let's review chapters 5 through 9 and 11 so this first question that we'll be working through is from chapter 5 when you learned about merchandising operations so it says summer company sold $1,000 of merchandise to Wilkes Company fov shipping point terms 2/10 net 30 the goods cost summer companies 650 dollars so we're first going to talk about just the journal entry or journal entries that we need to make for this sale so whenever you're a merchandising company you have two different entries for the sale the first entry is going to deal with what you sold the merchandise for right so what are you getting as the seller and how much revenue did you make the second entry is for how much those goods that you sold originally cost you right to the cost of the goods sold so we have those two entries so this first entry will be accounts receivable debited for 1,000 and sales revenue credited for 1,000 so the first entry will be accounts receivable and sales revenue because that's the amount of money that we sold this merchandise for so we want to count all of that revenue under our sales revenue and now how do we know that its accounts receivable and not cash let's say well those terms when you are given terms like that that means that it was a sale on account so we debit our accounts receivable because Wilkes company owes us $1,000 so that's for the selling price right the second entry this is for the cost of these goods so we debit cost of goods sold cost of goods sold is an expense account so that expenses increasing here with us debit and then we need to credit inventory what does crediting inventory do well inventory is an asset and so if we credit an asset it's decreasing that balance and why does that make sense well if we were to sell goods to Wilkes company we now have less inventory in our warehouse writes our inventory here has to decrease so we decrease our inventory by the six hundred and fifty dollars so those are the two entries that are made when you make a sale first we deal with the credit sale itself right we say how much do does the buyer oh us and how much in revenue did we make the second entry is how much was were these goods worth to us right what was the cost of those goods sold and how much inventory did we sell so those are your two entries now let's go back up to the original problem and talk about a few of these points in here first fop shipping point what does that mean well under fov shipping point that means that the buyer has to pay for the shipping so in this example Wilkes company would have to pay for the shipping and whenever the buyer pays for shipping they count that under inventory because it was it was an additional cost to them in order to acquire that inventory now the other option here would have been FOBT destination in that case the seller pays for the shipping and in that journal entry we would end up debiting Freight out which is another expense account so that deals with who pays for the freight costs and then this next point terms to 10 net 30 so we said earlier that that was the key that told us that it was on account now why well if we break out this this little phrase here what this is saying is that if Wilkes company pays within 10 days they get a 2 percent discount right so terms 2 10 so 2 percent discount if they pay within 10 days or they have to pay the net they have to pay all of it within 30 days so terms 2/10 net 30 so why does that mean that it's on account well because we're talking about if they pay within 10 days or if they pay within 30 days so that means that they didn't pay at the time of the purchase so these terms have replaced the little phrase where it would say the sale was made on account now why would a company give these discounts right why would summer company want to give Wilkes a 2 percent discount well they want to get their money now right so summer company was willing to give Wilkes a little bit of a discount just a 2 percent discount if they paid quickly right if they pay within the first 10 days so it's just a way to motivate a buyer to pay the money back that they owed now when this discount is recorded in a journal entry if we were summer company we we would record that 2% discount under the account sales discount if we were Wilkes company if we were the buyer we would record that 2% discount under inventory so now let's talk about perpetual inventory so this is when you started working into chapter six so you started to learn about FIFO LIFO and average cost right fight foes first-in first-out LIFO last in first out and the average cost we combined all of our inventories to figure out a average unit cost right so one piece that's really important here when you are working with FIFO LIFO or average cost you only pay attention to the cost you might be told a selling price but that selling price is not important to us when we need to figure out the cost of goods sold and the ending inventory under each of FIFO LIFO and average cost we do not worry about that selling price right if we take a look back at the journal entries that we just did we would only care about that six hundred and fifty we would only care about the 650 for cost of goods sold and the 650 for inventory we would not care about that 1,000 dollar amount and that is true for FIFO LIFO and average cost now what are some of the benefits of FIFO and LIFO well FIFO is going to give you a lower cost of goods sold and we said earlier cost of goods sold is an expense so if you have a lower cost of goods sold you have a higher net income right so a company using FIFO is going to show a higher net income now what about life oh well