O4.2 - Accounting with colors
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1 4 Unit 4 The Transaction Learning Objectives 1. Explain the use of journals and ledgers in the accounting process. 2. Develop experience in recognizing and properly recording basic accounting transactions. 3. Analysis: Explain and calculate a leverage ratio ©CourseCollege.com 2 Objective 4.1: Journals and Ledgers Transactions are first entered into a: journal then posted to the account: ledger O4.1 ©CourseCollege.com 3 Identify transaction, then Record in Journal Journal to Ledger TRANSACTION JOURNALIZING JOURNAL Post from Journal to the individual Account Ledgers O4.1 ACCOUNT LEDGERS POSTING ©CourseCollege.com 4 Journal GENERAL JOURNAL Date 14-Sep Description ¢Cash ¢Sales PR 100 400 Page 15 Debit Credit 250.00 250.00 Record Cash sale The Journal is the original book of entry where all transactions affecting the fundamental accounting equation are entered. O4.1 ©CourseCollege.com 5 Journal GENERAL JOURNAL Date 14-Sep Description ¢Cash ¢Sales PR 100 400 Page 15 Debit Credit 250.00 250.00 Record Cash sale The date of the transaction should be entered first. O4.1 ©CourseCollege.com 6 Journal GENERAL JOURNAL Date 14-Sep Description ¢Cash ¢Sales PR 100 400 Page 15 Debit Credit 250.00 250.00 Record Cash sale The account names involved in the transactions are entered in the description column O4.1 ©CourseCollege.com 7 Journal GENERAL JOURNAL Date 14-Sep Description ¢Cash ¢Sales PR 100 400 Page 15 Debit Credit 250.00 250.00 Record Cash sale Total debits must equal total credits for each transaction entered into the journal O4.1 ©CourseCollege.com 8 Journal GENERAL JOURNAL Date 14-Sep Description PR Page 15 Debit ¢Cash 100 250.00 ¢Equipment 150 500.00 ¢Owner, Capital Credit 300 750.00 There can be more than 2 accounts involved in a transaction (a compound entry) still, total debits must equal total credits.* *Here the owner is investing cash and O4.1 equipment into the business. ©CourseCollege.com 9 Journal GENERAL JOURNAL Date 14-Sep Description ¢Cash ¢Sales PR 100 400 Page 15 Debit Credit 250.00 250.00 Record Cash sale This is the posting reference column. When journal entries are posted to the ledger, the account ledger number is placed in this column for reference purposes. O4.1 ©CourseCollege.com 10 Journal GENERAL JOURNAL Date 14-Sep Description ¢Cash ¢Sales PR 100 400 Page 15 Debit Credit 250.00 250.00 Record Cash sale The page number of the journal is used to cross reference the journal entry in the account ledger. O4.1 ©CourseCollege.com 11 Journal GENERAL JOURNAL Date 14-Sep Description ¢Cash ¢Sales PR 100 400 Page 15 Debit Credit 250.00 250.00 Record Cash sale A summary description of each transaction can be entered here. O4.1 ©CourseCollege.com 12 Ledger LEDGER Account Nam e: ¢ CASH Date 2007 Item Balance Forward 1 4-Sep Acct #: 100 Post Ref. Debit Credit Debit Credit 14,500.00 J15 Each account in the Chart of Accounts has its own Ledger. This example is for the Cash account. BALANCE 250.00 14,7 50.00 BALANCE SHEET Assets Liabilities INCOME STATEMENT Revenue Expenses Equity Profit Debit Credit or Loss O4.1 ©CourseCollege.com 13 Ledger LEDGER Account Nam e: ¢ SALES Date 2007 Item Balance Forward 24-Sep Acct #: 400 Post Ref. BALANCE Debit Debit Credit 5,200.00 J15 This example is for the Sales account. Credit 