The accounting cycle involves collecting financial data, journalizing and posting transactions, preparing an adjusted trial balance, preparing financial statements and reports, and closing temporary accounts to retain earnings at the end of the accounting period in order to start the next period with updated balance sheet account balances.

1. ua l
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A po
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Accounting Cycle Review
1

2. Steps in the Accounting Cycle
1. Collect
data

3. Source Documents
Sales
Purchase Evidence needed Invoice
Invoice in an accounting
system to record
Cash
transactions - may Checks
Register be replaced by data
Receipt entry screens
Payroll Shipping Receiving
Records Document Document
3

4. Steps in the Accounting Cycle
1. Collect data
2. Journalize
transactions
(capture in
transaction
files)

5. The Accounting Equation
Assets = Liabilities + Owners’ Equity
Company Creditor’s Owner’s
Resources
= Claims + Claims
to Assets to Assets
The Accounting
Equation Must Always
Remain in Balance
5

6. Sample Transactions for T-
Shirts “R” Us
Issue capital stock for cash
Assets = Liabilities + Owners’ Equity
Cash Capital Stock
+ 10,000 = + 10,000
( Dr.) (Cr.)
Journal Entry Form: Dr. Cr.
Cash $10,000
Capital Stock $10,000
6

7. Debits/Credits and the
Accounting Equation
OWNERS’
ASSETS = LIABILITIES + EQUITY
Dr. Cr. Dr. Cr. Dr. Cr.
+ - - + - +
Opposite sides of the accounting equation are
increased/decreased in an opposite way

8. Purchase of inventory of
T-shirts on account
Assets = Liabilities + Owners’ Equity
Inventory Accounts Payable
+ 3,000 = + 3,000
(Dr.) (Cr.)
Purchases Journal:
Dr. Cr.
Inventory $3,000
Accounts Payable $3,000 8

9. Sell T-shirts during the month for $4,000
cash (cost is 50% of selling price)
Assets = Liabilities + Owners’ Equity
Where does sales
revenue fit into the
accounting
equation??
Sales Journal : Dr. Cr.
Cash $4,000
Sales Revenue $4,000
9

10. Effect of Revenue and Expenses
on Retained Earnings
Income Stmt. Stmt. of R/E
Beg. R/E
Revenue
+ Revenues
- Expenses
- Expenses
= Net income
- Dividends
= End. R/E
10

11. Sell T-shirts during the month for cash
(cost is 50% of selling price)
Assets = Liabilities + Owners’ Equity
Retained Earnings
Cash (Sales revenue is
closed to R/E)
+ 4,000 = + 4,000
(Dr.) (Cr.)
Sales Journal : Dr. Cr.
Cash $4,000
Sales Revenue $4,000
11

12. Sell T-shirts during the month for cash
(cost is 50% of selling price)
Assets = Liabilities + Owners’ Equity
Retained Earnings
Inventory (Cost of goods sold
is closed to R/E)
- 2,000 - 2,000
(Cr.) (Dr.)
Journal Entry Form: Dr. Cr.
Cost of goods sold $2,000
Inventory $2,000
12

13. Pay for 1/2 of the inventory purchased
earlier this month on account
Assets = Liabilities + Owners’ Equity
Cash Accounts Payable
- 1,500 = - 1,500
(Cr.) (Dr.)
Cash Disbursement Journal:
Dr. Cr.
Accounts Payable $1,500
Cash $1,500 13

14. Steps in the Accounting Cycle
1. Collect data
2. Journalize
transactions
(capture in
transaction files)
3. Post transactions to
accounts in ledger
(G/L master file)

15. General Ledger
/R 0
A 40 Cash
+$100
sh +$ 10 0 - $50
a 0
C 10 -$
+$ $50
-
File or book that contains one record
( or page) for each account. 15

16. The T Account
Account Name
Debits are Credits are
entered on left entered on right
Representation of one account in the G/L

17. The T Account
Account Name
$ 400 dr. $ 900 cr.
Debits & credits
are netted to obtain $ 500 cr.
balance in account

18. Normal Balances
Debit Credit
Assets Liabilities
Expenses Owners’ Equity
Dividends Revenues

19. Transactions and T Accounts
Cash Capital Stock
Post to individual
(1) 10,000 G/L accounts (1) 10,000
(See Figure 2-4)
(1) Issue capital stock for cash
Journal Entry Form: Dr. Cr.
Cash $10,000
Capital Stock $10,000
19

20. Transactions and T Accounts
Inventory Accounts Payable
(2) 3,000 (2) 3,000
(2) Purchase inventory of
T-shirts on account
20

21. (3a) Sell T-shirts during the month
for $4,000 cash.
(3b) Cost is 50% of selling price.
Cash Sales
Cost of
(3a) Goods Sold
(1) 10,000
4,000
(3a) 4,000 (3b) 2,000
Inventory
T Accounts reflect
(2) 3,000 current and previous
(3b) 2,000 postings to the account
for each period

22. (4) Pay for 1/2 of the inventory
purchased earlier this month on account
Accounts Payable Cash
(2) 3,000 (1) 10,000
(3a) 4,000
(4) 1,500 (4) 1,500

23. Balance the T Accounts
Cash Inventory
(1) 10,000
(2) 3,000 (3b) 2,000
(3a) 4,000 (4) 1,500
1,000
12,500
Accounts Payable
(4) 1,500 (2) 3,000
1,500

24. Steps in the Accounting Cycle
1. Collect data
2. Journalize
transactions
(capture in
transaction files)
3. Post transactions to
accounts in ledger
(G/L master file)
4. Prepare
unadjusted
trial balance

