Review of the Accounting Process ppendix Review of the Accounting Process 1 1 1 1

Objectives 1. Understand the components of an accounting cycle. 2. Know the major steps in the accounting cycle. 3. Prepare journal entries in the general journal. 4. Post to the general ledger and prepare a trial balance. 5. Prepare adjusting entries. Continued 2 2 2 4

Objectives 7. Prepare closing entries. 8. Complete a worksheet. 6. Prepare financial statements. 7. Prepare closing entries. 8. Complete a worksheet. 9. Understand subsidiary ledgers. 10. Use special journals. 11. Convert cash-basis financial statements to accrual-basis.

Accounting Equation Assets

Accounting Equation = Liabilities Debt Summary

+ Stockholders’ Equity Accounting Equation + Stockholders’ Equity Net Worth

Interrelated Accounting Equations Assets = Liabilities + Stockholders’ Equity Stockholders’ Equity = Contributed Capital + Retained Earnings Retained Earnings = Beginning Retained Earnings + Net Income – Dividends Net Income = Revenues – Expenses

Accounts Account title. Title

Accounts Title

“Debit” refers to the left side. Accounts “Debit” refers to the left side. Title Debit

Credit refers to the right side. Accounts Credit refers to the right side. Title Debit Credit

Accounts In the double-entry system, for each transaction that a company records, the total dollar amount of the debits must equal the total dollar amount of the credits.

Capital Stock Accounts Permanent Accounts Assets = Liabilities + Stockholders’ Equity Asset Accounts Liability Accounts Capital Stock Accounts (debit) (credit) Increase Decrease (debit) (credit) Decrease Increase (debit) (credit) Decrease Increase Retained Earnings . (debit) (credit) Decrease Increase

Accounts Temporary Accounts Revenue Accounts (debit) (credit) Decrease Increase Expense Accounts Retained Earnings . (debit) (credit) Increase Decrease (debit) (credit) Decrease Increase Dividend Accounts (debit) (credit) Increase Decrease

Financial Statements The Income Statement—This statement summarizes the results of a company’s income-producing activities for an accounting period. The Balance Sheet—The balance sheet summarizes the amounts of a company’s assets, liabilities, and stockholders’ equity on a particular date. The Statement of Cash Flows—The SCF summarizes a company’s cash receipts and cash payments during the accounting period.

The Accounting Cycle Step 1: Record daily transactions in a journal. Step 2: Post the journal entries to the accounts in the ledger. Step 3: Prepare and post adjusting entries. Step 4: Prepare the financial statements. Step 5: Prepare and post closing entries for revenue, expense, and dividend accounts.

Comprehensive Illustration for Dapple Corporation Step 1: Recording in the General Journal

GENERAL JOURNAL Date Account Titles and Explanations Debit Credit 2004 Jan. 1 Cash 20,000 Capital Stock 20,000 Issued 2,000 shares of no-par stock at $10 per share On January 1, 2004 various stockholders invest in Dapple by purchasing 2,000 shares of no-par stock at $10 per share.

GENERAL JOURNAL Date Account Titles and Explanations Debit Credit 2001 Jan. 1 Cash 20,000 Capital Stock 20,000 Issued 2,000 shares of no-par stock at $10 per share On January 16, Dapple purchases two acres of land as a building site, paying $1,500 an acre. 16 Land 3,000 Cash 3,000 Purchased 2 acres of land at $1,500 per acre.

Use the data in Exhibit C-3 to make general journal entries, then compare your work with Exhibit C-4.

Comprehensive Illustration for Dapple Corporation Step 2: Posting to the Ledger

Issued 2,000 shares of no-par stock at $10 per share GENERAL JOURNAL Date Account Titles and Explanations Debit Credit 2004 Jan. 1 Cash 20,000 Capital Stock 20,000 Issued 2,000 shares of no-par stock at $10 per share Cash 01/01 20,000 16 Land 3,000 Cash 3,000 Purchased 2 acres of land at $1,500 per acre. Capital Stock 01/01 20,000

Issued 2,000 shares of no-par stock at $10 per share GENERAL JOURNAL Date Account Titles and Explanations Debit Credit Cash 01/01 20,000 01/16 3,000 2004 Jan. 1 Cash 20,000 Capital Stock 20,000 Issued 2,000 shares of no-par stock at $10 per share 16 Land 3,000 Cash 3,000 Purchased 2 acres of land at $1,500 per acre. Land 01/16 3,000

After posting, the general ledger accounts contain the same information as in the general journal, just in a different format.

