Lecture 6: Module 3: Accounting Transactions, Adjusting, and Closing Entries

Normal (Daily) Transactions

  • Assumption of Cash Transactions: All transactions are assumed to be cash transactions unless explicitly stated otherwise.

    • Phrases like "on account" indicate a non-cash transaction, meaning payment will occur in the future.

  • Accounts Payable: For generic purchases "on account," the obligation to pay in the future is recorded as Accounts Payable.

  • Specific Payables: Other payables are more specific:

    • Notes Payable: Represents a loan.

    • Wages Payable: Represents salaries and wages owed.

  • Debit/Credit Conversion (Accounting Equation and T-Accounts):

    • The accounting equation can be converted into a T-account perspective:

      • Assets: Debit side (left).

      • Liabilities and Shareholder's Equity: Credit side (right).

    • Rule of Thumb:

      • If an account increases (plus), it takes the action of the side it lies on (e.g., increasing an asset is a debit).

      • If an account decreases (minus), it takes the opposite action of the side it lies on (e.g., decreasing an asset is a credit).

    • This rule has no exceptions for conversion.

  • Example: Purchasing a Computer "On Account"

    • Purchasing an asset (computer) for 1,5001,500 "on account."

    • Analysis: Computer (Asset) increases (+$1,500); Accounts Payable (Liability) increases (+$1,500).

    • Debit/Credit:

      • Computer (Asset, increases): Debit (+$1,500).

      • Accounts Payable (Liability, increases): Credit (+$1,500).

    • Journal Entry Rule: Debits are always listed first. Credits are indented.

      • Debit: Computer

      • Credit: Accounts Payable (indented)

  • Example: Paying for the Computer

    • Assumption: Paid with cash.

    • Analysis: Cash (Asset) decreases (-$1,500); Accounts Payable (Liability) decreases (-$1,500) as the obligation is eliminated.

    • Debit/Credit:

      • Accounts Payable (Liability, decreases): Debit (+$1,500) (opposite of its normal credit side).

      • Cash (Asset, decreases): Credit (+$1,500) (opposite of its normal debit side).

  • Importance of the Accounting Equation: Always start with the accounting equation on scratch paper to ensure accuracy, even if only the journal entry is required. It provides a foundational understanding and helps confirm balance.

  • Nature of Normal/Daily Transactions: These transactions occur in the normal day-to-day course of business and typically involve some form of external relationship or activity (e.g., selling stock to an outsider, purchasing a trademark from another entity).

Adjusting Entries

  • Timing Differences in Accrual Accounting: A core aspect of accrual accounting is recording revenues and expenses when the action occurs, not necessarily when cash flows. This often leads to timing differences.

    • These timing differences necessitate