the accounting cycle

The Accounting Cycle

Start

Analyzetransactions

Journalize

Post

Prepareunadjustedtrial balance

AdjustingEntries

Prepareadjusted

trial balance

Preparestatements

ClosingEntries

Preparepost-closingtrial balance

C3

3-1

POST

POST

The Accounting Processing

Cycle

Source Documents

Record in Journal

Transaction Analysis

Post to Ledger

During the Accounting Period

Financial Statements

Unadjusted Trial Balance

Adjusted Trial Balance

At the End of the Accounting Period

Record & Post Adjusting

Entries

Close Temporary Accounts

Post-Closing Trial Balance

At the End of the Year

AssetsAccountsAssets

AccountsAssets

AccountsAssets

AccountsAsset

AccountsAsset

Accounts =

The Account and its Analysis

+LiabilityAccountsLiability

AccountsLiability

AccountsLiability

AccountsLiability

AccountsLiability

AccountsEquity

AccountsEquity

AccountsEquity

AccountsEquity

AccountsEquity

AccountsEquity

Accounts

C 3

2-3

The Accounting Equation

A = L + OE- Owner Withdrawals+ Owner Investments

- Expenses- Losses

+ Revenues+ Gains

Accounting Equation for a Corporation

A = L + SE+ Retained Earnings+ Paid-in Capital

- Expenses- Losses

+ Revenues+ Gains

- Dividends

LiabilitiesLiabilities EquityEquityAssetsAssets = +


CommonStock

CommonStock Dividends Dividends RevenuesRevenues ExpensesExpenses

+ +– –

C 3

2-6

LandLand

EquipmentEquipment

BuildingsBuildings

CashCash

Notes Receivable

Notes Receivable

SuppliesSupplies

Prepaid AccountsPrepaid

Accounts

Accounts ReceivableAccounts

Receivable

AssetAccounts

AssetAccounts

Asset AccountsC 3

2-7

Accrued LiabilitiesAccrued

Liabilities

Unearned Revenue

Unearned Revenue

Notes PayableNotes

PayableAccounts Payable

Accounts Payable

LiabilityAccountsLiability

Accounts

Liability AccountsC 3

2-8

DividendsPayable

DividendsPayable

EquityAccounts

EquityAccounts

RevenuesRevenues

CommonStock

CommonStock

DividendsDeclared

DividendsDeclared

ExpensesExpenses

Equity AccountsC 3

RetainedEarningsRetainedEarnings

2-9

An account is a record of

increases and decreases in a specific asset, liability, equity,

revenue, or expense item.

An account is a record of

increases and decreases in a specific asset, liability, equity,

revenue, or expense item.


The general ledger is a record

containing all accounts used by

the company.

The general ledger is a record

containing all accounts used by

the company.

C 3

2-10

Ledger and Chart of Accounts

The ledger is a collection of all accounts for aninformation system. A company’s size and diversity of operations affect the number of accounts needed.

The ledger is a collection of all accounts for aninformation system. A company’s size and diversity of operations affect the number of accounts needed.

The chart of accounts is a list of all accounts andincludes an identifying number for each account.The chart of accounts is a list of all accounts andincludes an identifying number for each account.

101 Cash 319 Dividends106 Accounts receivable 403 Consulting Revenues126 Supplies 406 Rental revenue128 Prepaid insurance 622 Salaries expense167 Equipment 637 Insurance expense

201 Accounts payable 640 Rent expense

236 Unearned revenue 652 Supplies expense307 Common stock 690 Utilities expense318 Retained Earnings

C 4

2-11

A T-account represents a ledger account and is a tool used to understand the effects of one or more transactions.

Debits and Credits

(Left side) (Right side)Debit Credit

T- Account

C 5

2-12

General Ledger

The “T” account is a shorthand format of an account used by accountants to analyze transactions.

Double-Entry Accounting

NORMAL Balance

ASSETS = LIABILITIES + EQUITY DR = CR CR

Assets are on the left side of the equation; therefore, the left, or debit side is the normal balance side for assets.

Liabilities and equities are on the right side; therefore, the right, or credit side is the normal balance side for liabilities and equity.

Double-Entry Accounting

Total amount that is debited to accounts must equal the total amount credited to accounts for each transaction.

Sum of debit account balances in the ledger must equal the sum of credit account balances.

ASSETS = LIABILITIES + EQUITY ||

ASSETS = LIABILITIES + Common Stock – DIV + REV – EXPDR CR CR DR CR DR


Double-Entry AccountingNORMAL Balance

Debit Credit Debit Credit Debit Credit

ASSETS

+ - + -

LIABILITIES

- + - +

EQUITIES

- + - +

C 5

2-16

Whether a debit or a credit is an increase or decrease depends on the NORMAL Balance of the account.

