Jan. 5 Loaned $17,500 cash to Marc Jager, receiving a 90-days, 8% note. Feb. 4 S

Question

Jan. 5 Loaned $17,500 cash to Marc Jager, receiving a 90-days, 8% note.
Feb. 4 Sold merchandise on account to Tedra & Co., $19,000. The cost of merchandise sold was $11,000
Feb. 13 Sold merchandise on account to Centennial Co., $30,000. The cost of merchandise was $17,600.
Mar. 6 Accepted a 60-days, 6% note for $19,000 from Tedra & Co. on account
Mar. 14. Accepted a 60-day,9% note for $30,000 from Centennial Co, on account.
Apr. 5 Received the interest due from Marc Jager and a new 120-day,9% note as a renewal of the loan of January 5. (Record both the debit and credit to the notes receivable account.)
May. 5 Received from Tedra & Co. the amount due on the note of March 6.
May 13. Centennial Co. dishonored its note dated on March 14.
July. 12. Received from Centennial Co. the amount owed on the dishonored note, plus interest for 60 days at 12% computed on the maturity value of the note.
Aug 13. Received from Marc Jager the amount due on his note of April 5.
Sept 7. Sold merchandise on account to Lock-It Co., $9,000.The cost of merchandise sold was $5,000
Sept 17. Received from Lock-It Co, the amount of the invoice of September 7, less 1% discount.

Explanation / Answer

Journalizing transactions is easy if you understand that every transaction involves an exchange in which you receive something and give up something. Once you understand what you received and gave up it is easy to decide how to record it. For example, on January 5, you gave up cash so your cash asset decreased which is recorded with a credit. You received another asset in exchange, a note receivable, so you record that with a debit.

On Feb 4, you reduced merchandise by selling it and received an account receivable in exchange. Your merchandise account decreased by its cost of $11,000 but you received $19,000 of receivables in exchange, so your capital increased by $8,000. But merchants have devised a useful way of recording sales transactions so that they get more information from them.They record the entire sale at the amount of received, then reduce merchandise at its cost.

A/R. . . . . . . . 19,000
. . . Sales revenue . . . . . .19,000

CGS . . . . . . 11,000
. . . . .Merchandise . . . . 11,000

Now the $8,000 gain in capital is determined as sales revenue less cost of goods sold, which provides more useful information for a merchant.

What happened on March 6? Tendra owes you $19,000 on account. You exchanged that for a $19,000 note. This is an exchange of one asset for another. The note is a written document and carries interest, so you are better off then keeping the receivable which is not in writing and has produces no interest income. One asset increases, another decreases. anyone can figure out that journal entry.

Later when the note is collected, you receive cash which you debit because it increased, and you give back the note which you credit because it decreased. But you received more cash than the face value of the note, so you need another credit to balance the entry. That's because you earned interest which is an increase in capital called interest income. When you receive more than you gave up, you increase capital, called revenue or gain. When you receive less than you gave up, you incur an expense or a loss, a decrease in capital. Accounting is very logical, and if you understand what you receive and what you give up in a transaction, you don't have to memorize journal entries because you can develop each one logically as it takes place.

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