THE ACCOUNTING CYCLE

The Golden Rule: Double-Entry Bookkeeping

"For every debit entry, there must be a corresponding credit entry."

This is the mechanical core of accounting. It ensures that the accounting equation ($Assets = Liabilities + Equity$) always remains in perfect balance.

• The Dual Effect: Every single business transaction affects at least two accounts.

• The Check & Balance: If your total debits do not equal your total credits at the end of the day, an error has occurred.

The Direction of Accounts (Debit vs. Credit)

To keep the accounting equation in balance, each account type follows a specific "Normal Balance" rule:

• ASSETS (What you own)

  • Increase: Debit

  • Decrease: Credit

• LIABILITIES (What you owe)

  • Increase: Credit

  • Decrease: Debit

• EQUITY (Owner's stake)

  • Increase: Credit

  • Decrease: Debit

• EXPENSES (Costs of doing business)

  • Increase: Debit

  • Decrease: Credit

• REVENUE (Income earned)

  • Increase: Credit

  • Decrease: Debit

age...

Part A — Background and Transactions (Scenario)

• Company: GreenLine Consulting (service business).

• Fiscal months: January and February (Year 1).

• Chart of relevant accounts (simple): * Cash, Accounts Receivable, Prepaid Rent, Supplies, Equipment, Accumulated Depreciation, Accounts Payable, Unearned Revenue, Salaries Payable, Owner's Capital, Service Revenue, Supplies Expense, Rent Expense, Salary Expense, Depreciation Expense, and Bad Debt Expense.

• Transactions (Chronological Order):

  • Jan 1 — Owner invests $30,000 cash in the business. (Owner's capital)

  • Jan 5 — Purchased equipment for $60,000; paid $30,000 cash and $30,000 on a note payable. Useful life 5 years, no salvage. (Note: Corrected from original $60k cash to avoid negative cash balance).

  • Jan 10 — Paid $6,000 cash for 3 months' rent (Jan–Mar).

  • Jan 15 — Performed consulting services worth $20,000; invoiced the client (sent bill), not yet paid.

  • Jan 20 — Received $6,000 cash retainer for a 6-month service contract (service to be delivered monthly Feb–Jul). Record as cash received.

  • Jan 25 — Paid salaries of $2,500 for payroll covering January.

  • Feb 1 — Performed and billed consulting services $15,000 (invoice sent).

  • Feb 10 — Collected $12,000 cash from customers on account (applies to receivables arising from Jan 15 and Feb 1 invoices).

  • Feb 15 — Paid $900 cash for supplies purchased and used immediately.

  • Feb 20 — Performed one month of the service related to the Jan 20 retainer (i.e., earned 1/6 of the $6,000).

  • Feb 25 — Incurred salary expense for February $3,000 but not yet paid by Feb 28.

  • Feb 28 — Bought supplies on account for $1,200 (invoice received, to be paid later).

  • Feb 28 — Record monthly depreciation on equipment (straight-line, annual = 60,000/5 = 12,000 per year → 1,000 per month).

  • Feb 28 — Management estimates that 2% of accounts receivable will be uncollectible (allowance method for bad debts).

Part B — Student Tasks

• 1. Record the journal entries (accrual-basis) for each transaction as of the transaction date.

• 2. Record the cash-basis bookkeeping for the same transactions (only record when cash actually moves).

• 3. Prepare the adjusting entries required on Feb 28 for accrual accounting (rent amortization, earned portion of retainer, accrued salaries, depreciation, supplies used, supplies on hand, and bad debt allowance).

• 4. Prepare (a) accrual-basis income statements for Jan and Feb (separate months) and (b) cash-basis income statements for Jan and Feb (separate months).

• 5. Prepare (a) an accrual-basis balance sheet as of Feb 28 and (b) a cash-basis statement of financial position as of Feb 28.

• 6. Reconcile cash-basis net income to accrual-basis net income for February and explain the main reconciling items.

• 7. Show the journal entries required to convert the cash-basis records to accrual basis on Feb 28.

Part C — Solution Set (Step-by-Step)

1. Accrual-Basis Journal Entries

• Jan 1: Dr Cash 30,000 / Cr. Owner's Capital 30,000

• Jan 5: Dr Equipment 60,000 / Cr. Cash 30,000 / Cr. Note Payable 30,000

• Jan 10: Dr Prepaid Rent 6,000 / Cr Cash 6,000

• Jan 15: Dr Accounts Receivable 20,000 / Cr. Service Revenue 20,000

• Jan 20: Dr Cash 6,000 / Cr. Unearned Revenue 6,000

• Jan 25: Dr Salary Expense 2,500 / Cr. Cash 2,500

• Feb 1: Dr Accounts Receivable 15,000 / Cr. Service Revenue 15,000

• Feb 10: Dr Cash 12,000 / Cr. Accounts Receivable 12,000

• Feb 15: Dr Supplies Expense 900 / Cr. Cash 900

• Feb 20: Dr Unearned Revenue 1,000 / Cr Service Revenue 1,000

• Feb 25: Dr Salary Expense 3,000 / Cr. Salaries Payable 3,000

• Feb 28: Dr Supplies 1,200 / Cr. Accounts Payable 1,200

• Feb 28: Dr Depreciation Expense 1,000 / Cr Accumulated Depreciation 1,000

• Feb 28: Dr Bad Debt Expense 460 / Cr. Allowance for Doubtful Accounts 460 (Note: 2% of $23,000 Ending AR)

2. Cash-Basis Bookkeeping (Strict Cash Movement)

• Jan 1: Dr Cash 30,000 / Cr. Owner's Capital 30,000

• Jan 5: Dr Equipment 30,000 / Cr Cash 30,000 (Capitalized portion paid)

• Jan 10: Dr Rent Expense 6,000 / Cr. Cash 6,000 (Expensed when paid)

• Jan 20: Dr Cash 6,000 / Cr Service Revenue 6,000 (Revenue recognized on receipt)

• Jan 25: Dr Salary Expense 2,500 / Cr. Cash 2,500

• Feb 10: Dr Cash 12,000 / Cr. Service Revenue 12,000

• Feb 15: Dr Supplies Expense 900 / Cr. Cash 900

3. Accrual Calculations & Ending Balances (Feb 28)

• Accounts Receivable Calculation:

  • Jan 15 Billed: 20,000

  • Feb 1 Billed: 15,000

  • Feb 10 Collected: (12,000)

  • Ending A/R Balance: $23,000

  • Bad Debt Estimate (2%): $460

• Prepaid Rent Amortization:

  • Total paid: $6,000 for 3 months = $2,000/month.

  • Rent Expense Jan: $2,000 | Rent Expense Feb: $2,000.

  • Remaining Prepaid Balance: $2,000 (for March).

• Unearned Revenue (Retainer):

  • Total received: $6,000 for 6 months = $1,000/month.

