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file named less01.htm. Your browser will start and you will have access to the file.
Chapter 1
Introduction
We all take in money from one source or another and we all dispense of our money in one way or another. This is true
our entire life. We move money from our left pocket to our right pocket and back and forth trying to keep everyone,
especially ourselves, content. Sometimes the pockets are fairly full and feel good. Other times, the pockets are almost
empty and we don't always know why or how they got so empty. The relevance of this fact is a financial balancing act.
How can you best track the money you take in and the money you give out?
If you are like 99% of the population, you do not track every dollar that leaves your household. It is sometimes these
"little" amounts that add up quickly: your daily coffee, newspaper, lunch, postage stamps, etc. Before you realize it,
those little things have taken a considerable chunk out of your income.
When I graduated from business college and landed my first job, I began to realize that my
accounting classes were very important to me. I quickly learned that I needed a budget and
incorporated some of my accounting skills to obtain that goal. I have always enjoyed working
with numbers in a concrete way. Give me numbers, and I can usually figure out the solution
to any problem. The preciseness of having only one correct answer has always intrigued me.
To that end, I have spent many hours looking for an error, sometimes only cents, to make the
problem equal.
Presently, as a 20-year-plus business education teacher, I'm always pleased and proud to
see some of my students blossom in this area and go on to acquire degrees and/or jobs in
the accounting field. From the easy task of adding a row of numbers to the complex job of
determining financial reports at the end of the year for a business, accounting continues to be a challenging yet
satisfying and very important part of my life. I hope to instill this love of accounting in you, the students in my online
Accounting Fundamentals class.
This course will teach you how to track each and every dollar that comes into and goes out of your household. This
course is based primarily for small businesses that require financial records with which to make decisions. However, all
the principles used throughout this course can be tailored to single households, with very few adaptations. Tracking all
your income and expenses is also a valuable asset at tax time. Compiling your financial transactions as they occur
during the year can save you time, energy, and possibly money when April 15th rolls around.
When you have completed this lesson, you will understand the concepts of account classifications, account titles, the
debit side, the credit side, the increase side, the decrease side and the normal balance side of accounts. You will also
understand the accounting equation and how it relates to the account classifications throughout this course.
Note:
There are forms located in each lesson's
https://www.ed2go.com/cgi-bin/src/maillesson.cgi?ccd=fun&sec=fun1199&lsn=01 5/11/2007
Supplementary Material section. Print the pages before

starting a lesson, as you will need them in order to follow
along with the course material presented in the lesson.
Solutions for each lesson are also located in the

Supplementary Material sections.
Because you'll be getting so much accounting practice

within the lesson chapters, you won't need to complete an
assignment at the end of each lesson (you'll notice that
that section is blank).
Chapter 2
Types of Businesses
There are two distinct types of businesses: service businesses and merchandising
businesses. A service business provides a service for a fee. Some examples of service
businesses might be a taxi service and a house cleaning business. All service businesses
earn income from completing a service for their consumers.
A merchandising business sells products to its consumers. This type of business buys or
manufactures products to resell to its customers. They mark up the price of these products
so that the business shows a profit after paying all expenses related to manufacturing and/or
purchasing and reselling the product. Most stores are considered merchandising businesses.
Consumers go in, pay for a product, and walk out with the product they bought. Most
merchandising businesses collect a sales tax on their products. This tax is turned over to the
state government at various intervals in the year. There are a few states that do not require
a sales tax to be collected, and some states exempt certain items or certain amounts from
their sales tax. We will discuss sales taxes in depth in a future lesson.
Some businesses are a combination service/merchandise business. They provide a service

and also sell a product. An example would be a mechanic's shop. They service your car for
a fee and also replace parts, such as oil, filters, belts, etc. Part of their charge is for labor
and part is for the materials they use. Another example would be a hair salon. They charge
for cutting, styling your hair, and also have products for sale, such as shampoo, conditioner,
brushes, etc.
There are also many ways in which a business might organize itself. Some are sole proprietorships and have only one
owner. Others are partnerships and consist of two or more owners. Still other businesses are corporations made up of
stockholders.
Chapter 3
Account Classifications and Account Titles
So, let's get started. The accounting equation is:
These are examples of classifications of accounts. Remember in first grade how you learned about classifications?
The classification fruit has categories under it, such as oranges, bananas, apples, grapes, etc. The classification
vegetables might have corn, beans, carrots, and peas under it. They are all classified as vegetables, but have their own
individual names.
So it is in accounting. There are classifications of accounts, and these classifications have account titles under them. An
account is a record summarizing all the information pertaining to a certain item in the accounting equation.
The first classification of accounts is assets. An asset is anything you have that has any value to it. Examples would be
a home, car, land, furniture, etc. The number one asset (and most popular I'm sure) is cash. Even if an asset has a loan
or mortgage on it, it is still an asset. The value of a mortgaged asset will be decreased by the amount left on the
mortgage when we list liabilities. Any asset with a loan outstanding will also have its worth decreased by the amount
remaining on the loan. Examples of asset accounts might be supplies, insurance, cash, office equipment, appliances,
jewelry, automobiles, computers, furniture, etc. Each account will have its own title, but all assets will be grouped under
the classification of assets.
Next is the classification of accounts called liabilities. A liability is anyone you owe money to. This could be a person,
bank, credit union, or any other institution or company you owe money to. Account titles would be the name of the
person to whom you owe money, or the name of a business from whom you have bought on credit, or the name of the
bank where your loan or mortgage is financed. Again, you may have many account titles under the classification of
liabilities.
The third classification of accounts is called owners' equity. This classification of accounts usually has two main
account titles: Your Name, Capital and Your Name, Drawing. The capital account shows the owner's net worth in the
business or a person's net worth, and the drawing account shows how much money the owner of a business has
withdrawn throughout the fiscal period (not too applicable to a household budget, but very important to a business). A
fiscal period is the period of time for which a business records its activities (usually one month).
The drawing account is considered a contra account. Contra means to go against. Therefore, the balance in the
drawing account goes against the balance in the capital account. If you stop to think about this concept, you will see that
the balance in the drawing account (the amount that the owner of a business takes out for personal use) must be
deducted from the account balance in the capital account (the owner's net worth). Therefore, the contra account
drawing goes against (or is deducted from) the balance in the capital account. If this were not done, the owner's net
worth in the business would be overstated.
If there are partners in the business (two or more), there would be two capital accounts and two drawing accounts (one
for each partner).
The fourth classification of account is expense. Needless to say, expenses represent where money is spent to run the
business or household. Some examples of expense account titles might be utilities, rent, delivery, medical, food,
clothing, shipping, etc. Again, these account titles will vary from business to business and from household to household.
Each business or household will set up its accounting system with the expense accounts it requires. Very small,
infrequently used expenses can be combined under the account title Miscellaneous Expense.
Next, comes the account classification revenue. This is the money that comes into the business or household. Money
can come from many different sources. A business may have an account for sales or labor income or any other source
of income that they have. Larger stores may want to track income by department, such as sporting goods sales,
women's clothing, cosmetics, toys, etc. A household may have income from salaries or interest or any other source of
income they may have. Therefore, some businesses may only have one account title under this classification while
others may have ten. Both would be absolutely correct.
Last, but not least, comes cost of merchandise sold. Merchandising businesses that sell products use this
classification of account. Its primary purpose is to determine if the selling price of the merchandise is enough to make a
profit for the business.
Chapter 4
T-Accounts
A T-account is exactly what it sounds like—a big T with a left and a right side. The left side of a T-account is called the
debit side and the right side of the T-account is called the credit side. This does not change, no matter what
classification of account you are working with. What does change, however, is which side of the account you enter
dollar amounts on.
Location of debits and credits in a T-account
Any asset account is increased on the left or debit side and decreased on the right or credit side. The same for expense
and drawing accounts—increased on the debit side and decreased on the credit side.
Asset, expense, and drawing accounts
Liabilities are just the opposite—they increase on the credit side and decrease on the debit side. The capital and
revenue accounts are the same as liabilities—increased on the credit side and decreased on the debit side.
Liability, capital, and revenue accounts
The increase side of any account is always the normal balance side. In other words, the balance in an asset account
would be on the debit side, the balance in a liability account would be on the credit side, etc. A transaction is any
activity that changes two or more accounts. Keep in mind that each transaction affects at least two accounts: one by a
debit entry and the other by a credit entry. Therefore, the debits and credits always equal after each transaction. This is
known as the double entry system of accounting.
You might want to try this to help you remember which accounts increase on which side of the T account:
DEAD means accounts that increase on the debit side are expenses, assets, and drawing. The first D is for debit, the E
is for expenses, the A is for assets, and the D is for drawing.
CLeRC means accounts that increase on the credit side are liabilities, revenue, and capital accounts. The first C is for
credit, the L for liabilities, the little e doesn't stand for anything except to make the acronym easier to remember (as in
the word clerk), the R stands for revenue and the last C for capital.
For easy reference, I have made a chart for you to refer to when entering dollar amounts into the accounts:
T-accounts entry reference
I would like you to try this short assignment so that you can practice the concepts you learned in this lesson. Please put
the following account titles on the form you printed out. (The account title should be written on the top line of the T.)
z Cash
z Petty Cash
z Supplies—Store
z Supplies—Office
z Prepaid Insurance
Continue with the vendors that the company owes money to:
z Costco Wholesalers, Inc.
z Office Quarters, Inc.
z Staples, Inc.
Next:
z Joan Caldwell, Capital
z Joan Caldwell, Drawing
z Book Sales
z Video Sales
z Toy Sales
z Advertising Expense
z Miscellaneous Expense
z Rent Expense
z Utilities Expense
Next, I would like you to label the debit and credit sides of each T-account. Remember, the left side is always the debit
side and the right side is always the credit side, regardless of what account you are working with. You can use Dr for
debit (don't ask me where the r came from) and Cr for credit.
Okay, now I would like you to put a plus sign (+) on the increase side of each account and a minus sign (-) on the
decrease side of each account. On the normal balance side, put NB. Remember, the increase side of any account is
also the normal balance side. You may check your work by viewing the solution, which is located in the Supplementary
Material section.
Chapter 5
Conclusion
In this lesson, you have learned the difference between a service business and a merchandising business, and you
have learned about account classifications and account titles. You have also learned about the debit and credit sides of
T-accounts, the increase and decrease sides, and the normal balance side of T-accounts. I have explained the
accounting equation in this chapter.
These concepts will become very familiar to you as we move through the course and you actually begin to enter dollar
amounts into accounts.
Please feel free to refer to the chart in this lesson until you are comfortable with the debit/credit, increase/decrease
sides of the various accounts.
I hope you are now "hooked" on accounting fundamentals and are eager to learn more.
When you have finished and feel ready, I would like you to take a quick, multiple-choice quiz. Good luck!
Supplementary Material
Adobe Acrobat Reader

http://www.adobe.com/products/acrobat/readermain.html
All of the forms you will need to complete the exercises in this
course are Adobe Acrobat PDF files. You will need the current
version of Adobe Acrobat Reader to view and print them. Download
the latest version for free by clicking Free Adobe Reader in the
upper-left corner under Downloads.
Blank T-Account Form

/crs/pix/fun/L01-T-account.pdf
Used to learn the debit/credit sides, increase/decrease sides, and
the normal balance side of accounts.
Lesson 1 Solutions
/crs/pix/fun/L01-Solutions.pdf
All finished? Click here to check your work against this lesson's
solution forms. You can print them or check the amounts online.
Unfortunately, some of the wider forms can only appear sideways,
so printing may be your better option. If you don't mind tilting your
head, you'll be able to see what you need to see on the screen
while saving some printer ink and paper!
Note: Only those forms and accounts with new entries in them will
appear in each lesson's solutions. If you're curious about a
transaction in a previous lesson, you'll have to go back to that
lesson's Solutions link.
All Bookkeeping Resource

http://www.AllBookkeepingResource.com/Articles/BasicAccounting-
Bookkeeping.htm
Step-by-step instruction of entire accounting process. Excellent
definitions and examples.
ABC News.com: Business Glossary

http://abcnews.go.com/Business/story?id=88881&page=1
An extensive glossary of business and accounting terms.
Understanding Accounting
http://www.kat.elmvalefarm.com/bk01.htm
Good resource for all aspects of accounting.
A Bookkeeping and Accounting Primer

http://www.webcom.com/duane/acct1.html
Excellent explanations of all phases of accounting.
Accounting--Basic Accounting Terms and Concepts

http://www.businesstown.com/accounting/basic-terms.asp
Excellent explanations of debit/credit concepts.
FAQs
Q: How can an asset with a loan on it still be an asset?
A: An asset that has a loan on it is still an asset; however, the amount of the unpaid loan or
mortgage is subtracted from the value of the asset to get the true equity of the asset.
Q: How can a business be both a service business and a merchandising business?
A: A business can be both a service business and a merchandising business if it offers both
a service and a product to its customers. For example, a car body shop which charges for
labor for fixing your car and also charges a fee for the materials used to fix the car.
Q: Why is accounting referred to as a double entry system?
A: Accounting is sometimes referred to as a double entry system because at least two

accounts are affected by each transaction (one with a debit entry and one with a credit
entry). Also, the debits have to equal the credits after each transaction and must remain
equal at any given point in the fiscal period.
Copyright 2007 by ed2go.com. All rights reserved.

No reproduction or redistribution without written permission.
INSTRUCTIONS:
z To print this page, wait for the page to fully load. Once the document is ready to
print, simply click your browser's File menu and choose Print.
z To save this page, click your browser's File menu and choose Save As. Select a
disk drive and folder to receive the file, and change the name of the file to
less02.htm. To view the file while you are offline, just go to the drive and folder
you selected when you saved the file and double-click the file named less02.htm.
Your browser will start and you will have access to the file.
Chapter 1
Introduction
When you have finished this lesson, you will be able to analyze various business transactions, enter
the amounts into General Ledger accounts, and prepare a Balance Sheet. In Lesson 1 you learned
about T-accounts and how to increase and decrease various accounts. This lesson will reinforce
that concept, as you'll be entering dollar amounts into the increase and decrease sides of various
accounts. You'll also be preparing a Balance Sheet, which proves the accounting equation:
The accounts that you are going to use in this chapter are slightly different from those used in
Lesson 1. Look at the General Ledger account forms, one of the forms you printed out, while I
explain it to you. Each account has a section at the very top of the account for the account name
and the account number. There are also two columns for the date entries. Please disregard the Item
column at this time. The Post Ref. column will be explained in detail later and should be left blank
for now.
Important points to remember:
A debit entry in an account with a debit

balance will have a larger debit balance
because you add the debit entry to the debit
balance.
A credit entry in an account with a credit balance

will have a larger credit balance because you
add the credit entry to the credit balance, giving
the account a larger credit balance.
When you're entering an amount into an account with the opposite balance, the account balance is
carried by the larger number. For example, if you enter a debit entry of $500.00 into an account with
a credit balance of $300.00, the account would have a debit balance of $200.00. Because the debit
entry is greater than the credit, the debit takes over the balance. You would subtract the credit
balance from the debit entry to get your new account balance.
Likewise, if you have an account with a $700.00 debit balance and you make a credit entry of
$1,000.00, the account would have a new credit balance of $300.00. The balance is the difference
between the debit balance and the credit entry.
As we continue this lesson and you enter amounts into the General Ledger pages, you will see how
the entries affect the account balances.
Below is an illustration of an account from the General Ledger. Notice how the account title, account
number, and date are entered. Also notice how the entries affect the account balance. Cash is an
asset account with a normal debit balance. It is increased with a debit entry and decreased with a
credit entry. Follow through each entry so that you are aware of how each balance was calculated.
This is just a sample General Ledger page; your Cash account will have different entries. You can
also click the image or its caption to bring up a window containing an interactive version of this
General Ledger page.
General Ledger account example
Chapter 2
Chart of Accounts
From this point on, I will refer to the T-accounts simply as accounts or the General Ledger. The
General Ledger is a book of all the accounts a business uses. You will be figuring the account
balance in each account after you enter the dollar amount of a transaction. Because you will be
entering the dollar amount for each transaction into two separate accounts, one as a debit entry and
the other as a credit entry, your debit account balances and your credit account balances should
remain equal after each transaction.
To help you better understand the organization of the General Ledger, below is a Chart of Accounts
for Children's Capers, a fictitious business that I'll use throughout this course for instructional
purposes. A Chart of Accounts is a list of all the accounts used by a business, organized by
account classification. This business is a merchandise business that sells children's books, videos,
and toys. This business is owned and operated by Joan Caldwell and Stacy Hall, equal partners.
Chart of Accounts
Balance Sheet Accounts
(1000) Assets
1110 Cash
1120 Petty Cash
1130 Accounts Receivable
1140 Merchandise Inventory
1150 Office Supplies
1160 Store Supplies
1170 Prepaid Insurance
(2000) Liabilities
2110 A Children's Haven, Inc.

