©2008 Pearson Prentice Hall. All rights reserved.

Transactions Any event that impacts the financial position of a business Can be measured reliably Two sides: Business gives something Business receives something Accounting records both sides of a transaction Business activity is all about transactions. A transaction is any event that has a financial impact on the business and can be measured reliably. Transactions provide objective information about the financial impact on a company. Every transaction has two sides: ■ You give something, and ■ You receive something In accounting, we always record both sides of a transaction. ©2008 Pearson Prentice Hall. All rights reserved.

The Account Record of all changes in a particular asset, liability or equity Remember the accounting equation Assets = Liabilities + Owner’s Equity For each asset, each liability, and each element of stockholders’ equity, we use a record called the account. An account is the record of all the changes in a particular asset, liability, or stockholders’ equity during a period. The account is the basic summary device of accounting. ©2008 Pearson Prentice Hall. All rights reserved.

Common Asset Accounts Cash Bank accounts, cash on hand Accounts Receivable Customer promise to pay for goods or services provided Represents future collection of cash Notes receivable Written promise to pay Bear interest Assets are economic resources that provide a future benefit for a business. Most firms use the following asset accounts: Cash means money and any medium of exchange including bank account balances, paper currency, coins, certificates of deposit, and checks. Accounts Receivable. Companies sells their goods and services and receives a promise for future collection of cash. The Accounts Receivable account holds these amounts. Notes Receivable. A company may receive a note receivable from a customer, who signed the note promising to pay it. A note receivable is similar to an account receivable, but a note receivable is more binding because the customer signed the note. Notes receivable usually specify an interest rate. ©2008 Pearson Prentice Hall. All rights reserved.

Common Asset Accounts Inventory Products held for sale Prepaid expenses Expenses paid for in advance Provide future benefit Includes prepaid rent, prepaid insurance and supplies Land Other accounts include: Inventory. One of most important assets of a company that sells or manufactures products is its inventory – the goods its sells to customers. Other titles for this account include Merchandise and Merchandise Inventory. Prepaid Expenses. A company may pas certain expenses in advance, such as insurance and rent. A prepaid expense is an asset because the payment provides a future benefit for the business. Prepaid Rent, Prepaid Insurance, and Supplies are prepaid expenses. Land. The Land account shows the cost of the land a company uses in its operations. ©2008 Pearson Prentice Hall. All rights reserved.

Common Asset Accounts Buildings Equipment Furniture and Fixtures Additional accounts include: Buildings. The costs of a company’s office building, manufacturing plant, and the like appear in the Buildings account. Equipment, Furniture, and Fixtures. Companies can have a separate asset account for each type of equipment, for example, Manufacturing Equipment and Office Equipment. The Furniture and Fixtures account shows the cost of these assets, which are similar to equipment. ©2008 Pearson Prentice Hall. All rights reserved.

Common Liability Accounts
Accounts payable Company’s promise to pay for goods or services received Notes payable Signed agreements to pay Include interest Accrued liabilities Expenses that have not been paid Include interest payable and salaries payable Recall that a liability is a debt. A payable is always a liability. The most common types of liabilities include: Accounts Payable. The Accounts Payable account is the direct opposite of Accounts Receivable. A company’s promise to pay a debt arising from a credit purchase of inventory or from a utility bill appears in the Accounts Payable account. Notes Payable. A note payable is the opposite of a note receivable. The Notes Payable account includes the amounts a company must pay because it signed notes promising to pay a future amount. Notes payable, like notes receivable, also carry interest. Accrued Liabilities. An accrued liability is a liability for an expense a company has not yet paid. Interest Payable and Salary Payable are accrued liability accounts for most companies. Income Tax Payable is another accrued liability. ©2008 Pearson Prentice Hall. All rights reserved.

