1

Review of the
Accounting Cycle
 2
Learning Goals

• Outline the steps in the accounting

cycle
• Analyze business transactions
• Prepare accounting documents
• Prepare financial statements
 The Accounting Cycle

 The accounting cycle is a methodical set

of rules to ensure the accuracy and
conformity of financial statements.

The accounting cycle is started and

completed within an accounting period.
The period is a predetermined range of
time including each month, each quarter
and each fiscal year.
Irwin/McGraw-Hill 3 3
© The McGraw-Hill Companies, Inc., 2002
 The Accounting Cycle

 The transactions are added during the

accounting cycle, while the remainder of
the accounting cycle is typically completed
towards the end of the accounting period.
 Public entities are required to submit
financial statements by certain dates.
Therefore, their accounting cycle revolves
around reporting requirement dates.

Irwin/McGraw-Hill 4 © The McGraw-Hill Companies, Inc., 2002

 The Accounting Cycle
Prepare
Start post-closing
trial balance

Analyze POST
transactions
Closing
Entries
Journalize
Prepare
Post statements

Prepare Prepare
Adjusting
unadjusted POST adjusted
Entries
trial balance trial balance
 During the Accounting Period

Source Transaction Record in Post to

Documents Analysis Journal Ledger

At the End of the Accounting Period

Financial Adjusted Record & Post Unadjusted

Statements Trial Balance Adjusting Trial Balance
Entries

The
At the End Accounting
of the Year Processing
Close Temporary Post-Closing
Cycle
Accounts Trial Balance
 The Accounting Equation

A = L + OE
+ Revenues - Expenses
+ Owner Investments - Owner Withdrawals
+ Gains - Losses
 The Account and its Analysis

Assets
Assets Liability
Liability Equity
Equity
Asset
Accounts
Accounts
Accounts = Liability
Accounts
Accounts
Accounts + Equity
Accounts
Accounts
Accounts
 The Account and its Analysis

Assets = Liabilities
Liabilities + Equity
Equity

+ – + –
Common
Common Dividends
Dividends Revenues
Revenues Expenses
Expenses
Stock
Stock
 Asset Accounts

Cash
Accounts
Land
Receivable

Buildings
Asset
Asset Notes
Receivable
Accounts
Accounts
Prepaid
Equipment
Accounts
Supplies

2-10
 Liability Accounts

Accounts
Accounts Notes
Notes
Payable
Payable Payable
Payable

Liability
Liability
Accounts
Accounts
Accrued Dividends
Dividends
Accrued
Liabilities Payable
Payable
Liabilities

Unearned
Unearned
Revenue
Revenue
2-11
 Equity Accounts

Retained
Retained
Earnings
Earnings
Common
Common Dividends
Dividends
Stock
Stock Declared
Declared
Equity
Accounts
Revenues
Revenues Expenses
Expenses

2-12
 13
Double-Entry Accounting

A system of recording transactions in a way that

maintains the equality of the accounting
equation.
Assets = Liabilities + Owners’ Equity
or

A = L + OE
 14

Double-Entry Accounting Facts

 For every transaction, there must be

at least one debit and one credit.
 Debits must always equal credits for
each transaction.
 Debits are always entered on the left
side of an account and credits are
always entered on the right side.
 Double-Entry Accounting

Assets
Assets = Liabilities
Liabilities + Equity
Equity

ASSETS LIABILITIES EQUITIES

Debit Credit Debit Credit Debit Credit

+ - - + - +
 The Accounting Equation 16

with T-Accounts

Assets = Liabilities + Owners’ Equity

DR CR DR CR DR CR
+ - - + - +
 17

Journalizing
 Identify the accounts involved with an event or
transaction.
 Determine whether each account increased or
decreased.
 Determine the amount by which each account
was affected.
1. Analyze Transactions and 18

Business Documents
 Transactions are the
exchange of goods or
services between entities,
as well as other events that
have an economic impact
on a business.
 Business Documents are
records that are evidence
of transactions.
 19

2. Journalize Transactions
 A journal is an accounting record in which
business transactions are entered in
chronological order.
 Journal entries record transaction information;
debits equal credits.
 20

Journal Entries
 A journal is an accounting record in which
business transactions are entered in
chronological order.
 Journal entries record transaction information;
debits equal credits.

