3 - 1 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by...

3 - 1© 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater

ChapterChapter 33

In Chapters 1 and 2, we learned about the In Chapters 1 and 2, we learned about the accounting equation and how it is used to record accounting equation and how it is used to record business transactions.business transactions.

We learned about accounts, chart of accounts, T We learned about accounts, chart of accounts, T accounts, normal balance, debit and credit, and accounts, normal balance, debit and credit, and prepared a trial balance.prepared a trial balance.

In Chapter 3, we are going to learn about the In Chapter 3, we are going to learn about the accounting cycle.accounting cycle.


Hoffman’sHoffman’s

A bagel shop just off campusA bagel shop just off campus Stuart Hoffman is the ownerStuart Hoffman is the owner You ask Mr. Hoffman what makes the bagels so You ask Mr. Hoffman what makes the bagels so

goodgood He tells you his secretHe tells you his secret Baking is nothing more than following several Baking is nothing more than following several

steps in order. You follow the same steps with steps in order. You follow the same steps with every batch you bake—you don’t change every batch you bake—you don’t change anything. It’s just a cycle.anything. It’s just a cycle.


Accounting CycleAccounting Cycle

Following a set of steps in a certain orderFollowing a set of steps in a certain order

Once one cycle is complete, the accountant Once one cycle is complete, the accountant begins anotherbegins another

Knowing will help you gain a better Knowing will help you gain a better understanding of businessunderstanding of business

Learn how to speak the language of businessLearn how to speak the language of business



Normal accounting procedures performed over a Normal accounting procedures performed over a period of timeperiod of time

Takes place over a specific period of timeTakes place over a specific period of time Up to one year – month, quarter (3 months)Up to one year – month, quarter (3 months) Most businesses use one yearMost businesses use one year


IntroductionIntroduction

Accounting cycleAccounting cycle

The accounting periodThe accounting period

One year:One year:Calendar yearCalendar year

Fiscal yearFiscal year

Less than one year:Less than one year:QuarterlyQuarterlyMonthlyMonthly


Fiscal YearFiscal Year

A business may choose any fiscal periodA business may choose any fiscal period Must be convenientMust be convenient Inventories low and business activity are at a Inventories low and business activity are at a

low pointlow point Natural business yearNatural business year Count end-of-year inventories when it is easiest Count end-of-year inventories when it is easiest

to doto do


Interim ReportsInterim Reports

Businesses could not operate successfully if they Businesses could not operate successfully if they only prepared financial reports at the end of only prepared financial reports at the end of calendar or fiscal yearcalendar or fiscal year

Monthly, quarterly, or semiannuallyMonthly, quarterly, or semiannually


Clark’s Word Processing Clark’s Word Processing ServicesServices

Brenda Clark is ownerBrenda Clark is owner

Fiscal year – January 1 through December 31Fiscal year – January 1 through December 31

Also calendar yearAlso calendar year



Business transactions occurred.Business transactions occurred.

Analyzing transactions and recording.Analyzing transactions and recording.

Posting to the general ledger.Posting to the general ledger.

Preparing the trial balance.Preparing the trial balance.


General JournalGeneral Journal

Also called journal.Also called journal.

It is the book of original entry.It is the book of original entry.

Transactions are written in aTransactions are written in ajournal in chronological order.journal in chronological order.

Journalizing is the process of enteringJournalizing is the process of enteringinformation as debits and creditsinformation as debits and credits

to the correct accounts.to the correct accounts.


Chart of AccountsChart of Accounts

The accountant must refer to the chart of accountsThe accountant must refer to the chart of accountsfor the account name to be used in the journal.for the account name to be used in the journal.


General LedgerGeneral Ledger

Bound or loose-leaf book.Bound or loose-leaf book.

It is the book of final entry.It is the book of final entry.

The information from the journal is transferredThe information from the journal is transferredto the ledger in the posting process.to the ledger in the posting process.

Debits and credits in the journalDebits and credits in the journalremain exactly the same when postedremain exactly the same when posted

to the accounts in the ledger.to the accounts in the ledger.


Recording Entry in JournalRecording Entry in Journal

Debit portion goes firstDebit portion goes first

Credit portion is indented ½ inchCredit portion is indented ½ inch

Debits and Credits must equalDebits and Credits must equal

Skip one line after explanationSkip one line after explanation

Explanation follows immediatelyExplanation follows immediately


Journal EntryJournal Entry

Clark’s Word Processing ServicesClark’s Word Processing ServicesGeneral Journal Page 1General Journal Page 1

DateDateAccount TitlesAccount Titles

and Descriptionand Description PRPR Dr.Dr. Cr.Cr.

