A DAC 101 PRESENTATION BY H ONDIGO SCHOOL OF BUSINESS UNIVERSITY OF NAIROBI THE COMPLETE ACCOUNTING CYCLE

A DAC 101 PRESENTATION

BY H ONDIGO

SCHOOL OF BUSINESS UNIVERSITY OF NAIROBI

THE COMPLETE ACCOUNTING THE COMPLETE ACCOUNTING CYCLECYCLE

1.1. Understand basic accounting terminology.Understand basic accounting terminology.

2.2. Explain double-entry rules.Explain double-entry rules.

3.3. Identify steps in the accounting cycle.Identify steps in the accounting cycle.

4.4. Record transactions in journals, post to ledger Record transactions in journals, post to ledger accounts, and prepare a trial balance.accounts, and prepare a trial balance.

5.5. Explain the reasons for preparing adjusting entries.Explain the reasons for preparing adjusting entries.

6.6. Prepare financial statement from the adjusted trial Prepare financial statement from the adjusted trial balance.balance.

7.7. Prepare closing entries.Prepare closing entries.

8.8. Preparing reversing entriesPreparing reversing entries

9.9. Using a worksheetUsing a worksheet

Presentation ObjectivesPresentation ObjectivesPresentation ObjectivesPresentation Objectives

Identifying and recordingIdentifying and recording

JournalizingJournalizing

PostingPosting

Trial balanceTrial balance

Adjusting entriesAdjusting entries

Adjusted trial balanceAdjusted trial balance

Preparing financial Preparing financial statementsstatements

ClosingClosing

Post-closing trial balancePost-closing trial balance

Reversing entriesReversing entries

Accounting Accounting Information SystemInformation System

The Accounting The Accounting CycleCycle

Basic terminologyBasic terminology

Debits and creditsDebits and credits

Accounting equationAccounting equation

Financial statements Financial statements and ownership and ownership structurestructure

The Accounting Information SystemThe Accounting Information SystemThe Accounting Information SystemThe Accounting Information System

Collects and processes transaction data.

Disseminates the information to interested parties.

Accounting Information SystemAccounting Information SystemAccounting Information SystemAccounting Information System

Accounting Information System (AIS)

How much and what kind of debt is outstanding?

Were sales higher this period than last?

What assets do we have?

What were our cash inflows and outflows?

Did we make a profit last period?

Are any of our product lines or divisions operating at a loss?

Can we safely increase our dividends to stockholders?

Is our rate of return on net assets increasing?

Accounting Information SystemAccounting Information SystemAccounting Information SystemAccounting Information System

Helps management answer such questions as:

Basic TerminologyBasic TerminologyBasic TerminologyBasic Terminology

Accounts & Accounts & General ledger General ledger

Event & Event & Transaction Transaction

JournalJournal

PostingPosting

Trial BalanceTrial Balance

Adjusting EntriesAdjusting Entries

Financial Financial StatementsStatements

Closing EntriesClosing Entries

AccountsAccounts

Business people need to be able Business people need to be able to retrieve transaction data to retrieve transaction data quickly and in usable form. quickly and in usable form.

A filing system consisting of A filing system consisting of accounts is used to sort out or accounts is used to sort out or classify all the transactions that classify all the transactions that occur in a business.occur in a business.

Accounts are the basic storage Accounts are the basic storage unit for accounting data and are unit for accounting data and are used to accumulate amounts from used to accumulate amounts from similar transactions.similar transactions.

An account is the means by which An account is the means by which management accumulates the effects of management accumulates the effects of transactions; it is the basic storage unit for transactions; it is the basic storage unit for accounting data. accounting data.

The title should describe what is recorded in the account

The general ledger is the file or book in The general ledger is the file or book in which the company’s accounts are kept.which the company’s accounts are kept.

AccountsAccountsAccountsAccounts

An accounting system has a separate An accounting system has a separate account for each asset, liability, and account for each asset, liability, and each component of stockholders’ equity, each component of stockholders’ equity, including revenues and expenses.including revenues and expenses.

A small organization may have only a A small organization may have only a few dozen accounts; a multinational few dozen accounts; a multinational corporation may require thousands of corporation may require thousands of accounts.accounts.

The group of company accounts is The group of company accounts is known as the known as the general ledger general ledger or simplyor simply ledger.ledger.

The general ledger may be manual or The general ledger may be manual or computer-based.computer-based.

Accounts cont…Accounts cont…Accounts cont…Accounts cont…

Accounts are numbered to make Accounts are numbered to make them easy to find.them easy to find.

The list of all account numbers and The list of all account numbers and names is known as the names is known as the chart of chart of accounts. accounts.

AAccounts are numbered for ccounts are numbered for processing and reference purposes.processing and reference purposes. The account number may be coded to The account number may be coded to

provide information about the account. provide information about the account. An asset account typically starts with 1.An asset account typically starts with 1. A liability account typically starts with A liability account typically starts with

2.2.

Chart of AccountsChart of AccountsChart of AccountsChart of Accounts

Revenue and expense Revenue and expense accounts are separated accounts are separated from other owner’s from other owner’s equity accounts.equity accounts.

