Understanding The Recording Process

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Typical Chart of Accounts

ASSETS (100-199)Current Assets (100-150)101 Cash105 Accounts Receivable107 Inventory

Long-Term Assets (151-199)151 Land152 Building

LIABILITIES (200-299)Current Liabilities (200-219)201 Notes Payable202 Accounts Payable

Long-Term Liabilities (220-239)222 Mortgage Payable

OWNERS’ EQUITY (300-399)301 Capital Stock330 Retained Earnings

SALES (400-499)400 Sales Revenue

EXPENSES (500-599)500 Cost of Goods Sold523 Rent Expense528 Advertising Expense573 Utility Expense

Step 1Step 1Business Business documents documents analyzedanalyzed

Step 2Step 2Transactions Transactions recorded in recorded in journalsjournals

Step 3Step 3Transactions Transactions posted to posted to ledgersledgers

Recording Process

Overview of the Accounting Process

Step 5Step 5

AdjustmentsAdjustments

Work sheet Work sheet (optional)(optional)

ContinuedContinuedContinuedContinued

Step 4Step 4

Trial balanceTrial balanceSteps in the

Reporting Phase

Continued from previous slide

Step 7Step 7

AdjustmentsAdjustments

Step 6Step 6

Financial statementsFinancial statements

Steps in the

Reporting Phase

Step 8Step 8

Post-closing trial balance Post-closing trial balance (optional)(optional)

Overview of the Accounting Process

1. Analyzing Business Documents

Transactions are the exchange of goods or services between entities, as well as other events that have an economic impact on a business.

Business documents are records that are evidence of transactions.

General Journal Entry FormatDate Debit Entry.................................. xx

Credit Entry............................. xx Explanation.

A journal is an accounting record in which business transactions are entered in chronological order.

Journal entries record transaction information; debits equal credits.

2. Journalizing Transactions

Every journal entry involves a three-step process:

1. Identify the accounts involved with an event or transaction.

2. Determine whether each account increased or decreased.

3. Determine the amount by which each account was affected.

2. Journalizing Transactions

Assets = Liabilities + Owners’ Equity DR CR DR CR DR CR (+) (–) (–) (+) (–) (+)

Capital Stock

DR CR (–) (+)

Retained Earnings

DR CR (–) (+)

ContinuedContinuedContinuedContinued

Debits and Credits

Retained Earnings

DR CR (–) (+)

Expenses DR CR (+) (–)

Revenues DR CR (–) (+)

Dividends DR CR (+) (–)

Date DescriptionPostRef. Debits Credits

General Journal Page 24

2005July 1 Dividends 330 25,000

Dividends Payable 260 25,000Declared semiannualcash dividend oncommon stock.

10 Equipment 180 7,500Notes Payable 220 7,500

Issued note for newequipment .

Example: Journal Entry

On January 2, sold merchandise costing $60 to a customer on account for $75.

Make the journal entry.

Example: Journal Entry

Jan. 2 Accounts Receivable..................... 75 Sales Revenue.......................... 75

Sold merchandise on account.

2 Cost of Goods Sold...................... 60 Inventory................................. 60

To record cost and reduce inventory.

On January 2, sold merchandise costing $60 to a customer on account for $75.

Make the journal entry.This entry assumes that the This entry assumes that the perpetual system is used.perpetual system is used.

This entry assumes that the This entry assumes that the perpetual system is used.perpetual system is used.

3. Posting to the Ledger Accounts

Posting is the process of transferring amounts from the journal to the general ledger.

A ledger is a collection of accounts in which data from transactions recorded in the journals are posted, classified, and summarized.

A chart of accounts lists all accounts used by the company.

3. Posting to the Ledger AccountsThe Equipment account in the general ledger after the purchase of July 10 (Slide 9) has been posted

would appear as follows:

AccountEQUIPMENT Account No: 180

Date Item PR Debit Credit Balance

2005 July 1 Balance 10,550 10 Purchase Equipment J24 7,500 18,050

To examine the journal entry, click this button to go to Slide 9. To return, click on the word “July” in the entry on Slide 9.

Reporting Phase

4. A trial balance is prepared.

5. Adjusting entries are recorded.

6. Financial statements are prepared.

7. Closing entries are made.

8. A post-closing trial balance is prepared (optional).

4. Preparing a Trial Balance

Determine the account balance for each T-Account.

A trial balance is a list of all accounts and their balances. It provides a means to assure that debits equal credits.