Equity Accounts Common stock Shareholders’ investment in the company Retained earnings Earnings kept by the company Cumulative net income minus dividends paid to shareholders Revenues Earned by providing goods or services Expenses Costs of operating a business The owners’ claims to the assets of a corporation are called stockholders’ equity, shareholders’ equity, or simply owners’ equity. Corporate equity accounts include Common Stock, Retained Earnings, and Dividends accounts to record changes in the company’s stockholders’ equity. In a proprietorship, there is a single capital account. For a partnership, each partner has a separate owner equity account. Common Stock. The Common Stock account shows the owners’ investment in the corporation. The corporation receives cash and issues common stock to its stockholders. A company’s common stock is its most basic element of equity. All corporations have common stock. Retained Earnings. The Retained Earnings account shows the cumulative net income earned by a corporation over its lifetime, minus its cumulative net losses and dividends. Dividends. After profitable operations, the board of directors of a corporation may (or may not) declare and pay a cash dividend. Dividends are optional; they are decided by the board of directors. The corporation may keep a separate account titled Dividends, which indicates a decrease in Retained Earnings. Revenues. The increase in stockholders’ equity from delivering goods or services to customers is called revenue. The company uses as many revenue accounts as needed. The Sales Revenue account is often used for revenue earned by selling products. A Service Revenue account is used for the revenue it earns by providing services to customers. For example, a lawyer provides legal services for clients uses a Service Revenue account. A business that loans money to an outsider needs an Interest Revenue account. If the business rents a building to a tenant, the business needs a Rent Revenue account. Expenses. The cost of operating a business is called expense. Expenses decrease stockholders’ equity, the opposite effect of revenues. A business needs a separate account for each type of expense, such as Cost of Goods Sold, Salary Expense, Rent Expense, Advertising Expense, Insurance Expense, Utilities Expense, and Income Tax Expense. Businesses strive to minimize expenses and thereby maximize net income. ©2008 Pearson Prentice Hall. All rights reserved.

Transaction Analysis Every transaction has at least two parts The accounting equation always balances before and after each transaction A common transaction for a new business is to issue stock to its owners How would this impact the accounting equation? Each Business transactions impacts at least two accounts. The accounting equation always balances. For example, if one asset increases, either a liability or equity account must increase; or another asset must decrease. Let’s do several examples of transactions and see how they affect the accounting equation. ©2008 Pearson Prentice Hall. All rights reserved.

Example Transaction (1)
Three friends decide to start a salon They invest $40,000 to begin the business The business issues common stock to the owners Three friends decide to start a business, a salon that provides hairstyling, manicures and massages. The three friends invest a total of $40,000 cash and receive common stock of the salon. ©2008 Pearson Prentice Hall. All rights reserved.

Type of Equity Transaction
Stockholders’ Equity Type of Equity Transaction + Assets = Liabilities Cash Common stock (1) +$50,000 (1) +$50,000 Issued stock The accounting equation is listed at the top to ensure it always balances. If cash is received by the corporation, assets will increase by $50,000. The other side of the transaction is common stock, which is a stockholders’ equity account. ©2008 Pearson Prentice Hall. All rights reserved.

Stockholders’ Equity = + Assets Liabilities Cash Supplies Equip. Accts Pay Common stock Retained Earnings (1) +$50,000 (1) + $50,000 (2) - $12,000 (2) + $12,000 $38,000 + $12,000 = $50,000 This time two asset accounts are impacted. Any time cash is paid, it decreases. The other asset is equipment; it increases. So, now the company has two assets totaling $50,000 and equity of $50,000. ©2008 Pearson Prentice Hall. All rights reserved.

Example Transactions (3)
The salon purchases hair styling and other supplies on account for $5,000 Next, the salon purchases supplies on account for $ “On account” means the salon will pay later. This is an account payable – a liability. ©2008 Pearson Prentice Hall. All rights reserved.

Stockholders’ Equity = + Assets Liabilities Cash Supplies Equip. Accts Pay Common stock Retained Earnings (1) +$50,000 (1) + $50,000 (2) - $12,000 (2) + $12,000 (3) +$5,000 (3) +$5,000 $38,000 $5,000 $12,000 $5,000 $50,000 In this transaction, an asset increases – supplies – and a liability increases – accounts payable. These amounts are added to the equation. Now the salon has $55,000 of assets and $ of liabilities and equity. $55,000 $55,000 ©2008 Pearson Prentice Hall. All rights reserved.

