Balance Sheet Accounts in Job Order Costing

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  • 0:04 Job Order Costing
  • 1:00 What is a Balance Sheet?
  • 3:00 How to Record Transactions
  • 4:30 Lesson Summary
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Lesson Transcript
Instructor: Christian George

Christian has a PhD in Business Management and an MA in Accounting & Financial Management

This lesson reviews job order costing and discusses what a balance sheet is, different accounts on the balance sheet and how to record transactions onto the balance sheet.

Job Order Costing

Joey works at a custom auto parts shop. They create custom parts for automobiles at the request of customers.

He likes the work and wouldn't mind owning the shop himself one day. One of the things that he likes the most about his job is that his boss lets him price out jobs for customers. His boss taught him how to price jobs by adding parts, labor and overhead together for each job to get the costs associated with the repair, then adding a marginal up-charge for profit.

Some of the jobs that Joey does are the creation of custom parts that are specific to a customer's automobile. On one such job, Joey might work eight hours to finish the job; on another job he might work 40 hours to finish the job. Because each job is individualized to the customer, the costs are different every time. This method of costing is called job order costing. This method assigns costs to a specific unit or product.

What Is A Balance Sheet?

'Joey, come here for a minute.' Joey enters his boss's office after a long day at work. 'I want you to look at these financial statements to see how things are looking for the company.'

Joey looks confused. 'Financial statements?'

'A financial statement is just a chart that shows how the company is doing financially. Here are some of the statements used in the shop, and I want you to learn how to read and understand them.'

'No problem, boss!' exclaims Joey.

'The first one that you will need to learn about is the balance sheet. This chart shows all of the assets that the company has versus the liabilities and equity of the company. Assets are the positives within the company and liabilities are the negatives. If you look closely, you'll see that the positives and negatives balance. That's why it's called a balance sheet.'

Joey could see that the two sides of the balance sheet matched. He saw that some of the accounts listed on the asset side of the balance sheet had funny names: inventory, cash, depreciation.

Joey's boss went on. 'There are three major accounts on this asset side of the balance sheet that I want you to understand. See, when materials that you use in jobs for customers are bought, the business spends cash to buy the materials, but they are still an asset. Cash is sent out to buy the materials, but they are still worth something, so they're an asset. Record these parts in the raw material inventory account on the balance sheet. The cash account will go down for the purchase, but the raw material inventory account will go up.'

'I understand, boss. So, the balance sheet will stay balanced by adding or subtracting from accounts?'

'Correct, Joey. The assets half and the liabilities and equity half need to balance each other, but transactions can affect only one side of the balance sheet. The transaction must balance. Look at this on the computer. See how the transaction looked when the materials were purchased that you are using to build that engine you're working on?'

Recording Transactions

Joey's boss points to the computer screen, 'This journal entry is the transaction of buying the materials. See how the accounts from the balance sheet are listed in the entry? They balance out. Cash goes down, but raw materials inventory goes up.'

Joey looks closer at the numbers:

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