The Accounting

1
Review of Bookkeeping

• The Accounting
• Information System
• Cycle

2
The Accounting Cycle
Transactions
1. Journalization
9. Reversing entries
8. Post-closing trial balance
2. Posting
7. Closing entries
3. Trial balance
6. Financial Statements
4. Adjustments
Work Sheet
5. Adjusted trial balance
3
Transactions
Question Are the following events recorded in
the accounting records?
Discuss product design with potential customer.
Purchased a computer.
Event
Pay rent.
Is the financial position (assets, liabilities,
or stockholders equity) of the company changed?
Criterion
Record/ Dont Record
4
Accounting Transactions

• Transaction Analysis
• The process of identifying the specific effects
  of economic events on the accounting equation.

Basic Accounting Equation
Assets
Liabilities
Stockholders Equity


5
Accounting Transactions
Transaction Analysis
6
Transactions Tabular Format
Illustration 1. On October 1, cash of 10,000
is invested in Sierra Corporation by investors in
exchange for 10,000 of common stock.
1. 10,000 10,000
7
Accounting Transactions
2. On October 1, Sierra borrowed 5,000 from
Castle Bank by signing a 3-month, 12, 5,000
note payable.
1. 10,000 10,000
2. 5,000 5,000
8
Accounting Transactions
3. On October 2, Sierra purchased office
equipment by paying 5,000 cash to Superior
Equipment Sales Co.
1. 10,000 10,000
2. 5,000 5,000
3. -5,000 5,000
9
Accounting Transactions
4. On October 2, Sierra received a 1,200 cash
advance from R. Knox, a client.
1. 10,000 10,000
2. 5,000 5,000
3. -5,000 5,000
4. 1,200 1,200
10
Accounting Transactions
5. On October 3, Sierra received 10,000 in cash
from Copa Company for advertising services
performed.
1. 10,000 10,000
2. 5,000 5,000
3. -5,000 5,000
4. 1,200 1,200
5. 10,000 10,000
11
Accounting Transactions
6. On October 3, Sierra Corporation paid its
office rent for the month of October in cash,
900.
1. 10,000 10,000
2. 5,000 5,000
3. -5,000 5,000
4. 1,200 1,200
5. 10,000 10,000
6. -900 -900
12
Accounting Transactions
7. On October 4, Sierra paid 600 for a one-year
insurance policy that will expire next year on
September 30.
1. 10,000 10,000
2. 5,000 5,000
3. -5,000 5,000
4. 1,200 1,200
5. 10,000 10,000
6. -900 -900
7. -600 600
13
Accounting Transactions
8. On October 5, Sierra purchased a three-month
supply of advertising materials on account from
Aero Supply for 2,500.
1. 10,000 10,000
2. 5,000 5,000
3. -5,000 5,000
4. 1,200 1,200
5. 10,000 10,000
6. -900 -900
7. -600 600
8. 2,500 2,500
14
Accounting Transactions
9. Hired employees nothing to enter.
1. 10,000 10,000
2. 5,000 5,000
3. -5,000 5,000
4. 1,200 1,200
5. 10,000 10,000
6. -900 -900
7. -600 600
8. 2,500 2,500
15
Accounting Transactions
10. On October 20, Sierra paid a 500 dividend.
1. 10,000 10,000
2. 5,000 5,000
3. -5,000 5,000
4. 1,200 1,200
5. 10,000 10,000
6. -900 -900
7. -600 600
8. 2,500 2,500
10. -500 -500
16
Accounting Transactions
11. Employees have worked two weeks, earning
4,000 in salaries, which were paid on October 26.
1. 10,000 10,000
2. 5,000 5,000
3. -5,000 5,000
4. 1,200 1,200
5. 10,000 10,000
6. -900 -900
7. -600 600
8. 2,500 2,500
10. -500 -500
11. -4,000 -4,000
17
Bookkeeping The Account

• Record of increases and decreases in a specific
  asset, liability, equity, revenue, or expense
  item.
• Debit Left
• Credit Right

Account
An Account can be illustrated in a T-Account
form.
18
Bookkeeping The Chart of Accounts
19
Debit and Credit Procedures

• Double-entry accounting system
• Each transaction must affect two or more accounts
  to keep the basic accounting equation in balance.
• Recording done by debiting at least one account
  and crediting another.
• DEBITS must equal CREDITS.

