Selected Transactions For Thyme Advertising Company Inc

Thyme Advertising Company Inc. is a fictitious entity designed to illustrate the complexities and nuances of accounting for various business transactions. Understanding how these transactions impact the financial statements is crucial for students, accounting professionals, and business owners alike. This comprehensive guide walks through selected transactions, providing detailed explanations, journal entries, and their effects on Thyme Advertising's financial position.

Understanding the Basics of Accounting Transactions

Every business transaction has an impact on the fundamental accounting equation: Assets = Liabilities + Equity. Understanding how different transactions affect these elements is critical. The double-entry bookkeeping system ensures that for every transaction, at least two accounts are affected, maintaining the equation's balance.

Key Concepts:

• Assets: Resources owned by the company (e.g., cash, accounts receivable, equipment).
• Liabilities: Obligations of the company to others (e.g., accounts payable, salaries payable).
• Equity: The owners' stake in the company (e.g., common stock, retained earnings).
• Debit (Dr): Increases asset, expense, and dividend accounts; decreases liability, equity, and revenue accounts.
• Credit (Cr): Increases liability, equity, and revenue accounts; decreases asset, expense, and dividend accounts.

Selected Transactions for Thyme Advertising Company Inc.

Let's examine several transactions that Thyme Advertising Company Inc. might encounter, along with their accounting treatment.

1. Initial Investment by Shareholders

Transaction: Shareholders invest $500,000 cash in exchange for common stock.

Explanation: This transaction increases the company’s cash (an asset) and increases shareholders' equity through the issuance of common stock.

Journal Entry:

Account	Debit	Credit
Cash	$500,000
Common Stock		$500,000
To record initial investment by shareholders

Impact on Accounting Equation:

• Assets (Cash) increase by $500,000.
• Equity (Common Stock) increases by $500,000.

2. Purchase of Office Equipment

Transaction: Thyme Advertising purchases office equipment for $50,000, paying $20,000 cash and issuing a note payable for the remaining $30,000.

Explanation: This transaction involves an increase in an asset (office equipment), a decrease in another asset (cash), and an increase in a liability (note payable).

Journal Entry:

Account	Debit	Credit
Office Equipment	$50,000
Cash		$20,000
Notes Payable		$30,000
To record purchase of office equipment

Impact on Accounting Equation:

• Assets (Office Equipment) increase by $50,000.
• Assets (Cash) decrease by $20,000.
• Liabilities (Notes Payable) increase by $30,000.

3. Payment of Rent

Transaction: Thyme Advertising pays $5,000 for monthly rent.

Explanation: This transaction involves a decrease in cash (an asset) and an increase in rent expense, which reduces retained earnings (part of equity).

Journal Entry:

Account	Debit	Credit
Rent Expense	$5,000
Cash		$5,000
To record monthly rent payment

Impact on Accounting Equation:

• Assets (Cash) decrease by $5,000.
• Equity (Retained Earnings) decreases by $5,000 (due to the increase in Rent Expense).

4. Providing Advertising Services on Account

Transaction: Thyme Advertising provides advertising services to a client for $15,000 on account.

Explanation: This transaction increases accounts receivable (an asset) and increases service revenue, which increases retained earnings (part of equity).

Journal Entry:

Account	Debit	Credit
Accounts Receivable	$15,000
Service Revenue		$15,000
To record advertising services provided on account

Impact on Accounting Equation:

• Assets (Accounts Receivable) increase by $15,000.
• Equity (Retained Earnings) increases by $15,000 (due to the increase in Service Revenue).

5. Receipt of Cash from Accounts Receivable

Transaction: Thyme Advertising receives $10,000 cash from the client for services previously provided on account.

Explanation: This transaction involves an increase in cash (an asset) and a decrease in accounts receivable (an asset). It does not affect equity.

Journal Entry:

Account	Debit	Credit
Cash	$10,000
Accounts Receivable		$10,000
To record cash receipt from accounts receivable

Impact on Accounting Equation:

• Assets (Cash) increase by $10,000.
• Assets (Accounts Receivable) decrease by $10,000.
• Net effect on assets is zero.

6. Payment of Salaries

Transaction: Thyme Advertising pays employee salaries of $25,000.

Explanation: This transaction involves a decrease in cash (an asset) and an increase in salaries expense, which reduces retained earnings (part of equity).

