Presentation on theme: "A Review of the Accounting Cycle. 2 Learning Objectives Identify and explain the basic steps in the accounting process (accounting cycle). Analyze."— Presentation transcript:
2 Learning Objectives Identify and explain the basic steps in the accounting process (accounting cycle). Analyze transactions and make and post journal entries. Make adjusting entries, produce financial statements, and close nominal accounts. Distinguish between accrual and cash- basis accounting.
3 Learning Objectives Discuss the importance and expanding role of computers to the accounting process. EXPANDED MATERIAL Use special journals and subsidiary ledgers to process accounting information more efficiently and to provide additional useful information.
4 The purpose of this chapter is to review the basic steps of the accounting process.
5 Double-Entry Accounting 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 For every transaction, there must be at least one debit and one credit. Debits must always equal credits for each transaction. Debits are always entered on the left side of an account and credits are always entered on the right side. Double-Entry Accounting Facts
7 Assets = Liabilities + Owners’ Equity DR CR + - DR CR - + DR CR - + The Accounting Equation with T-Accounts
8 How Accounts Affect Owners' Equity Capital Stock DR CR - + Retained Earnings DR CR - + Owners' Equity DR CR - + Expenses DR CR + - Revenues DR CR - + Dividends DR CR + -
9 Journalizing 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. This process is used whether the accounting is being done manually or with a computer.
10 1. Analyze Transactions and 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.
11 2. Journalize Transactions A journal is an accounting record in which business transactions are entered in chronological order. Journal entries record transaction information; debits equal credits.
12 General Journal Entry Format Date Debit Entry.................................. xx Credit Entry............................. xx Explanation. Journal Entries A journal is an accounting record in which business transactions are entered in chronological order. Journal entries record transaction information; debits equal credits.
13 DateDescription Post Ref. DebitsCredits Journal Page 1 Jan 1Cash5 Revenue5 Received cash for services provided. 4Supplies12 Accounts Payable12 Purchased supplies on account. 10Accounts Payable12 Cash12 Paid for supplies.
14 Example: Journal Entry Merchandise is sold to a customer on account for $75. The cost of the product to the firm is $60. Make the journal entry.
15 Example: Journal Entry Jan. 1 Accounts Receivable..................... 75 Sales Revenue.......................... 75 Sold merchandise on account. Merchandise is sold to a customer on account for $75. The cost of the product is $60. Make the journal entry. 1 Cost of Goods Sold...................... 60 Inventory................................. 60 To record cost and reduce inventory. Merchandise is sold to a customer on account for $75. The cost of the product to the firm is $60. Make the journal entry.
16 3. Post Journal Entries to Accounts Posting is the process of transferring amounts from the journal to the general ledger. A ledger is a book of accounts in which data from transactions recorded in the journals are posted, classified, and summarized. A chart of accounts lists all accounts used by the company.
17 Chart of Accounts ASSETS (100-199) Current Assets (100-150) 101 Cash 105 Accounts Receivable 107 Inventory Long-Term Assets (151-199) 151 Land 152 Building LIABILITIES (200-299) Current Liabilities (200-219) 201 Notes Payable 202 Accounts Payable Long-Term Liabilities (220-239) 222 Mortgage Payable OWNERS’ EQUITY (300-399) 301 Capital Stock 330 Retained Earnings SALES (400-499) 400 Sales Revenue EXPENSES (500-599) 500 Cost of Goods Sold 523 Rent Expense 528 Advertising Expense 573 Utility Expense
18 The Reporting Phase A trial balance is prepared. Adjusting entries are recorded. Financial statements are prepared. Closing entries are made. Post-closing trial balance may be taken.
19 4. Determine Account Balances and Prepare a Trial Balance Determine the account balance for each T-Account. A Trial Balance is a listing of all account balances. It provides a means to assure that debits equal credits.
20 XYZ Company Trial Balance December 31, 2002 Debits Credits Cash$ 21 Accounts Receivable 15 Inventory 12 Land 200 Accounts Payable $ 30 Capital Stock 150 Retained Earnings24 Sales Revenue 919 Cost of Goods Sold 850 Advertising Expense 10 Misc. Expenses 15 ______ Total $ 1,123 $ 1,123
21 5. 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 and expenses on the income statement.
22 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 entries always incorporate a balance sheet account and an income statement account. Adjusting entries never involve a cash account.
23 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.
24 Three-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.) Determine what the correct balances should be at this point in time. Make the adjustments needed to correct the balances.
25 Example: Depreciation Rosi, Inc., purchased buildings in 1997 at a cost of $156,000. Each year, 5% of the cost is depreciated. At the end of 2002, the following adjusting entry is made: Adjusting Entry 12/31Depreciation Expense--Buildings 7,800 Accumulated Depr.--Buildings 7,800 To record depreciation on building at 5% per year.
