Accounting 101 with Jimmy 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

 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.