Equity AccountsEquity AccountsEquity AccountsEquity Accounts

The company’s act requires that The company’s act requires that capital investments and withdrawals capital investments and withdrawals be separated from revenues and be separated from revenues and expenses for income tax reporting, expenses for income tax reporting, financial reporting, and other financial reporting, and other purposes.purposes.

Management needs a detailed Management needs a detailed breakdown of revenues and expenses breakdown of revenues and expenses for budgeting and operating purposesfor budgeting and operating purposes

Accounting gives management Accounting gives management information about whether it has information about whether it has achieved its primary goal of earning a achieved its primary goal of earning a net income.net income.

Equity Accounts cont…Equity Accounts cont…Equity Accounts cont…Equity Accounts cont…

Relationship of Equity Accounts Relationship of Equity Accounts Relationship of Equity Accounts Relationship of Equity Accounts

Described by Fra Luca Pacioli, Italy, Described by Fra Luca Pacioli, Italy, 14941494

Principle of duality.Principle of duality. Each transaction must be recorded Each transaction must be recorded

with at least one debit and one credit with at least one debit and one credit so that monetary value of debits and so that monetary value of debits and credits are equal.credits are equal.

The whole system is always in balance.The whole system is always in balance. All accounting systems are based on All accounting systems are based on

the principle of duality.the principle of duality.

The Double Entry System The Double Entry System The Double Entry System The Double Entry System

Analyzing and Processing Analyzing and Processing TransactionsTransactions

Every transaction affects at least two Every transaction affects at least two accounts.accounts.

Total debits must equal total credits.Total debits must equal total credits. Assets = Liabilities + Owner’s Equity.Assets = Liabilities + Owner’s Equity.

Assets = Liabilities + OE

Debitfor

increases(+)

Creditfordecreases(-)

Debitfor

decreases(-)

Creditforincreases(+)

Debitfor

decreases(-)

Creditforincreases(+)

Application of Debit/Credit Rules to OEApplication of Debit/Credit Rules to OE

Debit is commonly abbreviated Dr.Debit is commonly abbreviated Dr.Credit is commonly abbreviated Cr.Credit is commonly abbreviated Cr.

+ Capital- Withdrawals+ Revenues- Expenses

Assets = Liabilities

Arrangement of the Accounting Arrangement of the Accounting EquationEquation

The accounting equation can be The accounting equation can be rearranged to shift withdrawals and rearranged to shift withdrawals and expenses to the left side.expenses to the left side.

Assets + Withdrawals + ExpensesAssets + Withdrawals + Expenses==

Liabilities + Capital + RevenuesLiabilities + Capital + Revenues

Analyzing and Processing TransactionsAnalyzing and Processing Transactions

Steps in Analyzing and Steps in Analyzing and Processing TransactionsProcessing Transactions

1.1. Analyze the transaction to Analyze the transaction to determine its effect on assets, determine its effect on assets, liabilities, and OE.liabilities, and OE. Supported by a source document.Supported by a source document.

2.2. Apply the rules of double entry.Apply the rules of double entry. Dr. increases an asset.Dr. increases an asset. Cr. increases a liability.Cr. increases a liability. Etc.Etc.

Steps in Analyzing and Processing Steps in Analyzing and Processing TransactionsTransactions (continued)(continued)

3.3. Record the entry.Record the entry. Enter in chronological order in a journal. Enter in chronological order in a journal. Enter the date/debit account/debit amount on one Enter the date/debit account/debit amount on one

line.line. Enter the credit account/credit amount indented on Enter the credit account/credit amount indented on

the next line.the next line.

Dr.Dr. Cr.Cr.

June 1 Cash June 1 Cash 100,000100,000 Notes PayableNotes Payable 100,000 100,000

This form is called This form is called journal formjournal form and is and is followed by an explanation.followed by an explanation.

Steps in Analyzing and Processing Steps in Analyzing and Processing TransactionsTransactions (continued)(continued)

4.4. Post the entry. Post the entry. Post the entry to the general Post the entry to the general

ledger by transferring the date and ledger by transferring the date and amount to the proper account.amount to the proper account.

5.5. Prepare the trial balance to Prepare the trial balance to confirm the balance of the confirm the balance of the accounts.accounts. Confirm that the accounts are still Confirm that the accounts are still

in balance after recording and in balance after recording and posting transactionsposting transactions..

Recording and Posting Recording and Posting TransactionsTransactions

Transactions are recorded in the Transactions are recorded in the General Journal and posted to the General Journal and posted to the General Ledger.General Ledger.

Procedure for Recording a Journal Procedure for Recording a Journal EntryEntry

1.1. Record the dateRecord the date For subsequent entries, only show date For subsequent entries, only show date

changes.changes.

2.2. Write the accounts to be debited and Write the accounts to be debited and credited, followed by an explanation.credited, followed by an explanation. Use Use exactexact account names.account names. Start debit accounts on the left.Start debit accounts on the left. IndentIndent credit accounts.credit accounts. Explanation should be brief, but sufficient.Explanation should be brief, but sufficient.

Note: a transaction can have more than one Note: a transaction can have more than one debit or credit entry (a compound entry).debit or credit entry (a compound entry).

Procedure for Recording a Journal Entry Procedure for Recording a Journal Entry (continued)(continued)

3.3. Write the debit amounts in the debit Write the debit amounts in the debit column and the credit amounts in column and the credit amounts in the credit column.the credit column.

