1. Review of the Accounting Process
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Review of the Accounting Process 1 1 1 1

2. 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

3. 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.

4. Accounting Equation
Assets

5. Accounting Equation
= Liabilities
Debt Summary

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

7. 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

8. Accounts
Account title.
Title

9. Accounts
Title

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

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

12. 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.

13. 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

14. 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

15. 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.

16. 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.

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

18. 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.

19. 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.

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

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

22. 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/ ,000
16 Land 3,000
Cash 3,000
Purchased 2 acres of land at
$1,500 per acre.
Capital Stock
01/ ,000

23. Issued 2,000 shares of no-par stock at $10 per share
GENERAL JOURNAL
Date Account Titles and Explanations Debit Credit
Cash
01/ , / ,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/ ,000

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

25. Cash
01/01 20,000 01/16 3,000
04/03 8,000 03/30 10,840
04/ /30 360
12/ /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

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

27. 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.

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

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

30. 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.

31. 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.

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

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

34. 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.

35. 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.

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

37. 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.

38. 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.

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

40. 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.

41. 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).

42. 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.

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

44. 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.

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

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

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

48. 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.

49. 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.

50. 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.

51. 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

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

53. 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.

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

55. 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.

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

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

58. 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)

59. A C
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