Accounting 101 with Jimmy Stewart James Stewart

I've read a lot of boring stuff so that you don't have to! Today we will summarize some of the useful information in the FASB Concepts Statements and other literature. 

This information will be useful as you move along to more advanced levels of accounting.

Example: You own a sole proprietorship. For this period, you had revenue of $100,000, wage expense of $40,000, and computer expense of $30,000 (net income of $30,000). You also contributed $10,000 to the business this period.

Step 1 – Transfer Revenue and Expense items to Income Summary

                                                             Debit           Credit

Revenue                                        $100,000

            Income Summary                                  $100,000

Income Summary                       $40,000

           Wage Expense                                           $40,000

Income Summary                       $30,000

           Computer Expense                                  $30,000

Step 2 – Transfer Income Summary to Equity (capital account)

                                                                  Debit           Credit

Income Summary                            $30,000

           Capital Account – YOUR NAME                 $30,000

Step 3 – Transfer contribution/distribution accounts to capital account

                                                            Debit          Credit  

Contributions – YOUR NAME     $10,000

          Capital Account – YOUR NAME           $10,000

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 Today we will go over the adjusting process. This is where we make our adjusting journal entries to get from our unadjusted trial balance to our adjusted trial balance, which contains the figures we use on the financial statements and tax returns.

We will briefly discuss prepaid expenses, unearned revenues, accrued revenues, accrued expenses, and depreciation/amortization. 

Today we will discuss the accounting cycle. This is the process taken each period to record transactions, prepare the financial statements, and to reset the temporary accounts to zero for the next period.

Keep in mind that the steps you may see in your accounting textbook or elsewhere may be slightly different - I have simplified some of the steps:

Step 1 – Record transactions as journal entries in the general ledger;

Step 2 – Prepare an unadjusted trial balance as of the end of the period;

Step 3 – Prepare adjusting journal entries and record on general ledger;

Step 4 – Prepare an adjusted trial balance as of the end of the period;

Step 5 – Prepare the financial statements;

Step 6 – Prepare and record closing journal entries to reset temporary accounts;

Step 7 – Prepare a post-closing trial balance.

Example # 1

Our Accounts Receivable balance increased by $20,000 from the end of last period to the end of this period.

1. Accounts Receivable is an asset, so it must be debited to increase its balance.

2. Create journal entry:

                                                             Debit    Credit

Accounts Receivable                  $20,000

          Fake Cash                                            $20,000

3. A $20,000 increase in Accounts Receivable = $20,000 cash flow reduction on the statement of cash flows.

Example # 2

Our Accounts Payable balance increased by $10,000 from the end of last period to the end of this period.

1. Accounts Payable is a liability, so it must be credited to increase its balance.

2. Create journal entry:

                                                               Debit     Credit

Fake Cash                                         $10,000

        Accounts Payable                                   $10,000

3. A $10,000 increase in Accounts Payable = $10,000 cash flow increase on the statement of cash flows.

Example # 3

Our Accrued Expense Payable decreased by $25,000 from the end of last period to the end of this period.

1. Accrued Expense Payable is a liability, so it must be debited to decrease its balance.

2. Create journal entry:

                                                              Debit     Credit

Accrued Expense Payable            $25,000

            Fake Cash                                             $25,000

3. A $25,000 reduction to Accrued Expense Payable = $25,000 cash flow decrease on the statement of cash flows.    

Today we will discuss the cost layering methods that are used within the periodic and perpetual inventory systems.

Assumptions for purchases:

50 units purchased on January 1 at $10 each (50 x $10 = $500)
100 units purchased on February 1 at $11 each (100 x $11 = $1,100)
150 units purchased on March 1 at $12 each (150 x $12 = $1,800)

Assumptions for sales:

250 units sold to customer on April 1 for $5,000

Journal entries to record purchases under Periodic Method (entry is the same whether LIFO or FIFO is being used):

January 1: Debit Purchases $500; Credit Accounts Payable $500

February 1: Debit Purchases $1,100; Credit Accounts Payable $1,100

March 1: Debit Purchases $1,800; Credit Accounts Payable $1,800

Total Debits to Purchases = $3,400 ($500 + $1,100 + $1,800)

Journal entries to record purchases under the Perpetual Method (entry is the same whether FIFO or LIFO is being used):

January 1: Debit Inventory $500; Credit Accounts Payable $500

February 1: Debit Inventory $1,100; Credit Accounts Payable $1,100

March 1: Debit Inventory $1,800; Credit Accounts Payable $1,800

Total Debits to Inventory = $3,400 ($500 + $1,100 + $1,800)

Journal entry to record sale - Periodic Method (entry is the same whether using FIFO or LIFO):

April 1: Debit Accounts Receivable $5,000; Credit Revenue $5,000

Adjusting journal entry to record Cost of Goods Sold and Inventory - Periodic Method (Using FIFO):

December 31: Debit Inventory $600 (for ending inventory); Debit Cost of Goods Sold for $2,800; Credit Purchases for $3,400; Credit Inventory for $0 (for beginning inventory)

Adjusting journal entry to record Cost of Goods Sold and Inventory - Periodic Method (Using LIFO):

December 31: Debit Inventory $500 (for ending inventory); Debit Cost of Goods Sold for $2,900; Credit Purchases for $3,400; Credit Inventory for $0 (for beginning inventory)

Journal entries to record sale - Perpetual Method (FIFO):

April 1: Debit Accounts Receivable $5,000; Credit Revenue $5,000

April 1: Debit Cost of Goods Sold $2,800; Credit Inventory $2,800

Journal entries to record sale - Perpetual Method (LIFO):

April 1: Debit Accounts Receivable $5,000; Credit Revenue $5,000

April 1: Debit Cost of Goods Sold $2,900; Credit Inventory $2,900