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1 Accumulating Accounting Data CHAPTER F7 © 2007 Pearson Custom Publishing.

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1 1 Accumulating Accounting Data CHAPTER F7 © 2007 Pearson Custom Publishing

2 2 Identify the eight steps of the accounting cycle. Learning Objective 1 © 2007 Pearson Custom Publishing

3 3 The Accounting Cycle The accounting cycle consists of a series of steps repeated in each accounting period that enable the firm to analyze, record, classify, and summarize the transactions into financial statements. The accounting cycle consists of a series of steps repeated in each accounting period that enable the firm to analyze, record, classify, and summarize the transactions into financial statements. © 2007 Pearson Custom Publishing

4 4 Steps of the Cycle  Analyzing Transactions  Journalizing Transactions  Posting Transactions to the General Ledger  Preparing a Trial Balance or Worksheet  Adjusting the Accounts ‘ Preparing Financial Statements ’ Preparing and Posting Closing Entries “ Preparing the Post- Closing Trial Balance © 2007 Pearson Custom Publishing

5 5 Step 1: Analyzing Transactions Part One: Determine when a transaction occurs. A transaction is any event that results in a change in the amount of an accounting element. Part One: Determine when a transaction occurs. A transaction is any event that results in a change in the amount of an accounting element. Part Two: Identify the nature of the transaction. This entails determining which accounting elements were affected and by how much. Part Two: Identify the nature of the transaction. This entails determining which accounting elements were affected and by how much. © 2007 Pearson Custom Publishing

6 6 Step 2: Journalizing Transactions A journal is a book of original entry that contains a chronological list of an entity’s transactions. A journal is a book of original entry that contains a chronological list of an entity’s transactions. A special journal records specific types of transactions such as a sales, purchases, cash receipts or cash payments. A special journal records specific types of transactions such as a sales, purchases, cash receipts or cash payments. A general journal records all transactions not recorded in a special journal. A general journal records all transactions not recorded in a special journal. © 2007 Pearson Custom Publishing

7 7 Step 3: Posting to the Ledger A ledger contains all the accounts of a firm. A ledger contains all the accounts of a firm. A chart of accounts is a list of all of the accounts used by a company. A chart of accounts is a list of all of the accounts used by a company. After transactions are entered in the journal, the same information is then posted to the ledger accounts. The ledger accounts indicate the current balance for each account. After transactions are entered in the journal, the same information is then posted to the ledger accounts. The ledger accounts indicate the current balance for each account. © 2007 Pearson Custom Publishing

8 8 Step 4: Preparing a Trial Balance Periodically, usually weekly or monthly, a trial balance is prepared. A trial balance is a listing of all ledger accounts and their balances. Periodically, usually weekly or monthly, a trial balance is prepared. A trial balance is a listing of all ledger accounts and their balances. The trial balance verifies that the accounting equation is in balance. The trial balance verifies that the accounting equation is in balance. © 2007 Pearson Custom Publishing

9 9 Using a Worksheet Another option for step 4 of the cycle is to prepare a worksheet. The worksheet is a ten column worksheet which begins with the trial balance. Another option for step 4 of the cycle is to prepare a worksheet. The worksheet is a ten column worksheet which begins with the trial balance. A worksheet helps accountants examine the accounts, adjust the accounts, and gather the data to prepare the financial statements. A worksheet helps accountants examine the accounts, adjust the accounts, and gather the data to prepare the financial statements. © 2007 Pearson Custom Publishing

10 10 Step 5: Adjusting the Accounts Some account balances require adjustment at the end of the accounting period, before the financial statements are prepared. Some account balances require adjustment at the end of the accounting period, before the financial statements are prepared. Adjustments are needed to ensure the proper application of the revenue recognition and expense recognition rules. Many adjustments are accruals and deferrals studied in Chapter Six. Adjustments are needed to ensure the proper application of the revenue recognition and expense recognition rules. Many adjustments are accruals and deferrals studied in Chapter Six. © 2007 Pearson Custom Publishing

