chapter 3 the accounting cycle: capturing economic events
TRANSCRIPT
Chapter
3THE ACCOUNTING CYCLE:Capturing Economic Events
The Role of Accounting RecordsThe Role of Accounting Records
Establishes accountability for assets and transactions.
Establishes accountability for assets and transactions.
Keeps track of routine business activities.
Keeps track of routine business activities.
Obtains detailed information about a particular transaction.
Obtains detailed information about a particular transaction.
Evaluates efficiency and performance within company.
Evaluates efficiency and performance within company.
Maintains evidence of company’s business activities.
Maintains evidence of company’s business activities.
The LedgerThe Ledger
The entire group of accounts is kept
together in an accounting record
called a ledger.
The entire group of accounts is kept
together in an accounting record
called a ledger.
Cash
Accounts Payable
Capital Stock
Accounts are individual records showing increases
and decreases.
Accounts are individual records showing increases
and decreases.
The Use of AccountsThe Use of Accounts
Increases are recorded on one
side of the T-account, and decreases are
recorded on the other side.
Left or
Debit Side
Right or
Credit Side
Title of Account
Let’s see how debits and credits are recorded in the Cash account for JJ’s Lawn Care
Service.
Let’s see how debits and credits are recorded in the Cash account for JJ’s Lawn Care
Service.
Cash5/1 8,000 5/2 2,500
5/25 75 5/8 2,0005/29 750 5/28 150
5/31 50 5/31 4,125Bal.
Cash5/1 8,000 5/2 2,500
5/25 75 5/8 2,0005/29 750 5/28 150
5/31 50 5/31 4,125Bal.
Receipts are on
the debit side.
Payments are on the
credit side.
The balance is the difference between the debit and credit
entries in the account.
The balance is the difference between the debit and credit
entries in the account.
Debit and Credit EntriesDebit and Credit Entries
AA = LL + OEOEASSETSASSETS
Debit for
Increase
Credit for
Decrease
EQUITIESEQUITIES
Debit for
Decrease
Credit for
Increase
LIABILITIESLIABILITIES
Debit for
Decrease
Credit for
Increase
Debits and credits affect accounts as follows:
Debits and credits affect accounts as follows:
Debit and Credit RulesDebit and Credit Rules
AA = LL + OEOEDebit
balancesCredit Credit
balancesbalances=In the double-entry accounting system, every transaction is recorded by equal dollar amounts of debits and credits.
In the double-entry accounting system, every transaction is recorded by equal dollar amounts of debits and credits.
Double Entry AccountingThe Equality of Debits and Credits
Double Entry AccountingThe Equality of Debits and Credits
Let’s record selected
transactions for JJ’s Lawn Care Service in the
accounts.
May 1: Jill Jones and her family invested $8,000 in JJ’s Lawn Care Service and received 800 shares of stock.
May 1: Jill Jones and her family invested $8,000 in JJ’s Lawn Care Service and received 800 shares of stock.
Will Cash increase or decrease?
Will Capital Stock increase or decrease?
Capital Stock5/1 8,000
Cash5/1 8,000
May 1: Jill Jones and her family invested $8,000 in JJ’s Lawn Care Service and received 800 shares of stock.
May 1: Jill Jones and her family invested $8,000 in JJ’s Lawn Care Service and received 800 shares of stock.
Cash increases $8,000 with a debit.
Capital Stock increases $8,000
with a credit.
May 2: JJ’s purchased a riding lawn mower for $2,500 cash.
May 2: JJ’s purchased a riding lawn mower for $2,500 cash.
Will Cash increase or decrease?
Will Tools & Equipment increase
or decrease?
May 2: JJ’s purchased a riding lawn mower for $2,500 cash.
May 2: JJ’s purchased a riding lawn mower for $2,500 cash.
Tools & Equipment5/2 2,500
Cash5/1 8,000 5/2 2,500
Cash decreases $2,500 with a credit.
Tools & Equipment increases $2,500
with a debit.
