Accounting cycle review
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Transcript of Accounting cycle review
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Accounting Cycle Review
Annual
Report
Steps in the Accounting Cycle
1. Collect data
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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)
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The Accounting Equation
Assets = Liabilities + Owners’ Equity
Creditor’sClaims
to Assets
Owner’sClaims
to Assets
CompanyResources
= +
The Accounting Equation Must Always
Remain in Balance
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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
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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
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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??
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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
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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
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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)
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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
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FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
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1212
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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
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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