20
Debit and Credit Procedures
If Debits are greater than Credits, the account
will have a debit balance.
10,000
Transaction 2
3,000
Transaction 1
8,000
Transaction 3
15,000
Balance
21
Debit and Credit Procedures
If Credits are greater than Debits, the account
will have a credit balance.
10,000
Transaction 2
3,000
Transaction 1
8,000
Transaction 3
Balance
1,000
22
Dr./Cr. Procedures for Assets and Liabilities

• Assets - Debits should exceed credits.
• Liabilities Credits should exceed debits.
• The normal balance is on the increase side.

SO 3 Define debits and credits and explain their
use in recording business transactions.
23
Dr./Cr. Procedures for Stockholders Equity

• Owners investments and revenues increase
  stockholders equity (credit).
• Dividends and expenses decrease stockholders
  equity (debit).

SO 3 Define debits and credits and explain their
use in recording business transactions.
24
Dr./Cr. Procedures for Revenue and Expense

• The purpose of earning revenues is to benefit the
  stockholders.
• The effect of debits and credits on revenue
  accounts is the same as their effect on
  stockholders equity.
• Expenses have the opposite effect expenses
  decrease stockholders equity.

SO 3 Define debits and credits and explain their
use in recording business transactions.
25
Debits and Credits Summary
Normal Balance Debit
Normal Balance Credit
SO 3 Define debits and credits and explain their
use in recording business transactions.
26
Debits and Credits Summary
Balance Sheet Income
Statement

-


Asset
Liability
Equity
Revenue
Expense
Debit
Credit
SO 3 Define debits and credits and explain their
use in recording business transactions.
27
Stockholders Equity Relationships
Illustration 3-15
SO 3 Define debits and credits and explain their
use in recording business transactions.
28
Summary of Debit/Credit Rules

• Relationship among the assets, liabilities and
  stockholders equity of a business

Illustration 3-16
Basic Equation
Assets
Liabilities

Stockholders Equity

Expanded Basic Equation
The equation must be in balance after every
transaction. For every Debit there must be a
Credit.
SO 3 Define debits and credits and explain their
use in recording business transactions.
29
Steps in the Recording Process
Illustration 3-17
Transfer journal information to ledger accounts
Analyze each transaction
Enter transaction in a journal
Business documents, such as a sales slip, a
check, a bill, or a cash register tape, provide
evidence of the transaction.
SO 4 Identify the basic steps in the recording
process.
30
The Journal

• Book of original entry.
• Transactions recorded in chronological order.
• Contributions to the recording process
• Discloses the complete effects of a transaction.
• Provides a chronological record of transactions.
• Helps to prevent or locate errors because the
  debit and credit amounts can be easily compared.

31
The Journal
Journalizing - Entering transaction data in the
journal.
Illustration Presented below is information
related to Sierra Corporation.
Sierra issued common stock in exchange for
10,000 cash.
Oct. 1
Sierra borrowed 5,000 by signing a note.
1
Sierra purchased office equipment for 5,000.
2
Instructions - Journalize these transactions.
SO 4 Explain what a journal is and how it helps
in the recording process.
32
Journalizing
Sierra issued common stock in exchange for
10,000 cash.
Oct. 1
General Journal
Cash
10,000
Common stock
10,000
SO 4 Explain what a journal is and how it helps
in the recording process.
33
Journalizing
Sierra borrowed 5,000 by signing a note.
Oct. 1
General Journal
Cash
5,000
Notes payable
5,000
SO 4 Explain what a journal is and how it helps
in the recording process.
34
Journalizing
Sierra purchased office equipment for 5,000.
Oct. 2
General Journal
Office equipment
5,000
Cash
5,000
SO 4 Explain what a journal is and how it helps
in the recording process.
35
The Ledger
Ledger contains the entire group of accounts
maintained by a company.
Illustration 3-19
SO 6 Explain what a ledger is and how it helps
in the recording process.
36
Chart of Accounts
Accounts arranged in sequence in which they are
presented in the financial statements.
SO 6 Explain what a ledger is and how it helps
in the recording process.
37
Posting
Posting the process of transferring amounts
from the journal to the ledger accounts.
General Journal
J1
101
General Ledger
Oct. 1
Owner investment
J1
10,000
10,000
SO 7 Explain what posting is and how it helps in
the recording process.
38
The Recording Process Illustrated
Illustration 3-21
Follow these steps 1. Determine what type of
account is involved. 2. Determine what items
increased or decreased and by how much. 3.
Translate the increases and decreases into
debits and credits.
SO 7 Explain what posting is and how it helps in
the recording process.
39
The Recording Process Illustrated
Illustration 3-22
Follow these steps 1. Determine what type of
account is involved. 2. Determine what items
increased or decreased and by how much. 3.
Translate the increases and decreases into
debits and credits.
SO 7 Explain what posting is and how it helps in
the recording process.
40
The Recording Process Illustrated
Illustration 3-23
Follow these steps 1. Determine what type of
account is involved. 2. Determine what items
increased or decreased and by how much. 3.
Translate the increases and decreases into
debits and credits.
SO 7 Explain what posting is and how it helps in
the recording process.
41
The Recording Process Illustrated
Additional Transactions
Illustration 3-24
SO 7 Explain what posting is and how it helps in
the recording process.
42
The Recording Process Illustrated
Additional Transactions
Illustration 3-25
SO 7 Explain what posting is and how it helps in
the recording process.
43
The Recording Process Illustrated
Additional Transactions
Illustration 3-26
SO 7 Explain what posting is and how it helps in
the recording process.
44
The Recording Process Illustrated
,
Additional Transactions
Illustration 3-27
SO 7 Explain what posting is and how it helps in
the recording process.
45
The Recording Process Illustrated
Additional Transactions
Illustration 3-28
SO 7 Explain what posting is and how it helps in
the recording process.
46
The Recording Process Illustrated
Additional Transactions
Illustration 3-29
SO 7 Explain what posting is and how it helps in
the recording process.
47
The Recording Process Illustrated
Additional Transactions
Illustration 3-30
SO 7 Explain what posting is and how it helps in
the recording process.
48
The Recording Process Illustrated
Additional Transactions
Illustration 3-31
SO 7 Explain what posting is and how it helps in
the recording process.
49
Summary Illustration of Journalizing
Illustration 3-32

