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TGS Year 1: Transaction 5 and a Summary

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TGS Year 1: Transaction 5 and a Summary

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.

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 - Draw basic conclusions about a company's financial health

Visualizar o programa do curso

Habilidades que você aprenderá

Financial Accounting, Accounting, Financial Statement, Balance Sheet

Ministrado por

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

Transcrição

Transaction 5.

The company made purchases of inventory throughout the year that cost $260,000.

$235,000 of that is paid in cash, and

the remaining $25,000 was purchased on account.

What accounts are affected?

Well inventory goes up because we bought that asset.

So we make a left hand side to the inventory account,

which is an asset debit, it increases by $260,000.

Cash of $235,000 was paid for this inventory, so cash decreases.

So that's a right side or a credit to the cash account for

$235,000.

And the remaining 25,000 was purchased on account.

So the company has an obligation to pay that in the future, so

it's incurred a liability.

We will call that liability Accounts Payable.

That balance increases by $25,000.

Now this is the first time we've seen in The Garden Spot,

a journal entry that had two right side entries.

So remember, we've gotta make sure that the total of the left side's

entries is equal to the total of the right side entries.

This total is 260, so these are equal.

So we've done the journal entry appropriately.

Now, let's post it to T-Accounts.

Well, the first time we've seen an inventory asset in this case, so

we'll create that T-Account.

Its beginning balances is 0.

We make a left side entry to that T-account for $260,000.

We make a note that that's associated with transaction 5.

We see the right side to cash of 235, so let's post that to the right side

of the T-account and make a note that that's associated with transaction 5.

And then we'll make a right side to the accounts payable T-account as well,

which we haven't seen before in this case, so we'll need to create it.

We'll give it a beginning balance of 0 because no prior transactions have

affected that account.

And we'll put the right side entry of 25,000 into that T-account,

and we'll denote that that is associated with transaction 5.

Now, let's make sure that the equation stays in balance after recording

the transaction.

Inventory, which is an asset, goes up by $260,000.

Cash, which is an asset, goes down by $235,000.

Accounts Payable, which is a liability, goes up by $25,000.

The assets net effect is to increase by $25,000.

So the left side of the equation increases by $25,000 and

the right side of the equation increases by $25,000.

So we are, yet again, smiling.

So now we've completed recording the first five transactions of The Garden Spot.

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