CHAPTER 2

FINANCIAL STATEMENTS FOR DECISION MAKING

DISCUSSION QUESTIONS
SOLUTIONS

7. A local football club has won the premiership for the past four years. Accordingly, the club has a
very strong supporter base. Rationalise if the players would be regarded as an asset of the
business to be recognised on the balance sheet.

To be recognised as an asset on the balance sheet, an item must satisfy definition and recognition
criteria specified in the Conceptual Framework. An asset is defined in the Framework as a resource
controlled by the entity as a result of past events and from which future economic benefits will flow to
the entity. The three definition criteria must be satisfied if the players were to be recognised on the
balance sheet as assets to the football club:
a. future economic benefits
The players do provide future economic benefits to the football club through the use of their skills. The
benefits could be in the form of ticket sales to see the players, winning the premiership, strong supporter
base, product’s endorsements, sponsorships, etc.
b. control
Control is the ability to benefit from the use of the assets and deny access of others to the benefits. It
could be argued that the football club does not have sufficient control over its players. Although the
players might have signed a contract with the club, they can still leave the club and play somewhere
else. The club does not own its players and the players’ skills that are used to generate future economic
benefits ultimately belong to the players, not the club.
c. past events
These are past transactions that give rise to control. Since the football club does not have control over its
players, there is no past transaction that gives rise to control. Signing a contract or giving a lump sum
amount as ‘advance payment’ does not give the club control over the players.
In addition to the definition criteria, two recognition criteria must also be satisfied for an asset to be
recorded on the balance sheet:
d. probable occurrence
This means that the future economic benefits are more like (than less likely) to flow into the football
club. It can be argued that future economic benefits as mentioned above are likely to flow to the club as
a result of players using their skills.
e. reliable measurement
To be recognised on the balance sheet, the players must have value that can be measured with reliability.
In this case, there is no reliable system that can be applied to measure how much players are worth.
Each player is unique, and hence it is very difficult to assign an objective value to each player.

To be recorded on the financial statements, all criteria must be satisfied. From the explanation
above, it can be seen that players do not satisfy the definition and recognition criteria of assets.
Subsequently, they cannot be recorded as assets on the balance sheet.

It should be noted that it is not necessary to work through the recognition criteria if it is determined that
the item does no satisfy the definition criteria. All aspects of the definition and recognition criteria must
be satisfied for the item to be recognised on the balance sheet.

Page 1 of 23
10. Discuss the significance of the following assumptions in the preparation of an entity’s financial
statements:
(a) entity assumption
(b) accrual basis assumption
(c) going concern assumption
(d) period assumption

(a) Entity Assumption

If the transactions of an entity are to be recorded, classified and summarised into financial
statements, the accountant must be able to identify clearly the boundaries of the entity being
accounted for. Under the accounting entity assumption, the entity is considered a separate entity
distinguishable from its owner and from all other entities. It is assumed that each entity controls its
assets and incurs its liabilities. The records of assets, liabilities and business activities of the entity
are kept completely separate from those of the owner of the entity as well as from those of other
entities. The accounting entity assumption is important since it leads to the derivation of the
accounting equation.

The nature of the entity’s business will also affect classification of elements recorded. For
example, a table would be recorded as a fixed asset (Furniture) for a restaurant business but a table
can be recorded as a current asset (Inventory or Stock) for a business selling furniture.

(b) The Accrual Basis Assumption

Under the accrual basis of accounting, the effects of transactions and events are recognised in
accounting records when they occur, and not when the cash is received or paid. Hence, financial
statements report not only on cash transactions but also on obligations to pay cash in the future and
on resources that represent receivables of cash in future. It is argued in the Conceptual Framework
that accounting on an accrual basis provides significantly better information about the transactions
and other events for the purpose of decision making by users of financial statements than does the
cash basis.

(c) The Going Concern Assumption

According to the Conceptual Framework, financial statements are prepared on the assumption that
the existing entity is expected to continue operating into the future. It is assumed that the assets of
the entity will not be sold off and that the entity will continue its activities; hence, liquidation values
(prices in a forced sale) of the entity’s assets are not generally reported in financial statements, as
this assumes that an entity is to be wound up.

When management plans the sale or liquidation of the entity, the going concern assumption is then
set aside and the financial statements are prepared on the basis of estimated sales or liquidation
values. The significance of the going concern assumption is in the valuation placed on the assets of
an entity in the entity’s financial statements. The statements should identify clearly the basis upon
which asset values are determined — going concern? Or liquidation?

(d) The Period Assumption

For financial reporting purposes, it is assumed that the total life of an entity can be divided into equal
time intervals. Hence, the financial performance of the entity can be determined for a given time
period, and the financial position of the entity can be determined on the last day of that reporting
period.

