1 Chapter 6 & 7 Lecture Notes The Steps of the Accounting CycleThe accounting period of a business is separated into activities that help the business keep its accounting records in an orderly fashion.
2 $ $ $ $ The Accounting Period Accounting records are summarized for a certain period of time, called an accounting period or fiscal period.An accounting/fiscal period can be:Monthly, Quarterly, YearlyIf yearly, it can cover aCalendar yearJanuary 1 - December 31Any period of twelve monthsExample: July 1 – June 30$$$$
3 Chapter 6 & 7 Lecture Notes Section 1 The Accounting Cycle (cont'd.)Chapter 6$The Second Step in the Accounting Cycle: Analyzing Business Transactions$$Analyzing business transactions to determinethe accounts effectedthe account(s) to debit and the amountthe account(s) to credit and the amountWhen you work, you won’t get a description of the transaction, instead, you will examine a source document to determine what occurred during a business transaction.$
4 BUSINESS TRANSACTION ANALYSIS ANALYSIS Identify 1. Identify the accounts affected.Classify 2. Classify the accounts affected.+ / – 3. Determine the amount of the increase or decrease for each account affected.4. Which account is debited? For what amount?5. Which account is credited?For what amount?6. What is the complete entry in T- account form?7. What is the complete entry in general journal form?
5 The Third Step in the Accounting Cycle: Recording Business Transactions in a Journal $What do you record?the debit and credit parts of each business transaction in a journal.A journal isa chronological record of all of the transactions of a business – the book of original entry.Journalizing isthe process of recording business transactions in a journal is called journalizing.$$$
6 Chapter 6 & 7 Lecture Notes What is a General Journal ?It is an all purpose journal in which all the transactions of a business may be recorded.
7 The parts of the general journal entry Chapter 6 & 7 Lecture NotesThe parts of the general journal entryNot written in until entry is posted. It will contain the general ledger account # the entry is posted to.Name of the account debitedYear & Month - At the top of each page and when the month changesDay – for each and every transactionPage #Amount of the debitName of theaccount creditedSource documentreference or anexplanationAmount of thecredit7
8 Recording a General Journal Entry The debit part of the entry is at the left margin in the description columnThe credit part of the entry is indented approximately ½”The explanation is indented an additional ½”This allows for easier reading of the journal.
9 Chapter 6 & 7 Lecture Notes Business Transaction 1Recording a General Journal EntryOn October 1, Maria Sanchez took $25,000 from personal savings and deposited that amount to open a business checking account in the name of Roadrunner Delivery Service, Memorandum 1.Maria Sanchez,Cash in Bank CapitalDebit25,000Credit+–
10 Chapter 6 & 7 Lecture Notes Business Transaction 2Recording a General Journal EntryOn October 9, Roadrunner bought a used truck onaccount from North Shore Auto for $12,000, Invoice 200.Delivery Accounts Payable—Equipment North Shore AutoCredit+12,000Debit–
11 Chapter 6 & 7 Lecture Notes Correcting Errors in General Journal Entries$An error should never be erased.To correct an error in your general journalDraw a horizontal line through the entire incorrect item and write the correct information above the crossed-out error.$$$
12 Chapter 6 & 7 Lecture Notes The Fourth Step in the Accounting Cycle: PostingPosting is transferring the information from the journal to the proper accounts in the general ledgerProvide a clear picture of how each account is affected by a business transaction.Posting brings the records of the business up-to-datePosting leaves an audit trail to easily trace a transaction to its original book of entry!!Page 3
13 Chapter 6 & 7 Lecture Notes General JournalAsset AccountsExpense AccountsOwner Equity AccountsLiability AccountsRevenue AccountsGeneral LedgerWhat is the General Ledger?a book or file that contains the accounts used by a business on separate pages or cards.Page 3
15 Chapter 6 & 7 Lecture Notes $Opening an Account with a Zero Balance(1) Write the account name at the top of the ledger account form.$Write the account number on the ledger account form.Write nothing else.$12$
16 Chapter 6 & 7 Lecture Notes $Opening an Account with a Balance(1) Write the account name at the top of the ledger account form.$(2) Write the account number on the ledger account form.$$
17 Chapter 6 & 7 Lecture Notes $$(3) Enter the complete date (year, month, and day) in the date column.(4) Write the word “Balance” in the Description column.$$
18 Chapter 6 & 7 Lecture Notes $(5) Place a check mark () in the Posting Reference column to show the amount entered on this line is not being posted from a journal.$$(6) Enter the balance in the appropriate balance column of the ledger account form.$
20 Posting from the General Journal to Ledger Accounts
21 Chapter 6 & 7 Lecture Notes Posting entries in the general ledger from the general journal.Left blank unless a correcting, closing or adjusting entry.The debit amount of the journal entryThe new balance in the account; always on the normal balance sideThe date of the journal entryThe journal and journal page number posting from$
22 Posting entries in the general ledger from the general journal. Chapter 6 & 7 NotesPosting entries in the general ledger from the general journal.Posting is done from left to right.The general ledger account number is then recorded in the general journal post reference columnThen repeat the posting process for the credit part of the entry in the general journal.Page 3
23 Chapter 6 & 7 Lecture Notes Business Transaction 1 after posted to general ledgerChapter 6 & 7 Lecture Notes101301
24 Chapter 6 & 7 Lecture Notes Computing a New Account BalanceAccounts with normal debit balances use the debit balance columns:Debit amounts are added to debit balancesCredit amounts are subtracted from debit balancesAccounts with normal credit balances use the credit balance columns:Credit amounts are added to credit balancesDebit amounts are subtracted from credit balances.The new balance (calculated after each posting) should be recorded on the normal balance side.If the new balance is zero, a line should be drawn across the center of the balance column on the side of the normal balance.
