ACC2013: Chapter 3 Part 2 - Journal Entries, Closing Entries, and Ratios

Introduction to Journal Entries (JEs)

We have previously learned to record transactions/events using the Horizontal Financial Statements Model (HFSM) and then reflecting those transactions in T-Accounts using Debits and Credits. Now, we will begin recording transactions using Journal Entries (JEs).

Rules of Journal Entries

1. Every Journal Entry requires a debit and a credit.

   • HFSM Equivalent: Every transaction was recorded in 2 places.

   • T-Account Equivalent: Every transaction affected 2 T-accounts.

2. Your DEBITS and CREDITS must equal.

   • HFSM Equivalent: The Basic Accounting Equation (BAE) is required to balance after each line (transaction).

   • In the end, our total debits and total credits should equal; we proved this with the trial balance.

3. Journal entries are recorded on 2 lines with the debit always listed first, then the credit on the next line, indented.

We record all our Journal Entries in the General Journal.

To help us understand what will be debited or credited in a transaction, we can still use our T-account Properties OR the acronym D E A D C L OE R:

• Debit

  • Expenses

  • Assets

  • Dividends

• Credit

  • Liabilities

  • Owner's Equity (specifically Common Stock & Retained Earnings)

  • Revenues

T-Account Properties for Assets and Claims

• Assets (e.g., Cash):

  • Debit side: Increases the account balance. This is how we increase these accounts!

  • Credit side: Decreases the account balance. The opposite would decrease these accounts!

• Claims (e.g., Liabilities/Stockholders' Equity):

  • Debit side: Decreases the account balance.

  • Credit side: Increases the account balance.

Recording Transactions: Examples

Event 1: Received 20,000 cash from the issue of common stock

Horizontal Financial Statements Model (HFSM)

Assets = Liabilities + Stockholders' \, Equity
Cash = Note \, Payable + Common \, Stock + Retained \, Earnings
+20,000 = 0 + 20,000 + 0

T-Accounts

CASH

COMMON \, STOCK

Journal Entry

Exercise 3-17A: Recording transactions in the general journal and T-accounts

Initial T-Account Solutions (Provided from Ch3 Pt1)

Assets = Liabilities + Stockholders’ \, Equity

Cash

Accounts \, Receivable

Accounts \, Payable

Common \, Stock

Dividends

Service \, Revenue

Salaries \, Expense

Other \, Operating \, Exp.

General Journal Entries:

Detailed Journal Entry Rules (Review)

1. Account title(s) to be debited are listed first (on top); credits go last (on bottom) and are indented.

2. No parentheses (()}) or minus ($----$) signs! Whether an account balance is increased or decreased is determined by whether you put the dollar amount under the “debit” or “credit” side of the entry.

3. There will always be at least 2 accounts affected. There will always be at least one debit and at least one credit.

4. The sum of your debits must ALWAYS equal the sum of your credits. For most entries, this is pretty simple!

5. The dollar amount you are using is the amount of the change in an account balance, NOT the resulting account balance.

Tip (not a rule): In Connect (software), do not type commas or signs when entering dollar amounts, as this will sometimes cause the software to read the number as text and count it wrong.

Exercise 3-14A: Recording events in the general journal

a. Performed 8,200 of services on account.

b. Collected 5,600 cash on accounts receivable.

c. Paid 1,450 cash in advance for an insurance policy.

d. Paid 400 on accounts payable.

e. Recorded the adjusting entry to recognize 300 of insurance expense.

f. Received 1,600 cash in advance for services to be performed at a later date.

g. Purchased land for 9,000 cash.

h. Purchased supplies for 350 cash.

Extra (not in the original problem):

(i) Record the adjusting entry for 500 of revenue earned related to event F.

(ii) Record the adjusting entry for supplies used. There was 200 of supplies left on hand at the end of the year. (Initial supplies purchased were 350 from event H, so 350 - 200 = 150 used.)

(iii) Recorded 5,000 of accrued salaries expense.

Closing Entries

We have already seen closing entries in Chapter 1 and 2. We know our closing entries close Revenue Accounts, Expense Accounts, and Dividends to Retained Earnings (RED \rightarrow RE).

Rather than these 3 account types directly affecting Retained Earnings, now they are recorded in their own separate accounts. This adds an extra step in the Closing Process. We now must