Review the following situations and record the journal entries for Mequon's Boutique.
| Transactions |
| :-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| May 10 | Mequon's Boutique purchases $2,400 worth of merchandise with cash from a manufacturer. Shipping charges are an extra $130 cash. Terms of the purchase are FOB Shipping Point. |
| May 14 | Mequon's Boutique sells $3,000 worth of merchandise to a customer who pays with cash. The merchandise has a cost to Mequon's of $1,750. Shipping charges are an extra $150 cash. Terms of the sale are FOB Shipping Point. |
Journal entries:
| | | | |
| :------ | :- | :- | :---------------------------- |
| May 10 | | | |
| | | | |
| | To record purchase. | | |
| May 10 | | | |
| | | | |
| | To record shipping charges. | | |
| May 14 | | | |
| | | | |
| | To record sale with cash. | | |
| May 14 | | | |
| | | | |
| | To record cost of sale. | | |
Answer (2)
On May 10, record the purchase by debiting Purchases $2 , 400 and crediting Cash $2 , 400 .
On May 10, record the shipping charges by debiting Shipping Charges $130 and crediting Cash $130 .
On May 14, record the sale by debiting Cash $3 , 000 and crediting Sales Revenue $3 , 000 .
On May 14, record the shipping charges by debiting Shipping Charges $150 and crediting Cash $150 , and record the cost of sale by debiting Cost of Goods Sold $1 , 750 and crediting Inventory $1 , 750 .
Explanation
Analysis of May 10 Transactions On May 10, Mequon's Boutique purchased merchandise for $2,400 with cash and incurred shipping charges of $130, terms FOB Shipping Point. We need to record these transactions as journal entries.
Recording the Purchase To record the purchase, we debit 'Purchases' to increase the value of inventory and credit 'Cash' to reflect the cash outflow.
Recording Shipping Charges To record the shipping charges, since the terms are FOB Shipping Point, the buyer (Mequon's Boutique) is responsible for the shipping costs. We debit 'Shipping Charges' (or 'Transportation-In') and credit 'Cash'.
Analysis of May 14 Transactions On May 14, Mequon's Boutique sold merchandise for $3,000 cash. The cost of the merchandise was $1,750, and there were shipping charges of $150, terms FOB Shipping Point. We need to record these transactions as journal entries.
Recording the Sale To record the sale, we debit 'Cash' to reflect the cash inflow and credit 'Sales Revenue' to recognize the revenue earned.
Recording Shipping Charges for Sale To record the shipping charges for the sale, since the terms are FOB Shipping Point, the seller (Mequon's Boutique) is responsible for the shipping costs. We debit 'Shipping Charges' (or 'Delivery Expense') and credit 'Cash'.
Recording Cost of Sale To record the cost of the sale, we debit 'Cost of Goods Sold' to recognize the expense and credit 'Inventory' to reduce the value of inventory.
Final Answer Here are the journal entries:
Date
Account
Debit
Credit
May 10
Purchases
$2,400
Cash
$2,400
To record purchase.
May 10
Shipping Charges (or Transportation-In)
$130
Cash
$130
To record shipping charges.
May 14
Cash
$3,000
Sales Revenue
$3,000
To record sale with cash.
May 14
Shipping Charges (or Delivery Expense)
$150
Cash
$150
To record shipping charges.
May 14
Cost of Goods Sold
$1,750
Inventory
$1,750
To record cost of sale.
Examples
Understanding and recording journal entries is fundamental in accounting. For instance, when a company buys office supplies with cash, it increases its 'Supplies' (an asset) and decreases its 'Cash' (another asset). The journal entry would debit 'Supplies' and credit 'Cash'. Similarly, when a company provides services and receives payment, it increases its 'Cash' and increases its 'Service Revenue'. These entries are crucial for creating accurate financial statements, which help stakeholders make informed decisions.
The journal entries for Mequon's Boutique include recording the merchandise purchase and shipping costs on May 10, followed by recording the sale, associated shipping charges, and cost of goods sold on May 14. Each transaction is documented with appropriate debits and credits. This ensures accurate financial records for the business.
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