The Accounting Cycle: Capturing Economic Events
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The Accounting Cycle: Capturing Economic Events
- 1. McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. The Accounting Cycle:The Accounting Cycle: Capturing Economic EventsCapturing Economic Events otaleem.blogspot.comotaleem.blogspot.com for more presentation(follow me)for more presentation(follow me) Chapter 3
- 2. 3-2 Accounting CycleAccounting Cycle The Sequence of accounting procedures used to record, classify, and summarize accounting information in financial reports at regular intervals is often termed the accounting cycle.
- 3. 3-3 Accounting Cycle StepsAccounting Cycle Steps
- 4. 3-4 The LedgerThe Ledger The entire group of accounts is kept together in an accounting record called a ledger. The entire group of accounts is kept together in an accounting record called a ledger. Cash Accounts Payable Capital Stock Accounts are individual records showing increases and decreases. Accounts are individual records showing increases and decreases.
- 5. 3-5 The Use of AccountsThe Use of Accounts Increases are recorded on one side of theT account, and decreases are recorded on the other side. Left or Debit Side Right or Credit Side Title of Account
- 6. 3-6 Cash 5/1 8,000 5/2 2,500 5/25 75 5/8 2,000 5/29 750 5/28 150 5/31 50 5/31 4,125 Bal. Receipts are on the debit side. Payments are on the credit side. The balance is the difference between the debit and credit entries in the account. The balance is the difference between the debit and credit entries in the account. Debit and Credit EntriesDebit and Credit Entries
- 7. 3-7 Balance of T AccountBalance of T Account Debit Balance Credit Balance Any Asset Account Any Liabilities and owner’s Equity Accounts Double Entry Accounting- the equality of debits and credits
- 8. 3-8 AA = LL + OEOEASSETSASSETS Debit for Increase Credit for Decrease EQUITIESEQUITIES Debit for Decrease Credit for Increase LIABILITIESLIABILITIES Debit for Decrease Credit for Increase Debits and credits affect accounts as follows:Debits and credits affect accounts as follows: Debit and Credit EntriesDebit and Credit Entries
- 9. 3-9 In an actual accounting system, transactions are initially recorded in the journal. In an actual accounting system, transactions are initially recorded in the journal. GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit 2009 May 1 Cash 8,000 Capital Stock 8,000 Owners invest cash in the business. The JournalThe Journal
- 10. 3-10 Posting Journal Entries to thePosting Journal Entries to the Ledger AccountsLedger Accounts Posting simply means updating the ledger accounts for the effects of the transactions recorded in the journal.
- 11. 3-11 GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit 2009 May 1 Cash 8,000 Capital Stock 8,000 Owners invest cash in the business.General Ledger Cash Date Debit Credit Balance 2009 May 1 8,000 8,000 Posting Journal Entries to thePosting Journal Entries to the Ledger AccountsLedger Accounts
- 12. 3-12 GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit 2009 May 1 Cash 8,000 Capital Stock 8,000 Owners invest cash in the business.General Ledger Capital Stock Date Debit Credit Balance 2009 May 1 8,000 8,000 Posting Journal Entries to thePosting Journal Entries to the Ledger AccountsLedger Accounts
- 13. 3-13 General Ledger Cash Date Debit Credit Balance 2009 May 1 8,000 8,000 2 2,500 5,500 T accounts are simplified versions of the ledger account that only show the debit and credit columns. T accounts are simplified versions of the ledger account that only show the debit and credit columns. Ledger Accounts After PostingLedger Accounts After Posting
- 15. 3-15 Net income is not an asset it’s an increase in owners’ equity from profits of the business. Net income is not an asset it’s an increase in owners’ equity from profits of the business. AA = LL + OEOEIncrease Decrease As income is earned, either an asset is increased or a liability is decreased. Increase Net income always results in the increase of Owners’ Equity What is Net Income?What is Net Income?
- 16. 3-16 Revenue and ExpensesRevenue and Expenses The price for goods sold and services rendered during a given accounting period. Increases owners’ equity. The costs of goods and services used up in the process of earning revenue. Decreases owner’s equity.
- 17. 3-17 Debit and Credit Rules forDebit and Credit Rules for Revenue and ExpensesRevenue and Expenses EQUITIES Debit for Decrease Credit for Increase Expenses decrease owners’ equity. Revenues increase owners’ equity. EXPENSES Credit for Decrease Debit for Increase REVENUES Debit for Decrease Credit for Increase
- 20. 3-20 End of Chapter 3End of Chapter 3
Notes de l'éditeur
- Chapter 3: The Accounting Cycle—Capturing Economic Events.
