> DO IT! Chapter 2 The Recording Process. Recording Business Activities D-7

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1 Chapter 2 The Recording Process Normal Balances Kate Browne has just rented space in a shopping mall. In this space, she will open a hair salon to be called Hair It Is. A friend has advised Kate to set up a double-entry set of accounting records in which to record all of her business transactions. Determine the types of accounts needed. Kate will need asset accounts for each different type of asset Identify the balance sheet accounts that Kate will likely need to record the transactions needed to open her business. Indicate whether the normal balance of each account is a debit or a credit. she invests in the business and liability accounts for any debts she incurs. Kate would likely need the following accounts in which to record the transactions necessary to ready her hair salon for opening day: Understand the Cash (debit balance) If she borrows money: Notes Payable types of owner s equity accounts. Only Owner s Equipment (debit balance) (credit balance) Capital will be needed when Kate begins the Supplies (debit balance) Owner s Capital (credit balance) business. Other owner s equity accounts will be Accounts Payable (credit balance) needed later. Related exercise material: BE2-1, BE2-2, BE2-5, E2-1, E2-2, E2-4, and DO IT! 2-1. Recording Business Activities Understand which activities need to be recorded and which do not. Any that affect assets, liabilities, or owner s capital should be recorded in a journal. Analyze the effects of transactions on asset, liability, and owner s equity accounts. Kate Browne engaged in the following activities in establishing her salon, Hair It Is: 1. Opened a bank account in the name of Hair It Is and deposited $20,000 of her own money in this account as her initial investment. 2. Purchased equipment on account (to be paid in 30 days) for a total cost of $4, Interviewed three persons for the position of hair stylist. In what form (type of record) should Kate record these three activities? Prepare the entries to record the transactions. Each transaction that is recorded is entered in the general journal. The three activities would be recorded as follows. 1. Cash 20,000 (Owner s investment of cash in business) 2. Equipment 4,800 Accounts Payable 4,800 (Purchase of equipment on account) 3. No entry because no transaction has occurred. Related exercise material: BE2-3, BE2-6, E2-3, E2-5, E2-6, E2-7, and DO IT! 2-2. D-7

2 D-8 2 The Recording Process Posting Recall that posting involves transferring the journalized debits and credits to specific accounts in the ledger. Determine the ending balance by netting the total debits and credits. Kate Browne recorded the following transactions in a general journal during the month of March. Mar. 4 Cash 2,280 Service Revenue 2, Salaries and Wages Expense 400 Cash Utilities Expense 92 Cash 92 Post these entries to the Cash account of the general ledger to determine its ending balance. The beginning balance of Cash on March 1 was $600. Cash 3/ / /4 2,280 3/ /31 Bal. 2,388 Related exercise material: BE2-7, BE2-8, E2-8, E2-12, and DO IT! 2-3. Determine normal balances and list accounts in the order they appear in the ledger. Accounts with debit balances appear in the left column, and those with credit balances in the right column. Total the debit and credit columns to prove equality. The following accounts come from the ledger of SnowGo Company at December 31,. 157 Equipment $88, Owner s Capital $20, Owner s Drawings 8, Salaries and Wages 201 Accounts Payable 22,000 Payable 2, Salaries and Wages 200 Notes Payable 19,000 Expense 42, Utilities Expense 3, Accounts Receivable 4, Prepaid Insurance 6, Service Revenue 95, Cash 7,000 Prepare a trial balance in good form. SNOWGO COMPANY December 31, Debit Credit Cash $ 7,000 Accounts Receivable 4,000 Prepaid Insurance 6,000 Equipment 88,000 Notes Payable $ 19,000 Accounts Payable 22,000 Salaries and Wages Payable 2,000 Owner s Drawings 8,000 Service Revenue 95,000 Utilities Expense 3,000 Salaries and Wages Expense 42,000 $158,000 $158,000 Related exercise material: BE2-9, BE2-10, E2-9, E2-10, E2-11, E2-13, E2-14, and DO IT! 2-4.