As a result of this assumption, profit determination involves a process of recognising the income for
a period and deducting the expenses incurred for that same period. Together, the period assumption
and accrual basis assumption lead to the requirement for making end-of-period adjustments on the
last day of the reporting period. These adjustments will be considered in chapter 4.
EXERCISE SOLUTIONS

Exercise 2.4 Determining profit from equity balances

Equity balances for Sen Widyaya appearing in the balance sheets of Widyaya’s Window Washing Services as at 30
June 2016, 2015 and 2014 are set out below:

30 June 2016 30 June 2015 30 June 2014

EQUITY
Sen Widyaya, Capital $27 300 $30 000 $28 000

During 2014–15, Sen withdrew $25 000 for personal use and also contributed additional capital of $8000. During
2015–16, he withdrew $10 000 capital from the business, and withdrew $15 000 cash for his own use in anticipation of
profits.

Required
Determine the profit/loss earned by the business in each of the 2 years ended 30 June 2016 and 30
June 2015.

WIDYAYA’S WINDOW WASHING SERVICES

Profit for years ended 30 June 2015 2016

Beginning Capital $28 000 $30 000

+ Additional Capital Contributions 8 000 —
– Withdrawals of Capital — (10 000)
– Drawings (25 000) (15 000)
Profit 19 000 22 300

Ending Capital $30 000 $27 300

Exercise 2.6 Elements in financial statements

A friend who has established a new dance studio, Hip and Hop, has asked you to give some advice as to the contents of
financial statements. Transactions of Hip Hop include:

(a) contribution of cash by your friend to the business

(b) purchase of studio sound equipment on credit
(c) electricity costs paid
(d) studio fees received in cash
(e) the owner’s house
(f) rental of a chilled water machine, paid in cash
(g) money withdrawn by your friend to pay university fees for a friend
(h) cash held by the business at the end of the year
(i) money borrowed for purchase of building.

Required
Indicate whether these items would appear in Hip and Hop’s balance sheet, income statement, statement of
changes in equity and/or statement of cash flows. For those items included in the statement of cash flows,
indicate whether the item relates to operating activities, investing activities, or financing activities. [Hint:
Some items may appear in more than one financial statement.]

(a) Balance sheet, statement of changes in equity, and statement of cash flows (Financing — treated as a
contribution of capital)
(b) Balance sheet only
(c) Income statement and statement of cash flows (Operating)
(d) Income statement and statement of cash flows (Operating)
(e) Not reported in the financial statements as not part of the accounting entity ‘Hip and Hop’
(f) Income statement and statement of cash flows (Operating)
(g) Balance sheet (reduction of capital), statement of cash flows (Financing as part of owner’s drawings
of capital from the business), statement of changes in equity
(h) Balance sheet and statement of cash flows (cash or cash equivalent balance).
(i) Balance sheet and statement of cash flows (Financing — for loan amount), (Investing — for
purchase of building)
Exercise 2.7 Assumptions and characteristics of information

Identify by letter the assumption or characteristic of information which best represents the situations given.

A. - Accounting entity assumption

B. - Accrual basis assumption
C. - Going concern assumption
D. - Period assumption
E. - Relevance
F. - Faithful representation
G. - Materiality
H. - Comparability

F. 1. The reporting of accounting information should be free from personal bias.

A. 2. In a single proprietorship, the owner’s house and car are not recorded in the records of the business.
G. 3. The cost of stationery is not shown separately in the income statement.
B. 4. Services provided by a business entity are recorded before the receipt of cash.
E. 5. Machinery held by the business under a long-term lease arrangement is recorded by the business as
its own asset.
D. 6. An expense is recorded in the year in which an asset or benefit is consumed in the process of
carrying on the entity’s business.
C. 7. Assets are not recorded at liquidation prices.
H. 8. Consistent accounting policies and methods are used in the preparation of financial statements
from one year to another.
Exercise 2.14 Effects of transactions on financial statements

List the effect of each of the following transactions upon any or all of the four financial statements of a
business. Apart from indicating the financial statement(s) involved, use appropriate phrases such as
‘increase total assets’, ‘decrease equity’, ‘increase income’, ‘decrease cash flow’ to describe the transaction
concerned.
1. Purchase equipment for cash
2. Provide services to a client, with payment to be received within 40 days
3. Pay a liability
4. Invest additional cash into the business by the owner
5. Collect an account receivable in cash
6. Pay wages to employees
7. Receive the electricity bill in the mail, to be paid within 30 days
8. Sell a piece of equipment for cash
9. Withdraw cash by the owner for private usage.
10. Borrow money on a long-term basis from a bank

1. In the balance sheet, increase an asset, equipment; decrease an asset, cash.

In the statement of cash flows, decrease cash flow (from investing activities).

