After taking the first part of this financial accounting course, you excitedly tell a friend what you have learned. You tell him about assets, liabilities and net worth and how they increase and decrease in value with every financial transaction. Your friend decides to start getting organized and apply accounting principles to his personal finances. He compiles everything that he thinks is important and calculates his net worth. He then asks you to look over what he has done to make sure it is correct. His important financial items are listed below, along with his version of the T-account records. 1. He had $950 in his bank account at the beginning of the month. 2. He had a $1,200 balance on his credit card at the beginning of the month. 3. He estimates that he had about $3,000 worth of "stuff" in his apartment at the beginning of the month (TV, sound system, computer and furniture). 4. He deposited his salary of $1,500. 5. He paid in advance for three months of rent with $1,350 cash. 6. He paid $600 to pay off a portion of the credit card bill. 7. He purchased a new video game system for $350 with his credit card. 8. He bought $120 worth of food with cash. 9. He got hired at a second job. He will start next month and will eam $800 per month 10. He spent $250 cash on movies, stage plays and Dave and Buster's Sports Bar. 11. He lived in his apartment for one of the three months he already paid for (see #5). Cash Unpaid Accounts 1. 950 5. 1,350 6. 600 2. 1,200 4. 1,500 6. 600 7. 350 8. 120 10. 250 + Total $134 Total $950 3 5. 8. 10. Net Worth 1,350 120 250 4. 7. 9. 3,000 1,500 350 800 Total $3,930 Required a) What are some immediate problems that you see with what your friend has prepared? b) With all the problems you see, your friend asks you to show him what the correct records should look like Use the templates at the end of this problem to record the transactions After showing your friend the corrected version, he asks a number of questions. c) Why did you use all of these accounts when I only used three (Cash Unpaid Accounts and Net Worth)? d) Why is the $3,000 worth of "stuff not considered net worth? e) I was having trouble figuring out how to record my second job which I start next month. They are going to be paying me $800 a month! I figured it will increase my net worth, but I didn't know where else to put it. I knew it couldn't be cash, because they haven't paid me yet. What did you do with it and why? What did you do with my rent? Shouldn't the entire $1.350 decrease my net worth? And what would happen if I did it my way? 9) I forgot to tell you that the $600 credit card payment included $30 of interest. I didn't think it mattered since the total payment amount is the same. This won't change anything, right? h) You may have noticed that I am running low on cash. Any suggestions on how I can raise more cash? i) This is very useful and I would like to do this more often. I can do it this weekend, then two weeks from now once I finish my exams, then probably not for another month after that. I'm going on a well- deserved vacation after my exams, so I won't be around to look after it. Do you think this will work out well? 1) Using the information provided, record the transactions in the T-accounts and complete calculations at the bottom of the personal balance sheet and income statement on the next page). PERSONAL BALANCE SHEET Assets Liabilities INCREASE DECREASE DECREASE NCREASE Opening Opening NCREASE DECREASE NCREASE Opening Opening: INCREASE DECREASE DECREASE GREASE Opening Opening = Total Assets Total Liabilities Net Worth Chapter Financial Statements: Personal Accounting PERSONAL INCOME STATEMENT DECREASI INCREASE REVENUE Less EXPENSES ISEASE CREASE DECREME NCREASE DECREASE ISCRIBE DECREASE CRETE DECREASE Total Revenue Less Total Expenses Surplus (Deficit)