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The Accounting Cycle

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The Accounting Cycle C3 Prepare post-closing trial balance Start Analyze transactions POST Closing Entries Journalize Prepare statements Post Prepare unadjusted – PowerPoint PPT presentation

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Title: The Accounting Cycle


1
The Accounting Cycle
C3
Preparepost-closingtrial balance
Start
Reverse (optional)
Analyzetransactions
POST
Closing Entries
Journalize
Preparestatements
Post
Prepareunadjustedtrial balance
Prepareadjustedtrial balance
Adjusting Entries
POST
3-1
2
The Accounting Processing Cycle
3
The Account and its Analysis
C 3

2-3
4
The Accounting Equation
A L OE

5
Accounting Equation for a Corporation
A L SE
6
The Account and its Analysis
C 3


Liabilities
Equity
Assets
2-6
7
Asset Accounts
C 3
Cash
Accounts Receivable
Land
AssetAccounts
Notes Receivable
Buildings
Prepaid Accounts
Equipment
Supplies
2-7
8
Liability Accounts
C 3
Notes Payable
Accounts Payable
LiabilityAccounts
Dividends Payable
Accrued Liabilities
Unearned Revenue
2-8
9
Equity Accounts
C 3
Retained Earnings
CommonStock
Dividends Declared
EquityAccounts
Revenues
Expenses
2-9
10
The Account and its Analysis
C 3
An account is a record of increases and decreases
in a specific asset, liability, equity, revenue,
or expense item.
The general ledger is a record containing all
accounts used by the company.
2-10
11
Ledger and Chart of Accounts
C 4
The ledger is a collection of all accounts for
aninformation system. A companys size and
diversity of operations affect the number of
accounts needed.
The chart of accounts is a list of all accounts
andincludes an identifying number for each
account.
2-11
12
Debits and Credits
C 5
  • A T-account represents a ledger account and
    is a tool used to understand the effects of one
    or more transactions.

2-12
13
General Ledger
The T account is a shorthand format of an
account used by accountants to analyze
transactions.
14
Double-Entry AccountingNORMAL Balance
ASSETS LIABILITIES EQUITY DR
CR CR Assets are
on the left side of the equation therefore, the
left, or debit side is the normal balance side
for assets. Liabilities and equities are on the
right side therefore, the right, or credit side
is the normal balance side for liabilities and
equity.
15
Double-Entry Accounting
ASSETS LIABILITIES EQUITY

ASSETS LIABILITIES Common Stock DIV
REV EXP DR CR CR DR CR
DR
Total amount that is debited to accounts must
equal the total amount credited to accounts for
each transaction. Sum of debit account balances
in the ledger must equal the sum of credit
account balances.
16
Double-Entry AccountingNORMAL Balance
C 5
Whether a debit or a credit is an increase or
decrease depends on the NORMAL Balance of the
account.
2-16
17
Double-Entry AccountingNORMAL Balance
C 5
Equity
2-17
18
Double-Entry AccountingNORMAL Balance
C 5
  • An account balance is the difference
    between the increases and decreases in an
    account.
  • Notice the T-Account

2-18
19
Journalizing Posting Transactions
P1
2-19
20
Journalizing Transactions
P1
  • Dollar amount of debits and credits

2-20
21
Balance Column Account
P1
  • T-accounts are useful illustrations, but
    balance column accounts are used in practice.

