ACCTG 211 1st Edition Lecture 7Outline of Last Lecture I. Double Entry AccountingII. Debits and CreditsIII. How debits and credits affect a balance sheetIV. Accounting Cycle V. Scott’s official 6 step process of Journalizing and Posting TransactionsVI. Anatomy of a Journal EntryVII. Examples of Debit and Credit ProblemsVIII. What is a trial balance?IX. The Closing ProcessX. Temporary VS Permanent AccountsOutline of Current Lecture I. Main Topics of Unit 3II. 5 Step Process to Error AnalysisIII. Example of a Unit 3 Problem IV. Example of an Unadjusted Journal Entry V. Example of adjusted journal entry VI. Example of a Trial BalanceVII. How to close accountsCurrent LectureVIII. Main Topics of Unit 3a. 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.c. The closing process “zeroes out” the following “temporary” accounts to RetainedEarningsi. Revenues, Expenses, and Dividends.II. 5 Step Process to Error Analysisa. Step 1: Journal entry for what DID happeni. 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 happenedc. Step 3: Compare Step 1 and Step 2d. Step 4: Determine impact on Income Statement (if any)e. Step 5: Determine impact on Balance SheetIII. Accrued Revenue: “Revenue Now, Cash Later” What if we fail to properly account for therevenue 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 happen1. Nothing. No journal entry was recorded.ii. Step 2: Journal entry for what SHOULD HAVE happened1. Dr. Accounts Receivable2. Cr. Service Revenueiii. Step 3: Compare Step 1 and Step 2iv. Step 4 & 5: 1. Revenues are understated.a. Because you didn’t credit2. Net Income is then understated.a. If revenue is understated then net income is understand3. Retained Earnings is then understated.a. If net income is understand then R/E is understated4. Owner’s equity is then understated.a. If R/E is understated then Owner’s equity is understated5. 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 sheetIV. 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 happen1. Nothing. No journal entry was recorded.iii. Step 2: Journal entry for what SHOULD HAVE happened1. Dr. Salaries Expense2. Cr. Salaries Payableiv. Step 3: Compare Step 1 and Step 2v. Step 41. Revenue: No effecta. 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 happen1. 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 happened1. Dr. Unearned Revenue XX2. Cr. Service Revenue XXiii. Step 3: Compare Step 1 and Step 2iv. Step 4 and 5:1. Revenues are understated.2. Net Income is then understated.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 happen1. Nothing. No journal entry was recorded.ii. Step 2: Journal entry for what SHOULD HAVE happened1. Dr. Insurance Expense XX2. Cr. Prepaid Insurance XXiii. Step 3: Compare Step 1 and Step 2iv. Step 4 & 51. 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 Problema. 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 inexchange 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 DOLLARSj. Create an