Accounting Journal Entries

Accounting Journal EntriesReview and Practice Materials

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What is a journal entry in Accounting? Journal entry is an entry to the journal. Journal is a record that keeps accounting transactions in chronological order, i.e. as they occur. Ledger is a record that keeps accounting transactions by accounts. Account is a unit to record and summarize accounting transactions. All accounting transactions are recorded through journal entries that show account names, amounts, and whether those accounts are recorded in debit or credit side of accounts. Double-Entry Recording of Accounting Transactions To record transactions, accounting system uses double-entry accounting. Double-entry implies that transactions are always recorded using two sides, debit and credit. Debit refers to the left-hand side and credit refers to the right-hand side of the journal entry or account. The sum of debit side amounts should equal to the sum of credit side amounts. A journal entry is called "balanced" when the sum of debit side amounts equals to the sum of credit side amounts. T-Account This form looks like a letter "T", so it is called a T-account. T-account is a convenient form to analyze accounts, because it shows both debit and credit sides of the account.

Account

Debit Credit

Examples of Journal Entries

Transaction 1: Company A sold its products at $120 and received the full amount in cash.

StepsSelf-Questions Answers

1 What did Company A receive? Cash.

2 If Company A received cash, how would this affect the cash balance? Receiving cash increases the

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cash balance of the company.

3 Which side of cash account represents the increase in cash? Debit side (Left side).

4 What is the account name to record the sales of products. Sales.

5 Which side of sales account represents the increase in sales? Credit side (Right side).

6 Does the sum of debit side amounts equal to the sum of credit side amounts? In other words, does this journal entry balance?

Yes.$120 = $120

[Journal entry to record transaction 1]

Debit Credit

Cash 120

Sales 120

Examples of Journal Entries

Transaction 2: Company A purchased supplies and paid $50 in cash.

StepsSelf-Questions Answers

1 What did Company A receive? Supplies.

2 If Company A received supplies, how would this affect the supplies balance?

It increases supplies balance.

3 Which side of supplies account represents the increase in cash? Debit side (Left side).

4 What did Company A pay? Cash.

5 Which side of cash account represents the decrease in cash? Credit side (Right side).

6 Does the sum of debit side amounts equal to the sum of credit side amounts? In other words, does this journal entry balance?

Yes.

$50 = $50

[Journal entry to record transaction 2]

Debit Credit

Supplies 50

Cash 50

Debits and Credits of Accounts

Debit Credit

Increase in asset accounts Decrease in asset accounts

Increase in expense accounts Decrease in expense accounts

Decrease in liability accounts Increase in liability accounts

Decrease in equity accounts Increase in equity accounts

Decrease in revenue accounts Increase in revenue accounts

Normal Balances of Accounts

Accounts have normal balances on the side where the increases in such accounts are recorded. Asset accounts have normal balances on debit side. Expense accounts have normal balances on debit side. Liability accounts have normal balances on credit side. Equity accounts have normal balances on credit side. Revenue accounts have normal balances on credit side. In the financial statements, accounts are reported on the sides where they have normal balances.

Balance Sheet

Assets Liabilities

Owners' Equity

Income Statement

Expenses Revenues

More Examples of Accounting Journal Entries

Adjusting Journal Entries: Review and Examples

Accounting Topics

Inventory Valuation MethodsDepreciation MethodsRevenue Recognition PrincipleAccrual Basis vs. Cash Basis AccountingBasics of Journal EntriesRatios for Financial Statement AnalysisOverview of Financial Statements

Accounting Journal Entry Examples 01

* Cash payment transactions1. Purchase of assets in cash2. Repayment of liabilities in cash3. Payment of expenses in cash

* Cash receipt transactions4. Sale of assets in cash5. Borrowing money6. Issuance of stock

* Cash payment transactions1. Purchase of assets in cash1a. Purchased merchandise and paid $2,000 in cash1b. Purchased an equipment and paid $15,000 in cash

2. Repayment of liabilities in cash2a. Repaid $7,000 of bank loans2b. Paid $3,000 accounts payable

3. Payment of expenses in cash3a. Paid $3,500 rent expense3b. Paid $6,000 salaries expense

* Cash receipt transactions4. Sale of assets in cash4a. Sold merchandise and received $6,500 in cash The cost of merchandise sold was 5,1004b. Sold an equipment and received $8,600 in cash The book value of the equipment was $8,000

5. Borrowing money5a. Borrowed $9,000 in cash5b. Issued a promissory note and received $11,000 in cash

6. Issuance of stock

6a. Issued 500 shares of common stock, at $50 per share6b. Issued 200 shares of preferred stock, at $80 per share

Cash payment transactions

1. Purchase of assets in cash

1a. Purchased merchandise and paid $2,000 in cash

debit credit

merchandise 2,000 cash 2,000

debit: increase in assets (merchandise)credit: decrease in assets (cash)