Cash 01/01 20,000 01/16 3,000 04/03 8,000 03/30 10,840 04/20 160 03/30 360 12/01 450 04/08 7,300 12/02 1,960 04/15 250 07/15 3,300 10/01 1,800 12/28 428 12/29 500 The balance of each permanent account is calculated (see Exhibit C-5). Determine the account balance. Balance 2,792

After the journal entries are posted for the accounting period, a trial balance is often prepared.

Credits Debits The trial balance is used to verify that the total of the debit balances is equal to the total of the credit balances.

Comprehensive Illustration for Dapple Corporation Step 3: Preparation of Adjusting Entries

On March 30, Dapple Corporation purchased a one-year comprehensive insurance policy.

GENERAL JOURNAL Date Account Titles and Explanations Debit Credit On March 30, Dapple Corporation purchased a one-year comprehensive insurance policy. 2004 Jan. 1 Cash 20,000 Capital Stock 20,000 Issued 2,000 shares of no-par stock at $10 per share 30 Prepaid Insurance 360 Cash 360 Purchased a 1-year comprehen- sive insurance policy.

By December 31, nine months of the policy had expired. GENERAL JOURNAL Date Account Titles and Explanations Debit Credit Adjusting Entries Dec. 31 Insurance Expense 270 Prepaid Insurance 270 To record expiration of 9 months of insurance coverage purchased. 2004 By December 31, nine months of the policy had expired.

By December 31, nine months of the policy had expired. Prepaid Insurance 03/30 360 12/31 Adj. 270 Balance 90 Insurance Expense 12/31 Adj. 270 By December 31, nine months of the policy had expired.

On December 1, Dapple Corporation received $450 for 3 months’ rent in advance. For Rent

GENERAL JOURNAL On December 1, Dapple Corporation received $450 for 3 months’ rent in advance. Date Account Titles and Explanations Debit Credit 2001 Jan. 1 Cash 20,000 Capital Stock 20,000 Issued 2,000 shares of no-par stock at $10 per share Dec. 1 Cash 450 Unearned Rent 450 Received 3-months’ rent in ad- vance at $150 per month. The company owes use of portion of building to Fritz Company for the 3-month period.

By December 31, one month’s rent ($450 ÷ 3 = $150) has been earned. GENERAL JOURNAL Date Account Titles and Explanations Debit Credit Adjusting Entries Dec. 31 Insurance Expense 270 Prepaid Insurance 270 To record expiration of 9 months of insurance coverage purchased. By December 31, one month’s rent ($450 ÷ 3 = $150) has been earned. 31 Unearned Rent 150 Rent Revenue 150 To record earning of 1 month of rent revenue from receipt collected in advance on December 1.

This entry is posted to the ledger. Unearned Rent 12/31 Adj. 150 12/01 450 Balance 300 Rent Revenue 12/31 Adj. 150 This entry is posted to the ledger.

On December 31, Dapple Corporation has accrued salaries of $900. Entries must be journalized before they are posted. Examine the accrued salaries journal entry in Exhibit C-6.

Next, the adjusting entry is posted. Salaries Expense 10/02 1,800 12/31 Adj. 900 Salaries Payable 12/31 Adj. 900 Next, the adjusting entry is posted.

On September 1, Dapple Corporation accepted a $1,320, 15% note as payment when it sold an acre of land.

GENERAL JOURNAL On September 1, Dapple Corporation accepted a $1,320, 15% note as payment when it sold an acre of land. Date Account Titles and Explanations Debit Credit Adjusting Entries Sept. 1 Notes Receivable 1,320 Loss on Sale of Land 180 Land 1,500 Sold 1 acre of land at less than it cost, incurring a loss. Buyer issued a note due in 6 months and bearing 15% annual interest.

