Chapter 3



Chapter 3

Journal Entries, Posting, General Ledger, and Trial Balance

In this chapter you will see how accounting systems are organized to process large volumes of data while constantly maintaining the equality of the accounting equation. As you proceed through this chapter, first concentrate on learning how business events affect resources and then learn how to process the events in the financial accounting system.

The Accounting Equation,

Debits, and Credits

Resources and where they come from are at the heart of modern financial accounting systems. The relationship between resources and their sources is represented by the accounting equation:

|Assets |= |Liabilities |+ |Stockholders' Equity |

The accounting equation shows a company's resources (assets) come from borrowing (liabilities), from owners' investments (stockholders' equity), or are generated by management and retained in the company (stockholders' equity). The accounting equation must always be in balance in order for the accounting system to provide useful information.

The double-entry system (debits = credits) was developed to easily maintain the equality of the accounting equation (assets = liabilities + stockholders' equity). The double-entry system is based on the idea that each business event has two parts. One part results in a change in one asset, liability, or stockholders' equity account and the other part results in an equal change in another asset, liability, or stockholders' equity account. It is impossible for an event to result in an increase or decrease in only one account.

The basic element of the double-entry system is the T account. T accounts are used to record the two parts of each business event. The left side of a T account is the debit side and the right side is the credit side. The process of converting each event into equal dollar amounts of debits and credits guarantees that the accounting equation always balances.

The debits equal credits process converts each event into debits and credits as follows:

|Account |Debits |Credits |

|Assets |Increases |Decreases |

|Liabilities |Decreases |Increases |

|Stockholders' equity |Decreases |Increases |

|Revenues |Decreases |Increases |

|Expenses |Increases |Decreases |

|Dividends |Increases |Decreases |

In accounting for most business events, all you need to remember about debits and credits are the following:

Point 1. Assets increase with debits

Point 2. Debits = credits

The two above points, when combined with an understanding of business and a little basic logic, will enable you to convert most business events into debits and credits and, in so doing, constantly maintain the equality of the accounting equation.

Difficulties Created by

Today's Companies

AT&T, like thousands of other companies, conducts business on a global scale. In fact, AT&T provides services in over 220 different countries. Consider the difficulties they face in trying to account for such wide-spread operations. How feasible would it be for them to use the accounting system we examined in Chapter 2? Could AT&T possibly account for its activities by using one set of T accounts? How many hundred T accounts would be required? Could the T accounts be drawn on one sheet of paper? How long would it take just to put the effects of AT&T's thousands of events into the many T accounts? Surely there must be a more efficient way to account for the events of such large companies.

Financial accounting systems used by companies like AT&T are based on the accounting equation. They make use of the debits equal credits process to maintain the equality of the accounting equation. However, they do not enter dollar amounts directly into T accounts as we did in Chapter 2. Instead of entering dollar amounts directly into T accounts, modern accounting systems record the debits and credits by preparing journal entries in journals. In this way, journals are prepared at numerous locations all around the world. The information is then sent to one location where it is organized and the financial statements are prepared from the organized information.

Modern Accounting Systems

In order to generate the information for financial statements, accounting systems need:

1) to organize the data to be reported. Financial accounting systems use a chart of accounts and a general ledger to organize data.

2) a process for getting data into the organized data system. Financial accounting systems use journals to get data into accounts.

3) a process for verifying that the data in the accounts will result in a balanced accounting equation. Financial accounting systems prepare trial balances to verify the equality of the debits and credits data in accounts.

The following sections examine each of the three above requirements of modern accounting systems.

Organizing Accounting Data

To prepare financial statements, you must know the types of information you want to report in the statements. For example, if you want to generate a cash report, you would accumulate data about cash. In financial accounting systems, because of the importance of resources and their sources, the data to be collected are organized around the accounting equation, assets = liabilities + stockholders' equity. The data are organized into accounts. Accounts are established for any information to be reported in the financial statements. You may remember that the Parks Computer Service Corporation examined in Chapters 1 and 2 had the following accounts: cash, accounts receivable, supplies, accounts payable, common stock, and retained earnings. An account is a data storage device. For example, an account can be as simple as a T account on a page, it could be a whole page in a book, it could be a file folder in a desk drawer, or it could be a data file in a computer.

Chart of Accounts When a list of all accounts in which a company can store accounting data is prepared, it is called a chart of accounts. The chart of accounts for the Parks Computer Service Corporation is presented in Exhibit 3-1.

|Exhibit 3-1 |

|Parks Computer Service Corporation |

|Chart of Accounts |

|Acct. No. |Account Name |

| |Assets |

|111 |Cash |

|113 |Accounts Receivable |

|115 |Supplies |

| | |

| |Liabilities |

|211 |Accounts Payable |

| | |

| |Stockholders' Equity |

|311 |Common Stock |

|313 |Retained Earnings |

|315 |Dividends |

| | |

| |Revenues |

|411 |Fees Revenue |

| | |

| |Expenses |

|511 |Supplies Expense |

Notice how the accounts in the Parks Computer Service Corporation's chart of accounts are organized. First, the accounts are separated into five categories: assets, liabilities, stockholders' equity, revenues, and expenses. Do not worry if you are unclear about revenues and expenses. You will become quite familiar with these terms as you progress through this and later chapters. At this point, you should note that the categories in the chart of accounts relate directly to the financial statements: revenues and expenses are reported on the income statement, while assets, liabilities, and stockholders' equity are reported on the balance sheet.

A company can have any accounts it wants in its chart of accounts. Information can be gathered for any items in which the company is interested. Remember the process we followed in Chapters 1 and 2 for gathering information for the income statement? In order to calculate total revenues to report on the income statement we had to analyze the retained earnings account for increases. Similarly, we had to analyze retained earnings for decreases in order to calculate expenses. Companies have found it easier and faster to prepare income statements when separate accounts are maintained to record revenues and expenses, rather than enter the dollar amounts directly into retained earnings. If separate accounts are used to record revenues and expenses, income statements can be quickly prepared by simply using the dollar amounts recorded in the revenues and expenses accounts.

