© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Accounting Cycle: The Mechanics of Accounting Chapter 3

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Accounting Cycle 2 Record the effects of the transactions Step 2 Summarize the effects of transactions 1. Posting journal entries 2. Preparing a trial balance Summarize the effects of transactions 1. Posting journal entries 2. Preparing a trial balance Step 3 Prepare reports 1. Adjusting entries 2. Preparing financial statements 3. Closing the books Prepare reports 1. Adjusting entries 2. Preparing financial statements 3. Closing the books Step 4 Step 1 Analyze transactions

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Analyzing Transactions With the Accounting Equation 3 A = L + OE Borrow money Invest in company Pay off a note Purchase equipment Borrow funds to settle a debt

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Terminology to Help Analyze Transactions Account Accounting record where similar transactions are recorded T-Account Simplified depiction of an account Debit Entry on the LEFT Credit Entry on the RIGHT 4 Name of Account Debit Credit

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5 Double-entry Accounting Debits must ALWAYS equal credits! If for every transaction, debits equal credits, then the accounting equation will balance

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Expanded Accounting Equation 6 Assets + Expenses + Dividends = Liabilities + Capital Stock + Revenues

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7 Journal An accounting record in which transactions are originally entered A chronological record General Journal Entry Format DateDebit Entry xx Credit Entry xx Explanation. Journals and Journal Entries

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Three steps for success: 1.Identify which accounts are involved 2.Determine if the account is increased or decreased 3.Determine by how much the account has changed 8 Journal Entries

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. You purchase $250 worth of inventory for cash on January 30. → Remember the 3-step process January 30 Inventory $250 Cash $250 To record purchase of inventory. 9 Journal Entry Example

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. A journal entry that involves more than one debit or more than one credit or both Example:You make a mortgage payment of $175. Of this, $150 reduces the mortgage while $25 is interest. Interest expense $ 25 Mortgage payable 150 Cash $175 To record monthly mortgage payment. 10 Compound Journal Entry

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Posting Transferring amounts from the journal to the ledger Ledger A book of accounts where journal transactions are posted and thereby summarized Chart of accounts A systematic listing of all accounts used by a company 11 Posting Journal Entries

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. After all the journal entries are posted to the ledger, the account balance can be computed by summing up all of the debits and credits. 12 The General Ledger DateExplanationRef.DebitsCreditsBalance Jan. 1Balance100 2Issued 100 shares of capital stock at $10 per share GJ11,0001,100 3Purchased equipmentGJ Sold inventoryGJ Monthly payment on loanGJ RevenueGJ12,5003,310

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. A listing of all account balances Provides a means of ensuring debits equal credits From these data, the balance sheet and income statement can be prepared Prepared by listing all accounts and their respective balances 13 The Trial Balance

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Example: Trial Balance 14 Debits = Credits

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Example: Income Statement & Balance Sheet 15

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Example: Statement of Cash Flows 16

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Computers allow businesses to calculate vast amounts of data quickly. Computers ease posting of journal entries and summarizing the data into reports and financial statements. Computers can’t think—that is your job! 17 How Have Computers Changed the Accounting Cycle?

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Advantages of Computers Quickly process large amounts of information without mathematical errors Perform mechanical functions like posting, summarizing, and preparing financial statements quickly with minimal errors Generate documents in a fraction of the time that it would take a person to prepare the same document 18

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Disadvantages of Computers GIGO (garbage in, garbage out) problems occur when data are entered incorrectly Fixing an error once it has been identified (an input error may require other adjustments) may be more complicated Limitations—areas requiring judgment (like transaction analysis) still require human input 19

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Chapter 3 Review Problem 20

21 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

22 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

23 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

24 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

25 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.