Brian Rountree

Introduction to Financial Accounting

Course Objective
Learn to understand and evaluate published financial statements

Some of the questions we will address:

• How does the accounting system work?
• What information do the financial statements and footnotes contain?
• When are revenues and expenses recognized?
• When is an expenditure an asset? When is it an expense?
• How are fixed assets measured? How are intangible assets measured?
• Which obligations are reported as liabilities on the balance sheet? Which ones are not?
• How are equity transactions reported in the financial statements?
• What are the financial reporting incentives of executives?
• How much accounting discretion do companies have?
• How does discretion affect the “quality” of reported numbers?
Some Terminology
• GAAP—Generally Accepted Accounting Principles
• FASB—Financial Accounting Standards Board
• SEC—Securities and Exchange Commission
• AICPA—American Institute of Certified Public Accountants
• IASB—International Accounting Standards Board
Who Determines the Rules?

Congress

SEC

FASB

AICPA

Industry Practice
Who Uses Financial Statements?
• Investors
• Creditors
• Analysts
• Managers
• Board of directors
• Competitors
• Government/regulators
• Labor unions
• Lawyers
• Etc.
What Are Financial Statements Used For?
• Evaluate past performance
• Assess future prospects
• Credit decisions
• Executive compensation
• Negotiations
• Lawsuits
• Etc.
 Brian Rountree

Accounting Equation
Balance Sheet, Part 1
Major Financial Statements

What is the financial How well did the

condition of the organization do
organization on a during a given
given day? period?

Balance Sheet Income Statement

Statement of Cash
Flows
The Accounting Equation
• All of the financial statements are based on this simple equation:

Assets Liabilities Stockholders’

Economic Economic Equity
resources with
= obligations to
+ Owners’
probable outsiders, residual interest
future benefits e.g., creditors

Examples: Examples: Examples:

• Cash • Accounts payable • Common stock
• Accounts receivable • Long-term debt • Retained earnings
• Inventory
• Property, plant and
equipment (PP&E)
Application of the Accounting Equation
• We use the accounting equation to keep track of transactions.
• How do the following affect the accounting equation?
1. Issue common stock to owners for $40,000 cash
2. Purchase property, plant and equipment (PP&E) for $3,400 cash
3. Purchase inventory on credit for $55,000
4. Pay vendor $32,000 of the amount owed
Transaction Analysis
1. Issue common stock to owners for $40,000 cash

Liabilities and Owners’

Assets
Equity
Accounts Accounts Owners’
=
Cash Receivable Inventory PP&E Payable Equity
Beg. Bal. 0 0 0 0 = 0 0
1
2
3
4
End. Bal.
Transaction Analysis
1. Issue common stock to owners for $40,000 cash

Liabilities and Owners’

Assets
Equity
Accounts Accounts Owners’
=
Cash Receivable Inventory PP&E Payable Equity
Beg. Bal. 0 0 0 0 = 0 0
1 +40,000 +40,000
2
3
4
End. Bal.
 Brian Rountree

Accounting Equation
Balance Sheet, Part 2
Application of the Accounting Equation
• We use the accounting equation to keep track of transactions.
• How do the following affect the accounting equation?
1. Issue common stock to owners for $40,000 cash
2. Purchase property, plant and equipment (PP&E) for $3,400 cash
3. Purchase inventory on credit for $55,000
4. Pay vendor $32,000 of the amount owed
Transaction Analysis
1. Issue common stock to owners for $40,000 cash

Liabilities and Owners’

Assets
Equity
Accounts Accounts Owners’
=
Cash Receivable Inventory PP&E Payable Equity
Beg. Bal. 0 0 0 0 = 0 0
1 +40,000 = +40,000
2
3
4
End. Bal.
Transaction Analysis
2. Purchase property, plant and equipment (PP&E) for $3,400 cash

Liabilities and Owners’

Assets
Equity
Accounts Accounts Owners’
=
Cash Receivable Inventory PP&E Payable Equity
Beg. Bal. 0 0 0 0 = 0 0
1 +40,000 = +40,000
2 –3,400 +3,400 =
3
4
End. Bal.
Transaction Analysis
3. Purchase inventory on credit for $55,000

