1. Chapter 4
Skyline College

2. The Accounting Cycle
The accounting cycle is a series of steps performed during each accounting period to classify, record, and summarize data for a business and to produce needed financial information.
This first section covers the first two steps of the accounting cycle.

3. The Accounting Cycle Step 2 Journalize the data about transactions
Step 3 Post the data about transactions
Step 1 Analyze transactions
Step 1 Analyze transactions
Step 4 Prepare a worksheet
Step 5 Prepare financial statements
Step 9 Interpret the financial information
Step Record adjusting entries
Here step 1 is to analyze transactions and step 2 is to journalize the data about transactions.
Step 7 Record closing entries
Step 8 Prepare a postclosing trial balance

4. Journals A journal is a record of original entry.
A journal is a diary of business activities.
There are different types of journals.
Transactions are entered in the journal in the order transactions occur (chronological order).
Let’s begin with the business’s journal. . .

5. The General Journal
A general journal is a financial record for entering all types of business transactions.
Journalizing is the process of recording transactions in a journal.
The journal is the book of original entry where we first record business transactions.

6. GENERAL JOURNAL PAGE 1 Enter the account to be debited.
DATE DESCRIPTION POST DEBIT CREDIT
REF.
2007
Nov. 6
Cash
90,000
Jason Taylor, Capital
90,000
Enter the account to be debited.
Enter the amount on the same line in the Debit column.
After entering the year and the date of the transaction, enter the name of the account debited flush against the date line, then place the $ amount in the debit column. Next drop down a line and indent ¼ to ½ inch and write the name of the account credited. Place the dollar amount of the credit in the credit column.
Enter the account to be credited.
Enter the amount on the same line in the Credit column.

7. GENERAL JOURNAL PAGE
DATE DESCRIPTION POST DEBIT CREDIT
REF.
2007
Nov. 6
Cash ,000
Jason Taylor, Capital ,000
Investment by owner
, Memo 01
Then enter a complete but concise description of the transaction.
One the transaction has been journalized, we need to indent a little and add an explanation of the event.
Whenever possible, the journal entry should refer to the source of the information.
Document numbers are part of the audit trail.

8. The Audit Trail
An audit trail is a chain of references that makes it possible to trace information, locate errors, and prevent fraud.
It is important to leave an audit trail so that you can follow what happened in a transaction—check numbers, invoice numbers, customer names, etc are all pieces of information which can be placed in the explanation.

9. Recording a Business Transaction
1. Analyze the financial event.
Identify the accounts affected.
Classify the accounts affected.
Determine the amount of increase or decrease for each account affected.
2. Apply the rules of debit and credit.
a. Which account is debited? For what amount?
b. Which account is credited? For what amount?
Here are the steps to begin a journal entry.
3. Make the entry in T-account form.
4. Record the complete entry in general journal form.

10. Cash Investment by Owner
On November 6 Jason Taylor withdrew $90,000 from
personal savings and deposited it in a new
business checking account for JT’s Consulting Services.
GENERAL JOURNAL PAGE
DATE DESCRIPTION POST DEBIT CREDIT
REF.
2007
Nov. 6
Cash ,000
Jason Taylor, Capital ,000
(Investment by owner)
Here is the general journal entry.

11. Cash Purchase of Equipment
On November 7 JT’s Consulting Services issued Check 1001 for $10,000 to purchase a computer and other equipment.
GENERAL JOURNAL PAGE
DATE DESCRIPTION POST DEBIT CREDIT
REF.
Nov
Let’s journalize the purchase of new equipment.
Equipment ,000
Cash ,000
(Purchased equip., Check 1001)

12. Credit Purchase of Equipment
On November 10 JT’s Consulting Services purchased office equipment on account for $12,000.
GENERAL JOURNAL PAGE
DATE DESCRIPTION POST DEBIT CREDIT
REF.
Nov. 10
Equipment ,000
Accounts Payable ,000
Purchased equipment on account from Office Plus, Inv. 2223, due in 60 days
All required information
should be included
in the explanation.
Here is the journal entry. Remember to include all important information in the explanation. This improves the audit trail.

