As the bookkeeper of Pat’s Plowing, you have been asked to complete portions of the accounting cycle for Pat from the following information. 1 Pat invested
10,200 worth of snow equipment into the plowing company. 1 Paid rent 6 months in advance for garage space,
12,000 on account. 6 Purchased snow supplies for
8,000 from plowing local shopping centers. 12 Pat Munro withdrew
5,000. 26 Paid salaries to employees,
- 30 Paid telephone bill, $140. Chart of Accounts Assets Owner’s Equity 111 Cash 311 P. Munro, Capital 112 Accounts Receivable 312 P. Munro, Withdrawals 114 Prepaid Rent 313 Income Summary 115 Snow Supplies Revenue 121 Office Equipment 411 Plowing Fees 122 Accumulated Depreciation, Expenses Office Equipment 511 Salaries Expense 123 Snow Equipment 512 Advertising Expense 124 Accumulated Depreciation, 513 Telephone Expense Snow Equipment 514 Rent Expense Liabilities 515 Snow Supplies Expense 211 Accounts Payable 516 Depreciation Expense, Office Equipment 212 Salaries Payable 517 Depreciation Expense, Snow Equipment
The Correct Answer and Explanation is:
Journal Entries for Pat’s Plowing – January
| Date | Account Title & Explanation | Debit | Credit |
|---|---|---|---|
| Jan 1 | Snow Equipment | 10,200 | |
| P. Munro, Capital | 10,200 | ||
| (Pat invested snow equipment into the business) | |||
| Jan 1 | Prepaid Rent | 12,000 | |
| Accounts Payable | 12,000 | ||
| (Paid 6 months’ rent in advance on account) | |||
| Jan 6 | Snow Supplies | 8,000 | |
| Cash | 8,000 | ||
| (Purchased snow supplies with cash) | |||
| Jan 12 | P. Munro, Withdrawals | 5,000 | |
| Cash | 5,000 | ||
| (Owner withdrew cash for personal use) | |||
| Jan 26 | Salaries Expense | 800 | |
| Cash | 800 | ||
| (Paid employee salaries) | |||
| Jan 30 | Telephone Expense | 140 | |
| Cash | 140 | ||
| (Paid telephone bill) |
Textbook-Style Explanation
The accounting cycle begins with the identification and recording of financial transactions. Each transaction is analyzed and journalized in chronological order. In the case of Pat’s Plowing, several January transactions must be recorded using the company’s chart of accounts.
On January 1, Pat invested snow equipment worth $10,200 into the business. This transaction increases the company’s Snow Equipment (an asset) and Owner’s Equity (P. Munro, Capital). Also on January 1, the business prepaid 6 months of rent totaling $12,000. Since it was paid on account, it increases Prepaid Rent (an asset) and Accounts Payable (a liability).
On January 6, the business purchased snow supplies worth $8,000, which increases Snow Supplies and decreases Cash. Then, on January 12, Pat withdrew $5,000 for personal use, which decreases Owner’s Equity (P. Munro, Withdrawals) and Cash. Withdrawals are not considered expenses; they are recorded as a reduction of equity.
On January 26, employee salaries were paid amounting to $800. This represents an expense and is recorded as a debit to Salaries Expense, while Cash is credited. Finally, on January 30, the business paid a telephone bill of $140. This is another expense, and it is recorded as a Telephone Expense with a corresponding reduction in Cash.
Recording these transactions properly ensures that financial statements will be accurate. Debits and credits must always balance for each journal entry, maintaining the fundamental accounting equation:
Assets = Liabilities + Owner’s Equity.
Each entry reflects a financial event that affects at least two accounts. These journal entries will later be posted to the general ledger and used to prepare trial balances and financial statements.
