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Step 1Step 1
Business Business documents documents analyzedanalyzed
Step 2Step 2
Transactions Transactions recorded in recorded in journalsjournals
Step 3Step 3
Transactions Transactions posted to posted to ledgersledgers
ContinuedContinuedContinuedContinued
Recording Process
Overview of the Accounting Process
3Overview of the Accounting Process
Step 5Step 5
AdjustmentsAdjustments
Work sheet Work sheet (optional)(optional)
ContinuedContinuedContinuedContinued
Step 4Step 4
Trial balanceTrial balanceSteps in the Reporting
Phase
Continued from previous slide
4
Step 7Step 7
AdjustmentsAdjustments
Step 6Step 6
Financial statementsFinancial statements
Steps in the Reporting
Phase
Step 8Step 8
Post-closing trial Post-closing trial balance (optional)balance (optional)
Overview of the Accounting Process
5
Recording Phase
A system of recording transactions in a way that maintains the equality of the accounting equation.
Assets = Liabilities + Owners’ Equity
or
A = L + OE
6
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.
7
General Journal Entry Format
Date Debit Entry.................................. xx
Credit Entry............................. xx
Explanation.
A journal is an accounting record in which business transactions are entered in chronological order.
Journal entries record transaction information; debits equal credits.
2. Journalizing Transactions
8
Every journal entry involves a three-step process:
1. Identify the accounts involved with an event or transaction.
2. Determine whether each account increased or decreased.
3. Determine the amount by which each account was affected.
2. Journalizing Transactions
9
Assets = Liabilities + Owners’ Equity DR CR DR CR DR CR (+) (–) (–) (+) (–) (+)
Capital Stock DR CR
(–) (+)
Retained Earnings DR CR
(–) (+)
ContinuedContinuedContinuedContinued
Debits and Credits
10
Debits and Credits
Retained Earnings DR CR
(–) (+)
Expenses DR CR
(+) (–)
Revenues DR CR
(–) (+)
Dividends DR CR
(+) (–)
11
Date DescriptionPostRef. Debits Credits
General Journal Page 24
2005July 1 Dividends 330 25,000
Dividends Payable 260 25,000Declared semiannualcash dividend oncommon stock.
10 Equipment 180 7,500Notes Payable 220 7,500
Issued note for newequipment .
12
Example: Journal Entry
On January 2, sold merchandise costing $60 to a customer on account for $75.
Make the journal entry.
13
Example: Journal Entry
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.
On January 2, sold merchandise costing $60 to a customer on account for $75.
Make the journal entry.
This entry assumes that the This entry assumes that the perpetual system is used.perpetual system is used.
This entry assumes that the This entry assumes that the perpetual system is used.perpetual system is used.
14
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.
15
3. Posting to the Ledger Accounts
The Equipment account in the general ledger after the purchase of July 10 (Slide 14) has
been posted would appear as follows:
Account EQUIPMENT Account No: 180
Date Item PR Debit Credit Balance
2005 July 1 Balance 10,550 10 Purchase Equipment J24 7,500 18,050
To examine the journal entry, click this button to go to Slide 14. To return, click on the word “July” in the entry on Slide 14.
16
Typical Chart of Accounts
ASSETS (100-199)Current Assets (100-150)101 Cash105 Accounts Receivable107 Inventory
Long-Term Assets (151-199)151 Land152 Building
LIABILITIES (200-299)Current Liabilities (200-219)201 Notes Payable202 Accounts Payable
Long-Term Liabilities (220-239)222 Mortgage Payable
OWNERS’ EQUITY (300-399)301 Capital Stock330 Retained Earnings
SALES (400-499)400 Sales Revenue
EXPENSES (500-599)500 Cost of Goods Sold523 Rent Expense528 Advertising Expense573 Utility Expense
17
Illustration 1. October 1, C.R Byrd invests $10,000 cash in an advertising venture to
be known as the Pioneer Advertising Agency
Oct. 1 Cash C.R.Byrd, Capital (Invested cash in business)
140
10,00010,000
2. October 1, office equipment costing $5,000 is purchased by signing a 3-month, 12%, $5,000 note payable.
Oct. 1 Office equipment Notes payable (Issued 3-month, 12%, note for office equipment)
1525
5,0005,000
3. October 2, a $1,200 cash advance is received from R. Knox, a client, for advertising services that are expected to be completed.