13. Cash Purchase of Supplies
On November 28, JT’s Consulting Services purchased supplies for $3,000, Check 1002.
GENERAL JOURNAL PAGE
DATE DESCRIPTION POST DEBIT CREDIT
REF.
Nov. 28
Supplies ,000
Cash ,000
(Purchased supplies, Ck. 1002)
Here is the general journal entry for the transaction.

14. Payment to a Creditor Business Transaction
On November 30 JT’s Consulting Services paid Office Plus $5,000 in partial payment of Invoice 2223, Check 1003.
GENERAL JOURNAL PAGE
DATE DESCRIPTION POST DEBIT CREDIT
REF.
Nov. 30
Accounts Payable ,000
Cash ,000
Paid on account, Office Plus,
Invoice 2223, Check 1003
When the business paid part of its bill for the equipment purchased earlier, it would debit Accounts Payable and credit Cash for $5,000.

15. Recording Prepaid Rent
On November 30, JT’s Consulting Services wrote Check 1004 for $7,000 to prepay rent for December and January.
GENERAL JOURNAL PAGE
DATE DESCRIPTION POST DEBIT CREDIT
REF.
Nov. 30
Prepaid Rent ,000
Cash ,000
Paid Dec. and Jan. rent in advance; Check 1004
When the business pays for two months rent in advance, it debited Prepaid Rent for $7,000 and credited Cash for $7,000.

16. 1. Performed services for $26,000 in cash.
GENERAL JOURNAL PAGE
DATE DESCRIPTION POST DEBIT CREDIT
REF.
2004
Dec. 31
Cash ,000
Performed services for cash
Fees Income ,000
Here is the general journal entry.

17. Record the revenue as earned even if you haven’t received the cash.
2. Performed services for $9,000 on credit.
GENERAL JOURNAL PAGE
DATE DESCRIPTION POST DEBIT CREDIT
REF.
Dec
Accounts Receivable ,000
Fees Income ,000
Performed services on credit
Record the revenue as earned even if you haven’t received the cash.
Here is the general journal entry on the 31st.

18. 3. Received $4,000 in cash from credit clients on their accounts.
GENERAL JOURNAL PAGE
DATE DESCRIPTION POST DEBIT CREDIT
REF.
Dec
Cash ,000
Accounts Receivable ,000
Received cash from credit clients on account
Here is the general journal entry.

19. 4. Paid $7,000 for salaries. GENERAL JOURNAL PAGE 2
DATE DESCRIPTION POST DEBIT CREDIT
REF.
Dec
Salaries Expense ,000
Cash ,000
Paid monthly salaries to employees, Check
And, here is the general journal entry.

20. 5. Paid $500 for a utility bill.
GENERAL JOURNAL PAGE
DATE DESCRIPTION POST DEBIT CREDIT
REF.
Dec
Utilities Expense
Cash
Paid monthly bill for utilities, Check 1007
Here is the general journal entry.

21. 6. The owner withdrew $4,000 for personal expenses.
GENERAL JOURNAL PAGE
DATE DESCRIPTION POST DEBIT CREDIT
REF.
Dec
Jason Taylor, Drawing ,000
Cash ,000
Owner withdrew cash for personal expenses, Check 1008
Here is the general journal entry on the 31st.

22. Preparing Compound Entries
Business Transaction
Preparing Compound Entries
entry that contains more than one debit or credit.
Let’s go back to the November 7 transaction.
Let’s journalize a transaction that affected more than two accounts.
Suppose that JT’s Consulting Services purchased equipment for $10,000, issued a check for $5,000, and agreed to pay the balance in 30 days.

23. Purchase Equipment—Partial Payment—Balance Due
GENERAL JOURNAL PAGE
DATE DESCRIPTION POST DEBIT CREDIT
REF.
Nov
Equipment ,000
Cash ,000
Bought equip. from SBM Tech, Inv. 11, issued Ck for $5,000, bal. due in 30 days
Accounts Payable ,000
The debited accounts are listed first and then the credited accounts are next. Equipment is debited and Cash and Account Payable are credited.
No matter how many accounts are affected by a transaction, total debits must equal total credits.
10, = ,000.00

24. The General Ledger
A general ledger is a permanent, classified record of all accounts used in a firm’s operation.
Every business has a general ledger.
The general ledger is the master reference file for the accounting system.
A ledger is the record of final entry. It is the last place that accounting transactions are recorded.

