PROBLEMS OF ACCOUNTING CYCLE

PROBLEM-1
Jill Smith opens an apartment-location business near a college campus. She is the sole
owner of the proprietorship, which she names Campus Apartment Locators. During the
first month of operations, July 20X1, she engages in the following transactions:

a. Smith invests $35,000 of personal funds to start the business.

b. She purchases on account office supplies costing $350.
c. Smith pays cash of $30,000 to acquire a lot next to the campus. She intends to use
the land as a future building site for her business office.
d. Smith locates apartments for clients and receives cash of $1,900.
e. She pays $100 on the account payable she created in transaction (b).
f. She pays $2,000 of personal funds for a vacation.
g. She pays cash expenses for office rent, $400, and utilities, $100.
h. The business sells office supplies to another business for its cost of $150.
i. Smith withdraws cash of $1,200 for personal use.

JOURNAL ENTRIES – JULY 20X1

Debit Credit
Date Account (ID) Explanation ↑/↓
($) ($)
Jul 1 Cash (1001) Owner investment ↑ Asset 35,000
Owner Equity(5001) Owner's equity increase ↑ Equity 35,000
Supplies purchased on
Jul 2 Office Supplies (1002) ↑ Asset 350
account
Accounts Payable (2001) Liability increased ↑ Liability 350
Jul 3 Land (1003) Purchased land with cash ↑ Asset 30,000
Cash (1001) Cash decreased ↓ Asset 30,000
Jul 4 Cash (1001) Revenue received ↑ Asset 1,900
Rental Revenue (3001) Revenue earned ↑ Revenue 1,900
Jul 5 Accounts Payable (2001) Partial payment of payable ↓ Liability 100
Cash (1001) Cash paid ↓ Asset 100
Not considered as business
Vacation paid from personal ❌ Not
Jul 6 Transaction — —
funds business
No Entry (Personal Transaction)
Jul 7 Rent Expense (4001) Paid rent ↑ Expense 400
Utilities Expense (4002) Paid utilities ↑ Expense 100
Cash (1001) Cash decreased ↓ Asset 500
Jul 8 Cash (1001) Sold supplies at cost ↑ Asset 150
Office Supplies (1002) Supplies decreased ↓ Asset 150
Jul 9 Owner’s Withdrawal (6001) Owner withdrew cash ↑ Drawing 1,200
Cash (1001) Cash decreased ↓ Asset 1,200
LEDGER ACCOUNT

Cash (1001)
Date Description Debit ($) Credit ($) Balance ($)
Jul 1 Owner Investment 35,000 35,000
Jul 3 Land Purchase 30,000 5,000
Jul 4 Revenue Received 1,900 6,900
Jul 5 Payable Payment 100 6,800
Jul 7 Rent & Utilities 500 6,300
Jul 8 Sold Supplies 150 6,450
Jul 9 Owner Withdrawal 1,200 5,250

Owner Equity (5001)

Date Description Credit ($)
Jul 1 Owner Investment 35,000

Office Supplies (1002)

Date Description Debit ($) Credit ($) Balance ($)
Jul 2 Purchased on Account 350 350
Jul 8 Sold to Other Biz 150 200

Land (1003)
Date Description Debit ($)
Jul 3 Land Purchase 30,000

Accounts Payable (2001)

Date Description Debit ($) Credit ($) Balance ($)
Jul 2 Supplies Purchase 350 350
Jul 5 Paid to Supplier 100 250
Jul 7 Utilities Payable — 250

Rental Revenue (3001)

Date Description Credit ($)
Jul 4 Revenue Earned 1,900

Rent Expense (4001)

Date Description Debit ($)
Jul 7 Rent Paid 400

Utilities Expense (4002)

Date Description Debit ($)
Jul 7 Utilities Paid 100

Owner’s Withdrawal (6001)

Date Description Debit ($)
Jul 9 Cash Withdrawal 1,200
TRIAL BALANCE AS OF JULY 9

Account Title Debit ($) Credit ($)