4.4. Nothing in the Post. Ref. Column Nothing in the Post. Ref. Column (until you post to the general (until you post to the general ledger).ledger).

5.5. Skip a line after each entry.Skip a line after each entry.

The General JournalThe General Journal

Also called “the book of original Also called “the book of original entry.”entry.”

Journal entries are made in Journal entries are made in chronological order.chronological order.

A separate journal entry is made A separate journal entry is made for each transaction (journalizing).for each transaction (journalizing).

Later, the debit and credit Later, the debit and credit portions of the entry are portions of the entry are transferred to the general ledger.transferred to the general ledger.

Posting to the LedgerPosting to the Ledger

Posting – transferring information Posting – transferring information from the journal to the ledger.from the journal to the ledger.

Performed on a daily basis, or less Performed on a daily basis, or less frequently if there are few frequently if there are few transactions.transactions.1.1. Locate the debit account named in Locate the debit account named in

journal transaction.journal transaction.2.2. Enter date,Enter date,3.3. Enter debit amount in Debit column.Enter debit amount in Debit column.4.4. Repeat 1-3 for credit side of journal Repeat 1-3 for credit side of journal

entry.entry.

IllustrationIllustration

Now let us Apply the steps for Now let us Apply the steps for transaction analysis and processing to transaction analysis and processing to simple simple transactionstransactions

Jan1. Joan Miller begins business and Jan1. Joan Miller begins business and deposits $ 10,000 in the business deposits $ 10,000 in the business

account JM & Associates .account JM & Associates .Dr. Cr.

Jan. 1 Cash 10,000 Joan Miller, Capital 10,000

Cash

Jan. 1 JM Capital l0,000

Joan Miller, Capital

Jan. 1 Cash 10,000

Jan 2. The business Rents an office, Jan 2. The business Rents an office, pays $800 rent in advance.pays $800 rent in advance.

Dr. Cr.Jan. 2 Prepaid Rent 800 Cash 800

Cash

Jan. 1 Capital 10,000

Prepaid Rent

Jan 2. Prepaid rent 800Jan 2. Prepaid rent 800

Jan. 2 Cash 800Jan. 2 Cash 800

Jan 4 .Purchases art equipment, $4,200, Jan 4 .Purchases art equipment, $4,200, with cash.with cash.

Dr. Cr.Jan. 4 Art Equipment 4,200 Cash 4,200

Cash


Art Equipment

Jan. 2 Prepaid Rent 800 Jan 4 Art Equipment 4,200 Art Equipment 4,200

Jan. 4 Cash 4,200Jan. 4 Cash 4,200

Jan 5. Purchases office equipment, Jan 5. Purchases office equipment, $3,000, pays $1,500 in cash and agrees $3,000, pays $1,500 in cash and agrees to pay the rest next month.to pay the rest next month.

Dr. Cr. Jan. 5 Office Equipment 3,000

Cash 1,500 Accounts Payable 1,500

Cash


Office Equipment

Jan. 2 Prepaid Rent 800 4 Art Equipment 4,200 5 Office Equipment 1,5005 Office Equipment 1,500

Jan. 5 Cash &Ac Payable 3,000Jan. 5 Cash &Ac Payable 3,000

Accounts Payable

Jan. 5 Office Equipment 1,500Jan. 5 Office Equipment 1,500

Jan 6. Purchases art supplies, $1,800, Jan 6. Purchases art supplies, $1,800, and office supplies, $800, on credit.and office supplies, $800, on credit.

Dr. Cr.Jan. 6 Art Supplies 1,800 Office Supplies 800 Accounts Payable 2,600

Art Supplies

Jan. 6 Ac Payable 1,800Jan. 6 Ac Payable 1,800

Office Supplies

Jan. 6 Acc Payable 800 Jan. 6 Acc Payable 800

Accounts Payable

Jan. 5 Off. Equipment 1,500 6 Art & Off. Supplies 2,6006 Art & Off. Supplies 2,600

Jan 8. Pays for a one-year insurance Jan 8. Pays for a one-year insurance policy with cash of $480.policy with cash of $480.

Dr. Cr.Jan. 8 Prepaid Insurance 480 Cash 480

Cash

Jan. 1 JM Capital 10,000

Prepaid Insurance

Jan. 2 Prepaid Rent 800 4 Art Equipment 4,200 5 Office Equipment 1,5005 Office Equipment 1,500 8 Prepaid Insurance 4808 Prepaid Insurance 480


Jan 9. Pays $1,000 of amount owed Jan 9. Pays $1,000 of amount owed to Taylor Supply Co.to Taylor Supply Co.

Dr. Cr.Jan. 9 Accounts Payable 1,000 Cash 1,000

Cash

Jan. 1 JM Capital 10,000

Accounts Payable

Jan. 9 Cash 1,000Jan. 9 Cash 1,000

Jan. 2 Prepaid Rent 800 4 Art Equipment 4,200 5 Office Equipment 1,5005 Office Equipment 1,500 8 Prepaid Insurance 4808 Prepaid Insurance 480 9 Accounts Payable 1,0009 Accounts Payable 1,000

Jan. 5 Off. Equipment 1,500 6 Art & Off. Supplies 2,6006 Art & Off. Supplies 2,600

Jan 10. Collects a fee of $1,400 for placing Jan 10. Collects a fee of $1,400 for placing advertisements.advertisements.

