Recording, Storing, & Reporting Accounting Information

1. Recording, Storing, & Reporting Accounting Information Appendix A

2. Recording App. A • Accounting system - identifies, measures, records, and retains accounting information • Account - records and retains the monetary information from transactions • General ledger - the entire set of accounts that a company uses

3. Debits and Credits App. A Title of Account • Debit entry - monetary amount recorded on the left side • Credit entry - monetary amount recorded on the right side Left (debit) side Right (credit) side

4. Recording Rules App. A Asset accounts are: • increased by debit entries • decreased by credit entries Liability accounts are: • increased by credit entries • decreased by debit entries

5. Recording Rules App. A Permanent owner’s equity, or capital accounts are: • increased by credit entries • decreased by debit entries

6. Recording Rules App. A Temporary owner’s equity accounts have the following rules: • Withdrawal accounts are increased by debit entries and decreased by credit entries • Revenue accounts are increased by credit entries and decreased by debit entries • Expense accounts are increased by debit entries and decreased by credit entries

7. Recording Rules App. A • Double entry rule - the total amount of the debit entries must equal the total amount of the credit entries for each transaction. • Balance of an account - the difference between the total increases and the total decreases recorded in an account.

8. Normal Balances App. A Assets Debit Liabilities Credit Owner’s capital Credit Owner’s withdrawals Debit Revenues Credit Expenses Debit

9. Accounting Cycle App. A • Recording (journalizing) the transactions in the general journal • Posting the journal entries to the accounts in the general ledger • Recording (and posting) adjusting entries • Preparing the financial statements • Recording (and posting) closing entries

10. Recording (Journalizing) Transactions App. A • General journal - a book where information is recorded for each transaction • Journalizing - the process of recording a transaction in the general journal • Journal entry - the recorded information for each transaction

11. Key Procedures in Journalizing App. A • Enter the month, day, and year • Enter the title of the account and amount to be debited • Enter the title of the account and amount to be credited • Enter a brief explanation of the transaction

12. Illustration of Journal Entries App. A Acct. No. Account Titles and Explanations Credit Date Debit 2003 Dec. 15 15,000 Cash A. Cox, Capital 15,000 Made initial investment in business 29 Store Equipment 2,200 1,000 Cash 1,200 Notes Payable Purchased store equipment from Ace Equipment Company, making cash down payment and signing 3-month note

13. Posting to the Accounts App. A • Posting - the process of transferring the journal entry information to the accounts in the general ledger • Chart of accounts - a numbering system designed to organize a company’s accounts

14. Key Procedures in Posting App. A • Locate the first account to be posted from the general journal • Enter the month, day, and year of the transaction and the debit amount in the debit (left) side of the account • Enter the account number in the general journal • Repeat the process for the credit amount

15. Illustration of Posting Process - Exhibit A-7 App. A Acct. No. Account Titles and Explanations Credit Date Debit 2004 Jan. 2 101 401 300 Cash Sales Revenue 300 Made cash sales General Ledger Cash No. 101 Sales Revenue No. 401 Bal. 7,300 1/02/04 300 1/02/04 300

16. Trial Balance App. A • Trial balance - a schedule that lists the general ledger accounts and the balances • Normally prepared at the end of the accounting period before making adjusting entries • Helps to detect a journalizing or posting error

17. Preparing Adjusting Entries App. A Adjusting entries - made at the end of an accounting period to bring the company’s revenue and expense account balances up-to-date Three types of adjusting entries • Apportionment of prepaid and unearned items • Recording of accrued items • Recording or apportionment of estimated items

18. Apportionment of Prepaid and Unearned Items App. A • Prepaid item - an economic resource that will be used in the near future • the “expired” part of the resource cost must be recorded as an expense • Unearned revenue - an obligation of a company to provide goods or services in the future • the “expired” part of the obligation must be recorded as a revenue

19. Accrued Items App. A • Accrued expense - an expense that has been incurred but that has not been paid or recorded • Accrued revenue - a revenue that has been earned but that has not been collected or recorded • Adjusting entries must be made to record the accrued expenses and revenues

20. Estimated Items App. A • Depreciation on buildings and equipment • Amortization of intangible assets • Recognition of uncollectible accounts receivable

