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© Dale R. Geiger 2011 1
Complete Steps 1-3 in Accounting Cycle
Principles of Cost Analysis and Management
© Dale R. Geiger 2011 2
What is the Accounting Cycle?
The Accounting Cycle is the systematic process by which accounting information is recorded, compiled, and reported to users.
© Dale R. Geiger 2011 3
Terminal Learning Objective
• Task: Complete Steps 1-3 In Accounting Cycle (Journalize, Post, Trial Balance)
• Condition: You are a cost advisor technician with access to all regulations/course handouts, and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors.
• Standard with at least 80% accuracy:• List steps in the Accounting Cycle• Describe terminology (journal, ledger, debit, credit)• Record transactions in tabular format under the accrual basis
© Dale R. Geiger 2011 4
The Accounting CycleRecord
TransactionsPost to Ledger
Prepare Trial
Balance
Adjust AccountsAdjusted
Trial Balance
Prepare Statements
Close Accounts
Post-Closing Trial Balance
© Dale R. Geiger 2011 5
The Accounting CycleRecord
TransactionsPost to Ledger
Prepare Trial
Balance
Adjust AccountsAdjusted
Trial Balance
Prepare Statements
Close Accounts
Post-Closing Trial Balance
© Dale R. Geiger 2011 6
The Accounting CycleRecord
TransactionsPost to Ledger
Prepare Trial
Balance
Adjust AccountsAdjusted
Trial Balance
Prepare Statements
Close Accounts
Post-Closing Trial Balance
© Dale R. Geiger 2011 7
The Accounting CycleRecord
TransactionsPost to Ledger
Prepare Trial
Balance
Adjust AccountsAdjusted
Trial Balance
Prepare Statements
Close Accounts
Post-Closing Trial Balance
© Dale R. Geiger 2011 8
The Accounting CycleRecord
TransactionsPost to Ledger
Prepare Trial
Balance
Adjust AccountsAdjusted
Trial Balance
Prepare Statements
Close Accounts
Post-Closing Trial Balance
© Dale R. Geiger 2011 9
The Accounting CycleRecord
TransactionsPost to Ledger
Prepare Trial
Balance
Adjust AccountsAdjusted
Trial Balance
Prepare Statements
Close Accounts
Post-Closing Trial Balance
© Dale R. Geiger 2011 10
The Accounting CycleRecord
TransactionsPost to Ledger
Prepare Trial
Balance
Adjust AccountsAdjusted
Trial Balance
Prepare Statements
Close Accounts
Post-Closing Trial Balance
© Dale R. Geiger 2011 11
The Accounting CycleRecord
TransactionsPost to Ledger
Prepare Trial
Balance
Adjust AccountsAdjusted
Trial Balance
Prepare Statements
Close Accounts
Post-Closing Trial Balance
© Dale R. Geiger 2011 12
Check on Learning
• What is the first step in the Accounting Cycle?• What is the purpose of the Trial Balance?
© Dale R. Geiger 2011 13
The Journal• Accounting events are recorded in the JOURNAL
• The Journal is a chronological record of all transactions
• Each transaction requires a journal entry• Each journal entry consists of at least one Debit and
one Credit: “Double Entry” Accounting• Debit amounts must equal Credit amounts• Debit: an entry on the left-hand side of the account• Credit: an entry on the right-hand side of the
account
© Dale R. Geiger 2011 14
Regarding Debits and Credits
• Debits and credits are neutral• Debit ≠ decrease • Credit ≠ increase• It depends on the type of account
• Some accounts types record increases with a debit, some record increases with a credit.
• The side of the account which records an increase is the account’s NORMAL BALANCE.
