WEBVTT NOTE From the event to the trial balance 1 00:00:00.000 --> 00:00:07.601 You are listening to Chapter 1 of the ACC 300 course reading, From the event to the trial balance. 2 00:00:07.601 --> 00:00:25.518 This chapter supports course objective 1.1: follow a transaction from the event through the journal and the ledger to the trial balance, and explain what equal trial balance totals test and which recording errors can remain hidden. 3 00:00:25.518 --> 00:00:39.324 By the end, you should be able to analyze an event, record its journal entry, post the entry to the ledger, and explain what the unadjusted trial balance does and does not prove. 4 00:00:39.324 --> 00:00:47.856 This recording is a draft audio review preview. Three optional activities at the end require the written page. 5 00:00:47.856 --> 00:01:04.698 The accounting cycle and this chapter. The accounting cycle is the sequence used to record a reporting period and prepare its financial statements: Analyze transactions. Record journal entries. Post to ledger accounts. 6 00:01:04.698 --> 00:01:19.917 Prepare the unadjusted trial balance. Record adjusting entries. Prepare the adjusted trial balance. Prepare the financial statements. Record closing entries. Prepare the post-closing trial balance. 7 00:01:19.917 --> 00:01:32.664 This chapter covers the first four steps. Chapter 2 covers adjustments and the adjusted trial balance. Chapter 3 covers the financial statements and closing entries. 8 00:01:32.664 --> 00:01:46.738 The first four steps move one transaction through the accounting records. First, analyze the event: decide whether to record it, when to record it, and which accounts change. 9 00:01:46.738 --> 00:01:59.274 Second, record the complete journal entry by date, with equal debits and credits. Third, post each entry line to the named ledger account on the same side. 10 00:01:59.274 --> 00:02:07.848 Fourth, list each ending account balance on the trial balance and compare total debits with total credits. 11 00:02:07.848 --> 00:02:13.031 In most organizations, software records and posts routine transactions. 12 00:02:13.031 --> 00:02:28.506 Accountants still need to understand this path so they can resolve unusual events, correct errors, and decide whether the resulting balances make sense. Step 1: Analyze transactions. What counts as a transaction. 13 00:02:28.506 --> 00:02:41.719 Beacon Design is a corporation that creates logos and other design work for business clients. It also provides support after a project ends. Beacon's first year ends on December 31. 14 00:02:41.719 --> 00:02:56.757 Like most organizations, Beacon does many things during a single year. It answers a request for proposal, disagrees with a client about a logo, interviews several designers and hires one, and wins an award. 15 00:02:56.757 --> 00:03:11.648 None of these activities is recorded in the accounting sense when it happens. An accounting transaction is an event that changes an asset, a liability, or equity and has an amount the company can support. 16 00:03:11.648 --> 00:03:24.788 Hiring a designer does not create an entry by itself. After the designer works, Beacon can measure the wages it owes and record the expense and liability. Check your understanding. 17 00:03:24.788 --> 00:03:36.978 Beacon sends a prospective client a proposal that quotes a 15,000 dollar fee. The client has not accepted it. Does Beacon record an accounting transaction? Answer. No. 18 00:03:36.978 --> 00:03:49.680 The proposal alone does not give Beacon a right to payment or an obligation to provide the work. The examples in this chapter use six sets of events from Beacon's first year: 19 00:03:49.680 --> 00:04:07.336 Date, January 2; Event, Shareholders invest cash and receive stock; Amount, 40,000 dollars. Date, January 2; Event, Beacon buys design equipment for cash; Amount, 18,000 dollars. 20 00:04:07.336 --> 00:04:25.685 Date, April 1; Event, Beacon pays a 12-month insurance premium; Amount, 12,000 dollars. Date, November 1; Event, A client pays in advance for 6 months of support; Amount, 6,000 dollars. 21 00:04:25.685 --> 00:04:44.928 Date, Through the year; Event, Beacon bills clients for completed design work; Amount, 114,100 dollars. Date, Through the year; Event, Employees complete work for Beacon; Amount, 62,000 dollars. 22 00:04:44.928 --> 00:04:58.673 Each amount needs support. A bank record and stock agreement support the cash investment. Invoices, payment records, and the support contract support the other amounts. 23 00:04:58.673 --> 00:05:06.446 The facts needed for each example appear beside the related analysis, entry, or ledger account. 