2 Step 1 Business documents analyzed Step 2 Transactions recorded in journals Step 3 Transactions posted to ledgers ContinuedContinued Recording Process Overview of the Accounting Process
3 Step 5 Adjustments Work sheet (optional) ContinuedContinued Step 4 Trial balance Steps in the Reporting Phase Continued from previous slide
4 Step 7 Adjustments Step 6 Financial statements Steps in the Reporting Phase Step 8 Post-closing trial balance (optional) Overview of the Accounting Process
5 Recording Phase 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 1. Analyzing 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.
7 General Journal Entry Format Date Debit Entry.................................. xx Credit Entry............................. xx Explanation. A journal is an accounting record in which business transactions are entered in chronological order. Journal entries record transaction information; debits equal credits. 2. Journalizing Transactions
8 Every journal entry involves a three-step process: 1.Identify the accounts involved with an event or transaction. 2.Determine whether each account increased or decreased. 3.Determine the amount by which each account was affected. 2. Journalizing Transactions
9 Assets = Liabilities + Owners’ Equity DR CR DR CR DR CR (+) (–) (–) (+) (–) (+) Capital Stock DR CR (–) (+) Retained Earnings DR CR (–) (+) ContinuedContinued Debits and Credits
10 Debits and Credits Retained Earnings DR CR (–) (+) Expenses DR CR (+) (–) Revenues DR CR (–) (+) Dividends DR CR (+) (–)
11 DateDescription Post Ref. DebitsCredits General Journal Page 24 2005 July 1Dividends33025,000 Dividends Payable26025,000 Declared semiannual cash dividend on common stock. 10Equipment1807,500 Notes Payable2207,500 Issued note for new equipment.
12 Example: Journal Entry On January 2, sold merchandise costing $60 to a customer on account for $75. Make the journal entry.
13 Example: Journal Entry Jan. 2 Accounts Receivable..................... 75 Sales Revenue.......................... 75 Sold merchandise on account. 2 Cost of Goods Sold...................... 60 Inventory................................. 60 To record cost and reduce inventory. On January 2, sold merchandise costing $60 to a customer on account for $75. Make the journal entry. This entry assumes that the perpetual system is used.
14 3. Posting to the Ledger Accounts Posting is the process of transferring amounts from the journal to the general ledger. A ledger is a collection 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.
15 3. Posting to the Ledger Accounts The Equipment account in the general ledger after the purchase of July 10 (Slide 14) has been posted would appear as follows: Account EQUIPMENT Account No: 180 Date Item PR Debit Credit Balance 2005 July 1 Balance 10,550 10 Purchase EquipmentJ247,50018,050 To examine the journal entry, click this button to go to Slide 14. To return, click on the word “July” in the entry on Slide 14.
16 Typical 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
17 Illustration 1.October 1, C.R Byrd invests $10,000 cash in an advertising venture to be known as the Pioneer Advertising Agency Oct. 1Cash C.R.Byrd, Capital (Invested cash in business) 1 40 10,000 2.October 1, office equipment costing $5,000 is purchased by signing a 3-month, 12%, $5,000 note payable. Oct. 1Office equipment Notes payable (Issued 3-month, 12%, note for office equipment) 15 25 5,000 3.October 2, a $1,200 cash advance is received from R. Knox, a client, for advertising services that are expected to be completed.
18 Illustration Oct. 2Cash Unearned Fees (Received advance from R.Knox for future service) 1 28 1,200 4.October 3, office rent for October is paid in cash, $900 Oct. 3Rent Expense Cash (Paid October Rent) 62 1 900 5.October 4, $600 is paid for a one-year insurance policy that will expire next year on September 30. Oct. 4Prepaid Insurance Cash (Paid one-year policy; effective date October 1) 10 1 600
19 Illustration 7.October 9, hire four employees to begin work on October 15. each employee is to receive a weekly salary of $500 for a 5-day work week, payable every 2 weeks – first payment made on October 26. A business transaction has not occurred. There is only an agreement between the employer and the employees to enter into a business. 8.October 20, C.R. Byrd withdraw $500 cash for personal use. Oct. 20C.R. Byrd, Drawing Cash (Withdraw cash for personal use) 41 1 500 6.October 5, an estimated 3-month supply of advertising materials is purchased on account from Aero Supply for $2,500 Oct. 5Advertising Supplies Account Payable (Purchased supplies on account from Aero Supply) 8 26 2,500
20 9.October 26, employee salaries of $4,000 are owed and paid in cash. (See October 9 transaction) Illustration 10.October 31, received $10,000 in cash from Copa Company for advertising services rendered in October. Oct. 31Cash Fees Earned (Received cash for fees earned) 41 1 500 Oct. 26Salaries Expense Cash (Paid salaries to date) 60 1 4,000
25 Reporting Phase 4.A trial balance is prepared. 5.Adjusting entries are recorded. 6.Financial statements are prepared. 7.Closing entries are made. 8.A post-closing trial balance is prepared (optional).
26 4. Preparing a Trial Balance Determine the account balance for each T-Account. A trial balance is a list of all accounts and their balances. It provides a means to assure that debits equal credits.
28 5. Preparing 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, costs, and expenses on the income statement.
29 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.