A second point to notice about the chart of accounts is how the accounts are organized within each category. For example, note that the three asset accounts are not listed alphabetically. In fact, the assets are listed by order of liquidity. Liquidity refers to how quickly the assets will be converted into cash or used up in the business. Based on asset liquidity, cash would appear first, followed by accounts receivable (which should be converted into cash soon, possibly in the next 30 days), and supplies (which will be used up in a short time, such as three months). As you progress through later chapters, you will learn the reasons for other accounts appearing in charts of accounts in the order in which they do. At this point in time, however, it is important that you recognize that information to be reported in the financial statements is the reason accounts are listed in the chart of accounts in the order in which they are.

The third point to notice about the chart of accounts is that each account has a number associated with it. As you may expect, these numbers are called account numbers. Account numbers are useful in identifying where a specific account would be in a grouping of other accounts. For example, notice in the Parks Computer Service Corporation's chart of accounts all assets begin with the digit 1 while liabilities begin with the digit 2. In manual accounting systems, account numbers make it easy to find a specific account when all accounts are grouped together in one book called the general ledger, which is discussed in the following section. With modern, computer-based accounting systems, account numbers facilitate the entry of data into the computer system. For example, to debit the accounts receivable account using a computer, it would be necessary only to input the account number 113 rather than inputting the account name, accounts receivable. Such use of account numbers rather than account names allows much faster data input into accounting systems.

** You now have the background to do exercise 3.1.

General Ledger When all accounts are grouped together, they are known as the general ledger. A ledger is simply a grouping of accounts. The general ledger contains all accounts used by a company. For example, in a manual system, the Parks Computer Service Corporation's general ledger would have a separate page for each of its accounts. There would be separate pages for cash, accounts receivable, supplies, accounts payable, common stock, retained earnings, dividends, fees revenue, and supplies expense. For an example of a general ledger page, see the cash account in the Parks Computer Service Corporation's general ledger presented as Exhibit 3-2.

|Exhibit 3-2 |

|General Ledger Page |

|Account Name: Cash |Account Number: 111 |

| | |Posting | | |

|$5,995 |= |$95 |+ |$5,000 |

|Sept. 1 |Cash |111 |5,000 | |

| |Common Stock |311 | |5,000 |

| |Owner's cash investment | | | |

Notice the general journal has several columns for recording information. The date column is used to show the date on which the event affected the business. Inasmuch as the company received the cash on September 1, this date is used. The description column identifies the specific accounts affected. Notice the debit to the cash account is entered first and appears next to the left margin of the description column. Debited accounts are always listed first in journal entries and they always appear next to the left margin. After the debit comes the account credited, which is indented from the left margin. Credits always appear after the debits and are always indented. If there were more than one account credited, they would appear directly underneath each other, indented the same number of spaces from the left margin. After all accounts have been listed, a brief explanation of the event is entered, indented still further from the left margin or centered in the column. The explanation enables readers of the journal to understand what the event is about. The posting reference column has various uses in different accounting systems. In this text, the posting reference column is used to identify the account number of each account recorded in the general journal. It will be discussed further in the following section on transferring data from the general journal to the general ledger. The debits and credits columns show the dollar amounts of the event's debits and credits. Finally, you should notice that the total debits ($5,000) in the journal entry equals the total credits ($5,000). Remember, the equality of debits and credits in the journal entry guarantees that the accounting equation will balance.

Borrowing resources On September 3, the Parks Computer Service Corporation purchases $350 of supplies on credit. No cash is paid by the company, but cash payment is promised by October 3. When the company purchases the supplies, resources (supplies) increase. The source of the resources is a creditor, since the supplies are purchased on credit. This results in an increase in liabilities. Thus, the company's resources and sources of resources increase by $350.

| | |Sources of Borrowed | |Sources of Owner Invested Resources |

|Total Resources |= |Resources |+ | |

|$10,995 |= |$95 |+ |$10,000 |

|Sept. 3 |Supplies |115 |350 | |

| |Accounts Payable |211 | |350 |

| |Supplies purchased on account | | | |

Once again, notice the detail in the general journal. Information was recorded showing the date, the account name, account number, and dollar amount of each account debited or credited. Notice how the account credited (accounts payable) was indented. A brief description of the event followed the entry in the journal. Finally, notice that the total dollar amount of the debits ($350) equals the total dollar amount of the credits ($350) in the entry. This equality maintains the equality of the accounting equation, assets = liabilities + stockholders' equity.

Using resources to buy other resources Nick decides to rent an office in which to conduct his business. He wants the office so his current clients have a place to meet with him and where potential clients can find him easily. On September 4, the company pays a total of $975 cash to rent a small office for the months of September, October, and November. When the Parks Computer Service Corporation pays the $975 rent, its resources (assets) change. By paying cash for rent, the company converts one resource (cash) into another resource (prepaid rent). Prepaid rent is a resource (asset) because it enables the company to use the office space in the future, in this case, for the next three months. Therefore, the company's resources increase and then decrease by the same amount, $975. Since total resources do not change, total sources of resources do not change.

| | |Sources of Borrowed | |Sources of Owner Invested Resources |

|Total Resources |= |Resources |+ | |

|$11,345 |= |$445 |+ |$10,000 |

|Sept. 4 |Prepaid Rent |117 |975 | |

| |Cash |111 | |975 |

| |Rent paid in advance | | | |

Notice in the above journal entry that the total debits ($975) equals the total credits ($975). Notice also that another account was added to the chart of accounts: 117, prepaid rent. At this point you should understand prepaid rent is an asset. The ability to use office space is valuable to the Parks Computer Service Corporation. Without the office space, the company may not be able to achieve its goals.