Dr. Cr.

Jan. 10 Cash 1 ,400 Advertising Fees Earned 1,400

Cash

Jan. 1 Capital 10,000 10 Ad Fee Earned 1,40010 Ad Fee Earned 1,400

Advertising Fees Earned

Jan. 10 Cash 1,400Jan. 10 Cash 1,400

Jan. 2 Prepaid Rent 800 4 Art Equipment 4,200 5 Office Equipment 1,5005 Office Equipment 1,500 8 Prepaid Insurance 4808 Prepaid Insurance 480 9 Accounts Payable 1,0009 Accounts Payable 1,000

Jan 12. Pays the secretary two weeks’ Jan 12. Pays the secretary two weeks’ wages, $600.wages, $600.

Dr. Cr.Jan. 12 Wages Expense 600 Cash 600

Cash

Wages Expense


Jan. 2 Prepaid Rent 800 4 Art Equipment 4,200 5 Office Equipment 1,5005 Office Equipment 1,500 8 Prepaid Insurance 4808 Prepaid Insurance 480 9 Accounts Payable 1,0009 Accounts Payable 1,000 12 Wages Expense 60012 Wages Expense 600

Jan. 1 Capital 10,000 Ad Fee Earned 1,400Ad Fee Earned 1,400

Jan 15. Accepts $1,000 for art work Jan 15. Accepts $1,000 for art work to be done for another agency.to be done for another agency.

Dr. Cr.Jan. 15 Cash 1,000 Unearned Art Fees 1,000

Cash

Unearned Art Fees

Jan. 15 Cash 1,000 Jan. 15 Cash 1,000

Jan. 1 Capital 10,000 10 Ad Fee Earned 1,40010 Ad Fee Earned 1,40015 Unearned ArtFee1,00015 Unearned ArtFee1,000

Jan. 2 Prepaid Rent 800 4 Art Equipment 4,200 5 Office Equipment 1,5005 Office Equipment 1,500 8 Prepaid Insurance 4808 Prepaid Insurance 480 9 Accounts Payable 1,0009 Accounts Payable 1,000 12 Wages Expense 60012 Wages Expense 600

Jan 19. Performs a service for Jan 19. Performs a service for $2,800. Fee to be collected next $2,800. Fee to be collected next

month.month.

Dr. Cr.Jan. 19 Accounts Receivable 2,800 Advertising Fees Earned 2,800

Accounts Receivable

Jan. 19 Adv Fee Earned 2,800Jan. 19 Adv Fee Earned 2,800

Advertising Fees Earned

Jan. 10 Cash Jan. 10 Cash 1,400 1,400 19 Accounts Receivable 2,80019 Accounts Receivable 2,800

Jan 26 . Pays the secretary two more weeks’ Jan 26 . Pays the secretary two more weeks’ wages, $600.wages, $600.

Dr. Cr.Jan. 26 Wages Expense 600 Cash 600

Cash

Wages Expense

Jan. 12 Cash 600 26 Cash 26 Cash 600 600

Jan. 2 Prepaid Rent 800 4 Art Equipment 4,200 5 Office Equipment 5 Office Equipment 1,500 1,500 8 Prepaid Insurance 8 Prepaid Insurance 480 480 9 Accounts Payable 9 Accounts Payable 1,000 1,000 12 Wages Expense 12 Wages Expense 600 600

26 Wages Expense 26 Wages Expense 600 600


Jan 29. Receives and pays the utility Jan 29. Receives and pays the utility bill, $100.bill, $100.

Dr. Cr.Jan. 29 Utilities Expense 100 Cash 100

Cash

Utilities ExpenseJan. 29 Cash 100Jan. 29 Cash 100



29 Utilities Expense 29 Utilities Expense 100 100


Jan 30. Receives (but does not pay) Jan 30. Receives (but does not pay) telephone bill, $70.telephone bill, $70.

Dr. Cr.Jan. 30 Telephone Expense 70 Accounts Payable 70

Telephone Expense

Jan. 30 Acc Payable 70Jan. 30 Acc Payable 70

Accounts Payable

Jan. 9 Cash 1,000Jan. 5 Off. Equipment 1,500 6 Off. Supplies 2,6006 Off. Supplies 2,600 30 Telephone Expense 7030 Telephone Expense 70

Jan 31. Withdraws $1,400 for Jan 31. Withdraws $1,400 for personal expenses.personal expenses.

Dr. Cr. Jan. 31 J.M Withdrawals 1,400 Cash 1,400

Cash

J.M Withdrawals Jan. 31 Cash 1,400Jan. 31 Cash 1,400



29 Utilities Expense 29 Utilities Expense 100 100 31 J.M Withdrawals31 J.M Withdrawals 1,400 1,400


Account Name

Debit / Dr. Credit / Cr.

Footing/Casting of the accountsFooting/Casting of the accountsFooting/Casting of the accountsFooting/Casting of the accounts

Before a Trial Balance is prepared accounts are footed/ balanced, If Debit entries are greater thangreater than Credit entries, the account will have a debit balance.

