Instruction Pack 1 - U.S. Career Institute

Instruction Pack 1

Bookkeeping

Lesson 1: Getting Started: Course Introduction andOverview

Lesson 2: Bookkeeping Explained

Lesson 3: Bookkeeping Equations

Lesson 4: The Accounting Cycle

Lesson 5: The Journal and Entry Systems

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No part of this document may be reproduced or transmitted in any form or by any means, electronic or mechanical, for any purpose, without the express written permission of U.S. Career Institute.

© Copyright 2004-2010, Weston Distance Learning, Inc. All Rights Reserved. 0201201LB11B-C0

ACKNOWLEDGMENTS

AUTHORSRobert James

EDITORIAL STAFF

Trish BowenChristine DunlapSara FagerDebbie HelmersElizabeth MunsonLeonard ValoreRobin VaughanKaty LittleRachel Metzgar

DESIGN/LAYOUT

Connie HunsaderBrent HausemanSandy Petersen

FOR MORE INFORMATION CONTACT:

U.S. Career InstituteFort Collins, CO1-800-347-7899

www.uscareerinstitute.edu

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Table of Contents

LESSON 1—GETTING STARTED: COURSE INTRODUCTION AND OVERVIEW

Step 1 Lesson Preview .......................................................................... 1Step 2 Learning Objectives for Lesson 1 ............................................. 2Step 3 Where You Can Work ................................................................ 2Step 4 The Importance of Bookkeeping ............................................... 3Step 5 Practice Exercise 1-1 ................................................................. 4Step 6 Review Practice Exercise 1-1 .................................................... 4Step 7 U.S. Career Institute’s Bookkeeping Course ........................... 5Step 8 Mail-in Quiz 1 ............................................................................ 6

LESSON 2—BOOKKEEPING EXPLAINED

Step 1 Lesson Preview .......................................................................... 1Step 2 Learning Objectives for Lesson 2 ............................................. 1Step 3 Terms You Will Need to Know ................................................. 2Step 4 Record of Transaction ............................................................... 2

The Journal—Debits and Credits ............................................. 3Step 5 Practice Exercise 2-1 ................................................................. 7Step 6 Review Practice Exercise 2-1 .................................................... 8Step 7 Defi ne Some Common Terms .................................................... 8

Classifying Assets...................................................................... 8Current Assets ........................................................................... 8Fixed Assets ............................................................................... 9Classifying Liabilities ............................................................... 9

Step 8 Practice Exercise 2-2 ............................................................... 10Step 9 Review Practice Exercise 2-2 .................................................. 10Step 10 Mail-in Quiz 2 .......................................................................... 11

CONTENTS

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LESSON 3—BOOKKEEPING SERVICES EQUATIONS

Step 1 Lesson Preview .......................................................................... 1Step 2 Learning Objectives for Lesson 3 ............................................. 1Step 3 Terms You Will Need to Know ................................................. 2Step 4 Accounting Equation ................................................................. 2Step 5 Balance Sheets .......................................................................... 4Step 6 Practice Exercise 3-1 ................................................................. 6Step 7 Review Practice Exercise 3-1 .................................................... 7Step 8 Net Income Equation ................................................................ 7Step 9 Practice Exercise 3-2 ................................................................. 8Step 10 Review Practice Exercise 3-2 .................................................... 8Step 11 Operating Statement................................................................. 8Step 12 Practice Exercise 3-3 ............................................................... 10Step 13 Review Practice Exercise 3-3 .................................................. 10Step 14 Mail-in Quiz 3 .......................................................................... 10

LESSON 4—THE ACCOUNTING CYCLE

Step 1 Lesson Preview .......................................................................... 1Step 2 Learning Objectives for Lesson 4 ............................................. 1Step 3 Terms You Will Need to Know ................................................. 1Step 4 Eight Parts of the Accounting Cycle ........................................ 2

The Transaction......................................................................... 3The Journal ................................................................................ 3

Step 5 Practice Exercise 4-1 ................................................................. 4Step 6 Review Practice Exercise 4-1 .................................................... 5Step 7 The Double-entry System ......................................................... 5Step 8 Practice Exercise 4-2 ................................................................. 7Step 9 Review Practice Exercise 4-2 .................................................... 8Step 10 The Ledger ................................................................................. 9

Posting and the Ledger ............................................................. 9Step 11 Practice Exercise 4-3 ............................................................... 11Step 12 Review Practice Exercise 4-3 .................................................. 11Step 13 Trial Balance ........................................................................... 12Step 14 Practice Exercise 4-4 ............................................................... 13Step 15 Review Practice Exercise 4-4 .................................................. 14

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Step 16 Final Half of the Accounting Cycle ......................................... 15The Worksheet ......................................................................... 15Financial Statements .............................................................. 16Adjustments ............................................................................. 17Closing the Books .................................................................... 17

Step 17 Practice Exercise 4-5 ............................................................... 18Step 18 Review Practice Exercise 4-5 .................................................. 18Step 19 Mail-in Quiz 4 .......................................................................... 19

LESSON 5—THE JOURNAL AND ENTRY SYSTEMS

Step 1 Lesson Preview .......................................................................... 1Step 2 Learning Objectives for Lesson 5 ............................................. 1Step 3 Terms You Need to Know ......................................................... 2Step 4 Book of Original Entry .............................................................. 2

Constructing the Journal .......................................................... 2Debits and Credits .................................................................... 4Assets ......................................................................................... 4Liabilities ................................................................................... 4Capital ........................................................................................ 5Revenues .................................................................................... 5Expenses .................................................................................... 5

Step 5 Practice Exercise 5-1 ................................................................. 7Step 6 Review Practice Exercise 5-1 .................................................... 8Step 7 Normal Account Balances ......................................................... 8Step 8 Practice Exercise 5-2 ................................................................. 9Step 9 Review Practice Exercise 5-2 .................................................... 9Step 10 Double-Entry System of Accounting ........................................ 9Step 11 Practice Exercise 5-3 ............................................................... 21Step 12 Review Practice Exercise 5-3 .................................................. 21Step 13 Journalizing ............................................................................. 22Step 14 Practice Exercise 5-4 ............................................................... 25Step 15 Review Practice Exercise 5-4 .................................................. 26Step 16 Mail-in Quiz 5 .......................................................................... 29

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PACK 1—ANSWER KEY

Practice Exercise 1-1 ................................................................................ 1Practice Exercise 2-1 ................................................................................ 1Practice Exercise 2-2 ................................................................................ 2Practice Exercise 3-1 ................................................................................ 3Practice Exercise 3-2 ................................................................................ 3Practice Exercise 3-3 ................................................................................ 4Practice Exercise 4-1 ................................................................................ 4Practice Exercise 4-2 ................................................................................ 5Practice Exercise 4-3 ................................................................................ 5Practice Exercise 4-4 ................................................................................ 6Practice Exercise 4-5 ................................................................................ 6Practice Exercise 5-1 ................................................................................ 7Practice Exercise 5-2 ................................................................................ 7Practice Exercise 5-3 ................................................................................ 8Practice Exercise 5-4 ................................................................................ 9

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Table of Contents

COURSE OBJECTIVE

The Bookkeeping Course prepares a student for an entry-level position in an accounting department or fi rm and enables the student to effectively manage an individual’s fi nances or a small company’s books and records. Students learn the basic elements and concepts of maintaining journals, ledgers and related records, as well as how to maintain and process various fi nancial statements. Students also master each step in the accounting cycle and the basic elements of accounts payable and accounts receivable processes. Additionally, students learn about computerized bookkeeping and the accounting elements of sole proprietorships, partnerships, corporations and non-profi t organizations.

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LESSON

1

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Getting Started: Course Introduction and Overview

Welcome to U.S. Career Institute’s Bookkeeping Course! Congratulations on your decision to become a bookkeeper professional. As a professional bookkeeper, you’ll possess valuable skills that are very much in demand. This course will show you the ins and outs of bookkeeping and will give you the skills you need to work as a bookkeeper professional in a business or—if you choose—to establish and market your own bookkeeping business.

We make your course work easy to follow. Work through each lesson at your own pace by following the step-by-step instructions. And remember, if you have any questions, be sure to call our student support line at U.S. Career Institute. Our students are the most important asset we have.

Step 1 Lesson Preview

What is bookkeeping? It is a skill needed by many—small businesspersons and individuals at home all need to know how much money they have. You will begin your journey toward the mastery of these skills here in Lesson 1. It is a lesson designed to show you the big picture of bookkeeping—from an introduction to people who need bookkeeping services to an overview of the skills you will need to be a successful professional bookkeeper.

Welcome to accounting!

Bookkeeping is a skill that helps you know how much money you have.

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Step 2 Learning Objectives for Lesson 1

After you complete this lesson, you will be able to:

Name situations where bookkeeping skills are needed.

Explain how U.S. Career Institute’s Bookkeeping Course works and what you can expect in every lesson. (For example, the format of each lesson will be the same, step-by-step instruction.)

List the skills you will learn to begin working as a professional bookkeeper.

Identify employment and business opportunities for a bookkeeper.

Step 3 Where You Can Work

Your career as a professional bookkeeper means that you can work for a wide variety of businesses. Your local ice cream store, doggie daycare, or hair dressers all have employees. That means they need you to handle their payroll.

Who pays taxes? Everyone! You’ve heard the saying that the only certain things in life are death and taxes? And everyone hates doing their own taxes, so they’ll love it when you show up at their door with the right skills.

Do you want to work in a business? If you are someone who likes variety, you could become a bookkeeper who gets different jobs through temporary agencies. Or you could work in the corporate offi ces of a chain of subway shops.

What about keeping sales and purchase records for the nail salon, small restaurant, or coffee shop? The gas station, bookstore, or kitchenware store?

Maybe you want to stay home, see the kids off to school, settle in for a second cup of coffee, and tackle the accounts of different clients.

If you don’t want to work for a business, advertise yourself to individuals. Maybe you have a desire to help a certain group of people? You can advertise your services at a discount rate for low-income, senior citizens who need help balancing their checkbooks.

It’s up to you! This course will provide you with the basic skills to begin your career in a wide choice of settings. Congratulations on making a great choice to improve your future!

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Lesson 1—Getting Started: Course Introduction and Overview

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Step 4 The Importance of Bookkeeping

Bookkeepers are, essentially, scorekeepers. They tally the scores in their “books.” Basically, the books tell who has how much at any given time. This score must be accurate, and because not everyone is an expert in accounting—as you will soon be!—many small businesses and individuals hire accounting services professionals to keep track of their fi nances. That’s where you come to the rescue.

Picture the owner of a small restaurant. This owner knows food. She knows the most scrumptious ways to prepare beef and potatoes. She knows the best supplier for her restaurant. She also knows she is not an expert in fi nances. Because she is a smart businessperson, she brings in someone who is a professional bookkeeper. She makes her money by being a great cook, and she pays out a little of that money to a professional bookkeeper, who keeps track of the fi nances for her. She doesn’t have to worry about fi guring the numbers, so she can concentrate on making her scrumptious beef dishes.

The restaurant owner’s bookkeeper keeps track of the payroll records—how much she paid to whom. The professional bookkeeper tabulates her expenses (that beef supplier is very happy). He records daily, monthly and yearly income (and this restaurant is successful). Tax records are another area this book keeper keeps track of—and both the restaurant owner and the IRS are satisfi ed.

And after all these records are put together, this professional bookkeeper presents the restaurant owner a year-end report that has the bottom line: what her business is worth. This enables the owner to plan for the next year.

Now consider the owner of a restaurant across the street from the fi rst example. This is a gourmet Italian place—with wonderful spaghetti and cannoli. The cook is terrifi c. The atmosphere is grand. But the books are a shambles. You see, this restaurant owner knows the best ways to cook linguine, but he knows noodles about keeping accurate records. Unfortunately, instead of paying a bookkeeper, this restaurant owner tried to keep his own records. Now his suppliers are mad because they haven’t been paid; his employees are confused because their tax forms (Form W-2—you’ll learn more about that later) are not accurate; and the Internal Revenue Service is planning an audit of the restaurant, but the owner can’t produce accurate records of his accounts.

The fi rst restaurant owner recognized the value of a good professional bookkeeper. The second restaurant owner made the mistake many people do. He tried to do a job he didn’t know enough about. If he had taken this course, he would have known about bookkeeping.

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This course may not show you the most scrumptious ways to cook beef or make you an excellent Italian cook, but it will certainly teach you the necessary skills to keep the businessperson satisfi ed that his or her records are accurate.

Business people are not the only ones who need effective bookkeepers. Many individuals fi nd it diffi cult to keep track of fi nances. Many would gladly pay someone to balance their checkbook or reconcile bank accounts for them. Some people also have mortgages and even rental property they must keep track of. As a professional bookkeeper, you can offer your services to virtually anyone who handles money or other assets.

Step 5 Practice Exercise 1-1

Read the following statements. For each statement below, write T for true or F for false.

_____ 1. The “books” are a business’ way of keeping score of its fi nancial situation.

_____ 2. Businesses such as restaurants can benefi t from having an accurate professional bookkeeper.

_____ 3. Tax records and payroll records are NOT kept by a bookkeeper.

_____ 4. Accurate records are essential to the success of a business.

_____ 5. Individuals rarely have any use for a bookkeeper.

Step 6 Review Practice Exercise 1-1

Check your answers with the Answer Key at the back of this book. Correct any mistakes you have made.

Many people would gladly pay someone to balance their checkbook or reconcile

bank accounts for them.

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Step 7 U.S. Career Institute’s Bookkeeping Course

You will be glad you decided to enroll in U.S. Career Institute’s Bookkeeping Course. We are the home study experts with more than 20 years’ experience helping people learn at home. Some courses hand you a book about the subject, but we walk you through each new lesson, step by step. And as you move through the lessons in this Bookkeeping Course, you will fi nd yourself becoming knowledgeable about every aspect of accounting services. You will understand the ledger and journal. The concepts of assets and capital will become familiar to you, as will checking accounts and the reconciliation process. You’ll also understand the difference between debits and credits, and you’ll learn where to post these items.

