Concept explainers
General Ledger:
General ledger includes all the accounts for recording of various transactions in relation to income, expenses, assets, liabilities, owner’s equity. It is backbone of any accounting software.
Adjusting entries are the accounting entries which are made at the end of an accounting period to change the closing balances of various general ledger accounts. They are made to align the reported results and financial position of the business in accordance with the accounting framework, such as GAAP or IFRS.
Rules of
To increase the balance of account one needs to debit assets, expenses and 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 an inventory system wherein the accounts related to inventory are updated on each purchase and sale activity. 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 Margin Ratio:
It means the ratio of gross profit earned to net sales. Formula to compute it:
It is ratio which gives idea about the ability of company to pay it liabilities. Formula to compute it:
Acid Test ratio:
It measures the ability of company to use cash or its liquid assets or paying off current liabilities. Formula to compute it:
1.
To prepare: Adjusting entries.
Explanation of Solution
Physical count of Store supplies at the year end shows $1,750 still available but store supplies listed shows $5,800.
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
Jan 31 | Supplies expense | 4,050 | ||
Store supplies | 4,050 | |||
(To record supplies consumed) |
Table (1)
- Supplies expense account is an expense account. Since Supplies expense is increased, expense is to be increased. So, debit the Supplies expense account.
- Store supplies account is an asset account. Since inventory is shrinked, so it is to be reduced. Therefore, Store supplies account is to be credited.
Working notes:
Computation of inventory shrinkage,
Prepaid selling expenses worth $1,400 have expired:
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
Jan 31 | Insurance expense | 1,400 | ||
Prepaid insurance expense | 1,400 | |||
(To record expired prepaid insurance expense) |
Table (2)
- Insurance expense is an expense account. Since insurance expense is increased, expense is to be increased. So, debit the insurance expense account.
- Prepaid insurance expense is an asset account. Since prepaid insurance expense have expired resulting a decrease in asset, so asset is to be decreased. Therefore prepaid insurance expense account is credited.
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
Jan 31 | Depreciation expense | 1,525 | ||
Store equipment | 1,525 | |||
(To record depreciation expense) |
Table (3)
- Depreciation expense is an expense account. Since depreciation expense is to be recorded, expense is to be increased. So, debit the depreciation expense account.
- Store equipment is an asset account. Since, depreciation expense is to be recorded resulting a decrease in asset, so asset is to be decreased. Therefore Store equipment account is credited.
Physical count of merchandise inventory at the year end shows $10,900 still available but merchandise inventory listed shows $12,500.
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
Jan 31 | Cost of goods sold | 1,600 | ||
Merchandise inventory | 1,600 | |||
(To record inventory shrinkage cost) |
Table (4)
- Cost of goods sold account is an expense account. Since goods are shrinked, expense is to be increased. Therefore, cost of goods sold account is debited.
- Merchandise inventory account is an asset account. Since inventory is shrinked, so it is to be reduced. Therefore, merchandise inventory account is to be credited.
Working notes:
Computation of inventory shrinkage,
2.
To prepare: Multi step income statement.
2.
Explanation of Solution
Multi Step Income Statement
Company N | ||
Multi step Income Statement | ||
For the Year Ended January 31, | ||
Particulars | Amount($) | Amount($) |
Sales Revenue | 111,950 | |
Less: Sales Returns and Allowances | (2,200) | |
Sales discount | (2,000) | (4,200) |
Net Sales | 107,750 | |
Less: Cost of Goods Sold | (40,000) | |
Gross Profit | 67,750 | |
Less: Selling expenses | ||
Advertising expense | (9,800) | (9,800) |
57,950 | ||
Less: General and admin Expenses | ||
Store supply expense | (4,050) | |
Rent expense | (15,000) | |
Insurance expense | (1,400) | |
Depreciation | (1,525) | |
Salaries | (35,000) | (56,975) |
Net income | 975 |
Table (5)
Hence, net income of Company N is $975.
3.
To prepare: Single step income statement.
3.
Explanation of Solution
Single Step Income Statement
Company N | ||
Single Step Income Statement | ||
Particulars | Amount($) | Amount($) |
Net Sales | 107,750 | |
Less: Expenses | ||
Cost of goods sold | (40,000) | |
Selling expenses | (9,800) | |
General and admin Expenses | (56,975) | (106,775) |
Net Sales | 975 |
Table (6)
Hence, net income of Company N is $975.
4.
To Compute: Current and acid test ratio and gross margin ratio.
4.
Explanation of Solution
Gross profit is $67,750. (From part 2)
Net sales is $107,750. (From part 2)
Formula to compute gross margin ratio,
Substitute $67,750 for gross profit and $107,750 for net sales.
Given,
Cash is $1,000.
Merchandise inventory is $10,900.
Store supplies are $1,750.
Prepaid asset is $1,000.
Current liabilities are $10,000.
Formula to compute current ratio,
Substitute $14,650 for current assets and $10,000 for current liabilities.
Working notes:
Computation of current assets,
Calculated,
Current assets are $14,650.
Merchandise inventory is $10,900.
Store supplies are $1,750.
Prepaid asset is $1,000.
Current liabilities are $10,000.
Formula to compute acid test ratio,
Substitute $14,650 for current assets, $12,650
Hence, gross margin ratio of Company N is 62.87%, Current ratio is 1.47, acid test ratio is 0.1.
General ledger:
Supply expense | |||||
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) | Balance($) |
Jan 31 | Store supply | 4,050 | 4,050 |
Table (7)
Hence, the ending balance is $4,050.
Store supply | |||||
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) | Balance($) |
Feb 1 | Opening balance | 5,800 | 5,800 | ||
Jan 31 | Supply expense | 4,050 | 1,750 |
Table (8)
Hence, the ending balance is $1,750.
Insurance expense | |||||
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) | Balance($) |
Jan 31 | Prepaid insurance expense | 1,400 | 1,400 |
Table (9)
Hence, the ending balance is $1,400.
Prepaid insurance expense | |||||
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) | Balance($) |
Feb 1 | Opening balance | 2,400 | 2,400 | ||
Jan 31 | Insurance expense | 1,400 | 1,000 |
Table (10)
Hence, the ending balance is $1,000.
Depreciation expense | |||||
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) | Balance($) |
Jan 31 | Store equipment | 1,525 | 1,525 |
Table (11)
Hence, the ending balance is $1,525.
Store equipment | |||||
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) | Balance($) |
Feb 1 | Opening balance | 42,900 | 42,900 | ||
Jan 31 | Depreciation expense | 1,525 | 41,375 |
Table (12)
Hence, the ending balance is $41,375.
Cost of goods sold | |||||
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) | Balance($) |
Jan 31 | Merchandise inventory | 1,600 | 1,600 |
Table (13)
Hence, the ending balance is $1,600.
Merchandise inventory | |||||
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) | Balance($) |
Feb 1 | Opening balance | 12,500 | 12,500 | ||
Jan 31 | Cost of goods sold | 1,600 | 10,900 |
Table (14)
Hence, the ending balance is $10,900.
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Chapter 4 Solutions
FINANCIAL ACCOUNTING FUNDAMENTALS
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