Accounting
What the Numbers Mean 10e
Demonstration Problem
Chapter 4 – Exercise 11
Record Transactions and Adjustments
Problem Definition
•
Enter the following column heading across the top of a sheet of paper:
Transaction/
Adjustment
Assets
Liabilities
Stockholders’
Equity
Net
Income
Problem Definition
•
Enter the following column heading across the top of a sheet of paper:
Transaction/
Adjustment
Assets
Liabilities
Stockholders’
Equity
Net
Income
Enter the transaction/adjustment letter in the first column and show the effect, if
any, of the transaction entry or adjusting entry on the appropriate balance sheet
category or on the income statement by entering the amount and indicating
whether it is an addition (+) or a subtraction (-). Column headings reflect the
expanded balance sheet equation; items that affect net income should not be
shown as affecting stockholders’ equity. In some cases, only one column may be
affected because all of the specific accounts affected by the transaction are
included in that category. Transaction a has been done as an illustration. (Note:
As an alternative to using the horizontal model, you may write the journal entry
for each transaction or adjustment.)
Problem Definition
a.
b.
c.
d.
e.
f.
g.
Provided services to a client on account; revenues
totaled $550.
Paid an insurance premium of $360 for the coming year.
An asset, Prepaid Insurance, was debited.
Recognized insurance expense for one month from the
above premium via a reclassification adjusting entry.
Paid $800 of wages accrued at the end of the prior
month.
Paid $2,600 of wages for the current month.
Accrued $600 of wages at the end of the current month.
Received cash of $1,500 on accounts receivable accrued
at the end of the prior month.
Problem Solution
Transaction/
Adjustment
Assets
a.
+550
Liabilities
Stockholders’
Equity
Net
Income
+550
Problem Solution
Transaction/
Adjustment
Assets
a.
+550
Liabilities
Stockholders’
Equity
Net
Income
+550
Journal entry:
Dr. Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . $550
Cr. Service Revenue. . . . . . . . . . . . . . . . . . . . . .
$550
Problem Solution
Transaction/
Adjustment
Assets
a.
+550
Liabilities
Stockholders’
Equity
Net
Income
+550
Journal entry:
Dr. Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . $550
Cr. Service Revenue. . . . . . . . . . . . . . . . . . . . . .
Accounts receivable (an asset account) increases and
Service Revenue (a revenue account) also increases
which causes Net Income to increase.
$550
Problem Definition
a.
b.
c.
d.
e.
f.
g.
Provided services to a client on account; revenues
totaled $550.
Paid an insurance premium of $360 for the coming
year. An asset, Prepaid Insurance, was debited.
Recognized insurance expense for one month from the
above premium via a reclassification adjusting entry.
Paid $800 of wages accrued at the end of the prior
month.
Paid $2,600 of wages for the current month.
Accrued $600 of wages at the end of the current month.
Received cash of $1,500 on accounts receivable accrued
at the end of the prior month.
Problem Solution
Transaction/
Adjustment
b.
Assets
-360
+360
Liabilities
Stockholders’
Equity
Net
Income
Problem Solution
Transaction/
Adjustment
b.
Assets
Liabilities
Stockholders’
Equity
Net
Income
-360
+360
Journal entry:
Dr. Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . $360
Cr. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$360
Problem Solution
Transaction/
Adjustment
b.
Assets
Liabilities
Stockholders’
Equity
Net
Income
-360
+360
Journal entry:
Dr. Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . $360
Cr. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$360
Prepaid Insurance (an asset account) increases and Cash
(an asset account) decreases. No effect on Net Income.
Problem Definition
a.
b.
c.
d.
e.
f.
g.
Provided services to a client on account; revenues
totaled $550.
Paid an insurance premium of $360 for the coming year.
An asset, Prepaid Insurance, was debited.
Recognized insurance expense for one month from
the above premium via a reclassification adjusting
entry.
Paid $800 of wages accrued at the end of the prior
month.
Paid $2,600 of wages for the current month.
Accrued $600 of wages at the end of the current month.
Received cash of $1,500 on accounts receivable accrued
at the end of the prior month.
Problem Solution
Transaction/
Adjustment
Assets
c.
-30
Liabilities
Stockholders’
Equity
Net
Income
-30
Problem Solution
Transaction/
Adjustment
Assets
c.
-30
Liabilities
Stockholders’
Equity
Net
Income
-30
Journal entry:
Dr. Insurance Expens . . . . . . . . . . . . . . . . . . . . . . . .
Cr. Prepaid Insurance . . . . . . . . . . . . . . . . . . . .
$30
$30
Problem Solution
Transaction/
Adjustment
Assets
c.
-30
Liabilities
Stockholders’
Equity
Net
Income
-30
Journal entry:
Dr. Insurance Expense . . . . . . . . . . . . . . . . . . . . . . . . .
Cr. Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . .
$30
$30
Insurance Expense (an expense account) increases which
causes Net Income to decrease; Prepaid Insurance (an
asset account) decreases.
Problem Definition
a.
b.
c.
d.
e.
f.
g.
Provided services to a client on account; revenues
totaled $550.
Paid an insurance premium of $360 for the coming year.
An asset, Prepaid Insurance, was debited.
Recognized insurance expense for one month from the
above premium via a reclassification adjusting entry.
Paid $800 of wages accrued at the end of the prior
month.
Paid $2,600 of wages for the current month.
Accrued $600 of wages at the end of the current month.
Received cash of $1,500 on accounts receivable accrued
at the end of the prior month.
Problem Solution
Transaction/
Adjustment
Assets
Liabilities
d.
-800
-800
Stockholders’
Equity
Net
Income
Problem Solution
Transaction/
Adjustment
Assets
Liabilities
d.