2115 Accounts Payable
2120 Costco Wholesalers, Inc.
2125 Employee Tax Payable
2130 FICA Tax Payable
2135 Health Insurance Premiums Payable
2140 Jamison Booksters, Inc.
2145 Sales Tax Payable
2150 Toys for Less, Inc.
2155 Unemployment Tax Payable—Federal
2160 Unemployment Tax Payable—State
2165 United Way Donations Payable
2170 U.S. Savings Bonds Payable
(3000) Owners' Equity
3110 Joan Caldwell, Capital

3120 Joan Caldwell, Drawing
3130 Stacy Hall, Capital
3140 Stacy Hall, Drawing
3150 Income Summary
Income Statement Accounts
(4000) Revenue
4100 Sales
(5000) Cost of Merchandise
5100 Purchases
(6000) Expenses
6110 Advertising Expense

6120 Credit Card Fee Expense
6130 Insurance Expense
6140 Miscellaneous Expense
6150 Payroll Tax Expense
6160 Rent Expense
6170 Salary Expense
6180 Supplies Expense—Office
6185 Supplies Expense—Store
6190 Utilities Expense
You'll find a printer-friendly copy of this Chart of Accounts in the Supplementary Material for
this lesson. Please print it and keep it handy for reference as we continue through the
course. The printer-friendly version is a PDF file, so you'll need a current version of Adobe
Reader to view and print it. There are many more PDF forms that you'll need to view and
print to get the most out of this course, so please don't skip this important step! You can download
the current version of Adobe Reader for free by going to the first link in the Lesson 1 Supplementary
Material section.
Chapter 3
Entering Transaction Amounts into the General Ledger
Okay! Whew! That was a lot of information, but all very necessary. Take a second look at it. Reread
it to make sure you understand about accounts and the General Ledger. Remember that each
account is exactly the same. The difference is where transaction amounts are entered and where
the account balance appears, either as a credit balance or a debit balance. Also notice that liability
accounts and expense accounts are arranged alphabetically. The accounts are numbered in
increments of 10 so that additional accounts can be added at a future time without having to assign
new numbers to already existing accounts.
Let's stop talking about it and begin doing it! Using the blank General Ledger forms required for this
lesson's assignment, I would like you to open each account in the General Ledger using the Chart
of Accounts in the previous chapter. To open an account, you put the account title and the account
number on one account for each of the accounts.
When you make an entry into an account, put the year in the Date column, using only the top half of
the first line under the Date column, a very small space. Then on the same line in the bottom half of
the line, put the month abbreviation, Dec., and in the box to the right, still under the Date column,
enter the day of the month. You do not need to repeat the year or the month as long as the month
remains the same. When you move on to another month, you will enter that month's abbreviation
once in the Date column and then only the day of that month for each entry into the account. If you
need to, refer to the Chart of Accounts in Chapter 2 of this lesson.
We are now going to journalize a few transactions:
Transaction #1: December 1, The owner, Joan Caldwell, gave the business $10,000.00
as an investment.
Note:
The proprietors or owners of a

business often invest their personal
money in the business to get it up and running.
To journalize this transaction, we would enter $10,000.00 in the Cash account as a debit. This will
make the account have a debit balance of $10,000.00. So you would put the $10,000.00 entry in the
first column, debit, and then carry it over to the Debit Balance column, the third column. This makes
the Cash account have a debit balance of $10,000.00. Whenever cash is received, no matter from
what source, cash is always debited.
Next, you have to enter this same amount in an account as a credit so your debits and credits
equal. Go to the Joan Caldwell, Capital account and enter the $10,000.00 as a credit in the second
column and bring it over into the Credit Balance column, the fourth column.
By doing this, we are saying that the company now has $10,000.00 in cash
represented by a debit balance in the Cash account and the owner now has
$10,000.00 worth of equity in the business represented by a credit balance in
her Capital account.
Put a check mark in the Post Ref. column of each account in the General
Ledger that we post to in this lesson. This Post Ref. box is usually for the
journal page that the transaction is being posted from, but in this lesson we
are not entering the transactions into a Journal, so we will enter check marks
in the Post Ref. columns.
Transaction #2: December 1, Paid cash for office supplies, $200.00.
The first account to be affected will be Cash. We paid out cash this time, so we'll credit the Cash
account for $200.00. Whenever cash is paid out for any reason, the Cash account is always
credited. The Cash account has a debit balance of $10,000.00. We'll enter the $200.00 in the Credit
column, column 2. We will now subtract the $200.00 credit entry from the $10,000.00 debit balance.
This will leave the account with a debit balance of $9,800.00. Remember that cash has a normal
debit balance and increases with a debit entry and decreases with a credit entry.
First two Cash account entries
The second account to be affected by this transaction is Office Supplies. This is an asset account
with a normal debit balance. Because we are increasing our asset office supplies, we will enter the
$200.00 in the Debit column and bring the $200.00 over to the Debit Balance column. We can now
see that we have $200.00 less in our asset account, Cash, but we have $200.00 in our Office
Supplies account, another asset account.
What we have done in the last transaction is change the configuration of

one asset into another asset. Our debits and credits will still be equal; we
have simply added to one asset account and subtracted from another
asset account. The accounting equation remains in balance.
Chapter 4
More Transactions and Balance Sheets
Our next transaction will involve the owners purchasing insurance coverage for their business.
When you purchase insurance coverage, you pay in advance for that protection. For example,
Children's Capers has to pay for six months' coverage all at once, due on
December 1 for the period December 1 through May 31 of the following
year. This insurance coverage is considered as asset until one month has
elapsed. At that point, the portion of the payment allocated for one month is
taken out of the asset account, Prepaid Insurance, and entered into an
expense account, Insurance Expense. In other words, it is not considered
an expense until after a certain amount of time has gone by.
In this case, if Children's Capers pays $600.00 for coverage from December
1 through May 31, it is paying $100.00 per month. However, until the end of
the month, all $600.00 will be entered into an asset account, Prepaid
Insurance. In a future lesson, you will make an adjustment to this asset
account and subtract the monthly allotment to be put into Insurance Expense.
So let's put this transaction into its proper General Ledger accounts:
Transaction #3: December 1, Paid for insurance coverage, $600.00.
We will enter a debit for $600.00 in the Prepaid Insurance account. This will make this account have
a debit balance of $600.00.
We will then enter a credit of $600.00 in our Cash account. We will subtract the $600.00 credit entry
from the $9,800.00 debit balance, leaving the account with a debit balance of $9,200.00.
Again, we have simply changed one asset, cash, into another form of asset, prepaid insurance. The
debit balances and the credit balances should agree.
Moving right along, let's do another type of transaction:
Transaction #4: December 1, Bought store supplies on account from Costco

Wholesalers, Inc., $350.00.
We are going to make a debit entry in store supplies for $350.00 and make a credit entry in Costco
Wholesalers, Inc. for $350.00. Enter a $350.00 debit in Store Supplies. Bring this $350.00 over into
the Debit Balance column. Store Supplies now has a debit balance of $350.00. Enter a $350.00
credit in Costco Wholesalers, Inc., account in column 2. Bring this $350.00 entry over into the fourth
column, Credit Balance. This gives this account a credit balance of $350.00.
Let's take time to check our account balances before we complete more transactions. Cash should
have a debit balance of $9,200.00; Joan Caldwell, Capital should have a credit balance of
$10,000.00; Office Supplies should have a debit balance of $200.00; Prepaid Insurance should
have a debit balance of $600.00; Store Supplies should have a debit balance of $350.00; and
Costco Wholesalers, Inc. should have a credit balance of $350.00. Our debits and credits both
equal $10,350.00.
Transaction #5: December 1, Paid Costco Wholesalers, Inc., $200.00 on account.
Okay, what this transaction is telling you is that Children's Capers is paying off some of its debt to
Costco Wholesalers, Inc. You will credit cash by entering $200.00 in column 2. Figure the new
balance in cash by subtracting the $200.00 credit entry from the $9,200.00 debit balance to get a
new debit balance of $9,000.00.
The debit entry for this transaction will be made in the Costco Wholesalers, Inc. account. Put a
$200.00 entry in the Debit column, then refigure the account balance by subtracting the $200.00
debit entry from the $350.00 credit balance. This will give the account a new credit balance of
$150.00. The credit balance represents the amount we now owe this company. In liability accounts,
a credit represents a purchase your business made on account and a debit represents a payment
on account made by your business. Therefore, a liability account should have a credit balance or
none at all if you don't owe that creditor any money.
The final job in this lesson is to prepare a Balance Sheet. This is a financial report that shows the
account balances and also proves the equality of debits and credits in the General Ledger.
You will need the Balance Sheet form, which is one of the forms that are necessary for this lesson's
assignment.
Below is an illustration of a Balance Sheet for you to look at as I explain how to prepare one.
Balance Sheet example
On the very first line of this form, put the company's name, Children's Capers. On the next line, put
the name of the report, Balance Sheet, and on the third line in the heading, put the date, December
1, 20--.
Next, put the word Assets on the first line on the left-hand side of the report form. You can center it
by eye on that first line. Then, list all the asset account titles and the ending balance in each asset
account as it appears in the General Ledger accounts. The account titles should start as far to the
left as possible on the line. Do not total this column yet.
Center the word Liabilities on the first line on the right-hand side of the report form. List all the
liability account titles from the General Ledger accounts that have balances in them. You don't need
to list the name of a liability account that does not show a balance. If you have listed more than one
liability account and its balance, put Total Liabilities on the line following the last liability account
balance and enter the total of the liability account balances. On the next line, still on the right-hand
side of the form, center Owners' Equity. Under this heading, put Joan Caldwell, Capital, and enter
the balance in her capital account. On the next line on the right-hand side, put Total Liabilities and
Owners' Equity and total the liabilities and the capital balances. Be sure you do not add the
individual liability account balances and then the total liabilities amount, as this will double the
amount of your liabilities. Use only the total liabilities amount to add to the capital account balance.
Next, go back to the left-hand side of the form. On the same line as you entered the total on the
right-hand side, put Total Assets and enter the dollar amount of all the asset account balances.
You may have to leave one or more blank lines on the left-hand side in order to put your totals on
the same line, but that is appropriate.
When you total the assets on the left-hand side of the report and the liabilities and owners' equity on
the right-hand side, the totals should be the same. If they're not, you've made an error somewhere
and you need to backtrack until you find it. It can be as simple as adding your account balances
again, or you may have to go back to each account and refigure the account balance.
If this is not where the error is, you may have to go back to the original transaction and check to
make sure you entered both the debit and credit amounts correctly in your General Ledger
accounts. Locating errors in this type of work can take time and is sometimes frustrating, but errors
must be found and corrected or they will carry through the entire system and you will not have a
true picture of the finances. You should also feel a sense of pride when you discover your own error
rather than having someone point out your mistake.
Once the totals agree, draw two lines close together under each column total. This is called double
ruling. This shows that the assets equal liabilities plus owners' equity. This is the accounting
equation that must remain equal at any given point.
Please feel free to check your work by viewing the solutions located in the Supplementary Material
section for this lesson.
Chapter 5
Conclusion
You've been exposed to a great deal of information in this lesson. You've opened and made entries
into the General Ledger accounts, figured the new balance in these accounts, and prepared a
Balance Sheet to prove the equality of debits and credits in the General Ledger. These concepts
are the basis of this course, which you will build on in future lessons.
Please keep the General Ledger accounts used in this chapter. In future chapters, we will build on
the previous chapters' work. To make locating the accounts easier, I would like you to arrange them
in the order shown in the Chart of Accounts in Chapter 2 of this lesson. I would then like you to put
them in a three-ring binder with sections to separate the categories of forms. You could label one
category General Ledger and the other Balance Sheet. Keeping your work organized this way will
be very valuable as we continue on and learn how to prepare more forms and reports.
When you feel you have mastered the concepts in this lesson, I would like you to take a short,
multiple quiz. Good luck!
Chart of Accounts
/crs/pix/fun/L02-Accounts.pdf
Here's a Chart of Accounts for Children's Capers.
Please print a copy of this chart and keep it handy as
you continue through the exercises for this course.
You'll need to refer to it often!
Opening General Ledger Printout

/crs/pix/fun/L02-Opening_GL_Printout.pdf
Here's the first set of forms you'll need to complete the
exercises in this course. This is the General Ledger for
Children's Capers. There are 37 accounts in this ledger.
It prints on 19 pages, with all of the names and account
numbers already entered. If you're working on a slow
Internet connection, you may have trouble downloading
this file. If so, go to the link below for an alternative
method.
Blank Opening General Ledger Printout

/crs/pix/fun/L02-Blank_Opening_GL_Printout.pdf
If your Internet connection is slow or if you're having
trouble downloading and printing the file in the link
above, you'll need to fill out the General Ledger forms
by hand. You will need a total of 19 copies of the blank
form. Then just copy all of the information from the
Chart of Accounts for Children's Capers into the
individual accounts on the blank forms.
Balance Sheet
/crs/pix/fun/L02-Balance_Sheet.pdf
Here's the Balance Sheet that you'll need to complete
this lesson's work.
Lesson 2 Solutions
All finished? Click here to check your work against this
lesson's solution forms. You can either print them or
check the amounts online. Unfortunately, some of the
wider forms can only appear sideways, so printing may
be your better option. If you don't mind tilting your head,
you'll be able to see what you need to see on the screen
while saving some printer ink and paper!
Note: Only those forms and accounts with new entries

in them will appear in each lesson's solutions. If you're
curious about a transaction in a previous lesson, you'll
have to go back to that lesson's Solutions link.

http://www.allbookkeepingresource.com/art-
basicacc.html
Step-by-step instruction of entire accounting process.
Excellent definitions and examples.
ABC News: Business Glossary

http://abcnews.go.com/Business/story?
id=88881&page=1
An extensive glossary of business and accounting
terms.

FAQs
Q: Why is it necessary for a business to have a Chart of Accounts?
A: A Chart of Accounts makes for easier location of accounts the business

uses. Anyone who needs this information can quickly and easily see what
accounts are used in the bookkeeping of the business by looking at the one-
page Chart of Accounts.
Q: Why should a Balance Sheet be prepared at least once a month?
A: A Balance Sheet report proves the equality of the debit and credit entries
in the General Ledger. If there is a mistake in the General Ledger accounts, it
should be located and corrected before the next month's transactions are
recorded
Q: Why is it so important that each transaction have a debit and a credit part
for the same amount?
A: Each transaction must have a debit part and a credit part for the same
amount because the debits and credits must remain equal after each
transaction. This is referred to as double entry accounting, and the
accounting equation must remain in balance at any given time in the
accounting cycle.

INSTRUCTIONS:
Chapter 1
Introduction
In Lesson 2, you learned how to enter amounts into General Ledger accounts. You saw how different entries affected
the account balance. Now that you have an understanding of the functions of the General Ledger, you're ready to move
on to the next phase of recording transactions: the journal.
In this lesson, you'll learn how to enter transactions into an 11-column journal and then post or transfer them into their
appropriate General Ledger accounts.
You will also be using the same General Ledger accounts as you used in Lesson 2. The balances in these accounts will
remain and will be built on throughout this course.
Chapter 2
Posting Transactions
The customary order in which a business analyzes and records its transactions is by first entering the transaction into a
journal. A journal is a form for recording transactions in chronological order. Chronological order is by date, with the
earliest date first. Once the transactions have been entered into the journal, they are posted or transferred into their
individual General Ledger accounts.
Posting can be done at any time throughout the month. Some businesses post to the General Ledger daily, some
weekly, some monthly. If a business has a very large number of transactions, it would make sense to post either daily or
weekly, so that the posting doesn't take so much time at the end of the month. In this course, I'll have you post at the
end of each lesson when applicable so that your General Ledger accounts are updated before a new lesson begins.
As a way of review, look at the Chart of Accounts in Lesson 2. This Chart of Accounts will be extremely helpful to you
throughout this course, as you journalize and post transactions. It would be an excellent idea to print out a copy of this
Chart of Accounts and keep it handy as we journalize transactions. Let's take a quick look at that chart and review the
accounts and how they increase and decrease when entries are made into them.
All assets increase with a debit entry and decrease with a credit entry. Assets will have a debit balance or no balance at
all.
All liability accounts increase with a credit entry and decrease with a debit entry. Liabilities have a credit balance or no
balance at all.
Owners' equity accounts, drawing and capital are a little different. The capital accounts increase with a credit entry and
decrease with a debit entry. The drawing accounts increase with a debit entry and decrease with a credit entry.
Remember that the capital accounts represent the owners' net worth in the business and the drawing accounts
represent the amount of cash and/or the value of merchandise that the owners have withdrawn from the business for
their personal use.
Revenue accounts increase with a credit entry and decrease with a debit entry. Revenue accounts are accounts for
your sources of business-generated income.
Under the Cost of Merchandise classification is the Purchases account, which increases with a debit and decreases
with a credit. This account is for the purchases you make of items to resell in your business. The amount in this account
is a wholesale amount, what your business pays for the merchandise before the
markup. The markup is simply the difference between what a business pays for an
item, the wholesale cost, and what the business sells it for, the retail cost. This is how
a business makes a profit—by purchasing merchandise and marking it up, and then
selling it to consumers.
Expenses are increased with a debit entry and decreased with a credit entry. Expense
accounts should have a debit balance or none at all. It is important for you to realize
that, as we enter amounts into the expense accounts, the debit balance will
increase.This does not mean that you owe more money for that particular expense. It
means that your business has paid out that amount to date for that expense.
For example, if Rent Expense has a $500.00 debit balance after January and you
enter another $500.00 debit for February's rent, the debit balance in Rent Expense
will become $1,000.00. This balance shows that, so far this year, your rent has cost
you $1,000.00. At the end of the year, the debit balance in any expense account represents what the business paid out
for the year for that particular expense.
Chapter 3
Journalizing Transactions
Here we go! Look at the 11-column journal page you printed out at the beginning of this lesson. At the top of each
column, are account titles with the exception of columns 1 and 2. Column 3 is Accounts Receivable Debit, column 4 is
Accounts Receivable Credit, and so on for all the columns in the journal. These columns, 3-11, are called special
amount columns. These columns are for frequently used accounts.
Whenever you make an entry in one of these special amount columns, the entry is not posted or transferred to the
General Ledger until the end of the month. At that time, the total of each of the special amount columns is posted to its
account as one entry for the column total.
This makes sense if you stop and think about it. If we have 25 entries to Cash Credit during the month, it would take us
a long time to post each of these amounts individually to the Cash account and refigure the balance after each entry.
And in the end, we would still have the same account balance if we post the total of Cash Credit at the end of the
month. This is the whole idea behind special amount columns—to save time in posting to the General Ledger.
A business may have any account it uses frequently as a special amount column in its Journal. These can be changed,
added, or deleted as the business determines its most frequently used accounts.
Please take a minute to look at the squares or divisions under each column in the journal. There are five separate
squares or divisions under each column heading. The first square would be for thousands or ten thousands (the 1 in
1,000.00 or the 10 in 10,000.00). The last square is for the cents. Again, there is only one square for the cents, so this
square will have two numbers in it, either two 0's or the numbers representing the cents in the transaction.
Now, let's look at columns 1 and 2 of the journal. These are labeled General Debit and General Credit. These two
columns are used whenever you cannot use a special amount column. You write the name of the account in the
Account Title space and then enter the dollar amount into the General Debit or general credit or sometimes both. If you
have to use the General Debit and general credit, the transaction will take up two lines in the journal, as you will need to
name each account in the Account Title space.
If you look at the journal page once more, you will notice a column titled Doc. This stands for document. There are six
different documents that are commonly used by businesses when journalizing: C (for check), T (for cash register tape),
M (for memorandum), R (for receipt), P (for purchase invoice), and S (for sales invoice).
Documents are used to backtrack if an error is found. You can easily refer to the original source document from where
the information used to journalize the transaction was obtained.
All of these source document abbreviations are followed by a number, and the numbers should be sequential, insuring
that all documents have been journalized and no transactions omitted. Unused documents should be entered in the
journal with an explanation such as check voided or memorandum destroyed so that each and every source document
is accounted for.
I am confident you will have a better understanding of this concept as we move on to Chapter 4 and start journalizing.
Chapter 4
Journalizing Transactions: Let's Do It!
This chapter will take you step by step through the journalizing process, the meat of this chapter.
Transaction #1: December 2, Paid cash to start a Petty Cash fund, $200.00, check #5.
On the first line of the journal, enter the date like you did in the General Ledger accounts. Remember, you only need to
enter the year and month once. After that, just enter the day of the month for each transaction. On the Account Title line,
enter Petty Cash. Enter $200.00 in General Debit column 1 and also in Cash Credit, column 11, on the same line. In the
Doc column in the journal, enter C5, which stands for check #5. That is all there is to this transaction. Petty Cash, an
asset account, is increased with a debit entry, and Cash, another asset account, is decreased with a credit entry.
This transaction creates a Petty Cash account for the business to pay small amounts rather than writing checks for such
small items as stamps, small repairs, etc. The Petty Cash fund is replenished when it gets low, and we will deal with that
transaction in a later lesson.
Transaction #2: December 3, Received cash from daily sales, $525.00, $500.00 from sales and $25.00
tax collected.
Note:
Many states have a sales tax which is usually a