24 00:05:06.446 --> 00:05:24.036 The accounting equation connects a company's resources with the claims on those resources: The rule, the accounting equation. Assets equals Liabilities plus Equity An asset is a present right to an economic benefit. 25 00:05:24.036 --> 00:05:36.799 An economic benefit can help a company provide services, reduce costs, or receive cash. A liability is a present obligation to transfer an economic benefit. 26 00:05:36.799 --> 00:05:50.053 In these definitions, present means that the right or obligation exists on the date being reported. The related cash receipt, service, or payment can occur later. 27 00:05:50.053 --> 00:06:05.598 Equity is the amount left for owners after liabilities are subtracted from assets. Revenue increases equity through the company's activities. Expenses reduce equity through those activities. 28 00:06:05.598 --> 00:06:16.971 For the accounting-cycle work in this chapter, group accounts into five basic classes: assets, liabilities, equity, revenues, and expenses. 29 00:06:16.971 --> 00:06:28.752 These classes are enough to organize the transactions in this chapter, but they are not the FASB's complete set of financial statement elements. 30 00:06:28.752 --> 00:06:42.252 The FASB also identifies gains, losses, investments by owners, distributions to owners, and comprehensive income as separate elements. Chapter 4 covers the full set. 31 00:06:42.252 --> 00:06:58.206 An account keeps the increases, decreases, and balance for one type of item. Cash and Equipment are separate asset accounts. Accounts Payable and Unearned Revenue are separate liability accounts. 32 00:06:58.206 --> 00:07:05.160 Separate accounts preserve details that a single asset or liability total would hide. 33 00:07:05.160 --> 00:07:22.284 For an unfamiliar transaction, make four decisions: Identify the event to record and its date. Identify the accounts that changed and classify each account. Determine whether each account increased or decreased. 34 00:07:22.284 --> 00:07:39.245 Choose debit or credit and confirm that total debits equal total credits. These decisions organize the analysis when the accounting is not obvious. You do not need to recite them for every routine transaction. 35 00:07:39.245 --> 00:07:54.584 On January 2, Beacon's shareholders invest 40,000 dollars cash and receive no-par common stock. Because the shares have no par value, Beacon records the full 40,000 dollars in Common Stock. 36 00:07:54.584 --> 00:08:07.406 Cash, an asset, increases by 40,000 dollars. Common Stock, an equity account, also increases by 40,000 dollars. Assets and equity increase by the same amount. 37 00:08:07.406 --> 00:08:25.260 Also on January 2, Beacon pays 18,000 dollars cash for design equipment. Equipment increases by 18,000 dollars, and Cash decreases by 18,000 dollars. Beacon exchanged one asset for another, so total assets do not change. 38 00:08:25.260 --> 00:08:32.808 The purchase creates no liability and no immediate expense. Compare the two January 2 events. 39 00:08:32.808 --> 00:08:45.306 The shareholder investment increases both sides of the equation: Cash increases on the asset side, and Common Stock increases within shareholders' equity. 40 00:08:45.306 --> 00:09:00.320 The equipment purchase changes two accounts on the asset side, Cash and Equipment, but does not change total assets. Beacon has converted one asset, Cash, into another asset, Equipment. 41 00:09:00.320 --> 00:09:14.684 Under double-entry accounting, every transaction has equal debits and credits. That equality keeps the accounting equation in balance after each entry. Check your understanding. 42 00:09:14.684 --> 00:09:18.336 Beacon pays 6,000 dollars cash for equipment. 43 00:09:18.336 --> 00:09:37.436 What happens to total assets at the purchase date? Answer. Total assets do not change. Cash decreases by 6,000 dollars and Equipment increases by 6,000 dollars. Debits, credits, and normal balances. 44 00:09:37.436 --> 00:09:58.080 A debit is an amount on the left side of an account. A credit is an amount on the right. Debit does not mean decrease, and credit does not mean increase. The account class determines which side records an increase. 45 00:09:58.080 --> 00:10:20.031 Account class, Assets; Increased by, Debit; Decreased by, Credit; Normal balance, Debit. Account class, Liabilities; Increased by, Credit; Decreased by, Debit; Normal balance, Credit. 46 00:10:20.031 --> 00:10:44.501 Account class, Equity; Increased by, Credit; Decreased by, Debit; Normal balance, Credit. Account class, Revenue, which increases equity; Increased by, Credit; Decreased by, Debit; Normal balance, Credit. 47 00:10:44.501 --> 00:10:57.816 Account class, Expenses, which reduce equity; Increased by, Debit; Decreased by, Credit; Normal balance, Debit. 