Accounting Cycle - Journals - Capturing accounting event
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What is the accounting cycle? The accounting cycle is often described as a process that includes the following steps: identifying, collecting and analyzing documents and transactions, recording the transactions in journals, posting the journalized amounts to accounts in the general and subsidiary ledgers, preparing an unadjusted trial balance, perhaps preparing a worksheet, determining and recording adjusting entries, preparing an adjusted trial balance, preparing the financial statements, recording and posting closing entries, preparing a post-closing trial balance, and perhaps recording reversing entries. Cycle and steps seem to be a carryover from the days of manual bookkeeping and accounting when transactions were first written into journals. In a separate step the amounts in the journal were posted to accounts. At the end of each month, the remaining steps had to take place in order to get the monthly, manually-prepared financial statements. Today, most companies use accounting software that processes many of these steps simultaneously. The speed and accuracy of the software reduces the accountant's need for a worksheet containing the unadjusted trial balance, adjusting entries, and the adjusted trial balance. The accountant can enter the adjusting entries into the software and can obtain the complete financial statements by simply selecting the reports from a menu. After reviewing the financial statements, the accountant can make additional adjustments and almost immediately obtain the revised reports. The software will also prepare, record, and post the closing entries
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Accounting Cycle - Journals - Capturing accounting event
- 1. Financial AFinancial Accountingccounting CHAPTERCHAPTER 33 Accounting Cycle:Accounting Cycle: Capturing EconomicCapturing Economic EventsEvents
- 2. THE ACCOUNTTHE ACCOUNT An account is an individual accounting record of increases and decreases in a specific asset, liability, or owner’s equity item. A company will have separate accounts for such items as cash, salaries expense, accounts payable, and so on.
- 3. The Role of Accounting Records Establishes accountability for assets and transactions. Establishes accountability for assets and transactions. Keeps track of routine business activities.Keeps track of routine business activities. Obtains detailed information about a particular transaction. Obtains detailed information about a particular transaction. Evaluates efficiency and performance within company. Evaluates efficiency and performance within company. Maintains evidence of a company’s business activities. Maintains evidence of a company’s business activities.
- 4. DEBITS AND CREDITSDEBITS AND CREDITS The term debit means left and credit means right respectively. The act of entering an amount on the left side of an account is called debiting the account and making an entry on the right side is crediting the account. When the debit amounts exceed the credits, an account has a debit balance; when the reverse is true, the account has a credit balance. DR CR
- 5. DOUBLE-ENTRY SYSTEMDOUBLE-ENTRY SYSTEM In a double-entry system, equal debits and credits are made in the accounts for each transaction. Thus, the total debits will always equal the total credits and the accounting equation will always stay in balance. Assets Liabilities Equity
- 6. DEBIT AND CREDIT EFFECTS —DEBIT AND CREDIT EFFECTS — ASSETS AND LIABILITIESASSETS AND LIABILITIES Debits Credits Increase assets Decrease assets Decrease liabilities Increase liabilities
- 7. NORMAL BALANCENORMAL BALANCE Every account classification has a normal balance, whether it is a debit or credit. For that particular account, the opposite side entries should never exceed the normal balance.
- 8. AA = LL + OEOE ASSETSASSETS Debit for Increase Credit for Decrease EQUITIESEQUITIES Debit for Decrease Credit for Increase LIABILITIESLIABILITIES Debit for Decrease Credit for Increase Debits and credits affect accounts as follows:Debits and credits affect accounts as follows: Debit and Credit Rules
- 9. NORMAL BALANCES — ASSETSNORMAL BALANCES — ASSETS AND LIABILITIESAND LIABILITIES Assets Increase Decrease Debit Credit Decrease Increase Liabilities Normal Balance
- 10. DEBIT AND CREDIT EFFECTS —DEBIT AND CREDIT EFFECTS — OWNER’S CAPITALOWNER’S CAPITAL Debits Credits Decrease owner’s capital Increase owner’s capital
- 11. NORMAL BALANCE —NORMAL BALANCE — OWNER’S CAPITALOWNER’S CAPITAL Owner’s Capital Decrease Increase Debit Credit Normal Balance
- 12. DEBIT AND CREDIT EFFECTS —DEBIT AND CREDIT EFFECTS — OWNER’S DRAWINGOWNER’S DRAWING Debits Credits Increase owner’s drawing Decrease owner’s drawing
- 13. NORMAL BALANCE —NORMAL BALANCE — OWNER’S DRAWINGOWNER’S DRAWING Owner’s Drawing Normal Balance Increase Decrease Debit Credit
- 14. DEBIT AND CREDIT EFFECTS —DEBIT AND CREDIT EFFECTS — REVENUES AND EXPENSESREVENUES AND EXPENSES Decrease revenues Increase revenues Increase expenses Decrease expenses Debits Credits
- 15. NORMAL BALANCES — REVENUESNORMAL BALANCES — REVENUES AND EXPENSESAND EXPENSES Increase Decrease Expenses Revenues Decrease Increase Debit Credit Normal Balance Normal Balance
- 16. EXPANDED BASIC EQUATION ANDEXPANDED BASIC EQUATION AND DEBIT/CREDIT RULES AND EFFECTSDEBIT/CREDIT RULES AND EFFECTS LiabilitiesAssets Owner’s Equity = + - += + - Assets Dr. Cr. + - Liabilities Dr. Cr. - + Dr. Cr. Owner’s Drawing + - Dr. Cr. Revenues - + Dr. Cr. Expenses + - Dr. Cr. Owner’s Capital - +
- 17. 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. Time Period Principle To provide users of financial statements with timely information, net income is measured for relatively short accounting periods of equal length.