1b. Purchased an equipment and paid $15,000 in cash

debit credit

equipment 15,000 cash 15,000

debit: increase in assets (equipment)credit: decrease in assets (cash)

2. Repayment of liabilities in cash

2a. Repaid $7,000 of bank loans

debit credit

borrowings 7,000 cash 7,000

debit: decrease in liabilities (borrowings)credit: decrease in assets (cash)

2b. Paid $3,000 accounts payable

debit credit

accounts payable 3,000 cash 3,000

debit: decrease in liabilities (accounts payable)credit: decrease in assets (cash)

3. Payment of expenses in cash

3a. Paid $3,500 rent expense

debit credit

rent expense 3,500 cash 3,500

debit: increase in expenses (rent expense)credit: decrease in assets (cash)

3b. Paid $6,000 salaries expense

debit credit

salaries expense 6,000 cash 6,000

debit: increase in expenses (salaries expense)credit: decrease in assets (cash)

Cash receipt transactions

4. Sale of assets in cash

4a. Sold merchandise and received $6,500 in cash

debit credit

cash 6,500 sales 6,500

debit: increase in assets (cash)credit: increase in revenue (sales)

The cost of merchandise sold was 5,100

debit credit

cost of goods sold 5,100 merchandise 5,100


4b. Sold an equipment and received $8,600 in cash

The book value of the equipment was $8,000

debit credit

cash 8,600 equipment 8,000 gain on sale of equipment

600


5. Borrowing money

5a. Borrowed $9,000 in cash

debit credit

cash 9,000 borrowings 9,000

debit: increase in assets (cash)credit: increase in liabilities (borrowings)

5b. Issued a promissory note and received $11,000 in cash

debit credit

cash 11,000 notes payable 11,000

debit: increase in assets (cash)credit: increase in liabilities (notes payable)

6. Issuance of stock

6a. Issued 500 shares of common stock, at $50 per share

debit credit

cash 25,000 Common stock 25,000

debit: increase in assets (cash)credit: increase in equity (common stock)

6b. Issued 200 shares of preferred stock, at $80 per share

debit credit

cash 16,000 Preferred stock 16,000

debit: increase in assets (cash)credit: increase in equity (preferred stock)

Accounting Equation 01

Basic form of an equation --> Left side = Right side

1. Balance Sheet VersionAssets = Liabilities + Equity

2. Income Statement VersionNet Income = Revenue - Expenses

3. Combined VersionAssets = Liabilities + Equity---> Equity = Beginning Equity + Net Income

Assets = Liabilities + Beginning Equity + Net Income---> Net Income = Revenue - Expenses

Assets = Liabilities + Beginning Equity + Revenue - Expenses

An Example of Combined Version

At January 1, 2010, the balance of equity was $100,000.During the year of 2010, revenue and expenses were as followsRevenue = $300,000Expenses = $240,000

What is the balance of equity at December 31, 2010?

Equity = Beginning Equity + Revenue - Expenses--> $100,000 + $300,000 - $240,000 = $160,000

At December 31, 2010, Entity A had the following balancesAssets = $280,000Liabilities = $120,000Equity = $160,000

Balance sheet versionAssets = Liabilities + Equity--> $280,000 = $120,000 + $160,000

Combined versionAssets = Liabilities + Beginning Equity + Revenue - Expenses--> $280,000 = $120,000 + $100,000 + $300,000 - $240,000

Cases and Practice Questions

Case 1:

Assets = $12,000Liabilities = $5,000

Equity = $7,000Assets = Liabilities + Equity$12,000 = $5,000 + $7,000

Practice Question 1:

If Assets = $12,000 and Liabilities = $3,000what is the amount of equity?

--> Equity = Assets - Liabilities = $12,000 - $3,000 = $9,000

Case 2:

Revenue = $16,000Expenses = $10,000Net income = Revenue - Expenses = $16,000 - $10,000 = $6,000


If Revenue = $16,000 and Expenses = $11,000what is the amount of net income?

--> Net income = Revenue - Expenses = $16,000 - $11,000 = $5,000

Case 3:

Assets = $25,000Liabilities = $11,000Beginning Equity = $10,000Revenue = $36,000Expenses = $32,000Assets = Liabilities + Beginning Equity + Revenue - Expenses$25,000 = $11,000 + $10,000 + $36,000 - $32,000


In the following case, what is the amount of Beginning EquityAssets = $55,000Liabilities = $21,000Revenue = $76,000Expenses = $62,000Beginning Equity = ?

Assets = Liabilities + Beginning Equity + Revenue - Expenses$55,000 = $21,000 + ? + $76,000 - $62,000--> Beginning Equity = ? = $20,000

Accrual Basis Accounting

Under the accrual basis accounting, revenues and expenses are recognized as follows:

Revenue recognition: Revenue is recognized when both of the following conditions are met: a. Revenue is earned. b. Revenue is realized or realizable.