48 00:10:57.816 --> 00:11:14.950 The normal balance is the side on which an account usually has its balance. An account that increases with debits usually has a debit balance. An account that increases with credits usually has a credit balance. 49 00:11:14.950 --> 00:11:30.867 Beacon records wages as employees work. Each wage entry debits Wages Expense. If Beacon pays the wages at the same time, the entry credits Cash. If Beacon will pay later, it credits Wages Payable. 50 00:11:30.867 --> 00:11:39.312 The wage entries recorded through December 31 contain 62,000 dollars of debit postings to Wages Expense: 51 00:11:39.312 --> 00:11:52.152 The Wages Expense T-account has 62,000 dollars on the debit side for wage entries posted during the year. Its ending balance is a 62,000 dollar debit. 52 00:11:52.152 --> 00:12:08.366 The 62,000 dollars is the unadjusted balance in Wages Expense. Chapter 2 records wages earned by December 31 that are not yet in the ledger. Chapter 3 shows how adjusted expense balances enter the income statement. 53 00:12:08.366 --> 00:12:23.216 Step 2: Record journal entries. The journal records complete transactions by date. Each journal entry lists the debits first, indents the credited accounts, and has equal debit and credit amounts. 54 00:12:23.216 --> 00:12:36.702 On April 1, Beacon pays 12,000 dollars for insurance coverage from April 1 through March 31 of the next year. The payment gives Beacon the right to receive 12 months of coverage. 55 00:12:36.702 --> 00:12:39.960 It records that right as Prepaid Insurance: 56 00:12:39.960 --> 00:12:51.936 The April 1 journal entry debits Prepaid Insurance, an asset, for 12,000 dollars and credits Cash, an asset, for 12,000 dollars. 57 00:12:51.936 --> 00:13:06.390 One asset increased while another decreased, so total assets did not change. Beacon does not record the full amount as an expense on April 1 because none of the coverage has been used. 58 00:13:06.390 --> 00:13:22.023 Chapter 2 explains how Beacon records the coverage used by December 31. On November 1, a client pays Beacon 6,000 dollars for 6 months of support that Beacon will provide from November through April. 59 00:13:22.023 --> 00:13:27.600 Beacon receives Cash and takes on an obligation to provide the support: 60 00:13:27.600 --> 00:13:41.040 The November 1 journal entry debits Cash, an asset, for 6,000 dollars and credits Unearned Revenue, a liability, for 6,000 dollars. 61 00:13:41.040 --> 00:13:54.918 The receipt increases both assets and liabilities by 6,000 dollars. Beacon records a liability because it still owes the client 6 months of support. Step 3: Post to ledger accounts. 62 00:13:54.918 --> 00:14:07.493 The general ledger groups accounting activity by account. Every account, not only Cash, has its own ledger record. The journal shows complete entries in date order. 63 00:14:07.493 --> 00:14:20.680 The ledger shows all increases, decreases, and the ending balance for one account. Posting copies each line of a journal entry to the named ledger account on the same side. 64 00:14:20.680 --> 00:14:36.705 Posting does not create a second transaction or alter the journal entry. Check your understanding. Beacon wants one list of every increase and decrease in Cash. Should it use the journal or the ledger? Answer. 65 00:14:36.705 --> 00:14:50.200 The ledger. The journal groups lines by transaction, while the ledger groups all posted lines for Cash in one account. Accountants often sketch a ledger account as a T-account. 66 00:14:50.200 --> 00:15:05.688 The account name is centered above the account, debits appear on the left, and credits appear on the right. The Cash account below contains the four cash transactions introduced earlier in this chapter: 67 00:15:05.688 --> 00:15:17.329 The Cash T-account for the four transactions shown has debits of 40,000 dollars for the shareholder investment and 6,000 dollars for the client advance. 68 00:15:17.329 --> 00:15:32.570 It has credits of 18,000 dollars for equipment and 12,000 dollars for insurance. The balance from these transactions is a 16,000 dollar debit: 46,000 dollars of debits less 30,000 dollars of credits. 69 00:15:32.570 --> 00:15:36.552 This is not Beacon's complete year-end Cash balance. 70 00:15:36.552 --> 00:15:51.546 That 16,000 dollar amount is not Beacon's year-end Cash balance. The account above includes only those four cash transactions. Now return to the November 1 customer advance. 