May 8: JJ’s purchased a $15,000 truck. JJ’s paid $2,000 down in cash and issued a note payable for the remaining $13,000.
May 8: JJ’s purchased a $15,000 truck. JJ’s paid $2,000 down in cash and issued a note payable for the remaining $13,000.
Will Truck increase or decrease?
Will Cash and Notes Payable
increase or decrease?
May 8: JJ’s purchased a $15,000 truck. JJ’s paid $2,000 down in cash and issued a note payable for the remaining $13,000.
May 8: JJ’s purchased a $15,000 truck. JJ’s paid $2,000 down in cash and issued a note payable for the remaining $13,000.
Truck5/8 15,000
Cash5/1 8,000 5/2 2,500
5/8 2,000
Notes Payable5/8 13,000
Truck increases $15,000 with a debit.
Cash decreases $2,000 with a credit.
Notes Payable increases $13,000
with a credit.
May 11: JJ’s purchased some repair parts for $300 on account.
May 11: JJ’s purchased some repair parts for $300 on account.
Will Tools & Equipment increase
or decrease?
Will Accounts Payable increase or
decrease?
May 11: JJ’s purchased some repair parts for $300 on account.
May 11: JJ’s purchased some repair parts for $300 on account.
Tools & Equipment increases $300 with
a debit.
Accounts Payable increases $300 with
a credit.
Tools & Equipment5/2 2,500
5/11 300
Accounts Payable5/11 300
May 18: JJ’s sold half of the repair parts to ABC Lawns for $150, a price equal to JJ’s cost. ABC Lawns agrees to pay JJ’s within 30 days.
May 18: JJ’s sold half of the repair parts to ABC Lawns for $150, a price equal to JJ’s cost. ABC Lawns agrees to pay JJ’s within 30 days.
Will Tools & Equipment increase
or decrease?
Will Accounts Receivable increase
or decrease?
May 18: JJ’s sold half of the repair parts to ABC Lawns for $150, a price equal to JJ’s cost. ABC Lawns agrees to pay JJ’s within 30 days.
May 18: JJ’s sold half of the repair parts to ABC Lawns for $150, a price equal to JJ’s cost. ABC Lawns agrees to pay JJ’s within 30 days.
Tools & Equipment decreases $150 with
a credit.
Accounts Receivable increases $150 with
a debit.
Tools & Equipment5/2 2,500 5/18 150
5/11 300
Accounts Receivable5/18 150
Exhibit 3.1
Overview of the Accounting CycleOverview of the Accounting Cycle
1. Analyze transactions
based on source
documentsChapter 1 and 2
2. JournalizeChapter 3
3. PostChapter 3
9. Prepare post-closing trial balance
Chapter 5
8. CloseChapter 5
7. Prepare financial
statements Chapter 2 through 5
6. Prepare adjusted trial
balanceChapter 4
5. AdjustChapter 4
4. Prepare unadjusted trial
balanceChapter 3
Step 1 Examine source
documents …
Liabilities EquityAssets = +
… and analyze transactions.
Remember this step?Now let’s look at some
additional steps.
Steps in Processing TransactionsSteps in Processing Transactions
Step 4Prepare unadjusted
trial balance.
Step 1Examine source
documents…
Assets Liabilities Equity= +
… and analyze transactions.
Step 2 Record transactions
in a journal.
ACCOUNT NAME: ACCOUNT No.
Date Description PR Debit Credit Balance
Step 3Post the journal
information to a ledger.
Exhibit 3.14
Steps in Processing TransactionsSteps in Processing Transactions
In an actual accounting system, transactions are initially recorded in the journal.
In an actual accounting system, transactions are initially recorded in the journal.
GENERAL JOURNAL
Date Account Titles and ExplanationPR Debit Credit
2003
May 1 Cash 8,000
Capital Stock 8,000
Owners invest cash in the business.