2-21
22
Posting Journal Entries
P1
1
Identify the debit account in ledger.
2-22
23
Posting Journal Entries
P1
2
Enter the date.
2-23
24
Posting Journal Entries
P1
3
Enter the amount and description.
2-24
25
Posting Journal Entries
P1
Enter the journal reference.
4
2-25
26
Posting Journal Entries
P1
Compute the balance.
5
2-26
27
Posting Journal Entries
P1
Enter the ledger reference.
6
2-27
28
Analyzing Transactions
A1
2-28
29
Analyzing Transactions
A1
2-29
30
Analyzing Transactions
A1
Analysis
2-30
31
Analyzing Transactions
A1
Analysis
2-31
32
Analyzing Transactions
A1
2-32
33
Analyzing Transactions
A1
2-33
34
After processing its remaining transactions for
December, FastForwards Trial Balance is prepared.
A1
2-34
35
The Accounting Cycle
C3
Preparepost-closingtrial balance
Start
Reverse (optional)
Analyzetransactions
POST
Closing Entries
Journalize
Preparestatements
Post
Prepareunadjustedtrial balance
Prepareadjustedtrial balance
Adjusting Entries
POST
3-35
36
The Adjustment Process
Accounts are adjusted at the end of a period to
record internal transactions and events that are
not yet recorded. Two basic principles for
recognizing Revenues and Expenses 1. The
revenue recognition principle requires revenue be
recorded when earned, not before and not
after. 2. The matching principle requires
expenses be recorded in the same period as the
revenues earned as a result of these expenses.
37
Accrual Basis versus Cash Basis
Accrual basis accounting uses the adjusting
process to recognize revenue when earned and to
match expenses with revenues. This means the
economic effects of revenues and expenses are
recorded when earned or incurred, not when cash
is received or paid. Accrual basis is consistent
with GAAP. Cash basis accounting revenues are
recognized when cash is received and expenses are
recognized when cash paid. Cash basis is not
consistent with GAAP. Accrual accounting also
increases the comparability of financial
statements from one period to another.
38
Accrual Basis vs. Cash Basis
C 1
Cash Basis Revenues are recognized when cash is
received and expenses recorded when cash is paid.
Accrual Basis Revenues are recognized when earned
and expenses are recognized when incurred.
Accounting
3-38
39
Accrual Basis vs. Cash Basis
C 1
On the cash basis the entire 2,400 would be
recognized as insurance expense in 2009. No
insurance expense from this policy would be
recognized in 2010 or 2011, periods covered by
the policy.
3-39
40
Accrual Basis vs. Cash Basis
C 2
On the accrual basis, Insurance expense is
recognized as follows100 in 2009, 1,200 in
2010, and 1,100 in 2011. The expense is matched
with the periods benefited by the insurance
coverage.
3-40
41
Adjusting Accounts
An adjusting entry is recorded to bring an asset
or liability account balance to its proper
amount. The adjusting process is based on
ACCRUAL ACCOUNTING of Revenue Recognition and
Matching Principle. Adjusting accounts is a
3-step process (1) Determine the current
account balance, (2) Determine what the current
account balance should be, and (3) Record
adjusting entry to get from step 1 to step 2.
42
Adjusting Accounts
C2, P1
Framework for Adjustments
Adjustments
including depreciation
3-42
43
Supplies
Prepaid (Deferred) Expenses
P1
  • During 2009, Scott Company purchased 15,500
    of supplies. Scott recorded the expenditures as
    Supplies. On December 31, a count of the supplies
    indicated 2,655 on hand.
  • What adjustment is required?

3-43
44
Depreciation
P1
  • Depreciation is the process of computing
    expense from allocating the cost of plant and
    equipment over their expected useful lives.

3-44
45
Depreciation
P1
  • On January 1, 2009, Barton, Inc. purchased
    equipment for 62,000 cash. The equipment has an
    estimated useful life of 5 years and Barton
    expects to sell the equipment at the end of its
    life for 2,000 cash.
  • Lets record depreciation expense for the
    year ended December 31, 2009.

3-45
46
Depreciation
P1
On January 1, 2009, Barton, Inc. purchased
equipment for 62,000 cash. The equipment has an
estimated useful life of 5 years and Barton
expects to sell the equipment at the end of its
life for 2,000 cash. Lets record
depreciation expense for the year ended December
31, 2009.
3-46
47
Depreciation
P1
Equipment is shown net of accumulated
depreciation. This amount is referred to as the
assets book value
3-47
48
Unearned (Deferred) Revenues
P1
Revenue
Credit Adjustment
Debit Adjustment
3-48
49
Unearned (Deferred) Revenues
P1
  • On October 1, 2009, Ox University sold 1,000
    season tickets to its 20 home basketball games
    for 100 each. Ox University makes the following
    entry

3-49
50
Unearned (Deferred) Revenues
P1
  • On December 31, Ox University has played 10
    of its regular home games, winning 2 and losing 8.

3-50
51
Accrued Expenses
P1
Were about one-half done with this job and want
to be paid forour work!
Costs incurred in a period that are both unpaid
and unrecorded.
3-51
52
Accrued Expenses
P1
Barton, Inc. pays its employees every Friday.
Year-end, 12/31/09, falls on a Wednesday. As of
12/31/09, the employees have earned salaries of
47,250 for Monday through Wednesday.
3-52
53
Accrued Expenses
P1
Barton, Inc. pays its employees every Friday.
Year-end, 12/31/09, falls on a Wednesday. As of
12/31/09, the employees have earned salaries of
47,250 for Monday through Wednesday.
3-53
54
Accrued Revenues
P1
Smith Jones, CPAs, had 31,200 of work
completed but not yet billed to clients. Lets
make the adjusting entry necessary on December
31, 2009, the end of the companys fiscal year.
3-54
55
3-55
56
The Accounting Cycle
C3
Preparepost-closingtrial balance
Start
Reverse (optional)
Analyzetransactions
POST
Closing Entries
Journalize
Preparestatements
Post
Prepareunadjustedtrial balance
Prepareadjustedtrial balance
Adjusting Entries
POST
3-56
57
  1. Prepare Income Statement