Cash (1001) 5,250
Office Supplies (1002) 200
Land (1003) 30,000
Accounts Payable (2001) 250
Owner Equity (5001) 35,000
Rental Revenue (3001) 1,900
Rent Expense (4001) 400
Utilities Expense (4002) 100
Owner's Withdrawal (6001) 1,200
Total 37,150 37,150

FINANCIAL STATEMENTS
1. Income Statement 2. Owner’s Equity 3. Balance Sheet
Company Statement As of Month of 2021
Income Statement Company
For the Month of 2021 Owner Equity Liabilities &
Assets $ $
Revenue For the Month of 2021 Owner’s Equity
Rental Revenue 1,900 Opening Capital 35,000
Accounts
Expenses Add: Net Income 1,400 Cash 5,250 250
Payable
Rent Expense 400 Less: Owner Office
(1,200) 200
Utilities Expense 100 Withdrawal Supplies
Total Expenses -500 Ending Capital 35,200 Owner’s
Land 30,000 35,200
Capital
Net Income 1,400
Total Total Liabilities
35,450 35,450
Assets + Equity
 PROBLEM-2
1) The business received $30,000 cash that Gillen invested to begin her travel agency.
2) Gillen paid $20,000 cash for land to be used as an office location.
3) Gillen purchased $500 in office supplies on account payable.
4) Gillen paid $300 on the account payable created in transaction 3.
5) Gillen remodeled her home with personal funds and a loan from Nations Bank.
6) Gillen withdrew $2,100 cash for personal living expenses.

GENERAL JOURNAL

Date Explanation Account & Account ID ↑/↓ Debit ($) Credit ($)
1 Investment by Gillen Cash (1001) ↑ Asset 30,000
Owner's Equity(3001) ↑ Equity 30,000
2 Paid $20,000 for land Land (1003) ↑ Asset 20,000
Cash (1001) ↓ Asset 20,000
3 Purchased $500 supplies on Office Supplies (1004) ↑ Asset 500
account
Accounts Payable
↑ Liability 500
(2001)
4 Paid $300 toward payable Accounts Payable (2001) ↓ Liability 300
Cash (1001) ↓ Asset 300
5 Remodeled home (personal) No journal entry - - -
Withdrew $2,100 for personal Owner's withdrawing
6 use ↑ Drawing 2,100
(3002)
Cash (1001) ↓ Asset 2,100

POSTING TO LEDGER ACCOUNTS

Cash Account
Date Description Debit (Dr) Credit (Cr) Balance
T1 Owner’s Capital 30,000 30,000
T2 Land 20,000 10,000
T4 Accounts Payable 300 9,700
T6 Drawings 2,100 7,600
Land Account
Date Description Debit (Dr) Credit (Cr) Balance
T2 Cash 20,000 20,000
Office Supplies Account
Date Description Debit (Dr) Credit (Cr) Balance
T3 Accounts Payable 500 500

Accounts Payable Account

Date Description Debit (Dr) Credit (Cr) Balance
T3 Office Supplies 500 500
T4 Cash 300 200
Owner’s Capital Account
Date Description Debit (Dr) Credit (Cr) Balance
T1 Cash 30,000 30,000
Drawings Account
Date Description Debit (Dr) Credit (Cr) Balance
T6 Cash 2,100 2,100

TRIAL BALANCE
As of Current Date
Account Title Debit ($) Credit ($)
Cash 7,600
Land 20,000
Office Supplies 500
Accounts Payable 200
Owner’s Capital 30,000
Drawings 2,100
Totals 30,200 30,200
 PROBLEM-3: EXPANDED PROBLEM INCLUDING REVENUES AND EXPENSES

Let's account for the revenues and expenses of the law practice of Jeff Hatton, Attorney,
for the month of July 20X1
1) Jeff Hatton invested $10,000 cash in a business bank account to open his law practice
2) Hatton performed service for a client and collected $3,000 cash
3) Hatton performed service for a client and billed the client for $500 on account
receivable. 4) Hatton earned $700 service revenue by performing legal service for a
client. The client paid Hatton $300 cash immediately. Hatton billed the remaining $400 to
the client on account receivable.
5) Hatton paid the following cash expenses: office rent, $900; employee salary, $1,500;
and utilities, $500.
6) Hatton received a telephone bill for $120 and will pay this expense next week.
7) Hatton collected $200 cash from the client established in transaction 3.
8) Hatton paid the telephone bill that was received and recorded in transaction 6.
9) Hatton withdrew $1,100 cash for personal use.