Numbers are the core of the bookkeeping profession. Because of that, we’ve included a three-part, math supplement with this course that will help you brush up on the skills you need.

As you move through the lessons in this Bookkeeping Course, you will fi nd yourself becoming knowledgeable about every aspect of bookkeeping. You will be able to read and use the ledger and journal. The concepts of assets and capital will become second nature to you, as will checking accounts and the reconciliation process. You’ll understand the difference between debits and credits, and you’ll learn how to use these items. You’ll learn how to calculate payroll, handle tax issues, create balance sheets, and much more!

When you have completed this course, you will be ready to begin work as a professional bookkeeper, either in a company or organization, or by starting your own bookkeeping business from your home. If you decide to begin your own at-home business, this course will teach you how to get started and obtain clients, and it will put you on the road to success.

Each lesson uses the same, step-by-step instruction so you don’t have to learn everything at once. Work at your own pace. Take the practice exercises to gauge your progress. Most importantly, dive in and have fun!

When most people think of numbers, they think of confusing scribbles on a blackboard. But when bookkeepers think of numbers, they think of stories. Numbers tell stories—stories of transactions, stories of businesses, stories of wealth. Some of the greatest success stories in history are written in numbers and pretty soon, not only will you be able to read those stories, you’re going to help write them!

Once again, congratulations on taking this fi rst step toward an exciting, new career. You are on your way to becoming a qualifi ed bookkeeper.

SuccessAhead!

We walk you through each new lesson, step-by-step.

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Step 8 Mail-in Quiz 1

Follow the steps to complete the quiz.

a. Be sure you’ve mastered the instruction and the Practice Exercises that this quiz covers.

b. Mark your answers on your quiz. Remember to check your answers with the lesson content.

c. When you’ve fi nished, transfer your answers to the Scanner Answer Sheet included. Use only blue or black ink on your Scanner Answer Sheet.

d. Important! Please fi ll in all information requested on your Scanner Answer Sheet or when submitting your quiz online.

e. Submit your answers to the school via mail, e-mail, fax or, to receive your grade immediately, submit your answers online at www uscareerinstitute.edu.

Circle the letter representing the best answer to each question.

1. Many small businesses hire professional bookkeepers to _____.a. hire their employeesb. tell them how to get customersc. accurately keep track of their business fi nancesd. write advertisements

2. In the beef restaurant example in this lesson, how did the restaurant owner use her bookkeeper? _____a. To keep track of where her money from the business was going

(payroll, taxes, supplies, etc.) and how much money was coming in.b. To teach her the most scrumptious ways to cook beef.c. To pay her employees.d. As a business investor.

3. What is the main problem a business owner might run into if he attempts to keep his own books? _____ a. He won’t be able to cook well enough.b. His business will not have enough customers.c. Both a and b.d. He is not an expert in bookkeeping.

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4. As a professional bookkeeper, your number one concern is _____.a. speedb. accuracyc. appearanced. an IRS audit

5. _____ businesses need bookkeepers.a. Nearly allb. Noc. Very fewd. Half of all

6. “The books” refers to a business’_____ situation.a. contractb. taxc. employeed. fi nancial

7. Individuals may use professional bookkeeper for _____.a. keeping track of their library booksb. bank records and checkbook reconciliationc. dealing with rental property tenantsd. nothing—individuals don’t use bookkeepers

8. U.S. Career Institute wants to enable you to _____.a. start an at-home businessb. compete in the bookkeeping fi eldc. get help if you need itd. all of the above

9. Bookkeeping requires a working knowledge of _____.a. tax law b. math and numbersc. entrepreneurshipd. penmanship

10. As a professional bookkeeper, you can offer your services _____.a. to virtually anyone who handles money or other assetsb. without worrying about accuracyc. both a and bd. only to organizations

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Don’t wait for your quiz results tocontinue with Lesson 2.

CongratulationsYou’ve completed Lesson 1.

LESSON

2

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BookkeepingExplained


One hundred years ago, in a small general store, bookkeeping simply meant writing down what was sold each day and counting the cash in the drawer. Today, a business’ fi nances are far more complex, requiring an expert to handle them—a professional bookkeeper. Taken as a whole, managing a business’ books may seem daunting at fi rst, but by focusing on small, easy-to-master steps, you’ll soon become an expert. The secret to handling complicated fi nancial matters as a bookkeeper is the consistent, careful, and diligent use of basic bookkeeping principles.

In this lesson, you will begin to understand these principles—the foundation of your successful career in bookkeeping. A word of caution: You will be introduced to many new phrases and terms in this lesson. However, you do not have to have them all perfectly memorized or be able to completely understand how they all fi t together. This will come with practice in later lessons. For now, focus on the big picture!

Step 2 Learning Objectives for Lesson 2 After you complete this lesson, you will be able to:

Explain what the record of transaction is and how it relates to bookkeeping.

Distinguish between assets and liabilities and explain how each one fi ts into the record of transaction.

Defi ne many of the most common terms used in bookkeeping.

Successful bookkeepers are diligent and detail-oriented!

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Step 3 Terms You Will Need to Know

Here are the bookkeeping terms you will learn about in this lesson:

accounts general ledger accounts payable journal accounts receivable liquidity assets long-term liabilities balance sheet net income capital net loss credit net revenue current assets net worth current liabilities operating statement debit posting equity revenue expenses short-term liabilities fi nancial reports transaction fi xed assets

Step 4 Record of Transaction

Any business dealing that involves money is called a transaction. As a professional bookkeeper, you will be responsible for keeping track of the transactions your clients conduct. You will keep the record of transaction. There are many examples of transactions in business.

When a restaurant owner pays for supplies, that is a transaction.

When an employee collects a paycheck, that is a transaction.

Consumers make transactions by purchasing goods and services.

Transactions are recorded in a journal. The journal is the starting point for a bookkeeping system. From the journal, information is transferred to accounts in the general ledger. Posting is what bookkeepers call the procedure of transferring information from the journal to an account. From the accounts, different fi nancial reports are prepared by the professional bookkeeper.

JOURNAL ACCOUNTS REPORTS

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Lesson 2—Bookkeeping Explained

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Let’s take a closer look at the fi rst step in accounting services: the journal.

The Journal—Debits and Credits

Although we will cover the journal in more detail in Lesson 3, there are some components to the journal you need to know now. First, there are debits and credits. Actually, debits and credits are essential to nearly all parts of the bookkeeping process, but the fi rst time you will use these two items is in the journal. Every bookkeeping entry will be either a debit or credit. A credit is always entered in the right-hand column, and a debit is in the left-hand column (fi gure 2-1). Be careful when you look at debits and credits—the terms don’t always mean subtraction and addition.

How can that be? “Debit” doesn’t always mean subtract; and “credit” doesn’t necessarily mean add. This is all part of basic accounting principles that apply to double-entry bookkeeping. Double-entry accounting itself is the most common way bookkeepers keep track of transactions. The principles that apply to that system have several rules that determine whether or not a transaction is a debit or a credit. You may not understand these rules right off the bat, but as you progress, you will learn them, and you will learn how to apply these rules. For now, rest assured; you will get the practice you need in later lessons. This is only an introduction and is not designed to explain everything.

One of the fi rst rules you need to know is that a debit is abbreviated Dr, and a credit is abbreviated Cr. In this course, we will refer to these abbreviations frequently, so you need to memorize them.

After you have mastered debiting and crediting in your journals, you will prepare various fi nancial statements. First, you will post the journal information to the correct accounts in the general ledger (this process will be covered later). Then, you will summarize the condition of the business based on the journal. Take a look at two kinds of “summary” fi nancial statements: the balance sheet and the operating statement.

1 2

Company Name

General Journal

1

2

3

4

5

DATE DESCRIPTION P/R Dr Cr

Figure 2-1: General Journal

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Two Financial Statements

After you post to the accounts the information in your journal, you use this information to prepare various fi nancial statements or reports. The fi rst two kinds we will talk about are the balance sheet and the operating statement.

The balance sheet is a summary of the business’ assets, liabilities and equity. Assets are what the business owns, such as vehicles and inventory. Liabilities include what the business owes, such as loans and accounts payable. Equity consists of what would remain of the assets if all the liabilities were paid.

Look at the balance sheet example of Jerry’s TV Repair (fi gure 2-2). Jerry Silver owns his own television repair shop. His assets include a delivery van, his repair tools, fi ve televisions he has for sale, the spare parts in his shop and the money in the cash register and in the bank. He also has an accounts receivable (people who owe him money) that is also an asset. The breakdown of assets is as follows:

Cash $ 1,000Accounts Rec. 250Van 12,500Tools 1,500Televisions 1,500Parts 800Total: $17,550

Now, the TV repair shop also has some liabilities. Jerry buys parts from a local supplier. The supplier allows Jerry to buy the parts he needs and then bills Jerry later for his purchases. This arrangement is known as accounts payable. The money that is owed to the supplier is a liability. The company also owes the bank for a loan on the van. Basically, the company’s liabilities break down like this:

Notes Payable: 10,400Accounts Payable: 1,400Total: $11,800

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Jerry’s TV RepairBalance SheetJuly 31, 20XX

ASSETS LIABILITIES

CURRENT ASSETS SHORT-TERM LIABILITIES Cash $1,000 Accounts Payable $1,400 Accounts Rec. 250 Total Short-Term Liabilities $1,400 Inventory 1,500 Parts 800 LONG-TERM LIABILITIES Total Current Assets $3,550 Notes Payable $10,400

FIXED ASSETS Total Long-Term Liabilities $10,400 Van $12,500 Tools 1,500 TOTAL LIABILITIES $11,800 Total Fixed Assets $14,000 CAPITAL Owner’s Equity $5,750 Total Capital $5,750 TOTAL ASSETS $17,550 TOTAL LIABILITIES AND CAPITAL $17,550

Figure 2-2: Balance Sheet

If we look at these numbers, we can determine the equity in Jerry’s TV Repair. The formula for equity is Assets – Liabilities = Equity. Equity is also called capital or net worth. For now, we will refer to it as equity. So, let’s fi gure the equity Jerry has in his business. Take his assets ($17,550) and subtract his liabilities ($11,800). What is the answer? Jerry has $5,750 worth of equity in his business. Or another way of saying this is Jerry’s TV Repair has a net worth of $5,750.

Overall, a business’ assets include such things as:

buildings, land, equipment, tools, cash (both on hand and in the bank), accounts receivable, inventories, materials and spare parts.

Liabilities include:

accounts payable (money owed to suppliers), payroll due (what the company owes its employees), loans and mortgage payments.

You will learn how to prepare a balance sheet in Lesson 3. You will also learn how to create an operating statement. The operating statement (also called a profi t-and-loss statement) shows expenses subtracted from income for a specifi c length of time (a month or year, for example). This statement shows whether or not a business is turning a profi t.

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You just learned that the balance sheet is a summary of assets, liabilities and capital. An operating statement is a summary of a company’s revenues, expenses and net income. Revenue is the process of collecting monies in exchange for goods and services. Expenses include those items that are used or needed to produce revenue. Net income consists of what’s left over after the expenses have been subtracted from the revenue. Net revenue equals the money left over after you subtract expenses from revenue. If for some reason expenses are greater than revenue, then the company has a net loss—that is, it lost money.

Let’s look at an example of an operating statement for Jerry’s TV Repair (fi gure 2-3). Because Jerry sells goods as well as services, he has two revenue accounts. They are as follows:

Sales Revenue: $2,000Service Revenue: 1,000Total: $3,000

He also has several expense accounts. They are as follows:

Advertising Expense: $100Fuel Expense: 200Salary Expense: 500Utilities Expense: 50Total: $850

Jerry’s TV RepairOperating Statement

July 31, 20XX REVENUES

Sales Revenue $2,000Service Revenue 1,000 Total Revenues $3,000

EXPENSESAdvertising Expense $100Fuel Expense 200Salary Expense 500Utilities Expense 50 Total Expenses $850

NET INCOME $2,150

Figure 2-3: Operating Statement

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In questions 1-3, pick the best answer from the choices provided.

1. As a professional bookkeeper, you keep track of your client’s transactions. The fi rst place these are recorded are in the _____.a. profi t-and-loss statementb. journalc. balance sheetd. operating statement

2. Debits are always entered in the _____ column while credits are entered in the _____ column.a. left-hand/right-handb. right-hand/left-handc. bottom/topd. top/bottom

3. “Posting” refers to _____.a. fi guring a company’s net worthb. balancing debits and creditsc. transferring journal information to the correct accountsd. creating the operating statement

For questions 4 and 5, write the company’s assets in the assets column and the liabilities in the liabilities column.

Joan’s Trucking has the following items as assets and liabilities. Classify them accordingly. Write assets for question 4 and liabilities for question 5.

15 delivery trucks Mortgage for warehouse Warehouse

35 spare tires Wages owed to drivers Forklift

$20,000 in the bank Loan balance on 15 trucks 2 computers

$50 owed to suppliers $200 owed to credit card company

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4. Assets 5. Liabilities______________________________ ________________________________

______________________________ ________________________________

______________________________ ________________________________

______________________________ ________________________________

______________________________ ________________________________

______________________________ ________________________________



Step 7 Defi ne Some Common Terms

Now let’s talk a little more about assets and liabilities. You’ve already learned what those two terms mean, but here you’ll learn the different classifi cations of assets and liabilities.

Classifying Assets

Assets, as you learned earlier in this lesson, are what the business owns. They can be classifi ed into two categories: Current Assets and Fixed Assets.

Current Assets

Current assets are assets that constantly change. On the balance sheet, list them according to how fast they can be converted to cash. This conversion is called liquidity. So, logically, the fi rst current asset a company has is its cash. From there, it descends according to an asset’s liquidity. Overall, current assets are items that will either become cash soon (they are intended for sale), or they will be used by the business within a year. Here is an example list of current assets.

