# The Accounting Cycle by pengxuebo

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```									     Financial Accounting
CHAPTER 3
Accounting Cycle:
Capturing Economic
Events
The Accounting Cycle

Make end-of-
Journalize                                                       year
Post entries to     Prepare trial
the ledger          balance.
accounts.

Prepare after-closing   Journalize and Prepare financial   Prepare adjusted
trial balance.        post closing     statements.        trial balance.
entries.
BASIC FORM OF ACCOUNT

 In its simplest form, an account consists of
1 the title of the account,
2 a left or debit side, and
3 a right or credit side.
 The alignment of these parts resembles the letter T, and
therefore the account form is called a T account.

Title of Account
Left or debit side   Right or credit side

Debit balance         Credit balance
DEBITS AND CREDITS
 The term debit means left and credit means right
respectively.
 The act of entering an amount on the left side of an
account is called debiting the account and making an
entry on the right side is crediting the account.
 When the debit amounts exceed the credits, an account
has a debit balance; when the reverse is true, the account
has a credit balance.          DR                 CR
TABULAR SUMMARY COMPARED TO
ACCOUNT FORM

Tabular Summary               Account Form
Cash                             Cash
\$15,000            Debit                 Credit
- 7,000               15,000                     7,000
1,200                 1,200                    1,700
1,500                 1,500                      250
- 1,700                   600                    1,300
- 250
600      Balance \$8,050
- 1,300                (Debit)
\$ 8,050
DOUBLE-ENTRY SYSTEM

 In a double-entry system, equal debits and
credits are made in the accounts for each
transaction.
 Thus, the total debits will always equal the
total credits and the accounting equation
will always stay in balance.
DEBIT AND CREDIT EFFECTS —
ASSETS AND LIABILITIES

Debits                Credits
Increase assets        Decrease assets
Decrease liabilities   Increase liabilities
Debit and Credit Rules
Debits and credits affect accounts as follows:

A = L + OE
ASSETS              LIABILITIES          EQUITIES
Debit for Credit for    Debit Credit for    Debit     Credit for
Increase Decrease        for    Increase     for      Increase
Decrease            Decrease
THE LEDGER
The entire group of accounts maintained by a
company is called the ledger.
A general ledger contains all the assets, liabilities,
and owner’s equity accounts.

GENERAL
LEDGER
Posting Journal Entries to the Ledger
Accounts

Posting involves
copying
information
from the journal
to the ledger
accounts.
The Ledger
Accounts are individual
Cash                  records showing
increases and decreases.
Accounts Payable

The entire group of
Capital               accounts is kept
Stock
together in an
accounting record
called a ledger.
THE GENERAL LEDGER

Individual      Individual          Individual
Assets        Liabilities       Owner’s Equity

Equipment      Interest Payable    Salaries Expense
Land           Salaries Payable    Fees Earned
Supplies       Accounts Payable    J. Lind, Drawing

Cash       Notes Payable       J. Lind, Capital
Posting Journal Entries to the Ledger
Accounts
GENERAL JOURNAL

Date       Account Titles and Explanation     Debit     Credit
2007
May 1 Cash                                       8,000
Capital Stock                                   8,000
Owners invest cash in the business.
General Ledger
Cash
Date         Debit    Credit        Balance
2007
May 1             8,000                8,000
Posting Journal Entries to the Ledger
Accounts
GENERAL JOURNAL

Date       Account Titles and Explanation     Debit     Credit
2007
May 1 Cash                                       8,000
Capital Stock                                   8,000
Owners invest cash in the business.
General Ledger
Capital Stock
Date         Debit     Credit       Balance
2007
May 1                        8,000     8,000
Posting Journal Entries to the Ledger
Accounts
GENERAL JOURNAL

Date      Account Titles and Explanation   Debit     Credit
2007
May 2 Tools & Equipment                       2,500
Cash                                          2,500
Purchased lawn mower.