26 Example: Doubtful Accounts An estimation of bad debts based on the ending receivables balance reveals that the allowance account needs to be increased by $1,100. Adjusting Entry 12/31Doubtful Accounts Expense1,100 Allowance for Doubtful Accounts1,100 To adjust for estimated doubtful accounts expense.
27 Example: Doubtful Accounts Later, assume on March 19 that a $150 receivable is deemed to be uncollectible. Using the allowance account, the uncollectible account is written off the books. 3/19Allowance for Doubtful Accounts150 Accounts Receivable150 To write off an uncollectible account.
28 Example: Accrued Expenses At the end of the fiscal period, Rosi, Inc., had accrued salaries and wages totaling $2,150. Adjusting Entry 12/31Salaries and Wages Expense2,150 Salaries Payable2,150 To record accrued salaries and wages.
29 Example: Accrued Revenues Rosi, Inc., holds a note receivable from a customer on which interest totaling $250 has accrued. Adjusting Entry 12/31Interest Receivable250 Interest Revenue250 To record accrued interest on a note receivable.
30 Example: 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. Adjusting Entry 12/31Insurance Expense4,200 Prepaid Insurance4,200 To record expired insurance. $8,000 - $3,800
31 Example: 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. Adjusting Entry 12/31Rent Revenue475 Unearned Rent Revenue 475 To record unearned rent revenue. Original credit to a revenue account. $2,550 - $2,075
32 Example: Deferred Revenues Adjusting Entry 12/31Unearned Rent Revenue2,075 Rent Revenue2,075 To record rent revenue ($2,550 - $475). Original credit to a liability account. 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.
33 Example: Inventory Refer to Rosi, Inc.’s trial balance in this chapter. Note that the firm has $45,000 in inventory. The year-end count shows that $51,000 is on hand. Assume that the firm uses a periodic system.
34 Example: Inventory The XYZ Company earns a rent revenue of $500 in 19x8 but will not receive the payment until January 10, 19x9. An adjustment will be needed. What is the adjusting entry? Adjusting Entry 12/31Inventory6,000 Purchases Discounts3,290 Cost of Goods Sold153,310 Purchases162,500 To adjust inventory, cost of goods sold, and related accounts. Purchases, Purchase Discounts, and Cost of Goods Sold are affected by the adjusting entry to update the inventory account. $51,000 - $45,000 To close
35 Record Trans- actions Prepare Trial Balance Make Adjusting Entries After all transactions have been recorded, a trial balance prepared, and adjusting entries made, the financial statements are prepared. 6. Preparing Financial Statements Prepare Financial Statements
36 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.
37 Revenues Bal. xxx Retained Earnings Beg. Bal. xxx Revenues The Closing Process xxx Since the revenue account is a nominal account, it is closed at the end of the period to Retained Earnings.
38 Expenses Bal. xxx xxx The expense account is credited in order to close the account at the end of the period. The Closing Process Expenses Retained Earnings Beg. Bal. xxx Revenues
39 Dividends Bal. xxx The Closing Process xxx The dividends account, which is also nominal, is credited to close out the balance. Expenses Retained Earnings Beg. Bal. xxx Revenues Dividends
40 The Closing Process Retained Earnings is a real account and always carries a balance. Net Income for the period is determined by these two entries. Expenses Dividends Retained Earnings Beg. Bal. xxx Revenues End. Bal. xxx
41 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.
42 Jim Brewster, Inc. Post-Closing Trial Balance December 31, 2002 DebitsCredits Cash $ 8,200 Accounts Receivable 4,000 Inventory 3,000 Supplies 1,000 Accounts Payable$ 5,000 Capital Stock 10,000 Retained Earnings 1,200 Totals $16,200$16,200 Example: Post-Closing Trial Balance
43 Summary of the Accounting Cycle Analyze transactions and business documents. Journalize transactions. Post journal entries to accounts. Determine account balances and prepare a trial balance. Journalize and post adjusting entries. Prepare financial statements. Journalize and post closing entries. Balance the accounts and prepare a post- closing trial balance.
44 Special Journals A special journal is a book for recording similar transactions that occur frequently. Sales Journal--A record where credit sales are recorded. Subsidiary Ledger--A grouping of individual accounts that equal the balance of a control account in the general ledger.
45 Voucher Register-- A book of original entry which takes the place of a purchases journal and provides a record of all authorized payments to be made by check. Charges on each voucher are classified by the appropriate accounting in the financial records. Cash Receipts Journal-- A record in which all cash received from sales, interest, rent, or other sources is recorded. Cash Disbursements Journal-- A record of all checks issued during the period in payment of properly approved vouchers. Special Journals