1. A Review of the Accounting Cycle

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. Double-Entry Accounting Facts
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. 18

7. The Accounting Equation with T-Accounts
Assets = Liabilities Owners’ Equity
DR CR 17

8. How Accounts Affect Owners' EquityDR CR - +
Capital Stock
DR CR
Retained Earnings
Expenses
DR CR
Revenues
DR CR
Dividends 22

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. 24

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. 25

12. 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.
General Journal Entry Format
Date Debit Entry xx
Credit Entry xx
Explanation. 26

13. Journal Page 1 Jan 1 Cash 5 Revenue 5 Received cash for
Post
Ref.
Date
Description
Debits
Credits
Jan Cash 5
Revenue 5
Received cash for
services provided.
4 Supplies 12
Accounts Payable 12
Purchased supplies
on account.
10 Accounts Payable 12
Cash 12
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. 32

15. Example: Journal Entry
Merchandise is sold to a customer on account for $75. The cost of the product is $60. Make the 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.
Jan. 1 Accounts Receivable
Sales Revenue
Sold merchandise on account.
1 Cost of Goods Sold
Inventory
To record cost and reduce
inventory. 33

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. 35

17. Chart of Accounts Long-Term Liabilities (220-239) 222 Mortgage Payable
OWNERS’ EQUITY ( )
301 Capital Stock
330 Retained Earnings
SALES ( )
400 Sales Revenue
EXPENSES ( )
500 Cost of Goods Sold
523 Rent Expense
528 Advertising Expense
573 Utility Expense
ASSETS ( )
Current Assets ( )
101 Cash
105 Accounts Receivable
107 Inventory
Long-Term Assets ( )
151 Land
152 Building
LIABILITIES ( )
Current Liabilities ( )
201 Notes Payable
202 Accounts Payable 37

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. 38

20. XYZ Company Trial Balance December 31, 2002 Debits Credits Cash $ 21
Accounts Receivable
Inventory
Land
Accounts Payable $ 30
Capital Stock
Retained Earnings 24
Sales Revenue
Cost of Goods Sold
Advertising Expense
Misc. Expenses ______
Total $ 1,123 $ 1,123 39

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. 16

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. 17

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. 18

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. 19

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
12/31 Depreciation Expense--Buildings 7,800
Accumulated Depr.--Buildings ,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
12/31 Doubtful Accounts Expense 1,100
Allowance for Doubtful Accounts 1,100
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.
3/19 Allowance for Doubtful Accounts 150
Accounts Receivable 150
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
12/31 Salaries and Wages Expense 2,150
Salaries Payable 2,150
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
12/31 Interest Receivable 250
Interest Revenue 250
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
12/31 Insurance Expense 4,200
Prepaid Insurance 4,200
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.
Original credit to a revenue account.
$2,550 - $2,075
Adjusting Entry
12/31 Rent Revenue 475
Unearned Rent Revenue 475
To record unearned rent revenue. 20

32. 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.
Original credit to a liability account.
Adjusting Entry
12/31 Unearned Rent Revenue 2,075
Rent Revenue 2,075
To record rent revenue
($2,550 - $475).

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?
Purchases, Purchase Discounts, and Cost of Goods Sold are affected by the adjusting entry to update the inventory account.
Adjusting Entry
12/31 Inventory 6,000
Purchases Discounts 3,290
Cost of Goods Sold 153,310
Purchases 162,500
To adjust inventory, cost of
goods sold, and related
accounts.
$51,000 - $45,000
To close
To close

35. 6. Preparing Financial Statements
After all transactions have been recorded, a trial balance prepared, and adjusting entries made, the financial statements are prepared.
Record Trans-actions
Prepare Trial Balance
Make Adjusting Entries
Prepare Financial Statements 33

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. 34

37. The Closing Process
Retained Earnings
Revenues
Beg. Bal. xxx
Revenues
xxx
Bal. xxx
Since the revenue account is a nominal account, it is closed at the end of the period to Retained Earnings. 44

38. The Closing Process
Retained Earnings
Beg. Bal. xxx
Revenues
Expenses
Expenses
The expense account is credited in order to close the account at the end of the period.
xxx
Bal. xxx 45

39. The Closing Process
Retained Earnings
Beg. Bal. xxx
Revenues
The dividends account, which is also nominal, is credited to close out the balance.
Expenses
Dividends
Dividends
xxx
Bal. xxx 46

40. The Closing Process Beg. Bal. xxx
Retained Earnings
Beg. Bal. xxx
Revenues
End. Bal. xxx
Retained Earnings is a real account and always carries a balance.
Expenses
Dividends
Net Income for the period is determined by these two entries. 47

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. 48

42. Example: Post-Closing Trial Balance
Jim Brewster, Inc.
Post-Closing Trial Balance
December 31, 2002
Debits Credits
Cash $ 8,200
Accounts Receivable 4,000
Inventory 3,000
Supplies 1,000
Accounts Payable $ 5,000
Capital Stock 10,000
Retained Earnings ,200
Totals $16,200 $16,200 49

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. 50

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. Special Journals
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.

46. The End