Generating resources through management operations On September 5, Nick provides computer systems services to a customer. In return for his services, the company receives a promise of $700 cash. The cash is to be received from the customer by October 5. Customers' promises to pay cash are called accounts receivable. Accounts receivable are resources because they are valuable. The act of providing services and receiving a promise of cash increases the company's resources and sources of resources by $700. Since the owner has a right to resources that come from the efforts of management, the source of resources that increases is stockholders' equity.

| | |Sources of Borrowed | |Sources of Owner Invested Resources |

|Total Resources |= |Resources |+ | |

|$11,345 |= |$445 |+ |$10,000 |

|Sept. 5 |Accounts Receivable |113 |700 | |

| |Fees Revenue |411 | |700 |

| |Services provided | | | |

The above journal entry shows when management provides services to the customer, the company's resource (accounts receivable) increases by $700. The $700 resource results directly from servicing the customer. It is important that you recognize the fees revenue account is used to show the source of the $700 increase in resources is management's servicing of the customer.

An event that does not require a journal entry On September 8, Nick hires an employee to work approximately 15 hours each week. The employee will answer customer phone inquiries, contact Nick if the situation warrants it, and do miscellaneous duties around the office. At the end of each month the employee will be paid $10 per hour for each hour worked during the month. On September 8, the company's resources and sources of resources do not change just because the employee is hired. Thus, a journal entry is not required on September 8. The company's resources will change, however, at the end of the month when the employee is paid. At that time the company's resources (cash) will decline and an expense will have to be recorded to recognize resources were used up in the operation of the company.

Using resources to buy other resources Nick decides to protect himself and his business by purchasing fire and theft insurance. The fire and theft insurance will protect the company from fire and break-ins. On September 11, the company pays a total of $480 cash to insure it for the months of September, October, November, and December. When the company pays $480 for insurance, its resources (assets) change. By paying cash for insurance, the company converts one resource (cash) into another resource (prepaid insurance). Prepaid insurance is a resource because it enables the company to protect itself in the future, in this case, for the next four months. As a result of converting one resource into another, the company's total resources remain unchanged, first increasing and then decreasing by the same dollar amount. Since total resources do not change, total sources of resources do not change.

| | |Sources of Borrowed | |Sources of Owner Invested Resources |

|Total Resources |= |Resources |+ | |

|$12,045 |= |$445 |+ |$10,000 |

|Sept. 11 |Prepaid Insurance |119 |480 | |

| |Cash |111 | |480 |

| |Insurance paid in advance | | | |

Notice in the above journal entry that the total debits equals the total credits. Notice also that another account was added to the chart of accounts: 119, prepaid insurance. At this point you should understand prepaid insurance is as asset. The ability to protect itself is valuable to the Parks Computer Service Corporation. Without the protection, the company may not be able to achieve its goals.

Converting one resource into another resource On September 16, the company receives $500 cash from the customer serviced on September 5. On September 5, management's servicing of the customer resulted in a $700 debit to accounts receivable and credit to fees revenue. On September 16, additional work is not done for the customer, but the customer pays the company $500 of the $700 owed. As a result, the company's cash resource increases by $500 and its accounts receivable resource decreases by $500. The increase in one resource and the decrease in another resource results in total resources remaining unchanged. Total sources of resources also remain unchanged.

| | |Sources of Borrowed | |Sources of Owner Invested Resources |

|Total Resources |= |Resources |+ | |

|$12,045 |= |$445 |+ |$10,000 |

|Sept. 16 |Cash |111 |500 | |

| |Accounts Receivable |113 | |500 |

| |Accounts receivable collection | | | |

Notice in the above journal entry that the company did not record any additional fees revenue. Remember, on September 16, the company did not perform any additional service for its customer. The company did not generate any additional resources on September 16, it merely changed the form of its resources from accounts receivable to cash.

Generating resources through management operations On September 19, the company services another customer and receives $600 cash and an $800 promise of cash in 30 days. This event increases the company's resources (assets) by $1,400, $600 of which are cash and $800 are accounts receivable, and increases sources of resources by $1,400. Since the owner has a right to resources that come from management efforts, the source of resources that increases is stockholders' equity.

| | |Sources of Borrowed | |Sources of Owner Invested Resources |

|Total Resources |= |Resources |+ | |

|$12,045 |= |$445 |+ |$10,000 |

|Sept. 19 |Cash |111 |600 | |

| |Accounts Receivable |113 |800 | |

| |Fees Revenue |411 | |1,400 |

| |Services provided | | | |

Notice the above entry has more than one debit. Journal entries with more than one debit or one credit are called compound entries. Journal entries can have numerous debits and credits. The important rule to remember is that for each journal entry the total dollars of debits must always equal the total dollars of credits.

Paying for borrowed resources On September 22, the company pays $250 of the amount owed for supplies purchased on September 3, when they were recorded as a $350 debit to supplies and credit to accounts payable. On September 22, the company does not obtain any additional supplies, but merely pays for those purchased on September 3. As a result, the company's resources (cash) decrease by $250 and its sources of resources decrease by $250. The source of resources that decreases is liabilities, specifically accounts payable. By paying the supplier $250, the amount owed to the supplier decreases by $250. Since the amount owed to suppliers is a liability, the $250 payment reduces liabilities.

| | |Sources of Borrowed | |Sources of Owner Invested Resources |

|Total Resources |= |Resources |+ | |

|$13,445 |= |$445 |+ |$10,000 |

|Sept. 22 |Accounts Payable |211 |250 | |

| |Cash |111 | |250 |

| |Accounts payable payment | | | |

Getting resources from potential customers On September 24, the company receives $400 from a customer as payment for work to be provided to the customer from September 29 through October 3. This event results in an increase in the company's resources because cash increases. Since the cash is not a result of the company converting another resource (such as accounts receivable) into cash, the company's sources of resources must increase by $400 also. The source of resources that increases is liabilities because $400 of services are owed to the customer.