General Journal Entry Format

Date Debit Entry.................................. xx
Credit Entry............................. xx
Explanation.
Journalizing Transactions


Transaction
Transaction 
Titles
Titles of
of Affected
Affected
Date
Date Accounts
Accounts

 
Dollar
Dollar amount
amount of
of debits
debits
Transaction
Transaction
explanation and
and credits
credits
explanation
 22

Journal Page 1
Post
Date Description Ref. Debits Credits
Jan 1 Cash 5
Revenue 5
Received cash for
services provided.

4 Supplies 12
Accounts Payable 12
Purchased supplies
on account.

10 Accounts Payable 12
Cash 12
Paid for supplies.
 23

Example: Journal Entry

Merchandise is sold to a customer on
account for $75. The cost of the product to
the firm is $60. Make the journal entry.
 24

Example: Journal Entry

Merchandise is sold to a customer on
Merchandise is sold
account for $75. Thetocost
a customer on is
of the product
account
$60. for $75.theThe
Make cost entry.
journal of the product to
the firm is $60. Make the journal entry.
Jan. 1 Accounts Receivable..................... 75
Sales Revenue.......................... 75
Sold merchandise on account.
1 Cost of Goods Sold...................... 60
Inventory................................. 60
To record cost and reduce
inventory.
 Analyzing Transactions

Analysis:

Double entry:
(1) Cash 101 30,000
Common stock 301 30,000
Posting:
Cash 101 Common Stock 301
(1) 30,000 (1) 30,000
 Analyzing Transactions

Analysis:

Double entry:
(2) Supplies 126 2,500
Cash 101 2,500
Posting:
Supplies 126 Cash 101
(2) 2,500 (1) 30,000 (2) 2,500
 Analyzing Transactions

Analysis:

Double entry:
(3) Equipment 167 26,000
Cash 101 26,000
Posting:
Equipment 167 Cash 101
(3) 26,000 (1) 30,000 (2) 2,500
(3) 26,000
 Analyzing Transactions

Analysis:

Double entry:
(4) Supplies 126 7,100
Accounts payable 201 7,100

Posting:
Supplies 126 Accounts Payable 201
2,500 (4) 7,100
(4) 7,100
 Analyzing Transactions

Analysis:

Double entry:
(5) Cash 101 4,200
Consulting Revenue 403 4,200

Posting:
Consulting Revenue 403 Cash 101
(5) 4,200 (1) 30,000 (2) 2,500
(5) 4,200 (3) 26,000
 Analyzing Transactions

Analysis:

Double entry:
(6) Rent Expense 640 1,000
Cash 101 1,000

Posting:
Rent Expense 640 Cash 101
(6) 1,000 (1) 30,000 (2) 2,500
(5) 4,200 (3) 26,000
(6) 1,000
 31

3. Post Journal Entries to Accounts

 Posting is the process of transferring

amounts from the journal to the general
ledger.
 A ledger is a book of accounts in which
data from transactions recorded in the
journals are posted, classified, and
summarized.
 A chart of accounts lists all accounts used
by the company.
 32
Chart of Accounts
ASSETS (100-199) Long-Term Liabilities (220-239)
Current Assets (100-150) 222 Mortgage Payable
101 Cash
105 Accounts Receivable OWNERS’ EQUITY (300-399)
107 Inventory 301 Capital Stock
330 Retained Earnings
Long-Term Assets (151-199)
151 Land SALES (400-499)
152 Building 400 Sales Revenue

LIABILITIES (200-299) EXPENSES (500-599)

Current Liabilities (200-219) 500 Cost of Goods Sold
201 Notes Payable 523 Rent Expense
202 Accounts Payable 528 Advertising Expense
573 Utility Expense
 The Account and its Analysis

An
An account
account is is aa
record
record of of
increases The
The general
general
increases and and ledger
decreases
decreases in in aa ledger isis aa record
record
specific containing
containing all
all
specific asset,
asset, accounts
liability,
liability, equity,
equity, accounts used used byby
revenue, the
the company.
company.
revenue, or or
expense
expense item.
item.