percent of the purchase price of items. This tax
is collected by the business and sent to the proper
government agency at various intervals of the year. The
business must, therefore, keep track of the sales tax
collected in a separate account from sales, which is the
money for the business to keep.
To journalize this transaction, enter the date, December 3, and this time, put a check mark in the Account Title column.
We can do this because this transaction will be entered into 3 special amount columns. These column totals will all be
posted to the General Ledger at the end of the month. In the Doc column, enter T3, as this information came from the
cash register tape for the 3rd day of the month. After this, enter $500.00 in the Sales Credit column, enter $25.00 in the
Sales Tax Payable Credit column, and enter the total, $525.00, in the Cash Debit column. We have two credits, one to
sales and one to Sales Tax Payable, which equal our one debit to cash, so our debits and credits remain equal after this
transaction.
Transaction #3: December 3, Purchased merchandise for cash from A Children's Haven, Inc., $750.00,
check #6.
To journalize this transaction, enter the date, then put a check mark in the Account Title column. We can do this again
because both the debit and credit parts of this transaction will go into special amount columns in the journal. Put C6 in
the Document column.
Enter a $750.00 debit in the Purchases special amount column. This increases Purchases with a debit. Enter the same
amount in Cash Credit, as we paid out money. This entry will decrease cash with a credit entry. That's all there is to this
transaction.
Transaction #4: December 3, Paid cash for advertising, $225.00, check #7.
On the next line in the journal, enter the date, then put Advertising Expense in the Account Title column. Enter a debit in
column 1, General Debit, and a credit to Cash, column 11, on the same line. Put C7 in the Doc column. This increases
what we have paid for advertising this year by a debit entry and decreases our cash with a credit entry.
Transaction #5: December 4, Stacy Hall, owner, withdrew $300.00 for personal use, check #8.
Enter the date, then put Stacy Hall, Drawing in the Account Title column. Put C8 in the Document column, and enter
$300.00 in the General Debit column, column l, and also in Cash Credit, column ll. This increases Stacy's withdrawals
from the business with a debit and decreases cash with a credit.
Transaction #6: December 4, Paid cash for miscellaneous expense, $5.00, check #9.
To journalize this transaction, enter the date, in the Account Title column, enter miscellaneous expense. Enter $5.00 in
the General Debit column and on the same line under Cash Credit. Put C9 in the Document column. This transaction
increases the amount we have paid out for miscellaneous expenses and decreases our Cash account.
Transaction #7: December 5, Stacy Hall, owner, Gave the business $12,000.00 as an investment, R1.
To journalize this transaction, enter the date first, then put Stacy Hall, Capital, in the Account Title column. Enter a
$12,000.00 credit in the General Credit column, column 2 and a debit for the same amount on the same line under Cash
Debit. Use R1 as the document number, receipt #1.
Transaction #8: December 5, Purchased merchandise for cash from Toys For Less, Inc., $300.00, check
#10.
Enter this transaction into the journal by entering the date first, then put a check mark in the Account Title column. Enter
a $300.00 debit in the special amount column Purchases and a $300.00 credit in the Cash Credit special amount
column. The document number will be C10.
Remember, you can check your work for Transactions #1-8, posted to the journal, by viewing the solutions in the
Supplementary Material section.
Posting to the General Ledger
Now you're ready to post from the journal to your General Ledger accounts. You'll post
only from columns 1 and 2 in the Journal—all the other entries will be posted at the end
of the month as column totals.
Remember, liability and expense accounts are arranged alphabetically within their
respective sections in the General Ledger. Also, remember that accounts in the
General Ledger are arranged according to their classification of account. . . assets first,
liabilities, owners' equity, revenue, expenses last.
Looking at the General Debit column, column 1, the first entry is a $200.00 debit to
Petty Cash. In your General Ledger, go to the Petty Cash account. Enter the date of the
transaction, December 2, and in the Post Ref. box, enter 12. This is the page number of
the journal. Journal pages start with 1 in January and continue consecutively until the end of the year. If any one
month's transactions take more than one journal page, then there would be more than 12 in a year. Then enter a debit
of $200.00 and also enter $200.00 under Debit Balance. Then return to the journal, and in the Post Ref. box there, put
1120, which is the account number of Petty Cash. You now are finished posting that transaction. The Post Ref. areas
are simply a way to track where you posted the amount in the ledger and what journal page that entry came from.
The next entry in the General Debit column is a $225.00 debit to Advertising Expense. Go to the Advertising Expense
account in the General Ledger, and enter the date, page 12 under Post Ref. and make a $225.00 debit entry in the
account. Bring the $225.00 entry over into the Debit Balance column to show that this is the balance in this account to
date. When you return to the journal, enter 6110 in the Post Ref. column to show that you posted that amount to
Account 6110 in the General Ledger.
Next, go to the Stacy Hall, Drawing account in the General Ledger and enter the date and a $300.00 debit. Bring the
$300.00 entry over into the Debit Balance column. Put 3140 in the Post Ref. column of the journal, as this is the account
number for Stacy Hall, Drawing.
Next, look at the General Debit column again. The next entry is a $5.00 debit entry to Miscellaneous Expense. Find that
account in the General Ledger and make a $5.00 debit entry in it; then bring the $5.00 over into the Debit Balance
column. Enter 12 in the Post Ref. column and put 6140 in the Post Ref. column in the journal.
That takes care of all the general debits. Now let's look at the General Credit column, column 2. There is only one entry
in that column so far, a $12,000.00 credit to Stacy Hall, Capital. In your General Ledger, find that account and enter the
date, Post Ref. 12, and a $12.000.00 credit. Bring the $12,000.00 credit entry over into the Credit Balance column. Put
the account number, 3130 in the Post Ref. box in the journal. Enter 12 in the Post Ref column in this General Ledger
account to show the amount was posted from journal page 12. We are now done posting to the General Ledger for this
lesson.
Your debit balances and your credit balances in the General Ledger will not equal now, as you have not posted columns
3-11 in the journal. You will not post those amounts until the end of the month, and at that time, you'll post the column
totals as one entry.
If you wish to check the accuracy of your journalizing, add up the debit columns—General, Purchases, and Cash Debit.
Then add up the credit columns—General, Sales, Sales Tax Payable, and Cash Credit. The debit total must equal the
credit total. If it doesn't, you must go back and check all your journalizing, insuring that you have a debit and a credit
entry for each transaction and that each transaction equals.
Note:
As you eventually will need to post to all of the

General Ledger accounts available, you must
open a General Ledger page for each account.
Remember, you can check your work for these postings to the General Ledger by viewing the solution in the
Chapter 5
Conclusion
You have now had practice entering various transactions into an 11-column Journal. Whenever you need to journalize a
transaction, stop and think how the parts of the transaction will affect the proper accounts. Will they increase or
decrease an account? Then, knowing that and using your Chart of Accounts for reference, journalize the transaction
into its debit and credit parts.
Remember, you may have more than one credit or more than one debit part for a transaction. That is fine, as long as
your debit entries equal your credit entries after you have finished journalizing the transaction. The example of this
concept in this lesson is journalizing cash sales. Sales and Sales Tax Payable are both credited and Cash is debited for
the total of the two credits. The one debit entry and two credit entries equal after this transaction.
When you feel ready, I would like you to take a quick multiple-choice quiz on the lesson. Good luck!
Journal Pages
/crs/pix/fun/L03-Journal.pdf
Here are the journal pages you will need for recording the
transactions throughout the course.
Lesson 3 Solutions
solution forms. You can either print them or check the amounts
online. Unfortunately, some of the wider forms can only appear
sideways, so printing may be your better option. If you don't mind
tilting your head, you'll be able to see what you need to see on the
screen while saving some printer ink and paper!

http://www.allbookkeepingresource.com/art-basicacc.html


FAQs
Q: When an expense is paid, it increases the balance in that account. Why isn't it decreased,
as the expense is being paid?
A: When a payment for an expense is entered into the General Ledger account, the balance
increases. This balance represents the amount paid for that expense year-to-date, not the
amount owed.
Q: Why are there two supplies accounts—office supplies and store supplies?
A: Some businesses like to keep track of the supplies used to run the business (office
supplies) and supplies used in the operation of the store (store supplies). This way, if cuts in
expenses need to be made, the owner(s) have a better idea of where such cuts might be
made.
Q: What is the difference between the owner's drawing and capital accounts?
A: The owner's capital account shows the owner's net worth in the business. It will increase
when the owner makes an investment in the business and also when the business shows a
net income. The owner's drawing account shows the amount of money and/or merchandise
the owner has taken (or drawn) out of the business for his or her personal use.

INSTRUCTIONS:
Chapter 1
Introduction
You now know how to enter business transactions in the 11-column journal. In this lesson, you will learn how to
journalize more cash purchases and purchases on account, known as accounts payable. You will also learn how to
post purchases on account to four accounts payable Ledger accounts, one for each of your vendors. You will continue
to use the journal page from Lesson 3.
At this point, if you have not already done so, I would like you put all your working papers
in a three-ring binder and separate them with dividers. This will make it much easier for
you to find the various forms and work that you have completed so far. I would like you to
have a section for journal pages, General Ledger pages, Accounts Payable Ledger
pages, etc. You will be adding more sections as we continue, but by doing this, your
work will be easily accessible to you at all times.
Also, from this lesson on, the solutions in the Supplementary Material section will only
contain the pages that were affected by the current lesson. For example, if we only use
five pages of the General Ledger, I will put only those five pages in the solutions, rather
than putting in all General Ledger pages. The solution pages will be progressive; by that, I mean that they will show the
solutions up to the current point in the course. For example, if I enter a journal page for this lesson and we have
previously used that journal page, the entries for past transactions will also show.
Chapter 2
Review Transactions
As a way of review of Lesson 3, I am going to give you a few transactions to journalize. After that, you'll begin
journalizing and posting accounts payable transactions. I will give you review transactions at the beginning of each
lesson so you'll always be using the knowledge you learned previously before tackling the new concept in the lesson.
I'm going to list the transactions by number and not lead you through journalizing them step by step. I feel confident that
you can journalize these transactions on your own. If you need to, refer to your completed work for Lesson 3, or you
may look at the solution for this lesson in the Supplementary Material section.
Transaction #1: December 6, Paid cash for utilities, $55.00, check #11.
Transaction #2: December 6, Received cash from daily sales, $300.00 plus $15.00 tax, total cash
received, $315.00, T6.
Transaction #3: December 7, Joan Caldwell, owner, took out $250.00 for personal use, check #12.
Transaction #4: December 7, Purchased merchandise for cash, $500.00, check #13.
Transaction #5: December 7, Paid cash for store supplies, $35.00, check #14.
Transaction #6: December 7, Purchased merchandise for cash from Toys for Less, $350.00, check #15.
Remember, read the transaction, decide which accounts are affected and how they are
affected, and enter the transaction in the journal. Your debits and credits must equal
after each transaction.
Before you go on, please total the columns in the journal and check to see if your Debit
column totals equal your Credit column totals. If they do, you can forge ahead. If not,
you need to go back and check each transaction to find your error. Remember, if you're
really stuck and have earnestly tried to locate the error on your own, you can go to the
solution in the Supplementary Material section to check your work.
Chapter 3
Journalizing Accounts Payable
Children's Capers makes many purchases throughout the month. Some purchases are for supplies to run the office,
some are for supplies to run the actual store area, and some are purchases of merchandise that they will resell to their
customers. Children's Capers sometimes pays cash for purchases; other times, they buy on credit from their vendors.
A vendor is a person or business from which another person or business buys on credit. In this course, you will be
working with four vendors. Look at the new Chart of Accounts in Chapter 4. Under Subsidiary Ledgers/Accounts
Payable you'll see A Children's Haven, Inc., Costco Wholesalers, Inc.,
Jamison Booksters, Inc., and Toys for Less, Inc. These are the four vendors
that Children's Capers purchases from.
Remember, liabilities increase with a credit entry and decrease with a debit
entry. The liability accounts will have a credit balance or none at all. When a
purchase is made on account, the vendor's account is credited for the
amount of the purchase. When a payment is made to that vendor, a debit
entry is made in that vendor's account. The debit entry decreases the credit
balance. The credit balance represents what is owed to that vendor. The
debit entry represents a payment to that vendor. Accounts payable accounts
collectively represent the total amount owed by a company to all its vendors.
Let's try journalizing some purchases on account.
Please use the same journal that we have been working in for previous
lessons.
Transaction #7: December 7, Purchased merchandise on account

from Costco Wholesalers, Inc., $500.00, P3.
The P is the document abbreviation for purchase invoice. A purchase invoice is a form describing the goods purchased,
the quantity, and the price for a purchase on account. Enter the date in the appropriate column of the journal. In the
Account Title column, enter Costco Wholesalers, Inc. Enter a $500.00 debit in the Purchases special amount column,
column 9 in the journal, and a $500.00 credit in the special amount column Accounts Payable, column 8 in the journal.
Both the debit and credit entry go on the same line, as we are using two special amount columns. Put P3 in the
Document column. That's it!
Remember, columns 3 through 11 in the journal are special amount columns. This means that these columns already
have an account title and a debit or credit designation at the top so only transactions meeting those criteria can be
entered there.
What you need to be careful about in journalizing accounts payable is whether the purchase was for store or office
supplies or if it was for merchandise. Merchandise is purchased to resell to customers. Store and office supplies are
purchased to run the business. Therefore, there are separate accounts for each of the three purchases. Only
merchandise for resale can be entered into the Purchases special amount column. Supplies, either Store or Office, must
be entered as a general debit and posted to the respective account in the General Ledger.
Transaction# 8: December 7, Purchased store supplies on account from Costco Wholesalers, Inc.
$250.00, P4.
This transaction will take two lines in the journal because you have to show the account name for both the debit and the
credit part. Enter the date in the journal, put Costco Wholesalers, Inc. in the Account Title column, and enter $250.00 in
the Accounts Payable special amount column, which is column 8 in the journal. On the next line, enter Store Supplies in
the Account Title column, and enter $250.00 in the General Debit column. Enter P4 in the Document column.
Transaction #9: December 7, Purchased merchandise on account from A Children's Haven, Inc.,
$450.00, P5.
Again, enter the date in the journal and enter A Children's Haven, Inc. in the Account Title column. Enter $450.00 in the
Purchases Debit column and again in the Accounts Payable Credit column. Use P5 as the document number.
Now, obviously Children's Capers has to pay for its purchases on account at some point in time. Let's journalize some
of those types of transactions.
Transaction #10: December 7, Paid $100.00 to Costco Wholesalers, Inc., Check 16.
To journalize this transaction, enter the date, and Costco Wholesalers, Inc. in the Account Title column, and C16 in the
Document column. Enter $100.00 in the Cash Credit special amount column and also in the Accounts Payable Debit
column. This debit will decrease the credit balance in this vendor's account when it is posted to the ledger.
Transaction #11: December 7, Paid $200.00 on account to A Children's Haven, Inc., C17.
Enter the date in the journal, enter A Children's Haven, Inc. in the Account Title column. Make a $200.00 debit entry in
Accounts Payable and a $200.00 credit in the Cash special amount column. Enter C17 in the Document column.
Below are some more transactions to try on your own. After you've completed these, you may check your work in the
Supplementary Material section. They are labeled Solution4-1.
Transaction #12: December 8, Purchased merchandise on account from Jamison Booksters, Inc.,
$500.00, P6.
Transaction #13: December 9, Paid Costco Wholesalers, Inc. on account $400.00, C18.
Transaction #14: December 9, Purchased merchandise on account from Toys For Less, Inc., $600.00,
P7.
Transaction #15: December 9, Paid on account to Jamison Booksters, Inc. $250.00, C19.
Transaction #16: December 10, Paid on account to Toys For Less, $400.00, C20.
Now, total all columns that contain entries. Add the debit totals together. Add the credit totals together. If these two
totals are the same, your journal page equals out and you may double rule the totals. To do this, simply draw two lines
close together under all the columns in the journal. This shows that the page is balanced.
If your debits and credits do not equal for page 12, you must backtrack and find your error. First, re-add the columns to
make sure the error is not simply in addition. Determine how much you are off by subtracting the two figures. Divide the
difference by two. Look for a transaction for this amount. If you entered two debit entries or two credit entries for a
transaction, this is a good way to find your error quickly.
If that doesn't solve the problem, check each and every transaction to make sure the debit part and the credit part of the
transaction equal. It's usually just a matter of checking your entries very carefully and checking your addition of the
columns.
Once your journal page proves out, please put 'Totals Carried Forward' in the account title column on the line where
your totals appear. Next, on the new journal page (page 13), please put 'Totals Brought Forward' on line 1 and bring
your totals from journal page 12 onto that line. Now, you're all set to begin your new journal page.
You will now post to the General Ledger from columns 1 and 2 of the journal and to the Accounts Payable subsidiary
ledger from columns 7 and 8—Accounts Payable Debit and Credit.
Post the amounts journalized in this lesson from columns 1 and 2, the General Debit and Credit. You'll be able to tell
where you finished posting from the previous lesson by looking in the Post Reference column. The last entry in the
General Ledger from the previous lesson will have an account number in the Post Ref. column. The first amount to be
posted should be a $55.00 debit to Utilities Expense.
Once again, if you've sincerely tried to locate your mistake and can't, you can check your work against the solution for
Lesson 4 in the Supplementary Material section.
Chapter 4
Posting Accounts Payable
When you've finished posting from columns 1 and 2, you'll be posting the Accounts Payable, columns 7 and 8. You will
not, however, be posting these amounts to the General Ledger. The four accounts payable forms you printed out at the
beginning of this lesson will make up a new ledger called the Accounts Payable Ledger. This is a book of all the
vendors to which you owe money arranged in alphabetical order. It's a separate book of accounts from the General
Ledger.
The Accounts Payable Ledger exists so that the business can determine how much is owed each individual vendor at
any time in the accounting cycle. At this time, you should remove the four Accounts Payable pages in the General
Ledger. They are A Children's Haven Inc., Costco Wholesalers, Inc., Jamison Booksters, Inc., and Toys For Less, Inc.
You need to open new Accounts Payable Ledger pages for each of these four vendors according to the numbers in the
Chart of Accounts below. Make a new, blank Accounts Payable Ledger page for Costco Wholesalers, Inc. Do not enter
the $150.00 balance showing in that account now into the new account you open. All four accounts payable accounts
should have no balance.
You also need to make an adjusting entry to the Cash account in the General Ledger for $150.00. Make a credit entry in
Cash for that amount. Use December 10 as the date, and simply put a check mark in the Post Ref. column. This
adjusting entry accounts for the $150.00 balance that was showing in Costco Wholesalers, Inc., but was not journalized
because we had not yet begun journalizing. By making this adjustment and starting Costco Wholesalers, Inc., with a
blank Accounts Payable Ledger page, the debits and credits will agree in the General Ledger.
Your new Chart of Accounts now looks like this:
Chart of Accounts
Balance Sheet Accounts
(1000) Assets
1110 Cash
1120 Petty Cash
1130 Accounts Receivable
1140 Merchandise Inventory
1150 Office Supplies
1160 Store Supplies
1170 Prepaid Insurance
(2000) Liabilities
2115 Accounts Payable