| | |Sources of Borrowed | |Sources of Owner Invested Resources |

|Total Resources |= |Resources |+ | |

|$13,195 |= |$195 |+ |$10,000 |

|Sept. 24 |Cash |111 |400 | |

| |Unearned Fees Revenue |213 | |400 |

| |Fees received in advance | | | |

Carefully review the above journal entry. It is one of the more important journal entries in this chapter and it is often difficult for students to understand. When a customer pays for a service in advance, that is, before the service is provided to the customer, the company that receives the cash does not generate resources (cash) through management operations. In effect, the company borrows the resources. Until the company provides the services, it owes them to the customer. Thus, when cash is received in advance from customers, the effect is an increase in assets (cash) and an increase in liabilities (unearned fees revenue). When the services are provided to the customer, the company will reduce its liabilities (unearned fees revenue) and increase stockholders' equity (fees revenue). This point will be examined further in later chapters.

Using up resources in management operations On September 26, the company pays $60 to the Municipal Power Plant for electric service used by the company in September. As a result, the company's resources (cash) decrease by $60. Since the company does not receive another resource (such as supplies) for its cash, sources of resources must decrease by $60 as well. The source of resources that decreases is stockholders' equity because a resource (cash) was used up through management's use of electric service.

| | |Sources of Borrowed | |Sources of Owner Invested Resources |

|Total Resources |= |Resources |+ | |

|$13,595 |= |$595 |+ |$10,000 |

|Sept. 26 |Utilities Expense |513 |60 | |

| |Cash |111 | |60 |

| |September electricity | | | |

Generating resources through management operations On September 29, Nick provides computer systems services to another customer and receives $900 cash. Once again, the act of providing services and receiving cash increases the company's resources (cash) and sources of resources (stockholders' equity) by $900.

| | |Sources of Borrowed | |Sources of Owner Invested Resources |

|Total Resources |= |Resources |+ | |

|$13,535 |= |$595 |+ |$10,000 |

|Sept. 29 |Cash |111 |900 | |

| |Fees Revenue |411 | |900 |

| |Services provided | | | |

Using up resources in management operations On September 29, the company receives a $45 telephone bill from Municipal Phone Services for telephone services used by the company in September. The company plans to pay the telephone bill in October. At first glance this event looks interesting, but not one that should require a journal entry. After all, the company has not paid out any resources: it will not pay the telephone bill until October. At second glance, however, it appears obvious that something has been used up: the telephone services provided by the Municipal Phone Services company were used up by the Parks Computer Service Corporation by the end of September.

It may be helpful in understanding the effects of this event to view the process as consisting of two parts: first, obtaining the telephone services resource and second, using the telephone services resource. First, the company receives a $45 resource from Municipal Phone Services and agrees to pay for the resource later. The resource received was the use of the telephone for the month of September. This first part of the event results in an increase in the company’s resources (one month’s use of the telephone). Since the telephone bill will be paid in October, the source of resources that increases is a liability.

| | |Sources of Borrowed | |Sources of Owner Invested Resources |

|Total Resources |= |Resources |+ | |

|$14,435 |= |$595 |+ |$10,000 |

|$14,480 |= |$640 |+ |$10,000 |

|$14,435 |= |$595 |+ |$10,000 |

|$14,435 |= |$595 |+ |$10,000 |

|Sept. 29 |Telephone Expense |515 |45 | |

| |Accounts Payable |211 | |45 |

| |September telephone bill | | | |

Distributing resources to the owner On September 30, the company pays a $75 cash dividend to Nick Parks. This event results in a decrease in the company's resources (cash). Since the resources go to the owner, it also results in a decrease in sources of resources (stockholders' equity). A dividend is the distribution to owners of resources generated through management operations. A dividend is not a return to owners of some of the resources invested by them.

| | |Sources of Borrowed | |Sources of Owner Invested Resources |

|Total Resources |= |Resources |+ | |

|$14,435 |= |$640 |+ |$10,000 |

|Sept. 30 |Dividends |315 |75 | |

| |Cash |111 | |75 |

| |Cash dividend | | | |

Using up resources in management operations On September 30, the company pays $450 to the employee hired on September 8 for work done in September. As a result, the company's resources and sources of resources decrease by $450. Cash resources decrease. Since the cash is used up through management operations, the source of resources that decreases is stockholders' equity.

| | |Sources of Borrowed | |Sources of Owner Invested Resources |

|Total Resources |= |Resources |+ | |

|$14,360 |= |$640 |+ |$10,000 |

|Sept. 30 |Wages Expense |517 |450 | |

| |Cash |111 | |450 |

| |September wages | | | |

Completed general journal The previous paragraphs presented analyses of several events affecting the Parks Computer Service Corporation's September operations. Each event was presented individually and recorded in the general journal. The complete general journal, showing all September entries for the company is presented as Exhibit 3-3.

