1. Recording Transactions
Lecture 4

2. Learning Objectives (LO)
After studying this chapter, you should be able to
Use double-entry accounting
Describe the five steps in the recording process
Analyze and journalize transactions and post journal entries to the ledgers
Prepare and use a trial balance
Close revenue and expense accounts and update retained earnings
Correct erroneous journal entries and describe how errors affect accounts
Explain how computers have transformed the processing of accounting data

3. LO 4 – Trial Balance
Trial Balance – list of all general ledger accounts
and their balances

4. LO 4 – Trial Balance (TB)
Taken anytime – but three times are important
Unadjusted TB - before making adjustments (Ch. 3)
Adjusted TB - after making adjustments (Ch. 4)
Could use TBs to prepare the financial statements
Post-closing TB – after closing entries (Ch. 3)
Accounts’ debit balances equal credit balances?
Yes – proceed but errors can still exist – see Learning Objective 6
No – go back and find/fix the error

5. LO 5 – Closing Accounts Closing the accounts - background
Adjustments (Ch. 4) must be made before closing
Balance sheet accounts are “permanent”
So long as a balance exists, they will be used from year to year, i.e. have a running balance so they are not closed
Income statement accounts {Revenue, Expenses, (Gains, Losses – later)} and Dividends are “temporary” accounts
Beginning of year - all have a zero balance
End of year – if activity occurred, have balances

6. LO 5 – Closing Accounts
Closing the accounts – the concept is to take all temporary accounts and
Transfer all income statement account balances to a “collecting” account called Income Summary
Transfer the Income Summary balance and Dividends balance to Retained Earnings which is a “permanent” stockholders’ equity account
Balance remaining in temporary accounts should equal zero and thus be ready for the next accounting period’s transactions

7. LO 5 – Closing Accounts Cost of Goods Sold Bal. 100,000 Rent Expense
Three Expense and one Revenue accounts need closing to get the ending balance to zero. WHAT NEEDS TO BE DONE?
Cost of Goods Sold
Bal ,000
Rent Expense
Income Summary
Sales Revenue
Bal ,000
Bal. 160,000
Depreciation Expense
Retained Income
Bal 0
Bal

8. LO 5 – Closing Accounts
Three Expense and one Revenue accounts need closing to get the ending balance to zero) WHAT NEEDS TO BE DONE?
Credit the Expense accounts; Debit Income Summary act
Debit the Revenue account; Credit Income Summary account
Determine the balance in the Income Summary account
Close the Income Summary balance to Retained Earnings
Cost of Goods Sold
Bal ,000
Rent Expense
Income Summary
Sales Revenue
Bal ,000
Bal. 160,000
Depreciation Expense
Retained Income
Bal
Bal

9. LO 5 – Closing Accounts Journal entries always precede entries to the
ledger accounts
Journal Entry: C1 Revenue 160,000
Income Summary 160,000
C2 Income Summary 102,100
Cost of goods sold 100,000
Rent expense ,000
Depreciation expense

10. LO 5 – Closing Accounts Cost of Goods Sold Bal. 100,000 C2 100,000
Rent Expense
Income Summary
Sales Revenue
Bal ,000 C ,000
C ,100 C ,000
C ,000 Bal. 160,000
Depreciation Expense
Retained Income
Bal
Bal C

11. LO 5 – Closing Accounts Journal entries always precede entries to the
ledger accounts
Journal Entry: C3 Income Summary 57,900
Retained Earnings 57,900

12. LO 5 – Closing Accounts Cost of Goods Sold Bal. 100,000 C2 100,000
Rent Expense
Income Summary
Sales Revenue
Bal , C ,000
C ,100 C1 160,000
C1 160,000 Bal. 160,000
C ,900
Depreciation Expense
Retained Income
Bal
Bal C
C ,900
New bal. 57,900

13. LO 5 – Closing Accounts Close Dividends directly to Retained Earnings
(Dividends are not part of income)
C4 Retained Earnings 50
Dividends 50
Retained Earnings
Dividends
C ,100 C1 160,000
Bal. 50
C ,900 C
C4 50
Bal ,850
After closing, four financial statements are prepared
- As frequently as management desires
- SEC – quarterly and annual reports

14. LO 6 - Errors Errors are multi-dimensional
No entry is made when one should have been made
If erroneous entry is made, could be
Correct amounts to incorrect accounts
Incorrect amounts to correct accounts
Transaction omitted
GAAP is misapplied
Types of accounts involved
Permanent – always open so correct anytime
Temporary
If accounts not closed, simple correction
If accounts are closed, use Retained Earnings or just wait (self correcting after 2 years)

15. LO 6 - Errors Approach to correcting errors – an example
What was recorded?
Rent Expense 100
Cash 100
What should have been recorded?
Prepaid Rent 100
Cash 100
Correcting entry depends on where we are in time?
Made and discovered in same fiscal year
Made in one fiscal year, discovered next fiscal year

16. LO 6 - Errors
Made and discovered in same fiscal year, the temporary account Rent Expense is still open (not been closed to Retained Earnings)
Prepaid Rent 100
Rent Expense 100
Made last year, discovered this year
(Rent Expense was closed to Retained Earnings
- Do nothing – after 2nd year, will be correct, or
Prepaid Rent 100
Retained Earnings 100
- Then later, debit Rent Expense and credit Prepaid Rent

17. LO 6 - Errors Ledger (“T”) accounts – an analytical tool
Information available (black); unavailable (purple)
Accounts Receivable
Cash
Sales Revenue
4,000
Sales ?
6,000
280,000
280,000
Sales Revenue?
- Assuming all sales were on credit, what was
Sales Revenue?
4,000 + Sales Revenue – 280,000 = 6,000
Sales Revenue =282,000

18. LO 7 – Computers’ effect on Accounting
Data Processing – hardware and software used to record, analyze, store, and report on activities
In general, computers
Increase
Speed of processing data
Accuracy of data/reports
Reduce
Processing costs (perhaps)
Errors

19. LO 7 – Computers’ effect on Accounting
Specific to accounting, computers
Capture cost of goods sold and inventory changes
Activate an order to a supplier
Check credit limits and update accounts receivable
Prepare invoices/statements to buyers
Process journal entries and post to ledger accounts
Prepare trial balances and financial statements
Extensible Business Reporting Language (XBRL)
Facilitate reporting and analyzing financial data