2. In the balance sheet, increase an asset, receivables; increase equity.

In the income statement, increase income.
In the statement of changes in equity, increase equity.

3. In the balance sheet, decrease an asset, cash; decrease a liability.

In the statement of cash flows, decrease cash (probably from operating activities).

4. In the balance sheet, increase an asset, cash; increase equity.

In the statement of cash flows, increase cash (from financing activities).
In the statement of changes in equity, equity is increased.

5. In the balance sheet, increase an asset, cash; decrease an asset, accounts receivable. In the statement
of cash flows, increase cash (from operating activities).

6. In the balance sheet, decrease an asset, cash; decrease equity.

In the income statement, increase expenses.
In the statement of cash flows, decrease cash (from operating activities).
In the statement of changes in equity, decrease equity.

7. In the balance sheet, decrease equity; increase a liability, accounts payable.

In the income statement, increase expenses.
In the statement of changes in equity, decrease equity.

8. In the balance sheet, increase an asset, cash; decrease an asset, equipment, increase equity (if a profit
was made on the sale).
In the income statement, increase income (if a profit was made on the sale).
In the statement of cash flows, increase cash (from investing activities).
In the statement of changes in equity, increase equity (if a profit was made on the sale).

9. In the balance sheet, decrease equity, decrease an asset, cash.

In the statement of cash flows, decrease cash (from financing activities).
In the statement of changes in equity, decrease equity.

10. In the balance sheet, increase an asset, cash; increase a liability, loan payable.
In the statement of cash flows, increase cash (from financing activities).
PROBLEM
SOLUTIONS

Problem 2.17 Preparing financial statements

Asset, liability, equity, income and expense amounts for Sadoka’s Interior Decorating at 30 June 2019 are
presented below:

Cash at bank $ 22 800 Advertising expense $ 36 000

Accounts receivable 117 600 Insurance expense 8 000
Supplies 26 400 Rent expense 33 000
Equipment 125 600 Supplies expense 12 600
Accounts payable 33 700 Telephone expense 12 200
Sadoka Nato, Capital ? Electricity expense 17 000
Decorating services 386 000 Wages expense 111 000
income

Required
a. Prepare an income statement for the business for the year ended 30 June 2019.
b. Prepare a balance sheet in narrative format as at 30 June 2019.
c. Explain succinctly the differences in the information conveyed by an income statement and a
statement of cash flows.

a.

SADOKA’S INTERIOR DECORATING

Income Statement
for the year ended 30 June 2019

INCOME
Decorating services income $386 000

EXPENSES
Advertising expense $36 000
Insurance expense 8 000
Rent expense 33 000
Supplies expense 12 600
Telephone expense 12 200
Electricity expense 17 000
Wages expense 111 000
229 800
PROFIT $156 200
b.

SADOKA’S INTERIOR DECORATING

Balance Sheet
as at 30 June 2019
ASSETS
Cash at bank $22 800
Accounts receivable 117 600
Supplies 26 400
Equipment 125 600
TOTAL ASSETS
$292 400
LIABILITIES
Accounts payable 33 700
TOTAL LIABILITIES $33 700
NET ASSETS $258 700
EQUITY
Sadoka Nato, Capital 258 700

TOTAL EQUITY $258 700

c.

An income statement reports the results of financial performance for a specific time period. It lists all income
and expenses of the entity for the reporting period, and shows profit/loss for the period as the difference
between the income and expenses. A statement of cash flows reports the cash inflows and outflows of an
entity for a specified time period resulting from operating activities (e.g. paying wages, receiving money
from customer), investing activities (e.g. purchasing equipment in cash), and financing activities (e.g.
borrowing money from bank, owner’s drawing).

There is an overlap between income statement and statement of cash flows, in the sense that all cash income
and expenses will be recorded in the statement of cash flows under operating activities. However, the income
statement also includes income earned on credit (i.e. not yet received from customers) and expenses incurred
on credit (i.e. not yet paid by the entity), which will not be recorded in the statement of cash flows. The
income statement is prepared on an accrual basis. The statement of cash flows also includes cash inflows and
outflows from other transactions other than income and expense related transactions in addition to cash
income and cash expenses, for instance paying for equipment purchased and cash withdrawn by owner for
personal use.

