Posting Journal Entries to Ledger Account and Trial Balance 1

Journalizing and Posting 2

Post. Ref. JOURNAL DateDescriptionDebitCredit Page Dec Prepaid Insurance Cash Paid premium on two-year policy. Dec. 1NetSolutions paid a premium of $2,400 for a comprehensive insurance policy covering two years. 3

Post. Ref. JOURNAL DateDescriptionDebitCredit Page Dec Prepaid Insurance Cash ACCOUNT Prepaid Insurance ACCOUNT NO. 15 Balance Debit Credit Date Debit Credit Item Post. Ref Dec Paid premium on two-year policy. 4

Post. Ref. JOURNAL DateDescriptionDebitCredit Page Dec Prepaid Insurance Cash ACCOUNT Prepaid Insurance ACCOUNT NO. 15 Balance Debit Credit Date Debit Credit Item Post. Ref Dec Paid premium on two-year policy. 5

Post. Ref. JOURNAL DateDescriptionDebitCredit Page Dec Prepaid Insurance Cash Paid premium on two-year policy. 15 ACCOUNT Cash ACCOUNT NO. 11 Balance Debit Credit Date Debit Credit Item Post. Ref Nov Dec

Post. Ref. JOURNAL DateDescriptionDebitCredit Page Dec Prepaid Insurance Cash Paid premium on two-year policy. 15 ACCOUNT Cash ACCOUNT NO. 11 Balance Debit Credit Date Debit Credit Item Post. Ref Nov Dec

Rent Expense Unearned Rent Paid rent for December. Dec. 1NetSolutions paid rent for December, $800. 8

Cash Unearned Rent Received advanced payment For three months’ rent of land. Dec. 1NetSolutions receives $360 for three month’s rent for land beginning December 1. 9

Dec. 4NetSolutions purchased office equipment on account from Executive Supply Co. for $1, Office Equipment Accounts Payable Purchased office equipment on account. 10

Dec. 6NetSolutions paid $180 for a newspaper advertisement Miscellaneous Expense Cash Paid for newspaper ad. 11

Dec. 11NetSolutions paid creditors $ Accounts Payable Cash Paid creditors on account. 12

Dec. 13NetSolutions paid a receptionist and part-time assistant $950 for two weeks’ wages. Post. Ref. JOURNAL DateDescriptionDebitCredit Page Dec Wages Expense Cash Paid two week’s wages. 13

Dec. 16NetSolutions received $3,100 from fees earned for the first half of December Cash Fees Earned Received fees from customers. 14

Dec. 16Fees earned on account totaled $1,750 for the first half of December Accounts Receivable Fees Earned Received fees from customers. 15

Dec. 20NetSolutions paid $900 to Executive Supply Co. on the $1,800 debt owed from the December 4 transaction Accounts Payable Cash Paid part of amount owed to Executive Supply Co. 16

Dec. 21NetSolutions received $650 from customers in payment of their accounts Cash Accounts Receivable Received cash from customer on account. 17

Dec. 23NetSolutions paid $1,450 for supplies Supplies Cash Purchased supplies. 18

Dec. 27NetSolutions paid the receptionist and part-time assistant $1,200 for two weeks’ wages Wages Expense Cash Paid two weeks’ wages. 19

Dec. 31NetSolutions paid its $310 telephone bill for the month Utilities Expense Cash Paid telephone bill. 20

Dec. 31NetSolutions paid its $225 electric bill for the month. Post. Ref. JOURNAL DateDescriptionDebitCredit Page Dec Utilities Expense Cash Paid utility bill. 21

Dec. 31NetSolutions received $2,870 from fees earned for the second half of December Cash Fees Earned Received fees from customers. 22

Dec. 31NetSolutions earned $1,120 on account for the second half of December Accounts Receivable Fees Earned Recorded fees earned on account. 23

Dec. 31 NetSolutions paid dividends of $2,000 to stockholders Dividends Cash Paid dividends to stockholders. 24

