Concept explainers
Analyzing the Effects of Transactions in T-Accounts and Computing Cash Basis versus Accrual Basis Net Income
Stacey’s Piano Rebuilding Company has been operating for one year. At the start of the second year, its income statement accounts had zero balances and its balance sheet account balances were as follows:
Cash | $6,400 |
Accounts receivable | 32,000 |
Supplies | 1,500 |
Equipment | 9,500 |
Land | 7,400 |
Building | 25,300 |
Accounts payable | $9,600 |
Unearned revenue | 3,840 |
Long-term note payable | 48,500 |
Common stock | 1,600 |
Additional paid-in capital | 7,000 |
11,560 |
Required:
- 1. Create T-accounts for the balance sheet accounts and for these additional accounts: Rebuilding Fees Revenue, Rent Revenue. Wages Expense, and Utilities Expense. Enter the beginning balances.
- 2. Enter the following transactions for January of the second year into the T-accounts, using the letter of each transaction as the reference:
- a. Rebuilt and delivered file pianos in January to customers who paid $19,000 in cash.
- b. Received a $600 deposit from a customer who wanted her piano rebuilt.
- c. Rented a part of the building to a bicycle repair shop: received $850 for rent in January.
- d. Received $7,200 from customers as payment on their accounts.
- e. Received an electric and gas utility bill for $400 to be paid in February.
- f. f Ordered $960 in supplies.
- g. Paid $2,300 on account in January.
- h. Received from the home of Stacey Eddy, the major shareholder, a $920 tool (equipment) to use in the business in exchange for 100 shares of $1 par value stock.
- i. Paid $16,500 in wages to employees who worked in January.
- j. Declared and paid a $2,200 dividend (reduce Retained Earnings and Cash).
- k. Received and paid cash for the supplies in (f).
- 3. Using the data from the T-accounts, amounts for the following at the end of January of the second year were
Revenues $ _________ −Expenses $ ________ = Net Income $
Assets $ _________ = Liabilities $ _________ + Stockholders’ Equity $ ________
- 4. What is net income if Stacey’s used the cash basis of accounting? Why does this differ from accrual basis net income (in requirement 3)?
1 and 2
Prepare the T- account and enter the transaction into their respective accounts for calculating the ending balance.
Explanation of Solution
T-account:
T-account is the form of the ledger account, where the journal entries are posted to this account. It is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.
The components of the T-account are as follows:
a) The title of the account
b) The left or debit side
c) The right or credit side
Prepare the T-accounts:
Cash account:
Cash account | |||
Beginning balance | $6,400 | (g) | $2,300 |
(a) | $19,000 | (i) | $16,500 |
(b) | $600 | (j) | $2,200 |
(c) | $850 | (k) | $960 |
(d) | $7,200 | ||
Ending balance | $12,090 |
Accounts receivable account:
Accounts receivable account | |||
Beginning balance | $32,000 | (d) | $7,200 |
Ending balance | $24,800 |
Supplies account:
Supplies account | |||
Beginning balance | $1,500 | ||
(k) | $960 | ||
Ending balance | $2,460 |
Equipment account:
Equipment account | |||
Beginning balance | $9,500 | ||
(h) | $920 | ||
Ending balance | $10,420 |
Land account:
Land account | |||
Beginning balance | $7,400 | ||
Ending balance | $7,400 |
Building account:
Building account | |||
Beginning balance | $25,300 | ||
Ending balance | $25,300 |
Accounts payable account:
Accounts payable account | |||
Beginning balance | $9,600 | ||
(g) | $2,300 | (e) | $400 |
Ending balance | $7,700 |
Unearned revenue account:
Unearned revenue account | |||
Beginning balance | $3,840 | ||
(b) | $600 | ||
Ending balance | $4,440 |
Long-term note payable account:
Long-term note payable account | |||
Beginning balance | $48,500 | ||
Ending balance | $48,500 |
Common stock account:
Common stock account | |||
Beginning balance | $1,600 | ||
(h) | $100 | ||
Ending balance | $1,700 |
Additional paid-in capital account:
Additional paid-in capital account | |||
Beginning balance | $7,000 | ||
(h) | $820 | ||
Ending balance | $7,820 |
Retained earnings account:
Retained earnings account | |||
Beginning balance | $11,560 | ||
(j) | $2,200 | ||
Ending balance | $9,360 |
Rebuilding fees revenue account:
Rebuilding fees revenue account | |||
Beginning balance | 0 | ||
(a) | $19,000 | ||
Ending balance | $19,00 |
Rent revenue account:
Rent revenue account | |||
Beginning balance | 0 | ||
(c) | $850 | ||
Ending balance | $850 |
Wages expense account:
Wages expense account | |||
Beginning balance | 0 | ||
(i) | $16,500 | ||
Ending balance | $16,500 |
Utilities expense account:
Utilities expense account | |||
Beginning balance | 0 | ||
(e) | $400 | ||
Ending balance | $400 |
Thus, the t-accounts are prepared and the ending balances are calculated.