In summary, the income statement conveys information about the entity’s income and expenses for the
period (both cash and credit), whereas the statement of cash flows conveys information about the entity’s
cash inflows and outflows which include cash income, expenses, and other cash transactions.
Problem 2.20 Preparation of financial statements

Dawson Industries began operations early in January 2020. On 31 December 2020, records showed the
following asset, liability, equity, income and expense amounts:

Accounts receivable $ 25 600 Lila Dawson, Capital $ ?

Rent expense 13 500 Electricity expense 7 200
Cash at bank 10 250 Telephone expense 4 900
Supplies expense 5 250 Advertising expense 12 500
Accounts payable 9 500 Insurance expense 2 500
Service income 147 500 Wages expense 44 000
Supplies 11 000 Drawings 23 400
Equipment 48 000

Required
a. Prepare an income statement for Dawson Industries for the year ended 31 December 2020.
b. Prepare a balance sheet as at 31 December 2020.
c. Prepare a statement of changes in equity for 2020.
d. Explain the difference between the items ‘supplies’ and ‘supplies expense’.

a.

DAWSON INDUSTRIES
Income Statement
for the year ended 31 December 2020

INCOME
Service income $147 500

EXPENSES
Advertising expense $12 500
Insurance expense 2 500
Rent expense 13 500
Supplies expense 5 250
Telephone expense 4 900
Electricity expense 7 200
Wages expense 44 000
89 850
PROFIT $57 650
b.
DAWSON INDUSTRIES
Balance Sheet
as at 31 December 2020
ASSETS
Cash at bank $10 250
Accounts receivable 25 600
Supplies 11 000
Equipment 48 000
TOTAL ASSETS
$94 850
LIABILITIES
Accounts payable 9 500
TOTAL LIABILITIES $9 500
NET ASSETS $85 350
EQUITY
Lila Dawson, Capital 85 350
TOTAL EQUITY $85 350

c.
DAWSON INDUSTRIES
Statement of Changes in Equity
for the year ended 31 December 2020
Lila Dawson, Capital – 1 January 2020 $51 100
Add: Capital contribution —
Profit for the year 57 650
108 750
Less: Drawings during the year 23 400
Lila Dawson, Capital – 31 December 2020 $85 350

d.
The term ‘supplies’ refers to items purchased by an entity to be used as part of its operations (e.g. stationery).
Supplies are usually purchased in bulk, and then are consumed or used during the period. At the time of
purchase, supplies are recorded as assets to the entity because they have future economic benefits in the form
of their use for the entity’s operation and they are controlled by the entity (i.e. the entity owns the supplies)
as a result of past event (which is the purchase transaction). As an asset account, supplies is recorded on the
balance sheet.

‘Supplies expense’ refers to supplies that have been used or consumed by the entity in their operation during
the period. Whilst unused supplies are assets to the entity, used supplies are recorded as expense because
they are decreases in economic benefits (from the consumption by the entity) in the form of decreases in
assets (i.e. supplies account). Furthermore, these decreases in economic benefits result in decreases in equity,
and they are not distributions to owners (i.e. the entity consumes the economic benefits, not the owners). As
an expense account, supplies expense is recorded on the income statement.
 CHAPTER 3
RECORDING TRANSACTIONS
DISCUSSION QUESTIONS
SOLUTIONS

1. Indicate whether each of the following events is an internal transaction, an external transaction, or
a non-transaction event. Explain your answer in each case:
(a) Receipt of money from a customer in payment of services to be provided early in the next
accounting period.
(b) Equipment is used to provide a service for a customer
(c) The human resources department provided services to the customer service department.
(d) A building owned by the business increased in value
(e) Received payment from a customer on account for services provided in the previous
accounting period.
(f) A prospective employee is interviewed and hired for a job
(g) Stationery supplies are used by an employee.

(a) External, because an event has happened between the entity and an outside party. Even though no
service has yet been provided the receipt of money means that the entity now has a liability to either
provide the service in the future or return the money. This needs to be recorded immediately.
(b) External and Internal. Even though the equipment has been used in the performance of a service to an
outside party (external), the usage and wearing out of the equipment is usually recorded as an internal
adjustment by way of depreciation on the equipment.
(c) Internal, as there needs to be a record kept within the entity of the provision of services between
departments so that the cost of running each department may be accurately determined.
(d) Non-transaction event. However, if it is the practice of an entity to revalue such assets to show the
higher value of the building, it would be recorded as an internal transaction, as there is no outside
party involved.
(e) External, as there is an external party directly involved. Even though the provision of services would
have been recorded in the previous period along with accounts receivable, the receipt of cash affects
the cash at bank and reduces accounts receivable in the current period.
(f) Non-transaction event, which is not recorded until an employee has begun work and has provided
services to the entity
(g) Internal, as there is merely an adjustment inside the entity to reflect a change in value due to supplies
being used. No external party is involved.