The salon earns $6,000 from providing services to customers. The business collected cash. Next, the salon actually starts earning revenue. The key phrase is “providing services”. The salon received cash. ©2008 Pearson Prentice Hall. All rights reserved.

Stockholders’ Equity = + Assets Liabilities Cash Supplies Equip. Accts Pay Common stock Retained Earnings (1) +$50,000 (1) + $50,000 (2) - $12,000 (2) + $12,000 (3) +$5,000 (3) +$5,000 (4) +$6,000 (4) +$6,000 Revenue So an assets increase – cash. Revenue is the “other side” of the transaction. Revenue increases retained earnings. So it is shown under Stockholders’ Equity. Again, as the balances as brought down and totaled, you can see that assets equal liabilities plus equity $44,000 $5,000 $12,000 $5,000 $50,000 $6,000 $61,000 $61,000 ©2008 Pearson Prentice Hall. All rights reserved.

The salon paid monthly rent of $4,000 The fifth transaction is the payment of rent. The word “paid” indicates a decrease in cash. Rent is a monthly expense. ©2008 Pearson Prentice Hall. All rights reserved.

Stockholders’ Equity Liabilities = + Assets Cash Supplies Equip. Accts Pay Common stock Retained Earnings (1) +$50,000 (1) + $50,000 (2) - $12,000 (2) + $12,000 (3) +$5,000 (3) +$5,000 (4) +$6,000 (4) +$6,000 Revenue (5) - $4,000 So, cash (an asset) will decrease. Expenses reduce Retained Earnings. Therefore, equity is decreased by $4,000. As always, the accounting equation balances after we total. (5) - $4,000 Expense $40,000 $5,000 $12,000 $5,000 $50,000 $2,000 $57,000 $57,000 ©2008 Pearson Prentice Hall. All rights reserved.

Learning Objective 2 Understand how accounting works
The second objective is to understand how accounting works. ©2008 Pearson Prentice Hall. All rights reserved.

Double-entry Accounting
Each transaction affects at least two accounts As you saw in the salon example, every business transaction affects at least two accounts. This is called double-entry accounting. There are no transactions that only affect one account. ©2008 Pearson Prentice Hall. All rights reserved.

Every transaction has both a debit and a credit
The T-account Account Title Debits on the left side Credits on the right side Every transaction has both a debit and a credit The T-account s a method of recording transactions and keeping track of the dollar amount in particular account. Accounting uses the terms “debit” and “credit” to show the changes to accounts. Debits are always on the left. Credits are on the right. Every transactions has at least one debit and one credit. Debits always equal credits. ©2008 Pearson Prentice Hall. All rights reserved.

Debit and Credit Rules Debit and credit are neutral terms Not good or bad Mean either a decrease or increase depending on the type of account Some students think that debits are good and credits are bad (or vice versa). Remember that they are neutral terms. Debits and credits are increases or decreases depending on the type of account. ©2008 Pearson Prentice Hall. All rights reserved.

Debits and Credits STOCKHOLDERS’ EQUITY = + ASSETS LIABILITIES Debit - Credit + Debit + Credit - Debit - Credit + Debit and credit rules are based on the accounting equation. All assets are increased by debits and decreased by credits. The other side of the equation – liabilities and equity – are the opposite. Credits increase and debits decrease. ©2008 Pearson Prentice Hall. All rights reserved.

Stockholders’ Equity Debit & Credits
Common stock and Retained Earnings are increased by credits Dividends reduce Retained Earnings Dividends are increased by debits Net income increases Retained Earnings Net Income = Revenues minus Expenses Revenues are increased by credits Expenses are increased by debits Since equity accounts have different categories, we need to split it out for purposes of debits and credit rules. The basic equity accounts of “common stock” and “retained earnings” are increased by credits. Since dividends reduce retained earnings, that account is the opposite. It is increased by debits. Net Income increases retained earnings. Net income is computed by subtracting expenses from revenues. Therefore, revenues follow the same debit/credit rules as retained earnings. Revenues are increased by credits. Since expense decrease net income, they are increased by debits. ©2008 Pearson Prentice Hall. All rights reserved.

