A Review of the Accounting Cycle

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Chapter 2 A Review of the Accounting Cycle
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Overview of the Accounting Process
Step 1 Business documents analyzed
Step 2 Transactions recorded in journals
Step 3 Transactions posted to ledgers
Continued
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Overview of the Accounting Process
Continued from previous slide
Step 4 Trial balance
Steps in the Reporting Phase
Step 5 Adjustments
Continued
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Overview of the Accounting Process
Step 6 Adjusted Trial Balance
Step 7 Financial statements
Steps in the Reporting Phase
Step 8 Closing
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Recording Phase
A system of recording transactions in a way that
maintains the equality of the accounting
equation.
Assets Liabilities Owners Equity
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Journalizing Transactions

• A journal is an accounting record in which
  business transactions are entered in
  chronological order.
• Journal entries record transaction information
  debits equal credits.

General Journal Entry Format Date Debit
Entry.................................. xx
Credit Entry.............................
xx Explanation.
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Journalizing Transactions
Every journal entry involves a three-step process

• Identify the accounts involved with an event or
  transaction.
• Determine whether each account increased or
  decreased.
• Determine the amount by which each account was
  affected.

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Debits and Credits
Continued
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Debits and Credits
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General Journal
Page 24
Date
Description
Debits
Credits
2005
July 1 Dividends 330 25,000 Dividends
Payable 260 25,000 Declared
semiannual cash dividend on common stock.
10 Equipment 180 7,500 Notes
Payable 220 7,500 Issued note for
new equipment .
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Posting to the Ledger Accounts

• Posting is the process of transferring amounts
  from the journal to the general ledger.
• A ledger is a collection of accounts in which
  data from transactions recorded in the journals
  are posted, classified, and summarized.
• A chart of accounts lists all accounts used by
  the company.

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Posting to the Ledger Accounts
The Equipment account in the general ledger after
the purchase of July 10 (Slide 14) has been
posted would appear as follows
To examine the journal entry, click this button
to go to Slide 14. To return, click on the word
July in the entry on Slide 14.
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Typical Chart of Accounts
Long-Term Liabilities (220-239) 222 Mortgage
Payable OWNERS EQUITY (300-399) 301 Capital
Stock 330 Retained Earnings SALES (400-499) 400
Sales Revenue EXPENSES (500-599) 500 Cost of
Goods Sold 523 Rent Expense 528 Advertising
Expense 573 Utility Expense
ASSETS (100-199) Current Assets (100-150) 101
Cash 105 Accounts Receivable 107
Inventory Long-Term Assets (151-199) 151
Land 152 Building LIABILITIES (200-299) Current
Liabilities (200-219) 201 Notes Payable 202
Accounts Payable
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Preparing a Trial Balance

• Determine the account balance for each T-Account.
• A trial balance is a list of all accounts and
  their balances. It provides a means to assure
  that debits equal credits.

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Preparing Adjusting Entries

• Adjusting entries are required at the end of
  each accounting period for accrual- basis
  accounting, prior to preparing the financial
  statements. The purpose for adjusting entries
  are to

• bring balance sheet accounts current.
• reflect proper amounts of revenues, costs, and
  expenses on the income statement.

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Tips Regarding Adjusting Entries

• Analytical Process. You must determine what
  original entry was made (if any) and what the
  ending balances should be before you know what
  adjusting entry to make. You cannot memorize
  adjusting entries.
• Adjusting entries always incorporate a balance
  sheet account and an income statement account.
• Adjusting entries never involve a cash account.

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Most Common Adjusting Entries

• Unrecorded RevenuesRevenues that have been
  earned but not yet recorded.
• Unearned RevenuesRevenues that have been
  recorded but not yet earned.
• Unrecorded ExpensesExpenses that have been
  incurred but not yet recorded.
• Prepaid ExpensesExpenses that have been recorded
  but not yet incurred.

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Preparing Financial Statements
After all transactions have been recorded, a
trial balance is prepared, adjusting entries are
made, and the financial statements are prepared.
Record Trans-actions
Prepare Trial Balance
Make Adjusting Entries
Prepare Financial Statements
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The Closing Process

• Real accounts are permanent accounts not closed
  to a zero balance at the end of the accounting
  period. These accounts are carried forward to
  the next period.
• Nominal accounts are temporary accounts that are
  closed to a zero balance at the end of each
  accounting period.
• Closing entries reduce all nominal accounts to a
  zero balance.

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The Closing Process
Retained Earnings
Revenues
Beg. Bal. xxx
xxx
Bal. xxx
Revenues
Since the revenue account is a nominal account,
it is closed at the end of the period to Retained
Earnings.
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The Closing Process
Retained Earnings
Beg. Bal. xxx
Revenues
Expenses
Expenses
The expense account is credited in order to close
the account at the end of the period.
xxx
Bal. xxx
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The Closing Process
Retained Earnings
The dividends account, which is also nominal, is
credited to close out the balance.
Beg. Bal. xxx
Revenues Expenses
Dividends
Dividends
xxx
Bal. xxx
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The Closing Process
Retained Earnings
Retained Earnings is a real account and always
carries a balance.
Beg. Bal. xxx
Revenues Expenses Dividends
End. Bal. xxx
Net Income for the period is determined by these
two items.
Dividends reduce Retained Earnings
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Post-Closing Trial Balance

• Provides a listing of all real account balances
  at the end of the closing balance.
• The trial balance assures that total debits equal
  total credits prior to the beginning of the new
  accounting period.
• Only real accounts will have a balance at this
  time.

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Example Post-Closing Trial Balance
Jim Brewster, Inc. Post-Closing Trial Balance as
of December 31, 2004 Debits Credits Cash
8,200 Accounts Receivable 4,000 Inventory
3,000 Supplies 1,000 Accounts Payable
5,000 Capital Stock 10,000 Retained Earnings
1,200 Totals 16,200 16,200
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Summary of the Accounting Cycle
1. Analyze transactions and business
documents. 2. Journalize transactions. 3. Post
journal entries to accounts. 4. Determine account
balances and prepare a trial balance. 5. Journaliz
e and post adjusting entries. 6. Prepare
financial statements. 7. Journalize and post
closing entries. 8. Prepare a post-closing trial
balance.
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Accrual Accounting
Accrual accounting recognizes revenues as they
are earned, not necessarily when cash is received.
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Accrual Accounting
Thats true. And, accrual accounting recognizes
expenses as they are incurred, not necessarily
when cash is paid.
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Cash-Basis Accounting
Cash-basis accounting is focused on cash receipts
and cash disbursements.
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