-800
-800
Stockholders’
Equity
Net
Income
Journal entry:
Dr. Wages Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $800
Cr. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$800
Problem Solution
Transaction/
Adjustment
Assets
Liabilities
d.
-800
-800
Stockholders’
Equity
Net
Income
Journal entry:
Dr. Wages Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $800
Cr. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wages Payable (a liability account) decreases and Cash
(an asset account) also decreases. No effect on Net
Income.
$800
Problem Definition
a.
b.
c.
d.
e.
f.
g.
Provided services to a client on account; revenues
totaled $550.
Paid an insurance premium of $360 for the coming year.
An asset, Prepaid Insurance, was debited.
Recognized insurance expense for one month from the
above premium via a reclassification adjusting entry.
Paid $800 of wages accrued at the end of the prior
month.
Paid $2,600 of wages for the current month.
Accrued $600 of wages at the end of the current month.
Received cash of $1,500 on accounts receivable accrued
at the end of the prior month.
Problem Solution
Transaction/
Adjustment
Assets
e.
-2,600
Liabilities
Stockholders’
Equity
Net
Income
-2,600
Problem Solution
Transaction/
Adjustment
Assets
e.
-2,600
Liabilities
Stockholders’
Equity
Net
Income
-2,600
Journal entry:
Dr. Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,600
Cr. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,600
Problem Solution
Transaction/
Adjustment
Assets
e.
-2,600
Liabilities
Stockholders’
Equity
Net
Income
-2,600
Journal entry:
Dr. Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,600
Cr. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,600
Wages Expense (an expense account) increases which
causes Net Income to decrease; Cash (an asset account)
decreases.
Problem Definition
a.
b.
c.
d.
e.
f.
g.
Provided services to a client on account; revenues
totaled $550.
Paid an insurance premium of $360 for the coming year.
An asset, Prepaid Insurance, was debited.
Recognized insurance expense for one month from the
above premium via a reclassification adjusting entry.
Paid $800 of wages accrued at the end of the prior
month.
Paid $2,600 of wages for the current month.
Accrued $600 of wages at the end of the current
month.
Received cash of $1,500 on accounts receivable accrued
at the end of the prior month.
Problem Solution
Transaction/
Adjustment
f.
Assets
Liabilities
+600
Stockholders’
Equity
Net
Income
-600
Problem Solution
Transaction/
Adjustment
f.
Assets
Liabilities
Stockholders’
Equity
Net
Income
+600
-600
Journal entry:
Dr. Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . $600
Cr. Wages Payable . . . . . . . . . . . . . . . . . . . . . . .
$600
Problem Solution
Transaction/
Adjustment
f.
Assets
Liabilities
Stockholders’
Equity
+600
Net
Income
-600
Journal entry:
Dr. Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . $600
Cr. Wages Payable . . . . . . . . . . . . . . . . . . . . . . .
$600
Wages Expense (an expense account) increases which
causes Net Income to decrease; Wages Payable (a liability
account) increases.
Problem Definition
a.
b.
c.
d.
e.
f.
g.
Provided services to a client on account; revenues
totaled $550.
Paid an insurance premium of $360 for the coming year.
An asset, Prepaid Insurance, was debited.
Recognized insurance expense for one month from the
above premium via a reclassification adjusting entry.
Paid $800 of wages accrued at the end of the prior
month.
Paid $2,600 of wages for the current month.
Accrued $600 of wages at the end of the current month.
Received cash of $1,500 on accounts receivable
accrued at the end of the prior month.
Problem Solution
Transaction/
Adjustment
g.
Assets
+1,500
-1,500
Liabilities
Stockholders’
Equity
Net
Income
Problem Solution
Transaction/
Adjustment
g.
Assets
Liabilities
Stockholders’
Equity
Net
Income
+1,500
-1,500
Journal entry:
Dr. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,500
Cr. Accounts Receivable. . . . . . . . . . . . . . . . . . .
$1,500
Problem Solution
Transaction/
Adjustment
g.
Assets
Liabilities
Stockholders’
Equity
Net
Income
+1,500
-1,500
Journal entry:
Dr. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,500
Cr. Accounts Receivable. . . . . . . . . . . . . . . . . . .
$1,500
Cash (an asset account) increases and Accounts
Receivable (an asset account) decreases. No effect on Net
Income.
Problem Solution
Transaction/
Adjustment
a.
b.
c.
d.
e.
f.
g.
Assets
+550
-360
+360
-30
-800
-2,600
Liabilities
Net
Income
+550
-30
-800
+600
+1,500
-1,500
Stockholders’
Equity
-2,600
-600
Problem Solution
Journal entries:
a. Dr. Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . $ 550
Cr. Service Revenue . . . . . . . . . . . . . . . . . . . . . .
$ 550
b. Dr. Prepaid Insurance. . . . . . . . . . . . . . . . . . . . . . . . . .
360
Cr. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
360
c. Dr. Insurance Expense . . . . . . . . . . . . . . . . . . . . . . . . .
30
Cr. Prepaid Insurance . . . . . . . . . . . . . . . . . . . . .
30
d. Dr. Wages Payable. . . . . . . . . . . . . . . . . . . . . . . . . . . .
800
Cr. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
800
e. Dr. Wages Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,600
Cr. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,600
f. Dr. Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600
Cr. Wages Payable. . . . . . . . . . . . . . . . . . . . . . . .
600
g. Dr. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500
Cr. Accounts Receivable. . . . . . . . . . . . . . . . . . .
1,500
Accounting
What the Numbers Mean 10e
You should now have a better understanding
of recording transactions and adjustments.
Remember that there is a demonstration problem for
each chapter that is here for your learning benefit.
David H. Marshall
Wayne W. McManus
Daniel F. Viele