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The Fundamental Accounting Equation
A Simple Balance Sheet and Income Statement
Debits and Credit Transaction Posting Rules
8b. Another Cash Transaction Posting Example
Accounts Payable and Wage Withholding
Prepaid Expenses and Deferred Revenue
Inventory and Cost of Goods Sold
The Lower of Cost or Market Rule
Financial Statement Preparation
16. The Reliability of Financial Statements
Relative Measures of Economic Performance
Here is another example of some cash transactions postings.
On 1/3/05 Hamlet, an MSW, decides to open a psychotherapy clinic. He contributes $5,000 to the business. The $5,000 is an increase in cash to the business, so cash must be increased (debited). Since the cash comes from the owner, the credit must be recorded in an equity account.
On 1/03/05 Hamlet borrows $15,000 from his friend Rosenkrantz to furnish his office and defray other start up costs. The business receives $15,000 cash and now owes $15,000.
On 1/4/05 Hamlet pays $1,500 rent for his office. Cash is decreased and an expense, rent, increases.
On 1/4/05 Hamlet purchases office furniture for $9,100. Office furniture is an asset, so this asset increases, while another asset, cash, decreases.
On 1/29/05 Hamlet collects $8,000 in patient fees from his HMO. An asset, cash, increases. He has earned these fees, so the offsetting entry is an increase to revenue.
On 1/30/05 he draws $3,500 for living expenses. Since Hamlet is drawing the money to defray personal expenses, the disbursement is considered an owner’s withdrawal, which is a decrease in owner’s equity.
On 1/31/05 he repays Rosenkrantz $3,000 in principal and $100 in interest expense on the previously recorded loan. The total payment to Rosenkrantz is $3,100. Clearly, cash decreases by $3,100. Also the principal on the note decreases by $3,000. But what about the $100 interest? This is an expense. So we have a decrease in asset offset by a decrease in a liability and an increase in expense, which you will remember, is also a decrease in equity.
These transactions have to be posted to the appropriate general ledger account. Here are the accounts after the postings:
Again all these steps are done automatically as checks are prepared in computerized accounting software such as Quickbooks.
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