Liabilities and Owners’

Assets
Equity
Accounts Accounts Owners’
=
Cash Receivable Inventory PP&E Payable Equity
Beg. Bal. 0 0 0 0 = 0 0
1 +40,000 = +40,000
2 –3,400 +3,400 =
3 +55,000 = +55,000
4
End. Bal.
Transaction Analysis
4. Pay vendor $32,000 of the amount owed

Liabilities and Owners’

Assets
Equity
Accounts Accounts Owners’
=
Cash Receivable Inventory PP&E Payable Equity
Beg. Bal. 0 0 0 0 = 0 0
1 +40,000 = +40,000
2 –3,400 +3,400 =
3 +55,000 = +55,000
4 –32,000 = –32,000
End. Bal.
Transaction Analysis

Liabilities and Owners’

Assets
Equity
Accounts Accounts Owners’
=
Cash Receivable Inventory PP&E Payable Equity
Beg. Bal. 0 0 0 0 = 0 0
1 +40,000 = +40,000
2 –3,400 +3,400 =
3 +55,000 = +55,000
4 –32,000 = –32,000
End. Bal. 4,600 55,000 3,400 = 23,000 40,000
Balance Sheet (Statement of Financial Position)
• Snapshot of financial condition at a given date

Assets Liabilities Stockholders’

Economic Economic Equity
resources with = obligations to + Owners’
probable outsiders, residual interest
future benefits e.g., creditors

• Net assets or book value of equity

A – L = SE
Basic Balance Sheet Format

Current Liabilities
Current Assets (will require payment within
(will be consumed or turned one year)
into cash within one year)
Liabilities

Assets Non-current Liabilities

Non-current Assets
Contributed Capital
Stockholders’
Retained Earnings Equity
Our Simple Balance Sheet

Assets Liabilities and Stockholders’ Equity

Cash $ 4,600 Accounts payable $ 23,000

Inventory 55,000

PP&E 3,400 Stockholders’ Equity 40,000

Total $ 63,000 Total $ 63,000

 Brian Rountree

Accounting Equation Income Statement

The Accounting Equation
• All of the financial statements are based on this simple equation:

Assets Liabilities Stockholders’

Economic Economic Equity
resources with
= obligations to
+ Owners’
probable outsiders, residual interest
future benefits e.g., creditors

Examples: Examples: Examples:

• Cash • Accounts payable • Common stock
• Accounts receivable • Long-term debt • Retained earnings
• Inventory
• Property, plant and
equipment (PP&E)
Accounting Income
• Accounting income is the change in stockholder’s equity resulting from
business operations.
• Therefore, assuming no other transactions with shareholders
∆A−∆L = ∆SE = Net Income
• Example: selling inventory
• Cash is received (or a customer promises to pay cash)
• This is an inflow of net assets (á SE and net income)
• We give the customer the inventory
• This is an outflow of net assets (â SE and net income)
• Again, use the accounting equation to keep track of income transactions.
Transaction Analysis

Liabilities and Owners’

Assets
Equity
Accounts Accounts Owners’
=
Cash Receivable Inventory PP&E Payable Equity
Beg. Bal. 0 0 0 0 = 0 0
Capital
1 +40,000 = +40,000
contribution
2 –3,400 +3,400 =
3 +55,000 = +55,000
4 –32,000 = –32,000
End. Bal. 4,600 55,000 3,400 = 23,000 40,000
Transaction Analysis
• How do the following affect the accounting equation?
5. Sell inventory for $72,000, of which $30,000 is collected in cash and
the remainder is on credit.
6. Cost of inventory sold is $44,500.
7. Collect $37,000 of the receivables.
8. Employees’ salaries for the period total $14,000, of which $13,000 is
paid in cash and the remainder is scheduled to be paid next period.
Transaction Analysis
Assets Liabilities and Owners’ Equity
Accounts Accounts Wages Owners’
=
Cash Receivable Inventory PP&E Payable Payable Equity
Beg. Bal. 0 0 0 0 = 0 0
1 +40,000 = +40,000
2 –3,400 +3,400 =
3 +55,000 = +55,000
4 –32,000 = –32,000
End. Bal. 4,600 55,000 3,400 = 23,000 40,000
5
6
7
8
End. Bal.
Transaction Analysis
Assets Liabilities and Owners’ Equity
Accounts Accounts Wages Owners’
=
Cash Receivable Inventory PP&E Payable Payable Equity
Beg. Bal. 0 0 0 0 = 0 0
1 +40,000 = +40,000
2 –3,400 +3,400 =
3 +55,000 = +55,000
4 –32,000 = –32,000
End. Bal. 4,600 55,000 3,400 = 23,000 40,000
5 +30,000 +42,000 = +72,000
6
7
8
End. Bal.
 Brian Rountree

