1. Chapter 3 Beginning the Accounting Cycle

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

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

4. 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

5. 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

6. 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

7. Relationship between the Journal and the Chart of Accounts

8. 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.

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. Learning Objective 2
Post Information from a Journal to a Ledger

17. 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.

18. Figure 3.15 How to Post from Journal to Ledger

19. 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

20. Learning Objective 3
Prepare a Trial Balance

21. 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

22. Trial Balance
Figure 3.17 Trial Balance

23. 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.

24. 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.

25. 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

26. 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

27. 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

28. 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

29. 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.

30. 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).

31. 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).

32. 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.

33. Questions?

34. Figure 3.14 Four-Column Account

35. Figure 3.16 Posting from Journal to the Ledger Using PR Columns

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

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

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

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

40. Figure 3.20 Correcting Entry

41. Figure 3.21 Correction After Posting

42. Figure 3.22 Corrected Entry for Telephone

43. Figure 3.25 Journal Entries and Posting References

44. Figure 3.26 General Ledger

45. Figure 3.27

46. Figure 3.28 General Journal

47. Figure 3.29 Journal Entries

48. Figure 3.30

49. Figure 3.31 Journal Entries

50. Figure 3.32 Incorrect Trial Balance

51. Figure 3.33 Recording Error

52. Figure 3.34

53. Figure 3.35

54. Figure 3.36

55. Figure 3.37 Prepaid Rent

56. Figure 3.38 Service Revenue

57. Figure 3.40 Phone Bill
Figure 3.41 Caffrey Collection

58. Figure 3.42 Paid Computers R Us
Figure 3.43 Purchased Computer Equipment

59. Figure 3.44 Received Phone Bill
Figure 3.45 Received Electric Bill

60. Figure 3.46 Service Revenue