  • Feb 20 earned: $1,000.

  • Remaining Unearned Balance: $5,000.

• Depreciation Expense:

  • $60,000 cost / 60 months = $1,000/month.

  • Accumulated Depreciation (Feb 28): $2,000 (Jan + Feb).

4. Income Statement Comparison (Jan & Feb)

• Accrual-Basis Net Income (January):

  • Revenue: 20,000

  • Expenses: 5,500 (Depr. 1k, Rent 2k, Salary 2.5k)

  • Net Income: $14,500

• Accrual-Basis Net Income (February):

  • Revenue: 16,000 (Billed 15k + Retainer 1k)

  • Expenses: 7,360 (Depr. 1k, Rent 2k, Salary 3k, Supplies 900, Bad Debt 460)

  • Net Income: $8,640

• Cash-Basis Net Income (January):

  • Revenue: 6,000 (Retainer receipt)

  • Expenses: 8,500 (Rent 6k, Salary 2.5k)

  • Net Result: ($2,500) Loss

• Cash-Basis Net Income (February):

  • Revenue: 12,000 (Collections)

  • Expenses: 900 (Supplies)

  • Net Income: $11,100

5. Accrual Balance Sheet (Feb 28 Summary)

• Assets ($92,340 Total):

  • Cash: 8,600

  • Net A/R: 22,540 (23,000 - 460)

  • Prepaid Rent: 2,000

  • Supplies: 1,200

  • Net Equipment: 58,000 (60,000 - 2,000)

• Liabilities ($39,200 Total):

  • Accounts Payable: 1,200

  • Salaries Payable: 3,000

  • Unearned Revenue: 5,000

  • Note Payable: 30,000

• Equity ($53,140 Total):

  • Owner's Capital: 30,000

  • Retained Earnings: 23,140 (Cumulative Net Income)

6. Reconciliation (Feb Cash-Basis to Feb Accrual-Basis)

• Start: Cash-Basis Net Income (Feb): $11,100

• Adjustments:

  • Add Revenue earned but not collected in Feb: +4,000 (AR increase 3k + Retainer earned 1k)

  • Subtract Salaries accrued but not paid: (3,000)

  • Subtract Bad Debt Expense (non-cash): (460)

  • Subtract Depreciation Expense (non-cash): (1,000)

  • Subtract Rent expense recognized in accrual but not cash: (2,000)

• Result: Accrual-Basis Net Income (Feb): $8,640

7. Conversion Journal Entries (Cash → Accrual)

• a) Accounts Receivable: Dr Accounts Receivable 23,000 / Cr. Service Revenue 23,000

• b) Unearned Revenue: Dr Service Revenue 6,000 / Cr. Unearned Revenue 6,000 (Followed by Dr Unearned Revenue 1,000 / Cr. Service Revenue 1,000)

• c) Accrued Expenses: Dr Salary Expense 3,000 / Cr. Salaries Payable 3,000

• d) Rent Reclassification: Dr Prepaid Rent 2,000 / Dr Rent Expense 4,000 / Cr Rent Expense 6,000 (Adjusts initial payment)

• e) Depreciation: Dr Depreciation Expense 2,000 / Cr Accumulated Depreciation 2,000

• f) Supplies on Hand: Dr Supplies 1,200 / Cr. Accounts Payable 1,200

• g) Bad Debts: Dr Bad Debt Expense 460 / Cr. Allowance for Doubtful Accounts 460

Discussion: Inventory Estimation and Loss Recovery for Harbor Tech 

Harbor Tech Computer Supply Company has just been destroyed by fire. Fortunately, however, the computerized accounting records had been “backed up” and were in a remote computer location so that the records were not destroyed. The company does not use the retail method of accounting, so although beginning inventory at cost, purchases at cost, purchase returns and allowances, freight in, sales, sales returns and allowances, and other accounting information are available, the retail method of estimating inventory destroyed cannot be used.

What suggestion can you give for determining the estimated cost of the inventory destroyed? What information is needed, and where would this information be found?

Estimating the Cost of Inventory Destroyed — Guidance for Harbor Tech Supplies

Summary

Harbor Tech Supplies must reconstruct its inventory position at the loss date from existing electronic and third‑party records. The goal is to produce a defensible estimate of inventory at cost (the book value of inventory destroyed) for financial reporting and insurance proof of loss.

The general identity to remember:

Beginning inventory + Net purchases = Cost of goods available for sale; Cost of goods available for sale − Cost of goods sold = Ending inventory (the amount lost when the inventory was destroyed).

Primary methods to estimate inventory destroyed (when the retail method is not used)

Specific identification (preferred when feasible)

• When to use: Harbor Tech Supplies uses an inventory system that tracks items by SKU, lot, or serial number, and purchase costs are recorded per item.

• Approach: Recreate the item-level inventory listing at the loss date, attach historical acquisition cost for each item, and sum costs to obtain the value destroyed.

• Information needed and where to find it:

  • Inventory master file / item ledger / SKU list — ERP or inventory system backups.

  • Item-level purchase invoices and supplier receipts — accounts payable files, supplier portals, e‑mail attachments, or vendor archives.

  • Receiving reports and warehouse logs—warehouse management system or receiving paper files if any survived.

  • Sales/shipping records to exclude items already sold or shipped — sales order system, shipping manifests, or carrier records.

  • Bills of lading for shipments in transit (to confirm ownership at loss date).

• Strengths: Most accurate and directly auditable.

• Practical note: Where specific invoice costs are missing, use recent purchase prices, supplier price lists, or standard cost schedules and document the reason for using those proxies.

Gross profit (gross margin) method (widely used and accepted)

• When to use: Sales records are complete and gross margins are relatively stable (or can be determined by product category).

• Approach: Estimate COGS by applying a reliable gross profit percentage to net sales through the loss date. Then compute ending inventory = Goods available for sale − Estimated COGS.

• Steps and information needed:

  • Beginning inventory at cost — prior-period closing schedules, general ledger.

  • Net purchases up to loss date (purchases − returns + freight‑in) — purchase journal, AP ledger, purchase invoices.

  • Net sales through loss date (exclude taxes) — sales journal, POS or e‑commerce order history, invoices.

  • Historical gross profit percentages by product line or at the company level—prior financial statements, management reports, or cost-of-sales analysis.

• Strengths and limitations: Practical and commonly used for claims; less precise if margins vary markedly among product lines (in which case compute by category).

Standard-cost / bill-of-material (BOM) reconstruction (for manufacturers or assemblers)

• When to use: Inventory includes assembled products or components with documented BOMs or standard costs.

• Approach: Use production/job-cost records and BOMs to reconstruct quantities of finished goods and components at their standard or recent actual costs.

• Data sources: Production logs, work orders, BOMs from ERP or engineering files, raw material purchase invoices.

