger accounts at a
specific point in time. It lists all the debit and credit balances to verify that they are equal.
• Why we use it: The trial balance is used to ensure that the accounting entries are mathematically
correct and serves as a basis for preparing financial statements.
• Example: Your bakery’s trial balance might show:
o Cash: Rs. 5,000 (Debit)
o Inventory: Rs. 10,000 (Debit)
o Accounts Payable: Rs. 2,000 (Credit)
o Owner's Equity: Rs. 13,000 (Credit)
o Total Debits: Rs. 15,000 = Total Credits: Rs. 15,000 (Balanced).

1. General Entries
• What It Is: General entries are like notes that record all money movements in a business. Whenever
money comes in or goes out, it gets recorded as a “general entry.” Each entry will show what
accounts were affected, the amount involved, and a short explanation of why it happened.
• How It Works:
o Double-Entry Accounting: Every transaction affects two accounts:
▪ Debit: Adds money to an account or increases its balance (like buying something for
the company).
▪ Credit: Takes money away or decreases its balance (like spending money).
o The total of debits and credits must always be equal in each transaction to keep things
balanced.
• Example: Imagine your company buys office supplies for $100 in cash.
o Debit: Office Supplies account gets $100 (because you have more supplies now).
o Credit: Cash account loses $100 (because you paid cash).
o This shows you have $100 more in supplies and $100 less in cash.

2. General Journal
• What It Is: The general journal is the first place where transactions are written down. Think of it as
a diary that records each transaction in the order it happens. This way, we keep a record of every
financial event.
• Key Parts of the General Journal:
o Date: When the transaction happened.
o Accounts: Names of the accounts affected.
o Debit Amount and Credit Amount: These two amounts should be equal for every entry.
o Explanation: A short note explaining what the transaction was about.
• Example: Suppose you pay rent for your office.
o Date: October 31
o Debit: Rent Expense for $500 (because rent expense increased).
 o Credit: Cash for $500 (because you used cash to pay it).
o Explanation: "Paid office rent for October."
• This structure helps keep everything organized and makes it easy to check each transaction’s details.

3. General Ledger (T-Account and Running Balance)

• What It Is: The general ledger is a big record book where each account (like Cash, Office Supplies,
or Rent Expense) has its own page or section to show all its transactions. It’s helpful because it lets
you see the history of each account and check its balance at any time.
• T-Account:
o The T-account is a way to organize debits and credits for each account, showing a “T” shape.
o Left Side: Where debits are listed.
o Right Side: Where credits are listed.
o Example:
▪ If $1000 cash is received:
▪ Debit side: +$1000
▪ If $500 is spent on rent:
▪ Credit side: -$500
▪ Balance after these entries: $500 in cash (because $1000 - $500 = $500).
• Running Balance: This is the updated balance shown after each entry. Every time a debit or credit is
added, the balance is adjusted, so you always know how much is in each account.

4. Trial Balance
• What It Is: The trial balance is like a summary page that shows the ending balance for each account.
It’s mainly used to make sure everything is accurate and balanced. In other words, it checks if debits
= credits across all accounts.
• How It’s Prepared:
o Each account's ending balance (from the general ledger) is listed.
o Total all the debits and all the credits separately.
o If the totals are equal, it means the entries are balanced. If not, there’s an error somewhere
that needs fixing.
• Example:
o Accounts listed on the trial balance might include:
▪ Assets: Like Cash ($500), Equipment ($2000), etc.
▪ Liabilities: Like Accounts Payable ($100).
▪ Equity: Like Owner’s Capital ($2400).
o Total Debits and Credits: If both equal, all is good!
Exercise 3.1:
Listed below in random order are the eight steps comprising a complete accounting cycle:
Prepare a trial balance.
Journalize and post the closing entries.
Prepare financial statements.
Post transaction data to the ledger.
Prepare an adjusted trial balance.
Make end-of-period adjustments.
Journalize transactions.
Prepare an after-closing trial balance.

a. List these steps in the sequence in which they would normally be performed. (A detailed
understanding of these eight steps is not required until Chapters 4 and 5.)
b. Describe ways in which the information produced through the accounting cycle is used by a company’s
management and employees.