30 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. Most Common Adjusting Entries
31 1.Identify the original entries that were made, if any. Original entries are only made for unearned revenues and prepaid expenses. 2.Determine what the correct balances should be at this point in time. 3.Make the adjustments needed to bring the balances to the desired amounts. Three-Step Process for Adjusting Entries
32 Rosi, Inc. purchased buildings in 2000 at a cost of $156,000, an expected life of 20 years, and no anticipated residual value. Each year, 5% of the cost is depreciated. At the end of 2005, 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. Asset Depreciation
33 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 and Wages Payable2,150 To record accrued salaries and wages. Accrued Expenses
34 Rosi, Inc. holds a note receivable from a customer on which interest total $250 has accrued. Adjusting Entry 12/31Interest Receivable250 Interest Revenue250 To record accrued interest on a note receivable. Accrued Revenues
35 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 Prepaid Expenses Original debit to an asset account
36 Rosi, Inc.’s trial balance shows that the asset account Insurance Expense has a balance of $8,000. By December 31, $3,800 applies to future periods. Adjusting Entry 12/31Prepaid Insurance3,800 Insurance Expense3,800 To record expired insurance. $8,000 – $4,200 Prepaid Expenses Original debit to an expense account
37 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 Deferred Revenues
38 Adjusting Entry 12/31Unearned Rent Revenue2,075 Rent Revenue2,075 To record rent revenue. 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. $2,550 – $475 Original credit to a liability account Deferred Revenues
39 Illustration 1.At the end of October 31, it reveals that $1,000 of supplies are still on hand. 39 Oct. 31 Advertising Supplies Expense Advertising Supplies (To record supplies used) 1,500 10/5 2,50010/31 Adj. 1,500 Advertising Supplies 10/31 Bal. 1,000 Advertising Supplies Expense 10/31 Adj. 1,500
40 Illustration 2.At the end of October 31, it reveals that $50 of insurance expires. ($600 ÷ 12 = $50 each month) 40 Oct. 31Insurance Expense Prepaid Insurance (To record insurance expired) 50 10/4 60010/31 Adj. 50 Prepaid Insurance 10/31 Bal. 550 Insurance Expense 10/31 Adj. 50
41 Illustration 3.Depreciation on the office equipment is estimated to be $480 a year, or $40 per month. 41 Oct. 31Depreciation Expense Accumulated Depreciation Equip (To record monthly depreciation) 40 10/31 Adj. 40 Accumulated Depreciation - OE 10/31 Bal. 40 Depreciation Expense 10/31 Adj. 40
42 Illustration 4.At the end of October 31, it reveals that $400 of fees from R. Knox has been earned. 42 Oct. 31 Unearned Fees Fees Earned (To record fees earned) 400 10/2 1,200 Unearned Fees 10/31 Bal. 800 Fees Earned 10/31 Bal. 10,000 10/31Adj. 400
43 Illustration 5.In October, Company earned $200 in fees for advertising service that were not billed to clients before October 31. 43 Oct. 31Accounts Receivable Fees Earned (To accrue fees earned but not billed or collected) 200 Accounts Receivable Fees Earned 10/31 10,000 10/31 400 10/31Adj. 200 10/31 Bal. 10,600
44 Illustration 6.Interest due on October 31 is $50. 44 Oct. 31Interest Expense Interest Payable (To accrue interest on notes payable) 50 Interest Expense Fees Earned 10/31 50
45 Illustration 7.Employees receive total salaries of $2,000 for a five-day work weeks, or $400 per day. Thus, accrued salaries at October 31, are $1,200 (3X$400). 45 Oct. 31Salaries Expense Salaries Payable (To record accrued salaries) 1,200 Salaries Expense Salaries Payable 10/26 4,000 10/31 Adj. 1,200 10/31 Bal. 5,200
53 Record Trans- actions Prepare Trial Balance Make Adjusting Entries After all transactions have been recorded, a trial balance is prepared, adjusting entries are made, and the financial statements are prepared. 6. Preparing Financial Statements Prepare Financial Statements
54 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.
55 Revenues Bal. xxx Retained Earnings Beg. Bal. xxx xxx Since the revenue account is a nominal account, it is closed at the end of the period to Retained Earnings. 7. The Closing Process Revenues
56 Expenses Bal. xxx xxx The expense account is credited in order to close the account at the end of the period. 7. The Closing Process Retained Earnings Beg. Bal. xxx Revenues Expenses
57 Dividends Bal. xxx xxx The dividends account, which is also nominal, is credited to close out the balance. 7. The Closing Process Retained Earnings Beg. Bal. xxx Revenues Expenses Dividends
58 Retained Earnings Retained Earnings is a real account and always carries a balance. Net Income for the period is determined by these two items. Beg. Bal. xxx Revenues Expenses Dividends End. Bal. xxx 7. The Closing Process Dividends reduce Retained Earnings
59 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.
60 Example: Post-Closing Trial Balance Jim Brewster, Inc. Post-Closing Trial Balance as of December 31, 2004 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
61 Summary of the Accounting Cycle 1.Analyze transactions and business documents. 2.Journalize transactions. 3.Post journal entries to accounts. 4.Determine account balances and prepare a trial balance. 5.Journalize and post adjusting entries. 6.Prepare financial statements. 7.Journalize and post closing entries. 8.Prepare a post-closing trial balance.
62 Summary of the Accounting Cycle An accountant must thoroughly understand the intricacies of the accounting cycle. That means you!
63 Accrual Accounting Accrual accounting recognizes revenues as they are earned, not necessarily when cash is received.
64 That’s true. And, accrual accounting recognizes expenses as they are incurred, not necessarily when cash is paid. Accrual Accounting
65 Cash-Basis Accounting Cash-basis accounting is focused on cash receipts and cash disbursements.
66 Computers and the Accounting Process There has been a rapid increase in the use of computers to assist in performing many of the tasks found in the accounting cycle.
67 Computers and the Accounting Process Computers are well suited to perform many accounting cycle tasks. RecordingRecordingStorageStorage Mathematical Computations RecallRecall Report Generation
68 Computers and the Accounting Process Computers will never replace the accountant.