21. Adjusted Trial Balance App. A • A schedule prepared after adjusting entries to prove the equality of the debit and credit balances in the general ledger accounts • Helps prevent the company from including debit and credit errors in the financial statements • Makes preparing the financial statements easier

22. Common Errors Found on the Adjusted Trial Balance App. A • Transposition - two digits in a number are mistakenly reversed • Slide - the digits are listed in the correct order but are mistakenly moved one decimal place to the left or right

23. Preparing the Financial Statements App. A • Income Statement • Statement of Changes in Owner’s Equity • Balance Sheet • Cash Flow Statement

24. Preparation of Closing Entries App. A Closing entries are done at the end of an accounting period to: • Show the current balance in the owner’s capital account • Show zero balances in the revenue, expense, and withdrawals accounts Income Summary account is a temporary account used in the closing process

25. Closing the Revenue Accounts App. A • A debit entry is made to each revenue account to bring the balance to zero • A credit entry is made to the income summary account for the total of the revenue accounts

26. Closing the Expense Accounts App. A • A credit entry is made to each expense account to bring the balance to zero • A debit entry is made to the income summary account for the total of the expense accounts

27. Closing the Income Summary Account App. A • The balance in the account is the net income (or net loss) • An entry is made to transfer the balance in the income summary account to the owner’s equity account

28. Closing the Withdrawals Account App. A • A credit entry is made to the withdrawals account to bring the balance to zero • A debit entry is made to the owner’s equity account for the total of the withdrawals account

29. Post-Closing Trial Balance App. A • A schedule prepared after making the closing entries to prove the equality of the debit and credit balances in the permanent accounts • Only permanent accounts should have balances since all temporary accounts have zero balances due to the closing process

30. Modifications for Corporations App. A • Investments by owners • Distributions to owners • Income taxes on the income statement • Stockholders’ equity on the balance sheet

31. Conclusion App. A A company’s accounting cycle includes: • recording (journalizing) transactions • posting to the accounts • recording and posting adjusting entries • preparing the financial statements • recording and posting closing entries

32. Homework Problem PA-2 (2) App. A Acct. No. Account Titles and Explanations Credit Date Debit Jan. 2 Cash 33,000 R. Foster, Capital 33,000 To record investment by owner of cash into business.

33. Homework Problem PA-2 (2) App. A Acct. No. Account Titles and Explanations Credit Date Debit 3 Land 3,000 21,000 Building Cash 6,000 Mortgage Payable 18,000 To record purchase of land and building; making cash down payment and signing mortgage for remaining balance.

34. Homework Problem PA-2 (2) App. A Acct. No. Account Titles and Explanations Credit Date Debit 4 Office Equipment 7,000 Notes Payable 7,000 To record purchase of office equipment & issuance of 1-year note.

35. Homework Problem PA-2 (2) App. A Acct. No. Account Titles and Explanations Credit Date Debit 10 Office Supplies 735 Cash 735 To record purchase of office supplies for cash.

36. Homework Problem PA-2 (2) App. A Acct. No. Account Titles and Explanations Credit Date Debit 21 Cash 3,020 Tax Service Revenues 3,020 To record collection of cash for services performed.

37. Homework Problem PA-2 (2) App. B Acct. No. Account Titles and Explanations Credit Date Debit 31 Salary Expense 1,450 Cash 1,450 To record payment of employee’s salary.

38. Homework Problem PA-2 (2) App. A Acct. No. Account Titles and Explanations Credit Date Debit 31 Utilities Expense 88 Cash 88 To record payment of January utilities.

39. Homework Problem PA-2 (2) App. A Acct. No. Account Titles and Explanations Credit Date Debit 31 R. Foster, Withdrawals 850 Cash 850 To record withdrawal of cash by owner for personal use.

40. Homework Problem PA-2 (4) App. A FOSTER TAX SERVICES COMPANY Trial Balance January 31 Account TitlesDebitsCredits Cash $26,897 Office supplies 735 Land 3,000 Building 21,000 Office equipment 7,000 Notes Payable $ 7,000 Mortgage payable 18,000 R. Foster, capital 33,000 R. Foster, withdrawals 850 Tax service revenues 3,020 Salary expense 1,450 Utilities expense 88 Totals $61,020 $61,020