11 11 Reconciling the Bank Account Adjusting entries normally do not affect the cash account, except for one adjustment that is needed to change the cash balance to the correct amount as of the end of the period. Adjusting entries normally do not affect the cash account, except for one adjustment that is needed to change the cash balance to the correct amount as of the end of the period. A bank reconciliation is prepared to determine the appropriate cash balance as part of the firm’s internal control structure. A bank reconciliation is prepared to determine the appropriate cash balance as part of the firm’s internal control structure. © 2007 Pearson Custom Publishing

12 12 Step 6: Preparing Financial Statements After all of the balances in the general ledger accounts have been properly adjusted, the financial statements can be prepared. After all of the balances in the general ledger accounts have been properly adjusted, the financial statements can be prepared. The income statement is prepared first, then the statement of retained earnings (or owners’ equity), then the balance sheet. The income statement is prepared first, then the statement of retained earnings (or owners’ equity), then the balance sheet. © 2007 Pearson Custom Publishing

13 13 Step 7: Preparing Closing Entries Closing entries are prepared to reset the balance of temporary accounts to zero. Closing entries are prepared to reset the balance of temporary accounts to zero. Temporary (or nominal) accounts include all income statement accounts plus dividends or owner withdrawals. Temporary accounts are closed at the end of the period. Temporary (or nominal) accounts include all income statement accounts plus dividends or owner withdrawals. Temporary accounts are closed at the end of the period. Most balance sheet accounts are permanent (or real) accounts and are not closed. Most balance sheet accounts are permanent (or real) accounts and are not closed. © 2007 Pearson Custom Publishing

14 14 Step 8: Preparing the Post-Closing Trial Balance After closing entries have been journalized and posted, only the balance sheet accounts should have a balance other than zero. After closing entries have been journalized and posted, only the balance sheet accounts should have a balance other than zero. A post-closing trial balance provides verification that the closing process was completed properly and also serves as a record of the beginning account balances for the next accounting period. A post-closing trial balance provides verification that the closing process was completed properly and also serves as a record of the beginning account balances for the next accounting period. © 2007 Pearson Custom Publishing

15 15 The Accounting Equation An accounting system is based on the following equation: An accounting system is based on the following equation: Assets = Liabilities + Equity Assets = Liabilities + Equity If one side of the equation is changed, the other side must also change, this is the basis of the double-entry system. If one side of the equation is changed, the other side must also change, this is the basis of the double-entry system. © 2007 Pearson Custom Publishing

16 16 Distinguish between debits and credits and apply them to the accounting equation. Learning Objective 2 © 2007 Pearson Custom Publishing

17 17 Debits and Credits Two of the most familiar accounting terms are debits and credits. In the double- entry system, debits must always equal credits. Two of the most familiar accounting terms are debits and credits. In the double- entry system, debits must always equal credits. Debit means the left side of the account and is abbreviated as DR. Debit means the left side of the account and is abbreviated as DR. Credit means the right side of the account and is abbreviated as CR. Credit means the right side of the account and is abbreviated as CR. © 2007 Pearson Custom Publishing

18 18 Normal Balance Accounts have a normal balance. Accounts have a normal balance. Left = Right Left = Right Assets = Liabilities + Equity Assets = Liabilities + Equity Debit = Credit Debit = Credit Remember there are five components of equity which have differing normal balances. Remember there are five components of equity which have differing normal balances. © 2007 Pearson Custom Publishing

19 19 Normal Balances Assets = debits Assets = debits Liabilities = credits Liabilities = credits Owner’s contributions = credits Owner’s contributions = credits Owner’s distributions = debits Owner’s distributions = debits Revenues = credits Revenues = credits Expenses = debits Expenses = debits © 2007 Pearson Custom Publishing

20 20 A Debit Increases assets. Increases assets. Decreases liabilities. Decreases liabilities. Decreases owner’s capital or capital stock accounts. Decreases owner’s capital or capital stock accounts. Increases withdrawal or dividend accounts. Increases withdrawal or dividend accounts. Decreases revenues or gains. Decreases revenues or gains. Increases expenses and losses. Increases expenses and losses. © 2007 Pearson Custom Publishing

