chapter 3 starting the accounting cycle for a service business 1© paradigm publishing, inc
TRANSCRIPT
Chapter 3
Starting the Accounting Cycle for a Service Business
1© Paradigm Publishing, Inc.
1. Describe the standard form of a two-column journal.
2. Record business transactions in a two-column journal.
3. Prepare a chart of accounts.
4. Describe the balance form of account.
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Learning Objectives
5. Post from a two-column journal to ledger accounts.
6. Prepare a trial balance from a ledger after posting.
7. Describe the procedures for locating and correcting errors in the accounting process.
8. Make entries to correct errors in the ledger.
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Learning Objectives
The Accounting Cycle
Sequence of steps and procedures
Used to record and summarize accounting data during an accounting period
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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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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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Describe the standard form of a two-column journal
Learning Objective 1
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Journal
A record in which business transactions are recorded in the order that they occur
AKA book of original entry
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Contents of a Journal1. 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© Paradigm Publishing, Inc. 10
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The sequence of steps and procedures used by a business to record and summarize accounting data is known as the
a. accounting cycle.
b. balance form of account.
c. book of original entry.
d. accounting period.
e. principle of materiality.
Quick Check
Record business transactions in a
two-column journal
Learning Objective 2
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To Record a Transaction
Analyze into its debit and credit parts.
For each transaction, you must decide: Which accounts are affected by the transaction
Were the accounts increased or decreased
How to increase or decrease (debit or credit the accounts affected
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To Record a TransactionProvide a brief explanation for each journal entry.
Notes telling someone not trained in accounting what occurred in a transaction.
Writing them will reinforce your understanding of transactions.
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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.
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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.
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
20X1Jan.
1 Cash 5,000
Alice Browning, Capital 5,000
Invested cash in the business.
Review Quiz 3-1
Record each transaction in a general journal. Omit the explanations.
Mar. 1, Becky invested $7,000 cash in her business.
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General Journal
Date Account Title P.R. Debit Credit
20XXMar.
1 Cash 7,000
Becky McAfee, Capital 7,000
Record each transaction in a general journal. Omit the explanations.
Mar. 4, purchased supplies on credit, $750.
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Review Quiz 3-1
General Journal
Date Account Title P.R. Debit Credit
20XXMar.
4 Supplies 750
Accounts Payable 750
Record each transaction in a general journal. Omit the explanations.
Mar. 6, purchased equipment for cash, $475.
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Review Quiz 3-1
General Journal
Date Account Title P.R. Debit Credit
20XXMar.
6 Equipment 475
Cash 475
Review Quiz 3-1
Record each transaction in a general journal. Omit the explanations.
Mar. 9, paid half of the amount owed for supplies, $375.
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General Journal
Date Account Title P.R. Debit Credit
20XXMar.
9 Accounts Payable 375
Cash 375
Compound EntryEntry 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.
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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.
Example
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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.
General Journal
Date Account Title P.R. Debit Credit
20X1Jul.
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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The process of recording transactions in a journal is called
a. dailying.
b. transitioning.
c. journalizing.
d. footing.
e. ledgering.
Quick Check
Review Quiz 3-2
Record each transaction in a general journal. Omit Explanations.
Jun. 12, paid utilities expense, $145.
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Date Account Title P.R. Debit Credit
Utilities Expense 145
Cash 145
20X1Jun.
12
General Journal
Review Quiz 3-2
John Dark’s business had the following transactions in June 20X1. Record each transaction in a general journal. Omit Explanations.
Jun. 17, John withdrew cash for personal use, $175.
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Date Account Title P.R. Debit Credit
John Dark, Drawing 175
Cash 175
20X1Jun.
17
General Journal
Review Quiz 3-2
John Dark’s business had the following transactions in June 20X1. Record each transaction in a general journal. Omit Explanations.
Jun. 22, received cash for services performed, $950.
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Date Account Title P.R. Debit Credit
Cash 950
Service Revenue 950
20X1Jun.
22
General Journal
Review Quiz 3-2
John Dark’s business had the following transactions in June 20X1. Record each transaction in a general journal. Omit Explanations.
Jun. 25, John made the following additional investments in his business: office supplies, $75; and a truck, $4,000.
