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Stice | Stice | Skousen. Intermediate Accounting,17E. A Review of the Accounting Cycle. PowerPoint presented by: Douglas Cloud Professor Emeritus of Accounting, Pepperdine University. © 2010 Cengage Learning. Recording Phase.

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a review of the accounting cycle

Stice | Stice | Skousen

Intermediate Accounting,17E

A Review of the Accounting Cycle

PowerPoint presented by: Douglas Cloud Professor Emeritus of Accounting, Pepperdine University

© 2010 Cengage Learning

slide2

Recording Phase

1. Business documents are analyzed.

  • Transactions are recorded.
  • Transactions are posted.
slide3

Reporting Phase

4. A trial balance of the accounts in the general ledger is prepared.

  • Adjusting entries are recorded.
  • Financial statements are prepared.
  • Nominal accounts are closed.

8. A post-closing trial balance may be prepared.

double entry accounting
An old and universally accepted system for recording accounting data.

Each transaction/ business event is recorded to maintain the equality of the basic accounting equation.

Assets

Liabilities

Owners’ Equity

=

+

Double-Entry Accounting
double entry accounting5
Double-Entry Accounting
  • A debit is an entry on the left side of an account.
  • A credit is an entry on the right side of an account.
  • Assets, expenses, and dividends are increased by debits and decreased by credits.
  • Liabilities, capital stock, retained earnings, and revenues are increased by credits and decreased by debits.
3 step journal entry process
3-Step Journal Entry 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.
summarizing
Summarizing
  • Assets are increased by debits and decreased by credits.
  • Liability and owners’ equity accounts are increased by credits and decreased by debits.
  • Owners’ equity for a corporation includes capital stock accounts and the retained earnings account.
  • Revenues, expenses, and dividends relate to owners’ equity through the retained earnings account.

(continues)

slide8

Summarizing

  • Expenses and dividends are increased by debits and decreased by credits.
  • Revenues are increased by credits and decreased by debits.
  • The difference between total revenues and total expenses for a period is net income (loss), which increases (decreases) owners’ equity through the retained earnings account.
journalizing transactions
Journalizing Transactions
  • A special journal is used to record a particular type of frequently recurring transaction.
    • sales, purchases, cash disbursements, cash receipts
  • The general journal is used to record all transactions for which a special journal is not maintained.
slide10

Posting to the Ledger Accounts

  • An accountis used to summarize the effects of transactions on each element of the expanded accounting equation.
  • A ledgeris a collection of accounts maintained by a business.
  • The transfer of information from the journal to the appropriate account in the ledger is referred to as posting.
slide11

Posting to the Ledger Accounts

  • The general ledgerincludes all accounts appearing on the financial statements, and separate subsidiary ledgers afford additional detail in support of certain general ledger accounts.
  • The general ledger account that summarizes the detailed information in a subsidiary ledger is known as a control account.
preparing a trial balance
Preparing a Trial Balance
  • A trial balance is a list of all accounts and their balances.
  • It provides a means to assure that debits equal credits.
adjusting entries
Adjusting Entries
  • Adjusting entries are required at the end of each accounting period prior to preparing the financial statements.
  • The purpose of adjusting entries:
  • To make balance sheet accounts current
  • To reflect proper amounts of revenues and expenses on the income statement
areas most commonly requiring analysis
Areas Most Commonly Requiring Analysis

1. Unrecorded assets—Assetsand revenues that have been earned but not yet recorded.

2. Unrecorded liabilities—Expenses and liabilities that have been incurred but not yet recorded.

3. Prepaid expenses—Expenses that have been recorded but not yet incurred.

4. Unearned revenues—Revenues that have been recorded but not yet earned.

5. Transactions involving estimates also require analysis.

3 step process for adjusting entries
3-Step Process for Adjusting Entries
  • 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.

unrecorded assets
Unrecorded Assets

If revenue is earned but not yet collected in cash, a receivable exists. The illustrative entry recognizing a receivable for Rosi, Inc., is as follows:

slide18

Unrecorded Liabilities

Liabilities can be created by expenses being incurred prior to being paid or recorded. Rosi, Inc., had unrecorded liabilities at the end of the accounting period.

Accrued Salaries

slide19

Unrecorded Liabilities

Liabilities can be created by expenses being incurred prior to being paid or recorded. Rosi, Inc., had unrecorded liabilities at the end of the accounting period.

Accrued Interest

slide20

Unrecorded Liabilities

Liabilities can be created by expenses being incurred prior to being paid or recorded. Rosi, Inc., had unrecorded liabilities at the end of the accounting period.

Accrued Taxes

slide21

Prepaid Expenses

Payments that a company makes in advance for items normally charged to expense are known as prepaid expenses. The method of adjusting for prepaid expenses depends on how the expenditure was originally entered in the accounts.

slide22

Original Debit to an Asset Account

The expired portion of Rosi’s prepaid insurance is $4,200. The following adjusting entry is required:

(continues)

slide23

Original Debit to an Asset Account (concl.)