LIFO gives you a higher cost of goods sold so that means you're gonna have a lower net income so that doesn't sound very good right well if we have a lower income that also means that we have less in taxes so if a company is using LIFO they'll be having to pay less than income taxes so average cost is gonna be somewhere between your FIFO and LIFO amounts it's not gonna be as high of a net income or as low of a net income as you would see in FIFO and LIFO it would just be somewhere in between those two now a company cannot just switch back and forth right they're not gonna say oh well in 2019 we're gonna go with FIFO 2020 we're gonna go LIFO and 2021 we're gonna go with average cost they have to go back multiple years and redo all of their financial statements to show what would our net income have been if we use this new inventory method right so a lot of companies are going to pick one method and stick with it now they can make a change but if they make a change they're then going to stick with that new one and not just constantly make changes year after year now in Chapter 7 you started learning about special journals so we had a few different special journals right we had the sales journal but purchases journal cash receipts cash payments and the general journal and then you had to identify which journal a bunch of transactions would fall into right so when you're working with special journals I want the first question that you ask yourself to be is cash involved in the transaction if cash is involved you will either record it in the cash receipts journal or the cash payments journal if cash is not involved then you know that is either going to be sales purchases or the general journal for something to go into the sales journal it needs to be a sale of merchandise on account for something to go into the purchases journal it needs to be a purchase of merchandise on account and then adjusting closing and correcting entries would all fall into the general journal so we'll go through a few transactions here and figure out which special journal they should fall into first cash sales so we made let's say $1,000 in cash sales which journal would that fall into well again the first question is cash involved yes so we know it's either cash receipts or cash payments well cash receipts are when we receive cash cash payments are when we pay cash so if we're making cash sailes we are receiving cash so it would go into your cash receipts journal next one credit sale of merchandise so we think is cash involved no right it's a credit sale so then we can fall under sales journal purchases journal or general journal well the sales journal we said were any sales of merchandise on account another way to phrase that is a credit sale of merchandise so this one's gonna go into the sales journal now owner withdraws cash is cash involved yes so it's either cash receipts or cash payments is the company getting cash or is the company losing cash again we don't look at it from the perspective of the owner we look at it from the perspective of the company itself and when an owner withdraws cash from the company the company is losing cash so it's the cash payments journal now purchase of merchandise on account so we ask ourselves is cash involved no right so it's either gonna be the sales journal the purchases journal or the general journal well it's not the sales journal because we said that was any sale of merchandise on account what about the purchases journal we said that was any purchase of merchandise on account so this is the definition of what goes into the purchase journal now cash purchase of land so again the first question is cash involved yes then we think are we getting cash or are we losing cash well if we are buying land we are paying cash so this goes into the cash payments journal and then our last one our equipment depreciates so if we think back to when we learned about recording depreciation right when we debit depreciation expense and credit accumulated depreciation that's an adjusting entry and we said earlier that adjusting entries along with closing entries and correcting entries all fall under the general journal so those are your special journals right the sales journal the purchases journal the general journal and then your cash receipts and your cash payments now in Chapter eight you learned about bank reconciliation and why does a company even deal with bank reconciliation well the amount on their bank statement of the amount of money that they have might not match what their books say what their ledger would say and that's not good right because you have a definitive amount of cash so if they don't match something's up right so you do these bank reconciliations to adjust these cash balances so that way your adjusted cash balance per Bank and per books equal at the end so we have this example problem here and it says Terry Davidson is unable to reconcile the bank balance at May 31st correct the errors in Davidson's reconciliation below so what Terry Davidson did wrong was putting these adjustments in the wrong spots we need to fix that so we'll start off with the same cash balance per Bank and cash balance per books as the example problem has then we need to think about what would get added to the cash balance per bank well so this is gonna be something that the bank doesn't know about and would increase the balance in your bank account so that's going to be a deposit in transit so what is a deposit in transit well this is gonna be any time that you have recorded a deposit in your books it just hasn't gotten to the bank yet you can even think about it as you