Dec. 16NetSolutions received $3,100 from fees earned for the first half of December Cash Fees Earned Received fees from customers. 25

Dec. 16Fees earned on account totaled $1,750 for the first half of December Accounts Receivable Fees Earned Received fees from customers. 26

Dec. 20NetSolutions paid $900 to Executive Supply Co. on the $1,800 debt owed from the December 4 transaction Accounts Payable Cash Paid part of amount owed to Executive Supply Co. 27

Dec. 21NetSolutions received $650 from customers in payment of their accounts Cash Accounts Receivable Received cash from customer on account. 28

Dec. 23NetSolutions paid $1,450 for supplies Supplies Cash Purchased supplies. 29

Dec. 27NetSolutions paid the receptionist and part-time assistant $1,200 for two weeks’ wages Wages Expense Cash Paid two weeks’ wages. 30

Dec. 31NetSolutions paid its $310 telephone bill for the month Utilities Expense Cash Paid telephone bill. 31

Dec. 31NetSolutions paid its $225 electric bill for the month. Post. Ref. JOURNAL DateDescriptionDebitCredit Page Dec Utilities Expense Cash Paid utility bill. 32

Dec. 31NetSolutions received $2,870 from fees earned for the second half of December Cash Fees Earned Received fees from customers. 33

Dec. 31NetSolutions earned $1,120 on account for the second half of December Accounts Receivable Fees Earned Recorded fees earned on account. 34

Dec. 31 NetSolutions paid dividends of $2,000 to stockholders Dividends Cash Paid dividends to stockholders. 35

Continuing with the Example of JJ Lawn Service 36

Posting Journal Entries to the Ledger Accounts 37

Posting Journal Entries to the Ledger Accounts 38

Let’s see what the cash account looks like after posting the cash portion of this transaction for JJ’s Lawn Care Service. Posting Journal Entries to the Ledger Accounts 39

This ledger format is referred to as a running balance (as opposed to simple T accounts). Ledger Accounts After Posting 40

Net income is not an asset  it’s an increase in owners’ equity from profits of the business. ALOE A = L + OE IncreaseDecreaseIncrease Either (or both) of these effects occur as net income is earned but this is what “net income” really means. What is Net Income? 41

ALOE A = L + OE Retained Earnings Capital Stock Retained Earnings The balance in the Retained Earnings account represents the total net income of the corporation over the entire lifetime of the business, less all amounts which have been distributed to the stockholders as dividends. 42

Revenue and Expenses The price for goods sold and services rendered during a given accounting period. Increases owner’s equity. The costs of goods and services used up in the process of earning revenue. Decreases owner’s equity. 43

The Realization Principle: When To Record Revenue Realization Principle Revenue should be recognized at the time goods are sold and services are rendered.

The Matching Principle: When To Record Expenses Matching Principle Expenses should be recorded in the period in which they are used up. 45

Debits and Credits for Revenue and ExpenseEQUITIES Debit for Decrease Credit for Increase REVENUES Debit for Decrease Credit for Increase EXPENSES Credit for Decrease Debit for Increase Expenses decrease owner’s equity. Revenues increase owner’s equity. 46

EQUITIES Debit for Decrease Credit for Increase CAPITAL STOCK Debit for Decrease Credit for Increase DIVIDENDS Credit for Decrease Debit for Increase Payments to owners decrease owners’ equity. Owners’ investments increase owners’ equity. Investments by and Payments to Owners 47

Let’s analyze the revenue, and expense transactions for JJ’s Lawn Care Service for the month of May. We will also analyze a dividend transaction. Let’s analyze the revenue, and expense transactions for JJ’s Lawn Care Service for the month of May. We will also analyze a dividend transaction. 48

½ May 29: JJ’s provided lawn care services for a client and received $750 in cash. Will Cash increase or decrease? Will Sales Revenue increase or decrease? 49

½ May 29: JJ’s provided lawn care services for a client and received $750 in cash. Cash increases $750 with a debit. Sales Revenue increases $750 with a credit. 50

