STEPS IN THE

ACCOUNTING CYCLE
1 Analyze business transactions
2 Journalize the transactions
 THE
THE ACCOUNT
ACCOUNT

 An account is an individual
accounting record of increases
and decreases in a specific asset,
liability, or owner’s equity item.
 A company will have separate
accounts for such items as cash,
salaries expense, accounts
payable, and so on.
The Account

Assets are the economic resources that

benefit the business now and in the future

Cash Land
Accounts receivable Buildings
Inventory Equipment,
Notes receivable furniture,
Prepaid expenses and fixtures
The Account

Liabilities are the debts of the company.

Notes payable
Accounts payable
Accrued liabilities
(for expenses incurred but not paid)
Long-term liabilities (bonds)
The Account

Stockholders’ (owners’) equity is the

owners’ claims to the assets of a corporation.
A proprietorship uses a single account.
A partnership uses separate accounts for each
owner’s capital balance and withdrawals.
A corporation uses separate capital
accounts for each source of capital.
The Account

Common Stock Retained Earnings

Dividends Revenues Expenses

Accounting for Business
Transactions

A transaction is any event that both affects

the financial position of the business entity
and can be reliably recorded.
Double-Entry Accounting

Double-entry bookkeeping means to record

the dual effects of each business transaction.

DR CR
 DOUBLE-ENTRY
DOUBLE-ENTRY SYSTEM
SYSTEM

 Thus, the total debits will always

equal the total credits and the
accounting equation will always stay
in balance.

Equity Liabilities Assets

 BASIC
BASIC FORM
FORM OF
OF ACCOUNT
ACCOUNT

 In its simplest form, an account consists of

1 the title of the account,
2 a left or debit side, and
3 a right or credit side.
 The alignment of these parts resembles the letter T,
and therefore the account form is called a T account.
Title of Account
Left or debit side Right or credit side

Debit balance Credit balance

 DEBITS
DEBITS AND
AND CREDITS
CREDITS
 The term debit means left and credit means right
respectively.
 The act of entering an amount on the left side of an
account is called debiting the account and making
an entry on the right side is crediting the account.
 When the debit amounts exceed the credits, an
account has a debit balance; when the reverse is
true, the account has a credit balance.
DR CR
 Increases and Decreases
in the Accounts
Balance Sheet
Liabilities
Assets
Equity

DEBIT SIDE CREDIT SIDE

 Increases and Decreases
in the Accounts

Accounting Stockholders’
Equation: Assets = Liabilities + Equity

Rules of
Debit and
Credit: Debit Credit Debit Credit Debit Credit
+ – – + – +
 Increases and Decreases
in the Accounts

Drawing Revenue Expenses

Rules of
Debit and
Credit: Debit Credit Debit Credi.t Debit Credit
+ – – + + –
 NORMAL
NORMAL BALANCE
BALANCE

 Every account classification has a

normal balance, whether it is a debit or
credit.
 For that particular account, the
opposite side entries should never
exceed the normal balance.
 EXPANDED
EXPANDED BASIC
BASIC EQUATION
EQUATION AND
AND
DEBIT/CREDIT
DEBIT/CREDIT RULES
RULES AND
AND EFFECTS
EFFECTS

Assets = Liabilities + Owner’s Equity

Owner’s Owner’s
Assets = Liabilities + -
Capital Drawing
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
+ - - + - + + -

+ Revenues - Expenses

Dr. Cr. Dr. Cr.

- + + -
Recording Transactions
in the Journal
Identify the transaction and
specify each account affected.

Determine whether each account is

increased or decreased by the transaction.
Use the rules of debits and credits.

Enter the transaction in the journal,

including a brief explanation for the entry.
 THE
THE JOURNAL
JOURNAL
 Transactions are initially recorded in
chronological order in a journal before
being transferred to the accounts.
 Every company has a general journal
which contains:
1. spaces for dates,
2. account titles and explanations,
3. references, and
4. two amount columns.
 THE
THE JOURNAL
JOURNAL
The journal makes several significant contributions
to the recording process:
1 It discloses in one place the complete effect of a
transaction.
2 It provides a chronological record of transactions.
3 It helps to prevent or locate errors because the
debit and credit amounts for each entry can be
readily compared.
 JOURNALIZING
JOURNALIZING
 Entering transaction data in the journal
is known as journalizing.
 Separate journal entries are made for
each transaction.
 A complete entry consists of:
1. the date of the transaction,
2. the accounts and amounts to be
debited and credited, and
3. a brief explanation of the
transaction.
 TECHNIQUE
TECHNIQUE OF
OF JOURNALIZING
JOURNALIZING

