1. Understanding The Recording Process

2. Typical Chart of Accounts
Long-Term Liabilities ( )
222 Mortgage Payable
OWNERS’ EQUITY ( )
301 Capital Stock
330 Retained Earnings
SALES ( )
400 Sales Revenue
EXPENSES ( )
500 Cost of Goods Sold
523 Rent Expense
528 Advertising Expense
573 Utility Expense
ASSETS ( )
Current Assets ( )
101 Cash
105 Accounts Receivable
107 Inventory
Long-Term Assets ( )
151 Land
152 Building
LIABILITIES ( )
Current Liabilities ( )
201 Notes Payable
202 Accounts Payable

3. Recording Process Recording Process Step 1 Business documents analyzed
Transactions recorded in journals
Step 3
Transactions posted to ledgers
Recording Process

4. Overview of the Accounting Process
Continued from previous slide
Step 4
Trial balance
Work sheet (optional)
Steps in the Reporting Phase
Step 5
Adjustments
Continued

5. Overview of the Accounting Process
Step 6
Financial statements
Step 7
Adjustments
Steps in the Reporting Phase
Step 8
Post-closing trial balance (optional)

6. 1. Analyzing Business Documents
Transactions are the exchange of goods or services between entities, as well as other events that have an economic impact on a business.
Business documents are records that are evidence of transactions.

7. 2. Journalizing Transactions
A journal is an accounting record in which business transactions are entered in chronological order.
Journal entries record transaction information; debits equal credits.
General Journal Entry Format
Date Debit Entry xx
Credit Entry xx
Explanation.

8. 2. Journalizing Transactions
Every journal entry involves a three-step process:
Identify the accounts involved with an event or transaction.
Determine whether each account increased or decreased.
Determine the amount by which each account was affected.

9. Debits and Credits Assets = Liabilities + Owners’ Equity
DR CR DR CR DR CR
(+) (–) (–) (+) (–) (+)
Capital Stock
DR CR
(–) (+)
Retained Earnings
DR CR
(–) (+)
Continued

10. Debits and Credits DR CR (–) (+) Expenses DR CR (+) (–) Revenues DR CR
Retained Earnings
DR CR
(–) (+)
Expenses
DR CR
(+) (–)
Revenues
DR CR
(–) (+)
Dividends
DR CR
(+) (–)

11. General Journal Page 24 2005 Post Ref. Date Description Debits Credits
July 1 Dividends ,000
Dividends Payable ,000
Declared semiannual
cash dividend on
common stock.
10 Equipment 180 7,500
Notes Payable ,500
Issued note for new
equipment .

12. Example: Journal Entry
On January 2, sold merchandise costing $60 to a customer on account for $75. Make the journal entry.

13. Example: Journal Entry
On January 2, sold merchandise costing $60 to a customer on account for $75. Make the journal entry.
This entry assumes that the perpetual system is used.
Jan. 2 Accounts Receivable
Sales Revenue
Sold merchandise on
account.
2 Cost of Goods Sold
Inventory
To record cost and
reduce inventory.

14. 3. Posting to the Ledger Accounts
Posting is the process of transferring amounts from the journal to the general ledger.
A ledger is a collection of accounts in which data from transactions recorded in the journals are posted, classified, and summarized.
A chart of accounts lists all accounts used by the company.

15. 3. Posting to the Ledger Accounts
The Equipment account in the general ledger after the purchase of July 10 (Slide 9) has been posted would appear as follows:
Account
EQUIPMENT
Account No: 180
Date Item PR Debit Credit Balance
2005
July Balance  ,550
Purchase Equipment J , ,050
To examine the journal entry, click this button to go to Slide 9. To return, click on the word “July” in the entry on Slide 9.

16. Reporting Phase 4. A trial balance is prepared.
5. Adjusting entries are recorded.
6. Financial statements are prepared.
7. Closing entries are made.
8. A post-closing trial balance is prepared (optional).

17. 4. Preparing a Trial Balance
Determine the account balance for each T-Account.
A trial balance is a list of all accounts and their balances. It provides a means to assure that debits equal credits.

