The Accounting

Cycle
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Learning Objectives

 Identify and explain the basic steps in the

accounting process (accounting cycle).
 Analyze transactions and make and post
journal entries.
 Make adjusting entries, produce financial
statements, and close nominal accounts.
 Distinguish between accrual and cash-
basis accounting.
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Learning Objectives

 Discuss the importance and expanding role

of computers to the accounting process.
EXPANDED MATERIAL
 Use special journals and subsidiary
ledgers to process accounting information
more efficiently and to provide additional
useful information.
 4

The
The purpose
purpose of of this
this
chapter
chapter isis to
to review
review thethe
basic
basic steps
steps of of the
the
accounting
accounting process.
process.
 5
Double-Entry Accounting

A system of recording transactions in a way that

maintains the equality of the accounting
equation.
Assets = Liabilities + Owners’ Equity
or

A = L + OE
 6

Double-Entry Accounting Facts

 For every transaction, there must be

at least one debit and one credit.
 Debits must always equal credits for
each transaction.
 Debits are always entered on the left
side of an account and credits are
always entered on the right side.
 The Accounting Equation 7

with T-Accounts

Assets = Liabilities + Owners’ Equity

DR CR DR CR DR CR
+ - - + - +
 8

How Accounts Affect Owners' Equity

Owners' Equity
DR CR
- +

Capital Stock Retained Earnings

DR CR DR CR
- + - +

Expenses Revenues Dividends

DR CR DR CR DR CR
+ - - + + -
 9

Journalizing
 Identify the accounts involved with an event or
transaction.
 Determine whether each account increased or
decreased.
 Determine the amount by which each account was
affected.

This
This process
process isis used
used whether
whether the
the
accounting
accounting isis being
being done
done manually
manually oror
with
with aa computer.
computer.
1. Analyze Transactions and 10

Business Documents
 Transactions are the
exchange of goods or
services between entities,
as well as other events that
have an economic impact
on a business.
 Business Documents are
records that are evidence
of transactions.
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2. Journalize Transactions
 A journal is an accounting record in which
business transactions are entered in chronological
order.
 Journal entries record transaction information;
debits equal credits.
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Journal Entries
 A journal is an accounting record in which
business transactions are entered in chronological
order.
 Journal entries record transaction information;
debits equal credits.

General Journal Entry Format

Date Debit Entry.................................. xx
Credit Entry............................. xx
Explanation.
 13

Journal Page 1
Post
Date Description Ref. Debits Credits
Jan 1 Cash 5
Revenue 5
Received cash for
services provided.

4 Supplies 12
Accounts Payable 12
Purchased supplies
on account.

10 Accounts Payable 12
Cash 12
Paid for supplies.
 14

Example: Journal Entry

Merchandise is sold to a customer on
account for P75. The cost of the product to
the firm is P60. Make the journal entry.
 15

Example: Journal Entry

Merchandise is sold to a customer on
Merchandise is sold
account for P75. Thetocost
a customer on
of the product is
account
P60.for P75.theThe
Make cost entry.
journal of the product to
the firm is P60. Make the journal entry.
Jan. 1 Accounts Receivable..................... 75
Sales Revenue.......................... 75
Sold merchandise on account.
1 Cost of Goods Sold...................... 60
Inventory................................. 60
To record cost and reduce
inventory.
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3. Post Journal Entries to Accounts

 Posting is the process of transferring

amounts from the journal to the general
ledger.
 A ledger is a book of accounts in which
data from transactions recorded in the
journals are posted, classified, and
summarized.
 A chart of accounts lists all accounts used
by the company.
 17
Chart of Accounts
ASSETS (100-199) Long-Term Liabilities (220-299)
Current Assets (100-150) 222 Mortgage Payable
101 Cash
105 Accounts Receivable OWNERS’ EQUITY (300-399)
107 Inventory 301 Capital Stock
330 Retained Earnings
Long-Term Assets (151-199)
151 Land SALES (400-499)
152 Building 400 Sales Revenue

LIABILITIES (200-299) EXPENSES (500-599)

Current Liabilities (200-219) 500 Cost of Goods Sold
201 Notes Payable 523 Rent Expense
202 Accounts Payable 528 Advertising Expense
573 Utility Expense
 18
The Reporting Phase

 A trial balance is prepared.

