Complete PPT Accountingbasics - Wiley Rev

Lecture/Seminar on Basics
of Accounting
(The Language of
Business)
ACLC Taytay, February 21, 2015
Speaker:
Evelyn B. Ferraris, MBM, CPA

WHAT YOULL LEARN
At the end of the lecture, the students should be able to:
Explain the fundamental function and purpose of
accounting
Enumerate the different users of accounting information
Understand the different branches or specialties of
accounting
Understand the meaning of accounting principles
Define accounting
Enumerate the different Financial reports prepared by
the accounting department and differentiate each
Enumerate and explain the steps in the accounting cycle
WHY STUDY ACCOUNTING?
In the highly competitive field of
management, successful careers
often depend on an ability to make
daily operating decisions based on
analysis of financial information.
If you want to get ahead in business

& marriage, be determined to
understand accounting basics.
Business & Accounting
Small businesses usually fail because
of poor understanding of accounting .
Even marriages usually fail
because of poor financial
management (majority of
divorces and annulments are
financially related.)
Even if you are not involved directly in
accounting activities, you will need to be
acquainted with the language to be able
to
Understand the meaning of accounting
information
How it is compiled
How it can be used and
What its limitations are.

Accounting defined
Accounting is often called the language of
business.
Through Accounting, the performance of

the business as well as its financial
condition is communicated to both the
internal and external users of accounting
information.
We have P10 million net income
Accounting is the system that
measures business activities or
transactions,
processes that information into reports
and
communicate the results to decision
makers through financial statements.

NET INCOME OR NET LOSS?
Main purpose of Accounting
To provide the information necessary to
the organizations management to enable
it to plan and control its business
activities.
The information provided by the
accounting system must be useful and
relevant to the users of the accounting
data the management and outsiders who
are interested in certain financial aspects
of the business.
What do Accountants Account For?
Everything of value!
USERS OF ACCOUNTING
INFORMATION
EXTERNAL AND INTERNAL
USERS
USERS OF ACCOUNTING
INFORMATION
A. EXTERNAL USERS persons and
groups outside the business
B. INTERNAL USERS- persons and
groups inside the business.
A. EXTERNAL USERS
Owners
creditors
prospective investors
Suppliers
Government regulatory agencies
Labor unions
Financial analysts and bankers
B. INTERNAL USERS
Board of directors
Managers and Supervisor
Employees
All readers of financial statements ,
managers, owners, investors, and
creditors are interested in analyzing
and interpreting the financial
statements.
However, what is of great interest to
one, may be of less interest to others.
Managers are concerned about the
internal operating efficiency of the
organization and will look for indications :
that things are running smoothly,
that operating goals are being met and
that the various departments are being
managed as profitably as possible.

Stockholders by contrast, are more
interested in
The Net income
And about future earnings and
dividend prospects.
Creditors and investors other than the
stockholders are more interested in
the
Debt-paying ability of the company.
A company might have good

earnings but because of a shortage
of cash , might not be able to meet
its debt obligations.
BRANCHES OF ACCOUNTING
A. FINANCIAL ACCOUNTING focus is
on financial reporting for external users.
B. MANAGERIAL ACCOUNTING focus
is preparation of financial reports to be
used by internal users ( such as
managers) for controlling operations and
in decision making and planning.
TAX ACCOUNTING for income tax
return preparation.
NOT-FOR-PROFIT ACCOUNTING for
nonprofit organizations (such as NGOs,
civic and charitable organizations)
GOVERNMENT ACCOUNTING for all
branches of government to report on the
use of government funding.
Through Accounting, the business
communicates the results of operations
to decision makers through financial
statements.
FINANCIAL STATEMENTS
Financial Statements are documents that
report on an individuals or an organizations
business in monetary terms.
Show the results of business operations or
business condition for a certain period.
Intelligent answers to business questions
such as:
Am I earning profit on my restaurant?
Can I afford to hire more waiters?
How much do I owe my creditors?
are basically based on accounting information.

MAJOR FINANCIAL
STATEMENTS
The five major financial statements
prepared by the accounting department
are:
STATEMENT OF COMPREHENSIVE INCOME
(INCOME STATEMENT)
STATEMENT OF FINANCIAL CONDITION
(BALANCE SHEET)
CASH FLOW STATEMENT
STATEMENT OF CHANGES IN OWNERS EQUITY
NOTES TO FINANCIAL STATEMENTS
STATEMENT OF COMPREHENSIVE
INCOME (INCOME STATEMENT)
It provides information regarding the
results of operations for a stated
period of time. It shows the
*revenues generated
*costs and expenses incurred
*resulting net income or loss for the
period.
FORMULA:
REVENUES COSTS AND EXPENSES=
NET INCOME OR NET(LOSS)
Revenues increase owners capital
Costs and expenses decrease owners
capital
STATEMENT OF FINANCIAL
CONDITION (BALANCE SHEET)
This statement provides information
regarding the financial position of
the business on a given date. It
shows the
*Assets
*Liabilities
*Equity
ILLUSTRATION 4-17 CLASSIFIED
BALANCE SHEET IN REPORT FORM
Pioneer Advertising Agency
Balance Sheet
A classified balance
October 31, 2002 sheet helps the
Assets
Current Assets financial statement
Cash $ 15,200 user determine:
Accounts Receivable 200
Advertising Supplies 1,000 The availability of
Prepaid Insurance 550 assets to meet debts as
Total Current Assets 16,950
Capital Assets they come due, and
Office Equipment $ 5,000 The claims of short-
Less: Accumulated Amortization 83 4,917
Total Assets $ 21,867 and long-term
creditors on total
Liabilities and Owner's Equity
Current Liabilities assets.
Notes Payable $ 1,000
Accounts Payable 2,500
Unearned Revenue 800
Salaries Payable 1,200
The balance sheet is
Interest Payable 25 most often presented
Total Current Liabilities 5,525
Long-term Liabilties in the report form,
Notes Payable 4,000
Total Liabilities 9,525 with the assets
Owner's Equity
C.R. Byrd, Capital 12,342
shown above the
Total Liabilities and Owner's Equity $ 21,867 liabilities and
ILLUSTRATION 4-10 STANDARD
BALANCE SHEET CLASSIFICATIONS
Financial statements become more useful when

the elements are classified into significant
subgroups.
A classified balance sheet generally has the
following standard classifications:
Assets Liabilities and Equity

Current Assets Current Liabilities
Long-Term Investments Long-Term Liabilities
Fixed Assets or PPE Owners/ Partners/ Shareholders
Equity
ASSETS
- anything a business owns which
has commercial value.
- economic resources of a business
that are expected to be of benefit
in the future.
- examples of assets are CASH,
RECEIVABLES, SUPPLIES,
EQUIPMENT.
Resources or assets of the firm
ASSETS
Tangible and Non-tangible resources of a
business that have future value. Usually
sub-classified as follows:
Quick Assets (Liquid Assets)
Cash Petty Cash Receivables -

Securities
Current Assets (Turn into cash/use
annually)
All the above + Inventories, Supplies
Fixed Assets (Used in the business and
depreciated over several yrs.)
Buildings, Equipment, Natural
Resources
Land (Fixed, but never depreciated)
Intangible Assets: Patents,
Trademarks, Copyrights
CURRENT ASSETS
Current assets are cash and other
resources that are reasonably expected
to be realized in cash or sold or
consumed in the business within one
year of the balance sheet date or the
companys operating cycle, whichever is
longer.
Listed in the order of liquidity.
Examples of current assets are cash,
temporary investments, receivables,
inventory, and prepaid expenses.
(CIRIP)
LONG-TERM
INVESTMENTS
Long-term investments are resources that

can be realized in cash, but the
conversion into cash is not expected
within one year or the operating cycle,
whichever is longer.
Examples include investments in
shares or bonds of another company
or investment in land held for resale.
Non-Current ASSETS or
Plant Property and
Equipment
Tangible resources of a relatively permanent
nature that are used in the business and not
intended for sale are classified as (1) property,
plant, and equipment and (2) natural
resources.
(1)Examples of property, plant, and
equipment include land, buildings, and
machinery.
(2)Examples of natural resources include
tracts of timber, oil and gas reserves, and
mineral deposits.
Intangible assets are noncurrent
resources that do not have physical
substance.
Examples include patents, copyrights,
trademarks, or trade names that give
the holder exclusive right of use for
a specified period of time.
CURRENT LIABILITIES
Current liabilities are obligations that
are reasonably expected to be paid
from existing current assets or through
the creation of other current liabilities
within one year or the operating cycle,
whichever is longer.
Examples include accounts payable,
unearned revenue, interest payable,
accrued expenses and current
maturities of long-term debt.
LONG-TERM LIABILITIES
Obligations expected to be paid

after one year are classified as
long-term liabilities.
Examples include long-term
notes payable, bonds payable,
mortgages payable, and lease
liabilities.
Liabilities
EQUITY
The content of the equity section varies with
the form of business organization.
In a proprietorship, there is a single owners
equity account called (Owners Name),
Capital.
In a partnership, there are separate capital
accounts for each partner.
For a corporation, owners equity is called
shareholders equity, and it consists of two
accounts: Share Capital and Retained
Earnings.
PAUSE
As a student, What are your
Assets?
Bank Account & Money in your pocket
Car
Clothes, uniforms and jewelries
Books
Prepaid rent
Computers & Electronic Equip.
What are your liabilities?
Unpaid tuition fees
Loans
Credit Card Balance
Unpaid bills
How much is your equity or NET
ASSETS?
Capital or Owners equity
Capital or Owners Equity
The portion of your assets that
you can legally claim. (Net
Assets). What you really own
legally.
Expressed as: Assets (minus)
Liabilities = Owners Equity (or
Capital)
Example (purchased a building for P5,000,000
with a 10% down payment (P500,000)
Cost of a building (sales price = Asset
amount) P5,000,000
Less: What you still owe on the building
(Liability) P4,500,000
Equals: Your equity in the building (Capital)
or your net worth in the building. P500,000
Owners Equity Account Titles
Single Proprietorship:
Capital
Corporation:
Common Stock or Ordinary shares (what
owners paid in)
Preferred Stock or preference shares (what
owners paid in)
Retained Earnings (profits that the business
keeps in the business and not distributed as
dividends
What is your net worth???
What you have minus what you owe.
What format do we use in business and in
personal finance to show our net worth?
A Balance Sheet or STATEMENT OF
FINANCIAL CONDITION
List of Assets (classified by type in
accounts)
Compared or balanced with:
List of Liabilities and Owners Equity
(classified by type and in accounts)

Example (Simplified)
John Does Business or Personal Records
Statement of Financial Condition
September 10, 2013
(in thousands)
Assets:
Current:
Cash at Home P100
Cash Deposits in Bank 500
Fixed:
Wardrobe 2000
Equipment 1000
Car 5000
Total Assets: P8,600
Liabilities:
Current:
Credit Card Payable P500
Long Term:
Note Payable (on Car) P2000
Total Liabilities P2,500
Capital, John Doe: 6,100
Total Liabilities & Owners Equity: P8,600
BALANCE SHEET EQUATION
Formula universally used in all financial and
personal financial institutions:
Assets = Liability + Owners Equity
(Resources you have) =(What you

owe to creditors) + (the amount that
you have invested.)
Assets = Liabilities +
Owners equity
OTHER TERMS
Temporary Accounts are used in addition to
balance sheet accounts to record changes in
owners equity each reporting period.
Expenses Decrease in owners equity during the
period by using up an asset or a portion of an asset.