Debits and Credits Debit to increase Assets Dividends Expenses Credits to increase Liabilities Revenue Common stock Retained earnings It’s important to memorize the debit and credit rules. If you can remember what increases an account, the opposite will be a decrease. Assets, dividends and expenses are increased by debits. Liabilities, Revenue, Common Stock and Retained Earnings are credits. Do NOT proceed until you learn these rules! ©2008 Pearson Prentice Hall. All rights reserved.

Practicing Debits and Credits
Increase cash Debit Increase accounts payable Credit Decrease accounts receivable Increase revenue Let’s practice the debit credit rules. If a company wants to increase cash, what should it do? Cash is an asset. Assets are increased by debits. Account payable is a liability. Liabilities are increased by credits. What type of account is accounts receivable? An asset. If you want to decrease an asset, you credit. Revenues are increased by credits. ©2008 Pearson Prentice Hall. All rights reserved.

Practicing Debits and Credits
Increase rent expense Debit Increase common stock Credit Decrease notes payable Decrease cash __________________________ What type of account is cash? How is it increased? Rent expense is an expense. Expenses are increased by debits. Common stock is part of equity. Therefore, it is increased by a credit. Notes payable is a liability. Since credits increase liabilities, a debit would decrease it. We debited cash when we receive it. So if cash is decreased, we credit. ©2008 Pearson Prentice Hall. All rights reserved.

Learning Objective 3 Record transactions in the journal
The third learning objective is to record transactions in a journal. ©2008 Pearson Prentice Hall. All rights reserved.

The Journal Chronological record of transactions Three steps Identify accounts impacted by transaction Apply debit/credit rules for the increase or decrease in the accounts You should have at least one debit and one credit Record transactions in journal Accountants use a chronological record of transactions called a journal. The journalizing process follows three steps: 1. Specify each account affected by the transaction and classify each account by type (asset, liability, stockholders’ equity, revenue, or expense). 2. Determine whether each account is increased or decreased by the transaction. Use the rules of debit and credit to increase or decrease each account. 3. Record the transaction in the journal, including a brief explanation. The debit side is entered on the left margin, and the credit side is indented to the right. Step 3 is also called “making the journal entry” or “journalizing the transaction.” ©2008 Pearson Prentice Hall. All rights reserved.

Journal entry Write the account debited first and the amount in the left column Write (and indent) the account credited next and the amount in the right column Debits must equal credits When making a journal entry, start by first writing the title of the account that will be debited. The amount is placed in the left column. Next write the title of the account that will be credited. The account credited is indented a bit, so it is not directly under the account debited. The amount of the credit is placed in the right column. Remember, to keep the accounting equation in balance, debits must equal credits. ©2008 Pearson Prentice Hall. All rights reserved.

Apr 1 – Received $25,000 and issued common stock JOURNAL Date Accounts Debit Credit 1-Apr Cash $25,000 Common stock Exercise 2-18 will provide an example of how to prepare journal entries. Let’s prepare journal entries for Double Tree Cellular’s transactions for the month of April. The first transaction involves issuing common stock and cash. The two accounts are cash (an asset) and (common stock (an equity). The company is receiving cash, so it needs to be increased. Assets are increased by debits. The date is written and “cash” is written in the journal. The amount is written in the left-column that is labeled debit. Common stock is increased by credits. Common stock is written on the next line and indented. This helps the reader know that this account is being credited. The amount is placed in the right column labeled credit. ©2008 Pearson Prentice Hall. All rights reserved.

