5 - 1 © 2005 Accounting 1/e, Terrell/Terrell Recording Accounting Data Chapter 5

5 - 5 - 11© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell

RecordingRecording

Accounting DataAccounting Data

Chapter 5Chapter 5


Learning Objective 1Learning Objective 1

Identify and describe the Identify and describe the

eighteight

steps of the accounting steps of the accounting

cycle.cycle.


The Accounting CycleThe Accounting Cycle

The accounting cycleThe accounting cycleis the sequence ofis the sequence of

steps repeated in eachsteps repeated in eachaccounting period.accounting period.



Analyzing transactionsAnalyzing transactions

Journalizing transactionsJournalizing transactions

Posting transactions toPosting transactions tothe general ledgerthe general ledger

Preparing the trial balancePreparing the trial balance



Adjusting the accounts andAdjusting the accounts andreconciling the bank statementreconciling the bank statement

Preparing financial statementsPreparing financial statements

Preparing and postingPreparing and postingclosing entriesclosing entries

Preparing the post-closingPreparing the post-closingtrial balancetrial balance


Step 1:Step 1:Analyzing TransactionsAnalyzing Transactions

EventEvent

JournalJournalentryentry

Change in asset,Change in asset,liability,liability,

or equity?or equity?

Nature ofNature oftransactiontransaction

YesYes

NoNotransactiontransaction

NoNo


Step 2:Step 2:Journalizing TransactionsJournalizing Transactions

Journalizing transactions isJournalizing transactions isthe act of recording accountingthe act of recording accounting

transactions into a journal.transactions into a journal.

AA journaljournal is a is abook of original entry.book of original entry.


Step 2:Step 2:Journalizing TransactionsJournalizing Transactions

TransactionTransaction

General journalGeneral journal

AccountAccount AccountAccount

??

Special journalSpecial journal

AccountAccount AccountAccount

??


Step 3:Step 3:Posting to the General Posting to the General

LedgerLedger

Each accounting element has an Each accounting element has an accountaccount..

Each account contains the history of all increasesEach account contains the history of all increasesand decreases in that accounting element.and decreases in that accounting element.

A A chart of accountschart of accounts is a list of all the is a list of all theaccounts used by a business entity.accounts used by a business entity.

The entire group of accounts in an accountingThe entire group of accounts in an accountingsystem constitute the system constitute the general ledgergeneral ledger..


Step 3:Step 3:Posting to the General Posting to the General

LedgerLedger

General JournalGeneral Journal

Account 101Account 101




Step 4:Step 4:Preparing the Trial BalancePreparing the Trial Balance

Trial BalanceTrial Balance

AssetsAssets $$$$$$

LiabilitiesLiabilities $$$$$$

EquityEquity $$$$$$

RevenuesRevenues $$$$$$

ExpensesExpenses $$$$$$Balance $$$Balance $$$

Balance $$$Balance $$$






Step 5:Step 5:Adjusting and ReconcilingAdjusting and Reconciling

At the end of an accounting period, priorAt the end of an accounting period, priorto the preparation of financial statements, to the preparation of financial statements, accountants review the accounts to insureaccountants review the accounts to insureeach complies with the matching principle.each complies with the matching principle.

RevenuesRevenues ExpensesExpenses

AccountingAccountingperiodperiod



AccrualsAccruals DeferralsDeferrals

Error correctionsError corrections

AccruedAccrued revenuerevenue

AccruedAccrued expenseexpense

Deferred Deferred revenuerevenue

Deferred Deferred expenseexpense



The adjusting process requires theThe adjusting process requires theapplication of the following three steps:application of the following three steps:

1. Identification of any accounts1. Identification of any accountsrequiring adjustment.requiring adjustment.

2. Determination of the correct2. Determination of the correctbalance in each account.balance in each account.



3. Preparation of the necessary3. Preparation of the necessaryentry or entries.entry or entries.

The adjusting process also requiresThe adjusting process also requiresreconciling the Cash in Bankreconciling the Cash in Bank

account with the bank statement.account with the bank statement.


