Queta Johnson is about to open a new business – Chocolate Nirvana. It will be a small chocolate specialties store. She plans on selling a limited number of hand-made molded candies, some of which are holiday specific and others that are of a more generic nature, as well as carrying a line of top-end candy bars. The majority of her sales will come from walk-in customers which will all be on a cash only basis. In addition, she will also sell direct to two local businesses, on account, with terms 1/10,n/30. She anticipates working full-time at the store and needing the help of four part-time employees. She uses a perpetual FIFO (First-in, First-Out) method to account for her inventory. So, every time you record a sale of merchandise, whether on account (Sales Journal) or for cash (Cash Receipts), you must also figure out the cost of the goods (determined from recording it in the merchandise inventory sheets and applying FIFO).
The purpose of this practice set is to allow you the chance to see how each of the separate components we have worked on this semester fit together. As you complete the set, you may find it necessary to look back at what we learned in various chapters to help remember exactly what to do.
1. Be sure to complete each form before moving on to the next form.
2. Read the form and decide which journal to put it in.
3. First – journalize the form into ONE of the journals. If it can go into one of the special journals, that is where you first put it. Only if you cannot (the transaction does not work for any of them) would you record it in the general journal.
If you are told to write a check – put it in the cash payments. It must go in the Cash credit column, which means that it must also go to the check book and write out a check. Why did we pay it? On account would go in the Accounts Payable debit column, you would need the name of the business off to the left, and it would need to be recorded in the Accounts Payable subidiary. Some other reason? Would need to go in the Other column and you would need the name of an account from the chart of accounts. If we have an asset relating to what we are paying for we should use that. If not then we can use the expense or other appropriate account. If we pay for more than one thing with the single check we will need 2 lines to record it so that we can properly show the details.
If you receive money put it in the cash receipts. The total amount of cash received must go in the Cash debit column and into the check book as a deposit. Why did you get the money? If you received it for a summary of cash sales, you must credit Sales – Store Sales and Sales Tax Payable. These numbers come from the bottom of the cash sales form. Then we must also take the things we sold into the merchandsie inventory sheets and record them as sales and determine what our COST in the goods sold would be. This is based on what we learned in chapter 7. Did we get the money for payment received on account? We have to go back to the original form to find out how much they owe us. We have already recorded the things they bought, so we are only recording the receipt of the payment. Credit Accounts Receivable for the full amount owed, debit Sales Discount for the appropriate discount amount based on the terms given on the original form, and show the cash received for the difference. The accounts receivable amount must go to the accounts receivable subsidiary. Because we affected accounts receivable we need the name of the business over on the far left. If we received it for any other reason it needs to go in the Other column and we need the name of an account on the left.
If you buy something on account (or receive a service that you will be paying for a bit later) it belongs in the Purchases Journal. Because everything in this journal will include a credit to Accounts Payable you will need the name of the business off to the left. Then, what did you buy? Merchandise? Then also put it in the Merchandise Inventory column. Something else? Then over on the right, put the amount in and then find an account from the chart of account that matches what you have gotten. Because we affected Accounts Payable we have to take that amount into the Accounts Payable subsidiary. If we purchased merchandise that must go to the merchandise inventory subsidiary.
If you sold something on account it belongs in the sales journal. For this journal everything needs to be in the Accounts Receivable column as well as in the Sales – Retail and Sales Tax Payable columns. These numbers come right from the form. Then we take the stuff we sold into the Merchandise Inventory sheets to determine what our COST in the goods we sold would be. We affected accounts receivable so we also have to take that amount into the Accounts Receivable subsidiary.
Only if you cannot record it in one of these four journals would you record it in the general journal. Which means you should not record anything here that affects Cash. We study returns and allowances in chapter 6 and payroll in chapter 11. We will also use the general journal for our adjusting and closing entries.
Payroll – record the payroll as instructed first into their employee earnings records, then transfer the information into the payroll register and after totaling the payroll register use that information to prepare a general journal entry. Specific data for each individual regarding their pay rate, status and number of allowances can be found on their earnings record sheets. Specific rates to be used for social security, medicare, and the unemployment amounts can be found down in the next section. Prepare the journal entries based off what we were taught in the textbook. You will need to debit the wages expense account for total gross wages and credit each of the things we withheld (as summarized on the payroll register). However you must credit Payroll Checking Account for the net pay because this business uses a separate checking account for normal checks and payroll checks.
Social Security 6.2%, on the first $118,500 earned each year by each employee Medicare 1.45% of all wages earned each year by each employee FUTA 0 .8% on the first $7000 earned each year by each employee SUTA 7% on the first $15,000 earned each year by each employee
Keep in mind that after recording the general journal entry to record the actual payroll you must also prepare a journal entry to record the payroll tax expense for the business. Chocolate Nirvana is responsible for matching the Social Security and Medicare amounts withheld from its employees and also must pay in for Federal and State Unemployment. This means that when it comes time to post into the ledger you will have two identical amounts in the Social Security account and two identical amounts in the Medicare account. This entry was shown in the textbook so please follow the format we saw there. We will not actually write out payroll checks to our employees, just put in check numbers 101 – 104 in the payroll register.
When you are asked to transfer enough funds to cover payroll, you will debit the Payroll Checking account for the same amount you credited in the first payroll entry in the general journal (net pay) but now it will be in the Cash Payments Journal. This will give you a debit and a credit and will result in a zero balance (and nothing recorded in the Wages Payable account yet).
4. After journalizing all forms, total up every column from all four special journals and write down your total on the journal page. Compare your totals with the check figures. Do they match? If they do not, determine how far off they are. Try to determine where the error would come from.