- 18. Revenue and Expenses The price for goods sold and services rendered during a given accounting period. Increases owners’ equity. The costs of goods and services used up in the process of earning revenue. Decreases owner’s equity.
- 19. The Realization Principle: When To Record Revenue Realization Principle Revenue should be recognized at the time goods are sold and services are rendered.
- 20. The Matching Principle: When To Record Expenses Matching Principle Expenses should be recorded in the period in which they are used up.
- 21. Debits and Credits for Revenue and Expense EQUITIESEQUITIES DebitDebit forfor DecreaseDecrease CreditCredit forfor IncreaseIncrease ExpensesExpenses decreasedecrease owners’owners’ equity.equity. RevenuesRevenues increaseincrease owners’owners’ equity.equity. EXPENSESEXPENSES CreditCredit forfor DecreaseDecrease DebitDebit forfor IncreaseIncrease REVENUESREVENUES DebitDebit forfor DecreaseDecrease CreditCredit forfor IncreaseIncrease
- 22. EQUITIESEQUITIES DebitDebit forfor DecreaseDecrease Credit forCredit for IncreaseIncrease Payments to owners decrease owners’ equity. Owners’ investments increase owners’ equity. DIVIDENDSDIVIDENDS CreditCredit forfor DecreaseDecrease DebitDebit forfor IncreaseIncrease Investments by and Payments to Owners CAPITAL STOCKCAPITAL STOCK DebitDebit forfor DecreaseDecrease Credit forCredit for IncreaseIncrease
- 23. The basic steps in the recording process are: 1 Analyze each transaction for its effect on the accounts. 2 Enter the transaction information in a journal (book of original entry). 3 Transfer the journal information to the appropriate accounts in the ledger (book of accounts). STEPS IN THESTEPS IN THE RECORDING PROCESSRECORDING PROCESS
- 24. ILLUSTRATIONILLUSTRATION 2-122-12 THE RECORDINGTHE RECORDING PROCESSPROCESS 1 Analyze each transaction 2 Enter transaction in a journal 3 Transfer journal information to ledger accounts JOURNAL JOURNAL LEDGER
- 25. THE JOURNALTHE JOURNAL Transactions are initially recorded in chronological order in a journal before being transferred to the accounts. Every company has a general journal which contains: 1 spaces for dates, 2 account titles and explanations, 3 references, and 4 two amount columns.
- 26. The journal makes several significant contributions to the recording process: 1 It discloses in one place the complete effect of a transaction. 2 It provides a chronological record of transactions. 3 It helps to prevent or locate errors because the debit and credit amounts for each entry can be readily compared. THE JOURNALTHE JOURNAL
- 27. JOURNALIZINGJOURNALIZING Entering transaction data in the journal is known as journalizing. Separate journal entries are made for each transaction. A complete entry consists of: 1 the date of the transaction, 2 the accounts and amounts to be debited and credited, and 3 a brief explanation of the transaction.
- 28. TECHNIQUE OF JOURNALIZINGTECHNIQUE OF JOURNALIZING The date of the transaction is entered in the date column.The date of the transaction is entered in the date column.
- 29. TECHNIQUE OF JOURNALIZINGTECHNIQUE OF JOURNALIZING The debit account title is entered at the extreme left margin of the Account Titles and Explanation column. The credit account title is indented on the next line. The debit account title is entered at the extreme left margin of the Account Titles and Explanation column. The credit account title is indented on the next line.
- 30. TECHNIQUE OF JOURNALIZINGTECHNIQUE OF JOURNALIZING The amounts for the debits are recorded in the Debit column and the amounts for the credits are recorded in the Credit column. The amounts for the debits are recorded in the Debit column and the amounts for the credits are recorded in the Credit column.
- 31. TECHNIQUE OF JOURNALIZINGTECHNIQUE OF JOURNALIZING A brief explanation of the transaction is given.A brief explanation of the transaction is given.
