Example 1: Financing Activities

May 1 Owner invested $10,000 in the company.

Analysis of Transaction
Steps

Debit or Credit ?
1 Increase in Assets (Cash) by $10,000 Debit
2 Increase in Owner's Equity by $10,000 Credit

Journal Entry


Debit Credit
Cash 10,000
Owner's Equity 10,000

Description of Journal Entry

Owner invested $10,000 in the company.

Results of Journal Entry

Cash balance increases by $10,000. --> Increase in Assets
Owner's Equity balance increases by $10,000. --> Increase in Owner's Equity

Example 2: Financing Activities


May 3 The company borrowed $20,000 from a bank.

Analysis of Transaction
Steps

Debit or Credit ?
1 Increase in Assets (Cash) by $20,000 Debit
2 Increase in Liabilities (Borrowings) by $20,000 Credit

Journal Entry
Debit Credit
Cash 20,000


Borrowings

20,000

Description of Journal Entry

Borrowed $20,000.

Results of Journal Entry

Cash balance increases by $20,000. --> Increase in Assets
Borrowings balance increases by $20,000. --> Increase in Liabilities

Example 3: Investing Activities


May 6 The company purchased $12,000 equipment and paid in cash.

Analysis of Transaction
Steps

Debit or Credit ?
1 Increase in Assets (Equipment) by $12,000 Debit
2 Decrease in Assets (Cash) by $12,000 Credit

Journal Entry


Debit Credit

Equipment
12,000


Cash
12,000

Description of Journal Entry

Purchased $12,000 equipment in cash.

Results of Journal Entry

Equipment balance increases by $12,000. --> Increase in Assets
Cash balance decreases by $12,000. --> Decrease in Assets

Example 4: Operating Activities



May 8 The company purchased $6,000 merchandise (600 units) on credit.

Analysis of Transaction
Steps

Debit or Credit ?
1 Increase in Assets (Merchandise) by $6,000 Debit
2 Increase in Liabilities (Accounts Payable) by $6,000 Credit

Journal Entry


Debit Credit

Merchandise
6,000

Accounts Payable
6,000

Description of Journal Entry

Purchased $6,000 merchandise on credit.

Results of Journal Entry

Merchandise balance increases by $6,000. --> Increase in Assets
Accounts Payable balance increases by $6,000. --> Increase in Liabilities

Example 5: Operating Activities



May 15 The company sold 500 units of merchandise at the price of $11,000. Customer
paid $9,000 in cash at the time of sale.

Analysis of Transaction
Note: This transaction includes both "REVENUE" and "EXPENSE" components.

(1) REVENUE side
Steps

Debit or Credit ?
1 Increase in Assets (Cash) by $9,000 Debit
2
Increase in Assets (Accounts Receivable) by $2,000 Debit
3
Increase in Revenue (Sales) by $11,000 Credit

(2) EXPENSE side
Steps

Debit or Credit ?
1 Increase in Expenses (Cost of Merchandise Sold) by $5,000
($6,000 / 600 units = $10 per unit)
($10 per unit X 500 units sold = $5,000 cost)
Debit
2 Decrease in Assets (Merchandise) by $5,000 Debit
(1) REVENUE Journal Entry


Debit Credit
Cash 9,000
Accounts Receivable 2,000

Sales Revenue
11,000
Description of Journal Entry

Sold merchandise at $11,000 price and received $9,000 in cash.

Results of Journal Entry

Cash balance increases by $9,000. --> Increase in Assets
Accounts Receivable balance increases by $2,000. --> Increase in Assets
Sales Revenue account balance increases by $11,000. --> Increase in Revenue

(2) EXPENSE Journal Entry


Debit Credit

Cost of Merchandise Sold 5,000


Merchandise

5,000

Description of Journal Entry

To record the cost of merchandise sold.

Results of Journal Entry

Merchandise balance decreases by $5,000. --> Decrease in Assets
Cost of Merchandise Sold account balance increases by $5,000. --> Increase in Expense

Example 6: Operating Activities



May 25 The company paid $3,500 salaries.