(or creating additional liabilities)
Revenue Increase in owners equity during the
period by performing a service or selling an asset.
Drawing or Dividends Decrease in owners equity
due to personal withdrawals by the owner(s).
INCOME (Income Statement)
Used to determine the net income or net
loss of an individual or business for a
defined period of time.
Used for marking progress by comparing
months and years result of business
operations
Used by financial institutions for determining
the progress and status of a company or
individuals financial health.
Used by the BIR for determining taxes
Income Statement What does it
contain?
Matches Expenses with Revenues for a specific
period of time. (Only the temporary type of
accounts are on the Statement of
Comprehensive Income or Income Statement.)
No Assets/Liabilities.
Income Statement accounts are closed out at
the end of the reporting period and started over
again the next period.so comparisons can be
made.
Statement of comprehensive Income
(Income Statement)
Name of Individual or business
Statement of Comprehensive Income
For the Month of Sept. 2013
(In thousands)
Revenue:
Income from Job P500
Income from Pell Grant 2000
Total Revenue: P2500
Expenses:
Clothes Expense P300
Rent Expense 200
Food Expense 50
Tuition Expense 1200
Misc. Expense 250
Total Expenses: 2000
Net Income for September: P 500
REVIEW
1. Which financial report is a snapshot of
the of the financial status of a business or
a family..and is given a specific date?
2. Which financial report is a moving
picture of the business/enterprise result
of operations for a period of time?
3. What does a balance sheet balance?
4. What are the two kinds of accounts
found on an Income Statement /Statement
of comprehensive Income?
5. On what financial report(s) is the cash
account found?
6. If the bank wanted to know your Net
Worth what report would they ask for?
7. Capital in a corporation is entitled ?
8. Two ways to increase the capital
account are?
9. Two ways to decrease the capital
account are?
How do individuals or
businesses keep track for all
their assets, liabilities, capital,
expenses, revenues. Etc.?
Thru the Accounting Process or
otherwise known as the Accounting Cycle.
(also called the Audit Trail of business
which is
Based on universally accepted accounting
principles. (Generally accepted
accounting principles)
Using the Double Entry Bookkeeping and
Accrual Accounting
Steps in Accounting Cycle
1st. Identify Transactions or
Events to be recorded
Explanation:
The accounting process begins with
analyzing transactions. A BUSINESS
TRANSACTIONS are exchange of
values that affects the financial
position of the business entity .These
are events that take place in the life of
the business that result in an equal
exchange of value.
The company first looks at the source
documents which describe the
transactions and events.
The evidence of the transaction is usually
backed up by a source document or
business document.
A BUSINESS DOCUMENT is any written
or printed evidence of a business
transaction that describes the essential
facts of the transaction.
For each business transaction that occurs,
a source document is received and
created.
These documents not only serve as
objective evidence that transactions have
taken place, but they also indicate the
amounts to be recorded, in keeping with
OBJECTIVITY CONCEPT of accounting.
Example of BUSINESS
TRANSACTION
When supplies are bought for the
restaurant business, an economic
exchange (exchange of values) takes
place.
You may give cash and receive supplies or
You may give a promise to pay and receive
supplies.
When a restaurant purchases food or
beverage for its inventory, it normally buys
these on account and receives an
INVOICE, which becomes the basis for
processing the purchase transaction.
When the invoice is paid, the check issued
by the restaurant will serve as proof that a
cash payment transaction has been
completed.
EXAMPLE OF BUSINESS
DOCUMENTS
1) OFFICIAL RECEIPTS for cash
received
2)CHECKS for payment of expenses or
properties and equipment
3)BILLS OR STATEMENT OF
ACCOUNTS - received from Meralco,
MWSS, PLDT
4) PURCHASE INVOICE- from suppliers
for items purchased
5) SALES INVOICE given to customers
for items sold.
2nd. Journalize Transactions and
Events.
Explanation:
After analyzing the transactions,
events and source documents, the
company is now ready to complete
step 2, journalize using the journal.
ILLUSTRATION 2-9 THE
RECORDING PROCESS
JOURNAL
LEDGER
JOURNAL
1. Analyse each transaction.

2. Enter transaction in a journal.
3. Transfer journal information to ledger
A journal is a complete record of each
transaction. Its easy to remember,
because journal entry has the word
journal in it!
A journal is a Chronological record of
transactions. It is called the Book of original
entry.
When the company journalizes the
accountant applies the rules of
double-entry accounting.
Remember that double-entry
accounting means that each
transaction must be recorded in at
least two accounts or that the debits
must equal the credits.
Example:
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.
Assets Liabilities Equity

THE JOURNAL
Transactions are initially recorded in
chronological order in a journal before being
transferred to the accounts.
Every company has a general journal which
contains
1. spaces for dates,
2. account titles and explanations,
3. references, and
4. two money columns.
JOURNALIZING
Entering transaction data in the journal is

known as journalizing.
Separate journal entries are made for each
transaction.
A complete entry consists of
1. the date of the transaction,
2. the accounts and amounts to be debited and
credited, and
3. a brief explanation of the transaction.
Steps in Journalizing:
Following are the steps involved in the
process of journalizing a transaction:
1.Determine the titles of the accounts

involved. Refer to the Chart of Accounts ( list
of all account titles to be used)
2. Understand the nature of the accounts.
3. Apply the rule of Debit & Credit described
above.
4. And make the necessary journal entry.
ILLUSTRATION 2-10
TECHNIQUE OF JOURNALIZING
The date of the transaction is entered in the date

column.
GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2002
Sept. 1 Cash 15,000
M. Doucet, Capital 15,000
Invested cash in business.
1 Equipment 7,000
Cash 7,000
Purchased equipment for cash.
ILLUSTRATION 2-10
The debit account title is entered at the extreme left
margin of the Account Titles and Explanation
column. The credit account title is indented on the
next line.
GENERAL JOURNAL J1
2002
Sept. 1 Cash 15,000
1 Equipment 7,000
Cash 7,000
ILLUSTRATION 2-10
The amounts for the debits are recorded in the Debit
column and the amounts for the credits are recorded in the
Credit column.
GENERAL JOURNAL J1
2002
Sept. 1 Cash 15,000
1 Equipment 7,000
Cash 7,000
ILLUSTRATION 2-10
A brief explanation of the transaction is given.
GENERAL JOURNAL J1
2002
Sept. 1 Cash 15,000
1 Equipment 7,000
Cash 7,000
ILLUSTRATION 2-10
A space is left between journal entries. The
blank space separates individual journal
entries and makes the journal easier to read.
GENERAL JOURNAL J1
2002
Sept. 1 Cash 15,000
1 Equipment 7,000
Cash 7,000
ILLUSTRATION 2-10
The column entitled Ref. is left blank at the time
the journal entry is made and is used later when
the journal entries are transferred to the ledger
accounts.
GENERAL JOURNAL J1
2002
Sept. 1 Cash 15,000
1 Equipment 7,000
Cash 7,000
SIMPLE AND COMPOUND
JOURNAL ENTRIES
If an entry involves only two accounts, one debit

and one credit, it is considered a simple entry.
GENERAL JOURNAL J1
2002
Oct. 2 Delivery Equipment 14,000
Cash 14,000
Purchased truck for cash.
ILLUSTRATION 2-11
COMPOUND JOURNAL ENTRY
When three or more accounts are required in

one journal entry, the entry is referred to as a
compound entry.
GENERAL JOURNAL J1
2002
Oct. 2 Delivery Equipment 34,000
1 Cash 8,000
Note Payable 26,000
2 Purchased truck for cash
and note payable.
3
IS THIS A CORRECT JOURNAL
ENTRY?
This is the wrong format; all debits must be

listed before the credits are listed.
GENERAL JOURNAL J1
2002
Oct. 2 Cash 8,000
Delivery Equipment 34,000
Note Payable 26,000
Purchased truck for cash
and note payable.
SAMPLE CHART OF
ACCOUNTS
THE ACCOUNT
An account is an individual accounting

record of increases and decreases in
a specific asset, liability, or owners
equity item.
A company will have separate accounts
for such items as cash, salaries
expense, accounts payable, and so on.
ILLUSTRATION 2-1
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 terms debit and credit mean left and 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
Debits and Credits are also terms
used to increase or decrease
various accounts and show
balances.
DR CR
NORMAL BALANCE
Every account classification

has a normal balance,
whether it is a debit or credit.
ILLUSTRATION 2-3 NORMAL
BALANCES ASSETS AND LIABILITIES
Assets
Increase Decrease
Debit Credit
Normal
Balance
Liabilities
Decrease Increase
Debit Credit
Normal
Balance
ILLUSTRATION 2-4 NORMAL
BALANCE OWNERS CAPITAL
Owners Capital
Decrease Increase
Debit Credit
Normal
Balanc
e
ILLUSTRATION 2-5
NORMAL BALANCE OWNERS DRAWINGS
Owners Drawings
Increase Decrease
Debit Credit
Normal
Balanc
e
ILLUSTRATION 2-6
NORMAL BALANCES
REVENUES AND EXPENSES
Revenues
Decrease Increase
Debit Credit
Normal
Balance
Expenses
Increase Decrease
Debit Credit
Normal
Balance
RECAP: RULES OF DEBIT
AND CREDIT
DR CR
ILLUSTRATION 2-7
EXPANDED BASIC EQUATION AND
DEBIT/CREDIT RULES AND EFFECTS
Asset = Liabilities + Owners Equity
s
Owners Owners
Assets = Liabilities + -
Capital Drawings
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
+ - - + - + + -
+ Revenues - Expenses
Dr. Cr. Dr. Cr.

