Financial Accounting: An Integrated Statements Approach, 2nd Edition

expects this initial phase of the business to last one to two years. During this period,

Janet will gather information on the software and hardware needs of customers. During

the second phase of the business plan, Janet plans to expand Online Solutions into an

Internet-based retailer of software and hardware to individuals and small businesses.

To start the business, Janet deposits $25,000 in a bank account in the name of

Online Solutions in return for shares of stock in the corporation. This first transaction

increases cash and capital stock by $25,000. The transaction is entered in the general

journal by first listing the date, then the title of the account to be debited, and the

amount of the debit. Next, the title of the account to be credited is listed below and to

the right of the debit, followed by the amount to be credited. The resulting journal

entry follows.

The increase in the asset, cash, is debited to the cash account. The increase in stock-

holders’ equity (capital stock) is credited to the capital stock account. As other assets are

acquired, the increases are also recorded as debits to asset accounts. Likewise, other in-

creases in stockholders’ equity will be recorded as credits to stockholders’ equity accounts.

Online Solutions entered into the following additional transactions during the re-

mainder of November:

Nov. 5 Purchased land for $20,000, paying cash. The land is located in a new busi-

ness park with convenient access to transportation facilities. Janet Moore

plans to rent office space and equipment during the first phase of Online

Solutions’ business plan. During the second phase, Janet plans to build an

office and warehouse on the land.

10 Purchased supplies on account for $1,350.

18 Received $7,500 for services provided to customers for cash.

30 Paid expenses as follows: wages, $2,125; rent, $800; utilities, $450; and

miscellaneous, $275.

30 Paid creditors on account, $950.

30 Paid stockholders (Janet Moore) dividends of $2,000.

The journal entries to record these transactions are shown at the top of the fol-

lowing page.

Effects of Journal Entries on the Financial Statements

Every transaction affects an element of the financial statements and, therefore, must be

recorded. In Chapters 2 and 3, we recorded transactions using the integrated financial

158 Chapter 4 Accounting Information Systems

Will Journalizing Prevent Fraud?

While journalizing transactions reduces the possibility of fraud,

it by no means eliminates it. For example, embezzlement can

be hidden within the double-entry bookkeeping system by cre-

ating fictitious suppliers to whom checks are issued.

INTEGRITY, OBJECTIVITY, AND ETHICS IN BUSINESS

2007

Nov. 1 Cash 25,000

Capital Stock 25,000