25. T-Shirts “R” Us
Unadjusted Trial Balance
At January 31, 2011 Debits Credits
Cash $ 12,500
Inventory 1,000
Accounts Payable $ 1,500
Capital Stock 10,000
Sales Revenue 4,000
Cost of Goods Sold 2,000
Total $ 15,500 $ 15,500

26. Steps in the Accounting Cycle
1. Collect data
2. Journalize
transactions
(capture in
transaction files)
3. Post transactions to
accounts in ledger
(G/L master file)
5. Prepare and post
adjusting entries 4. Prepare
unadjusted
trial balance

27. Types of Adjusting Entries
Deferred Accrued
expense ALL RECOGNIZE liability
REVENUE OR
EXPENSE
BEFORE OR
AFTER CASH IS
EXCHANGED
Accrued Deferred
asset revenue
27

28. Summary of Adjustments
Internal transaction FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICA
THE UNITED STATES OF AMERICA
THIS NOTE IS LEGAL TENDER
L70744629F
FOR ALL DEBTS, PUBLIC AND PRIVATE
Never involves cash
12 WASHINGTON, D.C. 12
A
H 293
L70744629F
12 SERIES 12
1985
ONE DOLLAR
ONE DOLLAR
Involves at least one
balance sheet and one
income statement Balance Income
account Sheet Statement
28

29. (5) Record employees wages for the
month that are earned but not yet due
Wage Expense Wages Payable
0 (5) 800
Adjusting Entry: Dr. Cr.
Wage Expense 800
Wages Payable 800

30. (6) Record income taxes on profits at 30%
income tax rate
Income Tax Expense Income Tax Payable
? (6) ?
How is this determined?

31. T-Shirts “R” Us
Income Statement
For the Month of January 2011
From T Accounts:
Sales $ 4,000
Less: Cost of goods sold 2,000
Gross margin 2,000
Wage expense 800
Pre-tax income $ 1,200
Prepared first…why?

32. T-Shirts “R” Us
Income Statement
For the Month of January 2011
From T Accounts:
Sales $ 4,000
Less: Cost of goods sold 2,000
Gross margin 2,000
Wage expense 800
Pre-tax income $ 1,200
Income tax expense (30%) 360

33. (6) Record income taxes on profits at 30%
income tax rate
Income Tax Expense Income Tax Payable
0 (6) 360
Adjusting Entry: Dr. Cr.
Income Tax Expense 360
Income Tax Payable 360

34. Steps in the Accounting Cycle
1. Collect data
2. Journalize
transactions
(capture in
transaction files)
3. Post transactions to
6. Prepare adjusted accounts in ledger
trial balance (G/L master file)
5. Prepare and post 4. Prepare
adjusting entries unadjusted
trial balance

35. T-Shirts “R” Us
Adjusted Trial Balance
At January 31, 2011 Debits Credits
Cash $ 12,500
Inventory 1,000
Accounts Payable $ 1,500
Wages Payable 800
Income Tax Payable 360
Capital Stock 10,000
Sales Revenue 4,000
Cost of Goods Sold 2,000
Wage Expense 800
Income Tax Expense 360
Total $ 16,660 $ 16,660

36. Steps in the Accounting Cycle
1. Collect data
2. Journalize
transactions
(capture in
7. Prepare transaction files)
accounting reports
3. Post transactions to
6. Prepare adjusted accounts in ledger
trial balance (G/L master file)
5. Prepare and post 4. Prepare
adjusting entries unadjusted
trial balance

37. T-Shirts “R” Us
Income Statement
For the Month of January 2011
From T Accounts:
Sales $ 4,000
Less: Cost of goods sold 2,000
Gross margin 2,000
Wage expense 800
Pre-tax income $ 1,200
Income tax expense (30%) 360
Net income $ 840

38. T-Shirts “R” Us
Statement of Retained Earnings
For the Month of January 2011
Beginning R/E, 1/1/10 $-0-
Add: Net income 840
Deduct: Dividends (-0-)
Ending R/E, 1/31/10 $ 840

39. T-Shirts “R” Us
Balance Sheet
At January 31, 2011
Liabilities:
Assets: Accounts payable $ 1,500
Cash $ 12,500 Wages payable 800
Inventory 1,000 Income tax payable 360
2,660
Owners’ equity
Capital stock 10,000
Total assets $ 13,500 Retained earnings 840
10,840
Total liabilities &
owners’ equity $13,500

40. Steps in the Accounting Cycle
1. Collect data
8. Close the 2. Journalize
accounts transactions
(capture in
7. Prepare transaction files)
accounting reports
3. Post transactions to
6. Prepare adjusted accounts in ledger
trial balance (G/L master file)
5. Prepare and post 4. Prepare
adjusting entries unadjusted
trial balance

41. Closing the Accounts
Balance sheet accounts (permanent or real
accounts) are carried forward to the next
period
12/31/11 1/1/12
Ending Beginning
Balances Balances
41

42. Closing the Accounts
Revenue, expense and dividend accounts
(temporary or nominal accounts) are closed
at the end of the period
12/31/11
Ending 1/1/12
Balances Beginning
closed to Balances
Retained
Earnings
-0-
42

43. Closing Entries
Revenues Expenses
close to normal normal close to
income sum. balance balance income sum.
XX XX XX XX
-0- -0-
Dividends Income Summary
normal close to from expense from revenue
balance R/E closings closings
XX XX XX XX
-0- balance closed
to R/E

44. Closing Entries
Revenues Expenses
close to normal normal close to
income sum. balance balance income sum.
XX XX XX XX
-0- -0-
Dividends Income Summary
normal close to from expense from revenue
balance R/E closings closings
XX XX XX XX
-0- balance closed
to R/E