|Exhibit 3-3 |

|Parks Computer Service Corporation |

|General Journal |

|General Journal |Page 1 |

| | |Posting Ref. | | |

|Date |Description | |Debits |Credits |

|Sept. 1 |Cash |111 |5,000 | |

| |Common Stock |311 | |5,000 |

| |Owner’s cash investment | | | |

| | | | | |

|3 |Supplies |115 |350 | |

| |Accounts Payable |211 | |350 |

| |Supplies purchased on account | | | |

| | | | | |

|4 |Prepaid Rent |117 |975 | |

| |Cash |111 | |975 |

| |Rent paid in advance | | | |

| | | | | |

|5 |Accounts Receivable |113 |700 | |

| |Fees Revenue |411 | |700 |

| |Services provided | | | |

| | | | | |

|11 |Prepaid Insurance |119 |480 | |

| |Cash |111 | |480 |

| |Insurance paid in advance | | | |

| | | | | |

|16 |Cash |111 |500 | |

| |Accounts Receivable |113 | |500 |

| |Accounts receivable collection | | | |

| | | | | |

|19 |Cash |111 |600 | |

| |Accounts Receivable |113 |800 | |

| |Fees Revenue |411 | |1,400 |

| |Services provided | | | |

| | | | | |

|22 |Accounts Payable |211 |250 | |

| |Cash |111 | |250 |

| |Accounts payable payment | | | |

| | | | | |

|24 |Cash |111 |400 | |

| |Unearned Fees Revenue |213 | |400 |

| |Fees received in advance | | | |

| | | | | |

|26 |Utilities Expense |513 |60 | |

| |Cash |111 | |60 |

| |September electricity | | | |

| | | | | |

|29 |Cash |111 |900 | |

| |Fees Revenue |411 | |900 |

| |Services provided | | | |

| | | | | |

|29 |Telephone Expense |515 |45 | |

| |Accounts Payable |211 | |45 |

| |September telephone bill | | | |

|Exhibit 3-3 (continued) |

|Parks Computer Service Corporation |

|General Journal |

|General Journal |Page 2 |

| | |Posting Ref. | | |

|Date |Description | |Debits |Credits |

|Sept. 30 |Dividends |315 |75 | |

| |Cash |111 | |75 |

| |Cash dividend | | | |

| | | | | |

|30 |Wages Expense |517 |450 | |

| |Cash |111 | |450 |

| |September wages | | | |

You should note several points in the general journal in Exhibit 3-3. First, the entries are listed in chronological order: the September 1 entry comes before the September 3 entry. Second, in each journal entry the debits appear before the credits. Third, in each journal entry's debits or credits, the accounts are listed by account number order: a debit to account 111 appears before a debit to account 113. Fourth, rather than having all the entries crammed together, there is a blank line between each entry to make the journal easier to read. Finally, for each entry in the general journal, the total dollar amount of the debits equals the total dollar amount of the credits. Remember, it is this equality of debits and credits that guarantees the equality of the accounting equation, assets equal liabilities plus stockholders' equity.

** You now have the background to do exercise 3.2.

Entering Accounting Data

in the General Ledger

Once a company's events are analyzed and recorded in the general journal, the dollar amounts are transferred from the general journal to the general ledger through a process called posting. The posting process is very simple. For example, recall the September 1, general journal entry of Parks Computer Service Corporation.

| | |Posting Ref. | | |

|Date |Description | |Debits |Credits |

|Sept. 1 |Cash |111 |5,000 | |

| |Common Stock |311 | |5,000 |

| |Owner’s cash investment | | | |

To post this entry to the general ledger in a manual accounting system it would be necessary to first find the general ledger cash account page and add the $5,000 debit information to it. Then it would be necessary to find the general ledger common stock account page and add the $5,000 credit information to it. The cash and common stock account pages of the Parks Computer Service Corporation's general ledger after all September's journal entries were posted are presented below.

|Account Name: Cash |Account Number: 111 |

| | |

| |

|Acct. No. |Account Name |Debits | |Credits |

|111 |Cash |$10,755 | | |

|113 |Accounts Receivable |$1,210 | | |

|115 |Supplies |$490 | | |

|117 |Prepaid Rent |$975 | | |

|119 |Prepaid Insurance |$480 | | |

|211 |Accounts Payable | | |$240 |

|213 |Unearned Fees Revenue | | |$400 |

|311 |Common Stock | | |$10,000 |

|313 |Retained Earnings | | |$900 |

|315 |Dividends |$75 | | |

|411 |Fees Revenue | | |$3,000 |

|513 |Utilities Expense |$60 | | |

|515 |Telephone Expense |$45 | | |

|517 |Wages Expense |$450 | | |

| | Totals |$14,540 | |$14,540 |

There are several important points to note in the Exhibit 3-4 trial balance. First, the totals of the debits and credits columns ($14,540) show the debits do in fact equal the credits. This information tells us the accounting equation, assets equal liabilities plus stockholders' equity, is in balance. As a result, we can be sure the financial statements prepared from the general ledger data will be mathematically logical. That is, the income statement will relate to the statement of retained earnings, the statement of retained earnings will relate to the balance sheet, and the balance sheet will balance. Second, notice the accounts are listed in the order in which they appear in the general ledger. For example, cash comes before accounts receivable. Third, notice the heading of the trial balance shows the company's name, the name of the report (trial balance), and date to which the information applies, in this case September 30. Finally, notice the account number column. Some trial balances prepared from manual accounting systems do not make use of an account number column. Modern, computer-based systems, however, often do present the account numbers in case accountants want to refer to the general ledger for further detail.

** You now have the background to do exercise 3.5.

Accounting Process Summarized

In order to generate useful information for financial statements, accounting systems:

1) organize data to be reported by using a chart of accounts and a general ledger.

2) put data into the general ledger through use of the general journal and the posting process.

3) verify data in the general ledger accounts will result in a balanced accounting equation through the preparation of a trial balance.

