The Accounting Cycle: Step 2 Professor Eric Carstensen MiraCosta College http://www.miracosta.edu/instruction/accounting/index.html

Step 2: Prepare Journal Entries Journal Entry Rule #1: Each transaction MUST affect at least two accounts (basis of double-entry accounting) Journal Entry Rule #2: Total Debits MUST equal Total Credits (see next page for Debit and Credit rules)

Debit and Credit Rules Assets Liabilities Owners' Equity Revenues dr. cr.   increases decreases normal balance Revenues Expenses Distributions

Transactions from Step 1 invest $35,000 cash in exchange for stock b. purchase insurance policy for $4,800 c. pay first month's rent = $3,000 d. purchase equipment for $2,000 down payment with balance ($5,200) due in 60 days e. borrow $10,000 on note payable f. purchase office supplies = $1,300 g. receive payment for services = $4,500 h. pay assistant = $2,000 for 10 days work i. earn $7,900 to be paid in 30 days j. make partial payment on A/P = $3,600 k. pay dividends = $1,000 l. receive partial payment on A/R = $4,000

transaction a Owner invests $35,000 in exchange for common stock There is a 35,000 increase in the asset cash and a 35,000 increase in the owners’ equity account common stock: debit cash 35,000 credit stock 35,000

transaction b Purchase insurance policy for $4,800 There is a 4,800 increase in the asset prepaid insurance and a 4,800 decrease in the asset cash: debit prepaid insurance 4,800 credit cash 4,800

transaction c Pay first month’s rent = $3,000 There is a 4,800 increase in rent expense and a 3,000 decrease in the asset cash: debit rent expense 3,000 credit cash 3,000

transaction d Purchase office furniture = $2,000 down payment + balance ($5,200) due in 60 days There is a 7,200 increase in the asset office furniture, a 5,200 increase in the liability A/P and a 2,000 decrease in the asset cash: debit office furniture 7,200 credit cash 2,000 credit A/P 5,200

transaction e borrow $10,000 on note payable There is a 10,000 increase in the asset cash and a 10,000 increase in the liability notes payable: debit cash 10,000 credit notes payable 10,000

transaction f Purchase office supplies = $1,300 There is a 1,300 increase in the asset supplies and a 1,300 decrease in the asset cash: debit supplies 1,300 credit cash 1,300

transaction g receive payment for services = $4,500 There is a 4,500 increase in the asset cash and a 4,500 increase in revenues: debit cash 4,500 credit revenue 4,500

transaction h Pay assistant = $2,000 for 10 days work There is a 2,000 increase in wages expense and a 2,000 decrease in the asset cash: debit wages expense 2,000 credit cash 2,000

transaction i Earn $7,900 to be paid in 30 days There is a 7,900 increase in the asset A/R and a 7,900 increase in revenues: debit A/R 7,900 credit revenue 7,900

transaction j Make partial payment on A/P = $3,600 There is a 3,600 decrease in the liability A/P and a 3,600 decrease in the asset cash: debit A/P 3,600 credit cash 3,600

transaction k Pay dividends = $1,000 There is a 1,000 increase in the contra equity account dividends and a 1,000 decrease in the asset cash: debit dividends 1,000 credit cash 1,000

transaction l Receive partial payment on A/R = $4,000 There is a 4,000 increase in the asset account cash and a 4,000 decrease in the asset A/R: debit cash 4,000 credit A/R 4,000

Partial Journal

Step 2 - Conclusion All journal entries have been prepared and entered into the journal. Next time, we’ll cover Step 3 which is called Posting. We take the various pieces of the journal entries and post them into their respective ledgers.