2. 3 - 1 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Chapter 3 In Chapters 1 and 2, we learned about the accounting equation and how it is used to record business transactions. We learned about accounts, chart of accounts, T accounts, normal balance, debit and credit, and prepared a trial balance. In Chapter 3, we are going to learn about the accounting cycle.

3. 3 - 2 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Hoffman’s A bagel shop just off campus A bagel shop just off campus Stuart Hoffman is the owner Stuart Hoffman is the owner You ask Mr. Hoffman what makes the bagels so good You ask Mr. Hoffman what makes the bagels so good He tells you his secret He tells you his secret Baking is nothing more than following several steps in order. You follow the same steps with every batch you bake—you don’t change anything. It’s just a cycle. Baking is nothing more than following several steps in order. You follow the same steps with every batch you bake—you don’t change anything. It’s just a cycle.

4. 3 - 3 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Accounting Cycle Following a set of steps in a certain order Following a set of steps in a certain order Once one cycle is complete, the accountant begins another Once one cycle is complete, the accountant begins another Knowing will help you gain a better understanding of business Knowing will help you gain a better understanding of business Learn how to speak the language of business Learn how to speak the language of business

5. 3 - 4 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Accounting Cycle Normal accounting procedures performed over a period of time Normal accounting procedures performed over a period of time Takes place over a specific period of time Takes place over a specific period of time Up to one year – month, quarter (3 months) Up to one year – month, quarter (3 months) Most businesses use one year Most businesses use one year

6. 3 - 5 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Introduction Accounting cycle The accounting period One year: Calendar year Fiscal year Less than one year: QuarterlyMonthly

7. 3 - 6 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Fiscal Year A business may choose any fiscal period A business may choose any fiscal period Must be convenient Must be convenient Inventories low and business activity are at a low point Inventories low and business activity are at a low point Natural business year Natural business year Count end-of-year inventories when it is easiest to do Count end-of-year inventories when it is easiest to do

8. 3 - 7 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Interim Reports Businesses could not operate successfully if they only prepared financial reports at the end of calendar or fiscal year Monthly, quarterly, or semiannually

9. 3 - 8 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Clark’s Word Processing Services Brenda Clark is owner Fiscal year – January 1 through December 31 Also calendar year

10. 3 - 9 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Accounting Cycle Business transactions occurred. Analyzing transactions and recording. Posting to the general ledger. Preparing the trial balance.

11. 3 - 10 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater General Journal Also called journal. It is the book of original entry. Transactions are written in a journal in chronological order. Journalizing is the process of entering information as debits and credits to the correct accounts.

12. 3 - 11 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Chart of Accounts The accountant must refer to the chart of accounts for the account name to be used in the journal.

13. 3 - 12 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater General Ledger Bound or loose-leaf book. It is the book of final entry. The information from the journal is transferred to the ledger in the posting process. Debits and credits in the journal remain exactly the same when posted to the accounts in the ledger.

14. 3 - 13 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Recording Entry in Journal Debit portion goes first Credit portion is indented ½ inch Debits and Credits must equal Skip one line after explanation Explanation follows immediately

15. 3 - 14 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Journal Entry Clark’s Word Processing Services General Journal Page 1 Date Account Titles and Description PRDr.Cr. 200x May 1 Cash Brenda Clark, Capital Initial investment of cash by owner 10,00010,000

16. 3 - 15 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Journal Entry Clark’s Word Processing Services General Journal Page 1 Date Account Titles and Description PRDr.Cr. 200x May 1 EquipmentCash Accounts Payable Purchase of equipment 6,0001,0005,000

17. 3 - 16 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Journal Entry 1.Year (first entry on page only) 2.Month (first entry on page only) 3.Day 4.Name of account debited 5.Name of account credited 6.Explanation 7.Amount of debit 8.Amount of credit 9.Skip one line

18. 3 - 17 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Journal Entry Clark’s Word Processing Services General Journal Page 1 Date Account Titles and Description PRDr.Cr. 200x May 1 Prepaid Rent Cash Rent paid in advance – 3 months 1,2001,200

19. 3 - 18 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Journal Entry Clark’s Word Processing Services General Journal Page 1 Date Account Titles and Description PRDr.Cr. 200x May 3 Office Supplies Accounts Payable Purchase of supplies on account from Norris 600600

20. 3 - 19 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Posting to the Ledger Account Name: CashAccount Number: 111 DatePost.Balance 200xDescriptionRef. DebitCredit Debit Credit May 1GJ 1 10,000 10,000 General Journal Page 1 DatePost. 200xDescriptionRef. DebitCredit May 1Cash 111 10,000 Brenda Clark, Capital 31110,000 To record initial investment

21. 3 - 20 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Posting From Journal to Ledger Step 1:Record the date Step 2:Record the journal page Step 3:Record the amount and calculate new balance Step 4:Record the account number in the post reference column in the ledger (cross referencing)

22. 3 - 21 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Posting From Journal to Ledger Post references are very helpful. Post references are very helpful. Tells which entries have been posted and which have not. Tells which entries have been posted and which have not. Tells us to which account amount was posted. Tells us to which account amount was posted. Leads us back to the original transaction by page number. Leads us back to the original transaction by page number.

23. 3 - 22 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Posting to the Ledger DatePost.Ref.DebitCredit DebitCredit Balance May 1 GJ110,00010,000 Clark’s Word Processing Services General Ledger CashAccount No. 111 Insert the number of the journal page.

24. 3 - 23 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Trial Balance The trial balance lists the accounts which have balances in the same order as they appear in the chart of accounts. The trial balance will show if debits/credits have been interchanged. It will show if amounts have been transposed, or if a debit/credit was omitted or recorded twice.

25. 3 - 24 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Preparing the Trial Balance Clark’s Word Processing Services Trial Balance, May 31, 200x Cash Accounts Receivable Office Supplies Prepaid Rent Word Processing Equipment Accounts Payable Brenda Clark, Capital Brenda Clark, Withdrawals Word Processing Fees Expenses Totals Totals DebitCredit DebitCredit 6,155 6,155 5,000 5,000 600 600 1,200 1,200 6,000 6,000 3,350 3,35010,000 625 625 8,000 8,000 1,770 1,770 21,35021,350

26. 3 - 25 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Preparing the Trial Balance  Heading  Accounts are listed in same order as ledger  Only those accounts with balances are listed  Will not be correct if posting is incorrect  Capital amount may be changed – WHY?  Totals must equal  No guarantee that transactions have been  properly recorded

27. 3 - 26 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Preparing the Trial Balance Mathematical error in addition Omission Slide or transposition

28. 3 - 27 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Correcting Entry Before posting – draw a line through incorrect amount and write the correct amount After posting – Make a correcting entry with explanation

29. 3 - 28 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Trial Balance Some errors do not show, such as omissions or recording to the wrong account. Corrections before posting are made in the journal. An audit trail must be left. Do not erase – cross out errors and enter corrections. (We are using pencil – I want you to erase)

30. 3 - 29 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Preparing the Trial Balance What about corrections after posting? This means that errors are also in the ledger accounts. Cross out incorrect amounts, change to corrected amounts, and record balance changes.