Complete Steps 1-3 in Accounting Cycle Principles of Cost Analysis and Management

Terminal Learning Objective Action: Complete Steps 1-3 in the Accounting Cycle (Journalize, Post, Trial Balance). Condition: FM Leaders in a classroom environment working individually and as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion. Standard: With at least 80% accuracy (70% for international Learners): Identify Steps in the Accounting Cycle Translate Terminology (journal, ledger, debit, credit) Record Transactions in Tabular Format under the Accrual Basis

Post-Closing Trial Balance The Accounting Cycle Record Transactions Post-Closing Trial Balance Post to Ledger Close Accounts Prepare Trial Balance Prepare Statements Adjust Accounts Adjusted Trial Balance

LSA #1 Check on Learning Q1. What is the first step in the Accounting Cycle? A1. Q2. What is the purpose of the Trial Balance? A2. Q1. What is the first step in the Accounting Cycle? A1. Record Transactions Q2. What is the purpose of the Trial Balance? A2. To identify any errors that might have occurred in the recording or posting process

LSA #1 Summary During this block, we went over the eight accounting cycles, which are: Record Transactions Post to Ledger Prepare Trial Balance Adjust Accounts Adjusted Trial Balance Prepare Statements Close Accounts Post-Closing Trial Balance

The Journal Accounting events are recorded in the Journal The Journal is a chronological record of all transactions Each transaction requires a journal entry Each journal entry consists of at least one Debit and one Credit: “Double Entry” Accounting Debit amounts must equal Credit amounts Debit: an entry on the left-hand side of the account Credit: an entry on the right-hand side of the account

Regarding Debits and Credits Debits and credits are neutral Debit ≠ decrease Credit ≠ increase It depends on the type of account Some accounts types record increases with a debit, some record increases with a credit. The side of the account which records an increase is the account’s NORMAL BALANCE.

“Normal” Account Balances Assets = Liab + FinPosition ± Net Change Net Change = Revenue – Expense, so: Assets = Liab + FinPosition + Rev – Expense + Expense = + Expense (Add Expense to both sides) Assets + Expense = Liab + FinPosition + Rev Everything on the LEFT side of the equation increases with an entry to the LEFT side of the account

“Normal” Account Balances (Cont.) Assets = Liab + FinPosition + Rev – Expense + Expense = + Expense (Add Expense to both sides) Assets + Expense = Liab + FinPosition + Rev Everything on the side of the equation increases with an entry to the side of the account RIGHT LEFT RIGHT LEFT

“Normal” Account Balances (Cont.) Assets + Expense = Liab + FinPosition+ Rev + – + – – + – + – + debit credit

LSA #2 Check on Learning Q1. What does “credit” mean? A1. Q2. An increase to an expense is reflected with an entry on which side of the account? A2. Q1. What does “credit” mean? A1. An entry on the right hand side of the account Q2. An increase to an expense is reflected with an entry on which side of the account? A2. Left hand or debit side.

LSA #2 Summary During the facilitation of this block of instruction we covered on accounting events are recorded in the Journal, that Debits and Credits being neutral and review examples of normal account balances.

Anatomy of a Journal Entry Date of Transaction Amount Debited Account Debited Amount Credited Posting Reference (Leave Blank) Becoming fluent in Debits and Credits takes practice beyond the scope of this course. We will demonstrate a few journal entries to give you the flavor, and then proceed to Step 2. Account Credited Explanation of Transaction

Lacy’s Journal Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Purchased Supplies -65 +65 Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Purchased Supplies -65 +65 Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Receives $200 Equity Transfer +200 Transaction Description Cash + Other Assets = Liab Financial Position Rev – Exp Receives $200 Equity Transfer +200 Credit to Cash reflects a decrease in the Cash account. Credit to Financial Position (right side) reflects an increase in the financial position account. Debit to Other Assets (left side) reflects an increase in the Other Assets account. Debit to Cash (left side) reflects an increase in the cash account.

The Ledger The LEDGER is a Summary of all Transactions By Account We will represent each Ledger Account with a T-Account A debit entry from the Journal is posted on the left side of the T-Account A credit entry from the Journal is posted on the right side of the T-Account The balance of an account is its excess of debits over credits (or vice versa)

Transaction Description Lacy’s Ledger Cash Cash Cash Cash Other Assets Other Assets Other Assets Other Assets Liabilities Liabilities Liabilities Liabilities (+) 200 15 5 50 -------------- 130 (+) 200 (+) 200 (+) (-) 20 10 5 65 40 ---------------- (-) (-) (-) (+) 20 65 40 -------------- 140 (+) 20 65 40 -------------- 140 (+) 20 65 40 -------------- 140 (+) (-) 5 --------------- (-) 5 --------------- (-) 5 --------------- (-) (-) 40 ---------------- (-) 40 ---------------- (-) 40 ---------------- (-) (+) 40 --------------- (+) 40 --------------- (+) 40 --------------- (+) Financial Position Financial Position Financial Position Financial Position Revenues Revenues Revenues Revenues Expenses Expenses Expenses Expenses (-) (-) (-) (-) (+) 200 (+) 200 (+) (+) (-) (-) (-) (-) (+) 15 20 50 --------------- 85 (+) (+) (+) (+) 10 5 --------------- 15 (+) (+) (+) (-) (-) (-) (-) After all transactions are posted, the Ledger Balances agree with our equation Transaction Description Cash + Other Assets = Liabilities Financial Position Revenues – Expenses Ending Balance 130 140 200 85 - 15

The Trial Balance Lists all accounts and their balances in two-column format Proves that Debits equal Credits - Forces accountant to find errors before preparing statements Provides a starting point for adjustments, statements and closing entries

Transaction Description Lacy‘s Trial Balance Account Title dr. cr.  Cash $130     Other Assets 140   Liabilities $ ---  Financial Position 200   Revenues  85  Expenses  15 Totals  $285 $285  Our equation essentially show the same information as the Trial Balance: Transaction Description Cash + Other Assets = Liabilities Financial Position Revenues – Expenses Ending Balance 130 140 200 85 - 15

Debits and Credits Debits and credits are used in accounting systems to reflect changes in accounts It’s not necessary to memorize debits and credits to understand the effects of transactions We will rely on the equation and T-Accounts to illustrate transactions

Accounting Cycle Spreadsheet Journal entries may be entered by hand (this step is optional)

Accounting Cycle Spreadsheet (Cont.) Post transactions to T-Accounts Balances calculate automatically

Accounting Cycle Spreadsheet (Cont.) The Trial Balance is generated automatically from the T-Accounts. Note that debits = credits

Practical Exercise / Review

LSA #3 Check on Learning Q1. A decrease to Cash is recorded on which side of the Cash account? A1. Q2. The summary of transactions by account is called the…? A2. Q1. A decrease to Cash is recorded on which side of the Cash account? A1. Right side or credit side Q2. The summary of transactions by account is called the…? A2. Ledger (represented here by T-accounts)

LSA #3 Summary During this lesson, we discussed the 8 steps of the accounting cycle (AC) and gave an in-depth description of each. Various terminologies associated with the AC were defined and explained. Finally, several account balance formulas were viewed using T-accounts, and the transactions recorded as a Journal Voucher Entry.

TLO Summary Action: Complete Steps 1-3 in the Accounting Cycle (Journalize, Post, Trial Balance). Condition: FM Leaders in a classroom environment working individually and as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion. Standard: With at least 80% accuracy (70% for international Learners): Identify Steps in the Accounting Cycle Translate Terminology (journal, ledger, debit, credit) Record Transactions in Tabular Format under the Accrual Basis