Revenue is earned when products are delivered or services are provided.Realized means cash is received.Realizable means it is reasonable to expect that cash will be received in the future.

Expense recognition: Expense is recognized in the period in which related revenue is recognized (Matching Principle). Cash Basis Accounting Under the cash basis accounting, revenues and expenses are recognized as follows: Revenue recognition: Revenue is recognized when cash is received. Expense recognition: Expense is recognized when cash is paid. Timing differences in recognizing revenues and expenses There are potential timing differences in recognizing revenues and expenses between accrual basis and cash basis accounting.

Four types of timing differences

a. Accrued Revenue: Revenue is recognized before cash is received. b. Accrued Expense: Expense is recognized before cash is paid. c. Deferred Revenue: Revenue is recognized after cash is received. d. Deferred Expense: Expense is recognized after cash is paid. An Example of Accrued Revenue Example: Products are sold at $5,000 on May 1, 2010 and cash is received on May 10, 2010.

May 1, 2010 May 10, 2010

Revenue is recognized. Cash is received.

[Journal entry on May 1, 2010]

Debit Credit

Accounts receivable 5,000

Sales 5,000


Debit Credit

Cash 5,000

Accounts receivable 5,000

An Example of Accrued Expense Example: On May 1, 2010, Company A borrowed $100,000 from a bank and promised to pay 12% interest at the end of each quarter.

May 31, 2010 June 30, 2010

Interest expense is recognized for May.

Cash is paid at the end of the quarter.


Debit Credit

Cash 100,000

Borrowings from bank 100,000


Debit Credit

Interest expense 1,000

Interest payable 1,000

$100,000 x 12% x 1/12 = $1,000 for each month.

Interest payable is a liability account.Credit side of interest payable (a liability account) represents an increase.

[Journal entry on June 30, 2010]

Debit Credit

Interest expense 1,000


Credit side of interest payable (a liability account) represents an increase.

Debit Credit


Cash 2,000

Company pays $2,000 as interests for May and June.Debit side of interest payable (a liability account) represents a decrease.

An Example of Deferred Revenue Example: On May 1, 2010, Company A had a new lease contract with a tenant and received $6,000 for two month rent.

May 1, 2010 May 31 and June 30 2010

Cash is received. Revenue is recognized at the end of May and June.

Revenue is recognized when Company A provides service. In this example, service is provided when time passes.


Debit Credit

Cash 3,000

Unearned rent revenue 3,000

Unearned rent revenue is a liability account.Credit side of unearned rent revenue (a liability account) represents an increase.

"Unearned revenue" accounts represent the amount of cash received before services are provided. Since services have not been provided yet, it is not revenue.

"Unearned revenue" accounts are liabilities of the company, because they should be paid back to the other party if service is not provided in the future.


Debit Credit


Rent revenue 3,000

Debit side of unearned rent revenue (a liability account) represents a decrease.Credit side of rent revenue (a revenue account) represents an increase.


Debit Credit


Rent revenue 3,000

Debit side of unearned rent revenue (a liability account) represents a decrease.Credit side of rent revenue (a revenue account) represents an increase. An Example of Deferred Expense Example: Company A purchased an insurance for a period from May 1, 2010 to July 31, 2010 and paid $6,000 cash for three month insurance premium.

May 1, 2010 May 31, June 30, July 31, 2010

Cash is paid. Expense is recognized at the end of May, June and July.


Debit Credit

Prepaid insurance 6,000

Cash 6,000

Prepaid insurance is an asset account.Debit side of prepaid insurance (an asset account) represents an increase.


Debit Credit

Insurance expense 2,000


Credit side of prepaid insurance (an asset account) represents a decrease.


Debit Credit




[Journal entry on July 31, 2010]

Debit Credit


Revenue Recognition Principle

U.S. GAAP Codification Topic 600: Revenue

Revenues are recognized when (a) realized or realizable and (b) earned. [SFAC No. 5, Para. 83] Revenues --> not recognized until realized or realizable. --> not recognized until earned.

Revenues are realized --> when products are exchanged for cash or claims to cash.

Revenues are realizable --> when related assets received are readily convertible to cash or claims to cash.

Revenues are earned --> when the products are delivered or --> services are performed.

Recognition is the process of --> recording an item in the financial statements.

Realization is the process of --> converting non-cash resources into cash.

Revenues are --> inflows of assets or settlements of liabilities (or both) --> from activities of the entity's central operations.

Gains are --> increases in net assets --> from peripheral or incidental transactions of an entity.

ARB No. 43, Chapter 1A

Accounting Research Bulleting (ARB) No. 43 a. Chapter 1A b. Issued in June 1953

Unrealized Profit --> should not be credited to income.

