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A Review of the Accounting Cycle. Learning Objectives. Identify and explain the basic steps in the accounting process (accounting cycle). Analyze transactions and make and post journal entries. Make adjusting entries, produce financial statements, and close nominal accounts.

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learning objectives
Learning Objectives
  • Identify and explain the basic steps in the accounting process (accounting cycle).
  • Analyze transactions and make and post journal entries.
  • Make adjusting entries, produce financial statements, and close nominal accounts.
  • Distinguish between accrual and cash-basis accounting.
learning objectives1
Learning Objectives
  • Discuss the importance and expanding role of computers to the accounting process.

EXPANDED MATERIAL

  • Use special journals and subsidiary ledgers to process accounting information more efficiently and to provide additional useful information.
slide5

Double-Entry Accounting

or

A = L + OE

A system of recording transactions in a way that maintains the equality of the accounting equation.

Assets = Liabilities + Owners’ Equity

slide6

Double-Entry Accounting Facts

  • For every transaction, there must be at least one debit and one credit.
  • Debits must always equal credits for each transaction.
  • Debits are always entered on the left side of an account and credits are always entered onthe right side.
slide7

The Accounting Equation with T-Accounts

Assets = Liabilities + Owners’ Equity

DR CR

+ -

DR CR

- +

DR CR

- +

slide8

Capital Stock

Retained Earnings

DR CR

DR CR

- +

- +

Expenses

Revenues

Dividends

DR CR

DR CR

DR CR

+ -

- +

+ -

How Accounts Affect Owners' Equity

Owners' Equity

DR

CR

-

+

journalizing
Journalizing
  • Identify the accounts involved with an event or transaction.
  • Determine whether each account increased or decreased.
  • Determine the amount by which each account was affected.

This process is used whether the accounting is being done manually or with a computer.

1 analyze transactions and business documents
1. Analyze Transactions and Business Documents
  • Transactions are the exchange of goods or services between entities, as well as other events that have an economic impact on a business.
  • Business Documents are records that are evidence of transactions.
2 journalize transactions
2. Journalize Transactions
  • A journal is an accounting record in which business transactions are entered in chronological order.
  • Journal entries record transaction information; debits equal credits.
slide12

Journal Entries

  • A journal is an accounting record in which business transactions are entered in chronological order.
  • Journal entries record transaction information; debits equal credits.

General Journal Entry Format

Date Debit Entry.................................. xx

Credit Entry............................. xx

Explanation.

slide13

Post

Ref.

Journal

Page 1

Date

Description

Debits

Credits

Jan 1 Cash 5

Revenue 5

Received cash for

services provided.

4 Supplies 12

Accounts Payable 12

Purchased supplies

on account.

10 Accounts Payable 12

Cash 12

Paid for supplies.

slide14

Example: Journal Entry

Merchandise is sold to a customer on account for $75. The cost of the product to the firm is $60. Make the journal entry.

slide15

Example: Journal Entry

Merchandise is sold to a customer on account for $75. The cost of the product is $60. Make the journal entry.

Merchandise is sold to a customer on account for $75. The cost of the product to the firm is $60. Make the journal entry.

Jan. 1 Accounts Receivable..................... 75

Sales Revenue.......................... 75

Sold merchandise on account.

1 Cost of Goods Sold...................... 60

Inventory................................. 60

To record cost and reduce

inventory.

3 post journal entries to accounts
3. Post Journal Entries to Accounts
  • Posting is the process of transferring amounts from the journal to the general ledger.
  • A ledger is a book of accounts in which data from transactions recorded in the journals are posted, classified, and summarized.
  • A chart of accounts lists all accounts used by the company.
chart of accounts
Chart of Accounts

Long-Term Liabilities (220-239)

222 Mortgage Payable

OWNERS’ EQUITY (300-399)

301 Capital Stock

330 Retained Earnings

SALES (400-499)

400 Sales Revenue

EXPENSES (500-599)

500 Cost of Goods Sold

523 Rent Expense

528 Advertising Expense

573 Utility Expense

ASSETS (100-199)

Current Assets (100-150)

101 Cash

105 Accounts Receivable

107 Inventory

Long-Term Assets (151-199)

151 Land

152 Building

LIABILITIES (200-299)

Current Liabilities (200-219)

