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The Mechanics of accounting
The document discusses the accounting cycle and how it has been affected by technology. It describes the key steps of the accounting cycle as analyzing transactions, recording transactions through journal entries, summarizing entries in a trial balance, and how computers have allowed these first three steps to be performed more efficiently through automation and processing large amounts of data. The accounting cycle is used to transform business transactions into useful financial information.
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The Mechanics of accounting
- 1.
- 5. Learning Objective 1 Understandthe process of transforming transaction data into useful accounting information.
- 6. What Are theDifferent Exchange Transactions? Distribute earnings to owners. Buy and sell goods or services. Borrow and invest money. Pay wages to employees. Purchase land, buildings, and equipment. Pay taxes to the government. Exchange Transactions
- 7. Business Documents Examples:Sales invoice, purchase order, check stub. Business documents are used to confirm that an arm’s-length transaction has occurred. to establish the amounts to be recorded. to facilitate the analysis of business events. These documents must be analyzed.
- 8. What is theSequence of the Accounting Cycle? Step 1 Record the effects of the transactions.Step 2 Summarize the effects of transactions. 1. Posting journal entries. 2. Preparing a trial balance. Step 3 Prepare reports. 1. Adjusting entries. 2. Preparing financial statements. 3. Closing the books. Step 4 Analyze transactions.
- 9. Learning Objective 2 Analyzetransactions and determine how those transactions affect the accounting equation (step one of the accounting cycle).
- 10. Step 1: AnalyzeTransactions What accounts are involved? Did each account increase or decrease? By how much? Transaction analysis framework Transaction analysis: breaks down complex transactions into manageable pieces. provides a self-checking mechanism.
- 11. What Is theAccounting Equation? Assets = Liabilities + Owners’ Equity Resources Creditors’ claims against resources = + Owners’ claims against resources
- 12. A = L+ OE Describe Effect of the Following Transactions on a Company. Borrow money Invest in company Pay off a note Purchase equipment Borrow funds to settle a debt
- 13. What Is theRule of Double-Entry Accounting? The debits must always equal the credits. Debits = Credits
- 14. Using Accounts Accountsprovide an efficient method to categorize transactions. A T-account is a simplified depiction of an account. Name of Account Debit Credit
- 15. The cash accounthas a beginning balance of $35. A check for $12 is written to pay for supplies. Using a T-account, what is the ending balance of the cash account? Using a T-Account 35 12 Cash 23
- 16. Debits and Credits Debitsare simply entries on the left. Credits are simply entries on the right. Remember:
- 17. DR CR DRCR DR CR (+) (-) (-) (+) (-) (+) Debits and Credits Assets = Liabilities + Owners’ Equity Asset accounts: Debit is an increase. Credit is a decrease. Liabilities and owners’ equity accounts: Debit is a decrease. Credit is an increase.
- 18. Expanding the Equation Revenues Increasesin a company’s resources from the sale of goods or the performance of services. Expenses Decreases in a company’s resources incurred in the normal course of business to generate revenues. Dividends Distributions to owners, which reduce Owners’ Equity.
- 19. Expanded Accounting Equation Assets DRCR + – = Liabilities DR CR – + + Owners’ Equity DR CR – + Capital Stock DR CR – + Retained Earnings DR CR – + Expenses DR CR + – Dividends DR CR + – Revenues DR CR – +
- 20. Learning Objective 3 Recordthe effects of transactions using journal entries (step two of the accounting cycle).
- 21. Step 2: RecordTransactions Record the results of the transactions in a journal. Journalizing provides a chronological record of all business activities. Journal -- book of original entry What is another name for the journal?
- 22. Step 2: RecordTransactions Record the results of the transactions in a journal. Journalizing provides a chronological record of all business activities. General Journal Entry Format: Date Debit Entry . . . . . . . . . . . . . . . xx Credit Entry . . . . . . . . . . . . xx Explanation.
- 23. Journal Entries What isthe three-step process? 1 Identify which accounts are involved. 2 For each account, determine if it is increased or decreased. 3 For each account, determine by how much it will change.
- 24. Supplies purchased for$25 are purchased “on account.” Prepare the correct journal entry. What do we mean by purchased “on account”? Example 1: Journal Entry Jan. 1 Supplies . . . . . . . . . . . . . . . . . . 25 Accounts Payable . . . . . . . . 25 Purchased supplies on account. We purchase on credit and use accounts payable.
