Concept explainers
It means recording of financial data related to business transactions in a journal in a manner so that debit equals credit. They provide an audit trail to the auditor and a means to analyze the effects of transactions to an organization’s financial health.
Rules of Journal Entry:
To increase the balance of account one needs to debit assets, expenses, losses and credit all the liabilities, revenues and gains including capital. To decrease the balance of account credit all assets, expenses, losses and debit all liabilities, revenues and gains including capital.
Perpetual Inventory System:
It is a inventory system wherein the accounts related to inventory are updated on each purchase and sale happening. Quantities of inventory are updated on continuous basis. This can be done by integrating the inventory system to order entry and to the retail sale point of system.
Gross Method:
Under this method, all the purchases are recorded in the books of account without taking into account the trade discount, returns and allowances. T
he purchases are to be recorded at full cost.
General ledger:
General ledger includes all the accounts for recording of various transactions in relation to income, expenses, assets, liabilities and owner’s equity. It is backbone of any accounting software.
To prepare: Journal entries in the books of Company L.
Explanation of Solution
Purchased merchandise inventory worth $7,500.
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
Aug 1 | Merchandise Inventory | 7,500 | ||
Account payable | 7,500 | |||
(To record merchandise inventory purchased on credit) |
Table (1)
- Merchandise inventory account is an asset account. Since there is purchase of merchandise inventory, so asset account is to be increased. Therefore, Merchandise inventory account to be debited.
- Account payable is a liability account. Since payment is to be made for purchases on account, so liability is to be increased. Therefore Account payable account is credited.
Sold Merchandise inventory on account for $5,200:
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
Aug 5 | 5,200 | |||
Sales | 5,200 | |||
(To record sales made on account) |
Table (2)
- Account receivable is an asset account. Since payment is to be received, so asset is to be increased. Therefore, account receivable account is debited.
- Sales is a revenue account. Since sales is made ,so it needs to be increased. Therefore, sales account is to be credited.
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
Aug 5 | Cost of goods sold | 4,000 | ||
Merchandise inventory | 4,000 | |||
(To record cost of goods sold) |
Table (3)
- Cost of goods sold account is an expense account. Since goods are being sold, expense is to increased. Therefore, Cost of goods sold account is debited.
- Merchandise inventory account is an asset account. Since inventory is being sold, so it is to be reduced. Therefore, merchandise inventory account is to be credited.
Purchased merchandise inventory worth $5,400.
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
Aug 8 | Merchandise Inventory | 5,400 | ||
Account payable | 5,400 | |||
(To record merchandise inventory purchased on credit) |
Table (4)
- Merchandise inventory account is an asset account. Since there is purchase of merchandise inventory, so asset account is to be increased. Therefore, Merchandise inventory account to be debited.
- Account payable is a liability account. Since payment is to be made for purchases on account, so liability is to be increased. Therefore Account payable account is credited.
Paid $125 cash for shipping charges:
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
Aug 9 | Merchandise Inventory | 125 | ||
Cash | 125 | |||
(To record shipping charges paid by buyer) |
Table (5)
- Merchandise Inventory is an asset account. Since the amount of freight is added up in the Merchandise inventory value, the value of assets is increased. So, debit the Merchandise Inventory account.
- Cash is an asset account. Since the Cash is paid, the value of assets is decreased. So, credit the Cash account.
Company L received the goods worth $600 back and restores them:
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
Aug 10 | Sales return and allowances | 600 | ||
Account receivable | 600 | |||
(To record sales return) |
Table (6)
- Sales return and allowances account is an expense account. Since Company A is receiving the sales return so it needs to be increased, so expense account is to be increased. Therefore, sales return and allowances account is to be debited.
- Account receivable is an asset account. Since account receivable is getting reduced because of sales return so asset is to be reduced. Therefore account receivable is to be credited.
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
Aug 10 | Merchandise inventory | 400 | ||
Cost of goods sold | 400 | |||
(To record cost of goods sold) |
Table (7)
- Merchandise inventory account is an asset account. Since inventory is being received, so asset is to be increased. Therefore, merchandise inventory account is to be debited.
