ACCTG 211 1st Edition Lecture 7 Outline of Last Lecture I II III IV V VI VII VIII IX X Double Entry Accounting Debits and Credits How debits and credits affect a balance sheet Accounting Cycle Scott s official 6 step process of Journalizing and Posting Transactions Anatomy of a Journal Entry Examples of Debit and Credit Problems What is a trial balance The Closing Process Temporary VS Permanent Accounts Outline of Current Lecture I Main Topics of Unit 3 II 5 Step Process to Error Analysis III Example of a Unit 3 Problem IV Example of an Unadjusted Journal Entry V VI VII Example of adjusted journal entry Example of a Trial Balance How to close accounts Current Lecture VIII Main Topics of Unit 3 a Asset accounts increase by debit i Every other rule for debits and credits can be derived from this rule if you follow it logically ii Dividends is a contra equity account that increases by debit b Journal entries are written in a consistent form and have four required items Remember debits on the left and credits on the right 1 A date account names dollar amounts and a description are required in a properly formatted journal entry These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute II III IV c The closing process zeroes out the following temporary accounts to Retained Earnings i Revenues Expenses and Dividends 5 Step Process to Error Analysis a Step 1 Journal entry for what DID happen i On exam it may be told to you that it is an error or you may have to determine if it is an error or not b Step 2 Journal entry for what SHOULD HAVE happened c Step 3 Compare Step 1 and Step 2 d Step 4 Determine impact on Income Statement if any e Step 5 Determine impact on Balance Sheet Accrued Revenue Revenue Now Cash Later What if we fail to properly account for the revenue now a Example What if we forget to record revenue that was earned in the current accounting period when cash associated with the revenue will be paid to us in a future accounting period i Step 1 Journal entry for what DID happen 1 Nothing No journal entry was recorded ii Step 2 Journal entry for what SHOULD HAVE happened 1 Dr Accounts Receivable 2 Cr Service Revenue iii Step 3 Compare Step 1 and Step 2 iv Step 4 5 1 Revenues are understated a Because you didn t credit 2 Net Income is then understated a If revenue is understated then net income is understand 3 Retained Earnings is then understated a If net income is understand then R E is understated 4 Owner s equity is then understated a If R E is understated then Owner s equity is understated 5 Assets are also understated which balances out the A L E equation 6 You should try and figure out the income statement first because this will then translate to the balance sheet Accrued Expenses Expense Now Cash Later What if we fail to properly account for the expense now a Example What if we forget to accrue for salaries payable at the end of the accounting period i Bringing forward salaries you should have paid ii Step 1 Journal entry for what DID happen 1 Nothing No journal entry was recorded iii Step 2 Journal entry for what SHOULD HAVE happened 1 Dr Salaries Expense 2 Cr Salaries Payable iv Step 3 Compare Step 1 and Step 2 v Step 4 1 Revenue No effect a Revenue is never debited or credited 2 Expenses are understated 3 Net Income is then overstated 4 Retained Earnings is then overstated 5 Owner s equity is then overstated 6 Liabilities are also understated which balances out the A L E equation V Deferred Revenue Cash Now Revenue Later What if we fail to properly account for the revenue later a Example What if we forget to record revenue that was earned in the current accounting period when cash associated with the revenue was paid up front to us in a prior accounting period i Step 1 Journal entry for what DID happen 1 Nothing No journal entry was recorded 2 We were paid in the past so previously there was a debit to cash and a credit to unearned revenue however now we are talking about what happens when the revenue becomes earned ii Step 2 Journal entry for what SHOULD HAVE happened 1 Dr 2 Cr Unearned Revenue Service Revenue iii Step 3 Compare Step 1 and Step 2 iv Step 4 and 5 1 Revenues are understated 2 Net Income is then understated XX XX 3 Retained Earnings is then understated 4 Owner s equity is then understated 5 Liabilities are also overstated which balances out the A L E equation VI Deferred Expenses Cash Now Expense Later What if we fail to properly account for the expense later a Example What if we fail to properly account for insurance that was used during the current accounting period when the insurance was prepaid in a prior accounting period i Step 1 Journal entry for what DID happen 1 Nothing No journal entry was recorded ii Step 2 Journal entry for what SHOULD HAVE happened 1 Dr Insurance Expense XX 2 Cr Prepaid Insurance XX iii Step 3 Compare Step 1 and Step 2 iv Step 4 5 1 Expenses are understated 2 Net Income is then overstated 3 Retained Earnings is then overstated 4 Owner s equity is then overstated 5 Assets are also overstated which balances out the A L E equation VII Example of a Unit 3 Problem a Twix Bar Company a consultancy began operations on 05 01 12 Transactions affecting Twix Bar Company during May 2012 follow b The owners started the business as a corporation by contributing 50 000 cash in exchange for common stock c The company provided a total 55 000 of consulting services for which 6 000 was collected in cash d The company paid 27 000 in cash for operating expenses e Salaries of 5 500 are paid each Friday for work performed Monday through Friday Four full weeks of salaries were paid in May 2012 f At the beginning of May the company also signed a 10 000 note from Sweet Tooth Bank at 12 per year with monthly interest payments g Salaries are paid each Friday for work performed Monday through Friday Four full weeks of salary were paid in May 2012 per the earlier transaction For the fifth week of May 2012 05 31 12 was a Monday h The Sweet Tooth Bank note requires an interest only payment to be made at the end of each month i DEBIT DOLLARS CREDIT DOLLARS j Create an Unadjusted Journal Entry Date Affected Accounts 05 31 12 Common Stock 05 31 12 Dr 50 000 Cash 50 000 Accounts Receivable 49 000 Cash 6 000 Service Revenue 05 31 12 05 31 12 05 31 12 55 000 Cash Operating Expenses …