Chapter 2, Problem 3PA

On November 1, 2016, Patty Cosgrove established an interior decorating business, Classic Designs. During the month, Patty completed the following transactions related to the business:

Instructions

1. 1. Journalize each transaction in a two-column journal beginning on Page 1, referring to the following chart of accounts in selecting the accounts to be debited and credited. (Do not insert the account numbers in the journal at this time.) Explanations may be omitted.

1. 2. Post the journal to a ledger of four-column accounts, inserting appropriate posting references as each item is posted. Extend the balances to the appropriate balance columns after each transaction is posted.
2. 3. Prepare an unadjusted trial balance for Classic Designs as of November 30, 2016.
3. 4. Determine the excess of revenues over expenses for November.
4. 5. Can you think of any reason why the amount determined in (4) might not be the net income for November?

To determine

Journalize the transactions in a two column journal beginning on Page 1.

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”.

Journalize each transaction in a two column journal beginning on Page 1.

Journal                                                          Page   1
Date		Description	Post. Ref	Debit ($)	Credit ($)
2016		Cash	11	27,750
November	1	Person PC, Capital	31		27,750
		(To record the transfer of cash from personal bank account to business account)
	1	Rent expense	53	4,000
		Cash	11		4,000
		(To record the payment of rent for the month of November)
	6	Equipment	16	12,880
		Accounts payable	22		12,880
		(To record the purchase of equipment on account)
	8	Van	18	32,500
		Cash	11		6,500
		Notes payable	21		26,000
		(To record the purchase of van by cash and on account)
	10	Supplies	13	1,860
		Cash	11		1,860
		(To record the purchase of supplies)
	12	Cash	11	7,500
		Fees earned	41		7,500
		(To record the receipt of cash for the completed job)
	15	Prepaid insurance	14	2,400
		Cash	11		2,400
		(To record the payment made for insurance premiums)
	23	Accounts receivable	12	12,440
		Fees earned	41		12,440
		(To record the invoices sent to customers for the jobs completed)
	24	Truck expense	55	1,100
		Accounts payable	22		1,100
		(To record the receipt of invoices for van expenses)

Table (1)

Journal                                                            Page 2
Date		Description	Post. Ref	Debit ($)	Credit ($)
2016	29	Utilities expense	54	3,660
November		Cash	11		3,660
		(To record the payment of utilities expense)
	29	Miscellaneous expense	59	1,700
		Cash	11		1,700
		(To record the payment of miscellaneous expense)
	30	Cash	11	8,000
		Accounts receivable	12		8,000
		(To record the receipt of cash from customers on account)
	30	Wages expense	51	4,750
		Cash	11		4,750
		(To record the payment of wages expense)
	30	Accounts payable	22	6,220
		Cash	11		6,220
		(To record the payment made to creditor on account)
	30	Person PC, Drawing	32	2,000
		Cash	11		2,000
		(To record the withdrawal of cash for personal use)

Table (2)

To determine

Post the journal to a ledger of four-column accounts with appropriate post references, and the balances after each transaction is posted.

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.

General Ledger

Account:         Cash                                                                Account no.        11
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
November	1		1	27,750		27,750
	1		1		4,000	23,750
	8		1		6,500	17,250
	10		1		1,860	15,390
	12		1	7,500		22,890
	15		1		2,400	20,490
	29		2		3,660	16,830
	29		2		1,700	15,130
	30		2	8,000		23,130
	30		2		4,750	18,380
	30		2		6,220	12,160
	30		2		2,000	10,160

Table (3)

Account:    Accounts Receivable                                                 Account no. 12
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
November	23		1	12,440		12,440
	30		2		8,000	4,440

Table (4)

Account:          Supplies                                                                Account no. 13
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
November	10		1	1,860		1,860

Table (5)

Account:    Prepaid Insurance                                                     Account no. 14
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
November	15		1	2,400		2,400

Table (6)

Account:    Equipment                                                                 Account no. 16
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
November	6		1	12,880		12,880

Table (7)

Account:     Truck                                                                         Account no. 18
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
November	8		1	32,500		32,500

Table (8)

Account:     Notes Payable                                                           Account no. 21
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
November	8		1		26,000		26,000

Table (9)

Account:     Accounts Payable                                                           Account no. 22
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
November	6		1		12,880		12,880
	24		1		1,100		13,980
	30		2	6,220			7,760

Table (10)

Account:       Person PC, Capital                                                      Account no. 31
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
November	1		1		27,750		27,750

Table (11)

Account:         Person PC, Drawing                                                    Account no. 32
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
November	30		2	2,000		2,000

Table (12)

Account:          Fees earned                                                                 Account no. 41
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
November	12		1		7,500		7,500
	23		2		12,440		19,940

Table (13)

Account:   Wages expense                                                                   Account no. 51
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
November	30		2	4,750		4,750

Table (14)

Account:   Rent expense                                                                      Account no. 53
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
November	1		1	4,000		4,000

Table (15)

Account:  Utilities expense                                                                  Account no. 54
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
November	29		2	3,660		3,660

Table (16)

Account:   Truck expense                                                                    Account no. 55
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
November	24		1	1,100		1,100

Table (17)

Account:   Miscellaneous expense                                                      Account no. 59
Date		Item	Post. Ref	Debit  ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
2016
November	29		2	1,700		1,700

Table (18)

To determine

Prepare an unadjusted trial balance of C Designs as of November 30, 2016.

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 C Designs as of November 30, 2016 as follows:

C Designs Unadjusted Trial Balance November 30, 2016
Particulars	Account No.	Debit $	Credit $
Cash	11	10,160
Accounts receivable	12	4,440
Supplies	13	1,860
Prepaid insurance	14	2,400
Equipment	15	12,880
Truck	18	32,500
Notes payable	21		26,000
Accounts payable	22		7,760
Person PC, Capital	31		27,750
Person PC,  Drawings	32	2,000
Fees earned	41		19,940
Wages expense	51	4,750
Rent expense	53	4,000
Utilities expense	54	3,660
Truck expense	55	1,100
Miscellaneous expense	59	1,700
Total		81,450	81,450

Table (19)

Conclusion

The debit column and credit column of the unadjusted trial balance are agreed, both having balance of $81,450.

To determine

Calculate the excess of revenues over expenses for the month of November.

Explanation of Solution

Calculate the excess of revenues over expenses.

$\begin{array}{c}\left(\begin{array}{l}\text{Excess of revenues}\\ \text{over expenses}\end{array}\right)\text{=}\left(\text{Fees earned}\right)-\left(\begin{array}{l}\text{Wages expense+Rent Expense}\\ \text{+Utilities expense+Truck Expense+}\\ \text{Miscellaneous Expense}\end{array}\right)\\ \text{=}\left(\text{\$19,940}\right)-\left(\begin{array}{l}\$4,750+\$+\$4,000+\$3,660\\ +\$1,100+\$1,700\end{array}\right)\\ =\$4,730\end{array}$

Conclusion

Hence, the excess of revenues over expenses for the month of November is $4,730.

To determine

Discuss the reason behind the amount determined in (4) might not be the net income for November.

Explanation of Solution

The amount determined in (4) might not be the net income for November, because adjusting entries for supplies used, insurance expired, and depreciation should be passed at the end of the accounting period in order to bring the accounts up to date.