3.
Determine the amount for the given equations at the end of the January.
Answer to Problem 3.10E
For the equation
For the equation
Explanation of Solution
Accrual basis of accounting:
Accrual basis of accounting refers to recognizing the financial transactions during the period in which the event occurs, even if the cash is not exchanged.
Working note:
Calculate the revenues:
Calculate the expenses:
Calculate the net income:
Particulars | Amount($) | Amount ($) |
Revenues | (1)19,850 | |
Less: Expenses | (2)16,900 | |
Net income | $2,950 |
Table (1)
Accounting equation:
Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Accounting equation is expressed as shown below:
Calculate the amount for the accounting equation:
Assets | = | Liabilities | + | Stockholders’ Equity |
$12,090 | $7,700 | $1,700 | ||
$24,800 | $4,440 | $7,820 | ||
$2,460 | $48,500 | $9,360 | ||
$10,420 | $2,950 | |||
$7,400 | ||||
$25,300 | ||||
$82,470 | = | $60,640 | + | $21,830 |
Table (2)
4.
Calculate the net income under cash basis of accounting and explain the reason in which manner the net income differ from accrual basis of accounting.
Answer to Problem 3.10E
Net income of Company SPR under cash basis of accounting is $7,890.
Explanation of Solution
Cash basis of accounting:
Cash basis of accounting refers to the recognition of financial transactions only when the cash is received or paid.
Calculate the net income under cash basis accounting:
Particulars | Amount($) | Amount ($) |
Cash receipts | (3) 27,650 | |
Less: Cash payments | (4) 19,760 | |
Net income | $7,890 |
Table (3)
Calculate the cash receipts:
Calculate the cash payments:
- According to the cash basis of accounting, the net income is higher than the accrual basis of accounting.
- The recording of the expenses and revenues differ from the accrual basis of accounting.
- Hence, the net income is different for the accrual basis of accounting and cash basis of accounting.
Want to see more full solutions like this?