- + + -
To recap:
Assets/Expenses/Withdrawals have
debit balances
Increased by debiting and
decreased by crediting
Liabilities, Capital, and Revenues
have credit balances.

Increased by crediting, and
decreased by debiting
REVIEW
SMILE POUT
DEBIT CREDIT
_____________an
ASSET
to increase it
_________ a LIABILITY
to increase it.
________ the
OWNERS EQUITY to
decrease it.
______ the REVENUE
to increase it.
_______the EXPENSE
to increase it.
______ the CAPITAL
to increase it.
_____ the DRAWING
to increase it.
___________ the
CONTRA-ASSET
to decrease it.
Statement
of the
days
objectives
OBJECTIVES:
Identify the items to
be debited and
credited.
Come up with real-life
transactions that
involve debit and
credit.
VOCABULARY
VOCABULARY WORDS
Debit = Left side of an

account
Credit = Right side of
an account
STORY TELLING
A little girl
named
JORNALIZA
has parents
who are
both
Accountants
.
She would often hear
the use of accounting
terms that she does
not understand. Being
an inquisitive girl, she
would ask: What is
DEBIT and what is
CREDIT?
Her mom
thought of
the
simplest
words to
explain
DEBIT &
CREDIT
DEBIT is
what you
GET.
CREDIT is
what you
GIVE
AWAY.
Young as she is, her
parents have been
teaching her the value
of RECIPROCITY by
the use of the terms
DEBIT and CREDIT.
They have been telling her
that for every DEBIT,
make sure that she
would make a
corresponding
CREDIT.
On her 7th
birthday,
her daddy
surprised
her with a
cute
DOLL.
Then, he asked from
Jornaliza, what did
you DEBIT?
DEBIT
the
DOLL
If you DEBIT a doll,
what would you
CREDIT?
CREDIT:
A thank
you KISS!
Whenever Jornaliza
goes shopping with
her parents, she
would say the
transaction thats
taking place.
One time, her
mom bought
a
MICROWAVE
OVEN and
paid it I
CASH.
Then, JOrnaliza said:
Debit: microwave oven
Credit: CASH
Jornaliza
grew up to
be a fine girl.
On her 14th
birthday, her
mom told her
a story she
would never
forget.
Jornaliza, in
real life,
there are 3
types of
relationships
The Debit-Debit
relationship;
The Credit-Credit
relationship ; &
Debit Credit
relationship
I have 3 friends:
Swappy, Tangy &Blancy.
SWAPPY is in a
Debit-Debit
relationship.
Why? Because
she does nothing
but to ACCEPT
without giving
anything in
return. Her
boyfriend left her
because of this
unfair
relationship.
Tangy is in a
CREDIT-CREDIT
relationship.
She gives all
that she has to
her boyfriend
without even
receiving
anything from
him. Due to
this, she cries
day and night.
Blancy, my
bestfriend, is
in the most
ideal
relationship.
It is the
Debit-Credit or
the
GET & GIVE
relationship.
When she GETS
something from her
boyfriend, she makes
sure that she also gives
something as a sign of
APPRECIATION, be it a
simple thank you, a
sweet note , or a kiss.
Blancy ended
up marrying
her
boyfriend,
and up to
now, they
are still
happily
married.
Blancy ended
up marrying
her
boyfriend,
and up to
now, they
are still
happily
married.
3rd. Posting from Journals to
Ledger
Explanation:
The third step in the accounting cycle
is to post. This sounds complicated
but its actually very easy.
Posting involves transferring
information from the journal to the
ledger.
A ledger is simply a collection of all
accounts it shows all of the number
detail about a companys accounts.
THE LEDGER
The entire group of accounts maintained by a

company is referred to collectively as the
ledger.
A general ledger contains all the assets,
liabilities, and owners equity accounts.
GENERAL
LEDGER
Ledger divided up into these different
accounts:
Assets (100 accounts)
Liabilities (200 accounts)
Capital/Owners Equity (300 accounts)
Revenues (400 accounts)
Cost of Goods Sold (Expense) (500
accounts)
General Expenses (600 accounts)
ILLUSTRATION 2-12
THE GENERAL LEDGER
Individual Individual Individual

Assets Liabilities Owners Equity
Equipment Interest Payable Salaries Expense

Supplies Salaries Payable Service Revenue
Accounts Rec. Accounts Payable Doucet, Drawings
Cash Notes Payable Doucet, Capital
STEPS in POSTING
to the Ledger
1. Transfer the DATE of the transaction from the
journal to the ledger.
2. Transfer the page number from the journal to
the J.R. or Journal Reference of the ledger.
3. Post the debit figure from the journal As a debit
figure in the ledger and the credit figure from
the journal as a credit figure to the ledger
4. Compute and accomplish the Balance column
in the ledger .
5. .Enter the account number from the ledger to
the P.R. or Post Reference column of the
journal once the posting is done.
GENERAL LEDGER
Account : Cash Account # 110
E X P L A N A T I O N J.R. DEBIT CREDIT BALANCE

DATE
3/03 SJ1 1000 1000
3/04 CPJ1 500 500

ILLUSTRATION 2-14
POSTING A JOURNAL ENTRY
General Journal J1
Date Account Title and Explanation Ref Debit Credit
2002
01-Sep Cash 101 15,000
M. Doucet, Capital 301 15,000
General Ledger
Cash 101
Date Account Title and Explanation Ref Debit Credit Balance
2002
01-Sep 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
and the account number to which the journal was posted.
ILLUSTRATION 2-14
POSTING A JOURNAL ENTRY
General Journal J1
Date Account Title and Explanation Ref Debit Credit
2002
01-Sep Cash 101 15,000
M. Doucet, Capital 301 15,000
General Ledger
M. Doucet, Capital 301
Date Account Title and Explanation Ref Debit Credit Balance
2002
1-Sep 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 and the account number to which the journal was posted.
When we post, we are simply
transferring the debits and credits
from the journal to the ledger.
STEPS in POSTING
to the T-ACCOUNT
Post the debit figure from the journal to the
debit side of the T-account and the credit
figure from the journal to the credit side of the
T-account.
Get the totals of the debit column and the
credit column.
Compute the Balance by getting the
difference between the debit total and the
credit total .
Write the balance on the side of the T-
account with the higher total.
GENERALIZATION
What is the that learning that
you acquired in todays
session
Did you learn how to post
entries to the ledger using the
new format.
How do we post entries to the
T-accounts?
4th. Prepare unadjusted Trial
Balance
Explanation:
To verify that the companies debits
equals the credits, an unadjusted trial
balance is prepared.
TRIAL BALANCE
A list of all accounts
with their respective
debit or credit
balances.
BUUBUUTSKEEH LANSCAPE SPECIALIST
TRIAL BALANCE
November 30, 2007
DEBIT CREDIT
Cash P 182,250
Accounts Receivable 7,500
Supplies 1,000
Prepaid Rent 21,000
Prepaid Insurance 24,000
Vehicles 300,000
Equipment 54,000
Notes Payable P 100,000
Unearned Revenues 13,500
Keeh, Capital 450,000
Keeh, Withdrawals 5,000
Lawn Cutting Revenues 37,500
Salaries Expense 4,000
Gas Expense 1,500
Advertising Expense 1,750
P 602,000 P 602,000
Purpose of the Trial Balance
To verify the equality of the

debits and credits in the
ledger.
To serve as a control device
that helps minimize
accounting errors.
STEPS in the Preparation of TB
1. List the account titles in the
financial statement order ( A,
L, OE, R, E)
2. Obtain the account balance of
each account from the ledger
3. Add the debit and the credit
columns.
4. Compare the totals.
The Trial Balance in Balance
The totals of the debits
and credits are EQUAL.
Provides a proof that as
recorded, debits = credits.
Does not guarantee the
absence of error.
Ex. Failure to record the
payment of rent.
The Trial Balance debit and
credit columns will still be
equal.
BUT, the accounts affected
are INCORRECT:
*RENT EXPENSE is understated.
*CASH is overstated.
Trial Balance with UNEQUAL
Balances
An inequality in the totals of
debits and credits will
automatically signal the
presence of an ERROR.
POSSIBLE ERRORS
1.Error in POSTING to the ledger
An erroneous amount was