2125 Employee Tax Payable
2130 FICA Tax Payable
2135 Health Insurance Premiums Payable .
2145 Sales Tax Payable
2155 Unemployment Tax Payable—Federal
2160 Unemployment Tax Payable—State
2165 United Way Donations Payable
2170 U.S. Savings Bonds Payable
(3000) Owners' Equity
3110 Joan Caldwell, Capital

3120 Joan Caldwell, Drawing
3130 Stacy Hall, Capital
3140 Stacy Hall, Drawing
3150 Income Summary
Income Statement Accounts
(4000) Revenue
4100 Sales
(5000) Cost of Merchandise
5100 Purchases
(6000) Expenses
6110 Advertising Expense

6120 Credit Card Fee Expense
6130 Insurance Expense
6140 Miscellaneous Expense
6150 Payroll Tax Expense
6160 Rent Expense
6170 Salary Expense
6180 Supplies Expense—Office
6185 Supplies Expense—Store
6190 Utilities Expense
Subsidiary Ledgers
Accounts Receivable
110 Larry Hamilton

120 Richard Johnson
130 Alan Lawton
140 Steven Miller
Accounts Payable
210 A Children's Haven, Inc.

220 Costco Wholesalers, Inc.
230 Jamison Booksters, Inc.
240 Toys for Less, Inc.
When posting accounts payable to the Accounts Payable Ledger, you must post column 8 and then column 7. The
reason behind this is that column 8 represents charges you have made; column 7 represents payments you've made. If
you posted column 7 first, you would have your payments entered before the charges appeared, thereby having the
account possibly showing a debit balance. Accounts payable accounts are liabilities and must show a credit balance,
which represents what you owe, or no balance at all if your account is paid in full. Therefore, please post column 8 first
into the four accounts payable accounts; then post column 7.
Make the entries in these accounts just like you have been doing, refiguring the balance after each transaction.
Remember, a credit balance and a credit entry give the account a larger credit balance. A debit entry in an account with
a credit balance will decrease the balance by the amount of the debit entry. Let's do the first one together!
The first journal entry that you'll be posting to Accounts Payable is Transaction #7 on December 7. Children's Capers
purchased merchandise on account from Costco Wholesalers, Inc., in the amount of $500.00, P3.
In the Accounts Payable Ledger in the Costco Wholesalers, Inc., account, enter the date, December 7. Enter the journal
page in the Post Ref. column and make a credit entry in column 2 for $500.00. Bring this $500.00 credit entry over into
the Credit Balance column. That's all there is to it! This credit balance shows that you now owe Costco Wholesalers,
Inc., $500.00.
When you have finished posting, please check your account balances with those in the Lesson 4 Solutions in the
Chapter 5
Conclusion
In this chapter, you've learned how to journalize accounts payable and post these journal entries into the Accounts
Payable Ledger. This is a major concept in accounting, as businesses must know how much money they owe their
vendors. Some businesses employ people to do nothing more than accounts payable or accounts receivable, which
we'll learn about in the next lesson.
You're learning a great deal of new information and should be proud of your accomplishments thus far. Stay tuned for
more new and exciting concepts in the world of accounting!
When you feel you're ready, I would like you to take a quick, multiple-choice quiz on this lesson. Good luck!
Chart of Accounts
/crs/pix/fun/L04-Accounts.pdf
Here's the new Chart of Accounts for Children's Capers.
Accounts Payable Ledger Pages

/crs/pix/fun/L04-Accounts_Payable.pdf
Here are the four Accounts Payable Ledger pages (one for each
vendor) that you will need for this lesson.
Lesson 4 Solutions


An extenstive glossary of business and accounting terms.

FAQs
Q: Why does it take two lines in the journal to journalize the transaction: bought store
supplies on account?
A: It takes two journal lines to journalize this transaction because you must write the account
title in the Account Title section of the journal for both the debit and credit entries for this
transaction. The general debit would be to Store Supplies and the credit would be to
Accounts Payable, and you must name the vendor from which you are buying.
Q: Why is accounts payable considered a liability?
A: Accounts Payable is a liability account because it shows money you owe to others.
Q: If a liability had a debit balance, what might that mean?
A: If a liability account has a debit balance, it could mean: 1) you have overpaid the account
or sent more money than was owed, or 2) you paid the bill in full and then returned some
items to the vendor for which he gave you credit.

INSTRUCTIONS:
Chapter 1
Introduction
In Lesson 4, you learned about accounts payable, which is money you owe your vendors for merchandise you
purchased. In this lesson, you'll learn about accounts receivable, which is money your customers owe you. An easy
way to remember the difference is accounts payable is money you have to pay later. Accounts receivable is money you
will receive later. When you've completed this lesson, you'll understand how to journalize and post accounts receivable
transactions.
Chapter 2
Review Transactions
As I did in the last lesson, I'm going to give you some review transactions before we go on to learn accounts receivable
journalizing and posting. Please journalize these transactions on page 13 of the journal, which is the one with which we
finished Lesson 4.
Transaction #1: December 10, Paid cash for rent, $500.00, check #21.
Transaction #2: December 10, Purchased merchandise for cash, $350.00, check #22.
Transaction #3: December 10, Purchased office supplies on account from Costco Wholesalers, Inc.,
$250.00, P8, which stands for Purchase Invoice #8.
Transaction #4: December 11, Paid Jamison Booksters, Inc., on account, $250.00, check #23.
Transaction #5: December 11, Joan Caldwell, owner, withdrew cash for personal use, $300.00, check
#24.This will be a debit to her Drawing account in the General Debit column and a credit to Cash.
Transaction #6: December 11, Stacy Hall, owner, withdrew cash for personal use, $350.00, check #25.
Transaction #7: December 11, Paid cash for advertising expense, $52.00, check #26.
Transaction #8: December 11, Purchased store supplies for cash, $175.00, check #27.
Remember when journalizing, think of the two accounts that are affected and how they are affected. If you get stuck on
a transaction, the solutions for these entries are in the Supplementary Material section.
Now you need to verify that your journal is balanced.You can do this by adding the Debit column totals and the Credit
column totals.If your debit total equals your credit total, then your journal is balanced.
Your next step is to post to the General Ledger.You'll post each individual entry to its specific account in the General
Ledger.You'll be posting the entries made in columns 1 and 2 of the journal.Start with the transaction for Rent Expense
and post all of the amounts in columns 1 and 2.You'll post the transaction Supplies—Store last. Now you need to post to
the Accounts Payable Ledger from columns 7 and 8.These are the charges and payments made to your vendors in this
chapter.
Chapter 3
Accounts Receivable
Children's Capers extends credit to some or all of its customers. This means that customers can purchase merchandise
from Children's Capers and pay for that merchandise at a later date. To Children's Capers, these accounts are known
as Accounts Receivable.
Accounts Receivable is an asset account. It increases with a debit entry and decreases with a credit entry. It is an asset
because it represents money that your customers owe you and that you'll receive at a later date.
Looking at the Chart of Accounts in Lesson 4, you will see that Children's Capers has four Accounts Receivable
customers. A business usually has numerous Accounts Receivable customers and Accounts Payable vendors. For this
course, however, I've decided you will only have to work with four Accounts Receivable customers.
The four Accounts Receivable customers are Steven Miller, Richard Johnson, Alan Lawton, and Larry Hamilton. Please
open an account for each one of these customers using the Accounts Receivable Ledger pages you printed out at the
beginning of the lesson. The customer numbers are shown on the Chart of Accounts. To open these four accounts,
simply put the customers' names and account numbers shown in the Chart of Accounts.
You will now journalize some transactions involving Accounts Receivable.
Transaction #9: December 11, sold merchandise on account to Larry Hamilton, $200.00 plus $10.00 tax,
total $210.00, S1, which stands for Sales Invoice #1.
To journalize this transaction, enter the date in the appropriate column of the journal, put Larry Hamilton in the Account
Title column, S1 is the document (sales invoice #1). Next, enter $200.00 in the Sales Credit column, column 5, and
$10.00 in the Sales Tax Payable column, column 6. Enter the total, $210.00, in Accounts Receivable Debit, column 3.
This shows that Larry Hamilton purchased $200.00 worth of merchandise from Children's Capers. He owes the
company the $200.00 plus the 5% sales tax or $10.00. His total debt is $210.00. We separate the amount of the sale
and the amount of the tax because the tax is a liability. It represents the amount of money Children's Capers must send
to the state for sales tax.
Some states do not have a sales tax, other places have a city or town tax. All taxes collected for government agencies
must be kept in a separate account from the value of the merchandise sold. The sales of Children's Capers would be
overstated if the tax was included in the amount of the sale.
As you can see, we have two amounts that were credited and only one debited, but our two credits equal our one debit
to Accounts Receivable, so the accounting equation is still in balance.
This transaction only takes one line in the journal as we are using three special amount columns. They are Sales Credit,
column 5, Sales Tax Payable Credit, column 6 and Accounts Receivable Debit, column 3.
Let's do a few more of this type of transaction.
Transaction #10: December 11, Steven Miller purchased merchandise on account, $300.00 plus $15.00
tax, total $315.00, S2.
This is the same type of transaction as number 1 above. Enter the date and Steven Miller in the Account Title column.
Use S2 as the document number. Enter $300.00 in Sales Credit and $15.00 in Sales Tax Payable Credit. Enter the
total, $315.00, in Accounts Receivable Debit. That's it! Go ahead and try a few more accounts receivable transactions
on your own.
Transaction #11: December 11, Richard Johnson purchased merchandise on account, $400.00 plus
$20.00 tax, total $420.00, S3.
Transaction #12: December 12, Alan Lawton purchased merchandise on account, $100.00 plus $5.00
tax, total $105.00, S4.
Transaction #13: December 12, Richard Johnson purchased merchandise on account, $300.00 plus
$15.00 tax, total $315.00, S5.
Transaction #14: December 12, Steven Miller purchased merchandise on account, $500.00 plus $25.00
tax, total $525.00, S6.
Transaction #15: December 12, Alan Lawton purchased merchandise on account $600.00 plus $30.00
tax, total $630.00, S7.
Now that you've journalized some sales on account, let's see how to journalize a transaction when one of our customers
makes a payment to Children's Capers.
Transaction #16: December 13, Received $100.00 from Larry Hamilton, R2, which stands for Receipt #2.
To journalize this transaction, enter the date in the proper column, enter Larry Hamilton in the Account Title column.
Enter $100.00 in Accounts Receivable Credit, column 4 and a $100.00 debit in Cash, column 10.
The credit to Accounts Receivable will decrease the balance in Larry Hamilton's account leaving a lower balance. The
debit to Cash will increase Children's Capers' cash because they took money in.
You can see now that a sale on account increases Accounts Receivable with a debit and a payment received on
account decreases Accounts Receivable with a credit.
Now I'm going to have you do a few more of this type of transaction alone. Enter the information in the journal the same
way you did for Transaction #16.
Transaction #17: December 13, Received $500.00 on account from Alan Lawton, R3.
Transaction #18: December 13, Received $400.00 on account from Steven Miller, R4.
Transaction #19: December 14, Received $500.00 on account from Richard Johnson, R5.
Transaction #20: December 14, Received $100.00 on account from Alan Lawton, R6.
Transaction #21: December 14, Received $200.00 on account from Steven Miller, R7.
When you've finished journalizing these transactions, I would like you to once again add your Debit columns and your
Credit columns in the journal. If the totals agree, you are ready to move on to Chapter 4.
Chapter 4
Posting Accounts Receivable
You're now ready to post these transactions into the Accounts Receivable Ledger. Just like the Accounts Payable
Ledger, the Accounts Receivable Ledger is a book of all the customers Children's Capers has. The accounts are
arranged alphabetically for ease in locating them.
I'll take you through the first two charge transactions and through the first two payments on account. I feel you should
then be able to post the remaining transactions on your own.
Remember, the solutions for these postings are in the Supplementary Material section.
Here we go!
When posting from the journal to the Accounts Receivable Ledger, you post only the amounts in columns 3 and 4,
Accounts Receivable Debit and Credit. The other parts of these transactions are in special amount columns—Sales,
Sales Tax Payable, and Cash. These special amount column totals will be posted as a column total at the end of the
month.
So let's look at columns 3 and 4 in the journal and see what we need to post. The first entry should be a debit of
$210.00 to Larry Hamilton. In the Accounts Receivable Ledger, find Larry Hamilton's account. Enter the date, put 13 in
the Post Ref. column, which stands for page 13 of the journal. Enter $210.00 in the Debit column and bring it over into
the Debit Balance column. Go back to the journal and put the account number for Larry Hamilton, 110, in the Post Ref.
column of the journal. That's all there is to it. You can see that Larry Hamilton now owes Children's Capers $210.00.
First accounts receivable entry
There is no entry made in the Item column of the Accounts Receivable Ledger.
The next transaction in column 3 of the journal is a debit in the amount of $315.00 to Steven Miller. Again, find this
customer's account in the Accounts Receivable Ledger and enter this debit amount as you did in the transaction above.
This account now should have a debit balance of $315.00. Put this account number, 140, in the Post Ref. column in the
journal.
Second accounts receivable entry
Continue posting the remaining amounts in Accounts Receivable Debit, column 3, of the journal. Remember, if you
enter a debit entry into an account that already has a debit balance, you would add the debit entry to the debit balance
and the account would have a higher debit balance. This would represent the total amount the customer owes the
business.
When you've finished posting column 3, you need to post column 4, Accounts Receivable Credit. Remember, this
column represents payments that your customers have made to Children's Capers. These entries will be decreasing the
amount they owe.
In the journal, look at the first amount in column 4, Accounts Receivable Credit. It is $100.00 from Larry Hamilton, To
post this transaction, find Larry Hamilton's account in the Accounts Receivable Ledger.
Enter the date, a 13 in the Post Ref. column, which stands for journal page 13, and a $100.00 credit entry. Subtract this
$100.00 from the debit balance of $210.00. This will leave a new debit balance of $110.00. The $100.00 payment
decreases the amount owed to the business and leaves Larry's balance at $110.00. Return to the journal and put 110 in
the Post Ref. column, which is Larry Hamilton's account number.
The next entry in column 4 is a $500.00 credit from Alan Lawton. Once again, find Alan Lawton's account in the
Accounts Receivable Ledger. Enter the date, 13 in the Post Ref. column and enter a credit in the amount of $500.00.
This will decrease the debit balance down to $235.00. Return to the journal and put Alan's account number, 130, in the
Post Ref. column of the journal.
Continue posting the remaining entries in column 4, Accounts Receivable Credit, in the journal.
Chapter 5
Conclusion
You've learned a lot in this lesson. You now know how to journalize and post not only accounts payable from Lesson 4,
but also accounts receivable from this lesson. You're able to determine new balances in customers' accounts and can
easily tell what your customers owe you by looking in the Accounts Receivable Ledger.
You now possess the basics of accounting in just five short lessons. You are ready to continue learning more financial
reports, payroll, and new and exciting material in Accounting Fundamentals.
When you feel ready, please take the quiz for Lesson 5. Good luck!
Accounts Receivable Ledger Pages

/crs/pix/fun/L05-Accounts_Receivable.pdf
Here are the four Accounts Receivable Ledger pages (one for each
customer) that you will need for this lesson.
Lesson 5 Solutions

ABC NEWS.com: Business Glossary


Excellent explanations of all aspects of accounting.
FAQs
Q: Why is there a separate ledger for Accounts Receivable?
A: There is a separate ledger for Accounts Receivable so that a business can keep track of
what each of its customers owes. Individual ledger pages are necessary to determine which
individual customers owe the business money.
Q: Why is Accounts Receivable considered an asset account?
A: Accounts Receivable is considered an asset account because it represents money that

the business will be getting at a later date. Even though the business does not actually have
the cash on hand at the present time, it will receive it in the future.
Q: Why is the sales tax on sales entered into a separate account, Sales Tax Payable?
A: The tax collected on sales is entered into a separate account because it is a liability which
the business owes to the government. The business is simply collecting the tax for the
government. If it were added into the amount of the sale, the business would show an invalid
figure in its sales account because all of that money would not be for the business to keep.