18
Illustration Oct. 2 Cash
Unearned Fees (Received advance from R.Knox for future service)
128
1,2001,200
4. October 3, office rent for October is paid in cash, $900
Oct. 3 Rent Expense Cash (Paid October Rent)
621
900900
5. October 4, $600 is paid for a one-year insurance policy that will expire next year on September 30.
Oct. 4 Prepaid Insurance Cash (Paid one-year policy; effective date October 1)
101
600600
19
Illustration
7. 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.
A business transaction has not occurred. There is only an agreement between the employer and the employees to enter into a business.
8. October 20, C.R. Byrd withdraw $500 cash for personal use.
Oct. 20 C.R. Byrd, Drawing Cash (Withdraw cash for personal use)
411
500500
6. October 5, an estimated 3-month supply of advertising materials is purchased on account from Aero Supply for $2,500
Oct. 5 Advertising Supplies Account Payable (Purchased supplies on account from Aero Supply)
826
2,5002,500
20
9. October 26, employee salaries of $4,000 are owed and paid in cash. (See October 9 transaction)
Illustration
10. October 31, received $10,000 in cash from Copa Company for advertising services rendered in October.
Oct. 31 Cash Fees Earned (Received cash for fees earned)
411
500500
Oct. 26 Salaries Expense Cash (Paid salaries to date)
601
4,0004,000
21
GENERAL LEDGER
Date Explanation Ref Debit Credit Balance
Oct. 1 2 3 4 20 26 31
J1 J1J1J1J1J1J1
10,0001,200
10,000
900 600 5004,000
10,00011,20010,300 9,700 9,200 5,20015,200
CASH
Date Explanation Ref Debit Credit Balance
Oct. 5 J1 2,500 2,500
ADVERTISING SUPPLIES NO 8
Date Explanation Ref Debit Credit B3alance
Oct. 4 J1 600 600
Prepaid Insurance NO 10
22
GENERAL LEDGER
Date Explanation Ref Debit Credit Balance
Oct. 1 J1 5,000 5,000
Office Equipment
NO 25
Date Explanation Ref Debit Credit Balance
Oct. 1 J1 5,000 5,000
Notes Payable
Date Explanation Ref Debit Credit Balance
Oct. 5 J1 2,500 2,500
Account Payable NO 26
Date Explanation Ref Debit Credit Balance
Oct. 2 J1 1,200 1,200
Unearned Fees NO 28
No. 15
23
GENERAL LEDGER
Date Explanation Ref Debit Credit Balance
Oct. 1 J1 10,000 10,000
C.R. Byrd, Capital
NO 41
Date Explanation Ref Debit Credit Balance
Oct. 20 J1 500 500
C.R. Byrd, Drawing
Date Explanation Ref Debit Credit Balance
Oct. 31 J1 10,000 10,000
Fees Earned NO 50
Date Explanation Ref Debit Credit Balance
Oct. 26 J1 4,000 4,000
Salaries Expense NO 60
No. 40
24
GENERAL LEDGER
Date Explanation Ref Debit Credit Balance
Oct. 3 J1 900 900
Rent Expense NO 62
PIONEER ADVERTISING AGENCY ACCOUNTS1-19 = Assets Accounts
20 – 39 = Liabilities40 – 49 = Owner’s Equity
50 – 59 = Revenues60 – 69 = Expenses
25
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).
26
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.
27PIONEER ADVERTISING AGENCY
TRIAL BALANCEOCTOBER 31, 2010
DEBIT CREDIT
Cash $ 15,200
Advertising Supplies 2,500
Prepaid Insurance 600
Office Equipment 5,000
Notes Payable $ 5,000
Accounts Payable 2,500
Unearned Fees 1,200
C.R. Byrd, Capital 10,000
C.R. Byrd, Drawing 500
Fees Earned 10,000
Salaries Expense 4,000
Rent Expense 900
$28,700=======
$28,700=======
28
5. Preparing Adjusting Entries
Adjusting entries are required at 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.
29
Tips Regarding Adjusting EntriesTips Regarding Adjusting EntriesTips Regarding Adjusting EntriesTips 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 entries always incorporate a balance sheet account and an income statement account.
Adjusting entries never involve a cash account.
30
• 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.
Most Common Adjusting EntriesMost Common Adjusting EntriesMost Common Adjusting EntriesMost Common Adjusting Entries
31
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.
