- Before we put our transactions in journal entry form let's just briefly discuss the formatting of a journal entry. So what you can see here is our first transaction remember Sheena contributed $30,000 to the business, in exchange, we issued her stock. So this is that transaction in journal entry form. So no longer will we be doing what we did in chapter one, meaning listing it in that ALE format. This is the format that we'll use throughout the rest of the course. Okay, so first of all, a journal entry. We'll have a date. The date is always listed over here on the left. And then we have our debit and our credit. Remember, debit just means left and credit just means right. You always list your debits first and then below your debits you list all your credits. So we only have one of each, one debit, one credit here. So notice that the debit is butted up against that line there and the credit is indented approximately a half inch. Now the nice thing is my lab pretty much does this for you and most computer software that you use. So you don't have to worry about spacing over. But when you're writing it in your notes you wanna try to be consistent and put a little half inch approximately half inch base there on your credit. So the cash increase so we put cash to show that an asset increases you put the number on the left side. So that's why cash is here on the left. And notice that the number is on the left, it's our debit. Debit just means left. And then our credit, meaning the right side of our entry was to increase common stock. So common stock is our credit and the number goes on the right. Okay, now you also put a brief explanation down below. So here we just have issued common stock and this is really important. What you'll find is later on we're gonna end up leaving those explanations off. But it's really important in class especially here at the beginning. So you'll recognize what you were doing. And then in the real world the explanations are very important especially on unique entries. Or if you make a mistake, then you have to correct it with another entry and that's when you start booking to these random accounts that don't make sense. So that's where the explanations are very, very important. Now you're typically limited to a certain number of characters. So you find that we would start getting creative when we were booking entries to try to fit the information that we needed into that software. Okay, so this is the formatting of the journal entries. Now what I wanna do is go through each of these transactions and put them in journal entry format and then post to our T accounts. And when I say post all that means is to transfer the information from our journal entry to the respective T accounts. So what you can see here is I have what's called our general journal on the left and then our T accounts on the right. So what we're gonna do is go through each transaction first put it in our general journal format or journalize the transaction is what we say and then post that transaction to our T accounts here on the right. Okay, so our very first transaction is that Sheena contributed $30,000 to the business and we issued her common stock. Now again, I think it's really good if you would ask yourself a couple of questions. First of all, what was the exchange? The exchange here was Sheena gave us, the business, cash and in exchange for that cash we issued her stock. And then ask yourself, what account do I book to? So you'll recall you learned about a chart of accounts. Chart of accounts is very important to a business. It's just a list of accounts that the business books to. So it'll have the account titles and then the account number. Because as you recall, each account has a unique number and it typically follows a standard format meaning assets or ones and so forth. Okay, so our first one is to book to cash in common stock. So I think it would also be helpful if you had that spreadsheet that we went through in chapter one if you had it handy because for the first nine transactions we'll be looking at the same one. So I would encourage you to compare those as we go through. Okay, so this first transaction number one the date is actually November the first. And again, this is all outta your textbook so you could go back and look at that. Now, cash increases with the debit. So I'll put cash here. And it's an asset account, so I like to put the plus A you're not gonna have this in my lab but I think it's really helpful while we're learning. And so I'm going to go ahead and put plus A to show that we're increasing an asset account with a debit and that amount was $30,000. So another question you need to ask yourself as we go through these, what accounts do we book to? And then what side do those accounts increase or decrease on? Now our credit, we indent a little bit and that credit will be to common stock which is a contributed capital account for what I'll say is increases stockholders' equity and it increases on the right side. Okay, and then we need to put a description here. So I'll say issued common stock for cash. All right, so let's go ahead and let's post this to out T account. Now we need to create a T account for cash. Cash is an assets, that means that it increases on the left and decreases on the right. So we increase cash by 30,000. Now notice it's on the left side of our journal entry so it needs to go on the left side of our T account. Okay, so I went ahead and highlighted this. Just to emphasize that when you put something on the left side of your journal entry and it needs to go on the left side of that account, okay, so we put 30,000 on the right side of our common stock accounts. Let's go ahead and create an account or T account for common stock. So 30,000 goes on the right side there. So you put it on the right side of the T. Now you would also put the date