Answer:
a. List these steps in the sequence in which they would normally be performed.
Answer:
Step Description
1 Journalize Transactions: Record each transaction in the journal as it happens.
2 Post Transaction Data to the Ledger: Transfer journal entries to individual accounts in the ledger.
3 Prepare a Trial Balance: Check if total debits equal total credits.
4 Make End-of-Period Adjustments: Adjust for items like accrued expenses or depreciation.
5 Prepare an Adjusted Trial Balance: Ensure debits and credits match after adjustments.
6 Prepare Financial Statements: Create the income statement, balance sheet, and other reports.
Journalize and Post Closing Entries: Close temporary accounts, such as revenue and expense
7
accounts.
8 Prepare an After-Closing Trial Balance: Verify that all accounts are balanced for the new period.

Question (b)
b. Describe ways in which the information produced through the accounting cycle is used by a
company’s management and employees.
Answer:
1. Decision-Making:
o Purpose: Financial statements (like income statements or balance sheets) help management
understand the company’s financial health.
o Use: This information guides important decisions, such as budgeting, new investments, and
cost-cutting.
2. Performance Evaluation:
o Purpose: Financial results allow management to assess how well employees and departments
meet financial goals.
o Use: This can lead to recognition, training, or improvement plans for departments based on
their performance.
3. Expense Management:
o Purpose: The accounting cycle reveals areas where the company spends money.
o Use: Helps the company control costs by identifying and analyzing high expenses.
4. Investor and Lender Relations:
o Purpose: Financial information reassures investors and lenders about the company’s
financial stability.
 o Use: Investors decide to invest, and lenders decide on loan approvals based on reliable
financial data.
Exercise 3.2:
Record the following selected transactions in general journal form for Sun Orthopedic Clinic, Inc.
Include a brief explanation of the transaction as part of each journal entry.
Oct. 1 The clinic issued 4,000 additional shares of capital stock to Doctor Soges at $50 per
share.
Oct. 4 The clinic purchased diagnostic equipment. The equipment cost $75,000, of which
$25,000 was paid in cash; a note payable was issued for the balance.
Oct. 12 Issued a check for $9,000 in full payment of an account payable to Zeller
Laboratories.
Oct. 19 Purchased surgical supplies for $2,600. Payment is not due until November 28.
Oct. 25 Collected a $24,000 account receivable from Health One Insurance Company.
Oct. 30 Declared and paid a $300,000 cash dividend to stockholders.

Answer:
Here’s the explanation of each transaction presented in table form for clarity:
Debit Credit
Date Transaction Description Explanation
($) ($)
The clinic issued 4,000 shares at $50 each,
Oct. Issued capital stock to Doctor
200,000 receiving $200,000 in cash. Cash increases, so
1 Soges.
it is debited.
Capital Stock is credited to reflect the issuance
200,000
of new shares.
Diagnostic equipment was bought for
Oct.
Purchased diagnostic equipment. 75,000 $75,000. This is an asset increase, so it is
4
debited.
Cash is credited by $25,000 for the cash
25,000
payment.
A note payable is credited for the remaining
50,000 balance of $50,000, increasing the clinic's
liabilities.
Oct. Paid account payable to Zeller The clinic paid off a $9,000 account payable,
9,000
12 Laboratories. decreasing the liability.
Cash is credited, reflecting the cash outflow
9,000
for the payment.
Oct. Purchased surgical supplies on Surgical supplies purchased for $2,600
2,600
19 credit. increase the clinic's assets, so it is debited.
Accounts Payable is credited to show the
2,600 liability incurred for the purchase, which is
payable later.
Collected account receivable
Oct. The clinic collected $24,000 in cash,
from Health One Insurance 24,000
25 increasing its assets.
Company.
Accounts Receivable is credited to decrease
24,000 the outstanding amount owed by Health One
Insurance.
Oct. Declared and paid cash dividend The clinic declared a $300,000 cash dividend,
300,000
30 to stockholders. which is an expense that reduces equity.
Cash is credited, reflecting the cash outflow
300,000
for the dividend payment.
Exercise 3.3:
Brown Consulting Services organized as a corporation on January 18 and engaged in the following
transactions during its first two weeks of operation:
Jan. 18 Issued capital stock in exchange for $30,000 cash.
Jan. 22 Borrowed $20,000 from its bank by issuing a note payable.
Jan. 23 Paid $100 for a radio advertisement aired on January 24.
Jan. 25 Provided $1,000 of services to clients for cash.
Jan. 26 Provided $2,000 of services to clients on account.
Jan. 31 Collected $800 cash from clients for the services provided on January 26.
a. Record each of these transactions.
b. Determine the balance in the Cash account on January 31. Be certain to state whether the balance
is debit or credit.

