Generating resources through management operations: on October 21 the manager coaches another client who agrees to pay $1,200 later in October or November.

The receipt of a $1,200 promise from a customer increased the company's resources because the promise is valuable. The resource account that increased is called accounts receivable. Since no other resources were given to the client in order get the accounts receivable, the company's total resources increased by $1,200. The source of the increased resources was a client, which means the resources were generated through management's operation of the business. Since the owner has a right to any resources generated by management, the source of resources that increased is stockholders' equity. The specific stockholders' equity in which the increase is recorded is fees revenue. The fees revenue account is used to record the dollar amount of the source of resources resulting in an increase in resources from management operations. Remember, resources increased by $1,200 through management providing services to a client. The resource that increased was accounts receivable. The source of the resource was called fees revenue. Thus, the company's resources and sources of resources both increased by $1,200, as shown below.

 

Total
Resources

=

Sources of
Borrowed
Resources

+

Sources of
Owner Invested
Resources

+

Sources of
Management Generated
Resources

Assets

=

Liabilities

+

Stockholders' Equity

$11,945

=

$400

+

$7,000

+

$4,545

+ $1,200
accounts receivable

=

 

 

 

 

+ $1,200
fees revenue

$13,145

=

$400

+

$7,000

+

$5,745

 

Remembering (1) in each journal entry the total dollar amount of debits must equal the total dollar amount of credits and (2) assets increase with debits, how is the October 21 coaching of a client recorded in the general journal?

Since accounts receivable are assets (resources) and assets increase through debits, the $1,200 increase in accounts receivable would be recorded as a $1,200 debit to accounts receivable. The required credit of $1,200 would be to fees revenue, which is a stockholders' equity account. As fees revenue increases through credits, total stockholders' equity is increasing because stockholders' equity increases through credits. Once again, since the owner has a right to any resources generated by management, the source of resources that increased is stockholders' equity. This event would be recorded in the general journal as follows.

Date 

Description 

Post. 
Ref. 

Debits 

Credits 

Oct. 21

Accounts Receivable 

113 

1,200 

 

 

     Fees Revenue

411 

 

1,200 

 

Services provided 

 

 

 


Distributing resources to the owner: on October 26 the company pays a $90 dividend to the owner.

The $90 cash payment decreased the company's resources (cash). Since the cash was paid to the owner, the company's sources of resources, in this case stockholders' equity, also decreased by $90. The specific stockholders' equity account affected is the dividends account. Thus, the company's resources and sources of resources both decreased by $90, as shown below.

Total
Resources

=

Sources of
Borrowed
Resources

+

Sources of
Owner Invested
Resources

+

Sources of
Management Generated
Resources

Assets

=

Liabilities

+

Stockholders' Equity

$13,145

=

$400

+

$7,000

+

$5,745

- $90
cash

=

 

 

 

 

- $90
dividends

$13,055

=

$400

+

$7,000

+

$5,655

 

Remembering (1) in each journal entry the total dollar amount of debits must equal the total dollar amount of credits and (2) assets increase with debits, how is the October 26 $90 dividend payment recorded in the general journal?

Since cash is an asset (resource) and assets increase through debits, hopefully it is again reasonable that assets must decrease with credits. This will result in a $90 credit to cash. The required debit of $90 would be to dividends. Dividends are debited because the cash payment reduced stockholders' equity. Since stockholders' equity increases with credits, it must decrease with debits. If you also remember from previous chapters that dividends increase with debits, you support this debit to dividends because dividends did increase by $90. It is important that you notice as dividends get larger and larger through debits, total stockholders' equity gets smaller because stockholders' equity decreases through debits. Since dividends are reductions in stockholders' equity because owners are taking some resources out of the company, it is logical to record increases in dividends as debits. This event would be recorded in the general journal as follows.

Date 

Description 

Post. 
Ref. 

Debits 

Credits 

Oct. 26

Dividends 

315 

90 

 

 

     Cash

111 

 

90 

 

Cash dividend 

 

 

 


Using up resources in management operations: on October 31 the company pays $600 to an employee for work done in October.

The cash payment of $600 decreased the company's resources (cash). Since no other resources were obtained for the cash, the company's total resources decreased by $600. The source of resources that decreased was stockholders' equity because the cash was used up through management's operation of the business. Remember management hired and used the employee. The specific stockholders' equity accounted affected was wages expense. Thus, the company's resources and sources of resources both decreased by $600, as shown below.

Total
Resources

=

Sources of
Borrowed
Resources

+

Sources of
Owner Invested
Resources

+

Sources of
Management Generated
Resources

Assets

=

Liabilities

+

Stockholders' Equity

$13,055

=

$400

+

$7,000

+

$5,655

- $600
cash

=

 

 

 

 

- $600
wages expense

$12,455

=

$400

+

$7,000

+

$5,055

 

Remembering (1) in each journal entry the total dollar amount of debits must equal the total dollar amount of credits and (2) assets increase with debits, how is the October 31 payment to an employee recorded in the general journal?

Since cash is an asset (resource) and assets increase through debits, the $600 decrease in cash would be recorded as a $600 credit to cash. The required debit of $600 would be to wages expense. Wages expense is debited because management's using up of resources reduced stockholders' equity. Since stockholders' equity increases with credits, it must decrease with debits. If you also remember from previous chapters that expenses increase with debits, you support this debit to wages expense because wages expense did increase by $600. It is important that you notice as expenses get larger and larger through debits, total stockholders' equity gets smaller because stockholders' equity decreases through debits. Since expenses are reductions in stockholders' equity because management is using up some resources, it is logical to record increases in expenses as debits. This event would be recorded in the general journal as follows.

