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Chapter 3

Chapter 3. In Chapters 1 and 2, we learned about the accounting equation and how it is used to record business transactions. We learned about accounts, chart of accounts, T accounts, normal balance, debit and credit, and prepared a trial balance.

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Chapter 3

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  1. Chapter3 • In Chapters 1 and 2, we learned about the accounting equation and how it is used to record business transactions. • We learned about accounts, chart of accounts, T accounts, normal balance, debit and credit, and prepared a trial balance. • In Chapter 3, we are going to learn about the accounting cycle.

  2. Hoffman’s • A bagel shop just off campus • Stuart Hoffman is the owner • You ask Mr. Hoffman what makes the bagels so good • He tells you his secret • Baking is nothing more than following several steps in order. You follow the same steps with every batch you bake—you don’t change anything. It’s just a cycle.

  3. Accounting Cycle • Following a set of steps in a certain order • Once one cycle is complete, the accountant begins another • Knowing will help you gain a better understanding of business • Learn how to speak the language of business

  4. Accounting Cycle • Normal accounting procedures performed over a period of time • Takes place over a specific period of time • Up to one year – month, quarter (3 months) • Most businesses use one year

  5. Introduction The accounting period One year: Calendar year Fiscal year Less than one year: Quarterly Monthly Accounting cycle

  6. Fiscal Year • A business may choose any fiscal period • Must be convenient • Inventories low and business activity are at a low point • Natural business year • Count end-of-year inventories when it is easiest to do

  7. Interim Reports • Businesses could not operate successfully if they only prepared financial reports at the end of calendar or fiscal year • Monthly, quarterly, or semiannually

  8. Clark’s Word Processing Services • Brenda Clark is owner • Fiscal year – January 1 through December 31 • Also calendar year

  9. Step 1 Business transactions occurred. Step 2 Analyzing transactions and recording. Step 3 Posting to the general ledger. Step 4 Preparing the trial balance. Accounting Cycle

  10. General Journal Also called journal. It is the book of original entry. Transactions are written in a journal in chronological order. Journalizing is the process of entering information as debits and credits to the correct accounts.

  11. Chart of Accounts The accountant must refer to the chart of accounts for the account name to be used in the journal.

  12. General Ledger Bound or loose-leaf book. It is the book of final entry. The information from the journal is transferred to the ledger in the posting process. Debits and credits in the journal remain exactly the same when posted to the accounts in the ledger.

  13. Recording Entry in Journal Debit portion goes first Credit portion is indented ½ inch Explanation follows immediately Skip one line after explanation Debits and Credits must equal

  14. Journal Entry Clark’s Word Processing Services General Journal Page 1 Date Account Titles and Description PR Dr. Cr. 200x May 1 Cash Brenda Clark, Capital Initial investment of cash by owner 10,000 10,000

  15. Journal Entry Clark’s Word Processing Services General Journal Page 1 Date Account Titles and Description PR Dr. Cr. 200x May 1 Equipment Cash Accounts Payable Purchase of equipment 6,000 1,000 5,000

  16. Journal Entry • Year (first entry on page only) • Month (first entry on page only) • Day • Name of account debited • Name of account credited • Explanation • Amount of debit • Amount of credit • Skip one line

  17. Journal Entry Clark’s Word Processing Services General Journal Page 1 Date Account Titles and Description PR Dr. Cr. 200x May 1 Prepaid Rent Cash Rent paid in advance – 3 months 1,200 1,200

  18. Journal Entry Clark’s Word Processing Services General Journal Page 1 Date Account Titles and Description PR Dr. Cr. 200x May 3 Office Supplies Accounts Payable Purchase of supplies on account from Norris 600 600

  19. Account Name: Cash Account Number: 111 Date Post. Balance 200x Description Ref. Debit Credit Debit Credit May 1 GJ 1 10,000 10,000 Posting to the Ledger General Journal Page 1 Date Post. 200x Description Ref. Debit Credit May 1 Cash 111 10,000 Brenda Clark, Capital 311 10,000 To record initial investment

  20. PostingFrom Journal to Ledger • Step 1: Record the date • Step 2: Record the journal page • Step 3: Record the amount and calculate new • balance • Step 4: Record the account number in the post reference column in the ledger (cross referencing)

  21. PostingFrom Journal to Ledger • Post references are very helpful. • Tells which entries have been posted and which have not. • Tells us to which account amount was posted. • Leads us back to the original transaction by page number.

  22. Clark’s Word Processing Services General Ledger Cash Account No. 111 Date Post. Ref. Debit Credit Balance Debit Credit May 1 GJ1 10,000 10,000 Insert the number of the journal page. Posting to the Ledger Posting

  23. Trial Balance Preparing the Trial Balance The trial balance lists the accounts which have balances in the same order as they appear in the chart of accounts. The trial balance will show if debits/credits have been interchanged. It will show if amounts have been transposed, or if a debit/credit was omitted or recorded twice.

  24. Preparing the Trial Balance Clark’s Word Processing Services Trial Balance, May 31, 200x Cash Accounts Receivable Office Supplies Prepaid Rent Word Processing Equipment Accounts Payable Brenda Clark, Capital Brenda Clark, Withdrawals Word Processing Fees Expenses Totals Debit Credit 6,155 5,000 600 1,200 6,000 3,350 10,000 625 8,000 1,770 21,350 21,350

  25. Preparing the Trial Balance • Heading • Accounts are listed in same order as ledger • Only those accounts with balances are listed • Will not be correct if posting is incorrect • Capital amount may be changed – WHY? • Totals must equal • No guarantee that transactions have been • properly recorded

  26. Preparing the Trial Balance Some Common Mistakes Mathematical error in addition Omission Slide or transposition

  27. Correcting Entry • Before posting – draw a line through incorrect amount and write the correct amount • After posting – Make a correcting entry with explanation

  28. Trial Balance Some errors do not show, such as omissions or recording to the wrong account. Corrections before posting are made in the journal. An audit trail must be left. Do not erase – cross out errors and enter corrections. (We are using pencil – I want you to erase)

  29. Preparing the Trial Balance What about corrections after posting? This means that errors are also in the ledger accounts. Cross out incorrect amounts, change to corrected amounts, and record balance changes.

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