Accounting Journal Entries

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Accounting Journal Entries Review and Practice Materials http://accountinginfo.com/study/je/je-01.htm

What is a journal entry in Accounting? Journal entry is an entry to the journal. Journal is a record that keeps accounting transactions in chronological order, i.e. as they occur. Ledger is a record that keeps accounting transactions by accounts. Account is a unit to record and summarize accounting transactions. All accounting transactions are recorded through journal entries that show account names, amounts, and whether those accounts are recorded in debit or credit side of accounts. Double-Entry Recording of Accounting Transactions To record transactions, accounting system uses double-entry accounting. Double-entry implies that transactions are always recorded using two sides, debit and credit. Debit refers to the left-hand side and credit refers to the right-hand side of the journal entry or account. The sum of debit side amounts should equal to the sum of credit side amounts. A journal entry is called "balanced" when the sum of debit side amounts equals to the sum of credit side amounts. T-Account This form looks like a letter "T", so it is called a T-account. T-account is a convenient form to analyze accounts, because it shows both debit and credit sides of the account. Account Debit Credit

Examples of Journal Entries Transaction 1: Company A sold its products at $120 and received the full amount in cash. Steps 1 2 Self-Questions What did Company A receive? If Company A received cash, how would this affect the cash balance? Cash. Receiving cash increases the cash balance of the company. Answers

3 4 5 6

Which side of cash account represents the increase in cash? What is the account name to record the sales of products. Which side of sales account represents the increase in sales? Does the sum of debit side amounts equal to the sum of credit side amounts? In other words, does this journal entry balance?

Debit side (Left side). Sales. Credit side (Right side). Yes. $120 = $120

[Journal entry to record transaction 1]

Debit Cash Sales 120

Credit

120

Examples of Journal Entries
Transaction 2: Company A purchased supplies and paid $50 in cash.

Steps 1 2 3 4 5 6

Self-Questions What did Company A receive? If Company A received supplies, how would this affect the supplies balance? Which side of supplies account represents the increase in cash? What did Company A pay? Which side of cash account represents the decrease in cash? Does the sum of debit side amounts equal to the sum of credit side amounts? In other words, does this journal entry balance? Supplies.

Answers

It increases supplies balance. Debit side (Left side). Cash. Credit side (Right side). Yes. $50 = $50

[Journal entry to record transaction 2] Debit Supplies Cash 50 50 Credit

Debits and Credits of Accounts Debit Increase in asset accounts Increase in expense accounts Credit Decrease in asset accounts Decrease in expense accounts

Decrease in liability accounts Decrease in equity accounts Decrease in revenue accounts

Increase in liability accounts Increase in equity accounts Increase in revenue accounts

Normal Balances of Accounts Accounts have normal balances on the side where the increases in such accounts are recorded. Asset accounts have normal balances on debit side. Expense accounts have normal balances on debit side. Liability accounts have normal balances on credit side. Equity accounts have normal balances on credit side. Revenue accounts have normal balances on credit side. In the financial statements, accounts are reported on the sides where they have normal balances.

Balance Sheet Assets Liabilities Owners' Equity

Income Statement Expenses Revenues

More Examples of Accounting Journal Entries Adjusting Journal Entries: Review and Examples Accounting Topics Inventory Valuation Methods Depreciation Methods Revenue Recognition Principle Accrual Basis vs. Cash Basis Accounting Basics of Journal Entries Ratios for Financial Statement Analysis Overview of Financial Statements

Accounting Journal Entry Examples 01 * Cash payment transactions 1. Purchase of assets in cash 2. Repayment of liabilities in cash 3. Payment of expenses in cash * Cash receipt transactions 4. Sale of assets in cash 5. Borrowing money 6. Issuance of stock * Cash payment transactions 1. Purchase of assets in cash 1a. Purchased merchandise and paid $2,000 in cash 1b. Purchased an equipment and paid $15,000 in cash 2. Repayment of liabilities in cash 2a. Repaid $7,000 of bank loans 2b. Paid $3,000 accounts payable 3. Payment of expenses in cash 3a. Paid $3,500 rent expense 3b. Paid $6,000 salaries expense * Cash receipt transactions 4. Sale of assets in cash 4a. Sold merchandise and received $6,500 in cash The cost of merchandise sold was 5,100 4b. Sold an equipment and received $8,600 in cash The book value of the equipment was $8,000 5. Borrowing money 5a. Borrowed $9,000 in cash 5b. Issued a promissory note and received $11,000 in cash

