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Accounting Journal EntriesReview 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.
StepsSelf-Questions Answers
1 What did Company A receive? Cash.
2 If Company A received cash, how would this affect the cash balance? Receiving cash increases the
cash balance of the company.
3 Which side of cash account represents the increase in cash? Debit side (Left side).
4 What is the account name to record the sales of products. Sales.
5 Which side of sales account represents the increase in sales? Credit side (Right side).
6 Does the sum of debit side amounts equal to the sum of credit side amounts? In other words, does this journal entry balance?
Yes.$120 = $120
[Journal entry to record transaction 1]
Debit Credit
Cash 120
Sales 120
Examples of Journal Entries
Transaction 2: Company A purchased supplies and paid $50 in cash.
StepsSelf-Questions Answers
1 What did Company A receive? Supplies.
2 If Company A received supplies, how would this affect the supplies balance?
It increases supplies balance.
3 Which side of supplies account represents the increase in cash? Debit side (Left side).
4 What did Company A pay? Cash.
5 Which side of cash account represents the decrease in cash? Credit side (Right side).
6 Does the sum of debit side amounts equal to the sum of credit side amounts? In other words, does this journal entry balance?
Yes.
$50 = $50
[Journal entry to record transaction 2]
Debit Credit
Supplies 50
Cash 50
Debits and Credits of Accounts
Debit Credit
Increase in asset accounts Decrease in asset accounts
Increase in expense accounts Decrease in expense accounts
Decrease in liability accounts Increase in liability accounts
Decrease in equity accounts Increase in equity accounts
Decrease in revenue 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 MethodsDepreciation MethodsRevenue Recognition PrincipleAccrual Basis vs. Cash Basis AccountingBasics of Journal EntriesRatios for Financial Statement AnalysisOverview of Financial Statements
Accounting Journal Entry Examples 01
* Cash payment transactions1. Purchase of assets in cash2. Repayment of liabilities in cash3. Payment of expenses in cash
* Cash receipt transactions4. Sale of assets in cash5. Borrowing money6. Issuance of stock
* Cash payment transactions1. Purchase of assets in cash1a. Purchased merchandise and paid $2,000 in cash1b. Purchased an equipment and paid $15,000 in cash
2. Repayment of liabilities in cash2a. Repaid $7,000 of bank loans2b. Paid $3,000 accounts payable
3. Payment of expenses in cash3a. Paid $3,500 rent expense3b. Paid $6,000 salaries expense
* Cash receipt transactions4. Sale of assets in cash4a. Sold merchandise and received $6,500 in cash The cost of merchandise sold was 5,1004b. Sold an equipment and received $8,600 in cash The book value of the equipment was $8,000
5. Borrowing money5a. Borrowed $9,000 in cash5b. Issued a promissory note and received $11,000 in cash
6. Issuance of stock
6a. Issued 500 shares of common stock, at $50 per share6b. 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 credit
merchandise 2,000 cash 2,000
debit: increase in assets (merchandise)credit: decrease in assets (cash)
1b. Purchased an equipment and paid $15,000 in cash
debit credit
equipment 15,000 cash 15,000
debit: increase in assets (equipment)credit: decrease in assets (cash)
2. Repayment of liabilities in cash
2a. Repaid $7,000 of bank loans
debit credit
borrowings 7,000 cash 7,000
debit: decrease in liabilities (borrowings)credit: decrease in assets (cash)
2b. Paid $3,000 accounts payable
debit credit
accounts payable 3,000 cash 3,000
debit: decrease in liabilities (accounts payable)credit: decrease in assets (cash)
3. Payment of expenses in cash
3a. Paid $3,500 rent expense
debit credit
rent expense 3,500 cash 3,500
debit: increase in expenses (rent expense)credit: decrease in assets (cash)
3b. Paid $6,000 salaries expense
debit credit
salaries expense 6,000 cash 6,000
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 credit
cash 6,500 sales 6,500
debit: increase in assets (cash)credit: increase in revenue (sales)
The cost of merchandise sold was 5,100
debit credit
cost of goods sold 5,100 merchandise 5,100
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
debit credit
cash 8,600 equipment 8,000 gain on sale of equipment
600
debit: increase in assets (cash)credit: increase in revenue (sales)
5. Borrowing money
5a. Borrowed $9,000 in cash
debit credit
cash 9,000 borrowings 9,000