21 21 A Credit Decreases assets. Decreases assets. Increases liabilities. Increases liabilities. Increases owner’s capital or capital stock accounts. Increases owner’s capital or capital stock accounts. Decreases withdrawal or dividend accounts. Decreases withdrawal or dividend accounts. Increases revenues or gains. Increases revenues or gains. Decreases expenses and losses. Decreases expenses and losses. © 2007 Pearson Custom Publishing

22 22 Describe accounts, journals, ledgers, and worksheets. Learning Objective 3 © 2007 Pearson Custom Publishing

23 23 The Account Each accounting element is represented by a separate account. The following information is required: Each accounting element is represented by a separate account. The following information is required: Account name and number Account name and number Date of each transaction Date of each transaction Beginning balance for the period Beginning balance for the period Each posted transaction from the journal including the date, reference, and amount Each posted transaction from the journal including the date, reference, and amount Ending balance for the period Ending balance for the period © 2007 Pearson Custom Publishing

24 24 T-Accounts For illustration purposes, accountants will often use a T-account. A T-account is a simplified version of the real account format used in the accounting records. For illustration purposes, accountants will often use a T-account. A T-account is a simplified version of the real account format used in the accounting records. In a T-account, you can see the effect of various transactions on any particular account. Debits, credits, and balances can all be shown with clarity. In a T-account, you can see the effect of various transactions on any particular account. Debits, credits, and balances can all be shown with clarity. © 2007 Pearson Custom Publishing

25 25 Any Account DEBIT (Left Side) CREDIT (Right Side) T-Account Format © 2007 Pearson Custom Publishing

26 26 T-Accounts for Assets ANY ASSET NORMAL BALANC E Debit Credit © 2007 Pearson Custom Publishing

27 27 ANY LIABILITY NORMAL BALANCE Credit T-Accounts for Liabilities Debit © 2007 Pearson Custom Publishing

28 28 ANY OWNERS’ CONTRIBUTIONS OR CAPITAL STOCK NORMAL BALANCE Credit T-Accounts for Owner’s Contributions or Capital Stock Debit © 2007 Pearson Custom Publishing

29 29 ANY OWNERS’ WITHDRAWALS OR DIVIDENDS NORMAL BALANCE Credit T-Accounts for Owner’s Withdrawals or Dividends Debit © 2007 Pearson Custom Publishing

30 30 ANY EXPENSE OR LOSS NORMAL BALANCE Debit ANY REVENUE OR GAIN NORMAL BALANCE Credit T-Accounts for Revenues/Gains and Expenses/Losses CreditDebit © 2007 Pearson Custom Publishing

31 31 Summarizing the Rules of Debits and Credits Normal Normal Increase Decrease Balance Increase Decrease Balance AssetsDRCRDR LiabilitiesCRDRCR Owners’ equityCRDRCR RevenuesCRDRCR ExpensesDRCRDR © 2007 Pearson Custom Publishing

32 32 Illustration Using T-Accounts Let’s use T-accounts to analyze the effect on the accounting elements of three basic business transactions. Let’s use T-accounts to analyze the effect on the accounting elements of three basic business transactions. In each case, we will: In each case, we will: Determine the accounts affected Determine the accounts affected Apply the rules of debits and credits Apply the rules of debits and credits Enter the appropriate amount Enter the appropriate amount © 2007 Pearson Custom Publishing

33 33 Record transactions in journals and post them to the general ledger. Learning Objective 4 © 2007 Pearson Custom Publishing

34 34 Transaction #1 CASHCOMMON STOCK Record the initial sale of stock by a new corporation, 10,000 shares of no-par stock at $10 per share. 100,000 © 2007 Pearson Custom Publishing

35 35 Transaction #2 EQUIPMENT The new corporation purchased equipment for $20,000 cash. 20,000 CASH © 2007 Pearson Custom Publishing

