Chapter

THE ACCOUNTING
3 CYCLE: CAPTURING
ECONOMIC EVENTS
 Last Session
The Process of recording, Processing and
recoding of accounting information
The Accounting Cycle
Stages of Accounting Cycle
Practice Questions
 Topics will be covered today
Accruals and Deferrals
Adjusting Entries
Adjusted Trial Balance
First, however, lets look at...

The
Accounting
Cycle
 The Accounting Cycle

Make end-of-
Journalize year
Post entries to Prepare trial
transactions. adjustments.
the ledger balance.
accounts.

Prepare after-closing Journalize and Prepare Prepare adjusted

trial balance. post closing financial trial balance.
entries. statements.
Types of Ledger Accounts

Assets

Liabilities

Stockholders Equity

Revenues

Expenses
Stage 1: General Journal Page
GENERAL JOURNAL
Page:

Date Description PR Debit Credit

 The Journal

In an actual accounting system, transactions

are initially recorded in the journal.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

2005
May 1 Cash 8,000
Capital Stock 8,000
Owners invest cash in the business.
 Stage 2: The Use of T-
Accounts

Increases are Title of Account

recorded on one
side of the T- Left Right
account, and or or
Debit Credit
decreases are Side Side
recorded on the
other side.
Ledger (T Accounts)
Stage 3: Trial Balance Illustration
First Company
Trial Balance
12/31/X8

Debits Credits
Cash $ 500
Accounts Receivable 1,200
Equipment 3,800
Accounts Payable $ 700
Notes Payable 1,450
Capital Stock 3,000
Retained Earnings - 1/1/X8 -
Dividends 250
Revenues 11,000
Salary Expense 5,000
Utility Expense 3,000
Rent Expense 2,400
$ 16,150 $ 16,150
Practice Question
 Practice Question
July 1. Owner invested PHp 500,000 cash along with computer
equipment that had a market value of php. 120,000 two years ago but
was now worth Php. 100,000 only.
July 8. Completed awork for a client and immediately collected the php.
32,000 cash.
July 10. Completed work for a client and sent a bill for php. 27,000 to be
paid within 30 days.
July 12. Purchased additional equipment for php. 8,000 in cash.
July 15. Paid an assistant php. 6,200 cash as wages for 15 days.
July 28. Owner withdrew php. 500 cash for personal use.
July 30. Completed work for another client who paid only php. 40,000 for
50% of the system design.
July 31. Paid salary of assistant php. 700.
July 31. Received PLDT bill, php. 1,800 and Meralco bill php. 3,800.
Required:
1. Record Business Transactions in General Journal
2. Develop the Ledger Accounts (T Accounts)
3. Trail Balance
Chapter
THE ACCOUNTING
4 CYCLE: ACCRUALS
AND DEFERRALS
 At the end of the
period, we need to
make adjusting entries
to get the accounts up
to date for the financial
statements.
 Adjusting Entries

Adjusting Every
entries are adjusting
needed whenever entry involves a
revenue or expenses change in either a
affect more than one revenue or expense
accounting and an asset
period. or liability.
 Types of Adjusting Entries

Converting Converting
assets to liabilities to
expenses revenue

Accruing Accruing
unpaid uncollected
expenses revenues
 Converting Assets to
Expenses

Examples Include:
Depreciation
Supplies
Expiring Insurance Policies
 Converting Assets to Expenses

Initially, costs that benefit more than one

accounting period are recorded as assets.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

Jan. 1 Unexpired Insurance 2,400
Cash 2,400
Purchase a one-year insurance policy.
 Converting Assets to Expenses

The costs are expensed as they are used to

generate revenue.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

Monthly Adjusting Entry for Insurance
Jan. 31 Insurance Expense 200
Unexpired Insurance 200
Insurance expense for January.
 The Concept of Depreciation
Depreciable assets are physical objects
that retain their size and shape but lose
their economic usefulness over time.

Depreciation is the systematic allocation of

the cost of a depreciable asset to expense.
 Depreciation Is Only an
Estimate
JJs Lawn Care Service would make the
following adjusting entry.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

May 31 Depreciation Expense: Equipment 50
Accumulated Depreciation: Equipment 50
To record one month's depreciation.

Contra-asset
 Depreciation Is Only an
Estimate
JJs $15,000 truck is depreciated over 60
months as follows:

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

May 31 Depreciation Expense: Truck 250
Accumulated Depreciation: Truck 250
To record one month's depreciation.

$15,00060 months = $250 per month

 Converting Liabilities to
Revenue
Initially, revenues that benefit more than one
accounting period are recorded as liabilities.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

Jan. 1 Cash 6,000
Unearned Rental Revenue 6,000
Collected $6,000 in advance for rent.
 Converting Liabilities to
Revenue
Over time, the revenue is recognized as it is
earned.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

Monthly Adjusting Entry for Rent Revenue
Jan. 31 Unearned Rental Revenue 500
Rental Revenue 500
Rental revenue for January.
Accruing Unpaid Expenses

Hey, when do
we get paid?
Examples Include:
Interest
Wages and Salaries
Property Taxes
 Accruing Unpaid Expenses

Initially, an expense and a liability are

recorded.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

May 31 Wages Expense 3,000
Wages Payable 3,000
To accrue wages owed to employees.
 Accruing Unpaid Expenses

The liability is extinguished when the debt is

paid.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

June 2 Wages Expense (for June) 2,000
Wages Payable (accrued in May) 3,000
Cash 5,000
Weekly payroll for May 29-June 2.
 Accruing Uncollected
Revenue

Examples Include:
Interest Earned
Work Completed But Not
Yet Billed to Customer
 Accruing Uncollected Revenue

Initially, the revenue is recognized and a

receivable is created.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

Jan. 31 Interest Receivable 170
Interest Revenue 170
To recognize interest revenue.
 Accruing Uncollected Revenue

The receivable is collected in a future period.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

Feb. 15 Cash 320
Interest Revenue (for February) 150
Interest Receivable (accrued Jan. 31) 170
To record interest received.
 Accruing Income Taxes Expense: The Final
Adjusting Entry
As a corporation earns taxable income, it
incurs income taxes expense, and also a
liability to governmental tax authorities.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

Dec. 31 Income Taxes Expense 780
Income Taxes Payable 780
Estimated income taxes applicable to
taxable income earned in December.
 The Concept of Materiality

An item is material if knowledge of the

item might reasonably influence the
decisions of users of financial statements.

Many companies
immediately charge
the cost of Lightbulbs
immaterial items to
expense.
Supplies
 Adjusted Trial Balance
JJ's Lawn Care Service
Adjusted Trial Balance All balances
May 31, 2005
Cash $ 3,925 are taken from
Accounts receivable
Tools & equipment
75
2,650
the ledger
Accum. depreciation: tools & eq. $ 50 accounts on
Truck 15,000
Accum. depreciation: truck 250
May 31 after
Notes payable 13,000 preparing the
Accounts payable 150
Capital stock 8,000 two
Dividends
Sales revenue
200
750
depreciation
Gasoline expense 50 adjusting
Depreciation exp.: tools & eq. 50
Depreciation exp.: truck 250 entries.
Total $ 22,200 $ 22,200
Perform Adjusting Entries
Un-Adjusted Trail Balance