¾ May 31: JJ’s purchased gasoline for the lawn mower and the truck for $50 cash. Will Cash increase or decrease? Will Gasoline Expense increase or decrease? 51

¾ May 31: JJ’s purchased gasoline for the lawn mower and the truck for $50 cash. Cash decreases $50 with a credit. Gasoline Expense increases $50 with a debit. 52

¿ May 31: JJ’s Lawn Care paid Jill Jones and her family a $200 dividend. Will Cash increase or decrease? Will Dividends increase or decrease? 53

¿ May 31: JJ’s Lawn Care paid Jill Jones and her family a $200 dividend. Cash decreases $200 with a credit. Dividends increase $200 with a debit. 54

Trial Balance 55

NetSolutions Trial Balance December 31, 2005 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Capital Stock Dividends Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense

NetSolutions Trial Balance December 31, 2005 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Capital Stock Dividends Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Balance Sheet Items 57

NetSolutions Trial Balance December 31, 2005 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Capital Stock Dividends Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Statement of Retained Earnings Item 58

NetSolutions Trial Balance December 31, 2005 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Capital Stock Dividends Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Income Statement Items 59

60

1.Failure to record a transaction or to post a transaction. 2.Recording the same wrong amount for both the debit and the credit parts of a transaction. 3.Recording the same transaction more than once. 4.Posting a part of a transaction correctly as a debit or credit but to the wrong account. Errors that will not cause the trial balance to be unequal: 61

Error Correction Procedure 1.Journal entry is incorrectDraw a line through the error but not posted.and insert correct title or amount. Error Correction Procedure Correction of Errors 62

Error Correction Procedure 1.Journal entry is incorrectDraw a line through the error but not posted.and insert correct title or amount. Error Correction Procedure 2.Journal entry is correctDraw a line through the but posted incorrectly.posted error and post correctly. Correction of Errors 63

Error Correction Procedure 3.Journal entry is incorrectJournalize and post a and postedcorrecting entry. Correction of Errors 64

What would be the necessary correcting entry? What would be the necessary correcting entry? Journal – As recorded and posted Correcting Errors – An Example On May 5, a purchase of office equipment on account was incorrectly journalized and posted as shown. DateDescriptionDebitCredit May 5Supplies 12,500 Accounts Payable 12,500 65

Journal – As recorded and posted Correcting Errors – An Example On May 5, a purchase of office equipment on account was incorrectly journalized and posted as shown. DateDescriptionDebitCredit May 5Supplies 12,500 Accounts Payable 12,500 DateDescriptionDebitCredit May 5Office Equipment12,500 66

DateDescriptionDebitCredit May 5Office Equipment12,500 Supplies12,500 Journal – As recorded and posted Correcting Errors – An Example On May 5, a purchase of office equipment on account was incorrectly journalized and posted as shown. DateDescriptionDebitCredit May 5Supplies 12,500 Accounts Payable 12,500 67

Financial Analysis and Interpretation Comparing an item in a current statement with the same item in prior statements is called horizontal analysis. 68

J Holmes, Attorney-at-Law, P.C. Income Statement For the Year Ended December 31, 2005 and 2006 Increase (Decrease) Amount Percent Fees earned$187,500$150,000$37, % Operating expenses: Wages expense$ 60,000$ 45,000$15, % Rent expense15,00012,0003, % Utilities expense12,5009,0003, % Supplies expense2,7003,000(300)(10.0)% Misc. expense 2,300 1, % Total operating expenses$ 92,500$ 70,800$21, % Net income$ 95,000$ 79,200$15, % 69

Now, let’s look at the Trial Balance for JJ’s Lawn Care Service for the month of May. 70

All balances are taken from the ledger accounts on May 31 after considering all of JJ’s transactions for the month. Proves equality of debits and credits. 71

Journalize transactions. Post entries to the ledger accounts. Prepare trial balance. Make end-of- year adjustments. Prepare adjusted trial balance. Prepare financial statements. Prepare after closing trial balance. Journalize and post closing entries. The Accounting Cycle 72

End of Chapter 3 73