300.00 BALANCE SHEET Assets Liabilities 5,500.00 INCOME STATEMENT Revenue Expenses Equity Profit Debit Credit or Loss O4.1 ©CourseCollege.com 14 Ledger LEDGER Account Nam e: ¢ CASH Date 2007 Item Balance Forward 1 4-Sep Acct #: 100 Post Ref. BALANCE Debit Credit Debit Credit 14,500.00 J15 250.00 14,7 50.00 Here is the balance column that displays both a debit and a credit column. (Single column balance columns are also used.) O4.1 ©CourseCollege.com 15 JOURNAL Ledger LEDGER Account Nam e: ¢ CASH Date 2007 Item Balance Forward 1 4-Sep Acct #: 100 Post Ref. BALANCE Debit Credit Debit Credit 14,500.00 J15 250.00 14,7 50.00 Here is the column where the journal entries for this particular account are posted, a debit or a credit entry. O4.1 ©CourseCollege.com 16 Ledger LEDGER Account Nam e: ¢ CASH Date 2007 1 4-Sep Item Balance Forward Acct #: 100 Post Ref. BALANCE Debit Credit Debit Credit 14,500.00 J15 250.00 14,7 50.00 Notice the date column O4.1 ©CourseCollege.com 17 Ledger LEDGER Account Nam e: ¢ CASH Date 2007 1 4-Sep Acct #: 100 Item Balance Forward Post Ref. BALANCE Debit Credit Debit Credit 14,500.00 J15 250.00 14,7 50.00 This column can be used to indicate that this is a Balance Forward (from the previous page of the ledger) O4.1 It also is used to indicate the type of journal entry that was posted (more on this later). For regular transactions is is usually left blank. ©CourseCollege.com 18 Ledger LEDGER Account Nam e: ¢ CASH Date 2007 1 4-Sep Acct #: 100 Item Balance Forward Post Ref. BALANCE Debit Credit Debit Credit 14,500.00 J15 250.00 14,7 50.00 In the posting reference column, the page number from the journal is entered when the posting is completed. The “J” stand for the type of journal used (more on this later). O4.1 ©CourseCollege.com 19 Ledger LEDGER Account Nam e: ¢ CASH Date 2007 1 4-Sep Item Balance Forward Acct #: 100 Post Ref. BALANCE Debit Debit Credit Credit 14,500.00 J15 250.00 14,7 50.00 Once each posting is complete, the new balance resulting from the entry is updated in the Balance column. O4.1 ©CourseCollege.com 20 Journal to Ledger GENERAL JOURNAL Date 22-Sep The posting process would flow like this. Description Page 15 Debit PR 100 ¢Cash Credit 600.00 400 ¢Sales 600.00 Record cash sale LEDGER Account Nam e: ¢ CASH Date 2007 Item Balance Forward Acct #: 100 BALANCE Post Ref. 22-Sep Debit Debit Credit Credit 11,230.00 J15 600.00 11,830.00 LEDGER Account Nam e: ¢ SALES Date 2007 22-Sep O4.1 Item Acct #: 400 Post Ref. BALANCE Debit Credit Debit Credit 6,350.00 J15 600.00 6,950.00 ©CourseCollege.com 21 Journal to Ledger GENERAL JOURNAL Date 22-Sep Description Page 15 Debit PR 100 ¢Cash Credit 600.00 400 ¢Sales 600.00 Record cash sale The resulting Account Nam e: ¢ CASH new balances Item are shownDate 2007 Balance Forward LEDGER Acct #: 100 BALANCE Post Ref. 22-Sep Debit Debit Credit Credit 11,230.00 J15 600.00 11,830.00 LEDGER Account Nam e: ¢ SALES Date 2007 22-Sep O4.1 Item Acct #: 400 Post Ref. BALANCE Debit Credit Debit Credit 6,350.00 J15 600.00 6,950.00 ©CourseCollege.com 22 Journal to Ledger GENERAL JOURNAL Date 22-Sep Description Debit PR 100 ¢Cash The ¢Sales posting Record cash sale references indicate Account Nam e: ¢ CASH the source of the Item entry Date 2007 Balance Forward Page 15 Credit 600.00 400 600.00 LEDGER Acct #: 100 BALANCE Post Ref. 22-Sep