18. XYZ Company
Trial Balance
December 31, 2005
Debits Credits
Cash $
Accounts Receivable
Inventory
Land
Accounts Payable $
Capital Stock
Retained Earnings
Sales Revenue
Cost of Goods Sold
Advertising Expense
Misc. Expenses ______
Total $ 1,123 $ 1,123

19. Illustration
October 1, C.R Byrd invests $10,000 cash in an advertising venture to be known as the Pioneer Advertising Agency
Oct. 1
Cash
C.R.Byrd, Capital
(Invested cash in business) 1 40
10,000
October 1, office equipment costing $5,000 is purchased by signing a 3-month, 12%, $5,000 note payable.
Oct. 1
Office equipment
Notes payable
(Issued 3-month, 12%, note for
office equipment) 15 25
5,000
October 2, a $1,200 cash advance is received from R. Knox, a client, for advertising services that are expected to be completed.

20. Illustration Oct. 2 Cash Unearned Fees (Received advance from R.Knox
for future service) 1 28
1,200
October 3, office rent for October is paid in cash, $900
Oct. 3
Rent Expense
Cash
(Paid October Rent) 62 1
900
October 4, $600 is paid for a one-year insurance policy that will expire next year on September 30.
Oct. 4
Prepaid Insurance
Cash
(Paid one-year policy; effective
date October 1) 10 1
600

21. Illustration
October 5, an estimated 3-month supply of advertising materials is purchased on account from Aero Supply for $2,500
Oct. 5
Advertising Supplies
Account Payable
(Purchased supplies on account
from Aero Supply) 8 26
2,500
October 9, hire four employees to begin work on October 15. each employee is to receive a weekly salary of $500 for a 5-day work week, payable every 2 weeks – first payment made on October 26.
A business transaction has not occurred. There is only an agreement between the employer and the employees to enter into a business.
October 20, C.R. Byrd withdraw $500 cash for personal use.
Oct. 20
C.R. Byrd, Drawing
Cash
(Withdraw cash for personal use) 41 1
500

22. Illustration
October 26, employee salaries of $4,000 are owed and paid in cash. (See October 9 transaction)
Oct. 26
Salaries Expense
Cash
(Paid salaries to date) 60 1
4,000
October 31, received $10,000 in cash from Copa Company for advertising services rendered in October.
Oct. 31
Cash
Fees Earned
(Received cash for fees earned) 41 1
500

23. GENERAL LEDGER Date Explanation Ref Debit Credit Balance Oct. 1 2 3 4
CASH
Date
Explanation
Ref
Debit
Credit
Balance
Oct. 1 2 3 4 20 26 31 J1
10,000
1,200
900
600
500
4,000
11,200
10,300
9,700
9,200
5,200
15,200
ADVERTISING SUPPLIES
NO 8
Date
Explanation
Ref
Debit
Credit
Balance
Oct. 5 J1
2,500
Prepaid Insurance
NO 10
Date
Explanation
Ref
Debit
Credit
B3alance
Oct. 4 J1
600

24. GENERAL LEDGER Date Explanation Ref Debit Credit Balance Oct. 1 J1
Office Equipment
No. 15
Date
Explanation
Ref
Debit
Credit
Balance
Oct. 1 J1
5,000
Notes Payable
NO 25
Date
Explanation
Ref
Debit
Credit
Balance
Oct. 1 J1
5,000
Account Payable
NO 26
Date
Explanation
Ref
Debit
Credit
Balance
Oct. 5 J1
2,500
Unearned Fees
NO 28
Date
Explanation
Ref
Debit
Credit
Balance
Oct. 2 J1
1,200

25. GENERAL LEDGER Date Explanation Ref Debit Credit Balance Oct. 1 J1
C.R. Byrd, Capital
No. 40
Date
Explanation
Ref
Debit
Credit
Balance
Oct. 1 J1
10,000
C.R. Byrd, Drawing
NO 41
Date
Explanation
Ref
Debit
Credit
Balance
Oct. 20 J1
500
Fees Earned
NO 50
Date
Explanation
Ref
Debit
Credit
Balance
Oct. 31 J1
10,000
Salaries Expense
NO 60
Date
Explanation
Ref
Debit
Credit
Balance
Oct. 26 J1
4,000

26. PIONEER ADVERTISING AGENCY ACCOUNTS
GENERAL LEDGER
Rent Expense
NO 62
Date
Explanation
Ref
Debit
Credit
Balance
Oct. 3 J1
900
PIONEER ADVERTISING AGENCY ACCOUNTS
1-19 = Assets Accounts
20 – 39 = Liabilities
40 – 49 = Owner’s Equity
50 – 59 = Revenues
60 – 69 = Expenses

27. PIONEER ADVERTISING AGENCY
TRIAL BALANCE
OCTOBER 31, 2010
DEBIT
CREDIT
Cash
$ 15,200
Advertising Supplies
2,500
Prepaid Insurance
600
Office Equipment
5,000
Notes Payable
$ 5,000
Accounts Payable
Unearned Fees
1,200
C.R. Byrd, Capital
10,000
C.R. Byrd, Drawing
500
Fees Earned
Salaries Expense
4,000
Rent Expense
900
$28,700
=======

28. 5. Preparing Adjusting Entries
Adjusting entries are required at the end of each accounting period for accrual- basis accounting, prior to preparing the financial statements. The purpose for adjusting entries are to:
bring balance sheet accounts current.
reflect proper amounts of revenues, costs, and expenses on the income statement.