Cash: This is the company’s total of dollars, coins, money orders, checks, letters of credit and bank drafts that it has on hand or in accessible bank accounts. Examples of accessible bank accounts (also called demand accounts) include checking and a normal savings account. Certifi cates of deposit and mutual funds typically are NOT demand accounts.

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Accounts Receivable: The amount of money customers owe the company for goods or services purchased but not yet paid for.

Inventories: The dollar value of goods a company has in stock (for sale).

Supplies: Materials used in the daily conducting of business. These include offi ce supplies and store supplies.

Prepaid Items: Items the company has purchased and paid for, but not received yet (insurance, for example).

Now that you have an idea what current assets are, let’s look at the second type of assets: Fixed Assets.

Fixed Assets

Fixed assets are what the business uses to produce its product or service. This includes everything from a computer system for producing invoices to a truck used to transport the fi nished product. Basically, if an item puts the product together, transports the product or is used by people producing the product, it is considered a fi xed asset.

Fixed Assets include the following items:

Land: The value of land owned by the company (fi gured at actual purchase price).

Buildings: The purchase price or construction costs of all structures owned by the company. This includes permit fees, engineering fees and surveys.

Equipment: Machines and vehicles along with interior structures, such as shelving and offi ce furniture.

Like assets, liabilities are also classifi ed into different categories.

Classifying Liabilities

Liabilities are put into one of two categories: current and long-term. Current liabilities must be paid within the current year. Long-term liabilities are, logically, those liabilities to be paid after the current year.

Payroll, the company’s accounts payable (to creditors for supplies, for example) and short-term loans are examples of current liabilities.

Long-term liabilities include mortgage payments and long-term loans.

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Match the account with the proper classifi cation.

1. _____ Cash

2. _____ Accounts Payable

3. _____ Equipment

4. _____ Inventory

5. _____ Mortgage Payable (30 years)

6. _____ Accounts Receivable

7. _____ Land

8. _____ Payroll

9. _____ Loan Payable (less than 1 year)

10. _____ Prepaid Insurance

11. _____ Building



a. Current assetb. Fixed assetc. Current liabilityd. Long-term liability

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d. Important! Please fi ll in all information requested on your Scanner Answer Sheet or when submitting your quiz online.

e. Submit your answers to the school via mail, e-mail,fax or, to receive your grade immediately, submit your answers online at www.uscareerinstitute.edu.


1. By studying bookkeeping principles, you can _____.a. build a good foundation for accounting servicesb. learn to be an IRS professionalc. learn IRS proceduresd. become a mathematician

2. A transaction is _____.a. any business dealing that involves moneyb. not important to accounting servicesc. a court cased. a rare business occurrence

3. The _____ is the starting point for a bookkeeping system.a. ledgerb. receiptc. transactiond. journal

4. You record _____ in the journal.a. cash inputb. assets onlyc. your client’s transactionsd. liabilities only

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5. Posting involves transferring information from the _____ to the _____.a. journal, general ledger accountsb. ledger, receiptsc. books, paperd. books, computer

6. A debit is always entered in the _____ column.a. right-handb. bottomc. topd. left-hand

7. A credit is always entered in the _____ column.a. right-handb. bottomc. topd. left-hand

8. Debit is abbreviated _____, and credit is abbreviated _____.a. deb., crd.b. Dr, Crc. debt., crdt.d. Dt, Ct

9. The balance sheet is a _____.a. summary of the business’ assets, liabilities and equityb. summary of the business’ equity vs. payrollc. bank document showing account balancesd. summary of the business’ liabilities

10. A business’ assets include such things as _____.a. everything the business owns minus what it owesb. cash and buildings onlyc. buildings, land, equipment, tools, cash (both on hand and in the bank),

accounts receivable, inventories, materials and spare partsd. cash, credit cards, bills the business owes, employees and ceiling fans

11. A business’ liabilities include _____.a. buildings it ownsb. accounts payable, payroll due, loans and mortgage paymentsc. only what others owe the businessd. all of the above

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12. Name the two ways to classify assets: _____ and _____.a. current, fi xedb. long-term, short-termc. equity, liabilitiesd. owed, clear

For questions 13-16, match the term with the correct defi nition. Choose from the list below.

13. _____ Cash

14. _____ Accounts receivable

15. _____ Inventories

16. _____ Supplies

For questions 17-20, match the term with the correct defi nition. Choose from the list below.

17. _____ Liabilities

18. _____ Equipment

19. _____ Current liabilities

20. _____ Long-term liabilities

21. Items a company has purchased and paid for, but has not yet received are called _____ items.a. advancedb. purchasedc. prepaidd. long-term liability

22. When a business makes a purchase and then pays the supplier at a later date, it is known as _____.a. accounts receivableb. notes payablec. an illegal actd. accounts payable

a. The amount of money customers owe the company for goods or services.

b. The company’s total of dollars, coins, money orders, checks, etc.

c. The dollar value of goods a company has in stock (for sale).

d. Materials used in the daily conducting of business. These include offi ce supplies and store supplies.

a. What the business owes. b. Must be paid within the current year.c. Must be paid after the current year.d. Machines, vehicles, and interior structures,

such as shelving and offi ce furniture.

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23. How quickly an asset can be converted to cash is referred to as _____.a. liquidityb. transfer conversion ratec. equityd. salability

24. When fi guring an asset, a building’s value includes the purchase price _____.a. of the building onlyb. of the building and the salary of people who sold itc. or construction costs including permit fees, engineering fees and surveysd. or construction costs, plotting, rezoning fees, engineering fees, rent

and lease legal fees

25. The two classifi cations of liabilities are _____.a. past and presentb. fi xed and currentc. assets and equityd. current and long-term

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LESSON

3

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BookkeepingEquations


A business is only as good as its accounting services professional. An accurate accounting services professional gives the business owner a clear picture of “the bottom line.” The bottom line is how much money a business has left after all of its expenses are paid. What’s beneath the bottom line? Debt! This lesson will show you how to calculate a business’ (or an individual’s) bottom line.

You will also learn the relationship between assets, liabilities, and capital. This relationship is described in the “accounting equation,” the formula that is the foundation of all accounting services. From that, you will go on to learn how to prepare balance sheets and operating statements.

What’s the best way to learn? By doing! Roll up your sleeves because in this lesson you’ll get to crunch your fi rst set of numbers. This lesson marks the beginning of your career as an accounting services professional!

Step 2 Learning Objectives for Lesson 3 After you complete this lesson, you will be able to:

Defi ne and use the accounting equation.

Fill out balance sheets.

Defi ne and use the net income equation.

Prepare operating statements.

\

+

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accounting equation

balance sheet

initial capital

net income equation

operating statement

sales revenue

service revenue

the bottom line

Step 4 Accounting Equation

The accounting equation is the basis of all bookkeeping activity. It shows the relationship between assets, liability and capital. Assets, you remember, are what a business owns. Liabilities consist of what the business owes. Those terms were covered in Lesson 2. Capital is the owner’s equity in the business. “Equity,” the same as capital, is the difference between how much an asset is worth and what is owed on it. A company truck, for example, might be worth $15,000. If the loan balance on the truck is $10,000, then the company has $5,000 equity in the truck ($15,000 – $10,000 = $5,000). Capital also includes any money and assets the business owner put into starting up the business. This beginning investment is called initial capital.

These principles relate together in the accounting equation. This equation states that Assets equal Liabilities plus Capital. It can be expressed like this:

A = L + CIf you remember what you learned in Lesson 2 about equity, you know it is equal to Assets minus Liabilities. The accounting equation requires you to use liabilities once to fi nd capital (equity), then use them again alone in the equation itself. Let’s look at an example from Susan’s Big Rig Trucking Company.

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Lesson 3—Bookkeeping Equations

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Susan’s company has assets that amount to $550,400. Included in this are the following items:

Cash: $ 22,400Accounts Receivable: 15,000Trucks: 475,000Building: 38,000 Total Assets $550,400

The company has the following liabilities, totaling $436,000:

Accounts Payable: $ 21,000Loans on Trucks: 395,000Loan on Building: 20,000 Total Liabilities $436,000

In Lesson 2, we saw that (Capital = Assets – Liabilities). Let’s plug the numbers into that formula.

Total Assets = $550,400Total Liabilities = $436,000

A – L = $550,400 -436,000Capital (equity) =$114,400

The Accounting Equation is A = L + C.

It can also be written with the capital broken into its component formula of (A–L) in this way:

A = L + (A–L)Knowing this, we can plug the numbers into the formula like this:

$550,400 = $436,000 + ($550,400–$436,000)

This equation is a checking system that allows you to ensure your work is accurate. If the equation doesn’t balance (both sides being equal), then you have made an error somewhere in your fi guring of assets and liabilities.

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Let’s see if our trucking company’s accounting equation balances.

$550,400 = $436,000 + $114,400

$550,400 = $550,400Yes, it does.

What does that tell us? It tells us we have accurately fi gured the company’s assets, liabilities and capital. Once we have established that, we can take the next step in bookkeeping: fi lling out a balance sheet.

Step 5 Balance Sheets

The balance sheet summarizes assets, liabilities and capital in a standard format. It is organized the same way every time you use it: two columns. Assets go in the left column; liabilities and capital in the right. Look at this example from Billy Bob’s Donut Shoppe (fi gure 3-1).

Billy Bob’s Donut ShoppeBalance SheetJuly 31, 20XX

ASSETS LIABILITIES

CURRENT ASSETS SHORT-TERM LIABILITIES Cash $22,500 Accnts Payable $7,900 Inventory 3,000 Wages Payable 4,000 Accnts Rec. 950 Notes Payable 5,750 Insurance 500 Total Current Assets $26,950 Total Current Liabilities $17,650

FIXED ASSETS LONG-TERM LIABILITIES Building $25,000 Mortgage $16,500 Van 17,000 Van Loan 8,000 Donut Oven 2,500 Total Long-Term Liabilities $24,500 Display Cases 1,000 TOTAL LIABILITIES $42,150 Total Fixed Assets $45,500 CAPITAL Owner’s Equity $30,300 Total Capital $30,300

TOTAL ASSETS $72,450 TOTAL LIABILITIES and CAPITAL $72,450

Figure 3-1: Balance Sheet

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As you can see, the assets side of the balance sheet is equal to the liabilities and capital side. That means the accounting equation of Assets = Liabilities + Capital checks and, therefore, your calculations are correct. Do you see now why it is called a “balance sheet”? If the assets balance with the liabilities and capital, you are well on your way to keeping accurate books.

Assets = Liabilities + Capital

Initial capital is handled as both an asset and as capital. We know, of course, that initial capital is the money a business owner invests in her own business to get it started. It can be money in the bank, or a building or car signed over to the business. Whatever cash value the item has is treated as an asset and as capital. If you plug the numbers into the accounting equation, you’ll see how this works. Say a business owner invests $14,000 in her business to get it started. According to our equation, she’ll have $14,000 in assets, $0 in liabilities and $14,000 in capital. So, our A = L + C equation does balance:

$14,000 = $0 + $14,000

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Use this Practice Exercise to sharpen your accounting equation and balance sheet skills.


Set up and complete the balance sheet for Jill’s Stained Glass (fi gure 3-2).

Jill’s Stained Glass has the following items. Classify them in the appropriate place on the balance sheet and then complete the balance sheet.

Building: $40,500Accounts Receivable: $250Cash: $2,750Accounts Payable: $14,750Mortgage: $22,500

Jill’s Stained GlassBalance SheetJuly 31, 20XX

ASSETS LIABILITIESCURRENT ASSETS SHORT-TERM LIABILITIES(1) __________________ $ _____ (7) __________________ $ _______(2) __________________ _____ Total Short-Term Liabilities (8)$ ______ Inventory 2,500 Total Current Assets (3)$ _____

FIXED ASSETS LONG-TERM LIABILITIES(4) __________________ $ _____ (9) __________________ $ _______ Equipment 1,250 Total Long-Term Liabilities (10) ______

Total Fixed Assets (5)$ _____ TOTAL LIABILITIES (11)$______

CAPITAL Owner’s Equity $10,000 Total Capital $10,000

TOTAL ASSETS (6)$ _____ TOTAL LIABILITIES and CAPITAL (12)$______

Figure 3-2: Practice Exercise 3-1 Balance Sheet

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If you had trouble with this review, go back and work through it again. It may be helpful to use a printing calculator to make sure your numbers agree.

Balance sheets may vary slightly depending on the type of business you keep books for. If it is a sales business (a retail store, for example), the balance sheet might be a little different than if it is a service business.

Step 8 Net Income Equation

Imagine being a business person. What’s the most important thing to know about your business? Is it where your competition is? Maybe. But most likely, the most important thing about your business is the bottom line: How much money is it making? The net income equation is the way to fi nd out how much money a business is making.

Very simply, the net income equation states that Revenue – Expenses = Net Income. Revenue refers to what money a business makes—the earnings of a company. The revenue can come from selling merchandise or from selling time and talent. When you sell a product, it is referred to as sales revenue. When you sell a talent or time, that is called service revenue.

Expenses are the cost of doing business. Salaries, rent, commissions and even gasoline for the company’s fl eet of cars all qualify as expenses. In fact, anything purchased for use by the business in a business-related manner is considered an expense.

When you subtract expenses from revenue, you are left with the net income of a company. Net income is not exactly the same as profi t. Profi t can be gross or net while net income is just that—net. It is the bottom line. Net income is what’s left after all expenses have been paid and it is called “the bottom line” because that’s where it appears on a bookkeeping summary.

Try a couple examples of this equation in the following Practice Exercise.

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Answer the following questions.

