Posting Journal Entries to Ledger Account and Trial

Posting Journal Entries to Ledger Account and Trial Balance 1

Journalizing and Posting 2

Dec. 1 Net. Solutions paid a premium of $2, 400 for a comprehensive insurance policy covering two years. Page 2 JOURNAL Date Description 2005 1 Dec. 31 Prepaid Insurance 2 Cash 3 Paid premium on two-year 4 policy. Post. Ref. Debit Credit 2 400 00 3

Page 2 JOURNAL Date Description Post. Ref. 2005 1 Dec. 1 Prepaid Insurance 2 Debit Credit 2 400 00 Cash 2 400 00 3 Paid premium on two-year 4 policy. ACCOUNT Date 2005 Dec. 1 Prepaid Insurance Item Post. Ref. Debit Credit 2 400 00 ACCOUNT NO. 15 Balance Debit Credit 2 400 00 4

Page 2 JOURNAL Date Description 2005 1 Dec. 1 Prepaid Insurance 2 Post. Ref. 15 Debit Credit 2 400 00 Cash 2 400 00 3 Paid premium on two-year 4 policy. ACCOUNT Prepaid Insurance Date 2005 Dec. 1 Item Post. Ref. 2 Debit Credit 2 400 00 ACCOUNT NO. 15 Balance Debit Credit 2 400 00 5

Page 2 JOURNAL Date Post. Ref. Description 2005 1 Dec. 1 Prepaid Insurance 2 15 Debit Credit 2 400 00 Cash 2 400 00 3 Paid premium on two-year 4 policy. ACCOUNT Date 2005 Nov. 30 Dec. 1 ACCOUNT NO. 11 Cash Item Post. Ref. 2 Debit Credit Balance Debit Credit 2 000 00 5 900 00 2 400 00 3 500 00 6

Page 2 JOURNAL Date Post. Ref. Description 2005 1 Dec. 1 Prepaid Insurance 15 2 11 Cash 3 Paid premium on two-year 4 policy. ACCOUNT Cash Date 2005 Item Debit Credit 2 400 00 ACCOUNT NO. 11 Post. Ref. Debit Credit Balance Debit Credit Nov. 30 2 2 000 00 5 900 00 Dec. 1 2 2 400 00 3 500 00 7

Dec. 1 Net. Solutions paid rent for December, $800. 14 15 16 1 Rent Expense Unearned Rent 52 11 800 00 Paid rent for December. 17 8

Dec. 1 Net. Solutions receives $360 for three month’s rent for land beginning December 1. 14 15 1 Cash 11 Unearned Rent 16 Received advanced payment 17 For three months’ rent of land. 23 360 00 9

Dec. 4 Net. Solutions purchased office equipment on account from Executive Supply Co. for $1, 800. 18 19 4 Office Equipment Accounts Payable 20 Purchased office equipment on 21 account. 18 21 1 800 00 10

Dec. 6 Net. Solutions paid $180 for a newspaper advertisement. 21 22 23 6 Miscellaneous Expense Cash 59 11 180 00 Paid for newspaper ad. 24 11

Dec. 11 Net. Solutions paid creditors $400. 24 25 26 11 Accounts Payable Cash 21 11 400 00 Paid creditors on account. 27 12

Dec. 13 Net. Solutions paid a receptionist and part-time assistant $950 for two weeks’ wages. Page 3 JOURNAL Date Description 2005 Post. Ref. 1 Dec. 13 Wages Expense 51 2 11 3 Cash Debit Credit 950 00 Paid two week’s wages. 4 13

Dec. 16 Net. Solutions received $3, 100 from fees earned for the first half of December. 5 6 7 16 Cash 11 Fees Earned 41 3 100 00 Received fees from customers. 8 14

Dec. 16 Fees earned on account totaled $1, 750 for the first half of December. 9 10 11 16 Accounts Receivable Fees Earned 12 41 1 750 00 Received fees from customers. 12 15

Dec. 20 Net. Solutions paid $900 to Executive Supply Co. on the $1, 800 debt owed from the December 4 transaction. 13 14 20 Accounts Payable Cash 15 Paid part of amount owed to 16 Executive Supply Co. 21 11 900 00 16

Dec. 21 Net. Solutions received $650 from customers in payment of their accounts. 18 19 21 Cash 11 Accounts Receivable 20 Received cash from customer 21 on account. 12 650 00 17

Dec. 23 Net. Solutions paid $1, 450 for supplies. 22 23 Supplies 14 23 Cash 11 24 1 450 00 Purchased supplies. 25 18

Dec. 27 Net. Solutions paid the receptionist and part-time assistant $1, 200 for two weeks’ wages. 27 27 Wages Expense 51 28 Cash 11 29 1 200 00 Paid two weeks’ wages. 30 19

Dec. 31 Net. Solutions paid its $310 telephone bill for the month. 31 31 Utilities Expense 54 32 Cash 11 33 310 00 Paid telephone bill. 34 20

