Review of the Accounting Process

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• Chapter 2
• Review of the Accounting Process

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Accounting Equation for a Corporation
A L SE
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Account Relationships
Debits and credits affect the Balance Sheet Model
as follows
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Account Relationships
Debits and credits affect the Balance Sheet Model
as follows
A L PIC RE R - E
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Source documents
Record in Journal
Transaction Analysis
Post to Ledger
Financial Statements
Unadjusted Trial Balance
Record Post Adjusting Entries
Adjusted Trial Balance
The Accounting Processing Cycle An Example
Close Temporary Accounts
Post-Closing Trial Balance
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After recording all entries for the period, Dress
Rights Trial Balance would be as follows
A Trial Balance is a listing of all accounts and
their balances at a point in time.
Debits Credits
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Additional Consideration
Perpetual Inventory System
Periodic Inventory System
Discussed in more depth in Chapters 8 9.
Inventory account is continually updated to
reflect purchases and sales. Cost of goods sold
account is continually updated to reflect sales.
Purchases account reflects purchases of
inventory. Cost of goods sold and inventory are
adjusted at period end.
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Adjusting Entries

• At the end of the period, some transactions or
  events remain unrecorded.
• Because of this, several accounts in the ledger
  need adjustments before their balances appear in
  the financial statements.
• For the most part, they involve conversion from
  cash basis to accrual basis.

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Transactions where cash is paid or received
before a related expense or revenue is recognized.
Transactions where cash is paid or received after
a related expense or revenue is recognized.
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Prepaid Expenses
Expense
Asset
Unadjusted Balance
Credit Adjustment
Debit Adjustment
Prepaid Expenses Items paid for in advance of
receiving their benefits Example
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Unearned Revenue
Revenue
Liability
Unadjusted Balance
Credit Adjustment
Debit Adjustment
Unearned Revenue Cash received in advance of
performing services Example
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Alternative Approach to Recording Prepayments
Unearned RevenueRecord initial cash receipts as
follows Cash Revenue
Adjusting EntryRecord the amount for the
unearned liability as follows Revenue
Unearned revenue
Prepaid ExpensesRecord initial cash payments as
follows Expense Cash
Adjusting EntryRecord the amount for the
prepaid expense as follows Prepaid expense
Expense
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Accrued Liabilities
Liability
Expense
Credit Adjustment
Debit Adjustment
Accrued Liabilities Costs incurred in a period
that are both unpaid and unrecorded Example
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Accrued Receivables
Revenue
Asset
Credit Adjustment
Debit Adjustment
Accrued Receivables Revenues earned in a period
that are both unrecorded and not yet
received Example
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Estimates

• An estimated item is a function of future events
  and developments.
• Uncollectible accounts and depreciation of fixed
  assets are estimated.
• Journal entry for bad debt expense
• Bad debt expense
• Allowance for uncollectible accounts
• Depreciation is the process of computing expense
  by allocating the cost of plant and equipment
  over their expected useful lives.
• Straight line depreciation Asset cost salvage
  value/useful life
• Journal entry for depreciation expense
• Depreciation expense
• Accumulated Depreciation
• Examples

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The income statement summarizes the results of
operating activities of the company.
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The balance sheet presents the financial position
of the company on a particular date.
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The balance sheet presents the financial position
of the company on a particular date.
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The statement of cash flows discloses the changes
in cash during a period.
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The statement of shareholders equity presents
the changes in permanent shareholder accounts.
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The Closing Process

• Identify accounts for closing
• Record and post closing entries
• Reset revenue, expense and dividend account
  balances to zero at the end of the period.
• Summarize a periods revenues and expenses in the
  Income Summary account.
• Close income summary to retained earnings.
• Prepare post-closing trial balance.

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Temporary and Permanent Accounts
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Closing Entries

• Close Revenue accounts to Income Summary.
• Close Expense accounts to Income Summary.
• Close Income Summary account to Retained
  Earnings.
• Example

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Post-Closing Trial Balance
Lists permanent accounts and their balances.
Total debits equal total credits.