Chapter 3 Solutions
FINANCIAL ACCOUNTING-W/ACCESS >CUSTOM<
- Financial statements Outlaw Realty, organized August 1. 20Y7, is owned and operated by Julie Baxter. How many errors can you find in the following financial statements for Outlaw Realty, prepared after its first month of operations? Assume that the cash balance on August 31, 20Y7, is $51,600 and that cash flows from operating activities is reported correctly.arrow_forwardTo demonstrate the difference between cash account activity and accrual basis profits (net income), note the amount each transaction affects cash and the amount each transaction affects net income. A. paid balance due for accounts payable $6,900 B. charged clients for legal services provided $5,200 C. purchased supplies on account $1,750 D. collected legal service fees from clients for current month $3,700 E. issued stock in exchange for a note payable $10,000arrow_forwardKrespy Corp. has a cash balance of $7,500 before the following transactions occur: A. received customer payments of $965 B. supplies purchased on account $435 C. services worth $850 performed, 25% is paid in cash the rest will be billed D. corporation pays $275 for an ad in the newspaper E. bill is received for electricity used $235. F. dividends of $2,500 are distributed What is the balance in cash after these transactions are journalized and posted?arrow_forward
- Analyzing the Accounts The controller for Summit Sales Inc. provides the following information on transactions that occurred during the year: a. Purchased supplies on credit, $18,600 b. Paid $14,800 cash toward the purchase in Transaction a c. Provided services to customers on credit1 $46,925 d. Collected $39,650 cash from accounts receivable e. Recorded depreciation expense, $8,175 f. Employee salaries accrued, $15,650 g. Paid $15,650 cash to employees for salaries earned h. Accrued interest expense on long-term debt, $1,950 i. Paid a total of $25,000 on long-term debt, which includes $1.950 interest from Transaction h j. Paid $2,220 cash for l years insurance coverage in advance k. Recognized insurance expense, $1,340, that was paid in a previous period l. Sold equipment with a book value of $7,500 for $7,500 cash m. Declared cash dividend, $12,000 n. Paid cash dividend declared in Transaction m o. Purchased new equipment for $28,300 cash. p. Issued common stock for $60,000 cash q. Used $10,700 of supplies to produce revenues Summit Sales uses the indirect method to prepare its statement of cash flows. Required: 1. Construct a table similar to the one shown at the top of the next page. Analyze each transaction and indicate its effect on the fundamental accounting equation. If the transaction increases a financial statement element, write the amount of the increase preceded by a plus sign (+) in the appropriate column. If the transaction decreases a financial statement element, write the amount of the decrease preceded by a minus sign (-) in the appropriate column. 2. Indicate whether each transaction results in a cash inflow or a cash outflow in the Effect on Cash Flows column. If the transaction has no effect on cash flow, then indicate this by placing none in the Effect on Cash Flows column. 3. For each transaction that affected cash flows, indicate whether the cash flow would be classified as a cash flow from operating activities, cash flow from investing activities, or cash flow from financing activities. If there is no effect on cash flows, indicate this as a non-cash activity.arrow_forwardEFFECTS OF TRANSACTIONS (BALANCE SHEET ACCOUNTS) Jon Wallace started a business. During the first month (March 20--), the following transactions occurred. Show the effect of each transaction on the accounting equation: Assets= Liabilities + Owners Equity. After each transaction, show the new account totals. (a) Invested cash in the business, 30,000. (b) Bought office equipment on account, 4,500. (c) Bought office equipment for cash, 1,600. (d) Paid cash on account to supplier in transaction (b), 2,000. EFFECTS OF TRANSACTIONS (REVENUE, EXPENSE, WITHDRAWALS) This exercise is an extension of Exercise 2-3B. Lets assume Jon Wallace completed the following additional transactions during March. Show the effect of each transaction on the basic elements of the expanded accounting equation: Assets = Liabilities + Owners Equity (Capital Drawing + Revenues Expenses). After transaction (k), report the totals for each element. Demonstrate that the accounting equation has remained in balance. (e) Performed services and received cash, 3,000. (f) Paid rent for March, 1,000. (g) Paid March phone bill, 68. (h) Jon Wallace withdrew cash for personal use, 800. (i) Performed services for clients on account, 900. (j) Paid wages to