Accounting Equation
Income Statement Transactions Completion
Transaction Analysis
• How do the following affect the accounting equation?
5. Sell inventory for $72,000, of which $30,000 is collected in cash and
the remainder is on credit.
6. Cost of inventory sold is $44,500.
7. Collect $37,000 of the receivables.
8. Employees’ salaries for the period total $14,000, of which $13,000 is
paid in cash and the remainder is scheduled to be paid next period.
Transaction Analysis
• Sell inventory for $72,000, of which $30,000 is collected in cash and the
remainder is on credit.
Assets Liabilities and Owners’ Equity
Accounts Accounts Wages Owners’
=
Cash Receivable Inventory PP&E Payable Payable Equity
Beg. Bal. 0 0 0 0 = 0 0
1 +40,000 = +40,000
2 –3,400 +3,400 =
3 +55,000 = +55,000
4 –32,000 = –32,000
End. Bal. 4,600 55,000 3,400 = 23,000 40,000
5
6
7
8
End. Bal.
Transaction Analysis

Assets Liabilities and Owners’ Equity

Accounts Accounts Wages Owners’
=
Cash Receivable Inventory PP&E Payable Payable Equity
Beg. Bal. 0 0 0 0 = 0 0
1 +40,000 = +40,000
2 –3,400 +3,400 =
3 +55,000 = +55,000
4 –32,000 = –32,000
End. Bal. 4,600 55,000 3,400 = 23,000 40,000
5 +30,000 +42,000 = +72,000
6
7
8
End. Bal.
Transaction Analysis
• Cost of inventory sold is $44,500.
Assets Liabilities and Owners’ Equity
Accounts Accounts Wages Owners’
=
Cash Receivable Inventory PP&E Payable Payable Equity
Beg. Bal. 0 0 0 0 = 0 0
1 +40,000 = +40,000
2 –3,400 +3,400 =
3 +55,000 = +55,000
4 –32,000 = –32,000
End. Bal. 4,600 55,000 3,400 = 23,000 40,000
5 +30,000 +42,000 = +72,000
6 –44,500 = –44,500
7
8
End. Bal.
Transaction Analysis
• Collect $37,000 of the receivables.
Assets Liabilities and Owners’ Equity
Accounts Accounts Wages Owners’
=
Cash Receivable Inventory PP&E Payable Payable Equity

Beg. Bal. 0 0 0 0 = 0 0
1 +40,000 = +40,000
2 –3,400 +3,400 =
3 +55,000 = +55,000
4 –32,000 = –32,000
End. Bal. 4,600 55,000 3,400 = 23,000 40,000
5 +30,000 +42,000 = +72,000
6 –44,500 = –44,500
7 +37,000 –37,000 =
8
End. Bal.
Transaction Analysis
• Employees’ salaries for the period total $14,000, of which $13,000 is paid
in cash and the remainder is scheduled to be paid next period.
Assets Liabilities and Owners’ Equity
Accounts Accounts Wages Owners’
=
Cash Receivable Inventory PP&E Payable Payable Equity
Beg. Bal. 0 0 0 0 = 0 0
1 +40,000 = +40,000
2 –3,400 +3,400 =
3 +55,000 = +55,000
4 –32,000 = –32,000
End. Bal. 4,600 55,000 3,400 = 23,000 40,000
5 +30,000 +42,000 = +72,000
6 –44,500 = –44,500
7 +37,000 –37,000 =
8 –13,000 = +1,000 –14,000
End. Bal.
Transaction Analysis

