LECTURE NOTES FOR CHAPTER 3

LECTURE NOTES FOR CHAPTER 3 - 1 LECTURE NOTES FOR CHAPTER 3...

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LECTURE NOTES FOR CHAPTER 3 IF YOU HAVE NOT MEMORIZED THE CHART ON PAGE 1 OF THE CHAPTER 2 LECTURE NOTES, “HOW TO INCREASE THE DIFFERENT TYPES OF ACCOUNTS” NONE OF THIS IS GOING TO MAKE ANY SENSE. Toward the end of chapter 2, we were so proud of ourselves because we got our trial balance to balance . Some people think that if the trial balance balances then everything must be correct. WRONG! Some of the accounts in our ledger are not correct. Not because we made a mistake but through the passage of time, the accounts are outdated. Again, not wrong but out of date. Question: If we have some accounts that are out of date, what do you think we should do about it? Heres a great idea; lets bring them up to date. So here is what we’re gonna do: Go through the ledger, identify those accounts that are out of date, and bring them up to date with something called an adjusting entry, which just happens to be the topic of chapter 3. We are gonna be cussing and discussing several different adjusting entries. However, as different as they are, they all have one thing in common and that is: Everyone of them involves an income statement account and a balance sheet account. Read that last statement again. Just to be sure, read it again. Lets use the trial balance on page 104 as our starting point. The first account that we see that is out of date is “supplies”. THE ADJUSTING ENTRY FOR SUPPLIES On the unadjusted trial balance at the bottom of page 104, third item from the top is the “Supplies” account. The balance of the account is $2,000. Lets talk about what that number represents, where it came from, and what happens next. Here’s the story. Early in the month the boss bought $2,000 of office supplies (pencils, paper clips and rubber bands) and put them in the supply cabinet and told the employees to help themselves to the items. When the supplies were purchased, we made this entry in the journal Dr. Cr. Supplies 2,000 Cash 2,000 After making the journal entry, we post it to the Supplies account in the ledger. Like so; Supplies The item to the left is called a “T” account because 2,000 of its shape. Although it looks different, it serves the same purpose as the accounts in the general ledger (see page 67) The only difference is that this version has the balance at the bottom, whereas the version in the book has the balance to the side. The $2,000 balance in the Supplies account means that we have supplies that cost us that amount. As time goes by, the employees use some of the supplies in their job. 1
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When dealing with the supplies account, sometimes we debit the account and sometimes we credit it. How do you know when to do what. Keep in mind that supplies is an item of value which means that it is an asset. When you purchase supplies, you want to increase the asset account so, according to the famous chart which you have now memorized, you do so with a debit. When the supplies are used, we want to reduce the supplies account so we would credit the account. You might say that when stuff goes
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LECTURE NOTES FOR CHAPTER 3 - 1 LECTURE NOTES FOR CHAPTER 3...

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