The Following Example Illustrates How to Record Journal Entries
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Transcript of The Following Example Illustrates How to Record Journal Entries
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The following example illustrates how to record journal entries:
Example
Company A was incorporated on January 1, 2010 with an initial capital of 5,000 shares of common
stock having $20 par value. During the first month of its operations, the company engaged in
following transactions:
Date Transaction
Jan 2 An amount of $36,000 was paid as advance rent for three months.
Jan 3 Paid $60,000 cash on the purchase of equipment costing $80,000. The remaining
amount was recognized as a one year note payable with interest rate of 9%.
Jan 4 Purchased office supplies costing $17,600 on account.
Jan 13 Provided services to its customers and received $28,500 in cash.
Jan 13 Paid the accounts payable on the office supplies purchased on January 4.
Jan 14 Paid wages to its employees for first two weeks of January, aggregating $19,100.
Jan 18 Provided $54,100 worth of services to its customers. They paid $32,900 and promised
to pay the remaining amount.
Jan 23 Received $15,300 from customers for the services provided on January 18.
Jan 25 Received $4,000 as an advance payment from customers.
Jan 26 Purchased office supplies costing $5,200 on account.
Jan 28 Paid wages to its employees for the third and fourth week of January: $19,100.
Jan 31 Paid $5,000 as dividends.
Jan 31 Received electricity bill of $2,470.
Jan 31 Received telephone bill of $1,494.
Jan 31 Miscellaneous expenses paid during the month totaled $3,470
The following table shows the journal entries for the above events.
Date Account Debit Credit
Jan 1 Cash 100,000
Common Stock 100,000
Jan 2 Prepaid Rent 36,000
Cash 36,000
Jan 3 Equipment 80,000
Cash 60,000
Notes Payable 20,000
Jan 4 Office Supplies 17,600
Accounts Payable 17,600
Jan 13 Cash 28,500
Service Revenue 28,500
Jan 13 Accounts Payable 17,600
Cash 17,600
Jan 14 Wages Expense 19,100
Cash 19,100
Jan 18 Cash 32,900
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Accounts Receivable 21,200
Service Revenue 54,100
Jan 23 Cash 15,300
Accounts Receivable 15,300
Jan 25 Cash 4,000
Unearned Revenue 4,000
Jan 26 Office Supplies 5,200
Accounts Payable 5,200
Jan 28 Wages Expense 19,100
Cash 19,100
Jan 31 Dividends 5,000
Cash 5,000
Jan 31 Electricity Expense 2,470
Utilities Payable 2,470
Jan 31 Telephone Expense 1,494
Utilities Payable 1,494
Jan 31 Miscellaneous Expense 3,470
Cash 3,470
At the end of the period, all the journal for the period are posted to
1
Cost of Goods Sold Journal Entry
Cost of Goods Sold Overview
The cost goods sold is the cost assigned to those goods or services that correspond to sales made
to customers. In the case of merchandise, this usually means goods that were physically shipped to
customers, but it can also mean goods that are still on the company's premises under bill and
hold arrangements with customers.
In either case, you need to reduce ending inventory by the amount of those goods that either were
shipped to customers or designated as being customer-owned under a bill and hold arrangement.
Follow these steps to arrive at the cost of goods sold journal entry:
1. Verify the beginning inventory balance. The actual amount of beginning inventory owned
by the company is properly valued and reflects the balances in the various inventory asset
accounts in the general ledger. If there is a difference between the beginning balance in
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the general ledger and the actual cost of the beginning inventory, the difference will flush
out through the cost of goods sold in the current accounting period.
2. Accumulate purchased inventory costs. As the accounting period progresses and you
receive invoices from suppliers for inventory items shipped to the company, record them
either in a single purchases account or in whichever inventory asset account is most
applicable. Be sure to accrue purchases at the end of the accounting period if goods have
been received but no supplier invoice.
3. Accumulate and allocate overhead costs. Any other costs involved in bringing sellable
inventory to the location and condition needed to sell it are designated asoverhead, and
allocated to all items produced during the accounting period.
4. Determine ending inventory units. Either conduct a physical inventory count at the end of
the period to determine the exact quantities of items on hand, or use aperpetual inventory
system to derive these balances (which typically involves the use of cycle counting).
5. Determine cost of ending inventory. This can be a complicated process, since you may use
a variety of cost layering systems, such as FIFO, LIFO, or the weighted average method to
determine cost.