2-33
 Debits and Credits
A T-account represents a ledger account
and is a tool used to understand the effects
of one or more transactions.

T- Account
(Left side) (Right side)
Debit Credit
 General Ledger

The “T” account is a shorthand format of an account

used by accountants to analyze transactions.
 Posting Journal Entries

1 Identify the debit account in ledger.

 Posting Journal Entries

2 Enter the date.

 Posting Journal Entries

3 Enter the amount and description.

 Posting Journal Entries

4 Enter the journal reference.

 Posting Journal Entries

5 Compute the balance.

 Posting Journal Entries

6 Enter the ledger reference.

 Recall:
Journalizing & Posting Transactions
Assets
Assets = Liabilities
Liabilities + Equity
Equity
T- Account
(Left side) (Right side)
Debit Credit

Step 1: Analyze transactions Step 2: Apply double-

and source documents. entry accounting

ACCOUNT NAME: ACCOUNT No.

Date Description PR Debit Credit Balance

Step 4: Post entry to ledger

Step 3: Record journal entry
 43
The Reporting Phase

 A trial balance is prepared.

 Adjusting entries are recorded.
 Financial statements are prepared.
4. Determine Account Balances 44

and Prepare a Trial Balance

 Determine the account balance for each
T-Account.
 A Trial Balance is a listing of all
account balances. It provides a means
to assure that debits equal credits.
 Double-Entry Accounting
NORMAL Balance

An account balance is the difference between the

increases and decreases in an account.
Notice the T-Account
 FastForward
Unadjusted Trial Balance
December 31, 2009
Debits Credits The trial balance lists
Cash $ 4,350
Accounts receivable -
all account balances
Supplies 9,720 in the general ledger.
Prepaid Insurance 2,400 If the books are in
Equipment 26,000
Accounts payable $ 6,200 balance, the total
Unearned consulting revenue 3,000 debits will equal the
Common stock 30,000
Dividends 200 total credits.
Consulting revenue 5,800
Rental revenue 300
Salaries expense 1,400
Rent expense 1,000
Utilities expense 230
Total $ 45,300 $ 45,300
 The Adjustment Process
Accounts are adjusted at the end of a period to
record internal transactions and events that are
not yet recorded.

Two basic principles for recognizing Revenues

and Expenses:
1. The revenue recognition principle requires
revenue be recorded when earned, not before
and not after.
2. The matching principle requires expenses be
recorded in the same period as the revenues
earned as a result of these expenses.
Accrual Basis versus Cash Basis
Accrual basis accounting —uses the adjusting
process to recognize revenue when earned and to
match expenses with revenues. This means the
economic effects of revenues and expenses are
recorded when earned or incurred, not when cash is
received or paid. Accrual basis is consistent with
GAAP.
Cash basis accounting —revenues are recognized
when cash is received and expenses are recognized
when cash paid. Cash basis is not consistent with
GAAP.
Accrual accounting also increases the comparability
of financial statements from one period to another.
 Accrual Basis vs. Cash Basis

Accrual Basis Cash Basis

Revenues are Revenues are
recognized when recognized when
earned and expenses cash is received and
are recognized when expenses recorded
incurred. when cash is paid.