The following T-accounts illustrate how this adjusting entry, when posted, would affect the accounts.

slide24

Original Debit to an Expense Account

The expense account shows $8,000, but $3,800 is applicable to future periods. The following adjusting entry is required:

(continues)

slide25

Original Debit to an Expense Account

The following T-accounts illustrate the effect that this adjusting entry would have on the relevant accounts:

Note that regardless of which method is used, the ending balance in each account is the same.

slide26

Original Credit to a Revenue Account

If the revenue account was credited when cash was received, the revenue account remains with a credit balance, representing the earnings applicable to the current period. For Rosi, Inc., the unearned revenue at the end of 2011 is $475 and is recorded as shown next.

(continues)

slide27

The T-accounts below illustrate the effect that the adjusting entry would have on the related accounts.

Original Credit to a Revenue Account

slide28

Original Credit to a Liability Account

If a liability account was originally credited when cash was received, the adjusting entries require that the liability be debited and the revenue account be credited for the amount applicable to the current period. If Rosi, Inc., had originally credited Unearned Rent Revenue for $2,550, the adjusting entry shown next would be made.

(continues)

slide29

The T-accounts below illustrate the effect that the adjusting entry would have on the related accounts.

Original Credit to a Liability Account

slide30

Transactions Involving Estimates

Asset Depreciation

In recording asset depreciation, operations are charged with a portion of the asset’s cost, and the carrying value of the asset is reduced using accumulated depreciation (a contra account).

slide31

Transactions Involving Estimates

Depreciation for 2011 on Rosi’s plant assets is $7,800 for building and $1,500 for furniture and fixtures. The adjustments at the end of the year are as follows:

slide32

Transactions Involving Estimates

Bad Debts

Under the accrual concept, an adjustment should be made for estimated bad debts in the current period rather than when specific accounts become uncollectible.

slide33

Transactions Involving Estimates

Using this concept, Rosi, Inc., needs to increase the allowance account by $1,100. The entry would be as follows:

adjusting entries summary
Adjusting Entries Summary
  • Adjusting entries alwaysincorporate a balance sheet account and an income statement account.
  • Adjusting entries do notinvolve cash.
preparing financial statements
Preparing Financial Statements

1. Identify all revenues and expenses—these account balances are used to prepare the income statement.

2.Compute the net income.

3.Compute the ending retained earnings balance.

4. Prepare a balance sheet using the balance sheet accounts from the trial balance and the modified retained earnings balance (from step 3).

slide36

Using a Spreadsheet

An optional step in the accounting process is to use a spreadsheet (also called a work sheet) to facilitate the preparation of adjusting entries and financial statements. The availability of spreadsheet software makes the preparation of a spreadsheet quite easy. A spreadsheet for Rosi, Inc, is shown next.

closing the nominal accounts
Real accounts

Not closed to a zero balance at the end of the accounting period.

Carried forward to the next period.

Nominal (or temporary) accounts

Closed to a zero balance at the end of each accounting period.

All income statement accounts and the dividend account.

Closing entriesreduce all nominal accounts to a zero balance.

Closing the Nominal Accounts
the closing process
The Closing Process

Revenues

Retained Earnings

xx

Bal. xxx

Beg. Bal. xxx

Revenues

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

the closing process41
The Closing Process

Retained Earnings

Expenses

Beg. Bal. xxx

Revenues

Expenses

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

xx

Bal. xxx

the closing process42
The Closing Process

Retained Earnings

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

Expenses

Beg. Bal. xxx

Revenues

Dividends

Dividends

xx

Bal. xxx

the closing process43
The Closing Process

Retained Earnings

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

Expenses

Beg. Bal. xxx

Revenues

Dividends

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

Dividends reduce Retained Earnings.

post closing trial balance
Provides a listing of all realaccount balances at the end of the closing process.

The post-closing trialbalance is prepared to verify the equality of debits and credits for all real accounts.

Post-Closing Trial Balance
accrual accounting
Accrual Accounting
  • Accrual accounting recognizes revenues as they are earned, not necessarily when cash is received.
  • Expenses are recognized as they are incurred, not necessarily when cash is paid.
  • Provides a better basis for financial reporting, according to the FASB.
cash basis accounting
Cash-Basis Accounting
  • Cash-basis accounting is focused on cash receipts and cash disbursements.
  • Typically used by service businesses, such as CPAs, dentists, and engineers.
  • AICPA holds that it is appropriate for small service companies.
computers and accounting
Computers and Accounting
  • Many steps of the accounting cycle are performed using computers.
  • Typical computerized functions include generating reports and computational analysis.
  • The computer will never replace a good accountant!
slide48

Computers and Accounting

  • A recent development in the use of computers in financial reporting is the spread of XBRI.
  • Stands for eXtensible Business Reporting Language.
  • Is a method of embedding computer-readable tags in financial report documents.
  • Allows a company to download its financial statements into spreadsheets where they can be compared to the financial statements of other companies that have also been downloaded.