The
Thedate
dateof
ofthe
thetransaction
transactionis
isentered
enteredin
inthe
the
date
datecolumn.
column.
 TECHNIQUE
TECHNIQUE OF
OF JOURNALIZING
JOURNALIZING
The
Thedebit
debit account
accounttitle
titleis
isentered
enteredat atthe
theextreme
extreme
left
leftmargin
marginof ofthe
theAccount
AccountTitles
Titlesand
andExplanation
Explanation
column.
column. The
The credit
credit account
accounttitle
titleis
isindented
indentedon
on
the
thenext
nextline.
line.
TECHNIQUE
TECHNIQUE OF
OF JOURNALIZING
JOURNALIZING

The
Theamounts
amountsforforthe
the debits
debitsare
arerecorded
recordedin inthe
the
Debit
Debitcolumn
columnandandthe
theamounts
amountsforforthe
the credits
credits are
are
recorded
recordedin
inthe
theCredit
Creditcolumn.
column.
TECHNIQUE
TECHNIQUE OF
OF JOURNALIZING
JOURNALIZING

AAbrief
briefexplanation
explanationof
ofthe
thetransaction
transactionis
isgiven.
given.
TECHNIQUE
TECHNIQUE OF
OF JOURNALIZING
JOURNALIZING
AAspace
spaceis
isleft
leftbetween
betweenjournal
journal entries.
entries. The
The
blank
blankspace
spaceseparates
separatesindividual
individual journal
journal entries
entries
and
andmakes
makesthetheentire
entirejournal
journal easier
easiertotoread.
read.
TECHNIQUE
TECHNIQUE OF
OF JOURNALIZING
JOURNALIZING
The
Thecolumn
columnentitled
entitledRef.
Ref. is
isleft
leftblank
blankatatthe
thetime
time
journal
journal entry
entryisismade
madeand
andis isused
usedlater
laterwhen
whenthethe
journal
journal entries
entriesare
aretransferred
transferredto tothe
theledger
ledger
accounts.
accounts.
 SIMPLE
SIMPLE AND
AND
COMPOUND
COMPOUND JOURNAL
JOURNAL
ENTRIES
ENTRIES
IfIfan
anentry
entryinvolves
involvesonly onlytwo
twoaccounts,
accounts, one
onedebit
debit
and
andoneonecredit,
credit, ititis
isconsidered
consideredaa simple
simpleentry.
entry.
 COMPOUND
COMPOUND JOURNAL
JOURNAL
ENTRY
ENTRY
When
Whenthree
threeorormore
moreaccounts
accountsare
arerequired
requiredinin
one
onejournal
journal entry,
entry, the
theentry
entryis
isreferred
referredto
toas
asaa
compound
compoundentry.
entry.

3
COMPOUND
COMPOUND
JOURNAL
JOURNAL ENTRY
ENTRY
This
Thisis
isthe
thewrong
wrongformat;
format;all
all debits
debitsmust
mustbe
belisted
listed
before
beforethe
thecredits
creditsare
arelisted.
listed.
 STEPS IN THE
ACCOUNTING CYCLE
1 Analyze business
transactions
2 Journalize the transactions
3 Post to ledger accounts
 THE
THE LEDGER
LEDGER
 The entire group of accounts maintained by a
company is called the ledger.
 A general ledger contains all the assets,
liabilities, and owner’s equity accounts.

GENERAL
LEDGER
 THE
THE GENERAL
GENERAL LEDGER
LEDGER

Individual Individual Individual

Assets Liabilities Owner’s Equity

Equipment Interest Payable Salaries Expense

Land Salaries Payable Fees Earned
Supplies Accounts Payable J. Lind, Drawing
Cash Notes Payable J. Lind, Capital
 POSTING
POSTING A
A JOURNAL
JOURNAL ENTRY
ENTRY

In the ledger, enter in the appropriate columns of the account(s)

debited the date, journal page, and debit amount shown in the journal.
 POSTING
POSTING A
A JOURNAL
JOURNAL ENTRY
ENTRY