- An account is an individual record showing increases and decreases in the balance. Think of a checkbook as an account. In it, cash receipts and disbursements are maintained, in chronological order, as well as the current account balance. The entire group of accounts for a particular business is called the ledger.
- Accountants often use a T account to represent a general ledger account. It is a quick way to analyze transactions before entering information in the journal. The left side of a T account is always called the debit side, and the right side is always called the credit side. This terminology comes from the time when the double-entry system was first developed. These terms are still used as a matter of convention. The words do not have any significant meaning other than they stand for the left and right side of a ledger account. Increases and decreases in an account balance are handled differently, depending upon the nature of the account.
- Part IHere are the dates and amounts of transactions that impacted the cash account of JJ’s Lawn Service for the month of May.Part IIBecause cash is an asset, all receipts, or increases, should be placed on the debit, or left, side of the ledger account. Part IIIIf increases are placed on the left side of the account, all payments, or decreases, should be placed on the right, or credit, side of the account, according to the basic accounting rules for assets. Part IVThe balance in any account is the difference between total debits and credits. The balance is placed on the side with the greater dollar amount.
- To review, the left side of a ledger account is always called the debit, and the right side is always called the credit. Now, let’s move on to the mathematics of the double-entry system. Liabilities and equity have the opposite sign of assets. If liabilities were to move to the left side of the equation, it would read assets minus liabilities equal equity. As a convention of double-entry accounting, it’s been decided that a debit, or left side, of an asset account will represent an increase in the asset account balance. This convention determines all of the remaining math.Because liabilities and equity have the opposite sign of assets, a debit to a liability or equity account must mean a decrease and a credit means an increase. Instead of using the terms increase and decrease we use the terms debit and credit. It is important to remember whether we are talking about an asset, liability, or equity account for the meaning of a debit or a credit. It may take a short while to become accustomed to using the terms debit and credit, but with practice the concept can be easily mastered.
- Transactions are initially recorded in the journal rather than the ledger account. The journal records transactions in chronological order. The ledger groups together all transactions that impact a particular account.When preparing a journal entry, always list debit accounts and amounts first and show credit accounts and amounts below the debits, indented slightly.Proper form requires that each journal entry be followed by a short description of the transaction. We skip a line after the description of the transaction before we start our next journal entry.
- At the end of the accounting period, transactions are posted from the journal into the ledger account. Posting is the process of systematically copying information from the journal to the ledger. Care must be taken when doing so, as it is easy to make mistakes.
- Part I A journal entry is shown here. Let’s see how to post this information from the journal to the ledger.Part IIFirst, find the proper ledger account. In this case, the cash ledger account.Part IINext, copy the date to the ledger account.Part IVFinally, copy the amount from the debit column in the journal to the debit column in the ledger. Update the balance in the cash account. The current balance is eight thousand dollars.Now, let’s post the credit side of the journal entry.
- Part IFirst, locate the capital stock account in the general ledger.Part IINext, copy the date from the journal entry to the proper column in the capital stock account.Part IIFinally, copy the amount from the credit column in the journal to the credit column in the ledger. Update the account balance for the new posting.
- In accounting, a T account is frequently used to represent a ledger account. You can see the red lines that show how we get the term T account. The T account is a simple way to debit or credit a ledger account for illustration purposes. T accounts are not part of the accounting system.
- Part INet income, the excess of revenues earned over expenses incurred, is not an asset. Net income increases owners’ equity by increasing retained earnings.Part IIWhen a company earns income, assets must increase or liabilities must decrease to reflect the earnings process. Remember, when JJ’s Lawn Care rendered services to its customers the asset account, cash, increased and so did the owners’ equity account, retained earnings.Part IIINet income always represents an increase in the owners’ equity of a company.
- Part IRevenues represent the price of goods sold or services rendered to customers during any given accounting period. Revenues increase owners’ equity.Part IIExpenses are the cost of goods or services used up in the process of earning revenue. Accountants try to match expenses incurred with the revenues generated in an accounting period. Expenses decrease owners’ equity.
- Part ILet’s look more closely at the recording of revenues and expenses. To review, revenues increase owners’ equity and expenses decrease owners’ equity.Part IIA decrease is shown in owners’ equity with a debit. Increases in expenses must be recorded as debits in a separate ledger account.Part IIIAn increase in owners’ equity is shown with a credit. Increases in revenues must be recorded as credits in a separate ledger account.
- Part ITo review, payments to owners decrease owners’ equity and investments by owners increase owners’ equity.Part IIDividends represent payments to owners of a corporation. An increase in the dividend account must be shown with a debit.Part IICapital stock represents investments by owners of a corporation. An increase in the capital stock account must be shown with a credit.
- End of chapter 3.