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Transaction 1

 

On December 2, McGruber started a new business as a corporation. The business received $20,000 from the stockholder (McGruber), and the company issued common stock to her. Note that the corporation is a separate entity, and we are preparing the financial statements for MM TAX, not McGruber (the individual).

Step 1: Analyze the transaction.

CAPTION

Cash increased by $20,000. Cash is an asset, and you increase an asset with a debit.

Common stock increased by $20,000. Common stock is in the owner’s equity account. You increase owner’s equity with a credit.

Step 2: Record the transaction in the general journal.

General Journal

General Journal
Date	Accounts and explanation	Debit	Credit
December 2	Cash	$20,000
	Common stock		$20,000
	Issued common stock.

Always list debits before credits.
For every transaction, debit dollar amounts must equal credit dollar amounts.

Step 3: Post the transaction to the ledger (T-Account).

Cash 101

debit transaction number	D	C	credit transaction number
Dec. 2	$20,000	-	-

Common Stock 301

debit transaction number	D	C	credit transaction number
-	-	$20,000	Dec. 2

 

 

Transaction 2

On December 2, MM TAX prepaid 12 months' worth of insurance for $1,200 cash.

Step 1: Analyze the transaction.

CAPTION

We prepaid insurance for 12 months. Prepaid expenses are new to Lesson 2. A prepaid expense is a payment of an expense in advance. Prepaid expenses are assets. We have a right to insurance coverage for 12 months. We have increased prepaid insurance. Prepaid insurance is an asset, and we increase assets with a debit.

We paid cash, which reduces our cash balance. Cash is an asset, and we decrease assets with a credit.

Step 2: Record the transaction in the general journal.

General Journal

General Journal
Date	Accounts and explanation	Debit	Credit
December 2	Prepaid insurance	$1,200
	Cash		$1,200
	Prepaid 12 months' insurance.

Step 3: Post the transaction to the ledger (T-Account) and update the balance in the cash account.

Cash 101

debit transaction number	D	C	credit transaction number
Dec. 2	$20,000	-	-
-	-	$1,200	Dec. 2
Balance	$18,800	-	-

Prepaid Insurance 104

debit transaction number	D	C	credit transaction number
Dec. 2	$1,200	-	-

 

Note: Generally, if there is only one transaction, a balance is not listed.

Transaction 3

On December 3, MM TAX purchased a computer for $500 cash.

Step 1: Analyze the transaction.

CAPTION

We purchased a computer. The computer account increased. The computer is an asset, and we increase assets with a debit.

We paid cash, which reduces our cash balance. Cash is an asset, and we decrease assets with a credit.

Step 2: Record the transaction in the general journal.

General Journal

General Journal
Date	Accounts and explanation	Debit	Credit
December 3	Computer	$500
	Cash		$500
	Purchased a computer with cash.

Step 3: Post the transaction to the ledger (T-Account) and update the balance in the cash account.

Cash 101

debit transaction number	D	C	credit transaction number
Dec. 2	$20,000	-	-
-	-	$1,200	Dec. 2
-	-	$500	Dec. 3
Balance	$18,300	-	-

Computer 121

debit transaction number	D	C	credit transaction number
Dec. 3	$500	-	-

 

Transaction 4

On December 4, MM TAX purchased office supplies on account for $50.

Step 1: Analyze the transaction.

CAPTION

Office supplies increased. Office supplies are an asset, and we increase assets with a debit.

A purchase on account (credit) increases accounts payable. Accounts payable is a liability. You increase a liability with a credit.

Step 2: Record the transaction in the general journal.

General Journal

General Journal
Date	Accounts and explanation	Debit	Credit
December 4	Office supplies	$50
	Accounts payable		$50
	Purchased office supplies on account.

Step 3: Post the transaction to the ledger (T-Account) and update the balance in the cash account.