Assets Liabilities and Owners’ Equity

Accounts Accounts Wages Owners’
=
Cash Receivable Inventory PP&E Payable Payable Equity
Beg. Bal. 0 0 0 0 = 0 0
1 +40,000 = +40,000
2 –3,400 +3,400 =
3 +55,000 = +55,000
4 –32,000 = –32,000
End. Bal. 4,600 55,000 3,400 = 23,000 40,000
5 +30,000 +42,000 = +72,000
6 –44,500 = –44,500
7 +37,000 –37,000 =
8 –13,000 = +1,000 –14,000
End. Bal. 58,600 5,000 10,500 3,400 = 23,000 1,000 53,500
Income Statement (Statement of Earnings; P&L)
• Summary of financial performance during a given period
• Revenue: increase in net assets from providing goods/services to customers
• Expense: decrease in net assets from providing goods/services to customers
• Revenues and expenses are measured using accrual accounting
• Recognize economic event when it occurs, not necessarily when cash is received or paid
• Income statement also includes gains and losses
• Gain (loss): increase (decrease) in net assets from peripheral transactions
• e.g., sale of production machinery
Net Income = Revenues – Expenses + Gains – Losses
Transaction Analysis

Assets Liabilities and Owners’ Equity

Accounts Accounts Wages Owners’
=
Cash Receivable Inventory PP&E Payable Payable Equity
Beg. Bal. 0 0 0 0 = 0 0
1 +40,000 = +40,000
2 –3,400 +3,400 =
3 +55,000 = +55,000
4 –32,000 = –32,000
End. Bal. 4,600 55,000 3,400 = 23,000 40,000 B/S
5 +30,000 +42,000 = +72,000
6 –44,500 = –44,500
I/S
7 +37,000 –37,000 =
8 –13,000 = +1,000 –14,000
End. Bal. 58,600 5,000 10,500 3,400 = 23,000 1,000 53,500 B/S
Basic Income Statement Format
Sales xxx
Cost of sales xxx
Gross profit xxx
Operating expenses (SG&A etc.) xxx
Operating income xxx
Other income, gain/loss xxx
EBIT (earnings before interest and taxes) xxx
Interest income/expense xxx
Income before income taxes xxx
Income tax expense xxx
Net income xxx
Our Simple Income Statement
Sales revenue $ 72,000
Cost of goods sold (44,500)
Gross profit $27,500
Operating expenses:
Salaries (14,000)
Net income $ 13,500
 Brian Rountree

Accounting Equation and Cash Flows

Major Financial Statements

What is the financial How well did the

condition of the organization do
organization on a during a given
given day? period?

Balance Sheet Income Statement

Statement of Cash
Flows
Defining Cash Flow
• Cash flow is simply the change in cash.
• We can organize transactions to determine the change in cash due to:
• Operating activities
• Investing activities
• Financing activities

• By itself, the change in cash may not be that interesting, but properly
organized cash flow can tell us important things about a company.
Balance Sheet and Cash Flows
Assets = + Liabilities + Stockholders’ Equity
Cash + Noncash Assets = + Liabilities + Stockholders’ Equity
Cash = + Liabilities – Noncash Assets + Stockholders’ Equity
ΔCash = + ΔLiabilities – ΔNoncash Assets + ΔStockholders’ Equity

The three sections are generally categorized as follows:

Operating à + ΔCurrent Liab. – ΔCurrent Asset + Net Income

Investing à – ΔLong-term Asset
Financing à + ΔLong-term Liab. + Transactions
with owners

Net Income – ΔCurrent Assets + ΔCurrent Liabilities = CFO

Statement of Cash Flows
• Summarizes sources and uses of cash during a given period

• Operating cash flows

• Generally, cash effects of transactions that affect income
In: collections from customers; dividends received; interest received
Out: payments to suppliers, employees, etc.; tax payment; interest payments
Statement of Cash Flows
• Investing cash flows
• Generally, cash effects of transactions involving long-term assets
In: sales of fixed assets, investment securities; collections of notes receivable
Out: purchases of fixed assets (capital expenditures), investments; lending money

