Balance Sheet



Recording Transactions using

Debit & Credit Approach

Retail Company Example

The current presentation uses the Barnes Bookseller example to illustrate the recording of transactions using the Debit & Credit Approach. The same layout is used here as in the Mike’s Barbershop example.

1. Barnes purchases a $20 book from a publisher. Barnes pays cash for the book.

|Balance Sheet |Income Statement |

|ASSETS = |LIABILITIES + |EQUITY |REVENUE |- EXPENSES |= NET INCOME |

| |  |  |  |  |  |

|  |  |  |  |  |  |

|Account |Debit |Credit |

|  |  |  |

|  |  |  |

|  |  |  |

|  |  |  |

1. Barnes purchases a $20 book from a publisher. Barnes pays cash for the book.

|Balance Sheet |Income Statement |

|ASSETS = |LIABILITIES + |EQUITY |REVENUE |- EXPENSES |= NET INCOME |

| +20 Inventory |  |  |  |  |  |

| - 20 Cash |  |  |  |  |  |

|Account |Debit |Credit |

| Inventory |20  |  |

|  Cash |  |20  |

|  |  |  |

|  |  |  |

2. Barnes sells the book purchased in question 1 to a customer for $30. The customer pays cash.

|Balance Sheet |Income Statement |

|ASSETS = |LIABILITIES + |EQUITY |REVENUE |- EXPENSES |= NET INCOME |

| |  |  |  |  |  |

|  |  |  |  |  |  |

|Account |Debit |Credit |

|  |  |  |

|  |  |  |

|  |  |  |

|  |  |  |

2. Barnes sells the book purchased in question 1 to a customer for $30. The customer pays cash.

|Balance Sheet |Income Statement |

|ASSETS = |LIABILITIES + |EQUITY |REVENUE |- EXPENSES |= NET INCOME |

| +30 Cash |  | + 10 Retained Earnings |30  | 20 | +10 |

|-20 Inventory |  |  |  |  |  |

|Account |Debit |Credit |

| Cash |30 |  |

| Inventory |  |20 |

| Cost of Goods Sold |20  |  |

|  Revenue |  |30  |

You may also see “Cost of Merchandise Sold” for the term “Cost of Goods Sold”. Either of the terms represents the name of the expense account used to keep track of inventory that gets sold. Notice that the Debit & Credit approach is not as explicit about the amount of profit (net income) made on the transaction. You have to subtract the Cost of Goods Sold expense that has been debited from the Revenue that has been credited in order to see that the net change has been an increase (net credit) to the retained earnings account under the equity section.

3. Barnes purchases a $40 book from a publisher on credit (i.e., Barnes asked to be billed for the book and will pay later).

|Balance Sheet |Income Statement |

|ASSETS = |LIABILITIES + |EQUITY |REVENUE |- EXPENSES |= NET INCOME |

| | |  |  |  |  |

|  |  |  |  |  |  |

|Account |Debit |Credit |

|  |  |  |

|  |  |  |

|  |  |  |

|  |  |  |

3. Barnes purchases a $40 book from a publisher on credit (i.e., Barnes asked to be billed for the book and will pay later).

