Accounting Cycle Stages

1. © The McGraw-Hill Companies, Inc., 2005
McGraw-Hill/Irwin
3-1
Chapter 3
Accounting Cycle

2. © The McGraw-Hill Companies, Inc., 2005
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3-2
Topics to be Discussed
 Accounting Cycle
 Debit Credit Rules
 General Journal Transactions
 Ledgers Accounts
 Trial Balance
 Practice Questions

3. © The McGraw-Hill Companies, Inc., 2005
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3-3
THE ACCOUNTING
CYCLE: CAPTURING
ECONOMIC EVENTS
Chapter
3

4. © The McGraw-Hill Companies, Inc., 2005
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3-4
Journalize
transactions.
Post entries to
the ledger
accounts.
Prepare trial
balance.
Make end-of-
year
adjustments.
Prepare adjusted
trial balance.
Prepare
financial
statements.
Prepare after-closing
trial balance.
Journalize and
post closing
entries.
The Accounting Cycle

5. © The McGraw-Hill Companies, Inc., 2005
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Types of Accounts
 Assets
 Liabilities
 Owners Equity
 Revenues
 Expenses

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Assets
Economics Resources of owned by organization /
company
Land
 Equipment
 Building
 Machinery
 Cars, Vehicles
 Bus / Transport

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Liabilities
Debts / payable, on an organizations.
Accounts payable
 Notes payable
 Bonds Payable
 Salaries payable
 wages payable
 etc

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Owners Equity
Investment by an owner in business
 Capital Stock
 Shares
 Dividends
 Drawings

9. © The McGraw-Hill Companies, Inc., 2005
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Revenues
Sales of company or organization
 Sales revenue
 Service revenue
 Consulting revenue
 feed revenue, etc.

10. © The McGraw-Hill Companies, Inc., 2005
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Expenses
Cost incurred or pay by company to earned revenue is
called expenses.
 Salaries expenses
 Utilities expenses
 Fuel expenses
 Maintenance expense
 Rent expense

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Debit & Credit
Basic Assumptions
 Debit
 Credit

12. © The McGraw-Hill Companies, Inc., 2005
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GAAP Principles for Debit and Credit
Types of Accounts Increase Decrease
Assets Debit Credit
Liabilities Credit Debit
Owners Equity Credit Debit
Revenues Credit Debit
Expenses Debit Credit

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The Role of Accounting Records
Establishes accountability for
assets and transactions.
Keeps track of routine
business activities.
Obtains detailed information
about a particular transaction.
Evaluates efficiency and
performance within company.
Maintains evidence of a
company’s business activities.

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The Ledger
The entire group of
accounts is kept
together in an
accounting record
called a ledger.
Cash
Accounts
Payable
Capital
Stock
Accounts are
individual records
showing increases
and decreases.

15. © The McGraw-Hill Companies, Inc., 2005
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The Use of Accounts
Increases are
recorded on one
side of the T-
account, and
decreases are
recorded on the
other side.
Left
or
Debit
Side
Right
or
Credit
Side
Title of
Account

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3-16
Let’s see how
debits and credits
are recorded in the
Cash account for
JJ’s Lawn Care
Service.

17. © The McGraw-Hill Companies, Inc., 2005
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Cash
5/1 8,000 5/2 2,500
5/25 75 5/8 2,000
5/29 750 5/28 150
5/31 50
5/31 4,125
Bal.
Receipts
are on
the debit
side.
Payments
are on the
credit
side.
The balance is the
difference between
the debit and credit
entries in the
account.
Debit and Credit Entries

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A = L + OE
ASSETS
Debit
for
Increase
Credit
for
Decrease
EQUITIES
Debit
for
Decrease
Credit
for
Increase
LIABILITIES
Debit
for
Decrease
Credit
for
Increase
Debits and credits affect accounts as
follows:
Debit and Credit Rules

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A = L + OE
Debit
balances
Credit
balances
=
In the double-entry accounting system,
every transaction is recorded by equal
dollar amounts of debits and credits.
Double Entry AccountingThe Equality of
Debits and Credits

20. © The McGraw-Hill Companies, Inc., 2005
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3-20
Let’s record
selected
transactions for
JJ’s Lawn Care
Service in the
accounts.

