Ch. 2 Financial Statements and Adjusting Entries
2.1 Review of Horizontal Model
Learning Objectives
After finishing this section, students will be able to:
- Process transactions in the horizontal model using Excel.
A transaction is a business activity or event that has an effect on financial information presented on financial statements. The information to record a transaction comes from an original source. An original source can be an invoice, a bill, a bank statement, or a legal document.
The following transactions occur for the first month, January 20X9, of operations for Printing Plus, a printing service company.
| Date | Transaction |
|---|---|
| Jan. 3 | Issues $20,000 shares of common stock for cash. |
| Jan. 5 | Purchases equipment on account for $3,500, payment due within the month. |
| Jan. 9 | Receives $4,000 cash in advance from a customer for services not yet rendered. |
| Jan. 10 | Provides $5,500 in services to a customer who asks to be billed for the services. |
| Jan. 12 | Pays a $300 utility bill with cash. |
| Jan. 14 | Distributes $100 cash in dividends to stockholders. |
| Jan. 17 | Receives $2,800 cash from a customer for services rendered. |
| Jan. 18 | Pays in full, with cash, for the equipment purchase on January 5. |
| Jan. 20 | Pays $3,600 cash in salaries expense to employees. |
| Jan. 23 | Receives cash payment in full from the customer on the January 10 transaction. |
| Jan. 27 | Provides $1,200 in services to a customer who asks to be billed for the services. |
| Jan. 30 | Purchases inventory on account for $500, payment due within three months. |
Transaction Jan. 3
Issues $20,000 shares of common stock for cash.
Source Document: Share Certificate
| Balance Sheet | Income Statement | Stmt of Cash Flows | |||||||||||||
| Cash | + | Noncash Assets | = | Liability | + | Common Stock | + | Retained Earnings | Revenue | – | Expense | = | Net Income | Cash | OA,IA,FA |
| 20,000 | = | 20,000 | 20,000 | FA | |||||||||||
Transaction Jan. 5
Purchases equipment on account for $3,500, payment due within the month. Accounts Payable is a liability and used to keep track of vendor bills to be paid later. An easy way to remember this is that you are liable to pay the vendors for items purchased.
Source Document: Invoice
| Balance Sheet | Income Statement | Stmt of Cash Flows | |||||||||||||
| Cash | + | Equipment | = | Accounts Payable | + | Common Stock | + | Retained Earnings | Revenue | – | Expense | = | Net Income | Cash | OA,IA,FA |
| 3,500 | = | 3,500 | |||||||||||||
Transaction Jan. 9
Receives $4,000 cash in advance from a customer for services not yet rendered. Unearned Revenue is a liability used to keep track of payments customers have paid before the service is provided. Because the service has not been provided, it cannot be put on the income statement. If you do not provide the service for the customers, you are liable to pay the customers back.
Source Document: Customer Check
| Balance Sheet | Income Statement | Stmt of Cash Flows | |||||||||||||
| Cash | + | Noncash Assets | = | Unearned Revenue | + | Common Stock | + | Retained Earnings | Revenue | – | Expense | = | Net Income | Cash | OA,IA,FA |
| 4,000 | = | 4,000 | 4,000 | OA | |||||||||||
Transaction Jan. 10
Provides $5,500 in services to a customer who asks to be billed for the services. Accounts Receivable is used to keep track of money customers owe. An easy way to remember this is you will receive money from customers. The service has been provided so the revenue can be put on the income statement.
Source Document: Work Order returned from service tech
| Balance Sheet | Income Statement | Stmt of Cash Flows | |||||||||||||
| Cash | + | Accounts Receivable | = | Liability | + | Common Stock | + | Retained Earnings | Revenue | – | Expense | = | Net Income | Cash | OA,IA,FA |
| 5,500 | = | 5,500 | 5,500 | – | = | 5,500 | |||||||||
Transaction Jan. 12
Pays a $300 utility bill with cash.
Source Document: Utility Bill
| Balance Sheet | Income Statement | Stmt of Cash Flows | |||||||||||||
| Cash | + | Noncash Assets | = | Liability | + | Common Stock | + | Retained Earnings | Revenue | – | Utility Expense | = | Net Income | Cash | OA,IA,FA |
| -300 | = | -300 | – | 300 | = | -300 | -300 | OA | |||||||
Transaction Jan. 14
Distributes $100 cash in dividends to stockholders. Remember the Retained Earnings formula is Beg R/E ($0) + Net Income ($0) – Dividends ($100) = End R/E (-$100).