• Financing cash flows

• Generally, cash effects of transactions involving long-term liabilities and stockholders’ equity
In: issuance of debt and equity securities
Out: share repurchases; debt repayments (principal only); dividend payments
Cash Transactions for Our Simple Example

Transaction Amount Type

 Sold stock to investors +40,000

‚ Purchased PP&E −3,400

„ Paid account with vendor −32,000

Cash sales +30,000

‡ Collected receivables +37,000

ˆ Paid salaries −13,000

Total Cash Flow 58,600
 Brian Rountree

Cash Flows
Major Financial Statements

What is the financial How well did the

condition of the organization do
organization on a during a given
given day? period?

Balance Sheet Income Statement

Statement of Cash
Flows
Transaction Analysis
Assets Liabilities and Owners’ Equity
Accounts Accounts Wages Owners’
=
Cash Receivable Inventory PP&E Payable Payable Equity
Beg. Bal. 0 0 0 0 = 0 0
1 +40,000 = +40,000
2 –3,400 +3,400 =
3 +55,000 = +55,000
4 –32,000 = –32,000
5 +30,000 +42,000 = +72,000
6 –44,500 = –44,500
7 +37,000 –37,000 =
8 –13,000 = +1,000 –14,000
End. Bal. 58,600 5,000 10,500 3,400 = 23,000 1,000 53,500
Cash Transactions for Our Simple Example

Transaction Amount Type

 Sold stock to investors +40,000 Financing

‚ Purchased PP&E −3,400 Investing

„ Paid account with vendor −32,000 Operating

Cash sales +30,000 Operating

‡ Collected receivables +37,000 Operating

ˆ Paid salaries −13,000 Operating

Total Cash Flow 58,600

Simple Cash Flow Statement
Cash collected from customers 67,000
Cash paid for inventory (32,000)
Cash paid for salaries (13,000)
Cash from Operating Activities 22,000

Cash paid for purchases of PP&E (3,400)

Cash Used in Investing Activities (3,400)

Cash received from stock issuance 40,000

Cash from Financing Activities 40,000

Total Cash Flow 58,600

Cash Flow vs. Income
• Why doesn’t operating cash flow = net income?
• Accounting accruals

Cash from Operating Activities 22,000

Sales revenue not collected 5,000 Δ A/R
Cost of goods
purchased but not expensed 10,500 Δ Inventory
expensed but not paid (23,000) Δ A/P
Salary expense not paid (1,000) Δ Wages Payable
Net Income 13,500

• Which is the “right” measure of operating performance?

How Do Firms Report Operating Cash Flow?

Cash from Operating Activities 22,000 Net Income 13,500

Sales revenue not collected 5,000 Sales revenue not collected (5,000)

Cost of goods Cost of goods

purchased but not expensed 10,500

“Flip” purchased but not expensed (10,500)

expensed but not paid (23,000) expensed but not paid 23,000

Salary expense not paid (1,000) Salary expense not paid 1,000

Net Income 13,500 Cash from Operating Activities 22,000

 Brian Rountree

Double Entry
Double-Entry Bookkeeping System
Double-Entry Bookkeeping System
• Based on the balance sheet identity:

Assets = Liabilities + Owners’ Equity

sum of account balances on sum of account balances on
=
LEFT RIGHT
sum of DEBITS (left) = sum of CREDITS (right)

• To preserve this identity, for every transaction:

DEBITS = CREDITS
Double-Entry Bookkeeping System
• Assets normally have debit balances
• Liabilities and owner’s equity normally have credit balances
• This means that:
á in assets are debits
â in assets are credits
á in liabilities and owners’ equity are credits
â in liabilities and owners’ equity are debits
Double-Entry Bookkeeping System
• Journal entries
DR Account A XXX
CR Account B XXX

• T-Accounts

Account A (e.g., Asset) Account B (e.g., Liability)