21. © The McGraw-Hill Companies, Inc., 2005
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 May 1: Jill Jones and her family invested $8,000
in JJ’s Lawn Care Service and received 800 shares
of stock.
Will Cash increase
or decrease?
Will Capital Stock
increase or
decrease?

22. © The McGraw-Hill Companies, Inc., 2005
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Capital Stock
5/1 8,000
Cash
5/1 8,000
 May 1: Jill Jones and her family invested $8,000
in JJ’s Lawn Care Service and received 800 shares
of stock.
Cash increases
$8,000 with a debit.
Capital Stock
increases $8,000
with a credit.

23. © The McGraw-Hill Companies, Inc., 2005
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 May 2: JJ’s purchased a riding lawn mower
for $2,500 cash.
Will Cash increase
or decrease?
Will Tools &
Equipment increase
or decrease?

24. © The McGraw-Hill Companies, Inc., 2005
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 May 2: JJ’s purchased a riding lawn mower
for $2,500 cash.
Tools & Equipment
5/2 2,500
Cash
5/1 8,000 5/2 2,500
Cash decreases
$2,500 with a credit.
Tools & Equipment
increases $2,500
with a debit.

25. © The McGraw-Hill Companies, Inc., 2005
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 May 8: JJ’s purchased a $15,000 truck. JJ’s
paid $2,000 in cash and issued a note payable
for the remaining $13,000.
Will Truck increase
or decrease?
Will Cash and
Notes Payable
increase or
decrease?

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 May 8: JJ’s purchased a $15,000 truck. JJ’s
paid $2,000 in cash and issued a note payable
for the remaining $13,000.
Truck
5/8 15,000
Cash
5/1 8,000 5/2 2,500
5/8 2,000
Notes Payable
5/8 13,000
Truck increases
$15,000 with a debit.
Cash decreases
$2,000 with a credit.
Notes Payable
increases $13,000
with a credit.

27. © The McGraw-Hill Companies, Inc., 2005
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 May 11: JJ’s purchased some repair parts
for $300 on account.
Will Tools &
Equipment increase
or decrease?
Will Accounts
Payable increase or
decrease?

28. © The McGraw-Hill Companies, Inc., 2005
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 May 11: JJ’s purchased some repair parts
for $300 on account.
Tools & Equipment
increases $300 with
a debit.
Accounts Payable
increases $300 with
a credit.
Tools & Equipment
5/2 2,500
5/11 300
Accounts Payable
5/11 300

29. © The McGraw-Hill Companies, Inc., 2005
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 May 18: JJ’s sold half of the repair parts to
ABC Lawns for $150, a price equal to JJ’s cost.
ABC Lawns agrees to pay JJ’s within 30 days.
Will Tools &
Equipment increase
or decrease?
Will Accounts
Receivable increase
or decrease?

30. © The McGraw-Hill Companies, Inc., 2005
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3-30
 May 18: JJ’s sold half of the repair parts to
ABC Lawns for $150, a price equal to JJ’s cost.
ABC Lawns agrees to pay JJ’s within 30 days.
Tools & Equipment
decreases $150 with
a credit.
Accounts Receivable
increases $150 with
a debit.
Tools & Equipment
5/2 2,500 5/18 150
5/11 300
Accounts Receivable
5/18 150

31. © The McGraw-Hill Companies, Inc., 2005
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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.
The Journal

32. © The McGraw-Hill Companies, Inc., 2005
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Posting
involves
copying
information
from the
journal to the
ledger
accounts.
Posting Journal Entries to the Ledger
Accounts

33. © The McGraw-Hill Companies, Inc., 2005
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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.
General Ledger
Cash
Date Debit Credit Balance
2005
May 1 8,000 8,000
Posting Journal Entries to the Ledger
Accounts

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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.
General Ledger
Capital Stock
Date Debit Credit Balance
2005
May 1 8,000 8,000
Posting Journal Entries to the Ledger
Accounts

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GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
2005
May 2 Tools & Equipment 2,500
Cash 2,500
Purchased lawn mower.
Let’s see what the cash account looks like after
posting the cash portion of this transaction for
JJ’s Lawn Care Service.
Posting Journal Entries to the Ledger
Accounts