part-time employee, 500. (k) Received cash for services performed on account in transaction (i), 500.arrow_forwardA business has the following transactions: A. The business is started by receiving cash from an investor in exchange for common stock $10,000. B. Rent of $1,250 is paid for the first month. C. Office supplies are purchased for $375. D. Services worth $3,450 are performed. Cash is received for half. E. Customers pay $1,250 for services to be performed next month. F. $6,000 is paid for a one year insurance policy. G. We receive 25% of the money owed by customers in D. H. A customer has placed an order for $475 of services to be done this coming week. How much total revenue does the company have?arrow_forward
- TRANSACTION ANALYSIS George Atlas started a business on June 1,20--. Analyze the following transactions for the first month of business using T accounts. Label each T account with the title of the account affected and then place the transaction letter and the dollar amount on the debit or credit side. (a) Invested cash in the business, 7,000. (b) Purchased equipment for cash, 900. (c) Purchased equipment on account, 1,500. (d) Paid cash on account for equipment purchased in transaction (c), 800. (e) Withdrew cash for personal use, 1,100.arrow_forwardIn March, T. Carter established Carter Delivery Service. The account headings are presented below. Transactions completed during the month of March follow. a. Carter deposited 25,000 in a bank account in the name of the business. b. Bought a used truck from Degroot Motors for 15,140, paying 5,140 in cash and placing the remainder on account. c. Bought equipment on account from Flemming Company, 3,450. d. Paid the rent for the month, 1,000, Ck. No. 3001. e. Sold services for cash for the first half of the month, 6,927. f. Bought supplies for cash, 301, Ck. No. 3002. g. Bought insurance for the truck for the year, 1,200, Ck. No. 3003. h. Received and paid the bill for utilities, 349, Ck. No. 3004. i. Received a bill for gas and oil for the truck, 218. j. Sold services on account, 3,603. k. Sold services for cash for the remainder of the month, 4,612. l. Paid wages to the employees, 3,958, Ck. Nos. 30053007. m. Carter withdrew cash for personal use, 1,250, Ck. No. 3008. Required 1. Record the transactions and the balance after each transaction 2. Total the left side of the accounting equation (left side of the equal sign), then total the right side of the accounting equation (right side of the equal sign). If the two totals are not equal, check the addition and subtraction. If you still cannot find the error, re-analyze each transaction.arrow_forwardIn March, T. Carter established Carter Delivery Service. The account headings are presented below. Transactions completed during the month of March follow. a. Carter deposited 25,000 in a bank account in the name of the business. b. Bought a used truck from Degroot Motors for 15,140, paying 5,140 in cash and placing the remainder on account. c. Bought equipment on account from Flemming Company, 3,450. d. Paid the rent for the month, 1,000, Ck. No. 3001 (Rent Expense). e. Sold services for cash for the first half of the month, 6,927 (Service Income). f. Bought supplies for cash, 301, Ck. No. 3002. g. Bought insurance for the truck for the year, 1,200, Ck. No. 3003. h. Received and paid the bill for utilities, 349, Ck. No. 3004 (Utilities Expense). i. Received a bill for gas and oil for the truck, 218 (Gas and Oil Expense). j. Sold services on account, 3,603 (Service Income). k. Sold services for cash for the remainder of the month, 4,612 (Service Income). l. Paid wages to the employees, 3,958, Ck. Nos. 30053007 (Wages Expense). m. Carter withdrew cash for personal use, 1,250, Ck. No. 3008. Required 1. In the equation, write the owners name above the terms Capital and Drawing. 2. Record the transactions and the balance after each transaction. Identify the account affected when the transaction involves revenues or expenses. 3. Write the account totals from the left side of the equals sign and add them. Write the account totals from the right side of the equals sign and add them. If the two totals are not equal, check the addition and subtraction. If you still cannot find the error, re-analyze each transaction.arrow_forward
- College Accounting (Book Only): A Career ApproachAccountingISBN:9781305084087Author:Cathy J. ScottPublisher:Cengage LearningPrinciples of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax College
- College Accounting (Book Only): A Career ApproachAccountingISBN:9781337280570Author:Scott, Cathy J.Publisher:South-Western College PubCollege Accounting, Chapters 1-27AccountingISBN:9781337794756Author:HEINTZ, James A.Publisher:Cengage Learning,