1. If Jon’s Tree Service needs $5,250 to operate each week and it brings in $12,250 each week, what is the company’s net income? _______________

2. Harold’s Hardware pays out $22,350 in expenses every month. The company brings in $14,000 in service revenue and $50,000 in sales revenue during the same amount of time. What is Harold’s Hardware’s net income? _______________

3. Rondell’s Thrift Shop makes $22,000 each month, but it costs Rondell $16,000 each month to keep the shop open. Now, if Rondell’s salaries in April cause his expenses to rise to $19,000, what is his shop’s net income for that month? What is his net income during each of the other 11 months of the year? _______________

4. Sharon owns a beauty shop. The shop cuts through its competition and makes $35,000 each month. It is located in a popular mall, and it costs Sharon $27,000 each month to keep the shop open. What is Sharon’s net income? _______________



Step 11 Operating Statement

Just as the balance sheet summarizes assets, liabilities and capital, the operating statement summarizes revenue, expenses and net income for a business for a certain amount of time. It can be a week, a month, a quarter (meaning one-quarter of a year or three months), a year or longer.

Translating your records of a business’ revenues and expenses and assets and liabilities and then summarizing those into operating statements and balance sheets is the basic function of all bookkeepers.

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Once you start keeping books for businesses, you may notice people calling operating statements by other names. “Income statement” or “profi t-and-loss statement” both refer to what you’re learning here: the operating statement. If you complete an operating statement for a 12-month period, it is a “yearly statement.” Obvious, you say. But remember, most people think of a year as being between January and December. That is called a calendar year. If you keep a statement for a different 12-month period, July through June, for example, then that is called a fi scal year.

When you prepare an operating statement, you begin by listing revenues. The fi rst one listed is sales revenue, then under that is service revenue. These two numbers are added together, and their total is set out to the right and underlined. (Don’t worry, we’ll outline this whole idea in a little bit.) After revenue, you list expenses. These should be broken down into categories (not just lumped together). Wages, rent, insurance and utilities are examples of these categories. Total the expenses together and put that total to the right and underline it as well. Then subtract the expenses from the revenue. Write that number directly under the expense total and double underline it. That is your net income.

Look at this example of a simple operating statement.

Nora’s Notes—Secretarial Service Operating Statement

for the Year Ended 12/31/20XX

REVENUESSales Revenue $12,000Service Revenue 55,000 Total Revenues $67,000

EXPENSESSalaries $19,000Rent 7,000Insurance 13,000Advertising 4,000Utilities 2,000 Total Expenses $45,000

NET INCOME $22,000

The underlined numbers mean “add the numbers above,” while a double underlined number is “the bottom line” and means stop.

Now, you’ve learned about balance sheets and operating statements. The components of the balance sheet include assets, liabilities and capital. Revenue and expenses make up the operating statement.

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Complete the following statement.

PDT Auto RepairsOperating Statement

for the Year Ended 12-31-20XX

REVENUESSales Revenue $4,000Service Revenue 12,000 Total Revenues $_______

EXPENSESSalaries $2,000Rent 1,000Purchases 1,000Utilities 2,000 Total Expenses $________

NET INCOME $________







c. When you’ve fi nished, transfer your answers to the scanner answer sheet included. Use only blue or black ink on your Scanner Answer Sheet.

d. Important! Please fi ll in all information requested on your Answer Sheet or when submitting your quiz via e-mail.

e. Submit your quiz to the school via mail, e-mail, fax or, to receive your grade immediately, submit your answers online at www.uscareerinstitute.edu.

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3-11

Complete the following balance sheet for Tia’s Treats Candy Store.

Tia’s Treats Candy Store has these items for your balance sheet:

Delivery truck: $22,000

Building: $65,000

Accounts payable: $10,350

Cash: $ 5,650

Mortgage: $59,000

Accounts receivable: $ 1,075

Tia’s Treats Candy StoreBalance SheetJuly 31, 20XX

ASSETS LIABILITIESCURRENT ASSETS SHORT-TERM LIABILITIES __________________ $ ________ __________________ $ _________ __________________ ________ Total Short-Term Liabilities $ ________ Inventory 2,500 Total Current Assets $ _______

FIXED ASSETS LONG-TERM LIABILITIES__________________ $ _________ __________________ $ ___________________________ _________ Loan on Truck 9,000 Total Fixed Assets $ _______ Total Long-Term Liabilities $ ________ TOTAL LIABILITIES $ ________

CAPITAL Owner’s Equity $ 17,875 Total Capital $ ________TOTAL ASSETS $ _______ TOTAL LIABILITIES and CAPITAL $ ________

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Complete the following Operating Statement for Rick’s Golf Clubs.

During 20XX, Rick’s Golf Clubs sold $54,000 worth of clubs and gave $10,000 worth of lessons. Rick, who owns the company, also paid out $17,000 in wages, $20,000 in utilities and $6,000 in rent. Fill out the operating statement for Rick’s Golf Clubs.

Rick’s Golf ClubsOperating Statement

for the year ending 12/31/20XX

REVENUESSales Revenue $ ____________Service Revenue ____________ Total Revenues $ 64,000

EXPENSES_____________ $____________ Utilities Expense 20,000Rent Expense 6,000 Total Expenses $ __________ NET INCOME $ __________


1. The Accounting Equation can be abbreviated as _____.a. R + NI = Cb. A = L + Cc. NI + A = Ld. A = R – E

2. In the Accounting Equation, the three things you need include _____.a. net income, liabilities and profi tb. assets, profi t and revenuec. calendar year profi t, expenses and net incomed. assets, liabilities and capital

3. If a business owner starts her business with $22,000 of initial capital, what will the accounting equation look like if it is set up correctly? _____a. $22,000 = $0 + $22,000b. $0 = $22,000 + $22,000c. $44,000 = profi td. $22,000 = net income – $22,000

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4. A balance sheet summarizes _____.a. net incomeb. assets, liabilities and capitalc. revenue, expenses and profi td. the operating statement

5. If a company has $22,543 in assets and $2,541 in capital, what liabilities does it have if the balance sheet balances correctly? _____a. $25,084b. $19,005c. $20,002d. not enough information to fi gure this out

Using the balance sheet you have completed, answer the following questions.

6. The fi rst current asset and its balance is _____.a. Cash: $5,650.00b. Accounts receivable: $1,075.00c. Cash: $1,075.00d. Accounts receivable: $5,650.00

7. Accounts receivable is a _____.a. current assetb. fi xed assetc. long-term liabilityd. capital

8. What are the total current assets of Tia’s Treats Candy Store? _____a. $5,650b. $9,225.00c. $10,350d. $22,000

9. Tia’s building would be considered a _____.a. short-term liabilityb. long-term liabilityc. total current assetd. fi xed asset

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10. What is the amount of Tia’s total fi xed assets? _____a. $22,000b. $65,000c. $87,000d. $96,225

11. Tia’s total assets include _____.a. delivery truckb. cashc. accounts receivabled. all of the above

12. The sum of Tia’s total assets is _____.a. $87,000b. $65,000c. $10,350d. $96,225

13. Accounts payable are a _____.a. short-term liabilityb. long-term liabilityc. fi xed assetd. capital

14. The total sum of Tia’s short-term liabilities is _____.a. $59,000b. $10,350c. $5,650d. $1,075

15. The total sum of Tia’s long-term liabilities is _____.a. $59,000b. $10,000c. $68,000d. $28,000

16. Tia’s total capital is _____.a. $96,225b. $86,000c. $17,875d. $54,225

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17. Tia’s total liabilities and capital equals _____.a. $96,225b. $86,225c. $76,225d. $55,225

18. If Tia has $96,225.00 in total assets and $17,875 in capital, what liabilities does she have if the balance sheet balances correctly? _____a. $17,000b. $22,000c. $78,350d. $68,250

19. The net income equation is stated as _____.a. revenues minus expenses equals net incomeb. R – E = NIc. both a and bd. NI = profi t - assets

20. The operating statement summarizes _____.a. assets, liabilities and capitalb. revenues, expenses and net incomec. yearly information onlyd. none of the above

Using the operating statement you have completed, answer the following questions.

21. What is Rick’s sales revenue? _____a. $54,000b. $10,000c. $43,000d. $64,000

22. Rick’s service revenue totals _____.a. $20,000b. $15,000c. $12,000d. $10,000

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23. Rick’s expenses include wages in the amount of _____.a. $16,000b. $20,000c. $17,000d. Rick does not pay wages.

24. Rick’s total expenses equal _____.a. $43,000b. $53,225c. $63,000d. $23,225

25. Rick’s total net income is _____.a. $23,250b. $21,250c. $23,000d. $21,000

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LESSON

4

88-880201201LB11B-04-C0

The AccountingCycle


Your base of knowledge is nearly complete! Don’t forget, nearly all of the complex tasks a bookkeeper performs can be reduced to a small number of easy-to-learn accounting principles. With this lesson, you will lay the cornerstone of your foundation in bookkeeping.

The accounting cycle brings together everything you’ve learned so far and organizes it into an “order of operations.” The steps of the accounting cycle are like the seasons of the year. They both always happen in the same order. The accounting cycle is a “how-to” guide to bookkeeping, and in it you will see your entire journey mapped out, from the beginning point of journalizing to the fi nal destination of closing the books.

Remember, these early lessons are designed to introduce you to the tools a bookkeeper uses in his or her trade. Don’t worry if you don’t have it all under your belt yet. We’ll go back and review all of this information in more detail later to reinforce what you’ve learned.

Step 2 Learning Objectives for Lesson 4 After completing this lesson, you will be able to:

List and defi ne the eight parts of the accounting cycle.

Explain how these parts fi t together and relate to each other.



chart of accounts ledger compound entry ledger accounts double-entry system trial balance journal worksheet

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Step 4 Eight Parts of the Accounting Cycle

No matter what type of business you provide bookkeeping for, you will use the accounting cycle. The accounting cycle consists of eight parts. The cycle begins when you record the transaction. A receipt is usually the record you use for that. After that, you enter the transaction in the business’ journal. From there, you post the journal entry to an account in the general ledger. From time to time, you will use a trial balance at this point to check your accuracy. After your trial balance is correct, you will prepare worksheets that refl ect any unrecorded changes you make to balance sheets and operating statements. Usually, these changes are adjustments that are not documented by records such as sales slips and invoices. Next, you enter into your ledger your adjusted entries and prepare your fi nancial statements. Finally, you close the books, and the accounting cycle is complete.

This section will cover the fi rst four parts of the cycle. Each part of the cycle is dependent on the others. What you put in the journal depends on the original transaction. Which accounts are posted depends on what’s in the journal. And the trial balance depends on all three: transaction, journal and posting. Let’s look at the fi rst four parts of the cycle: the transaction, the journal, posting to accounts in the ledger and the trial balance.

1. TRANSACTION Record receipts

The Accounting Cycle

2. JOURNALIZING Enter transactions in a journal

3. POSTING Transfer journal entries to ledger accounts

5. WORKSHEET Make adjustments to prepare financial statements

6. FINANCIAL STATEMENTS Prepare balance sheet and operating statement

7. ADJUSTING JOURNAL ENTRIES Post to ledger worksheet/financial statements

8. CLOSING Prepare books for next cycle

4. TRIAL BALANCE Verify, total and balance accounts

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Lesson 4—The Accounting Cycle

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The Transaction

As we discussed before, a transaction is any business dealing that involves the exchange of goods and/or services for money or another valuable asset. The transaction is the beginning of the accounting cycle. Imagine a transaction in which a customer purchases a package of bolts from Ed’s Hardware. The bolts cost $1. The beginning of that accounting cycle, therefore, is a $1 transaction.

After you determine the transaction type and amount (in this case a sale worth $1), enter that transaction into the journal. We will discuss exactly how you fi ll out the journal in the next lesson. For now, just read this overview and stay tuned.

The Journal

In the journal, you write down each transaction as it happens. This is called “entering,” and the items entered are called “entries.” Because the journal is the fi rst place a transaction is entered, it is often called the “book of original entry.” Entries in the journal are in chronological order—that is, the fi rst transaction that happens is the fi rst one entered, the second is second, and so on.

In the journal, you record transactions that are documented by written records. Receipts are one type of written record. Others are invoices, bank deposit records, bills of sale and lading (shipping) and credit account records. Each entry is given a description of the type of transaction involved. These descriptions will correspond to accounts in the ledger. Examples of accounts include supplies, transportation, salaries and equipment. The types and names of the accounts will vary according to the type of business. We will discuss this in detail in a later lesson.

The journal is divided into fi ve columns. A column for the date, a column to record the description of the transaction, a post reference column, a debit column, and fi nally, a credit column.

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As you set up the journal, you need to remember two rules. The fi rst we have already discussed: The journal is in chronological order. The second is just as important: Debits go on the left side, while credits go on the right. Always. You will also see a column labeled “P/R.” This stands for “Posting/Reference.” You’ll learn more about this later. Look at the following example (fi gure 4-1).

1 2

Company Name

General Journal

1

2

3

4

5

Figure 4-1: A Journal



Set up an account with the following entries. (Remember to list Debits on the left side and Credits on the right):

$150.75 credit $45.50 debit

$230.00 debit $71.50 credit

$45.75 debit $99.00 credit

Dr Cr

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Step 7 The Double-entry System

The question most students ask at this point is “How do I know whether something is a credit or a debit?” That is an important question. The answer is that it depends on the type of transaction and the account it affects. At fi rst, it may be diffi cult to decide whether a transaction is a debit or credit, but with some practice, you will fi nd it easier and easier to label entries as one or the other. You will become very familiar with the rules of debits and credits as you work through the next few lessons, so don’t worry if you don’t catch on perfectly right now.

As you record transactions in the journal, you will fi nd that each transaction is entered into at least two accounts—once as a debit and once as a credit. This system is called the double-entry system. It is covered in depth later in the course. Sometimes an entry affects more than two accounts. An entry that affects more than two accounts is called a compound entry. This will also be covered in depth later in this course.

Let’s touch briefl y now on the subject of accounts. So far in this lesson, you have learned that each entry in the journal must be given a description of the account it belongs to. But what is an account and how do you classify each account?

Simply stated, an account is a division of a company. Businesses use accounts to help track certain types of fi nancial transactions. These accounts are usually established depending upon the type of business—each individual business will have its own set of accounts. As a professional bookkeeper, you may or may not be asked by a business to help set these accounts up.