Analysis of Transaction
Steps

Debit or Credit ?
1 Increase in Expenses (Salaries Expense) by $3,500 Debit
2 Decrease in Assets (Cash) by $3,500 Credit

Journal Entry


Debit Credit

Salaries Expense
3,500

Cash
3,500

Description of Journal Entry

Paid $3,500 salaries.

Results of Journal Entry

Cash balance decreases by $3,500. --> Decrease in Assets
Salaries Expense account balance increases by $3,500. --> Increase in Expenses

Example 7: Operating Activities



May 26 The company paid $1,500 rent.

Analysis of Transaction
Steps

Debit or Credit ?
1 Increase in Expenses (Rent Expense) by $1,500 Debit
2 Decrease in Assets (Cash) by $1,500 Credit

Journal Entry


Debit Credit

Rent Expense 1,500


Cash

1,500

Description of Journal Entry

Paid $1,500 rent.

Results of Journal Entry

Cash balance decreases by $1,500. --> Decrease in Assets
Rent Expense account balance increases by $1,500. --> Increase in Expenses

Summary of Transactions

No. Date Transactions
(1) May 1 Owner invested $10,000 in the company.
(2) May 3 Borrowed $20,000 from a bank.
(3) May 6 Purchased $12,000 equipment in cash.
(4) May 8 Purchased $6,000 merchandise (600 units) on credit.
(5) May 15
Sold 500 units of merchandise at the price of $11,000.
Customer paid $9,000 in cash at the time of sale.
(6) May 25 Paid $3,500 salaries.
(7) May 26 Paid $1,500 rent.


Summary of Journal Entries

No. Journal Entries Debit Credit

(1) Cash 10,000
(1) Owner's Equity 10,000
Owner invested $10,000 in the company.

(2) Cash 20,000
(2) Borrowings 20,000
Borrowed $20,000.

(3) Equipment 12,000
(3) Cash 12,000
Purchased $12,000 equipment in cash.

(4) Merchandise 6,000
(4) Accounts Payable 6,000
Purchased $6,000 merchandise on credit.

(5)-1 Cash 9,000
(5)-1 Accounts Receivable 2,000
(5)-1 Sales 11,000
Sold merchandise at $11,000 price and received
$9,000 in cash.


(5)-2 Cost of Goods Sold 5,000
(5)-2 Merchandise 5,000
To record the cost of goods sold ($5,000
merchandise).


(6) Salaries Expense 3,500
(6) Cash 3,500
Paid $3,500 salaries.

(7) Rent Expense 1,500
(7) Cash 1,500
Paid $1,500 rent.

Calculating Accounting Balances

Cash
Debit Credit
(1) 10,000 (3) 12,000
(2) 20,000 (6) 3,500
(5)-1 9,000 (7) 1,500

Balance 22,000


Accounts Receivable
Debit Credit
(5)-1 2,000

Balance 2,000


Merchandise
Debit Credit
(4) 6,000 (5)-2 5,000

Balance 1,000


Equipment
Debit Credit
(3) 12,000

Balance 12,000


Accounts Payable
Debit Credit
(4) 6,000

Balance 6,000


Sales
Debit Credit
(5)-1 11,000

Balance 11,000


Cost of Goods Sold
Debit Credit
(5)-2 5,000

Balance 5,000


Salaries Expense
Debit Credit
(6) 3,500

Balance 3,500


Rent Expense
Debit Credit
(7) 1,500

Balance 1,500


Balance Sheet and Income Statement

Balance Sheet
As of May 31, 20XX
Assets Liabilities and Owner's Equity

Cash $ 22,000

Accounts Payable $ 6,000


Accounts Receivable 2,000

Borrowings 20,000


Merchandise 1,000




Equipment 12,000

Owner's Equity 11,000 (*1)







Total Assets $ 37,000
Total Liabilities and
Owner's Equity
$ 37,000

Income Statement
For the Period from May 1 to May 31, 20XX

Revenue


Sales $ 11,000


Total Revenue

$ 11,000




Expenses


Cost of Goods Sold $ 5,000


Salaries Expense 3,500


Rent Expense 1,500


Total Expenses

10,000





Net Income

$ 1,000 (*2)
(*1) Owner's Equity=Investment by Owner+Net Income=$10,000+$1,000=$11,000
(*2) Net Income = Total Revenue - Total Expenses = $11,000 - $10,000 = $1,000