Chapter 8, Problem 1CTP

William Evans began Evans Distributors, a sporting goods distribution company, in January 2019 and engaged in the transactions below. Assume Evans Distributors and its customers take advantage of all cash discounts.

INSTRUCTIONS

Record the transactions in a general journal. Number the first journal as page 1. Provide brief explanations after each journal entry.

To determine

Prepare general journal for the transactions of company ED.

Explanation of Solution

General Journal:

All the transactions of a business are prima facie recorded in general journal in chronological order. The general ledger is also known as the primary books of account.

Record the transactions in the general journal as follows:

Recording the capital invested:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 1, 2019	Cash		54,000
	Equipment		6,000
	Capital			60,000
	(to record the capital invested and equipment provided)

Table (1)

• • The cash account is an asset account and the account balance is increasing. Therefore, it is debited.
• • The equipment account is asset account and the balance of account is increasing. Therefore, it is debited.
• • The capital account is owners’ equity account. The balance is increased by introducing capital. Hence, it is credited.

Recording the merchandise purchased on cash:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 2, 2019	Purchases		10,500
	Cash			10,500
	(to record the merchandise purchased for cash)

Table (2)

• • The purchases account is expense account and has a normal debit balance which is increasing. Hence, it is debited.
• • The cash account is an asset account and the account balance is decreasing. Therefore, it is credited.

Recording the merchandise sold on credit:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 3, 2019	Accounts receivables/Company C		750
	Sales			750
	(to record the merchandise sold on account with terms 2/10, n/30)

Table (3)

• • The accounts receivable is an asset and the account balance is increasing. Hence, it is debited.
• • The sales account is a revenue account. The revenue is generated on selling the merchandise. Hence, it is credited.

Recording the merchandise purchased on credit:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 4, 2019	Purchases		1,900
	Accounts payable/Company TS			1,900
	(to record the merchandise purchased on account with terms 1/10, n/30)

Table (4)

• • The purchases account is expense account and has a normal debit balance which is increasing. Hence, it is debited.
• • Accounts payable is a liability and the account balance is increasing. Therefore, it is credited.

Recording the freight charges paid:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 5, 2019	Freight In		120
	Cash			120
	(to record the freight charges paid)

Table (5)

• • Freight-in charges are the expenses and the expenses are increasing. Hence, the account is debited.
• • The cash account is an asset account and the account balance is decreasing. Therefore, it is credited.

Recording the sold goods returned:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 10, 2019	Sales returns and allowances		100
	Accounts receivables/Company C			100
	(to record goods returned and credit memo issued)

Table (6)

• • The sales returns and allowances account is identified as contra revenue account with  normal debit balance and increasing. Therefore, it is debited.
• • The account receivable account is an asset account and the account balance is decreasing. Therefore, the accounts payable account is credited.

Recording the payment received from the buyer:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 11, 2019	Sales Discount		13
	Cash		637
	Accounts receivable/Company C			650
	(to record the payment received and discount provided)

Table (7)

• • The sales discount account is identified as contra revenue account and it has normal debit balance which is increasing. Therefore, it is debited.
• • The cash account is an asset account and the account balance is increasing. Therefore, it is debited.
• • The accounts receivable account is an asset account and the account balance is decreasing. Therefore, it is credited.

Recording the payment made:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 13, 2019	Accounts payable/Company TS		1,900
	Purchases discounts			19
	Cash			1,881
	(to record the payment made and receiving purchases discount)

Table (8)

• • The accounts payable account is liability and the account balance is decreasing. Therefore, accounts payable account is debited.
• • The purchases discount account is a contra expense account. The account has the normal credit balance and it is increasing. Therefore, it is credited.
• • The cash account is an asset account and the account balance is decreasing. Therefore, it is credited.

Recording the purchases on cash:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 15, 2019	Purchases		6,250
	Cash			6,250
	(to record the inventory purchased on cash)

Table (9)

• • The purchases account is an expense account. The purchases account has normal debit balance and the balance is increasing. Therefore, it is debited.
• • The cash account is an asset account and account balance is decreasing. Therefore, it is credited.

Recording of the merchandise sold using credit card:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 15, 2019	Credit card expense		36
	Cash		1,164
	Sales			1,200
	(to record the merchandise sold on)

Table (10)

• • The credit card expense is the expense account which has normal debit balance. The balance is increasing. Therefore, it is debited.
• • The cash account is an asset account and the account balance is increasing. Therefore, the cash account is debited.
• • The sales account is identified as the revenue account and the revenue is generated from selling merchandise. Therefore, sales account is credited.

Recording the wages paid:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 15, 2019	Wages		1,575
	Cash			1,575
	(to record the wages paid)

Table (11)

• • Wages are the expenses and the expenses are increasing. Hence, it is debited.
• • The cash account is an asset account and the account balance is decreasing. Therefore, it is credited.