36 36 Transaction #3 SUPPLIES The firm purchased supplies for $2,000 cash. 2,000 CASH © 2007 Pearson Custom Publishing

37 37 Summary of the Cash Account CASH After the first three transactions, the cash account would look like this: 100,000 20,000 2,000 balance 78,000 © 2007 Pearson Custom Publishing

38 38 Journal Entries Remember that the T-accounts are for illustration purposes only. Remember that the T-accounts are for illustration purposes only. Real accounting systems rely on journal entries and ledger accounts. Real accounting systems rely on journal entries and ledger accounts. Entries are made in a journal to formally record each event for the company. Using the same three transactions, the journal will look like the example on the next slide. Entries are made in a journal to formally record each event for the company. Using the same three transactions, the journal will look like the example on the next slide. © 2007 Pearson Custom Publishing

39 39 © 2007 Pearson Custom Publishing

40 40 Posting to the Ledger After the journal entries are made, the debits and credits need to be posted to the appropriate ledger accounts on a periodic basis. After the journal entries are made, the debits and credits need to be posted to the appropriate ledger accounts on a periodic basis. The next slide will show the result of having posted the three transactions to the cash account. The next slide will show the result of having posted the three transactions to the cash account. © 2007 Pearson Custom Publishing

41 41 Cash General Ledger Account © 2007 Pearson Custom Publishing

42 42 Compound Journal Entries Journal entries with more than two accounts affected are called compound journal entries. Assume we buy a $25,000 delivery truck with a $5,000 cash down payment. Journal entries with more than two accounts affected are called compound journal entries. Assume we buy a $25,000 delivery truck with a $5,000 cash down payment. © 2007 Pearson Custom Publishing

43 43 Prepare trial balances and worksheets. Learning Objective 5 © 2007 Pearson Custom Publishing

44 44 Trial Balance Prepare a list of the entire general ledger accounts with their corresponding debit or credit balances. Prepare a list of the entire general ledger accounts with their corresponding debit or credit balances. Total each column of debits and credits. Total each column of debits and credits. The debit and credit totals should be equal. The debit and credit totals should be equal. © 2007 Pearson Custom Publishing

45 45 Trial Balance Russell Jones Company Trial Balance December 31, 2007 DebitsCredits Cash$125,000 Inventory 128,000 Accounts Payable$ 90,000 Jones, Capital 85,000 Jones, Withdrawals 45,000 Revenues 200,000 Expenses 77,000 Total$375,000$375,000 Total$375,000$375,000 © 2007 Pearson Custom Publishing

46 46 Prepare adjusting journal entries and reconcile a bank account. Learning Objective 6 © 2007 Pearson Custom Publishing

47 47 Adjusting Entries As discussed in Chapter 6, there are various accounts that require adjustment prior to the preparation of the financial statements. As discussed in Chapter 6, there are various accounts that require adjustment prior to the preparation of the financial statements. Example of adjustments include: accrued interest expense or revenue, accrued wages, deferred service revenues, and the like. Example of adjustments include: accrued interest expense or revenue, accrued wages, deferred service revenues, and the like. These adjustments must be journalized. These adjustments must be journalized. © 2007 Pearson Custom Publishing

48 48 Along with the typical adjustments for accruals, deferrals, and depreciation, the bank statement needs to be analyzed for any additional adjustments. Along with the typical adjustments for accruals, deferrals, and depreciation, the bank statement needs to be analyzed for any additional adjustments. Typically, the cash account needs to be adjusted and the amount of the adjustment is determined by preparing a bank reconciliation. Typically, the cash account needs to be adjusted and the amount of the adjustment is determined by preparing a bank reconciliation. Bank Reconciliation © 2007 Pearson Custom Publishing

