Professional Documents
Culture Documents
1. Source documents such as sales invoices, bills from suppliers, and cash register tapes
serve to relay the information about each transaction to the accountant.
2. Transaction analysis- the process of reviewing the source documents to determine the
dual effect on the accounting equation and the specific elements (accounts) that will be
used to classify the items of analysis.
3. Journal- provides a chronological record of all economic events affecting a firm.
o Each journal entry is expressed in terms of equal debits and credits to accounts
affected by the transaction being recorded.
o A sales journal is an example of a special journal used to record a repetitive type
of transaction.
o A common convention is to list the debited accounts first, indented the credited
accounts, and use the first of two columns for the debit amounts and the second
column for the credit amounts.
4. Posting- involves transferring debits and credits recorded in individual journal entries to
the specific accounts affected.
5. Unadjusted trial balance- allows us to verify that the total of all debits is equal to the total
of all credits after recording all transactions during the period but before any adjusting
entries.
6. Adjusting entries- are used to record changes in assets and liabilities (and their related
revenues and expenses) that have occurred during the period but which we have not yet
recorded by the end of the period.
7. Adjusted trial balance- a trial balance that is prepared after all adjusting entries have
been recorded.
8. Financial statements- the primary means of providing information to investors and other
decision makers, which is the purpose of accounting.
o These statements include:
1) The income statement and statement of comprehensive income
2) The balance sheet
3) The statement of cash flows
4) The statement of shareholders’ equity
9. Closing entries serve two purposes: (1) to transfer the balances of temporary accounts
(revenues, expenses, and dividends) to the retained earning account, and (2) to reduce
the balances of these temporary accounts to zero to “wipe the slate clean” and ready
them for measuring activity in the next period.
10. Post-closing trial balance- a list of all permanent accounts and their balances after closing
entries have been recorded. Temporary accounts are at zero and not listed.
E. Journal, ledger, and trial balance
- Steps 1,2, and 3- obtain information about transactions from source documents, analyze the
transaction and record the transaction in a journal.
- Journal entries
• Common stock is a paid-in capital account.
• Assets: cash, prepaid rent, office equipment, inventory, supplies, accounts receivable,
interest receivable
• Liabilities: notes payable, accounts payable, deferred rent revenue, accumulated
depreciation, interest payable, deferred revenue, miscellaneous revenue
• Equity: common stock, cost of goods sold (expense), sales revenue, salaries expense,
interest expense, depreciation expense, rent expense
G. Adjusting entries
- Adjusting entries are necessary for 3 situati9ons:
1. Prepayments- transactions in which the cash flow precedes expenses or revenue
recognition.
2. Accruals- involve transactions where the cash outflow or inflow takes place in a period
subsequent to expense or revenue recognition.
3. Estimates- accountants often make them in order to comply with the accrual accounting
model.
- Prepayments- for example, a company may buy supplies in one period but use them in a later
period.
- Prepaid expenses- costs of assets acquired in one period and expensed in a future period.
• The adjusting entry required for a prepaid expense is a debit to an expense and a credit to
an asset.
- Deferred revenues- represent liabilities recorded when cash is received from customers in
advance of providing a good or service.
• The adjusting entry required when deferred revenues are recognized is a debit to a
liability and a credit to revenue.
- Accrued liabilities- represent liabilities recorded when an expense has been incurred prior to
cash payment.
• The adjusting entry required to record an accrued liability is a debit to an expense and a
credit to a liability.
- Accrued receivables- involve situations when the revenue is recognized in a period prior to
the cash receipt.
• The adjusting entry required to record an accrued revenue is a debit to an asset, a
receivable, and a credit to revenue.
H. The income statement and the statement of comprehensive income
- Income statement- a change statement that summarizes the profit-generating transactions
that caused shareholders’ equity (retained earnings) to change during the period.
I. Balance sheet
- Balance sheet- provides information useful for assessing future cash flows, liquidity, and long-
term solvency.
- Current assets- those assets that are cash, will be converted into cash, or will be used within
one year from, the balance sheet date.
- Current liabilities- those liabilities that will be satisfied within one year from the balance
sheet date.
- Examples of assets not classified as current include property and equipment and long-term
receivables and investments.
- Shareholders’ equity lists the paid-in capital portion of equity- common stock and retained
earnings.
J. Statement of cash flows
- Statement of cash flows- its presented for each period for which an income statement is
provided.
- The statement classifies all transactions affecting cash into one of three categories:
1. Operating activities- inflows and outflows of cash relate to transactions entering into the
determination of net income.
2. Investing activities- involve the acquisition and sale of long-term asset used int the
business and nonoperating investment assets.
3. Financing activities- involve cash inflows and outflows from transactions with creditors
and owners.
- The second closing entry transfers the expense account balances to retained earnings.
Because expense accounts have debit balances, we credit them to bring their balances to
zero.
- The third closing entry transfers dividends account to retained earnings. Because dividends
account has a debit balance, we credit it to bring its balance to zero.
- The final step is to prepare a post-closing trial balance
Post-closing trial balance- doesn’t include any of the temporary accounts- revenues,
expenses, and dividends.