Although many small businesses might operate on a cash basis, most of the larger ones use the accrual basis to record business events in the general journal. Learning the language of business is very challenging. There are so many terms, procedures, processes, and dos and do nots that keeping track of all of them requires a separate space in one’s brain. There are three business ownership types: (1) proprietorship, (2) partnership, and (3) corporation. Many of their accounting transactions are similar. However, there are some business events that require special transaction handling in accounting entries.
By now, you have seen the end products in the operation of an accounting information system. However, you have not demonstrated how you got there. Getting there is a journey that takes a full accounting period (monthly, quarterly, or yearly) and involves analyzing and recording a series of organizational events or transactions. After all of the transactions have been recorded in a journal, the amounts are posted (transferred) to a ledger (storage for accounts).
The recording process begins with the transaction. Business documents, such as a sales slip, credit card receipt, check, invoice, or cash register tape provide evidence of the transaction. The accounting department assembles and analyzes all of this evidence to determine the transaction’s effects on specific accounts. Once recorded, the journal entry is transferred to the designated accounts in the ledger.
Questions to Consider
To deepen your understanding, you are encouraged to consider the questions below and discuss them with a fellow learner, a work associate, an interested friend, or a member of the business community.
- Consider that you have been asked to make a presentation before your organization’s board of directors on how financial information flows through an accounting information system. To make your presentation move smoothly from the beginning to the end and not to lose any of the board members (and to keep them awake), you have decided to make a chart that shows the flow of information and the steps necessary for their understanding. You also need to make some notes on each step so you have a cheat sheet. In making this presentation:
- What application would you use to display it for a wow factor?
- What information would you include?
This assessment includes three parts. Use the template provided for each part to complete the assessment. The templates are linked in the Resources under the Required Resources heading.
Part 1: Proprietorship Business Transactions
Although many small businesses might operate on a cash basis, most of the larger ones use the accrual basis to record business events in the general journal. In this assessment, apply your knowledge of various business events that require journal entries to be made.
For this part of the assessment, use the Assessment 4, Part 1 Template to create journal entries for each of the following business events for Magnolia Greens Frisbee Golf Course:
- May 1: Invested $20,000 cash in the golf course business.
- May 3: Purchased Hampstead Golf Land for $15,000 cash. The price includes land $12,000, shed $2,000, and equipment $1,000.
- May 5: Paid advertising expenses of $700.
- May 6: Paid cash $600 for a 1-year insurance policy.
- May 10: Purchased golf discs and other equipment for $1,050 from Discs Are Us, payable in 30 days.
- May 18: Received $1,100 in cash for golf fees earned (service revenue).
- May 19: Sold 150 coupon books for $10 each. Each book contains four coupons that enable the holder to play one round of golf.
- May 25: Withdrew $800 cash for personal use.
- May 30: Pay salaries for part-time employees $250.
- May 30: Paid Discs Are Us the full amount due.
- May 31: Received $2,100 cash for fees earned.
Accounts to be used are given below:
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- Prepaid insurance.
- Accounts payable.
- Unearned service revenue.
- Owner’s capital.
- Owner’s drawings.
- Service revenue.
- Advertising expense.
- Salaries and wages expense.
Part 2: Accounting Knowledge Transfer
This part of the assessment allows you to demonstrate and reinforce your knowledge of business accounting terminology by transferring what is in your head onto paper.
For this assessment, use the Assessment 4, Part 2 Template to record your answers to the following short-answer questions designed to test your recall of accounting fundamentals.
- Define the internal and external users of accounting data. What data would each group most likely want to review? Provide examples of each user type.
- Describe the role ethics plays in the operation of an accounting system. Include a couple of examples.
- Select three among the several accounting conventions prescribed by law, regulators, and accounting organizations. For each selection, describe its purpose and provide an example of how it would be applied to an accounting system.
- Describe each of the three main financial statements—the end products of the work that takes place in an accounting system over a period of time—studied in the course. What does each statement present? Why is it important to prepare these? Who uses the information in the statements? Describe the interrelationship among the three statements.
- Discuss the rules of debit and credit as apply to each of the account types that would appear on a company’s balance sheet and income statement. Identify the normal balance for each account type and provide an example event for each. Analyzing business events requires the accountant to make several judgments about the facts contained in the event.
Part 3: Corporate Business Transactions
There are three business ownership types: (1) proprietorship, (2) partnership, and (3) corporation. Many of their accounting transactions are similar. However, there are some business events that require special transaction handling in accounting entries.
For this part of the assessment, use the Assessment 4, Part 3 Template to identify and prepare entries for the corporate ownership business type.
Imagine you are an accountant for J. Malone’s Law Firm, Inc. The accounts and transactions of the firm are listed below. Analyze each transaction. Identify the account or accounts to be debited and credited and, using the provided template, prepare a journal entry for each in the proper format.
Here is an example to record the owner’s investment to start the business:
- Cash: $54,000.
- Common stock: $54,000.
Use the following account titles for this scenario:
- Accounts receivable.
- Prepaid rent.
- Office equipment.
- Accounts payable.
- Interest payable.
- Note payable.
- Common stock.
- Automobile expense.
- Rent expense.
- Utilities expense.
- Salaries expense.
- Interest expense.
- Telephone expense.
- Service revenue.
- Invested $54,000 in cash to start the business.
- Paid $3,000 for 3 month’s rent.
- Bought a used automobile for the firm for $16,000 in cash.
- Performed services for $3,000 in cash.
- Paid $400 for automobile repairs.
- Performed legal services for $3,750 on credit.
- Borrowed $25,000 from the local bank to help expand his business.
- Purchased office chairs for $2,100 on credit.
- Received $1,800 from credit clients.
- Paid $1,000 on account to reduce the amount owed for the office chairs (purchased in item 8).
- Issued a check for $560 to pay the monthly utility bill.
- Purchased office equipment for $8,400. Paid half in cash; the remainder to be paid in 30 days.
- Issued a check for $5,680 to pay salaries.
- Performed legal services for $1,850 in cash.
- Performed legal services for $2,600 on credit.
- Collected $1,600 on accounts receivable from charge clients.
- One month’s worth of rent (paid in item 2) has expired.
- One month’s interest $145 accrued on the note payable (from item 7).