$10,000 Transaction #2$3,000

$15,000$15,000

8,000Transaction #3

Balance b/d

Transaction #1

$18,000$18,000$18,000$18,000

Balance c/d $15,000$15,000

Account Name

Debit / Dr. Credit / Cr.

Footing/Casting of the accounts Footing/Casting of the accounts cont…cont…

Footing/Casting of the accounts Footing/Casting of the accounts cont…cont…

If Credit entries are greater thangreater than Debit entries, the account will have a credit balance.

$10,000 Transaction #2$3,000

$11,000$11,000

8,000 Transaction #3

Balance c/d

Transaction #1

$11,000$11,000

1,0001,000

Balance

b/d1,0001,000

Cash AccountCash Account

Jan. 2 Prepaid Rent 800

4 Art Equipment 4,200 5 Office Equipment 5 Office Equipment 1,500 1,500 8 Prepaid Insurance 8 Prepaid Insurance 480 480 9 Accounts Payable 9 Accounts Payable 1,000 1,000 12 Wages Expense 12 Wages Expense 600 600 26 Wages Expense 26 Wages Expense 600 600 29 Utilities Expense 10029 Utilities Expense 100 31 J M Withdrawals31 J M Withdrawals 1,400 1,400 Balance c/d Balance c/d 1,7201,720 12,40012,400

Jan. 1 Capital 10,000 10 Ad Fee Earned 10 Ad Fee Earned 1,400 1,40015 Unearned Art Fee 15 Unearned Art Fee 1,0001,000

12,40012,400Bal b/dBal b/d 1,7201,720

The Trial BalanceThe Trial Balance

The total of debits and credits in the The total of debits and credits in the accounts must be equal.accounts must be equal.

A trial balance is prepared periodically A trial balance is prepared periodically (usually on the last day of the month) (usually on the last day of the month) to test this equality.to test this equality.

Steps in preparing a trial balance:Steps in preparing a trial balance:1.1. List each ledger account that has a List each ledger account that has a

balance, debit balances in the left column, balance, debit balances in the left column, credit balances in the right column.credit balances in the right column.

2.2. Add (foot) each column.Add (foot) each column.3.3. Compare the totals of the two columns.Compare the totals of the two columns.

TaskTask

Now prepare the Now prepare the trial balance of trial balance of

JM & Associates JM & Associates as at 31 January as at 31 January 20122012

The Trial Balance cont…The Trial Balance cont…

An account may have a balance other than its An account may have a balance other than its normal balance.normal balance. An asset account may have a credit balance.An asset account may have a credit balance. A liability account may have a debit balance.A liability account may have a debit balance.

The trial balance proves whether or not the The trial balance proves whether or not the total of all debits recorded equals the total of total of all debits recorded equals the total of all credits recorded.all credits recorded.

It does not prove that the transactions were It does not prove that the transactions were analyzed correctly or recorded for the correct analyzed correctly or recorded for the correct amounts or in the proper accounts.amounts or in the proper accounts.

It cannot identify transactions that were It cannot identify transactions that were completely omitted.completely omitted.

If the Trial Balance does not If the Trial Balance does not BalanceBalance

1.1. A debit was entered as a credit, or vice A debit was entered as a credit, or vice versa. versa.

2.2. The balance of an account was computed The balance of an account was computed incorrectly.incorrectly.

3.3. An error was made in carrying the account An error was made in carrying the account balance to the trial balance.balance to the trial balance.

4.4. The trial balance was footed incorrectly.The trial balance was footed incorrectly.

Possible Reasons

Discussion QuestionDiscussion Question

Arrange the following six items in sequence to show Arrange the following six items in sequence to show the flow of events through the accounting system:the flow of events through the accounting system:

aa. . Analysis of the transactionAnalysis of the transactionb. b. Debits and credits posted from the journal Debits and credits posted from the journal

to the ledger to the ledgerc.c. Occurrence of a business transaction Occurrence of a business transactiond.d. Preparation of the financial statements Preparation of the financial statementse.e. Entry made in the journal Entry made in the journalf. f. Preparation of the trial balancePreparation of the trial balance

Answer.

c a e b f d

The Accounting CycleThe Accounting CycleThe Accounting CycleThe Accounting Cycle

TransactionsTransactions

1. Journalization1. Journalization

6. Financial Statements6. Financial Statements

7. Closing entries7. Closing entries

8. Post-closing trail balance

8. Post-closing trail balance

9. Reversing entries9. Reversing entries

3. Trial balance3. Trial balance

2. Posting2. Posting

5. Adjusted trial balance5. Adjusted trial balance

4. Adjustments4. AdjustmentsWork SheetWork Sheet

Comprehensive IllustrationComprehensive Illustration

Now let us Apply the steps Now let us Apply the steps for transaction analysis and for transaction analysis and processing to a processing to a comprehensive class comprehensive class illustration from illustration from journalizing up to the journalizing up to the reversing entriesreversing entries

1. October 1: Stockholders invest $100,000 cash in an advertising venture to be known as Pioneer Advertising Agency Inc.

Common stock 100,000

Cash 100,000Oct. 1

Debit Credit

Cash

100,000100,000 100,000100,000

Debit Credit

Common Stock

Journalizing & PostingJournalizing & PostingJournalizing & PostingJournalizing & Posting

2. October 1: Pioneer Advertising purchases office equipment costing $50,000 by signing a 3-month, 12%, $50,000 note payable.

