Recording Transactions: Example 3

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Do curso por University of Virginia

Financial Accounting Fundamentals

275 ratings

University of Virginia

Financial Accounting Fundamentals

275 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 try one more example.

In this example, the company purchases $100 of inventory.

But this time it pays half of it, $50, with cash,

and it buys the remaining $50 on account and will pay its supplier later.

Four things we need to know in order to be able to write the journal entry,

the accounts affected, what type of accounts they are,

whether they increase or decrease, and the dollar amount.

I think we're getting the hang of this one.

Let's see.

What accounts are affected?

Well the company still is getting some inventory just as it has

in the past two examples.

That Inventory which is an asset account increases by $100.

In this example, the company pays for half of that $100 in cash, so

the cash account is affected.

So cash goes down by $50.

The remaining $50, it pays on account.

So, here we would have accounts payable account, That goes up by 50.

So now we know what accounts are affected.

There are three accounts.

We know what types they are, two are asset, one is a liability account.

We know whether they increase or decrease and we know the dollar amount.

So now we should be able to record our journal entry.

Let's think about cash.

Cash is an asset and it decreases.

A decrease in an asset is a right side entry.

Let's hold off on that for a moment.

Inventory which is an asset account increases.

Increases in asset account are left side entries or debits.

So let's start there.

We have a left side entry Inventory,

which is an asset account, increases by $100.

All right, what about this accounts payable account?

The accounts payable account is a liability account.

It increases, so that would be a right-side entry or a credit.

So we have two accounts, cash and accounts payable, that will be right-side entries.

So let's just start with cash.

We could start with either one, but we'll start with cash.

We're going to indent that right-side entry just a little bit underneath

the left-side entry.

So cash which is an asset account decreases by 50.

Okay, remember that the total of the left side

entries must equal the total of right side entries.

And here we see, that that's not yet the case.

Why is that not the case?

Because the accounts payable account is also affected.

It's an increase in the liability, that also is a right-side entry.

So, let's make that entry.

The accounts payable account,

which is a liability, increases by 50, okay?

So now we see in our journal entry that the total of the left side entries, or

debits, is exactly equal to the total of the right side entries, or credits.

So, we're satisfied that we've met that condition.

One thing to point out here, is you notice that we have a right side

entry to an asset at the same time as we have a right side entry to a liability.

But remember, right side entries to assets are decreases,

right side entries to liabilities are increases.

Lets post these to the individual t accounts.

We have three t accounts this time that are affected, cash,

Inventory And accounts payable.

I will just abbreviate that here as Ap.

Let's post the left side entry or debit to the inventory account.

To the left side of the inventory t account.

We'll post the right side entry to cash to the right side of the cash t account.

That's a decrease in cash and then we'll post the right side entry

to the accounts payable account to the right side of that t account.

Now recall it's important for us to make sure that the balance sheet equation stays

in balance after we've recorded this journal entry and

posted to the t accounts.

So let's do that.

Cash which was an asset decreased by 50,

so assets have been decreased by 50 due to that effect.

Inventory which is an asset increased by 100.

So that results in $100 increase in our asset side of the equation.

The net effect there would be an increase of 50 on the left-hand side or

the asset side of the equation.

The accounts payable account, which is a liability increased by 50.

So the liabilities are up in total by 50.

There's no effect on owner's equity.

So what we see is that, the asset side of the equation or

the left side in total is up by 50.

The right side of the equation is up by 50.

So the equation stays in balance.

Great work.

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