Summary, practice, and an exam-style warm-up¶
Every one of Chipotle's few thousand daily sales, and every transaction Marlow Landscaping, Brightline Cleaning, and Harbor Music Lessons ran through this chapter, went through the same six steps:
- Identify the transaction, using a source document as proof.
- Analyze its effect on the accounting equation.
- Decide the debits and credits that represent those changes.
- Record the journal entry.
- Post the entry to the ledger.
- Prepare a trial balance.
This section pulls all six steps back together, gives you room to practice each one again, and closes with a closed-book warm-up you should try before the real exam.
What you can now do¶
- LO2.1 Tell an external transaction, like a Chipotle sale, from an internal event recorded only at period end through Chapter 3's adjusting entries, and name the six-step process above from memory.
- LO2.2 Trace any transaction's effect on Assets = Liabilities + Stockholders' Equity, the way you did for Brightline Cleaning's first month, including the four that trip people up: prepaid rent, cash collected in advance, equipment bought for cash, and dividends.
- LO2.3 Turn any increase or decrease into a debit or a credit using an account's normal balance, and explain why debit does not mean increase and credit does not mean decrease.
- LO2.4 Write a full journal entry, date, debits flush left, credits indented, explanation, including a compound entry like Marlow Landscaping's part-cash, part-note equipment purchase.
- LO2.5 Post journal entries into T-accounts and compute an ending balance, the way you did for Harbor Music Lessons' Cash account.
- LO2.6 Build a trial balance from a jumbled list of ending balances, and state exactly what equal totals do, and do not, prove.
Concept checklist¶
| Section | Concepts to have solid |
|---|---|
| 1 · What counts as a transaction | external transaction vs. internal event, account, chart of accounts, source document |
| 2 · Every transaction, two effects | expanded equation (A = L + CS + RE), dual effect, prepaid expense, deferred revenue, accounts payable, accounts receivable |
| 3 · Debits and credits, finally | T-account, debit (left) and credit (right), normal balance |
| 4 · Recording in the journal | journal entry, compound entry |
| 5 · Posting to the ledger | general ledger, posting |
| 6 · The trial balance | (unadjusted) trial balance |
The whole cycle on one page¶
One transaction, run through every step: Marlow Landscaping providing $2,300 of landscaping services to Kestrel Dental on account, first seen when you learned to write journal entries.
| Step | What it looks like for this transaction |
|---|---|
| 1. Transaction | $2,300 of services to Kestrel Dental, on account. |
| 2. Equation effect | Assets +2,300 (Accounts Receivable); Liabilities 0; Equity +2,300 (Service Revenue). |
| 3. Debit or credit | Accounts Receivable is an asset: debit. Service Revenue is equity-side: credit. |
| 4. Journal entry | Debit Accounts Receivable 2,300; credit Service Revenue 2,300. |
| 5. Ledger posting | 2,300 to Accounts Receivable's debit side; 2,300 to Service Revenue's credit side. |
| 6. Trial balance | Accounts Receivable's balance lists as a debit; Service Revenue's lists as a credit. |
Pause and work¶
Eight rounds, cycling through every skill instead of drilling one at a time.
Reading a transaction and finding its effect on the equation.
Writing a full journal entry from a plain-English event.
The one call at the heart of this chapter: debit or credit.
Posting entries into T-accounts and finding an ending balance.
Sorting a jumbled list of ending balances into a balanced trial balance.
One more round on equation effects, fresh company, fresh numbers.
Predicting whether a specific bookkeeping error still lets the trial balance balance.
One more round of debit-or-credit calls, until the reflex is automatic.
Exam-style warm-up¶
Five questions, closed book, ten minutes, no going back to check the sections. Grab paper and try them cold.
Bridge to Chapter 3¶
Every balance on a trial balance came straight from the ledger, untouched since the day it was posted. That is the problem. Marlow Landscaping's Supplies balance still shows the full $900 bought on October 19, even if some of it has already been used up; only the portion used up becomes an expense, recorded in Chapter 3. Marlow's Deferred Revenue from the Alvarez family's advance payment still shows the full amount collected in advance, even after some of that work is done. None of that is a bookkeeping error, so a balanced trial balance will not catch it and will not fix itself. Chapter 3 adds one more step before financial statements are ready: adjusting entries, journal entries that update accounts like these for the passage of time and the work actually completed, so the statements reflect where things stand at period's end.