Chapter 2

The Accounting Cycle

Accounting, 21st Edition
Warren Reeve Fess
Lecturer: Abdinour Youuf

© Copyright 2004 South-Western, a division

PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
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Usefulness of an account

Accounting systems are designed to

show the increases and decreases in
each financial statement item in a
separate record. This record is called
an account.
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Usefulness of an account

 A group of accounts for a business

entity is called a ledger.

 A list of the accounts in the ledger is

called a chart of accounts.
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Usefulness of an account

 The accounts are normally listed in

the order in which they appear in the
financial statements.

 The balance sheet accounts are

usually listed first, in the order of
assets, liabilities and owner’s equity
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Usefulness of an account

 The income statement accounts are

then listed in the order of revenues and
expenses.
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Assets

Are resources owned by the business

entity. These resources can be physical
items, such as cash and supplies, or
intangibles that have value, such as
patent rights and copyrights.
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Liabilities

Are debts owed to outsiders (creditors).

Liabilities are often identified on the
balance sheet by titles that include the
word payable.
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Liabilities
Cash received before services are
delivered creates a liability to perform
the services. These future commitments
are often called unearned revenues.
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Owner’s Equity
The owner’s right to the assets of the
business.
The owner’s equity on the balance
sheet is represented by the balance of
the owner’s capital account.
A drawing account represents the
amount of withdrawals made by the
owner.
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Revenues
Are increases in owner’s equity as a
result of selling services or products
to customers.
Expenses
The using up of assets or consuming
services in the process of generating
revenues.
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Chart of accounts for Talasan Page

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Balance Sheet Accounts Income Statement Accounts

1. Assets 4. Revenue
11 Cash 41 Fees Earned

12 Accounts Receivable 5. Expenses

14 Supplies 51 Wages Expense

15 Prepaid Insurance 52 Rent Expense

17 Land 54 Utilities Expense
18 Office Equipment 55 Supplies Expense

2. Liabilities 59 Miscellaneous Expense

21 Accounts Payable
23 Unearned Rent

3. Owner’s Equity
31 Hassan M, capital
32 Hassan M, Drawing
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Characteristics of an account

 An account, in its simplest form,

has three parts
 First, each account has a title,
which Is the name of the item
recorded in the account.
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Characteristics of an account

 Second, each account has a space

for recording increases in the
amount of the item.
 Third, each account has a space
for recording decreases in the
amount of the item.
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Characteristics of an account

 The left side of the account is

called the debit side, and right side
is called the credit side.
  Title
 
Left side Right side
Debit Credit
 

 
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The Rules of Debits, Credits &

Normal Balance

Every transaction affects at least two

accounts.
 It may increase or decrease the
accounts.
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Balance sheet Accounts

The left (debit) side of asset accounts is

used for recording increases and the right
(credit) side is used for recording
decreases
The right (credit) side of liability and
owner’s equity is used to record increases,
and the left (debit) side of such accounts is
used to record decreases.
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 The left side of all accounts, whether

assets, liabilities, or owner’s equity, is
the debit side, and the right side is the
credit side.
 A debitmay be either an increase or a
decrease, depending on the account.
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Debit Credit

Asset accounts Increases (+) Decreases (-)

Liability accounts Decreases (-) Increases (+)
Owner’s equity (capital) Decreases (-) Increases (+)
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Income Statement Accounts

Just as increases in owner’s equity are

recorded as credits, so, too, are increases in
revenue.
Increases in expense accounts are
recorded as debits.
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Debit Credit

Revenues Decreases (-) Increases (+)

Expenses Increases (+) Decreases (-)
 Normal Balances of Accounts
Increase
(Normal Balances) Decreases

Balance sheet accounts:

Asset Debit Credit
Liability Credit Debit
Owner’s Equity:
Capital Credit Debit
Drawing Debit Credit
Income statement accounts:
Revenue Credit Debit
Expense Debit Credit
Flow of Business Transactions

Transaction Transaction Document

1 authorized 2 takes place 3 prepared

Entry recorded Entry posted to

4 in journal 5 ledger
Journalizing and
Posting
 System to Analyze Transactions
1. Determine whether an asset, a liability,
owner’s equity, revenue, or expense account
is affected by the transaction.
2. For each account affected by the transaction,
determine whether the account increases or
decreases.
3. Determine whether each increase or decrease
should be recorded as a debit or a credit.
 On November 1, Hassan Mohamed
deposits $25,000 in a bank account
in the name of Talasan.