Journal Entry:

Account	Debit	Credit
Salaries Expense	$25,000
Cash		$25,000
To record payment of employee salaries

Impact on Accounting Equation:

• Assets (Cash) decrease by $25,000.
• Equity (Retained Earnings) decreases by $25,000 (due to the increase in Salaries Expense).

7. Purchase of Advertising Supplies

Transaction: Thyme Advertising purchases advertising supplies for $2,000 cash.

Explanation: This transaction involves an increase in an asset (advertising supplies) and a decrease in another asset (cash).

Journal Entry:

Account	Debit	Credit
Advertising Supplies	$2,000
Cash		$2,000
To record purchase of advertising supplies

Impact on Accounting Equation:

• Assets (Advertising Supplies) increase by $2,000.
• Assets (Cash) decrease by $2,000.
• Net effect on assets is zero.

8. Payment of Utilities

Transaction: Thyme Advertising pays $800 for monthly utilities.

Explanation: This transaction involves a decrease in cash (an asset) and an increase in utilities expense, which reduces retained earnings (part of equity).

Journal Entry:

Account	Debit	Credit
Utilities Expense	$800
Cash		$800
To record payment of monthly utilities

Impact on Accounting Equation:

• Assets (Cash) decrease by $800.
• Equity (Retained Earnings) decreases by $800 (due to the increase in Utilities Expense).

9. Declaration and Payment of Dividends

Transaction: Thyme Advertising declares and pays a cash dividend of $10,000 to shareholders.

Explanation: This transaction involves a decrease in cash (an asset) and a decrease in retained earnings (part of equity).

Journal Entry:

Account	Debit	Credit
Dividends	$10,000
Cash		$10,000
To record declaration and payment of dividends

Impact on Accounting Equation:

• Assets (Cash) decrease by $10,000.
• Equity (Retained Earnings) decreases by $10,000.

10. Depreciation Expense

Transaction: Record depreciation expense for the office equipment. Assume the equipment has a useful life of 5 years and a salvage value of $5,000. Using the straight-line method, the annual depreciation expense is ($50,000 - $5,000) / 5 = $9,000.

Explanation: Depreciation is the allocation of the cost of an asset over its useful life. It is an expense that reduces the book value of the asset.

Journal Entry:

Account	Debit	Credit
Depreciation Expense	$9,000
Accumulated Depreciation		$9,000
To record annual depreciation expense

Impact on Accounting Equation:

• Assets (Accumulated Depreciation, a contra-asset account) increases by $9,000, effectively reducing the net book value of the assets.
• Equity (Retained Earnings) decreases by $9,000 (due to the increase in Depreciation Expense).

11. Using Advertising Supplies

Transaction: At the end of the period, it is determined that $800 of advertising supplies were used.

Explanation: This transaction recognizes the expense associated with the advertising supplies that were consumed during the period.

Journal Entry:

Account	Debit	Credit
Advertising Expense	$800
Advertising Supplies		$800
To record advertising supplies used

Impact on Accounting Equation:

• Assets (Advertising Supplies) decrease by $800.
• Equity (Retained Earnings) decreases by $800 (due to the increase in Advertising Expense).

12. Accrued Revenue

Transaction: Thyme Advertising performed services worth $3,000 that have not yet been billed to clients.

Explanation: Accrued revenue represents services provided but not yet billed. It needs to be recognized in the current period.

Journal Entry:

Account	Debit	Credit
Accounts Receivable	$3,000
Service Revenue		$3,000
To record accrued revenue

Impact on Accounting Equation:

• Assets (Accounts Receivable) increase by $3,000.
• Equity (Retained Earnings) increases by $3,000 (due to the increase in Service Revenue).

13. Accrued Expenses

Transaction: Thyme Advertising owes $1,500 in salaries to employees at the end of the period that will be paid next period.

Explanation: Accrued expenses represent expenses incurred but not yet paid. They need to be recognized in the current period.

Journal Entry:

Account	Debit	Credit
Salaries Expense	$1,500
Salaries Payable		$1,500
To record accrued salaries expense

Impact on Accounting Equation:

• Liabilities (Salaries Payable) increase by $1,500.
• Equity (Retained Earnings) decreases by $1,500 (due to the increase in Salaries Expense).

14. Deferred Revenue

Transaction: Thyme Advertising received $6,000 in advance for services to be performed over the next six months.