3. One often hears the statement: ‘Debits are bad and credits are good for the business.’ Do you
agree? Why or why not?

This statement is nonsense. The debits and credits are merely double-entry rules for recording transactions and
events. Even though expenses may be ‘debit’, so too are assets. ‘Debit’ implies neither good or bad. Likewise
for credits, which can be revenues or liabilities or equity.

Whether an account is debited or credited depends on the elements of financial statements that we
are referring to.
Element of financial Increase/Decrease Debit or Credit? Good or Bad?
statements
Asset Increase Debit Good
Liability Increase Credit Bad
Equity Increase Credit Good
Income Increase Credit Good
Expenses Increase Debit Bad

Recap the Accounting Equation: ASSET = LIABILITY + EQUITY (Normal balance: Debit =
Credit)
5. Why are journals required as part of the recording process? Would not a set of ledger accounts be
sufficient?

Journals provide a chronological record of transactions and events affecting an entity. The general ledger does
not, but classifies like transactions similarly. Hence, the purposes of the journal and ledger are different, but
complement each other.

7. Recently, a new student of accounting was overheard making the following remarks: ‘Why are we
learning how to use the double-entry system of recording in the accounting cycle? Surely there
are good computer packages available these days which can handle all of these details.’ Provide a
suitable reply.

Students must know the accounting cycle manually so that they can determine what a computer
package is doing in the accounting cycle, and so that they can correct any intentional and
unintentional discrepancies which can arise from time to time in computer packages. Furthermore,
some packages have their limitations and it is wise for the student to know what a package can and
cannot do for the entity concerned. Much of this knowledge can be gained by preparing a set of
accounts both manually and on computer.

Furthermore, in practice, some small clients still do not use computers to keep their accounting
records.

By learning how to prepare accounts manually students learn the relationship between transactions in
an entity and how they impact on the financial statements. Although this may be possible with a
computer package the relationship is not as obvious. An accountant with experience should be able
to look at the financial statements produced by a computer and tell if they are reasonable given their
knowledge of the business. Understanding the accounting process in the detail required to be able to
prepare manual accounts assists in developing these decision making skills.
EXERCISE SOLUTIONS

Exercise 3.4 Normal balance and classification in financial statements

The accounts below appear in the chart of accounts of Brightspark Electrical Services. Show
whether the normal balance is a debit or a credit. Indicate whether the account would appear in the
balance sheet or in the income statement, and under what classification, e.g. liability, asset, equity,
income or expense.

1.Service Vehicles 9. B.A. Brightspark, Drawings

2. Repairs Expense 10. GST Payable
3. Prepaid Insurance 11. GST Receivable
4. Accounts Payable 12. Mortgage Payable
5. Unearned Service Fees 13. Interest Revenu
6. Telephone Expense 14. B. A. Brightspark, Capital
7. Accounts Receivable 15. Electrical Services Revenue
8. Electrical Supplies

 Statement of Comprehensive Income (SOCI)/Income Statement is now known as

Statement of profit or loss and other comprehensive income (SPLOCI).
 Balance Sheet is known referred to as Statement of Financial Position (SOFP).

BRIGHTSPARK ELECTRICAL SERVICES

Item Normal Statement
Balance
1. Service Vehicles Debit Balance sheet/Statement of financial position (asset)
2. Repairs Expense Debit Income statement (expense)
3. Prepaid Insurance Debit Balance sheet/Statement of financial position (asset)
4. Accounts Payable Credit Balance sheet/Statement of financial position
(liability)
5. Unearned Services Fees Credit Balance sheet/Statement of financial position
(liability)
6. Telephone Expense Debit Income statement (expense)
7. Accounts Receivable Debit Balance sheet/Statement of financial position (asset)
8. Electrical Supplies Debit Balance sheet/Statement of financial position (asset)
9. B.A, Brightspark, Drawings Debit Balance sheet/Statement of financial position
(deduction from equity)
10. GST Payable Credit Balance sheet/Statement of financial position
(liability)
11. GST Receivable Debit Balance sheet/Statement of financial position (asset)
12. Mortgage Payable Credit Balance sheet/Statement of financial position
(liability)
13. Interest Revenue Credit Income Statement (income)
14. B.A. Brightspark, Capital Credit Balance sheet/Statement of financial position (equity)
15. Electrical Services Revenue Credit Income Statement (income)
Exercise 3.6 Account titles and type

Each of the following items describes aspects of the business of Lenny Linnehan, lawyer:

1. cash which Lenny Linnehan has withdrawn from the business for personal use
2. photocopiers, document binding machine and computers
3. amounts owing by the business to suppliers of an online legal database
4. amounts owing by customers for cases completed
5. tables, wall shelving and book cabinets for staff offices
6. GST charged to clients for legal services
7. money borrowed from a bank
8. lease rental on premises which should have been paid 1 month ago
9. supplies held for future document preparation
10. insurance premium paid in advance to cover the next 6 months.