The JournalThe Journal
Recording TransactionsRecording Transactions
Also called original book of entry. The process of recording the transactions is called journalizing. An example follows:
Also called original book of entry. The process of recording the transactions is called journalizing. An example follows:
Page G1Account Titles and Explanations PR Debit Credit
Jan. 1 Cash 30,000 Carol Finlay, Capital 30,000
Investment by owner
2 Supplies 2,500 Cash 2,500
Purchased store supplies for cash
3 Furniture 20,000 Cash 20,000
Purchased furniture for cash
6 Supplies 1,100 Furniture 6,000 Accounts Payable 1,100 Note Payable 6,000
Purchased supplies and furniture on credit
Date2001
General Journal
How To Record TransactionsHow To Record Transactions
Step 1 – Enter the year on the first line at the top of the first column.
Step 1 – Enter the year on the first line at the top of the first column.
Page G1Account Titles and Explanations PR Debit Credit
Jan. 1 Cash 30,000 Carol Finlay, Capital 30,000
Investment by owner
2 Supplies 2,500 Cash 2,500
Purchased store supplies for cash
3 Furniture 20,000 Cash 20,000
Purchased furniture for cash
6 Supplies 1,100 Furniture 6,000 Accounts Payable 1,100 Note Payable 6,000
Purchased supplies and furniture on credit
Date2001
General Journal
Recording TransactionsRecording Transactions
Step 2 and 3 – Enter the month in column one on the first line of the journal entry and the day in column two. Note that entries are recorded in
chronological order (by date).
Step 2 and 3 – Enter the month in column one on the first line of the journal entry and the day in column two. Note that entries are recorded in
chronological order (by date).Page G1
Account Titles and Explanations PR Debit Credit
Jan. 1 Cash 30,000 Carol Finlay, Capital 30,000
Investment by owner
2 Supplies 2,500 Cash 2,500
Purchased store supplies for cash
3 Furniture 20,000 Cash 20,000
Purchased furniture for cash
6 Supplies 1,100 Furniture 6,000 Accounts Payable 1,100 Note Payable 6,000
Purchased supplies and furniture on credit
Date2001
General Journal
Recording TransactionsRecording Transactions
Step 4 – Enter the titles of accounts debited. Account titles are taken from the chart of accounts and are
aligned with the left margin of the Account titles and explanation column. Accounts to be debited are always entered before accounts being credited.
Step 4 – Enter the titles of accounts debited. Account titles are taken from the chart of accounts and are
aligned with the left margin of the Account titles and explanation column. Accounts to be debited are always entered before accounts being credited.
Page G1Account Titles and Explanations PR Debit Credit
Jan. 1 Cash 30,000 Carol Finlay, Capital 30,000
Investment by owner
2 Supplies 2,500 Cash 2,500
Purchased store supplies for cash
3 Furniture 20,000 Cash 20,000
Purchased furniture for cash
6 Supplies 1,100 Furniture 6,000 Accounts Payable 1,100 Note Payable 6,000
Purchased supplies and furniture on credit
Date2001
General Journal
Recording TransactionsRecording Transactions
Step 5 – Enter the debit amount in the Debit column on the same line as the
accounts to be debited.
Step 5 – Enter the debit amount in the Debit column on the same line as the
accounts to be debited.Page G1
Account Titles and Explanations PR Debit Credit
Jan. 1 Cash 30,000 Carol Finlay, Capital 30,000
Investment by owner
2 Supplies 2,500 Cash 2,500
Purchased store supplies for cash
3 Furniture 20,000 Cash 20,000
Purchased furniture for cash
6 Supplies 1,100 Furniture 6,000 Accounts Payable 1,100 Note Payable 6,000
Purchased supplies and furniture on credit
Date2001
General Journal
Recording TransactionsRecording Transactions
Step 6 – Enter the titles of accounts credited. Account titles are indented from the left margin of the Account Titles and Explanation column
to distinguish them from debits.