 Adjusting entries are recorded.
 Financial statements are prepared.
 Closing entries are made.
 Post-closing trial balance may be
taken.
4. Determine Account Balances 19

and Prepare a Trial Balance

 Determine the account balance for each
T-Account.
 A Trial Balance is a listing of all
account balances. It provides a means
to assure that debits equal credits.
 XYZ Company 20
Trial Balance
December 31, 2002

Debits Credits
Cash P 21
Accounts Receivable 15
Inventory 12
Land 200
Accounts Payable P 30
Capital Stock 150
Retained Earnings 24
Sales Revenue 919
Cost of Goods Sold 850
Advertising Expense 10
Misc. Expenses 15 ______
Total P 1,123 P 1,123
 21
5. Adjusting Entries

Adjusting entries are required at the end of

each accounting period for accrual-basis
accounting, prior to preparing the financial
statements. The purpose for adjusting
entries are to:
 Bring balance sheet accounts current.
 Reflect proper amounts of revenues
and expenses on the income statement.
 22
Tips Regarding Adjusting Entries
 Analytical Process. You must determine what
original entry was made (if any) and what the
ending balances should be before you know
what adjusting entry to make. You cannot
memorize adjusting entries.
 Adjusting entries always incorporate a balance
sheet account and an income statement
account.
 Adjusting entries never involve a cash account.
 23
Most Common Adjusting Entries
• Unrecorded Revenues--Revenues that have been earned but not yet
recorded.
• Unearned Revenues--Revenues that have been recorded but not yet earned.
• Unrecorded Expenses--Expenses that have been incurred but not yet
recorded.
• Prepaid Expenses--Expenses that have been recorded but not yet incurred.
 Three-Step Process for 24

Adjusting Entries
 Identify the original entries that were made,
if any. (Original entries are only made for
unearned revenues and prepaid expenses.)
 Determine what the correct balances should
be at this point in time.
 Make the adjustments needed to correct the
balances.
 25
Example: Depreciation
Rosi, Inc., purchased buildings in 1997 at a
cost of P156,000. Each year, 5% of the cost
is depreciated. At the end of 2002, the
following adjusting entry is made:
Adjusting Entry
12/31 Depreciation Expense--Buildings 7,800
Accumulated Depr.--Buildings 7,800
To record depreciation on
building at 5% per year.
 26
Example: Doubtful Accounts
An estimation of bad debts based on the
ending receivables balance reveals that the
allowance account needs to be increased by
P1,100.
Adjusting Entry
12/31 Doubtful Accounts Expense 1,100
Allowance for Doubtful Accounts 1,100
To adjust for estimated doubtful
accounts expense.
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Example: Doubtful Accounts
Later, assume on March 19 that a P150
receivable is deemed to be uncollectible.
Using the allowance account, the uncollectible
account is written off the books.

3/19 Allowance for Doubtful Accounts 150

Accounts Receivable 150
To write off an uncollectible
account.
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Example: Accrued Expenses
At the end of the fiscal period, Rosi, Inc.,
had accrued salaries and wages totaling
P2,150.

Adjusting Entry
12/31 Salaries and Wages Expense 2,150
Salaries Payable 2,150
To record accrued salaries and
wages.
 29
Example: Accrued Revenues
Rosi, Inc., holds a note receivable from a
customer on which interest totaling P250 has
accrued.

Adjusting Entry
12/31 Interest Receivable 250
Interest Revenue 250
To record accrued interest on a
note receivable.
 30
Example: Prepaid Expenses
Rosi, Inc.’s trial balance shows that the asset
account Prepaid Insurance has a balance of
P8,000. By December 31, only P3,800
applies to future periods.
Adjusting Entry
12/31 Insurance Expense 4,200
Prepaid Insurance 4,200
To record expired insurance.
P8,000
P8,000 -- P3,800
P3,800
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Example: Deferred Revenues
Rosi, Inc., receives a payment of P2,550
from a customer prior to the services being
rendered. By December 31, P2,075 in
services have been provided.

Original
Original credit
credit to
to aa revenue
revenue account.
account.
P2,550
P2,550 -- P2,075
P2,075
Adjusting Entry
12/31 Rent Revenue 475
Unearned Rent Revenue 475
To record unearned rent revenue.
 32
Example: Deferred Revenues
Rosi, Inc., receives a payment of P2,550
from a customer prior to the services being
rendered. By December 31, P2,075 in
services have been provided.

