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Understanding The Recording Process. Typical 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

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slide2

Typical 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

slide3

Recording Process

Recording Process

Step 1

Business documents analyzed

Step 2

Transactions recorded in journals

Step 3

Transactions posted to ledgers

slide4

Overview of the Accounting Process

Continued from previous slide

Step 4

Trial balance

Work sheet (optional)

Steps in the Reporting Phase

Step 5

Adjustments

Continued

slide5

Overview of the Accounting Process

Step 6

Financial statements

Step 7

Adjustments

Steps in the Reporting Phase

Step 8

Post-closing trial balance (optional)

slide6

1. Analyzing 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.
slide7

2. Journalizing Transactions

  • 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.

slide8

2. Journalizing Transactions

Every journal entry involves a three-step process:

  • 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.
slide9

Debits and Credits

Assets = Liabilities + Owners’ Equity

DR CR DR CR DR CR

(+) (–) (–) (+) (–) (+)

Capital Stock

Retained Earnings

DR CR

(–) (+)

DR CR

(–) (+)

Continued

slide10

Debits and Credits

Retained Earnings

DR CR

(–) (+)

Expenses

Revenues

Dividends

DR CR

(+) (–)

DR CR

(–) (+)

DR CR

(+) (–)

slide11

Post

Ref.

General Journal

Page 24

Date

Description

Debits

Credits

2005

July 1 Dividends 330 25,000

Dividends Payable 260 25,000

Declared semiannual

cash dividend on

common stock.

10 Equipment 180 7,500

Notes Payable 220 7,500

Issued note for new

equipment .

slide12

Example: Journal Entry

On January 2, sold merchandise costing $60 to a customer on account for $75. Make the journal entry.

slide13

Example: Journal Entry

On January 2, sold merchandise costing $60 to a customer on account for $75. Make the journal entry.

This entry assumes that the perpetual system is used.

Jan. 2 Accounts Receivable..................... 75

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

Sold merchandise on

account.

2 Cost of Goods Sold...................... 60

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

To record cost and

reduce inventory.

slide14

3. Posting to the Ledger Accounts

  • Posting is the process of transferring amounts from the journal to the general ledger.
  • A ledger is a collection 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.
slide15

EQUIPMENT

Account No: 180

Account

Date Item PR Debit Credit Balance

2005

July 1 Balance  10,550

10 Purchase Equipment J24 7,500 18,050

3. Posting to the Ledger Accounts

The Equipment account in the general ledger after the purchase of July 10 (Slide 9) has been posted would appear as follows:

To examine the journal entry, click this button to go to Slide 9. To return, click on the word “July” in the entry on Slide 9.

slide16

Reporting Phase

4.A trial balance is prepared.

5.Adjusting entries are recorded.

6. Financial statements are prepared.

7. Closing entries are made.

8. A post-closing trial balance is prepared (optional).

slide17

4. Preparing a Trial Balance

  • Determine the account balance for each T-Account.
  • A trial balance is a list of all accounts and their balances. It provides a means to assure that debits equal credits.
slide18

XYZ Company

Trial Balance

December 31, 2005

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

slide19

Illustration

October 1, C.R Byrd invests $10,000 cash in an advertising venture to be known as the Pioneer Advertising Agency

October 1, office equipment costing $5,000 is purchased by signing a 3-month, 12%, $5,000 note payable.

October 2, a $1,200 cash advance is received from R. Knox, a client, for advertising services that are expected to be completed.

slide20

Illustration

October 3, office rent for October is paid in cash, $900

October 4, $600 is paid for a one-year insurance policy that will expire next year on September 30.

slide21

Illustration

October 5, an estimated 3-month supply of advertising materials is purchased on account from Aero Supply for $2,500

October 9, hire four employees to begin work on October 15. each employee is to receive a weekly salary of $500 for a 5-day work week, payable every 2 weeks – first payment made on October 26.

October 20, C.R. Byrd withdraw $500 cash for personal use.

slide22

Illustration

October 26, employee salaries of $4,000 are owed and paid in cash. (See October 9 transaction)

October 31, received $10,000 in cash from Copa Company for advertising services rendered in October.

slide23

GENERAL LEDGER

CASH

ADVERTISING SUPPLIES

NO 8

Prepaid Insurance

NO 10

slide24

GENERAL LEDGER

Office Equipment

No. 15

Notes Payable

NO 25

Account Payable

NO 26

Unearned Fees

NO 28

slide25

GENERAL LEDGER

C.R. Byrd, Capital

No. 40

C.R. Byrd, Drawing

NO 41

Fees Earned

NO 50

Salaries Expense

NO 60

slide26

GENERAL LEDGER

Rent Expense

NO 62

PIONEER ADVERTISING AGENCY ACCOUNTS

1-19 = Assets Accounts

20 – 39 = Liabilities

40 – 49 = Owner’s Equity

50 – 59 = Revenues

60 – 69 = Expenses

slide28

5. Preparing 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, costs, and expenses on the income statement.
slide29

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 entriesalwaysincorporate a balance sheet account and an income statement account.
  • Adjusting entries neverinvolve a cash account.
slide30

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.
slide31

Three-Step Process for Adjusting Entries

1. Identify the original entries that were made, if any. Original entries are only made for unearned revenues and prepaid expenses.

2. Determine what the correct balances should be at this point in time.

3.Make the adjustments needed to bring the balances to the desired amounts.

slide32

Adjusting Entry

12/31 Depreciation Expense—Buildings 7,800

Accumulated Depr.—Buildings 7,800

To record depreciation

on building at 5% per year.

Asset Depreciation

Rosi, Inc. purchased buildings in 2000 at a cost of $156,000, an expected life of 20 years, and no anticipated residual value. Each year, 5% of the cost is depreciated. At the end of 2005, the following adjusting entry is made:

slide33

Adjusting Entry

12/31 Bad Debts Expense 1,100

Allowance for Bad Debts 1,100

To adjust for estimated bad

debts expense.

Bad Debts

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

slide34

3/19 Allowance for Bad Debts 150

Accounts Receivable 150

To write off an uncollectible

account.

Bad Debts

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

Note that this entry is not an adjusting entry. It is made when the account is determined to be uncollectible.

slide35

Adjusting Entry

12/31 Salaries and Wages Expense 2,150

Salaries and Wages Payable 2,150

To record accrued salaries and

wages.

Accrued Expenses

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

slide36

Adjusting Entry

12/31 Interest Receivable 250

Interest Revenue 250

To record accrued interest on a

note receivable.

Accrued Revenues

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

slide37

Adjusting Entry

12/31 Insurance Expense 4,200

Prepaid Insurance 4,200

To record expired insurance.

Prepaid Expenses

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

Original debit to an asset account

slide38

Adjusting Entry

12/31 Prepaid Insurance 3,800

Insurance Expense 3,800

To record expired insurance.

Prepaid Expenses

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

$8,000 – $4,200

Original debit to an expense account

slide39

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.

$2,550 – $2,075

Adjusting Entry

12/31 Rent Revenue 475

Unearned Rent Revenue 475

To record unearned rent revenue.

Original credit to a revenue account

slide40

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.

$2,550 – $475

Adjusting Entry

12/31 Unearned Rent Revenue 2,075

Rent Revenue 2,075

To record rent revenue.

Original credit to a liability account