P3
3-57
58
  1. Prepare Statement of Retained Earnings

P3
Note Net Income from the Income Statement
carries to the Statement of Retained Earnings.
3-58
59
P3
  1. Prepare Balance Sheet

3-59
60
The Accounting Cycle
C3
Preparepost-closingtrial balance
Start
Reverse (optional)
Analyzetransactions
POST
Closing Entries
Journalize
Preparestatements
Post
Prepareunadjustedtrial balance
Prepareadjustedtrial balance
Adjusting Entries
POST
3-60
61
The Closing Process Temporary and Permanent
Accounts
C3
Temporary (nominal) accounts accumulate data
related to one accounting period. They include
all income statement accounts, the dividends
account, and the Income Summary account. These
accounts are closed at the end of the period to
get ready for the next accounting period.
Permanent (real) accounts report activities
related to one or more future accounting periods.
They carry ending balances to the next accounting
period and are not closed.
3-61
62
The Closing Process
63
Recording Closing Entries
P4
  1. Close revenue accounts to Inc. Summary
  2. Close expense accounts to Inc. Summary
  3. Close the income summary to RE
  4. Close dividends account to RE.

3-63
64
Recording Closing Entries
P4
Salaries Expenses
Consulting Revenues
25,000
18,100
Examine the accounts presented.
Retained Earnings
Income Summary
7,000
3-64
65
Recording Closing Entries
P4
Salaries Expenses
Consulting Revenues
Close revenues with a debit to the revenue
account and a credit to Income Summary.
25,000
18,100
Income Summary
Consulting Revenues 25,000 Income
Summary 25,000
3-65
66
Recording Closing Entries
P4
Salaries Expenses
Consulting Revenues
25,000
25,000
18,100
Close expense accounts with a credit to expenses
and a debit to Income Summary.
Income Summary
25,000
Income Summary 18,000 Salaries Expenses
18,000
3-66
67
Recording Closing Entries
P4
Salaries Expenses
Consulting Revenues
25,000
25,000
18,100
18,100
Income Summary
Determine the balance in the Income Summary
account.
18,100
25,000
3-67
68
Recording Closing Entries
P4
Income Summary 6,900 Retained Earnings
6,900
Salaries Expenses
18,100
18,100
Close the Income Summary to Retained Earnings.
Retained Earnings
Income Summary
18,100
25,000
7,000
6,900
3-68
69
Recording Closing Entries
P4
  • The dividends account is closed to Retained
    Earnings.

Retained Earnings
Dividends
2,000
7,000
6,900
3-69
70
Recording Closing Entries
P4
  • The dividends account is closed to Retained
    Earnings.

Dividends
Retained Earnings
2,000
2,000
2,000
7,000
6,900
11,900
Determine the ending balance in Retained Earnings.
3-70
71
Post Closing Trial Balance
P5
  • Trial Balance prepared after the closing entries
    have been posted.
  • The purpose is to insure that all nominal or
    temporary accounts have been closed.
  • The only accounts on this trial balance should be
    assets, liabilities, and equity accounts.

3-71
72
3-72
73
Let's prepare the Closing Entries for Dress
Right Corporation
74
(No Transcript)
75
.

CLOSING ENTRIES
Using the adjusted trial balance of 7/31, we can
prepare the following closing entries
1. To close the revenue accounts to income
summary
2. To close the expense accounts to income
summary
3. To close the income summary account to
retained earnings
76
CLOSING ENTRIES
Additional Consideration An alternative method
of recording a cash dividend is to debit a
temporary account called dividends, rather than
debiting retained earnings. If this approach is
used, an additional closing entry is required to
close the dividend account to retained earnings,
as follows
4. To close dividends to retained earnings
This is NOT the case with Dress Right
Corporation
77
Post-Closing Trial Balance
Lists permanent accounts and their balances.
Total debits equal total credits.
78
The Accounting Cycle
C3
Preparepost-closingtrial balance
Start
Reverse (optional)
Analyzetransactions
POST
Closing Entries
Journalize
Preparestatements
Post
Prepareunadjustedtrial balance
Prepareadjustedtrial balance
Adjusting Entries
POST
3-78
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