2 Overview of the Accounting Process Step 1Business documents analyzedStep 2Transactions recorded in journalsStep 3Transactions posted to ledgersRecording ProcessContinued
3 Overview of the Accounting Process Continued from previous slideStep 4Trial balanceWork sheet (optional)Steps in the Reporting PhaseStep 5AdjustmentsContinued
4 Overview of the Accounting Process Step 6Financial statementsStep 7AdjustmentsSteps in the Reporting PhaseStep 8Post-closing trial balance (optional)
5 Recording Phase A = L + OE Assets = Liabilities + Owners’ Equity or A system of recording transactions in a way that maintains the equality of the accounting equation.Assets = Liabilities + Owners’ EquityorA = 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.24
7 2. Journalizing Transactions 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 FormatDate Debit Entry xxCredit Entry xxExplanation.26
8 2. Journalizing Transactions Every journal entry involves a three-step process: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.
9 Debits and Credits Assets = Liabilities + Owners’ Equity DR CR DR CR DR CR(+) (–) (–) (+) (–) (+)Capital StockDR CR(–) (+)Retained EarningsDR CR(–) (+)Continued16
10 Debits and Credits Retained Earnings DR CR (–) (+) Expenses DR CR (–) (+)ExpensesDR CR(+) (–)RevenuesDR CR(–) (+)DividendsDR CR(+) (–)
11 General Journal Page 24 July 1 Dividends 330 25,000 PostRef.DateDescriptionDebitsCredits2005July 1 Dividends ,000Dividends Payable ,000Declared semiannualcash dividend oncommon stock.10 Equipment 180 7,500Notes Payable ,500Issued note for newequipment .
12 Example: Journal Entry On January 2, sold merchandise costing $60 to a customer on account for $75. Make the journal entry.32
13 Example: Journal Entry 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.Jan. 2 Accounts ReceivableSales RevenueSold merchandise onaccount.2 Cost of Goods SoldInventoryTo record cost andreduce inventory.33
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.35
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:AccountEQUIPMENTAccount No: 180Date Item PR Debit Credit Balance2005July 1 Balance 10,55010 Purchase Equipment J24 7, ,050To 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.
17 IllustrationOctober 1, C.R Byrd invests $10,000 cash in an advertising venture to be known as the Pioneer Advertising AgencyOct. 1CashC.R.Byrd, Capital(Invested cash in business)14010,000October 1, office equipment costing $5,000 is purchased by signing a 3-month, 12%, $5,000 note payable.Oct. 1Office equipmentNotes payable(Issued 3-month, 12%, note foroffice equipment)15255,000October 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. 2 Cash Unearned Fees (Received advance from R.Knox for future service)1281,200October 3, office rent for October is paid in cash, $900Oct. 3Rent ExpenseCash(Paid October Rent)621900October 4, $600 is paid for a one-year insurance policy that will expire next year on September 30.Oct. 4Prepaid InsuranceCash(Paid one-year policy; effectivedate October 1)101600
19 IllustrationOctober 5, an estimated 3-month supply of advertising materials is purchased on account from Aero Supply for $2,500Oct. 5Advertising SuppliesAccount Payable(Purchased supplies on accountfrom Aero Supply)8262,500October 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.October 20, C.R. Byrd withdraw $500 cash for personal use.Oct. 20C.R. Byrd, DrawingCash(Withdraw cash for personal use)411500
20 IllustrationOctober 26, employee salaries of $4,000 are owed and paid in cash. (See October 9 transaction)Oct. 26Salaries ExpenseCash(Paid salaries to date)6014,000October 31, received $10,000 in cash from Copa Company for advertising services rendered in October.Oct. 31CashFees Earned(Received cash for fees earned)411500
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.38
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.16
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.17
30 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
31 Three-Step Process for Adjusting Entries 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.19
32 Asset DepreciationRosi, 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 Entry12/31 Depreciation Expense—Buildings 7,800Accumulated Depr.—Buildings ,800To record depreciationon building at 5% per year.
33 Accrued ExpensesAt 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 and Wages Payable 2,150To record accrued salaries andwages.
34 Accrued RevenuesRosi, Inc. holds a note receivable from a customer on which interest total $250 has accrued.Adjusting Entry12/31 Interest Receivable 250Interest Revenue 250To record accrued interest on anote receivable.