just recorded it in in the ledger and you're currently on the way to the bank that deposit is in transit right you know about that five hundred and thirty dollars the bank doesn't know about it yet so once the bank finds out about it it's going to be added to your bank balance now what would get subtracted from your cash balance per Bank so again this is going to be something that the bank does not know about and would decrease the amount of money in your bank account so that's your outstanding checks so what is an outstanding check well let's say you loved this review so much and you thought hey Steven you know what I'm gonna write you a check for seven hundred and thirty dollars but I get this check and I just hold on to it for a little bit to you you've written that check you don't have that seven hundred and thirty dollars yet but until I take that check to the bank the bank has no idea that you wrote down on a piece of paper that you're giving me seven hundred and thirty dollars right so until I take that check to the bank it's an outstanding check because it's still out there in the world so the bank would not know about that and once they find out it's going to decrease your bank balance right so that's why we subtract it here on the bank reconciliation so now our adjusted cash balance per Bank well we're gonna take our initial cash balance per bank that three thousand five hundred and sixty and we add in the deposits in transit and we subtract out the outstanding checks and we'll get an adjusted cash balance per bank of three thousand three hundred and sixty dollars and twenty cents so now we can take a look at the cash balance perk books well we know that the only two adjustments left are the NSF check and the bank service charge so those are going to go over here on the cash balance per books but we just now need to figure out where they would go so let's talk about an NSF check first an NSF check is going to be subtracted from your cash balance per books and why well an NSF check is when you receive a check that you thought was was a good check but then realized after it after you deposited it it bounced right NSF is not sufficient funds so it's a check that someone else wrote to you and that person did not have enough money to write you this check so we have to now subtract this 490 dollar check that we got off of our books because we never actually got that money now our only other adjustment here is a bank service charge so we think about this as we may have known that a bank was going to charge us $25 here right there might be some monthly fee but we hadn't recorded it yet so we need to adjust our our books to account for this bank service charge now with this add to or subtract from our cash balance per books it's going to subtract from it right if the bank charges you $25 there's no world where that is going to add to what you have in your bank account right so it's gonna take away $25 from your bank account so we need to subtract that $25 here now it's okay that we don't have anything that's going to add to our cash balance per books but what sort of scenarios could there be well a common one is a note collected by the bank right so if we were told that the bank collected a $500 note with $50 interest and a $10 fee we would have to record that under the ad section of our pur books as a note collected by the bank and then the amount that we would include would be the face value plus the interest minus the fee so that's how we would figure out the number that would go on our bank reconciliation but here we didn't have anything that was going to add to our per books side so let's figure out our adjusted cash balance per books so we take our cash balance per books that 3875 and we add or we subtract out our NSF check and we subtract out our bank service charge and we get three thousand three hundred and sixty dollars and twenty cents number looks familiar and why is that because it's the same as our adjusted cash balance per bank it's not a coincidence it's why we did all of this work right we wanted to be able to show that our cash balance per bank is the same as our cash balance per books because we have three thousand three hundred and sixty dollars whether you look in our ledger or you look in the bank now another part of bank reconciliation our journal entries you would need to journalize only the adjustments on the per books side right because those are the adjustments that you are making to your books to your ledger and so those are the ones that would have to be journalized so we would need to make journal entries for the check and the bank service charge now let's move on to the allowance method so you learned about the allowance method in Chapter nine so this is a way for companies to estimate uncollectible amounts right in a perfect world everyone's going to pay you back everything that they owe you unfortunately that's not how it works in the real world right so a company uses these methods in order to account for that to figure out what can we expect to be an uncollectible amount so under the allowance method we have two different ways of doing this we can do it the percentage of sales basis or the percentage of receivables basis so we're gonna do both of those here in this problem so it says the ledger of preston company at the end of the year shows accounts receivable with a hundred and seventy five thousand dollars sales revenue five hundred and fifty thousand and sales returns and allowances thirty five thousand then if allowance for doubtful accounts has a credit balance of two thousand one hundred dollars in the trial balance we need