JOURNAL Page 1
Post.
Date Description Debit Credit
2005 Ref.
1 Nov. 1 Cash 25 000 00
2 Hassan Mohamed, Capital 25 000 00
3 Invested cash in Talasan.
4
 On November 5, Talasan bought land for
$20,000, paying cash.

4
5 5 Land 20 000 00
6 Cash 20 000 00
7 Purchased land for building
8 site.
9
10
 On November 10, Talasan purchased
supplies on account for $1,350.

10
11 10 Supplies 1 350 00
12 Accounts Payable 1 350 00
13 Purchased supplies on account.
14
15
16
 On November 30, Talasan paid creditors on
account, $950.

30
31 30 Accounts Payable 950 00
32 Cash 950 00
33 Paid creditors on account.
34
35
36
 On November 18, Talasan received fees of
$7,500 from customers for services
provided .

14
15 18 Cash 7 500 00
16 Fees Earned 7 500 00
17 Received fees from customers.
18
19
20
 Nov 30. Talasan incurred the following
expenses: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous, $275 .

18
19 30 Wages Expense 2 125 00
20 Rent Expense 800 00
21 Utilities Expense 450 00
22 Miscellaneous Expense 275 00
23 Cash 3 650 00
24
Paid expenses.
 On November 30, a count revealed that $800
of the supplies inventory had been used.

25
26 30 Supplies Expense 800 00
27 Supplies 800 00
28 Supplies used during
29 November.
30
31
 On November 30, Hassan Mohamed withdrew
$2,000 in cash from Talasan for personal use.

JOURNAL Page 2
Post.
Date Description Debit Credit
2005 Ref.
1 Nov. 30 Hassan Mohamed, Drawing 2 000 00
2 Cash 2 000 00
3 Hassan Mohamed withdrew cash
4 for
personal use.
 Dec. 1 Talasan paid a premium of $2,400 for
a comprehensive insurance policy
covering two years.

JOURNAL Page 2
Post.
Date Description Debit Credit
2005 Ref.
1 Dec. 31 Prepaid Insurance 2 400 00
2 Cash 2 400 00
3 Paid premium on two-year
4 policy.
 Dec. 1 Talasan paid rent for December,
$800.

14 1 Rent Expense 52 800 00

15 Cash 11 800 00
16 Paid rent for December.
17
 Dec. 1 Talasan receives $360 for three
month’s rent beginning December 1.

14 1 Cash 14 360 00
15 Unearned Rent 23 360 00
16 Received advanced payment
17 For three months’ rent of land.
 Dec. 4 Talasan purchased office equipment
on account from Executive Supply
Co. for $1,800.

18 4 Office Equipment 18 1 800 00

19 Accounts Payable 21 1 800 00
20 Purchased office equipment on
21 account.
 Dec. 6 Talasan paid $180 for a newspaper
advertisement.

21 6 Miscellaneous Expense 59 180 00

22 Cash 11 180 00
23 Paid for newspaper ad.
24
 Dec. 11 Talasan paid creditors $400.

24 11 Accounts Payable 21 400 00

25 Cash 11 400 00
26 Paid creditors on account.
27
 Dec. 13 Talasan paid a receptionist and part-
time assistant $950 for two weeks’
wages.

JOURNAL Page 3
Post.
Date Description Debit Credit
2005 Ref.
1 Dec. 13 Wages Expense 51 950 00
2 Cash 11 950 00
3 Paid two week’s wages.
4
 Dec. 16 Talasan received $3,100 from fees
earned for the first half of December.

5 16 Cash 11 3 100 00
6 Fees Earned 41 3 100 00
7 Received fees from customers.
8
 Dec. 16 Fees earned on account totaled
$1,750 for the first half of
December.

9 16 Accounts Receivable 12 1 750 00

10 Fees Earned 41 1 750 00
11 Received fees from customers.
12
 Dec. 20 Talasan paid $900 to Executive
Supply Co. on the $1,800 debt owed
from the December 4 transaction.

13 20 Accounts Payable 21 900 00

14 Cash 11 900 00
15 Paid part of amount owed to
16 Executive Supply Co.
 Dec. 21 Talasan received $650 from
customers in payment of their
accounts.

18 21 Cash 11 650 00
19 Accounts Receivable 12 650 00
20 Received cash from customer
21 on account.
 Dec. 23 Talasan paid $1,450 for supplies.

22 23 Supplies 14 1 450 00
23 Cash 11 1 450 00
24 Purchased supplies.
25
 Dec. 27 Talasan paid the receptionist and
part-time assistant $1,200 for two
weeks’ wages.