|Balance Sheet |Income Statement |

|ASSETS = |LIABILITIES + |EQUITY |REVENUE |- EXPENSES |= NET INCOME |

| + 40 Inventory |+ 40 Accounts Payable  |  |  |  |  |

|  |  |  |  |  |  |

|Account |Debit |Credit |

| Inventory |40 |  |

|  Accounts Payable |  |40 |

|  |  |  |

|  |  |  |

4. Barnes sells the $40 book to a customer for $60. The customer has asked to be billed for the book.

|Balance Sheet |Income Statement |

|ASSETS = |LIABILITIES + |EQUITY |REVENUE |- EXPENSES |= NET INCOME |

| | | | | | |

| | | | | | |

|Account |Debit |Credit |

| | | |

| | | |

| | | |

| | | |

4. Barnes sells the $40 book to a customer for $60. The customer has asked to be billed for the book.

|Balance Sheet |Income Statement |

|ASSETS = |LIABILITIES + |EQUITY |REVENUE |- EXPENSES |= NET INCOME |

| + 60 Accounts Receivable |  | + 20 Retained Earnings | 60 |40  |+20  |

| - 40 Inventory |  |  |  |  |  |

|Account |Debit |Credit |

| Accounts Receivable |60  |  |

|  Inventory |  |40  |

| Cost of Goods Sold |40 |  |

|  Revenue |  |60  |

5. Barnes receives the $60 the previous customer owes them for the book.

|Balance Sheet |Income Statement |

|ASSETS = |LIABILITIES + |EQUITY |REVENUE |- EXPENSES |= NET INCOME |

| |  |  |  |  |  |

|  |  |  |  |  |  |

|Account |Debit |Credit |

|  |  |  |

|  |  |  |

|  |  |  |

|  |  |  |

5. Barnes receives the $60 the previous customer owes them for the book.

|Balance Sheet |Income Statement |

|ASSETS = |LIABILITIES + |EQUITY |REVENUE |- EXPENSES |= NET INCOME |

| +60 Cash |  | | | | |

| - 60 Accounts Receivable |  |  |  |  |  |

|Account |Debit |Credit |

| Cash |60 |  |

|  Accounts Receivable |  |60 |

|  |  |  |

|  |  |  |

6. Barnes pays the publisher $40 for the book it had previously purchased on credit.

|Balance Sheet |Income Statement |

|ASSETS = |LIABILITIES + |EQUITY |REVENUE |- EXPENSES |= NET INCOME |

| |  |  |  |  |  |

|  |  |  |  |  |  |

|Account |Debit |Credit |

|  |  |  |

|  |  |  |

|  |  |  |

|  |  |  |

6. Barnes pays the publisher $40 for the book it had previously purchased on credit.

|Balance Sheet |Income Statement |

|ASSETS = |LIABILITIES + |EQUITY |REVENUE |- EXPENSES |= NET INCOME |

|- 40 Cash | - 40 Accounts Payable |  | | | |

|  |  |  |  |  |  |

|Account |Debit |Credit |

| Accounts Payable |40 |  |

|  Cash |  |40 |

|  |  |  |

|  |  |  |

7. Barnes pays its sales clerk her weekly wages of $300.

|Balance Sheet |Income Statement |

|ASSETS = |LIABILITIES + |EQUITY |REVENUE |- EXPENSES |= NET INCOME |

| |  |  |  |  |  |

|  |  |  |  |  |  |

|Account |Debit |Credit |

|  |  |  |

|  |  |  |

|  |  |  |

|  |  |  |

7. Barnes pays its sales clerk her weekly wages of $300.

|Balance Sheet |Income Statement |

|ASSETS = |LIABILITIES + |EQUITY |REVENUE |- EXPENSES |= NET INCOME |

| - 300 Cash |  | - 300 Retained Earnings |  | 300 |- 300 |

|  |  |  |  |  |  |

|Account |Debit |Credit |

|  Wage Expense |300 |  |

| Cash |  |300  |

|  |  |  |

|  |  |  |

8. Barnes signs an agreement with a local school to supply them with $2,000 worth of books. The school pays Barnes the entire $2,000 today, but the books will not actually be delivered until next week.

|Balance Sheet |Income Statement |

|ASSETS = |LIABILITIES + |EQUITY |REVENUE |- EXPENSES |= NET INCOME |

| |  |  |  |  |  |

|  |  |  |  |  |  |

|Account |Debit |Credit |

|  |  |  |

|  |  |  |

|  |  |  |

|  |  |  |

8. Barnes signs an agreement with a local school to supply them with $2,000 worth of books. The school pays Barnes the entire $2,000 today, but the books will not actually be delivered until next week.

|Balance Sheet |Income Statement |

|ASSETS = |LIABILITIES + |EQUITY |REVENUE |- EXPENSES |= NET INCOME |

| + 2,000 Cash |+ 2,000 Unearned Revenue  | | | | |

|  |  |  |  |  |  |

|Account |Debit |Credit |

| Cash |2,000 |  |

| Unearned Revenue |  |2,000 |

|  |  |  |

|  |  |  |

9. Barnes supplies $2,000 worth of books to the local school from question 8. Barnes had the books in inventory. The books had originally cost Barnes $1,500 to purchase from the publisher.

|Balance Sheet |Income Statement |

|ASSETS = |LIABILITIES + |EQUITY |REVENUE |- EXPENSES |= NET INCOME |

| |  |  |  |  |  |

|  |  |  |  |  |  |

|Account |Debit |Credit |

|  |  |  |

|  |  |  |

|  |  |  |

|  |  |  |

9. Barnes supplies $2,000 worth of books to the local school from question 8. Barnes had the books in inventory. The books had originally cost Barnes $1,500 to purchase from the publisher.

