1. Analyzing Transactions
LO 2b – Analyzing Transactions that Affect Balance Sheet Accounts

2. LO 2
Transaction A
On November 1, Chris Clark deposited $25,000 in a bank account in the name of NetSolutions in return for shares of stock in the corporation.
On November 1, Chris Clark deposits $25,000 in a bank account in the name of NetSolutions in exchange for shares of stock.

3. Accounting Equation Impact
LO 2
Transaction A
Step 2
Step 3
Step 1
Step 4
Step 5
Step 3
For the first entry on the journal page, the year is recorded along with the month and day in the Date column of the journal. The account debited is entered in the Description column. Cash, an asset, is being received by the business; therefore, Cash is debited for $25,000. The other element affected by this transaction is the Capital Stock account which was also increased. Since increases in Stockholders’ Equity accounts are recorded as credits, Capital Stock is written in the Description column of the journal on the next available line after the debit. The title of the account being credited is indented slightly in the Description column. Only the exact title of each account is used in the Description column, and the words debit and credit are not written. A brief explanation is added in the Description column of the journal. Adding an explanation is optional.
The effect of this entry is shown in the T accounts of NetSolutions. After the journal entry is transferred to the ledger accounts, the Cash account will have a debit of $25,000, and Capital Stock will have a credit of $25,000.
Accounting Equation Impact
Assets = Liabilities Stockholders’ Equity (investment)
increase
increase

4. LO 2
Transaction B
On November 5, NetSolutions paid $20,000 for the purchase of land as a future building site.
The next transaction to consider occurred on November 5 when NetSolutions bought land for $20,000, paying cash.

5. Accounting Equation Impact
LO 2
Transaction B
Accounting Equation Impact
Assets = Liabilities Stockholders’ Equity
It is typical to leave a blank line after each journal entry. The first step to enter this transaction in the journal is to indicate the date. The Land account increased by $20,000, which is entered as a debit in the Description column of the journal. The dollar amount of the debit of $20,000 is entered in the Debit column of the journal. The decrease to cash is recorded as a credit to Cash. The description of the account credited, Cash, is indented slightly in the Description column of the journal. The $20,000 credit is entered in the Credit column of the journal.
increase
decrease

6. LO 2
Transaction C
On November 10, NetSolutions purchased supplies on account for $1,350.
On November 10, NetSolutions purchased supplies on account for $1,350.

7. Accounting Equation Impact
LO 2
Transaction C
Accounting Equation Impact
Assets = Liabilities Stockholders’ Equity
On November 10, supplies, an asset, are purchased in the amount of $1,350. The name of the account debited is written in the Description column, and the amount of the debit of $1,350 is written in the Debit column. NetSolutions has made a promise to pay for the supplies in the future. Therefore, accounts payable, a liability, has increased. The name of the account credited, Accounts Payable, is entered in the Description column. The amount of the credit of $1,350 is entered in the amount column of the journal. The explanation is then added.
increase
increase

8. LO 2
Transaction D
On November 18, NetSolutions received cash of $7,500 from customers for services provided.
On November 18, NetSolutions received cash of $7,500 from customers for services provided.

9. Accounting Equation Impact
LO 2
Transaction D
Accounting Equation Impact
Assets = Liabilities Stockholders’ Equity (Revenue)
On November 18, NetSolutions received cash from a customer for performing services. Journalize this increase in assets by debiting Cash. As in all journal entries, write the date in the first column, and then write the title of the account in the Description column. Write $7,500 in the Debit column of the journal. NetSolutions’ revenue account is called Fees Earned. As in all journal entries, write the name of the account credited in the Description column, slightly indented. Enter the $7,500 in the Credit column. Notice that the date is written only once. Add a brief explanation, using as many lines as necessary. Skip a line in the journal between each journal entry.
increase
increase

10. Income Statement Accounts
LO 2
Income Statement Accounts
Credit for increases (+)
Debit for decreases (–)
Revenue Accounts
Income Statement Accounts
Credit for decreases (–)
Debit for increases (+)
Expense Accounts
Less

11. LO 2
Transaction E
On November 30, NetSolutions incurred the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.
Throughout the month, NetSolutions incurred the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

12. Accounting Equation Impact
LO 2
Transaction E
Accounting Equation Impact
Assets = Liabilities Stockholders’ Equity (Expense)
Enter the date in the Date column, and enter the name of each expense account on its own line in the Description column. Write each debit “flush” with the left margin of the Description column. Notice that the date is entered only once. An entry with more than one debit and credit is called a compound journal entry. Credit Cash for the total paid for expenses. Write the credit to Cash in the Description column, slightly indented, from the margin. Enter the amount of cash paid, $3,650, in the Credit column.
All four expense accounts increase
decrease

13. LO 2
Transaction F
On November 30, NetSolutions paid creditors on account, $950.
On November 30, NetSolutions paid creditors on account, $950.

14. Accounting Equation Impact
LO 2
Transaction F
Accounting Equation Impact
Assets = Liabilities Stockholders’ Equity
The liability, accounts payable, has decreased. Since decreases in liabilities are recorded as debits, the debit to accounts payable is entered in the Description column, and the $950 is entered in the Debit column. The decrease in cash is entered as a credit to Cash in the Description column, and the $950 credit is entered in the Credit column.
decrease
decrease

15. LO 2
Transaction G
NetSolutions purchased $1,350 of supplies on November 10. Chris Clark determined that the cost of supplies on hand on November 30 was $550 or, stated another way, $800 in supplies had been used.
On November 30, a count revealed that $550 of supplies were on hand at the end of the month.

16. Accounting Equation Impact
LO 2
Transaction G
Accounting Equation Impact
Assets = Liabilities Stockholders’ Equity (Expense)
Supplies were originally purchased in the amount of $1,350. When the count is done at the end of the month and only $550 of supplies remain on hand, that means $800 of supplies have been used up in operations. To record this, enter the date in the first column. Write the account debited, Supplies Expense, in the Description column. Enter the amount, $800, in the Debit column. Remember, increases in expenses cause owner’s equity to decrease, which is why we debit Supplies Expense. Write the account credited, Supplies, in the Description column. Enter the amount, $800, in the Credit column. Add a brief explanation after the credit.
decrease
increase

17. LO 2
Transaction H
On November 30, NetSolutions paid $2,000 to stockholders as dividends.
On November 30, NetSolutions paid dividends, $2,000.

18. Accounting Equation Impact
LO 2
Transaction H
Accounting Equation Impact
Assets = Liabilities Stockholders’ Equity (Dividends)
The Dividends account is increased with a debit. Credit Cash for the total paid for dividends. Write the credit to Cash in the Description column, slightly indented, from the margin. Enter the amount of cash paid, $2,000, in the Credit column.
decrease
increase

19. Income Statement Accounts
LO 2
Income Statement Accounts
Debits
Credits
Revenue accounts… Decrease (-) Increase (+)
Expense accounts… Increase (+) Decrease (-)
Expense accounts work opposite revenue accounts. Since increases in expenses cause owner’s equity to decrease, we record increases in expenses as debits. Decreases in expenses are recorded as credits.