April 2 - Purchased $800 of office supplies on account JOURNAL Date Accounts Debit Credit 2-Apr Supplies $800 Accounts payable Next, the company purchases supplies on account. The two accounts are “supplies” and “accounts payable”. When companies buy items on account, it results in a liability. Supplies is an asset, and it needs to be increased. Debits increase assets. So “supplies” is written first with the amount in the debit column. Liabilities are increased by credits. Therefore, accounts payable is credited. ©2008 Pearson Prentice Hall. All rights reserved.

April 4 - Paid $20,000 cash for land to use as a building site JOURNAL Date Accounts Debit Credit 4-Apr Land $20,000 Cash On April 4, the company paid cash for land. This transaction involves two assets – land and cash. Land is increasing (debit) and cash is decreasing (credit). ©2008 Pearson Prentice Hall. All rights reserved.

April 6 - Performed service for customers and received cash of $2,000 JOURNAL Date Accounts Debit Credit 6-Apr ______ $2,000 __________ “Performed service” indicates revenue was earned. Revenues are recorded with a credit. The debit side would be the cash received. Cash is an assets, and assets are increased by debits. ©2008 Pearson Prentice Hall. All rights reserved.

April 9 Paid $100 on accounts payable JOURNAL Date Accounts Debit Credit 9-Apr Accounts payable $25,000 Cash The company paid part of the accounts payable balance. “Paid” indicates a decrease in cash, which is recorded with a credit. The accounts payable is decreasing, since the company is paying off a portion. To decrease a liability, you debit. ©2008 Pearson Prentice Hall. All rights reserved.

What account is credited when services are performed?
April 17 – Performed services for FedEx on account totaling $1,200 JOURNAL Date Accounts Debit Credit 17-Apr Accounts Receivable $1,200 ________________________ The phrase “performed services” appears again, indicating we need to credit revenue. This time the phrase “on account” is also used. This means the customer will pay later. This is the asset called accounts receivable. We need to increase it, so it is debited. What account is credited when services are performed? ©2008 Pearson Prentice Hall. All rights reserved.

Apr 23 – Collected $900 from FedEx on account JOURNAL Date Accounts Debit Credit 23-Apr Cash $900 Accounts Receivable The customer from six days ago pays part of its bill. “Collected” indicates cash coming in, so we need to increase the asset cash with a debit. Since the customer is paying down its account, accounts receivable needs to be decreased. So it is credited. ©2008 Pearson Prentice Hall. All rights reserved.

Apr 30 – Paid the following expense: salary, $1,000; rent, $500 JOURNAL Date Accounts Debit Credit 30-Apr Salary expense $1,000 Rent expense $500 Cash $1,500 This is an example of a compound transaction. There is more than one debit and one credit. Two expenses are paid. Expenses are increased by debits. So, we write each expense on a separate line, and the amounts of each expense in the left column. Cash is paid for the total. Cash is credited for $1500. Debits still have to equal credits in a compound transactions. ©2008 Pearson Prentice Hall. All rights reserved.

Posting Transferring information from the journal to the ledger The collection of accounts and their balances Transactions are recorded by date in the journal. To determine the dollar amount in an account (balance), the amounts must be transferred from the journal to the ledger. The ledger is the collection of the accounts and their balances/ ©2008 Pearson Prentice Hall. All rights reserved.

Posting JOURNAL Date Accounts Debit Credit 6-Apr Cash $2,000 Service revenue CASH SERVICE REVENUE Here is how posting works. The above entry shows the transaction of $2000 cash received for services provided. To post this entry, the debit to cash is transferred to the debit side of the t-account for cash. The $2000 credited to service revenue is transferred to the credit side of the service revenue T-account. $2,000 $2,000 ©2008 Pearson Prentice Hall. All rights reserved.

Flow of Accounting Data
Transaction occurs Transaction analyzed Accounts identified Debit/Credit rules applied Transaction recorded in the Journal Amounts posted to the Ledger To review, the flow of accounting data follows: Business transactions occur. The transactions are analyzed to identify the accounts affected and whether they should be increased or decreased. Then, the debit/credit rules are applied to increase and/or decrease the accounts. The transactions are recorded in the journal. Finally, the amounts from the journal are posted to the ledger. ©2008 Pearson Prentice Hall. All rights reserved.