Once the trial balance is prepared, it is possible to prepare the financial statements from the trial balance data. Exhibits 3-5, 3-6, and 3-7 present the Parks Computer Service Corporation's September financial statements.

|Exhibit 3-5 |

|Parks Computer Service Corporation |

|Income Statement |

|for the Month Ended September 30 |

|Revenues | | |

|Fees Revenue | |$3,000 |

|Expenses | | |

|Utilities Expense |$60 | |

|Telephone Expense |$45 | |

|Wages Expense |$450 | |

|Total Expenses | |$555 |

|Net Income | |$2,445 |

From the Parks Computer Service Corporation's income statement we can see the company's management used the company's resources in September to generate $2,445 of additional resources. The income statement shows management brought in resources of $3,000 (revenues) and used $555 of resources (expenses).

|Exhibit 3-6 |

|Parks Computer Service Corporation |

|Statement of Retained Earnings |

|for the Month Ended September 30 |

|Retained Earnings, September 1 |$900 |

|Net Income for September |$2,445 |

|Subtotal |$3,345 |

|Dividends |$75 |

|Retained Earnings, September 30 |$3,270 |

From the Parks Computer Service Corporation's statement of retained earnings we can see that of the $2,445 resources generated through management operations in September (net income), $75 were distributed to the owner (dividends). By the end of September, the company retained in the business $3,270 of resources generated through management operations.

|Exhibit 3-7 |

|Parks Computer Service Corporation |

|Balance Sheet |

|September 30 |

|Assets | | |Liab| | |Cash |

| | | |ilit| | | |

| | | |ies | | | |

| | | |& | | | |

| | | |Stoc| | | |

| | | |khol| | | |

| | | |ders| | | |

| | | |' | | | |

| | | |Equi| | | |

| | | |ty | | | |

|Assets |= |Liabilities |+ |Stockholders' Equity |

|$0 |= |$0 |+ |$0 |+ |$0 |

|+ $27,000 |= | | |+ $27,000 | | |

|$27,000 |= |$0 |+ |$27,000 |+ |$0 |

| | |Posting Ref. | | |

|Date |Description | |Debits |Credits |

|Oct. 2 |Cash |111 |27,000 | |

| |Common Stock |311 | |27,000 |

| |Owners' investment | | | |

Oct. 5 The company paid $500 to rent office space for October.

| | |Sources of Borrowed | |Sources of Owner Invested | |Sources of Management Generated |

|Total Resources |= |Resources |+ |Resources |+ |Resources |

|Assets |= |Liabilities |+ |Stockholders' Equity |

|$27,000 |= |$0 |+ |$27,000 |+ |$0 |

| | | | | | | |

| | | | | | | |

| | | | | | | |

| | |Posting Ref. | | |

|Date |Description | |Debits |Credits |

|Oct. 5 | | | | |

| | | | | |

| | | | | |

Oct. 9 Performed $2,200 services for customers who promised to pay by Nov. 15.

| | |Sources of Borrowed | |Sources of Owner Invested | |Sources of Management Generated |

|Total Resources |= |Resources |+ |Resources |+ |Resources |

|Assets |= |Liabilities |+ |Stockholders' Equity |

|$27,000 |= |$0 |+ |$27,000 |+ |$0 |

| | | | | | | |

| | | | | | | |

| | |Posting Ref. | | |

|Date |Description | |Debits |Credits |

|Oct. 9 | | | | |

| | | | | |

| | | | | |

Oct. 13 Purchased $350 of supplies. Supplies will be paid for by Nov. 4.

| | |Sources of Borrowed | |Sources of Owner Invested | |Sources of Management Generated |

|Total Resources |= |Resources |+ |Resources |+ |Resources |

|Assets |= |Liabilities |+ |Stockholders' Equity |

|$29,200 |= |$0 |+ |$27,000 |+ |$2,200 |

| | | | | | | |

| | | | | | | |

| | |Posting Ref. | | |

|Date |Description | |Debits |Credits |

|Oct. 13 | | | | |

| | | | | |

| | | | | |

Oct. 16 Performed $1,300 services for customers and received cash.

| | |Sources of Borrowed | |Sources of Owner Invested | |Sources of Management Generated |

|Total Resources |= |Resources |+ |Resources |+ |Resources |

|Assets |= |Liabilities |+ |Stockholders' Equity |

|$29,550 |= |$350 |+ |$27,000 |+ |$2,200 |

| | | | | | | |

| | | | | | | |

| | |Posting Ref. | | |

|Date |Description | |Debits |Credits |

|Oct. 16 | | | | |

| | | | | |

| | | | | |

Oct. 20 Paid $88 cash dividends to owners.

| | |Sources of Borrowed | |Sources of Owner Invested | |Sources of Management Generated |

|Total Resources |= |Resources |+ |Resources |+ |Resources |

|Assets |= |Liabilities |+ |Stockholders' Equity |

|$30,850 |= |$350 |+ |$27,000 |+ |$3,500 |

| | | | | | | |

| | | | | | | |

| | |Posting Ref. | | |

|Date |Description | |Debits |Credits |

|Oct. 20 | | | | |

| | | | | |

| | | | | |

Oct. 23 Received $1,500 cash from customers serviced on Oct. 9.

| | |Sources of Borrowed | |Sources of Owner Invested | |Sources of Management Generated |

|Total Resources |= |Resources |+ |Resources |+ |Resources |

|Assets |= |Liabilities |+ |Stockholders' Equity |

|$30,762 |= |$350 |+ |$27,000 |+ |$3,412 |

| | | | | | | |

| | | | | | | |

| | | | | | | |

| | |Posting Ref. | | |

|Date |Description | |Debits |Credits |

|Oct. 23 | | | | |

| | | | | |

| | | | | |

Oct. 27 Paid $300 to insure the company for the month of November.

| | |Sources of Borrowed | |Sources of Owner Invested | |Sources of Management Generated |

|Total Resources |= |Resources |+ |Resources |+ |Resources |

|Assets |= |Liabilities |+ |Stockholders' Equity |

|$30,762 |= |$350 |+ |$27,000 |+ |$3,412 |

| | | | | | | |

| | | | | | | |

| | | | | | | |

| | |Posting Ref. | | |

|Date |Description | |Debits |Credits |

|Oct. 27 | | | | |

| | | | | |

| | | | | |

Oct. 31 Made $225 partial payment for supplies purchased on Oct. 13.

