ACCOUNTING RECORDS AND SYSTEMS

CHAPTER 3
ACCOUNTING CYCLE

 The accounting cycle is the process of

recording your business’s financial
activities.
 The accounting cycle looks back in
time at the end of a designated period.
 The accounting cycle makes accounting
easier, breaking your bookkeeping
down into smaller tasks.
THE ACCOUNT

 A format used for calculating net change in an item (e.g.,

cash, inventory, wage expense).
 Simplest form is T-account.
 Depending on the type of account increases are listed on
one side; decreases listed on the other side
PERMANENT ACCOUNTS

 Also called real accounts or balance sheet accounts.

 Reported on balance sheet.
 Since they are carried forward into next accounting period, they
are in essence permanent accounts.

Assets Liabilities Equity

TEMPORARY ACCOUNTS

 Also known as nominal accounts

 Helps summarize operating activity or operations of the business
over a period
 Avoids cluttering income statement
 Why temporary?
 At end of accounting period, balances are transferred to the income
statement. Therefore, balances at beginning are zero.
TEMPORARY ACCOUNTS

REVENUES EXPENSES

Operating Non-Operating Operating Non-Operating

Generated from Eg: Cost of Goods Sold

Business operations Rent
Electricity
PERSONAL ACCOUNTS

Personal Accounts are those accounts which are either directly

or indirectly related to:
 an individual
 a company or firm
 organization
DEBIT AND CREDIT

 Left hand side of an account arbitrarily called debit side

 Right hand side is credit side
ACCOUNT NAME
DEBIT CREDIT
 To “debit” is to record on left hand side
 To “credit” is to record on right hand side

For each transaction, DEBIT must EQUAL CREDIT

 Effect of Transactions
on
PERMANENT, TEMPORARY AND PERSONAL
ACCOUNTS
PERMANENT ACCOUNT

Increase (decrease) assets with debit (credit)

Increase (decrease) liabilities and equity with credit (debit) OR

For ASSETS: Debit What Comes In, Credit What Goes Out
For LIABILITIES and EQUITY: Credit What Comes In, Debit What Goes Out
TEMPORARY ACCOUNTS

• Revenues and expenses can be viewed as extension of Owners’ equity

• Why?
• Revenues increase owner’s equity (retained earnings)
• Expenses decrease owner’s equity (retained earnings)

Debit All Expenses And Losses, Credit All Incomes And Gains
PERSONAL ACCOUNT

Debit The Receiver, Credit The Giver

QUESTIONS:
COMPREHENSIVE ILLUSTRATION (PG. 80) AND REVIEW PROBLEM (PG. 98)

 PERMANENT ACCOUNTs: Assets, Liabilities and Equity

 For ASSETS: Debit What Comes In, Credit What Goes Out
 For LIABILITIES and EQUITY: Credit What Comes In, Debit What Goes Out

 TEMPORARY ACCOUNTS: Revenues and Expenses

 Debit All Expenses And Losses, Credit All Revenues And Gains

 PERSONAL ACCOUNTS:
 Debit The Receiver, Credit The Giver
 GENERAL
LEDGER
Some accounts may be in summary form
Detail or subsidiary ledgers may be kept
as required

SAMPLE
 CHART OF
ACCOUNTS

List of all accounts

May contain several levels of detail

SAMPLE 15
ADJUSTING ENTRIES

 Modification of account balances at end of period to fairly

reflect financial situation.

Example:
 Accrued Expense: It is an expense recognized in the books before it is paid. (L)
 Unearned Revenue: It is money received by an individual or company for a
service or product that has yet to be provided or delivered. (L)
ADJUSTING ENTRY FOR DEPRECIATION

Recollect: Ribbons an’ Bows case

Carmen purchased $2,000 of computer on April 1 which expected

to have a useful life of 2 years and $0 scrap value.
CLOSING ENTRIES

 Closing entries are journal entries made at the end of an

accounting period to reflect zero balances in the temporary
accounts.
 Temporary accounts are closed out to the Income statement.
 Income statement is then closed out to Equity.
TRIAL BALANCE

 Prepared after original entries are journalized and then posted to

ledger.
 List of all accounts and their (normal) ending balance:
 Assets (debit balance)
 Liabilities (credit balance)
 Owners’ equity (credit balance)
 Revenues (credit balance)
 Expenses (debit balance)
SAMPLE

TRIAL BALANCE
TRIAL BALANCE

Why prepare?
 Shows equality of debits and credits (i.e., maintained integrity of
accounting equation).
 But still could be errors.
 Convenient summary for making adjusting entries and preparing
financial statements.
FINANCIAL STATEMENT PREPARATION

 Income Statement
 Balances in temporary accounts prior to closing

 Balance Sheet
 Balances in permanent accounts
SUMMARY OF ACCOUNTING CYCLE
1. Analyze transactions
2. Journalize original entries - Record chronologically in journal
3. Post General ledger entries - Organize by account
4. Create unadjusted Trial Balance
5. Post adjusting entries - Per matching concept
6. Post closing entries - Close out temporary accounts
7. Prepare final Trial Balance
8. Prepare financial statements
OBJECTIVES OF ACCOUNTING SYSTEM

 Process information efficiently (i.e., low cost).

 Obtain reports quickly.
 Ensure a high degree of accuracy.
 Minimize possibility of theft or fraud.