Source Document: Email from Board of Directors (may vary by state)
| Balance Sheet | Income Statement | Stmt of Cash Flows | |||||||||||||
| Cash | + | Noncash Assets | = | Liability | + | Common Stock | + | Retained Earnings | Revenue | – | Expense | = | Net Income | Cash | OA,IA,FA |
| -100 | = | -100 | -100 | FA | |||||||||||
Transaction Jan. 17
Receives $2,800 cash from a customer for services rendered. Customer paid cash in full at time of the service so an entry does not need to be made in Accounts Receivable.
Source Document: Customer Check
| Balance Sheet | Income Statement | Stmt of Cash Flows | |||||||||||||
| Cash | + | Noncash Assets | = | Liability | + | Common Stock | + | Retained Earnings | Revenue | – | Expense | = | Net Income | Cash | OA,IA,FA |
| 2,800 | = | 2,800 | 2,800 | – | = | 2,800 | 2,800 | OA | |||||||
Transaction Jan. 18
Pays in full, with cash, for the equipment purchase on January 5. The purchase of the equipment has already been recorded and is being tracked under Accounts Payable. As cash decreases, accounts payable also decreases because less money is owed.
Source Document: Check used for business checking account
| Balance Sheet | Income Statement | Stmt of Cash Flows | |||||||||||||
| Cash | + | Noncash Assets | = | Accounts Payable | + | Common Stock | + | Retained Earnings | Revenue | – | Expense | = | Net Income | Cash | OA,IA,FA |
| -3,500 | = | -3,500 | -3,500 | IA | |||||||||||
Transaction Jan. 20
Pays $3,600 cash in salaries expense to employees.
Source Document: Employee Time Card
| Balance Sheet | Income Statement | Stmt of Cash Flows | |||||||||||||
| Cash | + | Noncash Assets | = | Liability | + | Common Stock | + | Retained Earnings | Revenue | – | Wages Expense | = | Net Income | Cash | OA,IA,FA |
| -3,600 | = | -3,600 | – | 3,600 | = | -3,600 | -3,600 | OA | |||||||
Transaction Jan. 23
Receives cash payment in full from the customer on the January 10 transaction.
Source Document: Customer Check
| Balance Sheet | Income Statement | Stmt of Cash Flows | |||||||||||||
| Cash | + | Accounts Receivable | = | Liability | + | Common Stock | + | Retained Earnings | Revenue | – | Expense | = | Net Income | Cash | OA,IA,FA |
| 5,500 | + | -5,500 | = | 5,500 | OA | ||||||||||
Transaction Jan. 27
Provides $1,200 in services to a customer who asks to be billed for the services.
Source Document: Work Order returned from service tech
| Balance Sheet | Income Statement | Stmt of Cash Flows | |||||||||||||
| Cash | + | Accounts Receivable | = | Liability | + | Common Stock | + | Retained Earnings | Revenue | – | Expense | = | Net Income | Cash | OA,IA,FA |
| 1,200 | = | 1,200 | 1,200 | – | = | 1,200 | |||||||||
Transaction Jan. 30
Purchases inventory on account for $500, payment due within three months. Inventory is an asset you own and is tracked until an entry is made from an adjusting entry or sale of product to a customer to show the inventory has been sold. When you later pay the inventory, you will reduce how much money you owe to the vendor.
Source Document: Vendor Bill
| Balance Sheet | Income Statement | Stmt of Cash Flows | |||||||||||||
| Cash | + | Inventory | = | Accounts Payable | + | Common Stock | + | Retained Earnings | Revenue | – | Expense | = | Net Income | Cash | OA,IA,FA |
| 500 | = | 500 | |||||||||||||
Summary
When January transactions are put into the same horizontal model, the last row can be summed to find the account balances (in bold). In the next section, we will create adjusting entries.
