1. Accumulating Accounting Data
CHAPTER F7
Accumulating
Accounting Data
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2. Identify the eight steps of the accounting cycle.
Learning Objective 1
Identify the eight steps of the accounting cycle.
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3. The Accounting Cycle
The accounting cycle consists of a series of steps repeated in each accounting period that enable the firm to analyze, record, classify, and summarize the transactions into financial statements.
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4. Steps of the Cycle Analyzing Transactions Journalizing Transactions
Posting Transactions to the General Ledger
Preparing a Trial Balance or Worksheet
Adjusting the Accounts
Preparing Financial Statements
Preparing and Posting Closing Entries
Preparing the Post-Closing Trial Balance
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5. Step 1: Analyzing Transactions
Part One: Determine when a transaction occurs. A transaction is any event that results in a change in the amount of an accounting element.
Part Two: Identify the nature of the transaction. This entails determining which accounting elements were affected and by how much.
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6. Step 2: Journalizing Transactions
A journal is a book of original entry that contains a chronological list of an entity’s transactions.
A special journal records specific types of transactions such as a sales, purchases, cash receipts or cash payments.
A general journal records all transactions not recorded in a special journal.
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7. Step 3: Posting to the Ledger
A ledger contains all the accounts of a firm.
A chart of accounts is a list of all of the accounts used by a company.
After transactions are entered in the journal, the same information is then posted to the ledger accounts. The ledger accounts indicate the current balance for each account.
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8. Step 4: Preparing a Trial Balance
Periodically, usually weekly or monthly, a trial balance is prepared. A trial balance is a listing of all ledger accounts and their balances.
The trial balance verifies that the accounting equation is in balance.
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9. Using a Worksheet
Another option for step 4 of the cycle is to prepare a worksheet. The worksheet is a ten column worksheet which begins with the trial balance.
A worksheet helps accountants examine the accounts, adjust the accounts, and gather the data to prepare the financial statements.
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10. Step 5: Adjusting the Accounts
Some account balances require adjustment at the end of the accounting period, before the financial statements are prepared.
Adjustments are needed to ensure the proper application of the revenue recognition and expense recognition rules. Many adjustments are accruals and deferrals studied in Chapter Six.
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11. Reconciling the Bank Account
Adjusting entries normally do not affect the cash account, except for one adjustment that is needed to change the cash balance to the correct amount as of the end of the period.
A bank reconciliation is prepared to determine the appropriate cash balance as part of the firm’s internal control structure.
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12. Step 6: Preparing Financial Statements
After all of the balances in the general ledger accounts have been properly adjusted, the financial statements can be prepared.
The income statement is prepared first, then the statement of retained earnings (or owners’ equity), then the balance sheet.
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13. Step 7: Preparing Closing Entries
Closing entries are prepared to reset the balance of temporary accounts to zero.
Temporary (or nominal) accounts include all income statement accounts plus dividends or owner withdrawals. Temporary accounts are closed at the end of the period.
Most balance sheet accounts are permanent (or real) accounts and are not closed.
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14. Step 8: Preparing the Post-Closing Trial Balance
After closing entries have been journalized and posted, only the balance sheet accounts should have a balance other than zero.
A post-closing trial balance provides verification that the closing process was completed properly and also serves as a record of the beginning account balances for the next accounting period.
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15. The Accounting Equation
An accounting system is based on the following equation:
Assets = Liabilities + Equity
If one side of the equation is changed, the other side must also change, this is the basis of the double-entry system.
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16. Learning Objective 2
Distinguish between debits and credits and apply them to the accounting equation.
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17. Debits and Credits
Two of the most familiar accounting terms are debits and credits. In the double-entry system, debits must always equal credits.
Debit means the left side of the account and is abbreviated as DR.
Credit means the right side of the account and is abbreviated as CR.
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18. Normal Balance Accounts have a normal balance. Left = Right
Assets = Liabilities + Equity
Debit = Credit
Remember there are five components of equity which have differing normal balances.
