Chapter 2

Accounting Cycle and How to

write Journal Entries
 Key Terms
The Accounting Cycle

accounting cycle check stub

source document journal
invoice journalizing
receipt fiscal year
memorandum calendar year
 Accounting Cycle
The accounting cycle is:
• a series of steps done in each accounting
period
• to keep records in an orderly fashion.
You can use the general journal to record all
of the transactions of a business.

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

 Accounting Cycle

The Accounting Cycle

 Steps of Accounting Cycle
The Accounting Cycle

Step 1 Step 2 Step 3

Collect and Journalize

Analyze each
verify source each
transaction.
documents. transaction.
Commonly Used Source Documents
The Accounting Cycle

Invoice Receipt

Memorandum Check stub

source document
A paper prepared as the evidence that a
transaction occurred.
 Commonly Used Source Documents
The Accounting Cycle

Invoice Receipt

Memorandum Check stub

invoice
A document that lists quantity, description,
unit price, and total cost of items sold and
shipped to a buyer.
 Commonly Used Source Documents
The Accounting Cycle

Invoice Receipt

Memorandum Check stub

receipt
A source document that serves as a record of
cash received.
 Commonly Used Source Documents
The Accounting Cycle

Invoice Receipt

Memorandum Check stub

memorandum
A brief written message that describes a transaction
that takes place within a business.
 Commonly Used Source Documents
The Accounting Cycle

Invoice Receipt

Memorandum Check stub

check stub
It lists the same information that appears on a check
and shows the balance in the checking account
before and after each check is written.
Commonly Used Source Documents
The Accounting Cycle
Invoice Receipts

Memorandum Check Stub

The Steps of the Accounting Cycle
The Accounting Cycle

Step 1 Step 2 Step 3

Collect and Analyze each Journalize

verify source each
documents. transaction. transaction.

Determine the debit and credit portions of each

transaction by analyzing the source document.
In the real world, you must examine this document to
determine what happened in a business transaction.
 The Steps of the Accounting Cycle
The Accounting Cycle
Step 1 Step 2 Step 3
Transactions
Collect and are entered into
Analyze each
verify source
transaction. a journal.
documents.
This is
journalizing.

journal
A chronological record of the transactions of a business.

journalizing
The process of recording business transactions.
 The Accounting Period
The Accounting Cycle

A fiscal year is not the same as a calendar year.

fiscal year
An accounting period of twelve months.

calendar year
Accounting period that begins on January 1 and
ends on December 31.
Journal Entries
Refresher on…

Debits
Credits
Accounts
THE GENERAL JOURNAL

Objectives:
1. Record transactions in a general journal.
2. Use a chart of accounts.
https://www.accountingcoach.com/chart-of-
accounts/explanation/2
3. Correct errors in the journal.
The Use of the General Journal

•The accounting record known as a

journal is used to list all the
necessary information about a
transaction in one place.
•The journal is known as the book of
original entry.
The Use of the General Journal
(continued)

•The process of recording these

transactions in the journal is known
as journalizing, or recording journal
entries.
•Double-entry accounting is the
system of journalizing when each
transaction affects at least two
accounts.
 Journalizing a Business’s
Transactions
• Accounts used in the recording
of transactions are taken from a
chart of accounts.
• The chart of accounts lists, by
number in chronological order,
the accounts determined to be
used by the business.
 Journalizing a Business’s
Transactions (continued)
•Pencil footings are used at the
bottom of the money columns to
provide balance of debits and
credits.
•Entries may contain more than one
debit and/or credit.
 Dual Skill
To do a journal entry, you need to know
1. What accounts are moving/impacted
2. How to classify those accounts
• Asset?
• Liability?
• Equity/Revenue/Expense/Dividend?
3. Where the accounts are going up or down
4. NOW you are ready to declare debit or credit!
 Debits & Credits
• Debits are the left of the T account.
• Debits do not mean increase.
• Debits are not “good” or “bad”.