Answer:

a. Recording Transactions

Date Account Title and Explanation Debit ($) Credit ($)

Jan. 18 Cash 30,000
Capital Stock 30,000
Issued capital stock in exchange for $30,000 cash.
Jan. 22 Cash 20,000
Notes Payable 20,000
Borrowed $20,000 from the bank by issuing a note payable.
Jan. 23 Advertising Expense 100
Cash 100
Paid $100 for a radio advertisement.
Jan. 25 Cash 1,000
Service Revenue 1,000
Provided $1,000 of services to clients for cash.
Jan. 26 Accounts Receivable 2,000
Service Revenue 2,000
Provided $2,000 of services to clients on account.
Jan. 31 Cash 800
Accounts Receivable 800
Collected $800 cash from clients for services provided on Jan 26.

b. Determine the Balance in the Cash Account on January 31

To find the Cash account balance, we add up all cash inflows (debits) and subtract all cash outflows
(credits):

1. Cash Inflows (Debits):

o Jan. 18: $30,000 (Issued capital stock)
o Jan. 22: $20,000 (Borrowed from the bank)
o Jan. 25: $1,000 (Provided services for cash)
o Jan. 31: $800 (Collected cash from receivables)
 Total Cash Inflows = $30,000 + $20,000 + $1,000 + $800 = $51,800

2. Cash Outflows (Credits):

o Jan. 23: $100 (Paid for advertisement)

Total Cash Outflows = $100

3. Cash Account Balance Calculation:

o Balance = Total Cash Inflows - Total Cash Outflows
o Balance = $51,800 - $100 = $51,700

Cash Account Balance on January 31:

• Balance: $51,700
• Type: Debit (since cash is an asset and has a normal debit balance)

Exercise 3.4:

Five account

classifications are shown as column headings in the table below. For each account
classification, indicate the manner in which increases and decreases are recorded (i.e., by debits or by
credits).

Answer:
Sure! Here’s a simpler explanation of how increases and decreases are recorded for different types of
accounts:
Account Type How to Increase How to Decrease
Assets Debits Credits
Liabilities Credits Debits
Equity Credits Debits
Revenue Credits Debits
Expenses Debits Credits
Explanation in Simple Words:
1. Assets (Things the company owns, like cash, equipment, and buildings):
o Increase: When you add something valuable (like buying new equipment), you record it as a
debit.
o Decrease: When you sell or use something (like selling an old car), you record it as a credit.
2. Liabilities (Money the company owes to others, like loans or accounts payable):
o Increase: When you borrow money (like getting a loan), you record it as a credit.
o Decrease: When you pay off a debt (like paying back a loan), you record it as a debit.
3. Equity (The owner's share in the company, including profits):
o Increase: When the owner invests more money in the business (like buying shares), you
record it as a credit.
o Decrease: When the company pays dividends to shareholders (like distributing profits), you
record it as a debit.
4. Revenue (Money earned from selling goods or services):
o Increase: When the company earns money (like making a sale), you record it as a credit.
 o Decrease: If the company has to give money back (like a customer refund), you record it as a
debit.
5. Expenses (Costs incurred in running the business, like rent or salaries):
o Increase: When you spend money (like paying for utilities), you record it as a debit.
o Decrease: If you get a refund for an expense (like returning equipment), you record it as a
credit.
Summary:
• Debits are used to increase assets and expenses, and decrease liabilities, equity, and revenue.
• Credits are used to increase liabilities, equity, and revenue, and decrease assets and expenses.
Exercise 3.8:
During March, the activities of Evergreen Landscaping included the following transactions and
events, among others. Which of these items represented expenses in March? Explain.
a. Purchased a copying machine for $2,750 cash.
b. Paid $192 for gasoline purchases for a delivery truck during March.
c. Paid $2,280 salary to an employee for time worked during March.
d. Paid an attorney $560 for legal services rendered in January.
e. Declared and paid an $1,800 dividend to shareholders.Answer:

To determine which of the items listed represent expenses for Evergreen Landscaping during March, let’s
look at each transaction and explain whether it qualifies as an expense.

Analysis of Each Item:

Transaction Expense? Explanation

This is a purchase of an asset (the copying machine), not an
a. Purchased a copying
No expense. The cost will be depreciated over time, but it’s not an
machine for $2,750 cash.
expense in the month of March.
b. Paid $192 for gasoline This is an expense. The gasoline is consumed in the course of
purchases for a delivery Yes operations, making it an operating expense for the month of
truck during March. March.
c. Paid $2,280 salary to an This is an expense. The salary paid to the employee represents
employee for time worked Yes labor costs incurred during March, classifying it as a wage
during March. expense.
Even though the services were rendered in January, the payment
d. Paid an attorney $560 for
is made in March, and it is an expense for legal services related
legal services rendered in Yes
to business operations. It reflects the cost of services consumed
January.
in prior periods.
e. Declared and paid an This is not an expense; it is a distribution of profits to
$1,800 dividend to No shareholders. Dividends reduce retained earnings but do not
shareholders. affect the income statement as an expense.

Summary of Expenses in March:

Based on the analysis:

• Expenses for March:

o b. Paid $192 for gasoline purchases.
o c. Paid $2,280 salary to an employee.
o d. Paid an attorney $560 for legal services.
 • Non-Expenses:
o a. Purchase of a copying machine (asset).
o e. Payment of dividends (distribution of profits).

Let me know if you need more details or clarification!

Exercise 3.10:

Wilson Consulting has provided the following information regarding cash payments to its employees

in May and June:

Salary payments in May for work performed by employees in April $ 8,000

Salary payments in May for work performed by employees in May 15,000

Salary payments in June for work performed by employees in May 9,000

Apply the matching principle to determine how much salary expense Wilson Consulting should

report in its May income statement

Answer:

To determine the salary expense that Wilson Consulting should report in its May income statement using the
matching principle, we need to recognize the salaries related to work performed by employees in May,
regardless of when the payments are made. The matching principle states that expenses should be recorded
in the same period as the revenues they help to generate.

Salary Payments:

1. Salary payments in May for work performed by employees in April: $8,000

o Not included in May’s salary expense since this is for work done in April.
2. Salary payments in May for work performed by employees in May: $15,000
o Included in May’s salary expense since this is for work done in May.
3. Salary payments in June for work performed by employees in May: $9,000
o Included in May’s salary expense because it relates to work performed in May, even though
the payment is made in June.

Total Salary Expense for May:

Now, we can calculate the total salary expense to report in the May income statement:

Total Salary Expense=Salary for May Work+Salary for May Work Paid in June\text{Total Salary Expense}
= \text{Salary for May Work} + \text{Salary for May Work Paid in
June}Total Salary Expense=Salary for May Work+Salary for May Work Paid in June
Total Salary Expense=15,000+9,000=24,000\text{Total Salary Expense} = 15,000 + 9,000 =
24,000Total Salary Expense=15,000+9,000=24,000

Conclusion:

Wilson Consulting should report a salary expense of $24,000 in its May income statement. This amount
includes salaries for work performed in May, ensuring that the expenses are matched with the appropriate
period according to the matching principle.
 Long Queations

Question 3.10:

Trafflet Enterprises incorporated on May 3, 2011. The company engaged in the following transactions
during its first month of operations:
May 3 Issued capital stock in exchange for $800,000 cash.
May 4 Paid May office rent expense of $1,000.
May 5 Purchased office supplies for $400 cash. The supplies will last for several months.
May 15 Purchased office equipment for $8,000 on account. The entire amount is due June 15.
May 18 Purchased a company car for $27,000. Paid $7,000 cash and issued a note payable for
the remaining amount owed.
May 20 Billed clients $32,000 on account.
May 26 Declared a $5,000 dividend. The entire amount will be distributed to shareholders on
June 26.
May 29 Paid May utilities of $200.
May 30 Received $30,000 from clients billed on May 20.
May 31 Recorded and paid salary expense of $14,000.
A partial list of the account titles used by the company includes:
Cash Dividends Payable
Accounts Receivable Dividends
Offi ce Supplies Capital Stock
Offi ce Equipment Client Revenue
Vehicles Offi ce Rent Expense
Notes Payable Salary Expense
Accounts Payable Utilities Expense
a. Prepare journal entries, including explanations, for the above transactions.
b. Post each entry to the appropriate ledger accounts (use the T account format illustrated in
Exhibit 3–8 on page 108).
c. Prepare a trial balance dated May 31, 2011. Assume accounts with zero balances are not
included in the trial balance.
Answer:
a. Journal Entries
Here are the journal entries for each transaction, including explanations:

Date Account Title Debit ($) Credit ($) Explanation

May 3 Cash 800,000 Issued capital stock for cash.

Capital Stock 800,000

May 4 Office Rent Expense 1,000 Paid May office rent expense.

Cash 1,000

May 5 Office Supplies 400 Purchased office supplies for cash.

Cash 400

May 15 Office Equipment 8,000 Purchased office equipment on account.

Date Account Title Debit ($) Credit ($) Explanation

Accounts Payable 8,000

May 18 Vehicles 27,000 Purchased a company car, part cash and note payable.

Cash 7,000

Notes Payable 20,000

May 20 Accounts Receivable 32,000 Billed clients for services rendered.

Client Revenue 32,000

May 26 Dividends 5,000 Declared a dividend to shareholders.

Dividends Payable 5,000

May 29 Utilities Expense 200 Paid May utilities.

Cash 200

May 30 Cash 30,000 Received cash from clients billed on May 20.

Accounts Receivable 30,000

May 31 Salary Expense 14,000 Recorded and paid salary expense.

Cash 14,000

b. Posting to T-Accounts
Now, let’s post the journal entries to the T-accounts:
Cash
Cash
--------------------------------
Date | Debit | Credit
-----------------------------
May 3 | 800,000 |
May 4 | | 1,000
May 5 | | 400
May 18 | 7,000 |
May 30 | 30,000 |
May 29 | | 200
May 31 | | 14,000
--------------------------------
Total | 837,000 | 15,600
Capital Stock
Capital Stock
--------------------------------
Date | Debit | Credit
-----------------------------
May 3 | | 800,000
--------------------------------
Total | | 800,000
Office Rent Expense
Office Rent Expense
--------------------------------
Date | Debit | Credit
-----------------------------
May 4 | 1,000 |
--------------------------------
Total | 1,000 |
Office Supplies
Office Supplies
--------------------------------
Date | Debit | Credit
-----------------------------
May 5 | 400 |
--------------------------------
Total | 400 |
Office Equipment
Office Equipment
--------------------------------
Date | Debit | Credit
-----------------------------
May 15 | 8,000 |
--------------------------------
Total | 8,000 |
Vehicles
 Vehicles
--------------------------------
Date | Debit | Credit
-----------------------------
May 18 | 27,000 |
--------------------------------
Total | 27,000 |
Accounts Payable
Accounts Payable
--------------------------------
Date | Debit | Credit
-----------------------------
May 15 | | 8,000
--------------------------------
Total | | 8,000
Notes Payable
Notes Payable
--------------------------------
Date | Debit | Credit
-----------------------------
May 18 | | 20,000
--------------------------------
Total | | 20,000
Accounts Receivable
Accounts Receivable
--------------------------------
Date | Debit | Credit
-----------------------------
May 20 | 32,000 |
May 30 | | 30,000
--------------------------------
Total | 32,000 | 30,000
Client Revenue
Client Revenue
--------------------------------
Date | Debit | Credit
-----------------------------
May 20 | | 32,000
--------------------------------
Total | | 32,000
Dividends
Dividends
--------------------------------
Date | Debit | Credit
-----------------------------
May 26 | 5,000 |
--------------------------------
Total | 5,000 |
Dividends Payable
Dividends Payable
--------------------------------
Date | Debit | Credit
-----------------------------
May 26 | | 5,000
--------------------------------
Total | | 5,000
Utilities Expense
Utilities Expense
--------------------------------
Date | Debit | Credit
-----------------------------
May 29 | 200 |
--------------------------------
Total | 200 |
Salary Expense
Salary Expense
--------------------------------
Date | Debit | Credit
-----------------------------
May 31 | 14,000 |
--------------------------------
Total | 14,000 |