Dec. 31 Net. Solutions paid its $225 electric bill for the month. Page 4 JOURNAL Date Description 2005 Post. Ref. 1 Dec. 31 Utilities Expense 54 2 11 3 Cash Debit Credit 225 00 Paid utility bill. 4 21

Dec. 31 Net. Solutions received $2, 870 from fees earned for the second half of December. 5 6 7 31 Cash 11 Fees Earned 41 2 870 00 Received fees from customers. 8 22

Dec. 31 Net. Solutions earned $1, 120 on account for the second half of December. 9 10 31 Accounts Receivable Fees Earned 11 Recorded fees earned on 12 account. 12 41 1 120 00 23

Dec. 31 Net. Solutions paid dividends of $2, 000 to stockholders. 14 15 16 31 Dividends Cash 33 11 2 000 00 Paid dividends to stockholders. 17 24

Dec. 16 Net. Solutions received $3, 100 from fees earned for the first half of December. 5 6 7 16 Cash 11 Fees Earned 41 3 100 00 Received fees from customers. 8 25

Dec. 16 Fees earned on account totaled $1, 750 for the first half of December. 9 10 11 16 Accounts Receivable Fees Earned 12 41 1 750 00 Received fees from customers. 12 26

Dec. 20 Net. Solutions paid $900 to Executive Supply Co. on the $1, 800 debt owed from the December 4 transaction. 13 14 20 Accounts Payable Cash 15 Paid part of amount owed to 16 Executive Supply Co. 21 11 900 00 27

Dec. 21 Net. Solutions received $650 from customers in payment of their accounts. 18 19 21 Cash 11 Accounts Receivable 20 Received cash from customer 21 on account. 12 650 00 28

Dec. 23 Net. Solutions paid $1, 450 for supplies. 22 23 Supplies 14 23 Cash 11 24 1 450 00 Purchased supplies. 25 29

Dec. 27 Net. Solutions paid the receptionist and part-time assistant $1, 200 for two weeks’ wages. 27 27 Wages Expense 51 28 Cash 11 29 1 200 00 Paid two weeks’ wages. 30 30

Dec. 31 Net. Solutions paid its $310 telephone bill for the month. 31 31 Utilities Expense 54 32 Cash 11 33 310 00 Paid telephone bill. 34 31

Dec. 31 Net. Solutions paid its $225 electric bill for the month. JOURNAL Date Description 2005 Page 4 Post. Ref. 1 Dec. 31 Utilities Expense 54 2 11 3 Cash Debit Credit 225 00 Paid utility bill. 4 32

Dec. 31 Net. Solutions received $2, 870 from fees earned for the second half of December. 5 6 7 31 Cash 11 Fees Earned 41 2 870 00 Received fees from customers. 8 33

Dec. 31 Net. Solutions earned $1, 120 on account for the second half of December. 9 10 31 Accounts Receivable Fees Earned 11 Recorded fees earned on 12 account. 12 41 1 120 00 34

Dec. 31 Net. Solutions paid dividends of $2, 000 to stockholders. 14 15 16 31 Dividends Cash 33 11 2 000 00 Paid dividends to stockholders. 17 35

Continuing with the Example of JJ Lawn Service 36

Posting Journal Entries to the Ledger Accounts 37

Posting Journal Entries to the Ledger Accounts 38

Posting Journal Entries to the Ledger Accounts Let’s see what the cash account looks like after posting the cash portion of this transaction for JJ’s Lawn Care Service. 39

Ledger Accounts After Posting This ledger format is referred to as a running balance (as opposed to simple T accounts). 40

What is Net Income? Net income is not an asset it’s an increase in owners’ equity from profits of the business. A = L + OE Increase Decrease Either (or both) of these effects occur as net income is earned. . . Increase . . . but this is what “net income” really means. 41

Retained Earnings A = L + OE Capital Stock Retained Earnings The balance in the Retained Earnings account represents the total net income of the corporation over the entire lifetime of the business, less all amounts which have been distributed to the stockholders as dividends. 42

Revenue and Expenses The price for goods sold and services rendered during a given accounting period. Increases owner’s equity. The costs of goods and services used up in the process of earning revenue. Decreases owner’s equity. 43

The Realization Principle: When To Record Revenue Realization Principle Revenue should be recognized at the time goods are sold and services are rendered.

The Matching Principle: When To Record Expenses Matching Principle Expenses should be recorded in the period in which they are used up. 45

Debits and Credits for Revenue and Expenses decrease owner’s equity. EQUITIES Debit Credit for Decrease Increase Revenues increase owner’s equity. EXPENSES REVENUES Debit Credit for Increase Debit Credit for Decrease Increase 46

Investments by and Payments to Owners Payments to owners decrease owners’ equity. EQUITIES Debit Credit for Decrease Increase DIVIDENDS Debit Credit for Increase Decrease Owners’ investments increase owners’ equity. CAPITAL STOCK Debit Credit for Decrease Increase 47

Let’s analyze the revenue, and expense transactions for JJ’s Lawn Care Service for the month of May. We will also analyze a dividend transaction. 48

½ May 29: JJ’s provided lawn care services for a client and received $750 in cash. Will Cash increase or decrease? Will Sales Revenue increase or decrease? 49