6. Issuance of stock 6a. Issued 500 shares of common stock, at $50 per share 6b. Issued 200 shares of preferred stock, at $80 per share

Cash payment transactions 1. Purchase of assets in cash 1a. Purchased merchandise and paid $2,000 in cash debit 2,000 credit 2,000

merchandise cash

debit: increase in assets (merchandise) credit: decrease in assets (cash) 1b. Purchased an equipment and paid $15,000 in cash debit 15,000 credit 15,000

equipment cash

debit: increase in assets (equipment) credit: decrease in assets (cash) 2. Repayment of liabilities in cash 2a. Repaid $7,000 of bank loans debit 7,000 credit 7,000

borrowings cash

debit: decrease in liabilities (borrowings) credit: decrease in assets (cash) 2b. Paid $3,000 accounts payable debit 3,000 credit 3,000

accounts payable cash

debit: decrease in liabilities (accounts payable) credit: decrease in assets (cash)

3. Payment of expenses in cash 3a. Paid $3,500 rent expense debit 3,500 credit 3,500

rent expense cash

debit: increase in expenses (rent expense) credit: decrease in assets (cash) 3b. Paid $6,000 salaries expense debit 6,000 credit 6,000

salaries expense cash

debit: increase in expenses (salaries expense) credit: decrease in assets (cash)

Cash receipt transactions 4. Sale of assets in cash 4a. Sold merchandise and received $6,500 in cash debit 6,500 credit 6,500

cash sales

debit: increase in assets (cash) credit: increase in revenue (sales) The cost of merchandise sold was 5,100 debit 5,100 credit 5,100

cost of goods sold merchandise

debit: increase in assets (cash) credit: increase in revenue (sales) 4b. Sold an equipment and received $8,600 in cash The book value of the equipment was $8,000

cash equipment gain on sale of equipment debit: increase in assets (cash) credit: increase in revenue (sales) 5. Borrowing money 5a. Borrowed $9,000 in cash debit 9,000

debit 8,600

credit 8,000 600

credit 9,000

cash borrowings

debit: increase in assets (cash) credit: increase in liabilities (borrowings) 5b. Issued a promissory note and received $11,000 in cash debit 11,000 credit 11,000

cash notes payable

debit: increase in assets (cash) credit: increase in liabilities (notes payable) 6. Issuance of stock 6a. Issued 500 shares of common stock, at $50 per share debit 25,000 credit 25,000

cash Common stock

debit: increase in assets (cash) credit: increase in equity (common stock) 6b. Issued 200 shares of preferred stock, at $80 per share debit 16,000 credit 16,000

cash Preferred stock

debit: increase in assets (cash) credit: increase in equity (preferred stock)

Accounting Equation 01 Basic form of an equation --> Left side = Right side 1. Balance Sheet Version Assets = Liabilities + Equity 2. Income Statement Version Net Income = Revenue - Expenses 3. Combined Version Assets = Liabilities + Equity ---> Equity = Beginning Equity + Net Income Assets = Liabilities + Beginning Equity + Net Income ---> Net Income = Revenue - Expenses Assets = Liabilities + Beginning Equity + Revenue - Expenses

