Page 76 - Accounting Principles (A Business Perspective)

This book is licensed under a Creative Commons Attribution 3.0 License

108 Prepaid Insurance Insurance policy premiums paid in advance of the periods for
which the insurance coverage applies.
112 Prepaid Rent Rent paid in advance of the periods for which the rent
payment applies.
150 Trucks Trucks used to transport personnel and training supplies to
clients' locations.
200 Accounts Payable Amounts owed to creditors for items purchased
Liabilities 216 Unearned Service Fees from them.
Amounts received from customers before the training services
have been performed for them.
Stockholders' 300 Capital Stock Retained The stockholders' investment in the business. The earnings
equity 310 Earnings retained in the business.
Dividends 320 Dividends The amount of dividends declared to stockholders.
Revenues 400 Service Revenue Amounts earned by performing training services for customers.
505 Advertising Expense The cost of advertising incurred in the current period.
506 Gas and Oil Expense The cost of gas and oil used in trucks in the
Expenses current period.
] 507 Salaries Expense The amount of salaries incurred in the current period.

511 Utilities Expense The cost of utilities incurred in the current period.
Notice the gaps left between account numbers (100, 103, 107, etc.). These gaps allow the firm to later add new
accounts between the existing accounts.

To begin, a transaction must be journalized. Journalizing is the process of entering the effects of a transaction
in a journal. Then, the information is transferred, or posted, to the proper accounts in the ledger. Posting is the
process of recording in the ledger accounts the information contained in the journal. We explain posting in more
detail later in the chapter.
In the following example, notice that each business transaction affects two or more accounts in the ledger. Also
note that the transaction date in both the general journal and the general ledger accounts is the same. In the ledger
accounts, the date used is the date that the transaction was recorded in the general journal, even if the entry is not

posted until several days later. Our example shows the journal entries posted to T-accounts. In practice, firms post
journal entries to ledger accounts, as we show later in the chapter.
Accountants use the accrual basis of accounting. Under the accrual basis of accounting, they recognize
revenues when the company makes a sale or performs a service, regardless of when the company receives the cash.
They recognize expenses as incurred, whether or not the company has paid out cash. Chapter 3 discusses the
accrual basis of accounting in more detail.
In the following MicroTrain Company example, transaction 1 increases (debits) Cash and increases (credits)
Capital Stock by USD 50,000. First, MicroTrain records the transaction in the general journal; second, it posts the
entry to the accounts in the general ledger.

Transaction 1:2010 Nov. 28 Stockholders invested $50,000 and formed MicroTrain Company.
General Journal
Date Account Titles and Explanation Post. Debit Credit
Ref.
2010 Nov. 28 Cash (+A) 100 5 0 0 0 0
Capital Stock (+SE) 300 5 0 0 0 0
Stockholders invested $50,000 cash in business.

General Ledger
Cash Capital Stock
(Dr.) Acct. No. 100 (Cr.) (Dr.) Acct. No. 300 (Cr.)
2010 2010
Nov. 28 50,000 Nov. 28 50,000

Accounting Principles: A Business Perspective 77 A Global Text