ch. 3 the accounting cycle for a service business · ch. 3 the accounting cycle for a service...

Ch. 3 The Accounting Cycle for a

Service Business

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Two-column journal

Chart of accounts

Ledger accounts

Prepare trial balance from ledger accounts

Accounting errors

The Accounting Cycle

Step 1 Analyze transactions from source documents.

Step 2 Record transactions in a journal.

Step 3 Post from the journal to the ledger.

Step 4 Prepare a trial balance of the ledger.

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• Sequence of steps and procedures

• Used to record and summarize accounting data

during an accounting period

Source Documents

• Business documents or papers that prove

business transactions

• The basis for journal entries

• Provide objective evidence to support the

journal entries

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Journal

• A record in which business transactions are

recorded in the order that they occur

• AKA book of original entry

Contents of a Journal

1. Numbered pages, beginning with page 1

2. A Date column to record transaction date

3. An Account Title column

To record the accounts affected

To record a brief explanation

4. A posting reference (P.R.) column

5. Two money (or amount) columns

Labeled Debit and Credit, respectively

Used to record the dollar amount

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Contents of a Journal

1. Page number

2. A Date column

3. An Account Title column

4. A Posting Reference (P.R.) column

5. Debit and Credit columns 5

To Record a Transaction

• Analyze into its debit and credit parts.

• For each transaction, you must decide:

o Which accounts are affected by the transaction

o Were the accounts increased or decreased

o How to increase or decrease (debit or credit

the accounts affected

• Provide a brief explanation for each journal entry.

o Notes telling someone not trained in accounting

what occurred in a transaction.

o Writing them will reinforce your understanding

of transactions. 6

Debits First or Credits First

???

When making journal entries, which is listed

first?

• Account being debited is always listed first

• Credit follows, indented

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Explanations for Journal Entries

• No set format

• Should be brief and easy to understand

• Optional: may be omitted if purpose of entry is

obvious

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Example

Alice Browning starts an accounting and tax business by

investing $5,000 in the business on January 1, 20X1.

Analyze the account to be debited and the account to be credited.

Cash, an asset account, is increasing.

Assets are increased with debits.

Alice Browning, Capital, an equity account, is

increasing.

Equity accounts are increased with credits.

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Example

Alice Browning starts an accounting and tax business by

investing $5,000 in the business on January 1, 20X1.

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General Journal

Date Account Title P.R. Debit Credit

20X1

Jan. 1 Cash 5,000

Alice Browning, Capital 5,000

Invested cash in the business.

Compound Entry

• Entry requiring three or more accounts

• Total debits will equal the total credits

regardless of the number of accounts involved

in the journal entry

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Example

On July 25, 20X1, Susan King purchases equipment

for $10,000 by making a down payment of $3,500 with

the balance on account.

Analyze the account(s) to be debited and the account(s) to be

credited.

• Equipment, an asset account, is increasing.

Assets are increased with debits.

• Cash, an asset account, is decreasing.

Assets are decreased with credits.

• Accounts Payable, a liability account, is increasing.

Liabilities are increased with credits.

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Example

On July 25, 20X1, Susan King purchases equipment for

$10,000 by making a down payment of $3,500 with the

balance on account.

Analyze the account(s) to be debited and the account(s) to be

credited.

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General Journal

Date Account Title P.R. Debit Credit

20X1

Jul. 25 Equipment 10,000

Cash 3,500

Accounts Payable

Purchased equipment with a

down payment and the balance

on account.