posted to the account.
A debit entry was posted as
a credit & vice versa.
A debit or credit posting
was omitted.
2. Error in determining the
Account Balances
A balance was
incorrectly computed.
A balance was entered in
the wrong balance
column.
3. Error in preparing the Trial
Balance
One of the columns in the TB
was incorrectly added.
The amount of the account
balance was incorrectly
recorded on the TB.
A debit balance was recorded
on the TB as a credit or vice
versa.
A balance was omitted entirely.
If the Trial Balance is
NOT in balance , it is a
MUST to locate the error.
ILLUSTRATION 2-28 A
TRIAL BALANCE
PIONEER ADVERTISING AGENCY
Trial Balance
October 31, 2002
Debit Credit
Cash $ 15,200
Advertising Supplies 2,500
Prepaid Insurance 600
Office Equipment The total 5,000
Notes Payable
Accounts Payable
debits must $ 5,000
2,500
Unearned Revenue equal the total 1,200
C. R. Byrd, Capital credits. 10,000
C. R. Byrd, Drawings 500
Service Revenue 10,000
Rent Expense 900
$ 28,700 $ 28,700
LIMITATIONS OF A
TRIAL BALANCE
A trial balance does not prove that all transactions
have been recorded or that the ledger is correct.
Numerous errors may exist even though the trial
balance columns agree.
The trial balance may balance even when
1. a transaction is not journalized,
2. a correct journal entry is not posted,
3. a journal entry is posted twice,
4. incorrect accounts are used in journalizing or
posting,
5. offsetting errors are made in recording the
amount of the transaction.
5th. Adjusting Journal Entries
Explanation:
The fifth step in the accounting cycle is to
prepare adjusting entries.
Adjusting entries involve bringing an asset or
liability account balance to its proper amount
and updating the corresponding revenue or
expense account.
Adjusting entries are recorded in the
general journal and then posted to the
ledger. All adjusting entries are made at
the end of the accounting time period.
Adjust the necessary accounts to bring
them up to date.
Requires internal transactions
Requires journal entries & posting as well
Adjusting entries make the revenue
recognition and matching principles
HAPPEN!
THE MATCHING
PRINCIPLE
The practice of expense recognition is
referred to as the matching principle.
The matching principle dictates that
efforts (expenses) be matched with
accomplishments (revenues).
Revenues expenses
earned are offset incurred in
this month against.... earning the
revenue
ADJUSTING ENTRIES
entries that reflect
financial data that have
occurred but have NOT
YET been recorded.
Entries that are made to
correct errors.
ACCRUAL BASIS of
ACCOUNTING
BASIS for the
ADJUSTING ENTRIES
ACCRUAL BASIS of
ACCOUNTING
REVENUES are recorded
in the period in which
they are earned
EXPENSES are recorded
in the period in which they
were incurred.
IMPORTANCE of ADJUSTING
ENTRIES
To measure properly he
profit for the period
To bring the affected
accounts to their correct
balances.
ACOUNTING PRINCIPLES
THAT REQUIRE the NEED
for ADJUSTING ENTRIES
TIME PERIOD CONCEPT
Periodic reports are needed in
assessing the financial
condition and performance of
the business.
The TIME PERIOD CONCEPT
ensures that accounting
information are reported at
regular intervals
TIME PERIOD CONCEPT
In order to provide timely
information to be used for
decision-making, the
accountant has to divide the
life of the business into
artificial time periods. This
assumption is referred to as
the TIME PERIOD CONCEPT.
ACCOUNTING PERIODS
are generally a month, a
quarter or a year.
The most basic is 1 year.
Companies differ in their
choice of accounting year.
ACCOUNTING YEARS
1. Calendar year an annual
period ending on
December 31.
2. FISCAL YEAR a period
of 12 consecutive months
not ending on Dec. 31
INTERIM PERIOD - A
period of less than 1 year.
Adjusting Entries are
recorded in the journal.
Made at the end of the
period ( month, quarter or
year)
2 TYPES of
ADJUSTMENTS
1. DEFERRAL
2. ACCRUAL
ACCRUAL
The recognition of:
** an EXPENSE already
incurred but not yet paid
( Accrued Expenses- Liability).
** a REVENUE earned but not
yet collected ( Accrued
Revenue Receivable).
DEFERRAL
The postponement of :
** an EXPENSE already paid but
not yet incurred ( Deferred
Expense or Prepaid Expense);
** a REVENUE already collected
but not yet earned (Deferred
Revenue or Unearned Revenue)
COMMON
ADJUSTING ENTRIES
Common Adjusting Entries
1. Accrued Expenses
2. Accrued Income
3. Prepaid Expenses
a) Asset Method b) Expense Method
4. Unearned Revenues
a) Liability Method b) Income Method
5. Depreciation
6. Bad Debts
7. Writing off Uncollectible Accounts
1. ACCRUED
EXPENSES
Expenses incurred but not yet
paid.
1. Accrued Expenses
An entity often incurs
expenses before paying for
them.
If the accounting period does
not coincide with the
scheduled cash payment date,
an adjusting entry is needed to
reflect the expense incurred .
ENTRY to recognize an
ACCRUED EXPENSE
DR CR
Expense xxx
Acc Exp Payable xxx
to adjust accrued expenses
2. ACCRUED
REVENUES
Income earned but not yet
collected.
2. ACCRUED REVENUES
An entity may provide

services during the
accounting period that are
neither paid for by the
clients NOR billed at the
end of the period
ENTRY to Recognize
Accrued REvenues
DR CR
Accounts Receivable xxx
Revenue xxx
to adjust accrued revenues
3. PREPAID
EXPENSES
A) ASSET METHOD
3. PREPAID EXPENSES
a) ASSET Method
Companies normally make
expenditures that benefit more than 1
period. These expenditures are
generally debited to an ASSET account,
At the end of the period, the amount of
asset USED UP or EXPIRED MUST BE
TRANSFERRED FROM THE ASSET
ACCOUNT to the EXPENSE ACCOUNT.
The Prepaid Expenses can be supplies,
insurance, advertising, rent, etc.
ENTRY to Allocate Assets to
Expenses
DR CR
Expense xxx
Prepaid Expense xxx
to adjust prepaid expense
3. PREPAID
EXPENSES
b) EXPENSE METHOD
PREPAID EXPENSES
b) EXPENSE Method
Some companies choose to

charge to the expense account
an expense that was paid for
in ADVANCE.
At the end of the accounting period,
NOT all of these prepaid expenses
have been used or have expired.
Therefore, the UNEXPIRED or
UNUSED portion must be transferred
from the EXPENSE account to the
ASSET account.
Entry to transfer Expense to Asset
Dr Cr
Office Supplies ( A) xxx
Office Supplies Expense (E) xxx
to record the UNUSED supplies
4. UNEARNED
REVENUES
A) Liability Method
4. UNEARNED REVENUES
a) LIABILITY Method
There are times when an entity

receives cash in advance before
service is rendered or goods are
delivered.
This gives rise to a companys
obligation to perform the service
in the future. This liability is
called as UNEARNED
REVENUE.
As the company renders
service, it earns part of
the advance payment.
This earned portion must
be allocated to the
REVENUE account.
ENTRY to Allocate Unearned
Revenue to Revenue
DR CR
Unearned Revenue xxx
Revenue xxx
Unearned Revenues
b) Income Method
UNEARNED REVENUES
b) Income Method
Some companies treat the
advance payment from client
as an income right away.
Therefore, an initial credit to
INCOME is made in the
books.
At the end of the accounting
period, it is possible that NOT the
entire advance payment has been
earned by the company.
Therefore, portion that is not yet
earned must be allocated to the
UNEARNED REVENUE account.
Entry to transfer Revenue to
Unearned Revenue
Dr Cr
Revenue xxx
5. Depreciation of Fixed Assets
When a business acquires

long-lived assets such as
buildings, vehicles,
computers, furniture, etc., it
is basically prepaying for
the usefulness of that asset.
DEPRECIATION
EXPENSE - it is the
amount incurred by the
business for the USE of the
fixed asset during the
accounting period.
Annual Salvage
Depreciation = Cost - Value
Expense useful life
Cost = acquisition price
Salvage (Scrap) Value = resale value
of the asset at the end of its useful life
useful life= # of years that the
company can make use of the asset
ENTRY for DEPRECIATION
DR CR
Depreciation Expense xxx
Accumulated Depreciation xxx
6. BAD DEBTS or DOUBTFUL
ACCOUNTS
Entities often allow clients to
purchase goods or avail of services
on CREDIT which gives rise to the
ACCOUNTS RECEIVABLE account.
Some of these accounts receivable
will never be collected and these
uncollectible accounts must be
reflected as an expense or as a
deduction to income.
BAD DEBTS
The estimated Bad Debts or
Uncollectible Accounts is
usually a certain % of the
current accounts receivable.
The % is determined based on
prior years experience.
ENTRY to Recognize BAD DEBTS
DR CR
Bad Debts Expense xxx
Allowance for Bad Debts xxx
7. Writing-off an Accounts
Receivable
Thoughout the accounting period,
when there is a positive evidence
that a specific amount of Accounts
Receivable is DEFINITELY
uncollectible, the amount is
WRITTEN-OFF against the contra-
account Allowance for Bad Debts.
ENTRY to Write-off Accounts
Receivable that cannot be collected
DR CR
Allowance for Bad Debts xxx
Accounts Receivable xxx
Alternative Methods of
Recording DEFERRAL
PREPAID EXPENSES
1. ASSET METHOD
Prepaid Expense xxx
Cash xxx
Adjusting Entry
Expense xxx
Prepaid EXpense
PREPAID EXPENSE
2. EXPENSE METHOd
Journal Entry
Expense xxx
Cash xxx
Adjusting Entry:
Prepaid Asset xxx
Expense xxx
UNEARNED REVENUES
1. LIABILITY METHOD
Journal Entry
Cash xxx
Adjusting Entry
Revenue xxx
UNEARNED REVENUE
2. REVENUE METHOD
Journal Entry
Cash xxx
Revenue xxx
Adjusting Entry
Revenue xxx
EFFECTS of OMITTING
ADJUSTING ENTRIES
The financial statement will
NOT ACCURATELY reflect the
financial position and
performance of the business.
Inaccuracies in 1 accounting
period can cause further
inaccuracies in the next
periods.
REVENUE RECOGNITION
PRINCIPLE
The revenue recognition principle states that
revenue should be recognized in the
accounting period in which it is earned.
In a service business, revenue is usually
considered to be earned at the time the
service is performed.
In a merchandising business, revenue is
usually earned at the time the goods are
delivered.
ILLUSTRATION 3-3
TRIAL BALANCE
Trial Balance
October 31, 2002
Debit Credit
Cash $ 15,200
Prepaid Insurance The Trial Balance 600
Office Equipment 5,000
Notes Payable
is analysed to $ 5,000
Accounts Payable determine the need 2,500
Unearned Revenue for adjusting 1,200
C.R. Byrd, Drawings entries. 500
Rent Expense 900
$ 28,700 $ 28,700
Example: Maybe some of your
Supplies valued at $500 when you
bought them have been usedyou
need to bring their value up to date
and expense what has been used.
Adjusting entries are required each time
financial statements are prepared.
Adjusting entries can be classified as

1. prepayments (prepaid expenses or
unearned revenues),
2. accruals (accrued revenues or
accrued expenses), or
3. estimates (amortization or depreciation).
TYPES OF ADJUSTING
ENTRIES
Prepayments
1. Prepaid Expenses Expenses paid in
cash and recorded as assets before they
are used or consumed.
2. Unearned Revenues Revenues received
in cash and recorded as liabilities before
they are earned.
TYPES OF ADJUSTING
ENTRIES
Accruals
1. Accrued Revenues Revenues earned
but not yet received in cash or recorded.
2. Accrued Expenses Expenses incurred
but not yet paid in cash or recorded.
TYPES OF ADJUSTING
ENTRIES
Estimates
1. Depreciation Allocation of the cost of
capital assets to expense over their
useful lives.
PREPAYMENTS
Prepayments are either prepaid

expenses or unearned revenues.
Adjusting entries for prepayments are
required to record the portion of the
prepayment that represents
1. the expense incurred or,
2. the revenue earned in the current
accounting period.
PREPAID
EXPENSES
Prepaid expenses are expenses paid in
cash and recorded as assets before
they are used or consumed.
Prepaid expenses expire with the
passage of time or through use and
consumption.
An asset-expense account relationship
exists with prepaid expenses.
Prior to adjustment, assets are overstated
and expenses are understated.
The adjusting entry results in a debit to
an expense account and a credit to an
asset account.
Examples of prepaid expenses include
supplies, rent, insurance, and property
tax.
UNEARNED
REVENUES
Unearned revenues are revenues
received and recorded as liabilities
before they are earned.
Unearned revenues are subsequently
earned by performing a service or
providing a good to a customer.
A liability-revenue account relationship
exists with unearned revenues.
Prior to adjustment, liabilities are
overstated and revenues are
understated.
The adjusting entry results in a debit to
a liability account and a credit to a
revenue account.
Examples of unearned revenues
include rent, magazine subscriptions,
airplane tickets, and tuition.
ILLUSTRATION 3-4 ADJUSTING
ENTRIES FOR PREPAYMENTS
Adjusting Entries
Prepaid Expenses
Asset Expensee
Unadjusted Credit Debit
Balance Adjusting Adjusting
Entry (-) Entry (+)
Unearned Revenues
Liability Revenue
Debit Unadjusted Credit
Adjusting Balance Adjusting
Entry (-) Entry (+)
ACCRUALS
A different type of adjusting entry is

