Refer to income received in advance although services

have not been rendered to the client

Refer to entries used to update the accounts prior to
 unearned income the preparation of financial statements

 adjusting journal entries

Refers to expenses incurred in the current period but

will be paid in the next accounting period

 accrued expense
Steps in the Accounting cycle
1. Identifying and analyzing
2. Journalizing
Refers to expenses already paid but not yet incurred or 3. Posting
used 4. Unadjusted trial balance
5. Adjusting entries
 prepaid expense
6. Adjusted trial balance (and/or Worksheet)
7. Financial statements
8. Closing entries
Refers to acquisition cost (cost of asset) less salvage 9. Post-closing trial balance
value 10. Reversing entries

 depreciable amount
Identifying and analyzing transactions and events

 Only accountable events are recorded.

Refers to losses due to uncollectible accounts Accountable events are those that affect the
assets, liabilities, equity, income or expenses of the
 bad debts/doubtful accounts
business.
 Accountable events are normally identified from
source documents, such as sales invoice, official
A method used where asset is recognized when an receipts, delivery receipts, and the like.
expense is paid in advance
TYPES OF EVENTS
 asset method
1. External events – are transactions that involve
the business and another external party.
2. Internal events – are events that do not involve
A method used where liability is recognized when an external party.
advance payment of income is received

 liability method Journalizing

Journalizing refers to recording an identified

accountable event in the journal by means of a journal
Depreciable cost divided by useful life is equivalent to
entry.
 annual depreciation
Simple and Compound journal entries

