Study: Analyze Transactions and Record Journal Entries - Part A
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If you are still struggling to understand how to record a journal entry, this professor does a nice job of explaining the process:How to Make a Journal Entry (8m:26s)
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The videos, images and transcripts below provide the same content as provided in Step #1 above. It has simply been broken down into smaller, bite-sized pieces for easier access and review.
Slides 1-2 (0m:44s)
Links to an external site.Welcome to Introduction to Accounting Preparing for a User’s Perspective
Analyze Transactions and Record Journal Entries
The purpose of this topic is to help you learn more about steps two and three in the full accounting cycle.
As you recall in Step 1, you learned about how to identify economic transactions and the need to capture the related source documents. In Step 2 you will learn to analyze the transaction information so that you can then perform Step 3, which is to record the transaction in a balancing journal entry so that the company’s accounts can be later updated (i.e. posted in Step 4) and related trial balances and the financial statements can be prepared in Step 5.
Here is a reminder of the questions we will ask and what we will do in each step.
Slides 3-4 (2m:52s)
Links to an external site.Step 2: Analyze the impact of the economic transaction information on the company’s accounts by determining the answer to the following four questions:
a) What accounts were affected? Hint: Use the balance sheet equation to think through which accounts are affected.
So, if you receive cash because you borrowed money you would know that you have assets, cash went up, and you borrowed money, so liabilities went up, so you would have an increase in assets and an increase in liabilities and you would name them cash, and let’s say a note payable.
b) For each affected account, did the account increase or decrease?
So we would say cash and we would put a plus sign here, showing it increased, and liabilities a note payable would be a plus sign here showing it increased.
c) What is the account’s increase or decrease amount?
So let’s say the loan was for $500, we would say cash + $500, notes payable +$500.
d) Will the accounts need to be debited or credited?
So the nice thing about finishing this part first, is that it will then help you know whether it is a debit or a credit. If cash increased +, you just go up [to the balance sheet equation] and say cash is an asset, it increased +, and therefore that would have to be a debit $500 here, meaning cash assets increased.
If notes payable increased $500 it would say notes payable increased $500 and we’d put it as a credit because the right-hand side [of liabilities] is the credit side, the left-hand side is the debit side.
Once you’ve got this little worksheet filled out, you’re ready to record the journal entry, in fact you are pretty much already done preparing the journal entry but let’s go and show Step 3.
Step 3: Record the journal entry or entries to reflect the impact of the information on the company’s accounts determined in Step 2 above, in a manner that keeps the balance sheet equation in balance.
The way you keep the balance sheet equation in balance is you make sure that the total of your debits equals the total of your credits.
This information is exactly the same as what you already had so you shouldn’t even have to rewrite it. I’m just showing it on a separate page so you can see that we are progressing but this is just a carry forward of the same information. Now I’ve added this other column [G/L Acct #] because you will see this in many accounting systems. That stands for general ledger account number and all that means is if you’ll look at all the accounts of a company, every account has its own unique number, so cash might be number 100, accounts receivable might be 200, and you work your way up through all the accounts of the company.
At any rate, we are just focusing on this green part, as long as we get this green part in, we are good on recording the journal entry for this class.
In my experience, the best way to learn the analysis, Step 2, and recording phase, Step 3 of the accounting cycle is to simply jump right in using a case study of a small business.
So, here we go.
Slide 5 (0m:27s)
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Slide 6 (1m:37s)
Links to an external site.March 1, X1: Suepervantastic Toy Co. (STC) received $98,000 cash contribution and a new $2,000 compute in exchange for 1,000 shares of no-par, common stock.
Question 1: What accounts were affected? Well, let’s look at that. It looks like we are getting more assets, cash in particular, and we are getting a computer. So it seems like our assets are going up and in exchange we gave out shares of common stock, so that means the amount of shares outstanding have increased.
So, what are the accounts affected? They would be cash, computer equipment, let’s just call it equipment, and capital stock. Now you will see I am already indenting because I am anticipating whether it’s a debit or a credit, sorry that is just a habit.
Next question.
Question 2: Did the accounts increase or decrease? Well we showed that increase, cash went up, equipment went up and equity went up.
Question 3: What were the amounts? This [cash] was $98,000, this [equipment] was $2,000, and this [capital stock] must have been $100,000 because we received an extra $100,000 in assets, how were they financed, all through equity.