| | |Sources of Borrowed | |Sources of Owner Invested | |Sources of Management Generated |

|Total Resources |= |Resources |+ |Resources |+ |Resources |

|Assets |= |Liabilities |+ |Stockholders' Equity |

|$30,762 |= |$350 |+ |$27,000 |+ |$3,412 |

| | | | | | | |

| | | | | | | |

| | |Posting Ref. | | |

|Date |Description | |Debits |Credits |

|Oct. 31 | | | | |

| | | | | |

| | | | | |

Exercise 3.3: Posting to General Ledger

At the beginning of December, the Eaton Corporation had the following balances in some of its accounts: cash of $8,620, accounts receivable of $1,875, supplies of $366, accounts payable of $883, fees revenue of $0, and rent expense of $0. During the first week of December, the Eaton Corporation recorded the following journal entries.

| | |Posting | | |

|Date |Description |Ref. |Debits |Credits |

|Dec. 1 |Cash |111 |900 | |

| |Accounts Receivable |113 | |900 |

| |Accounts receivable collection | | | |

| | | | | |

|2 |Rent Expense |519 |500 | |

| |Cash |111 | |500 |

| |December rent payment | | | |

| | | | | |

|3 |Supplies |115 |375 | |

| |Accounts Payable |211 | |375 |

| |Supplies purchased on account | | | |

| | | | | |

|4 |Accounts Receivable |113 |1,200 | |

| |Fees Revenue |411 | |1,200 |

| |Services provided | | | |

| | | | | |

|5 |Accounts Payable |211 |520 | |

| |Cash |111 | |520 |

| |Accounts payable payment | | | |

1. Set up T accounts for the Eaton Corporation's cash, accounts receivable, supplies, accounts payable, fees revenue, and rent expense.

| | | | | |

| | | | | | | | |

| | | | | | | | |

| | | | | | | | |

| | | | | | | | |

| | | | | |

| | | | | | | | |

| | | | | | | | |

| | | | | | | | |

| | | | | | | | |

2. Enter the beginning of December balances into the T accounts.

3. Post the December journal entries to the T accounts.

4. Calculate the balances in the T accounts at the end of the first week in December.

Exercise 3.4: General Ledger

The Garabedian Corporation's general ledger cash account for January is shown below.

|Account Name: Cash |Account Number: 111 |

| | |Post. | | |Balance |

|Date |Item |Ref. |Debits |Credits |Debits |Credits |

|Dec. 31 |Balance | | | |6,124 | |

|Jan. 1 |Accounts receivable collected |J1 |975 | |7,099 | |

|3 |January rent |J1 | |450 |6,649 | |

|9 |Services provided |J1 |850 | |7,499 | |

|15 |Wages paid |J1 | |500 |6,999 | |

|17 |Accounts receivable collected |J1 |700 | |7,699 | |

|21 |Accounts payable paid |J2 | |650 |7,049 | |

|24 |Owners' investment |J2 |2,000 | |9,049 | |

|27 |January insurance |J2 | |350 |8,699 | |

|28 |Services provided |J2 |900 | |9,599 | |

|29 |Cash dividend |J2 | |150 |9,449 | |

|31 |Wages paid |J2 | |450 |8,999 | |

1. What was the dollar amount of the company's cash at the beginning of January?

2. What was the dollar amount of cash received from customers?

3. What was the dollar amount of cash paid to employees?

4. What was the dollar amount of the company's cash at the end of January?

Exercise 3.5: Trial Balance

On December 31, the Keener Corporation had the following account balances.

|Accounts Payable |$5,000 | |Accounts Receivable |$12,500 |

|Cash |$18,000 | |Common Stock |$10,000 |

|Dividends |$1,200 | |Fees Revenue |$6,500 |

|Office Supplies |$800 | |Rent Expense |$2,400 |

|Retained Earnings |$17,000 | |Salary Expense |$3,600 |

1. Prepare the December 31 trial balance for the Keener Corporation.

2. Determine the company's net income for the period ended December 31.

3. Determine the company's December 31 assets.

4. Determine the company's December 31 liabilities.

5. Determine the company's December 31 stockholders' equity.

Exercise 3.6: Financial Statements

The Parker Corporation's January 31 trial balance is shown below.

|Parker Corporation |

|Trial Balance |

|January 31 |

|Account Name |Debits | |Credits |

|Cash |$8,500 | | |

|Accounts Receivable |$1,200 | | |

|Supplies |$450 | | |

|Prepaid Rent |$950 | | |

|Prepaid Insurance |$400 | | |

|Accounts Payable | | |$1,400 |

|Unearned Fees Revenue | | |$300 |

|Common Stock | | |$8,000 |

|Retained Earnings | | |$1,100 |

|Dividends |$200 | | |

|Fees Revenue | | |$3,650 |

|Utilities Expense |$200 | | |

|Telephone Expense |$150 | | |

|Wages Expense |$2,400 | | |

| Totals |$14,450 | |$14,450 |

1. Determine the dollar amount of resources obtained from customers for services provided to them in the period ended January 31.

2. Determine the dollar amount of resources used up in providing service to customers in the period ended January 31.

3. Determine the net dollar amount by which the company's resources increased through management operations in the period ended January 31.

4. Determine the dollar amount of resources paid to owners.

5. Determine the dollar amount of resources generated through operations and retained in the company by January 31.

6. Determine the dollar amount of resources on January 31.

7. Determine the dollar amount of borrowed resources.

8. Determine the dollar amount of resources invested by owners.

Chapter Three Problem

Problem 3.1: Journal Entries, Posting, and Trial Balance

Christopher Breitenbach opened the Breitenbach Photography Studio on June 1. The company's accounting system used only those accounts included in its trial balance shown in part 4. During June, the company engaged in the following transactions.