Let’s see what the cash account looks like after
posting the cash portion of this transaction for JJ’s
Lawn Care Service.
Ledger Accounts After Posting
General Ledger
Cash
Date     Debit    Credit     Balance
2007
May 1       8,000               8,000
2               2,500     5,500

This ledger format is referred to as a
running balance.
Ledger Accounts After Posting
General Ledger
Cash
Date     Debit    Credit    Balance
2007
May 1       8,000              8,000
2              2,500     5,500

T accounts are simplified versions of the
ledger account that only show the debit and
credit columns.
POSTING A JOURNAL ENTRY

GENERAL JOURNAL                                       J1
Date    Account Titles and Explanation         Ref.   Debit   Credit
2002
Sept. 1 Cash                                      10 15,000
R. Neal, Capital                        25        15,000
GENERAL LEDGER
CASH                                        NO. 10
Date                Explanation                Ref.   Debit   Credit Balance
2002
Sept. 1                                           J1 15,000                  15,000

R. NEAL, CAPITAL                                  NO. 25
Date                Explanation                Ref.   Debit   Credit Balance
2002
Sept. 1                                           J1           15,000    15,000

In the ledger, enter in the appropriate columns of the account(s)
debited the date, journal page, and debit amount shown in the journal.
POSTING A JOURNAL ENTRY

GENERAL JOURNAL                                    J1
Date    Account Titles and Explanation         Ref.   Debit    Credit
2002
Sept. 1 Cash                                      10   15,000
R. Neal, Capital                        25            15,000

GENERAL LEDGER
CASH                                        NO. 10
Date                Explanation               Ref.    Debit    Credit Balance
2002
Sept. 1                                           J1 15,000              15,000

R. NEAL, CAPITAL                                  NO. 25
Date               Explanation                Ref.    Debit    Credit Balance
2002
Sept. 1                                          J1             15,000   15,000

In the reference column of the journal, write the account
number to which the debit amount was posted.
POSTING A JOURNAL ENTRY

GENERAL JOURNAL                                        J1
Date    Account Titles and Explanation         Ref.     Debit    Credit
2002
Sept. 1 Cash                                      10 15,000
R. Neal, Capital                        25        15,000
GENERAL LEDGER
CASH                                         NO. 10
Date                 Explanation                Ref.    Debit    Credit Balance
2002
Sept. 1                                            J1 15,000               15,000

R. NEAL, CAPITAL                                   NO. 25
Date                 Explanation                Ref.    Debit    Credit Balance
2002
Sept. 1                                            J1             15,000   15,000

In the ledger, enter in the appropriate columns of the account(s) credited
the date, journal page, and credit amount shown in the journal.
POSTING A JOURNAL ENTRY

GENERAL JOURNAL                                   J1
Date    Account Titles and Explanation        Ref.    Debit    Credit
2002
Sept. 1 Cash                                      10   15,000
R. Neal, Capital                        25             15,000

GENERAL LEDGER
CASH                                        NO. 10
Date                 Explanation              Ref.    Debit    Credit Balance
2002
Sept. 1                                          J1 15,000                15,000

R. NEAL, CAPITAL                                  NO. 25
Date                 Explanation             Ref.     Debit    Credit Balance
2002
Sept. 1                                         J1              15,000    15,000

In the reference column of the journal, write the account
number to which the credit amount was posted.
CHART OF ACCOUNTS

Most companies have a chart of accounts that lists the accounts and
the account numbers which identify their location in the ledger.

Assets                                       Owner’s Equity
101.    Cash                                            301.   C.R. Byrd, Capital
112.    Accounts Receivable                             306.   C.R. Byrd, Drawing
126.    Advertising Supplies                            350.   Income Summary
130.    Prepaid Insurance                                               Revenues
157.    Office Equipment                                400.   Fees Earned
158.    Accumulated Depreciation — Office Equipment                     Expenses
200.   Notes Payable                                   722.   Insurance Expense
201.   Accounts Payable                                726.   Salaries Expense
209.    Unearned Fees                                   729.   Rent Expense
212.   Salaries Payable                                905.   Interest Expense
236.   Interest Payable                                911.   Depreciation Expense
INVESTMENT OF CASH BY OWNER

October 1, C.R. Byrd invests \$10,000 cash in an
Transaction    advertising venture to be known as the Pioneer

Basic       The asset Cash is increased \$10,000, and owner’s
Analysis     equity C. R. Byrd, Capital is increased \$10,000.