accruals.
Adjusting entries for accruals are
required to record revenues earned and
expenses incurred in the current
period.
The adjusting entry for accruals will
increase both a balance sheet and an
income statement account.
ACCRUED
REVENUES
Accrued revenues may accumulate with the
passing of time or through services
performed but not billed or collected.
An asset-revenue account relationship exists
with accrued revenues.
Prior to adjustment, assets and revenues are
understated.
The adjusting entry requires a debit to
an asset account and a credit to a
revenue account.
Examples of accrued revenues include
accounts receivable, rent receivable,
and interest receivable.
ACCRUED EXPENSES
Accrued expenses are expenses
incurred but not yet paid.
A liability-expense account
relationship exists.
Prior to adjustment, liabilities and
expenses are understated.
The adjusting entry results in a debit
to an expense account and a credit
to a liability account.
Examples of accrued expenses
include accounts payable, rent
payable, salaries payable, and
interest payable.
ILLUSTRATION 3-5 ADJUSTING
ENTRIES FOR ACCRUALS
Adjusting Entries
Accrued Revenues
Asset Revenu
e
Debit Credit
Adjusting Adjusting
Entry (+) Entry (+)
Accrued Expenses
Expens Liability
e
Debit Credit
Adjusting Adjusting
Entry (+) Entry (+)
DEPRECIATION
Depreciation is the process of
allocating the cost of certain capital
assets to expense over their useful life
in a rational and systematic manner.
Depreciation attempts to match the
cost of a long-term, capital asset to the
revenue it generates each period.
DEPRECIATION
DEPRECIATION is an estimate
rather than a factual measurement
of the cost that has expired.
Were not attempting to reflect the

actual change in value of an asset!
DEPRECIATION
In recording depreciation, depreciation
Expense is debited and a contra asset
account, Accumulated Depreciation is
credited.
The difference between the cost of the
asset and its related accumulated
depreciation is referred to as the net
book value of the asset.
Amortization Expense Accumulated Amortization

DEPRECIATION
Balance Sheet Presentation
Office equipment $5,000 Estimate

Less: Accumulated
Depreciation 83
Net book value $4,917
ILLUSTRATION 3-8
SUMMARY OF ADJUSTING ENTRIES
Type of Account Accounts before Adjusting
Adjustment Relationship Adjustment Entry
1.Prepaid Assets and Assets overstated Dr. Expenses

expenses expenses Expenses understated Cr. Assets
2.Unearned Liabilities and Liabilities overstated Dr. Liabilities
revenues revenues Revenues understated Cr. Revenues
3.Accrued Assets and Assets understated Dr. Assets
revenues revenues Revenues understated Cr. Revenues
4.Accrued Expenses and Expenses understated Dr. Expenses
expenses liabilities Liabilities understated Cr. Liabilities
5.Amortization Expense and Expenses understated Dr. Amort. Exp
contra asset Assets overstated Cr. Accum.
Amortization
Example:
6th. Prepare Adjusted Trial
Balance
ADJUSTED TRIAL
BALANCE
An Adjusted Trial Balance is prepared after
all adjusting entries have been journalized
and posted.
It shows the balances of all accounts at the
end of the accounting period and the effects
of all financial events that have occurred
during the period.
It proves the equality of the total debit and
credit balances in the ledger after all
adjustments have been made.
Financial statements can be prepared
directly from the adjusted trial balance.
ILLUSTRATION 3-11
TRIAL BALANCE AND ADJUSTED TRIAL BALANCE COMPARED
Trial Balance
October 31, 2002
Before Adjustment After Adjustment
Debit Credit Debit Credit
Cash $ 15,200 $ 15,200
Advertising Supplies 2,500 1,000
Prepaid Insurance 600 550
Office Equipment 5,000 5,000
Accumulated Amort'n. $ 83
Notes Payable $ 5,000 5,000
Accounts Payable 2,500 2,500
Unearned Revenue 1,200 800
Interest Payable 25
C.R. Byrd, Capital 10,000 10,000
C.R. Byrd, Drawings 500 500
Service Revenue 10,000 10,600
Adv. Supplies Expense 1,500
Amortization Expense 83
Insurance Expense 50
Salaries Expense 4,000 5,200
Rent Expense 900 900
Interest Expense 25
$ 28,700 $ 28,700 $ 30,208 $ 30,208
Steps in creating Adjusted Trial
Balance.
Step 1. Scan the trial balance for obvious
recording errors. Asset accounts should
have debit balances, and liability accounts
should have credit balances. If accounts
have nonsensical balances, there have
probably been errors recording or
classifying transactions throughout the
year.
Step 2. Make adjusting entries to resolve
incorrect classifications. Nonsensical
balances may be resolved by investigating
the cause of the strange debit/credit
balance and reclassifying entries
according to generally accepted
accounting principles.
Step 3. Identify standard accruals such as
depreciation and interest expense. Make
journal entries to record accruals that don't
result from day-to-day transactions such
as depreciation. These are often
overlooked in the initial preparation of the
trial balance. Also, notes payable often
needs adjustment for the included interest
expense, which isn't paid separately.
Step 4. Scan the adjusted trial balance for
reasonableness. After making adjusting
entries to correct any misclassifications
and to record basic accruals, review the
adjusted trial balance to be sure it's
accurate. Basic industry or business-
specific financial ratios such as profit
margin, inventory balance and debt ratio
may assist in determining the
reasonableness of account balances
7th. Prepare Financial Statement
Explanation:
The financial statements must be
prepared in a very specific order:
PREPARING FINANCIAL STATEMENTS
Financial statements can be prepared
directly from an adjusted trial balance.
1. The income statement OR STATEMENT
OF COMPREHENSIVE INCOME is prepared
from the revenue and expense accounts.
2. The statement of owners equity is
derived from the owners capital and
drawings accounts and the net income
(or net loss) shown in the income
statement.
3.
. The balance sheet OR STATEMENT
OF FINANCIAL CONDITION is then
prepared from the asset and liability
accounts and the ending owners
capital balance as reported in the
statement of owners equity
ILLUSTRATION 3-12 PREPARATION
OF THE STATEMENT OF COMPREHENSIVE INCOME OR INCOME
STATEMENT AND THE STATEMENT OF OWNERS EQUITY FROM THE
ADJUSTED TRIAL BALANCE
Pioneer Advertising Agency Pioneer Advertising Agency
Adjusted Trial Balance Income Statement
October 31, 2002 For the Month Ended October 31, 2002
Debit Credit Revenues
Cash $ 15,200 Service Revenue $ 10,600
Expenses
Adv. Supplies Expense $ 1,500
Office Equipment 5,000
Accumulated Amort'n. $ 83 Insurance Expense 50
Notes Payable 5,000 Salaries Expense 5,200
Accounts Payable 2,500 Rent Expense 900
Unearned Revenue 800 Interest Expense 25
Salaries Payable 1,200 Total Expenses 7,758
Interest Payable 25 Net Income $ 2,842
C.R. Byrd, Drawings 500 Pioneer Advertising Agency
Service Revenue 10,600 Statement of Owner's Equity
Adv. Supplies Expense 1,500 For the Month Ended October 31, 2002
Amortization Expense 83 C.R. Byrd, Capital, October 1 $ -
Add: Investments 10,000
Net income 2,842
Rent Expense 900
Interest Expense 25 12,842
$ 30,208 $ 30,208 Less: Drawings 500
C.R. Byrd, Capital, October 31 $ 12,342
ILLUSTRATION 3-13
PREPARATION OF THE BALANCE SHEET OR STATEMENT
OF FINANCIAL CONDITION FROM THE ADJUSTED TRIAL
BALANCE Pioneer Advertising Agency
Adjusted Trial Balance Balance Sheet
October 31, 2002 October 31, 2002
Debit Credit Assets
Cash $ 15,200
Cash $ 15,200
Office Equipment 5,000 Prepaid Insurance 550
Accumulated Amort'n. $ 83 Office Equipment $ 5,000
Notes Payable 5,000 Less: Accumulated Amortization 83 4,917
Accounts Payable 2,500 Total Assets $ 21,867
Salaries Payable 1,200 Liabilities and Owner's Equity
Interest Payable 25 Liabilities
C.R. Byrd, Capital 10,000 Notes Payable $ 5,000
C.R. Byrd, Drawings 500 Accounts Payable 2,500
Adv. Supplies Expense 1,500 From
Interest Payable Statement 25
Salaries Expense 5,200 Total Liabilities of Owners $ 9,525
Rent Expense 900 Owner's Equity Equity
Interest Expense 25 C.R. Byrd, Capital 12,342
$ 30,208 $ 30,208 Total Liabilities and Owner's Equity $ 21,867
INCOME OR Income Statement
is one of the financial

statements of a
company and
shows the
revenues and
expenses during a
particular period.
Merchandising business
Service
Statement of Retained Earnings(for
corporations)
The statement explains the changes in a
company's retained earnings over the
reporting period.
Balance Sheet or
STATEMENT OF FINANCIAL CONDITION
is a summary of the
financial balances of a sole
proprietorship, a business
partnership,
a corporation .
Assets, liabilities and ownership equity are listed as of
a specific date, such as the end of its financial year.
For a corporation
Statement of Cash
Flows
CASH FLOW STATEMENT
*This statement provides information about
cash receipts and payments concerning the
operating, investing amd financing activities
of the business.
*It shows the sources of cash and how cash
was used to arrive at the ending cash
balance.
CASH IN OR CASH OUT?
RELATIONSHIP OF INCOME
STATEMENT, BALANCE SHEET AND
STATEMENT OF CHANGES IN
OWNERS EQUITY
The Income Statement is prepared first so that