200x200xMay 1May 1 CashCash

Brenda Clark, CapitalBrenda Clark, CapitalInitial investment ofInitial investment ofcash by ownercash by owner

10,00010,00010,00010,000


Journal Entry Journal Entry




200x200xMay 1May 1 EquipmentEquipment

CashCashAccounts PayableAccounts Payable

Purchase of equipmentPurchase of equipment

6,0006,0001,0001,0005,0005,000



1.1. Year (first entry on page only)Year (first entry on page only)2.2. Month (first entry on page only)Month (first entry on page only)3.3. DayDay4.4. Name of account debitedName of account debited5.5. Name of account creditedName of account credited6.6. ExplanationExplanation7.7. Amount of debitAmount of debit8.8. Amount of creditAmount of credit9.9. Skip one lineSkip one line


Journal Entry Journal Entry




200x200xMay 1May 1 Prepaid RentPrepaid Rent

CashCashRent paid in advanceRent paid in advance– – 3 months3 months

1,2001,2001,2001,200






200x200xMay 3May 3 Office SuppliesOffice Supplies

Accounts PayableAccounts PayablePurchase of supplies onPurchase of supplies onaccount from Norrisaccount from Norris

600600600600


Posting to the LedgerPosting to the Ledger

Account Name: CashAccount Name: Cash Account Number: 111Account Number: 111

DateDate Post.Post. BalanceBalance200x200x DescriptionDescription Ref.Ref. Debit Debit Credit Debit CreditCredit Debit Credit

May 1May 1 GJ 1GJ 1 10,000 10,000 10,000 10,000

General JournalGeneral Journal Page Page 11

DateDate Post.Post.200x200x DescriptionDescription Ref.Ref. Debit Debit CreditCredit

May 1May 1 CashCash 111 111 10,000 10,000Brenda Clark, CapitalBrenda Clark, Capital 311 311 10,00010,000

To record initial investmentTo record initial investment


PostingPostingFrom Journal to LedgerFrom Journal to Ledger

Step 1:Step 1: Record the dateRecord the dateStep 2:Step 2: Record the journal pageRecord the journal pageStep 3:Step 3: Record the amount and calculate new Record the amount and calculate new

balancebalanceStep 4:Step 4: Record the account number in the post Record the account number in the post

reference column in the ledger (cross reference column in the ledger (cross referencing)referencing)


PostingPostingFrom Journal to LedgerFrom Journal to Ledger

Post references are very helpful.Post references are very helpful.

Tells which entries have been posted and which Tells which entries have been posted and which have not.have not.

Tells us to which account amount was posted.Tells us to which account amount was posted.

Leads us back to the original transaction by Leads us back to the original transaction by page number.page number.


Posting to the LedgerPosting to the Ledger

DateDatePost.Post.Ref.Ref. DebitDebit CreditCredit DebitDebit CreditCredit

BalanceBalance

May 1May 1 GJ1GJ1 10,00010,000 10,00010,000

Clark’s Word Processing ServicesClark’s Word Processing ServicesGeneral LedgerGeneral Ledger

CashCash Account No. 111Account No. 111

Insert the number of the journal page.Insert the number of the journal page.


Trial BalanceTrial Balance

The trial balance lists the accounts whichThe trial balance lists the accounts whichhave balances in the same order ashave balances in the same order asthey appear in the chart of accounts.they appear in the chart of accounts.

The trial balance will show ifThe trial balance will show ifdebits/credits have been interchanged.debits/credits have been interchanged.

It will show if amounts have beenIt will show if amounts have beentransposed, or if a debit/credittransposed, or if a debit/creditwas omitted or recorded twice.was omitted or recorded twice.


Preparing the Trial BalancePreparing the Trial Balance

Clark’s Word Processing ServicesClark’s Word Processing ServicesTrial Balance, May 31, 200xTrial Balance, May 31, 200x

CashCashAccounts ReceivableAccounts ReceivableOffice SuppliesOffice SuppliesPrepaid RentPrepaid RentWord Processing EquipmentWord Processing EquipmentAccounts PayableAccounts PayableBrenda Clark, CapitalBrenda Clark, CapitalBrenda Clark, WithdrawalsBrenda Clark, WithdrawalsWord Processing FeesWord Processing FeesExpensesExpenses TotalsTotals

DebitDebit CreditCredit 6,1556,155 5,0005,000 600600 1,2001,200 6,0006,000

3,3503,35010,00010,000

625625 8,0008,000

1,7701,77021,35021,350 21,35021,350



HeadingHeadingAccounts are listed in same order as ledgerAccounts are listed in same order as ledgerOnly those accounts with balances are listedOnly those accounts with balances are listedWill not be correct if posting is incorrectWill not be correct if posting is incorrectCapital amount may be changed – WHY?Capital amount may be changed – WHY?Totals must equalTotals must equalNo guarantee that transactions have been No guarantee that transactions have been

properly recordedproperly recorded



Mathematical error in additionMathematical error in addition

OmissionOmission

Slide or transpositionSlide or transposition


Correcting EntryCorrecting Entry

Before posting – draw a line through incorrect Before posting – draw a line through incorrect amount and write the correct amount amount and write the correct amount

After posting – Make a correcting entry with After posting – Make a correcting entry with explanationexplanation


Trial BalanceTrial Balance

Some errors do not show, such as omissionsSome errors do not show, such as omissionsor recording to the wrong account.or recording to the wrong account.

Corrections before posting are made in the journal.Corrections before posting are made in the journal.

An audit trail must be left.An audit trail must be left.

Do not erase – cross out errors and enter corrections.Do not erase – cross out errors and enter corrections.(We are using pencil – I want you to erase)(We are using pencil – I want you to erase)



What about corrections after posting?What about corrections after posting?

This means that errors are also in the ledger accounts.This means that errors are also in the ledger accounts.

Cross out incorrect amounts, change toCross out incorrect amounts, change tocorrected amounts, and record balance changes.corrected amounts, and record balance changes.

3 - 1 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by...

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