Sampling and unit-cost averaging

• When to use: Item-level cost data are incomplete, but quantity records (or counts from prior cycles) exist.

• Approach: Select a representative sample of SKUs, determine actual cost per unit from invoices, calculate average cost, and extrapolate to the total listed quantities. Document sampling method and selection rationale.

• Data sources: Prior physical count sheets, SKU lists, supplier invoices, recent purchase price lists.

Third-party confirmations and external documentary evidence (complements all methods)

Use vendor confirmations, carrier logs, bank and payment records, customs/import documents, and customer/shipping records to corroborate quantities and costs.

• Sources: Supplier statements, freight bills of lading, carrier tracking, bank statements, customs/import entries, customer order confirmations, and consignment agreements.

Key adjustments and special considerations

• Ownership issues (FOB terms, consigned goods): Determine whether goods in transit or consignments were owned by Harbor Tech Supplies at the loss date. Check purchase terms on invoices and shipping docs.

• Returns, layaways, and deposits: Decide whether items on layaway or subject to customer claims were still inventory or recorded differently.

• Obsolescence and damaged goods: Apply an obsolescence reserve only where justified and supported by prior inventory analysis or market data.

• Multiple margin levels: If Harbor Tech Supplies sells across product categories with different margins, perform gross profit calculations by category to reduce estimation error.

• Capitalization policy: Include or exclude packaging, import duties, or other incidental costs according to the company’s inventory capitalization policy (and insurer expectations).

Detailed checklist — records to collect and where to look

From Harbor Tech Supplies’ electronic systems (remote backups must be preserved):

• Inventory master list with SKUs, quantities on hand, and last or average costs.

• Item ledger cards or transaction history per SKU showing receipts and issues.

• Sales invoices, POS transaction logs, order management system exports, and shipping manifests.

• Purchase orders, supplier invoices, receiving reports, and freight-in invoices.

• Goods-in-transit documentation (bills of lading), supplier confirmations.

• Production/job-cost records, BOMs, and standard cost sheets (if applicable).

• Prior physical inventory count sheets and reconciliation schedules.

From accounting and finance:

• General ledger and trial balance as of the loss date.

• Cost of goods sold schedules and prior audited financial statements to support historical gross margins.

• Accounts payable and accounts receivable aging and statements.

From external/third parties:

• Supplier statements and confirmations.

• Carrier and warehouse receipts.

• Bank and credit-card statements showing payments for significant purchases.

• Customs/import entries and duty invoices (for imported goods).

• Customer confirmations for large orders or returns.

Physical evidence and electronic logs:

• Photographs of inventory and warehouse prior to loss, inventory tags, and barcode scans.

• IT transaction logs, timestamped sales, and receipt transactions from backups.

Step-by-step workflow to produce a defensible estimate

1. Preserve all electronic backups and logs in their original format and create secure copies to prevent alteration.

2. Notify the insurer promptly and obtain the insurer’s list of required documentation and any preferred formats for proof of loss.

3. Reconstruct a detailed inventory listing:

   • Export item-level data from the backup: SKU, description, recorded on‑hand quantity, and recorded cost (if available).

   • Reconcile the listing to general ledger beginning inventory and purchases.

4. Choose the primary estimation method:

   • If item-level cost data exist for most SKUs, apply specific identification.

   • If item-level cost data are incomplete but sales data are complete, apply the gross profit method by category.

   • For manufactured items: reconstruct via BOMs and production records.

5. Use sampling to fill gaps and corroborate with third‑party documents as needed.

6. Compute the estimate and prepare detailed work papers linking each figure to source documents (invoices, receiving reports, shipping manifests, and sales reports).

7. Adjust for ownership issues (consigned goods, goods in transit), obsolescence, and any items excluded from inventory policy.

8. Arrange for an independent review—internal audit, CPA, or forensic accountant—to validate the methodology and the estimates before submitting to the insurer.

Worked example (gross profit method — third person)

Facts:

• Beginning inventory = $180,000

• Net purchases to loss date = $320,000 (purchases − returns + freight‑in)

• Goods available for sale = $500,000

• Net sales through loss date = $620,000

• Harbor Tech Supplies’ historical gross profit % = 38% (by category or company level)

Calculation:

• Estimated gross profit on sales = $620,000 × 38% = $235,600

• Estimated COGS = $620,000 − $235,600 = $384,400

• Estimated ending inventory = $500,000 − $384,400 = $115,600

Conclusion: Under these assumptions, Harbor Tech Supplies would estimate $115,600 of inventory destroyed (subject to adjustment if category-level margins differ).

Documentation and audit trail to produce

• A complete inventory schedule (SKU-level if possible) showing quantities, unit costs, and total cost reconciled to the general ledger.

• Copies of supplier invoices, receiving reports, purchase orders, and bills of lading used in the reconstruction.

• Sales summaries and the calculations showing how gross profit percentages were derived (with supporting historical reports).

• Workpapers that reconcile the reconstructed inventory to the company’s accounting balances and that document all assumptions.

• A narrative report that explains the chosen methodology, period used for margin calculation, any extrapolations or sampling techniques, and adjustments (consignment, transit, obsolescence).

• Evidence of independent review (CPA or experienced forensic accountant), including any comments or qualifications.

When Harbor Tech Supplies should involve external experts

The company should engage a forensic accountant, CPA, or inventory appraisal specialist when

• The inventory value is large relative to company assets.

• Inventory is highly specialized or difficult to value.

• There is potential for insurer dispute or litigation.

• The sales/COGS history is inconsistent, or margins vary greatly by product line.

Practical next steps (recommended immediate actions)

1. Secure and make immutable copies of all backup data (inventory, sales, purchases, production, receiving).

2. Prepare an initial item-level export and reconciliation to the general ledger.

3. Identify gaps (missing cost data, missing categories) and plan the primary estimation method (specific identification preferred; otherwise gross profit by category).

4. Gather third‑party confirmations for large-value purchases and check bills of lading for goods in transit.

5. Prepare detailed workpapers and a narrative proof-of-loss package for the insurer.

6. Obtain an independent review prior to filing the claim.

Offer to help

If Harbor Tech Supplies would like, the advisor can

• Provide a fillable inventory-loss schedule template to populate with figures;

• Run the gross profit method calculations using the company’s beginning inventory, purchases, and sales figures (the company can paste those numbers); or

• Draft a checklist of documents specifically tailored for submission to the insurer and the company’s CPA.

