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Accounting Cycle - Journals - Capturing accounting event
The document provides an overview of the accounting cycle, detailing the process of capturing economic events through the use of debits and credits in financial accounting. It explains the double-entry system, the normal balance for accounts, and principles for recording revenue and expenses. Additionally, it outlines the steps in the recording process, including journalizing transactions and transferring entries to ledger accounts.
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Accounting Cycle - Journals - Capturing accounting event
- 1. Financial AFinancial Accountingccounting CHAPTERCHAPTER33 Accounting Cycle:Accounting Cycle: Capturing EconomicCapturing Economic EventsEvents
- 2. THE ACCOUNTTHE ACCOUNT Anaccount 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 ofAccounting 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 CREDITSDEBITSAND 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 Ina 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 CREDITEFFECTS —DEBIT AND CREDIT EFFECTS — ASSETS AND LIABILITIESASSETS AND LIABILITIES Debits Credits Increase assets Decrease assets Decrease liabilities Increase liabilities
- 7. NORMAL BALANCENORMAL BALANCE Everyaccount 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 CREDITEFFECTS —DEBIT AND CREDIT EFFECTS — OWNER’S CAPITALOWNER’S CAPITAL Debits Credits Decrease owner’s capital Increase owner’s capital
- 11. NORMAL BALANCE —NORMALBALANCE — OWNER’S CAPITALOWNER’S CAPITAL Owner’s Capital Decrease Increase Debit Credit Normal Balance
- 12. DEBIT AND CREDITEFFECTS —DEBIT AND CREDIT EFFECTS — OWNER’S DRAWINGOWNER’S DRAWING Debits Credits Increase owner’s drawing Decrease owner’s drawing
- 13. NORMAL BALANCE —NORMALBALANCE — OWNER’S DRAWINGOWNER’S DRAWING Owner’s Drawing Normal Balance Increase Decrease Debit Credit
- 14. DEBIT AND CREDITEFFECTS —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 EQUATIONANDEXPANDED 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 PeriodPrinciple 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 Theprice 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: WhenTo 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 Creditsfor 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 Paymentsto 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 stepsin 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 RECORDINGTHERECORDING 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 Transactionsare 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 makesseveral 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 datain 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 JOURNALIZINGTECHNIQUEOF 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 JOURNALIZINGTECHNIQUEOF 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 JOURNALIZINGTECHNIQUEOF 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 JOURNALIZINGTECHNIQUEOF JOURNALIZING A brief explanation of the transaction is given.A brief explanation of the transaction is given.
- 32. TECHNIQUE OF JOURNALIZINGTECHNIQUEOF 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 JOURNALIZINGTECHNIQUEOF 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 entryinvolves 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 ormore 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 ENTRYCOMPOUNDJOURNAL 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 theledger 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
- #4 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.
- #9 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.
- #18 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.
- #19 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.
- #20 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.
- #21 The matching principle states that we must match expenses with the period in which they are used.
- #22 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.
- #23 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.
- #38 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.