Required

A. Suggest an account title for each item described.

B. Classify the item as an asset, liability, equity, income or expense.

1. L. Linnehan, Drawings – Equity

2. Office Equipment – Asset

3. Accounts Payable – Liability

4. Accounts Receivable – Asset

5. Office Equipment – Asset

6. GST Payable – Liability

7. Bank Overdraft/Loan Payable – Liability

8. Rent Payable – Liability

9. Office Supplies – Asset

10. Prepaid Insurance – Asset

Exercise 3.7 Chart of accounts, posting to T accounts and trial balance

The general journal of Lenore Grunweld, Property Adviser, contained the entries below for the
month of July 2016. GST is ignored.

General Journal

Post
Date Particulars Ref Debit Credit
2016

July 1 Cash at Bank 150 000

Lenore Grunweld, Capital 150 000
(Cash invested by owner)
9 Cash at Bank 15 000
Service Fees Revenue 15 000
(Fees for services performed)
16 Office Equipment 32 000
Cash at Bank 3 200
Accounts Payable 28 800
(Office equipment for cash and on credit)
22 Service Fees Receivable 25 000
Service Fees Revenue 25 000
(Services performed on credit)
31 Cash at Bank 10 000
Service Fees Receivable 10 000
(Cash received from client)

Required
a. Post the transactions to T accounts. The chart of accounts for the business included the
following accounts:
Cash at Bank 1 – 100
Service Fees Receivable 1 – 200
Office Equipment 1 – 300
Accounts Payable 2 – 100
Lenore Grunweld, Capital 3 – 100
Service Fees Revenue 4 – 100
b. Prepare a trial balance of the general ledger of Lenore Grunweld, Property Adviser as at 31
July 2016.

a.
Cash at Bank 1-100
July 1 Lenore Grunweld, $150 000 July 16 Office Equipment $3 200
Capital
July 9 Service Fees 15 000 July 31 Balance c/d 171 800
July 31 Service Fees 10 000
Receivable
175 000 175 000
July 31 Balance b/d 171 800
 Service Fees Receivable 1-200
July 22
Service Fees Revenue $25 000July 31 Cash at Bank $10 000

July 31Balance c/d15 000

25 000 25 000
July 31Balance b/d 15 000

Office Equipment 1-300

July 16 Cash at $32 000
Bank/Accounts
Payable

Accounts Payable 2-100

July 16 Office Equipment $28 800

Lenore Grunweld, Capital 3-100

July 1 Cash at Bank $150 000

Service Fees Revenue 4-100

July 9 Cash at Bank $15 000
July 31 Profit & Loss 40 000 July 22 Serv. Fees Rec’ble 25 000
Summary
40 000 40 000

b.
LENORE GRUNWELD, FINANCIAL ADVISER
Trial Balance
as at 31 July 2016
Account Account Debit Credit
No.
Cash at Bank 1-100 $171 800
Service Fees Receivable 1-200 15 000
Office Equipment 1-300 32 000
Accounts Payable 2-100 $28 800
Lenore Grunweld, Capital 3-100 150 000
Service Fees Revenue 4-100 40 000
$218 800 $218 800
Exercise 3.8 Recording transactions in general journal and
analysis

The following accounts appear in the ledger of the Henrietta’s Huge Hair Hairdressers: Cash at Bank;
Accounts Receivable; Hairdressing Equipment; Accounts Payable; Henrietta Bouffant, Drawings;
Hairdressing Revenue; Salaries Expense; and Advertising Expense.

Required
a. Prepare the general journal entries to record the transactions that occurred during December
(ignore GST).
b. Explain why you have made each of the journal entries to account for the transactions.

Dec 1 Purchased hair drying equipment for $65 000. Paid $5000 deposit and agreed to pay the
balance in 60 days.
3 Henrietta withdrew $1200 from the business to buy herself a new dress for a friend’s
wedding.
8 Paid salaries of $6800.
14 Paid $800 for advertisements in the local newspaper.
19 Received $540 from customers to reduce the balance in their accounts.
23 Paid $3700 to creditors for supplies that had been purchased on
30 credit.
Earned $57 600 in hairdressing revenue during the month. Of these, 80% of the fees were
collected in cash and 20% will be paid within a month.
a.
HENRIETTA’S HUGE HAIR HAIRDRESSERS
(ignore GST)
Dec. 1 Hairdressing Equipment 65 000
Cash at Bank 5 000
Accounts Payable 60 000
Purchased hair drying equipment for cash and on credit.