© Dale R. Geiger 2011 15
“Normal” Account Balances
Assets = Liab + FinPosition ± Net Change Net Change = Revenue – Expense, so:
Assets = Liab + FinPosition + Rev – Expense + Expense = + Expense
(Add Expense to both sides)Assets + Expense = Liab + FinPosition + Rev
Everything on the LEFT side of the equation increases with an entry to the LEFT side of the
account
© Dale R. Geiger 2011 16
“Normal” Account Balances
Assets = Liab + FinPosition ± Net Change Net Change = Revenue – Expense, so:
Assets = Liab + FinPosition + Rev – Expense + Expense = + Expense
(Add Expense to both sides)Assets + Expense = Liab + FinPosition + Rev
Everything on the LEFT side of the equation increases with an entry to the LEFT side of the
account
© Dale R. Geiger 2011 17
“Normal” Account Balances
Assets = Liab + FinPosition ± Net Change Net Change = Revenue – Expense, so:
Assets = Liab + FinPosition + Rev – Expense + Expense = + Expense
(Add Expense to both sides)Assets + Expense = Liab + FinPosition + Rev
Everything on the LEFT side of the equation increases with an entry to the LEFT side of the
account
© Dale R. Geiger 2011 18
“Normal” Account Balances
Assets = Liab + FinPosition + Rev – Expense + Expense = + Expense
(Add Expense to both sides)Assets + Expense = Liab + FinPosition + Rev
Everything on the LEFT side of the equation increases with an entry to the LEFT side of the
account
© Dale R. Geiger 2011 19
“Normal” Account Balances
Assets = Liab + FinPosition + Rev – Expense + Expense = + Expense
(Add Expense to both sides)Assets + Expense = Liab + FinPosition + Rev
Everything on the RIGHT side of the equation increases with an entry to the RIGHT side of
the account
© Dale R. Geiger 2011 20
“Normal” Account Balances
Assets + Expense = Liab + FinPosition+ Rev
debit credit
+ – + – – + – + – +
© Dale R. Geiger 2011 21
Check on Learning
• What does “credit” mean?• An increase to an expense is reflected with an
entry on which side of the account?
© Dale R. Geiger 2011 22
Anatomy of a Journal Entry
Page 1
DATE ACCOUNT TITLES P.R. DEBIT CREDIT
1-Dec Merchandise Inventory 2500 Accounts Payable 2500Purchased inventory on account
GENERAL JOURNAL
Date of Transaction
© Dale R. Geiger 2011 23
Anatomy of a Journal Entry
Page 1
DATE ACCOUNT TITLES P.R. DEBIT CREDIT
1-Dec Merchandise Inventory 2500 Accounts Payable 2500Purchased inventory on account
GENERAL JOURNAL
Account Debited
© Dale R. Geiger 2011 24
Anatomy of a Journal Entry
Page 1
DATE ACCOUNT TITLES P.R. DEBIT CREDIT
1-Dec Merchandise Inventory 2500 Accounts Payable 2500Purchased inventory on account
GENERAL JOURNAL
Amount Debited
© Dale R. Geiger 2011 25
Anatomy of a Journal Entry
Page 1
DATE ACCOUNT TITLES P.R. DEBIT CREDIT
1-Dec Merchandise Inventory 2500 Accounts Payable 2500Purchased inventory on account
GENERAL JOURNAL
Account Credited
© Dale R. Geiger 2011 26
Anatomy of a Journal Entry
Page 1
DATE ACCOUNT TITLES P.R. DEBIT CREDIT
1-Dec Merchandise Inventory 2500 Accounts Payable 2500Purchased inventory on account
GENERAL JOURNAL
Amount Credited
© Dale R. Geiger 2011 27
Anatomy of a Journal Entry
Page 1
DATE ACCOUNT TITLES P.R. DEBIT CREDIT
1-Dec Merchandise Inventory 2500 Accounts Payable 2500Purchased inventory on account
GENERAL JOURNAL
Explanation of Transaction
© Dale R. Geiger 2011 28
Anatomy of a Journal Entry
Page 1
DATE ACCOUNT TITLES P.R. DEBIT CREDIT
1-Dec Merchandise Inventory 2500 Accounts Payable 2500Purchased inventory on account
GENERAL JOURNAL
PostingReference(Leave Blank)
© Dale R. Geiger 2011 29
Anatomy of a Journal Entry
Page 1
DATE ACCOUNT TITLES P.R. DEBIT CREDIT
1-Dec Merchandise Inventory 2500 Accounts Payable 2500Purchased inventory on account
GENERAL JOURNAL
Becoming fluent in Debits and Credits takes practice beyond the scope of this course. We will demonstrate a few journal entries to give you the flavor, and then proceed to Step 2.
© Dale R. Geiger 2011 30
Lacy’s Journal
Page 1
DATE ACCOUNT TITLES P.R. DEBIT CREDIT
1-Jan Cash 200 Financial Position 200Received equity transfer from family
GENERAL JOURNAL
Transaction Description Cash + Other
Assets = Liab + Financial Position + Rev – Exp
Receives $200 Equity Transfer +200 + = + +200 + –
Debit to Cash (left side) reflects an increase in the cash account.