RevenuesRevenues ExpensesExpensesCommon

StockCommon

StockDividendsDividends__ ++ __

Debit Credit

Stock

- + - + Debit Credit

Dividends

+ - + - Debit Credit

Expenses

+ - + -Debit Credit

Revenues

- + - +

EquityEquity

C 5

2-17


An account balance is the difference between the increases and decreases in an account.

Notice the T-Account

C 5

2-18


Journalizing & Posting Transactions

Step 1: Analyze transactions and source documents.


Step 2: Apply double-entry accounting

(Left side) (Right side)Debit Credit

T- Account

ACCOUNT NAME: ACCOUNT No.

Date Description PR Debit Credit Balance

Step 4: Post entry to ledgerStep 3: Record journal entry

P1

2-19

Dollar amount of debits and credits

Dollar amount of debits and credits

Journalizing Transactions

Transaction Date

Transaction Date

Transaction explanation

Transaction explanation

Titles of Affected Accounts

Titles of Affected Accounts

P1

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T-accounts are useful illustrations, but balance column accounts are used in practice.

Balance Column AccountP1

2-21

11 Identify the debit account in ledger.

Posting Journal EntriesP1

2-22

22 Enter the date.


2-23

33 Enter the amount and description.


2-24

44 Enter the journal reference.


2-25

55 Compute the balance.


2-26

Enter the ledger reference.66


2-27

Analyzing Transactions

Analysis:

(1) Cash 101 30,000 Common stock 301 30,000

Double entry:

(1) 30,000Cash 101

(1) 30,000Common Stock 301

Posting:

A1

2-28


Analysis:

(2) Supplies 126 2,500 Cash 101 2,500

Double entry:

(2) 2,500Supplies 126

(1) 30,000 (2) 2,500Cash 101

Posting:

A1

2-29


(3) Equipment 167 26,000 Cash 101 26,000

Double entry:

(1) 30,000 (2) 2,500(3) 26,000

Cash(3) 26,000

Equipment 167 101

Posting:

A1

Analysis:

2-30


Analysis:

(4) Supplies 126 7,100 Accounts payable 201 7,100

Double entry:

2,500 (4) 7,100

Supplies 126

(4) 7,100Accounts Payable 201

Posting:

A1

2-31


Analysis:

(5) Cash 101 4,200 Consulting Revenue 403 4,200

Double entry:

(1) 30,000 (2) 2,500(5) 4,200 (3) 26,000

Cash(5) 4,200

Consulting Revenue 403 101

Posting:

A1

2-32


Analysis:

(6) Rent Expense 640 1,000 Cash 101 1,000

Double entry:

(1) 30,000 (2) 2,500 (5) 4,200 (3) 26,000

(6) 1,000

Cash(6) 1,000

Rent Expense 640 101

Posting:

A1

2-33

After processing its remaining transactions for December, FastForward’s Trial Balance is prepared.

After processing its remaining transactions for December, FastForward’s Trial Balance is prepared.

Debits CreditsCash 4,350$ Accounts receivable - Supplies 9,720 Prepaid Insurance 2,400 Equipment 26,000 Accounts payable 6,200$ Unearned consulting revenue 3,000 Common stock 30,000 Dividends 200 Consulting revenue 5,800 Rental revenue 300 Salaries expense 1,400 Rent expense 1,000 Utilities expense 230 Total 45,300$ 45,300$

FastForwardUnadjusted Trial Balance

December 31, 2009

The trial balance lists all account balances in the general ledger.

If the books are in balance, the total

debits will equal the total credits.

The trial balance lists all account balances in the general ledger.

If the books are in balance, the total

debits will equal the total credits.

A1

2-34


Start

Analyzetransactions

Journalize

Post


AdjustingEntries

Prepareadjusted

trial balance

Preparestatements

ClosingEntries


C3

3-35

POST

POST

The Adjustment Process

Accounts are adjusted at the end of a period to record internal transactions and events that are not yet recorded.

Two basic principles for recognizing Revenues and Expenses:

1. The revenue recognition principle requires revenue be recorded when earned, not before and not after.

2. The matching principle requires expenses be recorded in the same period as the revenues earned as a result of these expenses.

Accrual Basis versus Cash BasisAccrual basis accounting —uses the adjusting process to recognize revenue when earned and to match expenses with revenues. This means the economic effects of revenues and expenses are recorded when earned or incurred, not when cash is received or paid. Accrual basis is consistent with GAAP.

