BEGINNING THE ACCOUNTING CYCLE -...

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 3 - 1

BEGINNING THE

ACCOUNTING CYCLE

Chapter 3


Learning Objectives

1. Journalizing: analyzing and

recording business transactions into a

journal.

2. Posting: transferring information from

a journal to a ledger.

3. Preparing a trial balance.

3 - 3 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Journalizing: analyzing and

recording business transactions into

a journal

Learning Objective 1


Accounting Cycle

Normal procedures occurring over a

period of time

Takes place over an accounting period

Usually one year

Calendar year

January 1 – December 31

Fiscal year

Any 12 consecutive months


Accounting Period

Period of time covered by the income

statement

Monthly

Quarterly

Annually

Called a natural business year

Usually at the slowest time of the year

Interim Reports


General Journal

Book of original entry

Simplest form of a journal

All transactions are located in the

same place

Records information in chronological

order

Information is then transferred to the

ledger


Relationship between the Journal

and the Chart of Accounts


Formalities for Journalizing a Transaction

The debit portion of the transaction is recorded first.

The credit portion of a transaction is indented and

placed below the debit portion.

The explanation of the entry follows the credit.

A one-line space follows each journal entry to make

it easier to read.

The total amount of debits must always equal the

total amount of credits.

Each transaction must affect at least two different

accounts.


Journalizing Example

May 1, 200X: Brenda Clark began the business

by investing $10,000 in cash

Year Month Day Account Debited Account Credited

Explanation Amount Debited Amount Credited



May 1: purchased word processing equipment from ben

co. for $6,000; paying $1,000 and promising to pay the

balance within 30 days

Compound journal entry is a journal entry with more than

two accounts

Only the day is entered if transaction before contained

year and month



May 1: rented office space, paying $1,200 in advance

for the first three months

May 3: purchased office supplies from Norris Co. on

account, $600


May 7: completed sales promotion pieces for a client and

immediately collected $3,000

May 13: paid office salaries, $650




May 18: advertising bill from Al’s News Co. comes in but

is not paid, $250

May 20: Brenda Clark wrote a check on the bank account

of the business to pay her home mortgage payment of

$625



May 22: billed Morris Company for a sophisticated word

processing job, $5,000

May 27: paid office salaries, $650



May 28: paid half the amount owed for word processing

equipment purchased May 1 from Ben Co., $2,500

May 29: received and paid telephone bill, $220


Posting: transferring information

from a journal to a ledger.



Involves the transfer of information from the

journal to the ledger.

Step 1 - In the debit account in the ledger, record the

date (May 1, 200X) and the amount of the entry.

Step 2 - Record the page number of the journal

“GJ1” in the posting reference (PR) column of the

debit account.

Step 3 - Calculate the new balance of the account.

Step 4 - Record the account number of debit account

in the posting reference (PR) column of the journal.

This listing is known as cross-referencing.

Posting


Cross-Referencing

The Posting Reference column tells us

which transactions have or have not been

posted

In the ledger, the posting reference leads

us back to the original transaction

Users can use the posting references

columns to find the journal and ledger

transactions


Preparing a trial balance



Trial Balance

A list of the individual accounts with their balances taken from the ledger

If the information is incorrectly journalized

or posted, the trial balance will not be

correct

Computational errors

Transposition or slide errors

Posting errors


Trial Balance


What to Do If a Trial Balance Doesn’t Balance

If the difference (the amount you are off) is 10, 100,

1,000, etc., it is probably a mathematical error in

addition.

If the difference is equal to an individual account

balance in the ledger, the amount could have been

omitted. It is also possible the figure was not posted

from the general journal.

Divide the difference by 2, then check to see whether

a debit should have been a credit, or vice versa, in

the ledger or trial balance.


What to Do If a Trial Balance Doesn’t Balance

If the difference is evenly divisible by 9, a slide or

transposition may have occurred. A transposition is

the accidental rearrangement of digits of a number.

A slide is an error resulting from adding or deleting

zeros in writing numbers.

Compare the balances in the trial balance with the

ledger accounts to check for copying errors.

Recompute balances in each ledger account.

Trace all postings from journal to ledger.


Making a Correction Before Posting

Draw a line through the incorrect entry, write the

correct information above the line, and write your

initials near the change.


Step 1: Draw a line through the error and write the correct

figure above it.

Step 2: Change the running balance to reflect the corrected

posting by drawing a line through the balance; the corrected

balance is written above it.

Making a Correction After Posting


Correcting Entry Posted to the Wrong Account

A correction must first be made to the journal and

include an explanation.

The correct information must be posted to the

appropriate ledger accounts.

Step 1: The journal entry is corrected and explained


Correcting Entry Posted to the Wrong Account

Step 2: The Advertising Expense ledger account is corrected

Step 3: The Telephone Expense ledger is corrected


Summary of the chapter

When recording transactions into a general journal, the debit(s) will be against the date column and the credit(s) will be indented. These titles will come from the chart of accounts. The explanation line will then be indented below the last credit entry. The sum of the left side (Dr.) must equal the sum of the right side (Cr.) for each transaction.

Remember that the accounts affected come from the chart of accounts. You have six categories: assets, liabilities, capital, withdrawals, revenues, and expenses.



The Posting Reference (PR) column of the journal will show to which account information has been posted. The PR column in the ledger accounts show from which page of the journal the information came. When updating ledger accounts, two debits added equal a debit balance. Two credits added would be a credit balance. If you have a debit and a credit, take the difference between them; whichever side is larger is the balance (be it a debit or credit).



Posting is copying from the journal to the ledger. The ledger will accumulate information in the form of debits and credits. The last line in the balance column will show whether it is a debit or credit balance. The general journal does not show a running balance like the ledger accounts do.

Items in a trial balance are listed in the same order as in the ledger or chart of accounts. Expect each account to have its normal balance (either a debit or credit). No title in the trial list balance can have both a debit and credit balance.


List the ending balance of each ledger account (last number listed in the balance columns) in the order of the ledger. They should follow this pattern:

Assets Dr. Liabilities Cr. Capital Cr. Withdrawals Dr.

Revenues Cr. Expenses Dr.

When complete, the total of all debits will equal the total of the credits.

If the trial balance does not balance, it could be a posting mistake or just a math error.



Questions


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