Accounting cycle review

1

Accounting Cycle Review

Annual

Report

Steps in the Accounting Cycle

1. Collect data

3

Source Documents

Evidence neededin an accountingsystem to record

transactions - may be replaced by data

entry screens

PurchaseInvoice

CashRegisterReceipt

SalesInvoice

ReceivingDocument

PayrollRecords

ShippingDocument

Checks

Steps in the Accounting Cycle

1. Collect data2. Journalize transactions (capture in transaction

files)

5

The Accounting Equation

Assets = Liabilities + Owners’ Equity

Creditor’sClaims

to Assets

Owner’sClaims

to Assets

CompanyResources

= +

The Accounting Equation Must Always

Remain in Balance

6

Assets = Liabilities + Owners’ Equity

Cash Capital Stock

+ 10,000 = + 10,000

( Dr.) (Cr.)

Issue capital stock for cash

Sample Transactions for T-Shirts “R” Us

Journal Entry Form: Dr. Cr. Cash $10,000

Capital Stock $10,000

Debits/Credits and the Accounting Equation

=ASSETS

Dr. Cr.

+ -

+LIABILITIES

Dr. Cr.

+-

OWNERS’EQUITY

Dr. Cr.

+ -

Opposite sides of the accounting equation are increased/decreased in an opposite way

8

Assets = Liabilities + Owners’ Equity

Inventory Accounts Payable+ 3,000 = + 3,000 (Dr.) (Cr.)

Purchase of inventory ofT-shirts on account

Purchases Journal: Dr. Cr.

Inventory $3,000Accounts Payable $3,000

9

Assets = Liabilities + Owners’ Equity

Sell T-shirts during the month for $4,000 cash (cost is 50% of selling price)

Sales Journal : Dr. Cr. Cash $4,000

Sales Revenue $4,000

Where does sales revenue fit into the

accounting equation??

10

Revenue

- Expenses

= Net income

Income Stmt. Stmt. of R/E

Beg. R/E

+ Revenues

- Expenses

- Dividends

= End. R/E

Effect of Revenue and Expenses on Retained Earnings

11

Assets = Liabilities + Owners’ Equity Retained Earnings Cash (Sales revenue is

closed to R/E)+ 4,000 = + 4,000 (Dr.) (Cr.)

Sell T-shirts during the month for cash (cost is 50% of selling price)

Sales Journal : Dr. Cr. Cash $4,000

Sales Revenue $4,000

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Assets = Liabilities + Owners’ Equity Retained EarningsInventory (Cost of goods

sold is closed to R/E) - 2,000 - 2,000

(Cr.) (Dr.)

Sell T-shirts during the month for cash (cost is 50% of selling price)

Journal Entry Form: Dr. Cr. Cost of goods sold $2,000

Inventory $2,000

13

Assets = Liabilities + Owners’ Equity

Cash Accounts Payable

- 1,500 = - 1,500

(Cr.) (Dr.)

Pay for 1/2 of the inventory purchased earlier this month on account

Cash Disbursement Journal: Dr. Cr.

Accounts Payable $1,500Cash $1,500

Steps in the Accounting Cycle

3. Post transactions to accounts in ledger(G/L master file)

1. Collect data2. Journalize transactions (capture in

transaction files)

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General Ledger

File or book that contains one record ( or page) for each account.

Cash

+$100

-$50

A/R

+$400

- $100

Cash +$100 - $50

The T Account

Account Name

Representation of one account in the G/L

Debits are entered on left

Credits areentered on right

The T Account

$ 900 cr.

Account Name

$ 400 dr.

$ 500 cr.Debits & credits

are netted to obtainbalance in account

Normal Balances

Assets

Expenses

Dividends

Liabilities

Owners’ Equity

Revenues

Debit Credit

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Cash Capital Stock

(1) 10,000 (1) 10,000

Transactions and T Accounts

Journal Entry Form: Dr. Cr. Cash $10,000

Capital Stock $10,000

(1) Issue capital stock for cash

Post to individualG/L accounts

(See Figure 2-4)

20

Inventory Accounts Payable

(2) 3,000 (2) 3,000

Transactions and T Accounts

(2) Purchase inventory ofT-shirts on account

(3a) Sell T-shirts during the month for $4,000 cash.

(3b) Cost is 50% of selling price.

T Accounts reflect current and previous

postings to the account for each period

Cash

(1) 10,000(3a) 4,000

Inventory

(2) 3,000(3b) 2,000

(3a) 4,000

Sales

(3b) 2,000

Cost ofGoods Sold

(4) Pay for 1/2 of the inventory purchased earlier this month on account

Cash

(4) 1,500

(1) 10,000(3a) 4,000

Accounts Payable

(4) 1,500

(2) 3,000

Balance the T Accounts

Inventory

(2) 3,000 (3b) 2,000

Cash

(4) 1,500(1) 10,000(3a) 4,000

12,500 1,000

Accounts Payable

(4) 1,500

1,500

(2) 3,000

Steps in the Accounting Cycle

4. Prepareunadjusted

trial balance

3. Post transactions to accounts in ledger(G/L master file)

1. Collect data2. Journalize transactions (capture in

transaction files)