Accounts are established for similar transactions. These accounts are then further organized into groups of accounts that are also similar. For example, if you work for a manufacturing company, you might have an account labeled “Transportation” and this account might be grouped with other accounts under the heading “expenses.”

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Here is a list of accounts you will probably encounter as you work in the bookkeeping fi eld:

cash accounts receivable accounts payable supplies salaries expense utility expenses transportation offi ce equipment inventory purchases

Later on in this course, you will learn how to group accounts.

Now, let’s take a moment to further discuss this debit and credit business. You know that when you enter a transaction in the journal, you must enter debits on the left and credits on the right. It’s common to think that credits are always positive and that debits are negative, but this is not the case. Whether a credit or a debit increases or decreases the amount in an account depends upon the type of account in question.

Look at the following chart:

Type of Account Increases With Decreases With

Assets Debits CreditsExpenses Debits CreditsLiabilities Credits DebitsCapital Credits DebitsRevenues Credits Debits

To use debits and credits correctly, accounting services professionals ask themselves the following questions as they enter each transaction in the journal:

1. What accounts does this transaction affect?

2. To what category do these accounts fi t: assets, liabilities, capital, revenue or expenses?

3. How does the transaction affect these accounts? Does it increase or decrease them?

The answers to these questions tell the bookkeeper whether to enter the transaction as a debit or a credit, following the chart above.

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Let’s look at the example for Ed’s Hardware. We know the store sold some bolts for $1. We know that information needs to be entered in the journal. But how should we enter it? Well, ask yourself the three questions.

What accounts does this transaction affect? A cash sale has two parts: cash and sale. So the transaction affects the Cash Account and the Sales Account.

What type of accounts are these? Cash is an asset and sales are revenue.

How does the transaction affect these accounts? Common sense tells us that cash is increased with the addition of the $1. Our revenue account is also increased with this addition of a sale.

So, in the case of the Cash Account, since this is an asset account and we want to increase it, the chart tells us that asset accounts increase with debits. In other words, to increase an asset account, you must enter a debit. So $1 would be entered on the debit side of the Cash Account. Sales, a revenue account, also increases. And we know from the rules that an increase in revenue requires a credit entry to that account. Therefore, we credit the sales account $1 for the bolt sale.


Try these practice problems.

For each situation, we’ve indicated what transaction took place and which two accounts were affected. Complete the entry for each transaction, using your chart to determine if you should enter a debit or a credit.

Use the following list of accounts for this exercise:

Asset accounts: Cash, Equipment, Supplies

Liability accounts: Accounts Payable, Notes Payable

Revenue accounts: Sales

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1. John Smith purchases a $50 doll from Barb’s Doll Making Company. He pays cash. Both the cash and the sales accounts are increased.

Cash Sales

Dr Cr Dr Cr

2. Barb’s Doll Making Company purchased $1,500 worth of supplies on credit. The Supplies Account is increased (the company has $1,500 more of supplies), and Accounts Payable is also increased (the company owes $1,500 more to the supplier).

Supplies Accounts Payable

Dr Cr Dr Cr

3. Yvonne’s Donut Shoppe takes out a $10,000 loan to buy a truck. The Equipment Account is increased (the company has more equipment), and the Notes Payable Account is also increased (a new loan has been added to the books).

Equipment Notes Payable

Dr Cr Dr Cr

4. Ed’s Hardware pays off a $500 credit account with a wholesale paint supplier. The Cash Account is decreased by making the payment, and the Accounts Payable Account is also decreased (Ed now owes less).

Cash Accounts Payable

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Step 10 The Ledger

You will get more practice with debits and credits as you work through future lessons. But make sure to memorize the rules set out in this lesson, and keep them nearby as you work through the rest of this course.

One fi nal note about debits and credits: In the journal, you do not total these columns. This will be done as a trial balance and then transferred to a fi nancial statement. We will touch on those concepts a little later in this lesson. For now, let’s move on to posting journal entries to accounts.

Posting and the Ledger

In the previous section, you had a brief glimpse into the debit and credit universe. You also saw how these entries can be applied to different accounts. When the entries are put into the journal, they are simply listed in chronological order. In order to separate and sort entries into different accounts, you must post the entries to your ledger.

The ledger is simply a book that is organized into different accounts. Remember the section about how debits and credits affect different accounts? Well, the accounts themselves are listed in the ledger. Accounts generally are listed separately, one per page. That is, a cash account might be on page one, while the inventory account might be listed on page two and so on. An account is a specifi c listing for an individual group of transactions. These transactions may be grouped by customer or by type of transaction. For example, if you bake pies and sell them to Bill’s Bakery, you would have an account in your ledger to list all of the sales you have made to Bill’s Bakery. You may also have an account called “Purchases” where you list all the transactions involving the purchase of fl our, sugar, shortening, etc. As mentioned earlier, the type and number of accounts depend on the type of business and the items that the business owner needs to keep track of.

The process of transferring journal entries into the ledger is called posting. You post entries into specifi c accounts on the appropriate pages in the ledger. On each account page, the ledger is organized into separate accounts. The format of the ledger is similar to the journal. Again, the debits are listed on the left, the credits on the right. The two headings are underlined, and the two columns are separated by a line. Post each journal entry into the ledger by writing it into the appropriate account.

Each account is assigned a title and a number. The title simply describes what the account is—cash, salaries payable or accounts payable, for example. The account number further identifi es the type of account.

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The account number has two parts: The fi rst number represents the general section the account fi ts into, and the second number is the subsection number of the account. For example, you could designate “Assets” as your number one account. That means any asset category (cash, for example) would have the number 1 as its fi rst numeral. If cash is your fi rst subsection in your assets accounts, then label cash as account number “10.” The 1 stands for assets, and the 0 is the fi rst subsection. Generally, accounting ledgers are organized so cash is the only subsection that ends in 0. Listed below is an example of the organization of a ledger, complete with account categories, titles and numbers.

A summary like this one is called a chart of accounts. You can think of it as a table of contents for the ledger. It is divided not only into the account categories, but also into two halves: balance sheet accounts and income statement accounts. These tell which accounts make up each of these fi nancial statements.

Ed’s Hardware Chart of Accounts

Balance Sheet Accounts Operating Statement Accounts 1. Assets 4. Revenues10. Cash 41. Sales 11. Accounts Receivable 42. Service 12. Supplies 5. Expenses13. Inventory 51. Purchases14. Offi ce Equipment 52. Salaries Expense15. Building 53. Transportation Expense16. Prepaid Insurance 54. Electric Expense 2. Liabilities 55. Telephone Expense21. Accounts Payable22. Mortgage Payable23. Taxes Payable 3. Capital31. Ed Young, Owner’s Equity32. Ed Young, Owner’s Drawing

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As you can see, asset accounts are labeled as “tens” accounts with a 1 as their fi rst number. Liabilities are in the “twenties” and have the number 2 at their beginnings. Look at the rest of the account numbers, and you’ll see they are organized in a similar fashion: capital = 3, revenue = 4 and expenses = 5.

This is an example of a Chart of Accounts. Sometimes these vary from business to business, but in general they are all similar to the one on the previous page.


Take this time to practice assigning account numbers to these accounts (based on the chart on the previous page):

____ Warehouse____ Telephone Expense____ Accounts Payable____ Salaries Expense____ Cash____ Owner’s Equity



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Step 13 Trial Balance

We will cover the ledger completely in a future lesson. This section just gives you an idea of what posting means and how the basic setup of a ledger applies to posting. The trial balance relies heavily on the ledger, so let’s move into that section. Remember, this lesson is still an introduction to accounting services ideas and concepts. Trial balances are covered in a future lesson as well.

Periodically, you will need to check to make sure the debits and credits in the ledger balance. This process is called a trial balance. This procedure usually is done every month, but it can occur at the end of any accounting period (weekly, monthly, annually, etc.).

There are two steps to the trial balance. The fi rst is to fi nd the account balance for each ledger account. The second is to take that account balance and record it in the proper place on the trial balance sheet.

Let’s look at the fi rst step: fi nding the account balances for the ledger accounts you have. To do this, you need to follow these steps for each account:

1. Add up the debit column.

2. Add up the credit column.

3. Using these totals, subtract the smaller one from the larger. For example, if an account has a total of $150 in the credit column and $180 in the debit column, you subtract $150 from $180 and get $30.

4. Take the result of your subtraction ($30 in the example above) and enter it on the side of the larger original number. In our example, because the $180 of the debit side is the larger of the two numbers, we enter the $30 in the debit column.

After you have the totals for each account, and have determined into which column (debit or credit) the difference should be entered, you are ready to construct your trial balance sheet. The trial balance sheet is a listing of each account’s name, number and balance. The balances are expressed with the debits on the left and credits on the right. Consequently, if you have a cash account that has a $30 debit balance, you would organize the entry like this:

Acct. No. Title Dr CR 10 Cash $30

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The accounts should be listed in numerical order based on their account number. Therefore, cash is always listed fi rst, and the accounts proceed from there. When you have all the accounts written in the trial balance sheet and all the debits and credits correctly listed, you can check your balance. The total of the debits column must equal the total of the credits column. If they are not equal, then you have made an error somewhere in your ledger and you must correct it.

Check this sample trial balance for Ed’s Hardware. Do the debit and credit columns balance?

Acct. No. Title Dr Cr10 Cash 450.0021 Accounts Payable 200.0052 Salaries 250.00Total:

The columns do balance. The total on the debit side is $450, and the total on the credit side is the same.

You will have plenty of practice later in this course. This lesson is an introduction, not a comprehensive study. Just four more concepts in the accounting cycle. Before we move on, check yourself with this review.


Circle the letter by the best answer for each question.

1. The journal is sometimes called the _____.a. draft bookb. book of original entryc. book of original transactionsd. trial balance sheet

2. The process of transferring a journal entry to a ledger account is called ____.a. postingb. draftingc. enteringd. transpositioning

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3. The trial balance is used to _____.a. check ledger accounts and make sure they balanceb. compare journal accountsc. post ledger accounts to the journald. correct any errors by adjusting entries

4. The fi rst four parts of the accounting cycle are _____.a. drafting, journalizing, totaling and postingb. journalizing, jumping, booking and numberingc. transaction, journalizing, posting and trial balanced. transaction, drafting, entering and posting

5. Debits are entered on the _____ side and credits are entered on the _____ side.a. top / bottomb. bottom / topc. right / leftd. left / right



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Step 16 Final Half of the Accounting Cycle

The last four parts round out the accounting cycle. These four include the worksheet, fi nancial statements, adjustments and closing. Let’s look at each of these four items individually.

The Worksheet

In bookkeeping, as in any situation, there may be mistakes to correct and adjustments to make. You’ll need to take special situations into account when you fi nalize your account balances. The worksheet allows you to make adjustments without written documentation such as invoices and receipts. Often, the worksheet will adjust for things like depreciation and uncollectable accounts (write-offs). Inventory of offi ce supplies and business items are also covered by the worksheet. You count how many supplies that remain and put that on the worksheet to adjust the amount of supplies you started out with. The worksheet is easy to use and essential to accounting services. We’ll cover it more extensively later in this course. For now, read this short introduction to worksheets.

Worksheets are set up in a standard format that consists of ten columns. These ten columns are divided into fi ve sets of two columns each. The fi rst column (left side) in each set is for debits, and the second (right side) is for credits. The fi ve sets include the following:

1. Unadjusted Trial Balance

2. Adjustments

3. Adjusted Trial Balance

4. Operating (Income) Statement

5. Balance Sheet

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One big difference between the worksheet and other bookkeeping forms is that the worksheet is for YOU (the accounting services professional) only. It is not presented to anyone. It is simply used to check your fi gures, correct any errors and make the appropriate adjustments (for depreciation, write-offs, etc.). Take a look at the following example.

The Worksheet

Unadjusted Trial Adjustments Adjusted Trial Operating Balance Balance Balance (Income) Sheet Statement

Acct No. Account Title Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr

Financial Statements

In a previous lesson, you learned the format for both the balance sheet and operating statement. Now you know where in the accounting cycle these two items fi t in. The adjusted trial balances from your worksheets are used to prepare the fi nancial statements. This ensures your books balance for each business you work for or for each account you are responsible for in your offi ce.

If you look back at the worksheet section, you can see the fi nancial statement items have their own columns. The operating statement entries are in columns 7 and 8, while the balance sheet entries are listed in columns 9 and 10.

After you complete the worksheets, you will be able to prepare the fi nancial statements as well as journalize the adjustment entries.

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Adjustments

Because the worksheets are not presented to anyone but you, the bookkeeper, the adjustments made on them must appear somewhere else as well. Imagine if you bake cookies at home, but before anyone else gets a chance to see those cookies, your dog eats them. To everyone else, it’s as though you had never baked at all. The worksheets are the same as those cookies. Often, they are thrown away before anyone sees them.

Now, if you had put those same cookies you baked into a cookie jar, out of reach of the dog, they would be there for others to enjoy. Of course, no one actually saw you bake them, but they do know there are nice, warm, soft, delicious cookies for them to eat. The adjustments you make must be “put into the cookie jar,” and that jar is the journal.

After you have completed the adjustments, you will be able to complete the fi nal step in the accounting cycle—closing the books.

Closing the Books

Closing the books consists of simply totaling each account and readying the revenue and expense accounts for the next accounting period. Closing can be done anytime, as long as the period is consistent. Periods can be daily, weekly, monthly, quarterly or annually. Each business may use a different accounting period.

Many transactions take place during an accounting cycle. Transactions such as sales, the paying of expenses and cash draws made by the owner all affect the amount of capital a company has. Because of the diffi culty in separating out the various transactions from within the capital account itself, different accounts are set up to keep track of these various business dealings. These accounts are called temporary accounts, and they include the sales, expenses and drawing accounts.

