Chapter 3 Starting the Accounting Cycle for a Service Business 1© Paradigm Publishing, Inc.

Chapter 3

Starting the Accounting Cycle for a Service Business

1© Paradigm Publishing, Inc.

1. Describe the standard form of a two-column journal.

2. Record business transactions in a two-column journal.

3. Prepare a chart of accounts.

4. Describe the balance form of account.

© Paradigm Publishing, Inc. 2

Learning Objectives

5. Post from a two-column journal to ledger accounts.

6. Prepare a trial balance from a ledger after posting.

7. Describe the procedures for locating and correcting errors in the accounting process.

8. Make entries to correct errors in the ledger.


Learning Objectives

The Accounting Cycle

Sequence of steps and procedures

Used to record and summarize accounting data during an accounting period


The Accounting Cycle

Step 1 Analyze transactions from source documents.

Step 2 Record transactions in a journal.

Step 3 Post from the journal to the ledger.

Step 4 Prepare a trial balance of the ledger.


Source Documents

Business documents or papers that prove business transactions

The basis for journal entries

Provide objective evidence to support the journal entries


Describe the standard form of a two-column journal

Learning Objective 1


Journal

A record in which business transactions are recorded in the order that they occur

AKA book of original entry


Contents of a Journal1. Numbered pages, beginning with page 1

2. A Date column to record transaction date

3. An Account Title column To record the accounts affected To record a brief explanation

4. A posting reference (P.R.) column

5. Two money (or amount) columns Labeled Debit and Credit, respectively Used to record the dollar amount


Contents of a Journal

1. Page number

2. A Date column

3. An Account Title column

4. A Posting Reference (P.R.) column

5. Debit and Credit columns© Paradigm Publishing, Inc. 10


The sequence of steps and procedures used by a business to record and summarize accounting data is known as the

a. accounting cycle.

b. balance form of account.

c. book of original entry.

d. accounting period.

e. principle of materiality.

Quick Check

Record business transactions in a

two-column journal



To Record a Transaction

Analyze into its debit and credit parts.

For each transaction, you must decide: Which accounts are affected by the transaction

Were the accounts increased or decreased

How to increase or decrease (debit or credit the accounts affected


To Record a TransactionProvide a brief explanation for each journal entry.

Notes telling someone not trained in accounting what occurred in a transaction.

Writing them will reinforce your understanding of transactions.


Debits First or Credits First???

When making journal entries, which is listed first?

Account being debited is always listed first

Credit follows, indented


Explanations for Journal Entries

No set format

Should be brief and easy to understand

Optional: may be omitted if purpose of entry is obvious


Example

Alice Browning starts an accounting and tax business by investing $5,000 in the business on January 1, 20X1.

Analyze the account to be debited and the account to be credited.


Cash, an asset account, is increasing.

Assets are increased with debits.

Alice Browning, Capital, an equity account, is increasing.

Equity accounts are increased with credits.

Example

Alice Browning starts an accounting and tax business by investing $5,000 in the business on January 1, 20X1.


General Journal

Date Account Title P.R. Debit Credit

20X1Jan.

1 Cash 5,000

Alice Browning, Capital 5,000

Invested cash in the business.

Review Quiz 3-1

Record each transaction in a general journal. Omit the explanations.

Mar. 1, Becky invested $7,000 cash in her business.


General Journal


20XXMar.

1 Cash 7,000

Becky McAfee, Capital 7,000


Mar. 4, purchased supplies on credit, $750.


Review Quiz 3-1

General Journal


20XXMar.

4 Supplies 750

Accounts Payable 750


Mar. 6, purchased equipment for cash, $475.


Review Quiz 3-1

General Journal


20XXMar.

6 Equipment 475

Cash 475

Review Quiz 3-1


Mar. 9, paid half of the amount owed for supplies, $375.


General Journal


20XXMar.

9 Accounts Payable 375

Cash 375

Compound EntryEntry requiring three or more accounts

Total debits will equal the total credits regardless of the number of accounts involved in the journal entry


Example

On July 25, 20X1, Susan King purchases equipment for $10,000 by making a down payment of $3,500 with the balance on account.

Analyze the account(s) to be debited and the account(s) to be credited.


Equipment, an asset account, is increasing. Assets are increased with debits.

Cash, an asset account, is decreasing. Assets are decreased with credits.

Accounts Payable, a liability account, is increasing. Liabilities are increased with credits.

Example


On July 25, 20X1, Susan King purchases equipment for $10,000 by making a down payment of $3,500 with the balance on account.

Analyze the account(s) to be debited and the account(s) to be credited.

General Journal


20X1Jul.

25 Equipment 10,000

Cash 3,500

Accounts Payable

Purchased equipment with a down payment and the balance on account.