Question 4: Now we can go on to whether it is a debit or a credit. We have cash, which is an asset, that increased [by $98,000]. Therefore, that has to be on the left-hand side (i.e. debit side), the same for equipment $2,000. Now capital stock increased, that’s on the right-hand side of this, so that’s a credit and it would have to be $100,000. That is the journal entry, you can see that the journal entry is the account and the debit and credit and we should also put the date 3/1/X1.
Let’s go on to another one.
Slide 7 (1m:15s)
Links to an external site.STC purchased a building for $200,000, okay, that’s going to be a building, that’s going to be going up over here (I’m just going to put it in while it goes along) by paying $40,000 of cash. Wait, so I gave away assets of $40,000 and borrowing the remaining $160,000. So I have more liability of $160,000 under a 10 year note payable with simple interest to be charged 5% per year to be paid annually. We’ll deal with that interest later as we incur it, and we will have to repay the principal portion in 10 years.
Question 1: What accounts were affected? So what accounts are affected here on March 1st? We know we have more building, and we know we have less cash, and we know we have more note payable.
Question 2: Did the affected accounts increase or decrease? We have more building, cash, we have less cash, note payable, we have more note payable.
Question 3: What is the account’s increase or decrease amount? How much more building? We have $200,000 more in building. We have $40,000 less of cash. We have $160,000 more note payable.
Question 4: Will the accounts need to be debited or credited? So, if we have an increase in building, you can see that’s a debit. If we have a decrease in cash, you can see that’s a credit, and if we have an increase in note payable, that is a credit.
There you go. You are doing journal entries. Pretty easy isn’t it?
Slide 8 (1m:13s)
Links to an external site.Paid $12,000. When I say “paid $12,000” you should see [in your mind] cash going out. So we’re paying $12,000 to insure its building for the next 12 months.
Well this one’s kind of unique. We haven’t been insured yet. So that means we are paying now for a future benefit, that if you recall the definition of an asset, which is a probable future economic benefit, as a result of a past transaction or event. That means we have a new asset in exchange. Now what are we going to call that? Okay, well this is March 1st again.
Question 1: What accounts were affected? We gave away cash, that one’s pretty easy, but I am going to put that on the second line just because I want to. And we received another asset in exchange which we will call “Prepaid insurance”. We paid now for insurance in the future, we have not used this up yet.
Question 2: Did the affected accounts increase or decrease? So we have more prepaid insurance and we have less cash.
Question 3: What is the account’s increase or decrease amount? We know that prepaid insurance went up $12,000 and cash went down $12,000.
Question 4: Will the accounts need to be debited or credited? Well if we increase an asset called prepaid insurance that has to be a left-hand, debit entry, if we decrease an asset called cash, that is a credit entry.
There you go.
Slide 9 (0m:57s)
Links to an external site.Next, we purchased inventory costing $7,000 on account.
Do not use cash, this is “on account”, that means we are going to pay later, we promised to pay later. So we got inventory, so we got $7,000 more inventory and we haven’t paid yet so we are not going to reduce cash. But we will say that we owe more. That’s going to be an account payable.
So here on March 2nd, [Question 1] the account is Inventory and I will follow this all the way through, [Question 2] we received more inventory, [Question 3] How much more? $7,000. [Question 4] Is that a debit or a credit? Well it’s clearly a debit, because it is on the debit side. That is the increase side for assets.
[Question 1] Liabilities, this is going to be an account payable, that’s what we call the amounts owed to suppliers, and [Question 2] we owe more [Question 3] we owe $7,000 more, and [Question 4] since it’s on the credit side of the liabilities account, $7,000 [credit].
We’re cruising. Let’s keep going.
Slide 10 (0m:50s)
Links to an external site.Purchased $1,000 of office supplies for cash, pay attention to that.
[Question 1] So we got office supplies, this is something that is going to provide a future benefit, because you will have paper and pens to be used over the next year.
[Question 2] So we have $1,000 more in supplies assets but we have $1,000 less of cash. [Question 3] So here on March 4th, we’re going to say our office supplies (and you’ll see I’m going to go through all four questions in a row now), office supplies went up $1,000. [Question 4] If you increase an asset called office supplies, that’s going to be a debit, and you decrease another asset called cash, $1,000, that has to be a credit.
That is the end of Part A. Go ahead and take the quiz questions related to these transactions and then move on to Part B.