1. 3 - 1 Beginning the Accounting Cycle – Journalizing, Posting, and the Trial Balance Chapter 3

2. 3 - 2 Journalizing: analyzing and recording business transactions into a journal. Learning Objective 1

3. 3 - 3 The Accounting Cycle n Accounting procedures are performed over a period of time. n Procedures are performed in a definite order in the accounting cycle. n The accounting period is a period of time covered by the income statement. n Usually this is a twelve month period. n The accounting cycle has sequential steps to be performed again each year.

4. 3 - 4 The Accounting Cycle n Accounting is the process that... – analyzes, – records, – classifies, – summarizes, – reports, and... – interprets.

5. 3 - 5 The Accounting Cycle A sole proprietorship: – has one owner – begins with a monthly accounting cycle – owner has a capital and withdrawals account

6. 3 - 6 Business Organizations n All three types of business entities use the same basic accounting system. Sole proprietorship Partnerships Corporations

7. 3 - 7 Recording Business Transactions The Accounting Period One Year Calendar year Fiscal year Less than One Year Quarterly Monthly

8. 3 - 8 Learning Unit 3-1 n The Accounting Cycle: 1 Analyzing 2 Recording transactions – journalizing 3 Posting to the ledger accounts 4 Preparing the trial balance n The accounting cycle has some variations in a computerized accounting system.

9. 3 - 9 Learning Unit 3-1 What is the general journal? n It is the book of original entry. n Transactions are written in a journal in chronological order. n The format of the journal is important. n Journalizing is the process of entering information as debits and credits to the correct accounts.

10. 3 - 10 Learning Unit 3-1 What is the general ledger? n It is the book of final entry. n The information from the journal is transferred to the ledger in the posting process. n Debits and credits in the journal remain exactly the same when posted to the accounts in the ledger.

11. 3 - 11 Learning Unit 3-1 What is the chart of accounts? n It is the list of accounts used by a business. n Each business entity has its unique chart of accounts. n Every chart of accounts has the same numbered account categories: – Assets, Liabilities, Owner’s Equity – Revenues, Expenses

12. 3 - 12 Learning Unit 3-1 Journalizing n Debits are always recorded first. n Indent, then record the credit below the debit. n A short explanation is included on the second line. n Leave a space between journal entries.

13. 3 - 13 Learning Unit 3-1 n Debits must always equal credits. n Amounts incurred for items that benefit future accounting periods are recorded as assets. n What are some examples? – prepaid rent – prepaid insurance

14. 3 - 14 Learning Unit 3-1 n Amounts for items used (expenses incurred) in the current accounting period are recorded as expenses. n What are some examples? – supplies used – rent for the month – expired insurance

15. 3 - 15 Learning Unit 3-1 n Amounts are recorded as revenue on the date in which they are earned. n When are revenues earned? n When services are performed, not necessarily when cash is paid.

16. 3 - 16 Learning Objective 2 Posting: transferring information from a journal to a ledger.

17. 3 - 17 Learning Unit 3-2 Posting n All transactions are recorded in the journal, then amounts are copied to the ledger accounts named on the journal line. n Once the amounts are entered into the accounts, a posting reference (PR) must be entered in the journal. n New balances are computed in the running ledger accounts.

18. 3 - 18 Learning Unit 3-2 Posting Balance Account: Cash Account: 1000 Insert the number of the journal page. Date ref. debit credit debit credit June 1 jr1 5,000 5,000

19. 3 - 19 Example Journal Page 1 Date Account and Explanation Post Ref. debit credit Initial investment June 1 Cash 1000 5,000 Clara J. Capital 3010 5,000

20. 3 - 20 Example Journal Page 1 Date Account and Explanation Post Ref. debit credit Paid phone bill July 3 Phone Expense 5040 155 Accounts Payable 2000 155

21. 3 - 21 Example Journal Page 1 Date Account and Explanation Post Ref. debit credit Paid insurance bill July 6 Insurance Expense 5060 150 Cash 1000 150

22. 3 - 22 Example Journal Page 1 Date Account and Explanation Post Ref. debit credit Paid Accounts Payable July 8 Accounts Payable 2000 200 Cash 1000 200

23. 3 - 23 Example Journal Page 1 Date Account and Explanation Post Ref. debit credit Performed Services July 8 Accounts Receivable 1020 850 Service Revenue 4000 850

24. 3 - 24 Learning Objective 3 Preparing a trial balance.

25. 3 - 25 Learning Unit 3-3 Preparing the Trial Balance n The trial balance lists the accounts that have balances in the same order as they appear in the chart of accounts. n The trial balance will show if debits/credits have been interchanged, or if amounts have been transposed, or if a debit/credit was omitted or recorded twice.

26. 3 - 26 Learning Unit 3-3 n Some errors do not show, such as omissions or recording to the wrong account. n Corrections before posting are made in the journal. n An audit trail must be left. n Do not erase – cross out errors and enter corrections.

27. 3 - 27 Learning Unit 3-3 n What about corrections after posting? n This means that errors are also in the ledger accounts. n Cross out incorrect amounts, change to corrected amounts, and record balance changes.

28. 3 - 28 End of Chapter 3