An Example of Combined Version At January 1, 2010, the balance of equity was $100,000. During the year of 2010, revenue and expenses were as follows Revenue = $300,000 Expenses = $240,000 What is the balance of equity at December 31, 2010? Equity = Beginning Equity + Revenue - Expenses --> $100,000 + $300,000 - $240,000 = $160,000 At December 31, 2010, Entity A had the following balances Assets = $280,000 Liabilities = $120,000 Equity = $160,000 Balance sheet version Assets = Liabilities + Equity --> $280,000 = $120,000 + $160,000 Combined version Assets = Liabilities + Beginning Equity + Revenue - Expenses --> $280,000 = $120,000 + $100,000 + $300,000 - $240,000

Cases and Practice Questions Case 1: Assets = $12,000 Liabilities = $5,000 Equity = $7,000 Assets = Liabilities + Equity $12,000 = $5,000 + $7,000 Practice Question 1: If Assets = $12,000 and Liabilities = $3,000 what is the amount of equity? --> Equity = Assets - Liabilities = $12,000 - $3,000 = $9,000 Case 2: Revenue = $16,000 Expenses = $10,000 Net income = Revenue - Expenses = $16,000 - $10,000 = $6,000 Practice Question 2: If Revenue = $16,000 and Expenses = $11,000 what is the amount of net income? --> Net income = Revenue - Expenses = $16,000 - $11,000 = $5,000 Case 3: Assets = $25,000 Liabilities = $11,000 Beginning Equity = $10,000 Revenue = $36,000 Expenses = $32,000 Assets = Liabilities + Beginning Equity + Revenue - Expenses $25,000 = $11,000 + $10,000 + $36,000 - $32,000 Practice Question 3: In the following case, what is the amount of Beginning Equity Assets = $55,000 Liabilities = $21,000 Revenue = $76,000 Expenses = $62,000 Beginning Equity = ? Assets = Liabilities + Beginning Equity + Revenue - Expenses $55,000 = $21,000 + ? + $76,000 - $62,000

--> Beginning Equity = ? = $20,000

Accrual Basis Accounting Under the accrual basis accounting, revenues and expenses are recognized as follows: Revenue recognition: Revenue is recognized when both of the following conditions are met: a. Revenue is earned. b. Revenue is realized or realizable. Revenue is earned when products are delivered or services are provided. Realized means cash is received. Realizable means it is reasonable to expect that cash will be received in the future. Expense recognition: Expense is recognized in the period in which related revenue is recognized (Matching Principle). Cash Basis Accounting Under the cash basis accounting, revenues and expenses are recognized as follows: Revenue recognition: Revenue is recognized when cash is received. Expense recognition: Expense is recognized when cash is paid. Timing differences in recognizing revenues and expenses There are potential timing differences in recognizing revenues and expenses between accrual basis and cash basis accounting. Four types of timing differences a. b. c. d. Accrued Revenue: Revenue is recognized before cash is received. Accrued Expense: Expense is recognized before cash is paid. Deferred Revenue: Revenue is recognized after cash is received. Deferred Expense: Expense is recognized after cash is paid.

An Example of Accrued Revenue Example: Products are sold at $5,000 on May 1, 2010 and cash is received on May 10, 2010. May 1, 2010 Revenue is recognized. [Journal entry on May 1, 2010] Debit Accounts receivable Sales 5,000 5,000 Credit May 10, 2010 Cash is received.

[Journal entry on May 10, 2010] Debit Cash Accounts receivable 5,000 5,000 Credit

An Example of Accrued Expense Example: On May 1, 2010, Company A borrowed $100,000 from a bank and promised to pay 12% interest at the end of each quarter. May 31, 2010 Interest expense is recognized for May. [Journal entry on May 1, 2010] Debit Cash Borrowings from bank [Journal entry on May 31, 2010] Debit Interest expense Interest payable $100,000 x 12% x 1/12 = $1,000 for each month. Interest payable is a liability account. Credit side of interest payable (a liability account) represents an increase. [Journal entry on June 30, 2010] Debit Interest expense Interest payable 1,000 1,000 Credit 1,000 1,000 Credit 100,000 100,000 Credit June 30, 2010 Cash is paid at the end of the quarter.