here. I'll try to squeeze it in. This happened on November the first. So it makes it easier when you're trying to go back and identify where you put that on your T accounts. Okay, so our next transaction, so down here, our second transaction is Smart Touch Learning purchased land. So what was the exchange there? Well, we purchased land. So land increase, in exchange for that land, we paid cash. Okay, so the two accounts we'll book to? Our cash and land, and they both happen to be an asset account. So on our journal entry to make our second one we skip a line here and that date was on November the second. Okay, so we'll increase our asset land and that was for our cost, which is $20,000. And then our credit will be to cash because we're decreasing cash. So it goes on the right side. And then we need to put a description and I'll say purchase land for cash. Okay, so we show cash decreased by putting 20,000 on the right side. And then we need to put a date November 2nd and I'm running out of room here. So lemme make that a little bit bigger. And then we need to post our credit. Well, I posted our credit, sorry we need to post our debit to land. So we need to create another asset account called land. So that 20,000 is to increase land. And again, that was November the second. Okay, so we need to skip a line then we'll go to our third transaction. Our third transaction is to buy office supplies on account. And that happened on November the third. We increased the asset called office supplies increasing an asset for our cost of supplies, which were $500. And then remember, we didn't pay for it right away so we need to increase our liability called accounts payable. So I'll put a plus L there and liabilities increase on the right side, I'll put purchased office supplies on account. Remember anytime you see the word on or the work on account that indicates that no cash was exchanged. Okay, so we need to create another asset called office supplies. And we increased office supplies on November the third for $500. And we also increased a liability account called accounts payable. Oops, we don't need an L there. Okay, account payable increased $500 and that was again on November the third. Okay? Transaction number four, we provided services in exchange for those services. Our clients paid us $5,500. So this happened on November the eighth. I like to start with cash, I think it's the easiest. So we increase cash for the 5,500 that we received. And then our credit is to an account called service revenue. It is a revenue account which also increases stockholders' equity, and that's for $5,500. Let's add our description, provided services. Okay, let's post that to our T accounts. So we debit cash for 5,500, and that happened on or occurred on November the eighth. And then we need to create a revenue account under retained earnings. We'll call service revenue, 5,500 increases on the right. And that occurred on November the eighth. Okay, we're ready for our fifth transaction here. Number five, we provided services for clients who do not pay right away. So they owe us, we provided the services in exchange for that, they gave us a promise to pay. So we call that account receivable. Let's go ahead and put our date here. It's November the 10th. And so that would be booked to account receivable which is an asset for the amount that they owe us. And then the credit will be once again to service revenue for $3,000. And then we will add our description here and that will be provided services on account. Okay, let's post that. So we don't have accounts receivable yet so we need to add that here to our T accounts under assets. And that occurred on November the 10th. So we increase accounts receivable by 3000 on the left side. And then we need to increase our revenue account on the let me scoot over, yes, on the right side for $3,000. And that was November. Okay, now, if you were to pause at any moment during this process, our debits should equal our credits. And you can see for every transaction debits equal credits, each one, they have to balance. And if they don't, we did something wrong. Actually, your accounting software will not let you post a transaction unless your debits and your credit's equal even if you're off by 1 cent, it will not let you post it. So you can see here each transaction equals but what I wanted to emphasize is that our debits and credits still equal when you look at it in this format, your ALE here. So if you were to total these all up you could see that the left side the assets equals liabilities and equity. So what we're going to do is I'll go ahead and finish the transactions and then we'll total them all up. And you can see where the left side equals the right side. Okay, so our next transaction is to pay expenses. So we paid $3,200 for these expenses and that occurred on November the 15th. If you want to start with cash, you could I'm gonna skip down because cash decreases with a credit and that in total was $3,200. Okay, so we had two different expense accounts that we'll need to put to. We have rent expense we're increasing an expense which has the effect of decreasing stockholders' equity. So rent was $2,000. And then our other expense account is for our salaries and wages. And we will book that to the account called salaries expense. Now, if you're ever unsure about what account to book to you would look at a company's chart of accounts and you would find the account there. You could also go back and look at the history that they booked to and see where they booked that type of transaction in the past. Okay, that's for $1,200. And so now we need to add our explanation here. So that description or explanation would just be that we paid and salaries. Okay, so let's post this to our T account. So we debit rent expense and we need to create that here. Remember, expenses increase