6,500

Advantages of Using a Journal

Provides a chronological (by order of date) record of transactions

Provides a place to make an explanation of an entry, if needed

Use lessens the possibility of recording an error, because both the debit and credit parts are recorded together

Easier to locate recording errors



The process of recording transactions in a journal is called

a. dailying.

b. transitioning.

c. journalizing.

d. footing.

e. ledgering.

Quick Check

Review Quiz 3-2

Record each transaction in a general journal. Omit Explanations.

Jun. 12, paid utilities expense, $145.



Utilities Expense 145

Cash 145

20X1Jun.

12

General Journal

Review Quiz 3-2

John Dark’s business had the following transactions in June 20X1. Record each transaction in a general journal. Omit Explanations.

Jun. 17, John withdrew cash for personal use, $175.



John Dark, Drawing 175

Cash 175

20X1Jun.

17

General Journal

Review Quiz 3-2


Jun. 22, received cash for services performed, $950.



Cash 950

Service Revenue 950

20X1Jun.

22

General Journal

Review Quiz 3-2


Jun. 25, John made the following additional investments in his business: office supplies, $75; and a truck, $4,000.



Office Supplies 75

John Dark, Capital 4,075

20X1Jun.

25

General Journal

Truck 4,000



Prepare a Chart of Accounts

A listing of all accounts and their account numbers

A directory of accounts available for making journal entries

Includes only account titles that may be used when recording transactions in the journal


Account Category

Account Number

Account Title

Assets (100-199) 111112

113

116

117

CashAccounts ReceivableOffice SuppliesOffice EquipmentOffice Furniture

Liabilities (200-299) 211 Accounts Payable

Owner’s Equity (300-399)

311

312

Stanley Walker, CapitalStanley Walker, Drawing

Revenue (400-499) 411 Service Revenue

Expenses (500-599) 511512

Rent ExpenseRepairs Expense

Chart of Accounts


A directory or listing of accounts available in the ledger is referred to as the

a. book of final entry.

b. book of original entry.

c. source document.

d. chart of accounts.

e. balance form of account.

Quick Check



Describe the balance form of account

An Account

A record for each item in a business

The balance form of an account includes a Debit columnCredit columnDebit Balance columnCredit Balance column

The four-column ledger account form shows a running balance of each account

Ledger accounts not footed and balanced

Balance form of account widely used© Paradigm Publishing, Inc. 36

The Balance Form of Account



The ledger is often referred to as the book of

a. final entry.

b. numbers.

c. balances.

d. original entry.

e. materiality.

Quick Check



Post from a two-column journal to ledger accounts

Posting the Debit Part of an Entry

40

1. The date of the journal entry is recorded in the Cash account.

2. The Cash account is debited for 10,000.3. The page number of the journal entry is recorded

in the P.R. column of the Cash account.4. The account number is recorded in the journal.5. Since this is the first number posted to the Cash

account, the balance is 10,000 and is recorded in the balance debit column.


© Paradigm Publishing, Inc.

1


41





2. The Cash account is debited for 10,000.


2


42





3

3. The page number of the journal entry is recorded in the P.R. column of the Cash account.







43

4

4. The account number is recorded in the journal.



44





5

5. Since this is the first number posted to the Cash account, the balance is 10,000 and is recorded in the balance debit column.


Posting the Credit Part of an Entry

1. The date of the journal entry is recorded in the Owner’s Capital account.


1

Posting the Credit Part of an Entry1. The date of the journal entry is recorded in the

owner’s capital account.2. Stanley Walker, Capital is credited for 10,000.3. The page number of the journal entry is recorded

in the P.R. column of the Stanley Walker, Capital account.

4. The account number is recorded in the journal.5. Since this is the first number posted to the

Stanley Walkr, Capital account, the balance is 10,000 and is recorded in the balance credit column.

2. Stanley Walker, Capital is credited for 10,000.

2






Stanley Walker, Capital account, the balance is 10,000 and is recorded in the balance credit column.

3

3. The page number of the journal entry is recorded in the P.R. column of the Stanley Walker, Capital account.






Stanley Walker, Capital account, the balance is 10,000 and is recorded in the balance credit column.



4

Posting the Credit Part of an Entry

1. The date of the journal entry is recorded in the owner’s capital account.

2. Stanley Walker, Capital is credited for 10,000.

3. The page number of the journal entry is recorded in the P.R. column of the Stanley Walker, Capital account.


5. Since this is the first number posted to the Stanley Walker, Capital account, the balance is 10,000 and is recorded in the balance credit column.

5

5. Since this is the first number posted to the Stanley Walker, Capital account, the balance is 10,000 and is recorded in the Balance Credit column.



Which of the following represents the correct order of the first four steps of the account cycle?

a. Analyze transactions, journalize, post to ledger, prepare trial balance

b. Journalize, analyze transactions, post to ledger, prepare trial balance

c. Analyze transactions, post to ledger, journalize, prepare trial balance

d. Journalize, post to ledger, analyze transactions, prepare trial balance

e. Journalize, post to ledger, prepare trial balance, analyze transactions

Quick Check



Prepare a Trial Balance from a Ledger after Posting

Trial BalanceNot a formal financial statement

A test of the equality of debits and credits in the ledger

The order of accounts is consistent with the order on the financial statements and the chart of accounts


Trial BalanceThe purpose of the trial balance is to prove the equality of the debits and credits.