Debit Debit Credit Credit 11,230.00 J15 600.00 11,830.00 LEDGER Account Nam e: ¢ SALES Date 2007 22-Sep O4.1 Item Acct #: 400 Post Ref. BALANCE Debit Credit Debit Credit 6,350.00 J15 600.00 6,950.00 ©CourseCollege.com 23 Objective 4.2: Recording transactions Transactions must be studied to determine: Which accounts are involved? and How are they affected? O4.2 ©CourseCollege.com 24 Assets Liabilities Equity Revenue Expenses BALANCE SHEET ASSETS LIABILITIES Debits increase Credits decrease Credits increase Debits decrease INCOME STATEMENT + - - + Use the Color Map to learn transactions REVENUE EXPENSES EQUITY Profit OR Loss ©CourseCollege.com 25 Tips for transactions The Acid Test steps A What accounts are involved? C What classification are these I D Test accounts? How will the transaction affect each of these accounts –increase or decrease? What entries, debit or credit, will accomplish the desired increase or decrease to the existing balance in the account? Test the proposed changes for equality of debits and credits. ©CourseCollege.com June 1 26 Frieda makes an investment of $15,000 cash into her new proprietor ship, Freida’s Fabulous Fashions O4.2 Which accounts are involved? ©CourseCollege.com 27 Frieda’s Fabulous Fashions Balance Sheet Assets Cash Accounts Receivable Supplies Inventory Prepaid Insurance Office Equipment Income Statement Liabilities + Equity Accounts Payable Wages Payable Taxes Payable Unearned Revenue Notes Payable Frieda, Capital Frieda, Drawing Sales Cost of Goods Sold Wages Expense Rent Expense Utilities Expense Insurance Expense Interest expense Misc expense Profit Both of these accounts should go up. O4.2 OR Loss ©CourseCollege.com 28 Recording Transactions GENERAL JOURNAL Date 1-Jun Description Page 1 Debit PR 100 ¢Cash ¢Frieda, Capital Credit 15,000.00 400 15,000.00 Record owner investment LEDGER Account Nam e: ¢ CASH Date 2007 Item Balance Forward 1-Jun Acct #: 100 BALANCE Post Ref. Debit Debit Credit Credit 0.00 J1 15,000.00 15,000.00 LEDGER Account Nam e: ¢ FRIEDA, CAPIT AL Date 2007 1 -Jun O4.2 Item Post Ref. Acct #: 300 BALANCE Debit Credit Debit Credit 0.00 J1 15,000.00 15,000.00 ©CourseCollege.com June 1 29 Frieda signs a $5,000 note at her bank to purchase an office copier for Frieda’s Fine Fashions O4.2 Which accounts are involved? ©CourseCollege.com 30 Frieda’s Fabulous Fashions Balance Sheet Assets Cash Accounts Receivable Supplies Inventory Prepaid Insurance Office Equipment Income Statement Liabilities + Equity Accounts Payable Wages Payable Taxes Payable Unearned Revenue Notes Payable Frieda, Capital Frieda, Drawing Sales Cost of Goods Sold Wages Expense Rent Expense Utilities Expense Insurance Expense Interest expense Misc expense Profit Both of these accounts should go up. O4.2 OR Loss ©CourseCollege.com 31 Recording Transactions GENERAL JOURNAL Date 1-Jun Description Page 1 Debit PR ¢Office Equipment 165 ¢Notes Payable 270 Credit 5,000.00 5,000.00 Purchase copier by signing note LEDGER Account Nam e: ¢ OFFICE EQUIPMENT Date 2007 Item Balance Forward 1-Jun Acct #: 165 BALANCE Post Ref. Debit Debit Credit Credit 0.00 J1 5,000.00 5,000.00 LEDGER Account Nam e: ¢ NOT ES PAY ABLE Date 2007 1 -Jun O4.2 Item Post Ref. Acct #: 370 BALANCE Debit Credit Debit Credit 0.00 J1 5,000.00 5,000.00 ©CourseCollege.com June 5 32 Frieda signs a rental agreement