Chapter 2. Review of the Accounting Process. + Owner Investments. - Owner Withdrawals. + Revenue + Gains. - Expenses - Losses. The Accounting Equation. A = L + OE. + Paid-in Capital. + Retained Earnings. + Revenues + Gains. - Expenses - Losses. - Dividends.
Record in Journal
At the End of the Accounting Period
Adjusted Trial Balance
Record & Post Adjusting Entries
Unadjusted Trial Balance
The Accounting Processing Cycle
At the End of the Year
Close Temporary Accounts
Post-Closing Trial Balance
On January 1, $40,000 was borrowed from a bank and a note payable was signed.
Prepare the journal entry.
The “T” account is a shorthand format of an account used by accountants to analyze transactions. It is notpart of the bookkeeping system.
Post the debit portion of the entry to the Cash ledger account.
We follow the same procedure to post the credit portion of the entry to the Common Stock account.
After recording all entries for the period, Dress Right’s Unadjusted Trial Balance would be as follows:
A Trial Balance is a listing of all accounts and their balances at a point in time.
Debits = Credits
Transactions where cash is paid or received beforea related expense or revenue is recognized.
Transactions where cash is paid or received after a related expense or revenue is recognized.
Today, I will pay
for my first
6 months’ rent.
Items paid for in advance of receiving their benefits
Recall the Furniture and Fixtures for $12,000 listed on Dress Right’s unadjusted trial balance. Assume the following:
Let’s calculate the depreciation expense for the month ended July 31, 2009.
Recall the Furniture and Fixtures for $12,000 listed on Dress Right’s unadjusted trial balance.
$12,000 - $0
$200 per month
After posting, the accounts look like this:
Buy your season tickets for
all home basketball games NOW!
Cash received in advance of performing services
“Go Big Blue”
Prepaid ExpensesRecord initial cash payments as follows:
Expense $$$ Cash $$$
Adjusting EntryRecord the amount for the prepaid expense as follows:
Prepaid expense $$$ Expense $$$
Unearned RevenueRecord initial cash receipts as follows:
Cash $$$ Revenue $$$
Adjusting EntryRecord the amount for the unearned liability as follows:
Revenue $$$ Unearned revenue $$$
I won’t pay you
until the job is done!
Liabilities recorded when an expense has been incurred prior to cash payment.
Yes, you can pay me
in May for your April 15 tax return.
Revenue earned in a period prior to the cash receipt.
An estimated item is a function of future events and developments.Estimates
The estimate of bad debt expense at the end of the period is an example of an adjusting entry that requires an estimate.
Assume that Dress Right’s management determines that of the $2,000 of accounts receivable recorded at July 31, only $1,500 will ultimately be collected. Prepare the adjusting entry for July 31.
This is the Adjusted Trial Balance for Dress Right after all adjusting entries have been recorded and posted.
Dress Right will use these balances to prepare the financial statements.
The income statement summarizes the results of operating activities of the company.
The balance sheet presents the financial position of the company on a particular date.
Notice that assets of $143,000 equal total liabilities plus shareholders’ equity of $143,000.
The statement of cash flows discloses the changes in cash during a period.
The statement of shareholders’ equity presents the changes in permanent shareholder accounts.
Lists permanent accounts and their balances.
Total debits equal total credits.
Jeter, Inc. paid $20,000 cash for insurance during the current period. On Jan. 1, Prepaid Insurance was $5,000, and on Dec. 31, the account balance was $3,000.
A worksheet can be used as a tool to facilitate the preparation of adjusting and closing entries and the financial statements.
Let’s look at the completed worksheet for Dress Right.
Reversing entries remove the effects of some of the adjusting entries made at the end of the previous reporting period for the sole purpose of simplifying journal entries made during the new period. Reversing entries are optional and are used most often with accruals.
Subsidiary ledgers contain a group of subsidiary accounts associated with particular general ledger control accounts. Subsidiary ledgers are commonly used for accounts receivable, accounts payable, plant and equipment, and investments.
For example, there will be a subsidiary ledger for accounts receivable that keeps track of the increases and decreases in the accounts receivable balance for each of the company’s customers purchasing goods and services on credit.
After all of the postings are made from the appropriate journals, the balance in the accounts receivable control account should equal the sum of the balances in the accounts receivable subsidiary ledger accounts.
Special journals are used to capture the dual effect of repetitive types of transactions in debit/credit form.
Let’s look at some special journals.
Sales journals record all credit sales. Every entry in the sales journal has the same effect on the accounts; the sales revenue account is credited and the accounts receivable control account is debited.
Other columns capture information needed for updating the accounts receivable subsidiary ledger.
Cash receipts journals record all cash receipts, regardless of the source. Every entry in the cash receipts journal produces a debit to the cash account with the credit to various other accounts.