- Cost of goods sold account is an expense account. Since goods are being returned, expense is to be reduced. Therefore, Cost of goods sold account is credited.
Company L received price reduction for purchase of goods from Company W $400:
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
Aug 12 | Account payable | 400 | ||
Merchandise Inventory | 400 | |||
(To record price reduction worth $400) |
Table (8)
- Account payable is a liability account. Since the Inventory which was purchased on credit is returned, which reduces the liability to be paid. So, debit the Accounts Payable account.
- Merchandise Inventory is an asset account. Since it is returned to the seller , the value of asset is to be reduced. So credit the Merchandise inventory account.
Paid $200 cash for shipping charges reducing the amount owed to Company A:
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
Aug 14 | Account payable | 200 | ||
Cash | 200 | |||
(To record shipping charges paid by buyer) |
Table (9)
- Account payable is a liability account. Since the amount of freight is paid and value of liability is to be decreased. So, debit the Account payable account.
- Cash is an asset account. Since the Cash is paid, the value of assets is decreased. So, credit the Cash account.
Received cash from customer:
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
Aug 15 | Cash | 4,508 | ||
Sales discount | 92 | |||
Account receivable | 4,600 | |||
(To record final payment received from Company A) |
Table (10)
- Cash is a asset account. Since, payment is received in cash, so it is to be increased. Therefore, cash account is debited.
- Sales discount is an expense account. Since, an expense is getting increased, so it requires a debit in the entry. Therefore, sales discount is debited.
- Account receivable is an asset account. Since account receivable is getting recovered for cash, so it is to be reduced. Therefore, account receivable is credited.
Working notes:
Computation of account receivables,
Computation of sales discount,
Computation of cash to be received,
Company L makes final payment to Company W:
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
Aug 18 | Account payable | 5,000 | ||
Merchandise inventory | 50 | |||
Cash | 4,950 | |||
(To record cash payment made for merchandise inventory ) |
Table (11)
- Account payable is a liability account. Since payment is to be made for account payable this will result in reduction of liability. Therefore, account payable account is debited.
- Merchandise inventory account is an asset account. Since, discount is received in making final payment by company S from Company T, merchandise inventory is to be reduced. Therefore, merchandise inventory account is credited.
- Cash account is an asset account. Since, cash is paid so asset is reduced. Therefore, cash account is credited.
Working notes:
Computation of account payables,
Computation of merchandise inventory,
Computation of cash to be paid,
Sold Merchandise inventory on account for $4,800:
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
Aug 19 | Account receivable | 4,800 | ||
Sales | 4,800 | |||
(To record sales made on account) |
Table (12)
- Account receivable is an asset account. Since payment is to be received, so asset is to be increased. Therefore, account receivable account is debited.
- Sales are a revenue account. Since sales are made, so it needs to be increased. Therefore, sales account is to be credited.
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
Aug 19 | Cost of goods sold | 2,400 | ||
Merchandise inventory | 2,400 | |||
(To record cost of goods sold) |
Table (13)
- Cost of goods sold account is an expense account. Since goods are being sold, expense is to be increased. Therefore, cost of goods sold account is debited.
- Merchandise inventory account is an asset account. Since inventory is being sold, so it is to be reduced. Therefore, merchandise inventory account is to be credited.
Company L received price reduction for purchase of goods from Company W $500:
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
Aug 22 | Sales Return and Allowance | 500 | ||
Account receivable | 500 | |||
(To record price reduction worth $500) |
Table (14)
- Sales return and allowances account is an expense account. Since Company A is receiving the sales return so it needs to be increased, so expense account is to be increased. Therefore, sales return and allowances account is to be debited.
- Account receivable is an asset account. Since account receivable is getting reduced because of sales return so asset is to be reduced. Therefore account receivable is to be credited.
Received cash from customer:
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
Aug 29 | Cash | 4,300 | ||
Account receivable | 4,300 | |||
(To record final payment received from Company A) |
Table (15)
- Cash is an asset account. Since, payment is received in cash, so it is to be increased. Therefore cash account is credited.