27 27 Wages Expense 51 1 200 00

28 Cash 11 1 200 00
29 Paid two weeks’ wages.
30
 Dec. 31 Talasan paid its $310 telephone bill
for the month.

31 31 Utilities Expense 54 310 00

32 Cash 11 310 00
33 Paid telephone bill.
34
 Dec. 31 Talasan paid its $225 electric bill for
the month.

JOURNAL Page 4
Post.
Date Description Debit Credit
2005 Ref.
1 Dec. 31 Utilities Expense 54 225 00
2 Cash 11 225 00
3 Paid utility bill.
4
 Dec. 31 Talasan received $2,870 from fees
earned for the second half of
December.

5 31 Cash 11 2 870 00
6 Fees Earned 41 2 870 00
7 Received fees from customers.
8
 Dec. 31 Talasan earned $1,120 on account
for the second half of December.

9 31 Accounts Receivable 12 1 120 00

10 Fees Earned 41 1 120 00
11 Recorded fees earned on
12 account.
 Dec. 31 Hassan Mohamed withdrew $2,000
for personal use.

14 31 Hassan Mohamed, Drawing 32 2 000 00

15 Cash 11 2 000 00
16 Hassan Mohamed withdrew cash
17 for personal use.
Trial Balance
 Talasan
Trial Balance
December 31, 2005
Cash2 065 00
Accounts Receivable 2 220 00
Supplies 2 000 00
Prepaid Insurance 2 400 00
Land 20 000 00
Office Equipment 1 800 00
Accounts Payable 900 00
Unearned Rent 360 00
Hassan Mohamed, Capital 25 000 00
Hassan Mohamed, Drawing 4 000 00
Fees Earned 16 340 00
Wages Expense 4 275 00
Rent Expense 1 600 00
Utilities Expense 985 00
Supplies Expense 800 00
Miscellaneous Expense 455 00
42 600 00 42 600 00
 Talasan
Trial Balance
December 31, 2005
Cash2 065 00
Accounts Receivable 2 220 00
Supplies 2 000 00
Prepaid Insurance Balance
2 400 00
Land 20 000 00 Sheet
Office Equipment 1 800 00
Accounts Payable 900 00 Items
Unearned Rent 360 00
Hassan Mohamed, Capital 25 000 00
Hassan Mohamed, Drawing 4 000 00
Fees Earned 16 340 00
Wages Expense 4 275 00
Rent Expense 1 600 00
Utilities Expense 985 00
Supplies Expense 800 00
Miscellaneous Expense 455 00
42 600 00 42 600 00
 Talasan
Trial Balance
December 31, 2005
Cash2 065 00
Accounts Receivable 2 220 00
Supplies 2 000 00
Prepaid Insurance 2 400 00
Land 20 000 00
Office Equipment 1 800 00
Accounts Payable 900 00
Unearned Rent 360 00
Hassan Mohamed, Capital 25 000 00
Hassan Mohamed, Drawing 4 000 00
Fees Earned 16 340 00Statement
Wages Expense 4 275 00
Rent Expense 1 600 00
of Owner’s
Utilities Expense 985 00 Equity
Supplies Expense 800 00 Item
Miscellaneous Expense 455 00
42 600 00 42 600 00
 Talasan
Trial Balance
December 31, 2005
Cash2 065 00
Accounts Receivable 2 220 00
Supplies 2 000 00
Prepaid Insurance 2 400 00
Land 20 000 00
Office Equipment 1 800 00
Accounts Payable 900 00
Unearned Rent 360 00
Hassan Mohamed, Capital 25 000 00
Hassan Mohamed, Drawing 4 000 00
Fees Earned 16 340 00
Wages Expense 4 275 00 Income
Rent Expense 1 600 00
Utilities Expense 985 00
Statement
Supplies Expense 800 00 Items
Miscellaneous Expense 455 00
42 600 00 42 600 00
Chapter 2

The End
 Practice Problem

1. Received cash from owner as additional investment, $35,000.

2. Received cash for providing delivery services, $15,000.
3. Paid creditors on account, $1,800.
4. Billed customers for delivery services on account, $11,250.
5. Paid advertising expense, $750.
6. Purchased supplies for cash, $800.
7. Paid rent for February, $2,000.
8. Received cash from customers on account, $6,740.
9. Determined that the cost of supplies on hand was $135; therefore, $665 of supplies had
been used during the month.
10. Paid cash to owner for personal use, $1,000.
Prepare Journal Entries , Prepare T-Accounts, Prepare Trail Balances, Prepare Financial
Statements

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