Sophia provides you with a list of business transactions that occurred during the year. You must use these transactions to demonstrate the first four steps in the accounting cycle: analyzing each transaction, using double entry accounting to record these transactions in the general journal, and posting them to their respective accounts. Finally, you prepare a trial balance, the fourth step in the accounting cycle, which ensures that the first three steps in the accounting cycle have been completed currently. A. The Sisters invest $15,000 in cash in Happy Home Environmental Cleaning (HHEC)
B. HHEC buys a building for $10,000 in cash.
C. HHEC buys office equipment for $1,800 for cash.
D. HHEC buys cleaning supplies for $2,800, agreeing to pay the upplier in 30 days.
E. HHEC earns cleaning revenues of $16,460 in cash.
F. HHEC earns cleaning revenues of $2,200 on account.
G. HHEc paid the following expenses in cash:

Wages $4275

Utilities $985

Miscellaneous $195

H. HHEC pays $950 in cash to creditors on account.
I. HHEC purchases a two year insurance policy for $2,400 in cash
J. At the end of the year, the cost of cleaning supplies on hand is $2040.
K. The sisters withdrew $2,000 in cash.

Happy Home Environmental Cleaning

Demonstration of the first four steps in accounting cycle:

1) Analyzing each transaction:

A) Cash + $15,000 and Owners' Equity + $15,000

B) Building + $10,000 and Cash -$10,000

C) Office Equipment + $1,800 and Cash - $1,800

D) Cleaning Supplies + $2,800 and Accounts Payable + $2,800

E) Cash + $16,460 and Equity (Retained Earnings) + $16,460

F) Accounts Receivable + $2,200 and Equity (Retained Earnings) + $2,200

G) Cash - Wages $4,275, Utilities $985, Miscellaneous $195 and Equity (Retained Earnings) - $4,275, $985, $195

H) Cash - $950 and Liabilities - $950

I) Cash - $2,400, Prepaid Insurance + $1,200, and Equity (Retained Earnings) - $1,200

J) Cleaning Supplies -$760 and Equity (Retained Earnings) - $760

K) Cash - $2,000 and Equity - $2,000

2) Using double entry accounting to record transactions in the general journal:

A) Debit Cash Account $15,000

    Credit Owners' Equity $15,000

To record capital contributed to the business.

B) Debit Building $10,000

   Credit Cash Account $10,000

To record purchase of building.

C) Debit Office Equipment $1,800

    Credit Cash Account $1,800

To record purchase of office equipment.

D) Debit Cleaning Supplies $2,800

Credit Accounts Payable $2,800

To record purchase of cleaning supplies on account.

E) Debit Cash $16,460

Credit Service Revenue $16,460

To record cash sales of services.

F) Debit Accounts Receivable $2,200

    Credit Service Revenue $2,200

To record sale of services on account.

G) Debit Wages $4,275

    Debit Utilities $985

    Debit Miscellaneous $195

    Credit Cash Account  $5,455

To record payment of expenses.

H) Debit Accounts Payable $950

   Credit Cash Account $950

To record payment on account.

I) Debit Prepaid Insurance $2,400

  Credit Cash $12,400

To record insurance prepaid.

I) Debit Insurance Expense $1,200

  Credit Prepaid Insurance $1,200

To record insurance expense for the period.

J) Debit Cleaning Supplies Expense $760

   Credit Cleaning Supplies $760

K) Debit Drawings Account $2,000

Credit Cash Account $2,000

To record cash drawings.

3) Posting transactions to the Ledger accounts:

                                                        Debit          Credit        Balance

Cash Account:

Owners' Equity                              15,000                            15,000

Building                                                               10,000        5,000

Office Equipment                                                  1,800        3,200

Service Revenue                           16,460                            19,660

Wages                                                                   4,275       15,385

Utilities                                                                     985       14,400

Miscellaneous                                                          195       14,205

Accounts Payable                                                    950      13,255

Prepaid Insurance                                                 2,400      10,855

Drawings                                                                2,000       8,855

                                                      Debit          Credit        Balance

Owners' Equity:

Cash                                                                 15,000       15,000

                                                      Debit          Credit        Balance

Service Revenue Account:

Cash                                                                 16,460          16,460

Accounts Receivable                                        2,200          18,460

                                                      Debit          Credit        Balance

Building Account:

Cash                                            10,000                            10,000

                                                      Debit          Credit        Balance

Office Equipment Account:

Cash                                               1,800                            1,800

                                                      Debit          Credit        Balance

Wages Expense:

Cash                                              4,275                             4,275

                                                      Debit          Credit        Balance

Utilities Expense:

Cash                                                985                             985

                                                      Debit          Credit        Balance

Miscellaneous Expense:

Cash                                                195                               195

                                                      Debit          Credit        Balance

Cleaning Supplies:

Accounts Payable                         2,800                              2,800

Cleaning Supplies Expense                              760            2,040

                                                      Debit          Credit        Balance

Cleaning Supplies Expense:

Cleaning Supplies                         760                               760

                                                      Debit          Credit        Balance

Accounts Payable:

Cleaning Supplies                                             2,800         2,800

Cash                                               950                                1,850

                                                      Debit          Credit        Balance

Prepaid Insurance:

Cash                                              2,400                             2,400

Insurance Expense                                            1,200         1,200

                                                      Debit          Credit        Balance

Insurance Expense:

Prepaid Insurance                        1,200                             1,200

                                                      Debit          Credit        Balance

Drawing Account:

Cash                                              2,000                             2,000

4) Preparation of a Trial Balance:

                                                      Debit          Credit

Cash                                           $8,855

Owners' Equity                                              $15,000

Building                                      10,000

Office Equipment                        1,800

Cleaning Supplies                      2,040

Cleaning Supplies Expense          760

Accounts Payable                                              1,850

Service Revenue                                             18,660

Accounts Receivable                2,200

Prepaid Insurance                      1,200

Insurance Expense                    1,200

Wages                                        4,275

Utilities                                          985

Miscellaneous                               195

Drawings                                   2,000

Total                                       $35,510          $35,510

Explanation:

The steps in the accounting cycle are:

a) Analyzing each transaction from source documents, e.g. from Sales Invoice.  This shows the accounts affected and even the effect of the transaction on the accounting equation.

b) Journal Entries:  This involves using the doubt entry system of accounting to record transactions in the general journal.  This is the first accounting record.  It shows the accounts to be debited and the ones to be credited in the General Ledger.

c) General Ledger: Each transaction is posted to their respective accounts in the ledger, depending on journal entries.  Usually, two accounts are affected by each transaction, just like in the journal.

d) The fourth step is the extraction of a Trial Balance.  This is an accounting tool for checking that the first three steps have been completely and correctly followed.