Step 6:Step 6:Preparing Financial Preparing Financial

StatementsStatements

Work SheetWork SheetI/SI/S B/SB/S

StatementStatementof owners’of owners’

equityequity

BalanceBalancesheetsheet

IncomeIncomestatementstatement


Step 7:Step 7:Preparing Closing EntriesPreparing Closing Entries

AssetsAssets

LiabilitiesLiabilities

EquityEquity

Owners’Owners’CapitalCapital

Net Income Net Income Balance $Balance $

ExpensesExpensesRevenuesRevenues

Balance $Balance $Closing Closing Balance $Balance $ IncomeIncome

SummarySummary

General JournalGeneral Journal

RevenuesRevenues Income SummaryIncome Summary

Income SummaryIncome Summary ExpensesExpenses

Income SummaryIncome Summary Owners’ CapitalOwners’ Capital


Step 8:Step 8:Preparing the Post-ClosingPreparing the Post-Closing

Trial BalanceTrial Balance

Post-Closing Trial BalancePost-Closing Trial Balance

AssetsAssets $$$$$$

LiabilitiesLiabilities $$$$$$

EquityEquity $$$$$$Balance $$$Balance $$$






Distinguish between debits Distinguish between debits

and credits and apply and credits and apply

themthem

to the accounting equation.to the accounting equation.


The Accounting SystemThe Accounting Systemof Debits and Creditsof Debits and Credits

An accounting system gathers data fromAn accounting system gathers data fromsource transactions to create the bookssource transactions to create the books

and records that transform the dataand records that transform the datainto a manageable format whichinto a manageable format which

produces the financial statements.produces the financial statements.


The Accounting SystemThe Accounting Systemof Debits and Creditsof Debits and Credits

Left = Right

Debit Credit =

Assets Liabilities + Equity=


Effect of Debits and Credits Effect of Debits and Credits on Accounting Elementson Accounting Elements

Accounting ElementAccounting ElementAssetsAssetsLiabilitiesLiabilitiesEquityEquityRevenuesRevenuesExpensesExpensesOwners’ investmentsOwners’ investmentsDividendsDividendsGainsGainsLossesLosses

DebitsDebitsIncreaseIncreaseDecreaseDecreaseDecreaseDecreaseDecreaseDecreaseIncreaseIncreaseDecreaseDecreaseIncreaseIncreaseDecreaseDecreaseIncreaseIncrease

CreditsCreditsDecreaseDecreaseIncreaseIncreaseIncreaseIncreaseIncreaseIncreaseDecreaseDecreaseIncreaseIncreaseDecreaseDecreaseIncreaseIncreaseDecreaseDecrease



Identify the normal balance ofIdentify the normal balance of

accounts and distinguishaccounts and distinguish

between permanent andbetween permanent and

temporary accounts.temporary accounts.


Temporary andTemporary andPermanent AccountsPermanent Accounts

Temporary accounts are all revenue,Temporary accounts are all revenue,expense, gain, and loss accountsexpense, gain, and loss accounts

that are part of net incomethat are part of net incomeplus the dividend account.plus the dividend account.

Permanent accounts include asset,Permanent accounts include asset,liability, and equity accounts,liability, and equity accounts,

except for the dividend account.except for the dividend account.


Identify Normal BalanceIdentify Normal Balance

Debit Credit = Credit+

Assets Liabilities= Equity+



Describe accounts, chartsDescribe accounts, charts

of accounts, journals,of accounts, journals,

ledgers, and worksheets.ledgers, and worksheets.


The Account FormThe Account Form

Dec 1Dec 1

Dec 31Dec 31

Dec 31Dec 31

Beg. balanceBeg. balance

CR34CR34

CP57CP57

54,19854,198

56,11156,111

34,58934,589

88,78788,787

32,67632,676

DateDate DebitDebit CreditCredit DebitDebit CreditCredit

PostPost BalanceBalance 20042004Account NameAccount Name Cash in Bank Cash in Bank Account NumberAccount Number 101 101

Ref.Ref.DescriptionDescription


T-AccountT-Account

2004200412-112-112-3112-31

34,58934,58954,19854,19832,67632,676

56,11156,11112-3112-31

Cash in Bank 101Cash in Bank 101



Record transactionsRecord transactions

in journals.in journals.