Cash basis accounting —revenues are recognized when cash is received and expenses are recognized when cash paid. Cash basis is not consistent with GAAP.

Accrual accounting also increases the comparability of financial statements from one period to another.

Accounting

Accrual Basis vs. Cash Basis

Accrual Basis

Revenues are recognized when earned and expenses are recognized when incurred.

Cash Basis

Revenues are recognized when cash is received and expenses recorded when cash is paid.

Not GAAPNot GAAPNot GAAPNot GAAP

C 1

3-38


On the cash basis the entire $2,400 would be recognized as insurance expense in 2009. No insurance expense from this policy would be recognized in 2010 or 2011, periods covered by the policy.

On the cash basis the entire $2,400 would be recognized as insurance expense in 2009. No insurance expense from this policy would be recognized in 2010 or 2011, periods covered by the policy.

Jan Feb Mar Apr

-$ -$ -$ -$ May Jun Jul Aug

-$ -$ -$ -$ Sep Oct Nov Dec

-$ -$ -$ 2,400$

Insurance Expense 2009

C 1

3-39


Jan Feb Mar Apr

-$ -$ -$ -$ May Jun Jul Aug

-$ -$ -$ -$ Sep Oct Nov Dec

-$ -$ -$ 100$

Jan Feb Mar Apr

100$ 100$ 100$ 100$ May Jun Jul Aug

100$ 100$ 100$ 100$ Sep Oct Nov Dec

100$ 100$ 100$ 100$

Jan Feb Mar Apr

100$ 100$ 100$ 100$ May Jun Jul Aug

100$ 100$ 100$ 100$ Sep Oct Nov Dec

100$ 100$ 100$ -$




On the accrual basis, Insurance expense is recognized as follows:$100 in 2009, $1,200 in 2010, and $1,100 in 2011.

The expense is matched with the periods benefited by the insurance coverage.

On the accrual basis, Insurance expense is recognized as follows:$100 in 2009, $1,200 in 2010, and $1,100 in 2011.

The expense is matched with the periods benefited by the insurance coverage.

C 2

3-40

Adjusting Accounts

An adjusting entry is recorded to bring an asset or liability account balance to its proper amount.

The adjusting process is based on ACCRUAL ACCOUNTING of Revenue Recognition and Matching Principle.

Adjusting accounts is a 3-step process: (1) Determine the current account balance,

(2) Determine what the current account balance should be, and

(3) Record adjusting entry to get from step 1 to step 2.

AdjustmentsAdjustments

Adjusting Accounts

Paid (or received) cash before expense (or revenue) recognized

Paid (or received) cash before expense (or revenue) recognized

Paid (or received) cash after expense (or revenue) recognized

Paid (or received) cash after expense (or revenue) recognized

Prepaid (Deferred) expenses*

Prepaid (Deferred) expenses*

Unearned (Deferred) revenues

Unearned (Deferred) revenues

AccruedexpensesAccruedexpenses

AccruedrevenuesAccruedrevenues

Framework for Adjustments

*including depreciation

C2, P1

3-42

Supplies

During 2009, Scott Company purchased $15,500 of supplies. Scott recorded the expenditures as Supplies. On December 31, a count of the supplies indicated $2,655 on hand.

What adjustment is required?

During 2009, Scott Company purchased $15,500 of supplies. Scott recorded the expenditures as Supplies. On December 31, a count of the supplies indicated $2,655 on hand.

What adjustment is required?

Dec. 31 Supplies Expense 12,845 Supplies 12,845

To record supplies used during 2009

Bought 15,500 Dec. 31 12,845Bal. 2,655

Supplies 126Dec. 31 12,845

Supplies Expense 652

P1

3-43

Prepaid (Deferred) Expenses

Straight-LineDepreciationExpense

= Asset Cost - Salvage Value

Useful Life

Depreciation

Depreciation is the process of computing expense from allocating the cost of plant and equipment over their expected useful lives.

P1

3-44

Depreciation

On January 1, 2009, Barton, Inc. purchased equipment for $62,000 cash. The equipment has an estimated useful life of 5 years and Barton expects to sell the equipment at the end of its life for $2,000 cash.

Let’s record depreciation expense for the year ended December 31, 2009.



2009DepreciationExpense

= $62,000 - $2,000

5= $12,000

P1

3-45

Depreciation





Dec. 31 Depreciation Expense 12,000 Accumulated Depreciation - Equipment 12,000

To record equipment depreciation

Accumulated depreciation isa contra asset account.Accumulated depreciation isa contra asset account.

P1

3-46

Depreciation

Equipment is shown net of accumulated depreciation. This amount is referred to as the asset’s book value

P1

3-47

Unearned (Deferred) Revenues

Revenue

Buy your season tickets forall home basketball games NOW!