Determining Account Balance
After transactions are posted, the amount in each ledger account is computed The debit side and credit side are totaled The difference between the two sides is computed If the debit side is larger, the account has a debit balance If the credit side is larger, the account has a credit balance After transactions are posted to the ledger, the account balance can be determined. The amounts on the debit side of the T-account are added up, as well as, the amounts on the credit side. The difference between the two totals is computed. The larger side is the balance. That is, if the debit total is greater than the credit total, the account balance is on the debit side. ©2008 Pearson Prentice Hall. All rights reserved.

Determining Account Balance
Cash $10,000 $7,000 The credits total to $19,000 $12,000 $15,000 The debits total to $33,000 $ 8,000 Here’s an example to demonstrate how to compute an account balance. First, add the amounts in the left column (debit side). They total to $33,000. Next add the two credit amounts on the right side. They equal $19,000. The difference between $33K and $19K is $14K. The debit side is larger. So cash has a debit balance of $14,000. $14,000 Cash has a debit balance of $14,000 ($33,000 - $19,000) ©2008 Pearson Prentice Hall. All rights reserved.

Trial Balance Lists all accounts with their balance Debit amounts in the left column Credit amounts in the right column Begins with assets, then liabilities and stockholders’ equity The columns are totaled and should equal each other Shows if debits equal credits A trial balance is a listing of all accounts from the ledger and the balances of those accounts. The debit accounts balances are listed in the left column and the credit account balances are listed in the right column. Traditionally, a trial balance begins with the assets, then the liabilities and equity accounts (including revenue and expenses). The two columns are totaled and should equal each others. This demonstrates that debits equal credits. ©2008 Pearson Prentice Hall. All rights reserved.

Correcting Errors Sometimes the trial balance columns don’t equal Steps to find the error: Search for any missing accounts Divide the out-of-balance amount by two This will help find a debit that was listed as a credit, and vice versa Divide the out-of-balance amount by nine Slide – misstating an amount by omitting or adding a zero ($4000 as $400) Transposition – switching figures within a number ($1342 as $1423) Sometimes an error occurs and the trial balance columns don’t equal each other. The first thing a person can do is look for any accounts in the ledger that were omitted from the trial balance. Also, make sure that amounts were posted correctly and in the correct column. If the error still cannot be located, compute the difference between the two columns. Divide this number by two. Look for this amount on the trial balance. Chances are a debit is listed as a credit or vice versa. If you still haven’t found the error, divide the out-of-balance amount by nine. If the result is a whole number (no decimals) look for one of the following two errors: a slide (a missing or extra zero in a balance) or a transposition (switching figures within the balance). ©2008 Pearson Prentice Hall. All rights reserved.

Chart of Accounts Each account is assigned a number Assets usually begin with 1 100s or 1000s Liabilities usually begin with 2 200s and 200s Stockholders’ Equity (Common Stock, Dividends and Retained Earnings) begin with 3 Revenues with a 4 and Expenses with a 5 Companies use a chart of accounts to assign numbers to specific accounts. A standard numbering system is used. Assets begin with a “1”. Depending on the size of the company, 100s or 1000s or even 10,000 is used. For example, cash might be account number 101 or 1010 or Liabilities begin with the number two. For example, accounts payable might be 201 or The pattern continues. Equity accounts begin with the number 3. Revenues begin with a four and expenses with a five. ©2008 Pearson Prentice Hall. All rights reserved.

Normal Balance What increases the account (debit or credit) is the normal balance Assets are increased by debits, so assets have a normal debit balance If the balance is not “normal”, it indicates a negative amount If cash has a credit balance, it means the company has overdrawn its bank account Each account also has a normal balance. If a debit increases the account, the account has a normal debit balance. For example, cash is an asset, assets are increased with debits. Cash has a normal debit balance. Accounts payable, on the other hand, would have a normal credit balance. If an account has a balance opposite of its normal balance, it indicates a negative balance. ©2008 Pearson Prentice Hall. All rights reserved.