The General JournalThe General Journal

General JournalGeneral Journal Page 423Page 423

DateDate20042004 DescriptionDescription

PostPostRef.Ref. DebitDebit CreditCredit

JanJan 2424 Accounts ReceivableAccounts ReceivableSalesSales

To record the sale of 1,500To record the sale of 1,500units to John George, Inc.units to John George, Inc.Terms 2/10, n 30Terms 2/10, n 30

110110401401

23,42523,42523,42523,425


Accounting CycleAccounting CycleApplication ExampleApplication Example

On June 1, 2004, Elevation Sports, Inc., beganOn June 1, 2004, Elevation Sports, Inc., beganby issuing 4,000 shares of its $10 par valueby issuing 4,000 shares of its $10 par value

common stock in exchange for $100,000 in cash.common stock in exchange for $100,000 in cash.

June 1, 2004June 1, 2004Cash in BankCash in Bank 100,000100,000

Common StockCommon Stock 40,00040,000Paid-in CapitalPaid-in Capital 60,00060,000


Accounting CycleAccounting CycleApplication ExampleApplication Example

On June 1, paid the attorney $2,000 forOn June 1, paid the attorney $2,000 forpreparing and filing the articles ofpreparing and filing the articles of

incorporation and other documents.incorporation and other documents.

June 1, 2004June 1, 2004Legal ExpenseLegal Expense 2,000 2,000

Cash in BankCash in Bank 2,000 2,000



Post transactions fromPost transactions from

the general journal tothe general journal to

the general ledger.the general ledger.


Posting to the General Posting to the General LedgerLedger

Elevation Sports, Inc.Elevation Sports, Inc. General JournalGeneral Journal Page 1Page 1

DateDate20042004 DescriptionDescription

PostPostRef.Ref. DebitDebit CreditCredit

JunJun 11 Cash in BankCash in BankCommon StockCommon StockPaid-in CapitalPaid-in Capital

To record issuance ofTo record issuance of4,000 shares of $104,000 shares of $10value common stockvalue common stock

101101310310311311

100,000100,00040,00040,00060,00060,000



Posting requires attention to detailPosting requires attention to detailin the following procedures:in the following procedures:

1. Post to the general ledger each1. Post to the general ledger eachentry in the order that it appearsentry in the order that it appears

in the general journal.in the general journal.

2. Record the date as the same date2. Record the date as the same dateas the entry in the general journal.as the entry in the general journal.



3. There is no need to write any description3. There is no need to write any descriptionunless a special notation is indicated.unless a special notation is indicated.

4. For the posting reference on the4. For the posting reference on thegeneral ledger, the page number ofgeneral ledger, the page number of

the journal page should be used.the journal page should be used.

5. Record the amount of the entry in5. Record the amount of the entry inthe correct debit or credit column.the correct debit or credit column.



Jun 1Jun 1 Beg. balanceBeg. balance GJ1GJ1 100,000100,000 100,000100,000DebitDebit CreditCredit DebitDebit CreditCredit

BalanceBalanceAccount NameAccount Name Cash in Bank Cash in Bank Account NumberAccount Number 101 101

20042004PostPostRef.Ref.

DateDate

DescriptionDescription

GJ1GJ1 2,0002,000 98,00098,000

Jun 1Jun 1 GJ1GJ1 2,0002,000 2,0002,000DebitDebit CreditCredit DebitDebit CreditCredit

BalanceBalanceAccount NameAccount Name Legal Expense Legal Expense Account NumberAccount Number 730 730


DateDate




Jun 1Jun 1 Beg. balanceBeg. balance GJ1GJ1 40,00040,000 40,00040,000DebitDebit CreditCredit DebitDebit CreditCredit

BalanceBalanceAccount NameAccount Name Common Stock Common Stock Account NumberAccount Number 310 310


DateDate


Jun 1Jun 1 GJ1GJ1 60,00060,000 60,00060,000DebitDebit CreditCredit DebitDebit CreditCredit

BalanceBalanceAccount NameAccount Name Paid-in Capital Paid-in Capital Account NumberAccount Number 311 311


DateDate




Compute cash discounts Compute cash discounts

andand

determine the implicationdetermine the implication

of freight terms.of freight terms.