To refl ect these changes to the capital, all the temporary accounts are closed into the capital account at the end of an accounting cycle. When you close temporary accounts into the capital account, it makes the capital account accurately refl ect any changes that were made during the cycle. This process also readies the temporary accounts for the next accounting cycle. We will cover this in more detail later on in the course.

That’s it—the eight parts of the accounting cycle, briefl y explained. You will go through each segment again, practicing and learning how to use each one.

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Circle the letter by the best answer for each question.

1. The worksheet is useful to the professional bookkeeper because it is _____.a. for you onlyb. to share with othersc. perfect, with no mistakesd. complete with twenty columns

2. The fi rst column in the worksheet is for _____.a. creditsb. debitsc. special situationsd. supplies

3. The worksheet allows you to _____.a. prepare the fi nancial statementsb. close the booksc. journalize adjustment entriesd. both a and c

4. Closing the books means _____.a. quitting your jobb. making adjustment entriesc. totaling each accountd. passing the work to a co-worker

5. Temporary accounts include _____.a. salesb. expensesc. drawing accountsd. all of the above



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d. Important! Please fi ll in all information requested on your Scanner Answer Sheet or when submitted your quiz online.

e. Submit your answers to the school via mail, e-mail, fax or, to receive your grade immediately, submit your answers online at www.uscareerinstitute.edu.


1. The Accounting Cycle _____.a. is not important to accounting servicesb. contains all of the bookkeeping information and is essential to knowc. consists of 12 partsd. does not include the transaction itself

2. There are _____ parts to the Accounting Cycle, and these parts are ____.a. seven: journals, jumping, referrals, adjustments, closing, rejournalizing, endingb. six: posting, balancing, worksheet, referrals, rebalance, adjustmentsc. eight: transaction, journalizing, posting, trial balance, worksheet, fi nancial

statements, adjustments, closingd. two: transaction, closing

3. The “book of original entry” is another name for the _____.a. journalb. ledgerc. adjusted trial balanced. worksheet

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4. The fi rst place a transaction is recorded is the _____.a. ledgerb. cash registerc. worksheetd. journal

5. The main requirement of the double-entry accounting system is _____.a. each transaction is entered twice: once as a debit and once as a creditb. each transaction is entered only oncec. each transaction must be made in three areasd. that it be computerized

6. Journal entries and ledger accounts are usually _____.a. not relatedb. documented with written receipts and other written recordsc. copied directly into the closing income summary without any adjustmentsd. recorded fi ve times each

7. Journal columns include _____.a. debits on the left and credits on the rightb. beverage accountsc. organized account listingsd. seven columns

8. Assets _____ with a debit entry.a. decreaseb. do not changec. increased. any of the above

9. Liabilities _____ with a debit entry.a. do not changeb. increasec. must be itemized twiced. decrease

10. Revenues _____ with a credit entry.a. do not changeb. increasec. change to expensesd. decrease

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11. The process of transferring entries from the journal to the ledger is called _____.a. postingb. journalizingc. transferenced. projection

12. If a transaction affects more than two accounts, it is called a _____ entry.a. multipleb. salesc. superd. compound

13. The trial balance is used to make sure the debits and credits in the ledger _____.a. balanceb. contradictc. decrease or increase, depending on the situationd. post

14. The ledger is organized into _____.a. journalsb. accountsc. timelinesd. both a and c

15. The worksheet is presented to _____.a. the business ownerb. customersc. both a and bd. nobody—only the accounting services professional looks at the worksheet

16. Worksheets have _____ sets of _____ columns each.a. fi ve / twob. six / fi vec. two / fi ved. three / three

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17. The adjusted trial balances from the worksheet are used to prepare the _____.a. fi nancial statementsb. ledgerc. journald. tax returns and payroll

18. A journal has _____ columns.a. fi veb. fourc. sixd. a varied number of

19. The two fi nancial statements covered by the worksheet are the _____.a. balance sheet and trial balanceb. balance sheet and operating statementc. operating statement and journald. ledger and the transaction sheet

20. A table of contents for the ledger is called _____.a. a chart of suppliesb. an expense listc. both a and bd. a chart of accounts

21. Often the worksheet will adjust for things like _____.a. inventory of the suppliesb. both a and cc. depreciation and uncollectible accountsd. any expense

22. _____ are called temporary accounts.a. Assetsb. Revenue accounts and expense accountsc. Liabilitiesd. All of the above

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23 The closing process is performed _____.a. always at the end of each monthb. at the end of a selected accounting periodc. only at the end of the yeard. always twice per day

24. The closing process is designed to _____.a. ready the accounts for new information from a new accounting periodb. shut down or sell a businessc. ensure employee productivityd. all of the above

25. All the temporary accounts are closed into the _____ account.a. capitalb. drawingc. cashd. ledger

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LESSON

5

88-880201201LB11B-05-C0

The Journal andEntry Systems


If you look at a recipe, you’ll see it is separated into two sections: the ingredient list and the procedure. Think of the journal as the ingredient list for bookkeeping. Later on, you’ll move into the procedure portion of the recipe. But now, we’ll discuss what goes into the fi nancial recipe.

This lesson explains the journal, the process called “journalizing,” and the double-entry system for the journal. You will learn how to list the “ingredients” of the fi nancial recipe by entering them correctly in a journal. You will learn about the journal, debits, credits and account balances, as well as compound entries. You can then apply these skills in either an offi ce or home-business environment.

Step 2 Learning Objectives for Lesson 5 After completing this lesson, you will be able to:

Explain the “book of original entry” and its components: debits, credits and entries.

List the advantages of the double-entry system.

Apply the double-entry system in the journal.

Explain how a compound entry affects the journal.

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Step 3 Terms You Need to Know


compound entry

journalizing

normal account balances

Step 4 Book of Original Entry

The journal is the fi rst, and therefore the most important, step in recording a fi nancial transaction. It is essential to accurately record the appropriate information in the journal—the numbers and transaction description must be correct. Why is this so important?

Consider this: You are going to bake cookies, and you read the list of ingredients in order to assemble all of the items you need. Unfortunately, you don’t notice that the canister you thought contained fl our actually contains powdered sugar. Assuming the white powder to be fl our, you go ahead and bake your cookies. You follow the recipe’s directions exactly. You make no other mistakes except for the fl our/sugar mix-up. How will those cookies taste? Trust me, you don’t want to know. You see, one mistake in the beginning can expand to consume the entire fi nished product and make everything wrong. These cookies have to be thrown away, and all the time you spent baking them will have been wasted. The same sort of disaster would result if a seemingly small mistake is made in the journal during bookkeeping. This lesson is designed to show you how to avoid these mistakes.

The fi rst step in keeping an accurate journal is getting the layout of the journal right, so let’s take a look at the way a journal is set up.

Constructing the Journal

The journal is the fi rst place a transaction is entered in the books of a business. You already know how important it is to be accurate in the journal. But how do you set up this essential bookkeeping tool? The fi rst thing you’ll need is two-column ledger paper. This is the simplest ledger paper available, and you can fi nd it at a local offi ce supply store. Even grocery stores sometimes carry this type of paper (fi gure 5-1).

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Lesson 5—The Journal and Entry Systems

5-3

1

2

3

4

5

1 2

Figure 5-1: Example of 2-column Ledger Paper

NOTE: Paper used for bookkeeping is referred to by the number of columns for entering the numerical information—that would be the number of columns on the right-hand side of the page. Notice that these columns are numbered at the very top of the page, just under the space used to write the title.

Once you get the right type of paper, you’re ready to set up the journal. The fi rst thing you do is “head up” the journal by writing the company’s name on the top line (above the columns), then write “General Journal” under the name. Next, go to the line directly above the double line in the column setup. In the far left column, write the year. Go two columns to the right (the smallest column of all) and write “P/R” at the top of the column. Then set up your last two columns. Remember, debits go on the left and credits go on the right. When you are fi nished, your journal should look like fi gure 5-2.

Now you’re ready to start making entries in the journal. But before you do, let’s review debits and credits again. Making the entries in the journal will be easier if you fi rst practice using debits and credits.

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1

2

3

4

5


1 2

Company Name

General Journal

Figure 5-2: Journal Example

Debits and Credits

In a previous lesson, we explained that an entry in a journal will generally affect two different accounts.

Let’s take a look at the fi ve basic accounts used in bookkeeping and the types of transactions or information that might be included in each account. Each of these accounts will be discussed in detail later in the course. At the present time, you just need to be familiar with the types of things that are included in each of the categories of accounts.

Assets

Anything of value to a business is called an asset. This includes property that the business owns and such things as equipment, tools, cash, materials and supplies.

Liabilities

Liabilities include the money that the business owes to others. This includes the amount owed to the bank on equipment that is fi nanced, money owed to suppliers, and money owed for taxes.

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Capital

This is the amount of money the business owes to the owner of the business. Usually when someone starts a business, they use a certain amount of their own money. For example, Mary Jones decides to start a business selling rubber stamps. She takes $1,000 out of her personal savings account and puts it into a checking account for her new business. This is called “owner’s equity.”

Revenues

Revenues are what the business earns—the money that comes into the company as a result of selling its products or services. The revenue may be in the form of checks, cash, money orders or credit card purchases.

Expenses

This account lists the costs of doing business. This includes salaries paid to employees, advertising costs, the purchase of supplies to make the business’ product, the rent or mortgage payment, and the cost of utilities such as electricity and telephone.

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The following chart summarizes the account information.

CHART OF ACCOUNTS SUMMARYAssets:

Cash Accounts receivable (money owed to the business by its customers) Supplies (on hand) Inventory (products not yet sold, for example) Offi ce equipment Building (if the business owns its building instead of paying rent) Prepaid insurance (insurance paid for in advance)

Liabilities: Accounts payable (money the business owes to other people, such as

its suppliers) Mortgage payable (money the business owes on the residence of

the business) Taxes payable (this includes taxes that have not yet been paid) Notes payable (money the business owes on a loan)

Capital: Owner’s equity (net worth of the business) Drawing

Revenues: Sales (money collected for selling a product)Service (money collected for

performing a service)Expenses:

Purchases (items bought for resale) Salaries expense Rent expense Electricity expense Telephone expense

As you enter items in the journal, fi rst identify which accounts are affected by the transaction, and then decide whether the account has increased or decreased by that transaction. You will then know whether to enter the transaction in the debit or credit column. The following chart, which you fi rst saw in Lesson 4, summarizes how accounts are affected.

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5-7

DEBIT/CREDIT CHARTName of Account Increases With Decreases With

Assets Debits CreditsExpenses Debits CreditsLiabilities Credits DebitsCapital Credits DebitsRevenues Credits Debits


Use the chart above to fi ll in the blanks below:

1. If a transaction increases the assets account, you enter a ____________________.

2. If a transaction decreases the capital account, you enter a ____________________.

3. If a transaction increases the revenues account, you enter a ____________________.

4. If a transaction decreases the liabilities account, you enter a ____________________.

5. If a transaction decreases an asset account you enter a ____________________.

6. If a transaction increases the capital account you enter a ____________________.

7. If a transaction decreases the mortgage payable account you enter a ____________________.

8. If a transaction increases the rent expense account you enter a ____________________.

9. If a transaction increases the cash account you enter a ____________________.

10. If a transaction decreases the supply account you enter a ____________________.

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Check your answers with the Answer Key at the back of this book. Correct any mistakes you may have made.

Step 7 Normal Account Balances

With those rules in mind (and in front of you), let’s go on to another item that is affected by debits and credits: normal account balances. All of the accounts in bookkeeping have a typical balance that is either a debit or a credit. This tendency for an account to have a typical balance is called its normal account balance. This information is helpful because when you know what the normal account balances are for each account, you can catch errors more easily.

Below is a list of accounts and their normal account balance (a credit or debit).

NORMAL ACCOUNT BALANCES

Assets — Debit

Liabilities — Credit

Capital — Credit

Revenues — Credit

Expenses — Debit

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5-9


Try this practice exercise using the chart above:

Match the account to its normal account balance. Write a “Dr” if its normal account balance is a debit and a “Cr” if its normal account balance is a credit. Refer to the chart on the previous page if you are unsure what account each item fi ts into.

1. _____ Cash

2. _____ Equipment

3. _____ Accounts payable

4. _____ Sales

5. _____ Owner’s equity


Check your answers with the Answer Key at the back of this book. Correct any mistakes you may have made.

Step 10 Double-Entry System of Accounting

When you make entries in the journal, you will need to decide what accounts are affected by a transaction and then correctly debit or credit those accounts. Typically, every transaction is recorded twice. This is because you need to record where the money in the transaction came from and also where it went. This is called the double-entry system.

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In bookkeeping, particularly in the double-entry system, every time you debit an account, you will also credit an account. This system is one of checks and balances. For example, if the owner of a business takes $100 out of the Cash Account to pay the electric bill for the month, the amount of the Cash Account would decrease by $100, and the amount of money listed in the Expenses Account would increase by $100.

The fi rst step in entering transactions in the journal is to decide what accounts are affected by the transaction. Then you need to decide whether each of the affected accounts will increase or decrease. In order to do this, you will need to analyze the transaction.

To get an idea of how this business of analyzing transactions works, let’s take a look at the transactions for Julie’s Floral Shop on May 15th, 20XX.

Transaction

At 8:00 a.m. Julie, the store owner, makes a deposit from her personal account to her business account for the amount of $2,000. The amount will be used later in the day to purchase a piece of equipment.

Description

a. The deposit increases the amount of available cash the business has.

b. With the increase in the asset of cash is also an increase in the amount of capital or equity Julie has in the business.


1 2

General Journal Page 33

1 5 15 Cash 2 0 0 0 00

2 Capital 2 0 0 0 00

3 addition to capital

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5-11

Transaction

Julie opens the store promptly at 9:00 a.m. Mrs. Stevens is the fi rst customer of the day. While in the store, Mrs. Stevens picks out a $30.00 arrangement. She has a charge account and puts the $30.00 on her account.