| Balance Sheet | Income Statement | Stmt of Cash Flows | ||||||||||||||||||||||
| Cash | + | Accounts Receivable | + | Inventory | + | Equipment | = | Accounts Payable | + | Unearned Revenue | + | Common Stock | + | Retained Earnings | Revenue | – | Expense | = | Net Income | Cash | OA,IA,FA | Description | ||
| J3 | 20,000 | + | + | + | = | + | + | 20,000 | + | – | = | 20,000 | FA | Stock | ||||||||||
| J5 | + | + | + | 3,500 | = | 3,500 | + | + | + | – | = | – | – | Equipment | ||||||||||
| J9 | 4,000 | + | + | + | = | + | 4,000 | + | + | – | = | 4,000 | OA | Cust. Pay | ||||||||||
| J10 | + | 5,500 | + | + | = | + | + | + | 5,500 | 5,500 | – | = | 5,500 | – | – | Revenue | ||||||||
| J12 | -300 | + | + | + | = | + | + | + | -300 | – | 300 | = | -300 | -300 | OA | Utility Exp | ||||||||
| J14 | -100 | + | + | + | = | + | + | + | -100 | – | = | -100 | FA | Dividends | ||||||||||
| J17 | 2,800 | + | + | + | = | + | + | + | 2,800 | 2,800 | – | = | 2,800 | 2,800 | OA | Cust. Pay | ||||||||
| J18 | -3,500 | + | + | + | = | -3,500 | + | + | + | – | = | -3,500 | IA | Equipment | ||||||||||
| J20 | -3,600 | + | + | + | = | + | + | + | -3,600 | – | 3,600 | = | -3,600 | -3,600 | OA | Wages Exp | ||||||||
| J23 | 5,500 | + | -5,500 | + | + | = | + | + | + | – | = | 5,500 | OA | Cust. Pay | ||||||||||
| J27 | + | 1,200 | + | + | = | + | + | + | 1,200 | 1,200 | – | = | 1,200 | – | – | Revenue | ||||||||
| J30 | + | + | 500 | + | = | 500 | + | + | + | – | = | – | – | Inventory | ||||||||||
| 24,800 | + | 1,200 | + | 500 | + | 3,500 | = | 500 | + | 4,000 | + | 20,000 | + | 5,500 | 9,500 | – | 3,900 | = | 5,600 | 24,800 | Totals | |||
2.1a Example
Watch video from 0:00 to 10:47
Wood, Corp was created on June 1, 20X6. The company owns and operates a shoe store. The following transactions occurred.
| Date | Transaction Detail |
|---|---|
| 1 | Issued 100,000 shares of common stock in exchange for $250,000 cash. |
| 2 | Purchased fixtures (asset) at a cost of $100,000. $40,000 was paid in cash and a note payable was signed for the balance owed. |
| 3 | Paid $14,000 in rent on the building for the month of June. |
| 4 | Purchased inventory on account at a cost of $200,000. |
| 5 | Credit sales (on account) for the month totaled $280,000. |
| 6 | Paid $120,000 on account for merchandise purchased in transaction 4. |
| 7 | Collected $55,000 from customers on account billed in transaction 5. |
| 8 | Paid $2,500 for utilities expense. |
| 9 | Paid $24,000 for 12 months of insurance. |
| 10 | Paid $3,000 for advertising expense. |
| 11 | Paid dividends of $4,750. |
Instructions:
- Using the Horizontal Model, prepare entries for the above transactions.
2.1a Practice
Geller Enterprises had the following balances as of December 31, Year 3.
- Assets: Cash, $54,000; Accounts Receivable, $51,000; Land, $33,000
- Liabilities and Equity: Accounts Payable, $24,000; Common Stock, $103,000; Retained Earnings, 11,000
Using the Horizontal Model, prepare entries for the below transactions.
| Date | Transaction Detail |
|---|---|
| 1 | Issued 50,000 shares of common stock in exchange for $48,000 cash. |
| 2 | On March 1, paid $5,400 in advance for a one-year lease for office space. |
| 3 | Paid a $1,800 dividend to the stockholders. |
| 4 | Purchased additional land that cost $45,000. |
| 5 | Paid $12,000 of bills in accounts payable. |
| 6 | On July 1, received $7,600 in advance as a retainer for services to be performed monthly over the coming year. |
| 7 | Sold land for $22,000 cash that had an original cost of $22,000. |
| 8 | Earned $69,000 of service revenue on account during the year. |
| 9 | Collected $55,000 from customers on account. |
| 10 | Incurred other operating expenses on account during the year that amounted to $11,000. |
Check Figures:
- Cash, $122,400
- Accounts Receivable, $65,000
- Retained Earnings, $67,200
- Solution (Excel file will download)
2.1 a Homework
Grazy Strokes Glass Blowers was created on August 1, 20X4. The company produces high end vases. The following transactions occurred.
| Date | Transaction Detail |
|---|---|
| 1 | Acquired cash of $65,000 from the issue of common stock. |
| 2 | Purchased inventory on account of $25,000 |
| 3 | Purchase land costing $18,000 with cash. |
| 4 | Paid $2,200 on account for merchandise purchases in transaction 2. |
| 5 | Credit sales (on account) for the month totaled $43,000. |
| 6 | Paid cash of $18,000 for the next year’s administrative rent expenses. |
| 7 | Collected cash of $37,000 from customers. |
| 8 | Paid $2,200 on account for merchandise purchases in transaction 2. |
Instructions:
- Using the Horizontal Model, prepare entries for the above transactions.
Licensing and Attribution:
Content on this page is adapted from the following openly licensed resource(s):
Principles of Accounting, Volume 1: Financial Accounting by Mitchell Franklin, Patty Graybeal, and Dixon Cooper licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License
is a business activity or event that has an effect on financial information presented on financial statements.