Cash DiscountsCash Discounts

A 2% discount is allowed if payment isA 2% discount is allowed if payment ismade within 10 days; otherwise paymentmade within 10 days; otherwise payment

is due 30 days after the invoice date.is due 30 days after the invoice date.

A 1% discount is allowed if paid within 10 daysA 1% discount is allowed if paid within 10 daysafter the end of the month; otherwiseafter the end of the month; otherwise

payment is due 60 days from the invoice date.payment is due 60 days from the invoice date.


Freight TermsFreight Terms

FOB point defines the point whereFOB point defines the point wheretitle passes and the purchase/salestitle passes and the purchase/sales

transaction legally occurs.transaction legally occurs.

FOB shipping pointFOB shipping point FOB destinationFOB destination



Prepare a trial balance.Prepare a trial balance.


Elevation Sports, Inc.Elevation Sports, Inc.Trial Balance June 30, 2004Trial Balance June 30, 2004

101 Cash in Bank101 Cash in Bank110 Accounts Receivable110 Accounts Receivable130 Merchandise Inventory130 Merchandise Inventory131 Raw Materials Inventory131 Raw Materials Inventory132 Work-in-Process Inventory132 Work-in-Process Inventory134 Office Supplies Inventory134 Office Supplies Inventory140 Prepaid Rent140 Prepaid Rent141 Prepaid Insurance141 Prepaid Insurance154 Administrative Equipment154 Administrative Equipment156 Selling Furniture and Fixtures156 Selling Furniture and Fixtures158 Production Equipment158 Production Equipment180 Patents180 Patents185 Copyrights185 Copyrights190 Trademarks190 Trademarks201 Accounts Payable201 Accounts Payable205 Other Accounts Payable205 Other Accounts Payable212 Payroll Taxes Payable212 Payroll Taxes Payable

$ 53,430$ 53,430 450450 4,3004,300 3,0393,039 2,8112,811 1,0001,000 10,00010,000 5,0005,000 5,1005,100 8,4008,400 89,60089,600 5,0005,000 400400 600600

$ 6,600$ 6,600 22,23422,234 1,0001,000


Elevation Sports, Inc.Elevation Sports, Inc.Trial Balance June 30, 2004Trial Balance June 30, 2004

213 Sales Tax Payable213 Sales Tax Payable250 Note Payable – Vail National Bank250 Note Payable – Vail National Bank310 Common Stock310 Common Stock311 Paid-in Capital – Common Stock311 Paid-in Capital – Common Stock401 Retail Sales – Snowboards401 Retail Sales – Snowboards405 Wholesale Sales – Snowboards405 Wholesale Sales – Snowboards410 Retail Sales – Other410 Retail Sales – Other420 Sales Discounts420 Sales Discounts600 Advertising Expense600 Advertising Expense640 Internet Expense640 Internet Expense680 Telephone Expense – Sales680 Telephone Expense – Sales690 Utilities Expense – Sales690 Utilities Expense – Sales730 Legal Expense730 Legal Expense740 Officers’ Salaries Expense740 Officers’ Salaries Expense780 Telephone Expense – Administrative780 Telephone Expense – Administrative790 Utilities Expense – Administrative790 Utilities Expense – Administrative

TotalsTotals

362362 60,00060,000 40,00040,000 60,00060,000 3,3753,375 900900 1,8401,840

$196,311$196,311

99 249249 500500 8585 153153 2,0002,000 4,0004,000 160160 2525$196,311$196,311


Appendix – Examples of an Appendix – Examples of an Annotated Chart of Annotated Chart of

AccountsAccounts

AccountAccountNumberNumber Account NameAccount Name DescriptionDescription

Notes ReceivableNotes Receivable

Wages PayableWages Payable

Retained EarningsRetained Earnings

115115

211211

320320

Amounts due based on aAmounts due based on awritten promise to paywritten promise to pay

Amounts earned byAmounts earned byemployees but not paidemployees but not paid

Total of all earnings of anTotal of all earnings of anentity since inception lessentity since inception less

all dividends declaredall dividends declared


End of Chapter 5End of Chapter 5

Documents

5 - 1 © 2005 Accounting 1/e, Terrell/Terrell Recording Accounting Data Chapter 5