201 Notes Payable

202 Accounts Payable

slide18

The Reporting Phase

  • A trial balance is prepared.
  • Adjusting entries are recorded.
  • Financial statements are prepared.
  • Closing entries are made.
  • Post-closing trial balance may be taken.
4 determine account balances and prepare a trial balance
4. Determine Account Balances and Prepare a Trial Balance
  • Determine the account balance for each T-Account.
  • A Trial Balance is a listing of all account balances. It provides a means to assure that debits equal credits.
slide20

XYZ Company

Trial Balance

December 31, 2002

DebitsCredits

Cash $ 21

Accounts Receivable 15

Inventory 12

Land 200

Accounts Payable $ 30

Capital Stock 150

Retained Earnings 24

Sales Revenue 919

Cost of Goods Sold 850

Advertising Expense 10

Misc. Expenses 15 ______

Total $ 1,123 $ 1,123

5 adjusting entries
5. Adjusting Entries

Adjusting entries are requiredat the end of each accounting period for accrual-basis accounting, prior to preparing the financial statements. The purpose for adjusting entries are to:

  • Bring balance sheet accounts current.
  • Reflect proper amounts of revenues and expenses on the income statement.
tips regarding adjusting entries
Tips Regarding Adjusting Entries
  • Analytical Process. You must determine what original entry was made (if any) and what the ending balances should be before you know what adjusting entry to make. You cannot memorize adjusting entries.
  • Adjusting entriesalways incorporate a balance sheet account and an income statement account.
  • Adjusting entries neverinvolve a cash account.
most common adjusting entries
Most Common Adjusting Entries
  • Unrecorded Revenues--Revenues that have been earned but not yet recorded.
  • Unearned Revenues--Revenues that have been recorded but not yet earned.
  • Unrecorded Expenses--Expenses that have been incurred but not yet recorded.
  • Prepaid Expenses--Expenses that have been recorded but not yet incurred.
three step process for adjusting entries
Three-Step Process forAdjusting Entries
  • Identify the original entries that were made, if any. (Original entries are only made for unearned revenues and prepaid expenses.)
  • Determine what the correct balances should be at this point in time.
  • Make the adjustments needed to correct the balances.
slide25

Example: Depreciation

Adjusting Entry

12/31 Depreciation Expense--Buildings 7,800

Accumulated Depr.--Buildings 7,800

To record depreciation on

building at 5% per year.

Rosi, Inc., purchased buildings in 1997 at a cost of $156,000. Each year, 5% of the cost is depreciated. At the end of 2002, the following adjusting entry is made:

slide26

Example: Doubtful Accounts

Adjusting Entry

12/31 Doubtful Accounts Expense 1,100

Allowance for Doubtful Accounts 1,100

To adjust for estimated doubtful

accounts expense.

An estimation of bad debts based on the ending receivables balance reveals that the allowance account needs to be increased by $1,100.

slide27

Example: Doubtful Accounts

3/19 Allowance for Doubtful Accounts 150

Accounts Receivable 150

To write off an uncollectible

account.

Later, assume on March 19 that a $150 receivable is deemed to be uncollectible. Using the allowance account, the uncollectible account is written off the books.

slide28

Example: Accrued Expenses

Adjusting Entry

12/31 Salaries and Wages Expense 2,150

Salaries Payable 2,150

To record accrued salaries and

wages.

At the end of the fiscal period, Rosi, Inc., had accrued salaries and wages totaling $2,150.

slide29

Example: Accrued Revenues

Adjusting Entry

12/31 Interest Receivable 250

Interest Revenue 250

To record accrued interest on a

note receivable.

Rosi, Inc., holds a note receivable from a customer on which interest totaling $250 has accrued.

slide30

Example: Prepaid Expenses

Adjusting Entry

12/31 Insurance Expense 4,200

Prepaid Insurance 4,200

To record expired insurance.

Rosi, Inc.’s trial balance shows that the asset account Prepaid Insurance has a balance of $8,000. By December 31, only $3,800 applies to future periods.

$8,000 - $3,800

example deferred revenues
Example: Deferred Revenues

Rosi, Inc., receives a payment of $2,550 from a customer prior to the services being rendered. By December 31, $2,075 in services have been provided.

Original credit to a revenue account.