to journalize the adjusting entries at December 31st assuming bad debts are expected to be first one percent of net sales and then we'll do this problem again under the percentage of receivables basis and say that our bad debts are expected to be ten percent of accounts receivable so before we even start thinking about the adjusting entry itself and the journal entry we need to first figure out the numbers to you in the century so we're first working on this 1% of net sales well we weren't given net sales but we were given the pieces to find net sales so we take our sales revenue and we subtract down our sales returns and allowances so 550,000 minus 35,000 and your net sales will be five hundred and fifteen thousand dollars so we're saying that our bad debts will be 1% of that right so what is 1% of our net sales so we take 1% of five hundred and fifteen thousand dollars and multiply it by point zero one and we see that one percent of our net sales are five thousand one hundred and fifty dollars so we can now look at our adjusting entry your adjusting entry will be a debit to bad debt expense and a credit to allowance for doubtful accounts so allowance for doubtful accounts is a contra asset it goes against your accounts receivable now we were initially told that our allowance for doubtful accounts has a credit balance of two thousand one hundred when you are working in the percentage of sales basis you don't even worry about that number that twenty one hundred that's gonna come into play once we do the percentage of receivables but in this case we just toss in that one percent of net sales into your bad debt expense and your allowance for doubtful accounts so now let's look at part two right assuming that bad debts are expected to be 10 percent of accounts receivable well they gave us our accounts receivable right so we take ten percent of that so one hundred and seventy-five thousand dollars times 0.1 zero the 10% and we find that that number is 17,500 now this is where that existing balance and allowance for doubtful accounts is gonna come into play we make a t-account right make a tea account for our allowance for doubtful accounts and it told us that it started off with a credit balance of 2100 so we put that into our tea account and we just found the 10% of accounts receivable that's what we want the ending balance to be and allowance for doubtful accounts so we're starting off with 2100 on the credit side and we want to end with 17,500 on the credit side so how much do we need to credit allowance for doubtful accounts to get from 2100 to 17500 well to do that you subtract those two amounts and you'll see that you need to credit an additional fifteen thousand four hundred so now we have everything that we need to journalize our adjusting entry the framework of the entry is exactly the same you debit your bad debt expense and you credit your allowance for doubtful accounts for how much 15400 the amount that you had to adjust your allowance for doubtful accounts for to go from that beginning balance to the ending balance that you calculated now let's move on to chapter 11 where you started learning the difference between gross earnings net pay started learning about some taxes right so gross earnings what what are gross earnings well that's gonna be the total amount earned by the employee so if you think of this as the number of hours worked times your hourly wage right if you worked 40 hours this week and you make $10 an hour your gross earnings would be four hundred dollars but your gross earnings is not what your paycheck is probably for right your paycheck is gonna be what your net pay is so that's the total amount received by the employee or the total amount that the company has to pay the employee and how do we get that that's your gross earnings minus your deductions so deductions are taxes insurance right all of those things that gets get taken out of your paycheck those are all of your deductions so you subtract that from your gross earnings and that's how you get your net pay now if you have to record the journal entry for the pay for the period your gross earnings will be your salaries and wages expense number right expense earnings you would debit that then you would credit all of your taxes payable right let's say federal income taxes payable FICA taxes payable right all of those taxes would be credited and then you would also credit your salaries and wages payable and that salaries and wages payable is your net pay right so net pay goes into the payable and the earnings go into the expense now one of the taxes that you learned about was FICA taxes so you learn that FICA taxes were seven point six five percent that's not just some random number that's made up of two different taxes you have 6.2 percent and one point four five percent so what's that 6.2 percent that's your social security tax right now this has a special limit on it right so up to a hundred and seventeen thousand dollars in gross earnings per year so someone will have to pay Social Security taxes up until they hit that threshold once they make more than a hundred and seventeen thousand dollars in a year they no longer have to deal with any Social Security taxes now the one point four five percent that's Medicare now with Medicare there is no limit if you make seven million dollars every single dollar is being taxed for Medicare right so someone who is under that one hundred and seventeen thousand dollar limit is paying seven point six five percent in FICA taxes anyone above that limit of a hundred and seventeen thousand is paying only one point four five percent in Medicare taxes