Walker and Associates Trial Balance November 30, 20X1

Account Title Debit Credit

Cash 9,525

Accounts Receivable 300

Office Supplies 125

Office Equipment 3,000

Office Furniture 2,000

Accounts Payable 4,000

Stanley Walker, Capital 10,000

Trial BalanceThe purpose of the trial balance is to prove the equality of the debits and credits.


Walker and Associates Trial Balance November 30, 20X1


Stanley Walker, Drawing

Service Revenue

Rent Expense

Repairs Expense

Totals 16,20016,200

8,000

2,200

400

50


The four-column account form contains each of the following columns except the

a. Debit Balance column

b. Credit Balance column

c. Credit column

d. Debit column

e. Difference column

Quick Check

Prepare a trial balance for the following accounts.


Account Balance

Accounts Payable $ 7,210

Cash 1,400

Equipment 16,400

LeAnn Lovering, Capital 14,600

LeAnn Lovering, Drawing 700

Rent Expense 3,000

Repairs Expense 450

Revenue from Services 16,380

Salaries Expense 2,510

Supplies 3,860

Truck 9,400


Review Quiz 3-3

Answer:


LeAnn’s TV Repair ShopTrial Balance December 31, 20XX


Cash 1,400

Supplies 3,860

Equipment 16,400

Truck 9,400

Accounts Payable 7,210

LeAnn Lovering, Capital 14,600

LeAnn Lovering, Drawing 700

Revenue from Services 16,380

Rent Expense 3,000

Salaries Expense 2,510


Repairs Expense 450

Totals 16,200 16,200

Review Quiz 3-3

Locating and Correcting Errors

Accounting errors can include

Math errors

Recording errors

Posting errors

Errors cause the trial balance to be out of balance




Describe the procedure for locating and correcting errors in the accounting

process

Types of Errors

Posting

Recording

Transposition

Slide


Posting Error

An amount correctly entered in the journal but posted incorrectly to the ledger

Corrected by

Drawing a line through the error

Writing the correct figure above it


Recording Error

A mistake made in a journal entry

Posting error

An incorrect transfer from the journal to an account or from the ledger to the trial balance


Transposition Error

A type of posting error

Caused by the reversal of digits

Example: entering 240 for 420


Slide Error

A type of posting error

Caused by an incorrectly placed decimal point

Examples: entering 100 for 1,000 or 24.50 for 245



Each of the following errors will not cause the trial balance to be out of balance except

a. Posting a transaction twice

b. Failing to record a transaction

c. Transposing digits in a posting

d. Failing to post an entry to the ledger

e. Recording a transaction twice

Quick Check



Make entries to correct errors in the ledger

Summary of Correction Procedures


Type of Error Method of Correction

Math error made in pencil Erasure

Math error made in pen Line out the incorrect figure, initial, and enter the correct figure

Recording error discovered before posting

Line out incorrect information, initial, and enter correct information

Recording error that has been posted Correcting entry

An incorrect amount posted to the correct account

Line out, initial, and enter the correct amount

A correct amount posted to the incorrect account

Correcting entry


This type of error occurs in the process of transferring figures from the journal to the ledger.

a. Math error

b. Recording error

c. Posting error

d. Omission error

e. Standard error

Quick Check

Review Quiz 3-4

Indicate how the following error should be corrected.

1. A cash purchase of equipment was recorded as a cash purchase of supplies. The entry has not been posted to the ledger.


Answer:

Line out the title Supplies in the journal and write the title Equipment above it.

Review Quiz 3-4


2. A journal entry for $470 was posted as $47 in one of the accounts involved.


Answer:

Line out $47 in the ledger account and write $470 above it.

Review Quiz 3-4


3. A cash payment of $50 for Repairs Expense was journalized as a debit to Rent Expense and a credit to Cash. The entry was then posted.


Answer:

Review Quiz 3-4


4. In a company with over $6,000,000 in annual sales, it was discovered that the purchase of a $6.40 book of stamps was debited to Advertising Expense, instead of Postage Expense.


Answer:

Why do you believe the plastic surgeon kept his job at the clinic even though he admitted that he had stolen several hundred thousands of dollars?

Focus on Ethics


Refer to the Focus on Ethics box on page 109 in your text.

The First Four Steps in the

Accounting Cycle

Joining the Pieces


Chapter 3 Starting the Accounting Cycle for a Service Business 1© Paradigm Publishing, Inc.

Documents

Transcript of Chapter 3 Starting the Accounting Cycle for a Service Business 1© Paradigm Publishing, Inc.