Chart of Accounts 

In June 20X1, Joseph Hayes opened Cosco, a photography studio. The chart of accounts is as follows:

• ASSETS

  • 101 Cash

  • 111 Accounts Receivable

  • 121 Supplies

  • 137 Prepaid Rent

  • 141 Office Equipment

  • 151 Photographic Equipment

• LIABILITIES

  • 202 Accounts Payable

• OWNER’S EQUITY

  • 301 Joseph Hayes, Capital

  • 302 Joseph Hayes, Drawing

• REVENUE

  • 401 Fees Income

• EXPENSES

  • 511 Office Cleaning Expense

  • 514 Rent Expense

  • 517 Salaries Expense

  • 520 Telephone Expense

  • 523 Utilities Expense

August Transactions 

Below are the transactions for Cosco during its first month of operations:

• June 1: Joseph Hayes invested $65,000 cash in the business.

• June 2: Issued Check 1001 for $5,500 to pay the June rent.

• June 5: Purchased office equipment for $18,200 from Office Interiors, Inc.; received Invoice 2153, payable in 60 days.

• June 6: Issued Check 1002 for $7,400 to purchase photographic equipment.

• June 7: Purchased supplies for $2,300; paid with check 1003.

• June 10: Issued check 1004 for $2,100 for office cleaning service.

• June 12: Performed services for $8,400 in cash and $4,100 on credit.

• June 15: Returned damaged supplies; received a $720 cash refund.

• June 18: Purchased a computer for $5,800 from Deluxe Office Supply, Invoice 403; issued Check 1005 for a $1,200 down payment. The balance is payable in 30 days.

• June 20: Issued Check 1006 for $9,000 to Office Interiors, Inc., as payment on account for office furniture, Invoice 2153.

• June 26: Performed services for $5,300 on credit.

• June 27: Paid $625 for the monthly telephone bill; issued Check 1007.

• June 30: Received $6,100 in cash from credit clients.

• June 30: Issued Check 1008 to pay the monthly utility bill of $1,150.

• June 30: Issued Checks 1009–1011 for $15,800 for salaries.

Illustration

1. Journal entries (chronological)

• June 1 Dr 101 Cash.............................................. 65,000 Cr 301 Joseph Hayes, Capital........................... 65,000 (Owner invested cash in the business.)

• June 2 — Check 1001 Dr 514 Rent Expense...................................... 5,500 Cr 101 Cash........................................... 5,500 (Paid June rent)

• June 5 — Invoice 2153 Dr 141 Office Equipment................................. 18,200 Cr 202 Accounts Payable.............................. 18,200 (Purchased office equipment on account)

• June 6 — Check 1002 Dr 151 Photographic Equipment............................ 7,400 Cr 101 Cash........................................... 7,400 (Purchased photographic equipment for cash)

• June 7 Dr 121 Supplies.......................................... 2,300 Cr 101 Cash........................................... 2,300 (Purchased supplies and paid cash)

• June 10 — Check 1004 Dr 511 Office Cleaning Expense.......................... 2,100 Cr 101 Cash........................................... 2,100 (Paid for office cleaning service)

• June 12 Dr 101 Cash ................................................ 8,400 Dr 111 Accounts Receivable............................... 4,100 Cr 401 Fees Income................................... 12,500 (Performed services: $8,400 cash, $4,100 on account)

• June 15 Dr 101 Cash................................................ 720 Cr 121 Supplies........................................ 720 (Returned damaged supplies; received cash refund)

• June 18—Invoice 403; Check 1005 down payment Dr 141 Office Equipment................................. 5,800 Cr 101 Cash........................................... 1,200 Cr 202 Accounts Payable............................... 4,600 (Purchased computer; $1,200 paid, remainder on account.)

• June 20 — Check 1006 Dr 202 Accounts Payable................................ 9,000 Cr 101 Cash........................................... 9,000 (Payment on account to Office Interiors, Invoice 2153)

• June 26 Dr 111 Accounts Receivable............................... 5,300 Cr 401 Fees Income................................... 5,300 (Performed services on credit)

• June 27 — Check 1007 Dr 520 Telephone Expense................................ 625 Cr 101 Cash............................................. 625 (Paid monthly telephone bill)

• June 30 (receipt from customers) Dr 101 Cash.............................................. 6,100 Cr 111 Accounts Receivable........................... 6,100 (Collected cash from credit clients)

• June 30 — Check 1008 Dr 523 Utilities Expense................................ 1,150 Cr 101 Cash........................................... 1,150 (Paid monthly utility bill)

• June 30 — Checks 1009–1011 (salaries) Dr 517 Salaries Expense............................... 15,800 Cr 101 Cash.......................................... 15,800 (Paid salaries)

2. Ledger / T-account ending balances (summary)

• Assets

  • 101 Cash........................................... 35,145 Dr (Calc: +65,000 - 5,500 - 7,400 - 2,300 - 2,100 + 8,400 + 720 - 1,200 - 9,000 - 625 + 6,100 - 1,150 - 15,800 = 35,145)

  • 111 Accounts Receivable............................ 3,300 Dr (Calc: +4,100 +5,300 -6,100 = 3,300)

  • 121 Supplies....................................... 1,580 Dr (Calc: +2,300 - 720 = 1,580)

  • 137 Prepaid Rent..................................... 0 (No prepaid rent transactions given)

  • 141 Office Equipment.............................. 24,000 Dr (Calc: +18,200 + 5,800 = 24,000)

  • 151 Photographic Equipment......................... 7,400 Dr

• Liabilities

  • 202 Accounts Payable.............................. 13,800 Cr (Calc: +18,200 + 4,600 - 9,000 = 13,800)

• Owner’s Equity

  • 301 Joseph Hayes, Capital......................... 65,000 Cr

  • 302 Joseph Hayes, Drawing.......................... 0 Dr (no drawings recorded)

• Revenue

  • 401 Fees Income................................... 17,800 Cr (Calc: +12,500 + 5,300 = 17,800)

• Expenses (debit balances)

  • 511 Office Cleaning Expense......................... 2,100 Dr

  • 514 Rent Expense................................... 5,500 Dr

  • 517 Salaries Expense.............................. 15,800 Dr

  • 520 Telephone Expense ................................ 625 Dr

  • 523 Utilities Expense .............................. 1,150 Dr

• Summary check (Assets = Liabilities + Equity)

  • Total assets = 35,145 + 3,300 + 1,580 + 24,000 + 7,400 = 71,425

  • Liabilities = 13,800

  • Equity (capital) = 65,000

  • Net income (loss) = Revenues 17,800 - Expenses 25,175 = (7,375) loss

  • Liabilities + Equity after recognizing loss = 13,800 + (65,000 - 7,375) = 71,425

  • Balances agree (71,425 = 71,425)

3. Unadjusted Trial Balance — June 30, 20X1 (pre-closing)

• Debit balances

  • Cash (101)..................................... 35,145

  • Accounts Receivable (111)........................ 3,300

  • Supplies (121).................................. 1,580

  • Office Equipment (141)........................ 24,000

  • Photographic Equipment (151).................... 7,400

  • Office Cleaning Expense (511).................... 2,100

  • Rent Expense (514)............................... 5,500

  • Salaries Expense (517).......................... 15,800

  • Telephone Expense (520)........................ 625

  • Utilities Expense (523)........................ 1,150

  • (Total Debits)................................ 71,600 — wait, compute below precisely