71 00:15:51.546 --> 00:16:02.640 A client paid Beacon 6,000 dollars for 6 months of support that Beacon had not yet provided. Beacon recorded this journal entry: 72 00:16:02.640 --> 00:16:14.180 The posting diagram follows the November 1 entry into the ledger. The 6,000 dollar Cash debit joins the earlier Cash activity on the debit side. 73 00:16:14.180 --> 00:16:24.678 After the four transactions shown, Cash has 46,000 dollars of debits, 30,000 dollars of credits, and a 16,000 dollar debit balance. 74 00:16:24.678 --> 00:16:39.984 The 6,000 dollar Unearned Revenue credit moves to the credit side of that account and produces a 6,000 dollar credit balance. Posting preserves the amount and side of each journal-entry line. 75 00:16:39.984 --> 00:16:55.106 The debit remains a debit when it enters the Cash account. The credit remains a credit when it enters the Unearned Revenue account. The two postings reorganize one journal entry by account. 76 00:16:55.106 --> 00:17:09.107 They do not record another receipt or another 6,000 dollars. Step 4: Prepare the unadjusted trial balance. The trial balance lists every ledger account and its ending balance. 77 00:17:09.107 --> 00:17:26.709 Debit balances appear in one column, credit balances appear in the other, and each column has a total. Additional year-end information. The selected events above do not include every transaction from Beacon's first year. 78 00:17:26.709 --> 00:17:42.871 The complete ledger balances below also reflect customer collections, payments, borrowing, and other routine activity that the chapter has not shown. Follow one transaction through the first four steps. 79 00:17:42.871 --> 00:17:48.072 The November 1 customer advance appears differently at each step. 80 00:17:48.072 --> 00:18:06.974 Step 1, analyze. The customer pays Beacon 6,000 dollars for support from November through April. Cash, an asset, increases by 6,000 dollars. Unearned Revenue, a liability, also increases by 6,000 dollars. 81 00:18:06.974 --> 00:18:16.981 Step 2, journal. Debit Cash for 6,000 dollars and credit Unearned Revenue for 6,000 dollars. Step 3, ledger. 82 00:18:16.981 --> 00:18:39.497 The Cash account includes a January 2 debit of 40,000 dollars for the investment, a January 2 credit of 18,000 dollars for equipment, an April 1 credit of 12,000 dollars for insurance, and the November 1 debit of 6,000 dollars for the advance. 83 00:18:39.497 --> 00:18:57.380 Other collections and payments not detailed in this chapter bring Cash to its complete 40,200 dollar debit balance. Unearned Revenue has a 6,000 dollar credit and a 6,000 dollar credit balance. 84 00:18:57.380 --> 00:19:00.437 Step 4, unadjusted trial balance. 85 00:19:00.437 --> 00:19:30.829 Beacon's December 31 debit balances are Cash, 40,200 dollars; Accounts Receivable, 14,500 dollars; Prepaid Insurance, 12,000 dollars; Equipment, 18,000 dollars; Wages Expense, 62,000 dollars; Rent Expense, 24,000 dollars; Utilities Expense, 7,300 dollars; Advertising Expense, 3,600 dollars; and Software Expense, 4,800 dollars. 86 00:19:30.829 --> 00:19:48.249 Its credit balances are Accounts Payable, 6,300 dollars; Unearned Revenue, 6,000 dollars; Notes Payable, 20,000 dollars; Common Stock, 40,000 dollars; and Service Revenue, 114,100 dollars. 87 00:19:48.249 --> 00:20:01.128 Total debits and total credits are both 186,400 dollars. The November 1 entry is now part of the Cash and Unearned Revenue ending balances. 88 00:20:01.128 --> 00:20:16.901 The trial balance tests whether the debit balances and credit balances in the ledger add to the same total. It does not test whether Beacon recorded every transaction or chose the right date and accounts. 89 00:20:16.901 --> 00:20:30.586 Check your understanding. Beacon records a 340 dollar utility bill as 430 dollars in both the debit and credit lines. Can the trial balance still have equal totals? Answer. Yes. 90 00:20:30.586 --> 00:20:45.585 Both columns contain the same 90 dollar error, so the totals can remain equal even though the recorded amount is wrong. When the totals do not agree. The debit and credit totals should be equal. 91 00:20:45.585 --> 00:21:00.353 If they are not, the records contain at least one error that affected the columns by different amounts. The difference does not identify the error. Separate errors can also offset each other. 92 00:21:00.353 --> 00:21:04.296 Each error below usually makes the columns unequal: 93 00:21:04.296 --> 00:21:18.193 Error, An entry has a debit but no credit, or unequal debit and credit amounts; Why the totals differ, The journal sends different amounts to the two sides of the ledger.. 94 00:21:18.193 --> 00:21:30.465 Error, Only one line of an entry is posted; Why the totals differ, One trial balance column receives an amount that the other column does not receive.. 