|Balance Sheet |Income Statement |

|ASSETS = |LIABILITIES + |EQUITY |REVENUE |- EXPENSES |= NET INCOME |

| - 1,500 Inventory | - 2,000 Unearned Revenue | + 500 Retained Earnings | 2,000 | 1,500 | + 500 |

|  |  |  |  |  |  |

|Account |Debit |Credit |

| Unearned Revenue |2,000 |  |

| Inventory |  |1,500 |

| Cost of Goods Sold |1,500 |  |

| Revenue |  |2,000 |

10. The business has been doing so well that Barnes plans to expand by opening up two new stores. First, however, they will need to raise the money to finance the eventual expansion. They decide to sell 1,000 shares in the company (the shares represent part ownership in the business) at a price of $20 per share.

|Balance Sheet |Income Statement |

|ASSETS = |LIABILITIES + |EQUITY |REVENUE |- EXPENSES |= NET INCOME |

| |  |  |  |  |  |

|  |  |  |  |  |  |

|Account |Debit |Credit |

|  |  |  |

|  |  |  |

|  |  |  |

|  |  |  |

10. The business has been doing so well that Barnes plans to expand by opening up two new stores. First, however, they will need to raise the money to finance the eventual expansion. They decide to sell 1,000 shares in the company (the shares represent part ownership in the business) at a price of $20 per share.

|Balance Sheet |Income Statement |

|ASSETS = |LIABILITIES + |EQUITY |REVENUE |- EXPENSES |= NET INCOME |

| +20,000 Cash | |+20,000 Capital Stock  |  |  |  |

|  |  |  |  |  |  |

|Account |Debit |Credit |

| Cash |20,000 |  |

| Capital Stock |  |20,000 |

|  |  |  |

|  |  |  |

11. Barnes decides to pay a dividend to its shareholders. It pays 50 cents per share to each of the 1,000 shares.

|Balance Sheet |Income Statement |

|ASSETS = |LIABILITIES + |EQUITY |REVENUE |- EXPENSES |= NET INCOME |

| |  |  |  |  |  |

|  |  |  |  |  |  |

|Account |Debit |Credit |

|  |  |  |

|  |  |  |

|  |  |  |

|  |  |  |

11. Barnes decides to pay a dividend to its shareholders. It pays 50 cents per share to each of the 1,000 shares.

|Balance Sheet |Income Statement |

|ASSETS = |LIABILITIES + |EQUITY |REVENUE |- EXPENSES |= NET INCOME |

|- 500 Cash | |- 500 Retained Earnings | | | |

|  |  |  |  |  |  |

|Account |Debit |Credit |

| Dividends |500 |  |

| Cash | |500 |

| |  | |

|  |  |  |

Notice here that we use the account Dividends to record the transaction. We do this in order to keep track of the amount of dividends paid during the period. However, prior to constructing the financial statements the Dividend account will be ‘closed’ to the Retained Earnings Account. Don’t let this confuse you. We do the same thing with expenses and revenue. These, including dividends, are embedded within the retained earnings account. During the period we keep track of the distinctly, but then close them to the Retained Earnings account.

12. Barnes sells $200 worth of books to a customer for cash. The books had cost Barnes $140 to purchase from the publisher.

|Balance Sheet |Income Statement |

|ASSETS = |LIABILITIES + |EQUITY |REVENUE |- EXPENSES |= NET INCOME |

| |  |  |  |  |  |

|  |  |  |  |  |  |

|Account |Debit |Credit |

|  |  |  |

|  |  |  |

|  |  |  |

|  |  |  |

12. Barnes sells $200 worth of books to a customer for cash. The books had cost Barnes $140 to purchase from the publisher.

|Balance Sheet |Income Statement |

|ASSETS = |LIABILITIES + |EQUITY |REVENUE |- EXPENSES |= NET INCOME |

|+ 200 Cash |  |+ 60 Retained Earnings | 200 |140 | + 60 |

|- 140 Inventory |  |  |  |  |  |

|Account |Debit |Credit |

| Cash |200 |  |

| Inventory |  |140 |

|Cost of Goods Sold |140 |  |

| Revenue |  |200 |

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download