A Environmental Services, Inc., performs various tests on wells and septic systems. A few of the company's business transactions occurring during August are described below:
1. On August 1, the company billed customers $2,500 on account for services rendered. Customers are required to make full payment within 30 days.
2. On August 3, the company purchased testing supplies costing $3,800, paying $800 cash and charging the remainder on the company's 30-day account at Penn Chemicals. The testing supplies are expected to last several months.
3. On August 5, the company returned to Penn Chemicals $ 100 of testing supplies that were not needed. The return of these supplies reduced by $100 the amount owed to Penn Chemicals.
4. On August 17, the company issued an additional 2,500 shares of capital stock at $8 per share. The cash raised will be used to purchase new testing equipment in September.
5. On August 22, the company received $600 cash from customers it had billed on August 1.
6. On August 29, the company paid its outstanding account payable to Penn Chemicals.
7. On August 30, a cash dividend totaling $6,800 was declared and paid to the company's stockholders.
Instructions
a. Prepare an analysis of each of the above transactions. Transaction 1 serves as an example of the form of analysis to be used.
1. (a) The asset Accounts Receivable was increased. Increases in assets are recorded by debits. Debit Accounts Receivable $2,500.
(b) Revenue has been earned. Revenue increases owners' equity. Increases in owners' equity are recorded by credits. Credit Testing Service Revenue $2,500.
b. Prepare journal entries, including explanations, for the above transactions.
c. How does the realization principle influence the manner in which the August 1 billing to customers is recorded in the accounting records?
d. How does the matching principle influence the manner in which the August 3 purchase of testing supplies is recorded in the accounting records?
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