Before the solutions of the examples, following information must be reminded:

 

Assets are objects, claims and rights.

 

Objects are the resources owned by the firm such as cash, bank accounts, materials inventory, merchandise inventory, land, buildings, vehicles, furniture and fixtures, machinery and equipment etc.

 

Claims are cash, services or goods that other businesses, individuals or government owe to the firm. If a firm does not receive the payment when it delivers goods or provides a service, it has a trade receivable. If the receivable is open account it is called accounts receivable, if the firm receives a note or a forward-dated check (if the receivable is backed by a note or a forward-dated check) it is called notes receivable. If a firm pays a cash deposit or a guarentee that will be received in the future if the firm complies with an agreement (refundable deposit), it is called deposits and guarentees extended. If a firm pays money before receiving a service (such as insurance) or before benefiting from someting (such as paying the rent in advance before using an apartment flat or a store), it is called prepaid expenses. If a firm makes a payment before receiving the goods it is called advance payments. Accounts receivable, notes receivable, deposits and guarentees extended, prepaid expenses, and advance payments are claims. In accounts receivable, notes receivable, deposits and guarentees extended the firm will receive cash; in prepaid expenses the firm will receive a service or a benefit; in advance payments the firm will receive goods.

 

Rights are license, patent, franchise, copyright, trade mark, etc. that are controlled by the firm.

 

Liabilities are cash, services or goods that the firm owes to other businesses, individuals or government. If a firm does not make payment when it receives goods or services, it has a trade payable. If the payable is open account it is called accounts payable, if the firm gives a note or a forward-dated check it is notes payable.If a firm receives a cash deposit or a guarentee that will be returned in the future if the other firm complies with an agreement, it is called deposits and guarentees received. If a firm owes money to the government it is called  taxes and other duties payable. If a firm receives money before providing a service, it is called unearned revenue. If a firm receives money before delivering the goods, it is called advance payments received.  Accounts payable, notes payable, deposits and guarentees received, taxes and other duties payable, unearned revenue, and advance payments received are liabilities. In accounts payable, notes payable, deposits and guarentees received, taxes and other duties payable the firm owes cash; in unearned revenue the firm owes service; in advance payments received the firm owes goods.

 

Only item that we have studied in shareholders’ equity is capital. Capital is the amount that the owners put as cash or goods to the firm.

 

Assets = Liabilities + Shareholders’ equity

 

Assets are on the left hand side of the equation. So, an increase in an asset item is debited (recorded on the left hand side) to the related account, a decrease in an asset item is credited (recorded on the right hand side) to the related account. Liabilities and shareholders’ equity are on the right hand side of the equation. So, an increase in liability or shareholders’ equity item is credited (recorded on the right hand side) to the related account, a decrease in liability or shareholders’ equity item is debited (recorded on the left hand side) to the related account. Revenues and gains are always credited; costs, expenses and losses are always debited. In an accounting record debit total must be equal to the credit total. These are the basic rules of accounting.

 

1.   Money put by the owners is capital. When this money is put by the owners it is the asset of the company. So the company’s assets increased (company has money). Increased asset item is bank accounts. This money is put by the owners. So the capital (a shareholders’ equity item) also increased. Since bank accounts is an asset item and this item increased, 800,000 must be debited to the bank accounts (increases in asset items are debited). Capital also increased, that is why 800,000 must be credited to the capital (increases in shareholders’ equity items are credited). Accounting record:

	Debit	Credit
Bank accounts	800,000
Capital		800,000

 

 

2.   Here an asset item increased, which is buildings (the firm owns a building). But another asset item decreased. Because 400,000 TL comes from the bank accounts and bank accounts decreased by 400,000 TL. Remember, increases in asset items are debited, decreases in asset items are credited. Accounting record:

 

	Debit	Credit
Buildings	400,000
Bank accounts		400,000

 

 

3.   Here, the firm buys furniture and fixtures. So, an asset item (furniture and fixtures) increased. But the firm also pays value added tax (VAT). When a firm pays VAT whenever it buys goods or services, the amount of VAT is debited to VAT deductible. Total money comes from the bank accounts. So bank accounts decreased. Accounting record:

 

 

	Debit	Credit
Furniture and fixtures	80,000
VAT deductible	14,400
Bank accounts		94,400

 

4.   Here the firm made a payment before receiving a benefit (before using the apartment flat). So, the payment of one-year rent (2,500 * 12 = 30,000 TL) is prepaid expenses. 5,000 TL security deposit is deposits and guarantees extended. These two asset items (prepaid expenses, and deposits and guarantees extended) increased. Total money (30,000 + 5,000 = 35,000 TL) comes from the money in the bank account. So, bank accounts decreases. Accounting record:

 

	Debit	Credit
Prepaid expenses	30,000
Deposits and guarantees extended	5,000
Bank accounts		35,000

 

5.   Vehicle is an asset. So an asset item (vehicles) increased by 50,000 TL. VAT (50,000 * 0,18 = 9,000 TL) is debited to VAT deductible. Total amount of the money (50,000 + 9,000 = 59,000) comes from the bank accounts. So bank accounts decreased by 59,000 TL. Accounting record:

 

	Debit	Credit
Vehicles	50,000
VAT deductible	9,000
Bank accounts		59,000

 

6.   The guarantee paid is deposits and guarantees extended. This money comes from the bank accounts. When the firm paid this guarantee one asset item (deposits and guarantees extended) increased, another asset item (bank accounts decreased). Accounting record:

 

	Debit	Credit
Deposits and guarantees extended	40,000
Bank accounts		40,000

                                                                  

7.   Merchandise inventory is an asset item. So this asset item increased. VAT (50,000 * 0,18 = 9,000 TL) is recorded as VAT deductible. The firm does not make the payment (50,000 + 9,000 = 59,000 TL) when it received the goods. So the firm owes 59,000 TL to the supplier. This is a liability. Since it is open account, the liability item is accounts payable and it increased. Accounting record:

 

	Debit	Credit
Merchandise inventory	50,000
VAT deductible	9,000
Accounts payable		59,000

 

 

8. Packaging materials is asset. 2,000 TL is over the capitalization limit. So these materials must be capitalized (must be recorded as an asset). The asset item is materials inventory and this asset item increased. If the amount were below the capitalization limit, it would be expensed. VAT (2,000 * 0,18 = 360 TL) is recorded as VAT deductible. Total money (2,000 + 360 = 2,360) comes from the cash. So cash, which is an asset item, decreased. Accounting record:

	Debit	Credit
Materials inventory	2,000
VAT deductible	360
Cash		2,360

 

9. Here the firm makes sales and receives 3,000 TL cash. That is an increase in an asset item (cash). Customers paid 17,000 TL by using their credit cards. The bank owes 17,000 TL to the firm, in other words the firm has 17,000 TL credit card receivables from the bank. That is an increase in another asset item, which is credit card receivables. So two asset items (cash and credit card receivables) increased. 20,000 TL includes both the revenue and the VAT. VAT and revenue must be separated. This is done as follows:

 

 

      Whenever goods are sold two records are made. The first record recognizes the revenue and the increase in assets. The second record recognizes the cost of merchandise sold (cost of goods sold) and decrease in inventory. Cost of merchandise sold (cost of goods sold) is debited, decrease in inventory is credited. Revenue earned by selling goods or services inside Turkey is called domestic sales and it is credited. VAT that is received is VAT payable and it is also credited. Whenever there is domestic sales, there is VAT payable. Accounting record:

	Debit	Credit
Cash	3,000
Credit card receivables	17,000
Domestic sales		18,519
VAT payable		1,481
Cost of merchandise sold	12,000
Merchandise inventory		12,000

 

10. Here the firm receives credit card receivables from the bank. But the bank deducts 1.7 % commission and pays the rest to the firm.