Notes payable 50,000

Office equipment 50,000Oct. 1

Debit Credit

Office Equipment

50,00050,000 50,00050,000

Debit Credit

Notes Payable


3. October 2: Pioneer Advertising receives a $12,000 cash advance from KC, a client, for advertising services that are expected to be completed by December 31.

Unearned service revenue

12,000

Cash 12,000Oct. 2

Debit Credit

Cash

100,000100,000 12,00012,000

Debit Credit

Unearned Service Revenue


12,00012,000

4. October 3: Pioneer Advertising pays $9,000 office rent, in cash, for October.

Cash 9,000

Rent expense 9,000Oct. 3

Debit Credit

Cash

100,000100,000 9,0009,000

Debit Credit

Rent Expense


12,00012,0009,0009,000

5. October 4: Pioneer Advertising pays $6,000 for a one-year insurance policy that will expire next year on September 30.

Cash 6,000

Prepaid insurance 6,000Oct. 4

Debit Credit

Cash

100,000100,000 6,0006,000

Debit Credit

Prepaid Insurance


12,00012,0009,0009,000

6,0006,000

6. October 5: Pioneer Advertising purchases, for $25,000 on account, an estimated 3-month supply of advertising materials from Aero Supply.

Accounts payable 25,000

Advertising supplies 25,000Oct. 5

Debit Credit

Advertising Supplies

25,00025,000 25,00025,000

Debit Credit

Accounts Payable


7. October 9: Pioneer Advertising signs a contract with a local newspaper for advertising inserts (flyers) to be distributed starting the last Sunday in November. Pioneer will start work on the content of the flyers in November. Payment of $7,000 is due following delivery of the Sunday papers containing the flyers.


8. October 20: Pioneer Advertising’s board of directors declares and pays a $5,000 cash dividend to stockholders.

Cash 5,000

Dividends 5,000Oct. 20

Debit Credit

Cash

100,000100,000 5,0005,000

Debit Credit

Dividends


12,00012,0009,0009,000

6,0006,000

5,0005,000

9. October 26: Employees are paid every four weeks. The total payroll is $2,000 per day. The pay period ended on Friday, October 26, with salaries of $40,000 being paid.

Cash 40,000

Salaries expense 40,000Oct. 26

Debit Credit

Cash

100,000100,000 40,00040,000

Debit Credit

Salaries Expense


12,00012,0009,0009,000

6,0006,000

5,0005,000

40,00040,000

10. October 31: Pioneer Advertising receives $28,000 in cash and bills Copa Company $72,000 for advertising services of $100,000 provided in October.

Accounts receivable 72,000Cash 28,000Oct. 31

Debit Credit

Cash

100,000100,000 72,00072,000

Debit Credit

Accounts Receivable


12,00012,0009,0009,000

6,0006,000

5,0005,000

40,00040,000

Service revenue 100,000

100,000100,000

Debit Credit

Service Revenue

28,00028,000

8,0008,000

Trial Trial BalanceBalance – A list of each account and its balance; used to prove equality of debit and credit balances.

TheTrial BalanceTheTrial BalanceTheTrial BalanceTheTrial Balance

Adjusting EntriesAdjusting EntriesAdjusting EntriesAdjusting Entries

RevenuesRevenues - recorded in the period in which - recorded in the period in which they are earnedthey are earned.

Expenses Expenses - recognized in the period in which - recognized in the period in which they are incurredthey are incurred.

Adjusting entriesAdjusting entries - needed to ensure that - needed to ensure that the the revenue recognitionrevenue recognition and and matching matching principlesprinciples are followed. are followed.

Types of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting EntriesTypes of Adjusting Entries

1. Prepaid Expenses. Expenses paid in cash and recorded as assets before they are used or consumed.

Prepayments

3. Accrued Revenues. Revenues earned but not yet received in cash or recorded.

4. Accrued Expenses. Expenses incurred but not yet paid in cash or recorded.

2. Unearned Revenues. Revenues received in cash and recorded as liabilities before they are earned.

Accruals

Deferrals are either prepaid

expenses or

unearned revenues.

Adjusting Entries for DeferralsAdjusting Entries for DeferralsAdjusting Entries for DeferralsAdjusting Entries for Deferrals

Payment of cash that is recorded as an asset because Payment of cash that is recorded as an asset because service or benefit will be received in the future.service or benefit will be received in the future.

Adjusting Entries for “Prepaid Adjusting Entries for “Prepaid Expenses”Expenses”


insuranceinsurance

suppliessupplies

advertisingadvertising

Cash PaymentCash Payment Expense RecordedExpense RecordedBEFORE

rentrent

maintenance on maintenance on equipmentequipment

fixed assetsfixed assets

Prepayments often occur in regard to:Prepayments often occur in regard to:

Supplies.Supplies. Pioneer purchased advertising supplies costing$25,000 on October 5 on Account. Prepare the journal entry to record the purchase of the supplies.

Accounts Payable 25,000

Advertising supplies 25,000

Oct. 5

Debit Credit


25,00025,000 25,00025,000

Debit Credit

Accounts Payable



Supplies. An inventory count at the close of business on October 31 reveals that $10,000 of the advertising supplies are still on hand.

