The Accounting Cycle Capturing Economic Events

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Chapter3
The Accounting CycleCapturing Economic Events
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Learning Objective
To identify the steps in the accounting cycle and
discuss the role of accounting records in an
organization.
LO1
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The Role of Accounting Records
Establishes accountability for assets and
transactions.
Keeps track of routine business activities.
Obtains detailed information about a particular
transaction.
Evaluates efficiency and performance within
company.
Maintains evidence of a companys business
activities.
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Learning Objective
To describe a ledger account and a ledger.
LO2
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The Ledger
Accounts are individual records showing increases
and decreases.
Cash
Accounts Payable
The entire group of accounts is kept together in
an accounting record called a ledger.
Capital Stock
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The Use of Accounts

• Increases are recorded on one side of the
  T-account, and decreases are recorded on the
  other side.

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Lets see how debits and credits are recorded in
the Cash account for JJs Lawn Care Service.
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Debit and Credit Entries
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Learning Objective
To understand how balance sheet accounts are
increased and decreased.
LO3
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Debit and Credit Rules
Debits and credits affect accounts as follows
A L OE
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Learning Objective
To explain the double-entry system of accounting.
LO4
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Double Entry Accounting???The Equality of Debits
and Credits
A L OE

Debit balances
Credit balances
In the double-entry accounting system, every
transaction is recorded by equal dollar amounts
of debits and credits.
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Lets record selected transactions for JJs Lawn
Care Service in the accounts.
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• May 1 Jill Jones and her family invested
  8,000 in JJs Lawn Care Service and received 800
  shares of stock.

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• May 1 Jill Jones and her family invested
  8,000 in JJs Lawn Care Service and received 800
  shares of stock.

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• May 2 JJs purchased a riding lawn mower for
  2,500 cash.

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• May 2 JJs purchased a riding lawn mower for
  2,500 cash.

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• May 8 JJs purchased a 15,000 truck. JJs
  paid 2,000 in cash and issued a note payable for
  the remaining 13,000.

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• May 8 JJs purchased a 15,000 truck. JJs
  paid 2,000 in cash and issued a note payable for
  the remaining 13,000.

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• May 11 JJs purchased some repair parts for
  300 on account.

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• May 11 JJs purchased some repair parts for
  300 on account.

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• May 18 JJs sold half of the repair parts to
  ABC Lawns for 150, a price equal to JJs cost.
  ABC Lawns agrees to pay JJs within 30 days.

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• May 18 JJs sold half of the repair parts to
  ABC Lawns for 150, a price equal to JJs cost.
  ABC Lawns agrees to pay JJs within 30 days.

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Learning Objective
To explain the purpose of a journal and its
relationship to the ledger.
LO5
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The Journal
In an actual accounting system, transactions are
initially recorded in the journal.
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Posting Journal Entries to the Ledger Accounts

• Posting involves copying information from the
  journal to the ledger accounts.

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Posting Journal Entries to the Ledger Accounts
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Posting Journal Entries to the Ledger Accounts
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Posting Journal Entries to the Ledger Accounts
Lets see what the cash account looks like after
posting the cash portion of this transaction for
JJs Lawn Care Service.
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Ledger Accounts After Posting
This ledger format is referred to as a running
balance.
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Ledger Accounts After Posting
T accounts are simplified versions of the ledger
account that only show the debit and credit
columns.
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Learning Objective
To explain nature of net income, revenue, and
expenses.
LO6
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What is Net Income?
Net income is not an asset ??its an increase in
owners equity from profits of the business.
A L OE
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Retained Earnings
A L OE
Capital Stock
Retained Earnings
The balance in the Retained Earnings account
represents the total net income of the
corporation over the entire lifetime of the
business, less all amounts which have been
distributed to the stockholders as dividends.
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The Income Statement A Preview
The income statement summarizes the profitability
of a business for a specified period of time.
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Accounting Periods
Time Period Principle To provide users of
financial statements with timely information, net
income is measured for relatively short
accounting periods of equal length.
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Revenue and Expenses
The price for goods sold and services rendered
during a given accounting period.
Increases owners equity.
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Learning Objective
To apply the realization and matching principles
in recording revenue and expenses.
LO7
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The Realization Principle When To Record Revenue
Realization Principle Revenue should be
recognized at the time goods are sold and
services are rendered.
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The Matching Principle When To Record Expenses
Matching Principle Expenses should be recorded in
the period in which they are used up.
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Debits and Credits for Revenue and Expense
Expenses decrease owners equity.
Revenues increase owners equity.
EQUITIES
Debit for Decrease
Credit for Increase
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Investments by and Payments to Owners
Payments to owners decrease owners equity.
Owners investments increase owners equity.
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Learning Objective
To understand how revenue and expense
transactions are recorded in an accounting system.
LO8
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Lets analyze the revenue and expense
transactions for JJs Lawn Care Service for the
month of May. We will also analyze a dividend
transaction.
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• May 29 JJs provided lawn care services for a
  client and received 750 in cash.

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• May 29 JJs provided lawn care services for a
  client and received 750 in cash.

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• May 31 JJs purchased gasoline for the lawn
  mower and the truck for 50 cash.

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• May 31 JJs purchased gasoline for the lawn
  mower and the truck for 50 cash.

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• May 31 JJs Lawn Care paid Jill Jones and her
  family a 200 dividend.

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• May 31 JJs Lawn Care paid Jill Jones and her
  family a 200 dividend.

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Learning Objective
To prepare a trial balance and explain its uses
and limitations.
LO9
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Now, lets look at the Trial Balance for JJs
Lawn Care Service for the month of May.
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All balances are taken from the ledger accounts
on May 31. You may notice from the balances
presented that JJs Lawn Care Service had
transactions in May other than those presented on
the preceding slides.
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Learning Objective
To distinguish between accounting cycle
procedures and the knowledge of accounting.
LO10
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The Accounting Cycle
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End of Chapter 3