 

 

	Debit	Credit
Bank accounts	16,711
Commission expense	289
Credit card receivables		17,000

 

 11. Here the company bought merchandise. So an asset item (merchandise inventory) increased. But the firm does not pay for the goods it received. So the firm owes money to the supplier, and this liability is backed by a forward-dated check. That is an increase in a liability item (notes payable). Accounting record:

 

 

	Debit	Credit
Merchandise inventory	60,000
VAT deductible	4,800
Notes payable		64,800

 

 

	Debit	Credit
Notes payable	64,800
Bank accounts		64,800

 

13.Here a manufacuring company sells finished goods that it produced.. But the firm does not receive the payment, instead the firm receives a forward-dated check. Forward-dated check is a receivable (notes receivable), so an asset item (notes receivable) increased. Accounting record:

 

	Debit	Credit
Notes receivables	35,400
Domestic sales		30,000
VAT payable		5,400
Cost of goods sold	22,000
Finished goods inventory		22,000

 14.  When the check is cashed by the firm the money is deposited into the bank account. So an asset item (bank accounts) increased. Another asset item (notes receivable) decreased, because since the check is cashed this receivable no longer exists. Accounting record:

 

	Debit	Credit
Bank accounts	35,400
Notes receivable		35,400

 

15. Hotel is a service firm. Hotel provided a service (accomodation) and earned revenue. Revenue is received as cash. Accounting record:

 

       VAT = 40,000 * 0.18 = 7,200 TL.

 

	Debit	Credit
Cash	47,200
Domestic Sales		40,000
VAT Payable		7,200

 

16. Company made a payment before receiving a benefit. This is prepaid expenses. So an asset item (prepaid expenses) increased. Suppose the firm made the payment from cash. So another asset item (cash) decreased. Accounting record:

 

	Debit	Credit
Prepaid expenses	3,000
Cash		3,000

 

 
17. In this question the firm makes an advance payment before receiving the goods. So the seller owes goods to the firm for this advance payment. Payment made before receiving the goods is an asset item, which is advance payments. So an asset item (advance payments) increased. Since this money comes from the bank account another asset item (bank accounts) decreased. Accounting record:

 

	Debit	Credit
Advance payments	14,000
Bank accounts		14,000

 

18. Here the firm receives the goods. So an asset item (merchandise inventory) increased. The firm paid 14,000 TL before. Now the firm must pay the remaining amount from the bank account. This is a decrease in an asset item (bank accounts). Since the firm received the goods the claim (receivable) no longer exists. So another asset item (advance payments) decreased. Accounting record:

 

 

	Debit	Credit
Merchandise inventory	24,000
VAT deductible	1,920
Bank accounts		11,920
Advance payments		14,000

 

19. Here the firm receives advance payment before delivering the goods. The firm owes goods to the buyer. This is an increase in a liability item (advance payments received). The buyer deposited the money into the firm’s bank account. This is an increase in an asset item (bank accounts). Accounting record:

 

	Debit	Credit
Bank accounts	22,000
Advance payments received		22,000

 

20.Here the company delivers the goods. So the company fulfills its liability. This is a decrease in a liability item (advance payments received). The company should recognize the revenue (domestic sales). The company also received the remaining amount. This is an increase in an asset item (bank accounts). Accounting record:

 

 

	Debit	Credit
Bank accounts	25,200
Advance payments received	22,000
Domestic sales		40,000
VAT payable		7,200
Cost of goods sold	27,000
Finished Goods Inventory		27,000

 

 21. In this example the customer returns the merchandise that she/he received before. This is a sales returns. The firm receives the merchandise back and returns the cash to the customer. The accounting record:

 

       VAT returned to the customer: 3,000 * 0.18 = 540 TL.

 

 

	Debit	Credit
Sales Returns	3,000
VAT deductible	540
Cash		3,540
Merchandise Inventory	3,000
Cost of Merchandise sold		3,000

 

 When the sale was made the firm recorded 3,000 TL as domestic sales. Sales returns cancels that record. Also, VAT received from the customer (540 TL) was recorded as VAT payable. VAT deductible cancels that record. The firm paid 3,540 TL to the customer. So, its cash (asset) decreased. That is why 3,540 is credited to cash.

 

The firm received the merchandise back. Merchandise inventory increased. That is why 3,000 TL is debited to merchandise inventory. A credit record of 3,000 TL to cost of merchandise sold cancels the record when the sale was made.