29. Tips Regarding Adjusting Entries
Analytical Process. You must determine what original entry was made (if any) and what the ending balances should be before you know what adjusting entry to make. You cannot memorize adjusting entries.
Adjusting entries always incorporate a balance sheet account and an income statement account.
Adjusting entries never involve a cash account.

30. Most Common Adjusting Entries
Unrecorded Revenues—Revenues that have been earned but not yet recorded.
Unearned Revenues—Revenues that have been recorded but not yet earned.
Unrecorded Expenses—Expenses that have been incurred but not yet recorded.
Prepaid Expenses—Expenses that have been recorded but not yet incurred.

31. Three-Step Process for Adjusting Entries
1. Identify the original entries that were made, if any. Original entries are only made for unearned revenues and prepaid expenses.
2. Determine what the correct balances should be at this point in time.
3. Make the adjustments needed to bring the balances to the desired amounts.

32. Asset Depreciation
Rosi, Inc. purchased buildings in 2000 at a cost of $156,000, an expected life of 20 years, and no anticipated residual value. Each year, 5% of the cost is depreciated. At the end of 2005, the following adjusting entry is made:
Adjusting Entry
12/31 Depreciation Expense—Buildings 7,800
Accumulated Depr.—Buildings ,800
To record depreciation
on building at 5% per year.

33. Bad Debts
An estimation of bad debts based on the ending receivables balance reveals that the allowance account needs to be increased by $1,100.
Adjusting Entry
12/31 Bad Debts Expense 1,100
Allowance for Bad Debts 1,100
To adjust for estimated bad
debts expense.

34. Bad Debts
Later, on March 19 that a $150 receivable is deemed to be uncollectible. Using the allowance account, the uncollectible account is written off the books.
3/19 Allowance for Bad Debts 150
Accounts Receivable 150
To write off an uncollectible
account.
Note that this entry is not an adjusting entry. It is made when the account is determined to be uncollectible.

35. Accrued Expenses
At the end of the fiscal period, Rosi, Inc. had accrued salaries and wages totaling $2,150.
Adjusting Entry
12/31 Salaries and Wages Expense 2,150
Salaries and Wages Payable 2,150
To record accrued salaries and
wages.

36. Accrued Revenues
Rosi, Inc. holds a note receivable from a customer on which interest total $250 has accrued.
Adjusting Entry
12/31 Interest Receivable 250
Interest Revenue 250
To record accrued interest on a
note receivable.

37. Original debit to an asset account
Prepaid Expenses
Rosi, Inc.’s trial balance shows that the asset account Prepaid Insurance has a balance of $8,000. By December 31, only $3,800 applies to future periods.
Adjusting Entry
12/31 Insurance Expense 4,200
Prepaid Insurance 4,200
To record expired insurance.
$8,000 – $3,800
Original debit to an asset account

38. Original debit to an expense account
Prepaid Expenses
Rosi, Inc.’s trial balance shows that the asset account Insurance Expense has a balance of $8,000. By December 31, $3,800 applies to future periods.
Adjusting Entry
12/31 Prepaid Insurance 3,800
Insurance Expense 3,800
To record expired insurance.
$8,000 – $4,200
Original debit to an expense account

39. Original credit to a revenue account
Deferred Revenues
Rosi, Inc. receives a payment of $2,550 from a customer prior to the services being rendered. By December 31, $2,075 in services have been provided.
$2,550 – $2,075
Adjusting Entry
12/31 Rent Revenue 475
Unearned Rent Revenue 475
To record unearned rent revenue.
Original credit to a revenue account

40. Original credit to a liability account
Deferred Revenues
Rosi, Inc. receives a payment of $2,550 from a customer prior to the services being rendered. By December 31, $2,075 in services have been provided.
$2,550 – $475
Adjusting Entry
12/31 Unearned Rent Revenue 2,075
Rent Revenue 2,075
To record rent revenue.
Original credit to a liability account