2-2 Application Problem: Analyzing transactions into debit and credit parts Lo4 Helfrey Marketing Services uses the following accounts Sawyer Helfrey, Capital Sawyer Helfrey, Drawing Sales Cash Supplies Prepaid Insurance Accounts Receivable-Neco Valenza Accounts Payable-All Star Company Advertising Expense Rent Expense Transactions: June 1. Received cash from owner as an investment, $10,000.00. 2. Paid cash for insurance, $4,000.00 4. Bought supplies on account from All Star Company, $6,000.00. 5. Paid cash for supplies, $1,000.00. 8. Paid cash on account to All Star Company, $4,000.00. Instructions: 1. Prepare two T accounts for each transaction. On each T account, write the account title of one of the accounts affected by the transaction. Use the forms in your Working Papers. 2. Write the debit or credit amount in each T account to show how the transaction affected that account. T accounts for the first transaction are given as an example.
The correct answer and explanation is:
Here’s a detailed explanation of how to analyze and record the transactions into debit and credit parts using T-accounts. We will work through each of the five transactions and show the respective T-accounts:
Transaction 1: Received cash from owner as an investment, $10,000.
- Debit: Cash (Increases)
- Credit: Sawyer Helfrey, Capital (Increases)
The business receives an investment from the owner, increasing both the Cash account and the Capital account (equity). The Cash account is debited because it is increasing, and Sawyer Helfrey, Capital, is credited because the owner’s equity in the business increases.
Transaction 2: Paid cash for insurance, $4,000.
- Debit: Prepaid Insurance (Increases)
- Credit: Cash (Decreases)
When the business pays cash for insurance, the Prepaid Insurance account (an asset) increases, so it is debited. The Cash account decreases as a result of the payment, so it is credited.
Transaction 3: Bought supplies on account from All Star Company, $6,000.
- Debit: Supplies (Increases)
- Credit: Accounts Payable-All Star Company (Increases)
Here, the business purchases supplies on account, meaning it owes money to All Star Company. The Supplies account (an asset) increases, so it is debited. The Accounts Payable-All Star Company account increases because the business now has an obligation, so it is credited.
Transaction 4: Paid cash for supplies, $1,000.
- Debit: Supplies (Increases)
- Credit: Cash (Decreases)
In this transaction, the business pays cash for supplies. The Supplies account is debited because supplies are an asset that is increasing. Cash is credited because it decreases as a result of the payment.
Transaction 5: Paid cash on account to All Star Company, $4,000.
- Debit: Accounts Payable-All Star Company (Decreases)
- Credit: Cash (Decreases)
The business pays off part of its debt to All Star Company. The Accounts Payable-All Star Company account is debited because the obligation is reduced. Cash is credited because it is decreasing due to the payment.
T-accounts:
- Cash
- Debit: +$10,000 (Investment)
- Credit: -$4,000 (Insurance)
- Credit: -$1,000 (Supplies)
- Credit: -$4,000 (Payment to All Star Company)
- Sawyer Helfrey, Capital
- Credit: +$10,000 (Investment)
- Prepaid Insurance
- Debit: +$4,000 (Insurance Payment)
- Supplies
- Debit: +$6,000 (Bought on Account)
- Debit: +$1,000 (Paid Cash for Supplies)
- Accounts Payable-All Star Company
- Credit: +$6,000 (Bought Supplies)
- Debit: -$4,000 (Payment on Account)
Explanation:
The debit and credit entries are recorded according to the rules of double-entry bookkeeping, where every transaction affects at least two accounts. The debit entries increase assets (such as Cash, Prepaid Insurance, and Supplies) or decrease liabilities (such as Accounts Payable). On the other hand, credit entries decrease assets (such as Cash) or increase liabilities and equity (such as Accounts Payable and Sawyer Helfrey, Capital). This ensures that the accounting equation (Assets = Liabilities + Owner’s Equity) remains balanced after each transaction.