How to make T-accounts, how to show the effects of each transaction on net earnings and cash and how to compute the company’s total asset turnover ratio?
1 Answer
See below
Explanation:
T-accounts
On a piece of paper, you'll want to draw in the 12 accounts listed above (in good order is best - for instance on the asset side you'd want cash first, then A/R, then inventory, etc...). You'll also need T-accounts for Sales, Cost of Sales, Employee expense, and other accounts on the Income Statement. Overall, as a model, it should look something like this (note that these are not in good order...):
Next put in all your starting amounts.
Activity
Now record the activity on the accounts. I'd label the activity with the letters shown for each event so you can easily trace a mistake (much like the example image is showing individual transactions, like number 1 showing an increase in Raw Materials and putting it on their account (they didn't pay cash - they owe the money).
For example:
a - DR property and equipment 150, CR long term debt 150 (create a T-account for long term debt)
b - DR cash 900, CR A/R 900
c - DR telephone expense 1, CR cash 1
d - DR A/R 500, CR sales 500, DR Cost of sales 300, CR inventory 300
e - DR Wage expense 100, CR cash 100
f - DR deferred income tax 1259, CR cash 1259
g - DR inventory 223, CR accounts payable 223
h - DR prepaid asset 12, CR cash 12
i - DR long term borrowing 10, DR interest expense 1, CR cash 11
j - DR patent 8, CR cash 8
Effects on Cash, Earnings
For effects on cash, simply add up the activity and show the balance at the bottom of the T-account (use a horizontal line to indicate that the balance number is separate from the activity numbers)
For effects on earnings, sum the sales numbers and subtract the expenses incurred (telephone, wages, interest).
Total Asset Turnover Ratio
This can be found by:
https://www.myaccountingcourse.com/financial-ratios/asset-turnover-ratio