25. Posting to the Ledger
Posting is the process of transferring data from a journal to a ledger.
When we transfer data from the general journal to the ledger, this is called “posting”.

26. The Accounting Cycle Step 2 Journalize the data about transactions
Step 3 Post the data about transactions
Step 3 Post the data about transactions
Step 1 Analyze transactions
Step 4 Prepare a worksheet
Step 5 Prepare financial statements
Step 9 Interpret the financial information
Step Record adjusting entries
Positing is the third step in the accounting cycle.
Step 7 Record closing entries
Step 8 Prepare a postclosing trial balance

27. Ledger Account Forms
On the ledger account form shown below, notice the:
Account name and number
Columns for date, description, and posting reference
Columns for debit, credit, debit balance, and credit balance
ACCOUNT CASH ACCOUNT NO
POST BALANCE
DATE DESCRIPTION REF DEBIT CREDIT DEBIT CREDIT
2007
Nov J1 90, ,000
The general ledger looks a lot like the general journal but it has two additional BALANCE columns.

28. Post to the general ledger in five steps.
On the ledger form, enter the date of the transaction. Enter a description of the entry, if necessary. Usually, routine entries do not require descriptions.
On the ledger form, enter the general journal page in the Posting Reference column.
On the ledger form, enter the debit amount in the Debit column or the credit amount in the Credit column.
On the ledger form, compute the balance and enter it in the Debit Balance column or the Credit Balance column.
On the general journal, enter the ledger account number in the Posting Reference column.
Let’s review the five steps of posting from the general journal to the general ledger.

29. Step 1: On the ledger form, enter the date of the transaction
Step 1: On the ledger form, enter the date of the transaction. Enter a description of the entry, if necessary. Usually, routine entries do not require descriptions.
GENERAL JOURNAL PAGE
DATE DESCRIPTION POST DEBIT CREDIT
REF.
2007
Nov
Equipment ,000
Cash ,000
Purchased equipment Check 1001
ACCOUNT Equipment ACCOUNT NO
POST BALANCE
DATE DESCRIPTION REF DEBIT CREDIT DEBIT CREDIT
2007
Nov J1 10, ,000
Step one: transfer the date and description (if necessary).

30. Step 2: On the ledger form, enter the general journal page in the Posting Reference column. The letter J refers to the general journal.
GENERAL JOURNAL PAGE
DATE DESCRIPTION POST DEBIT CREDIT
REF.
2007
Nov
Equipment ,000
Cash ,000
Purchased equipment Check 1001
ACCOUNT Equipment ACCOUNT NO
POST BALANCE
DATE DESCRIPTION REF DEBIT CREDIT DEBIT CREDIT
2007
Nov J1 10, ,000
Next, write the Journal page that the journal entry is on in the Posting Reference column in the General Ledger. “J” refers to journal.

31. Step 3: On the ledger form, enter the debit amount in the Debit column or the credit amount in the Credit column.
GENERAL JOURNAL PAGE
DATE DESCRIPTION POST DEBIT CREDIT
REF.
2007
Nov
Equipment ,000
Cash ,000
Purchased equipment Check 1001
ACCOUNT Equipment ACCOUNT NO
POST BALANCE
DATE DESCRIPTION REF DEBIT CREDIT DEBIT CREDIT
2007
Nov J1 10, ,000
Next, transfer the dollar amount to either the debit or the credit column of the general ledger “action” columns.

32. Step 4: On the ledger form, compute the balance and enter it in the Debit Balance column or the Credit Balance column.
GENERAL JOURNAL PAGE
DATE DESCRIPTION POST DEBIT CREDIT
REF.
2007
Nov
Equipment ,000
Cash ,000
Purchased equipment Check 1001
ACCOUNT Equipment ACCOUNT NO
POST BALANCE
DATE DESCRIPTION REF DEBIT CREDIT DEBIT CREDIT
2007
Nov J1 10, ,000
Make sure that you enter the balance of the account after posting from the general journal. (This is the most up-to-date balance in the account.)