GENERAL JOURNAL

Date Account & Explanation ↑/↓ Debit ($) Credit ($)

Jul 1 Cash (1001) ↑ Asset 10,000
Owner's Equity (3001) ↑ Equity 10,000
Jul 2 Cash (1001) ↑ Asset 3,000
Service Revenue (4001) ↑ Revenue 3,000
Jul 3 Accounts Receivable (1002) ↑ Asset 500
Service Revenue (4001) ↑ Revenue 500
Jul 4 Cash (1001) ↑ Asset 300
Accounts Receivable (1002) ↑ Asset 400
Service Revenue (4001) ↑ Revenue 700
Jul 5 Office Rent Expense (5001) ↑ Expense 900
Salaries Expense (5002) ↑ Expense 1,500
Utilities Expense (5003) ↑ Expense 500
Cash (1001) ↓ Asset 2,900
Jul 6 Telephone Expense (5004) ↑ Expense 120
Accounts Payable (2001) ↑ Liability 120
Jul 7 Cash (1001) ↑ Asset 200
Accounts Receivable (1002) ↓ Asset 200
Jul 8 Accounts Payable (2001) ↓ Liability 120
Cash (1001) ↓ Asset 120
Jul 9 Owner's Withdrawal (3002) ↑ Drawing 1,100
Cash (1001) ↓ Asset 1,100
 PROBLEMS-4
The trial balance of ABC Computer Service Center on March 1, 20X2, lists the entity’s
assets, liabilities, and owner’s equity on that date.
Trial Balance
Account Title Debit Credit
Cash $26,000
Accounts Receivable $4,500
Accounts Payable $2,000
Larry ABC, Capital $28,500
Total $30,500 $30,500
During March, the business engaged in the following transactions:
(a) Borrowed $45,000 from the bank and signed a note payable in the name of the
business.
(b) Paid cash of $40,000 to a real estate company to acquire land.
(c) Performed service for a customer and received cash of $5,000.
(d) Purchased supplies on credit, $300.
(e) Performed customer service and earned revenue on account, $2,600.
(f) Paid $1,200 on account.
(g) Paid the following cash expenses:
 Salaries: $3,000
 Rent: $1,500
 Interest: $400
(h) Received $3,100 on account.
(i) Received a $200 utility bill that will be paid next week.
(j) Withdrew $1,800 for personal use.
JOURNAL ENTRIES – MARCH 20X2

Date Account & Account (ID) Explanation ↑/↓ Debit ($) Credit ($)
Mar 1 Cash (1001) Borrowed from bank ↑ Asset 45,000
Note Payable (2002) Liability increase ↑ Liability 45,000
Mar 2 Land (1003) Paid cash to buy land ↑ Asset 40,000
Cash (1001) Cash decreased ↓ Asset 40,000
Mar 3 Cash (1001) Received cash for services ↑ Asset 5,000
Service Revenue (3001) Revenue earned ↑ Revenue 5,000
Mar 4 Supplies (1004) Supplies purchased on credit ↑ Asset 300
Accounts Payable (2001) Liability increased ↑ Liability 300
Mar 5 Accounts Receivable (1002) Service performed on account ↑ Asset 2,600
Service Revenue (3001) Revenue earned ↑ Revenue 2,600
Mar 6 Accounts Payable (2001) Paid on account ↓ Liability 1,200
Cash (1001) Cash paid ↓ Asset 1,200
Mar 7 Salaries Expense (4001) Salary paid ↑ Expense 3,000
Rent Expense (4002) Rent paid ↑ Expense 1,500
Interest Expense (4003) Interest paid ↑ Expense 400
Cash (1001) Cash decreased ↓ Asset 4,900
Mar 8 Cash (1001) Received payment on account ↑ Asset 3,100
Accounts Receivable (1002) Receivable reduced ↓ Asset 3,100
Mar 9 Utilities Expense (4004) Utility bill incurred ↑ Expense 200
Accounts Payable (2001) Will pay later ↑ Liability 200
Mar 10 Owner Withdrawal (6001) Owner withdrew cash ↑ Drawing 1,800
Cash (1001) Cash decreased ↓ Asset 1,800

