The Accounting Cycle

Capturing Economic Events

Chapter 3

Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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The Role of Accounting Records
Establishes
Establishesaccountability
accountabilityfor
forassets
assets
and
andtransactions.
transactions.

Keeps
Keepstrack
trackof
ofroutine
routinebusiness
business
activities.
activities.

Obtains
Obtainsdetailed
detailedinformation
informationabout
aboutaa
particular
particulartransaction.
transaction.

Evaluates
Evaluatesefficiency
efficiencyand
and
performance
performancewithin
withincompany.
company.

Maintains
Maintainsevidence
evidenceof
ofaacompany’s
company’s
business
businessactivities.
activities.
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The Ledger

Accounts
Accounts are
are
Cash individual
individual records
records
showing
showing increases
increases
Accounts and
and decreases.
decreases.
Payable

The
The entire
entire group
group of
of
Capital accounts
accounts is is kept
kept
Stock
together
together in in an
an
accounting
accounting record
record
called
called aa ledger.
ledger.
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 The Use of Accounts

Increases are recorded

on one side of the T Title of Account

account, and decreases Left Right

are recorded on the or or
Debit Credit
other side. Side Side

3-4
Debit and Credit Entries
Debits and credits affect accounts as follows:

A = L + OE
ASSETS LIABILITIES EQUITIES
Debit Credit Debit Credit Debit Credit
for for for for for for
Increase Decrease Decrease Increase Decrease Increase

3-5
 Double Entry AccountingThe Equality
of Debits and Credits

A = L + OE
=
Debit Credit
balances balances

In
In the
the double-entry
double-entry accounting
accounting system,
system,
every
every transaction
transaction is
is recorded
recorded by
by equal
equal
dollar
dollar amounts
amounts of
of debits
debits and
and credits.
credits.
3-6
The Journal
In
In an
an actual
actual accounting
accounting system,
system,
transactions
transactions are
are initially
initially recorded
recorded in
in the
the
journal.
journal.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
2015
Jan 20 Cash 80,000
Capital Stock 80,000
Owners invest cash in the business.
3-7
 Posting Journal Entries to the
Ledger Accounts
GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
2015
Jan 20 Cash 80,000
Capital Stock 80,000
General
Owners invest Ledger
cash in the business.
Cash
Date Debit Credit Balance
2015
Jan 20 80,000 80,000
3-8
 Posting Journal Entries to the
Ledger Accounts
GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
2015
Jan 20 Cash 80,000
Capital Stock 80,000
General
Owners invest Ledger
cash in the business.

Capital Stock
Date Debit Credit Balance
2015
Jan 20 80,000 80,000
3-9
Ledger Accounts After Posting
General Ledger
Cash
Date Debit Credit Balance
2015
Jan 20 80,000 80,000
21 52,000 28,000

TT accounts
accounts areare simplified
simplified versions
versions of
of
the
the ledger
ledger account
account that
that only
only show
show the
the
debit
debit and
and credit
credit columns.
columns.
3-10
 What is Net Income?
Net
Net income
income is
is not
not an asset it’s
an asset it’s an
an increase
increase
in
in owners’
owners’ equity
equity from
from profits
profits of
of the
the
business.
business.

A = L + OE
Increase Decrease Increase

As income is earned, Net income

either an asset is always results in
increased or a liability is the increase of
decreased. Owners’ Equity
3-11
Retained Earnings

A = L + OE
Capital Retained
Stock Earnings

The balance in the Retained Earnings account

represents the total net income of the corporation
over the entire lifetime of the business, less all
amounts which have been distributed to the
stockholders as dividends.

3-12
Revenue and Expenses
The price for
goods sold
and services Increases
rendered during a owners’ equity.
given accounting
period.

The costs of
goods and Decreases
services used up owner’s equity.
in the process of
earning revenue.
3-13
 The Matching Principle: When
To Record Revenue

Matching Principle
Revenue should be
recognized at the time goods
are sold and services are
rendered.
Expenses should be
recorded in the period in
which they are used up.

3-14
The Accrual Basis of Accounting
Current Future
Accounting Period Accounting Period

Jan.
Jan. 1,
1, 2015
2015 Dec.
Dec. 1,
1, 2015
2015 Jan.
Jan. 1,
1, 2016
2016 Dec.
Dec. 1,
1, 2016
2016

The
The income
income statement
statement
Cash
Cash is
is received
received or
or paid
paid But . . .
reports
reports revenue
revenue or
or
here
here expense
expense here
here

OR

The
The income
income statement
statement But . . . Cash
Cash is
is received
received or
or paid
paid
reports
reports revenue
revenue oror here
here
expenses
expenses here
here
3-15
End of Chapter 3

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