3 H. Bouffant, Drawings 1 200

Cash at Bank 1 200
Cash withdrawn by owner.

8 Salaries Expense 6 800

Cash at Bank 6 800
Salaries paid.

14 Advertising Expense 800

Cash at Bank 800
Cash paid for radio commercials.

19 Cash at Bank 540

Accounts Receivable 540
Cash received from credit customers

23 Accounts Payable 3 700

Cash at Bank 3 700
Cash paid to suppliers.

30 Cash at Bank 46 080

Accounts Receivable 11 520
Hairdressing Revenue 57 600
Memberships fees earned.
b.
Dec. 1 The Hairdressing Equipment account is increased to record the purchase by
debiting the account. At the same time, Cash at Bank is decreased by crediting
the account for the amount of the deposit paid, and a liability, Accounts
Payable is increased by crediting the account for the amount of $60 000
payable in 60 days.

3 This transaction is a withdrawal of assets from the business by the owner and
is not an expense related to the earning of income. A debit is made to the
Drawings account to reflect the decrease in the owner’s investment in the
business, and the decrease in the Cash at Bank account is recorded by a credit.

8 Salaries are an expense of the business to reflect the cost of services received
by the business from its employees. The business pays its employees for the
services they have rendered to the business by crediting the Cash at Bank
account and debiting the Salaries Expense account.

14 Advertising costs are an expense of the business to reflect the cost of

advertising services received as supplied by the newspaper. The business pays
the newspaper for the services rendered to the business by crediting the Cash at
Bank account and debiting the Advertising Expense account.

19 The receipt of cash from credit customers is recorded by a debit to the Cash at
Bank account; and Accounts Receivable is credited to reduce the amount
owing to the business by these customers. Services have previously been
supplied to the customers by the business, and this transaction reflects the
receipt of cash from these customers.

23 The supplies had been purchased on a previous occasion; hence, an Accounts

Payable liability account would have been credited at that time. Now, the
payment of the Accounts Payable is recorded by reducing the liability account
(debit) and reducing the Cash at Bank account (credit) for the amount of
$3700.

30 This is an income transaction reflecting the amount of hairdressing revenue

earned (received or receivable) for the month of December. Hence, a revenue
account, called Hairdressing Revenue, is credited and Cash at Bank is debited
for the amount received from customers who paid in cash. For credit
customers, an asset, Accounts Receivable, is debited to record the amount
owing by these customers for services received by them from the business in
December.
Problem 3.19 Journal entries, entering beginning account balances,
posting to T accounts, and trial balance

The 31 May 2020 trial balance of Amy Wait, Physiotherapist, is shown below. Ignore GST.

AMY WAIT, PHYSIOTHERAPIST

Trial Balance
as at 31 May 2020
Account Debit Credit
Cash at bank $ 105 000
Accounts receivable 48 000
Supplies 12 300
Prepaid insurance 8 200
Furniture and equipment 260 600
Accounts payable $ 9 700
Electricity account payable 9 500
Unearned revenue 2 900
A. Wait, Capital 314 960
A. Wait, Drawings 161 200
Services revenue 462 000
Salary expense 170 300
Electricity expense 9 460
Rent expense 24 000
$ 799 060 $ 799 060

The following transactions were completed during June:

June 1 Purchased supplies on credit for $5800.
3 Received $24 400 from patients as payment on account.
6 Paid the electricity expense of $9500, previously recorded.
10 Performed services for $2000 that was recorded previously as unearned revenue.
14 Recorded revenue of $178 600 in cash and $13 650 on credit.
Paid salaries of $65 880.
20 Purchased furniture for $15 400 and paid by electronic transfer.
23 Withdrew $60 000 from the business for personal use.
24 Paid creditors $7000.
26 Purchased insurance policy for $24 000 to cover business assets.
27 Received $12 000 from patients as payment on account.
29 Recorded revenue of $124 600 in cash and $25 000 on credit.
30 Paid rent of $24 000.
Required
a. Prepare journal entries to record each transaction.
b. 1. Open T accounts for the accounts shown in the trial balance.
2. Enter the 31 May balance in each account.
3. Post the journal entries to the T accounts.
c. Prepare a trial balance as at 30 June 2020.
a.
General Journal
(GST ignored)
June 1 Supplies 5 800
Accounts Payable 5 800
Purchase of supplies on credit.

3 Cash at Bank 24 400

Accounts Receivable 24 400
Cash received from patients.