INSTRUCTIONS:
Chapter 1
Introduction
I'm sure that you now feel quite confident about journalizing and posting the various transactions that occur in
businesses on a regular basis. You're well on your way to becoming proficient in the aspects of general bookkeeping
techniques. You should be proud of your new knowledge and accomplishments!
In this lesson, you'll gain information that is valuable for any business with employees: how to compute payroll. When
you have a business with employees, you need to know how to determine such things as gross pay, deductions, and
net pay. Most importantly, you must understand how to journalize these transactions into the business journal so they
can be considered as expenses. You will learn how to do all of these things as we explore another bookkeeping
adventure with Children's Capers.
Chapter 2
Review Transactions
As before, I'm going to give you a few review transactions before we go on to the new concepts to be presented in this
lesson. Please journalize these transactions in your journal, which is now at page 14.
Since this will be the beginning of a new journal page, please add all the columns down on page 13 and prove the
journal. By that, I mean add all the Debit column totals and all the Credit column totals. They must agree before you can
continue. When they do, carry the totals onto the first line of the new journal page. Then go ahead and journalize the
following transactions.
Don't forget to post these transactions to the General Ledger and the Accounts Receivable Ledger. Check your work by
viewing the solutions in the Supplementary Material section.
Transaction #1: December 15, Recorded cash sales for the day, $600.00 plus $30.00 tax, total received,
$630.00, T15.
Transaction #2: December 15, Received cash as an investment from Joan Caldwell, $10,000.00, R8.
Transaction #3: December 15, Sold merchandise on account to Larry Hamilton, $200.00 plus $10.00 tax,
total $210.00, S8.
Transaction #4: December 15, Received cash on account from Steven Miller, $140.00, R9.
Transaction #5: December 15, Paid the electricity bill (Utilities Expense), $155.00, C28.
Transaction #6: December 15, Purchased office supplies for cash $175.00, C29.
Chapter 3
Computing Wages and Deductions/Payroll Forms
Children's Capers employs people in its store. Some of the employees are paid on salary. This means that they receive
the same pay each pay period no matter how many hours they work. Other employees are paid an hourly wage. They
are also paid overtime pay for all hours over 40 in a week. The standard rate of pay for overtime hours is the overtime
hours multiplied by the overtime hourly pay. The overtime hourly pay is the regular hourly pay multiplied by one and a
half.
For example, let's say you have an employee, Jack, who earns $12.00 an
hour regularly; he would receive $18.00 an hour for overtime hours. You can
calculate that pay by multiplying his regular hourly rate, $12.00, times one and
one-half. You would then multiply the number of overtime hours Jack had
times his overtime hourly pay. This would give the gross overtime pay.
You would then add Jack's regular pay, which is his regular hourly rate times
regular hours worked, and his overtime pay to come up with his total gross
pay for the payroll period.
There are various payroll periods available to businesses. They might pay
their employees each week, every other week, twice a month, or even once a
month. The choice is up to the business.
Payroll Deductions
It is important that you understand the difference between gross pay and net pay. Gross pay is what an employee
actually makes before any deductions. Net pay is what the employee actually takes home after all deductions are
made. It's the amount for which his paycheck is written. Deductions vary from business to business, but there are a few
that are mandatory throughout the entire United States.
The first is federal income tax. The federal government in the United States mandates that employees pay a portion of
their income to fund various government programs. Charts that the government sends out to each and every employer
determine the amount of this deduction.
The amount of tax withheld from an employee depends on the answers to these questions:
z Is the employee married or single?
z What is the amount of the employee's gross pay?
z How many allowances is the employee claiming?
An employee is allowed to claim one allowance for each person that he/she is supporting. Other factors may allow
additional exemptions. To determine the correct number of exemptions, each employee should complete a W-4 form.
The second mandatory deduction is Social Security tax. This is a percentage of an employee's pay, with no allowance
for how many people the worker is supporting or for marital status. Each and every employee who works in the United
States must pay a percentage of his/her wages to the Internal Revenue Service. This tax is for funding the Social
Security retirement system and Medicare, which is a health insurance plan for elderly persons.
These are the two mandatory deductions for workers in the United States.
Some states have their own state tax, which is mandatory if you work in
such a state. Other countries have different mandatory taxes on a worker's
pay.
Besides the mandatory deductions, there are many voluntary deductions that a worker may elect to have deducted from
his pay. Some examples would be union dues, health insurance premiums, charitable contributions, loan payments (if
the business has a credit union), and deductions for a 401(k) plan, which is a voluntary retirement savings plan.
Some employers offer plans for purchasing United States Savings Bonds. The employer takes a set amount out of the
employee's check each pay period and when there is enough to purchase a savings bond, the employer does so and
gives it to the employee. There are many different voluntary deductions depending on the employer and the needs of
his employees.
Hourly Paid Employees
You are going to complete a payroll for the period ending December 15. Children's Capers has many employees, but
we will only be completing payroll for two of their employees, one paid on a salary basis and one paid on an hourly
basis.
First, you'll complete the Employee Earnings Records. In the line following Earnings Records for Quarter Ended, put
December 31, 20--. This form covers an entire quarter of the year. There is one form for each employee for the quarter
ended March 31, June 30, September 30, and December 31. There are seven lines on each form for payroll entries.
One line is used for each payroll.
Fill in the information at the top for this employee:
Name: John Jones

Employee No: 7
Marital Status: Married
Allowances: 4
Rate of pay: $9.00/hr.
SSN: 434-43-5656
Position: Shipping and receiving clerk
John worked 80 regular hours this payroll period, which is two weeks' long. He also worked two overtime hours during
the two-week period.
On the first line, enter the date ended as December 15. Multiply his regular hours, 80, times his regular rate, $9.00, to
get his regular earnings, which would be $720.00. He worked two overtime hours. His overtime rate is $9.00 times 1½,
or $13.50 per hour. Two hours times $13.50 per hour equals $27.00, which goes in the overtime column. Add his
regular earnings and his overtime earnings to get his total earnings, which go in the total column. His total earnings
would be $747.00. This is the gross pay and the amount used to determine his deductions.
Using the tax chart for married employees that you printed out at the beginning of this lesson, look up the tax for an
employee making $747.00 with four allowances. Notice that the first column in the tax chart reads at least and the
second column reads but less than.
Looking at the tax chart, you can see that John's gross pay falls in the at least $740 but less than $760 row. Follow that
row over until you get to the column that has a 4 at the top, which is the number of allowances John is claiming. Where
the row and the column meet is $45.00. That's the amount of federal withholding tax that John will have deducted from
his pay this pay period. Enter the $45.00 in the federal income tax column on John's line in the Payroll Register.
Next, multiply John's total gross earnings, $747.00 by 8%. This is the amount that John must pay for Social Security tax.
Enter this amount, $59.76, in the column labeled FICA tax. FICA and Social Security tax are one and the same. FICA
stands for Federal Insurance Contributions Act, which is the name of the act when it was passed in Congress. Most
people know it as simply Social Security tax.
Now, let's say that John has $15.00 per paycheck deducted to pay part of his health insurance premium. Enter that
amount in the health insurance column.
Next, add all the deductions you've just figured—federal tax, FICA tax, and health insurance. Enter this total in the
column labeled Total. Last, subtract this amount, total deductions, from the column labeled Total, which is the total
gross wages. This subtraction of deductions from gross pay will give us the amount of net pay or the amount for which
we would write John's paycheck. John's net pay for this pay period is $627.24
The accumulated earnings column is a running balance of gross pay year-to-date. Let's enter $25,600.00 in that column
above our line for this payroll. To figure the new accumulated pay, add the previous accumulated pay, $25,600.00 and
John's gross pay for this pay period, $747.00. This gives us a new accumulated pay of $26,347.00. The last figure in
this column at the end of December is John's total yearly wages. This column shows John's total gross wages at any
given point in the year.
Now, please transfer this information from John's individual earnings record onto the Payroll Register on line 1. The
date of the payroll is December 15, and the date of payment would be December 16. You're now simply copying
information from John's earnings record onto the Payroll Register. The Payroll Register will contain information for all
employees paid. Each employee has his own individual earnings record, but all employees are grouped together in the
Payroll Register. A new Payroll Register is prepared for each payroll.
Salary Paid Employees
Okay, let's do the payroll for a salaried employee now. Open a new earnings record for the following employee:
Name: Sara Dowling

Employee No: 12
Marital Status: Single
Allowances: 1
Rate of pay: $630.00 per pay period
SSN: 437-67-3232
Position: Mail clerk
Sara is paid on salary, so she will receive her salary of $630.00 every two weeks, no matter how many hours she works.
On line 1 of Sara's earnings record, enter the date, December 15, and enter $630.00 in the Regular Earnings column.
Carry the $630.00 over into the Total Earnings column. Look up her federal income tax from the tax chart for single
persons. The amount should be $76.00. Next, multiply her earnings by 8% to get her FICA tax, which is $50.40. Sara
has no other deductions, so add those two and enter them in the Total column. Subtract this amount from her total
gross earnings of $630.00 to get her net pay.
Next, enter $12,500.00 as her year-to-date accumulated earnings. Now add her gross pay this pay period, $630.00 to
her accumulated earnings to get her new up-to-date accumulated earnings, $13,130.00.
Last, transfer this information to the Payroll Register. Sara's earnings will go on the line immediately below John's.
Now, there would normally be more employees, but to save time, we will continue with only these two.
Please add all the columns of the Payroll Register down. To check the accuracy of your work, add the total of Regular
Earnings and Overtime Earnings. This should be the total of Total Gross Earnings. Then, add the totals of columns 4, 5,
6, and 7. This should equal the total of column 8, Total Deductions. Subtract the column 8 total from the column 3 total
and you should get the column 9 total. Think of it this way. Take the total gross earnings, subtract all deductions, and
you should have the net pay total left. See? Not hard at all when you think of it that way.
When your totals have successfully proven out, double rule each column total. Now you know how to figure your own
paycheck to see if it is correct!
Chapter 4
Journalizing the Payroll
Once you've added all the columns in the Payroll Register and made sure they equal out, you're ready to journalize the
payroll. You will be journalizing this payroll by continuing of page 14 of December's journal.
Enter the date first, and then in the Account Title column, enter Salary Expense. In the Document column, enter C30. In
General Debit, column 1 of the journal, enter the total gross wages. This is the total from the third column in the register.
On that same line of the journal, under Cash Credit, column 11, for the total net payroll, enter the figure from column 9
in the Payroll Register.
Next, on the following journal line, enter Employee Income Tax Payable and enter the amount of federal income tax
withheld, the total of column 4 in the register. This amount will go in the General Credit column.
On the next line, enter FICA Tax Payable and enter in the General Credit column the amount of FICA tax withheld, the
total of column 5 in the register.
On the next line in the journal, enter Health Insurance Premiums Payable in the Account Title column. Then, in the
General Credit column, enter the total of column 6 in the register.
Now, your three general credits plus the credit to Cash should equal the one debit to Salary Expense.
You may now post your General Debit and Credit entries to the General Ledger. The credit to Cash will be posted at the
end of the month when the Total Cash Credit column, column 11, is posted.
You should post the debit to Salary Expense, and the three credits for the
deductions. Remember to enter the appropriate numbers in the Post Ref. columns
as you post. Use C30 for the document number. In Lesson 7, we will be writing
check number 30 to pay this payroll. To check your work, view the solutions in the
That's it! You've now completed a payroll and journalized the transaction. Good
job!
Chapter 5
Conclusion
Once again, you've mastered many new skills in this chapter. You've learned how
to figure gross pay, deductions, and net pay for two of the employees of
Children's Capers. These new concepts will surely help you in both your personal
and professional life. You now understand with greater clarity how your employer determines your net pay. In the next
lesson, you will learn about writing checks, endorsing checks, preparing a bank reconciliation, and completing a bank
deposit ticket.
When you feel ready, please take the quiz for Lesson 6. Good luck!
Lesson 6 Forms and Tax Tables
/crs/pix/fun/L06-Forms.pdf
Here are all of the forms and tax tables that you will need in order
to complete this lesson.
Lesson 6 Solutions

FAQs
Q: What is the difference between an employee paid on salary and one paid an hourly
wage?
A: An employee who is paid on a salary basis receives the same amount of pay every pay
period, no matter how few or how many hours worked.
An employee who is paid on an hourly basis receives a set amount for every hour worked
and usually receives overtime pay for any hours worked over 40 in a week.
Q: What is the difference between gross pay and net pay?
A: Gross pay is what an employee actually makes before any deductions.
Net pay is the amount of money the employee actually receives after all deductions. It is the
amount for which his/her paycheck is written.
Q: What is the difference between a mandatory deduction and a voluntary deduction?
A: A mandatory deduction is one which an employee must have deducted from his/her pay.
This type of deduction is usually mandated by state or federal law. Examples would be
federal income tax and Social Security tax.
A voluntary deduction is one that the employee chooses to have taken out of his/her pay.
Some examples might be charitable contributions, health insurance premiums, union dues,
etc.

INSTRUCTIONS:
Chapter 1
Introduction
In Lesson 6, you learned how to prepare a payroll, including gross pay, overtime pay, and salaried pay. You now know
how to determine federal income tax, Social Security tax, and other deductions.
In this lesson, you'll be writing checks for Children's Capers, making out a deposit
slip, and preparing a bank reconciliation statement. You will use the Payroll Register
you completed in Lesson 6 to continue in this lesson. Being able to write checks,
make deposits, and reconcile a bank statement are valuable tools not only in
business but in your personal life as well.
Most everyone today has a checking account and writes checks to make various
payments. By properly writing and endorsing checks and being able to keep your
checkbook in balance with the bank's records, you insure that your finances are
correct and in good order at all times.
Chapter 2
Review Transactions
As is the case with most businesses, Children's Capers has numerous transactions
that need to be entered into a journal. Some businesses journalize their transactions
daily, and some journalize on a weekly basis. All businesses are not necessarily
identical in how their financial information is processed. Being flexible and creative is a
good trait for bookkeepers and accountants to possess. Personally, I have, on many
occasions, wanted to "throw in the towel" when trying to find an error or attempting to
make a financial report balance out. However, I have always moved forward and
untangled the problem. You will also, as your skills and knowledge continue to expand.
Below are your review transactions for this lesson. By now you're able to journalize
these with no problem. However, if you need them, the solutions are located in the
Supplementary Material section and labeled accordingly.
Transaction #1: December 16, Received cash from daily sales, $1,500.00 plus $75.00 tax, total
$1,575.00, T16.
Transaction #2: December 16, Paid cash for miscellaneous expense, $27.00, check #31.
Transaction #3: - December 16, Sold merchandise on account to Alan Lawton, $200.00 plus $10.00 tax,
total $210.00, S9.
Transaction #4: December 16, Purchased office supplies for cash, $37.00, check #32.
Transaction #5: December 16, Purchased merchandise on account from Jamison Booksters, Inc.,
$225.00, P9.
Chapter 3
Writing Checks/Endorsements
In this chapter, you'll make out a deposit slip, write checks, and reconcile Children's Capers' checkbook with their bank
statement. This is all very useful knowledge, even in your personal life.
Here we go again!
The first thing you need to do is write a check for the payroll you completed in the last
lesson.
You'll be writing three separate checks in this chapter. The first one will be from the
general account of Children's Capers, made payable to the payroll account of Children's
Capers. Most businesses have two separate checking account—one for regular bills and
another for payroll checks. The reason for this is that payroll checks are quite different
from regular checks.
Look at the page of checks you printed out at the beginning of this lesson. Do you notice that there are two different
checks on the page? The first check is from the general account. You can see these words printed in the top, left-hand
corner of the check.
The second check is from the payroll account. Again, you can see these words printed in the top, left-hand corner of this
check. Notice the difference between the two checks. The payroll check has spaces to show gross earnings,
deductions, and net pay. The general account check does not. This is the reason why businesses usually have a
separate checking account for their payroll.
You are now going to write two checks, one for John Jones and one for Sara Dowling, our two employees in Lesson 6.
But, before you do that, you need to write a check from the general account to deposit into the payroll account to cover
the total amount of the payroll.
Looking at the Payroll Register you completed in Lesson 6, you can see that the net payroll amount, the total of column
9, is $1,130.84. This is the amount of money you need to transfer from the regular checking into the payroll account to
pay Children's Capers' two employees.
Before writing the actual check, we need to enter the balance brought forward on the general account check. Enter
$5,000.00 as the balance brought forward. There is no deposit, so bring this amount down to the Total line. Subtract the
amount of this check, $1,130.84, from the total, $5,000.00, to get the balance to carry forward.
Using the check from the general account, write the check dated December 16, 200- made payable to Payroll Account
in the amount of $1,130.84. Sign Joan Caldwell's name as the person who wrote the check.
Be sure to write out the dollar amount in words correctly. If there is a difference between the amount written in digits on
a check and the amount written in words, the bank will go by the amount written in words.
Be certain to start writing the amount in words as far to the left on the line as possible to insure that no one can insert
any words before yours. It would be fairly easy to put an extra 1 in front of a check written for $100.00 and put one
thousand in front of one hundred if too much blank space is left on the line. By doing so, the check would be worth
$1,100.00 instead of $100.00! Quite a difference!
Deposit Tickets
You've now finished writing the check for our net payroll from the General Account. That was pretty easy, wasn't it?
Now, you must prepare a deposit ticket and deposit the check in the payroll account. This is a form provided by the
bank used to make a deposit into an account at the bank. There are deposit tickets for checking accounts and savings
accounts.
Using the deposit ticket you printed out at the beginning of this lesson, enter the date, December 16, 200-. Then, to the
left of the amount column, enter the nine-digit number located in the bottom, left-hand corner of the check. That is the
ABA number for Children's Capers' general checking account. This number is assigned to banks, with each bank having
their own individual ABA number. Enter the amount of the check you are depositing, $1,130.84, in the space provided
for dollar amounts.
Next, bring down the total to be deposited as $1,130.84. This amount goes next to the dollar sign ($) and is the very last
number entered on the deposit ticket. Now, the check to be deposited must be endorsed.
When a check is endorsed, it means that the payee of the check, the person or business receiving the money, is
transferring that check to someone else or the bank. The endorsement goes on the back of the check. With the check
facing you, turn the check over and endorse it at the top, which would be the left side of the back of the check. Most
checks have a special endorsement area. Your endorsement should not go below this line as the bank will use that
space for information they require for processing the check.
There are three types of endorsements. The first is a blank endorsement, which is simply the signature of the person
to whom the check is made out. This type of endorsement should be used only if you are at the bank ready to cash or
deposit the check. If a check is lost with a blank endorsement on the back, anyone who finds the check may cash it.
The second type is a special endorsement. A typical special endorsement is: Pay to the order of Jane Doe, and then
the payee's signature. This transfers this check to Jane Doe, and she will have to endorse the back before she can cash
the check.
The third type of endorsement is restrictive. A restrictive endorsement restricts what can be done with the check. An
example of a restrictive endorsement is: For deposit only to the account of Children's Capers. The only thing then that
could be done with that check is deposited into Children's Capers' account.
Most businesses have an endorsement stamp that is put on a check at the time it is received. This endorsement places
a limit on the check so it can only be deposited into that business' account. This protects the business because if the
check is lost or stolen, no one else can cash or deposit it.
Children's Capers Payroll Checks
You're now ready to write the two payroll checks: one to John Jones and one to Sara Dowling.
Look at the payroll account checks you printed out. They are pretty self-explanatory. The period ending is December 15,
200-. The box for Earnings is for Total Earnings, column 3 in the Payroll Register.
There are two lines beneath that space, one for regular earnings and one for the overtime earnings. These two amounts
must equal the total earnings. Regular earnings come from column 1 in the register, overtime earnings come from
column 2, and total earnings come from column 3.
You're now simply copying information from the Payroll Register to the checks. Enter all of John's deductions and show
his net pay in the last box on the check stub. Then, go ahead and write John's check for the net amount of his pay,
$627.24.
Next, do the same for Sara Dowling. Copy the information from the Payroll Register to the check stub and write her
check for her net pay, $503.60. Remember, if you need to refer to them, the solutions for this lesson are in the
Chapter 4
Bank Reconciliation
In this chapter, you'll learn how to prepare a bank reconciliation statement. This form allows you to bring the balance in
a checking account into agreement with the bank records for the same checking account.
Most banks provide a bank reconciliation form when they send out your monthly bank statement. Your monthly
statement from the bank shows your beginning balance, checks that have been paid by the bank, deposits you have
made, any bank charges made to your account, and your ending balance for the period. These forms are the easiest
way to reconcile your account with the bank. They are very easy to follow.
Look at the bank reconciliation form you printed out at the beginning of this lesson. On the left-hand side of the form is
where information from your checkbook would be entered. The right-hand side of the form is where information about
the bank statement is entered.
Let's assume that your checkbook shows a balance of $235.01. The bank statement shows your balance at $150.31.
The bank statement also shows bank fees deducted as follows: $3.00 for your monthly service charge and $12.00 for
credit card fees. Most banks charge a percentage of credit card deposits made to an account. This is a charge that you,
as the account holder, pay to the bank. Both of these charges are automatically deducted from your account before the
statement is sent out. The date of this statement is December 16, 200-.
The first thing you can do is fill in the checkbook balance on the left side of the form. Let's assume this is the balance on
check stub number 33. Enter $235.01 next to Balance on check stub no. 33.
Under Deduct Bank Charges, enter SC for service charge as the description, and enter $3.00 in the Amount column.
Under that, enter CC for credit card fees, and enter $12.00 under the Amount column. Total these two charges, $15.00,
and enter this amount on the line Total Bank Charges.
Next, subtract the total bank charges from the balance on check stub 33, and you'll get $220.01, which is the Adjusted
Check Stub Balance. That completes the left-hand side of the form.
On the right-hand side, enter the balance on the bank statement, which you see is $150.31. This number is taken from
the bank statement and is your ending balance. After that, look at the bank statement and compare deposits you have
entered in your checkbook with those shown on the bank statement. If there are any that you have entered in your
checkbook but are not yet showing on the bank statement, list those as outstanding deposits. In this case, there is one
in the amount of $300.00 on December 15, 2001.
Outstanding deposits occur when you make a deposit and the bank has not yet
posted it to your account, so it does not show up on your statement. Add the statement
balance with the outstanding deposit and enter that on the Total line about half way
down on the right-hand side of the form.
Now, you must determine if there are any outstanding checks. An outstanding check
is a check that you have written and deducted from your checkbook balance but has
not yet cleared the bank and therefore has not been deducted from your account.
Checks take a day or two to get back to your bank and be deducted from your account.
Therefore, you must compare the checks listed as paid on your statement with those in your checkbook. Any that you've
written but are not showing on your statement are listed as outstanding checks.
In this example, there are two outstanding checks, number 30 for $118.20 and number 29 for $112.10. Enter these two
checks in the box under Deduct Outstanding Checks and enter the total of the two checks, $230.30, on the line 'total
outstanding checks'.
Now, subtract your outstanding checks from the total and you should come up with the same number as you have on
the 'adjusted check stub balance' on the left-hand side of the form. In other words, both sides have to equal the same
amount.
This is a fairly easy concept and is very useful in both a business situation and your personal life. The solution for this
job is located in the Supplementary Material section and labeled accordingly.
When you have finished the bank reconciliation, you need to journalize the service charge and the credit card fee
charge. Below are the two transactions to journalize these charges.
Transaction #6: December 16, Received bank statement showing a service charge of $3.00, M1.
This would be a general debit to Miscellaneous Expense and a credit to Cash.
Transaction #7: December 16, Received bank statement showing credit card fees of $12.00, M2.
This would be a general debit to Credit Card Fee Expense and a credit to Cash.
Chapter 5
Conclusion
Once again, you've been exposed to some very valuable information in this lesson. As you can see, many of the
concepts in this course are applicable not only to a business but also to your personal life. Writing checks is probably
already part of your life, as are making deposits and balancing your checkbook balance with the bank balance. Now,
you understand how to complete this for a business account. It's really not that different!
You're ready to move on and gain even more knowledge as we continue with the remaining lessons in Accounting
Fundamentals. In Lesson 8, you'll be preparing a worksheet for Children's Capers. This financial report shows how the
business did for the year. Did it make a net income, or did it experience a net loss? The worksheet is one of the most
valuable financial reports of a business. It's the first report of many in ending a fiscal period and preparing the accounts
for the beginning of a new fiscal period.
When you feel ready, I'd like you to take a quick, multiple-choice quiz on this lesson. Good luck!
Lesson 7 Forms
Here are the three checks, the deposit ticket, and the bank
reconciliation statement.
Lesson 7 Solutions
FAQs
Q: What is the difference between a blank endorsement, a special endorsement, and a