- 25. Example 2: JournalEntry Feb. 1 Cash . . . . . . . . . . . . . . . . . . . . . 100 Revenue . . . . . . . . . . . . . . . . 100 Received cash for services. A check for $100 is received in payment for services rendered. Make the correct journal entry.
- 26. Example 3: JournalEntry Mar. 1 Accounts Receivable. . . . . . . . 75 Sales Revenue . . . . . . . . . . . 75 Sold merchandise on account. Merchandise is sold to a customer on account for $75. The cost of the product was $60. Make the journal entries. Mar. 1 Cost of Goods Sold . . . . . . . . . 60 Inventory. . . . . . . . . . . . . . . . 60 To record cost and reduce inventory.
- 27. Date Transaction Ref.Debits Credits Jan. 1 Supplies 25 Accounts Payable 25 Purchased supplies on account. Feb. 1 Cash 101 100 Revenue 100 Received cash for services. Mar. 1 Accounts Receivable 75 Sales Revenue 75 Sold merchandise on account. Journal 1 Page 1 Entered when posted to ledger.
- 29. Learning Objective 4 Summarizethe resulting journal entries through posting and prepare a trial balance (step three of the accounting cycle).
- 30. Preparing a TrialBalance Define the Following Terms Posting transferring amounts from the journal to the ledger. Ledger a book of accounts where journal transactions are posted and thereby summarized. Posting reference a cross-reference number between the general journal and the accounts in the general ledger. Chart of accounts a systematic listing of all accounts used by a company.
- 31. General Ledger Date ExplanationRef. Debits Credits Balance Jan. 1 Balance 100 2 Issued 100 shares of capital stock at $10 per share GJ1 1,000 1,100 3 Purchased equipment GJ1 300 800 4 Sold inventory GJ1 60 860 5 Monthly payment on loan GJ1 230 630 6 Revenue GJ1 2,500 3,130 ACCOUNT: Cash Account No. 101
- 32. ASSETS (100-199): Current Assets(100-150): 101 Cash 105 Accounts Receivable 107 Inventory Long-Term Assets (151-199): 151 Land 152 Buildings LIABILITIES (200-299): Current Liabilities (200-219): 201 Notes Payable 202 Accounts Payable Long-Term Liabilities (220-239): 222 Mortgage Payable OWNERS’ EQUITY (300-399): 301 Capital Stock 330 Retained Earnings SALES (400-499): 400 Sales Revenue EXPENSES (500-599): 500 Cost of Goods Sold 501 Sales Salaries and Commissions 523 Rent Expense 528 Advertising Expense 573 Utilities Expense 579 Accounting and Legal Fees Chart of Accounts
- 33. Determining Account Balances Nameof Account Debit Credit Accounts with typical debit balances are? Accounts with typical credit balances are? Expenses Assets Dividends Owners’ Equity Revenues or Income Liabilities An account’s balance is usually on the side that increases the account. It is referred to as the “Normal Balance.” Do you see the mnemonic memory device, DEAD COIL?
- 34. Define The TrialBalance A listing of all account balances; provides a means to assure that debits equal credits. From the data in the trial balance, the balance sheet and income statement can be prepared. What is the Trial Balance used for?
- 35. The Example Company TrialBalance December 31, 2003 Debits Credits Cash $ 21 Accounts Receivable 15 Inventory 12 Land 200 Accounts Payable $ 30 Capital Stock 150 Retained Earnings 24 Sales Revenue 919 Cost of Goods Sold 850 Advertising Expense 10 Miscellaneous Expenses 15 ______ Total $ 1,123 $ 1,123 Sample Trial Balance The trial balance shows that debits equal credits.
- 36. Learning Objective 5 Describehow technology has affected the first three steps of the accounting cycle.
- 37. Advantages of Computers Largeamounts of information can be quickly processed without mathematical errors. More documents can be produced than humanly possible in the same amount of time. Common tasks can be automated for increased efficiency.
- 38. Disadvantages of Computers –Computer hardware and software require human judgment and input. – GIGO (garbage in, garbage out). – Once an error is identified, fixing the problem may require many adjustments.