Description

a. Julie has many charge customers. The amount they owe is known as accounts receivable. Because the amounts owed are to be collected in the future, they are considered an asset. Mrs. Stevens’ purchase increases Julie’s accounts receivable.

b. Mrs. Stevens’ purchase, although on account, constitutes a sale. Her purchase also increases the amount of sales for the day.


1 2


1 5 15 Accounts Receivable 3 0 00

2 Sales 3 0 00

3 charged sale

Transaction

At 10:00 a.m. Julie’s mail arrives. She fi nds the telephone bill, which she promptly opens and decides to pay. Julie writes a check for $80.00 to pay the bill.

Description

a. The telephone bill constitutes an expense. Expenses are those items used or needed to produce revenue. Items such as services, labor costs, utilities and rent are expenses. By paying this bill, Julie increases the amount of expenses incurred by the business for this year.

b. The payment of the telephone service decreases the amount of cash the business has.

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1 2


1 5 15 Phone Expense 8 0 00

2 Cash 8 0 00

3 paid phone bill

Transaction

Also included in the mail is a bill from a fl ower supplier. The fl owers were purchased previously from a company that extends credit on Julie’s purchases. She writes a check for the amount of $500 to pay the fl ower supplier.

Description

a. Julie’s arrangement of buying items and paying for them later is known as accounts payable. The companies she has this arrangement with are called creditors. The money Julie owes to her creditors is considered a liability. Julie’s paying of this creditor decreases her liability.

b. With this payment once again Julie is decreasing the amount of cash the business has.


1 2


1 5 15 Accounts payable 5 0 0 00

2 Cash 5 0 0 00

3 paid creditor

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Transaction

Because Julie has the checkbook out she decides to pay this month’s mortgage. Julie writes a check for $800.00, the mortgage payment amount.

Description

a. Often times a business owner will take out a loan to pay for the building or location of his or her business. This loan creates a liability called mortgage payable. Sometimes a business owner will also take out a loan for improvements, equipment, inventory, etc. This type of loan also creates a liability and is often labeled notes payable. Julie’s payment in effect decreases her liability.

b. Once again the payment will decrease the amount of cash the business has.


1 2


1 5 15 Mortgage payable 8 0 0 00

2 Cash 8 0 0 00

3 paid mortgage

Transaction

Julie has a part-time employee who helps her in the store. Julie pays her wages on the fi fteenth and the fi rst of every month. Julie realizes she has not yet paid her and proceeds to write a check for the amount of $82.50.

Description

a. The payment of an employee’s wages constitutes an expense of doing business. In writing the check, Julie increases her expenses. Generally an account called salaries expense is set up to keep track of payroll expenses.

b. As with any transaction where a check is written, the amount of cash the business has is once again decreased.

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1 2


1 5 15 Salaries Expense 8 2 50

2 Cash 8 2 50

3 paid salaries

Transaction

At 11:00 Julie takes a personal draw of $10.00 out of the register and heads off for lunch.

Description

a. Julie’s withdrawal decreases the amount of capital or equity she has in the business. To record the withdrawal of money from a business, a special type of capital account called the drawing account is set up.

b. Julie’s withdrawal decreases the amount of cash in her business.


1 2


1 5 15 Drawing 1 0 00

2 Cash 1 0 00

3 personal draw

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Transaction

While at lunch Julie stops in a store that specializes in display cases. She has had her eye on one and decides to buy it. The case costs $3,000 dollars. Julie pays $2,000 now and will pay the remaining $1,000 in monthly installments.

Description

a. Julie now owns a new piece of equipment (the display case). Property that is used on a long-term basis in the conduct of business operations is considered equipment. This purchase increases the amount of equipment in the business.

b. Julie now also owes the owner of the display case store $1,000. The amount Julie owes and will pay on in the future is known as accounts payable. This debt constitutes an increase in her liabilities.

c. The last element in this transaction is the amount of money Julie paid on the equipment (the $2,000 down payment). Her business now has $2,000 less than it did when she walked into the case store.

Note: Notice that this transaction has two credit entries and one debit entry. An entry with more than one credit entered or more than one debit entered is called a compound entry. Even though the two credits may make this entry seem lopsided, the two credits actually add up to the one debit, making this entry balance.


1 2


1 5 15 Equipment 3 0 0 0 00

2 Cash 2 0 0 0 00

3 Accounts payable 1 0 0 0 00

4 new display case

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Transaction

On her way back to work, Julie stops at a local fl ower warehouse. She will need some extra roses for some wedding arrangements she will make later in the day. Julie writes a check for the amount of $200 for the roses.

Description

a. Some businesses not only sell services, but also goods. The items that are bought for resale constitute an expense for the company. To record this transaction, a special expense account called the purchases account is set up. Julie’s purchase of the roses for resale will increase her expenses.

b. Once again the amount of cash the business has is decreased.


1 2


1 5 15 Purchases 2 0 0 00

2 Cash 2 0 0 00

3 roses for arrangements

Transaction

One last stop before Julie heads back to the shop. Julie needs some offi ce supplies. She goes to the local offi ce supply store and buys computer paper, invoices, pens, and bubble paper for packaging. Her total bill came to $50.00.

Description

a. Supplies are those items that are used on a daily basis in the conducting of a business operation. They are generally items that will be used in a short period of time, such as invoices, paper clips, pens and computer paper. These items have a value and are therefore an asset. This purchase increases the asset account called offi ce supplies.

b. Once again the business has less money than it did at the beginning of the day.

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1 2


1 5 15 Offi ce Supplies 5 0 00

2 Cash 5 0 00

3 offi ce supplies

Transaction

At 4:30 p.m. Mr. Winkler comes into Julie’s shop. Mr. Winkler is a local restaurant owner and has an account with Julie. Today he has come in to pay his bill for the fl owers he bought the previous month for his restaurant. He owes Julie $180.00 and pays her with a check.

Description

a. With the payment of Mr. Winkler’s check, the business now has more money than it had at the beginning of the day.

b. Accounts receivable is an agreement between Julie and the customer for future payment of goods received. Mr. Winkler holds up his part of the agreement by coming in and paying for his previous purchases. Because the accounts receivable is no longer owed by Mr. Winkler, it is, in effect, decreased with this transaction.


1 2


1 5 15 Cash 1 8 0 00

2 Accounts Receivable 1 8 0 00

3 customer payment

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Transaction

It has come to the end of Julie’s day. In closing the register and printing a tape of the days transactions, she fi nds that she had $1,200 in cash sales. It’s been a good day.

Description

a. The business, from the day’s sales, now has $1,200 more in cash than when it started the day.

b. Revenue is the process of collecting monies in exchange for services or the sale of goods. When a sale is made, it increases the revenue of the business. This revenue is often recorded in an account called sales.


1 2


1 5 15 Cash 1 2 0 0 00

2 Sales 1 2 0 0 00

3 day’s sales

Now analyze the following examples on your own. Go slowly, and be sure you follow each step as you go. Write the accounts affected and the proper entries (debit or credit) for each of these transactions:

1. A clothing company sells one of its clothing lines for $10,000 to a customer, Mr. Jones. Mr. Jones does not pay cash; he charges the entire amount on his account with you.

Which accounts are affected?

_____________________________________________

_____________________________________________

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5-19

Do you enter a debit or a credit for each account? Sales _____________________________________

Accounts Receivable _______________________

2. A barber buys $67.50 worth of scissors and razors for his business. He does not pay cash; he puts the entire amount on his account with the supplier.

Which accounts are affected?

_________________________________________

_________________________________________

Do you enter a debit or credit for each account?

Supplies _____________________________________

Accounts Payable _____________________________

Analysis of 1

The transaction affects the Sales Account in Revenue and the Accounts Receivable Account in Assets. The Sales Account in Revenue will increase because the company now has more sales, so you will need to enter a credit to this account. The Accounts Receivable Account in Assets will increase because Mr. Jones now owes the company for the line of clothing. The entries are a debit to the Accounts Receivable Account and a credit to the Sales Account. If Mr. Jones had paid for the clothing in full, the Cash Account would have been affected instead.

Analysis of 2

The transaction affects the barber’s Supplies Account in Assets and the Accounts Payable Account in Liabilities. The Supplies Account will increase because the barber has now added more supplies to what he already had, so you would enter a debit to the Supplies Account in Assets. The Accounts Payable Account in Liabilities will increase because the barber now owes more money to the supplier than he did before. So you would enter a credit to the Accounts Payable Account in Liabilities.

Don’t be discouraged if it takes you some time at this point to fi gure out which accounts are affected and what type of entry you need to make. This will become easier with practice. The most important thing now is for you to use the charts provided to help you do it correctly.

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NOTE: In most small retail businesses, the Inventory Account is not decreased with every single sale made in the course of the business day. The sales are entered in the Cash Account and the Sales Accounts. The increase or decrease in the inventory is handled separately as Cost of Goods Sold and handled as adjustments. This procedure will be handled later in the course.

Sometimes you may come across an entry that affects more than two accounts. When that happens, it is called a compound entry. An example of a compound entry is if a company buys a new building and pays for part of it with cash and gets a loan for the other part. You would need to enter two separate credits (the cash and accounts payable) to equal the debit (the building account). Look at this situation below.

New building costs $75,000.

The company pays $25,000 in cash and takes out a loan for $50,000 for the rest of the price.

For this situation, you need to look at the accounts affected:

Cash Account—cash is taken out and used for part of the payment.

Mortgage Payable—a loan is also secured for the rest of the payment (the company owes this money to the bank now).

Buildings Account—the company owns a $75,000 building.

The Cash Account will go down with the withdrawal of money to pay for the building, and the Buildings Account will go up with the acquisition of the building. In addition, the Mortgage Payable will go up because the company now owes money to the bank on the loan. Using the Debit/Credit Chart, we know to credit the Cash Account $25,000; credit the Notes Payable $50,000 and debit the Buildings Account $75,000.

The total of the credits must equal the total debit in order for the books to balance. And, in this example, they are equal.

Let’s move on to the practice exercise.

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5-21


Part One: For questions 1 and 2, pick the best answer from the choices given.

1. The journal entries are made _____.a. with debits on the left and credits on the rightb. in alphabetical orderc. in a 6-column ledger paper formatd. all of the above

2. The tendency of an account to have a balance on either the debit or credit side of the account is called its _____.a. accounting habitb. credit increasec. normal account balanced. inventory relay system

Part Two: Complete the following table by entering the word “debit” or “credit” in the appropriate space.

Category of Transaction increases Transaction decreases Normal AccountAccount account, enter a . . . account, enter a . . . Balance

Assets _______________ _______________ _______________

Liabilities _______________ _______________ _______________

Capital _______________ _______________ _______________

Revenues _______________ _______________ _______________

Expenses _______________ _______________ _______________



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Step 13 Journalizing

The act of entering transaction information into the journal is called journalizing. When you journalize a transaction, you follow some simple guidelines. First, as already explained, the journal is kept on 2-column ledger paper.

The fi rst step in journalizing a transaction is to enter its date in the far left column of the paper. Remember that journal entries are listed in chronological order, the order in which they occurred. On the ledger sheet, you will notice that the main columns are separated by a heavy double line. Inside columns, there are lighter dividing lines that split the column itself into smaller parts. The far left column has two parts in it. Enter the month in the fi rst space, then enter the date next to it. Note that you do not write the date each time you enter a transaction. You only write the date when it changes. That way, it is obvious which entries go with the same date (fi gures 5-3 and 5-4).

After you enter the date, the next step is to enter a description of the account the transaction affects. For example, if you know a transaction will affect the cash account, then you will write “Cash” in the column to the right of the date.

Next, write in the amount of the transaction. Remember that for each transaction, you will decide whether the affected account increases or decreases; that will tell you whether to enter the amount in the debit column or the credit column. For example, if the transaction increases the Cash Account, you would enter the amount in the debit (Dr) column.

Don’t forget that every time you enter a credit, you must also enter a debit; and every time you enter a debit, you must also enter a credit. So the next step in journalizing is to make the second entry on the next line in your journal. In the above example, the Cash Account was increased. Let’s say that in that transaction, the increase was due to Sales Revenue, so the Sales Revenue Account increased. That means that you need to credit the Sales Account. Follow the same steps you did to enter the debit; this time record Sales as the account and record the amount under the “Cr” heading in your journal.

Finally, after you have journalized both accounts for this transaction, you need to write on the next line what the transaction was. In our example, this description goes on the line directly underneath the credited Sales Account entry. If the transaction we’ve been describing is “Sales for the week of July 4,” then we write that description underneath “Sales” in the journal.

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5-23

1 6 15

2 21

3 7 1

4 14

5 21


1 2

Company Name

General Journal

Figure 5-3: Example of the Journal with Columns and the Date Filled In


1 2

General Journal

1 7 4 Cash 5 0 0 0 00

2 Sales 5 0 0 0 00

3 sales for week ending July 4

Bev’s Antique Shop


Look at this process as it appears in the journal (fi gure 5-4).

What is shown here is that Bev’s Antique Shop sold $5,000 worth of goods the week of July 4. The bookkeeper entered a $5,000 debit to increase the Cash Account and a $5,000 credit to increase the Sales Revenue Account. The description on the last line indicates that this was the total amount of sales for the week.

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1 2

General Journal

1 7 4 Salaries Expense 5 0 0 0 00

2 Cash 5 0 0 0 00

3 salaries pd for wk ending July 4



Let’s look at a general journal entry for the wages Bev paid to her employees (fi gure 5-5).


1 2

General Journal

1 7 10 Drawing 1 0 0 00

2 Cash 1 0 0 00

3 personal withdrawal



Now let’s look at a general journal entry of Bev’s withdrawal from the business (fi gure 5-6).

As a fi nal note on journalizing, take a look at the transactions above. Notice that they start with the debit entry. Recording the debit entry fi rst makes the posting process easier. For that reason, it is better to record the debit entry fi rst.

The “P/R” column is not used at this point. It is used during the posting procedure when you transfer the information in the journal into your account ledger.

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5-25

After you post a journal entry, you will put a check mark in the “P/R” column in the journal. So do not put anything in this column while you are journalizing your transactions.