Cash

Inventory

Accounts Payable

Capital Stock

Sales Revenue

Cost of Goods Sold

Total

$ 12,500

1,000

$ 1,500

10,000

4,000

2,000

$ 15,500 $ 15,500

Debits Credits

T-Shirts “R” UsUnadjusted Trial BalanceAt January 31, 2011

Steps in the Accounting Cycle

5. Prepare and postadjusting entries

3. Post transactions to accounts in ledger(G/L master file)

1. Collect data2. Journalize transactions (capture in

transaction files)

4. Prepareunadjusted

trial balance

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Types of Adjusting Entries

ALL RECOGNIZE REVENUE OR

EXPENSE BEFORE OR

AFTER CASH IS EXCHANGED

Deferred expense

Accrued liability

Accrued asset

Deferredrevenue

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Summary of Adjustments

Internal transaction

Never involves cash

Involves at least one balance sheet and one income statement account

A

FEDERAL RESERVE NOTE

THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA

L70744629F

12

1212

12

L70744629F

ONE DOLLARONE DOLLAR

WASHINGTON, D.C.

THIS NOTE IS LEGAL TENDER

FOR ALL DEBTS, PUBLIC AND PRIVATE

SERIES

1985

H 293

BalanceSheet

IncomeStatement

(5) Record employees wages for the month that are earned but not yet due

Wage Expense

(5) 800

Wages Payable

(5) 800

Adjusting Entry: Dr. Cr.Wage Expense 800 Wages Payable 800

(6) Record income taxes on profits at 30% income tax rate

Income Tax Expense

(6) ?

Income Tax Payable

(6) ?

How is this determined?

T-Shirts “R” UsIncome Statement

For the Month of January 2011

Sales $ 4,000

Less: Cost of goods sold 2,000

Gross margin 2,000

Wage expense 800

Pre-tax income $ 1,200

Prepared first…why?

From T Accounts:

T-Shirts “R” UsIncome Statement

For the Month of January 2011

Sales $ 4,000

Less: Cost of goods sold 2,000

Gross margin 2,000

Wage expense 800

Pre-tax income $ 1,200

Income tax expense (30%) 360

From T Accounts:

(6) Record income taxes on profits at 30% income tax rate

Income Tax Expense

(6) 360

Income Tax Payable

(6) 360

Adjusting Entry: Dr. Cr.Income Tax Expense 360 Income Tax Payable 360

Steps in the Accounting Cycle

5. Prepare and postadjusting entries

6. Prepare adjustedtrial balance

3. Post transactions to accounts in ledger(G/L master file)

1. Collect data2. Journalize transactions (capture in

transaction files)

4. Prepareunadjusted

trial balance

CashInventoryAccounts PayableWages PayableIncome Tax PayableCapital StockSales RevenueCost of Goods SoldWage ExpenseIncome Tax Expense

Total

$ 12,500 1,000

$ 1,500 800 360 10,000 4,000

2,000 800 360

$ 16,660 $ 16,660

Debits Credits

T-Shirts “R” UsAdjusted Trial BalanceAt January 31, 2011

Steps in the Accounting Cycle

6. Prepare adjustedtrial balance

7. Prepare accounting reports

5. Prepare and postadjusting entries

3. Post transactions to accounts in ledger(G/L master file)

1. Collect data2. Journalize transactions (capture in

transaction files)

4. Prepareunadjusted

trial balance

T-Shirts “R” UsIncome Statement

For the Month of January 2011

Sales $ 4,000

Less: Cost of goods sold 2,000

Gross margin 2,000

Wage expense 800

Pre-tax income $ 1,200

Income tax expense (30%) 360

Net income $ 840

From T Accounts:

T-Shirts “R” UsStatement of Retained EarningsFor the Month of January 2011

Beginning R/E, 1/1/10 $ - 0 -

Add: Net income 840

Deduct: Dividends ( - 0 - )

Ending R/E, 1/31/10 $ 840

Liabilities:Accounts payable $ 1,500Wages payable 800Income tax payable 360

2,660Owners’ equityCapital stock 10,000Retained earnings 840

10,840Total liabilities & owners’ equity $13,500

T-Shirts “R” UsBalance Sheet

At January 31, 2011

Assets:Cash $

12,500Inventory

1,000

Total assets $ 13,500

Steps in the Accounting Cycle

6. Prepare adjustedtrial balance

8. Close theaccounts

7. Prepare accounting reports

5. Prepare and postadjusting entries

3. Post transactions to accounts in ledger(G/L master file)

1. Collect data2. Journalize transactions (capture in

transaction files)

4. Prepareunadjusted

trial balance

41

Closing the Accounts

Balance sheet accounts (permanent or real accounts) are carried forward to the next period

1/1/12 Beginning

Balances

12/31/11 Ending

Balances

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Closing the Accounts

Revenue, expense and dividend accounts (temporary or nominal accounts) are closed at the end of the period

1/1/12 Beginning

Balances

- 0 -

12/31/11Ending

Balancesclosed toRetained Earnings

Closing Entries Revenues Expenses close to normal normal close to income sum. balance balance income sum.

XX XX XX XX

- 0 - - 0 - Dividends Income Summarynormal close to from expense from revenuebalance R/E closings closings

XX XX XX XX

- 0 - balance closed to R/E

Closing Entries Revenues Expenses close to normal normal close to income sum. balance balance income sum.

XX XX XX XX

- 0 - - 0 - Dividends Income Summarynormal close to from expense from revenuebalance R/E closings closings

XX XX XX XX

- 0 - balance closed to R/E