- 32. TECHNIQUE OF JOURNALIZINGTECHNIQUE OF JOURNALIZING A space is left between journal entries. The blank space separates individual journal entries and makes the entire journal easier to read. A space is left between journal entries. The blank space separates individual journal entries and makes the entire journal easier to read.
- 33. TECHNIQUE OF JOURNALIZINGTECHNIQUE OF JOURNALIZING The column entitled Ref. is left blank at the time journal entry is made and is used later when the journal entries are transferred to the ledger accounts. The column entitled Ref. is left blank at the time journal entry is made and is used later when the journal entries are transferred to the ledger accounts.
- 34. If an entry involves only two accounts, one debit and one credit, it is considered a simple entry. If an entry involves only two accounts, one debit and one credit, it is considered a simple entry. SIMPLE AND COMPOUNDSIMPLE AND COMPOUND JOURNAL ENTRIESJOURNAL ENTRIES
- 35. When three or more accounts are required in one journal entry, the entry is referred to as a compound entry. When three or more accounts are required in one journal entry, the entry is referred to as a compound entry. COMPOUND JOURNAL ENTRYCOMPOUND JOURNAL ENTRY 2 1 3
- 36. COMPOUND JOURNAL ENTRYCOMPOUND JOURNAL ENTRY This is the wrong format; all debits must be listed before the credits are listed. This is the wrong format; all debits must be listed before the credits are listed.
- 37. 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
Editor's Notes
- All accountants play a pivotal roll in establishing and maintaining economic information about a company. Much of Chapter Three will illustrate how an accounting system works. Most information is stored on computers -- and accounting information is no exception. Accountants must be proficient in establishing and maintaining databases of financial information for a company. This information is used to prepare financial statements and other reports of interest to management and others.
- To review, the left side of a ledger account is always called the debit, and the right side is always called the credit. Now, let’s move on to the mathematics of the double-entry system. Liabilities and Equity have the opposite sign of Assets. If liabilities were to move to the left side of the equation, it would read assets minus liabilities equal equity. As a convention of double-entry accounting, it’s been decided that a debit, or left side, of an asset account will represent an increase in the asset account balance. This convention determines all of the remaining math.Because Liabilities and Equity have the opposite sign of Assets, a debit to a liability or equity account must mean a decrease and a credit means an increase. Instead of using the terms increase and decrease we use the terms debit and credit. It is important to remember whether we are talking about an asset, liability, or equity account for the meaning of a debit or a credit. It may take a short while to become accustomed to using the terms debit and credit, but with practice the concept can be easily mastered.
- To provide timely and meaningful information to users of financial statements, business operations are divided into arbitrary time periods. Financial statements are usually prepared monthly. However, many transactions cross from one accounting period to the next. This creates a problem for accountants.
- Part IRevenues represent the price of goods sold or services rendered to customers during any given accounting period. Revenues increase owners’ equity.Part IIExpenses are the cost of goods or services used up in the process of earning revenue. Accountants try to match expenses incurred with the revenues generated in an accounting period. Expenses decrease owners’ equity.
- One of the basic concepts of accounting is that revenue should be recognized when the goods or services are sold to customers. This concept may take some time to understand, as most people are cash-based. That is, they recognize revenue when cash is received rather than when it is earned and recognize expenses when paid rather than when incurred.
- The matching principle states that we must match expenses with the period in which they are used.
- Part ILet’s look more closely at the recording of revenues and expenses. To review, revenues increase owners’ equity and expenses decrease owners’ equity.Part IIA decrease is shown in owners’ equity with a debit. Increases in expenses must be recorded as debits in a separate ledger account.Part IIIAn increase in owners’ equity is shown with a credit. Increases in revenues must be recorded as credits in a separate ledger account.
- Part ITo review, payments to owners decrease owners’ equity and investments by owners increase owners’ equity.Part IIDividends represent payments to owners of a corporation. An increase in the dividend account must be shown with a debit.Part IICapital stock represents investments by owners of a corporation. An increase in the capital stock account must be shown with a credit.
- This is a detailed schematic of the accounting cycle. It starts with recording transactions in the journal. At the end of each period, the books are closed and the next accounting period begins. The next chapter will continue to expand the accounting process to include all of the steps listed in this schematic. We view the accounting cycle as an efficient means of introducing basic accounting terms, concepts, processes, and reports. Please do not confuse your familiarity with this sequence of procedures with a knowledge of accounting. The accounting cycle is but one accounting process—and a relatively simple one at that. Accountants spend much of their time focusing on the more analytical aspects of their discipline. These include, for example: Determining the information needs of decision makers. Designing systems to provide the information quickly and efficiently. Evaluating the efficiency of operations throughout the organization. Assisting decision makers in interpreting accounting information. Auditing, which is confirming the reliability of accounting information. Forecasting the probable results of future operations. And, Tax planning.