GENERAL LEDGER

In the ledger, enter in the appropriate columns of the account(s) credited the
date, journal page, and credit amount shown in the journal.
POSTING
POSTING A
A JOURNAL
JOURNAL ENTRY
ENTRY

In the reference column of the journal, write the account

number to which the debit or credit amount was posted.
 CHART
CHART OF
OF ACCOUNTS
ACCOUNTS
Most
Mostcompanies
companieshave
haveaachart
chartof
ofaccounts
accountsthat
thatlists
liststhe
theaccounts
accountsand
andthe
the
account
accountnumbers
numberswhich
whichidentify
identifytheir
theirlocation
locationin
inthe
theledger.
ledger.
 INVESTMENT
INVESTMENT OF
OF CASH
CASH BY
BY OWNER
OWNER

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

Transaction advertising venture to be known as the Pioneer
Advertising Agency.

Basic The asset Cash is increased $10,000, and owner’s

Analysis equity C. R. Byrd, Capital is increased $10,000.

Debits increase assets: debit Cash $10,000.

Debit-Credit
Credits increase owner’s equity: credit C.R. Byrd,
Analysis Capital $10,000.
 INVESTMENT
INVESTMENT OF
OF CASH
CASH BY
BY OWNER
OWNER

JOURNAL
JOURNALENTRY
ENTRY

POSTING
POSTING
 PURCHASE
PURCHASE OF
OF OFFICE
OFFICE EQUIPMENT
EQUIPMENT

October 1, office equipment costing $5,000 is

Transaction purchased by signing a 3-month, 12%, $5,000 note
payable.

Basic The asset Office Equipment is increased $5,000, and

Analysis the liability Notes Payable is increased $5,000.

Debits increase assets: debit Office Equipment

Debit-Credit
$5,000. Credits increase liabilities: credit Notes
Analysis Payable $5,000.
 PURCHASE
PURCHASE OF
OF OFFICE
OFFICE EQUIPMENT
EQUIPMENT

JOURNAL
JOURNALENTRY
ENTRY

POSTING
POSTING
 RECEIPT
RECEIPT OF
OF CASH
CASH FOR
FOR FUTURE
FUTURE SERVICE
SERVICE

October 2, a $1,200 cash advance is received from

Transaction R. Knox, a client, for advertising services that are
expected to be completed by December 31.

The asset Cash is increased $1,200; the liability

Unearned Fees is increased $1,200 because the
Basic service has not been rendered yet. Note that
Analysis although many liabilities have the word “payable” in
their title, unearned fees are considered a liability
even though the word payable is not used.

Debits increase assets: debit Cash $1,200.

Debit-Credit
Credits increase liabilities: credit Unearned Fees
Analysis $1,200.
 RECEIPT
RECEIPT OF
OF CASH
CASH FOR
FOR FUTURE
FUTURE SERVICE
SERVICE

JOURNAL
JOURNALENTRY
ENTRY

POSTING
POSTING
 PAYMENT
PAYMENT OF
OF MONTHLY
MONTHLY RENT
RENT

October 3, office rent for October is paid in cash,

Transaction $900.

Basic The expense Rent is increased $900 because the

Analysis payment pertains only to the current month; the
asset Cash is decreased $900.

Debit-Credit Debits increase expenses: debit Rent Expense $900.

Analysis Credits decrease assets: credit Cash $900.
 PAYMENT
PAYMENT OF
OF MONTHLY
MONTHLY RENT
RENT

JOURNAL
JOURNALENTRY
ENTRY

POSTING
POSTING
 PAYMENT
PAYMENT FOR
FOR INSURANCE
INSURANCE

October 4, $600 is paid for a one-year insurance

Transaction policy that will expire next year on September 30.

The asset Prepaid Insurance is increased $600

because the payment extends to more than the
current month; the asset Cash is decreased $600.
Basic Note that payments of expenses that will benefit more
Analysis than one accounting period are identified as prepaid
expenses or prepayments. When a payment is made,
an asset account is debited in order to show the
service or benefit that will be received in the future.

Debit-Credit Debits increase assets: debit Prepaid Insurance

Analysis $600. Credits decrease assets: credit Cash $600.
 PAYMENT
PAYMENT FOR
FOR INSURANCE
INSURANCE

JOURNAL
JOURNALENTRY
ENTRY

POSTING
POSTING

Prepaid Insurance 130

Oct. 4 600
 PURCHASE
PURCHASE OF
OF SUPPLIES
SUPPLIES ON
ON CREDIT
CREDIT

October 5, an estimated 3-month supply of

Transaction advertising materials is purchased on account from
Aero Supply for $2,500.