SO 7 Explain what posting is and how it helps in
the recording process.
50
Summary Illustration of Journalizing
Illustration 3-32

SO 7 Explain what posting is and how it helps in
the recording process.
51
Summary Illustration of Posting
Illustration 3-33

52
The Trial Balance

• A list of accounts and their balances at a given
  time.
• Purpose is to prove that debits equal credits.

Illustration 3-34

53
The Trial Balance
Limitations of a Trial Balance

• The trial balance may balance even when
• a transaction is not journalized,
• a correct journal entry is not posted,
• a journal entry is posted twice,
• incorrect accounts are used in journalizing or
  posting, or
• offsetting errors are made in recording the
  amount of a transaction.

54

• Adjusting Entries

55
The Basics of Adjusting Entries

• Adjusting entries make it possible to report
  correct amounts on the balance sheet and on the
  income statement.
• A company must make adjusting entries every time
  it prepares financial statements.
• Every adjusting entry will include one income
  statement account and one balance sheet account.

56
Timing Issues
Accountants divide the economic life of a
business into artificial time periods (Time
Period Assumption).
. . . . .
Jan.
Feb.
Mar.
Apr.
Dec.

• Generally a month, a quarter, or a year.
• Fiscal year vs. calendar year

57
Timing Issues
Revenue Recognition Principle
Companies recognize revenue in the accounting
period in which it is earned. In a service
enterprise, revenue is considered to be earned at
the time the service is performed.
58
Timing Issues
Illustration Assume Conrad Dry Cleaners cleans
clothing on June 30, but customers do not claim
and pay for their clothes until the first week of
July. The journal entries for June and July would
be
59
Timing Issues
Let the expenses follow the revenues.
60
Timing Issues
61
Timing Issues
Accrual- vs. Cash-Basis Accounting

• Accrual-Basis Accounting
• Transactions recorded in the periods in which the
  events occur
• Revenues are recognized when earned, rather than
  when cash is received.
• Expenses are recognized when incurred, rather
  than when paid.

62
Timing Issues
Accrual- vs. Cash-Basis Accounting

• Cash-Basis Accounting
• Revenues are recognized when cash is received.
• Expenses are recognized when cash is paid.
• Cash-basis accounting is not in accordance with
  generally accepted accounting principles (GAAP).

63
Timing Issues
Illustration Suppose that Fresh Colors paints a
large building in 2009. In 2009 it incurs and
pays total expenses (salaries and paint costs) of
50,000. It bills the customer 80,000, but does
not receive payment until 2010.
64
The Basics of Adjusting Entries

• Revenues - recorded in the period in which they
  are earned.
• Expenses - recognized in the period in which they
  are incurred.
• Adjusting entries - needed to ensure that the
  revenue recognition and matching principles are
  followed.