restrictive endorsement?
A: A blank endorsement is simply the name of the person to whom the check is made out. A
special endorsement transfers the check to someone else, as in "pay to the order of." A
restrictive endorsement restricts what can be done with the check, as in "for deposit only."
Q: What is an outstanding check?
A: An outstanding check is a check that has been written but has not yet been presented at
the bank for payment. It has been deducted from your checkbook balance, but the bank has
not as yet deducted it from your balance at the bank.
Q: What is an outstanding deposit?
A: An outstanding deposit is a deposit which has been entered into your checkbook but does
not yet show on the bank statement.

INSTRUCTIONS:
Chapter 1
Introduction
You took a little break from your journal and General Ledger in the last lesson while you learned about various banking
services. In this lesson, you'll return to your journal and General Ledger. You're going to learn how to post the column
totals in the journal to the General Ledger and how to prepare a Schedule of Accounts Payable and Schedule of
Accounts Receivable.
These two schedules are extremely important to Children's Capers. The Schedule of Accounts Receivable shows the
total amount of money owed to Children's Capers at the end of the month. The Schedule of Accounts Payable shows
how much money Children's Capers owes its vendors.
If Children's Capers extends too much credit to its customers, it may not have enough
working cash to meet its obligations. On the other hand, Children's Capers has to
keep a close eye on how much is owed to its vendors. The business doesn't want to
be in debt so much it can't pay the bills when they are due.
Just as individuals keep track of their income and expenses, so must a business,
especially a new company that may not have the dedicated customers that a
longstanding, well-known business would have.
These reports are only two of the many various end of fiscal period reports that will
assist the owners of Children's Capers in making decisions relating to the business in
the coming year.
Chapter 2
Review Transactions
Once again, I will give you a few review transactions to keep your new skills sharp. Please enter these transactions in
your journal:
Transaction #1: December 17, Received cash from daily sales, $1,500.00, plus $75.00 tax, total,
$1,575.00, T17.
Transaction #2: December 17, Purchased merchandise on account from Toys For Less, Inc., $350.00,
P10.
Transaction #3: December 20, Received on account from Richard Johnson, $150.00, R10.
Transaction #4: December 22, Paid Costco Wholesalers on account, $400.00, C33.
Transaction #5: December 26, Paid cash for office supplies, $250.00, C34.
Transaction #6: December 28, Joan Caldwell, owner, withdrew $250.00 for personal use, C35.
You should now post columns 3 and 4 to the Accounts Receivable Ledger and columns 7 and 8 to the Accounts
Payable Ledger. Remember to post column 8 first, then column 7.
Now, you'll need to post the individual entries in columns 1 and 2 that you just journalized. Be sure to insert the Post
Ref. numbers in both the General Ledger accounts and the journal as you post.
Next, add the column totals of all the columns on page 14 of the journal and make sure the debit totals equal the credit
totals. Double rule the totals if they are in agreement. In the Account Title section, simply put Totals on the line where
your totals appear. Use December 31 as the date, as you are done posting for the month of December.
If your debit and credit totals do not agree, then you need to go back and check each individual transaction. You need
to be certain that you have a debit and a credit for each transaction for the same amount. Your totals should be on the
last line of the journal page.
Once again, the solutions to this lesson are in the Supplementary Material section.
Chapter 3
Posting Totals to the General Ledger
In Chapter 3, you're going to learn how to post the column totals in your journal to the General Ledger. Everything in
columns 1 and 2, General Debit and Credit, has already been posted. You posted those entries in each lesson as you
journalized them. That leaves columns 3-11. These are all special amount columns, so only the total of each column will
be posted to the General Ledger.
So, let's do it. Use December 31 as the date when posting all of the column totals. Column 3 is the Accounts Receivable
Debit column.
Find the Accounts Receivable account in the General Ledger and enter that debit entry. Bring that amount over into the
Debit Balance column. Now, on the next line of that account, make a credit entry for the total of column 4, Accounts
Receivable Credit. This credit is smaller than the debit balance, so subtract it from the debit balance. The difference is
still a debit balance because the debit balance was larger than the credit entry.
Enter 14 as the Post Ref. number in the ledger account, as you're posting from page 14 of the journal. Under the
column total put 1130 which is the account number assigned to Accounts Receivable in the General Ledger. This
account number goes under the total for both columns 3 and 4, as you posted both of those totals to that account.
Next, post the total of column 5, Sales, as a credit in the sales account in the General Ledger. Put the sales account
number, 4100, under the total of column 5 in the journal.
Then, post the total of column 6, Sales Tax Payable as a credit in the Sales Tax Payable account in the ledger. The
Sales Tax Payable account number is 2145, which goes under the total of column 6.
Next are columns 7 and 8, Accounts Payable. You're going to post the total of column 8 first, so that the charges are put
in before the payments. Post the total of column 8 as a credit to Accounts Payable in the General Ledger and bring the
total over to the Credit Balance column. Then, post the debit total from column 7 and a debit on the next line in the
General Ledger account.
The credit balance is larger than the debit entry, so subtract the debit from the credit balance. This will give you the new
credit balance. Don't forget to put the account number for Accounts Payable, 2115, under the column total in the journal.
Now you'll post the total of column 9 to the Purchases account in the General Ledger, account number 5100. Enter the
column total from the journal into the General Ledger account. Bring over the debit entry into the Debit Balance column
in the ledger. Put the Purchases account number under the total of column 9 in the journal.
Finally, you'll post the column totals from columns 10 and 11, Cash Debit and Credit. Enter the debit first in the Cash
account in the General Ledger. Add the debit entry to the debit balance already showing in the ledger. This will give the
account a higher debit balance.
On the next line in the ledger account, enter the credit total from column 11 in the journal. Subtract this credit entry from
the debit balance and you have a new, lower debit balance in Cash. Put the Cash account number, 1110, under both
the Debit and Credit column totals in the journal.
That's it! One more check and you'll have it. I want you to go through your General Ledger and add every debit balance
together. Then I want you to go through once more and add every credit balance together. These totals must be the
same. If they aren't, you must find the error.
If your journal equals out but your debits and credits in the General Ledger do not, you must check each General
Ledger account for accuracy in addition and subtraction. If everything appears to be in order there, you must check to
be sure you transferred the amounts correctly from the journal to the ledger accounts.
I'm not going to tell you this will only take a minute because in reality it could take more than a few. But the error(s) must
be found before you can move on. Remember, after you have given it your best shot, the solutions to this lesson are in
the Supplementary Material section.
Chapter 4
Schedule of Accounts Payable and Accounts Receivable
Once you have the journal and General Ledger all balanced out, I'm going to have you prepare a Schedule of Accounts
Payable and a Schedule of Accounts Receivable for Children's Capers. There is something quite amazing about how
the totals equal out, but I won't let you in on the surprise until you have finished preparing these schedules.
On one of the forms you printed out (they are both the same form) put Children's Capers on the first line in the heading.
On the second line, put Schedule of Accounts Receivable. On the last line in the heading, put the date, December 31,
200-.
Next, go to your four accounts in the Accounts Receivable Ledger. If a person has a balance, list his name in the wide
column to the left on the schedule form. Enter their balance in the column squared for money amounts. Do this for each
account receivable account that has a balance. On the line following the last entry, write Total Accounts Receivable and
put the total of all the people who owe Children Capers money.
Now for the fun part. Look at the total on the form you just filled out, the Schedule of Accounts Receivable. Go to the
Accounts Receivable account in the General Ledger. The debit balance in that account should be the same number as
the total on your Schedule of Accounts Receivable. Hopefully, it is! How about that?
If it isn't, you must once again find your error. It might be in figuring the balances in the Accounts Receivable Ledger or
you might have made an error in transferring a number from the journal to the ledger account. You must, however, find
the error before you continue.
For the next step, I want you to do the same thing with your Accounts Payable Ledger. Use the second form you printed
out to make a Schedule of Accounts Payable in the same manner you made your Schedule of Accounts Receivable.
When you're done and have a total of accounts payable, go to the Accounts Payable Ledger account in the General
Ledger. That credit balance must be the same as the total on your Schedule of Accounts Payable. Again, if it is not, you
must find your error.
Chapter 5
Conclusion
Accounts receivable and accounts payable were always my favorite activities in accounting. The manner in which the
balances in the General Ledger equal the total of the two schedules is very satisfying when they equal on the first try.
However, I found it a little frustrating when they did not. I remember times when I've looked for an hour for a one-cent
error. Hardly seems worth the time involved, but that one-cent error must be found or it will carry through your entire
system. I gained great pleasure from finally finding and correcting the error!
In this lesson, once again, you've learned a great deal of information. You've learned how to post journal totals to
Children's Capers General Ledger and how to prepare and prove a Schedule of
Accounts Payable and a Schedule of Accounts Receivable.
I hope you feel excited with your new knowledge and anxious to put it to good use.
You are now ready to move on to learn how to prepare the year-end financial reports
for Children's Capers.
When you're comfortable with the concepts in this lesson, I'd like you to take a short,
multiple-choice quiz.
Lesson 8 Forms
/crs/pix/fun/L08-Schedules.pdf
Here are the Schedule of Accounts Payable and Schedule of
Accounts Receivable forms.
Lesson 8 Solutions
FAQs
Q: What are Accounts Receivable and Accounts Payable Schedules?
A: A Schedule of Accounts Receivable shows how much money is owed to your business by
customers. A Schedule of Accounts Payable shows what your business owes by vendor.
Q: Why are account numbers put under the column totals in the Journal?
A: These numbers represent the account number in the General Ledger where the column
total was posted to.
Q: What must be true in the General Ledger to insure that your work is correct?
A: The debit account balances and the credit account balances must be equal.

INSTRUCTIONS:
Chapter 1
Introduction
Wow! Here you are at the beginning of Lesson 9 already. You've learned the basic accounting cycle for a small
business. What you've completed in the course up to this point is all the monthly requirements. You're now ready to
continue with the end-of-the-year work.
This work consists of many different financial reports that show the condition of the business and how it has progressed
during the previous 12 months.
The worksheet is a business report that shows how the business has progressed from January 1 to December 31 of the
same year. It will, when completed, show whether the business had a net income or a net loss for the year.
The worksheet is also a place where adjustments to some of Children's Capers' accounts will be made. We'll discuss
these adjustments at length in Chapter 3. Below is an example of a completed worksheet for you to view as I explain
how to prepare a worksheet. Please feel free to refer to this sample worksheet throughout this lesson or whenever
necessary.
It's important for you to realize that not many bookkeepers know automatically how to complete each and every report,
especially those that are completed only once a year. I've always allowed my students in high school to have access to
an example. The important part is being able to complete the reports accurately with the proper figures.
J & J Auto Repair Worksheet
Chapter 2
Trial Balance Section of the Worksheet
Look at the form you printed out to complete the worksheet. It has three lines in the heading. On the first line, put the
name of the company, Children's Capers. On the second line, put the name of the financial report, Worksheet. On the
last line, put For the Year Ended December 31, 200-. The date is entered this way on the worksheet because the report
is showing the progression of the business from one point in time, January 1, to another point in time, December 31. If a
financial report shows the condition of the business on a particular date, then only the date is entered, like December
31, 200-.
Before you can continue with the adjustments, you must make two entries in your General Ledger. The first entry will be
a debit to Merchandise Inventory for $7,250.00. Please use December 31, 200- as the date and put a check mark in the
Post Ref. column. This will make this account have a debit balance of $7,250.00. Next, enter a credit to Cash for
$7,250.00, again using December 31, 200- as the date and putting a check mark in the Post Ref. column. This
transaction is necessary because the merchandise inventory account in the General Ledger would, in a real situation,
have a balance from the previous year. Because I had you open General Ledger accounts with no balances for this
course, you need to enter a fictitious balance in Merchandise Inventory. Now you're all set!
Once you've finished the heading, take a look at the columns of the worksheet form. The first column is for account
titles. The second and third columns are labeled Trial Balance Debit and Credit. The next columns are Adjustments
Debit and Credit. Next is Income Statement Debit and Credit and last are Balance Sheet Debit and Credit.
In this chapter, you'll concentrate on the Trial Balance Debit and Credit columns. Using your entire General Ledger,
enter the account titles in the order in which they appear in the ledger. If the account has a debit balance, enter it in the
Trial Balance Debit column. You do not need to list account titles for account numbers 2155, 2160, 2165, 2170, or 6150
as we will not be using these accounts when preparing the Worksheet. If the account has a credit balance, enter it in the
Trial Balance Credit column. Remember you're only working with the General Ledger, not the Accounts Payable or
Accounts Receivable Ledgers.
When all the account balances in the General Ledger have been entered, add up the amounts in columns 1 and 2.
These two totals must be equal. This, once again, proves the equality of the
debits and credits in the General Ledger.
As usual, if these two columns do not agree, you can't continue. You must
find and correct any errors in the General Ledger or in transferring the
account balances from the General Ledger onto the Trial Balance section of
the worksheet.
Once you've got these two columns balanced, put two lines under the total
to show that they are in agreement.
Chapter 3
Adjustments
You're now ready to make adjustments to some of the asset accounts. As