- Account receivable is an asset account. Since account receivable is getting recovered for cash, so it is to be reduced. Therefore, account receivable is credited.
Working notes:
Computation of Account receivables,
Company L makes final payment to Company A:
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
Aug 30 | Account payable | 7,300 | ||
Cash | 7,300 | |||
(To record cash payment made for merchandise inventory ) |
Table (16)
- Account payable is a liability account. Since payment is to be made for account payable this will result in reduction of liability. Therefore, account payable account is debited.
- Cash account is an asset account. Since, cash is paid so asset is reduced. Therefore, cash account is credited.
Working notes:
Computation of account payables,
General ledger
Merchandise Inventory | |||||
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) | Balance($) |
Aug 1 | Account Payable | 7,500 | 7,500 | ||
Aug 5 | Cost of goods sold | 4,000 | 3,500 | ||
Aug 8 | Account Payable | 5,400 | 8,900 | ||
Aug 9 | Cash | 125 | 9,025 | ||
Aug 10 | Cost of goods sold | 400 | 9,425 | ||
Aug 12 | Account Payable | 400 | 9,025 | ||
Aug 18 | Account Payable | 50 | 8,975 |
Table (17)
Hence, the ending balance is $8,475.
Sales Discount | |||||
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) | Balance($) |
Aug 15 | Account Receivable | 92 | 92 |
Table (18)
Hence, the ending balance is $92.
Sales Return and Allowance | |||||
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) | Balance($) |
Aug 10 | Account Receivable | 600 | 600 | ||
Aug 22 | Account Receivable | 500 | 1,100 |
Table (19)
Hence, the ending balance is $1,100.
Account Payable | |||||
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) | Balance($) |
Aug 1 | Merchandise Inventory | 7,500 | 7,500 | ||
Aug 8 | Merchandise Inventory | 5,400 | 12,900 | ||
Aug 12 | Merchandise Inventory | 400 | 12,500 | ||
Aug 14 | Cash | 200 | 12,300 | ||
Aug 18 | Merchandise Inventory | 50 | 12,250 | ||
Aug 18 | Cash | 4,950 | 7,300 | ||
Aug 30 | Cash | 7,300 | 0 |
Table (20)
Hence, the ending balance is $ 0.
Account Receivable | |||||
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) | Balance($) |
Aug 5 | Sales | 5,200 | 5,200 | ||
Aug 10 | Sales return | 600 | 4,600 | ||
Aug 15 | Cash | 4,508 | 92 | ||
Aug 15 | Sales discount | 92 | 0 | ||
Aug 19 | Sales | 4,800 | 4,800 | ||
Aug 22 | Sales return | 500 | 4,300 | ||
Aug 29 | Cash | 4,300 | 0 |
Table (21)
Hence, the ending balance is $0.
Cash | |||||
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) | Balance($) |
Aug 9 | Merchandise Inventory | 125 | (125) | ||
Aug 14 | Account payable | 200 | (325) | ||
Aug 15 | Account Receivable | 4,508 | 4,183 | ||
Aug 18 | Account payable | 4,950 | (767) | ||
Aug 29 | Account Receivable | 4,300 | 3,533 | ||
Aug 30 | Account payable | 7,300 | (3,767) |
Table (22)
Hence, the ending balance is $(3,767).
Cost of goods sold | |||||
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) | Balance($) |
Aug 5 | Merchandise Inventory | 4,000 | 4,000 | ||
Aug 10 | Merchandise Inventory | 400 | 3,600 |
Table (23)
Hence, the ending balance is $3,600.
Sales | |||||
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) | Balance($) |
Aug 5 | Account Receivable | 5,200 | 5,200 | ||
Aug 19 | Account Receivable | 4,800 | 10,000 |
Table (24)
Hence, the ending balance is $10,000.
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Chapter 4 Solutions
FINANCIAL ACCOUNTING FUNDAMENTALS
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