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Date Account Title P.R. Debit Credit
Office Supplies 75
John Dark, Capital 4,075
20X1Jun.
25
General Journal
Truck 4,000
Learning Objective 3
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Prepare a 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
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Account Category
Account Number
Account Title
Assets (100-199) 111112
113
116
117
CashAccounts ReceivableOffice SuppliesOffice EquipmentOffice Furniture
Liabilities (200-299) 211 Accounts Payable
Owner’s Equity (300-399)
311
312
Stanley Walker, CapitalStanley Walker, Drawing
Revenue (400-499) 411 Service Revenue
Expenses (500-599) 511512
Rent ExpenseRepairs Expense
Chart of Accounts
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A directory or listing of accounts available in the ledger is referred to as the
a. book of final entry.
b. book of original entry.
c. source document.
d. chart of accounts.
e. balance form of account.
Quick Check
Learning Objective 4
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Describe the balance form of account
An Account
A record for each item in a business
The balance form of an account includes a Debit columnCredit columnDebit Balance columnCredit 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© Paradigm Publishing, Inc. 36
The Balance Form of Account
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The ledger is often referred to as the book of
a. final entry.
b. numbers.
c. balances.
d. original entry.
e. materiality.
Quick Check
Learning Objective 5
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Post from a two-column journal to ledger accounts
Posting the Debit Part of an Entry
40
1. The date of the journal entry is recorded in the Cash account.
2. The Cash account is debited for 10,000.3. The page number of the journal entry is recorded
in the P.R. column of the Cash account.4. The account number is recorded in the journal.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.
1. The date of the journal entry is recorded in the Cash account.
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Posting the Debit Part of an Entry
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1. The date of the journal entry is recorded in the Cash account.
2. The Cash account is debited for 10,000.3. The page number of the journal entry is recorded
in the P.R. column of the Cash account.4. The account number is recorded in the journal.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.
2. The Cash account is debited for 10,000.
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Posting the Debit Part of an Entry
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1. The date of the journal entry is recorded in the Cash account.
2. The Cash account is debited for 10,000.3. The page number of the journal entry is recorded
in the P.R. column of the Cash account.4. The account number is recorded in the journal.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.
3
3. The page number of the journal entry is recorded in the P.R. column of the Cash account.
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1. The date of the journal entry is recorded in the Cash account.
2. The Cash account is debited for 10,000.3. The page number of the journal entry is recorded
in the P.R. column of the Cash account.4. The account number is recorded in the journal.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 Debit Part of an Entry
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4
4. The account number is recorded in the journal.
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Posting the Debit Part of an Entry
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1. The date of the journal entry is recorded in the Cash account.
2. The Cash account is debited for 10,000.3. The page number of the journal entry is recorded
in the P.R. column of the Cash account.4. The account number is recorded in the journal.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.
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.
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Posting the Credit Part of an Entry
1. The date of the journal entry is recorded in the Owner’s Capital account.
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1
Posting the Credit Part of an Entry1. The date of the journal entry is recorded in the
owner’s capital account.2. Stanley Walker, Capital is credited for 10,000.3. The page number of the journal entry is recorded
in the P.R. column of the Stanley Walker, Capital account.
4. The account number is recorded in the journal.5. Since this is the first number posted to the
Stanley Walkr, Capital account, the balance is 10,000 and is recorded in the balance credit column.
2. Stanley Walker, Capital is credited for 10,000.
2
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Posting the Credit Part of an Entry1. The date of the journal entry is recorded in the
owner’s capital account.2. Stanley Walker, Capital is credited for 10,000.3. The page number of the journal entry is recorded
in the P.R. column of the Stanley Walker, Capital account.
4. The account number is recorded in the journal.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.
3
3. The page number of the journal entry is recorded in the P.R. column of the Stanley Walker, Capital account.
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Posting the Credit Part of an Entry1. The date of the journal entry is recorded in the
owner’s capital account.2. Stanley Walker, Capital is credited for 10,000.3. The page number of the journal entry is recorded
in the P.R. column of the Stanley Walker, Capital account.
