« Monday MBA Math: Supply and Demand | Main | Emory (Goizueta) Chooses MBA Math »

Monday MBA Math: Journal and T-Accounts

The Monday MBA Math series helps prospective MBA students to self assess their proficiency with the quantitative building blocks of the MBA first year curriculum.

The first MBA Math accounting exercise explained that balance sheets provide a snapshot of a firm's financial condition at a moment in time, with "balance" referring to the equality between the left side's assets and the right side's combination of liabilities and equity.  The second accounting exercise introduced transactions as the means by which the balance sheet changes over time.  As long as the balance sheet equation (assets = liabilities + equity) is maintained for each transaction then the new balance sheet that results from a large sequence of transactions will remain in balance. 

This exercise introduces journals and t-accounts as recording systems to handle the volume of transactions that companies generate.  Modern accounting recording systems are automated, of course, but putting pencil to paper with journals and t-accounts helps beginning students to internalize the logic of accounting.

Spending time in the accounting trenches working with transactions is critical to developing an informed understanding of the financial statements that MBAs will analyze in their classes and careers. 

Exercise:

Ruston Company
Balance Sheet
As of January 4, 2009
(amounts in thousands)
 
Cash 9,300 Accounts Payable 2,500
Accounts Receivable 5,000 Debt 2,300
Inventory 5,500 Other Liabilities 6,500
Property Plant & Equipment 15,900 Total Liabilities 11,300
Other Assets 1,400 Paid-In Capital 5,700
    Retained Earnings 20,100
    Total Equity 25,800
Total Assets 37,100 Total Liabilities & Equity 37,100

 

Transfer the journal entries to T-accounts for the transactions below, compute closing amounts for the T-accounts, and construct a final balance sheet to answer the question.

Journal amounts in thousands

Date Account and Explanation Debit Credit
Jan 4 Accounts Payable 8  
     Cash   8
  Paid money owed to supplier    
Jan 5 Property, Plant & Equipment 49  
     Cash   49
  Paid cash for machine    
Jan 6 Cash 70  
     Paid-In Capital   70
  Issued stock    
Jan 7 Cash 20  
     Inventory   16
     Retained Earnings   4
  Sold and delivered product to customer    
Jan 8 Cash 51  
     Debt   51
  Borrowed money from bank    
Jan 9 Inventory 14  
     Accounts Payable   14
  Bought manufacturing supplies on credit    
Jan 10 Cash 10  
     Accounts Receivable   10
  Received customer payment    

 

What is the final amount in Total Assets?

Solution (with audio commentary): click here

Prof. Peter Regan created the self-paced, online MBA Math quantitative skills course and teaches live MBA courses at Dartmouth (Tuck), Duke (Fuqua), and Cornell (Johnson).

Posted on Tuesday, January 19, 2010 at 09:50AM by Registered CommenterPeter Regan in , , | Comments3 Comments

Reader Comments (3)

Very interesting theory.
Not all companies use computerised accounts systems.
At my wifes place of employment they still use daily pencil entries into large book type ledgers and journals then enter the end of month totals into the computer.
They reckon this saves a tremendous amount of time when finalising month and year end figures.
I learnt acounting through the old fashion double entry bookeeping method and still think to this day it is the best way of teaching accounting to students.
So keep up the good work.
July 30, 2010 | Unregistered CommenterDavid
For the help please use http://www.google.com
September 7, 2010 | Unregistered CommenterRarroyabbom
MBA problems like these are vital to work through to be successful in your future career as an accountant or other financial professional.
January 15, 2014 | Unregistered CommenterCPAs Naperville

PostPost a New Comment

Enter your information below to add a new comment.

My response is on my own website »
Author Email (optional):
Author URL (optional):
Post:
 
All HTML will be escaped. Hyperlinks will be created for URLs automatically.