5. Once you have your totals correct, begin posting into the general ledger. You must post all 5 journals (includes the general journal!!!) From the special journals, if you have the name of an account in the column heading, you will post ONLY the total from that column into the general ledger as either a debit (DR) or a credit (CR) based on what is shown in the column heading. For the “Other” columns you must post each amount individually. This comes from chapter 5. From the general journal you need to post every account you have used.
6. As you post in the general ledger, keep running balances. Remember if you have a debit balance and a debit transaction they are added and stay a debit. If you have a credit balance and a credit transaction they are added and stay a credit. If you have one as a debit and the other as a credit they are subtracted and the balance goes to the higher side. Remember the rules for normal balances! Do not worry about an account’s balance too much until you have posted all transactions – at that time all accounts should have their “normal” balance.
7 After posting all numbers from the journals into the general ledger, go to the Unadjusted Trial Balance in the back of the booklet. Write down each account, in order, from the general ledger that has a balance (you will have many accounts that do not yet have balances) and write in the balance – debit or credit – and add up your balances. Check your totals (this is a Trial BALANCE so your two balances should be the same) and compare to the check figures.
8. Use your chart of accounts page to begin work on your worksheet. List all accounts, in order, except you do not need to list Payroll Checking Account, Notes Payable – current, Income Summary, or Miscellaneous Expense.
9. For the accounts on your unadjusted trial balance, fill in their balances on to the worksheet in the Unadjusted Trial Balance columns. Leave all other accounts blank for these columns.
10. Journalize your adjusting entries in the general journal. You are given the information here, but you will need to also use the chart of accounts, sometimes you will need to look back at the form where we originally got the information we recorded for this charge, or you may need to look up on the forms, the ledger, or the trial balance a cost amount.
Prepare month end adjusting entries based on the following data for OCTOBER:
a) Record accrued interest on the long term note for 3 days – $13.56
b) Depreciation – calculate depreciation for JUST the month of October based on the following information:
Store Equipment – 5 year life, $3000 salvage value, use straight line depreciation
Office Equipment – 5 year life, $300 salvage value, use straight line depreciation
c) Record entry for expired insurance
d) Currently there are $75 worth of office supplies on hand
e) Currently there are $115 worth of store supplies on hand
f) Record entry for amount of advertising expired for the period just ended
g) Record wages earned, but unpaid, on Oct 31 of $250
11. We do not total our general journal columns, however, you should add up your debit / credit columns to see if they match the check figures, but do not write it on the journal page.
12. Post your adjusting entries into the general ledger and get new running balances. Remember from chapter 3 what date we use and how we show this in the ledger.
13. Also, add your adjusting entries on to the worksheet in the Adjustments column. You will total your adjusting entries here.
14. You can now complete the worksheet. Your Adjusted Trial Balance columns should match your general ledger balances. What accounts need to get extended into the Income Statement columns (based on the Adjusted Trial Balance numbers) and which ones need to go into the Balance Sheet columns? Look at chapter 4 if you can’t remember. Also, check chapter 4 to remind yourself how to show the totals on the botom of the last page of the worksheet.
15. You are now ready to prepare your financial statements. Be sure to use chapter 6 examples as references.
16. Your Accounts Receivable Customer Balance (Schedule of Accounts Receivable) and Accounts Payable Vendor balance (Schedule of Accounts Payable) are from chapter 5. Simply list each customer that owes you money (Accounts Receivable) or that you owe money to (Accounts Payable) and total them (examples in chapter 5). You do not have to list any businesses that do not have balances at the end of the month.
17. Income Statement – use a multiple step format. We have two revenue accounts so we need to show them both. What all do you show, and in what columns (chapter 6) to get to gross profit? Where do you show Interest Expense?
18. Statement of Owner’s Equity – were we in business last month? Does that affect how we show anything on this statement?
19. Balance Sheet – use the classified example in report form from chapter 6. The Notes Payable – current balance on the Balance Sheet should be $16,500 and the Notest Payable – noncurrent balance on the Balance Sheet should be $15,125.
20. You are now ready to prepare your closing entries. These need to be journalized in the general journal. Use chapter 4 as a reference. If you prepared your worksheet correctly this is a great help in preparing the closing entries. Remember, though, we may have some accounts now that we did not have back in chapter 4 that still need to be closed because of the type of account they are.
21. After journalizing the closing entries, you then need to post them into the general ledger. Do we put something in the item column?
22. After posting the closing entries, you will then prepare the post-closing trial balance. Which accounts should still be open?
In the Exhibit section you will find:
Chart of Account
Tax Withholding Chart (amounts shown are the dollars to withhold)
In the Forms section you will find:
The transactions forms you need to record in the various journals
In the Journals section you will find:
Sales Journal – begin with invoice 1001
Cash Receipts Journal – begin with invoice 101
Cash Payments Journal – begin with check 1001
General Journal (ONLY transactions that CANNOT go into one of the special journals)
In the Ledgers section you will find:
Accounts Receivable Subsidiary Ledger
Accounts Payable Subsidiary Ledger
Merchandise Inventory Subsidiary Ledger
In the Checkbook section you will find:
Checkbook – begin with check 1001
In the Payroll section you will find:
Individual Earnings Records
Payroll Register – Begin with check 101 (assign to employees in order – do not actually write out checks to the employees)
In the Financial Statement section you will find:
Unadjusted Trial Balance
Accounts Receivable Customer Balance (Schedule of Accounts Receivable)
Accounts Payable Vendor Balance (Schedule of Accounts Payable)
Income Statement (Multiple Step format)
Statement of Owners’ Equity
Balance Sheet (Classified format)
Post Closing Trial Balance
Be sure to use your textbook as a reference as you work through this set. All of this information comes from work in our textbook.
Before turning in your completed practice set – Please be sure to put your name on it