you know, Children's Capers bought store and office supplies and insurance
coverage throughout the month of December and previous months in the
year. They've also made many purchases for merchandise for resale. These balances will not be the same at the end of
the year as the balance in the General Ledger is showing.
The balances in the General Ledger accounts represent the balance at the beginning of the year. The balances at the
end of the year are different. There are four accounts that need adjustments made to them in order to be up-to-date for
the new year. They are Office Supplies, Store Supplies, Prepaid Insurance, and Merchandise Inventory.
Let me explain adjustments and why they're necessary before you continue. Children's Capers bought store and office
supplies throughout the year and entered those transactions in the respective supplies accounts as debits. These debit
balances represent the dollar amount of supplies Children's Capers has on hand.
Obviously, the business used some of those supplies as the months went by. The ending balance of their supplies
would be smaller than the beginning balance, because some of those supplies have been used. What you need to do is
make an adjustment to the two supply accounts, store supplies and office supplies, in order to bring their debit balances
down to the actual dollar amount you have left on hand at the end of the year.
You do this by taking an inventory of the supplies you have on hand on December 31. Then
you find the difference between what Children's Capers started the year with and what they
have on hand at the end of the year. The difference is the dollar amount of supplies that
were used during the year. This amount needs to be transferred to an expense account so
that it can be subtracted from the sales figure for the year. If you didn't do this, your net
income would be overstated because you have not deducted all the expenses for the
period.
Now, remember when I talked about prepaid insurance? I told you that Children's Capers
pays for insurance coverage in advance and then applies the amount allocated per month
to an expense account at the end of the month. You paid $600.00 for six months' coverage,
so that would be $100.00 a month. You'll make an adjustment to that asset account and put
the $100.00 for December into an expense account. This is done, once again, so you have
a true picture of the net income of the business and all expenses that have been applied to that net income.
The last adjustment is made to the account Merchandise Inventory. Once again, this account represents the value of
merchandise Children's Capers has on hand for resale to their customers. The January 1 merchandise inventory and
the December 31 inventory figures will be quite different, as you have purchased merchandise during the year and sold
some also.
Now, I'm going to give you the December 31 balances for those four accounts:
Office Supplies: $722.00
Store Supplies: $513.00
Merchandise Inventory: $9,350.00
Prepaid Insurance: $500.00
Let's do Office Supplies first. The balance in that General Ledger account now is $912.00. At the end of December, you
took an inventory of office supplies and found you had $722.00. That means that you've used the difference, $190.00.
You need to make an adjustment to bring the debit balance in Office Supplies down to $722.00.
To do this, in the worksheet, enter a credit of $190.00 in column 4, Adjustments Credit, on line 5, which is the line that
Office Supplies is on. Then, go down to Office Supplies Expense, and enter a debit for $190.00 in column 3,
Adjustments Debit. You've now made the adjusting entry to reduce the asset account Supplies and enter the portion of
supplies used into the expense account, Office Supplies Expense.
Let's do the same thing with Children's Capers' Store Supplies account. The account shows $810.00 in the General
Ledger. The inventory on December 31 is $513.00. The difference is the amount used, or $297.00. Enter this as a credit
on line 6, Store Supplies, in column 4, Adjustments Credit. Then, go down to the line for Supplies Store Expense and
enter the same amount in column 3, Adjustments Debit. That's that!
Next, let's do the adjustment to Prepaid Insurance. Enter a credit on line 7 in column 4, Adjustments Credit, for $100.00.
This is the difference between the balance in the account now, $600.00, and the value of insurance coverage at the end
of December, $500.00. Now, go to line 22 of the worksheet which is the line that Insurance Expense is on and enter a
debit for $100.00 in column 3, Adjustments Debit. One more!
Last but not least, you need to make an adjustment for merchandise inventory. The balance in column 1 is $7,250.00.
The balance on December 31 is $9,350.00. You can see that Children's Capers' merchandise inventory increased. This
account has a debit balance, so to increase that balance you must debit Merchandise Inventory on line 4 in column 3,
Adjustments Debit for the difference, which is $2,100.00. The credit part of this transaction will be to Income Summary,
which is on line 17. Enter a credit for the same amount, $2,100.00, under Adjustments Credit, column 4.
That's it! You've entered four transactions in your two Adjustments columns of the worksheet. You have a debit part and
a credit part for each transaction. Total these two columns, columns 3 and 4, and make sure they are equal. When
they're equal, double rule the totals to show that they are in agreement. And you're ready to move on!
Chapter 4
Completing the Worksheet
There are four columns left on your worksheet forms. The Income Statement columns, numbers 5 and 6, are for those
balances that determine if a business has a net income or a net loss. These accounts are shown from the account titled
Income Summary down through the last expense account title. That means that for each and every account that is
showing a balance in either column 1, 2, 3, or 4, you need to bring that balance over into columns 5 and 6.
If the balance is a debit, it goes to column 5, the Debit column. If the balance is a credit, it goes to column 6, the Credit
column. Remember to bring over your three new expense account balances, Store Supplies Expense, Office Supplies
Expense, and Insurance Expense.
Now, total columns 5 and 6. These two totals should not agree. Time for another surprise! After you finish with columns
7 and 8, I'll let you in on the secret!
Next, bring the remaining accounts, your assets, liabilities, capital, and drawing account balances over into columns 7
and 8, the Balance Sheet columns. When you bring over the accounts that were adjusted, you'll bring over the ending
balances, those that I gave you in the last chapter. If you look at the Merchandise Inventory line, for example, there is a
balance of $7,250.00 in column l. Then there is a debit adjustment of $2,100.00. The new, adjusted balance in
Merchandise Inventory is $9,350.00, the sum of the two debits. Make sense?
This is how the four accounts you made adjustments to will appear on the Balance Sheet section of the Worksheet,
columns 7 and 8. They will either be increased or decreased by the adjustment you made. In addition, the ending
balances in column 8 will be the numbers I gave you above as your December 31 balances.
Next, total columns 7 and 8. Again, these two columns should not equal. Now for the surprise: the difference between
columns 5 and 6 and the difference between columns 7 and 8 must be the same number. This number represents either
a net loss or a net income.
Take a look at column 5, Income Statement Debit. Your expenses are shown here. In column 6 is your sales figure. If
column 5, expenses, is larger than column 6, income, you have a net loss. If column 6, the sales, is larger than column
5, your expenses, you have a net income. Obviously, a business strives for a net income.
When columns 5 and 6 and 7 and 8 have the same difference, enter that difference under the lower number in each set
of columns and add them down, which will make columns 5 and 6 agree and columns 7 and 8 agree. On the line where
you entered the difference, enter either net income or net loss in the Account Title column. Be sure to double rule the
totals of the last four columns once they agree.
Please feel free to look at the sample worksheet given in this lesson as a guide while you complete the one for
Children's Capers.
As usual, the solution for this lesson's work is in the Supplementary Material section.
Chapter 5
Conclusion
It must seem like you've covered a tremendous amount of material in this chapter, and you did! But isn't it great to have
the knowledge and skills to complete an entire accounting cycle? Remember, you'll always have examples of the work
required by most businesses in your three-ring binder. This can become a valuable asset to you both personally and
professionally. Only three more lessons to go—ahhhh—but very interesting ones!
As usual, when you feel you're ready, there is a short, multiple-choice quiz waiting for you. Good luck!
Worksheet
/crs/pix/fun/L09-Worksheet.pdf
This form is used to calculate the net income or net loss of a
business.
Lesson 9 Solutions

FAQs
Q: Why is it necessary to make adjustments to Supplies, Prepaid Insurance, and

Merchandise Inventory accounts?
A: It is necessary to make adjustments to these accounts in order to have these accounts

have up-to-date, accurate balances at the beginning of the new year. If no adjustments were
made, the net income or net loss of the business would not be an accurate figure because all
of the expenses relating to the business for that period of time would not have been
deducted.
Q: What is the main purpose of a worksheet?
A: The main purpose of a worksheet is to show whether the business had a net income or a
net loss for the period.
Q: Why must columns 1 and 2 of the worksheet, Trial Balance Debit and Credit, equal?
A: Columns 1 and 2, Trial Balance Debit and Credit, on the worksheet prove the equality of
the General Ledger. These two columns must equal before the worksheet is completed.

INSTRUCTIONS:
Chapter 1
Introduction
You're getting very close to the culmination of the accounting process. In just this lesson and two more, you'll have all
the knowledge of beginning bookkeepers. You should be very proud of your accomplishments in this course.
In Lesson 9, you learned how to prepare a worksheet for Children's Capers, showing its net income. This document is
the basis for the year-end reports you will be completing in this lesson.
In this lesson, you'll learn how to prepare four financial, end-of-the-year reports for Children's Capers. The first report is
an Income Statement, the second is a Distribution of Net Income, the third is an Owners' Equity Statement, and the
fourth and last is a Balance Sheet.
All of the information for the last three lessons of Accounting Fundamentals will be taken from the worksheet you
prepared in Lesson 9. This year-end work is, for the most part, simply a matter of copying figures from the worksheet
onto the various financial reports and the General Ledger accounts. While these reports are fairly easy to complete, I'm
going to give you an example of each of them in this lesson before you have to complete the report for Children's
Capers. That way, you'll have a model to follow as you prepare the various reports.
These reports are vital to the owners of Children's Capers and their financial advisor, their bank, and/or accountant. If
Children's Capers' financial reports are favorable for the year, Joan and Stacy, the owners, can purchase fixed assets
like their own building for the business, or expand their advertising territory. The owners can also withdraw more money
from the business for their personal use once they feel confident that Children's Capers is in good financial standing.
On the other hand, if Children's Capers' year-end financial records show that the
business only made a slight profit, the owners may wish to increase the prices on
their merchandise or try to reduce expenses in order to increase the net profit
during the next fiscal period.
Regardless of the reasons, every business needs to have its financial condition
evaluated at least once a year to regulate the activities mentioned in the
paragraphs above.
Now, let's get busy!
Chapter 2
Income Statement
An Income Statement is a report that shows the progress from the beginning of the year until the end of the year. This
report shows income, cost of merchandise sold, expenses, and net income or net loss. Once again, all of the figures
necessary to complete an Income Statement are taken from the worksheet for Children's Capers.
Below is an example of an Income Statement for you to look at as I explain how to prepare one for Children's Capers.
Income Statement
First, as always, enter Children's Capers on the first line of the heading for the Income Statement. On the second line,
enter the words Income Statement, and on the third line enter For the Year Ended December 31, 200-.
Now, on the first line of the actual report, put the word Revenue. Below that, write Sales. Find the total amount of sales
by looking at the balance in the Sales account on the worksheet. Enter that amount in the second dollar-amount column
of the Income Statement form. Write 100% in the column labeled % of Sales. This shows that this amount is the total
amount of sales for the year.
Next, on the following line put the words Cost of Merchandise Sold. You're now going to figure out how much the total
merchandise sold for the year actually cost Children's Capers. This will be the wholesale amount Children's Capers paid
for merchandise that was purchased by their consumers during the year. This figure goes in the first column designated
for dollar amounts.
On the next line, enter Merchandise Inventory, January 1, 200-. Find the merchandise inventory value on January 1 in
column 1 of the worksheet. On the next line, enter Purchases and enter the amount of the Purchases account from
column 1 of the worksheet. Next, enter Total Cost of Merchandise Available for Sale and add those two numbers
together. This gives you the wholesale dollar amount of the total amount of merchandise available for consumers to
buy.
But not all of this merchandise was sold. On the next line, enter Less Merchandise Inventory, December 31, 200-. Find
this amount in the Merchandise Inventory account in column 7 of the worksheet. Then subtract this figure from the total
cost of merchandise available for sale, and you have the actual wholesale amount of the merchandise Children's
Capers sold in the 12-month period. Enter Cost of Merchandise Sold on the next line and put the number you found by
subtracting the ending merchandise inventory from the total merchandise available in the second column.
Now, subtract the Cost of Merchandise Sold from the Sales figure above. This gives you the Gross Profit on Sales for
Children's Capers for the year. This figure is simply the difference between the wholesale amount or the price Children's
Capers paid for the merchandise and the retail amount or the amount for which Children's Capers sold the
merchandise.
Next, on the following line, enter the word Expenses. From column 5 of the worksheet, list all the expenses and their
balances. These balances go in the first column designated for numbers. When you've listed all the expenses, put Total
Expenses on the next line and total up the expenses. This total goes in the second column for figures.
Then, go ahead and subtract the Total Expenses from the Gross Profit on Sales. This
gives you the net income for the year. This figure should be the same number that is
showing for the net income on the worksheet. Amazing, huh?
You only have one more step to complete this report. You need to find the component
percentages for each component of the report. Businesses have minimum standards for
component percentages. These minimums are what a typical business would like to see to
be certain their business is thriving and headed in the right direction. These minimum
component percentages are:
z Cost of Merchandise Sold: Not more than 50.0%.
z Gross Profit on Sale: Not less than 50.0%.
z Total Expenses: Not more than 32.0%.
z Net Income: Not less than 18.0%.
To arrive at the component percentages, you would divide each of the components by the Sales number. For example,
to find the Cost of Merchandise Sold component percentage, divide the Cost of Merchandise figure by the Sales figure.
In this example, J & J Auto Repair's sales for the year were $172,000.00. The Cost of Merchandise Sold was
$90,170.00. To arrive at the component percentage, divide $90,170.00 by $172,000.00. Change the decimal number
arrived at into a percent by moving the decimal point two places to the right. Then, round the percent to one place after
the decimal point. On the calculator, $90,170.00 divided by $172,000.00 is .5242. Change this to a percent, which
would be 52.42%. Then, round it to one place after the decimal point, which would give you 52.4%.
To find the Gross Profit on Sales figure, divide that number by the Sales number. To determine the Expenses
component percentage, divide the Total Expenses number by the Sales figure. And, to find the Net Income Component
Percentage, divide the Net Income by the Sales number.
You need to round each of these percentages to one place following the decimal point. For example, a component
percentage of 32.67% would be 32.7%. A component percentage of 45.32% would be 45.3%.
Sometimes when dividing one category into two separate categories using percents rounded to one tenth of a percent, it
is necessary to add one tenth of a percent to make the two add back up to the total. So it is in the case of the percent
for the net income. The calculation comes out to 19.8%, but you need to make it 19.9% so that this percent and the
Total Expenses percent add back up to the Gross Profit on Sales percent. When you determine the percent of the Net
Income, you will have to add one tenth of a percent, which will make it 19.9% rather than the 19.8% your calculator will
show.
To check your work, the Cost of Merchandise Sold percentage and the Gross Profit percentage should add up to 100%.
The Total Expenses component percentage and the Net Income percentage should add up to the Gross Profit on Sales
number.
Once you've completed the Income Statement, put two double lines under both columns to show that all the numbers
are correct and in agreement with the worksheet.
Chapter 3
Distribution of Net Income and Owners' Equity Statement
In this chapter, you'll be preparing two financial reports, a Distribution of Net Income and an Owners' Equity Statement.
Once again, below are models of these two financial reports.
The Distribution of Net Income Statement will be the first report you make out. This is a financial statement showing how
the net income or net loss is distributed to the partners.
Distribution of Net Income
Once again, fill in the three-line heading. Children's Capers goes on the first line, Distribution of Net Income Statement
on line 2 and For the Year Ended December 31, 200- on the third line.
Children's Capers has two partners, Joan Caldwell and Stacy Hall. These two partners have agreed to share net
income or net loss equally. This means that Joan will receive 50% of the net income and Stacy will receive 50%.
Partners may decide to share net income and net loss any way they desire. Partners don't have to be equal or 50/50
partners, but Joan and Stacy are.
On the first line of the report, enter Joan Caldwell. On the line below her name, put 50.0% of Net Income and enter the
dollar amount in the column to the right. To find Joan's dollar amount of the net income, simply multiply the net income
found on the worksheet by 50%.
On the next line, write Stacy Hall, and on the line under her name, write 50.0% of Net Income. In the dollar column,
enter her share of the net income, which would be the same as Joan's share since they share the net income equally.
Next, on the following line, write Net Income and total the two partners' dollar amounts. This figure should equal the net
income showing on the worksheet. If it does, double rule the total. That's all there is to that report!
Completing the Owners' Equity Statement
You'll now complete the Owners' Equity Statement. This report updates the owners' equity in the business. Remember
that the owners' equity is in an account titled Capital. The two things that change the owners' equity are their share of
the net income and their drawing. The net income will increase the balances in the owners' capital accounts and the
drawing account balances will decrease the owners' capital accounts. These two figures change the capital accounts of
the owners at the end of the year. Obviously, the owners want their capital account balances to increase. That shows
that the business is thriving and making them money.
So, let's go ahead and complete this financial report for the partners of Children's Capers.
Use the following sample of an Owners' Equity Statement as a model as you complete Children's Capers Owners'
Equity Statement.
Owners' Equity Statement
Fill in the three-line heading, only this time the second line will be Owners' Equity Statement.
The first partner in Children's Capers is Joan Caldwell. Enter her name on the first line. On the line under her name,
indent a little and write Capital, January 1, 200-. This figure is shown in column 2 of the worksheet, Trial Balance Credit.
Enter this figure in the second dollar-amount column of the form.
On the next line, put Share of Net Income. Since Joan and Stacy are equal partners in Children's Capers, each will
receive one half of the net income, which is $713.50. Enter this amount in the first dollar-amount column.
Next, on the following line, write Less Withdrawals. This is the account balance in Joan's drawing account. You'll get this
number from column 1 of the worksheet in the account Joan Caldwell, Drawing. Enter this amount in the first dollar-
amount column.
Now, because the drawing is greater than Joan's share of the net income, you will put Net Decrease in Capital on the
next line. Subtract the net income figure from the drawing balance. This amount is a decrease in capital. Enter the net
decrease figure in the middle or second dollar-amount column.
The capital account will be smaller because Joan withdrew more money during the year than Children's Capers made
for her. Obviously, the goal of any business is to make more money than its owners withdraw, but the opposite happens
at times.
So, subtract the Net Decrease in Capital from the January 1 capital balance. This gives you the capital balance on
December 31, 200-. This new capital balance goes in the third dollar-amount column. Write Capital, December 31, 200-,
on the line next to this figure. The December 31 capital account balance will be smaller than the January 1 capital
account balance. This is so because Joan withdrew more from Children's Capers throughout the year than her share of
the net income. This will make her capital account balance less at the end of the year than it was at the beginning of the
year.
Stacy will have a net increase in her capital account balance, as she withdrew less than her share of the net income.
Now you need to go through the same process for Stacy Hall, the other partner in Children's Capers. Remember to take
the January 1 capital balance and Stacy's drawing account balance from columns 1 and 2 of the worksheet. They are
not necessarily the same figures as Joan's.
When owners' capital account balances decrease from one year to the next, they may wish to make some changes for
the coming year. They could decrease the amount of money they withdraw from the business. They might mark up their
merchandise a little more to increase their net income. They also could cut down on their expenses, which would make
the net income larger. These are all options that owners of a business have when looking over the financial reports.
Chapter 4
Balance Sheet
The fourth financial report in this lesson is a Balance Sheet. The Balance Sheet shows the financial condition of a
business on a specific date. It is used to make financial decisions for the ensuing fiscal period. An example Balance
Sheet is shown below:
Balance Sheet
Using the Balance Sheet form you printed at the beginning of this lesson, please fill in the three-line heading. Enter
Children's Capers on the first line, Balance Sheet on the second, and December 31, 200- on the third line.
On the first line following the heading, enter Assets, centered on the line. On the next and continuing lines, list each and
every asset account and its balance from column 7 of the worksheet. Enter these dollar amounts in the first column of
the report form. Notice that this section of the worksheet is the Balance Sheet section; thus, you are preparing a
Balance Sheet. Makes sense, huh?
On the line after the last asset account name and balance, enter Total Assets and add the asset account balances. This
total goes in the second column.
Next, center the word Liabilities on the next line. After that line, enter each liability account name and its balance from
column 8 of the worksheet. These figures are entered in the first column designated for numbers. On the following blank
line, put Total Liabilities and enter the total of all the liability account balances in the second column.
Now, center Owners' Equity on the next line. Enter Joan Caldwell, Capital on the following line. You can't use the capital
account balance that is showing in column 8 of the worksheet. This is the January 1 capital balance. The balance in the
owners' capital account has changed from January 1 to December 31. You need to use the updated capital account
balances. These are found on the Owners' Equity Statement that you completed earlier in this lesson.
When you've entered both partners' new capital balances, add the two amounts together and enter Total Owners'
Equity on the next line. Write the total in the second column.
Now, you must check your work to make sure everything is in balance. The total assets must equal the sum of the total
liabilities plus the sum of the total owners' equity. If these two totals agree, double rule both columns below the last used
line. This double ruling shows that the report is in agreement.
Chapter 5
Conclusion
Once again, I want to congratulate you on your accomplishments in this lesson. You've learned how to prepare four
very important financial reports at the end of an accounting cycle. These reports are the basis for some extremely
important financial decisions that Children's Capers and all businesses have to make.
With only two lessons to go, you're very close to the finishing touches of Children's Capers' accounting cycle. Please
take a few minutes to reflect on the new knowledge and skills you've acquired so far in this course and give yourself a
pat on the back. You deserve it.
As usual, when you feel you are ready and are comfortable with the concepts presented in this lesson, I'd like you to
take a quick, multiple-choice quiz. Good luck!
Lesson 10 Forms
Here are the four new forms you will need for this lesson.
Lesson 10 Solutions
FAQs
Q: Why are financial reports necessary at the close of the fiscal period?
A: Financial reports are necessary at the close of the fiscal period to show how the business
progressed during the year. These reports are used to project business profits and the future
success of the business.
Q: If a business shows a net loss for the year rather than a net income, what can be done to
correct the situation?
A: If a business shows a net loss for the year, the owner(s) might consider: 1) looking at
expenses to determine where they could be cut and 2) increasing the markup of
merchandise they sell.
Q: Why is it important that the owner's capital account balance increase from the beginning
of the year to the end?
A: The owner's capital account balance should increase because this shows that the
business is making the owner money and also his equity in the business is increasing.

