Environmental Services, Inc. performs various tests on wells and septic systems. A few of the company’s business transactions occurring during August are described below:

On August 1, the company billed customers $2,500 on account for services rendered. Customers are required to make full payment within 30 days.

On August 3, the company purchased testing supplies costing $3,800, paying $800 cash and charging the remainder on the company’s 30-day account at Penn Chemicals. The testing supplies are expected to last several months.

On August 5, the company returned to Penn Chemicals $100 of testing supplies that were not needed. The return of these supplies reduced by $100 the amount owed to Penn Chemicals.

On August 17, the company issued an additional 2,500 shares of capital stock at $8 per share. The cash raised will be used to purchase new testing equipment in September.

On August 22, the company received $600 cash from customers it had billed on August 1.

On August 29, the company paid its outstanding account payable to Penn Chemicals.

On August 30, a cash dividend totaling $6,800 was declared and paid to the company’s stockholders.

Instructions

Prepare an analysis of each of the above transactions. Transaction 1 serves as an example of the form of analysis to be used.

(a) The asset Accounts Receivable was increased. Increases in assets are recorded by debits. Debit Accounts Receivable $2,500.

(b) Revenue has been earned. Revenue increases owners’ equity. Increases in owners’ equity are recorded by credits. Credit Testing Service Revenue $2,500.

a. Prepare journal entries, including explanations, for the above transactions.

b. How does the realization principle influence the manner in which the August 1 billing to customers is recorded in the accounting records?

c. How does the matching principle influence the manner in which the August 3 purchase of testing supplies is recorded in the accounting records?