SC company – coming back to the 26th October:
A: SC company
1. On October 1., stockholders invest 10 000 $ in an outdoor guide service
company to be known as SC.
2. On October 1. SC borrows cash of 5000 $ by signing a 3-month, 12 %,
note payable;
3. On October 2nd SC uses cash of 5000 $ to purchase equipment
4. On October 2nd, SC received a 1200 $ cash advance from R. Knox, a
client, for guide services that are expected to be completed in the
future
5. On October 3rd, SC receives 10 000 $ in cash from Copa Company for
guide services provided in October;
6. On October 3rd, SC paid office rent for October in cash, 900 $
7. On October 4th, SC pays (600 $) a 1-year insurance policy that will
expire next year on September 30th
8. On October 5th, SC purchased on account an estimated 3 months of
supplies from Aero Supply for 2 500 $.
9. On October 9th, SC hired four employees to begin work on October 15th,
Each employee will receive a weekly salary of 500 $ for a 5-day work
week, payable every 2 weeks – first payment on 26th of October;
10.On October 20th, SC paid a 500$ cash dividend to stakeholders;
11.On October 26th SC paid employee salaries of 4000 $ in cash.
Accounts:
Cash A
Debit
15 200
Credit
Supplies A
Debit
2 500
Credit
(12) 1500
Prepaid insurance A
Debit
Credit
600
50(13)
Equipment A
Debit
Credit
5 000
Accumulated depre. (A-)
Debit
Credit
40 (14)
Notes payable L
Debit
Credit
5 000
(17) 50
Accounts payable L
Debit
Credit
2 500
Unearned service revenue
L
Debit
Credit
(15) 400
1 200
Owners capital C
Debit
Credit
10 000
Dividends (C -)
Debit
Credit
500
Service revenue R
Debit
Credit
10 000
(15) 400
(16) 200
Supplies expense E
Debit
Credit
(12) 1500
Accounts receivable A
Debit
Credit
(16) 200
Interest expense E
Debit
Credit
(17) 50
Depreciation expense E
Debit
Credit
(14) 40
Salaries expense E
Debit
Credit
4000
Rent expense E
Debit
Credit
900
Insurance expense (E)
D
50 (13)
Periodicity assumption: Economic life of business can be divided into artificial time periods
Revenue Recognition Principle: Revenue recognized in the accounting period in which it is earned
(regardless of the payment moment – accrual principle, not cash principle)
Expense Recognition Principle: Expenses matched with revenues in the period when efforts are
expended (resources used) to generate revenue, regardless of the payment moment - accrual
principle, not cash principle)
Revenue and Expense Recognition – in accordance with the law, generally accepted rules.
In the end of each period – adjusting entries.
Types of adjusting entries:
1) Deferrals:
a) Prepaid expenses
b) Unearned revenues
2) Accruals:
a) Accrued revenues (earned but not yet recorded or paid)
b) Accrues expenses (incurred but not yet recorded or paid)
12.On October 30th an inventory count : supplies worth 1000$ are still on
hand.
13.One month’s insurance has expired
14.The equipment has been used – assumption: 40$ per month
15.It has been estimated that the work of 400$ of the service for the
customer has actually been done
16.Service done for the client but not yet recorded and billed to the client
on the 31th of October has been found: 200 $
17.The note signed on the 1st of October involves interests, 12% per year
thus 1% per month (they are not being paid yet!)
18.Recording the due salaries for days worked, but not paid.
Preparing financial statements:
 R and E accounts – Income statement, Revenues – Expenses = Net
Income (a C account, credited)
 A,L and C accounts – balance sheet (- C diminishes the Capital, - A
diminishes the assets)
 Cash Flow statement – on the basis of the Cash account.