6,500

Advantages of Using a Journal

• Provides a chronological (by order of date)

record of transactions

• Provides a place to make an explanation of an

entry, if needed

• Use lessens the possibility of recording an error,

because both the debit and credit parts are

recorded together

• Easier to locate recording errors

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Chart of Accounts

• A listing of all

accounts and their

account numbers

• A directory of

accounts available for

making journal entries

• Includes only account

titles that may be used

when recording

transactions in the

journal 15

Account Category Account

Number Account Title

Assets (100-199) 111

112

113

116

117

Cash

Accounts

Receivable

Office Supplies

Office

Equipment

Office Furniture

Liabilities (200-299) 211 Accounts

Payable

Owner’s Equity (300-

399)

311

312

Stanley Walker,

Capital

Stanley Walker,

Drawing

Revenue (400-499) 411 Service Revenue

Expenses (500-599) 511

512

Rent Expense

Repairs Expense

An Account

• A record for each item in a business

• The balance form of an account includes a

Debit column

Credit column

Debit Balance column

Credit Balance column

• The four-column ledger account form shows a

running balance of each account

• Ledger accounts not footed and balanced

• Balance form of account widely used 16

The Balance Form of Account

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Posting the Debit Part of an Entry

1.

2.

3.

4.

5.

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1. The date of the journal entry is recorded in

the Cash account.

1


1.

2.

3.

4.

5.

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2. The Cash account is debited for 10,000.

2

3. The page number of the journal entry is recorded

in the P.R. column of the Cash account.


1.

2.

3.

4.

5.

20

3


1.

2.

3.

4.

5.

21

4

4. The account number is recorded in the journal.

Posting the Debit Part of an Entry 1.

2.

3.

4.

5.

22

5

5. Since this is the first number posted to the

Cash account, the balance is 10,000 and is

recorded in the balance debit column.

Posting the Credit Part of an Entry

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1. The date of the journal entry is recorded in

the Owner’s Capital account.

1


1.

2.

3.

4.

5.

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2. Stanley Walker, Capital is credited for 10,000.

2


1.

2.

3.

4.

5.

25

3

3. The page number of the journal entry is recorded

in the P.R. column of the Stanley Walker, Capital

account.


1.

2.

3.

4.

5.

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4. The account number is recorded in the journal.

4


1.

2.

3.

4.

5.

27

5

5. Since this is the first number posted to the Stanley

Walker, Capital account, the balance is 10,000 and

is recorded in the Balance Credit column.

Trial Balance

• Not a formal financial statement

• A test of the equality of debits and credits in the

ledger

• The order of accounts is consistent with the

order on the financial statements and the chart

of accounts

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Trial Balance

The purpose of the trial balance is to prove the

equality of the debits and credits.

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Walker and Associates

Trial Balance November 30, 20X1

Account Title Debit Credit

Cash 9,525

Accounts Receivable 300

Office Supplies 125

Office Equipment 3,000

Office Furniture 2,000

Accounts Payable 4,000

Stanley Walker, Capital 10,000

Trial Balance

The purpose of the trial balance is to prove the

equality of the debits and credits.

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Walker and Associates

Trial Balance November 30, 20X1

Account Title Debit Credit

Stanley Walker, Drawing

Service Revenue

Rent Expense

Repairs Expense

Totals 16,200 16,200

8,000

2,200

400

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Locating and Correcting Errors

• Accounting errors can include

o Math errors

o Recording errors

o Posting errors

• Errors cause the trial balance to be out of balance

Types of Errors

• Posting

• Recording

• Transposition

• Slide 31

Posting Error

• An amount correctly entered in the journal but posted

incorrectly to the ledger

• Corrected by

o Drawing a line through the error

o Writing the correct figure above it

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Recording Error • A mistake made in a journal entry

• Posting error

o An incorrect transfer from the journal to an

account or from the ledger to the trial balance

Transposition Error

• A type of posting error

• Caused by the reversal of digits

• Example: entering 240 for 420

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Slide Error • A type of posting error

• Caused by an incorrectly placed decimal point

• Examples: entering 100 for 1,000 or 24.50 for 245

Summary of Correction Procedures

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Type of Error Method of Correction

Math error made in pencil Erasure

Math error made in pen Line out the incorrect figure, initial,

and enter the correct figure

Recording error discovered before

posting

Line out incorrect information, initial,

and enter correct information

Recording error that has been

posted

Correcting entry

An incorrect amount posted to the

correct account

Line out, initial, and enter the correct

amount

A correct amount posted to the

incorrect account

Correcting entry

The First Four

Steps in the

Accounting Cycle

Joining the Pieces

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