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19. Normal Balances Assets = debits Liabilities = credits
Owner’s contributions = credits
Owner’s distributions = debits
Revenues = credits
Expenses = debits
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20. A Debit Increases assets. Decreases liabilities.
Decreases owner’s capital or capital stock accounts.
Increases withdrawal or dividend accounts.
Decreases revenues or gains.
Increases expenses and losses.
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21. A Credit Decreases assets. Increases liabilities.
Increases owner’s capital or capital stock accounts.
Decreases withdrawal or dividend accounts.
Increases revenues or gains.
Decreases expenses and losses.
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22. Describe accounts, journals, ledgers, and worksheets.
Learning Objective 3
Describe accounts, journals, ledgers, and worksheets.
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23. The Account
Each accounting element is represented by a separate account. The following information is required:
Account name and number
Date of each transaction
Beginning balance for the period
Each posted transaction from the journal including the date, reference, and amount
Ending balance for the period
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24. T-Accounts
For illustration purposes, accountants will often use a T-account. A T-account is a simplified version of the real account format used in the accounting records.
In a T-account, you can see the effect of various transactions on any particular account. Debits, credits, and balances can all be shown with clarity.
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25. T-Account Format Any Account DEBIT (Left Side) CREDIT (Right Side)
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26. T-Accounts for Assets ANY ASSET NORMAL BALANCE Debit Credit
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27. T-Accounts for Liabilities
ANY LIABILITY
NORMAL
BALANCE
Credit
Debit
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28. T-Accounts for Owner’s Contributions or Capital Stock
ANY OWNERS’ CONTRIBUTIONS
OR CAPITAL STOCK
NORMAL
BALANCE
Credit
Debit
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29. T-Accounts for Owner’s Withdrawals or Dividends
ANY OWNERS’ WITHDRAWALS
OR DIVIDENDS
NORMAL
BALANCE
Credit
Debit
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30. T-Accounts for Revenues/Gains and Expenses/Losses
ANY EXPENSE
OR LOSS
ANY REVENUE
OR GAIN
NORMAL
BALANCE
Debit
NORMAL
BALANCE
Credit
Credit
Debit
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31. Summarizing the Rules of Debits and Credits
Normal
Increase Decrease Balance
Assets DR CR DR
Liabilities CR DR CR
Owners’ equity CR DR CR
Revenues CR DR CR
Expenses DR CR DR
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32. Illustration Using T-Accounts
Let’s use T-accounts to analyze the effect on the accounting elements of three basic business transactions.
In each case, we will:
Determine the accounts affected
Apply the rules of debits and credits
Enter the appropriate amount
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33. Record transactions in journals and post them to the general ledger.
Learning Objective 4
Record transactions in journals and post them to the general ledger.
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34. Transaction #1
Record the initial sale of stock by a new corporation, 10,000 shares of no-par stock at $10 per share.
CASH
COMMON STOCK
100,000
100,000
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35. The new corporation purchased equipment for $20,000 cash.
Transaction #2
The new corporation purchased equipment for $20,000 cash.
EQUIPMENT
CASH
20,000
20,000
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36. Transaction #3 The firm purchased supplies for $2,000 cash. SUPPLIES
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37. Summary of the Cash Account
After the first three transactions, the cash
account would look like this:
CASH
100,000
20,000
2,000
balance 78,000
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38. Journal Entries
Remember that the T-accounts are for illustration purposes only.
Real accounting systems rely on journal entries and ledger accounts.
Entries are made in a journal to formally record each event for the company. Using the same three transactions, the journal will look like the example on the next slide.
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40. Posting to the Ledger
After the journal entries are made, the debits and credits need to be posted to the appropriate ledger accounts on a periodic basis.
The next slide will show the result of having posted the three transactions to the cash account.