the net income can be recorded in the
Statement of Owners Equity which comes
next. It shows why and how the owners
investments have changed. The ending capital
in the Statement of Owners equity is used in the
Balance Sheet, which shows the present
standing or financial position of the business.
This order is important because
information provided in the income
statement is used in the statement of
retained earnings, and information from
the statement of retained earnings is used
in the balance sheet.
1.What is the principal purpose of accounting?
2. What are the major financial statements?
3. Who are the external users of financial statements?
4. Who are the internal users of financial statements?
5. Describe the branches of accounting.
6.How does one know if a business is profitable or
stable?
7. What information may be obtained from the Income
Statement? Balance Sheet? Cash Flow Statement?
8. Describe the relationship among the Income
Statement, Statement of Changes in Owners Equity and
Balance Sheet.
8th. Journalize and post closing
Entries
Step eight in the accounting cycle is
to prepare the closing entries. Closing
entries are prepared after the
financial statements are completed.
The purpose of closing entries is to
prepare the accounts for recording
transactions and events for the next
period.
PURPOSE OF CLOSING ENTRIES
1. Updates the owners capital

account in the ledger by
transferring net income (loss) and
owners drawings to owners
capital.
2. Prepares the temporary accounts
(revenue, expense, drawings) for
the next periods postings by
reducing their balances to zero.
What are Closing entries ?
Closing Entries is the process of
transferring the entire ending balance of
one account to another account such that
its balance becomes ZERO.
However, not all accounts closed.
What accounts are closed?
Only the TEMPORARY accounts are
closed at the end of the accounting period.
At the end of the period, ALL temporary
accounts are brought to a ZERO balance.
What accounts are TEMPORARY?
INCOME accounts
EXPENSE accounts
WITHDRAWAL account
WHEN and WHERE are closing
entries made?
Closing entries are made at the end of the
accounting period .
Closing entries are recorded in the
General Journal.
After closing entries are prepared, they are
also posted to the ledger.
PURPOSE of closing entries
Closing entries are made in order to
reduce the temporary accounts (revenues
, expenses, and drawing) to a zero
balance by transferring their balances to
the capital account.
What particular accounts
are closed?
There are 4 accounts that are
closed.
1. INCOME Accounts transferred to the
Income Summary account.
2. EXPENSE Accounts transferred to
the Income Summary account
3. INCOME SUMMARY Account
transferred to the Capital account.
4. DRAWING Account transferred to the
Capital account.
What is a Income Summary
account?
Income Summary is a temporary
account which is used to close the Income
and Expense accounts.
The Income Summary account is credited
when Income accounts are closed.
The Income Summary account is debited
when Expense accounts are closed.
INCOME SUMMARY
The balance of the Income Summary
account indicates the result of operations
of the business.
NET PROFIT - if the Income Summary
has a credit balance after closing the
Income and Expense accounts.
NET LOSS if the Income Summary has
a debit balance after the income and
expense accounts are closed.
STEPS in
CLOSING ENTRIES
1. Close ALL the INCOME
accounts to INCOME SUMMARY
Dr Cr
Consulting Revenues 67,700
Referral Revenues 4,000
Income Summary 71,700
to close all the income accounts
2. Close ALL the EXPENSE
Dr Cr
Supplies Expense 3,000
Rent Expense 4,000
Insurance Expense 1,200
Utilities Expense 4,400
Depreciation Expense-Vehicle 4,000
Depreciation Expense O.E 1,000
Interest Expense 3,500
to close all expense accounts
3. To close the Income Summary
to the CAPITAL account
Dr Cr
Chu, Capital 35,000
to close the income summary account
T-account for the Income Summary
after Income & expense are closed
INCOME SUMMAR Y
Dr Cr
36,700 71,700
____________________________
35,000
GENERAL LEDGER
Account Name: INCOME SUMMARY Account No. 330
E X P L A N A T I O N J. R D EB IT CREDIT BALANCE
DATE
Dec. 31 to close the revenue accounts J-5 71,700 71,700
31 To close the expense accounts J-5 36,700 35,000
4. Close the Drawing account to
the CAPITAL account
Dr Cr
Chu, Capital 14,000
Chu, Drawing 14,000
To close the drawing account
ALTERNATIVE
METHOD for
CLOSING ENTRIES
STEPS
1. Close the Income accounts to Income
Summary
2. Close Expense accounts to Income
Summary
3. Close the Income Summary account to
the Drawing account
4. Close the Drawing account to the capital
account
1. Close
Step 1ALL the INCOME
Alternative
Dr Cr
Consulting Revenues 67,700
Referral Revenues 4,000
to close all the income accounts
2. Close ALL the EXPENSE
Dr Cr
Rent Expense 4,000
Utilities Expense 4,400
Depreciation Expense-Vehicle 4,000
Depreciation Expense O.E 1,000
to close all expense accounts
3. Close Income Summary
account to the DRAWING account
Dr Cr
Chu, Drawing 35,000
to close the income summary account
4. To close the Drawing account to
INCOME SUMMARY account
Dr Cr
Chu, Drawing 21,000
Chu, Capital 21,000
to close the drawing account
T- account
C H U , D R A W I NG
Dr Cr
14,000 35,000
______________________
21,000
ILLUSTRATION 4-2
TEMPORARY VERSUS PERMANENT
ACCOUNTS
TEMPORARY (NOMINAL) PERMANENT (REAL)
These accounts are closed These accounts are
not closed
All revenue accounts All asset accounts
All expense accounts All liability accounts
Owners drawings Owners capital

account
(Income Statement /
Drawings Accounts) (Balance Sheet Accounts)
ILLUSTRATION 4-3
DIAGRAM OF CLOSING PROCESS
(INDIVIDUAL) (INDIVIDUAL)
EXPENSES REVENUES
Normal Dr. Normal Cr.
Cr. to close Dr. to close
Balance Balance
-0- -0-
2
1
OWNERS
CAPITAL
Opening Balance
Expenses Revenues
1 Debit each revenue account for its balance, and credit the
owners capital account for total revenues.
2 Debit the owners capital account for total expenses, and
credit each expense account for its balance.
ILLUSTRATION 4-3
DIAGRAM OF CLOSING PROCESS
OWNERS
CAPITAL
Expenses Opening Balance
Drawings Revenues
Ending Balance
OWNERS
DRAWINGS
Normal Dr. Cr. to close
Balance
-0-
3 Debit owners capital for the balance in the owners

drawings account and credit owners drawings for the
same amount.
CLOSING ENTRIES
STOP AND CHECK

1. Does the balance in your
Owners Capital account
equal the ending capital
balance reported in the
Balance Sheet and
Statement of Owners
Equity?
2. Are all of your temporary
account balances zero?
The accountant is now getting the books
ready for next year!
9th. Prepare Post Closing Trial
Balance
POST-CLOSING TRIAL BALANCE
After all closing entries have been

journalized and posted, a post-closing
trial balance is prepared.
The purpose of this trial balance is to
prove the equality of the permanent
(balance sheet) account balances that
are carried forward into the next
accounting period.
ILLUSTRATION 4-8
POST-CLOSING TRIAL BALANCE
Post-Closing Trial Balance
October 31, 2002
After Adjustment
Debit Credit
Cash $ 15,200
Accounts Receivable
The post-closing trial 200
Advertising Supplies balance is prepared 1,000
Prepaid Insurance from the permanent 550
Office Equipment accounts in the ledger. 5,000
Accumulated Amortization $ 83
Notes Payable The post-closing trial 5,000
balance provides
Salaries Payable evidence that the 1,200
Interest Payable journalizing and 25
C.R. Byrd, Capital posting of closing 12,342
entries has been $ 21,950 $ 21,950
properly completed.
Explanation:
A post-closing trial balance should only
contain the debit and credit balance for
permanent accounts,
because these are the only accounts that
are remaining after the closing process.
Once again the purpose of this trial
balance is to ensure that the debits equal
the credits and that all temporary accounts
have a zero balance.
For many companies this is the last step in

the accounting cycle, the company is now
ready to start the new accounting period.
10th. Journalize and Post
Reversing Journal Entries
REVERSING ENTRIES
(OPTIONAL STEP)
A reversing entry is made at the

beginning of the next accounting
period.
A reversing entry reverses certain
adjusting entries made in the previous
period. Opening balances can then be
ignored when preparing year-end
adjusting entries.
A reversing entry is a
journal entry which is the
exact opposite of a related
adjusting entry previously
made at the end of the
accounting period.
PURPOSE
It is an accounting procedure made
to simplify the recording of regular
transactions in the next accounting
period.
A reversing entry is OPTIONAL. It
is only done for the purpose of
convenience and ease in the
recording process.
WHEN are Reversing Entries
Made?
Reversing entries are made at the
BEGINNING of the next accounting
period.
Example:
If the accounting period ends on
December 31, 2008, the reversing
entries are prepared on January 1,
2009.
WHAT ENTRIES ARE
REVERSED?
What Entries Are REVERSED?
Only ADJUSTING ENTRIES are
reversed. However, NOT all
adjusting entries should be
reversed.
GENERAL RULE
Only adjusting entries that
INCREASED an ASSET or a
LIABILITY should be
reversed.
Therefore, ALL ACCRUALS and only
deferrals initially recorded as a
nominal ( Income or Expense)
account should be reversed.
SPECIFIC RULES
The following adjusting entries are
reversed :
1. Accrued Expenses
2. Accrued Income
3. Prepaid Expenses ( Expense
method only)
4. Unearned Revenues ( Income
Method only)
ILLUSTRATION
1. ACCRUED EXPENSE
ADJUSTING ENTRY: Dr Cr
Dec. 31 Salary Expense 20,000
Salary Payable 20,000
to adjust accrued salary
REVERSING ENTRY:
Jan.1 Salary Payable 20,000
Salary Expense 20,000
to reverse accrued salary
2. ACCRUED INCOME
ADJUSTING ENTRY: Dr Cr
Dec.31 Accounts Receivable 18,000
to adjust accrued income
REVERSING ENTRY:
Jan.1 Service Revenue 18,000
Accounts Receivable 18,000
to reverse accrued income
3. PREPAID EXPENSE
( Expense Method)
ADJUSTING ENTRY Dr Cr
Dec.31 Prepaid Rent 30,000
Rent Expense 30,000
to adjust prepaid rent
REVERSING ENTRY:
Jan.1 Rent Expense 30,000
Prepaid Rent 30,000
to reverse prepaid rent
4. UNEARNED REVENUE
(Income Method)
ADJUSTING ENTRY Dr Cr
Dec.31 Service Revenue 5,000
Unearned Service Revenue 5,000
to adjust unearned revenue
REVERSING ENTRY :
Jan.1 Unearned Service Revenue 5,000
to reverse unearned revenue
ADJUSTING ENTRIES
THAT ARE NOT
REVERSED.
The following adjusting entries are
not reversed:
1. Prepaid Expense ( Asset Method)
2. Unearned Revenue ( Liability Method)
3. Depreciation
4. Doubtful Accounts
** REASON: because they did not
cause any INCREASE in
ASSET or LIABILITY
EVALUATION
Determine if the following adjusting
entries must be reversed, then give
the appropriate reversing entry, if
applicable.
Dr Cr
Prepaid Supplies 8,500
Dr Cr
Depreciation Expense 17,300
Accumulated Depreciation 17,300
Dr Cr
Dr Cr
Unearned Legal Fees 7,000
Legal Fees 7,000
Dr Cr
Interest Income 1,500

