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Net income is not an asset its an increase in owners equity from profits of the business.
Increase
A = L + OE
Decrease Increase . . . but this is what net income really means.
Retained Earnings
A = L + OE
Capital Stock Retained Earnings The balance in the Retained Earnings account represents the total net income of the corporation over the entire lifetime of the business, less all amounts which have been distributed to the stockholders as dividends.
The costs of goods and services used up in the process of earning revenue.
EQUITIES
Debit Credit for for Decrease Increase
Lets analyze the revenue, and expense transactions for JJs Lawn Care Service for the month of May.
May 29: JJs provided lawn care services for a client and received $750 in cash.
May 29: JJs provided lawn care services for a client and received $750 in cash.
May 31: JJs purchased gasoline for the lawn mower and the truck for $50 cash.
May 31: JJs purchased gasoline for the lawn mower and the truck for $50 cash.
Cash 5/1 8,000 5/2 2,500 5/29 750 5/8 2,000 5/31 50
May 31: JJs Lawn Care paid Jill Jones and her family a $200 dividend.
May 31: JJs Lawn Care paid Jill Jones and her family a $200 dividend.
Cash 5/1 8,000 5/2 2,500 5/29 750 5/8 2,000 5/31 50 5/31 200
5/31
Dividends 200
Balancing a T-Account
Cash
8,000 750
8,750
Cash
8,000 750 Next, foot the 2,900 credit side. 8,750 2,500 2,000 50 200 4,750
Subtract total credits Cash from total debits to obtain the account 8,000 2,500 balance.
750
4,000
8,750
Now, lets look at the Trial Balance for JJs Lawn Care Service for the month of May.
JJ's Lawn Care Service Unadjusted Trial Balance May 31, 2003 Cash $ 3,925 Accounts receivable 75 Tools & equipment 2,650 Truck 15,000 Notes payable Accounts payable Capital stock Dividends 200 Sales revenue Gasoline expense 50 Total $ 21,900
All balances are taken from the ledger accounts on May 31 after considering all of JJs transactions for the month.
Cash Basis
Cash Basis Revenues are recognized when cash is received and expenses recorded when cash is paid.
Cash Basis
Cash Basis Revenues are recognized when cash is received and expenses recorded when cash is paid.
Not GAAP
Journalize transactions.
Prepare after closing Journalize and post closing trial balance. entries.
500
500
GENERAL JOURNAL
DATE DESCRIPTION POST. REF . DEBIT
Page 3
CREDIT
20X5 Dec. 31 Supplies Expense Supplies To record the supplies used during December
500.00
500.00
PURCHASE OF EQUIPMENT
On November 9 & 10th, the firm purchased equipment at a total cost of $15,000. This equipment was put to use in December when the firm opened for business. At the time the equipment was bought, its cost was debited to the asset account Equipment.
Depreciation
Depreciation is the process of allocating the cost of a longterm asset to operations during its expected useful life.
SALVAGE VALUE
Salvage value is the amount an item can be sold for after it has been used by the business.
STRAIGHT-LINE DEPRICIATION
One of many different ways to figure amortization.
Formula: Depreciation =
The formula results in an equal amount of depreciation being charged to each accounting period during the assets useful life.
FORMULA
Depreciation = Cost - Salvage Value Estimated months of useful life
Equipment cost $15,000, had 0 salvage and an estimated life of 5 years. (5 yr. X 12 mo. = 60 months) Depreciation = $15,000 - 0 = $250.00 60
BOOK VALUE
The portion of an assets original cost that has not yet been amortized.
balance contra or opposite to the normal balance of an asset account. An example of a contra asset account is: Accumulated Depreciation - Equipment.
250
250
GENERAL JOURNAL
DATE DESCRIPTION POST. REF . DEBIT
Page 3
CREDIT
20X5 Dec. 31 Depreciation Expense Accumulated Depreciation To record the cost of equipment allocated to producing revenue in December
250.00
250.00