Credit side of interest payable (a liability account) represents an increase. Debit Interest payable Cash 2,000 2,000 Credit

Company pays $2,000 as interests for May and June. Debit side of interest payable (a liability account) represents a decrease.

An Example of Deferred Revenue Example: On May 1, 2010, Company A had a new lease contract with a tenant and received $6,000 for two month rent. May 1, 2010 Cash is received. May 31 and June 30 2010 Revenue is recognized at the end of May and June.

Revenue is recognized when Company A provides service. In this example, service is provided when time passes. [Journal entry on May 1, 2010] Debit Cash Unearned rent revenue 3,000 3,000 Credit

Unearned rent revenue is a liability account. Credit side of unearned rent revenue (a liability account) represents an increase. "Unearned revenue" accounts represent the amount of cash received before services are provided. Since services have not been provided yet, it is not revenue. "Unearned revenue" accounts are liabilities of the company, because they should be paid back to the other party if service is not provided in the future.

[Journal entry on May 31, 2010] Debit Unearned rent revenue Rent revenue 3,000 3,000 Credit

Debit side of unearned rent revenue (a liability account) represents a decrease. Credit side of rent revenue (a revenue account) represents an increase. [Journal entry on June 30, 2010] Debit Unearned rent revenue Rent revenue 3,000 3,000 Credit

Debit side of unearned rent revenue (a liability account) represents a decrease. Credit side of rent revenue (a revenue account) represents an increase. An Example of Deferred Expense Example: Company A purchased an insurance for a period from May 1, 2010 to July 31, 2010 and paid $6,000 cash for three month insurance premium. May 1, 2010 Cash is paid. May 31, June 30, July 31, 2010 Expense is recognized at the end of May, June and July.

[Journal entry on May 1, 2010] Debit Prepaid insurance Cash 6,000 6,000 Credit

Prepaid insurance is an asset account. Debit side of prepaid insurance (an asset account) represents an increase. [Journal entry on May 31, 2010] Debit Insurance expense 2,000 Credit

Prepaid insurance

2,000

Credit side of prepaid insurance (an asset account) represents a decrease. [Journal entry on June 30, 2010] Debit Insurance expense Prepaid insurance 2,000 2,000 Credit

Credit side of prepaid insurance (an asset account) represents a decrease. [Journal entry on July 31, 2010] Debit Insurance expense Prepaid insurance 2,000 2,000 Credit

Credit side of prepaid insurance (an asset account) represents a decrease.

Revenue Recognition Principle U.S. GAAP Codification Topic 600: Revenue Revenues are recognized when (a) realized or realizable and (b) earned. [SFAC No. 5, Para. 83] Revenues --> not recognized until realized or realizable. --> not recognized until earned. Revenues are realized --> when products are exchanged for cash or claims to cash. Revenues are realizable --> when related assets received are readily convertible to cash or claims to cash. Revenues are earned --> when the products are delivered or --> services are performed. Recognition is the process of --> recording an item in the financial statements. Realization is the process of --> converting non-cash resources into cash. Revenues are --> inflows of assets or settlements of liabilities (or both) --> from activities of the entity's central operations. Gains are --> increases in net assets --> from peripheral or incidental transactions of an entity. ARB No. 43, Chapter 1A Accounting Research Bulleting (ARB) No. 43 a. Chapter 1A b. Issued in June 1953 Unrealized Profit --> should not be credited to income. Profit is deemed to be realized

--> when a sale (in the ordinary course of business) is effected. --> unless the collection of sale price is not reasonably assured. Profit is NOT deemed to be realized --> if the collection of sale price is not reasonably assured.

