QuickBooks 2017 All-In-One For Dummies. Nelson Stephen L.
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$1,000.
You can calculate the account balance for any account by taking the starting account balance and then adding the debits and credits that have occurred since then. By hand, this arithmetic is a little unwieldy. Your computer (with the help of QuickBooks) does this math easily.
Almost a Real-Life Example
To cement the concepts that I talk about in the preceding paragraphs of this chapter, I want to quickly step through the journal entries, or bookkeeping transactions, that you would record in the case of the hot-dog-stand business discussed in the preceding chapter. To start, you need to know that the balance sheet shown in Table 2-2 is the balance sheet at the start of the day. This means that the account balances in all the accounts appear as shown in Table 2-7. This list of account balances is actually called a trial balance. It shows the debit or credit balance for each account.
TABLE 2-7 A Trial Balance at the Start of the Day
Recording rent expense
Suppose that the first transaction to record is a $1,000 check written to pay rent. In this case, the journal entry appears as shown in Table 2-8. In this example, $1,000 is debited to rent expense, and $1,000 is credited to cash.
TABLE 2-8 Journal Entry 4: Recording the Rent Expense
Recording wages expense
If you need to record $4,000 of wages expense, you use the journal entry shown in Table 2-9. This journal entry debits wages expense for $4,000 and credits cash for $4,000. In other words, you use $4,000 of cash to pay wages for the hot-dog-stand business.
TABLE 2-9 Journal Entry 5: Recording the Wages Expense
Recording supplies expense
To record $1,000 of supplies expense paid for by writing a check, you record the journal entry shown in Table 2-10. This transaction debits supplies expense for $1,000 and credits cash for $1,000.
TABLE 2-10 Journal Entry 6: Recording the Supplies Expense
Recording sales revenue
Suppose that you sell $13,000 worth of hot dogs. To record this transaction in a journal entry, you debit cash for $13,000 and credit sales revenue for $13,000, as shown in Table 2-11. I should tell you, however, that in the case of the hot dog stand selling hot dogs for a dollar or two apiece, you wouldn’t necessarily use a single journal entry to record sales revenue amounts. Though you could use a single journal entry that tallied the entire day’s sales, if you’re selling hot dogs at a dollar a dog, you could also record 13,000 one-dollar transactions. Each of these one-dollar transactions debits cash for a dollar and credits sales revenue for a dollar.
TABLE 2-11 Journal Entry 7: Recording the Sales Revenue
Recording cost of goods sold
You must record the expense of the hot dogs and buns that you sell. You must also record the fact that if you use up your inventory of hot dogs and buns, your inventory balance has decreased. Table 2-12 shows how you record this. Cost of goods sold gets debited for $3,000, and inventory gets credited for $3,000.
TABLE 2-12 Journal Entry 8: Recording the Cost of Goods Sold
If you’re confused about this cost-of-goods-sold transaction – it represents the first transaction that doesn’t use cash – read Book 1, Chapter 1, where I describe the two accounting principles. In short, these two principles go like this:
✓ Expense principle: This principle says that an expense gets counted when the item gets sold. This means that the inventory isn’t counted as cost of goods sold or as an expense when it’s purchased. Rather, the expense of the hot dog and bun that you sell gets counted when the item is actually sold to somebody.
✓ Matching principle: This principle says that expenses or cost of a sale get matched with the revenue of the sale. This means that you recognize the cost of goods sold at the same time that you recognize the sale. Typically, in fact, you can combine journal entries 7 and 8.
Recording the payoff of accounts payable
Suppose that one of the things you do at the end of the day is write a check to pay off the accounts payable. The accounts payable are the amounts that you owe vendors – probably the suppliers from which you purchased the hot dogs and buns. To record the payoff of accounts payable, you debit accounts payable for $2,000 and credit cash for $2,000, as shown in Table 2-13.
TABLE 2-13 Journal Entry 9: Recording the Payoff of Accounts Payable
Recording the payoff of a loan
Suppose also that you use cash profits from the day to pay off the $1,000 loan that the balance sheet shows (see Table 2-2). To record this transaction, you debit loan payable for $1,000 and credit cash for $1,000, as shown in Table 2-14.
TABLE 2-14 Journal Entry 10: Recording the Payoff of the Loan
Calculating account balance
You may already be able to guess this: If you know an account’s starting balance and have a way to add up the debits and the credits to the account, you can easily calculate the ending account balance.
Take the case of the cash account balance of the hot-dog-stand business. If you look at the balance sheet shown in Table 2-2, you see that the beginning balance for cash is $1,000. You can easily construct a little schedule of how the account balance changes – this is called a T-account – that calculates the ending balance. (In case you are wondering, a T-account is a visual aid to help in accounting. You start by drawing a big capital T, with debits on the left side and credits on the right side). In fact, Table 2-15 does just this. If you look closely at Table 2-15, you see that the cash beginning balance is $1,000. Then, on the following lines of the T-account, you see the effects of Journal Entries 4, 5, 6, 7, 9, and 10. Some of these journal entries credit cash. Some of them debit cash. You can calculate the ending cash balance by combining the debit and credit amounts.
TABLE 2-15 A T-Account of the Cash Account
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