Original
Original credit
credit to
to aa liability
liability account.
account.

Adjusting Entry
12/31 Unearned Rent Revenue 2,075
Rent Revenue 2,075
To record rent revenue
(P2,550 - P475).
 33

Example: Inventory
Refer
Refer toto Rosi,
Rosi, Inc.’s
Inc.’s trial
trial balance
balance in
in
this
this chapter.
chapter. Note
Notethat
that the
thefirm
firmhas
has
P45,000
P45,000 in in inventory.
inventory. The The year-end
year-end
count
count shows
shows that
that P51,000
P51,000 isis onon hand.
hand.
Assume
Assume thatthat the
the firm
firm uses
uses aa periodic
periodic
system.
system.
 34

Example: Inventory
The XYZ Company
Purchases, Purchaseearns a rent revenue
Discounts, and CostofofP500
in 19x8 but will not receive the payment until
Goods Sold are affected by the adjusting
January 10, 19x9. An adjustment will be
entry to update
needed. What the inventory
is the adjustingaccount.
entry?
Adjusting Entry
12/31 Inventory 6,000
Purchases Discounts 3,290
Cost of Goods Sold 153,310
P51,000
P51,000 -- P45,000
P45,000
Purchases To
To close
close 162,500
To adjust inventory, cost of
goods sold, and related To
To close
close
accounts.
 35

6. Preparing Financial Statements

• After all transactions have been recorded, a

trial balance prepared, and adjusting entries
made, the financial statements are prepared.
Record Prepare Make Prepare
Trans- Trial Adjusting Financial
actions Balance Entries Statements
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7. The Closing Process
 Real accounts are permanent accounts not closed to
a zero balance at the end of the accounting period.
These accounts are carried forward to the next
period.
 Nominal accounts are temporary accounts that are
closed to a zero balance at the end of each
accounting period.
 Closing entries reduce all nominal accounts to a
zero balance.
 37

The Closing Process

Revenues Retained Earnings
Beg. Bal. xxx
xxx Bal. xxx
Revenues

Since
Since the
the revenue
revenue account
account is is
aa nominal
nominal account,
account, itit is
is
closed
closed at
at the
the end
end of
of the
the
period
period to
to Retained
Retained Earnings.
Earnings.
 38

The Closing Process

Retained Earnings
Beg. Bal. xxx

Expenses Revenues

Expenses
The
The expense
expense account
account isis
Bal. xxx xxx credited
credited inin order
order to
to close
close
the
the account
account atat the
the end
end of
of
the
the period.
period.
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8. Post-Closing Trial Balance
• Provides a listing of all real account
balances at the end of the closing
balance.
• The trial balance assures that total
debits equal total credits prior to the
beginning of the new accounting period.
• Only real accounts will have a balance
at this time.
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Example: Post-Closing Trial Balance
Jim Brewster, Inc.
Post-Closing Trial Balance
December 31, 2002
Debits Credits
Cash P 8,200
Accounts Receivable 4,000
Inventory 3,000
Supplies 1,000
Accounts Payable P 5,000
Capital Stock 10,000
Retained Earnings 1,200
Totals P16,200 P16,200
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Summary of the Accounting Cycle
 Analyze transactions and business documents.
 Journalize transactions.
 Post journal entries to accounts.
 Determine account balances and prepare a trial
balance.
 Journalize and post adjusting entries.
 Prepare financial statements.
 Journalize and post closing entries.
 Balance the accounts and prepare a post-
closing trial balance.
 42
Special Journals

• A special journal is a book for recording

similar transactions that occur frequently.
• Sales Journal--A record where credit sales
are recorded.
• Subsidiary Ledger--A grouping of
individual accounts that equal the balance
of a control account in the general ledger.
 43
Special Journals

• Voucher Register--A book of original entry which

takes the place of a purchases journal and provides a
record of all authorized payments to be made by
check. Charges on each voucher are classified by the
appropriate accounting in the financial records.
• Cash Receipts Journal--A record in which all cash
received from sales, interest, rent, or other sources is
recorded.
• Cash Disbursements Journal--A record of all
checks issued during the period in payment of properly
approved vouchers.
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The End