on the left side. So that was $2,000 for rent. And then that date let me get it over here is November the 15th. November 15th. And then we also had our other expense for salaries expense when we pay our employees. And that was $1,200 and also occurred on November the 15th. Okay, so let's go ahead and post our cash. So we credited cash $3,200 and that was on November the 15th. Okay, on our next transaction, seven was on November 21st we paid $300 for the office supplies that we purchased earlier on. Let's see, on transaction three which happened on November the third. So we bought these supplies but we didn't actually pay for them. So now we're gonna pay 300 of the $500 that we owe. So what we need to do is reduce this account called accounts payable because we no longer owe the full $500. So we'll make a debit to that account called accounts payable which is a liability. So with a debit, we are decreasing that account. And then our credit is to cash to show that we paid out $300. And then we'll add our description here and we'll just put paid on account. Okay, let's post that transaction. So we'll go to account payable, which we've already created and we paid it down by $300 on November the 21st. And then we need to show a decrease to cash for $300 on that same day, November, November 21st. Okay, so now let's go to our next transaction which is transaction eight here. Smart Touch Learning collected $2,000 from those services on the 10th right here. They didn't pay us, they gave us a promise to pay. So we need to reduce this account called accounts receivable, but I think it's easier just to start with cash. So let's start with our cash account. So we increased cash for the $2,000 that we received and then our credit now is to reduce our asset called accounts receivable, update our account. So we need to put a minus A there to show that we're reducing an asset. And then let's add our description here and we'll put received cash on account. Let's post that transaction. So we'll start with our cash. We received $2,000 on November 22nd and then we need to reduce account receivable by that $2,000 on November 22nd. All right, so now our next transaction occurred on November 25th, and we paid $5,000 to our owners which right now is only Gina. And we call that a dividend. And this is actually the last transaction from chapter one. So we booked that to an account called dividends. So what we're doing is we're increasing dividends which has the effect of decreasing stockholders equity and that's for $5,000, and our credit is to decrease cash for the same amount, $5,000. And we'll add the description, paid cash dividends. Okay, let's post that transaction. We'll need to create our T account for dividends. Now, dividends is part of retain to earnings and just like your expenses, they increase on the left side and that happened on November 25th. And then we need to credit cash for that same amount on November 25th. Okay, so let's go to our next transaction. And this happened on December the first. These are our new transactions. So on December the first we prepaid for three months worth of rent and we call that prepaid rent, which is an asset. Once we start using this rent we'll move it out of this account into an expense account. But for now until we've used it it's an asset called prepaid rent, and that's for $3,000. And then we need to decrease our cash account for $3,000. And then we'll add our description here prepay for three months rent. Let's post that to our T account. So we need to create a new asset called prepaid rent. Another common one you'll see is prepaid insurance another common prepaid account. And this happened December the first. And then we need to decrease cash by $3,000 on December the first. Okay? Our next transaction is also on December the first and we are paying our employees again. So we'll book that to salaries expense and then we'll credit cash. And let's see, we wanna be consistent. Let's see what we put earlier. Just, "paid salaries". So we'll put paid salaries for $1,200. So we need to increase our salaries expense account which we already have. And this is December the first. And then we need to decrease cash by $1,200 also on December the first. All right. So our next one is we purchased a building for $60,000 on December the first. We had a busy December the first. So we'll create a new asset account called building and that's $60,000. Now notice we did not pay cash. We finance this whole purchase, and that's fine. But when we have a formal loan agreement, we'll book that to an account called note payable. When we borrow money, you can have a note receivable or note payable. Receivable means somebody owes us or we loan them money and they owe us. And if it's a payable, that means it's a liability where we owe someone else. So this is a liability, and that's for 60,000. Oftentimes what you'll see in this type of situation is that people typically pay down a little bit of cash and you'll see that a little bit later on. But for now, we finance the whole purchase. So we'll say purchased building with notes payable. All right, let's post that. We need to create a T account for our building and we record this at the cost of our asset. And again, that's on December the first. And we need to create a new liability account called Notes Payable $60,000 on December the first. Our next transaction occurred on December the second and Sheena gave us some furniture in exchange for that furniture, we gave her common stock. So we'll increase the account called furniture which is an asset, and that's for the value of that furniture that was given. And then we increase our contributed capital account called Common Stock for $18,000. And we'll add our explanation here. Issued common stock at this time, instead of for cash it was for asset furniture. Let's post that. So we'll