TRIAL BALANCE OF ABC COMPUTER SERVICE CENTRE

Accounts Debit Credit

Cash $31,200
Accounts Receivable $4,000
Land $40,000
Supplies $300
Accounts Payable $1,300
Notes Payable $41,000
Owner’s Capital $28,800
Owner’s Withdrawal $1,800
Service Revenue $7,600
Utilities Expense $200
Internet Expense $400
Rent Expense $1,500
Salaries Expense $3,000
$82,400 $82,400
FINANCIAL STATEMENTS
1) Income Statement (Profit and Loss 2. Owner’s Equity Statement
Account) ABC Computer Service Centre
For the Month Ended March 31, 2023 For the Month Ended March 31, 2023
Revenue
Service Revenue $7,600
Opening Capital 28,500
Expenses
Add: Net Income 2,500
Utilities Expense $200
Less: Owner
Internet Expense $400 (1,800)
Withdrawal
Rent Expense $1,500
Ending Capital 29,200
Salaries Expense $3,000
Total Expenses $5,100
Net Income $2,500
3. Balance Sheet
ABC Computer Service Centre As of March 31, 2023
Assets Liabilities and Owner’s Equity
Cash: $31,200 Accounts Payable: $1,300
Accounts Receivable: $4,000 Notes Payable: $45,000
Land: $40,000
Supplies: $300
Owner’s Equity
Capital (Ending): $29,200
Total Assets: $75,500 Total Liabilities + Equity: $75,500
 PROBLEM-5
Garwood Marine is a boat repair yard. During August its transactions included the following:

1) On August 1, paid rent for the month of August, $4,400.

2) On August 3, at request of Kiwi insurance, Inc., made repairs on boat of Michael Fay. Sent bill
for $5,260 for service rendered to Kiwi Insurance, Inc.
3) On August 9, made repairs to boat of Dennis Conner & collected in full the charge of $2,830.
4) On August 14, placed advertisement in Yatching World to be published in issue of august 20
at cost of $165, payment to be made within 30 days.
5) On August 25, received a check for $5,260 from Kiwi Insurance, Inc., representing collection of
the receivable of August 3.
6) On August 26, made repairs on the vessel Independent totaling $1,890. Collected $400 cash;
balance due in within 30 days.
7) On August 30, sent check to Yatching World in payment of the liability incurred on August 14.
8) On August 31, Barbara Garwood, owner of Garwood Marine, withdrew $7,600 for personal use.

GARWOOD MARINE - JOURNAL ENTRIES FOR AUGUST

Date Account & Explanation Debit Credit
Aug 1 Rent Expense 4,400
Cash 4,400
(Paid rent for August)
Aug 3 Accounts Receivable – Kiwi Insurance Inc. 5,260
Service Revenue 5,260
(Billed Kiwi Insurance for boat repairs)
Aug 9 Cash 2,830
Service Revenue 2,830
(Received cash for repairs from Dennis Conner)
Aug 14 Advertising Expense 165
Accounts Payable – Yachting World 165
(Placed ad in Yachting World, to be paid later)
Aug 25 Cash 5,260
Accounts Receivable – Kiwi Insurance Inc. 5,260
(Received payment from Kiwi Insurance)
Aug 26 Cash 400
Accounts Receivable – Independent 1,490
Service Revenue 1,890
(Partial cash and receivable for vessel Independent repairs)
Aug 30 Accounts Payable – Yachting World 165
Cash 165
(Paid for ad placed on August 14)
 EXPLANATION

August 1 – Rent Payment:

Rent is an expense for the business, so "Rent Expense" is debited.
Cash is reduced, so "Cash" is credited.

