A transaction occurs between the company and another party. A transaction affects the financial statements of the company.

Assets = Liabilities + Stockholders’ Equity

Accounting Cycle:

1. Record the entries in the journal2. Post the entries to the general ledger3. Prepare a trial balance4. Prepare adjusting entries5. Prepare the financial statements

4/8 Account debited XX

Account credited XX

Each journal entry must have at least one debit and one credit. You can have more than one debit or one credit as long as total debit equals total credit.

Recording an entry:

1. Determine which accounts are affected by the transaction2. Determine if each account is increasing or decreasing3. Follow the rules of debit and credit to record the entry

On 4/1 The company purchases equipment for cash for $5,000

4/1 Equipment 5,000

Cash 5,000

On 4/1 The company purchased equipment for $5,000

4/1 Equipment 5,000

Accounts payable 5,000

If you see “cash” or “paid” or “received”, then cash is involved in this transaction

If you see “on account” or “on credit”, then we have Accounts receivable or accounts payable

If nothing is mentioned, it is accounts receivable or accounts payable

On 4/2 the company sold the product for $2,000 on account

4/2 Accounts receivable 2,000

Sales revenues 2,000

4/3 The company paid salaries for $1,000

4/3 Salaries expense 1,000

Cash 1,000

4/3 The company purchases office supplies on account for $700. Office supplies are assets NOT expenses.

4/3 Office supplies 700

Accounts payable 700

All adjusting entries are recorded on the last day of the period (quarter or year).

On 6/30, a count indicates that $200 of supplies are still on hand

6/30 Office supplies expenses 500

Office supplies 500

4/5 The company purchases office equipment for $2,000

Office equipment 2,000

Accounts payable 2,000

On 6/30, the office equipment gets depreciated over 2 years.

$2,000/2 years = $1,000 depreciation/year

$1,000 x 3/12 = $250/quarter

6/30 Depreciation expense 250

Accumulated depreciation 250

On 4/7, the company received $1,000 in cash for services to be performed in the future

4/7 Cash 1,000

Unearned revenues 1,000

On 6/30, A total of $600 of services was provided

6/30 unearned revenues 600

Revenues 600

On 4/1, the company prepays insurance for 6 months for $1,200.

4/1 Prepaid insurance 1,200

Cash 1,200

On 6/30, an adjustment is made:

6/30 Insurance expense 600

Prepaid insurance 600

On 6/30, we have unpaid salaries of $200.

6/30 Salaries expense 200

Salaries payable 200

Accrual accounting means that we record a transaction when it occurs not when cash is paid or received

A trial balance is a list of all debit and credit balances. The total debit must equal the total credit.

Some of these transactions will have new accounts (i.e. not on the trial balance given). These new accounts will be included in requirement 3 (the adjusted trial balance).