Page 56 : Accounting Processing Cycle Source documents Record in Journal Transaction Analysis Post to Ledger During the Accounting Period Financial Statements Unadjusted Trial Balance Adjusted Trial Balance At the End of the Accounting Period Record & Post Adjusting Entries Close Temporary Accounts Post-Closing Trial Balance At the End of the Year
Illustration 2-3 on page 58: Twelve Transactions
#1 (of 12): two individuals each invested $30,000 in a new business, Dress Right Clothing Corporation. Each investor was issued 3,000 shares of common stock.
Two accounts are affected:
Cash (an asset) increases by $60,000.
Common stock (a shareholders’ equity) increases by $60,000.
July 1 Cash 60,000 Common stock 60,000
Posting Journal Entries pages 62 & 63
After recording all entries for the period, Dress Right’s Unadjusted Trial Balance would be as follows (page 64): Debits = Credits A Trial Balance is a list of all accounts and their balances at a particular date.
Adjusting Entries (pages 66 to 73) Prepays (page 67) Accruals (p.70-72) Estimates (p. 72-73) At the end of the period, adjusting entries are required to satisfy the realization principle and the matching principle . Transactions where cash is paid or received before a related expense or revenue is recognized. Transactions where cash is paid or received after a related expense or revenue is recognized. Accountants must often make estimates in order to comply with the accrual accounting model.
Page 74: Adjusted Trial Balance for Dress Right after all adjusting entries have been recorded and posted. Dress Right will use these balances to prepare the financial statements.
Page 76: Income statement The income statement summarizes the results of profit-generating activities of the company.
Page 77: Balance Sheet The balance sheet presents the financial position of the company on a particular date.
Page 77: Balance Sheet Notice that assets of $143,000 equals total liabilities plus shareholders’ equity of $143,000.
Page 78: Statement of Cash Flows The statement of cash flows discloses the changes in cash during a period.
Page 79: Statement of Shareholders’ Equity The statement of shareholders’ equity presents the changes in permanent shareholder accounts.
The Closing Process (page 79) Temporary Accounts Revenues Income Summary Expenses Dividends Permanent Accounts Assets Liabilities Shareholders’ Equity The closing process applies only to temporary accounts.
Conversion From Cash Basis to Accrual Basis (pages 83-85)
Read very carefully
Confirm your understanding by working through Illustration 2-14 on page 85
Appendix 2A: Use of a Worksheet A worksheet can be used as a tool to facilitate the preparation of adjusting and closing entries and the financial statements.
Steps to Follow for Worksheet Completion:
Enter account titles in column A and the unadjusted account balances in columns B and C.
Determine end-of-period adjusting entries and enter them in columns E and G.
Add or deduct the effects of the adjusting entries on the account balances and enter in columns H and I.
Transfer the temporary retained earnings account balances to columns J and K.
Transfer the balances in the permanent accounts to columns L and M.
Let’s look at the completed worksheet for Dress Right.
Appendix 2C: Subsidiary Ledgers Subsidiary ledgers contain a group of subsidiary accounts associated with particular general ledger control accounts. Subsidiary ledgers are commonly used for accounts receivable, accounts payable, plant and equipment, and investments. For example, there will be a subsidiary ledger for accounts receivable that keeps track of the increases and decreases in the accounts receivable balance for each of the company’s customers purchasing goods and services on credit. After all of the postings are made from the appropriate journals, the balance in the accounts receivable control account should equal the sum of the balances in the accounts receivable subsidiary ledger accounts.
Appendix 2C: Special Journals Special journals are used to capture the dual effect of repetitive types of transactions in debit/credit form.
Special journals simplify the recording process in the following ways:
Journalizing the effects of a particular transaction is made more efficient through the use of specifically designed formats.
Individual transactions are not posted to the general ledger accounts but are accumulated in the special journals and a summary posting is made on a periodic basis.
The responsibility for recording journal entries for the repetitive types of transactions is placed on individuals who have specialized training in handling them.
Example of a Special Journal: Cash receipts journals record all cash receipts, regardless of the source. Every entry in the cash receipts journal produces a debit to the cash account with the credit to various other accounts .