debit: increase in assets (cash)credit: increase in liabilities (borrowings)
5b. Issued a promissory note and received $11,000 in cash
debit credit
cash 11,000 notes payable 11,000
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 credit
cash 25,000 Common stock 25,000
debit: increase in assets (cash)credit: increase in equity (common stock)
6b. Issued 200 shares of preferred stock, at $80 per share
debit credit
cash 16,000 Preferred stock 16,000
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 VersionAssets = Liabilities + Equity
2. Income Statement VersionNet Income = Revenue - Expenses
3. Combined VersionAssets = 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 followsRevenue = $300,000Expenses = $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 balancesAssets = $280,000Liabilities = $120,000Equity = $160,000
Balance sheet versionAssets = Liabilities + Equity--> $280,000 = $120,000 + $160,000
Combined versionAssets = Liabilities + Beginning Equity + Revenue - Expenses--> $280,000 = $120,000 + $100,000 + $300,000 - $240,000
Cases and Practice Questions
Case 1:
Assets = $12,000Liabilities = $5,000
Equity = $7,000Assets = Liabilities + Equity$12,000 = $5,000 + $7,000
Practice Question 1:
If Assets = $12,000 and Liabilities = $3,000what is the amount of equity?
--> Equity = Assets - Liabilities = $12,000 - $3,000 = $9,000
Case 2:
Revenue = $16,000Expenses = $10,000Net income = Revenue - Expenses = $16,000 - $10,000 = $6,000
Practice Question 2:
If Revenue = $16,000 and Expenses = $11,000what is the amount of net income?
--> Net income = Revenue - Expenses = $16,000 - $11,000 = $5,000
Case 3:
Assets = $25,000Liabilities = $11,000Beginning Equity = $10,000Revenue = $36,000Expenses = $32,000Assets = 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 EquityAssets = $55,000Liabilities = $21,000Revenue = $76,000Expenses = $62,000Beginning 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. Accrued Revenue: Revenue is recognized before cash is received. b. Accrued Expense: Expense is recognized before cash is paid. c. Deferred Revenue: Revenue is recognized after cash is received. d. 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 May 10, 2010
Revenue is recognized. Cash is received.
[Journal entry on May 1, 2010]
Debit Credit
Accounts receivable 5,000
Sales 5,000
[Journal entry on May 10, 2010]
Debit Credit
Cash 5,000
Accounts receivable 5,000
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 June 30, 2010
Interest expense is recognized for May.
Cash is paid at the end of the quarter.
[Journal entry on May 1, 2010]
Debit Credit
Cash 100,000
Borrowings from bank 100,000
[Journal entry on May 31, 2010]
Debit Credit
Interest expense 1,000
Interest payable 1,000
$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 Credit
Interest expense 1,000
Interest payable 1,000
Credit side of interest payable (a liability account) represents an increase.
Debit Credit
Interest payable 2,000
Cash 2,000
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 May 31 and June 30 2010
Cash is received. 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 Credit
Cash 3,000
Unearned rent revenue 3,000
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 Credit
Unearned rent revenue 3,000
Rent revenue 3,000
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 Credit
Unearned rent revenue 3,000
Rent revenue 3,000
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 May 31, June 30, July 31, 2010
Cash is paid. Expense is recognized at the end of May, June and July.
[Journal entry on May 1, 2010]
Debit Credit
Prepaid insurance 6,000
Cash 6,000
Prepaid insurance is an asset account.Debit side of prepaid insurance (an asset account) represents an increase.
[Journal entry on May 31, 2010]
Debit Credit
Insurance expense 2,000
Prepaid insurance 2,000
Credit side of prepaid insurance (an asset account) represents a decrease.
[Journal entry on June 30, 2010]
Debit Credit
Insurance expense 2,000
Prepaid insurance 2,000
Credit side of prepaid insurance (an asset account) represents a decrease.
[Journal entry on July 31, 2010]
Debit Credit
Insurance expense 2,000
Prepaid insurance 2,000
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 GainsOperating 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 on sale of securities Gain on sale of buildings
Gain on sale of machinery Gain on sale of 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 methodsExamples of Dollar Value LIFO Examples of Lower of Cost or Market (LCM)