Recording Transactions using. Debit & Credit Approach
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1 Recording Transactions using Debit & Credit Approach Retail Company Example The current presentation uses the Barnes Bookseller example to illustrate the recording of transactions using the Debit & Credit Approach. The same layout is used here as in the Mike s Barbershop example.
2 1. Barnes purchases a $20 book from a publisher. Barnes pays cash for the book.
3 1. Barnes purchases a $20 book from a publisher. Barnes pays cash for the book. +20 Inventory - 20 Cash Inventory 20 Cash 20
4 2. Barnes sells the book purchased in question 1 to a customer for $30. The customer pays cash.
5 2. Barnes sells the book purchased in question 1 to a customer for $30. The customer pays cash. +30 Cash + 10 Retained Earnings Inventory Cash 30 Inventory 20 Cost of Goods Sold 20 Revenue 30 You may also see Cost of Merchandise Sold for the term Cost of Goods Sold. Either of the terms represents the name of the expense account used to keep track of inventory that gets sold. Notice that the Debit & Credit approach is not as explicit about the amount of profit (net income) made on the transaction. You have to subtract the Cost of Goods Sold expense that has been debited from the Revenue that has been credited in order to see that the net change has been an increase (net credit) to the retained earnings account under the equity section.
6 3. Barnes purchases a $40 book from a publisher on credit (i.e., Barnes asked to be billed for the book and will pay later).
7 3. Barnes purchases a $40 book from a publisher on credit (i.e., Barnes asked to be billed for the book and will pay later) Inventory + 40 Accounts Payable Inventory 40 Accounts Payable 40
8 4. Barnes sells the $40 book to a customer for $60. The customer has asked to be billed for the book.
9 4. Barnes sells the $40 book to a customer for $60. The customer has asked to be billed for the book Accounts Receivable + 20 Retained Earnings Inventory Accounts Receivable 60 Inventory 40 Cost of Goods Sold 40 Revenue 60
10 5. Barnes receives the $60 the previous customer owes them for the book.
11 5. Barnes receives the $60 the previous customer owes them for the book. +60 Cash - 60 Accounts Receivable Cash 60 Accounts Receivable 60
12 6. Barnes pays the publisher $40 for the book it had previously purchased on credit.
13 6. Barnes pays the publisher $40 for the book it had previously purchased on credit Cash - 40 Accounts Payable Accounts Payable 40 Cash 40
14 7. Barnes pays its sales clerk her weekly wages of $300.
15 7. Barnes pays its sales clerk her weekly wages of $ Cash Retained Earnings Wage Expense 300 Cash 300
16 8. Barnes signs an agreement with a local school to supply them with $2,000 worth of books. The school pays Barnes the entire $2,000 today, but the books will not actually be delivered until next week.
17 8. Barnes signs an agreement with a local school to supply them with $2,000 worth of books. The school pays Barnes the entire $2,000 today, but the books will not actually be delivered until next week. + 2,000 Cash + 2,000 Unearned Revenue Cash 2,000 Unearned Revenue 2,000
18 9. Barnes supplies $2,000 worth of books to the local school from question 8. Barnes had the books in inventory. The books had originally cost Barnes $1,500 to purchase from the publisher.
19 9. Barnes supplies $2,000 worth of books to the local school from question 8. Barnes had the books in inventory. The books had originally cost Barnes $1,500 to purchase from the publisher. - 1,500 Inventory - 2,000 Unearned Revenue Retained Earnings 2,000 1, Unearned Revenue 2,000 Inventory 1,500 Cost of Goods Sold 1,500 Revenue 2,000
20 10. The business has been doing so well that Barnes plans to expand by opening up two new stores. First, however, they will need to raise the money to finance the eventual expansion. They decide to sell 1,000 shares in the company (the shares represent part ownership in the business) at a price of $20 per share.
21 10. The business has been doing so well that Barnes plans to expand by opening up two new stores. First, however, they will need to raise the money to finance the eventual expansion. They decide to sell 1,000 shares in the company (the shares represent part ownership in the business) at a price of $20 per share. +20,000 Cash +20,000 Capital Stock Cash 20,000 Capital Stock 20,000
22 11. Barnes decides to pay a dividend to its shareholders. It pays 50 cents per share to each of the 1,000 shares.
23 11. Barnes decides to pay a dividend to its shareholders. It pays 50 cents per share to each of the 1,000 shares Cash Retained Earnings Dividends 500 Cash 500 Notice here that we use the account Dividends to record the transaction. We do this in order to keep track of the amount of dividends paid during the period. However, prior to constructing the financial statements the Dividend account will be closed to the Retained Earnings Account. Don t let this confuse you. We do the same thing with expenses and revenue. These, including dividends, are embedded within the retained earnings account. During the period we keep track of the distinctly, but then close them to the Retained Earnings account.
24 12. Barnes sells $200 worth of books to a customer for cash. The books had cost Barnes $140 to purchase from the publisher.
25 12. Barnes sells $200 worth of books to a customer for cash. The books had cost Barnes $140 to purchase from the publisher Cash + 60 Retained Earnings Inventory Cash 200 Inventory 140 Cost of Goods Sold 140 Revenue 200
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