2. 5 - 1 © 2005 Accounting 1/e, Terrell/Terrell Recording Accounting Data Chapter 5

3. 5 - 2 © 2005 Accounting 1/e, Terrell/Terrell Learning Objective 1 Identify and describe the eight steps of the accounting cycle.

4. 5 - 3 © 2005 Accounting 1/e, Terrell/Terrell The Accounting Cycle The accounting cycle is the sequence of steps repeated in each accounting period.

5. 5 - 4 © 2005 Accounting 1/e, Terrell/Terrell The Accounting Cycle Analyzing transactions Journalizing transactions Posting transactions to the general ledger Preparing the trial balance

6. 5 - 5 © 2005 Accounting 1/e, Terrell/Terrell The Accounting Cycle Adjusting the accounts and reconciling the bank statement Preparing financial statements Preparing and posting closing entries Preparing the post-closing trial balance

7. 5 - 6 © 2005 Accounting 1/e, Terrell/Terrell Step 1: Analyzing Transactions Event Journalentry Change in asset, liability, or equity? Nature of transaction Yes Notransaction No

8. 5 - 7 © 2005 Accounting 1/e, Terrell/Terrell Step 2: Journalizing Transactions Journalizing transactions is the act of recording accounting transactions into a journal. A journal is a book of original entry.

9. 5 - 8 © 2005 Accounting 1/e, Terrell/Terrell Step 2: Journalizing Transactions Transaction General journal Account Account Account ? Special journal Account Account Account ?

10. 5 - 9 © 2005 Accounting 1/e, Terrell/Terrell Step 3: Posting to the General Ledger Each accounting element has an account. Each account contains the history of all increases and decreases in that accounting element. A chart of accounts is a list of all the accounts used by a business entity. The entire group of accounts in an accounting system constitute the general ledger.

11. 5 - 10 © 2005 Accounting 1/e, Terrell/Terrell Step 3: Posting to the General Ledger General Journal Account 101 Account 120 Account 300

12. 5 - 11 © 2005 Accounting 1/e, Terrell/Terrell Step 4: Preparing the Trial Balance Trial Balance Assets$$$ Liabilities$$$ Equity$$$ Revenues$$$ Expenses$$$ Balance $$$ Account 101 Balance $$$

13. 5 - 12 © 2005 Accounting 1/e, Terrell/Terrell Step 5: Adjusting and Reconciling At the end of an accounting period, prior to the preparation of financial statements, accountants review the accounts to insure each complies with the matching principle. RevenuesExpenses Accountingperiod

14. 5 - 13 © 2005 Accounting 1/e, Terrell/Terrell Step 5: Adjusting and Reconciling AccrualsDeferrals Error corrections Accrued revenue revenueAccrued expense expenseDeferredrevenueDeferredexpense

15. 5 - 14 © 2005 Accounting 1/e, Terrell/Terrell Step 5: Adjusting and Reconciling The adjusting process requires the application of the following three steps: 1. Identification of any accounts requiring adjustment. 2. Determination of the correct balance in each account.

16. 5 - 15 © 2005 Accounting 1/e, Terrell/Terrell Step 5: Adjusting and Reconciling 3. Preparation of the necessary entry or entries. The adjusting process also requires reconciling the Cash in Bank account with the bank statement.

17. 5 - 16 © 2005 Accounting 1/e, Terrell/Terrell Step 6: Preparing Financial Statements Work Sheet I/SB/S Statement of owners’ equity Balancesheet Incomestatement

18. 5 - 17 © 2005 Accounting 1/e, Terrell/Terrell Step 7: Preparing Closing Entries Assets Liabilities Equity Owners’Capital Net Income Balance $ Expenses Revenues Closing IncomeSummary General Journal General JournalRevenues Income Summary Income Summary Income Summary Expenses Expenses Income Summary Owners’ Capital Owners’ Capital

19. 5 - 18 © 2005 Accounting 1/e, Terrell/Terrell Step 8: Preparing the Post-Closing Trial Balance Post-Closing Trial Balance Post-Closing Trial Balance Assets$$$ Liabilities$$$ Equity$$$ Balance $$$ Account 101 Balance $$$

20. 5 - 19 © 2005 Accounting 1/e, Terrell/Terrell Learning Objective 2 Distinguish between debits and credits and apply them to the accounting equation.