 Simple journal entry – contains a single debit

Refers to the recognition of the loss in value of plant of and a single credit element.
fixed asset over its useful life  Compound journal entry – contains two or
more debits or credits.
 depreciation expense
Posting
Posting, the third step in the accounting cycle, is the
process of transferring data from the journal to the
appropriate accounts in the ledger.
Trial balance
A trial balance is a list of general ledger accounts and
their balances. It is prepared to check the equality of
total debits and total credits in the ledger.
Types of Trial balance
A. Unadjusted trial balance – this is prepared
before adjusting entries are made.
B. Adjusted trial balance – this is prepared after
adjusting entries but before the financial
statements are prepared.  
C. Post-closing trial balance – this is prepared after
the closing process.
Errors revealed by a trial balance
1. Journalizing or posting one-half of an entry, i.e.,
a debit without a credit, or vice versa.
2. Recording one part of an entry for a different
amount than the other part.
3. Errors of Transplacement (Slide error) on one
side of an entry.
4. Error of Transposition on one side of an entry.
Errors not revealed by a trial balance
1. Omitting entirely the entry for a transaction
2. Journalizing or posting an entry twice
3. Using wrong account with the same normal
balance as the correct account
4. Wrong computation with the same erroneous
amounts posted to debit and credit sides
BUSINESS PAPERS
These are documents involving
transactions of the business which are used for
recording. Some of the typical business papers are the
following:
OFFICIAL RECEIPT is issued when cash is received by the
business.
CASH VOUCHER is a document used when cash is paid
by the business
CHECKS are negotiable instruments used as a substitute
for cash payments drawn against the company’s current
account.
A STATEMENT OF ACCOUNT is a bill presented to a
customer for service rendered or merchandise given for
which payment is demandable.
PROMISSORY NOTE is a written promise to pay a certain
sum of money at a future date. The maker is the debtor
and it is addressed to the payee or creditor.
ACCOUNTING CYCLE
This consists of a series of steps or procedures
performed in a systematic manner within one year or an
accounting period. The first five steps of the accounting
cycle are illustrated below. Transactions describing the
economic activities are captured in business papers.
These are then analyzed and recorded
in a book called the journal after which it is classified
and posted in another book called the ledger. Balances
are extracted from the general ledger and a trial
balance is prepared. The remaining steps in the
accounting cycle consisting of worksheet preparation
financial statement presentation, adjusting and closing
the books are discussed in chapter 8.
ACTIVITY
1) COLLECT RAW DATA
(gather the economic data about each
transaction)
2) ANALYZE EACH TRANSACTION
3) JOURNALIZE
(record on the journal the economic effects of
each transaction in chronological order)
4) POST TO THE LEDGER
(gather each assets, liability and owner’s equity
in separate accounts)
5) PREPARE A TRIAL BALANCE
(list of account balances to facilitate
preparation of financial reports)
THE CHART OF ACCOUNTS
The account is a device used to
record the increases and decreases affecting
each of the different assets, liabilities and
owner’s equity. The Chart of Accounts is a
listing of accounts titles which guides the
bookkeeper in the recording of the
transactions. The number and the nature of
accounts depend on the type of business
operation.
The accounts are properly arranged with the
assets listed first, followed by the liabilities and
lastly by the owner’s equity. Account numbers
are assigned for each account for easy
reference. To illustrate using the Happy Tour
problem:
THE T ACCOUNT
The simplest form of an
account called the T Account has two sides: one
side is for recording increases and the other
side is for recording decreases, at the center of
the T account is the title of the item. To
illustrate
When an amount is to be recorded on the left
side, we simply say debit the account and when
it is to be recorded on the right side, we say
credit the account. Debit is an accounting term,
which simply means left side of an account,
while credit simply means right side of an
account. What happens when the amount is
placed on the left side or on the right side of an
account? Some accounts are increased on the
debit side while other accounts are increased
on the credit side depending on its position in
the accounting equation:
 To summarize, the following rules for
debit and credit should be observed in
the processing transactions:
 Increases in assets are to be recorded
on the debit side of the account, while
decreases in assets are to be recorded