Journalize these transactions for Julie’s Floral Shop. Use the journal pages that follow the transactions to complete your entries. The chart of accounts on page 5-6 may be used to help you determine the account titles.

1. January 1, 20XX, Mr. Peterson, a customer, buys a $40.00 arrangement for his wife and charges the amount to his account.

2. January 2, 20XX, Julie the store owner pays the phone bill of $120.00.

3. January 3, 20XX, Julie pays the fl ower supplier, a creditor, $3,000.00 for fl owers received on credit earlier in the month.

4. January 4, 20XX, Julie pays on the mortgage of her business, an amount of $800.00.

5. January 5, 20XX, Julie pays her employees an amount of $350.00.

6. January 6, 20XX, Julie goes to her fl ower supplier and purchases on credit the fl owers she will need for this weekend’s wedding an amount of $1,000.00.

7. January 7, 20XX, Mr. Anderson, a customer, buys a $50.00 arrangement and pays cash.

8. January 8, 20XX, Julie takes a personal draw from the business in the amount of $20.00.

9. January 9, 20XX, Julie purchases some vases for resale and pays cash for them in the amount of $150.00.

10. January 10, 20XX, Julie pays the electric bill in the amount of $85.00.

11. January 11, 20XX, Mrs. Winkler buys an arrangement in the amount of $12.00 and pays cash.

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12. January 12, 20XX, Julie pays the premium on her insurance in the amount of $350.00.

13. January 13, 20XX, Mr. Jones buys a $50.00 arrangement and charges the amount to his account.

14. January 14, 20XX, Julie purchases on credit ribbon for resale in the amount of $200.00.

15. January 15, 20XX, Julie buys offi ce supplies in the amount of $50.00 and pays cash.

16. January 16, 20XX, Mr. Rodriguez buys a $50.00 arrangement for his wife and pays cash.

17. January 17, 20XX, Mrs. West, a customer, makes a payment on her account in the amount of $150.00.

18. January 18, 20XX, Julie pays the rent on the pop machine in the amount of $120.00.

19. January 19, 20XX, Julie pays a greenery supplier, a creditor, $1,500.00 for greenery received on credit earlier in the month.

20. January 20, 20XX, Julie makes a cash addition to capital in the amount of $2,000.00.

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DATE Description P/R Dr Cr

1 2 General Journal Page 1

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7

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Julie’s Floral Shop

DATE20XX

10

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5-29







c. When you’ve fi nished, transfer your answers to the Answer Sheet. Use only blue or black ink.

d. Important! Please fi ll in all information requested on your Answer Sheet or when submitting your quiz via e-mail.

e. Submit your quiz to the school via mail, e-mail or fax.

For questions 1 through 10, complete the sample journal for KiteWorks Company. Refer to the Chart of Accounts on page 5-6 for account headings. Use the journal page provided on the back of your answer sheet.

1. On June 15, the company pays its employees a total of $12,000.

2. Sales for the week ending June 21 total $45,500.

3. On June 22, the company makes a $5,050 mortgage payment.

4. Check 80 is issued to buy a new desk for the amount of $2,000 on June 30.

5. On July 1, the company pays the electric bill for the amount of $1,000.

6. On July 5, the company pays $5,000 for insurance. This is a prepaid item.

7. On July 9, the company sells $21,000 worth of goods to Jed’s Dept. Store. Jed’s charges the sale to its account.

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8. The company buys $3,250 worth of supplies on July 15, and pays cash.

9. On July 15, KiteWorks purchases $2,000.00 of resale items and pays cash.

10. The owner of the company puts $7,540 of his own cash into the business account on July 25.

For questions 11 through 25, circle the best single answer for each question.

11. The journal is also known as _____.a. the fi rst bookb. the book of original entryc. the book that startsd. the trial balance sheet

12. In the journal, debits go on the _____ and credits go on the _____.a. left, rightb. right, leftc. top, bottomd. outside, inside

13. The double-entry system requires that _____.a. every transaction be recorded onceb. the books are kept open at all timesc. every transaction be recorded in two accountsd. red ink be used

14. A compound entry is one that affects _____.a. more than two accountsb. no more than two accountsc. only one accountd. all accounts

15. To increase the balance of an asset account, enter a _____.a. cash withdrawalb. creditc. debitd. revenue share

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5-31

16. To increase the balance of a liability account, enter a _____.a. debitb. transaction numberc. both a and bd. credit

17. If the owner of a company puts $5,000 of her own money into the business cash account, you would record a _____ for the cash account and a _____ for the capital account.a. credit, debitb. credit, creditc. debit, debitd. debit, credit

18. In the sales account, if the transaction increases the balance, you enter a _____.a. debitb. revenue sharec. creditd. both credit and debit to the account

19. In any liability account, the normal account balance is _____.a. a creditb. overdrawnc. a debitd. both b and c

20. The normal account balance for a capital account is _____.a. equal to the trial balanceb. a creditc. a debitd. dependent upon what’s in the account

21. When preparing a journal, the fi rst step is to _____.a. make the entriesb. “head up” the journal with the company namec. post to the ledgerd. write down the date

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22. An asset is increased with a _____ and decreased with a _____.a. credit, creditb. debit, debitc. credit debitd. debit, credit

23. Entries in the journal are _____.a. in all capital lettersb. never in any orderc. in chronological orderd. both a and b

24. In the journal, debits are abbreviated _____.a. Drb. Dtc. Dfd. De

25. In the journal, credits are abbreviated _____.a. Ctb. Cec. Drd. Cr

Fold on dotted lineThis Space for Instructor Use

1. Fill in your student ID and your course code below.

STUDENT ID NUMBER COURSE CODE

2. Be sure your name and address are fi lled in below.3. Transfer your answers to this cover sheet.

NAME

ADDRESS

CITY STATE ZIP

U.S. Career Institute2001 Lowe StreetFort Collins, CO 80525

BK-2

For School Use Only: Grade: ___________

BookkeepingMail-in Quiz 5

0201201LB11B-05-C0

11. _____

12. _____

13. _____

14. _____

15. _____

16. _____

17. _____

18. _____

19. _____

20. _____

21. _____

22. _____

23. _____

24. _____

25. _____

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1 2

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Don’t wait for your quiz results tocontinue with Pack 2 and Lesson 6.

CongratulationsYou’ve completed Lesson 5

and Pack 1!

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PACK

1

88-880201201LB11B-AK-C0

BookkeepingAnswer Key

PRACTICE EXERCISE 1-1

T 1. The “books” are a business’ way of keeping score of its fi nancial situation.

T 2. Businesses such as restaurants can benefi t from having an accurate professional bookkeeper.

F 3. Tax records and payroll records are NOT kept by a bookkeeper.

T 4. Accurate records are essential to the success of a business.

F 5. Individuals rarely have any use for an professional bookkeeper.


1. As a professional bookkeeper, you keep track of your client’s transactions. The fi rst place these are recorded are in the b. journal.

2. Debits are always entered in the a. left-hand column while credits are entered in the a. right-hand column.

3. “Posting” refers to c. transferring journal information to the correct accounts.

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Bookkeeping

AK-2

4. ASSETS 5. LIABILITIES

15 Delivery trucks $50 owed to suppliers

35 Spare tires Mortgage for warehouse

$20,000 in the bank Wages owed to drivers

Warehouse Loan balance on 15 trucks

Forklift $200 owed to credit card company

2 computers


1. Cash a

2. Accounts Payable c

3. Equipment b

4. Inventory a

5. Mortgage Payable (30 years) d

6. Accounts Receivable a

7. Land b

8. Payroll c

9. Loan Payable (less than 1 year) c

10. Prepaid Insurance a

11. Building b

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Answer Key—Pack 1

AK-3


Jill’s Stained GlassBalance SheetJuly 31, 20XX

ASSETS LIABILITIESCURRENT ASSETS SHORT-TERM LIABILITIES(1) Cash $ 2,750 (7) Accounts Payable $ 14,750(2) Accounts Rec. 250 Total Short-Term Liabilities (8) $14,750 Inventory 2,500 Total Current Assets (3) $5,500

FIXED ASSETS LONG-TERM LIABILITIES(4) Building $ 40,500 (9) Mortgage $ 22,500 Equipment 1,250 Total Long-Term Liabilities (10) $22,500

Total Fixed Assets (5) $41,750 TOTAL LIABILITIES (11) $37,250 CAPITAL Owner’s Equity $10,000 Total Capital $ 10,000

TOTAL ASSETS (6) $47,250 TOTAL LIABILITIES and CAPITAL (12) $47,250


1. $7,000 ($12,250 minus $5,250)

2. $41,650 ($14,000 plus $50,000 equals $64,000 in total revenue, minus $22,350 in expenses)

Look once more at the net income formula:

Revenue – Expenses = Net Income

It can be abbreviated to: R – E = NI.

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Bookkeeping

AK-4

3. Rondell will have a net income of $3,000 in April, and $6,000/month for the other 11 months.

4. Sharon will have a net income of $8,000 each month.


PDT Auto RepairsOperating Statement

for the Year Ended 12-31-20XX

REVENUESSales Revenue $ 4,000Service Revenue 12,000 Total Revenues $16,000

EXPENSESSalaries $2,000Rent 1,000Purchases 1,000Utilities 2,000 Total Expenses $6,000

NET INCOME $10,000


Dr Cr 230.00 150.75 45.75 71.50 45.50 99.00

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Answer Key—Pack 1

AK-5


1.

Cash Sales

Dr Cr Dr Cr$50 $50

2.

Supplies Accounts Payable

Dr Cr Dr Cr$1,500 $1,500

3.

Equipment Notes Payable Dr Cr Dr Cr$10,000 $10,000

4.

Cash Accounts Payable

Dr Cr Dr Cr $500 $500


15. Warehouse55. Telephone Expense21. Accounts Payable52. Salaries Expense10. Cash31. Owner’s Equity

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1. The journal is sometimes called the b. book of original entry.

2. The process of transferring a journal entry to a ledger account is called a. posting.

3. The trial balance is used to a. check your ledger accounts and make sure they balance.

4. The fi rst four parts of the accounting cycle are c. transaction, journalizing, posting and trial balance.

5. Debits are entered on the d. left side and credits are entered on the d. right side.


1. The worksheet is useful to the accounting services professional, because it is a. for you only.

2. The fi rst column in the worksheet is for b. debits.

3. The worksheet allows you to d. both a and c.

4. Closing the books means c. totaling each account.

5. Temporary accounts include d. all of the above.

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Answer Key—Pack 1

AK-7


1. If a transaction increases the assets account, you enter a debit.

2. If a transaction decreases the capital account, you enter a debit.

3. If a transaction increases the revenues account, you enter a credit.

4. If a transaction decreases the liabilities account, you enter a debit.

5. If a transaction decreases an asset account you enter a credit.

6. If a transaction increases the capital account you enter a credit.

7. If a transaction decreases the mortgage payable account you enter a debit.

8. If a transaction increases the rent expense account you enter a debit.

9. If a transaction increases the cash account you enter a debit.

10. If a transaction decreases the supply account you enter a credit.


1. Dr Cash

2. Dr Equipment

3. Cr Accounts payable

4. Cr Sales

5. Cr Owner’s equity

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Part One:

1. The journal entries are made a. with debits on the left and credits on the right.

2. The tendency of an account to have a balance on either the debit or credit side of the account is called its c. normal account balance.

Part Two:

Category of Transaction increases Transaction decreases Normal AccountAccount account, enter a . . . account, enter a . . . Balance

Assets debit credit debit

Liabilities credit debit credit

Capital credit debit credit

Revenues/Sales credit debit credit

Expenses debit credit debit

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Answer Key—Pack 1

AK-9



Date Description P/R Dr Cr 20XX

17 5 Salaries Expense 3 5 0 00


2 Sales 4 0 003 charged sale

1 1 1 Accounts Receivable 4 0 00

14 Cash 8 0 0 0015 paid mortgage

13 4 Mortgage Payable 8 0 0 00

11 paid creditor 10 Cash 3 0 0 0 00

89 3 Accounts Payable 3 0 0 0 00

7 paid phone bill

5 2 Telephone Expense 1 2 0 006 Cash 1 2 0 00

4

18 Cash 3 5 0 00

16

2021 6 Purchases 1 0 0 0 00

19 paid salaries

23 credit purchase24

22 Accounts Payable 1 0 0 0 00

27 cash sale

29 8 Drawing 2 0 00

4039 paid electricity bill

37 10 Electricity Expense 8 5 00

3231 cash draw

26 Sales 5 0 00

30 Cash 2 0 00

38 Cash 8 5 00

34 Cash 1 5 0 0033 9 Purchases 1 5 0 00

25 7 Cash 5 0 00

35 resale items

12

28

36

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AK-10

PRACTICE EXERCISE 5-4 CONTINUED


Date Description P/R Dr Cr 20XX

17 15 Supplies 5 0 00


2 Sales 1 2 003 cash sale

1 1 11 Cash 1 2 00

14 Accounts Payable 2 0 0 0015 credit purchase

13 14 Purchases 2 0 0 00

11 charged sale 10 Sales 5 0 00

89 13 Accounts Receivable 5 0 00

7 paid premium

5 12 Prepaid Insurance 3 5 0 006 Cash 3 5 0 00

4

18 Cash 5 0 00

16

2021 16 Cash 5 0 00

19 bought supplies

23 cash sale24

22 Sales 5 0 00

27 customer payment

29 18 Rent Expense 1 2 0 00

4039 addition to capital

37 20 Cash 2 0 0 0 00

3231 paid rent

26 Accounts Receivable 1 5 0 00

30 Cash 1 2 0 00

38 Capital 2 0 0 0 00

34 Cash 1 5 0 0 0033 19 Accounts payable 1 5 0 0 00

25 17 Cash 1 5 0 00

35 paid creditor

12

28

36

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Instruction Pack 1 - U.S. Career Institute

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Transcript of Instruction Pack 1 - U.S. Career Institute