65
Types of Adjusting Entries
Deferrals
Accruals
1. Prepaid Expenses. Expenses paid in cash and
recorded as assets before they are used or
consumed.
3. Accrued Revenues. Revenues earned but not yet
received in cash or recorded.
4. Accrued Expenses. Expenses incurred but not
yet paid in cash or recorded.

• Unearned Revenues.
• Cash received and recorded as liabilities before
  revenue is earned.

66
Types of Adjusting Entries
Trial Balance Each account is analyzed to
determine whether it is complete and up-to-date.
67
Adjusting Entries for Prepaid Expenses

• Payment of cash, that is recorded as an asset
  because service or benefit will be received in
  the future.

Cash Payment
Expense Recorded
BEFORE
Prepayments often occur in regard to

• rent
• maintenance on equipment
• fixed assets (depreciation)

• insurance
• supplies
• advertising

68
Adjusting Entries for Prepaid Expenses

• Prepaid Expenses
• Costs that expire either with the passage of time
  or through use.
• Adjusting entries (1) to record the expenses that
  apply to the current accounting period, and (2)
  to show the unexpired costs in the asset accounts.

69
Adjusting Entries for Prepaid Expenses
Adjusting entries for prepaid expenses

• Increases (debits) an expense account and
• Decreases (credits) an asset account.

70
Adjusting Entries for Prepaid Expenses
Illustration Sierra Corporation purchased
advertising supplies costing 2,500 on October 5.
Sierra recorded the payment by increasing
(debiting) the asset Advertising Supplies. This
account shows a balance of 2,500 in the October
31 trial balance. An inventory count at the close
of business on October 31 reveals that 1,000 of
supplies are still on hand.
(2,500 1,000 1,500)
Advertising supplies expense
1,500
Oct. 31
Advertising supplies
1,500
71
Adjusting Entries for Prepaid Expenses
Illustration On October 4 Sierra Corporation
paid 600 for a one-year fire insurance policy.
Coverage began on October 1. Sierra recorded the
payment by increasing (debiting) Prepaid
Insurance. This account shows a balance of 600
in the October 31 trial balance. Insurance of
50 (600 / 12) expires each month.
Insurance expense
50
Oct. 31
Prepaid insurance
50
72
Adjusting Entries for Prepaid Expenses

• Depreciation
• Buildings, equipment, and vehicles (long-lived
  assets) are recorded as assets, rather than an
  expense, in the year acquired.
• Companies report a portion of the cost of a
  long-lived asset as an expense (depreciation)
  during each period of the assets useful life
  (Matching Principle).

73
Adjusting Entries for Prepaid Expenses
Illustration For Sierra Corporation, assume
that depreciation on the office equipment is 480
a year, or 40 per month.
Depreciation expense
40
Oct. 31
Accumulated depreciation
40
74
Adjusting Entries for Prepaid Expenses

• Depreciation (Statement Presentation)
• Accumulated Depreciation is a contra asset
  account.
• Appears just after the account it offsets
  (Equipment) on the balance sheet.

75
Adjusting Entries for Prepaid Expenses
Summary
76
Adjusting Entries for Unearned Revenues

• Receipt of cash that is recorded as a liability
  because the revenue has not been earned.

Cash Receipt
Revenue Recorded
BEFORE
Unearned revenues often occur in regard to

• magazine subscriptions
• customer deposits

• rent
• airline tickets
• school tuition

77
Adjusting Entries for Unearned Revenues

• Unearned Revenues
• Company makes an adjusting entry to record the
  revenue that has been earned and to show the
  liability that remains.
• The adjusting entry for unearned revenues results
  in a decrease (a debit) to a liability account
  and an increase (a credit) to a revenue account.

78
Adjusting Entries for Unearned Revenues
Adjusting entries for unearned revenues
Illustration 4-11

• Decrease (a debit) to a liability account and
• Increase (a credit) to a revenue account.

79
Adjusting Entries for Unearned Revenues
Illustration Sierra Corporation received 1,200
on October 2 from R. Knox for advertising
services expected to be completed by December 31.
Unearned Service Revenue shows a balance of
1,200 in the October 31 trial balance. From an
evaluation of the work Sierra performed for Knox
during October, the company determines that it
has earned 400 in October.
Unearned service revenue
400
Oct. 31
Service revenue
400
80
Adjusting Entries for Unearned Revenues
Summary
81
Adjusting Entries for Accruals

• Made to record
• Revenues earned and
• OR
• Expenses incurred
• in the current accounting period that have not
  been recognized through daily entries.

82
Adjusting Entries for Accrued Revenues

• Revenues earned but not yet received in cash or
  recorded.