Let’s list and sum carefully:

Debits:

• Cash: 35,145

• A/R 3,300

• Supplies 1,580

• Office Equipment: 24,000

• Photographic Equipment 7,400

• Office Cleaning Expense: 2,100

• Rent Expense: 5,500

• Salaries Expense: 15,800

• Telephone Expense 625

• Utilities Expense: 1,150

Sum debits = 35,145 + 3,300 + 1,580 + 24,000 + 7,400 + 2,100 + 5,500 + 15,800 + 625 + 1,150 Calculate: 35,145 + 3,300 = 38,445; +1,580 = 40,025; +24,000 = 64,025; +7,400 = 71,425; +2,100 = 73,525; +5,500 = 79,025; +15,800 = 94,825; +625 = 95,450; +1,150 = 96,600

Total debits = 96,600

Credits:

• Accounts Payable (202)........................... 13,800

• Joseph Hayes, Capital (301)........................ 65,000

• Fees Income (401)................................. 17,800

Sum credits = 13,800 + 65,000 + 17,800 = 96,600

Trial balance balances: Debits = 96,600; Credits = 96,600

Note on net loss and presentation

• The company has a net loss for June of 7,375 (expenses 25,175 > revenues 17,800). That loss will be closed to the owner’s capital account at period end (closing entries). If you want the post-closing balances, I can prepare closing entries and show the final capital balance after closing (which would be 65,000 - 7,375 = 57,625, assuming no drawings).

OST-CLOSING TRIAL BALANCE — JUNE 30, 20X1

DEBITS

• 101 Cash: 35,145

• 111 Accounts Receivable: 3,300

• 121 Supplies: 1,580

• 141 Office Equipment: 24,000

• 151 Photographic Equipment: 7,400

• Total Debits: 71,425

CREDITS

• 202 Accounts Payable: 13,800

• 301 Joseph Hayes, Capital: 57,625

• Total Credits: 71,425

INCOME STATEMENT

REVENUES

• Fees Income: 17,800

EXPENSES

• Office Cleaning Expense: 2,100

• Rent Expense: 5,500

• Salaries Expense: 15,800

• Telephone Expense: 625

• Utilities Expense: 1,150

• Total Expenses: 25,175

• Net Loss: (7,375)

CLASSIFIED BALANCE SHEET

ASSETS

• Cash (101): 35,145

• Accounts Receivable (111): 3,300

• Supplies (121): 1,580

• Total Current Assets: 40,025

• Office Equipment (141): 24,000

• Photographic Equipment (151): 7,400

• Total Noncurrent Assets: 31,400

• Total Assets: 71,425

LIABILITIES AND OWNER'S EQUITY

• Accounts Payable (202): 13,800

• Total Current Liabilities: 13,800

• Joseph Hayes, Capital (301): 57,625

• Total Liabilities and Owner's Equity: 71,425

GENERAL JOURNAL

JUNE TRANSACTIONS

• June 1: Cash (101) Dr 65,000 | Joseph Hayes, Capital (301) Cr 65,000

• June 2: Rent Expense (514) Dr 5,500 | Cash (101) Cr 5,500

• June 5: Office Equipment (141) Dr 18,200 | Accounts Payable (202) Cr 18,200

• June 6: Photographic Equipment (151) Dr 7,400 | Cash (101) Cr 7,400

• June 7: Supplies (121) Dr 2,300 | Cash (101) Cr 2,300

• June 10: Office Cleaning Expense (511) Dr 2,100 | Cash (101) Cr 2,100

• June 12: Cash (101) Dr 8,400, Accounts Receivable (111) Dr 4,100 | Fees Income (401) Cr 12,500

• June 15: Cash (101) Dr 720 | Supplies (121) Cr 720

• June 18: Office Equipment (141) Dr 5,800 | Cash (101) Cr 1,200, Accounts Payable (202) Cr 4,600

• June 20: Accounts Payable (202) Dr 9,000 | Cash (101) Cr 9,000

• June 26: Accounts Receivable (111) Dr 5,300 | Fees Income (401) Cr 5,300

• June 27: Telephone Expense (520) Dr 625 | Cash (101) Cr 625

• June 30: Cash (101) Dr 6,100 | Accounts Receivable (111) Cr 6,100

• June 30: Utilities Expense (523) Dr 1,150 | Cash (101) Cr 1,150

• June 30: Salaries Expense (517) Dr 15,800 | Cash (101) Cr 15,800

GENERAL LEDGER SUMMARY

ACCOUNT BALANCES

• 101 Cash: 35,145 (Debit)

• 111 Accounts Receivable: 3,300 (Debit)

• 121 Supplies: 1,580 (Debit)

• 141 Office Equipment: 24,000 (Debit)

• 151 Photographic Equipment: 7,400 (Debit)

• 202 Accounts Payable: 13,800 (Credit)

• 301 Joseph Hayes, Capital: 57,625 (Credit)

Accounts Payable — Notes on Key Terms

Below is a structured set of notes covering the terms you listed, organized under the general heading "Accounts Payable." Each term includes a concise definition, how it relates to accounts payable, typical journal entries (where relevant), and practical points to remember.

Accounts Payable (A/P)

• Definition: A current liability representing amounts owed to suppliers for goods and services purchased on credit.

• Relation to A/P: Central account that records obligations; increases with credit purchases, decreases with payments or credits (returns/allowances).

• Typical entry when purchasing on credit:

  • Dr Purchases (or Inventory)

  • Cr Accounts Payable

• Practical: A/P is often tracked per supplier in an accounts payable ledger; periodic reconciliations and aging are important for cash planning.

Accounts Payable Ledger

• Definition: A subsidiary ledger that contains individual supplier accounts showing invoices, payments, returns, and balances.

• Relation to A/P: Provides detail supporting the general ledger accounts payable control account.

• Practical: Used to prepare a schedule of accounts payable and to manage vendor-specific balances and due dates.

Schedule of Accounts Payable (Aging/Schedule)

• Definition: A report listing outstanding payables by supplier, often broken down by aging categories (current, 30, 60, 90+ days).

• Relation to A/P: Used to verify the balance in the control account and to prioritize payments.

• Practical: Helpful for cash flow forecasting and identifying overdue invoices that may incur penalties or lose discounts.

Purchase Requisition

• Definition: An internal document requesting the purchase of goods or services; initiates the procurement process.

• Relation to A/P: Not an A/P transaction itself, but precedes the purchase order and invoice that create A/P.

• Practical: Used for internal approvals and budgeting control.

Purchase Order (PO)

• Definition: A formal document sent to a supplier specifying items, quantities, prices, and delivery terms.