INSTRUCTIONS:
Chapter 1
Introduction
In Lesson 10, you learned about the year-end financial reports of a business. These reports are extremely valuable in
determining how Children's Capers is progressing as a viable, profit-making business. These four financial statements
show the vitality and strength of Children's Capers. In addition, they can be valuable tools to determine which areas are
weak and need improvement for the ensuing year.
In this lesson, you'll continue completing the year-end work required in a merchandising business. These tasks prepare
the financial records of Children's Capers to begin the new fiscal period. You'll be making adjustments to certain asset
accounts so their balances will accurately reflect the dollar amount of those assets still remaining at the end of the year.
As you near the finish line in Accounting Fundamentals, I would like to invite you to think back on all
the new information and skills you have acquired. In just five short weeks, you have gained the
knowledge that it normally takes a high school student at least three-quarters of a school year to
acquire. Take a moment to congratulate yourself. You certainly deserve it!
Chapter 2
Why Adjusting Entries Are Necessary
Now that you've successfully completed the worksheet for Children's Capers, there's some information from it that must
be journalized and posted to the General Ledger.
You're going to be journalizing the four transactions in the Adjustments columns of the worksheet. These are columns 3
and 4 in the worksheet labeled Adjustments.
I would like to take a minute to explain to you why you're going to journalize these adjusting entries and what these
transactions will do to the General Ledger accounts when they are posted. Let's look at the Merchandise Inventory line
on the worksheet. If you look in column 1, Trial Balance debit, you will see the amount $7,250.00 for the account
Merchandise Inventory. This figure represents the value of merchandise available for sale on January 1, 200-. On that
same line, look to the right at column 3, Adjustments debit. You made a $2,100.00 adjustment in that column. Finally,
look on that same line in column 7, Balance Sheet debit. The amount there is $9,350.00.
If you analyze those three figures, you'll see that the merchandise inventory increased from January 1, 200- to
December 31, 200-. Since Merchandise Inventory has a normal debit balance, you made a debit adjustment for the
amount of the increase from the beginning of the year until the end of the year. Therefore, a debit of $7,250.00 from
column 1 plus a debit adjustment of $2,100.00 from column 3 equals the new debit balance of $9,350.00, the figure in
column 7.
The credit half of this adjusting transaction is entered as a credit to the account Income Summary. Therefore, enter a
credit in column 4 for $2,100.00 on the line which is for the account Income Summary. The account Income Summary is
simply a holding account for various numbers until they are transferred into other General Ledger accounts. When you
journalize and post the closing entries in Lesson 12, you will see how the amounts in Income Summary are entered and
then zero out at the end of the year.
If you look at the other three transactions in the Adjustments columns of the worksheet, columns 3 and 4, you can
readily see what the adjustments are doing. They are either increasing or decreasing the dollar amount in various
accounts in the General Ledger. The balance in these accounts changes from the beginning of the year to the end of
the year.
Obviously, if you had $912.00 in Office Supplies on January 1, the balance will be different on December 31. You used
some of those supplies and bought more throughout the year. What the adjusting entries are doing is bringing certain
accounts up to date so their balances reflect the actual amount of supplies and/or prepaid insurance on hand at the end
of the year.
Chapter 3
Journalizing Adjusting Entries
Below is an example of how your adjusting entries will look. I have used J & J Auto Repair for this purpose, which was
the business used for examples in Lesson 9 and 10.
Okay, let's journalize those adjusting entries on journal page 15. On the first line of this new journal page, enter
Adjusting Entries, centered in the Account Title section.
Look once more at the Adjustments columns, columns 3 and 4 of the worksheet. The first adjusting entry is a debit of
$2,100.00 to Merchandise Inventory.
On the second line of the journal, enter Merchandise Inventory in the Account Title column and enter $2,100.00 in the
General Debit column, column 1. On the next line, enter Income Summary in the Account Title column and make a
credit entry in column 2 for $2,100.00. That's all that is necessary to journalize the adjustment to Merchandise
Inventory.
Find the next adjusting entry in columns 3 and 4 of the worksheet. It is a $190.00 credit to Office Supplies and a
$190.00 debit to Supplies Expense/Office. Using the next two lines in the journal, enter a $190.00 credit to Office
Supplies on one line and a $190.00 debit to Supplies Expense/Office on another line. Use columns 1 and 2, General
Debit and Credit, to journalize all the adjusting transactions.
The next transaction in the Adjustment columns is a $297.00 credit to Store Supplies and a $297.00 debit to Supplies
Expense/Store. Using the next two lines of the journal, journalize this transaction using the General Debit and Credit
columns.
The last adjusting entry in columns 3 and 4 of the worksheet is a $100.00 credit to Prepaid Insurance and a $100.00
debit to Insurance Expense. On the next two lines of the journal, enter this transaction, once again using only the
General Debit and Credit columns.
That's all there is to journalizing the adjusting entries. You should have used nine lines on your new journal page,
including the line on which you wrote Adjusting Entries.
Chapter 4
Posting the Adjusting Entries
Now you must post those adjusting entries to the General Ledger accounts.
Post the transactions, one line at a time, make sure to enter 15 in the General Ledger Post Ref. column. This stands for
page 15 of the journal. Also, be sure to enter the account number to which you posted the adjusting transaction in the
Post Ref. column of the journal.
Let's do the first one together. Looking at your journal page, you can see that the first entry is a $2,100.00 debit to
Merchandise Inventory. Go to the Merchandise Inventory account in the General Ledger and enter $2,100.00 in the
Debit column. Now for another "amazing fact" of accounting!
After you refigure the balance in the Merchandise Inventory account, look at column 7 on the worksheet for
Merchandise Inventory. The amount in column 7 on the worksheet should be the same debit balance that is now
showing in the Merchandise Inventory account in the General Ledger. How about that!
Merchandise Inventory account in the worksheet and General Ledger
Go ahead and post the rest of the adjusting entries from the journal to their respective General Ledger accounts. The
new balance in the General Ledger accounts should be the same number that is in column 7 of the worksheet for each
asset account title, i.e. Supplies—Office, Supplies—Store, and Prepaid Insurance.
You can now see how you're bringing the General Ledger accounts up to date for the next fiscal period. In other words,
the ending balance in these accounts will be the beginning balance for the next year.
As usual, if you have problems, the solutions to this lesson are in the Supplementary Material section.
Chapter 5
Conclusion
This chapter has shown you some very important end-of-year activities: how to journalize and post adjusting entries.
With only one lesson remaining in this course, you realize that there is very little work remaining to complete all the
accounting duties for a business. You can now see the finish line ahead of you, so go forward with the confidence that
you have done an excellent job and have gained a tremendous amount of knowledge in just six short weeks.
As usual, when you feel ready, there is a short, multiple-choice quiz I would like you to take (famous last words!).
Lesson 11 Solutions
FAQs
Q: Why are adjusting entries needed in a business?
A: Adjusting entries are necessary so that certain accounts in the general ledger are brought
up-to-date for the beginning of the new year.
Q: What is the Income Summary account in the general ledger used for?
A: Income Summary is a holding account. Figures are entered in Income Summary until they
can be properly posted to other accounts in the general ledger. At the end of the fiscal
period, the Income Summary account zeros out and has no balance.
Q: How is it possible for Merchandise Inventory to have either a debit adjustment or a credit
adjustment?
A: Merchandise Inventory would have a debit adjustment if the inventory was higher at the
end of the year than it was at the beginning. A credit adjustment would indicate that
merchandise inventory was lower at the end of the year than it was as the beginning.

INSTRUCTIONS:
Chapter 1
Introduction
In Chapter 11, you learned how to journalize and post the adjusting entries on
Children's Capers worksheet. This is an important step in closing out the year's records
and preparing the General Ledger for the next fiscal period.
You're now about to learn the final step in the accounting cycle. In this last lesson, you'll
learn how to journalize and post closing entries to the General Ledger. You'll also be
preparing a post closing trial balance as the final financial report for the year.
I always get excited when I reach this point in accounting. I can see the finish-line
clearly ahead and can't wait until I cross it so I can begin a new fiscal period. So, let's
get going!
Chapter 2
Why Close Out Accounts and Which Ones?
You're going to be closing out certain accounts in your General Ledger. This is necessary so that certain General
Ledger accounts have zero-balances with which to begin the new fiscal period.
All asset accounts will remain open. Those balances will be carried into the next fiscal period. Think about those asset
accounts for a minute. Cash needs to be carried forward. If you were to close out Cash, Children's Capers would show
a zero-balance. Accounts Receivable's balance is also carried forward. Just because a new fiscal period is occurring
doesn't mean that people don't owe you any money. Likewise for the rest of the asset accounts. All of the balances are
carried into the next fiscal period.
Liability account balances are also carried into the next fiscal period. Again, just because a new year or fiscal period is
occurring doesn't mean that all Children's Capers debts are wiped out. Wouldn't that be neat, though?
Under the classification Owners' Equity, the drawing account is closed out. The capital account balance is carried into
the next cycle's work. However, the balance in the capital account will change, as you will see later in this lesson.
Your Sales account will close out, as will all of your expense accounts. Purchases will also close out. The reason behind
closing out these account balances is quite reasonable. You cannot have a balance in any of these accounts when you
begin a new accounting cycle. If you did, Children's Capers would not have a true picture of the next year's financial
progress because the previous year's figures would be included in the new year's figures.
You cannot build on the previous year's balances and have an honest picture of what the business did in the new year.
Therefore, the following accounts will be closed out and will have no balances at the
beginning of the new fiscal period: drawing, Sales, Purchases, plus all expense accounts.
The following accounts will have balances to carry forward into the new fiscal period: assets, liabilities, and the capital
accounts.
Chapter 3
Journalizing Closing Entries
In order to close out an account, you must enter an amount equal to the balance showing in that account, but the
opposite of the balance. In other words, the drawing account has a debit balance. To close this account, you need to
enter a credit entry for the amount of the debit balance. That credit entry will completely cancel out the debit balance
and leave Drawing with a zero-balance.
The same concept applies to the Sales account. Sales has a normal credit balance. To zero out this credit balance, you
will need to enter a debit entry for the same amount to close out Sales.
All expenses will also be closed out in preparation for the new fiscal period.
Look at the journal page depicted below. This is an example of how closing entries are entered into a journal. Notice
that the account Income Summary is used three times. This account is used to summarize amounts before they are
transferred to other accounts. When all the closing entries have been posted to the General Ledger, Income Summary
will have no balance.
Closing entries in J & J Auto Repair's journal
Using the illustration above as a guide, let's journalize our closing entries for Children's Capers.
There are four transactions to be completed to properly close out the required accounts at the end of the year. Let's
enter them into your journal page 16 one at a time.
Use December 31 as the date for these closing entries. On the first line of the journal, enter Closing Entries in the
Account Title area.
On the next line, enter Sales and enter a debit for $7,200.00 in the General Debit column of the journal. I arrived at this
figure by looking on the worksheet for Children's Capers. Sales is showing a credit balance for $7,200.00 on the
worksheet, so you need to make a debit entry in the journal. When this is posted, the Sales account will zero out.
Now, you need a credit for the same amount. Remember, the debits and credits must equal after each transaction. On
the next line in the journal, enter Income Summary and make a credit entry for $7,200.00 in the general Credit column
of the journal. That's all there is to the first closing entry.
Next, you will be closing out Purchases and all the expense accounts. Look at the worksheet and make a credit entry in
the journal for the balance in Purchases, which is $4,875.00. Now you need to close out all the expense account
balances. Look at column 5 of the worksheet. You can see that Children's Capers has a total of 9 expense accounts,
starting with Advertising Expense and ending with Utilities Expense. In the journal, make credit entries for each of these
expense accounts for the balance that is showing on the worksheet. This will take up nine lines in the journal, as there
are nine expense accounts and each one has to be listed separately. Now you need a debit entry to match these 10
credit entries. Total up the 10 credit entries to Purchases and all the expense accounts. Make one debit entry on the
next line in the journal for the total of all 10 credit entries. This debit entry will go to Income Summary (you guessed it!).
Now, you have two more closing entries. The first, will close out the drawing accounts of both partners. Remember that
the drawing account balance represents the dollar amount that the owner has withdrawn from the business during the
year. This amount will decrease the owner's net worth in the business, which is shown in the capital account.
Therefore, we are going to credit the drawing account for the balance showing on the worksheet and debit the owner's
capital account for the same amount. This will close out the drawing account and will decrease the owner's capital
account balance. This will take only two lines in the journal, but you need to close out both partners' drawing accounts.
You will, in fact, have two identical transactions, both with a debit and credit entry. One will be to close out Joan
Caldwell's drawing and the other will be to close out Stacy Hall's drawing.
Last, but not least, you need to get the partners' share of the net income into their individual capital accounts. The
capital account is increased with a credit, so make a journal entry to credit Joan Caldwell's capital account for her share
of the net income, which is $713.50. The debit-half of this transaction will be to Income Summary.
Again, you will need to make this entry in both partners' Capital accounts. Once again, please refer to the illustration
above. I am confident that you will understand the concept of closing entries better by looking at that example.
This will conclude the closing entries. Please post these journal entries to the General Ledger. Remember, these journal
entries will close out drawing, Sales, Purchases, plus all expense accounts.
The ledger accounts that should have balances remaining after you have posted these closing entries are: assets,
liabilities, and the two capital accounts.
Chapter 4
Post Closing Trial Balance
You're really crowding that finish line now. Just one more report to complete and you'll be done!
On the Post Closing Trial Balance sheet you printed out, enter Children's Capers on the first line in the heading. Put
Post Closing Trial Balance on the second line and December 31, 2001 on the third line of the heading.
Now, go through your General Ledger one account at a time. If an account has a balance, list the account name and the
balance in that account in either the Debit or Credit column, depending on whether the balance is a debit balance or a
credit balance.
When you have gone through the entire General Ledger, add both columns of the Post Closing Trial Balance report. If
they agree, you're done. If not, you need to once again find your error and correct it.
Double-rule the column totals to show that they are in agreement. Don't forget—the solutions to this lesson are in the
Chapter 5
Conclusion
Wow! It's hard to believe that it's over, isn't it? I'm very proud of each of you for the hard work you've put into this
course. Give yourself a huge pat on the back!
As usual, when you're comfortable with the concepts in this lesson, please take the multiple-choice quiz for Lesson 12.
The skills and knowledge you've acquired in this course will serve you well in your life, both personally and
professionally. You can use this knowledge to better control your finances and/or you may wish to continue with further
accounting courses. In either case, you're now a more informed individual and have a good foundation of basic
accounting skills.
I hope you've enjoyed learning the basics of accounting principles in Accounting Fundamentals! If this course has
spurred your desire for more accounting, I hope you'll come back and join me for the next level, Accounting
Fundamentals II.
In the sequel to this course, you'll learn all about corporate accounting, including such topics as dividends, retained
earnings, notes payable and receivable, uncollectible accounts receivables, depreciation, accrued income and
expenses, and much more. You'll also gain valuable knowledge in the area of payroll tax requirements and the quarterly
payroll reports required by the federal government. Please check the school's course catalog for more information. I
hope to "see" you there!
Finally, I'd like to take this opportunity to tell all of you how very much I've enjoyed creating this course and helping you
become proficient in general accounting procedures. It's been an extremely rewarding experience for me. Good luck,
and keep those debits and credits equal!
Post Closing Trial Balance

/crs/pix/fun/L12-PCT_Balance.pdf
This form proves the equality of debits and credits in the general
ledger at the end of the fiscal period.
Lesson 12 Solutions
FAQs
Q: Why are closing entries necessary?
A: Closing entries are necessary so that certain account balances are zeroed out at the end
of the fiscal period. If there were no closing entries, all accounts would have balances that
would be carried forward into the next year. If this were to happen, the owners would not
have a clear picture of how the business progressed during the new year.
Q: Which accounts are closed out?
A: The Drawing account, all expense accounts, Sales, and Purchases are closed out.
Q: Which accounts have balances that are carried into the next fiscal period?
A: The Capital account, all assets, and all liabilities will have balances that will be brought
into the next fiscal period.


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Printer Friendly Version of Lesson 01 Page 1 of 8

Lesson 01 (printer-friendly version)

There are forms located in each lesson's

Supplementary Material section. Print the pages before

Solutions for each lesson are also located in the

Because you'll be getting so much accounting practice

Some businesses are a combination service/merchandise business. They provide a service

Account Classifications and Account Titles

So, let's get started. The accounting equation is:

Location of debits and credits in a T-account

Asset, expense, and drawing accounts

Liability, capital, and revenue accounts

known as the double entry system of accounting.

T-accounts entry reference

z Costco Wholesalers, Inc.

z Office Quarters, Inc.

z Joan Caldwell, Capital

z Joan Caldwell, Drawing

Adobe Acrobat Reader

Blank T-Account Form

All Bookkeeping Resource

ABC News.com: Business Glossary

A Bookkeeping and Accounting Primer

Accounting--Basic Accounting Terms and Concepts

Q: How can an asset with a loan on it still be an asset?

Q: How can a business be both a service business and a merchandising business?

Q: Why is accounting referred to as a double entry system?

A: Accounting is sometimes referred to as a double entry system because at least two

Copyright 2007 by ed2go.com. All rights reserved.

Lesson 02 (printer-friendly version)

Important points to remember:

A debit entry in an account with a debit

A credit entry in an account with a credit balance

General Ledger account example

2110 A Children's Haven, Inc.

(3000) Owners' Equity

3110 Joan Caldwell, Capital

Income Statement Accounts

(5000) Cost of Merchandise

6110 Advertising Expense

Entering Transaction Amounts into the General Ledger

We are now going to journalize a few transactions:

The proprietors or owners of a

Transaction #2: December 1, Paid cash for office supplies, $200.00.

First two Cash account entries

What we have done in the last transaction is change the configuration of

More Transactions and Balance Sheets

Transaction #3: December 1, Paid for insurance coverage, $600.00.

Moving right along, let's do another type of transaction:

Transaction #4: December 1, Bought store supplies on account from Costco

Transaction #5: December 1, Paid Costco Wholesalers, Inc., $200.00 on account.

Balance Sheet example

Opening General Ledger Printout

Blank Opening General Ledger Printout

Note: Only those forms and accounts with new entries

All Bookkeeping Resource

ABC News: Business Glossary

A Bookkeeping and Accounting Primer

Q: Why is it necessary for a business to have a Chart of Accounts?

A: A Chart of Accounts makes for easier location of accounts the business

Q: Why should a Balance Sheet be prepared at least once a month?

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Lesson 03 (printer-friendly version)