Profit is deemed to be realized --> when a sale (in the ordinary course of business) is effected.

--> unless the collection of sale price is not reasonably assured.

Profit is NOT deemed to be realized --> if the collection of sale price is not reasonably assured.

APB Opinion No. 10

Accounting Principles Board (APB) Opinion No. 10 a. Omnibus Opinion b. Issued in December 1966

Revenues --> should (ordinarily) be accounted for --> at the time of a transaction is completed --> with appropriate provision for uncollectible accounts. [Para. 12]

Installment Method of Recognizing Revenue --> is not acceptable, with the exception of cases --> where receivables are collectible over an extended period of time --> and there is no reasonable basis for estimating the degree of collectibility.

When the following conditions are met --> either installment method --> or cost recovery method may be used.

Conditions --> receivables are collectible over an extended period of time --> and there is no reasonable basis for estimating the degree of collectibility

Cost Recovery Method --> equal amounts of revenue and expense are recognized --> as collections are made --> until all costs have been recovered.

--> recognition of profit is postponed until all costs are recovered.

SFAS No. 48

Statement of Financial Accounting Standards (SFAS) No. 48 a. Revenue Recognition When Right of Return Exists b. Issued in June 1981

Sale that gives buyer the right to return the product --> Revenue from such sales shall be recognized --> at the time of sale --> ONLY IF all of the following conditions are met.

Conditions a. Seller's price

--> is substantially fixed or determinable at the date of sale. b. Buyer's obligation to pay seller --> is not contingent on resale of the product. c. Buyer's obligation to pay seller --> does not change when the product is lost or damaged. d. Buyer acquiring the product for resale --> has economic substance apart from that provided by seller. e. Seller does not have significant obligations --> for future performance to directly bring about --> resale of the product by buyer. f. Amount of future returns ---> can be reasonably estimated.

Revenues that are not recognized at the time of sale --> because the above conditions are not met --> shall be recognized either when the return privilege has substantially expired or when the above conditions are subsequently met --> whichever occurs first.

Cost of returns --> if sales revenue is recognized because the above conditions are met --> any costs or losses expected due to any returns --> shall be accrued as required by SFAS No. 5, Accounting for Contingencies.

Estimated returns --> Sales revenue and cost of sales --> shall be reduced to reflect estimated returns.

Examples of Revenues and GainsOperating Revenues Operating revenues include --> revenue accounts generated from the primary operations of the company.

Sales

Nonoperating Revenues and Gains Nonoperating revenues and gains include --> revenue and gain accounts generated from --> other than the primary operations of the company.

Interest revenue (or interest income) Gain on sale of securities Gain on sale of buildings

Gain on sale of machinery Gain on sale of equipment

Interest revenue (or interest income) account --> may be classified as operating revenues --> for banks and other financial corporations --> whose primary operations are lending money to earn interest income.

Gains from Discontinued Operations Gains from discontinued operations are --> due to the disposal of business segment.

Gain from operations of discontinued business segment Gain on disposal of business segment

Extraordinary Gains Extraordinary gains include --> gains that unusual and infrequent.

Gain on early extinguishment of debt

Accounting for Inventories

U.S. GAAP Codification , Accounting Textbooks Principles of Accounting , Intermediate Accounting , Advanced Accounting

U.S. GAAP by Topic, Accounting by Topic, Securities Law Library

Accounting for Inventories

GAAP Accounting Research Bulletin (ARB) No. 43, Chapter 4, June 1953

Inventory Recording System Perpetual Inventory System Periodic Inventory System

Inventory Valuation Methods First-in First-out (FIFO) Last-in First-out (LIFO) Moving Average Method Weighted Average Method Dollar Value LIFO

Lower of Cost or Market (LCM) Inventories are valued at cost or market, whichever is lower. [ARB No. 43, Chapter 4, Para. 8]

Market Value of Inventories [ARB No. 43, Chapter 4, Para. 9] Market value = Current replacement cost Upper limit (Ceiling) of Market value = Net Realizable Value (NRV) Lower limit (Floor) of Market value = Net Realizable Value (NRV) - Normal Profit Margin Net Realizable Value (NRV) = Estimated Selling Price - Cost of Completion and Disposal

Items to be included in inventories Goods in transit FOB destination --> Seller's Inventory FOB shipping point --> Buyer's Inventory Consigned goods are consignor's inventory Goods sold by installment sales are not included in seller's inventory. Profit on installment sales is recognized in proportion to cash collected.

Examples of Inventory Valuation

Journal entries for perpetual and periodic inventory systems Examples of FIFO, LIFO, Average methodsExamples of Dollar Value LIFO Examples of Lower of Cost or Market (LCM)

Accounting Journal Entries

Documents

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