31
Lacy’s Journal
Page 1
DATE ACCOUNT TITLES P.R. DEBIT CREDIT
1-Jan Cash 200 Financial Position 200Received equity transfer from family
GENERAL JOURNAL
Transaction Description Cash + Other
Assets = Liab + Financial Position + Rev – Exp
Receives $200 Equity Transfer +200 + = + +200 + –
Credit to Financial Position (right side) reflects an increase in the financial
position account.© Dale R. Geiger 2011
32
Lacy’s JournalPage 2
DATE ACCOUNT TITLES P.R. DEBIT CREDIT
5-Jan Other Assets 65 Cash 65Purchased Supplies
GENERAL JOURNAL
Transaction Description Cash + Other
Assets = Liab + Financial Position + Rev – Exp
Purchased Supplies -65 + +65 = + + –
Debit to Other Assets (left side) reflects an increase in the Other
Assets account.© Dale R. Geiger 2011
© Dale R. Geiger 2011 33
Lacy’s JournalPage 2
DATE ACCOUNT TITLES P.R. DEBIT CREDIT
5-Jan Other Assets 65 Cash 65Purchased Supplies
GENERAL JOURNAL
Transaction Description Cash + Other
Assets = Liab + Financial Position + Rev – Exp
Purchased Supplies -65 + +65 = + + –
Credit to Cash reflects a decrease in the Cash account.
© Dale R. Geiger 2011 34
The Ledger• The LEDGER is a Summary of all Transactions By
Account• We will represent each Ledger Account with a
T-Account• A debit entry from the Journal is posted on the left side of
the T-Account• A credit entry from the Journal is posted on the right side
of the T-Account• The balance of an account is its excess of debits over
credits (or vice versa)
© Dale R. Geiger 2011 35
Lacy’s LedgerCash Other Assets Liabilities
Financial Position Revenues Expenses
(+) (-) (+) (-) (-) (+)
(+) (-)(-) (+)(-) (+)
© Dale R. Geiger 2011 36
Lacy’s LedgerCash Other Assets Liabilities
Financial Position Revenues Expenses
(+)200
(-) (+)20652040
--------------140
(-)5
---------------
(-)40
----------------
(+)40
---------------
(+) (-)(-) (+)(-) (+)
Page 1
DATE ACCOUNT TITLES P.R. DEBIT CREDIT
1-Jan Cash 200 Financial Position 200Received equity transfer from family
GENERAL JOURNAL
© Dale R. Geiger 2011 37
Lacy’s LedgerCash Other Assets Liabilities
Financial Position Revenues Expenses
(+)200
(-) (+)20652040
--------------140
(-)5
---------------
(-)40
----------------
(+)40
---------------
(+) (-)(-) (+)(-) (+)200
Page 1
DATE ACCOUNT TITLES P.R. DEBIT CREDIT
1-Jan Cash 200 Financial Position 200Received equity transfer from family
GENERAL JOURNAL
38
Lacy’s LedgerCash Other Assets Liabilities
Financial Position Revenues Expenses
(+)200
155
50
--------------130
(-)2010
56540
----------------
(+)20652040
--------------140
(-)5
---------------
(-)40
----------------
(+)40
---------------
(+)10
5---------------
15
(-)(-) (+)152050
---------------85
(-) (+)200
Transaction Description Cash + Other Assets = Liabilities + Financial Position + Revenues – Expenses
Ending Balance 130 + 140 = 0 + 200 + 85 - 15
After all transactions are posted, the Ledger Balances agree with our equation
© Dale R. Geiger 2011
© Dale R. Geiger 2011 39
The Trial Balance
• Lists all accounts and their balances in two-column format
• Proves that Debits equal Credits• Forces accountant to find errors before preparing
statements
• Provides a starting point for adjustments, statements and closing entries
40
Lacy‘s Trial BalanceAccount Title dr. cr.
Cash $130
Other Assets 140
Liabilities $ ---
Financial Position 200
Revenues 85
Expenses 15
Totals $285 $285
Our equation essentially show the same information as the Trial Balance:
Transaction Description Cash + Other Assets = Liabilities + Financial Position + Revenues – Expenses
Ending Balance 130 + 140 = 0 + 200 + 85 - 15© Dale R. Geiger 2011
© Dale R. Geiger 2011 41
Check on Learning
• A decrease to Cash is recorded on which side of the Cash account?
• The summary of transactions by account is called the…?
© Dale R. Geiger 2011 42
Conclusion
• Debits and credits are used in accounting systems to reflect changes in accounts
• It’s not necessary to memorize debits and credits to understand the effects of transactions
• We will rely on the equation and T-Accounts to illustrate transactions
© Dale R. Geiger 2011 43
Practical Exercise
© Dale R. Geiger 2011 44
Accounting Cycle Spreadsheet
Journal entries may be entered
by hand (this step is
optional)
45
Accounting Cycle SpreadsheetPost transactions to T-Accounts
Balances calculate automatically
© Dale R. Geiger 2011
© Dale R. Geiger 2011 46
Accounting Cycle Spreadsheet
The Trial Balance is generated automatically
from the T-Accounts.Note that
debits = credits
© Dale R. Geiger 2011 47
Practical Exercise