College Accounting, by Heintz and Parry Chapter 7: Accounting for a Professional Service Business:...

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College Accounting, by Heintz and Parry Chapter 7: Accounting for a Professional Service Business: The Combination Journal

Transcript of College Accounting, by Heintz and Parry Chapter 7: Accounting for a Professional Service Business:...

Page 1: College Accounting, by Heintz and Parry Chapter 7: Accounting for a Professional Service Business: The Combination Journal.

College Accounting, by Heintz and Parry

Chapter 7: Accounting for a Professional Service Business: The Combination Journal

Page 2: College Accounting, by Heintz and Parry Chapter 7: Accounting for a Professional Service Business: The Combination Journal.

Eddie’s accounting professor for the winter quarter, Prof. Gene Yuss, heard about Eddie’s band and asked Eddie whether he was using the cash basis of accounting on the company’s books. Under the cash basis, revenues and expenses are only recorded on the date that the cash is actually paid or received. Eddie told him that he was using the accrual basis: recording revenues when earned and expenses when incurred.

Question: What are some accounts that would not be needed if Eddie used the cash basis?

Page 3: College Accounting, by Heintz and Parry Chapter 7: Accounting for a Professional Service Business: The Combination Journal.

Answer: Accounts Receivable, Accounts Payable, Supplies, Prepaid Insurance, Musical Instruments, Accumulated Depreciation, Depreciation Expense, and Wages Payable are all accounts Eddie wouldn’t need.

The cash basis is only used by some small companies and by most individuals for tax purposes. The modified cash basis, which combines the two methods, is used by many professional service businesses.

Page 4: College Accounting, by Heintz and Parry Chapter 7: Accounting for a Professional Service Business: The Combination Journal.

With the new year, Eddie decided to start using a new journal: a combination journal. It differs from a general journal in that you have special columns: columns that are headed with the names of the most commonly used accounts. Eddie has new columns for cash debits and credits and gig revenue.

Cash General Gig RevDate Dr. Cr. Description PR Dr. Cr. Cr.

Page 5: College Accounting, by Heintz and Parry Chapter 7: Accounting for a Professional Service Business: The Combination Journal.

With a combination journal, many transactions fit on one line, because you only need to write one description (for the general debit or credit) if you use a special column.

For example, Eddie started the year by sending an advertising brochure to all presidents of student organizations at the school. It would be journalized like this: Cash General Gig RevDate Dr. Cr. Description PR Dr. Cr. Cr.2000Jan 5 40 Advertising Expense 40

Page 6: College Accounting, by Heintz and Parry Chapter 7: Accounting for a Professional Service Business: The Combination Journal.

If no special columns are used, the transactions still needs two lines, just like in a general journal.

For example, Eddie had a friend who wanted to sell a steel drum. Eddie always wanted to do some Bob Marley songs, so he bought it on account. The transaction looked like this: Cash General Gig RevDate Dr. Cr. Description PR Dr. Cr. Cr.2000Jan 5 40 Advertising Expense 40 12 Musical Instruments 75 Accounts Payable 75

Page 7: College Accounting, by Heintz and Parry Chapter 7: Accounting for a Professional Service Business: The Combination Journal.

If two special columns are used, the transaction only needs one line, and no description is needed.

For example, the band decided to do a special gig to raise money for the Big Brothers/Big Sisters group on campus, and reduced their fee to $100. Since they received the cash that day, the journal entry looked like this: Cash General Gig RevDate Dr. Cr. Description PR Dr. Cr. Cr.

2000Jan 5 40 Advertising Expense 40 12 Musical Instruments 75 Accounts Payable 75 19 100 100

Page 8: College Accounting, by Heintz and Parry Chapter 7: Accounting for a Professional Service Business: The Combination Journal.

One big advantage of using a combination journal is that special columns are posted as one monthly total.

After proving that debit column totals (100 cash + 115 general = 215) equal credit column totals (40 cash + 75 general + 100 gig revenue = 215), Eddie posted the general items individually. Then he posted the three special columns totals, listing the account number below the column. If you have many cash debits and credits per month, this can save a lot of time!

Cash General Gig RevDate Dr. Cr. Description PR Dr. Cr. Cr.2000Jan 5 40 Advertising Expense 55 40 12 Musical Instruments 15 75 Accounts Payable 22 75 19 100 100 100 40 115 75 100

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