The Accounting Cycle

The Accounting Cycle
C3
Start
Prepare
post-closing
trial balance
Analyze
transactions
POST
Closing
Entries
Journalize
Post
Prepare
statements
Prepare
unadjusted
trial balance
Prepare
adjusted
trial balance
Adjusting
Entries
POST
3-1
During the Accounting Period
Source
Documents
Transaction
Analysis
Record in
Journal
Post to
Ledger
At the End of the Accounting Period
Financial
Statements
Adjusted
Trial Balance
Record & Post

Adjusting
Entries
At the End
of the Year
Close Temporary
Accounts
Post-Closing
Trial Balance
Unadjusted
Trial Balance
The
Accounting
Processing
Cycle
C3
The Account and its Analysis
Assets
Assets
Asset
Accounts
Accounts
Accounts
Liability
Liability
Liability
Accounts
Accounts
Accounts
Equity
Equity
Equity
Accounts
Accounts
Accounts
2-3
The Accounting Equation
A = L + OE
+ Owner Investments
- Owner Withdrawals
+ Revenues
+ Gains
- Expenses
- Losses
Accounting Equation for a

Corporation
A = L + SE
+ Paid-in Capital
+ Retained Earnings
+ Revenues - Expenses - Dividends

+ Gains
- Losses
C3

Assets
+
Common
Common
Stock
Stock
Liabilities
Liabilities
Dividends
Dividends
+
+
Revenues
Revenues
Equity
Equity
Expenses
Expenses
2-6
Asset Accounts
C3
Cash
Land
Buildings
Asset
Asset
Accounts
Accounts
Equipment
Supplies
Accounts
Receivable
Notes
Receivable
Prepaid
Accounts
2-7
Liability Accounts
C3
Accounts
Accounts
Payable
Payable
Accrued
Accrued
Liabilities
Liabilities
Notes
Notes
Payable
Payable
Liability
Liability
Accounts
Accounts
Dividends
Dividends
Payable
Payable
Unearned
Unearned
Revenue
Revenue
2-8
Equity Accounts
C3
Common
Common
Stock
Stock
Retained
Retained
Earnings
Earnings
Dividends
Dividends
Declared
Declared
Equity
Equity
Accounts
Accounts
Revenues
Revenues
Expenses
Expenses
2-9
C3
An
An account
account is
is aa
record
record of
of
increases
increases and
and
decreases
decreases in
in aa
specific
specific asset,
asset,
liability,
liability, equity,
equity,
revenue,
revenue, or
or
expense
expense item.
item.
The
The general
general
ledger
ledger is
is aa record
record
containing
containing all
all
accounts
accounts used
used by
by
the
the company.
company.
2-10
C4
Ledger and Chart of Accounts

The ledger is a collection of all accounts for an
information system.
A companys size and diversity of operations
affect the number of accounts needed.
The chart of accounts is a list of all accounts and
includes an identifying number for each account.
2-11
C5
Debits and Credits

A T-account represents a ledger account and is a
tool used to understand the effects of one or
more transactions.
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.
ASSETS = LIABILITIES + EQUITY
||
ASSETS = LIABILITIES + Common Stock DIV + REV EXP

DR
CR
CR
DR
CR
DR
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.
NORMAL Balance
C5
Assets
Assets
ASSETS
Debit
Credit
Liabilities
Liabilities
LIABILITIES
Debit
Credit
Equity
Equity
EQUITIES
Debit
Credit
Whether a debit or a credit is an increase or decrease

depends on the NORMAL Balance of the account.
2-16
NORMAL Balance
C5
Equity
Common
Common
Stock
Stock
Dividends
Dividends
Revenues
Revenues
Expenses
Expenses
Stock
Dividends
Revenues
Expenses
Debit Credit
Debit Credit
Debit Credit
Debit Credit
2-17
C5
NORMAL Balance
An account balance is the difference between the increases
and decreases in an account.
Notice the T-Account
2-18
P1
Journalizing & Posting Transactions

Assets
Assets
Step 1: Analyze transactions

and source documents.
ACCOUNT NAME:
Date
Liabilities
Liabilities
Equity
Equity
Step 2: Apply doubleentry accounting
ACCOUNT No.
Description
PR
Debit
Credit
Balance
Step 4: Post entry to ledger
Step 3: Record journal entry
2-19
P1
Journalizing Transactions
Transaction
Transaction
Date
Date
Transaction
Transaction
explanation
explanation
Titles
Titles of
of Affected
Affected
Accounts
Accounts
Dollar
Dollar amount
amount of
of debits
debits
and
and credits
credits
2-20
P1
Balance Column Account