6 Electricity Account Payable 9 500

Cash at Bank 9 500
Payment of electricity account.

10 Unearned Revenue 2 000

Services Revenue 2 000
Revenue previously received.

14 Cash at Bank 178 600

Accounts Receivable 13 650
Services Revenue 192 250
Revenue received and receivable.

14 Salary Expense 65 880

Cash at Bank 65 880
Salaries paid.

20 Furniture and Equipment 15 400

Cash at Bank 15 400
Furniture purchased for cash.

23 A. Wait, Drawings 60 000

Cash at Bank 60 000
Drawings by owner.

24 Accounts Payable 7 000

Cash at Bank 7 000
Payment to creditors.

26 Prepaid Insurance 24 000

Cash at Bank 24 000
Purchase of insurance policy.

27 Cash at Bank 12 000

Accounts Receivable 12 000
Payment received from debtors.

29 Cash at Bank 124 600

Accounts Receivable 25 000
Services Revenue 149 600
Revenue received and on account.

30 Rent Expense 24 000

Cash at Bank 24 000
Payment of rent.
b.
Cash at Bank
31/5 Balance b/d 105 000 6/6 Electricity Account 9 500
Payable
3/6 Accounts 24 400 14/6 Salary Expense 65 880
Receivable
14/6 Services Revenue 178 600 20/6 Furniture & Equipment 15 400
27/6 Accounts 12 000 23/6 A. Wait, Drawings 60 000
Receivable
29/6 Services Revenue 124 600 24/6 Accounts Payable 7 000
26/6 Prepaid Insurance 24 000
30/6 Rent Expense 24 000
30/6 Balance c/d 238 820
$444 600 $444 600
30/6 Balance b/d 238 820

Accounts Receivable
31/5 Balance b/d $48 000 3/6 Cash at Bank 24 400
14/6 Services Revenue 13 650 27/6 Cash at Bank 12 000
29/6 Services Revenue 25 000 30/6 Balance c/d 50 250
$86 650 $86 650
30/6 Balance b/d 50 250

Supplies
31/5 Balance b/d 12 300 30/6 Balance c/d 18 100
1/6 Accounts Payable 5 800
18 100 18 100
30/6 Balance b/d 18 100

Prepaid Insurance
31/5 Balance b/d $8 200 30/6 Balance c/d 32 200
26/6 Cash at Bank 24 000
32 200 32 200
30/6 Balance b/d 32 200

Furniture and Equipment

31/5 Balance b/d $260 600 30/6 Balance c/d 276 000
20/6 Cash at Bank 15 400
276 000 276 000
30/6 Balance b/d 276 000
 Accounts Payable
24/6 Cash at Bank 7 000 31/5 Balance b/d 9 700
30/6 Balance c/d 8 500 1/6 Supplies 5 800
15 500 15 500
30/6 Balance b/d 8 500

Electricity Account Payable

6/6 Cash at Bank 9 500 31/5 Balance b/d 9 500

Unearned Revenue
10/6 Services Revenue 2 000 31/5 Balance b/d 2 900
30/6 Balance c/d 900
2 900 2 900
30/6 Balance b/d 900

A. Wait, Capital
30/6 Balance c/d 314 960 31/5 Balance b/d 314 960

A. Wait, Drawings
31/5 Balance b/d 161 200 30/6 Balance c/d 221 200
23/6 Cash at Bank 60 000
221 200 221 200
30/6 Balance b/d 221 200

Services Revenue
30/6Profit & Loss Summary 805 85031/5Balance b/d 462 000

10/6Unearned Revenue 14/6Cash at Bank/AR 2 000

29/6Cash at Bank/AR 192 250
149 600
805 850
805 850

Salary Expense
31/5 Balance b/d 170 300 30/6 Profit & Loss Summary 236 180
14/6 Cash at Bank 65 880
236 180 236 180
 Electricity Expense
31/5 Balance b/d 9 460 30/6 Profit & Loss Summary 9 460
9 460 9 460

Rent Expense
31/5 Balance b/d 24 000 30/6 Profit & Loss Summary 48 000
30/6 Cash at Bank 24 000
48 000 48 000

c.
AMY WAIT, PHYSIOTHERAPIST
Trial Balance
as at 30 June 2020
Debit Credit
Cash at Bank $238 820
Accounts Receivable 50 250
Supplies 18 100
Prepaid Insurance 32 200
Furniture and Equipment 276 000
Accounts Payable $8 500
Unearned Revenue 900
A. Wait, Capital 314 960
A. Wait, Drawings 221 200
Services Revenue 805 850
Salary Expense 236 180
Electricity Expense 9 460
Rent Expense 48 000
$1 130 210 $1 130 210