21. 5 - 20 © 2005 Accounting 1/e, Terrell/Terrell The Accounting System of Debits and Credits An accounting system gathers data from source transactions to create the books and records that transform the data into a manageable format which produces the financial statements.

22. 5 - 21 © 2005 Accounting 1/e, Terrell/Terrell The Accounting System of Debits and Credits Left = Right DebitCredit = AssetsLiabilities + Equity =

23. 5 - 22 © 2005 Accounting 1/e, Terrell/Terrell Effect of Debits and Credits on Accounting Elements Accounting Element Accounting ElementAssetsLiabilitiesEquityRevenuesExpenses Owners’ investments DividendsGainsLossesDebitsIncreaseDecreaseDecreaseDecreaseIncreaseDecreaseIncreaseDecreaseIncreaseCreditsDecreaseIncreaseIncreaseIncreaseDecreaseIncreaseDecreaseIncreaseDecrease

24. 5 - 23 © 2005 Accounting 1/e, Terrell/Terrell Learning Objective 3 Identify the normal balance of accounts and distinguish between permanent and temporary accounts.

25. 5 - 24 © 2005 Accounting 1/e, Terrell/Terrell Temporary and Permanent Accounts Temporary accounts are all revenue, expense, gain, and loss accounts that are part of net income plus the dividend account. Permanent accounts include asset, liability, and equity accounts, except for the dividend account.

26. 5 - 25 © 2005 Accounting 1/e, Terrell/Terrell Identify Normal Balance DebitCredit = + AssetsLiabilities = Equity +

27. 5 - 26 © 2005 Accounting 1/e, Terrell/Terrell Learning Objective 4 Describe accounts, charts of accounts, journals, ledgers, and worksheets.

28. 5 - 27 © 2005 Accounting 1/e, Terrell/Terrell The Account Form Dec 1 Dec 31 Beg. balance CR34 CP57 54,198 56,111 34,589 88,787 32,676 DateDebitCreditDebitCredit Post Balance 2004 2004 Account Name Cash in Bank Account Number 101 Ref. Description

29. 5 - 28 © 2005 Accounting 1/e, Terrell/Terrell T-Account 200412-112-3134,58954,19832,67656,11112-31 Cash in Bank 101

30. 5 - 29 © 2005 Accounting 1/e, Terrell/Terrell Learning Objective 5 Record transactions in journals.

31. 5 - 30 © 2005 Accounting 1/e, Terrell/Terrell The General Journal General JournalPage 423 General JournalPage 423 Date2004DescriptionPostRef.DebitCredit Jan24 Accounts Receivable Sales To record the sale of 1,500 units to John George, Inc. Terms 2/10, n 30 11040123,42523,425

32. 5 - 31 © 2005 Accounting 1/e, Terrell/Terrell Accounting Cycle Application Example On June 1, 2004, Elevation Sports, Inc., began by issuing 4,000 shares of its $10 par value common stock in exchange for $100,000 in cash. June 1, 2004 Cash in Bank100,000 Common Stock40,000 Paid-in Capital60,000

33. 5 - 32 © 2005 Accounting 1/e, Terrell/Terrell Accounting Cycle Application Example On June 1, paid the attorney $2,000 for preparing and filing the articles of incorporation and other documents. June 1, 2004 Legal Expense 2,000 Cash in Bank 2,000

34. 5 - 33 © 2005 Accounting 1/e, Terrell/Terrell Learning Objective 6 Post transactions from the general journal to the general ledger.

35. 5 - 34 © 2005 Accounting 1/e, Terrell/Terrell Posting to the General Ledger Elevation Sports, Inc. Elevation Sports, Inc. General JournalPage 1 General JournalPage 1 Date2004DescriptionPostRef.DebitCredit Jun1 Cash in Bank Common Stock Paid-in Capital To record issuance of 4,000 shares of $10 value common stock 101310311100,00040,00060,000

36. 5 - 35 © 2005 Accounting 1/e, Terrell/Terrell Posting to the General Ledger Posting requires attention to detail in the following procedures: 1. Post to the general ledger each entry in the order that it appears in the general journal. 2. Record the date as the same date as the entry in the general journal.