““Go Big Blue”Go Big Blue”

Cash received in advance of providing products or services.

Cash received in advance of providing products or services.

LiabilityUnadjustedBalance

CreditAdjustment

DebitAdjustment

P1

3-48


On October 1, 2009, Ox University sold 1,000 season tickets to its 20 home basketball games for $100 each. Ox University makes the following entry:

Oct. 1 Cash 100,000 Unearned Revenue 100,000

Basketball revenue received in advance

Oct.1 100,000Unearned Revenue

P1

3-49


On December 31, Ox University has played 10 of its regular home games, winning 2 and losing 8.

Dec. 31 Unearned Revenue 50,000 Basketball Revenue 50,000

To recognize 10-games of revenue

Dec. 31 50,000 Oct. 1 100,000Bal. 50,000

Unearned RevenueDec. 31 50,000

Basketball Revenue

P1

3-50

We’re about one-halfdone with this job andwant to be paid forour work!

We’re about one-halfdone with this job andwant to be paid forour work!

Costs incurred in a period that areboth unpaid and unrecorded.

Costs incurred in a period that areboth unpaid and unrecorded.

Accrued Expenses

Expense LiabilityCreditAdjustment

DebitAdjustment

P1

3-51

12/1/09 12/31/09Year end

Last paydate12/26/09

Next paydate

Record adjustingjournal entry.Record adjustingjournal entry.

Accrued Expenses

Barton, Inc. pays its employees every Friday. Year-end, 12/31/09, falls on a Wednesday. As of 12/31/09, the employees have earned salaries of $47,250 for Monday through Wednesday.


P1

3-52

Accrued Expenses



Dec. 31 Salaries Expense 47,250 Salaries Payable 47,250

To accrue 3-days' salary

Other salaries657,500

Dec. 31 47,250Bal. 704,750

Salaries Expense

Dec. 31 47,250Salaries Payable

P1

3-53

Accrued Revenues

Smith & Jones, CPAs, had $31,200 of work completed but not yet billed to clients. Let’s make the adjusting entry necessary on December 31, 2009, the end of the company’s fiscal year.

Smith & Jones, CPAs, had $31,200 of work completed but not yet billed to clients. Let’s make the adjusting entry necessary on December 31, 2009, the end of the company’s fiscal year.

Dec. 31 Accounts Receivable 31,200 Service Revenue 31,200

To accrue revenue earned

Other receivables1,325,268

Dec. 31 31,200Bal. 1,356,468

Accounts ReceivableOther revenues

6,589,500 Dec. 31 31,200Bal . 6,620,700

Service Revenue

P1

3-54


Start

Analyzetransactions

Journalize

Post


AdjustingEntries

Prepareadjusted

trial balance

Preparestatements

ClosingEntries


C3

3-56

POST

POST

1. Prepare Income StatementP3

3-57

2. Prepare Statement of Retained Earnings

Note: Net Income from the Income Statement carries to the Statement of Retained Earnings.

P3

3-58

FastForwardBalance Sheet

December 31, 2009

AssetsCash 3,950$ Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Less: accum. depr. (375) 25,625 Total assets 42,345$

LiabilitiesAccounts payable 6,200$ Salaries payable 210 Unearned revenue 2,750 Total liabilities 9,160$

EquityCommon stock 30,000 Retained earnings 3,185 Total liabilities and equity 42,345$

3. Prepare Balance SheetP3

3-59


Start

Analyzetransactions

Journalize

Post


AdjustingEntries

Prepareadjusted

trial balance

Preparestatements

ClosingEntries


C3

3-60

POST

POST

The Closing Process: Temporary and Permanent Accounts

Temporary (nominal) accounts accumulate data related to one accounting period. They include all income statement accounts, the dividends account, and the Income Summary account. These accounts are “closed” at the end of the period to get ready for the next accounting period.

Temporary (nominal) accounts accumulate data related to one accounting period. They include all income statement accounts, the dividends account, and the Income Summary account. These accounts are “closed” at the end of the period to get ready for the next accounting period.

Permanent (real) accounts report activities related to one or more future accounting periods. They carry ending balances to the next accounting period and are not “closed.”

Permanent (real) accounts report activities related to one or more future accounting periods. They carry ending balances to the next accounting period and are not “closed.”

C3

3-61

Temporary Accounts

Revenues

Income Summary

Exp

ense

s

Divid

end

s

Permanent Accounts

Assets

Lia

bili

ties

Sh

areho

lders’

Eq

uity

The closing process applies only to temporary accounts.