T-accounts are useful illustrations, but balance
column accounts are used in practice.
2-21
P1
Posting Journal Entries
Identify the debit account in ledger.
2-22
P1
Enter the date.
2-23
P1
Enter the amount and description.
2-24
P1
Enter the journal reference.
2-25
P1
Compute the balance.
2-26
P1
Enter the ledger reference.
2-27
A1
Analyzing Transactions
Analysis:
Double entry:
Posting:
101
301
2-28
A1
Analysis:
Double entry:
Posting:
126
101
2-29
A1
Analysis:
Double entry:
Posting:
167
101
2-30
A1
Analysis:
Double entry:
Posting:
126
201
2-31
A1
Analysis:
Double entry:
Posting:
403
101
2-32
A1
Analysis:
Double entry:
Posting:
101
2-33
A1
After processing its remaining transactions for December,

FastForwards Trial Balance is prepared.
FastForward
Unadjusted Trial Balance
December 31, 2009
Cash
Accounts receivable
Supplies
Prepaid Insurance
Equipment
Accounts payable
Unearned consulting revenue
Common stock
Dividends
Consulting revenue
Rental revenue
Salaries expense
Rent expense
Utilities expense
Total
Debits
$
4,350
9,720
2,400
26,000
Credits
6,200
3,000
30,000
200
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.
5,800
300
1,400
1,000
230
$ 45,300
$ 45,300
2-34
C3
Start
Prepare
post-closing
trial balance
Analyze
transactions
POST
Closing
Entries
Journalize
Post
Prepare
statements
Prepare
unadjusted
trial balance
Prepare
adjusted
trial balance
Adjusting
Entries
POST
3-35
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 Basis

Accrual 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.
C1
Accrual Basis vs. Cash Basis

Accrual Basis
Cash Basis
Revenues are
recognized when
earned and expenses
are recognized when
incurred.
Revenues are
recognized when
cash is received and
expenses recorded
when cash is paid.
Accounting
Not GAAP
3-38
C1
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
3-39
C2

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.
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.
C2, P1
Adjusting Accounts
Framework for
Adjustments
Adjustments
Paid
Paid (or
(or received)
received) cash
cash before
before
expense
expense (or
(or revenue)
revenue) recognized
recognized
Paid
Paid (or
(or received)
received) cash
cash after
after
expense
expense (or
(or revenue)
revenue) recognized
recognized
Prepaid
Prepaid
(Deferred)
(Deferred)
expenses*
expenses*
Accrued
Accrued
expenses
expenses
Unearned
Unearned
(Deferred)
(Deferred)
revenues
revenues
*including depreciation
Accrued
Accrued
revenues
revenues
3-42
Prepaid (Deferred) Expenses

P1
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?
126
652
3-43
P1
Depreciation
Depreciation is the process of computing
expense from allocating the cost of plant and
equipment over their expected useful lives.
Straight-Line
Asset Cost - Salvage Value
Depreciation =
Useful Life
Expense
3-44
P1
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.
Lets record depreciation expense for the year
ended December 31, 2009.
2009
$62,000 - $2,000
Depreciation =
=
Expense
5
$12,000
3-45
P1
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.
Lets record depreciation expense for the year
ended December 31, 2009.
Accumulated
Accumulated depreciation
depreciation is
is
aa contra
contra asset
asset account.
account.
3-46
P1
Depreciation
Equipment is
shown net of
accumulated
depreciation.
This amount is
referred to as the
assets book
value
3-47
P1
Unearned (Deferred) Revenues

Cash
Cash received
received in
in
advance
advance of
of
providing
providing
products
products or
or
services.
services.
Go Big Blue
Revenue
Liability
Debit
Adjustment
Buy your season tickets for

all home basketball games NOW!
Unadjusted
Balance
Credit
Adjustment
3-48
P1

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:
3-49
P1

On December 31, Ox University has
played 10 of its regular home games,
winning 2 and losing 8.
3-50
Accrued Expenses
P1
Costs
Costs incurred
incurred in
in aa
period
period that
that are
are
both
both unpaid
unpaid and
and
unrecorded.
unrecorded.
Expense
Debit
Adjustment
Were about one-half

done with this job and
want to be paid for
our work!
Liability
Credit
Adjustment
3-51
Accrued Expenses
P1
Barton,
Barton, Inc.
Inc. pays
pays its
its employees
employees every
every Friday.
Friday. Year-end,
Year-end,
12/31/09,
12/31/09, falls
falls on
on aa Wednesday.
Wednesday. As
As of
of 12/31/09,
12/31/09, the
the
employees
employees have
have earned
earned salaries
salaries of
of $47,250
$47,250 for
for Monday
Monday
through
through Wednesday.
Wednesday.
Last pay
date
12/26/09
12/1/09
Next pay
date
12/31/09
Year end
Record
Record adjusting
adjusting
journal
journal entry.
entry.
3-52
P1
Accrued Expenses
Barton,
Barton, Inc.
Inc. pays
pays its
its employees
employees every
every Friday.
Friday. Year-end,
Year-end,
12/31/09,
12/31/09, falls
falls on
on aa Wednesday.
Wednesday. As
As of
of 12/31/09,
12/31/09, the
the
employees
employees have
have earned
earned salaries
salaries of
of $47,250
$47,250 for
for Monday
Monday
through
through Wednesday.
Wednesday.
3-53
P1
Accrued Revenues
Smith
Smith &
& Jones,
Jones, CPAs,
CPAs, had
had $31,200
$31,200 of
of work
work
completed
completed but
but not
not yet
yet billed
billed to
to clients.
clients.
Lets
Lets make
make the
the adjusting
adjusting entry
entry necessary
necessary on
on
December
December 31,
31, 2009,
2009, the
the end
end of
of the
the companys
companys fiscal
fiscal
year.
year.
3-54
3-55
C3
Start
Prepare
post-closing
trial balance
Analyze
transactions
POST
Closing
Entries
Journalize
Post
Prepare
statements
Prepare
unadjusted
trial balance
Prepare
adjusted
trial balance
Adjusting
Entries
POST
3-56
P3
1. Prepare Income Statement
3-57
P3
2. Prepare Statement of Retained