Beg. Bal. Beg. Bal.
XXX XXX
End. Bal. End. Bal.
 ASSETS = LIABILITIES + OWNERS' EQUITY
+ – – + – +
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
NORMAL NORMAL NORMAL
BALANCE BALANCE BALANCE

PAID IN CAPITAL RETAINED EARNINGS

+
– + – +
DEBIT CREDIT DEBIT CREDIT

NORMAL NORMAL
BALANCE BALANCE

EXPENSE REVENUE
+ – – +
DEBIT CREDIT DEBIT CREDIT
The Accounting Cycle
• Record transactions that occur during the
fiscal period
• e.g., purchase inventory, sell inventory, pay bills
• At the end of the fiscal period, make necessary adjusting entries to report correct
financial statement amounts
• e.g., record depreciation expense, transfer prepaid rent to rent expense
• Prepare financial statements
• Close income statement accounts to Retained Earnings on the balance sheet
Practice Problem
1. Stockholders contributed $240 in cash in exchange for common stock.
2. On July 1, signed a 1-year lease on a warehouse, paying $60 cash in
occupancy for 12 months.
3. On July 1, acquired warehouse equipment for $100. A cash down payment of
$40 was made and a note payable was signed for the balance.
4. On July 1, paid $24 cash for a two-year insurance policy covering fire, casualty,
and related risks.
5. Acquired assorted merchandise for $35 cash.
6. Acquired assorted merchandise for $190 on open account.
Practice Problem
7. Total sales were $200, of which $30 were for cash.
8. Cost of inventory sold was $160.
9. Rent expense was recognized for the month of July.
10. Depreciation expense of $2 was recognized of the month.
11. Insurance expense was recognized for the month.
12. Collected $35 from credit customers.
13. Disbursed $80 to trade creditors.
Problem Using Debits and Credits
Cash Accts. Rec. Inventory Prepaid Rent Prepaid Ins. Equipment

Accts. Pay. Notes Payable Paid in Capital Retained Earn.

Sales Revenue COGS Rent Expense Depr. Expense Insurance Exp.

Problem Using Debits and Credits
Cash Accts. Rec. Inventory Prepaid Rent Prepaid Ins. Equipment
(1) 240

Accts. Pay. Notes Payable Paid in Capital Retained Earn.

(1) 240

Sales Revenue COGS Rent Expense Depr. Expense Insurance Exp.

 Brian Rountree

Double Entry, Part 2

Double-Entry Bookkeeping System

• Based on the balance sheet identity:

Assets = Liabilities + Owners’ Equity

sum of account balances on LEFT = sum of account balances on RIGHT

sum of DEBITS (left) = sum of CREDITS (right)

• To preserve this identity, for every transaction:

DEBITS = CREDITS
Practice Problem
1. Stockholders contributed $240 in cash in exchange for common stock
2. On July 1, signed a 1-year lease on a warehouse, paying $60 cash in occupancy for 12 months
3. On July 1, acquired warehouse equipment for $100. A cash down payment of $40 was made and
a note payable was signed for the balance
4. On July 1, paid $24 cash for a 2-year insurance policy covering fire, casualty, and related risks
5. Acquired assorted merchandise for $35 cash
6. Acquired assorted merchandise for $190 on open account
7. Total sales were $200, of which $30 were for cash
8. Cost of inventory sold was $160
9. Rent expense was recognized for the month of July
10. Depreciation expense of $2 was recognized of the month
11. Insurance expense was recognized for the month
12. Collected $35 from credit customers
13. Disbursed $80 to trade creditors
Problem Using Debits and Credits
Cash Accts. Rec. Inventory Prepaid Rent Prepaid Ins. Equipment

Accts. Pay. Notes Payable Paid in Capital Retained Earn.

Sales Revenue COGS Rent Expense Depr. Expense Insurance Exp.

Problem Using Debits and Credits
Cash Accts. Rec. Inventory Prepaid Rent Prepaid Ins. Equipment
(1) 240

Accts. Pay. Notes Payable Paid in Capital Retained Earn.

(1) 240

Sales Revenue COGS Rent Expense Depr. Expense Insurance Exp.

