Ch2-14

School: Henry Ford College - Course: BAC 131 - Subject: Accounting

The basic tool of accounting is the accounting equation. It measures the resources of a business (what the business owns or has control of) and the claims to those resources (what the business owes to creditors and the owners). The accounting equation comprises three parts— assets,liabilities, andequity and shows how these three parts are related. Assets appear on the left side of the equation, and the liabilities and equity appear on the rightAssets=Liabilities+Equity Part 2 : Transactions are first recorded in a journal, which records transactions in date order. Journalizing a transaction records the data only in the journal— but not in the ledger (the record holding all of the accounts of a business). The data must also be transferred to the ledger. The process of transferring date from the journal to the ledger is calledposting. We post from the journal to the ledger. Debits in the journal are posted as debits in the ledger and credits as credits— no exceptions. Part 3 The journalizing and posting process has five steps: Step 1:Identify the accounts and the account type (asset, liability, or equity). Step 2:Decide if each account increases or decreases using the Step 3:Record the transaction in the journal. Step 4:Post the transaction into the ledger. Step 5:Determine if the accounting equation is in balance. In this problem, we will focus on the first four steps. We will analyze and then record Tina Paisley, CPA's transactions in the journal (journalize the transactions) in Requirement 1— Steps 1 through 3— and then we will post the transactions to the ledger in Requirement 2— Step 4. Part 4 Requirement 1.Journalize the transactions and then post the journal entries to the four-column accounts. Keep a running balance in each account. Assume the journal entries are recorded on page 10 of the journal. Begin by journalizing the transactions. We'll begin with the first transaction on the 1st and will analyze the first few transactions in the context of the first three steps discussed above. Part 5 June 1:Paisley opened an accounting firm by contributing $15,000 cash and office furniture with a fair market value of $5,200 in exchange for common stock. Prepare a compound entry. Step1:Identify the accounts and the account type (asset, liability, or equity). The three accounts involved are Cash, Office Furniture (both assets) and Common Stock (an equity account). Step2:Decide if each account increases or decreases using the of debits and credits. The business received a total contribution of $20,200 ($15,000 cash and office furniture valued at $5,200) from the owner of the business in exchange for common stock. The business has more cash and furniture than it had before. Cash increases; Office Furniture increases; and Common Stock increases. The increases in the asset accounts (Cash and Office Furniture) are recorded with debits. An increase in the common stock account is recorded with a credit. Step3:Record the transaction in the journal. To record this transaction in the journal we must increase Cash with a debit for $15,000; Office Furniture with a debit for $5,200; and Common Stock with a credit for $20,200. Go ahead and prepare the entry. Be sure to select a brief description of the transaction on the last line of the journal entry table. (Record debits first, then credits. Exclude explanations from journal entries.) AccountsDebitCredit Jun. 1Cash15,000 Office Furniture5,200 Common Stock20,200 Part 6 June 5:Paid monthly rent of StepIdentify the accounts and the account type (asset, liability, or equity). The two accounts involved are Rent

Ch2-14 1:Expense (equity) and Cash (an asset). Step2:Decide if each account increases or decreases using the of debits and credits. Rent Expense increases. The business has incurred an expense. Cash decreases. The business paid cash. An increase in an expense account is recorded with a debit. A decrease in an asset account is recorded with a credit. Step3:Record the transaction in the journal. To record this transaction in the journal we must increase Rent Expense with a $1,300 debit and decrease Cash with a $1,300 credit. Record the entry.