Not GAAP
Accounting
 Accrual Basis vs. Cash Basis

Insurance Expense 2009

Jan Feb Mar Apr

$ - $ - $ - $ -
May Jun Jul Aug

$ - $ - $ - $ -
Sep Oct Nov Dec

$ - $ - $ - $ 2,400

On the cash basis the entire $2,400 would be recognized

as insurance expense in 2009.
No insurance expense from this policy would be
recognized in 2010 or 2011, periods covered by the
 Accrual Basis vs. Cash Basis
On the accrual basis,
Insurance Expense 2009
Jan Feb Mar Apr Insurance expense is
$ -
May
$ -
Jun
$ -
Jul
$ -
Aug recognized as follows:
$ -
Sep
$ -
Oct
$ -
Nov
$ -
Dec
$100 in 2009,
$ - $ - $ - $ 100 $1,200 in 2010, and
Jan
Insurance Expense 2010
Feb Mar Apr
$1,100 in 2011.
$ 100 $ 100 $ 100 $ 100

$
May
100 $
Jun
100 $
Jul
100 $
Aug
100
The expense is matched
$
Sep
100 $
Oct
100 $
Nov
100 $
Dec
100
with the periods benefited
Jan
Insurance Expense 2011
Feb Mar Apr
by the insurance coverage.
$ 100 $ 100 $ 100 $ 100
May Jun Jul Aug
$ 100 $ 100 $ 100 $ 100
Sep Oct Nov Dec
$ 100 $ 100 $ 100 $ -
 52
5. Adjusting Entries

Adjusting entries are required at the end of

each accounting period for accrual-basis
accounting, prior to preparing the financial
statements. The purpose for adjusting
entries are to:
 Bring balance sheet accounts current.
 Reflect proper amounts of revenues
and expenses on the income statement.
 Adjusting Accounts
An adjusting entry is recorded to bring an asset
or liability account balance to its proper amount.

The adjusting process is based on ACCRUAL

ACCOUNTING of Revenue Recognition and
Matching Principle.

Adjusting accounts is a 3-step process:

(1) Determine the current account balance,
(2) Determine what the current account balance
should be, and
(3) Record adjusting entry to get from step 1
to step 2.
 Adjusting Accounts
Framework for
Adjustments
Adjustments

Paid
Paid (or
(or received) cash before
received) cash before Paid
Paid (or
(or received) cash after
received) cash after
expense
expense (or(or revenue)
revenue) recognized
recognized expense
expense (or(or revenue)
revenue) recognized
recognized

Prepaid
Prepaid Unearned
Unearned Accrued
Accrued Accrued
Accrued
(Deferred)
(Deferred) (Deferred)
(Deferred) expenses
expenses revenues
revenues
expenses*
expenses* revenues
revenues
*including depreciation
 Prepaid (Deferred) Expenses

Supplies
During 2009, Scott Company purchased $15,500
of supplies. Scott recorded the expenditures as
Supplies. On December 31, a count of the
supplies indicated $2,655 on hand.
What adjustment is required?
Dec. 31 Supplies Expense 12,845
Supplies 12,845
To record supplies used during 2009
Supplies 126 Supplies Expense 652
Bought 15,500 Dec. 31 12,845 Dec. 31 12,845
Bal. 2,655
 Depreciation

Depreciation is the process of computing

expense from allocating the cost of plant and
equipment over their expected useful lives.

Straight-Line Asset Cost - Salvage Value

Depreciation =
Expense Useful Life
 Depreciation
On January 1, 2009, Barton, Inc. purchased
equipment for $62,000 cash. The equipment
has an estimated useful life of 5 years and
Barton expects to sell the equipment at the end
of its life for $2,000 cash.
Let’s record depreciation expense for the year
ended December 31, 2009.

2009 $62,000 - $2,000

Depreciation = = $12,000
Expense 5
 Depreciation

On January 1, 2009, Barton, Inc. purchased

equipment for $62,000 cash. The equipment
has an estimated useful life of 5 years and
Barton expects to sell the equipment at the end
of its life for $2,000 cash.
Let’s record depreciation expense for the year
ended December 31, 2009.
Dec. 31 Depreciation Expense 12,000
Accumulated Depreciation - Equipment 12,000
To record equipment depreciation

Accumulated
Accumulated depreciation
depreciation is
is
aa contra
contra asset
asset account.
account.
Depreciation

Equipment is
shown net of
accumulated
depreciation.
This amount is
referred to as the
asset’s book
value
 Unearned (Deferred) Revenues

Cash
Cash received
received in
in
advance
advance ofof Buy your season tickets for
providing
providing all home basketball games NOW!
products
products or
or
services. “Go Big Blue”
services.