c. Trial Balance as of May 31, 2011

Now, let's prepare the trial balance. The trial balance lists all the accounts and their balances at a specific
date.

Account Title Debit ($) Credit ($)

Cash 837,000

Accounts Receivable 32,000

Office Supplies 400

Office Equipment 8,000

Vehicles 27,000

Dividends 5,000

Office Rent Expense 1,000

Utilities Expense 200

Salary Expense 14,000

Capital Stock 800,000

Accounts Payable 8,000

Notes Payable 20,000

Dividends Payable 5,000

Client Revenue 32,000

Total 1,014,600 1,014,600

Conclusion
• The journal entries have been prepared with explanations.
• The T-accounts have been posted.
• The trial balance as of May 31, 2011, is balanced.

Question 3.11:
The McMillan Corporation incorporated on September 2, 2011. The company engaged in the
following transactions during its first month of operations:
Sept. 2 Issued capital stock in exchange for $900,000 cash.
Sept. 4 Purchased land and a building for $350,000. The value of the land was $50,000, and
the value of the building was $300,000. The company paid $200,000 cash and issued a
note payable for the balance.
Sept. 12 Purchased office supplies for $600 on account. The supplies will last for several
months.
Sept. 19 Billed clients $75,000 on account.
Sept. 29 Recorded and paid salary expense of $24,000.
Sept. 30 Received $30,000 from clients billed on September 19.
A partial list of the account titles used by the company includes:
Cash Notes Payable
Accounts Receivable Accounts Payable
Offi ce Supplies Capital Stock
Land Client Revenue
Building Salary Expense
a. Prepare journal entries, including explanations, for the above transactions.
b. Post each entry to the appropriate ledger accounts (use the T account format illustrated in
Exhibit 3–8 on page 108).
c. Prepare a trial balance dated September 30, 2011. Assume accounts with zero balances are not
included in the trial balance.
Answer:

a. Journal Entries

Here are the journal entries for each transaction, including explanations:

Date Account Title Debit ($) Credit ($) Explanation

Sept. 2 Cash 900,000 Issued capital stock for cash.
Capital Stock 900,000
Sept. 4 Land 50,000 Purchased land as part of the property acquisition.
Building 300,000 Purchased building as part of the property acquisition.
Cash 200,000
Notes Payable 150,000 Issued a note for the remaining balance.
Sept. 12 Office Supplies 600 Purchased office supplies on account.
Accounts Payable 600
Sept. 19 Accounts Receivable 75,000 Billed clients for services rendered.
Client Revenue 75,000
Sept. 29 Salary Expense 24,000 Recorded and paid salary expense.
Cash 24,000
Sept. 30 Cash 30,000 Received cash from clients billed on September 19.
Accounts Receivable 30,000

b. Posting to T-Accounts

Now, let's post the journal entries to the T-accounts.