• Credits are the right of the T account.

• Credits do not mean decrease.
• Credits are not “good” or “bad”.
 Debits & Credits

Assets, Exp Liabilities, Equity

& Dividends & Revenues
DR CR DR CR
Incr. Decr. Decr. Incr.
+ - - +

Memorize this right now

Takes about 60 seconds.
Close your eyes and do it now.
 Impact on accounts
• How do you show new credit sales
[accounts receivable go up]?

• How do you reflect prepaid

insurance getting used up [go
down]?

• How do you take land you sold off

the books [no gain or loss]?

• How do you show an increase to

cash from a customer paying their
bill?
 Impact on accounts
• How do you show new credit sales • Debit AR
[accounts receivable go up]? • Credit Sales Rev.
• How do you reflect prepaid
insurance getting used up [go • Debit Insurance Exp
down]? • Credit Prepaid
• How do you take land you sold off
the books [no gain or loss]? • Debit Cash
• Credit Land
• How do you show an increase to
cash from a customer paying their
bill? • Debit Cash
• Credit AR
 Liability Accounts
• How do you show buying inventory
on credit [accounts payable goes
up]?

• How do you reflect taxes payable

getting paid [go down]?

• How do you show paying off an old

loan with a new loan?

• How do you show the obligation

to pay workers after their work is
complete but not yet paid?
 Liability Accounts
• Debit Inventory
• How do you show buying
inventory on credit [accounts • Credit Accts Payable
payable goes up]?
• Debit Tax Payable
• How do you reflect taxes payable
getting paid [go down]? • Credit Cash

• How do you show paying off an • Debit Old Loan

old loan with a new loan?
• Credit New Loan
• How do you show the obligation
to pay workers after their work is • Debit Salaries Expense
complete but not yet paid?
• Credit Salaries Payable
 What do you need – debit or credit?
• Make patents go up?
• Make AP go down?
• Make Revenue go up?
• Make Expenses go up?
• Make Mortgage Loan go up?
• Make Salaries payable go down?
• Make Cash go down?
 What do you need – debit or credit?
• Make patents go up? • Debit
• Make AP go down? • Debit
• Make Revenue go up? • Credit
• Make Expenses go up? • Debit
• Make Mortgage Loan go up? • Credit
• Make Salaries payable go down? • Debit
• Make Cash go down? • Credit
 Recording a General Journal Entry
Recording Transactions
in the General Journal

Two Columns of the General Journal

The left column The right column

for recording for recording
debits credits

general journal
An all-purpose journal in which all the transactions
of a business may be recorded.
Recording a General Journal Entry
Recording Transactions
in the General Journal
 Recording a General Journal Entry
Recording Transactions
in the General Journal

Seven steps to determining each journal entry

Identify the accounts affected.

Classify the accounts affected.

Determine the amount of increase or decrease for each account affected.

Determine which accounts are debited and for what amount.

Determine which accounts are credited and for what amount.

Determine the complete entry in T-account form.

Determine the complete entry in general journal entry form.

 Recording a General Journal Entry
Here is Recording
an example
Transactions
in the General Journal showing the analysis of a business
transaction and its general journal entry:

Business Transaction

Zip issued a $3,000 check to purchase a computer system.

 Recording a General Journal Entry
Recording Transactions
in the General Journal
Do not erase an error. Draw a line through it with a pen and enter
the correct information above the line.

Business Transaction
Describe the general journal entry for the following event.
On January
Question16,
1 20-- On Time Delivery issued Check 243 to
Comfort Space for $4,000 to buy office furniture.

20--
Jan. 16Office Furniture 4 0 0 0 00
Cash in Bank 4 0 0 0 00
Check 243
 First record the date in the Date Column.

Question 1

20--
Jan. 16

(continued)
Then record:
the account debited in the Description
Question 1
column.
the amount of the debit in the Debit column.