Debits increase assets: debit Cash \$10,000.
Debit-Credit
Credits increase owner’s equity: credit C.R. Byrd,
Analysis      Capital \$10,000.
INVESTMENT OF CASH BY OWNER

JOURNAL ENTRY

Date     Account Titles and Explanation      Ref.   Debit Credit
Oct. 1   Cash                                  101   10,000
C. R. Byrd, Capital                 301          10,000

POSTING

Cash                     101               C. R. Byrd, Capital   301
Oct. 1  10,000                                            Oct. 1 10,000
PURCHASE OF OFFICE EQUIPMENT

October 1, office equipment costing \$5,000 is
Transaction    purchased by signing a 3-month, 12%, \$5,000 note
payable.

Basic       The asset Office Equipment is increased \$5,000, and
Analysis     the liability Notes Payable is increased \$5,000.

Debits increase assets: debit Office Equipment
Debit-Credit
\$5,000. Credits increase liabilities: credit Notes
Analysis      Payable \$5,000.
PURCHASE OF OFFICE EQUIPMENT

JOURNAL ENTRY

Date     Account Titles and Explanation   Ref.   Debit Credit
Oct. 1   Office Equipment                   157    5,000
Notes Payable                   200          5,000
(Issued 3-month, 12% note
for office equipment)

POSTING

Office Equipment       157                Notes Payable       200
Oct. 1     5,000                                      Oct. 1    5,000
RECEIPT OF CASH FOR FUTURE SERVICE

Transaction    R. Knox, a client, for advertising services that are
expected to be completed by December 31.

The asset Cash is increased \$1,200; the liability
Unearned Fees is increased \$1,200 because the
Basic       service has not been rendered yet. Note that
Analysis     although many liabilities have the word “payable” in
their title, unearned fees are considered a liability
even though the word payable is not used.

Debits increase assets: debit Cash \$1,200.
Debit-Credit
Credits increase liabilities: credit Unearned Fees
Analysis      \$1,200.
RECEIPT OF CASH FOR FUTURE SERVICE

JOURNAL ENTRY

Date     Account Titles and Explanation   Ref.   Debit    Credit
Oct. 2   Cash                               101    1,200
Unearned Fees                    209             1,200
Knox for future services)

POSTING

Cash             101              Unearned Fees              209
Oct. 1   10,000                                       Oct. 2            1,200
2    1,200
PAYMENT OF MONTHLY RENT

October 3, office rent for October is paid in cash,
Transaction    \$900.

Basic       The expense Rent is increased \$900 because the
Analysis     payment pertains only to the current month; the
asset Cash is decreased \$900.

Debit-Credit   Debits increase expenses: debit Rent Expense \$900.
Analysis      Credits decrease assets: credit Cash \$900.
PAYMENT OF MONTHLY RENT

JOURNAL ENTRY

Date     Account Titles and Explanation   Ref.   Debit   Credit
Oct. 3   Rent Expense                       729     900
Cash                             101              900
(Paid October rent)

POSTING

Cash            101            Rent Expense               729
Oct. 1   10,000 Oct. 3       900     Oct. 3    900
2    1,200
PAYMENT FOR INSURANCE

October 4, \$600 is paid for a one-year insurance
Transaction    policy that will expire next year on September 30.

The asset Prepaid Insurance is increased \$600
because the payment extends to more than the
current month; the asset Cash is decreased \$600.
Basic       Note that payments of expenses that will benefit more
Analysis     than one accounting period are identified as prepaid
expenses or prepayments. When a payment is made,
an asset account is debited in order to show the
service or benefit that will be received in the future.

Debit-Credit   Debits increase assets: debit Prepaid Insurance
Analysis      \$600. Credits decrease assets: credit Cash \$600.
PAYMENT FOR INSURANCE

JOURNAL ENTRY

Date      Account Titles and Explanation   Ref.   Debit Credit
Oct. 4   Prepaid Insurance                   130     600
Cash                             101            600
(Paid one-year policy;
effective date October 1)

POSTING

Cash             101          Prepaid Insurance       130
Oct. 1   10,000 Oct. 3       900     Oct. 4    600
2    1,200      4       600
PURCHASE OF SUPPLIES ON CREDIT

October 5, an estimated 3-month supply of
Transaction    advertising materials is purchased on account from
Aero Supply for \$2,500.

