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Case Study: Journal Entries

Case Study: Journal Entries

Author: Evan McLaughlin

Identify journal entries in the context a particular business.

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Hey everyone, and welcome to our video today on our case study on journal entries. So what's today's video going to be about? We're going to look at a subject company today for our case study. It's called Legacy Realty.

And we're going to talk a little bit about what their business is, and what they do. So we're going to look at our company. And then we're going to look at some journal entry examples for this company. OK, so we're going to look at some case study transactions.

So let's learn a little bit about who our company is. So our case study company is Legacy Realty. So what type of company is legacy realty? It's a sole proprietorship.

That's a type of company that is owned by one single individual, and where that individual and the business are legally treated as the same. So what's the purpose of the business? This business owns, leases, and manages its own rental properties.

So it purchases houses and condominiums and leases them out to tenants. They also perform their own management of their units. And so where's the business located? It's in Washington DC. And they have a small staff of five people. So this is the company that we're going to be looking at during our case study.

So does our company need journal entries? What do you guys think? Does Legacy Realty need journal entries. The answer is yes. Yes, they do.

Why? Why does Legacy Realty need journal entries? Well, journal entries help us to track accounting events, determine specific changes to our accounts, and they allow the business to be able to tell our story. So journal entries are very important for a company in order to perform their accounting functions.

So let's go ahead and jump into our example transactions. So our first transaction, the owner contributes $200,000 for the initial funding of the company. So the reason behind this transaction is the company needs money to purchase the properties and fund their operations.

So what does that journal entry look like? What does our first journal entry look like? We're going to assume this is on the first day of the year.

And they put cash into the business. So we have a debit to our cash account of $200,000. And remember, that reference column, that's our actual account number that we're going to use to identify that cash account within our accounting system. So we have a debit to cash of $200,000, and then a credit to owner's capital as well of $200,000 for this cash that the owner's putting into the business.

So that's our first transaction. Let's look at our next transaction, the purchase of the first property for $75,000. So this is to invest funds in the business's primary purpose, and to start generating revenue.

We need to have a rental unit in order to generate our income. And we're going to assume that the company pays cash for this purchase. So we have our second journal entry.

This happened at the end of the month. So January 31st, we purchased a building. So that's an asset. So in this case, we have a building for $50,000.

And when you purchase a property, there's also land. So some of our purchase price of $75,000 is also land. So we have a debit to building of $50,000 and a debit to land of $25,000.

And since we're paying cash, we're going to have a credit to cash, because that's an asset. And assets are reduced with credits. So our credit to cash is $75,000 or the total of our building and land, so the total purchase price.

Let's look at our third transaction. We're going to perform $5,000 of repairs to our property before we're going to lease it to a tenant. So why do we need this? Well, we need to make sure the property is in adequate condition in order to lease and generate revenue. And we're also going to pay cash for these repairs.

So now we have our third journal entry. So this happened on the 2nd of February. And it's an expense. So we're incurring an expense, in this case, repairs. And expenses are increased by debits. So we're going to have a $5,000 debit to our expense account.

So what's going to be our credit? Well, I mentioned that we're going to assume that we pay cash for these expenses. So cash is our credit. Cash is going down by $5,000.

Next transaction, we're going to purchase $500 worth of office supplies, key words here, on account. So why do we need this transaction? Well, our office needs basic supplies in order to operate.

So our next journal entry, journal entry four. A few days later, February 5th, again we have an expense because this is money that we are spending. Or in this case, it's on account. So we're incurring an expense. And expenses are increased with debits. So we debit our expense of $500.

And now what's the credit going to be? Now, since it's on account, it's not going to be cash. It's going to be accounts payable. It's a liability. So we have a credit to our liability accounts payable of $500.

One more transaction, transaction number five, our properties leased. So now we're going to collect our first month's rent of $1,500. Well, when the unit is leased, we collect rent. That's our primary way that our business generates its revenue.

So let's look at journal entry number five. On the 1st of March, the first month, we're going to collect rent. And when we collect rent, we receive cash. So we're going to debit our cash account for $1,500.

Now, what's the credit going to be in this case? Well, we're generating revenue, right? So our credit's going to be to revenue because revenues are increased with credits. So $1,500 credit to revenue, so that's our last transaction.

So let's just do a quick recap. So what did we talk about today? We introduced our case study company, Legacy Realty, that is in the business of owning and leasing their own rental properties.

We looked at several examples of journal entries. We looked at cash contribution by the owner. We looked at the purchase of a property for the business. We looked at incurring repairs expense in order to bring that property up to rentable condition. We looked at purchasing office supplies in order to run our small office. And the last transaction we looked at was collecting rent on our property.

I hope everybody enjoyed this video, got a lot out of it. And I hope to see you next time.