to rent a retail store location at $1,000 per month beginning June 15 O4.2 Which accounts are involved? ©CourseCollege.com 33 Frieda’s Fabulous Fashions Balance Sheet Assets Cash Accounts Receivable Supplies Inventory Prepaid Insurance Office Equipment Liabilities + Equity Accounts Payable Wages Payable Taxes Payable Unearned Revenue Notes Payable Frieda, Capital Frieda, Drawing Although an event has taken place, (signing a rental agreement), as of this date, nothing has affected the accounting equation and no transaction is recorded. O4.2 Income Statement Sales Cost of Goods Sold Wages Expense Rent Expense Utilities Expense Insurance Expense Interest expense Misc expense Profit OR Loss ©CourseCollege.com June 8 34 Frieda purchases a business insurance policy for one year paying $1,800 in cash O4.2 Which accounts are involved? ©CourseCollege.com 35 Frieda’s Fabulous Fashions Balance Sheet Assets Cash Accounts Receivable Supplies Inventory Prepaid Insurance Office Equipment Liabilities + Equity Accounts Payable Wages Payable Taxes Payable Unearned Revenue Notes Payable Frieda, Capital Frieda, Drawing O4.2 Income Statement Sales Cost of Goods Sold Wages Expense Taxes Expense Rent Expense Utilities Expense Insurance Expense Interest expense Cash goes down Profit Prepaid Insurance goes up OR Loss ©CourseCollege.com 36 Recording Transactions GENERAL JOURNAL Date 8-Jun Description Debit PR ¢Prepaid Insurance Page 1 145 Credit 1,800.00 100 ¢Cash 1,800.00 Purchase insurance LEDGER Account Nam e: ¢ CASH Date 2007 Item Balance Forward 8-Jun Acct #: 100 BALANCE Post Ref. Debit Credit Debit Credit 15,000.00 J1 1,800.00 13,200.00 LEDGER Account Nam e: ¢ PREPAID INSURANCE Date 2007 8-Jun O4.2 Item Post Ref. Acct #: 145 BALANCE Debit Credit Debit Credit 0.00 J1 1,800.00 1,800.00 ©CourseCollege.com June 10 37 Frieda purchases $7,500 of inventory paying $2,000 in cash, the balance on account O4.2 Which accounts are involved? ©CourseCollege.com 38 Frieda’s Fabulous Fashions Balance Sheet Assets Income Statement Liabilities + Equity Cash Accounts Receivable Supplies Inventory Prepaid Insurance Office Equipment Accounts Payable Wages Payable Taxes Payable Unearned Revenue Notes Payable Frieda, Capital Frieda, Drawing Sales Cost of Goods Sold Wages Expense Rent Expense Utilities Expense Insurance Expense Interest expense Misc expense Profit This is a compound entry with inventory and accounts payable up while cash goes down. Debits must still equal credits O4.2 OR Loss ©CourseCollege.com 39 Recording Transactions GENERAL JOURNAL Date 10-Jun Description PR 135 ¢Inventory Page 1 Debit Credit 7,500.00 ¢Accounts Payable 200 5,500.00 ¢Cash 100 2,000.00 Purchase inventory LEDGER Account Nam e: ¢ INVENT ORY Date 2007 Item Balance Forward 10-Jun Acct #: 135 BALANCE Post Ref. Debit Credit Debit Credit 0.00 J1 7 ,500.00 7 ,500.00 LEDGER Account Nam e: ¢ ACCOUNT S PAY ABLE Date 2007 1 0-Jun O4.2 Item Post Ref. Acct #: 200 BALANCE Debit Credit Debit Credit 0.00 J1 5,500.00 5,500.00 ©CourseCollege.com Recording Transactions GENERAL JOURNAL Date 10-Jun Description PR 135 ¢Inventory 40 Page 1 Debit Credit 7,500.00 ¢Accounts Payable 200 5,500.00 ¢Cash 100 2,000.00 Purchase inventory LEDGER Account Nam e: ¢ CASH Date 2007 10-Jun O4.2 Item Balance Forward Acct #: 100 Post Ref. BALANCE Debit Credit Debit Credit 13,200.00 J1 