$2,550 - $2,075

Adjusting Entry

12/31 Rent Revenue 475

Unearned Rent Revenue 475

To record unearned rent revenue.

slide32

Example: Deferred Revenues

Rosi, Inc., receives a payment of $2,550 from a customer prior to the services being rendered. By December 31, $2,075 in services have been provided.

Original credit to a liability account.

Adjusting Entry

12/31 Unearned Rent Revenue 2,075

Rent Revenue 2,075

To record rent revenue

($2,550 - $475).

slide33

Example: Inventory

Refer to Rosi, Inc.’s trial balance in this chapter. Note that the firm has $45,000 in inventory. The year-end count shows that $51,000 is on hand. Assume that the firm uses a periodic system.

slide34

Example: Inventory

The XYZ Company earns a rent revenue of $500 in 19x8 but will not receive the payment until January 10, 19x9. An adjustment will be needed. What is the adjusting entry?

Purchases, Purchase Discounts, and Cost of Goods Sold are affected by the adjusting entry to update the inventory account.

Adjusting Entry

12/31 Inventory 6,000

Purchases Discounts 3,290

Cost of Goods Sold 153,310

Purchases 162,500

To adjust inventory, cost of

goods sold, and related

accounts.

$51,000 - $45,000

To close

To close

slide35

6. Preparing Financial Statements

Prepare Trial Balance

Make Adjusting Entries

Prepare Financial Statements

  • After all transactions have been recorded, a trial balance prepared, and adjusting entries made, the financial statements are prepared.

Record Trans-actions

7 the closing process
7. The Closing Process
  • Real accounts are permanent accounts not closed to a zero balance at the end of the accounting period. These accounts are carried forward to the next period.
  • Nominal accounts are temporary accounts that are closed to a zero balance at the end of each accounting period.
  • Closing entries reduce all nominal accounts to a zero balance.
slide37

The Closing Process

Retained Earnings

Revenues

Beg. Bal. xxx

Revenues

xxx

Bal. xxx

Since the revenue account is a nominal account, it is closed at the end of the period to Retained Earnings.

slide38

The Closing Process

Retained Earnings

Beg. Bal. xxx

Revenues

Expenses

Expenses

The expense account is credited in order to close the account at the end of the period.

xxx

Bal. xxx

slide39

The Closing Process

Dividends

Retained Earnings

Beg. Bal. xxx

Revenues

The dividends account, which is also nominal, is credited to close out the balance.

Expenses

Dividends

xxx

Bal. xxx

slide40

The Closing Process

Net Income for the period is determined by these two entries.

Retained Earnings

Beg. Bal. xxx

Revenues

End. Bal. xxx

Retained Earnings is a real account and always carries a balance.

Expenses

Dividends

8 post closing trial balance
8. Post-Closing Trial Balance
  • Provides a listing of all real account balances at the end of the closing balance.
  • The trial balance assures that totaldebits equal total credits prior to the beginning of the new accounting period.
  • Only real accounts will have a balance at this time.
example post closing trial balance
Example: Post-Closing Trial Balance

Jim Brewster, Inc.

Post-Closing Trial Balance

December 31, 2002

DebitsCredits

Cash $ 8,200

Accounts Receivable 4,000

Inventory 3,000

Supplies 1,000

Accounts Payable $ 5,000

Capital Stock 10,000

Retained Earnings 1,200

Totals $16,200 $16,200

summary of the accounting cycle
Summary of the Accounting Cycle
  • Analyze transactions and business documents.
  • Journalize transactions.
  • Post journal entries to accounts.
  • Determine account balances and prepare a trial balance.
  • Journalize and post adjusting entries.
  • Prepare financial statements.
  • Journalize and post closing entries.
  • Balance the accounts and prepare a post-closing trial balance.
special journals
Special Journals
  • A special journal is a book for recording similar transactions that occur frequently.
  • Sales Journal--A record where credit sales are recorded.
  • Subsidiary Ledger--A grouping of individual accounts that equal the balance of a control account in the general ledger.
special journals1
Special Journals
  • Voucher Register--A book of original entry which takes the place of a purchases journal and provides a record of all authorized payments to be made by check. Charges on each voucher are classified by the appropriate accounting in the financial records.
  • Cash Receipts Journal--A record in which all cash received from sales, interest, rent, or other sources is recorded.
  • Cash Disbursements Journal--A record of all checks issued during the period in payment of properly approved vouchers.