need to create a new asset here called furniture. That's 18,000 on December the second. And then we need the increase common stock by 18,000 on December the second. Okay, our next transaction here, transaction 14 we received a telephone bill, but we haven't paid it yet. So we'll book that to a liability account. So let's put our date here, December the 15th. Okay, we have a telephone bill, and we're booking that to utilities expense. So we're increasing our expense account which decreases stockholders' equity for hundred dollars and then we'll book it to our liability called accounts payable. So this is a liability account you'll use much more often than notes payable. Okay, so let's credit accounts payable, and let's add our explanation here. Record telephone. Okay, so let's increase utilities expense and we'll need to add that here for $100 on December the 15th. And then we need to increase accounts payable for $100 on December 15th. Okay, we're almost done. We're getting close. All right, our next transaction also on December the 15th we paid our employees again. So we'll book to salaries expense for $1,200 and we will credit cash for the same amount. And then we'll add our explanation. And let's see what I put earlier. Just, paid salaries. So let's increase salaries expense by $1,200. On December the 15th and let's credit cash by $1,200 on December the 15th. Okay, our next transaction is number 16 here and that occurred on December 21st. So on December 21st, a client prepaid us $600. So let's start with cash, that's the easy part. So we increased cash by the $600 that they prepaid us and we book that to an account called Unearned Revenue. This is where you book any prepayment that a customer makes. And why is that? Because we can't book it to revenue since we haven't earned it. So we put it here in this liability account because if we were not to fulfill that obligation we would owe them their money back. So just remember, if somebody prepays us you book it to the account called unearned revenue and that it's a liability account. So let's add our explanation. Customer paid in advance. Okay, so let's increase cash $600 And that is on December 21st. And then we need to create the liability account called unearned revenue. Increase that by $600. And and that happened on December 21st. Okay, our next transaction here, and our last transaction on December 28th, we collected $8,000. We provided services and the customers paid us $8,000. So let's just go ahead and increase cash. And then we need to increase our revenue account called service Revenue because that's what we are providing is services which increases stockholders equity and provided or performed services for. Let's post that. So we need to increase cash for $8,000 on December 28th and then we need to increase our revenue account by $8,000 also on December. Okay, so now that we've posted all of our transactions what I wanna show you is how our equation still balances. Okay, so now what you wanna do is total each one of your accounts, and another term we use for that is foot. So when you foot something is when you total it going vertical. And then if you total something going horizontal we call that cross foot. Okay, so what I'm going to do is create some subtotals. You don't have to but just to emphasize what we're doing here. So you can see the left side of my cash or all the cash coming in totals $46,100 and then all the cash going out for November and December is 33,900. So what you do is you take the larger side of your account and subtract the smaller side. So when I do that, our balance is $12,200 in cash. The other thing I really wanna emphasize right now is that notice that the balance is on the side that the account increases. We call that the normal balance of the account. All of these accounts should have a balance on the side where the plus is that's considered the normal balance of the account. And you can see that, see land the balance is on the side that it increases. The rest of these will be pretty easy to foot 'cause we don't have nearly as many transactions. So account receivable, our balance is 1000. Let's go over here. We have 600 on the right side, 300 on the left. So the balance goes on the side with a larger number. Let's see, for our common stock, we have 48,000. And let's go ahead and total our revenue. We earn 16,500 in revenue and we paid 3,600 in salaries during these two months. And then we don't need to worry about the rest. Okay, so what I'm going to do is create a total down here total assets. So I will sum up all the asset accounts. I take our balance and cash plus land plus office supplies accounts receivable, prepaid rent, building, and furniture. I add that all up and I get 114,700. Now we know that should equal our total liabilities plus our stockholders equity. So let's go ahead and add up all our liabilities. So we take the 300 plus 60,000 plus 600 and that gives us 60,900. And again, that should equal our stockholders equity. But I'll go ahead and bring down our contributed capital balance which is just our common stock. So that is 48,000, and we'll list out our retained earnings. Now, pay close attention to retained earnings because remember, some accounts increase on the right our equity, our revenue account, but then our expenses and dividends increase on the left side. So what we'll have to do is start with our revenue and then subtract out all our expenses as well as our dividends. Okay, so when I subtract expenses and dividends I came up with a positive 5,800. All right, so let's add these all up and see if they balance. So we have 114,700 on the left and that should equal liabilities plus contributed capital, plus retained earnings. And it does. So you can see assets equals liabilities plus equity. Okay, so that gives me just some additional assurance that we did this correctly.