20--Jan.16 Office Furniture 4 0 0 0 00

(continued)
Then record:
Question 1
the account credited in the Description column. The
account name is indented under the debit account name.
the amount of the credit in the Credit Column.

20--
Jan. 16 Office Furniture 4 0 0 0 00
Cash in Bank 4 0 0 0 00

(continued)
Finally, in the Description column, record:
Question 1
an explanation. Indent the explanation
under the credit account name.

20--
Jan. 16 Office Furniture 4 0 0 0 00
Cash in Bank 4 0 0 0 00
Check 243
 Why do businesses separate their accounting
records into accounting periods?
Question 2

• Businesses use accounting periods

to make financial comparisons
possible.
• Comparisons of business
performance would be impossible if
fiscal periods varied in length.
 Transaction

Record the owner’s investment in the

business:
•Cash, $32,000
•Accounts Receivable, $2,000
•Office Equipment, $12,000
•Delivery Trucks, $60,000
•Accounts Payable, $20,000
•Capital, $86,000
Transaction Analysis
• The assets (debits) and liabilities (credit)
and owner’s equity account (credit) are
recorded in the journal.
Post
Date Description Ref Debit Credit
20 xx
Nov 1 Cash 32,000
Accounts Receivable 2,000
Office Equipment 12,000
Delivery Trucks 60,000
Accounts Payable 20,000
Christopher Johns, Capital 86,000
Investment in the business
7-42
 Transaction Analysis
Paid $1800 to Wilson Management for the
November rent
• An increase in expenses decreases owner’s
equity (debit Rent Expense).
• An asset decreases (credit Cash).

Post
Date Description Ref Debit Credit
20 xx
1 Rent Expense 1,800
Cash 1,800
Paid November rent.
 Transaction Analysis
Paid $400 to Kenworth Truck Sales on account.

• A liability decreases (debit Accounts Payable).

• An asset decreases (credit Cash).

Post
Date Description Ref Debit Credit
20 xx
10 Accounts Payable 400
Cash 400
Paid Kenw orth Truck Sales on account

7-44
 Transaction Analysis
Paid $150 for gasoline and oil for the trucks
• An increase in expenses decreases owner’s
equity (debit Truck Expense).
• An asset decreases (credit Cash).
Post
Date Description Ref Debit Credit
20 xx
13 Truck Expense 150
Cash 150
Paid for gasoline and oil.
Date Description DB CR

Rent a apartment “ expenses “ 20,000

Cash 6000
Account payable 14,000

Aslam rented an apartment for rent

expenses of 20,000, Cash 6000$ was
paid and remain on account payable
Utilities 200
Cash 200
Cash 10,000
Hamid O.E 10,000
Date Description DB CR
Cash 200,000
Busses 200,000
Cash 200
Cake 150
Rev 50
Account Rev 200
Sale of Calculator 100
Rev of Calculator 100
Date Description DB CR

Salaries to be paid 100,000

Utilities 30,000
Account payable 130,000
Cash 140,000
Aslam O.E 140,000
Account payable 130,000
Cash 130,000
 Chapter Summary

• A journal is used to keep a record of the

day-to-day financial activities of a
business.
• Some people use “T” accounts to
analyze the transactions before entering
them into the journal.
Chapter Summary(continued)

•The journal is used to list essential

information about each transaction.
•The journal is called the book or record
of original entry.
•A general journal is a common type of
journal.
Chapter Summary(continued)
• A systematically arranged list of a
business’s accounts is known as a chart
of accounts.
• The chart of accounts shows account
classifications (assets, liabilities, owner’s
equity, revenue, and expenses) as well as
the name and number of each account.
Chapter Summary(continued)

•A journal entry may contain more than

one debit and/or credit. This type of entry
is called a compound entry.
•The totals of the debit and credit columns
must be equal no matter how many
accounts are used in a transaction.
The END