The Accounting Cycle – Step 1 Professor Eric Carstensen MiraCosta College http://www.miracosta.edu/instruction/accounting/index.html

The Accounting Cycle Step 1: Analyze Transactions Step 2: Prepare Journal Entries Step 3: Post Entries to Ledgers Step 4: Prepare Unadjusted Trial Balance Step 5: Prepare and Post Adjusting Entries Step 6: Prepare Adjusted Trial Balance Step 7: Prepare Financial Statements Step 8: Prepare and Post Closing Entries Step 9: Prepare Post-Closing Trial Balance

Analyzing Transactions Determine how many accounts are involved Determine if these accounts are assets, liabilities, equity, expenses, revenue or other accounts Determine whether these accounts are increasing or decreasing

Transactions = Events and Instances That Affect Our Business invest $35,000 cash in exchange for stock b. purchase insurance policy for $4,800 c. pay first month's rent = $3,000 d. purchase equipment for $2,000 down payment with balance ($5,200) due in 60 days e. borrow $10,000 on note payable f. purchase office supplies = $1,300 g. receive payment for services = $4,500 h. pay assistant = $2,000 for 10 days work i. earn $7,900 to be paid in 30 days j. make partial payment on A/P = $3,600 k. pay dividends = $1,000 l. receive partial payment on A/R = $4,000

transaction a Owner invests $35,000 in exchange for common stock Two accounts involved There is a 35,000 increase in the asset cash and a 35,000 increase in the owners’ equity account common stock Assets side increases 35,000 and Liabilities & Equity side increases 35,000

transaction b Purchase insurance policy for $4,800 Two accounts involved There is a 4,800 increase in the asset prepaid insurance and a 4,800 decrease in the asset cash Assets, in total are unchanged (prepaids increase and cash decrease); Liabilities & Equity side is not affected

How Net Income Affects Retained Earnings (and Owners’ Equity) 1. Income Statement 2. Statement of Retained Earnings Revenue Beginning Retained Earnings less: Expenses add: Net Income = Net Income less: Distributions = Ending Retained Earnings

How Net Income Affects Retained Earnings and Equity - Continued Scenario #1 Scenario #2 Revenue 1,000 Expenses Net Income -1,000 Retained Earnings +1,000 Owners' Equity

transaction c Pay first month’s rent = $3,000 Two accounts involved There is a 4,800 increase in rent expense and a 3,000 decrease in the asset cash Assets side decreases 4,800 and equity side decreases 4,800 as a result of expense

transaction d Purchase office furniture = $2,000 down payment + balance ($5,200) due in 60 days Three accounts involved There is a 7,200 increase in the asset office furniture, a 5,200 increase in the liability A/P and a 2,000 decrease in the asset cash Net increase to Assets is 5,200 and increase of 5,200 to Liabilities & Equity side

transaction e borrow $10,000 on note payable Two accounts involved There is a 10,000 increase in the asset cash and a 10,000 increase in the liability notes payable Assets side increases 10,000 and Liabilities & Equity side increases 10,000

transaction f Purchase office supplies = $1,300 Two accounts involved There is a 1,300 increase in the asset supplies and a 1,300 decrease in the asset cash No change to Assets side; Liabilities & Equity side is not affected

transaction g receive payment for services = $4,500 Two accounts involved There is a 4,500 increase in the asset cash and a 4,500 increase in revenues Assets side increases 4,500 and Liabilities & Equity side increases 4,500 due to revenue

transaction h Pay assistant = $2,000 for 10 days work Two accounts involved There is a 2,000 increase in wages expense and a 2,000 decrease in the asset cash Assets side decreases 2,000 and Liabilities & Equity side decreases 2,000 due to expense

transaction i Earn $7,900 to be paid in 30 days Two accounts involved There is a 7,900 increase in the asset A/R and a 7,900 increase in revenues Assets side increases 7,900 and Liabilities & Equity side increases 7,900 due to revenue

transaction j Make partial payment on A/P = $3,600 Two accounts involved There is a 3,600 decrease in the liability A/P and a 3,600 decrease in the asset cash Assets side decreases 3,600 and Liabilities & Equity side decreases 3,600

transaction k Pay dividends = $1,000 Two accounts involved There is a 1,000 increase in the contra equity account dividends and a 1,000 decrease in the asset cash Assets side decreases 1,000 and Liabilities & Equity side decreases 1,000

transaction l Receive partial payment on A/R = $4,000 Two accounts involved There is a 4,000 increase in the asset account cash and a 4,000 decrease in the asset A/R The net effect to the Assets side is zero; Liabilities & Equity side not affected

Summary of All Transactions Cash A/R Ppd. Insur. Supplies Equipment = A/P + ST Note Equity <--- Stock Revenue Expenses Dividends a. 35,000 b. (4,800)   4,800 - bal. 30,200 c. (3,000) 3,000 27,200 32,000 d. (5,000) 14,200 9,200 22,200 e. 10,000 32,200 f. (1,300) 1,300 30,900 g. 4,500 35,400 36,500 h. (2,000) 2,000 33,400 34,500 5,000 i. 7,900 42,400 12,400 j. (3,600) 29,800 5,600 k. (1,000) 1,000 28,800 41,400 l. 4,000 (4,000) total 32,800 3,900

Preliminary Financial Statements 1. Income Statement 2. Statement of Retained Earnings Revenues $ 12,400 Beginning Balance $ - Rent Expense 3,000 Net Income 7,400 Wages Expense 2,000 Dividends (1,000) Total Expenses 5,000 Increase (Decrease) 6,400 $ 7,400 Ending Balance $ 6,400 3. Balance Sheet Assets Liabilities Cash $ 32,800 Accounts Payable $ 5,600 Accounts Receivable 3,900 Notes Payable 10,000 Prepaid Insurance 4,800 Total Liabilities $ 15,600 Supplies 1,300 Total Current Assets $ 42,800 Owners' Equity Paid in Capital 35,000 Equipment 14,200 Retained Earnings Total Plant Assets Total Owners' Equity 41,400 Total Assets $ 57,000 Total Liabilities & Equity

Step 1 - Conclusion We could keep the books using a similar spreadsheet, but, as we add more transactions and accounts it would become unruly In Step 2, we’ll learn to use debits and credits to create proper journal entries and make our record keeping easier