Explanation: Deferred revenue represents cash received for services that have not yet been performed. It is a liability until the services are provided.

Journal Entry (Initial Receipt):

Account	Debit	Credit
Cash	$6,000
Deferred Revenue		$6,000
To record receipt of cash for services to be performed

Journal Entry (After One Month - $1,000 earned):

Account	Debit	Credit
Deferred Revenue	$1,000
Service Revenue		$1,000
To record revenue earned

Impact on Accounting Equation:

• Initial Receipt: Assets (Cash) increase by $6,000, and Liabilities (Deferred Revenue) increase by $6,000.
• After One Month: Liabilities (Deferred Revenue) decrease by $1,000, and Equity (Retained Earnings) increases by $1,000 (due to the increase in Service Revenue).

15. Payment on Notes Payable

Transaction: Thyme Advertising makes a $5,000 payment on the notes payable, including $500 of interest.

Explanation: This transaction reduces both the liability (notes payable) and the asset (cash). The interest portion is recorded as an expense.

Journal Entry:

Account	Debit	Credit
Notes Payable	$4,500
Interest Expense	$500
Cash		$5,000
To record payment on notes payable

Impact on Accounting Equation:

• Assets (Cash) decrease by $5,000.
• Liabilities (Notes Payable) decrease by $4,500.
• Equity (Retained Earnings) decreases by $500 (due to the increase in Interest Expense).

Preparing Financial Statements

After recording all transactions, Thyme Advertising can prepare its financial statements:

• Income Statement: Reports revenues and expenses to determine net income or loss.
• Balance Sheet: Reports assets, liabilities, and equity at a specific point in time.
• Statement of Cash Flows: Reports cash inflows and outflows during a period, categorized into operating, investing, and financing activities.

Example: Partial Income Statement

Revenue
Service Revenue	$18,000
Expenses
Rent Expense	$5,000
Salaries Expense	$26,500
Utilities Expense	$800
Depreciation Expense	$9,000
Advertising Expense	$800
Interest Expense	$500
Net Loss	($24,600)

Example: Partial Balance Sheet

Assets
Cash	$462,700
Accounts Receivable	$8,000
Advertising Supplies	$1,200
Office Equipment	$50,000
Accumulated Depreciation	($9,000)
Liabilities
Notes Payable	$25,500
Salaries Payable	$1,500
Deferred Revenue	$5,000
Equity
Common Stock	$500,000
Retained Earnings	(Calculated based on net loss and dividends)

Key Takeaways

• Understanding the double-entry bookkeeping system is crucial for accurate financial record-keeping.
• Each transaction affects at least two accounts, ensuring the accounting equation (Assets = Liabilities + Equity) remains balanced.
• Accrual accounting principles (recognizing revenues when earned and expenses when incurred) provide a more accurate picture of a company's financial performance than cash-based accounting.
• Preparing financial statements allows stakeholders to assess a company’s financial health and performance.

FAQ

• What is the purpose of journal entries?

  Journal entries are the first step in the accounting cycle. They record the financial impact of business transactions in a systematic and chronological order. They provide a detailed record of each transaction, including the accounts affected and the amounts.

• Why is the accounting equation important?

  The accounting equation is the foundation of the double-entry bookkeeping system. It ensures that the balance sheet remains balanced, providing a clear picture of a company's assets, liabilities, and equity.

• What is the difference between accrued revenue and deferred revenue?

  Accrued revenue is revenue that has been earned but not yet billed to clients. Deferred revenue is cash received for services that have not yet been performed.

• How does depreciation affect the financial statements?

  Depreciation expense reduces net income on the income statement and accumulated depreciation reduces the book value of assets on the balance sheet. It reflects the allocation of an asset's cost over its useful life.

• Why are adjusting entries necessary?

  Adjusting entries are necessary to ensure that revenues and expenses are recognized in the correct accounting period, in accordance with accrual accounting principles. They account for items like depreciation, accrued revenues and expenses, and deferred revenues.

Conclusion

By meticulously recording and analyzing these selected transactions, Thyme Advertising Company Inc. can maintain accurate financial records, produce reliable financial statements, and make informed business decisions. A thorough understanding of accounting principles and practices is essential for success in any business endeavor, providing insights into financial performance and overall business health. This detailed guide offers a solid foundation for navigating the complexities of accounting transactions.