CHAPTER 3: OVERVIEW OF ACCOUNTING CYCLE

I. II. III. IV.

Charts of accounts Book-keeping and its importance Accounting cycle Journals, ledgers and trial balances

CHAPTER 3: OVERVIEW OF ACCOUNTING CYCLE

I.

CHART OF ACCOUNTS: a list of account titles used by the business. Such accounts are divided into sections and each title has a given code number.

1.

2.

3.

4.

Current accounts vs. non-current accounts: , . Real account/Balance sheet accounts: , , . Nominal/Temporary accounts: , , . Permanent accounts: , .

CHAPTER 3: OVERVIEW OF ACCOUNTING CYCLE

I.

CHART OF ACCOUNTS: a list of account titles used by the business. Such accounts are divided into sections and each title has a given code number.

1.

2.

3.

4.

Current accounts vs. non-current accounts: asset and liability accounts Real account/Balance sheet accounts: asset, liability and owners equity accounts Nominal/Temporary accounts: income, expense, dividend accounts Permanent accounts: balance sheet accounts, retained earnings account

CHAPTER 3: OVERVIEW OF ACCOUNTING CYCLE

II. BOOK-KEEPING AND ITS IMPORTANCE

Bookkeeping is the process of recording business transactions accurately and systematically in accordance with certain principles or rules

Monitoring the success or failure of your business Providing the information you need to make decisions Obtaining bank financing Obtaining other sources of capital Budgeting Preparing your income tax return Submitting sales taxes Distributing profits

CHAPTER 3: OVERVIEW OF ACCOUNTING CYCLE

III.

ACCOUNTING CYCLE A series of steps which are repeated every reporting period. The process starts with making accounting entries for each transaction and goes through closing the books.
The Accounting Cycle
1 2
Journalizing 3

4
Adjusting

5
Preparing FS

6
Closing

Analyzing

Posting

The Accounting Cycle

1-3 4 5 6 Time

Accounting for External Transactions

Preparing Adjusting Journal Entries

Preparing Financial Statements

Preparing Closing Journal Entries

Analyzing external evidence Journalizing Posting

Analyzing internal evidence Journalizing Posting

Income statement Retained earnings statement Balance sheet Statement of cash flows

Determining temporary account balances Journalizing Posting

Accounting period 1

End of accounting period 1

Accounting period 2 (cycle begins again)

Time

Evidence of business transactions 1. Analyzing (ongoing) 4. Adjusting

Do accounting cycle steps

2. Journalizing (ongoing)
3. Posting (periodically)

5. Preparing financial statement

6. Closing

1. Analyzing (ongoing) 2. Journalizing (ongoing) 3. Posting

CHAPTER 3: OVERVIEW OF ACCOUNTING CYCLE IV. JOURNALS, LEDGERS AND TRIAL BALANCES

Students are expected to bring samples of journal, ledger and trial balances to the class.

Exercise 1: POSTING FROM THE GENERAL JOURNAL TO THE LEDGER GENERAL JOURNAL
Date 19xx Jan Description 30 telephone Expense A/P Received bill for telephone expense post. ref. debit page 2 credit

513 212

70 70 account no. 212 balance debit credit 1500 4100 3100 3170

GENERAL LEDGER
A/P date 19xx jan Item 5 6 9 30 post. Ref. J1 J1 J1 J2 debit credit 1500 2600 1000 70

GENERAL LEDGER
Telephone Expense date 19xx jan Item 30 post. Ref. J2 debit 70 credit account no. 513 balance Debit 70 credit

Exercise 2: After graduation from veterinary school, Laura Cox entered private practice. The transactions of the business through May 27 are as follows: 19xx A. May 1 Laura Cox deposited $2,000 in her business bank account. B. May 3 Paid $300 for two months rent in advance for an office. C. May 9 Purchased medical supplies for $200 in cash. D. May 12 Purchased $400 of equipment on credit, making a one-fourth down payment. E. May 15 Delivered a calf for a fee of $35. F. May 18 Made a partial payment of $50 on the equipment purchased May 12. G. May 27 Paid a utility bill for $40.

Requirements:
1. 2.

3.

Record the above entries in the general journal. Post the entries from the journal to the following accounts in the ledger: Cash 111, Medical Supplies 115, Prepaid Rent 116, Equipment 141, A/P 211, Laura Cox, Capital 311, Veterinary Fees Earned 411, Utility Expense 511. Prepare a trial balance.

The unadjusted trial balance for Certified Answering Service appeared as follows in Dec 31st 2002:
Certified Answering Service Trial Balance 31-Dec-02 Cash A/R Office Supplies Prepaid Insurance $2,160 1250 180 240

Office Equipment
Accu. Depreciation, Office Equipment A/P Unearned Revenue James Neal, Capital James Neal, Withdrawals Answering Service Revenue Wages Expense

3400
$600 700 460 4870 400 2900 1500

Insurance that expired during Dec amounted to $40. Office supplies on hand at the end of Dec totaled $75. Depreciation for the month of Dec totaled $100. Accrued wages at the end of Dec totaled $120. Revenues earned for services performed but not yet billed on Dec 31 totaled $300. Revenues earned for services performed that were paid in advance totaled $160.

Requirements:
1. Prepare T accounts for the accounts in the trial balance and enter the balances. 2. Determine the required adjusting entries and record them directly to the T accounts. Open new T accounts as needed. 3. Prepare an adjusted trial balance. 4. Prepare an income statement, statement of owners equity, and a balance sheets for the month ended Dec 31, 2002.

Rent Expense

400
$9,530 $9,530