• Relation to A/P: When goods are received and an invoice arrives matching the PO, A/P is recorded. Helps match three-way (purchase order, receiving report, supplier invoice) for verification.

• Practical: Helps prevent unauthorized purchases and supports matching in the purchasing/receiving process.

Receiving Report

• Definition: Document prepared by the receiving department confirming goods received (quantities, condition, date).

• Relation to A/P: Used to verify supplier invoices before recording A/P; helps complete the three-way match (PO, receiving report, invoice).

• Typical effect: On receipt of inventory (when using perpetual systems):

  • Dr Inventory

  • Cr Accounts Payable (if invoiced) or Accrued Purchases (if not yet invoiced)

Purchase Invoice (Supplier Invoice)

• Definition: A vendor’s bill requesting payment for goods or services provided.

• Relation to A/P: Primary source document for recording the liability; triggers entry to Accounts Payable upon approval/matching.

• Typical entry on recognition:

  • Dr Purchases (or Inventory/Expense)

  • Cr Accounts Payable

Purchases Account

• Definition: A nominal (income statement) account used in periodic inventory systems to record the cost of goods purchased for resale.

• Relation to A/P: Credit purchases are posted to Purchases and create a liability in Accounts Payable.

• Practical: In periodic systems, net purchases flow into the cost of goods sold calculation at period end.

Purchases Journal

• Definition: A specialized journal for recording credit purchases of inventory (or other frequently purchased items).

• Relation to A/P: Totals from the purchases journal are posted to Accounts Payable (control account) and Purchases (or Inventory).

• Practical: Helps organize high-volume purchase transactions and simplifies posting.

Purchase Return

• Definition: Goods returned to the supplier for reasons such as defects or incorrect items.

• Relation to A/P: Results in reduction of the amount owed. Documented by a debit memo from the buyer or a credit memo from the supplier.

• Typical entries:

  • If the buyer issues a debit memorandum (reduces what the buyer owes):

    • Dr Accounts Payable (or Purchase Returns & Allowances)

    • Cr Inventory (or Purchases Returns & Allowances)

  • If supplier issues Credit Memorandum:

    • Dr Accounts Payable

    • Cr Purchase Returns & Allowances (or Inventory)

Purchase Allowance

• Definition: A reduction in price granted by a seller to a buyer for goods that are defective or not as ordered, where the buyer retains the goods.

• Relation to A/P: Lowers the amount payable; recorded via a credit memo from the supplier or an internal adjustment.

• Typical entry:

  • Dr Accounts Payable

  • Cr Purchase Returns & Allowances (or Inventory/Expense reduction)

Purchase Discount (Purchases Discount / Purchase Discount)

• Definition: A reduction in the invoice amount offered by a vendor for early payment (e.g., “2/10, n/30”).

• Relation to A/P: When payment is made within discount terms, the discount reduces the cash paid and is often recorded in a Purchase Discounts or Discounts Received account (contra-cost).

• Typical entry when taking discount under gross method:

  • On purchase (gross):

    • Dr Purchases

    • Cr Accounts Payable (full invoice)

  • On payment within the discount period:

    • Dr Accounts Payable (full invoice)

    • Cr Cash (net paid)

    • Cr Purchase Discounts (for discount amount)

• Practical: Taking discounts improves margin; A/P aging should highlight discount windows.

Purchase Discount Terms (Example)

• “2/10, n/30”—2% discount if paid within 10 days; otherwise, net amount due in 30 days.

• Always compare the effective annual cost of not taking a discount vs. using short-term funds.

Freight In (Transportation In) / Transportation In account

• Definition: Freight costs incurred by the buyer for transporting purchases from the supplier to the buyer's premises.

• Relation to A/P: If a supplier invoices freight to a buyer, the freight becomes part of the cost of inventory (or is recorded separately depending on policy) and creates an A/P entry if unpaid.

• Typical entries:

  • If added to inventory cost:

    • Dr Inventory (or Freight In/Transportation In)

    • Cr Accounts Payable (or Cash)

  • Freight In is included in Cost of Goods Sold when inventory is sold (periodic system).

• Practical: Distinguish between Freight In (buyer pays) and Freight Out (seller pays/delivery expense).

Cost of Goods Sold (COGS)

• Definition: The cost attributable to goods sold during a period; includes purchase cost plus related costs like freight-in (when the buyer pays) and less purchase returns/allowances/discounts.

• Relation to A/P: Purchases (and freight in) recorded via A/P ultimately flow into COGS (periodic or perpetual systems).

• Calculation (periodic system):

  • Beginning Inventory + Net Purchases + Freight In − Ending Inventory = COGS

Net Purchases

• Definition: Purchases less purchase returns, purchase allowances, and purchase discounts.

• Relation to A/P: Net purchases represent the net amount that increases COGS and supplier balances once returns and discounts are accounted for.

• Debit Memorandum (Buyer-side)

• Definition: A document prepared by the buyer to inform a supplier that the buyer is debiting the supplier’s account (reducing the supplier's receivable) because of a return or allowance.

• Relation to A/P: Used to justify a reduction in the Accounts Payable balance owed to the supplier.

• Typical entry on buyer’s books:

• Dr Accounts Payable

• Cr Purchases Returns & Allowances (or Inventory)

• Credit Memorandum (Seller-side)

• Definition: A document issued by a seller to the buyer indicating the seller has credited the buyer’s account (reducing the amount the buyer owes), typically due to returns, allowances, or billing adjustments.

• Relation to A/P: The buyer records the credit memo as evidence to reduce Accounts Payable.

• Debit / Credit Memos Practical Flow

• Buyer returns goods → buyer sends/records a debit memorandum (or the supplier issues a credit memo) → accounts payable is reduced when the supplier acknowledges or when the buyer books the memo under authorization.

• Sales Invoice and Sales Discount (Context)

• Sales Invoice: The vendor’s invoice is the buyer’s purchase invoice; it's the same document but from the seller's perspective.

• Sales Discount: For the seller, the counterpart of a purchase discount; when the seller grants an early-payment discount, the seller records a discount allowed (contra-revenue) and reduces accounts receivable.

• Relation to A/P: From the buyer perspective, the sales invoice becomes a purchase invoice and a liability in A/P. Sales discounts granted by sellers correspond to purchase discounts available to buyers.

• Sales Invoice (as A/P source)

• Definition: The seller’s billing document; when received by the buyer, it becomes the purchase invoice used to record accounts payable.

• Contra-Cost Accounts (Purchase Returns & Allowances, Purchase Discounts)

• Definition: Accounts that have credit balances and reduce the gross purchases amount to arrive at net purchases.

• Examples: Purchase Returns & Allowances, Purchase Discounts (or Discounts Received).