½ May 29: JJ’s provided lawn care services for a client and received $750 in cash. Cash increases $750 with a debit. Sales Revenue increases $750 with a credit. 50

¾ May 31: JJ’s purchased gasoline for the lawn mower and the truck for $50 cash. Will Cash increase or decrease? Will Gasoline Expense increase or decrease? 51

¾ May 31: JJ’s purchased gasoline for the lawn mower and the truck for $50 cash. Cash decreases $50 with a credit. Gasoline Expense increases $50 with a debit. 52

¿ May 31: JJ’s Lawn Care paid Jill Jones and her family a $200 dividend. Will Cash increase or decrease? Will Dividends increase or decrease? 53

¿ May 31: JJ’s Lawn Care paid Jill Jones and her family a $200 dividend. Cash decreases $200 with a credit. Dividends increase $200 with a debit. 54

Trial Balance 55

Net. Solutions Trial Balance December 31, 2005 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Capital Stock Dividends Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense 2 2 20 1 065 220 000 400 000 800 00 900 00 360 00 25 000 00 16 340 00 4 275 00 1 600 00 985 00 800 00 455 00 42 600 00 56

Net. Solutions Trial Balance December 31, 2005 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Capital Stock Dividends Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Balance Sheet Items 2 2 20 1 065 220 000 400 000 800 00 900 00 360 00 25 000 00 4 000 00 16 340 00 4 275 00 1 600 00 985 00 800 00 455 00 42 600 00 57

Net. Solutions Trial Balance December 31, 2005 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Capital Stock Dividends Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense 2 2 20 1 065 220 000 400 000 800 00 900 00 360 00 25 000 00 Statement of Retained Earnings Item 4 000 00 16 340 00 4 275 00 1 600 00 985 00 800 00 455 00 42 600 00 58

Net. Solutions Trial Balance December 31, 2005 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Capital Stock Dividends Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense 2 2 20 1 065 220 000 400 000 800 00 900 00 360 00 25 000 00 4 000 00 Income Statement Items 16 340 00 4 275 00 1 600 00 985 00 800 00 455 00 42 600 00 59

60

Errors that will not cause the trial balance to be unequal: 1. Failure to record a transaction or to post a transaction. 2. Recording the same wrong amount for both the debit and the credit parts of a transaction. 3. Recording the same transaction more than once. 4. Posting a part of a transaction correctly as a debit or credit but to the wrong account. 61

Correction of Errors Error 1. Journal entry is incorrect but not posted. Correction Procedure Draw a line through the error and insert correct title or amount. 62

Correction of Errors Error 1. Journal entry is correct incorrect 2. not posted. but posted incorrectly. Correction Procedure Draw a line through the error and insert correct title or posted error and post amount. correctly. 63

Correction of Errors Error Correction Procedure 3. Journal entry is incorrect Journalize and post a and posted correcting entry. 64

Correcting Errors – An Example On May 5, a purchase of office equipment on account was incorrectly journalized and posted as shown. Journal – As recorded and posted Date Description May 5 Supplies Accounts Payable 12, 500 Debit Credit 12, 500 What would be the necessary correcting entry? 65

Correcting Errors – An Example On May 5, a purchase of office equipment on account was incorrectly journalized and posted as shown. Journal – As recorded and posted Date Description May 5 Supplies Accounts Payable 12, 500 Date Description May 5 Office Equipment Debit Credit 12, 500 66

Correcting Errors – An Example On May 5, a purchase of office equipment on account was incorrectly journalized and posted as shown. Journal – As recorded and posted Date Description May 5 Supplies Accounts Payable 12, 500 Date Description May 5 Office Equipment Supplies 12, 500 Debit Credit 12, 500 67

Financial Analysis and Interpretation Comparing an item in a current statement with the same item in prior statements is called horizontal analysis. 68

J Holmes, Attorney-at-Law, P. C. Income Statement For the Year Ended December 31, 2005 and 2006 Fees earned Operating expenses: Wages expense Rent expense Utilities expense Supplies expense Misc. expense Total operating expenses Net income 2005 Increase (Decrease) Amount Percent $187, 500 $150, 000 $37, 50025. 0% $ 60, 000 $ 45, 000 12, 500 9, 000 2, 700 3, 000 2, 300 1, 800 $15, 00033. 3% 3, 00025. 0% 3, 50038. 9% (300) (10. 0)% 500 27. 8% $ 92, 500 $ 70, 800 $ 95, 000 $ 79, 200 $21, 70030. 6% $15, 80019. 9% 69

Now, let’s look at the Trial Balance for JJ’s Lawn Care Service for the month of May. 70

All balances are taken from the ledger accounts on May 31 after considering all of JJ’s transactions for the month. Proves equality of debits and credits. 71

The Accounting Cycle Journalize transactions. Post entries to the ledger accounts. Prepare after closing trial balance. Prepare trial balance. Journalize and Prepare financial post closing statements. entries. Make end-ofyear adjustments. Prepare adjusted trial balance. 72

End of Chapter 3 73