Chapter 2, Problem 2PA

Journal entries and trial balance

On October 1, 20Y6, Jay Crowley established Affordable Realty, which completed the following transactions during the month:

a. Jay Crowley transferred cash from a personal bank account to an account to be used for the business in exchange for common stock, $40,000.

b. Paid rent on office and equipment for the month, $4,800.

c. Purchased supplies on account, $2,150.

d. Paid creditor on account, $1,100.

e. Earned sales commissions, receiving cash, $18,750.

f. Paid automobile expenses (including rental charge) for month, $1,580, and miscellaneous expenses, $800.

g. Paid office salaries, $3,500.

h. Determined that the cost of supplies used was $1,300.

i. Paid dividends, $1,500.

Instructions

1. Journalize entries for transactions (a) through (i), using the following account titles: Cash, Supplies, Accounts Payable, Common Stock, Dividends, Sales Commissions, Rent Expense, Office Salaries Expense, Automobile Expense, Supplies Expense, Miscellaneous Expense. Explanations may be omitted.

2. Prepare T accounts, using the account titles in (1). Post the journal entries to these accounts, placing the appropriate letter to the left of each amount to identify the transactions. Determine the account balances after all posting is complete. Accounts containing only a single entry do not need a balance.

3. Prepare an unadjusted trial balance as of October 31, 20Y6.

4. Determine the following:

a. Amount of total revenue recorded in the ledger.

b. Amount of total expenses recorded in the ledger.

c. Amount of net income for October.

5. Determine the increase or decrease in retained earnings for October.

To determine

Prepare the journal entry to record the transactions for the month October.

Explanation of Solution

Journal:

Journal is the book of original entry. Journal consists of the day today financial transactions in a chronological order. The journal has two aspects; they are debit aspect and the credit aspect.

Rules of debit and credit:

“An increase in an asset account, an increase in an expense account, a decrease in liability account, and a decrease in a revenue account should be debited.

Similarly, an increase in liability account, an increase in a revenue account and a decrease in an asset account, a decrease in an expenses account should be credited”.

Prepare the journal entry to record the transactions for the month October.

Date		Description	Post.Ref.	Debit ($)	Credit ($)
20Y6	a	Cash		40,000
October		Common stock			40,000
		(To record the issuance of common stock)
20Y6	b	Rent expense		4,800
October		Cash			4,800
		(To record the rent paid for the month)
20Y6	c	Supplies		2,150
October		Accounts payable			2,150
		(To record the purchase of supplies on account)
20Y6	d	Accounts payable		1,100
October		Cash			1,100
		(To record the payment of cash to creditors)
20Y6	e	Cash		18,750
October		Sales commission			18,750
		(To record the fees received from customers)
20Y6	f	Automobile expense		1,580
October		Miscellaneous expense		800
		Cash			2,380
		(To record the payment of automobile and miscellaneous expense)
20Y6	g	Salaries expense		3,500
October		Cash			3,500
		(To record the payment of office salaries )
20Y6	h	Supplies expenses		1,300
October		Supplies			1,300
		(To record the supplies that are used)
20Y6	i	Dividends		1,500
October		Cash			1,500
		(To record the dividends)

Table (1)

To determine

Prepare the T-accounts and post the respective journal entries.

Explanation of Solution

T-account:

An account is referred to as a T-account, because the alignment of the components of the account resembles the capital letter ‘T’. An account consists of the three main components which are as follows:

• The title of the account
• The left or debit side
• The right or credit side

Post the journal entries in the T-account:

To determine

Prepare an unadjusted trial balance of Company A at October 31, 20Y6.

Explanation of Solution

Unadjusted trial balance:

The unadjusted trial balance is the summary of all the ledger accounts that appears on the ledger accounts before making adjusting journal entries.

Prepare an unadjusted trial balance of Company A at October 31, 20Y6 as follows:

Company A Unadjusted Trial Balance October 31, 20Y6
Particulars	Debit ($)	Credit ($)
Cash	45,470
Supplies	850
Accounts payable		1,050
Common stock		40,000
dividends	1,500
Sales commission		18,750
Rent expense	4,800
Salaries expense	3,500
Automobile expense	1,580
Supplies expense	1,300
Miscellaneous expense	800
Total	59,800	59,800

Table (2)

To determine

Determine the following:

1. (a) Amount of total revenue recorded in the ledger.
2. (b) Amount of total expenses recorded in the ledger.
3. (c) Amount of net income for October.

Explanation of Solution

Revenues: Revenues are earnings from operations of a business. The operating activities are sale of goods and services, and rent revenue.

Expenses: Expenses are costs incurred for the operations of a business. The costs incurred for generating revenues are rent expense, depreciation expense, general and administrative expenses, selling expenses, and utilities expense.

Net income: The bottom line of income statement which is the result of excess of earnings from operations (revenues) over the costs incurred for earning revenues (expenses) is referred to as net income.

1. (a) The total amount of revenue (sales commission) recorded in the ledger is $18,750.
2. (b) The total amount of expenses $\left(\text{\$4,800 + \$3,500 + \$1,580+ \$1,300}+\text{\$800}\right)$ recorded in the ledger is $11,980.
3. (c)  The amount of net income $\left(\text{\$18,750 – \$11,980}\right)$ recorded for October is $6,770.

To determine

Determine the increase or decrease in retained earnings for October.

Explanation of Solution

Retained earnings: Retained earnings are that portion of profits which are earned by a company but not distributed to stockholders in the form of dividends. These earnings are retained for various purposes like expansion activities, or funding any future plans.

The increase or decrease in retained earnings for October is as follows:

Particulars	Amount ($)
Add: Net income	6,770
Less: Dividends	1,500
Retained earnings	5,270

Table (3)

Conclusion

Thus, the retained earnings for October are $5,270.