June 1 Christopher started the business by depositing $18,000 in a bank account in the corporation's name in exchange for 9,000 shares of $2 par value per share common stock.

June 5 Paid $390 for photography supplies.

June 9 Paid $260 to rent a photography studio for the month of June.

June 11 Photographed KMV Inc. executives and billed them $910 for services. KMV Inc. promised to pay Breitenbach Photography Studio by July 11.

June 14 Purchased $325 of photography supplies on credit.

June 17 Received $650 for photographing high school seniors.

June 21 Received $470 from KMV Inc. as partial payment for photography services provided to them on June 11.

June 23 Paid June telephone bill of $39.

June 26 Paid $260 to rent the photography studio for the month of July.

June 30 Declared and paid a cash dividend of $70.

1. By addition and subtraction, show the effects of the transactions on Breitenbach Photography Studio's resources and sources of resources. Notice that the first transaction has been processed for you.

| | | |Sources of Owner Invested |Sources of Management |

| | |Sources of Borrowed |Resources |Generated Resources |

| | |Resources | | |

| |Resources | | | |

| |Assets |Liabilities |Stockholders’ Equity |

|June 1 |+ $18,000 |_______ |+ $18,000 |_______ |

|June 5 |_________ |_______ |_________ |_______ |

|June 9 |_________ |_______ |_________ |_______ |

|June 11 |_________ |_______ |_________ |_______ |

|Subtotals |__$18,910 |_____$0 |__$18,000 |___$910 |

|June 14 |_________ |_______ |_________ |_______ |

|June 17 |_________ |_______ |_________ |_______ |

|June 21 |_________ |_______ |_________ |_______ |

|Subtotals |__$19,885 |___$325 |__$18,000 |_$1,560 |

|June 23 |_________ |_______ |_________ |_______ |

|June 26 |_________ |_______ |_________ |_______ |

|June 30 |_________ |_______ |_________ |_______ |

|Totals |__$19,776 |_$325 |__$18,000 |_$1,451 |

2. Record the Studio's transactions in its general journal. Remember, the company’s accounting system used only those accounts included in its trial balance shown in part 4.

|Date |Description |Debits |Credits |

|June 1 |Cash________________ |$___18,000 | |

| | Common Stock________ | |$___18,000 |

| |Owner's investment___________ | | |

| | | | |

|June 5 |____________________ |$_________ | |

| |____________________ | |$_________ |

| |______________________________ | | |

| | | | |

|June 9 |____________________ |$_________ | |

| |____________________ | |$_________ |

| |______________________________ | | |

| | | | |

|June 11 |____________________ |$_________ | |

| |____________________ | |$_________ |

| |______________________________ | | |

| | | | |

|June 14 |____________________ |$_________ | |

| |____________________ | |$_________ |

| |______________________________ | | |

| | | | |

|June 17 |____________________ |$_________ | |

| |____________________ | |$_________ |

| |______________________________ | | |

| | | | |

|June 21 |____________________ |$_________ | |

| |____________________ | |$_________ |

| |______________________________ | | |

| | | | |

|June 23 |____________________ |$_________ | |

| |____________________ | |$_________ |

| |______________________________ | | |

| | | | |

|June 26 |____________________ |$_________ | |

| |____________________ | |$_________ |

| |______________________________ | | |

| | | | |

|June 30 |____________________ |$_________ | |

| |____________________ | |$_________ |

| |______________________________ | | |

| | | | |

3. Post the Studio's journal entries to its general ledger. Calculate the ending balance for each general ledger account.

|Cash | |Accounts Receivable | |Photography Supplies |

| | | | | | | | |

| | | | | | | | |

| | | | | | | | |

| | | | | | | | |

| | | | | | | | |

| | | | | | | | |

| | | | | | | | |

|18,101 | | | | | | | |

|Prepaid Rent | |Accounts Payable | |Common Stock |

| | | | | | | | |

| | | | | | | | |

| | | | | | | | |

| | | | |325 | | | |

|Retained Earnings | |Dividends | |Fees Revenue |

| | | | | | | | |

| | | | | | | | |

| | | | | | | | |

| | | | | | | |1,560 |

|Telephone Expense | | | | |

| | | | | | | | |

| | | | | | | | |

| | | | | | | | |

| | | | | | | | |

4. Prepare the Breitenbach Photography Studio's June 30 trial balance.

|Breitenbach Photography Studio |

|Trial Balance |

|June 30 |

|Account Name |Debits | |Credits |

|Cash |$___18,101 | | |

|Accounts Receivable |$_________ | | |

|Photography Supplies |$_________ | | |

|Prepaid Rent |$_________ | | |

|Accounts Payable | | |$_________ |

|Common Stock | | |$_________ |

|Retained Earnings | | |$________0 |

|Dividends |$_________ | | |

|Fees Revenue | | |$_________ |

|Telephone Expense |$_________ | | |

| Totals |$___19,885 | |$_________ |

5. The dollar amount of the Breitenbach Photography Studio's net income for June was $_____________.

6. The dollar amount of the Breitenbach Photography Studio's total assets on June 30 was $_____________.

7. The dollar amount of the Breitenbach Photography Studio's total liabilities on June 30 was $_____________.

8. The dollar amount of the Breitenbach Photography Studio's total stockholders' equity on June 30 was $_____________.

9. The dollar amount of the Breitenbach Photography Studio’s total resources on June 30 was $_____________.

10. The dollar amount of June 30 resources that the Breitenbach Photography Studio obtained through borrowing was $_____________.

11. The dollar amount of June 30 resources that the Breitenbach Photography Studio obtained from the owner was $_____________.

12. The net dollar amount of resources that the Breitenbach Photography Studio generated through management operations in June was $_____________.

13. The dollar amount of June 30 resources that the Breitenbach Photography Studio generated through management operations and kept in the business was $_____________.

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