Problem Using Debits and Credits
Cash Accts. Rec. Inventory Prepaid Rent Prepaid Ins. Equipment
(1) 240 (2) 60 (2) 60

Accts. Pay. Notes Payable Paid in Capital Retained Earn.

(1) 240

Sales Revenue COGS Rent Expense Depr. Expense Insurance Exp.

Problem Using Debits and Credits
Cash Accts. Rec. Inventory Prepaid Rent Prepaid Ins. Equipment
(1) 240 (2) 60 (2) 60 (3) 100
(3) 40

Accts. Pay. Notes Payable Paid in Capital Retained Earn.

(3) 60 (1) 240

Sales Revenue COGS Rent Expense Depr. Expense Insurance Exp.

Problem Using Debits and Credits
Cash Accts. Rec. Inventory Prepaid Rent Prepaid Ins. Equipment
(1) 240 (2) 60 (2) 60 (4) 24 (3) 100
(3) 40
(4) 24

Accts. Pay. Notes Payable Paid in Capital Retained Earn.

(3) 60 (1) 240

Sales Revenue COGS Rent Expense Depr. Expense Insurance Exp.

Problem Using Debits and Credits
Cash Accts. Rec. Inventory Prepaid Rent Prepaid Ins. Equipment
(1) 240 (2) 60 (5) 35 (2) 60 (4) 24 (3) 100
(3) 40
(4) 24
(5) 35

Accts. Pay. Notes Payable Paid in Capital Retained Earn.

(3) 60 (1) 240

Sales Revenue COGS Rent Expense Depr. Expense Insurance Exp.

Problem Using Debits and Credits
Cash Accts. Rec. Inventory Prepaid Rent Prepaid Ins. Equipment
(1) 240 (2) 60 (5) 35 (2) 60 (4) 24 (3) 100
(3) 40 (6) 190
(4) 24
(5) 35

Accts. Pay. Notes Payable Paid in Capital Retained Earn.

(6) 190 (3) 60 (1) 240

Sales Revenue COGS Rent Expense Depr. Expense Insurance Exp.

Problem Using Debits and Credits
Cash Accts. Rec. Inventory Prepaid Rent Prepaid Ins. Equipment
(1) 240 (2) 60 (7) 170 (5) 35 (2) 60 (4) 24 (3) 100
(7) 30 (3) 40 (6) 190
(4) 24
(5) 35

Accts. Pay. Notes Payable Paid in Capital Retained Earn.

(6) 190 (3) 60 (1) 240

Sales Revenue COGS Rent Expense Depr. Expense Insurance Exp.

(7) 200
Problem Using Debits and Credits
Cash Accts. Rec. Inventory Prepaid Rent Prepaid Ins. Equipment
(1) 240 (2) 60 (7) 170 (5) 35 (8) 160 (2) 60 (4) 24 (3) 100
(7) 30 (3) 40 (6) 190
(4) 24
(5) 35

Accts. Pay. Notes Payable Paid in Capital Retained Earn.

(6) 190 (3) 60 (1) 240

Sales Revenue COGS Rent Expense Depr. Expense Insurance Exp.

(7) 200 (8) 160
Problem Using Debits and Credits
Cash Accts. Rec. Inventory Prepaid Rent Prepaid Ins. Equipment
(1) 240 (2) 60 (7) 170 (5) 35 (8) 160 (2) 60 (9) 5 (4) 24 (3) 100
(7) 30 (3) 40 (6) 190
(4) 24
(5) 35

Accts. Pay. Notes Payable Paid in Capital Retained Earn.

(6) 190 (3) 60 (1) 240

Sales Revenue COGS Rent Expense Depr. Expense Insurance Exp.

(7) 200 (8) 160 (9) 5
Problem Using Debits and Credits
Cash Accts. Rec. Inventory Prepaid Rent Prepaid Ins. Equipment
(1) 240 (2) 60 (7) 170 (5) 35 (8) 160 (2) 60 (9) 5 (4) 24 (3) 100 (10) 2
(7) 30 (3) 40 (6) 190
(4) 24
(5) 35

Accts. Pay. Notes Payable Paid in Capital Retained Earn.

