Question

Cullumber Company has the following transactions during August of the current year. Aug. 1 Opens an office as a financial advisor, investing $4,000 in cash in exchange for common stock. 4 Pays insurance in advance for 6 months, $1,500 cash. 16 Receives $400 from clients for services performed. 27 Pays secretary $1,000 salary. Journalize the transactions.

Answer 1

Answer:

• Aug 1  Cash   $4000 Dr

                          Common Stock    $4000 C

• Aug 4  Prepaid Insurance  $1500 Dr

                           Cash                           $1500 Cr

• Aug 16  Cash   $400 Dr

                            Service Revenue    $400 Cr

• Aug 27  Salary Expense   $1000 Dr

                            Cash                       $1000 Cr  

Explanation:

• Aug 1.  The transaction relates to owner's investment in the business/company thus we debit the cash coming into the business and credit common stock as both are increasing.

• Aug 4.  The insurance paid in advance is a current asset for the business. So, we debit the prepaid insurance account as the asset is increasing and credit the cash account as it is decreasing due to payment for insurance.

• Aug 16.  400 received is the service revenue and as the revenue is increasing, we credit it. We are receiving cash so we debit the cash account.

• Aug 27.  The payment of salary is an expense and as expense is increasing, we debit the salary expense account and credit the cash account as cash is decreasing.