Three-Step Process for Three-Step Process for Adjusting EntriesAdjusting Entries
Three-Step Process for Three-Step Process for Adjusting EntriesAdjusting Entries
32
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:
Adjusting Entry 12/31 Depreciation Expense—Buildings 7,800
Accumulated Depr.—Buildings 7,800To record depreciationon building at 5% per year.
Asset DepreciationAsset DepreciationAsset DepreciationAsset Depreciation
33
At the end of the fiscal period, Rosi, Inc. had accrued salaries and wages totaling $2,150.
Adjusting Entry 12/31 Salaries and Wages Expense 2,150
Salaries and Wages Payable 2,150To record accrued salaries andwages.
Accrued ExpensesAccrued ExpensesAccrued ExpensesAccrued Expenses
34
Rosi, Inc. holds a note receivable from a customer on which interest total $250 has accrued.
Adjusting Entry 12/31 Interest Receivable 250
Interest Revenue 250To record accrued interest on anote receivable.
Accrued RevenuesAccrued RevenuesAccrued RevenuesAccrued Revenues
35
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.
Adjusting Entry 12/31 Insurance Expense 4,200
Prepaid Insurance 4,200To record expired insurance.
$8,000 $8,000 –– $3,800 $3,800$8,000 $8,000 –– $3,800 $3,800
Prepaid ExpensesPrepaid ExpensesPrepaid ExpensesPrepaid Expenses
Original debit to an asset accountOriginal debit to an asset account
36
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.
Adjusting Entry 12/31 Prepaid Insurance 3,800
Insurance Expense 3,800To record expired insurance.
$8,000 $8,000 –– $4,200 $4,200$8,000 $8,000 –– $4,200 $4,200
Prepaid ExpensesPrepaid ExpensesPrepaid ExpensesPrepaid Expenses
Original debit to an expense accountOriginal debit to an expense account
37
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.
Adjusting Entry 12/31 Rent Revenue 475
Unearned Rent Revenue 475To record unearned rent revenue.
Original credit to a revenue accountOriginal credit to a revenue account
$2,550 $2,550 –– $2,075 $2,075$2,550 $2,550 –– $2,075 $2,075
Deferred RevenuesDeferred RevenuesDeferred RevenuesDeferred Revenues
38
Adjusting Entry 12/31 Unearned Rent Revenue 2,075
Rent Revenue 2,075To record rent revenue.
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 $2,550 –– $475 $475$2,550 $2,550 –– $475 $475
Original credit to a liability accountOriginal credit to a liability account
Deferred RevenuesDeferred RevenuesDeferred RevenuesDeferred Revenues
39
Illustration
1. At the end of October 31, it reveals that $1,000 of supplies are still on hand.
39
Oct. 31 Advertising Supplies Expense Advertising Supplies (To record supplies used)
1,5001,500
10/5 2,500 10/31 Adj. 1,500
Advertising Supplies
10/31 Bal. 1,000
Advertising Supplies Expense
10/31 Adj. 1,500
4040
Illustration
2. At the end of October 31, it reveals that $50 of insurance expires. ($600 ÷ 12 = $50 each month)
40
Oct. 31 Insurance Expense Prepaid Insurance (To record insurance expired)
5050
10/4 600 10/31 Adj. 50
Prepaid Insurance
10/31 Bal. 550
Insurance Expense
10/31 Adj. 50
414141
Illustration
3. Depreciation on the office equipment is estimated to be $480 a year, or $40 per month.
41
Oct. 31 Depreciation Expense Accumulated Depreciation Equip (To record monthly depreciation)
4040
10/31 Adj. 40
Accumulated Depreciation - OE
10/31 Bal. 40
Depreciation Expense
10/31 Adj. 40
42424242
Illustration
4. At the end of October 31, it reveals that $400 of fees from R. Knox has been earned.
42
Oct. 31 Unearned Fees Fees Earned (To record fees earned)
400400
10/2 1,200
Unearned Fees
10/31 Bal. 800
Fees Earned
10/31 Bal. 10,000
10/31Adj. 400
10/31 Adj. 400
4343434343Illustration 5. In October, Company earned $200 in fees for advertising
service that were not billed to clients before October 31.
