Northlake’s December, second half

Worked example — 12 to 28 December

The season is open. Six more transactions, two of which turn on when something is recorded rather than what.

12 Dec — day-pass and rental revenue, $16,400 cash. Cash (asset, up — debit) and Service Revenue (revenue, up — credit). Earned and collected on the same day: the simplest revenue entry there is. Not Retained Earnings — the revenue account, so the income statement can be built.

15 Dec — billed the district school board $7,200 for a lesson program delivered this week. Accounts Receivable (asset, up — debit) and Service Revenue (credit). The lessons have been given, so the revenue has been earned; the school board's cheque will come when it comes. Waiting for the cash before recording revenue is the cash-basis error Module 5 opens with, and on the paper it costs both the revenue and the receivable.

18 Dec — received the December hydro bill, $1,950, due 10 January.

Dec 18  Utilities Expense                 1,950
            Accounts Payable                        1,950
        December hydro, due 10 January.

The arrival of the bill is the trigger, because the electricity has been consumed: an expense has been incurred and an obligation exists. Not Cash — nothing has been paid — and not "no entry until 10 January". On 10 January the payment is Dr Accounts Payable 1,950 / Cr Cash 1,950, which clears the liability and touches no expense. Recording the expense twice, once when billed and once when paid, is the error the January entry must avoid.

22 Dec — collected $4,000 of the school board's account. Cash (asset, up — debit) and Accounts Receivable (asset, down — credit). One asset swapped for another. Not Service Revenue — that was recorded on 15 December when the lessons were delivered; recording it again doubles the revenue. The remaining 3,200 stays in Accounts Receivable.

24 Dec — paid staff wages, $11,300. Salaries Expense (expense, up — debit) and Cash (credit). Not Salaries Payable: no wages had been accrued before this payment, so there is no liability to clear. (After the year-end accrual in Module 5 there will be, and the January payroll will split.)

28 Dec — the directors declared a dividend of $8,000, payable 15 January.

Dec 28  Dividends                         8,000
            Dividends Payable                       8,000
        Dividend declared, payable 15 January.

The declaration creates a legal obligation, so the credit is Dividends Payable, a current liability. Cash is untouched until January, when the payment is Dr Dividends Payable 8,000 / Cr Cash 8,000. The debit is Dividends — a temporary equity account that Module 6 closes to Retained Earnings — and not any expense account: a dividend is a distribution of income already earned, not a cost of earning it, and it never appears on the income statement. (A case may instead debit Retained Earnings directly on declaration; Module 6 shows both.)

The pair the paper asks for

Declaration and payment are two entries on two dates, and a case that says "declared 28 December, paid 15 January" wants both, dated. The December balance sheet shows Dividends Payable 8,000; the January entry clears it. Write the pair cold:

Dec 28  Dividends                         8,000
            Dividends Payable                       8,000
Jan 15  Dividends Payable                 8,000
            Cash                                    8,000