2,000.00 11,200.00 ©CourseCollege.com June 12 41 Frieda purchases supplies for $750 cash. O4.2 Which accounts are involved? ©CourseCollege.com 42 Frieda’s Fabulous Fashions Balance Sheet Assets Income Statement Liabilities + Equity Cash Accounts Receivable Supplies Inventory Prepaid Insurance Office Equipment Accounts Payable Wages Payable Taxes Payable Unearned Revenue Notes Payable Frieda, Capital Frieda, Drawing Sales Cost of Goods Sold Wages Expense Rent Expense Utilities Expense Insurance Expense Interest expense Misc expense Profit Cash should go down and Supplies should go up O4.2 OR Loss ©CourseCollege.com 43 Recording Transactions GENERAL JOURNAL Date 12-Jun Description Page 1 Debit PR ¢Supplies 125 ¢Cash 100 Credit 750.00 750.00 Purchase supplies LEDGER Account Nam e: ¢ CASH Date 2007 Item Balance Forward 12-Jun Acct #: 100 BALANCE Post Ref. Debit Credit Debit Credit 11,200.00 J1 7 50.00 10,450.00 LEDGER Account Nam e: ¢ SUPPLIES Date 2007 1 2-Jun O4.2 Item Acct #: 125 Post Ref. BALANCE Debit Credit Debit Credit 0.00 J1 7 50.00 7 50.00 ©CourseCollege.com June 15 44 Frieda pays cash for the first month’s store rent of $1,000 O4.2 Which accounts are involved? ©CourseCollege.com 45 Frieda’s Fabulous Fashions Balance Sheet Assets Income Statement Liabilities + Equity Cash Accounts Receivable Supplies Inventory Prepaid Insurance Office Equipment Accounts Payable Wages Payable Taxes Payable Unearned Revenue Notes Payable Frieda, Capital Frieda, Drawing Sales Cost of Goods Sold Wages Expense Rent Expense Utilities Expense Insurance Expense Interest expense Misc expense Profit Cash should go down and Rent expense should go up O4.2 OR Loss ©CourseCollege.com 46 Recording Transactions GENERAL JOURNAL Date 15-Jun Description Debit PR ¢Rent Expense Page 1 560 Credit 1,000.00 100 ¢Cash 1,000.00 Paid rent LEDGER Account Nam e: ¢ CASH Date 2007 Item Balance Forward 15-Jun Acct #: 100 BALANCE Post Ref. Debit Credit Debit Credit 10,450.00 J1 1,000.00 9,450.00 LEDGER Account Nam e: ¢ RENT EXPENSE Date 2007 1 5-Jun O4.2 Item Post Ref. Acct #: 560 BALANCE Debit Credit Debit Credit 0.00 J1 1,000.00 1,000.00 ©CourseCollege.com June 16 47 Frieda completes a sale to her first customer who purchases a coat for $150 paying cash. The coat cost Frieda $80. Frieda updates her inventory account with each sale (perpetual inventory). O4.2 Which accounts are involved? ©CourseCollege.com 48 Frieda’s Fabulous Fashions Balance Sheet Assets Cash Accounts Receivable Supplies Inventory Prepaid Insurance Office Equipment Income Statement Liabilities + Equity Accounts Payable Wages Payable Taxes Payable Unearned Revenue Notes Payable Frieda, Capital Frieda, Drawing Sales Cost of Goods Sold Wages Expense Rent Expense Utilities Expense Insurance Expense Interest expense Misc expense Profit Lots of things are happening with this transaction. 