XYZ CompanyTrial Balance

December 31, 2005

Debits CreditsCash $ 21Accounts Receivable 15Inventory 12Land 200Accounts Payable $ 30Capital Stock 150Retained Earnings 24Sales Revenue 919Cost of Goods Sold 850Advertising Expense 10Misc. Expenses 15 ______ Total $ 1,123 $ 1,123

Illustration 1. October 1, C.R Byrd invests $10,000 cash in an advertising

venture to be known as the Pioneer Advertising Agency

Oct. 1 Cash C.R.Byrd, Capital (Invested cash in business)

10,00010,000

2. October 1, office equipment costing $5,000 is purchased by signing a 3-month, 12%, $5,000 note payable.

Oct. 1 Office equipment Notes payable (Issued 3-month, 12%, note for office equipment)

5,0005,000

3. October 2, a $1,200 cash advance is received from R. Knox, a client, for advertising services that are expected to be completed.

Illustration Oct. 2 Cash

Unearned Fees (Received advance from R.Knox for future service)

1,2001,200

4. October 3, office rent for October is paid in cash, $900

Oct. 3 Rent Expense Cash (Paid October Rent)

900900

5. October 4, $600 is paid for a one-year insurance policy that will expire next year on September 30.

Oct. 4 Prepaid Insurance Cash (Paid one-year policy; effective date October 1)

600600

Illustration

7. October 9, hire four employees to begin work on October 15. each employee is to receive a weekly salary of $500 for a 5-day work week, payable every 2 weeks – first payment made on October 26.

A business transaction has not occurred. There is only an agreement between the employer and the employees to enter into a business.

8. October 20, C.R. Byrd withdraw $500 cash for personal use.

Oct. 20 C.R. Byrd, Drawing Cash (Withdraw cash for personal use)

500500

6. October 5, an estimated 3-month supply of advertising materials is purchased on account from Aero Supply for $2,500

Oct. 5 Advertising Supplies Account Payable (Purchased supplies on account from Aero Supply)

2,5002,500

9. October 26, employee salaries of $4,000 are owed and paid in cash. (See October 9 transaction)

Illustration

10.October 31, received $10,000 in cash from Copa Company for advertising services rendered in October.

Oct. 31 Cash Fees Earned (Received cash for fees earned)

500500

Oct. 26 Salaries Expense Cash (Paid salaries to date)

4,0004,000

GENERAL LEDGER

Date Explanation Ref Debit Credit Balance

Oct. 1 2 3 4 20 26 31

J1 J1J1J1J1J1J1

10,0001,200

10,000

900 600 5004,000

10,00011,20010,300 9,700 9,200 5,20015,200

Oct. 5 J1 2,500 2,500

ADVERTISING SUPPLIES NO 8

Date Explanation Ref Debit Credit B3alance

Oct. 4 J1 600 600

Prepaid Insurance NO 10

GENERAL LEDGER

Oct. 1 J1 5,000 5,000

Office Equipment

Oct. 1 J1 5,000 5,000

Notes Payable

Oct. 5 J1 2,500 2,500

Account Payable NO 26

Oct. 2 J1 1,200 1,200

Unearned Fees NO 28

No. 15

GENERAL LEDGER

Oct. 1 J1 10,000 10,000

C.R. Byrd, Capital

Oct. 20 J1 500 500

C.R. Byrd, Drawing

Oct. 31 J1 10,000 10,000

Fees Earned NO 50

Oct. 26 J1 4,000 4,000

Salaries Expense NO 60

No. 40

GENERAL LEDGER

Oct. 3 J1 900 900

Rent Expense NO 62

PIONEER ADVERTISING AGENCY ACCOUNTS1-19 = Assets Accounts

20 – 39 = Liabilities40 – 49 = Owner’s Equity

50 – 59 = Revenues60 – 69 = Expenses

PIONEER ADVERTISING AGENCYTRIAL BALANCE

OCTOBER 31, 2010

DEBIT CREDIT

Cash $ 15,200

Advertising Supplies 2,500

Prepaid Insurance 600

Office Equipment 5,000

Notes Payable $ 5,000

Accounts Payable 2,500

Unearned Fees 1,200

C.R. Byrd, Capital 10,000

C.R. Byrd, Drawing 500

Fees Earned 10,000

Salaries Expense 4,000

Rent Expense 900

$28,700=======

5. Preparing Adjusting Entries

Adjusting entries are required at the end of each accounting period for accrual- basis accounting, prior to preparing the financial statements. The purpose for adjusting entries are to:• bring balance sheet accounts

current.

• reflect proper amounts of revenues, costs, and expenses on the income statement.

Tips Regarding Adjusting EntriesTips Regarding Adjusting EntriesTips Regarding Adjusting EntriesTips Regarding Adjusting Entries

Analytical Process. You must determine what original entry was made (if any) and what the ending balances should be before you know what adjusting entry to make. You cannot memorize adjusting entries.