43
Oct. 31 Accounts Receivable Fees Earned (To accrue fees earned but not billed or collected)
200200
Accounts Receivable
Fees Earned
10/31 10,000
10/31 400
10/31Adj. 200
10/31 Adj. 200
10/31 Bal. 10,600
444444444444Illustration 6. Interest due on October 31 is $50.
44
Oct. 31 Interest Expense Interest Payable (To accrue interest on notes payable)
5050
Interest Expense
Fees Earned
10/31 50
10/31 50
45454545454545Illustration 7. Employees receive total salaries of $2,000 for a five-day
work weeks, or $400 per day. Thus, accrued salaries at October 31, are $1,200 (3X$400).
45
Oct. 31 Salaries Expense Salaries Payable (To record accrued salaries)
1,2001,200
Salaries Expense
Salaries Payable
10/26 4,000
10/31 Adj. 1,200
10/31 Adj. 1,200
10/31 Bal. 5,200
46
GENERAL LEDGER
Date Explanation Ref Debit Credit Balance
Oct. 1 2 3 4 20 26 31
J1 J1J1J1J1J1J1
10,0001,200
10,000
900 600 5004,000
10,00011,20010,300 9,700 9,200 5,20015,200
CASH
Date Explanation Ref Debit Credit Balance
Oct. 31 Adj. Entry J2 200 200
Accounts Receivable NO 6
47
GENERAL LEDGER
Date Explanation Ref Debit Credit Balance
Oct. 5 31
Adj. EntryJ1J2
2,5001,500
2,5001,000
ADVERTISING SUPPLIES NO 8
Date Explanation Ref Debit Credit B3alance
Oct. 4 31 Adj. Entry
J1 J2
60050
600550
Prepaid Insurance NO 10
48
GENERAL LEDGER
Date Explanation Ref Debit Credit Balance
Oct. 1 J1 5,000 5,000
Office Equipment
NO 16
Date Explanation Ref Debit Credit Balance
Oct. 31 Adj. Entry J12 40 40
Acc. Dep. - OE
No. 15
49
GENERAL LEDGER
NO 25
Date Explanation Ref Debit Credit Balance
Oct. 1 J1 5,000 5,000
Notes Payable
Date Explanation Ref Debit Credit Balance
Oct. 5 J1 2,500 2,500
Account Payable NO 26
Date Explanation Ref Debit Credit Balance
Oct. 2 31 Adj. Entry
J1J2 400
1,200 1,200 800
Unearned Fees NO 28
Date Explanation Ref Debit Credit Balance
Oct. 31 J2 50 50
Interest Payable NO 27
50GENERAL LEDGER
Date Explanation Ref Debit Credit Balance
Oct. 1 J1 10,000 10,000
C.R. Byrd, Capital
NO 41
Date Explanation Ref Debit Credit Balance
Oct. 20 J1 500 500
C.R. Byrd, Drawing
Date Explanation Ref Debit Credit Balance
Oct. 31 31 31
Adj. EntryAdj. Entry
J1 J2 J2
10,000 400 200
10,00010,40010,600
Fees Earned NO 50
No. 40
Date Explanation Ref Debit Credit Balance
Oct. 31 Adj. Entry J2 1,200 1,200
Salaries Payable No. 29
51GENERAL LEDGER
NO 41
Date Explanation Ref Debit Credit Balance
Oct. 31 Adj. Entry J12 1,500 1,500
Adv. Supplies Exp
Date Explanation Ref Debit Credit Balance
Oct. 31
Adj. Entry J2 900 900
Rent Expense NO 62
Date Explanation Ref Debit Credit Balance
Oct. 26Oct. 31 Adj. Entry
J1 J2
4,0001,200
4,0005,200
Salaries Expense No. 60
No. 61
Date Explanation Ref Debit Credit Balance
Oct. 31
Adj. Entry J2 50 50
Insurance Expense NO 63
52
GENERAL LEDGER
Date Explanation Ref Debit Credit Balance
Oct. 31 Adj. Entry J2 50 50
Interest Expense NO 64
PIONEER ADVERTISING AGENCY ACCOUNTS1-19 = Assets Accounts
20 – 39 = Liabilities40 – 49 = Owner’s Equity
50 – 59 = Revenues60 – 69 = Expenses
Date Explanation Ref Debit Credit Balance
Oct. 31 Adj. Entry J2 40 40
Depreciation Expense NO 65
53
Record Trans-actions
Prepare Trial
Balance
Make Adjusting
Entries
After all transactions have been recorded, a trial balance is prepared, adjusting entries are made, and the financial statements are prepared.