1)Cash up, Sales up. 2) Cost of Goods Sold up and Inventory down. O4.2 OR Loss ©CourseCollege.com 49 Recording Transactions GENERAL JOURNAL Date 16-Jun Description Page 1 Debit PR 100 ¢Cash Credit 150.00 400 ¢Sales ¢Cost of Goods Sold 150.00 530 80.00 135 ¢Inventory 80.00 Cash sale LEDGER Account Nam e: ¢ CASH Date 2007 Item Balance Forward Acct #: 100 BALANCE Post Ref. 16-Jun Debit Credit Debit 10,450.00 J1 150.00 LEDGER 10,600.00 Account Nam e: ¢ SALES Date 2007 O4.2 1 6-Jun Item Credit Acct #: 400 Post Ref. BALANCE Debit Credit Debit Credit 0.00 J1 150.00 150.00 ©CourseCollege.com 50 Recording Transactions GENERAL JOURNAL Date 16-Jun Description Page 1 Debit PR 100 ¢Cash Credit 150.00 400 ¢Sales ¢Cost of Goods Sold 150.00 530 80.00 135 ¢Inventory 80.00 Cash sale LEDGER Account Nam e: ¢ COST OF GOODS SOLD Date 2007 Item Balance Forward 16-Jun Acct #: 530 BALANCE Post Ref. Debit Debit Credit 0.00 J1 80.00 LEDGER 80.00 Account Nam e: ¢ INVENT ORY Date 2007 O4.2 1 6-Jun Item Credit Post Ref. Acct #: 135 BALANCE Debit Credit Debit Credit 7 ,500.00 J1 80.00 7 ,420.00 ©CourseCollege.com June 18 51 Frieda receives and records an invoice for coffee service charges for the past 60 days. Total invoice is $135 which she schedules for payment in 10 days. O4.2 Which accounts are involved? ©CourseCollege.com 52 Frieda’s Fabulous Fashions Balance Sheet Assets Income Statement Liabilities + Equity Cash Accounts Receivable Supplies Inventory Prepaid Insurance Office Equipment Accounts Payable Wages Payable Taxes Payable Unearned Revenue Notes Payable Frieda, Capital Frieda, Drawing Sales Cost of Goods Sold Wages Expense Rent Expense Utilities Expense Insurance Expense Interest expense Misc expense Profit Miscellaneous expense goes up and Accounts Payable goes up O4.2 OR Loss ©CourseCollege.com 53 Recording Transactions GENERAL JOURNAL Debit Date Description PR 18-Jun ¢Miscellaneous Expense 590 ¢Accounts Payable Page 1 Credit 135.00 200 135.00 Miscellaneous expense-coffee LEDGER Account Nam e: ¢ MISCELLANEOUS EXPENSE Date 2007 Item Balance Forward 18-Jun Acct #: 590 BALANCE Post Ref. Debit Credit Debit Credit 0.00 J1 135.00 135.00 LEDGER Account Nam e: ¢ ACCOUNT S PAY ABLE Date 2007 O4.2 1 8-Jun Item Post Ref. Acct #: 200 BALANCE Debit Credit Debit Credit 5,500.00 J1 135.00 5,635.00 ©CourseCollege.com June 21 54 Frieda completes a sale to a charge customer who makes a $475 purchase on account. These inventory items cost Frieda $210. Frieda updates her inventory account with each sale (perpetual inventory). O4.2 Which accounts are involved? ©CourseCollege.com 55 Frieda’s Fabulous Fashions Balance Sheet Assets Cash Accounts Receivable Supplies Inventory Prepaid Insurance Office Equipment Income Statement Liabilities + Equity Accounts Payable Wages Payable Taxes Payable Unearned Revenue Notes Payable Frieda, Capital Frieda, Drawing Sales Cost of Goods Sold Wages Expense Rent Expense Utilities Expense Insurance Expense Interest expense Misc expense Profit 1)Accounts Receivable up, Sales up. 2) Cost of Goods Sold up and Inventory down. O4.2 OR Loss ©CourseCollege.com 56 Recording Transactions GENERAL JOURNAL Date 21-Jun Description Page 1 Debit PR ¢Accounts Receivable 110 Credit 475.00 400 ¢Sales ¢Cost of Goods Sold 475.00 530 210.00 135 ¢Inventory 210.00 Credit sale LEDGER Account Nam e: ¢ ACCOUNT S RECEIVABLE Date 2007 Item Balance Forward BALANCE Post Ref. 21-Jun Acct #: 110 Debit Credit Debit 0.00 J1 47LEDGER 5.00 47 5.00 Account Nam e: ¢ SALES Date 2007 O4.2 21 -Jun Item Credit Acct #: 400 Post Ref. BALANCE Debit Credit Debit Credit 150.00 J1 47 5.00 625.00 ©CourseCollege.com 57 Recording Transactions GENERAL JOURNAL Date 21-Jun Description Page 1 Debit PR ¢Accounts Receivable 110 Credit 475.00 400 ¢Sales ¢Cost of Goods Sold 475.00 530 210.00 135 ¢Inventory 210.00 Credit sale LEDGER Account