Adjusting entries always incorporate a balance sheet account and an income statement account.

Adjusting entries never involve a cash account.

• Unrecorded Revenues—Revenues that have been earned but not yet recorded.

• Unearned Revenues—Revenues that have been recorded but not yet earned.

• Unrecorded Expenses—Expenses that have been incurred but not yet recorded.

• Prepaid Expenses—Expenses that have been recorded but not yet incurred.

Most Common Adjusting EntriesMost Common Adjusting EntriesMost Common Adjusting EntriesMost Common Adjusting Entries

1. Identify the original entries that were made, if any. Original entries are only made for unearned revenues and prepaid expenses.

2. Determine what the correct balances should be at this point in time.

3. Make the adjustments needed to bring the balances to the desired amounts.

Three-Step Process for Three-Step Process for Adjusting EntriesAdjusting Entries

Rosi, Inc. purchased buildings in 2000 at a cost of $156,000, an expected life of 20 years, and no anticipated residual value. Each year, 5% of the cost is depreciated. At the end of 2005, the following adjusting entry is made:

Asset DepreciationAsset DepreciationAsset DepreciationAsset Depreciation

Adjusting Entry 12/31 Depreciation Expense—Buildings 7,800

Accumulated Depr.—Buildings 7,800To record depreciationon building at 5% per year.

An estimation of bad debts based on the ending receivables balance reveals that the allowance account needs to be increased by $1,100.

Adjusting Entry 12/31 Bad Debts Expense 1,100

Allowance for Bad Debts 1,100To adjust for estimated baddebts expense.

Bad DebtsBad DebtsBad DebtsBad Debts

Later, on March 19 that a $150 receivable is deemed to be uncollectible. Using the allowance account, the uncollectible account is written off the books.

3/19 Allowance for Bad Debts 150Accounts Receivable 150

To write off an uncollectibleaccount.

Bad DebtsBad DebtsBad DebtsBad Debts

Note that this entry is not an adjusting entry. It is made when the account is determined to be uncollectible.

At the end of the fiscal period, Rosi, Inc. had accrued salaries and wages totaling $2,150.

Adjusting Entry 12/31 Salaries and Wages Expense 2,150

Salaries and Wages Payable 2,150To record accrued salaries andwages.

Accrued ExpensesAccrued ExpensesAccrued ExpensesAccrued Expenses

Rosi, Inc. holds a note receivable from a customer on which interest total $250 has accrued.

Adjusting Entry 12/31 Interest Receivable 250

Interest Revenue 250To record accrued interest on anote receivable.

Accrued RevenuesAccrued RevenuesAccrued RevenuesAccrued Revenues

Rosi, Inc.’s trial balance shows that the asset account Prepaid Insurance has a balance of $8,000. By December 31, only $3,800 applies to future periods.

Adjusting Entry 12/31 Insurance Expense 4,200

Prepaid Insurance 4,200To record expired insurance.

$8,000 $8,000 –– $3,800 $3,800$8,000 $8,000 –– $3,800 $3,800

Prepaid ExpensesPrepaid ExpensesPrepaid ExpensesPrepaid Expenses

Original debit to an asset accountOriginal debit to an asset account

Rosi, Inc.’s trial balance shows that the asset account Insurance Expense has a balance of $8,000. By December 31, $3,800 applies to future periods.

Adjusting Entry 12/31 Prepaid Insurance 3,800

Insurance Expense 3,800To record expired insurance.

$8,000 $8,000 –– $4,200 $4,200$8,000 $8,000 –– $4,200 $4,200

Prepaid ExpensesPrepaid ExpensesPrepaid ExpensesPrepaid Expenses

Original debit to an expense accountOriginal debit to an expense account

Rosi, Inc. receives a payment of $2,550 from a customer prior to the services being rendered. By December 31, $2,075 in services have been provided.

Adjusting Entry 12/31 Rent Revenue 475

Unearned Rent Revenue 475To record unearned rent revenue.

Original credit to a revenue accountOriginal credit to a revenue account

$2,550 $2,550 –– $2,075 $2,075$2,550 $2,550 –– $2,075 $2,075

Deferred RevenuesDeferred RevenuesDeferred RevenuesDeferred Revenues

Adjusting Entry 12/31 Unearned Rent Revenue 2,075

Rent Revenue 2,075To record rent revenue.

Rosi, Inc. receives a payment of $2,550 from a customer prior to the services being rendered. By December 31, $2,075 in services have been provided.$2,550 $2,550 –– $475 $475$2,550 $2,550 –– $475 $475

Original credit to a liability accountOriginal credit to a liability account

Deferred RevenuesDeferred RevenuesDeferred RevenuesDeferred Revenues