August 3 – Service Rendered to Kiwi Insurance:

Since the service was provided but not paid immediately, "Accounts Receivable" is debited,
meaning the company expects to receive payment.
Revenue is recorded by crediting "Service Revenue."

August 9 – Service Rendered and Cash Collected:

Since the payment was received immediately, "Cash" is debited.
"Service Revenue" is credited to record the earnings.

August 14 – Advertisement Expense Incurred:

"Advertising Expense" is debited because it is a cost incurred.
Since the payment will be made later, "Accounts Payable" is credited to recognize the liability.

August 25 – Payment Received from Kiwi Insurance:

"Cash" is debited because the payment is received.
"Accounts Receivable" is credited to remove the amount owed by Kiwi Insurance.

August 26 – Service on Vessel Independent (Partial Payment Received):

The total service revenue is $1,890, so "Service Revenue" is credited.
Only $400 was received in cash, so "Cash" is debited.
The remaining $1,490 is still to be received, so "Accounts Receivable" is debited.

August 30 – Payment of Advertisement Expense:

Since the company paid off its liability, "Accounts Payable" is debited.
Cash is reduced, so "Cash" is credited.

August 31 – Owner’s Withdrawal for Personal Use:

When an owner withdraws money, it is recorded as "Drawing" (equity reduction), so "Barbara
Garwood, Drawing" is debited.
Cash is credited to reflect the reduction in company funds.
 IMPORTANT ACCOUNTING POINT

"On account" means the transaction is on credit, not paid in cash immediately.
o If you provide service on account → customer will pay later (you create Accounts
Receivable).
o If you buy on account → you will pay later (you create Accounts Payable).
Example:
 Sold service on account → customer owes you → Accounts Receivable.
 Bought supplies on account → you owe supplier → Accounts Payable.

Debit & Credit Rules (Made Easy):

Type Increase Decrease

Asset Debit Credit
Liability Credit Debit
Owner's Equity Credit Debit
Revenue Credit Debit
Expense Debit Credit
Withdrawal Debit Credit

Quick Rules to Remember:

 Assets ↑ → Debit
 Liabilities ↑ → Credit
 Expenses → Always Debit
 Revenues → Always Credit
 Owner’s Withdrawal → Debit
 Owner’s Investment → Credit

Tips:
 Paying rent, utilities, salaries = Expenses → Debit
 Earning from services = Service Revenue → Credit
 Buying something = Asset (like Supplies, Land) → Debit
 Selling something on credit = Accounts Receivable → Debit, Revenue → Credit
 Borrowing money = Cash → Debit, Notes Payable → Credit
 Repaying loan = Notes Payable → Debit, Cash → Credit


ACCOUNT IDS
Assets Liabilities Expenses
Cash – 1001 Accounts Payable – 2001 Salaries Expense – 4001
Office Supplies – 1002 Accounts Receivable – Utilities Expense – 4002
Land – 1003 2002 Rent Expense – 4003
Equipment – 1004 Notes Payable – 2003 Supplies Expense – 4004
Buildings – 1005
Revenue
Owner’s Equity – 5001 Rental Revenue – 3001
Owner’s Withdrawals – 6001 Service Revenue – 3002

Transactions and Their Effects:

 Owner invests money →
→ Cash (Asset) increases → Debit
→ Owner’s Equity increases → Credit
 Owner withdraws money →
→ Owner’s Withdrawal (Drawing) increases → Debit
→ Cash decreases → Credit
 Buying assets (e.g., land, equipment) →
→ Asset account increases → Debit
→ Cash or Accounts Payable increases → Credit
 Paying bills (e.g., rent, utilities) →
→ Expense account increases → Debit
→ Cash decreases → Credit