(6) 190 (3) 60 (1) 240

Sales Revenue COGS Rent Expense Depr. Expense Insurance Exp.

(7) 200 (8) 160 (9) 5 (10) 2
Problem Using Debits and Credits
Cash Accts. Rec. Inventory Prepaid Rent Prepaid Ins. Equipment
(1) 240 (2) 60 (7) 170 (5) 35 (8) 160 (2) 60 (9) 5 (4) 24 (11) 1 (3) 100 (10) 2
(7) 30 (3) 40 (6) 190
(4) 24
(5) 35

Accts. Pay. Notes Payable Paid in Capital Retained Earn.

(6) 190 (3) 60 (1) 240

Sales Revenue COGS Rent Expense Depr. Expense Insurance Exp.

(7) 200 (8) 160 (9) 5 (10) 2 (11) 1
Problem Using Debits and Credits
Cash Accts. Rec. Inventory Prepaid Rent Prepaid Ins. Equipment
(1) 240 (2) 60 (7) 170 (12) 35 (5) 35 (8) 160 (2) 60 (9) 5 (4) 24 (11) 1 (3) 100 (10) 2
(7) 30 (3) 40 (6) 190
(12) 35 (4) 24
(5) 35

Accts. Pay. Notes Payable Paid in Capital Retained Earn.

(6) 190 (3) 60 (1) 240

Sales Revenue COGS Rent Expense Depr. Expense Insurance Exp.

(7) 200 (8) 160 (9) 5 (10) 2 (11) 1
Problem Using Debits and Credits
Cash Accts. Rec. Inventory Prepaid Rent Prepaid Ins. Equipment
(1) 240 (2) 60 (7) 170 (12) 35 (5) 35 (8) 160 (2) 60 (9) 5 (4) 24 (11) 1 (3) 100 (10) 2
(7) 30 (3) 40 (6) 190
(12) 35 (4) 24
(5) 35
(13) 80

Accts. Pay. Notes Payable Paid in Capital Retained Earn.

(13) 80 (6) 190 (3) 60 (1) 240

Sales Revenue COGS Rent Expense Depr. Expense Insurance Exp.

(7) 200 (8) 160 (9) 5 (10) 2 (11) 1
Problem Using Debits and Credits
Cash Accts. Rec. Inventory Prepaid Rent Prepaid Ins. Equipment
(1) 240 (2) 60 (7) 170 (12) 35 (5) 35 (8) 160 (2) 60 (9) 5 (4) 24 (11) 1 (3) 100 (10) 2
(7) 30 (3) 40 (6) 190
(12) 35 (4) 24
(5) 35
(13) 80

Accts. Pay. Notes Payable Paid in Capital Retained Earn.

(13) 80 (6) 190 (3) 60 (1) 240 (C) 32

Closing Entry:
Sales Revenue COGS Rent Expense Depr. Expense Insurance Exp.
(C) 200 (7) 200 (8) 160 (C) 160 (9) 5 (C) 5 (10) 2 (C) 2 (11) 1 (C) 1 DR Rev/Exp 32
CR Ret. Earn. 32
Problem Using Debits and Credits
Cash Accts. Rec. Inventory Prepaid Rent Prepaid Ins. Equipment
(1) 240 (2) 60 (7) 170 (12) 35 (5) 35 (8) 160 (2) 60 (9) 5 (4) 24 (11) 1 (3) 100 (10) 2
(7) 30 (3) 40 (6) 190
(12) 35 (4) 24
(5) 35
(13) 80
66 135 65 55 23 98

Accts. Pay. Notes Payable Paid in Capital Retained Earn.

(13) 80 (6) 190 (3) 60 (1) 240 (C) 32

110 60 240 32

Closing Entry:
Sales Revenue COGS Rent Expense Depr. Expense Insurance Exp.
(C) 200 (7) 200 (8) 160 (C) 160 (9) 5 (C) 5 (10) 2 (C) 2 (11) 1 (C) 1 DR Rev/Exp 32
CR Ret. Earn. 32