Sample Transaction #2
Chima
illustrates for Femi a second transaction. On December 2, Fast Delivery
purchases a used delivery van for N2.4million by writing a check for N2.4million.
The two accounts involved are Cash and Vehicles (or Delivery Equipment). When the check is written, the
accounting software will automatically make the entry into these two accounts.
Chima
explains to Femi what is happening within the software. Since the company pays
N2.4million, the Cash account is credited. (Accountants consider the checking
account to be Cash, and the TIP you learned is that when cash is paid,
you credit Cash.) So we know that the Cash account will be credited
for N2.4million and we know the other account will have to be debited
for N2.4million. We need only identify the best account to debit. In this case
we choose Vehicles (or Delivery Equipment) and the entry is:
The
balance sheet will look like this after the vehicle transaction is recorded:
The
balance sheet and the accounting equation remain in balance:
As
you can see in the balance sheet, the asset Cash decreased by N2.4million and
another asset Vehicles increased by N2.4million. Liabilities and stockholders'
equity were not involved and did not change.
Sample Transaction #3
The
third sample transaction also occurs on December 2 when Femi contacts an
insurance agent regarding insurance coverage for the vehicle Fast Delivery just
purchased. The agent informs him that N180,000 will provide insurance
protection for the next six months. Femi immediately writes a check for N180,000
and mails it in
Let's
consider this transaction. Using double entry, we know there must be a minimum of
two accounts involved—one (or more) of the accounts must be debited, and
one (or more) must be credited.
Since
a check is written, we know that one of the accounts involved is Cash. Since
cash was paid, the Cash account will be credited. (Take another look
at the last TIP.) While we have not yet identified
the second account, what we do know for certain is that the second account will
have to be debited.
At
this point we have most of the entry-all we are missing is the name of
the account to be debited:
We
know the transaction involves insurance, and a quick look through the chart of
accounts reveals two possibilities:
Prepaid Insurance (an asset account reported on the
balance sheet) and Insurance Expense (an expense account reported on the
income statement)
Assets
include costs that are not yet expired (not yet used up), while expenses are
costs that have expired (have been used up). Since the N180,000 payment is for
an expense that will not expire in its entirety within the current month, it
would be logical to debit the account Prepaid Insurance. (At the end of each
month, when N30,000 has expired, N30,000 will be moved from Prepaid Insurance
to Insurance Expense.)
The
entry in the general journal format is:
After
the first three transactions have been recorded, the balance sheet will look
like this:
Again,
the balance sheet and the accounting equation are in balance and all of the
changes occurred on the asset/left/debit side of the accounting equation.
Liabilities and Stockholders' Equity were not affected by the insurance
transaction.
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