37. 5 - 36 © 2005 Accounting 1/e, Terrell/Terrell Posting to the General Ledger 3. There is no need to write any description unless a special notation is indicated. 4. For the posting reference on the general ledger, the page number of the journal page should be used. 5. Record the amount of the entry in the correct debit or credit column.

38. 5 - 37 © 2005 Accounting 1/e, Terrell/Terrell Posting to the General Ledger Jun 1 Beg. balance GJ1100,000100,000 DebitCreditDebitCredit Balance Account Name Cash in Bank Account Number 101 2004 PostRef.Date Description GJ1 2,000 98,000 98,000 Jun 1 GJ12,0002,000 DebitCreditDebitCredit Balance Account Name Legal Expense Account Number 730 2004 PostRef.Date Description

39. 5 - 38 © 2005 Accounting 1/e, Terrell/Terrell Posting to the General Ledger Jun 1 Beg. balance GJ140,00040,000 DebitCreditDebitCredit Balance Account Name Common Stock Account Number 310 2004 PostRef.Date Description Jun 1 GJ160,00060,000 DebitCreditDebitCredit Balance Account Name Paid-in Capital Account Number 311 2004 PostRef.Date Description

40. 5 - 39 © 2005 Accounting 1/e, Terrell/Terrell Learning Objective 7 Compute cash discounts and determine the implication of freight terms.

41. 5 - 40 © 2005 Accounting 1/e, Terrell/Terrell Cash Discounts A 2% discount is allowed if payment is made within 10 days; otherwise payment is due 30 days after the invoice date. A 1% discount is allowed if paid within 10 days after the end of the month; otherwise payment is due 60 days from the invoice date. payment is due 60 days from the invoice date.

42. 5 - 41 © 2005 Accounting 1/e, Terrell/Terrell Freight Terms FOB point defines the point where title passes and the purchase/sales transaction legally occurs. FOB shipping point FOB destination

43. 5 - 42 © 2005 Accounting 1/e, Terrell/Terrell Learning Objective 8 Prepare a trial balance.

44. 5 - 43 © 2005 Accounting 1/e, Terrell/Terrell Elevation Sports, Inc. Trial Balance June 30, 2004 101 Cash in Bank 110 Accounts Receivable 130 Merchandise Inventory 131 Raw Materials Inventory 132 Work-in-Process Inventory 134 Office Supplies Inventory 140 Prepaid Rent 141 Prepaid Insurance 154 Administrative Equipment 156 Selling Furniture and Fixtures 158 Production Equipment 180 Patents 185 Copyrights 190 Trademarks 201 Accounts Payable 205 Other Accounts Payable 212 Payroll Taxes Payable $ 53,430 450 450 4,300 4,300 3,039 3,039 2,811 2,811 1,000 1,000 10,000 10,000 5,000 5,000 5,100 5,100 8,400 8,400 89,600 89,600 5,000 5,000 400 400 600 600 $ 6,600 22,234 22,234 1,000 1,000

45. 5 - 44 © 2005 Accounting 1/e, Terrell/Terrell Elevation Sports, Inc. Trial Balance June 30, 2004 213 Sales Tax Payable 250 Note Payable – Vail National Bank 310 Common Stock 311 Paid-in Capital – Common Stock 401 Retail Sales – Snowboards 405 Wholesale Sales – Snowboards 410 Retail Sales – Other 420 Sales Discounts 600 Advertising Expense 640 Internet Expense 680 Telephone Expense – Sales 690 Utilities Expense – Sales 730 Legal Expense 740 Officers’ Salaries Expense 780 Telephone Expense – Administrative 790 Utilities Expense – Administrative Totals 362 362 60,000 60,000 40,000 40,000 60,000 60,000 3,375 3,375 900 900 1,840 1,840$196,311 9 249 249 500 500 85 85 153 153 2,000 2,000 4,000 4,000 160 160 25 25$196,311

46. 5 - 45 © 2005 Accounting 1/e, Terrell/Terrell Appendix – Examples of an Annotated Chart of Accounts AccountNumber Account Name Description Notes Receivable Wages Payable Retained Earnings 115 211 320 Amounts due based on a written promise to pay Amounts earned by employees but not paid Total of all earnings of an entity since inception less all dividends declared

47. 5 - 46 © 2005 Accounting 1/e, Terrell/Terrell End of Chapter 5