2 Learning ObjectivesIdentify 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 ObjectivesDiscuss the importance and expanding role of computers to the accounting process.EXPANDED MATERIALUse 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’ EquityorA = 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’ EquityDR CR17
9 JournalizingIdentify 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 EntriesA 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 FormatDate Debit Entry xxCredit Entry xxExplanation.26
13 Journal Page 1 Jan 1 Cash 5 Revenue 5 Received cash for PostRef.DateDescriptionDebitsCreditsJan Cash 5Revenue 5Received cash forservices provided.4 Supplies 12Accounts Payable 12Purchased supplieson account.10 Accounts Payable 12Cash 12Paid 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 ReceivableSales RevenueSold merchandise on account.1 Cost of Goods SoldInventoryTo record cost and reduceinventory.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
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
21 5. Adjusting EntriesAdjusting 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 Entry12/31 Depreciation Expense--Buildings 7,800Accumulated Depr.--Buildings ,800To record depreciation onbuilding 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 Entry12/31 Doubtful Accounts Expense 1,100Allowance for Doubtful Accounts 1,100To adjust for estimated doubtfulaccounts 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 150Accounts Receivable 150To write off an uncollectibleaccount.
28 Example: Accrued Expenses At the end of the fiscal period, Rosi, Inc., had accrued salaries and wages totaling $2,150.Adjusting Entry12/31 Salaries and Wages Expense 2,150Salaries Payable 2,150To record accrued salaries andwages.
29 Example: Accrued Revenues Rosi, Inc., holds a note receivable from a customer on which interest totaling $250 has accrued.Adjusting Entry12/31 Interest Receivable 250Interest Revenue 250To record accrued interest on anote 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 Entry12/31 Insurance Expense 4,200Prepaid Insurance 4,200To 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 - $2,075Adjusting Entry12/31 Rent Revenue 475Unearned Rent Revenue 475To 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 Entry12/31 Unearned Rent Revenue 2,075Rent Revenue 2,075To record rent revenue($2,550 - $475).
33 Example: InventoryRefer 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: InventoryThe 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 Entry12/31 Inventory 6,000Purchases Discounts 3,290Cost of Goods Sold 153,310Purchases 162,500To adjust inventory, cost ofgoods sold, and relatedaccounts.$51,000 - $45,000To closeTo 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-actionsPrepare Trial BalanceMake Adjusting EntriesPrepare Financial Statements33
36 7. The Closing ProcessReal 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 ProcessRetained EarningsRevenuesBeg. Bal. xxxRevenuesxxxBal. xxxSince the revenue account is a nominal account, it is closed at the end of the period to Retained Earnings.44
38 The Closing ProcessRetained EarningsBeg. Bal. xxxRevenuesExpensesExpensesThe expense account is credited in order to close the account at the end of the period.xxxBal. xxx45
39 The Closing ProcessRetained EarningsBeg. Bal. xxxRevenuesThe dividends account, which is also nominal, is credited to close out the balance.ExpensesDividendsDividendsxxxBal. xxx46
40 The Closing Process Beg. Bal. xxx Retained EarningsBeg. Bal. xxxRevenuesEnd. Bal. xxxRetained Earnings is a real account and always carries a balance.ExpensesDividendsNet 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
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 JournalsA 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 JournalsVoucher 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.