The Closing Process

Recording Closing EntriesRecording Closing Entries

1. Close revenue accounts to Inc. Summary;

2. Close expense accounts to Inc. Summary;

3. Close the income summary to RE;

4. Close dividends account to RE.

P4

3-63


Income Summary

Salaries Expenses Consulting Revenues

$ 18,100 $ 25,000

Retained Earnings

$ 7,000

Examine the accounts presented.

Examine the accounts presented.

P4

3-64

$ 25,000 Close revenues with a debit to the revenue account and a credit to Income Summary.


$ 18,100


Income Summary

$ 25,000

$ 25,000

P4

3-65

Consulting Revenues 25,000 Income Summary 25,000

$ 25,000$ 25,000

Close expense accounts with a credit to expenses and a debit to Income Summary.$ 25,000


$ 18,100


Income Summary

$ 18,100

$ 18,100

P4

3-66

Income Summary 18,000 Salaries Expenses 18,000

$ 18,100 $ 25,000

$ 18,100 $ 25,000$ 25,000$ 18,100

Determine the balance in the Income Summary account.

Determine the balance in the Income Summary account.



Income Summary

$ 6,900

P4

3-67

$ 18,100 $ 25,000

$ 18,100 $ 18,100

$ 7,000

Close the Income Summary to Retained Earnings.

Close the Income Summary to Retained Earnings.


$ 6,900

Salaries Expenses

Income Summary Retained Earnings

$ 6,900$ 6,900

P4

3-68

Income Summary 6,900 Retained Earnings 6,900


Dividends

$ 2,000 $ 7,000

6,900

Retained Earnings

The dividends account is closed to Retained Earnings.

$ 2,000 $ 2,000

P4

3-69


Dividends

$ 2,000 $ 2,000 $ 2,000

Determine the ending balance in Retained Earnings.

Determine the ending balance in Retained Earnings.

$ 11,900

$ 7,000

6,900

Retained Earnings

The dividends account is closed to Retained Earnings.

P4

3-70

Post Closing Trial Balance

Trial Balance prepared after the closing entries have been posted.

The purpose is to insure that all nominal or temporary accounts have been closed.

The only accounts on this trial balance should be assets, liabilities, and equity accounts.

P5

3-71

Let's prepare the Closing Entries

for Dress Right Corporation

DRESS RIGHT CLOTHING CORPORATIONAdjusted Trial Balance

July 31, 2013Account Title Debits CreditsCash 68,500$ Accounts receivable 2,000 Supplies 1,200 Prepaid rent 22,000 Inventory 38,000 Furniture and fixtures 12,000 Accumulated depr.-furniture & fixtures 200 Accounts payable 35,000 Note payable 40,000 Unearned rent revenue 750 Salaries payable 5,500 Interest payable 333 Common stock 60,000 Retained earnings 1,000 Sales revenue 38,500 Rent revenue 250 Cost of goods sold 22,000 Salaries expense 10,500 Supplies expense 800 Rent expense 2,000 Depreciation expense 200 Interest expense 333 Totals 180,533$ 180,533$

Using the adjusted trial balance of 7/31, we can prepare the following closing entries:

1. To close the revenue accounts to income summary:

.

2. To close the expense accounts to income summary:

3. To close the income summary account to retained earnings:

CLOSING ENTRIES

Additional Consideration An alternative method of recording a cash dividend is to debit a temporary account called dividends, rather than debiting retained earnings.

If this approach is used, an additional closing entry is required to close the dividend account to retained earnings, as follows:

CLOSING ENTRIES

4. To close dividends to retained earnings

***This is NOT the case with Dress Right Corporation

Post-Closing Trial Balance

Lists permanent accounts and their

balances.

Total debits equal total credits.

DRESS RIGHT CLOTHING CORPORATIONPost-Closing Trial Balance

July 31, 2013Account Title Debits CreditsCash 68,500 Accounts receivable 2,000 Supplies 1,200 Prepaid rent 22,000 Inventory 38,000 Furniture and fixtures 12,000 Accumulated depr.-furniture & fixtures 200 Accounts payable 35,000 Note payable 40,000 Unearned rent revenue 750 Salaries payable 5,500 Interest payable 333 Common stock 60,000 Retained earnings 1,917 Totals 143,700 143,700


Start

Analyzetransactions

Journalize

Post


AdjustingEntries

Prepareadjusted

trial balance

Preparestatements

ClosingEntries


C3

3-78

POST

POST

the accounting cycle

Documents

ledger account

number of accounts

sum of debit account

sum of credit account

johnsons equity balance

liabilities equity dr

chart of accountsthe

accounting equationa