3 DO IT! D-9 > Comprehensive DO IT! Bob Sample opened the Campus Laundromat on September 1,. During the first month of operations, the following transactions occurred. Sept. 1 Bob invested $20,000 cash in the business. 2 The company paid $1,000 cash for store rent for September. 3 Purchased washers and dryers for $25,000, paying $10,000 in cash and signing a $15,000, 6-month, 12% note payable. 4 Paid $1,200 for a one-year accident insurance policy. 10 Received a bill from the Daily News for advertising the opening of the laundromat $ Bob withdrew $700 cash for personal use. 30 The company determined that cash receipts for laundry services for the month were $6,200. The chart of accounts for the company is the same as that for Pioneer Advertising Agency plus No. 610 Advertising Expense. Instructions (a) Journalize the September transactions. (Use J1 for the journal page number.) (b) Open ledger accounts and post the September transactions. (c) Prepare a trial balance at September 30,. Make separate journal entries for each transaction. In journalizing, make sure debits equal credits. In journalizing, use specific account titles taken from the chart of accounts. Provide appropriate description of each journal entry. Arrange ledger in statement order, beginning with the balance sheet accounts. Post in chronological order. Use numbers in the reference column to indicate the amount has been posted. In the trial balance, list accounts in the order in which they appear in the ledger. List debit balances in the left column, and credit balances in the right column. to Comprehensive DO IT! (a) GENERAL JOURNAL Date Account Titles and Explanation Ref. Debit Credit Sept. 1 Cash ,000 Owner s Capital ,000 (Owner s investment of cash in business) 2 Rent Expense 729 1,000 Cash 101 1,000 (Paid September rent) 3 Equipment ,000 Cash ,000 Notes Payable ,000 (Purchased laundry equipment for cash and 6-month, 12% note payable) 4 Prepaid Insurance 130 1,200 Cash 101 1,200 (Paid one-year insurance policy) 10 Advertising Expense Accounts Payable (Received bill from Daily News for advertising) 20 Owner s Drawings Cash (Withdrew cash for personal use) 30 Cash 101 6,200 Service Revenue 400 6,200 (Received cash for services performed) J1

4 D-10 2 The Recording Process (b) GENERAL LEDGER Cash No. 101 Sept. 1 J1 20,000 20,000 2 J1 1,000 19,000 3 J1 10,000 9,000 4 J1 1,200 7, J , J1 6,200 13,300 Prepaid Insurance No. 130 Sept. 4 J1 1,200 1,200 Equipment No. 157 Sept. 3 J1 25,000 25,000 Service Revenue No. 400 Sept. 30 J1 6,200 6,200 Notes Payable No. 200 Sept. 3 J1 15,000 15,000 Accounts Payable No. 201 Sept. 10 J Owner s Capital No. 301 Sept. 1 J1 20,000 20,000 Owner s Drawings No. 306 Sept. 20 J Advertising Expense No. 610 Sept. 10 J Rent Expense No. 729 Sept. 2 J1 1,000 1,000 (c) CAMPUS LAUNDROMAT September 30, Debit Credit Cash $13,300 Prepaid Insurance 1,200 Equipment 25,000 Notes Payable $15,000 Accounts Payable 200 Owner s Drawings 700 Service Revenue 6,200 Advertising Expense 200 Rent Expense 1,000 $41,400 $41,400

5 DO IT! D-11 DO > IT! Review Identify normal balances. (LO 2), C Record business activities. (LO 4), AP Post transactions. (LO 6), AP Prepare a trial balance. (LO 7), AP DO IT! 2-1 Ivan Klumb has just rented space in a strip mall. In this space, he will open a photography studio, to be called Picture This! A friend has advised Ivan to set up a double-entry set of accounting records in which to record all of his business transactions. Identify the balance sheet accounts that Ivan will likely need to record the transactions needed to open his business. Indicate whether the normal balance of each account is a debit or credit. DO IT! 2-2 Ivan Klumb engaged in the following activities in establishing his photography studio, Picture This!: 1. Opened a bank account in the name of Picture This! and deposited $6,300 of his own money into this account as his initial investment. 2. Purchased photography supplies at a total cost of $1,100. The business paid $400 in cash and the balance is on account. 3. Obtained estimates on the cost of photography equipment from three different manufacturers. In what form (type of record) should Ivan record these three activities? Prepare the entries to record the transactions. DO IT! 2-3 Ivan Klumb recorded the following transactions during the month of April. April 3 Cash 3,400 Service Revenue 3,400 April 16 Rent Expense 700 Cash 700 April 20 Salaries and Wages Expense 300 Cash 300 Post these entries to the Cash T-account of the general ledger to determine the ending balance in cash. The beginning balance in cash on April 1 was $1,600. DO IT! 2-4 The following accounts are taken from the ledger of Recha Company at December 31,. 200 Notes Payable $20, Cash $ 6, Owner s Capital 28, Supplies 6, Equipment 80, Rent Expense 4, Owner s Drawings 8, Salaries and Wages Payable 3, Salaries and Wages Expense 38, Accounts Payable 11, Service Revenue 88, Accounts Receivable 8,000 Prepare a trial balance in good form.