QuickBooks 2015 All-in-One For Dummies. Nelson Stephen L.

Entry 8: Recording the Cost of Goods Sold

      If you’re confused about this cost-of-goods-sold transaction – it represents the first transaction that doesn’t use cash – flip back to Book I, Chapter 1, where I describe the two accounting principles. In short, these two principles go like this:

      ✔ Expense principle: This principle says that an expense gets counted when the item gets sold. This means that the inventory isn’t counted as cost of goods sold or as an expense when it’s purchased. Rather, the expense of the hot dog and bun that you sell gets counted when the item is actually sold to somebody.

      ✔ Matching principle: This principle says that expenses or cost of a sale get matched with the revenue of the sale. This means that you recognize the cost of goods sold at the same time that you recognize the sale. Typically, in fact, you can combine Journal Entry 7 and Journal Entry 8.

      

Another way to think about the information recorded in Journal Entry 8 is this: Rather than “spend” cash to provide customers hot dogs and buns, you spend inventory.

       Recording the payoff of accounts payable

      Suppose that one of the things you do at the end of the day is write a check to pay off the accounts payable. The accounts payable are the amounts that you owe vendors – probably the suppliers from which you purchased the hot dogs and buns. To record the payoff of accounts payable, you debit accounts payable for $2,000 and credit cash for $2,000, as shown in Table 2-13.

Table 2-13 Journal Entry 9: Recording the Payoff of Accounts Payable

       Recording the payoff of a loan

      Suppose also that you use cash profits from the day to pay off the $1,000 loan that the balance sheet shows (see Table 2-2). To record this transaction, you debit loan payable for $1,000 and credit cash for $1,000, as shown in Table 2-14.

Table 2-14 Journal Entry 10: Recording the Payoff of the Loan

       Calculating account balance

      You may already be able to guess this: If you know an account’s starting balance and have a way to add up the debits and the credits to the account, you can easily calculate the ending account balance.

      For example, take the case of the cash account balance of the hot dog stand business. If you look at the balance sheet shown in Table 2-2, you see that the beginning balance for cash is $1,000. You can easily construct a little schedule of how the account balance changes – this is called a T-account – that calculates the ending balance. In fact, Table 2-15 does just this. If you look closely at Table 2-15, you see that the cash beginning balance is $1,000. Then, on the following lines of the T-account, you see the effects of Journal Entries 4, 5, 6, 7, 9, and 10. Some of these journal entries credit cash. Some of them debit cash. You can calculate the ending cash balance by combining the debit and credit amounts.

      The information shown in Table 2-15 should make sense to you. But just in case you’re still trying to memorize what debits and credits mean, I’m going to give you a bit more detail. To calculate the ending balance shown in Table 2-15, you add up the debits, add up the credits, and combine the two sums. The net amount in the cash account equals the $5,000 debit. If you recall from the preceding paragraphs, a debit balance in an asset account, such as cash, represents a positive amount. A $5,000 debit balance in the cash account, therefore, indicates that you have $5,000 of cash in the account.

Table 2-15 A T-Account of the Cash Account

      Cash is usually the trickiest account to analyze with a T-account because so many journal entries affect cash. In many cases, however, a T-account analysis of an account balance is much more straightforward. For example, if you look at Table 2-16, you see a T-account analysis of the inventory account. This T-account analysis shows that the beginning inventory account balance equals $3,000. However, when Journal Entry 8 credits inventory for $3,000 – this is the journal entry that records the cost of goods sold – the inventory balance is wiped out.

Table 2-16 A T-Account of the Inventory Account

      Paying off the accounts payable and loan payable accounts is similarly straightforward. Table 2-17 shows the T-account analysis of the accounts payable account. Table 2-18 shows the T-account analysis of the loan payable account. In both cases, the T-account analysis shows that the liability accounts start with a credit beginning balance. (Remember that a liability account would have a credit balance if the firm really owed money.) Then, when the payments are recorded to pay off the accounts payable and loan payable in Journal Entries 9 and 10, the liability account is debited. The result, in the case of both accounts, is that the liability account balance is reduced to zero.

      I’m not going to show T-account analyses of the other accounts that the preceding journal entries use. In every other case, the only debit or credit to the account comes from the journal entry. This means that the journal entry amount is the account balance. For example, only one journal entry affects the sales revenue account: Journal Entry 7, which credits sales revenue for $13,000. Because the sales revenue account has no beginning balance, that $13,000 credit equals the sales revenue account balance. The expense accounts work the same way.

Table 2-17 A T-Account of Accounts Payable

Table 2-18 A T-Account of the Loan Payable Account

       Using T-account analysis results

      If you or your accounting program construct T-accounts for each balance sheet and income statement account, you can easily calculate account balances at a particular point in time by using the T-account analysis results. Table 2-19 shows a trial balance at the end of the day for the hot dog stand business. You can calculate each of these account balances by using T-account analysis.

      The first line shown in the trial balance in Table 2-19 is the cash account, with a debit balance of $5,000. This debit account balance comes from the T-account analysis shown in Table 2-15. The account balances for inventory, accounts payable, and loan payable also come from the T-account analyses shown previously in this chapter (Table 2-16, Table 2-17, and Table 2-18).

      As I note in the preceding section, you don’t need to perform T-account analyses for the other accounts shown in the trial balance provided in Table 2-19. These other accounts show a single debit or credit.

      I need to make one final and perhaps already-obvious point: The information provided in Table 2-19 is the information necessary to construct an income statement for the day and a balance sheet as of the end of the day. For example, if you take sales revenue, cost of goods sold, rent, wages expense, and supplies expense from the trial balance, you have all the information that you need to construct an income statement for the day. In fact, the information shown in Table