6. Determine the cost of goods sold. If you are using a purchases account, then add the
balance in that account to the beginning inventory total, and then subtract the costed
ending inventory total to arrive at the cost of goods sold. If you are instead using several
inventory accounts instead of a purchases account, then add them together and subtract
the costed ending inventory total to arrive at the cost of goods sold.
7. Generate cost of goods sold entry. If you are using a purchases account, then the cost of
goods sold journal entry should reduce that account balance to zero, as well as adjust the
inventory account balance to match the costed ending inventory total.
Cost of Goods Sold Journal Entry Example
Simple version: ABC International has a beginning balance in its inventory asset account of
$500,000. It buys $450,000 of materials from suppliers during the month. At month-end, it counts
its ending inventory and determines that there is $200,000 of inventory on hand. The cost of goods
sold journal entry is:
Debit Credit
Cost of goods sold expense 750,000
Purchases 450,000
Inventory 300,000
This entry matches the ending balance in the inventory account to the costed actual ending
inventory, while eliminating the $450,000 balance in the purchases account.
Advanced version: ABC International has a beginning balance in its inventory asset account of
$1,000,000. It buys $350,000 of materials from suppliers during the month, which it records in the
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inventory account. At month-end, it counts its ending inventory and determines that there is
$475,000 of inventory on hand. In addition, ABC incurs $150,000 of overhead costs, which it
records in an overhead cost pool asset account. There are now two cost of goods sold journal
entries, of which the first is:
Debit Credit
Cost of goods sold expense 875,000
Purchases 350,000
Inventory 525,000
The first entry was similar to the transaction noted earlier in the simple version, where we
eliminated the balance in the purchases account and altered the ending inventory balance to
match the costed amount of ending inventory.
In addition, there is $150,000 of overhead to allocate to the items produced during the month. An
analysis of produced items reveals that 1/3 were sold and 2/3 retained in inventory. Thus, the cost
allocation is:
Debit Credit
Inventory 100,000
Cost of goods sold 50,000
Overhead cost pool 150,000
Related Topics
Accounting inventory methods
How do I reconcile inventory?
How do I report an inventory write down?
What is an inventory reserve?
What is backflush accounting?
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Accrual Process for Period-End Accruals
Key points for accruing expense purchases at period-end include:
o You record the total uninvoiced receipt liabilities accrued during the accounting period.
o Actual journal entries are created for the amount of the receipt liabilities, debiting the charge account and crediting the PO distribution accrual account (normally the Expense A/P Accrual Account defined in the Define Purchasing Options form).
o You reverse accrual journal entries manually at the start of the new accounting period.
o If you are using encumbrance accounting, purchase order encumbrance is relieved when the invoice(s) matched to the purchase order are posted to the general ledger.
Receiving TransactionsPurchasing does not record any accounting entries for expense during a receiving transaction if you use period-end accruals. You record all of your uninvoiced liabilities at month end using the Receipt Accruals - Period-End process. See: Receipt Accruals - Period End Process
Receipts Accruals-Period EndUse the Receipt Accruals - Period End process to create period-end accruals for your uninvoiced receipts for expense distributions. Purchasing creates an accrual journal entry in your general ledger for each uninvoiced receipt you choose using this form. If you use encumbrance or budgetary control, Purchasing reverses your encumbrance entry when creating the corresponding accrual entry.
Purchasing never accrues an uninvoiced receipt twice. Each time you create accrual entries for a specific uninvoiced receipt, Purchasing marks this receipt as accrued and ignores it the next time you run the Receipt Accrual - Period-End process. Purchasing creates accrual entries only up to the quantity the supplier did not invoice for partially invoiced receipts.
Purchasing creates the following accounting entries for each distribution you accrue using the Receipt Accruals - Period-End process:
Account Debit Credit
PO charge account @ Uninvoiced Quantity * PO Price XX
Expense A/P accrual account @ Uninvoiced Quantity * PO price XX
As soon as you open the next period, Purchasing reverses the accrual entries using the following accounting entries:
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Account Debit Credit
Expense A/P accrual account @ Uninvoiced Quantity * PO price XX
PO charge account @ Uninvoiced Quantity * PO Price XX
Match, Approve, and Post an InvoiceWhen you enter an invoice in Payables, you match each invoice line to a specific purchase order shipment in Purchasing. You can set up Payables to ensure that you pay only for the quantity you received. If you accrue your uninvoiced receipts at period-end, Payables records the expense transactions part of the accounting transactions:
Account Debit Credit
PO Distribution Charge Account @ Invoice Quantity * PO Price XX
PO Distribution Variance Account @ Invoice Quantity * (Invoice Price - PO Price) XX
A/P Liability @ (Invoice price * Invoice Quantity) XX
Attention: Normally, you charge the original expense account for any invoice price variances, so your PO distribution variance account is the same as the PO distribution charge account. You do not record invoice price variances for expense purchases. Purchasing uses the Account Generator to set your purchase order distribution variance account to be the same as your purchase order charge account. If you want to record your invoice price variances to a separate account, use the Account Generator to define the business rules you use to determine the correct invoice price variance account.