in the credit side of the account.
 Increases in liabilities are to be
recorded on the credit side of the
account, while decreases in liabilities
are to be recorded on the debit side of
the account.
 Increases in owner’s equity are to be
recorded on the credit side of the
account, while decreases in owner’s
equity are to be recorded on the debit
side.
Take note that every transaction entry must have a
debit equal to a credit no matter how many accounts
are affected just like in the last transaction. This is called
the Double Entry Bookkeeping System.
Let us take a look at the T accounts. Since the
increases and decreases are accumulated for each
particular account at any point of time the balances of
each could be determined. The difference between the
debit total and the credit total is called an account
balance. If the debit total is higher than the credit total
the account balance is a debit balance.
worksheet
A worksheet is an analytical device used to facilitate the
gathering of data for adjustments, the preparation of
financial statements, and closing entries.
Financial statements
The financial statements are the end product of the
accounting process. Information from the journal and
the ledger are meaningless to most users unless they
are summarized and communicated through the
financial statements.
The major processes in accounting are summarized
below:
  Statement of financial position (or Balance
sheet) – shows information on assets, liabilities
and equity.
 Statement of profit or loss (or Income
statement) – shows information on income and
expenses, and consequently, the profit or loss
for the period.
Closing entries
Closing entries are entries prepared at the end of the
accounting period to “zero out” all nominal accounts in
the ledger. This is done so that the transactions during
the period will not commingle with the transactions in
the next period.
Closing entries are prepared as follows:
 All income accounts are debited and all expense
accounts are credited. The resulting balance is
recorded in a clearing account called the
“Income summary.”
 The balance of “Income summary” is closed to
the “Owner’s capital” account.
 Any balance in the “Owner’s drawings” account
is closed to the “Owner’s capital” account.
REVERSING ENTRIES
Reversing entries are entries usually made on the first
day of the next accounting period to reverse certain
adjusting entries made in the immediately preceding
period
Adjusting entries that may be reversed
1. Accruals for income or expense
2. Prepayments initially recorded using the
expense method
3. Advanced collections initially recorded using the
income method
ACCOUNTING SYSTEM-SPECIAL JOURNALS
Processing Transactions –
Manual System
Similar transactions are grouped together and recorded
in special journals
- Sales journal (all sales on account)
- Purchases journal (all purchases on account)
- Cash receipts journal
- Cash disbursements journal
- General journal
SPECIAL JOURNALS
Accounting journals used to record one specific type of
transaction
- Save time
- Save money
Sales on account - Sales journal-S
Cash receipts- Cash receipts journal- CR
Purchases on account- Purchases journal- P
Cash payments- Cash payments journal- CP
All others-General journal-J
Subsidiary ledgers
Provides details on individual balances
Customers (accounts receivable)
Suppliers (accounts payable)
Control account
The general ledger account
Equals the sum of the individual account balances in a
subsidiary ledger
GENERAL JOURNAL
Used for transactions that do not fit into any of the
special journals including adjusting and closing entries
Balancing the Ledgers
At the end of the accounting period:
Total debits and credits of account balances in the
general ledger are equal
Control account balances are equal to the sum of the
appropriate subsidiary ledger accounts
CR -Cash sale of inventory
CP-Payment of rent
J-Depreciation of computer equipment
P- Purchases of inventory on account
CR-Collection of accounts receivable
J-Expiration of prepaid insurance
S-Sale on account
CP-Payment on account
CP-Cash purchase of inventory
CR-Collection of dividend revenue earned on an
investment
CP-Prepayment of insurance
CR-Borrowing money on a long-term note payable
P-Purchase of equipment on account
S-cost of goods sold along with a credit sale
1.In which special journal should the
following transaction be recorded: Adjustment
to prepaid rent at the end of an accounting
period?
General journal
2. In which special journal should the
following transaction be recorded: Cash
purchase of equipment?
Cash disbursements Journal
3. In which special journal should the
following transaction be recorded: Purchase
of supplies for cash?
Cash disbursements journal
4. In which special journal should the
following transaction be recorded: Cash
collected from credit account customer?
Cash receipts journal
 