Cash
markdown

Copy code

Cash

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

Date | Debit | Credit

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

Sept. 2 | 900,000 |

Sept. 4 | | 200,000

Sept. 29| | 24,000

Sept. 30| 30,000 |

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

Total | 930,000 | 224,000

Capital Stock

Capital Stock

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

Date | Debit | Credit

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

Sept. 2 | | 900,000

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

Total | | 900,000

Land

Land

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

Date | Debit | Credit

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

Sept. 4 | 50,000 |

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

Total | 50,000 |
Building

Building

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

Date | Debit | Credit

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

Sept. 4 | 300,000 |

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

Total | 300,000 |

Notes Payable

Notes Payable

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

Date | Debit | Credit

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

Sept. 4 | | 150,000

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

Total | | 150,000

Office Supplies

Office Supplies

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

Date | Debit | Credit

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

Sept. 12| 600 |

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

Total | 600 |

Accounts Payable

Accounts Payable

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

Date | Debit | Credit

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

Sept. 12| | 600

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

Total | | 600

Accounts Receivable

Accounts Receivable

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

Date | Debit | Credit

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

Sept. 19| 75,000 |

Sept. 30| | 30,000

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

Total | 75,000 | 30,000

Client Revenue

Client Revenue

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

Date | Debit | Credit

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

Sept. 19| | 75,000

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

Total | | 75,000

Salary Expense

Salary Expense

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

Date | Debit | Credit

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

Sept. 29| 24,000 |

--------------------------------
Total | 24,000 |

c. Trial Balance as of September 30, 2011

Now, let's prepare the trial balance. The trial balance lists all accounts and their balances at a specific date.

Account Title Debit ($) Credit ($)

Cash 706,000
Accounts Receivable 45,000
Office Supplies 600
Land 50,000
Building 300,000
Salary Expense 24,000
Capital Stock 900,000
Notes Payable 150,000
Accounts Payable 600
Client Revenue 75,000
Total 1,125,600 1,125,600

Conclusion

• The journal entries have been prepared with explanations.

• The T-accounts have been posted accordingly.
• The trial balance as of September 30, 2011, is balanced.

Question 3.13

Herrold Consulting incorporated on February 1, 2011. The company engaged in the following
transactions during its first month of operations:
Feb. 1 Issued capital stock in exchange for $750,000 cash.
Feb. 5 Borrowed $50,000 from the bank by issuing a note payable.
Feb. 8 Purchased land, building, and office equipment for $600,000. The value of the land
was $100,000, the value of the building was $450,000, and the value of the office
equipment was $50,000. The company paid $300,000 cash and issued a note payable
for the balance.
Feb. 11 Purchased office supplies for $600 on account. The supplies will last for several
months.
Feb. 14 Paid the local newspaper $400 for a full-page advertisement. The ad will appear in
print on February 18.
Feb. 20 Several of the inkjet printer cartridges that Herrold purchased on February 11 were
defective. The cartridges were returned and the office supply store reduced Herrold’s
outstanding balance by $100.
Feb. 22 Performed consulting services for $6,000 cash.
Feb. 24 Billed clients $9,000.
Feb. 25 Paid salaries of $5,000.

Feb. 28 Paid the entire outstanding balance owed for office supplies purchased on February 11.

A partial list of the account titles used by the company includes:

Cash Notes Payable
Accounts Receivable Accounts Payable
Offi ce Supplies Capital Stock
Land Client Service Revenue
Building Advertising Expense
Offi ce Equipment Salaries Expense
a. Prepare journal entries, including explanations, for the above transactions.
b. Post each entry to the appropriate ledger accounts (use the T account format as illustrated in
Exhibit 3–8 on page 108).
c. Prepare a trial balance dated February 28, 2011. Assume accounts with zero balances are not

included in the trial balance.

Answer:

a. Journal Entries

Here are the journal entries for each transaction, including explanations:

Debit Credit
Date Account Title Explanation
($) ($)
Feb. 1 Cash 750,000 Issued capital stock for cash.
Capital Stock 750,000
Feb. 5 Cash 50,000 Borrowed cash from the bank.
Notes Payable 50,000 Issued note payable for the borrowed amount.
Feb. 8 Land 100,000 Purchased land as part of the property acquisition.
Building 450,000 Purchased building as part of the property acquisition.
Office Equipment 50,000 Purchased office equipment as part of the acquisition.
Cash 300,000
Notes Payable 400,000 Issued note payable for the balance.
Feb.
Office Supplies 600 Purchased office supplies on account.
11
Accounts Payable 600
Feb.
Advertising Expense 400 Paid for advertisement to the local newspaper.
14
Cash 400
Feb. Returned defective office supplies and reduced
Accounts Payable 100
20 balance.
Office Supplies 100
Feb.
Cash 6,000 Performed consulting services for cash.
22
Client Service
6,000
Revenue
Feb.
Accounts Receivable 9,000 Billed clients for consulting services.
24
Client Service
9,000
Revenue
 Debit Credit
Date Account Title Explanation
($) ($)
Feb.
Salaries Expense 5,000 Paid salaries to employees.
25
Cash 5,000
Feb.
Accounts Payable 600 Paid outstanding balance for office supplies.
28
Cash 600

b. Posting to T-Accounts

Now, let's post the journal entries to the T-accounts.

Cash

Cash
--------------------------------
Date | Debit | Credit
-----------------------------
Feb. 1 | 750,000 |
Feb. 5 | 50,000 |
Feb. 8 | | 300,000
Feb. 14 | | 400
Feb. 22 | 6,000 |
Feb. 25 | | 5,000
Feb. 28 | | 600
--------------------------------
Total | 806,000 | 306,600

Capital Stock

Capital Stock
--------------------------------
Date | Debit | Credit
-----------------------------
Feb. 1 | | 750,000
--------------------------------
Total | | 750,000

Notes Payable

Notes Payable
--------------------------------
Date | Debit | Credit
-----------------------------
Feb. 5 | | 50,000
Feb. 8 | | 400,000
--------------------------------
Total | | 450,000

Land

Land
--------------------------------
Date | Debit | Credit
-----------------------------
Feb. 8 | 100,000 |
--------------------------------
Total | 100,000 |

Building

markdown
Copy code
Building
--------------------------------
Date | Debit | Credit
-----------------------------
Feb. 8 | 450,000 |
--------------------------------
Total | 450,000 |

Office Equipment

Office Equipment
--------------------------------
Date | Debit | Credit
-----------------------------
Feb. 8 | 50,000 |
--------------------------------
Total | 50,000 |

Office Supplies

Office Supplies
--------------------------------
Date | Debit | Credit
-----------------------------
Feb. 11 | 600 |
Feb. 20 | | 100
--------------------------------
Total | 600 | 100

Accounts Payable

Accounts Payable
--------------------------------
Date | Debit | Credit
-----------------------------
Feb. 11 | | 600
Feb. 20 | 100 |
Feb. 28 | 600 |
--------------------------------
Total | 700 | 600

Advertising Expense

Advertising Expense
--------------------------------
Date | Debit | Credit
-----------------------------
Feb. 14 | 400 |
--------------------------------
Total | 400 |

Client Service Revenue

Client Service Revenue

--------------------------------
Date | Debit | Credit
-----------------------------
Feb. 22 | | 6,000
Feb. 24 | | 9,000
--------------------------------
Total | | 15,000

Accounts Receivable

Accounts Receivable
--------------------------------
Date | Debit | Credit
-----------------------------
Feb. 24 | 9,000 |
--------------------------------
Total | 9,000 |

Salaries Expense

Salaries Expense
--------------------------------
Date | Debit | Credit
-----------------------------
Feb. 25 | 5,000 |
--------------------------------
Total | 5,000 |

c. Trial Balance as of February 28, 2011

Now, let's prepare the trial balance. The trial balance lists all accounts and their balances at a specific date.

Account Title Debit ($) Credit ($)

Cash 499,400
Accounts Receivable 9,000
Office Supplies 500
Land 100,000
Building 450,000
Office Equipment 50,000
Accounts Payable 700
Notes Payable 450,000
 Account Title Debit ($) Credit ($)
Client Service Revenue 15,000
Capital Stock 750,000
Advertising Expense 400
Salaries Expense 5,000
Total 1,092,300 1,092,300

Conclusion

• The journal entries have been prepared with explanations.

• The T-accounts have been posted accordingly.
• The trial balance as of February 28, 2011, is balanced.