Nam e: ¢ COST OF GOODS SOLD Date 2007 Item Balance Forward 21-Jun Acct #: 530 BALANCE Post Ref. Debit Credit Debit 80.00 J1 210.00 LEDGER 290.00 Account Nam e: ¢ INVENT ORY Date 2007 O4.2 21 -Jun Item Credit Post Ref. Acct #: 135 BALANCE Debit Credit Debit Credit 7 ,420.00 J1 210.00 7 ,210.00 ©CourseCollege.com June 25 58 Frieda makes a scheduled $2500 cash payment to partially satisfy her account with the vendor who provided her merchandise on account. O4.2 Which accounts are involved? ©CourseCollege.com 59 Frieda’s Fabulous Fashions Balance Sheet Assets Cash Accounts Receivable Supplies Inventory Prepaid Insurance Office Equipment Income Statement Liabilities + Equity Accounts Payable Wages Payable Taxes Payable Unearned Revenue Notes Payable Frieda, Capital Frieda, Drawing Sales Cost of Goods Sold Wages Expense Rent Expense Utilities Expense Insurance Expense Interest expense Misc expense Profit Cash down, Accounts Payable down. O4.2 OR Loss ©CourseCollege.com 60 Recording Transactions GENERAL JOURNAL Date 25-Jun Description Page 1 Debit PR ¢Accounts Payable 200 Credit 2,500.00 100 ¢Cash 2,500.00 Payment made on account LEDGER Account Nam e: ¢ CASH Date 2007 Item Balance Forward 25-Jun Acct #: 100 BALANCE Post Ref. Debit Debit Credit Credit 10,600.00 J1 2,500.00 8,100.00 LEDGER Account Nam e: ¢ ACCOUNT S PAY ABLE Date 2007 O4.2 25-Jun Item Post Ref. Acct #: 200 BALANCE Debit Credit Debit Credit 5,635.00 J1 2,500.00 3,135.00 ©CourseCollege.com June 30 61 Frieda sends a scheduled $550 loan payment to her bank for the copier loan which includes $50 interest accrued. O4.2 Which accounts are involved? ©CourseCollege.com 62 Frieda’s Fabulous Fashions Balance Sheet Assets Cash Accounts Receivable Supplies Inventory Prepaid Insurance Office Equipment Income Statement Liabilities + Equity Accounts Payable Wages Payable Taxes Payable Unearned Revenue Notes Payable Frieda, Capital Frieda, Drawing Sales Cost of Goods Sold Wages Expense Rent Expense Utilities Expense Insurance Expense Interest expense Misc expense Profit O4.2 Cash down, Notes Payable down and Interest Expense up. A compound entry OR Loss ©CourseCollege.com 63 Recording Transactions GENERAL JOURNAL Date 30-Jun Description Page 1 Debit PR Credit ¢Notes Payable 270 500.00 ¢Interest Expense 580 50.00 100 ¢Cash 550.00 Copier loan payment made LEDGER Account Nam e: ¢ CASH Date 2007 Item Balance Forward 30-Jun Acct #: 100 BALANCE Post Ref. Debit Credit Debit Credit 8,100.00 J1 550.00 7 ,550.00 LEDGER Account Nam e: ¢ NOT ES PAY ABLE Date 2007 O4.2 30-Jun Item Post Ref. Acct #: 270 BALANCE Debit Credit Debit Credit 5,000.00 J1 500.00 4,500.00 ©CourseCollege.com 64 Recording Transactions GENERAL JOURNAL Date 30-Jun Description Page 1 Debit PR Credit ¢Notes Payable 270 500.00 ¢Interest Expense 580 50.00 100 ¢Cash 550.00 Copier loan payment made LEDGER Account Nam e: ¢ INT EREST EXPENSE Date 2007 30-Jun O4.2 Item Balance Forward Post Ref. Acct #: 580 BALANCE Debit Credit Debit Credit 0.00 J1 50.00 50.00 ©CourseCollege.com June 30 65 Frieda withdraws $1,200 from her business for personal expenses she incurred after a visit to her jeweler O4.2 Which accounts are involved? ©CourseCollege.com 66 Frieda’s Fabulous Fashions Balance Sheet Assets Income Statement Liabilities + Equity Cash Accounts Receivable Supplies Inventory Prepaid Insurance Office