Recording the purchase of equipment:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 16, 2019	Equipment		1,750
	Cash			1,750
	(to record the equipment purchased)

Table (12)

• • Equipment is an asset and the account balance of asset is increasing. Hence, the account is debited.
• • The cash account is an asset account and the account balance is decreasing. Therefore, it is credited.

Recording the charges paid for transporting equipment:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 17, 2019	Equipment		350
	Cash			350
	(to record the freight charges paid on equipment)

Table (13)

• • Freight-in charges are the expenses and the expenses are increasing. Hence, the account is debited. The freight-in charges related to transport of equipment are debited to the equipment account only.
• • The cash account is an asset account and the account balance is decreasing. Therefore, it is credited.

Recording the purchases on credit:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 18 , 2019	Purchases		1,700
	Accounts payable/Company TE			1,700
	(to record the inventory purchased on account with terms1/10, n/30)

Table (14)

• • The purchases account is debited. This is because the purchase account is an expense account and has normal debit balance which is increasing.
• • Accounts payable is liability and account balance is increasing. Therefore, it is credited.

Recording the merchandise sold on credit:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 20, 2019	Accounts receivables/Company M		2,500
	Sales			2,500
	(to record the merchandise sold on account with terms 1/10, n/30)

Table (15)

• • The accounts receivable is an asset and the account balance is increasing. Hence, it is debited.
• • The sales account is a revenue account. The revenue is generated on selling the merchandise. Hence, it is credited.

Record the purchases on the credit:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 21, 2019	Purchases		3,000
	Freight In		70
	Accounts payable/Company S			3,070
	(to record the inventory purchased on account with terms 1/30, n/30)

Table (16)

• • The purchases account is an expense account. The purchases account has normal debit balance and the balance is increasing. Therefore, it is debited.
• • Freight-in charges are the expenses and the expenses are increasing. Hence, the account is debited.
• • The accounts payable is a liability and the account balance is increasing. Therefore, it is credited.

Recording the payment made:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 27, 2019	Accounts payable/Company TE		2,700
	Purchases discounts			27
	Cash			2,673
	(to record the payment made and receiving purchases discount)

Table (17)

• • The accounts payable account is liability and the account balance is decreasing. Therefore, accounts payable account is debited.
• • The purchases discount account is a contra expense account. The account has the normal credit balance and it is increasing. Therefore, it is credited.
• • The cash account is an asset account and the account balance is decreasing. Therefore, it is credited.

Recording the payment received from the buyer:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 29, 2019	Sales Discount		25
	Cash		2,475
	Accounts receivable/Company M			2,500
	(to record the payment received and discount provided)

Table (18)

• • The sales discount account is identified as contra revenue account and it has normal debit balance which is increasing. Therefore, it is debited.
• • The cash account is asset account and the account balance is increasing. Hence, cash account is debited. The amount in cash account would be calculated by subtracting the merchandise returned by the buyer and the sales discount provided.
• • The accounts receivable account is an asset account and the account balance is decreasing. Therefore, it is credited.

Recording the payment made:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 30, 2019	Accounts payable/Company S		3,070
	Purchases discounts			30
	Cash			3,040
	(to record the payment made and receiving purchases discount)

Table (19)

• • The accounts payable account is liability and the account balance is decreasing. Therefore, accounts payable account is debited.
• • The purchases discount account is a contra expense account. The account has the normal credit balance and it is increasing. Therefore, it is credited.
• • The cash account is an asset account and the account balance is decreasing. Therefore, it is credited.

Recording the purchases on cash:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 30, 2019	Purchases		6,825
	Cash			6,825
	(to record the inventory purchased on cash)

Table (20)

• • The purchases account is an expense account. The purchases account has normal debit balance and the balance is increasing. Therefore, it is debited.
• • The cash account is an asset account and account balance is decreasing. Therefore, it is credited.

Recording of the merchandise sold using credit card:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 30, 2019	Credit card expense		66
	Cash		2,134
	Sales			2,200
	(to record the merchandise sold on)

Table (21)

• • The credit card expense is the expense account which has normal debit balance. The balance is increasing. Therefore, it is debited.
• • The cash account is an asset account and the account balance is increasing. Therefore, the cash account is debited.
• • The sales account is identified as the revenue account and the revenue is generated from selling merchandise. Therefore, sales account is credited.

Working Note:

Calculation for sales discount:

The sales discount is provided to the customer by the seller fulfilling the terms of making the timely payments as per 2/10, n/30 terms. The customer is entitled to receive the two percent of sales discount on the merchandise sold if the payment is made with ten days of invoice provided.