• Relation to A/P: These accounts reduce the actual cost recognized and the net amount ultimately paid to suppliers, lowering A/P when recorded.

• Purchases Discount vs. Sales Discount (Terminology)

• Purchase Discount: A term used by the buyer to record discounts received.

• Sales Discount: Used by the seller to record discounts allowed to customers.

• Both reflect the same economic event from opposite perspectives and affect A/P (buyer) and A/R (seller).

• Practical Internal Controls and Processes Related to Accounts Payable

• Three-way match: Match Purchase Order, Receiving Report, and Supplier Invoice before recording A/P and approving payment.

• Segregation of duties: Different staff for ordering, receiving, and payment to reduce fraud.

• Approval workflows: Use requisition and PO approvals for budget control.

• Vendor reconciliations: Regularly reconcile supplier statements to the accounts payable ledger.

• Aging and cash forecasting: Use the schedule of accounts payable to prioritize payments, capture discounts, and manage liquidity.

Example Journal Entries (Summary)

1. Purchase on credit (periodic system):

   • Dr Purchases

   • Cr Accounts Payable

2. Purchase on credit (perpetual system; inventory increases directly):

   • Dr Inventory

   • Cr Accounts Payable

3. Pay supplier taking discount (gross method):

   • Dr Accounts Payable (full invoice)

   • Cr Cash (invoice less discount)

   • Cr Purchase Discounts (discount amount)

4. Return of goods to supplier:

   • Dr Accounts Payable

   • Cr Purchases Returns & Allowances (or Inventory)

5. Freight In charged to buyer and unpaid:

   • Dr Inventory (or Freight In)

   • Cr Accounts Payable

Quick Checklist for Processing A/P Transactions

• Is there an approved purchase requisition and PO for this purchase?

• Has goods receipt been confirmed with a receiving report?

• Does the supplier invoice match the PO and receiving report (quantity/price)?

• Are discount terms being offered, and is it beneficial to take them?

• Has the supplier’s statement been reconciled against the A/P ledger?

Below are the full, self-contained periodic solutions for June: the three-column Purchases Journal, the Sales Journal, the Accounts Payable and Accounts Receivable subsidiary ledgers (with running balances), the general ledger control posting summaries, and the month-end Schedules of Accounts Payable and Accounts Receivable dated June 30. All figures use the account codes you provided. 

Account codes (used throughout)

• Accounts Receivable = 101

• Accounts Payable = 201

• Sales Tax Payable = 230

• Sales = 400

• Purchases = 500

• Freight In = 505

ASSUMPTIONS

• Periodic inventory system (use Purchases 500 and Freight In 505).

• Freight/delivery charges are recorded to Freight In (505).

• No cash payments or discounts were taken in June (all invoices outstanding as of June 30).

• Purchase discounts are noted on invoices but not recorded until payment.

1. Three‑Column Purchases Journal (periodic) Format: Date | Supplier (Acct. Credited) | Invoice No. (Invoice Date) | Purchases (500) DR | Freight In (505) DR | Accounts Payable (201) CR

Entries:

• June 3 | Elite Garments (201) | Invoice 801 (May 28) | Purchases: 5,200.00 | Freight In 145.00 | Accounts Payable: 5,345.00

• June 5 | Global Travel Gear (201) | Invoice 334 (May 30) | Purchases 4,100.00 | Freight In 95.00 | Accounts Payable 4,195.00

• June 7 | Modern Textiles (201) | Invoice 902 (June 2) | Purchases 3,600.00 | Freight In 80.00 | Accounts Payable 3,680.00

• June 9 | Rugged Outfitter (201) | Invoice 415 (June 6) | Purchases 2,850.00 | Freight In 0.00 | Accounts Payable 2,850.00

• June 12 | Corporate Attire Inc. (201) | Invoice 212 (June 10) | Purchases 7,200.00 | Freight In 180.00 | Accounts Payable 7,380.00

• June 18 | Urban Steps (201) | Invoice 607 (June 15) | Purchases 3,950.00 | Freight In 110.00 | Accounts Payable 4,060.00

• June 25 | Fine Knits Ltd. (201) | Invoice 1205 (June 22) | Purchases 1,400.00 | Freight In 0.00 | Accounts Payable 1,400.00

Purchases Journal totals—June

• Total Purchases (Account 500) — DEBIT: 28,300.00
  (5,200 + 4,100 + 3,600 + 2,850 + 7,200 + 3,950 + 1,400)

• Total Freight In (Account 505) — DEBIT: 610.00
  (145 + 95 + 80 + 0 + 180 + 110 + 0)

• Total Accounts Payable (Account 201) — CREDIT: 28,910.00
  (28,300 purchases + 610 freight)

General ledger posting from Purchases Journal (control posting)

• Debit Purchases (500): 28,300.00

• Debit Freight In (505) 610.00

• Credit Accounts Payable (201): 28,910.00

(Record posting date: June 30 — post journal totals to respective GL control accounts.)

2. Sales Journal (periodic system posts sales to Sales and AR control) Format: Date | Customer (Acct. Debited) | Sales Slip No. | Accounts Receivable (101) DR | Sales (400) CR | Sales Tax Payable (230) CR

Entries:

• June 29 | Lucas Grant (101) | Sales Slip 510 | Accounts Receivable 918.00 | Sales 850.00 | Sales Tax Payable 68.00
  (Sale: $850; Sales tax: $68; AR total: $918)

• June 30 | Sophia Martinez (101) | Sales Slip 511 | Accounts Receivable 1,350.00 | Sales 1,250.00 | Sales Tax Payable 100.00
  (Sale: $1,250; Sales tax: $100; AR total: $1,350)

Sales Journal totals

• Total Accounts Receivable (101) — DEBIT: 2,268.00

• Total Sales (400) — CREDIT: 2,100.00

• Total Sales Tax Payable (230) — CREDIT: 168.00

General ledger posting from the sales journal (control posting)

• Debit Accounts Receivable (101) 2,268.00

• Credit Sales (400): 2,100.00

• Credit Sales Tax Payable (230) 168.00

(Record posting date: June 30 — post journal totals to GL control accounts.)

3. Accounts Payable Subsidiary Ledger (vendor detail) — running balances as of June 30 (Each vendor account is part of AP subsidiary; no payments during June so balances equal invoice totals.)