Basic The asset Advertising Supplies is increased $2,500;

Analysis the liability Accounts Payable is increased $2,500.

Debits increase assets: debit Advertising Supplies

Debit-Credit
$2,500. Credits increase liabilities: credit
Analysis Accounts Payable $2,500.
PURCHASE
PURCHASE OF
OF SUPPLIES
SUPPLIES ON
ON CREDIT
CREDIT

JOURNAL
JOURNALENTRY
ENTRY

POSTING
POSTING
 HIRING
HIRING OF
OF EMPLOYEES
EMPLOYEES

October 9, hire four employees to begin work on

October 15. Each employee is to receive a weekly
Transaction 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

Basic only an agreement between the employer and the
Analysis employees to enter into a business transaction
beginning on October 15.

Debit-Credit A debit-credit analysis is not needed because there is

Analysis no accounting entry.
 WITHDRAWAL
WITHDRAWAL OF
OF CASH
CASH BY
BY OWNER
OWNER

October 20, C. R. Byrd withdraws $500 cash for

Transaction personal use.

Basic The owner’s equity account C. R. Byrd, Drawing is

Analysis increased $500; the asset Cash is decreased $500.

Debits increase drawings: debit C. R. Byrd,

Debit-Credit
Drawing $500. Credits decrease assets: credit
Analysis Cash $500.
 WITHDRAWAL
WITHDRAWAL OF
OF CASH
CASH BY
BY OWNER
OWNER

JOURNAL
JOURNALENTRY
ENTRY

POSTING
POSTING
 PAYMENT
PAYMENT OF
OF SALARIES
SALARIES

October 26, employee salaries of $4,000 are owed

Transaction and paid in cash. (See October 9 transaction.)

Basic The expense account Salaries Expense is increased

Analysis $4,000; the asset Cash is decreased $4,000.

Debit-Credit Debits increase expenses: debit Salaries Expense

Analysis $4,000. Credits decrease assets: credit Cash $4,000.
 PAYMENT
PAYMENT OF
OF SALARIES
SALARIES

JOURNAL
JOURNALENTRY
ENTRY

POSTING
POSTING
Salaries Expense 726
Oct. 26 4,000
 RECEIPT
RECEIPT OF
OF CASH
CASH FOR
FOR FEES
FEES EARNED
EARNED

October 31, received $10,000 in cash from Copa

Transaction Company for advertising services rendered in
October.

Basic The asset Cash is increased $10,000; the revenue

Analysis Fees Earned is increased $10,000.

Debit-Credit Debits increase assets: debit Cash $10,000. Credits

Analysis increase revenues: credit Fees Earned $10,000.
RECEIPT
RECEIPT OF
OF CASH
CASH FOR
FOR FEES
FEES EARNED
EARNED

JOURNAL
JOURNALENTRY
ENTRY

POSTING
POSTING
 STEPS IN THE
ACCOUNTING CYCLE
1 Analyze business
transactions
2 Journalize the transactions
3 Post to ledger accounts
4 Prepare a trial balance
 THE
THE TRIAL
TRIAL BALANCE
BALANCE
 A trial balance is a list of accounts and their balances at a
given time.
 The primary purpose of a trial balance is to prove (check) that
the debits equal the credits after posting.
 If the debits and credits do not agree, the trial balance can be
used to uncover errors in journalizing and posting.
 The procedures for preparing a trial balance consist of:
1 List the account titles and their balances.
2 Total the debit and credit columns.
3 Prove the equality of the two columns.
A
A TRIAL
TRIAL BALANCE
BALANCE

The total debits

must equal the
total credits.
 LIMITATIONS
LIMITATIONS OF
OF A
A
TRIAL
TRIAL BALANCE
BALANCE
 A trial balance does not prove that all transactions
have been recorded or that the ledger is correct.
 Numerous errors may exist even though the trial
balance columns agree.
 The trial balance may balance even when:
1 a transaction is not journalized,
2 a correct journal entry is not posted,
3 a journal entry is posted twice,
4 incorrect accounts are used in journalizing or
posting
5 offsetting errors are made in recording the
amount of the transaction.
END OF CHAPTER 2