Interest Receivable Interest Revenue 12/31 Adj. 66 12/31 Adj. 66 Refer to Exhibit C-6 for the journalized adjusting entry. By December 31, the company has earned 4 months of interest totaling $66 ($1,320 x 0.15 x 4/12).

Examine the remaining adjusting entries in Exhibit C-6 Examine the remaining adjusting entries in Exhibit C-6. Then, refer to Exhibit C-5 to see their impact on the ledger.

Comprehensive Illustration for Dapple Corporation Step 4: Preparation of Financial Statements

Steps 4 Procedures 1. If necessary, recompute the balance of each account in the ledger. 2. Prepare an adjusted trial balance to test that debits equal credits. 3. Prepare an income statement. 4. Prepare a statement of retained earnings. 5. Prepare a balance sheet.

The completed financial statements for Dapple Corporation are found in Exhibits C-8 through C-10.

Comprehensive Illustration for Dapple Corporation Step 5: Preparation of Closing Entries

…(2) update the retained earnings and inventory accounts. Closing entries (1) reduce the balance in each temporary account to zero, and...

Typical Order of Closing Entries (1) Close temporary accounts with credit balances to Income Summary and record the ending inventory. (2) Close temporary accounts with debit balances to Income Summary and close the beginning inventory. (3) Close Income Summary to Retained Earnings. (4) Close Dividends Distributed to Retained Earnings.

Dapple Corporation’s closing entries are illustrated in Exhibit C-11 Dapple Corporation’s closing entries are illustrated in Exhibit C-11. Note how the entries follow the four steps listed in Slide 48. Refer again to Exhibit C-5 to see how the closing entries “closed” the temporary accounts.

General Guidelines for Reversing Entries Reversing entries should be made for any adjusting entry that establishes a new balance sheet account, as follows: 1. Adjusting entries that establish accrued revenues or expenses to be collected or paid in the next accounting period. 2. Adjusting entries related to prepayments of costs initially recorded as expenses or receipts-in-advance initially recorded as revenues.

General Guidelines for Reversing Entries Reversing entries should not be made for: 1. Adjusting entries related to prepayments of costs initially recorded as assets or receipts-in-advance initially recorded as liabilities. 2. Adjusting entries related to estimated items such as depreciation or bad debts. REVERSING ENTRY

The Worksheet A worksheet is prepared to facilitate preparing adjusting entries, closing entries, and the financial statements.

Why use a subsidiary ledger? Subsidiary Ledgers Why use a subsidiary ledger? 1. To reduce the size of the general ledger. 2. To minimize errors. 3. To divide the accounting task. 4. To keep up-to-date records of its dealings with charge customers and suppliers.

Subsidiary Ledgers General Ledger Subsidiary Ledger Frank Company Accounts Receivable Balance 7,000 Balance 3,000 Knox Company Balance 4,000

Special Journals Sales Journal. Used to record all (and only) sales of merchandise on account. Purchases Journal. Used to record all (and only) purchases of merchandise on account. Cash Receipts Journal. Used to record all cash receipts. Cash Payments Journal. Used to record all cash payments. General Journal. Used to record adjusting, closing, and reversing entries and other transactions not recorded in the special journals.

Cash-Basis Accounting Under cash-basis accounting, a company records revenues when cash is collected and records expenses when cash is paid.

Cash-Basis Accounting Cash-basis accounting is used by small retail stores and professionals such as dentists, doctors, and architects.

Cash-Basis Accounting Adjustments Accrual Basis Collections from customers + Ending accounts receivable – Beginning accounts receivable Sales revenue + Beginning inventory – Ending inventory + Ending accounts payable – Beginning accounts payable Cost of goods sold Payments to suppliers + Beginning prepaid expenses – Ending prepaid expenses + Ending accrued expenses – Beginning accrued expenses Payments for other operating costs Operating expenses (except depreciation)

A C ppendix The End