95 00:21:30.465 --> 00:21:48.182 Error, An amount is posted to the wrong side; Why the totals differ, A 2,000 dollars credit posted as a debit makes debits 2,000 dollars too high and credits 2,000 dollars too low. The columns differ by 4,000 dollars.. 96 00:21:48.182 --> 00:22:02.160 Error, A ledger balance or trial balance column is added incorrectly; Why the totals differ, The calculated total does not equal the balances that should be in the column.. 97 00:22:02.160 --> 00:22:17.513 Equal totals show only that the recorded debit balances and credit balances add to the same amount. They do not prove that all of the accounting is correct. Errors that equal totals do not reveal. 98 00:22:17.513 --> 00:22:32.239 Equal totals do not show whether every transaction was recorded or whether the correct accounts were used. An error can remain hidden when it changes debits and credits by the same amount. 99 00:22:32.239 --> 00:22:37.800 These examples use Beacon, but the rule applies to every trial balance: 100 00:22:37.800 --> 00:22:56.723 Error that remains hidden, Omit a complete transaction; Beacon example, Beacon does not record a 340 dollars December utility bill.; What is wrong, Utilities Expense and Accounts Payable are both 340 dollars too low.. 101 00:22:56.723 --> 00:23:16.779 Error that remains hidden, Record a complete transaction twice; Beacon example, Beacon records and posts 2,000 dollars of December rent twice.; What is wrong, Rent Expense and its credited account are both 2,000 dollars too high.. 102 00:23:16.779 --> 00:23:38.231 Error that remains hidden, Use the wrong account on the correct side; Beacon example, Beacon debits Advertising Expense instead of Software Expense for 4,800 dollars.; What is wrong, Total expense is correct, but both expense accounts are wrong.. 103 00:23:38.231 --> 00:23:58.200 Error that remains hidden, Make errors that offset; Beacon example, Wages Expense is 500 dollars too high, and Rent Expense is 500 dollars too low.; What is wrong, The debit total is correct, but both account balances are wrong.. 104 00:23:58.200 --> 00:24:13.058 An entry can have equal debit and credit amounts and still record the wrong accounting. If the system were configured incorrectly, it could debit Cash and credit Service Revenue for 6,000 dollars. 105 00:24:13.058 --> 00:24:27.234 Beacon has not earned revenue because it has not provided the support. The contract shows that Beacon still owes the client 6 months of service, so Unearned Revenue is the correct credit. 106 00:24:27.234 --> 00:24:38.681 Chapter 2 begins with another hidden error. Employees can work during the last week of December before Beacon receives the payroll report or pays them. 107 00:24:38.681 --> 00:24:46.944 If Beacon records nothing, the trial balance remains equal while Wages Expense and Wages Payable are too low. 108 00:24:46.944 --> 00:25:02.249 From the event to the trial balance. The first four accounting-cycle steps create a traceable record. Analysis connects an event to its date and accounts. The journal keeps the complete entry together. 109 00:25:02.249 --> 00:25:13.747 The ledger groups the posted lines by account. The unadjusted trial balance lists the ending account balances and compares the debit and credit totals. 110 00:25:13.747 --> 00:25:29.813 Every trial balance amount should be traceable through those records to the event and evidence behind it. Equal trial balance totals mean only that the recorded debit balances equal the recorded credit balances. 111 00:25:29.813 --> 00:25:45.652 They do not show that every transaction was recorded or that each entry uses the correct date, accounts, and amounts. Software can move an incorrect entry through the journal and ledger without correcting it. 112 00:25:45.652 --> 00:25:58.444 The accountant must connect the entry to the evidence and decide whether the resulting balances reflect what happened. Beacon's December 31 trial balance is unadjusted. 113 00:25:58.444 --> 00:26:11.160 In Chapter 2, Beacon records activity that the ledger does not yet reflect completely, including insurance Beacon has used, support it has provided, and wages it owes. 114 00:26:11.160 --> 00:26:21.025 The page ends with three optional activities. The first follows one transaction through an entry, ledger accounts, and trial-balance totals. 115 00:26:21.025 --> 00:26:36.175 The second asks you to prepare and post a compound equipment purchase made partly for cash and partly on credit. The third asks which trial-balance errors make the columns unequal and which errors can remain hidden. 116 00:26:36.175 --> 00:26:44.208 These activities need the forms on the page, so return to the written chapter when you are ready to complete them.