33. Step 5: On the general journal, enter the ledger account number in the Posting Reference column.
GENERAL JOURNAL PAGE
DATE DESCRIPTION POST DEBIT CREDIT
REF.
2007
Nov
Equipment ,000
Cash ,000
Purchased equipment Check 1001
141
ACCOUNT Equipment ACCOUNT NO
POST BALANCE
DATE DESCRIPTION REF DEBIT CREDIT DEBIT CREDIT
2007
Nov J1 10, ,000
The last thing you need to do is write the account number of the account in the POST REF column of the general journal. This indicates that the journal entry has been posted to the general ledger.

34. Review the Posting Process
GENERAL JOURNAL PAGE
DATE DESCRIPTION POST DEBIT CREDIT
REF.
2007
Nov
Equipment ,000
Cash ,000
Purchased equipment Check 1001
101
ACCOUNT Cash ACCOUNT NO
POST BALANCE
DATE DESCRIPTION REF DEBIT CREDIT DEBIT CREDIT
2007
Nov J1 90, ,000
Nov J1 10, ,000
Let’s review the posting process.

35. General Ledger Accounts
In the general ledger accounts, the balance sheet accounts appear first and are followed by the income statement accounts. The order is:
Assets
Liabilities
Owner’s equity
Revenue
Expenses
The general ledger contains all of the accounts that exist in a business and all of their activity. Balance sheet accounts are listed first, then the income statement accounts are listed next.
This order of accounts speeds the preparation of the trial balance and the financial statements.

36. Journal and Ledger Errors
Sometimes errors are made when recording transactions in the journal.
The method used to correct an error depends on whether or not the journal entry has been posted to the ledger.
If the accountant wants to correct an error, the correction method will depend on whether or not the journal entry has been posted yet to the general ledger.

37. Correcting Journal and Ledger Errors
If an error is discovered before the entry is posted, neatly cross out the incorrect item and write the correct data above it.
To ensure honesty and provide a clear legal audit trail, erasures are not made in the journal.
Here is one correction method.

38. Before Posting
On September 1 an automobile repair shop purchased some shop equipment for $9,000 in cash.
By mistake the journal entry debited the Office Equipment account rather than the Shop Equipment account.
Let’s practice correcting an error that was discovered before it was posted to the general ledger.

39. Before Posting Shop Equipment
GENERAL JOURNAL PAGE
DATE DESCRIPTION POST DEBIT CREDIT
REF.
2007
Sept. 1
Office Equipment ,000
Cash ,000
Purchased equipment Check 2141
Shop Equipment
The accountant would neatly cross out Office Equipment and write Shop Equipment above it.
Cross out the incorrect account and write the correct account above the crossed out one. Post like normal after the correction is made.
The correct account Shop Equipment would be posted to the ledger in the usual manner.

40. Correcting Journal and Ledger Errors
If the error is discovered after posting, a correcting entry – a journal entry made to correct the erroneous entry – is journalized and posted.
Do not erase or change the journal entry or the postings in the ledger accounts.
Note that erasures are never permitted in the journal or ledger.
What if the error is discovered after posting? It is important never to erase in the journal or the ledger.

41. After Posting
On September 1 an automobile repair shop debited Office Equipment rather than Shop Equipment for $9,000 by mistake.
The debit was posted to the Office Equipment account in the general ledger.
A correcting journal entry must be journalized and posted.
If the error is discovered after being posted to the general ledger, then a correcting journal entry must be journalized and posted.

42. After Posting
GENERAL JOURNAL PAGE
DATE DESCRIPTION POST DEBIT CREDIT
REF.
2007
Sept. 1
Office Equipment ,000
Cash ,000
Purchased equipment Check 2141
This erroneous journal entry was posted to the general ledger.
In this journal entry Office Equipment was debited instead of Shop Equipment. To correct this error, a correcting journal entry must be made. .

43. After Posting
GENERAL JOURNAL PAGE
DATE DESCRIPTION POST DEBIT CREDIT
REF.
2007
Oct
Shop Equipment ,000
Office Equipment ,000
To correct error made on Sept. 1 when a purchase of shop equipment was recorded as office equipment
The correcting journal entry debits Shop Equipment and credits Office Equipment for $9,000.
The entry transfers $9,000 out of the Office Equipment and into the Shop Equipment account.
Here is the correcting journal entry.