35 Original debit to an asset account Prepaid ExpensesRosi, 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 – $3,800Original debit to an asset account
36 Original debit to an expense account Prepaid ExpensesRosi, 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 Entry12/31 Prepaid Insurance 3,800Insurance Expense 3,800To record expired insurance.$8,000 – $4,200Original debit to an expense account
37 Original credit to a revenue account Deferred RevenuesRosi, 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 – $2,075Adjusting Entry12/31 Rent Revenue 475Unearned Rent Revenue 475To record unearned rent revenue.Original credit to a revenue account20
38 Original credit to a liability account Deferred RevenuesRosi, 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 – $475Adjusting Entry12/31 Unearned Rent Revenue 2,075Rent Revenue 2,075To record rent revenue.Original credit to a liability account
39 39IllustrationAt the end of October 31, it reveals that $1,000 of supplies are still on hand.Oct. 31Advertising Supplies ExpenseAdvertising Supplies(To record supplies used)1,500Advertising Supplies10/ ,50010/31 Adj. 1,50010/31 Bal. 1,000Advertising Supplies Expense10/31 Adj. 1,500
40 4040IllustrationAt the end of October 31, it reveals that $50 of insurance expires. ($600 ÷ 12 = $50 each month)Oct. 31Insurance ExpensePrepaid Insurance(To record insurance expired)50Prepaid Insurance10/10/31 Adj10/31 BalInsurance Expense10/31 Adj
41 414141IllustrationDepreciation on the office equipment is estimated to be $480 a year, or $40 per month.Oct. 31Depreciation ExpenseAccumulated Depreciation Equip(To record monthly depreciation)40Accumulated Depreciation - OE10/31 Adjd10/31 BalDepreciation Expense10/31 Adj
42 42424242IllustrationAt the end of October 31, it reveals that $400 of fees from R. Knox has been earned.Oct. 31Unearned FeesFees Earned(To record fees earned)400Unearned Fees10/31 Adj10/ ,20010/31 BalFees Earned10/31 Bal ,00010/31Adj
43 Illustration4343434343In October, Company earned $200 in fees for advertising service that were not billed to clients before October 31.Oct. 31Accounts ReceivableFees Earned(To accrue fees earned but notbilled or collected)200Accounts Receivable10/31 AdjFees Earned10/ ,00010/10/31Adj10/31 Bal. 10,600
44 Illustration Interest due on October 31 is $50. Interest Expense 444444444444Interest due on October 31 is $50.Oct. 31Interest ExpenseInterest Payable(To accrue interest on notespayable)50Interest Expense10/Fees Earned10/
45 Illustration45454545454545Employees 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).Oct. 31Salaries ExpenseSalaries Payable(To record accrued salaries)1,200Salaries Expense10/ ,00010/31 Adj. 1,20010/31 Bal. 5,200Salaries Payable10/31 Adj ,200
46 GENERAL LEDGER Date Explanation Ref Debit Credit Balance Oct. 1 2 3 4 CASHDateExplanationRefDebitCreditBalanceOct. 1234202631J110,0001,2009006005004,00011,20010,3009,7009,2005,20015,200Accounts ReceivableNO 6DateExplanationRefDebitCreditBalanceOct. 31Adj. EntryJ2200
53 6. Preparing Financial Statements After all transactions have been recorded, a trial balance is prepared, adjusting entries are made, and the financial statements are prepared.Record Trans-actionsPrepare Trial BalanceMake Adjusting EntriesPrepare Financial Statements33
54 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
55 7. The Closing ProcessRetained EarningsRevenuesBeg. Bal. xxxxxxBal. xxxRevenuesSince the revenue account is a nominal account, it is closed at the end of the period to Retained Earnings.44
56 7. The Closing ProcessRetained EarningsBeg. Bal. xxxRevenuesExpensesExpensesThe expense account is credited in order to close the account at the end of the period.xxxBal. xxx45
57 7. The Closing ProcessRetained EarningsThe dividends account, which is also nominal, is credited to close out the balance.Beg. Bal. xxxRevenuesExpensesDividendsDividendsxxxBal. xxx46
58 7. The Closing Process Retained Earnings Retained Earnings is a real account and always carries a balance.Beg. Bal. xxxRevenuesExpensesDividendsEnd. Bal. xxxNet Income for the period is determined by these two items.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.48
60 Example: Post-Closing Trial Balance Jim Brewster, Inc.Post-Closing Trial Balanceas of December 31, 2004Debits CreditsCash $ 8,200Accounts Receivable 4,000Inventory 3,000Supplies 1,000Accounts Payable $ 5,000Capital Stock 10,000Retained Earnings ,200Totals $16,200 $16,20049
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.50
62 Summary of the Accounting Cycle An accountant must thoroughly understand the intricacies of the accounting cycle. That means you!
63 Accrual AccountingAccrual accounting recognizes revenues as they are earned, not necessarily when cash is received.
64 Accrual AccountingThat’s true. And, accrual accounting recognizes expenses as they are incurred, not necessarily when cash is paid.
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.RecallReport GenerationStorageRecordingMathematical Computations
68 Computers and the Accounting Process Computers will never replace the accountant.