4Business DocumentsExamples: Sales invoice, purchase order, check stub.Business documents are usedto confirm that an arm’s-length transaction has occurred.to establish the amounts to be recorded.to facilitate the analysis of business events.These documents must be analyzed.
5What is the Sequence of the Accounting Cycle? Step1Step2Step3Step4
6Learning Objective 2Analyze transactions and determine how those transactions affect the accounting equation (step one of the accounting cycle).
7Step 1: Analyze Transactions Transaction analysis frameworkWhat accounts are involved?Did each account increase or decrease?By how much?Transaction analysis:breaks down complex transactions into manageable pieces.provides a self-checking mechanism.
11Accounts provide an efficient method to categorize transactions. Using AccountsAccounts provide an efficient method to categorize transactions.A T-account is a simplified depiction of an account.Name of AccountDebitCredit13
12Using a T-AccountThe cash account has a beginning balance of $35. A check for $12 is written to pay for supplies. Using a T-account, what is the ending balance of the cash account?Cash35122319
13Debits and Credits Remember: Debits are simply entries on the left. Credits are simply entries on the right.15
14Explain How Debits and Credits Work Assets = Liabilities + Owners’ Equity16
15Expanding the Equation RevenuesIncreases in a company’s resources from the sale of goods or the performance of services.ExpensesDecreases in a company’s resources incurred in the normal course of business to generate revenues.DividendsDistributions to owners, which reduce Owners’ Equity.21
17Learning Objective 3Record the effects of transactions using journal entries (step two of the accounting cycle).
18Step 2: Record Transactions Record the results of the transactions in a journal.Journalizing provides a chronological record of all business activities.What is another name for the journal?
19Step 2: Record Transactions Record the results of the transactions in a journal.Journalizing provides a chronological record of all business activities.General Journal Entry Format:Date Debit Entry xxCredit Entry xxExplanation.
20Journal EntriesWhat is the three-step process?123
21Example 1: Journal Entry Supplies purchased for $25 are purchased “on account.”Prepare the correct journal entry. What do we mean by purchased “on account?”28
22Example 2: Journal Entry A check for $100 is received in payment for services rendered.Make the correct journal entry.28
23Example 3: Journal Entry Merchandise is sold to a customer on account for $75. The cost of the product was $60.Make the journal entries.28
24Journal 1 Page 1 Date Transaction Ref. Debits Credits Jan. 1 Supplies 25Accounts Payable 25Purchased supplies on account.Feb. 1 CashRevenue 100Received cash for services.Mar. 1 Accounts Receivable 75Sales Revenue 75Sold merchandise on account.Entered when posted to ledger.
25Learning Objective 4Summarize the resulting journal entries through posting and prepare a trial balance (step three of the accounting cycle).
26Step 3: Posting Journal Entries and Preparing a Trial Balance Define the Following Terms LedgerPosting referenceChart of accounts
27General Ledger ACCOUNT: Cash Account No. 101 Date Explanation Ref. Debits Credits BalanceJan. 1 Balance2 Issued 100 shares of capital stock at $10 per share GJ1 1,000 1,1003 Purchased equipment GJ4 Sold inventory GJ5 Monthly payment on loan GJ6 Revenue GJ1 2,500 3,130ACCOUNT: CashAccount No. 101
29Determining Account Balances Name of AccountDebitCreditAn account’sbalance is usuallyon the side thatincreases theaccount. It isreferred to as the“Normal Balance.”Accounts with typical debit balances are?Accounts with typical credit balances are?Owners’ EquityRevenues or IncomeLiabilitiesExpensesAssetsDividendsDo you see the mnemonic memory device, DEAD COIL?38
30Define The Trial Balance What is the Trial Balance used for?38
31Sample Trial Balance The Example Company Trial Balance December 31, 2006Debits CreditsCash $ 21Accounts Receivable 15Inventory 12Land 200Accounts Payable $Capital Stock 150Retained Earnings 24Sales Revenue 919Cost of Goods Sold 850Advertising Expense 10Miscellaneous Expenses ______Total $ 1,123 $ 1,12339
32Learning Objective 5Describe how technology has affected the first three steps of the accounting cycle.