Revenue
Liability
Debit Unadjusted Credit
Adjustment Balance Adjustment
 Unearned (Deferred) Revenues

On October 1, 2009, Ox University sold 1,000 season

tickets to its 20 home basketball games for $100 each.
Ox University makes the following entry:

Oct. 1 Cash 100,000

Unearned Revenue 100,000
Basketball revenue received in advance

Unearned Revenue
Oct.1 100,000
 Unearned (Deferred) Revenues

On December 31, Ox University has

played 10 of its regular home games,
winning 2 and losing 8.

Dec. 31 Unearned Revenue 50,000

Basketball Revenue 50,000
To recognize 10-games of revenue
Unearned Revenue Basketball Revenue
Dec. 31 50,000 Oct. 1 100,000 Dec. 31 50,000
Bal. 50,000
 Accrued Expenses
We’re about one-half
done with this job and
Costs
Costs incurred
incurred in
in aa want to be paid for
period
period that
that are
are our work!
both
both unpaid
unpaid and
and
unrecorded.
unrecorded.

Expense Liability
Debit Credit
Adjustment Adjustment
 Accrued Expenses

Barton,
Barton, Inc.
Inc. pays
pays its
its employees
employees every
every Friday.
Friday. Year-
Year-
end,
end, 12/31/09,
12/31/09, falls
falls on
on aa Wednesday.
Wednesday. As As of
of 12/31/09,
12/31/09, the
the
employees
employees have
have earned
earned salaries
salaries of
of $47,250
$47,250 for
for Monday
Monday
through
through Wednesday.
Wednesday.

Last pay Next pay

date date
12/26/09

12/1/09 12/31/09 Record

Record adjusting
adjusting
Year end journal
journal entry.
entry.
 Accrued Revenues
Smith
Smith && Jones,
Jones, CPAs,
CPAs, had
had $31,200
$31,200 ofof work
work
completed
completed but
but not
not yet
yet billed
billed to
to clients.
clients.
Let’s
Let’s make
make the
the adjusting
adjusting entry
entry necessary
necessary on
on
December
December 31,
31, 2009,
2009, the
the end
end of
of the
the company’s
company’s fiscal
fiscal
year.
year.

Dec. 31 Accounts Receivable 31,200

Service Revenue 31,200
To accrue revenue earned
Accounts Receivable Service Revenue
Other receivables Other revenues
1,325,268 6,589,500
Dec. 31 31,200 Dec. 31 31,200
Bal. 1,356,468 Bal . 6,620,700

3-65
3-66
C3 The Accounting Cycle
Prepare
Start post-closing
trial balance

Analyze POST
transactions
Closing
Entries
Journalize
Prepare
Post statements

Prepare Prepare
Adjusting
unadjusted POST adjusted
Entries
trial balance trial balance
3-67
 68

6. Preparing Financial Statements

• After all transactions have been recorded, a

trial balance prepared, and adjusting entries
made, the financial statements are prepared.
Record Prepare Make Prepare
Trans- Trial Adjusting Financial
actions Balance Entries Statements
1. Prepare Income Statement

3-69
2. Prepare Statement of Retained
Earnings
Note: Net Income from the Income
Statement carries to the Statement
of Retained Earnings.

3-70
3. Prepare Balance Sheet

FastForward
Balance Sheet
December 31, 2009
Assets
Cash $ 3,950
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Less: accum. depr. (375) 25,625
Total assets $ 42,345
Liabilities
Accounts payable $ 6,200
Salaries payable 210
Unearned revenue 2,750
Total liabilities $ 9,160
Equity
Common stock 30,000
Retained earnings 3,185
Total liabilities and equity $ 42,345

3-71