6. Preparing Financial Statements
Prepare Financial
Statements
54
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.
55
Revenues
Bal. xxx
Retained Earnings Beg. Bal. xxx
xxx
Since the revenue account is a Since the revenue account is a nominal account, it is closed at nominal account, it is closed at
the end of the period to the end of the period to Retained Earnings.Retained Earnings.
Since the revenue account is a Since the revenue account is a nominal account, it is closed at nominal account, it is closed at
the end of the period to the end of the period to Retained Earnings.Retained Earnings.
7. The Closing Process
Revenues
56
Expenses
Bal. xxx xxxThe expense account is The expense account is
credited in order to credited in order to close the account at the close the account at the
end of the period.end of the period.
The expense account is The expense account is credited in order to credited in order to
close the account at the close the account at the end of the period.end of the period.
7. The Closing Process
Retained Earnings
Beg. Bal. xxx RevenuesExpenses
57
Dividends
Bal. xxx xxx
The dividends The dividends account, which is also account, which is also nominal, is credited nominal, is credited
to close out the to close out the balance.balance.
The dividends The dividends account, which is also account, which is also nominal, is credited nominal, is credited
to close out the to close out the balance.balance.
7. The Closing Process
Retained Earnings
Beg. Bal. xxx RevenuesExpensesDividends
58
Retained Earnings
Retained EarningsRetained Earnings is is a real account and a real account and always carries a always carries a
balance.balance.
Retained EarningsRetained Earnings is is a real account and a real account and always carries a always carries a
balance.balance.
Net Income for the Net Income for the period is determined by period is determined by
these two items.these two items.
Net Income for the Net Income for the period is determined by period is determined by
these two items.these two items.
Beg. Bal. xxx RevenuesExpensesDividends
End. Bal. xxx
7. The Closing Process
Dividends reduce Dividends reduce Retained EarningsRetained EarningsDividends reduce Dividends reduce Retained EarningsRetained Earnings
59
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 total debits equal total credits prior to the beginning of the new accounting period.
• Only real accounts will have a balance at this time.
60
Example: Post-Closing Trial Balance
Jim Brewster, Inc.Post-Closing Trial Balanceas of December 31, 2004
Debits CreditsCash $ 8,200Accounts Receivable 4,000Inventory 3,000Supplies 1,000Accounts Payable $ 5,000Capital Stock 10,000Retained Earnings 1,200 Totals $16,200 $16,200
61
Summary of the Accounting Cycle
1. Analyze transactions and business documents.
2. Journalize transactions.3. Post journal entries to accounts.4. Determine account balances and prepare a
trial balance.5. Journalize and post adjusting entries.6. Prepare financial statements.7. Journalize and post closing entries.8. Prepare a post-closing trial balance.
62
Summary of the Accounting Cycle
An accountant must thoroughly understand the
intricacies of the accounting cycle. That means you!
An accountant must thoroughly understand the
intricacies of the accounting cycle. That means you!
63
Accrual Accounting
Accrual accounting recognizes revenues as they are earned, not necessarily
when cash is received.
Accrual accounting recognizes revenues as they are earned, not necessarily
when cash is received.
64
That’s true. And, accrual accounting recognizes expenses
as they are incurred, not necessarily when cash is paid.
That’s true. And, accrual accounting recognizes expenses
as they are incurred, not necessarily when cash is paid.
Accrual Accounting
65
Cash-Basis Accounting
Cash-basis accounting is focused on cash receipts and cash disbursements.
Cash-basis accounting is focused on cash receipts and cash disbursements.
66Computers and the Accounting Process
There has been a rapid increase in the use of computers to assist in performing many of the tasks
found in the accounting cycle.
67Computers and the Accounting Process
Computers are well suited to perform many accounting
cycle tasks.
RecordingRecordingRecordingRecordingStorageStorageStorageStorageMathematical Mathematical ComputationsComputationsMathematical Mathematical ComputationsComputations
RecallRecallRecallRecallReport GenerationReport GenerationReport GenerationReport Generation
68Computers and the Accounting Process
Computers will never replace the accountant.
Computers will never replace the accountant.
69
The EndThe End
chapter 2
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