Earnings
Note: Net Income from the Income
Statement carries to the Statement
of Retained Earnings.
3-58
P3
3. Prepare Balance Sheet
3-59
C3
Start
Prepare
post-closing
trial balance
Analyze
transactions
POST
Closing
Entries
Journalize
Post
Prepare
statements
Prepare
unadjusted
trial balance
Prepare
adjusted
trial balance
Adjusting
Entries
POST
3-60
C3
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.
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.
3-61
The Closing Process
Income
Summary
Liabilities
Permanent
Accounts
Shareholders
Equity
Temporary
Accounts
Assets
Dividends
Expenses
Revenues
The closing process applies

only to temporary accounts.
P4
1.
2.
3.
4.
Recording Closing Entries

Close revenue accounts to Inc. Summary;
Close expense accounts to Inc. Summary;
Close the income summary to RE;
Close dividends account to RE.
3-63
P4

Salaries Expenses
$ 18,100
Consulting Revenues
Examine the
accounts
presented.
Income Summary
$ 25,000
Retained Earnings
$ 7,000
3-64
P4

Salaries Expenses
Consulting Revenues
$ 25,000
$ 18,100
Income Summary
$ 25,000
Close
with a
reven
and a
Incom
$ 25,000
Consulting Revenues 25,000

Income Summary
25,000
3-65
P4

Salaries Expenses
$ 18,100
$ 18,100
Income Summary
$ 18,100
$ 25,000
Consulting Revenues
$ 25,000
$ 25,000
Close expense
accounts with a
credit to expenses
and a debit to
Income Summary.
Income Summary
18,000
Salaries Expenses
18,000
3-66
P4

Salaries Expenses
$ 18,100
$ 18,100
Income Summary
$ 18,100
$ 25,000
$ 6,900
Consulting Revenues
$ 25,000
$ 25,000
Determine the
balance in the
Income Summary
account.
3-67
P4

Salaries Expenses
$ 18,100
$ 18,100
Income Summary
6,900
Retained Earnings
6,900
Close the Income

Summary to
Retained Earnings.
Income Summary
$ 18,100
$ 6,900
$ 25,000
$ 6,900
Retained Earnings
$ 7,000
$ 6,900
3-68
P4

The dividends account is closed to
Retained Earnings.
Dividends
$ 2,000
$ 2,000
Retained Earnings
$ 2,000
$ 7,000
6,900
3-69
P4

The dividends account is closed to
Retained Earnings.
Dividends
$ 2,000
$ 2,000
Retained Earnings
$ 2,000
Determine the ending

balance in Retained
Earnings.
$ 7,000
6,900
$ 11,900
3-70
Post Closing Trial Balance
P5
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.
3-71
3-72
Let's prepare
the Closing Entries
for Dress Right Corporation
CLOSING ENTRIES
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:
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.
C3
Start
Prepare
post-closing
trial balance
Analyze
transactions
POST
Closing
Entries
Journalize
Post
Prepare
statements
Prepare
unadjusted
trial balance
Prepare
adjusted
trial balance
Adjusting
Entries
POST
3-78

The Accounting Cycle

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The Accounting Cycle

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The Accounting Cycle

During the Accounting Period

At the End of the Accounting Period

Record & Post

The Account and its Analysis

The Accounting Equation

Accounting Equation for a

+ Revenues - Expenses - Dividends

The Account and its Analysis

The Account and its Analysis

Ledger and Chart of Accounts

Debits and Credits

The T account is a shorthand format of an account

Assets are on the left side of the equation;

ASSETS = LIABILITIES + Common Stock DIV + REV EXP

Total amount that is debited to accounts

Whether a debit or a credit is an increase or decrease

Journalizing & Posting Transactions

Step 1: Analyze transactions

Step 2: Apply doubleentry accounting

Step 4: Post entry to ledger

Step 3: Record journal entry

Balance Column Account

Posting Journal Entries

Identify the debit account in ledger.

Posting Journal Entries

Enter the date.

Posting Journal Entries

Enter the amount and description.

Posting Journal Entries

Enter the journal reference.

Posting Journal Entries

Compute the balance.

Posting Journal Entries

Enter the ledger reference.

After processing its remaining transactions for December,

The trial balance lists