Complete Period TransactionsIf you use encumbrance or budgetary control, Purchasing creates encumbrance journal entries in your general ledger each time you approve a purchase order. Similar to accrual journal entries, encumbrance journal entries recognize a liability towards your supplier before any invoicing transactions occur. Unlike accrual journal entries, encumbrance journal entries are not actual transactions. General Ledger tracks actual and encumbrance journal entries and balances separately.
Period-End ChecklistPurchasing provides you with complete flexibility and control for your period-end accruals. You can use the Uninvoiced Receipts Report to analyze your uninvoiced non-inventory receipts before you accrue these receipts. You can then use the Receipt Accruals - Period-End process as many times as you want to generate accrual entries for the receipts you choose.
For your period-end reconciliation, you should perform the following steps:
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1. Identify the purchasing period you want to reconcile and close.
2. Enter all receiving transactions for goods and services you received during the period. Purchasing automatically creates receipt accruals for all receipts you entered up to the end of this period. To prevent any period-end disruption, Purchasing lets you provide a receipt date that is different from the date you enter the receipts. You never have to enter all the receipts for a period before the end of this period. You can enter these receipts later. You simply need to back date the receipt date.
3. Enter and match all invoices you received during the period for your receipt accrual entries. You should make sure that you solve all posting holds problems in Payables before accruing receipts. Purchasing creates accrual journal entries for all purchase orders you received and did not match to an invoice. If you matched a purchase order to an invoice, Purchasing does not accrue the corresponding receipts. Purchasing does not accrue any purchase order that you closed on or before the end of the accrual period you choose. If the invoice is on posting hold, Payables has not yet accounted for the liability corresponding to the invoice. Under these conditions, the liability corresponding to this invoice would not appear in your books for the period. Payables lets you recognize this liability in the following period.
4. Close your accounts payable period corresponding to the purchasing period for your receipt accrual entries.
Note: The List of Values for period end accruals does not require the Accounts Payable period to be closed, however it's strongly recommended that closed periods are used, as the receipt accruals process will not pick up invoices entered after the accruals process is run for the period.rcvaccov
5. For period-end accruals of expense purchases, run the Uninvoiced Receipts Report. Use this report to analyze your uninvoiced receipts. The Uninvoiced Receipts Report lets you use the same selection criteria for your uninvoiced receipts as the Receipt Accruals - Period-End process. You always know exactly what you accrue and for what amount.
6. For period-end accruals of expense purchases, use the Receipt Accruals - Period-End process as many times as you need. You can use the search criteria to choose what you want to accrue and accrue your receipts steps by steps. You create accruals for a specific purchasing period. Purchasing automatically accrues all uninvoiced receipts your entered up to the end of the accrual period you specify. See: Receipt Accruals - Period End Process.
Each time you use the Receipt Accruals - Period-End process, Purchasing creates an unposted journal entries batch in your general ledger for your receipt accruals. If you are using encumbrance, Purchasing creates another journal entries batch in your general ledger corresponding to the encumbrance reversal entries for the uninvoiced receipts you accrued.
Purchasing never accrues your uninvoiced receipt twice. Each time you create accrual entries for a specific uninvoiced receipt, Purchasing marks this receipt as accrued and ignores it the next time you use the Receipt Accruals - Period-End process. Purchasing creates accrual entries only up to the quantity your supplier did not invoice for your partially invoiced receipts.
7. Post Accrual and Encumbrance Reversal journal entry batches in your general ledger (See the following section to identify Accrual and Encumbrance Reversal journal entry batches.)
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8. Perform all the steps you need to close your accounting period and generate your period-end reports and financial statements in your general ledger.
9. Use your general ledger system to reverse all the receipt accrual and encumbrance reversal batches you created for your period-end accruals.
10. Close the purchasing period for your receipt accruals. When you close a purchasing period, Purchasing automatically un-marks all the receipts you previously accrued to make sure you can accrue these receipts again if they are still uninvoiced in the next period. See: Uninvoiced Receipts Report.
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