Equipment Accounts Payable Wages Payable Taxes Payable Unearned Revenue Notes Payable Frieda, Capital Frieda, Drawing Sales Cost of Goods Sold Wages Expense Rent Expense Utilities Expense Insurance Expense Interest expense Misc expense Profit O4.2 Cash down, Frieda, Drawing up (a contra account) OR Loss ©CourseCollege.com 67 Recording Transactions GENERAL JOURNAL Date 30-Jun Description Page 1 Debit PR ¢Freida, Drawing 350 Credit 1,200.00 100 ¢Cash 1,200.00 Personal withdrawal LEDGER Account Nam e: ¢ CASH Date 2007 Item Balance Forward 30-Jun Acct #: 100 BALANCE Post Ref. Debit Credit Debit Credit 7 ,550.00 J1 1,200.00 6,350.00 LEDGER Account Nam e: ¢ FREIDA, DRAWING Date 2007 O4.2 30-Jun Item Post Ref. Acct #: 350 BALANCE Debit Credit Debit Credit 0.00 J1 1,200.00 1,200.00 ©CourseCollege.com 68 Objective 4.3: Leverage ratio Leverage ratios reveal the relationship between total assets, liabilities and equity in a particular balance sheet O4.3 ©CourseCollege.com 69 Leverage Balance Sheet Assets Liabilities Balance Sheet Assets Liabilities Equity Equity O4.3 Highly Leveraged (claims on assets are Limited Leverage (claims on assets are mostly from liabilities) mostly from equity) ©CourseCollege.com 70 Leverage and Financial Risk Higher leverage mean higher financial risk Financial risk is the risk that a firm may be unable to meet the payment obligations scheduled to its creditors (liabilities) Lower leverage means less financial risk. Equity holders (owners) are not promised specific payments or returns. Payments to equity holders are discretionary. The consequences of too much leverage and financial risk are failure and bankruptcy ©CourseCollege.com 71 Leverage Balance Sheet Assets Liabilities Balance Sheet Assets Liabilities Equity Equity O4.3 Highly Leveraged (claims on assets are Limited Leverage (claims on assets are mostly from liabilities) mostly from equity) ©CourseCollege.com 72 Leverage ratio: Debt to Worth Debt to Worth = Total Liabilities/ Total Equity Debt to Worth is one of several leverage ratios It answers the question: How many dollars of liabilities are supported by each dollar of equity? ©CourseCollege.com 73 Debt to Worth Example #1 CASE SUPPLY BALANCE SHEET As of 12/31/07 ASSETS Cash Accounts Receivable Inventory Supplies Equipment Total Debt to Worth D/W 24,000 34,500 67,800 1,500 43,200 171,000 = = LIABILITIES Accounts Payable Salaries Payable Notes Payable Total 56,000 3,400 1,200 60,600 EQUITY Owner, Capital Total 110,400 231,600 Total Liab/Total Equity 0.55 Each dollar of Equity supports 55 cents of Liabilities ©CourseCollege.com 74 Debt to Worth Example #2 AMANA SUPPLY BALANCE SHEET As of 12/31/07 ASSETS Cash Accounts Receivable Inventory Supplies Equipment Total Debt to Worth D/W 8,700 61,300 28,700 800 15,000 114,500 = = LIABILITIES Accounts Payable Salaries Payable Notes Payable Total EQUITY Owner, Capital Total Total Liab/Total Equity 2.22 61,200 1,240 16,500 78,940 35,560 193,440 Each dollar of Equity supports $2.22 of Liabilities ©CourseCollege.com 75 Which example has more leverage risk #1 or #2? • #1 D/W = .55 • #2 D/W = 2.22 #2 Amana Supply has to support $2.22 of Liabilities with each dollar of Equity #1 Case Supply shows less leverage risk with each Equity dollar supporting only $.55 of Liabilities ©CourseCollege.com 76 End of Unit 4 ©CourseCollege.com
