1 Recording, Storing, & Reporting Accounting Information Appendix A: Recording, Storing, and Reporting Accounting InformationAppendix ARecording, Storing, & Reporting Accounting Information
2 RecordingApp. AAccounting system - identifies, measures, records, and retains accounting informationAccount - records and retains the monetary information from transactionsGeneral ledger - the entire set of accounts that a company uses
3 Debits and CreditsApp. ATitle of AccountLeft (debit) sideRight (credit) sideDebit entry - monetary amount recorded on the left sideCredit entry - monetary amount recorded on the right side
4 Recording Rules Asset accounts are: increased by debit entries App. AAsset accounts are:increased by debit entriesdecreased by credit entriesLiability accounts are:increased by credit entriesdecreased by debit entries
5 Recording Rules Permanent owner’s equity, or capital accounts are: App. APermanent owner’s equity, or capital accounts are:increased by credit entriesdecreased by debit entries
6 Recording RulesApp. ATemporary owner’s equity accounts have the following rules:Withdrawal accounts are increased by debit entries and decreased by credit entriesRevenue accounts are increased by credit entries and decreased by debit entriesExpense accounts are increased by debit entries and decreased by credit entries
7 Recording RulesApp. ADouble entry rule - the total amount of the debit entries must equal the total amount of the credit entries for each transaction.Balance of an account - the difference between the total increases and the total decreases recorded in an account.
8 Normal Balances Assets Debit Liabilities Credit Owner’s capital Credit App. AAssets DebitLiabilities CreditOwner’s capital CreditOwner’s withdrawals DebitRevenues CreditExpenses Debit
9 Accounting CycleApp. ARecording (journalizing) the transactions in the general journalPosting the journal entries to the accounts in the general ledgerRecording (and posting) adjusting entriesPreparing the financial statementsRecording (and posting) closing entries
10 Recording (Journalizing) Transactions App. AGeneral journal - a book where information is recorded for each transactionJournalizing - the process of recording a transaction in the general journalJournal entry - the recorded information for each transaction
11 Key Procedures in Journalizing App. AEnter the month, day, and yearEnter the title of the account and amount to be debitedEnter the title of the account and amount to be creditedEnter a brief explanation of the transaction
12 Illustration of Journal Entries App. AAcct. No.DateAccount Titles and ExplanationsDebitCredit2003 Dec. 15Cash15,000A. Cox, Capital15,000Made initial investment in business29Store Equipment2,2001,000Cash1,200Notes PayablePurchased store equipment from Ace Equipment Company, making cash down payment and signing 3-month note
13 Posting to the Accounts App. APosting - the process of transferring the journal entry information to the accounts in the general ledgerChart of accounts - a numbering system designed to organize a company’s accounts
14 Key Procedures in Posting App. ALocate the first account to be posted from the general journalEnter the month, day, and year of the transaction and the debit amount in the debit (left) side of the accountEnter the account number in the general journalRepeat the process for the credit amount
15 Illustration of Posting Process - Exhibit A-7 App. AAcct. No.DateAccount Titles and ExplanationsDebitCredit2004 Jan. 2Cash101401300Sales Revenue300Made cash salesGeneral LedgerCashNo. 101Sales RevenueNo. 401Bal ,3001/02/1/02/
16 Trial BalanceApp. ATrial balance - a schedule that lists the general ledger accounts and the balancesNormally prepared at the end of the accounting period before making adjusting entriesHelps to detect a journalizing or posting error
17 Preparing Adjusting Entries App. AAdjusting entries - made at the end of an accounting period to bring the company’s revenue and expense account balances up-to-dateThree types of adjusting entriesApportionment of prepaid and unearned itemsRecording of accrued itemsRecording or apportionment of estimated items
18 Apportionment of Prepaid and Unearned Items App. APrepaid item - an economic resource that will be used in the near futurethe “expired” part of the resource cost must be recorded as an expenseUnearned revenue - an obligation of a company to provide goods or services in the futurethe “expired” part of the obligation must be recorded as a revenue