Date 

Description 

Post. 
Ref. 

Debits 

Credits 

Oct. 31

Wages Expense 

517 

600 

 

 

     Cash

111 

 

600 

 

October wages 

 

 

 


 

Using up resources in management operations: on October 31 the manager's review of supplies shows that $525 of supplies are on hand.

At the beginning of October, the Guitar Lessons Corporation had $575 of supplies on hand. On October 6, the company purchased an additional $400 of supplies, bringing its total supplies to $975 ($575 + $400). When the examination of supplies on October 31 shows that only $525 of supplies are on hand, it suggests that $450 ($975 - $525) of supplies must have been used up during October. Thus the company's resources decreased by $450. The source of resources that decreased was stockholders' equity because the supplies were used up through management's operation of the business. The specific stockholders' equity accounted affected was supplies expense. Thus, the company's resources and sources of resources both decreased by $450, as shown below.

Total
Resources

=

Sources of
Borrowed
Resources

+

Sources of
Owner Invested
Resources

+

Sources of
Management Generated
Resources

Assets

=

Liabilities

+

Stockholders' Equity

$12,455

=

$400

+

$7,000

+

$5,055

- $450
supplies

=

 

 

 

 

- $450
supplies expense

$12,005

=

$400

+

$7,000

+

$4,605

 

Remembering (1) in each journal entry the total dollar amount of debits must equal the total dollar amount of credits and (2) assets increase with debits, how is the October 31 using up of supplies recorded in the general journal?

Since supplies are assets (resources) and assets increase through debits, the $450 decrease in supplies would be recorded as a $450 credit to supplies. The required debit of $450 would be to supplies expense. Supplies expense is debited because management's using up of resources reduced stockholders' equity. Since stockholders' equity increases with credits, it must decrease with debits. If you also remember from previous chapters that expenses increase with debits, you support this debit to supplies expense because supplies expense did increase by $450. It is important you notice that as expenses get larger and larger through debits, total stockholders' equity gets smaller because stockholders' equity decreases through debits. Since expenses are reductions in stockholders' equity because management is using up some resources, it is logical to record increases in expenses as debits. This event would be recorded in the general journal as follows.

Date 

Description 

Post. 
Ref. 

Debits 

Credits 

Oct. 31

Supplies Expense 

511 

450 

 

 

     Supplies

115 

 

450 

 

October supplies used 

 

 

 

Practice Exercise

Record the following transaction in the Christopher Corporation's general journal (in this exercise, ignore the post. ref. column). Before you prepare the journal entry, determine the transaction's effects on the company's resources and sources of resources. On April 5, the company purchased an additional $800 of supplies by paying cash.

The receipt of the supplies increases the company's resources by $800. On the other hand, the cash payment decreases the company's resources by $800. Thus, in total, the company's resources remained unchanged.

Total
Resources

=

Sources of
Borrowed
Resources

+

Sources of
Owner Invested
Resources

+

Sources of
Management Generated
Resources

Assets

=

Liabilities

+

Stockholders' Equity

+ $800
supplies

- $800
cash

 

 

 

 

 

 

 

Assets (resources) increase with debits. Thus, the $800 increase in supplies would be recorded as a debit to supplies. The debits = credits rule requires an $800 credit to some other account. In this case the $800 credit is to cash, since cash was reduced as it was paid out.

Date 

Description 

Post. 
Ref. 

Debits 

Credits 

Apr. 5 

Supplies 

 

800 

 

 

     Cash 

 

 

800 

 

Supplies purchase 

 

 

 


 

Completed general journal: In actual companies, business events are recorded by many accountants in many general journals. The following is an example of the complete general journal in which all of the previous events were recorded.

 

Guitar Lessons Corporation
General Journal 

General Journal 

Page 1 

Date

Description 

Post.
Ref. 

Debits 

Credits 

Oct. 3 

Cash 

111 

1,300 

 

 

     Accounts Receivable 

113 

 

1,300 

 

Accounts receivable collection 

 

 

 

 

 

 

 

 

Oct. 6 

Supplies 

115 

400 

 

 

     Accounts Payable 

211 

 

400 

 

Supplies purchased on account 

 

 

 

 

 

 

 

 

Oct. 13 

Cash 

111 

1,100 

 

 

     Fees Revenue 

411 

 

1,100 

 

Services provided 

 

 

 

 

 

 

 

 

Oct. 19 

Accounts Payable 

211 

550 

 

 

     Cash 

111 

 

550 

 

Accounts payable payment 

 

 

 

 

 

 

 

 

Oct. 21

Accounts Receivable 

113 

1,200 

 

 

     Fees Revenue 

411 

 

1,200 

 

Services provided 

 

 

 

 

 

 

 

 

Oct. 26 

Dividends 

315 

90 

 

 

     Cash

111 

 

90 

 

Cash dividend 

 

 

 

 

 

 

 

 

Oct. 31 

Wages Expense 

517 

600 

 

 

     Cash 

111 

 

600 

 

October wages 

 

 

 

 

 

 

 

 

Oct. 31 

Supplies Expense 

511 

450 

 

 

     Supplies 

115 

 

450 

 

October supplies used 

 

 

 

 

The following important points should be noted in the completed general journal.

1. Entries are recorded in chronological order. The October 3 entry is listed before the October 6 entry.

2. In each journal entry, the debits are listed before the credits.

3. In each journal entry, the total dollar amount of debits equals the total dollar amount of credits.

4. In order to make the journal easy to read, there is a blank line separating the journal entries.
 

** You now have the background to do text exercise 3.2.

 

 

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