Unearned Interest Income 1,500
Dr Cr
Bad Debts 9,000
Allowance for Bad Debts 9,000
Dr Cr
Interest Receivable 4,000
Interest Income 4,000
Dr Cr
Rent Expense 25,000
Accrued Rent Expense 25,000
REVIEW
1. If XYZ Company closed its books on March 31
2008, WHEN did the accountant prepare a
reversing entry?
2. ABC Company does not prepare reversing

entries. Is the company violating any accounting
standard or practice?
3. All adjusting entries are
reversed. True or False.
4. What is the General Rule to

remember in reversing entries?
5. Give the 4 adjusting entries that

are reversed.
,
Write YES if the adjusting entry
require a reversing entry; and
NO if no reversing entry is
required.
Interest Payable 2,000
Prepaid Rent 40,000

Rent Expense 40,000
Unearned Accounting Fees 1,000

Accounting Fees 1,000
Give the reversing entry , if
necessary, for the following
adjusting entries :
# 14)
2007 Dr Cr
Apr 30 Accounts Receivable 10,000
Medical Fees 10,000
# 15)
April 30 Insurance Expense 6,000
WORK SHEET
A work sheet is a multiple-column form

that may be used in the adjustment
process and in preparing financial
statements.
It is a working tool or a supplementary
device for the accountant and not a
permanent accounting record.
Use of a work sheet should make
the preparation of adjusting entries
and financial statements easier.
ILLUSTRATION 4-1
WORK SHEET
Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet
Account Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
4. Extend adjusted
1. Prepare
2. Enter 3. Enter balance to appropriate
trial balance
adjustment adjusted columns.
on the
data. balances 5. Calculate income/loss
worksheet.
and complete the
worksheet.
ACCOUNTING EVENT
&
BUSINESS
TRANSACTIONS
ACCOUNTING EVENT
An economic occurrence that causes
changes in the elements of the accounting
equation ( A, L, OE, R, E)
These events may be internal or external
Internal events - e.g. use of equipment
External events purchase of supplies
BUSINESS TRANSACTION
A particular kind of event that involves the
transfer of something of value between
tw0 entities.
Examples:
Investment by owner
Borrowing funds from creditors
Purchasing supplies
TYPES of
TRANSACTIONS
1. Source of ASSETS (SA)
An asset account increases with a
corresponding increase in the claims
account ( liabilities or Owners equity
Ex.
Cash investment by owner : A , OE
Purchase of equipment on account: A,L
2. Exchange of Assets( EA)
One asset account increases and another
asset account decreases.
Examples:
Cash purchase of supplies: A( s) , A( c)
Collection of Receivable : A(c) , A( r)
3. Use of assets ( UA)
Decrease in asset with a corresponding
decrease in claims ( Liabilities or OE)
Examples:
Payment of salaries : A, OE
Payment of debts: A , L
4. Exchange of claims (EC)
One claim account increases and another
claim account decreases.
Claim accounts are : LIablities & OE
Received meralco bill but did not pay:
L , OE
Explanation: By receiving meralco bill, the
company must recognize a utility expense.
Expense has a negative effect on OE,
therefore, OE is decreased.
EFFECTS of
TRANSACTIONS on the
ACCOUNTING
EQUATION
9 EFFECTS
1. Increase in A = Increase in L ( SA)
2. Increase in A = Increase in OE ( SA)
3. Increase in one A=Decrease in another A (EA)
4. Decrease in A = Decrease in L (UA)
5. Decrease in A = Decrease in OE ( UA)
6. Increase in OE= Decrease in Liabilities ( EC)
7. Increase in L= Decrease in OE ( EC)
8. Increase in one L=Decrease in another L(EC)
9. Increase in 1 OE=Decrease in another OE(EC)
COMMON
BUSINESS
TRANSACTIONS
1.INITIAL INVESTMENT
MayeenMagno initially
invested P800,000
cash to start a new
business: MAGNO
ACCOUNTING
SERVICES
INITIAL CASH INVESTMENT
A OE
CASH Magno,CAPITAL
2. Cash purchase of an
ASSET
Magno made a cash
purchase of bond
paper, CDs,pens,
folders, & other
supplies costing
P20,000 from NB
Store.
CASH PURCHASE of
SUPPLIES
A A
PREPAID SUPPLIES CASH
3. Purchasing an ASSET
on CREDIT or ACCOUNT
Magno bought a
computer, fax
machine, &
calculators at a cost
of P100,000 from
Abenson on ACCOUNT.
PURCHASE of EQUIPMENT on
CREDIT
A L
EQUIPMENT ACCOUNTS PAYABLE
4. Payment of Liability
Magno decided
to pay P 40,000
to Abenson.
PAYMENT of LIABILITIES
L A
ACCOUNTS PAYABLE CASH
5. Rendering Services
for CASH
Magno Accounting
Services earned a
total of P 210,000 in
revenue from
clients who paid in
CASH.
RENDERING SERVICE for
CASH
A OE
CASH ACCOUNTING FEES
6. RENDERING services
on ACCOUNT
Magno Accounting
Services earned
P70,000 of revenue
from CHARGE
ACCOUNTS clients,
RENDERING SERVICE on
ACCOUNT
A OE
Accounts Receivable ACCOUNTING
FEES
7. Collecting Receivables
Magno collected
P30,000 from clients
who previously
bought services on
account.
COLLECTION of RECEIVABLE
DEBIT CREDIT
CASH ACCOUNTS RECEIVABLE
8. Payment of EXPENSES
Magno Accounting
Services paid the
SALARIES of its
employees for
P25,000.
PAID SALARIES
OE A
SALARIES EXPENSE CASH
9. Withdrawal by the
Owner
Mayeen Magno
withdraws P150,000
cash for personal
use.
OWNERS CASH WITHDRAWAL
OE A
MAGNO, DRAWING CASH
10. BORROWING MONEY FROM
CREDITORS by issuing a note
A L
Cash Notes
Payable
11. LENDING MONEY to
EMPLOYEES
A A
Advances to Cash
Employees/
Receivable from
Employees
12. Lending money to third parties
(debtors)
A A
Notes Cash
Receivable
13. ACCRUING AN EXPENSE
Received Meralco bill for April
OE L
Utilities Utilities
Expense Payable/
Accrued
Utilities
Expense
14. ACCRUING AN INCOME
Rendered services to client but no
payment has been received yet.
A OE
Accounts Accounting
Receivable/ Fees
Accrued
Income
15. RECORDING UNEARNED INCOME
or DEFERRED INCOME
(Received advance payment from client)
A L
Cash Unearned
Revenue/
Deferred Income
16. ISSUING A NOTES PAYABLE
TO EXTINGUISH AN EXISTING
ACCOUNTS PAYABLE
L L
Accounts Notes
Payable Payable
17. PAYMENT OF BUSINESS EXPENSES BY
OWNER OUT OF HIS PERSONAL FUNDS
OE
Expense
OE
Capital
18. PAYMENT OF PERSONAL
EXPENSES/ DEBTS OF THE
OWNER BY THE BUSINESS
OE A
Drawing Cash
REVIEW
Review with Partner
1-2. Give the accounting equation and define each element in the equation.
_____________________________ = _________________________
+ ___________
Define:_________________________
________________________ _____
_____________________________________
3. Accounting is called the _____________________________________ of

business.
4-7. Name these two statements (The Trial Balance is not a Statement)
used in accounting which are used by managers to make financial decisions
(the ones completed in your accounting project) What type of accounts are
on each statement?
First Statement
prepared___________________
Types of accounts found on this
statement._________________________
Last Statement
Prepared__________________________
Two accounts found on this
statement?_________________________
_________________________
8-12. Give the verbs and nouns of the Six first steps in
the accounting cycle: (fill in the blanks)
Verb Noun
1.) _________________________________
_________________________________
2.) _________________________________
_________________________________
3.) _________________________________
_________________________________
4.) ____Adjust _______ InternalAccounts__
5.) _________________________________
_________________________________
6.) _________________________________
_________________________________
13. If the accountant wanted to know the balance of cash
currently owned by the business he would go to the:
____________________________________________
14. If the accountant wanted to know what type of

transaction happened on a specific day he would go to the:
____________________________________________
15. The report that determines the net profit or loss of a

business for a specific period of time is called the:
___________________________________________
Credit Debit Matching
16. ______Increase to Assets when recorded in the journal are:
17._______Increase to Liabilities when recorded in the journal are:
18. _______Increase to Expenses when recorded in the journal are:
19._______Asset accounts carry what kind of balances:
20._______Revenue accounts carry what kind of balance:
A. DEBIT (S)
B. CREDIT(S)
C. CAN BE EITHER DEBIT OR CREDIT
D. ALWAYS BOTH DEBIT AND CREDIT
21. What does ROI stand for in finance/accounting? _____________
__________ ______________________
22. What is the Separate Entity
Principle_______________________________________________________
23. Net Income is added to what account in the Statement of Owners
Equity__________________________
24. In what two ways can you decrease the Capital Account?
_________________ _____________________
25-26. Draw/format the ledger account for cash (only) with a beginning balance
of P2000 and post the following two transactions in the account that occurred
today. (You do not need to make any journal entries.)
A. Received P5000 into the business from a personal investment from the
owner of the business.
B. Paid out P1000 to employees in wages.
27-30. Format the April Income
Statement for Ace company that has
these accounts: (You may not need to
use all of the accounts): Cash: $100,
A/P P50, Service Revenue: P500,
Sales Revenue: P1000, Cost of Goods
Sold Expense: P400, Advertising
Expense: P100, Misc. Expense: P300,
Wages Expense P200, A/R: P300.
Separate Entity Principle
(Keep your business records separate
from you personal records)
Lets start a home cleaning business.
First Transaction on 1/1
Pull $1,000 savings out of your personal
account and put it into your business account.
Assets = Liabilities + Owners Equity
Cash = 0 Capital
1,000 1,000
Record in Daily Journal
Date Entries PR DR CR Pg1
1/1 Cash 101 $1000
Capital 301 $1000
Started business with personal investment.
Posting to the Ledger Accounts:
Post $1000 as a debit to the cash account
Post $1000 as a credit to the capital
account
Cash 101
Date Explanation PR DR CR BAL
1/1 J1 $1000 $1000
Capital 301
1/1 J1 $1000 $1000
2nd Transaction
Acquire a Loan of $5,000 to buy
equipment and materials to start a
cleaning business.
Assets = Liabilities + OE
Cash Loan Payable Capital
$6,000 $5,000 $1,000
($1,000 + $5,000)
$6000 = $6000
Journal Entry
Date Explanation PR DR CR
1/2 Cash 101 $5000
Loan Payable 201 $5000
Received cash on credit.
Posting
Cash (101)
1/1 J1 1000 1000
1/2 J1 5000 6000
Loan Payable (201)