Adjusting entry results in
Cash Receipt
Revenue Recorded
BEFORE
Accrued revenues often occur in regard to

• rent
• interest
• services performed

83
Adjusting Entries for Accrued Revenues
Accrued Revenues An adjusting entry serves two
purposes (1) It shows the receivable that
exists, and (2) It records the revenues earned.
84
Adjusting Entries for Accrued Revenues
Adjusting entries for accrued revenues

• Increases (debits) an asset account and
• Increases (credits) a revenue account.

85
Adjusting Entries for Accrued Revenues
Illustration In October Sierra Corporation
earned 200 for advertising services that were
not billed to clients before October 31.
Accounts Receivable
200
Oct. 31
Service Revenue
200
86
Adjusting Entries for Accrued Revenues
Summary
87
Adjusting Entries for Accrued Expenses

• Expenses incurred but not yet paid in cash or
  recorded.

Adjusting entry results in
Cash Payment
Expense Recorded
BEFORE
Accrued expenses often occur in regard to

• rent
• interest

• taxes
• salaries

88
Adjusting Entries for Accrued Expenses
Accrued Expenses An adjusting entry serves two
purposes (1) It records the obligations, and
(2) It recognizes the expenses.
89
Adjusting Entries for Accrued Expenses
Adjusting entries for accrued expenses

• Increases (debits) an expense account and
• Increases (credits) a liability account.

90
Adjusting Entries for Accrued Expenses
Illustration Sierra Corporation signed a
three-month note payable in the amount of 5,000
on October 1. The note requires Sierra to pay
interest at an annual rate of 12.
Interest expense
50
Oct. 31
Interest payable
50
91
Adjusting Entries for Accrued Expenses
Illustration Sierra Corporation last paid
salaries on October 26 the next payment of
salaries will not occur until November 9. The
employees receive total salaries of 2,000 for a
five-day work week, or 400 per day. Thus,
accrued salaries at October 31 are 1,200 (400 x
3 days).
Salary expense
1,200
Oct. 31
Salary payable
1,200
92
Adjusting Entries for Accrued Expenses
Accrued Expenses An adjusting entry serves two
purposes (1) It records the obligations,
and (2) it recognizes the expenses.
93
Adjusting Entries for Accrued Expenses
Summary
94
Summary of Basic Relationships
95
Worksheet to Close
Adjusting Entries Financial Statements Closing
Entries
96
The Adjusted Trial Balance
After all adjusting entries are journalized and
posted the company prepares another trial balance
from the ledger accounts (Adjusted Trial
Balance). Its purpose is to prove the equality of
debit balances and credit balances in the ledger.
97
The Adjusted Trial Balance
98
Preparing Financial Statements
Financial Statements are prepared directly from
the Adjusted Trial Balance.
Balance Sheet
Income Statement
Retained Earnings Statement
99
Preparing Financial Statements
100
Preparing Financial Statements
Illustration 4-28
101
7. Closing Entries

• To reduce the balance of the income statement
  (revenue and expense) accounts to zero.
• To transfer net income or net loss to equity.
• Statement of financial position (asset,
  liability, and equity) accounts are not closed.
• Dividends are closed directly to the Retained
  Earnings account.

LO 7 Prepare closing entries.
102
Closing the Books
At the end of the accounting period, companies
transfer the temporary account balances to the
permanent stockholders equity accountRetained
Earnings.
Illustration 4-29
103
Closing the Books
In addition to updating Retained Earnings to its
correct ending balance, closing entries produce a
zero balance in each temporary account.
Illustration 4-30
104
Closing the Books
Illustration 4-31
105
8. Post-Closing Trial Balance
Illustration 3-38
LO 7 Prepare closing entries.
106
9. Reversing Entries
After preparing the financial statements and
closing the books, a company may reverse some of
the adjusting entries before recording the
regular transactions of the next period.
LO 7 Prepare closing entries.
107
Accounting Cycle Summarized

1. Enter the transactions of the period in
   appropriate journals.
2. Post from the journals to the ledger (or
   ledgers).
3. Take an unadjusted trial balance (trial balance).
4. Prepare adjusting journal entries and post to the
   ledger(s).
5. Take a trial balance after adjusting (adjusted
   trial balance).
6. Prepare the financial statements from the
   adjusted trial balance.
7. Prepare closing journal entries and post to the
   ledger(s).
8. Take a trial balance after closing (post-closing
   trial balance).
9. Prepare reversing entries (optional) and post to
   the ledger(s).

LO 7 Prepare closing entries.