Step 6 – Enter the titles of accounts credited. Account titles are indented from the left margin of the Account Titles and Explanation column
to distinguish them from debits.Page G1
Account Titles and Explanations PR Debit Credit
Jan. 1 Cash 30,000
Carol Finlay, Capital 30,000 Investment by owner
2 Supplies 2,500 Cash 2,500
Purchased store supplies for cash
3 Furniture 20,000 Cash 20,000
Purchased furniture for cash
6 Supplies 1,100 Furniture 6,000 Accounts Payable 1,100 Note Payable 6,000
Purchased supplies and furniture on credit
Date2001
General Journal
Recording TransactionsRecording Transactions
Step 7 – Enter the credit amount in the Credit column on the same line as the
accounts to be credited.
Step 7 – Enter the credit amount in the Credit column on the same line as the
accounts to be credited.Page G1
Account Titles and Explanations PR Debit Credit
Jan. 1 Cash 30,000
Carol Finlay, Capital 30,000 Investment by owner
2 Supplies 2,500 Cash 2,500
Purchased store supplies for cash
3 Furniture 20,000 Cash 20,000
Purchased furniture for cash
6 Supplies 1,100 Furniture 6,000 Accounts Payable 1,100 Note Payable 6,000
Purchased supplies and furniture on credit
Date2001
General Journal
Recording TransactionsRecording Transactions
Step 8 – Write a brief explanation of the transaction on the line below the entry.
Step 8 – Write a brief explanation of the transaction on the line below the entry.
Page G1Account Titles and Explanations PR Debit Credit
Jan. 1 Cash 30,000 Carol Finlay, Capital 30,000
Investment by owner
2 Supplies 2,500 Cash 2,500
Purchased store supplies for cash
3 Furniture 20,000 Cash 20,000
Purchased furniture for cash
6 Supplies 1,100 Furniture 6,000 Accounts Payable 1,100 Note Payable 6,000
Purchased supplies and furniture on credit
Date2001
General Journal
Recording TransactionsRecording Transactions
Step 9 – Skip a line between each journal entry for clarity.
Step 9 – Skip a line between each journal entry for clarity.
Page G1Account Titles and Explanations PR Debit Credit
Jan. 1 Cash 30,000 Carol Finlay, Capital 30,000
Investment by owner
2 Supplies 2,500 Cash 2,500
Purchased store supplies for cash
3 Furniture 20,000 Cash 20,000
Purchased furniture for cash
6 Supplies 1,100 Furniture 6,000 Accounts Payable 1,100 Note Payable 6,000
Purchased supplies and furniture on credit
Date2001
General Journal
Posting involves copying
information from the
journal to the ledger
accounts.
Posting Journal Entries to the Ledger Accounts
Posting Journal Entries to the Ledger Accounts
Posting EntriesPosting Entries
Entries are then posted from the journal into the general ledger on a transaction by transaction
basis; first the debit, then the credit.
Entries are then posted from the journal into the general ledger on a transaction by transaction
basis; first the debit, then the credit.
#101Account Titles and Explanations PR Debit Credit Balance
Jan. 1 G1 30,000 30,000 2 G1 2,500 27,500 3 G1 20,000 7,500
10 G1 2,200 9,700
Cash Account in the General LedgerDate2001
Posting EntriesPosting Entries
Step 1 – Identify the ledger account that was debited in the journal entry and find it in the
general ledger. Example – first entry on Jan. 1 had a debit to the cash account for $30,000.
Step 1 – Identify the ledger account that was debited in the journal entry and find it in the
general ledger. Example – first entry on Jan. 1 had a debit to the cash account for $30,000.
#101Account Titles and Explanations PR Debit Credit Balance
Jan. 1 G1 30,000 30,000 2 G1 2,500 27,500 3 G1 20,000 7,500
10 G1 2,200 9,700
Cash Date2001
Posting EntriesPosting Entries
Step 2 – Enter the date of the journal entry in this ledger account.
Step 2 – Enter the date of the journal entry in this ledger account.
#101Account Titles and Explanations PR Debit Credit Balance
Jan. 1 G1 30,000 30,000 2 G1 2,500 27,500 3 G1 20,000 7,500
10 G1 2,200 9,700
Cash Date
2001
Posting EntriesPosting Entries
Step 3 – Enter the amount debited from the journal entry into the Debit column of the
ledger account.