1/2 J1 5000 5000
3rd Transaction Jan 3rd
Purchased Equipment (Vacuum, Carpet
Cleaner, Floor Polisher etc.) Cost: $3,000
Assets = Liabilities + OE
Cash Loan Payable + Capital
Equipment
Accounting Equation Stays in Balance:
Cash = $3000 = $5000 + $1000
Equipment = $3000
Journal Entry
Date PR Dr Cr___
1/3 Equipment 120 $3000
Cash 101 $3000
Used cash to purchase equipment
Posting to the Ledger Accounts
Cash 101
Date PR Dr Cr Bal___
1/1 J1 1000 1000
1/2 J1 5000 6000
1/3 J1 3000 3000
Equipment 120
Date PR Dr Cr Bal__
1/3 J1 3000 3000
4th Transaction 1/4
Paid $200 for full page ad in the
Newspaper.
Journal Entry
Date PR Dr Cr
1/3 Advertising Expense 601 200
Cash 101 200
Purchased ad for business
Postings
Advertising Expense 601
Date PR Dr Cr Bal______
1/4 J2 200 200
Cash 101
1/1 J1 1000 1000
1/2 J1 5000 6000
1/3 J1 3000 3000
1/4 J2 200 2800
5th Transaction 1/5
Had my first cleaning job for $400. Was
paid $100 down with the rest due at the
end of the month.
Journal Entry
Date PR Dr Cr
1/5 Cash 101 100
A/R 110 300
Revenue 401 400
Performed services and received
down payment. Bal due: 1/31
Postings
Cash 101
1/1 J1 1000 1000
1/2 J1 5000 6000
1/3 J1 3000 3000
1/4 J2 200 2800
1/5 J2 100 2900

1/5 J2 300 300
Service Revenue 401

1/5 J2 400 400
Transaction #6 #7#8#9&10
Hired my little brother to help me and paid
him $100 in wages
Worked all day on second cleaning job
and was paid $500
Had to spend $300 on cleaning supplies to
be used during the next two months.
Took $200 out of my business to take my
wife on a mini moon.
Allocated 50% use of my truck to my
business. Book price of truck = $6000
Journal Entries
Date PR Debit Credit
1/6 Wages Expense 620 100
Cash 101 100
1/7 Cash 101 500
Service Revenue 401 500
1/8 Cleaning Supplies 130 300
Cash 101 300
1/9 Drawing 320 200
Cash 101 200
1/10 Truck 150 3000
Capital 301 3000
Postings
Wages Expense 620
Date PR Dr Cr Bal
1/6 J2 100 100
Cash 101
1/1 J1 1000 1000
1/2 J1 5000 6000
1/3 J1 3000 3000
1/4 J2 200 2800
1/5 J2 100 2900
1/6 J2 100 2800
1/7 J2 500 3300
1/8 J2 300 3000
1/9 J2 200 2800
Posting Cont.
Service Revenue 401
1/5 J2 400 400
1/7 J2 500 900
Cleaning Supplies 130

Date PR Dr Cr Bal_____
1/8 J2 300 300
Anderson, Drawing 320

Date PR Dr Cr Bal______
1/9 J2 200 200
Posting Cont.
Truck 150
1/10 J2 3000 3000
Capital 301
1/1 J1 $1000 $1000
1/10 J2 $3000 $4000
Adjustments at the end of the
month Internal Transactions
Step #4 in the Accounting Cycle
Adjusted the cleaning supplies to show

that 33% had been used up.
Adjusted the truck account to show that
one month had been used up.
Truck was expected to last for two more years
$3000/24months = $125 use per month
Journal Entries Adjustments
Date PR Dr Cr__
1/31 Adjustments
Cleaning Supplies Expense 621 100
Cleaning Supplies 130 100
Inventory showed that only $200 in supplies remained
at the end of the month.
1/31 Adjustment
Depreciation Expense/Trk 650 125
Truck (Accum Dpr.) 151 125
Postings of Adjustment Entries
Cleaning Supplies Expense 621
Date PR Dr Cr Bal
1/31 Adjustment J2 100 100

1/8 J2 300 300
Depreciation Expense Truck 650

Date PR Dr Cr Bal
Truck 150
1/10 J2 3000 3000
1/31 Adjustment 125 2875
Step # 5 Trial Balance
Account Debit Credit
Cash $2800
Equipment 3000
Truck 2875
Loan Payable 5000
Anderson, Capital 4000
Anderson, Drawing 200
Service Revenue 900
Advertising Expense 200
Wages Expense 100
Cleaning Supplies Expense 100
Depreciation Expense/Truck 125
Total Balance $9,900 $9,900

Step #6 Prepare Financial Statements
Anderson Cleaning Services
Income Statement
Month of January 2004
Revenue:
Service Revenue: $900
Expenses:
Advertising Expense: $200
Wages Expense: 100
Cleaning Supplies Expense: 100
Depreciation Expense: 125
Total Expenses: 525
Net Income (Loss) $375
Return on Cash Investment $375/1000 = 37.5%

Return on Total Investment $375/4000 = 9.4%
What is our Income Statement Missing???????
Statement of Owners Equity
Andersons Cleaning Business
Statement of Owners Equity
For May 2005
Beginning Capital 5/1/05: $1000
Add: New Investments (truck) 3000
Net Income (from Income Statement) 375
Less: Drawing (mini-moon) (200)
Net Loss na
Ending Capital 5/31/05: $4175
PAUSE
REVIEW
Pop Quiz Are you ready?
1. Give the accounting equation and
define each element.
2. What is the separate-entity principle?
3. Give the first three steps in the
accounting cycle using verbs and nouns.
4. When a family or a business does
something to change their financial picture
or position it is called what?
5. What are the two financial statements
discussed in class and what type of
accounts are on each.
6. When we increase an asset what do we say
in terms of debits and credits? How about a
liability?
7. What are the temporary accounts used in
financial management?
8. What kind of a balance do the following
accounts carry:?
Assets Expenses Revenues
Liabilities Capital Drawing
9. Format a balance sheet and income
statement.
8 Steps Reviewed
Verb Noun
1. Analyze Source Documents
2. Enter (Journalize) Journal
3. Post Ledger
4. Adjust Internal Entries
5. Balance Trial Balance
6. Prepare Financial Statements
7. Close Temporary Accounts
8. Analyze Data
1. Write out the proper accounting
equation: (formula)
2. . What is the first accounting book
called that is used to record transactions
chronologically?
Final Quiz:
3. For any and all transactions Debits
must always equal _______________?
4. If I wanted to know what balance I had
in cash what record/book would I turn to?
5. Cash carries what kind of a balance?
Quiz:
6. The use of a fixed asset over a period
of time is called what?
7. What is ROI and what two figures in
accounting do you use to determine it?
8. The accounting cycle is also known as
the _______________ _____________?
9. Using the following accounts, format in titles
only the Income Statement and the Balance
Sheet.
Cash,
Accounts Payable,
Accounts Receivable,
Equipment,
Advertising Expense,
Depreciation Expense,
Service Revenue,
Capital
1. Using the Balance Sheet Format, prepare your own
personalized or family Balance Sheet Report listing at
least seven accounts. (Make it neat (with heading).
2. Using the income statement format, complete a
cash flow personalized income statement showing all the
revenue (money) you received in January, and the
expenses (money) you spent. The bottom line would be
your net profit or net loss for January. Show at least
seven items in this report. Examples of Revenue:
(money from parents) (money from pell grant) (money
from savings) (money earned from work) (money
borrowed from roommates) (money received from loans)
etc. Examples of expenses: (money paid for tuition)
(money paid for books) (food) (entertainment) (utilities)
(phone) etc.
Both Reports need to have headings and both need to
be in the format for balance sheet and income statement
that we have learned .

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Lecture/Seminar on Basics

Evelyn B. Ferraris, MBM, CPA

If you want to get ahead in business

How it can be used and

What its limitations are.

Through Accounting, the performance of

makers through financial statements.

Financial analysts and bankers

Managers and Supervisor

that operating goals are being met and

that the various departments are being

managed as profitably as possible.

And about future earnings and

A company might have good

are basically based on accounting information.

Financial statements become more useful when

Assets Liabilities and Equity

Cash Petty Cash Receivables -

Long-term investments are resources that

Obligations expected to be paid

(classified by type and in accounts)

Assets = Liability + Owners Equity

(Resources you have) =(What you

period by using up an asset or a portion of an asset.

1. Analyse each transaction.

Assets Liabilities Equity

Entering transaction data in the journal is

1.Determine the titles of the accounts

The date of the transaction is entered in the date

A brief explanation of the transaction is given.

If an entry involves only two accounts, one debit

When three or more accounts are required in

This is the wrong format; all debits must be

An account is an individual accounting

Every account classification

Dr. Cr. Dr. Cr.

have credit balances.

Debit = Left side of an

The entire group of accounts maintained by a

Individual Individual Individual

Equipment Interest Payable Salaries Expense

E X P L A N A T I O N J.R. DEBIT CREDIT BALANCE

3/03 SJ1 1000 1000

3/04 CPJ1 500 500

In the ledger, enter in the appropriate columns of the account(s)

In the ledger, enter in the appropriate columns of the account(s)

To verify the equality of the

An erroneous amount was

An entity may provide

Some companies choose to

There are times when an entity

When a business acquires

Adjusting entries can be classified as

Prepayments are either prepaid

A different type of adjusting entry is

Were not attempting to reflect the

Amortization Expense Accumulated Amortization

Balance Sheet Presentation

Office equipment $5,000 Estimate

1.Prepaid Assets and Assets overstated Dr. Expenses

is one of the financial

The Income Statement is prepared first so that

1. Updates the owners capital