49 49 Follow the steps as outlined on the bank reconciliation form. Follow the steps as outlined on the bank reconciliation form. The bank statement balance is reconciled to a corrected bank balance. The bank statement balance is reconciled to a corrected bank balance. The balance per books (from the cash account in the general ledger) is reconciled to a corrected book balance. The balance per books (from the cash account in the general ledger) is reconciled to a corrected book balance. Both balances should be the same! Both balances should be the same! Reconciling the Bank Statement © 2007 Pearson Custom Publishing

50 50 Bank Reconciliation - Top Half © 2007 Pearson Custom Publishing

51 51 Bank Reconciliation - Bottom Half © 2007 Pearson Custom Publishing

52 52 Prepare financial statements from a worksheet. Learning Objective 7 © 2007 Pearson Custom Publishing

53 53 Preparing Financial Statements After all accounts have been adjusted, the financial statements can be prepared. After all accounts have been adjusted, the financial statements can be prepared. At this point, you should be able to prepare the three financial statements shown in Chapter 6: At this point, you should be able to prepare the three financial statements shown in Chapter 6: (1) the income statement, (1) the income statement, (2) the statement of owner’s (stockholders’) equity, and (2) the statement of owner’s (stockholders’) equity, and (3) the balance sheet. (3) the balance sheet. © 2007 Pearson Custom Publishing

54 54 Prepare closing journal entries. Learning Objective 8 © 2007 Pearson Custom Publishing

55 55 Closing the Accounts After the year-end financial statements have been prepared, the temporary (or nominal) accounts are closed. Closing an account means that the account will have a zero balance after the entry is journalized and posted. After the year-end financial statements have been prepared, the temporary (or nominal) accounts are closed. Closing an account means that the account will have a zero balance after the entry is journalized and posted. © 2007 Pearson Custom Publishing

56 56 Closing the Accounts Balance sheet accounts (permanent or real accounts) are not closed, their ending balance becomes the beginning balance for the next period. Balance sheet accounts (permanent or real accounts) are not closed, their ending balance becomes the beginning balance for the next period. © 2007 Pearson Custom Publishing

57 57 Preparing Closing Entries There are four closing entries: There are four closing entries: Close all revenue accounts to Income Summary Close all revenue accounts to Income Summary Close all expense accounts to Income Summary Close all expense accounts to Income Summary Close Dividends to Retained Earnings, or close Withdrawals to the Owners’ Capital account(s) Close Dividends to Retained Earnings, or close Withdrawals to the Owners’ Capital account(s) Close Income Summary to Retained Earnings or to the Owners’ Capital account(s) Close Income Summary to Retained Earnings or to the Owners’ Capital account(s) © 2007 Pearson Custom Publishing

58 58 Trial Balance Before Closing Entries Russell Jones Company Trial Balance December 31, 2007 DebitsCredits Cash$125,000 Inventory 128,000 Accounts Payable$ 90,000 Jones, Capital 85,000 Jones, Withdrawals 45,000 Revenues 200,000 Expenses 77,000 Total$375,000$375,000 Total$375,000$375,000 © 2007 Pearson Custom Publishing

59 59 © 2007 Pearson Custom Publishing Preparing the Closing Entries

60 60 Prepare a post-closing trial balance. Learning Objective 9 © 2007 Pearson Custom Publishing

61 61 Post-Closing Trial Balance The final step in the accounting cycle is to prepare a post-closing trial balance. The final step in the accounting cycle is to prepare a post-closing trial balance. Since the nominal accounts have all been closed, only the real accounts will appear in the post-closing trial balance. Since the nominal accounts have all been closed, only the real accounts will appear in the post-closing trial balance. These account balances also serve as the opening balances for the next accounting period. These account balances also serve as the opening balances for the next accounting period. © 2007 Pearson Custom Publishing

62 62 Post-Closing Trial Balance Russell Jones Company Post-Closing Trial Balance December 31, 2007 Debits Credits Debits Credits Cash$125,000 Inventory 128,000 Accounts Payable$ 90,000 Jones, Capital 163,000 Total$253,000$253,000 © 2007 Pearson Custom Publishing

63 63 The End © 2007 Pearson Custom Publishing


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