$\begin{array}{c}\text{Amount of sales discount}=\left(\text{Sales}-\text{Sales returns}\right)\times \left(\frac{\text{Percentage of sales discount}}{100}\right)\\ =\left(\$750-\$100\right)\times \frac{2}{100}\\ =\$13\end{array}$

The amount calculated as per given information would be $13.

Calculation of purchases discount:

The purchases discounts are received by the buyer for fulfilling the terms of timely payment to seller for purchases. The terms related to paying on timely basis with the company TS was agreed as 1/10, n/30. The terms 1/10, n/30 means the buyer is entitled to receive one percent of purchase discount on the purchases amount. The buyer will be entitled to the discount only if the payment is paid within ten days after provided invoice.

$\begin{array}{c}\text{Amount of purchases discount}=\left[\begin{array}{c}\left(\begin{array}{l}\text{Purchases amount}-\text{Purchases reutrns}\\ -\text{Freight charges}\end{array}\right)\\ \times \left(\frac{\text{Percentage of purchases discount}}{100}\right)\end{array}\right]\\ =\left(\$1,900\right)\times \frac{1}{100}\\ =\$19\end{array}$

The amount calculated as purchase discount would be $19.

Calculations for the credit card expense:

The fee is charged for availing the services of credit card. The bank fee to be charged as credit card is given as three percent for all credit card sales.

$\begin{array}{c}\text{Credit card fee}=\text{Sales amount }\times \frac{\text{Percentage of credit fees}}{100}\\ =\$1,200\times \frac{3}{100}\\ =\$36\end{array}$

The expense would amount to be $36.

Calculations for the purchases amount:

The seller provides the trade discount of forty percent on the list price to the buyer. The purchases amount to be recorded by the buyer would be at the invoice price.

$\begin{array}{c}\text{Trade discount}=\text{List price}\times \frac{\text{Percentage}}{100}\\ =\$4,500\times \frac{40}{100}\\ =\$1,800\end{array}$

$\begin{array}{c}\text{Invoice price}=\text{List price}-\text{Trade discount}\\ =\$4,500-\$1,800\\ =\$2,700\end{array}$

The purchases amount that would be calculated is $2,700.

Calculation of purchases discount:

The purchases discounts are received by the buyer for fulfilling the terms of timely payment to seller for purchases. The terms related to paying on timely basis with the company TE was agreed as 1/10, n/30. The terms 1/10, n/30 means the buyer is entitled to receive one percent of purchase discount on the purchases amount. The buyer will be entitled to the discount only if the payment is paid within ten days after provided invoice.

$\begin{array}{c}\text{Amount of purchases discount}=\left[\begin{array}{c}\left(\begin{array}{l}\text{Purchases amount}-\text{Purchases reutrns}\\ -\text{Freight charges}\end{array}\right)\\ \times \left(\frac{\text{Percentage of purchases discount}}{100}\right)\end{array}\right]\\ =\left(\$2,700\right)\times \frac{1}{100}\\ =\$27\end{array}$

The amount calculated as purchase discount would be $27.

Calculation for sales discount:

The sales discount is provided to the customer by the seller fulfilling the terms of making the timely payments as per 1/10, n/30 terms. The customer is entitled to receive the one percent of sales discount on the merchandise sold if the payment is made with ten days of invoice provided.

$\begin{array}{c}\text{Amount of sales discount}=\left(\text{Sales}-\text{Sales returns}\right)\times \left(\frac{\text{Percentage of sales discount}}{100}\right)\\ =\left(\$2,500\right)\times \frac{1}{100}\\ =\$25\end{array}$

The amount calculated as per given information would be $25.

Calculation of purchases discount:

The purchases discounts are received by the buyer for fulfilling the terms of timely payment to seller for purchases. The terms related to paying on timely basis with the company S was agreed as 1/10, n/30. The terms 1/10, n/30 means the buyer is entitled to receive one percent of purchase discount on the purchases amount. The buyer will be entitled to the discount only if the payment is paid within ten days after provided invoice.

$\begin{array}{c}\text{Amount of purchases discount}=\left[\begin{array}{c}\left(\begin{array}{l}\text{Purchases amount}-\text{Purchases reutrns}\\ -\text{Freight charges}\end{array}\right)\\ \times \left(\frac{\text{Percentage of purchases discount}}{100}\right)\end{array}\right]\\ =\left(\$3,070-\$70\right)\times \frac{1}{100}\\ =\$30\end{array}$

The amount calculated as purchase discount would be $30.

Calculations for the credit card expense:

The fee is charged for availing the services of credit card. The bank fee to be charged as credit card is given as three percent for all credit card sales.

$\begin{array}{c}\text{Credit card fee}=\text{Sales amount }\times \frac{\text{Percentage of credit fees}}{100}\\ =\$2,200\times \frac{3}{100}\\ =\$66\end{array}$

The expense would amount to be $66.