The Accounting Cycle by pengxuebo

VIEWS: 0 PAGES: 42

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


                                                              Make end-of-
 Journalize                                                       year
                  Post entries to     Prepare trial
transactions.                                                 adjustments.
                    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
             (invested cash in business)
                          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
             (invested cash in business)


                          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
             (invested cash in business)
                            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
             (invested cash in business)

                           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.

                                 Pioneer Advertising Agency
                        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
                         Liabilities                    631.   Advertising Supplies Expense
 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
               Advertising Agency.


   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
                 (Invested cash in business)




   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



               October 2, a $1,200 cash advance is received from
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
                  (Received advance from R.
                  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
                   (Received cash for fees
                   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
transactions.                                                 adjustments.
                    the ledger          balance.
                    accounts.




Prepare after-closing   Journalize and Prepare financial   Prepare adjusted
   trial balance.        post closing     statements.        trial balance.
                           entries.

								
To top