Advertising supplies 15,000

Advertising supplies expense

15,000

Oct. 31

Debit Credit


25,00025,000 15,00015,000

Debit Credit

Advertising Supplies Expense

15,00015,000



10,00010,000

Statement Presentation:

Advertising supplies identifies that portion of the asset’s cost that will provide future economic benefit.




Advertising expense identifies that portion of the asset’s cost thatexpired in October.



Insurance. On Oct. 4th, Pioneer paid $6,000 for a one-year fire insurance policy, beginning October 1. Show the entry to record the purchase of the insurance.

Cash 6,000

Prepaid insurance 6,000Oct. 4

Debit Credit

Prepaid Insurance

6,0006,000 6,0006,000

Debit Credit

Cash



Insurance. An analysis of the policy reveals that $500 ($6,000 / 12) of insurance expires each month. Thus, Pioneer makes the following adjusting entry.

Prepaid insurance 500

Insurance expense 500Oct. 31

Debit Credit

Prepaid Insurance

6,0006,000 500500

Debit Credit

Insurance Expense



500500

5,5005,500


Prepaid insurance identifies that portion of the asset’s cost that will provide future economic benefit.




Insurance expense identifies that portion of the asset’s cost thatexpired in October.



Depreciation. Pioneer Advertising estimates depreciation on its office equipment to be $400 per month. Accordingly, Pioneer recognizes depreciation for October by the following adjusting entry.

Accumulated depreciation 400

Depreciation expense 400Oct. 31

Debit Credit

Depreciation Expense

400400 400400

Debit Credit

Accumulated Depreciation




Accumulated Depreciation—is a contra asset account.




Depreciation expense identifies that portion of the asset’s cost thatexpired in October.



Receipt of cash that is recorded as a liability Receipt of cash that is recorded as a liability because the revenue has not been earned.because the revenue has not been earned.

Adjusting Entries for “Unearned Adjusting Entries for “Unearned Revenues”Revenues”


RentRent

Airline ticketsAirline tickets

Tuition fee Tuition fee received in received in advanceadvance

Cash ReceiptCash Receipt Revenue Recorded/Earned

Revenue Recorded/Earned

BEFORE

Magazine subscriptionsMagazine subscriptions

Customer depositsCustomer deposits

Mobile AirtimeMobile Airtime

Unearned revenues often occur in regard to:Unearned revenues often occur in regard to:

Unearned Revenue. Pioneer Advertising received $12,000 on October 2 from KC for advertising services expected to be completed by December 31. Show the journal entry to record the receipt on Oct. 2nd.

Unearned advertising revenue

12,000

Cash 12,000

Oct. 2

Debit Credit

Cash

12,00012,000 12,00012,000

Debit Credit

Unearned Rent Revenue



Debit Credit

Service Revenue

100,000100,000 12,00012,000

Debit Credit

Unearned Service Revenue

4,0004,000

8,0008,000



Unearned Revenues. Analysis reveals that Pioneer earned $4,000 of the advertising services in October. Thus, Pioneer makes the following adjusting entry.


Unearned service revenue

4,000Oct. 31

4,0004,000



Statement Presentation

Unearned service revenue identifies that portion of the liability that has not been earned.

Accruals are either accrued

revenues or

accrued expenses.

Adjusting Entries for AccrualsAdjusting Entries for AccrualsAdjusting Entries for AccrualsAdjusting Entries for Accruals

Revenues earned but not yet received in cash or Revenues earned but not yet received in cash or recorded.recorded.

Adjusting Entries for “Accrued Adjusting Entries for “Accrued Revenues”Revenues”


rentrent

interestinterest

services performedservices performed

BEFORE

Accrued revenues often occur in regard to:Accrued revenues often occur in regard to:

Cash ReceiptCash ReceiptRevenue RecordedRevenue Recorded

Adjusting entry results in:Adjusting entry results in:

Accrued Revenues. In October Pioneer earned $2,000 for advertising services that it did not bill to clientsbefore October 31. Thus, Pioneer makes the following adjusting entry.


Accounts receivable 2,000Oct. 31

Debit Credit

Accounts Receivable

72,00072,000



Debit Credit

Service Revenue

100,000100,000

4,0004,000

2,0002,000

106,000106,000

2,0002,000

74,00074,000



Statement Presentatio

n

Expenses incurred but not yet paid in cash or Expenses incurred but not yet paid in cash or recorded.recorded.

Adjusting Entries for “Accrued Adjusting Entries for “Accrued Expenses”Expenses”


rentrent

interestinterest

taxestaxes

BEFORE

Accrued expenses often occur in regard to:Accrued expenses often occur in regard to:

Cash Payment, if any*

Cash Payment, if any*

Expense RecordedExpense Recorded

salariessalaries

bad debts*bad debts*

Adjusting entry results in:Adjusting entry results in:



Accrued Interest. Pioneer signed a three-month, 12%, note payable in the amount of $50,000 on October 1. The note requires interest at an annual rate of 12 percent. Three factors determine the amount of the interest accumulation:

1 2 3

Interest payable 500

Interest expense 500Oct. 31

Debit Credit

Interest Expense

500500 500500

Debit Credit

Interest Payable



Accrued Interest. Pioneer signed a three-month, 12%, note payable in the amount of $50,000 on October 1. Prepare the adjusting entry on Oct. 31 to record the accrual of interest.




n



Accrued Salaries. The employees receive total salaries of $10,000 for a five-day work week, or $2,000 per day. At October 31, the salaries for these days represent an accrued expense and a related liability to Pioneer..

