Did somebody say CPA Exam FAR journal entries? You guys need to stop messing with me. You know how much I LOVE journal entries 🙂 For reference, I love journal entries almost as much as I love bite-sized cupcakes, Mini Coopers, and tiny homes. You are the best! Thank you for making my day.
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CPA Exam FAR Journal Entries: The Basics
In case you need a little refresher, let’s go over the basics of journal entries. The whole idea behind a journal entry is that it records an economic transaction such as a sale of inventory, purchase of a capital asset, or receipt of cash in a general journal. This journal collects all of these journal entries or records of transactions and allows for an efficient and effective way to communicate the financial picture of a company at a specific time or for a specific period. The general journal aids in producing financial statements such as the Balance Sheet, Income Statement, and Statement of Cash Flows and the associated disclosure notes. These statements and disclosures then help the business, investors, creditors, analysts, regulators, etc. make informed decisions about the company.
CPA Exam FAR Journal Entries: The Mechanics
Every journal entry that you encounter should have its debit (DR) balance equal its credit (CR) balance. What does debit mean? What does credit mean? Debit means left side, and credit means right side. Okay, but left side and right side of what?
T accounts 🙂 Specifically, every asset, liability, equity, revenue, expense, gain, and loss item has a normal side of the T account where increases and decreases occur. For example, assets, expenses, and losses have a normal debit side, which means debits increase these T accounts and credits decrease these T accounts. Conversely, liabilities, equity, revenue, and gains have a normal credit side, which means credits increase these T accounts and debits decrease the T accounts.
CPA Exam FAR Journal Entries: Example
Let’s do some example journal entries to help solidify these concepts.
Sarah is in the business of selling syrup. No surprises here, her business is called Sarah’s Syrup 🙂 I am talking viscous, full-flavored maple syrup. It is the best syrup in the world. I love Sarah’s Syrup almost as much as I love journal entries. Anyways, I buy 10 bottles of Sarah’s Syrup for $5 each, and I promise to pay Sarah in 30 days. Sarah uses the specific identification method of valuing inventory, and each bottle is worth $3. It’s time to record Sarah’s journal entries.
DR: Accounts Receivable 50
CR: Sales Revenue 50
Description: To record the sale of 10 bottles of Sarah’s Syrup for $5 each to Andrew
DR: Cost of Goods Sold 30
CR: Inventory 30
Description: To record cost of goods sold and removal of inventory for 10 bottles of Sarah’s Syrup for $3 each
[Today’s Date + 30 Days]
DR: Cash 50
CR: Accounts Receivable 50
Description: To record the receipt of cash from the sale of Andrew on account 30 days ago
CPA Exam FAR Journal Entries: Summary
Understandably, the example above is not the most challenging; however, it serves as an example of how a series of journal entries work. On FAR, you will most likely encounter several journal entry problems in the form of multiple choice or task-based simulations.
It is important to note that journal entries, regardless of the difficulty, all have the same basic structure. At the minimum, there is at least one debit and at least one credit. The sum of the debits equals the sum of the credits. Moreover, certain classes of accounts behave in predictable ways. Debits and credits do not mean increase and decrease. Instead, debits and credits indicate which side of a T account will be hit. Lastly, depending on the problem encountered, you may not necessarily see dates, the abbreviations DR and CR, or descriptions underneath transactions. A stripped down version of the journal entry may just have a non-indented debit and an indented credit. Be prepared to see journal entries in all shapes and forms.
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