Week 3 Prepare for the week:

22-Jan Chapter 3: Read pages 112 - 145

24-Jan Finish watching chapter 2 videos and Chapter 3 videos (1 – 5) Accrual basis v. Cash basis and
26-Jan introduction of adjusting entries.
In class
Finish Chapter 2: The Accounting Cycle: During the period (trial balance)
and
Chapter 3: The Accounting Cycle: End of the Period -- Accrual basis v. Cash basis and
introduction of adjusting entries.
Due this week
VLN 2 due by 1/24 at 11:59 PM
Chapter 2 Guided Practice (in CONNECT) due by 1/24 at 11:59 PM
Class practice (CP2) submitted in Canvas due by 1/24 at 11:59 PM
Chapter 2 homework due on 1/25 by 11:59 PM
Use the McGrawHill extra practice problems, for review.

RECORDING TRANSACTIONS

The Journal Entry

In a journal entry, debited accounts and amounts should be listed first followed by credits.
Credited accounts and amounts are indented below the debit portion(s) of the journal entry.

Analyzing Transactions - Journalizing - Posting to the Ledger

Record the 3 transactions we analyzed from last week:

Record the transactions. (Which account should be debited, which should be credited?) Why?

a. Issue common stock for $50,000 in cash.

A = L + SE R - E = NI
Cash+50,000 Common
stock
+50,000

Account Title Debit Credit

(a)

b. Provide $8,000 of services to customers on account.

A = L + SE R - E = NI
A/R +8,000 +8,000 Service +8,000
+8,000

Account Title Debit Credit

(b)

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 c. Record $4,000 for employee salaries for work done this week will pay them next week.

A = L + SE R - E = NI
Salaries -4,000 Salaries -4,000
payable +4,000
+4,000

Account Title Debit Credit

(c)

Post the transactions to T-accounts. The balances before the transactions are included in the
accounts.
Cash Account receivable
BB 12,000 BB 5,000

Salaries payable Common stock

1,000 BB 350,000 BB

Service revenue Salaries expense

25,000 BB BB 13,000

PRACTICE: Retained Earnings had a beginning balance of $100,000 on January 1st

Effect on RE: Increase (+), Decrease (-), or No effect (X)
Amount Effect on RE
Issue common stock for cash $15,000
Provide services to customers on account 30,000
Purchased a new computer with cash 3,000
Rented a truck for the month, cost of rent 2,500
Employee’s salaries for the month, will pay next week 10,000

Retained earnings balance on January 31st: $_______

Retained earnings
100,000 (1/1)

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Trial balance
DEA—LOR will help identify the correct column for the account balance.
-IMPORTANT: The sum of all debits has to equal the sum of all credits.

The retained earnings amount shown above is special, it is the ONLY account that is showing
the BEGINNING balance in the account. The ending balance is calculated by preparing the
Statement of Stockholders’ Equity. The other account balances shown are the ending balances
of the account before adjustment.

Trial Balance
Is this correct?
Accounts Debits Credits
Yes or No
Cash $25,000
Accounts receivable $30,000
Equipment 400,000
Accounts payable 8,000
Deferred revenue 15,000
Note payable 100,000
Common stock 150,000
Retained earnings 7,000
Dividends 50,000
Service revenue 700,000
Salaries expense 350,000
Utilities expense 15,000
Advertising expense 100,000
Interest expense Can we determine?
Total ? ?

Using the corrected trial balance determine:

The total credits

The total debits
The interest expense dollar amount
Net income
Ending retained earnings
Total Assets

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Chapter 3
Accrual basis of accounting

Revenue recognition

1. A good or service has been providedrecognize the revenue as long as 2 exists.

2. Collection is probable.

Should revenue be recognized in January?

 Mowed customer’s yard three times in January, the customer paid on February 5 th
 Delivered and installed mulch at customer’s yard on Jan 28, will invoice customer on Jan 31.
 Collected $1,000 on Jan 10th from customer from invoiced sent for work done on December
31st
 Customer paid $1,500 to the company on Jan 30th for sod to be delivered and installed on
February 18th.

Expense recognition (Matching Principle)

Incur a cost to earn revenueuse up an asset or cause a liability to come into existence.

Should an expense be recognized in January?

 Employees worked for the company the last week of January; the company will pay them in
February.
 The company’s employees used the company cell phones in January; the company prepaid
the cell phone bill in December.
 The company purchased supplies on account on December 31st, used them in January, and
paid for them in February.
 The company bought lunch for the overtime employees working on January 22nd.

Cash-basis of accounting

Cash-basis revenue or expense

1. cash flowgot cash or paid cash (CASH HAS TO BE INVOLVED)
2. from an operating activity

Cash basis revenuereceiving cash from an operating activity.

What month should cash basis revenue be recognized?
 Mowed customer’s yard three times in January, the customer paid on February 5 th
 Delivered and installed mulch at customer’s yard on Jan 28, customer paid on February 8th
 Collected $1,000 on Jan 10th from customer from invoiced sent for work done on December
31st
 Customer paid $1,500 to the company on Jan 30th for sod to be delivered and installed on
February 18th.

Cash basis expensepaying cash for an operating activity.

What month should cash basis expense be recognized?

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 Employees worked for the company the last week of January; the company paid them in
February.
 The company’s employees used the company cell phones in January; the company prepaid
the cell phone bill in December.
 The company purchased supplies on account on December 31st, used them in January, and
paid for them in February.
 The company bought lunch for the overtime employees working on January 22nd.

Accrual basis versus Cash basis of accounting

Understanding Accounts Receivable

Accounts receivable arises when the company provides a good or a service to a customer and
allows the customer to pay later.

When a company provides a good or service on account, the company recognizes revenue—
accrual basis revenue and A/R increases, but cash does not change.

When a customer pays the A/R, the A/R decreases and cash INCREASES--cash basis revenue,
but revenue does not change.

+ Accounts Receivable -
Beginning balance
When customers pay
Increases due to the A/R decreases and
accrual basis revenue cash basis revenue
increases
Ending balance

Practice:
During the year the company provided service to customers on account. At the beginning of
the year the balance in A/R was $10,000 and by the end of the year the balance was $25,000.
During the year, customers paid the company $500,000 on account.

What was the service revenue for the year?

What was the cash basis revenue for the year?

+ Accounts Receivable -

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Understanding Salaries Payable

Salaries payable increases when a company recognizes salaries expense but has not paid the
salaries yet, an accrual basis expense.

Salaries payable decreases when the company pays the salaries, a cash basis expense.

- Salaries payable +
Beginning balance
Decreases when
salaries are paid, Increases when
cash basis expense salaries expense is
increases recorded (accrual
expense)
Ending balance

Practice:
During the year the employees worked for the company. At the beginning of the year the
company owed their salaried employees $5,000 and by the end of the year the company owed
their salaried employees $10,000. During the year the company paid salaries of $325,000.

What was the salaries expense for the year?

What was the cash basis expense for salaries for the year?

- Salaries payable +

Adjusting Entries—accruals and deferrals

TIME PERIOD ASSUMPTION (PERIODICITY)

January 1st December

31st

Income Statement is prepared over the year (Jan 1 – Dec 31)

Statement of Stockholders’ Equity is prepared over the year (Jan 1 – Dec 31)
Balance Sheet is prepared AT 11:59:59.9 PM December 31 st
Statement of Cash Flows is prepared over the year (Jan 1 – Dec 31)

Purpose of Adjusting entries is to record all Revenues and Expenses for the ENTIRE period…and
in doing so, it will also update a Balance Sheet account.

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