Accounting Solution 2.1 (Accounting for Accruals)
Transaction #6: Purchase of certificate of deposit
|
Assets |
... |
Assets |
|
Cash |
... |
Certificate of Deposit |
Beginning Balances |
$6,800 |
|
$ 0 |
6) Purchase of CD |
-2,500 |
|
+2,500 |
Ending Balances |
4,300 |
|
2,500 |
Transaction #7: Recognition of salaries payable
|
Liabilities |
... |
Equity |
|
Salaries Payable |
... |
Retained Earnings |
Beginning Balances |
$ 0 |
|
$1,300 |
7) Salaries Payable Accrual |
+1,200 |
|
-1,200 |
Ending Balances |
1,200 |
|
100 |
Transaction #8: Recognition of interest receivable
|
Assets |
... |
Equity |
|
Interest Receivable |
... |
Retained Earnings |
Beginning Balances |
$ 0 |
|
$100 |
8) Interest Receivable Accrual |
+50 |
|
+50 |
Ending Balances |
50 |
|
150 |
Note that Event No.5 and Event No.7 in 20X7 (salary expense) both decrease Retained Earnings. However, they act differently as to their second corresponding accounts. When we pay cash for salary expenses (Event No.5), assets (Cash) decrease, but when we record an accrual for salary expenses (Event No.7), liabilities (Salaries Payable) increase.
For Event No.8 in 20X7 Fored Company recognized interest revenue on the certificate of deposit for 20X7, that is for the 3 months (from October to December). The formula to calculate the interest accrual is as follows: $2,500 x 8% x (3 / 12) = $50.
At the end of accounting period 20X7, account balances were as follows:
Cash |
4,300 |
Accounts Receivable |
500 |
Interest Receivable |
50 |
Certificate of Deposit |
2,500 |
Land |
0 |
Salaries Payable |
1,200 |
Interest Payable |
0 |
Note Payable |
0 |
Contributed Capital |
6,000 |
Retained Earnings |
150 |
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