Recording Transactions: Example 2

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Do curso por University of Virginia

Financial Accounting Fundamentals

274 ratings

University of Virginia

Financial Accounting Fundamentals

274 ratings

This course will teach you the tools you'll need to understand the fundamentals of financial accounting. Concise videos, the financial records of a small business, and "your turn" activities guide you through the three most commonly used financial statements: the Balance Sheet, the Income Statement, and the Statement of Cash Flows. Beyond recording transactions, you'll learn how to prepare these financial statements, and read and analyze them to draw basic conclusions about a company's financial health. By the end of this course, you will be able to: - Use journal entries to record transactions; - Prepare and use t-accounts to summarize transactions recorded during an accounting period; - Describe the three most commonly used financial statements and how they fit together; - Prepare these financial statements based on transactions recorded during an accounting period; and - Draw basic conclusions about a company's financial health.

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Introduction to Recording Transactions

After learning about the Balance Sheet, we’re ready to move on to using journal entries to record transactions, then t-accounts to summarize transactions recorded during an accounting period. We’ll apply those tools to record transactions for a fictional startup company, The Garden Spot, during its first year of operations (TGS Year 1). As we go along, we’ll also evaluate the effect of transactions on the balance sheet equation to ensure it remains balanced.

Introduction to Recording Transactions1:27

T-Accounts: A Tutorial4:06

Journal Entries: A Tutorial3:47

Recording Transactions: Example 15:32

Recording Transactions: Example 24:50

Recording Transactions: Example 36:10

Recording Transactions: Your Turn10:42

Introduction to TGS Year 15:42

TGS Year 1: Transaction 16:05

TGS Year 1: Transaction 24:35

TGS Year 1: Transaction 32:30

TGS Year 1: Transaction 41:50

TGS Year 1: Transaction 5 and a Summary3:58

Conheça os instrutores

Luann J. Lynch
Almand R. Coleman Professor of Business Administration
Darden School of Business

Let's look at a second example.

In this example, the company buys $100 worth of inventory.

But instead of paying with cash, it purchases the inventory on account.

In other words, it will pay it's supplier at a later date.

Remember the four things that we need to know to record the journal entry.

You need to know the accounts affected, what type of accounts they are,

whether they go up or down, and the dollar amount.

Let's use the balance sheet equation as a tool again to help us think about what

accounts are affected.

Well the company gets inventory through this transaction.

And the inventory account increases by $100.

But instead of paying cash,

the company incurs an obligation to pay it's supplier at a later date.

So it now has a liability that it must record on it's books.

Let's call that liability accounts payable.

That's what we would typically call a liability when we purchase something from

a supplier and decide we'll pay the supplier later.

So an accounts payable account is affected and

it increases by $100.

So now we know the accounts affected, what type they are,

whether they go up or down and the dollar amount by which they're affected.

So we know everything we need to know to record the journal entry.

Let's start with inventory.

Inventory is an asset and it increases.

We'll we know an increase in an asset account as a left hand side entry or

a debit.

So let's write the left side entry, inventory the account name,

the account type, increases by $100.

Accounts payable is a liability and it increases by $100.

Increases and liabilities are right side entries.

Remember they are on the right side of the equation, so they're right side entries.

Let's write the account name indented to the right underneath the left

portion of the entry.

Accounts payable, the account type is a liability.

It increases, By $100.

Now if we compare this to the transaction that we just recorded in the prior

example.

In both situations, we record a left side to inventory

because inventory increased by $100 in both examples.

But in the first example, the company paid cash.

So assets went down so that was our right side entry.

But in this example the company buys on account.

So liabilities go up, so that's our right side entry.

So these two entries differ only by the right side of the entry.

Let's post these to the individual T accounts.

The inventory account is affected, And the accounts payable account is affected.

Let's take the left side of the journal entry, the debit to the inventory account.

And let's put it on the left side of the inventory T account.

And the right side of the entry, the accounts payable increase,

goes on the right side of the accounts payable T account.

Our left side total and our right side total are equal, we're happy about that.

Let's go back to the balance sheet equation and make sure that

our equation stays in balance after we've completed our journalizing and posting.

Inventory which is an asset goes up by 100, so assets are up by 100.

Accounts payable which is a liability increase by 100, so

liabilities in total are up by 100.

The left side of the equation is increased by 100.

The right side of the equation is increased by 100.

So the equation stays in balance.

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