4. The account number is recorded in the journal.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.
4. The account number is recorded in the journal.
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4
Posting the Credit Part of an Entry
1. The date of the journal entry is recorded in the owner’s capital account.
2. Stanley Walker, Capital is credited for 10,000.
3. The page number of the journal entry is recorded in the P.R. column of the Stanley Walker, Capital account.
4. The account number is recorded in the journal.
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.
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.
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Which of the following represents the correct order of the first four steps of the account cycle?
a. Analyze transactions, journalize, post to ledger, prepare trial balance
b. Journalize, analyze transactions, post to ledger, prepare trial balance
c. Analyze transactions, post to ledger, journalize, prepare trial balance
d. Journalize, post to ledger, analyze transactions, prepare trial balance
e. Journalize, post to ledger, prepare trial balance, analyze transactions
Quick Check
Learning Objective 6
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Prepare a Trial Balance from a Ledger after Posting
Trial BalanceNot 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 BalanceThe 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 BalanceThe 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 16,20016,200
8,000
2,200
400
50
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The four-column account form contains each of the following columns except the
a. Debit Balance column
b. Credit Balance column
c. Credit column
d. Debit column
e. Difference column
Quick Check
Prepare a trial balance for the following accounts.
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Account Balance
Accounts Payable $ 7,210
Cash 1,400
Equipment 16,400
LeAnn Lovering, Capital 14,600
LeAnn Lovering, Drawing 700
Rent Expense 3,000
Repairs Expense 450
Revenue from Services 16,380
Salaries Expense 2,510
Supplies 3,860
Truck 9,400
Utilities Expense 470
Review Quiz 3-3
Answer:
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LeAnn’s TV Repair ShopTrial Balance December 31, 20XX
Account Title Debit Credit
Cash 1,400
Supplies 3,860
Equipment 16,400
Truck 9,400
Accounts Payable 7,210
LeAnn Lovering, Capital 14,600
LeAnn Lovering, Drawing 700
Revenue from Services 16,380
Rent Expense 3,000
Salaries Expense 2,510
Utilities Expense 470
Repairs Expense 450
Totals 16,200 16,200
Review Quiz 3-3
Locating and Correcting Errors
Accounting errors can include
Math errors
Recording errors
Posting errors
Errors cause the trial balance to be out of balance
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Learning Objective 7
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Describe the procedure for locating and correcting errors in the accounting
process
Types of Errors
Posting
Recording
Transposition
Slide
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Posting Error
An amount correctly entered in the journal but posted incorrectly to the ledger
Corrected by
Drawing a line through the error
Writing the correct figure above it
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Recording Error
A mistake made in a journal entry
Posting error
An incorrect transfer from the journal to an account or from the ledger to the trial balance
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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
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Each of the following errors will not cause the trial balance to be out of balance except
a. Posting a transaction twice
b. Failing to record a transaction
c. Transposing digits in a posting
d. Failing to post an entry to the ledger
e. Recording a transaction twice
Quick Check
Learning Objective 8
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Make entries to correct errors in the ledger
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
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This type of error occurs in the process of transferring figures from the journal to the ledger.
a. Math error
b. Recording error
c. Posting error
d. Omission error
e. Standard error
Quick Check
Review Quiz 3-4
Indicate how the following error should be corrected.
1. A cash purchase of equipment was recorded as a cash purchase of supplies. The entry has not been posted to the ledger.
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Answer:
Line out the title Supplies in the journal and write the title Equipment above it.
Review Quiz 3-4
Indicate how the following error should be corrected.
2. A journal entry for $470 was posted as $47 in one of the accounts involved.
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Answer:
Line out $47 in the ledger account and write $470 above it.
Review Quiz 3-4
Indicate how the following error should be corrected.
3. A cash payment of $50 for Repairs Expense was journalized as a debit to Rent Expense and a credit to Cash. The entry was then posted.
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Answer:
Review Quiz 3-4
Indicate how the following error should be corrected.
4. In a company with over $6,000,000 in annual sales, it was discovered that the purchase of a $6.40 book of stamps was debited to Advertising Expense, instead of Postage Expense.
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Answer:
Why do you believe the plastic surgeon kept his job at the clinic even though he admitted that he had stolen several hundred thousands of dollars?
Focus on Ethics
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Refer to the Focus on Ethics box on page 109 in your text.
The First Four Steps in the
Accounting Cycle
Joining the Pieces
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