36. © The McGraw-Hill Companies, Inc., 2005
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General Ledger
Cash
Date Debit Credit Balance
2005
May 1 8,000 8,000
2 2,500 5,500
This ledger format is referred to as a
running balance.
Ledger Accounts After Posting

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General Ledger
Cash
Date Debit Credit Balance
2005
May 1 8,000 8,000
2 2,500 5,500
T accounts are simplified versions of
the ledger account that only show the
debit and credit columns.
Ledger Accounts After Posting

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JJ's Lawn Care Service
Income Statement
For the Month Ended May 31, 2005
Sales Revenue 750
$
Operating Expense:
Gasoline Expense 50
Net Income 700
$
The income statement summarizes the profitability
of a business for a specified period of time.
The Income Statement: A Preview

39. © The McGraw-Hill Companies, Inc., 2005
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Accounting Periods
Time Period Principle
To provide users of financial
statements with timely
information, net income is
measured for relatively short
accounting periods of equal
length.

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The Realization Principle: When To
Record Revenue
Realization Principle
Revenue should be
recognized at the
time goods are sold
and services are
rendered.

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The Matching Principle: When To
Record Expenses
Matching Principle
Expenses should be
recorded in the
period in which they
are used up.

42. © The McGraw-Hill Companies, Inc., 2005
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Let’s analyze the
revenue and
expense
transactions for
JJ’s Lawn Care
Service for the
month of May.
We will also
analyze a dividend
transaction.

43. © The McGraw-Hill Companies, Inc., 2005
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 May 29: JJ’s provided lawn care services for
a client and received $750 in cash.
Will Cash increase
or decrease?
Will Sales Revenue
increase or
decrease?

44. © The McGraw-Hill Companies, Inc., 2005
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Sales Revenue
5/29 750
 May 29: JJ’s provided lawn care services for
a client and received $750 in cash.
Cash increases
$750 with a debit.
Sales Revenue
increases $750 with
a credit.
Cash
5/1 8,000 5/2 2,500
5/29 750 5/8 2,000

45. © The McGraw-Hill Companies, Inc., 2005
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 May 31: JJ’s purchased gasoline for the lawn
mower and the truck for $50 cash.
Will Cash increase
or decrease?
Will Gasoline
Expense increase or
decrease?

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Gasoline Expense
5/31 50
 May 31: JJ’s purchased gasoline for the lawn
mower and the truck for $50 cash.
Cash decreases $50
with a credit.
Gasoline Expense
increases $50 with a
debit.
Cash
5/1 8,000 5/2 2,500
5/29 750 5/8 2,000
5/31 50

47. © The McGraw-Hill Companies, Inc., 2005
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 May 31: JJ’s Lawn Care paid Jill Jones and
her family a $200 dividend.
Will Cash increase
or decrease?
Will Dividends
increase or
decrease?

48. © The McGraw-Hill Companies, Inc., 2005
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Dividends
5/31 200
 May 31: JJ’s Lawn Care paid Jill Jones and
her family a $200 dividend.
Cash decreases
$200 with a credit.
Dividends increase
$200 with a debit.
Cash
5/1 8,000 5/2 2,500
5/29 750 5/8 2,000
5/31 50
5/31 200

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Now, let’s look at
the Trial Balance
for JJ’s Lawn Care
Service for the
month of May.

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JJ's Lawn Care Service
Unadjusted Trial Balance
May 31, 2005
Cash 3,925
$
Accounts receivable 75
Tools & equipment 2,650
Truck 15,000
Notes payable 13,000
$
Accounts payable 150
Capital stock 8,000
Dividends 200
Sales revenue 750
Gasoline expense 50
Total 21,900
$ 21,900
$
All balances
are taken from
the ledger
accounts on
May 31 after
considering all
of JJ’s
transactions
for the month.
Proves equality
of debits and
credits.

51. © The McGraw-Hill Companies, Inc., 2005
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Journalize
transactions.
Post entries to
the ledger
accounts.
Prepare trial
balance.
Make end-of-
year
adjustments.
Prepare adjusted
trial balance.
Prepare
financial
statements.
Prepare after-closing
trial balance.
Journalize and
post closing
entries.
The Accounting Cycle

52. © The McGraw-Hill Companies, Inc., 2005
McGraw-Hill/Irwin
3-52
End of Chapter 3