Chapter 2: Accounting for Accruals

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Chapter 4
Keeping the Books The
Mechanics of an Accounting System Illustration
s in class

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The General Ledger System

• THE ACCOUNTING CYCLE
• Transactions occur in the normal course of
  business. We record them in our records with a
  JOURNAL ENTRY.
• Journal entries are posted to the GENERAL LEDGER
  (T accounts)
• ADJUSTING ENTRIES are made and posted.
• A trial balance can be prepared at any time to
  make sure we havent made an error with the
  debit-credit part of the accounting system.
• Financial statements are prepared.
• Closing journal entries are made and posted.
• A post-closing trial balance may be prepared.

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Journal entries

• A journal is a book where a chronological record
  of transactions is recorded.
• Only basic information is contained in the
  journal.
• A journal entry is just a recorded transaction.
• Because of the design of the debit/credit system
  to go with the accounting equation, in every
  journal entry there are equal dollar amounts of
  debits and credits.

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Journal entries

• Journal entries are recorded chronologically as
  the transactions occur
• e.g., Services are rendered for 100 cash
• Cash (debit) 100
• Service Revenue (credit) 100
• An explanation goes here.
• Journal entries are written in a journal and then
  posted to the general ledger accounts (t-accounts)

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Terminology

• What is a general ledger?
• A big book of accounting records in which every
  page is an account.
• Whats an account?
• A page in the general ledger that is devoted to
  keeping track of an individual asset or liability
  or type of owners equity.
• These accounts are referred to as T-accounts

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Debits and Credits
We can represent an account with a T, where one
side is the place where we put the increases and
the other side is for decreases.
The left side is always called the debit
side. When we put something on the left side of
an account, we are debiting the account. The
right side is always called the credit side.
When we put something on the right side of an
account, we are crediting the account.
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Debits and Credits the rules

• Assets Liabilities Owners Equity

__
__
__



Revenue
Expense
__


__
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Summary

• Each account can be increased or decreased.
• Debit means left side
• Credit means right side
• Asset and expense accounts are increased with
  debits and decreased with credits.
• Liability, equity, and revenue accounts are
  increased with credits and decreased with debits.

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Summary of Journal Entries

• Assets and Expenses are increased with debits.
• Assets include
• Cash
• A/R
• Inventory
• Supplies
• Prepaid Rent
• Equipment

• Liabilities and Owners Equity and Revenue
  accounts are increased with credits.
• Liabilities include all PAYABLES.
• Equity accounts include
• Contributed Capital
• Retained Earnings
• Retained earnings is affected by revenues,
  expenses and dividends

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Accounting cycle

• Preparing a trial balance
• Since debits credits in all journal entries,
  at any point in time we should be able to take
  the balances in all of our general ledger
  accounts and confirm that DEBITS CREDITS for
  all accounts together.
• Preparing adjusting entries
• Adjustments must be made for accruals and
  deferrals (chapter 3)
• Preparing the financial statements
• The income statement, statement of changes in
  owners equity, balance sheet and statement of
  cash flows

debits
credits
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Accounting cycle

• Preparing closing entries
• All temporary accounts (income statement
  accounts and distributions) are closed at the end
  of the accounting period, after the statements
  are prepared.
• Their balances are brought to ZERO, and the
  balancing entry is made to the retained earnings
  account.
• Preparing post-closing trial balance
• What accounts will be on this trial balance?
• Only the balance sheet accounts
• Revenue, expense, dividend accounts have zero
  balances