Chapter 3 Beginning the Accounting Cycle

Learning Objectives Journalizing: Analyze and Record Business Transactions into a Journal Post Information from a Journal to a Ledger Prepare a Trial Balance

Learning Objective 1 Journalizing: Analyze and Record Business Transactions into a Journal

Accounting Cycle Normal procedures occurring over a period of time Takes place over an accounting period Usually one year Calendar year January 1 – December 31 Fiscal year Any 12 consecutive months

Accounting Period Period of time covered by the income statement Monthly Quarterly Annually Called a natural business year Usually at the slowest time of the year Interim Reports

General Journal Book of original entry Simplest form of a journal All transactions are located in the same place Records information in chronological order Information is then transferred to the ledger

Relationship between the Journal and the Chart of Accounts

Formalities for Journalizing a Transaction The debit portion of the transaction is recorded first. The credit portion of a transaction is indented and placed below the debit portion. The explanation of the entry follows the credit. A one-line space follows each journal entry to make it easier to read. The total amount of debits must always equal the total amount of credits. Each transaction must affect at least two different accounts.

Journalizing Example May 1, 200X: Mel Blass began the business by investing $10,000 in cash Figure 3.2 Owner Investment Account Debited Account Credited Day Amount Debited Amount Credited Explanation Year/ Month

Journalizing Example May 1: Purchased Computer Equipment from Ben Co. for $6,000, Paying $1,000 and Promising to Pay the Balance Within 30 Days Compound journal entry is a journal entry with more than two accounts Only the day is entered if transaction before contained year and month Figure 3.1 The General Journal

Journalizing Example May 1: Rented office space, paying $1,200 in advance for the first three months May 3: Purchased office supplies from Norris Co. on account, $600 Figure 3.4 Paid Rent in Advance Figure 3.5 Purchased Supplies on Account

Journalizing Example May 7: Completed Computer Repairs for a Client and Immediately Collected $3,000 May 13: Paid office salaries, $650 Figure 3.6 Services Rendered Figure 3.7 Paid Salaries

Journalizing Example May 18: Advertising bill from Al’s News Co. comes in but is not paid, $250 May 20: Mel Blass Wrote a Check on the Bank Account of the Business to Pay His Home Mortgage Payment of $625 Figure 3.8 Received Advertising Bill Figure 3.9 Personal Withdrawal

Journalizing Example May 22: Billed Morris Company for a Complete Repair of All Its Computers, $5,000 May 27: Paid office salaries, $650 Figure 3.10 Fees Earned Figure 3.11 Paid Salaries

Journalizing Example May 28: Paid Half the Amount Owed for Computer Equipment Purchased May 1 from Ben Co., $2,500 May 29: Received and paid telephone bill, $220 Figure 3.12 Partial Payment Figure 3.13 Paid Telephone Bill

Learning Objective 2 Post Information from a Journal to a Ledger

Posting Involves the transfer of information from the journal to the ledger. Step 1 - In the debit account in the ledger, record the date (May 1, 200X) and the amount of the entry. Step 2 - Record the page number of the journal “GJ1” in the posting reference (PR) column of the debit account. Step 3 - Calculate the new balance of the account. Step 4 - Record the account number of debit account in the posting reference (PR) column of the journal. This listing is known as cross-referencing.

Figure 3.15 How to Post from Journal to Ledger

Cross-Referencing The Posting Reference column tells us which transactions have or have not been posted In the ledger, the posting reference leads us back to the original transaction Users can use the posting references columns to find the journal and ledger transactions

Learning Objective 3 Prepare a Trial Balance

Trial Balance A list of the individual accounts with their balances taken from the ledger If the information is incorrectly journalized or posted, the trial balance will not be correct Computational errors Transposition or slide errors Posting errors

Trial Balance Figure 3.17 Trial Balance

What to Do If a Trial Balance Doesn’t Balance If the difference (the amount you are off) is 10, 100, 1,000, etc., it is probably a mathematical error in addition. If the difference is equal to an individual account balance in the ledger, the amount could have been omitted. It is also possible the figure was not posted from the general journal. Divide the difference by 2, then check to see whether a debit should have been a credit, or vice versa, in the ledger or trial balance.