Normal Balances DEBITS Assets Dividends Expenses CREDITS Liabilities Retained Earnings Common Stock Revenues Here’s a listing of the account groups and their normal balances. If you memorize these, you will have know what increases each type of account. ©2008 Pearson Prentice Hall. All rights reserved.

T-Accounts A quick informal analysis Helps users of financial information make decisions Sometimes, a business person is out in the field and doesn’t have a journal handy. T-Accounts offer a quick way to determine the impact of certain financial decisions. ©2008 Pearson Prentice Hall. All rights reserved.

Cash $10,000 Feb. 28 Bal. ? Cash Receipts $80,000 Total cash paid $ 5,000 T-Accounts also provide a visual picture of what impacts an account during a period. E2-26 demonstrates this. The beginning and ending balances of certain accounts are provided, along with the description and amount of what increased the account during the month. You can solve for the decrease in the account. If you have three out of four numbers, you can figure out the missing amount. Cash began March with a $10,000 balance and ended March with a $5000 balance. The beginning balance is placed on the left – the debit side – because cash has a normal debit balance. The ending balance is placed after the line, also on the debit side. Cash receipts were $80,000. Receipts increase cash, so that amount is placed on the debit side underneath the beginning balance. So we know that cash began the month with $10,000 was increased by $80,000 and ended the month with $ What was the amount of cash paid out during the month? Mar. 31 Bal. ©2008 Pearson Prentice Hall. All rights reserved.

Cash $10,000 Feb. 28 Bal. ________ Cash Receipts $80,000 Total cash paid Add together the beginning balance and cash receipts. Subtract the ending balance from that amount $ 5,000 Using basic algebra, you can solve for the missing amount. Add together the beginning balance and the receipts to get $90,000. Subtract the ending balance from the $90,000 subtotal to get the amount of cash paid - $85,000. You can check your work by adding $10K + $80K and subtracting $85K. When you do, the correct ending balance of cash is computed. Mar. 31 Bal. ©2008 Pearson Prentice Hall. All rights reserved.

(b) Accounts Receivable $26,000 Feb. 28 Bal. ? Cash collections from customers Sales on account $50,000 $ 24,000 We can use the set up from cash to help solve for the amount “cash collected from customers”. The beginning and ending balance of accounts receivable are provided. Sales on account increase accounts receivable. Cash collections decrease accounts receivable. Mar. 31 Bal. ©2008 Pearson Prentice Hall. All rights reserved.

(b) Accounts Receivable $26,000 Feb. 28 Bal. Cash collections from customers Sales on account $50,000 $52,000 $ 24,000 Add together the beginning balance of AR and add sales on account. The result is $76,000. Subtract the ending balance of $24,000 to determine the cash collections. Mar. 31 Bal. $26,000 + $50,000 = $76,000 $76,000 - $24,000 = $52,000 ©2008 Pearson Prentice Hall. All rights reserved.

Note Payable $13,000 Feb. 28 Bal. Cash paid on note ? $80,000 New Borrowing $ 21,000 Mar. 31 Bal. Now, we need to switch over to the credit side of the T-Account for notes payable, a liability with a normal credit balance. Again, place the beginning and ending amounts in the T-Account. The new borrowing is an increase to notes payable, while cash paid on the note is a decrease. ©2008 Pearson Prentice Hall. All rights reserved.

Note Payable $13,000 Feb. 28 Bal. Cash paid on note $72,000 $80,000 New Borrowing $13,000 + $80,000 = $93,000 $93,000 - $21,000 = $72,000 $ 21,000 Mar. 31 Bal. Add the beginning balance and the new borrowing to get the subtotal of $93,000. Subtract the ending balance to solve for the cash paid on the note. ©2008 Pearson Prentice Hall. All rights reserved.

©2008 Pearson Prentice Hall. All rights reserved.

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