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41. Cash General Ledger Account
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42. Compound Journal Entries
Journal entries with more than two accounts affected are called compound journal entries. Assume we buy a $25,000 delivery truck with a $5,000 cash down payment.
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43. Prepare trial balances and worksheets.
Learning Objective 5
Prepare trial balances
and worksheets.
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44. Trial Balance
Prepare a list of the entire general ledger accounts with their corresponding debit or credit balances.
Total each column of debits and credits.
The debit and credit totals should be equal.
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45. Trial Balance Russell Jones Company Trial Balance December 31, 2007
Debits Credits
Cash $125,000
Inventory ,000
Accounts Payable $ 90,000
Jones, Capital ,000
Jones, Withdrawals ,000
Revenues ,000
Expenses ,000
Total $375,000 $375,000
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46. Prepare adjusting journal entries and reconcile a bank account.
Learning Objective 6
Prepare adjusting journal entries and reconcile a bank account.
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47. Adjusting Entries
As discussed in Chapter 6, there are various accounts that require adjustment prior to the preparation of the financial statements.
Example of adjustments include: accrued interest expense or revenue, accrued wages, deferred service revenues, and the like.
These adjustments must be journalized.
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48. Bank Reconciliation
Along with the typical adjustments for accruals, deferrals, and depreciation, the bank statement needs to be analyzed for any additional adjustments.
Typically, the cash account needs to be adjusted and the amount of the adjustment is determined by preparing a bank reconciliation.
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49. Reconciling the Bank Statement
Follow the steps as outlined on the bank reconciliation form.
The bank statement balance is reconciled to a corrected bank balance.
The balance per books (from the cash account in the general ledger) is reconciled to a corrected book balance.
Both balances should be the same!
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50. Bank Reconciliation - Top Half
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51. Bank Reconciliation - Bottom Half
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52. Prepare financial statements from a worksheet.
Learning Objective 7
Prepare financial statements from a worksheet.
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53. Preparing Financial Statements
After all accounts have been adjusted, the financial statements can be prepared.
At this point, you should be able to prepare the three financial statements shown in Chapter 6:
(1) the income statement,
(2) the statement of owner’s (stockholders’) equity, and
(3) the balance sheet.
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54. Prepare closing journal entries.
Learning Objective 8
Prepare closing
journal entries.
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55. Closing the Accounts
After the year-end financial statements have been prepared, the temporary (or nominal) accounts are closed. Closing an account means that the account will have a zero balance after the entry is journalized and posted.
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56. Closing the Accounts
Balance sheet accounts (permanent or real accounts) are not closed, their ending balance becomes the beginning balance for the next period.
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57. Preparing Closing Entries
There are four closing entries:
Close all revenue accounts to Income Summary
Close all expense accounts to Income Summary
Close Dividends to Retained Earnings, or close Withdrawals to the Owners’ Capital account(s)
Close Income Summary to Retained Earnings or to the Owners’ Capital account(s)
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58. Trial Balance Before Closing Entries
Russell Jones Company
Trial Balance
December 31, 2007
Debits Credits
Cash $125,000
Inventory ,000
Accounts Payable $ 90,000
Jones, Capital ,000
Jones, Withdrawals ,000
Revenues ,000
Expenses ,000
Total $375,000 $375,000
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59. Preparing the Closing Entries
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60. Prepare a post-closing trial balance.
Learning Objective 9
Prepare a post-closing
trial balance.
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61. Post-Closing Trial Balance
The final step in the accounting cycle is to prepare a post-closing trial balance.
Since the nominal accounts have all been closed, only the real accounts will appear in the post-closing trial balance.
These account balances also serve as the opening balances for the next accounting period.
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62. Post-Closing Trial Balance
Russell Jones Company
Post-Closing Trial Balance
December 31, 2007
Debits Credits
Cash $125,000
Inventory ,000
Accounts Payable $ 90,000
Jones, Capital ,000
Total $253,000 $253,000
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63. The End
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