Accounting: The Language of Business (Part 12)

“People don’t pay attention. And then one day there’s an accounting. And after that, nothing is the same.” —Unknown

Analyzing Transactions (Part D)

by

Charles Lamson

Dec. 1 NetSolutions paid rent for December, $800. The company from which NetSolutions is renting its store space now requires the payment of rent on the 1st of each month, rather than at the end of the month.

 Analysis You may pay monthly rent on an apartment on the first of each month. Your rent transaction is similar to NetSolutions (from preceding posts). The advance payment of rent is an asset, much like the advance payment of the insurance premium in the preceding transaction (from part 11). However, unlike the insurance premium, this prepaid rent will expire in one month. When an asset that is purchased will be used up in a short period of time, such as a month, it is normal to debit an expense account initially. This avoids having to transfer the balance from an asset account (Prepaid Rent) to an expense account (Rent Expense) at the end of the month. Thus, when the rent for December is prepaid at the beginning of the month, rent expense is debited for $800 and cash is credited for $800.

Dec. 1 Netsolutions received an offer from a local retailer to rent the land purchased on November 5. The retailer plans to use the land as a parking lot for its employees and customers. NetSolutions agreed to rent the land to the retailer for three months, with the rent payable in advance. Netsolutions received $360 for three months rent beginning December 1.

Analysis By agreeing to rent the land and accepting the $360, NetSolutions has incurred an obligation (liability) to the retailer. This obligation is to make the land available for use for three months and not to interfere with its use. And the liability created by receiving the cash in advance of providing the service is called unearned revenue. Thus, the $360 received is an increase in an asset and is debited to cash. The liability account Unearned Rent increases and is credited for $360. As time passes, the unearned rent liability will decrease and will become revenue.

Dec. 4 NetSolutions purchased office equipment on account from Executive Supply Co. for $1,800.

Analysis The asset account Office Equipment increases and is therefore debited for $1,800. The liability account Accounts Payable increases and is credited for $1,800.

Dec. 6 Netsolutions paid $180 for a newspaper advertisement.

Analysis An expense increases and is debited for $180 the asset Cash decreases and is credited for $180. Expense items that are expected to be minor in amount are normally included as part of the miscellaneous expense. Thus, miscellaneous expense is debited for $180.

Dec. 11 NetSolutions paid creditors $400.

Analysis This payment decreases the liability account Accounts Payable, which is debited for $400. Cash also decreases and is credited for $400.

Dec. 13 NetSolutions paid a receptionist and a part-time assistant $950 for two weeks' wages.

Analysis This transaction is similar to the December 6 transaction where an expense account is increased and Cash is decreased. Thus, Wages Expense is debited for $950, and cash is credited for $950.

Dec. 16 NetSolutions received $3,100 from fees earned for the first half of December.

Analysis Cash increases and is debited for $3,100. The revenue account Fees Earned increases and is credited for $3,100.

Dec. 16 Fees earned on account totaled $1,750 for the first half of December.

Analysis Assume that you have agreed to take care of a neighbor's dog for a week for $100. At the end of the week, you agree to wait until the first of the next month to receive the $100. Like NetSolutions, you have provided services on account and thus have a right to receive the payment from your neighbor. When a business agrees that payment for services provided or goods sold can be accepted at a later date, the firm has an account receivable, which is a claim against the customer. The account receivable is an asset, and the revenue is earned even though no cash has been received. Thus, Accounts Receivable increases and is debited for $1,750. The revenue account Fees Earned increases and is credited for $1,750 

Dec. 20. NetSolutions paid $900 to Executive Supply Company. On the $1,800 debt owed from the December 4 transaction.

Analysis This is similar to the transaction of December 11.

Dec. 21 Netsolutions received $650 from customers in payment of their accounts.

Analysis When customers pay amounts owed for the services they have previously received, one asset increases and another asset decreases. Thus, Cash is debited for $650, and Accounts Receivable is credited for $650.

Dec. 23 NetSolutions paid $1,450 for supplies.

Analysis The asset account Supplies increases and is debited for $1,450. The asset account Cash decreases and is credited for $1,450.

Dec. 27 NetSolutions paid the receptionist and the part-time assistant $1,200 for two weeks' wages.

Analysis This is similar to the transaction of December 13.

Dec. 31 NetSolutions paid it's $310 telephone bill for the month.

Analysis You pay a telephone bill each month. Businesses, such as NetSolutions, also must pay monthly utility bills. Such transactions are similar to the transaction of December 6th. The expense account Utilities Expense is debited for $310, and Cash is credited for $310.

Dec. 31 NetSolutions paid its $225 electric bill for the month.

Analysis This is similar to the preceding transaction.

Dec. 31 NetSolutions received $2,870 from fees earned for the second half of December.

Analysis This is similar to the transaction of December 16.

Dec. 31 Fees earned on account totaled $1,120 for the second half of December.

Analysis This is similar to the transaction of December 16.

Dec. 31 Chris Clarke withdrew $2,000 for personal use.

Analysis This transaction resulted in an increase in the amount of withdrawals and is recorded by a $2,000 debit to Chris Clark, Drawing. The decrease in business cash is recorded by a $2,000 credit to cash. 

*WARREN, REEVE, & FESS, 2005, ACCOUNTING, 21ST ED., PP. 58-61*

end