Salaries payable 6,000

Salaries expense 6,000Oct. 31

Debit Credit

Salaries Expense

40,00040,000 6,0006,000

Debit Credit

Salaries Payable



Accrued Salaries. Employees receive total salaries of $10,000 for a five-day work week, or $2,000 per day. Prepare the adjusting entry on Oct. 31 to record accrual for salaries.

6,0006,000

46,00046,000




n

Salaries expense 34,000

Salaries payable 6,000Nov. 23

Debit Credit

Salaries Expense

34,00034,000 6,0006,000

Debit Credit

Salaries Payable



Accrued Salaries. On November 23, Pioneer will again pay total salaries of $40,000. Prepare the entry to record the payment of salaries on November 23.

Cash 40,000

6,0006,000



Bad Debts. Assume Pioneer reasonably estimates a bad debt expense for the month of $1,600. It makes the adjusting entry for bad debts as follows.

Shows the balance of all accounts, after adjusting entries, at the end of the accounting period.

Adjusted Trial BalanceAdjusted Trial Balance Adjusted Trial BalanceAdjusted Trial Balance

Preparing Financial StatementsPreparing Financial Statements Preparing Financial StatementsPreparing Financial Statements

Financial Statements are prepared directly from the Adjusted Trial Balance.

Financial Statements are prepared directly from the Adjusted Trial Balance.

Balance Sheet

Income Statemen

t

Statement of

Retained Earnings



Closing EntriesClosing Entries Closing EntriesClosing Entries

To reduce the balance of the income To reduce the balance of the income statement (statement (revenuerevenue and and expenseexpense) accounts ) accounts to zero. to zero.

To transfer net income or net loss to owner’s To transfer net income or net loss to owner’s equity.equity.

Statement of Financial Position accounts Statement of Financial Position accounts ((assetasset, , liabilityliability, and , and equityequity) are not closed.) are not closed.

Dividends are closed directly to the Retained Dividends are closed directly to the Retained Earnings account.Earnings account.

Closing EntriesClosing EntriesClosing EntriesClosing Entries

Retained earnings 5,000 Dividends

5,000


Income Summary106,000

Income summary 73,000

Salaries expense46,000

Advertising expense15,000

Rent expense9,000

Insurance expense500

Interest expense500

Depreciation expense400

Bad debt expense1,600

Closing Journal Entries:

LO 7 Prepare closing LO 7 Prepare closing entries.entries.

Closing Closing EntriesEntries

Closing Closing EntriesEntries

Post-Closing Trial BalancePost-Closing Trial Balance Post-Closing Trial BalancePost-Closing Trial Balance

Accounting Cycle SummarizedAccounting Cycle SummarizedAccounting Cycle SummarizedAccounting Cycle Summarized

1. Enter the transactions of the period in appropriate journals.

2. Post from the journals to the ledger (or ledgers).

3. Take an unadjusted trial balance (trial balance).

4. Prepare adjusting journal entries and post to the ledger(s).

5. Take a trial balance after adjusting (adjusted trial balance).

6. Prepare the financial statements from the second trial balance.

7. Prepare closing journal entries and post to the ledger(s).

8. Take a trial balance after closing (post-closing trial balance).

9. Prepare reversing entries (optional) and post to the ledger(s).

Reversing EntriesReversing EntriesReversing EntriesReversing Entries

After preparing the financial After preparing the financial statements and closing the books, a statements and closing the books, a company company may may reverse some of the reverse some of the adjusting entries before recording the adjusting entries before recording the regular transactions of the next period. regular transactions of the next period.

Summary of Reversing EntriesSummary of Reversing Entries

1. All accruals should be reversed.

2. All deferrals for which a company debited or credited the original cash transaction to an expense or revenue account should be reversed.

3. Adjusting entries for depreciation and bad debts are not reversed.

Recognize that reversing entries do not have to be used. Therefore, some accountants avoid them entirely.

Reversing Entries cont…Reversing Entries cont…

Illustration of Reversing Entries—AccrualsIllustration of Reversing Entries—AccrualsIllustration 3B-1


Illustration of Reversing Entries—DeferralsIllustration of Reversing Entries—Deferrals


A company prepares a worksheet either on

columnar paper or

within an electronic spreadsheet.

A company uses the worksheet to adjust

account balances and

to prepare financial statements.

USING A WORKSHEETUSING A WORKSHEET

The Worksheet:

provides information needed for preparation of the financial statements.

Sorts data into appropriate columns, which facilitates the preparation of the statements.

Preparing Financial Statements from a Preparing Financial Statements from a WorksheetWorksheet

USING A WORKSHEET cont…USING A WORKSHEET cont…

AdjusteAdjusted Trial d Trial BalancBalancee





THE ENDTHE END

THANK YOUTHANK YOU

Documents

A DAC 101 PRESENTATION BY H ONDIGO SCHOOL OF BUSINESS UNIVERSITY OF NAIROBI THE COMPLETE ACCOUNTING CYCLE