Lesson 8: 17. Goodwill Example

Michael Sack Elmaleh , CPA, CVA

Here is an example of some common transactions postings.

Transaction 1. Jim Morrisin, a licensed pilot, starts an air transport company called Joint Ventures. The company specializes in delivering agricultural products between Central America and the southern United States via small planes. His business will be organized as a proprietorship. He invests $10,000 of his own money and opens a checking account.

This transaction consists of an increase in cash and an offsetting increase in owner’s equity and should be recorded like this:

Notice the slight indentation of the Owner’s Equity account. This slight indenting of the account that receives the credit emphasizes the credit is the right side of the entry while the debit is the left side of the entry.

Notice also that the transaction maintained the basic accounting equation, with the left side (assets) increased by $10,000 and the right side (liabilities and equity) increased by the same amount.

Transaction 2.  Jim leases a small plane for $1,000 a month. The entry for the first month’s rent looks like this:

This transaction involves an expense and an asset. Again, the fundamental equation is maintained. A decrease in an asset (cash) is offset by a decrease in equity. Remember that expense accounts are sub-categories of equity, and that the increase in the Equipment Lease expense decreases equity.

Transaction 3: Jim receives his first delivery order from a Mexican farmer to ship several kilos of product from Mexico to San Antonio. He receives $5,000 for making the delivery. The entry is:

The increase in an asset (cash) has been offset by an equal increase in equity (revenue).

Transaction 4: Jim withdraws $3,000 from the business for personal living expenses. The entry is:

The decrease in assets (cash) is offset by a decrease in equity (owner’s draws reduce equity). Note that in an unincorporated business distributions to owners are not treated as expenses. Such draws constitute reductions in equity.

All journal entries, whether made in the general journal or in a specialized journal such as the cash disbursements journal, must be posted to the appropriate general ledger account.

Here is what the general ledger “T” accounts look like after posting the above journal entries:

Notice that the ending balance in the cash account is a debit of $11,000, because the total debits of $15,000 exceed the total credits of $4,000 by that amount.

Click here for a tutorial on making general journal entries in Quickbooks.

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