Basic       The asset Advertising Supplies is increased \$2,500;
Analysis     the liability Accounts Payable is increased \$2,500.

Debits increase assets: debit Advertising Supplies
Debit-Credit
\$2,500. Credits increase liabilities: credit
Analysis      Accounts Payable \$2,500.
PURCHASE OF SUPPLIES ON CREDIT

JOURNAL ENTRY

Date     Account Titles and Explanation     Ref.   Debit Credit
Oct. 5   Advertising Supplies                 126    2,500
Accounts Payable                   201          2,500
(Purchased supplies on
account from Aero Supply)

POSTING

Advertising Supplies    126               Accounts Payable     201
Oct. 5   2,500                                          Oct. 5    2,500
HIRING OF EMPLOYEES

October 9, hire four employees to begin work on
October 15. Each employee is to receive a weekly
Transaction    salary of \$500 for a 5-day work week, payable every
2 weeks -- first payment made on October 26.

A business transaction has not occurred. There is
Basic       only an agreement between the employer and the
Analysis     employees to enter into a business transaction
beginning on October 15.

Debit-Credit   A debit-credit analysis is not needed because there is
Analysis      no accounting entry.
WITHDRAWAL OF CASH BY OWNER

October 20, C. R. Byrd withdraws \$500 cash for
Transaction    personal use.

Basic       The owner’s equity account C. R. Byrd, Drawing is
Analysis     increased \$500; the asset Cash is decreased \$500.

Debits increase drawings: debit C. R. Byrd,
Debit-Credit
Drawing \$500. Credits decrease assets: credit
Analysis      Cash \$500.
WITHDRAWAL OF CASH BY OWNER

JOURNAL ENTRY

Date       Account Titles and Explanation    Ref.   Debit Credit
Oct. 20   C. R. Byrd, Drawing                  306     500
Cash                              101            500
(Withdrew cash for personal
use)

POSTING

Cash             101            C. R. Byrd, Drawing        306
Oct. 1   10,000 Oct. 3        900      Oct. 20      500
2    1,200      4        600
20        500
ILLUSTRATION 2-27
PAYMENT OF SALARIES

October 26, employee salaries of \$4,000 are owed
Transaction     and paid in cash. (See October 9 transaction.)

Basic        The expense account Salaries Expense is increased
Analysis      \$4,000; the asset Cash is decreased \$4,000.

Debit-Credit    Debits increase expenses: debit Salaries Expense
Analysis       \$4,000. Credits decrease assets: credit Cash \$4,000.
PAYMENT OF SALARIES

JOURNAL ENTRY

Date      Account Titles and Explanation   Ref.   Debit Credit
Oct. 26   Salaries Expense                   726    4,000
Cash                            101          4,000
(Paid salaries to date)

POSTING

Cash              101             Salaries Expense    726
Oct. 1   10,000 Oct. 3        900     Oct. 26    4,000
2    1,200      4        600
20        500
26      4,000
RECEIPT OF CASH FOR FEES EARNED

October 31, received \$10,000 in cash from Copa
Transaction    Company for advertising services rendered in
October.

Basic       The asset Cash is increased \$10,000; the revenue
Analysis     Fees Earned is increased \$10,000.

Debit-Credit   Debits increase assets: debit Cash \$10,000. Credits
Analysis      increase revenues: credit Fees Earned \$10,000.
RECEIPT OF CASH FOR FEES EARNED

JOURNAL ENTRY
Date      Account Titles and Explanation   Ref.   Debit Credit
Oct. 31   Cash                               101   10,000
Fees Earned                      400          10,000
earned)

POSTING
Cash            101                Fees Earned          400
Oct. 1   10,000 Oct. 3       900                        Oct. 31   10,000
2    1,200      4       600
31   10,000     20       500
26     4,000
The Accounting Cycle

Make end-of-
Journalize                                                       year
Post entries to     Prepare trial