25 Chapter 6 & 7 Lecture Notes Posting Date rules when posting to the general ledger:Year & MonthAt the top of each accountAnd when the month changesDay – for each and every transaction postedThe frequency of posting depends on:The size of the businessThe number of transactions being processedIf a manual or computer system is being usedMost business post DAILYPage 3
27 $ $ $ $ The Fifth Step in the Accounting Cycle: The Trial Balance Chapter 7Section 3 Preparing a Trial Balance$The Fifth Step in the Accounting Cycle: The Trial BalanceA formal way to prove that debits equal credits is to prepare a trial balance.Prepared on two-column accounting stationery.Three line heading:Who – the name of the businessWhat – the name of the accounting formWhen – the fiscal period covered.PreparedNormally at the end of the fiscal periodCan be prepared at any time during the fiscal periodAccounts includedAll accounts - even zero balance accounts$$$
28 Chapter 6 & 7 Lecture Notes Finding Trial Balance ErrorsAdd the debit and credit columns again.Determine the amount you are out of balanceIf the difference is 10, 100, 1000, possibly an addition error – Re-add columns againIf the difference is evenly divisible by 9, you may have atransposition error – two numbers have been accidentally reversed. Check balances against general ledgerslide error – decimal point moved. Check balances against general ledgerCheck general ledger for a balance that matches the difference; one account may have been omittedIf the difference is divisible by 2, possibly one of the balances has been recorded in the wrong column. Check balance types against general ledger.Recompute the balances in the general ledger.Check postings from general journal to general ledger.Page 3
29 Chapter 6 & 7 Lecture Notes The First Step in the Accounting Cycle: Collecting and Verifying Source Documents$The accounting cycle starts bycollecting and verifying the accuracy of source documents.A source document isa paper prepared as evidence of a transaction.Examples:InvoiceReceiptMemorandumCheck Stub$$$
30 $ $ $ $ Source Documents - Invoice Chapter 6 Invoice (2 kinds – Buy and Selling):Invoices for items your business is buying are issued by your creditors.Invoices you issue for services/items your business is selling are issued to your customers.The invoice lists the date of the transaction, the terms, along with the quantity, description, and cost of each item.$
31 $ $ $ $ Source Documents - Receipt Chapter 6 Receipt: A record of cash received by a business.It indicates the date the payment was received, thename of the person or business from whom the payment was received, and the amount of the payment.$
32 $ $ $ $ Source Documents - Memorandum Chapter 6 Memorandum: A brief written message that describes a transactionthat takes place within a business.Often used if no other source document exists for the business transaction.
33 $ $ $ $ Source Documents - Check Stub Chapter 6 Check Stub: The check stub lists the same information that appears on a check: the date written, the person or business towhom the check was written, and the amount of the check.The check stub also shows the balance in the checking account before and after each check is written.$
34 Chapter 6 & 7 Lecture Notes Correcting errorsError in a journal entry that is not postedCorrection: Draw a single line through the incorrect item in the journal and write the correction directly above.Error in posting to the ledger when the journal entry is correctCorrection: Draw a single line through the incorrect item in the ledger and write the correction directly aboveError in a journal entry that is posted.Correction: Make a correcting entry in the journal and post to the ledgerWhen posting to the ledger, include the words “Correcting Entry” in the description columnPage 3