Office Supplies 103

debit transaction number	D	C	credit transaction number
Dec. 4	$50	-	-

Accounts Payable 201

debit transaction number	D	C	credit transaction number
		$50	Dec. 4

 

Transaction 5

On December 20, MM TAX prepared a tax return for a corporate client and billed the client $2,500.

Step 1: Analyze the transaction.

CAPTION

We billed our client, who has promised to pay us in the future. Accounts receivable increased. Accounts receivable is an asset. You increase an asset with a debit.

We performed a service and earned $2,500. Revenue is recorded when earned. Revenue has increased. You increase revenue with a credit.

Step 2: Record the transaction in the general journal.

General Journal

General Journal
Date	Accounts and explanation	Debit	Credit
December 20	Accounts receivable	$2,500
	Fees earned		$2,500
	Completed a tax return and billed client.

Step 3: Post the transaction to the ledger (T-Account).

Accounts Receivable 102

debit transaction number	D	C	credit transaction number
Dec. 20	$2,500	-	-

Fees Earned 401

debit transaction number	D	C	credit transaction number
		$2,500	Dec. 20

 

Transaction 6

On December 20, MM TAX paid its employee $200 cash for two week’s work.

Step 1: Analyze the transaction.

CAPTION

Salaries expense increased. You increase an expense with a debit.

Cash decreased. Cash is an asset, and we decrease assets with a credit.

Step 2: Record the transaction in the general journal.

General Journal

General Journal
Date	Accounts and explanation	Debit	Credit
December 20	Salaries expense	$200
	Cash		$200
	Paid employee salary.

Step 3: Post the transaction to the ledger (T-Account) and update the balance in the cash account.

Cash 101

debit transaction number	D	C	credit transaction number
Dec. 2	$20,000	-	-
-	-	$1,200	Dec. 2
-	-	$500	Dec. 3
-	-	$200	Dec. 20
Balance	$18,100	-	-

Salaries Expense 501

debit transaction number	D	C	credit transaction number
Dec. 20	$200	-	-

 

Transaction 7

On December 20, MM TAX paid a $200 dividend to its sole stockholder, M. McGruber.

Step 1: Analyze the transaction.

CAPTION

Dividends increased. You increase dividends with a debit.

Cash decreased. Cash is an asset, and we decrease assets with a credit.

Step 2: Record the transaction in the general journal.

General Journal

General Journal
Date	Accounts and explanation	Debit	Credit
December 20	Dividends	$200
	Cash		$200
	Paid dividends.

Step 3: Post the transaction to the ledger (T-Account) and update the balance in the cash account.

Cash 101

debit transaction number	D	C	credit transaction number
Dec. 2	$20,000	-	-
-	-	$1,200	Dec. 2
-	-	$500	Dec. 3
-	-	$200	Dec. 20
-	-	$200	Dec. 20
Balance	$17,900	-	-

Dividends 303

debit transaction number	D	C	credit transaction number
Dec. 20	$200	-	-

 

Transaction 8

On December 20, MM TAX received $2,000 cash from a client for work that will be performed in December and January. This transaction is new to Lesson 2.

Step 1: Analyze the transaction.

CAPTION

We received cash. Cash is an asset. You increase assets with a debit.

We received money for services to be performed later. We owe our client service. This is a liability. Our liabilities have increased. You increase a liability with a credit.

Step 2: Record the transaction in the general journal.

General Journal

General Journal
Date	Accounts and explanation	Debit	Credit
December 20	Cash	$2,000
	Unearned revenue		$2,000
	Received cash for services to be performed later.

Step 3: Post the transaction to the ledger (T-Account) and update the balance in the cash account.

Cash 101

debit transaction number	D	C	credit transaction number
Dec. 2	$20,000	-	-
-	-	$1,200	Dec. 2
-	-	$500	Dec. 3
-	-	$200	Dec. 20
-	-	$200	Dec. 20
Dec. 20	$2,000
Balance	$19,900	-	-

Unearned Revenue 202

debit transaction number	D	C	credit transaction number
-	-	$2,000	Dec. 20