19 Accrued ItemsApp. AAccrued expense - an expense that has been incurred but that has not been paid or recordedAccrued revenue - a revenue that has been earned but that has not been collected or recordedAdjusting entries must be made to record the accrued expenses and revenues
20 Estimated Items Depreciation on buildings and equipment App. ADepreciation on buildings and equipmentAmortization of intangible assetsRecognition of uncollectible accounts receivable
21 Adjusted Trial Balance App. AA schedule prepared after adjusting entries to prove the equality of the debit and credit balances in the general ledger accountsHelps prevent the company from including debit and credit errors in the financial statementsMakes preparing the financial statements easier
22 Common Errors Found on the Adjusted Trial Balance App. ATransposition - two digits in a number are mistakenly reversedSlide - the digits are listed in the correct order but are mistakenly moved one decimal place to the left or right
23 Preparing the Financial Statements App. AIncome StatementStatement of Changes in Owner’s EquityBalance SheetCash Flow Statement
24 Preparation of Closing Entries App. AClosing entries are done at the end of an accounting period to:Show the current balance in the owner’s capital accountShow zero balances in the revenue, expense, and withdrawals accountsIncome Summary account is a temporary account used in the closing process
25 Closing the Revenue Accounts App. AA debit entry is made to each revenue account to bring the balance to zeroA credit entry is made to the income summary account for the total of the revenue accounts
26 Closing the Expense Accounts App. AA credit entry is made to each expense account to bring the balance to zeroA debit entry is made to the income summary account for the total of the expense accounts
27 Closing the Income Summary Account App. AThe balance in the account is the net income (or net loss)An entry is made to transfer the balance in the income summary account to the owner’s equity account
28 Closing the Withdrawals Account App. AA credit entry is made to the withdrawals account to bring the balance to zeroA debit entry is made to the owner’s equity account for the total of the withdrawals account
29 Post-Closing Trial Balance App. AA schedule prepared after making the closing entries to prove the equality of the debit and credit balances in the permanent accountsOnly permanent accounts should have balances since all temporary accounts have zero balances due to the closing process
30 Modifications for Corporations App. AInvestments by ownersDistributions to ownersIncome taxes on the income statementStockholders’ equity on the balance sheet
31 Conclusion A company’s accounting cycle includes: App. AA company’s accounting cycle includes:recording (journalizing) transactionsposting to the accountsrecording and posting adjusting entriespreparing the financial statementsrecording and posting closing entries
32 Homework Problem PA-2 (2) App. AAcct. No.DateAccount Titles and ExplanationsDebitCreditJan. 2Cash33,000R. Foster, Capital33,000To record investment by owner of cash into business.
33 Homework Problem PA-2 (2) App. AAcct. No.DateAccount Titles and ExplanationsDebitCredit3Land3,000Building21,000Cash6,000Mortgage Payable18,000To record purchase of land and building; making cash down payment and signing mortgage for remaining balance.
34 Homework Problem PA-2 (2) App. AAcct. No.DateAccount Titles and ExplanationsDebitCredit4Office Equipment7,000Notes Payable7,000To record purchase of office equipment & issuance of 1-year note.
35 Homework Problem PA-2 (2) App. AAcct. No.DateAccount Titles and ExplanationsDebitCredit10Office Supplies735Cash735To record purchase of office supplies for cash.
36 Homework Problem PA-2 (2) App. AAcct. No.DateAccount Titles and ExplanationsDebitCredit21Cash3,020Tax Service Revenues3,020To record collection of cash for services performed.
37 Homework Problem PA-2 (2) App. BAcct. No.DateAccount Titles and ExplanationsDebitCredit31Salary Expense1,450Cash1,450To record payment of employee’s salary.
38 Homework Problem PA-2 (2) App. AAcct. No.DateAccount Titles and ExplanationsDebitCredit31Utilities Expense88Cash88To record payment of January utilities.
39 Homework Problem PA-2 (2) App. AAcct. No.DateAccount Titles and ExplanationsDebitCredit31R. Foster, Withdrawals850Cash850To record withdrawal of cash by owner for personal use.