Chapter

THE ACCOUNTING CYCLE:

Capturing Economic Events

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Accounting Cycle The accounting cycle generally consists of

eight specific steps: (1) journalizing (recording) transactions. (2) posting each journal entry to the appropriate ledger accounts. (3) preparing a trial balance. (4) making end-of-period adjustments.

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Accounting Cycle
(5) preparing an adjusted trial balance. (6) preparing financial statements. (7) journalizing and posting closing entries. (8) preparing an after-closing trial balance. Note: Accounting records provide the information that is summarized in financial statements, income tax returns, and other accounting reports
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Rules of Debt & Credit

Increases in assets are recorded by debits and decreases
are recorded by credits Increases in liabilities and in owner's equity are recorded by credits and decreases are recorded by debits. Notice that the debit and credit rules are related to an account's location in the balance sheet. If the account appears on the left-hand side of the balance sheet (asset accounts), increases in the account balance are recorded by left-side entries (debits).
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Rules of Debt & Credit.. If the account appears on the right-hand side of
the balance sheet (liability and owner's equity accounts), increases are recorded by right-side entries (credits).

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Debit and Credit Rules

Debits and credits affect accounts as follows:

A = L + OE
ASSETS Debit Credit for for Increase Decrease LIABILITIES Debit Credit for for Decrease Increase EQUITIES Debit Credit for for Decrease Increase
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Journal
The journal, or book of original entry, is the
accounting record in which business transactions are initially recorded.

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Journal
The entry in the journal shows which ledger
accounts have increased as a result of the transaction, and which have decreased.

After the effects of the transaction have been

recorded in the journal, the changes in the individual ledger accounts are then posted to the ledger.
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Analytical Tool: The Journal Entry

A typical journal looks like this:
GENERAL JOURNAL
Date Posted Account Titles and Explanation Ref. Debit Credit

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 May 1: Jill Jones and her family invested $8,000 in JJs Lawn Care Service and received 800 shares of stock.

Will Cash increase or decrease?

Will Capital Stock increase or decrease?

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The Journal
In an actual accounting system, transactions are initially recorded in the journal.
GENERAL JOURNAL
Date 2003 May 1 Cash Capital Stock Owners invest cash in the business.
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Account Titles and Explanation

Debit 8,000

Credit

8,000

 May 2: JJs purchased a riding lawn mower for $2,500 cash.

Will Cash increase or decrease?

Will Tools & Equipment increase or decrease?

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Journal Entry
GENERAL JOURNAL
Date 2003 May 2 Tools & Equipment Cash Purchased lawn mower. 2,500 2,500 Account Titles and Explanation Debit Credit

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 May 8: JJs purchased a $15,000 truck. JJs paid $2,000 down in cash and issued a note payable for the remaining $13,000.
Will Cash and Notes Payable increase or decrease?

Will Truck increase or decrease?

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Students .. Need to pass the entry shown in last slide. Exercise No: 3.2 class activity

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Papa Johns issues $2,000 of additional common stock to new investors for cash.
Identify & Classify the Accounts 1. Cash (asset). 2. Contributed Capital (equity).

Determine the Direction of the Effect 1. Cash increases. 2. Contributed Capital increases.

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The company borrows $6,000 from the local bank, signing a three-year note.
Identify & Classify the Accounts 1. Cash (asset). 2. Notes Payable (liability).

Determine the Direction of the Effect 1. Cash increases. 2. Notes Payable increases.

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Papa Johns purchases $10,000 of new equipment, paying $2,000 in cash and signing a two-year note payable for the rest.
Identify & Classify the Accounts 1. Equipment (asset). 2. Cash (asset). 3. Notes Payable (liability).

Determine the Direction of the Effect 1. Equipment increases. 2. Cash decreases. 3. Notes Payable increases.

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Papa Johns lends $3,000 to new franchisees who sign five-year notes agreeing to repay the loan.
Identify & Classify the Accounts 1. Cash (asset). 2. Notes Receivable (asset).

Determine the Direction of the Effect 1. Cash decreases. 2. Notes Receivable increases.

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Papa Johns purchases $1,000 of stock in other companies as an investment.

Identify & Classify the Accounts 1. Cash (asset). 2. Investments (asset).

Determine the Direction of the Effect 1. Cash decreases. 2. Investments increase.

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Analytical Tool: The T-Account

After journal entries are prepared, the accountant posts (transfers) the dollar amounts to each account affected by the transaction.
GENERAL JOURNAL
Posted Date Account Titles and Explanation Ref. Jan. 1 Cash Contributed Capital Debit 20,000 Credit 20,000

Ledger

Post

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How Do Companies Keep Track of Account Balances?

Journal entries T-accounts

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Direction of Transaction Effects

A T-account is a tool used to represent an account.
Account Name
Left Right

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Direction of Transaction Effects

The left side of the T-account is always the debit side. The right side of the T-account is always the credit side.

Account Name
Left Right

Debit

Credit

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Transaction Analysis Illustrated

Lets prepare some journal entries for Papa Johns and post them to the ledger.

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Papa Johns issues $2,000 of additional common stock to new investors for cash.
GENERAL JOURNAL
Date Posted Account Titles and Explanation Ref. Cash Contributed Capital
Cash 6,000 2,000

(a)

Debit 2,000

Credit 2,000

Beg. Bal. (a)

Contributed Capital 1,000 Beg. Bal. 2,000 (a)

8,000
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The company borrows $6,000 from the local bank, signing a one-year note.
GENERAL JOURNAL
Date Posted Account Titles and Explanation Ref. Cash Notes Payable
Cash 6,000 2,000 6,000

(b)

Debit 6,000

Credit 6,000

Beg. Bal. (a) (b)

Notes Payable 146,000 Beg. Bal. 6,000 (b)

14,000
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Papa Johns purchases $10,000 of new equipment, paying $2,000 in cash and signing a two-year note payable for the rest.
GENERAL JOURNAL
Date Posted Account Titles and Explanation Ref. Equipment Cash Notes Payable Debit 10,000 Credit 2,000 8,000

(c)

Lets see how to post this entry . . .

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Papa Johns purchases $10,000 of new equipment, paying $2,000 in cash and signing a two-year note payable for the rest.
Beg. Bal. (c) Equipment 246,000 10,000

256,000

Beg. Bal. (a) (b)

Cash 6,000 2,000 6,000

2,000 (c)

Notes Payable 146,000 Beg. Bal. 6,000 (b) 8,000 (c)

12,000
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160,000
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Home Assignment
Exercise 3 3.3 Exercise 3.9 Problem # 3.3,3.4 & 3.5.

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End of Chapter 3

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