APB Opinion No. 10 Accounting Principles Board (APB) Opinion No. 10 a. Omnibus Opinion b. Issued in December 1966 Revenues --> should (ordinarily) be accounted for --> at the time of a transaction is completed --> with appropriate provision for uncollectible accounts. [Para. 12] Installment Method of Recognizing Revenue --> is not acceptable, with the exception of cases --> where receivables are collectible over an extended period of time --> and there is no reasonable basis for estimating the degree of collectibility. When the following conditions are met --> either installment method --> or cost recovery method may be used. Conditions --> receivables are collectible over an extended period of time --> and there is no reasonable basis for estimating the degree of collectibility Cost Recovery Method --> equal amounts of revenue and expense are recognized --> as collections are made --> until all costs have been recovered. --> recognition of profit is postponed until all costs are recovered. SFAS No. 48 Statement of Financial Accounting Standards (SFAS) No. 48 a. Revenue Recognition When Right of Return Exists b. Issued in June 1981 Sale that gives buyer the right to return the product --> Revenue from such sales shall be recognized --> at the time of sale --> ONLY IF all of the following conditions are met. Conditions

a. Seller's price --> is substantially fixed or determinable at the date of sale. b. Buyer's obligation to pay seller --> is not contingent on resale of the product. c. Buyer's obligation to pay seller --> does not change when the product is lost or damaged. d. Buyer acquiring the product for resale --> has economic substance apart from that provided by seller. e. Seller does not have significant obligations --> for future performance to directly bring about --> resale of the product by buyer. f. Amount of future returns ---> can be reasonably estimated. Revenues that are not recognized at the time of sale --> because the above conditions are not met --> shall be recognized either when the return privilege has substantially expired or when the above conditions are subsequently met --> whichever occurs first. Cost of returns --> if sales revenue is recognized because the above conditions are met --> any costs or losses expected due to any returns --> shall be accrued as required by SFAS No. 5, Accounting for Contingencies. Estimated returns --> Sales revenue and cost of sales --> shall be reduced to reflect estimated returns.

Examples of Revenues and Gains Operating Revenues Operating revenues include --> revenue accounts generated from the primary operations of the company. Sales Nonoperating Revenues and Gains Nonoperating revenues and gains include --> revenue and gain accounts generated from --> other than the primary operations of the company. Interest revenue (or interest income)

Gain Gain Gain Gain

on on on on

sale sale sale sale

of of of of

securities buildings machinery equipment

Interest revenue (or interest income) account --> may be classified as operating revenues --> for banks and other financial corporations --> whose primary operations are lending money to earn interest income. Gains from Discontinued Operations Gains from discontinued operations are --> due to the disposal of business segment. Gain from operations of discontinued business segment Gain on disposal of business segment Extraordinary Gains Extraordinary gains include --> gains that unusual and infrequent. Gain on early extinguishment of debt

Accounting for Inventories

U.S. GAAP Codification, Accounting Textbooks Principles of Accounting, Intermediate Accounting, Advanced Accounting U.S. GAAP by Topic, Accounting by Topic, Securities Law Library

Accounting for Inventories GAAP Accounting Research Bulletin (ARB) No. 43, Chapter 4, June 1953 Inventory Recording System Perpetual Inventory System Periodic Inventory System Inventory Valuation Methods First-in First-out (FIFO) Last-in First-out (LIFO) Moving Average Method Weighted Average Method Dollar Value LIFO Lower of Cost or Market (LCM) Inventories are valued at cost or market, whichever is lower. [ARB No. 43, Chapter 4, Para. 8] Market Value of Inventories [ARB No. 43, Chapter 4, Para. 9] Market value = Current replacement cost Upper limit (Ceiling) of Market value = Net Realizable Value (NRV) Lower limit (Floor) of Market value = Net Realizable Value (NRV) - Normal Profit Margin Net Realizable Value (NRV) = Estimated Selling Price - Cost of Completion and Disposal Items to be included in inventories Goods in transit FOB destination --> Seller's Inventory FOB shipping point --> Buyer's Inventory Consigned goods are consignor's inventory Goods sold by installment sales are not included in seller's inventory. Profit on installment sales is recognized in proportion to cash collected.

Examples of Inventory Valuation

Journal entries for perpetual and periodic inventory systems Examples of FIFO, LIFO, Average methods Examples of Dollar Value LIFO Examples of Lower of Cost or Market (LCM)

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