Step 3 – Enter the amount debited from the journal entry into the Debit column of the
ledger account.
#101Account Titles and Explanations PR Debit Credit Balance
Jan. 1 G1 30,000 30,000 2 G1 2,500 27,500 3 G1 20,000 7,500
10 G1 2,200 9,700
Cash Date2001
Posting EntriesPosting Entries
Step 4 – Enter the source of the debit in the PR (post-reference) column. The letter G indicates
the entry came from the general journal.
Step 4 – Enter the source of the debit in the PR (post-reference) column. The letter G indicates
the entry came from the general journal.
#101Account Titles and Explanations PR Debit Credit Balance
Jan. 1 G1 30,000 30,000 2 G1 2,500 27,500 3 G1 20,000 7,500
10 G1 2,200 9,700
Cash Date2001
Posting EntriesPosting Entries
Step 5 – Compute and enter the account’s new balance in the Balance column. Remember, a debit balance would be increased by a debit
and decreased by a credit.
Step 5 – Compute and enter the account’s new balance in the Balance column. Remember, a debit balance would be increased by a debit
and decreased by a credit.
#101Account Titles and Explanations PR Debit Credit Balance
Jan. 1 G 30,000 30,000 2 G 2,500 27,500 3 G 20,000 7,500
10 G 2,200 9,700
Cash Account (in general ledger)Date2001
Recording TransactionsRecording Transactions
Step 6 – Finally, enter the ledger account number in the PR column of the journal entry.
Step 6 – Finally, enter the ledger account number in the PR column of the journal entry.
Page G1Account Titles and Explanations PR Debit Credit
Jan. 1 Cash 101 30,000 Carol Finlay, Capital 30,000
Investment by owner
2 Supplies 2,500 Cash 2,500
Purchased store supplies for cash
3 Furniture 20,000 Cash 20,000
Purchased furniture for cash
6 Supplies 1,100 Furniture 6,000 Accounts Payable 1,100 Note Payable 6,000
Purchased supplies and furniture on credit
Date2001
General Journal
GENERAL JOURNAL
Date Account Titles and ExplanationPR Debit Credit
2003
May 1 Cash 8,000
Capital Stock 8,000
Owners invest cash in the business.General LedgerCash
Date Debit Credit Balance2003
May 1 8,000 8,000
Posting Journal Entries to the Ledger Accounts
Posting Journal Entries to the Ledger Accounts
GENERAL JOURNAL
Date Account Titles and ExplanationPR Debit Credit
2003
May 1 Cash 8,000
Capital Stock 8,000
Owners invest cash in the business.General LedgerCapital Stock
Date Debit Credit Balance2003
May 1 8,000 8,000
Posting Journal Entries to the Ledger Accounts
Posting Journal Entries to the Ledger Accounts
GENERAL JOURNAL
Date Account Titles and ExplanationPR Debit Credit
2003
May 2 Tools & Equipment 2,500
Cash 2,500
Purchased lawn mower.
Let’s see what the cash account looks like after posting the cash portion of this transaction for
JJ’s Lawn Care Service.
Let’s see what the cash account looks like after posting the cash portion of this transaction for
JJ’s Lawn Care Service.
Posting Journal Entries to the Ledger Accounts
Posting Journal Entries to the Ledger Accounts
General LedgerCash
Date Debit Credit Balance2003
May 1 8,000 8,000 2 2,500 5,500
This ledger format is referred to as a running balance (as opposed to simple
T accounts).
This ledger format is referred to as a running balance (as opposed to simple
T accounts).
Ledger Accounts After PostingLedger Accounts After Posting
Generally, dollar signs and Rs. Signs are not used in the
journals or ledgers.
Generally, dollar signs and Rs. Signs are not used in the
journals or ledgers.
RoundingRoundingRound numbers in financial
statements to the nearest dollar.
Round numbers in financial statements to the nearest
dollar.
ACCOUNT NAME: ACCOUNT No.
Date Description PR Debit Credit Balance
Formatting ConventionsFormatting Conventions