What to Do If a Trial Balance Doesn’t Balance If the difference is evenly divisible by 9, a slide or transposition may have occurred. A transposition is the accidental rearrangement of digits of a number. A slide is an error resulting from adding or deleting zeros in writing numbers. Compare the balances in the trial balance with the ledger accounts to check for copying errors. Recompute balances in each ledger account. Trace all postings from journal to ledger.

Making a Correction Before Posting Draw a line through the incorrect entry, write the correct information above the line, and write your initials near the change. Figure 3.18 Account Error Figure 3.19 Number Error

Making a Correction After Posting Step 1: Draw a line through the error and write the correct figure above it. Step 2: Change the running balance to reflect the corrected posting by drawing a line through the balance; the corrected balance is written above it. Figure 3.21 Correction After Posting

Correcting Entry Posted to the Wrong Account A correction must first be made to the journal and include an explanation. The correct information must be posted to the appropriate ledger accounts. Step 1: The journal entry is corrected and explained Figure 3.22 Corrected Entry for Telephone

Correcting Entry Posted to the Wrong Account Step 2: The Advertising Expense ledger account is corrected Step 3: The Telephone Expense ledger is corrected Figure 3.23 Ledger Update for Advertising Figure 3.24 Ledger Update for Telephone

Summary of the Chapter When recording transactions into a general journal, the debit(s) will be against the date column and the credit(s) will be indented. These titles will come from the chart of accounts. The explanation line will be indented below the last credit entry. The sum of the left side (Dr.) must equal the sum of the right side (Cr.) for each transaction. Remember that the accounts affected come from the chart of accounts. You have six categories: assets, liabilities, capital, withdrawals, revenues, and expenses.

Summary of the Chapter The Posting Reference (PR) column of the journal will show to which account information has been posted. The PR column in the ledger accounts show from which page of the journal the information came. When updating ledger accounts, two debits added equal a debit balance. Two credits added would be a credit balance. If you have a debit and a credit, take the difference between them; whichever side is larger is the balance (be it a debit or credit).

Summary of the Chapter Posting is copying from the journal to the ledger. The ledger will accumulate information in the form of debits and credits. The last line in the balance column will show whether it is a debit or credit balance. The general journal does not show a running balance like the ledger accounts do. Items in a trial balance are listed in the same order as in the ledger or chart of accounts. Each account to have its normal balance (either a debit or credit).

Summary of the Chapter List the ending balance of each ledger account (last number listed in the balance columns) in the order of the ledger. They should follow this pattern: Assets Dr. Liabilities Cr. Capital Cr. Withdrawals Dr. Revenues Cr. Expenses Dr. When complete, the total of all debits will equal the total of the credits. If the trial balance does not balance, it could be a posting mistake or just a math error.

Questions?

Figure 3.14 Four-Column Account

Figure 3.16 Posting from Journal to the Ledger Using PR Columns

Figure 3. 16 Posting from Journal to the Ledger Using PR Columns (cont

Figure 3. 16 Posting from Journal to the Ledger Using PR Columns (cont

Figure 3. 16 Posting from Journal to the Ledger Using PR Columns (cont

Figure 3. 16 Posting from Journal to the Ledger Using PR Columns (cont

Figure 3.20 Correcting Entry

Figure 3.21 Correction After Posting

Figure 3.22 Corrected Entry for Telephone

Figure 3.25 Journal Entries and Posting References

Figure 3.26 General Ledger

Figure 3.27

Figure 3.28 General Journal

Figure 3.29 Journal Entries

Figure 3.30

Figure 3.31 Journal Entries

Figure 3.32 Incorrect Trial Balance

Figure 3.33 Recording Error

Figure 3.34

Figure 3.35

Figure 3.36

Figure 3.37 Prepaid Rent

Figure 3.38 Service Revenue

Figure 3.40 Phone Bill Figure 3.41 Caffrey Collection

Figure 3.42 Paid Computers R Us Figure 3.43 Purchased Computer Equipment

Figure 3.44 Received Phone Bill Figure 3.45 Received Electric Bill

Figure 3.46 Service Revenue