Vendor / Invoice No. (Invoice date) — Amount — Running balance

• Elite Garments — Inv. 801 (May 28) — 5,345.00 — Balance 5,345.00

• Global Travel Gear — Inv. 334 (May 30) — 4,195.00 — Balance 4,195.00

• Modern Textiles — Inv. 902 (June 2) — 3,680.00 — Balance 3,680.00

• Rugged Outfitter — Inv. 415 (June 6) — 2,850.00 — Balance 2,850.00

• Corporate Attire Inc. — Inv. 212 (June 10) — 7,380.00 — Balance 7,380.00

• Urban Steps — Inv. 607 (June 15) — 4,060.00 — Balance 4,060.00

• Fine Knits Ltd. — Inv. 1205 (June 22) — 1,400.00 — Balance 1,400.00

Total — Accounts Payable subsidiary ledger balance = 28,910.00
(Control account: Accounts Payable 201 = 28,910.00)

4. Accounts Receivable Subsidiary Ledger (customer detail) — running balances as of June 30

Customer / Sales Slip No. (Date) — Amount — Running balance

• Lucas Grant — Slip 510 (June 29) — 918.00 — Balance 918.00

• Sophia Martinez — Slip 511 (June 30) — 1,350.00 — Balance 1,350.00

Total—Accounts Receivable subsidiary ledger balance = 2,268.00
(Control account: Accounts Receivable 101 = 2,268.00)

5. Control Account Posting Summary (verification) from Purchases Journal:

• Debit Purchases (500): 28,300.00

• Debit Freight In (505) 610.00

• Credit Accounts Payable (201): 28,910.00

From Sales Journal:

• Debit Accounts Receivable (101) 2,268.00

• Credit Sales (400): 2,100.00

• Credit Sales Tax Payable (230) 168.00

Verification: Subsidiary totals equal control accounts

• AP control (201) = 28,910.00—matches AP subsidiary total 28,910.00

• AR control (101) = 2,268.00—matches AR subsidiary total 2,268.00

6. Schedule of Accounts Payable — dated June 30 (Control account: Accounts Payable — 201)

Schedule of Accounts Payable Date: June 30

• Elite Garments (Invoice 801 — May 28).......................... 5,345.00

• Global Travel Gear (Invoice 334 — May 30).................... 4,195.00

• Modern Textiles (Invoice 902 — June 2)....................... 3,680.00

• Rugged Outfitter (Invoice 415 — June 6).................... 2,850.00

• Corporate Attire Inc. (Invoice 212 — June 10).............. 7,380.00

• Urban Steps (Invoice 607 — June 15)......................... 4,060.00

• Fine Knits Ltd. (Invoice 1205 — June 22).................... 1,400.00

Total Accounts Payable (201)................................ 28,910.00

Notes: All invoices shown are unpaid at June 30. Purchase discounts are available per vendor terms but are only recorded if/when payment is made.

7. Schedule of Accounts Receivable — dated June 30 (Control account: Accounts Receivable — 101)

Schedule of Accounts Receivable Date: June 30

• Lucas Grant (Sales Slip 510 — June 29)..................... 918.00
  (Sale $850 + Sales tax $68)

• Sophia Martinez (Sales Slip 511—June 30)................ 1,350.00
  (Sale: $1,250 + Sales tax: $100)

Total Accounts Receivable (101)............................ 2,268.00

Notes: Both customer invoices are outstanding at June 30.

Charge-account sales

• Definition: Sales of merchandise made to customers who have an established credit line with the business, allowing them to pay at a later date.

• Accounting Treatment: These are recorded in the Sales Journal. Debit: Accounts Receivable (asset increases); Credit: Sales (revenue increases).

• Impact: Increases total assets on the balance sheet and increases net income on the income statement.

Discount on credit card sales

• Definition: A service fee (usually 1% to 5%) charged by credit card companies or banks for processing a customer's credit card transaction.

• Accounting Treatment: Recorded as an expense at the time of the sale or when the cash is deposited. Debit: Cash (for the net amount); Debit: Credit Card Expense (for the fee); Credit: Sales (for the full price).

• Impact: Decreases net income by increasing operating expenses on the income statement.

Invoice

• Definition: The primary source document sent by the seller to the buyer that specifies the items sold, quantities, unit prices, total amount, and credit terms.

• Accounting Treatment: The invoice provides the data to record the entry in the sales journal. It triggers a debit to accounts receivable and a credit to sales.

• Impact: Acts as the legal evidence of a transaction for both the seller's revenue and the buyer's liability.

List price

• Definition: The initial price of a product as printed in a manufacturer’s or wholesaler’s catalog or price list.

• Accounting Treatment: The list price is not recorded in the accounting system if a trade discount is involved. It serves only as the starting point for calculating the actual transaction price.

• Impact: No direct impact on financial statements; it is purely a reference figure.

Net price

• Definition: The final price of a product after any trade discounts have been subtracted from the list price ($ \text{List Price} - \text{Trade Discount} = \text{Net Price} $).

• Accounting Treatment: This is the amount actually recorded in the journals. Debit: Accounts Receivable; Credit: Sales at the net price amount.

• Impact: This is the "true" revenue amount that appears on the income statement.

Open-account credit

• Definition: A flexible credit arrangement where a customer is permitted to make ongoing purchases up to a certain limit and pay the balance monthly.

• Accounting Treatment: Similar to charge-account sales. Recorded by debiting: Accounts Receivable in the General Ledger and the customer's specific account in the Subsidiary Ledger.

• Impact: Maintains a continuous asset balance on the balance sheet until the customer pays in cash.

Trade discount

• Definition: A reduction from the list price offered by wholesalers or manufacturers to certain classes of customers, such as retailers.

• Accounting Treatment: Trade discounts are never recorded in the accounting records. Only the resulting net price is captured.

• Impact: Does not appear on the income statement as a separate item; it simply results in a lower sales figure.

Wholesale business

• Definition: A business that acts as an intermediary, buying goods in bulk from manufacturers and selling them in smaller quantities to retailers or other professional users.

• Accounting Treatment: Wholesalers rely heavily on the sales journal because most of their business is conducted on credit. They frequently issue trade discounts and invoices to their retail clients.

• Impact: Characterized by high-volume transactions and large accounts receivable balances on the balance sheet.

Would net sales increase, decrease, or remain the same if the company offers a series of trade discounts on toys (25 percent, 15 percent) instead of a single 40 percent discount?

• a. Increase

• b. Decrease

• c. Remain the same

• d. Cannot answer given the data provided

Answer:

6. Analysis Question (from image_7ef5be.png)

Would net sales increase, decrease, or remain the same if the company offers a series of trade discounts on toys (25 percent, 15 percent) instead of a single 40 percent discount?

• Calculation for Series Discounts (25% then 15%):

  • Net Price Factor = $(1 - 0.25) \times (1 - 0.15) = 0.75 \times 0.85 = 0.6375$

  • Equivalent Single Discount = $1 - 0.6375 = 0.3625$ or 36.25%

• Calculation for Single Discount (40%):

  • Net Price Factor = $1 - 0.40 = 0.60$ or 60%

• Comparison:

  • Under series discounts, the customer pays 63.75% of the list price.

  • Under a single 40% discount, the customer pays 60.00% of the list price.

  • Since the company receives a higher net price (63.75% > 60.00%) from the series discount, net sales would increase.