Quiz 3: The Income Statement

Business

1. Journal entry: This is the way of recording of accounting transaction. Prepare the required journal entries of May 2013 as below: img Describe each journal as below. May 1: Cash: This is an asset and decreases, therefore credited by $3,000. Prepaid insurance: The advance payment of insurance premium is known as prepaid insurance. It is an asset and increases, therefore debited by $3,000. May 4: There should not be any entry, because there is no transaction. May 7: Service revenue: This is the earning by providing spa service. Any sort of earning should be credited. Therefore service revenue of $860 is also credited. Accounts receivable: This is the due amount from customers. Since the earning is not received, it increases assets. Therefore accounts receivable of $860 is debited. May 10: Supplies: This is an asset and increases, therefore debited by $800. Accounts payable: This is the due amount of supplier. It creates liability, since nonpayment. Therefore accounts payable of $800 is credited. May 13: Advertising expense: This is the expense during the month, therefore debited by $60 for charging in the income statement. Cash: This is an asset and decreases, therefore credited by $60. May 16: Cash: This is an asset and decreases, therefore credited by $200. One-quarter of $800 is $200. Accounts payable: The liability of nonpayment is reduced, therefore debited by $200. May 19: Cash: This is an asset and increases, therefore debited by $1,900. Unearned revenue: This is the amount of earnings received in advance. It creates liability and should be credited by $1,900. May 20: Cash: This is an asset and increases, therefore debited by $5,000. Note payable: This is the signing amount of borrowing loan. It is a liability of the company by crediting. Therefore $5,000 is credited as note payable. May 22: Massage table: This is an asset and increases by debiting. Therefore this account is debited by $500. Cash: This is an asset and decreases, therefore credited by $500. May 25: Utility expense: This is the expense during the month, therefore debited by $500 for charging in the income statement. Cash: This is an asset and decreases, therefore credited by $500. 2. Income statement: This is the statement of net income during a period. Net income is the difference of total revenue and total expense. Revenue: This is the income of a firm during an accounting period. The income is recognized as and when goods are delivered or services are provided. Expense: This is the amount of obligation for payment during an accounting period. The obligation may be paid instantly or may be kept as outstanding. Prepare the income statement of May 2013 below: img Net income is the difference of total revenues and total expenses. Net income is positive here. It indicates excess of revenue over expense. The company is profit making. 3. Option 'c' is correct. Recording of supplies expense during the month and income taxes of the earning of the month should be adjusted before finalizing the income statement of the month. Supplies expense: This is amount of use of supplied materials to the company during the month. This is the cost of material. It increases expense and reduces the net income. Income tax: This is the liability of tax on earnings during the month. It is an expense and also reduces the net income.

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b. Debit: Cash; Credit: Contributed capital. Cash: This is an asset and it increases. Therefore cash is debited. Contributed capital: This is the investing amount of investors. It constitutes liability of the company. Liability increases, therefore contributed capital is credited. c. Debit: Cash; Credit: Service revenue. Cash: This is an asset and it increases. Therefore cash is debited. Service revenue: This is the amount of earning by providing service. Any sort of earnings should be credited. Therefore service revenue is also credited. d. Debit: Rent expense; Credit: Cash. Rent expense: This is the fare for using other's property. Any sort of expense should be debited. Therefore rent expense is also debited. Cash: This is an asset and it decreases. Therefore cash is credited. e. Debit: Accounts receivable; Credit: Service revenue. Accounts receivable: The list of customers not yet paid their dues, known as accounts receivable. Accounts receivable must have debit account balance and such balance should appear in the asset side of the balance sheet. Accounts receivable will be debited when there is credit sale or service. Service revenue: This is the amount of earning by providing service. Any sort of earnings should be credited. Therefore service revenue is also credited. f. Debit: Cash; Credit: Accounts receivable. Cash: This is an asset and it increases. Therefore cash is debited. Accounts receivable: The list of customers not yet paid their dues, known as accounts receivable. Accounts receivable must have debit account balance and such balance should appear in the asset side of the balance sheet. Accounts receivable will be credited when debtors make their payment. g. Debit: Accounts payable; Credit: Cash. Accounts payable: This is the supplier's account of payment obligation. It is a liability of the company and should appear in the balance sheet. Accounts payable will be debited when company makes payment. Cash: This is an asset and it decreases. Therefore cash is credited. h. Debit: Supplies; Credit: Cash. Supplies: This is raw material of production. It increases company's stock. It is debited, since incoming of stock. Cash: This is an asset and it decreases. Therefore cash is credited. i. Debit: Supplies expense; Credit: Supplies. Supplies expense: This is the amount of supplies used for production. It is debited, since matching the expense with production. Supplies: This is raw material of production. It is credited, since reduction in stock. j. Debit: Income tax expense; Credit: Cash, Income tax payable. Income tax expense: The tax for earning is income tax. The expense should be recognized out of the earnings of current year. It is debited for the whole amount. Cash: Since a portion is made through cash, it is credited. Income tax payable: The due amount of payment creates liability; therefore income tax payable is credited. k. Debit: Prepaid insurance; Credit: Cash. Prepaid insurance: This is the advance payment of insurance premium. It creates an asset. Therefore asset increases and debited to prepaid insurance. Cash: This is an asset and it decreases. Therefore cash is credited.

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