5. In which special journal should the
following transaction be recorded: Services
are purchased on account?
\Purchases journal
6. In which special journal should the
following transaction be recorded: Sales are
invoiced to a customer on account?
Sales journal
7. In which special journal should the
following transaction be recorded:
Depreciation expense for the accounting
period is recorded?
General journal
8. In which special journal should the
following transaction be recorded: Paid
insurance annually in advance?
Cash disbursements journal
9. In which special journal should the
following transaction be recorded: Adjusted
prepaid insurance account at end of
accounting period?
General journal
10. In which special journal should the
following transaction be recorded: Sale to
customer for cash?
Cash receipts journal

 In a firm that uses special journals, a sale of
merchandise on credit is recorded in the sales journal
In a firm that uses special journals, the acceptance of a
return of merchandise from a credit customer is recorded
in the general journal
 In a firm that uses special journals, an allowance given
for damaged merchandise is recorded in the general
journal
 In a firm that uses special journals, the collection of
sums on account from credit customers is recorded in the
cash receipts journal
In a sales journal used to record taxable sales, the total of
the Accounts Receivable column should equal
the sum of the totals of the Sales Tax Payable Column
and the Sales Column
To find the balance due from an individual customer, the
accountant would refer to the accounts receivable
subsidiary ledger
 If a firm had sales of $50,000 during a period and sales
returns and allowances of $4,000, its net sales were
$46,000
 After all postings have been made, the total of the
schedule of accounts receivable should equal
the balance of the Accounts Receivable account in the
general ledger
 A wholesale business sells goods with a list price of
$900 and a trade discount of 40 percent. The net price is
$540.
Kay Sadia sold merchandise for $8,750 subject to a 6%
sales tax. The entry in the sales journal will include a
debit to Accounts Receivable for
$9,275.00
ADJUSTING ENTRIES
1.What type of entry will increase the normal
balance of the general ledger account Service
Revenues?
Credit
2.What type of entry will increase the normal
balance of the general ledger account that reports
the amount owed as of the balance sheet date for a
company's accrued expenses?
CREDIT The amount owed for accrued expenses is
reported in a liability account such as Accrued
Expenses Payable. Since a liability account is
expected to have a credit balance, a credit entry will
increase the normal balance. [Recall that liabilities
are on the right side of the accounting equation.
Credit entries appear on the right side of a T-
account.]
What type of entry will increase the normal
balances of the general ledger accounts Electricity
Expense, Insurance Expense, Interest Expense, and
Repairs Expense?
DEBIT
What type of accounts are Interest Receivable and
Fees Receivable?
ASSET
What type of entry will decrease the normal
balances of the general ledger accounts Interest
Receivable and Fees Receivable?
CREDIT
What type of accounts are Deferred Revenues and
Unearned Revenues?
LIABILITIES
Accounts such as Deferred Revenues, Unearned
Revenues, and Customer Deposits
are liability accounts. As with liability accounts, the
normal balance will be a credit balance.
Under the accrual method of accounting, the
accounts such as Unearned Revenues are necessary
when a company receives money from a customer
in advance of the company earning the money.
(Since the money has not yet been earned, it cannot
be reported as revenues on the income statement.)
The liability account communicates that a company
has an obligation to provide its customers with
goods or services or return the money to the
customers.
What type of accounts are Prepaid Insurance,
Prepaid Advertising, and Prepaid Expenses?
ASSET
What type of entry will decrease the normal
balances of the accounts Prepaid Insurance and
Prepaid Expenses, and Insurance Expense?
CREDIT
What type of accounts are Accumulated
Depreciation and Allowance for Doubtful
Accounts?
CONTRA ASSET
What type of entry will increase the balances that
are normally found in the accounts Accumulated
Depreciation and Allowance for Doubtful
Accounts?
CREDIT
In the case of a company's accrued interest expense,
which of the following occurs first?
INCURRING THE INTEREST EXPENSE
An accrued expense is an expense (and a liability)
which was incurred by a borrower but the interest
has not been recorded.
In the case of a bank's accrued interest revenues,
which occurs first?
Earning The Interest Revenues
Accrued revenues are recorded because the bank
has earned both the interest revenue and a related
receivable and neither has yet been recorded by the
bank
In the case of a company deferring insurance
expense, which occurs first?
Paying The Insurance Company
Deferred insurance expense is the result of paying
the insurance premiums at the start of an insurance
coverage period. The amount of insurance
premiums that have not expired as of the balance
sheet date should be reported in an asset account
such as Prepaid Insurance. [As the prepaid
insurance premiums expire an adjusting entry
should be written to credit the asset Prepaid
Insurance and debit Insurance Expense.]
Which of the following will be included in the
adjusting entry to accrue interest expense?
CREDIT INTEREST PAYABLE
Which of the following will be included in the
adjusting entry to accrue interest income or interest
revenues?
DEBIT INTEREST RECEIVABLE
The adjusting entry that reduces the balance in
Prepaid Insurance will also include which of the
following?
DEBIT INSURANCE PAYABLE
As the debit balance in the asset account Prepaid
Insurance expires, there will need to be an adjusting
entry to 1) debit Insurance Expense, and 2) credit
Prepaid Insurance.
The adjusting entry that reduces the balance in
Deferred Revenues or Unearned Revenues will also
include which of the following?
CREDIT TO FEES EARNED
As the deferred or unearned revenues become
earned, the credit balance in the liability account
such as Deferred Revenues needs to be reduced.
Hence, the adjusting entry to record these earned
revenues will include 1) a debit to Deferred
Revenues, and 2) a credit to Fees Earned.
the ending balance in the account Prepaid Insurance
is expected to report which of the following?
THE UNEXPIRED PORTION OF THE
INSURANCE PREMIUMS PAID
The ending balance in the asset account Prepaid
Insurance should be the cost of the insurance
premiums that have been paid and which have not
yet expired (or have not yet been used up).
The ending balance in the account Deferred
Revenues (or Unearned Fees) should report which
of the following?
The Fees Received In Advance Which Are Not
Yet Earned
When customers pay a company in advance, the
company credits Unearned Revenues. Then as the
company earns some of the revenues, the account
Unearned Revenues will be debited and an income
statement account such as Service Revenues or Fees
Earned will be credited. Thus, the remaining credit
balance in Unearned Revenues is the amount
received but not yet earned.

Which type of adjusting entry is often reversed on

the first day of the next accounting period?
ACCRUAL
For example, if a company has incurred
commissions expense on December's sales, but will
not pay the commissions until January 25, the
company will write an accrual type adjusting entry
for December’s financial statements. On January 25
the company will write a check to pay those
commissions. To avoid having two entries for
December's commissions, it is common practice on
the first day of the month following the accrual
adjusting entry to record a reversing entry.
(Deferrals do not pose the risk of double counting
expenses or revenues.)

Typically an adjusting entry will include which of

the following?
One Balance Sheet Account And One Income
Statement Account
Nearly all adjusting entries involve a minimum of
one balance sheet account and a minimum of one
income statement account.